Forward-Looking Statements
In this Report on Form 10-Q, we make forward-looking statements about our financial condition, results of operations and business. Forward-looking statements are statements made by us concerning events that may or may not occur in the future. These statements may be made directly in this document or may be "incorporated by reference" from other documents. Such statements may be identified by the use of words such as "anticipates", "expects", "estimates", "intends" and "believes" and variations thereof and other terms of similar meaning.
Forward-Looking Statements are not Guarantees of Future Performance
Forward-looking statements involve known and unknown risks, uncertainties and other factors, including those that may cause our actual results, performance or achievements or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include those identified under "Risk Factors" in our Annual Report on Form 10-K for the year-endedDecember 31, 2021 and the following, among others: •general economic and business conditions; •compliance with and changes in regulatory requirements; •the COVID-19 global pandemic poses significant risks to our business, financial condition and results of operations, which may be heightened as the pandemic, government and hospital responses to it, continue; •the possibility thatUnited States or foreign regulatory and/or administrative agencies may initiate enforcement actions against us or our distributors; •the introduction and acceptance of new products; •the risk of an information security breach, including a cybersecurity breach; •competition; •changes in customer preferences; •changes in technology; •the availability and cost of materials, including inflation and ongoing supply chain challenges; •cyclical customer purchasing patterns due to budgetary and other constraints; •environmental compliance risks, including lack of availability of sterilization with Ethylene Oxide ("EtO") or other compliance costs associated with the use of EtO; •the quality of our management and business abilities and the judgment of our personnel, as well as our ability to attract, motivate and retain employees at all levels of the Company; •the availability, terms and deployment of capital; •future levels of indebtedness and capital spending; •changes in foreign exchange and interest rates; •the ability to evaluate, finance and integrate acquired businesses, products and companies; •changes in business strategy; •the risk of a lack of allograft tissues due to reduced donations of such tissues or due to tissues not meeting the appropriate high standards for screening and/or processing of such tissues; •the ability to defend and enforce intellectual property, including the risks related to theft or compromise of intellectual property in connection with our international operations; •the risk of patent, product and other litigation, as well as the cost associated with such litigation; •trade protection measures, tariffs and other border taxes, and import or export licensing requirements; and •weather related events which may disrupt our operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" below and "Risk Factors" and "Business" in our Annual Report on Form 10-K for the year-endedDecember 31, 2021 for a further discussion of these factors. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events. 25 -------------------------------------------------------------------------------- Table of Contents OverviewCONMED Corporation ("CONMED", the "Company", "we" or "us") is a medical technology company that provides devices and equipment for surgical procedures. The Company's products are used by surgeons and other healthcare professionals in a variety of specialties including orthopedics, general surgery, gynecology, thoracic surgery and gastroenterology. Our product lines consist of orthopedic surgery and general surgery. Orthopedic surgery consists of sports medicine instrumentation and small bone, large bone and specialty powered surgical instruments as well as, imaging systems for use in minimally invasive surgery procedures and service fees related to the promotion and marketing of sports medicine allograft tissue. General surgery consists of a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic and gastrointestinal procedures, smoke evacuation devices, a line of cardiac monitoring products as well as electrosurgical generators and related instruments. These product lines as a percentage of consolidated net sales are as follows: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Orthopedic surgery 43 % 42 % 44 % 44 % General surgery 57 % 58 % 56 % 56 % Consolidated net sales 100 % 100 % 100 % 100 % A significant amount of our products are used in surgical procedures with approximately 83% of our revenues derived from the sale of single-use products. Our capital equipment offerings also facilitate the ongoing sale of related single-use products and accessories, thus providing us with a recurring revenue stream. We manufacture substantially all of our products in facilities located inthe United States andMexico . We market our products both domestically and internationally directly to customers and through distributors. International sales approximated 46% and 45% of our consolidated net sales during the six months endedJune 30, 2022 and 2021, respectively.
Business Environment
OnJune 13, 2022 , we acquiredIn2Bones Global, Inc. ("In2Bones") and all of its stock (the "In2Bones Acquisition") for an aggregate upfront payment of$145.0 million in cash. We paid$143.0 million upon closing, with a$2.0 million purchase price adjustment holdback, pursuant to the merger agreement for the In2Bones Acquisition. In addition, there are potential earn-out payments to In2Bones' equity holders in an amount up to$110.0 million based on the achievement of certain revenue targets for In2Bones products during the sixteen (16) successive quarters commencing onJuly 1, 2022 . We financed the purchase through a combination of the issuance of$800.0 million in 2.250% Notes due in 2027 as further described in Note 11 and cash on hand. Refer to Note 4 for further information on the business acquisition. Our business has been and may continue to be impacted by the COVID-19 pandemic as variants of the virus, such as omicron, emerge and hospitals and surgery centers reduce the number of, or postpone, non-urgent surgical procedures in order to minimize the risk of infection and allow for proper staffing. We believe we will continue to experience market variability as a result of the pandemic that could influence sales, suppliers, patients and customers. There remains uncertainty related to the COVID-19 pandemic, including the duration and severity of future impacts to the business and we continue to see our customers and suppliers impacted in a variety of ways. The Company is also being impacted by the macro-economic environment and we are experiencing higher manufacturing and operating costs caused by inflationary pressures and ongoing supply chain challenges. We continuously work with suppliers to mitigate these impacts; however, we expect these challenges to continue throughout 2022. This will likely impact our results of operations. During the first half of 2022, the world experienced, and continues to experience, the impact ofRussia's invasion ofUkraine . The Company has no direct operations in eitherRussia orUkraine and our business is limited to selling to third party distributors. Total revenues associated with sales to third party distributors in these countries are not material to the consolidated financial results, and we have fully reserved the outstanding accounts receivable from distributors in these territories ($0.5 million as ofJune 30, 2022 ). We will continue to monitor and adjust our business strategy in this region as necessary. While the direct impact on the Company ofRussia's invasion ofUkraine is limited, we are being affected by increases in the price of oil as a result of sanctions onRussia , which contributes to overall inflation and increased costs. 26
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Table of Contents Critical Accounting Policies Preparation of our financial statements requires us to make estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year-endedDecember 31, 2021 describes the significant accounting policies used in preparation of the Consolidated Financial Statements. On an ongoing basis, we evaluate the critical accounting policies used to prepare our consolidated financial statements, including, but not limited to, those related to goodwill and intangible assets, contingent consideration and our pension benefit obligation. As described above and in Note 4, the In2Bones Acquisition involves potential payment of future consideration that is contingent upon the acquired business reaching certain performance milestones. The Company records contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred, estimated as the probability-weighted future cash flows, discounted back to present value. The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues. Projected revenues are based on the Company's most recent internal operational budgets and long-range strategic plans. The discount rate used is determined at the time of measurement in accordance with accepted valuation methodologies. Changes in projected revenues, probabilities of payment, discount rates, and projected payment dates may result in adjustments to the fair value measurements. Contingent consideration is remeasured each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized as income or expense within operating expense in the consolidated condensed statements of comprehensive income. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated condensed statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.
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