CNMD

CONMED Corporation (CNMD)

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CONMED Corporation (CNMD)

Q3 2010 Earnings Call Transcript

October 28, 2010 10:00 am ET

Executives

Joseph Corasanti – President and CEO

Rob Shallish – CFO

Analysts

Matt Miksic – Piper Jaffray

Robert Goldman – C. L. King

James Sidoti – Sidoti & Company

Dalton Chandler – Needham & Company

John Sullivan – Olstein Capital Management

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2010 CONMED earnings conference call. My name is Lisa and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the conference over to your host for today Mr. Joseph Corasanti, President and CEO of CONMED. Please proceed.

Joseph Corasanti

Thank you, Lisa. Good morning, everyone. Welcome to CONMED Corporation’s third quarter 2010 earnings conference call. With me today is Rob Shallish, our Chief Financial Officer. After formal remarks, the call will be opened for questions.

Before we begin, let me remind you that during this call, we will be making comments and statements regarding our financial outlook, which represent forward-looking statements that involve risks and uncertainties as those terms are defined under the Federal Securities Laws. Our actual results may differ materially from our current expectations. Please refer to the risk factors and other cautionary factors in today’s press release, as well as our SEC filings for more details on factors that may cause actual results to differ materially.

You will hear Rob and me refer to certain non-GAAP measurements during this discussion. While these figures are not a substitute for GAAP measurements, company management uses them to aid us in monitoring the company’s ongoing financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against other medical technology companies.

Non-GAAP net income and non-GAAP earnings per share measure the income of the company, excluding credits or charges that are considered by management to be unusual or outside of the normal ongoing operations of the company. These unusual items are specified in the reconciliation in the press release issued this morning. With these required announcements completed, I can now turn to my comments.

2010 continues to be a strong year for us as we consistently fulfill our stated goal for improved profitability. Cost-cutting activities and factory consolidations completed this year and last year continue to drive profitability. For the just-completed third quarter, earnings again exceeded our expectations. GAAP diluted earnings per share were over seven times greater in this third quarter than in the third quarter of 2009. Adjusting for unusual items in both quarters, non-GAAP diluted EPS increased 21% to $0.34 per share. Year-over-year, the GAAP gross margin improved 51.7% compared to 49.9% and the non-GAAP gross margin improved to 51.8% compared to 51.2%.

Our non-GAAP operating margin also improved from 8.3% in the third quarter last year to 9.1% in the third quarter this year. Because currency had only a negligible effect on the third quarter results and pricing was flat, these increases in margins were primarily a result of the manufacturing or restructuring activities we have been focused on over the last two years.

As a reminder, we have completed the consolidation of the former three upstate New York manufacturing sites into one site and moved a number of product lines to a new manufacturing plant in Chihuahua, Mexico. Consequently, the benefit of searching out these efficiencies help grow the gross margin in third quarter compared to the same period a year ago. Although the most visible and difficult restructuring activities are complete, we will continue to optimize our manufacturing footprint.

On our last conference call, we discussed the consolidation of 40 administrative positions at our Florida, Santa Barbara and Portland locations, resulting in approximately $5 million in annual savings. Based on this initiative, in the just completed third quarter, SG&A as a percentage of sales, excluding restructuring costs, declined to 38.4% of sales compared to 39.5% of sales in the previous second quarter.

Turning to the top line, as we anticipated and communicated on the July conference call, the quarterly sequential trend related to CONMED sales returned to a normal historical pattern. This was in sharp contrast to the unusual sales results generated in 2009 as a result of the unprecedented effects of the global economic crisis.

Specifically, this year’s third quarter sales declined quarter-over-quarter as a result of the normal summer slowness. Last year, the third quarter sales uncharacteristically grew $11 million over the 2009 second quarter, as we fulfilled significant capital equipment orders that had been delayed from the first half of ’09, and we saw a material number of surgeries that had been previously delayed actually take place.

Consequently, the year-over-year comparison of sales growth in the third quarter is a reflection of the very difficult comparisons created by the unusually strong results in last year’s third quarter. So, while the 1.7% year-over-year constant currency decline in sales is certainly not the kind of growth percentage that we strive for, we believe CONMED is performing as we had anticipated and is well positioned for future success.

I would however be remiss if didn’t acknowledge that the third quarter sales of $172.2 million was slightly short of the low end of our previously provided quarterly revenue guidance of $174 million.

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