Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Conmed Corporation (NASDAQ:CNMD)

Q2 2010 Earnings Call

July 29, 2010 10:00 am ET

Executives

Joe Corasanti - President and CEO

Rob Shallish - CFO

Analysts

Matt Miksic - Piper Jaffray

Dalton Chandler - Needham & Company

James Sidoti - Sidoti & Company

Robert Goldman - CL King

Valerie Brown - Alliance Bernstein

Operator

Good day ladies and gentlemen and welcome to the second quarter 2010 Conmed earnings conference call. My name is Louisa and I will be your operator for today. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Joe Corasanti, President and CEO of Conmed. Please proceed, sir.

Joe Corasanti

Thank you very much. Good morning everyone. Welcome to Conmed Corporation's second 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 represents 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 also 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. Our second quarter performance was highlighted by a multitude of successes. Specifically, GAAP diluted earnings per share were five times greater in the second quarter than in the second quarter of 2009 on a sales increase of 10%. Adjusting for unusual items in both quarters, non-GAAP diluted EPS increased to 88% to $0.32 per share. Additionally, year-over-year the GAAP gross margin improved to 51.7% compared to 47% and the non-GAAP gross margin improved to 52.3%, compared to 49.2%. Also we experienced solid growth in our single use product lines of 7% and exceptional growth in our capital product lines of 21.2%. Overall, sales grew 10% on a reported basis and 8.1% in constant currency.

Based on this quarter's performance, which builds on the fine results of the first quarter of this year, we believe that our business is stabilizing and returning to a state of steady consisting growth which is in stark contrast to what occurred in late 2008 and throughout 2009 due to the unprecedented economic conditions over that time. Although there maybe some continued variability within the individual product lines of our business, overall the single-use devices we provide to the healthcare industry continued to meet our sales expectations.

As for the smaller percentage of our business that falls under the capital expenditure budgets of hospitals, we experienced a significant increase in sales during the second quarter. This confirms our previously communicated belief that hospitals can only delay the purchasing, the kinds of capital products we sell, for a limited period of time. These products must be replaced in due course so that surgeries can continue without disruption.

With that overview, let's take a closer look at the second quarter's results. As you know, single-use medical devices primarily used in surgery are the main stay of our business accounting for approximately 75% of Conmed's revenues. These products are used everyday in medical centers around the world. In the recently completed second quarter, our single-use products grew 5.1% in constant currency compared to the second quarter of last year.

Our sports medicine arthroscopy business delivered an extraordinary quarter with single-use sales growth of 15.4% in constant currency. As a reminder, these are devices and instruments that repair torn and damaged soft tissue in joints, generally caused by sports activity. ACL repair in the knee and rotator cuff repair in the shoulder are common procedures. While these minimally invasive arthroscopy procedures are orthopedic by their nature, they should not be confused with total reconstruction of a hip or a knee joint involving large and expensive implants.

Patient population for arthroscopy is much different than the patient population for joint reconstruction. An injury requiring arthroscopy can occur in any age group and most patients will elect to have the surgical repair performed as quickly as possible. On the other hand, joint reconstruction is generally limited to a much older population that has had chronic arthritis condition for sometime. This population of patients generally elects to have the total joint replacement procedure performed when pain becomes unbearable. This tipping point is obviously subjective from person-to-person and much more susceptible to deferment as compared to a sports injury requiring more immediate attention.

Our reason for going through all of this is to point out that our arthroscopy business has had very strong growth so far this year as a result of new product introductions and procedure volume increases. This is in the face of some concern for investors about the overall orthopedic market growth. Fortunately for us, our segment of the industry dealing with sports injuries has done well.

The remainder of Conmed single-use products experienced the usual variability in growth in the second quarter of 2010 when compared to the same period last year. While powered instrument disposables were down slightly in constant currency, the very strong showing from powered instrument handpieces, a CapEx product, bodes well for the future disposable stream in this line. Products for surgery single-use devices grew 4% year-over-year in the second quarter in constant currency. This was a very nice up-tick from last year, as well as a sequential improvement from first quarter of this year.

Although in endoscopic technology sales declined 6.4% in constant currency from a year ago. We experienced slight growth sequentially from the first quarter of this year and are hopeful of continued improving results throughout the year. And the surgery had a very small decline in sales year-over-year due to a difficult comparison caused by strong international distributor sales a year-ago. The business unit did however meet our expectations for sequential sales, compared to the first quarter of this year.

Patient care products experienced a 2.4% constant currency increase compared to a year ago, reversing the negative trend of the last few quarters. We are seeing some of our major US distributors of these products increased their purchase rates after a period of what we believe to be inventory adjustments.

Now turning to the capital product portion of our business, we saw significant increase in sales with capital in this quarter, both on a year-over-year basis and sequentially from the first quarter of this year. Surgical video within the arthroscopy group grew 28.8% in constant currency. However, surgical instrument handpieces grew 13.2% and electrosurgical generators grew 5.6%. Purchases of these capital products are susceptible to variability due to the nature of the longer sales cycle compared to single-use products which are generally dependent on the demand created by surgical procedures.

As we have discussed in the past, these capital products are used routinely in surgical settings each day and are susceptible to wear and tear and must be replaced on a fairly regular basis. Generally, we believe that the capital for products replacement cycle ranges between 3 and 5 years. We are pleased that this quarter's capital product sales results confirm our thinking that hospitals are beginning again to purchase the types of capital products we offer in order to meet their surgical needs.

I would now like to take a moment to discuss some of our newer products. The shoulder restoration system for rotator cuff repair continues to be a strong performer that enhances our portfolio arthroscopic procedure-specific devices. Last week, we launched an additional suture anchor device designed to address shoulder instability procedures. We expect the new PopLok anchor to perform very well in $450 million shoulder instability market.

The ECOM device for monitoring cardiac output on a minimally invasive basis during surgery continues to gain traction. During the quarter we added an additional vital sign measurement to the unit. This measurement is called stroke volume variation. Stroke volume variation calculates the percentage of variability in the amount of blood pumped by each heartbeat. Independent studies have shown that a high variation in the volume of blood in series of heartbeats means that the patient does not have the proper amount of fluid in his or her circulatory system leading to less than adequate oxygenation to key body organs. By minimizing the variability between strokes of the heart, studies have shown improved patient outcomes in fewer days of hospitalization. Our ECOM system now has the capability to provide this measurement of stroke volume variability during surgery. We believe this enhancement will provide additional value to the usage of ECOM.

As we mentioned on our last conference call in April, we have submitted the 510(k) to the FDA for our tissue sealing device from our electrosurgery group. We have heard back from the FDA with follow-up questions and are formulating our responses. At this point, it is unlikely that we will be able to launch the product during the third quarter of this year in the Unites States. Obviously, we would like to release this product as soon as possible and we keep you advised of when this product is cleared by the FDA. Please note, that our 2010 total company sales and earnings forecast are not effective by the launch timing for this product.

On the cost side of our business we continue to realize benefits from the various efficiency actions we have recently taken. As discussed in the past, these actions include moving certain production lines to our Mexican facility and the consolidation of certain administrative activities. During the most recent quarter, we continued with the previously announced production moves, and in addition consolidated 40 administrative positions in our Florida, Santa Barbara and Portman offices. As a result, we incurred severance and other related costs of approximately $2 million which we have excluded from the non-GAAP amount. We expect that these second quarter actions will result in annual cost savings of approximately $5 million and anticipate that we will start to realize these savings in the third quarter of this year.

As I mentioned earlier, we believe that the sales and earnings progression by quarter for 2010 will evolve as we have seen historically. Specifically, the first and second quarters of the year, typically have solid sales in earnings. The third quarter has the softest sales in earnings due to the summer slowness in surgeries while the fourth quarter produces the strongest results of the year. In 2009 this pattern was broken by the severe economic prices that reduced business in the first half of 2009 while the second half of that year grew substantially due to previously delayed spending for capital products.

So, while the 2009 numbers for the third and fourth quarters make for difficult comparisons to the expected 2010 results. Sequentially, we anticipate our business to perform relative to historical trends. I bring this up because the difficult comparisons in the second half of this year may cause the year-over-year sales growth percentages to be less than what we have experienced in the first half of 2010, but sequentially, we expect to be on track consistent with our guidance.

For the full year we are reiterating our 2010 guidance previously provided. Specifically, we estimate that Conmed sales in 2010 should approximate $715 million to $725 million and that non-GAAP diluted earnings per share should range between $1.20 and $1.30 per share. We estimate that third quarter 2010 sales should approximate $174 million to $179 million and that non-GAAP diluted earnings per share should approximate $0.25 to $0.30.

I will now turn the call over to Rob Shallish for further review of our financials.

Rob Shallish

Thanks very much Joe and good morning everyone. As Joe mentioned, we are very pleased with Conmed's performance in the second quarter of 2010, and for that matter the entire first half of the year. Second quarter sales grew 10% year-over-year to $181.1 million, while earnings per share grew five times on a GAAP basis and 88% on a non-GAAP basis.

For the six months, sales were up 8.1%, GAAP EPS was higher by two and one half times and non-GAAP EPS grew 67%. Overall, foreign currency exchange rates were favorable in the second quarter compared to the same quarter a year-ago. Using the exchange rates and effect a year ago, sales would have been $3.2 million less. For the 6 months sales increased $11.1 million due to favorable FX rates, compared to the first six months of 2009 rates. Thus year-over-year constant currency sales growth was 8.1% for the second quarter and 5.4% for the first half of 2010.

As a result of the manufacturing cost efficiency measures we put in place last year, as well as the effects of positive FX during the second quarter. The company's gross margin has improved from a year-ago. Specifically, the second quarter non-GAAP gross margin percentage excluding restructuring matters was 52.3%, compared to 49.2% in the June 2009 quarter. This was an increase of 310 basis points. 90 basis points of this increase is due to currency, and the remaining 220 basis points is generally due to improvements we have made in our cost base.

Our Mexican manufacturing plant is fully operational, and as we have discussed in the past, beyond the product lines we have already transferred to that site. We will be moving additional lines there over the next few months.

Selling, general and administration expense for the second quarter of this year was 39.5% of sales as compared to 39% in the prior year period. The increase is due to employee benefit programs such as worker's compensation and health programs offset to some extent by cost efficiency actions taken in prior periods. Please note that on a sequential basis from the first quarter of this year, the SG&A ratio as a percentage of sales declined 50 basis points as we expected.

As we look out to the remainder of 2010, we expect that the company's SG&A costs will moderate as a percentage of sales as we see increases in sales and as a result of the recent consolidation of administrative positions that Joe mentioned.

Research and development cost of $6.4 million declined $1 million compared to the June 2009 quarter as a result of certain R&D activities nearing completion. On a quarterly basis for the remainder of this year, we expect R&D costs to range between $6.5 million and $7 million.

With respect to the company's overall non-GAAP operating margin derived by adding back the reconciling items between GAAP and non-GAAP amounts described in the press announcement this morning. The second quarter's operating margin grew to 9.2% of sales, compared to 5.8% on the second quarter of 2009. This was in line with our goal for expanding Conmed's operating margin as we realized benefit from cost efficiency actions and as we leverage the anticipated top-line increase in sales in comparison to the relatively fixed cost structure in manufacturing and administrative expense.

The company's income tax rate in the second quarter on a non-GAAP basis was 38%. This was higher than our previously disclosed expected effective tax rate of 37.5% due to the expiration of the research and development tax credit. While we expect the congress will extend the credit later this year, we are not able to benefit from it until an estimate occurs. I will remind that payment of nearly all of this tax provision is differed to future periods because of differences in reporting expense for financial accounting compared to tax accounting, thus increasing the company's currency cash flow.

With regard to the reconciling items between GAAP and non-GAAP amounts that are described in this morning's press announcement. We now anticipate that the remaining and restructuring costs associated with the movement of additional product lines to the Chihuahua manufacturing site will approximate $1.5 million for the rest of this year.

Now turning to the balance sheet. The most significant change results from the company's receivable financing facility with the bank and the required change in accounting for such facilities. Previously the receivables sold to the bank through the facility were eliminated from our balance sheet as we have disclosed in all of our SEC filings. As we have discussed in the past, beginning in 2010, the financial accounting standard's board requires such off balance sheet financing to be placed on the company's balance sheet.

As of June 2010, we used $31 million of this facility to finance receivables. So, on this quarter's balance sheet, receivables are higher by $31 million than they would have been without the change in accounting. Further, the company's debt is $31 million higher than would have been the case using the previous methodology.

Let me emphasize that all of the company's financing sources are exactly the same as they were in December 2009. The change in receivables and in the current portion of long-term debt in the June 2010 balance sheet is simply the result of the required change in accounting for the receivables facility. Further, this change in accounting only affects the balance sheet in the cash flow statement. There is no effect on our P&L. Including the securitization financing in the debt to book capitalization calculation, the June 2010 ratio declined to 26% compared to the December 2009 ratio of 27.1%.

Cash flow of the business was very good in the second quarter of 2010. I draw your attention to the cash flow statement and the additional reconciliation of cash flow from operations included in this morning's release. Excluding the effect of the change in accounting which we view as a non-cash matter. Cash flow from operating activities grew $18.5 million, compared to $7.3 million in the second quarter a year-ago.

For the six months, the adjusted cash flow from operating activities was $34.5 million in 2010, compared to $40 million in 2009. Free cash flow for the six months was $27.3 million compared to $2 million for the same period of 2009. During the second quarter of this year, we used this cash flow to reduce outstanding debt by $5.5 million, including a $3 million repurchase of convertible bonds and to repurchase 475,000 shares of the company's stock in the amount of $9.5 million. Depending on market conditions, we anticipate further repurchases of the company's stock from our current cash flow.

Now I will spend a few moments updating the foreign currency hedging program, we started some months ago. Our plan involves entering into foreign currency exchange contracts whereby we agree to deliver foreign currency at a set time at an agreed-upon exchange rate. As of now, approximately 80% of the estimated FX exposure in the third quarter of this year is hedged and 60% of the fourth quarter's exposure is hedged.

Using currency rates from last week as an estimate of the future, and knowing the hedges we have in place, we estimate that currency fluctuations in this upcoming third quarter will have a negligible effect on sales when compared to the rates of the third quarter last quarter. In the fourth quarter, we expect that currency changes from the fourth quarter 2009 rates will have an unfavorable effect on sales of approximately 1% to 2%. We have taken these effects into consideration in developing our earnings guidance for the rest of the year.

With that Louisa, I would now like to open the conference call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Matt Miksic with Piper Jaffray. Please proceed.

Matt Miksic - Piper Jaffray

I wanted to ask one question about just what was pretty significant improvement in margins. You talked about FX having a minor impact and operational being sort of the bulk of the improvement. I guess what I'm trying to reconcile is you saw an up-tick and it sounds like in capital sales, and I think of those things as maybe being lesser margin kind of products compared to some of your consumables. Is it just that the absorption is so much better? Or if you could maybe talk about what kind of mix impact you might have seen versus what kind of a cost reduction, as you described, a reduction of your base costs that might have had an impact.

Rob Shallish

I think most of the improvement in the margin was due to the cost actions that we have taken over the last several months. Absorption helps a little bit, but comparing the sales numbers say in the second quarter to the first quarter, we had a $5 million or $6 million increase in sales which really doesn't have too much of an impact on absorption,

With regard to the margins on capital products, the video systems within arthroscopy tend to have a slightly lower gross margin than our overall corporate average. So, to the extent we are selling more video systems that would have a negative impact on our margins. But the cardios and handpieces and the electrosurgical generators generally are in line with our overall company gross margin. So, I guess the reason for going through all this is to say that the improvement is really from the cost actions and not necessarily any significance from product mix.

Matt Miksic - Piper Jaffray

And I guess if I'm hearing that correctly, the conclusion I would draw is that your margins could have been actually a bit better but for a return to a more sort of traditional mix or maybe slightly stronger in video that offset some of your cost improvements.

Rob Shallish

Yes, it's difficult to quantify that, but in concept I would agree with that, to the extent we are selling more video systems that would have somewhat of a negative impact on the overall gross margin.

Matt Miksic - Piper Jaffray

How would you characterize the back half? Are we getting into sort of a normalized mix of your business given the comps and growth in capital?

Rob Shallish

Well, that's what we believe that we are getting to a more historical type of trend in our business, both from a standpoint of seasonality for all of our products and with regard to the mix.

Matt Miksic - Piper Jaffray

And then just had one follow-up on FX, and I apologize if we're going back over something. It's just that I want to make sure we understand how the impacts of pluses or minuses are happening, kind of your revenues and gross margins and so on. But where do we read the gross profit and/or revenue and/or operating line adds and takes from the FX and from your hedges?

Rob Shallish

Well, the way we have accounted for the hedges is to include the net benefit of the hedge in sale, since that's where most of the deleterious effect of FX occurs. So, in this particular quarter we had a positive impact from FX in sales of about $1.4 million.

In SG&A there would be an increase in costs as a result of our currency rate changes. So there is an impact there too but effect of the hedges is the $1.4 million included in sales.

Matt Miksic - Piper Jaffray

And then the net benefit to the bottom line is something or is it the operating line I guess. Is that neutral or was that a positive?

Rob Shallish

Well, I think the disclosure that we made is that the entire FX effect on sales was a $3.2 million. That includes that $1.4 million of the hedges. So, as we have discussed in the past, when the top-line is impacted by a dollar of FX change, 60% of that falls through to the bottom-line.

Matt Miksic - Piper Jaffray

So that's still the case on the positive side, as well. Alright. Well, that's it. I'll hop out and bank in queue if we have any follow-ups, but thanks so much for taking our questions.

Operator

Your next question comes from the line of Dalton Chandler with Needham. Please proceed.

Dalton Chandler - Needham & Company

Just a quick question on the guidance. For the quarter you exceeded the high-end of your guidance range by a little bit, but you are reiterating the full year guidance. Is that just a little bit of caution on your part?

Rob Shallish

Well, yes Dalton. That's the answer. We've had this guidance of $1.20 to $1.30 for the entire year of 2010 since October of last year, and we've analyzed that each quarter as we come out with new information and at this point I think from the standpoint of being cautious and not trying to get ahead of ourselves we have decided to keep the guidance for the full year, the same as we've had it in the past.

Dalton Chandler - Needham & Company

And there was such a big surge in the capital sales in the quarter. Is there a feeling that maybe there was a bit of a one-time nature to some of that as facilities tried to get caught up from previously delayed orders?

Rob Shallish

Well, there may be some of that. Certainly, the comparison to last year is favorable because last year was so weak in the second quarter, but I think as Joe mentioned we are getting back to a more normal cycle with the purchases of capital equipment.

Dalton Chandler - Needham & Company

So you think the levels of ordering that you saw in this quarter are sustainable going forward?

Rob Shallish

Well, as we look out to the entire year, I think the answer is yes. I think that we do forecast more traditional capital business as a percentage of sales.

Operator

Your next question comes from the line of James Sidoti with Sidoti & Company

James Sidoti - Sidoti & Company

Historically capital sales have signaled better disposable use going forward. How long do you think it'll take before we see it at this cycle?

Rob Shallish

Video as you know doesn't have any disposables directly related to it except that certainly we are not, our sales people are demonstrating video coming in to make sure people are happy with the video systems that they purchased. It gives them an opportunity to talk about the full range of our products, particularly the single-use products. With the powered instruments, there is more of a direct correlation there between handpieces and the single-use drill bits and saw blades that are used on each procedure. But in terms of whether there is going to be an up-tick because of very good capital sales this quarter. It's very hard for me to quantify that.

James Sidoti - Sidoti & Company

With regards to FX, I think this is the first year you've put those hedges in place. Is this a program you're going to continue going forward, or will you hedge 2011?

Rob Shallish

We'll certainly give that consideration. We have extended the hedges into the first and second quarters of 2011 at this point. The nice thing about having the hedges in place is that it allows us to forecast with a greater confidence knowing that allowance swings in currency won't affect that guidance.

James Sidoti - Sidoti & Company

So basically, it allows you to put out a guidance at the beginning of the year and feel comfortable that you're not going to get burnt by a change in the euro.

Rob Shallish

In general, the answer is yes. It certainly produces the volatility.

James Sidoti - Sidoti & Company

And then, are there any other options in terms of refinancing? I know you said you paid down some of the convertible debt, but is there any opportunity to pay down some of the other debt on the balance sheet or refinance some of the other debt on the balance sheet at a more favorable rate?

Rob Shallish

Well, we are beginning to have discussions with regard to how we refinance the receivable facility which currently has a due date of October 31st this year. In the absence of anything else happening, we can always role that into the revolving facility. And we are also thinking about we refinance the senior credit facility. I don't know if we would be able to achieve rates which are less than what we currently have, but I don't think they are going to be substantially more either.

Operator

Your next question comes from the line of Robert Goldman from CL King. Please proceed.

Robert Goldman - CL King

A couple of questions on R&D, first as it impacts the tax rate. Rob, you mentioned that your forecasts do not include an extension of the R&D tax credit, but were that to happen and were that to be retroactive to January 1, how would that in and of itself impact your tax rate?

Rob Shallish

Well, on an overall basis we would achieve a rate for the entire year if they were to enact that. It would be roughly 36.5%, something like that. We had some adjustments in the first quarter of this year relative to a completion of an IRS exam. So as we look at our full tax rate, we expect it to be 37.5% absent changes as a result of IRS exams. And because we had some of that earlier this year in 2010, we would expect the full year tax rate to be somewhere in the neighborhood of 36.5%.

Robert Goldman - CL King

And the other question on R&D is on the R&D expenses. Many companies in the current environment are choosing to or having to increase R&D because of FDA requirements, et cetera. And Joe, you did mention that you had a winding down of some R&D programs and that's why the R&D dollars went down. But could you give us some guidance on where you see R&D dollars or R&D as a percent of sales going over the next couple of years and sort of perhaps your philosophy on R&D spending?

Joe Corasanti

Our thinking on R&D is that it probably will moderate slightly. It increased substantially between 2001 and probably 2008. The reason for the significant increase in those years was because of two or three very significant projects: the ECOM project for Cardiac Output Monitoring and the Tissue Sealing project. So we did a lot of spending in those areas. And I would also add, we also, probably in 2005 and 2006 added substantially to arthroscopy as well to improve and round out the sports medicine procedure-specific lines.

So, those projects are winding down and are focused now is really on sales and marketing to get a return on investment for that extra spending in R&D. You mentioned FDA concerns with other companies. We went through that 4 or 5 years ago when you saw in those years 2006, 2007, increased spending in quality. We had added a corporate vice president for quality to oversee all of the division's quality activities and regulatory activities. So, we think we've already improved our quality systems to meet the new standards set by the FDA with regard to the new GMPs. They came out in '98-'99.

So, we think we are in really good shape with the FDA. We are strongly in compliance and all of the, what I would say, historical or legacy product lines that perhaps were lacking in documentation because of their age are now all caught up and up to date. So, what does that mean going forward? I think it means that our level of R&D spending is pretty much going to be where it is today with maybe slight increases for inflation, but I don't see us ramping it up as maybe some other companies are saying that they are doing. Our focus now is getting a return on investment for what we have already spent in R&D.

Robert Goldman - CL King

If I can just follow up and just so I can get it right for modeling purposes, should we assume R&D then, the dollars, though, are basically in line with inflation, as you say? And I guess that means that the R&D to sales ratio will probably trickle down over the next few years.

Joe Corasanti

That's correct. That's what I am expecting to see.

Operator

Your next question comes from the line of Valerie Brown with Alliance Bernstein. Please proceed.

Valerie Brown - Alliance Bernstein

I have a question about your operating margins for each of the reported segments. Could you provide us with that information, please?

Rob Shallish

I don't have all of that in front of me. I guess I'd refer you to the SEC filings that we make on a quarterly basis. We intend to file the 10-Q for this past quarter well in the next few days. So we'll have all that in there.

In general, the operating margins for the Linvatec business which is the orthopedic business, so Linvatec, electrosurgery and endosurgery are in rough terms speaking from a memory about 15%. The two product areas that we have, that we are working on in terms of improving those margins are the endoscopic technologies line and the patient care line whose margins are well less than 5% each.

Operator

Your next question is a follow-up from the line of James Sidoti with Sidoti & Company. Please proceed.

James Sidoti - Sidoti & Company

One last question on margins. If you break out the one-time costs in the quarter you were at 9.2% operating margin. Now, you just said you're going to get a little leverage on the R&D line, and I think earlier you said you should be saving some money on this SG&A line because of some of the cost cuts you did this quarter. So, is it reasonable to think that by 2011 you get somewhere close to 11% on an operating margin basis?

Rob Shallish

I don't want to give exact guidance now, Jim. We will be able to provide more of that in October, but the trend you are thinking about is absolutely what we think we can do, because as we talked in the past, we were working toward an operating margin in the mid-teens that we believe we can accomplish in the 3 years or so. So, as each year roles by, we should be improving that operating margin to get to that 3 year goal.

James Sidoti - Sidoti & Company

How much cost do you think you'll save next quarter because of the reductions you made this quarter? I think Joe threw out a number.

Joe Corasanti

We didn't talk about the quarterly savings, it's just within expected annual savings from the, the costs we made this quarter should be about $5 million.

James Sidoti - Sidoti & Company

So $5 million on an annual basis?

Joe Corasanti

Yes.

James Sidoti - Sidoti & Company

And that's on the sales and marketing line? Or is that across the income statement?

Rob Shallish

For the most products on SG&A, a little bit with regard to the movement of product lines to the Mexico which would be in cost to sales.

Operator

(Operator Instructions) And at this time we have no further questions in the queue. I would like to turn the call back over to Mr. Joe Corasanti for any closing remarks. Sir?

Joseph Corasanti

Well, I want to thank everyone for joining us today for our second quarter earnings conference call and we look forward to speaking to everyone again for the third quarter conference call in October. Thank you very much. Bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Conmed Corporation Q2 2010 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts