Merit Medical Systems Inc (MMSI) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Merit Medical Systems first quarter 2012 earnings conference call. During today's presentation all parties are in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). It is now my pleasure to introduce our host for today, Mr. Fred Lampropoulos, Chairman and CEO. Please go ahead, sir.

Good afternoon, ladies and gentlemenWe are delighted to have you with us. Before we get started we will have our General Counsel, Rashelle Perry, read our disclaimer. Rashelle?

Thank you, Fred. In the course of our discussion today, reference may be made to projections, anticipated events or other information which is not purely historical. Please be aware that statements made in this call may be considered forward-looking statements. We caution you that all forward-looking statements involve risks, unanticipated events, uncertainties and other factors that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks, uncertainties and other factors are discussed in our annual report on Form 10-K and other reports and filings with the SEC, which are also available on our website. To the extent any forward-looking statements are made in this call, such statements are made only as of today's date, and we do not assume any obligation to update such statements.

Although Merit's financial statements are prepared in accordance with accounting principles which are generally accepted in the US, Merit's management believes that certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of Merit's ongoing operations and can be useful for period over period comparisons of [said] operations. The table included in our quarterly earnings release, which will be discussed on this call, sets forth supplemental financial data and corresponding reconciliations to GAAP financial statements. Investors should consider these non-GAAP measures in addition to, not as a substitute for, financial reporting measures reported in accordance with GAAP. These non-GAAP financial measures exclude some but not all items that affect net income. Additionally, these calculations may not be comparable with similarly titled measures of other companies.

Thanks, Rashelle. You sure there is not something else you would like to say?

I think we are good.

You think you covered it? All right. Thank you. Ladies and gentlemen, thank you for joining us. Again, we are delighted to have you with us today.

What we would like to do today is talk about our business, the results of our first quarter, where we are having our successes, where we are having softness or areas that I think we already discussed but will discuss further, and maybe more importantly some of the areas we are making great strides and some initiatives relative to cost, and where we think that will lead us in the future. So we are delighted to go through and talk to you first about the results of the quarter.

If you can read, our sales were right about midrange, from our 9% to 12% growth that we talked about, coming in at about 10.4%. Double digits in what I think is a very difficult market. As you can see from our comments, we are seeing relatively slow growth in the United States. In fact, I would say that it is the slowest growth I have seen in many, many, many years. The places where we have made investments in the past -- in China, Europe, in Eastern Europe with our dealers, and in our technology companies, and some improvement in the areas of Endotek and the technology companies -- are really what is driving the growth. And I'm grateful for the investments that we have made in the past that allow us to see this double digit growth.

Now, I would like to point out that we have done this despite some headwinds. These headwinds being, for instance, the Laureate guide wire. As I allude to in our notes, we had a warning letter from the FDA. We stopped selling the product in the United States in February. And we continue to is sell it, by the way, in the rest of the world. We have done all of the things to comply. We have responded to the FDA. They have come back to us. We will respond again in a couple of weeks, and it is really kind of anybody's guess when the product will be back on the market. I would think sometime probably in the third quarter hopefully. But that was one of the fastest growing products we had.

In addition to that, we had an issue with another product, and it kind of slowed us down a bit. We had to do some -- make some -- I don't want to call them alterations, but issues relative to quality and that slowed us down. So despite those things we were still able to come in kind of about midrange in the revenue side, and we particularly saw very, very strong sales in a number of areas of the Company. But before I go to those, Kent, do you want to comment at all on this?

Just that the Laureate actually stayed strong and didn't decline from last year, and so westayed even at the growth we saw internationally. Another thing is that at 10.4% we really weren't farunder the 11% top of our range. So it was still strong sales quarter.

Let me go through a couple of, I think, the highlights on the sales side. And if we go look at, for instance, our Endotek, Endotek was up 41%. Worldwide dealers were up 35.7%. So this is going to beCentral, South America; that area. China was up 31%. Our technology companies were up almost across-the-board by about 30%. Europe direct -- now here's an area of the world where there is a lot of distress -- up 15%. European dealers up 58.5%. So this would take in the Russia, the Gulf states, Middle East, and that area. 58%.

I think these are terrific numbers, and I think again this is coming from the areas where we have made investments in the past in these marketplaces that I think are paying off now. And will continue to grow, particularly the Middle East, Gulf States, Eastern Europe is going to continue to be very strong. OEM, when you take out the Kyphon business, grew at on the core side of it at 20%. So all of the areas of our business are very, very strong. The only laggard would be the United States market, in which we saw about 2.4%, 2.5%. Kent?

Yes, I think the inflation devices, it's worth noting that without the drop in the Kyphon OEM business we were up 14% in that. So even that was a strong [group].

Let me add some color to that as well, Kent. And that is that as you all know Merit is the world leader in inflation devices, and as we are having success with our Blue Diamond, we're having success with our Big 60, and we've got what I think is arguably the best inflation device in the world, which we allude to called, the Merit Touch. The BasixTOUCH is an extraordinary device. We expect to have it on the market by the end of the year.

Sometime in the near future and particularly in the trade shows and finance meetings that we will be meeting with many of you in the next several months we will be showing off what I think is a cavalcade of extraordinary products of growth in things that we have been working on, from balloon catheters to new inflation devices to hemostatic valves to new snares. So we have a full pipeline, all of which is coming through and coming to fruition this year. These are tremendous products, and I think they bode well for us as we look forward into the following years.

I would also like to point out if you take a look at the earnings number, just make sure that you all understand --and I know you can read well here -- and that is that the shares were up about 17%, so you will recall that we did an offering in the second quarter last year, so this is comparing the earnings per share on different a number of shares. So we wanted to make sure that you were aware of that.

Let me go over a couple of other highlights in terms of product areas. If you take a look at Endotek sales, as I mentioned, they were up 46%. Catheter sales up 23%. Stand alone devices up 20%. And you'll look at BioSphere, it was only up 2%. Let me talk about that, because I think that will be of interest to you.

If you look at the BioSphere business, you'll find that our the EmdoSphere was actually soft. However, our QuadraSphere, which is our drug- eluting sphere, was up 127%, and we are very excited about the continued momentum that we see across the world on our QuadraSphere/HepaSphere product line, andwe expect that trend will continue. I should point out, by the way, that this product trades in the area of 85% to 90% gross margin, so as that continues to come forward, we are excited from the opportunities that will bring.

Just a couple of other area of interest. ASAP Aspiration catheter up 233%. Our radial sheath business -- and this is again another extraordinary area -- up 50%. And this is particularly I think telling that the radial sheaths, in which we get much higher profit than on our standard sheaths, happen to be in these areas of the world where our growth is coming from, and that is part of what is driving it. So in Europe they are going use and have more radial procedures than they do in the United States.

I will tell you that radial procedures in the United States are starting to gain momentum, and we think that the time will come down the road where you will see 30% to 40% of procedures in the United States will be done through radial sheaths. Merit will launch a new sheath later on this year, which will be a new hydrophilic radial sheath, and again we think that has great prospects and great potential. Kent, do you want to add any color?

Yes, I think that it is interesting that the ASAP catheter has added over $400,000 this quarter and is up 233% over last year, so that is a nice growth product for us. As well as the EN Snare. It's up 23% this quarter. So those are, again, high margin products that are really assisting, I think, in the mix.

Yes, and the interesting thing about that, Ken, is last year it was relatively flat at about 8%. This year it is trending higher, and we have a new snare product called the ONE Snare. And again, as we have a very unique strategy. As we are out on the road in the future, we'll discuss this terrific line of new products that are coming forward.

Now, you can read the earnings numbers and do all the comparisons. Kent, one thing I would like you to do for a moment is talk a little bit about the tax issue, because I think that is important. As many of you know, we consider the tax strategy of a business to be important -- as important as many of the other areas, often overlooked and I think undervalued by many. But why don't you talk a little bit about our tax strategy, Kent?

Our tax situation this quarter was actually favorable, ahead of what we expected. It came in at 27.5%. And it did have a one-time assist or a help from -- at the rate, because of our top hat program that is not taxed, a gain there. So -- but what is really driving the change and what will in the future is the increased income and ratio of total worldwide income in Ireland. Also there is smaller help from some of the other international groups of sales companies, China, but others are growing the business and in lower tax environments. So it is mostly a ratio of the Ireland income being greater as a percentage of the total income.

Thank you very much. So let me talk a little bit about the business itself and the initiatives that we have and why we think that what we are going to see as we move down through this year and as we go into next year is better opportunities in terms of growth and in fact earnings.

One of the things that we talked about in our last call was what we are doing worldwide. And again, as you can see from our growth, most of our growth is coming from these international markets. We continue to expand those markets. We continue to expand those markets, and we have put people in place that we told you about in Russia, in the Balkan states, in the Gulf states. We have hired more people here in the United States, and we have hired some additional folks in Europe. So we continue to invest in the sales force simply because we have a lot of opportunity, we have a lot of products, and these sales guys can't continue to carry all of these products. So we need to have more people to carry essentially the load of these product introductions.

We also are continuing to develop sales models in India and Brazil and other areas where we will have the kind of opportunities that we have seen in China in the past. Now, we have not -- although some said, well, you shouldn't do these things, or can't you defer these things? The fact of the matter is, no, we are not going to defer them. We think these are the great opportunities. While other people are deferring them, we believe it is the right thing to do in terms of growth in the future. Now, however, it is important that we also take a look at our business and that we can be critical of ourselves. So let me tell you some of the things that we are doing that will help to reduce and will help to reduce our expenses and help to improve our profitability.

We have had several what we think are substantial cost issues. When I say cost issues, opportunities. One worth about $2.4 million,and one worth over $2 million. That is $4.4 million on two initiatives that we expect will be in place this year. And those are substantial savings, improvements in gross margins and bottom line.

These will kick in in the late third quarter of this year for one for half of that, and another one I just got a report that they are doing what they would call PQs, which means they are not far away from finishing that up. But I would say third quarter for that as well, because you have to build and then put those into the inventory system. That is in addition to the other $5 million worth of cost savings projects that we have identified and which we in fact have set as a goal this year. If we are able to accomplish all of that, we would have over $9 million worth of cost savings programs, which would equivocate to over 200 basis points in gross margins. Now, there are import costs and other issues that offset that to some extent, but these are very, very big deals.

We have done some other things. We have consolidated some of our R&D. We had a satellite R&D office. When we first initiated that several years ago, it was very effective. As the business has grown, it has become more isolated. We decided that it did not serve the purpose that we were using several years ago. We have shut that down. It was a reduction in this head count of two. We've looked internally, and there were a number of issues where we were going and looking very I think realistically at both the needs of the business, but saying things have changed. There are areas here and areas there, so we had another I'll call it an adjustment of about eight to ten personnel, and we will continue to do that.

Now, these are not fun things to talk about, but these are things that we think are necessary, and in order to pay for some of the other programs, we have to look at the things that will give us the best return, and there are areas where we can tighten our belt. And so we continue to look at those areas in terms of essentially reduction of what we think of noncritical position, and we will continue, while investing in the areas that we think will bring us more growth and higher gross margins in the future. Kent, do you want to just maybe add some color?

I think it will be a slow or gradual process of trying to hold the line on many of our costs and increases and therefore start to get leverage as the sales line can grow faster than the expenses grow. I think that's the important objective. And I hope as a percentage of sales that our SG&A has reached kind of a peak and now we can hold it there or level it off.

Let me give you an example of another area we are looking at. One of the things we are doing now that we didn't have to do in the past is we are attending more trade shows. I will give you some of them. The SER meeting. TheGEST meeting in New York in a couple of weeks, which is coming up in New York in a couple of weeks; the Global Embolization meeting. TCT and the PCR, in edition the DDW, which is the endoscopy meeting and a fewer others. But one of the things we found is that sometimes the traffic has been a little bit slower, so I have instructed our marketing department that we should effectively cut our booth space in half. That means that you will have less cost, you will have less transportation, and you will have less personnel. We still have a presence, we will be much more focused on new products instead of trying to show the whole Company.

So we are looking at things that are relatively easy to do, but some of those will not take effect and you won't see the effect of those, as Kent points out. For instance, if we were to look at the SER meeting, we essentially said next year we will be half of where we are today, and we will have a different focus rather than the whole Company. But we won't see those effects, but those decisions are being put into place so that we can downsize in some of the areas but still have the effect that we want in terms of the presence of the Company, and having a meaningful presence but still pull back and maybe a little bit more conservative in those approaches. So we are doing a number of those types initiatives as well.

In terms of research and development, we continue to invest, and I would like to talk about some of these new products that I alluded to. If we take a look at our EndoMAXX stent, it as relatively new product which we just released. It is doing very, very well. We talked about the Big 60 inflation device, and we still have the EndoMAXX EVT and what we call the TIO product, which is a new disposable product, as well as the dilatation balloons for our endoscopy.

One of the things we are doing much better and that we hope we will be able to -- we haven't turned the corner yet, but we are getting there. If we look at the Endotek business, we have reduced our losses in that division from almost $1 million a year ago to about $330,000 for the quarter. We would expect that by the time we get to year end we will be profitable. It might just be one month or two months, but we he are going to start to make a profit in this division, and next year it is going to be very profitable. And so it has taken us longer than we thought.

It has been painful for us and painful for you, but we think that this division has great growth prospects. Gross margins, I should mention, are approaching 60% and could get as high as 70% as we move down the road. So instead of being a drag -- we were just talking about this a couple of calls ago -- it is going to start to be a great contributor. So we have worked hard on these divisions, and I think this is one that is making a lot of progress. Last month, when we take out intercompany interest expense, it was essentially at almost break even. One month does not a trend make, but we believe that we are on the right track, and this particular division is going to be something that we will be able to talk about proudly. We always talked about it proudly, particularly the patients that is serves and the quality of the product. So there is another area we are very excited about.

In terms of other new products, let me go over them a little bit. I have talked a little bit about them. The Elation Dilatation Balloon. Very nice market. It is in our Endotek division. We will be filing 510(k)s on that product in the next 60 to 90 days, and so then we will have to go through the regulatory process. But this is an area that is a new technology for the Company. It is one we worked very hard on and one that we think will serve us for a number of other balloon products in other divisions of the Company as we now expand our balloon technology.

I talked about the BasixTOUCH. It is an exciting product. As Kent pointed out, we're doing 13.5% on our inflation device when you take out one of our OEM customers. But this [new] inflation device is a30 ML device that will is a capacity of 35 atmospheres to 40 atmospheres in terms of its pressure rating,and it is an extraordinary device that we are excited to get into the marketplace.

I mentioned the hydrophilic sheaths, I mentioned the ONE Snare, and the TIO. Let me talk to you about the Concierge Guiding Catheter. For a number of years we have had a guiding catheter, which we've been selling in Europe. But becauseof patent issues we have not brought those -- that product forward. We have developed a new product in trials -- animal trials and bench trials with cardiologists. They have rated this product equal to or better than any on the market. It is a natural fit. We will be later on this year, but this is a product that has $150 million to $200 million worth of market in the US alone. We are very excited about this product and what it means for Merit.

We have the BowTie. This is kind of an interesting little product and drives a lot of issues, and this will be something that I will talk to you about on the road. Of course, the [OsteoPro] is doing well. We are opening new accounts. The thing that is really exciting about the OsteoPro is what it does and the accesses it allows us and the pull-through that come interests this.

So these are products that we have essentially just introduced. We trained our are sales force. They are out there and about , and it is one of those products that nobody else has. Nobody has a product like this anywhere, and we are very excited about what it means in the marketplace.

I would just add that April is really the first month we are getting started with it in the US with training and samples and everything and having the sales force really equipped, and international is to follow. And like you said, the access to it is really interesting, and it so synergistic with the ASAP catheter and the Concierge, which is the exact catheter it needs to go through to deliver. So it's going to be real synergistic, I think, as we go through the next coming quarters.

Yes, and also the BasixTOUCH. It something we do in [place of] devices that go right alone. So it's niceto have a very strong lineup in our cardiology line, which has not been our strongest point over, let's say, the last ten years because we have focused so much onradiology products. Also, we have redefined and made some adjustments to the Centros catheter, which we acquired, which was developed by Dr. Steven Ash, and we are introducing that product into the marketplace. I believe and I am told by physicians it is the best hemodialysis catheter on the planet,and so we are very excited. At the recent SER meeting we had 45 or 50 leads just for this product. And so it is now rolling out.

So I think you can see that we have products that are exciting in the future. We have markets in which we invested heavily in the past and some of now which are in the development stage that we are very excited about. We do have this international flavor, which I think, again, if we didn't have that -- and there are other companies that don't have it -- the US market is soft, and having this breadth that we have is very important.

The fact that we believe, you believe, and we all believe that Merit can do better, that we can improve our profitability, we have do better with our expenses and in fact that we can control discretionary spending and other areas in the Company to give better financial performance are things that are on our mind constantly and things that every person that is sitting in this room today -- and I am sitting here with about 25 members of my staff -- every one of them know what their call is. Every one of them has either -- I don't want to call it the hot seat, but it is a little bit warm -- has sat on that seat to talk about areas in which the business needs to adjust.

We also are adding additional capacity, and we are going to consolidate. So I think in terms of efficiency in the future with some automation and things we are doing here, it is going to help reduce our overall head count in terms of production. It will be much more automated and much more efficient as we move throughout this year. So I think we are doing all of the things we should be doing. There is more that we can do. But I think that overall I'm very pleased, particularly in the sales organizations, and outside the US, the technology company sensors, coatings, and those areas are doing very, very well.

So, Kent, that is about all I have. Do you want to add some more color in terms of the financial side?

I would like to add some color to the fact that we have started to control costs. I have another measurement of that. Last year we increased the head count 200 people. This quarter it is only up 35, and 23 of those are all in the sales around marketing area that we talked about when we did our guidance. They are international sales people in large part and some in the US. So almost the entire growth is in the areas we said we would invest in and there has been very little elsewhere. A little bit in R&D as well. So those areas of -- the G&A areas and the manufacturing and administrative stuff is not -- we are holding our costs, is what I guess we are saying.

And Kent doesn't talk about things unless he is excited about it and he believes it. So I appreciate you mention those things.

Listen, we spent about a half hour giving you an overview. Let me do it again in summary. What I think is good growth. I think there is substantial growth in front of us. We have a great product pipeline. We are working on the new products, these cost issues. There were a couple of extraordinary expenses with some severance and other expenses in the quarter. Some of those are one-time expenses.

So I think all in all for us from my perspective it was an okay quarter. I'm not here to bang the drum and say it was a great quarter. But I think, as Kent pointed out, it is kind of at, okay, we built the foundation, we have our marching orders, we have our R&D moving, we have our eyes open, and we are marching forward, and we will be able to I think perform better.

Our gross margins, by the way, were up 40 basis points quarter to quarter. Remember, we promised you 150,but we have a lot of work to do. As we sew the OsteoPro, as we see the snares and some these other products roll out, we'll start to see that as they move forward through the year. Kent?

When you take out the amortization, the non-GAAP version of gross margins were up 60 bits, so [that helps].

Okay. All right, well, thank you. That's helpful. Good. Well, ladies and gentlemen, I think that is it. I think it is now time -- it is your turn. We'll see if we can answer those tough questions that you have been formulating. So at this time we will go ahead and turn the time over to our operator and ask that only those who are friendly to us talk to us. I'm just joking.

Thank you. (Operator Instructions). Our first question comes from the line of Larry Solow from CJS Securities. Please go ahead.

Good afternoon, guys.

Hi, Larry.

Just to follow up, Kent, just real quickly. You mentioned last year the head count was about 200 on the upside, and this first quarter was you increased it only about 35. Is that a good trend? I mean, you had talked about some initiatives in the sales force, and I imagine that is still ongoing, but do you expect head count -- any way you can give us an outlook for the full year on where you think head count might be? Plus or minus --I realize it is not an exact science.

No, I just think it is slowing, and the growth is, and we are holding the line in many respects. And a lot of the sales people that we committed to have already been hired in this quarter. There are still a few more to go. There is still work to done in some of the foreign -- India and Brazil and some of those places that we talked about. But the overall head count growth has slowed overall, and wewatch it every week, and it leveled off in total.

Right. So -- I mean, looking at SG&A, is this a good level to look at, and as sales increase you will have the variable comp rise, but -- which -- isthat a fair statement?

Yes, there is going to still be some increases, but as a percentage of sales we hope to hold this if not lower it a little bit.

Okay. And then as you look out into 2013, obviously you talked about a couple of the initiatives. I would imagine you'd get half these initiatives, and even your SG&A could still grow a little bit. You could still get some leverage there. I mean, is that your take on it as well for next year?

Larry, this is Fred. I don't think there is any question that in order for us to be able to talk about doing better, that we are going to have to get this leverage. That means we are going to have to control our expenses, make sure we're focusing on the higher margin product and growing in the marketplaces, but restrained in areas that we -- in fact, these discretionaries that we have control over. SoI think we understand what we need to do.

Right. Could I just clarify? You mentioned $2 million, I know, for the -- that you called out in the press release for improved procurement it looks like. And the other two whatever million -- two point -- $2.5 million, is that a combined reduction from head count and discretionary spending? Where is that number coming from?

No, let me clarify that, and thank you for the question. The one I mention in the press release, there is one product, our stent products in which we are reducing the cost just in that product line. There is a cost of goods on that of about $6 million. We are going to reduce it by $2 million. Now, think about that. That is pretty extraordinary, and that is going to then take that product group in terms of gross margin from 60% to 70% or better.

So that is just one. There is another product, the cost savings issue, on another catheter, and the cost savings on that group alone is about $2.4 million. So these are just two products. On top of that we have a goal of another $5 million or so of cost savings this year. So that is a big plate of beans. That is a lot of stuff. Kent?

I do want to say that they'll be phased in over some time, boththe number of catalog numbers in the catheters will take some time to fully implement, and the timing of rolling through the inventory and getting your older, more expensive out first through the cost of sales before the lower cost items follow behind it. And so it won't be all at once, but you will see the opportunities in the next 12 months of this rolling through.

Yes, but I think the point, Larry, and then we will move on to any other questions you want, butas Kent is pointing out, some of these things will come into place in the third quarter. We will have to sell the inventory that is already on the shelf. What [that] means is that as we move forward into 2013, just on the two alone you are talking about over 100 basis points in gross margin that are coming out of costs.

Right. As soon as those products are flushed through, so [good bread]. No, understood completely. Just if I may switch real quickly, just the US market -- obviously I know things have been slowing down for the last few quarters, and unfortunately for you guys you have a good piece of your business outside the US. Anything in particular? Is it just utilization in hospitals that continues to remain lackluster? Anything, trends you saw the quarter or anything that stands out?

It is hard for us to just put our finger. I think utilization is one of it. Monroe, do you have any other thoughts you are seeing out there other than utilization?

(Inaudible -- no mic) we are hearing that procedures are slowing.

Yes. So basically just procedure, and that is from the guy out on the firing line, our Vice President of Sales. So we are just seeing the procedures. I think, listen, we are in a tough economy, and it is going to get tougher in my view. We have got this election, we have these taxes coming up. We have all of these things that people are starting to pull back on, and we are just seeing --

And not only that, but it is amazing that we are seeing some things, for instance, in certain areas where various government initiatives are starting to slow things down. I will talk to you about that offline, but we are actuallyseeing evidence where they are trying to reduce usage of certain types of products, and we will talk about that offline so that -- anyway for obvious reasons.

But I mean last year we did 7.5%, 8%, I think, in the US. This year, 2.5% at least for the first quarter. Do we think it will get better with the new products? We do. But at the same time I'm sure glad we made these investments, and there's -- we have got those dealers and there is China and all these things we have done in the last several years are going to make a big difference.

And continue to do.

And continue to do. I think the companies that didn't make these investments and they have 80% or 90% of the revenues coming in the United States are going to have to face the music here pretty soon.

Great. Okay. Excellent. Thank you very much. I appreciate it.

Thanks, Larry.

Thank you. Our next question comes from the line of Brooks West with Piper Jaffray. Please go ahead.

Hi, guys. Can you hear me?

Yes, we can, Brooks. How are you?

I am doing well. And, Fred,I encourage you not to feel bad feel bad about 10% topline growth.

Okay, I'm feeling better since you said that.

There you go. A couple questions. BioSphere at 2% and you said, I think, it was the EmdoSphere side was soft. Could you go into that a little bit? Is that the old [Euroginde] business. What's going on there, and is that a trend we should continue to see?

Yes, I think it is. It's the area of uterine fibroid's, so UFEs. Again, I think it goes back to this utilization. This is basically a US product, and it is kind of falling right in line with the growth that we are seeing across the board. And if you go tomorrow of the women's health issues, at least our experience and what we have been hearing is many of those things have been slowing down. So I think this is just in line with that overall, where we are seeing --and I would also say some of it is focus, because we believe there are great opportunities as well in these other areas, particularly on the oncology side. And we have been focusing in those areas, because of some of the disruptions in other opportunities that we see there. Some of it is focus, but a good portion of it is really the trends and utilization in the marketplace.

So, Kent, just to follow-up on that, understanding that the oncology beads or the drug delivery beads are doing well, should we be thinking about BioSphere as a low single digit grower until the cancer can grow to offset the UFE?

It has been a little lumpy, I mean, as far as the ups and downs of the bio -- the uterine fibroid business, but we think there is another growth opportunity, but it is not going to really be a lot this year. But BPH is getting a lot of press in interventional radiology. It was at the SER. We are seeing it in communications within the industry. That will be I think a great opportunity, and one we are really looking forward to for the embolic product, meaning the EmdoSphere that we are talking about. But it's not going to be real quick, but it is coming.

Well, and -- this is not on the public record -- I know there will be a live procedure in Sao Paolo broadcast in the United States at the GEST meeting, which is the Global Embolization meeting in New York showing this new procedure. So we are not here to promote that procedure or that use, we are just simply saying it as trend that is out there that will be seen other places in the world and eventually I believe we will be approved in the United States.

Another thing, Brooks, justa couple of other points. We have a new embolic. We referred to it. We don't give a lot of the -- we talk much about it. But if you look in the press release here, you'll see there's a new product called the Bearing. It will be out later this year, early first quarter of next year. So we have a new embolic developed by Merit at our BioSphere laboratories, so we have something else that we will be showing that will be part of this.

So even if it is mid digits this year, I believe that as we look forward to next year my belief is that in 2013 with some emerging procedures worldwide and new embolic and continued growth in the oncology, that it would not surprise me at all if you saw it up in the double digits as those products are introduced next year. So there's just a couple of other points that --

And one last point. The wonderful thing about the business is this pull-through. I talk about it a lot. Remember, every one of these embolics that we talk about, whether they use our product or somebody else's, has to be used and delivered. Our microcatheters are up 80%. This isn't a new product. They are up 80% from the year-ago quarter. And I just think there is a lot of other pieces of the business -- and then you go back to that 10% plus, 10.4%. The embolics may get a little soft. I think, Kent, used the word lumpy?

Yes, and uneven.

That is a new one for me. But there is a lot of pull through of a lot of these other products that Merit benefits, and the microcatheters would be one of the primary beneficiaries of the pull-through.

That is helpful. Two more quick questions. R&D, Kent, was a little light versus our model. I'm wondering is there some timing in that, maybe some spending that is moving around?And then kind of remind us where R&D should be as a percentage of revenues for the year?

Well, dependent on -- we were talking in the low six to mid -- 6.2%, 6.5% for are what I call core R&D. That is for a lot of the products Fred has been talking about in the endoscopic business and some of our other -- vascular access and drainage and so forth. But the other part of it is the trial, and that has been a little slow. And has been a little behind what -- depending how you spread that out, that cost of $3.5 million we talked about in our guidance. So it has been less than that, and that is part of what has helped this quarter be ahead of our --

And if I could, that's -- therehas been a shortage ofdoxorubicin, so it has been slower than we like. But one of the important things, Brooks, that I see is continued respect by physicians for that the fact that we're doing the study and how important they think it is. So thisshortage has slowed us down a little bit, but we still believe that this is an important study and that we will have huge returns on the back end of it. So that is a little bit of maybe I think some of the lumpiness that Kent is talking about.

And should pick up a little more through the year.

Okay. And last one, just on tax --Sorry, Fred, go ahead.

Let me just jump in. One of my goals is to offset those costs through these cost reductions; through head count, through efficiencies and cost savings. So I'm -- what I'm working very hard to do -- and we won't see all of that, but I can tell you that these programs are in place. We are not just thinking about them, they are being done. Our goal is to offset not only the cost of that study but additional costs to improve our operating margins across the board. So we are serious about this. Very serious. Go ahead.

Thanks for that. Let me just last one on tax. You mentioned you had a one-time benefit. Kent, could you -- how much was the one-time benefit this quarter?

About 1.5% --

1.5%.

-- reduction -- yes -- for this quarter over what it would have been. More like 29% is where it would have been?

And that goes away after this quarter?

It is undetermined. It could continue. It has to do with how the investments are out there in our fund. [It's] like a 401(k), but it is [nonqualifying].

So that -- what you are talking about here is the deferred compensation. But I think it raises another question. Kent, I am going to ask you this question -- Brooks, if you will give me some license here -- and that is, we had talked during the year about an effective tax rate. Would you talk about what the current thinking is on our effective tax rate for the year?

Yes. We are closer to 29% or 30% is where we think we are going to be for the year, based on what the first quarter ran like and what we see projecting [and what we are] continuing the plan forward. The mix could change on that. The transfer pricing is a tricky thing with international business when you have contract manufacturing in Ireland. That is particularly where it is, because Ireland is what drives this more than anything else because of the differential between their tax rate and what it is in US or other places that are much higher. So we are taking advantage of a structure we worked on for a long time, and that flow of it could be plus or minus a few, but we are thinking we can save a little more on taxes than we originally thought.

And, Brooks, I think again we have worked very hard for many, many years to work on this tax strategy, but if you're talking about29% versus the US corporate rate of 38%, I think we have an effective plan. And as you know, we have a new facility in Ireland opening up sometime around mid-May, and that will allow us to build more products there in the future that allow us to have a lower tax rate. So this is a trend that you will see and continue to see, both on the OUS types of business as well as our manufacturing businesses, a much lower effective tax rate over time based on our tax strategy.

I mean, even in France the embolic products have a 6% lower tax rate, so as that grows profitability there, it helps too.

That is all I have. Thanks, guys.

Thank you very much.

Thank you. The next question from the line of Jayson Bedford with Raymond James. Please go ahead.

Good afternoon.

Hi, Jason.

Hi, Jason.

Just a couple of follow-up there. The old tax rate, when you gave the guidance, the assumption was 33%? Is that correct?

That's right.

Okay. And then you talked about the $4.4 million in cumulative savings. That will manifest in the cost of goods. The additional $5 million, is that in SG&A or is that just sprinkled through the organization?

It is kind of sprinkled through the organization. Most of it, though, is operational stuff, so it's gross margin stuff. There are things like automation that we put in place. It will be savings in packaging. It will be savings in lots of areas of the business where we focus on reducing price. Most of that will be above the line.

Okay. On the topline you saw a nice step up in standalone sales. AndI realize there is a ton of products in there, but what really -- isthere any kind of one or two products that you would highlight that really accounted for the acceleration in growth?

Yes, there is a couple that jump out. This is kind of an interesting -- if you take a look at, for instance, our VacLok, our patented VacLok syringe was up 69%. If you take a look at our -- this is an interesting one -- our diagnostic guide wires, these are things that have been around for a long time. We manufacture them in Ireland. They are up 38%. A lot of this is attributed to the disruption some players who have become weaker or who have left various markets. 38% for what is generally regarded as a very, very mature market.

And another one, the biggest one in the group is [Maps]. They are up $800,000; 28%. Talk about a mature market, but a lot of that is the international. China and stuff keeps growing.

Yes, so Maps would be our hemostatic valve, and there's another segment tothat. Our Honor Hemostasis valve, which is again right -- essentially a Map, but it has its own line item -- or hemostasis valve, is up 82.5% over a year-ago. These are extraordinary numbers. And this comes a lot from our dealers in Europe and Russia, and these are by the way are 80%, 90% gross margin products, so these are very, very nice products.

The EN Snares we said was a big contributor in that family. The Scion [Clo-Sur] patch is also helping out in there. That's anotherone that's added a couple hundred thousand this quarter, new revenues.

Okay. Just in terms of OsteoSolution or OsteoPro, you didn't see a big impact from that in standalone, where I'm guessing that is where that product gets categorized?

It is.

That is, correct. Yes, we did not -- itwas relatively new. We were training and just were doing -- getting samples out to sales people, so there is very little effect. But you know, I think, as I mentioned in my previous comments, we get into places, Jayson, we have never been able to get into. We are sitting shoulder to shoulder with physicians and teaching them and showing them how it should be used, and the techniques and so on, so forth. We are doing those sorts of things, and itis amazing, all of a sudden we are their best friends.

It's really -- read all the comments from and chatter out of the sales force. It is just amazing the confidence it gives them, and that means you are going to continue to see products across the board be sold. SoI love the pull-through, and I also like the gross margins of a product selling for $800 with about a 75% or 80% gross margin.

And the trend is strong. When you look at it from February to March to now in April, it is like doubling, but it is on small numbers.

Yes. It will get bigger.

It is little, but it's happening. It's rolling.

Okay. And then last two quick ones. The old BioSphere business, can you break out the growth between the US and OUS business? And I guess my specific question is more did you see any impact from excess inventory in the channel in the first quarter?

Jayson, we don't have that number in terms of outside the US in that particular thing, but we will dig it up and talk to you after the call and be able to respond to you. It is not material in terms of disclosure issues, but you we are happy to break that out and discuss it with you.

Okay. And just maybe I guess, just -- and maybe I missed this, but US versus OUS in terms of contribution?

Yes, it has moved up another percent now. It is 36% of sales for international.

Okay. Thank you.

Yes.

Thank you. Our next question comes from the line of Chris Cooley with Stephens Inc. Please go ahead.

Thank you for taking the questions. You hear me okay?

We can, thank you.

Thanks, guys. Could you -- just two quick ones. First, youare doing a phenomenal job on the top line. Can you help us sync, when we look at the guidance range for the full year, what --either as a percentage or in dollar terms, how should we think about the contribution coming from the newer higher margin products and also the step up in ASP that you get as you go direct in these emerging markets like China, just so when I think about parsing out the growth in that respect? And then I have a quiche follow-up.

The sales this year in most of those conversion area are still pretty small. We are in a transition period. I'm talkingIndia, I'm talking Brazil. Russia is a little ahead. It's actually doing pretty well, because we got started a little earlier, and we don't need the infrastructure there with the distribution and customer service already set up in the Netherlands. But -- so it's relatively small impact as far as on gross margins, because the dollar numbers aren't huge there as we convert over, but we are in that process. It will help. I don't have specific numbers to give you bips for it off the top of my head. I can just talk in generalities, but it is a large impact, because it won't make a lot of dollar sales change this year.

And then when you launch those products, you have the samples that go out with them and this sort of thing. So I think what we are seeing now is minimal impact, but on the OsteoPro, on any of the newer products you'll see that we -- we do see higher prices in places like Russia. We see higher prices than I think our corporate average -- or better than US prices in many of these marketplaces.

And the Middle East.

And the Middle East, we see high price there. I think as -- whether it be Brazil, India, the Balkans, Russia, that much like we saw in the US when we switched over and went direct in China, you get the contribution both in units -- As an example, inthe Gulf area today we are participating in an $8 million tender, and these are just the products that Merit -- we have never been on those tenders before. So this is going, again, continue to be a high level of focus for us, and they will contribute to higher gross margins and overall growth.

Super. And I know you like to provide guidance once on annual basis, but during the call you talked about the tax rate now a couple hundred bips lower. You've talked about a couple of initiatives that are clearly going to improve the gross margin line. Any thoughts as it pertains to the earnings guidance that you set out for us after the fourth quarter call?

No, I don't think so at this point. It is an interesting question, and we look at them. And we're not ready -- it is within the sales range that we said. As Kent pointed, around the high side of -- I think we went, what, 9% to 11%?

9% to 11%.

9% to 11%, so we are on the high side of that. But I think we are going to stay where we are. We get into the second quarter -- and again, just as kind of a heads up, it is always hard, even if we have a great second quarter, to kind of up it as we go into the summer, because you know we always have a reduction in procedures. So you always kind of -- it'sa tough place.

So I think what we will do is we know that the tax rate and just kind of a general feeling about what is running through there, that -- we were probably too conservative there. Right now we will just stay with the rest of them. But I think what will be fun and enjoyable is to sit here and talk about the improvements in these operational issues as we move through. That is the part that has our focus; cost, discretionary costs, above the line, below the line.

We are looking at everything, and that is our job. And at the same time we don't want to ignore the growth prospects. We don't want to mortgage the -- or sell off the opportunities by trying to get so tight that we can't grow in these markets like we did in China. I know that some people actually criticized us about the investments we were making in China. We don't hear much of that criticism today, because it has been a great success, and these other areas -- we are already seeing the success there. It will just accelerate.

Okay. And one final question, and I will hop back in queue then. When we just think about the initiatives that you articulated here today on the call, and you think about the improving margin profile of the top line -- of the products that you are selling that are contributing to the top -- the primary contributors to growth on the top line, longer term should we see a material step up in operating margin? I mean if I just add the $10 million roughly in cost savings that you talked about, which are predominantly on the growth side, that gets you up closer to about a 12%, 13% op margin, at least off of our assumptions, which is still -- I know you are outpacing peer growth pretty materially, but still pretty significantly lower than your peers at the operating levels. I'm just kind of curious where you see operating margins going over the course of the next two years, or longer term?

I think the way I would like to respond to that is that we recognize we can do better. We think we have to discipline ourselves, but it is something that we have to do. This isn't, as far as I'm concerned, optional. It is something that we have to do. It is something that we can do. And so I don't like being a sub-performer. I don't like being in a situation where we are growing and not giving those returns. And don't candidly, I sure as hell don't like a $12 stock price.

So how am I going to serve the shareholders are? I'm going to grow the top line, and we going to have to increase those operating margins, and that is what we are focusing on. I mean, we are not just talking about it. It is like laser focused. We can go around the room here. We could just go one by one, and everyone in this room knows what they are expected to do, what their contribution is, where they need to hold the line and the changes that we need to make in our behavior and our business to be -- have more success. More success comes from better operating margins.

So rather than give you the numbers and throw some things out there that would be off the top of my head, listen, 12% -- 15%, very hard to do. 12% is something we are certainly capable of doing and we should be doing and we will do. Now, I'm not going to tell you next quarter, next month, whatever, but I'm just telling you that'swhat we have to do and that's what we will do.

Understood. Thanks so much, and congrats on the great quarter.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Jim Sidoti with Sidoti & Company. Please go ahead.

Good afternoon. Can you hear me?

We can, Jim.

Good, good. I was afraid I wasn't going to get on, Fred. The one times in the quarter, now there's about $0.01 of those, and I assume that is related to the Osteo acquisition?

Some of that, yes.

Some of that. There is some severance from some changes in areas there. There is several other areas of some one-time expenses that are in there, Jim.

Okay. Now, you mentioned that the capacity in Ireland should come online late in this quarter. How quickly does that ramp up, and what is the impact of that on your gross margin?

We are going to -- we have several businesses starting up in that particular facility. Some that are new. Some that we do not want to disclose here for competitive reasons today, but I will assure you -- and I have the project manager of the facility sitting with us today, and we expect that once we get into the May 17 -- is that it? So we will have the prime minister of Ireland and a number of other elected officials in Ireland will open it up in May. You will probably have 30, 60, 90 days of -- we have to set stuff up. So you are not going to really see anything effect in terms of its production and its effect until we get into the fourth quarter.

But on the other side, could that actually be a drag on gross margins for the second -- part of the second and third quarter?

Yes, so listen, Jim, we to start to depreciation the building, starting in the fourth quarter, certainly earliest. That is going to be a charge there. However, where we are looking at growth and where we are seeing the fastest growth and where we need the capacity is there. So by definition you will have the expense, but as Kent points out, we have new snare products. We have the EN Snare that is growing. The guide wires we talked about that are built there. The hemostatic valves that we discussed are all built there. The Basix. So all of the products that are growing like crazy are all built there.

All right --

So [we've got] a lot of absorption opportunities there is I guess what I'm saying.

Okay. And then last two questions. What was the international sale is growth for the quarter?

It was mixed. It totaled up to 36 -- it was $5.7 million, wasinternational growth. Up 33% overall -- or 20%, was it? No, that's too low. It the higher than that. Anyway, and then it was [3.2] that was domestic. So I don't know what answers your question, but it moved us to a ratio of 36% up from 35%.

Can I throw something in there too that sometimes I think is overlooked. I know,Kent, you have commented on the past. You have to remember that we threw on -- 18 months ago we threw all of this BioSphere, of which 90% of those revenues were coming from the US. If you kind of back that out and then looked at what Merit is on the international side and this and that, it is going to go over 40%, because you are backing out almost $30 million worth of revenues. It's essentially -- we're just almost all US. So pull that back out, and you see even more dramatic numbers in terms of what our outside -- OUS numbers are. If it you back that out -- Now, you can't back it out, but I want to -- it is more dramatic than even it appears is what I'm saying to you.

Okay. So -- but if you leave it in -- I'm sorry, Fred, I didn't hear the number. It was 20%?

Yes, it is 20%.

20%. Okay. And then the last --

Overall. It grew 20% outside the US.

Last question is on the debt. Now, I assume that went up because of the acquisition. When do you start to use cash to pay that off, or are you comfortable with debt level, or do you think you will go up from here? What are your plans?

Jim, the debt level that we have today, the acquisition costs were paid off of BioSphere. We have made, as you are aware of, a couple of acquisitions during the quarter --

Yes, $12 million we borrowed basically for that purpose. Most of it was OsteoPro.

OsteoPro, and the rest of it --

A couple little ones.

And the rest of the capital that being used in the debt has been accumulated for the Irish facility, which will open up, and new facilities being built in Salt Lake City.

There was $12 million in buildings in this quarter.

In this quarter. So that's $12 million. Just a reminder we will be actually shutting down one of the -- actually the original facility that Merit leased. We will about be shutting that down at end of the year or early first quarter of next year and consolidating all of that out here on to our campus here in South Jordan.

Okay. So what are your plans as far as -- assuming no acquisitions for the rest of the year, when do you start paying off that debt?

Well, we are going to continue to spend more than our operating cash flow on completing the facilities. There will be a few months left in Ireland, and then all of this year and a few months into next year for the other facility. When those facilities are completed, our operating cash flow will exceed our CapEx requirements, and we will have free cash flow to start paying it down. So you will see that starting into next year. Mid-year it will start declining. That's barring transactions or acquisitions, of course.

Right, which --

$7.5 million that we will be paying in the second quarter for Osteo and Scion as well.

Yes, I think that pulls into what Kent said. So it will continue -- it will be a net borrow through the end of the year. Those projects will be paid down, and then we will generate substantial -- start paying it off as we move into next year.

Okay. Thank you.

Thank you. And our next question comes from the line of Ross Taylor with CL King. Please go ahead.

Hi. I just have two or three questions. I'll start, some of the cost saving initiatives that you've mentioned, I guess totaling about $9 million. Are there any other areas you may invest in that would offset that savings, so we don't see all that flow to the bottom line over time.

Well, I mean, there -- Ross, we're looking out and looking forward, [other areas] that we'll invest in. We look at knew things every day that walk in. But I want to point something out to clarify something. We set a goal of $5 million in cost savings. We have these two other initiatives that are going on. There are many other areas that have our focus in terms of cost savings. I don't want to go into all of them, but there is a number of them that are out there. So they are across the board.

In terms -- I missed the second would you repeat the second part of the question? The last part of it? Oh, other investments, yes.

I mean, this capacity is part of that.

The capacity is the biggest part of it that we are investing. We are investing in the R&D part of it. There is CapEx that goes into equipment and automation for the new products that are coming on. For instance, in the balloon products we bought a lot of equipment last year for balloons. So -- but I don't see anything major other than the facilities themselves that we will be investing in.

Okay. And also just on the gross margin, it sounds like it is up about 60 basis points year-over-year if you exclude the amortization expense. And given that your annual goal is much higher than that, is that kind of consistent with your thinking for the quarter, or is there anything that maybe impacted it or held it back at all in the quarter?

Oh, boy. It is really good question. I will say that I think we can do better than that, and in fact we have to bring a lot of stuff. I think the OsteoPro will add to that. The Clo-Sur hemostatic patch will add to that. And then many of the new projects we are launching are relatively inefficient, because you have the cost over the manufact -- you're starting up. So I think as things come on the line during the year will help us substantially, as well as these cost savings products are going to help the gross margin as well. So we will be fine. I mean, generally we have been holding onto this 150 basis points as a goal every year. I think last year we may have missed it, but if you look at the last five years or six years, we have hit it every year. So we will get there.

No, we actually made it last year.

Did we make it last year? Yes, we were right on the number.

Yes, you take out the inventory adjustment for BioSphere product --

But the point is that we haven't missed this for five or six years. We'll get it.

Okay. And my last question is, I don't know if you can outline your launch or marketing ramp-up plans for the OsteoPro at all. I mean, what your expectations for that might be over the next 12, 18 months.

First of all, let me point out that it has not been approved in Europe at this particular point, and so any of the stuff we are giving is just the US market. It has not received approval in China, Japan, in any place else. So we are just selling it in the United States. We think it will do several million dollars. We had a market I think what it was, Kent, about $3.5 million that we estimated this year.

Yes, we've a range of $1.5 million to $3.5 million.

Yes, so we have the range. It is not huge, but then it will start -- this is a product, like even to this day we had two or three new accounts opened up just today, and it is something that the sales guys are very excited about because they can get in and sell all their other products. It is a nice lead product to do it. So -- and then as we go down the road and get these other regulatory approvals, we will have regulatory approval I would say in Europe sometime probably in the fourth quarter. Maybe third quarter late. Third quarter. My guy is telling me third quarter. So they will start to accelerate as it becomes available in other places on the planet.

I will tell you that we were showing it recently in the Gulf states, and they are very excited about it there, and we are actually training in the Gulf states right now and Dubai and other locations, Saudi Arabia, of places where they were using it and there is a need for it right now. There is also some studies that coming out that one of our physicians pointed out -- it's a left main study -- that essentially requires that you -- well, let me just say you would want to make sure you place this stent properly. These are being done by Abbott and other companies. But there are other things that we think will bring more and more attention to the OsteoPro.

Okay. That is helpful, thank you.

Thank you. Our next question comes from the line of Gary Macosko with Lord Abbott. Please go ahead.

Yes, thank you. Hi, Fred.

Hi, Greg, how are you?

Fine. Just so I understand you mentioned early on with regard to Laureate guide wire. Was there another quality issue you mentioned or something? I wasn't clear on that when you were talking --

No, what happened is that we received a notice from the -- they did an inspection of our Irish facility in the fall. We got a warning letter in early February -- mid-February saying they thought we should file an additional 510(k). We had already filed and received approval, and there have not been additional quality problems for the product, and we have complied with the request. In meantime we are selling it in China, we are selling every place in the world --

No, Fred. What I mean was -- so it's all -- everything you talked about was just with regard to the Laureate and there was nothing else discussed?

Oh, yes, there was. Thanks, Greg, now I understand. We had a problem with one of our devices that probably had a charge in the quarter of about $100,000 --

Between the Laureate and that we had about $200,000 charge is all. 20 basis points.

Okay, there was a $200,000 charge for these particular issues in the quarter. So I'm not going to put out any additional tentative information, but a $200,000 charge in the quarter for these particular issues.

But it has been resolved.

But it has been resolved, yes.

So there was a second issue, but it is resolved.

That's correct.

Okay.

And it did not involve a recall. Did not involve the FDA or anybody. There was just an internal production issue that had to be resolved.

And I don't think we lost much sales for it. We had to maybe back order for a short time, but we refilled those.

We had it done and --

Okay. With regard to -- you talked about procedures in the United States. Are you saying that procedures slowed down, or were you saying they continue slow, because that is one of the things we had been hearing last year.

We -- I think we would say that they are slowing down even further. As we look at our sales based on our business experience in the sales that we're seeing in the US, our sales force and the numbers would indicate to us that it continues to slow.

Okay. Then I saw that accounts receivable were up 12% sequential. Does that mean anything versus sales being up 5%?

No, it was because of the strong sales in the end of the quarter. March was really heavily loaded in the quarter. So our days average receivables was only 43 days. 42, I think it was. So we are still healthy there. It means that the collections will go bigger. You will watch that drop down in a month or so.

Okay.

I'm not concerned about it.

Okay. And then finally, when you talked -- I believe you talked about it was the Endotek you were talking about with regard to being very profitable, or you hoped for good profits in 2013. Was that the division or group --

Yes, and part of the reason is that if you take a look at that, that area is going do about $13 million in revenues this year, and we going to pull a full $2,000 -- or, excuse me, $2 million out of about a $5 million or $6 million cost of sales, we are going to pull out over $2 million. So we are going to reduce cost of sales by about 40% or so.

Okay.

And [ASPs] are up because of our new stent, we are getting about 20% higher prices. So we are essentially, when you back out intercompany interest --

Good. Thanks very much.

-- we expect it to be much better. Thanks, Greg.

Thank you. And our last question comes from the line -- a follow-up question from Larry Solow with CJS Securities.

A couple of quickies. Did you mention anything about the tender in China and Beijing? Any update with that?

There is no update on it, Larry. If there were --

That's fine.

I tell you what has happened though is we are selling products that are on the -- that are approved. It is starting not as quickly as it would if the tender were approved, but there are other territories and --

Laureate and some of these --

Laureate and some of the products are starting to sell.

A little bit.

But not as they would be if it was all done, so --

That's fine. Could you give a cash flow from operations number, and then what CapEx was and D&A for the quarter.

Cash flow from operations was seven -- where did I put that?

$7.5 million.

$7.5 million, I think. $7.4 million.

Okay.

And the total CapEx was -- I remember the buildings were $12 million.

$16.5 million.

$16.5 million was the total.

Okay.

So we had $4 million in equipment and $12 basically -- $4.5 million and $12 million in buildings. So what else did you ask?

And then I guess the CapEx is in line with -- I think you full year numbers in the 50s, some where, right?

Yes, and it was $16.5 million for the quarter.

How did D&A, did you get that?

Yes, the total was -- it was $4.7 million -- $4.8 million for the quarter.

Okay. In terms of the gross margin -- you guys have pretty much discussed every line item, and I know obviously going out further as you get more products, higher margin newer products, you would expect -- hopefully the goal is to increase the growth. Do you think in this year is this number is good base in the 47%, 48% range, or you know any color on that?

Well, our goal is to add 150 basis points for the year, so it would be 47%.

On a GAAP basis.

On a GAAP basis.

So you still think -- okay. On a GAAP basis. Okay. All right. So that would imply there is some upside from Q1. I imagine you expect some improvement as the year progresses, right?

That is our goal.

Got it. Okay. Great. Thanks so much.

Thanks, Larry.

That was our last question. I would like to turn it back over to management.

Well, again, ladies and gentlemen, we appreciate your time. We will be out to some of the financial conferences. Again, I think the issue is -- I'm going to pick up from Brooks' comments. We are generally pleased with the top line growth. We are not pleased with the performance. We believe that we can do better. We believe that we will do better. And we are focused on the actions and initiatives that will bring those better results. So I'm not here is to bang the drum, but I will though -- I think the topline is fine. I think we can do better even there. But we have got a lot of work to do to build this Company, put capacity in place to cut costs, to become more efficient, and very candidly be more efficient in getting our products to the marketplace.

And we are doing this -- by the way, I have not mentioned this at all today, but in a very, very tough regulatory environment. Not just because we got a letter, but across the board if you talk to anybody, the days to get things approved becoming more and more difficult. So there will be he times for us to have further discussions about those kind of issues in the fall. We understand what we need to do. I think if there were one issue that I would like to leave you, we understand the task. And we look forward to reporting the results of our efforts in the future.

We again thank you for your attention, your time, and we will go ahead and sign off now from Salt Lake City. Wishing you all a good evening. Thank you very much.

Ladies and gentlemen, that does conclude today's presentation. Thank you for your participation. You may now disconnect.