Merit Medical Systems Inc (MMSI) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the MMSI first quarter 2013 earnings conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to our host, Fred Lampropoulos, Chairman and CEO. Please go ahead sir.

Good afternoon, ladies and gentlemen. We are assembled in South Jordan, Utah, to present to you our first quarter results and to talk about a lot of items that I know that you're interested in today.

We'll start out first by having our General Counsel, Rashelle Perry, read our opening statement. Rashelle.

During 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 which are not historical, may be considered forward-looking statements. We caution you that all forward-looking statements involve risks, unanticipated events, and uncertainties that could cause our actual results to differ materially from those anticipated in such statements.

Many of these risks are discussed in our annual report on form 10K and other reports and filings with the Securities and Exchange Commission, available on our website.

Any forward-looking statements made in this call 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 United States, GAAP, 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 such operations.

The table included in our release, which will be discussed in 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 prepared in accordance with GAAP. These non-GAAP financial measures exclude some, but not all, items that affect net income.

Finally, these calculations may not be comparable with similarly titled measures of other companies.

Rashelle, thank you very much. Ladies and gentlemen, we have a lot to talk about today and a lot of issues that I know will be of interest to you.

Let me start out first and talk a little bit about the revenue side of things and explain a little bit about our business there in the first quarter. And then I will turn the time over to Kent Stanger, our Chief Financial Officer, who will discuss with you the various issues as it pertains to gross margins and the expenses that have been added there, so that you'll have a clear understanding.

Let's talk about revenues. First of all, as I think you're well aware, that we had a relatively slow quarter. This is not inconsistent with other medical device companies, and there are many, many factors behind this. Some has to do with utilization. Some has to do with the various aspects of the Affordable Healthcare Act. There are a lot of various issues that go into this.

Our sales increase over the previous year was 9%. However, of note for you is that 3% was the direct growth rate of Merit's direct sales, and the rest of that was added from the addition of Malvern. So that is, I think, essentially the slowest quarter in terms of growth that I can recall. And I can go through, and we'll go through a number of the areas a little bit later on in terms of those revenues.

Now, lest you immediately either get off the call or get dismayed, I will tell you that business -- that in March, we had a record month. We did $37.5 million. Business has improved substantially. And we have a number of new products and ideas that we will submit to you that we think will be of interest to you.

But the first thing I'm going to do is have Kent go over the gross margins, because we think that's an important thing to understand. Kent, you want to go through that?

Certainly. Gross margins were 41.4%, compared to 46.2% for the first quarter a year ago. And there's a lot of issues there that I want to disclose. First of all, we had a reduction due to manufacturing variances or unapplied overhead due to reduction of inventory. We dropped our inventory $2.1 million during the quarter and are managing that in a prudent manner. And $1 million of that was due to variances in Malvern and the lower sales volumes and production volumes associated with that.

The next thing of note is that we had new amortization of intangibles in regards to gross margins for Malvern, which was $1.3 million. And we also had a new tax, as you're aware of it. That was -- we've put it into the cost of sale. So that was over $1 million, almost $1.1 million and 1% of sales, adjustment to the cost of sales.

And finally, 0.6%, or $580,000 of one-time charges that have to do with the markup of inventory or the increase of the inventory cost due to the acquisition accounting values that are flowing through and are almost completed this quarter. We have a couple of hundred thousand of that left. The total adjustments was the 4.8% that you saw on a GAAP basis.

All right. Kent?

I might follow on with the non-GAAP basis, the gross margins were 44.4%, compared to 47.2% of a year ago. And if you take the tax out of that, which wasn't there to be compared, it's 45.4%. So still a decline of 1.8. And most of that had to do with the manufacturing variances I referred to.

All right. Thank you. Let me talk about the revenue side for a moment. You'll notice, and I'm sure you're well aware that Merit has reduced its guidance for the year by about $10 million. Almost all of that comes from Malvern. And I'd like to explain to you what our thinking is there and why we've done this.

When we acquired Thomas Medical, we had a forecast based on the best possible information and due diligence that was available. One of the things that we had not -- we did see, by the way, a substantial amount of record sales of product that was shipped out of Malvern in the fourth quarter. We were fortunate that we picked up about $1.7 million worth of that. But clearly, the pipeline was quite full. In fact, I think their amount was almost $8 million. Kent, if I'm --

For the quarter?

For the quarter, the fourth quarter.

The total was over $10 million.

Over $10 million.

Yes.

And for business that is doing -- was doing about $36 million, that's a pretty heavy fourth quarter. And so as we came into the first quarter, that pipeline was full and it was clear to say it was very dry.

Now, we talked with management at Thomas Medical, now they're at Malvern, and these are the guys that are now Merit employees who work there. And they indicated to us that this was not unusual to see a dry spot in that first quarter and that sales will ramp up over the year. That's what we have seen as we're starting to see that trend.

But where the fly in the ointment is, so to speak, is that what we're not sure of, but what we have anecdotal evidence to believe, is that we may have lost -- we didn't know this at the time, but we may have lost, and we have reason anecdotally to believe that the orders which represented about 23% of the revenues of Malvern, which were a major company that was the largest part of that business, may have gone to another company. We have reason to believe that.

We've met with the management of that company. And so that I don't say anything or mention -- if you'll go back into our records in the past, you'll know exactly who I'm talking about, because there are only three or four companies that we deal with on that OEM, that large size. So they may have gone away.

Now, we had the same thing happen at Thomas prior to Merit's acquisition, and that was another company up in the new England area, and they came back.

So I'm not suggesting they'll come back. But based on the best information we have, since we've not received any orders for them and it is now almost May, we felt that it was important that we would adjust the forecast in light of the presently known facts.

Now, we can have a lot of discussion about why didn't we know that or were there any indications and all this kind of stuff. I will tell you that based on the information we had, and this goes to the extent that we even lowered the price and sent a quote back to them, it was substantially lower than what they had received before, still at favorable margins, we had reason to believe that we may be able to retain that business. So that was kind of one of the big parts of it.

Needless to say, the rest of the planet was very, very slow, and I think you're seeing across the spectrum in the medical device areas.

So let me tell you what we've done, because I think these are the important issues that you want to hear today. In fact, I would say this. Once you get over the initial view and read this and hear what we have to say about what we have done, not what we're going to do, but what we've done, hopefully you'll have a much better feel for the action the company has taken.

The very first thing we've done is that in this division, we had approximately 155 employees. We've already reduced the employee load by 20 employees. It's not something I like to do. It's not something that's pleasant to do. But what we've done is we've matched the current demand with our capacity. We may have to make other adjustments, and we will in any area of the business where we see that we have to do that. Some of this stuff has been done just in the last 30 days, most of it in the last 30 days. As we came to kind of an understanding that we might see lower volumes, we adjusted the headcounts. And again, that's not fun to do, but we've already done that.

Let me tell you what we've done with the rest of our business. And we've talked about these things in the past, but I think it's important for you to hear these. Kent, of course, discussed with you about inventory. And you guys are all aware of the fourth quarter and the fact that anticipation of our move and our new facilities that we built too much inventory and we slowed the business down. In the first quarter, we reduced inventories by every $2 million. And by the way, I should note that that's even with 9% growth. The 9% growth is real. And, but it's inventories to sell that product. We still reduced inventories.

We meet on a monthly basis. We think one of the key indicators of making sure that we keep that inventory at the appropriate level is to meet each month. And we have the operational group and the marketing group that are accountable for justifying and having discussion about inventories. It's a big issue. It contributes to cash and it reduces other expenses like obsolescence.

We have done a lot of other things already. One of the things we wanted to do is we'd like to maintain as many jobs as possible as we go through this rather strict undertaking of looking at our expenses. We have cut the 401K contributions effective the 1st of April, to the company. That's approximately $1.8 million.

And again, those are things that are not pleasant. But while we're going through and making a critical assessment of the business, we felt that was the best place to go. We've had to do that in the past and we've been able to reinstate it. It's my hope and belief that we will reinstate it again, but we have to be able to afford that. And we thought better than laying people off, that that would be the first thing. We'll still make that critical assessment.

We've made other cuts that are millions of dollars, millions of dollars. And they have to do with issues like trade shows. Recently I read a report from an analyst who had visited us at the SIR meeting, and he noted that we had reduced substantially the amount of coverage we had there. I will tell you, that very same show that we just attended, the SIR meeting in Orlando, we've now cut again by half. We will be present there next year, but our booth and our [presence] is cut in half. We've cut almost everything that we're doing in these trade shows. We're still attending. But instead of having a big booth, we may just have a 10-foot booth. And instead of having 20 people to cover the shifts and product managers, we may have 10.

So we're cutting is discretionary expenses as quickly as we can. We've even done things like we were talking around here about our political contributions and our community affairs. Merit has always believed that we should be involved in our community. And we believe that what goes around comes around. And in many cases we receive things like R&D tax credits. We receive various grants, [EDIPs], the economic development -- these are in millions of dollars.

And Merit has tried to return and be a partner in the community. Well, we've sent out letters, and, although we'll still have some contributions, we'll cut a substantial -- we're talking about $1 million now. So we're talking about big money, all of this coming out of SG&A.

I would also point out that in the month of March, and I may have already said this, I'll repeat it, that our SG&A expense as a percentage of sales for the month of March, this record month, was 27.2%. And I think you'd all agree that when you've been looking at areas at 30% to 31%, that's a significant drop. You will see even further in cases, if we had that same level of sales and we look at that SG&A in March -- or, excuse me, in April, you would see that decline even further as a percentage of sales because of these cuts that we're making. Kent?

I'd like to add, the SG&A expenses, when you look at on a non-GAAP basis and pull out some one-time charges and compare it to the prior year, was down to 28.9% versus 29.5% a year ago. So we did drop in real terms, I think 60 bips out of our SG&A costs in the comparative quarter analysis.

This will be another one that I think will be important for you to hear. We've cut over $2.3 million going forward in bonuses and bonus structures that existed in the company. Now, short of some that, though, we have contractual responsibility to fulfill, we've taken a lot of the existing structure and cost in those areas, and on an annual basis it will reduce our expenses by $2.3 million. In other words, all of us at Merit are going to be making a lot less money because our shareholders aren't making any money. And, but it's big money. It's big money.

So let me review some of these things. So we've got the bonuses. We've got discretionary spending, trade shows, contributions. All of these things are millions and millions of dollars, and they have been cut, essentially, to be bone.

Now I think it's important for us, if we could for a minute, to move to operations, talk a little bit about some of the things we're doing and some of the expenses that are in this statement. Merit, as many of you know, over it's 25-year history has tried to plan for our growth and tried to look at essentially a 5- to 7-year plan. We built the most recent facilities on our campus about 7 years ago, and we filled them up and built our business. We've been in a older facility of about 85,000 square feet about 5 miles from here, and it's where all of our automation is. And so we constantly are trucking product back and forth, and a lot of people are involved in that movement.

In the new facility, which we've just opened in South Jordan, we have essentially an automated delivery that goes from molding to the fulfillment center to automation and to the floor. It will cut out tens -- hundreds of -- millions of dollars of cost as it comes online.

And, Kent, I'm going to let you maybe just comment briefly on kind of the structure of cost as it pertains to this.

Thank you. Yes. So the new facility, the 255,000 square feet [was] 62,000 square feet, which is substantial increase in clean rooms and other support facilities, is going to cost about $3.9 million a year for all the overhead, depreciation, and other costs. We can eliminate or offset $1 million a year of that when we, in the August time expected and beyond, when we close down and move out of the facility across town that Fred referred to.

We also believe that the material handlers alone, in other words, the people moving and touching the parts, will be some 39 people, 30 to 39 people, or another $1.1 million per year. So we're approaching half of it, at least, can be offset later this year towards the end of the third quarter, certainly by the fourth quarter. The rest of that overhead will be absorbed over the next 5 to 7 years as we bring in new products and grow the business in volumes within our existing products and bring new ones on, and that will take some time.

Yes. Now, I think I have a little different number than Kent, and I don't know, but it's not like a sales number we're going to argue about. But I believe that when we're up and efficiently running, this is so by the end of the year, it will help us to avoid hiring at least 100 people, or, depending on the business level and how efficient we've become, we'll be able to reduce by 100 people.

And if you look at $35,000 a year with average benefits and salaries and that sort of thing, that's $3.5 million on an annual basis. Not that we'll pick up this year, but we'll pick up a portion of it. And you take that $3.5 million and then you take the other million dollars of less operations from the other facility, now what you've done in a relatively short period of time, is you've picked up almost all the costs. Now, that's my optimistic view of all of this. And then what you've done is you have a lot of capacity going forward.

So that will be the other part of it is that we were going to more than double that capacity as we billed our business. And we have plenty of reasons to believe, by the way, that our business will grow. And I still believe, by the way, that we will be in the double digits. Now, we're at 9%. But I believe some of the things I'm going to share with you now, I'll show you how we're going to continue to grow because we think there's a couple ways out of this - reduce expenses and increase revenues.

And that's what we are focused on. So let's talk about the revenue side of things and where we're going from here. A good portion of our growth is still coming from outside the United States. Merit is introducing a new product, and that product has been introduced in Europe this week. It's called the Basix TOUCH.

We showed the product at the SIR meeting. And this product, I believe, has the capability over the next several years to produce over $50 million a year in revenues. This is the most advanced and the best inflation device in the world.

Why is this important? Well, it goes to 35 atmosphere. Nobody else's device of the Big Four gets anywhere near that. So, for instance, our competitors are generally in the 26 atmosphere range. Why is it import to have this extra pressure? Because high pressure is the horizon of the future. Recently in Europe we found that they are taking PTCA balloons and selected branches and calcified lesions and taking them up to 35 atmospheres.

In fact, in a recent case in England, they actually had to trade out and drop another inflation device on because the one that they were using from a major Big Four wouldn't work at that level. And it cost that hospital $110 more in that case. When they realized they only had to have one inflation device and that they could save that money, that hospital has already switched their allegiance and come to Merit, at the expense of one of our competitors.

So what this does is not just told us at the status quo. It makes us the premier inflation device and accessory company in the world. This is a very, very big deal. This isn't a product that we're developing. This is a product that we've released.

We have filed a 510K. We have received responses from the FDA. We will respond to those in the next few weeks. We believe that somewhere in the next 60 days or so, give or take, that we'll have approval for this product in the United States.

Important to know that we believe that our current capacity in this device will essentially be taken up in Europe. This is a very, very big deal, and it's right in Merit's wheelhouse. So it's a significant product. Kent?

Well, I think it's significant. It's got all new IP on it that will help us maintain our position and keep the separation or differentiation in our product.

Yes. And again, I don't -- I'm going to talk about this just a little bit more because I don't want you to dismiss it, because once you're in those labs, things like the Ostial PRO, things like our sheets, our packs, snares, all of these things kind of go right along with it. And we're going to be able to be in places that we haven't been before, so it's -- or we haven't been able to compete. So we're very excited about this product.

To the IP side of things, we received notice from the patent office that they have, I want to make sure I use the right word. What's the word I want to use, Rashelle?

Preliminary.

Preliminary. Approved almost 20 claims. So they have allowed, on a preliminary basis -- the reason I say that is, you go through the final preparation for receiving notice of allowance and can adjust up or down slightly. But the fact of the matter is, is we'll have new intellectual property that we think we'll have issued in the next 3 or 4 months, if it goes its normal course of action. This will give us almost 20 years of proprietary preference for this product.

Now, another reason why it's important is, for instance, if you're using a balloon to do a PTA, an angioplasty that you would do for a patient that's having dialysis and has that [fistula] block off, there are balloons that go up to 35 atmospheres. But none of the companies of the Big Four, have an inflation device [that can] get anywhere near that, that we're aware of, that they have on the market right today.

And so, we had one physician use this product at the SIR meeting, and this is what he said. Well, when I'm using one of the competitive devices, when I get to this level, it starts to whine, when I get to this level, it starts to crack, and when I get to this higher pressure level, I get very nervous. He took our device, cranked it all the way up to 35 atmospheres, and his next statement was, to me, would you please have your salesman call on me as soon as this is available?

So this is a big deal and something that is already on demand in Hong Kong, in Russia, and all of Europe, and we think we'll be very exciting worldwide.

We are introducing next week at the GEST meeting, which is the Global Embolization meeting in Prague, a new product, the non- spherical bearing PVA. This is a product that Merit developed. Our chemists develop it. It is another one of the stool [of] leg of embolic products that we're adding, and we're very excited about what this means, particularly outside the United States.

As you also notice, we saw a decline in our and embolic products. But I want to point out that in our QuadraSphere, HepaSphere product, it increased by almost 17% over the year-ago period. We saw it softer, of course, in the Embosphere. This will help us to firm this up because they often use PVA along with our Embospheres, because it's lower cost. But Merit still gets a substantial above-corporate-average gross margin on this product. So that's a new product.

We have a whole list of new products that are coming out in the future. We have the low-profile access product, the -- oh, goodness gracious. The ASAP.

ASAP.

We have the Worley Snare System. We have a new hydrophilic sheath. I should point out that we believe and we can support the fact that radial artery procedures are still increasing dramatically in the United States and all over the world. Our radial products for radial sheath is up to over $8 million on a ramp basis, is up 416% from a year ago, and this does not include this new hydrophilic sheath which we'll introduce this year.

We have a couple new products that we'll introduce hopefully by the end of the year of Thomas Medical Division, or our Malvern Division. We have a new hemostasis valve.

I could go on and on. But I have 12 new products that we'll introduce this year. These are all very big deals to Merit. So we have a full pipeline of products that are, I think, very, very important to us. Where we know that other people are cutting those R&D budgets, Merit has spent the money in the past.

Now, that being said, one of the high areas that you'll see is in our research and development. And in this area, some of that is attributed to the regulatory posture we're taking with new products. And so part of that regulatory expense, some of that has the trials and some of that, of course, is new product development to get these 12 new products and another list of probably 30 that we have in development.

So we are going to look at setting priorities. And we may take some of these products or these projects off the table so that we can reduce this expense [at all]. It's an area we're going to go look at, is the R&D, to make sure it's efficient, and try to manage this better in terms of a percentage of sales. So it's an area that we, I think, are interested.

Kent, do you want to go ahead and comment on the R&D side of things for the new products? And by the way, because oftentimes you're Ying and I'm Yang, and people say, well, they kind of play off each other, I'd like your opinion on this device, Kent, because I think it's so significant.

Oh, the Basix?

Do you concur?

Yes, the TOUCH. I think it's fabulous. One of the things that he didn't mention that I like is the fact that one of the obstacles we've had to gaining market share recently is the ability that some of our competitors had to do what is called a one-hand prime, where you can control the fluid end of -- and the expelling of fluid better with their devices.

Ours now have power steering built into the handle, and it allows you to press down against a table or other object and, therefore, release the trigger and push out the fluid and do a one-handed prime. So I think it not only ups them on as far as pressure, as far as volume, and as far as the ease of use of going to the high-pressure, it also allows them to set it up and prepare it much easier and take away that one negative I think we have.

So from the little bit I've seen and the conversations with the sales force, I'm excited about where this is going. I see it as a real strong product.

Let's talk about some other areas of the business that I think you'll find interesting. We discussed [just] briefly that for the first time, that our Endotek Division was profitable. I know that many of you were concerned when we bought it. We were a little bit disappointed. And for a couple of years, we've operated at losses in that division.

Now, we've been able to do this without adding a lot of overhead, of course. But one of the really exciting things that will be happening here that we've discussed before is that we are now just starting to ship. We have shipped some of the newer low-cost stents. So we were able to reduce, by shifting vendors - this has been well over a year ago - our cost of goods in this division by over a third. And that has a savings on volume that's somewhere around $1.5 million to $2 million, annually, once we get all of the stents converted. And that will happen ever the balance of the year, which means that we'll see higher gross margins. They're about 62% in that division right now. We believe that those will rise to probably somewhere around 67% or 68%.

And so we'll continue to make a lot more money in that particular division. And that becomes a very attractive asset and opportunity as we go forward, particularly with the new products that are coming out of there. Most noted -- notable is the new valve esophageal stent. So that's a very, very big deal, to be able to swing got around into profitability and to contribute both to gross margins and to profitability going forward. Kent, you want to comment?

I agree, it's nice relief, I guess I'll say, from a financial standpoint, to see it contributing. It's even doing more so on an EBITDA basis. And there's leverage there because of the gross margins not only being higher now, we've raised prices in some of our products, we're seeing the cost reductions you're talking about, and the volume increases are making it more efficient. It's also improving the efficiency of our distribution system. We've had too few products, and we're getting more of them and there's more to come.

Yes. Thanks, Kent. One of the things I've been asked, because I think it did have such an impact on this first quarter is I want to come back to Malvern just for a second and talk a little bit about that. I've been asked, and I'm sure I will be asked, did you make a mistake. And the answer to that is, well, if you look at it today, I suppose you could come to that conclusion. I have not come to that conclusion.

I believe that electrophysiology, which continues to grow. I recently read a report that was issued just a few days ago about a division of a major Big Four in the electrophysiology, well, that area grew at 12%. We continue to believe that that particular area is going to become very, very important for Merit, as a lot of pull-through. We have a lot of new products that we are issuing in that area, coronary sinus guides, (inaudible) needles, steerable catheters, and then a new and improved classic sheath. All of those things are coming forward. We've sized the business. We'll continue to size it to its revenue base. But we, although it's very disappointing at first, in some ways it kind of reminds me of Alveolus, in which we -- it was disappointing kind of coming out of the shoot, But we didn't give up on it.

We believe and continue to believe that this particular area on a worldwide basis is going to be very, very important. And we will [Meritize] products, we'll deliver new products, and we'll build this business.

So it's $10 million off what we thought. That's kind of a big hit, there's no doubt about it. And we could have a lot of discussion about that. But the bottom line is, is we've already made the adjustments. We'll make additional adjustments. And we're already doing the things.

The other thing that is exciting about this is some of that product that we were talking about that we haven't gotten the orders for, we're now -- our sales force is out calling on these accounts, and we're picking up some of that business from -- that was going on an OEM basis, and we're picking it up on a retail basis at Merit. And we're getting substantially higher prices than we would be if we were selling it through one of the other companies. So it has kind of forced us to accelerate our efforts and the focus of our sales force to go out and get this business. And we're opening up new accounts and gathering this business every day.

And, of course, all basic EP labs are a substantial source of new business for all of these other products that we're talking to you about. They use inflation devices. They use catheters. They use sheets. They use trees. They use trays. They use all of the things that Merit makes. And it's at that call point where we think [it] has a substantial opportunity to have these products.

So I'm going to get beat up. If you would look at it today, you can hammer me. But I won't give up on it, just like we haven't when we moved to Ireland many, many years ago. We took some heat for that. It took some time to get it squared around today, it's a big deal. Our trade business, we got beat up on that one, and people questioned that. It's going to generate $35 million to $40 million in revenues this year.

All of these areas are things that will take time. I don't think Thomas Medical will take as much time as Alveolus did, because we have a stronger sales base there. But, I think that it's important to note that it's disappointing to us. Will that revenue come back? Will it come back around the other door? I don't know. I'm not counting on it.

I'm going to go out and get the revenue. Remember, the product is still the [gold] standard. It is still the gold standard. Now what we have to do is have our sales force go get that business, and with this inflation device and other products, it gives us a very good opportunity to go there.

So it is what it is. We're doing the things to adjust the costs. We need to do more work at Malvern, but we will make it successful - to that, I have no doubt.

So, as I mentioned in my note, there's no doubt that we've being in essentially a perfect storm. Now, we've got an acquisition. We've got new facilities. We've got the medical device tax. And we had a slow-down in procedures. I mean, I don't know what else could have gone wrong.

Now, what's right? What's right is, is that we have new products. We've recognized this. We're cutting costs quickly but responsibly and we won't give up. And so I say, and I believe that the worst is behind us. So many of you are going to say, well, we have to see proof of this or this and that, and that's fine. You do your job, and I'll do my job.

But I'm telling you that we've made already a good portion of the adjustments that we need to make. And we've been through this before, many companies have. We've been through this before, we know what to do, we're doing it. Now, you can argue or make your comments and you can give us your view in your letters tomorrow and that sort of thing. I am telling you that when we come out of the other end of this, we'll be a much leaner company. We'll be a much more profitable company. And we'll do the things that we all know that Merit needs to do. And that is, we will increase our operating profits, and we'll do that by reducing and controlling expenses and be much more conscientious about the expense lines and the things we need to do, to and including, we have a couple of facilities, one is an expansion of a warehouse in Europe. If we have to slow those down or stop them, that's what we'll do.

We will do the things that need to be done to make the tough decisions that have to be made to make sure that we get this business on track. It's a great business. It doesn't look all that well now, but I'm telling you, the patient has had surgery and the patient is recovering. And the patient will recover quickly, because I'm telling you about things you haven't seen yet. They're clearly not in this statement. But the decisions have been made.

Kent, now, you're a guy that you and I fight all the time and you think this and you think that and that kind of stuff. Is what I've said true or not true?

Well, I know that we've made cuts and made decisions to eliminate some $7 million, $8 million after you annualize them, going forward. And, no, they weren't really effective in the first quarter. In fact, we had increased costs due to severance and some of those things to make this decisions. And we've got increased cost to move into these facilities in the interim.

So no, it's not going to be easy, and the second quarter isn't going to be real easy either. But it is going to sequentially improve - I really believe that. And you'll start to see more leverage when you get to the fourth quarter and into next year as we can downsize some of this redundancy in our facilities and some of the people and really take advantage of some of the -- both new product introductions and growth in sales because our sales volumes, according to the forecast to reach our numbers, are going to increase.

Yes. Well, and so one other thing that Kent mentioned that I hadn't discussed is that in this quarter we had almost $1 million of expense. I'm not going to call it one-time expense, because I don't think that's -- it was an expense. And that expense was for severance. We made a number of management changes and a number of things that had to be attended to, and we made those and we took the hit for it. They're in this quarter as well. It was a substantial sum of money.

So we again made the tough decisions that we thought needed to be made, and that was in this quarter. So again, that's another part of the perfect storm, is we had all of these things hit us. But they are -- not that we won't have these expenses and other business issues, but those things are behind us.

And what you'll see forward is a more efficient company, a more cost-conscious company. In fact, all the staff is sitting in our room right now. They're hearing all this. They know what they need to do. We know what we need to do.

So you'll have to make the decisions as to the value. And what we will do is we'll make the decisions relative to what we can do to increase that value from where we are today. That's our job. That's what we're committed to do, and it's underway. Again, this isn't something that we decided today. This is something that we've been working on now for this quarter, and looking at these issues as we saw it kind of play out.

So I think, Kent, that's all I have. Do you want to add anything else?

Yes, a couple other just quick comments. And I think part of the difference from last year is that our interest expense is considerably higher due to the transaction of purchasing Malvern. And that we had an unusual tax thing where we were able to bring, from last year, a catch-up that Congress and the President passed right early in the here from last year for the R&D tax credit. So it made our tax advantage look strange in the percentage of pretax income. So I just wanted to point that out.

Another thing, too, that we're very concerned about is we're very concerned about the debt level. And we have opportunities that don't dilute shareholders to go out and that can help to offset a lot of this debt and these interest rates that we'd like to have.

So there are a lot of options that we have, and opportunities, to align our business, to take a look at the strategic assets, and to align the business the way we think will be the most efficient in terms of our sales points and that sort of thing. And so we'll be doing some of those things as well.

So I think that pretty well covers it. Greg, unless you want to add anything.

No.

I think what we'll do is we'll call on our operator and we'll go ahead and open up the line and we'll go ahead and take your questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Thom Gunderson with Piper Jaffray. Please go ahead.

Good afternoon, everybody. So a couple of clarifications first, and then I'll finish up with one original question. But the clarification is, the worst is behind us kind of tone you're giving us. And then the March number revenues that you gave us of $37.5 million and a lower SG&A ratio, can you give us a comparison on that? And is the $37.5 million all in or is that core without Malvern? Give us a sense of how to compare that to last March.

Yes, I don't have last March in front of me. But it is all in, Thom. That was $37.5 million of revenues for all divisions in the company. So I [did have] -- but I don't have in front of me the last March. I think what I was trying to point out was, is even though January and February were very slow in the $31 million, $33 million range, I think in that range, that it was a pretty substantial increase. And we started seeing -- we ended up, I think at about $5.5 million for the quarter, with --

-- Malvern in.

-- Malvern. And I think for the first two months we were like, I'm just going to pull these off. But I think it was like two eight. So we almost doubled it as that thing started ramping up and that pipeline started filling up that has been kind of a history of their business. People fill up for the year, they work down their inventories, and then it starts to fill back up again.

So we saw, not quite, but we saw the business almost double just in the month of March. And we continue to see, by the way, orders now on a regular basis that we're lacking in that first quarter coming from these large OEM customers. So that goes to -- that is the best way I can answer that.

Now, we can go back and look at March and -- but I think the point I also wanted to make out, Kent talked about that sequentially on a non-GAAP basis, we improved our SG&A expense. And I will tell you that sequentially every month going forward, it will reduce and improve substantially.

Now, be it that 27.2%? I will tell you this, that if it was that same revenue level, that number may very well be 26%. Again, I'm pulling that number out. But there are a number of these costs that have been taken out, and we will see that as a percentage of sales going forward every quarter because of these things, these costs that we've already taken out.

That's the best way I can answer the question now. We'll do some research and get back to you on a --

Thanks.

-- comparison to last March. Now I'll go ahead and take your next question.

Sure. And then the other clarification, maybe we can do that offline. I'll just ask, on the Malvern side in lowering guidance and the putting in the lost customer, do you have a sense -- you talked about price and lowering the price for them. But do you have a sense of what was the cause of the loss?

Yes.

Did somebody come in and underbid or what was it?

Yes, I know exactly what the cause is, Thom. And you asked the question, I'll answer it. So one of the things that was taking place in Thomas Medical is at one time they were a sole provider on an OEM basis to one customer. Patents expired on that product, and Thomas Medical went out and attempted to go direct to the end users then, rather than go through a third party, okay.

Yes.

They were successful in doing that, except in one case in which they went to one of the companies which was their largest customer. You can go back in the records, it's very easy to identify who they are. And what they did, I'm talking about the Thomas Medical, this is an issue of record. They raised substantially the price of the product they were selling to the third party in an attempt to get that business direct. And the bottom line was, it backfired. And the other guys didn't want to have -- didn't want to do that. And so they got tired of that whole situation.

So what we did, and this is why I can say in good faith that we did not anticipate -- we went back to Pressure Products, who was the original customer, had all of this business, we went back and we lowered the price to what their original price was because we believed together we could get that business back. That's what we did.

So it wasn't like we lowered it below -- we lowered it back to the original price they were getting before management at Thomas raised it substantially. And we didn't think that was the right thing to do. As it all turns out, it wasn't. So we put it back to the original price. But by that time, there had been so much damage done, they decided that they would go look at some alternatives. And that's where it sits today.

Now, I will tell you that we've attempted to meet with some of the senior management. I will tell you that I am having a dinner with a senior official of that company on Friday evening. And this is a member at the highest level of that company. And I'll have a discussion about this issue. Will it change the outcome? I don't know. I don't know at all. But that's what it was.

So but here's the important point. It wasn't something that Merit did. It was something that was part of a historical situation. We thought it could get salvaged. We did all that we could. But at least today that business has not appeared and could be gone. And so what we're trying to do here is to say, if that's, in fact, the case, we're going to have to pull $10 million of revenues out of there.

I'll also say, Thom, that the way we'll get this business back, and we will get it back over time, it may take us 3 years to get that $10 million back, but we'll get it back. We'll do it because, rather than going through that OEM customer, we'll go through Merit's direct sales force, and we'll get it back that way. But it will take time to do that. But it's already happening. We're already getting that business back. We are opening up 2, 3, 4, 5, new accounts every single day at prices that are substantially higher than our previous transfer price. So we have a plan. We're already working that plan.

And I think, by the way, it's the product that stands here. It is a good product. So that's the history of it.

Got it. Thanks, Fred. I'll let others ask some questions.

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

Hi. Good evening. Can you hear me?

We can, Jayson.

Yes.

Thank you for being on the call.

Okay. Thanks. Just as a follow-up, what is your expectation for the Malvern business in 2013?

Right now we're booking it at approximately $26 million, I think. Kent, is that correct?

Yes, that's right.

Yes, $26 million.

Okay. And so getting the customer back would be upside, clearly, to that $26 million?

Right.

That's correct. And, Jayson, if I could on this revenue, the entire amount of adjustment, we went back to each of our sales units and responsibility, the leadership of each of those units, and up until last evening, we were going through all of this to make sure that when we looked at this we would have confidence. And every one of our sales leaders indicated that they would stand -- they weren't coerced. They were simply asked, are you going to beat up, down, or the same? And every one of them, international, OEM, US direct, Endotek, all came back with they expect to be on forecast.

Now, what that means is it was pretty low in the first quarter. Hardly any of them hit that. But each and every one of them believe that by the time they get to the end of the year, they will have made their original forecast that was part of our initial guidance. So almost 100% of this guidance that's being reduced is because of this situation in Malvern. And we'll work and eventually we'll get that business back one way or the other.

Okay. In the quarter, just excluding the Malvern piece, where was the softness geographically? Was it in the US, Europe, emerging markets? Can you maybe just parse that out for us?

Yes. Our -- Kent, I'll let you go through that, because I -- let me comment on a little bit. So without Malvern, our domestic sales force was about 3.5%, I think. Is that correct?

It was 3.5% with Malvern, and it was -- they don't have a lot. It was 2.3% without.

Okay. So it was not at the level. I would say most of the softness we're seeing was in -- at Endotek, was a little softer than we have seen in the past. That was a slow quarter for them.

US OEM.

US OEM was down. And that's with [inaudible]. But the international markets were still very strong.

Yes. The Pacific Rim was 17% up, Japan was 6%, China was 10%. So those areas were still strong. Some slower than they have been, but still in double digits. The EU Direct had slowed down somewhat at 6%, and the EU Dealers was only 3%. That one had slowed down some.

So the international is still where most of the growth is. It was up 7.5% as a total group. And the US Direct was, like I said, 3.5%, including some of the direct sales with the Malvern product that helped a little bit. You want more than that? I think we've covered most of it.

Okay. That's helpful. And then, I guess just one last one for me and then I'll let someone else jump in. On the gross margin, Kent, you mentioned the variances. Have you kind of burned through that? Are these going to continue to be headwinds in the second quarter? And then maybe where do you expect gross margins for the year to shake out on a non-GAAP basis? Thanks.

Yes, I'm glad you asked. There is some overhang still. We feel like we're caring maybe $1 million right now that's been -- that comes through the flow of inventory. But it is improving. I will share with you that in March, we had positive variances here in Salt Lake. So that was a switch from some large negatives that were in the few months prior [or something].

Now, in this negative variance and this overhang, more than half of it is coming out of Malvern.

Yes.

Because when you have the overhead there, even though we've trimmed 20 people, we didn't trim them in January, we trimmed them as we started to see, and most of those were done in March, and some in April. So we've trimmed that. So we've got that overhead hang that's sitting there.

And, but the positive part is, is that that part of the business is starting to improve. But that's more than half of the variance that we saw in the first quarter.

So the trend is positive. It's not over with. It's not going to stop over night. And we do have, we have coming on the whole explanation about the higher facilities when it converts over to production and the overheads get allocated to there versus the move cost in SG&A, you'll see that has to be overcome too.

So there's still some challenges as we go through this. But the trend is good. Some of the worst months were in late fourth quarter and early first quarter, and that's been improving.

Yes, Kent, also on that point, the cost of a new facility in the first quarter (inaudible) SG&A line, is that correct?

Most of it was. It started in March and it got reallocated because it's [not in] production right now. It's just being moved and qualified and so forth. Some of it is starting to become productive, just now in April more.

So some of that will then move to the gross margin line is my point.

Correct.

And I think it's also interesting to note that even at 27.2%, that there was a portion of the SG&A cost -- or of the facilities cost, because it wasn't in the production yet, the SG&A.

381,000 was --

Also -- 381,000.

Yes.

Also, another point that we hadn't mentioned is that as part of this expense issue, there was a transition agreement that we had with GE, as we were transitioning through computers and telephone lines and car [jack sales] and all these various things. And I think that number --

That was a 140.

That took about $140,000. That'll be gone in the second quarter --

Yes.

Because we've essentially wrapped up essentially almost all of the transition items. But that was expense also in the first quarter. That goes back to this perfect storm. Everything that we could get hit with, we did get it. I don't think we missed a single shot.

If we were in a snowball fight, we got hit by all of them. But I think that as we move forward, we're going to have a few snowballs of our own, so.

Okay. Jayson, I hope that answers your question.

It does. Thank you.

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

Good afternoon. Can you hear me?

We can, Jim.

Great. Great. I just want to get some numbers down before I ask questions. You said that you had about 3% organic growth and the rest was Thomas. So I assumed Thomas is about $5.5 million. Does that sound right?

That's correct.

That's correct.

Okay. And then if I look at some of the non-GAAP adjustments, if I just take the adjustments that were one time, not the amortization, it looks like it was a little over $2 million, about $2.3 million. Does that sound about right?

I'd have to add up what you're talking about. I can go through some of them, but --

Okay. I'm just -- if you -- acquisition, severance, and inventory write-ups, looks like it totaled a little over $2 million.

Yes, that's right.

So that's about $0.04 or --

That's right.

-- $0.05 of one-time charges in the quarter?

Yes.

All right. And now --

And do you have to tax severance?

You have to tax it too, though. You have to tax it. You got to make sure you do that, so.

Yes.

But anyway, go ahead.

Yes. Tax about 30%?

Yes, we're using 38% on an incremental basis, although, our tax rate average, or effective rate's, going to be more like 22%, 24% this year.

Okay. All right. So, but it's still about $0.04 or $0.05 of one times in the quarter, it sounds like.

Sounds a little high. I think it's more like $0.02 or $0.03, isn't it?

$0.02 or $0.03 --

Yes.

All right. I'll double check the tax rate on that. Now --

He's doing his own [now].

The Thomas --

First you have to -- go ahead.

Thomas customer was about 25% of their revenue?

23, I think was the number.

Yes.

Okay. And I'm sorry, did you say that they were going to make the product themselves or they went to another supplier?

No. No, no, no, no. They don't make the product themselves. They are, we believe, that they are buying it from one or two -- we have three competitors in the marketplace. There's Merit. There's Oscor, which sells through pressure products. And there's Greatbatch. Those are the three competitors.

Merit is still the market leader over all those other companies. We still have a substantial market share. And I think that market share is probably close to, I'm going to say two-thirds, or something like that. So we're still the market leader in this area. We tend to -- we intend to stay the market leader. And in fact, increase and take some of that business and take more of it direct over time at higher sales prices.

Okay. And the way you'll do that now is, instead of going through the OEM, you're going to sell direct to the hospital?

Yes. Yes, we are doing that. We are doing that -- by the way, there was another distributor out there that they have signed a deal with. And so we're competing with our sales force against all these other players with our product. That's what we're doing.

By the way, we did calculate that, Jim, and it was a little bit -- about $0.031, on that --

So about $0.03.

-- on that one-time charge. Yes.

Yes, after tax.

Okay. All right. Great. All right. Thank you.

Yes. I think $0.05 would probably be closer when you take -- well, maybe $0.04, $0.045. We'll go ahead and take the next question now.

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

Thanks so much, and appreciate you taking the questions here this evening. Can you hear me okay?

Your welcome, Chris. Yes, we hear you fine.

Yes.

I really appreciate all the detail you provided us in terms of the initiatives that you're taking to reduce cost, and fully appreciate this is going to have to play out over the course of the year. So I just wanted to make sure that I heard you correctly there, Kent, when you were talking about how we should think about this to our margins. Specifically, you're looking for about $7 million to $8 million in annual cost savings. But we're not really going to see the majority of that impact until the fourth quarter of this year.

Help us think a little bit about the current quarter and maybe a little bit into the 3Q in terms of how we should think about this through our operating lines. Then I have one quick follow-up. Thanks so much.

Well, I want to clarify something. Most of that $7 million, $8 million is in SG&A, and it starts, most of it, in April. The 401K adjustment started April 1st. Many of the terminations were in the month of March and into April, some of it.

The savings over time, through marketing and sales reductions, will come through the year as they happen in a show or in advertising or in whatever they happen to be.

Okay. Let me clarify so that I understand your answer.

Yes.

What you're saying is that $7 million to $8 million will spread, I'm not going to say necessarily evenly, but it will be spread throughout the balance of this year?

Right. And probably, we're estimating $6 million of it. I'm not including the bonuses. But $6 million of it will be in this year '13, through three quarters in front of us, second, third, and fourth quarter.

And if you add the bonuses, what happens then?

That's another $2.3 million.

Why wouldn't you include those.

Only because we had already left them out of the first quarter. So they weren't increased savings.

Okay.

So, Chris, I think what he's saying is 75% of those bonuses or those expenses, reductions, will roll through the balance of the year, going forward. And we took a portion of that $2 million, we reduced in the first quarter.

So we have had that benefit already in the first quarter. We did not accrue for any bonuses for the management.

So we took 25% of that $2.3 million was a reduction in cost in the first quarter.

Already in our numbers, correct.

Yes, okay.

Got it.

So when you talk about gross margins, that was the discussion about transitioning into our new facility getting out of our old facility, bringing online the automated handling systems, and being able to start reducing headcount. That discussion may have been confused with the other. But it is a separate transition into our facilities and the utilization of the capital we've invested here. And we can try and go --

I think we're good there. Thank you so much. And then just to clarify, I think you stated to one of the prior questions, that your expectations for the Malvern business this year, 2013, were $26 million. And I was curious what type of growth rate you're assuming on that base business that remains? Because I know Fred had mentioned that you were winning new contracts. So I'm just trying to parse out what type of growth you're seeing there in terms of new customer add versus existing customers accelerating use. I'll get back in the queue.

Let me explain. It's a hard question to answer. But let me just put it this way. Almost 100% of the business that Thomas had went through OEM customers. And what we're doing, and, candidly, what we're forced to do and we have already initiated this, is we are putting these products, particularly the classic sheath is in our sales bag right now, and we're opening up new accounts every day. I looked at it a minute ago. We opened up six new accounts today.

And I would imagine we'll continue to [adjust] to that. So I have a hard time comparing that against what they had, because there wasn't any. So because it's all now -- these portions are now going direct. But we'll continue to accelerate that.

We have two new products that we've [Meritized] that were never in our forecast. These are our coronary sinus guides and our lateral vein introducers, were never in Merit's bag when we bought Thomas. They were products they made for another company. But what we did is we negotiated the ability to sell those worldwide.

So those are two new products that we, other than mentioning them now, that will be in our bag going forward that we didn't have there. That will all be all new incremental mental business on those products. And those are product that sell for $400 or $500 a pop, by the way, and which we get about 65% gross margin.

So that's the best I can answer that question right now. We can do some more work or talk offline. But that's the best I can give you right now.

That's great. Thank you so much. I'll get back in queue.

Thank you. (Operator Instructions) And our next question comes from the line of Ross Taylor with C.L. King. Please go ahead.

Hi. I missed a lot of the call, so maybe you've answered these questions already. But I just wondered if you have capital spending forecast for the year and whether you maybe kind of cut back on what your original CapEx plans were, given what happened here.

And I guess also, you mentioned realigning the business with the debt levels. Are there any assets or facilities you can sell as a result of some of the consolidation of facilities and other things you have going on in your business in order to raise some cash and pay down the debt?

Yes. Let me go through. In terms of assets to sell, in terms of buildings, we're moving from a place that we were renting. And so that certainly [may be]. Are assets that we could sell to reduce our business while not affecting the overall business? And the answer is yes. I don't think it would be appropriate for me to identify those at this particular point, for [varied] reasons. But yes, there are our things [to do]. In terms of cash flow, we have a capital budget. This is again, budgets that people put forth and all those things are being reviewed. Some of those will be deferred. Some of those will be discontinued. And there may be other opportunities. As an example, on a facility, we may just stop the facility. That's one of our options. We may slow it down. We may do lots of things.

But I think to answer your question, all of those things are being looked at as well. But what we want to do is get the burden of this debt out of the way, and we know how to do that. We have to sell more and we have to have better margins. And we do have some other opportunities. But again, I can't really comment on those right now.

Okay. And any specific number you have attached to the capital spending budget right now, for 2013?

Yes. On a budget basis, there's about $50 million or so that are in there. And we're very likely to reduce that by a third to a half - one way or the other, we will.

Okay. All right. Good. Thank you.

Thank you. Our next question is a follow-up from the line of Chris Cooley with Stephens. Please go ahead.

Thank you very much. I apologize I didn't ask you earlier there, Fred and Kent. When you talk about the debt and the opportunities you have to further reduce the balances, I'm assuming you can't get [into that] at this point. But can you talk to us a little bit about what level of debt you might be more comfortable with, just when we think about the capital structure going forward? Maybe help us get a better understanding of kind of the levels that you're trying to get the company down to in the nearer term or over time.

Yes, I think I would like -- Yes, I mean, I think over the intermediate term or the near term, I'd like to reduce the debt by $80 million to $100 million.

And is that just from a working capital standpoint, covenant standpoint?

Yes.

I'm just trying to think about why --

No, I'm just --

-- what you're seeing now --

I'm just [stating] --

That really wants you to get the debt levels down at this point.

I always want to get -- I mean, I don't like debt. [We have a] very low rate. But I mean, you asked the question of what I think. But if I had $100 million less or $80 million less in debt, I'd feel a lot -- I'd feel better. I'll feel a lot better when it's gone. But I think that's kind of the, what I have in mind is a reduction in debt to that level.

But again, I want to say that I really can't answer any further questions on that, other than the statement that I've made.

Understood. Thank you so much for the clarity.

Thank you. I'm showing no further questions in the queue at this time. I'd like to turn the conference back to management for final remarks.

Well, ladies and gentlemen, it's late in the afternoon here and I know later where you are, and we appreciate the questions. Kent and I will be available for the next couple of hours to answer your questions and to maybe clarify some of these points.

But I think that it's, we all know where we are. I hope -- what I would like to see, and you'll have to make this call, but we believe that we are doing the things that need to be done in a serious manner. Let me give you an idea of some other things that we're talking about. We have a President's Club every year. It's something that we use for our sales force. We have substantially reduced, by almost 75%, the expense in that area.

We're going to have a Christmas party this year. We have one every year. It's going to be in the Merit cafeteria this year. These may sound trite. But these are, I think, the things that the staff knows.

We put up Christmas lights around our place. Yes, we may put up a few lights. We'll put up a wreath. But we're not going to spend that kind of money. We are cutting back in a lot of areas.

And government affairs, Greg Fredde, who oversees that for us and has helped us in terms of grants, of R&D tax credits in the state of Utah, I could go on and on. But essentially, when I asked him the question, what's your budget for political contributions this year, he answered straightforward, it's zero. We're just not going to spend that money. We can't. We have debt to take care of. We have performance and we're just going to tighten this baby down very, very tight.

I was scheduled to go to Europe this weekend to go to the GEST show, which is the Global Embolization meeting. I'm not going. I'm going to stay home. I'm going to answer your questions and I'm going to work on running the business here.

I could look around the room, and everybody's engaged in these activities in this room. And what it means ultimately is we're going to be a hell of a lot better off 3 months, 6 months, 9 months, a year from now, than we are today. And we're going to [approach] the kind of [areas] that we need to be at to sustain this business going forward. That's what we're committed to doing.

We've talked about it for a long time. But listen, we're -- how do I say this? I mean, we're not talking about it. And it's not like we're talking about it today and this is what we're going to do tomorrow. We're already doing many of these things.

As Kent already pointed out, on an annualized basis, we've already taken $6 million or $8 million, almost $8 million out of the business. If we go back, there's some 8 million bucks out. We've got more to take out, and we will.

So we'll know that at the same time this anemic growth rate in the first quarter, I mean this is very unlike Merit. But we really do have the goods and the products to take it forward. Like I said, in fact, like we talked about this new inflation device. You might say, well, one inflation device does not a company make. That's absolutely true. But this product is the best. This product is what the market is calling for. And we essentially have no competitors that can match the quality of this product and its performance. It's a big deal. It's what built this company.

And if we take a look at the revenue line as an example for inflation devices, we're talking about $60 million, $70 million, $80 million a year. And we have a product that we think will take our market share from 50% to better than 65% over the next couple years. We have that.

Our Basix TOUCH, which is a product that we sell in our Endotek Division, it's another inflation device.

Big 60.

The big 60. Excuse me. Is up 130%. So we have the products. We have the sales force. We're cutting the discretionary expenses, but we're not cutting that sales force. We're also not adding to that sales force. But what we are doing is adding these products that will have a dramatic effect.

So we're doing what has to be done. And you guys will have to decide the speed of that, how we're doing. But as Kent pointed out, we've already done a good portion up to this point. We've reaffirmed with our sales leadership, the revenues. And the difference this year over our first part of the year was the Malvern situation, which we explained to you to the best of our ability.

So there it is. We know what we need to do. The task is before us. We're engaged in it, and it'll be -- we'll look forward to reporting back our results.

We again thank you for joining us today. And I will tell you this isn't a pleasant call to make. And I've been looking at all the other reports from other medical device companies. The medical device industry is having a tough time. But all that being said, these are the times when the great opportunities present themselves and this is when businesses and individuals have the opportunity to rise to the occasion, and we think that's exactly what we intend to do.

So, ladies and gentlemen, thank you again for your interest. Kent and I will be available here. We'll look forward to answering your questions. Thank you very much. Sign off from Salt Lake City. Goodnight.

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.