Merit Medical Systems Inc (MMSI) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You joined the Merit Medical Systems Q1 2017 Earnings Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Chairman and CEO of Merit Medical Systems, Mr. Fred Lampropoulos. Sir, you may begin.

And thank you, ladies and gentlemen for joining us. We are broadcasting from our corporate offices in Salt Lake City, and we appreciate at this busy time of the earnings season of taking the time to join us. The first thing I'd like to do is to have Brian Lloyd, our General Counsel, read our safe harbor provision. Brian?

Thank you, Fred. 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 purely 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 10-K 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 except as required by law or regulation, we do not assume any obligation to update any such statements, whether as a result of new information, future events or otherwise. Please refer to the section of our presentation, entitled Disclosure Regarding Forward-Looking Statements, for important information regarding such statements.

Our financial statements are prepared in accordance with accounting principles, which are generally accepted in the United States. However, we believe certain non-GAAP financial measures provide investors useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period-over-period comparisons of such operations.

The table included in our release and discussed on this call sets forth supplemental financial data and corresponding reconciliations to GAAP financial statements. Please refer to the sections of our presentation, entitled Non-GAAP Financial Measures and Notes to Non-GAAP Financial Measures, for important information regarding non-GAAP financial measures discussed on this call. Readers should consider 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 items that affect net income. Finally, these calculations may not be comparable with similarly titled measures of other companies.

Brian, thank you very much. And ladies and gentlemen, thank you again for joining us. We are gathered here along with our operating staff and with Bernard Birkett, our Chief Financial Officer, who will weigh in just a few minutes.

I think you can see by our press release and our report the success that we had in the first quarter. Revenue growth on a core basis up 11.7% is, in my opinion, extraordinary. You can also see that non-GAAP earnings of $0.28 a share as well. And I think, of course, these 3 important issues -- again, our gross margin on a non-GAAP basis was 48.3%. So I think all of the metrics that we all look at and that we have promised have been delivered in this quarter.

It was an exciting quarter with a lot of things going on. And not only did we have to run the business, but we had a couple of acquisitions that we had to do due diligence with. It was the first of the year. We had a lot of sales meetings, and so the activity level at the business globally was very, very, very busy. There are a couple of things that I want to make note of that you'll need to pay some attention to, and then Bernard will clarify this. But it's on some of the accounting issues as they pertain to our acquisition of Argon. So Bernard will get that -- to that in a minute.

But listen, I could go on and on and talk about sales growth. We can talk about the margins. We can talk about the earnings. We can talk about all of those things, which I think speak for themselves. But the real effort is done by the staff. And numbers are numbers, but those numbers don't develop and become what they need to be without a lot of hard work. And so I would be remiss if I didn't really thank the staff that's sitting here for the efforts that it took, traveling globally, whether it be Singapore or Europe. There's a lot of work done and I think of results that will please you.

Now I think without further ado, I'm going to ask Bernard to weigh in and go through all of the financial numbers and add some clarity to some points that you may have an interest in. Bernard?

Thank you, Fred. So in the Q1, worldwide revenue was $171.1 million and $172.3 million on a constant-currency basis. That's up 23.9% as reported and 24.8% on a constant-currency basis over Q1 2016. Q1 core revenue was up 11.7% over Q1 '16. Core revenue was up 12.6% on a constant-currency basis.

Q1 GAAP gross margin was 44.4%, compared to 43.5% in Q1 '16. Q1 2017 non-GAAP gross margin was 48.3%, compared to 45.9% in Q1 '16. This increase is a combination of a change in product mix and also realization of production efficiencies that we've been working on for over the last 12 months.

Q1 2017 GAAP EPS was $0.32, compared to $0.10 in Q1 '16. And on a non-GAAP basis, EPS was $0.28, compared to $0.19 in Q1 '16.

Our GAAP numbers include legal expenses of $4.8 million in Q1 related to our DOJ response, and the GAAP numbers also include a preliminary bargain purchase gain, acquisitions we made from Argon, which represent $0.27 of the GAAP EPS that we've experienced in the first quarter. And this gain and the legal expense have been excluded from our non-GAAP numbers.

And as a result of the bargain purchase gain, we will be adjusting our GAAP guidance for 2017, that will go from range of $0.54 to $0.60 to $0.80 to $0.86, as I said, as a result of that preliminary gain that we've experienced.

And just to finally comment on the public offering that we completed in March. And the public offering generated net proceeds of $136.5 million. The purpose of the offering was to reduce our debt balance and to create additional flexibility. And total proceeds were used to pay down debt, and this was split between our revolver and term loan.

I think that's it from me. Fred, I'll hand back to you.

Yes. Bernard, thank you very much, well done, well done.

A couple of points of interest. We plan on delivering an update on our 3-year plan by adding 2 years in our next quarterly report. We're preparing that, we're reviewing it, and we're actually very excited. We think that, that particular exercise has been something that's been very important for the staff and every employee in the business to focus on what we've promised, and all of our decisions are made based on the commitments that we've made to shareholders. So we look forward to that. It's the appropriate time, we think, after this quarter to do so, and that will again be updated at that particular time.

I'd also like to just let you know that we reaffirm our guidance of $713 million to $723 million in that range, and we also reaffirm our earnings on a non-GAAP basis of $1.15 to $1.20. Now the reason I think that's important to understand, we -- as Bernard pointed out, we recently issued shares. And we are not lowering our guidance because of those shares, we're maintaining that guidance. And I think that speaks for itself. It -- I think that we -- our people were asking questions about why you did an offering, why you did this. I think that Bernard, I think, answered it sufficiently, but again, we're happy to be able to take and reaffirm that earnings number at $1.15 to $1.20 on a non-GAAP basis.

Just overall, ladies and gentlemen, the business is operating. And I think one of the parts that is gratifying is the plan that we put in many years ago. And we're often asked about this. "Well, what's happened in the last 18 months?" And I think you've seen the results quarter by quarter of these improvements, but I think it's also important to be reminded that we put capacity plans in place several years ago. And we could see the growth. We could see the opportunities globally, and we spent a lot of money and put a lot of capital structures in place. And had we not done that, very candidly, we just couldn't grow at this level.

So this is not a 3-year plan or an extension of 2 years. This is a 7-year plan in which we did a lot of work to set the stage for this performance. And now what you're seeing is our CapEx continues, I believe. And Bernard, just weigh in here. Are CapEx for the quarter on schedule?

Yes, we're on schedule. We're on target for the guidance that we've given for the year.

Okay. So all those things, I think, are very, very important in terms of where we're spending our money both in maintenance and new projects but not any large capital expenditures out there. And so we continue to believe that we're going to see a continued absorption as our business continues to grow, as we work towards those goals that we've set forth for the year.

There's -- as you look across the product lines and the growth, we see a lot of areas and products that are getting a good acceptance. And particularly a reminder that we launched 5 new products in January. We're just getting a little bit of contribution from those products at this point, but they're starting to ramp up. And so we're confident in the numbers that we've given you in terms of our core growth and our overall business going forward -- and again, we just look forward to reporting that continued plan, if you will, at the end of the second quarter.

Well, that's about all that I have. I mean, I think there is plenty here. There's a -- but anything outside would have -- or probably distract from what ought to be looked at.

So Bernard, do you want to add anything before we close?

No. I think we'll just open it up to questions.

Okay, very good. Well, ladies and gentlemen, we'll now turn the time then back over to our administrator, and we'll -- we're sitting here ready for your questions. So here we go. Let's turn it back over.

(Operator Instructions) Our first question comes from the line of Larry Biegelsen of Wells Fargo.

Fred, I wanted to start with the quarter and maybe a little bit more color on what drove the upside relative to consensus in the quarter. Can you talk about what the contribution was from DFINE, HeRO, Argon and CCI the strength in stand-alone devices, catheters and CRM? And I had a couple of follow-ups.

Okay. Larry, I'll go ahead and start, then I'll have Bernard weigh in on some of the contributions by the units. What we did see in the quarter was a lot of strength coming back in from our international dealers. When we hit some of the oil resets here a year, 18 months ago, we saw a slowdown in Russia and Saudi Arabia in some of these locations. So we saw a resurgence of business in these areas. That would be one. Our OEM business, which has been relatively quiet the last several years in the low single digits, surged and a lot of this because of some of the newer products, like the Prelude SNAP that's being used by one of the major EP companies on an OEM basis. And so it's coming from that area; our Endotek business although the smallest part of our contributors grew substantially and we expect that to continue to grow actually at higher percentage levels as we go forward. So that would be another contributor. And then we saw growth across the board, as you pointed out, in stand-alone devices and catheters. So if you look at the business areas and the geographic areas, China continues to grow and Southeast Asia at levels of approximately 20%. So we're getting a lot of contributions in the first quarter, which, candidly, it was a little surprising to see all of this kind of all hit at once. But Bernard, let me turn some time over to you and have you go through the specific contributions by the various groups.

Okay. So Argon and CCI contributed about $9 million in revenue; DFINE, $7.1 million; HeRO, $2.2 million. And as Fred said, we've seen growth across all product categories apart from custom kits and procedure trays. And across all geographic markets, we saw strong growth as well. So everything, all of that combined, led to the very strong revenue number.

Larry, let me just add some color to the custom kits and trays. It's a business that is out there. It's an important part of our business. But with all the new products and the higher-margin products, we directed and incentivized our sales force to sell these other products. So we would expect to continue to see that to be flat simply because it's not where we're focusing our business. I know that you're relatively new to the story, Larry, but let me just say there's a lot of elasticity in that particular area [because] we want it to be. But again, because of the margins, our preference is to have our guys work on these newer products. So hopefully, that answers your first part of your question.

It does. I didn't hear you mention SwiftNinja. Any color on that, Fred?

Well, it continues to ramp up in the United States. I think that we did in the quarter about $1 million. But remember, we just launched it in late January, so about $1 million of contribution. I still think -- but when it gets done by the end of the year, it's going to be the star product. And also, Larry, one other thing that's important is that we have the -- this PAE thing that -- approval that we're waiting for, still haven't received it. So that's going to be another big impetus for the -- both for the embolic business but particularly for the SwiftNinja. So...

And just a clarification. On PAE, Fred, can you talk about whether it's a PAE label or a BPH treatment indication? And I know you have a study going on in that area. And any update on the PAE study and the potential market opportunity?

Yes. This will forego and remove the PAE study. So it'll eliminate that expense. This will give us a de novo approval for our Embosphere to be used in the treatment of BPH. So that's -- and again, we've been waiting for this for quite some time. We've been answering questions and responding back to the FDA. And as much as I know, imminent seems to be -- or imminent seems to be months, but it could be literally any day. And that's a significant, I think, business opportunity for us.

That's exciting. Let me transition to the guidance. You left the guidance unchanged. Why did you leave the guidance unchanged given the beat? Was there something about the first quarter that was onetime in nature? Is there something, Fred, that you're seeing that makes you cautious on the second through fourth quarter?

Well, it's like Bernard said. Everything was hitting on all cylinders, which is -- yes, there's always something that's awry in a business in some location or whatever. And we just like to be conservative, Larry. And yet I think as we approach that second quarter, we'll look at how did we do there. We'll look at that -- the extra 2 years. Adding that on, we probably or at least are considering an Investors Day. But we just think 1 quarter was just not enough visibility for us to go ahead and literally stick our necks out here. So we'll do it when we're absolutely confident that we can beat and whatever it is that the level is. And we want to be fair, but at the same time, I don't want to stick my neck out there and disappoint anybody. When we're ready and we're very confident and everybody in this room raises their hand in the square, then we will go ahead and adjust.

Okay. Last one from me but just before, I just want to confirm. So nothing that you felt was onetime in the quarter and there's nothing that you're seeing right now in the business that's making you cautious? Is that fair, Fred?

Well, I'm always cautious. I talk and I'm a salesman, but I'm always cautious, Larry. But no, I am -- we're not seeing anything that's out there that would alarm us and cause us to say we're not doing it because there's something that scares us. So we don't see anything like that at all. And again, on the earnings side, I mean, I think without adjusting that, remember, we said we're going to still be in that upper -- not the range but the initial range, and that includes the additional shares. So I think that is, in effect, an upgrade of our thinking there from the dilution. So we're essentially going to absorb that, which I think is, in and of itself, not a bad thing.

That, I agree. So lastly from me then I'll jump back in queue. How are you thinking about your appetite for M&A going forward post the financing? And are there any areas of interest that -- or areas of focus that you're willing to share with us?

Thanks. Larry, there are a lot of opportunities out there. There are a lot of people who are shuffling their portfolios there, as we're all aware, issues with Becton, Dickinson and with Bard. And you've got -- you have the Abbott. You have all of these things out here. Medtronic recently sold some things off. And some of those things are going to pop up. And in fact, we have seen a couple of opportunities that have come out of those situations that we look at. We look at -- I would think right now, we have at least 5 deals that we look at. I probably rejected 10 almost initially. So there's a lot of opportunities out there, but again, here is the critical issue for us: we want to be able to provide a value proposition for our customers. We want to be able to keep the commitments to our shareholders and to our employees. So it has to meet a lot of parameters. And we're not out here just taking a look and trying to be bunch of swingers just taking down whatever. Things have to fit into the business area. And we're just trying to make sure that we take advantage of the opportunities, but we have plenty to do and plenty of opportunities right in front of us. But it doesn't mean we won't look and that we are, in fact, looking all the time. So (inaudible).

Our next question comes from Matthew O'Brien of Piper Jaffray.

Just a follow-up on a couple of Larry's questions. Bernard, the maintaining of earnings despite the dilution that you're going to be experiencing from the capital raise, can you just give us a sense of where some that excess leverage is coming from?

Well, if you look at -- obviously, include the earnings from the first quarter and then look at what's out there for Q2 to Q4 and based on the level of dilution there, I think we've made up some of the ground that we -- particularly in the first quarter that would have helped with absorbing some of that dilution on an annual basis. That will be the primary area. And again -- and based on the strong start to the year, I think that gave us confidence that we could maintain that guidance of $1.15 to $1.20.

Okay. I guess just given the gross margin softness in the quarter, I'd love to hear a little bit about what caused that. And I think it might have been the OEM business really perking up, but just given that softness we saw there, you still had a good bottom line print and then maintaining -- sorry, go ahead.

So we're -- well, that was just -- we're a little bit concerned about what -- the use of the word softness. I mean, we went from the previous year of...

45.9% to 48.3%.

45.9% to 48.3%, and that doesn't seem very soft to me. And maybe we're misunderstanding that, Matt.

Yes, my apologies. I'm bouncing between calls. I may have miscalculated that, but it's just like a little bit lighter than I think I was calculating but not by much or expecting it might be adjustment. So let me move on then. The DFINE number in the quarter, I think you did $6 million in Q4 of last year and you just did $7.1 million, so very strong sequential improvement there in what's traditionally a seasonally soft quarter. So would love to hear about some of the traction that you're seeing there and how we should think about that line item going forward.

Yes. So -- as you know, Matt, we bought this in July of last year. And then we went through a transition that took us all the way through the end of the year, and in fact, we dismissed over 100 employees as we took in and put -- and merged the businesses together. We shut down offices. And I think the softness in the fourth quarter was a bit of the -- there were people leaving and maybe not an attention to customers that was necessary. Well, now that things have stabilized, we saw a better first quarter. Some -- our MX product is starting to ramp up, which is a product that uses a Merit inflation device as the piston in that particular device, which is -- by the way, just historically, what got us interested in it because they were using a Merit device that really made a difference in the outcomes or in the performance. And then I think the other thing that we're doing is that we've started R&D projects. And we have a number of things. So -- that are in the wind, so to speak. And I -- my belief is that we'll have a major product out on the market by the end of the year, and then I think that we'll have several other products as we have now Merit-ized and are doing that, what -- that's my word, but Merit-izing is getting people to understand our R&D projects to get engaged. We've had a number of focus groups, and then we march down the road. So some of these businesses that we bought had not done R&D projects for a long time. They were maintaining and trying to hang on and doing this, and then what Merit does, whether it be with BioSphere or whether it would be with Thomas -- and by the way, incidentally, Thomas, which is this electrophysiology business that's booming that we talked about on the OEM side, was out of the Thomas acquisition. It kind of fell on its face out of the blocks, but we just stuck with it and continued to invest in it, and now we're starting to see some of the proofs there. So I think it's a process. And this is the same thing that you'll see with the -- with, let's say, the businesses that we bought in this quarter, which would be the Argon and the Catheter Connections. And hardly anybody ask me about Catheter Connections, but in May, which is, what, a week away, we then go from the distribution model to the direct model. So all of that business now turns over to Merit and our salespeople service it. And then we'll also be selling it all direct to those accounts, and that businesses are going to start expand. And I think, very candid, that business, which was about a $10 million business, I think we have on the books to grow at about 50% for the next 5 years. So -- and you'll see new products coming out of that. So there's a lot of areas in the business, but they take a little time sometimes to get stabilized, get the transition work done and then start to get the investments. And then maybe the most important part of all of this is (inaudible) system. So whether it be in the U.S. or Canada, Europe, Asia, you start to funnel it into there and then you start to see pretty dramatic growth. So on -- back to DFINE, we expect that you're going to continue to see probably a little bit of growth like you're seeing here quarter to quarter. But by the time we move into 2018, these other new products will be onboard and we should see pretty substantial growth, and double-digit growth would be my goal next year. So we'll have a few of those that, again, take a little time, but once they get going and we have those investments in that pipeline, they can be extraordinary performers.

Great. And then one more from me. Just you mentioned the Medtronic-Cardinal deal and the Becton-Bard deal and some of the inorganic opportunities you're seeing there. What about anything on the organic side in terms of maybe disruption that comes along with those transactions? Is there some meaningful opportunity for you to take some business over the next several quarters?

I'm not going to say meaningful because we don't know enough about their strategies and that sort of thing at this point. But I will say if we look historically, at a number of these larger transitions, whether it be Boston and Guidant or whether it be this or that, we always see Cardinal and Cordis. We always kind of see that it takes them a while and then they have strategies and people are leaving and the -- kind of what we saw with DFINE. When you have these things, there's going to be some consequences initially. It's not just all roses. And so there are some -- and what we've done is we've gone and looked at all of their products, all of our products, looked at what crosses over, looked at our strategies. And so we've already started even though I think it's what -- [just Sunday night]. We're already looking and plotting and doing all the things that we think that we can put together plans and, in fact, will benefit it. Now meaningful means -- I mean, that's a big word. I would say that we're going to be doing things that will give us opportunities to continue to grow the business. And there may -- and they may turn into meaningful. When they do, I'll -- you'll be -- I'll be the first one to tell you, but we've got to get there first.

Our next question comes from John (sic) [Jim] Sidoti of Sidoti & Company.

Fred, they changed my name. Can you talk a little bit about the legal expenses in the quarter if that's something we should expect going forward or you think they'll tick down a little from Q1?

Well, I actually think they're going to tick down a bit as we move out through the year. By the way, this was all part of our original guidance. So this -- but we put it in there because we didn't want anybody to think that we're avoiding it. This is the lawyering up, and this is the part of what's -- we've delivered a million documents. It's just part of the process, but that being said, let me add -- go ahead, Bernard. Do you want to weigh in?

Yes, I would agree with that. A lot of the heavy work had to be done in the first quarter, and we expect that to reduce throughout the rest of the year. So based on what we see right now, we would expect those expenses to tick down.

All right. And then now that you've completed the offering, what should we assume for interest expense and a share count for the rest of the year?

On the interest expense, you're probably looking at about -- between 2.5% and 2.8% interest cost. That's...

So what would it be? Now that you've paid it down, what would that be in dollars per quarter?

I've got about $2 million a quarter, something like that in that range. And the share count is going to...

Will be 96 million.

No, it will be 50 million.

About 50 million?

Yes. Just over 50 million.

Okay, a 50 million share count, all right. And can you just give me a little more color? What is a bargain purchase gain?

Jimmy, I was hoping you'd ask the question. I said if there'll be one guy in this call who will ask that question, it will be Jim Sidoti. But this is going to be an interesting one. Go ahead, Bernard, because it's a fun one to talk about.

So essentially, it's when you buy an entity or buy an asset where -- and the fair market value of that asset is greater than the amount that you actually pay for it. So then we have to go in and value of all of the assets. Obviously, we're working through various advisers with that on valuations on the assets and liabilities. And then if the net of those is greater than what you pay for the asset, then you have a bargain purchase and you have to recognize it through your income statement for GAAP -- on GAAP basis. So it's really noncash, what -- it's just the way the accounting has to be recorded.

And Jim, we spent more time on this. And again, these are requirements from our accountants as well as external advisers who review this. So we don't make this stuff up, but the essence of the question is, is the assets worth more than we paid for it, they make you write this up on a one-time issue. It is a preliminary number. It can all be adjusted as -- and remember, this just took place, I think, in, what, February, yes.

February. So we've had a lot of work done in the quarter, and there is still some more work to be done on that. We're going obviously -- we'll be through that in the second quarter, but it just takes time.

And I don't want to say it's meaningless. I mean, it's something unique we've never dealt with before but something that was required. But again, in the big picture, it's an entry. Is that a fair statement? I mean, I don't want to diminish it but...

Yes, it's an entry. It takes time, and we want to make sure that it's 100% accurate and that's what we're doing. We spent a lot of time and effort on this and taken a lot of advice to make sure that it's correct, and that's where our focus is.

Have you ever seen one before Jim? I've never -- we've never.

No. Usually, it's the other way where they're writing things down. They're not [writing things down].

Yes, I know. We've had a few of those over the years, too. So -- anyway, okay, all right. Jim, anything else?

All right. No, no. Numbers speak for themselves.

(Operator Instructions) Our next question comes from Jayson Bedford of Raymond James.

Just a few quickies. You launched the 5 products in January, a little surprised that you mentioned that they weren't bigger contributors in the quarter. Just to be clear, the expectation is that these products will grow and become bigger contributors throughout the year? I don't mean to state the obvious, but I just want to reaffirm (inaudible)

Well -- and thanks. I hope I didn't give any impression that somehow that these aren't winners because they are. They're going to be big players. I mean, when you take the Ninja or you take the Sync or you take the Elation pulmonary balloons, all of the various products that we launched are going to big. But when you launch something in the quarter -- I think what I was trying to point out, Jayson, is the growth that we saw across the board, geographically and for our products, wasn't because of just these products. That's where a substantial growth in these products will come in all of them, and each one of them is a winner. So we know that for a fact. But you have to get inventory. You have to get out there. Everybody has to do their trials. It has to go to the [back] committees and all this sort of stuff. And we're having a lot of fun, and we're making an impact in the market. But there wasn't a lot because we have a sales meeting in January -- late January, February. That gives you 60 days. And in the meantime, management is out, running around, doing all of these things and traveling to facilities worldwide. So it has all of our focus. The sales guys are on it. They're like hunting dogs. They've got the scent. And I've got a report yesterday from a hospital on the East Coast, where they did 11 cases yesterday of the Prelude Sync. And the docs and the nurses and everybody just love it. We're hearing that every day. So I'm pleased, and thank you for the questions so that I can clarify it that these are all going to be winners and big contributors -- and maybe equally important is their contributions from a gross margin point of view. These are products that have 65% and up to 80% gross margin. So as they grow, they're going to be contributors to our efforts on the gross margin side. So thank you for asking that question so I could clarify it.

Okay. And that's actually a good lead-in maybe for Bernard. You reiterated the gross margin guidance for the year. First quarter gross margin, I thought, was quite strong. I realize that Argon and Catheter Connections probably weigh on margins a bit. But was there anything kind of onetime in nature that helped the first quarter gross margin?

I don't think there was any -- there wasn't anything onetime in nature. I think we got a really good product mix in the first quarter. And again, that's something that we've been focusing on. And we're seeing strong growth in our embolics, and SwiftNinja made an impact. DFINE was strong again in the quarter, which helped on the margin side. We see our Elation balloon coming into play. So there's a lot of factors helping to contribute to that margin. And plus -- then on the operational side, we're driving lot of efficiencies. We're seeing better utilization of our facilities given that we have higher output. So it's a combination of all of those factors together supporting that margin growth.

And Jayson, if I could, we've had a couple of facilities that weren't performing like we'd like them to. And I think to the credit of our operations group, Ron Frost and his guys, Neil Peterson and many others, Clay Creamer, the group that's responsible for this, we've turned those around. We particularly have seen that in our Houston -- sorry, our Pearland, Texas facility. And with -- I think we've talked in the past about how those were kind of not performing at the level that we needed them to, and we turned them. So I think that that's a strong opportunity going forward to improve those gross margins and those contributions. So as Bernard said, it's coming from a lot of areas, but there were some pretty fundamental things that we did that, I think, will really help all areas, I mean, particularly the gross margins going forward. But like you said, it's coming from a lot of areas, and that's the way it ought to be instead of just one issue.

Okay. Last one from me, just on Argon and Catheter Connections. I think the previous assumption was they'd contribute together kind of low $40 million range. You were a bit ahead of where we're thinking for the first quarter. Is low $40 million kind of the -- still the rough number for -- or the expectation for '17?

Yes, that's what I would then still be guiding towards. There may be upside within that, but that's what I would be guiding to right now particularly as we continue to integrate the sales force for that business and make changes there. And just as Fred said, some of that business, again, is changing, switching over to (inaudible) and we're moving into a direct-based business. So giving all of those factors and the consolidation that's taking place in that area, I think that number is reasonable.

Okay. Jayson, anything else?

No, that's good.

Our next question comes from Charles Haff of Craig-Hallum Capital.

This is Lucas Baranowski on for Charles Haff. And looking at the way your operating margins have expanded year-over-year, we were just wondering if you could talk a little bit about your kind of longer-term goals on an operating margin, maybe where it could get to over the long term?

Yes. Lucas, I hate to disappoint you, but I think what we want to do is we want to get to the second quarter. We want up to 1 more quarter of these new acquisitions and to look at their contributions. And I think that we'll do that at the end of the second quarter, and we'll expand out an additional 2 years beyond. So I think as much as I'd like to answer the question, I think it would be best settled in our second quarter call, and we'll start taking a look at what our goals would be, our CapEx, earnings. We'll do all of that stuff. And very likely, by the way, that an Investor Day Meeting, we may do in New York or -- that -- those are kinds of things that -- we were just so busy, we -- and it was only the first quarter of these new businesses. So we'll just kind of have to hold that in abeyance to the future, and then we'll bring those numbers forward at the end of the second quarter.

Okay. And then turning to acquisitions. Obviously, some of the acquisitions you've done recently have benefited margins. I mean, do you -- when you look at other potential acquisitions, I mean, do you expect the ones you would do in the future would continue to help expand margins?

Yes, I mean, I think our goal is always -- again, as we look at the plan up to this point, where we've had to ask -- or if we were seeking 100 to 150 basis points of gross margin per year, some of that's going to come in mix. Some is going to come in absorption. But in our analysis of these businesses, we look at their contributions. But I think the important part of that is just something that has a high gross margin is not good enough. It has to have the strategy. It has to be able to go to our sales points, use, all of the other skill sets that Merit has, distribution, point-of-sale, consistency and building out product lines. So it has to have a lot of factors for us to consider them as well as value proposition. So listen, we like the way the business is moving. We -- I think -- or I guess I could say we're on a roll. I mean, this is, what, our sixth -- is it our sixth or seventh quarter?

Sixth.

Sixth. And -- but here is the real key. It's everybody that's sitting in this room -- there is 30 or 40 people sitting here with me. The great thing about setting these goals and putting them out there is everybody in this organization and everybody in this room is like a hound dog. I mean, they are focused on those goals, and everything they do as well as everything that we review has to meet that corporate goal or we're simply not going to do it. It has to meet the test. So that's the best way I know, Lucas, to answer your question.

Yes, I think that answers it.

Very good, sir. Thank you for it. We're -- it's good to have you on board, too, Lucas, and give my best to Charles.

At this time, I'd like to turn the call back over to management for any closing remarks.

Well, first thing we'd like to do is again thank all of you for taking the time. I know it's busy and we were very, I think, aware of trying to keep this call as concise and to the point as possible. Bernard and I will be for the next couple of hours. And if there is some clarification on some of these points, we'll be happy to do that. And so we'll be here. Thank you, again. We look forward to reporting in the future. Thank you for your continued support. And good night, signing off from Salt Lake City, best wishes.

And ladies and gentlemen, that does conclude the program. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.