Merit Medical Systems Inc (MMSI) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Merit Medical Systems Fourth Quarter and Year-end 2017 results and 2018 Guidance Call. (Operator Instructions) And as a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Fred Lampropoulos, Chairman and CEO. Sir, you may begin.

Well, thank you very much, and good afternoon, ladies and gentlemen, and welcome to a wintry weather afternoon here in Salt Lake City. We are assembled here with our staff and are pleased to be able to report to you our fourth quarter and also guidance for 2018. But first item on the agenda is a pronouncement of our safe harbor provision.

And I'd ask Brian Lloyd, our Chief Legal Officer, to present that. Brian?

Thank you, Fred. During our discussion today, reference may be made to projections, anticipated events or other event -- 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 with 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 tables included in our release and discussed on this call set 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 again, ladies and gentlemen, welcome and thank you for taking the time. We're delighted to be able to report our 4Q and full-year results and talk about the future with you today. A reminder that there are -- there is a slide deck presentation. And if you will go to merit.com, you can follow along with some of the slides on our presentation and some photographs of products and so on and so forth. So there'll be I think some good information at that location for you.

Let's get started. The bottom line is this, Merit accomplished all of their 2017 goals. Our business is healthy, robust. Pipeline is full, and I think our future is very bright. There's a lot of momentum, and we're excited about, of course, the Becton, Dickinson transition.

And listen, on the Becton, Dickinson deal, just so that everybody understands about the process that we'll be going through. And we've talked about this before. But as a reminder, Merit owns the business. Becton, Dickinson will produce the product for Merit over the next 6 months or so.

During that period of time, Merit is -- will be transitioning the business from several locations where the products are currently being made, but primarily in the Dominican Republic, and will be transitioned to our facility in Tijuana, Mexico.

As we speak, our teams are on the ground in the Dominican Republic. The full transition and transfer teams are in place in that location, and they will be working on several visits over several weeks, looking at equipment and all the various things that are necessary to transfer this. A reminder that -- and I hope this comes across like I intended this, we're pretty good at this stuff. I mean, we've been transitioning and moving products, some probably 20 product lines to Mexico. We've moved them all over the world, and we have a very seasoned and professional knowledgeable team that will be moving these products. So we're excited to have the process done and now working in this transition.

And incidentally, it was a very unique transaction. It took time. It took patience. It took regulatory approval. It took a lot of work, and there's a lot of work left to do. But I think as I've said previously, it fits perfectly into our portfolio. And then it will complement a couple of other products, the Laurane bone biopsy devices and other devices that Merit has; and goes to our competency in terms of the drainage side, where we do extrusions and we do tunneled catheters. And so we're very excited and continue to be about this.

In just a few minutes, Bernard will talk about the effects, because the timing on this is something we want to make sure we review with you. We closed a few weeks ago, and so we're going to have some irregular timing of revenues and things like that because of the stub periods. But that being said, we're very encouraged by the transaction, and we'll talk further about that in a few minutes.

I just returned from Japan, and there are a lot of other things that are going on in the business. In Japan, we have consolidated the Argon business with the Merit business that came out of our distribution channel. I've been into our warehouses, our distribution center. I've been into our business offices. And then I just have to say that from probably an analyst point of view, this is kind of business as usual and expected. But I have to speak to the hard work of the staff and putting these all together and bringing it together in a very, very timely fashion. I think we're going to see extraordinary results going forward out of Japan in terms of growth that we haven't seen for many years.

I also spent time in Singapore. And that transition of that facility, the Meritization of that facility, will pay huge dividends in the future. So rather than going to that -- any of that detail at this point, I just really want to talk to you about really the effort that's been made. And all of this has been going on while the work on Becton, Dickinson.

Everybody here has been working very, very hard as you would expect us to and as we would expect of ourselves. So a reminder, and I do in our prepared comments, talk a little bit about some of the timing of expenses. Bernard will talk about that, but remember that we're going to be going through some transition expenses. These have to do with customer service, with delivery of products, making of products, IT and several other things as you transition all of those capabilities over to Merit. And those are expense items, and some of those are going to fall in this quarter and the next quarter. And I'll have Bernard go on to that.

And then going into the guidance. You'll need to pay some really close attention today on the guidance. But I think the critical point is that the core growth, the new product pipeline, the distribution channels, the wholesale, the retail, all of these things are all in sync, and we expect the business to continue to grow per our published plan. And of course, our goal is to try to exceed that. But we're, I think, looking forward to future reports to talk about the progress that we've made.

Well, now with that being said, I think it's appropriate because there's a lot of financial data in this report and some clarification that's necessary. So with that being said, I'm going to turn the time over to Bernard Birkett.

And Bernard, if you would kind of go through and make sure that everybody's squared away on all this information. So Bernie?

Thank you, Fred, good afternoon. First of all, I'd like to go through our Q4 numbers. Q4 worldwide revenue was $190.9 million, $188.2 million on a comparable constant currency basis, up 21% as reported and 19.3% on a constant currency basis over Q4 2016.

Q4 2017 core revenue was up 9.4% over Q4 '16. Our core revenue was up 7.9% on a comparable constant currency basis. And we just also need to note there was a one-time return of inventory in the quarter from our Japanese distributor as part of our move to a direct selling model in Japan. And adjusted for this one-time return our organic constant currency growth would have been approximately 8.3% in the quarter.

Year-to-date, worldwide revenue is $727.9 million, $727.3 million on a comparable constant currency basis, up 20.5% as reported and 20.4% on a constant currency basis over the same period for '16. Year-to-date, core revenue was up 8.8% over core revenue for the same period '16. Core revenue on a constant currency basis was up 8.7%.

We continue to see gross margin improvement year-over-year. And for the period, our gross margin was 47.9%. And just to note also, there was a one-time impact related to a transition services agreement that we have in place with ITL. This affected us by about 20 basis points in the quarter. Adjusted for this, our gross margin would have been 48.1%. So on the year, gross margin is up to 48.1% compared to 46.9% for the prior year, and that's in line with the projections that we have outlined.

Q4 '17 EPS on a GAAP basis was $0.13 compared to $0.17 in Q4 '16. Q4 non-GAAP EPS was $0.33 compared to $0.31 in Q4 2016. On our GAAP number in Q4, there was an impact for transition tax and tax reform. And the impact there was approximately $1.8 million on a GAAP basis. On a cash flow basis, we'll see an impact in the first year for a transition tax charge of approximately $400,000.

That's it?

That's it on the Q4 numbers.

Okay. All right. So let's go to the guidance then.

Okay, guidance for 2018. Our revenue range is between $838 million to $851 million, up approximately 15% to 17% on a reported basis. The composition of that is there will be a 7.5% to 8.5% organic growth on a constant currency, and then also adding in the acquisitions that we completed at the back end of 2017, plus the addition of the BD acquisition products. The range there will be between $36.75 million to $42 million, and that's adjusted for the closing of the deal, which took place in mid-February.

At gross margin on a GAAP basis, the range will be between 45.6% and 46.5%; and gross margin on a non-GAAP basis, the range will be between 49.7% and 50.8%. The margin improvement is built up of a number of different components. On an organic basis -- organic business, we expect to see 100 to 150 basis-point improvement over 2017. And then the balance will be made up of the addition of the biopsy and drainage product portfolios, which we have just acquired.

On an EPS basis, EPS GAAP will range between $0.77 and $0.85 for 2018. On a non-GAAP basis, the range will be between $1.57 and $1.69. That's a 27% increase at the midpoint. That's made up of 13% to 15% increase on EPS on our core business, and then layered in -- we've layered in the increase in EPS from the biopsy and drainage product portfolios we've acquired and also the effect of tax reform.

On a tax basis, we're forecasting our rate to be between 25% to 27% for '18, and that's in comparison to our previous guidance prior to tax reform of between 29% and 31%. So we're picking up some benefit there from tax reform.

Well, that's a lot of information. And it's all good information. I mean, the net-net of all of this is that the transaction will be beneficial to Merit. The core growth is there, the product pipeline is full. Just as a side note, that we'll be attending the SIR meeting and introducing a number of new products at the end of March in Los Angeles. This is the Society for Interventional Radiology. It's one of our biggest shows of the year.

We have gross margin improvement, earnings improvement. And all of this is consistent with our previous discussion and the adding on of the 2 years that we discussed with you previously. The momentum is here. The business is healthy. We also will be out over the next 5 or 6 weeks. We have a number of conferences coming up, and I think we sent that notice out. And so we're going to be busy running our business and making sure that everybody understands all of these numbers. Again, there are a lot of them and a lot of input that we haven't had before.

I just think, all in all, and I think you can hear this tone, I think we did what we said we were going to do. We're confident about the future, and we're prepared. People have worked hard. But I think we've positioned the business in our selling groups, in our geographic presentations and in our new product pipeline for continued growth. We've only talked about the next 2 years financially, and that's all we'll talk about today. But the framework and the products and the research and development are well in place for other products and other things to carry the business into the future.

So all in all, it's -- we appreciate your patience with us. I hope that -- and I believe that you appreciate our discipline, our vision and we're hard at work.

So that being said, I think we'll -- Bernie, do you have anything else you'd like to add?

Yes, just one thing on tax reform that I'd like to add is that we are planning to reinvest some of the benefit from tax reform into OpEx and SG&A to support market growth in the coming year. So about 25% to 30% of that benefit will be reinvested.

We believe that's important as we continue to scale and grow with these rates to make sure that we have the correct infrastructure in place to deliver on what we have outlined right now and also to be able to continue to scale in the future.

Yes. I think it's an important point that you just can't go out and expect the systems and everything to kind of operate when you keep stacking on more and more of this business. So as Merit has always done, we try to plan for the future, to put structure in place and think about things out 3, 5 and 10 years. And I think, with that being said, Bernard, I was looking at the business, going over the numbers, and just kind of looking at the past and thinking about, we've made a lot of tough decisions over the years. We've always thought long term, and we've always tried to invest long term.

And I think what you're seeing is a maturation of that thought process and the benefits that come from that kind of thinking. It's probably one of the biggest advantages that we have, is that we're not sellers, we're not flippers. We simply have a vision of our business, a multibillion-dollar business, and we have a vision of how we're going to do that. And we've executed on that plan, and we continue to do so. So I appreciate that comment that we want to be able to give returns to shareholders. But at the same time, we want to make sure that we have adequate infrastructure, appropriate infrastructure for really substantial growth that you've seen and you'll continue to see going forward.

So I think, again, thank you very much for all of that analysis and presentation. Ladies and gentlemen, I think that pretty well wraps it up for us. I think what we'd like to do now is turn it over to our administrator. And Bernard and I are here to answer your question as well as other members of the staff, if appropriate. And of course, we'll be here following the Q&A period for whatever period of time is necessary for clarifications and making sure that issues on the taxes and things that are appropriate to discuss will be clarified for you, those who have an interest in doing so.

We thank you for your participation. We wish you the very best. And that being said, we'll turn the time back now over to the administrator.

(Operator Instructions) Our first question comes from the line of Jim Sidoti with Sidoti & Company.

When you discussed the integration with Becton, Dickinson's products, I think you used the term irregular. Is that something to describe the top line or is that the bottom line? And can you just give us a little more color what you mean by that?

Sure, Jim. Thank you. Well, what I was trying to spell out there, as Bernard pointed out that, yes, we closed in the middle of February. When we originally announced the deal, we gave you annual numbers. And so we wanted just to make sure that everybody knows that there will be about 1.5 quarters -- or excuse me, about 1.5 months associated on the revenue stream. So that's part of it. The other part is the transition. So right now, BD is taking orders, they continue to do so. And we will start transitioning out of this as we go through the weeks and the months ahead as we're prepared.

As an example, in the U.S., we believe that about in the middle of March, give or take, inventory will be moved. We will then take the orders and deliver the orders. But on an international basis, because of licenses and regulatory requirements, BD will continue to ship to those markets until we make sure that we have everything in order from a regulatory point of view. And what really drives this, Jim, is making sure that our customers are served and they get products. So -- but there's a cost to this. In many of these transactions are these transitions agreement. There's IT. There's data going back and forth. There's the daily call sheets. There's shipping and handling and all of these sorts of things. And all of these things hit the expense line.

When -- as we transition out over these things, and our business development department and Greg Fredde in our Accounting Department will work through all of this. So what I was really trying to point out is that there's expenses associated with this, but they're not rolled back up. They are pure expense. And so that will hit the P&L. But the more important part, and what I was trying to say, that as you look at the numbers and look for the year, I think you would agree that as you look for the full year, we've taken into account these expenses. And we can use the word lumpy, irregular, but they were like stub periods. And I just want everybody to kind of be aware that there are all these things and make sure that everybody understands the 12-month picture.

I understand we have quarterly reports and updates, but that was really what I was trying to point out. And Bernie, do you want to maybe add a little bit to that what some of those expenses are? And again, it's not to concern everybody, but just to know that this is the process that we have to go through to get the benefits of the transaction.

Yes, so all of these expenses are built into the guidance that we've just provided. So we're taking the look over the 12-month period. But the initial part of the transaction, we've got these TSA services that we're going to have to pay for over a 6-month period, and they will vary. And we've also -- we've been hiring people, onboarding people for BD and Aspira products and both from a manufacturing point of view to make sure that we have people trained and that we have the right sales infrastructure and operational structure in place. We began that process at the back end of 2017 just to make sure that we're ready to onboard. And so those expenses are in place already, but we've already -- they're factored into our numbers. But we just want people to be aware of them so if they see build expenses coming through in the first quarter, they are planned for.

And as you know, Jim, we don't give quarterly guidance. But we want to, again, make sure that everybody understands that, for instance, you can't hire people after the deal is done. We had hoped that it would be done by the end of the year, by mid-December and it would have made it so much easier. But that's not what happened. We had to go through, as you know, the FTC. We had to go through the EC. We had to testify to these groups. We had to go through MOFCOM after the BD Bard deal closed to get approval from that side of the pond.

And so we just want to let people kind of know about those -- and we hire people, so we'll have some expense in that first quarter. However, if you take a look at the back end of the full year, we're confident on, as I mentioned, the pipeline, the cost reduction initiatives, the mix, all of the other factors that will give us the performance, the improvement in gross margins, the core growth and then the overall growth for the year, which I think that you would agree, I hope you would agree, that as you look at the numbers end of the year, that those are pretty extraordinary numbers. But a lot of work to get done to get there, but we're confident that we'll be able to do that. So I appreciate the question and allowing us to maybe clarify it a little bit, Jim.

So basically, it sounds like the first half of the year is going to look a little different from the second half for 2018?

Yes, and you'll get some of it's wholesale. The retail, there's distribution. We'll be -- we have to get licensed in Australia. We have to go to Europe. There's some distribution partners. There's all these things that have to be worked out in this kind of transaction. Just to remind you, though, remember this was a business that Becton, Dickinson didn't want to sell. They wanted this business. It was a requirement from the FTC and from the other regulatory bodies that these assets be sold. And all of this, by the way, everything we're talking about, is all planned for. So we tried to point that out in our numbers and in our prepared statements. We're pointing it out now that as we look at the -- this isn't a surprise. It's not meant to frighten everybody. In fact, what it's done is just to clarify and set the stage.

Okay. And then on the bottom line guidance, Bernard, there's about an $0.80 difference between the GAAP and the non-GAAP number. And I assume a portion of that is the noncash amortization. Can you tell me how much that is and what the rest of that $0.80 is?

So it's made up of a number of factors. So you're going to have -- we have a markup on inventory that will come with the BD deal and the increased amortization that's going to come onboard when we onboard that. And then we've also got some other expenses and legal expenses that we're going to pick up in the year.

Okay. How much will the amortization be on an annual basis?

Approximately $0.59.

Okay. All right, Fred. It looks like $1 billion is not that far away.

We're looking at the number, too. That's what we're working toward.

And our next question comes from the line of Larry Biegelsen with Wells Fargo.

It's Adam Maeder in for Larry. I guess, I wanted to -- I guess, I just wanted to start with the top line. Can you walk us through some of the different puts and takes on top line growth in 2018 and maybe share your expectations for the different business lines what gets better, what gets worse, et cetera?

Yes, nothing gets worse. So I'll just start out with that. You do have some wholesale to retail in Japan. That's going to be transitioning throughout the year. That's part of it. The new products, some products like the SYNC that we launched last year is ramping very, very nicely. We're very pleased with that. As I mentioned, we have a number of new products. But all of these products kind of pull together. There's an awful lot of pull-through. When you sell a SYNC, you're generally selling a sheath. You're doing the vascular access and then you've got to put something in there. So if you look at the endoscopy, if you look at vascular access, you take a look at our cardiac business, you take a look at our peripheral business, our OEM business, our sensor business, everything that's on the board is going to improve during the year.

So one of the other things that I think that's also interesting, we're getting a lot of requests. It's interesting when you have a transaction like BD and Bard. And then all of a sudden, now BD has some capabilities that they maybe didn't have before. And a lot of OEM customers now start to line up for various types of products like inflation devices, like a 40 atmosphere inflation device that they now have to compete with that Merit has. So there's a lot of things like that. But Bernard, I'm going to let you maybe address a little bit of that, maybe more specifically because you've got that broken down in front of you.

Yes. As we've mentioned earlier, you've got the organic constant currency growth of 7.5% to 8.5%. We're seeing strong growth across all geographies and continued growth across all product lines. So there isn't one that we need to specifically call out and there isn't really one area of concern for us. Then you've also got a number of acquisitions that will be layered in. So you've got BD, which I've called out earlier on. Adjusting for the 10.5 months, so that's between $37 million and $42 million. And then you're going to have Argon for a month in the first quarter, DualCap and then Laurane, Osseon and ITL to be layered in. Fred?

Yes, so just another thing. Just as a reminder, you'll recall that we did an acquisition I think in the late third, early fourth quarter of Laurane Medical. And this is a bone biopsy business. We've stated in some of our previous calls, Adam, that we really couldn't go-to-market with that product for additional customers because they simply didn't have the capacity. As of today, all of that has been moved and is in place in Ireland.

And I can't tell you how much work that was to pick up that business, move it all from a small operation and then put it into Ireland. We'll now be building first lots to stock so that we will be able to launch that business in the U.S. I think we're -- we've had people literally begging us for product. But we didn't want to cut our other customers short, and these guys had no distribution. So there is a product that is going, I'll call that one out, because that's going to be a very nice thing.

And you take that, along with the kind of a launching of the CorVocet and then you take the biopsy lines from BD and put all that together, plus several other products. I'm not going to disclose those today, but let me just assure you that Merit has other products and services that go along with this biopsy business. So it's not just another device. We think we have a number of things that we can add that will enhance the business and, in fact, differentiate our business.

Another would be a really interesting product, the BasixTAU. In our slide deck, we showed this new inflation device. Nothing like it on the market, and it allows you to essentially inflate a balloon twice as fast as traditional methods. It's a patented device. Again, you can look at it in the slide deck. Another product is the new Nephrostomy Catheter. It's in there, along with a new product called FastBreak. I could go on and on about the products. There's a lot of them.

Let me just quickly go to geography. One of the areas that we grew a lot last year was in Brazil, and we grew at 20% last year in Brazil. And then with currency, we did almost 40% in Brazil. But the infrastructure, we're going more and more direct to our customers. We have our own warehouses. And that closeness to the customer brings us more capabilities. It does a lot of things as you guys have seen over the years. Let me slip over to Australia, where direct is still gaining momentum there. All of Southeast Asia: Thailand, Vietnam, Malaysia, Indonesia, all of those places. It's the fastest-growing part of our business, and we're well situated both to manufacture, to deliver product to our customers and to serve those, including Japan, which we mentioned earlier. So that's the geographic part.

Let me come back just quickly to some other new products that are on the slide deck. One of them that you'll look at that's on Page 9, it is a DISTAL Radial Compression Device. To the best of my knowledge, we're the only people in the world that have this product. It's not cleared in the U.S. yet. But from inception to completion and the sign off today, it took us 90 days. I'll just throw out a couple little words that will be of interest. This is a snuffbox approach. So again, I don't want to get too -- seem corny here. But if you take and you think about -- if you had someone that would put snuff in between their thumb and their index finger, they're actually now approaching this instead of you having your hand up and coming through a standard radial approach.

This is catching on fire in Europe. We developed this with the father of radial procedures, and that product we'll be over doing trials in Europe, a 90-day turnaround. The magic, if you will, and thank you for allowing me to say it, but the magic, Larry, of all of this is the ability that we have to turn products around. Another one you'll see there is a product called the Choice, snaps on to our vascular access product and allows a physician to be able to put more than 1 device down a sheath.

And then the Prelude IDeal. We've done over 100 to 150 -- somewhere around 100 to 150 cases. This is a brand-new reinforced sheath, hydrophilic, that does not collapse, does not move, and that's going to be launching here in the next couple of weeks. So we have plenty in this pipeline, and they're all tied together. It's not like 1 product. It's several products that we go and that's in the bag of our salespeople. And at these particular areas that we play in, it's just unmatched. So we have all of that to go along with it too. So that's a lot of discussion. But as you can see from my voice, I'm always excited, but I'm trying to restrain myself.

No, that's helpful. And then, I guess, I recognize you don't give quarterly guidance. But can you help us think through the quarterly cadence for the top line this year?

I wish I could, but it's not our policy to do so. I think we've tried, if you take -- I mean, I think you can do the math. I mean, I don't mean to insult you, please don't be angry at me. But if you take a look at the core growth, it will, in fact, move out during the year. So you might have -- I don't want to say a little bit. I don't think I want to get into this. But the bottom line is, it will ramp up through the year. It will be back end loaded because of all the efforts on the BD thing. But we're very confident about our ability to meet our numbers. And again, our goal is to exceed them. So that's the best I can do, I'm sorry.

Okay, thanks, Fred. And then if I can sneak in one more. I wanted to ask about the bottom line. Can you walk us through the non-GAAP EPS bridge from 2017 to the 2018 guidance? I know I think we started to go through that on the call. I maybe just missed a component or 2. But the underlying growth of 13% to 15%, I think I missed the BD ex accretion. And then you have the lower tax rate and I'm not sure if anything is assumed for FX. So if you could take us through those different pieces, that would be helpful.

On the organic, so it's like as you said 13% to 15%, so that gets you to between $145 million, $147 million BD acquisition. We adjusted the numbers there for the -- just related to when the deal closed, so that's $0.09 to $0.17. And then tax reform, we estimate between $0.06 and $0.07, and that gets you to the guidance range.

And our next question comes from the line of Bruce Nudell with SunTrust.

I just -- Bernard, just for precision. What is the presumed acquisition dollar and FX dollar contribution for the year?

So on the acquisition piece, you're looking -- so for BD, it's about $37 million to $42 million, then approximately about $13.5 million for the other acquisitions. And then FX, I'm looking at between $5.5 million and $6 million.

What was that? I'm sorry, I missed that?

Between $5.5 million and $6 million for the FX piece.

Okay, perfect. And then, Fred, just from this year, with around $50 million of acquisition growth, it looks like it's about 7% contributor to the year. Should we be thinking that that's going to be the pattern for the foreseeable future that there's going to be a hefty supplement of the 8% core with 5 to 10 points of acquisition or inorganic growth?

Well, one of the things that we do in our forecast is we really go easy on new products. And the reason we do that is whatever uncertainty you have in terms of the regulatory environment and that sort of thing and the ramp-up, we've just found that instead of trying to project those things out that are brand-new and are just coming to the market, as much confidence as we have when we show these products, that's kind of -- what's the word here? Kind of the queen, so to speak. A good portion of this are things that we think may very well be in addition to.

Perfect. And Fred, in the fourth quarter, you alluded to a potential kind of windfall associated with pressure transducers and that it might be a durable effect as was the case with Cook supply issues. Did that in fact, manifest itself or do you anticipate it to manifest itself?

I'm glad you asked that question because it did not manifest itself. They were able to recover, they were able to fill, but that being said, we have put a program in place because we produce those same products. They'll continue to transform the business over to a Merit-produced product, so that if we have other incidents in the future like this, these natural disasters, that we're not going to be subject to ever being at risk. So it did not develop on that transducer side.

That being said, I think that our business for the Argon transaction actually exceeded our expectations for the year and that we see that business continuing to grow, and we've never really launched that product line in the United States, which we plan on doing. But -- and remember, that was withdrawn years ago, went offshore, the majority of that business goes to Europe and to Japan. But it's still our intention to launch that project.

At one time, that business alone in the United States was better than $100 million. Now that being said, there's a lot of water under the bridge, Bruce, and we're so busy on the other side, with the higher margin products, that we may not get -- even get to launching that product line until 2019. Just because we are just so busy and we have so many other things that very candidly give us higher returns. So that's the essence of the transducer and the effects of the transducer business.

And our next question comes from the line of Matthew O'Brien with Piper Jaffray.

So 2 for me, Fred and Bernard. The first one is on -- and as I think, as investors are thinking about the story now with a lot going on, a lot of moving parts here. I think it might be helpful just to characterize how you view the risk of the BDX acquisition from an integration perspective because historically, you've bought assets that were stand-alone, that you just took and you overtook, now you're kind of extracting one that's got some very long relationships with a big company. So just, can you help us understand how the integration risk compares versus other deals that you've done and then how you keep the organization focused on the core business at the same time?

Yes. It's a really good question, Matt, and I'm glad. I'm going to talk to you about it in 2 segments. One is the manufacturing. So one of the reasons this was an attractive deal to us, because if you look at the drainage side of it, which was about $20 million or so, we already extrude catheters. We build those things in our facility in Houston in our peritoneal dialysis. Now this is a little bit different but it's the same materials and the same general processes. So that's part of it.

The other part, and the reason it was attractive to us, is we're in the biopsy business. We understand to some extent how that works. I mean, there are going to be things that we don't know about their products, but that's why we hit the ground running. As I mentioned in my previous comments, we have teams on the ground, we have an integration plan. Our guys in Mexico have a long history with Medtronics, Covidien, Smith's, I mean, that's where their backgrounds are, where they've moved all these products. It involves molding, insert molding and skill sets that Merit already has in its -- within its capability to and including injection molding. So all of the skill sets are there.

And maybe to give you a little bit more comfort. As I mentioned, this transaction was unique to anything I've ever done in my career and very few companies ever get involved with these forced divestitures. I mean, they happen, but they're not the normal run-of-the-mill type of transaction. I think that the regulatory bodies felt out of all the people who had pursued this opportunity, that the best prepared, the best where we have capacity, we have the skill sets, we have the knowledge and we have the capabilities, we were selected.

There were a lot of other factors. I think the marketing, the geographic position and so on and so forth, but those bodies looked at us and looked at us hard. We testified in front of them, we presented to them, we had to sell what we had and then they did a lot of deep diving in terms of the capabilities. And they selected us or at least approved us as a worthy competitor to Boston -- excuse me, not Boston, Becton, Dickinson. So that's another part of it.

So that's the -- I think the manufacturing part and the regulatory part and the review process of our capabilities. In terms of the market -- in some ways, we actually have a distinct advantage because in many of these products which came from the CareFusion purchase by Becton, Dickinson, there was a lot of distribution. And so the thing that we bring to that portfolio is, we have a lot more products that go to the users. So if you're going into interventional radiology, we really have this drainage and process. If you're talking about centesis, paracentesis, if you go to compartmental drainage and so on and so forth, Merit had that whole portfolio, whereas previously, as it was structured, they didn't.

And then we have the full core biopsy and we have bone biopsy. So from a product point of view and approval, there's a lot of opportunity there because we have a lot of pull through products and almost every one of those customers are already Merit customers. So I think, what did you say, Greg? 90% of the existing base of customers are already our customers. So that's kind of a big deal. They're familiar with us, they know us, and so on and so forth.

If I can go over to the drainage, this is peritoneal and pleural effusion. We've already started research and development programs for new products that will come out over the next 12 to 18 months. So we've already started on those. The other big advantage there is they were only selling that product in the United States. And other than that, they really didn't have a presence. Merit has a global network and these products are eminently sellable in Japan, China, all of Europe and South America, Central South America. So there's a huge growth opportunity in an area where we've put these direct models.

So the things that we did in Australia, Brazil, Japan, China, Singapore, these programs that we've paid for and put into place and staffed over the last several years are in place to support the growth of that business as well outside the United States where it's the only place. So the attractiveness for us was the growth opportunity.

And I think, another reason why we were selected by and approved by these bodies is because we can compete. We compete effectively against these guys and they're big companies. But listen, big companies, big deal. I've been competing against Boston, Medtronics, Cook, Abbott. We've built our business on competing with these guys. So I like to compete and I think we've competed effectively, and those are the areas, geographic, product line mix, pull through and existing customer base. So that's why we were very excited and why we worked very hard.

And then I have the people. We've built almost a $1 billion business, and you don't build it with the second team. I've got airborne rangers that work here. I have people with experience internationally and domestically. So we've got the goods and we'll perform. So that's the best way I can answer it. It's kind of bold to say the things I've said. I believe every single word of my comments.

That's very fair and encouraging to hear, Fred. And then secondly, as far as the outlook for the business goes, you had said that you thought you'd provided some guidance for us as we look out, but this was before you had done the Becton deal, this is before tax reform. So can you just help us understand some of the benefits that you should be able to get beyond what you've communicated on the gross margin line or from the extra investment in terms of reinvesting some of the tax savings in the business? Can that help accelerate core growth? Can we get some gross margin benefit, maybe beyond what we had been expecting originally?

Well, I think, Matt, we've talked about this in the past, and I've talked with many of the other analysts about this, that we have an intermediate-term goal of 55%. That's down the road. We think that we can add this 100 to 150 basis points from our core business. We've talked about the benefits of it come from the BD acquisition, and I think the product mix. I think one of the things that we're doing and continue to do is really look at the mix and really make sure that we have the structures in place to support more difficult products.

The HeRO, as an example, continues to grow. There are a number of things on these more complex products that when we start talking about this move essentially from accessories into primary use, that continues to be a big focus for us. And part of these pleural effusion, peritoneal products and other products in our pipeline are moving in that direction. One of the products we've talked about is the Rhapsody. This is Merit's first entry into the vascular area with stents and that's going to be introduced, we think, late this year in Europe. And those kinds of things give me plenty of confidence in terms of our transition, our market presence, our pull through, a fresh line of new products.

I mean, that's what we've been known for. Things like the IDeal. This is a big deal, the IDeal is a big deal, our new sheath. So I mean, the best way for me to answer it is that we have plenty of strategies, plenty of products, geographically, we have strategies in terms of market penetration, we have more clinical depth, and the company just continues to put on more muscle and capability. So do you want to add to that, Bernard?

I think as you said it, it's investment to ensure that we can continue to scale at the rate that we have been doing. And that's important and I think the guidance range we've given are wide enough and that investment we believe is required and we will get a return on it over time.

Let me add one other thing, too. In this process, I cannot tell you about how much effort went in from essentially July all the way till we made the announcement of getting the deal done to actually close on the deal. It was 6 or 7 months. There was a tremendous amount of attention that was necessary to get this deal done. I think that actually cost us in terms of focus because we focused on what we needed to do. But it took a lot of time and effort for that. Now that we have the deal done, we have the teams out, and by the way, we are well prepared, and we didn't just wake up 1 morning and say, let's think about this. We were well prepared on our business development, on our transition teams, they've been assigned. There's all of that work going on, and then there's all the new products.

But from a management point of view and a sales point of view, our guys are out there, we know who the accounts are, they are transitioning into these new markets or to these new accounts that are already Merit customers with new products. So when we walk in, we're sitting there with the CorVocet, we're sitting there with Alliant products, we're sitting with the BD products, and one other kind of interesting part to this. And again, this is addition to everything else I said. The ability to walk in, and if you take a look at a biopsy procedure, there are a lot of things that go along with that. You have to prep it, you have to do the device, there's scalpels, there's all these syringes. There's things that Merit already does to be able to deliver a service to the institution that many of our competitors simply can't do. That's where the custom business and some of the other skill sets come into place where we can add services and capabilities that our competitors simply don't have. And it's not new for us. We've been doing it for 30 years. So that ability to customize, deliver things is kind of a big deal.

And our next question comes the line of Jason Mills with Canaccord.

Fred, can you hear me okay?

I can, Jason. Good to hear your voice.

Congratulations on a great year. I want to make an observation for you and Bernard to weigh in on. It really has to do with the leverage in the business. So, tracking this business for a while, it's not lost on me this is the first year your operating margin, pro forma operating margins have had a 1 3 handle on it. You hit 11% and 12% multiple years, and you've always, Fred, talked about the top line and the new products and we continue to do that on this call. It sounds like the pipeline is full. What you allowed to have happen, if you will, lack of a better way to put it, is for more margin to drop through. And perhaps it's the scale in the business. Perhaps it's more discipline, I'm not sure. I'd love for you to comment on that.

But -- and it looks like as we look forward into 2018, so back of the envelope in your guidance, Bernard, if you could confirm this, you're looking at a 14.5 handle, perhaps, even maybe up to 15% operating margins with the Becton, Dickinson acquisition providing some uplift to that. Where do you -- maybe talk about that discipline or that change in the business, any positive change in the business and where you see the leverage going over the intermediate period timeframe.

Thank you. It is a good question. Jason, I have a friend, an analyst who once said to me, it's all about delivering. It's all about progression. It's all about doing those sorts of thing. And I think our goal is -- again, these are longer-term goals but have always been to be able to have an operating margin in that 18% to 20% range. But that's part of where you have to work toward and I think as we look at -- and one of the great things that I think Bernard has brought to the business and his staff who are sitting in this room is the assistance they've given us. You look around your shoulder and you look over it, there's one of those FNAs sitting there, wanting to help us in the guidance operationally, over in operations, making sure we keep those numbers in place, that there's that gross margin, that even in the evaluation, and this also goes to our board, our capital and the efficiency of that.

So we're mindful. I think that's the maturity that we've gained over the last couple of years -- several years. But again, one of the things we did in the past, as I mentioned, is we put the basic infrastructure to build this business. We made the investments, and at the time, there were some, "Oh, you guys can do the top line but can't do the bottom line." Well, here's the bottom line now, we can do the top line and the bottom line. We have focuses and focus on these opportunities that help to give us the kind of returns so that we get that progression, and we bring value to our shareholders. I mean, that's what we think about every day here. That's what we drive to and what everybody's compensation, very candidly, is based on, the ability to do that. So I appreciate the compliment. And I just want you to know of our laser focus on accomplishing that and building value and returns for all of our stakeholders. So Bernard?

Yes, that's where the focus has been. So if you look at our OpEx over the last 2 to 3 years, it's been pretty consistent as a percentage of sales. And that's deliberate to allow the improvement in gross margin, as you said, to fall to EPS. And that's what we've communicated through this 3-year strategy that was outlined in '15 and we constantly reinforce that message and again reinforce it for '18 and '19. So that's where we're seeing the increase in profitability coming from.

Looking at operating margin for '18, yes, you're right, 14.5-plus is the target, and again, it's down to the same level of focus and discipline, managing that OpEx line but also really focusing on expanding gross margin. And that's the key.

Yes, the key is that gross margin, which has to do with the mix and our focus on the products. And then Jason, I think, on the same thing, some might say, "Well, you're not getting every leverage on the SG&A line." And what we've said in the past and will continue to say there, it really is that gross margin line. But in order to continue this transformation from accessories to primary, it requires more investment in our clinical staff. We have more people out there, even internally. We have a -- it's a more clinical company.

So we've chosen not to try to leverage that up, use that money to make these investments. But that's all in the numbers. That's all baked into what we're doing. And at some point, we'll actually, I would say, 2 or 3 years -- well, I'm not going to say it. We're going to continue to build a business and make that top line of the new products that really drive this and drive the margin. So we'll say the same thing.

In R&D, I'm going to continue to spend money in R&D but at the disciplined level. And I think that's again the help that we've had from our accounting staff and from Bernard as they help us. And we just -- I think they're doing a much better job of that today that we've ever done in the past so that we can, in fact, get on these calls and we can deliver the results that our shareholders expect of us.

Right. Fred, that's helpful. It strikes me that this year, while it's a transition year for you, you're still showing some tremendous leverage to Bernard's point, 14.5%-plus, but you're also talking about the fact that you're going to have some expenses in transitioning this business that you won't necessarily have on an incremental basis in '19 and '20.

What's more, you get the benefit of tax reform and you're deciding to reinvest 25% to 30% of that. My guess is, given that you know that tax rate's going to be in place next year, you're not going to spend an additional 25% to 30%. Where I'm going with this is it sounds to me like the potential is that on an incremental year-over-year basis, margin expansion is going to be good this year. It could be even better in '19 and '20. And I want to make sure I'm not thinking about this incorrectly.

No, I think those are our goals. Bernard? Check me on that.

Yes, there's a lot of opportunity there. We've given guidance for '18 and '19 obviously, preliminary guidance for '19. I think there is opportunity there, but we got to manage the business to make sure that we can continue to grow and continue to scale.

Our next question comes from the line of Jayson Bedford with Raymond James.

I'll just ask a couple quickies here. Just as a follow-up. The acquired BD drainage products, 100% U.S, they take it International. Do you have all the regulatory clearances you need? Or will there be a process here where you need approval in certain geographies?

Yes. We will need approval in certain geographies, but the good news there is that again, part of our structure that we've handled over the years, we have a full regulatory staff, and we have already started on this process in Europe. We have regulatory staffs in Asia. So we do have to get this worked on. I'm going to say just kind of off the cuff and I'm looking at my regulatory officer here, that it's going to be 6 to 9 months, give or take, [Glen], is that sound reasonable to you as we start the bigger markets in Europe? Is that sound reasonable?

(inaudible)

Yes. But it'll be -- but again, we really couldn't start on until we owned it, but we had planned it out. We will work in those markets and we think there are tremendous opportunities. In Europe, there's essentially on the drainage side, there's 2 competitors. 1 is BD and the other one is -- well, there's another competitor over there. But we believe that we have a -- as I mentioned previously, more breadth in our product line and in our distribution, our direct sales, all of that stuff is in place. We don't have to hire to do that. It's all there. So we'll go through the regulatory process. We'll probably get a benefit of that this year. I think will have a tremendous benefit in that product group as we move into '19. So I think you're going to see the big move in '19 in that area. As well as even here in the U.S., there's a lot of opportunity here because some of the current work was done in distribution here, where we have that direct sales force out here in all these locations. So I think that drainage side of things is one of the areas -- I think both of them have potential. But clearly, that one from a percentage point of view probably is going to be the bigger player as a percentage simply because we have all of that geographic opportunity.

Okay. That's helpful. And just as kind of a related follow-up. The BD manufacturing transition, I was a little unclear. Is that going to impact revenue in the near-term? Or is it more of a cost dynamic? And then, is there any way you can kind of give us a little bit of guidance as to how the 37 to 42 will trend throughout the year? Meaning, how much of that is kind of back end loaded?

Yes, so right now, this day, and for let's say the next 30 days or so, orders are going into Becton, Dickinson, they're being filled through Becton, Dickinson every day. And of course, that's in our system. 30 days from now, in the United States, we will transition to our product in our warehouses, orders coming into our business. So that's the order. So I don't expect that you'll have much effect on revenue that way, other than the stop periods. So whatever that business was, I believe -- now where the real fun comes is once we get that over and once we're manufacturing the product, and we know that we have secure capabilities. In other words, it's not in the Dominican Republic, it's -- we'll move it to our facility where we have control on it. It will start to trend up as we get some air under our wings, so to speak. Once we control it, we can be more aggressive in the International markets in launching and building and managing that. So right now, they have to produce a certain amount of inventory, they have to produce it by contract, and -- but once we have it, we'll have even some newer products to introduce along with it. We'll have that capability. So it's going to trend up during the year, and particularly, as the geographic parts come over, once it's filled in Merit product, then we will spread those wings and we'll have a longer runway at that point.

And our next question comes from the line of Mark McGrath with Kenmare.

Just a couple of quick ones for Bernard. It looks like you need to sense a difference between the GAAP diversity adjusted. I think you said $0.59 is amortization. How much of the remaining $0.23 is other versus inventory markup?

I would think about it, heard of it as inventory markup and I mean, the balance come from others.

And can you give us a sense for CapEx for '18?

50% to 55%.

And our final question comes from the line of Mike Petusky with Barrington Research.

Bernard, you may have to dig for this or you may not. But do you have DNA stock comp and CapEx for the quarter? And if you have the big 4, that's my next question.

We'll get it for you.

Yes, we're digging that. Go ahead and ask the next question and we'll pull that up.

Okay. Around the transition of some of the BD products to Tijuana, I guess my question is, what's the capacity now and what will it be post that transition?

For the BD products?

Yes. Essentially, I mean, how much can you continue to, I guess how much work is being done there relative to how much work can be done there? And after you've done with BD down there, is there still excess capacity to do other things? Or are you kind of filled?

Yes. So let me work it backwards and say that we're at about 50% capacity at this point in our facility. And again, I think one of the capabilities that helped us to get the deal is that we, in fact, had a facility that was competitively priced with the existing facility. And then we had capacity. And when we built Mexico and built those facilities out, we had expansion. We get more than we needed because of situations and opportunities, the growth of our business, moving things from Salt Lake or other places into Merit, a manufacturing system. So there's plenty of room down there, and we'll still have room when this is done. I would say, this is going to take up 10% to 15% of that will be at 65% and then we'll be -- through the year, we'll be moving additional products into our Mexico facility. And again, as a reminder, in Utah, we have a 3.1% unemployment rate. So for us, we do get lower cost but the more important thing is the availability of labor. And because of the way we've done things down there, we're the company of choice. We have, I think, 200 [Louise], 200 to 300 people that are in the queue that want to come into work for us. Our competitors aren't very happy about it, we're thrilled.

Well, that's good. I guess the next -- I don't want to distract Bernard from digging. But the next question really goes to ...

We've got them for you. The D&A is at 14.2 and the stock is 1.2.

And CapEx for the quarter?

It was about $8 million, I think?

$9 million, I think.

, Hold on, I saw it here. $9 million.

$9.1 million.

$9.1 million.

Okay, great. All right. And then just in terms and again, I realize you don't give quarterly guidance, but I do suspect you don't want analysts to weigh too optimistic around the quarter. And I think you've done a good job of giving a sense. But would you be willing to say -- I mean, would you expect a down comparison versus the '17 first quarter in terms of adjusted EPS due to all the noise around the BD transition? I mean, I think you did adjusted EPS of around $0.28 in Q1 '17. I mean, would you expect a somewhat down comparison?

Yes. First of all, I don't think that's the case, and if I walk into that, I don't want to call it -- this is my comment on it. I would remind you that we had some dilution from last year because of shares. That's why we remind everybody about that because we issued out about, I think, 4.4 million shares so we had that. And then you'll also recall that we -- 4.2? -- okay, 5.2 and then we still, even with that dilution, we increased our guidance. You'll recall all of those particular issues. And then again, I don't want to walk down the path of trying to predict or to lay out this thing and then walk into a boxed canyon. So we'll stick with what we've said and stick with the year. I think we've tried to just make everybody aware that you do have some of these things that are going to be one-time, but they're going to be expensed and by that, I mean, they're not going to be non-GAAP. We have to take those expenses. So that's really the issue here is those are pure expense on a GAAP side and we want to make sure we're kind of set. Now we'll break out what those expenses are and kind of maybe have some conversation about it. We just don't want anybody to be disappointed, so we're just trying to say, "Look, look at the year, look at the increase in operating margin, look at the increase what we have in our earnings per share at the midpoint on a non-GAAP basis of 27%, look at the goals that we set out." And if you look at all those things, you guys get to make the call about what you think about that. But I think

(technical difficulty)

what from my point of view, I think it sets us up for a year of extraordinary performance. We did everything we said we were going to do. It's our intention to do that going forward. Other than the somewhat -- the lumpiness because of the transaction, which I hope we get credit for, not discredit. But that's up to you guys and shareholders to determine.

Right, okay, okay, well, it's in guidance.

And that does conclude today's Q&A session. So I'd like to return the call to Mr. Fred Lampropoulos for any closing remarks.

Well, I usually try to keep these calls as short as I can, because I know how busy you guys are. But thank you for taking the time. Again, let's just summarize. We met our goals. We haven't talked much about the third quarter but you saw, as we've said, we rebounded like we said we would. We exceeded our goals for the year of our 8%. So we shouldn't forget those sorts of things. We have a business plan, we have a geographic plan, we have a new product pipeline. I hope if anybody is in L.A. at the [Sur] meeting, you'll come by. We have a lot of really cool things to show you. So we have a lot of momentum. Our sales force is aligned down our product lines, incentivized. Our folks are out there, and our teams, as we speak, in the Dominican Republic, in Mexico, executing our plan, and like Merit always does. And again, I want to remind you of all this. We don't just buy a product line and stuff it into a catalog. What Merit does is invest, it plans geographic expansion and new products to enhance and support and build these businesses. That's what we do. I mean, I go back and try to think about what we did when we bought out [Veolis]. I remember I got scolded for it. $5 million revenue, losing money. We had a plan, we said we had a plan. No one believed that plan. Today, it's a $30 million-plus business, it's 70% gross margins and growing at double digits. So that's what we do. I want to remind everybody that, that's what Merit does. So you get to decide, we'll look forward to your comments. But I just want you to know that we have a plan, we have the team, we have the resources, we have a strategy, and what we have is good stuff, and we're excited. I think everybody in this room understands, and we've made a commitment. We've said, "This is what we're going to do for the next 2 years," and when you start to think about that, remember, this is all on higher numbers. We didn't back down and say, "Well, if you back that out and then you add 8% to that" -- that's not what we said. We reaffirmed our top line, core business of 8%, we reaffirmed our increase of gross margins on our core business to 100 to 150, plus we'll get some benefit, and we reaffirm our bottom line and I think it's been pointed out the progression that, that makes. So this is what I think we feel comfortable in promising and, of course, our goal is to over-deliver. And so that's our commitment to you is to build this business and to continue to lay everything out that we can.

We going to be here for the next, I guess, an hour or so, 2 hours. We'll be here longer than you will be there. So if you're just sitting around with nothing to do, give us a call, Bernard and I are here. We'll answer the questions you have or clarify questions. We'll stay within the bounds of FD and make sure we do think properly. We look forward to reporting in the future. Thank you for your interest, your continued interest and signing off now from Salt Lake City. We're wishing you a good evening, and good night.

Ladies and gentlemen, thank you for participating in today's conference. This is conclude the program, and you may all disconnect. Everyone, have a great day.