Medical Action Industries Inc. F2Q09 (Qtr End 09/30/08) Earnings Call Transcript

Nov.21.08 | About: Medical Action (MDCI)

Medical Action Industries Inc. (NASDAQ:MDCI)

F2Q09 (Qtr End 09/30/08) Earnings Call Transcript

November 6, 2008, 10:00 am ET

Executives

Paul Meringolo – Chairman, President and CEO

Charles Kelly – CFO

Richard Satin – VP, General Counsel and Corporate Secretary

Analysts

Matthew Dolan – Roth Capital

Tim Cohen – Fidelity Growth & Income Fund

Mitra Ramgopal – Sidoti

Steve Friedman – Wachovia Securities

Gerry Heffernan – Lord Abbett & Co

Operator

Good morning, my name is Arday, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter financial earnings results conference call for Medical Action Industries. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Satin, you may begin your conference.

Richard Satin

Thank you. Good morning and thank you for holding. With me on this call are Paul D. Meringolo, CEO and President; and Charles L. Kelly, Chief Financial Officer of Medical Action Industries. The primary purpose of this call is to discuss our results for the three and six months ended September 30, 2008, which were released this morning.

As you know, we must first touch all of the legal bases by noting that both our commentary and responses to your questions may include forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties discussed in detail in our report on Form 10-K, annual report to stockholders and our quarterly report on Form 10-Q, all of which have been filed with the Securities and Exchange Commission. The company’s actual future results may vary.

It is now pleasure to introduce Paul Meringolo.

Paul Meringolo

Good morning and thank you all for being here today, again. I assume that you’ve all had a chance to see the news release, challenging quarter. We’re going to focus today, again, heavily on the three issues that continue to put some pressure on our margins, higher resin costs, higher costs for Chinese-made products and our efficiency issues at our Tennessee plant during fiscal year ‘09. These are all challenges that we’ve discussed in previous calls and will continue to monitor and discuss them until they are behind us.

Let’s look at second quarter numbers briefly. Net sales $73.8 million, up 2% from the prior year period. Net income $480,000 or $0.03 per diluted share versus $3,268,000 or $0.20 in the prior year period. Like we’ve talked about, the three challenges that I just explained had a Q2 impact of about $6,600,000, a significant amount of money.

Before I get into some of the challenges in more detail, I’d like to mention a few positives. We’ve continued to be successful at raising prices in marketplace. What we’ve seen happen in the last few months with the oil spiking to historic heights, resin followed, we had significant impacts from our resin standpoint and cost. The price increases that we have put in place again have been long-term and have taken a long time to get out of the field and are well behind with the cost of resin was, and for us in inventory still is today. So we’ve talked about that in previous calls and that continues to be the case.

Now from a positive side from those historic highs, oil has dropped dramatically, and we’re starting to see the effects of that decline in oil start to hit our resin suppliers and hit our pricing. Where I believe we are today, those prices of our resin will be at the point where they’ll be at powerful where we’ve raised our prices in the marketplace, so we are very comfortable with that.

Good news is we’re not going to have to spend anymore time today based on current scenario going up to the marketplace and continuing to raise prices. If oil stayed where it was, and resin stayed it where it was, we would have had to go out and do another round of price increases and it would have taken a tremendous amount of effort, time and effort and I am pleased to see this reduction in cost and I am pleased from Medical Action perspective, and I am also pleased from a customer perspective.

Customer base remained sound and strong. I have spent the fair amount of time over last six weeks out in the field working at our end-user customer and sales reps, so I am comfortable with that. I am confident in our ability to continue to address these profitability issues, I think they are short-term and I am excited about what the future has in store.

We’re going to continue to pursue our growth strategies of selling our existing products into new markets; developing new products internally for our existing markets; continuing to enhance our position and develop our strategies for the huge international marketplace.

One last note and less positive this quarter, this past weekend after many months of work we effectively did our next-to-last stage of integrating MediGene [ph] onto our SAP platform and we effectively went live with our Warehouse Management System in Tennessee, this past weekend without a glitch.

It wasn’t easy and it was just great execution from our team lead by Carmine Morello, VP of Information Systems, which I think did a very good job in making sure team was on-track and focused on all the right things and I believe the team in Tennessee did an awesome job in executing.

So we’re pleased that the next-to-last component is behind us and now we have one more hurdle in front of us, and they’re starting to work on that as we speak I believe within the next six months or thereabouts, MediGene will be fully integrated on our SAP platform – so excited about that.

From a challenge side, we’ll talk about a couple of components. First, I want to address modest growth in sales for Q2, and like I’ve talked about in the past, this is part of our process is inefficient market place, but also, we’ve looked at certain segments of our business that were marginally profitable.

Some of our private label business, which doesn’t take a lot of sales resources and the expense component of that business, is much lower compared to our traditional branded products and so we have a little lower threshold for margin, but one quest increased dramatically and the margin shrink quickly and we took in approach with a couple of larger chunks of business where we went to our customers and raised prices, and they said no, and we effectively walked away from the business.

In Q2 versus the same quarter last year that represented in just one item alone, patient aids, crutches, walkers and canes about $1.2million and lost revenue with a very little corresponding gross margin decline. So that’s first part of it.

Second part of it is, we have had over the course of the last year as a part of our move from Colorado to Tennessee, we’ve had a number of long-term supply issues and service issues with our customers, and we’ve been backordered on a number of items for a relatively long period of time. Even though we’ve been continuing to supply our customers, we still haven’t caught-up.

There was a significant amount of noise from an industry perspective in the fourth quarter last year going into the first quarter this year. A lot of customers out-of-product, but we focused over the last six months and in this last quarter, we have gone from a backordered that was approaching $3.5million on MediGene patient products to below $1million of a backorder which is a significant drop.

But more importantly, the noise level from customer and from our distributor partners has dropped significantly as the service levels have increased. I’ve been out in field and I could see the impact that’s had on our customers because today they are happy, where a couple of months ago, they were not happy from the service side and so that’s a positive.

From a negative side, once we’ve shipped out a lot of those backorders, the reorders have not reappeared. So again, it’s just part of that process of being inefficient and I’m sure and now we loose business on days and we gain business on days, I’m sure that’s part of that, but we remain confident in our ability to grow this business serve for the long-term.

Let’s talk about the factors affecting our margin and we’ll focus on cost and I’ll break it up into three pieces; resin, China, and inefficiencies in Tennessee. Higher resin prices in the second quarter impacted us to the tone of about $2,402,000. Significant spikes July, August and September in cost of resin. We had no idea where oil was going to go. We had visions that oil could go to $200 a barrel, and so in an effort to make sure that raw material wasn’t an issue for us, we continue to buy at those high levels, as a result, its impact of this quarter.

As you can see from the release, with what’s in inventory in finished goods we expect that trend to continue just purely as a fact that the inventory that we have is higher costs due to the resin. So we expect that trend to continue through this quarter. What we see for our fiscal year fourth quarter, which is January, February, March, a decrease in cost of goods, which will have a corresponding increase in gross margin, and the swings could be a fairly large in size.

We continue to monitor volatile oil price and continue to monitor what’s going on with oil and our hope is that we don’t have this volatility and it will stabilize somewhere in the current area expenses associated with our China sourced product and the floating yen to the dollar.

Second quarter cost increase was about $1,841,000. Here too, we continue to monitor that situation; it’s not something that we control, but from what we see today versus what we saw a quarter or two ago, it seems like that has stabilized even to the point where we see some of the impact of lower resin prices affecting some of our China prices the same way it’s affected resin is. There’s starting to be some decrease in costs from a China side which again will allow as not to have to go though the market and raise prices and focus our sales peoples’ efforts and our operations’ people focus on righting our customer and grown and growing our business.

We have to continue to monitor the situation and we continue to believe that it will be stable for the short-term future, so we’re excited about that. We’re going to continue to manage our price. Like I said, we will well behind the curve from a price increase standpoint. From our current cost in inventory we continue to be behind the curve from a price standpoint, but I think once this all settles out in the fourth quarter where we are priced with our customers will be exactly what we promised them it would be and we’re excited about that fact that we don’t have to go the market and raise prices again.

As we’ve talked about, these increases have taken effect after a long period of time. Some of them have taken longer than others to hit the P&L. Some of them haven’t hit the P&L yet. So we continue to be focused on being prudent in our price increases. We continue to be focused on being fair with our customers and delivering them the right product at the right price.

We will continue to remain highly competitive and be the low-cost producer in any market that we compete and we want to continue to maintain our sound and strong customer base. So it’s been a rather torturous path with the volatility in oil and China and hopefully that was spot to stabilize for the short-term future.

From a Tennessee standpoint, these are the things that we control. Some take longer than others, but we’re well on our way. Q2, costs of current inefficiencies were a resounding $2,335,000. Part of the tick up in that inefficiency had to do with our focus on making sure that we had enough inventory to address our service issues. Eric Liu deployed a strategy very early on and he’s taking responsibility for that facility to outsource some molding in short-term while we got our new equipment up and running, to focus on addressing our customer issues, irregardless of what it meant from a core standpoint.

So we’ve taken some molds to outside molders. We’ve done some things outside the country from a supply side to augment our current production, and that has a double-negative. First, costs to procure those products are a little bit higher, and second, the volume comes out of the facility from an absorption standpoint. So is a double-whammy there, but most important thing that we want to focus on is making sure that our service levels came back to a normal level and we’ve accomplished that.

Now we’re in mode where we’re starting to bring all outsourced products back in-house and so we’re confident that we are well on our way to getting that facility healthy not only from a process side but again from our focus on bringing in anything that we’ve had outsourced that shouldn’t be outsourced and doesn’t make sense to be outsourced, we are on a focused approach right now to bring all that in-house.

We have continued to invest in that business in this past quarter. We had three new pieces of molding equipment come online. One of the new pieces of equipment ran out of 72 hours, it ran 71 hours in 58 minutes. So it’s a process that we are getting healthy and we’re going to get healthy there over the next couple of quarters like we’ve talked about.

So we’ve installed three new lines and we are, as we speak, we’ve got en-route to us two new presses that are en-route right now to our facility right now which are going to provide us high efficiency, more output and will allow us the ability to continue to focus on getting some of the other equipment off (inaudible) well and so we’ve also continued and have installed a number of robotic pieces of equipment on existing machines, we replaced all robots, and we’ve also installed some new robots that have increased the output on existing equipment rather dramatically and so we’re excited about those effects.

As previously discussed, these investments that we’ve made in the facility are to continue to increase the output so that we could meet the demands of our customers in a timely manner, should be a minimal expectation.

We want to increase our capacity to manufacture a broader range of products. We want to reduce the need for manual labor and including our outsourced labor and outsourced production. We want to reduce waste and we want to continue to help alleviate that margin pressure caused by these inefficiencies. These processes will continue through fiscal year 2009, and I believe the mindset and the approach will continue for the foreseeable future.

I’m going to pass it over to Charles just to talk a little bit about our amendment of our term-loan agreement with our banks.

Chuck Kelly

Thanks Paul. Those of you that have followed company are probably aware that on September 30th the company renegotiated or amended its credit facilities with its three lenders. The primary driver behind our decision to amend the credit facilities was that we were in a position where we believe that we were going to have to amortize the term loans with our revolver as the operations we’re using cash in the form of supporting working capital and the investments in propping new equipment in the company’s head quarters.

So we felt that there would be pressure on our liquidity as far as the headroom we could have on our revolver and we went back to the bank and approached them for a solution to what we perceive that’ll be problem going at the upcoming year and what we agreed to was that we would change the amortization of the term loan from $3.2 million a quarter to $250,000 a quarter for the balance of the year, and in the next fiscal year we will increase that just over $1 million a quarter.

That was the primary change to the credit facility as well as the amending a few of the covenants that we have operated on that to give us a little bit more space and how we operated our working capital and liquidity needs over the next year. We provided the bank with reasonable projections on what liquidity operations we are going to perform at.

They did not contemplate any significant declines in resin prices which is what we’re seeing now. They did not contemplate any significant changes in our sales structure or profitability, but just moving along the way we were during the first two quarters of the year.

So, obviously as we improve, we will create some additional headroom in the revolvers we pay it down after some portion of new sales. That’s principally the driver behind what we’ve done. If you want a little more information, you can look at the 8-Kwhich explains in detail how we amendment the covenants and what that means to us as well as some of the additional matters that we agreed to with regards to our earnings during the balance of the fiscal year.

The long-term outlook from my perspective remains bright. From a revenue side, I believe we will continue to look at our business and where there are pieces of business that don’t make sense from a margin or resource standpoint, we will continue to look to address those issues.

We believe there is a plethora of opportunities out there in the minor procedure kit and tray end. The patient bed side products now that we’ve got the supply side back on track. We’re going to go out and refocus our sales force to go out and not have to address the supply issues but more address growing that business like we think we can.

From a containment side of our business, there have been a whole host of players out there that have made some changes to their pricing strategies. They’ve increased pricing in the marketplace. They’ve walked away from contracts. They’ve had some service related issues that are creating some opportunities for us on the containment business as well, and in our OR products we’re going to continue to focus our people are driving more share in the marketplace. So we’re going to continue to be diligent on focusing our sales people on growing our business.

We continue to believe that this blip from a income statement and margin side continues to be just that, and we believe that light is at the end of the tunnel from a cost-of-goods-sold standpoint, from resin and China today, and we believe that we are well on our way to making Tennessee the facility that we think it could be for the long-term, and we’re very focused on that.

We will continue to monitor oil prices and China labor cost in a dollar versus Yuan, and we’ll continue to focus again very heavily on the Tennessee and make it sure that plans running rate were optimistic.

And so thank you all for participating in the call, and I look forward to keeping you posted on our progress.

With that we can go to questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Matthew Dolan

Matthew Dolan – Roth Capital

Good morning Paul, good morning Chuck.

Paul Meringolo

Good morning, Matt.

Chuck Kelly

Good morning, Matt, how are you?

Matthew Dolan – Roth Capital

So first question on the revenue side I think Paul there is a lot of noise out there today regarding your purchasing patterns that hospitals especially into October and distributors holding on the less inventory that they may have in the past given the credit market.

So, can you give us a feel for your assurance there on the revenue side that you are seeing related to your sales force your partners and that’s channel and how that impacts you during the next couple of months?

Paul Meringolo

Yes Matt I think it’s too soon to tell. I’ve been utmost field and that’s stock was one of the questions I focused on when I talked to an end-user and again its little bit different in the distributor, on an end-user basis and I had a plethora of answers from declining surgeries to increased surgeries. So I think it’s a little too soon to tell or even comment on.

From a distributor standpoint I think we have done a fairly good job keeping their real inventories fairly low because of our service related issues and so and I don’t think typically distributors carry rather large inventories because their margin parameters are relatively narrow and the only way they are really going to make money is by turning their inventory.

So, I don’t see this dramatic effect from a distributor adjusting their inventories but could you have a slight impact in our coming quarter? I would be guessing. I think we’ve got to let some time go and let’s see what happens from that perspective.

My thought is if that is going to happen to offset that again. I think we have spent a lot of time from our sales perspective dealing with service related issues and price increases I think if we can get back to basics and not have to focus on raising prices and service related issues and some of them at the same time which doubly complicates it, I think we will be able to focus more on some of the opportunities that are out there and maybe we can grow our business a little bit faster to offset any of that kind of stuff that goes on, that’s our hope.

Matthew Dolan – Roth Capital

Okay. Alright, great and I guess just a quick follow-up on the quarter itself were their do you think their revenue numbers may be a little higher than you hoped given the issues you worked through and that seem to be behind use that fair assumption?

Paul Meringolo

What do you think? You know us long enough?

Matthew Dolan – Roth Capital

Alright moving on, on the gross margin side obviously a lot of variables here the way I know we’ve got I think may be a price increase per month there and when the middle of it you have a lot of that challenges clearly we understand the cost and that sort of thing but just trying to get a handle on gross margin in the near-term.

It seems starting with June of ‘09 we should be back to more normal Medical Action levels if not may be slightly better if the price increases come in. In the interim you can help us out; we have gone from high teens to mid teen period in a matter of a quarter, so any guidance you give there would be appreciated.

Paul Meringolo

Sure. Matt we think that the three variables that we’re continuing to right now moving back levels that we were experiencing in the fourth quarter of last year and that’s raising prices in China prices. The dollar is held relatively stable against the Yuan for the past quarter hope that remain in that way the next two quarters, that’s going to enable us to focus our attention from a management perspective solely on what’s happening in Tennessee.

We are singularly focused on increasing through for two factors there is a substantial opportunity of loyalty for us and outsource product that we have been acquiring to the supplier our customers with that we can bring back in-house and eliminate some of those efficiencies that we have been reporting over the past nine months.

We needed to get these five machines that we have acquired in place ‘09, which should be done by the end of this month, and we should start seeing improvement off of that that – that’s not to say everything in the factory is perfect but I think we are moving to a situation where its going to be nominal maintenance and hands-on-the-pumps, so to speak with machines and keeping up and running as opposed to capital investment.

So I think that we have seen most of cap investment that we are going to be need to be putting in facility and are a successful hinge on us keeping the machines up and running, which we believe that we got a fairly good control over.

So we are cautiously optimistic that we are going to see that uptick that you just referred to. Once again as we said during our last call we are not sure whether it’s this month or next months or we do believe its coming.

Matthew Dolan – Roth Capital

Okay. So we should keep for the mid teens?

Paul Meringolo

Yeah and I think you are I think your approach your approach from the timing you told that June in ‘09 and I think it’s fairly conservative. So I think we are onboard with that.

Matthew Dolan – Roth Capital

Okay, and then I guess last question you mentioned your competitors. I have to imagine that given all the cost pressures out there, smaller players are struggling to say the least, so maybe update us. I know you got your hands full with Tennessee at this point, but any plans to go out there and be opportunistic and the acquisition front and pick up some companies that are struggling and to capitalize on lower valuations?

Paul Meringolo

You know Matt what we spent all these years is building a great platform here Medical Action and so if the opportunity presents itself and it will not to detract from the progress that we’re making on this plan to get these margins back to a level that we’ve all been accustomed to which we know we can get to.

If it’s going to detract one ounce of focus from that we will probably not pull the trigger, but having said that, I believe there are a number of possibilities out there that could present themselves that would not detract from us. So again we are we’re not putting our head in the sand. We’re continuing to be out with our eyes wide open and the if one of those opportunities present itself little valuated accordingly and if it make sense we’ll do if it doesn’t we don’t.

Matthew Dolan – Roth Capital

Great, thanks guys.

Paul Meringolo

Thanks Matt

Operator

Your next question comes from the line of Tim Cowen.

Tim Cohen – Fidelity Growth & Income Fund

Hi guys. I was wondering what are you guys doing to enhance shareholder-value here. You’re a public company, are you guys getting out on the road? I know you cancelled one meeting in September which was very discouraging. Can you explain to us as a public company what are you doing, what are your plans, and are you going to be buying back shares at these levels?

Paul Meringolo

You know Tim, I would prefer to take that question offline, but I will tell you. Our focus will be and has always has always been to make sure that we are focused on delivering good operating results. We’re not focused on today on buying back shares we’ve had this conversation numerous times and I’ve told you we’re going take our capital and invested in the business because that was what we believe we’ll have the best return for shareholders.

From a road show perspective when we have when we believe will our thought when we should spend a fair amount time out on the road, we will do that, we don’t avoid shareholders we talk to anybody where we need to talk to and we’ve done a fair amount of road shows in the past and we’ll continue to do that.

Tim Cohen – Fidelity Growth & Income Fund

What about IR Firm?

Paul Meringolo

Tim, we’re not going to have this conversation on a conference call. I have very, very specific thoughts on IR Firms and I’ve had a plethora of experiences in my three years here at Medical Action in 15 years as most senior person talking to the Street. I’ve got my views on IR Firm and again we’ve taken this company from below a $1 to north of $30 without the help of in IR Firm just by putting up good operating results and talking to the Street we’re going to continue to go down that appears.

Are we not going to continue to look for support from alternative sources banking and research and all those things? Absolutely. As you can see, we continue to enhance our board of directors; that board has expensive experience with public with public companies and approaches and we’re going to continue to make the most prudent decisions for the company, which we believe we’ll benefit shareholders. That’s our approach.

Tim Cohen – Fidelity Growth & Income Fund

Thank you.

Operator

(Operator instructions) Your next question comes from the line of Mitra Ramgopal.

Mitra Ramgopal – Sidoti

Hi, good morning guys.

Paul Meringolo

Good morning

Mitra Ramgopal – Sidoti

Paul it seems like based on the initiatives you’re implementing and give what’s happening with resin and the currency, etc. Again I know you don’t what to provide any predictions or guidance here but it would seem that we could look at the second quarters as pretty much the trough for you?

Paul Meringolo

Mitra I got to believe if that’s the case and my issue right now and like we’ve talked about very openly from a release standpoint. Is that we still have some of those increase cost on that are in inventory that will flow through the income statement in this quarter that we’re in right now. What I see from a resin and of course the goods sold standpoint for the future I think that’s the true statement.

Mitra Ramgopal – Sidoti

Okay just remind again if we look at costs it goes like how much of it is related to resin you would say?

Paul Meringolo

Better than 50%

Mitra Ramgopal – Sidoti

Okay and then just going back to the revenue line, again you mentioned you did cutoff some customers unwilling to accept price increases. If you strip that out and you look at. I see you know your product lines, was there pretty much business as expected across the board or are you seeing any witness anywhere?

Paul Meringolo

Mitra that’s why I’ve broken up into a couple of pieces first of all I want to be clear and we don’t take an approach to cutoff cost in this okay? We go to our customers what we believe is a fair price increase, so that we can have fair return for what we do and if our customers disagree with that price increase and that going to be the once that are going to walk away from it. So we don’t take an approach to cutoff customers; we’re trying to be fair, we try to negotiate in good faith and some customers will take that and some customers don’t, but we’re not going take a position where we say we would cutoff the customer.

From a sales standpoint it’s difficult for me to comment because I think there are a number of components that make up some of the weakness. First component being what I talked about is increased prices and loss in business that really have a very little impact on margin. The second component that I talked about is the inefficiency when you have a backward buildup that you clear out and what the effects are on the reorder process.

So, what I can see is, I can see what our distributors come back and again I don’t want to get too sort of complex; what our distributors report to us and what they’re looking for some rebate standpoint if there is a decline and what they reporting to us at their selling to end-user customers we would be able to see it and we are not seeing any significant declines in that information that we are getting from our distributors.

So the last and final piece is I think our people have spent fair amount of time with our customers having to talk about price increases and the mix of service issues that they probably could have been spending a lot more time uncovering opportunities and working with our customers to grow our business.

So I think now that will service level issues are behind us we going to have to refocus the sales force on going out there and closing business.

Mitra Ramgopal – Sidoti

And coming to the sales force, do you need to expand that or do you pretty much have the people in place you need?

Paul Meringolo

I think we have the people placed that we need, but if you take a look at mix that you talk about that when you talk about expenses if you take a look at our expenses, Q2 last year versus Q2 this year actually our expenses are down and even if you look at the sequential we are down so we’re continuing to make sure that we’re manage the expense side of the equation as well.

Mitra Ramgopal – Sidoti

Then okay find that I notice the tax rate was a little below what we’ve seen in the past. What’s a good rate going forward?

Paul Meringolo

I can’t answer that for you, I don’t know. I would think that it would be in line with the blended rates that we put in for the first six months of this year carrying out with the balance in the year hardly.

Chuck Kelly

You know I’m sure that’s the time when base level slides to your income, Mitra. So hopefully we’ll get that tax rate up

Mitra Ramgopal – Sidoti

Okay. Thanks

Paul Meringolo

Thanks Mitra.

Operator

Your next question comes from the line of Steve Friedman.

Steve Friedman – Wachovia Securities

Good morning Richard and Paul. How are you?

Paul Meringolo

Good morning Steve

Steve Friedman – Wachovia Securities

It’s Steve Friedman. I identified my little scratch you’ve got by less or whatever but just a couple of quick questions one with the price of oil in resin maybe stabilizing to coming down would you consider and I would think it would be much wiser you use your money than buying shares, doing some hedging at these levels and due to the fact that OPEC is threatening a cut production or has cut production again and, it seems like oil is at present levels lower than it was may be at this time last year.

Chuck Kelly

Well the opportunity that those present it to do built on our inventory, we do have the sensitive through according to the position of the company and tying up significant amount of money in inventory even though it may be a longer term cost effective to manage resin. We think that resin will be trading within the bend over the next couple of months, there is a reduction of demand for US resin over fees which is pushing pipeline back into US, and the US resin produces are still running a reactive. So we don’t see any shortness in supply side over the next couple of months, although you have to assume that going out in sometime next year, but we don’t think that we need to make a strike with a large by over next 30 to 60 days take advantage of current pricing.

Steve Friedman – Wachovia Securities

Okay, thanks Chuck. On an another question regarding the increase in the debt on the balance sheet, does that reflect any changes in the structuring of your debt from your debt redefining your agreement or does that reflect the additional machinery purchases?

Chuck Kelly

On the pure debt position we are at about $54.5 million outstanding from the current to the long-term portion its just a switch in the amendment, we think of spending a $30 million, we push $9 million relevant to long-term.

Steve Friedman – Wachovia Securities

So just more about just a restructuring duty your revised agreement?

Chuck Kelly

We have borrowed on the revolver and that’s close as we have low profitability, we’ve an inventory build and we’ve put $7 million in cash equivalent down Tennessee, and so it’s a combination of those three, but you know couple of quarters we were on par to have on our evolver and that were $30 million, we don’t get to many dollars of cash were effectively $11 million going in evolver that’s where it comes from.

Steve Friedman – Wachovia Securities

Okay and finally Paul, Richard and Chuck may be just a quick comment does the presidential election results have any type of effect on the buying patterns or the pricing in patterns of your group organizations going forward in your opinion or continue for see any changes under an Obama administration?

Chuck Kelly

I would think that be pure speculation, remember we sell to healthcare facilities, aging population people are going to continue to get sick, hospitals will continue to provide healthcare. I would think its speculation.

Steve Friedman – Wachovia Securities

Okay, thanks a lot and looks like you guys are getting your arms around the perfect storm.

Chuck Kelly

Thank you, it feels better.

Steve Friedman – Wachovia Securities

Thank you, take care.

Operator

Your question comes from the line of Gerry Heffernan.

Gerry Heffernan – Lord Abbett & Co

Good day everybody Paul.

Paul Meringolo

Hi Gerry, how are you doing?

Gerry Heffernan – Lord Abbett & Co

Good, how are you doing?

Paul Meringolo

Good man.

Gerry Heffernan – Lord Abbett & Co

Hey Paul, perhaps I’m just being a little bit tense, but I was wondering if you could walk us through the China expense portion of that one part of the three issues, I guess if you could one give us an idea, what percentage of your revenues are we talking about in regards to these products in China and then two, I am not quite sure what the remedy of the situation is, what forms it take, is it takes buying from different people in China, sourcing somewhere else other than China, or just everything staying as it is and return of the currency evaluation kind of having seems take care of themselves.?

Paul Meringolo

I probably think it’s probably all the above, but let me break it down, again China related products probably represents 50% plus give or take of our business.

Gerry Heffernan – Lord Abbett & Co

Okay.

Paul Meringolo

The most significant impact from the China standpoint has to do with currency so whether I buy from one factory or another factory in China, currency and exchanges still the same. I think we have got a long enough history in China that we have drilled every significant (inaudible) penny add of our cost, anything that we would, we have to be careful that could impact the quality and the reliability and the repeatability of the quality of the product that we buy and we don’t like to mess with that one bit.

From an alternative source standpoint, other countries we have looked at and have worked with a couple of them on some items but some items are, there is a local knowledge and technical ramp up that will take some time and do I think the impact of what we would see from a course perspective is worth the time and effort today. I think those are the countries have some inflationary pressures as well, and will be in the same boat.

So, although I think in some instances there are some opportunities there that we are currently working and buying from, India, Vietnam and countries like that. I think that there has been a pendulum swing too far one way with this respect to currency and also China Government reducing VAT tax that they provide to their manufacturers that export product to the US. So now we started to see in some instances on a very, very small scale China increasing VAT tax return to some of these suppliers in China which is something that we haven’t seen in a while.

So I think the results of what’s going on in economy that’s not only impact in the US but impact in China is having a potentially positive effect for us from a course perspective to help offset some of that huge swing that one way to have it come back to other way and make it little bit more manageable. I think the days of expecting declining courses from China or any other country its unless we can do some significant design changes or probably a thing at the past and that I believe that China will still be low cost producer for the products that were in.

Although we may see some modest inflationary returns from the cost perspective, we’ve just have to be, we have got a plan for it in the future and make sure that we built into our process going forward. I think what you have seen is some larger than normal spikes and I think that will be more normalized that will be able to manage to do better in future.

Gerry Heffernan – Lord Abbett & Co

Okay well believe me from our side of the desk we seen some larger than normal spikes also what we are doing here day-to-day. In regards to price in China they were the low cost producer and that’s why we went there, to what extent is the resin falling that you can purchase in the US does the resin fall far enough, so that lower resin cost less to transportation makes it more economical to build it here.

Paul Meringolo

Very little.

Gerry Heffernan – Lord Abbett & Co

Very little chance for that?

Paul Meringolo

Yeah, remember we have been in China for long time and on some of our items that are more domain to China production has nothing to really to do with resin price that has really to do with size, stack ability, ability to load a lot of products on a container volume a bed pan that is relatively low cost that takes a lot of space of and doesn’t fill up trail with the lot of money with freight cost doesn’t make it really effective to buy from China.

Gerry Heffernan – Lord Abbett & Co

Right.

Paul Meringolo

But there are certain items like bags that in some instances makes it more cost effective to buy from China, so I think what we are trying to do are some molded products that we buy from China today, that we believe that once we get the Tennessee facility up to snuff and increase the capacity that we will be able to bring more and more of those molded products in house, but that’s not an over whelming portion of what we bring in from China, it’s a very, very small portion.

Gerry Heffernan – Lord Abbett & Co

Right, okay. Thank you.

Paul Meringolo

Thank you.

Operator

Your next question comes from the line of Matt Dolan.

Matthew Dolan – Roth Capital

Hi guys, just a couple of quick follow ups first can you give the contribution from Medegen?

Paul Meringolo

We’ve started to move away from modeling out Medegen contribution versus this product limited our products because this is now blending of the activities in the factory, of course the product line is well the sourcing processes, but there has been no direct relationship between revenue volumes of Medegen in production capacity.

Matthew Dolan – Roth Capital

Okay and second do you have any price or price growth versus unique growth or mix changes relative to September last year?

Paul Meringolo

That’s fully written up in the Q, I think the second quarter of last year to the second quarter of this year, we’ve had price mix of variables that increase sales by $3.6 million and we have a reduction in volumes that second sales with $500,000 low. Are you looking for more granularity than that, Matt?

Matthew Dolan – Roth Capital

That’s fine, thanks a lot.

Operator

(Operator instructions)

Paul Meringolo

I appreciate you all being on the call. I appreciate your patience and support, as you know we’ve got a team here that has run this business rather well over the years and we had significant challenges in this past year but I believe very strongly that we are up to the task and we are making progress and you will start to see in the near future and the results of our labors.

Thanks to all the teammates for their focus and diligence on helping in this process especially and Tennessee plant kind of overshadows with their issues our other two plans but I will tell you, our Arden facility and Oxford, West Virginia facility continue to operate very impressively. Our goal is to have our Galloway plant in Tennessee run as good as those other two plants and we will be on our way to being the low-cost producer in that marketplace.

So thanks to those plans as well and thank you for your time and we look forward to getting back to you soon.

Operator

This concludes today’s conference call, you may now disconnect.

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