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Executives

Fred Lampropoulos - Chairman and CEO

Rashelle Perry - General Counsel

Kent Stanger - Chief Financial Officer

Analysts

Tom Gunderson - Piper Jaffray

Jayson Bedford - Raymond Jame

Jim Sidoti - Sidoti & Company

Chris Cooley - Stephens

Ross Taylor - CL King

Merit Medical Systems, Inc. (MMSI) Q1 2013 Results Earnings Call April 25, 2013 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the MMSI’s First Quarter 2013 Earnings Conference Call. During today's presentation all participants will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions)

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

Fred Lampropoulos

Good afternoon, ladies and gentlemen. We are assembled in South Jordan, Utah to present to you our first quarter results and to talk about lot of items that I know that you are interested in today. We’ll start out first by having our General Counsel, Rashelle Perry read our opening statements. Rashelle?

Rashelle Perry

During our discussion today, reference may be made to projections, anticipated events or other information which is not purely historical. Please be aware that statements made in this call which are not historical may be considered forward-looking statements.

We caution you that all forward-looking statements involve risks, unanticipated events, and uncertainties that could cause our actual results to differ materially from those anticipated in such statements.

Many of these risks are discussed in our annual report on Form 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 we do not assume any obligation to update such statements.

Although Merit's financial statements are prepared in accordance with accounting principles which are generally accepted in United States, GAAP, Merit's management believes that certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of Merit's ongoing operations and can be useful for period over period comparisons with such operation. The table included in our release, which will be discussed on this call, sets forth supplemental financial data and corresponding reconciliations to GAAP financial statements.

Investors should consider these non-GAAP measures in addition to, not as a substitute for financial reporting measures prepared in accordance with GAAP. These non-GAAP financial measures exclude some but not all items that affect net income. Finally, these calculations may not be comparable with similarly titled measures of other company.

Fred Lampropoulos

Rashelle thank you very much. Ladies and gentlemen, we have to talk about today and a lot of issues that I know will be of interest to you. Let me start off first and talk a little bit about the revenue side of things and explain a little bit about our business there in the first quarter. And then I will turn the time over to Kent Stanger, our Chief Financial Officer, who will discuss with you the various issues as it pertains to gross margins and the expenses that have been added there, so that you have a clear understanding.

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

Our sales increased over the previous year was 9%, however, of note for you, well, is that 3% was the direct growth rate of Merit’s direct sales and the rest of that was added from the addition of Melbourne. So that is I think essentially the slowest quarter in terms of growth that we’ve, that I can recall and I can go through, and we’ll go through a number of the areas little bit later on in terms of both revenues.

Now, unless you immediately either get off the call or get this made, I will tell that business were better in March. We had a record month. We did $37.5 million. The business has improved substantially and we have a number of new products and ideas that we will submit to you that we think will be of interest to you.

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

Kent Stanger

Certainly. Gross margins were 41.4% compared to 46.2% for the first quarter year ago and there is a lot of issues there that I want to disclose. First of all, we had a reduction due to manufacturing variances or unapplied overheads due to reduction of inventory.

We drop our inventory $2.1 million during the quarter and are managing that in a prudent manner. And $1 million of that was due to variances in Malvern in the lower sales volumes and production volumes associated with that.

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

And finally, 26% or $580,000 of one-time charges that have to do with the markup of inventory or the increase of inventory costs due to the acquisition accounting values that are flowing through and almost completed this quarter, we have a couple hundred thousand that left. I think those are total adjustments was the 4.8% that you saw on the GAAP basis.

Fred Lampropoulos

Okay. All right, Kent.

Kent Stanger

I might following with net non-GAAP basis but the gross margins were 44.4%, compared to 47.2% a year ago and if you take the tax out of that which wasn't there to be compared, its 45.4%. So still a decline of 1.8% and most of that has to do with the manufacturing variances I referred to.

Fred Lampropoulos

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

When we acquired Thomas Medical, we had a forecast based on the best possible information of due diligence that was available. One other things that we have not -- we did see by the way, a substantial amount of record sales of product that was shipped out of Malvern in the fourth quarter.

We were fortunate that we picked up about $1.7 million worth of that, but clearly the pipeline was quite full. In fact I think their amount was almost $8 million, Kent, if I’m…

Kent Stanger

For the quarter.

Fred Lampropoulos

… for the quarter.

Kent Stanger

The total was over $10 million.

Fred Lampropoulos

… over $10 million.

Kent Stanger

Yeah.

Fred Lampropoulos

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

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

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

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

Now, we had the same thing happened at Thomas prior to Merit’s acquisition and that was another company up in the New England area and they came back. So I'm not suggesting they will come back, but based on the best information we have, since we've not received any orders for them and it is now almost May, we felt that it was important that we would adjust the forecast in light of the presently known facts.

We have a lot of discussion about why didn't we know that, were there are indications and all this kind of stuff. I will tell you that based on the information we had and this goes to the extent that we even lower the price and send a call back to them that were substantially lower than what they had received before, so at favorable margins. We have reason to believe that we may be able to obtain that business, so that was kind of one of the big part.

Needless to say the rest of the plant was very, very slow and I think you're seeing across the spectrum in the medical device areas. So let me tell what we’ve done, but I think these are the important issues that you want to hear today.

In fact I would say this, once you get over the initial view of and read this, and here what we have to say about what we have done, not what we’re going to do but we've done. Hopefully you will have a much better feel for the action the company has taken.

The very first thing we've done is that in this division we had approximately 155 employees. We've already reduced the employee load by 20 employees. It’s not something I like to do. It’s not something that's pleasant to do. But what we've done is we've matched the current demand with our capacity.

We may have to make other adjustments and we were in any area of the business where we see that we have to do that, some of this stuff has been done just in the last 30 days, most of it in the last 30 days. As we came to kind of an understanding that we might see lower volumes we adjusted the headcounts and again, that's not fun to do, but we’ve already done that.

Let me tell you what we've done with the rest of our business and we’ve talked about these things in the past but I think it’s important for you to hear these. Kent of course discussed with you about inventory and you guys were all aware of the fourth quarter and the fact that anticipation of our move in our new facilities that we built too much inventory and we slowed the business down.

In the first quarter we reduced inventories by over $2 million and by the way, I should note that that’s even with 9% growth. The 9% growth is real and but inventory to sell that product, we still reduced inventories.

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

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

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

We’ve made other cuts that are millions of dollars, millions of dollars. They have to do with issues like trade shows. Recently I read a report from an analyst who had visit us at the [SIR] Meeting and he know that, that we had reduce substantially the amount of coverage we have there. I will tell you that very same show that we’ve just attended the [SIR] meeting in Orlando.

We’ve now cut again by half. We will be present there next year but our booth and our present is cutting half. We've got almost everything they were doing and these trade shows. We’re still attending but instead of having a big booth we may just have a 10-foot booth and instead of having 20 people to cover shift, the product manager, we may have 10. So we're cutting those discretionary expenses as quickly as we can.

We've even done things like we were talking around here about our political contributions and our community affairs. Merit has always believed that we should be involved in our community and we believe that what goes around comes around, and in many cases we received things like R&D tax credits, we receive various brands, get tips in economic development areas, these are in millions of dollars and Merit has tried to return and be a partner in the community.

Well, we’ve sent out letters and although we’ll still have some contributions, we’ll cut a substantial. We are talking about the million dollars now. So we are talking about big money all of this coming out of SG&A.

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

Kent Stanger

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

Fred Lampropoulos

This should be another one that I think will be important for you. We've got over $2.3 million going forward in bonuses and bonus structures that existed in the company. Not sure of some but we have contractual responsibility to fulfill. We've taking a lot of the existing structure in cost in those areas and on an annual basis it will reduce our expenses by $2.3 million.

In other words, all of us at Merit are going to be making a lot less money because our shareholders aren’t making any money. And but its big money, its big money. So let me review some of these things. So we've got the bonuses. We’ve got discretionary spending, trade shows, contributions, all of these things are millions and millions of dollars, and they have been cut essentially to the bone.

Now I think it's important for us if we could for minute to move to operations, talk a little bit about some of the things we are doing and some of the expenses that are in this statement.

Merit, as many of you know, over 25 year history has tried to plan for our growth and tried to look essentially a five to seven-year plan. We built the most recent facilities on our campus about seven years ago and we fill them up and built our business.

We’ve been in a older facility of about 85,000 square feet, about 5 miles from here and it's where all of our automation is and so we constantly are tracking product back and forth with a lot of people involved in that movement.

In the new facility, which we’ve just opened in South Jordan, we have essentially an automated delivery that goes from modeling, to the fulfillment center, to automation and to the floor. It will cut out ten hundreds of thousands millions of dollars of cost as it comes online and Kent, I will let you, maybe just comment briefly on kind of the structure of cost as everyone came for this.

Kent Stanger

Thank you. Yeah. So the new facility the 255,000-square feet was 62,000-square feet which is substantial increase in clean rooms and other supports. The facility is going to cost about $3.9 million a year for all this overhead, depreciation and another costs.

We can eliminate or offset $1 million a year that when we in August time expected and beyond. When we close down and move out of the facility across time that Fred referred too. We also believe that the material handlers alone. In other words the people moving and touching the parts will be some 39 people, 30 to 39 people, another $1.1 million per year.

So we are approaching half of that at least in the offset later this year towards the end of the third quarter, certainly by the fourth quarter. The rest of that overhead will be absorbed over the next five to seven years as we bring in new products and grow the business and volumes within our existing products and bring new ones off and that will take sometime.

Fred Lampropoulos

Yeah. Now, I think, I have a little bit from number that Kent, and I don’t know but its, its not like sales number I’m going to argue about. But I believe that we are up and efficiently running this facility by the end of the year. It will helps us to avoid hiring at least 100 people or depending on the business level and how efficiently become we’ll be able to reduce by 100 people.

And if you look at $35,000 a year would average benefits and salaries and that sort of thing that’s $3.5 million on an annual basis, not that we’ll pick up this year but we will pick up a portion of it.

And you take that $3.5 million and then you take the other million dollars of less operation from the facility, now what you have done in a relatively short period of time, as you’ve picked up almost all the costs, then that’s my optimistic view of all of this and then what you’ve done is you have a lot of capacity going forward. So that will be -- the other part is that we’re going to more than double that capacity as we build our business.

And we have plenty of reasons to believe by the way that our business will grow. And I still believe by the way that we will be in the double digits. Now, we’re at 9% but I believe some of the things I’m going to share with you now, I’ll show you how we’re going to continue to grow because we think there is a couple of ways out of this, reduce expenses and increase revenues and that’s what we are focused on.

So let’s talk about the revenue side of things and where we’re going from here. A good portion of our growth is still coming from outside the United States. Merit is introducing a new product and that product has been introduced in Europe this week. It’s called the basic touch. We showed the product at the SIR meeting.

And this product I believe has the capability over the next several years to produce over $50 million a year in revenues. This has been most advanced and the best inflation device in the world. Why is this important? Well, it goes to 35 atmospheres. Nobody else’s device of the big four gets anywhere near that.

So for instance, our competitors are generally in the 26 atmosphere range. Why is it important to have this extra pressure because high pressure is the horizon of the future. Recently in Europe, we found that they are taking PTCA balloons in selected branches in calcified regions and taking about the 35 atmospheres.

In fact, in a recent case in England, they actually had to trade out and drop another inflation device on because the one that they were using from a major big four didn’t work at that level. And it cost that hospital $110 more in that case.

When they realized they only had to have one inflation device and that they could save that money, that hospital has also already switched their agents and come to Merit at the expense of one of our competitors. So what this does, it’s not just hold us at the status quo, it makes us the premiere inflation device and an accessory company in the world. This is a very, very big deal.

This is a product that we’re developing. This is a product that we’ve released. We have filed five 10-K. We have received responses from the FDA. We will respond to those in the next few weeks. We believe that somewhere in the next 60 days or so, give or take that we’ll have approval for this product in the United States.

Important to know, we believe that our current capacity and then this device we’re essentially taken up in Europe. This is a very, very big deal. And its right marred to wheelhouse. So it’s a significant product. Kent?

Kent Stanger

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

Fred Lampropoulos

Yeah. And again I’m going to talk about this just a little bit more because I don’t want you to dismiss it because once you are in those labs, things like the OsteoPro, things like our sheets, our pacts, snares, all of these things, kind of, go right along with it. And we’re going to be able to be in places that we have been before.

So we’ve been able to compete. So we’re very excited about this product. The IP side of things we received notice from me from the patent office that they have -- I want to make sure, I use the right word. What’s the word I want to use for sure? Preliminary approved almost 20 claims. So they have allowed our preliminary basis, the reason I say that as you go through the final preparation, we’re receiving notice of allowance. It could adjust up or down slightly.

But the fact of the matter is we’ll have new intellectual property that we think we’ll have issued in the next three or four months. If it goes, it’s normal course of action. This will give us almost 20 years of proprietary preference for this product.

Now, another reason why it's important is for instance, if you're using a balloon to do a PTA, an angioplasty that you would do for patients that’s having dialysis and has that fissure to block of.

They have balloons that go up to 35 atmospheres but none of the companies that of the big four have an inflation device that can get anywhere near that, that we’re aware of, that they have on the market like today. So we had one physician use this product at the SIR meeting. And then this is what he said, when I’m using one of the competitive devices, when I get to this level, it starts to wind.

When I get to this level, it starts to crack. And when I get to this higher-pressure level, I get very nervous. He took our device, cranked at all the away up to the 35 atmospheres. And his next statement was to me, would you please help your salesman call on me as soon as this is available.

So this is a big deal. And something that is already on demand in Hong Kong, in Russia, in all of Europe and we think it will be very exciting worldwide. We are introducing next week at the guest meeting which is the Global Embolization meeting in Prague, a new product of the nonspherical bearing PVA.

This is a product that Merit developed. Our chemist developed it. It is another one of the stool of leg, embolic products that we’re adding. And we’re very excited about what this means, particularly outside the United States. As you also notice, we saw a decline in our embolic products.

But I want to point out that in our -- excuse me -- our QuadraSphere, HepaSphere product, it increased by almost 17% over the year ago period. We saw softer course in the Embosphere. This will help us to firm this up because they often use PVA along with our Embospheres because it's low cost.

But Merit still gets a substantial above corporate average gross margin on this price. That’s a new product. We have a whole list of new products that are coming out in the future. We have the local file access product -- goodness gracious.

The [ASAP] we have the wooly snare system. We have a new hydrophilic sheath. I should point out that we believe and we can support the fact that radio artery procedures are still increasing dramatically in the United States and all over the world. Our radio products for our radio sheath is up to over $8 million on a ramp basis. It’s up 416% from a year ago and this does not include this new hydrophilic sheath which we’ll introduce this year.

We have a couple of new products that will introduce hopefully by the end of the year of Thomas Medical Division or our Malvern Division. We have a new hemostasis valve. I could go on and on but I have 12 new products that we’ll introduce this year. And these are all very big deals to Merit.

So we have a full pipeline of products that are, I think, very, very important to us where we know that other people are cutting those R&D budgets, Merit has spent the money in the past. Now, that being said, one of the high areas that you'll see is in our research and development.

And then in this area, some of that is attributed to the regulatory posture we’re taking with new products. And so there is part of that regulatory expense, some of that has the trials and some of that of course is new product development to get these 12 new products and another list of probably 30 that we have in development.

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

So it’s an area that we -- I think are interested. Kent, do you want to comment on the R&D side of things of the new products. And by the way, there is often times, you're getting and I’m getting. And people say well, they kind of play off each other. I like your opinion on this device, Kent, because I think it’s so significant.

Kent Stanger

On the basic?

Fred Lampropoulos

You concur.

Kent Stanger

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

We now have power steering built into the handle. And it allows you to press down against the table or other object and therefore release the trigger and push out the fluid and do one hand of prime. So I think it not only ups them, starts pressure as far as volume and as far as the ease of use of going to the high-pressure.

It also allows them set it up, prepare much easier and take away that one negative I think we have. So from the little bit I’ve seen in the conversations of the sales force, I'm excited about this is going, I see it as a real strong product.

Fred Lampropoulos

Let’s talk about some others areas of the business but I think you find interesting. We’ve discussed this briefly that for the first time that our Endotek division was profitable. I know that many of you were concerned. When we bought it, we were little bit disappointed and for of a couple of years we've operated at losses in that position.

Now, we've been able to do this without adding a lot of overhead cost. One of the really exciting things that will be happening here as we’ve discussed before is that we are now just starting to shift. We have shipped some of the newer low-cost stents.

So we were able to reduce by shipping vendors and this has been well over a year ago, our cost of goods in this division by over a third. And that has a savings on volume at somewhere around $1.5 million to $2 million annually, once we get all of the stents converted. And that will happen over the balance of the year, which means that we’ll see higher gross margins.

We are about 62% in that division right now. We believe that those will rise to probably somewhere around 67% or 68%. And so we’ll continue to make a lot more money in that particular division and that becomes a very attractive asset and offer to us as we go forward particularly with the new products that are coming out of there, most noted -- notable is the new valve esophageal stents.

So that's a very, very big deal to be able to swing that around into profitability and to contribute both the gross margins and to profitability going forward. Kent, you want to comment.

Kent Stanger

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

It's also improving the efficiency of our distribution system. We’ve had too few products and we’re getting of them on this, more to come.

Fred Lampropoulos

Thanks Kent. Lot of the things I have been asked because I think it did have such an impact on this first quarter. I want to come back to Melbourne just for a second and talk a little bit about that.

I’ve been asked and I'm sure I will be asked, did you make a mistake? And the answer to that is, well if you look at it today, I suppose you could come to that conclusion. I have not come to that conclusion.

I believe the electrophysiology, which continues to grow. I wish I read report. It was issued just a few days ago about division of a major big four. And the electrophysiology with that area grew at 12%.

We continue to believe that particularly area is going to become very, very important from that, has a lot of pull through. We have a lot of new products that we are issuing in that area, coronary sinus guides, transeptal needles, steerable catheters and then mirror improved classic sheath. All of those things are coming forward.

We’ve sized the business. We’ll continue to size it to its revenue base but we -- although it’s very disappointing at first. In some ways, it kind of reminds me of alveolus in which we -- it was disappointing kind of coming out of the shoot.

But we didn’t give up on it. We believe and continue to believe that this particular area on a worldwide basis is going to be very, very important. And we will meritize products, will deliver new products and will build this business. So it's $10 million off what we thought that’s kind of a big hit. There's no doubt about it.

And we could have a lot of discussion about that. But the bottom line is as we’ve already made the adjustments, we’ll make additional adjustments and we’re already doing the things. The other thing that is exciting about this is some of that product that we were talking about -- that we haven’t got the orders for, were now -- our sales forces are calling on these accounts and we're picking up some of that business from -- that was going on in an OEM basis and we're picking up on a retail basis at Merit.

And we’re getting substantially higher prices than we would be if we were selling it through one of the other companies. So it has kind of forced us to accelerate our efforts and the focus of our sales force to go out and get this business and we’re opening up new accounts in gathering this business every day. And of course all those EP labs are a substantial source of new business for all of these other products that we’re talking to you about.

They use inflation devices. They use catheters. They use sheaths. They use trays. They use all of the things that Merit makes. And at that car point where we think has a substantial opportunity to have these products.

So I’m going to get beat up if you would look at it today, you can handle me. But I won’t give up on it, just like we haven't when we -- when we moved to Ireland many, many years ago. We took some heed for that. It took sometime to gets it squared around today. It’s a big deal.

Our tray business, we got beat up on that one and people questioned that. It’s going to generate $35 million to $40 million in revenues this year. All of these areas where things will take time. I don't think Thomas Medical will take as much time as Alveolous did because we have a stronger sales base there.

But I think that its’ important to note that it’s disappointing to us. With that, revenue comeback or it come back around the door, I don't know. I'm not counting on it. I'm going to go out and get the revenue. Remember the product is still the gold standard. It is still the gold standard.

Now, what we have to do is have our sales force go get that business. And with this inflation device and other products, it gives us a very good opportunity to go there. So it is what it is, we’re doing the things to adjust the cost .We need to do more work at Melbourne but we will make it successful. To that I have not doubt. So as I mentioned in my note, there's no doubt that we've been in essentially a perfect storm.

Now, we've got acquisition. We've got new facilities. We've got the medical device tax with a slowdown procedures. I mean I don't what else could have gone wrong. Now, what's right? Now, what’s right is that we have new products. We recognize this. We’re cutting costs quickly, but responsibly. And we won't give up. And so I say and I believe that the worst is behind us.

So many of you are going to say well, you know we have to see proof of this or this and that, that’s fine. You do your job and I'll do my job. But I'm telling you that we've made already a good portion of the adjustments that we need to make. And we've been through this before. Many companies have. We’ve been through this before, we know what to do were doing it.

Now you can you can argue or make your comments and you can give us your view on in your letters tomorrow and that sort of thing. I am telling you that when we come out of the other end of this, we’ll be a much leaner company, we’ll be a much more profitable company and will do things that we all know that Merit needs to do.

That is we will increase our operating profits and we’ll do that by reducing and controlling expenses and be much more conscientious about the expense lines and the things when you do (inaudible) including. We have a couple of facilities. One is an expansion of the warehouse in Europe.

If we have to slow those down or stop them, that’s what we’ll do. We will do the things that need to be done and make the tough decisions that have to be made to make sure that we get this business on track.

It’s a great business. It doesn’t look all that well now, but I'm telling you the patient has had surgery and the patient is recovering, and the patient will recover quickly because I’m talking about things you haven't seen yet. They are clearly not in this statement but the decisions have been made.

Now, your guy -- you and I fight all the time and you think this and you think that and that kind of stuff because what I’ve said true or not true.

Kent Stanger

Well, I know that we’ve made cuts and made decisions to eliminate some $7 million, $8 million at the AEROSIZER. Going forward and no, they weren’t really effective in the first quarter. In fact, we had increased caused due to severance and some of those things to make those decisions.

And we’ve got increased cost to move into these facilities in the interim. So, no, it's not going to be easy and the second quarter isn’t going to be really easier. But it’s going to sequentially improve I really believe that, and you'll start seeing more leverage when you get to that to the fourth quarter and in the next year, as we can downsize some of this redundancy in our facilities. And some of the people and really take advantage of some of the, both new product introduction both in sales, because our sales volumes were going to forecast to reach our numbers are going to increase.

Fred Lampropoulos

So, one other thing I can’t mentioned I have discussed is that in this, we had almost a $1 million of expense. I’m not going to call it one-time expense because I don’t think that it was an expense. Med expense was for severance. We made a number of management changes in a number of things that to be intended to and we made those and we took the hit forth there in this quarter as well. It was a substantial sum of money. So we, again, made the tough decisions that we thought needed to be made and that was in this quarter.

So again, that's another part of the perfect storm because when all of these things hit us, but they are -- not that we won't have these expenses and other business issues, but those things are behind us. And what you will see forward is a more efficient company, a more cost conscious company. In fact, all the staff is sitting in our room right now. They're hearing all this.

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

Kent Stanger

No. Couple of quick comments. I think part of the difference from last year is that our interest in expense is considerably due to the transaction of purchasing power. And that we have an usual tax being, where we were able to bring from last year, a catch up that Congress and the President passed right early in the year from last year for the R&D tax credit. So it made our tax advantage looks strange in the percentages of in pretax income. So, I just wanted to point that out.

Fred Lampropoulos

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

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

So, I think that pretty well covers it. Great, unless you want to add anything. I think what we will do is we will call on our operator and we will go ahead and open up the line and we will go ahead and take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Tom Gunderson with Piper Jaffray. Please go ahead.

Tom Gunderson - Piper Jaffray

Good afternoon, everybody.

Speaker

Hey, Tom.

Tom Gunderson - Piper Jaffray

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

Speaker

Yeah. I don't have last march in front of me. But it is all in, Tom that was $37.5 million of revenues for all divisions in the company. So I do that but I don't have in front of me last March. I think what I was trying to point out was, is even though January and February were very slow in the $31 million, $33 million range are working on, I think in that range.

It was a pretty substantial increase and we start seeing. We ended up I think at about $5.5 million for the quarter with Malvern. And I think for the first two months, we are like -- I’m just going to pull this off. But I think it was 28. So we almost double that, as that thing started ramping up, that pipeline start filling up. That has been kind of the history of their business. People fill up for the year. They worked on their inventories and then, it starts to fill back up again.

So we saw not quite but we saw the business almost double just in the month of March. And we continued to see by the orders now on a regular basis that were lacking in that first quarter, coming from this large OEM customers. So that goes to -- it’s the best way I can answer that now.

We can go back and look at March. But I think the point I also wanted to make up, Kent talked about that sequentially on a non-GAAP basis, we improved our SG&A expense and I will tell you that sequentially every month going forward it will reduce and improve substantially. Now, we would be at that 27.2%. I will tell you this. That if it was that same revenue level that number may very well be 26%.

Again, I’m pulling that number up but there are a number of these costs that have been taken out and we will see that as a percentage of sales going forward every quarter, because of these things, these costs that we’ve already taken out. That’s the best way I can answer the question now. We will do some research and get back to you on a comparison to last March. Now, I’m going to take your next question.

Tom Gunderson - Piper Jaffray

Sure. And then the other clarification, maybe we can do that offline. I will just ask. On the Malvern side and lowering guidance and putting in the premium loss customer, do you have a sense? You talked about price and lowering the price form. But do you have a sense of what was the cause of the loss? Did somebody come in and underbid or -- ?

Speaker

I know exactly what the cause is, Tom, and you ask the question, I will answer it. So one of the things that was taking place in Thomas Medical is that one time, they were a sole provider on an OEM basis to one customer. Patents expired on that product and Thomas Medical went out and attempted to go direct to the end users then rather than go to a third-party. Okay.

They were successful in doing that except in one case, in which they went to -- one of the companies which was their largest customer. If you go back in the records there, it's very easy to identify who they are and what they did -- I’m talking about the Thomas Medical. This is an issue of record. They raise substantially the price of the product that was under the third-party in an attempt to get that business direct. And the bottom line was it backfired.

And the other guys didn't want to do that and so they got tired of that whole situation. So what we did and this is why I can say in good faith that we did not anticipate. We went back to pressure products who is -- was the original customer that all of this business. We went back and we lowered the price to what their original price was, because we believe together we can get that business back. That’s what we did.

So it wasn’t likely lowered below. We loaded back to the original price they were getting before management at Thomas raised it substantially. And we didn't think that was the right thing to do, as it all turns out it wasn't. So we put it back to the original price. By that time there had been so much damage done. They decide that they would go look at some alternatives and that’s where it is sits today.

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

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

I'll also say, Tom that the way we will get this business back and we will get it back over time. It may take us three years to get that $10 million back but we will get it back. We will do it because rather than going through that OEM customer, we will go through Merit’s direct sales force and we will get it back that way. But it will take time to do that but it’s already happening.

We are already getting that business back. We are opening two, three, four, five new account every single day at prices that are substantially higher than our previous transfer price. So we have a plan. We are already working that plan. And I think by the way, it’s that stands here. It is a good product. So that’s the history of it.

Tom Gunderson - Piper Jaffray

Got it. Thanks, Fred. I will add other ask their questions.

Speaker

Thanks, Tom.

Operator

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

Jayson Bedford - Raymond Jame

Hi. Good evening. Can you hear me?

Speaker

We can't, Jason. Thank you for being on the call.

Jayson Bedford - Raymond Jame

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

Speaker

Right now, we are booking at approximately $26 million. I think, Kent, is that correct. We have $26 million.

Jayson Bedford - Raymond Jame

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

Speaker

That’s correct. And Jason if I could on this revenue, the entire amount of adjustment, we went back to each of our sales units and responsibly leadership of each of those units. And up until last evening, we were going to all of this to make sure that when we look at this we would have confidence in everyone of our sales leaders, indicated that they would stand and they went coerced. They were simply asked, are you going to be up, down or the same and everyone of it, the international, OEM, U.S. direct, Endotek. All came back with -- they expect to be on forecast. Now what that means is it was pretty low in the first quarter. Hardly any of them hit that.

But each and every one of them believed that by the time they get to the end of the year, they will make their original forecast that was part of our initial guidance. So, almost 100% of this guidance that's been reduced is because of this situation in Malvern. And we will work and eventually, we will get that business back one way or the other.

Jayson Bedford - Raymond Jame

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

Fred Lampropoulos

Kent and I will let you go through that because let me comment on little bit. So without Malvern, our domestic sales force was about 3.5%. I think that…

Kent Stanger

3.5% was Malvern and they don’t have a lot. It was 2.3% with that.

Fred Lampropoulos

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

Kent Stanger

OEM.

Fred Lampropoulos

U.S. OEM was down and that’s what type on, but the international markets were still very strong.

Kent Stanger

The Pacific Rim was 17% up. Japan was 6%. China was 10%. So those areas were still strong, some slower than they have been but still in double digits. EU directive slowed down some at 6% and the EU dealers was only 3%, that one had slowdown also. So the international is still where most of the growth is. It was up 7.5% percent of the total group and the U.S. direct was like you said 3.5%, including some of the direct sales of Malvern product that helped a little bit. You want more than that. I think we covered most of it.

Jayson Bedford - Raymond Jame

Okay. That’s helpful. And then just one last one for me and then I will let someone jump in. On the gross margin, Kent you mentioned the variances. Have you kind of burn through that or are these going to continue with the headwinds in the second quarter and then maybe where do you expect gross margins for the year to shakeout on an non-GAAP basis? Thanks.

Kent Stanger

Yeah, I'm glad you asked. There is some overhangs still. We feel like we are carrying, maybe $1 million right now that comes to the flow of inventory but it is improving. I will share with you that in March, we had positive variances here in Salt Lake. So that was a switch from some large negatives that were in few months for prior.

Fred Lampropoulos

In this negative variance and this overhang, more than half of his coming out of Malvern.

Kent Stanger

Yeah. Because when you have the overhead there, even though we frame -- 20 people, we didn't train them in January, we trained them as we started to see and most of those were done in March and some in April. So we’ve turned print that. So we got that overhead thing that’s sitting there. But the positive part is that that part of the business is start to improve where that’s more than half of the variance that we saw in the first quarter.

So the trend is positive. It’s not over but it’s not going to happened stop overnight and we do have. We have coming on, the whole explanation about the higher facilities when it converts over to production and overheads get allocated there versus to move costs. In SG&A, you will see that have to be overcome too. So, there is still some challenges as we go through this but the trend is good it. Some of the worst months were in late fourth quarter and early first quarter and that’s been improving.

Jayson Bedford - Raymond Jame

Yeah. Kent, also on that, the cost of the new facility in the first quarter runs in SG&A line. Is that correct?

Kent Stanger

Because most of it was. It started in March and it got reallocated because it’s non-production right now. It's just being moved and qualified and so forth. Some of it is starting to become productive now in April month.

Fred Lampropoulos

So some of that will move to the gross margin line is my point. And I think it’s also interesting to know that even at 27.2%, that there was a portion of the SG&A cost of the facilities cost because it was in the production we had there in G&A. 381,000. Also another point that we hadn’t mentioned is that, as part of this expense issue there was a transition agreement that we had with GE, as we were transitioning through computers and telephone lines and cards access and all these various things.

And I think that number -- that was about $140,000 that will be gone in the second quarter because we’ve essentially wrapped up, essentially almost all of the transition items, that was expensed also in the first quarter. That goes back to this perfect storm. Everything that we could get hit with, we did get hit with. I don’t think we missed a single shop. We had a snowball fight. We got hit by all of them. But I think that as we move forward, we are going to have a few snowballs of our own so. Okay. Jason, I hope that answers your question.

Jayson Bedford - Raymond Jame

It does. Thank you.

Fred Lampropoulos

Okay. Thank you.

Operator

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

Jim Sidoti - Sidoti & Company

Good afternoon. Can you hear me?

Fred Lampropoulos

We can, Jim.

Jim Sidoti - Sidoti & Company

Great. Great. I just want to get some numbers down before I ask a question. You said that you had about 3% organic growth and the rest was Thomas. So, I assume Thomas is about $5.5 million. So it sounds right.

Fred Lampropoulos

That’s correct.

Kent Stanger

That’s correct.

Jim Sidoti - Sidoti & Company

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

Fred Lampropoulos

I have to add what are you talking about. I can go through some of them but…

Jim Sidoti - Sidoti & Company

Okay. I’m just -- if your acquisitions severance and inventory write-ups, looks like it totaled little over $2 million to about $0.04, $0.05 per share.

Kent Stanger

Yeah. That’s right.

Jim Sidoti - Sidoti & Company

So that’s about $0.04, $0.05 of one-time charges in the quarter? And now…

Fred Lampropoulos

And do you have the sense…

Kent Stanger

The after tax to that, the after tax that you have mention you do that, but, I mean, right, go ahead…

Jim Sidoti - Sidoti & Company

After tax about 30%.

Kent Stanger

Yeah. We are using 38% on an incremental basis, although, our tax rate on average -- our effective rate is going to be like 22%, 24% this year.

Jim Sidoti - Sidoti & Company

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

Kent Stanger

Sounds little high, I think it’s more accurate, Fred, isn’t it.

Jim Sidoti - Sidoti & Company

Terrified. I’ll double-check the tax rate on it.

Kent Stanger

Okay. You said you don’t know.

Fred Lampropoulos

Yeah.

Jim Sidoti - Sidoti & Company

This…

Fred Lampropoulos

Go ahead.

Jim Sidoti - Sidoti & Company

The Thomas…

Kent Stanger

Go ahead.

Jim Sidoti - Sidoti & Company

Thomas customer was about 25% of the revenue.

Fred Lampropoulos

23, I think was the number.

Kent Stanger

Yeah.

Jim Sidoti - Sidoti & Company

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

Fred Lampropoulos

No, no. They don’t make the product themselves. They -- we believe that they are buying it from one or two -- we have three competitors in the marketplace. There is Merit, there is Oscars, which sales through pressure products and there is GREATBATCH. Those are the three competitors.

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

Jim Sidoti - Sidoti & Company

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

Fred Lampropoulos

Yeah. We are doing that, we are doing that. By the way there was another distributor out there that they have signed the deal with and so we’re completing with our sales forces against all these other players with our products, that’s what we are doing. By the way, we did calculate that, Jim, and it was a little bit about $3.01…

Jim Sidoti - Sidoti & Company

The $0.03…

Fred Lampropoulos

… that come back to us.

Kent Stanger

Yeah. That’s correct.

Jim Sidoti - Sidoti & Company

Okay. All right. Great.

Kent Stanger

Okay.

Jim Sidoti - Sidoti & Company

All right. Thank you

Fred Lampropoulos

Yeah. I think $5 would probably be closer when you take, well, maybe $4, $4.5. You can take the question now.

Operator

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

Chris Cooley - Stephens

Thanks so much and appreciate you’re taken the questions here evening. You hear me okay.

Fred Lampropoulos

You’re welcome, Chris.

Chris Cooley - Stephens

Yeah. We hear you fine. I really appreciate all the detail you provided us in terms of the initiatives that you are taking to reduce costs and fully appreciate this, have to play out over the course of the year. So I just want to make sure that I heard you correct, Kent, when you were talking about, how we should think about this to our margins, specifically you are looking for about $7 million to $8 million in annual cost saving, but not really going to see the majority of that impact until the fourth quarter of this year. Help us think a little bit about the current quarter and maybe a little bit into the 3Q in terms of how we should think about this through our operating lines and then I have one quick follow up? Thanks so much.

Kent Stanger

I want to clarify, Kent, most of that $7 million to $8 million is in SG&A and its start most of it in April. The following K adjustment started April 1st, many of the termination were in that month so March and in the April some of it. The saving overtime through marketing and sales reductions will come through the year as they happened in the show or in advertising or in whatever they happened to be.

Fred Lampropoulos

Okay. Let me clarify so that I extent your answer. What you are saying is $7 million to $8 million was spread, I’m not to say necessary evenly, but it will be spread throughout the balance of this year?

Kent Stanger

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

Fred Lampropoulos

And if you add the bonuses what happened then?

Kent Stanger

That’s another $2.3 million.

Fred Lampropoulos

Why wouldn’t you include those?

Kent Stanger

Only because we had all ready left them out of the first quarter.

Fred Lampropoulos

Okay.

Kent Stanger

They were increase savings.

Fred Lampropoulos

So, Chris, I think, what you saying is 75% of those bonuses or those expanses reduction will role through the balance of the year…

Chris Cooley - Stephens

Right about.

Fred Lampropoulos

… coming quarter and we took a portion of that $2 million we reduced in the first quarter.

Kent Stanger

So we have that that benefit already in the first quarter. We didn’t recoup for any bonuses for the management.

Fred Lampropoulos

So we took 25% of that $2.3 million.

Kent Stanger

Yeah.

Fred Lampropoulos

… was reduction in cost in the first quarter.

Kent Stanger

It’s ready in our numbers, correct.

Fred Lampropoulos

Yeah. Okay.

Chris Cooley - Stephens

Got you.

Fred Lampropoulos

So when you talk about gross margin that was the discussion about transitioning into our new facility, getting out of our old facility, bringing online the automated handling systems and being able to start reducing headcount, that discussion may have been confuse with the other. But it was as a separate transition into our facilities and the utilization of the capital we’ve invested here.

Kent Stanger

And we can try it out.

Chris Cooley - Stephens

No. I think we got there. Thanks so much. And then just to clarify, I think you stated into one of the prior questions that your expectations for the Malvern business this year 2013 were $26 million. And I was curious, what type of growth rate, you’re assuming on that, that base business that remains. Now, Fred had mentioned that you were winning new contrasts. So I’m just trying to parse out what type of growth you’re seeing there in terms of new customer ad versus existing customer accelerating use. I’ll get back to you?

Fred Lampropoulos

Let me explain. It’s a hard questions to answer but let me put this way. Almost a 100% of the business that Thomas had when through OEM customers. And what we’re doing and in Canada, what we’re forced to do, and we have already initiated this as we’re putting this products, particularly sheet is in our sales bag right now. And we’re opening up new accounts everyday.

I look at it a minute ago, we opened up new six new accounts today. And I will imagine will continue to adjust that. So I have a hard time comparing that against to what they had because there wasn’t any. So because it’s old now, these portion are now going direct.

But we’ll continue to accelerate that. We have two new products that we meritized that we never win our forecast. These are coronary sinus guides and our lateral vein introducers were never in Merit’s bag when we both -- when we both Thomas.

The products they made for another company but what we did as we negotiated the ability to sell those worldwide. So those are two new products that we other than mentioning now that will be in our bag going forward that we didn’t have there. That will be our new incremental business on those products.

And those products itself 400 or 500 a prop by the way and which we get about 65% gross margin. So that’s the best I can answer that question right now. We can do some more work, I’ll talk of then but that’s the best I can give you right now.

Chris Cooley - Stephens

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

Fred Lampropoulos

Thank you.

Operator

Thank you. (Operator instructions) And our next question come from the line of Ross Taylor with CL King. Please go ahead.

Ross Taylor - CL King

Hi. I missed a lot of the call, maybe you’ve answered this questions already. But I just want to know, if you have capital spending or forecast for the year and whether you maybe you kind of cutback on what your original CapEx plans were, given more happens here.

And I guess, also you mentioned you’re realigning the business with the debt levels. Is there any assets or facilities you can sell with the result of some of the consolidation facility and other things yet going on in your business in order to your raising cash and pay down the debt?

Fred Lampropoulos

Yeah. Let me go through a terms of assets to sell towards the building. We’re moving from a place that we are renting and so that’s certainly be. There are assets that we could sell to reduce our business while not affecting the overall business in our -- and the answer is the yes.

I don’t think it would be appropriate to meet or identify those at this particular point for vague reason. But yes there are things too. In terms of cash flow, we have a capital budget. This is again budgets that people foot forth. And all those things are being reviewed. Some of those will be deferred, some of those will be discontinued. And there maybe other opportunities.

As an example, on the facility, we may just the stop the facility. That’s one of our options, we may sell it down. We may do lots of things but I think to answer your question, all of those things are being looked at as well. What we want to do is get up, get burden of the step out of the way and we know how to do that. We have to sell more and we have to have better margins and we do have some other opportunities. But again I really comment on those right now.

Ross Taylor - CL King

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

Fred Lampropoulos

On a budget basis, it is about $50 million or so that are in there and was very likely to reduce that by a third to a half. One way or the other, we will.

Ross Taylor - CL King

All right. Good. Thank you.

Fred Lampropoulos

Okay.

Operator

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

Chris Cooley - Stephens

Thank you, very much. I apologized I didn’t ask earlier there, Fred and Kent. When you talk about the debt and the opportunities you have to further reduce the balances. Assuming you can get in those at this point but can you talk to us a little bit about what level of debt, you might be more comfortable with just when we think about the capital structure going forward. Maybe help us get a better understanding of kind of the levels that you’re trying to get the company down to in the near term?

Fred Lampropoulos

Yeah. I think -- I mean I take over the intermediate term or the near term. I’d like to reuccedover the immediate term of the near term, I’d like to reduce the debt part by $80 to $100 million?

Chris Cooley - Stephens

And is that just from the working capital standpoint, covenant standpoint, just trying to think about what’s -- why, what you’re seeing now the debt level down at this point

Fred Lampropoulos

I also want to get -- I mean I don’t like that to start at very low rate. But I mean, you asked the question of what I think if had $100 million less or $80 million lest in debt, I feel low, and I feel better. I feel a lot better when it’s gone. But I think that’s kind of what I have in mind is reduction in extra level. But again I want to say that I really can’t answer any further questions on that other than the statements that I have made.

Chris Cooley - Stephens

Understood. Thank you so much for the clarity.

Operator

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

Fred Lampropoulos

Well. Ladies and gentlemen, so late in the afternoon here and I know later where you are and we appreciate the questions. Kent and I will be available for the next couple of hours to answer your questions and to maybe clarify some of these points. But I think, we all now where we are. I hope what I would like to see and you will have to make this call but, we believe that we are doing the things that need to be done in a serious manner.

Let me give you an idea of some other things that we are talking about. We have a President's Club every year. It is something that we use for our sale force. We have substantially reduced by almost 75% of the expense in that area. We are going to have a Christmas Party this year. We have one every year. It’s going to be in the Merit Cafeteria this year.

And this may sound right. But these are I think the things that the staff knows. We put our Christmas light around our place. We make and put up a few lights. We will put up a tree, but we are now going to spend that kind of money. We are cutting back a lot of areas, our government affairs. Greg Fredde, who overseas that for us and has helped us in terms of grants of R&D tax credits in the State of Utah. I can’t go on and on. But essentially when I asked him the question, what’s your budget for political contribution this year, he answered straight forward. It’s zero.

We are just not going to spend that money. We can’t. We have debt to take care of. We have performance and we are just going to tighten this, maybe down very, very tight. I was scheduled to go to Europe this weekend, to go to the guest show which is the Global Embolization meeting. I’m not going. I’m going to stay home. I’m going to answer your questions, and I’m going to work on running the business here.

I can look around the room and everybody’s engaged in these activities in this room. And what it means, ultimately, is we are going to be a hell of a lot better off, three months, six months, nine months and a year from now than we are today and we are going to focus on the kind of areas that we need to be at to sustain this business going forward. That’s what we are committed to doing. We’ve talked about it for a long time. But listen, how do I say this?

I mean, we not talking about it. And it’s not like we are taking about today and this is what were going to do tomorrow. We are already doing amazing. As Kent already pointed out, on an annualized basis we’ve already taken $6 to $8 million, almost $8 million out of the business. If we go back to some $8 million bucks up, we’ve got more to take out and we will.

So we’ll do that. At the same time, this anemic growth rate in the first quarter. I mean, this is very unlike Merit. But we really do have the goods and the products to take it forward. Like I said, in fact, one of the, right, we talked about this new [inflation]. You might say one inflation device does not a company make that’s absolutely true.

But this product is the best. This product is what the market is calling for and we essentially have no competitors that can match the quality of its products and performance. It’s a big deal. It’s what built this company. If we take a look at the revenue line, as an example for inflation devices, we are talking about $60 million, $70 million, $80 million a year. And we have a product that we think will take our market share from 50% to better than 65% over the next couple years. We have that. Our basixTOUCH, which is a product that we sell in our Endotek Division, is another inflation device.

Kent Stanger

The BIG60.

Fred Lampropoulos

The BIG60, excuse me is up 130%. So we have the products. We have the sales forces. We are cutting the discretionary expanses but we are not cutting our sales force. We are also not adding to that sales forces, but what we are doing is adding these products that will have a dramatic affect.

So we are doing what has to be done. And you guys left aside, the speed of that how we are doing? But as Kent pointed out, we’ve already done a good portion up to this point. We’ve reaffirmed with our sales leadership, the revenues and the difference this year over our first part of the year was this, the Malvern situation which we explained to you to the best of your ability. So there it is. We know what we need to do. The task is before us, we are engaged in it and it will be -- we look forward to reporting back our results.

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

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

Operator

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

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