Earnings Labs

Merit Medical Systems, Inc. (MMSI)

Q4 2012 Earnings Call· Thu, Feb 21, 2013

$66.75

-1.02%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.

Same-Day

-15.18%

1 Week

-13.81%

1 Month

-10.92%

vs S&P

-13.93%

Transcript

Operator

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Merit Medical Systems, Incorporated Fourth Quarter and Year-End 2012 Earnings Conference Call. [Operator Instructions] I’d now like to turn the conference over to Fred Lampropoulos, Chairman and CEO. Please go ahead, sir.

Fred Lampropoulos

Analyst

Good afternoon ladies and gentlemen and thank you for joining us. We are broadcasting from Salt Lake City and we’d like to begin our meeting today with having our Safe Harbor provision read by our General Counsel Rashelle Perry. Rashelle?

Rashelle Perry

Analyst

Thank you. 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 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 SEC, 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 generally accepted in the United States, 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 operations. 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, financial reporting measures prepared in accordance with GAAP. These non-GAAP financial measures exclude some but not all items that affect net income. Finally, these calculations may not be comparable with similarly titled measures of other companies.

Fred Lampropoulos

Analyst

Rashelle, thank you very much and again, good afternoon ladies and gentlemen. Thank you for joining us. We have a very complicated discussion today including a lot of details and projections for the future and clarifications. So let me just start and give a little bit of a review of our year. We ended the year with revenues of $394 million, an increase of 10% over the previous year. For the quarter we’re up 12%, just as a note that there was a couple of million dollars, $1.9 million or so, that came into place in the last 12 days of the month from the Thomas acquisition. And that’s included in this number. I’m going to ask Kent Stanger, to kind of go through the GAAP and non-GAAP because there are a lot of issues relative to the expenses of the Thomas deal, that are associated with that. Also there is the acquired inventory mark up cost that were in the fourth quarter. So there is a lot of complicated things here and I will ask you, Kent, to go through, kind of clarify that for the group.

Kent Stanger

Analyst

So Merit’s non-GAAP income for the quarter ended the fourth quarter with $6.2 million or $0.15 a share compared to $7.4 million or $0.18 a share for the quarter a year-ago in ’11. For the year we were $30.8 million or $0.72 a share compared to nearly the same, $30.9 million or $0.78 a share which is on fewer shares a year-ago. So when we look at the GAAP net income as where Fred was really talking about, it gets interesting because our earnings were $641,000 or $1.005 about, once it rounded to $0.01, compared to $5 million or $0.12 a year-ago. And in that was 2 large adjustments we had. One, which is in the non-GAAP adjustment is that $2.7 million for acquisition cost. Bankers, auditors, lawyers and those kinds of things. The other big adjustment was a write-off for an impairment of an investment in a privately held company which net of tax was $1.5 million. So those $3.7 million made a big difference obviously in our earnings compared to the prior-year. Okay? All right.

Fred Lampropoulos

Analyst

Thanks, Kent. And again, I think the one little issue there on the impairment cost was -- had to do with an investment that Merit made in an Irish company on a technology that we have actually transferred and so Merit actually acquired the rights in producing that product here. But the equity part of that investment was the part that we impaired. So I appreciate that. In the fourth quarter as you can imagine we were very busy with all the work that is necessary to do a transaction. Let me address the Thomas Medical Transaction for you, it’s been now about 2 months. Part of that of course was during the holiday and I will tell you a little bit about what our thinking is today about the transaction. I think that we thus continue to feel that Merit’s entry way into the basket or access market via the cardiac rhythm management business is something that’s very comfortable for us, both in terms of the technology, the personnel that we have brought along with the deal here and the opportunities worldwide. We have dispatched 2 Merit employees, long time employees to Malvern, Pennsylvania where they will act as, in the RD capacity and the Managing Director of the facility, to essentially meritise the product. We are convinced and believe, and I think this -- the numbers will hold this that the splitable, peelable sheath is the gold standard worldwide and I think that is clear and evident when it is being essentially utilized but all of our major large companies, the big four, the big five depending on your perspective. Now one of the challenges is that there was a lot of product that was put into customers hands in the fourth quarter and if you can just…

Kent Stanger

Analyst

Well, just that the new facilities like you said, carrying that layer of overhead. At the beginning they’re going to have to be allocated to SG&A, so we did want to make people aware of that. We’ll see a bump in SG&A for the facilities that aren’t in use yet during the time when they’re not in production. As they come online in production it will transfer over and become overheads for production or a cost of sale. So we are going to see this $3 million to $4 million of new overhead played in there and then over time we’ll see efficiencies absorb them up both from the reduction of headcounts as you said and the increased volumes of productions as we add new product lines and increase volumes with existing product lines.

Fred Lampropoulos

Analyst

So let me move on then, now that we’ve kind of discussed the headwinds. They are interest expense, amortization of intangibles, they are the Medical Device Tax, some of the clinical trials were involved in the new facilities, moving expenses, there’s a cost of that, inventory markup that we’ll have -- we had about 800,000 in the fourth quarter and then we’ll have another 800,000 in the first quarter, and then we’ll be done with it.

Kent Stanger

Analyst

Yes.

Fred Lampropoulos

Analyst

And then, this pipeline issue that I discussed previously where there’s a lot of stuff that got booked and not with us, we had a little bit of it, but then there was a lot of inventory out there and this will ramp-up during the year and then of course it will be facilitated with Merit’s direct sales both domestically and internationally. So, let me go then to our guidance, and our thinking, and our goals. We would like to at this specific time guide in revenues, $455 million to $465 million. So, those are the numbers that would give us an overall growth rate of 15% to 18% and a core growth rate of 7% to 9%. I would like to point out that last year we gave a range of guidance for the year at $392 million to $402 million and we came in at just slightly above the lower end of the range. But also a reminder that a portion of the year, our Laureate Guide Wire was removed from the market and we estimate that, that cost us about $4 million to $5 million in revenues last year. So we would have been right around at the mid range last year and we feel that these -- that we're comfortable with these numbers. Now, because of all of the new products, there is opportunity for upside, but we feel comfortable with this particular sales guidance. Kent, I know that you and I were here and Greg and Marty and all the guys were involved here. I know that you actually don’t look all that bad with that black eye and that bad light that you're walking around today, but we battled this out in terms of if you want to comment at all on these low -- on these numbers that you and I have agreed to.

Kent Stanger

Analyst

So you'd like me to go over the GAAP...

Fred Lampropoulos

Analyst

I just want our investors to feel that this isn’t just my number, that this is something that we as a Company -- this is a Company number.

Kent Stanger

Analyst

So with the expenses that Fred has outlined and challenges we believe that we can get a GAAP EPS number of between $0.40 and $0.46 a share. When you can adjust many of these onetime costs and amortizations of intangibles, then you’re able to, we think, get to $0.61, to $0.67 on a non-GAAP basis.

Fred Lampropoulos

Analyst

Okay. I am going to leave it there, and I will tell you that, that is our official number. I want to tell you personally that my goal this year is $0.72. So, our guidance is $0.61 to $0.67, my goal is $0.72. Let me tell you what we’re doing to get there, and let me tell you the things that we’ve initiated to help to bring some of these ratios and percentages in line. Many of you are aware of the declines that we’ve seen. We’ve seen mostly increases in gross margins, but you’ve seen higher SG&A cost and you’ve seen R&D cost as well. I want to talk about R&D cost in the past year and kind of where they are now. Part of these expenses have come because of part of the acquisitions and the additional SG&A expense that it took to support the various initiatives, trainers, clinical personnel and so on and so forth. And also what we saw as a requirement to have a greater presence at various trade shows. One of the things that I’ve instructed and directed is that we take an across the board 40% cut in all trade shows and administrative expenses we have associated with those trade shows, effective immediately. So, we’re not going to go to many of these shows. We will go to the ones that we think are the most important, but we’re going to cut back. I’ll give an example of one. Based on the request I have to go to the store meeting which is coming up here at the end of March, in early April in New Orleans. I’ve taken and cut requests of 25 personnel to go to that show. So, we are serious about cutting our SG&A expense, and particularly on the…

Kent Stanger

Analyst

I believe that in spite of those challenges I see progress. For example, in the fourth quarter I was glad to see it's been quite some many years now since we’ve had an improvement comparatively for SG&A expenses in the fourth quarter of ’12 compared to the fourth quarter of ’11 on a non-GAAP basis when we adjust out those one-time expenses. So, to have it not go up, it's been a first time in many years actually, so that trend has already started in the fourth quarter. I think it's going to continue in the next year particularly as a percentage of sales when you look at it with the Malvern or the Thomas products now having carrying a lower SG&A cost of sale.

Fred Lampropoulos

Analyst

Well, ladies and gentlemen we’ve, I think, laid out the situation and the results of last year. We have talked about the headwinds and the opportunities of 2013. We have talked about our goals to align and have improvements in our operational performance. We have talked about the opportunities and the very fortunate position that Merit has to have this global footprint that we have and the growth that we’ve seen in those markets. They weren’t a onetime deal. They were issues because of the investments that we’ve made and I had a couple of CEOs of companies that you all know that are companies like Merit or smaller recently talked to me and made comments like, well I wish that we would have made those businesses and made those investments years go because we have 10% or 15% of our revenues coming from international markets. And now they’re going to have these expenses and they’re going to have the higher expenses they have in the domestic market while they’re trying to do this and we’ve made those investments. I want to complement my team here. I think that they’re all -- they all look a little bit sheepish in the room. They know the task is before them. I think we understand what we have to do. So, I hope that you’ll give us that consideration and for those of you that may have lost faith, I just can’t wait to prove you wrong and so, you guys get to make your decisions and as we go through the year and we find that we’re progressively improving, doing exactly what we said, I will stand a little taller in the chair and report those results. But there it is. Those are our results. Those are the challenges. Those are the issues and those are the opportunities for the future. So, again I thank you for taking a little bit more time than usual as we go over a very complicated scenario and now we’ll go ahead and open the line up. I’ll be -- just as a reminder that Kent, and I'll be here for a couple of hours and we’ll be here of course all-day tomorrow to provide not any exclusive information, but more clarity on the things that we’ve talked about and the information that’s in the statements for you. So, we’ll go ahead now and turn the time back over to our operator, and we will now open it up for questions.

Operator

Operator

[Operator Instructions] The first question is from the line of Larry Solow with CJS Securities.

Lawrence Solow

Analyst

Just a couple of questions on the guidance. First of all the Thomas acquisition, you guys, when you made the acquisition or when you announced that you had sort of guesstimated it would be about $0.15 accretive on an adjusted basis. Is that still the case in ‘13?

Kent Stanger

Analyst

Yes, we look and we believe now after looking at all the numbers and that one of the things that changes the Medical Device Tax position for us was an adjustment that we’ve made a difference in since that time, but anyway we have $0.12 as a non-GAAP number for maybe this year.

Lawrence Solow

Analyst

Okay. That's still a pretty good number. And that sort of offsets -- that includes the higher interest expense, right? So you mentioned that was one of the challenges, but yet really the interest expense being added is only because you get -- is actually indirectly an accretive process, right?

Kent Stanger

Analyst

Yes, I’m sorry. I am actually glad you brought that up because we have made a choice partly it was required by the bank and partly for our protection of interest rate risk increases that we did in hedge of $150 million. Now what that does this year is it actually increased the interest expense about a little over $0.5 million. First is where it's running at now as a variable rate. But when you go in the out years, particularly years 3, 4 and 5 of our models, it gets better because it's locked that in at about 3%. So, we don’t have a risk of that interest rate increasing like we had originally forecasted. So that’s another adjustment as part of why that’s $0.12 now...

Lawrence Solow

Analyst

Got it. 12% to 15%, go that. I guess, -- go ahead Fred.

Fred Lampropoulos

Analyst

Larry, can I comment on something?

Lawrence Solow

Analyst

Absolutely.

Fred Lampropoulos

Analyst

This is something that we have not discussed a lot, but I want to share something with you on the Medical Device Tax and this would be again for the benefit of everybody. As I mentioned Merit has somewhere just under 40% of our revenues come from international markets, and then we have some technology companies that generate somewhere around $10 million worth of revenues in transducers, sensors and wires, and then other OEM sales. One of the issues that came up was, how are you going to deal with this tax? And I think it was the assumption that everybody was just going to go ahead and pass it on and that would be the end of that. Let me tell you what Merit’s position is and what we have decided to do, which is built into these numbers. And that is, as we looked at the business, and as we looked at our national contracts and a good portion of our domestic business is covered by contracts. Many of those things are locked in to price. And as you can imagine many of the buying groups and others, individual hospitals we were just absolutely bombarded with various requests to absorb it, to do this, to do that. Some were stronger, some were I thought very in a partnership basis saying we hope you would consider this, and this and that. And that is where you’re just flat out, aren’t going to do this. And so we got all this kind of stuff going on and there was this, this battle of accounting this and that. As we looked at the business and we sat and counseled as a sales and marketing team and as a management team, we decided that we were going to absorb this cost. There’s…

Lawrence Solow

Analyst

And if I could just follow up on the guidance. I'm just trying to parcel out sort of what is maybe one-time-ish or sort of related to your move, your moving of facilities, consolidation of facilities and severance, all these other issues, and wouldn't some of them be called out as -- pulled out of your adjusted earnings?

Kent Stanger

Analyst

Yes, I mean they will be when we can. For example, the move costs are just parts of that, that we will outline, but it's relatively small in the total, much of the cost is the existing equipment being moved and personnel being put in a short-term position of doing SG&A cost while they’re out of production, so to speak. And those are costs that don’t go away, so they’re not really onetime, they’re just being reallocated to SG&A temporarily and then they’ll go back to being production when that’s what they’re doing. So, that’s a little difficult. We’ve been having our own internal debate actually on how to present that, but those are the challenges of trying to be fair and completely transparent into what those costs are comparatively. So some of them will be and some will not as far as those moving costs go. So, when you talk about severance, yes, many of those -- there are people who we don’t replace and its part of the restructuring of either the Thomas acquisition and or the restructuring we’re doing to move and consolidate facilities and so forth. We will break those out and make adjustments to them as we go along.

Fred Lampropoulos

Analyst

And there are some that are management decisions per reduction of headcount, as well. So some of them are not associated with some of the efficiencies, its other issues or positions that we’re simply going to eliminate.

Kent Stanger

Analyst

It's reprioritizing our expenses, I suppose [indiscernible].

Lawrence Solow

Analyst

With some of the charges, your gross margin was down in Q4, and yet you mentioned sort of it was down year-over-year because of down production. Was that because Q3 produced ahead or because your sales are up, so I'm just trying to figure out why that came down, sort of against the recent trends and usually you're seasonally strong in Q4. And I guess, the second part of that question is do gross margins not go up in 2013, and I guess, are you sort of splitting the expense between SG&A and gross margin?

Kent Stanger

Analyst

Yes, I think that is a lot of questions there, but it's okay.

Fred Lampropoulos

Analyst

Let me go to the first part, that is that, one of the things that we found that we had overproduced, the responsibility of course is all of ours but this was a -- I don’t want to call it a surprise but it wasn’t what was expected, so we pulled back on our production so as not to make more inventory than we needed. And so, we were kind of slow because we really had produced more than we should have probably in the second and third quarter. And as we adjusted that downward we didn’t apply as much overhead. So, there was about $1.5 million I think give or take Kent's negative variance mostly in November that affected that fourth quarter that affected our overall gross margins. Just as a point of interest, when we set our goals for the year, we hit about 85% the only one that we didn’t hit Larry, was the gross margins which went up about 20 basis points which is the lowest that we’ve done in the last 4 or 5 years, and -- but all of the other things that we hit in terms of our guidance last year we had except for the gross margin thing and that was because of this over production issue that we had.

Kent Stanger

Analyst

And I do want to clarify something, you said we actually for the year did improve gross margins on a GAAP basis by 20 points and on a non-GAAP by 30 points. So we did improve, but we lost some momentum in the fourth quarter, there’s no doubt, and we were actually down in the quarter comparison as you pointed out. But in part due, on a GAAP basis, to the adjustment, to the acquisition of inventory sold at a higher basis because of the acquisition accounting, about $800,000. That’s almost a percent as part of that difference when you look at it on a GAAP basis we reported. And part of this, what Fred was explaining, we did build the extra inventory, some of which was for year-end shutdown, some of which was for the move coming up. But we all admit there was a little more than we should have [indiscernible] above that.

Fred Lampropoulos

Analyst

Yes. And instead of keep doing it, we pulled back production. I think from an attrition point of view, from the production, there was probably 30 or so employees that we did not replace mostly through attrition. What's been interesting about, though, Larry, and we’re going to have to move on so that we can give the other guys some time to ask some questions, but I was going to say that what was interesting about that, it was about 3 or 4 weeks from this, and then as we came back after the first of the year, it always takes a little bit of while just to kind of get tuned back up, a week or so, 10 days as you’re starting to get everything moving again, and then all of a sudden it kind of hits us again. So we’re running today about the same level of injection molding and some of those things that were last year, so we’re very busy as we speak today. Now I will tell you that we’re meeting monthly as a management team and this is something that Greg, for you and Ron and Kent, we need to meet with the February numbers more down and look at the inventories and so we -- so that this doesn’t get away from us in 2 or 3 months. We’re meeting monthly to go through at the end of the month and look at our inventory levels to make sure they’re in line with our production and our sales.

Kent Stanger

Analyst

And let’s put that in January, we did see a drop in the inventory, which it hasn’t occurred for a few months, so the trend is correcting, I’d say.

Operator

Operator

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

Jayson Bedford

Analyst

Just a few questions. What is your gross margin expectation for 2013?

Kent Stanger

Analyst

On a GAAP basis we’re expecting 43% to 44% and you have to know that included in that is the Medical Device Tax of nearly 1%. There’s also another 0.2% for the year of the adjusted inventories due to the Malvern acquisition accounting, Thomas medical accounting for that, so there’s another two-tenths there. And then we have additional intangible amortizations of another 1.2%. So, on a GAAP basis you’re seeing another adjustment of 3% or so. On a non-GAAP basis we’re talking 45.5% to 46.5%, so we think we’ll get around 46%, you won't see as much of a struggle there, but by the way the tax are still in that. It’s not something we can adjust. Well, I think we can separate it out so people can see it and make an adjustment for it, but it's really not an -- it's an ongoing expense that we have to leave in there, I believe.

Jayson Bedford

Analyst

So, your non-GAAP gross margin was a little north of 47% in ‘12?

Kent Stanger

Analyst

Correct.

Jayson Bedford

Analyst

You're adding let's call it $35 million of Thomas medical revenue at 55% gross margin. You have a higher base business. Your gross margin is coming down on an apples-to-apples basis. Why is that?

Kent Stanger

Analyst

There is the tax effect I already mentioned. Again, it's still in there, and there’s also the additional overheads and some inefficiencies as we make these moves and reconfigure our production and absorb those overheads in the second half of the year or second two-thirds of the year. So those are new buildings, both in Ireland and here in the U.S., the larger one, aren’t going to have an impact this year on what those margin percentages are.

Jayson Bedford

Analyst

And when you shut down the facility in Salt Lake as the other one comes up. What's the cost associated with that, that will fall off, I'm guessing sometime in ‘14?

Kent Stanger

Analyst

Yes, it's going to be phased down. It won't have a lot of impact this year, it will be a few $100,000, a $1 million possibly in total because of -- and we are going to have to wait and see on that. We’re trying to be a little conservative because it will phase out before we close it down and then we’ll have the extra people that will take -- have to move in as we get our new automated inventory replenishment system operating and tested. So, we don’t have a hard number for you, but it won't be a lot of improvement this year, you’ll see it more in ’14 when it's all gone for the whole year.

Fred Lampropoulos

Analyst

Jayson, as you know this is a facility that we lease. It's in segments of about 5000 square feet that’s where we started our business 25 years ago, and we will essentially move one cell at a time, make sure that we don’t miss anything in terms of our customer levels and then by the end of the -- we think it will be about a six month period of time is what we’re guesstimating on our plan, and then we will vacate that facility. We’ll have no ongoing costs of that or any, I guess, it will be essentially month-to-month. Then what we will see as we bring this up and running, I estimate that we will have an efficiency level of probably close to 100 individuals give or take through these automated systems, these transportation, handling, drivers, secretaries and so on and so forth.

Jayson Bedford

Analyst

Okay, last one for me, and then I'll let someone jump in. I think you mentioned $3 million to $4 million in new overhead cost. I'm assuming a lot of that is permanent, yet you obviously gain leverage as you ramp manufacturing. Is that a fair way of looking at it or are there some temporary costs associated with that $3 million to $4 million?

Fred Lampropoulos

Analyst

These are going to be essentially permanent. They’re going to be depreciation and operational costs and even those things as we’re looking at in terms of the services, we’re looking at carefully to make sure that we don’t load it up and have those things. But they’re going to be those permanent costs. What you see as we’re able to bring these products and move them here, we will start to absorb that up, again as I mentioned over a 6-month period. The other thing that it will do for us is that we have, for instance, there is an avoidance process here. On the R&D side, some of it will be -- we will be vacating some of our existing facilities here in South Jordon and making some space for some manufacturing plant - pilot plant from our R&D. As an example, when we start talking about the basixTOUCH, those are produced in that pilot plant and there are certain capacity limitations there right now, once this thing starts moving it will come into this facility and we’re talking about 10s of 1000s of units that have to be produced. They could not be produced in our existing R&D facility. So some of this stuff had we not done this and advanced our capacity here, we would have had to go out and get another facility someplace, because we simply just did not have the capacity to produce these products. So, but it’s a process and hopefully if we’re successful in terms of these new products and there is a number of things here. Then we will absorb it faster, I think as Kent pointed out, we try to be conservative and not surprise anybody in terms of what these expenses are, but the building is there and the facilities as I pointed out we should see over time a reduction for the same dollar volume about 100 individuals that are absorbed or hiring -- that are furloughed or hiring avoided. So that’s a lot of folks.

Operator

Operator

Next question is from the line of Jim Sidoti with Sidoti & Company.

James Sidoti

Analyst

Let’s start with international sales. What were they as a percentage of your total sales in 2012? And what do you think they will be in ’13?

Kent Stanger

Analyst

For the year and the quarter they were 37% international and therefore 63% domestic.

Fred Lampropoulos

Analyst

So that was 2012 and as I mentioned that a good percentage of our products that are -- our growth last year came from there and I would assume at this particular point that we will still see about 75%, I would say maybe 60% be a more conservative number of growth coming from international markets and 40% in the domestic market.

Kent Stanger

Analyst

I know its little over 16% with the growth rate international and it was 6% domestic including OEM and stuff. We do have a weight again when we did the acquisition, the majority of the sales are from the Thomas product lines are domestic. So you’re laying on this layer of domestic and then the growth as you said, Fred, will start going back international, but it does throw that percentages in there for a while.

Fred Lampropoulos

Analyst

Yes, the hotspots, Jim, are Russia, Gulf States and the Baltics, Eastern Europe are kind of on fire [indiscernible] , and Asia. I mean that’s very, very, very busy.

James Sidoti

Analyst

So how does that affect your tax rate for ’13? Will it go up a little because you will have a temporary swing back to the domestic?

Kent Stanger

Analyst

We are still projecting the growth being as lot of the international or a lot of the new -- some of the new products in the Irish tax advantages keeping our tax rates, we were estimating in the 29% range again. So 28%, 29%. So it’s not going to -- we don’t think it's going to hurt us much. The other good thing is we got the R&D tax credit coming back for 2 years, they said it -- actually, wow.

Fred Lampropoulos

Analyst

So one other thing on that point. In the first quarter, we will have a one-time benefit of about $0.5 million, Greg? About $500,000 will come in the first quarter and that’s because of the way the bill was signed in January, but essentially - it was essentially retroactive, so we will bring that on the -- pronouncement is to bring that as a one-time entry. And then the ongoing R&D tax credit, Jim, for the - for 2013 will be in our effective tax rate.

James Sidoti

Analyst

Okay. All right. And then Fred, it seems like you’re going to take a step backwards in operating margins for ’13 because of some of this consolidation you’re doing and hopefully improvements to your efficiency. Do you have any long-term target of where you think the operating margin should be? It sounds like this year it's going to be, on a GAAP basis, somewhere around 7% or 8%. Where do you think it will be 3 or 4 years from now?

Fred Lampropoulos

Analyst

It’s a really good question, Jim, and a tough question. As you know, these things are all functions of our ability to manage all the operating lines and the one -- there are a number of issues in our favor. If you take a look at all of these new products that are coming out, they all have margins that are well north of our corporate average. They’re all 60% type of products and as that mix comes in as though -- and these are big opportunities. These are big opportunities, they’re not a couple of million dollars, these are 10s of millions of dollars. So we will start to see the effect of those as these things move forward. I still believe that we can operate in the 12% to 15% profit range which is almost double from where we are or better than where we are today. But In order to do that, we’ve got to be very serious about making sure that we restrain and one of the things we’re trying to teach ourselves and teach our staff and they’re all sitting here is that the amount of increases they get every year, I think even our budgeting process, we look at it quite differently than we have in the past is that we -- they may get, if we have for instance 8% or 9% growth, they get essentially 5% in terms of their operating budgets, so that we can get some leverage. So, it's going to take a lot of work and its going to take 2 to 3 years, but I think with the Malvern products, I think with the global issues the new pipeline, some of these things like the radio sheets that have 2x or 3x, our standard sheets. And I will give you another one is our Laureate. Our Laureate hydrophilic guide wire that’s back online. We have a lot of capacity there and as we absorb those overheads over there, those things are going to get leveraged out quite a bit. So, I would say that 15% would be my goal and that’s a long ways from here Jim. But it’s like saying $0.72, that’s a long ways from here, but you have to have those goals and those are the things we have to step forward to and that’s what I’m committing myself to and the staff to.

James Sidoti

Analyst

All right. Then the last question is on cash flow. You know in the past you’ve used cash from operations primarily for acquisitions. At this point are you going to start to pay down some of that debt?

Fred Lampropoulos

Analyst

We are going to pay down as much as we can. There are some cash flow benefits that we get out of the 338. It came out of the Malvern acquisition. We still have some NOLs that flow out of the BioSphere. We have a lot of the tax issues relative to the facilities and things like that where there is accelerated depreciation and those sorts of things. We are out of the acquisition business, clearly. We’ve got business to attend too, we’ve got debt to pay down and so we will take every available -- and by the way we’re also hedged a good portion, so that the interest rate risk that we -- that would be present particularly in light of today maybe some numbers and some things that we could see, although who knows what the Feds going to do. We are hedged in that way, so we have our risk somewhat mitigated down on that side. So the whole program here is increase sales, profitable sales. Pulling back on things that are discretionary and some that aren’t, where we just simply have to make some cuts. I don’t like the word cut, in fact when Kent uses it I get mad at him. But I think I said it more times today than he has. And we’re going to cut, we’re going to slice, we’re going to lean out, we’re going to get into shape. And I’ve got some folks back there saying I don’t believe him and -- but that’s what I’m committed to, so that’s what I’m going to do.

Operator

Operator

[Operator Instructions] The next question is from the line of Ross Taylor with CL King.

Ross Taylor

Analyst

Maybe some cash flow estimates for 2013. Can you give any forecast of what your expectations for depreciation and amortization expense might be in 2013? And if you could break that out between depreciation separately and amortization separately that would help.

Kent Stanger

Analyst

Yes. We are still going to see some completion of the facilities here as well as in Texas. And there is also a pretty heavy list of equipment as we continue to do the product pipeline that Fred outlined. I don’t have the depreciation right handy. I know that the amortization is about...

Fred Lampropoulos

Analyst

17.5%.

Kent Stanger

Analyst

17.5% for depreciation or combined?

Fred Lampropoulos

Analyst

Depreciation.

Kent Stanger

Analyst

Yes, I think amortization is another $14 million.

Fred Lampropoulos

Analyst

Yes.

Ross Taylor

Analyst

Okay.

Fred Lampropoulos

Analyst

Kent, say the numbers again, guys wants to hear them. Depreciation is...?

Kent Stanger

Analyst

17.5%.

Fred Lampropoulos

Analyst

17.5%, I need your military voice. 17.5%.

Kent Stanger

Analyst

17.5% and 14.7% on the amortization.

Fred Lampropoulos

Analyst

On the amortization.

Kent Stanger

Analyst

Of intangibles.

Ross Taylor

Analyst

Okay, all right, that helps. Also related to Thomas Medical, can you explain again why some of those sales were pulled forward into 2012? And your $0.12 accretion estimate, does that factor in the slow revenue expectations for January and February? Or is that for kind of a forward period starting in, say, the June quarter?

Fred Lampropoulos

Analyst

Yes, it does right now. Let me tell you about some of those issues and again some of these were not our issues, but they were contractual issues between Thomas and some of their OEMs. In order for them to get the pricing that they had, they had to fulfill those and many of those customers bought those things so they could buy those things at lower prices. What Merit ended up with was the residual of what didn’t get shipped out at the very end. But that means that there was a whole bunch of inventory that went out to the benefit and sales of GE during the year and then as people work off that inventory, then we will see this thing start to ramp. Now let me just tell -- go ahead Kent.

Kent Stanger

Analyst

I was going to say that, that’s a normal kind of cycle. They showed us their trends in the first quarter. It has always been weaker because of certain reasons this isn’t a new thing for them. But it’s a little more exaggerated this year it appears like.

Fred Lampropoulos

Analyst

Yes. Ross, let me just tell you that Merit’s position is that we have a price for customers and we don’t like to fill that pipeline. Customers’ orders from us, we fill the orders. And so we have a little bit different approach to it than maybe the predecessor. And then I think there is another factor here that as you may very well see lower volume, but you will see higher margins and that is because much -- some of this business is going to do faster than we thought in terms of going from wholesale to retail. And that is as our sales force is out in the field, many of these customers are saying well, you know what? I see you guys all the time, I did this, I’d rather buy this stuff from you, and we get the advantage of going from the wholesale price that we would sell into the retail price and consequently we’re going to see higher margins, higher gross margins on that business.

Ross Taylor

Analyst

Okay. All right, good. And …

Fred Lampropoulos

Analyst

And one other thing we’re doing to, over the next 60 to 90 days, because the process has already started. We will also meritize all this product. It will have Merit’s brand name on it and all be produced by Merit and by the time we get to June, there will be no labeling left of any of the GE products at all. That’s both contractual and we think from a commerce point of view, the right thing to do. So we’re meritizing all the product and moving that through the system and I think that gives us more visibility and better branding for our products anyway.

Ross Taylor

Analyst

Okay and 1 or 2 other questions. I was just trying to think about the medical device tax and the potential for price increases to offset it. But even on some of the more proprietary products, like the BioSphere or say the snare devices, are you not taking any price there to offset the medical device tax?

Fred Lampropoulos

Analyst

You know on those products that you mentioned we make very high gross margins, but we also have a lot of competitors. As an example, let’s go specifically to the snare. If we go on with it, let's say the snare product which is a high gross margin and proprietary product and we’re go in with this new snare, the one snare and tell you all by the way we’ve got this new product, we would like to replace a competitor, I’m sure you’re not going to mind, you want to pay and take this price up a little bit by adding this tax. We just don’t think that’s the right approach. We think we’re receiving a fair profit for this product and as we looked at these things, I will tell you we have competitors and we have other people chosen not to do this and some who have chosen to do this. Again, our position is, Ross, that we want our guys selling, we want them not to be hiding, not to be ducking, not to avoid customers, we will do that here on this side and we will make it up on the volume. We will sell more and our guys will be out there with the clear mind, while others are ducking and weaving and avoiding their customers, we'll be taking their business. That’s how we believe it will shake out and that’s why I personally believe that we have upside on our sales and our earnings opportunity because our guys are kind of loaded for bear. They’re excited to be out there and they don’t have a cloud over their head. Others may have other opinions, that’s the position that we’ve taken the way we’re approaching it.

Ross Taylor

Analyst

Okay. And last question. Some of these cost reductions, can you maybe describe this some -- but kind of review what functions or departments that’s going to be coming out of, is it sales, manufacturing, other areas of operations? Just any detail there will be helpful.

Fred Lampropoulos

Analyst

Yes. Well, you ought to see how everybody look in this room right now. I mean it defies -- yes, the biggest area of discretionary spending that we have is in the sales and marketing area. And it’s not in the area of the actual sales people, because we think that’s our advantage is -- our advantage, but at some of the areas where the discretionary marketing expenses are. As an example, we have 4, 5 major shows and probably 30 minor shows we have the SIR meeting, we have TCT, we have [indiscernible] and we have PCR. These things can cost upwards of $0.5 million each. These are expensive. They’re located in foreign countries. By the time you get people, their time, the cost, boots, all of this and so forth. And I’ve just said, a 40% cut across the board. How will that affect us? We will just have less expense in those areas, we won’t have as much -- now what they may decide to do, instead of going to the big boot, they may decide to cut it down. I will give an example. I think I mentioned this earlier. We have a big trade show coming up in New Orleans. It’s the big interventional radiology meeting and we chose to do that. We were already committed on the booth, Ross, but what we did as we said, that there are a bunch of our technical people like to go, R&D people, clinical people and so on, so forth. We just said we’re not going to send them, we will send the sales and marketing and the business people. We cut it by 25 people. That alone is probably going to save $50,000 to $75,000. And all of that stuff just kind of adds up. Marty you want to add anything to that?

Martin R. Stephens

Analyst

I will just say we also deferred a new booth, which we were going to construct, which is going to save us a little over $100,000 and we also, in a way, with one of the evening symposia that we were going to do to commemorate Merit’s 25th anniversary. And we had a big bash in a way planned. And that’s about $75,000. So just down to SIR show alone, we are well over 200, probably $2.75 million, we cut out that budget in the last 2 weeks.

Fred Lampropoulos

Analyst

I will give you some others. Merit is, I think over the years, Ross, and it’s been very, very generous in our community. And we’ve supported boys and girls clubs, we’ve supported junior achievement, the arts, and we’ve done that because we felt the responsibility to our community. However, we feel more responsibility to our shareholders and our employees. And so we will cut those expenses pretty dramatically. We’ve also been involved politically. I will just share this one with you right now. Not half an hour ago, I got a request for a contribution on a political issue and I’m not going to approve it. So those kinds of things are things that we may have done in the past, but we’re not going to do in the future or if we do, we’re going to cut them to a more -- to a substantially lower level. So those kinds of things -- so I can go across the board. I can go to the sales and marketing area, you can take a look at -- even Greg, this is kind of interesting. Greg was saying, well we did all this growth in the last of couple of years and you haven't added one person. I said okay Greg, but we have to look at this, so how can we go and be better automated, what can we do that helps us to not have to add anybody this year while we grow the business and get some leverage in that particular area? I’m looking around the room, I’m thinking about let's see here. OEM, another guy’s trade shows, travel. I can give you a million things that we can do to help to reduce our expenses. And that’s what we have to do to get these things in line. So there is just things to -- that -- legal. I think legal wants to hire another lawyer, guess what? There isn’t going to be hired another lawyer. Some...

Unknown Executive

Analyst

There are huge cuts we can do in Legal.

Fred Lampropoulos

Analyst

Yes, yes. [indiscernible] saying there are huge cuts we can do in legal. So we can go across the board. R&D, it’s going to be -- we have a lot of projects, but we’re going to have to bring that in alignment. We may have to defer some of those or cut some of the R&D. We currently have 54 R&D projects or more and we just have to say we’re not going to hire more people, perhaps go to the end of the line we will finish these other ones and by the way this is the worldwide -- there's a number in Ireland, there's some in Texas, there's some here, and we will just take a look, but we’re not going to hire additional personnel to do that. So we just have to kind of change our behavior and so all of these things that seem so terrible. Actually I think for those who really listen to what we’re saying today it’s like the best thing that could have ever happened. I don’t want to say we got a wakeup call, it’s more like we got banged on the head so we just can’t operate our business this way. So there is doubters, I understand that. But let me just tell you that, that this is what we’re going to do. And some of it's going to be painful for the people in this room. Dues and subscriptions. How many line items do you want me to go through? I can go through a bunch of issues here, you all are going to be looked at and more importantly each and every department is going to be cut. Probably the biggest one you will see the 2 is you’re going to see the issues in SG&A, mostly in marketing and sales, mostly in marketing and then on the R&D thing to bring that in line with the percentages so that they don’t spend more and we get leverage on those lines. And I’m not letting the manufacturing guys off the hook either. Like I said, they’re kind of the guys that hide under the rocks and all of us sales guys take the deal. I’m going to look at how many drivers we have, I’m going to take a look at how many people that we have that move in materials and the plans that they sold me, they sold me this building under the proviso that they were going to be able to produce product at a lower price, have less employees, that's less healthcare, that’s less this and that’s less that. That’s what they sold. And I’m going to tell you I didn’t get sold a bill of goods because I'm going to hold their feet to the fire. So there you go. You want some more?

Ross Taylor

Analyst

No, I think that’s a good list.

Operator

Operator

Our next question is from the line of Kevin Casey with Casey Capital.

Kevin Casey

Analyst

Is there any way to quantify how much the tax is going to impact you guys? I mean, I like your strategy of being one of the few companies basically eating it, versus all of your competitors are trying to ram down price increases to your customers. But I just want to try to quantify that. Seems like it’s a pretty big earnings hit, probably not a sales hit?

Kent Stanger

Analyst

Kevin, its $4 million to $5 million.

Fred Lampropoulos

Analyst

Its $4 million to $5 million. And by the way it’s very, very complicated. There is a lot more rules. Most companies by the way just in the last couple of days and some of you read this have actually reduced their provisions for taxes and some of that is because ablate that whatever inventory that you had, you don’t have to pay the tax on that. So we are studying that particular issue. There have been pronouncements by some of the big four. They kind of lowered that tax provision and so without sounding flip, maybe some of that stuff that we produced too much of, we would be able to pay less tax on. That being said, it may be less than this and if we turn our inventory 3 times or something like this, it could save us maybe as much as $1 million, $1.5 million [indiscernible] to study and that’s just an observation and something that we’re studying and we will comment in our first quarter.

Operator

Operator

[Operator Instructions] There are no further questions in queue. I would like to turn the call back over for closing remarks.

Fred Lampropoulos

Analyst

Well again, it’s been a long call, an hour and 18 minutes, a lot of details. Again, some in disappointment, I’m sure. Some who probably feel in many ways encouraged, let me just again speak to our resolve. And by the way these are not things we’re talking about today. These are things that we’ve started, these are things that are on their way. We will become a more efficient company. We will become a leaner company. We will be able to have higher margins in our business and higher profits which will lead to higher stock prices. The work is in front of us. We’ve done this before. We will lean this out and we will move the business forward and we look forward to reporting our results to you in the first quarter. We -- again, I’m very grateful to our staff here and I think that I hope that some of you will take a look at these top line numbers that we think are things that we feel comfortable with and then listen to our plans and put a pencil to it. And I know that maybe hearing isn’t believing, but seeing certainly is and so we look forward to reporting to you in the near future. Well, thank you again and we wish you a very good evening. Broadcasting and signing off from Salt Lake City. Good night.

Operator

Operator

And ladies and gentlemen, that does conclude our conference for today. We like to thank you for your participation and you may now disconnect.