Good day, ladies and gentlemen, and welcome to the Merit Medical Third Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions]. And as a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Fred Lampropoulos, Chairman and CEO. Sir, you may begin.

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos. We are broadcasting from Salt Lake City, and we'd like to thank you for joining us today. Before we get started, I'd like Brian Lloyd, our Chief Legal Officer, to read our safe harbor provision. Brian?

Thank you, Fred. During our discussion today, reference may be made to projections, anticipated events, or other information which is not purely historical. Please be aware that statements made in this call which are not purely historical may be considered forward-looking statements. We caution you that all forward-looking statements involve risks, unanticipated events, and uncertainties that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks are discussed in our annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission, available on our website. Any forward-looking statements made on this call are made only as of today's date. And except as required by law or regulation, we do not assume any obligation to update any such statements, whether as a result of new information, future events or otherwise. Please refer to the section of our presentation entitled Disclosure Regarding Forward-Looking Statements for important information regarding such statements. Our financial statements are prepared in accordance with accounting principles which are generally accepted in the United States. However, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period over period comparisons of such operations. The tables included in our release and discussed on this call set forth supplemental financial data and corresponding reconciliations to GAAP financial statements. Please refer to the sections of our presentation entitled Non-GAAP Financial Measures and Notes to Non-GAAP Financial Measures for important information regarding non-GAAP financial measures discussed on this call. Readers should consider non-GAAP measures in addition to, not as a substitute for financial reporting measures prepared in accordance with GAAP. These non-GAAP financial measures include some items that affect net income. Finally, these calculations may not be comparable with similarly titled measures of other companies.

Brian, thank you very much. And again, ladies and gentlemen, welcome. We're delighted to have and for you taking your valuable time. Well, here we go. It's summertime. The third quarter, as you always know and as we generally try to talk about, is summertime. People take vacations. Procedures are down. That being said, despite the fact that we had weather and issues that really had a broad effect, and generally across the board both in terms of disruption of our facilities, our employees and so on and so forth, I think all in all we did pretty well. What I want to talk to you about today is a few factors in regards to our sales and then I want to talk about 3 bolt-on acquisitions that generally you're hearing about for the first time. So in sales, I think there were a couple of things to consider. The acceleration of our inflation device business, one of our legacy products, continues to improve. And you can look at that through the numbers in our presentation. On our standalone devices, we see the very same things, as well with our embolic devices. All in all, for a summer quarter with the disruptions that we saw, I think we are pleased. Let me go through for a moment and share with you a little bit on some of these acquisitions, and then I'll ask Bernard to weigh in on a couple of these. First of all, I'd like to talk to you about Laurane Medical. Laurane Medical is a small company based in the United States but with manufacturing in Europe that's in the bone biopsy business. And very interestingly, this product is one that came to us from a physician who called me one day and said, Fred, this is…

Thank you, Fred. And so first we'll go through the numbers for the quarter. And in line with our 3 year objective of sales growth, gross margin improvement, and earnings growth, we're pleased to announce our Q3 results, which continue to deliver on consistent growth in revenue, which grew by 13.6% on a constant currency basis to $178.3 million for the quarter, and by 14.2% to $179.3 million on a reported basis. Organic growth for the quarter was 4.5% on a constant currency basis and 5.1% on a reported basis. And we continue to see sales growth across all our product portfolios and across all regions. Gross margin on a non-GAAP basis was 48.1%, up from 46.8% in Q3 of 2016. Margin improvement has been accomplished by continuing to deliver on our objectives of changes in product mix, an improvement in efficiency, cost management, and increased utilization of our facilities. And on earnings, the earnings improvement continues on non-GAAP. For the quarter, we achieved earnings of $0.32 per share versus $0.26 in Q3 of 2016. On a GAAP basis, we are actually reporting a $0.07 loss for Q3. And as Fred already mentioned, that primarily is down to an in-process R&D charge which we took on a GAAP basis. And that related to the acquisition of IntelliMedical. The effect of that on our statement of in-process R&D for the quarter was $0.23 on EPS. And for the year, we're seeing that $0.25 EPS charge for in-process R&D, and the vast majority of that relates to IntelliMedical. On the other side of that, we have the effect of the bargain purchase that we reported earlier on this year. We had some true-up to do in the third quarter on that, and that was about a $0.02 effect, a negative effect after tax, on a GAAP basis. And then on the year, we're reporting a bargain purchase gain of $10.8 million, which effectively means $0.22 earnings on a GAAP basis. So you can see these transactions neutralized each other throughout the course of the year. And so based on that, our GAAP earning guidance, we're updating that to it'll be between -- the range will be between $0.55 to $0.61. And again, the primary reason for that is this in-process R&D charge. And we maintain our guidance on revenues, gross margin, and on non-GAAP earnings.

Yes, I think that's really important. Again, now to emphasize that, is that we maintain our guidance. And we will start to see our business accelerate as we get into our stronger quarters now, which is our fourth and our first quarter and second quarter of the year. So we're already starting to see in the numbers that the business is -- everybody's kind of back from vacation. It's back to work, kids are back to school, and procedures are starting to increase. So I'd like you, Bernard, if you would, to maybe just discuss for a moment the discipline of the relationship between the expenses and the growth and the increase in expenses and the relation. Would you just discuss that, please?

Yes, you can see across all facets of our business, from an operational point of view and down into OpEx and R&D, that we continue to maintain very strong cost discipline and revenues continue to grow faster than our OpEx expenses. And we're on track with the guidance that we had given for those numbers. And that's been very important, that we've been able to maintain that over the course of this year. Gross margin continues to expand also at a faster pace than revenue growth. And again, that's in line with our overall objectives.

Thank you very much. Let me switch for a moment and talk about Hurricane Harvey just for a minute. I don't want to linger on this, but our facility that we built in Houston several years ago sustained no damage. We did have a lot of damage to a number of our employees' homes. We lost about 3.5, 4 days of production but everything's back at full strength. And it had a minor amount of cost to it. I think the biggest cost was that of the psychological cost. And of course, anytime you have employees that are disrupted it's always bothersome to all of us. If we look at Maria sitting over now and coming up to Puerto Rico, not much effect on our business. However, there are a lot of medical device companies, as you're all well aware, in Maria -- or, excuse me, in Puerto Rico. And one of the advantages I want to point out, because I think -- I am not going to go into a lot of detail, but I think there's an opportunity that may be presenting itself. And that is, as many of you know, Merit has its own self-contained wafer fab. We make our own pressure sensors here. We buy pressure sensors in our Singapore facility from an outside vendor. That outside vendor is located in Puerto Rico. Fortunately for Merit, we have the capacity and I think, very candidly, the wisdom to have looked at these issues long ago. Our capacity in our sensor business is coming up. We don't see any disruption that will come from our business in Singapore simply because we will be able to provide the sensors necessary to meet that need. So what we essentially have is a sensor that we make that drops in…

No, I think that's it.

Okay. All right. Well then, ladies and gentlemen, we're going to turn the time back over to our administrator and we'll start taking your questions.

[Operator Instructions]. Our first question comes from the line of Bruce Nudell with SunTrust Robinson. Your line is now open.

Good afternoon. Thanks for taking the question. So Fred, it looks like, if I heard correctly, that the 4 businesses you purchased in the quarter had about a $25 million annual run rate in sales. And I was just wondering -- first of all, I think there was $14 million of non-core revenue in the quarter. How much of that was due to these businesses? And also, what is the annualized potential of these businesses 2 or 3 years out if the run rate's $25 million today?

Yes. Bruce, thank you for the question. That number is incorrect. The run rate is about $14 million. And the numbers that you're looking at might be that they were purchased in -- for instance, the Australian business was reported in Aussie dollars, and so I think that's confusing.

Okay.

But let me go through them, each one of them, and tell you where the opportunity is. Let me start with Laurane Medical. Laurane Medical, as we mentioned, is a -- was a very small company based in Connecticut with manufacturing in France. One of the challenges these guys have is they were essentially at full capacity. And they had 1 salesperson in the United States and they had 1 in England and 1 in France, so they essentially were this little teeny company. What we're in the process of doing with Laurane is we are moving the manufacturing from France in this little industrial park, very small, 2,500 square feet or something like that. And that is all being moved and scaled in our Irish plant. And we expect that that will all be completed by sometime in the early -- or about the first quarter. And so we're meeting customers' orders. We're not taking any more orders. We have not launched the product, but we will in the first quarter in January at our national sales meeting. And again, what this is is at our same call point. This has a product that's 75% gross margin. And I think when we release our 60 or so salespeople in the U.S. and all of Europe, this is going to be an exciting product. We've actually on our slides -- in our slide deck on our website, if you'll go there you can actually see the product. And I think you'll understand why this worked so nicely for Merit. You can see some of the product. So that's Laurane. Let me go to Osseon. Osseon, again, is a small kyphoplasty company. But because of their scale and a couple of million dollars or so in revenues, just simply don't have…

All right. Thanks, Fred. And how much did they contribute in the quarter?

Very little. And we just closed -- you know what? Bernard, I'm going to have you answer that one. Why don't you pick that one up? Because the biggest one was, of course, ITL, and that was like the last week of the quarter or something like that. So why don't you pick that one up, Bernard?

ITL had no effect in the third quarter. We didn't see any revenues from that business. And for the other 2 businesses combined, you're probably looking at $400,000 to $500,000 max in the quarter.

Okay, great.

So not really a material effect on our numbers.

And in terms of the quarter, the organic, the underlying core growth rate, I think it was 4.5% and year-to-date it's 8.6%. Is there any -- given the number of SKUs that your business has and the difficulty in kind of tracking it all and modeling it really effectively, is there any cause for concern in the sub 5% core growth rate in the quarter? Is some of it hurricane? How would you kind of assuage concerns saying or speaking to the 8% core growth target that you laid out in the last call?

Yes, I'll pick that up. So I think, Bruce, it was one of those things. It's the summer quarter. We see it. We always actually caution and warn about it as we go into it. I think there were those disruptions. It look a lot of management time. In the meantime, we were also working on a number of these deals. I don't want to make excuses, but I will tell you that as we've watched the third quarter -- or, excuse me, fourth quarter emerge, we're back already at least in terms of our business doing what we would expect it to do with those numbers. Let me give an example. You can also look at it, and you'll see that our endoscopy business was off, very soft in the third quarter. We are already talking about, for instance, this month having a record month, an all-time record month for that business. So I think it has bounced very nicely, and we will meet or exceed the numbers that we have developed and that we have presented in terms of our balance of this year and our 3 year plan. So I understand the concern. I would do everything I can to alleviate that because I just -- it was just summer, and then you threw a few storms in there and this and that. But I think we are -- I don't want to use the word bounce, but maybe for lack of a better word, the business is accelerating very nicely. And I'm sitting around the table here with my Chief Operating Officer and others in the business, and we feel that it's already behind us. But we'll be back to visit you next year, same time, same station, with some of the same issues. It's just summertime, and that's really all we can attribute it to.

So just to be clear, Fred, summertime usually has the lowest core growth of the -- growth rate, annualized growth rate of the year.

That's correct. And the reason, Bruce, is that -- because of our mix of products globally. You'll see Germany shuts down. France shuts down almost for a whole month and sometimes a month and a half. You'll see this. And American doctors go on vacation as well. It's just the slowest time of the year. It has been traditionally for the 30 years we've been in business.

Thanks so much, Fred.

All right. Thanks, Bruce.

Thank you. And our next question comes from the line of Jim Sidoti with Sidoti & Company. Your line is now open.

Good afternoon. Can you hear me?

We can hear you fine, Jim. How are you?

Great, great. At least they got my first name right. A question on IntelliMedical. I just wanted to verify there's no revenue at this point from that business, right?

There is not.

Okay. So can you just quickly go over what's the approval process like for that? And is -- the Laurane product and the Osseon product, are those already approved in the U.S.?

Yes, let me to go to the Intelli system. You are correct. There is no revenue. The product will be developed in our R&D capabilities in Ireland, which as all of you know is where we build all of our guide wires. The reason that we liked this, we think robotics, we think steerability, we think those things are the wave of the future. We already see it in a number of our other products, our HeartSpan product and the SwiftNINJA. These are things that physicians like. They save time. They save exposure. It'll be developed. It will not be on the market for the next 2 years. And Jim, I have to say on that product whenever you have to take an in-process research and development expense, I don't like to do that. But I think as we looked at this technology and as I -- and I'll take full responsibility for it. I felt that this was something that we had to have. The developers really didn't have the resources to bring the full product line to market. It will be 2 or 3 years. It will go through a standard 510(k) process, a normal -- it doesn't require studies and that sort of thing in the U.S. Let me go to the Laurane Medical. They were selling $2 million. They're in every major cancer center on the East Coast. So if you start in Boston and you head down to Miami, but once you get done with that -- and France, a little bit of business in England, that's about it. They just -- again, a very small business generating about $2 million of revenue at around 70% to 75% gross margin. We think that once we have -- and we couldn't meet the demand. Interestingly enough, we have not released this product to our sales force. We're simply meeting existing customer demand. And then what we'll do is we're bringing a broad capacity out of our Irish plant. This is Ron Frost and his team. And that -- we should be up -- we were just talking to them in the last day or two. We should be up in the first quarter and then we will release this to our sales force in January. Again, a high margin product. From my point of view, over the next 2 to 3 years it should have at least $20 million worth of opportunity at those kinds of margins. So it can be a big opportunity for Merit, again, in a product that physicians absolutely love. This is a physician-driven acquisition because of the product and its performance level. So that's on the Laurane Medical. Anything else, Jim?

And the Osseon, I assume that that's approved in the U.S. as well.

It is. It's approved in the U.S. and in Europe as well. So the approvals are all there except for IntelliMedical. Everything else has its existing approvals in place.

Okay. And can you just -- you went over what the revenue was. I don't think you mentioned what you paid for the businesses.

I didn't. I'll give it to you. For Osseon, we paid $6.8 million; for Laurane Medical $16 million, now that's a big number but there's big potential there; for ITL we paid $11 million U.S.; and for IntelliMedical we paid $12 million. So that's what the costs were for these opportunities.

So about $45 million, $46 million in total.

No, I've got -- let's see, I've got 22, 32, about what, $44 million? Yes, I think you're right. So 6, 8 and 6, that's 12 and 11, 23. No, that's about $35 million, about $35 million.

Okay. All right. And I assume you just extended the line of credit.

Yes, we just paid for it out of existing facilities.

Okay. All right. And is there any way -- I'm sure there was some procedures delayed during the quarter in Houston and in Florida. Any way to quantify what that impact was?

Well, I don't want to make excuses and blame it on the weather. Listen, we lost 4 days of production. That was in -- and some delay of getting product up from the facility up to Salt Lake City. But they were really kind of minor deals. I think we lost $400,000 or $500,000 in applications of overhead that were part of that. But the good news is that the plant was fine. It was a huge disruption not just for salespeople but for managers and the entire company. But listen, it's something we've had to deal with. We've had to deal with Ike blowing our roof off before. We've had things that have happened before, Jim, and it's gone. And really, I think a fair statement is to say it had a minimal effect on the business. It had a tremendous effect on probably 8 or 10 of our employees who will never be able to move back into their homes again in the Houston area. And we put together a relief fund. We did all that we could, and we've helped -- all of our employees globally helped our employees either with funds -- I think we raised close to $100,000 to help our employees there. So everything's fine there, except for some of those folks it's pretty tough sledding.

Okay. All right. Well, that's it for me. Thank you.

All right, Jim. Thank you.

Thank you. And our next question comes from the line of Matthew O'Brien with Piper Jaffray. Your line is now open.

Good afternoon. Thanks for taking the questions. And I'm really sorry to keep harping on this because I know the employee side is much more important to you. I think you're talking about, on the weather side, the facility was shut down for a few days. But most investors are really trying to get their mind around the revenue side as far as what kind of impact that could have had, just given that the organic number was a little bit lower than I think some people were expecting. So is there any way just to frame it up? Was it a couple million bucks? Was it $6 million, just anything along those lines on the top line that you could point to specifically?

It's a really hard question. Like I said, Matt, we had some difficulty getting product that was manufactured up to Salt Lake City that could have been shipped. Maybe the more important issue was it's not just the salespeople and hospitals, but it takes a lot of people. Florida and Texas are probably the 2 largest areas. I think totally we have about, I don't know, 20 salespeople in that area. And that's a lot of people to have not just when the storm hits, but on the frontend of it. So again, I don't have a number of saying, well, woulda, coulda, shoulda. I just don't. We know that it had an effect in production. We know that it had an effect in orders. But I think there are other things. I think it was just really the summer selling. And again, that's why that we -- every year we always say as we go into that third quarter, here comes summer. Now, here's the important part. Because -- I'm trying to figure out how I'd frame this in saying that it's -- we're going to meet our numbers. As Bernard said, meet or exceed our numbers. They're going to come back. And we can look through the rearview mirror, and I know that's what you have to do. But anyway, it's just -- I think we were a couple of million dollars lighter than maybe we would have seen otherwise in the quarter. And at the end of the quarter, we also had about $1 million back order that we couldn't ship. So I don't know, $1 million or $2 million or so. That's kind of a SWAG, but that's about the best way. Maybe the more important issue is just the disruption of people who couldn't be out selling, who couldn't close deals, who couldn't ship, things like that. But again, I don't want -- it's not an excuse. It's just -- I don't want to do that, so maybe it sounds like I am.

All right. Okay.

I'm not trying to.

I think, Fred, you made the point earlier that, yes, there was some softness in the quarter, and so obviously that's reflected in the numbers. But I think the important thing for us is what -- the early indicators that we've seen in the first part of Q4, and the numbers that we're seeing coming through and the feedback we're getting from our sales team. That's given us a level of confidence to be able to say that the softness in the third quarter was temporary for us. And what we have as we move into this fourth quarter, we're seeing a lot of positivity there. So it doesn't really overly concern us. It's not where we wanted to be, but we see a lot of positives as we move forward. And we're seeing that strength coming through based on the indicators that we have. And I think every year for 30 years -- I'm sorry, Matt. But every year for 30 years, as we go into the third quarter we always guide down because of the weather. We've always done that. So this isn't like we're making it up. It's something that we've always done.

Okay. And just to be clear, and I'll get off this in a second here, but just the softness that you saw in the quarter you're saying was in addition to the hurricane related impact that you saw, but you've seen a recovery in that specific softness that you saw outside of the weather here in Q4.

Yes.

Yes.

Okay.

Just on some other issues here to show you I think some internal strength in the business, if we take a look at the quarter with our inflation devices, so this is interesting. We picked up an account. That's up 9.1%. And so there were areas of our business that continued to be strong. Some of that had to do with the fact that we just picked up a contract with a major healthcare provider about 5 or 6 months ago. And we'll see -- in the fourth quarter or moving to next year you'll start to see inflation devices move to double digits. So this is for a legacy product that will be growing. And we're not talking about small dollars either. We're talking about inflation devices somewhere around -- I know about $100 million or so. So it's a big business that's growing. It's one of highest margin products. So we saw the strength in that in the quarter. Most of that had to do with the fact that we've replaced another player on a national account, and that's for 3 years. And we would expect that that would continue to ramp up as we go through the year. And if I could, one other point I wanted to make about the transducers. So we believe, and I think there's an opportunity that may present itself probably in December. I think, Ron, you think it's December.

Yes, or January or February.

Yes, late this year or early next year. So the fact that we've produced our own transducers may not sound like a very big deal, but let me explain to it. Those transducers are used in every single procedure we sell our products into in cardiology. And those transducers go into kits that contain a number of Merit products. Well, we're fine because we have capacity. We have a couple of competitors out there that are going to be relying on this other vendor, this third party vendor. If you can't provide a transducer in your kit or in your offering to your hospitals, if that should present itself, and we think it's going to, that opens up an opportunity that we think is substantial. And by substantial I mean in comparison to Cook. It would be larger than the Cook opportunity. So it's just something that we talked about in my previous comments. But it means that we'll be essentially the only company because we're the only ones that can produce that product internally. And we could have a huge advantage. And the reason we know it's a problem is because we buy from that vendor and we've started to see some inability of them to meet our demand and to meet their deliveries to us. Fortunately for us, we have that capacity and that capability. It's going to become an issue over the next 4 -- 3 or 4, 5 months.

Very helpful. So just a little more clarity on that opportunity as well. And that's over and above anything we talked about in terms of our guidance.

Very helpful. Just real quick, one for maybe Bernard. As far as the -- and you talked about next year and '19, really the margin improvement coming from the gross margin side of things. But the SG&A performance and leverage in the quarter was quite good. Should we not expect to see a similar type performance from that metric going forward? Should we see a bounce back up, or is this an area that you think you could draw a little bit more leverage from maybe in '18 and '19? Thanks.

There is always going to be opportunity there. And look, we're obviously going to -- we're sticking with the guidance that we've given for '18 and '19. It's preliminary guidance, and we know that potentially we may have some spend in that area in '18 and '19 given the markets that we're moving into. And we want to be able to make sure that we can support the revenue growth and continue to support the gross margin improvement. But I think the big takeaway that you can take from the third quarter as well is that we were -- we managed our expenses very, very well within the quarter and, given the way revenue turned out, still managed to improve gross margin. So I think there's a level of control and discipline in the business to be able to adapt quickly and to be flexible depending on what's going to happen. But for '18 and '19, we're going to maintain the guidance that we have. But again, there's always opportunity.

Yes. If I could just add in there, because we need to move on here in a second, but I think that really is an important thing in that note. And that is we did I think exceed the Wall Street expectations I think by a couple of pennies a share, and that was in this environment. I think it really speaks to what everybody has been concerned about all these years, and that was our ability to have that discipline. And I think we have demonstrated that we in fact have that in place. So I hope that'll be considered.

Thank you. And our next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is now open.

Hey, good afternoon guys. Can you hear me okay?

Yes, we can, Larry. How are you?

Good, thank you. Let me start with PAE, Fred. Any color on the rollout there and any metrics you can share with us?

Yes, Larry. We have had now I think our second class. We've added 3 or 4 classes now, training classes, that will roll into the first quarter. So I think when we're all said and done, we already have on the line about 9 or 10 that we'll have done by the first quarter. The reception continues to be enthusiastic. We're continuing to see the SwiftNINJA continue to grow and contribute. And I think it's meeting our expectations, maybe exceeding. I know that the SwiftNINJA is doing -- I don't want to say better than we had hoped because we had high hopes for it, but it's doing really, really well. So I think other than that I will say, and I want to be careful how I say this, but I've talked to now 3 men that have had this procedure done. And I think one of them said that they went home and took some ibuprofen. It's been about -- almost 2 months now, and the last time I talked to this individual it was a dramatic improvement in his lifestyle. And it's somebody that I know. It's somebody we all know. And you guys know this individual as well. I won't give names out because it'd be inappropriate, but I'm just telling you that I think it's going all the things we had hoped it would do. And as these people get trained and then -- remember it's not just coming to a class. We then have to go and proctor and have other physicians proctor them during 4 or 5 cases to get them going, and then I think they're on their own after that. So I think it's going to plan.

Fred, are you willing to say how much revenue this could contribute in 2018, even a range?

Larry, I would be just throwing a number off the top of my head. We have a number. We've not published that number. I will say that I think by the time we get done at the end of this year, having just launched the SwiftNINJA, that it's going to be in the range of $4 million or $5 million just for that catheter. But I think the more important issue is all of the things that go with this. It is the vascular access. It's a tray. It's a guide wire, the True Form, which is a new guide wire that Merit just introduced. So I would be guessing at the number, but I tell what I will do is that we will put together -- and actually, we've been going through our planning and getting everything worked out for next year. The next time you ask me the question, I will in fact have a number for you. We have a number in -- but it's so many different products I'll want to be able to quantify that a little bit better. So I'm not going to give you a number today, but I will just say that the business is moving along. There's a lot of excitement. And the biggest challenge for us is trying to figure out how to get all these people trained. The demand for these courses -- which by the way are taught by physicians, these experts coming in and teaching them. And it's been really overwhelming I guess is -- we've never seen anything like this before in any of our businesses, where there's the demand to come in like this. 10 classes in about 5 months is a lot of training and a lot of opportunity for physicians and for Merit.

Thanks. And I had two more; one product related, one guidance related. So on the product side, we saw a deceleration in CRM, a pretty significant one. And we saw a deceleration in the catheter growth. I know you talked about the weather and the summer seasonality. But can you talk about the outlook, particularly for CRM and catheter growth and why the slowdown particularly in CRM growth in the third quarter? And I had one follow up.

Yes. I'm going to go to the CRM and just say that Merit has just launched a new HeartSpan steerable. There is that key word again, steerable catheter, and that that catheter is a catheter that sells for about $1,000. Let me just say that based on our initial response to that catheter, and this is really looking forward, not looking backwards, we just increased our forecast for next year by 600%. The response to this catheter has been overwhelming. It's a $1,000 catheter that's used in EP procedures. Other than the seasonality, Larry, I really don't have any other comment. I'm not going to try to make excuses other than to say we still have high expectations for that business going forward.

And the catheter growth of 5%, is that what we should expect now that we've kind of anniversaried the Cook benefit, or could that improve as well?

Yes, I think it'll improve. We have at least one new catheter coming out. It's a uterine artery catheter that is coming out we think in the next 90 days or less. And we expect that catheter, which has been used -- not used, but has been demonstrated to physicians. We have high expectations of this catheter, which, again, is used in uterine fibroids, which is a business that, as you know, draws a lot of products out of Merit, including our Embosphere and our guide wires and vascular access products. So again, I understand there are questions in each of these groups, and I appreciate those questions. Again, I think it'll be a really -- a much more interesting call for the fourth quarter. I think it'll take all this stuff away and then we'll start there. We are, again, reaffirming our guidance and -- across the board. So that's the best way I can answer it, Larry.

Larry, just on the Cook catheter, the comparable shifts a little bit when you move into Q4. In Q2 and Q3 of '16, we saw unusually high demand for that product related to Cook as we had to replenish shelves at that point, so the sales were a little bit higher. And you'll see it normalize in Q4 and then into Q1 of next year. So that will help with the growth rate there.

Yes, I'm sorry, Larry. And to that point, you have to remember that when that recall took place, everybody was ordering not just from Merit, but anything they could get their hands on. And it was a huge bolus. I think what we have seen is we have seen that go up, we saw it kind of crest, move down. But I also think -- Bernard and I were talking about this just a few days ago, about how that now has stabilized, and we're retaining most of that core business in those catheters. So other than the bolus that we saw that you would expect when you have no product at all, I think we're -- our sales are holding up and we're holding on to that business going forward.

That's helpful. Bernard, just lastly for me, I'm trying to understand what the implied constant currency organic growth is for Q4. So by our math, the implied guidance for Q4 is, on a reported basis, 8% to 11%. I'm assuming about 2% for currency and 1% for the acquisitions' benefit, getting me to about 5% to 8% organic constant currency growth for Q4. Is my math right?

Yes, you're -- on the constant currency I'm looking at closer to 8% and maybe a little bit higher.

So constant currency organic growth implied by the Q4--

Yes.

Guidance is about 8%.

Yes. Yes.

Okay, that's very helpful.

8% to 9%, I would think.

8% to 9%, okay. Super helpful. Thank you. Thanks for taking the questions, guys.

Thanks, Larry.

Thank you. And our next question comes from the line of Jason Mills with Canaccord. Your line is now open.

Great. Hi, Fred, Bernard. Can you hear me okay?

Yes.

We can. We're fine.

Terrific. So Fred, been a lot of discussion here on those intra quarter acquisitions, which are terrific and obviously you're excited about them, and then some discussion on individual products. But we're talking about product lines that are sort of smaller percentages. What I'd like to do if you could, Fred, is take you up to the 20,000 foot level. You touch a lot of procedures in the medical device sphere, specifically in interventional radiology and cardiology. And I'd like your perspective on procedural volume growth sort of notwithstanding the hurricanes, which are transient hopefully, and your share position in it as you're launching new products and developing better solutions for your customer around procedural -- procedures in and of themselves. So from a 20,000 foot view, how do you feel now about the markets in which you're competing just on a general growth perspective and your business needing to gain share within those markets to get to your 8% to 9% growth realm?

Yes. I think that we are comfortable. We've read all the reports that all you guys are reading too. And most of the reports that I've read talk about kind of softness in the third quarter from almost all the -- even the bigger guys. It's just something that's out there. And our song's not any different than the rest of them. I think the markets that we're in, and in terms of things like PAE, in things like electrophysiology, despite the fact that the third quarter was a little light -- another one that was really light, as I mentioned, Jason, was in the area of the Endotek, a smaller part of our business but, again, an area that was very -- was soft. Again, we've -- already see that rebounded where this month, as I mentioned, we'll have a record month. And a record quarter is what we'll have in our Endotek business. So we've gone from something very light. And I think we're still talking about almost 20% in that business for the year. So again, as we look at the whole thing and we look at the interventional radiology procedures, we look at the new cardiology procedures including inflation devices, we take a look at our guide wire business. So let me go to that just a second, because this is one of those little things that gives us a lot of I think optimism for the future. We launched a new products called the Amplatz, the InQwire Amplatz guide wire. And again, this is one of those products where we can't make it fast enough. But what it's done is it's helped to also accelerate the growth of our general guide wire, our diagnostic guide wire business. And that business is up about 20%, and we saw that in the quarter. So in between all of this there are these areas where we either have contracts, where we're launching other products and our sales force is out there, and we're picking up what we call the pull through. So I'm satisfied with where we are. These new products that we're talking about are tactical in a much more strategic view of the business and add things competitively that our competitors don't have. And I think just overall I don't know that you could be in a better place despite the fact that generally what we hear is that procedures and admissions have been down or have been soft. So I hope that answers the question. It's my best view of it from that 20,000 foot level.

That's helpful, Fred. Thanks. A couple follow up for me. You talked about the more recent acquisitions, but could you give us a sense for -- you've now had DFINE for over a year. The HeRO you used to talk about quite a little bit, and I know that that got off to a good start in your hands. Perhaps give us an update on those businesses, which aren't trivial to your standalone device business.

Yes. Thank you for the question. Let's talk about the HeRO. We expect that the HeRO will grow this year about 20%. So when I think all in all, as you're aware we have talked about this in the past, that our gross margins when we bought it were about 55%, and we think they're -- and I'm now closer to 65% to 70%. And we're quite satisfied with the HeRO in our hands. I think we've demonstrated that it was a good acquisition. If we look at DFINE Medical, one of the challenges with DFINE is that we had -- you let go 114 employees. It's like the first time in history we had to do that. We did that transaction, as you know, last summer in July and then a lot of those people were going. And I think we're still convinced that it's a good acquisition, but we have firmed it up, for instance, with the Osseon acquisition, which adds some bookends to it in some areas. And then we have some R&D projects that we have started up that will be rolling out in the first quarter of next year. And these are things that we did a year ago and enhanced that. So I'm satisfied there. If we take a look at the cath business, out of catheter connections we are excited. We continue to see that business -- I think we had talked about that business growing at 50% a year for 5 years, which is a big number. And I think that we're tracking along at that level. We're opening up new accounts. We've gone through the distribution cycle. We have at least a new product that's coming out in that area that we have developed that we believe will be out in…

That's helpful, Fred. Yes. No, that's helpful. Two more questions and I'll get out of the way here; first geographically. Could you give us a sense for how the business, in your view, is performing geographically; you've had some good success in China, what the opportunity is there? I'll just ask the second one now. Gross margins, another 130 bps year-over-year. You've done a little bit better year-over-year in the last couple of quarters. Perhaps the revenue slowness from the hurricanes, etc., impacted that. Maybe you could comment on that. But as you're looking forward, there doesn't seem to me to be any greater driver to your operating income than gross margin expansion on a year-over-year basis. Perhaps you could give us a 20,000 foot view of your gross profit outlook for the next couple of years as well. Just update us on that, Fred. Thanks.

Sure. Well, I think, Jason, that you're right. Geographically China continues to be the star, but it's not just China. It's all of Southeast Asia. So if you look into Indonesia, Malaysia, Vietnam, Thailand, all of those areas have been performing very, very well for us, and have been really very consistent in that growth. So I think we're happy there. I think, as you know, kind of the slower point has been in the U.S. But I think there's been probably the most disruption in the U.S., and that's because many of these acquisitions haven't affected places like China, haven't affected Europe. They've been -- really started in the U.S. And I think that there's some reorganization of the sales force and training that has to go on. And these products just don't come out and just jump off the deck. You have to train salespeople. You have to introduce yourself and compete out there. So I think one of the areas that you will see is I think you'll start to see some acceleration in the U.S. And I think that's something that we're looking forward to. So I think you'll see more exciting things coming out of the U.S. because, in a number of products including the HeartSpan, including the True Form and some of these other products that we've talked about here, those are going to be floating out, including the inflation devices and, as I mentioned in I think our previous call, the Tau. So the Tau is a new inflation device system that we expect to come out in the first quarter, and you'll be hearing a lot about that. I think that's going to accelerate not only what we're seeing because of the acquisition -- or not the acquisition but because of the…

Thank you, Fred.

Thanks, Jason.

Thank you. And our next question comes from the line of Charles Haff with Craig-Hallum. Your line is now open.

Hi guys. Thanks for taking my questions. A lot of them have been asked and answered. I wanted to talk about ITL for a minute. That's a pretty interesting acquisition to me. You haven't been in Australia in a big way. You're expanding your manufacturing facilities down there. And I guess it could be just the pack business today, but it can be something else down the road. And I understand from our research that it's one of the only couple of clean rooms in the continent of Australia, so just wondered what ITL does for you in the future in terms of Australian presence and what it says about your Southeast Asia plans going forward.

It's a good question. And Charles, thank you. One of the things that ITL has is, as you mentioned, it's a clean room operation. One of the things in our assessment of the business, Charles, was that if we just took the products that we've purchased and applied our pricing to the very same products that they're buying -- in other words, they're buying things that we buy. If we just took the existing pricing on that and used our pricing, it saves $600,000 to $800,000 a year day one, boom, just like that. The other thing that it does, it's one of only 2 sterilizers, from what I've been told, in the country. So for the first time, Merit has its own sterilizer in the facility certified. And the ability that it gives us to take these enormous amounts of products and to be able to customize, put things together -- and the turnaround time. I think that's the critical issue. It takes 30 days to get a boat there. And if not, everybody else is flying a product that's very expensive as you fly it in to the facility. So it gives us the ability to turn products around quickly for our customers. It gives us a sterilization capability which we will use for Southeast Asia and also for New Zealand. It's also a unique capability that really nobody else has in that area. So it gives us an opportunity to bring our products in and our pricing in to bring more volume into the facility. And then one last comment. We already have a facility in Australia. And we've actually been in Australia for a very long time, but we've been there with a distributor. That distributor was bought out a couple of years ago. It's when we decided to go direct. And so with the facilities, with the cost improvements we see, the ability to be able to take our products and deliver them to customers, we think there's a big opportunity. Listen, I'm not all that excited about getting into a pack business. But from a tactical point of view and strategically for the region, it was a great opportunity for us to be able to do something that others can't do. So I'll give you one last example. So we make a product called the TRAM. It is a manifold that has a built in transducer. And we sell it and make nice profits on it, but it goes to other packers. What we're going to do is consolidate those things and take that business direct. That gives us a price advantage, a packaging advantage, and gives us a delivery advantage. And I think as we look at it -- and again, if you hadn't of asked the question, I wouldn't go through all these things. But we think it's a big opportunity for us to really, I'll use the word, kind of take control of what's going on down in Australia.

Yes.

It gives us huge opportunity.

Yes, it seems very strategic. And the 40 or so employees that you had at that facility, are you going to expand that dramatically, or how do you kind of see that ramping?

Well, a couple other points. There are 64 employees that come with the deal. And we didn't keep all the -- because it was a split out at the end of this. But another thing that we're doing is that we have an existing facility. It's not manufacturing, but an office and a warehouse, and we're going to take and combine that into this facility. So we're going to shave off the cost of having 2 facilities by simply consolidating. And if you'll look again at the slide deck, you'll see -- and this is a Merit quality facility. And you'll see that it gives us substantial capacity. As we start this out, we're probably just about -- I'm going to say 50%, Ron? Is that a fair number?

A little less.

A little less than 50% capacity. So there's a lot of growth opportunity there, consolidating our other facility, customer service, management, and warehousing into this facility and then taking those products and services -- and again, when you have a sterilizer that you control, it's yours. And this is a 16 pallet, or is it 8?

12.

12, 12 pallet sterilizer. We can turn around a lot of product. You're going to hear a lot about this in the future.

Okay, great. And then a couple of other cats and dogs here. On Osseon, you said that it was doing about $2 million of revenues when you bought it. And did I hear you correctly saying that you've had $2 million of revenues from Osseon just in the first few weeks since you've owned it?

No, no, no. But if you'd like to say that, it's okay but it's not true. But -- no, no. We have -- it's about $2 million -- what I did say is that one of the products that they have is a steerable kyphoplasty balloon.

Yes.

To the best of my knowledge, nobody else -- they have -- other people have balloons. Nobody has a steerable balloon. And that's the one that -- we didn't expect it. It just came out just right -- as soon as our sales guys started showing it, it just cleaned the shelves out. And I think what we've done now is we've really ramped that up now because there's a lot of demand for that steerable. In the DFINE business, they had a steerable osteotome, but this is a steerable balloon. And as you know, 85% of the market uses a balloon. The fact that you can steer it now gives us an opportunity with our cement and all of our products. And we're getting $1,000 for that balloon. It's probably, what, a 75%, 80% gross margin product, Ron? Do you know?

I don't know.

Okay. But it exceeds our corporate margins substantially. So that's the story, yes.

Great. And on the kit business, I wondered if you could characterize how pricing was on the kit business. We've been hearing some others in the industry that have been raising prices there. Did you see that as well in the quarter?

We did not. We have not raised our prices. But as I've mentioned, I don't know if you caught this on the front end, but with our transducer capabilities we think there is going to be an opportunity that's going to present itself here late this year or early next year, and that we're going to have an opportunity to take advantage of some people that may not be able to deliver those kits and packs for lack of having transducers. So we think there's something out there. We're already seeing signs of that present itself, and we think that that hole is going to open up here late this year or early next year.

Okay, great. Thanks for taking my questions.

Thanks, Charlie.

Thank you. And our next question comes from the line of Mike Petusky of Barrington Research. Your line is now open.

Okay. Hey guys, thanks for taking all the time. I'll try to be as quick as I can. I just want to make sure I heard right. How much did you guys pay for Laurane?

We paid $16 million for Laurane, which would be about 8 times their existing revenues. So it's pretty rich on that side, but we have some options on some additional technology in the deal. And we think we can ramp that pretty quickly. The biggest problem Laurane had is they can't meet demand. There is -- they cannot meet demand. They could never launch it on a national basis, and they had 3 salespeople globally. As we look at the product, look at the prices, look at the margins -- and as I mentioned earlier, Mike, these products that they have are sold in the largest cancer centers in the country up and down the East Coast. But once you go to the Appalachian Mountains, there's nothing, either there or nothing in Europe other than a little bit in France and Great Britain. But they just simply have not had the resources, but what they do have is patented technology, good products. What they don't have is manufacturing capacity and sales and marketing. And those are the things that we have substantially.

Got you. Okay, great. And then as you kind of think through these 4 deals, at what point kind of in aggregate do these become accretive to your numbers? Is it kind of, when you look in aggregate, maybe '19, '20?

Well, I think in terms of Osseon, those revenues will come in, and after the deprecation all of our models show all of these being contributors. But for instance, with -- we'll go to Laurane. We're not going to be able to launch that product until the first quarter of next year, because we have to move it. We got to move it to a lower cost, lower tax environment in Ireland. And we'll move it there. We're building inventory, and our goal is to have that up and launched globally in the first quarter. Osseon is kind of the same situation. All of their manufacturing is done by -- outsourced to other manufacturers. And we'll -- that should become accretive because of the margins because we are in fact selling that product right now. ITL, again, we've owned it for 2 weeks or so, 2 or 3 weeks. And so that once should start to contribute immediately. And IntelliMedical, on the other hand, is really a development project. And I think I addressed that by saying we'll be developing that. But it's something that's very important and is being developed, and will be developed under the current expense structure that we have in place. So we are not going to increase our R&D spending in terms of numbers. We'll use those same disciplined numbers of around 7.5%, and it will be absorbed into that number. So we will keep those numbers where we said. This will just become one of the priorities for development but within the existing cost structure.

Right. Okay. So yes, I think you guys have laid out pretty well what you think the potential is with all these. But just in terms of '18 in aggregate, these deals aren't accretive to earnings, correct?

No, I would -- Bernie, why don't you go ahead and hit that one?

Yes. The margins on Osseon and Laurane are higher than our corporate average gross margins right now. But for them to have an impact -- I think that's what you're getting to, Mike, have an impact on the overall margin profile of the company, we're going to have to wait until we see improvement in the revenue numbers so they can actually drive some change. And so, yes, you're going to the backend of '18, probably into 2019 before you see a real accretive impact from them.

Okay. And obviously that would not only go for Laurane and Osseon, but it would certainly go for IntelliMedical--

Yes.

Obviously as well.

Yes.

What about ITL as a standalone? Is that accretive to numbers in '18 or no?

It's not really going to have an effect on our overall numbers in '18 from a gross margin profile because just the level of revenues aren't that high. And so when you blend it in, it doesn't have a dramatic effect. I think that the big plus with the other two technologies is when we start to grow revenues through the backend of '18 and '19 when we can scale up production to meet the market demand. Then you'll start to see some impact.

Got you, okay. All right, great. And then just, Bernard, I may have missed this earlier. Forgive me if I did. What was the cash flow from ops and CapEx for the quarter?

So the CapEx for the quarter was $11.7 million. And then operating cash flow was $8.8 million for the quarter.

Got it, okay. Guys, again, thanks so much for all the time tonight; really appreciate it.

Thanks, Mike.

Thank you. And our next question comes from the line of Jayson Bedford with Raymond James. Your line is now open.

Hey guys. Thanks for taking the questions and good evening. Apologize if some of these are -- have been asked. I got on the call a little late here. But in aggregate, these deals that were announced, what's the expected contribution in 2018 revenue?

If we look at them right now, we'll just give you what their run rates, where they were. It's about $2 million of Osseon; Laurane Medical about $2 million; ITL for about $11 million. So you take those, that's going to be about what, $15 million run rate?

Yes.

For those three? IntelliMedical, as we mentioned, is a development -- it's an R&D project that is in development.

Okay, perfect. And then you piqued my interest on a couple things, Fred. The double digit growth in inflation devices next year, is that just solely due to this new account, this new national account win, or does it assume some contribution and push from Tau?

Yes, I'm really addressing that just really based on this account. And I think the -- so this is this national account. But we've also seen that in our basixTOUCH, which was a device that we introduced about what, 2 years ago, that's accelerating as well. The upside potential above that is going to really come from the Tau. Again, I saw the first production runs -- not production, but qualification runs of that product today. And I'm going to be over at TCT, Jayson, and maybe I can -- I'll have one in my pocket to show to you.

Okay. Okay. So the national account is what gets you to double digit growth. And then--

That's correct. And then the Tau is kind of the frosting, if you will.

Okay. And then lastly, just on the transducers, I think I understand the opportunity. But is that going to happen or is it something you hope to happen? I'm just trying to gauge the probability of it actually happening.

You mean in terms of the transducers?

Yes, and the opportunity there.

Yes, it's even more complicated, but let me just give you just a little bit more color. 60% of all the transducers that are produced for critical care cath labs are produced in Puerto Rico. One of those -- one of the producers there produces for our facilities at Merit Singapore. We're having some difficulties getting all the product that we need. However, we have manufacturing capability through our own wafer fab. As we look at this, we see signs that there is going to be difficulty. It not only includes the transducers, but many of the inks that are used to build substrates, which are the circuits that are ceramic where you have the resistors, are also produced in Puerto Rico. The intelligence that we have is that we're having difficulties receiving those as well. Fortunately for Merit, we produce our substrates. Again, these are the -- this is what your put the sensor on. It's kind of the -- and again, I'll show you one of these when I come to TCT, but we have ours produced in Japan. And so we have the sensors, we have the substrates, and it's at least my belief that that there is going to be a hole. So again, we're seeing signs of it personally. We'll have to see how it all shakes out. But for those who don't have a transducer and who can't deliver a completed kit, because it's an essential element it creates a real problem. And that will be an opportunity for Merit. So that's the best way I can handicap it. But again, we're not making this stuff up. We're not wishing and hoping. We're telling you the things that we're seeing. And are they going to be able to recover over time? The answer is yes, but there's going to be a hole. And they're going to have to get through that hole, and Merit has an opportunity I think to go in. And it will help us in terms of being able to meet a need very much like, as I mentioned, the Cook opportunity.

Okay. Thanks, Fred.

Okay. Thanks, Jayson.

Thank you. And our next question comes from the line of Mark McGrath with Kenmare. Your line is now open.

Oh, thank you. My questions are answered.

Okay. Thanks, Mark. Let's move on then. I think, Bruce, you're the last one in queue, so let's wrap it up with your question.

It looks like Mr. Nudell has left the queue.

Okay. All right, ladies and gentlemen. Well, listen, thank you very much. We appreciate the time you've taken. I hope we were able to answer the questions. Bernard and I will be around for the next hour or so to answer questions and any follow ups to clarify issues for you. Again, as I mentioned, a little slower than we wanted, but a lot of other positive things and opportunities for Merit. Again, our commitment to hit everything that we said we would do, that discipline that you've asked for years, I think even in these situations we've demonstrated our ability to deliver those numbers and to deliver gross margins. So we'll look forward to reporting in the future, and we'll keep you up to date as things develop. We'll go ahead and sign off now, wishing you a very good evening. Good night.

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