Earnings Call Transcript - MMSI Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Merit Medical Systems’ First Quarter 2020 Earnings Call. At this time, all participant lines are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference may be recorded. I’d now like to hand the conference over to your host today, Mr. Fred Lampropoulos, Chairman and Chief Executive Officer. Please go ahead, sir.

Fred Lampropoulos, CEO

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos. I’m joined with Raul Parra as well as our General Counsel, Brian Lloyd, and Anne-Marie Wright, our Vice President of Corporate Communications. A little unusual today, because normally we have many people in this room. The four of us are all that you have today, but our staff is listening in. Again, thank you for joining us. I’d like to start by asking Brian Lloyd to offer our safe harbor provision. Brian?

Brian Lloyd, General Counsel

Thank you, Fred. I’d like to remind everyone that this presentation contains forward-looking statements that receive safe harbor protection under the federal securities laws. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties. The realization of any of these risks or uncertainties, including the unpredictable effect of the COVID-19 coronavirus outbreak, which is negatively affecting public health, financial markets, and global economic activity can cause actual results to differ materially from those currently anticipated. In addition, any forward-looking statements represent our views only as of today, April 23, 2020, and should not be relied upon as representing our views as of any other date. We specifically disclaim any obligation to update such statements. Please refer to the section entitled Disclosure Regarding Forward-Looking Statements in today’s presentation for important information regarding such statements. Please also refer to our most recent filings with the SEC for a detailed discussion of the factors that could cause actual results to differ from these forward-looking statements. This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP measures to the most directly comparable U.S. GAAP measures are included in today’s release and presentation furnished to the SEC under Form 8-K. Both today’s preliminary earnings release and presentation are available on our company’s website.

Fred Lampropoulos, CEO

Brian, thank you very much. Ladies and gentlemen, once again, thank you for joining us. Reminder that a slide deck is available on our website and we would ask you to refer to that if you have interest. We have a lot of financial metrics today. So I’m going to be relatively brief and discuss some of the highlights that I think you have most likely already read. But that being said, let me start out by saying that we had a positive year-over-year result in terms of revenues. And I find that extraordinarily rewarding in light of the fact that we started seeing some early evidence of slowdown in China, starting in late January, almost falling to zero by the end of February and March. Subsequent to that, we have seen a rebound of China’s revenues as we have moved into the month of April. We also saw about the last two weeks of the quarter, a slowdown in the U.S. And I think these are things that you’ve been hearing from everybody. I think we were hit early with China. However, as we move now into the second quarter, that will be a positive, at least coming back to an area that we felt we would accomplish in our forecast. I think another advantage that we have, if there is to be one, is that we’ve had our heads down and arms and legs moving for several months. We’ve been in the process of reducing expenses, planning on the movement of 40 new products, and consolidation of facilities. We’ve been looking at revenue and we’ve been looking at inputs, outputs. We’ve been balancing the expenses along with those revenues and we’ve taken a number of steps that would include a reduction in management pay, the use of furloughs whilst still keeping intact our sales force, because we believe that’s an important asset in our company. We have reduced some headcount. And those are the things that are not pleasant to do. Discretionary spending and CapEx and those things, Raul will talk about in just a few minutes. We’ve also condensed our R&D efforts, and also balanced that in terms of some short-term furloughs, effectively reducing the amount of time worked by 25%. That being said, it’s important to understand that our R&D pipeline, even though it’s condensed, is very full. And at some point when hospitals are receiving salespeople and things return to whatever the new sense of normalcy is, we believe that these products are going to have a major play in safety and efficiency for physicians and healthcare workers. We’ve also been using this time to do a lot of training. As you all know, Merit has a very broad product line. And in many ways that has been very helpful with these events. We had pluses and those have been things like peritoneal dialysis, it would be our hemodynamic monitoring, and other products that have been helpful in the treating of COVID-19 patients. But we’ve also had those products that would be so-called elective. And really, I have to tell you that I never thought that treatment of angina and other types of things would be considered elective, but that’s how it worked. Just yesterday, in meeting with the Governor of the State of Utah, he announced that they were opening up elective procedures starting the first week of May. We’re hearing that across the board, from early May through the month of May. We’re hearing it from healthcare professionals, from administrators and from clinicians. We’ve been using this time to train. I think you would all agree and you’re using these tools now that there are a lot of things, and we’ve learnt how to conduct business. I would have to say that in terms of the use of Teams, which is on our Microsoft platform, that’s been very, very effective in terms of communication and training. And we trained literally hundreds. I said in my press release 100. But it’s more than that in terms of the use of doing procedures for peritoneal dialysis catheters, many of those being done laparoscopically and now being done percutaneously and moving over to the IR docs. That’s been very helpful. So this time has been helpful for us to consolidate our training and our understanding. Now, I also want to briefly address the supply chain. Over the last several weeks, I’ve had many calls from people who have asked, how are you doing with supply chain? Do you see any disruptions? The answer is it’s been minimal. One of the things that you’re all aware of is that Merit is very much vertically integrated. That includes our molding, extrusion, our sensors, many of the things that we do ourselves. Recently, I saw a report that indicated of the 24,000 purchased parts, and incidentally, that will be instructions for use, it would be boxing, packaging, springs, coils, all kinds of things. We had only 14 that were in jeopardy and they were not meaningful to the business. I think just that in and of itself is an extraordinary accomplishment. We also have been able to look at new things. Just yesterday, we talked about our new nasopharyngeal swabs. It was something that there was a press release out on, and you can read that. Let me just give you a little more color. We were approached by the Governor of the State of Utah, who talked about the shortages that they had and they needed somebody to step up. I presented it to our R&D staff. And within a day or two, they have developed a plan that would allow us to get into production within two or three weeks. And as I speak to you today, we are in production. We believe right now, we can produce approximately 10,000 a day. We have an order from the state of Utah, as you have read for 400,000. But this very day, I’ve received requests and people talking about another couple of million. Well, it’s going to take us quite a bit of time, and although we believe that at some point this will turn down and will not always be at these levels. This is going to be something that’s going to be around for a long time, at least a reasonable period of time. And Merit believes that we will be able to ramp up over the next few months to 50,000 units a day. And we think that this is a great opportunity, and also, I think equally important, fills the gap, while our employees and where we’ve seen a slowdown in other areas it fills the gap. And although I never want to say there are advantages to these horrible things that are going on on this planet right now, one of the things that is going to be a benefit of the company is the reduction of the pressure that we’ve seen for labor. There will be plenty of people looking for work and Merit will have plenty of jobs for them down the road. And so there are some things that help the business. At the same time, it’s important for us to help our fellow human beings, and I think we’re doing that. Anyway, I think that pretty well covers the things that I wanted to say, and I’m going to turn the time over now to Raul. Raul, you’ve got a lot of things to talk about, very interesting things, and so I’ll let you pick it up from here.

Raul Parra, CFO

Great. Thank you, Fred. I’ll start on the revenue front, and then work my way down the P&L. So revenue for the first quarter was approximately $244 million as reported and approximately a 2.2% increase over the comparable period of 2019 and approximately 3% on an organic constant currency basis. Key puts and takes on these results include: FX headwinds of approximately $2.8 million for the quarter; peripheral intervention sales were up approximately $2.4 million or 2.9% from the corresponding period, driven by our access and drainage products, which saw increased demand offset partially by decreased sales of angiography and vertebral compression fracture products. Custom Procedural Solutions sales were up approximately $1.8 million or 3.8% from the corresponding period, driven by our trays and critical care products many of which saw increased demand due to COVID-19 offset partially by decreased kit sales. OEM sales were up approximately $800,000 or 3% from the corresponding period, driven by our Custom Procedural Solutions and cardiac intervention products offset partially by decreased sensor sales. Endoscopy sales were favorably affected by sales of our AEROmini and EndoMAXX fully covered esophageal stents. COVID-19 impact for the first quarter was approximately $16 million, which is within our previously given guidance. The negative impact was partially offset by $6 million in EMEA and U.S. regions that were tracking ahead of plan in Q1 until COVID impacted sales in the last two weeks of March. The COVID-19 impact was as follows: APAC impact was approximately $9.2 million, with China accounting for $8.4 million, with the remaining balance coming from EMEA at $1.3 million and U.S. regions at $5 million. Our revenue contributions by sale division based on an organic constant currency basis are as follows: EMEA up 15%; U.S. direct up 3%; OEM up 3%; Endoscopy up 2%; and worldwide dealers down by 7%. We did rollout our new revenue reporting as disclosed in the press release and Form 8-K this was filed on April 3 with historical numbers for those that missed it. Operating margin. Our Q1 operating margin on a non-GAAP basis was 12.7% in the quarter or 70 basis point improvement over the comparable period. As we discussed during our Q4 call over the last 6 or 9 months, we’ve been working on getting leaner and saw $1.7 million reduction in operating expenses from Q1 over the comparable period. This makes two consecutive quarters of operating expense reductions. The operating expense reductions were offset by decreased gross margin of 70 basis points, which was due to lower sales in China, which is a higher gross margin market for us. Overall, we are pleased with our operating margin improvement plan is going, and it was nice to be able to deliver continued cost savings. Those cost savings, as Fred mentioned, came from principally from our San Jose office consolidation, a leaner R&D process, reduced headcount, and lower discretionary expenses, including travel and tradeshows. In addition, we continue to evaluate our headcount and footprint to increase our operational efficiencies. We will continue to take that approach as we continue to deliver on our operational efficiency programs in 2020. The tax rate on a non-GAAP basis was 23.8% for the quarter compared to 20.9% for the comparable period. The difference in the tax rate was primarily driven by decreased stock option exercise as compared to the comparable period. On the earnings front, non-GAAP earnings were $0.38 for the quarter as compared to $0.37 for the comparable period. Again, we are happy with our operating margin improvement plan is going, and we believe our results on the bottom line show evidence that our cost control efforts are materializing even with the impact of COVID-19 on our revenue. To wrap up, let me hit a few balance sheet and cash flow items, and some more color on COVID-19 for everyone. Debt balance was $446 million and our cash balance was $50.1 million putting us at a 2.92 net leverage ratio on an adjusted basis. Available borrowing capacity on a net basis was approximately $147 million. Our cost of debt is approximately 2.8%. As we discussed, we have given guidance on free cash flow for 2020 and is an area of targeted improvement for us. We are happy to report that we have free cash flow for Q1 of approximately $15 million. Working capital was $297 million and we do not expect to pay any material contingent payments for the remainder of the year. CapEx for the quarter came in at $14 million. D&A of approximately $23 million, and stock compensation expense of $3 million. A little more color on COVID-19. The decline in procedure volumes observed in the first quarter is expected to continue to create a headwind in 2020, but we are also seeing some tailwinds. Visibility for procedures for the remainder of the year is limited, and we are not able to predict when or how quickly procedure volumes will recover, nor do we expect the tailwinds to outpace the headwinds. Accordingly, as we mentioned in our press release, we are withdrawing our annual financial guidance for 2020. Our decision to withdraw our guidance is centered on the unpredictability resulting from the volume of data points and wide variations within these data points, feeding into our models. We feel our broad product portfolio is particularly well suited to weather the storm, but we also cannot be precise on the pace of the recovery. Models from some of our markets have more advanced states in the process, giving us some optimism as we try to estimate the timing and impact of the pandemic on our operations and financial results. However, we can’t predict how long it will take to see the rebound, but we know this is a very fluid situation and with some areas of our business down, we also have some areas with higher than normal sales. Having said that, it is our current belief, based on the information we have reviewed, that sales will see a gradual U-shaped return to normal through the remainder of the year. However, with the fluctuation in models and underlying assumptions, we are not in a position to make any concrete forecast. As we continue to manage through the impact of COVID-19 and as we start to see some markets stabilize, our models will continue to improve. In the meantime, we have taken the following steps: continued execution on previously disclosed operational efficiencies. Please reference the slide deck for an update on previously disclosed plans, implementing salary reductions for executive officers and most non-production employees, furloughs for certain sales and R&D employees, controlling discretionary spend across the organization including travel, tradeshows, and events, deferring and/or controlling capital and project spend, adjusting manufacturing capacity based on demand, while ensuring sufficient inventory levels to support current demand. And finally, we also believe that given the challenges we experience in Q2 and Q3 of 2019, we have a very robust plan on leaning out the business and have been focused on delivering on those plans. We believe this has given us a head start and an advantage in the current situation. Fred?

Fred Lampropoulos, CEO

Well, Raul, that’s a lot. And I think the point is this is that – it’s not over for us. We continue to work on becoming more efficient and challenging product lines, locations, and strategies, so we continue to look at that. But I do believe that with our pipeline and with the interest that we’ve created, and incidentally, we’ve done this and provided, as you pointed out, a number of areas that were in high demand. But we’ve done it at fair pricing. We’ve not gouged anybody. We have run the business as we always have, and that’s with integrity. And I think our customers really appreciate that. So when the time comes for those procedures and things get back to whatever sense that they will, Merit is probably uniquely positioned to take advantage and have the business grow at a higher rate. So I’m really looking forward to the challenge. And I really want to thank the staff for the endless hours. I was joking with someone the other day saying, I need us to get back to normal so I can get some rest. We start usually at 5 in the morning, we’ll go to 9 o'clock at night, everybody has been working hard, everybody has been planning and thinking and executing. And it’s really rewarding to see a team and staff. I think on the free cash flow to go from a centrally neutral or flat in the fourth quarter, which was an improvement to $15 million is a big swing. And I think that takes attention and I think we’ve executed on a number of areas that you will see in this. And yet, we understand that there is this abyss, if you will, that we’ll see. That being said, I have absolute confidence in the future of the company, the products, some of the really exciting things like the WRAPSODY. There are a lot of things that we have that patients need and that physicians need to treat those patients and make their lives easier. So we want to again thank you for your time. Raul and I will be here for the next several hours to clarify things. And we appreciate your support and interest. And with that being said, we’ll go ahead and turn the time over to our administrator, and we’ll start taking questions. Thank you very much for joining us.

Operator, Operator

Our first question comes from Larry Biegelsen with Wells Fargo. Your line is now open.

Shagun Singh, Analyst

Thank you for taking the question. This is Shagun in for Larry. Fred, Raul, could you share with us what was the growth that you saw in January and February? Was it in line with guidance, and what was the exit growth rate in March? And I’m also curious to get your thoughts on what kind of growth you’re seeing in April and how that has informed your expectation for the remainder of Q2 and the rest of the year? If you could provide any color by segment or geography, it will be very helpful. Thank you.

Raul Parra, CFO

Yeah, so, as far as our guidance, we were essentially at or slightly above through February on the higher end of our guidance, so the 5% to 7% on core growth. We were doing really well. And as a matter of fact, as we looked out for a forecast for March, we felt pretty confident that we’d have a strong revenue number. Obviously, the second week of March, that kind of tails off for our U.S. and EMEA regions.

Fred Lampropoulos, CEO

I think in terms of China, we talked about a little bit. We started seeing signs of weakness in January. I think the good news is as we enter this quarter, we’ve seen it rebound. Initially, we were seeing 75% to 80%. At least through this point, we’re seeing it almost back to normal. But that being said, I was reading more information today about some other things that have popped up in China. So we’re cautiously optimistic about China. The Nordics, if we take a look at the Nordics, they’ve been very, very strong, even through all of this. And then, of course, the biggest concern and our biggest market is the U.S., and that’s why I think we look forward to watching the pace in the release as the procedures come back online. So that’s kind of the best we can answer your question. But thank you very much for that question.

Shagun Singh, Analyst

If I could just follow-up, can you give a directional color on the impact by business segment? Which ones do you expect will be hit more materially and where do you see increased utilization or potential offsets? Any range there would be helpful. Thank you so much.

Fred Lampropoulos, CEO

You’re welcome. I really just talked more about the areas. I think our critical care business that we talk about has been very, very busy in Singapore. I think we have seen segments or products in our peripheral group where there is a lot of demand. Most of those though associated with hospital-wide types of needs as well as our infection control product. So I think all of those areas, collection, drainage, pericardiocentesis. And they kind of go across a number of the product lines, some of them in the cardiac area, some of them in the peripheral; but again, not enough to offset some of the declines in the procedures. And OEM has also been very strong going forward. So that’s the best color I can give you right now. Thank you very much.

Operator, Operator

Our next question comes from Mike Matson with Needham & Company. Your line is now open.

Michael Matson, Analyst

Hi, thanks for taking my questions. I guess, first, I just want to ask about kind of what you were seeing in the last few weeks of the quarter. I know you quantified the impact. I want to make sure I got the numbers right here. But I think you said the COVID impact for the full quarter was $16 million and that there was about $9 million of that in Asia Pacific, just over $1 million in Europe, EMEA, I guess, and then about $5 million in the U.S. Is that right? And then, is it safe to assume that the EMEA and U.S. impacts were pretty late in the quarter, kind of in the last few weeks in particular?

Fred Lampropoulos, CEO

Yeah, I think that’s a fair statement. We started seeing it tail off. Usually in Europe, you have after the first of the year, you have a little bit of a slow start up as well, so it’s a little slower to start, start to gain some momentum and then, of course, we saw the fall offs. So it’s kind of the sequence of events. Raul, you want to add to that?

Raul Parra, CFO

Yeah, it was really in the last two weeks, I’d say, of March. I think on a net basis really the impact was about $10 million. So we had some areas like EMEA, OEM, U.S. direct that were doing really well through February.

Michael Matson, Analyst

Okay. And is there any way – I mean, I guess, just in terms of modeling the second quarter, should we kind of look at those impacts and try to look at the run-rate you were at, at the tail-end of the quarter, and project that into the second quarter? I know you’re not giving guidance. But I guess, I’m just trying to figure out what you’re seeing kind of – what you were seeing from a growth perspective at the very end of the quarter and in the early part of the second quarter, if you can comment on that? I understand that may or may not last through the entire second quarter though.

Fred Lampropoulos, CEO

Yeah, Mike, listen, I think we want to stay on track in terms of what we said. I think what we did see and I think the more important part of this is what we saw at the beginning of the year, prior to this falling off the strength in the business. And then we saw the last couple of weeks. So I think, we don’t want to wander off and I think our statement stands. I’m not trying to be evasive. But like you trying to figure it out, we’re trying not just to figure out, but we’re watching things every day, and watching softness here, strength there. It’s unlike anything any of us have ever seen. I mean, we get to see it on a day-by-day basis. But I think we’re just going to have to stay with our previously – our statements that we made just stay on track, so we don’t cross into FDA issues and things that we shouldn’t be talking about.

Michael Matson, Analyst

Okay. That’s fine. Fair enough. And then, just had one on WRAPSODY, and then I’ll let someone else get on. So just with WRAPSODY, I think you’re expecting a CE mark this year potentially. So can you talk about your confidence in that? And then can you talk about the market opportunity, maybe the size of the potential market, both in the U.S. and in Europe? And then, just the competitive landscape there, are there any competing products like Becton, Dickinson has a stent graft called Covera. I didn’t know if that was a direct competitor or not. Thank you.

Fred Lampropoulos, CEO

Yeah, thanks, Mike. Listen, we believe that the WRAPSODY is the most exciting product that Merit has ever had. It’s taken us 7.5 years. We conducted a first-in-man study in Europe, very successful. We are just weeks away, and when I say weeks, one or two, submitting our application for an IDE with the U.S. government and they work and you have seen the breakthrough designations that we have. In terms of the CE mark, we believe that we have – and we have in fact submitted all the documentation that’s required, answered questions, and we believe that our product will be going to staff within a week and will be going to panel in the next few weeks. So it’s possible that we could have the CE mark sometime in May. Now, as you know everything in Europe, they move some things out with MDR. There are just a lot of unknowns. I think we’re confident in the data and we’re confident in the process. So we think it’s a big deal for the company. And rather than just talking about the initial indications, which are important, I think it’s really talking about the technology and its broad use initially, and the outflow circuits for dialysis patients and the central veins, those are areas in which we have some indications that others do not have. It does compete with Covera. There are some other products, but nothing really quite like this. And I believe the data will show and at the appropriate time that will come forward that it is a product that we believe is superior to anything in the marketplace. And there are a lot of reasons for that. With all that being said, we think that this will come hopefully in the next 30 days or less. Now, one of the other questions that will be very interesting is that the access both in starting up the trial. We’ve been working during this period of time, getting all of the work done of – so that’s one of the things this has allowed us to do. But we have inventory. We are ready to go in Europe. If it’s not in Europe, then we’re ready to swing and we can run both of these simultaneously, going forward in terms of both the European release, which then will also lead to other areas that we will file on in Canada, Australia, and I think we’re already approved in New Zealand. So I think we have done everything that we – again, we’ll just sit and cross our fingers for the next few weeks and see how that shakes out. The much bigger market, of course, is on the peripheral side. And we started talking about iliacs and some of the areas that we’re talking about, those are just great opportunities. The market size, depending on who you talk to – and I’m just talking about on-label use now $100 million, $150 million globally. One of the things we’re trying to do, Mike, is when we run into this, we wanted to go in and get to the market the fastest way we could and develop the technology. Even that took 7 years. So it’s been a long time, we’re looking forward to the business. And depending – and we should hopefully will come out in a very specific layout market strategy. Those that we can release we’ll talk about separately and do a press release and a conference, a press conference in the days shortly following the approvals and we will make those announcements, should they come. Now, if they don’t come from Europe, then we’re ready to start the IDE and then work towards the PMA approval. So we’re on track. We build all that product right here in Salt Lake City and it’s very exciting for the future. The technology, the broad area of the technology is something that we’ll be doing for many, many years to come.

Michael Matson, Analyst

Thank you.

Fred Lampropoulos, CEO

You bet, Mike. Thank you.

Operator, Operator

Our next question comes from Matthew O’Brien with Piper Sandler. Your line is now open.

Matthew O’Brien, Analyst

Thanks for taking my question. Afternoon, everybody. Fred and Raul, can we just start with Utah, specifically? I know it’s a smaller U.S. market, specifically from the state perspective. But you guys there, you had this conversation with the Governor yesterday about opening things back up. I think the moratorium on elective procedures started roughly a month ago. I think it was March 23. So can you talk about what you saw? I mean, was your elective business down 70%, 80%-ish in the first 3 weeks of the quarter? Expect things to maybe stabilize a little bit next month, and then maybe get back to a little bit of growth in June? Is that a fair way to think about how the quarter can kind of play out just in Utah alone?

Fred Lampropoulos, CEO

Yeah, I would say that I would kind of stay on track. I would tell you that – I saw the very same things that many saw on the Johnson & Johnson, some of these other reports. Our business is not seeing those kinds of declines, already we’re close to those. But, Raul, I’m going to let you maybe talk about this, so I can stay out of trouble, but then you can get yourself into trouble.

Raul Parra, CFO

I’ll give you guys some color, because I think I’m going to try and dance around this a little bit, Matt, because obviously we want to make sure that we don’t – the reality is that there are a lot of variables, and I’ll get into those here in a minute. But I think if you look at our OEM business, which is roughly 10% of our business, that seems to be stable. Okay, so you can pull that off the table from whatever you projected for that. I think the Nordics is around a $20 million business for us. That seems to be either stable or just a little bit above what we forecasted. So that’s stable business. China, you guys know is about 11% of our business, that seems to be coming back a little bit, right, but Fred mentioned it. There was news today that maybe things are picking up again. So that’s – and I think the hard part about this is that you’ve got China, which gives us a very good footprint of what to expect. The problem is that the rest of the world is not going to act like China, we don’t think, because, one, the government in China can force certain narratives and certain processes. What you have with the rest of the world is that you’ve got individual countries at different parts of the curve. You’ve got different states here in the U.S. at different parts of the curve. You’ve got countries and states that have different policies. And then, you have the added component of patients and how they’re going to react to either, A, not wanting to go to the hospital or going to the hospital. And so, it’s just – there are just a ton of moving parts, and so it’s hard to kind of give you anything more than that.

Fred Lampropoulos, CEO

And, listen to me, Matt, you’ve had a lot of calls and a lot of people are – everybody is asking the same questions. I made a comment and I believe this, I believe our business will respond faster than others. And the reason I say that is because there is nothing orthopedic part of it, no offense to my orthopedic friends. These are things that have been growth areas. Our peripheral business has been the strongest area. And many of those IR docs have been pulled down into critical care or emergency room care and many of those are coming back on. I was talking to a physician back east, who is going to be back in his lab next Monday. It’s just the pace of working the patients up. And very candidly, it’s like a football team or basketball team that hasn’t played for a couple of months and it’s going to take time. But I think in terms of our product, our mix, our breadth, and our geography that we, in my view, will respond probably at least, again, this is my own opinion, but I believe that we’ll respond faster than most, is just our belief. So I don’t know if that answered your question, but that’s the best I can do.

Matthew O’Brien, Analyst

No, it does. But it also dovetails into another one that I have, which is just in – you might kill me for asking this. But just people are trying to get a sense for what 2021 is going to look like coming out of this. And so, is it fair to say, because of the breadth of your products, because of the geographies and the dispersion there, that 2021 most likely will end better than 2019 – excuse me, 2019 did? Is that a fair way of kind of thinking about it?

Fred Lampropoulos, CEO

I’m just going to stick with my previous statement, Merit will rebound. Again, the other part of this is we have a number of new products that were launched in January that didn’t get launched. And so we have all of that. We have the OEM part of it. We have the critical care. We think it’s going to continue to grow. We think these other procedures will come back. And then, we’ve been continuing to work in our R&D projects and focused on bringing more things to the market. So we’re loaded and we’ve been using the time as we talked about to train. But maybe equally important, one of the other things, and I know we said, peritoneal dialysis. But there is a lot of interest out there from physicians. And the President prior to this have talked about how he wanted to move and have I think 50% of procedures and dialysis by 2025. We’re seeing tremendous interest in training and, very candidly, revenues in these areas. So I think that you’re going to see this company rebound faster, leaner. And I think what we try to do is protect the sales force. One of the questions will be, well, what is the sales force and are they going to have access and you’re going to be able to do these things. I think the things that we’ve learned is, of the training that we can do online – by the way, when we talk about that training, we’re talking about physicians training other physicians online. And we had one today where we had 150 and this was to do pericardiocentesis, which is one of these factors as a complication of COVID-19. So this has taught us a lot, it’s also created a lot of opportunities. There will be a lot of products that come out of this that we’ve already developed. One of them is the swab in the test kits. That’s going to go on for quite some time. That’s not over. And there’s not been much question on that, and that’s fine. But it’s – there are a lot of things that are really Merit can respond to very quickly. So Matt, my expectation is, I can’t specifically say what I’ll do, I’ll just say it’s my belief that it will be faster than most and then we have a full pipeline of products, and I think we’ve used this time very effectively with our sales force, while keeping them intact. But at the same time, reducing the expense and that was through having a furlough. And so we’ve run that effectively, where we’ve only furloughed half of our team for a week, then I won’t go through all the details. But we’ve reduced the cost by about 25%, while using that time to train and to get ready to get back out there as soon as we’re allowed to. So that’s the best way I can answer that.

Matthew O’Brien, Analyst

That’s very helpful. Can I sneak in one more for Raul, real quick?

Raul Parra, CFO

Sure.

Matthew O’Brien, Analyst

Just the free cash flow number in the quarter was great to see, I just, I know, Raul, you did made some comments about the full year projection pre-COVID, I wasn’t sure if I caught what you said during the script as far as what do you think free cash flow will look like this year. Are you still expecting, I think, it was the $40 million to $50 million range this year even with the COVID impact?

Raul Parra, CFO

We’re not going to give that color, Matt. I will say that we’re in – we’ve got some initiatives in place that we talked about. And we were excited about the $15 million and we’ll just leave it at that.

Fred Lampropoulos, CEO

Well, but I will say this, we made improvements from third to fourth quarter. We brought back to neutral. We were able to bring $15 million worth of free cash flow. And I think under normal terms, you will see that the things we put into place will help. Now the question becomes a lot of other parts of the business that’s difficult to predict. But I think the initiative and the momentum that you’re seeing and something that we would expect to continue. I mean, it’s what we get paid on. It’s what we’re looking at, and we’re spending our time. And more importantly, it’s the right thing to the business. So I just think – hope that you’ll just look at the momentum that we’ve created and what we’ve done to turn that, I think, speaks volumes.

Michael Petusky, Analyst

And then, in terms of the $3.9 million impairment, can you just sort of walk us through what that’s all about?

Raul Parra, CFO

Yeah, that was just a – it was a purchase option that we had in place. Obviously, under the current circumstance, we didn’t think it was the right thing to do. And so, obviously, from an accounting perspective, you have a value assigned to that purchase option and we walked away from it.

Matthew O’Brien, Analyst

Okay, all right. And then, just last one for Fred. Fred, I think you alluded your – and nobody has a crystal ball and I know you’re not absolutely projecting this, but your gut tells you that you see sort of a U-shape recovery. And then some commentary that you made during this call seems to indicate that your view would be that maybe the bottom of that U was sort of late second quarter. Is that a fair characterization of your thinking?

Fred Lampropoulos, CEO

Yeah. But I think that is fair, because here we are – as April is done, here we are as we move into May, we’ll start to see procedures come back online. You’ll see – I think, Raul – he is over here grinning at me, so I have to – he calls it the Nike swoosh. I’m going to go ahead and say, it’s kind of like that. It will come back up and then I think we’ll see – interestingly enough, in the summer quarter, that’s the interesting part of this. But historically, it’s always our slowest quarter, people go on vacation and people do this and go to the beaches and everybody checks out. I think it’s going to be a little different this year.

Michael Petusky, Analyst

Right, maybe the folks in France will actually stay in the office in August.

Fred Lampropoulos, CEO

Yeah, they’ve been – yeah, well, now, let’s not pick on France. We have a facility there, so I’ll be getting, yeah. They’re going to say, you got to talk Petusky not saying like that. I’ll just have.

Operator, Operator

I’m showing no further questions in queue at this time. I’d like to turn the call back to Mr. Lampropoulos for closing remarks.

Fred Lampropoulos, CEO

Well, Liz, thank you very much for your help today. And to all of you, thank you for your time. Interesting times. We look forward to – when we have some visibility, we’ll come back and we’ll talk to you and we’ll keep you up to date. Just so that you know that we are deeply engaged every day in this business and that we have a great business and one that we’re very excited about looking forward. So we’ll get over a few bumps that everybody is going to hit and we’ll go from there. Thank you for your attendance. Raul and I will be around for a few hours and we look forward to your calls in clarifications. Bless you all. Good health and good night. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.