Invacare Corporation
Q1 2013 Earnings Call Transcript

Published: 25 Apr 2013

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing-by. Welcome to the Invacare 2013 First Quarter Conference Call. I will begin with the customary Safe Harbor statement that this conference call may include statements regarding anticipated and future developments that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that describe future outcomes or expectations that are usually identified by words such as should, could, plan, intend, expect, continue, forecast, believe and anticipate and include for example any statement made regarding the company's future results. Actual results may differ materially as a result of inherent uncertainties and risks including the risk factors described in the company's Form 10-K and other filings with the Securities and Exchange Commission and in the company's earnings release. The company may not be able to predict and may have little or no control over the factors or events that may influence its financial results. Also of note, on January 18, 2013, the company completed the sale of Invacare Supply Group, its domestic medical supplies business. Accordingly, the financial information for all periods excludes the impact of the discontinued operations except for cash flow information which includes the results and impact of the sale of ISG. For more information see the detailed condensed consolidated financial statements in the earnings release. On today’s call, the management team will focus on the highlights of the quarter as opposed to covering all the detail which you can read in the release that was issued earlier. In particular, I would refer investors to the company’s earnings release to review the definition of free cash flow and some of the adjusted earnings items which will be mentioned during the call. You can find the release at www.invacare.com. Before I turn the call over to Invacare’s President and Chief Executive Officer, Mr. Gerry Blouch, I would remind you that all phones lines have been placed on-mute for the first part of the call. After the management overview, we will open the call to question. This conference is being recorded Thursday, April, 25, 2013. I would like to turn the call over to Mr. Gerry Blouch, President and Chief Executive Officer. Mr. Blouch, you may now begin.

[Gerry Blouch:]

Thank you and good morning. With me on today’s call is Rob Gudbranson, Invacare's Chief Financial Officer. As covered in today’s release the challenges posed by the consent decree have had a dramatic adverse impact on the company. I want to begin by assuring you that we are confident that we are making the right steps to stabilize the business and position the company to quickly return to profitability once we emerge from the injunctive phase of the consent decree. To this end, we continue to cooperate fully with the United States Food and Drug Administration, the FDA to ensure this process proceeds as smoothly as possible. We have made excellent progress so far including the completion of the first and second third party certification reports. The third party expert has filed and certified that the company's equipment and process validation procedures and its design control systems are in compliance with the FDA’s quality system regulations. These reports have been submitted to the FDA and are further reviewed which I expect to have results from and we’ll discuss in greater detail later on the call. While we cannot control all the timing issues in this process, we are committed to deploy the research if necessary to satisfy the terms of the consent decree and we are making an excellent progress. The company is taking actions to aggressively reduce costs during this challenging time; as we address costs, we are executing basic containment strategies as well as exploring opportunities to accelerate structural changes that will better position the company to restore profitability once we emerge from the injunctive phase of the consent decree. That said our first quarter results were significantly impacted by the consent decree which limits the company’s ability to manufacture products at the Taylor Street facilities in Elyria, Ohio. While several divisions are indirectly impacted, the principal impact is in the HMV business and also with the microprocessor controller business in Asia Pacific. As background, under the terms of the consent decree, we are committed to fulfill orders and both the votes prior to the consent decree going into effect; as well, we are obliged to fulfill the orders, but subject to the completion of Verification of Medical Necessity or VMN. As the CD went into effect we shutdown temporarily to provide for a clean cut-off both before and after CD activity and to allow time for the implementation of CD compliance protocols most notably training for our employees and customers under VMN completion. We have been successful in securing documentation that allows us to ship orders in both that existed prior the consent decree and early in the quarter, the flow of VMN and the documents required to ship new orders was inline with our expectations. However, during the quarter, the FDA audited the VMN and provided us feedback regarding the content relating to the appropriate documentation. As we better understood the FDA’s expectations, we have modified our VMN preparation and review process. Unfortunately, this resulted in a significant weakening of both submissions and approvals of VMN as the quarter progressed. This increased rigor with VMN protocols is an addition to already complicated documentation requirements that are placed to our customers and unfortunately this is a bridge too far for many. As of the end of the quarter, the number of the orders fulfilled in the first quarter of 2013 with the appropriate VMN progressively weakened and by quarter end represented only 4.1% of the company’s in the time with the similar period last year. It's been a powerful process for all of us and we have been encouraged that many of our customers had tried to work through this process and continue to work with us and I want to thank our customers for their continued support. Essentially, as a result of the (inaudible) on the company’s higher margin product category custom power wheelchairs and ongoing remediation divestments adjusted earnings per share was negative $0.36 in the quarter compared to a positive $0.15 for the first quarter of 2012. Organic net sales declined by 5.6% compared to the same period last year with strong performance in Europe overshadowed by lower sales in almost all of the segments. Gross margin as a percent of net sales for the first quarter was lower at 2.7 percentage points compared to last year’s quarter; the margin was negatively impacted principally by North American HME sales declines in custom power wheelchairs reinsurance which is a very high margin product. In addition, the negative impact of production volume out of Taylor Street facility caused an unfavorable cost consumption to the facility as well as the microprocessor control equipments in Asia Pacific region. Gross margin was also negatively impacted by sales mix favourably more margin customers and research and development costs. In the quarter, the company’s free cash flow was negative $36 million principally due to the loss from continuing operations. But free cash flow was also impacted by a few one-time costs associated with the sales of the Invacare Supply Group which resulted in a negative impact of approximately $16 million. The next more significant impact on free cash flow is inventory build up due to the weaker than expected sales at the end of the quarter. SG&A expense increased 3.3% to $104 million in the first quarter compared to $100.7 in the first quarter of last year. Foreign currency translation increased SG&A expense by five-tenth of the percentage points. Excluding the impact of foreign currency translation and increased regulatory compliance costs related to quality systems improvement, SG&A expense increased by 1.4% compared to the first quarter last year primarily related to unfavorable foreign currency transactions principally in Europe and greater associate costs also in Europe. With that, I would like to have Rob review additional financial highlights.

[Rob Gudbranson:]

Thanks Gerry. For the quarter ended March 31, 2013, organic net sales for North America HME were down 13.6% compared to last year driven by declines in mobility and seating and lifestyle products partially offset by increased net sales in respiratory products. The sales decline in mobility and seating products was primarily driven by the impact of the consent decree with FDA which Gerry has referenced in detail. Turning to before income taxes for North America HME segment decreased $15.5 million, primarily as a result of buying declines, unfavorable sales mix favoring lower margin customers and lower margin products as well as the unfavorable absorption of fixed costs at Taylor Street manufacturing facility related to the mobility and seating products volume declines. The earnings decline also was impacted by increased associate costs primarily related to quality system improvement. Organic net sales for the Institutional Products Group decreased 2.7% driven primarily by declines in beds, safe patient handling equipment and therapeutic support services. This was partially offset by decreases in interior design projects for long term care facilities and sales of dialysis chairs. Earnings before income taxes decreased by $1.4 million compared to the first quarter of last year due to volume declines, increased research and development and associated costs. The increased research and development expenses included the cost of contracted engineering on negative pressure, wound therapy products. The European business segment carried its strong performance in 2012 into the first quarter of 2013, with organic net sales increasing 7.9%, primarily related to increases in net sales across all three main product categories. Earnings before income taxes increased by $0.2 million compared to last year. The increase in earnings before income taxes was largely attributable to volume increases which were partially offset by an unfavorable sales mix favoring lower margin product lines and lower margin customers, increased SG&A expenses, primarily due to unfavorable foreign currency transactions and increased associated costs. In the first quarter Asia Pacific organic net sales for the quarter decreased 27.8%. The company's Australian distribution business experienced declines in mobility and feeding and lifestyle products. The net sales declined in the company's subsidiary which produces microprocessor controllers which primarily related to its sale of controller and to its contract manufacturing business with companies outside the healthcare industry. For the first quarter, earnings before income taxes decreased by $0.8 million compared to last year’s first quarter. The decrease in earnings before income taxes was primarily attributable to the company's subsidiary which produces microprocessor controllers as a result of volume declines. Earnings for the first quarter were favorable for the company's Australian and New Zealand distribution businesses, compared to prior year, as a result of significant restructuring to the business implemented in the fourth quarter of last year. Total debt outstanding which includes the convertible debt discount as described in the release was $119.8 million as of March 31, 2013. The company's total debt outstanding consists of $99.4 million drawn on the revolver credit facility, $13.4 million in convertible debt and $7.0 million of other debt. The company's debt levels were significantly reduced as a result of the application of $144.7 million in net proceeds from the sale of its medical supplies business Invacare Supply Group during the first quarter of 2013. I will now turn the call back over to Gerry for a few closing comments. We can then address questions.

[Gerry Blouch:]

To reiterate our priorities how to stabilize the business, cooperate with the FDA so we can exit the injunctive phase of the consent decree and quickly return to profitability. Again I'm pleased to report that we have made considerable progress on third party certification of audits. As you may recall, the consent decree requires three certification that must be completed via third party experts and reviewed and approved by the FDA in order to resume full operations at that corporate [entailed] facilities. Earlier this month the first two certification audit reports we provided to the FDA for review and these reports the third party experts certified that both the company's equipment process validation procedures and design controls are compliant with the FDA’s quality system regulation. In accordance with the terms of the consent decree with the company we expect to receive a response from the FDA within the next two weeks. Receiving FDAs approval on the first certification audit would permit the company to resume manufacturing parts and components for other manufacturing facilities throughout our supply chain. Receiving the FDA’s approval on the second certification of product will let the companies resume design activities for beds and power wheelchairs which are a critical component of the company’s recovery plans. The company started the third and most comprehensive audit in March and plans to complete this audit by the end of the second quarter. We are making excellent progress and I am grateful to all our associates for the time and energy that they are putting in to quality, system compliance and mitigation. We're also actively managing spending with the execution of comprehensive cost reduction and containment programs. Part of this plan it includes the reduction of the workforce (inaudible) to more closely align staffing, secure production volume, other aggressive cost reduction initiatives will take place through general cost reduction and project delays. These initiatives will stabilize the business and help drive us to our restoration and positive free cash flow in the second half of 2013. With regards to the position of the company, the exit of the [injunction] phase of the consent decree we’ve accomplished a lot and we’ve come a very long ways since the execution of the consent decree in December 2012. I want to assure you that our Board and management team are committed to making hard decisions to ensure the company is well positioned to establish profitability and shareholder value where we emerge from the injunction phase with consent decree. On behalf of the company, I appreciate your time and attention during this call and we will now open the phone lines to take your questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Jim Sidoti of Sidoti. Your line is now open.

[Jim Sidoti:]

So first question; can you break out what you spent on the audits and in general to resolve some of these issues with the consent decree during the quarter?

[Rob Gudbranson:]

Sure Jim its Rob. Yeah we spend and we think we released, we hadn’t released. We spent an incremental $1.4 million in first quarter compared to first quarter 2012. So as we are preceding and working with [Becker] our third party auditor in closing up some of the issues, we did have an incremental spend.

[Jim Sidoti:]

Okay. That I say incremental but you did have some of these expenses in first quarter of 2012 as well as I think you knew you would prepare for this. Can you give us a sense of what you spend overall on the [entire] issues?

[Rob Gudbranson:]

Yeah I can tell you that if you look at our (inaudible) in terms of QARA we spend about little more than $7 million in the first quarter of 2013.

[Jim Sidoti:]

So 7 million, so at some point these issues will be resolved and these will be passed due. I assume there will probably be some of the cost that will remain as being part of the FDA requirement but do you think the bulk of that would be gone?

[Gerry Blouch:]

Hey Jim this is Gerry. The answer to your question, it will decline. Once we exit the injunction phase of the consent decree we have some follow-on work to do to make sure that our (inaudible) in the same position and compliance (inaudible) that’s been an ongoing process but there will be a tail related to that and there will be some infrastructure that will be put in, but that will be a significant time to run off as we exit the injunction phase.

[Jim Sidoti:]

So I know it’s hard to give any forecast at this point, but you think two-thirds of that $7 million would be gone?

[Gerry Blouch:]

I will just be sticking my finger in the air. As we are closer to it, we’ll get better guidance.

[Jim Sidoti:]

Okay, all right. And can you talk about the audits how they are progressing. I know you have to complete, did you expected the third one to be done at this point or is this one on schedule?

[Gerry Blouch:]

The guidance that we have given from the beginning that we expect to complete the third and final audit by the end of the second quarter. We started in March and now at the end of April I think we are significantly into it, and coupled this one was as we said the most expensive therefore offered the most uncertainty in terms of how deep and how far they go, but I’d say we are in good shape.

[Jim Sidoti:]

Okay, so assuming you get this third one complete; you could theoretically hear back from the FDA on all three sometime by the beginning of the fourth quarter is that schedule sound reasonable?

[Gerry Blouch:]

We should hear back from the FDA. The consent decree calls for their response within 30 days, so within one or two weeks I expect that we expect to hear backup one or two and then when they respond on three, the part of the response will be a conformation that they plan to come in and do an audit so that I don't know if that answers your question, but you said the fourth quarter is not that big.

[Jim Sidoti:]

Yeah, I guess my question is it unreasonable to assume that you would be back in full production by the fourth quarter?

[Rob Gudbranson:]

Jim, let me take another shot at Gerry’s (inaudible) right thing. They have -- once we give them the report and we said we will begin with the report in second quarter that's our best guess at this point and Gerry indicated we would make great progress on it, but if we are done there and we give them the report, they have 30 days to read it and set up a visit and be here. How long they will be here in terms of doing an audit? I don't think we know and additional I don't want to have the FDA think that we expect them to be done in a certain timeframe. The piece I can tell you once they are done with their audit is they have 45 days to write up a report and indicate that we are in compliance or they’re raising issue, they've raised an issue. So we know the front-end 30 days and back-end 45, I don't think it would be prudent for us to speculate how long it would be for them to do the audit.

[Jim Sidoti:]

Okay, all right. Now when you get the first two responses back, it sounds like you will be able to set components to your other facilities, is that correct?

[Rob Gudbranson:]

We will be able to bid when we get number kind of one approval, number one we will be able to manufacturer and ship purchasing components to other facilities out of the Taylor Street.

[Jim Sidoti:]

And approval number one, does that require an FDA audit of your facility or will that just be approval of the third party audit?

[Rob Gudbranson:]

That will be approval of the third party audit. No additional audits, one or two, just number three.

[Jim Sidoti:]

So theoretically you could start shipping to other facilities some time in the second or third quarter of this year.

[Rob Gudbranson:]

I'd be disappointed if it wasn’t in the second quarter.

[Jim Sidoti:]

Okay. And then once you start shipping microprocessors with Asia, I think you said the last quarter that the tough comps because of the Australian customer ended in the first quarter, should we see Asia turn to growth at some point in the second half of this year?

[Gerry Blouch:]

There's two pieces of that, the distribution business in Australia and New Zealand. And as we announced in November December last year, we cut over 50% of the staffing and exited some significant chunk of business to stabilize on the profitable core and we are building from there. So we are up against until we get into the fourth quarter next year, we are up against for the sales standpoint, up against tough comparables. On the microprocessor control business, again we did a significant restructuring and exited the contract manufacturing business last year so there will be a couple more quarters against tough comparable there as well, but we are healthy for those -- both of those changes.

[Rob Gudbranson:]

I agree with Gerry, (inaudible) its unknown that the microprocessor controller business provides controllers for H&E business so as we resolve the issues and the H&E Taylor Street business starts making power wheelchairs again then we will see an improvement there, but in the near term we will see pressures very much in his comments from the [profits of industry].

[Jim Sidoti:]

Okay. And then last question, can you give me some sense on what you are doing to maintain your customer relationships during this period and how confident you are you will be able to you know resume business with some of those customers once Taylor Street is back online?

[Gerry Blouch:]

That's a great question. I didn't say it’s kind of and I probably should have that the flow of, I mean it’s subtle, the flow of requests that submitted (inaudible) is significantly higher than it was in spite of getting through the audit process. So the one was while the level of final and approved the events we can produce that is on a year-over-year basis only 4% of 2012 with the level of activity as we still have people still hanging in there and trying as best they can to provide the Vietnam documentation so the level of ongoing relationship is significantly higher than the level of activities. So the people appreciate volunteer. So it will be, I think we're optimistic that once we're back in business that those relationships will not have (inaudible). Again we will have some things to take out to them talk about as well.

[Rob Gudbranson:]

I will add to that. One of the good things, [Steve], is that as we inspect, we get the design controls certified by the FDA and of course they have to make that decision. But that locals get back to the designing so that hopefully when we hit the ground running, not only will we be able to say we are back but we got new products and I think that will be very important and that was a good request by us and it was good that FDA spotted it and again I am assuming we will get the design control to report but that is the FDA’s decision obviously but Jim may give us a lot of capability to get it.

[Jim Sidoti:]

Now will you be able to show customers what your design changes are prior to that third audit being completed or we have to wait for that third audit before your customers see what you are going to come out with?

[Rob Gudbranson:]

There is a protocol that transcend the consent decree, you can’t showcase (inaudible) approved by the FDA, very much satisfied 10-K so that's normal thing that would dictate that independent of the consent decree.

[Jim Sidoti:]

Okay. So you really need to get that third audit complete before you can get back in front of customers with new products?

[Rob Gudbranson:]

Like I said before substantially that’s correct.

[Operator:]

(Operator Instructions) Your next question comes from the line of Robert Goldman of CL King. Your line is now open.

[Robert Goldman:]

Okay. Good morning.

[Gerry Blouch:]

Hey Bob.

[Robert Goldman:]

Questions first on the expenses side, you mentioned in the press release and again verbally about other regressive cost reduction initiatives that will take place through a general expense reduction and project delays. Could you give us some more detail on what you mean or what the timing is and what impact per share this will mean for 2013 and ‘14?

[Rob Gudbranson:]

Bob, this is Rob. A couple of things, one we have really laid out a number of projects and a number of spends that we know we need to look carefully at. As Gerry mentioned, there are structural changes we need to make to, but those are ones we wanted to properly and not impact the businesses. I think we have said in the fourth quarter, Gerry has made a clear that we wanted to be able to hit the ground running post the consent decree and junction based, when we can get back to manufacturing one hit the ground running, but we have got the number of actions that we are doing all the way from relatively simple things from (inaudible) to watching travel, watching our expenses and marketing two things that are much figured. We spent a lot of effort and negative pressure on therapy. We are going to delay that project. We are going to come back. We are going to delay it right now, till it ranges, quite a big range there. Additionally it's not just cost containment, it's also conserving cash. So we are going to really put a tight process on CapEx to make sure that we are not spending capital that we don't need in the near term. Those things are important. Bob in terms of the impacts of this year, without giving any guidance already it's not really meaningful to give you a number, but I think the key is, we know that we’ve got to take actions so they are going to give us a better performance and what we just saw will be operating earnings, operating income loss from the first quarter.

[Robert Goldman:]

Okay. Also on the SG&A, your SG&A even adjusting for the compliance cost and FX was up. Of course we knew you are heading into the [vertex] of problems. And in fact your SG&A dollar is about the same as it was in years past when your sales were about 25% greater than they are now. What sort of if you are not willing to say for this year and next, what sort of overtime cuts can you make in SG&A and what do you think you’re SG&A the sales can go down too, if you look out over the next several years?

[Rob Gudbranson:]

Yeah, Bob a couple of things, one, we just talked about the SG&A because we think it’s important. You are right if we pull out the FX and even the transaction FX and the [QARA] we are still up little more 1%. I would emphasize that was in really two areas and particularly one is Europe which we are still supporting, it’s a strong piece of the business and performing well. So we do have additional costs there. And then additionally if you look at the IPG Group, we did put in some money for what we call integrated outcomes management for some people there, the rental business and that is an important business for us. So yeah, we are putting people strategically in some spots. So I want to make sure the investors understand that. Additionally not I guess I say when we get back to the Montana, we are clearly targeting to get back to our high single digits operating income margin and regardless how you said that up, we are clearly going to be moving down back to more historic levels of SG&A as a percent of sales. But we clearly have to get beyond this consent decree to get to those kinds of levels and get the business back right size and stabilize as Gerry said.

[Robert Goldman:]

And then on the 4.1% figure that you used in the press release, I still frankly don't understand what that means. Could you reexplain it to us.

[Rob Gudbranson:]

Okay. what we did is we looked at the VMNs or the verification of medical necessity forms and we looked at not just what was submitted to us, but what we were able to approve and the documentation what is pretty stringent requirements to be able to be processed under the [CDS] as currently written. So we've gone ahead and looked at that and what we are seeing is that the VMNs we can get through with our customers’ help and they have been working hard is about 4.1% of the volume we saw prior year first quarter. So what we are trying to show with that number is obviously that business has fallen off substantially if the answer is we are able to get through what would normally be a 100% volume organic through 4%. Does that make sense?

[Robert Goldman:]

The rest of that volume either your customers are willing to wait or they are going to their competitor any sense of how much impact is coming from weight versus share loss.

[Rob Gudbranson:]

These are not typically customers who can afford to wait, so it would be safe to assume that all of that is going to competitors.

[Robert Goldman:]

Okay. And this is addressed to I think a question before, but since it sounds like you've lost 96% of that market how do you get it back.

[Rob Gudbranson:]

We had it to begin with because of superior products, superior quality and superior service. So that hasn't changed. The competition hasn't been sitting around while our engineers have been tied up and sitting on the sidelines. So the gaps have been closed but we have, we do not lack for opportunities and plans on how to reinvigorate the product line and there's a lot of (inaudible) out there. This category has been exempted from competitive bidding because of Stephanie Tubbs Jones a Congresswoman who stood up and represented the needs of the industry at the behest during the tenure of care Al Nixon so there’s a lot of royalty there. We've been, people know the legacy we introduced microprocessor controllers with our wheelchairs so all that aura hasn't gone away.

[Robert Goldman:]

And then finally again on this 4.1%, but you had mentioned in the press release that the sales dollar volume out of Taylor Street was $17 million versus $37 million in the prior year. Based on that 4% number one might think that the volume coming out of Taylor Street in the second quarter is going to be in low single digits. Can you comment on that?

[Rob Gudbranson:]

We clearly will have some pressure, because in the first quarter we did have additional orders that were in place. The consent decree did allow us to continue ship quarters that were in the system and additionally closed. So there are some benefit in the first quarter from the fact that we are running off those existing orders and quotes. We will still see some of that benefit we believe in the second quarter, but there could be some additional pressure as that over time Bob that's probably less likely to be continuing but there are still orders and quotes that are out there. So there could be additional pressure.

[Operator:]

(Operator Instructions) Your next question comes from the line of [Bill Mascarenhas of Heartland Fund]. Your line is open.

[Unidentified Analyst:]

As a follow up to Bob, you mentioned once you have approval and you are through the third audit, and you are ready to go, you are going to reinvigorate the product line. How long is that going to take to be competitive? Once you are approved your rate of produce, your AOK and how long you are going to take to reinvigorate?

[Rob Gudbranson:]

We have a good solid product that are still in the system and we’ve got a product that we're design work was halted when the consent decree went in to effect. But that’s targeted the key product, the key new product is targeted early in 2014.

[Unidentified Analyst:]

Okay. Anything else that’s in the works?

[Rob Gudbranson:]

Well, we have a number of new products throughout the product line. So if we introduce a product in the tower, specific the tower, we introduce the product just before that it went in to effect, we’ve got another product that we have been developing with the help of a third-party which will be coming onscreen for several things. There are several things in the works.

[Unidentified Analyst:]

The key product is at Q1 of 2014?

[Rob Gudbranson:]

Yes, right now that’s depending on how soon we get approval from the FDA on certification too, which is the design control. So that lets us get back to engineering on these products.

[Unidentified Analyst:]

So it could be Q4?

[Rob Gudbranson:]

Well, that side, lets (inaudible) for a minute, because I want to make sure we are clear, if we look at Cert 2 which is the design control in this would be true for (inaudible), we have submitted those report or I should say more specifically, third party auditors submitted those reports to the FDA earlier this month. So we expect within 30 days we will hear from the FDA. They will decide whether they will give us that approval or not, but if we get that approval then in May we will be back in full operation on design controls and designing products. You got to get to Cert 3 to be able to introduce products like Cert 2 lets us start to a process I don't want to leave impression that we are not going to be able to work on design and again subject to FDA approvals and designs in May is that all?

[Unidentified Analyst:]

Okay. Well we are looking for the business to stabilize and start to grow and be profitable again. So just trying to get a read of how much longer shareholders are going to have to wait?

[Rob Gudbranson:]

Understood, the key to be re-establishing normal operations and getting cost out and the cost containment activities for (inaudible) now as well as structural changes that are part of [Invacare] are all critical elements. We understand that it's going to take some time to get to recover full share, but we don't need to recover full share to begin returning to respectable profitability.

[Operator:]

(Operator Instructions) Your next question comes from the line of [Kennan Goldman] from Invesco. Your line is now open.

[Unidentified Analyst:]

Good morning. One of you talk about the debt covenant a little bit, it looks like if this level of profitability continues for a couple more quarters you will violate covenant, so maybe just broad question about how you expect to address that with your negotiations with the banks or you have some other capital clients?

[Rob Gudbranson:]

A couple of things. One, we are laying out a number of these cost reductions and as the business typically does improves second and third and fourth quarter compared to first, first is usually our weakest. We don't know believe at this point we will see issues on the covenants but we are taking a number of actions (inaudible) and then into two categories. One as we discussed we are going to be looking at cost reductions, conserving cash but I also put on there we look at structural changes and some of those changes will likely include none-core business like ISG that we sold January 18, there will be additional activities that we're doing to make sure to bring down that revolver balance which is a $99 million right now. So we are $99 million drawn on a $400 million revolver. We are very focused on again improving our cost position, conserving cash and then finally looking at structural changes which will at this point also includes something from additional reserves. That is only one bucket. The second bucket I’d emphasize is we are staying close to our bank group really in terms of staying close to our agent bank. So we've had discussions with them. We made sure that they are up-to-date and we will keep close to that. If something changes obviously we want them to understand what we are pursuing and what we are looking at, but at this point we don't perceive an issue given the activities we will take. If that changes again we are staying very close to our agent bank and our bank group.

[Unidentified Analyst:]

So does that mean obviously at this level profitability continues you would violate the covenants. So is that assuming the back-end production at Taylor Street by the end of the year to be profitable enough to cover the EBITDA level?

[Rob Gudbranson:]

A couple things. One if we look and we want to make sure we have back up so that's why I mentioned that we got to have the ability also to potentially look at the business if we are not take up in full production. So we've got different vantage points on that, but I do want to be clear on your question, it’s a good one. If you look at the EBITDA level that we've got for the second quarter, clearly if we stayed at a level that would be a risk in terms of being able to hit that covenant. If your EBITDA is low enough no matter how well -- you know there how well you get to that and in short term you could have an issue. But again our focus is looking very clearly at cost reductions, making sure to conserve cash and then finally looking at businesses in order to bring down that debt. So again we are in a better position than we were then years ago having the debt at $99 million and at the levels we have even few quarters ago.

[Unidentified Analyst:]

So you are considering disposal of other businesses, is that what you said?

[Rob Gudbranson:]

That's correct.

[Unidentified Analyst:]

And which ones would qualify for non-core once you've considered?

[Rob Gudbranson:]

We prefer not to name specific ones on this call obviously, but there are smaller businesses that they are meaningful in terms of being substantial enough that they would be debt pay down. But yeah, I prefer not to mention specific businesses if that impacts specific associates.

[Operator:]

At this time I'll turn the conference call back over to Mr. Blouch for closing comments. Thank you.

[Gerry Blouch:]

Thank you very much. We appreciate your time and attention. We know this is a very difficult time for shareholders as it is for our associates and management owns 15% of the stock so this is not an abstraction to us. It’s our company and it’s our money and it’s our future, so we take this very seriously. We are totally committed to stabilizing the business to cooperate with the FDA, so we can quickly exit the adjunctive phase and CD and return to profitability. And we’re constantly attacking costs and we are again at the same time positioning the company to emerge quickly and profitability. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.