Invacare Corporation
Q3 2013 Earnings Call Transcript

Published: 24 Oct 2013

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Invacare 2013 Third 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 statements 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, except for free cash flow, the financial information for all periods excludes the impact of the discontinued operations. Discontinued operations include Invacare Supply Group, the company’s former domestic medical supplies business that was divested on January 18, 2013 and Champion Manufacturing, Incorporated, the company’s former domestic medical recliner business for dialysis clinics that was divested on August 6, 2013. Champion was a part of the Institutional Products Group segment. 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 and access to the company’s SEC filings 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 phone lines have been placed on mute for the first part of the call. After the management’s overview, we will open the call to questions. This conference is being recorded Thursday, October 24, 2013. I would like to now turn the call over to Mr. Gerry Blouch, President and Chief Executive Officer. Mr. Blouch, you may begin.

[Gerry Blouch:]

Thank you, Sheila and good morning. With me on today’s call is Rob Gudbranson, Invacare’s Chief Financial Officer. During this morning’s call we will begin with the review of the company’s third quarter earnings. Following Rob’s comments, I will highlight the company’s progress relating to our conent decree with the FDA at our Corporate and Taylor Street facilities in Elyria, Ohio. To begin, and I’d like to congratulate our European associates on a strong third quarter. Well this segment has experienced the ripple effects of the conent decree particularly the lack of new products. The strength of their performance continues to be the highlight of our 2013 financial performance today. And I’d like to thank the team once again for delivering another fine quarter. The other three business segments, the North American HME segment, the Institutional Products Group and the Asia/Pacific segment continue to be negatively impacted by pressures primarily related to the conent decree, the lack of significant new product introduction over the past two years as a result of our focus on our Quality Systems remediation and limitations in those by the conent decree. And finally an unfavorable sales mix favoring lower margin products. Principally, as a result of these pressures, overall adjusted loss per share was $0.18 in the third quarter compared to adjusted earnings per share of $0.05 in the third quarter of 2012. Organic net sales declined by 7% compared to the same period with an increase in Europe being more than offset by lower sales for the other three business segments. Despite the sales decline we managed to decrease inventory levels and increase inventory turns in the quarter. We also had stronger than expected collections of accounts receivables and held days outstanding consistent with the solid performance in the second quarter of this year. The great efforts of our associates to reduce net working capital helped us achieve positive free cash flow of $29.4 million which we feel is particularly strong in these challenging conditions. Also in the quarter, we divested our Champion manufacturing business for approximately $42.9 million in net proceeds. This sale, combined with our free cash flow, allowed us to reduce the company’s total debt outstanding to $58.9 million at the end of the third quarter. Gross margin as a percentage of net sales in the third quarter was lower by 1.9 percentage points compared to last year’s third quarter. The margin was negatively impacted principally by the North America/HME sales decline in custom power wheelchairs, which is one of our highest margin product lines. Also, the negative impact of reduced order volume through our Taylor Street manufacturing facility caused an unfavorable absorption of fixed costs. Gross margin was also negatively impacted by sales mix favoring both lower margin products and lower margin customers. These pressures were partially offset by a reduced reduction in warranty expense. Excuse me, suffering besides of the first calls now for the region. SG&A expense decreased 4.4% to $98.7 million in the third quarter compared to $103.3 million in the third quarter of last year excluding the impact of foreign currency translation which increased SG&A expense by $0.9 of a percentage point. SG&A expense decreased by 5.3% compared to the third quarter of last year primarily related to a reduction in regulatory and compliance costs and reduced associate costs. These reductions were partially offset by unfavorable foreign currency transactions and increased bad debt expense. With that I’d like to have Rob to review additional financial highlights of the third quarter. Rob?

[Rob Gudbranson:]

Thanks Gerry. All the references to earnings before tax exclude restructuring costs. For the quarter ended September 30, 2013, organic net sales for North America/HME decreased by 11.2% driven by declines in mobility and seating and lifestyle products. These declines were partially offset by increased net sales in respiratory products, which were driven in part by a large order of Invacare HomeFill Oxygen Systems by a national account. The sales decline in mobility and seating products was largely attributable to the impact from the FDA consent decree. Earnings before income taxes for the North America/HME segment decreased $9.3 million, as a result of volume declines, unfavorable sales mix, unfavorable absorption of fixed costs at the Taylor Street manufacturing facility and increased bad debt expense in part due to the early impact of National Competitive Bidding on a large customer. These negative factors were partially offset by decreased SG&A expense related to regulatory and compliance costs as well as reduced associated costs, interest expense and warranty costs. For the third quarter 2013 organic net sales for the Institutional Products Group decreased 16.1% driven by declines in virtually all product categories. It is worth-noting that organic net sales in the third quarter of 2012 increased 22.2% principally as a result of increases in interior design projects for long-term care facility that did not reoccur to the same extent in 2013. Earnings before income taxes increased by $0.5 million which is largely attributable to reduced SG&A expense partially offset by volume declines. The reduction in SG&A expense was primarily related to the absence of the earn-out expense that was recorded last year due to the profitability achievement of a rentals acquisition. The European business segment’s organic net sales in the third quarter increased 1.5% primarily related to increases in net sales of lifestyle and mobility and seating products. This was partially offset by declines in respiratory products. Earnings before income taxes increased by $3.0 million largely due to volume increases and lower freight and warranty expenses which were partially offset by increased SG&A expenses, primarily related to associated costs. In the third quarter Asia/Pacific organic net sales decreased 20.1%. The net sales decline in the Company’s subsidiary which produces microprocessor controllers was primarily related to the reduced sales of those controllers as well as the decision to exit its contract manufacturing business with companies outside of the healthcare industry. The Company’s Australian distribution business experienced net sales declines in lifestyle, and mobility and seating products. For the third quarter the Asia/Pacific loss before income taxes increased by $0.2 million. The increase in the loss was primarily attributable to volume declines of the Company’s subsidiary which produces microprocessor controllers which was partially offset by reduced SG&A expense primarily in associated costs. The loss for the quarter was reduced for the Company’s Australian and New Zealand distribution businesses as a result of a significant restructure 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 $58.9 million as of the quarter end. The Company’s total debt outstanding consists of $39 million drawn on the revolving credit facility, $13.4 million in convertible debt and $6.5 million of other debt. I’ll now turn the call back over to Gerry for some other comments and then we can address questions.

[Gerry Blouch:]

Thank you, Rob. At this point I would like to highlight the progress that we made of late into the Company’s consent decree with the FDA. As you may recall under the terms of the consent decree we must complete three third-party certification audits, that will be followed by a comprehensive FDA inspection before we could be permitted to resume full operations in our Taylor Street manufacturing and Corporate Facilities in Elyria. Each of the three audit reports is submitted to the FDA for their review and acceptance. On May 13, we announced that the FDA accepted the Company’s first expert certification report. As a result of that we were able to resume manufacturing of parts and components at our Taylor Street facility that are used in manufacturing of products at other Invacare facilities. On July 16, we announced that the FDA accepted the Company’s expert certification audit relating to design and control systems at the Company’s Corporate and Taylor Street facilities. As a result we resumed new product development at our critical products during the quarter including complex power wheelchairs. We expect to find now a most comprehensive expert certification report dating the company is in compliance with 21 CFR Part 820 of the Quality System Regulation to be completed by the third-party expert and filed with the FDA by our previously announced mid-November 2013 target. In addition to the third-party certification report the company will file the total report as to its compliance with the FDA’s QSR as well as responses to any audit observations noted in the third-party certification report. In accordance to the consent decree the FDA is expected to commence its own inspection of the impacted facilities within 30 days of the receipt of the final certification report and the Company’s report. If following the FDA’s inspection the agency finds the company to be in compliance, it will issue a written notification permitting the Company to resume full operations at the Corporate and Taylor Street facilities. Throughout 2013 we made substantial progress on our Quality System’s improvement. I’m proud of the ongoing efforts of our associates to drive this effort and support the audit process. On behalf of the company I appreciate your time and attention during this call and Sheila will now open up the phone lines for questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Bob Labick from CJS Securities. Your line is now open.

[Bob Labick:]

Good morning, hi good morning, congratulations on some excellent cash flow and nice performance in the quarter.

[Unidentified Company Speaker:]

Thank you, Bob.

[Unidentified Company Speaker:]

Thank you.

[Bob Labick:]

First question is one to start with sales in North America, it looks like if I didn’t ask quickly and correctly the sales excluding Taylor Street were up about 3.9%. I was wondering if you could tell us a little bit some of the drivers there and then also I know it’s early but talk about the impact of National Competitive Bidding on your customers and what are you seeing from that so far?

[Rob Gudbranson:]

Bob, just to be clear first on the Taylor Street number we referenced that Taylor Street products which actually go into a number of the statement so you can’t back that out exactly just from North America HME so I wouldn’t want that conclusion to be drawn. So again there is some pressures there as we mentioned during the write-off and then the release, we did well in respiratory but in the other categories we had pressure, but again Taylor Street that’s more of a plan selling globally.

[Bob Labick:]

Okay.

[Gerry Blouch:]

On the consent decree honestly it’s too early, the.

[Rob Gudbranson:]

[indiscernible].

[Gerry Blouch:]

Competitive Bidding is too early to tell, it’s going to impact on July 1 and it was a shocker, it was far fewer given the magnitude of the MSAs covered and this was 91 this time compared to 9 last time, then the number, the shocker was the depth of the average reduction and reimbursement rates was [45%] and that’s a relatively small number of winning awards made by the government.

[Rob Gudbranson:]

So it’s created a lot and on top of that honestly this is [indiscernible] information the – not only with the number of awards proportionately significantly smaller than we won, but there was the number of one or two were out of mind who came from outside of the – winning good market was remarkably high and some cases more than half of the bidders were from outside of the market and didn’t have facilities therefore they hadn’t put once they [indiscernible] their slang when they put in place the capability to service the business. And a lot of them and also another shocker was the number of winners who didn’t even have credentials we’re going to state that there are awarded bids and so again they had it. So lot of the slang were going on and it’s just simply too early to say, we – I’d say that it will sort itself out in the fullness of time but there is nothing conclusive that we can share with you that wouldn’t be a pedal of later being unfounded so that point is secondly but lot of the cases.

[Bob Labick:]

Okay, fair enough, and thank you for the detail. Just as it relates to HomeFill, is that a potential solution for people going into this lower reimbursement environment, is there anything to do with the strong sales or that coincidental on that regard but it should help your customers in the future?

[Gerry Blouch:]

It’s not coincidental and there has been understandably a lot of concern about pressure advising and then there is always pressure advising, but we were – our solution with marketplace is technology and quality, the large part of the, the majority of the products included in the Competitive Bidding were relatively products. So products that are both [indiscernible] and reliable and also reduce operating cost for the provider is the smart solution and we’ve seen with the conent decree a renewed figure and with the whole feeling about the technology after spending more money to save money to have a more robust infrastructure and the thinking on other product so. So the people get complete management story people get the second 10% on the product that’s less at its own isn’t a – great trade off and we are considering continue to force that line that, that forces foreclosures desperate people to adopt to things I’m not saying it but its universally and wholly adopted but that’s the right solution for our customer and we continue to stay the course on it.

[Bob Labick:]

Okay, fantastic thank you – as it relates to the consent decree obviously happy here you’re still on track for the mid November third party submission of the audit. Can you tell us what has to happen between now and then for about for you to reach out going mid-November? And then typically what happens in a process beyond and maybe if you could set our expectations but we, the 30 days the FDA regular inspection and then usually some give and take after that or is that you don’t hear anything until it’s over or how does the process unfold, first in the next 30 days and then I’m giving a timeframe but the process beyond that?

[Gerry Blouch:]

Well a multi-part question Bob. First, the first part – the auditor are completed their field work and went out and now they’re compiling other quarters and review it as you can see the management then we’re kind of back and forth looking at clarification. So that’s where the process is in term of the third party certification in that work. And the – aside from the answer will be shorter on the left but – the consent decree calls for them to just file it within 30 days and – then we’re oblige to initiate the other work and we consistently said that I think their intend is to get it over and done with it – like to get these things cleaned up. But they have all sort of things to deal with if the prices comes up and finish some place so they – former prices they have to – they have to manage their resources just making the healthy operation and while we expect to grow want to allow in a team a few into audit and get them and complete that then there is no way for them to get back in and there is no way for us because they – well the external things may impact their work.

[Bob Labick:]

Okay, great. And then just one last question I’ll jump back into queue. As let me ask to your globalization initiative, can you share some data on targeting health, what can be done during this chunk of days and what do you have to wait until the FDA process is more completed to implement?

[Rob Gudbranson:]

Well that’s the – what we call the fulcrum is product development at the core of globalization is globally globalizing the product cycles and so we simplify the business. And that requires engineering and that’s been forestall and then we made some progress but we’re considerably behind where we originally expected to be. So, that to start with – but we’re doing this we’re with the – to fulcrum is product, simplifying the product and simplifying the infrastructure, the product platform, simplifying the supply chain and simplifying the administrative infrastructure all following orders so we were, we’ve been realigning the prior effect where we’ve been happily working to go back to square one and look at the plans we see if anything that transpire through the consent decree they will process you prioritize and we’ve been refreshing the product plans, the product roadmaps. So we got the blueprint and we’d say that there is ironically increased instead of an enthusiasm for the lack of loading get moving on this.

[Bob Labick:]

Great, thank you very much.

[Operator:]

Your next question comes from the line of Jim Sidoti from Sidoti and Company. Your line is now open.

[Jim Sidoti:]

Good morning can you hear me?

[Rob Gudbranson:]

Sure.

[Jim Sidoti:]

Great I just to start to get a little more color on timings on the consent decree. Can you just remind me the first two audits after you completed those, the FDA got back to you relatively quickly but there is no FDA audits involved in those first two…

[Rob Gudbranson:]

There was no – that wasn’t for two of the things that was – that was part of the plan so.

[Jim Sidoti:]

Right.

[Rob Gudbranson:]

Then we had questions currently asked clarifying questions and there was some additional that’s nationalized but they did not do a few or lot of themselves.

[Jim Sidoti:]

Right and then responded those first two audits in a matter of weeks I recall is that correct?

[Rob Gudbranson:]

Pretty much.

[Jim Sidoti:]

Okay. Now this third one you said they have 30 days to get back to you now that’s just too, some schedule their audit or what do they have to get back to you in 30 days with?

[Rob Gudbranson:]

The key thing is scheduling the audit. But – I would expect that they’ll have questions I think they do, these are complicated things. But the difference for them is to they have to schedule the audit to get the clarification and when they’re going to be here and when we should expect them to strike back.

[Jim Sidoti:]

Okay and when, how long did it take your third party consultant to complete their audit?

[Rob Gudbranson:]

I think – it’s hard to be, it’s been – it’s kind of, it’s hard to say because – there is lot of 1 and 2 create building blocks for 3 so it’s a more complicated question in fact that’s even, they’ve been doing for most of the course of the time since we started and contributed to the final audit but in terms of how much was specifically related to the third audit and will be difficult to deal with it and when everyone doing that also.

[Gerry Blouch:]

And Bob ultimately it wouldn’t really be an indicator, I’m sorry it wouldn’t be an indicator only from the vantage point that well the FDA can clearly do what they want and they’re going to be taking their own timeframe so regardless of how long it took our third party to do it the FDA sets their own timeframe so.

[Jim Sidoti:]

Okay so I – is it possible that just to drag out three or four months?

[Gerry Blouch:]

That’s possible.

[Jim Sidoti:]

Okay. Alright so assuming though that sometime in the middle of 2014 your audits complete the plants back on line what’s your plan to go out and regain some of the share that you’ve lost this last 12 months since you’ve been offline?

[Gerry Blouch:]

We’ve got a detailed plan that we’re presenting to the Board that’s an eight part plan and that deals with products, that deals with – if it’s that what would Jim what would you do and like get to this we covered all those things. So it deals with promotions, education, products, supply chain initiative the whole host of things that we will be launching on that thing, the ink is dry and everybody is working and we’re giving a formal presentation to the Board shortly.

[Jim Sidoti:]

And over the last 12 months I assume you’ve kept in touch with your valued customers – how difficult do you think it would be to get them to reorder?

[Gerry Blouch:]

There is a – there is a guide to blew customers and that will happen quickly and there is other people that will take long. I think – it’s not going to be a walk in the park, it’s not going to be a walk in the park, we fully expect that we’re going to have earn that business back and we’re prepared to do that.

[Rob Gudbranson:]

Hey Jim just one other comment just and I know you know this but just for the benefit of the call. We are still in contact with all these customers so for instance a number of them are still ordering product under the verification of medical necessity. Our sales people continue to call on them, we have relationships with them so I just want to make sure to leave them actually very clearly that we still are talking to these players as we obviously have limited production at the industry but we’re still supporting the customer base and doing everything we can on that front.

[Gerry Blouch:]

As well we stayed in front of the major rehab centers and – senior management as well as our field sales territory managers.

[Jim Sidoti:]

Okay. So well be a little unrealistic can think you got a 100% of that business back in year one you think you’re going to get a significant piece of that business back within the first couple of quarters when you come on run?

[Gerry Blouch:]

I don’t – yeah other than to say it is not unlikely but its highly impossible those 100% of them back into…

[Jim Sidoti:]

Yeah.

[Gerry Blouch:]

We got it.

[Jim Sidoti:]

No, no that’s not what I’m saying but you’re going to get more than 25% back?

[Rob Gudbranson:]

Hey Jim I guess I’d answer it this way, given that we’re not even given guidance on Q4 this year, I’m trying to predict timing on FDA and trying to predict timing in getting those accounts back will be difficult to sort of pull it. So, let it get through the conent decree, clearly as Gerry said we have an excellent plan to go back into the marketplace which we’re going to implement when the times arrive but I think trying to give you any more at this point is tough.

[Jim Sidoti:]

Okay, all right. Two other quick questions, and Asia, I know it’s been about a year since you got on that VA contract in Australia. And now you’ve got out of the contract manufacturing business, well how many more quarters before that turns to – before all those anniversary net levels at?

[Gerry Blouch:]

I think really the two wholly independent businesses there is the trading business in Australia and New Zealand which is not operating for the one management group. And the performance the year-over-year performance there has been dramatic and I think we – the – it wasn’t just the DVA they’re approaching the FDA it looks at a comprehensive consolidation facilities and anecdotes getting into a smaller business to focus on and focus on core businesses. But certainly the biggest single piece was the DVA business. But I think the most importantly we have – we’re very optimistic about the financial performance of the business, the operating income and that is heading in the direction in consistent with our plans and we’re confident that we’ll have good news to report next year. Sales, we expect to be the timing on the revenue recovery but almost slower but I think, that’s like our Board you’re probably more interested in the operating income and the sales but we’re moving it the performance of time that will come back as well.

[Jim Sidoti:]

Right.

[Gerry Blouch:]

On the DCL business that is totally linked and shackled with the conent decree are recovering a market share. So, that’s – that will move with and in accordance with our – in fact their share and I say you should make a note and one would saying as the HME the core business.

[Jim Sidoti:]

Okay. All right. And then finally on the balance sheet. Rob, you’ve been very successful paying down debt throughout this whole year. Are you at a point now where you’re comfortable regarding your covenants or do you think you’ll need to take more steps in the next 6 to 12 months to continue to reduce debt?

[Rob Gudbranson:]

I think what we said last quarter and I think through this quarters, we’ll continue to keep a close eye on where we are in a couple of different fronts. One, the operating performance of the business. Two, we’ve shown some really nice improvement and in turn that is certainly where we like to be in longer term but given the environment as Gerry mentioned a good improvement. DSOs are at very low levels for the company. So, we continue to keep an eye on where we are in terms of the working capital, the operating performance of business. And then on that front, we’ll look at where we are on the EBITDA. So, at this point we don’t receive an issue but if we do we’re going to look hard and look what we can do on working capital. And if we need to then we’ll look at potentially another non-core business and whether or not that business at this point will be better than somebody else’s finance than in ours. So, we’re going to keep all those things on the radar screen but we’re very pleased with the performance in Q3 where we got the leverage ratio down to 2 to 1.

[Jim Sidoti:]

Okay. Thank you.

[Rob Gudbranson:]

Thank you.

[Gerry Blouch:]

Thanks, Jim.

[Operator:]

Thank you. (Operator Instructions) Your next question comes from the line of [indiscernible]. Your line is now open.

[Unidentified Analyst:]

Hi, there. Good morning.

[Rob Gudbranson:]

Good morning.

[Unidentified Analyst:]

Just want to start, could you describe sort of – or help me provide some color around how large the size of the one-time order of HomeFill oxygen was in the quarter?

[Rob Gudbranson:]

Yeah, we have not broken that out at this stage but it was a very important product of the growth for the respiratory group. And now, we haven’t broken that out.

[Unidentified Analyst:]

Okay. Well that sort of an double-digit millions or is that $15 million to $20 million?

[Rob Gudbranson:]

Yeah. And at this point they’re keeping that here, we’re just talking about respiratory in general.

[Unidentified Analyst:]

Okay.

[Gerry Blouch:]

That’s for a several reason for a public company but also the customer prefers it that way as well.

[Unidentified Analyst:]

Okay. I was going to follow up with some of the questions around [Technical Difficulty] that just specifically but I was just thinking about how to think about the timing of the third-party auditor, so they started if I’m reading the notes in your filings correctly, they started their third and comprehensive audit in late March. And if that script in scale of an FDA audit might be similar, you had taken them approximately 8 months if they submitted by middle of November. Is there any reason to think that a comprehensive FDA audit should be shorter than sort of the script in scale of what the third-party auditor have to do? [Technical Difficulty]

[Operator:]

You do have a question. In line is [indiscernible]. Your line is now open.

[Unidentified Analyst:]

Hi. Can you just share a little bit of the bad debt issue that happened with one of your customers?

[Rob Gudbranson:]

Sure. And we go ahead and talk about that. We won’t go into huge amount of details obviously just because we’re always sensitive towards specific account. It was an account that had an issue in terms of they were looking at some refinancing, they were looking at a variety of different activities. And they did not win bids and that actually led us some difficulty in terms of their bank lines. And so, we’re little concerned about where they are right now as we put a reserve on. So, it was triggered, I’d emphasize it was triggered by the fact that they didn’t get win on bids for national competitors bidding. But I would also emphasize that we don’t think this is a trend [indiscernible] from the vantage point that it’s early, you will be very surprised to see something happen this quickly given that most of the accounts can continue to serve their patients, grandfather their patients and continue to get cash. So, it was a very special situation. We are very focused on this because we’ve already said accounts receivable could be a big risk for big national competitors bidding, if it ends up being with fewer providers or servicing Medicare long term, but again, this was very specific to this account. We wouldn’t have expected something this early but given that it did happen, we wanted to get some color to it. Does that help?

[Unidentified Analyst:]

Yeah, certainly. Can you talk about to your reach out efforts to the winning bidders on the competitive bidding, that perhaps went in the market before when your customers are ready.

[Rob Gudbranson:]

We’ve tried as part of our credit process and our sales process. So, we really work carefully in our North America/HME business to help both the credit people who are improving credits and sales people working together, obviously anybody who is out there who we feel is comfortable with the credit and we’ll put that in place. And again the nice part about the system right now is the two teams are working together as oppose to in some companies that been there credit and sales not necessarily CI data. So, we’ve been reaching out to the right players, the winners. But we’ve also stayed close to the people who didn’t necessarily get the bid because in some cases they have good prime insurance that they have well other exposures where they’re going to do well. And we may be better offer them hands with people who didn’t I guess I shouldn’t say win the bid, didn’t get awarded the bid from the vantage point they still maybe good credits and good accounts, we’ll continue to work with.

[Unidentified Analyst:]

Got it. Is it fair to say those considering your national scope and size competitors that even these new winning bidders though they might not have been in those particular markets are still known in this year?

[Rob Gudbranson:]

I don’t hear because that numbers it’s going to be for round two, but I think they were similar to round one. There were quite a few winning bidders who we either didn’t know or where bidders that we really didn’t have much of an exposure to at that point. So, there is always work to be done and there are some cases where people weren’t really in the industry at all. So, there is kind of a mix here in terms of going through the detail, you’re going to be quite arranged in terms of who were the people awarded to bid.

[Unidentified Analyst:]

Got it, got it. And amongst your competitors, are you seeing any changes in pricing or financing terms?

[Gerry Blouch:]

But they’re – I hope you’re getting – excuse me I’m just having cold. In terms of getting that announced in the major set of bounce, now it’s national program. So, I think we hear anecdotes of things happening and so that’s nobody as a matter of policy has published competitor bidding pricing those actually, if you see more these featured products that they’re not going to be effect that again these are either anecdotes. So, one can make sure that their lifestyle as well as these featured products. But again there is not – the margins on the manufacturing side of the house part are not substantial enough. And once again there is the amount of pricing reduction for the winning bidders was I think in all cases extremely that what the providers paid for, for the products. So, the product is a meaningful part of their cost but it’s not going to drive their cost by any structure.

[Unidentified Analyst:]

Got it. Thank you.

[Operator:]

(Operator Instructions) Your next question comes from [indiscernible]. Your line is now open.

[Unidentified Analyst:]

Hi, there. Can you hear me?

[Rob Gudbranson:]

Yes, we can.

[Unidentified Analyst:]

Great. So, I was asking a question around sort of understanding the timing of the conent decree and I think the call got cut. But my question is as we think about sort of how comprehensive the FDA are will be. How does that compare in scope to what the third-party auditor has done with their third and final audit?

[Gerry Blouch:]

I think the third-party looks, it looks at everybody. So, their portfolio is to ensure that to do audits at all of the individual processes everyone and then to do horizontal audits to see how the processes naturally mix with one another. So, their work is top to bottom seeking us and the FDA will not be as comprehensive.

[Unidentified Analyst:]

Okay. That’s helpful. So, they – I’m just trying to think about the timeline. So, the third-party auditors started their third and comprehensive audit in late March, if the timeline around that finishing is been November approximately eight months or slightly less than eight months. Is it unreasonable to assume that FDA could be in doing their audit for a similar period of time?

[Gerry Blouch:]

That would be unusual.

[Rob Gudbranson:]

Yeah, that’s what I would say Matt from just a size there is a lot of different work done by the third-party auditors between SERP 1, SERP 2 and SERP 3 during the timeframe. But again we’ve been I think it’s good advice, we’ve been pretty well approached it, we shouldn’t try to guess what time the FDA is going to need it either short or long not only from the vantage point that there is clearly they’re propagated and they take seriously, they make sure we are in compliance, we believe we will be but they have to determine that themselves.

[Unidentified Analyst:]

Okay. And then in your prepared remarks you mentioned an impact to one of your large customers from the rollout around two, I may have missed any color you provided there as I was trailing back into the call. Can you provide any colors to what you meant there?

[Rob Gudbranson:]

So, I’ll try to do it again and again just for the record, we got disconnected too Matt. So, don’t think that we were avoiding the call. But to answer your question I think that will be consistent I believe with what I already said. We had a very specific account which was in the past we also doing some bank refinancing , some other activity, they did not went on the bid , the Medicare bid was very important to their business, it caused the some difficulties with their financing. And so we put an additional reserve in place. I would emphasize though that we don’t think that is an indicator yet for what’s going to happen on national competitors bidding, they’re clearly not winning the big, it was a tribute for them. I would also emphasize that, this is very special. You would not have expected us to have any bad debt issues this quickly because most of the accounts have the ability even if they don’t get awarded a bid to grandfather and continue to support patients at the new degrees. And I think in general the most of them would do that just to keep the flow going plus they could have all the receivables to collect from Medicare business they had before the bid was awarded. So, again very special but given that it did relate to MCB and given that, that will be a big focal point for us because there is risk obviously is where the biggest creditor industry. We did want to make sure that highlighted but again not see it as being initially yet one will continue to watch very closely.

[Unidentified Analyst:]

Okay. That’s helpful. And then as related to the rate of business you’re still getting detail history in complex where you have I think you said in your release this 11.2%. Should we view that sort of as a fair run rate going forward well you’re still under in conjunction space at the conent decree?

[Rob Gudbranson:]

Yes, that’s kind of hard to answer only from the vantage point that there is lot on what customers want to do with the verification from other necessity. And you can make an argument as people get comfortable with that. So, you maybe do more you can also make the argument that, that might be a constrain on paper work and efforts that they reach a point that they struggle with that. So, I guess at this point similar to just this status we’re in right now we haven’t given guidance for fourth quarter and it probably at this point say that to talk on the answer until we get through the fourth quarter.

[Unidentified Analyst:]

Okay.

[Gerry Blouch:]

Thank you for that. Again it’s been nine months or 10 months since the conent decree was approved by in front of the judge. So, I’d say that it’s probably stable just sort of the improved to an extent that you can make changes as kind of sort of that to the people who understand it one or the other that and I just put a little extent any significant changes for either direction.

[Unidentified Analyst:]

Okay. And did you say well you spend on remediation costs on the quarter?

[Rob Gudbranson:]

We did not but I wanted to share that information for a quality and regulatory and I’m focusing here just on a corporate and HME efforts. We spent about $5 million in the quarter so that was down and it was moving the right away, it’s tough to answer how this is – how much more that could come down but again focusing on our corporate efforts and the HME efforts on the remediation and quality it’s about $5 million bucks.

[Unidentified Analyst:]

How much of that is consultant spend?

[Rob Gudbranson:]

I only have right in front of me we’re still spending in consultants but I don’t know what are they.

[Unidentified Analyst:]

Okay. Okay. Maybe I’ll finish up on the Institutional Products, you’re not backing up Champion I guess it was a little bit reserved than I thought it would be. Can you provide any color as to what’s contributing to the weakness there?

[Rob Gudbranson:]

A couple of things, one just so it’s clear where IPG we back out Champion from both prior year and the current year. So, really it’s continuing off, continuing operation. So, I didn’t want to imply this Champion losing Champion and change that, we make it apples-to-apples comparison. The big issue is and we emphasize this in the release. The organic net sales in the third quarter of 2012 so last year’s third quarter grew 22.2%. There were a variety of projects were interior design projects for long term year facilities that pulled in a lot of products across the whole product line. That was a very, very strong quarter, we’re organically down 16% this third quarter and the business does tend to be compared to some of the other ones a little more project based. And so that was really the big drivers we just didn’t get the same number of projects we had very strong projects, it’s not often we have 22% in the quarter. And so that was a little bit of the reason and the driver for us in the decline organically this year. Does that help?

[Unidentified Analyst:]

Yeah. That’s helpful. Thank you.

[Operator:]

There are no further questions at this time. I’m going to turn the call back over to Mr. Blouch, for closing remarks.

[Gerry Blouch:]

Thanks Sheila. Again, apologize for the technical interruption, I’m not sure what that was but it wasn’t on our end. Again I want to assure our shareholders that our Board and management team are committed to making a right decision to ensure the company’s continued progress and implementation of a comprehensive quality system that is both compliant and sustainable. We also are committed to ensuring that company is well positioned to reestablishing the profitability and improve shareholder value once we resume full operations at the Taylor Street and Corporate facilities. Thank you for your time and attention. I appreciate the questions. And it’s obviously we can get hold of Bob nor I during anytime today and tomorrow. Please feel free to do that. Have a great day.

[Operator:]

That concludes today’s conference call. You may now disconnect.