Question-and-Answer Session
Operator
(Operator instructions) Our first question is from Joshua Zable from Natixis.
Joshua Zable – Natixis Bleichroeder
Hi, guys, congrats on a great quarter. Nice for taking my call here.
Richard Packer
Thank you.
Joshua Zable – Natixis Bleichroeder
First, Ernie, I am just trying to understand, I know you did a real good job of walking us through the P&L, but I guess, it seems like your top line obviously is pretty similar to where it was or exactly the same where it was, but your EPS came down. And I know you talked about foreign exchange. My understanding was it, A, you guys had a number of contracts in dollar denominated contracts. And B, I guess, assuming the sales are lost overseas for whatever reason and they are regained in other places, is the sort of non-drop to the bottom line really more a function of Welch Allyn deal, and other things – I am just trying to put the math together here and it’s not adding up for me.
Ernie Whiton
So, there is a hit to revenue that comes from foreign exchange because our products are produced in the US, there is – as we take a hit from foreign exchange to revenue there is nothing offsetting that hit in cost of goods sold. So, that hit drops straight to gross margin. There is a partial offset in the operating expenses. So, the top line revenue hit doesn’t drop straight to the bottom line, but it drops in a fairly significant way. Offsetting that drop in revenue are pickups we are getting from things like the LifeVest, the military, and potentially some international upside in the base apples to apples local market comparative business. So, for example when I described international growth expectations on a comparative local currency basis, we said mid to high teens. You know that’s substantially slower than we’ve been growing. So, there is some potential upside. When we put all of that together, we see revenues essentially unchanged. The reason the bottom line drops is because the marginal impact of the foreign exchange hit was no relief in cost of goods sold because the products are produced in the US is greater than the marginal benefit that we get from the other revenues that are going to be up, okay? Another way to think about it is if you start at $1.40, take $0.26 off for foreign exchange, take $0.05 off Welch Allyn, add $0.06 to the LifeVest, and add $0.06 for cost reductions that we have initiated that gets you back to $1.21, which is essentially 10% growth. Does that help?
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