CONMED Corporation (CNMD) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2011 CONMED Corporation Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Joseph Corasanti, President and Chief Executive Officer. You may proceed.

Thank you, Francis. Good morning, everyone. Welcome to CONMED Corporation’s fourth quarter 2011 earnings conference call. With me today is Rob Shallish, our Chief Financial Officer. After formal remarks the call will be opened for questions. Before we begin, let me remind you that during this call we will be making comments and statements regarding our financial outlook, which represent forward-looking statements that involve risks and uncertainties as those terms are defined under the Federal Securities Laws. Our actual results may differ materially from current expectations. Please refer to the risk factors and other cautionary factors in today’s press release, as well as our SEC filings for more details on factors that may cause actual results to differ materially. You will also hear Rob and I refer to certain non-GAAP adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, company management uses them to aid us in monitoring the company’s ongoing financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against other medical technology companies. Adjusted net income and adjusted earnings per share measure the income of the company, excluding credits and/or charges that are considered by management to be unusual or outside of the normal ongoing operations of the company. These unusual items are specified in the reconciliation in the press release issued this morning. With these required announcements complete, I can now turn to my comments. I am pleased to report that we completed the fourth quarter and our 2011-year end by meeting or exceeding all of our operational expectations. Beyond the non-cash goodwill write off in the Patient Care division, which Rob and I will comment on in a moment, CONMED’s results were extremely positive. Further, we are off to a very good start to the New Year through our association with the Musculoskeletal Transplant Foundation, as well as a small acquisition of our former distributor in the Nordic countries, which we completed on December 31 last year. With that, here are the fourth quarter highlights. Sales of $185.6 million were at the high end of the forecasted range with an increase of about 1% over sales in the fourth quarter of 2010. Although the overall sales increase was modest as expected, the adjusted earnings in the quarter were $0.46 per share, exceeding the forecasted adjusted earnings forecast and growing 28% over Q4 of 2010. On a GAAP basis, diluted EPS was a loss of $0.90 due to the non-cash write off of goodwill in the Patient Care division. Adjusted operating margin expanded to 10.7% of sales, an increase of 120 basis points over that of the fourth quarter of 2010. Cash provided by operating activities in the fourth quarter equaled $26.3 million, equivalent to $0.94 per share on a cash basis, more than 2 times the adjusted EPS. Now turning to the highlights for the full year of 2011. Sales grew to $725.1 million at the higher end of our last forecast range. Adjusted earnings per share grew 15.4% to $1.50 exceeding the forecast range. Due to the non-cash goodwill write off, GAAP EPS was $0.03 per share. The adjusted operating margin for the year grew 110 basis points to 10.1%. Cash provided by operating activities grew to a record $103 million. On a cash basis, this is equivalent to $3.60 per share, 2.4 x more than the adjusted EPS. Free cash flow was a record $85.4 million. Adjusted EBITDA was $111.9 million for an adjusted EBITDA margin of 15.4%, an increase of 91 basis points over 2010. All in all, 2011 was a very good year for CONMED, continuing to rebound from the effects of a weak economy. We performed well operationally, launched a number of new products and grew the operating margin as we had expected. Perhaps one of the most important events to impact the company’s future was the announcement on January 3, 2012 of our long-term partnership with MTF for sports medicine tissue. MTF a non-profit organization is the largest tissue bank in the country. With our recent agreement, we are now the exclusive worldwide marketing representative for MTF sports medicine allograft tissue. CONMED Linvatec’s team of surgical representatives will serve as the educational resource to surgeons and facilities concerning the suitability of MTF allograft for ligament reconstruction, cartilage repair and meniscal transplantation, as well as for biologic solutions including scaffolds and fixation devices. On closing the agreement, the 35 employees of MTF Sports Medicine Marketing and Surgical Consulting Group became employees of CONMED Linvatec. MTF will maintain full responsibility for all activities related to donor suitability, quality, acceptance, processing, storage and distribution of the tissue, as well as reimbursement of service fees related to sports medicine allografts. Financially our association with MTF is expected to be accretive to CONMED’s EPS by $0.15 to $0.18 in 2012. In general, CONMED will be paid one half of the revenue MTF receives from the sports medicine tissue services. We estimate that this will approximate $30 million in 2012. Additionally as part of our agreement, we will become the exclusive distributor of the cascade Platelet-Rich Plasma product or PRP. We expect 2012 revenues of approximately $5 million from our new PRP product. So total revenue for the new MTF partnership in 2012 is anticipated to be $35 million with additional EBITDA of approximately $15 million to $18 million. We paid MTF $63 million upon closing the agreement. Future payments are contingent upon MTF providing an adequate supply of tissue. Those payment amounts are $34 million in January 2013 and $16.7 million in each of the 3 succeeding years, for a total potential consideration of $147 million. Beyond the financial terms, which are clearly beneficial to CONMED, our association with the industry leader for allograft sports medicine tissue will enhance our product offering in sports medicine and augment our leadership position in the industry. Moving to cash flow, we had excellent cash flow for the quarter and for the year. Cash provided by operating activities for 2011 equaled $103 million, a record year for CONMED. Subtracting the year’s capital expenditures of $17.6 million, we arrived at the free cash flow for the year of $85.4 million. This equals $2.98 per share of free cash flow, about 2 times greater than the adjusted EPS of $1.50. CONMED has always been known for its ability to generate cash and 2011 was no exception. As we look forward to 2012, we continue to be optimistic about CONMED’s prospects. Our strategy is quite simple; we intend to grow the top line at a higher rate than our growth and expenses. We did this quite well in 2011 despite a still uneven economy, as our sales growth of $11.3 million over 2010 more than offset the expense growth that we have $2.4 million adjusted for unusual items. The resulting $8.9 million was a direct increase in pretax profit and an increase in operating margin of 110 basis points. We believe we will be able to continue this increase and increasing operating margin trend for the foreseeable future by introducing new products, expanding in to growing markets and by judiciously monitoring and improving CONMED’s cost structure. In 2011 we introduced a number of new products including Sequent for meniscal repair and Alterus for energy based tissue sealing. Both of these products have great potential and have experienced the increasing monthly sales since their launches. Sequent finished the year with sales of $3.3 million. Alterus sales were slightly less than $1 million and we expect 2012 sales of $5 million to $10 million for Alterus. Both of these products compete in very large markets; Sequent in a $200 million market and Alterus in a market exceeding $1.5 billion. Because of what we believe to be superior functionality of these products, we expect to grow into meaningful market share positions with both. Last week at the American Academy of Orthopedic Surgeons annual meeting, we introduced several new products in our sports medicine and power instrument lines. Of note is our extensive line of instrumentation for hip arthroscopy. Although minimally invasive hip preservation surgery is still in its infancy, it is the fastest growing segment of sports medicine. CONMED is firmly positioned to provide the necessary tools for our surgeon customers. In the powered instrument line, we announced that we would soon be launching lithium-ion batteries for our Hall branded line of battery-powered instruments. This lithium-ion battery technology will provide greater power and longevity during surgery when compared to present batteries. They also allow customers to charge, auto play and store sterilized, fully charged batteries on the shelf ready for surgery. This makes CONMED Linvatec battery power easier to set up and use compared to competitive product. As we look forward to a new year in 2012, we remain optimistic about CONMED’s ability to deliver continued improving earnings with margin expansion and greater cash flow. Although sales growth in 2011 was hindered by sluggish global economic conditions, particularly with respect to our surgical video capital products, we have managed through this difficult operating environment by focusing on those single use products that are going to improve patient outcome and are thus in demand by our surgeon customers. We have also controlled cost, enabling continued expansion of our operating margin. We will continue to focus on devices that improve patient outcomes and cost control to improve profitability and create long term shareholder value. For 2012 we have increased our sales and earnings forecast over what we provided in October last year as a result of the MTF sports medicine partnership, specifically the 2012 sales forecast now stands at $780 million to $790 million, an increase of 7.5% to 9% over 2011 sales. Organic constant currency growth is estimated at 3% to 4% with the remainder of the growth coming from MTF. At this level of sales, we believe adjusted earnings per share should approximate $1.75 to $1.88. This would result in an increase in EPS of between 17% and 25% over 2011 adjusted earnings per share. For the first quarter of 2012 we forecast sales of $190 million to $195 million and adjusted earnings per share of $0.42 to $0.47. As I mentioned before, we remain extremely positive about the direction of the company and look forward to making continued progress in 2012. I’ll now turn the call over to Rob Shallish for a further review of the financials. Rob.

Thanks very much, Joe, and good morning, everyone. On our last conference call I mentioned that CONMED had completed 10 quarters in a row, meeting or exceeding our operational goals and forecasts. This just completed fourth quarter of 2011 now adds another quarter to that string of positive results. The fourth quarter sales totaled $185.6 million at the higher end of the range we had forecast. Similarly, total 2011 sales of $725.1 million were at the higher end of the annual forecasted range. Of note was the fourth quarter’s favorable overall performance from our suite of single use surgical devices. Together the single use devices within our arthroscopy, electrosurgery and endosurgery, making up over 65% of the fourth quarters single use sales, grew in excess of 5% in the quarter when compared to the fourth quarter of 2010. We are especially pleased with the performance of our sports medicine, our arthroscopy line, where we believe that we are meaningfully growing our market share with the new products we have launched recently. Capital product sales in the fourth quarter, which made up 22% of the quarter sales had mixed results, with the surgical video products within arthroscopy and electrosurgical generators in electrosurgery showing declines from sales in the fourth quarter of 2010. With respect to the surgical video products, sales declined $1.9 million compared to the fourth quarter of 2010. As we have discussed in the past, the surgical video capital products, representing approximately 9% of our total sales have been affected by our decision to de-emphasize the integrated systems product offering, involving the onsite construction of overhead booms holding surgical lights and monitors. Additionally, these made to order installations involve the integration of software control on various items of equipment in the operating room. Approximately one half of the sales decline in the capital arthroscopy product group for the fourth quarter and also for the full year of 2011, was due to our decision to de-emphasize this marginally profitable integrated systems product offering. We believe the remainder of the decline in capital arthroscopy is primarily due to general economic conditions, whereby hospital administrators are continuing to delay replacement of these kinds of capital equipment. As for electrosurgical generators, the capital product component of the electrosurgery line, the fourth quarter 2011 experienced the decline of $1.6 million due to a difficult comparison to the fourth quarter of 2010. Of note, electrosurgical generator sales increased 7.4% for the full year of 2011 over 2010. In 2011, the generator sales were evenly spaced over the 4 quarters, while in 2010 the sales were lumpier with lower sales in the first 3 quarters and a substantial pick up in the fourth quarter, creating this year’s difficult comp. So wrapping up the sales performance for the quarter, single use products making up 78% of the quarter sales performed well, while capital products had overall negative growth due to certain product decisions by management, general economic conditions and a difficult comp in electrosurgery. Now let me take a few moments to discuss this quarter’s non-cash write off of goodwill related to our patient care division. As you know we have significant amounts of goodwill capitalized on our balance sheet as a result of numerous acquisitions in the 1990s and early 2000s. Accounting rules require analysis of the goodwill asset carrying value of each of our business units in relation to future expected performance. This year the Patient Care units’ calculations do not support the goodwill values on the books, resulting from acquisitions in the 1990s. Those of you who have followed us for a while recognize that the Patient Care division is presently at the least profitable of our business units. However, while a non-cash write off was necessary in 2011, we are still committed to the products and employees who are associated with Patient Care. We are also continuing to support the sales and development of our ECOM device for minimally invasive cardiac output monitoring. There is a large potential market for this kind of product and we are proceeding with improving the technology. Finally, let me emphasize that this write off does not result in any reduction of cash flow, nor does it affect any future profitability of the company. Our GAAP earnings in the fourth quarter of 2011 were adversely affected by this non-cash write off of goodwill, resulting in a GAAP loss for the quarter of $0.90. However on an adjusted basis, adding back the effects of this write off and other unusual items identified in this morning’s press release, adjusted earnings per share equaled $0.46, exceeding the forecasted range we provided in October of last year. Of note, with adjusted net income of $12.9 million and adjusted earnings per share of $0.46, the fourth quarter of 2011 was the most profitable quarter of the company’s history on an adjusted basis. Also of importance, our margin expansion strategy is clearly working. Gross margin on an adjusted basis of 52.5% grew 140 basis points over that of the fourth quarter of 2010, due to the favorable product mix weighted towards the single use products. This increase was also helped by our multiple programs to improve manufacturing efficiency. As a result of the improved gross margin and minor changes in SG&A and R&D as a percent of sales, the adjusted operating margin in the fourth quarter of 2011 grew 120 basis points to 10.7%. For the full year of 2011 the adjusted operating margin improved 110 basis points to 10.1% of sales, in keeping with our plan to improve operating margin at least 100 basis points per year for the next several years. We anticipate achieving these higher operating margins by continuing to leverage our structure. Sales are expected to advance at a greater rate than cost increases, due to the benefit of new products that should generally have gross margins greater than the company’s current average, as well as overall market growth from our current products. Further, we will continue to review our cost base to ensure the business is operating in the most efficient manner possible, with regard to both cost of manufacturing products and the SG&A line. Turning now to cash flow. As Joe mentioned, we had an outstanding cash flow quarter and year. We finished 2011 with free cash flow of $85.4 million, 63% higher than the 2010 free cash flow of $52.5 million. On a per share basis, the 2011 free cash flow is equivalent to $2.98 per share compared to $1.82 per share in 2010. Of note, the cash flow per share in 2011 is almost double the adjusted earnings per share. The increased cash flow is due to higher income, lower days and receivables and higher inventory control. On the balance sheet at December 2011, the cash balance stands at $26 million and days and receivables are equal to 67 days, down from 72 days in December 2010. Inventory declined $4.4 million compared to December 2010. As we anticipated, substantially all of the $112 million in convertible bonds were put to us last November. We used our cash on hand and borrowings under our $250 million revolver to fund the debt repayment. As of December 2011 borrowings under the revolver totaled $80 million. We do not foresee any significant change in interest rates in 2012, since the cost of the revolver is expected to be equivalent to the interest rate on the convertible debt. On a GAAP basis for 2012, the additional amortization of convertible debt discount that we had been recording as a result of an FASB pronouncement a few years ago has been eliminated. Finally as of December 2011, the debt to book capitalization calculation declined to 20% compared to 25% at December 2010, as a result of the decreased debt balances. In 2011, our cash flow enabled a reduction in the company’s overall debt of $56 million and the repurchase of $50 million of the company’s common stock. And with that, Francis, that concludes our prepared remarks and we would like to open the lines for questions.

[Operator Instructions] Our first question is from the line of Matt Miksic from Piper Jaffray.

This is Young in for Matt. The first one is, can you comment on any early feedback or progress related to the MTF integration?

Sure. It’s going very well. The early integration for us is the immediately hiring on the closing day of the transaction, the 35 MTF employees that we mentioned in my prepared remarks and then following that we had a national sales meeting at our Linvatec facility in Florida and had several of the managers of MTF attend that meeting and started the training process for cross selling and other integration matters. As far as customers are concerned, this integration and the partnership and the transaction seems to be going extremely well and it really is kind of a seamless transaction from a customer point of view, so it’s going very well. Thank you.

All right, great. Can you provide some color on the tone of the market in Q4? Do you see stabilization and utilization rates or any signs of bottoming here and also any or how current utilization trends differ across geographies?

Well, we’ve seen utilization rates remain fairly constant throughout 2011. I think the same is true so far in Q1. We had good growth in arthroscopy, so procedure rates we think are fairly strong there. There was some weakness in some of the European countries, but perhaps off set by strength in Brazil and most of Asia and I think that’s really, that’s pretty much the same for our general surgery segments as well.

Okay, great. One last question, to put some of your new products in context, the knotless anchor and other new anchors introduced last week at AAOS. Can you give us an idea of what kind of size these products contribute to sales over time and maybe how they compare to Sequent for example?

Yes, with Sequent we are expecting probably anywhere from $10 million to $20 million in sales for 2012 and so that’s taking out very nicely and then if we compare that with the Shoulder Restoration System which was launched 18 months ago, that’s already a $25 million product line for us, competing in the 2 segments of the shoulder arthroscopy, rotator cuff and instability procedures, each representing about a $300 million market potential. The Y-KNOT product that was just launched at AAOS is a terrific product for instability procedures. We also think it has applications in hip arthroscopy, but of course for now the immediate penetration we are expecting is going to be instability procedures in the shoulder and yes, I would think that would have similar launch projection trajectory as SRS, as well as the Sequent. It should be a very good product for us.

Your next question is from the line of Mark Landy from Summer Street Research.

I apologize if some of my questions were covered in your prepared remarks. I have been juggling a couple of calls this morning. As we kind of look into 2012, given the transition towards more of the single use products and away from the capital high products, shouldn’t we expect any other inventory implement charges or have you basically been declining the inventory line with as you’ve been exiting those businesses.

Well, Mark, we are not expecting any charges. We are not really exiting any of our businesses or any of our products. It’s perhaps more of our R&D these days as focused more on the single use products than the capital. So new products coming out generally would be of the single use category, but we are not anticipating any inventory charges at this point.

Okay Rob. And then if I’m looking at the operating margin for next year and assuming that you get you at least this time a 100 basis point increase that you’ve been targeting, is that going to come mostly out of the manufacturing side, improvements in manufacturing or through gross margins with respects to the higher margin products or more out of streamlining expenses related to running the businesses from SG&A and R&D.

Well, we have an interesting situation with the MTF acquisition or association I guess I should say, since there is very little cost of sales associated with those revenues. So my currently expectation is that the operating margin improvement in 2012 will primarily come from the gross margin line and not from SG&A. As I mentioned we have very little cost of sales relative to the revenue associated with MTF, but we do have a cost in SG&A for selling and marketing activities. So the gross margin will improve, the SG&A as a percentage of your sales number will probably -- could get a little bit worse actually in 2012 with an overall benefit at the operating margin line.

Okay, Rob. And then just 2 quick questions; can you provide us just an anecdotal update on Alterus on how the re-launch is going?

Yes, Alterus is proceeding very, very well. Just to review, Alterus was launched in January of last year. It had some starts and stops during the launch process. Issues were related to product supply and some reliability testing that we were doing, which of course limited supply. We went several months with limited supplies of our 10-millimeter instrument. There are 2 versions, there’s a 10-millimeter and a 5-millimeter. Many of the initial evaluations that surgeons like to do are with 10 millimeters, so that could slow down the evaluation process for us really in fourth quarter. But the long and short of it is that Alterus is growing every month and at this point we do have full supply now, both 10 millimeter and 5-millimeter instrumentation for our Alterus vessel sealing device and the product is performing extremely well.

So the kind of $10 million guided number, you’re still comfortable with that?

Yes, absolutely. Yes, our guidance is $5 million to $10 million for 2012 and we are very comfortably with it, yes.

And then just lastly as we look towards 2013 and the med device excise tax, what type of initiatives should we expect you to put in place as you go through the year or is that something you’re going to worry about exiting the year.

That, there are a couple of ways to approach the excise tax. We would probably try one or both approaches, maybe there’s even a third that we haven’t thought about it yet, but the approaches we are thinking about are that we would add the excise tax on to our invoices beginning in 2013 and if necessary, we would raise prices for some of our products, probably not all of them, but the products that have advanced technology and superior performance etcetera. We will probably target those to have price increase for it if necessary. If everything works well with adding the tax on to our invoices, then we will probable leave it at that.

And your next question is from the line of Dalton Chandler from Needham & Company.

I was wondering if you could give us a little bit more color on Europe. I know you said it was a little bit weak. We have been hearing from some other companies that it’s pretty country specific that some are in pretty bad shape and others it’s pretty much business as usual, so if you could comment on that and your exposure to the countries that may be the weak ones.

Well Dalton, last year we had a mixed performance and you're right, it is somewhat county specific. The single use products in general performed pretty well, better than I think most people would expect given the economic news that we keep hearing out of Europe. Where I think we may have fallen down a little bit is in the capital products, particularly in the video systems, but that was somewhat universal along with here in the United States. So in general, combining the single use growth with capital products declines, we saw in general flat sales overall from Europe. The U.K. was rather flat, Southern Europe, Spain and Italy generally flat as well. We saw a little bit of growth in Germany. So overall I would say we performed in 2011 probably better than most people would have expected, given the negative news we hear all the time from Europe.

Okay. Any thoughts about what we might see this year?

Well, we are expecting generally the same kind of trend frankly. We are not expecting much in the way of growth, but on the other hand we are not expecting declines. We do think that a single use product should continue to outperform the capital products. I guess one thing to point out is that national health care is prevalent in almost all countries, probably all countries in Europe. We have a significant amount of business in private hospitals, as much as 50% of our business in some countries comes from private hospitals which are somewhat cushioned I guess you might say from the day-to-day economic turmoil of the national governments.

Okay and then just a final question on the M&A environment. Historically you’ve been pretty active, but it’s been a while. What are you seeing in traditional M&A?

Yes, in traditional M&A we keep looking at things very frankly. We would like to be able to add either technology or market share to the product groups that we already have. We are not looking to add another leg to the business that’s diverse from what we currently offer. Of course the MTF association, while not an acquisition in the traditional sense, certainly it perhaps achieves the same kind of purpose, where we are growing our product offering and growing our profitability through association with that fine non-profit organization. So we continue to look at things, but we want things to fit in to what we currently offer and we would like them to be accretive fairly quickly if not immediately.

Your next question is from the line of James Sidoti from Sidoti & Company.

Can you just repeat how the payments to MTF are structured. It was $62 million when you closed the deal, $34 million in 2013, but what were the payments after that?

Yes, we have 3 payments of $16.7 million.

Okay, at the beginning of each year.

Yes.

And then I assume those are based on hitting some kind of growth hurdles or…

Not related to growth, its related to supply of tissue and it’s not a very onerous measurement, but we do have some downside protection in the event that there is kind of inability of the MTF tissue bank to supply tissue.

Okay. And Rob, can you tell me, what was long-term debt then when you closed your deal on January 3?

Well, the December 2011 debt was roughly $140 million.

Okay, so about $200 million.

When we closed the deal.

Right.

When we closed the deal we would have added another -- wasn’t quite $60 million because we used some cash on the balance sheet. So that’s probably 180, 190 or something like that.

And for your guidance for ‘12, what are you factoring in as far as interest expense?

We are assuming that interest expense will be calculated on the basis of overall interest rate of about 2.5%.

Okay. So about $5 million or so.

Well actually, total interest expense was probably not going to be much different than the interest expense we had in 2011.

Okay and then, in terms of use of cash, would that be your primary use or would you prefer to do stock buybacks or look at M&A or…

No, primarily it will be debt repayment. Of course as I mentioned in the last question with Dalton, we continue to look at acquisitions, but we haven’t done that in any in the last 5 years. MTF is certainly positive for us. Whether we’ll find other ones this year or not, I just don’t know.

Your next question is from the line of Robert Goldman from CL King.

A couple of questions on some of the newer product. First on Alterus, the tissue sealing, in order to sort of give us an enhanced degree of confidence in the $5 million to $10 million projection, could you share what the monthly sales were in January and December and I got the same question with Sequent to give us confidence in the $10 million to $20 million projection.

Well Bob, I hate to give monthly numbers, because there’s always some variation on a monthly basis. I guess, let me leave it at this, that we see progression on a monthly basis with both of those products.

The progression you are seeing off late, does that suggest to you the annual sales projections you’ve given on both products or would you need further acceleration from wherever you are now to reach those annual numbers.

We need further acceleration. Our anticipation is that sales of both of those products would continue to accelerate as we go through 2012.

So then what metrics are you focused on to give yourselves a sense of confidence of reaching those annual numbers?

Well Bob, we take a look at reports from our sales force who have been extremely positive about both of those of products. We see the growth that has occurred already throughout 2011 and are projecting that same kind of growth out into 2012. And frankly, given the markets for both of those products. Our expected sales in 2012 are extremely modest in relation to the overall market. So while we are doing some estimation I admit. We are confident at this point that we’ll hit those goals.

And on the SRS, it looks like those sales have capped out at this $25 million run rate. Can you speak to what’s going on there?

I think that those particular sales are a little more stable. But we’ve introduced some new products that might replace some of the anchors that are in the SRS product portfolio like the Y-KNOT and the PressFT anchor. So what we include in the SRS bundle is perhaps a little confusing to me, but certainly with introducing the products such as we did last week at AOS. We believe that the overall growth of the arthroscopy business will support the sales forecast that we have given.

And then finally, Rob, on the cash flow, you rightly said that the free cash flow per share was almost doubled that of earnings per share. Should we look for that same ratio in 2012?

I think that it’s fair in its magnitude. We certainly had a very good performance relative to working capital items in 2011 with working capital reduction of $7 million to $8 million benefiting the overall cash flow over the business. I’m not sure we can replicate that kind of improvement in working capital in 2012, but in order of magnitude our cash flow should be much superior to our earnings.

Okay, and beyond that are you prepared to give us some guidance on free cash per share?

Well, this year free cash flow was $84 million, $85 million. I think it’s fair to say that with working capital use or source being negligible compared to being a benefit in 2011, I think that free cash flow should approximate what the free cash flow was in 2000 -- 2012 free cash flow should approximate to the same amount as 2011.

Your next question is from the line of Brad Evans from Heartland.

I have a couple of questions regarding cash tax. What’s the tax rate you are using for the year Rob?

For 2012 we are looking at about a 37% book tax rate.

And can you amplify, how much that will be cash do you anticipate. How much will you be able to defer?

I think we are still going to be in a very positive situation relative to the cash tax that we pay. So in the neighborhood of 5% to 10% would be the cash tax rate.

Okay. Depreciation and amortization, should be around about $45 million for the full year, is that right?

It maybe just slightly higher due to the amortization of the payments on MTF, but somewhere in that $45 million to $50 million range would be the amount.

Okay, and your CapEx budget for the year should be roughly what for 2012?

Well, we had $17 million of CapEx in 2011. We are looking at around $20 million for 2012.

Okay, and stock based compensation should be about $6 million?

Between $5 million and $6 million.

So it looks like you could do maybe even a little more, maybe a $100 million in free cash flow if that working capital dynamic is not a big use of cash.

Yes, I think the unknown factor is working capital. We actually made very good progress on working capital this past year and I’m not sure as I mentioned we can replicate that. So it could be somewhat of a negative, but not a large I don’t believe.

So if you don’t find an acquisition to make, you could really pay down a large portion of the revolver if you so choose, again under the caveat of meeting your expectations of course.

Yes, I agree with that Brad. I think cash flow is going to be very strong, continuing to be very strong.

Okay, that’s great. Keep up the good work on that front. Did you buy back any stock in the quarter?

No, we did not buy any more in the fourth quarter. Most of the buyback occurred in the third quarter.

I mean if you are able -- if the free cash flows materialize as you are expecting, do you think you have a latitude to perhaps both buy back stock and pay down debt simultaneously or do you -- I don’t want to -- I know you indicated you like to pay down debt, but I wonder whether you have the wherewithal to perhaps do both.

Well certainly the cash would be there I believe. I think that primarily we would be focusing on debt repayment.

[Operator Instructions] Our next question is from the line of Dale Dutile from The Boston Company.

Along the same lines of cash flow, I think I understand what that’s related to, but when do the cash taxes start to approximate your gap tax rate, is that several years away or…

Well, the final year of amortization relative to the Linvatec goodwill is this year, 2012. So we will be losing some deductions in our tax return as a result of that. We now have some deductions relative to MTF and that amortization, so that tends to offset it a little bit. So we will start seeing a progression towards merging the cash tax rate and the book tax rate starting in 2013. But it won’t be immediate, because of other acquisitions and other deductions that we have, there will be a gradual merging of those 2 rates over probably a 5 year period.

Is the Linvatec goodwill amortization kind of half of or 3 quarters, can you give some sense.

Yes, it’s probably closer to 60%.

Okay, and then you had some comments in the press release about your currency hedging. I don't know exactly how the cost structure shakes out from a currency standpoint, but it would seem like that Euro hedge is pretty beneficial to margins this year. I’m wondering kind of what 2013 will look like if or does that hedge on a euro roll off.

Yes, those hedges that we identified in the press release are for 2012. We’ve only done a very moderate amount of hedging for 2013 at this point and none of which was in the euro at this point. So we could end up in a situation in 2013 where rates are a little less favorable to us than they are today. But we’ll be watching that as we go through the course of the year and locking in rates as we go, so that we can provide a reasonable forecast of our business in 2013 and beyond.

Are those costs dollar based cost of goods sold for the stuff you sell in Europe.

Yes, all of -- well, we have one small manufacturing site in Finland, but otherwise -- and of course we have the Mexican Maquiladora in Chihuahua, but substantially all of our manufacturing costs are U.S. dollar based.

Okay. Well, I mean that looks like maybe a 100 basis point headwind. I’m just thinking kind of a third of revenues at your hedges is probably worth 7 or 8 points and a 50% gross margin, roughly. I don’t know, is that math about right?

Well, this year is actually a tail wind for us, with the hedges.

No, I’m thinking 2013.

Yes. If the rates stay as they are now, it could be somewhat of a headwind for us in comparison to 2012. Offsetting the sales amount our cost in our foreign locations, our selling costs. So roughly we figure that for every percentage change in top line affecting currency, about 60% of that change falls through to pretax profitability. So of course if rates are substantially going the wrong way for us in 2013, we’ll be looking at ways to offset that effect in our overall profitability.

Okay, how would you do that? I mean, what are the steps you would take.

Well, it’s looking across more effectively, so cost control I guess would be the major thing that we would look at and -- but maybe there’s upside with new products that we might come out with.

At this time, there are no other questions in the queue. I’d like to turn the call back over to Mr. Joseph Corasanti for closing remarks.

Thank you very much for joining us today for our fourth quarter earnings conference call and we look forward to talking to you again on our first quarter 2012 call. Thank you very much. Bye.

And ladies and gentlemen, this concludes your presentation. You may now disconnect and have a great day.