Orthofix Medical Inc. (OFIX) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen and welcome, to the Orthofix International Sponsored 2012 Second Quarter Earnings Conference Call. [Operator Instructions] Now I would like to turn the floor over to your host, Senior Vice President and General Counsel, Mr. Jeff Schumm. Sir, the floor is yours.

Thanks, operator, and good afternoon, everyone. I would like to welcome you to the Orthofix second quarter 2012 earnings call. Joining me on the call today is our President and Chief Executive Officer, Bob Vaters; and Senior Vice President and Chief Financial Officer, Brian McCollum. I will start with our Safe Harbor statements and then pass it over to Bob. During this call, we will be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical fact are forward-looking statements, including any earnings guidance we provide and any statements about our plans, beliefs, strategies, expectations, goals, or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matters contained in such statements will occur. The forward-looking statements we make on today's call are based on our beliefs and expectations as of today, July 26, 2012. We do not undertake any obligation to revise or update such forward-looking statements. Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risks disclosed under the heading Risk Factors in our 2011 Form 10-K filed with the SEC. If you need copies, please contact my office at Orthofix, Lewisville, Texas. In addition note that on today’s call, we will refer to certain non-GAAP financial measures in which we exclude certain items from our GAAP financial results. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to consider the impact of these items as a supplement to financial performance metrics determined in accordance with GAAP. Please refer to today’s press release announcing our second quarter 2012 results available on our website for a reconciliation of these non-GAAP performance measures to our GAAP financial results. At this point, I will turn the call over to Bob.

Thanks, Jeff. Good afternoon everyone. Thanks for joining us today for our second quarter 2012 earnings call. This is our first reported quarter after the break sale and as you can see, we’ve made progress in several areas. Our gross margin now exceeds 80%; adjusted operating margins are now above 20%; adjusted net income grew double-digits on a constant currency revenue growth of 5% and, importantly, we strengthened our balance sheet through strong cash flow and the divestiture of the Sports Medicine business. There is a tremendous sense of accomplishment here as we have achieved these targets as we laid them out on previous calls. We now have the financial capacity and flexibility to make the necessary investments to drive long-term growth. When you combine these achievements with the execution of settlement agreements with the U.S. Government in both the FCPA and the bone growth stimulator matters, we feel we now have the clarity along with the capacity to return to investing in research and development along with selective pursuits of inorganic opportunities. Let me now get to the performance highlights of Q2 before turning the call over to Brian. Starting with our top line results, net sales were $119.5 million in the second quarter 2012, up 2% on a reported basis from a $116.7 million in the second quarter of 2011 and up 5% on a constant currency basis. Starting with our Spine business, total spine sales grew 7% over the prior year. This reflects a strong performance in our Regenerative Stimulation business, which grew 9% in the quarter. We believe this reflects share taking as we increase the quality and quantity of our distribution channel. We now have the ability to reinvest back into this business, including investing in science, which we believe will further drive long-term growth. Within Spine, our repair implants and regenerative Biologics business sales increased 4% and these results were driven by very strong Biologics revenue growth, which actually topped Q1’s record number. This phenomenal performance was offset by continued mid-single-digit pricing pressure on spinal implants. As with Trinity Evolution we look to leverage our improving distribution network to drive adoption of these novel products. We continue to focus on our product pipeline. We are anticipating the full market introduction of our next generation intra-body device FORZA during the third quarter. We have a number of new cervical implant products slated for launch in the fourth quarter and through 2013. Our collaboration with MTF to deliver another allograft with viable cells, providing a natural biologic solution, is both complementary to Trinity Evolution and offers a truly next-generation tissue form. This tissue form is on-track to launch in 2013. The outstanding relationship with MTF is one of which we are extremely proud. Trinity Evolution's safety profile is well established with more than 50,000 cases performed with no adverse events attributed to this tissue form. Our combined Spine revenues worldwide represent 58% of total net sales. Moving onto Orthopedics; our revenue was $37.7 million, down a reported 6% but up 2% on a constant currency basis. Foreign currency negatively impacted reported sales by $3.3 million, which reflect a weaker euro and real. In addition, increased competition in Brazil drove weakness internationally somewhat offset by strong growth in Regenerative Biologics as well as 2 recently launched internal fixation systems for the foot and ankle in the U.S. We continue to believe that with the rollout of the ankle compression nail for fine foot fusion and the Lapidus Plate for mid foot fusions we can become more of a significant player in a high-growth segment of the market and with our unique value proposition can create more pull-through opportunities for our Regenerative Stimulation and Biologics products. In addition to portfolio improvements, we have a number of initiatives in the U.S. which should create momentum for us in the second half of 2012 and beyond. Specifically, we have recently attracted some top talent in our sales and marketing management teams. We have realigned the sales regions for growth and we are in the process of increasing the number of reps in the field. In leveraging our existing expertise in the foot and ankle market, we expect to continue to attract quality distribution, which should contribute to growth this year, 2013 and beyond. The lower extremities market is an attractive segment with size and growth for us to make the appropriate strategic investments going forward. As with our Spine business, we believe our orthopedics hardware product offering to repair bone along with our Biologics and stimulation solutions for regeneration create a unique value proposition for the patient, surgeon and hospital. Orthopedics revenue represented 32% of total sales. In both businesses our pipeline is improving for 2013 and beyond, including our extremely exciting launch of our next-generation Trinity Evolution. As I mentioned in my opening comment, our overall gross margin for the second quarter was 80.2%. This represents a roughly 400 basis point improvement post Sports Medicine divestiture. Brian, will review some additional financial details which led to a 20.9% adjusted operating margin and an 11% increase in adjusted net income from continuing operations along with highlighting the strength of our balance sheet. Brian?

Thanks, Bob. Going through the income statement for the quarter, Bob covered revenues and gross margin, so I will start with the operating expenses and move on to the balance sheet. Finally, I will provide an update to our revenue and earnings guidance for the full year of 2012. SG&A expenses were $64.1 million for the quarter, at 53.6% of sales, down from 57.8% in the prior year prior year. Prior year SG&A expenses included a $3.5 million charge associated with the succession and restructuring activities; when adjusting for this prior year charge, current period SG&A was up slightly on higher net sales resulting in 110 basis point improvement in SG&A leverage. This improvement was related to lower legal costs incurred during the period. R&D expenses in the quarter were $9.3 million, or 7.7% of sales, up 240 basis points from last year’s 5.3%. Included in this quarter expenses was $3.1 million, or 2.6% of net sales, related to an unfavorable arbitration resolution associated with a 2008 co-development agreement. Normalized R&D expense was flat at $6.2 million compared to the prior year period. Reported operating income from continuing operations was $20.6 million, or 17.2% of net sales, compared to 16.6% of net sales in the prior year. However, when adjusting for the $3.1 million adverse arbitration resolution of the 2008 co-development agreement and the $1.4 million charge for prejudgment interest related to certain settlements with the U.S. government, adjusted operating income from continuing operations were $25 million, or 20.9% of net sales, compared to 19.6% in the prior year, a 130 basis points improvement. Total stock based compensation in the quarter was $1.5 million, of which $1.3 million was from continuing operations and $200,000 was related to discontinued operations. This compares to $2.5 million in the second quarter of the prior year, of which $2.4 million is from continuing operations including $900,000 related to succession and restructuring activities and $100,000 was from discontinued operations. Our effective tax rate during the quarter was approximately 30%, which included an incremental tax benefit associated with the deductibility of certain U.S. government settlements of approximately $1.3 million, or 7%. On a normalized basis, the second quarter tax rate would have been 37%, compared to 38% in the prior year. Now moving on to net earnings from continuing operations. In the second quarter 2012, we reported net income from continuing operations of $14 million, or $0.73 per diluted shares. Adjusting for the adverse arbitration resolution of the 2008 co-development agreement, charges related to prejudgment interests of certain settlements with the U.S. government and foreign exchange gains and a change in the estimate under the tax deductibility of certain settlements with the US,. government our adjusted net income was $14.9 million, or $0.78 per diluted share. This compares to $13.4 million, or $0.72 per diluted share in the prior year. This 11% increase was led by operational improvement as well as lower interest expense as a result of the sports medicine divestiture. Net loss from discontinued operations was $2.8 million, or $0.15 per diluted share, compared to $600,000, or $0.03 from the comparative period. The current period net loss from discontinued operations includes the net booking of $900,000 associated with the sports medicine divestiture, which was offset by accelerated amortization of debt placement costs and interest expense of $800,000 and $2.9 million of ongoing net expenses associated with the retained liabilities of the sports medicine business. Our total cash position as of June 30, 2012, was $123 million, up from $78.7 million at year end. This build up of cash includes $41.5 million received from the escrow fund established connection with the Blackstone acquisition of which $32 million is earmarked to resolve all outstanding legal matters associated with the Blackstone government investigation. The residual cash balance puts us in a position to make the payments related to the government settlement and make the proper investments in the business. Following the settled sports medicine business, we use net proceeds of $145 million to prepay our debt as required by our credit agreement. In addition year-to-date we also prepaid approximately $24 million of our outstanding credit facility with cash on hand, of which $20 million occurred during the second quarter. As a result of these prepayments, our leverage ratio as defined by our credit agreement is less than 1/2 turn. Our cash flow from operations for the 6 months of 2012 were $57.8 million and included $41.5 million received from the escrow fund established during the Blackstone acquisition, for which $32 million is earmarked to resolve all outstanding legal matters associated with the Blackstone government investigation. As a reminder, during the first half of 2012, the company also invested more working capital in the form of accounts receivables associated with its MTF partnerships. As you recall, there is no inventory working capital required by the company for Trinity Evolution as we are receiving end marketing service fee. This additional investment was made to continue to fund the rapid acceleration of Trinity Evolution sales over the past several quarters and is also important for the successful development and launch of the next generation cell-based technology. Capital expenditures were $13 million, compared to $11.3 million in the prior year. This increase was primarily the result of capital expenditures associated with the relocation of some of our direct OUS distribution entities as well as an additional investment in instrumentation and trade to support product launches. Now moving on to non-financial metrics. These non-financial metrics have been adjusted for the sports medicine divestiture for all comparable periods. Day sales outstanding were 114 days at quarter end, up from 112 days at the end of the previous quarter and up from 99 days at year end. Our inventory churns at quarter end were 1.2x, which was up slightly from 1.1x at the end of the previous quarter and was consistent with the prior year end. The increase in DSO during the period was partially related to the additional working capital investment made associated with our MTF partnerships as well as temporary delays in billing capabilities related to a system conversion and office relocation and 2 of our foreign jurisdictions. Now on to guidance. The company expects net sales from continuing operations to be between $481 million to $491 million for the full year 2012, or a 2% to 4% increase over the corresponding net sales from continuing operations in 2011 of $470 million. This new range reflects negative impact due to the changes in foreign exchange rates on international sales of our orthopedic business unit. Further, based upon the current rates of foreign currencies to report 2012 total net sales from continuing operations will be negatively impacted by approximately 2.25%, all of which will be in our orthopedic business unit. We expect a more significant impact from foreign currency rates of approximately 3% on the third quarter results. The company expects GAAP earnings per share from continuing operations to be approximately $2.79 to $2.89 per diluted share and adjusted earnings per share from continuing operations to be approximately $2.95 to $3.05 per diluted share. While GAAP earnings from continuing operations increased $0.06 on the both the low and high end of the range, adjusted net earnings from continuing operations remained unchanged from previous guidance. Keep in mind that we expect to make $2 million of milestone payments to MTF in the third quarter, which will be included in reported results but treated as an adjustment item to net earnings from continuing operations. Please refer to the 2012 outlook update section of our press release from today for a more detailed reconciliation of our previously issued guidance to this updated guidance, which incorporates the impact of current foreign exchange rates along with the identified adjustment items. I will now turn the call back to Bob for closing remarks.

Thank you, Brian. I am extremely proud of both the operational performance and strategic accomplishment achieved during the second quarter of 2012. While we were navigating international headwinds, we were still able to grow net income by double-digits. With the close of the sports medicine sale and the signing of the U.S. government settlement agreements, we believe we are in the best position in years to invest in the business and continue to create value for shareholders. With that operator, let’s open the line for questions.

[Operator Instructions] We take our first question from Raj Denhoy with Jefferies & Company.

Wonder if I could ask a little bit about you know have your thoughts on how investments have evolved since you have sold sports medicine, in particular the operating margin as you noted was pretty substantial in the quarter and little above almost 21% here. And as you look at over the next 18 months or so, what is your appetite for continuing to drive that margin higher versus perhaps investing back into the business now?

That’s a great question since when I thought about a lot on the last 2 months. And the reality is as we look at acquisitions and I am spending a lot more time doing that. Very few companies have as good a pro forma profile as we do. Having said that, I have been spending a lot of time focusing on the incremental operating margin in the pro forma operating margin, so there might be times where we would trade off the gross margins as long as we feel like we have the same type of operating margin profile that our existing company. So it is difficult because we have such good financial statistics right now.

Beyond the idea of acquisition, I mean, you mentioned you launched a couple of products in lower extremities in the quarter, it is clearly is a substantial opportunity and I guess the other option as I opposed to that you could get more aggressive in terms of your own internal investment there. Do you have any thoughts around that?

Yes, we do and we are actually increasing our investment in the science aspect of Stim. As you know that's a 90% gross margin business. We are under way in our investment in our Biologics, which is a 100% gross margin business. And in the other areas, particularly in the Spine, what's called traditional product, we are looking to launch higher-profit margin products than we have and less likely to do sort of the historical type profit margins that we inherited when we bought Blackstone. And of course we will be spending a lot of time working on vertical integration for manufacturing.

Well, maybe I could just ask a different way, I mean, do you have a sort of target in the sense for what sort of leverage you want to drive out of this business? If you saw the 21% as the starting point from here in this quarter, as you move into 2013 and you are looking for a 100 basis points a year perhaps more, given some of the initiatives you are working on?

Well, I mean we are looking to increase, but we are getting to more lofty ranges than we've been. Certainly we've progressed quickly to the 21% range. So I think that if you look at organically, we are certainly looking to increase those margins through manufacturing initiatives. When you look to inorganic activities, it’s a little more difficult. So I think we are going to continue to try to push it up, but I don't want to give any sort of guidance that 25% earnings and like that. I think we are going to see slow and steady progress from here.

We will take our next question from Matt Miksic with Piper Jaffray.

I wanted to follow up maybe on that question about sort of strategic thoughts and maybe you could push a little bit on the kinds of things -- there are lot of markets moving in a lot of different directions here today and you know mapping out sort of the kind of businesses that you want to be in, in terms of leverage, the kind of product lines that you want to extend that you're already in. And then as you think about the models for the medtech and markets that you're in, you've got something that's 2 ways to come at this business, right? One is investment in clinical and long-duration bets that gets you sort of real sustainable innovation and premiums and defensible product lines and then the other is more near-term 510(k) type markets. I would love to get your preference and your thoughts on the kinds of things that you are predisposed to sort of you know look at in that regard, if you have a mix of both approaches, longer-term, shorter-term investments that you're willing to think about as you bring on products or IP or whatever it is. I'd love to get your thoughts on that and then I have one follow-up.

Sure, the way I look at it is really simple. We look at by business, so if you look at the spine area, our focus is doing anything we can increase distribution, particularly since we have the magic combo of Trinity Evolution plus our traditional Spine products. In addition to that in the Orthopedics business, we are looking to grow our U.S. orthopedics business, particularly in the foot and ankle area. And then when you step back and look and look at overall new business, we are really not looking so much for new businesses as we are broadening the indications. For example, in our investment in science for stimulation, we will look to invest in new indications for the same proven technology that we had for years. So if we just do a couple of those things with the strong P&L profile we have and the capacity we have, this will be a very good situation for the long-term earnings growth of the company.

Okay, so maybe sort of trying to eliminate or mitigate you know 1 of 2 of the risks of any of those investments with known technology, product line extensions, known product lines, distribution extensions, is that a fair way to think about it?

Yes, I think it is.

And then, I don't know if you had spoken to this in your prepared remarks. I apologize if you did, but updated thoughts on, as you look at these investments -- you have been working on your capital structure in your P&L for a while, what is the, I guess, what are your updated thoughts to the ranges that you think about in terms of your -- the right cap structure for Orthofix going forward?

I don't have a hard answer to that. What I know is we have spent several years taking a company that was leveraged about 4 to 1 to leverage, as Brian mentioned, a half turn or less to one with virtually no net debt. That's not something I particularly want to stay at, but I don't have a targeted leverage structure or anything like that. What we feel comfortable about today is that we have more than ample capacity. We have a strong set of ratios for P&L and really in a very good position to invest both inorganically and in our own pipeline. So I don't feel comfortable going back to where we were when I came to the company, but I certainly have the capacity to grow -- to increase the leverage a bit in order to grow the top line, and that’s what we are going to do. But nothing that takes us to a new risk profile or anything of that nature.

And then one last if I could, just on just the environment that we are in, post Supreme Court Accountable Care Act decision and with an election and the fiscal cliff ahead of us. Do any of these things -- have any of these things influenced sort of way that you look at acquisitions? Are you sort of more comfortable? Are the unknown variables sort of been nailed down and so you are sort of more comfortable looking at deals now or do you feel that you will be more comfortable in a post-election environment knowing kind of what, what the landscape will look like? Does any of those near-term catalysts have any impact on your thinking throughout the year?

Not particularly. What has the most impact on my thinking is to continue to have the discipline that I have showed up to now when price asks are higher than they ought to be. So here we are after a lot of years being on defense, never going on offense and so it’s up to me to really drive a lot of discipline to not overpay for assets. So that’s probably the biggest challenge. But I would say there's that many macro situations, obviously like others we have a very clear plan for absorbing the Medical Device Tax, now that’s pretty clear that that’s going to happen. But frankly, we have a lot of ways or directions we can go right now and really a great deal of flexibility.

We will take our next question from Michael Matson with Mizuho Securities USA.

I guess I will just continue on the path of asking questions about the kind of M&A strategy since that's where people have been going. I guess just with regard to the types of things you would be looking at, do you have a preference for adding sort of the higher-growth technologies or platforms versus doing something that is more overlapping to gain scale and just get bigger in some of the areas that you are already in?

I think I have a preference for both.

Okay. And then you had some amazingly strong growth out of the Trinity product, the 48% in Spine, but it seems like that, that would imply that your spinal implant or metal growth was not so hot. Can you quantify that or can you at least qualitatively tell me if I am missing something there?

No, I mean, I can’t quantify it, but there is no doubt that the driver of our Spine is the phenomenal success of Trinity. We are growing in Spine, as I said in my opening remarks at a faster pace than the record pace of last quarter. So we are just lights out in Spine by way of Trinity Evolution. But you really can look at them separately, because you know the Metals drive the Spine and the Spine drives the Metals. So we are really getting away from breaking that out, but, of course, the Biologics are far exceeding the traditional metals.

Okay, and that success with Trinity and Spine, is that still really the by-product of everything that has happened with Infuse or are there other factors that you kind of point to in terms of why it's doing so well?

I certainly think that's a big element. I think when you've seen some of the other reporters, the reporting companies, they'd probably say the same thing. But I would also like to take a little credit for our own execution, because I think we've really in recent months gotten our act together. We've learned about the product. We are executing, we are cross-selling and, by the way, I haven't even mentioned we've got our next-generation product that's coming out next year. So all things are on a go in our Biologics department and -- or Biologics group, so I just think to mirror the factors, but the Infuse issues certainly does not hurt.

Okay. And then I just wanted to clarify, I am a little confused by the 2 EPS numbers that you reported. I just wanted to know which, whether it’s the $0.78 or the $0.73 that will be apples-to-apples with your $2.95 to $3.05 guidance range?

Mike, its Brian; its $0.78. So we are guiding to the adjusted earnings from continuing operations and that's the $0.78.

Okay, so beat pretty significantly then in the quarter, but you are not raising your guidance range; I mean, is that just being conservative or is that some of these additional items that you are calling out here that maybe people weren't factoring into their models?

This is Brian again. Look, through Q2 June year-to-date has been a very strong 6 months for us. But as we said, we want to get back to investing in the science and R&D. So until we kind of see where that's going to go in the back half of the year, I think we've probably been a little bit conservative here, but we feel very comfortable by the $2.95 to $3.05 range and so that's kind of what we stuck with.

We will take our next question from Mary Nielson with ThinkEquity.

Just a quick question about your outlook on the second half. It seems a lot of a smaller companies have had decent second quarters and even positive, but they all seem to be remaining cautious on the second half. I am just wondering how you are thinking about second half?

Mary, this is Bob. As Brian said, we are very comfortable with our earnings. I would have to be a fool not to look at certain European countries and be cautious, so I think we are very comfortable with our earnings. I think we are very comfortable with the recent turnaround on the Stem, Biologics or Lights Out. I think I am a little cautious; I don't think, I know I am a little cautious in areas of certain European countries and Brazil. So I think if we throw it all together, I think we certainly landed on the right guidance. Having said that, I think we are not doing anything different. I think we are investing as we should, and I think we are ready to take advantage of any opportunity as it presents itself.

Okay. And then just a follow-up on that, do you have a timeline for any future acquisitions? I know you've talked a lot about your strategy with the prior questions on the call, but can we expect to see something maybe this year or are we looking more into next year?

I don't really have a timeline I'm ready to communicate, but I could say we are actively in the market looking.

We will take our next question from Charles Croson with Sidoti & Company.

First one, going back to the guidance here, I mean, you lowered it but some, you are maintaining the adjusted EPS and I apologize if you had mentioned as some of the reasons why. But can you just give me the confidence or give me an idea of what gives you the confidence that you will be able to meet that EPS range despite the lower sales?

This is Brian. Look, on the lower sales, we didn’t necessarily lower the constant currency number. We only lowered the range due to FX which is out of our control. So we kept that intact. Therefore, we believe that we will able to keep the earnings number, because we have a natural hedge. We have local currency expenses in compared to those sales expenses. So by the time you get down to earnings, there is no virtually no impact. So just because sales are reduced by FX, which is out of our control, there is really no impact at the earnings line. which makes us comfortable in the $2.95 to $3.05 on an adjusted basis.

Okay. Next question then is I am not sure if you had mentioned this in elaboration. I had some issues with my phone here. Really impressive growth on the stimulation side, can you kind of elaborate on some of the reasons for that, especially given continued pay or push back here?

Yes, this is Bob. I think that we have done really good at executing; we have hired some key talent, some from our competitors. We have been able to get some new distribution and, really, we've just come out of the long period of management changes to the point where we are just executing a lot better. And the result has been share taking. More importantly, what it's going to do is allow us to best in science, which I think is really going to differentiate us to whole new level and take it through some place where we can try to sell into new indications and broaden the size of the market. So it’s really exciting right now, certainly compared to what it was a year ago.

And I guess in speaking to that you going into more aggressively trying to get more clinical data there, do you have sense on what R&D might be for the next few quarters? I think you alluded to it a little bit but if you can get a little granular on that, that would be helpful and then that’s all I have got?

This is Brian again. I would just look back a historical, Charles. We were about a little north of 5% in R&D as percent of sales in Q1 and Q2. I think we are not uncomfortable going a little bit higher than that if the right opportunities present themselves and the right activities to drive long-term growth come up, but I would say that’s probably a pretty good range than your term here as we exit 2012.

We will take our next question from Stan Mann with Mann Family Investors.

I have some simple questions; your net cash right now at close of the second quarter, where is that?

Stan, this is Brian when you carve out the amounts for the government settlements with and then the $40 million we owe with the bank still, we are at net debt of about 0.

Okay. So net debt is 0, cash, the cash left after all this is positive cash?

Yes, the cash we have $123 million on the balance sheet at June 30, we owe the government, obviously, $82 million-somewhat, so that’s about $40 million of cash and that compares to $40 million of debt.

Okay. So when I look -- your DNA looks like it’s around 22 a year, which is over a buck non-cash charge, right?

Yes, it is about $22 million a year roughly. If you look at the 6 months cash flow, it is about 11 through the 6 months.

Right, so it's 22 annual. So you're a little over a dollar in D&A or non-cash charge. Your EBITDA then is above a $100 million is what we are running, right?

That’s right, you look at it from continuing operations, Stan, it will be above a $100 million when you give consideration to the Breg's divestiture.

Okay, so everybody has asked if you are going to buy somebody and it sounds like acquisitions are really expensive and really would not improve our current operational balance sheet and performance. So what is -- how do you look at a dividend or a stock buyback or other use of the cash?

This is Bob. That's a great question. The stock buyback is a little more complicated particularly with credit agreements and all that. The dividend is also an interesting question. I could say we've talked about it, but we have no current plans to do either of those 2 things.

But your bank document even at the $40 million level doesn’t allow you to utilize any of that cash or the building cash for buyback or dividend?

Reality is we have the current credit agreement in place that was done a few years when we were leveraged and we haven’t replaced that yet. So it has covenants that reflect that. I am certain if we were able to refinance, we would get more flexibility. But before we even do that and, like I said, the Board will have to conclude on whether a buyback or a dividend is appropriate. We have not done that, although we've had some discussions.

But refinancing is a possibility in the equation?

Yes, this is Bob again. I think for 2 reasons. One, I think we can do better in our current terms in refinance and, 2, we want to reflect it on the capacity needs we have today, not when we did it a couple of years ago.

Okay, so our current cost to capital is probably around 7% or 8%?

Yes, I mean cost to debt, Stan, where LIBOR plus 300 with a new lower leverage; we are going to go down much lower than that. So I would say we are well below 3% on cost of debt.

Oh, it's not high at all. So our opportunity for growth on bottom line then is some more leverage on gross profit and net operating margin?

Stan, this is Brian. I mean, obviously we've improved the profile to north of 80 and north of 20 with the sports medicine divestiture, but as Bob alluded to, I think, in the opening question, yet we are still trying to drive operating leverage at both of those line items and we feel comfortable that we can, but we are not prepared to put a new target out there.

Okay, last question is, it sounds like, Bob, you mentioned that we are picking up some pretty good talent in distribution. Is that as a result of the Synthes-J&J combination, where they are kind of changing their distribution et cetera?

No, Stan. Again, this is Bob, I was referring more in the stimulation business.

So we are picking them up from, we only 2 competitors in the Stim business.

Yes, I'd rather not comment from whom, but you can guess.

Okay, I'm showing no further questions in the queue.

Thank you all very much for participating and I look forward to talking to you over the coming weeks and certainly at the next quarterly call. Have a good day, everybody.

Thank you very much, ladies and gentlemen. This concludes today's presentation. You may disconnect your lines and have a wonderful day. Thank you for your participation.