Orthofix Medical Inc. (OFIX) Q3 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Orthofix Third Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] as a reminder there conference is being recorded. I would like to introduce your host for today's conference, Mr. Mark Quick, Director of Business Development and Investor Relations. Please proceed.

Thanks operator, and good afternoon, everyone. Welcome to the Orthofix third quarter 2017 earnings call. Joining me on the call today are President and Chief Executive Officer, Brad Mason; Chief Financial Officer, Doug Rice; and Chief Strategy Officer, Mike Finegan. I’ll start with our Safe Harbor statements and then pass it over to Brad. During this call, we’ll be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical facts 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, October 30, 2017. 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 Form 10-K for the year ended December 31 2016, as well as additional SEC filings we make in the future. If you need copies of any of these documents, please contact my office at Orthofix in Lewisville, Texas. In addition, on today’s call, we will refer to various non-GAAP financial measures. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to financial measures determined in accordance with U.S. GAAP. Please refer to today’s press release announcing our third quarter 2017 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results. At this point, I’ll turn the call over to Brad.

Thanks, Mark, and good afternoon, everyone. As usual, I will start by giving you a summary of our third quarter 2017 performance, after which Doug will walk you through the financial results that we reported today. I will then followup with our updated guidance for the remainder of the year before opening it up for Q&A. We had another strong top line performance in the third quarter with net sales of $105.2 million this represents an increase of 6% over prior year in constant currency. As we started the year we had two primary objectives. The first was to accelerate our organic top line growth rate sustainably into the mid-single digits. We invested in new products and sales force enhancements to achieve this acceleration. Year-to-date we have achieved constant currency quarterly growth rates of 4.6%, 5.1%, and 6% respectively. This was accomplished in spite of significant headwinds in our extremity fixation business due to restructuring and the discontinuation of our non-core business. The second objective was to position the company through a restructuring initiative for meaningful margin expansion in 2018 and beyond. I will provide an update on these programs later in the call. We are very pleased with our progress to date on achieving both of these objectives. Now looking at each of our strategic business units or SBUs and starting with BioStim, net sales grew 3.4% over the third quarter of 2016. This performance was impacted by the disruption of business due to the Florida and Houston hurricanes. Our estimate is that excluding this impact sales growth would have been approximately 5% for the period. Our other three SBUs were only modestly impacted during the period from these two storms since their base of business is considerably smaller in those geographies that are BioStim business. We estimate that the hurricane that devastated Puerto Rico will impact our sales approximately $500,000 per quarter including Q4 of this year until such time as medical procedures begin to ramp back to normal volumes. Based on this we are planning for little to no sales in Puerto Rico for the next four to six quarters. Extremity Fixation net sales increased 1.4% in constant currency for the period, but was up 4.6% on a constant currency trailing 12-month basis when normalized for the previously discussed restructuring and discontinued non-core business. In our Biologics business we recorded another solid quarter of 6.2% growth over the prior year. Trinity Elite continues to be the driver of this business in combination with sales force enhancements. Our Spine Fixation SBU continued to exceed our expectations delivering 19.1% year-over-year growth in constant currency for the third quarter. Products introduced in the last 18 months, the uptake of new distribution partners and the approved engagement of our legacy sales force continue to be the primary drivers of this business. To help our investors appropriately compare our Biologics and Spine Fixation SBUs to our peers it should be noted that unlike our peers we report these two businesses separately instead of as one spine business segment. If we reported them together we would show trailing 12-month sales of $140.5 million making us the eighth largest worldwide spine company with 13.3% year-over-year growth for the third quarter and a year-to-date growth rate of 10.3%. Moving on to our non-sales key metrics in the quarter. Adjusted EBITDA margin was 20.1%, adjusted earnings per share was $0.42, adjusted ROIC was 10.7%, free cash flow was $9.1 million and we had cash balance of $53.9 million as of September 30, 2017. All of the metrics were roughly in line with expectations. Doug will give you more detail in a few minutes on these numbers. I'll now review a few operational highlights for the quarter and year-to-date. As you may have seen in our press release last week, one of the most widely read publications in the spine space Orthopedist This Week recognized Orthofix Stim Ontrack technology one of the top 10 medical device advancements for 2017. It was awarded this honor for its potential to facilitate therapy compliance and ultimately improve patient outcomes. As we previously mentioned, earlier this year our BioStim SBU introduced this mobile app that works with the latest generation of Orthofix Cervical-Stim and Spinal Stim on growth stimulators. The technology includes a first to market feature that enables physicians to receive real-time data on how their patients are [indiscernible] to the prescribed treatment allowing them to adjust and personalize follow-up protocols to help achieve better outcomes. In parallel they help provide patients with a daily treatment reminder and a device usage calendar to help them adhere to their prescription and take an active role in the spinal fusion recovery. This award is a great recognition of the commitment we are making to the future of this bone therapy technology. We are also committed to finding new ways in which our Pulsed Electromagnetic Field Technology or PEMF can augment the body's natural healing process. To that end we have now enrolled more than 75 patients in the 150-patient IDE clinical feasibility study of the effectiveness of PEMF for treatment of osteoarthritis of the knee. Additionally we expect to begin enrollment before the end of the year in our 540-patient pivotal human clinical IDE for the adjunct treatment of rotator cuff surgery through the use of PEMF. We are excited about the potential benefits this therapy holds for very large population of patients. In our Extremity Fixation business the recent limited U.S. commercial launch of our full line internal fixation system for the foot and ankle called RIVAL has generated positive feedback from both distributors and surgeons. As you may recall, the RIVAL system is a sterile packed indication specific plate and screw implant system with a unique universal instrument set designed to address over 50 indications in the foot and ankle all in one tray. The RIVAL system is an important element in our strategy to expand our product portfolio in the foot and ankle space in the U.S. and leverage our reputation as a leader in lower limb external fixation solutions. We are in the process of ramping up our full commercial launch of this product line which we expect will take several quarters. In our Spine Fixation SBU the next significant product introduction will occur in the first quarter of next year when we launched our FORZA XP line of expandable interbody product line. We believe this new addition to our portfolio along with a strong market acceptance of our CETRA Anterior Cervical Plate released earlier this year and our proprietary PTC interbody porous titanium and PEEK composite technology will contribute significantly to our growth in the years to come. Now I'd like to share some of the things we are doing to address margin expansion through execution improvements going forward. By year-end we will have completed the extremity fixation SBU restructuring that I previously mentioned which included closing a non-core business in the UK, moving a manufacturing business from the UK to our facility in Verona, Italy, the transition of direct sales business in Puerto Rico and Brazil to stocking distributors and associated reduction in force. We also recently finalized a U.S. restructuring plan primarily focused on corporate expenses and workforce rationalization. This initiative is well underway and expected to contribute significantly to our margin expansion objectives. Finally, the biggest area for improvement remaining in the company is our spine fixation supply chain effectiveness, inventory management, and instrument set logistics. This opportunity is evident in looking at our inventory balance and turns, it is a high priority for us to address. We have an opportunity for numerous process improvements that will have meaningful financial and customer benefits. We believe we now have the right team in place and the right plan to achieve these benefits over the next six to eight quarters. The final item to note for the quarter is that we recently received formal notification from the Office of Inspector General that Orthofix has fully satisfied the terms of its five-year corporate integrity agreements and the agreement has concluded. We are pleased to reach this milestone. Now more than ever a company's commitment to ethics and compliance is an indicator of culture, health and value. Orthofix has a strong commitment to its compliance program and has implement rigorous controls and processes to ensure ethical behavior in everything we do. We are proud of this commitment, the culture we fostered and the respect we've gained within our industry over the last several years. Overall, we are very pleased with the quarter and the way the year is shaping up. Not only have we outperformed the goals we laid out for ourselves at the beginning of the year, but we are confident about our accelerating momentum that will carry over into 2018 and beyond. With that I'll turn the call over to Doug for the financials. Doug?

Thanks Brad and good afternoon everyone. I'll start by providing details into our net sales and earnings results and then discuss some of our other financial measures. Total net sales in the quarter are $105.2 million up 6.9% on a reported basis and 6.0% on a constant currency basis when compared with the third quarter 2016. The percentage increase was primarily driven by growth in our Spine Fixation and Biologics SBUs. Gross margin in the third quarter was 77.5% down from 79.8% in the prior year period. These results were driven primarily by sales mix, operational variances, the impact of converting the stocking distributors in Brazil in our Extremity Fixation SBU and $600,000 of nonrecurring expenses related to the U.S. restructuring plan that Brad mentioned. As for the full-year 2017 we now expect gross margins to be modestly lower than prior year. Sales and marketing expenses were 45.1% of net sales in the third quarter of 2017 compared to 42.4% of net sales in the third quarter of 2016. This year-over-year increase was primarily due to higher commission expenses from geographic mix in Extremity Fixation and higher rates from new Spine Fixation and Biologics distributors as well as sales and tax benefits in the third quarter of 2016. We are pleased with our second consecutive quarter of sequential improvement in sales and marketing expenses as a percent of net sales and expect this trend to continue in the fourth quarter. Non-GAAP net margin in the quarter was 32.3% of net sales which was down from 37.5% of net sales in the third quarter of 2016. This decrease was primarily due to the reduction in gross margin and increase in sales and marketing spending over the prior year that I just mentioned. General and administrative expenses were 17.2% of net sales in the third quarter of 2017 which were down from 19.6% compared to the prior year period. This year-over-year increase was due primarily to lower share based compensation and core expense reductions which offset $1 million in US restructuring expenses. Research and development expenses were 6.6% of net sales in the third quarter which were down slightly from the prior year. We now expect full year 2017 R&D expenses as a percent of sales to be down slightly from 2016 due to the higher sales than expected. For the third quarter 2017 we reported net income from continuing operations of $0.18 per share as compared to $0.56 per share for the third quarter 2016. After adjusting for certain expenses and when normalizing for tax using a long-term tax rate of 38% adjusted net income from continuing operations was $0.42 per share compared to $0.36 per share in the third quarter of 2016. This bottom line improvement primarily reflects the revenue growth and lower share-based compensation during the quarter. Adjusted EBITDA margin during the third quarter decreased to 20.1% of net sales from 23.9% of net sales in the prior year. The reduction in adjusted EBITDA margin was due to the lower gross margins and higher sales and marketing expenses offset by lower general and administrative expenses as I just detailed. Now turning to tax, we had income tax expense for the quarter of 65% of income before income taxes as compared to an income tax benefit of negative 14% of income before income taxes in the same period of 2016. This year-over-year increase in our rate was driven by accruals for uncertain tax positions in the current quarter as well as a one-time tax benefit in the third quarter of 2016 related to a change in estimate for share based compensation that did not recur this year. Moving on to the balance sheet highlights, day sales outstanding or DSOs were 53 days at the end of the third quarter 2017 up from 49 days at the end of the third quarter 2016 due primarily to our increased Spine Fixation sales. Our inventory turns at the end of the third quarter 2017 of 1.2 times which were slightly slower than the prior year's 1.3 times reflects the new product introductions in Spine Fixation and Extremity Fixation. As Brad mentioned this is an area of opportunity for improvement that is a focus for us. Cash and cash equivalents at the end of the third quarter increased to $53.9 million compared to $39.6 million at the end of 2016. Cash flow from operations for the quarter was $13.8 million compared to $17 million in the third quarter 2016. This decrease was primarily due to higher working capital investments and inventory to drive revenue growth. Capital expenditures during the quarter were $4.7 million or $3.9 million in the prior year due primarily to the instruments required for new product introductions during the quarter. Free cash flow defined as cash flow from operations minus capital expenditures was $9.1 million during the quarter compared to $13.1 million in the prior year. The decrease was primarily due to the lower cash from operations that I just mentioned. As a reminder, our fourth quarter has historically been our highest quarter of free cash flow generation and we expect the same this year. I will now turn it back to Brad.

Thanks Doug. I will now update you on our full year guidance. Starting with net sales, we now expect to finish 2017 between $428 million to $431 million compared to our previous guidance range of $422 million to $425 million. This updated range represents a 4.4% to 5.2% year-over-year growth rate based on current foreign currency exchange rates. Looking at the growth contribution from each SBU we continue to expect BioStim and Biologics SBUs to grow in the mid-single-digit range for the full-year. Our expectation for Extremity Fixation net sales is to finished the year with a low single digit top line decrease a return to constant currency mid-single-digit growth in 2018 as the restructuring and discontinued business headwinds we saw this year come to an end. For Spine Fixation SBU based on our continuing momentum we now expect to achieve low double-digit growth for the full year 2017. Looking ahead to 2018 consolidated top line performance with the momentum we have in each of our businesses we feel very good about achieving solid mid-single digit organic revenue growth for the full year. Moving on to adjusted EBITDA, we are updating our adjusted EBITDA range to $79 million to $82 million for the full-year and still project to improve adjusted EBITDA margins by a minimum of 100 basis points in each of the next three years. For this full year we now expect adjusted earnings per share to be in the range of $1.54 to $1.63 using weighted average shares of 18.4 million and a long-term tax rate of 38%. Our previous guidance range for adjusted EPS was $1.54 to $1.60 per share. With that operator, we are now ready to open up the lines for questions.

Thank you. [Operator Instructions] And our first question comes from Ryan Zimmerman from BTIG. Your line is open.

Great, thank you. Can you guys hear me?

Yes, we can hear you Ryan.

All right, thank you so much for taking the questions, congrats on the top line performance, the guidance raises are starting to become routine, so that's good. If we could talk a little bit about the strength in spine this quarter and kind of the stocking impact that you saw from the Brazilian and Puerto Rico distributors I think that would certainly be helpful? And then I have a few – couple of follow ups.

Sure, Doug do you want to start with the stocking for the…?

Yes, so we saw COGS impacted by the restructuring that we embarked on last year with Extremity Fixation moved us from a more direct distribution model to that of a third party distributor model and so we had some large orders in the third quarter for which we had to recognize COGS on and didn’t get the benefit of the sales. We expect the cash and the revenue to come in in the fourth quarter but it did negatively impact Q3.

Understood.

And then Ryan, in terms of just the momentum we have in the spine business really driven by the same things I've been talking about, the new products, the new distributor uptake and the engagement of our legacy distributors. One metric I can give you that I think is pretty exciting for us is 25% of our sales in the quarter came from products that were released within the last 24 months, so that all the time and energy we put into kind of revamping our new product development cycle and process is really now starting to pay off. It was a three or four-year effort to get there but now we're seeing the results of that. So that's what's really kind driving the spine business.

And just given the increased guidance in the spine segment that you talked about in the low double-digits where do you see opportunities from a distributor standpoint, maybe it's geographically or opportunist operator distributor classes, I mean what gives you that confidence that you can kind of really take those numbers up and for the fourth quarter? And then my followup question will be around FY-'18 specifically, but just on that first?

Sure, I mean there is still a lot of geography that we don’t have coverage particularly well and so there is always opportunities and we are – you know the other thing that's changed in terms of the momentum in our spine business is we're not out looking for distributors as much as they are looking for us now. The word is out from our current distributors and the feelings they have about Orthofix and working with Orthofix that the engagement that I talked about. So we have a lot of distributors coming to us looking for a long-term home and that's what we want to be, that's one of our goals is to be the preferred partner for independent distributors out there. And so there's a lot of room left for us to continue to grow there. And we still have more uptake on the distributors that we've added to kind of help continue the momentum as well.

I appreciate that and I'll sneak one last one and just on FY-'18 I appreciate you've given us the color for your FY-'18 initial thoughts, anything you can provide just on the initial puts and takes of that business from a segment standpoint in terms of how we should be thinking about these businesses? I mean mid-single-digits across four business segments can provide a lot of variation, so I'm just wondering if there is anything we should take away kind of exiting this year as maybe indicative of how we should be thinking about the segment businesses into '18? Thank you.

Sure now that's great Ryan. Now I think if you think about the BioStim business it is such a rock solid business for us. Think in the mid-single-digits, we talked about for the rest of this, for the kind of that number for the full year this year but also into '18 as we think about mid single-digits it stands not surprisingly at 3.5 to 6.5 sort of range, so anywhere in that range is where we expect to be. We expect to be solidly in the range on a consolidated basis. Biologics, same thing, we expect next year to be in the mid-single-digits. Extremity Fixation, we've got coming off some lower comps this year we've got some very good opportunity there, I would say mid-single to the high end of the mid-single digits is what we will be shooting for and same thing for Spine Fixation business. We have good momentum. I don't want to get too far ahead of our skis on it. The spine we have lot of competitors out there, but we feel very good about still high end of the mid-single-digits next year for spine. So all of the business we expect to perform in that range next year with probably a little bit more opportunity for growth because the base is smaller in our Extremity Fixation business and our spine business base and where the comps are a little bit lower.

I appreciate the color. Thanks for taking the questions guys.

You bet Ryan, take care.

And our next question comes from Raj Denhoy from Jefferies. Your line is open.

Hi good afternoon.

Hey Raj, how are you?

Pretty good, thanks. What if [indiscernible] are maybe on expectations as you mentioned, you know the growth there remains a little bit challenged and I am completely appreciating the changes that are going on there, but maybe you could just give us a little bit more about where you are in that process? It sounds like a lot of the efforts are overseas and in trying to get that business on better footing, but maybe a little more detail will be helpful?

Yes, sure, I'm happy to do so. Yes we really have the vast majority of that behind us. As we exit the fourth quarter we will no longer have the comp of the discontinued non-core business that was about a $0.5 million headwind per quarter. We were a little bit late this year in getting a stocking distributor to replace our direct sales in Brazil, so that will still be a little bit of a headwind in the first couple of quarters next year but not something significant. We still expect to post strong mid single digit growth to overcome that. Puerto Rico is going to be a little bit different issue. It will cost us about a $0.5 million a quarter we think next year, but that's spread across a few businesses, Ex-Fix spine and biologics mostly expects in spine. So that will be a little bit of headwind, but we do think I do feel very good about our Ex-Fix business now returning to very strong growth going forward. And it will be a little bit unusual next year and Doug can speak to it better than I can but the revenue recognition standards are changing which will change how the timing of when we recognize revenue from a lot of our customers that are currently today on a modified cash basis. So but we'll could be comparing those numbers year-over-year, but that will even things, should help even things out a little bit more than we've had over the past few years, but we feel very good about that business going into next year.

Your assumption that it is getting tighter in terms of the revenue recognition?

It is over time we've seen the volatility of the difference between cash basis revenue and invoice based revenue. Slimmed down some over the last several quarters and it obviously impacts mostly our Extremity Fixation and Spine Fixation businesses. Raj, just there is a one more follows up on that too. The other driver next year significant driver for that for our Extremity Fixation business is the RIVAL foot and ankle products in the U.S. that we're just launching now, so that's our fastest growing geography in the Extremity Fixation in the U.S. and adding that foot and ankle plating and screw system to it will help drive that business even more.

Okay, fair enough and then the other stand out in the quarter was just the higher spending. You know I appreciate the gross margin is a little bit weaker on the mix. But you are spending more and sales and marketing was a bit higher and so again sort of similar question right I mean it does so Mike you're making investments this year that you hope to leverage in the next year, but I mean how do you, how do we get comfortable again that that the spending is kept elevated but it will start to come down?

So you’re exactly right Raj. We are spending this year. We did some spending to increase our top line growth rate which we've accomplished, some of that spending will come down, some of it won't. So our sales and marketing expenses as an example, I think if you, if we were thinking in general in that mid 45 range that is going to be the right range. We did increase our commissions in some of our businesses and appropriately so, those we don't expect to come back down significantly next year. We will have some improvement in Q4 of this year as we bring it back down into that 45% range-ish from where we started the year, but going on beyond that into next year we have a possibility of getting some leverage on our increase in sales but not a lot there. That's an area I want to be very careful about the spending so that we don't disrupt what we've accomplished now on our top line growth. In terms of G&A we do have more opportunity there. It's less than we had a few years ago. We've accomplished a lot there already, but we feel we have some there. R&D, I'm not going to touch. We're going to continue to spend in R&D to drive our business and then cost of goods is where we really have the most opportunity. We are in the process of addressing the inventory and working capital, particularly inventory issues that you see with some structural changes and new focus on that that will be the primary place we drive COGS and we're going to - cost of goods and we're going to continue to focus on that through the year. And we think we have very good opportunity in that area.

Raj just kind of looking at overall we talked about at least 100 basis points improvement per year for the next three years in our adjusted EBITDA margin.

Yes, and it's always getting at so that 100 basis point sounds like its primarily gross margin driven with some perhaps G&A, but we shouldn't think about much coming out of sales and marketing R&D if any.

I think that's fair, it's going to be - we're going to get it from, I think we have the opportunity to get up from all three how it breaks out we'll have to – we'll see how that rolls out next year.

Great, maybe just one last one just any updates on acquisition and I doubt you'll give us much, but you've talked at times about that being a focus and on the balance he remains in pretty good shape for generating cash so where does it stand on potential acquisitions?

Yes, we're still very active, looking at all opportunities for all of our business units and we see some limited opportunities for certain business units and more opportunities in others and you can see that our activity declined a bit in the third quarter relative to the first couple of quarters just by the spending that you see there for our strategic initiatives, but we are active, very active and will continue to be. And again we're going to be very disciplined and there's a lot of deals that we've passed on that didn't meet our criteria and we've talked about that ROIC, EPS accretion relative near term and strategic fit. So we're not currently looking to add a fourth leg on the stool. We are focusing on how we can grow our existing businesses and leverage the core competencies that we have.

Great, I appreciate the updates. Thank you.

Thank you, Raj.

And our next question comes from Jeffrey Cohen from Ladenburg Thalmann. Your line is open.

Hi, guys thanks for taking the question and congratulations on a nice quarter.

Thanks, Jeff.

If you could just two or three items I just wanted you to run through because this is and use of the service way before and that is a little bit of color on JuniOrtho and move the discussion on RIVAL and the number sets out there now and what kind of updates you expect? And then thirdly if you could assure the status of your expendables as far as numbers sets and penetration, give us any color would be appreciated?

Absolutely, I’ll take those in order then. JuniOrtho as we've talked about over a third of our business is focused on pediatric orthopedics, in our Extremity Fixation business. We are still doing very well in that business. JuniOrtho is a branding initiative that also connects the physicians and families and the children who are being treated in a different way we’re very much engaging all of them in the process and so it's from our perspective it's doing very well. Our sales are still strong and we expect them to continue to be strong and we are working on a number of new products that are specifically designed for pediatric orthopedics, so everything is good there. RIVAL in the U.S we have I will say over 4,000 steps in the field today. Getting the steps in the field doesn't necessarily translate into sales immediately. You still have to get hospital approvals, you have to get the physicians trained and those sorts of things. So it's going to be a little bit of a slow ramp for the remainder of the year. And then into next year, but we do have strong expectations for RIVAL next year in the U.S. And so we started a little bit about a quarter behind where we wanted to, so we're a little behind where we had expected to be, but we're still obviously doing very well on our top line overall in spite of that as a company. So, very happy with so far the cases that they're doing. The physicians are very satisfied with the product and the instruments and it's going very well. So no concerns there and we're bullish about RIVAL in 2018 and beyond. And then finally FORZA XP which is our expandable interbody, we expect that to be out on a limited market release in the first part of the first quarter of next year. So within 90 days or so that should be in the market and we're excited about that one that's probably the single biggest gap we have in our portfolio today for Spine Fixation and we're excited to fill that gap. So we're looking forward to seeing how that can contribute next year as well.

Okay and then if you could just provide a little color generally speaking as far as how it feels on the momentum front, it looks like a few of your businesses are doing very well and taking up some share, could you talk about Spine in particular and feedback that you're hearing from the field, from your commercial force and from physicians?

So in general let me make sure I've got your question right Jeff. Just the feedback we're getting about our Spine business from our distributors and physicians in general?

Yes, and how you're feeling about the momentum carrying forward.

We feel terrific about it. It was not an easy turn to get that business to where it is and it's like anything else. It's like moving a train. Once you get it moving it keeps moving, but if it's moving backwards it keeps moving backwards and it's hard to stop. Well we got stopped and we have it moving forwards. Now we have good momentum. The feedback from the physicians is very good and equally as important if not more important is the feedback from our distributors. We were just as you know and just talking to our distributors saying that this is a different orthotics, this is not orthotics Spine business that they knew three or four or five or even eight years ago. This is a different business. They are engaged differently, they're excited; they have new products. As I've mentioned on the earlier question Jeff, 25% of our products of our sales in Q3 came from products that have been released in the last 24 months in that business and the pipeline continues. And so I couldn't ask for anything more in that business today, it's got a lot of momentum, lot of good energy and a lot of people working very hard.

Perfect. Thanks for taking the questions.

You bet. Take care.

And our next question comes from Jim Sidoti from Sidoti & Company. Your line is open.

Good afternoon. Can you hear me?

I can Jim. How are you today?

Hi Jim.

Good, good thanks for taking the questions. First one on the tax rate in the quarter you said taxes were up because of accruals for uncertain tax benefits is that in the U.S. or outside the U.S.

It's in the U.S. We've previously announced in out that were audit for tax years 2012 and 2013 and this quarter we were in a position to go ahead and recognized the amounts that we estimated that it could take to resolve those matters.

Okay and then inventory went up in the quarter compared to the June quarter, is that in preparation for a strong fourth quarter and did that prompt some of the restructuring that you talked about earlier on the call?

And most of that increase Jim, had to do with the new products, particularly RIVAL and stocking up to releasing those products that was the biggest addition to our inventory was new products.

Okay and then my last question, look at the guidance of the year which is really the kind of for the fourth quarter where we are now. It's relatively tied on the top line $3 million but about $0.09 on the bottom line can you just talk about the puts and takes?

Yes. I'll tell you as we get into Q4 here. Q4 can be a little bit more on the bottom line can be a little bit more volatile due to just yearend, some yearend adjustments and those sorts of things. So we chose to leave the bottom end of our range at adjusted EBITDA at $79 million for the year and keep the bottoming to range of the EPS there. We do see some upside and that's why we increased the top end of the range and on both of those on both EPS as well as adjusted EBITDA for the year. But we also want to be a little bit careful as we go into Q4. I've been through a lot of Q4s where some things came up at your end as you're going through the closing process that weren't expected so that's the reason where we are.

Okay, all right. Thank you.

Thanks Jim.

Thank you.

And at this time I'm showing no further questions.

Thank you, Operator. I appreciate your help today and appreciate everybody calling in and we will look forward to talking to you again very soon. Take care. Have a good evening.