Orthofix Medical Inc. (OFIX) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Orthofix Fourth Quarter and Full Year 2017 Earnings Results Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Mark Quick, Director of Business Development and Investor Relations. Sir, you may begin.

Thanks, operator and good afternoon, everyone. Welcome to the Orthofix fourth quarter and full year 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, February 26, 2018. 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 2017, as well as additional SEC filings we make in the future. If you need copies 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 fourth quarter and full year 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. I will start by giving you a summary of our fourth quarter and full year 2017 performance, after which Doug will discuss the financial results that we reported today. I will then follow up with our key areas of focus and outlook for the full year 2018 before taking questions. In the fourth quarter, we saw our top line growth momentum continue with reported net sales of $116.9 million. This represents year-over-year increases of 7.7% as reported and 6.1% in constant currency. For the full year 2017, reported sales were $433.8 million, or 5.9% reported growth and 5.5% in constant currency growth over prior year. Now looking at each of our strategic business units or SBUs, and starting with BioStim. Net sales grew 4.1% over the fourth quarter of 2016 and 5.3% for the full year. This growth was in line with our Q4 and full year expectations, driven primarily by the market acceptance of our next generation bone growth stimulators and accompanying Stim onTrack mobile app. Extremity Fixation net sales increased 2.2% in constant currency for the period and was up 3% for the full year when normalized for restructuring and a discontinued non-core business. We exited 2017 with good momentum in our U.S. business and our pediatric and foot and ankle strategic product areas. This gives us confidence in our higher 2018 growth expectations for this SBU which I will speak about in a few minutes. Our Spine Fixation SBU continued to deliver strong top line performance with double digit constant currency growth for the quarter and full year of 13.2% and 12.7% respectively. New products are the primary driver of this business along with a growing and engaged sales force, particularly in the U.S. where we saw over 20% revenue growth in 2017 for the full year. And in our biologics business, we reported another quarter of strong growth of 10.7% over prior year. For the full year, our 8.3% year-over-year growth rate significantly outpaced the allograft stem cell market growth rate with Trinity ELITE allograft continuing to be the driver of this performance. As I mentioned last quarter, unlike our peers, we report our spine and biologics businesses separately instead of as one spine business segment. When combined, revenues in constant currency were $38 million in the fourth quarter and $144.6 million for the full year. This represents year-over-year growth of 12.1% for the quarter and 10.8% for the full year, making our total Orthofix spine business among the fastest growing top ten spine companies in 2017. Moving on to our non-sales key metrics in the quarter. Adjusted EBITDA margin was 20.8%. Adjusted earnings per share of $0.52 and free cash flow was $26.2 million. For the full year, adjusted EBITDA margin was 18.8%, adjusted earnings per share was $1.62, adjusted ROIC was 12.5%, free cash flow was $36.4 million, and we had a cash balance of $81.2 million as of December 31, 2017. 2017 was a terrific year for Orthofix in so many ways. We accelerated our growth rate and over-achieved our top line expectations with strong volume growth in each of our SBUs. We have successfully transformed our spine fixation SBU, delivering exceptional growth and sales momentum in addition to a robust stream of new products. We continue to make steady progress in our IDE clinical trials focused on using our pulse electromagnetic field technology or PEMF to treat osteoarthritis of the knee and reduce the instances of repair failure following rotator cuff surgery. Additionally, a few weeks ago we announced the initiation of the enrollment of a prospective randomized double-blind placebo controlled trial evaluating the safety and efficacy of PEMF as adjunctive treatment to surgical repair of full thickness rotator cuff tears. We are very excited to build upon our compelling, pre-clinical research in this application and look forward to keeping you updated in the years ahead. Additionally on the clinical front, we will be announcing the publication of new data in bone and joint research, which confirms the effectiveness of our Cervical-Stim device in improving fusion rates. As we will highlight in the forthcoming press release, the study's findings show that after ACDF surgery, use of PEMF stimulation significantly increased the fusion rate relative to the control group at six and 12 months for participants who are at risk of pseudoarthrosis. We look forward to adding this publication to our extensive portfolio of clinical research supporting the safety and effectiveness of using our PEMF products for treatment in high risk patients. Additionally, we launched 20 new products and significant line extensions during the year and have 17 slated for 2018. In December, we executed an amendment to our agreement with MTF Biologics that extends the term of our existing agreement by two years until July 2027 and initiates the development of some exciting new technologies for our Trinity technology platform. And lastly, in the fourth quarter we largely completed our restructuring initiatives that included a worldwide reduction in force of 9%, the closing of a non-core business, moving a business from the United Kingdom to our operations in Italy, the transition of Extremity Fixation direct sales business in Puerto Rico and Brazil to stocking distributors to improve profitability, and numerous cost saving efforts in G&A in the U.S. Overall, we are very pleased with the quarter and the year. We outperformed the goals we laid out for ourselves at the beginning of the year and ended 2017 with strong momentum that should propel us into 2018 and beyond. I will now turn the call over to Doug for the financial details. Doug?

Thanks, Brad, and good afternoon, everyone. I will 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 were $116.9 million, up 7.7% on a reported basis and 6.1% on a constant currency basis when compared to the fourth quarter 2016. Throughout 2017, we saw better-than-expected growth driven by our spine fixation and biologics SBUs. Gross margin in the fourth quarter 2017 was 79.8%, up from 78.5% in the prior year period. This result was driven primarily by our U.S. and o-U.S. restructuring initiatives during 2017, as well as the higher revenue from o-U.S. Extremity Fixation stocking distributors. Moving into 2018, we expect a minimum of 50 basis points of improvement from our full year 2017 gross margin of 78.6% due to our inventory and instrument set management initiatives. Sales and marketing expenses were 44.4% of net sales in the fourth quarter of 2017 compared to 44.9% of net sales in the fourth quarter of 2016. In line with our expectations, we were pleased to see this year-over-year decrease while maintaining our higher growth momentum. For 2018, we expect sales and marketing expenses as a percent of sales to stay roughly flat with 2017. Non-GAAP net margin in the quarter was 35.5% of net sales which was up from 33.6% of net sales in the fourth quarter of 2016. This improvement was due to the increase in gross margin and the decrease in sales and marketing spending as a percent of sales over the prior year that I just mentioned. General and administrative expenses were 16.7% of net sales in the fourth quarter of 2017, which were down from 19.4% compared to the prior year period. This year-over-year decrease was due primarily to lower legal settlement costs in the quarter as well as core expense reductions due to our U.S. and o-U.S. restructuring initiatives and lower professional fees. Research and development expenses were 7.2% of net sales in the fourth quarter which were up slightly from the prior year due to the ramp up of our clinical research activity and initiating additional product development studies with MTF Biologics that Brad mentioned. For 2018, we also expect R&D expense as a percent of sales to stay roughly flat with 2017. Adjusted EBITDA during the fourth quarter increased to 20.8% of net sales compared to 19.4% of net sales in the prior year. The primary driver of this 140 basis point margin improvement in the quarter came from general and administrative expense reductions due to our o-U.S. and U.S. restructuring initiatives and lower professional fees. As Brad will outline shortly, we plan to achieve a minimum of 100 basis points of adjusted EBITDA margin expansion in 2018. Now turning to taxes. We had income tax expense for the quarter of 91% of income before income taxes compared to 238% in the same period of 2016. This year-over-year decrease in our rate was driven by significantly higher pre-tax income in the fourth quarter of 2017 offset by $8.6 million of additional income tax expense related to the impact of the recent U.S. tax reform on our net deferred tax assets. Absent this change, our rate would have been 39% for the quarter. As we look to 2018 and beyond, we will benefit from the new lower corporate in the U.S. However, that benefit is partially offset by the loss of certain historical tax deductions on the U.S. that are no longer allowed, higher tax rates on our earnings outside of the United States which accounts for approximately 20% of our total revenue and certain corporate costs incurred by Curacao parent that provide very little tax benefit. Accordingly, based on our current expectations of tax laws and income we expect our long-term adjusted effective tax rate to improve to 35% from our previous rate of 38%. I would like to take a brief moment now to share an initiative we are pursuing to move our domicile from Curacao to the United States. We have been evaluating this move for some time and pending additional diligence, intend to initiate the re-domicile this year. We currently believe that changing our domicile out of Curacao and into the U.S. would benefit us in a number of ways including simplifying our organizational and governance structure, enhancing our ability to centralize cash for more efficient deployment, allowing us to fully benefit from our parent's corporate cost and take advantage of potential opportunities afforded by the recent U.S. tax reform act, and increase in our cash flow as a result of lowering of our effective income tax rate. While much work still needs to be done, based on what we know today our expectation is to request shareholder approval for this move in conjunction with our annual shareholder meeting later this year. We anticipate incurring approximately $4.5 million of cost over the next three quarters in order to complete all of the underlying steps for re-domiciling our parent company. These costs are included in strategic investments in our 2018 guidance. For the fourth quarter 2017, we reported net income from continuing operations of $0.08 per share as compared to a loss of $0.29 per share for the fourth quarter 2016. After adjusting for certain items and when normalizing for tax using a long-term rate of 38%, adjusted net income from continuing operations was $0.52 per share compared to $0.42 per share in the fourth quarter of 2016. This bottom line improvement primarily reflects the revenue growth and margin expansion during the quarter. Moving on to the balance sheet highlights. Days sales outstanding or DSOs were 50 days at the end of the fourth quarter 2017, up from 49 days at the end of the fourth quarter 2016. Due to the adoption of the new revenue recognition standard, we expect a onetime increase in accounts receivable of approximately $9 million. This will add 8 to 10 days to our historical DSO calculation. Our inventory turns at the end of the fourth quarter 2017 were 1.1 times, which was slower than the prior year at 1.4 times. Reflects the new product introductions in spine fixation and extremity fixation. As noted, this is an area of opportunity for improvement that is the focus for us and we expect modest improvement in 2018. Cash and cash equivalents at the end of the fourth quarter increased to $81.2 million compared to $39.6 million at the end of 2016 and $53.9 million at the end of the third quarter 2017. Cash flow from operations for the quarter was $29.8 million compared to $6.3 million in the fourth quarter 2016. This increase was due to the strength of our fourth quarter performance, the receipt of an approximately $6 million D&O liability insurance settlement for prior costs incurred for the historical SEC FCPA matters and the fact that we paid $14.4 million in the fourth quarter 2016 for our U.S. government resolutions which depressed cash flow for that period. Capital expenditures during the quarter were $3.7 million versus $4.1 million in the prior year due primarily to project Bluecore spending related IT investments in the fourth quarter 2016. In 2018, we expect capital expenditures to increase modestly due to continued investments in new product instrument sets that support top line growth. Free cash flow, defined as cash flow from operations minus capital expenditures was $26.2 million during the quarter compared to $2.2 million in the prior year. As we expected and experienced historically, our fourth quarter free cash flow generation was the strongest of the year due primarily to the higher profitability and flow through. As we previously announced, starting on January 1, 2018, we were required to adopt a new revenue recognition methodology that primarily impacts the timing of revenue recognition for our sales to stocking distributors for extremity fixation and spine fixation SBU's that were historically accounted for using the sell through method. This new revenue will now be recorded on invoice sales instead of deferring revenue recognition until cash is received. What we expect over time that the new revenue recognition standard will provide a materially consistent revenue result on an annual basis as compared to our previous revenue recognition policies, there may be some variability on a quarterly basis due to timing of cash collections in the prior years. To provide appropriate comparisons, we will compare our prospective 2018 results under the previous revenue recognition methodology versus our 2017 reported revenue in our 2018 10-Qs and 10-K. Further, in order to provide an appropriate comparison to 2018's reported net sales, we have provided a table in today's press release providing non-GAAP, unaudited net sales for each quarter in 2017 under the new revenue recognition standard. In 2017, net sales under the new standard were approximately $431 million, a reduction of $3 million from the previous standard. With that, I will now turn it back to Brad.

Thanks, Doug. In 2017, our strategy was to accelerate our organic top line growth rate while maintaining adjusted EBITDA margins. This strategy proved very effective and resulted in us exceeding our growth expectations for the year. Now as we look forward to 2018 and beyond, we are focused on continuing our organic growth momentum, expanding margins, and actively pursuing value accretive inorganic opportunities to further accelerate growth. To maintain our organic sales momentum, we must continue our initiatives to further engage our legacy sales force and add new representation in underserved markets, while remaining committed to investing in R&D and a steady pace of new product and service introductions, such as our Stim onTrack mobile app and JuniOrtho pediatric care support tools. Additionally, we must continue to educate physicians and payers through published, peer reviewed research papers that demonstrate the safety, efficacy and cost effectiveness of our products. In 2018, we can now return our focus to adjusted EBITDA margin expansions. Our biggest opportunity is in gross margins, particularly around improving inventory and instrument set management in our spine and extremity fixation businesses. We also expect to begin to realize the cost benefits of our restructuring initiatives as well as benefit from leveraging our fixed cost and G&A. Orthofix is very well positioned to accelerate top line growth through the acquisitions of products, technologies, and companies. In addition to our strong balance sheet and free cash flow, we have an experienced and proven management team, a global footprint, and a reconstructed infrastructure on which to build. We have been and will remain very active in pursuing small to mid-sized opportunities that will drive shareholder value, particularly through top line growth acceleration. However, we will remain disciplined in our investment decisions, focusing on deals that are a good strategic fit with our core businesses, that give us access to higher growth markets and have the likelihood of creating significant shareholder value in the near to midterm. We are pleased with our positioning going into 2018 and optimistic about our ability to drive shareholder value for the foreseeable future. Moving on to our expected 2018 performance, the guidance we give today and going forward will reflect the new recognition standard that Doug just mentioned and as a reminder, just as in prior years we continue to expect to see our typical seasonality of sales throughout the year with Q1 significantly lower than the prior Q4. Q2 and Q3 each accounting for approximately one quarter of our annual sales and Q4 finishing stronger. For the full year, the company expects to report net sales of $450 million to $455 million based on current foreign exchange rates which when recasting 2017 revenue to the new revenue standard reflects reported year-over-year growth of approximately 4.5% to 5.7%. This guidance includes a positive currency impact of approximately $4 million in our Extremity Fixation SBU, offset by an estimated $3.9 million decrease in the 2018 marketing service fee the company receives from MTF Biologics. This decrease is due to the final contractual step down in the fee that Orthofix receives from MTF Biologics for our sales of Trinity ELITE and Trinity Evolution tissue forms from 65% to 60%. This change effective March of this year in accordance with the terms of our amended 2008 agreement with MTF, coincides with the expiration of a corresponding royalty payment on our net sales of Trinity ELITE and Trinity Evolution that Orthofix currently pays to a third party. The expiration of the royalty payment partially offsets the impact of the fee reduction to operating income and adjusted EBITDA. Looking at the growth contribution from each SBU, we expect the BioStim SBU to grow in the 4% to 5% range, Extremity Fixation from 7% to 9% when recasting 2017 sales in accordance with the new revenue recognition standards and including the currency benefit I just mentioned. Spine Fixation growth in the 5% to 7% range and biologics sales to be roughly flat for the full year due to the decrease in the marketing service fee we already receive from MTF. Excluding this change, we expect biologics sales to increase 5% to 7% for the year. We also expect to achieve adjusted EBITDA in the range of $89 million to $91 million for the full year 2018. Regarding adjusted earnings per share, we expect stock based compensation to increase in 2018 over prior year by approximately $5.6 million or $0.19 per share. This is primarily due to the accounting treatment differences between the different types of performance based equity plans we have used over the last several years and the planned earlier grant date in 2018 than prior years. This increase is reflected in our adjusted EPS guidance of $1.76 to $1.84 using weighted average shares of 18.9 million and a long-term tax rate of 35%. With that operator, we are now ready to open up the lines for questions.

[Operator Instructions] Our first question comes from Bruce Nudell from SunTrust. Your line is now open.

On the re-domicile, like if we were to assume that in fact it's approved by the board, where would that drive the long-term tax rate.

This is Doug. It's a really good question. We are optimistic about the potential here but it's really too early to say in terms of exactly where that would land directionally. We are optimistic that we are moving in the right direction and we think that the project will have positive ROI but still just a little bit early to say. We will come out as soon as we can to let everybody know. In addition to that, you probably noticed that we lowered our effective long-term tax rate from 38% to 35%. As a result primarily of U.S. tax reform. So we are moving in the right direction and we think that re-dom could be a help as well.

And just to expand on that. Is there some issue with kind of mismatch of expenses and revenues that makes the exercise more complicated.

I think re-domiciling is complicated in general but in terms of the specific cost themselves, there are some costs that are incurred by our parent company which is Curacao based that we don’t get full benefit for. That could be beneficial to us under a U.S. domicile so that’s probably the biggest one that comes to mind.

Okay. Thanks so much. And Brad, my follow up is about the spine market. Everybody is reporting that it's under pressure, it is a point or two points below the historic recent averages. And I know you are taking advantage of the distributor segment not played in by the majors but given the kind of procedural bundling the majors were talking about inclusive of robotics and inclusive of navigation, is there a risk to the segment, the distributor segment that you are playing in where hospitals begin to consolidate to a much greater extent than they have in the past.

Yes. Bruce, good question. To date I think we have been turned away from one or two hospital groups. We are one of the largest players, we are the eighth largest spine company out there. We have great relationships and reputations with the hospitals, we also have a very very strong contracting group at Orthofix. And so while that’s -- if I am one of the larger companies, I would be talking about that as well, but we don’t see that impacting us. We didn’t see it impacting us in 2017 and we don’t see it as any sort of material impact in 2018. Certainly, there will be isolated cases here and there and over time it may be more pressure, but currently it's not a factor for us that we are concerned about.

And if I could just squeeze another one on stimulation, how impactful do you think that new study will be and maybe you could describe the top line results of that study. Thanks.

So, yes, the new study -- there will be a press release coming out on that in the next week or so. That will give some more details around it. I won't steal the thunder of the press release on that. But it just goes to -- it's one more log on the fire or it's one more tool on the bag I should say to help us sell the products and to get further adoption of the technology. So, it is one piece -- one published study is one thing but when you add that to the studies that we already have, it just becomes, it starts to become -- I wouldn’t say overwhelming but it's very very impactful and it will help. Now how to quantify that, it's in our guidance that we have given for the year, generally, but we haven't quantified that specifically.

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

This is Catherine on for Raj. So, first, could you please talk about how the limited U.S. commercial launch of RIVAL is going? Your vision for 2018 and, if any, maybe give us a timeline of dates for the full commercial launch of the product line.

Sure. RIVAL is rolling out a little bit slower than we had hoped, to be very honest about it. We still are very confident in the product line and the products that we are putting out there. We are -- it is a measured rollout, Catherine, and we expect to have it completely rolled out by midyear and contributing pretty significantly to the U.S. extremity fixation business in 2018, which is baked into our 7% to 9% guidance for growth in the extremity fixation business.

Great. And also this is a very competitive market, can you expand on your plan to push its portfolio and its fueled growth? And where is your price point against competitors? If you could give any color on this, it would be very appreciated. Thank you.

Sure. I mean, you are talking about our foot and ankle -- let me clarify, Catherine, you are talking about our foot and ankle products in the U.S.

Yes.

So, we don’t get into price points. I just don’t discuss that but in terms of the opportunity in that market, one of the primary requirements to be a really strong foot and ankle company is external fixation. With our TrueLok HEX and that whole product line, we believe of course it's our opinion that it is the best product line out there. It has the features and benefits, it's very well regarded worldwide. So that as a starting point is really important in foot and ankle. We will be talking about a -- and probably a press release about another product coming out here also within the next month that will be an important addition to that product line. And then RIVAL is really the start of our internal fixation products for that category. RIVAL, well it's got almost 1,000 SKUs and it is differentiated particularly in the instruments since we have one instrument can serve up to 50 different indications and surgeries, so it is different. That’s a start but we will still add things, staples and bunionectomy sort of products and full line focusing on -- one of our focuses will be diabetic foot and Charcot, and we think it's a fast growing market, that’s where we want to play and we think we can do well there. We have a very good – very strong sales force very well focused on the podiatry market as well.

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

So can I get a little more color on the deferred tax asset and if there is any further on that for 2018 as you currently anticipate.

We studied the U.S. tax reform as much as we could. Obviously, as of the end of the year, determined that the rate reduction from 35% to 21% caused us to revalue our net deferred tax assets. So they went down about $8.6 million which was reflected in our tax provision in the fourth quarter.

Got it. And while I have you, Doug, a little further on the AR, the one time of $9 million that you referenced on the call.

One time, with regards to revenue recognition, we adopted rev rec on the modified retrospective basis which means that you don’t restate prior years for the new method. And as a result there is an opening retained earnings adjustment in the following year and so that’s where they came from, is the deferred cash based revenue that we will never get to realize as a result of the new standard that was recognized or will be in our opening balance sheet in 2018.

Okay. Got it. And finally, Brad, if you could give us a little bit of commentary on the environment as you see it now, in particular you had -- in particular the M&A environment. You also had some commentary where you spoke about seeking M&A that would be accretive as opposed to instantaneously in the near to medium term. So could you give us a little further color on that, that would be helpful. Thank you.

Sure, Jeff. I think with all the work we have done over the past number of years, we are now at a position where we can be more acquisitive and we have been. You saw in some of our strategic investments last year that we have been busy, we have been active. We remain active and we expect to be. What we are looking for primarily are businesses that are synergistic with our core businesses that also get us into spaces that are faster growing then our existing businesses. We feel top line growth acceleration is still major shareholder value creator and now in addition to that our expectation is to be able to improve our margins at the same time as look for the sorts of acquisitions. It all depends on the strategic fit. I am looking at three to five years out for the company, I am not just looking for the next year. That said, we are also going to be very cognizant of our shareholders and the things that we invest in. But we could have deals that have a longer payback than others, we could have some that have a very short payback. But one of the things you have to think about in the market -- and the market is, we feel there is some very good assets out there. The market -- these assets, they are very proud of their businesses and for us to be competitive in this environment, it's tough to be accretive in the very short term. Or you are not going to get the deal, someone else will get the deal. But that said, we are still going to be disciplined about it and make sure it meets the criteria of being in our core or very adjacent to our core and hopefully accelerate, it moves us into markets that are growing faster than our existing markets.

Super helpful. And maybe, if I can touch further on, perhaps for you Brad also or for Doug, how do you feel about then use of capital for acquisitions in the case of stock and/or debt at current levels.

You know it depends on the deal. The sort of deals that are the most likely with our cash flow, our current position, our borrowing capacity, that’s how we would go. I wouldn’t see the need to use equity for any of the sorts of deals that we are looking at currently.

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

Just a couple of follow-ups. You took that $0.11 charge for strategic investments in the fourth quarter. Is that acquisition activity or what was that?

The strategic investments in the fourth quarter is really just our continued evaluation of opportunities externally. Yes.

Okay. So those are deals that you looked at and at some point you may or may not pull the trigger on.

Exactly.

Okay. And then the tax adjustment, the charge you took in the quarter, is that cash tax payment you made?

No. It's just a book revaluation of the deferred tax assets that we had existing that were impacted by the rate reduction from tax reforms.

Okay. So that $9 million is not a cash charge?

Correct.

Okay. And then I know you are hesitant to go into too much detail going further out in 2018 but I got to assume you wouldn’t make this change to domicile here in the U.S. if you didn’t think the tax rate was going to be lower than even that 35% going forward. Is that a good assumption?

Yes.

Thank you. And I am showing no further questions in the queue at this time. I would like to turn the call back over to Brad Mason, President and CEO, for any closing remarks.

Thank you, operator, and thanks everyone on the call today for joining us. We look forward to speaking with you again soon and have a very nice evening.

Ladies and gentlemen, this does conclude your call and you may all disconnect. Everyone have a great day.