Executives
Christine Jacobs - President and CEO
Frank Tarallo - CFO
Analysts
Brett Reiss - Janney Montgomery Scott
Joseph Munda - Sidoti & Company
Ryan Hummer - Encore Advisors
Constantine Davides - JMP Securities
Theragenics Corporation (TGX) Q4 2010 Earnings Call February 15, 2011 11:00 AM ET
Operator
Greetings, and welcome to the Theragenics fourth quarter and year-end 2010 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host; Christine Jacobs, Chairman and CEO. Thank you Ms Jacob, you may begin.
Christine Jacobs
Thank you, Joey, and good morning. Welcome to our Theragenics fourth and year-end 2010 conference call. We appreciate the fact that you dialed in today. In just a few minutes, I'll provide some comments on this past quarter 2010 and outlook for 11. But first, I am going to turn the call over to Frank Tarallo; our Chief Financial Officer. Frank.
Frank Tarallo
Thank you, Chris. This morning, we released our fourth quarter and annual results for 2010. If you do not receive this new release or if you like to be added to either our fax or our e-mail distribution list, please contact Investor Relations at 800-998-8479 or 770-271-0233. Before I begin my review, please be aware that some comments made during this conference call may contain forward-looking statements involving risks and uncertainties regarding our operations and future results.
Please see our press release issued today and our filings with the Securities and Exchange Commission, including, without limitations, the company's Form 10-K and Forms 10-Q, which identifies specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.
Now onto our results; our consolidated revenue in the fourth quarter was $20.7 million, an increase of 11% over 2009. Both segments contributed to revenue growth in the fourth quarter, this is the second consecutive quarter we have been able to say that. For the year, consolidated revenue was $82.2 million, our highest annual revenue ever and an increase of 5% over 2009.
Earnings per share were $0.01 in the fourth quarter and $0.06 for the year. We had three special items that had a significant impact on our 2010 earnings. First; charges from amounts due from Core Oncology, for which we believe collection is doubtful. These charges affected both of our business segments; we will talk more about Core in a few minutes.
Second; we had expenses related to the legal actions we took against the former owner of CP Medical, those actions were settled in the fourth quarter. And third; we incurred moving related expenses in 2010 in connection with the move to our new needle facility. These three items had the effect of decreasing our earnings per share by $0.02 in the fourth quarter and $0.06 for the year.
Let me move now to our segment results. Revenue in our surgical products segment increased 12% in the fourth quarter and 10% for the year over 2009. This is our second consecutive year of 10% organic growth - revenue growth in this business. Operating income in our surgical business was $63,000 in the quarter and $215,000 for the year.
The special items I mentioned earlier all impacted our profitability in this segment. The charge for receivables from Core, the expenses related to our legal actions against the former owner of CP Medical, and the moving related expenses together reduced our operating income in this segment by $305,000 in the fourth quarter and $1.6 million for the year.
In addition to these special items, our 2010 gross margins ran lower than they did in the 09 periods, changes in customer behavior along with increased costs related to our new larger needle facility has contributed to the decline in gross margins.
Moving now to our brachytherapy segment, brachy revenue grew 8% in the fourth quarter over 09. This was our second consecutive quarter of year-over-year product revenue growth in this business after 19 consecutive quarters of year-over-year declines. The distribution agreement we entered into with Core Oncology in 2010 was the primary factor in our product revenue gains during the third and fourth quarters of last year.
For the full year, revenue was down 5% compared to 09 again Core had a significant impact reducing what the rate of decline would have otherwise been. Operating income in our brachy business was $439,000 in the fourth quarter and $3.7 million for the year. These charges related to the Core Oncology receivables had a significant impact on profitability. Those charges reduced our brachy operating income by $840,000 in Q4 and $1.6 million for the year.
So, let me address Core Oncology for a minute. We began 2010 with Core as our new TheraSeed distributor. Core was expected to bring us incremental unit volume which they did. Sales to Core represented 14% of our brachy segment revenue. As we have discussed before, manufacturing costs in our brachy business are relatively fixed. Incremental TheraSeed volume is highly profitable for us as incremental costs to produce are minimal. I should note that Core is also a customer to our surgical products segment, though sales to Core were less than 1% of surgical revenue in 2010.
We had a very positive relationship with Core from the start and in fact we continue to have a positive relationship with them today. During 2010 Core represented to us that they were tempting to obtain refinancing; they ran into some difficulties in that process. During this period of time, we were in constant communication with the senior management at Core. They fell behind in their payment terms with us. In an effort to support Core and the TheraSeed unit volume, we established alternative terms of payment on a temporary basis.
Core substantially adhered to these terms through late 2010 and we continue to remain in constant contact with them. In late January of 2011, a third party filed a lawsuit against Core; apparently there is a dispute over terms of a strategic alliance through which the parties previously agreed. It is not our place to speculate on the dealings between other parties. However, as it relates to Theragenics; in our view that litigation created an unacceptable level of uncertainty surrounding Core's ability to satisfy their obligations to us.
Accordingly, we notified Core of contract termination on February 1, 2011. Our primary objectives right now are to retain as much of the TheraSeed volume as we can, and to obtain repayment of amounts due to us from Core. I should also note that we have made sales to Core in January 2011 prior to our notice of termination. If these amounts are not paid in full or Core does not otherwise demonstrate an ability to satisfy these obligations, we will have additional charges related to Core receivables in the first quarter of 2011. Chris will talk more about our actions and expectations surrounding this revenue stream in just a few minutes.
Returning to consolidated results; adjusted EBITDA was $2.4 million in the quarter and $11.6 million for the year. The special legal moving and Core related expenses reduced our adjusted EBITDA by $1.1 million in Q4 and $3.2 million for the year. Despite the affect of these special charges, our cash flow from operations remains healthy at $2.6 million for the quarter and $7.9 million for the year.
Moving to capital expenditures; our CapEx totaled $1.1 million in the fourth quarter and $9.1 million for the year. Our rate of capital expenditures declined in Q4 as construction of our needle facility was completed earlier in that year. To a lesser degree, our ERP implementation also contributed to the higher rate of CapEx in 2010. Looking forward we expect our capital spend to decline significantly in 2011 and to be in the range of about $2.5 million to $3.5 million.
We ended 2010 with $40.6 million in cash, cash equivalents and marketable securities. We have $27 million outstanding under our credit agreement resulting in a net positive position of $13.6 million.
That wraps up my comments and I will now like to turn the call back over to Chris.
Christine Jacobs
Thank you Frank. We are quite pleased with our accomplishments in 2010, we just delivered another year of record revenue and we delivered another year of organic growth in our surgical products segment. And in the last half of 2010, we also delivered products revenue growth in the brachy business for the first time in almost 5 years. Since this is year-end, I would like to put - to take a moment and reflect and put our 2010 results in context.
Several years ago, we foresaw what was about to happen in the brachytherapy industry. We anticipated that unfavorable reimbursement policies by CMS would lead to a decline in the number of Brachy procedures. We were transparent and we had several choices back then. In 2005, we took steps to ensure that the brachy business will remain profitable by restructuring. We were surely well-positioned when the recession hit in 2008.
We also took steps to diversify the overall business by passing up on industry consolidation in a declining industry and instead choose an avenue complementary but not dependent on the brachy industry. Now for over 20 years, 100% of our revenue came from the brachy business until May of 2005. Since that time, we have successfully diversified to the point that now over 70% of our 2010 revenue came from surgical products.
Since 2005, we have never failed to deliver annual organic growth in this segment and as Frank mentioned earlier, 2010 was the second consecutive year that this segment delivered 10% organic revenue growth, all this over a period of time that saw some of the most difficult economic circumstances that we have experienced in the US for a long time.
Our objectives were diversification and top line organic growth and I think you would agree we have been successful of meeting of those objectives. So, what happened in the branchy industry over this period of time? Well, our projections for the brachy industry have turned out to be true. Reimbursement policies at CMS plus aggressive interpretations of the exceptions to the Stark amendment by some doctors and expensive marketing campaign have contributed to gains in market share by competing treatments.
In particular, IMRT and robotic surgery; they have gained market share mostly at the expense of brachytherapy. Yet, the available clinical data shows that brachy is producing the best patient outcomes among all competing treatments. The data also shows that brachy is providing superior outcomes at the lowest overall cost. Again, I hope you would agree that the actions we took in this business were founded and appropriate and it is a shame that we have a cure for prostate cancer at lower cost with better outcomes but we had a company to diversify, and so we did.
Today, the brachy business is strong, it is a healthy contributor to cash flow, and it is well positioned to take advantage of the uncertainties that will surely continue in this space. So, now you have the context for what we did from 05 forward. So, let us look at 2010 results and future prospects.
We have delivered on organic revenue growth in the surgical product segment. We address the pressing capacity issues that we faced in 2010. We made investments in infrastructure to enable us to sustain growth going forward. Some profitability was eroded as we focused on the top line growth and capacity, but that was expected. We stated our intentions throughout the recession would be to buckle down, invest in our specialty product and be at the ready when the economy and healthcare recovers.
As Frank said, our top line growth in this segment delivered 10% organic growth for the last two years, which is quite positive in our view yet operational and customer behavior issues linger. Besides the capacity constraints that we saw earlier in the year, demand has always been lumpy in this business. Last year, we saw changes in customer behavior that we've not previously experienced. Ordering patterns became even more volatile and unpredictable.
Order and delivery dates were delayed in some cases and they were accelerated in others. Reacting to the changes eroded our gross margins, we hired temporary workers, we ran overtime, and in one plant, we added a shift. We believe that the economic recession in the last couple of years was the primary driver of these changes in our customer's behavior.
Following the difficulties in the economy over the last several years, many businesses became very conservative in managing their inventory and their cash, and they had a tendency to be reactionary rather than proactive, because of the difficulties.
We believe that the macroeconomic difficulties of the past few years have changed the fundamental business behavior going forward. This in turn, will continue to make demand and customer behavior more difficult to predict. While continued changes in behavior will affect our margins. We are aware of this, and we have been taking steps to improve the efficiency and better control cost in going forward focusing on improving the profitability in this segment is a high priority.
Now, let me switch over to the brachy business. Our strategy of increasing market share and control over operating cost is exceeding. We believe that overall procedures are continuing to decline in the US, though the rate of decline has slowed. In spite of this, we saw growth in brachy revenue in both the third and the fourth quarter of 2010 when compared to 2009.
This after 19 consecutive quarters of year-over-year decline, overall revenue in the brachy business grew 8% in the fourth quarter over last year. And the growth in brachy sales in the last half of 2010 is a direct result of a strategy that we have implemented for increasing market share through expanding and broadening our distribution channels and doing this with alliances or other arrangements.
Things were showing signs of stabilizing, maybe not across the entire industry but in our business, they are. Most of this is attributable to the distribution agreement with Core Oncology that began in 2010. So what is going to happen now that we have terminated the agreement with Core? Well, Frank addressed the history of the Core agreement and the events that transpired through January of this year, but let me talk about the objectives going forward and I want to make four points.
First; I wanted to reiterate what Frank said. Our relationship with Core has always been and continues to be very good. Core understands why we took the action that we took. Let me also be clear up front. If Core is able to fully satisfy their obligations to us and demonstrate an ability to do so going forward, we are very willing to consider reinstating our supply agreement with them in a short timeframe. So, in a time period since we notified Core of termination, they have been cooperative, and we believe acting in the best interest of their doctors and patients.
We also know that they are continuing to attempt to obtain financing. While the termination of the agreement is in place, we look forward to Core addressing their issues and working with them in the future. Second point; we have not given up on collecting all amounts due us from Core. Core continues to work through their issues and in managing this process over the last couple of months; we have had the flexibility of knowing that our incremental cost to supply Core have been relatively small.
If a physician or a patient wants to use palladium for their treatment, we want that palladium to be our TheraSeed. We are managing through the process in such a way as to give us the best chance to collect all amounts due us. We are also managing through the process to give us the highest probability of retaining the TheraSeed volume.
Third point, in our providing notice of termination to Core, we've also provided a short transition period under which we are going to honor orders from Core that were on the books at the time that we gave notice. We are also going to accept orders from Core on a prepaid basis during the transition period. We do not want it to end - adversely impact any customer or patient.
And lastly, the fourth point. As recently as yesterday, Core management reiterated to us that they have no current intention of seeking an alternative palladium supply. So, to net out, we have a very good chance of keeping the business. So what do we think is going to come next here? Well, in the past healthcare providers have shown a strong loyalty to our TheraSeed. And we have been highly successful in retaining the TheraSeed customers following a termination of the distribution agreement.
Healthcare providers who previously purchase TheraSeed through Core have every opportunity to continue an uninterrupted supply of products; they can do it either directly through us or through one of our distribution channels. Remember that in additionally getting paid in full, our primary objective is to retain as much of the TheraSeed volume as we can going forward.
A moment ago, I mentioned that we have been successful in retaining TheraSeed volume following the termination of distribution agreement. Some of our investors may remember that we have terminated our agreement with Indigo which was the division of J&J several years ago. We also terminated an agreement with Oncura several years ago. In each case, we retained over 85% of the TheraSeed volume that we were otherwise supplying through those agreements.
So in this case you could be assured, that we have plans in place and we are in process to retain as much as the TheraSeed volume as possible. We are only two weeks past the notice of termination that we provided to Core. And I can tell you that in these two weeks we have not experienced a material decline in TheraSeed unit volume compared to the volumes that we would have expected had the Core agreement has not been terminated by us.
We fully expect that we are going to be successful in retaining a significant portion of the unit volume going forward. I would like to pull back now and take a look at the big picture. And of one thing you can be certain; we remain the leader in the segment of the market. And the fundamental long-term issues facing our brachy business is not the current circumstance with Core. To be sure is too important, we want to get paid and we want to retain the volume.
But the single most fundamental long-term issue in this business has to do with creating a level playing field for the re-imbursement. Clinical studies show that brachytherapy cures prostate cancer better or at least as well as other competing treatments and we do so at a lower overall cost. The issues whether anyone in the Federal government cares about the effectiveness and the healthcare costs - and healthcare cost controls.
So, as I wrap up, it's been an exciting year 2010, another record year for us. Our diversified revenues stream produced 11% organic growth in the fourth quarter, with a second consecutive year of 10% growth - organic growth in the surgical products business. We have got healthy cash flows, we have a healthy balance sheet and we have choices; indeed we are not without our challenges but our challenges are solvable.
Our intent is to be a U.S based manufacturer of medical devices known for a quality reputation, accountability and devices that medical providers can depend on. Our intent is to improve the delivery of healthcare in the United States and we do this with every order that we ship. Our intent is to deliver appropriate shareholder value over time or a 30 year old company that just delivered a record historic revenue. And with that I will stop and turned it over to questions. Joey
Question-and-Answer Session
Operator
Thank you. We will now be conducting a question and answer session. (Operator instructions) Thank you. Our first question is coming from Brett Rice with Janney Montgomery Scott; please proceed with your question.
Brett Rice - Janney Montgomery Scott
Good morning Chris, Frank and Lisa.
Frank Tarallo
Good morning.
Christine Jacobs
Good morning, Brett.
Brett Rice - Janney Montgomery Scott
Your background comments on Core were very helpful and I appreciate them. I just want to make sure and I - understand - your shipping current unit volume on an prepayment basis and you still harbor hope by risking perhaps being an unsecured creditor by laying back if they were able to resolve the issue with the other party you mentioned briefly that ultimately we - the-the $2 million write off of a portion if not all will ultimately be collectable?
Frank Tarallo
Yes Brett thanks for that question. I think you summarized it really well. We - under the terms of our agreement, orders that were on the books at the time the termination became effective we are required to fill and will do so. However, for orders passed that point we have agreed to fill those on a prepaid basis if they are coming from Core. Although we don't intend to do that for ever, it is a very limited transition period.
Brett Rice - Janney Montgomery Scott
Right.
Frank Tarallo
So you are exactly right. And then the second part you actually explained very well, you are right we have two objectives. One; is to get paid and secondly is to retain all or as much of that TheraSeed volumes as we possibly can so, we are managing the process in such a way to give us the highest probability of achieving both. And I think that's what you stated in your question. And so your understanding is exactly right.
I do want to point out that we have not given up any of our rights. And so, there is other actions obviously that we can take if and when we believe that time is appropriate, but right now we feel like the way we are managing through this process will give us the highest probability of achieving those two objectives.
Brett Rice - Janney Montgomery Scott
Can you give us a little bit more color on what the nature of the disagreement is between Core and the other party. Because you are taking - you are making the judgment call by laying back and being nice because you had a relationship with Core. You do risk being lower down in the chain if ultimately they have to file for bankruptcy. So you are laying back giving them breathing room for them to be able to work things out with the other party they are interested with. Are you with liberty or can you give us some feel or what is that all about?
Frank Tarallo
Yes. I mean look we have to be careful. We don't, we can't, speculate speak on behalf of other parties right. There are public disclosures, press releases that deal with that particular dispute. And the dispute revolves around in alliance that the parties have agreed to about a year ago. And - and I don't know that I can say a lot more than that but I can tell you that there are some press releases out there that will tell you about the same thing.
You have proper - I think I do agree with the way you worded or the way you explained what you understand our position to be. We're taking a bit of a risk; it is the calculated risk because our - any actions that we may initiate on our side may have an effect that winds up reducing chances of succeeding in our two objectives which is getting paid in full, right and retaining the volume. Remember besides trying to give Core an opportunity to settle that dispute, there is something else going on, which is Core is trying to finish up their financing.
And so there are a lot of moving parts and it is a very fluid situation. I can tell you that I personally speak with the executive management at Core 1 to 2 times a week sometimes more frequently. And I can also say that up to this point the management at Core in my opinion is been very transparent with us and has been very co-operative in trying to - in understanding our issues as we start our work through this with them. Is that of help?
Brett Rice - Janney Montgomery Scott
Yes, yes, I appreciate that.
Christine Jacobs
And Brett I guess I could say strategically I want to put some of this in the context we do not tend to be cream puffs back here when it comes to litigation when we go after our do, so we - like Frank said we're walking a rope here because we would like to maintain the units and we want to get paid but I want to bring one thing into strategic focus here is; Core delivered market share which we would not have been able to get at without Core.
Their relationship, their agreements with positions, this was market share that we did not have access to and although, we have - we are in a tough spot and we had to take a very tough decision and during a tough time for Core. There is some market share out there that is attractive and I would like to do what it takes to be able to maintain that going forward and so that set the stage maybe for what Frank had explained our actions are.
Brett Rice - Janney Montgomery Scott
Okay fair enough, just shifting subjects, the new NeedleTech facility, is that up and running at full efficiency and what is the capacity utilization?
Christine Jacobs
Let's see, is it up and running, yes it is, but the picture is that they sent us after those snow storms in December made me worried but we had snow up over the roof but, no I don't think it is running at capacity right now, Frank you can address that. But it is operational and the ERP system is in place which allows us better cost controls going forward so, and they had a nice fourth-quarter.
Frank Tarallo
Brett, Chris is right and I can add to that that factory was operational the entire fourth quarter so all of the operating expenses that go along with that larger facility or in our Q4 numbers.
Christine Jacobs
And Brett, I think on several calls prior to that you have been quite worried about dropped balls when we shift when we shifted over, closed one plant and opened another. And I'm pretty glad to report that, I do not forget the question number one and number two, we had no appreciable loss when we flipped over.
Brett Rice - Janney Montgomery Scott
Right, right, thank you for your answers, I may have other questions but I'm going to drop back in queue because I'm sure that there are few other people on the call.
Christine Jacobs
Okay, alright.
Frank Tarallo
Thanks Brett.
Christine Jacobs
Joey, are there any other questions in the queue?
Operator
Yes, our next question is coming from Joe Munda with Sidoti, please proceed with your question.
Joseph Munda - Sidoti & Company
Good morning guys.
Christine Jacobs
Good morning Joe.
Frank Tarallo
Good morning Joe.
Joseph Munda - Sidoti & Company
Just real quick, how much was on the books with Core at termination?
Frank Tarallo
How much what Joe, how much sales you mean?
Joseph Munda - Sidoti & Company
Yes how many sales.
Frank Tarallo
We are in sort of the middle of the quarter, I don't know that I can give exact numbers but I can tell you that 14% of our break-even revenue last year is what core was which was about $3.2 million and so that can probably give you an idea of what might have been on the books one month then. As far as the exact numbers I cannot really disclose in the middle of the quarter.
Joseph Munda - Sidoti & Company
Also, you guys had mentioned possible additional charges in the first quarter of 2011, can you give us some idea of what those, I mean are we expecting a similar charge that we saw this fourth-quarter.
Frank Tarallo
No, that is what I was just referring to is our run rate last - is, our sales to Core last year were about $3.2 million but that was for the entire year, We terminated - we did notice a termination on February 1, so that might give you little idea of what it might have been in a one -month timeframe. So to give you a little may be idea of what kind of charges it might be if we have to go that route.
Joseph Munda - Sidoti & Company
Okay, yes. Just give me one second. I know you guys, we talked about the Wall Street Journal article of - what is going on are you guys in contact with your Congressmen as far as making light of this breach of the Stark Law, has there been any moment on the reimbursement front?
Christine Jacobs
With the - what I can say about the process is yes, that article in December and for those investors that are not familiar with what Joe is talking about, there was an article, early part of December about positioned sort of walking throw in a very lenient interpretation of the Stark Law and how the use of IMRT centers etc, etc had prop cost. It cropped up at the expense of patients getting other choices for the treatment of cancer.
Now, all of that was shared and in, what it is doing with me right now is I am sort of putting together and amassing what may or may not be a campaign. If you remember Joe I had to get by the election to find out what was going to happen post-November.
Now that things are settling down, I am interested in seeing what kind of a vehicle, might- we have to put through another CMS push. I have not made the total decisions yet, what I can say is that article caused a stir and our sales force reported back that throughout the landscape in the US everybody saw it and everybody read it.
Now, have I seen anything if they, got an injunction to stop these folks? No, I have not seen that yet. What I continue to look for is the level playing field where comparative effectiveness and cost controls that I mentioned in the conference call, looking for avenues where this gets a stage in Washington, but right now Joe, there is a lot of clutter, we are trying to repeal healthcare reform and we have not had an opportunity to get voiced.
Joseph Munda - Sidoti & Company
Yes, Christine and also, and what I got out of the article is, it seems like these guys really put all their cash together and are going after and logging the Congressmen, how do you compete when these guys are doing that.
Christine Jacobs
Well, first of all, they have been doing it for quite a while and the Office of Inspector General and I cannot give you with certainty when that date was maybe 09, around 09 in the Office of Inspector General and there is an article by Yale University from last year about over-utilization of IMRT because of this, I will tell you I don't know that if Theragenics has the horsepower to fight this battle, what I can say is that it is not lost on CMS, what these charges have - what they have done for the Medicare and the treatment schemes for early stage prostate cancer.
Theragenics is not big enough to fight this war on its own, we just cannot. What I am doing is making sure that everybody is aware of it. I'm hoping that the government takes control over their missed steps.
Joseph Munda - Sidoti & Company
Do you guys have like oncologists speaking on your behalf and well-being as well.
Christine Jacobs
Yes, oh sure when I get an opportunity, we have an audience, yes.
Joseph Munda - Sidoti & Company
Okay. And I just have one last question. As far as the seeds - themselves, any progress on the development of iodine seeds?
Frank Tarallo
Joe, I think that iodine is an area that we have a very small presence in right now and it is an area that obviously we would have an interest in expanding our presence in but I don't really have anything further to report right now.
Christine Jacobs
And we do have an iodine seed for sale, it is a small portion Joe.
Operator
Thank you, our next question comes from the line of Ryan Hummer with Encore Advisors, please proceed with your question.
Ryan Hummer - Encore Advisors
Hi, how are you doing?
Christine Jacobs
Good morning
Frank Tarallo
Good morning
Ryan Hummer - Encore Advisors
I just had one quick question; I was trying to get an idea of your fixed costs structure now that the new facility is up and running. Is that possible for you to give me an idea of your costs by segments?
Frank Tarallo
Ryan, we don't disclose, we don't break out and disclose fixed and variable costs by segments. I think you probably know that in the brachytherapy segment, the manufacturing costs are relatively fixed, that one is little easier right to get a handle on. In the surgical product segment we tend to act more like the classical variable cost due to the manufacture if you will. But I cannot, I don't have a breakout that I can disclose for you right now on what the fixed versus variable is in that segment.
Ryan Hummer - Encore Advisors
Okay, (inaudible) for you, thank you.
Frank Tarallo
Thank you
Operator
Thank you our next question is coming from Constantine Davides with JMP Securities. Please proceed with your question.
Constantine Davides - JMP Securities
Thanks good morning. First a quick housekeeping item, did you quote an open orders number for the quarter?
Frank Tarallo
We did not. But if you give me just a second Constantine I can give it to you.
Constantine Davides - JMP Securities
Sure, maybe while you look for that Frank, if I assume I guess a historical gross margin rate for brachytherapy of let's call it 50% you get a sort of a 33% number in Surgical. So I'm wondering A, is that right and B, what should we think about for 2011 and are we going to see a pick up there from the moving of the new facility and if so can you maybe quantify that for us?
Frank Tarallo
Yes, first let me go back, the open orders were $13.6 million at the end of the year. So it is still at a pretty healthy level in our view. On the gross margins I think you calculate - you are looking at the Q4 numbers I think.
Constantine Davides - JMP Securities
That's right.
Frank Tarallo
Yes and so, yes I think 33% is pretty close to what the gross margin was on the surgical side, it's a little bit lower than it was about a year ago. I think you have been following us for a while and you have heard us talk about some of the factors that have affected margins especially in 2010, the changes in customer behavior some of the costs that we had to incur to address, some of that lumpiness and some of those changes the large of needle facility that came online in Q3 that increased some of our cost base. And so I think if I am not mistaken you are probably familiar with what sort of - what happened in 2010, is that correct?
Constantine Davides - JMP Securities
That's right.
Frank Tarallo
Look going forward, I think Chris mentioned in her comments in a few minutes ago that improving profitability in the surgical portion - in the surgical segment of our business is a very high priority for us. We have spent a couple of years investing in infrastructure, investing in capacity and we have spent a lot of money in 2010 especially on the needle facility. So we certainly have those expectations and we are certainly focused on that.
I can't forecast for you as to what the margins might be or what we are budgeting, we don't do that kind of forward-looking forecasting. But I can tell you is the picture is a little muddier when you look for - when you are looking forward not only because of what we can control that we feel pretty good we'll get right and fixed going forward, but some of the things we can't control. healthcare reform for example; there is still a lot of rule making to be made and it has got a lot of laws to be written and in fact healthcare reforms is being challenged right up in Washington right now.
So there is lot to be written in terms of Healthcare reform. I can tell you that as the results we believe of healthcare reform are health insurance premiums in our businesses - across our businesses have increased just significantly over last year not unlike a lot of other businesses. It is a big number and that obviously has an impact not only on overall profitability but on gross margins as well.
Lot of questions about med device tax and nobody is exactly sure how that - if it is going to be implemented how it is going to be implemented many, many of our products on the surgical side are components and they are not finished goods. And so perhaps we are shielded a bit from that or we have yet to see what are the final rules are and in - so forth so I'm sorry to give you such a long-winded answer but it is not sort of - it is not a straight line I guess it is what I am saying.
We the message I think is we're not satisfied with the level of profitability in that segment. We have spent time investing in the infrastructure and getting ready to be able to support continued growth and now we want to focus on the profitability going forward.
Constantine Davides - JMP Securities
Okay. And then maybe just one or two follow ups on Core. I think that color on your previous terminations is pretty helpful around that 85% number. I guess my question, is this that a fairly near term expectation or did that take six to eight quarters to get that 85% retention rate? And when you do get is it sort of an even split between direct and alternate - and alternate distributor?
Frank Tarallo
Yes, it is clearly is not a - to six to eight quarter period of time. It is going to be a fairly short period of time. There will be some noise in the very short term the happening as we - during this last couple of weeks and these next few weeks. But we should have a pretty good idea in one maybe two quarters at the most Constantine, of knowing where we are going to end up there. So it is not going to be a lengthy period of time at all nor was it is in the past.
As far as the channel, that's a little difficult to predict. Our objective is to retain the volume and we - as you know we have multiple channels direct as well as several distributors and each TheraSeed user is a unique case in terms of how that customer may be accessing the product for example; is it through a purchasing organization and if it is through a GPO purchasing organization perhaps there are only one or two of our channels that we can supply through.
And that may or may not be direct and so there is a lot of iterations there and it is difficult to predict. At the end of the day we are focused on retaining the volume almost regardless of the Channel.
Constantine Davides - JMP Securities
So it is fair to say that we really shouldn't think about a margin differential on those volumes, whether or not they go through Core or not?
Frank Tarallo
Yes I think that is a really good way to look at it. The way we view it is, we are not focused on the margin differential and if we pick it up that is the bit of icing on the cake I think. But that is not where we focused on we want to retain the volume to keep the factory humming.
Constantine Davides - JMP Securities
All right. That is all I have. Thank you.
Frank Tarallo
Good, thank you.
Operator
Thank you. (Operator instructions)
Christine Jacobs
Joey is Brett Rice back in the queue?
Operator
No. He just queued in. One moment please. There is a follow-up question coming from Brett Rice with Janney Montgomery Scott. Please proceed with your question.
Brett Rice - Janney Montgomery Scott
I won't keep you too long. I'm getting hungry.
Christine Jacobs
Oh Brett I didn't want to create a problem I'm like - I'm looking for Brett Joey, where is he?
Frank Tarallo
You said you might buzz back in Brett so that -
Brett Rice - Janney Montgomery Scott
Just the follow up from JPM Securities, Constantine. He asked you a very good question and I wish we had little bit of a better answer on what kind of gross margin improvement - are we looking for with the new plant? I will stipulate - there are things you can't control but when you made the capital budgeting decision to invest in the new facility. Isn't there some range that you're looking for so that we - you can monitor whether you are hitting the target?
Christine Jacobs
You are absolutely correct. Here is the wrestling match and I think - let me try to say it the same way or maybe put it little differently than Frank. These are growth companies that historically - they will grow in at double digits - let me give you an example. This does not apply to NeedleTech specifically but let's say we have got surgical products business, you buy it in at $9 million in revenue. There are flying over $20 million and they are doing this in a very short period of time.
Yes, we do expect economies of scale from these but at the same time we are layering your bureaucracy and controls on top of them because of our regulatory environment both devices and also with our need for financial control. And so we are only a couple of months into paying in the electric bill up there in a very unusual - in a very unusual nasty cold winter.
So I agree with you, how about if I say going forward Frank and I look for an opportunity to if nothing else, look for the ranges and Brett I'm sorry to confuse that one more point. The NeedleTech line primarily components, they are going to have low margins than the finished goods. And so the lumping everything into one easy range is going to be a little bit on difficult side.
So I can't answer your question specifically, I can give you the uncertainty around trying to find a specific number for you. But on a go forward basis you have made suggestions to us in the past about things like helping you understand, how did we really performed against special items etc. you have made us suggestions and we will take this one too.
Brett Rice - Janney Montgomery Scott
Great, okay thank you.
Christine Jacobs
Okay, alright Joey.
Operator
There are no further questions at this time. I would like to turn the floor back over to the management for closing comments.
Christine Jacobs
All right thank you all for - thank you all for your support and we look forward to reporting on how we are doing in 2011. Thank you.
Operator
This concludes today's teleconference; you may disconnect your lines at this time. Thank you for your participation.
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