SurModics, Inc. (SRDX) SurModics, Inc. Annual Shareholder Meeting 2012 February 6, 2012 5:00 PM ET
Gary R. Maharaj – President and Chief Executive Officer
Timothy J. Arens – Vice President of Finance and interim CFO
Bryan K. Phillips – Senior VP, Legal and Human Resources, General Counsel and Secretary
Robert C. Buhrmaster – Chairman, Board of Directors
Beth Lilly – Gabelli Asset Management
Dan Casbom – Private Investor
Good afternoon. My name is Bob Buhrmaster. I’m Chairman of the board of directors. On behalf of the entire board, (inaudible) shareholders. We are pleased to be able to host this year’s annual meeting at the company’s corporate headquarters (inaudible) appreciating your attendance.
I have the pleasure of introducing our board of directors, but before doing that, I’d like to turn the call over to Bryan Philips, our General Counsel and Corporate Secretary, who again will (inaudible). Bryan?
Thank you, Bob. Before we get started I would remind you to read and review our agenda for today’s meeting. Following the conclusion of the formal business session, Bob will return and provide – read the introductory remarks and introduce the board of directors. Our President and Chief Executive Officer, Gary Maharaj, will introduce the company’s executive officers. Certain special guests and advisers to the company are present here today. Gary will also discuss our key achievements during the past and provide an update on our strategy (inaudible). Our Vice President of Finance and Interim Chief Financial Officer, Tim Arens, will spend a few moments highlighting several aspects of the company’s financials. Gary and Tim will then open the call for your questions.
Before we continue, let me remind you that some of the statements made at this meeting may be considered forward-looking statements. The company cautions investors that results of future operations may differ from those anticipated. We urge you to review the cautionary statements and other information contained in the company’s filings with the Securities and Exchange Commission. (Inaudible) the company’s annual report on Form 10-K for fiscal 2011 which identify certain factors that could cause actual results to differ materially from those projected in any forward-looking statements made during this meeting. Copies of the 10-K and other filings are available through the Company or online on our website.
Now, we will conduct the formal business which was set forth in the (inaudible) meeting and proxy (inaudible) on or above December 28th, 2011 to all parties for purpose of records as of December 9, 2011.
According to our (inaudible) American (inaudible) company, there were 17,547,000 shares of the company’s common stock outstanding as of record (inaudible). Common shares present immediately prior to the commencement of this meeting indicated that at least 16,330,000 shares of the company’s common stock are present, impassive or by proxy. This was approximately 93% of the outstanding stock adjustment. Importantly, the Chairman has determined as appropriate the Federal (inaudible). We have backing from sufficient shareholders to form a quorum. Moreover, according to the standards of the company’s bylaws relating to the following of the meeting of shareholders (inaudible), this meeting is lawfully convened to transact business. Let me note that most shares are voted by proxy. If you desire a public purchase, you may approach one of the designated individuals at the theatre room to (inaudible) products.
The Chairman has determined an appropriate and best reading of the minutes of the last two meetings. These minutes are available for any shareholder wishing to review them at the literature page left side of me. The forward proposals will be included during the meeting, all of which were described in detail in the proxy statements we furnished the shareholders.
The first item of business is the selection class one directors. The board has selected José Bedoya, David Dantzker, Gary Maharaj and Scott Ward as its nominees for election in class one directors. Those shares being voted by proxy consist of (inaudible) shares representative at this meeting have voted in favor of this proposal. Now, to request that these four nominees have to receive the cumulative votes of the (inaudible).
Of significant change (inaudible) substantial in all of the assets of our pharmaceuticals (inaudible) best course of action (inaudible) all alternatives. (Inaudible) we dedicate our full resources to growth opportunities (inaudible) diagnostics business (inaudible) management (inaudible). Gary will elaborate more on several of the (inaudible).
I would like to introduce the members of our board. As I call each member, please stand (inaudible). Please (inaudible) past directors and (inaudible). The directors are David (inaudible), David Dantzker, Gerald Fischer, Susan Knight, Gary Maharaj, Jeff Smith, who is unable to be with us today (inaudible). Thank you.
Following today’s meeting, please feel free to visit with our directors and members at any point. At this point, I’d like to turn the podium to (inaudible) yesterday by an update (inaudible).
Thank you, Bob. Before I get started, I saw John Meslow in the room. Is John here? I’d like to introduce John, and we need to adjust this a little bit. (Inaudible). I think we have a hot mic. John and I met a little over a year ago and it was a wonderful conversation with John in Mary Brainerd’s office and some of the things he said to me at that point was help convince me the compass SurModics. So John, thank you. I’m glad to see you again.
Let’s introduce everyone, and is there an echo still or is it just me? It’s the deep baritone voice. I can hold the mic. That’s fine. Go Phil Donahue style here. I will be reaching out into the audience.
Let’s introduce our executive team. Please stand when your name is called. Tim Arens, Vice President of Finance and Interim Chief Financial Officer; Charlie Olson, Senior Vice President and General Manager of Medical Devices; Bryan Philips, Senior Vice President, General Counsel and Secretary to the board. Bryan also has the power of Human Resources and Information Systems function, and finally, Joe Stich, Vice President of Business Operations and General Manager of In Vitro Diagnostics. Each of our officers will be available following today’s meeting for you to meet. Thank you gentlemen.
I would like to introduce some additional people who are important to our business. Again, please stand when your name is called. First, please welcome Mr. Michael Stanchfield and Mr. Douglas Long, partners at the law firm of Faegre Baker & Daniels, headquartered here in Minneapolis. Thank you, gentlemen. And they are counsel us in our Corporate Securities and other commercial matters at the company. Also please welcome Mr. Chris Swanston, Managing Partner of the Minneapolis office; and Mr. Adam Krasnoff, Partners with our auditors Deloitte & Touché. We are happy to have you both here with us today. Thank you.
So, those of you who remembered my introductory presentation a year ago, I left you with three big circles about the purpose, passion and path of SurModics that leads us to the best value of creation for shareholders. I bet you wondered how after one year on the job, how do I still – those circles have been filled out. The question you should have is, have we found our purpose? Do we feel the passion and are we following the path? After I’m done, I hope that you can decide. Who signs all this, or is it just me?
Let’s talk of our purpose first, and why to me SurModics is more than a business, it’s actually a course. And I’ll share why we are excited about SurModics and talk about the passions as we have found in this company over the last year. This passion is actually best demonstrated and what we have accomplished and I will discuss largely the path to where we are headed and its future.
First, purpose. The purpose of our business, now that we have sold the pharmaceuticals business, is really clear. It’s to improve the performance of devices that improve the detection and treatment of disease. That may sound like a big, bold purpose and in fact it is. It’s a challenge for us if we intend to do this and do it well. We’ll accomplish it for the unique combination and this company has knowledge and expertise in Chemistry, Biochemistry, Material’s Engineering, Material Science and Physiology.
While it does sound like a bold mission, you have to look at what SurModics has indeed accomplished in its past. This is a company that created the original lateral flow chemistry for the pregnancy detection kits. Arguably, it’s a company that also through its Bravo drug- eluding platform, created the entire drug- eluting stent industry and certainly enabled it.
We have demonstrated acts of genius and greatness in our past and we absolutely have the capability in this company to create that great future. We are not going to reclaim this greatness in one step however. It’s going to require sound strategy, investment, imagination, hard work and of course some patience.
Passion, what drives and excites us, and I said this is something that is a prerequisite to create the maximum shareholder value. Our team here at SurModics over this past year has demonstrated a passion in many different ways, more ways that you can see. In their tireless dedication, they have in a very short time closed many gaps in our returning this company to greatness.
Please allow me to share just some of the highlights with you. First, Bob said we sold the Pharma business. This is not an easy business to sell. It took more time and effort by our team. I am pleased with our company SurModics and its shareholders. I am also pleased with our prior employees in the Pharma business because they now have a better home and a better business operated by Evonik Degussa, who will be a better owner. This is an excellent outcome for all stakeholders in this business.
Another thing we did this year is we exceeded our operating plan. This is important not only to rebuild our credibility with investors and investment community, but to be and more importantly to me, it rekindled the belief inside of SurModics and our capability and a return to winning ways for our employees. I cannot overemphasize the importance of that for a company, especially for a technology based business as SurModics. Our employees, their talents, their commitment, their imagination and their passion are what will propel us into this great path.
Next, we put a cohesive culturally aligned and passionate management team in place. Bryan, Charlie, Joe and Tim are indomitable carriers of the flame of SurModics. They love the company, they believed in our purpose and they have the courage to face all the challenges we’ll face along the way. I have personally seen this under some very adverse conditions from these executive team members and you should be proud of that.
Next, we implemented a strategic focus on our core business and we adjusted the cost structure to align with this focus. We’ve had some awesome outcomes from this. We are in the end of technology business. Both our R&D teams and medical devices and IVD really cranked this year. We reframed our R&D portfolio into ideas, experiments and projects. The good news is we have many ideas inside these walls to draw upon and have actually started investment in multiple projects and several experiments along the way.
In medical devices, we made a breakthrough in developing next generation of Hydrophilic Coatings. We are pleased to report that this next generation is now available for purchase by all licensed customers. This platform creates a compelling value proposition for these customers, finally illuminating the tradeoff between durability and lubricity in our coating. In fact, our testing shows that our ability to provide significant particulate reduction inside the vascular systems of the body, coupled with its best in class cell lubricity, is an important step for future uses in capital based devices. As part of our commercialization process on this coating, we have commenced numerous commercialization validations with our customers and the results are very encouraging.
As a reminder, the targeted segments of growth in this area are balloon angioplasty, neuro-vascular applications and any other specialty catheters that require high lubricity with very low particle regeneration. We also see an opportunity to help customers who don’t currently use our coatings by having the attractiveness and performance of this coating rejoined to their devices.
Turn to our IVD business, another accomplishment that demonstrated a lot of passion from our employees this year. We had not launched a core IVD product in over three years. This past year we launched two new products in the same year, both of which have the ability to improve the accuracy of diagnostic test kits. Again, multiple customers are evaluating this for inclusion in their test kits.
Next, our propriety coating platform for drug coated balloons made significant progress, especially in the last six months. As you may know, drug coated balloons are far better alternatives than current therapies for certain areas of the vasculature where you cannot place the stent effectively. Examples of these are in the peripheral vessels such as the superficial femoral artery and coronary vessels to treat instant re-synopsis. The worldwide market for drug coated balloons is predicted to be over $1 billion. There are several generations of products already in the market and one in the US that has vasculature by its exemption.
We are excited with our preclinical studies and just struck with the balloon, and in fact we believe we can demonstrate an extremely high control of the drug on the surface of that device. Think about this. If any company can control a drug on a polymer on an incipient on the device, it will be SurModics and we intend to have developed the world’s best drug coated balloon. This way we can aggressively pursue the development of this, so when we license this to our commercial partners, we can have a better conversation of the value that SurModics is bringing to this technology.
On our operation side, we’ve been busy as well. We bought a company called BioFX in Maryland in 2007 and we integrated the manufacturing of the BioFX products in IVD fully into our very operations since that summer. This is a big step for our IVD team. We finally have a unified interface with all our products to our customers. And that’s in the same quality footprint, customer interface for sales, service and support.
Announcing we did in operations, we actually ramped up our coating services for devices in the form of bridge to manufacturing for several of our clients. We currently coat close to 15,000 devices per month at SurModics for our customers in the medical device area.
I will stop here. It sounds like a brag sheet, but I wanted to let you know it has been a year that our employees and our team has demonstrated a lot of passion in closing some gaps and returning this company to greatness. I call it – they are trying to polish the gem that SurModics is, truly the diamond in the rough and our best days are ahead of us.
The year did have numerous challenges, the most visible being the announcement by Johnson & Johnson coating division about the discontinuation of the side to drug-eluting stent product line. But as Tim will show with the financial data in a moment, our core business, Hydrophilic Coatings and reagents continued to show solid growth, generate a high level of profit and reasonable cash flow.
So a lot of passion. I didn’t want to put everything under one slide, but let’s talk about the path. I get a lot of jokes on how I pronounce the word path. So it’s a British pronunciation. So let’s talk about the path. So where are we headed? If year one was about dealing with legacy issues, getting refocused on the core and strategy, that will define year one. We did all sorts of things I just described and we put in place a structure for growth in year two. Year two will be defined in my opinion by three areas. How well and what’s our ability to execute and expand our higher margin business, what I call focusing on driving growth within the core.
Second thing we’ll be defined by is our investment in internal R&D to drive organic growth and optimize long term returns so that we can expand from this core. I will go into more detail on this in a few minutes.
And finally, what is our strategic use of cash on the balance sheet and the use of cash that we generate on an ongoing basis? So let’s first talk about the core and how it’s defined, and it’s very important because it’s pivotal to our strategy.
The core is not something you set out as an aspiration. It’s actually something that you discover about a company, and our core is defined by where we get the majority of our revenues, our biggest customers, the most critical product offerings, major source of risk free cash flow and the things that really differentiate our internal capability in terms of what we do, the people or persons, technology and knowhow. So that’s the basis and the premise for defining the core of each business.
They sound like very simple sentences but each word weighs a ton, because each word means something very specific. In our medical device businesses, the core is defined by Hydrophilic Coatings for catheter based delivery systems. That is a where the source of SurModics greatest risk free cash flows lie, but it’s also the source of greatest growth in the near term. Those are areas that we have to continue to invest in until our job is done.
For the diagnostics business, it really is immuno-active reagents that actually help to improve the accuracy of the test kits of our customers. Again we’ll talk a little more in that. But bear in mind those core definitions are our guiding posts in terms of how we execute on this strategy.
The focus on the core. Here, the first thing we need to do and the first thing we have set the stage for in this year two, how do we drive profitable growth in that core over the next one to two years? And our core has a lot of growth still and we expect to identifying capture growing segment. Examples of these are certainly the transcatheter for bowel segment in the medical devices, in neurovascular segment and certainly in some of the colorimetric reagents in the IVD business. But we still have to continue to invest in this core. PRO 5, our next generation Hydrophilic Coating has created a new platform to go get more business and solve more customer problems in medical devices. In the same vein our reagents business, we have the exact proposition to go forward.
Finally, evaluating international growth opportunities. This -- for many companies the size can be a tricky proposition. We certainly have demand for our products in Western Europe and more and more in countries like China and India, but the ability to navigate in these international markets is fraught with risks. So we’re going to take it one step at a time and get our distribution in Western Europe for medical devices set up first before going too far into countries like China. So this is an emerging thing where customers there, we have to be able to reach them since we already have the product offerings that they need. So this is what I mean about driving profitable roads in the core business.
How about expanding the core? So if we want to deliver growth over the two to five year period and in fact accelerate the rate of growth of the business, we need to plant the seeds of the future and invest in expanding the core today. Certainly isn’t going to be done overnight and so what we’re doing and we’ve actively done over the past years is actively looked at all new viable product market opportunities and we’re screening those as we speak. What we’ve also done is directed our R&D portfolio to key strategic areas. And I’ll give some examples of this as we go forward.
So it sounds like kind of belaboring this point, but it’s important for me that you understand how we’re going to migrate from the focus on the core giving us really good growth over the next one to two years and how we’re going to expand the core to markets and products that are adjacent to this business. The one thing we’ve learned at SurModics and many companies have learned is there is risk in growing from the core. The thing I want to assure you, this management team and the board clearly understand that there is risk and these migrations are things that you undertake with very careful forethought.
This chart is an empirical graph. It actually has done what companies have migrated from the core and the probabilities of failure as you get too far away from your core business. But the point is to continue to grow in the three to five year horizon. We have to make some of these moves and lower our risk profile so that we are in the 60% here that are successful, not the 40% that are not successful.
How will we do this? The best way to do this in a company like SurModics is to use the jumping off point of the things you know very well. And so if these are the related markets and these are new skills, our first premise is we’re going to use what we know, what we’re good at, be it the product platform, a core technology or a current skill. These we’ll use in terms of related markets since the market itself is new and to mitigate risk, we have to pin down one element of that migration. So to give you an example, I didn’t actually label what these are, but we have several plays that we’re looking at to carefully methodically expand the core with very little risk. That’s the message I want to leave with you.
Now, SurModics is a small business, but it’s very important for us to understand where on the map of these markets we like and the reason I use the IVD market landscape here is to help you understand all the considerations that we take in terms of growing this business. So our market and the majority of our revenues come from IV diagnostics test kits manufacturers and we tell reagents those test kit manufacturers. They can be used in many different ways, different market segments. Primarily ours are used in clinical diagnostics and primarily they are used to detect infectious diseases or autoimmune diseases.
The standard or the type of tests that’s done primarily with our In Vitro Diagnostic products is something called the ELISA test. My point here is not to educate everyone on In Vitro Diagnostics except to say when we talk about our core technologies and what we have to offer, we have to understand the map of where we’re trying to solve the problems and what those adjacencies are and different parts of it. I don’t intend to make it complex. My point is to help you to understand that these are not simple decisions. They’re decisions that we’re evaluating so that we can improve our odds of success when we make these changes.
Finally I’ll talk about capital allocation and I know this has been on a lot – top of many people’s minds. We have a lot of cash in our balance sheet and that’s granted and as you know, cash is a strategic asset. By the very term strategic asset, it says how you deploy it should be based on strategy. What we and the board, the management and the board are currently doing is we’re finding out – we’ve determined what our strategy is, the focus and extend on the core, but we have to determine what are the sources and uses of cash to drive the value creation in this business.
We also want to make sure that we have cash on hand – I call that robustness, to withstand in this macroeconomic environment any adverse business conditions. We also want to make sure we have cash on hand to capture unexpected investment opportunities and we are absolutely clear and understand completely that we have as part of this, a return to owners as part of this analysis. So the point I want to leave you with is we’re not considering one option, they’re not wild options. There are options that are balanced and we’re considering every option of how to best deploy cash on our balance sheet to serve all the stakeholders and value creators in the business.
I’ve gone on very long here, but I’d like to leave you with one thing. When I first came here I saw a business that as I said had greatness in its past and I believed had greatness in its future. Now I know it has greatness in its future. What our management team and board have decided, we’re going to build things with firm foundations so that when we grow we can be assured of future growth. SurModics has already incredible core scientific capabilities in the minds of the talented scientists and engineers who work here. We have excellent brand reputation. People turn to us for solutions, even in the IVD business. It’s a very small business and a very small segment, but yet we are known for the goals and the products in that small segment.
So very great reputation for the company, something to build on. We do have technical superiority in our platforms and we intend to further amplify those. This intellectual property, a great financial profile especially as we have sold Pharma. We’re generating cash growing with very high return on invested capital. The talented and driven management team. What we have here in our base business, it’s a very sticky business with expansive customer network to build upon. That gives me a good feeling for the future because those are the customers we’ll be turning to to solve their problems in different areas.
For future growth, we have an idea of where we’re going to. We’re already well poised and raised at growing. If you want to grow, a very easy way to grow is to show up where growth is going to happen and many of these – both of these businesses we actually have shown up where growth is happening in the future. And then I didn’t touch much about our next generation products here. I don’t want this meeting to be too headline driven, but we have deep and meaningful plays and some very exciting catalysts that will help cement future growth opportunities in the three plus year timeframe. So when I look at this pyramid, I see we’re building a strong base, we’re building it in the right ways and we’re building it for an enduring enterprise. I forgot to turn my page for the whole speech.
In summary, we’re excited about these opportunities going forward. The growth in our core products, the re-trimming of our R&D and a strategic use of cash to create value for all our stakeholders. Fiscal 2011 was a transformational year for SurModics and granted we have a lot more work to be done. We’re going to continue to build on the momentum we have generated. As we enter year two, we’re going to keep doing what we’re doing in terms of driving this core builder’s business, building on that profitable cash flow and growth into these core businesses, and then planting the seeds of innovation for organic growth in the future.
At this point, I’d like to turn it over for Tim for a review and recap of the first quarter 2012 financial results. Thank you.
All right, let’s see. Yep, we’ve got it on. Thank you, Gary. Good afternoon and thank you all for joining us today. Before I present our financial results from continuing operations for our first quarter fiscal 2012, let me highlight our performance from the past year which we believe has positioned us well for future success. We’ve got two great and growing businesses with market leading products, attractive operating margins and strong cash flow generation. Within medical device, our Hydrophilic Coatings grew 8% during fiscal 2011 and our In Vitro Diagnostics business grew 17% in 2011. This growth reflects a refocus on our core businesses.
Now some of you may have missed our earnings call that we held earlier this morning, so let me spend a few moments reviewing our results. Starting with our first quarter fiscal 2012 GAAP results from continuing operations, which excludes our Pharma pharmaceuticals business, revenue in the first quarter was $11.9 million, down 5% compared with the first fiscal quarter of 2011.
GAAP EPS was $0.12 in the first quarter, compared with $0.16 from the year ago period. Now, our GAAP results are an important part of our story, but they don’t tell the whole story. For example, although our Hydrophilic Coatings business and our In Vitro Diagnostics business have delivered strong growth, we continue to face legacy issues, not only Codis’s decision to exit the manufacturer of its coronary Cypher Stent.
Our Non-GAAP results from continuing operations provide us with greater insights on the performance of the business. Cypher revenue declined, offset solid first quarter performance of our medical device and In Vitro Diagnostics businesses. Our first quarter fiscal 2012 results saw Cypher based revenue decline nearly $2 million from the year ago period. Excluding Cypher, our SurModics revenue grew 14% from the first quarter of fiscal 211.
Both of our business units are double digit revenue growth during the first quarter. Medical devices grew 14% and In Vitro Diagnostics grew 13%. Adjusting for the first quarter 2011 Cordis revenue and product costs, as well as excluding onetime charges such as our restructuring charges and therapeutic grant income, our Non-GAAP EPS was $0.11 and that compared with $0.08 from the year ago period.
Our performance in the first quarter was as we expected and on our earnings call we reaffirmed our guidance for the company for the full year fiscal 2012. We expect to generate revenue in the range of $47 million to $51 million. And GAAP diluted earnings per share from continuing operations is also unchanged and is expected to be in the range of $0.45 to $0.53 per share.
Now I’d like to provide a few highlights on our core business units. So within our medical device business, we have device drug delivering product offerings and Hydrophilic Coatings. This slide represents Hydrophilic Coatings which is the majority of our medical device revenue.
In 2011, SurModics generated record Hydrophilic Coatings revenue of nearly $34 million. Additionally, with our Q1 fiscal 2012 results, we have now delivered 10 consecutive quarters of year-on-year revenue growth with Hydrophilic Coatings.
Moving on to our In Vitro Diagnostics business, as Gary mentioned, our In Vitro Diagnostics business unit produces a number of gold standard chemical components that help diagnostic tests to accurately detect the presence or absence of disease. In fiscal 2011, SurModics generated record In Vitro Diagnostics product revenue of nearly $13 million. So both our Hydrophilic Coatings and In Vitro Diagnostics business generated record revenue in 2011. Additionally, IVD has also seen five consecutive quarters of growth.
Moving on to our operating cash flow. Our royalty based medical device business and high margin IVD products drive strong profit margins and cash flow. In fact, SurModics has generated nearly $200 million of operating cash flow in the past six years. While cash flow has declined in recent years, the company continues to generate positive operating cash flow.
Our balance sheet continues to be strong with cash and investments totaling $94.4 million at the end of the first quarter. This is an increase of nearly $35 million from the year ago level and we have zero debt. Note, our first quarter cash position does not reflect an additional $2.9 million recently released from Escrow establishing connection with the $30 million sale of our pharmaceutical assets.
As Gary mentioned earlier today on our earnings call, we are evaluating all options to use our balance sheet to the best advantage of our business and our shareholders. We will be disciplined in our evaluation of the uses of cash to create value. However, we have no plans to deploy significant portions of cash reserves and acquisitions.
In conclusion, our key Hydrophilic Coatings and In Vitro Diagnostics product offerings are delivering solid performance. They are profitable and well positioned for growth. Moving forward, we are committed to driving execution of our organic growth strategy and look forward to delivering against our fiscal 2012 financial commitments.
With that, I would like to invite Gary back to the podium and open the session to your questions. Since our meeting today is being broadcast over the internet, we would appreciate it if you’d wait for the microphone, then give your name and affiliation before you ask your question. Thank you very much.
Beth Lilly – Gabelli Asset Management
Hi Gary. Beth Lilly with Gabelli Asset Management. We’ve been shareholders in SurModics for many years. Thank you for riding the ship and getting the company back on track and appreciate all your hard work in selling the Pharma assets. One of the things that concerns us is half your stock price of core established our prices in cash and in terms of your priorities, return to owners is at the bottom. Is that because – first of all let’s address that and also I’d love to hear what the board has to say. And also, what’s the decision tree that you go through in terms of returning that cash to shareholders? And we would advocate a share buyback as opposed to a dividend. So would love to get your thought processes as well, maybe Bob Buhrmaster’s or whoever board member wants to talk about it.
Sure. There was no fraudulent slip ball in terms of it being last. The point I was trying to make is, usually in a disciplined process of use of cash, you start with the sources and uses and you figure out your capital structure, what your credit ratio is, what you want to be and then you look at how you deploy it. So no intention for that being last on the list and I should have caught that earlier. In terms of where we are, the board and management are looking at that – in that exact same process. So we’re not unopposed obviously to a return to shareholders and that should be stated. The best means of returning that, I don’t want to speculate on where we’re going to end up, but certainly we understand the pros and cons, also the tax benefits or lack thereof of different types of returns of this cash.
Beth Lilly – Gabelli Asset Management
Just in terms of the decision tray, your (inaudible) the business is profitable so it’s self financing in essence and you probably need some money left over for some small deals. So and you said on the conference call this morning we’re not going to do a big deal.
Beth Lilly – Gabelli Asset Management
So that really leaves (inaudible) the bottom of the list in essence is then the next priority. Is that correct?
Well, again it’s a process of investments. The bottom of the list is not an investment. It’s a redistribution of value obviously and so we’re compelled to look at ways to create value and make sure those are well funded so that when we do return value, that we know we have starved the creation of value in that division of that bucket. It may seem – and I understand, it may seem you can go from A to Z right away and say if we can get to an Endsville and return a lot of cash. But I believe the company needs that discipline. When it has a great balance sheet, it has no balance sheet, if it has debt; to me it’s the exact same discipline you go through so that when you end up of Endsville, it’s an answer you can defend in perpetuity. Totally not the signal I wanted to send though, I want to make sure of that.
Dan [Casbom] ph and we’ve been investors since Steels talked me into buying it. I own a private company and what’s the book value? I forgot I read it about four months ago. But you have probably 60 companies. So what is your book value approximately?
So the book value is approximately $10 to $11 per share.
Well, all I’m seeing on buying back shares.
Are you talking about the cash position? What the value of cash is relative to (inaudible)?
That’s about $2?
It’s about $5.40.
Oh, $5.40. Okay. The idea was – I’ve talked to a lot of men who have owned companies and they don’t believe in this share buyback business unless it’s awfully close to book value or to think it’s a seal and if everything went wrong they could probably get out of it at a profit. This chasing companies, chasing their stock and keeping it up, you’ve pissed away millions of dollars and then the stock drops 20 points on these big companies, 30 points and no explanation. They just lost $380 million and a small company like yours can’t take this kind of chances. So I would say I don’t believe in that. Get the stock going up by making money and we don’t need all that.
We certainly appreciate the comments and I will tell you that we share the sentiment that you can grow value by delivering continuing revenue growth and profitability over time. We do also appreciate that we do have a huge strategic asset on our balance sheet in the form of cash and we will look at all options that create shareholder value, including looking at returning cash to shareholders. So these are activities that we’re currently undertaking today. But you can rest assured that we won’t be looking to deliver value by only one means. Hopefully people leave today appreciating the value of the two core businesses and the organic growth strategy that we’ve implemented over the past year, the success we’ve had and the success that we continue to expect to have with that.
(Inaudible) they never bought their shares and they’ve done just phenomenal and now they have a lot of money and if they get into a problem, they’ve got the money to get out of it. And too many people get into this buying their shares back and I think it’s a complete waste of money.
Thank you for your comment. Well, if we have no further questions, I’d like to thank everyone for coming out and joining us today of our 2012 Annual Meeting of Shareholders and for listening in on the webcast. We look forward to updating you on our progress throughout the year and I hope you will be able to join us now for a reception. All are invited. Thank you.