Integer Holdings Corp (ITGR) 2010 Q1 法說會逐字稿

Welcome, everyone, to the First Quarter 2010 Greatbatch, Incorporated Conference Call. Before we begin, I would like to read the Safe Harbor Statement.

This presentation and our press release contains forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995 and involves a number of risks and uncertainties. These risks and uncertainties are described in the Company's annual report on Form 10-K. The statements are based upon Greatbatch, Incorporated's current expectations and actual results could differ materially from those stated or implied. The Company assumes no obligations to update forward-looking information included in this conference call to reflect change, assumptions, the occurrence of unanticipated events, or changes in future operating results, financial conditions or prospects. I would now like to turn the call over to today's host, Corporate Controller and Treasurer, Marco Benedetti. Please proceed, sir.

Thank you. On the call today are Thomas J. Hook, President and Chief Executive Officer, and Thomas J. Mazza, Senior Vice President and Chief Financial Officer. In terms of today's agenda, Tom Hook will start by providing a few brief comments regarding our first quarter results, and then he will update you on our key strategic initiatives. After that, Tom Mazza will provide further comments on our financial results. We will then open up the floor to Q&A. As we have done in the past, we are including slide visuals that will go along with this presentation, which you can access on our website at www.Greatbatch.com. Let me now turn the call over to our President and Chief Executive Officer, Tom Hook.

Thank you, Marco. I'd like to thank everyone for joining our earnings call today. We are pleased to be able to share with you our results for the first quarter of 2010. As you can see from the highlights listed on Slide 5, our sales results for the quarter were $132 million, in line with our expectations and indicative of a good start to the year. We carried the momentum that began in the Fourth Quarter of last year into 2010, delivering sequential sales growth for the second consecutive quarter.

Our growth was broad-based, and was supported by improvement in all of the underlying markets we serve. More importantly, this included sequential sales growth of 17% from orthopedics, and 8% from our vascular product lines, a positive sign that those markets have begun to stabilize. This improvement, coupled with our strong customer relationships and strategic initiatives, give us confidence in our previously-communicated expectations for the year. As we discussed in our call last quarter, we expected difficult market conditions which are impacting our results to continue through the first half of 2010. However, we are encouraged by the improvements we have seen thus far.

Similar to sales, our operating results were consistent with our expectations. Despite the impact of lower sales levels on our margin during the quarter, we continued to pursue our long term strategic objective of delivering innovative solutions to our customers. As we discussed last quarter, we entered 2010 with an expectation that our investment in research and development would be higher than that of the previous year. While this certainly held true for the first quarter, our net R&D expenses were higher than normal due to the timing of customer cost reimbursements during the period.

While we invested in the future of our business, we also continued to make difficult cost cutting decisions. These actions helped to significantly reduce our SG&A expenses during the period. The net result of all of this was a decrease in adjusted operating income and margin to $15 million, or 11.4% of sales. Despite this decrease, we remain confident that our full year adjusted operating margin will be in line with our previously-stated guidance of 12.0% to 13.5% of sales. We remain committed to our long term growth and profitability which we believe will be fueled by our investments in innovative new products and solutions as well as greater operational efficiencies across our business.

Tom Mazza will provide additional detail on our financial results later in this call.

As is customary, I would now like to spend a few minutes updating you on the progress we are making on our strategic initiatives. With regards to our first long term strategic initiative, diversification, this quarter was a good example of the benefits of this component of our strategy as we experienced the return to growth in both our orthopedics and vascular product lines, which helped to bolster our other product lines whose sales growth was more moderate during the quarter.

As you may recall, only two years ago we had no sales in these product lines. Today, we have a more diversified and stable revenue base which provides a significant platform to grow from. We are proud of the strides we have taken to diversify Greatbatch, but realize that we need to do a better job of taking advantage of the long term growth opportunities within the key markets in which we operate.

Driving operating performance is our second strategic initiative, and is also a critical part of our long term plan to drive shareholder value. At this point, we have completed all of our publicly-announced consolidation initiatives. With that said, we continually analyze our business to find ways to improve our efficiency and we expect to take additional steps to drive operational excellence throughout the organization. Particularly, with respect to our orthopedics product line.

We remain committed to this product line and intend to aggressively invest in it over the next three years, in order to further drive improvements in growth.

Our last key strategic initiative is to drive growth through delivering innovative solutions. During this economic downturn, other companies were cutting back on research and development investment. We are increasing our focus in this area. During the quarter we spent approximately 9.5% of sales revenue on research and development, compared to 7.5% in last year's first quarter. We remain confident that this investment in research and development will enable us to maintain our leadership in our core markets and drive further growth in margin improvement.

During the quarter we achieved this significant milestones with regards to this strategy which I would now like to spend a few minutes reviewing in further detail starting on slide 7.

Last quarter, we outlined the key steps we have taken over the last two years to deliver innovative solutions to our customers and drive growth through innovation. The outcome of these efforts is that we are now in a position to provide our OEM customers with full system solutions. This includes providing comprehensive products and services from development and regulatory submissions through manufacturing and supporting worldwide distribution.

These systems are niche product solutions that complement our OEM customers' products, and fit perfectly into our expertise and capabilities. This strategy includes partnering with our OEM customers including sharing technology and resources, in order to bring these solutions to market.

The benefits to our OEM customers include shortening the time to market for these products by accelerating the velocity of innovation, optimizing their supply chain, and ultimately providing then with cost efficiencies. This quarter I am pleased to report that we achieved a significant milestone with regards to this strategy. As we disclosed in our press release last month, on March 15th, 2010, Greatbatch Medical received FDA clearance for its OptiSeal Valve PTFE Peelable Introducer. We have also received approval in Canada and OptiSeal is CE-marked for distribution in Europe. This is significant because OptiSeal represents the first 510(k) regulatory clearance under the Greatbatch Medical brand, and a result of the significant investments made over the last few years.

Additionally, this clearly demonstrates our ability to provide our customers global regulatory support, a capability we did not have just two short years ago. OptiSeal is also significant because it represents the type of niche system-level products that we are trying to provide, that is, products which are complimentary to the core products of our customers and fit perfectly within our size and capabilities. OptiSeal was developed in collaboration with our OEM customers and leverages our technology and expertise and provides our customers with value-added innovative features. More importantly, it represents a $20 million annual market opportunity and it would bring it with margins that are consistent with our other cardiac rhythm management products.

Clearly this represents a win-win situation for both Greatbatch and our customers. Even though OptiSeal by itself will not dramatically impact our revenue, it is a nice addition to our revenue base and is indicative of the types of revenue opportunities that we are looking for. Additionally it provides us with an opportunity for expansion into the vascular and peripheral access markets. In the second half of this year, we expect to finalize distribution agreements with our customers and OptiSeal will begin to provide a return on the research and development investment we have made over the last two years.

We also expect to make additional announcements similar to OptiSeal over the next several years, as more of these system level projects are commercialized.

Before ending my portion of the call today, I'd like to provide a brief overview of how we analyze and make decisions with regards to our technology investments such as OptiSeal and the types of returns on investments we expect.

First off, as indicated on slide 8, we have placed a disciplined and systematic approach to development of new technology and product introductions. This process includes a sequence of six clearly-defined stages. Each stage contains prescribed activities which must be performed and certain fundamental issues in the development process that must be addressed. At the end of each stage, a formal review is held and authorization must be received before the project proceeds to the next stage and further investment is made. I should point out that approval authority could be as high as the Technology Development and Innovation Committee of our Board of Directors depending on the level of materiality of the project.

Early on in the process, an extensive business plan must be created for each development project, including preparing a formal valuation of the project based on a discounted cash flow analysis. All new development projects are assigned an internal rate of return hurdle that is consistent with the risk of the project and is required to contribute incrementally to the Company's return on invested capital target.

In general, we expect all of our development products to have a return on invested capital of at least 15% and with a payback of less than five years, once again depending on the risk of the project. In addition to these measures, all of our development projects must be consistent with our technology road map and the overall strategic direction of the Company. As discussed last quarter, none of our projects involve selling directly to the end markets such as hospitals and clinicians. This is not one of our core competencies. We excel at operational excellence, technology, innovation and quality systems, and that is what we will provide to our customer in one integrated solution. Additionally, the focus of our systems level projects will be the same medical markets that we serve today-- cardiology, neurostimulation, orthopedics, as well as the commercial markets.

In closing, we are proud of the progress we continue to make on our strategic initiatives. By staying connected, committed and focused on all aspects of our business, we expect to continue driving value for our stakeholders. We are certain that our dedication to improving the business and closely following our strategic priorities has placed us in a strong position to experience continued success in 2010 and beyond.

With that, I'll now turn the call over to Tom Mazza for a more detailed review of our first quarter financial results.

Thanks, Tom, and good afternoon. For the call today, I would like to provide you a quick overview of our results for the quarter in comparison to prior year amount. However, where relevant I will also be discussing sequential variances to the fourth quarter of 2009.

As you can see on slide 9, sales for the first quarter were $132 million compared to $139.8 million in the comparable 2009 period, and $125.8 million for the fourth quarter of 2009. The 6% decline from the prior year was due to inventory stocking by our customers in the 2009 period and the underlying conditions in the orthopedics and energy markets.

However, in comparison to the sequential 2009 fourth quarter, sales increased 5% driven by improvements across all of our product lines including a 17% increase in orthopedics, and an 8% increase in vascular sales. Our CRM and neuromodulation sales remain consistent with the prior year first quarter as the benefit of further adoption of our Q batteries was offset by lower feed-through revenue due to various customer product launches in the prior year first quarter that did not occur in the current quarter.

We should point out that CRM and neuromodulation sales can vary significantly from quarter to quarter, based upon the timing of customer product launches, customer outsourcing decision, changes in the customer market share mix, product recalls, and customer inventory adjustments.

First quarter 2010 sales of our vascular product line were $8.2 million compared to prior year sales of $10.7 million. This decrease was primarily due to the lower introducer sales, as a result of customer inventory stocking during the first half of 2009 in connection with our ongoing introducer litigation. The impact of this inventory stocking began to ease during the first quarter of 2010 as vascular sales increased 8% from the sequential quarter.

We remain optimistic about the potential of this product line as we continue to work with our customers on developing system level projects such as OptiSeal which Tom has discussed earlier. However, many of the projects that we are working on today will not generate sales until the second half of 2010 and beyond.

Our orthopedics product line sales were $29.4 million for the first quarter of 2010 compared to $34.1 million for the same period 2009. Similar to prior quarters, this decrease is due to uncertain economic and regulatory environment which caused reduced spending on elective procedures and increased emphasis on inventory management programs for our customers.

As expected, the impact of these factors eased during this current quarter as sales increased 17% over the sequential quarter. During this inventory downturn, we continue to streamline, invest in our orthopedic operations, which we believe present significant opportunities. Going forward, we expect year-over-year comparables to be more favorable for this product line.

First quarter 2010 sales for the Electrochem business segment were $17.5 million, slightly below the $17.7 million in the first quarter of 2009. This decrease from the prior year primarily related to the slowdown in the energy and portable medical markets, which caused some customers to reduce inventory levels and pushed back projects.

These conditions continued to ease in the first quarter, but are still expected to be a challenge for the next two quarters.

Turning now to expenses, gross profit as a percentage of sales for the 2010 first quarter was consistent with the 2009 first quarter of 31.6%, as the benefit from our various consolidation and cross-cutting initiatives was offset by lower production volumes and excess capacity, which was expensed in the current quarter. We anticipate that our margins will improve throughout 2010, as sales levels increase and we further leverage our manufacturing capacity.

Showing general and administrative expenses of $15.7 million for the first quarter of 2010, were $3 million lower than the same period of 2009 due to the various consolidation cost cutting initiatives, as well as reduced 2010 performance-based compensation of approximately $1.6 million for the quarter compared to the 2009 period.

As expected, net research development and engineering costs for the 2010 first quarter of $11 million were above the comparable 2009 period of $7.9 million. This is due to further investment in the development of new technologies in order to provide solutions for our customers and ultimately create long term opportunities.

Additionally during the quarter, we received a lower level of customer cost reimbursement. These cost reimbursements can vary significantly from period to period due to the timing of the achievement of milestones of the development projects. Excluding these customer cost reimbursements, RD&E was 9.5% of sales for the current quarter compared to 7.5% of sales in the first quarter of 2009. We anticipate that while cost reimbursements will return to more normal levels, the higher level of RD&E investment will continue for the remainder of 2010 consistent with our long term strategy.

As a result of these variances, GAAP operating income for the first quarter of 2010 was $14 million compared to $14.8 million for the first quarter of 2009. Similarly, adjusted operating income was $15 million, or 11.4% of sales in the first quarter of 2010, compared to $17.6 million or 12.6% of sales for the parallel period 2009.

As expected, the 2010 first quarter GAAP and adjusted effective tax rate increased to 35%, compared to 31.5% and 32.6% respectively for the 2009 period. This increase was primarily due to the expiration of the US R&D tax credit at the end of 2009. However, current proposed legislation, if enacted, would reinstate this tax credit retroactively to the beginning of 2010.

GAAP diluted EPS for the first quarter 2010 were $0.24 per share compared to $0.28 per share for the first quarter 2009. Similarly, adjusted diluted EPS were $0.32 per share in the first quarter of 2010 versus $0.41 for the comparable 2009 period. I should point out that these adjusted amounts exclude the additional non-cash interest expense related to the change in accounting for convertible debt adopted in 2009. The impact of this new accounting standard was to increase adjusted diluted EPS by $0.05 per share in both the first quarter of 2010 and 2009. We refer you to the appendix at the end of this presentation for a reconciliation of adjusted amounts to GAAP.

Driving operating performance is a critical part of our long term plan to drive shareholder value. Since the first quarter of 2009, we completed a number of strategic initiatives designed to improve operational efficiency including initiatives to reduce inventory and receivable levels. The benefit of these initiatives can be seen in our strong cash generation, as cash flow from operations for the first quarter of 2010 were approximately $21 million compared to $60,000 in the last year's first quarter. Additionally, our cash flow from operations was higher than the prior year due to the timing of payments and lower consolidation and integration costs.

Moving on to slide 11, as you can see we are reaffirming our full year product line sales growth rate and adjusted operating income margin for 2010. As discussed on our last call, these percentages are annual growth rates. When determining our guidance, we anticipated that our operating income would start off lower in the first quarter of 2010 and improve throughout the remainder of the year as the economy and healthcare environment improves. We expect this to result in higher sales levels and incrementally higher gross margins as we fill our excess capacity.

Additionally, we are expecting customer cost reimbursements on our R&D projects to return to a more normalized level for the remainder of 2010. Overall, we remain focused on our long term strategic objective of growing sales faster than our markets through diversifying our revenue base, leading innovation and providing our customers with the technology solutions that they need to be successful. We have worked hard to implement an efficient operating model while making the necessary investments to ensure growth across our various product lines. Despite the difficult operating environment, our strong financial position, the resiliency of our core markets, as well as the benefit of a more diverse revenue stream make us confident in our ability to deliver more profitable results going forward.

Let me now turn the call back over to the moderator to take questions.

(Operator Instructions) I have the first question coming from the line of Glenn Novarro with RBC Capital Markets. Please proceed.

Hey, thanks, good afternoon, guys. Two questions. One, I'm just curious, did the Boston Scientific recall have any impact on your end of quarter revenues, or will it have any impact for 2Q? That's question one. And then secondly, with the operating margin coming in around 8% for 1Q, I know you're reaffirming your 12% to 13.5% guidance, but should we be modeling more towards the lower end of that guidance, given what we saw in the first quarter?

Glenn, this is Tom Hook. In terms of the Boston Scientific recall, obviously that occurred kind of late into the first quarter. It's impossible for us to really see if there was any pattern changes. We tend for most of our product lines, have lead times that are in multiple weeks, and hard commitments against purchases and shipment, so I don't think there was a big effect. As it gets into the second quarter and the remainder of the year, largely as each of our OEM customers shifts their forecast, their orders, and their polls from us, we're—Boston Scientific obviously is a very significant customer as well as the other OEMs are, so as their shifts between their product lines and their content, there is an effect on us but obviously it's maybe pickups in other locations, and certainly it's swamped overall by inventory management and growth. So, we don't expect to see a large effect out of it overall. I think your question with regards to operating income, might want to make sure we're on the same page, because--

It was 11%. 11.4%.

Adjusted operating margin was 11.4% for the first quarter, which is just under the low end of our guidance range which is 12% to 13.5%. We expected to start the year a little challenged, given the economy, healthcare reform, and things are getting back to normal and the economy is progressing, and we continued the momentum over the last couple of quarters and carried that into 2010. But, we definitely see the year being more positive momentum and crescendoing as the year unfolds. So, it's where we expected it to be both in revenue and adjusted operating income at this point of the year, and we still expect to hit within the ranges we've given and the growth rates we've seen. We're confident that we're going to be there.

Okay. Sorry, I read the wrong number, I was looking at a different number.

Okay.

Now you did come in a little bit below what we were expecting, so that's why I was just asking the question that, starting at 11, it's going to move higher, but you want to give us a sense of where in that range you may feel comfortable with right now?

I think I can say with 100% confidence, it's somewhere in between 12% and 13.5%.

Okay. All right. I thought I would try, I thought I would try. All right, thanks, guys.

Thank you.

Your next question comes from the line of Tim Lee with Piper Jaffray, please proceed.

Hi you guys, it's actually Cynthia in for Tim. Just one quick question, I know DePuy had reported really strong sales this past quarter, so is it safe to assume that the inventory drawdown have largely been completed and ortho should return to a more normalized level in line with underlying market growth?

I'd say Cynthia, we don't really, as you know, DePuy is a very significant customer for us, given that we acquired the manufacturing facility from them a few years ago for implants, so that we're inextricably linked to their sales and their inventory management. You can tell from the big uptick in our orthopedics revenue that there's a favorable response there, so it's a good conclusion that you're seeing the effect of stabilization in the orthopedics market, and the health is coming back, and obviously inventory level reductions that occurred in 2009 are going to bleed off in 2010. The degree and the magnitude which took place last year is not going to repeat itself. By product line, there may be some adjustments based on their mixes, but for the most part we think we're clear of that and the lingering effects that may have spilled over into Q1 or the first half of this year won't continue into the second half of the year.

Okay, that's very helpful. And then just one quick question on operating margins. I know this quarter came in low, but you're still reaffirming that 12% to 13.5%, and so is that most likely going to come out of [dating] from SG&A? I know this quarter was again a significant improvement year-over-year, and sequentially as well. So, is that kind of the new run rate, SG&A?

I don't like to think, you know, we have significant programs that are variable to our operating results. SG&A will scale with our revenue and our operating income success, they'll stay in synchrony. I think where we're at in terms of driving the financial results squarely come down to driving revenues, and since we've done a very good job and a diligent job, and all of the product lines with the exception of orthopedics, we've consolidated our manufacturing facilities. We're in a position to leverage the volume, to pass on cost reductions to our customers as well as drive incremental profitability, which drives operating income up. We don't-- all those consolidation programs are done, and the way they pay off now is to drive revenue. So we're very revenue-growth focused within the product lines, and then for orthopedics we're making more consolidation and investment on that quarter of our business right now to get the same level of operational efficiencies we have in the balance of the business. So, that's how we're going to get the operating income up, is drive revenue.

Okay. And fair enough, just one last follow up question in terms of the other facilities, consolidation expenses expected, is that expected to go away, or should it be kind of at this level, just as you--?

Cynthia, I think we've quoted the number to be between $3 million and $4 million in our previous call. I think we're being consistent with that. We'll reaffirm that number as well, between $3 million and $4 million for 2010.

I just want to clarify that it's in the page in the guidance had the $4 million to $6 million consolidation and integration number that you want to key off of, and that'll be consistent with that for this year. And then again, is when we give guidance for 2011, we will you know, these initiatives had been winding down and the majority of the business so we continue to see that bleed out towards zero, as we finish up the orthopedics in 2011 and 2012.

Yes, I mis-spoke, Cynthia, it is 4% to 6% we're showing on the slide deck.

Okay great, thank you.

Your next question comes from the line of Greg Brash with Sidoti & Company, please proceed.

Good afternoon guys, thanks for taking my call. Can you just, on the gross margin side, you mentioned lower volumes and excess capacity, yet it was down sequentially on higher revenue. Is that attributed to product mix, just in there being more orthopedic sales?

Part of it is certainly the mix effect with our cardiac rhythm management and neurostimulation products having more tempered growth, but orthopedics coming back. There's somewhat of a mix effect that you're talking about. I think what we want to be careful of, though, is that we have a lot of product consolidation initiatives that occurred and we also have production variances that spill off of those consolidation products that have timing associated with them, and as those wash out through the P&L there's effects on the gross margin line, and it's both the mix and that production variance, it's timing that can affect the gross margins, but in general as you get out across a couple of quarters those timing effects on variances go away because we're completed with the consolidation initiatives now, except for orthopedics. So, the effects would be as it were just going to, as we grow revenue we're going to sequentially keep the operating margins moving in the right direction.

The only thing that would affect that, if it was a really big rebound and a lower margin product in say the orthopedics product line, and then that may temper that a little bit, but those are the big effects that we, that you're seeing the effect of come through the P&L.

Okay good, that's helpful. As far as new product launches, sounds like you have a lot of stuff going out in the back half of this year. Any concerns, the FDA's being a little more stringent these days, delaying product approvals. Any concerns there, you're still pretty confident and have good visibility into what you're launching?

I always have concerns with regards to the approval gates. We have, we're a very conservative company. We've done an extensive amount of testing. We've done our submissions very comprehensively. We have thorough, we've added quality system and production systems so we view that we're making very strong submissions. The quality and regulatory teams within the businesses have done an exceptional job over the last couple of years to be disciplined in pulling this together, so we don't forecast any unplanned delays. We've planned some cushion into this, into the schedules, so that we can have time for interchange with the regulatory bodies to answer questions and provide any supplemental data. We haven't really tapped into that very much. I think the exciting thing for us is not only do we feel the economy coming back and the healthcare reform settling in, but what we also see is that after years of investment in this system strategy, we're finally seeing some of these clearances on the regulatory hurdles, and then moving off to distribution with our OEM customers. It's the combination of all those that will build up some incremental momentum on these niche products as the year unfolds. I think they're all additive to each other. Each one of them can be small, but together they can be significant in terms of the materiality effect on the P&L. And one of the items, as you point out, is we have to get by these clearances and regulatory approval hurdles so that we get those individual revenue streams in, and we're very focused on it, and so far we've done well both in the US clearances with the FDA as well as the international clearances, as well.

Okay. On the OptiSeal, did I catch that correctly, that you won't be--your customer won't be distributing that until year-end? Is that correct?

It'll be the second half of the year. Individual OEMs will pick it up in their sales processes. They do their training and roll it out into their field reps, and then in the 2011 it'll be a more full year effect.

Okay, one final quick one for me, on the earnings. I guess just looking at the GAAP earnings, I come up with $0.23 on the diluted number of 23,900. I guess you came up with 24 on both basic and diluted. Is there something—

Did you add the convert interest back?

No.

It's probably about a half a penny of convert interest that you have to add back.

Okay, very helpful, thank you.

No problem.

Your next question comes from the line of Gregory Macosko with Lord Abbett. Please proceed.

Yes, thank you. Just one question regarding SG&A. I believe it's down fairly significantly sequentially. Do you expect the--what kind of a run rate are you expecting there?

I think you'll find the run rate would be higher than what's going to be in the first quarter here. As we get deeper into the year and we pass milestones for profit sharings and incentive plans to come into the picture, we'll start accruing and funding those when we reach those milestones. So, the run rate in the first quarter was good. We had some good hard cost reduction savings in there as well, but is--we don't really break it down and provide a lot more color than that, Greg. But, there's incentive plans as the financials pick up. It'll temper off some of the gains in SG&A by funding up those incentive clients.

Okay, thank you.

Welcome.

The next question comes from the line of Stan Mann with Mann Family Investments, please--

Hi, gentlemen. I have some detailed questions. Can you go through the outstanding debt, converts, regular, give us a little more color on the when they're callable if any, and interest rate on it? Seems like we're paying about a 6% overall interest rate if I've calculated right.

Yes, Stan, I can give you the details on that. Good to hear from you again. The converts, the one tranche of the converts is about $30 million, is callable in June of 2010.

Oh, of this year, okay.

This year. Yes. We've been--that's why we're planning on having sufficient cash and we have approval under the credit agreement already to pay those off, if they are callable. The balance of the $197 million does not mature until 2013, it's not callable until 2013. The cash--

What about the rates on those?

I'll be glad to give them to you. The rates on those are both -- the cash interest expense on those is 2.25%.

Okay, and convertible, convertible at what price?

They're well under the money, approximately $40 and $38 I believe is the--

Oh, wow, out of the money. Okay.

Okay, out of the money. Okay. And they're tax deductible because they are [co-hosts] that they are tax deductible at basically 8% plus.

Okay. And the rest of the debt?

The line of credit is good until 2012.

Okay, but we've got about 290-something million outstanding?

Excuse me?

Debt, we have $290 million debt outstanding? You've covered $197 million and $30 million.

Yeah, and the balance is the revolving credit agreement which we have approximately $100 million which matures in 2012.

And what's the rate on that?

It's about 2%.

Okay, real-- so it seems like we're paying--

It's LIBOR plus 1, LIBOR plus 1.

Okay. So, but the rate that we're paying at about $5 million a quarter seems to average out higher than that.

That's interest expenses not calculated on the same basis, that's why we make the adjustment in the FSP. The interest expense that we have to do under the new rules that were put in in 2010 increases that about $2 million per quarter.

And that's a non-cash?

It's a non-cash item, correct.

Okay. So the cash we're generating which we're really starting to generate, will--the additional cash after we pay off the June which is upcoming, what--do we have any plans for that?

To reduce the debt.

To just to start really reducing debt.

Correct.

Okay. Second question is on these R&D projects, on previous calls we were talking pretty loudly about this MRI-able pacing, CRT or pacer, and Medtronic has come out with it. Are we still in the game?

So one thing I want to clarify is, we're developing enabling technologies for MRI and working in cooperation with OEM customers, all the OEM customers, to actively develop and sell that. The--so there's three sets of technology, non-magnetic materials, proximal-tip filtering on the lead wire, and distal tip filtering on the lead wire. One of the technologies you've highlighted is what we call Be Safe Filter, which allows the lead wire heating effect to be eliminated. Different OEMs are taking different approaches to MRI. In terms of placing restrictions on the imaging fields as well as power and what can be done. The OEMs since they're selling the actual pacing systems, they control that. We're doing the development to supply the underlying technologies in terms of [componentry] and for some OEMs, even the lead wire development, but we're approaching it as trying to make the entire device immune. So, there's--it's a much bigger technology leap to get to that point, which is why our program unfolds over the next two to three years.

Is it still a major program?

It's still a major program. We'll keep highlighting it and we've made significant process on both the technical development as well as the engineering of the products, and as I've said on prior calls Stan, which you know, is, it's in product development. We're just not breaking out specifically who we're working with.

No, I understand that, I understand. Is it, you're spending $11 million, so is that a major, is that the major project at this point?

No, it is not the major project in terms of research and development spend, no.

It is not? Can you share with us a little about some other projects other than this Opti--that's a lot of money to be spending quarterly. I'm sure it's been a call. Is there anything that you can share with us as to the larger projects in general? As much as you can tell without letting a competitor or feeling--

Yes, I think there's, that's obviously is the balances that many of our programs that we're spending that are major project expenditures we have development agreements with confidentiality clauses that restrict us from talking about them, even though I would love to be able to be able to highlight the--

Can you say if it's cardiology, orthopedics, vascular? Can you just tell us that?

I would say that right now, our research and development spending is being focused in three areas, vascular, neurostimulation, cardiac rhythm management, and we are first going to focus on the production efficiencies and production improvements and investments in orthopedics, in combination with scaling up that business and research and development spending. So, we've got a lot of investments to make still in orthopedics. We'll make them progressively, but right now we've made significant investments in CRM, neurostim and vascular, and the vascular ones are coming out first because they're the shorter regulatory pathway.

The easiest? Easiest.

They're not easy, but definitely the easiest amongst all of those other projects. So, they're emerging first.

So we can expect to start seeing some of these in the CRM and a neuro area? This year, in your opinion?

Well you're already seeing it, Stan, because the first project is a CRM valve introducer for lead wire placement, which is the OptiSeal, so that is, it's a--it's a vascular introducer, but it is a CRM product, it's sold by the CRM OEMs for CRM applications. So, is--you know, we'll continue to see these roll out. We're just, until we actually make the FDA submissions, we can't actually discuss the projects. We're not going to get permission for competitive reasons with our OEM partners, because it is in their product roadmap and they're fairly secretive of it, and they're not going to allow a supply chain and strategic partner like Greatbatch to discuss it until they're ready to highlight it. That's just one of the frustrations we have in product development that we would love to talk about things, we're putting these investments earlier, but we have pretty tight restrictions in terms of development agreements.

(Operator Instructions) I have a follow-up question coming from the line of Glenn Novarro with RBC Capital Markets, please proceed.

Oh, thanks. Hey, I'm just playing with the model here, and it seems on your vascular revenue number in terms of guidance, it just, I'm--can you help us get to kind of how you still feel comfortable with that range? It just seems like, given that number and again that was a number that was a little bit below what we were looking for in the quarter, it seems like that vascular number may be a little bit of a stretch, and maybe that's the number that should be closer to the bottom end of guidance. So, is there anything you can tell us that maybe will get us in the [inaudible] zone?

Yes, I mean, to hit the bottom end of the guidance Glenn, I'm seeing that we've got to hit $9.6 million a quarter to get there. Yes, we still think that's well within the range to hit the bottom of the guidance.

Yes, and I think just Glenn, to follow up on what we were talking about with Stan, is you know, a few of the systems pieces are hitting first in the vascular areas, so in the first quarter we had zero sales of those initiatives. So, as the year moves along and we start to see sales in those areas, then it's going to add to the base product lines we have that are growing also, and it's going to tend to look like vascular has a much higher growth rate to get to that guidance range, but that's all factored into the numbers we gave some of these system level products, even though they're not big revenue streams, in a product line area like vascular they can make a significant difference on a percentage basis. What you've got to remember is, these things tend to when a system is launched, they tend to get initial stocking purchases, production plans that are laid out to flood the supply chain. So, there can be significant effects over the course of a quarter, just getting it kicked off.

Gotcha, so that's the thing then, there's going to be probably some OptiSeal stocking.

Right.

In the fourth quarter, got it. Okay. And just to clarify, you already have the OEMs picked out, this is already locked and loaded, just a function of how quickly you can ramp up production and how quickly they can train sales staff to launch the product, is that correct?

Correct, and they have to, you know, we've got the product cleared, we have an indication of interest from all the OEMs, they're evaluating it, they have to decide how they roll it out. We can't decide that for them. We obviously support them in that roll-out, and then we provide the production support in the process too.

Okay. All right. Thank you.

And that concludes today's question and answer session. I'd like to turn the call back over to Marco Benedetti for any closing remarks.

Thanks. I'd like to remind you that both the audio portion of this call and the slide visuals will be archived on our website at Greatbatch.com, and will be accessible for 30 days. Thanks, everyone, for joining us.

Thank you for your participation. That concludes today's conference. Have a great day.