Integer Holdings Corp (ITGR) 2011 Q3 法說會逐字稿

Welcome, everyone, to the third quarter 2011 Greatbatch, Incorporated conference call.

Before we begin, I would like to read the Safe Harbor statement. This presentation and other press releases contain forward-looking statements within the meaning 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 changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial conditions or prospects.

I would like to turn the call over to today's host, Corporate Controller and Treasurer, Marco Benedetti.

Hello, everyone, and thank you for joining us for our 2011 third quarter earnings call. With us 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 with a few brief comments regarding our third quarter results, and will then provide an update on our strategic initiatives. After that, Tom Mazza will review our financial results and guidance for 2011. We will then open up the call to Q&A. As we have done in the past, we are including slide visuals that go along with this presentation which you can access on our website at www.greatbatch.com.

With that, let me now turn the call over to our President and CEO, Tom Hook.

Thank you, Marco, and welcome to all of you who are listening to our call today.

I am pleased to report that we had another solid quarter. Revenue of $131.7 million was consistent with our expectations and represents an increase of 3% over the prior year, 2% on a constant currency basis. This increase was lead by our Greatbatch medical segment, which increased 4% on a constant currency basis and included year-over-year growth across all 3 of its product lines. This growth was primarily driven by our vascular access and orthopedic products lines, which increased 26% and 11% respectively. These increases are significant accomplishments given the challenges we are facing in our core medical markets and are a good example of the benefits of our diverse revenue base.

With that said, we are not immune to the headwinds that the downturn in the global economy and in our end markets present. More specifically, we continue to see significant pricing pressure from our OEM customers. These pricing pressures, combined with higher performance-based compensation and mix of lower margin orthopedics revenue, resulted in 110 basis point decline in our gross margin to 31.8% of sales. Despite this pressure, we were able to drive profitability improvements, as our adjusted operating income increased 2% to $14.7 million.

During the quarter, we continued to generate a significant amount of cash flow from operations, which totaled $21 million and was used to repay $10 million of debt. This brings the total amount of debt repaid over the last 3 years to $155 million. We have now nearly repaid all the credit line debt used to fund our acquisitions back in 2007 and 2008.

This lower debt level, as well as a lower effective tax rate, contributed to a 21% increase in adjusted earnings per share to $0.41 per share. These results, combined with our strong performance for the first 2 quarters of this year, put us well on our way to achieving our annual revenue and adjusted EPS targets, which we raised at the end of the second quarter. Tom Mazza will provide additional detail on our financial performance and outlook later in the call.

Now, more than ever, I am steadfast in my belief that the best way to navigate through these challenging times such--will be to remain dedicated to our 3 strategic objectives of growing and diversifying our revenue base, driving operating performance and delivering innovative solutions to our customers. I would now like to devote the remainder of my prepared remarks to reviewing the highlights of the progress we are making in implementing these objectives.

With regard to our first long-term strategic initiative of growing and diversifying our revenue base, this quarter provides a good example of the benefits of this strategy. Despite a contracting CRM market, which still represents over 50% of our business, we were able to report 2% constant currency revenue growth this quarter and 5% constant currency revenue growth for the year-to-date period.

These increases were almost entirely attributable to our vascular access and orthopedic product lines, which we have been able to grow 16% and 14% respectively on a constant currency basis for the year. These product lines continue to diversify our revenue base away from the cardiac rhythm management market and provides us with other avenues from which to grow. You may recall that these product lines were acquired 4 years ago and were a direct result of the diversification facet of our strategy. Going forward, we intend to continue to make investments to grow these product lines and grow further and diversify our revenue.

Driving operating performance is our second strategic initiative and is also a critical part of our long-term plan to create shareholder value. During the quarter, our adjusted operating income benefited from the various investments and Lean initiatives put in place over the last year, which enabled growth in key areas of our business and helped offset market-driven pricing pressure. Going forward, we expect that leveraging our operational excellence will continue to be a fundamental part of our growth strategy and will be critical to maintaining our profitability as pricing pressures persist.

To that end, this month our Board of Directors approved a multifaceted plan to further expand, optimize and leverage our manufacturing infrastructure. More specifically, this plan includes the opening of 2 new orthopedic design centers, transferring production of several product lines to lower cost manufacturing facilities, consolidating our orthopedic operations in Switzerland, expanding 2 existing facilities to accommodate medical device manufacturing, and upgrading our ERP system.

The total capital expenditure for these initiatives is expected to be between $40 million and $50 million, with total expense expected to be in the $10 million to $15 million range. We have already begun implementing these initiatives, which is expected to take 2 to 3 years to complete. Once finished, these investments will add to our capabilities, provide manufacturing infrastructure to support our medical device strategy and further leverage our low-cost manufacturing facilities in order to drive manufacturing efficiencies. As always, we will continuously update you on the status of the progress we are making on these initiatives, which will position our Company for improved profitability and long-term growth.

Our last key strategic initiative is to drive growth through delivering innovative solutions. During the quarter, we continued to make good progress on the medical device initiatives that we outlined at our investor day in March. At this point, we are encouraged by the development of our entire medical device portfolio, which continues to track to our expectations. We are currently in various stages of development on over a dozen medical devices either through partnerships with our OEM customers or independently. Although we do not discuss each of these products individually each quarter, we will discuss significant milestones as they occur.

As an indication of our success during the first 3 quarters of 2011, we generated nearly $2 million of incremental revenue related to our medical device products and expect this amount to approach $5 million for the full year. Although the absolute revenue is still modest, we're making strong progress on all initiatives and expect this amount to continue to build meaningfully over the next several years.

Also indicative of our progress is the incredible amount of intellectual property and regulatory submissions and approvals that are being generated by our Company each quarter. Similar to last earnings call, we have summarized our progress in these areas on slide 7 of our presentation. I would like to point out that the regulatory submissions and approvals that we disclose on a quarterly basis are not just referring to FDA submissions, but OUS submissions as well. As you can see, we continue to make good progress on these initiatives despite the regulatory headwinds that we, as well as others in our industry, are facing.

I'm encouraged with our progress on all 3 facets of our strategy, and I am confident that the investments we are making today will position our Company for higher growth and profitability in the future.

With that, let me now turn the call over to Tom Mazza for a more detailed review of our third quarter financial results.

Thanks, Tom, and good afternoon, everyone. For the call today, I'm pleased to review with you our results for the third quarter, beginning on slide 8.

Consolidated third quarter 2011 sales grew 3% over the prior year period to $131.7 million. Excluding the $2 million benefit of foreign currency fluctuations, revenue growth was 2% despite contraction in the CRM market and the tough comparison for our Electrochem segment. Our vascular access and orthopedic product lines were the primary drivers behind this growth.

I would like to point out that foreign currency exchange rate fluctuations only impact our orthopedic product line sales. Thus, for all other product lines, the sales growth rates I'm about to discuss are the same on both a reported and a constant currency basis.

Looking at our CRM and neuromodulation product line, sales for the third quarter 2011 increased 2% to $70.7 million compared to the prior year period, but were down 9% comparison to the sequential 2011 second quarter. During the first half of 2011, CRM revenue included the benefit of customer inventory builds and product launches, which are now complete and will not reoccur in the second half of 2011. Additionally, CRM sales continue to be impacted by pricing pressures and a contraction in the underlying market. As a result of these headwinds, we expect full year CRM and neuromodulation revenue for 2011 to be flat in comparison to 2010 despite being up 1% for the first 9 months of the year.

Third quarter 2011 sales for our vascular access product line increased 26% to $11.4 million compared to the prior year. This increase was mainly attributable to both growth in the underlying market and market share gains. Additionally, vascular access revenue for the quarter included approximately $500,000 from sales of medical devices that were developed under the Greatbatch name.

Orthopedic product line sales of $31.1 million for the quarter of--for the third quarter of 2011 were 11% above the comparable 2010 period. Third quarter 2011 orthopedic sales included the favorable impact of foreign currency exchange rate fluctuations, which increased sales by approximately $2 million compared to the prior year. On a constant currency basis, sales were up 4% over the prior year period. This increase was primarily due to higher sales of orthopedic instruments as a result of the investments made over the last several years to expand capabilities, shorten lead times and improve quality and on-time delivery, partially offset by lower implant sales.

In comparison to the 2011 second quarter, sales decreased 18%, primarily due to seasonal facility shutdowns in our European operations as a result of a reduced number of customer product launches, which occurred in the first half of 2011 and are not expected to reoccur in the second half of 2011.

As expected, sales for the Electrochem business segment decreased 12% to $18.5 million compared to the third quarter of 2010, as the third quarter of 2010 included the benefit of a one-time energy customer inventory build that resulted in record revenue for that segment. Additionally, Electrochem revenue for the first half of 2011 included the benefit of seasonality in the energy market and the timing of inventory pulls by our environmental customers, which are not expected to reoccur in the second half of 2011. Despite this quarter-over-quarter decrease, Electrochem sales are up 1% for the year and are still expected to be at the high end of the 2% to 5% annual growth rate range provided at the beginning of the year.

As you can see on slide 9, gross profit was $41.9 million in the current quarter and was consistent with the comparable 2010 period. During the quarter, gross profit included the impact of higher performance-based compensation and price concessions made to our larger OEM customers near the end of 2010. As a result of this, as well as the higher mix of lower margin orthopedic revenue, gross profit as a percentage of sales decreased 110 basis points to 31.8% when compared to the 2010 third quarter, but was consistent with the sequential second quarter of 2011.

Selling, general and administrative expenses increased 4% to $17.8 million or 13.5% of sales for the third quarter of 2011, compared to $17.1 million or 13.4% of sales for the same period of 2010. In comparison to the prior year, SG&A expenses for the 2011 quarter included higher performance-based compensation and an increase in professional and consulting costs in connection with the Company's medical device initiatives. Additionally, current quarter SG&A expenses were higher reflecting the impact of strengthening foreign currencies on our international operations in comparison to the prior year. We estimate that foreign currency exchange rate fluctuations added approximately $500,000 to SG&A costs during the current quarter in comparison to last year.

Net research, development and engineering costs for the 2011 third quarter were $11.1 million or 8.4% of sales, slightly below the comparable 2010 period, including a higher level of customer cost reimbursements in comparison to the 2010 period. As expected, the Company continues to invest resources in developing complete medical devices for its OEM customers. Total costs incurred in connection with these initiatives during the third quarter of 2011 were $6.2 million and included $1.6 million of design verification testing costs related to the QiG Group's development of a neuromodulation platform.

As you will note in our GAAP to non-GAAP reconciliation, our adjusted operating income and adjusted EPS excludes these design verification testing expenses. For the year, net RD&E was 7.7% of sales; however, as previously disclosed, over the long term we expect net RD&E to be around 8.5% to 9% of sales.

GAAP operating income for the third quarter of 2011 was $12.9 million, compared to $13.2 million for the third quarter of 2010. Adjusted operating income was $14.7 million or 11.2% of sales in the third quarter of 2011, compared to $14.4 million or 11.3% of sales for the comparable 2010 period.

I would like to refer you to the appendix of today's presentation for a reconciliation of adjusted amounts to GAAP.

The 2011 third quarter GAAP and adjusted effective tax rates were 24.4% and 27.6% respectively, compared to 28.1% and 30% respectively for the same periods of 2010. The 2011 rates include the benefit of the R&D tax credit, which was reinstated in the fourth quarter of 2010 and extends through the end of 2011. Based on the results of the first 3 quarters, the effective tax rate for the full year is expected to be approximately 32%.

The net result of the above is that GAAP and adjusted diluted earnings per share for the third quarter of 2011 were $0.30 and $0.41 per share respectively, which represents increases of 20% and 21% respectively over the prior year. This growth, over and above the increase in adjusted operating income, is due to our lower effective tax rate for the year, as well as lower interest expense due to reduced debt levels.

Cash flow from operations for the third quarter of 2011 were approximately $21 million, compared to $28 million in the 2010 period. This decrease was primarily due to the timing of cash receipts and fluctuations in working capital levels. We currently expect the cash flow from operations will continue to be used to support RD&E investments in connection with our medical device strategy, as well as capital expenditures which will be incurred in connection with the consolidation and optimization initiatives Tom discussed earlier.

During the third quarter of 2011, the Company repaid $10 million of long-term debt and will continue to use cash--free cash flow to make debt repayments.

With regards to guidance, as you can see from our release today, at this time we are reaffirming our revenue, adjusted operating income as a percentage of sales and adjusted diluted earnings per share guidance, which were revised upward following the second quarter. With that said, we remain cautious regarding the fourth quarter of 2011 due to the headwinds facing our markets, particularly within our CRM product line.

It's important to note that foreign currency rate fluctuations added approximately $8 million to revenue for the first 3 quarters of 2011 in comparison to 2010. It is also important to note that foreign currency rate fluctuations do not materially impact our operating income, as the benefit from higher revenue levels are naturally offset by corresponding increases in production and SG&A costs.

In summary, during the third quarter we again delivered strong financial performance, which is enabling us to continue to execute on our long-term strategy. We continue to progress on our medical device initiatives, which will drive additional growth and profitability for our Company over the long term. We are on track to achieve our guidance for the year, but are mindful of the challenges that current market dynamics will present.

With that, let me turn the call back over to the moderator to take questions.

(Operator Instructions) Tom Gunderson, Piper Jaffray.

Tom Hook, maybe you could give us a little bit--it's kind of intriguing to see $2 million year to date on the medical devices under the GB name go to $5 million for the year. There's a nice inflection point there, and we like seeing inflections even if they are on small numbers. Is that new product launches? Is that the current products gaining a little bit more traction? Can you give us some color on that?

Those really are the products that we had, in prior calls, highlighted at the beginning of this year that we had received regulatory approvals. And then, as we've engaged with partners to distribute those products and bring them to market, it's us more or less getting traction on that process. And one of those products is the vascular introducer OptiSeal, which is one of the ones we've highlighted on prior calls.

And we--on all these products, for several years we've been funding the product developments, moving them through their product development phases, their design verification testing phases, and then onto customer qualifications. And they go, obviously, for regulatory approvals, then they go to customer training, and then the customer or partner we're using will actually train their sales teams and bring them to market. So, we're seeing the initial products starting to bring that inflection point.

Tom, it's consistent with what we shared at investor day. We're a little frustrated with the longer times for approval through the regulatory bodies, but we're still very confident in our ability to see the milestones reached, and we're looking for an increase on a sequential basis as we move forward from this year. So, we're just happy to start having some device revenues, and we're looking forward to ramping them in '12 and into '13.

And that FDA slowdown is also affecting your OEM customers, is that right, on some of their new products that you would have components in?

Certainly is, as I think it is--we are affected not only in our medical device products with these, as with every device of--many other customers are experiencing similar delays. I mean, I think it's well documented, the longer review and approval timelines of the FDA in particular, but they do affect us on the component side, much to your point, Tom--is because all of the--most every single product that we manufacture in the Company in some way contributes, from a customer standpoint, into a device that has to also receive FDA or OUS regulatory approval. The delays still have an effect on the discrete component side for us as well.

And then, just one quick question, and then I'll let others jump in here. The pricing pressure is a long theme for a lot of the medical device companies, and you included. I'm curious, have you seen any change in this cascade? I mean, the payers are putting pressure on the hospitals, hospitals put pressure on their suppliers, those suppliers put pressure on you. Is--that's the way of the world for the last couple hundred years, but we've seen an increase in that in the last couple of years. But, I'm curious, just in the last 3 to 6 months, has there been a change one way or the other in that pressure?

I think--I've been in the Company here 7 years, and I've only seen acute pricing pressure the entire time I've been in the Company. So, I don't know if I've necessarily seen a change, but there's kind of 2 sides to a scissor to cut, and it's the 2 sides here that cause the problem. One is there's obviously--one side of the scissors is the pricing pressure that the overall clinical supply chain places on our OEM customers down to us. The other side is the way you battle that is with innovation. And when the innovation/the approvals from the FDA bodies slow down, that's the other side of the scissors which cuts you because you use the ability to design to lower price targets, design more features in to get around this pricing pressure. So, when, from a regulatory standpoint, that innovation flow through slows down, then the pricing pressures on your legacy products are more acute, and then it cuts harder.

And that's really what the combination of just the--what I would think are just the normal pricing pressures in an industry. It's exacerbated and compounded by the fact that these longer approval timelines take it longer for OEMs and us to get new technology to the market that has better feature sets, that can sell at higher ASPs, that can perform better clinically and provide more value, and you can't get them through the regulatory bodies to get them to market to bring that effect to your financials. And that's--the 2 sides of that is what is more acutely felt here in the last year or so.

Jason Mills, Canaccord.

I'd like to pick up there where Tom left off and where you left off with your answer with respect to the regulatory pathways. Correct me if I'm wrong, but most of the products that--if they're in front of the FDA or you're putting them in front of the FDA currently--well, this may change down the line with the neuromod product, etc., but currently are they not 510(k) or supplementary filings? And if they are, are you seeing a demonstrable change in the regulatory pathway for those supposedly less arduous timelines?

I think--you're correct, Jason. For the FDA submissions that we're doing, primarily they are 510(k) clearances, and it won't be until the Algostim product files in the end of next year will we actually pursue the PMA route; however, I think what's important to note is the regulatory delays that we're seeing at the FDA in terms of timeline are affecting both 510(k)s and PMAs. And so, if you--it's fairly well documented the average approval times of submissions has gone up year over year by a significant amount. So, what it's forcing us to do, effectively, is just have to plan our initiatives around that longer timeline.

Now, obviously, actively right now there's a lot of work by AdvaMed in negotiation with the FDA to try to bring a better standardization and predictability in performance on those review timelines, and that could have a--if that is successfully done, it could have a very positive benefit on us as a Company, not only in the device projects we're doing, but also, obviously, in the customer projects that we're doing where we make components. On the component side, most of those devices that our customers sell our PMA devices, so I'd say, for the most part, the components business, especially on the cardiac rhythm management side, is more prone to the delays for product introductions.

And it's interesting--I didn't plan to go down this route in the Q&A, but you mentioned AdvaMed. I believe in our previous discussions, you have a fairly good sense for what's going on there; you're pretty close to what they're doing. I'd be interested in a little bit more color on the last part of your statement, that the lobbying efforts that are going on--am I picking up from your tone that you're somewhat optimistic that they could have a material or noticeable impact on timelines in the not-so-distant future?

Well, I wouldn't want to speak on behalf of AdvaMed, even though we're a member, but I'm always optimistic, but always plan conservatively. So, reality is, is that the review timelines have steadily increased, so that's how we have to plan. And I think from an engagement and discussion standpoint, I believe the leadership of the FDA, as well as the industry leadership, wants to see these timelines become more predictable and still not sacrificing anything on the safety side, but for [med] companies to have more predictable timelines and shorter timelines that are more consistent with the longer-term history. So--and that's what the discussions and the negotiations are all along. Accomplishing that comes down to a question of what's that going to cost, and what has to be submitted to achieve them to satisfy the regulatory bodies.

I think the more--it's like anything; the more clarity there is upfront when we start projects, the easier it is to make sure that that information is available at the submission. And that's where the delays are coming is there's crystal--inputs that the FDA requires is what allows us to give that information and ensure we can meet the timelines. So, that's pretty much what the discussion is about, making sure those inputs are crystal clear.

And I think AdvaMed's done a commendable and a really good job at representing industry on behalf of that discussion, also on the renewal of the user fee agreement. And I think, obviously, Steve Ubl at AdvaMed could give even more details on what the up-to-the-minute status is on it.

Could you speak about your GAAP net income and how--with the incremental initiatives that you talked about today, how should we think about that in 2012? I understand you haven't given formal guidance, but it looks like GAAP net income this year per your guidance relative to last year is flat to down. How should we think about next year?

Jason, this is Tom Mazza. I mean, clearly, we've called out that there's--on a GAAP basis, there's certainly going to be--to do all these initiatives, we've called it out--it was, what, $10 million to $13 million worth of potential costs there. So, a portion of that cost will be in 2012, and the benefit will be not received until the end of 2012, going into 2013.

Directionally, are you at a point now in your planning where you can give us some color?

It really is going to depend on the detailed timelines. I wouldn't want to give that color now.

Charles Croson, Sidoti & Company.

A couple of quick ones here, and then I'll just hop back in the line. Turning back to the device sales, it looks--pretty happy to see some numbers there. But, just trying to get a taste of how you feel about that. Was that at the level that you were hoping? And then, that projected amount, same question.

This is Tom Hook, Charles. I'd say it's pretty tough to be at a level that's going to satisfy me, so I'll say that while pragmatically it's a level where I think is realistically achievable, I would like to see our device sales--if we had received the regulatory approvals on the timelines we had planned, we would have had even higher device sales. But, those delayed regulatory clearances have hurt us because, obviously, these sales are mostly backend loaded, in 2011 in particular. So, the--very much right now we're ready to go on a lot of products waiting for, obviously, the hurdles to be cleared. And I think we could do better if we can shorten those timelines or make them more predictable so we can plan and guide more accurately.

So, I think from my perspective it's that--am I satisfied? No, we can do much better. And--but, realistically, from a pragmatic standpoint, I think we've done it about as best as we could and kept the risk level to be very, very low.

Okay, that's fair, but a question on the guidance, then. Does that kind of change a little bit where you feel the range might be? I know you haven't changed it, but does it fall a little bit more towards one end or the other because of those delays?

No. I--so, we'll say that--I think as any good management team would do, you have a list of upsides and downside areas as a business operationally. We clearly had, for our device initiatives, the regulatory approval risk in the timeline flagged as a potential issue for us, and it, obviously, makes you use other items to make sure you can push and pull on other--on the list that you have to make sure you can deliver against your planned results.

And I expect this to be a--and this is also--it is not just a device area for us; it's also a components area that is--when customers' regulatory approvals are delayed, it also effects the timing of our component sales. So, even on the components side, we tend to have those--on those launches, upward risk and downward risk based on when the launch quantities are built. So, it's something we're pretty familiar with.

We obviously--we know we're not going to bat 1,000, so we tend to, obviously, plan in some hedges so that if we have some items that we risked on. We did very good in the first half of the year managing the downside risk, and we came in better than we thought we would based on where the launches in a lot of the programs were.

Third quarter for us is always kind of a strange quarter because of the orthopedic business shutdown that we have, so we have less ability to cover in the orthopedic area to help us out. So, it just kind of--it minimizes other ability we have to cover for shortfalls. But, in general, we're comfortable with the guidance, both from a revenue and an income standpoint.

Then, just one last quick one here, then. One of your customers cited a potential slowdown in neuromodulations because of the elective nature. I'm just trying to see what impact that might have on you and if you're seeing any evidence of what they stated.

No, our neuromodulation business is very small in terms of a component side of the Company, in terms of Greatbatch Medical, the discrete products we sell to neuromod. I think on the device side, since we're not selling any devices yet, it's relatively immune to us right now. I think it does, obviously, stand that it is an elective procedure, but also neurostimulation is not immune from regulatory approval delays either. So, it's a complicated picture on that side as well.

Glenn Novarro, RBC Capital Markets.

Two questions. One, I know you're cautious on the CRM side, but Boston Scientific on their call last week when they reported, they said that they saw an improvement in at least the first few weeks of October in terms of ICD implant trends. Are you seeing any of that with respect to your customer orders? That's question one.

And then, the second question is on the orthopedic side. Constant currency you grew 4%; that's above the market, which is about flat. Can you walk us through how you're delivering this growth? Have you won some new contracts? Any color in how it can be sustained? Thanks.

Yes, certainly, Glenn. Well, I'll start off with the cardiac rhythm management custom orders. With all the components we sell to each of the 5 CRM customers we have, we sell with long lead times and rolling forecasts, and the pulls that they take are rather significant in size. So, a signal in terms of a market signal that an individual OEM customer would have from their sales teams wouldn't directly filter down into our take rates at all. It would happen over a much longer run period of time. We have significant safety stock between us and the customer that requires long-range testing, and I think if--in general, I'd say our pulls from customers would be smoothed over several quarters, not so much visible on a week-by-week basis. And that goes on the upswing or the downswing as I'd say.

The way we win in CRM is literally just years before we ever get revenue is to win a design contract with a customer and partner with them to develop the technology that they need in any one of dozens of various product components. And then, obviously, they, as they're launching their product, it pulls those quantities from us from launch on.

So, I'd say in general our data is much more smoothed than the demand-type performance that a customer would see. We just have no visibility. Our--the visibility we would get would be more the same reports that you're looking at.

So, the takeaway is the market's still challenging, and if there's going to be a pickup in the marketplace, you'll see it more in the order flow next year than probably this quarter, correct?

That's an excellent way to look at it. I mean, we'll provide our guidance in February for 2012, but, I mean, we're looking at--as we have in the past, we've looked at the market growth very conservatively and are going to plan around being very conservative and running a tight ship operationally because we're not going to plan on a growth rate recovery.

And then, my orthopedic question.

So, on the ortho side, for the last 3 years we have made a considerable amount of investment in orthopedics, both from a facilities and a team standpoint. Third quarter's a--like I said before on a prior question, is an usual quarter for us because we have such a--we have a lot of ortho business over in Europe, and we have a rather protracted shutdown, so it's hard to, a lot of times, gain traction in the third quarter.

But, despite that, we are still winning design projects with customers. We're still--not only on the instruments and the case and tray side, but we're also doing a very good job of winning design projects on the implant side as well. And effectively, it's just like the other lines of business we have. It's all about winning those contracts, and then working to get them qualified and precipitated through the revenue stream. So, a lot of the revenue pickups we're seeing are based off victories that are--been made in 2010 and that are coming to fruition.

As we continue to invest in orthopedics, and will continue to invest going forward, we've been gaining significant customer traction across the board in all the product lines that we have. And we expect that's only going to accelerate as we are investing in the completion of our Fort Wayne facility, and obviously we've announced that we're going to be consolidating into a new Swiss location in which we'll be able to take 3 locations and move them into 1. All those help our ability to manage overhead better and provide more output in a single facility. It's more productive, and we can continue to build the revenue base of the Company, so it's all capacity argument.

And, I mean, that's, more or less, how we're winning is we're, more or less, taking a--just an ABC approach to how we approach our individual customers and just winning a project at a time with them and delivering against those commitments and winning more business.

Just one follow up. As you know, we cover the orthopedic space, and we're projecting that the end markets organically, knees and hips, kind of grow in the 0% to 2% range next year. If we're in the ballpark and we're right on our forecast--this quarter, you grew 2x the market, 3x the market. Is that something you can continue to do in the years to come?

I feel comfortable with saying that, Glenn. We're a really small player in ortho relative to the size of the market and other significant players in the industry. I think we've got the ability with the investments we've made to continue to ramp the growth in that at a rate much faster than the market. That wouldn't give you a precise number that we'll guide to for 2012, but it will be consistent with how we kind of looked at 2011. We expect ortho to be a double-digit gainer for us.

[Stan Manny], [Manny Family Investments].

Several questions. One, there was quite a growth in inventory and receivables, like a total of $27 million. Can you kind of tell us is that temporary? Is that going to be brought down? What--explain what it is and what you intend to do and what we should expect?

Yes, Stan, this is Tom Mazza. Yes, we think it's a little bit higher than it needs to be. We have initiatives to try to reduce it, but it's--we certainly think it can be reduced by $4 million to $5 million.

Near term, long term?

Within the next 6 months.

Second question, use of cash--I mean, there are options on using cash, debt reduction, stock buybacks. Give us a little color on what your vision is on the use of cash going forward.

I think all those that we've debated and discussed, Stan, is--I think where we are, obviously, right now is we've paid down the credit facility near to completion, and we are, and have--continue to look at potential bolt-on areas in the Company that are--for other product lines. I think that we're just at the beginning of looking at that. I think we're going through our strategic planning and rolling out and budgeting for 2012 to determine what the precise nature of our strategic plans will be, but that could include potentially looking at other product lines to bring into the Company.

And we have considered the--from a capitalization standpoint is looking at buybacks and other things. We have--other than discussions we haven't decided to do any of those at this time. We're just looking at our strategic options, and then I think with our 2012 guidance, we'll, obviously, be providing more clarity on not only what we're doing operationally, but strategically and give a little bit more color on that.

Your--would you say that you are looking at bolt-on--I mean, years ago you did a whole bunch, then you stopped.

Yes, I think we're--now that we're coming--I think with the little information I gave you here today on us completing the Greatbatch Medical consolidation, we're at the end of consolidating the orthopedic facilities that we had acquired. We're really at the end of the acquisition integration from the last round of M&A, and that's coinciding with us looking at other inorganic growth opportunities to consider.

And again, as these integrations in ortho are going to take us another year plus to do, and I think that's probably a similar type timeline where we'll start looking at other assets that are out there that fit with us strategically. I think it'll be more formalized than it has been over the past 2 years because we've been very busy operationally with the integrations of a lot of different facilities and product lines. And as that kind of has reached a crescendo and it's fallen down to finish up, it's a natural time to start looking at the deal funnel and potential opportunities, so--and I think it's very much like you said, it's more looking for bolt-ons and product line areas that we're already in that are consistent with our business, and we'll--I don't think we're in rush to do anything, but we're obviously keeping our eyes open for potential ideas and work--still--but, still working more earnestly on the acquisition integration side of the equation to finish those ortho projects up.

In your opinion, are there opportunities for bolt-ons that you can vision?

Well, I think there always are, and I think it's a question of the timing, the strategic focus of the Company. It was a big year for us to launch the medical device initiative, so there's a lot of investment going on in that area. And the team's energies have been working very hard at rolling those out and capitalizing them. So, I think there's certainly always targets out there. I think it's a question of--from a bigger picture strategy is what's the best timing to do them. And of course, you don't want one operating group doing both launches of device projects and deals and consolidations at the same time because it's just too much for an operating team to handle all those simultaneously and remain the stake free. So, I see plenty of potential investment ideas out there.

This question you'll like. Your operating margin goals, do you feel that the goal of 15%, 20% operating margin near term, do you see that--I mean, you're consolidating--you're doing quite a bit more efficient consolidation in Switzerland and in Fort Wayne. Do you think we're going to see the bottom line operationally pick up those synergies?

It's an excellent question. The--and I think definitively the answer would be yes as the consolidations in the ortho side of the equation and driving volume are to deliver against the operating income targets of the Company.

I think we're--from a device perspective in terms of our projects--as we said in investor day, we've kind of reached the level of device investment that we want. Now, it's time to see those products through, and also see them contribute to the operating income of the Company. Obviously, it happens over a little longer period of time due to the longer regulatory approvals for those products, but from this point forward is--we want to make the QiG business self sustaining. We don't--we're not going to continue to ramp the device spending unabated from this point. We've kind of, as we said in investor day, reached a level that we're comfortable with, and now we want to start pushing more products through the pipeline, and we want to precipitate them out the other end with revenue and contribution margin to pay back the investment.

So, the answer is that we should expect, in time, operating margin improvement from these projects?

Both ortho consolidations and volume from ortho, and also from QiG. That's the plan, yes.

And you're optimistic?

I'm optimistic on all those. I'm very pessimistic on the economy in--so, that would be the one offset. But, on the consolidations-driven savings, which we're very good at--and we've done 22, 23 of these over the last 6 years. I feel very good about that. I feel very good about our ability to continue to demonstrate ortho growth and precipitating income gains. Obviously, the--although the FDA approval route on the medical device side is complicated, it may delay us, but if the medical device projects are going very well, we'll reach commercialization and will also contribute, so on those items I am confident that we will continue to grow the operating income line going forward.

Well, gain confidence on the economy because the economy is like your consolidation timing, your new device timing and your operating margin goal improvement--same. It will improve; it just will take some time. So, I think you can be optimistic on that front also.

Well, let's just hope it doesn't get worse, Stan. But, I appreciate the sentiment.

Thank you. Good job, gentlemen.

Thanks, Stan.

Thank you.

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

Thank you. I would 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 call.