Integer Holdings Corp (ITGR) 2012 Q3 法說會逐字稿

Welcome, everyone, to the Third Quarter 2012 Greatbatch, Incorporated, Conference Call. Before we begin, I'd like to read the Safe Harbor statement.

This presentation and our press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and it 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 now like to turn the call over to today's host, Vice President of Finance and Treasurer, Marco Benedetti.

Hello, everyone, and thank you for joining us today for our 2012 Third Quarter Earnings Call. With us on the call are Thomas J. Hook, President and Chief Executive Officer; and Michael Dinkins, Senior Vice President and Chief Financial Officer.

In terms of today's agenda, Tom will start us off with a few brief comments regarding our third quarter results and will then provide an overview of our strategic focus, going forward. After that, Michael will review our third quarter financial results and guidance for 2012. 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 Tom Hook.

Thank you, Marco, and welcome to all of you who are listening to our call today. We are pleased to be able to share with you our results for the third quarter, which was a strong quarter for us.

During the quarter, we were able to achieve 8% organic constant currency revenue growth by exceeding market growth rates in our cardiac rhythm management and vascular access product lines. Also, cardiac rhythm management comparables were easier versus the prior year.

Overall, revenue increased 22% in comparison to the prior year, reflecting the successful acquisition of Micro Power, which continues to perform ahead of our expectations. This increased revenue, the initiatives we began to implement in the second quarter to leverage our operating infrastructure, and the optimization of our research and development investments, allowed us to achieve 27% adjusted operating income growth. However, a lot of hard work remains in order to attain our financial targets for the year and to achieve our strategic objectives.

Near the top of our priority list is the completion of our consolidation in productivity initiatives and, in particular, our Swiss Orthopedic consolidation initiative. These initiatives continue to impact our GAAP financial performance and resulted in negative GAAP earnings for the quarter given the charges taken.

As a result of the progress we have made, we increased our estimate for the amount of non-GAAP adjustments we expect for 2012. It is important to note that while we are increasing the 2012 estimate for these costs, our estimate for the overall cost to complete our consolidation initiative remains unchanged, and the impact of our operating cash flows will be significantly less than the charges taken.

Even though these charges reduce our GAAP operating results in the near term, these initiatives will increase operating leverage and profitability as we move forward beginning in the first quarter of 2013.

Excluding the charges related to these initiatives, we achieve adjusted EPS of $0.46 per share, which keeps us on track to achieve our 2012 financial guidance. Michael Dinkins will provide more details around our financial results and guidance for 2012 in just a few moments.

I would now like to devote the remainder of my prepared remarks to update you on the progress we are making towards achieving our strategic objectives.

As you are all aware, one of our key strategic objectives is to drive top-line growth in our core business. Over the last several years, we have faced considerable headwinds in our core businesses due to slower-than-expected and, in some cases, declining market demand, particularly in cardiac rhythm management.

However, our long history of innovation as well as our operational excellence has enabled us to grow faster than our core markets. Going forward, we believe we can maintain this above-market growth trajectory in cardiac rhythm management and our other implantable medical product lines through an increased focus on and investment in our sales and marketing efforts.

We see a tremendous opportunity to bolster our worldwide sales and marketing capabilities in an effort to better align with and service our OEM partners to our differentiated technology solutions. In 2012 alone, we have signed long-term development and supply agreements with six of our top OEM customers that cover over a dozen medical device and component products in our cardiac rhythm management, neuromodulation, and vascular access product lines.

We expect the revenue from these contracts to continue to ramp up in 2013 and 2014 and will reach a more meaningful level in 2015. This increased level of product development activity demonstrates the world-class reputation we have earned with our OEM customers through execution and performance and also secures a significant portion of our revenue for a number of years.

Combined with this top-line growth in our core business is our continued focus on driving operational efficiencies to improve profitability. We currently have numerous productivity and consolidation initiatives in process, the most notable of which is the consolidation of our Swiss Orthopedic operations.

As I discussed on our last earnings call, this plan involves transferring the manufacturing being performed at our locations in Orvin and Corgemont, Switzerland, into our facilities in Fort Wayne, Indiana, and Tijuana, Mexico.

We continue to move forward with this consolidation plan and are working diligently as possible in order to complete this initiative in a timely and effective manner. We believe that we have an adequate transition plan in place and, consistent with previously completed consolidation initiatives, we are working closely with our customers to manage the transition.

From a financial standpoint, we currently expect the benefits from the productivity improvements that we are implementing will begin to be realized in the first quarter of 2013.

With that said, I would also like to point out that in addition to the consolidation of manufacturing, we are also streamlining our Swiss Orthopedic product line. This will include discontinuing several non-core products, which didn't make sense for Greatbatch to continue to manufacture. We are evaluating several alternatives and options for these discontinued product lines in order to help ensure a smooth transition for our customers. Our current estimate is that the discontinuance of these products will reduce our 2013 orthopedic revenue by approximately $10 million to $15 million.

Finally, I would like to reiterate that we remain committed to our orthopedics business and our European customers. Additionally, I continue to believe that over the long term, our orthopedic product line presents us with considerable organic growth opportunities and the investments that we are making today will establish Greatbatch as a more comprehensive and capable partner to the world's leading OEM companies.

As you know, part of our long-term strategic plan is to supplement our core business growth through targeted acquisitions. In connection with this strategy, we are pleased to report that the Micro Power acquisition we made last December continues to perform ahead of our expectations. This performance is being driven by successful new product introductions into the higher growth, higher value portable medical market. This market provides us with a significant opportunity for growth given its favorable market trends.

Additionally, the portable medical market is also attractive given its long product lifecycles and also further diversifies our revenue base.

Since this acquisition has been fully integrated, and the brand has been retired, in the future we will no longer focus on the results of Micro Power individually but rather report on the results of Electrochem and, in particular, the portable medical market portfolio as a whole.

For the combined dedication, credibility and expertise from both organizations, we anticipate being able to continue to win new customers, new applications, and next-generation products in the portable medical market. Going forward, we also expect to continue to identify and consummate targeted acquisitions, such as Micro Power, that will enhance our growth trajectory.

Our last strategic objective is to drive growth through innovative medical devices. As discussed, last quarter we began a process to more fully optimize our research and development efforts. This includes the reallocation of research and development resources to higher priority projects, the postponement of some research and development projects, and the decision to pursue various alternatives to monetize our existing intellectual property that are outside our core business.

The impact of these initiatives is lowering our 2012 second half run rate of net research development and engineering costs compared to the first half. We have already begun to realize some of the benefits of these efforts as in comparison to the second quarter of 2012, net research development and engineering costs declined $0.9 million this quarter.

With regards to algostim, or spinal cord stimulator for the treatment of chronic pain in the trunk and limbs, last quarter we provided an update on the timing of our PMA submission given the extension of our design verification testing timeline. I am pleased to report that we continue to make strong technical progress on the development of this novel device and continue to require critical milestones needed for program completion and the ultimate submission to regulatory authorities, which we still expect in the second half of 2013.

Additionally, we continue to receive strong interest from numerous world-class medical device companies who appreciate the unique opportunity to market and distribute the algostim spinal cord stimulation system to interventional pain physicians, neurosurgeons, and orthopedic spine surgeons around the world. We believe algostim's unique features and benefits will allow the right commercial partner to capture significant market share in today's $1.3 billion spinal cord stimulation market, which continues to see double-digit market growth.

The Company looks forward to sharing more details regarding the algostim system and our commercial partner progress at our next Investor Day conference, which will be scheduled early next year.

Overall, we continue to see a high level of interest in our medical device programs from our OEM customers. However, we now believe that our medical device revenue for 2012 will be in the $8 million to $10 million range, down from the $10 million to $15 million guidance we provided earlier in the year. This decrease is primarily due to the rate of market acceptance for our devices, which has been slower than we originally anticipated.

On a percentage basis, our projected medical device revenue still represents a significant decrease over our full-year 2011 medical device sales of $5 million.

In closing, I am pleased with the progress we have made on our strategic objectives and remain confident that these initiatives will improve the long-term growth and profitability of our Company. There is still a significant amount of work, which remains to be completed for us to achieve our strategic objectives, both over the long and short term. We look forward to updating you on the progress towards achieving these objectives.

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

Thanks, Tom, and good afternoon, everyone. I am very pleased to be on the call today and review with you the results in the third quarter. I would like to provide some color commentary on our financial results to help you understand how we view our third quarter performance and updated guidance. For more specific details regarding our financial results in the quarter, we refer you to our press release that we issued earlier today. With that, let's get started.

Here are the key highlights about the quarter. CRM neuromodulation, 13% revenue growth; continued high growth portable medical business performance; aggressively addressing our Swiss Orthopedic issues; prioritize our R&D investment along with ongoing productivity efforts. We are very aware of the large difference between our GAAP EPS and adjusted EPS because of the expenses incurred for our numerous productivity and consolidation initiatives. We expect the difference between GAAP and adjusted EPS to be much smaller next year and to realize the productivity from our investments we are making this year.

We are confirming our EPS guidance at the lower end of the range and are cautiously optimistic for the fourth quarter given the continued challenges surrounding key CRM players.

And, finally, our cash flow from operations remains strong and provides the funding we need to execute on all of our strategic objectives.

I would now like to provide further details on some of these points. In comparison to the third quarter last year, CRM and neuromodulation sales increased 13%. This growth consisted of various increases and decreases within that product line but, in general, can be attributed to our customers having more level inventory ordering patterns in 2012 in comparison to 2011, as well as easier comparables versus the 2011 period.

These results are ahead of our expectations and put us on track to exceed the high end of our full-year CRM sales guidance. I should point out that this rate of growth is not expected to continue in the fourth quarter, as the fourth quarter of 2011 is a much tougher comparable.

Additionally, given the continued ongoing challenges surrounding our key CRM players, we want to reiterate that our visibility to customer ordering patterns is over a short period of time and that any significant customer field actions or relative market share shifts among the OEM manufacturers could impact our results. However, at this time, we have not seen any material changes in our orders from our OEM manufacturers.

With that being said, we believe that the impact of these factors is somewhat muted by the fact that we do have business with all of the key CRM players and have significantly diversified our revenue base over the last four years. We remain cautiously optimistic regarding our CRM business over the short term but are confident that over the long term, our increased focus on sales and marketing as well as the increased pace of new product development opportunities we are winning, gives us confidence that we can meet our objective for growing this product line faster than the market.

Similar to CRM, our portable medical product line within our Electrochem segment also is exceeding our expectations. This product line, the majority of which was acquired last December, is benefiting from a high level of new product introductions as well as favorable market trends and grew at approximately 30% during the quarter on a pro forma basis.

Our funnel of portable medical products continues to be full and is expected to drive high single-digit revenue growth through the next several years. Overall, revenue for the quarter was strong, and our 8% organic constant currency growth rate is a tremendous accomplishment given the headwinds we are facing in our orthopedic product line and the challenges surrounding the CRM market.

Now with regards to our operating performance -- our results continue to be impacted by the operational issues we are experiencing at our Swiss Orthopedic facilities. These operational issues resulted in fewer customer product launches and development opportunities as well as lower gross margins. As Tom discussed earlier, we are aggressively addressing these issues and are diligently implementing our plan to transfer functions currently performed at our Swiss Operations into Fort Wayne and Tijuana, Mexico, facilities.

This consolidation as well as other actions we are taking is expected to drive better operating performance beginning the first quarter of 2013. As a result of the progress we are making on our Swiss consolidation plan, we now expect that our non-GAAP adjustments to operating income will be $40 million to $45 million for 2012 compared to the $20 million to $30 million we guided to last quarter. It is important to note that while we are increasing the 2012 estimates of these costs, the overall estimate to complete our consolidation projects remains unchanged and the impact of our operating cash flows will be significantly less than the charges incurred.

I would also like to note that these costs are being incurred in connection with half a dozen consolidation, productivity and optimization projects, which, as I mentioned will begin to provide a payback starting the first quarter of 2013.

Let me reassure you that we take these investments very seriously, and would not enter into them unless they had adequate returns on our invested capital. In general, we look to achieve a return of at least 50% on all of our investments. For 2013 we expect these differences between GAAP and adjusted amounts to be much smaller as these initiatives are completed.

This greater than 15% return on invested capital target also relates to our investment in research and development projects. To that end, as discussed last quarter, we are making strategic decisions to fully optimize our R&D efforts and improve our return on invested capital. This includes reallocating R&D resources to higher-priority projects, the postponement of some R&D projects as well as the decision to pursue various alternatives to monetize some of our existing intellectual property that is outside our core business.

With that said, we fully intend to continue to make investments on our medical device strategy. These expenditures currently impact our implantable medical segment operating margin and total $8.9 million for 2012 third quarter compared to $7.5 million for 2011 and includes SG&A costs as well as RD&E.

For the year, we have now invested $27.3 million in this strategy versus $20.1 million in 2011. We have already begun to realize some of the benefits of our optimization efforts in comparison to the second quarter of 2012, net research, development, and engineering costs declined $0.9 million.

Despite this increased investment in our consolidation of medical device initiatives, cash flow from operations still remains strong, in total, $16 million for the third quarter, compared to $21 million last year. We use this cash flow to repay $6 million of long-term debt and have now repaid $24 million of long-term debt during the year.

Additionally, our total debt to equity and working capital ratios remain strong and stand at 48% in 2.8 times, respectively. These ratios are healthy and reflect the strength of our capital structure. Additionally, we have $359 million available on our existing line of credit, which is at favorable terms and which will be used to fund the maturity of our $198 million of convertible MLTs early next year.

One other area I want to spend a few moments discussing with you is our effective tax rate. As you can see from today's release, our effective tax rate has been significantly impacted this year by Swiss Orthopedic consolidation. Our GAAP effective tax rate for the first nine months of 2012 was 93.0% and includes approximately $5 million of tax charges recorded in connection with our Swiss Orthopedic consolidation.

These charges relate to the loss of our Swiss tax holiday due to our decision to discontinue manufacturing in Switzerland and the establishment of a valuation allowance on our Swiss-deferred tax assets, as it is more likely than not that they will not be fully realized.

Additionally, our 2012 effective tax rate includes a significant amount of losses from our Swiss operations, which are deducted at a lower effective tax rate, thus increasing the overall effective tax rate of the Company.

Finally, our 2012 effective tax rate does not include the benefit of the US R&D tax credit, which expired at the end of 2011. On an adjusted basis, which excludes the impact of these consolidation charges, our effective tax rate is more in line with the US tax return rate of 35%.

It is important to note that the impact of the loss of Swiss tax holiday, the valuation allowance on our Swiss-deferred tax assets, as well as the impact of the loss of R&D tax credit, could all be reversed at some point in the future when our operations in Switzerland turn profitable again.

I should also point out that we currently have various tax plan initiatives in place that are aimed at reducing our effective tax rate over the long term as another strategic objective that our finance department is focused on.

Moving on to our 2012 guidance, as you can see from slide 14, we are reaffirming our guidance provided last quarter. Based upon our results of the first three quarters and projections for the fourth quarter, we still expect to achieve our sales targets and, as explained last quarter, to be at the lower end of our adjusted operating income percentage and adjusted diluted EPS range as provided.

In closing, I would like to reiterate the following key points -- we have added a high-growth portable medical business. We have added sales and marketing resources to our implantable medical segment, focused on growing our revenues faster than the market. We are aggressively addressing our Swiss Orthopedic issues with a consolidation plan that is on track to deliver and improve operating results starting in early 2013. We have prioritized our R&D investment and will continue to focus on improving our return on invested capital both near term and long term. We will continue our ongoing productivity effort with suppliers, lean manufacturing processes, and focused SG&A cost reductions.

We are very aware of the large difference between our GAAP, EPS and our adjusted EPS because of the expenses incurred for our numerous productivity and consolidation initiatives. We expect the difference between GAAP and adjusted EPS to be much smaller next year and to realize the productivity from our investments we are making this year.

We are confirming our EPS guidance at the lower end of the range and are cautiously optimistic for the fourth quarter given the continued challenges surrounding key CRM players.

And, finally, our cash flow from operations remains strong and provides the funding we need to execute on all of our strategic objectives.

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

(Operator Instructions) Bruce Jackson, Northland Capital Markets.

You mentioned in the press release that you had some new contracts in the quarter, new long-term contracts with some of your OEM suppliers. I was wondering which business units those benefit?

We've actually been pretty successful with signing long-term agreements across each of the business units. We started this practice in Greatbatch Medical, really, seven, eight years ago, and we've matured these along. In Electrochem, it's newer where we've been signing long-term agreements, and we've continued to mature that progress with the integration of Micro Power there as well.

So -- the LTAs we've signed in 2012 have been within both business units, and we expect that that's going to continue to secure ties with business on new products as well as the current products we manufacture. So it's a bit of both.

Okay, and then one other question on the CRM neuro business unit -- the number there was quite strong. I was wondering if you could just give us a little bit more color on whether it was the CRM or the neurostim component that was driving the growth. And then I noticed a little bit more color on what you're seeing in terms of the current quarter.

It certainly is, and I'll let Mike chime in here. But, in general, our neurostims product line revenues are very small still, and we've been very successful at winning neurostim development agreements, which will start to build in terms of return and results in the 2013 to 2015 time range. But, primarily, the revenue growth for the quarter was really driven by cardiac rhythm management. We've done a good job over the last three-plus years, which, if you think and remind yourself, we completed our cardiac rhythm management consolidation in the 2008 timeframe. So we've been successful at partnering with OEMs over the past several years and winning projects for them and increasing our share with OEMs in terms of the discrete component technologies we have been selling.

It's fair to say we did have a weak comparable relative to Q3 2011 as well. We're not immune from the slowdown in the cardiac rhythm management markets or because of the uptick of some of the technologies that we've been selling, our winning of development contracts over the past several years with key OEM customers. We still feel confident we can grow above the market, growth rates entirely through the management and our results reflect that for Q3.

And we expect that while the percentage, the upper single-digit numbers really aren't sustainable, we do expect that that trend of staying ahead of the market will continue in the current quarter and we plan that also for 2013.

Charles Haff, Craig-Hallum.

I apologize, I had to be on another call so I may have missed this, but, Tom, you mentioned that growing faster than the market in CRM. What's your expectation for market growth in the next few periods?

Well, as you know, I've -- over the last several years have been fairly pessimistic about CRM market growth, and we have really geared and planned the cardiac rhythm management business to be in synchronization with our customers and expect their rather stabilization of those markets here over 2012 that it's going to be kind of continuing challenging market dynamics and do for the rest of the year into 2013. So we're not really expecting what I would call growth in the CRM markets but more stability and relative flatness. But through the partnering initiatives and the developing agreements that we have, we think we can have a low single-digit growth rate because of the success we're having there.

So we're just as eager to see the results from the OEMs and have been tracking those as they've been reported, as you have, and, obviously, monitoring our progress on a share basis with regards to their initiatives and technologies that they're launching. And we know we've got a favorable trend, but we don't expect CRM to ignite into a fast-growing opportunity for us. It's an area where we plan to have progressive growth based on hard-won innovation projects, and we expect the market to continue to be challenging.

Sure. And then you made a comment about the easier year-over-year comps helped a little bit here, if I heard you right. But it's a pretty similar comp to what you had last quarter. However, this quarter's growth in CRM was dramatically higher than last quarter, and I think you had mentioned in the press release about the inventory adjustments, and I apologize if you gave more color earlier in the call. But can you just kind of share with us a little bit more color, which -- what led to the big delta since your comps were pretty similar to last quarter?

I'll let Mike answer this one.

Generally speaking, there is a little bit of seasonality to that. So, generally, in the third quarter last year you should have seen a bump in the third quarter that did not happen. So even though the comps are flat, in the $70 million range, this year we saw a more general pattern where the third quarter is higher than the second quarter. So that's the reason why we say it's a leveling of the orders that we get from our CRM customers. They really didn't buy more than this year, they must bought on a pattern more consistent with what we've seen in the past.

I got you. So last year each quarter was kind of in that $77.5 million range, plus or minus a half a million, and so because that last quarter a year ago was weaker, you had an easier comp, and you're saying --

Yes, that last quarter last year actually dipped down to $71 million. So -- it actually did go down.

Yes, okay, I got you. And then last question -- on the orthopedic side of the business, I think you mentioned on the last quarterly call that you're positioning with the Swiss facilities was causing you to miss out on some opportunities in ortho. Now that you're kind of moving through the integration and shifting business to Indiana, et cetera, have the business wins or the business development efforts started -- restarted now or is it still a little too early for that in ortho?

If you look at our orthopedic business, and we divide the business up into the pieces that we sell, half the business for us is implants, and we have done a very good job in the implant side of the business out of our Corgemont facility for 2012, and we have been winning and expanding that business quite nicely this year and plan to continue that into 2013 with similar momentum. So on that half of the business we've done very well.

In the other half of the business, in our delivery systems, or cases and trays business, we've consolidated that business into our newly refurbished Indiana facility, and we have launched in 2012 -- we've added incremental sales and marketing efforts in that delivery systems product line, and we've done a very nice job of winning new business and in ramping revenue there. It has mitigated some of the effect of the Swiss operating problems.

So in the, let's say, 75%, really, of the orthopedic business, we've done a good job of getting onto winning programs with customers and expanding the business, and it's mitigated some of the effects on the instrument side of struggling with multiple operating locations, in particular, our Swiss locations. So our expectations are as we complete the Swiss consolidation projects, we get the product lines fully into Fort Wayne and Tijuana, Mexico, we'll be able to pick up more incremental business and development wins on the instruments side of the business. In that area, right now, we are struggling, obviously, through the complexity of the consolidations, and we're not winning what I would call our fair share because we're preoccupied with our key OEM customers working on the transition plans.

And our plan is for 2013 to -- once we have the consolidations completed is to pivot and start working on the new projects so that we can start ramping opportunities with them on that segment of our orthopedic business.

Okay, that's very helpful. Thanks, Tom. Would that be more of a first half 2013 or a second half 2013 kind of event?

I think what we're looking at, for the consolidation on the orthopedic side is to move the project through over the course of 2013. Obviously, you know that we're aggressively moving on this, which is why we reflected some of these costs moving into 2012. So we're making some aggressive progress. My expectation is on the instrument side of the business, we'll be starting to pick up opportunities in the beginning of the year and then building momentum towards the end of 2013.

(Operator Instructions) Mark Cooper, Pacific Ridge.

You mentioned cash flow from operations in the quarter was $16 million, is that right?

That is correct.

And then what was the CapEx for the quarter?

Give me a second. Give me a second to calculate that for you. Then we'll come back as soon as I calculate it. I have a year-to-date number at $33.6 million, so I've got to calculate the current quarter.

That's fine, I can back into it.

So the year-to-date is $33.6 million.

Stan Mann, Mann Family Investors.

First I want to congratulate you on rationalizing our R&D efforts. I think it was an extremely smart business move. Secondly, can we talk about the converts -- when they're due and how you plan to handle that on the balance sheet?

The convertible notes?

Yes, the converts, yes.

Oh, okay, I didn't understand what you said. They come due June of next year, and our intention is to retire them by using the availability that we have on our revolver.

Okay, which -- and your plan or your vision, will that use up most of our capability of finance or liquidity?

No, it would not. It will still leave us well in excess of $100 million of liquidity and as we use the revolver, we've already entered into a forward contract to fix this so that we don't -- we're not 100% variable. So we'll still have liquidity left, and we'll be somewhere in the range of 60% and 40% between variable and fixed, and we think we'll still be in good position.

Plus, as we rebound on our EBITDA performance, it creates even greater liquidity for us to do deals. So unless we're doing some type of huge transformational deal, we'll have more than enough to support our acquisition needs next year.

Okay. Does this save us on any cost of dividends on your converts? It really can make a difference.

When you say the cost of the dividends on the convert?

Yes, what we repay as interest -- that's going to be eliminated.

Well, the two-part rate that we're paying on the converts versus what we're going to be paying on the revolver, there's not much difference between that -- maybe 20 basis points higher that we'll be paying on the revolver versus the converts.

The one thing that is impacting that is that we had used a method where, even though we were paying 2.75 or whatever the number is, on the converts, we were taking a higher percent of that because of equity transition that we thought would happen on our tax reductions. So we do have, in 2013, to repay back to the IRS since the converts did not happen in, roughly, about $30 million. But we've taken that into consideration on our cash flows. And when I said we have enough liquidity to do deals.

Okay, just staying on the convertibles, will that reduce our diluted or our share count at all once this is done?

No, it will not.

It will not, okay.

It will not.

My next question, Tom --

Unless you guys raise the cap price of our stock real high real soon.

Let's (inaudible) up, gentlemen. Tom, you alluded that we grew the Microchem or Electrochem acquisition has brought us great opportunities in portable electronic devices, at least that's what I hear. Is that correct?

That is correct, Stan. I think it -- you know, Micro Power has done an extremely good job historically building their portable medical business. We had started, over the last couple of years, in Electrochem to do that, but the Micro Power acquisition gave us the opportunity to combine the resources of our Electrochem initiatives and Micro Power. Susan Bratton and her team that run Electrochem, very quickly integrated the two businesses together, and they picked up significant momentum in commercializing Micro Power's product development portfolio. And they also won a significant amount of new contracts on new business that they brought into their deal funnel.

So -- the win-win of the Micro Power deal was we've been able to leverage our operating efficiencies and resource space much more effectively than Micro Power could alone. It's accelerated the growth rate and it's an area that we intend to maintain our momentum into 2013 as it's been a really good targeted acquisition, and we're ahead of our deal models for the current year and expect to be ahead of them next year as well.

Do you see opportunities to get bolt-on acquisitions in this electronic portable device area? Is it -- is there available bolt-ons?

I think there's three directions to go here, Stan. One is there's definitely opportunities to look for other similar portable medical product lines that could be of interest to us. We're definitely going to be adding sales and marketing and resources and engineering resources to perform on all the customer wins that we're getting and to also grow the business, because it's fertile territory, and the market is maturing aggressively due to the mobility aspect that is being driven into medical devices, especially for patient care outside of hospital settings. Also in the surgical suites with powered surgical instruments, so we both organically feel confident we can grow.

We also feel that there is targeted deals out there that could open up other product lines or geographies. And the third piece is that the more we build our capabilities as a company, we can do more work for our strategic OEMs on these portable medical devices to include not just batteries but battery packs, charging systems, electronics and power management, and actually some of the actual integration of the product itself and potentially even we could move up towards product assembly -- sub-assembly stages. All of those are revenue opportunities for us.

And, of course, when you're performing for your customers, and they're happy, they open up more opportunities, and that allows us to build the business quicker. So it's an area that we're going to put significant resources into all three of those buckets, going forward, and have already done that. It's an area where we think that we can significantly have opportunities for growth as a company.

Can you frame for us, just approximately, your vision on the size of that market opportunity relative to where we are now?

I think if you --

It seems to be bigger than the CRM area that we have. Can you give us (inaudible) like it's a large-growing market?

Sure. Because I think if you look at it today, Stan, and drew what I would call tight brackets around it -- in other words, battery power, power management of portable medical devices for high-value applications, you know, defibrillation, AEDs, surgical instruments, you're looking at around slightly less than a half a billion dollar market. Clearly, for us, we've got about an $80 million product line. So there's plenty of room for us to grow.

If you draw broader brackets around the market, and you include device sub-assembly and then other product lines that are more mid-value segments, powered carts, et cetera, there you're talking a multi-billion dollar market, much higher volumes, more standardization. So there's multiple avenues for us to grow here in this market. And this obviously used to be a $5 million to $10 million product line for us, so we've taken a significant jump with the Micro Power deal, and we expect to grow very aggressively organically next year. And also, you know, look for potential on the -- moving up the food chain from a technology standpoint and also potentially looking at targeted deals in the space, too.

So if this is like the Stryker power --

(dog barking)

It could be. There could be -- we don't disclose specific deals, as you know, but any powered surgical instrument from general surgery to orthopedics or anything, it's the decluttering of the OR from a power cord perspective. Some of these instruments exist today, but there's a lot more instruments that do not exist that are on the drawing board. They all need effective power solutions that are reliable, sterilizable, autoclavable. So we've got a lot of unique technologies that we've developed. Clearly, quality and reliability, FDA registration, ISO 1345 are all pivotal requirements in this space, so we're very well positioned, and we're going to take advantage of that.

Just the last part of it -- you, in the CRM area, dominate that market segment on the stuff you do with the largest players -- Medtronic, St. Jude, Boston Sci -- in this area are you among the not three or four -- are you a major supplier to the major medical device companies that's all powered instruments yet?

I think the answer to that, Stan, is yes. But there is significant gaps in our customer product matrix, and just like we do in Greatbatch Medical, we map out where we have design wins with current customers, and we work hard to get "designed in" to their new applications. So the approach in our portable medical product lines is the same. It's just that the opportunities in portable medical are much greater because we're starting from a smaller base. But we're still a very significant, if not the most significant, player in the portable medical market, but there's just a lot more room to grow organically, inorganically, and through technology.

The other important thing to note is while CRM market is not growing -- it's stable, but it's flat growth. The portable medical market is growing as a market. There's a lot of work in this area. OEMs are putting a significant amount of attention and resources and innovation attention on this. So, for us, the timing is good for us to innovate and partner with them and take advantage of that market and the application growth.

And that concludes today's question-and-answer session. I would like to turn the call back over to 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. Thank you, everyone, for joining us.

Thank you for your participation. This concludes today's conference call.