Integer Holdings Corp (ITGR) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome everyone to the fourth-quarter 2012 Greatbatch, Inc 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 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, Inc.'s current expectations and actual results could differ materially from those stated or implied. The Company assumes no obligation to update forward-looking information included in this conference call to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results, financial conditions or prospects.

I would like to now turn the call over to today's host, Vice President and Corporate Controller, Mr. Tom Mazza. Please proceed, sir.

Thank you. Hello, everyone, and thank you for joining us today for our 2012 fourth-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 Hook will start off with a few brief comments regarding our fourth-quarter results and will then provide an overview of our strategic focus going forward. After that, Michael will review our financial results and 2013 guidance in more detail. 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, Tom, and welcome to all of you who are listening on our call today. We are pleased to be able to share with you our results for the fourth quarter which was a strong quarter for us. During the quarter we were able to achieve a 36% increase in adjusted diluted earnings per share to $0.53. This increase was fueled by our revenue growth due to our acquisitions and reduced RD&E expenditures. Sales increased 12% over the prior year as a 2% organic constant currency decline was offset by additional revenue from our acquisitions of Micro Power in December of 2011 and NeuroNexus in February of 2012. The first year performance of our Micro Power acquisition has met or exceeded our initial expectations on almost every financial measure, including revenue where the pro forma organic growth is 38% and driving an accretion of our earnings per share.

Michael will discuss our financial results in further detail later in the presentation. But you will notice the following improvements in our quarter-over-quarter performance -- 110 basis point improvement in gross margin; reduced net RD&E expenses by 13% despite incremental spend related to the acquisitions; adjusted operating margin performance of 13.3%, which is up 220 basis points over the prior year.

As shown on slide 6, there are two key things we want everyone on the call to understand about Greatbatch. First and most importantly, our core business is well positioned because OEM customers leverage our portfolio of intellectual property and have entered into long-term manufacturing agreements which secure our core business revenue stream. Second, we are building a healthy pipeline of opportunities as we work with our OEM customers on projects. Additionally, we are enhancing our sales and marketing capabilities to take our existing portfolio of intellectual property and manufacturing excellence to new customers and new markets. Combine this with a stronger discipline to ensure we have adequate returns for all projects, we expect our bottom-line performance will continue to improve.

As indicated in last quarter's call, near the top of our priority list is the completion of the consolidation and productivity initiatives, and in particular the Swiss Orthopaedic consolidation. These initiatives continue to impact GAAP financial performance and resulted in negative GAAP earnings for the quarter given the charges taken. On slide 7, we have provided an update for you on the Swiss Orthopaedic consolidation. As of today, we have successfully completed new supplier certification for key customers and also reached a resolution on our lawsuit. We have successfully shipped product from our Mexico facility and now we are working on ramping up volume to meet customer demand. The Fort Wayne validation process is in progress and we are in good position to service our customers with some backlog that we will clear up in the second quarter. Our progress is consistent with the guidance we provided for 2013.

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. Our strategic focus is outlined on slide 9 as is follows -- to strengthen our core business; to sustain at least 5% core organic sales growth; to increase our earnings growth; and to commercialize Algostim for additional upside. For the next few minutes I will spend some time on each of these key objects.

First, strengthening our core business. A majority of the components and devices Greatbatch sells incorporate our proprietary technologies. These proprietary technologies provide an entry barrier for new competitors and prohibit existing competitors from duplicating our design. In addition to these technologies, our proprietary know-how in the manufacture of these products provides further barriers to competition. Both of these factors are drivers behind our continued success in entering into long-term agreements with key OEM customers across all of our product lines.

As of the end of 2012, we have 541 active US patents and 367 active foreign patents. We also have 307 US and 286 foreign pending patent applications at various stages of approval. As a result of the QiG Group's efforts to develop complete Medical Devices, the amount of intellectual property being generated by the Company has accelerated. We currently have 159 pending patent applications and 57 patents have been granted to us relative to our Medical Devices. Our manufacturing history in intellectual property make us a uniquely positioned Company in our targeted markets. When combined with our enhanced sales and marketing resources, we can leverage these into profitable growth.

Our second objective is to sustain 5% core organic sales growth. During 2012, our 2% increase in cardiac and neuromodulation sales exceeded expectation, benefiting from further adoption of our proprietary component technologies and deepening customer relationships. Over the long term, we anticipate an increased pace of product development opportunities from our cardiac customers. And in combination with our enhanced sales and marketing resources, will allow the Company to achieve this strategic objective and grow this product line faster than the underlying market. For 2012, our Vascular product line grew 15%. This was due to underlying market growth and share gains and included a 47% increase in sales and marketing -- in sales of Medical Devices developed by Greatbatch to $6.6 million. Still a significant increase despite being below our projections at the beginning of the year. These Medical Devices will be another key factor in achieving our organic growth objective.

During 2012 we took aggressive steps to turn our Orthopaedic business around, which experienced an 8% constant currency sales decline. By the end of the year, production was moved from Switzerland to existing Greatbatch facilities in the US and Mexico and we expect to see the benefit throughout 2013. We now feel that the worst is behind us for this product line and expect to see organic growth resume in 2013.

Finally, with regards to Electrochem, revenue continues to exceed our expectations and doubling -- and doubled during 2013 as a result of the acquisition of Micro Power in December of 2011. This acquisition significantly enhanced our position in the portable medical market, which is benefiting from an aging population and the shifting of patient care from clinical settings to the home. These favorable market dynamics, along with our pipeline of new products, provides us a significant lever to drive organic growth. We have a long-standing history of operational excellence which is one of our core competencies. As we move forward investing in operations, we will continue to be critical of the success of our profitable growth.

Another important strategic objective is to drive earnings growth. Michael will review our 2012 results and reconfirm the 2013 guidance in a minute. I want to focus on the key enablers for our upside performance. Since 2006 we have completed 17 plant consolidations. Going forward we will have some small carryover costs, but essentially the major plant consolidations are behind us. As a result, we are projecting that the Orthopaedic fix along with manufacturing productivity and reduced R&D spend will be the key drivers behind our 7% to 13% 2013 adjusted EPS growth. All this while still funding an increased investment in our sales and marketing capabilities and an increase in our performance-based compensation.

Finally, I want to spend a minute talking about our R&D spend so everyone understands what has happened and what we plan going forward. This quarter, for the first time, we expanded Table A in the press release to show our operating results by segment and to break out our incremental Medical Device expenses. We believe this will assist the reader of our financial statements in better understanding the performance of the Company. In 2012, we spent $28 million for Medical Device R&D and an additional $5 million for design verification testing, or DVT. The comparable numbers for 2011 were $22 million and $5 million. A large portion of these expenses went towards the development of our neuromodulation platform, and more specifically Algostim, our evolutionary spinal cord stimulator.

As previously announced, we have scheduled an Investor Day presentation on March 18. At that time, we will provide significantly more information with regards to Algostim. At this time, I am pleased to report that we continue to make strong technical progress on the development of this novel device and continue to retire critical milestones needed for program completion. We have started to discuss with several world class medical device companies the opportunity to market and distribute Algostim to interventional pain physicians, neurosurgeons and orthopaedic spine surgeons around the world. We believe Algostim's unique features and benefits will allow us 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.

Our strategy is to extend our partnerships with key OEM customers beyond discrete components to include Medical Device systems. I want to emphasize that the strategy is to extend our partnership with our existing OEM customers and not compete with them. Until this point, we have funded the Medical Device strategy, including Algostim, through our own P&L. However, after we complete the Algostim commercialization, future Medical Device development will be funded through third-party development agreements to partially or completely offset the EPS impact. Net take away, we expect R&D spend in 2014 to decline.

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 the Company. There is still a significant amount of work which remains to be completed for us to achieve our strategic objectives over the short and long term. We look forward to updating you at our Investor Day meeting which will provide you an opportunity to understand more about our core business performance and appreciate the Algostim technology and commercialization plans.

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 pleased -- I am very pleased to be on the call today and review with you our results for 2012. I would like to provide some color commentary on our financial results to help everyone understand how we view our performance and confirm our guidance for 2013. For more specific details regarding our financial results for the year, we refer you to our press release that we issued earlier today. With that let's get started.

As shown on slide 16, the key highlights for the year are as follows -- revenue up 14%; adjusted operating margin performance of 11.4%, down 50 basis points from the prior year; adjusted EPS up 5%; and continued strong adjusted cash flow performance of $80 million when adjusted for the Swiss consolidation effort and DVT; actual cash flow of $65 million compared to $90 million last year. I will also address our high effective tax rate in a few minutes. For 2012, our Cardiac/Neuromodulation sales increased 2%, which exceeded our expectations. During 2012, our Cardiac and Neuromodulation sales benefited from further adoption of our Q Series batteries partially offset by the timing of customer inventory builds and product launches between 2011 and 2012.

We remain cautiously optimistic over the short-term prospects of this product line given the continued ongoing challenges surrounding some of our key cardiac customers. We believe that the impact of these factors is somewhat muted by the fact that we have business with all of the key cardiac OEMs and have significantly diversified our revenue base. Additionally, we continue to see increased pace of product development opportunities from our customers. This, combined with our increased focus on sales and marketing, will allow us to grow this product line faster than the underlying market.

For 2012, our Vascular product line sales increased 15%. This increase was primarily attributable to growth in the underlying market and market share gains. Additionally, Vascular revenue for the year included $6.6 million from sales in Medical Devices that were developed by Greatbatch, an increase of 47% over 2011.

Orthopaedic product line sales for 2012 declined 13%. On a constant currency basis, Orthopaedic sales declined 8% for 2012 as foreign currency exchange rate fluctuations decreased Orthopaedic revenue by approximately $6 million. The remaining decline in 2012 Orthopaedic sales was the result of price concessions provided to customers as well as fewer customer product launches and development opportunities due to the operational issues at our Swiss Orthopaedic facilities that Tom discussed earlier.

In addition to the consolidation of manufacturing, during 2012 we also streamlined our Swiss Orthopaedic product line offerings. This included the sale of several non-core product lines near the end of the year which closed last month. Our current estimate is that the sale of these products will reduce our 2013 Orthopaedic revenue by approximately $15 million in comparison to 2012. For 2013, we expect our performance to improve as we progress through the year as the first quarter 2013 will be impacted by the startup of these recently transferred Orthopaedic production lines. The second half of the year is expected to improve as this Orthopaedic backlog is relieved.

2012 sales for Electrochem increased $83.3 million to $163 million and included $82.4 million of incremental revenue related to our acquisition of Micro Power in December 2011. On an organic basis, Electrochem revenues was consistent with the prior year. The first year performance of our Micro Power acquisition has met or exceeded our initial expectations on almost every financial measure, including revenue where the pro forma organic growth is 38%. This acquisition significantly enhanced our position in the portable medical market, which is benefiting from a shifting of patient care from a clinical setting to the home plus an aging population. These favorable market dynamics, along with our pipeline of new products, provides us with a significant lever to drive organic growth.

Electrochem's technology, customer relationship and legacy of delivering highly reliable and innovative solutions has enabled us to win in this evolving market and continues to position us to capture market share. Electrochem continues to secure long-term agreements in this space and our funnel of portable medical products from this acquisition continues to be full, which is expected to drive revenue growth of this product line for the next several years.

Slide 18, we are providing a summary of our operating performance for 2012 compared to 2011. We have talked about these items throughout the year and during this call. This chart quantifies the variance driver for the year. I will be happy to answer any questions on the drivers during the Q&A portion of this call.

I will make a few brief comments on 2013. We are reaffirming our guidance for 2013. Based upon our results for 2012 and the first couple of months of 2013, we are confirming the sales guidance provided last month. We expect our performance to improve as we progress through 2013 as the new product introductions and the impact of targeted sales initiatives will benefit the second half of the year more than the first. Additionally, our productivity projects will show favorable impact starting in the first quarter. But because of volume leveraging, will have a greater impact in the second half of the year and the same is true for our R&D spend where in the first half of the year we will have a full impact of Algostim, but as we approach PMA submission, the spend will decrease. We also expect the milestone achievement for engineering reimbursement to be slightly weighted to the second half.

One other area I want to spend a few minutes 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 our Swiss Orthopaedic consolidation. Our GAAP effective tax rate for 2012 was 171% and includes approximately $6 million of tax charges recorded in connection with our Swiss Orthopaedic 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 evaluation 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. As you all are aware, the R&D tax credit was signed into law last month. However, as required by GAAP, the benefit of the R&D tax credits earned in 2012 will be recognized in the first quarter of fiscal 2013. R&D tax credits earned in 2013 will be recorded throughout fiscal 2013. We estimate that the benefit related to the 2012 R&D tax credits will be approximately $1.5 million. On an adjusted basis, which excludes the impact of these consolidation charges, our effective tax rate is more in line with the US statutory rate of 35%.

It is important to note that the impact of the loss of the Swiss tax holiday, valuation allowance on our Swiss deferred tax assets could 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 planning initiatives in place that are aimed at reducing our effective tax rate over the long term and is another strategic objective that our finance department is focused on.

In closing, I would like to reiterate some key points. We have a strong core business because of the intellectual property and long-term relationships with OEM customers, we are targeting sustainable 5% organic growth and higher earnings growth and we are working on commercializing Algostim as an upside.

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

(Operator Instructions)

Julia Kufman, RBC Capital Markets.

This is Julia Kufman calling in for Glenn. So my first question is relating to the CRM market and what is your outlook for 2013?

Well, this is Tom. I think when we look at the CRM market, we really review the same information that you see in terms of tracking OEM performance and the market analytics. So we do see a separation between price and volume. We see a continued contraction in the clinical CRM markets of our customers. We do see and project that it's going to stabilize as has been shown by some of the results that have been reported by the OEMs. We're monitoring it.

But given the adoption we've had over the course of years, with winning technology adoptions with OEMs and selling incremental technologies to them, we're a little bit more bullish than what the market looks like in terms of being able to get our technologies into the new designs of the OEMs and offset some of that market decline, which is why we think we can outpace the market. So although we don't have perfect visibility into 2013 and we expect still there will be some price decline in the clinical markets, our long-term agreements that we have in place with customers and the adoptions of the technologies they have will be able to hold our revenues stable to slightly growing because of those long-term agreements and the adoption of new technologies combined. So we project that we will be able to drive the business in a low single-digit territory relative for the year.

Okay, thank you, that's helpful. And is there any update on the Algostim FDA filing?

We will be updating that at our March 18 Investor Day, Julia, and we look forward to seeing you there.

Okay, great. Thanks.

Charles Croson, Sidoti & Company.

For -- just actually a quick one, real quick. The neurostim, how much of CRM is that now making?

Well, in neurostimulation in combined with what we call the cardiac and neuromodulation product line, neurostim components is a very small number. So it's -- you're looking at, I think we've used before on the $10 million neighborhood, but we don't break it out specifically. But we are woefully underpenetrated in the neurostimulation components, and it's been an area that Mauricio Arellano and Greatbatch Medical have focused on considerable attention on. And you can see that in this quarter we're successful in doing well to pick up a key customer contract in this area. And a lot of that is being leveraged off the technologies we're developing for our neuromodulation platforms. We're able to leverage those in component forms with our OEM customers. So we project that neuromodulation on the component level will be a driver for us as well that'll help our growth rate in 2013 and beyond.

Okay. All right, that's helpful. In terms of the increased spend in sales and marketing, can you touch up a little bit more on that, what you -- what initiatives you're really undertaking there?

As you know, for the eight years I've been in the Company, we've talked extensively on our operating capability and our engineering capability. And we've had a lot of moving parts in consolidating and integrating our manufacturing base and acquisitions together. We've done a very good job of designing products for OEMs and also protecting those intellectual properties. What has not been in the core DNA of Greatbatch has been a concerted commercialization process as a Company. And both Mauricio Arellano in Electro -- and Greatbatch Medical and Susan Bratton in Electrochem have brought in sales leadership in those areas, so we can commercialize our technologies and our operating capabilities in a better fashion, more effectively and efficiently with OEMs. Not just our current OEM customers, but to identify new customers and new applications for the technologies we have.

So we've brought on a key individual, Andrew Holman, to run our sales and marketing initiatives in Greatbatch Medical. And we've brought on a key individual from Micro Power, Greg Webster, in Electrochem. And we've been providing incremental investment there to bring on sales and marketing expertise to identify customer opportunities that were hidden from our view before, and engaged the customers that we currently have and new customers to win products. And it's off to a very good start. It's increasing our effectiveness and our partnerships. It's deepening them with the OEMs and we're picking up some new applications to use our current technologies in. And that's been very effective for us and we plan on continuing to roll that out and it's going to receive incremental investment in 2013 as it continues to build momentum. And we expect that to be a driver for our 5% revenue growth as we go forward.

Okay. All right, that's helpful. I'll hop back in the queue.

Brooks West, Piper Jaffray.

Let me start real quick with the orthopaedic business, wanted to base that business. I know with the shutdown of the Swiss plant you left, I want to say it was $15 million or $25 million as you exited that business. But I'm guessing you also might have lost a little bit of business with the issues that you had over there. Can you just talk about the base business that you have now and how we should think about that progressing over the next couple of years? Are you aggressively going after new customers? What -- just a little bit more flesh on the bones of that orthopaedic business.

Certainly. I think when you look at 2012, the 8% constant currency decline you saw in our business was based on us struggling operationally to perform for customers, and that's the lost business. The $15 million-plus of business we elected not to move, which would end up being the business that we sold off and left in Switzerland to another company to manage, is what we literally will not be transferring into US operations. What that equates to is in 2013 we're targeting 8% to 14% organic growth in orthopedics. But those three buckets will give you the answers that I think you're looking for, Brooks.

Okay. And then, I mean, Tom, how much of that, the struggles that you talk about with last year, how much of that is forever gone? And how much of that is volume that your OEMs are willing to fairly immediately switch back to you?

I think -- I never think anything is forever gone except for the product lines we've agreed to sell off, which is that $15 million-plus of business that have -- I'll just call it low volume business that would be more expensive to move than to sell. So that business, we're not going to get back into those types of product lines. We feel that with the stronger operating base and obviously the challenge in making these investments, we feel we're in an operating base that's actually stronger in 2013 than last year. So we feel we can win back any business that moved away from us last year and even pick up incremental business, which is why we're bullish on the organic growth for 2013.

Okay, and then, maybe one just follow up on the sales and marketing spend. It sounds like that's a couple of people and some programs. Mike, could you give us an actual number, incremental sales and marketing spend for our models?

We believe our sales and marketing spend for 2013 compared to '12 will probably be increased somewhere in the range of $3 million to $5 million.

Great. Thank you much, guys.

Bruce Jackson, Northland Capital Markets.

So with the [Sierra Menuro] you've done a pretty good job of talking about why you think you're going to grow faster than the overall end user market. Can you do the same thing for us in orthopaedics? What are some of the strategies you're employing to get faster than expected growth? And then also could you speak to the success of your new marketing efforts in orthopaedics? That's one area where you've been investing some money.

Certainly, Bruce. I think the highlight in orthopaedic market is we don't expect a lot of market growth. We're a very small player in the orthopaedic market, and that's different than the cardiac rhythm management component market where we have substantial share within that market space. So the opportunity for growth in orthopaedics at the delivery systems, instruments and implants level is very large opportunity. So we don't have a ceiling that inhibits us in this area. Additionally, in orthopaedics, the deals tend to be of shorter gestation period than they are in cardiac rhythm management. Where it takes us years in cardiac rhythm management to develop technologies, additional years to develop designs and sign development agreements with OEMs and then move on to manufacturing. In orthopaedics, we can do that cycle on a much shorter basis. So our initial sales and marketing investments have been in orthopaedics in 2012. And that's brought us some struggling results because we're offsetting, trying to win business at the same time we're trying to move our Swiss facility over to the US.

However, I will say that in the areas where we did make investments in our product lines were US-based, we were able to do fairly well with getting engagement with customers. But it's imperative on us for 2013 to get beyond the Swiss consolidation dynamics that we've struggled behind and we've seen the engagements that have been good with the customer. The customers have worked with us, even though it's been challenging at times with the Swiss moves. But they have given us incremental opportunities to win business, and especially out of some of the locations that have received investment dollars, like our Indianapolis and our Fort Wayne facilities. They've done well in 2012 to perform. And we expect that performance to continue. We expect their profitability to continue to improve as we drive volume into those facilities as well.

So when you look at our engagement with a better operating basis where we can meet time, quality and our commitments for the customers, we feel more confident that we can back up the contracts that we do sign. And of course in orthopaedics, when you perform, you have the ability to continue to collect more business. And it's that foundation that the sales and marketing resources are driving off of. We definitely see an increased funnel of activity. We're bidding on more opportunities, and we're trying to leverage our operating capabilities that we already have running now to be able to deliver for the customer. So we remain confident for 2013. We're not bullish yet, but we definitely feel we'll pick up momentum during the course of the year, sticking to just performing for customers and getting into new business opportunities with the sales team.

Okay, that's very helpful. Then just two other questions on the income statement. You said that the revenue this year was going to be probably stronger in the second half of the year. Do you expect to be up sequentially in Q1?

We'll give guidance by each individual quarter except to try to give some indication. But Q1 should be somewhere flat to maybe slightly down a little bit for all the reasons that we indicated. But we believe our total year guidance of 5% to 8% organic growth, that we're still on track to be within that range. But it is a pattern that builds from the first quarter to second quarter, et cetera. Not only from the orthopaedic business, but also some of our other businesses, portable medical, et cetera, because we're seeing that the new product introductions are more in the second half of the year than they are in the first half of the year.

Okay. Then last question on the research and development expense line. Is that something where it's going to continue at its current rate for the first half of the year and then step down in the second half of the year?

No. If you look at the rate that we had in the fourth quarter, we had the benefit of an NRE payment and the timing of that so that we went off of the $13 million, $14 million run rate down to $11 million. That was one of the drivers for our fourth quarter being up. With the efforts that we have on Algostim, et cetera, even though we've reduced it from the run rate for the first half of 2012, we expect that that will come back up to the third-quarter run rate in 20 -- in the first half of 2013. Then in the second half, as we near PMA submission and because of some other things that we're doing, it will come down a little bit in the second half. And there's also time in NREs that we seem to get to the milestones more in the second half of the year than the first half. So we've done work that we run through the P&L and then we get reimbursed from it from our clients, customers in the second half. So first half back to the third quarter run rate, and then second half come back down a little bit.

Okay, great. Thank you very much.

Charles Haff, Craig-Hallum.

I had a question regarding an item you had in the press release about a $1.7 million additional customer cost reimbursements due to the timing of when milestones were achieved. Can you explain that a little bit? Is that a good guy or a bad guy? I'm not quite clear.

It's a good guy. Our customers engage us to do research for their products and we run that engineering service and R&D expense through our P&L. And then we periodically get reimbursed from the customer as we reach milestones. So in the fourth quarter of 2012, we had the benefit above and beyond our normal run rate of $1.7 million milestone. Now the good thing about that, and this is what Tom was talking about earlier, those projects are the future new product introductions that our customers are going to introduce into the marketplace where they hope to either replace an existing product or win market share with that product. So as we're doing that type of work, that builds our pipeline for future sales and is one of the reasons why we believe that in these markets we can slightly outperform the market performance because we are winning and being successful in working on these projects with our customers.

Okay. That's very helpful, thank you. And then I was trying to understand the pro forma Electrochem numbers that you're giving. In the press release you said pro forma Electrochem and portable medical grew 38%. And then I think you said in your comments, Mike, that Electrochem ex-Micro Power was flat. So I'm just trying to understand what your definition is of pro forma here.

By pro forma we were trying to say that if we had owned Electrochem in 2011, and you just look at what their business was that they inherited and how we grew it, we grew that 38%. But we didn't have the 2011 base. So then when you look at how it actually impacts our financials, it all comes through as some acquisition dollars. So we were giving the acquisition dollars impact favorability that it had for us by us owning it in 2012.

Okay, I understand. Thank you. And then you mentioned in your prepared remarks that you resolved the lawsuit with Zimmer. How did that get resolved? Was that the ortho products that were divested or was there some other resolution?

It was in direct interface with Zimmer to bridge a transition approach for the qualification as we went forward. And it was an agreement that got put in place after extensive negotiation over the holiday period with the executives of both companies cooperating in it. It just defines how the transition will go. And we did it cooperatively and that's how we resolved it. And all it does is set out the approach and the timeline for an orderly transition, much of which is in our integration and consolidation plans anyways. So we just -- we did not do as good of a job as we should have in communicating with our customers. We fell out of synchronization with them, but we were able to recover it before the end of the year to get the lawsuit resolved and we're back on a very positive track with them now.

Great, thanks for the additional color.

And that concludes today's question-and-answer session. I'd like to now turn the call back over to Tom Mazza for any closing remarks. Please proceed.

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 www.greatbatch.com and will be accessible for 30 days. Thanks everyone for joining us today.

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