Integer Holdings Corp (ITGR) 2014 Q3 法說會逐字稿

Welcome, everyone, to the third quarter 2014 Greatbatch Incorporated Conference Call. Before we begin, I would like to read the Safe Harbor Statement.

This presentation and our press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. It involves a number of risks and uncertainties. These risks and uncertainties are described in the Company's annual reports on Form 10-K. The statements are based upon Greatbatch Incorporated 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 Finance and Treasurer, Betsy Cowell.

Hello, everyone, and thank you for your patience today. We appreciate you joining us for our third quarter 2014 earnings call. With us on the call are Thomas J. Hook, President and Chief Executive Officer, and Michael Dinkins, Executive Vice President and Chief Financial Officer.

In terms of today's agenda, Tom will start us off with an overview of both the quarter and the first nine months of the year and a strategic update along with discussion on our product lines. Michael will then provide comments on the third quarter and year-to-date 2014 financial results as well as discuss our 2014 guidance. We will then open up the call to Q&A.

As we have done in the past, we're including slide visuals to accompany this presentation which you can access at our website, www.greatbatch.com.

Now let me turn the call over to Tom Hook.

Thank you, Betsy, and good afternoon to all of you who are joining our call today. We continue to advance our business and financial performance in line with our strategic objectives.

The Company's improved ROIC is a result of our disciplined approach to investment opportunities, both organic and inorganic. Working with our customers we continue to invest in discrete proprietary technologies to enhance existing and next generation products.

We are also expanding our partnerships via both equity and cash investments with development start-up companies to fuel early stage innovation. We have over 300 engineers working on 100 current and future projects and a $12 million of technology oriented equity investments.

Our patent portfolio has been expanded to include 200 plus patents in 2014 including over 120 medical device patents. We maintain a healthy portfolio of long-term customer agreements, or LTAs, which represents approximately 70% of our business. These agreements range from 18 months to as many as eight years in length.

We value our customer's confidence in Greatbatch and together we will deliver innovation to pursue market opportunities.

The neuromodulation market is large and growing with a market size of approximately $2.9 billion. Greatbatch is focused on spinal cord stimulation, a $1.5 billion market growing approximately 6% annually. Our success ranges from discrete product development products to fully integrated medical device systems. We continue to expand these product offerings with a wider array of business in the neuromodulation markets.

We are pleased to welcome the CCC Medical Device business and its associates to Greatbatch. CCC Medical Device's history in the neuromodulation space enhances Greatbatch connection to early stage innovative companies. Our strategy is to partner with companies who are employing neuromodulation technology across many fields to find and provide effective implantable therapies.

Coupling the deep intellectual property and capability of both Greatbatch and CCC Medical Devices together will allow us to continue to accelerate growth in this market.

Our Algovita product remains on track along both the regulatory approval pathway and early eve commercialization planning.

With regard to our financial performance, revenue growth is at or above the industry growth in all product lines with the exception of portable medical as a result of the strategy changes we communicated in late 2013.

Our business fundamentals and financial results demonstrate our commitment to 5% revenue growth and adjusted EPS growth of at least 2X our organic growth. Year-to-date revenues grew 5% and an organic constant currency basis and adjusted EPS is 13% ahead of 2013.

Leveraging volume, realizing manufacturing efficiencies and containing operating costs has resulted in an adjusted operating margin of 13.2% on a year-to-date basis.

We continue our commitment to innovating and developing novel and electrical property protected products and utilizing our strong cash position to fund organic and inorganic growth opportunities.

Now, I would like to provide some comments relative to our various product lines. The chart on slide eleven highlights our organic growth performance. As we have mentioned before, from quarter-to-quarter we can have significant changes in our organic growth driven by the inventory management efforts of our customers and that our quarter end dates do not always align.

This quarter we delivered 1% organic growth but the best way to evaluate our performance is to look at the rolling four quarter performance of 7% organic growth, which is outpacing the markets that we serve.

We are obviously very pleased with our orthopedic and vascular performance of double-digit organic growth. (inaudible) clearly grew the management, year-to-date growth of 5% is outpacing the clinical market which based on recently announced competitive data reflecting the clinical market, is growing closer to 1% to 1.4%.

CRM and neural sales of $85.6 million were slightly below Q3, 2013. Several of our customers repositioned inventory quantities during the quarter pressuring the quarter-over-quarter growth rates. Additionally, we continued the process of transitioning a few of end-of-life discrete products in the third quarter. We offset these effects with our battery and shield assembly product double-digit growth. This is due to customers launching new products and favorable customer ordering patterns.

We continue to believe we are positioned to grow this category faster than the overall market growth, although when measured quarter-over-quarter there will be some variation in our performance.

Third quarter orthopedic product line sales on an organic constant currency basis grew 8% when compared to the same period in 2013. Our instrument business grew in excess of 30% while implants were up over 4%.

Q3, 2014 delivery system revenue was impacted by the timing of product launches when compared with the level of Q3, 2013 product launches.

Year-to-date revenues increased 13% on a constant currency basis. We are forecasting low double-digit growth for the year excluding $1 million to $2 million of negative foreign currency impact in Q4.

The portable medical product line third quarter revenue totaled $17.2 million. The headwinds associated with the strategy change will begin to taper into fourth quarter. We have secured nine new product wins implementing our new power charging and battery management technologies.

The transfer of our portable medical operations to the expanded facilities in Tijuana, Mexico is on track to be completed in late 2015.

Our vascular product line grew double-digits for the third consecutive quarter plus 21% in the current quarter. Our products serve several markets including electrophysiology and peripheral interventions where our technology is well received and we are outpacing the market in these therapeutic areas. We anticipate continued strength in our vascular performance for the remainder of the year.

The energy, military and environmental product line sales totaled $19.0 million for the quarter, flat with the prior year quarter attributable to customer ordering patterns. Favorable trends continue in both our rechargeable battery assembly technology and power source packs, particularly in the energy as customers become more aware of the benefits of rechargeable applications.

I will now turn the call over to Michael for more insight on the quarter and year-to-date financial performance and explain our new guidance.

Thanks, Tom, and good afternoon, everyone. I'm very pleased to be on the call today to provide an overview of our third quarter and year-to-date 2014 performance. I'm going to cover a few slides and refer everyone to our press release we issued earlier today for more details regarding our financial performance.

On slide 18 we continued to win with our technology. Our growth for the year is in line with expectations and above market growth in terms of units with the exception of portable medical where we are seeing positive signs of our revised strategy being accepted in the marketplace.

Productivity and efficiencies in our manufacturing facilities have been leveraged to the bottom line. We have made strategic investments in sales, marketing and R&D, which are funded by manufacturing efficiencies and lower general and administrative expenses.

Our favorable tax rate will continue to add positive contributions to the Company through the remainder of the year and into 2015.

Operating cash flow of $28.2 million is approximately 14% ahead of last year. As a result of our performance, we are raising our guidance for the year and I will get into more details on this in a couple of slides.

Slide 19 shows the key metrics Tom commented upon at the beginning of the presentation. Our third quarter financial results are in line with expectations. Organic constant currency revenue growth on sales of $171.7 million was 1% for the quarter and adjusted EPS totaled $0.64, a 12% increase over the same period 2013.

Adjusted EBITDA margins expanded 10 basis points and ROIC for the quarter was 8.4%.

Turning to slide 20, I will discuss the 12% increase in adjusted EPS. We focus on productivity because we know that to deliver our commitment of getting at least twice the organic growth to the bottom line and continue to improve our ROIC, we need to constantly, consistently drive productivity.

This quarter we improved our gross margin by 50 basis points because of several ongoing initiatives. The restructuring projects of our vascular and portable medical products will begin to provide benefits in late 2015 and into 2016 and even further margin expansion.

Our higher operating expenses partially offset our growth profit improvement. The takeaway is, as shown by our above market organic growth performance when measured over the last four quarters, our higher run rate of sales and marketing expenses is delivering the expected growth. Additionally, in 2014 we are absorbing previously incurred design verification testing or DVT expenses in normal operations.

The lower adjusted operating margin, we saw improvement in our tax rate and lower interest expense associated with our lower debt contributing $0.04 and $0.02 adjusted EPS respectively. This favorability was partially offset by the higher [2014] share count of $0.02. We estimate that our full [2014] full-year diluted shares outstanding will be around 25.9 million.

Our current quarter effective tax rate declined from the previous year due to higher income and lower tax jurisdictions. Looking forward we are forecasting our GAAP and adjusted tax rate to be 30% to 32%. We have included the R&D tax credit in our adjusted rate.

Operating cash flow for the quarter was $28.2 million, 14% ahead of 2013. In 2013 we made an estimated tax payment of $8 million in relation to the convertible debt retirement.

Now turning to the year-to-date performance, we are on track to deliver 5% growth and returning 2X to growth rate to our shareholders. Operating margins continue to expand as we focus on productivity. ROIC of 8.4% through September improved 10 basis points over the prior year.

Operating cash flow through the year totaled $54.7 million increasing $38 million from the same period 2013. In 2013 we made an estimated year-to-date tax payment of $20 million in relation to the convertible debt retirement.

On slide 22, we discussed the drivers of the 13% increase to our year-to-date adjusted EPS. Year to date gross profit improvement accounted for $0.32 of the increase. We continue to express positive contributions from both the mix of products and improved output in our manufacturing facilities.

Operating expenses reduced our adjusted EPS by $0.17 because of the following. First, as you know, we increased our sales and marketing resources which drive our organic growth. The impact of our adjusted EPS of adding these resources is $0.11. There are several factors impacting RD&E.

Last year before we filed a PMA for Algovita, we adjusted our performance for the DVT. So having filed the PMA we do not make an adjustment for DVT. The year-to-date impact of this change accounts for $0.12 dilution to adjusted EPS.

We have adjusted our R&D spending a positive $0.02 impact to adjusted EPS year-to-date. However, we have seen an NRE reduction of approximately $0.03. This NRE reduction is caused by the timing of milestone payments associated with our technology programs. With the 100 plus programs underway, we will see reimbursements for the collaboration programs in the coming months and through 2015.

Along with the R&D reduced spending, our focus on continuous improvement in productivity resulted in a pickup of $0.03 in general and administrative costs.

Lastly, the timing for the performance-based accrual helped to offset the year-to-date change in operating expenses. Below the operating line, we have a positive $0.06 improvement with our lower interest because of reduced debt levels and favorable interest rates. The effective adjusted tax rate through September 30 through September was 30% compared with 32.4% during the first nine months of 2013 accounting for $0.06 improvement to adjusted EPS.

The headwind from the rise in diluted shares outstanding due to the increase in our stock price has cost us $0.06. We expect our adjusted effective tax rate for the remainder of the year will approximate 30% to 32%.

Now, I'd like to provide comments on operating cash flow. For the first nine months of 2014, we generated $54.7 million positively impacted by stronger operating income and lower tax payments that in 2013 were paid when we retired the convertible debt.

Capital expenditure was $16 million year-to-date. We expect to be at the lower end of our guidance for total year of capital expenditures.

Turning to our 2014 outlook which is on slide 24, we are raising our adjusted EPS guidance to $2.32 to $2.38. We are also tightening the revenue guidance targeting revenues to be between $695 million to $705 million. We are providing the range because we have several large customers and their inventory management efforts can significantly impact our results, especially when their quarter end does not align with our quarter end.

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

(Operator Instructions). Please stand by for your first question. Your first question is from Matthew Mishan from Keybanc.

Good afternoon and thank you for taking my questions. I think my first question is on CRM. I was just curious if you could quantify the headwind of the two legacy programs that you're kind of facing over the next several quarters and when do you think you're going to be comping positive again in that segment?

Matt, this is Tom Hook. It is periodically over the course of a decade of being Greatbatch at any one time we see end-of-life products come in and out and obviously launches along with that. It's a little bit more rare to see them happen at the exact same time. It usually takes three-quarters or so of effect for it to bleed over depending on the launch plans as well as the production transfer plans and that's pretty typical, a nine-month period of time for that transition to occur as kind of out with the old, in with the new.

So as those technologies change over, we on last quarter's conference call kind of put the headlights on that over the second half of this year into next year those -- a few products are going to be through that transition period. And so we've entered that period of time. We have offsets for that still in the CRM and neural categories, which are making up for the loss of those end-of-life products and we continue to see that swap, so to speak, take place over the next couple of quarters as well.

Okay, and on portable medical in the press release I think there was a little bit of a change as far as the headwinds you're facing there where before it was through the end of 2014 and I think now it said also through maybe the first half of 2015 as well? Did you do some adjustments on some additional programs that you may have given up?

Nope is we've been doing the portable medical team bowing the shift in strategy, which obviously also incorporated a project in which we're -- our production for those product lines down to an expansion of a facility in our Tijuana, Mexico location. On that strategy has been implemented smoothly and they've been doing a very good job of new project wins. So it is literally just a transitioning time frame where we're not going to continue. We're not going to move on profitable business.

We've already gotten a lot of traction to get ourselves back into that transition period over the course of this year and we expect as those products move into production next year, that we will start getting back on to a favorable comparable growth rate to the period of time before we implemented that strategy change.

So I would expect that that effect will start in the first half of 2015 and then it becomes stronger effect as we move into the New Mexico facility late in 2015 and then we'll get a full-year effect of that starting late next year. But the positive effect of the product development [launch] is already begun.

That's helpful and on CapEx, it looks like you revised it down. Did you push -- did a project get pushed off? What was the reasoning for that?

No I think as we always encourage the operating managers and certainly Mike in the finance organization looks very carefully at any payments we're making on any contracts we have with regard to the capital projects and if there's opportunities for us to be more judicious with the payments on those, we are and just reflective really of just good management but the projects are all on time and it's just that we're managing the expenditures appropriately like we should.

Great. And just last question from me, any color on Europe and maybe some clinical updates on Algovita?

Well, I'd be really anxious to give you all kinds of information but at this point in time everything is on schedule now that six years ago starting this initiative in the Company there's a lot of anxiousness to be able to talk about it but we're going to be quiet on it for the current time and but I do look forward to answering that question in the future.

Okay I'll look forward to asking it again. All right thanks, guys.

We do expect that.

Glenn Novarro, RBC Capital Markets.

This is Julia Kufman calling in for Glenn Novarro. Can you hear me okay?

Yes.

Okay great. I just wanted to see if you could speak about -- a little bit more about CCC. What's a reasonable growth rate and can we assume that third quarter on a prorated basis is an appropriate run rate going forward?

We're not -- is CCC, which was primarily owned by the Fiandra family and we've been in contact with them over the course of 2014 to negotiate this deal. It is a really nice complement for us in the neuromodulation area. We're not going to break out really specifically the CCC business in terms of what our projections are. We're going to aggregate that into our overall guidance.

But what we've seen thus far in a few months is a tremendously complementary business and opening up the advantages of the innovation engine that CCC Medical Devices has along with the deep intellectual property bench as well as production capabilities at Greatbatch so the lines will quickly blur of what was traditional CCC Medical Devices and it will quickly be integrated together. And it's naturally coming together very effectively and we'll be able to bring the capabilities of Greatbatch to the CCC Medical Device customers very quickly and we've already started that process.

So it really doesn't make sense to kind of guide specifically to their business because we actually see that the combination of companies is going to increase the growth rate for neuromodulation for us as a combined Company. So that's one of the reasons why we've continued to be bullish on neuromodulation beyond just Algovita that the CCC Medical Device acquisition does a good job of positioning us even deeper in that market and it's going to continue to accelerate the growth in those product lines for ones that they've brought and the ones that we have.

Got and then sort of back to Algovita, what's left in terms of the FDA review process? Are we just waiting on a decision or is there any some more back and forth in terms of questions or anymore data that you guys need to submit? Can you sort of guide us into what we're still looking for?

There's still a few steps of the process that are -- that usually occur late in the PMA process when certain final inspections and reviews of labeling have to occur. We're at those steps. We've really are answering any questions that we receive and we're in routine correspondence with regards to the project but no signs of it not moving along the time lines that we have already indicated. It's just progressing like it should, both from the project regulatory approval as well as from a rollout perspective in Europe and we expect the same thing to occur over the next several months between now and our conference call early next year.

Okay and then is there any sort of time line that you can give us on when we can expect this year progress on the commercial partner?

We will -- from a -- we'll update when it makes sense. We have plans we're putting in place with regards to that segment of the project. We're not at liberty to disclose them now as we advance them but you can expect along with the PMA announcements and that we expect a time line to be completed early next year. We will clarify our commercialization plans at around the same time interval, if not at the exact same time.

Got it, that makes sense. And then just to pitch back on your base business, in CRM you sort of spoke about new product development opportunities. Can you expand on those comments? What specifically can you do to get the business going in both the markets?

One of my deep frustrations over the 10 years I've been here as Chief Executive is our inability to speak specifically to our customer wins. The reason our CRM and Neuro categories have done very well is because they've innovated with our current OEMs, put in place development and long-term agreements and we're really developing some very innovative discreet product technology that is driving their end market innovation. Those teams within Greatbatch have done an excellent job of winning that business over the past three to four years that is now precipitating into revenue over the last year and what we predict is going to also in the future.

So despite some of the end of life products, the new projects that we've won years ago and have completed product development and to our customers the OEMs we're launching now, we're simply winning a higher percentage of them and they're drawing a deeper set of intellectual property based products from us that drive more value, which is fundamentally why we can grow slightly higher rate than those end clinical markets. At the end of the day it's all winning based on innovation of those underlying discreet product projects and I don't see that trend stopping. I see it continuing in starting with the management and I can see it continuing in neuromodulation at a discreet product level, both.

Okay and then just lastly, on portable medical will we have -- you know, you're divesting lower margins products. You're moving operations to Tijuana. Can you speak to some of the tailwinds that are going to offset the negative impacts?

I think the easiest way to understand it is once we made the decision to put our operations in Tijuana, Mexico we can have the commercial teams leveraging from a project win standpoint, us comprehending projects with the capabilities of our Mexico facility, both from a product design capability as well as a manufacturing cost standpoint so it allows us to be much more aggressive and because we have a lower cost basis of the production that will be brought on line in late 2015, we'll be more profitable out of those product lines and more competitive. So that puts us in a position today to go win business and do the product developments and prepare things for operations that as they're implemented into production how we know that will have that tailwind so as we move to bring on that production volume, it gives us the opportunity to leverage that both revenue and profitability.

In the short run the investments we've made in sales and marketing on the portable medical team that have already won deals are actually being produced out of our Beaverton, Oregon operations. Those product development wins will start cascading into production in the early next year, so while we won't have the profit advantage of picking up, ultimately they will move down to the Mexico operation and it will get both the revenue and the profit leverage. So it's we view it as continuum.

Sales and marketing, you know, project rationalization first which we've done; sales and marketing investments which are winning product development opportunities and precipitating the product development projects quickly, which precipitates into the revenue streams and then eventually moving that all down to Mexico, which will precipitate into the revenue and margin leverage. And we're walking along that path on that project very smoothly and we're right on time or ahead of milestones in every aspect of the project.

Okay thanks, Tom. I am going to get back in queue so you can have a chance with some other [investors].

Charles Haff, Craig-Hallum.

Thanks for taking my questions. There's a lot of background noise too, by the way, on the call. But I wanted to ask you a couple of questions here. You talked about portable medical tapering, or the headwinds tapering in the fourth quarter and you obviously have an extremely easy comp in portable medical in the fourth quarter so I was wondering if your comments were driven more to the easier comp or are there some inherent changes or things that are changing that make the business get stronger in the fourth quarter or less weak?

Actually thank you for pointing out the easier comp. I really don't focus on that myself, Charles, but is where I look at as fundamentally the investments of what we're doing in portable medical are just going to start flowing and returning first and foremost, the investments in expanding and deepening the sales and marketing teams and the product development wins that come through. Some of those products can have long time frames but up to two years but some of them can have shorter time frames so those improvements start to move into affecting our financial performance in the fourth quarter of this year.

We don't get obviously full-year effects on them until they're really, the revenue streams ramp up and we get multiple projects but all the leading indicators, the deal funnel for portable medical is full. We're getting good sales wins. The product development teams are very busy working on those projects and they're starting to precipitate off into revenue for those projects within our Beaverton operations. Now ultimately they'll end up down in Mexico but that won't occur for another four to five quarters as they're qualified so the leverage I'm not as bullish on in the near term because we'll be leveraging our current production facility that's qualified, not the new one.

But over the next four quarters to five quarters as we move all of these operations and manufacturing down to our New Mexico capabilities, we'll be able to see both the top line and the bottom line push through so we know we're working off a tough period of time. We know as we get through the middle of this we'll have easier comparables but I more track the leading indicators of the business, which is sales activity, product development activity and how they're going to line up to be moved into the production schedule and all those are very positive and we'll start to see some of that positive effect in the fourth quarter but it won't be an instantaneous turnaround.

It will take the course of 2015 to get us back on the trajectory that's consistent with 5% and 2X profitability as a Company. We expect portable medical to be double-digit grower over the longer run and we're making the investments to be able to do that.

Okay thanks for that response, Tom, and another question that I had was from on an area we don't talk about too much, the energy line item. It's about 8% of total revenues but do you have another -- do you have easy comp there as well in the fourth quarter and was wondering how we should maybe think about the energy line for the remainder of the year. Anything that's going on there in terms of strengthening or challenges to the business?

Nothing out of the ordinary I think is the biggest variable we tend to have is within many of our lines of business is we sell to -- we're exclusive providers of technology to specific oil field services companies and as they push and pull inventory around year-ends, that would be the largest individual effect as we see the remainder of the year but in terms of the market, oil and gas markets are obviously healthy and while there is [portobation] in the price of gas and oil, we still see the oil services company as very busy and drawing upon technology as they go to deeper depths, still are expanding in the areas of fracking in North American drilling and in particular for gas.

And we don't see that trend stopping so fundamentally I still see the same market trends occurring and our same trajectory and our plans are to continue to have that as a growth product line for us as a Company and unless there's unforeseen changes we see in inventory or other pieces that our customers haven't informed us of, which would be very untypical, I expect that we continue to perform and grow in that area over the longer run.

Okay thanks and then a question for you on the CRM side, I understand about the two legacy CRM products that are kind of rolling off and that should continue for the next couple of quarters as you explained to an earlier question, Tom, but in terms of materiality, I realize you don't want to mention what the products are and so forth in terms of percentage of the CRM business or dollar basis, are these two legacy products pretty material to your total CRM business or just any way you could help us think about this would be helpful. Thanks.

Well, as the CEO, every penny to me is material because we're pushing the operating teams to be successful at winning the business. The definition of materiality from a financial viewpoint obviously Michael would give a different response but our job is to manage the business to grow and 2X leverage the bottom line and part of life in any high technology market is end of life and product introduction and that occurs all the time. So no matter what the size if you look at it this way if there's a large end of life product with a lot of revenues rolling off, that means there's a new product launch that's rolling in.

And some many times those I'd say two-thirds to three-quarters of the time those products align. There's an old generation out, a new generation in but about a quarter of the time they don't align. There's a technology being eliminated and there's a different project and a different product area that's being introduced and that's more the case here that's occurring over the course of these three quarters.

So it's a bit unusual and but again, as the character of the management team is offsetting it with previously won projects and they're professionally ramping down one and ramping up an unrelated project at the same time to make sure we're not shrinking, I see that trend continuing. It's a challenging transition but we have the operating teams to be able to do it and still maintain our ability to be efficient and profitable and they've done a nice job on it. But we certainly wouldn't be highlighting it if it was an insignificant event of a few hundred thousand dollars. I mean we would only highlight it if it was something we felt was meaningful and if meaningful means materiality for you, then I think it's material.

Okay and if I can squeak one more in on sales and marketing expenses, my made a comment that the -- you saw the leverage that you were getting on sales and marketing efforts but the expenses were running a little bit higher than you would expect or were planning on. Can you just clarify that a little bit? I just want to make sure I have that right and are you still building headcount in sales and marketing or how should we think about that?

The sales and marketing expenses are not higher than we had planned or right on target where we had planned for the year. If anything, sales and marketing expense tends to be based on success so we plan it to support the 5% revenue growth rate and 2X profitability. We know what that trajectory looks like and when our sales and marketing expense may be increasing because we expect to sell more in the future, that is just an indicator that they're winning.

Their variable compensation plans are paying them and we're recognizing the expense and it's a good indicator that we're winning deals that are moving into product development that will eventually get into the revenue streams in the P&L performance at Greatbatch anywhere from a year to three years out so I don't see them higher. I see them moving higher because we're winning more deals and we are going to continue to make investments in sales and marketing and expand it but they're not above what our plans are. They're supporting exactly what we need to be doing.

Okay so this level as a percentage of sales should we be planning on this for the next few quarters or how should we think about from a modeling perspective?

Yes I think that's a good way to think about it. I think of it more on an absolute basis but when you tend to see when there's multiple effects in there. When you expand the team it can go up. When that sales and marketing expense goes up it could be an indicator that you've won a lot of deals that will precipitate faster growth rates and of course if you've not hit your targets it can tend to go down but for projection purposes is that you've seen our adjusted guidance. We're moving the revenue range and profitability range up and we plan on being at the same trajectory for expense control including sales and marketing that reflect that.

Just on last we have not fully built out our sales and marketing team so when you look to a year-over-year comparison, it's an explanation of the increase to 2013 actual. It's not above what we expected and it's pretty much at the run rate that we expect going forward and to Tom's point since there's a variable compensation piece there, let's hope it goes up because that means revenue is going up even more.

Okay thanks, Mike.

No further questions at this time. Again, ladies and gentlemen, if you do wish to ask a question please key star and one on your touchtone telephone.

Thank you, everyone. I would like to remind you that both the audio portion of the call as well as the slide visuals will be archived on our website at www.greatbatch.com and will be accessible for the next 30 days. Appreciate everyone joining us and have a good evening.