Integer Holdings Corp (ITGR) 2014 Q4 法說會逐字稿

Welcome, everyone, to the fourth-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 meanings of the Private Securities Litigations Reform Act of 1995 and involve a number of risks and uncertainties. These risks and uncertainties are described in the Company's annual report on form 10-K.

These statements are based upon Greatbatch Incorporated current expectations and actual results could differ materially from those stated or implied. The Company assumes no obligation to forward-looking statements, information included in this conference call, to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial conditions, or prospects.

I would like to turn the call over to today's host, Vice President, Finance, and Treasurer, Betsy Cowell. Please proceed.

Hello, everyone, and thank you for joining us today for our fourth-quarter 2014 earnings call. With us on the call are Thomas J Hook, President and Chief Executive Officer, as well as Michael Dinkins, Executive Vice President and Chief Financial Officer.

As we have done in the past, we are including slide visuals to accompany the presentation, which you can access on our website at www.Greatbatch.com. Once Tom and Michael have completed their presentation, we will then open up for Q&A session. Both Michael and I are available to take further questions following the call.

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 are very pleased with our operating results for the year. For the second year in a row, we have exceeded our commitment to return 2 times our revenue growth to the bottom line.

On the top line, we had record revenues of $688 million, recognizing double-digit growth in orthopedics and vascular, and mid single-digit growth rates in energy, military, and environmental. Our adjusted operating margins expanded 80 basis points to 13.3%, reflecting our sustained productivity and cost control efforts.

Michael will provide additional information about our lower taxes. We believe we will continue to benefit from a lower overall effective tax rate into 2015 and beyond.

We were able to increase our adjusted diluted earnings per share by over 15% this year, while driving key strategic objectives of growing our intellectual property portfolio with 134 new patents, positioning Algovita for FDA approval in the first half of 2015, executing our strategy to become a leading manufacturer in the growing neuromodulation market, and positioning us for continued margin expansion by building our new facility in Mexico. We are confirming our 2015 guidance.

There are a lot of numbers in slide 6, but at the bottom is the key measurement, operating cash flow of $81.3 million, an ROIC improvement of 50 basis points to 8.4% for 2014. As you can see, across all of our metrics, we've showed improvement. Most importantly, we made the investments to continue our success.

We expect 2015 to be a transformative year and remain confident in our strategy of leveraging our broad intellectual property portfolio and manufacturing excellence into the growing neuromodulation market. Algovita US regulatory approval was on track, as is EU commercialization. Our CCC Medical Devices acquisition has been successful for both companies, and together we are projecting a promising 2015.

We expect to enhance our competitive position in our core markets through a culture of continuous improvement, investments in capabilities and capacity, and technology. And our acquisition pipeline is robust and active.

Now, I would like to provide some comments relative to our various product lines. Slide 7 highlights our organic constant currency revenue performance for the quarter and the year. Orthopaedics, vascular, and EME delivered double-digit growth in the fourth quarter.

Year-to-date results were also impressive. Orthopaedics end of the year, plus 12% organic constant currency growth, while vascular was plus 22%, and EME was plus 5%.

We experienced the effects of several of our cardiac and neuromodulation customer's inventory reduction programs during the quarter. And a continued impact of the end of life of two legacy products. This resulted in a negative 19% in the fourth quarter, cardiac neuromodulation decline, and 1% decline for the year.

The impact of cardiac neuromodulation performance, along with some other factors, left us short of our 5% organic growth target, as we posted 3% organic growth for 2014. We are not satisfied with our cardiac neuromodulation performance for the quarter or the total year. Our actions are focused on improving our go-forward performance.

We have not lost any major customers and continue to be successful in entering into long-term agreements with our key customers. The current challenge in our cardiac neuromodulation category is that our new product successes do not completely offset end-of-life products and ongoing management efforts by our customers to reduce their inventory levels.

These dynamics will create some challenging quarter-over-quarter comparisons. However, it does not change the long-term prospects of our growing cardiac rhythm management revenue, above the market growth rate, and leveraging our broad intellectual property portfolio, and manufacturing excellence in the faster growing neuromodulation market.

Fourth-quarter orthopedic product line sales, on an organic constant currency basis, grew 10% when compared to the same period 2013, and 12% for the year. We are very pleased with the performance in this product category. Our bone cutting and preparation technologies has a strong position in the marketplace.

We look forward to another growth year and continue to innovate orthopaedics technology with silicone handles, new instrumentation, and higher level assemblies. We are forecasting low double-digit growth for the year.

Portable medical results were down 13%, however in line with total year projections and positioned for a more profitable business, with our second Mexico facility coming online in late 2015. We have over 18 active projects which will drive our performance.

Vascular product line revenue of $15.6 million set a record for the quarter by growing 18%. For the year, vascular posted 22% growth.

Entering 2015, we see opportunity to expand our product offerings into adjacent growth markets. Fourth-quarter revenue of $23.3 million was a record for EME and represented 13% growth over the prior-year fourth quarter. For the year, EME grew 5% to $81.8 million.

I will now turn the call over to Michael for more insight on the quarter and the year-to-date financial performance and explain our 2015 guidance.

Thanks, Tom, and good afternoon, everyone.

I am very pleased to be on the call today to provide an overview of our 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. We will discuss fourth quarter and conclude with the total year.

Slide 14 shows the key fourth-quarter metrics. As Tom previously discussed, the drivers for the decline of 3.9% in revenue, I will focus on how we were able to improve our operating metrics with double-digit increases in adjusted operating income, adjusted net income, adjusted EPS, and EBITDA, which resulted in 100 basis point improvement on return on invested capital.

Let's turn to slide 15, where we have outlined the drivers of our performance improvements. RD&E spending netted to a $0.12 improvement for the quarter. This decrease was primarily a result of lower cost incurred in connection with the development of our Algovita spinal cord stimulation system.

Additionally, this decrease was due to a $1.9 million increase in customer cost reimbursements, compared to prior year, due to the timing of achievements and milestones on various projects. Normal operating expenses lowered adjusted diluted EPS by $0.02, because of the acquisition of CCC Medical.

Below adjusted operating margin, notable improvements include lower interest expense associated with our lower debt, and foreign-exchange gains associated with our euro denominated payables.

Tax rate for the quarter was higher than the fourth quarter 2013, because in 2013 we realized a favorable foreign tax rate change. Adjusted tax rates were 23.6% and 21.3% from Q4 2014 and Q4 2013 respectively. During the quarter, fully diluted shares outstanding increased another 2%, negatively impacting adjusted EPS by $0.02.

On slide 16, we have our total year performance. We reached record levels of revenues of $688 million, 4% growth, and organic constant currency basis growth was 3%.

Adjusted diluted EPS for the year totaled $2.42, a 15% improvement when compared with 2013. Operating margins expanded to 13.3%, as we focus on productivity. Return on invested capital appreciated to 8.4%. Operating capital was $81.3 million, increasing $24.5 million from 2013.

On slide 17, we provide a variance analysis so you can understand why we were able to post 15% adjusted EPS growth. Contribution from the mix of products, improved manufacturing output, and the CCC Medical Devices acquisition, all fueled the gross profit improvement, and accounted for $0.36 of the increase for the year. The vascular and portable medical product restructuring projects will begin to provide benefit in late 2015 and into 2016, enabling further ramp to margin expansion.

Operating expenses reduced our adjusted diluted EPS by $0.06, primarily due to the impact of CCC Medical, the higher investments we have made in sales and marketing, as well as higher legal fees, which include intellectual property related costs. The impact of these increases were partially offset by our various consolidation initiatives, including operating unit realignment, which began in the second quarter 2013, as well as lower performance-based compensation.

Offsetting these pressures, we had lower RD&E and G&A spending, and recognized $9.1 million of payments from customers to design new products for them, which we refer to as NRE. This is a 6% increase versus 2013.

Below the operating line, we delivered another $0.08; $0.06 of which is due to lower interest because of reduced debt levels and favorable interest rates. Another $0.04 is attributable to foreign-exchange gains, driven by the strong US dollar.

The effective adjusted tax rate for the year was 28.3%, compared with 29.8% during 2013, accounting for $0.04 improvement to the adjusted EPS. The headwind from the rise in diluted shares outstanding is due to the increase in our stock price and cost us $0.06.

Now, I would like to provide some comments on operating cash flow. For the year, we generated $81.3 million of operating cash flow, because of stronger operating income, and last year we made a payment of $29 million, because of our retirement of our convertible debt. Capital expenditures totaled $24.8 million in 2014, and depreciation and amortization totaled $37.5 million.

On slide 18, we show our working capital. Receivables, ended the year were $11.3 million above 2013, because of the addition of CCC Medical, $3 million, and because of timing of receipts of customer payments.

As you can see, throughout 2014, our collection efforts resulted in a 15% reduction of amounts 30 days past due. Inventory increased $11 million, including $5 million from acquisition of CCC Medical, and was actively managed with the changes in our customer inventory positions.

Slide 20. We are confirming the guidance we gave last month of 4% to 6% revenue growth and 2X our revenue growth improvement in adjusted diluted earnings per share performance. Revenue guidance to $715 million to $730 million. However, we expect currency translations to have a negative impact of approximately 1.5%. Therefore, at this time, we expect to be closer to the lower end of our guidance for revenue.

Operating margin is expected to expand 40 to 70 basis points with continuous productivity initiatives and leveraging SG&A to deliver 13.7% to 14% adjusted operating margin. Adjusted EPS guidance is $2.61 to $2.71, assuming fully diluted shares of 26.5 million. Included in the operating results is an estimate of other operating expenses totaling $22 million, as two projects come online by the end of the year.

GAAP and adjusted tax rate of 25% and 26%, respectively, are assumed for the 2015 guidance. We estimate capital expenditures for the year to be $35 million to $45 million, again, as the new plant in Mexico comes online.

Adjusted operating cash flows are expected to be between $80 million and $100 million. Looking to the first quarter, we expect our customers to continue to aggressively manage inventory, and we will continue to be impacted by end-of-life of products.

These actions, coupled with continued currency pressures, and Greatbatch's strong 2014 first-quarter performance, lead us to believe that the year-over-year growth for the first quarter will be below Q1 2014, in the high single-digit range. However, as we stated earlier, we are confirming our guidance for the total year, because we expect considerable momentum will be built throughout the year based on new product launches that offset the effect of the end-of-life products.

In closing, we should mention our guidance will be updated upon Algovita FDA approval.

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

(Operator instructions)

First, Matt Mishan, KeyBanc.

Good afternoon, and thank you for taking my questions. I think just on the inventory issues, can you just clarify is this a customer issue or is this customers? Because I couldn't tell, and in the press release, it kind of indicates there was one customer, but I think you guys indicated that your customers were managing inventory aggressively.

Yes, Matt. It's a good question. I think -- in that all of our customer agreements have confidentiality provisions. We can't divulge a lot of details, but I would say, just in general, customers are more tightly managing their inventory which is always a balance. Because in most cases, as a sole source technology developer and manufacturer for them, they require us contractually to have levels of safety stock on what is in our inventory, to protect them against any potential disaster that could affect us.

But as they had inventory on their end and they choose to tighten that up, it does affect the sales flow from us to them, and as we are at the year-end or quarter-end points, they are much more active in managing that, and that is where the source of the effect comes from. We are not losing any business or doing any less development. They are just managing their inventory tighter and taking fewer pulls from us.

But as you know, historically following us, because those pulls can typically be very large in size, multiple millions of dollars, it is a very easy decision for them to not pull, and it would have a considerable effect on our ability to grow revenues and that is exactly what has happened at the end of 2014.

Okay, as I think about the timing of the impact of the CRM, is it kind of right to think that the first quarter will be like the last impact from some of the legacy programs coming off, kind of finish up on the inventory overhang, and then that's also going to be your toughest comp of the year?

I think Q1 will definitely be our toughest comp, but end-of-lives, we highlighted, was a second-half 2014 event, which largely has washed through, but because of the year-over-year comparisons, it would be the first two quarters of 2015 that that would be in effect and then it would be levelled out from there.

On energy and other, what is the assumption that you are using that is in part of your guidance for energy level for the year?

That is an excellent question, and you know that there is a lot of dynamics going on in the energy markets right now, as we all can see, and we are looking very closely with our customers. We had taken the best thinking we have in providing our overall guidance and it is incorporating what I would feel is a lower price per barrel of oil, and then knocked down effect to the oil services companies, which are our customers.

So while we grew that quite aggressively in 2014, we are expecting that that is going to be a tougher end market because of the price of oil and the price of gas continues to be very low, which will have an effect on drilling and hence on the usage of our products. So we factored that into the guidance ranges that we provided, but we're not -- it's tough for us, I think, to give a lot more specifics on that since it's a pretty dynamic situation.

But we have been in contact with all of our large customers, and even the smaller ones, and we have what their thinking is for 2015, and we've incorporated it in our plans and our guidance.

Okay and then last question for me and then I will jump back in the queue. You've had about six months Algovita in Europe right now, and since it has been approved, at least, can you give us an update on kind of whether or not you have been testing the device, how it is doing, and what is going on over there?

I can only say we're not going to provide any detailed information until we get to an investor day event for Algovita, which would be -- we project to be midyear-ish based on when we think we will get FDA approval in the first half.

We will provide more details then, but we are encouraged and very satisfied, and we look forward to sharing more details, and we're reaching milestones every day, both on the regulatory side for US approval, as well as the clinical evaluations that we are doing in Europe, and we're quite satisfied.

Okay, thank you very much guys.

Next, Charles Haff, Craig-Hallum.

Thanks for taking my questions today. Michael, I was wondering on the tax rate, I think you said about a month ago, that you are expecting 27.5% and now you are looking for, is it 26%? Is that the right number to use compared to the 27.5% you were using before? And if so, what are the reasons for the decrease?

The answer is yes and yes, we do think we will be closer to 26% on the adjusted tax basis. And the reason for the decrease is that we are having a higher percent of our income at the lower tax rate, which reflects the fact that the orthopaedics and other lines of business are doing quite well, also taking into consideration that we -- with the CCC Medical at 25% tax rate, they also mix us down, and we're optimistic about that business and their performance in 2015 also.

Okay, thanks. And you made a comment about high single-digit revenue growth in the first quarter of 2015. Which line item was that? I think I missed a detail there.

I've got to correct you. We're thinking a high single-digit decline in revenue growth in 2015.

The first quarter, as Tom indicated, will be a tough quarter for us because one, 2014 we posted 17% organic growth that quarter, so it is a very tough base for us. And as Tom indicated, we will be impacted -- continue to be impacted on the year-over-year comparison by end-of-life through the first and second quarter; and we are optimistic about new product introductions that will allow us to stick with our guidance for the total year. But they will build -- starting in the second quarter, build greater momentum throughout the year.

Okay, that makes a lot of sense, thanks. And then increasing CapEx about 40% to 80% year over year to a level of $35 million to $45 million, can you kind of explain what the delta is, the additional $10 million to $20 million versus 2014?

It primarily reflects the building of the second production facility in Mexico. That is the primary driver, and then we also anticipate some expenditures to grow our CCC Medical business. But it's predominantly the projects coming to end-of-life, and as you know, a lot of that you park on the balance sheet that when you put it in production, it shows up as CapEx. So that indicates the late 2015 startup of our new facilities.

Okay, great, and my last question is in portable medical. I know that you have been moving some product down to TJ. You have been phasing out some unprofitable business. What are some of the updated puts and takes that you see there and how should we think about portable medical growth in 2015?

Yes, Charles, great question. Think of it this way, number one, we've taken the business that was unprofitable and we phased that out and terminated it, so we're not going to move that business. That is no business that has moved yet from our Beaverton, Oregon operations down to our new Mexico facility, because the Mexico facility has not finished construction, nor is it qualified.

In parallel with qualifying over the next several quarters, a lot of the product lines, which we will ultimately move in the second half of this year to the Mexico facility, to finish that at the end of the year and bring it online. We are in parallel, have been regenerating the portfolio, which is representative of some of the 18 projects I referenced in my comments.

In parallel with that move, in other words we're selling, and developing, and generating proposals based on having operations in Mexico next year; which has led to a refresh and replenishment of the business that we would not have to quote, move, but just originate that from our new Mexico facility. So we are very good at these moves, as you know from history, and we've done this before to great success, so we're doing phase one, which is unprofitable products have been eliminated and phased out, which has led to our revenue decline, but somewhat paradoxically, a profitability improvement, because we're eliminating non-profitable products we don't want to move to the new facility.

Phase two and three are in parallel with facilities under construction and qualification, and we're winning, and have won, a dozen and a half deals that will originate in that facility that won't be moved. And by the end of the year, obviously, all of the product lines on qualification and customer approvals will be sourced out of the new Mexico facility, so all of that happens in parallel for the year.

It gives us -- it obviously builds momentum throughout the course of the year, and then gives us a healthy start to 2016, both on the top line, as well as on the bottom line profitability contribution from portable medical in the new year.

Okay, yes, I understand there are a lot of moving parts there and I appreciate that you do not want to be too specific with guidance but on the portable medical line, should we be thinking about kind of low single digits or mid-single digits or high single digits? Any help you can give us there would be appreciated.

I think the best way to think about it is we like to stabilize that business and keep it stable and flat during this transition period. That is what our plans are for the year that is incorporated in our thinking. We're going to go through this lull like we did in orthopaedics several years ago during the move we had there, and we expect to come out of it with healthy growth rates after the move has been completed. You should expect stability followed by growth pattern, indicative that we had in ortho, as we bring the new plant online next year.

Okay that sounds great, thank you very much.

(Operator instructions)

Next, Gregory Macosko, Montrose.

Yes, thank you. Just a couple of questions, there were a number of questions around inventory. I wondered, with regard to the balance right now, and you mentioned the fact that there has been some large changes because of safety stock and the like. If we look at the history, is it fair to say that we could see some large pushes out to the customer over the next few quarters to maybe push sales up, in the same way there was a negative in the past?

Right, Tom Hook, thanks for the question. I think what we have seen over the past year has been that customers are relying on the relationship they have with us and our safety stock as a primary means for inventory. And that the inventory level they are managing on their end, they are going to manage it much tighter in the process. So I don't expect that they would, based on how they're improving their ability to manage their inventory across their balance sheet; I wouldn't expect that they would draw from our safety stock and replenish theirs on large pulls.

Now with that said, it has happened before, but it is not our expectation for that going forward, given that cardiac rhythm management growth rates are stabilized and more predictable. We don't see large perturbations within the Business, so we wouldn't expect that they'd take a huge unplanned pull, and since we're in constant strategic and tactical communication with them, we've got pretty good confidence that the guidance we provided does not incorporate that thinking; and we're not planning on it.

Okay good. With regard to the changing lower margin product that you've had, what effect has that had on the sales growth over the past year and is that pretty much complete at this point?

The portable medical products that were unsatisfactory profitability, even if moved to an integrated facility in our new Mexico facility would not have come to a satisfactory level of profitability. Our ability to put in our information technology systems into acquired companies to understand costs on an SKU basis, allow us to see which product lines are profitable and which ones are not.

So, that product that was done in 2012 targeted the product lines we wanted to trim before the move, and the net effect of that is, while lowering revenues, it results in us reallocating our engineers and production talent on the projects that produced incremental margins, and obviously, revenue growth that has a higher quality. So while painful to do it, it's productive to do this because it's very expensive to move these product lines only to find out that you cannot make money at them after investing more money. And we have learned that lesson the hard way, by moving unprofitable product lines in some instances, historically. It's only resulted us in the new location of having to terminate them.

So through a lot of experience, we have learned to swallow the medicine now is better. We set the relationship with customers on product lines we're better completed to make, and that's exactly what we've done with the customers involved here, and it's actually strengthened the relationship by taking that approach.

But just to summarize, that's pretty much done, and so that's finished, okay. Thanks very much.

Next, Matt Mishan, KeyBanc.

I don't want to get too much into the weeds here, but the loss for QiG group on the operating segment came down, and I was just curious if that's a good run rate going forward, and also corresponding, the corporate other loss on allocated corporate costs did go up. Did anything come out of QiG, allocated corporate cost? And is that QiG loss that we experienced in 4Q, is that a good run rate going forward, over the near-term at least?

First off, as you know with our QiG segment, that's predominantly where we incur our costs for doing research development projects. And therefore, I wouldn't think of it as a run rate type of business, when you look at it. It's going to go up and down based upon our level of funding of projects and what we want to do.

However, I do believe that the run rate that you saw for the first quarter is a little bit below the normal run rate, primarily because we had realized upside with customers paying us for projects that we were doing for them. And we were up in the first quarter, I believe, almost $2 million from what our normal run rate previous year, so it's a little bit light, only because of those good news. Those payments that or customers make for us are very lumpy.

We hit a milestone and we get a payment, so quarter over quarter, it's not best to think of QiG in terms of a run rate. When you look at the unallocated and you look at the increase, we moved some expenses from unallocated to Greatbatch Medical, and that's why you are seeing the unallocated increase.

We took some expenses, as you look on table A, the 1647, most of that is just a movement between unallocated to Greatbatch Medical, so that by year-end, for tax purposes, on the maquiladora that we set up, we had the expenses aligned with where we incurred, and help with our overall tax position to put the expenses where it was being incurred in order to reduce our taxes. So that's a just a flip-flop between unallocated and Greatbatch Medical.

Okay, I do appreciate the color on that. And then last question, CRM is kind of a flat to low single-digit market right now. Seems like that's kind of where it's at. Anything you can do to mitigate some of the volatility you are seeing in your CRM business?

There is, I mean, just by continuing, Matt, to win all the product development programs that we have active with our customers and making them successful and hit the regulatory milestones is, that we believe, that's the best position. Now in that revenue line for us, also incorporates neuromodulation, which is much faster growing, albeit a much, much smaller market. Our ability, which has been very strong, to win neuromodulation business, will continue to have an increasing material effect. But right now, compared to the low-voltage and high-voltage component side and CRM, is nowhere near those levels; but it will continue to increase in its meaningful contribution.

One effect that we really cannot manage is the fact that we sell large pulls of inventory to OEMs based on their resource management and pool of our products. Now that is great because they rely upon us, but if they want to multiple millions of dollars of shipment pulled in or pushed out, that does result in one factor of lumpiness.

The second factor of lumpiness which is tough to smooth out, is launches or end-of-lifes. So what we always do, is obviously, encourage that we do this on a rolling or smooth basis. We will do our best to call out one-time effects like we have on inventory tightening at customers for cardiac management, for the fourth quarter that we called out, and we can get a better idea of how we are doing relative to the growth in the market. But it's our intention as a company, in cardiac and neuromodulation, that we should be growing in the mid-single digits based on the opportunities that we're doing designs for and see within the markets, and that we should be able to grow faster than the underlying market given the success we've been having in those areas.

We didn't demonstrate it in 2014. That is not satisfactory, from a leadership perspective, from my and Mike's point of view, and it's our plan to get that corrected going forward by continuing to expand time and connecting with customers on the launches, as well as our development programs.

Alright, thank you very much, Tom, Mike, Betsy, and have a good night.

Charles Haff, Craig-Hallum.

Thanks for taking my follow up questions. Regarding the foreign exchange hit of about 1.5%, is most of that following in the orthopaedic segment or is that spread in some of the other areas?

No, it's predominantly all orthopaedics.

Okay thank you, and then the operating cash flow guidance for 2015 of $80 million to $100 million, is a fairly wide range, and I know on the sale side, you are kind of guiding people down to the lower end of the posted guidance. Should we think about the operating cash flow guidance as we should be thinking more in the low range there, or is that range still valid in any revenue range scenario?

I think that range is still valid. In the revenue range scenario one of the factors that also, as Tom indicates, we have large customers that also try to manage their cash flow at the end of the quarter and we can have someone hold up on an invoice to pay us January 3 rather than December 31st. It's a $20 million payment.

So we provide that wide range simply because our customers -- we make component parts, but we aggregate them into a big shipment and then we ship them all at once and, to Tom's point, they can hold up on the shipment and they can take an invoice and hold up and pay it in 35 days rather than 30 days or even sometimes 45 days, and it materially impacts our cash flow. That is the main reason why we give that type of range because we are impacted by those type of moves. First two weeks of January, we collected $17 million of cash on our receivables.

So, I think, Charles, to understand it, is our ortho business the translation effect on FX is mostly top line, because we obviously predominantly sell in euros and our expenses are in euros, so we're naturally hedged down through the P&L and into the cash flow statement. So if you think of it that way, in light of Mike's comments, we structured it so that it's efficient.

Okay, and then my last question is on NRE revenues. You had $9.1 million in 2014. Could you help me understand the NRE revenues and where they fall in your reporting segments? Are these revenues that you receive, are they really high margin relative to your other businesses since it's all service, or how should we think about NRE from a margin perspective?

NRE, for our Greatbatch Medical segment, and that's where you mostly find it, is a reduction to our RD&E expenses, so it's a cost reduction for us. However, in our portable medical, in our CCC Medical, they do price their design services, which often times the customer owns, and that's the difference in the Greatbatch Medical model, and that would be in revenue, but we call that engineering services. So we had about $9.1 million of NRE reimbursement in 2014, and we anticipate being in that range for 2015 also. And helping us of our customers, means they are coming to us for us to design new products for them in the future.

Just for clarity, Charles, it's a business practice choice that we negotiate with our customers because they would like certain costs in the development that we incur to be subsidized and paid in advance rather than us amortizing it, and the cost of the product going forward. That's all.

I see, that makes sense, thanks.

That concludes today's question and answer session. I would like to turn the call back over to Betsy Cowell for any closing remarks.

Thank you. I would like to remind those of you that are on the call that both the audio as well as the visual portion of our discussion today will be archived at our website at www.Greatbatch.com and will be accessible for the next 30 days. Thanks a lot for the questions and joining us and have a good afternoon.

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