Integer Holdings Corp (ITGR) 2015 Q3 法說會逐字稿

Welcome, everyone, to the third-quarter 2015 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 and involve a number of risks and uncertainties. These risks and uncertainties are described in the Company's annual report on Form 10-K. The statements are based upon Greatbatch Incorporated's current expectations, and actual results could differ materially from those stated or implied. The Company assumes no obligation to update forward-looking information included in this conference call to reflect changed assumptions, the occurrence of an unanticipated event 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 of Finance and Treasurer, Betsy Cowell. You may begin.

Hello, everyone, and thank you for joining us today for our third-quarter 2015 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 this presentation which you can access at our website, www.Greatbatch.com. Once Tom and Michael have completed their presentations, we will then open the call up for Q&A session. I am available to take further questions following that call.

Let me now turn the call over to Tom Hook.

Thank you, Betsy, and good afternoon to everyone joining the call today. A few days ago, we achieved a significant milestone for Greatbatch, having successfully consummated the acquisition of Lake Region Medical. We are now one of the largest medical device outsource manufacturers in the world serving the cardiac, neuromodulation, orthopedics, vascular, advanced surgical and portable medical markets. Welcome to all our new associates to the Company.

Our mission is to enhance the lives of patients worldwide by being our customers' partner of choice for innovative medical technologies and services. Working together, we will provide innovative products into the markets we serve, which will certainly provide strong growth for our shareholders and associates. Additionally, we will change the name of our Company to Integer Holdings Corporation, subject to shareholder approval at our annual shareholder meeting in 2016. We will provide innovative technologies to customers through our global Greatbatch Medical, Electrochem and Lake Region Medical brands. These brands have strong recognition with our legacy partners to drive organic growth in our core business.

The acquisition closed Tuesday, and we announced the new business and executive organizational structure during a two-day integration meeting with the new executive leadership team. Lake Region Medical had a strong finish to the third quarter with double-digit adjusted EPS.

The forecast for the remainder of the year is in line with expectations. This transformative acquisition benefits all stakeholders. The combined company will have unmatched ability to serve customers and help patients worldwide, being one of the largest medical device outsource manufacturers in the industries we serve. Our strategic imperative remains unchanged: executing our strategy for profitable growth. And we are committed to making significant investments to integrate and optimize the combined company global operating footprint.

We continue with a positive momentum for the spin of Nuvectra. We successfully completed our pre-PMA inspection and anticipate approval in the fourth quarter of 2015. As announced in July, Scott Drees will lead Nuvectra and Joe Miller will be the Chair of the Nuvectra board. We expect the spin to occur shortly following pre-market approval of Algovita. We are confirming our revenue guidance that was previously announced in early October.

Turning to the third-quarter financial results, we remain optimistic about the future growth of Greatbatch. Our customer relationships remain strong, and we are positioned to achieve our revised 2015 revenue guidance. However, for the third quarter we were disappointed with our revenue performance, which was below expectation and resulted in quarterly metrics below those attained in the third quarter of 2014.

For the third quarter of 2015, sales aggregated $146.6 million, or negative 13% on an organic constant currency basis. Our disappointing results of adjusted diluted EPS for the quarter of $0.58, which is $0.17 below prior-year Q3, was driven by lower revenue volume across most of our product lines.

Over the next few slides, I will discuss our revenue performance, and then Michael will provide additional comments explaining our adjusted EBITDA and adjusted EPS performance. We also want to point out that reconciliations of adjusted diluted EPS and adjusted EBITDA can be found in the tables included in our press release. We will discuss revenue in more detail in the following slides.

For the quarter, revenue totaled $146.6 million, or negative 13%, on an organic constant currency comparison basis. We had several discrete factors impacting our financial performance in all the product lines, which I will explain over the next few slides. We remain confident in our future because of our deeply rooted customer relationships that remain unchanged during the quarter.

Cardiac neuromodulation revenue was $72.8 million, including inter-segment sales, declined 15% when compared to the third quarter 2014.

In the second quarter, we worked closely with our customers to ensure inventory positions were adequate to facilitate summer holidays and facility shutdowns. In the current quarter we saw end-of-life products runoff at a higher pace than forecasted, which was further augmented by customers tightly managing their inventory levels and pushing some product launches into future quarters. Our success in neuromodulation continues, and this is one of the key drivers of our fourth-quarter performance. We are confident in our ability to continue to deliver innovative technologies to serve our customers now and in the future.

Orthopedic product line sales of $27.8 million declined 7% on an organic constant currency basis when compared to the same period in 2014. When comparing the quarterly growth in 2015 with that of 2014, we were up against a tough comparable because of 2014 customer launches of approximately $4 million. We expect orthopedics growth to be in the high single digits for the total year, and we also have several new organic products in development for introduction in 2016.

Normal medical sales totaled $17.2 million, flat with third-quarter 2014. Manufacturing transition to Mexico was on track, and initial production was slated for late in the fourth quarter. Some customers are building safety stock for the product line transfers, and which will enhance our Q4 performance and depress our first-quarter 2016 performance.

Vascular product line sales of $14.1 million were 5% below Q3 2014. As expected, end-of-life unfavorably impacted sales again this quarter. Several new products will be introduced in early 2016. Our product line transfers to Mexico -- our Mexico operation position us to be competitive in both new and existing markets.

Energy, military and environmental revenue of $12 million is 37% behind the same period of 2014, principally attributed to the persistent energy market correction. In addition, we experienced our customer-depleting inventories this quarter further dampening results. Our development programs such as wide-range and high-temperature batteries are on track, and we continue to receive favorable input from our customers as Greatbatch innovates in areas to improve our customers' efficiency and exploration.

I will now turn the call over to Michael to cover financial results and 2015 guidance.

Thanks, Tom, and good afternoon, everyone. My comments today will include our operating performance, balance sheet metrics, and I will conclude with a discussion of 2015 guidance, which we are reconfirming.

Before I begin, I want to take a moment to discuss our updated metrics. Beginning third quarter 2015, Greatbatch will report adjusted diluted earnings per share, excluding amortization of intangible assets. This change aligns Greatbatch metrics with other medical device companies.

Secondly, adjusted EBITDA has been refined to exclude stock-based compensation from this metric. A table from the earnings release outlines GAAP EPS and EBITDA to adjusted diluted EPS and adjusted EBITDA for both the quarter and year-to-date September.

Turning to page 19, you have a summary of the financial results. As Tom discussed, sales for the third quarter aggregated $146.6 million and included $2.5 million negative impact from foreign currency exchange rate fluctuations, due to strengthening US dollar versus the euro as compared to 2014. Gross margins expanded in the quarter to 35.2%, driven by ongoing productivity programs, lower performance-based compensation and, to a lesser extent, favorable mix. Adjusted diluted EPS totaled $0.58, which is a drop of $0.17 from the $0.75 reported adjusted diluted EPS in Q3 2014. The decrease in revenues period over period accounted for $0.19 of the reduced adjusted diluted EPS.

Throughout the year, we have invested in two strategic areas: Nuvectra, and product development. We also implemented various functional spending controls and lowered our performance-based compensation. The net result is a negative $0.02 impact on our adjusted diluted EPS.

Tax results had a positive effect of $0.07 in the quarter. The quarter-to-date adjusted tax rate was 13.6%, driven by favorable results from various state and federal tax provisions, and tax reserves associated with research and development tax credits.

Page 20 outlines key balance sheet metrics. Both adjusted EBITDA and return on invested capital, ROIC, fell below 2014 total-year results due to lower operating income. With the projected fourth quarter, we believe we will be in line or slightly ahead of 2014 results. Days sales outstanding improved five days on a comparable quarter-over-quarter basis due to sales volumes.

We forecasted higher inventories to support the Q4 revenue increase and the product line transfers to Mexico. We expect inventory days will decrease to historical levels by the end of the year. CapEx of $31.3 million through September 2015 reflects investments in our manufacturing facilities, principally Mexico and France. We forecast total-year CapEx of $40 million to $50 million.

Slide 21 -- we secured $1.760 billion for the financing of Lake Region Medical, and it's outlined on slide 21. We have clear line of sight to the committed acquisition synergies and believe we are able to service our debt and de-lever the Company to 3.5 to 3 leverage over the next two to three years.

Turning to slide 23, we are confirming the guidance of $685 million to $695 million revenue and adjusted diluted EPS on the new basis of $2.96 to $3.06. We believe we'll be at the lower end of the adjusted diluted EPS guidance. This guidance does not include the impact of Lake Region Medical acquisitions. At the end of 2015 we will include two months of results from the acquisition and associated interest expense. We expect the adjusted diluted EPS for the year to be 5% to 10% dilutive due to the incremental interest expense and approximately 5.1 million shares issued in connection with the transaction. However, we continue to expect the acquisition to be double-digit accretive in 2016.

To conclude, we are confident in our ability as one of the largest outsourced medical device manufacturers. We will continue to create shareholder value by enhancing the lives of patients worldwide by being our customers' partner of choice for innovative medical technologies and services.

I will now turn the call back over to the moderator for questions.

(Operator Instructions) Glenn Novarro, RBC Capital Markets.

Tom, you talked about confidence that the CRM business would come back in the fourth quarter, but several of your customers have delayed orders because launches have been pushed out. So, what does it give you -- what gives you the confidence that these orders are going to come back in the fourth quarter given that there may with your customers still be uncertainty in the first half of next year as to when these products launch? Thanks.

Certainly, Glenn. For the fourth quarter of 2015, we've just got better visibility for our project launches because the customers have turned in orders and the deliveries are scheduled in the current quarter for those launches. So we are already in manufacturing, building those products to support their launches.

However, to your point, on launches that were originally planned on Q3, we need to be careful that all those launches weren't just moved to Q4. Some are moved to 2016, as you are referencing. It's also important to note that because in our cardiac rhythm management also includes neuromodulation for our revenue results. We are on a significant ramp in partnership with Nevro commercialization, and that will be obviously driving success with regards to fulfillment of their requirements and their launch plans. So the combination of those launches, both in cardiac rhythm management and neuro, are timed for the fourth quarter. But there are some that have gone into the 2016, and we've planned for that accordingly.

Just as a follow-up, for the orders that you've just received and that you plan on delivering this quarter, is there any way that the customer can cancel at the last minute? Or these orders are in place, they are going to be delivered and that's why you are feeling so confident.

I think there is always an opportunity for us to work with customers on the timing of deliveries for launches. But I would say that launches are very regulatory-driven, and they normally ramp their productions based on the predicted dates of those approvals. But because we do maintain inventory -- finished goods inventory between us and our customers, they do have the ability to plan for unplanned inventory changes. That, we don't see that. We are in close coordination with our customers based on our year end, which is very typical of us traditionally. So we don't see those effects at this time. But obviously anything is possible, but I think it's a very low probability.

Okay, great. And then just one last question. The energy piece now is a much smaller part of the Company. Is this a piece that you would think about divesting? Is it even possible to divest in this end market? I was just curious as to how energy now fits into the strategy. Thanks.

I think our Electrochem-branded business, which is mission-critical batteries for both industrial as well as medical applications, has been a good growth business for us historically. But you are correct. In the energy markets, the energy markets are undergoing a lot of pressure right now, which has retracted that business. Technologically being experts in the battery business across medical and industrial areas, we've got a commitment to continue that battery technology. We do cross-pollinate the technologies between our medical and industrial areas of the business and also from a quality systems perspective. We see great leverage across those two battery franchises, and we have no plans actively to go out and see the divestiture of Electrochem. We plan on leveraging that capability in energy transmission both for the medical brand and, in particular, in portable medical power applications. And we also see a great future for the leveraging of that technology and engineering capability for wireless energy transmission for a partnership with electricity in the future. So, no plans for that. Only plan is to leverage the technology across medical and nonmedical brands.

Okay, great. Thanks, Tom.

Matt Mishan, KeyBanc.

I was hoping you could help me a little bit with my model. We're obviously going to try and combine the two companies and put out a 2016 number and a 2017 number combined. What do you -- I was just hoping for little bit of a base. What do you expect for full-year Lake Region Medical sales and EBITDA for 2015 now that we are about 10 months in?

For 2015, you said?

Yes, for this year.

Their revenues will be between $800 million and $805 million, and we expect their EBITDA to be around $150 million.

Okay. Thank you. That's helpful. What do you think full-year free cash flow can be for the combined company going forward? I think obviously with the leverage, it seems like that's going to be pretty important.

We are in the process of working on our 2016 budget and those type of plans. If we perform around historical levels, then we should be able to generate free cash flow in the $150 million, $170 million kind of range.

And would you prioritize debt reduction over additional M&A? Is that the first use of cash at this point?

Yes.

Yes. We have no plans for additional M&A in 2016. Our focus is to integrate and drive synergies for the Lake Region Medical acquisition. And that's our primary focus: drive that core business and integration going forward, and to deliver using our free cash flow.

Okay. And then moving on to CRM, I was just hoping you could help me understand maybe what has changed with how some of your customers are managing their inventory. And then also, why end-of-life programs are impactful for -- such an extended period of time.

With regards -- I'll kind of do the inventory question first, Matt, and then move on to end-of-life. First on inventory management, we contractually maintain with customers inventory levels to support their operations as well as risk management. At any period of time, customers can actively manage the level of inventory that we have contractually held or they hold, and rely on lower levels of inventory based on their sales going down or their risk plans based on our performance which has been extremely good, being at a level that allows them to have less inventory in the channel.

That tends to -- when they make those changes, that tends to have a one-time effect to us on those inventory changes because they tend to go down based on our strong performance. And it's really only when a launch would occur where inventory would flow back into the system and would elevate that level of inventory between us and our end customer.

So, we haven't won any new business or lost any new business with regards to this. It's just purely how much safety stock they desire us to hold in the channel between us and them. And it varies extensively by product line, but it can be a material amount of money as we've seen some of the effect in Q3 via the reduction of those inventory levels.

The second question that you had was regard to end-of-life. And as we have messaged throughout 2015, we have predicted that there is a couple of end-of-life projects that have been happening at the same time, which is unusual. And the simultaneous nature of those occurring at the same time of several launches occurring, the timing of those are a little offset. The end-of-life's come in earlier than we had anticipated, and the project launches for the new product introductions have come a little later than anticipated, and it's left us with a gap.

These are unrelated product lines. In one case, unrelated customers. And just the timing of those phase-outs of the technology and the launches, the commercial launches of those new products have just been displaced. So, while we have done a great job of planning for research development and product development, the changeover of those product lines in our manufacturing plants, the customers' demands and their end approvals to pull on those launches have been pushed out, and it's created a gap for us.

But based on those accruals having been received, the launch is now ongoing. We're confident that these new product introductions will ramp in Q4 into 2016, and the end-of-life effect that we've seen in 2015 will subside. As we get to the end of the year and we move into 2016, those end-of-life effects that happened quarter over quarter will go away now. So the year-over-year comparisons will be on a more trued-up basis.

Okay. Yes, that was very helpful. Thank you very much.

Charles Haff, Craig-Hallum.

I had a question regarding Nuvectra. Congratulations on the pre-PMA inspection being completed. I was wondering if there are any outstanding items. Or were there any comments, anything preventing or that you need to respond to before the ultimate approval?

Not at this time, Charles. First of all, thank you. We know it's a big event. It's been two years in the making. It's the submission to get to the point of past -- passing the PMA inspection, so we are very excited about that. As you know, we've already received an approvable letter from the Office of Device Evaluation for Algovita. So, it was subject to the passing of that inspection, which we have done. Now, we end up having to wait for that process to finish for the formal completed approval. There are some administrative steps, but they are more administrative in nature that have to be completed to get the formal approval. And we will work in conjunction with the FDA to get those. So we don't see any roadblocks, and we are anticipating the timing of this to be in the next several months before the end of the year. And then the Board of Directors will be deliberating and finalizing the spin-out of Nuvectra post that PMA approval.

Okay, great, and congratulations for that. On portable medical, as you mentioned, you expect 4Q to be strong and first quarter to be weak due to the stocking. I wondered if you can kind of quantify what level of stocking you would expect. Is it going to be around the $3 million to $4 million range? Or any help there you can give us?

Yes, I think what you're going to see from an FX, Charles, is about $5 million. And it literally is just last time production is Beaverton operations that they would source from that and accept shipment on. And then we would start up formally in a qualified status the New Mexico facility and start ramping production there. So it results in about a $5 million delta from your modeling perspective.

Okay, great. Thanks for that. And then on cardio and neuro, your comment in the press release, expecting significant improvement. You had a very easy year-over-year comparison there in the fourth quarter with negative 19% in fourth quarter of 2014. So, significant improvement. You can kind of drive a truck through that.

But how should we think about that? $69 million in the fourth quarter of 2014 and $72 million or $73 million this quarter. Any more specifics that you can give us? 20% growth? 25% growth? How should we think about this?

Well, I think, Charles, if you look at what our guidance is for the total year that we provided on a revenue basis and then you see where we've given some additional information on DME vascular and orthopedic markets, you can derive where cardiac and neurology is going to come. It's very neuro-driven. But also, we see the inventory effects from cardio rhythm management do not reoccur.

So, from an overall number standpoint we're not going to provide the specific guidance just for that one product line. But if you look and just extend the performance we've had in the other areas, you'll be able to derive it quite easily. And I think, based on that, what you'll find is that it significantly improves the fourth quarter to be able to deliver around the revenue guidance range that we've provided for the overall Company.

Okay. And on military and other, historically the last couple of years you've had a nice uptick in the fourth quarter of maybe $1 million or $2 million versus the third quarter. Are you expecting that again in 2015?

I think we will see from an energy, military, environmental standpoint better performance in the fourth quarter simply because the customer inventory rationalization that's occurring is -- we were already absorbing a lower growth rate in those markets. But in the third quarter we also absorbed inventory reduction for customers that wanted to rationalize their inventories out. That rationalization of inventory is not planned to occur. There is limited opportunity for that to occur in the fourth quarter. So based on that, there would be a recovery in the fourth quarter back to normalized patterns because you would just have it -- you won't have that inventory effect that we experienced in Q3.

Okay, thanks. I have some Lake Region questions, but I'll hop back in the queue.

Jim Sidoti, Sidoti & Company.

I just want to confirm, based on the presentation, it looks like the blended interest rate for the $1.9 billion will be between 5% and 6%. Is that correct?

Yes, it is.

All right. And can you tell me what Lake Region Sales were for the first 10 months of the year?

For the first 10 months of the year?

Well, at the time you closed the acquisition.

I don't have -- we are looking it up right now. We'll post that for you in a little bit. A little over $600 million.

Okay. So you are expecting about $200 million in the fourth quarter from Lake Region.

No, that's nine months. I don't have 10 months. I'm sorry.

We won't have 10 months for another week or (multiple speakers).

Won't have that for another week or so.

Okay, so you are expecting -- all right, somewhere around $150 million or so for those two months.

Yes. Basically we'll expect for the last quarter of the year right in that $200 million range.

Right. Okay. And when you say that you expected guidance -- or you expected the acquisition to be double-digit accretive, is that accretive from where you would've been for 2016 had you not done the acquisition?

Yes, it is.

Okay. And at this point your 2016 looks like it would have been in line with historical growth rates?

When you say in line with historical growth rate -- oh, our 2016, Greatbatch?

Yes. It would be similar to historical performances.

Okay, all right. Thank you.

Matt Mishan, KeyBanc.

I just had a couple of follow-ups. First on CRM -- and I know you guys don't like to talk about which platforms you are on or the level of content, but it just seems like some of the problems are around delays in kind of MRI-safe devices. How should we think about your exposure there? Do you have -- do you think you have more or less content on those devices than you would have on non-MRI-safe devices?

We think we have content across the product portfolio with customers consistent with historical patterns. The one exception would be is just one end-of-life technology that is no longer used in the device for the customer that we were selling that to. But whether those are MRI or non-MRI, you remain consistent to historical patterns of cardiac rhythm management.

One of the -- one of the significant differences for us going forward in our cardiac rhythm management and neuromodulation revenue line is going to be the effect of the emerging neuromodulation sales, especially as we move into the fourth quarter and also into 2015 and into the future. And we expect only to enhance this post the spin out of Nuvectra as they are moving to their commercial launch phase.

All right. And then in the fourth quarter, implied in your guidance is -- and this would be excluding Lake Region -- would be a significant sequential jump in operating margins. And I'm thinking it's kind of mid- to high teens. What gives you confidence that you can get to that level? Because I don't think you've ever been there before.

It's primarily leveraging volume. But, you know, once you get above a certain volume, it's falling through to the bottom line at a pretty good rate.

And I think additionally the other effect would end up being mix is that as we are recovering in the cardio rhythm management and neuromodulation line based on the product launches we have there, have a very healthy margin for us, and that ends up driving the ability to get higher levels of operating margin. And we expect also with the spin-out of Nuvectra in 2016 that we'll be able to continue to expand that operating margin based on the nature of the spin and research development and engineering expenses that we have highlighted will be externalized with that spin.

And to a smaller degree, the start-up of production in Mexico is obviously at a better margin than what it was at the plants we were shutting down.

Okay. Thank you. And this last question, I was just hoping you can help me walk through the math on the 5% to 10% dilution in the last -- with two months of sales coming in from Lake Region.

We can post something that will give you a walk on that rather than try to do that now. But it's a combination that they are profitable. But we will incur interest expense. We will incur additional interest expense for the debt in general, incur additional interest expense for unwinding some hedges and other things that are going on. And then last but not least, issuing the 5.1 million shares that causes the dilution in the fourth quarter. When you do that over a total year, we have time to cover the 5.1 million shares.

Okay, got it. Thank you.

Charles Haff, Craig-Hallum.

Thanks for taking my follow-up questions. I'm wondering if you could share with us how the reported revenue segments may look in your presentation in the fourth quarter. Will you be spiking out Lake Region separately, or will you be blending it in with Greatbatch?

We are examining the GAAP guidance on that, and we will be making a recommendation to our Board of Directors at our meeting in December, and we'll decide that reporting at that time. So at this time I don't have an answer for you.

Okay. But will you help us as we are moving forward for the next few quarters, showing us the separation between the Lake Region and the legacy Greatbatch, or is it too early to say?

Well, as you know, we'll have to file the historical pro formas on Lake Region 71 days after the transaction close. So in early part of 2016, we will be making that filing, and that will give you some historical -- three-year historical Lake Region data. And then the methodology of how we provide that data going forward, we're still working on. But we are very cognizant of the fact that our shareholders need to be able to understand what's going on with the business, so we will do it in a fashion that should be informative and allow us to communicate what's going on with our Company.

Okay. Thanks, Mike. Then my last question is more qualitative. Now that you've been looking at Lake Region for a little while now and looking under the hood, I'm just wondering what new things that you've found as you do your due diligence.

Certainly. Well, we are ecstatic we've picked up a tremendous company. They have exceptional operating management. Clearly, from what we've communicated with regards to our combined executive team, there is a blend of both Greatbatch as well as Lake Region medical management in the new combined executive team. They are as good as we have historically been, if not better, in the manufacturing areas and technology. We see very complementary to our overall product portfolio.

And additionally, we see our ability to serve our current customers very comprehensively. I believe also we are very confident now from the synergy and integration plan with respect to getting a clear path to merge the companies together, merge the cultures and also squeeze out synergies of the deal.

So I think we are retiring a lot of question marks that we've had, and what we're finding is a lot of good news and a lot of good performance that gives us a lot of confidence to leverage the two companies going forward. And we are off to a very quick start. We've been doing the synergy planning for the last several months, and we've been doing the integration planning for the past several months. So we have a head start. And upon the deal closing on Tuesday, we've spent the week planning out the rollout of both the integration and the synergy planning to take advantage of that across the combined organization. And so we are off to a solid and quick start, too. So, only good news, Charles.

I would also say we have found a platform of information technology tools and capabilities that are quite well done and very leverageable so that the integration process is going to go faster and, I think, also yield an end result that we are going to be very pleased with. So, we found an information technology platform and tools that we are very pleased with.

Okay. And just following up on that comment you made, Tom, about superior manufacturing and technology in some cases with Lake Region Medical versus legacy Greatbatch, there's considerable margin difference between the two, about 18% for Lake Region. On an adjusted EBITDA, 24% or so for Greatbatch.

So I'm just wondering, with the superior manufacturing technology pieces that Lake Region has, is it just a mix issue that gives Greatbatch the higher adjusted EBITDA margins with exposure in CRM and neuro? Or is there something else that maybe explains those dramatic margin differences?

I think it's probably clear that, as someone pointed out, as we have done our communications on this transaction that our views on intellectual property around products and processes are different. From an historical perspective, Greatbatch over the past decade in particular has done a lot of development of innovative core technologies at the discrete product and materials level. We've integrated that into systems, and we are enjoying the fruits of those labors.

In addition, we've been very aggressive that cost out across our manufacturing base in particular to invest in large-scale manufacturing consolidations. The combination of all of that investment that the shareholders and our Board of Directors have supported has allowed us to drive margin and cash flows that are higher. But, frankly, that's what we see the investment opportunities that we see in Lake Region going forward to invest that capital and to be able to drive those synergies in our integration plans to bring up those margins and to serve our customers more comprehensively by driving value to them as well.

So, we see that that execution model that's led through innovation and investment has been quite successful for us over the past 12 years. And we know through our partnerships with the Lake Region managers that we've been working with, they also see that same opportunity out there with the investments we plan on making in the synergy plans. And that's how we are going to walk that math to get to the -- to harmonize those.

Great. That's very helpful. Thanks, Tom. Good luck.

Greg Chodaczek, CRT Capital.

First of all, like everyone said, congratulations on the FDA inspection. I know it's been a long time coming for most, probably more for you guys than us. In terms of Lake Region Medical and synergies, a lot of questions have already been asked. But a few months back, you talked about a certain amount of synergies dollar-wise. Are you more comfortable, less comfortable now that you've seen the business for another two months? Can you speak to that?

I think we are more comfortable because we have more information and we've retired more questions, Greg. It is simply we've committed to providing synergies in year one of $25 million; and by year three, $60 million on an annualized basis. To -- because we obviously know there's a funnel of opportunities there that are greater than $25 million and $50 million. We are going to be working along with potential synergies to make sure we can produce those commitments.

But now that we've received antitrust approval, the deal is closed. We have the active involvement of both management teams on a completely unrestricted basis. We very rapidly retired a lot of risks and are able to share data on an unrestricted basis, and our confidence level is only higher post the close of the deal. And I would think with the two months of head start that we have to get going in advance of 2016, that's a significant leverage point that we'll be able to get into 2016 and with a very aggressive basis, and use the next couple of months to get ahead of the curve we set forward. So I'm very confident.

Excellent. And in terms of the cardiovascular business, once the -- now that you are combined, are there large customers that you did not have that Lake Region Medical had for that segment of the business?

That's an excellent question. And just as a reminder, Greatbatch and Lake Region had very little product line customer overlap. So our technologies and the transaction are extremely complementary. There are customers that are similar, but we've just been selling them different products. And we have discovered very quickly there are individual, discrete technologies we are selling to customers for applications in which we are doing different pieces of that for the same company. So, we are very rapidly getting the line around our customer engagements to provide them more comprehensive offerings. So that's going to present some really nice opportunities for us to serve our customers on a more comprehensive basis, which we are pretty excited about.

And really until a week ago, we have not been able to share that data because of antitrust. So we have learned quite a bit in the past week with regards to how deep our partnerships go with companies and just how far we can leverage that into new areas where we haven't enjoyed business before.

And that's kind of where I'm going with this, Tom. The synergies you talked about were expense synergies, I'm assuming. And I'm also assuming, just like hospitals want from the end customers, you guys now can use bundled pricing almost to get more out of these accounts that you have.

I think you are correct is that all of the synergies we're committing to are costs synergies, and we've specifically said that while the strategy of Lake Region and Greatbatch coming together is to drive the long-term revenue synergies of more comprehensive offerings to our customers, we are counting on none one of those synergies in terms of our guidance with regards to profitability for this deal.

The reason why is simple -- is because while we readily see these opportunities immediately as actionable in 2016, we know that because of regulatory approvals can take several years, as we have just experienced with projects like Algovita. We know those synergies largely will come out in years four and five, so we've specifically not provided any guidance or color with regards to that.

However, that is the underlying strategy of the rationale for the Lake Region Medical and Greatbatch combination is to have those comprehensive offerings and be a more holistic provider into customers in the medical device outsourcing industry. Because that is where the real leverage comes in this transaction is to be able to do more for our customers at all levels in their business to drive their business faster.

And last but not least, I know orthopedics as a percentage of revenue is going to go down now with the combined companies. But as you look out in the orthopedic business, are you getting at -- receiving any pressure from your end customers based on what Medicare is doing with changing it -- with reimbursements in terms of knees and hips? And I'll stop with that.

Certainly. As we receive unending price pressure from our customers across all product lines, and we worked very actively with them to partner on how to drive price productivity for them based on continuous improvement projects, which we are very successful both in Greatbatch and Lake Region to do. Be very careful that Lake Region Medical also has a very successful orthopedic product line that they run in their advanced surgical business.

And it's -- while that is more focused on areas other than the hip and the shoulder where Greatbatch has been traditionally strong, the combination of our orthopedic product category of the combined companies will still be very significant and somewhat consistent with where we are today within Greatbatch. We'll provide those breakdowns in the future on a more specific basis. It's just that Lake Region traditionally has been in different areas of recon and spine than Greatbatch has been focused on. And we'll have to reframe our combined orthopedics business in the future to provide more clarity on how comprehensive we are.

But, again, because orthopedic customers tend to be multimodality within orthopedics, we see that as a great leverage point. And we expect while those comprehensive relationships provide us with business uptick opportunities, undoubtedly the nature of those negotiations and transactions will also provide price pressure for customers as it inevitably does with any customer.

Thank you, Tom, and congratulations again.

Glenn Novarro, RBC Capital Markets.

I had a follow-up on Nuvectra. You'll go to the Board toward the end of the year to get approval on the spin. Is the key to the Board approving the spin -- does it come down to valuation? And what if the Board does not agree with the valuation? In other words, is there a chance that the Board does not approve the Nuvectra spin? Thanks.

Certainly, Glenn, is -- I think that we have been clear that the key event for the Board has been waiting for with regard Nuvectra spin is the PMA approval on Algovita. We've been very diligent since the announcement of the intention to evaluate the spin at the beginning of the year that the Board has formed a special committee to review this. We -- the Board has engaged an investment bank to provide guidance with regard to the valuation of this. The work has continued very smoothly. We've retired a lot of the concerns that you have referenced.

And while the spin has not been finalized or formalized in terms of its approval, we don't see those being impediments to the spin occurring based on the work that's been done, which has been very thorough. And while there's some administrative work left, the last major milestone that was really going to be determining the timing and the final approval by the Board would be the actual PMA being granted for Algovita. And then that spin is programmed to occur shortly thereafter.

So, would the timing of the spin, then, be probably -- do you think it will fall into January versus the end of this year?

We have to make -- obviously with the timing of -- we can't control the timing of when the FDA provides that notification to us based on that. As long as it isn't going to compete with holidays, we would have to just avoid that potential for occurrence. It would just be a question of following the typical spin-out timeline that any company would have. But having prepared to for this over the course of the year, we think that can be a matter of weeks based on the PMA approval being granted. So we think that timeframe is fairly short. But we wouldn't do it over a holiday period; we would avoid that if that became a conflict.

Okay, great. Thanks, Tom.

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

Thank you, Robin. I would like to remind all of you that are on the call today that both the audio portion of this call as well as the slide visuals will be archived on our website and will also be accessible for the next 30 days. Thank, everyone, for joining us, and have a good evening.

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