Integer Holdings Corporation

I would now like to turn the call over to today's host, Corporate Controller and Treasurer, Mr. Marco Benedetti.

Please proceed.

Hello everyone and thank you for joining us for 2011 fourth quarter earnings call. With us today are Thomas J.

Hook, President and Chief Executive Officer and Thomas J. Mazza, Senior Vice President and Chief Financial Officer.

In terms of today's agenda, Tom Hook will start us off with a few brief comments regarding our fourth quarter results, and will then provide an overview of our 2011 accomplishments and strategic focus going forward. After that, Tom Mazza will review our financial results and guidance for 2011.

We will then open up the call to Q&A. As we have done in the past we are including slide visuals that go along with this presentation, which you can access on our website at www.greatbatch.com.

With that let me now turn the call over to Tom Hook.

Thank you, Marco and welcome all of you who are listening to our call today. We are pleased to be able to share with you our results for the fourth quarter, which marked the completion of a successful year for Greatbatch.

During the quarter, revenue was $141.7 million, which represented an increase of 6% over the prior year. This increase was driven by our diversification strategy and included 28% Vascular Access and 27% Electrochem organic growth, which offset a 2% decline in cardiac rhythm management.

Also noteworthy, was that the current quarter revenue included approximately $3 million of medical device sales and $2.5 million from the acquisition of Micro Power Electronics, which we completed in December. The strong revenue growth did not translate into decreased operating profitability during the quarter as the results continued to reflect the pricing and mix structures we are experiencing as long as our decreased spend in connection with our medical device strategy, which impacted both SG&A and RD&E.

However, we continue to make significant progress in developing the complete medical devices for our customers, which I will highlight to you in more detail in just a few moments. These medical devices will be one of our growth drivers in the future and a critical key to the long-term success of our company.

Despite these pressures on our profitability we were still able to generate solid diluted earnings per share growth for the year, which was up 11% on an adjusted basis and it was ahead of the guidance that you provided at the beginning of the year.

I would now like to devote the remainder of my prepared remarks to reviewing some of the highlights for 2011 and provide some commentary for our strategic focus going forward. A little over 5 years ago we embarked in a 3 pronged strategy to elevate the growth and profitability of the company.

This included growing and diversifying revenue, driving operating performance and delivering innovative solutions to our customers. This past year highlights the importance of these imperatives, which came together to help us to achieve our solid operating results despite the global headwinds, which don’t appear to be subsiding anytime soon.

With regards to growing a diversifying revenue, despite a pronounced slowdown in the global cardiac rhythm management market we were able to grow total company revenue 7% or 5% on a constant currency basis. This growth was the direct result of the product lines we acquired back in 2007 and 2008 as well as the medical device initiatives that we completed over the last 4 years.

More specifically on a constant currency basis for 2011 our Vascular Access, Orthopaedics and Electrochem product lines have increased 19%, 11% and 9% respectively significant growth by any standard.

As a result, CRM revenue accounted for just 53% of total sales during 2011 and now the addition of Micro Power to our Electrochem business is expected to contribute less than 50% of our revenue in 2012. This is a significant shift from the 90% level in 2004, when I joined the company.

Furthermore as we continue to grow these non-CRM product lines both organically and through targeted acquisitions and with the commercialization of our medical device pipeline over the next several years, we expect a concentration in CRM markets will continue to diminish with an ultimate goal of having CRM accounts only one third of our revenue within the next 5 years.

Driving operating performance is in our second strategic focus and is the corner stone of our long-term plan to great shareholder value. The staffing our strategy is critical and without it none of our other strategic imperatives would be possible.

Without operational excellence we would not be able to manage our growth either through organic or acquisition and without operational excellence we will not have the funding resources or aptitude to design, develop and manufacture medical devices. We have a long history of operational excellence and it is one of the core competencies of the company.

During 2011 we continue to make investments in our operations more specifically near the end of the year we began implement multi-faceted plan to further expand, optimize and leverage our manufacturing infrastructure. These initiatives will take the better part of 2012 and 2013 to complete, but once finished it will leave us with a more capable and cost effective Orthopaedics business and with an infrastructure that will support the manufacturing of complete medical devices.

Innovation was another prominent focus for us in 2011. Starting to our Investor Day meeting in March we provided details and our 2-year old venture to QiG Group and along with it announced a number of new and exciting medical devices that will accelerate our growth in the coming years.

In fact, medical devices emanating from our investment in the QiG Group contributed approximately $5 million through revenues in 2011 as we began to deliver these innovative solutions to our OEM customers.

Although the aggregate revenue level was still modest, it is significant and that it represents the first medical device revenues to our company in its 40-plus year history. We continue to make strong progress on all initiatives and expect this revenue stream to continue to build meaningfully over the next several years.

Moreover you can see from our guidance we issued today significant growth from these devices is expected in 2012.

We are currently in various stages of production or development on 15 to 20 medical devices either through partnerships with our OEM customers or independently. The most significant of which is the development of a neuromodulation platform including a spinal cord stimulator for treatment of chronic pain at the trunk and limbs, which we introduced at our Investor Day as Algostim.

We are now in the final stages of development of this device and are half way through the design verification testing phase. I’m pleased to report that we are on track to make the applicable regulatory submissions on this device near the end of 2012.

As you can see from the information detailed on slide 8, we continue to achieve numerous milestones in the development of these devices despite the regulatory headwinds that we as well as others at our industry are facing. In fact this month we just received 2 additional 510k clearances on device products that we outlined at our Investor Day last March the other for Transradial Catheter Sheath Introducer and steerable delivery sheath for AF ablation.

Sales of these devices are expected to start at the second half of 2012 and have been incorporated into the 2012 guidance that we provided in our release today.

To-date I would deem the progress we have made on all 3 facets of our strategy a success especially given the macroeconomic challenges that we are facing. Our strategy has positioned our company for higher growth and profitability over the next several years and provides us multiple levers to achieve this growth namely organic, growth through targeted acquisition and growth that will come from the commercialization of our medical devices.

As we continued down the strategic path as evolving our company’s strategy doing good innovative medical devices, our main focus would be on these 3 imperatives. I look forward to updating on the progress towards achieving these goals both in 2012 and beyond.

With that let me now turn the call over to Tom Mazza for a more detailed review of our fourth quarter financial results.

Thanks Tom and good afternoon everyone. For the call today I’m pleased to review with you our results for the fourth quarter beginning on slide 10.

Fourth quarter 2011 sales increased 6% over the prior year period to $141.7 million, which was led by 28% Vascular Access and 44% Electrochem growth. Fourth quarter results included the benefit of approximately $3 million for medical device sales and $2.5 million for revenue from the acquisition of Micro Power in December 2011.

For the year, sales increased 7% to $568.8 million included the favorable impact of approximately $8 million from the foreign currency exchange rate fluctuations. Excluding the impact of these exchange rate fluctuations as well as the Micro Power acquisition organic revenue growth for 2011 was 5%.

This was comprised of Vascular Access growth of 19%, Orthopaedics revenue growth of 11% and Electrochem revenue growth of 6%. Additionally as Tom mentioned, sales for 2011 benefited from the commercialization of medical devices developed under the Greatbatch name, which added $5 million to revenue for the year.

I would like to point out that foreign currency exchange rate fluctuations only impact our Orthopaedics product line sales thus for all other product lines the sales growth rates I’m about to discuss are the same on both the reported and constant currency basis. Looking at our CRM and Neuromodulation product line in comparison to prior year, sales for the fourth quarter 2011 decreased 2% but were consistent for the full year period.

During the first half of 2011, CRM revenue included the benefit of customer inventory bills and product launches which did not occur in the second half of 2011. Additionally CRM and Neuromodulation sales continued to be impacted by pricing pressures and a slowdown in the underlying market.

As a result of these headwinds we expect CRM and Neuromodulation revenue for 2012 to be lower in the first half of 2012 but began to rebound in the second half of the year as the CRM market stabilizes.

Fourth quarter and full year 2011 sales for our Vascular Access product line increased 28% and 19% respectively over the prior year periods. These increases were primarily attributable to growth in the underlying market and market share gains.

Additionally Vascular Access revenue included approximately $2 million for the quarter and $4 million for the full year of medical device sales that were developed under the Greatbatch name. I should point out that approximately $1 million of device sales for 2011 was included within the Neuromodulation revenue line.

For 2012, we expect sales of medical devices of up to $15 million with a majority of that revenue being realized in the second half of the year. In comparison to the prior year Orthopaedics product line sales increased 3% and 18% respectively for the fourth quarter and full year periods.

So year 2011 Orthopaedics sales included the favorable impact of approximately $8 million from foreign currency exchange rate fluctuations, these exchange rate fluctuations did not have a material impact on our fourth quarter revenue.

On a constant currency basis Orthopaedics sales for 2011 was up 11% over the prior year period. These increases were a direct result of the investments made over the last several years to expand capabilities, shortened lead times and improved quality and on time delivery.

Even though we have made significant improvements in this area and are gaining market share organic growth in 2012 will remain challenging given the weakness in the underlying markets and global economic headwinds. Turning now to our Electrochem segment, fourth quarter 2011 sales for Electrochem increased 44% in comparison to the prior year and were up 9% for the full year.

Fourth quarter 2011 sales for Electrochem included $2.5 million of additional revenues for the Micro Power acquisition completed in December. Excluding the revenue provided by Micro Power fourth quarter and full year sales increased 27% and 6% respectively.

During 2011, Electrochem revenue varied from quarter-to-quarter due to the timing of various customer inventory pulls. For the full year the organic revenue growth in Electrochem was due to our increased investment in sales and marketing, which resulted in market share gains in several new customer contracts as well as continued strength in the energy markets.

As you can see from slide 11, gross profit of $44.7 million for the fourth quarter 2011 was consistent with comparable 2010 period. For the full year gross profit increased $6.8 million to $180.4 million.

Fourth quarter 2011 cost of sales includes $0.2 million of acquisition related inventory step up amortization, excluding this amortization gross profit as a percentage of sales was 31.7% for both the fourth quarter and full year 2011 compared to 33.4% and 32.5% for the same periods of 2010 respectively.

This decrease in gross profit margin was primarily due to freight concessions given to our larger OEM customers near the end of 2010 in exchange for long-term contracts and increase in performance based compensation and a lower mix of a higher margin CRM revenues.

Selling general and administrative expenses increased to $18.6 million or 13.1% of sales for the fourth quarter of 2011 compared to $15.3 million or 11.5% of sales for the same period of 2010. For the year, SG&A costs were $72.5 million or 12.8% of sales versus $64.5 million or 12.1% of sales for 2010.

SG&A expenses for the quarter and full year increased primarily due to higher legal and regulatory consulting costs incurred in connection with our medical device initiatives, higher performance based compensation and negative impact of strengthening foreign currencies on the cost of our international operations in comparison to the prior year.

Additionally, SG&A for the fourth quarter 2011 included approximately $400,000 of cost related to the operations of Micro Power. The increase in SG&A related to our medical device strategy impacted the quarter by $1.6 million and $4 million for the year and primarily related to consulting fees paid to outside contractors who are providing technical expertise on both on our device projects as well as legal fees incurred in connection with the numerous patent filings that we are generating.

Net research, development and engineering costs for the fourth quarter were $12.8 million or 9% of sales compared to $11.4 million or 8.6% of sales for the corresponding 2010 period. For the full year, net RD&E totaled $45.5 million or 8% of sales versus $45 million or 8.4% of sales for 2010.

As expected during 2011, we continue to invest resources in developing complete medical devices for our OEM customers total cost incurred in connection with these initiatives during the fourth quarter of 2011 was $6.7 million and $23.3 million for the year. This included $2.3 million for the quarter and $5.1 million for the year of design verification testing cost related to the QiG Group’s development of a Neuromodulation platform.

When combined with the SG&A expense I just discussed total cost incurred in connection with our medical device initiatives totaled $29 million in 2011 versus $22 million in 2010.

Partially offsetting these RD&E increases was a higher level of customer cost reimbursements of $700,000 for the quarter and $2.4 million for the year. As most of you are aware these cost reimbursements can vary significantly from period-to-period due to the timing of achievement of milestones on development projects.

GAAP operating income for the fourth quarter and full year 2011 was $12.5 million and $61.7 million respectively compared to $24.5 million and $69 million for the respective periods of 2010.

During the fourth quarter of 2010, the company recognized a $9.5 million gain from the settlement on the lawsuit related to its Electrochem subsidiary. Additionally, full year 2011 results reflect a $4.2 million gain in the sale of one of the company’s cost method investments.

Adjusted operating income, which excludes these gains as well as other charges, was $15.7 million and $67.6 million for the fourth quarter and year ended December 30, 2011 compared to $17.8 million and $64.9 million for the comparable 2010 periods. I would like to refer you to the appendix of today’s presentation for a reconciliation of adjusted norms to GAAP.

2011 fourth quarter and full year effective tax rates were 34.1% and 31.6% respectively compared to 32.6% and 32.8% for the same period of 2010. For 2012, the company expected GAAP effective tax rate to approximately the statutory rate of 35% due to expiration of the R&D tax credits at the end of 2011.

Net result for the above is the GAAP diluted earnings per share for the fourth quarter and full year were $0.24 and $1.40 per share respectively compared to $0.59 and $1.40 per share for the respective 2010 periods.

Similar to operating income fourth quarter 2010 and in full year 2011 periods includes the impact of the Electrochem litigation charge and cost method investment gains. Adjusted diluted earnings per share for the fourth quarter and full year 2011 were $0.39 and $1.68 per share respectively compared to $0.46 and $1.51 per share for the corresponding 2010 period.

Cash flows from operations for the fourth quarter of 2011 were approximately $31 million and $9 million for the full year. During 2011 we used a strong cash generation to repay $40 million of long-term debt.

However, in order to partially fund the Micro Power acquisition, we borrowed an additional $45 million under our revolving credit facility near the end of the year.

Moving on to 2012 guidance, as you can see from slide 13 our current expectation is that 2012 sales will be between $645 million and $665 million. This guidance assumes that our CRM and Neuromodulation will be slightly negative to flat for the year and our Vascular Access revenue will grow between 10% and 20% bolstered by the launch of several new systems and device products.

We are also assuming that our Orthopaedics and Electrochem product line revenue will continue within growth rates, that is between 5% and 15% for Orthopaedics and approximately 5% for Electrochem. Given the underlying weakness in healthcare markets as well as the tough comparables versus the first and second quarters of 2011 we currently expect revenue for the Greatbatch Medical for the first half of 2012 to be below the 2011 levels.

That rebound in the second half of the year as healthcare market stabilizing and begin to recover.

Consistent with prior years we are also providing guidance with regards to our adjusted operating margin, which for 2012 we expect will be between 11.5% and 12.5% of sales. This guidance reflects our assumption that our net RD&E spend will remain at 8.5% to 9% of sales.

Net result that we expect 2012 adjusted diluted earnings per share to be $1.75 and $1.85 per share. This is what equates to an increase of between 4% and 10% over 2011 adjusted diluted earnings per share.

In summary, we are very pleased with our results for 2011 despite the challenges that our markets and macroeconomic environment presented we were still able to exceed our revenue and adjusted EPS targets said at the beginning of the year and our reporting for additional growth in 2012. Our operations continue to generate significant cash flow, which allows us to execute on our strategic initiatives and we will continue to drive our growth in the future.

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

Tom, I wanted to ask on organic versus overall revenue for next year. What is your, what would your dollar amount be for an organic range, or said another way, what’s the contribution of I guess is primarily the Micro Power acquisition.

Brook this is Tom Mazza. The percentage that we quoted are really done at a pro forma basis assuming we had Micro Power for the full year.

And as shown within the so basically we are seeing 5% growth on the combined Electrochem entities all the other growth rates we’ve quoted there are organic growth rates.

Okay, but at a dollar amount isn’t Micro Power contributing about $60 million, $70 million next year?

Yes, starting number is about $65 million to $67 million for Micro Power.

Can you call out the spend associated with QiG in ’12?

Yes, we can. It will be in the range of it’s been the organic numbers in the range of $35 million.

30 to 35.

One more if I could. The ICD guys are cautiously optimistic that the market is going to stabilize in calendar Q2 after we anniversary the DOJ investigation.

If that’s the case, shouldn’t you guys front run that a little bit as a supplier?

I think you know obviously we tend to obviously look at a little bit longer runway on the year because we have a significant amount of safety stock between us and customers for testing purposes. I don’t think we really end up seeing quarter at quarter pervasions if there is a stabilization or recovery is dramatically, I think they are a little bit more drawn out.

So our expectation will be as we are kind of again probably for the fourth year in a row, planning on fairly flat CRM growth in the market and planning for that operationally as we align our productivity initiatives and not have a lot of push through on volume. And then we will look at any stabilization or recovery to that is an upside and then we will wait for the actual signals to come in with our first quarter results or second quarter results to validate that.

But right now we are really not expecting it or planning on it but clearly obviously we are anxious to be able to see that come through and some way to recovery of stabilization in the market but right now we really feel comfortable giving any touch of indication, our visibility to that, because we don’t really have good visibility on it.

So a quick couple of questions here. First one is kind of housekeeping, on that $15 million to $20 million adjustment you were talking about, can you kind of break that down further?

I guess I’m more interested on where that’s going to hit in 2012.

Are you talking about the other operating expense?

Yes, the $15 million to $20 million in adjustment.

You are quite right. We are starting these projects now that the Orthopaedics projects are well underway and the implementations are, I expect it to be fairly evenly spread over the year.

Right now, we are estimating approximately $5 million of that is non-cash charge and that was determined at the point in time where we no longer utilize the assets or we determine that we need to write them off.

Okay, that’s helpful and then another one quick housekeeping one, any idea on debt repayments for the year?

No, I mean we have got a lot of things we are looking at so I don’t have any idea of debt repayments currently.

Okay, and then just one last one. Can you kind of comment on the NeuroNexus acquisition and is this with this kind of augment to the launch of the Algostim is that, what kind I was reading through on the conference call there.

Sure, Charles, it’s Tom Hook. On your debt question I prefer to just pay off the revolver debt as early as possible in the year and just keep leveraging the strong cash flows that we’ve been showing operationally.

So we hope to even though we drew on the revolver debt for the Micro Power acquisition is to retire that very early in the year just by strong operating cash flows so like we’ve been able to generate last year. On NeuroNexus we are very excited about both the NeuroNexus as well as the Micro Power deals and they add significant capability to us both operationally and technically.

NeuroNexus does have a very successful electrode product line that they sell into animal research applications that we’ve picked up and one of their significant attractions of that acquisitions in working with Dr. Daryl Kipke who is the General Manager of that business has been to apply those thin film electrode technologies into technology that are used for human use.

So there is a couple of dozen highly skilled people that are at NeuroNexus to comprise that team plan prominently in both our subsequent generations of our Neuromodulation platforms as well as derivations of the current generation products like Algostim which you provide advanced features on them. So they, we wouldn’t hold up commercialization of the first generation of Algostim technologies but we definitely would be adding to it with other features that would include some of the technical characteristics that the NeuroNexus intellectual property through bias.

We will share and we believe as we are in most QiG projects we kind of keep a lot of that those ideas and innovations under the covers until we are ready to talk about them. But the NeuroNexus successes around electrode designs or applications that range from animal research all the way through applicability into humans is -- some of that information is already public and we are going to aggressively build off on that.

We are excited to have that team. Just like we are really excited to have the Micro Power team and the capabilities that it brings to the Electrochem business there both of them are really nice acquisitions for us to add capabilities and operating expansion from a revenue and income standpoint and we look for consolidating those.

NeuroNexus is going to consolidate with the QiG Group and Micro Power consolidating Electrochem Group and then as we do it normally through a tightening integration and consolidation we will drive profitability’s and cash flows after we finish those programs up.

I have a couple of questions for you. The first one is on your Orthopaedics business can you give more color on the trends that you are seeing underlying that business in 2011 the first 2 quarters were stronger than second 2.

Should we see that same seasonality in 2012?

Sure, this is Tom Hook again. I think, if we look at 2011 there is 2 forms of I think growth in Orthopaedics one is kind of growing with the trends of the market and the OEMs, which tended to be strong the beginning of 2011 and then weakened as the course of the year went along.

And then because we are a fairly small player in Orthopaedics we obviously have our own sales tempo that we’ve been able to create by working hard to win business with customers. So, you can see certainly the effect -- and obviously you’ve seen some of the competitors in Orthopaedics announced the results already, is the year and 2011 definitely from a market perspective tend to do what I call tail off in 2011.

And we tailed off with it but we are still able to maintain some stability because we are still have been successful picking up projects in Orthopaedics and it kind of offset some of that market decline. I think the story in 2012 is going to be a little bit flipped upside down I think we will see the stabilization that’s already started to occur in the first half of the year.

And I believe as you can see from our guidance is some of that market is going to come back in the second half and also we are just going to continue to execute on programs for our customers, and underlying that is the investments we’ve made and in our Indianapolis facility and if completed will be moving into our Fort Wayne facility that’s half finished under construction moving to the second half of this year. And we also have plans to consolidate our European operation so we provide a little info on all those will help us with capabilities and pick up business.

So I think the 2 factors -- I would like to think our ability to pick up projects is kind of a, we are going to steadily build that capability and hence steadily build that type of business with our key customers. But the market is going to have definitely some of its ups and downs.

And then the last thing I will point out, which is not a factor yet in Orthopaedics is in the QiG Group we have an active Neuromodulation and an active Cardio Vascular form we do not yet have an active Orthopaedics funnel and we will not start that until we finish the operating investments in Greatbatch Medical. Even though that won’t help us in 2013 when we look out several years from now innovating on the medical device level on Orthopaedics and providing those solutions out through our OEM customers on a partnership basis will also provide us a longer term growth driver to Ortho we are trying to do a Neuromod and Cardio Vascular.

So hopefully that helps.

Okay, but just a follow up and to be clear when we are looking at the low to a decent level for those at least in the first quarter and then build from there?

Yes, we are really not going to give quarterly guidance but I think the comparables for the first quarter and the first half as we said overall are going to be difficult because as Tom mentioned it was a building in a market there but there was also significant amount of product launches in the first half of last year. Which we quoted, so the comparables for the first half are difficult.

Okay and then just one final question just on the time line you gave for some of your medical device project at the Analyst Day. Has there been any significant push back in any of those?

No, not really, no we’ve had to do some follow up submissions on some of the regulatory clearances we got so cost this another say 30 to 60 days at most. But most part on these smaller Cardio Vascular products where we are cutting our teeth and kind of building our capabilities, they’ve come in on time or a few months late.

As I think the as we move towards the more sophisticated products that like Algostim I say we’ve taken a fairly conservative approach to how we are approaching that project and the data that we are collecting. So we have more robust submissions and more proactive at engaging into discussions with the FDA proactive basis.

So I say that we are where even valued more flexibility into the time lines that provide us the ability to reach to additional data requests. But right now I’m still confident that on the milestone performance basis we are going to continue the projects as we outlined in Investor Day to completion, including Algostim sometime at the end of this year beginning in early next year we will file that submission to the FDA and then we will be moving on that system and obviously there is many other systems past that we will have time line from 2013.

Thank you. I would like to remind you that both the audio portion of this call and the slide visuals will be archived on our website at greatbatch.com and will be accessible for 30 days.

Thank you, everyone, for joining us today.