Integer Holdings Corporation

Hello, everyone, and thank you for joining us today for our 2012 second quarter earnings call. With us on the call are Thomas J.

Hook, President and Chief Executive Officer; and Michael Dinkins, Senior Vice President and Chief Financial Officer.

In terms of today's agenda, Tom will start us off with a few brief comments regarding our second quarter results and will then provide an overview of our strategic focus going forward.

After that, Mike will review our second quarter financial results and guidance for 2012. 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 to all of you who are listening on our call today. We are pleased to be able to share with you our results for the second quarter, which as expect, improved in comparison to the sequential first quarter.

This improvement was primarily due to our increased sales, which are being driven by stronger-than-expected growth from our cardiac rhythm management and portable medical markets and 16% growth from our Vascular Access product line, which benefited from the commercialization of our medical device pipeline.

In comparison to the second quarter 2011, sales increased 14% to a record $166.5 million. This increase was primarily a result of our acquisition of Micro Power Electronics in December of last year, which added $21.3 million to sales.

On an organic constant currency basis, sales for the second quarter increased 1% as our cardiac rhythm management, Vascular Access and portable medical sales growth was partially offset by weakness in our orthopedics product line.

Despite the increased sales level, adjusted operating income for the quarter increased only 1% in comparison to the prior year as our higher gross profit was offset by continued operational issues in our Switzerland orthopedic operations and increased investment in our medical device strategy.

We are aggressively addressing these operational issues. As indicated in our earnings release today, we expect to see operating income improvements as the year progresses, which will come from the consolidation of our orthopedic operations and optimization of our R&D investment as well from various other measures we have initiated to manage our cost structure.

Despite these efforts, we are now expecting that our full-year 2012 adjusted operating income percentage and adjusted diluted earnings per share will be at the lower end of the guidance we provided.

Importantly, we are reaffirming our top line guidance of 13% to 17% growth we set at the beginning of the year. Michael will provide more details regarding our financial results and guidance for 2012 in just a couple of minutes.

We are disappointed that our EPS and profitability performance was at the low end of our expectations due cheaply to the operational issues we are experiencing in our orthopedics business.

Let me reassure you we are aggressively addressing these issues. To that end, during the quarter, we made several strategic announcements aimed at driving growth and ultimately shareholder value.

I would now like to devote the remainder of my prepared remarks to update you on the progress we are making towards achieving these strategic objectives.

As you are all aware, over the last several years we have focused -- faced considerable headwinds in our core business due to slower-than-expected, and in some cases, declining market demand, particularly in cardiac rhythm management.

However, our initiatives to improve our operations and leverage the strong history and innovation at Greatbatch have given new breadth and depth to our key OEM customer relationships.

Over the last 2 years, all of our top 5 customers have entered into multiyear agreements with us. Initially we have seen an increase in the pace of product development opportunities with these top 5 customers.

This signifies the world class reputation we have earned through execution and performance and, importantly, secures a significant portion of our revenue through a number of years into the future.

As we move forward, our goal is to not only protect our core business, but grow them as well. We intend to do this through an increased focus and investment in our sales and marketing efforts.

We see a tremendous opportunity to bolster our worldwide sales and marketing capabilities in an effort to better align with our service to OEM partners and differentiate our technology solutions.

Given this increased focus on sales and marketing as well as the increased pace of new product development opportunities with our CRM customers’ gives us confidence we can continue to grow our core CRM product line faster than the underlying market.

As I mentioned earlier, during the quarter we also achieved 16% growth in our Vascular Access product line. This increase was primarily driven through commercialization of our medical devices that are emanating from our QUIG group.

Going forward, we expect this double-digit growth to continue as we are still in the early stages of commercializing these products.

Combined with this top line growth in the core business is our legacy focus on driving operational efficiencies to improve profitability. Although not yet evident in our financial results, during the quarter we continue to make significant progress on our major operational initiatives.

This included the opening of our manufacturing facility in Ft. Wayne, Indiana, which will be used to consolidate our orthopedics operations.

More specifically, last week we announced the finalization of our plan to transfer functions currently performed at our Swiss operations into the Ft. Wayne facility as well as our Tijuana, Mexico facility over the next 12 to 18 months.

This consolidation will further leverage our existing operating infrastructure while enhancing the overall financial performance of the business.

In addition to our orthopedic consolidation, during the quarter we also completed the expansion of our infrastructure in Plymouth, Minnesota, to support the manufacturing of medical devices and made significant progress towards the upgrade of our global ERP system. When complete, these initiatives will improve our margins, enable our medical device strategy and provide complete back office integration of our operations and administrative functions, giving us enhanced oversight of our business performance.

Supplementing our core business growth will be growth through targeted acquisitions. As you know, the most recent phase of this strategy was initiated last December with our acquisition of Micro Power.

We are pleased to report that the integration of Micro Power in the Electrochem business is now complete and it's performing well ahead of our initial expectations.

This performance is being driven by successful product launches into the higher growth, higher value portable medical market. Gaining better access to this attractive market was one of the main drivers behind our acquisition of Micro Power as it provides us with a significant opportunity for growth given its $400 million market size.

Additionally, this market is benefitting from favorable market trends as patient care shifts from clinical settings to the home and as an aging population drives the need for light weight and portable medical devices for patients and care givers. These favorable trends are expected to allow this market to grow over 6% annually for the next several years, which is well above our legacy market growth rates.

Finally, this market is also attractive to us given that is has long product lifecycles that will provide stability and diversification to our revenue base.

Going forward, we expect to continue to identify and consummate targeted acquisitions that will enhance our growth trajectory. Given our track record of identifying, executing and integrating acquisitions in the past, we are confident in our ability to be successful in doing so in the future.

Our last strategic objective is to drive growth through innovative medical devices. During the quarter, we established an active and plannable medical device R&D center in Singapore, the first of its kind in that country.

The establishment of this center is a continuation of our medical devices strategy and is the first step of our strategy to engage in emerging health care markets, namely the Asia Pacific region.

Through this R&D center, we intend to employ frugal healing, innovation strategies to help develop cost effective active and plannable medical devices and position Greatbatch to capitalization on emerging market opportunities. We look forward to updating you on the status of this exciting new initiative as we achieve significant milestones.

As many of you are also aware, over the last 3 years we have been significantly increase our investment in research and development in order to evolve our company from not only being an innovative component manufacturer but also a provider of complete medical device systems. As indicated, when we embarked on this initiative, we have a process in place with multiple levels of review to ensure that we are making the most cost-efficient use of capital and providing the appropriate returns to our shareholders.

To that end, during the quarter we made several strategic decision in order to fully optimize our R&D efforts. This included a reallocation of R&D resources to higher priority products, the postponement of some R&D products as well as the decision to pursue various alternatives to monetize some of our existing intellectual property that are outside of our core business line.

The impact of these decisions is now that we are expecting our 2012 second half run rate of research development and engineering expense to be slightly lower than the first half, that the benefit of these initiatives will be partially offset by an increased level of design verification tests. As always, we will provide updates on the status of this initiative as information becomes available.

Finally, I would like to spend the last few minutes of my prepared remarks giving you an update on our medical device projects.

When we first introduced the QIG group at our investor day last year, we indicated that the QIG group will operate through a diversified portfolio approach. That portfolio will consist of strategic acqui [ph] investments, OEM initiated medical device projects [ph] and independent, market-driven medical device development to be commercialized through OEM partners.

To date, I am extremely proud of the progress we have made and believe that now more than ever this is the right strategic avenue for us to take and one that will ultimately provide significant returns on investment and value to our shareholders.

Today we have 5 strategic equity investments and have developed or in the process of developing nearly a dozen medical devices in conjunction with our OEM partners, which are now just beginning to provide a return on the investment we have made.

Additionally, we have 4 new medical devices that we are independently working on that are in various stages of development. The most notable of which is Algostim, our spinal cord stimulator for the treatment of chronic pain in the trunk and limbs, which we introduced to you at our investor day.

We intend to update you on the other 3 devices in the near future.

I would like to point out that all of the products in our portfolio develop at a different pace. The OEM discrete customer projects having a shorter development timeline than the medical devices than we are independently developing, given the complexity of those projects.

To that end, we have made significant progress on all of our medical devices with some products being developed faster than originally anticipated and some slower than anticipated.

With regards to Algostim, similar to our other products in the portfolio, we are pleased with our progress to date and remain excited about its future. We are currently in the process of design verification testing of the device and continue to focus on bringing a quality products to the market quickly.

We have also finalized our pre-IDs discussions with the FDA and have begun to have discussions with OEM partners with regards to commercialization alternatives.

Given the novel features of the device and our emphasis on design for manufacturability, we are extending the design verification testing timeline. As a result, we now expect to make the PMA submission in the second half of 2013.

Given that we are developing this device from the ground up and consulting with key opinion leaders to optimally meet the unmet clinical needs for the industry, we are taking every precaution to ensure this device performs exactly as we intend.

Even though we are extending this timeline, we are extremely optimistic about the prospects of this device and are encouraged by the feedback we're receiving from OEM partners that have interest in commercialization.

We'll also like to point out that in addition to the value each of these individual device development products possess independently, we have also generated a significantly amount of intellectual property which also has value. Since QIG was formed, it generated approximately 60 patents and have over 100 additional patent applications pending.

In closing, I would like to reiterate that as a whole, we are progressing as expected on our medical device strategy. I would also like to point out that the value of our medical device portfolio and Greatbatch as a whole is not dependent on any one of these products individually, but rather a sum of all products taken as a whole.

Given that our quarterly earnings calls are limited to just an hour, we are planning on hosting another investor day either later this year or early next year to update you on the progress of all these strategic initiatives.

With that, I'll now turn over the call to Mike Dinkins with a more detailed review of our second quarter financial results.

Thanks, Tom, and good afternoon, everyone. I am very pleased to be on the call today with you to review our results for the second quarter.

I also look forward to meeting many of you in my new role as CFO.

In a change from prior practice, I would like to provide some color commentary on our financial results to help everyone understand how we view our second performance and updated guidance. For more specific details regarding our financial results for the quarter, we refer you to our press release that we issued earlier today.

With that, let's get started. Here are the key points we would like you to consider about the quarter.

Our CRM and portable medical product lines are performing ahead of our expectations. When combined with our strong Vascular Access growth, we are on track to achieve our full-year revenue guidance.

Our orthopedic product line is weighing down our operating performance but it is aggressively being addressed.

The increase in our other operating expense reflects the multiple consolidation, productivity and optimization initiatives we have in place and will generate future benefits.

During the quarter, we made strategic decisions in order to fully optimize our R&D efforts, which will be focused on fewer projects going forward.

And finally, our cash flows from operations remains strong and provides the funding we need to execute on all of our strategic objectives. I would like to provide further details on each of these key points.

First beginning with CRM, in comparison to the second quarter of last year, CRM and neuromodulation sales increased 3%. This growth consisted of various increases and decreases within that product line that in general can be attributed to our higher level of customer product launches in comparison to last year.

These results are much improved from the first quarter and put us on track to be at the high end of our full-year CRM sales guidance. For the remainder of the year we expect CRM revenue to be more in line with the first quarter this year but will still be above prior year levels as the comparisons get easier.

Overall, I would like to point out that we continue to see an increased pace of product development opportunities from our CRM customers and believe this, combined with increased focus on sales and marketing, Tom discussed earlier, will allow the company to grow this product line faster than the underlying market.

As indicated in today's release, our Vascular Access product line remains strong and is benefitting from the commercialization of our medical device pipeline. We expect this pace of growth over the prior year will continue in the second half of 2012.

Additionally, we expect 2012 sales of medical devices to be in the range of $10 million to $15 million, which is consistent with the guidance we provided last quarter.

Similar to CRM, our portable medical product line within our Electrochem segment also is exceeding our expectations. This product line, the majority of which was acquired from Micro Power last December, is benefitting from our higher level of new product launches as well as favorable market dynamics that Tom reviewed with you earlier.

We are winning opportunities in this segment due to the investment we made in technology and facilities, our experience in patented solutions, our customer relationships, our capacity to service our customers and our legacy of delivery highly reliable and innovative solutions to the medical marketplace. Our funnel of portable medical products in the Micro Power acquisition continues to be full and is expected to drive high single digit revenue growth over the next several years.

Now with regard to our operating performance, as I mentioned earlier, our results continue to be impacted by the operational issues we are experiencing in our Swiss Orthopaedic facilities. These operating issues resulted in fewer customer product launches in development opportunities as well as lower gross margins.

Overall, these issues decrease our adjusted EPS by $0.08 in comparison to the 2011 second quarter.

As Tom discussed earlier, we are aggressively addressing these issues and announced the finalization of our plan to transfer functions currently performed at our Swiss operations into our Ft. Wayne facility as well as our Tijuana, Mexico facility over the next 12 to 18 months.

This consolidation, as well as other actions we have taken, is expected to drive operating performance, better operating performance in the second half of this year.

As a result of the Swiss consolidation plan, we now expect that our non-GAAP adjustments, which consist primarily of unusual non-recurring operating expenses, will be $20 million to $30 million for 2012 compared to $15 million to $20 million we originally guided to. These costs are being incurred in connection with over half a dozen consolidations, productivity and optimization projects which will begin to provide a payback later this year and into next year.

Let me reassure you that we take these investments very seriously and will not enter into them unless they have adequate returns.

To help offset increased levels of expenses during the quarter, we made strategic -- several strategic decisions in order to fully optimize our R&D efforts. This included the reallocation of R&D resources to higher priority projects, the postponement of some R&D projects as well as the decision to pursue various alternatives to monetize some of our existing intellectual property that have offset our core business.

The impact of these decisions is that we now expect our 2012 second half run rate of R&D and E to be slightly lower than the first half. But the benefit of these initiatives will be partially offset by an increased level of design verification testing in connection with the development of our neuromodulation platform.

One other area I want to highlight for you is the cash flow generation of our operations. Despite the operating issues we are experiencing, we're still able to generate $24 million in cash from operations during the quarter.

We used this cash flow to repay $8 million in long-term debt during the quarter and fund our consolidation in R&D investments. As a result, our debt to equity and working capital ratios now stand at 48% and 3.1 times, respectively.

These ratios are healthy and reflect the strength of our capital structure.

Additionally, we still have $350 million available under our existing line of credit, which we restructured in June of last year at favorable terms in order to fund the maturity of our $197 million of convertible notes which come due in June of next year.

Moving on to our 2012 guidance, as you can see from Slide 12, we are reaffirming our sales guidance provided at the beginning of the year. However, based upon our results of the first 2 quarters and projections for the remainder of the year, we are now expect our adjusted operating income percentage and adjusted diluted EPS to be at the lower end of the ranges provided.

This guidance reflects our expectation that we will not achieve the revenue growth assumption previously provided for our orthopedic product line but still -- but we still expect to achieve our 13% to 17% revenue growth guidance given stronger-than-expected performance from our CRM and portable medical product lines.

Additionally, we expect to see operating income improvements as the year progresses, which will come from the consolidation of our orthopedic operation and optimization of R&D investment as well as other various measures we have initiated to manage our cost structure.

In closing, I would like to reiterate the key points that I began my presentation with. Our CRM and portable medical product plans are performing ahead of our expectations.

When combined with our strong Vascular Access growth, we are on track to achieve our full-year revenue guidance.

Our orthopedic product line is weighing down our operating performance but it is aggressively being addressed. The increase in other operating expense reflects the multiple consolidation, productivity and optimization initiatives we have in place and will generate future benefits.

During the quarter we made strategic decisions in order to fully optimize our R&D efforts, which will be focused on fewer projects going forward. And finally, our cash flow from operations remains strong and provides the funding we need to execute on all of our strategic objectives.

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

Tom, I wanted to start with CRM, definitely some upside there versus our model and, as you said, ahead of your expectations. Given the contractual nature of that business, I'm curious where you saw the upside and do you think the upside is sustainable certainly going forward into the rest of the year?

A lot of that business we do have locked in, in the CRM side. Those contracts are somewhat variable in nature in that as we have spent years consolidating our operations and signing those agreements, we've won new product lines with customers and as they're in the mode of launching those new product technologies, their component sets that we have won with those are richer than some of the legacies, both in terms of technology as well as in terms of share.

So as we transition or as they move to those product lines or those product variations, then it gives us an upside opportunity to both sell from a technology standpoint as well as from a mix standpoint a higher set of products. Obviously there's differences between OEMs, but there's also, more importantly, differences between the product platforms that they have and our content in them in terms of technology.

And of course, more recent versions of technology you have better pull through for us. So as a -- from a CRM side, as well, we're still predictive that CRM is going to be a tough market and it's going to have some level of dynamics with it from a unit basis, you can look at the volumes.

They're stabilizing across the market. We're anticipating obviously looking at the other OEM's announce results, but when we look over the course in the first half and the second half of the year, we see that we still can have low single digit growth in that business as a company from the wins that we've had historically.

Tom, I was hoping if you could provide a little bit more detail on the orthopedic issues. And then as a follow-up, it seems like you are maintaining your current client base but you're not able to win new business and new contracts.

So does that mean revenues should stay kind of where they are for the next couple of quarters? Or is there a risk that your current -- you lose business from the current base today?

And then I had a follow-up on Algostim.

Sure. We'll just look at the ortho first.

As you know, of all the acquisitions that we've done in the company, we've been aggressively consolidating our operations and we have not consolidated our Swiss operations. And we studied this very carefully over the past several years as that business was transitioning from Susan Campbell to Mauricio Arellano and we reached the -- obviously the reality that running 3 smaller Swiss facilities is very costly.

Certainly some of the European market turbulence has made the European market more challenging. Obviously in the results also is a significant FX factor which we obviously will provide some information and it's about $3 million that we try to normalize out.

But at the end of the day, we know that operating from those smaller, less efficient facilities necessitates us making an operating decision to consolidate. So after a lot of evaluations of many different options, we purposefully made the decision to consolidate into the new facilities we have, which is obviously into Ft.

Wayne and also into the Tijuana, Mexico facility to leverage the infrastructure we already have in place. That allows us to have a much more effective overhead structure and cost structure that will improve both the gross margins as well as ultimate operating contribution for them.

I think where we stand from a client base, I think we are very good at these transfers. We feel very confident we can hold the client base.

I also feel better going forward that because we'll have a better cost structure and we can be more competitive, we'll be able to do a better job at winning new business and that's really where we see a lot of our strategy has been built on investing to win new business. And when our cost structure is out of alignment with it, it's very easy to spin our wheels and we have to plan on that new business coming, which we did.

And if we don't get it, we're overspent and overextended and we've obviously had to, in the second quarter here, make some significant adjustments to align that spending so that we can get after the new business from the operations in Ft. Wayne and Tijuana from a much more cost effective basis and kind of hit our batting percentage on a higher basis.

So I don't expect to see continued slide in ortho revenues. I definitely feel confident that we can hold our customer base.

But I definitely feel the improved operations will allow us to be much better at making commitments to customers and achieving them and hitting cost targets that they're going to want to commit the business to us. Ortho for us is much more of a shorter lead time business because we don't have a lot of long-term agreements.

And it's not like CRM where we have a lot of multiyear agreements in place that kind of -- we've already reached the maturity level of being able to make those commitments. We still have our work cut out for us in ortho to do that.

So I think you're saying the transition to Ft. Wayne is 12 to 18 months.

So is it going to take 12 to 18 months before orthopedic revenues start to improve or can you get that sooner?

Drawing FX out to the side is that I feel we still can still have a positive trajectory on orthopedics moving forward, but we're going to have to get that positive trajectory out of our U.S. operations where we're going to be more competitive.

And because of the nature of transitioning our Swiss operation, it's going to be tougher to grow that base. We're going to be most cost reducing that base as we move it to the U.S.

Additionally obviously, as you know, we have our implant facility in Chaumont, France, which is not moving and already is consolidated. We've already made significant investments there.

And that's an operation where we still feel we can bring on new customers as well and get some organic growth out of that as well. So I do feel in the U.S.

and in France -- in our French operations, in particular, we're positioned to grow. What we have to do is shake the negative effect that the Swiss operations are having on us right now.

It's obviously flat growth from the Swiss operations on the instrument side, and it's really negative profit contribution because we're in a very extensive cost structure and we've got to rationalize it out quickly. Hopefully that answers your question, Glenn.

One quick question on guidance here and I think you kind of highlighted it but maybe a little more granular. Lowering the guidance for ortho, that makes sense in terms of the revenue but looking at a higher CRM, why are you now expecting EPS to be on the lower end of guidance, I should say adjusted EPS?

Primarily because of the first half performance that's already behind us and also during the transition period, not expecting a material improvement in the Swiss operations, the contribution to the bottom line we do believe will be better than the first half but not materially different back to where it was last year. Those 2 factors are already built into our numbers, cause us to be conservative on our guidance and say that we are targeting -- we're communicating towards a lower end.

However, we as a management team are undertaking numerous actions and are not satisfied with being at the lower end of that guidance. And we hope that we can update you at the end of the third quarter with something better than that.

So I do not want to send the message that that is something that we're happy with and not trying to take some additional actions to improve upon.

With regard to your strengths in CRM, your customers have just come through some pretty major new product launches. So what gives you the confidence that you're going to be able to maintain that sales trajectory for the rest of the year?

I think the better way to look at it is not so much your trajectory, Bruce, but it's as we come through those product launches it kind of becomes the normalized level. So when you kind of look at how we're going forward, I think we've done a lot of transition on these new product launches.

We have a very disciplined supply chain with the OEMs. They can have quarter-to-quarter variations based on the sales we have to them from a -- because we transfer to them large dollar amounts at any one time.

But I would not refer to it so much as a ramp as I would that we've achieved through years of product development wins with them a higher level of mix on those products and that is, in turn, putting us on a standpoint where on a comparison basis we have higher levels of sales than we did in the prior year. So I don't want anybody to walk away with the impression that we're accelerating growth in CRM.

It's low single digit in comparison to last year. It's much more favorable than we had though it would be.

We were planning for a very flat year. And just since the execution of the research and development teams to win these projects and the customers commercializing them that have got this.

And as a comparison, we're comparing those levels of sales to last year but it's I'd say favorable. But it's certainly not a trend up.

Two questions that I had; first, you mentioned in the press release that you were increasing strategic focus on sales and marketing to drive core business growth. I wondered if you could kind of elaborate on that.

And then my second question is regarding the 10 discrete OEM projects that you're working on in the QIG group, should we expect any launches in the second half of the year?

Is the -- from a strat focus standpoint is I think -- I've been at Greatbatch 8 years and I'm being very objective. I think we've done a very good job from a manufacturing standpoint, manufacturing consolidation, manufacturing investment.

We've also done a very good job in terms of R&D rationalization, establishing innovation engines and having those innovation engines work at a very efficient basis with manufacturing. An area that we have not done well on and has not received much investment and focus in the company has been our sales and marketing investments, how we interface and work with customers.

Clearly we have had many successes in areas like how we grow the management and signing long-term agreements. But our level of market understanding, market knowledge and how we work with OEMs, whether it be contractually or through partnerships, we have a lot of room for improvement.

And I think in areas like the medical device area as well as in areas like orthopedics, we have not had the focus and hence not the success that we should be achieving. In areas where we have put this focus in sales and marketing -- and I'll highlight Electrochem here, both in the energy markets as well as in portable medical, we've had great results come out of those investments.

So building off the success of the investments in sales and marketing we've had on Electrochem, we're implementing that type of approach in Greatbatch medical now where we're going to be able to partner with our customers better, be more sensitive and timely to their technical needs as well as their cost targets, be more timely and to be able to, just like we've developed our manufacturing capabilities and our research development capabilities, we're going to also develop our sales and marketing capabilities to be able to hit better product opportunities and to be able to partner with our customers, the OEMs in particular, more compellingly. So that will add the third element of operations that we feel has been inconsistent across the company.

It's been good in Electrochem. It's been good in CRM.

We don't feel that we've done this well in neuromodulation, the cardiovascular areas like Vascular Access or in orthopedics. And we've had to do a frank reassessment of this based on our first half results.

We've had to bring some talent in from the outside of the company to provide us better subject matter expertise and better leadership in this area and we are focusing on it to drive improvements over the second half of the year into 2013 to get that foundational basis. And operating delivery in the sales and marketing side improved dramatically.

With regard to the 10 OEM projects, all the projects are either commercialized or they're moving forward. We do expect to have products reach milestones in the second half of the year.

I’m going to be somewhat obtuse and not try to say which specific projects or which customers because we're under confidentiality agreements. But we set these OEM products up and in particular in the cardiovascular portfolio as a way to commercialize these technologies.

Several products have reached the regulatory milestones, are being commercialized, as you know today, generating sales that we've highlighted. Other products are reaching their commercialization milestones with OEMs and could kick off in the second half of the year depending on OEM customer plans.

But also we're in a position to commercialize those products through other means through the OEMs as well which could include even licensing the technologies out to the OEMs and having us as a partner in the commercialization of it through the licensing route rather than on a manufacturing basis. So we are, on the OEM side, still remain bullish for the second half of the year to continue to drive double-digit growth in the cardiovascular medical device area.

If we could go back to the Algostim design verification process, exactly what does that entail and why has it slipped? Is it a personnel issue?

Is it a design issue, maybe a little bit more color on that particular topic?

Yes, I think I'd best classified it as a testing issue, Bruce, is that we've been surprised -- pleasantly surprised at the level of interest that the investor day last year has created in Algostim. We have multiple OEMs that have engaged us in terms of learning more about the system, which we've been very careful at sharing information with but certainly have engaged in discussions with regards to the commercialization of the product.

But since we're in a very delicate stage of securing intellectual property and completing that design verification testing, we're being very selective in terms of the amount of information we provide while we're protecting the investment that we have. The process itself of doing design verification testing, we've laid out a very comprehensive testing program and is, I think, based on the components that have finished design verification testing as well as the portions of the systems, I mean, the system is really a collection of multiple devices.

Some of those devices have completed the DDT testing. Some have yet to be completed.

We made the decision based on the test data that we've seen to date as well as our customer interfaces and interactions given that we're going to commercialize these via partnership, that we're going to expand the scope of the DDT testing on certain device pieces within that Algostim system. And that is going to give us obviously a little bit more testing expense.

It won't necessarily increase the ultimate overall testing cost and product cost of Algostim, but it is going to extent out the submission timeline. Obviously it's our first major product platform.

We are being very risk averse and very thorough on the testing plan and being extremely conservative on the interpretation of all the test results which are very comprehensive. We know that going forward in the future that we may have design verification testing processes that we could be more selective.

But I'd say for our first system through, we are being err on the side of having a lot more testing than is required and much more testing than we originally had planned. And we feel that's the more prudent thing to do for our first project and that process decision in terms of design verification testing is what's creating the delay.

It's Justin Seriorni [ph] at Tameracq [ph]. I missed your complete medical device sales that you guys reported this quarter within the vascular segment.

We are not -- like I said, we're kind of were on the path last year because we were just starting of just getting our medical device sales on a quarterly basis. Now we've just provided kind of our general guidance of $10 million to $15 million for the year.

We're not going to report it on a quarterly basis, quarter-to-quarter. But on a -- we're still confident that we're going to be in that $10 million to $15 million range for 2012 and we're managing the business to that.

Obviously some of it's launch dependent. But our approach is going to be as to -- so we don't have to report this kind of every quarter, we're just going to start having it -- providing the guidance with a consistent with what we're doing on a yearly basis.

One follow-up question as it relates to the consolidation costs. You guys expect $20 million to $30 million this year between cash and non-cash charges.

Should we be expecting these actions with the consolidations to continue into 2013 with extra costs on top of that as well?

Well, I'd say that the nature of these products is that they will spill from 2012 to 2013. But it is -- the decisions we've made on the consolidation products are made, the scopes are captured within the programs that we have reviewed and particularly big one of the Swiss consolidation and some of the product line transfers that we're making down to our Tijuana facility.

But the scope of those has already captured but spending will definitely -- and the expense that we recognize will be part 2012, part 2013, but 2013 is the full scope of those projects. It does not extend beyond 2013.

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