Integer Holdings Corp (ITGR) 2002 Q3 法說會逐字稿

Welcome, everyone, to the third quarter Wilson Greatbatch Technologies conference call. This presentation and our press release contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involves a number of risks and uncertainties. These risks and uncertainties are described in the company's annual report and form 10-K. The statements are based on the current expectations, and actual results could differ materially from the statements. The company assumes no obligations to update forward looking information included in this conference call, to, the occurrence of unanticipated events, or changes in financial conditions or prospects. I would like now to turn the call over to today's host, chairman, president, and chief executive officer, Ed Voboril.

Thank you for joining us for our third quarter conference call, with me I have Larry Reinhold or Executive Vice-President and Chief Financial Officer and Tony Borowicz, our treasurer. I will begin by providing an overview of our financial and operating highlights for the third quarter. I will then turn the call over to Larry Reinhold to provide the details on our financial results. I will have some closing remarks and then open the call to Q&A.

The third quarter marked or second consecutive quarterly sales record. Sales for the quarter were $45.4 million, which represents an 18 percent increase over last year's third quarter. Included in this quarter are approximately $5 million in sales of Globe Tool, which we acquired on July 9th of this year, excluding these sales, the record for the quarter still stands. We reported net income of $2.5 million and EPS of $0.12 in the third quarter. This compares to $3.3 million or $0.16 last year. As reported earlier this month, we recorded two special one-time non-cash charges that impacted earnings per share for the third quarter by $0.10 per share. Larry will discuss the details of these charges in his review of the financial results.

Let me now discuss the major operational highlights for the quarter. First, the strong sales were the result of growth across many of our product lines. A major growth driver continues to be our ICD battery sales. ICD battery sales increased by 40 percent, compared to last year, and for the year sales have increased by 37 percent. The result of the trials have clearly expanded the use of the devices in a larger patient base. We believe that a high rate of growth can be sustained in the foreseeable future, as these devices gain wider acceptance within the medical community.

A second major development in the quarter was the over 40 percent sequential increase in our sales of Greatbatch-Sierra filter feed-throughs, as reported last quarter, our sales were up the most half, were negatively affected by production yield issues at Greatbatch-Sierra. As evidenced by the sales growth in the quarter, we believe we have substantially solved these problems. This also resulted in significantly improved gross margins in the quarter at Greatbatch-Sierra, and we expect to continue to make progress on improving these margins even further in the fourth quarter. A third operational highlight was the agreement read with our third wet tantalum (ph) capacitor customer. As you recall, we announced an agreement with a second capacitor customer earlier this year, which means that three of the five leading manufacturers have adopted our proprietary technology. Sales from the second customer will begin shipping in the fourth quarter of this year, and the expectation is that our third customer will begin shipping in the second quarter of FY's 03, next year. This significant sales growth will help us leverage our manufacturing cost base and help us to improve gross margins as well.

Finally, our commercial battery sales increased by 3 percent in the quarter, as compared to the same quarter of last year. This marks a significant turnaround from the 10 percent decline in the first half of 2002, compared to last year. The oil rig count, which is an point leading sales indicator, apparently bottomed out in the March/April time frame. Since then the rig count has increased by about 4 percent, which in turn has led to our gain.

During the quarter, we completed the acquisition of Globe Tool. They make enclosures for cardiac-rhythm management devices and other implantable medical products. Globe sales, as of the most recent fiscal year, which ended in June, were approximately $20 million. Historically, globe sales have been growing in the high single-digit range. We believe we can improve on the historical sales growth rate and also increase by deploying the Six Sigma methodology. The acquisition of Globe further strengthens our position in the rapidly expanding market, as Globe is the market leader in the enclosure segment for these customers. Furthermore, this acquisition is important, because it establishes a physical presence for us in Minneapolis, which is in close proximity to many of our customers. Let me turn to an issue that was raised last week, in terms of battery performance. ICDs are powered by lithium silver vanadium oxide referred to as Li/SVO for short. Wilson Greatbatch originally developed the SVO battery for ICDs was developed during the 1980s, and SVO has been the standard for use in ICDs. During SVO batter midlife period, if the battery is not called upon to charge the high-voltage circuitry frequently enough, a pasivation layer forms between the anode, and the SVO cathode.

This may results in an impedance which limits the battery's ability to develop the necessary current during the first few seconds of charging. This phenomenon, which occurs inside the battery is known as voltage delay. It is inherent in all SVO batteries. Different design elements in SVO batteries and different patient usage regimes, when interacting with different ICD models can have the effect of making voltage delay more acute. It has recently been discovered that the interaction, of three different SVO battery modeling designed by Wilson Greatbatch in the '90s, and certain ICD models designed by our customers magnifies the phenomenon and may result in extended charge times for some of these devices. One of our customers recently issued a letter to physicians describing the issue and its impact on some of the devices. WGT and the customer worked very closely in investigating this issue, and are now working together more closely than ever to ensure that the customer circuitry and WGT batteries work optimally together. Wilson Greatbatch's current SVO battery design utilizes different technology than was used in these pre-1990s designs and should not exhibit similar voltage delay issues. I will now turn the call over to Larry Reinhold to discuss more details of our financial results.

Thanks, Ed. Our total sales for the third quarter were $45.4 million, up 18 percent from the third quarter of last year. Medical technology product sales increased by 21 percent, while sales of our commercial battery products increased by 3 percent. Let me address the sales increase in detail by product line. Our implantable medical battery revenues increased by 11 percent, compared to last year's third quarter. As Ed stated earlier, ICD battery sales increased by 40 percent in the quarter, and year-to-date by 37 percent over the prior year amounts. Given the robust demand for these devices, we believe that minimally, we can achieve a 20-plus percent growth rate throughout next year.

Sales of pacemaker batteries declined by 14 percent in the quarter, compared to last year. The comparison to last year is difficult to make. Last year's sales had increased significantly in both the second and third quarters as a result of new customer product launches for these lower-energy devices. Since that time, inventory, by our customers have resulted in reduced order volume this fiscal year. Based on discussions with our customers, we now expect sales to remain relatively flat in the fourth quarter, but we anticipate that we will begin seeing normalized single-digit growth in the first half of FY '03. Turning to capacitors, sales are lower by 8 percent in this quarter as compared to the same quarter last year. This decline is a result of the timing of customer orders. Year-to-date revenues remain strong, with an increase of 21 percent over the prior year. We expect continued strong growth throughout next year, as our second and third customers come on board.

Turning to components product segments, sales for the third quarter were $19.3 million, an increase of 44 percent compared to last year. Note that included in this category is approximately $5 million in sales of Greatbatch-Globe enclosures. In the quarter, we experienced a significant increase in sales of our filtered feedthrough component products. This increase was mainly for new filtered feedthroughs used in pace makers. It's important to note that even though our pacemaker battery sales have been impacted by inventory, by our customers, new EMI filtering technology is being added, which has resulted in increased sales in both the mature pacemaker market, and the rapidly growing ICD market as well. We anticipate sales in the fourth quarter for our components group will grow as comparable rates, and we should continue this growth into next year as our customers add EMI filtering to their new devices. It is our estimation that EMI filtering is included in less than half of the implantable devices being marketed today.

In our non-medical commercial battery division, sales increased by 3 percent in the quarter, compared to last year, reflecting a modest up tick in the oil and gas market. Year to day commercial battery sales are 6 percent below last year. We expect sales will continue to be flat to low single-digit rate of growth in the fourth quarter and into next year, barring any major unforeseen events that may impact oil prices or the economy in general.

Turning to gross profit, our gross margin relative to sales was 42 percent in the quarter, compared to 43 percent last year. It should be noted that the third quarter gross margins were impacted by an approximate $600,000 purchase accounting charge, related to the acquisition of Globe. In accordance with generally accepted accounting principles, Globe's inventory value was stepped up by approximately $600,000. This entire amount was charged to cost of sales during the quarter, as the inventory sold through to outside customers. This charge resulted in the consolidated gross margin being lower by 1.3 percentage points in the quarter, compared to the second quarter of this year, excluding the special charge, gross margin improved by two percentage points. This is mainly attributable to the resolution of the Greatbatch-Sierra first-half production yield issue.

Next, I'll address our operating expenses. Selling general and administrative expenses were $6.3 million for the quarter, or 13.9 percent of the sales. This compares to $4.7 million or 12.3 percent last year. We continue to invest in our infrastructure to support the level of growth and geographically dispersed operations of the company. These investments include the Six Sigma quality initiative, recruitment of a CLO and marketing expenditures. Additionally, we incurred higher costs in the quarter for patent and related legal issues. Year to date SG&A expenses were 14.5 percent of sales in 2002 versus 12.9 percent last year. We expect the SG&A expense to revenues ratio to remain in the same relative range for the midterm, as we continue to make investments in infrastructure. RD&E expenses were $3.5 million or 7.7 percent of sales, compared to $3.2 million or 8.5 percent of sales last year. The decrease in the percent of sales ratio is mainly attributable to the low RD&E of Globe. Historically, we have targeted spending to be in the range of 10 percent of sales. Going forward, we anticipate this ratio will be somewhat lower based upon the company's current product offerings.

As we reported earlier, we took two special one-time, non-cash charges in the quarter, that totaled $3.2 million or $0.10 in earnings per share. The first charge amounted to $1.7 million on a pretax basis represented the write-off of a covenant not to compete with Fred Hittman, who passed away in September. This write-off is shown on a separate line in the income statement as an element of operating expense. The second charge, amounting to $1.5 million on a pretax basis, represented the write-off of an investment in an unrelated entity that we made during 1998. This charge is reported separately in the income statement as an elements of other non-operating expenses.

In terms of our balance sheet, we continue to generate significant cash flows from operations. During the quarter, we used approximately $32 million in cash for the Globe acquisition, and financed the balance of that transaction with $26 million in bank debt. This increased the long-term debt balance to approximately $96 million as of the acquisition date. Subsequently, with the cash flows generated from operations, we have repaid $10.5 million of the long-term debt outstanding. Effectively, we have prepaid our next three quarterly debt payments under our existing lending agreements. With respect to our 2002 outlook as you know, we do not issue detailed guidance on a quarterly basis, but, rather, only for a full year. We are reiterating our guidance of revenues between 160-$165 million and EPS between 65 and 70 cents. Now, having said that, we are aware that one can readily do the arithmetic to subtract the $120 million in year-to-date sales and $0.44 in year-to-date EPS from the full-year guidance to arrive at a Q4 of 40 to $45 million in sales, and $0.21 to $0.26 in EPS, and we are absolutely very comfortable with that arithmetic. Let me now turn the call back over to Ed for his closing remarks.

Thanks, Larry. Our results for the quarter were right in line with our expectations, and we continued to see significant growth across many of the product lines in the CRM market. Furthermore, we made important improvements in our manufacturing operations resulting in increased gross margins. This coupled with our strong cash flow generation, will allow us to continue to invest in support of the strong market growth that we are experiencing. In terms of providing guidance for FY 03, we are in the process of developing our detailed plans for next year, and will comment in that regard during January. I will now turn the call back over to the moderator to facilitate the Q&A. Eleanor?

Thank you. Ladies and gentlemen, at this time, we will be conducting our question-and-answer session. If you would like to ask a question, please press star 1 on your telephone key pad. To remove your question from the queue please press star 2, and for participants using speaker equipment, it may be necessary to pick up your handset. Again, to ask a question, please press star 1 on your key pad, and if you are using a speakerphone, please pick up your handset. I'll pause for a brief moment. You're first question comes from Mark Landy.

Hi, Great quarter.

Thank you.

Good to see the margins back on track. Just from looking through the numbers on the product side, I have a couple of housekeeping questions. But one just before that. If I see the ICD battery sales up pretty strongly, but I see capacitors down a little bit. Is that just inferring, maybe that one of your customers was a stronger purchaser in the quarter or others, or is there nothing to read into that?

I think it's partly timing issues. Like we keep saying, our quarters in any one business can be lumpy, depending on new product introductions. And we expect a very strong finish for our capacitor business in '02, and we expect to see very significant growth in '03 as the other two customers come on board.

And then CFX revenues for the quarter, could you maybe give those to me?

Mark, they're included in the other -

Yeah, I'm -- I tried to break it out.

It was approximately -- it was a couple hundred thousand dollars.

Okay. And then I know Glenn's going to ask this question, so I'm going to ask it before that. If we have a look at Sierra, relative to last quarter, was it down or flat, or how should we think about that?

Sierra was -- the revenues were increased from last quarter being sequentially --

Right.

by more than 40 percent.

Okay, guys. Thanks very much.

Yeah.

: Our next questions comes from Glenn Reicin, from Morgan Stanley.

Good quarter. The fourth quarter guidance, you can basically drive a truck through that at this point. Can we push you up to the upper end? Lower end? Sort of where are you leaning at?

I think we're toward the upper end, Glenn, and the reason we're giving a broad range, at year-end, we always see our customers moving stuff in and out, depending on adjusting inventories and so forth, and we rarely push back if they want to move something into January, we let them. So that's why it tends to be kind of broad. But we're certainly -- we believe we'll have a very strong fourth quarter.

Okay. Maybe if you could talk a little bit about the predictability of business these days. It seems like, especially on the ICD front, we have product families flying all over the place, they're not going with vitality this year, but then all of a sudden they came up with the contact CD 2, which does have a capacitor. Medtronics has been a little more predictable. Can you maybe talk a little bit about the visibility and what you're seeing in terms of the changeover product families, how that impacts you?

Well, as you know, both of our major ICD battery customers, reported very strong quarters in the third quarter, and they're keying off of the same thing we see, which is a very robust market for Taq (ph) devices. If we look at the ICD, capacitor business, which is the belle weathers for ICDs, we certainly see very strong growth into '03, certainly 20 percent-plus. And you didn't ask it yet, but I'll answer already, we see our iodine business, or brady business resuming high single-digit growth rates as our European customers come back into line into a more normalized ordering pattern.

What about fourth quarter, with respect to ICDs? Very tough comparisons. Is it conceivable they're flattish, or

That's where the product moving in and out of December is going to -- it's a question mark.

Okay.

But if we look at the next four quarters, you know, if I go 12 months rolling forward, we see very strong growth in ICD-related products.

Can we push you at all in the fourth quarter with respect to capacitors? We don't know the size of this second customer in terms of those orders. Any way of helping us out and quantifying that?

There won't be a big impact from the second customer in the fourth quarter, but we see -- we believe our capacitor business -- there will be certainly an uptick in the fourth quarter.

A couple really short questions, and then I'll get back in line. For this third customer, is this technology going to be used for their mainline products or mainly for things like high-energy products?

Well, I probably -- to be honest with you, I can't recall exactly which model is going to come first, but -- you know, I probably wouldn't identify which either -- I think it's -- it's safe to say, as the technology is adopted, it won't be -- you know, it won't be a step function. It won't be -- people won't change over completely their entire product line, so it will be a ramp that will build.

Okay. Then one last question for Larry. When you say ramp up, you mean they're going to test on some more product lines and protect go mainstream over time.

You have to phase the technology in usually as the product comes on board, and you know how these things -- they usually break it up into certainly models, and they're usually introduced at different time frames. So it's kind of as, you know, we kind of get on the train, as more cars are added to the train we get more business.

Right. So, Larry, one last question for you. Can you talk a little bit about gross profit trends for capacitors, and for the components business?

Gross profit trends in the capacitors business, hold on a second --

I'm assuming there's not much change in the battery business from quarter to quarter.

Yeah, you're correct in that assumption. The capacitor's margin trend is improving, and we anticipate that it's going to improve significantly in the next two years, but it is improving quarter to quarter.

If I'm estimating, 500 to 700 basis points, could it be that great?

In what time frame?

Sequentially.

So from one quarter to the next?

That's too much, Glen.

Too much. Okay.

That's too much improvement. That's too much. In terms of Sierra, the -- that would be very, very extremely conservative for last quarter to the quarter we just experienced.

That doesn't say much.

You're right, it doesn't. The margin improvement in Sierra from last quarter, I think we told you was certainly in single digits, and this quarter it's, um, more -- approaching normal margins for the components part of our business.

We're shooting for Larry's age within the next year or two.

Wow, that's really high. Thanks a lot, folks.

Thanks, Glenn.

: Our next question comes from Archie Smith with Piper Jaffray. Please state your question.

Hey, guys, how are you? We're Buffalo fans this year.

Well, this Sunday's the bellwether.

Maybe I'll hop on a plane. I have just a few additional questions for you. If you think of if there are five major Taq (ph) players, but only three horsemen, would one of your No. 2 or 3 customers constitute one of those three horsemen.

Arch, I can't answer that. I'm going to restate something. I'm very confident that within a reasonable period of time, every company that's making a TAQ (PH) device will use our capacitor technology at some level. Now, I keep saying that, and were just -- you know, we keep moving the, you know, moving the chains.

Got it. Could you guys give us some input on the amount of your components and/or batteries that might be expected to go into cardiac resynchronization therapy products?

Well, it depends on the customer, Arch. At some level, even some very modest level, I think, you know, given the fact, for example, that we make components for Medtronic batteries, at some level we have a component in almost every product that's going to be out there, but it's the content that will vary.

Okay. But it doesn't -- looking at your pacing numbers, it seems like CRT is helping a number of players in the area, but it doesn't seem to be moving your pacing numbers, I guess is what I'm trying to get at.

Well, hmm, I -- it may be that we categorizes things differently than other people do too.

Okay. I'll leave that one alone.

Yeah.

COO, how are we doing?

Well, we're moving it right along. I'm going to put myself on the spot here. My objective is to have somebody on board by year-end.

Which would suggest you are -

We're pretty far along.

You've done everything but finance the house?

Well, maybe not that far, but we're pretty far along.

Okay. And is this an individual that will be a known entity in the medical device world, or are you casting a wider net than that?

We have, we have been casting a wider net. I'm going to say that the -- we're looking for someone that brings a very strong manufacturing background to the party, and we believe we have found that person.

Got it. And, then, last question I have is, you went through a lot of guidance items, but you didn't give much guidance on gross margin for either Q4 or for going forward.

Well, we never do that, but I'm going to repeat something that I've also said, and I -- and I believe we'll deliver on it. We'll -- we believe we'll certainly get at least one point a year from Six Sigma, and based on everything that I have seen in the pipeline for Six Sigma projects, I believe that will certainly be true in '03, and then it depends -- again, it's driven very much by what happens at Sierra and the capacitors, because those have been the laggards in terms of gross margin, and we have seen significant improvement in both parts of the business, and we continue the improvement to continue through the end of the year and into next year.

Which would suggest just a little better than Six Sigmas if you look out into '03.

Yes.

Thanks for your time. Go, Bills.

: Our next comes costs from Bob Hopkins.

Thanks very much.

Don't forget to say go Bills.

That goes without saying from my perspective, especially this weekend. Two quick questions. First one, for Larry, I know when you were talking about the fourth quarter and the full year 2002, there also seemed to be a little bit of talk about 2003 from a revenue perspective, and I know you say you're going to give formal guidance in 2003, but if I just sort of extracted from the comments you made on the various product lines, I come up with a revenue growth range somewhere in the -- well, total revenues somewhere in the neighborhood of 190 to 200 million, and maybe a 20 to 23 percent growth range. Am I reading you correctly, or did I mishear.

I would think of it this way. Probably 75 percent of our business is related to CRM, and we see CRM growing well over 15 percent next year. That's the big driver for us, and then we have the adoption rates on new technology like caps and filtering.

Okay. But -- okay. That's fair enough. We'll wait for January. Let's see. The second question is just another follow-up on pace makers. To what degree is the growth that we have seen this year kind of inventory issue from a major customer, or is some of it a market issue? In the numbers that are visible to us from the sell side from the major players are out there for everybody to read, but maybe some of the Europeans aren't doing as well, so make the market isn't growing as robustly. Is it 80 percent inventory, 20 percent market or really a 100 percent inventory issue?

Let me answer it this way. I was looking over some of our numbers. If we look at the first nine months of this year, almost all of our decline in pacemaker revenues is related to European sales in some way, and we expect as I said earlier that in '03 that our European customers will resume a more normal ordering pattern.

Okay. And I remember that comment, you said something about high single-digit growth? Was that for the European customers.

That's for the whole --

That's for the battery business.

Yep.

Thanks very much. Great quarter.

Thanks, Bob.

: Our next question comes with Kurt Kruger.

High, guys.

How ya doin' out there? We have California weather, bright and sunny, only trouble is it's 20 or 30 degrees colder.

Great. I feel for you. Just a couple questions about the -- some of the comments you made about sequential or year to year. I was a little confused. I think you said the commercial area would be flat to slight growth in the fourth quarter, and I didn't understand whether you were talking about sequentially or year-to-year?

It's probably close to both. I think.

Because I think you had a really strong fourth quarter last year -- yeah, you did. So if it's going to be flat year to year, that would be pretty good.

My friends, the financial guys, are kind of checking the metrics here.

Yeah, we'll be -- we expect to be -- we're up a little bit sequentially, and we would expect to be up a little bit year over year in the fourth quarter.

I guess that same question applies to pacing, too. I think you answered a question about being fairly flat.

We expect Q4 to be relative flat, with Q3, the one we just emerged from.

Okay. So sequentially -- all right. And then, you know, I think there was a little talk about the growth margins already, but if I could ask it differently, you reach almost 43 percent gross margins. Does that give us a sense we'll see those rise from that level in '03?

Let me put it this way. It's got to rise in '03, Kurt. Again, I'm going to sound like a broken record here. This is a 50 percent gross margin company. We have to get back to that, and to do that, we have to make sequentially improvements every year, and it's going to happen next year. Some of it will be Six Sigma, some will be growth, and some will be the new product areas that are coming on board.

And talking about the overall for that-line growth rate, if you took out Globe, which gives you somewhat of an artificial benefit, and you corrected for the capacitor, call it, you know a million 1/2 or two million, just on a regular order pattern, you're talking about 11 percent or 12 percent growth. So how do you address the fact that you are growing more slowly than the customer bases you serve? I guess part of that could be the commercial side, but, I mean --

It's -- Kurt, the math on that is obviously the commercial side is flat, it has been flat for a while, and the issue we talked about with respect to pace makers.

All right. Then when you talk about matching the growth rate of the overall CRM market, certainly I subscribe to that, too, 15-plus percent, that's a big portion of your business. If you look at that, would you say there's going to be some increase of penetration,, if you will, within the customers you serve? And what would that be worth in terms of a percentage or two in terms of growth rate?

Well, that's -- for example, that's what we're seeing with, you know, with filtered feedthroughs, and that's what we're seeing with capacitors. That's part of how we get additional business with customers, get additional real estate on the devices. So it's going to enhance our growth rate, no question.

Just a little follow-up question. I think you alluded to it, but I wasn't sure whether you had a confirm on it. The guidance, you do make the capacitor for the CD2, am I right?

I think so. I've got this long list of -- we have this matrix, but I believe that uses our capacitors.

Okay. Nathan, you had a question?

I had a quick question for Ed. Can you put a number or broad range on the contribution that you expect the additional capacitor customers to make over the next year or so?

We don't have a hard number on that, but when we -- when we give guidance for '03, we've give you some sense for that. We're waiting to get some schedules.

And one final question on my part, if I could. There are a lot of moving parts out there, a lot of products, model numbers, but can you make a comment, maybe just broadly, about how pricing trended in the quarter? Do you feel like you got any price increases?

I don't think there was any major movement plus or minus.

Across all of them. Okay. So that didn't suppress the growth at all.

No.

There were no price reductions in a particular company.

No.

Okay. Thanks.

: Our next question comes from contain and Keay Nakae with Wedbush Morgan.

If we could just zero in on expected gross ma engines in Q4, it seems like you obviously made some significant improvements at Sierra, but it seems like you have a little bit of improvement left there sequentially as we head into the fourth quarter. Am I looking at that correctly?

Yeah. Yeah.

We expect there's more improvement, we're expecting improvement sequentially at most of our business units, including Sierra. We made a very -- that's right. The other impact, obviously is with respect to Globe is now in the equation. Globe has separate financials for Globe were part of our 8-K, but they're lower an the average margin for the rest of our business.

On a percentage basis.

Yes.

And then, on the other hand, on the consulted basis we won't take the hit on the fourth quarter from the inventory that we had to take in Q3.

Okay. And then, with respect to the third wet tantalum customer, am I correct in hearing you saying that they have committed to using that product --

Yes.

-- in a device.

Yeah.

-- that they expect to market in the middle of next year?

Absolutely right.

Okay. That's pretty much all I had. Thanks a lot.

Okay.

: Our next question comes from Glenn with Morgan Stanley.

Just a couple follow-ups. It's a pleasure asking these questions with Larry around here. On the R&D and SG&A line, can you give us a sense on the absolute dollar basis, what kinds of trends you're seeing? In other words, do you anticipate SG&A sort of sticking in sort of a six, six and a half million range, and R&D in the three and a half range in the quarter?

Yeah. I think for the foreseeable future you're going to see SG&A, if it picks up much from that, somebody will be, yeah, somebody here will pay with their head, and I hope it's not me. But expect that to be in that range. The nature of what we're investing in, you know, given the acquisitions we have made and sort of the far-flung way we're operating the company now, we have some real investments to make, particularly in IT. Much of that will be in the form of capital kind of spending, so there is a fairly significant amount of infrastructure that we will be investing in. I think, as a percentage of revenues, for modeling purposes, I wouldn't expect it to creep up much beyond what it is, but in terms of relative dollars, it could tick up a little bit, but it will be in that range.

So for the fourth quarter, is there any reason why it would be more than a hundred or $200,000 higher than the third, SG&A?

I don't -

I mean there's not like a bonus pool or something that comes in the fourth quarter, or anything like that?

No, not unless there was a dramatic -- in terms of those variable things, unless there was a dramatically different revenue, top-line number than we're currently looking at.

And as we go up the quarters going forward, but over a year-over-year basis, probably not much faster in sales growth.

I would certainly hope that's --

Let's go through the same exercise. For R&D in the four quarter, we're going to be a down tick in absolute spending relative to this quarter.

I would expect it to be relative flat.

As we go into next year, even a 10 percent increase in that first quarter would suggest a real ramp-up to more like four, four and a half million.

10 percent?

In year over year. You had this first huge quarter in terms of R&D spending.

Some of our net -- some of the R&D is net, so on a quarterly basis, it can be impacted by reimbursement funding.

Right.

So I would have to go back and look at that. I would look at R&D in terms of, you know, sequential quarters, and I would expect it's going to be relatively flat in terms of spend. Obviously, as a percentage of revenue is dropping, as we add things like Globe into the business.

Right. Okay. I appreciate your help.

Okay.

: Our next question again comes from Archie Smith with Piper Jaffray. Please state your question.

I just want to know who's starting at quarterback this weekend? One quick question, Ed. You usually are willing to give us, at least, a general update on acquisition activity, whether you're looking at a lot of stuff not so much stuff, and whether or not you think you have deals to be consummated over a six- to 12-month period.

Well, Archie, I think we're looking at a number of things, and I think, as I mentioned a little earlier this year, I think there's a pretty good possibility that we would do threats within mower deal sometime within the next 12 months. The Globe -- the Globe has been a relatively straightforward process, very well-run company, highly respected by its customers, a company we've been very familiar with, because they've been a supplier for many, many years. And so we're very confident that we could take on certainly one more acquisition without -- you know, within the infrastructure that we've got in place now.

And you have properties that look like they would fit in your wheelhouse that are willing to sell?

Yes, we do.

Great. Thanks a lot.

: Our next question comes from Matthew Butten with Argus.

Matthew (ph) Butten (ph): Hi, guys, and congratulations as well.

Thank you.

Matthew (ph) Butten (ph): Can you tell me, on the brady side, if you exclude the customers with the inventory issues, what would the growth have been for the quarter for brady batteries.

Probably flat to low single digits. Low single digits. For the three quarters?

Matthew (ph) Butten (ph): Right.

Yeah.

Matthew (ph) Butten (ph): And as we look at your quarterly performance, help me understand, the $0.12 that you talk about versus the $0.10.

I'm sorry. Yeah.

Matthew (ph) Butten (ph): And I know the two cents is relative to the inventory, but explain to me, is this a one-time inventory runthrough?

Yeah, let me.

Matthew (ph) Butten (ph): Just give me a little more color on that, please.

We reported $0.12 obviously at the bottom under GAAP. The two special charges were $0.10 on an after-tax basis. The inventory write-up was also $0.02 a share, so it's an unusual thing. It happens every time you have purchase accounting of -- and you purchase inventory, the accounting rules require you to value the inventory, you know, at fair value, so you write it up, if you will, what you bought to a higher number than it cost to manufacture, and then as that inventory sells through, you have sort of an artificially low gross margin. So it certainly has happened to this company in the past, the acquisition of Sierra a year ago if we -- additional acquisitions are made, we would face it again in the future.

Matthew (ph) Butten (ph): And is there a residual impact next quarter.

No, I'm sorry. It's a one-time -- Globe's inventory turns significantly faster than the rest of our company. So all that purchased inventory was flushed -- sold through during the quarter. It's all gone.

Matthew (ph) Butten (ph): Okay. And when you talk about the fourth quarter and some of your customer ordering patterns in December, maybe can you give a little more color as to what that variability might be caused by?

Well, typically -- some of our customers, we have calendar and fiscal years. People have objectives to keep inventory down and so forth, and so sometimes we get asked to delay a shipment into January that might normally have gone in December. We're increasingly on pull-through combon (ph) with a lot of our customers, so with the flow-through situations that's not much of a factor, but we still can see it happen periodically, and there's no reason to believe it might not happen to us in December of this year. But there's nothing specific that we know of right now, sitting here at the end of October.

Matthew (ph) Butten (ph): Okay. And when you talked about the earnings guidance in the $0.65 to $0.70, on an apples-to-apples basis, would we be adjusting it by $0.10 or $0.12 to come up with the -- on the same basis as your prior?

Um, probably $0.12. Yeah.

Matthew (ph) Butten (ph): So the EPS math that you did was maybe off by two cents in terms of the fourth quarter.

Run that question by me again.

Matthew (ph) Butten (ph): Well, you adjusted your reported growth.

When we -- we took it down to 65 to 70.

We took it down to -- the earlier takedown and guidance related to -- related to just the two sort of very unusual one-time charges for the covenant write-off and the investment write-off, as opposed to the other maybe not so very unusual one-time charge of purchase accounting for a write-up for inventory. So the $0.10 related to the first two charges.

Matthew (ph) Butten (ph): Okay.

Apples and apples add 12 cents.

Matthew (ph) Butten (ph): To the 65 to 70?

Um-hmm.

Matthew (ph) Butten (ph): Okay. Thank you.

: Our next question comes again from Mark Landy.

Guys, could you maybe just discuss the business outside of cardiology, with respect to maybe artificial hearts, stimulators, and how that new business entity is going.

Yes, emerging technologies is off to a good start, Mark. Of course, with the LVAD folks, it's very much a question of their clinical trial time line, and so forth. Let me comment on an area that we think is a very potential bright spot, and that's the implantable drug pump business. We continue to be very optimistic about the approval -- ultimate approval of the Medtronic Implantable Insulin Pump. That's a product where we have very high content, in terms of total value, and it's an area we have invested in over many years and we think we'll finally see dividends start to pay from that and we are working with some other large companies whose projects are fairly well along in other applications other than insulin.

This isn't going to happen overnight, but if I look over the next two to four years, this could become a very significant business for us.

Thanks, guys.

: Our next question comes from Kurt Kruger.

Thank you. If I could just follow up on that last question. We track cyberonics quite closely, and we figure they might be worth, in terms of batteries to you more on the order of four or five hundred thousand dollars per quarter, because they've been going through a growth spurt, as you know. You said earlier in the call that CFX was probably only a couple hundred thousand a quarter, but am I out of line or incorrectly assuming -- is it the CFX that is the cyberonics battery.

This is one where maybe ups and downs in inventory levels. Cyberonics has been a very solid customer, and I didn't mean to neglect them in my comment, but certainly as they move ahead with the potentially for other applications, they'll be a growth story for us, sure.

But you still made the comment that it was only a couple hundred thousand.

That's correct, and I said I believe that's a result of maybe some inventory adjustment on the part of the customer.

And on Sierra, you made the point, I think, that it was less than 50 percent penetrated, using those screen devices -- filtering devices. Can you remind us which companies you sell to. And am I right to assume that Medtronics makes their own filtering device.

Medtronic, as far as we know does not make their own filtering capacitors. The best way to cut -- the first way to slice the pie is most of the Europeans devices are not filtered.

Okay.

So the percentage of adoption in Europe is, you know, probably under 10 percent. But we see significant growth in the U.S. as new product families come on board. So then in the aggregate, with come up with less, except for the companies that aren't filtering at all, we sell something to everyone.

Okay. So Medtronic is filtering, and you - to the extent they do filter, you sell the filters to them.

We sell something to everyone.

Okay. Thanks you.

Thank you,.

: Gentlemen, there are no further questions at this time.

Okay. Thank you!