Integer Holdings Corp (ITGR) 2002 Q4 法說會逐字稿

Welcome, everyone, to the Fourth Quarter Wilson Greatbatch Technologies conference call. My name is Patrick and I will be your coordinator. Initially, all participants will be on a listen-only mode, with a Q&A session to follow at the end. If anyone should require assistance at any time, please key star, then 0 and an operator will assist you. Before we begin, I would like to read the following Safe Harbor statement.

This presentation and our press release contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. These risks and uncertainties are described in the Company’s annual report on Form 10-K. The statements are based upon Wilson Greatbatch Technologies’ current expectations and actual results could differ materially from those stated or implied. The Company assumes no obligations to update forward-looking information included in this conference call to reflect changes, assumptions, the occurrence of unanticipated events or changes in future operating results, financial conditions or prospects.

I would now like to turn the call over to today’s host, Treasurer and Director and Investor Relations, Tony Borowicz.

Thank you, Patrick. Good afternoon and welcome to our Fourth Quarter Earnings conference call. With me today are Ed Voboril, our Chairman, President, and CEO, Larry Reinhold, our EVP and CFO and, joining us for the first time on our call, is our new EVP and COO, Joe Almeida.

In terms of today’s format, Ed will provide an overview of the fourth quarter and Larry will discuss the financial details, as well as earnings guidance for 2003. Joe will be available for the appropriate Q&A that will follow our prepared remarks.

Now, I’d like to turn the call over to Ed Voboril.

Thanks Tony. Good afternoon, everyone. Our results from the fourth quarter were, once again, quite strong.

Sales for the quarter were a record $47m, which exceeded our internal expectations. If you were to back out the revenue of Greatbatch Globe, which we acquired in July of this year, our apples-to-apples comparison growth rate was 19% in the quarter. EPS of $0.23 were right in line with our own expectations. For the year, sales of $167m exceeded our guidance, with our medical segment growing 15%, exclusive of the Globe and Sierra acquisitions. In terms of full year EPS, we achieved $0.68 a share, which was in the upper portion of our guidance range.

Now let me walk you through our major product segment sales performance for the quarter.

Looking first at our medical battery sales, revenue increased by 8%, with ICD battery sales increasing 8%, pacemaker battery sales remaining flat, while other power source revenue doubled in the quarter. The lower growth rate in ICD battery revenue that we have seen, compared to previous quarters, is mainly due to customers filling their pipeline in the fourth quarter of ’01, in anticipation of the higher current year market demand. ICD battery sales for the full year drew at a rate of 28% and remain a strong growth catalyst for us looking into 2003.

Turning to pacemaker batteries, the flat revenue was due, in part, to the introduction of higher voltage battery chemistries required for new CFx devices being introduced in the marketplace today. Sales have and should continue to shift from our oldest technology, low voltage lithium iodine cells.

Looking at our capacitor product line, we have many successes to discuss.

First, revenues in the quarter grew 23% to $7.5m. We also made our first shipment to the second customer. In addition, we began our investment in product development and production capacity to meet the requirements from an agreement with another major CRM customer. Sales to this third customer are anticipated to begin in mid-2003. By signing and delivering to our 2 new customers, we can expect sales to grow to more than our $30m current annual run rate in the coming year.

The results in our medical component category were extremely strong, with revenues growing to $21.4m. Again, if we exclude the Globe revenues, sales still grew by a robust 40%. The main driver for this growth is the inclusion of our Greatbatch Sierra EMI filtering feed-through in new products introduced by major Sierra end customers. Though some of this may represent initial pipeline filling, indications are that demand will be strong throughout 2003. We have been deploying Six Sigma quality and lean manufacturing initiatives at Sierra, which have put us on a steady improvement track through the last half of 2002 and continuing into 2003.

Finally, commercial power source revenue was lower by $134,000, compared to the fourth quarter of last year, but we believe that this decrease is not indicative of any significant trends. The oil and gas market has remained relatively stable since bottoming out in April of ’02. We don’t see the market dropping below current levels and could possibly show some improvement, modestly, in this product line for 2003.

Let me conclude my remarks by addressing our new product pipelines and our R&D activities and how they will impact our business over the next several years.

We’ve already discussed our newer generation CFx higher rate battery technology. We developed this battery chemistry several years ago in anticipation of customer requirements. We have just begun to see the impact of this technology in the marketplace, with higher voltage requirements being introduced into the CRM marketplace by our customers.

In addition, this chemistry is also being adopted for neural stimulation devices being introduced by our customers and, for the full year, CFx batteries accounted for more than $1m in sales. Revenues from this product should begin to provide more significant contributions, in terms of gross margins and revenues, over the next 1 to 3 years.

Secondly, through our R&D activities, we have developed medical components that are used in drug deliveries, LVAD’s, and artificial hearts and hearing assistance devices. These products are in various stages of market acceptance. In terms of the introduction timeline, these products will gain in significance over the next 2 to 4 years.

On the emerging development front, we continue to use material science expertise to create new standards in the marketplace. We are far along in the development of a new battery chemistry that, in simple terms, combines the best performance features of SVO and CFx and is designed to enhance performance. This next generation power source, which we refer to as Quasar, should become the industry standard for all types of implantable devices.

We have already begun to provide for increased capacity by purchasing a new manufacturing facility in December. This capital investment will allow us to meet increased ICD battery product demand going forward.

In summary, R&D and engineering remain a key element of our business model and we will continue to invest there significantly, in order to continuously deliver our new solutions to our customers.

Now, I’ll turn the call over to Larry, who will discuss the financial results for the quarter and guidance for 2003.

Thanks, Ed. Since Ed has already provided an overview of the sales performance for the quarter, I will focus on the gross margin and the expense categories.

Our overall gross margin for the quarter was 43%, which compares to 45 % for the fourth quarter of last year. The margin drop is attributable to the inclusion of the lower margin Globe sales in our consolidated results. Excluding Globe, the gross margin for the quarter would've been 46%. In terms of the Globe acquisition, the integration has gone extremely well so far. We will continue to focus on improving efficiencies and implementing lean manufacturing initiatives, with the goal of improving Globe’s margins significantly by the end of 2003.

In addition to the Globe mix issue, we are in the middle of consolidating our two commercial battery facilities into a single location. This integration has resulted in additional costs during the quarter and we expect ongoing higher costs through the first quarter of 2003, at which time the consolidation should be substantially complete.

On the positive side, we have significantly improved the manufacturing efficiencies of both our capacitor and filtered feed-through manufacturing operations. We have greatly reduced our scrap costs, the impact of which is partly reflected in the second half of this year. We expect year over year margin improvement as the impact of the scrap reductions is reflected in our full year results.

Now, let me make some comments regarding operating and other expenses for the quarter before discussing our sales and earning guidance.

The fourth quarter SG&A expenses remained at 14.9% of sales, about the same level as last year’s fourth quarter. However, included in this quarter are significant recruiting and relocation expenses, hiring of our new COO and to hire our first CIO positions, as well as several additional management relocations. These costs added in excess of 1 point to the current year’s percent of sales ratio.

R&D and engineering expense was 8.3% of sales in the quarter. This run rate of spending is lower than the historical levels. The reason for this is primarily due to the inclusion of Globe revenues, with little corresponding R&D and engineering spending.

Goodwill amortization of expense of about $1m per quarter was eliminated beginning on January 1st of this year. This accounting change had the impact of reducing this quarter’s operating expense as a percent of sales by about 2 points. Other expense in the fourth quarter of in excess of $700,000 was primarily due to losses on normal disposals of property, plant, and equipment.

Finally, the tax rate in the fourth quarter was reduced to 28% to reflect an annual effective tax of 1.5%. This reduction was due to the completion of an R&D tax study by an outside firm and various state tax planning initiatives that resulted in tax credits greater than we initially estimated. We believe that further tax planning opportunities exist, which should serve to keep next year’s tax rate at the current 31.5% or lower.

Turning to the balance sheet, the fourth quarter was another strong performance from a cash flow perspective. During the quarter we funded the purchase price of our new battery facility with internally generated cash. Despite the higher capital requirements, we also paid down $750,000 in debt in the quarter and we increased our cash position by $1.3m.

Looking ahead, we have essentially prepaid 60% of our next year’s debt principle obligation. We ended the year with a leveraged ratio of 1.9 times, which is debt to EBITDA, that will further serve to lower our long-term interest rate. At current rates, our effective interest rate on our long-term debt is now 3.4%, down a full point from a year ago.

Next, I’d like to offer some commentary on our sales and earnings guidelines for next year.

Starting from a baseline that includes a full year of pro forma Globe revenues in ’02, we expect top line sales growth in the range of 13% to 18% for the entire Company. Looking at the two major business segments, we expect medical revenues to grow between 15% and 20% and commercial revenues to increase from 0 to 5%.

In terms of our growth in net income, it is our expectation that earnings will grow at a rate greater than sales, as we leverage our costs over higher sales volume. Again, if we were to include Globe’s operations as if it had been in our results for the full year and exclude the third quarter 2002 special charges for the write off of the Hittman non-compete, the write off of an investment in an unrelated entity, and for Globe purchase accounting charges, which all total $0.12 a share, our outlook is for net income to increase by between 16% and 25%, depending on the level of sales volume achieved.

This ends our prepared remarks and now I would like to turn the call back over to Patrick, our moderator, to facilitate the Q&A.

Thank you. Ladies and gentlemen, at this time, if you do have any questions or comments, please key star-1 on your keypad, star-3 will withdraw that question and all questions will be taken in the order in which they were received. One moment for the first question, please.

And we have our first question from Archie Smith. Please go ahead.

Hey guys!

Hi Archie.

Hi.

How are you?

Great.

I’m a little remote today, so I don’t have my full range of questions that I would normally, but I do have two things that come to mind.

Sure.

And the first is on your gross margin, which seemed to be a little light. Not dramatically so, but just a little bit and is the basic point here that you’ve had some kind of one-time expenses? Or do you think you are going to see gross margin at or near these levels for some time?

Well, I’m going to answer your last question first, Archie, and then I’ll ask Larry Reinhold to comment. We believe that we will continue to improve gross margins beyond the present levels.

We have somewhat of a mix issue with Globe, but as Larry mentioned, we’re in the midst of initiating some quality initiatives and lean manufacturing initiatives at Globe and we will improve the margins there. And we will continue to see, we believe, significant improvements in the margins with the Sierra and our capacitor business. Which showed significant improvement over the second half of this past year in ’02 and, we believe, will continue on an improvement track through ’03.

Larry, would you like to add further to that?

The only thing to add, Archie, is that the consolidation of the commercial facilities - again, we made the commercial batteries in two different facilities --

That was going to be my next question.

Yeah, one here in western New York and also up in Massachusetts. We are consolidating them both into the Massachusetts facility. Again, we’re about halfway done. We expect to be mostly done by the end of March. Some of this may trickle in a little bit into Q4, but most all of it will be done in Q1, so I would expect that there will be some margin impact in Q1 also from that. So, at that sort of a - I won't say it’s one-time - it’s mostly a two-time charge for the same thing.

Let me ask about that. What would your gross have been in the quarter without that consolidation? I think you broke out the gross margin ex-Globe, but what would it have been without the battery consolidations?

I don’t have that calculation exactly with me. I think I might estimate about a point higher.

About a point, okay. And then your capacitor business, Ed, is obviously ramping very nicely. You got customer 2 kind of under your belt, customer 3 coming. Is it reasonable to assume that the third customer is considerably larger than the second customer, in terms of their contribution to growth in the business is?

Well, I probably don’t want to comment on that in detail, Archie, but I think that the three customers, collectively as they all participate in the growth in the ICD market, will collectively give our capacitor business a nice boost for ’03.

Okay. Thanks a lot guys, good quarter.

Thank you, Archie.

And we have the next question now from Glenn Rich [ph]. Please go ahead.

Good afternoon, everyone.

Hi Glenn.

Hi Glenn.

Several questions. Let’s start off with history first. In the press release, it looks like you said for the full year ’02, you came up with $0.68 plus the $0.12 in one-time charges taken in the third quarter. I’m coming up with $0.78. I’m coming up with $21-point -- hold on, let me just get this -- $24.3m pre-tax, $16.6m after tax, which gets you $0.78. What am I doing wrong in this calculation?

Glenn, I don’t know what you’re calculating.

Did you go back and restate tax rates for the first three quarters?

No you don’t. The way you -- sorry.

You just made the fourth quarter adjustment.

Yeah, the way you handle those things is you have to sort of flood the fourth quarter to your effective rate for the year. So, the fourth quarter has a 28% effective tax rate, which gets the year to 31.5 points.

Right. Okay. But you don’t know what you’re using for pre-tax and net to get you to the $0.80?

Yeah, you know we haven't looked at it that way, Glenn. If you take the $0.68 we reported for the full year?

Yeah.

We know there’s $0.05 for the Hittman write off, $0.05 for the other write off, and $0.02 for the Globe purchase account, for the inventory. You kind of write up and flush through and --.

Oh. You took that out? You took that Globe out of there?

Yeah. That’s the other $0.02 of the $0.12 a share.

Okay.

So, however you model it, but that’s how we've reported that.

Okay, next question then. You said SG&A, without hiring - I’ll be controversial here - I’ll say without hiring Joe and your CIO, it would've added 1%. Was that 1% to sales for the entire Company, or was it just 1% growth in SG&A?

No. That’s of sales for the whole Company. That’s the percentage of SG&A to total revenues with a point of it due to Mr. Al -- the guy sitting to my right and another person.

Well, that’s the cost of hiring a celebrity, I suppose. All right, so looking forward, when we do the math, you’re saying $0.80 and then we essentially grow at either $0.15 or $0.25, which is quite a wide range, I must say. But you come up with some numbers that are a little bit less than the consensus numbers out there. I’d love to know what you think the delta is, in terms of -- I mean, the revenues look fine. Is this an issue of the SG&A? Is this an issue of the gross margins? Maybe talk a little bit about what you expect, in terms of these costs, in ’03.

Yeah, first, Glenn, if you do the cross-multiplication of it, the range is not that far off on the EPS. I’ll leave you to however you want to look at that.

Well, what range are you thinking?

It’s 15% to 25% growth over sort of the pro forma EPS that we had this year.

Right. So, that’s $0.92 to $1.00?

You know, maybe we can take that offline later on, if you will, with our IR groups. The other part of your question was what gives rise to the range. Obviously the impact of them is we have different profit margins and gross margins on certain different products and the mix changes significantly and the gross profit changes fairly significantly, depending on what we sell.

Right.

So we can't, depending on you know how lumpy quarterly things get and depending on product introductions and the like, depending on which of our components are in demand, it can move things.

Let me ask you a different way. If, 90 days ago I asked you to look at the range for ’03 from a cost perspective and then compared to today, how is that adjusted? What incremental expenses are you including that you didn’t know 90 days ago?

Well you didn’t ask me that 90 days ago, so I don’t know exactly how to answer that. Other than we’ve gone through in the past, sort of the end of the year if you will and we’ve gone through our annual planning cycle and we have brought our new COO on board and sort of the numbers are, if you will, what they are.

Yeah. Well, can you give us a little bit, then, what's in the SG&A line for next year and what you’re thinking?

Yeah this --

Or for this year?

Pardon me, what was that, Glenn?

Just for this year, what you're anticipating for SG&A, if you can give us a general idea on what’s in there, in terms of the increases.

What’s in the ’02 numbers?

’03 numbers.

The ’03 versus ’02? Well, we’re not breaking the guidance down. We certainly anticipate continued investment in IT in order to support the far-flung operations of the business. As we mentioned, we’ve purchased a new facility that we’re going to -- it’s going to become a primary manufacturing facility for our implantable batteries. So, there’re going to be a number of things that we’ll invest in, in ’03.

Also, obviously, with respect to Sarbanes-Oxley and other things that are imposed upon us from the outside world and insurance and premiums, etc, we do have some higher costs that are pretty difficult to manage and we’re not unique in that world.

Okay a final question?

Sure.

Can you give us a range for the first quarter, what you’re anticipating on non-EPS?

Good try!

I assume that’s a no.

Yes, that’s a no, Glenn.

Thank you.

Okay.

Thanks, Glenn.

We have the next question now from Bob Hopkins. Please go ahead, sir.

Thanks very much, good afternoon.

Hi Bob.

Hi. I just want to go back to this guidance a little bit more and just ask you specifically, because I’m offline too or remote, whatever the right word is and you gave some guidance that included some things and it didn’t include some others. And I’m wondering, is there any opportunity that you could just specific, in terms of the ’03 revenue and EPS range that we should be expecting, just do the math for us?

You know, Bob, the numbers are what they are. I mean, we expect our medical sector, again, to grow at 15% to 20%, flat to 5% on the other commercial part of the business.

Yeah, no, no, I know. I heard that, but I’m just -- you gave some -- I mean, essentially, in your primary guidance, you gave some sales guidance and some earnings guidance.

Right.

That again, included some things and excluded some things that will crank out a number or a range of numbers for total sales and then EPS.

Sure.

And I’m wondering if, because in this guidance you’re excluding some things and including some things and I’m just wondering if you could just do that math for us. What would that 13% to 18% sales growth for the entire Company spit out as a revenue range for ’03? And then, what will the -- you know the same thing on the EPS side?

Yeah, on the top line, pro forma, you’re probably at maybe around 200 or, depending on what numbers you use, the 209 or 210, something like that.

Bob Hopkins200 to 210? Is that what a range --?

Yeah.

--that 13% to 18% gets you to, to 200 to 210?

Yeah, I mean, we reported $167m at the top line. Now we add Globe for half the year we didn’t own it and break it down into the two pieces.

And then the same thing on the EPS side, does that range that you talked to, of - what was it? - 15% to 25%, was Glenn right? Did that get you to $0.92 to $1.00?

Well --

He’s in the ballpark there, depending on what your assumption is, really, that you include for Globe’s profitability.

Right. Right. We know that’s somewhat less profitable.

Right. As we announced when we purchased Globe, again, when we revised our guidance at that point in time, if you recall, we raised the revenue guidance for the rest of the year by $10m.

Right.

We left the earnings guidance as was, although we did say that we believed that the Globe acquisition would help get us into the upper end of the range from where we before. So, from that perspective you can see the level of impact it probably has, to make your assumption.

Right. And also, just historically, the way you guys have guided, I think and correct me if I’m wrong, is sort of operating earnings growth of 25% or greater and I'm just wondering. This is specific to ’03, but from a long-term perspective, is that still the way you think about the growth opportunity for Wilson Greatbatch?

In our presentations and the like, we've talked about long-term 25% growth in bottom line earnings.

Right.

Certainly our long-term objectives have remained constant.

Okay. And so there’s nothing in what happened in the last three months and obviously there’s sort of a reassessment of things with Joe coming on that changes kind of the way you think about those long-term growth opportunities for Greatbatch? Is that fair or --?

No. Let me jump in here, Bob. I think that we believe that the long-term outlook for CRM and for our ability to grow with that marketplace is as positive as ever. And, quite frankly, with some of the excitement about the additional indications and the new therapies, CRM looks even more attractive, perhaps, if that’s possible, than it did even a year or two ago.

Uh-huh.

But as we approach our business, we’re looking at ways to be more efficient, more cost effective. And as we look at that, maybe and certainly with our investment in the new battery facility, to bring some new technology on board and to even further refine our manufacturing approach, there’s going to be some investments and some expense on that in ’03. And quite frankly, Joe hasn’t had the time to take a complete look at that, so we’re giving a rather broad range now.

And, I think, as we move further into the year, I believe we’ll be in a better position after we understand what these investment levels are, what these expense levels are, to maybe tighten up the guidance.

Okay.

So, don’t misconstrue this as a different way of looking at our business, because it certainly is not. As a matter of fact, the question that was asked earlier regarding gross margins, even though this quarter was unusual with some of the puts and takes regarding consolidation and the addition of Globe and so forth, I’ll stand by my commitment that we’re going to improve our gross margin by one point a year.

Right.

And there’s going to be Six Sigma initiatives when manufacturing and so forth. We’ve go the right team in place. We’ve got the right initiatives [technical difficulty] and I believe it is going to happen.

So, is it -- you know I just want to make sure I’m thinking about things correctly. Is it fair to summarize, then, that as far as you’re concerned, the business outlook continues to be very, very strong in ’03, spending a little bit more money than perhaps analysts had been forecasting? Because I think most people are above the sort of high end of your guidance right now, in terms of a consensus, but that we’ll get a little bit better look at things a little bit later on in the year.

Right. Again, we are making some investments this year. We certainly, in looking at the growth in the implantable battery business, need to be positioned to meet that demand and we felt that a new facility was the best way to do that and the most cost effective way to do that in long run. And the infrastructure regarding information technology that we have to have in place to support the business is, quite frankly, going to require an investment in this coming year and perhaps into the next year. That, again, will position us for the type of success that we expect in the future, but it’s going to mean some additional spending.

And as we refine our estimates about what that’s going to take, as Larry mentioned, we have a new CIO on board who’s looking, who’s making recommendations on how to report to the IT and of course, Joe’s onboard less than a month and he needs to finalize his plans. And we’ll be finalizing those plans over the next month or two, in terms of how we’re going to proceed to implement our new manufacturing facility and other related applications of lean manufacturing approaches to help even further reduce our costs and improve our margins.

Okay. Great, thanks very much and welcome, Joe.

Thank you.

Thanks.

And we have the next question now from Kurt Krueger [ph]. Please go ahead, sir.

Hi guys.

Hi Kurt.

Hi thanks, yeah, a couple of questions if I could? Again, just so we understand, I know you’ve given a few different parameters that we can calculate or deduce the expectations, but could you just tell us what the base sales will be for corporate in ’02?

Yeah, I mean, we reported $167m and can probably add $10m for Globe for the first half of the year we didn’t own it.

So, you figure $10m for Globe?

Yeah.

Right.

[Crosstalk]

About a $20m business and we’ve owned it half the year.

Okay, you know just along the same lines as some of the other analysts have asked. I’m doing some scratching away on a piece of paper here, or Nathan and I, but it looks like for you to meet your guidance, make your guidance, you’re not assuming any kind of lift in operating margins and maybe I should just ask that. Do you think we expect op margins in ’03 to be flat with the way you’ve finished this year at about 17% op margin? Is that fair?

We’re, again, not guiding with detailed information beyond what we’ve already provided. So, we believe our tax rate, we've already stated, is going to stay at 31.5% or lower.

Right.

We have some investments that we’ll be making in various fixed projects.

All right. It just seems like we’re backing into that op margin. It looks like in order for you to make the bottom line expectation of that $0.92 to $1.00, it seems like that’s predicated on a pretty poor op margin performance.

No, I don’t think that’s right, Kurt.

Okay.

I don’t believe that’s Right.

Because I would -- we’d like to see that op margin widen from these levels, obviously and feel like you can do that as you move forward. You know, just a couple of questions back into some of the commentary earlier that you made when you presented the results? You said, I think, Ed, I’m not sure if it was you, but you said pacemakers were swelled because, in part, not only just was there a buy-in in the first quarter of ’01 -- excuse me, fourth quarter of ’01, but you also said that, I think, there’s been a shift toward CHF devices. Certainly we’ve all seen that.

Yes.

But the pacemaker sales have also grown at these companies. You know St Jude has grown it’s pacemaker sales. I mean, obviously it --

Well, there’s a mix, Kurt. I mean, some companies are up and some companies are down or closer to flat.

Okay.

You know, it’s a mixed bag.

All right. I mean, my understanding was guidance was at least, on the year, it was up a little bit in pacemakers, up even maybe 4% or 5%. I can’t remember. I know they had the CHF wend its way through those.

Yeah, as we discussed, Kurt, sometime in the next couple of years, lithium iodine will hit it’s high watermark and we’re going to see it decline as more products and more applications convert to medium rate or higher rate cells. It’s just going to happen.

Plus the iodine --

Nathan going to ask one, but if I could just duck in before him. The third customer, the Cap customer you said was going to actually manifest revenues for you in the middle part of this year.

Mid-year, that’s right.

That’s great, good news. Would that be a generation of product that customers are talking about with us at this point? Or is that a future generation of just buying in very early?

I’m trying to go through the whole catalog of the different products. To be honest with you, I don’t know the answer to that question, Kurt. I think -- I don’t know.

Because I would’ve thought that, had one of the two, I trust it’s one of the two big ones, if they had been conversational to us about that new generation.

Well, I’m not sure they’re going to be talking to you about what capacitor they’re using in their products, but you know in most cases here we’ve been talking to all of these folks for a long time. So things move along and then all of a sudden something that was kind of moving along all of a sudden gets locked in and a decision’s made and we know we’re going into production. So, it’s not like this kind of just popped up.

Yeah.

So that means that is those are levels that would represent a real production level, it wouldn’t be just sort of -- I just --

Oh no, these are not just evaluation units. These are production units.

Okay, there’s no trialing, because I think that’s --

No, it’s the production units.

Ed, this is Nathan, just a real quick question. With your CFx technology, have you yet seen your pacemaker customers start to design that?

Absolutely.

So they’re designed into normal pacemakers?

They’re being designed into what you might have predicted for these devices.

Okay. That’s great to hear.

Great and then, going back to the Cap business, you’ve got the second customer that actually had revenues already in the fourth quarter. Is that what you said?

Yeah.

And then that will continue on, I guess, in the New Year, certainly, and then you’ll have the third names. Are we going to find out the identity of any of those customers at some points?

Well, I’m not going to tell you, but that’s up to them if they want to tell you. I can't disclose what a customer’s using unless they tell me that I can do that and most people want to have this kind of information remain confidential.

Yeah. That’s fair, all right, well that’s helpful. Thanks, guys.

Okay, Kurt.

We have the next question now from Cain Kaye [ph]. Please go ahead.

Yeah, just a couple things. With respect to the new battery facility, can you give us an idea of the up front costs to purchase the facility?

Yeah, it was about $4m.

Yeah. That’s the building, which is a little bit more than a shell, but basically the big investment, which we haven’t really determined yet, is going to be facilitizing it for the battery production with a significant amount of capital spending involved there.

Sure. Okay and then, on the other income line, the $744,000, can you give us a little more detail on that?

Yeah. Most -- primarily, Cain, that was the write off, if you will, of some fixed assets that became obsolete. And, I think, in a normal sort of fourth quarter process identified some fixed assets that were obsolete and writing them down to their disposal value.

Okay. That number seems to be a little higher than historical. I’m just trying to assess the one-time nature of that.

Yeah. Well, we actually got a new CFO coming to look at it and all the quarters, is what you’ve got.

Yeah. No, that’s fine. That’s fine.

Hopefully that’s more in the one-time nature than occurring, let me put it that way.

Right. Okay and then, just to try to get a better handle on the EPS for next year if we look at Globe as a separate business, I know when you acquired it, you did say it was profitable.

Sure.

You didn’t really add too much to -- I mean, Larry spoke to this earlier.

Right.

But your guidance for the year really didn’t go up much, but we know it’s profitable. We know in Q3 there were some charges.

Right.

We look at that stand-alone, I would think that you’ve got to be making at least $0.05 a share there, maybe somewhere between $0.05 and $0.10. Is that in the ballpark?

I think you know we don’t disclose that, Cain, but --

Let me tell you the biggest issue at Globe. They have tremendous demand right now and we’re working enormous amounts of overtime to meet that, which is just killing us from an expense standpoint.

And what we’re doing, one of the first priorities Joe has been looking at is looking at ways to re-engineer the process at Globe so that we can cut down lead times, cut down work-in-process and significantly reduce the amount of overtime.

Now, that’s not going to happen overnight, but as was the case with Sierra and with capacitors, we are addressing a manufacturing cost issue and throughout the year we will see steadily improving margins at Globe. But it is not going to be a step function.

Right, but it was profitable?

Yes.

And it will be potentially, slightly, more profitable? Is that fair, just low?

Yes. Yeah. I think that it will be more profitable this year, absolutely.

Okay.

In very practical terms, one thing that happened, of course, is the depreciation expense went up to core.

Yeah.

Okay. So, with that said, when we look at EPS for next year, with your net income growth, I would think a dollar or more is reasonable, on an apples-to-apples basis, the way you’ve laid it out?

We’re certainly shooting for the high end of the range, but until we have a better idea of what a couple of these major investment areas are going to mean, in terms of expenses during the balance of the year, we’re giving you a rather broad range.

Okay. Fair enough, thanks.

We have the next question now from Sanjif Aurora [ph]. Please go ahead.

Thank you, just a couple follow-ups. With regards to the R&D that you’re doing in capacitors?

Uh-huh.

Our conversations with Medtronic indicate that they’re not one of the three that you’re talking to. What would make them interested? Is it -- they’ve expressed concern to us regarding the weight of the device and a few other things with regards to how the capacitor functions. Do you think that you have a product that intrigues them right now, or do you need to do -- is there a next generation that you’re working on that might reach that stage?

Yeah. I think we’ve got a product that intrigues anyone that’s making ICD’s. We’re looking at, by the end of year, end of ’03, being able to deliver almost 7 jewels per cc - delivered - which is probably 40% better than anyone’s even claiming for aluminum, let alone what they're actually performing to and so that means significant size reduction potential. Our performance in many of the electrical characteristics is superior and we also believe that we do offer somewhat more flexibility in packaging, even with the prismatic aluminum that a couple of people are using today.

So, we continue - I’m sound like a broken record on this, but in fact we are continuing - to talk with every manufacturer of ICD’s about our capacitor technology and we remain optimistic that, at some point in time, every company making and ICD will be a customer at some level. That doesn’t mean they will adopt the technology for all of their devices. We never claimed we were going to get 100% market share. But we believe we will be represented in some part of the product line for everyone that’s making an implantable cardiac defibrillator.

And when you compare your product line today with the 6 jewel per cc capacitor that’s there, there’s a 7 jewel or would you anticipate the 7 jewel as selling for a premium and --?

No.

No.

Okay.

No I wouldn’t.

Can you talk a little bit about the capacity, with regards to capacitors today?

Yeah. We’re, right now, probably in a position to manufacture about 8,000 a week and with the existing facilities, we can probably go to 10,000 a week and we’re still working on significant reductions in scrap and rework. Which will further improve the ability to increase output beyond any given facility or work force addition.

Okay. Sticking on the R&D side, can you talk a little bit about the Quasar timing? And also, once again, any price premium or margin improvement associated with that?

Well, it’s probably at least three years away, in terms of actually going into a product that’s being delivered in the marketplace. But one of the things that we’re doing in designing this new facility is to introduce significant amounts of automation to the manufacturing process. So, we’d be actually improving our product costs with the new technology, improving our efficiency. We haven't talked to people in any significant way about pricing yet.

Okay.

We have to design our process, understand what the implications are from a cost standpoint and then we’ll talk about pricing.

Okay, just two more questions. One, components now, particularly with Globe, make up a significant portion of your revenues.

Right.

What are you seeing with regards to pricing in that segment of the marketplace?

It really, again, depends on the product area, for example, feed-thoughs. There’s almost a linear relationship, in terms of the price of a feed-through, depending on how many wires come out of it. And with the multiple leads, with the more complexity in terms of lead systems, the average feed-through is getting more complex and we’re able to charge higher prices.

In cases, we are working with some new materials and if we’re successful in those new materials, which have some characteristics that are of high value to the customer, we may be able to increase prices there. On the average, we expect prices to be relatively flat throughout, if I average ups and downs. We do give volume discounts, too. A lot of our agreements with customers have price breaks on volume and as the market grows and they get those discounts, sometimes on a product that we sell, we give a lower price because someone hit the volume point.

Okay and then lastly, with regards to the revenues for the emerging technologies, the neural stimulators, drug delivery, etc, what did that do this quarter?

Hold on a second, I’m looking at - yeah, there. Yeah, they were in the range of several hundred thousand dollars.

Okay. Great, thank you.

The next question now is a follow up from Archie Smith. Please go ahead.

Archie, we thought we’d lost you.

You can’t. I’m like a bad penny. I keep coming back. Two quick questions, one on SG&A. Given that you have now, presumably, relocated all of your major hires, is it reasonable to assume that that will blip back down as a percent of sales in Q1 or is that not a reasonable assumption?

Well, we have -- you can never say never in terms of whether you’ve hired everybody you need to hire. Again, we hire -- we have a new COO who’s joined us and there may additional people, high quality people, we bring into the business. So and again, we anticipate some increased IT and some other initiatives such as that, as well as some of the spend for, again, what I mentioned earlier, the Sarbanes-Oxley and all the external things. Those, unfortunately, we believe are permanent. So, I’m not going to say it’s a one-time blip in it’s entirety, but we expect to be able to manage our G&A as a percentage of revenues, sort of in the same general ballpark.

Okay and then last question. You gave us a pretty good idea of the Globe contribution to the top line in the front half year, had it been acquired and consolidated. What about a general sense of what the either bottom line or operating contribution would've been?

Yeah, again we haven't disclosed that. You know Globe --

Let’s start bigger than a bread basket.

Pardon me?

It’s modest.

Yeah, it’s modest.

Okay.

Okay?

That’s all I need, guys. Thanks a lot.

Okay Arch.

The next question is a followup, again from Glenn Rich [ph] and please go ahead, sir.

Hey folks.

Hey Glenn.

Hi Glenn.

I just got an email from a client saying I sounded angry last time. So, I’m not angry, I just --

You sounded normal to us.

Yeah I know. You know someone said to me that - they’re always in good moods - and well, wish I could say the same, but I’ll have to work on that -- just a couple of questions. After discussing sort of business plans with clients, what’s your best guess, do you think, for unit growth for pacers and ICD’s over the next 12 months for the market?

For the market?

Yeah.

I would, for brady, I’d still stick in the mid-range, like maybe 5%. On tachy, it’s 20-something and you know it may get up into the high 20’s, Glenn. Certainly it’s more than 20%.

Okay and what are you sort of thinking, in terms of your planning, closer to the lower end or the higher end of that range?

It may somewhere in the middle, but again, it depends on some of our customers’ new product introduction schedules, in terms of when they’re filling pipelines. So, it could get caught at the end of year with the quarter either going up or way down, depending on what happened with a new product introduction. But again, if you average out the year, certainly somewhere between 25% and 30% probably on a unit basis.

Okay and when I look at the business, the components business, ex-Globe, it looks like it had a nice ramp up. It’s had actually a very nice sequential ramp up since the first quarter.

Right.

If my numbers are right, it’s $11.5m Q1, $13m Q2, $14.3m in Q3, and $15.4 in Q4. So I’m wondering a) what do you think the impact of just stocking is, in those numbers and how that impacts Q1 results. And number two what do you think the growth rate in that product line in general could be in the coming year?

Yeah. I think that, of course, the big driver there is going to be Sierra, with the EMI filtering. And we believe the scenario that we described when we acquired the company, which is that in the next couple three years, as more products incorporate EMI filtering, that it would drive the growth at Sierra at higher than market rates. And we believe that’s what’s been happening. Again, on a quarter to quarter basis, depending on the new product introduction schedule, it can pull something up or down on a quarterly basis. But certainly on an annualized basis, we expect to see Sierra grow faster than certainly CRM. It depends a little bit on mix, of course. We don’t get proportionately as much more for our tachy feature as the brady, so this tends to be influenced a little bit more by the brady. So, if you look at kind of like the overall CRM market growth rates, which are kind of like in the mid-to-upper teens.

Right.

And we’d be growing Sierra faster than that.

Yeah.

And what about the remaining parts of the -- well, two followup questions. Of the $15.4m this quarter, how much of that was just sort of a one-time stocking up from one customer, just so we understand base?

I don’t think much.

No.

I don’t think much.

No.

I don’t think much at all.

Okay. So is that a run rate we build off of, the first $15.4m in the fourth quarter or does it come down in the first quarter?

This business is much more run rate-ish, Glenn. I think that that’s a -- we’re not aware of any kind of really unusual ordering patterns and stocking or the like.

Yeah.

Well, okay and then what’s happening with the normal non-Sierra or the conventional non-Sierra businesses in like the old Hittman? What kind of growth rates are you putting out.

Well, of course, a lot of it’s feeding up to Sierra now.

Yeah.

Because, I mean, it’s good and more of it’s feeding - no pun intended - up to Sierra and you’ll look at the combination, really.

And Glenn, certainly some of the other business, if you look at other than the feed-through, if you look at some of the other things done down at Hittman, particularly the titanium nitride tips, that business is growing very well, very healthy.

So this is a med-teens kind of growth business?

At least.

Yeah.

What the other thing that’s probably, just to build off Larry’s point, as we see multi, as we see more leads per device, that’s going to favorably impact Hittman’s coatings business, where they coat the lead tips.

Right. Okay, I’ll get back in line. Thank you.

The final question of this evening’s session comes from Mike Joel [ph]. Please go ahead, sir.

Yes, hi. I had a question on the rechargeable batteries. I was wondering if you would give us an update on the work that you’re doing there and potentially any milestones we should be expecting and maybe a projected timeline on when we should expect to see a device with your rechargeable battery in it?

Well, there are actually a number of devices. The AbioCor artificial heart, a number of LVAD companies have adopted our technology, both implantable. One change is we, in the fourth quarter of last year, concluded an agreement with at a company called AGM in the UK. They have a lithium ion D-cell, an external battery, and it was much more attractive to outsource that than to continue developing the D-cell on our own. So, we’re concentrating our internal efforts on the implantable batteries and we’re going to be sourcing exclusively the lithium ion D-cell for medical applications from AGM. And that will be offered to existing customers like LVAD customers who want to buy both the external pack and the implantable cell from us.

Okay. Thank you.

Thank you.

That’s the end of the Q&A session. I would now like to hand the call back over to Mr. Borowicz for closing remarks.

Thank you for your participation on the call today. I’d just like to remind you that this call is being archived on our web site at greatbatch.com and will be accessible for the next 90 days. Thanks again, everyone, for joining us today.

Thank you, ladies and gentlemen, this concludes your conference call for today. You may now disconnect. 20