Integer Holdings Corp (ITGR) 2003 Q2 法說會逐字稿

Wilson Greatbatch Technologies earnings conference call 5 August 2003 Thank you for your patience, again, ladies and gentlemen. Your conference will begin shortly. The Wilson Greatbatch Technologies conference call will begin momentarily.

Welcome, everyone, to the 2nd quarter Wilson Greatbatch Technologies conference call. Before we begin, I would like to read the safe harbor statement. This presentation and our press release contains forward-looking statements within the meaning of the private securities litigation reform act of 1995 and involves a number of risks and uncertainties. These risks and uncertainties are described in the company's annual report and Form 10K. 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 changed 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 of Investor Relations, Tony Borowicz. Please proceed, sir.

Thank you, Mike. Welcome everyone to the 2nd quarter Wilson Greatbatch earnings call, with me on the call today are Ed Voboril our Chairman, President, and Chief Exexutive Officer and Larry Reinhold, Executive Vice President, and Chief Financial Officer. In terms of format for today's call, Ed will provide a review of the results and strategic and operational initiatives. Larry will follow up with a detailed review of the financial results, and then he will turn the call back over to Ed to summarize his closing remarks. At that point we'll then open up the call for Q and A. As a reminder, we are providing slide visuals to go along with the webcast which we hope you find useful. These slides can be accessed at our website at www.Greatbatch.com. With that introduction I would like to turn the call over to Ed.

Thanks Tony. Good afternoon, folks. Let me begin with comments on the second quarter, and then both Larry and I will discuss some of the details. In terms of our financial performance compared to the 2nd quarter of last year, sales increased by 46% to a record level of about $56 million in earnings per share increased by 35% to $0.23 per share, including the $0.05 a share charge we took for the early extinguishment of debt under our previous bank agreement as a result of the successful $100 million convertible bond offering completed in May. Larry will cover this aspect in greater detail.

If you look at organic growth in the quarter after backing out Globe revenues, sales increased by 35%, which reflects strong across the board medical technology sales, especially ICD batteries and capacitors and filtered future products. Operationally we completed the commercial consolidation during the quarter and are more than halfway through our lean initiatives. Typically with this type of full-scale implementation, we have to invest before we can move forward. We are now in the investment stage and expect to see dividends starting in the lower manufacturing costs later in the year. On the strategic front, I will cover where we are with our new battery technology, which is a very important product launch for us. This discussion will include our plans for the facility which will house these new battery production operations. I'll close my discussion with a few comments on the sale of our non-medical filter future product line which was completed in June. Larry will then help you to understand the details of our financial results and provide you with our revised financial guidance for 2003.

Looking at our sales highlights, as mentioned, we experienced strong growth in our medical product lines. Our ICD battery sales increased by 57% in the quarter. Which is indicative of the growth rate we are seeing in this market segment. Pace maker battery revenues also increased significantly in the quarter. As we experienced in the 1st quarter of the year, we are also seeing increased order flow from our European customers in the 2nd quarter. Turning to our ICD capacitor product line revenues increased by 41%. We remain on track to begin shipping to both the second and third capacitor customers later this year. In terms of potential new capacitor customers, we remain in discussions with customers regarding adoption of our wet channeling capacitor technology.

Moving on to medical component products, sales increased by 74% in the quarter. Our medical EMI filtered feed through product line mainly drove this increase with sales reaching record levels in the quarter. This represents increased adoption of our technology in CRM devices sold by our customers. It is somewhat difficult to gauge the penetration of this technology in the marketplace. However, we believe good growth will be sustainable for the next few years as new devices receive this technology. This increased volume has also allowed us to penetrate -- has also allowed us to improve our EMI filter feed through gross margins due in part to the increased fixed overhead absorption. Larry will help to quantify this impact in his discussion. Finally, turning to our commercial business, sales increased by 1% in the quarter. We had a relatively strong quarter last year, but we still managed to show a slight increase in revenues this year. This business remains at a steady and healthy growth.

At this time we do not see this business slowing down from the 5% rate of growth we have experienced in the first half. Turning to our product sales, our overall CMR--CRM sales volume increased organicly by 35% from last year's 2nd quarter. Overall, CRM products now represent 85% of our product offering, up from 81% year-over-year. From an operational standpoint, we completed the consolidation of our commercial battery facility in Canton, Massachusetts. This consolidation took over six months to complete. We built inventories to higher than normal costs during the move so as not to disrupt customer shipments and are now in the process of selling through this higher cost inventory and we expect to begin to see margin improvement later this year as we manufacture all commercial batteries in one facility. We are also continuing our implementation of sic-sigma and lean manufacturing at all plants the benefits of these initiatives won't be completely realized until 2004 when the process has been fully implemented at all facilities and we are selling through product that has been manufactured at the lower cost. However, we are seeing the benefits in terms of shortened manufacturing lead times and lower manufacturing costs, as we create these lean manufacturing cells. In terms of our strategic initiatives, let me provide you with a status update on a couple of areas.

As we introduced at NASBY in May, we are in the process of developing the next generation battery technology. This highly proprietary new technology combines the best of our current high-rate chemistries, SBO and CFX into one battery. We believe this technology will become the industry standard for high-rate applications and in the longer term may become the battery technology chosen for all CRM devices. The production process for our new battery technology requires a clean room environment we will build out the new facility we purchased last year to house this production. In addition, we will begin purchasing custom design state of the art automation equipment to efficiently produce the product. We are currently in the process of designing this facility and the production processes. We will commence buildup of the facility later this year, and expect to complete construction by late 2004. We are currently working with our customers to design in their requirements into our production processes, and it will begin production in late '04 and begin shipping in the first half of '05. The next strategic initiative I want to comment on is the sale of the non-medical personal capacitor product line. These products had been manufactured at our Sierra facility in Carson City, Nevada.

As I reported earlier, we have been experiencing record growth in our medical filtered feed through products. The sales of these non-medical products was taking up resources that we needed to redeploy to our medical products. With with the sale complete, we are now able to focus our efforts and manufacturing capacities to support the high-growth medical segment. We will continue to supply the product to the new owners through the 3rd quarter, at which time we expect to have completely exited non-medical capacitor production. I will now turn the call over to Larry to discuss our financial results in more detail.

Thank you, Ed. As mentioned earlier, we completed a successful convertible security note offering in May. We raised $170 million through the issuance of contingent convertible supported notes. The notes will pay a semi annual coupon of two and a quarter percent and are convertible into common stock at a price of $40.29 per share. We issued the notes with a contingent convertible feature, which will keep the underlying 4.2 million common shares out of the EPS denominator until the stock price exceededs approximately $48 per share. In connection with this transaction, we recorded a one-time after tax charge of about $0.05 per share from the extinguishment of the existing bank term loan. On a go-forward basis, we expect this transaction to be EPS neutral. As the extinguishment of the higher rate term debt combined with a modest interest income assumption should offset the interest expense and the new deferred financing charges. We used the proceeds to extinguish our existing floating rate term loan which at the time had an interest rate of about 3.3%. This note issuance was strategicly important for a number of reasons.

We basically have fixed our interest rate at historic low levels, which takes away any concern of interest rate fluctuation. Equally as important, we now have in excess of $100 million in cash that we can use to support our internal cash requirements and to provide funding for future acquisitions. The new notes have no principal payments for at least seven years, and no financial covenants. We've established a conservative investment policy with respect to the management of the cash. Under this policy, the low risk eligible investments range from treasuries to munies and agencies, money market funds and top tier commercial paper. At today's tax equivalent yields we can expect to earn between 1.3 and 1.5% on the portfolio.

Some of the cash we raise will be used to fund the implementation of our ERP software. During the quarter, we completed our vendor selection process and we chose Oracle as the platform. Additionally, we completed an implementation partner search and we chose IBM global services as our implementation partner. We are currently in the planning stage, and we'll begin the location by location implementation of the Oracle software in the second half of this year. We anticipate spending about $7 million over the next year-and-a-half on this project. Of that, we'll spend about two to $3 million in the second half of 2003 for the software infrastructure upgrades and implementation. The balance will be incurred in 2004, and we anticipate the project will be completed at the end of 2004. In addition to the ERP spending the buildout of the new battery facility will also use cash over the next few years. We expect to spend in the range of $15 to $20 million on this facility in the next two to three years. We anticipate spending only about $1 million this year, with heavy spending in 2004. In any respect, the money raised from the convertible offering will also be used and available for this purpose.

Let me now provide you with the details of our financial results for the 2nd quarter. As discussed, sales revenues increased by 40% -- 46% in the 2nd quarter, compared to the same quarter last year. Our medical technology segment experienced strong organic growth of about 35%. With this growth being represented across all of our CRM product line. In fact, we achieved record quarterly sales in our ICD batteries, ICD capacitors and filtered feed through products in the quarter. We are beginning to see the impact on our sales from the new CRT devices marketed by our customers, in particular the majority of our filtered feed through growth came from adoption of our EMI filtering technology in these devices. Gross profit improved to 41.5% in the 2nd quarter, up from 40.7% last year. Primarily the result of year-over-year cost improvement at our Sierra filtered feed through manufacturing plant. I'll provide more detail in the gross margin change later in the discussion.

Operating expenses increased by 44% in the 2nd quarter, and as a percentage of sales were 22.6%. Down slightly from last year's 22.8%. Due to the increased sales volume, and lower R&D spending on the Globe enclosure products. The increase in absolute spending is primarily due to the inclusion of Globe's operating expenses, and infrastructure additions in IT, finance, quality, ERP consulting, and corporate development costs. Operating income increased by 60% compared to last year and as a percent of sales improved to 17.0 from 15.6% last year. Due to the gross margin improvements and the lower relative R&D spending.

In terms of earnings per share, we earned $0.23 per diluted share compared to $0.17 last year, which is an increase of 35%. As we discussed, we incurred a $0.05 charge from the extinguishment of debt that is reflected in the $0.23 earned this quarter. Additionally, the number of shares outstanding, including in the EPS denominator increased to 21.5 million, up from 21.3 million used in the 1st quarter. The increase was due to the affect of additional stock-based compensation programs. Turning to gross margin, as I mentioned, we reported gross margin of 41.5% this quarter. An improvement from the 40.7% last year. Again, the increase is mainly due to improvements in our gross margins for our filtered feed through products. This improvement accounted for a 4.8 margin percent margin point improvement in our overall gross margins compared to last year. As you may recall in the first half of 2002, we experienced high costs due to certain manufacturing issues at our Carson City plant.

We essentially corrected this situation at the end of the 2nd quarter of last year, and have been experiencing higher gross margins from that point forward. To a lesser extent, our gross margin improvement was also due to cost improvements in our capacitor, and medical battery operations. We continue to make strides in reducing our wet channel capacity scrap as a result of targeted fixed sigma project initiatives. We expect these improvements will continue to lower our manufacturing costs into the next year. Partially offsetting these improvements were higher costs to the commercial battery consolidation, the inclusion of the low-margin -- lower margin globe products and the additional costs incurred from lean manufacturing initiatives. As Ed reported we completed the commercial plant consolidation in the 2nd quarter. The costs incurred in the 2nd quarter contributed to a 1.2 margin point reduction in our overall gross margins. The inclusion of the lower margin Globe products had the effect of our lower -- of lowering our gross margins in the quarter by 1.6 margin points compared to last year. We continue to experience higher sales growth for the Globe enclosure products which has a dampening effect on our overall gross margins. We are continuing to focus efforts on improving these margins and should be in a position beginning in 2004 to see the impact from our cost reduction actions.

Lastly, we are in the middle of our lean manufacturing changes, aimed at improving our lead times, our quality levels and lowering our manufacturing costs. These changes impacted our gross margin by 1.8 points in the quarter. We expect to be complete with this implementation across all of our facilities by the end of the 4th quarter. We have -- are already seeing the benefits in our manufacturing lead times at those facilities where lean has been implemented. We expect to see the improvement in terms of reduced manufacturing costs in 2004, when we are manufacturing product at lower average costs.

Let me now provide you with our financial outlook for the remaining -- the full year 2003. Given our strong first half sales results, and our current outlook, we are raising our sales projection for the full year as follows. We expect our medical technology sales to range from 188 to 192 million dollars for the full year. Which represents an increase of 24 to 26% compared to last year. This is up from the 175 to 182 million in sales that we had projected earlier in the year. We expect our commercial power source sales to continue to grow in the 5 to 7% range, to 27 to $28 million for the full year. This is up slightly from the range of 25 to 26 million that we projected previously. For the total company, sales are expected to be in the range of 215 to 220 million. And overall sales growth of 21 to 24%, compared to last year. Our previously stated projection for sales ranged from 200 to 208 million.

In terms of gross margin outlook, we are on track to deliver a 100 basis point improvement in our medical technologies segment gross margins for the full year 2003. However, the consolidation of our commercial business has impacted margins to the extent that it is unlikely we will be able to deliver the same 100 basis point improvement on a consolidated basis. In terms of earnings per share, we are raising our projection to 1.03 to $1.07 including the $0.05 charge from the early extinguishment of debt. Our previous guidance was for EPS of 98 cents to 1.06 which excluded this early debt extinguishment. We are also providing guidance on our capital spending for 2003. As I discussed earlier, we expect to begin spending at a higher rate in the second half, primarily due to the IT infrastructure upgrades in support of our ERP initiative. With that, we can expect capital spending to be in the range of 13 to $16 million for the year. This is down from the -- about $20 million spent last year. You may recall last year, spending including approximately $7 million related to the completion of the R&D facility expansion, and the purchase of our new battery plant. We expect to spend -- to spend higher levels in 2004 as we build out our new plant coupled with continuing spending on ERP. Let me now turn the call back over to Ed for his closing remarks.

Thanks, Larry. In summary we had a very successful quarter. In terms of our financial results, and with respect to the completion of important operational and strategic initiatives. We experienced strong growth across all of our major medical product lines, achieving record growth in our IC medical power and our filtered feed-through components. We completed the consolidation of our commercial business into one integrated facility, and also sold non-core, non-medical capacitor product line assets, combined with lean manufacturing, we can expect these initiatives to contribute to improved gross margins in the second half, and into next year. We significantly improved our capital structure. Through the successful completion of the 170 million dollar convertible debt offering. We now have in excess of $100 million in cash on the balance sheet to help us support the future growth in the company. Finally, in terms of this future growth, we are actively working on the next generation in battery technology. A technology we feel will represent a significant improvement and which we believe will become the industry standard of choice for both high rate and low rate CRM devices. Let me now turn the call back to our moderater to facilitate the question-and-answer session. Thank you.

Ladies and gentlemen, if you wish to ask a question, please press star-one on your telephone. If your question has been answered or you wish to withdraw your question, please press star 2. Again please press star-one to ask a question. And our first question comes from Glen Reicin with Morgan Stanley. Please proceed.

Good afternoon folks, good quarter. A couple of questions, if I do my back of the envelope calculation Globe was about 4.1 million. Is that correct?

No. Not correct. Way off.

Not correct? Can you give me that number?

It's over 6. Glen.

Over 6 million. Can you give me the exact number.

It is 6.3.

It's 6.3 million. Okay. And the commercial part of that that goes away?

The -- oh, the commercial capacitors.

Without Sierra, Glen.

Oh, okay, I'm sorry.

That is at Sierra.

I'm confused. Sorry. Question in terms of these run rates on your businesses, the -- for example, on pacers, the six-and-a-half million dollar run rate is a very strong number. And same thing with the 11 million dollar ICD number, when we look at -- at the next quarter, is this a -- a normalised run rate or do you expect the absolute dollars to come down for those two product lines?

This is Ed, Glen. Two things, first of all, I think the -- the Brady or the pacer in the first half, you are seeing some catch-up whereas we had it turned down last year. We're -- we're, you know, seeing some cycle here. But no question if we look at the percentage growth rates in ICD batteries, for example, we keep blinking our eyes, and asking ourselves how long we'll be seeing 50%, you know, year-over-year increases in terms of the quarterly numbers. And I'm sure our customers are asking themselves the same thing. So, as you can see on the full year, we probably are tempering our enthusiasm just a bit, and perhaps in the 4th quarter we might see some softening. Typically we see that kind of thing sometimes in the -- in the 4th quarter. But I guess, no, I don't think we see it as a -- as a sustain of the rates of increase we're seeing, we don't think it is sustainable, you know, quarter after quarter.

Let me ask you it a different way. In the 2nd quarter, if I broke up the business between sort of replenishment versus inventory stocking, were there any new product launches that you can point to that you think would have inflated the 2nd quarter numbers, because of that initial inventory stocking and of a new product launch?

I don't think new product per se. There may be some inventory adjustments that -- billed or adjustments that affect it. If I go back and I look at the full year and -- and say, well, what do we think is happening out there in terms of market growth rates, we still see the traditional Brady market probably high single digits, and we would have to say that ICD, including the CRTD devices looks like certainly a 30% -- at least a 30% growth rate for the full year.

All right. And then if I think of the pacer business as upper single digits and then benefiting from the restocking of product from ELA, can that bring you to a double digit growth rate in the pacer business this year?

I don't think we'll quite -- no, I do not think that we'll quite get to double digits.

Okay. That is very helpful. Thank you.

Okay.

And our next question comes from Tom Gunderson with U.S. Bancorp. Piper Jaffray. Please proceed.

Hi, this is Tim Nelson for Tom.

Hi, Tim.

Could you comment on the capabilities of wet tantalum to provide the higher outputs that are coming into the new models now in terms of capacitors? New ICD models.

You mean higher energy.

Higher energy, higher output devices, can you do it without increasing size and/or weight.

Well, Tim, first of all we continue to see improvement in terms of the product capabilities. We -- we have been projecting that by the first part of '04 we'll be delivering energy densities of 7 jewels per C C delivered. We're bringing our 230, 235 volt cap into production and we also have product under development dual annode high voltage system that offer -- offers higher voltages as well. So we've got a very complete product spectrum. Not every customer is picking the same technology for every application. So we've got a rather wide spectrum of implementation going on out there.

Can you repeat that specification, 7 jewels per CC, a improvement from what level? In.

Around 6.

Around.

What we've been delivering for -- for most of '03.

Okay. Great. So you certainly can at least provide some incremental increase in jewels without size --

Yeah, and we're not out of gas yet either. You know, obviously it gets a little bit more difficult to squeeze more performance but we've been successful in doing it. And we don't -- we certainly would not stop at 7 jewels per cc.

What do you think that it can get to over what period of time.

We probably have got, if we look at, you know a two, three year time horizon we have probably another 15% plus that we can squeeze out.

Great. That is it. Thanks. Good quarter.

Thank you.

And our next question comes from Bob Hopkins with Lehman brothers. Please proceed.

Thanks, very much. Good afternoon.

Hi, Bob.

Hi, Bob. From rainy Buffalo.

Oh, dear, I'm in sunny California. Lets see just a couple of quick ones, could you give us an update on the timing of your next generation ICD battery as well as maybe an update on when we might think that CFX technology could be rolled out into a pacer line or a -- or a -- a ERT device?

Sure. I think, Bob, in terms of what we are targeting, we're targeting to be in production, to be, you know, going through the early manufacturing launch of the new high-rate battery technology end of '04 with commercial quantity deliveries in the -- in the early part of '05. As far as CFX used in CRM type devices, we're probably looking at a nominally about a two-year time frame until you would see actually product in the marketplace.

Okay. And just one other question, I wondered if you could give us an update as well on the new customer front for wet tantalum and what your expectations are.

It is still very active. What we are seeing is we're seeing a little program -- you know, product program slippage out there, but we're sustaining good -- tremendous growth rates there. We are -- we are not nervous about anything.

Still optimistic that there is an opportunity to capture more customers?

Yes, yeah. Yes. We're still optimistic, absolutely.

Okay so no major change there. Is that a fair characterization.

Other than I said that, you know, we see some -- some product programs slipping out.

And is that a -- is it just product programs slipping out as a result of changes in customer time lines or in terms of changes of design?

I think there is some of both.

Some of both.

Okay. Thanks very much.

And our next question comes from Mark Landy with Leerink Swann. Please proceed.

Great, quarter, guys.

Thank you, mark.

Pretty impressive. Just a couple of questions. CFX, could you maybe give us that number for the quarter?

It is about half a million dollars.

Out on target then. And then as we look at your comment in terms of CRTD being a driver, you know, we're all aware of one of your customers out there doing really well. You know, can you maybe help us, what you are seeing from a second potential customer in that area and, you know, how they are going?

Well, we -- we hesitate to talk about any -- or try to differentiate in terms of any individual customer. But I think this is a -- let's say it is a situation where rising tide is floating all boats, I think. And we're seeing -- it is tough to tell on any one given quarter in terms of mix. The mix can shift somewhat. But we're just seeing such a robust situation in that whole ICD-related marketplace, that it's just coloring the results across the board.

I mean, would it be affair assumption that that second customer would be actively buying CLTD products, you know, as they build inventory?

Well, the -- let me say that in many cases the customer -- the customers use the same component in different parts of the product family. So sometimes we can't tell if a given battery or a given capacitor is being used in a, let's say, an ICD only or a CRTD, because they would be using -- use the same model.

And maybe if we move on a little to the -- to the filters, you know, they -- they have a good impact on gross margin. You know, is it fair to assume that the business there could be as much as 20% of the overall mix this quarter?

Oh, let me do the math. Not quite.

Okay.

Not quite.

A lot less or just a little less?

Mid teens.

Yeah, mid teens.

Okay. That is great. And just as we look at, you know, at the -- at the growth drivers of the increased guidance going forward, either, you know, is it pretty much what we should expect or is there anything that you are expecting to be a larger driver than -- than normal?

Well, it -- the real question, Mark, is whether or not our customers continue to report 50% year on year quarterly increases in -- in ICD-related sales. That -- that is driving the whole market now. And like I said, we have to pinch ourselves to say how many quarters, quarter after quarter can we see these kind of numbers in terms of growth? But that-- I mean that is the driver. That market segment is the big driver.

Ed, you've been in this business longer than I've probably been alive. Any guess on --

Hey, thanks for that, Mark.

Thanks, guys. Great quarter.

Okay, thank you.

And our next question comes from Keay Nakae with Wedbush Morgan. Please proceed.

Yes, first question on the guidance for gross margin, you said that it would be less than 100 basis points improvement for the full year over '02, will it be at least 50 basis points improvement?

I -- we're looking, Keay, I think we're looking in the low 40s, probably 42, 43% range. I can't give you any more specific than that.

Let me answer that a different way, Keay, and I'll -- this is a kind of a more generic answer, we are seeing -- we are seeing tremendous momentums in the manufacturing costs reduction, gross margin improvement across most of the medical business. I mean, to be honest with you, that is where we should be focusing. It's -- it's 85% of our business, or even a little higher now. We've had -- because of our consolidation in Canton, we've had some disappointments in terms of where we thought our commercial battery business was going to be. So it's less a question of optimism or -- or certainty that we're getting the improvements in the medical technology segment, and more a little bit of a question of -- about whether we can -- how quickly we can get back to where we used to be on the commercial battery business.

Okay.

That -- that -- that's how to look at it.

Okay. And then with respect to the second and third customers for the wet tantalum, when we look at the full year revenue contribution from wet tantalum, at this time, given the product slippages that you mentioned, Ed, what percent of the full year wet tantalum revenue do you think will come from the second and third customers.

A relatively small percentage.

1%.

We've had product program slippage in terms of, again, I will not get into the details, so I guess the good news is that we're looking at significant percentage increase and it is primarily momentum from our initial customer, but the second and third customers are coming along.

Close to zero or just?

You know, right now, to be honest with you, I think it's -- it's -- you know, week to week in terms of schedules moving around and so forth. And so I -- it is difficult. I would not want to give you an answer that was -- was far off. But it is, you know, it's a -- it's a relatively modest contribution.

Okay. Thank you.

And our next question is a follow-up from Mr. Glen Reicin from Morgan Stanley. Please proceed.

Okay, guys, a bunch of little follow-up questions here. On the gross margin line, I've always tried to model by-product and you have not helped me too much on that. But maybe if you tell me a little bit on a sequential basis just with arrows up and down, if I looked at the core battery business compared to Q1, is profitability about the same or down.

Up.

Up? And I'm talking about a percentage of sales.

Yes, gross margins.

Gross margins are up on that. So what maybe ask it a different way. What is down relative to the 1st quarter in terms of gross margins, which battery -- which product lines? Is it really the commercial?

Commercial is -- commercial is lower. And fillers and closures.

Globe.

So Globe is? Okay. And then getting.

Just to add parenthetically to Globe, that is one of the places where we made the biggest relative investment in terms of trying to change the production and manufacturing methodologies, and the inefficiencies and over time we had to work to catch up and so forth really impacted on our margins in the 2nd quarter, but we do see ourselves breaking out of that, and that could be a major component in terms of the improvement that we see overall on medical technology in reaching that 100 basis point improvement that we were committed to for the full year.

Okay. And if I hear you correctly, you are saying there is a catch-up, eventually gets to the same margins that you targeted. So theoretically, given the underperformance in the gross margin line this quarter, could you do -- or this year, you could conceivably do better than 100 basis points next year.

Oh, yes.

Sure. Yeah, that -- that is for sure.

Okay. And the last time we met you were contemplating what you were going to do on the cap ex line in '04. Do you have any better numbers now, given that you had lowered the expectations for '03.

I will let Larry talk to at that.

Yeah. Well, you know, while we are not providing any detail, Glen, on '04. You know, I -- from what I've talked about earlier, we've typically spent somewhere in the range of around $10 million on maintenance in the last few years and ERP will eat up an additional of about 4 million,from we talked about 7, and two to three we'll spend this year and most of the 15 to 20 million dollars on the new facility will be next year, so I think if you kind of add those rough numbers together, you'll probably get to the 30 or 35 million dollar spent next year, subject to, well, more detailed guidance at the end of the year.

Wow. A big number.

A big number. Obviously most of the -- the biggest piece of that is investment in our new battery technology.

Investment in the future Glen.

I appreciate it. I -- oh, one last question, I'm sorry, I'm now out of my confused state. The -- the sale of the Carson City business, what is that on an annual basis in terms of the revenue impact.

It is about $1 million Bucks worth of top line, and there was a -- the gain was -- the gain -- there was a very modest -- minimalist gain on the sale.

On the sales line or the other income line.

No, on the sale of the business, there was a modest gain, a very modest gain on the sale of the business. Compared to the book value.

Is it accurate to say that the sales gain offset the loss revenues and we're in a same place on a apples-to-apples basis.

You mean in the second half.

No, in the 2nd quarter.

No. First off, when you say the "sales gain" I'm not sure what you are referring to.

You just said. I'm sorry you said

The gain -- the gain on the sale which is minimal, is included in the G&A cost, in the net G&A. You know, along with our other gains and losses on other assett disposal.

Okay so it was not a sales -- it was not recognized in the sales line.

Correct it is not in there. The sales of the products are in the sales line and through the -- through the -- along with the date that we sold it.

All right. Thank you very much.

Okay.

Once again, ladies and gentlemen, if you wish to ask a question, please press star-one. Again, that is star-one to ask a question. Please stand by to see if there are any more questions . There are no further questions at this time. And that does conclude today's question-and-answer session. I would like to turn the call back over to the host for today for any closing remarks.

Okay, thanks, Mike. I would just like to remind you that, you know, the call will be archived on our website at Greatbatch.com and you can get that for the next 90 days. So thanks to everyone for joining us on the call.

Thank you for your participation. That does conclude today's conference.