Integer Holdings Corp (ITGR) 2003 Q4 法說會逐字稿

Welcome, everyone to the fourth 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 10 K. The statements are based on 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 statements information in this conference call for reflect changed assumption, 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 IR, Tony Borowicz.

Thank you. Welcome to the fourth quarter and year end Wilson Greatbatch earnings conference call. With me on the phone are Ed Voboril, our Chairman, President, and CEO and Larry Reinhold, EVP and CFO. In terms of the format for today's call, Ed will provide a summary review of the results and discuss the key accomplishments in 2003 and the critical focus areas for 2004. Larry will follow with the detailed review of the financial results and provide summary financial guidance for 2004. At that point, we will then open up the call for Q&A.

As a reminder, we are providing slide visuals to go along with the webcast, which we hope you fill find useful. These slides can be accessed on our website at www.greatbatch.com.

Now, let me turn the call over to Ed.

Good afternoon. Thank you for joining us on the fourth quarter earnings call. Let me start by providing a summary of our sales results for the quarter and full year. Sales for the fourth quarter were $49 million, which represents a 4% increase over last year. As we discussed on our third quarter conference call, we anticipated sales would be lower in this quarter than in Q3, mainly due to inventory reductions by our CRM customers.

The most significant impact and the slow down in shipments was in medical components. We believe that the impact on sales from inventory reductions at our CRM customers will continue through the early part of FY '04 and have reflected this in our guidance for the full year. Medical technologies sales increased by 6% over last year. The growth in ICD battery sales and capacitor sales offset the volume related reductions in pace maker batteries and CRM components. Commercial sales in the quarter decreased by 4%, primarily due to a temporary slow down in orders from a major customer. In addition, sales in general were soft in the oil and gas market.

Turning to the full year, we achieved record sales performance in 2003. Sales increased by 29% to $216 million. Medical technology sales increased 34% for the year and commercial or non-medical sales increased by 3%. As a reminder, medical sales in 2002 included only 6 months of enclosure products on the Globe acquisition on a proforma basis. The organic growth in medical sales was a solid 25% for the full year.

The medical sales growth was led by sales of ICD batteries, which increased by a robust 46%, reflecting the strength of this market. In addition, capacitor sales increased by 28%. We expect the sales increase in 2004 to include significant volume from our second and third capacitor customers. We remain in active discussions with the remaining CRM customers regarding adoption of our proprietary wet channel and capacitor technology.

Looking at our sales mix, CRM product sales increased by 28% over last year and now represent 83% of our total product mix up from 80% last year. We remain very positive about the growth prospects of the CRM market long-term. Given the number of trials under way that could significantly increase the patient population eligible to receive an ICD, coupled with new devices introduced by our customers to treat heart failure, we are well positioned to participate in this market growth.

Looking back at 2003, there were many significant accomplishments which would further strengthen our position in the marketplace in 2004 and beyond. I'll recap those for you. First, we achieved record financial results. With sales growth of 29% and earnings per share growth of 59%. We improved our operating leverage as evidenced by the increase in our operating profit margins to 17.7% in 2003, up from 15.5% last year. We signed our third capacitor customer and 305 world-wide serum device manufacturers have now adopted our capacitor technology. We signed our first Quasar battery customer. We signed long-term contract extensions with major customers, solidifying our long-standing relationship as a critical supplier to the CRM market. We realigned the way we are organized internally to provide a single face to the customer.

In addition, we added several team managers in various areas of the company in support of the company growth objectives. We made significant investments to improve our operating margins through lean manufacturing and Six Sigma initiatives and by consolidating our 29 medical production operations at our Canton facilities in Massachusetts. We selected Oracle as our new business platform solution for ERP and are well under way in implementing the system. Finally, we enhanced our capital structure, with successful completion of a convertible security financing at historically low interest rates.

As we look forward into next year, there are a number of critical areas that we will focus on. We will continue to address ways to expand our product offering and customer penetration. Given our broad product offering for the CRM market, we can provide additional value added services that our single product competitors cannot offer. We will expand our production operations to meet the increased capacitor customer demands and continue to focus our efforts on signing the remaining CRM customers to this technology. We will focus significant resources on our next generation Quasar battery technology and again production delivery by year end.

We will continue to leverage our infrastructure over a higher sales base resulting in improved operating margins. We will complete the base implementation of ERP systems at all locations by the end of the year. We started this implementation the second half of '03 and went live with our first manufacturing site yesterday. Finally, we will aggressively look for acquisition opportunities that will strengthen our technological leadership or broaden our product offering.

Now I'll turn the call over to Larry to review our financial results.

Thank you, Ed. As mentioned earlier, our sales increased by 4% in the quarter, which was within our expected range. Our gross margin in the quarter was 40.2% compared to 43.3% in last year's fourth quarter. I will address this in detail in just a minute. We achieved net income of $4.5 million, or 21 cents per diluted share versus $5.0 million, or 23 cents per diluted share in the fourth quarter of last year.

For the full year, sales increased by 29% to $216 million, which was within the full year guidance we provided after Q2 was announced and reaffirmed after Q3. Our gross profit margin was 41.5% for the full year compared to 42.4% for the full year last year. Our operating income margin improved to 17.7% from 15.5% last year. This improvement was due to the increased leverage on the higher sales volume.

Net income increased by 62% to $23.3 million, or a $1.08 per diluted share compared to $14.4 million or 68 cents per diluted share in 2002. This was also within the guidance range we provided on the third quarter conference call.

Let me provide an analysis of the change in our gross margin in the quarter and full year compared to the last year period. In the fourth quarter, our gross margin decreased from 43.3 to 40.2%. This decrease was the result of several factors. First, in anticipation of the sales slowdown, we had lower production volume in the second half of the year, which contributed to unfavorable fixed overhead absorption. That is spreading fixed manufacturing costs over a lower unit production. Second, we had increased costs for the hiring of additional key plant management personnel. These factors contributed to an overall margin decrease of about 300 basis points for the quarter.

For the full year, gross margin decreased from 42.4% to 41.5% this year. This decrease was primarily due to the cost incurred in the first and second quarters to consolidate the commercial battery plants, start-up costs from the implementation of lean manufacturing, the inclusion of the lower gross margin Globe and Closure products for the full year, the costs of hiring new plant management personnel, and changes in selling prices for certain medical components. These factors contributed to a 310 basis point reduction in gross margin on a year over year basis. The costs associated with the consolidation of the commercial manufacturing plants, the start-up costs from lean manufacturing implementation and certain costs associated with the hiring of these key plant personnel were one time in nature and should not reoccur. These three factors comprised about half of the full year impact.

Turning to cash flow, we generated significantly higher free cash flow in 2003. Free cash flow is defined as operating cash flow minus capital expenditures and was $42.1 million in 2003 compared to $17.3 million last year. We achieved operating cash flow of $54.8 million, an increase of 90% over last year. We accomplished this through increased profitability and improved working capital management.

We improved our inventory turns from 3 in the last year to 4 turns in this year. This was a direct result of the lean initiatives that were implemented across most of our manufacturing plants over the past year.

In addition to the improved working capital, capital spending of $12.7 million for the year was lower than historical levels. The majority of the current year spending was for maintenance-type capital expenditures. In comparison we spent $20.5 million last year, which included about $8 million for new investment projects in addition to about $13 million for maintenance type capital ex.

We significantly enhanced our balance sheet through the improved operational cash flow and from the convertible security financing we completed in May of this year. At year end, we had $131 million of cash and cash equivalents on our balance sheet. Our net debt to cash ratio has improved from 28% to 14.8%. This improved capital structure allows us to support our internal growth and provides liquidity for corporate development initiatives.

As I mentioned a moment ago, we completed the convertible security transaction in May. Based on the terms of the transaction, the debentures can be converted into common stock under several circumstances. One of these is when the share price exceeds $48.34 for at least 20 trading days out of a 30-day trading period.

Since our stock price has been above $40 recently, I thought it would be beneficial to review the economics of this trigger point on the diluted earnings per share calculation. Under these conversion conditions, both the interest expense and the amortization expense of the operating costs, net of income taxes, would be added back to the reported net income for the period. In addition, the underlying convertible shares would be added to the earnings per share denominator.

To illustrate this, if the conversion trigger were to have been met on January 1, the annual coupon interest on the convert of $3.8 million and the amortization of deferred financing fees of about $650,000 would be added back to the reported net income. Our current effective tax rate, this would result in a hypothetical additional $3 million in net income. Given the share conversion price of $40.29 per share, this would result in an additional 4.2 million shares outstanding. At current, the hypothetical total shares outstanding would increase to about 25.9 million. Based on our next year's outlook guidance, the per share delusion would be about 8%, or 11 cents per share.

Let me now provide you with our full year 2004 financial guidance. We project our total sales will increase between 11 and 13% to a range of 240- $245 million. Expect our medical technology sales will increase between 13-14% and will account for 214- $217 million, and our commercial power sources sales will increase between flat and 7% to 26- $28 million. We expect that based upon this sales level, we will achieve an operating margin of between 19 and 20%. We expect earnings per share to be in the range of $1.37-$1.43 per diluted share, representing an increase of 27-32%. This growth in EPS is based on the increased sales volume and the operating margin expansion through increased leverage of our infrastructure and our manufacturing and cost reductions.

Partially offsetting this growth, however, are significantly increased costs for the start-up of our new medical battery facility. Increased costs to comply with the Sarbanes Oxley requirements, higher insurance premiums, and changes in selling prices on selected medical components. We anticipate that in 2004, we will incur additional capital costs, primarily due to the build-out of the medical battery plant and from the continuation of our ERP implementation. Based upon these factors and our maintenance capital, we expect total capital spending will be in the range of 37- $42 million in 2004.

To summarize, our sales growth in the fourth quarter slowed, as customers reduced their inventory levels. Our results for the full year reached record levels, reflecting the continued robustness in the CRM market. We established our 2004 sales and earnings guidance, 240- $245 million and $1.37-$1.43 per share.

Our focus in 2004 will be in five critical areas, first, increasing our capacitor customer penetration, second, identifying value-add sales opportunities from a broad product offering; third, delivering on our next generation Quasar battery technology by year end; fourth, improving our operating margin through leverage of our existing infrastructure and from manufacturing cost reductions; and fifth, to complete the implementation of the base Oracle ERP solution on time and under budget.

This ends our prepared remarks. We'll now turn the call over to the moderate or to facilitate the Q&A.

Thank you, sir. Ladies and gentlemen. If you wish to ask a question, please key star 1 on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, please key star 2. Again, to ask a question, please key star 1 on your touch-tone telephone. We also ask that you please pick up the hand set when asking your question.

Your first question comes from the line of Tom Gunderson with Piper Jaffray. Please go ahead.

Hi. Good afternoon.

Hi, Tom.

Hi. Just a quick clarification and then a broader question. The clarification is; tax rate in Q4 looks like it was a little lower than we expected, that's good, don't pay as many taxes. But what's the assumption on tax rate for '04?

Yeah, you know, Tom, obviously, we haven't guided to the specifics of the tax rate for '04. Our tax rate for the fourth quarter, respective rate, our effective rate for the year is 30.4% and the way you do the bookkeeping for the tax rates is you true it up so that if the quarter happens to fall out to whatever it needs to be, to true it up to the effective rate for the year. So it was 28.8% for the quarter, but that's not reflective of next year. We don't expect any significant movement in the effective tax rate one way or another in '04

Okay. Then the broader question is, Ed, early in the conference call you made a statement that I think I got right, which was very positive, you feel very positive about growth of ICD's long-term. We've heard that phrase a number of times in the last week or so and it's like everybody's reading from the same book and putting emphasis on the long-term part. Can you elaborate a little bit as to why you think there may be some variability short-term, but long-term, you're comfortable with the growth rate of ICD's?

Well, in our case,Tom, if you want to call it variability, we said we looked at a slow-down in the fourth quarter. You can see fourth quarter rates in ICD batteries and capacitors, while still very good, were below the average for the year, and we see that coming back, those growth rates coming back in '04, but we're expecting to be a little slow in the early part of the year. At your conference we reiterated, we see the total CRM growth in the mid teens, approximately. And because we still see the ICD market as being significantly under penetrated, and no negative factors from the clinical or otherwise external influence, we still expect to see very solid ICD growth going out over a number of years, including '04.

Okay, and then last quick question, and that is the change in operating from '03-'04, you went through a number of improvements on gross margin. Is the improvement on the operating income margin mostly coming from the GM side?

I'll have Larry take this.

I'm sorry, Tom, the GM side?

Gross margin.

It's a combination of a lot of factors, but including, we had lower SG&A expense in dollars in the second half than in the first half, and obviously that, has a significant effect. We had in the first half of the year, we had some non-reoccurring, if you will, personnel related charges, et cetera. Same thing with our RD&E, the second half was relatively flat to slightly lower than in the first half. So the improvement in operating margins really came from more than gross margin. It was with all three categories.

Okay. I'll get back in queue.

Okay. Thank you.

Your next question comes from the line of Glenn Reicin with Morgan Stanley. Please go ahead.

Good evening, folks. Can we get some potential guidance for Q1in terms of sales and EPS?

No, we don't guidance by quarter.

Okay. That's fair. How did Globe do year over year in the quarter?

Let's see, how did globe do year over year? Well, again, we don't break it out by-product line, but I will tell you as with our other acquisitions, we have been able to impact the operations at Globe with implementation of new quality initiatives and lean manufacturing. And Globe is performing much better in the fourth quarter than it was in the fourth quarter.

Right. In the past you've given us some idea of the level of sales at globe and they have been within the 6-4 range. I want to sort of know where they're at in the fourth quarter. I've been watching that one closely because of the margin issue.

Yeah. Again, we basically don't break it out on a quarterly basis, Glenn, but for the, for the full year, Globe showed some reasonable growth.

You won't give a number?

No.

Okay. Can you give us an idea sequentially then, by business, how gross margins sort of trended?

I'll let Larry.

Glenn, why don't you ask me what questions you want on it and I'll tell you. Obviously we don't either guide or provide historical disclosures of our gross margin.

Right.

On a product basis.

So why don't we go through some buckets here, batteries, capacitors, and Globe, let's say in, components. Just give us in buckets, an idea about improvement or erosion in gross margin relative to Q3. Are all of them down relative to Q3 in terms of gross margin?

Well, obviously on an overall basis, Glen, Q4, the overall margin was less than Q3, and the reason for that, the overwhelming driver of that was the lower production volumes in the second half spreading fixed costs. So if you are looking across the board, we basically saw lower margins everywhere. There's always a couple. I will tell you that notably we had gross margin improvement, as you would expect, in our commercial business because in Q3, we were selling through inventory that we had made in Q2, which is right in the height of the consolidation efforts, so it was inefficiently manufactured, if you will.

Right.

So we had very good healthy growth in margins in commercial, but across the medical component, that was where the big slow down in volume occurred, so in general all the margins were lower.

All of them were lower; none of them stayed flat with Q3?

Well, again, it depends. You've got to define flat for yourself. The difference in overall margin was less than 2 points. So, in our business, it's lumpy on a quarter to quarter basis on an overall and it's also lumpy internally on a product by-product basis. So overall, I'm comfortable telling you that our commercial products we had improved margin and in our medical components, all of our medical technology products on average had a slightly softer margin.

Okay. And then I'll get back in line in a second, but I wanted to know on a cash flow front, I think you said $54.8 million was cash operations in '03? Is that right?

Yeah.

What are the buckets there and then can you give us an idea of what sort of the rest of it is get to $131 million in cash. In other words, I'm talking about cash flow.

I've got a cash flow here in front of me. It's rough, but I have one here. You start with $23 million in income, DNA is about $13 million. We have about $4 million between non-cash expenses, like the extinguishment of debt and stock-based comp. Then we have all the changes in the other ins and outs of working capital.

That was very positive, right? That has to be like $20 million positive. Not quite.

23 and 13 gives you 36. Yeah, I guess so.

Yeah.

Yeah. I mean this math works. Glenn, the biggest piece here is inventories were reduced by almost $6 million.

Okay. And then below that, we had, what, $2.5 million proceeds from asset sales, $12.3 out for capital ex. I don't know what else is there.

There's not much else in that part of the equation.

And then in the financing activity?

Yeah, well, obviously we had to convert. We paid off the old long-term debt, which was about $85 million, and issue costs and some other miscellaneous stuff was about $5 million. And our net issuance of stock, which is really just option exercises, was the better part of - - well, net of about $700,000. It ends up with over $130 million of cash, cash equivalents and potentially short-term investments, you know, bookkeeping has to put that in different places on the balance sheet.

Okay. Thank you very much.

Your next question comes from the line of Bob Hopkins with Lehman Brothers. Please go ahead.

Hi, thank you. I hope you can hear me because I'm on a cell phone. Quick, two quick questions. One question for Ed. Ed, last spring and summer, you had indicated that you had hoped by the beginning of '04, you might have all five of the five major CRM players as at least signed up to be a capacitor customer, and I'm wondering if that time line is still good.

We're working on and it we're still optimistic, Bob. But as you know, when someone designs [INAUDIBLE] it has to be in conjunction with a platform change because it typically involves changes in [INAUDIBLE] and so forth. So it is somewhat driven by changes in our customer's production or product and production schedules as well.

So you still think by the first - - well, in the near term, it's potential for that five of five to be a possibility?

We're still optimistic that certainly within the year it's going to happen.

Okay. Second question is in terms of the continued slow down and the order from guidance, which you mentioned in the third quarter call as a reduction inventories and you said you would still see softness in the first half of '04. I'm wondering is that still a continuation in full back in inventories for these companies, or is it just some softness in the overall market?

I don't think we actually identified specific customers, but we said some CRM customers.

Okay.

And I mean there's a lot of things going on. Part of it, to some extent, we improved with lean manufacturing our, cut down our lead time on orders, as we go dock to stock with customers, as you go to pull systems where basically they don't even need to schedule, they just pull from a [INAUDIBLE] system, it drives the total inventory down in the field, so to speak, and to some extent at one time, but for a number of reasons we're in the middle of that process right now.

Okay. You mentioned, obviously, inventory reductions, but there has been no change in your communication that you had received from those companies that it's something other than reduction inventory, or is there something more to the story now as some more time has passed?

We don't believe so, Bob.

Okay. Thanks very much.

Okay.

Your next question comes from the line of Glen Navarro with Bank of America Securities. Please go ahead.

Thanks. I'm a little bit newer to the story, and I do recall that you provided fourth quarter guidance back in October. I understand you may not want to provide the first quarter guidance, but maybe can you give us at least a sense of, I think consensus is 35 cents, is that a good number? That's question number 1.

Question No. 2, Larry, I think you have always had the stated goal of improving the gross margin about 100 basis points. Is that a good goal for 2004?

Then lastly, for Ed, you talked a bit about a slow down in the business in the first quarter and then a pickup thereafter. I guess what gives you the confidence that we get the pickup later in the year? Thanks.

Glen, let me answer the last question first and then I'll let Larry answer the first two questions you asked. Over the years what we've continued to say is you can't judge this business by any one or two quarters. I mean, historically in the past, we've seen this happen before, and since we don't see our margin position changing substantially and we are a strong believer of the growth rate of the market, we think things are going to snap back and that's what we have based our full year guidance on.

But what's curious to me about particularly earlier, early in the year is you've got at least one customer, that being St. Jude, that needs to be ramping up on their Epic HF, which they plan to launch in May. I would assume that would drive a very strong first quarter for you guys.

You're talking about one product out of, you know, a universe of very large volume of sales in terms of tens of millions of dollars, and also timing wise, things can fall between one quarter and the other, so you can't, again, you can't look at one quarter and say, well, it's going to be significantly effected by one given product line. It really doesn't work that way.

Is it fair to say that your key customers are still very optimistic about the ICD market and still are giving you plans for strong growth in 2004?

Again, you know, as far as what our customers are saying in the, in the marketplace, I, I believe is that they are still very optimistic about the long-term growth rates for CRM therapy.

Okay.

We certainly share that opinion. Let Larry answer the first couple of questions, Glen.

Sure. Glen, I know you're relatively new to our story. We historically provide full year guidance, no quarterly guidance. Obviously we have reaffirmed our full year guidance at the conclusion of each quarter, so by higher arithmetic, after Q3, we have in effect guided for the fourth quarter. But there is no difference here, we have not guided at the beginning of the year, given any indication and matter of fact, to the contrary; we have continuously cautioned anybody following our company to look at our results and model us based upon your own assumptions, but looking at history, looking at a 4-quarter stack or a trailing 12 month. Obviously, as I said, I don't even know what consensus is. Presumably it will be different tomorrow than it is today, but whatever it is out there on first call today, we don't really have any comment on that.

Our full year EPS guidance is 1.37- $1.43, and as Ed mentioned earlier, we do think that at the bottom line, as well as the top line is going to be a much stronger year in the second half than early on.

Okay.

In terms of your second comment on the 100 basis point improvement, we absolutely are committed in the company to improving our operating performance. And I believe it was after Q2, maybe it was Q3, I don't recall, in '03 where we, say, retracted our commitment, if you will, or guidance on the 100 basis point improvement for the full year '03, and we expect in '04 that we will continue to lower our manufacturing costs significantly through the continued improvements that we've made in scrap through our Six Sigma initiatives, continued productivity improvements through our lean manufacturing initiatives and obviously higher volume that we've guided to.

We have a lot of factors going into the equation, including selling price changes and we have, or we're shifting our focus, if you will, from talking as much about gross margin to really into the operating margin, and so that's, that's what we can say about that. We will, though, reduce our cost to manufacture products in 2004 significantly, as we did in '03.

And just quickly, for '04 at a tax rate, I had in my models 30.5%. Is that a good tax rate?

Yeah, I mean that's certainly consistent with what we put up this year in '03, and as I said earlier, we don't anticipate any changes in '04.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Keay Nakae with Wedbush Morgan. Please go ahead.

Hi, guys. You've mentioned a couple times some price weakness. Can you be a little more specific in terms of what components you might be experiencing there.

I'm not sure I would describe it as price weakness, but I think what we've said in the past is typically as customers get certain volume levels or certain break points, they do get the benefit in some cases of lower pricing from higher volumes. And as you have seen our volumes go up we see that happening to some extent. But we don't consider it to be in terms of long-term commitment.

So are you saying that it's due to volume discounts as opposed to just kind of lower prices?

Not entirely. Not entirely, but the volume breaks are a driver.

But never the less, it will effect gross margin next year.

It has a negative effect, but as I mentioned, manufacturing cost reductions drive it the other way.

Okay, and then medical components, the revenue growth there was weaker. Can you at least help us to understand which of those products in that category might have been weaker than expected?

Well, what happens in our, what I'll call our passive components, that is much more weighted toward the higher, significantly higher market unit volumes for Brady, for traditional pace makers. So when you weight it more for pace maker unit volume, it lowers the volume for that total category, the aggregate category of medical components.

So that would suggest that filters did okay on the quarter.

I don't think you could pick out any one product. Again, all the products in that category tend to be driven more by pace maker volume than by ITE volume.

Let me ask you this. Were all the major product categories, glove, filters and components, were they all weaker than they are had been?

They were all down.

Okay.

When we said CRM, we really meant CRM across the board.

Okay. Thanks. I'll get back in queue.

Your next question comes from the line Alex Arrow with Lazard. Please go ahead.

Thank you. Good evening.

Hello, Alex.

First question, in Ed's comments, you had said that the Quasar, you were aiming to have done by year end. Can you tell us whether you mean, you know, are you just going to get the first unit out the door by December 31st or is it more like it will be a fourth quarter contributor to revenue?

I don't think it will be a major contributor, but we expect to be shipping qualified products to our customer to use in their production, their own production activity.

Okay, and is that a change versus the last time you gave us Quasar launch guidance?

No, we have been saying end of '04.

Okay.

At least I have.

No one has said anything earlier than the end of '04, Alex.

Actually, I thought you had said '04 and your were saying '05 there's an increase.

We expect, as Ed said, we expect we are going to deliver at the end of '04, but it's not going to be a material part of our sales in '04. '05 is a different story.

Have you commented previously, and if not, would you be willing to, on the price differential you would expect on Quasar batteries versus your existing top of the line batteries?

No, we're not breaking that out.

Okay. Even just as a percentage increase?

No.

Okay, and then on the other medical battery section, can you say anything about whether the expected launch of the Cyberonics device into its new indication for depression has triggered them to do an inventory build?

Again, we don't comment on individual customers. That increase across is rather broad range of device categories. As we keep saying, we've got this pipeline out there of different types of devices and emerging therapies and we're starting to see a little bit of a pickup in terms of the activity as those customers get further along in their plans for launch and market introduction and you will continue to see increases in that activity over the reasonably foreseeable future.

Does it seem like they are already planning for launch or are they going to wait and see before they get approval, or can you say that?

Again, I wouldn't break it out that way except there's a number of companies with a number of products that comprise that category, that's why it's others.

Okay. Is Cyberonics the largest of the other, or not?

Well, again, we wouldn't break it out by customer.

Okay. Thank you.

Your next question comes from the line of Mark Landy with Leerink Swann. Once again, ladies and gentlemen, that's star 1 for questions. Mr. Landy, please go ahead.

Good evening, guys.

Hi, Mark.

Just a couple questions, could you break out CFX for me?

It's in the other category.

The entire portion of the other category?

No.

So you're not going to give me what it is?

No.

Okay. In terms of Q4 '04, traditionally the fourth quarter is lighter than the fourth quarter. Given that you are expected a back end ramp to the year, how should we think about the fourth quarter relative to the historical norm?

I'll let Larry take that.

Will you repeat that question for me, Mark.

Sure, Larry. Traditionally the fourth quarter is a weak quarter. Given that you are expecting '04 to be back end loaded, how should we think about Q4 versus how it normally has been historically?

You know, Mark, we're not guided to Q1 of '04. We're certainly not going to guide to Q4 of '04. Any individual quarter, it is what it is. We think that the early part of '04 is going to be at lower relative levels, kind of that we have talked about, we experienced in this quarter and it's going to ramp in the second half of the year. The exact enter play of Q2 and Q3 versus Q4, you can - - happy to read your model - -

Yeah, tomorrow morning. Okay. So seasonality is kind of something that, historical seasonality is something we should still bear in mind for 2004?

We don't see traditional seasonality in our business. Quarter to quarter changes are much more reflective of customer specific issues as well as I've seen in a couple year ends that I've been here, and I know Ed has told me, all the year ends that he's been here is that we typically see in the fourth quarter, not unusual to see customers changing inventory levels, to you know, for their own balance sheet appearance management.

Just maybe to take a stab at some of the other issues, in terms of the components, you had mentioned that you had done a good job of getting Globe up and running into levels that far exceeded when you purchased Globe. What would be wrong with the logic in thinking that maybe your efficiencies there are causing some draw downs in inventories?

Yeah, sure, that could be true. As we've improved deliver times, as we've reduced delivery times, there's no question that customers are seeing a benefit from that, yes.

That is, that is a very realistic inference to make from it.

And since about 80 plus percent of the business, like the rest of their business is CRM, falls in the general bucket that we talked about earlier.

So would Medtronics still be the largest customer at Globe?

Medtronic is the largest customer at Globe.

So when you refer to customers, we should think about Medtronic as a customer.

Oh, they are very much a customer.

I think that should answer the questions, guys. Thanks very much.

You're welcome.

Your next question is a follow-up from the line of Glenn Reicin with Morgan Stanley Dean Witter. Please go ahead.

Hey, folks. Can you help us a little bit in '04 what you think R&D will be up, and also I didn't hear you give any explicit guidance on gross margins, maybe I missed that, but maybe some range on the gross margin line.

I'll let Larry take that.

Glenn, we are not guiding to gross margin. Again, as I mentioned earlier, we will continue to take costs out of the manufacturing process, for continued productivity improvements through lean and scrap reduction, Six Sigma and the benefit of higher volume, but as we've talked about earlier, we are going to not place as much focus, if you will, in our forward guidance on gross margins, but rather on operating margins.

Okay, and can you at least answer on the R&D question?

Again, we're not guiding to R&D.

I mean, guys you sort of asked this yourselves, because when Joe Almeida came on you made a big deal, so now to drop this as a benchmark for you guys I don't think is reasonable. You must have some ideas about, about what you expect for gross margin in '04.

Sure. We have, we have detailed plans for our entire business. There's no question about that. It's a question of what we're going to publicly guide to and what we're not. But we are going to take manufacturing, we're going to reduce our manufacturing costs. That is what we expect to do, but gross margin is a more complex equation, you've got manufacturing costs. Our R&D was around 8% of sales, 7.9 or something like that of percent of sales in '03, and we are going to continue investing in R&D in '04 to the level we need to to maintain leadership and technology.

Okay. I did notice that you're breaking up this other expense line in a way that you have not other operating expense line.

Correct.

I don't think I've seen that before. What is that?

Yes. Basically what we've done, Glenn, is we've netted all the gains and losses on, on fixed assets, disposals. We had them in various places and the rules have been changing, so we've broken them all out right there in one separate line item. So if you recall in the fourth quarter of last year, we kind of had a fixed asset, you know, clean-up and we're doing those kinds of things. So in each of the two years, that's what is in that line item.

And do we just assume that it's fairly stable from year to year?

Yeah, we hope that fixed asset clean-ups get less in the future.

Okay. All right, folks. Thanks.

Thank you.

Your next question comes from the line of Keay Nakae with Wedbush Morgan. Please go ahead.

Follow-up question on the implantable batteries, other devices line, we did see a fairly significant step-up there sequentially. How sustainable is that? I know you talked about new products coming closer to market, Ed, but how should we model that because it is a fairly significant step-up.

I'll let Larry take that one again.

Keay, I think that in that category, we have slow and steady growth. We don't think this is a blip. There are some specific particular devices that, that we've seen from healthy improvement in, so I would, without guiding to any specific revenue category, we don't think that's this was a one time blip.

Okay. Thanks.

And that does conclude today's question and answer session. I'd like to turn the call back over to Tony Borowicz for any closing remarks.

Thanks. I would just like to remind you that both the audio portion of this call and the slide visuals will be archived on our website at greatbatch.com and will be accessible for 90 days. Thanks, everyone, for joining us.

Ladies and gentlemen, thank you for your participation. That does conclude today's conference. You may now disconnect.