Integer Holdings Corp (ITGR) 2004 Q1 法說會逐字稿

Welcome everyone to the first 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 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 or unanticipated events or changes in future operating results, financial conditions, or prospects. I would like to now turn the call over to today's host, Treasurer and Director of Investor Relations, Tony Borowicz.

Thanks Bill, and welcome to the first quarter Wilson Greatbatch earnings conference call. With me on the call today are Ed Voboril, our Chairman, President, and Chief Executive Officer, and Larry Reinhold, Executive Vice President and Chief Financial Officer. In terms of the format for today's call Ed will provide a summary review of the sales results and provide an update on the progress made on our significant strategic objectives for 2004. Larry will follow with a detailed review of the financials and provide an overview of the NanoGram acquisition that was completed in the quarter and define how that acquisition will impact 2004 earnings guidance. At that point we will open up the call for the customary Q&A. As a reminder we are providing slide visuals to go along with the webcast. These slides can be accessed on our web site at GreatBatch.com. Let me now turn the call over to Ed.

Hello everyone. Thank you for joining us on the first quarter earnings call. Let me start by providing a summary of our sales results for the quarter. As you recall, we had anticipated sales would be similar to the fourth quarter level of last year. Sales came in somewhat stronger than expected, increasing to $55.5 million compared to the $49.4 million recorded in the fourth quarter of 2003. The increase came primarily from strong sales of EMI filtered feedthroughs and coated component sales. Compared to last year, sales were relatively flat increasing by 1%. Looking at the segment compatible medical components increased by 1% to $48.3 million and electric and power sales increased by 6% to $7.2 million. Medical and implantable cardiac defibrillator and pacemaker battery sales were 12% lower than last year's first quarter.

ICD capacitor sales were strong in the quarter increasing by 18%. We now have signed up four capacitor customers and we are shipping significant quantities to two of them. Enclosure sales were lowered by 20% compared to last year. This is indicative of the lumpiness in ordering patterns by our CRM customers. We are the clear CRM market leader in this product category. We estimate that we have got at least 85% market share and we've got a longstanding, stable customer base. Even with our solid positioning in this market and with no substitute technology we are still subject to these quarter to quarter sales fluctuations. Commercial sales in the quarter increased by 6%, primarily due to sales increase in domestic oceanographic sales and an increase in international sales of specialty batteries.

As we have discussed in the past it is important to look at sales over a rolling twelve-month basis in order to eliminate any normal fluctuations in customer orders. Looking at our major medical categories we've enjoyed long-term growth of 20% or more in ICD batteries, capacitors and in feedthrough products. Enclosure sales have only increased by 1% over the twelve-month period. The low growth is due to improvements in our manufacturing cycle times which led customers to reduce inventories and the discontinuation of some nonmedical products so we could increase our capacity for medical customers. One of our main focus areas for 2004 is on increasing our customer penetration. As discussed we began shipping significant quantities to our second capacitor customers. We also signed an agreement with our fourth capacitor customers. In terms of the fifth possible capacitor customer among the major CRM customers we remain in active discussions regarding capacitors and other potential opportunities. We are also pleased to announce that we signed a development agreement with our second QHR battery customer. We expect to develop, excuse me, we expect to deliver qualified QHR batteries by the end of this year. We are currently in the build out phase of the new production facility which includes specialized equipment for the manufacturing of this technology. We expect this next-generation battery design will further improve the battery performance of our high rate ICD batteries.

Looking across our major implantable medical component product line we are well positioned in every area including medical batteries, capacitors, feedthroughs and enclosure products. With sales or agreements in place with either four or five of the major CRM companies depending on categories. With respect to capacitors, three of our five major CRM company customers now have FDA approved devices incorporating our proprietary wet panel technology. Our focus remains on continuing the expansion of our QHR and wet tantalum technology customer base. We remain confident that we will continue to increase our customer penetration and strengthen our position as a leading component supplier to the CRM industry.

Our objectives remain to grow the bottom line faster than the top line by leveraging our infrastructure. As mentioned we delivered on this objective in the quarter by improving our operating margin to 18.7% from the 17.6% achieved last year. The implementation of our new ERP software platform remains on schedule. We went live at electrochem during February and we just went live on May 3, at Carson City. We anticipate going live with our western New York battery facility early in the third quarter and remain pleased with the timing of the major software implementation and with the benefits that this new information technology will provide.

Finally, we completed the acquisition of the NanoGram Devices Corporation, NDC, in March. NanoGram is a materials research and development company focused on developing nanoscale materials for use in various batteries and potentially other medical device technology applications. We believe that this acquisition will be very synergistic with our own QHR battery development and accelerate the time to market of the next-generation of medical battery technology. This acquisition demonstrates our commitment to leadership in advancing medical device technology. Let me now turn the call over to Larry Reinhold who will discuss our financial results and provide further insight into the strategic rationale of the NanoGram acquisition.

Thanks, Ed. As mentioned our sales increased by 1% comprised of a 1% increase in our implantable medical components, 6% increase in our electrochem commercial products compared to last year. Gross margins remained relatively flat at 41.7% but we are up sequentially from 40.2% in Q4 of 2003. Operating expenses came down by 1% as a percentage of sales to about 23%. The lower operating expenses contributed to the operating margin improvement from 17.6% last year to 18.7 in the current quarter. We reported net income of $6.6 million, or 31 cents per diluted share, which is up 11% from 28 cents last year.

The gross profit of 41.7% that we reported in the quarter was influenced by a number of factors. On the positive side we saw significant improvement in our commercial battery product gross margins which are manufactured at our Canton, Massachusetts, facility. At this time last year we were right in the middle of consolidating our two separate commercial battery manufacturing plants. That consolidation was successfully completed in June of 2003. We began seeing significant margin improvement in Q4 and continued to benefit from lower manufacturing costs in the first quarter. Partially offsetting the improvement in our commercial battery margin was the effect of lower relative sales of our highest margin products in the medical battery, which are medical battery products.

Going forward we will continue to focus on the progress we have made in reducing our scrap and other manufacturing costs towards our goal of becoming the lowest cost manufacturer of medical components. The decrease in operating expenses was primarily due to lower SG&A. As discussed last quarter we reorganized the company from four separate business units to two business units as of January 1. Those business units are implantable medical components, and our electrochem power solutions. This internal reorganization which was done in order to provide a single face to our medical customers resulted in the elimination of certain general management positions. SG&A costs of $6.9 million in the quarter were down 10% from $7.7 million recorded a year ago.

Turning to the BS, net cash and equivalent decreased by about $49 million from December of '03. The primary reason for the decrease was the $45 million of cash used to acquire NanoGram. In addition the reduction in cash reflects the payment of normal year end accruals and increased capital spending primarily related to our new battery plant build out. Accounts receivable increased by $4 million from year end, mainly due to the increase in sales volume. Day sales outstanding increased by 1 day to 44 days overall. Inventories increased by about $3 million reflecting an inventory build in our customer imposed safety stock levels. Inventory turns remained at 4.1, consistent with where they were at year end but improved significantly compared to about three turns a year ago.

As mentioned we acquired NanoGram in mid March. NanoGram has a strong patent position relative to the manufacturing nanoscale materials using the laser pyrolysis process. We believe this acquisition will accelerate the time to market of our next-generation battery technology and will provide additional product enhancements. Our goal is to develop an implantable battery that is five cubic centimeters in volume with a consistent five-second charge time and over a five-year battery life. We believe that utilizing the laser pyrolysis process to manufacture nanoscale materials combined with our own battery technology will enable us to design and manufacture a battery that achieves these performance characteristics. In addition to application in medical batteries we also believe this technology will open the way to producing other high performance cathode materials for potential use in other nonbattery applications such as tantalum, capacitors, ceramic dielectric, and coating applications.

We have already put a new organization structure in place headed by Dr. Curt Holmes, our Chief Technology Officer. There has been much coordination that has taken place between the Fremont engineering staff and our existing research group here in Clarence, New York, as we collaborate on our development efforts. We are maintaining the Fremont, California, facility which we have renamed the Greatbatch Technologies advanced research laboratory. In the short term we are focusing our efforts on bringing the existing Quasar and nanocardia designs to the marketplace. Longer term we will address how we can integrate these technologies to improve medical battery performance and explore wider range applications of nanotechnology. The $45.4 million purchase price has been preliminarily allocated as follows: To property and equipment, $.7 million. Other net liabilities, $.9 million. Deferred taxes, $5.8 million, to patented and unpatented technology, $16.5 million, and the residual, which is goodwill, is $34.9 million.

The most significant elements of the purchase price allocation were to the technology and goodwill. As mentioned NanoGram has a strong intellectual property position around the laser pyrolysis process and accordingly a significant allocation was made to technology. That cost will be amortized over the estimated remaining useful life of the technology which is about 13 years. For the remainder of '04 this amortization expense will be around $100,000 a month. The residual amount of the allocation of $34.9 million to goodwill is not amortized but rather is subject to periodic testing for impairment. Pursuant to the valuation that we obtained the status of NanoGram's technology was sufficiently advanced such that technological feasibility requirements were met at the acquisition date. Accordingly, no in process R&D charge was recorded.

As we discussed in the last quarter earnings call the NanoGram acquisition will be dilutive to earnings in 2004. In addition to the amortization of expense of about $900,000 over the last nine months of the year we expect to incur incremental R&D cost in the range of 5 to $6 million. If you include the impact of lower interest income of about half a million we expect that the acquisition will lower our previously recorded guidance by between 21 and 23 cents per diluted share. We do not expect to incur any additional large incremental capital expenditures as a result of the acquisition. We now move on to our full year guidance. In summary we now expect diluted earnings per share to be in the range of $1.14 to $1.22. We expect our operating income to be in the range of 16 to 17%.

In summary, our sales came in a little stronger than expected, particularly in our ICD capacitor and filtered feedthrough products. Additional sales volume allowed to us leverage our operating expenses and improve our operating margins to 18.7%. We completed a strategically important technology acquisition in NanoGram. We believe that the long-term -- over the long-term this technology will allow us to continue our leadership in batteries and will provide additional capability in products enhancements. We expect diluted EPS for the year to be in the range of $1.14 to $1.22. Finally, we successfully concluded a number of other strategically important initiatives. In addition to NanoGram we increased our customer penetration by adding our fourth capacitor customer and our second Quasar battery customer. We continue to believe we are on track in terms of delivering on our long-term strategic objectives, maintaining our technology leadership, delivering the highest quality products at the lowest and becoming the lowest cost component supplier to the implantable medical device industry. That ends our prepared remarks. We will now turn the call over to the moderator to facilitate Q&A.

Thank you very much, sir. Ladies and gentlemen, if you would like to ask a question, please key star one on your touchtone telephone. If your question has been answered or you wish to withdraw your question at any time, please key star two. Questions will be taken in the order they are received. Please press star one now to begin and we will wait one moment to compile a list of questions. Gentlemen, your first question comes from Bob Hopkins of Lehman Brothers. Please proceed, sir.

Good afternoon. A couple quick questions. First of all on the outlook for ICD and pacemaker battery growth in the second half of the year, do you expect, when do you expect the inventory reductions to kind of end and us to return to kind of normalized market growth rates?

Bob, it's Ed. I think it's going to vary somewhat by category. I think the anticipation is that in the second half we are going to see the industry with the kind of I'll call them expected growth rates that we believe are appropriate for the long-term. But it's going to vary somewhat by category in terms of what our situation looks like.

Then a little bit more specifically, though. What are you hearing from your customers? I mean you've heard from them to expect an uptick? And maybe what are you hearing that's different from ICDs versus pacemakers?

Bob, I would say that we are looking forward to (INAUDIBLE) when we can talk to them again and probably firm up our own conclusions in terms of what it looks like by category.

Do you think this inventory reduction that started in I guess late third quarter, is that still going on at this point?

Again, it's a little tough to say. Again, we're probably in a couple categories we are probably seeing it in a couple categories yet.

And then two other quick questions. One, for the fourth capacitor customer that you announced is that an OUS.based company.

I guess we are not going to say but you can probably draw your own conclusions.

Finally on Quasar, should we expect that to be a premium margin product for you when its launched?

Bob, like with any other new product probably in the first couple of quarters of production we are going to be in a learning curve. But part of our investment, our significant investment in this new facility is to significantly lower the cost of production and make sure that this is above average in terms of profit margin.

I guess finally, just one more, in terms of this new reporting structure, there is, in the implantable medical components there is an other line of $5 million there that showed 0% growth. What is that specifically?

Bob, that comprises various things. The components that go into some nonCRM devices, things like thrust pumps, thing like coated components, LVADs, and the like. So it's miscellaneous things, machined and molded components.

Okay. Great. Thanks very much, guys.

Thank you very much, sir. Gentlemen, your next question comes from Glenn Reicin of Morgan Stanley. Please proceed.

Trying to understand a little bit about this components number. You did better in the quarter. The upside really came from commercial and the component side of the business. Can you give us some sense of what kind of outlook you have for the second quarter on sales? And just wondering if you pulled stuff from the second to the first because obviously the body language throughout the quarter was that business was relatively tough?

No, Glenn, obviously we, clearly we don't guide to the quarter. But certainly in terms of the quarter is what it is. There were no pull ins or push outs here in Q1.

I didn't mean that it was intentional and then customers coming in late in the quarter.

Not that we know of.

Would you anticipate that the second quarter would be up relative to the first in terms of sales?

Glenn, we are not guiding to the quarter.

Okay. The SG&A line, can you give us a sense going forward what you think the normalized quarterly run rate is on a dollar basis?

Well, I certainly think that we've made the investments in infrastructure, we've made for the most part, we are in the middle of this implementation of Oracle which is a significant project that will go on for the remainder of the year. So there's an elevated level of both capital and expense on the implementation conversion of data and the like. The other significant thing that's going on for the remainder of this year is Sarbanes-Oxley compliance work. So that will also continue to the end of the year. So I think on a run rate basis we would expect in '05 to see it certainly not grow, you might even see some less. But we don't have any major G&A headcount to fill or anything of the sort. So it looks pretty good. We're elevated on -- we've got elevated spending going on for a major ERP project and for the Sarbanes-Oxley.

So on an absolute spending level you say it's still around $7 million a quarter going forward.

Yeah. That's probably reasonable.

That was a lot lower than we thought.

That's probably in the ballpark.

Okay. And then the tax rate at 30.5, that's the new tax rate?

Yeah, that's our effective rate based upon our expectations for the year that's the effective rate.

Okay. Two last questions. You've mentioned that four of the five major ICD manufacturers are using wet tantalum today or at least have FDA approval for wet tantalum products. Besides the one large customer you haven't guided can you characterize what kind of devices, these -- wet tantalum is used in today? are these high output devices? are these small devices? Is there any sort of pattern here on the usage of wet tantalum?

I don't think there's a discernible pattern, Glenn, but I have got to be honest with you, I'm losing track there are so many different products out there these days and the categories bounce around so much I am losing track of what is categorized as what I just got to be honest with you.

Okay. And just so I understand exactly on an apples to apples basis what had happened, do you mind just going back to the three restrated numbers, Tony this afternoon you said you would provide the sales numbers in both formats. Can you give us the sales number under the old format? By category.

I am going to do this, not reading numbers on line. We can take that up in a separate call. The category that, the recategorization, if you will, we provided additional, we certainly expected that the investment community was very happy with this additional disclosure by segregating the breaking out of that very large thing that we call components in the past, breaking out our enclosures and our feedthroughs from that number. So we provided that on a historical basis as well. The other is as I said earlier, the other category includes all those miscellaneous machines and molded components, direct pumps, LVADs, and these significant growing, coatings business that we have. So we can provide that stuff, you know, any detailed questions off-line.

Fine. Thank you.

As I committed to I will supply that information to anybody that wants it in terms of what the format would have been for the balance of this year.

Okay. Thank you.

Thank you very much, sir. Gentlemen, your next question comes from Glenn Novarro, Banc of America Securities. Please proceed.

Thanks, guys. Two questions. One, just a follow up to Bob's question, are you still expecting ICD customers to work down their ICD inventories in the second quarter? That's specific. And then secondly on the guidance, you've essentially in your press release and on the call reaffirmed guidance of $1.14 to $1.22. You had a really good quarter beating consensus by about 5 cents. You just told Glenn that SG&A was going to be a lot lower at least relative to what we forecasted. So as I look at the numbers I'm just wondering, is there anything that's making you nervous out there that's preventing you from raising the guidance going forward? Thanks. Thanks.

Thanks Glenn, no, there's nothing, first off let me clarify one point. We said that we may have lower G&A in the future than we may be now that was really in '05, not for the remainder of '04. In terms of our guidance, right now we have, and you saw this last year and I think you'll see this consistently this year, we guide for the full year and one quarter does not a year make. So last year you guys were asking the same question which is after Q1 why are we revising guidance. We wanted to be, we are more conservative than that and so at this point in time we certainly need to revise it for the impact of NanoGram. We will continually look at what, what the full year looks like but it's too early to, for us to change anything other than the impact of NanoGram.

Then just, Ed, if you want to talk specifically to your ICD customers and has the one major, two major customers that have been slowing down their buying pattern have they finally worked out their specific ICD inventories to levels that are reasonable and now will they start accelerating the buying going forward?

Well, it's tough to say in detail, Glenn. And I want to go back to the one point I was trying to make because there is something else that's going on and I was trying to use the globe situation to illustrate it. In all of our business areas we've been implementing both Six Sigma and Lean, in most cases it's dramatically reduced our lead time, it's improved our ship rates on delivery rates and so part of what we are seeing is the customers are feeling that they have to carry less safety stock at their facility to protect against fluctuations historically that we might have had at places like globe on our ability to deliver. To some extent that's a one time effect. But the inventory levels by components could vary quite significantly in terms of what the customers had. So when I say it's going to vary by components, it depends in some cases on how much safety stock or buffer stock those customers were carrying in their facility that they have now worked down or are working, in the process of working down because they have an increased confidence in our ability to deliver in a very timely manner.

Okay. Thank you very much.

Thank you very much, sir. Gentlemen your next question comes from Keay Nakae of Wedbush Morgan. Please proceed, sir.

First question, with lower pricing, Larry, can you give us a sense for what that impact was on gross margin?

Well, we talked across the company that the effect of modest price cuts was about three-points of the those, three-points off the top ends of the gross margin line item.

Okay. Second question, you talked about folding in the NanoGram technology and coming up with a more optimal battery design. If you were looking out standing where you are now can you offer a time frame for when you might have a product like that as described?

Okay. This is -- Let me address that a couple of different ways. First of all, as we have told people for about the past year since we've been talking about Quasar, what we now call QHR, before we go to market we want a considerable amount of actual batteries built put on live test, long-term testing and we will employ the same philosophy with batteries that include nanoscale technology. We are in the process of evaluating different designs and different approaches so the time frame depends both on what a specific customer design requirement might be as well as on what we feel is an appropriate amount of live testing, reliability testing before we are actually ready to deliver an implantable grade battery. That's on the front end. Now we are talking about also here more than one flavor. We think that there is more than one way to incorporate nanoscale technology into implantable batteries and also we are very optimistic about the technologies, the process, for making nanoscale materials to be employed in other areas like capacitor technology, like ceramic materials for potentially new types of feedthroughs, and a coating technology as well. So we view this as a very broadly based technology acquisition that will benefit the company for many years to come in many different ways.

All right. Let's move on to something else. You didn't provide explicit revenue guidance. I can back into a number based on the data you did give us but any reason why you haven't provided that number which you have always given us in the past?

It didn't change.

Okay. Simple as that.

We provided you the numbers that changed.

Okay. Good enough. Then that's good enough for now. Thanks.

Thank you very much, sir. Again ladies and gentlemen, just as a reminder, if you'd like to ask a question, please hit star one on your touchtone telephone. Your next question, gentlemen, is a follow up from Glenn Reicin from Morgan Stanley. Please proceed.

Just as a follow up why don't you just articulate then what the previous sales estimates were?

They were, sales for the year was 240 to 245.

Okay. So that has not changed. Okay. At this point in time I don't know since NanoGram if you've gone back to your existing customers and had discussions with them about their future plans. But, I'm wondering if you can give us a little insight into those conversations? And then also when we look at the ICD and pacemaker sales this year it's easy to say that it's due to destocking on the part of OEMs. How certain are you at this point that this is not due to another battery manufacturer taking up some of those volumes that could have potentially gone to you?

Well, I guess we are we are never 100% certain on anything when it comes to other alternatives our customers might be pursuing, but we are fairly sure that we have maintained our market leadership position. People are always looking at other alternatives but we think that as we have said that most of what we are looking at here is a result of those scheduling and inventory factors that we previously indicated.

Well, you usually have pretty good visibility, say kind of two to three month rolling basis on what your customers are saying and doing. The fact that you are, sort of, talking about a second half recovery can we assume that you have not seen that much of a pick up in the ICD or pacemaker battery business for the second quarter?

Yeah. I mean, again, I have to repeat it, it varies by category. But I think we are going to see the bulk of any kind of recovery after the second half.

I don't want to beat a dead horse here but you saw very strong sequential growth in feedthroughs. I mean very strong. We are talking about $3 million of sequential growth, you only had one quarter last year that did close to $14 million. Again what is that? Was that one customer? Was that at a slew of customers? Was it one type of?

Well, again, Glenn, in the case of Carson City we continue to benefit by the adoption of filtering. And we are still in a growth cycle there in terms of -- as new products come on that were previously unfiltered. If they are filtered that means there's more revenue for us. If it's filtered (INAUDIBLE).

Yeah. You could have said the same thing in the fourth quarter and you had down year over year down sequentially so I am just trying to understand again what made up that growth, that strong growth this quarter.

Glenn, I just got to repeat it's stuff to take us from quarter to quarter looking at what customers, (INAUDIBLE) watering patterns, I'm sorry, I just underscore our filtered feature business continues to have very strong growth based on the superiority of our technology and will continue to do so over the, you know, again on an annualized basis for the foreseeable future.

Okay. And then last quarter, or a couple quarters ago you were trying to shy away from predicting gross margins. Are you willing to get back in that business?

What we are trying to do now is to try to emphasize operating performance, Glenn. We do have the mix factors and different product categories we do have different gross margins. And our Lean initiative well across the board are proceeding at a different rate in different areas of the business. So we want to try to shift the focus which we think is a good focus to have on the operating performance.

Here is the confusing thing about the gross margin line. Here you have your two highest gross margin products ICD and pacemaker batteries that were down substantially and you credited the approved gross profit to the commercial business which is a relatively small business. I don't quite understand that. Either last year those gross margins had to have been really, really understated.

Correct. They weren't understated, Glenn, we were in the middle of the, smack dab in the middle of the, if you will the low point of the consolidation the most inefficient part of the process. So you can do, you can do the math backward but it was two full margin points was the impact on that small sales volume of the battery, of the commercial battery.

Is the gross profit on that business closer to the battery business or closer to the capacitor business?

Closer to the corporate average.

Okay. Thank you.

Thank you very much, sir. Next question comes from Alex Arrow of Lazard. Please proceed.

Thanks, just two questions about Eagle-Picher if I could. First can you tell us anything about the longevity of the relationship with the manufacturing of NanoGram of Eagle-Picher? And secondly now that Eagle-Picher has the extension of the advanced neuromodulation contract, it appears like they are a being a little more aggressive about targeting what are traditionally Wilson Greatbatch type battery customers? Can you say what you feel their competitive impact might be on any of your either existing or new medical customers?

Alex let me have Larry answer your first question regarding the NanoGram, Eagle-Picher relationship, and I'll take the second one.

Alex, I believe that NanoGram itself issued a press release when they signed a contract, a manufacturing contract. That agreement is, I believe was executed in either the third or the fourth quarter of '03. So the relationship was started then and the relationship was severed a few days after our acquisition closed.

It's completely severed now and there's no more residual, it's totally over?

It was terminated according to, according to the termination provisions of the contract.

Okay. Okay. Great.

Now, as far as Eagle-Picher as a potential competitor. Certainly they are a potential competitor. As far as we know they have a certain range of technologies, final fluoride type technologies. They have had some application in neurostimulators. We honestly aren't aware of what other technologies they might have under development. We know they have lithium ion technology. They've used it in satellite batteries and apparently NSI has chosen to use that in one of their products but that's about all we know about it.

Okay. Thank you.

Thank you very much, sir. Gentlemen, your next question is another follow up from Keay Nakae from Wedbush Morgan. Please proceed.

Just wanted to revisit the inventory issue. Ed, in the third quarter one of your customers deliberately increased their level of safety stocks and we saw that actually in your revenue. Obviously that had an effect in Q4 and now as we've moved into Q1 and now into Q2, you've talked about reducing your (INAUDIBLE) stock so we can accept that. In Q1 as it progressed did you begin to see a resumption in order flow, not just the commercial products or the feedthroughs but in the pacemakers and ICDs from those customers?

Okay. I don't know how to say this any more clearly other than we guide the sales for the year. We take, we get beaten up continually about the lumpiness on a quarterly basis. The last thing we are going to do is try to slice this thing into weekly. So if you think it's bad on a quarterly basis try monthly or weekly. We are just not going to go there. The results were what they were for the quarter. We guided, provided our guidance for the year. And we've tried painstakingly to explain, if you will, how the nature of what it's like being a component supplier.

Okay. I'll accept that for now, thanks .

Hello, Bob, are you there?

Yes, sorry. I didn't hear. I have one more question on UTI Med Source. I'm wondering if Med Source being put out of its misery if there's any opportunities there from you guys in terms of M&A opportunities going forward? Just wanted to get your opinion on M&A opportunities going forward that's always been part of the story historically and just wondering if that's something we should continue to expect out of you guys in the near term.

Well, Bob, I think that this is it. First of all, of course, we did not use Med source as a director competitor. We think our business model is quite a bit different. We, even though we did acquire NanoGram in the first quarter we still have some ammunition in the locker and we continue to look at attractive opportunities both to diversify the technology base as well as the customer base, and again while nothing is imminent, we continue to be very active in terms of looking at possibilities.

Thanks very much.

Thank you, sir. Ladies and gentlemen, if you'd like to ask a question, as a reminder, just key star one on your touchtone telephone. And gentlemen, we do have a follow up question from Glenn Novarro, Banc of America Securities. Please proceed, sir.

Thanks. Just wanted to follow up on the potential fifth capacitor customer? Can you maybe give us a little insight into what's potentially delaying the signing of this fifth customer? Is it a price issue? Is it a design feature? Maybe if you can just let us a little bit in on what's delaying this final sign up. Thanks.

Well, I guess, I'll repeat something -- I will remind you of something that I've said on other occasions. Adding or converting to tantalum technology typically requires a circuit redesign, it may require a system redesign, it's usually done in conjunction with a new platform and those are longer term cycles than just deciding, oh, I will put it in a little niche product of some thing that's ongoing. So we continue to wait for the right opportunity. We continue to believe that the benefits of our technology will be compelling. And that within a reasonably near term future we will be able to say that it's five out of five.

Okay. Thanks, Ed.

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.

Great. Thank you and just to remind you that both the audio portion of this call and the slide visual will be archived on our web site at Greatbatch.com for the next 90 days. Thanks everyone for joining us on the call.

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