Integer Holdings Corp (ITGR) 2004 Q3 法說會逐字稿

Ladies and gentlemen, welcome everyone to the third 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 changed assumptions, the occurrence of 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. Please proceed, sir.

Thank you, Carlo. And welcome everyone to the third quarter Wilson Greatbatch earnings conference call.

On the call today are Ed Voboril, our Chairman, President, and Chief Executive Officer, and Larry Reinhold, Executive Vice President and Chief Financial Officer. Let me add that Ed is joining us remotely today from outside of the country, so hopefully we'll make this call as seamless to you as possible.

In terms of the format for today's call, Ed will provide a summary of our financial results for the quarter, and briefly review our current business and strategic initiatives. Larry will review the financial results in detail, and provide an update on our 2004 guidance and 2005 sales outlook. At that point, we'll open up the call for the customary Q&A.

Let me remind you that we are providing slide visuals of this call, which can be accessed on our website at greatbatch.com.

Now let me turn the call over to Ed.

Thanks, Tony. Well welcome, folks. Good afternoon, it's great to have you with us. I'll start by providing an overview of our financial results.

We achieved sales of $45.2 million for the quarter, and earnings-per-share of $0.14. These results were ahead of expectations.

In terms of sales, implantable medical component sales were 24% lower than last year, and the decrease is primarily due to reduced shipments from one customer.

Looking at our commercial products, sales increased by 10%. We experienced strong demand from our oil and gas customers throughout the quarter, driven mainly by increased down hole drilling.

In terms of earnings, we are achieving the structural expense savings and the cost reduction plan implemented in the second quarter. We have effectively curtailed discretionary spending, while at the same time continuing to invest in the important long-term strategic initiatives, which I'll review later.

Turning to the business highlights, first of all, we recently completed a number of significant customer agreements. As previously announced, we extended our supply agreement with Saint Jude Medical through 2008, with renewal options running through 2010. We've enjoyed a longstanding partnership with St. Jude, and we remain excited and committed to working together with them to bring new technologies to the marketplace. In addition, we amended our current supply agreement with Guidant, to include our next generation QHR battery technology.

We also executed a new supply agreement with Medtronic to provide value-added sub-assembly for many of their CRM and neuro devices.

Second, we successfully went live with three more locations on our new ERC business platform this quarter. This brought the total to seven locations that we have successfully moved from the Legacy system to our new business platform, and we went live with the eighth and final location last week. My hat goes off to the entire implementation team for their tremendous effort in implementing this new business solution. We believe this new technology will enable us to continue to enhance our productivity throughout the organization.

And third, we hired Tom Hook as our new Executive Vice President and Chief Operating Officer. Tom brings a great deal of marketing and manufacturing expertise to the Company, and is a welcome addition to the senior management team. Tom's focus will be continuing the development of our customer relationships, while advancing our manufacturing cost reduction initiatives, and furthering our commitment to operational excellence.

Let me now discuss the progress on our major strategic initiatives, which remain the focus of the organization's long term. I'm pleased to report that we are on schedule for completion of the new advanced battery manufacturing facility. We expect to complete construction in December. We have completed phase 1 construction, and have been operational with our new dry room for several weeks. The remaining battery production space is set for completion in December.

As you recall, the battery manufacturing process in this facility is going to be substantially more automated than the current process. We expect to take delivery of the custom designed equipment throughout November, December, and January.

In terms of next generation QHR technology, product development is proceeding as planned. We are currently building and delivering QHR cells to our first and second customers. Concurrently, we are working on the development of QMR cells, which we'll use for lower voltage applications, such as neuro simulation devices. We remain very excited about the performance enhancement that this proprietary technology will bring to the CRM and neuro simulation marketplace.

In addition to the advanced battery manufacturing plant construction, we are also on track with the construction of the new value-added assembly plant in Tijuana, Mexico. The construction of the other facility, Shell, is complete, and we are currently working on the interior infrastructure. We are in the process of procuring the manufacturing assembly equipment. and expect to take occupancy in January of 2005. We also remain on schedule to begin the value-added device assembly activity, beginning in the first quarter of 2005.

Again a tip of the hat to all employees who are working hard to get this facility, and our new advanced battery plants up and running.

Finally, on the strategic front, we are on schedule with the development of the first generation nano SVO battery cells. We have completed the manufacture of over 600 NOSEO cells, and have these cells on test. We are in the process of scaling up the material synthesis process, and are currently validating the nano SVO production process. We expect to begin production and deliver nano SVO cells in the second half of 2005.

In summary, we believe that QHR, QMR, and nano batteries in the long run will completely replace the existing medical battery technology we are offering today. We believe these products will offer a competitive advantage, compared with the products that are available today to power both low, medium, and high voltage implantable medical devices.

Now I'm going to turn the call over to Larry Reinhold to give more details on our financial results.

Thank you, Ed.

Total sales for the third quarter were 45.2 million, which was a decrease of 11.2 million, or 20% compared to last year. Net income totaled 3 million, a decrease of 61%, and diluted EPS was $0.14, a decrease of 61%.

We take a look at the sales by segment, our implantable medical component sales decreased by 24%. 21 of the 24% decline was attributable to reduced volume, primarily to a single customer, as discussed earlier. The remaining 3% decrease was due to lower selling prices across most of the product categories.

Turning to commercial products, we experienced solid growth in our Electrochem Power Solutions segment. The 10% was all volume related and was driven by more frequent pipeline inspections and increased down oil drilling by our oil and gas customers.

Moving down the income statement, gross margin of 38.5% declined by 400 basis points from last year. Lower medical component selling prices accounted for about 280 basis points of the reduction. The remainder of the decline is primarily a direct result of the unfavorable affect of spreading fixed manufacturing cost over lower production volumes.

The lower sales volume wasn't mitigated by financial controls and cost savings initiatives that were put in place last quarter.

Looking at research, development and engineering expense, the increase compared to last year is due to the nano development costs pertaining to the acquisition of NanoGram Devices in March of this year. The sequential decline in RD&E expense of about a $1.5 million from Q2 of '04 is primarily due to reimbursements from significant engineering projects that were realized in this quarter.

Turning to taxes, in the third quarter we completed a series of tax savings initiatives that has resulted in a reduction of our 9-month year-to-date tax rate to 29.5%. The reduction was primarily due to recognition of various state tax credits.

In the first two quarters of this year, we were using an estimated annual effective tax rate of 30.5%. In order to bring the full-year rate down to 29.5%, we reduced the third quarter effective rate to 25.5. And in the fourth quarter. we expect we will accrue income taxes at the full-year rate of 29.5%. The reduction in our tax rate had the effect of improving earnings by about $0.01 per share this quarter.

Looking ahead, as most of you know, the President recently signed the American Jobs Creation Act of 2004. This Act significantly changes the tax treatments of foreign sales activities, and of domestic manufacturing operations. We are currently analyzing the impact of this change on our future operating results, and will quantify the impact when we provide 2005 bottom-line guidance.

Turning to the balance sheet, at the end of September, we had cash equivalents and short-term investments of $83.9 million, which was an increase of $1 million from the end of last quarter.

In working capital, day of sales outstanding increased by 3 days, due to an increase in our commercial receivables outstanding. Again, the issues that drove the DSOs higher have been resolved, subsequent to the end of the quarter.

Days of inventory on hand increased by 5 days, primarily due to lower sales volumes, and our building of safety stock requirements.

Capital spending was $10.9 million in the quarter. We expect spending will be in the range of 19 to 24 million in the fourth quarter, reflecting the increased spending on the various facility projects, and the ERP implementation.

Our long-term debt of 170 million at September 30 was comprised of 2.25% convertible debentures that we issued in May of 2003. These notes carry a contingent conversion feature, commonly referred to as a Coco.

As many of you are aware, beginning with reporting periods after December 15 of '04, or our fourth quarter, the Emerging Issues Task Force recently ruled that the dilutive effect of contingently convertible debt instruments should be included in diluted earnings per share. If dilutive, this would mean that about $3.2 million in after-tax interest expense and amortization, would be added to the EPS numerator, and about 4.2 million shares of common stock would be added to the EPS denominator.

We anticipate in the fourth quarter of '04, we will need to restate our diluted earnings-per-share for the second, third, and fourth quarters of 2003, the full year 2003, and the first and second quarters of 2004.

For the third quarter of this year, and for our anticipated results in the fourth quarter, and for the full year of '04, the effect would be anti-dilutive, and therefore, the EPS calculation will not be adjusted.

In terms of our forward-looking guidance, let me provide the following updates.

We expect sales for the full year of '04 to be in the range of $195 to $200 million, compared to a range of $195 to $205 million previously announced. We anticipate that operating income will be in the range of 23 to 25 million, up slightly from our previous guidance of 20 to 23 million. And we expect to earn between $0.64 and $0.68 per diluted share, up from the $0.51 to $0.58 we announced at the end of the second quarter.

The increase in the anticipated operating income and net earnings is primarily due to the effect of higher than expected savings from our cost reduction initiatives, and the reduced effective tax rate.

For 2004, we expect capital spending to be in the range of 45 to 50 million, down slightly from our previous guidance of 47 to 52. This primarily is due to the timing of certain capital expenditures, and controls in place over spending.

Looking ahead to 2005, we now expect sales to be in the range of 200 to 220 million, compared to 207 to 230 million, as previously announced. This decrease reflects the impact of refined volumes from our major customers as a result of the passage of time, as well as revised medical component pricing. We continue to work on refining our sales outlook, and we will provide an update along with our expected capital spending and earnings-per-share guidance for 2005, at a later date.

In conclusion, our financial performance for the quarter was ahead of expectations. We quickly adjusted to the lower sales levels by implementing the necessary financial disciplines.

In terms of our long-term goals, we've entered into a number of key strategic supply agreements with all of our major CRM customers, which should position us for future growth opportunities.

Furthermore, we remain on track with the various key strategic initiatives relative to the new facility construction, the development of our next generation battery technologies, and with implementing the base ERP system.

All of these initiatives represent important advancements in the Company's strategic direction.

This concludes our prepared remarks. Let me now turn the call over to the moderator to facilitate the Q&A.

[OPERATOR INSTRUCTIONS] Our first question is from the line of Glenn Reicin from Morgan Stanley.

Good afternoon, can you hear me, guys?

Can hear you fine, Glenn.

Okay. Few questions on the gross margin side. Is there significant consumption in progress right now that is not being amortized or depreciated on the gross margin line, and if so when does that kick in and what's the size of that?

The answer to that is yes, there is significant construction and progress that is for two primarily manufacturing facilities that are not yet been placed in service. They will be placed in service in Q1 of 2005. And we'll factor, we'll factor that in what we can advise you on what the amount will be at a later date.

Okay. Can you give us then, at least maybe for this quarter compared to last, some idea about the gross margin by product line. In other words, can you give us an idea whether batteries were up or down, whether capacitors were up or down, commercial [indiscernible] and maybe give us a idea just in general trends where they should be going in the next couple of quarters?

Well, yeah, let me again, we've resisted disclosing specifics by product line, but let me just say in general the volume decreases were across almost all of our medical product line, so correspondingly the gross margins were lower for almost every product. I think if I look at things, the -- there's one product line, that being our coated components, where the volumes actually had grown significantly and margins were accordingly improved in there, but I think in every other product line they were lower. And I think it will -- certainly expect that we've got a number of -- we've made a lot of progress on cost reduction initiatives. We have a lot more coming, and we believe that the effect of our cost reduction initiatives will be more than sufficient to preserve gross margin against, if you will, price reductions.

What about against the increased CIP.

That would include the increased construction for the new facilities, that's all factored in there, Glen.

Okay. So while you're not providing guidance for next year, one thing we can bank on is higher gross margins? Not to put you on the spot.

It's obviously, we haven't guided for next year. It'll be highly volume dependent, but all things being equal, we'd expect that gross margins would improve with cost reduction initiatives.

Thank you. I'll get back in line.

Thanks, Glen.

Our next question is from the line of Mark Landy from Susquehanna Financial Group.

Evening, folks.

Hi, Mark.

Couple of quick questions here. Larry, for 2005, what percentage of the revenues are you attributing from the sub-assembly?

We haven't -- we don't guide obviously to the specific product line. But it's a pretty small number. It will be second half weighted. Talked about we will be occupying the facility in the first quarter, and then there's a ramp, if you will, that'll occur primarily over the first and second quarters and will be in, you know, higher volumes in the second half of the year.

But from the top line perspective, you know, it's not going to -- it's baked into the number that we have in there, and it's, you know, it's certainly not up there with batteries and the like yet.

So maybe I'm coming at more of an angle that Glen's getting at. It's not going to be large enough to meaningfully impact the gross margin next year or could it actually get to a point where it might be a slight drag?

I don't think it's going to be large enough. Again, and while I know you focus on gross margins again, remember, this operation is, you know, assembly operation, and we're really looking at some of these things on operating margins as opposed to gross margins.

Okay. Have you had any inquiries from any of the other manufacturers from a sub-assembly perspective?

Ed, do you want to take that one please?

Sure. Mark, I think it's fair to say that we're talking with almost every other major company out there about this type of opportunity because we believe it certainly makes a lot of sense from the longer term for us to be adding value through assembly above and beyond the components that we provide to most companies.

If you can move on to QMR for neuro stim for a little while, are you validating these for existing customers, or do you have a new customer interest in this area?

Both, both.

So these will be for your existing too and then there would be two others so you might have inquiry from, would that be about right?

Don't forget that QRM brought applications in thinks like neuro simulators and drug pumps, in addition to CRM. So it's from an application standpoint, it has a much broader application base that we can address.

I'm specifically talking talking about neuro stim cell, so it would be stim and drug pumps?

And again we're working on designs for both existing customers and new customers.

And when you say, do you break out the drug delivery from neuro stim as two separate companies, or if one company offers both is that considered a single customer?

When I was addressing the question of customers I was addressing it on a customer basis, not a product line basis.

Okay great, and lastly what was CFX sales, Larry?

What was what?

CFX

Carbon monofluoride.

Sales -- you know, it's in our -- we include that in our pacemaker and other batteries category, so that was 4.1 million for the quarter.

So was it around, you know, was it up from last quarter, flat, or down, because I think you gave us the number last quarter.

I don't have the number with me. Quite frankly, I believe it was up, but you know what, you have to follow up on that.

Okay. Thanks, guys.

Okay.

Our next question is from the line of Bob Hopkins with Lehman Brothers.

Hi, thank you, and good afternoon.

Hi, Bob.

Just a couple of quick questions here. Wondering if we can talk a little bit more about the revenue guidance that you're giving, which is obviously down a little bit from where you were. And you mentioned further conversations with your customers. I'm wondering if you could in any way give us a little bit more color on the tone of those conversations. Is this more of them being conservative on their outlook or more inventory issues, or is this more the one customer that seems to be vertically integrating a bit here?

You know, Bob, it's really probably, we don't want to go into public discussions about what our conversations are with any of our customers. Our guidance range for '05, we're 3 months closer now to '05 from where we were before, and it reflects our latest thinking on the range of what we -- where we're going to end up across the whole spectrum of customers. So I mean, it's really not -- we really don't want to comment about specific conversations with any specific customer.

Fair enough. Then another question on, you mentioned also pricing a couple times in the prepared remarks, and you announced during the quarter a couple of new long-term agreements, you know, specifically St. Jude was the most recent. So for the new battery technologies then I guess is it's a safe assumption that the, that the revenue to Greatbatch per device on batteries, even with the new technology factored in, is going down, or is that not the right assumption?

I don't think you can generalize like that, Bob. This is Ed. I mean, there's no question there's tremendous pricing pressure throughout the entire industry. I'm talking about all the way from what our customers, the pressures our customers are seeing from the marketplace and, of course, that's reflected in the kind of -- I'll call it pressures we get from them and we try -- we've been trying to address that, as Larry mentioned earlier. A couple of years ago, we started to address major cause take-outs in a number of ways, being manufacturing, improving and quality, and so we're confident that that, you know, those initiatives are on or ahead of schedule.

What we're seeing again, is there's a mix, it's hard to generalize it by device because depending on the kind of technology chosen, and the combination in some cases, the, you know, the average cost or content per device could actually be up.

Okay. But generally speaking in terms of how we should be thinking about this for your existing customers that are swapping out of your SVO batteries into your new technologies, you're generally speaking not getting a price premium for those batteries. Is that a fair statement?

No, I think we're still looking at a price premium for QHR and QMR. It depends on the mix, and don't forget, Bob, that even though we're in production early, well, actually we're in production now on limited quantities. But these are still typically new platforms and our customers are introducing so even though we're shipping in the first half of '05, you know, the actual ramp on production of devices that actually include these technologies is weighted toward the, you know, the second half of '05. So you're not going to see a big, a tremendous impact from pricing on new technologies in '05 is all I'm trying to say.

Okay. And then in terms of the new sub-assembly contract and the timing of that kicking in which you mentioned on the call, any update on whether or not that sub-assembly business in the last 3 months since we last chatted, has led to the possibility of capturing some of the higher-end business, like feed-through, or batteries, or capacitors?

We're very bullish on discussions with all of our customers in terms of our new EMI filtering technologies, advanced battery technologies, improvements in capacitors, and I think ultimately the fact that we're adding more value, we'll be adding more value for most of our customers puts us in even better position competitively for the long-term to incorporate advanced technology.

Last question and I promise this isn't a sneaky way of trying to get '05 guidance out of you, just to think about longer term and all of your opportunities here, if I were to ask, over the next five years, obviously '05 is going to be a little bit of a adjustment year for you guys as you do some -- open up the new plants and deal with what has gone on Guidant and then the opportunities on the positive side with some of your new customers. As you think about the top-line growth objectives for the Company over a five-year period, what do you think -- what kind of top-line growth outlook is there for Wilson Greatbatch as you see it now over the next five years?

I'll let Larry take that once first and then I'll chime in a bit. Larry?

Oh, gee, thanks, Ed.

Historically, I can say one way to answer it is relative to your guidance at the time of the IPO which was, if I'm remembering correctly, you thought that you'd be sort of a 10 to 15% top line and then through efficiencies could grow at a much faster rate with operating leverage. Just where --

Bob, you know, we certainly our current outlook for the primarily CRM-related component part of our business that we believe that the market for CRM devices will grow in unit terms in sort of the mid-teens and that's -- you have your own view on that, I know, and we don't have really any better view than that of a lot of other people so it's kind of in the mid-teens. We have -- we've talked extensively about the various cost reduction initiatives that we have in place and we have experienced.

We had a 3% price decline compared to last year for our implantable product line, and we think that we can take cost out faster than we may have to adjust prices to reflect the reality of the marketplace we're in. So in terms of top-line growth, if you, if you add that together, you're probably looking, you know, still at double digit top-line growth. We are not guiding to this in any specific period. And we have the ability, clearly you can look at the investments we've made whether it's manufacturing facilities, whether it's business platforms, and/or, you know, per people that we have the infrastructure in place to scale very efficiently to a much larger organization. And so a long winded way of saying that we absolutely still have the ability to grow the bottom line faster than the top line.

But, you know, the top line, the reality of pricing at the top line is different than it was when this Company went public. Ed, if you want to add anything?

Yeah, I think Larry, our business model obviously has put more of a recent emphasis on the operational excellence aspect, manufacturing cost take-outs and so forth, but we're absolutely still committed to technology and quality leadership.

I just want to paraphrase, we were at a recent technology review by one of major customers, and one of their senior technology people said in addressing the entire spectrum of our battery technology, this is just unbelievable what you guys have here. I don't know how you can reduce this to a message that will go out to your investors and those people that advise those investors, but this -- the new line of a battery technology basically is better than anything else that's out there. And so we remain committed, as I mentioned earlier, even though we had to take some actions earlier this year, we have not backed off one iota from our investment in both the technology that we're developing for the future, or the facilities that we're preparing to support those technologies.

I think that's the message. Obviously 2004 turned out to be a more challenging year than we expected. We're not blinking, we're continuing to invest. We believe we've got the right product for the future, and with additional value-add opportunities, I believe we'll certainly be able to do what Larry just mentioned, which is to grow double digit. Obviously, there's a lot of questions on how much some of the new initiatives or some of the new studies that are being approved are going to add to the growth rate, but with most of our sales still concentrated in CRM, we believe we'll continue to significantly benefit from the secular growth in that marketplace for the foreseeable future.

Thanks very much.

Our next question is from the line of Jason Mills with First Albany.

Hi, Larry, thanks. Can you hear me okay?

We can hear you fine, Jason.

Great. I wanted to discuss maybe the issue of bundling. What you're doing there. Are you using that to increase the value proposition and maybe help us out where that plays a role in your business over the next 12 to 18 months, good or bad, and will it help sustain prices maybe across-the-board a little bit better vis-a-vis maybe holding on to some business. Can you just address that as well as maybe potentially any pull-through increasing sales vis-a-vis bundling as well. Just kind of bundling in general.

Sure, well, I'll address it as briefly as I can. It really relates to most relevantly to the assembly opportunities that we're pursuing and we're about to roll out in short oder. We have the ability because of the multiple product lines that we sell, that come in these devices that we can bundle, if you will, and we've elevated the sales price in terms of what the customer is buying from us, to a sub-assembly from a collection of components. And so obviously there's a, from a business model perspective, there's a defensive element to that, which makes it very difficult for a third party competitor to come in and try to compete on an individual component basis when they can't offer the same solution.

It also, as part of this model, if you will, is that our models that we will assemble, the leading technology which is what we represent by what we've developed ourselves. So the components that we assemble in the long run, we expect are going to be components that we manufacture ourselves.

Yeah.

So in terms of both, you know, if you will, opportunity to grow faster than the market to the extent that we, that we're successful in the strategy, we can sell assemblies and convert the component content to Greatbatch components, that's obviously a very healthy way to grow faster than the unit volume in the market, as well as the defensive position that is an obvious one.

Yeah, I think the other aspect, of course, ultimately we have to provide our customers with cost-effective solutions. But with our ability to cut across the component lines and look at an entire product or an entire set of assemblies, we can offer them solutions to problems, or to challenges on their device design and the new products they bring to market. We offer solutions that basically they can't get from anyone else. So we're positioning ourselves very uniquely here on the merits of both our technology as well as our ability to effect significant savings for the customer.

Okay. That's very helpful.

Secondly for me, maybe I missed this, and I'm working remotely, so I haven't seen all the details, but I think your battery revenues were up. I see the battery revenues were up and compacitors revenues year-over-year were down. Is that correct? Is that reflective of the mix of the large companies who is virtually integrating?

You know, if you look at our press release you'll see that for the most part, most of the medical component categories were down from the year-ago quarter, other than the one that was up notably was the coated component which is a part of the "other" category that we talked about earlier. For the most part, the overwhelming driver again in the revenue declines, most of it was volume. A little bit of it was price. But of the volume, the declines overwhelmingly that was one customer, and it hit multiple product lines.

Okay. Great, and maybe I missed it, but did you all give gross margin guidance sequentially.

No, you didn't miss it. We didn't give it and you didn't miss it. We don't.

You want to?

No.

Okay thanks, I'll hop back in queue.

The next question is from the line of Eli Kammerman from Cathay Financial.

Good afternoon. A couple of questions. Firstly, on the sales expectation for next year , on the upper end it looks like you could do somewhere in the neighborhood of 5% to 10% growth for the full year, but on a quarterly basis when would you expect to see a return to a minimum of 5% sales growth.

We don't -- we have not historically guided to the quarter and so, you know, clearly things will be, as we talked about, the things such as the assembly, the assembly operations will come in in the second half, et cetera. So I would presume that everything is, you know, it's greater later in the year than it is early in the year.

Is it unreasonable to expect 5% sales growth in the second quarter of '05?

You know, your assumption is as good as you want to make it. We don't guide to or provide comfort, if you will, on the quarter-by-quarter numbers.

Okay. Secondly, there was some minor restatements in the revenue figures for the year-ago period. How did those occur?

I'm, I don't know. We're just shaking our head here, so I'm not sure what you're talking about.

For the implantable medical component revenues, some of the numbers changed from the way they were originally reported.

Oh, okay. You know what, why don't you give Tony Borowicz a call afterwards. We made a change. We affected the beginning of the year. We regrouped some things in a slightly different manner than we had the past year. And Tony can probably walk you through that. I know you're new to the Company. Tony can walk you through that afterwards.

Okay. And then my final question is, you've talked a lot about technological advantage and your ability to provide highly differentiated products that the competition can't match. So I'm having a little bit of a difficult time understanding how the pricing pressures come into play for products that are differentiated, if you have a quasi-monopolistic position there. Why do you need to cut prices if the features are so unique?

First let me, a and I'm sure Ed will want to chime in on this. Remember that while we have the most advanced technology in every product category. And as Ed has mentioned eloquently, the price pressure that we are experiencing is -- if you will, unprecedented in our history.

Remember that we certainly don't have a monopoly. I don't know if anybody says that but they don't -- they're not -- they don't operate in our business if anybody believes that. There are substitutes, there are competitive products which may or may not be, we believe they're not as advanced technologically, but there are substitutes. And so we compete in a very dynamic marketplace, and we believe that fundamental to our business model is to give our customers the best value, which we believe is represented by the most advanced solution at a competitive price to what substitutes are out there.

Is there one particular product category which is particularly resistant to pricing pressures?

No, no, I don't think so.

I don't.

We experience pressure everywhere .

Our next question comes from the line of Tom Gunderson from Piper Jaffray.

I'll be quick. I just need a clarification on the lower tax rate. I missed that. Is that a '04 adjustment, or is that a sustainable change in the tax rate?

It's 04. It's '04 only, and we guided from 30.5 down to 29.5, and so that's '04. Obviously '05 we talked about, we have this new tax act that was signed into law last month which significantly changes the landscape for manufacturers and people that export and/or people who manufacture domestically. Both of those are we what we do and so we've got to sort through the details of that when we provide our '05 guidance. But I would in general, I would not expect that 29.5 rate to stick. It'll probably go up a touch.

And then, I know your're -- you don't want to give too much '05 guidance here so I'll again try and broaden it out. You went from an operating margin of mid- to high teens to something lower, and I'm not sure how this cycle goes with the changes with Guidant and the pressures on pricing, et cetera. Ed, what's your goal for getting back to mid- to high teens? Is a year too soon? Is that about right?

This is Larry, I'll take.

Okay.

A year is, a year is not reasonable to think that we can - with a business like ours, with the amount of fixed costs that we have and with the volume decreases that we've seen, to think that we can get back to the operating margins we had a year ago. That's too soon. But in terms of a longer term objective of operating margins, you know, in that range up there, that is absolutely still our objective.

Okay. Thanks, that helps.

Okay.

Sir, our next question is from the line of Alex Arrow with Lazard & Co.

Thanks, my first question is about the wide-spread pricing pressure. There's a competitor in one particular market that would explain pricing pressure in one area, but can you offer thoughts as to why there would be the wide-spread pricing pressure at this particular time across lots of categories?

Alex, this is Ed Voboril. I'll answer that. You talk to our customers I'm sure, and I'd be surprised if they weren't telling you that out in the marketplace with the products that they're selling, that within the past year they have seen unprecedented pressure from, you know, large buying groups, from large hospitals, from physicians in terms of reducing the prices that they charge to their customers. And given that environment, which when we really believe is somewhat of a see [ph] change from even two years, they're looking to their suppliers to help them preserve their margins. And through the initiatives that we've been talking about, we believe we'll be able to help them do that, but we don't think it's isolated to any one customer, any one product line. It is across-the-board. And it certainly starts internationally, and the pressures have been spreading to the domestic market as well.

Okay. That makes sense. Could you -- the way you gave us that nice timing guidance on the QHR, could you give us similar guidance on NanoGram, anything you're willing to say about when NanoGram is likely to be a factor and launch?

We're plan to start delivering our first NanoGram SVO batteries in the second half of '05.

And anything like how many customers, like you did with QHR?

We -- I don't think we've provided any guidance on that. We've got one large customer, and again we're talking pretty much across-the-board to the entire industry about our developments in that area.

Okay. And then my last question is going back to guidance. I don't know you don't give guidance on particular customers, but in the last two quarters you have said that the guidance was telling you that '05 would be flat versus '04. Can you offer any follow-up to that commentary you gave us about --

I don't think we have any additional detailed comments beyond what we've already given.

Okay. Thank you very much.

Sir, we have another question from the line of Glenn Reicin with Morgan Stanley.

Hi, I just want to clarify guidance. The 23 to 25 million and the $0.64 to $0.68, was that a pro forma number?

No, it's not pro forma, Glen. It includes the one-time charges, variety of one-time, unusual charges in that, which include obviously NanoGram from Q1, includes the Paten acquisition in Q2, which was $2 million, includes the 800,000 plus severance that we had in Q2, and includes startup expenses of the Tijuana facilities, somewhere in the range of 2 to 2 .5 million.

I think that was like $0.19 last time around, right?

Yeah, yeah, my numbers here are 17 to 18%, all those things excluding NanoGram, which you guys have already modeled in. That's a GAAP number.

What was the operating income turn into then at 23 to 25, what does that --

We anticipated this question but I didn't -- I don't have it with me. I have the EPS line but not at the gross number, but we can probably follow up with Tony and look for that.

Also there was a $300,000 other expense in the quarter. I think that other operating expense, was that a one-time in nature? What was that?

You know, that's mostly Tijuana startup costs, Glenn.

Is that included in the guidance or excluded? Well, it's included in the guidance you gave.

It's included in there.

Yeah, so the question is whether we want to take it out or not.

Yeah, we got, you know, more of these startup costs coming here in Q4 and Q1.

Right.

That's most of what that was.

Right. But you didn't provide a $0.15 pro forma number for this quarter.

We're not a pro forma recording company.

Yeah, I understand that, sir. Okay. All right. That's all I had, thank you.

Thanks, Glen.

The next question is from the line of Tim Beltrum [ph] with Piper Jaffray.

Hi, guys. Could you quantify a little bit more your goals for QHR sales? You said it's going to become a major portion of your mix and ramping in second half of next year. What rate in terms of battery would you care to quantify or goals. What exit rate in terms of battery sales would you care to quantify, of if there's a goal.

We do not guide to the product category --

I'm speaking in terms of a percentage. Do you expect it whatever your battery sales are going to be, something like 50% by then or 25% or --

Of next year?

Yes.

It's not going to be that high. The life cycles of these products are much longer than that. And we, you know, we're delivering the first high rate QHR cells. We're delivering the first QHR cells to our customers as we now and as we -- we're getting feedback on the line here. I'm sorry. And it's going to ramp, it's going to ramp as new designs incorporate QHR technology.

Okay. Thanks.

Sir, this concludes's today question-and-answer session. I'd like to turn the call back over to Tony for any closing remarks. Okay, thanks, and I'd like to remind everyone 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 today. Ladies and gentlemen, we thank you for your participation in today's conference. This conclude's today's presentation.