Integer Holdings Corp (ITGR) 2005 Q1 法說會逐字稿

Welcome, everyone, to the first quarter Wilson Greatbatch Technologies conference call. Before we began, I would like to read the Safe Harbor Statement.

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

I would now like to turn the call over to today's host, Treasurer and Director of Investor Relations, Mr. Tony Borowicz. Sir, over to you.

Thank you, Jeanne (ph), and welcome, everyone, to the first quarter Wilson Greatbatch earnings conference call. On the call today are Ed Voboril, our Chairman, President and CEO, and Larry Reinhold, Executive Vice President and CFO.

In terms of the format for today's call, we will deviate a little bit from the norm and we will have Larry start by reviewing our financial results for the quarter and discuss our updated 2005 financial guidance. Ed will follow with an update on the business and strategic initiatives. At that point, we will 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 Larry.

Thank you, Tony. Let me start by providing an overview of our first-quarter financial results.

We achieved all-time record quarterly sales of 56.4 million for the quarter and we reported earnings per share of $0.19. We also reached all-time record quarterly sales for our commercial battery business and we experienced strong sales in our medical business, led by the growth in ICD batteries, device enclosures, and continued strength in our coated component product line.

Earnings per share, though lower than Q1 of last year, increased $0.10 on a sequential basis. This increase from Q4 is primarily due to the higher margin contribution from higher incremental sales of about $10 million.

Taking a closer look at sales by segment, our implantable medical component sales decreased by 1% in the quarter compared to last year, primarily due to the lower capacitor product sales. However, compared to the fourth quarter of 2004, capacitor sales have increased, reflecting the recent increase in contractual commitments from a major customer for our wet tantalum capacitors.

We experienced strong growth in ICD battery sales across our major CRM customer base. In addition, device enclosures sales increased by 21%, reflecting an increased demand from a major customer. Coated components continued to exhibit strong growth as our customers continued to adopt our titanium nitride coating.

Turning to our commercial battery segment, sales increased by 17% in the quarter to an all-time quarterly record level of $8.5 million. The increase is due in part to the strong underpinnings of high oil prices and from federal legislation that requires more frequent inspection of oil pipelines for various safety and security reasons. In addition, we have significantly upgraded our sales force, which is already beginning to pay dividends. We will continue to add to our selling resources during 2005 and we expect to continue our growth in our commercial battery segment.

Turning to the income statement, net income declined by $2.6 million, or $0.10 a share from the comparable period last year. In terms of the big picture, this decrease is primarily due to excess capacity costs and higher other operating expenses which I will detail later in this presentation.

In terms of gross profit, we achieved a gross margin of 36.9% in the quarter, which was down from 41.7% in Q1 of '04. The reason for the decrease is primarily due to the following factors. First, excess capacity cost of about 1.5 million, of which about 800,000 relates to our Tijuana plant and 700,000 related to our existing capacitor plant. Both of these amounts were in line with what we had outlined earlier. The second factor is lower medical component selling prices of about $700,000. Together these two accounted for a decrease of 390 points in gross margin. The remainder of the decrease was primarily related to sales mix.

Let me provide some additional detail on the other operating expense category which, as previously mentioned, accounted for roughly half of the earnings decrease. As you recall from our previous guidance discussion, we anticipate that we will spend $12 million for the year on these selective expenses -- 5 million for the Carson City plant relocation, 5 million for the start-ups of the Tijuana and Alden, New York facilities, and $2 million for severance.

In the quarter, we incurred costs of 1.9 million out of this $12 million, which is broken down as follows -- first, severance cost of about 1.5 million from the cost reduction initiatives put in place in the first quarter; second, about $200,000 for the planned relocation of the Carson City plant; and third, about 200,000 for the start-up of the Alden and Tijuana facilities.

As a reminder, the excess capacity costs are comprised of the net costs of the Tijuana operation, which is being built in advance of a three-year occupancy plan, and the assumption that our current capacitor plant will be at about 50% capacity for 2005. We expect to shut down the current existing capacitor plant and move it into our new Alden plant during the second half of the year. The Tijuana and Alden start-up costs include moving costs and equipment qualification expenses primarily.

Turning to the balance sheet, at the end of March 2005, we had cash, cash equivalents and short-term investments on hand of $86 million, a decrease of 6 million from year-end. Accounts receivable increased by $5 million to about $30 million in total and the days sales outstanding increased by two days, basically due to increased sales volume in the quarter. Total inventories declined by $2 million resulting in days inventory on hand of 95, down 7 from year-end. In the quarter, we spent .$8.6 million on capital projects, primarily for the Alden and the Tijuana plants.

Looking at our financial guidance for the full year 2005, we have increased our outlook as follows. First, we have increased our sales guidance by 5 million and now expect sales to be in the range of 210 to $225 million. This increase is attributable to strength in both the core medical and commercial markets. Second, we increased our earnings per share guidance by $0.05 and now expect EPS to be in the range of $0.12 to $0.20, inclusive of the $12 million in costs for the Alden, Tijuana and severance, as described earlier, and the $7 million in excess capacity costs for the Tijuana plant and our existing capacitor plant. Third, we are reaffirming our effective tax rate of 30% or less and capital spending in the range of 30 to 35 million.

In terms of our earnings per share guidance, we are expecting to make additional investments in the area of medical (indiscernible) research, development and engineering, and in field sales for both the medical and commercial businesses. In addition, we are also factoring in higher manufacturing costs as we transition from the existing medical battery and capacitor plants to our new Alden plant. These factors will impact the results in the second half of the year.

Let me also note that the earnings guidance does not include the impact of expensing share-based compensation. The Company will begin expensing stock options when FASB 123R becomes effective, which is currently anticipated for the first quarter of 2006.

Let me now turn the call over to Ed Voboril to provide an update on the key business initiatives that are underway.

Thanks, Larry. First, let me recap some long-term key success drivers for the Company.

First and foremost, a continuing emphasis on technology leadership in all product categories with a special emphasis on Greatbatch's market-leading QHR and QMR implantable medical battery technology; successful consolidation and integration of advanced manufacturing capabilities, led by the relocation of medical battery and tantalum capacitor production to our new Alden facility; successful leveraging of our Tijuana investment to create assembly-driven pull-through of proprietary component technology; identification of new market niches for our proprietary technology like the IRM contract; and, aggressive expansion of our commercial battery business through investment in sales and marketing capabilities and product line extensions.

Let me now review our progress on these initiatives. First of all, regarding the Alden battery and capacitor manufacturing facility, the move is proceeding ahead of schedule. We have completed the construction of the battery manufacturing portion of the facility and we are transferring battery production and expect to complete the transfer by midyear. Furthermore, we have started the planning for the capacitor facility move and expect to complete the facility modification by midyear and finish the capacitor move in the third quarter.

Regarding the Tijuana plant, we are extremely pleased to report that we have completed construction on plan and on budget. We are in the process of installing production equipment in various stages and expect to complete the final move as scheduled in the third quarter of '05. As mentioned previously, we have made our first shipment to our customer of assembly in accordance with the original schedule. And in addition, we have commenced the planning process for the Carson City move, which we expect to complete by mid 2006.

Moving on to our Q series battery development, we are pleased to report that we have QHR development agreements in place with all of our current SVO battery customers. In addition, we have multiple new QMR development agreements in place for neurostimulation applications. We believe that our QHR and QMR technology represent the best battery technology available for both the CRM and neurostimulation markets.

Regarding our filtered feedthroughs, we believe that our new inductor slab filtering technology represents the best technology available for addressing the evolving rigorous PC 69 standards for protecting implantable devices from electronic interference.

In our commercial battery business, we are beginning to see the benefits from the investments we have made in our sales and marketing capabilities. The all-time record first-quarter sales were due in part to increased market presence in addition to the strong underlying market fundamentals.

We are also pleased to announce that we have received an unqualified opinion from our auditors on our 2004 Sarbanes-Oxley Section 404 assessment which indicates that WGT has effective internal controls over financial reporting.

In summary, we are very pleased with the strong start to 2005. We achieved all-time record sales with strong performance in both our core medical and commercial markets. Given the strong start to the year, we have increased both our sales and earnings outlook. The Tijuana plant is complete, and anyone who has seen this facility would state that it is truly a world-class facility and an important asset for Greatbatch's future.

The medical battery portion of the Alden plant construction is complete and we have commenced moving our battery manufacturing into that facility. And we successfully completed the Sarbanes-Oxley assessment for 2004.

In conclusion, I would like to add that I believe we are on the brink of another period of successful growth. We have the best leadership team in place that I've ever had associated with me in my 35 years in the medical technology business. I believe we have the best technology in every product category and we continue to invest to widen our competitive advantage. We have 26 active medical battery and component customer development programs in place which should fuel growth going forward. Our challenge will be to accomplish all of our objectives in a timely manner. I remain very confident about Greatbatch and its future.

That concludes our prepared remarks and I will now turn the call over to the moderator to facilitate our Q&A.

(OPERATOR INSTRUCTIONS). Glenn Reicin, Morgan Stanley.

Just a couple of questions on gross margins. 37% this quarter -- I'm going through sort of on a product line by product line basis, and I'm assuming gross margin for batteries are over 50%, if you can confirm that. And then, I am also just trying to get a sense of what do you think the excess capacity run rate will be as we head out of the year, and is there any help you can give us on gross margins for the year? Because you blew out the numbers for the first quarter, but the guidance is not going up commensurately. So, can you sort of help us there?

To the first part of your question, although you know we don't disclose margin on a product basis, I guess I will say that battery margin did exceed 50%. With respect to how you sort of get to the year, again, in our gross margin -- in those reported gross margin numbers include the $7 million worth of excess capacity. We're kind of right on track, if you will, to incurring that throughout the year. And in the back half of the year there will be an impact related to sort of the inefficiencies of the movement of the battery business into the new facility, and then the movement of the capacitor manufacturing into the new facility. So, while we have categorized the actual move and qualification costs out of the gross margin line, we're going to have inefficiencies in just the start-up and disruption, etcetera, that we are providing in our guidance. We're providing an ample cushion to cover those.

To the extent that they are lower, that will accrue to our benefit. And to the extent they're bigger than we're anticipating, then I wouldn't be -- I would go the other way. But, we've tried to conservatively provide for the -- this sort of disruption that happens in the movement of major manufacturing in our bottom-line guidance. And, obviously, if you are trying to back into it, probably the biggest driver of that is what -- your expectation of what the gross margin will be.

So, let me just (indiscernible) on a couple of items. If you had roughly 1.5 million of absorption this quarter, you're saying it's still 7 million for the year. What would it be at the end of the fourth quarter? What is the normalized number as we leave the year? And then, if we're using gross margins in the 34% range, does that sound like a decent number for 2005?

Glenn, in '05 -- again, if you think about what we're doing, the $7 million in '04 relates to the capacitor product line move which, again, in our current facility is operating at a dramatically lower volume than it was scaled to. So, that move will happen in '05 and be done by the end of the year. There will still be excess capacity in our Tijuana facility until, as we have guided to this -- it's going to be in late '06, until there is enough in there that we can say that it is not mostly excess. So, there's going to be excess cost, excess capacity cost all through '05; a lower amount in '06 as Tijuana gets occupied with things.

You don't want to quantify that?

No.

And the 34% number? 34% gross margin for the year?

That's your number, Glenn. We're not going to guide to that.

Okay. So, what is your number? Okay. You don't want to go there. Also, I noticed subassembly revenues were not much in the quarter. I think you were targeting around 10 million. Is that still a doable number?

What, for the quarter?

For the year.

It probably won't exceed that, Glenn. But, it was de minimus in the quarter. We expect it will approach that amount for the year.

Jason Mills, First Albany.

I wanted to go to the top-line for a second. Obviously, it exceeded our expectations across the board. I was wondering if you could give us a little bit more of an update with respect to progress in a couple of areas, specifically new customers in the neuro with QMR. I wanted to ask specifically -- I think you said or maybe alluded to, or maybe I'm just gleaning this out of reading between the lines, but maybe fiberonics (ph) was starting to build inventory a little bit last quarter. Did that favorably impact battery sales in the quarter?

And I also wanted to ask you about potential revenue sources that you are considering that you would consider as not well addressed by Greatbatch currently, but nonetheless in your wheelhouse, so to speak -- whether they be molded headers; that seems to be a big business that you could explore. I know it's a detailed question, but maybe you can take pieces of it.

This is Ed. First of all, of course, we don't comment on individual customers with regard to what is happening in any given timeframe, but just a general statement that we have made with CRM which also applies to neuro; we have at least one component in almost every powered neurostimulation market -- device that's going into the market. So, we have very broad coverage.

Now, depending on approvals and so forth of different indications, of course, that number -- that market growth that we're looking at in the future can be pretty significant. But, we haven't shipped commercially any QMR yet, in terms of actual -- we have got contracts; we've get (indiscernible) contracts we're working on. But, we have not yet shipped any significant commercial quantities of QMR. That will be gearing up in the second half as we move into the new facility. Our Q battery production line will be coming up to speed. And so, by the end of the year we expect that we will have some qualified units shipping.

So, the QMR impact is still to be recognized in the future. In terms of new opportunities of the type you mentioned -- you said molded headers and so forth. Certainly, one of the ways that we intend to leverage the Tijuana facility is where we assemble other proprietary component technology that we are offering into assemblies and subassemblies for various customers, both in CRM and neuro. And we do expect that to be a major part of our growth going forward. Again, we're not talking about specific customers, but there is no question that we believe very strongly that we'll be able to leverage our Q1 capabilities as a real asset to grow that type of business in the future.

Okay. That's helpful. Again, on the battery side, again, you mentioned your technology across the board. Can you talk about what you're looking at to expand on that technology. In neuromodulation, one of the seemingly big trends here is rechargeable batteries and lithium ion. Would that be a consideration for Greatbatch?

Yes. We're working on the next generation of rechargeable technology, but we don't have anything to announce at this point in time. But, we think in the future, rechargeable could be important. So, we want to be positioned there. But, we certainly see most of the demand is for primary right now. And as I said in my remarks, we believe that QMR and QHR are the best battery technology available for primary sales to be used in implantable devices, period.

Just to expand on that, we talked a little bit about on the last call the progress towards a two-cap solution. Could you give us an update on that and the potential that holds to potentially get into the business that you don't have on that side with (indiscernible) Medtronic?

Well, our development program continues. We don't see any reason to change the outlook at this point in time, either plus or minus. We're looking at roughly a two-year timeframe in terms of availability to the market. We still believe that tantalum is the best technology available and represents significant technical benefits. And that ultimately will prevail.

Ed, is that two years from right now? I think you mentioned two years from last quarter, too. Are we talking about maybe --

Back half of '06, early '07. Some of this is driven by the customer development program as well. We can make a product available but it still has to tie in to a given customer design platform for it to actually become a commercial reality. So, it's a little bit of a chicken and egg.

Right. Just one clarification if I might, Larry. On the guidance, inclusive of the restructuring expenses, if we back that out -- you said in the press release, I think, it was 60 -- inclusive of $0.60 to $0.63. So, essentially pro forma expectations are the 12 to 20, then you would add the 60 to 63. So, sort of 70 to 85?

I think that's the way that math works, yes.

I just wanted to make sure that it -- okay -- wasn't subtracting (inaudible). Thank you very much. Good quarter.

Timothy Nelson, Piper Jaffray.

A couple of questions on Tijuana. If you look out into '06 after Carson has moved in, I think -- what would be the available capacity left after Carson has moved in and your subassembly business is up to its run rate at the end of '05?

We are probably still only using -- with those two moves, it's still less than half utilized at that point in time.

Less than half utilized. Okay. Just to follow up a little bit more on neurostim. You have previously talked about your customer mix being about 35% non CRM. Is that (indiscernible) number?

Our CRM revenues in medical are still like over 80% of the total.

Tim, approximately 80% of our consolidated total set (ph) revenues are components and assemblies now that go into CRM (multiple speakers)

So, is the other 20% mostly neurostim?

Well, it's a combination. Yes, it's neuro. Probably neuro was the biggest piece of the other, but then there is some miscellaneous other things (multiple speakers)

Have you had any design wins with QMR in either neurostim or CRM you can talk about, in terms of new this quarter?

We've got multiple QMR development programs for neurostimulation applications that are signed and the development is underway, customers to be unnamed.

Like on QHR, we have repeated -- now it's over five years. We've got over five years of real-time test data and we've got thousands of batteries on test. So, all of this is based on real data. When we sit down with our customers' engineers who are designing new ICDs, and they look at the test data that we're showing them from QHR, it knocks their socks off.

Is that in -- I guess in this quarter what I'm trying to figure out is whether you have had any new design wins or new projects started that would help you with --?

Yes and yes. The answer is yes. And Tim, certainly you can appreciate our customers' desire to be -- have things remain confidential.

I'm not asking you to tell us who they are; just sort of quantify how many there have been, and whether that's a significant growth driver for 2006. That's about it for my questions, I think.

Eli Kammerman, Cathay Financial.

Can you give us some perspective on when you might expect to see your gross margin get back over the 40% level, as you achieved for the full year 2004?

Although we don't -- again, we don't provide guidance at that detailed of a level. It certainly won't be in 2005. And it's highly dependent on the mix of our business. As you know that we have made a major push into assembly. And some of the businesses that we have acquired and the product lines that our customers are interested in are inherently at lower gross margins, but not necessarily inherently lower operating margins than our traditional battery and capacitor business. But, obviously, as I outlined earlier, a key factor in the end of the day in the gross margin improvement will be when the Tijuana facility is fully occupied and the relocations are done. And that -- any relocation-related inefficiencies have been flushed through the system so to speak.

For your standard ICD battery, can you give us some idea of what the current size limitations are today in, say, volume and cubic centimeters, and where you might expect that volume to shrink to over the next year?

I think with QHR we're looking at -- with the level or the -- where we are in the implementation curve, we are looking at roughly a 60 c, maybe a little over 60 c battery. Certainly, the driver is to try to get that two 5 cc. But, there's always a trade-off between size and longevity. So, do you want another year or two, or do you want another -- do you want to shave off another millimeter? And we think that our customers will continue to make that trade-off. So, most customers, you know, they have a long life or a high energy, they have a very broad product line. And our Q battery technology is very modular. So, one of the attractions beside the performance -- the pure performance is that we can really tailor it very specifically to a given device and tweak it for a specific device to meet exactly the requirements for a given application.

Alex Arrow, Lazard.

First, if I could start out just with the share count. I understand you restated the share count from a year ago. I might have missed why that was. And if you could also tell us what the current count is?

Probably because in the fourth quarter, we had to adopt the new accounting requirement that makes you include the effect of the -- the contingently -- the effect of the convertible securities in the denominator.

So the year-ago number you weren't having that assumption, and now you are with the conversion (multiple speakers)

The accounting rule changed in Q4. So, you -- I think that is when. It was either Q3 or Q4 of last year when they changed the rule. So, you restate, if you will, your prior comparable period.

Not all prior historical periods, just the one year ago prior comparable periods?

You can't -- you restate to -- basically you restate back to the date when the converts were issued, which was in the second quarter of '03.

The milestone that you spoke about crossing to begin shipping from your Tijuana facility for the subassemblies, are you -- have you or would you give any guidance as to the amount of that? And even if it's just how much happened this quarter or how much you might guide us to for the full year. And if you haven't made any comment on that, I'm not trying to push you to say something that you haven't -- you're not willing to say. But, if you have any guidance specifically on that Medtronic business?

As we earlier have talked about, we thought that this could be an 8 to $10 million product line for the year. As we said in our press release -- earlier in this call, first shipments occurred during the quarter. It was not (indiscernible) revenue associated with it was a small number and it is included in the other medical category. But, that's -- what else to say?

Would it have its own category by the end of the year, or do you expect it to still be (multiple speakers)

It might, but I think it will depend. It will depend on how big it is, if you will. But, it might. I'm not committing to that now.

Next question. On the issues that Eagle-Picher is going through right now, could you give us any thoughts on how that impacts any aspect of your business?

Obviously, we certainly wouldn't want to comment about any other company. I think that our medical battery business -- we have had the -- are the dominant market share leader and we haven't seen any impact of -- from that.

I think it is just a good reminder to all of our customers regarding security of supply. We have been doing what we do successfully for 35 years now and we deliver. We are (indiscernible) in the market as the technology leader with a very strong track record.

Do you think you could pick up any Eagle-Picher customers, or you can't say?

I'm not even sure who any of the Eagle-Picher customers might be, but I do believe that our product line from the technology and quality standpoint speaks for itself.

Last question if I could. The intravascular ICD that you had mentioned on a previous call -- any update on how that is progressing and how that might impact your outlook?

I can tell you that we have delivered to that company. We have delivered the prototype (inaudible) not for human use products. That is two different batteries -- a high rate battery, a medium rate battery and a capacitor, all in what we call a novel or cylindrical form factor. So, we've delivered and that company has -- we know that they are working hard on their product.

Do you know anything about how many years it might be away from their eventual or potential FDA approval of that product?

We do, but we wouldn't comment on that.

Aaron Lindberg, William Smith & Co.

Just a couple of quick general questions. On a year-over-year basis from Q1 of '04, did you grow your revenues from all three of your major medical customers?

I don't have that information handy here and I don't know that we would comment on that on a customer-by-customer basis. We certainly do that on an annual basis. But, I don't actually have that here with me.

Of the 5 million in increased guidance, how much of that is commercial power?

We don't guide by the segment.

When will you break down the customer concentration? In Q1 or just annually?

We haven't historically -- that's an annual disclosure. We haven't historically done that, and don't have the numbers here with me even if we wanted to.

Back to a previous question. What was the share count in the quarter?

Earnings per share -- the diluted EPS was 21,583,000. So, that includes the effect (indiscernible) it was anti-dilutive in the quarter. Okay. That doesn't include the effect of the converts. The effect of these convertible securities and the denominator of EPS gets, if you include it, gets -- they're dilutive. And you don't include it if they are anti-dilutive. And in our case with our share count and the like, when you get in the mid $0.70 per -- of EPS for the year, it gets right on the bubble. So, it's sort of either in or out and has a very small effect of in and out.

So, fully diluted in Q1 is 21.58

21.6 (ph).

And you don't include the converts Q1 of '05, but you had to in Q1 of '04?

Correct. That's correct. That is the difference. So, it's not only the share count, but your numerator for EPS is different as well. In '04 you had to back out the after-tax interest effect. And in '05 you just leave it as it is.

Vincent Sally (ph), First Manhattan.

A question on the guidance of $0.12 to $0.20. You reported the $0.19 inclusive of charges this quarter. I'm just curious if the worst-case scenario of $0.12 comes out to be correct, we should expect then, I guess, quarterly losses in the future? And if the $0.20 is the best we do, mostly zero, maybe $0.01. Can you just help me reconcile that number?

Certainly, that is the way that math would work. As I said earlier, we have got a lot of moving parts and we've got investments to be made. And the inefficiencies of the manufacturing relocations, as well as the cost of those relocations and the like, all of which we have outlined in all of the special charges and selected charges in the year, the effect of most of those is yet to come. So there are a lot of unusual or infrequent costs that are going to hit in the back half of the year.

In the second quarter, I guess, because you keep saying -- should we still see a positive EPS then in the second quarter, because we're not going to see the real hit until the second half? Or could we see the decline starting in the second quarter? I just want to make sure I understand the progression.

Our guidance is for a one-year period.

Finally, on the cash balance. If we look at the -- you have what? 20 to 25 million left in CapEx and the $0.12 to $0.20 in earnings guidance is inclusive of, I guess, cash charges, or somewhat of charges. Is there any kind of help you can give us on forecasting the cash balance through the end of the year? And should we expect it to decline from here given the cash charges, the earnings and the CapEx?

We're not specifically giving a number. But, yes, you should expect cash is going to go down. We are -- you are correct; we're guiding 30 to 35 million in CapEx and we are 8 or $9 million into it for the first quarter. And we have got all these other charges, most of which are cash related, with respect to these facility moves resulting in, obviously, a fairly nominal bottom line. So, that basically means we're going to use cash.

Is the CapEx going to be second-half loaded as well, or should we continue to see a progression the way we have seen it?

I think it's going to be spread out throughout the year. Probably less in the second half than in the first half.

The last question on the guided capacitor agreement, I guess. If it goes through first quarter '06, you don't have any kind of visibility whether or not that gets re-upped at the same level. Or is it possible that actually they could more or less in '06, I guess?

First, you're correct. That amended agreement now runs through the end of Q1 of '06. We wouldn't comment beyond that, other than that the existing agreement base has minimum volume than (indiscernible). Obviously, there are no maximums.

Glenn Reicin.

Hopefully we'll get some answers here. First, we talked about coated components. Can you give us the nature of that product line? You said coated components from one customer accounted for most of the growth. What kind of product was that?

What we do, Glenn, at our facility in Columbia, Maryland -- we have been doing this for many years. We apply a -- most of it is something called titanium nitride. And what it does, it reduces the (technical difficulty) on the tips where several of the components are going to the leads. And that has the effect of helping to conserve -- there are a number of reasons they do it from a clinical standpoint, but it also has the effect of helping to conserve the battery. So, it also improves battery -- indirectly improves battery longevity.

What was the nature of the generator? Was it CRM? Was it something else?

This is all CRM.

Was this a new customer or a large existing customer?

We have two large existing customers that -- and, again, we are benefiting from the growth in CRM and also from continuing adoption; it's not 100% adopted across the board. But, as in many things, like for example filtered feedthroughs, this is a technology that will become more fully utilized in the future.

A couple of other things. At the time of the contract announcement for Guidant, you said at the 10-Q or at a later date you would disclose the pricing. What is the price in that contract?

No. We don't disclose that.

You said you were going to disclose the change in price, the concession on the price. I think you did.

I don't remember saying that. Glenn, I suppose anything is possible. We don't (multiple speakers)

Those are redacted and, obviously, highly confidential.

And then you mentioned ramps in SG&A and R&D as the year progresses. Can you give us an idea from current run rates how that would progress?

I think we've made investments in sort of sales resources, primarily in our commercial battery segment. We have additional increases in those type of costs that -- in our medical segment that probably we are anticipating that are yet to be incurred. Clearly, we have numerous R&D initiatives that we are -- that are in the pipeline. And we have flexibility as to how -- how much we turn the dial up on them. So, depending on sort of the top-line, there's some operating costs.

What is the magnitude? In other words, right now you have around 7 million of SG&A, 4.5 million of R&D. So, what is the magnitude of the addition on those kind of base run rate?

Glenn, they could both ramp up. We could spend a couple of million dollars a quarter more if we wanted to.

It's important that you answer these questions, guys. It's not like we're being difficult. It's just -- there's little to no guidance as is on the sales line. There's very little. It's very hard to forecast from quarter to quarter. The margins are bouncing around. Whatever guidance you can give us; otherwise people are just going to stop trying. So, I don't mean to be difficult.

Also, long-term when you talk about the CRM, that your company can grow in excess of the total growth in the CRM market; really, two questions on the assumptions. If in fact the business with Guidant does not grow and your business with Medtronic does not grow beyond feedthroughs and (indiscernible) subassemblies, can you still hit that growth rate?

We certainly have to continue to gain market share.

But how do you do that? I'm just trying to understand the sensitivities to certain assumptions here. If Guidant says that their business should be flattish going forward and Medtronic has no intention of building the relationship beyond feedthroughs, can you achieve that target?

Glenn, let me answer it this way. I made a statement in my remarks that we have the best technology available in every component category. I believe that. The R&D investment that we're making is not just defensive, it is also to widen the gap. And, I believe, category by category, at some point in time the differences become compelling. Does that happen in a year or two years? We're not looking at a 12 to 18-month timeframe here; I'm looking at a three to five-year timeframe. So, if you look at our base today and all the initiatives, the advanced battery technology, the new -- and don't underestimate the impact of this new standard on the imperative to add filtered feature technology to all devices. That is going to be a big driver in the future. And not just our existing coating technology, but new coatings technology. I believe we will be able to grow at least as fast as the market. And if we are successful more quickly than perhaps we think in some of these what I'm going to call compelling technologies, then we can grow faster than the market.

But I am assuming then the answer is you need both Medtronic and Guidant to grow in order to do that.

We need to grow market share with all of our customers.

And then, when you talked about the filter feedthrough -- the new rules regarding filtered feedthroughs, can you quantify what the benefit of that will be this year, and how much that contributed to the upside?

I'm not sure it will accelerate our growth rate this year, because these new standards still haven't become official. But, we're sending a strong message that there will be some even increasingly rigorous standards that have to be met. And we believe that our technology is the best way to meet the standards.

Okay. No timing in terms of when this becomes official?

It's still under discussion, Glenn. There are committees, you know. And AMI (ph) and the FDA pacemaker committee is looking at it. So, these are in play as we speak. And whether they are finalized by year-end and published by year-end, I'm not honestly sure. We may know -- have a better idea by mid summer.

Last question. I promise. So far this quarter, we have seen horrendous growth in the pacemaker market. And it sounds like Medtronic's pacemaker revenues will probably be down double-digit year-over-year as well. How does that fit in with the outlook and how -- you certainly haven't seen it in your business relative to expectations. How should we be thinking of pacemakers going forward?

We're seeing some decline in our lithium ion battery business. But, this -- again, to earlier comments, the old way of categorizing things high rate low rate probably is not operative anymore. That's why we have made such a strong plan to medium rate technology. And what do you call a pacemaker these days? That is part of it. So, I think over the next year some of this is going to shake out. And that is why we think that our QMR battery technology is such a strong factor going forward, because a lot of what used to be called pacemakers are something else that require a higher rate capability battery for a number of reasons.

Fair enough. So, the switch from low-energy to CRT and CRTT -- you buy into that as the explanation?

That's certainly part of it. Yes.

Mark Landy, Susquehanna Financial.

Just a quick question on timing. Previously, your business has been lumpy from quarter to quarter. Did we see any -- or to the best of your knowledge, did you get any orders or deliver any product this quarter that might have been Q4 '04 quarter designees or Q2 designees?

No. A lot of our business is on a pull basis. Again, we've gotten our production lead times down so we can deliver on fairly quick order. And a customer -- a customer pulls; they get it. If he delays a pull then we don't get to ship.

On the enclosures, previously you did have a capacity issue at one of your customers. Is that now resolved?

We had a what?

Not capacity; an overage issue. Sorry. (multiple speakers) they were sitting with a whole bunch of product.

Yes. There was some inventory reduction going on in the first half of '04. There were some inventory adjustments. But again, I think the growth is just consistent with the growth we're seeing across the board in the rest of the business.

So, should we think of that growth as a little higher than traditionally? Because that's typically grown in the single digits, hasn't it?

I think it's -- there's an uptick there. And certainly, in terms of the unit volume, it's much more driven by the Brady (ph), what used to be called the pacemaker business. But now we're seeing an increasing complement of neuro, because that is becoming a bigger portion of the market and will continue to do so longer-term.

For the enclosures, Ed?

Yes, of course.

How many of the neuro customers do you have on enclosures?

Again, I will go back to what I said earlier, that we believe we have at least one component in almost every implantable neuro device being sold. And of course, the most ubiquitous of those is the enclosure.

Lastly, on the neuros. You said you now have a number of tests (indiscernible) out with the neuro companies. What is the lead-time to closing business there?

Again, it depends on where it is in the development cycle. But typically it would take at least a year -- 12 to 15 months -- for a design program to turn into any meaningful volume.

So, in essence, neuro is not going to really be a kicker for a couple of years for you? Is that correct?

I said earlier that QMR -- we'll be cranking up QMR at year-end in the new factory. But, I don't think there will be any meaningful volume until '06.

Remember, Mark, that we actually -- we actually sell, including batteries, but other components in the neuro market already. So, yes; there will not be any meaningful QMR revenue until sometime in '06, but that doesn't mean we don't have neuro-related component sales today.

Our carbon monofluoride batteries go into a number of neurostimulators as the existing primary battery technology being used.

I suppose that comment (indiscernible) last question I wanted to go down. What are CFx revenues in the quarter?

It's included in our -- that one category. Actually I do know what it is, but we don't break that out.

(indiscernible) started to (indiscernible) Larry. And I suppose you should have had a fairly large pickup this quarter. Did you see a decent pickup in CFx?

We saw (multiple speakers)

It's no secret you had one customer that's using CFx ramping up product.

We sell CFx to more than one customer, Mark.

But one of your larger, I think, CFx customers is ramping up pretty aggressively.

We don't break it out. It's not -- the change in CFx battery revenue is not a meaningful number to the overall picture here.

Jason Mills, First Albany.

Larry, just some additional clarity, at least for me, on the excess capacity. Did you mention 700,000 was absorbed in the quarter. So, there's about 6.3 million left in your projection for the year?

No. I think -- let me remember my numbers here. We said it was about 7 million for the year between the two facilities. 1.5 of that 7 was incurred in the quarter. So, it's a little less than one-fourth of the total, because there will be more costs incurred in Tijuana in the second half than in the first half. And of that 1.5, it was 700 in Tijuana -- excuse me -- 800 in Tijuana and 700 in our capacitor plant.

So, the balance, 5.5 million-ish won't be linear throughout the year; it will be about -- maybe about the same as it was this quarter in the second and then linear for (multiple speakers)

It will ramp slowly throughout the (inaudible). That's close enough.

And then for 2006, Ed, you mentioned you will still have some excess capacity, just not as much as '05. Relative to that 7 million number, can you give us, just so we can play around with it, an estimate for maybe what excess capacity you would expect to incur in '06?

I think it's probably going to be around half of that number.

Around half?

Yes.

Alex Arrow, Lazard.

If I can backup a bit just for a big picture question about the facilities, the Tijuana new facility and the updated automated one that you have in, I believe in New York. The goal of these once this year is out of the way is to overall improve your operating margins. Have you or could you say anything about if once everything is said and done, will the final operating margin that the Company is capable of, given the low cost of the Tijuana facility, be better than they were before you undertook this move to Tijuana? And if you're willing to say roughly how much better. And the second part of the question is for the facility that is still in the U.S., is the level of automation because of the QHR initiative going to be such that it will be similar to the level of automation that your CRM customers have, which historically has been a higher level of automation than your previous New York facility had?

On the first part of your question, certainly we're not guiding beyond what we provided here. Certainly on a long-term outlook, we've talked in the past about a business that could be able to support 20% operating margins. And that is still an objective that we think that we expect that we get done with this chessboard of movement into low cost and automated manufacturing, that that's an achievable objective. The second part of your question, why don't I let Ed take that.

In terms of the productivity on automation and so forth?

The productivity, but also, yes; just the level of automation. Because that is a factor for, we believe, for your customers since they are so highly automated once they take your output and put it into their input.

There's two things, Alex. First of all, of course, one of the big drivers on our facility program has been to consolidate and then to get some benefits from a productivity standpoint. But also, again, with the complexity of the manufacturing process in terms of yield and quality, we felt the investments in the new manufacturing technology would be very important to supporting those elements as well. So, it's kind of a combination of objectives that we're trying to achieve. And having walked through the facility yesterday morning, I would say we're very much on track in terms of where we think we wanted to be by year-end.

Would it be fair to conclude, for those of us who are just trying to analyze this from the outside, that if we were to take that same walk that you just did through your QHR facility, that the degree of automation there is similar to the degree of automation in Guidant, Medtronic or St. Jude's own assembly?

I don't think so. I haven't been through some of the facilities that you might have seen, but I would say it's probably not comparable to the level of automation.

But it's a step up from what it used to be?

Absolutely. A major step.

That does conclude today's question-and-answer session. I would like to turn the call back over to Tony Borowicz for closing remarks.

Thanks. I would just 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 for the next 90 days. Thanks, everyone, for joining us today.

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