Integer Holdings Corp (ITGR) 2005 Q3 法說會逐字稿

Good-day ladies and gentlemen. Welcome to the third quarter Greatbatch Incorporated conference call. Before we begin, I would like to read following 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 involve 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 Greatbatch Incorporated's 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 like to now turn the call over to today's host, Treasurer and Director of Investor Relations, Tony Borowicz. Please proceed, sir.

Thank you Carlos and welcome everyone to the third quarter Greatbatch Incorporated earnings conference call.

On the call today are Ed Voboril, our Chairman and CEO; Tom Hook, our President and COO; and Tom Mazza, Senior Vice President and CFO. In terms of the format for today's call, Ed will start by reviewing our business highlights for the quarter. Tom Mazza will conclude with a detailed review of our financial results. 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 at our Web site at greatbatch.com.

Let me now turn the call over to Ed Voboril.

Thanks Tony. Good morning everyone. Thanks for joining us to review our third quarter results. I am pleased to report that we’ve completed another strong quarter highlighted by the 38% increase in sales compared to last year.

Let me start by reviewing the factors that are driving our significant top-line growth. First, it is clear that the market growth for ICD products remains robust, estimated to grow at more than 20%. We are experiencing this type of broad-based growth across our entire product line and customer base related to ICD.

Second, we are also experiencing increased growth from international markets. We have seen increased market penetration for our pacemaker batteries market in these markets and in addition, our tantalum capacitors sales have also exhibited strong growth. We began selling capacitors internationally late in 2003. Demand has steadily increased as the adoption of our technology becomes more wide-spread.

Third, we are seeing increased sales volume for feedthrough products from both existing and new customers. The increase is attributable to the strong underlying market fundamentals and increased market penetration.

Fourth, growth in our coated component products continues to remain strong. Use of titanium nitrate coating is becoming increasingly more important in the marketplace as the technology improves battery longevity and enhances telemetry.

Finally, we are certainly seeing some one-time effects from customer field action. We are also beginning to see increasing neuro modulation device volume. In addition to increased for our mid rate batteries, we are seeing growth for other medical components such as feedthrough and enclosures. Although sales in this area represent approximately 1% to 2% of our current sales volume, we expect this market to become an increasingly more important market for Greatbatch in the future.

Turning to our commercial business. We are continuing to experience steady growth. While the oil and gas and pipeline inspection sales growth has slowed compared to the first half, sales in oceanographic and military markets have accelerated. We have seen steady demand for power sources used in seismic and ocean monitoring applications along with military applications where high reliability and safety requirements are paramount.

Let me turn to providing an update on our key facility consolidation project. I am pleased to report that we are nearing successful completion with respect to various plant moves. Our battery production move to our new Alden facility is substantially complete. Our move of capacitor production into this facility is also progressing. Given the increased capacitor volume that we are experiencing, we may delay the move out into the first quarter to ensure a steady product flow to our customers.

Turning to our Tijuana facility, we are successfully nearing completion of the transfer of the assembly operation from our customer. The move of the filtered feedthrough production from Carson City is also progressing as planned. We have already established a number of feedthrough production lines in Tijuana and are in the process of validating these operations. We believe that these moves will be substantially complete in the first half of 2006.

Now let me provide an update on our technology initiatives. We are very encouraged with Q-series battery product development. We are continuing to see increased interest in our Q higher-end battery, QHR. We are currently selling this product to multiple customers. It is expected that volume for this product will ramp in 2006. In this the QHR, our Q medium-rate battery development continues to advance. We have several neurostimulation product development programs underway for this technology and expect to have the product available for customer evaluation in early 2006.

A key project for Greatbatch is the development of a higher voltage capacitor. We have focused our capacitor development efforts on this program. We are making significant advancement in this development and are starting to make samples for testing. We believe that we will have a product available for customer review by the end of 2006. Regarding our capacitor product line, we announced that we entered into a royalty-based licensing agreement with Medtronic with respect to certain intellectual property pertaining to tantalum capacitors. As stated in the press release, the use of tantalum technology by Medtronic is subject to their internal evaluation. We do not expect any significant financial impact in 2006 from this agreement.

Okay, I’ll take it from here. As already discussed, we achieved a 38% increase in sales during the quarter. Let me remind you that in Q3 of last year, sales were lower due to the actions by a major CRM customer. Sales in the current quarter to that customer, as well as all other major CRM customers, exhibited strong growth. Some portion of this increase was attributable to the marketplace field actions. However, we believe that a majority of the growth in the quarter came from a more sustainable factors as discussed earlier. This volume growth resulted in a 5.5% increase in gross margin, which demonstrates our ability to generate significant operating leverage. This increase was partially offset by 3.4% point reduction primarily due to excess capacity costs in Tijuana and at our existing capacitor facility. The excess capacity costs relative to the capacitor plant is due to operating out of two production facilities. As mentioned previously, given the increased capacitor volume, we may delay the closure of the existing capacitor plant into Q1 of 2006.

Turning to operating expenses, the increase in volume resulted in improved leverage. SG&A as a percentage of sales decreased to 14.2% compared to 15.3% last year. RD&E also declined as a percentage of sales to 8.2% from 9.2 last year.

Shifting to the other operating expense category, let me provide you a detailed breakdown of the cost components. First, let me address the cost of the various plant moves and restructuring initiatives. In the quarter, we incurred costs of 3.3 million or $0.11 per share. For the full year of 2005, we expect to incur costs of approximately 13.5 million or $0.43 per share. All of this is in line with our previous guidance. In addition to these costs we took an additional charge of 4.5 million during the quarter, or $0.15 per share for the disposition of certain assets during Q3. This charge was primarily related to a decision not to further utilize some battery production equipment. The manufacturing process related to this equipment did not match our overall manufacturing strategy. In summary, combining the cost for the plant moves and the restructuring with the additional asset dispositions, we now expect to incur a total of approximately $18 million in costs for this category for the full year of 2005.

Let me also add that we continue to track and forecast our excess capacity costs at our Tijuana and capacitor facilities. We incurred excess capacity costs of 2.1 million in the quarter and project that we will incur excess capacity costs of approximately $7 million or $0.23 per share for the full year 2005. Once again, this is in line with our previous guidance. We expect the excess capacity costs will be reduced beginning in the second half of 2006 when existing facility moves have been completed.

Turning to earnings, we achieved EPS of $0.03 per share in the third quarter. If we exclude the costs of the plant moves, restructuring, and other asset dispositions, which in the quarter were 7.8 million, adjusted EPS is $0.28 per share representing a 100% increase over last year. The increase is primarily due to increased operating leverage from the higher sales volumes.

Shifting now to the balance sheet. We finished the quarter with cash and cash equivalents and investments of 102 million, an increase of 10 million over the Q2 balance. Our cash and investment balance has steadily increased throughout the year despite the increased capital spending requirements. Compared to last quarter, accounts receivable days outstanding declined by one to 50 days and inventory turns remained constant at 3.9%.

Let me turn to a discussion of our full year guidance for 2005. Given the strong performance in the third quarter, we now expect sales to be in the range of 235 to 240 million for the quarter. We expect to earn $0.45 to $0.55 per share inclusive of the $18 million in other expenses for the entire year. Excluding approximately $18 million of other expenses or $0.58 per share, adjusted EPS is expected to be in the range of $1.03 to $1.13. Please note that we are planning on providing our 2006 outlook on our fourth quarter conference call, which we expect to conduct in the first quarter of 2006.

Let me conclude with a brief comment on the two restatements we made to our previously issued balance sheet and cash flows. Effective November 4, 2005, we have revived the classification of our investments in auction-rate securities and cash and cash equivalents to short-term investments on our balance sheet. This change in classification had no impact on our previously reported current assets or net income. As a result of this change we are required to amend the applicable balance sheets and cash flows for 2003, 2004, and 2005, which we will do in the near future. Please refer to our 8-K, which we issued earlier today for the details of the changes that will be made. In addition, based upon our review of our 2004 Federal tax filing, we concluded that net operating losses we acquired from NDC can be utilized by Greatbatch in future filings. Correspondingly we assigned an after-tax value of 1.7 million to this item. As a result we reduced the NanoGram goodwill by 1.7 and offset our deferred tax liability by a corresponding amount.

Operator, this concludes our prepared remarks. I will now turn the call over to the moderator to facilitate Q&A.

Thank you, sir. (Operator Instructions) Bob Hopkins with Lehman Brothers.

Thanks and good morning. A couple quick questions. First, could you give a shot at quantifying the temporary benefit from all the recall activity in ICD-land and pacemaker land?

Our best guess is – everybody knows that this is an estimate. Based upon our factors, we think it is probably about $5 million for the quarter.

I think what is important is you understand that this is not a fixed item right now. It is still a variable that is obviously pushing through. It’s hard, because of the number of variables involved, to get a firm handle on it. It’s just an approximation, but certainly 5 million is a rough estimate for the quarter. It is obviously going to keep pushing through and have an effect on us over the near future.

We think it is probably going to be closer – we have given a range of 5 to 10 million for the full year. It is probably going to be closer to 10 million for the first year.

That’s very helpful. For Tom Hook, could you talk a little about the commercial business, or the non-medical business? The way I used to think about this business – and I think most people did – is that it was going to have some ups and downs, but really wouldn't be a major contributor in terms of the growth profile of the Company over the long haul. How much is that changing? Or is it changing at all? How do you think about the growth opportunity in commercial as you look forward?

As you know and many other do that I am very bullish on the commercial market, having grown up in this industry before. We’ve made very significant investments in sales and marketing. We have been doing some direct and indirect selling in the channel across a variety of markets. The opportunities are out there. We have been successful in securing contracts in a variety of segments beyond just oil and gas and pipeline inspection. We have very bullish sentiments going into the future to continue to grow that business. We have a very strong manufacturing plant that has a base of operations in Canton, Massachusetts that is our manufacturing capability. We expect to grow in the low double-digits over the long run by continuing to make logical manufacturing initiatives and lean out the plant and also to continue to invest in sales and marketing and grow our channels. We think we can grow that market quite effectively, very complementary to the medical business we have.

Thank you. Last question I have is in terms of the neurostimulation opportunity, how many customers do you have buying product from you today?

I couldn’t give you an exact number. It is in several dozen. They buy a variety of products, obviously a sampling of all our product lines. Our objective and our strategy is to sell every single component, including also the ability to do value-added assembly for those components, to every neurostim customer. Just like we’re making the investments in sales and marketing on the commercial side, as we look beyond the CRM market in neurostim, in particular, we do intend and have for this year, been making significant investments to go out and contractually sell our products into the neurostim customers very broadly. We’ve been successful in doing that. We lead with the technology in doing that – the QMR series batteries. But we also bring our components technologies like feedthroughs and filter feedthroughs, [half metal] (ph) cases, etc. into those opportunities. Our intention is to continue to invest there because we do thing that growth rate is going to be robust. And we do think it is going to be a significant portion of our revenue stream out into the future.

I think we can justifiably make the claim that almost every neurostimulation implantable device out there has at least one component made by us. Obviously we are trying to get as much real estate as possible in every device.

Okay, the last one and then I’ll go away. On capacitors, Guidant is still the sole actively purchasing customer right now?

No, that is not correct. There are more than a single customer out of that business. I will say that all customers have been buying with increased, not only in the current generation of technology. They are also qualifying and staying synchronized with us on our new technologies as well. It’s a very healthy business. Right now we’re manufacturing and in [power-up] (ph) production in two facilities. One in our older facility on Genesee Street and now also in Alden. We are going to extend the timeframe that we are going to be manufacturing in both facilities to keep up with growth rates. Then beginning of the first quarter next we are going to shut the older Genesee plant down and only be manufacturing in Alden. So that business is healthy.

Thank you very much. I appreciate it.

Glenn Reicin with Morgan Stanley.

A couple questions. They are going to be difficult to answer. So I am just asking you to maybe try your best or at least walk me through the logic.

The first is, can you talk about what you think the expectations are for stocking in Q4 and how that relates to the range. I am going to lay out all the questions. Then maybe you can hit them one-by-one.

Secondly, when I look at your two largest customers, Guidant and St. Jude and I look at their ICD sales for the third quarter, they are essentially flat year-over-year. So whatever St. Jude grew at, it was offset by the declines in the Guidant business. I assume what is happening is Guidant is anticipating a comeback so they are stocking up and building inventory so their customers are going to have that available to them. St. Jude obviously is anticipating continued share gains. My question is, as we look to next year, how do we know that some of this inventory doesn’t come back? Not come back, literally, but that both sides are anticipating 120% share between the two of them. That is an exaggeration, obviously. But you get what I mean.

Also finally, if you can relate to the content issue, Guidant obviously has more content because of the capacitor business than St. Jude. How does that fit in with the normalized 10% growth rate – double-digit growth rate for you going forward? Thanks.

I am going to try to take part of that. Then I’ll let Tom Hook add in. First of all, I guess the simplest answer is, it is difficult for us to deconvolve everything. We know there is a field action effect. There may be an inventory effect. You also have to add into that, there are a number of new product development programs underway. Filling the pipeline for new product as they go through the approval process and ramp up into production at our customers, that is also a layer that has an ebb and flow from quarter-to-quarter. Finally, there is still the underlying growth rate in the ICD market, which although perhaps might have been – had some ups and downs because of field action, we fundamentally believe that, on a go forward basis when we consider all the product categories, we’re looking at certainly high teens approaching 20% growth rate as far as we can see for ICD-related products. We honestly don’t know right now how important each one of those factors is in the very strong growth rate that we’re seeing in the business. We believe we are gaining market share in certain areas. We have to add that in. We’re sticking to our guns. We’re not giving guidance for ’06. Historically we’ve done that in the first quarter. Partly it’s because we’re trying to figure all this out ourselves as our customers are in the process of trying to figure it out.

Just echo his comments that obviously multiple effects including the overall market growth, the effect of the one-time on the X plant. I think what we’re focusing on is staying very tightly synchronized across the entire supply chain with our customers to make sure that at every point we build the supply chain with safety stock to make up for the volumes in X plant or projected volumes going forward that we’re forecasting correctly. I can only assume. I don’t know. Can’t speak for our customers that there is some prognostication for potential upside volumes. I think that is a variable that historically we’ve had control on. Right now it’s a bit of a question mark. Given the overall inventory situation, we’re really not holding excessive amounts of inventory. We’re very much where we need to be. In light of our plant moves and having dual production capability and the ability to respond fairly quickly during the period of time. Right now we maintain our daily and weekly communication and are trying to look at the same signals in the market that you are and haven’t really been able to deduce precisely what is going to happen, but are preparing for all contingencies in ’06.

Let me push you a little bit. Are they at all sharing with you what their inventories are relative to historical levels?

We have a very good handle on what the inventory is in the supply chain as a course of business just in general. It is obviously as partners it is intelligent to make sure we have a good handle on exactly what their needs are and what they have and what we have internally. Some of it is specified contractually on our side.

So you actually do know how much inventory each of your customers has right now?

Granularly by product, by unit, by SKU – no. In macro typically yes, based on feedback we get on specific products and their demand.

What does that tell us right now in terms of the amount of inventory relative to the sell-through?

We don’t feel that there, is at our location, any type of excess inventory condition. The inventory we held is well within what we are contractually obligated to hold. In addition, it is also within the limits that we’ve outlined with the customers to hold in light of the different plant relocations we’ve done. Other than that, we have no bubble, no buildup. We’ve been synchronized to where we’ve agreed to. If a lot of people have prognosticated that there is some type of “double betting”. We are not aware of it. We do not have a way to de-convolute it, it that’s the case. The answer would have to come from our customers, not us.

Just two follow-ups on that. In the past Guidant has been a very volatile customer where the order rates can change on a dime. Has there been any change in behavior in the last six months given these new agreements to prevent a sudden surprise over the next six months.

We’ve seen no change in behavior over the last six months. We have done a lot to invest time in all of our customers to make sure we are synchronized properly with them because of the volatility right now. Communication level has been dramatically higher with all the dynamics right now. No volatility out of any customer in terms of surprises. We’re very tightly coordinated right now.

Last question. You brought down your CapEx expectations for this year. Was that related to the delay of the capacitor move? Or is that something else?

It is just timing of expenditures. There are slight delays, but nothing major.

So if we take out a couple million bucks from this year, do we put it into next year?

Probably yes.

Yes. That is a fair statement. Our programs on CapEx are very lumpy. It is the shift basically in the timing of projects.

Okay. Thank you very much. I’ll get back in line.

Alex Arrow with Lazard Capital Markets.

Thank you. Good morning. If I could just start on the neurostimulation, looking forward to the closing of the St. Jude Anci (ph) acquisition, is the Anci battery contract something that you would consider in play given your relationship with St. Jude and the fact that the current supplier is operating out of bankruptcy?

We look at every opportunity in the neurostimulation market very aggressively. Yes, we do have a very healthy relationship with some of our largest customers – St. Jude, obviously. We look forward to that deal going through. We are going to stay in close contact with St. Jude, coordinate with them differing types of technologies in the batteries that are used. Clearly long before this acquisition was announced, based on the chapter filings and eagle picture, we’ve been all over seizing opportunities in that market space. This is just a variable that is in our favor to potentially expand on it as well.

Having said that, we’ve had some very good discussions ongoing with NSI even prior to the acquisition, although as Tom mentioned, obviously St. Jude Medical is one of our strongest customer relationships. So that is a plus for us.

The question about the wet tantalum license with Medtronic. I am little surprised to hear you say that it is entirely subject to their internal evaluation. The fact that they paid you an up-front fee for license, wouldn't that suggest that they have already decided that they do need wet tantalum? Why would they (multiple speakers)?

I think it’s a question of how and when they use it. The customer is driving on that decision.

Okay, so we can assume that they are going to use it. It is just a question of how soon they might start.

Like I said, it’s their decision in terms of how and when.

I think what we need to do to clarify. They have not paid us licensing fees. If they decide to use the technology, they would owe us the licensing fee. I think the juncture where we’re at is step one. We have a technology. It is a large ship in terms of technology in the marketplace, the current generation of technology in capacitors. Any organization is going to want to do a very thorough and detailed review of the technology before deciding to use it. We’ve taken step one to set up the licensing terms and agree to them. There is a lot of experimentation that still has yet to be done on our end and their end before they are going to feel comfortable in making a firm commitment to definitively move in that direction. It’s a piece of news. We view it as a piece of good news. We’re still going to push the relationship and that technology forward. It is just step one.

The nature of the press release you put out recently is there is no literal commitment from Medtronic other than they are evaluating this. There is no commitment to pay even an up-front fee unless they decide that they want to at some point in the future?

There is a commitment for them to pay if they commercialize the technology. It is obviously our choice to get them interested in this type of technology and take the first step toward having them commercialize it.

Last question, on the non-medical part of the business, the terrific growth you’ve had in the oil and gas pipeline. You mentioned that part was slowing off a bit this quarter and then the oceanography and seismic part was kicking in. On the oil and gas pipeline is it fair to estimate that that is roughly half of the non-medical business? Can you say whether the growth effect of the Pipeline Safety Act of 2002 has run its course? Or is there still more – a lot more enforcement of that Act that could drive more growth in the oil and gas part?

Certainly. I think just for benchmarking, oil and gas and pipeline inspections, you are looking at about two-thirds of the commercial power business in terms of percentages. There has been some favorable legislation with regards to pipeline inspection. We primarily have a niche in the long run pipeline inspection market. It is much longer runs – hundreds of miles, higher temperatures, higher pressures, higher reliability requirements than the short run market, which we don’t widely participate in today. Growth prospects remain in oil and gas and pipeline inspection well beyond what we have in revenue today. I do think we’ll continue to grow that business by finding opportunities, using our sales team to go out there and identify opportunities in the marketplace, and continue to sell into that space. There is more than enough market in the oil and gas and pipeline inspection that we don’t have that we can continue to grow. Our intent is to continue to expand the sales investment on both direct and indirect channels to go and get that. Beyond oil and gas and pipeline inspection as well, we are looking very broadly into those market segments – oceanographic, telematics, military, etc., with our focus on the niche which is the high reliability environment where we think we have a significant and competitive advantage technologically.

What was it specifically in the September quarter that made oil and gas take a little bit of a breather from its growth?

I didn’t quite hear the question.

In the September quarter, I think in Ed’s opening comments he said that the oil and gas component was not as robust as – or at least the growth rate wasn’t as previously. And I understand your answer just now to say that it’s----

We had – there is a combination of factors. The hurricane certainly didn’t help with people being knocked out of business for a period of time. So there was a little bit of a stutter step with the marketplace. Everybody was holding their breath. We also ended up having a lot of business we focused on for the first half of the year. We are shifting some focus into other market segments in the second half of the year. We don’t have an inexhaustible resource right now on the sales side. We consciously made the decision to move on to some other market segments, focus on those. We still think oil and gas and pipeline inspection are continue to grow strong. We are forecasting that we will continue with that low double-digit growth rate across the segment – Q4 and into 2006 as well.

Last thing. On the short pipeline opportunity, is it an initiative out there that should lead us to predict that you are going to be able to realize that opportunity in the----

Yes there is. I won’t describe it on the phone technologically because we do think there are some competitive aspects to this. The short run market is dominated by Alcor (ph) Technologies, not particularly reliable with respect to temperatures and pressures. We do think the reliability aspect can be exploited and have plans to do so by trying to secure some significant contracts and opportunities. That is one that you will have to give us a report card on in 2006 because we have work to do there.

Given that most of us on this line are medical analysts and really don’t know the heart of the business as well as you clearly do, can you say roughly what market penetration – just a very rough number that you have in the long distance pipeline. We have very little sense of how far penetrated you are into that.

I would say we’re over 50% in the long run market. We are probably under 1% in the short run market.

How big is the short market overall versus the long run market?

Probably three times the size of the long run market. You are talking from a market opportunity tens of millions of dollars in that type of market segment as we would define it in specialty power.

Thank you very much.

Jason Mills with First Albany Capital.

Good morning. Congratulations on a good quarter. I want to ask you first. You mentioned Ed the approximately $5 million estimated benefit from the recall impacting the sales number. Could you drill down a little bit deeper and at least qualitatively give us a sense for whether one line item, whether it be batteries or capacitors benefited more than others? It would seem to me that filter feedthrough business may be a reflection of increasing penetration and utilization given the niche (multiple speakers)

There is no question about that. The move almost wholesale across all product lines in the industry to use filtered feedthrough, is no question benefiting us and accelerating the growth in that segment. I think for the most part, it’s across the board, as we continue to say, all product lines, all customers strung across the board. That 5 million for the quarter is just a guesstimate. As I said earlier, we said 5 to 10 million for the full year. It is probably closer to 10 million. There are so many moving parts right now, that it is tough to pin down an exact number.

I would say just to amplify his comments that this is a one-time effect. The 5 million for Q3 or what we are estimating to be 10 million for the full year, really is very well balanced across all our product lines and all our customers. We see it across our entire portfolio.

I’ve got it. Okay, thank you. With respect to the filter feedthrough, what can you give us as an update with respect to the new standards – what kind of an impact you would expect?

I think that both domestically as well as internationally, there is an enormous amount of focus on filtering out EMI interference. We definitely know there has been quite a bit of discussion, much of which we’re intimately involved in, in terms of what energy and specifically what frequency ranges we need filtering to shield. Clearly there is a huge technology aspect to this and very sophisticated in terms of trying to filter these signals out. It requires a lot of testing. We work very closely with the committees that we sit on in AMEE, (ph) the PC-69 Committee in specific, in providing feedback from our testing is where we should be filtering in terms of frequency range and power levels. The challenge is the number of emitters in consumer and industrial electronics are growing at such a rapid pace that clearly the opportunity for filtering and the pressure to filter is growing very quickly. We are trying to keep pace from a technology standpoint to be able to filter out broader frequency ranges and higher power levels. From our customers aspect maintaining synchronization with the next generations of technology is critical. That is why that business is up with our current products. That is why our qualification programs are very robust across our entire customer base.

I think you were hoping to have some insight into the new standards at this point in the year. What sort of expectation do you have at this point with respect to the PC-69 Committee?

They are very selectively studying – I could not, would not want to give you a statement on their behalf other than that they have considered issuing, based on test results, certain improvements in filtering requirements. But that hasn’t been done yet. We participate on those committees and have provided information and recommendations and will continue to do so. Can’t really make a statement or a commitment for them on when they’ll do that. We are anxiously awaiting some updating of what filtering requirements will be for implantable devices.

That’s helpful. Just a couple of housekeeping and then one OpEx question with respect to moving into 2006. The latter first. I know 2006 guidance has not been given yet. Tom maybe you could give us an idea for your expectations in spending in both SG&A and R&D. I think the last quarter or even the last couple quarters you have talked about R&D spending increasing towards the 9%, 10% level. You haven’t gotten there yet. Obviously that has been impacted by your strong top-line. Do you still expect to move towards 9%, 10% in 2006.

On the SG&A side, you have some cost reduction initiatives in the Oracle ERP system should help. Could you talk about nominally if we should stay in the $8 million, $9 million range per quarter. Is there that much fixed cost? Help us out a little bit in modeling those fixed, at least on the OpEx line.

I’ll definitely try to help. In terms of the R&D specifically, I will tell you that directionally we will continue to move towards 10% in terms of our overall spend on R&D in terms of how we view the overall innovation pipeline. Clearly because we also have in the engineering category non-recurring engineering payments on certain product lines, many times it clouds that. As you pointed out, the one-time effect, which has flowed through the system, clearly changes the percentages that we see because of that effect. I think we’ll provide more details on the call in 2006, but we don’t plan to see shifts per se. We’ll give more granularity at that time, both on the SG&A timeline as well as R&D as to how the percentages will work. Clearly we are going to see some efficiencies going forward. Clearly we are going to make some incremental investments in the channel. How the percentages work out, I can’t comment.

And on the SG&A line?

Really same thing.

So I guess we’ll have to wait until next year. A couple housekeeping and then I’ll get back in queue. Could you remind me what the excess capacity has been year-to-date, number one. And number two, the fully diluted shares outstanding in the quarter – I think you have expectations for that to go higher next year is the fully diluted count. Could you give us both of those numbers as well?

The excess capacity on a year-to-date basis was 4.9 million. Once again, we’re predicting, for the full year, it to be 7.2 million. On the shares outstanding, it’s about 21.7 million currently. What you are probably referring to is the impact of the contingent converts. If we get over $0.75 a share, there would be an additional 4.2 million shares that come into play. Those are the only two impacts that we really have.

What impact didn’t impact you in the quarter?

No, because it’s got to be over – the breakeven point is about $0.75 per share on an annual basis. So since our shares – our price was below $0.75 base, the converts are anti-dilutive.

Okay. I thought it was quarter by quarter.

It is a quarter by quarter basis. But it has to be over whatever one-fourth of $0.75 is -- $0.19.

I see, on a GAAP basis.

Correct. On a GAAP basis.

So for all of next year, should we be assuming 26.5 million shares?

You have to wait till February to see it.

Worth a try. Thanks.

Mark Landy with Susquehanna Financial.

Good morning. I’ve got three questions. Firstly, give us an update on a rechargeable offering. Second, could you give us a sense of CFX sales. I don’t you don’t like to break them out any longer. Was it flat? Up a little bit? Up a lot? Down a little bit? Down a lot?

Lastly, probably a little bit more of a softer question, but more a quantitative than qualitative. Can you give us some sense of the interaction with Guidant and the changes in their demeanor that you have seen over the last 18 months. Specifically a little while ago they were very much on the offense taking business in-house, wanting to be a far more complete manufacturer of the product. So I would assume now it’s a little bit more defensive. Can you help us understand how you see their interaction.

Let me go first. Then Tom Hook can jump in. On the CFX side we are seeing sales increasing on CFX size.

That I would say in response to the neuro and CRM segments – the technology. The growth rate is very good.

Is it up a lot? Just a little? Have you seen a big bump up this quarter over the last quarter? Can you just give us some sense of direction?

We don’t want to break that out. I will just describe it as very healthy and very much what we expect it to be as well. Rechargeable side – I won’t provide any granularity in rechargeable. You know we are in the business of manufacturing retractable batteries. It is small business. We do sell both rechargeable and primary batteries into the neurostimulator marketplace. We plan to continue to do so. We’ve been making investments in this area. Don’t have any news to announce. You can expect that in ’06 and beyond we’ll be talking more about it. We’ve been playing our cards fairly close to the vest on this.

The third question qualitative is we’ve made big investments in our relationships with customers and our interaction and communications with customers. That has not only been a good investment, but it has been an absolute necessity to do that with the level of operating consolidations that we have been doing. Clearly we think that that communication improves the relationships and keeps us higher synchronized with all of our customers. We think that continuing to make that investment going forward even after the plant consolidations is directionally where we’re going to go. Can’t make a comment in terms of the verticalization of technologies at one any particular customer. It’s just that we are going to be world-class in everything we do and make it, from a technology and efficiency standpoint, difficult for anybody to do business with anybody but us.

Maybe I can just rephrase and see. What are you seeing from them? Clearly a year ago, they probably were a different customer with respect to their attitude and demeanor than they are today. Or haven’t you seen a change? Can you help us work through or walk through some of how you have seen them as they negotiated from the other side of the table just to get a better sense of how they are doing with various issues that they are handling.

I wasn’t here all of last year – just the end of last year when I came to Greatbatch. I would say that we’ve received many an opportunity from Guidant over the past year in particular as well as we have from all of our customers. It’s tough for me to comment on specific behavioral changes. We don’t make, as a matter of course, specific comments about the specific customers. I think we have a very healthy relationship. We have been focused on being very capable, very synchronized with them. In spite of all these dynamics, we are not involved in the dynamics. We’re helping solve challenges not create them and staying in tight communication. Other than that, it would be tough for me to make a definitive statement in terms of shift (multiple speakers).

Maybe if it just get a little more direct. Let me answer it another way. Let’s see if we can put it to rest this way. I’ve been here 15 years. I would say that the working relationship with Guidant at all levels is as healthy as it’s ever been.

I think that gives us a good sense. Thank you.

Eli Anarch (ph) with Cathay Financial.

Good morning. A question related to the feedthrough line. Have you now secured the new customer relationships for feedthroughs based on some of the recalls that have occurred and some defects that were identified so that this substantial growth of 70%-plus is likely to persist through the next four quarters.

Feedthrough growth stems from two things – customers as well as the individual products that are made. We’ve seen successes in terms of customers and in terms of products that we’ve made. Feedthroughs is a contraction line item. It includes both unfiltered feedthroughs and filtered feedthroughs. Clearly as people are shifting their unfiltered feedthroughs towards filtered feedthroughs that line item will continue to grow because of the more complex nature of the product with filtered feedthrough. That business and the feedthrough line is very broad scope in terms of new customer wins, new product wins, and more filtering. We’re very bullish on that line item from a technology standpoint. We see that continuing to be healthy in the future.

We are proving the theory of the case when we acquired CR a little over three years ago, we said what’s going to happen is more people are going to filter and we have the best technology so it will be something that we can really leverage. In fact, that is exactly what has happened.

So then do you see the 72% increase as more of a one-time event for this quarter?

We are not going to project any individual growth rates except that it is going to continue to be a very healthy business because of those two factors I just mentioned.

Alright. Thanks very much.

Tim Nelson with Piper Jaffray.

A couple questions. Just a follow-up on the 10 million in terms of inventory. Can you remind us what the Q2 impact estimated was.

2 to 3 million, we said. You said inventory.

I meant----

I think we were talking about one-time effect.

That’s what I meant. In terms of excess capacity, if you can clear up something. You mentioned that you were going to delay the capacitor factory shift to Q1, but also indicated your excess capacity might extend through the first half. How should we think about excess capacity charges in 2006? In what magnitude?

Clearly we have two sources of the excess capacity charges. One is the capacitor facility in Genesee as Tom mentioned previously. That we will be shutting down by the end of the first quarter – we intend to shut down by the end of the first quarter. We will continue to have excess capacity, however, at our Tijuana facility. We expect that to start reducing towards the end of the second half of next year some time. I believe the split we gave everybody was about 3 million for the Genesee Street and about 4 million for Tijuana.

And those are next year?

That’s this year.

That’s this year, okay. Secondly, just a follow-up on feedthroughs. Can you talk about how the margins on feedthroughs compare to corporate margins and how they grow filtered versus unfiltered.

We don’t provide that information by product line.

Okay. The rest of my questions have been answered. Thanks a lot.

Bob Hopkins with Lehman Brothers.

Thanks. Just a quick follow-up on the neurostim opportunity. Could you quantify for us the best-case scenario in terms of per unit revenue opportunity to Wilson Greatbatch. If you are selling the casings, the batteries, the feedthroughs whatever else you might be able to sell into those devices.

Consistent, the big difference is you don’t end up having a therapy capacitors. It is consistent with how the CRM business for us lines up with us. The scale of the job is there are a lot larger number of customers and more variability in it. In general there is not a big difference in terms of – minus the capacitor – not much difference in terms of the overall flavor of the business.

You’ve broken that out previously. Is it possible to remind me?

It’s several hundred dollars. It depends on how many pins in the feedthrough. It’s a wide range. A good way to characterize it is several hundred dollars.

Okay. Thanks so much.

Glenn Reicin with Morgan Stanley.

A bunch of follow-ups. Last year in the fourth quarter, how much inventory do you think came out of your sales because of the Guidant situation?

(indiscernible).

I’ll tell you where I am headed with this. Let’s assume it’s 7 million and your reported sales were 46, 47 million and then I grow that by 10%, then I add another couple million from the field actions, you get better than 240 million for the year and a pretty high number, approaching 60 million for the fourth quarter. I want to understand what was behind your guidance using that as a starting point.

I don’t have that number at my hand. Clearly we---

You’ve got your crack comptroller there.

We raised it to 240. We are comfortable with a range of 235 to 240.

That assumes 2 to 3 million from the field actions, you are saying?

Yes. Bringing the field actions up to 10 for the year. That’s right.

I forgot what you said previously about the total impact of T stocking from Guidant last year.

About 7 or 8 million.

Was that all concentrated in one quarter or two?

Two.

Two quarters, okay. It was only 7 million?

Yes. Rather than going through this because we don’t have all these numbers right at our fingertips. (multiple speakers)

After the call, I’ll call back your crack Treasurer. Also, just on the SG&A line. Someone was pushing you before. I couldn’t understand the answer. Is your run-rate now on SG&A about 8.5 to 9 million a quarter? Or was there something this quarter that added abnormally to it?

It wasn’t abnormally high. It was probably a little less than that is our normal run-rate.

So something in the $18.5 million range?

Yes, something north.

On the R&D side, round numbers.

Tom is giving you his best guess saying we think we’re shooting for 10 percent. Clearly we’re investing more money in R&D going forward.

But you look at that as percentage of sales rather than total spend.

That is the number Tom gave you. I would look at it----

I look at it – we look at it internally as total spend. But we never get asked that question. We always get asked in terms of the percentage which jumps around based on the revenue number.

Although it’s not reached 10% ever?

I think it depends on what you define as ever.

Second quarter of ’04 was ever.

It also depends on the cycle we were in during product development. As Tom mentioned our RD &E is net of customer reimbursements. We don’t record that as sales. It is always an offset. If we have a big quarter on customer reimbursement for engineering, that has an impact as well.

Okay. Thanks folks.

Steven Greer (ph) with Merrill Lynch.

Nice quarter. Could you talk about – I am asking a general question. How are you contemplating the risk to Guidant? There is a lot going on with them now. The FDA will almost certainly give them a warning letter, if not an injunction, since the Department of Justice is involved. There is some significant risk. How are you planning for that in your business model? I am sure some of that will be offset with St. Jude upside. Have you talked about that much?

No, we haven’t talked about it. We don’t talk about specific customer issues. I stand by our earlier statements. Our business is strong will all customers on all product lines. That is about all we’ll say on it.

Do you have any thoughts on their 43 response? It is out there. It is public.

We absolutely would not comment on anything like that.

Alright.

Ladies and gentlemen this concludes our question-and-answer portion for today’s conference. Back over to the group for any further remarks.

Thanks. I appreciate everyone joining us today. I would like to remind everyone that both the audio portion of this call as well as the slide visual as always are archived on our website on greatbatch.com for the next 90 days. Thanks everyone for joining us today.

Ladies and gentlemen we thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect.