Integer Holdings Corp (ITGR) 2006 Q1 法說會逐字稿

Welcome, everyone, to the Greatbatch, Incorporated, conference call. My name is Latitia, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this convergence. [Instructions] As a reminder, this conference is being recorded for replay purposes.

Before we begin, 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 involves a number of risks and uncertainties. These risks and uncertainties are described in the company’s annual report in Form 10-K. The statements are based upon Greatbatch, Inc.’s current expectations, and actual results could differ materially from those stated or implied. The company assumes no obligations to update forward-looking information included in this conference call, to reflect changed assumptions, the occurrence of unanticipated events, or changes in future operating results, financial results, or prospects.

I will now turn the call over to today’s host, Treasurer and Director of Investor Relations, Tony Borowicz. Please proceed, sir.

Thank you, Latitia, and welcome to the first quarter Greatbatch earnings conference call. On the call today are Ed Voboril, our Chairman and Chief Executive Officer; Tom Hook, President and Chief Operating Officer; and Tom Mazza, Senior Vice President and Chief Financial Officer.

As we have done in the past, we are including slide visuals that will go along with this presentation which you can access on our website. Let me also point out that we’ve expanded the financial disclosure in our press release, which I hope you will find useful. This will allow us to focus our prepared remarks on the more relevant points and allow more time for your questions, hopefully.

With that, let me turn the call over to Ed.

Thanks, Tony. Good afternoon, again, and welcome, again, to the Greatbatch earnings call. I’ll highlight a few key areas that are worth emphasizing and are indicative of the strength of our first quarter performance. I’ll then turn the call over to Tom Hook to discuss the drivers that were the catalyst for the better-than-expected sales performance. And Tom Mazza will follow with a review of financial results; after which, we’ll open the call for our customary Q&A.

As you read in our press release, we achieved record sales in both our medical and commercial businesses with year-over-year growth exceeding 20% in each of these segments. On the earnings side, earnings per share, excluding move-related expenses and stock-based compensation, increased by 37% to $0.37 a share for the first quarter of 2006.

Our operating margins, adjusted for the move-related expenses and stock-based compensation, reached 20%, representing approximately a 5 percentage point improvement over last year. A major component of this improvement was generated through increased gross margins, which, again compared to last year, increased by more than 5 percentage points. This margin increase includes the favorable effect of increased manufacturing volume and lower production costs generated from several key cost-savings initiatives -- most notably from the closure of our former capacitor plant and from cost improvements at our Tijuana facility.

With the closure of our former stand-alone capacitor plant in the quarter, we eliminated approximately $3 million in annual excess capacity costs from the cost structure in our medical power business. With this plant consolidation, all of our medical battery and capacitor manufacturing is now consolidated in our Alden facility.

In terms of the Tijuana facility, we saw a significant improvement in our gross margin in the quarter compared to last year, which reflects the transition from a startup mode in 2005 to the current production phase of operations.

In addition to producing shield assemblies, we recently began manufacturing and shipping filtered feedthroughs from this facility, which previously were manufactured at Carson City, Nevada. We are in the process of moving the balance of the filtering operation from Carson City and estimate at this point that the move is approximately 70% complete. Based on our current schedule, the completion of this move is expected in mid-2006.

Furthermore, let me add that the transition of the Columbia feedthrough manufacturing operation to Tijuana is well underway and we are on schedule for a mid-2007 completion of this move.

In summary, we’re off to a great start in 2006 led by our strong results across the medical and commercial businesses. It’s important to note the growth in our medical segment came during a quarter in which the industry as a whole saw a slowdown.

Now I’ll turn the call over to Tom Hook to discuss the growth drivers that were instrumental in achieving our better-than-expected top-line performance.

There were a number of factors that contributed to our solid sales growth. First, we are seeing strong incremental revenue from our European customers. These customers contributed roughly one-third of our sales growth in the quarter. Most notably, we experienced increased volume in the ICD battery and capacitor product lines, reflecting the increased adoption of our current high-voltage component technology.

As noted in our press release, we recently signed a new comprehensive supply agreement with Sorin/ELA. This new agreement represents a significant revenue opportunity over our 5-year term, and it includes provisions for all our products.

Now, turning to US-based customers, we also saw significant growth in the quarter. Domestic CRM sales increased by 15% compared to last year. The growth over last year was driven by increased sales of both feedthroughs and CRM batteries. Feedthroughs grew through three principal factors. First, market growth. Second, a mixed shift to our filtered feedthrough technology. And three, competitive wins of our filtered feedthrough technology.

Let me add that $7 million of our domestic-based revenue was shipped from our Tijuana facility. A majority of this revenue represents product that was transferred either from Minneapolis -- in terms of shield assemblies -- or Carson City, in terms of filtered feedthroughs.

We continue to have discussions with our customers regarding incremental revenue opportunities. Currently, we are working with an existing customer on planing for additional assembly volume, which we expect to begin producing by the end of this year.

In total, our implantable medical component revenue was up by 20% in the quarter. For the full year, we anticipate medical sales will increase by 8% to 12% on a range of $224 million to $232 million, up from our previous range of $210 million to $228 million.

Let me remind you that we received $10 to $15 million in revenue benefit in 2005 from customer field actions in the marketplace, which occurred primarily in the second half of 2005. Adjusting for this impact, we view our 2006 organic growth to be in the range of 14 to 19%.

Now, turning to the commercial business, we achieved record performance, with revenue increasing by 24% to $10.5 million in the quarter. We continue to see solid growth in the oil and gas, ocean, and seismic markets. Several factors have driven this success, including favorable market conditions and our increased sales and marketing emphasis, which has resulted in additional market penetration. For the year, we are forecasting our revenue to normalize in the second half and expect commercial sales will be in the range of $36 to $38 million -- up slightly from our previous guidance range.

With that, I’ll turn the call over to Tom Mazza to provide a review of the financial highlights for the quarter.

Thank you, Tom. Before I provide the financial highlights, let me point out a few items regarding our financial statements.

First, in the quarter we implemented the new accounting rules under FAS 123R for stock-based compensation expense. On a pretax basis, incremental stock-based compensation during the quarter, the first quarter of 2006, totaled approximately $950,000. This was comprised of $780,000 in SG&A and approximately $100,000 in both cost of sales and RD&E.

Second, we were also required to include amortization expense in the cost of sales section of the income statement. This expense, which primarily pertains to patented and unpatented technology, was previously included as a separate line item on the income statement in the operating expense section. For the first quarter of 2006 and 2005, the amount, including cost of sales, was approximately $958,000. For comparative purposes, we have identified the amortization expense as a separate line item on the income statement. This classification, obviously, does not impact our reported net earnings.

Third, I would also like to point out that in the current quarter, we reached the earnings trigger point whereby we are required to include the dilutive effect of the conversion of the convertible subordinated notes in the weighted average share count and diluted earnings per share calculations. The impact on the quarter resulted in reduction of diluted earnings per share of $0.02. The weighted average share count for the quarter was 26 million shares, inclusive of 4.2 million underlying shares for the convertible notes outstanding.

Let me now make a few comments on the income statement. For the first quarter, we reported diluted earnings per share of $0.28. This includes $0.07 per share from move-related costs and $0.02 per share for the impact related to expensing stock-based compensation. Excluding these items, we earned $0.37 per share, an increase of 37% versus last year.

Gross profit margin, including amortization expense, was 40.6% in the first quarter of 2006, a significant improvement over the 35.2% reported last year. Excluding amortization expense, gross margin for this year and last year were 42% and 36.9%, respectively.

Either way you look at it, about 2 percentage points of improvement is due to the elimination of the capacitor facility excess capacity costs and from the increased sales at the Tijuana facility. The balance of the increase is due to the favorable gross profit contribution resulting from the increased factory utilization. The higher factory utilization is a function of the increased sales volume and replenishing inventory safety stock levels in the first quarter.

Now turning to operating expenses. SG&A expense, which included approximately $780,000 of stock-compensation expense, increased $2.3 million. The balance of the increase is primarily due to three factors -- incremental Tijuana general and administrative expenses compared to last year; higher compensation costs related to wage and benefit increases; as well as selling and marketing headcount additions in both the medical and commercial segments.

Now, turning to R&D. Research, development, and engineering expenses were 8.7% of sales compared to 7.8% in last year’s first quarter, mainly due to increased headcount and decreased reimbursement on new product development projects in the first quarter of this year compared to last year.

Interest income increased $617,000, reflecting a 22% increase in cash and short-term investments compared to last year and higher interest rates on the invested cash.

Turning to our guidance for the full year, let me highlight a few key areas. We have increased our sales guidance to the range of $260 million to $270 million, up from the range of $245 to $265 million. The increase is essentially all due to the increased outlook for CRM sales.

We anticipate that our operating income, adjusted for move-related costs and stock-based compensation, will be in the range of $39.5 million to $43 million.

As a percentage of sales, we expect operating margins of 15 to 16% for the year. This compares with first quarter operating margin of 20%. The reason for the change is due to several factors -- increased investments in research and development in support of new development programs; sales mix changes from increased sales of medical component products, which carry lower margins; lower production levels; and higher compensation expense.

Moving on to earnings per share. We are now expecting earnings per share to be in the range of $1.15 to $1.25, excluding $0.33 to $0.40 in move-related costs and $0.12 to $0.15 in stock-based compensation. This represents an increase in adjusted earnings per share of 13 to 23% over last year. On a GAAP basis, we expect earnings per share to be in the range of $0.60 to $0.70 per share, up between 30 and 50% from the $0.46 recorded in 2005.

Let me now turn the call over to the moderator to facilitate question and answer.

[Instructions] And your first question comes from the line of Tim Nelson from Piper Jaffray. Please proceed.

Hi, just a couple of clarifying questions. First of all, your European sales -- how much of that was stocking with Sorin? Was the Sorin deal signed before the end of the quarter? And had they been a prior customer? Did you fill their channel, or-- could you describe how that happened?

The Sorin deal was signed the last day of the quarter, so the agreement didn’t have any effect in terms of the quarterly performance. So that-- we obviously had existing business before that point with all of our European customers, including Sorin, that were in there, but the agreement was not part of it.

Okay. So there isn’t any stocking impact from a new customer in that big increase?

Yeah, Sorin. Tim, Sorin has been a-- Sorin and ELA have been customers of ours for a long, long period of time.

So you just solidified the deal for longer periods [inaudible] contract. Got it.

I think the future holds opportunities for revenue streams outside of what we’ve historically done. That’s where the opportunity will come from on an incremental basis.

Okay. And the other category you’ve had a really nice sequential-- the last couple of quarters have been very strong. How much of that is sub-assemblies in Tijuana? Is that the biggest reason for that nice upward trend in that product category?

Tim, it’s actually split between three categories. It really includes our molder header business, some assembly lines, as well as our coated components. It’s pretty much equally distributed between those three.

Okay. And finally, when-- this year, do you expect any significant new contribution from the QHR series of batteries in terms of commercialization of those products that contain those components?

We have been commercializing and qualifying new product designs of the Q-series technology, both high rate as well as medium rate. They bleed into the year at a gradual rate. They started last year; they continue in importance through 2006. But certainly for the product cycle on an overall basis for the company, it builds slowly over the course of 3 years in total.

Okay. And then, the last question. It certainly appears like-- we were expecting, because of the excess components you sold last year -- that $10 million -- that maybe we’d see some of that get bled off in the first half of this year, those excess component inventories. It sounds like that impact is well behind us now.

Hard for us to tell. The inventory in the whole system-- obviously, we maintain some inventory as safety stock, but generally, we’ve seen the orders healthy and can’t really get a read on that in terms of the overall supply chain downstream from us.

Okay. I’ll get back in queue; thanks.

Your next question comes from the line of Bob Hopkins from Lehman Brothers. Please proceed.

Okay. Thank you, and good afternoon.

Hi, Bob.

To take sort of a macro approach here, because we’ve obviously got the ICD market slowing and you’re a company that generates revenues from a couple of different areas, but ICDs are a big part of it -- and you’re raising guidance. So I want to try and reconcile those two things.

You mentioned a few things in your prepared remarks, but first to continue on with Europe. Is one of the things that we’re missing here as analysts as we’re looking at the ICD market the fact that maybe ELA and Sorin are just doing better than we expected? Or is it more that you’re doing more business with them than you have previously?

Bob, it’s Ed. I think it’s a combination of things. First of all, historically the Europeans have been, I think, underappreciated in terms of the level of activity. And they’re also very broadly-based customers and they’ve been very aggressive in terms of adopting our most advanced technology, which tends to carry a premium. So there are a number of factors that all add into that. But it’s a very healthy part of our business.

Do you get a sense, though, that on a unit-- is it more of a mix issue where they’re adopting higher-end technology, or is it just that their units, overall, are growing faster for you than you originally anticipated? Which would suggest that they’re taking some share from the bigger players.

I’m going to let Tom Hook respond to that, but I’ll add one more thing, Bob. In some component categories, we had other competitive offerings. And we are gaining market share -- there’s no question we’re also gaining market share in Europe. We’re becoming a bigger percentage of the total supply chain for the European customers.

Okay.

Bob, this is Tom. I’d just say that there are kind of three pieces there to capture. One is, obviously, adopting higher levels of technology that have-- more premium technologies certainly drive growth for us. I do think that has, obviously, picked up the level of business. I do think the European customers are growing as well.

And finally, I just think that-- I’ve made this comment before to many people. I think the European volume of business is underestimated; in general that the European customers generate. I don’t think that the tracking on that is captured well. Obviously, because we have hard shipments to those we have a much better accounting of what it is. And it’s felt that that’s underestimated, in general.

Right. But that wouldn’t account for the account it the margin that you’re seeing right now in terms of growth.

Not on the margin.

That’s just a statement of fact. I mean, which is very helpful to understand, but it doesn’t account for the really good performance in the first quarter.

Not to our performance, just a general statement to help answer your question on the macro that you were asking.

Yeah, I know; very helpful. And just on the US, where we can see the numbers from Medronics and Jude and Guidant and what’s going on with the market rate of growth there. And yet, your business there also continues to grow and you’re raising your guidance for the rest of the year. So the only conclusion I can come to is that that, too, is deeper penetration of those existing customers. I was wondering if you could be a little more specific about where that’s happening.

Yeah. This is Ed, again. I’ll echo a couple of things that Tom said earlier, then I’ll let him comment as well. We are-- in the case of, for example, feedthroughs, we keep talking about the fact that the industry has been converting to filtered feedthroughs, so there’s a conversion effect going on. And also, there have been other sources for these type of products, and we are definitely gaining share in that area.

But I think we also see a pretty healthy market. There’s a pipeline of new product designs going through the introduction process, and typically, we see in front of that healthy activity. So there’s also-- I’ll call it a front -- a bow wave, a front-end type of effect that we probably are benefiting from, as well.

Okay.

Yeah, I totally agree with what Ed is saying there. Clearly, the market we sell into to the OEMs is ahead of the overall market. In general, in the long run they are all in synchronization. But I do think that there’s a lot of activity. We’ve been very successful in terms of winning new product designs and winning some long-term supply agreements and ramping the business. And I do think that the market is still viewed as healthy over the long run, and that’s reflecting in our business.

Great quarter, guys. Thanks for the time.

Thanks, Bob.

Your next question comes from the line of Glenn Novarro with Banc of America Securities. Please proceed.

Hi, it’s Eric Lowe [ph] in for Glen. How you guys doing?

Hi, Eric.

I was wondering if you could provide some color around the supply agreement with Sorin. Is it basically a renewal of the existing contract or is it a new contract that gives you more market share or perhaps more volume? And you also mentioned potential other revenue opportunities coming from the contract.

I can really answer kind of both at the same time. it is a brand new contract. It totally rescopes the relationship between the two companies -- not just in terms of the existing business that we have been doing with them but also other component technologies that we can qualify and develop together in the future. So it will offer both a continuation of the existing business we have, new forms of technology of that existing business as we develop them, in addition to brand new revenue streams as well for component technologies that we haven’t historically been selling to Sorin/ELA.

I see. And in terms of European growth, what-- you mentioned US growth was 15%. What was it outside the US?

I think what we said, Eric, was that a third of our growth came from the European markets.

A third of the total?

A third of the total.

Okay, I missed that. And my last question -- talk about additional assembly volume coming from when your customers-- When is that additional business going to hit your P&L? And also, I guess, what percentage increase are we talking about here?

The additional revenue from that will end up hitting our P&L by the end of the year. And that is in some of our guidance that Tom Mazza has revised. It’s relatively small because it’s phasing in through qualification right now and it really won’t hit in terms of shipments until, really, the very end of the year and really ramping in 2007.

So how much additional business would you guys get at the end of the day? Like, once this thing fully ramps up?

We won’t guide to that and won’t break it out just because of the confidentiality of the contract itself.

Okay, great. Thanks, guys.

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

Good evening, folks.

Hi, Glenn.

Let me throw out a couple of numbers here and-- I’m going to try and come up with a conclusion and I want you to sort of push back and tell me if this is a good way of looking at it or a bad way of looking at it.

If you look at the upside of the quarter, a good portion of that was really the ICD business, not so much the capacitor or feedthrough business. So it was really the battery component business -- both pacers and ICDs.

And as I look at your European customers, they didn’t really gain much incremental share between the fourth quarter-- or, even the third or fourth quarter and the first quarter. And if I look at just the combined sales of St. Jude and Guidant, which are your two largest customers, the combined sales were roughly $500 million in each of the two quarters, and inventory was up at St. Jude by $25 million, sequentially, from the fourth to the first quarter.

So why-- if I look at your guidance for the year relative to street expectations, essentially what you’re doing is taking the upside of the quarter and letting it flow through for the next three quarter. So why can’t we just come to the conclusion that the upside in the quarter was really due to a stocking issue, maybe in Europe, related to new product launches; and that’s not necessarily sustainable going forward.

Glenn, obviously, we’re not saying that the quarter is sustainable. I mean, our guidance is clearly lower than the $68 million at our fourth quarter run rate. So we are taking that into consideration in our numbers, and we believe that our numbers reflect what we’re seeing coming through the pipeline, which we have a pretty strong handle for the next 3 months. Six months, we have a pretty good view at it. And for the balance of the period, it’s still up for discussion.

Yeah, Glenn, it’s at-- I think the best way to describe it is-- and we keep saying you can’t go on just one quarter. It was a great quarter. We don’t think it was a stocking bubble. We are not privy to all of our customers’ inventory decisions, both up or down. And certainly, this early in the year -- because April is still early -- we’re not going to get out ahead of ourselves with guidance.

But I just want to push back there again a little bit. It is sort of a stocking bubble. If ELA has competitive CRT-D [ph] product line for the first time, and they have downsized ICDs, and they’re buildings inventory, that’s something-- If they don’t get sell-through, that’s something that does reverse down the road. Same thing goes for St. Jude and Guidant if growth in the market does not materialize the way they think. So I’m wondering whether there is actual risk in the future quarters to your new revised estimates. I guess that’s what I’m really getting after.

Well, let me just comment in one further way, Glenn. Now, certainly, we to some extent on rely on the forecast that we get from our customers. And we do try to look at-- I’ll call it macroeconomics, and listen to what you folks are saying, also, about where you think the market’s headed. But based on what our customers are telling us, we’re making the projections that we’ve made. Now, certainly, things can change. And if they do, of course, we’ll reflect that in our estimates. But right now, this is based on the year as we see it based on input from our customers and the experience that we’ve gained over the first few months of the year.

And have you seen any change in ordering patterns from your domestic customers based on the events in the last 90 days? Have they given you any indication that things are changing?

Tom, do you want to comment on that?

I didn’t quite hear that question.

Has anything changed in the last 90 days that we’re seeing from the other customers?

I guess you’re referring to US-based customers?

Yes.

Okay. I think that the guidance-- we receive the forecasts on a monthly basis. They have a tendency to creep directionally, not make major jumps. Haven’t seen major jumps in them.

Clearly, from a business standpoint, there’s been specific product lines that we’ve shown some nice growth in that we kind of flagged in the beginning comments -- CRM batteries and feedthroughs in particular.

There’s a very-- one thing I think that kind of pushes back on your argument, Glenn, is that there is a significant shift in feedthroughs, in particular, that I think is more pronounced as filtering technology is more broadly adopted in the marketplace by both European as well as domestic customers. It is a significant factor as we’re more successful in shipping that. And, obviously, it helps us as the market grows.

But just that mix shift in and of itself is very helpful for us in terms of our growth as well as our guidance -- being more aggressive in terms of growth. So all the factors you mention are valid, but there are so many more factors beyond that, it’s just a much more complicated picture than having a simple view of it just being inventory-related.

Remember, I was just looking at the ICD business. But just two quick follow-ups. Is there-- historically, your domestic customers have not been particularly forgiving in terms of their adjustments to schedules. They don’t give you a lot of warning when there are adjustments. Is there a financial incentive now in place for them to give you early warning if they have changes to their plan, or is there some sort of incentive that they would have to keep you going until the last possible moment? So that’s question No. 1.

Question No. 2 -- last year when you signed the subassembly contract with a new customer, there was the hope that the margins from that contract would improve dramatically once feedthrough manufacturing was transferred to you. Has that happened, and will that happen, just based on that contract?

Well, how would you--? Kind of two completely separate ones to comment on. I’ll just handle the second one first. Obviously, we signed an assembly contract. That business has been ramping. We don’t provide guidance relative to its profitability with regard to the lines of the business we have or will get. It has grown nicely. It has not just been transferred; it’s also expanding in terms of its scope, in terms of the business relationship, onto other products. It is one of the principal foundation pieces down in our Tijuana manufacturing facility and we intend to not only grow it with our current customers but we plan on, obviously, expanding it beyond that.

There are other lines-- obviously, all our customers we have broad business relationships with, and we attempt to leverage our advantages in a particular product line like assembly into other lines of businesses such as feedthroughs. So that activity continues. Clearly, because feedthroughs are still in Columbia, that transfer hasn’t physically occurred yet, but over the long run, it will. So it’ll all end up showing up in our Tijuana operation, but right now it is not. Hence, we don’t report it that way, we don’t break it out that way. And we don’t provide guidance that way. So there isn’t going to be a way to track that.

But you were waiting for regulatory approvals for this one customer to start transferring feedthroughs to you. Has that occurred?

I’m not sure what you mean by regulatory approvals, but we don’t-- in terms of individual wins or product lines wins, we don’t break them out like that.

Okay.

Glenn, let me just-- I’ll take the first question, which is do our customers surprise us? Well, sometimes they do. But I think especially over the last year, Tom Hook has worked with all of our key customers very closely. And I think we’ve got a better working relationship with our key customers than we’ve ever had. And I’m not saying-- they certainly have to look out after their own business. But I believe they value the contribution that we make to their business and they don’t want to do anything that would put us at a significant disadvantage. I really believe that. Now, does that mean we won’t have ups and downs? No, we’ll have some ups and downs; forecasts change. But I think we really are viewed as partners by most of our customers in terms of how we prosecute our business.

I’ll just expand on what Ed has already said with regard to your question No. 1, Glenn. There could be a surprise. We’ve spent an enormous amount of effort because --especially due to the dynamics in the marketplace in ’05 -- of synchronizing very closely across every single product line and every single part number with each of our customers.

We’ve spent a lot of time-- there are certain hard commitment periods for product lines, depending on each product, that have to be committed to that we make to. And we also run with a running forecast that has a tendency to be very accurate based on the assumptions we put into that build of the model along with our customers. We spend a lot of time on customer interface to make sure that’s very accurate. And if the quality of input equals the quality of output, then so far, we’ve been doing very well.

Thank you.

Your next question comes from the line of Jason Mills with First Albany. Please proceed.

Thanks for taking the question. Congratulations on a very good quarter.

Thanks, Jason.

I wanted to go back to the feedthrough business again. It’s seemingly your biggest near-term, medium-term opportunity here. Are you not manufacturing any of the feedthroughs down in Tijuana today? And you mentioned your expectation for the completion of the move of the Columbia facility. Will that be going from 0% to 100% at that point in time when you’re finished, or will there be a transition there -- is my first question.

Okay, let me take that one, Jason, for you. Sometimes terminology can get a little bit confusing. But feedthroughs that we make are-- bare feedthroughs without filters on them occur in the Columbia plant in Maryland.

Right. And the filters are done in Carson City.

Right now, they’re partially done in Carson City and partially done in Tijuana. But 100% of the bare feedthrough case is done, still-- all of that is in Columbia. It won’t be until the middle of the summer until we have 0% filtering in Carson City and 100% in Tijuana. And it won’t really be until the first quarter of next year until 0% of the feedthrough cases are made in Columbia.

In other words, everything will be transferred down to Tijuana by the second quarter of 2007. So more or less, for the next year we’re going to continue to talk about the transition of Carson City and Columbia as we move specific product lines for specific customers one at a time.

Okay. And staying on feedthroughs for a second, your-- once both the filter component as well as the bare feedthrough exist and are manufactured in the Mexico facility, can you speak to what sort of efficiencies that may provide you, both in manufacturing and maybe on the cost side with respect to manufacturing the integrated product at the same facility? Will you be able to pass that on to the customer, and what does that mean for your ability to gain sort of share in their supply chain in that product?

Okay, very good question. And two pieces of that question that are important. There are efficiencies in order to make a filtered feedthrough in one manufacturing location, which is the genesis of the project of moving Columbia and Carson City into the new facility in Tijuana. Obviously, there is also an advantage due to the labor basis down in Mexico to make products cost-effectively.

Now, what we’ve been doing is in advance of those moves, is when we are doing product designs and when we are developing technologies, we are doing it with an understanding that this manufacturing is being done on an integrated basis in Tijuana. And we’re drafting our contracts and our proposals to reflect those advantages to win business.

And that’s some of the reason why we’ve been very successful at ramping revenue, winning those product designs, and winning the business. Because we’ve been using that advantage in advance, knowing that it takes a while to qualify these products and bring them into production and ramp them in terms of revenue.

Tom Mazza can give you a little bit of breakdown and a little bit more of the metrics of the cost-savings in terms of the facilities.

Yeah, basically, it’s about $2.5 to $3.5 million for the Carson City once the Carson City move is completed, and approximately a similar number for once the Columbia goes down there as well.

So about $5 to $7 for the cumulative; okay.

That’s right, about $5 to $7 million worth of takeout of costs.

And that’s consistent with what we’ve provided information on in the past as well.

Exactly.

Okay, that’s helpful. Two-- okay, so from that to a product line-- not to point out sort of one of the product lines that goes down. But going to capacitors, year over year down and sequentially down as well. Could you give us a little bit more color to the dynamics in that business? Are we seeing more-- one of the largest customers vertically integrate more there? Could you speak to what the dynamics are for that particular line item?

I certainly can; this is Tom Hook talking. There’s a lot of dynamics in the capacitor line item. We brought on two significant capacitor customers end of ’05, beginning of ’06, and have ramped that business rather nicely.

It has been offset by an unfortunate decline of our biggest customer that purchases capacitors that has decreased their capacitor purchases of the Tantalum [ph] technology. However, we’ve been working very closely to repackage and requalify that technology for them to win all of that business back in the future, and have maintained a very tight working relationship in terms of our next-generation technology being their lead technology for their new devices.

Is winning back that business predicating your guidance, or not?

It is not. Because that would be a win-back that would affect our P&L second half of 2007, so it is not in our ’06 guidance.

So it would take that long to sort of win back that business?

It does. As you know, the battery and capacitor technology programs are long running programs that take up to a year to qualify the technology for a customer in terms of their implementation into the marketplace.

And is there-- what sort of revenues, if you can quantify them, are still at risk for that customer? It has to be getting pretty small.

We don’t guide to that, Jason.

We don’t guide to that. But obviously, you can get a handle, if you did a little math, on what we lost; you got a handle on what we could gain back. And obviously, the market is a lot bigger in terms of capacitor opportunity than that. So we have a lot of ability to sell that technology and we have to become more aggressive and be more successful at it.

Just a few quick follow-ups and I’ll get back in queue. Thanks for all the time. Just quickly back to feedthroughs -- what’s your expectation, Ed and Tom, as to sort of the share of the potential opportunity you currently have there?

We have the best technology available, period. So ultimately, I think we should have a very significant portion of the total available market for that technology.

Right, but what is-- can you quantify the total available market? Sort of what share you have of it now?

Jason, I want to make sure you understand a very important dynamic in the filtered segment of the feedthrough market. That segment is going to grow for two reasons. One, the requirements for filtering are increasing in implantable medical, whether it’s neurostimulation or cardiac rhythm management. The requirements to filter out the broadening array of EMI interference is becoming more difficult; hence, higher levels of technology. That’s why we’re making such large investments in terms of R&D to deliver the capabilities the customers are going to need in the future.

There is also a competitive capture opportunity for us. A lot of products do not use filters, and there are also competitors that we have in the marketplace. We feel, with the investments that we’ve made, with the programs we’re qualifying for both neurostimulator and CRM customers, we can win competitive wins, we can win technology wins, and we can convert the mix from unfiltered product to filtered product in both domestic and European customers.

Jason, we’re going to have to move on to the next question, if you don’t mind getting back in the queue.

Sure; thanks.

Your next question comes from the line of Alex Arrow with Lazard. Please proceed.

Hi. This is Avril Guterman [ph], in for Alex.

Hello.

Can you give us some more color on the non-medical division? In the last couple of last years, its operating margin was significantly higher than the one of the IMC division. Do you see this trend continuing?

You’re talking about the commercial power business?

Yes.

We’ve made some nice investments in sales and marketing in our commercial power group. We’ve gone out with a direct approach to sales, complementing with some third parties to help us in the channel to grow in very specialty segments like oceanographic and seismic. The leader of that business, and the leadership team in that business, have a very aggressive growth mindset. And we forecast that that business is going to continue to grow successfully. It’s a smaller business than we have in the medical product line, but we see the opportunities for growth to be just as good, and hence we plan on making continued investments in those areas. And we think we can maintain it as a very profitable business and still grow it very quickly.

Okay, thanks. One more question -- you have between $8.4 and $10.6 million left in special charges for the year. How is it going to be spread over the next 3 quarters? Is it pretty much going to be spread evenly over the next 3 quarters?

No, we’re not going to guide to the quarter spread. We’re giving basically 12.4 for the whole year. It tends to flow with the costs of the projects.

Yeah, there are some big projects lumped in there, Alex, so the timing can shift-- some pretty significant dollars between quarters. So that’s why we don’t do that.

Okay, thank you.

Your next question comes from the line of Keau Nakae with C. E. Unterberg Towbin. Please proceed.

Yes, a couple of questions. First, you mentioned you’d have increased subassembly business. Is this from your current customer or is this from new customers?

It’s from current customers.

Okay. And you guys have made no secret about your desire to get Medtronic to use your filter feedthrough design. Are you making any progress?

We’re working on it.

It’s still no secret. We want them to use our filtering technology as well as our feedthrough technology. And we’re going to continue to pursue that. The opportunity is 100% of their business in both technology areas. And it’s not just cardiac rhythm management; it’s also neurostimulation. And the same way for assembly, as well. We view all three of those as the same line of business and are going to approach it that way.

Okay. And then, on your operating income guidance. If we look at that, it looks like you’re guiding us to lower gross margin through the balance of the year. Am I looking at that correctly?

That’s correct. Basically, the significant volume in the first quarter caused it to be higher than we anticipated for the whole year. We also anticipate higher levels of R&D spend in the second half of the year.

Right. I captured that; okay. So okay, that’s fine. And then, just back to the capacitor issue -- the high-voltage capacitors. You’d lost a lot of business to Guidant in ’04. They had some problems with their stuff, so you recaptured a little bit of that in ’05. And Tom, if I heard you correctly, are they now seeming to have resolved some of their issues and are ordering less of that than we saw in ’05?

Well certainly-- I don’t like to talk about specific customers and their product purchases. There are a lot of dynamics there, so I’d like to steer clear of that. Like I said before, there are a lot of dynamics in capacitor purchase. We have one customer that dramatically decreased -- multiple reasons beyond that. You can connect the dots. You mentioned them already.

And we’ve had a couple of new customer wins that have offset that loss. But just because we’ve lost some volume from a significant customer, we’re very aggressive at winning that back using our current technologies and next-generation technologies. So I’m not giving up on wining that business back in the ’07 plan. That’s the plan, and that’s what we’re going to execute to.

So when we think about your two-cap solution, is ’07 still a good timeline for you to have that completed?

From the last call, we guided on the two-cap-- what we call our 360-volt-plus solution. For competitive reasons, we’re not saying what the voltage is going to be. It’s really a technology we’ll qualify from a technology platform standpoint by the end of ’07. It won’t be available for customer programs into ’08. So it is not within the revenue walk that we are planning on in ’07. That-- what we’re walking to in ’06 and ’07 is our current generations of capacitor technology that we’ve already done our product design work on and we’re qualifying actively with current customers.

Okay, great. Thanks for that clarification.

Your next question comes from the line of Eli Kammerman with Cathay Financial. Please proceed.

Thank you, good afternoon. Sorry if you mentioned this already, but can you provide some kind of commentary on whether there was any effective change of pricing on the batteries for ICDs for the quarter?

No, we haven’t seen any significant pricing changes. Pricing changes were under 1% across the board.

Okay. But what about related to mix and the newer batteries?

We don’t break that out, but the effect is aggregated, and it’s all less than 1% in total. But even in batteries, it’s less than 1% -- even including mix.

Okay. And then, regarding the split between CRM and neuro, can you give us some rough idea of what the relative proportions are there?

Neuro’s still very small, Eli. It’s still an emerging technology.

Okay. Thanks very much.

Your next question is a follow-up question from the line of Bob Hopkins with Lehman Brothers. Please proceed.

Thanks very much. On the battery side -- ICDs and pacemakers -- was any part of the good performance here winning back business from customers that you had lost business from previously?

If you’re specifically talking about defib and pacer batteries, the answer’s no. That’s all business that we had with our current customers both domestically as well as in Europe. The effect is a little bit shifted by, as they’re qualifying new technologies, Bob, obviously those new technologies do have a shift effect, especially on the defib side, from kind of price points as well as capability. So there is a shift there, but it’s all aggregated in. We had the business; we just took an old model out and put a new model in as their new device hit production.

Okay. And then two other things, one on the filtered feedthrough side. Do you guys have any sense as to what percentage market share you have of the filtered feedthrough market? And also, what percentage of the market has transitioned to filtered feedthroughs?

We have a sense on it, Bob, but we really don’t provide any of the information or guidance to it. We definitely hold that as competitively sensitive. But in general, I would say the opportunity is very large in terms of both the current market opportunity. And it’s even larger when you factor in that, as filtering requirements become more and more difficult to achieve, the opportunity is going to increase even more.

So just on the percentage of total devices for the neurostim or CRM that have filtered feedthrough products, if we could maybe just talk baseball analogies. Are we-- what inning?

In terms of technology, we’re in second, third inning. I’ll give you this much -- we’re well less than 50% of the market opportunity in terms of filtering given consideration to everything; well less. There’s a big opportunity out there just in general in the marketplace.

Okay. And then, lastly, in your other medical line, up 76% year-over-year. But even up sequentially up almost 10%. Could you comment on that at all, especially to the degree that there’s anything in here that you feel is a situation where you are gaining a higher percentage of a customer’s business?

I just want to make sure you’re referring to the other revenue line in the cardiac rhythm management -- there’s a medical--

Yeah, the $12.9 million.

Got it. I’ll let-- Tom gave a little bit of color -- Tom Mazza give a little bit of color with regard to that breakout. But we really don’t provide too many specifics on it.

Yeah, I heard the breakout. I’m just wondering, is that good growth in that business a function, again, of you being able to more deeply penetrate important customers? Or is it just--?

I can just say yes, and that’d be right on target for you, Bob.

Okay. Thanks very much; that’s all I have.

Your next question is a follow-up question from the line of Tim Nelson from Piper Jaffray. Please proceed.

Bob asked all my questions. Thank you.

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

Yes. Thanks for all your questions. We did have a few in the queue, and sorry we couldn’t get to them all. Again, I’d like to remind everybody that we’ve got the slides on the website; they’re accessible for 90 day. Thanks, everyone, for joining us. And go, Sabers!

Thank you for your participation. That does conclude today’s conference. You may all disconnect, and have a good day.