Integer Holdings Corp (ITGR) 2006 Q2 法說會逐字稿

Welcome, everyone, to the Second Quarter Greatbatch, Inc., Earnings Conference Call. Before we begin, I would like to read the Safe Harbor Statement.

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

I would now like to turn the call over to your host for today’s call, Treasure and Director of Investor Relations, Tony Borowicz.

Welcome to the second quarter Greatbatch earnings conference call. On the call today, 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 always, we’re including slide visuals that will go along with this presentation which you can access on our website. With that, let me turn the call over to Ed.

Good afternoon, everyone. Again, welcome to the Greatbatch second quarter earnings call. I’ll start by providing a few key comments regarding second quarter results, and then turn the call over to Tom Hook. He will provide an update on where we’re at in terms of strategic initiatives, and then Tom Mazza will close with a revenue of the financial results at which point we open the call for the customary Q&A.

As you just read in our press release, we’ve achieved our second consecutive record quarterly sales with second quarter revenues reaching $70.6 million. These strong results came during a period of significant volatility in the CRM marketplace and are indicative of the underlying strength of our position in that marketplace.

Overall, our sales increased by 11% from the prior year with inflammable medical components up 9%, and commercial sales up a strong 24%.

I’d like to remind everyone that the second quarter medical sales comparison to 2005 was a difficult comparison period, given that last year’s results included the added ICD related revenue resulting from marketplace field actions by our customers which we estimate added in approximately $3 million to second quarter 2005 results.

Adjusting for this impact, our underlying sales growth for our medical products line is in the range of 15%. Again, given the dynamics in the CRM industry, these results are extremely positive.

Turning to our commercial business, we continue to experience solid growth in our core of oil and gas markets and increase pipeline inspection sales volume. In addition to the strong industry economic factors, our commercial sales growth is also being driven by market share gains, and increased sales for new products such as batteries used in telematic satellite tracking applications.

Given the better than expected sales performance, we are increasing our sales outlook for the remainder of the year. We now expect our full year sales to be in the range of $270 million to $280 million, up $10 million from our previous guidance.

Again, adjusting for the annual impact in the marketplace field actions in 2005, which we estimate were about $12 million. This represents an annual growth of between 18% to 22%. $7 million of the $10 million in increased guidance is due to our increased medical sales outlook with the balance reflecting continued strength in commercial.

Turning to earnings. We had a solid quarter. Earnings of $0.32 a share, adjusting for stock-based compensation of $0.02 a share in a move related in other costs of $0.09 a share.

For the full year, we are increasing our adjusted earnings guidance to be in the range of $1.18 to $1.30, up $0.10 to $0.13 on an equivalent bases to our previous guidance.

This increase represents the expected incremental earnings from the aforementioned improved hot line outlook. On a comparable basis this reference stands an increase in adjusted earnings per share of 16% to 27% over 2005.

Let me turn back to other operating costs that were incurred in the quarter and shed some light on the $800,000 charge for corporate development expenses.

We continue to actively pursue our corporate strategy to diversify our customer base, and reduce market concentration. We are being extremely disciplined in our approach to find the right acquisition that meets our financial filters for growth in profitability. We have had ongoing negotiations with a potential target acquisition over the past several quarters. Based on the current uncertainties surrounding completion of this transaction, we determined that it was appropriate to take a charge in this quarter for the corporate development costs that have been capitalized to date.

We remain steadfast in our commitment to our long-term strategy to reduce the risk of concentration and to continuously improve shareholder value.

In conclusion, we’re extremely pleased with where we are through the first half of the year in terms of meeting our growth objective. The underlying business is stronger because of the initiatives we have put in place. We continue to grow our top line and to position the company to leverage this growth.

I’ll now turn the call over to Tom Hook to provide an update on the key long-term strategic objectives of the company

Thank you, Ed. First let me provide a brief mid-year overview of where we are in terms of accomplishing our long-term strategic objectives.

Our strategy is built on accomplishing five fundamental long-term objectives. First obtain a critical mass and diversified both our customer base and markets. Second, achieve operating efficiency defined by 20% operating margins. Third, reduce our excess capacity costs. Fourth, expand our CRM market share with our current customers. And fifth, development of a secondary battery offering.

In terms of our diversification strategy, Ed has already addressed where we are in terms of pursuing this objective. The entire senior management team and our board of directors, have been involved in reviewing the option in front of us as well as numerous other potential ideas.

We remain committed to achieving our diversification initiative, but only if we can find the right deal. We are, obviously, committed to achieving this objective and will continue to have ongoing discussions on this matter. In addition to diversification through acquisition, we see the neurostimulation market as an opportunity to expand our customer base, and product offerings which will aide in the achievement of this objective.

Achieving our operating margin target is predicated on a few fundamental principals. Growth on the top line, increased operating leverage through prudent management of expenses, and continued investment in R&D.

Success is defined as achieving it’s sustainable 20% operating margin. Our results have approached these levels in the past, and we feel confident we obtain the operating margin goal during our current three year planning horizon.

A major contributor in terms of achieving this goal is the completion of our consolidation initiative which in turn will reduce our excess capacity investment.

To date, we have completed the move of our capacitor and former medical battery manufacturing operation to our new plant in Alden, New York. These moves have reduced access capacity costs by approximately $3 million.

In addition, the initial customer assembly moves to Tijuana have been completed. We achieved both our internal goals as well as a quality and performance requirements of our customer.

We are in a process of completing the move of our filtered feature operation from Carson City to Tijuana. This move it scheduled to be completed in the third quarter. The overall timing of the consolidated project is always based on our internal project plans as well as final customer regulatory approval.

We’re also in the processes of moving our Columbia manufacturing operation. We have completed the construction of the control manufacturing area and the class 10,000 clean room for advanced coatings in Mexico. Equipment installation has begun and the operator training is ongoing. Completion of this move remains on schedule, to be completed in the first half of 2007.

In summary, these moves have gone exceptionally well with minimal destruction and customer operation. We expect to reduce our manufacturing costs by $10 million per year beginning in the second half of 2007, when all the moves have been completed.

In addition to the manufacturing moves, we have successfully consolidated all of our medical research activities into our advanced technology research center in Clarence, New York. However, there are some development programs that will remain in Columbia until the completion of the manufacturing moves in mid-2007.

Turning to our objective of expanding our market share with our customers, we believe that our results are indicative of our success in this area. We are gaining share in the medical components area as well as our commercial segment. We will continue to focus on bringing new products to the market which will continue to advance our leadership position in the market place.

Finally, we continue to make progress on a secondary battery offering. In addition to primary batteries, rechargeable battery technology will be a key product for neurostimulation application. We remain on track to bring the first in a series of advanced lithium-ion rechargeable batteries to the market by the end of this year. We will continue to invest in this important technology for both medical and commercial applications.

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

Thank you, Tom. I’ll start by making a few comments on the income statement that are important to note when reviewing our second quarter results. For the second quarter reported GAAP earnings per share at $0.21. This includes $0.09 per shared from move related and operating costs at $0.02 per share with incremental impact of expensing stock-based [inaudible].

Excluding these items, we earned $0.32 per share versus $0.33 per share in 2005.

Moving to gross margin. Let me remind everyone that amortization of intangible expenses, primarily, related to patented and unpatented technology of approximately $1 million, is now included in cost of sales for both the 2006 and 2005 results.

Gross profit margin including Amortization expense was 37.9% in the second quarter of 2006 compared to 38% achieved in 2005.

In the second quarter, the effect of unfavorable products mix was more than offset by higher volume and manufacturing cost reductions.

In summary, the changing gross profit from last year is comprised of increased sale volume, approximately $3 million. Favorable manufacturing cost reductions of 2.1 offset by unfavorable product mix of $2.5 million. A combination of these factors resulted in an increase in gross profit of $2.6 million and contribute to the stable year over year gross margin comparison.

Turning to operating expenses. The [inaudible] second quarter’s earnings are comparable with last year is due to the plant increase in RD&E spending.

Gross RD&E spending increased by $1.5 million or 28% versus last year. This level of spending is in line with our stated objectives to continue our investment in advancing our proprietary technology. In addition to higher plans spending customer reimbursements for product development expenses were significantly higher in 2005 compared to the current year which provides for a tough year over year comparison.

[Inaudible] reimbursements decreased by $1 million in the current quarter compared to last year, combined with the higher investment spending, net RD&E increased by $2.5 million.

As we outlined in our press release, we expect RD&E spending to range from 9% to 9.5% of sales. The reason this is slightly down from our earlier guidance of 10%, is due to the higher sales volume. Spending and expense reimbursements remain relatively on plan.

In terms of selling, general and administrative costs, the increase of $1.4 million from last year is primarily due to the expensing of stock-based compensation under FAS123R.

Turning to our guidance for next year. We have addressed all of the relative numbers in Ed’s earlier comments and in the press release. For your reference, we have also included a slide in the presentation which address these numbers.

In summary, we have raised our previous sales guidance by $10 million and increased our adjusted operating [inaudible] projection by $2.5 million to $5 million which is consistent with the increased sales volume.

It is worth noting that our previous adjusted EPS guidance of $1.15 to $1.25 did not assume that the convertible earnings per share trigger would be met. At the forecast increased earnings level to convert capitalization trigger would be met, and then to reflect it in our current EPS guidance and our share of GAAP. For comparison purpose the inclusion of convertible shares in the current EPS guidance have the effect the of reducing our outlook by approximately $0.07 per share.

That concludes our prepared remarks. Let me turn the call over to the moderator to facilitate the question and answer.

[Operator Instructions] Bob Hopkins with Lehman Brothers.

First of all, can you just remind us exactly what’s in the other medical line? Break that $16 million down into whatever component parts you feel comfortable breaking it down to.

Bob, we won’t give the details on the line but, basically, that includes, primarily, the coated components and the assembly, and also our molded and machine products.

Coated components. Like the leads?

Yes.

Can you give some color on exactly what’s driving that growth?

What’s driving the growth is assembly in the coatings business in the other revenue line, but we don’t make out the exact magnitude of it.

It’s safe to assume, though, that obviously this is a line where you have lower margin kind of stuff.

We really don’t provide margin guidance to the product line but, clearly, obviously, the assembly business is more of a volume based business. So, qualitatively that’s correct for assembly.

In terms of the ICD battery line, where it went down sequentially by almost $2 million, do you expect that to be a trough for the year, and I know quarter to quarter things move around an awful lot for you guys, but I’m just wondering if you could articulate what you’re seeing on that side of the business.

Just to remind you, the comparison was impacted by the amount of field action related revenue, the so-called bubble, that we already started to see in the second quarter last year. So, it is a--

I’m talking about sequentially. I think you did $12.7 million in Q1 in battery sales and just under $11-- ICD battery sales just under $11 in Q2.

Don’t read anything into sequentially. We’re still confident in the business, certainly, quarter to quarter there’s some lumps that come through based by particular customer and particular product lines, but it’s much better to look over the longer term trends then just quarter to quarter. It’s a little too granular to look, or excuse me, year to year not quarter to quarter because we, typically, get very large orders and we satisfy them in large quantities at once, but sometimes you can bridge a quarter it can make a pretty big swing on the rake.

You did, I think, last year, roughly, $46 million in battery sales. For this year, would you be comfortable commenting, do you think you’ll be flat with that number, up or down a little bit?

I know, Bob, you love us to give you a little bit of product line guidance here, but we don’t. But you’re right. It’s, roughly, if you look year-wise, you have to narrow it down to the types of batteries you’re talking about. I think you’re talking ICD battery.

Yes.

We don’t, really, break it down. There’s, obviously, a lot of effects. The recall effect, inventory, market shifts within CRM, OEM players, etc. So we, usually, don’t provide any color as that.

You commented, Tom, on the year over year gross margin being flat and, basically, seeing some ups and some downs and, basically, no change year over year. Again, I was wondering if you could just help me understand the dynamics. Sequentially, you’re at, I think, a couple hundred basis points higher in the first quarter, and just wondering what the dynamics were that they took it down a couple hundred basis points, sequentially.

Yes, Bob, that stuff’s pretty easy. Basically, we had a significant-- if you look at our inventory levels on our balance sheet, our inventory is back up to fairly high levels, primarily, due to rebuilding our safety stop, which took place, primarily, in the first quarter. That resulted in us having some pretty favorable margins in the first quarter, and contributing substantially to the increased margin.

Thanks, very much.

Alex Arrow with Lazard Capital Markings.

If I could start with the statement that you made about the $10 million increase in guidance, $7 million coming from medical and $3 million coming from Electrochem. What is it that is driving the improving outlook of Electrochem? Is it more the oil and gas, is it more the oceanography sentinels, or is just having the salespeople there?

Well, I think it’s squarely due to an aggressive sales effort in all market segments. Both the historical market segments like pipeline inspection, and oil and gas, but also we just opened a new market segment like Telematics and continue to focus on a lot of new areas like seismic and oceanographic. The gains there, both direct sales as well as through our evaluated resellers are pretty broad scope, and pretty uniform across the board.

Is it safe to say that since the non-medical part of your business is only about 15% of revenue and yet 30% of your increase in guidance is coming from it, that it’s improving at twice the rate the rest of the business is?

I’d say for the balance of the year that’d be the view. Clearly, the growth rates in the two industries are different over the long run, but we’re very confident we can aggressively grow both the medical and the commercial markets at a very good rate.

Yes. It’s a very healthy business.

Are you doing things that your competitors are not doing or, perhaps, your competitors are had salespeople and you’re just getting them for the first time, or is there something else with that?

It’s a very simple process. We offer the best product because we have more people getting out the message and talking with the [inaudible].

Yes. I think one thing is in commercial is you have to understand, Alex, is that we’re capturing share by putting competitive offerings in the field. There’s a lot of opportunities in commercial power. So the breath of opportunity is much greater. So because we’re a small business, we’re being as aggressive and as broad as we can, and we’re capitalizing even though the industry as a whole, much slower growth than medical.

Thank you. On to this acquisition that might or may not happen that cost $800,000 so far, this is a teaser, can you say anything about what line of business is in or if it’s coming in an entirely new line of business for you?

No. We’re not going to give any details. As I mentioned a couple of times during the remarks, we reiterated our objective of reducing our risk concentration, and that is a very important [inaudible] in terms of acquisition possibilities. We’re in extensive negotiations. It looks a little less certain in terms of whether we can especially pull it off, but the deal is not dead.

Can you say whether you’re open to the possibility of buying a company that sales directly to hospitals and physicians as opposed to being a supplier?

Well, we would be very careful about doing anything that would be viewed as directly competitive with any of our major customers. We’re very careful about that.

If I can just go into a neuro question. You made some comments in your opening comments about expanding the neuro business and your neuro contracts, and then about the lithium-ion. Are those two things related or were you just talking about them at the same time? Is there a lithium-ion that’s going to give you an edge up in getting neuro contracts such as the St. Jude contracts or am I just mixing those up because you talked about them so close together?

Alex, you’re not mixing them up. Because we feel that lithium-ion technologies in rechargeable batteries is applicable to both the commercial market for our division as well as for medical in the neuro stimulator area in particular. So we think we can leverage that core technology into both marketplaces, and that’s what our plans our.

Yes. But we don’t-- it core addition to product portfolio, but all of our other key component technologies are just as important except, of course, for high voltage capacitors, but the batteries, the feedthroughs, the filter feedthroughs are all as vitality important compared to stimulators as the [inaudible] device.

Would that be just a product, the future differentiator over the ones at St. Jude or the [inaudible] St. Jude business currently has where it’s rechargeable? Is this something that, specifically, could get you the St. Jude neuro contract?

Let me just say, I won’t comment on specific customers, but I will say that, clearly, primary batteries as well as rechargeable batteries are going to be in important in the neuro stimulation market. Our strategy is to use core technology in both areas to win contracts with our existing customers like the ones you mentioned or new customers that are more in the startup phase because all applications are just not defaulting to rechargeable batteries. There’s a healthy mix of both primaries and rechargeables in neurostimulation, and we feel more competitive with having a good secondary or rechargeable battery offering when we sell out our other components at the same time, and that’s what we’ve been doing, and it’s been proving successful.

Since Eagle-Picture has been in bankruptcy for quite some time now, has there been any difference in their ability to compete with you? Are they becoming-- are you able to increase your likelihood of getting that contract because of their bankruptcy or are they just the same type of competitor that they were?

I will say it, certainly, it is favorability to the longstanding player, namely, Greatbatch in the marketplace, and we’re going to do everything we can to capitalize on the opportunities to present to us, but we’re doing a primary area that isn’t a focus at all because we don’t see them that much. The secondary area, clearly, they have an offering and so do we, and we think we’re more competitive, and we’re proving it.

But they’re still competing even though they’re operating out of bankruptcy the same as they were before.

I wouldn’t want to comment on what they’re doing. I know they haven’t emerged yet from bankruptcy, but you’d have to ask them in terms of what the plans are, but we don’t really cross that with them that much.

Thanks, very much.

Glenn Reicin with Morgan Stanley.

Can you give us an update on customer concentration?

Actually, of the three customers, probably, guidance news about--

[technical difficulty]

I can barely hear you. You’re saying, now, it’s St. Jude, [inaudible], Metronic? In that order?

I think as we look at the first half that that’s, probably, true because I think the overall concentration of the big three is remained relatively the same over 70% of our total.

Can you give us the percentages how they compare with last year?

We’re not going to break that out yet.

Yes. We’re not ready to do that, Glenn, in full detail.

Why not?

We’re not willing to talk about it in detail. We don’t want to specifically mention to customers [inaudible] in total detail, but I think Tony’s has given you a pretty even comparison. Basically, we can, certainly, say that the biggest percentage from Metronic is coming up from where it was at year end, and the other two are [inaudible] split between the two.

It’s guided down year over year in absolute dollars?

We’re not going to tell you that.

Usually you provide us some sort of insight, by product line, what’s happening. Maybe, you can do that. Batteries, capacitors. What’s driving each of those segments?

You’re talking quarter over quarter or year over year?

Year over year.

Year over year.

If you want to talk quarter, okay. Whatever you think is most insightful here.

Well, I would say we’ve got more products and capacitors. We’ve got more product out there that are in the marketplace now using our capacitor technology like we had before. So we continue to believe that if there’s important technology industry and that we’ll see increasing sales over time as these new products pick up steam. We believe that our new battery technology through [inaudible] designing new products and, of course, all is dependent on the rate of approval by the FDA. That means that our newer technologies in batteries are going to continue to provide a different percentage in the future revenues going forward, and the rest of our business, the enclosures, assembly, feedthroughs, our filter feedthroughs are all very healthy, they continue the [technical difficulty] of filtering at every level [technical difficulty] guidelines going forward.

Let me tell you what I’m getting after. At the beginning of the year you, clearly, outlined your assumptions for the year. One of your assumptions was 18% CRM growth. We’d be lucky to see half of that this year in terms of total CRM growth. So I’m just trying to understand the disconnect between that vital assumption in terms of underlying sales growth in the markets you address and the fact that you’ve raised your guidance by $7 million on the medical side.

Yes, I’m sure, Glenn, you’re looking at what we had put out already in terms of the quarter over quarter results. We’re a little bit [inaudible] by the recall effect from ’05. Yes, we see the deceleration in the growth rate in the CRM market. Like you said, we’re covering some of that on the commercial side. We’re also picking up some share and some volume on the medical side and that’s beyond just the planned increases as we implement the assembly business. So we have won some contracts that are paying off. We have increased our penetration somewhat and that’s, more or less, why we’re guiding up is we’re compensating for the slower overall market growth with, basically, program wins that are coming through with revenues that we worked on over the past couple of years.

Do you think you’re benefiting from increased projection rates of products that guide it? In other words, every time they announce they had another recall, they destroy more product and they got to rebuild inventory?

Well, I, certainly, wouldn’t count on a particular recall or customer, what we’ve said in general. We don’t think there’s a big recall bubble effect in our first half numbers or in our guidance for the year, but there’s, obviously, something in there but it’s no where near to the magnitude of 2005, and we don’t have the ability to break it out because we don’t have that level of detail.

What the disconnect is-- if you won-- let’s assume you’re doing more business on a capacitor front and the enclosure front with Itronix and [inaudible], and which would be where previously you said you were doing some more business with, and combine market share, those two players, it’s 4%. So how does the compensate for the top three players, growing at a rate of 3% year to date.

Yes. What’s important, Glenn, is understand is we don’t have 100% penetration in all our customers. We have by product lines a lot of opportunities to improve our efforts in determining getting qualified and selling. Several customers have more than one source [inaudible]. Clearly, we don’t sell into the NCR market, we sell into component market which is somewhat different, and there’s a lot of deltas that effect the end market to the component market that we participate in. So while the overall market growth is lower there’s plenty of opportunities for us to perform better operationally for our customers and win more business. Even though their overall growth rate driven by the market is not as high as what was expected.

Tim Nelson with Piper Jaffray.

On the other medical line to see if we can drill into that a little bit. From a simple semi-prospective, how many customers do you have now, and does more than one account for more than 10% of whatever the number is?

In other medical?

In other medical?

Yes.

Well, we don’t breakout other medical but, yes, there’s, certainly, more than one customer in the other medical line.

Well, I’m talking mostly about this other assembly component of that.

Well, right now, it’s principally, since we just moved it. We just moved the-- based on the contract that was disclosed a few years ago, that initial move is just being completed but I would say on the opportunity landscape there are many opportunities from a diverse set of customers in both CRM as well as neurostimulation that are opportunities to do work down in Tijuana. They’re just earlier in their gestation. So it’ll take awhile for them to mature but for right now--

Whatever this other assembly number is, primarily, one customer.

Yes. We just finished the first project.

That’s correct.

Then, just to see if I can’t get you to clarify on the neuro-stim timeline for the rechargeable battery. You said something about the end of ’06. Did I get that right?

Yes. We’re launching our new generation of technology and EMI at the end of this year to move and continue on in 2007 with customer qualifications.

So, basically, it’s available for being designed in their products by the end of this year.

Yes. First generation already is, it’s already designed in the product and we’re following it up with the second generation this year, and we have other programs in Research & Development for the rest of the strategic planning process period.

So in terms of commercial results it all, certainly, depends on if you need timelines for whatever or, probably, later on in ’07, maybe, the second half.

It, certainly, does in an aggregate neurostimulation represents less than 3% of our revenue base today, and we expect as we would win qualifications our customers complete their product development and approval processes of the FDA. We’re going to see components sales and, obviously, revenue growth opportunities.

Our current projection growth is 69 including significant numbers for lithium-ion.

Yes. I wouldn’t think so. The access capacity cost, is that part of the $0.09 in adjusting that you do?

No. No, it’s not.

So that’s part of the basic gross margin. Was that running around a million this quarter?

It’s slightly more than a million.

Slightly more than a million.

Just to clarify that. That’s, primarily, related to our Tijuana facility, the excess capacity cost that we had with the capacitor facility has been eliminated and it’s why they’re gearing up for duel staff down in the Tijuana, and making the moves that we have extra facility next to people handling it, and it’s running a little bit over a million dollars a quarter.

Back in the revenue area on filter feedthroughs, that was a hot topic last quarter. Can you give us an update on how the share-- what kind of share you’re gaining in that segment or how the overall market penetration unfiltered versus regular feedthroughs is proceeding?

Certainly. In general, we see a couple favorable trends. One is the continued conversion of product lines from unfiltered to filtered designs in terms of technology. We do, obviously, see a increased demand for increased levels of filtering capability. In other words, filter out higher powers and broader frequency ranges. Clearly, as regulations come out that mandate that, it kicks off quite a bit of new program activity that doesn’t necessarily add revenue immediately but on the out years will continue to be a positive factor in growing our filter feedthrough business. We also have the day to day dynamics of what’s happening in the overall Sierra market. There was some recall effect on filtered feedthroughs in 2005 that make the year over year comparison by quarter difficult, but we’re still very bullish on that business. We still think we’re picking up market share and, obviously, because of the moves there is a lot of dynamics around us building safety stocks, our customers building safety stocks for very specific product lines, for very specific periods of time that come in and out based on months and quarters as the move from Carson City to Tijuana completes, and then they’ll phase that out again when the move’s complete.

So there’s a lot of variables in this that we track extremely closely, but the general trend is good growth in that area because of market growth, good growth in that area because of the conversion to up from unfiltered to filtered, and good growth in that area because of increasing levels of filter demand.

So if you sum all that up, how much faster can filter segment of the market grow than the overall underlying unit demand if we’re growing implantable devices at 8% to 10% and filtered feedthroughs grow at 15%?

I wouldn’t want to give you a number. I think we’d make some assumptions and we don’t really give guidance on it, but we try to break out the individual effects, track them carefully. We know they’re all positive, but we really don’t try to give anybody a rule of thumb to plan on because it’s just too difficult.

This is all from other area where we do have other third party competitors and, as Tom mentioned, and I also mentioned earlier in regard to other questions, we are gaining market share.

Thanks.

Glenn Reicin with Morgan Stanley.

Approximately how big was the subassembly business in dollars?

Well, we don’t break it out in terms of the other revenue line. It’s combined in there, Glenn. It’s, obviously, was a lot smaller in ’05 since we just turned it on near the end of the first half. So we had about a minimal amount in the first half of ’05, and then, obviously, in ’06 it’s coming on really at-- the move has been completed and we’re at normalized production levels right now for that and they’re, obviously, increasing with what the market’s doing.

Do you have positive gross margin from that business?

Yes. We have positive gross margin.

We have positive gross margin. Yes.

Any sense of how they compare with general gross margins?

There’s no argument there. Glenn, we’ve pointed out that we think the mix this period, the last period was approximately $3 million in our results and, obviously, you can see that we’re moving from batteries into the other medical which is rightly so includes the assembly, and the coated components [inaudible].

Neuro stim, is that material? We’re getting a lot of questions on neuro stim, but how material is that today?

It’s about 3% of--

[inaudible] 3% of our current revenue, Glenn, but in the future, obviously, based on our program success so far [inaudible] a larger number as our customers are successful and we get to sell the components to them.

That 3% is versus what? Around the same amount last year?

Slightly less than last year.

It’s not material. That wasn’t a material contributor of the growth.

No, nothing not.

It’s really the subassembly business and the feedthrough business, , and the enclosure business?

It’s the other medical which is, primarily, the coated and the subassembly was the drivers of the sales increase for this period.

We’re getting a lot of questions on the other medical category. I think in what we said last quarter, probably, still holds true that that category’s really broken up almost equally between assembly products, between coated components, and machine components.

One-third, one-third, one-third.

Yes. That’s a good guess.

And last year, what was that?

Well, it would’ve been half and half.

Half and half because--

There was very little assembly at the June time period.

Half coated, half machine components.

And machine, you mean enclosures?

Molded parts as well as--

Metal parts that have not been stamped, but has been milled or had been turned on a lathe.

It’s, primarily, [inaudible].

Now, you said you weren’t going to give the customer concentration just yet. When will you? I’d love to see what percentage [inaudible] represents your business today versus a year ago.

Yes. You’ll get a year end [inaudible].

Can you tell us if that’s all the growth in the year over year?

What is all this?

Metronic.

No. It’s definitely not. No.

Has guided grown?

Glenn.

This is essential. I don’t understand how you can’t give this. This a critical issue in analyzing the company.

Well, first of all, it’s changes from quarter to quarter because things do move around, and as we keep saying you can’t draw too many conclusions from one quarter. At year end we’ll see where we’re at.

I think you have to ask our individual customers to give you guidance on how their business is doing. We’re just not going to break it out.

That’s where the problem stems from, but and then what was cash and operations for the first six months this year versus last year?

The operating cash flow?

Yes.

About $8 million compared to $13 million.

Why is that down?

Inventory [inaudible] receivable.

Why is that?

Higher sales volumes levels and the inventory with safety stock coming back up.

We have contractual safety stock levels for specific customers that we, clearly, because of the recall effect were depleting, and it took us quite awhile to get them back up to normal levels.

Then on this capitalized cost of M&A, do I read this correctly, you were very confident that you were going to close this deal, therefore, you capitalized the costs. Now you are less confident and, therefore, you expensed it?

Absolutely.

That’s exactly right. It’s adjusting volume.

So there’s no more cost that are capitalized. This is the full amount that you’ve invested in this acquisition so far.

Yes.

Thanks.

Jason Mills with First Albany Capital.

Just following up on the feedthrough side of the business. It was a big topic in the first quarter and, maybe, I missed it but I think you said you pointed to the variability of that business. It was up considerably in the first quarter, down here in the second quarter. For the first half of the year, though, is it fair to look at the growth in the first of half of the year as to the way we should be looking at that in the second half of the year or should we expect that to accelerate? It looks like that you, maybe, have any easy comp in the second half of the year, the first half was up, this year was up, maybe, 3% or 4%, maybe, give just us a little color there.

Certainly. I’m not sure of the comp in the second half of the year is going to get any easier because they’re-- there definitely is a recall effect for the second half of the year and some of that, too, that’s up to deconvolute, but in general we think from, if you look at the first half of 2006, the second half of 2006, we’re going to see a favorable trend in terms of growth for that product line.

That’s for a variety of reasons, Jason, in particular, we believe that people are moving to filtered from the unfiltered piece, and that will help.

Can you talk about within your customer base right now, what is the, maybe, the penetration is within your overall customer base not breaking it down by customer but overall?

Jason, it’s all over the map and it depends on product [inaudible].

I think the best way of saying it is, we think that within a relatively short period of time almost everything is going to be filtered, and we also think we’re taking market share from other people that have been trying to get-- either have had that business or trying to get it, and so you’ve got the gross rate and a market share [inaudible] any one snapshot to capture exactly where we’re at on [inaudible] variable.

I think what’s tough-- to answer, maybe, a basic form of your question, my guess is it’s, probably, 70/30, 70 filtered, 30 unfiltered from the global perspective, but that’s my best guess, but you have to look at some filtering requirements or filtering regulations are increasing and they’re, probably, my guess would be is there’s some level of grandfathering in an existing design, new designs as they come on are going to have to not incorporate the existing filtering technology. They’re going to have to incorporate higher levels of filtering capability. So the whole market is going to continue to shift.

So that percentage, essentially, gets recalibrated.

Absolutely. It’s just going keep pressure down because the old filtering capability is not going to be adequate for new products.

And the tougher the requirements, the better position we’re in.

So just to make sure I follow, that in some you would expect growth in that business looking at a first half versus second half to accelerate second half of the year over year versus what you did in the first half.

Well, year over year. I think sequentially--

Six months.

Yes. We’ll accelerate, but I think year over year minus the recall effect, yes, even year over year by half.

Back to a previous question on the ICD battery business. In the first quarter you spoke about the European customers and increasing the penetration in the European-- amongst European customers. You, also, in your previous comments made mention that that business in [inaudible] patterns can’t be lumpy. Is it safe to assume that the first quarter results did include, maybe, some orders that otherwise would’ve fallen in the second quarter? Can we blend those two together and look at it for the first six months on a year over year basis is a better gauge of your business?

I couldn’t tell you exactly. It sounds logical but I couldn’t give you a precise answer. I would say that all our customers all order in large quantities that can be somewhat lumpy in between quarters. So it’s always best to quarter average on a rolling basis to get the trend. Clearly, because we signed a long-term agreement with a customer the final day of the first quarter we were able to win some new business into that second quarter period that was favorable for us and, obviously, that’s going to continue on and, certainly, we’re not giving up on just that one customer or that one particular program.

Did you achieve any new customers in that business in the quarter?

You mean from the prior quarter?

Sequentially. Correct.

On programs, yes. On revenue, not significant.

So the program comment should suggest that revenue will flow through within what, a quarter or two? What’s the sales cycle there?

Well, again, you’re talking about the product, life cycle, development time for CRM customer. So it could be a year, it could be three years depending on their program.

Update on the two cap solution, capacitor and then, also, with respect to guidance on the capacitor side, clearly, it’s no secret that that business with that customer you are re-qualifying, repackaging that business. Is there any update that you can give us with respect to that?

We’ve had favorable developments in our program for leveraging a higher voltage capacitor system which could be used in two capacity solution. Again, somewhat, our customers determine how they do the configuration and the device, but we’ve been on track with that program overall with advancements, and we’ve been on the qualification loop which does take about a 12 month period of time to go through our qualifications and research and, again, project that in the second half of 2007, as we originally stated that we’re going to be able to bring that technology to customers for qualification. I will say that there’s universal interest in that type of technology whether it is the ultimate generation of it or the early generations of it. It has attracted a lot of interest and we’re actively, as we do every day, collaborate with customers to show them that they should incorporate it in their product designs. So we’ve been on track with that. Other than that I don’t have any particular milestones I’d report. We keep that stuff competitively confidential so we can keep it under the covers in terms of exactly when we launch.

Thanks.

Glenn Novarro of Banc of America.

Guidance did have another recall, although, minor by standards at the end of 2Q. Do you anticipate any one timers coming as a result of that late 2Q recall, and then, secondly, qualitatively, can you talk to us about how the new relationship with the Boston Scientific Regime is going? Obviously, with the Guidance Regime, they were looking to take more business in-house. Is the Boston scientific-tier management team more open to giving more business to Greatbatch? Some people have worried that they have a relationship with a battery company called Qualion and, thus, may look to take business there. If you just want to qualitatively comment on that. Thanks.

Again, I really avoid making specific comments. I think our relationships with our customers are very good. Our strategic prospects are very good in general, and I do think we have-- because the basis of good operating performance, a lot of good opportunities out there. I really don’t like to single out any one particular effective, what’s happening within the marketplace with a particular customer. So I wouldn’t feel comfortable making many more qualitative comments other than that, other than we do talk to the management teams at all our of customers. We’re in daily contact with them with regards to our shipments, programs, new programs, as well as our product lines, and I think our opportunities in the future are good with all our customers. Our number competitive factor is, obviously, all our customers have some level of internal manufacturing and we also have some third party manufacturers. So we’re aware of this competitive threat, and that’s why we’re staying in the forefront of technology and being operationally superior, and we think that no matter who the customer is, whether they’re internally manufacturing or third party manufacturing, we can be an incredible alternative for them, and that’s how we’re selling and going to market, and the customer you mentioned is no exception.

Can you, at least, say, is the dialogue better than what you had under the old guidance regime?

Glenn. Let me [inaudible – too far from mic]. I think, again, without specifically, pointing to one customer or two in one time period, I will say that I have only [inaudible – too far from mic] three years now. I believe that our relationships are working relationships with all of our customers are as good or better than they have ever been in the time I’ve been with the company. So I think every customer relationship is very healthy, does it mean we’re going to get 100% of the business? Of course not. But in terms of our ability to have a dialogue and to be active part of the discussions of the future going forward with every customer, we’re doing as well as we’ve ever done.

Glenn, the other thing I’d say is just I’d encourage you -- we’re all about performance in terms of technology and operations, and you’re, certainly, welcome to ask our customer how we’re doing and they can give you our report card, and that’s the only report card that matters to me, and we’re going to continue to perform for them, and we realize that, on average, if we continue to have the best technology and good operating performance, some strategic decisions may not go in our favor but the majority them will with the level of technology here that’s extraordinarily difficult, and if we can be at the leading edge of it, and operationally perform, that we’re going to be incredibly competitive for all the marketplace.

Do you expect any one timers in 3Q as a result of the announced guidance recall late in 2Q, and then, secondly, what is the status of the guidance contract? If I remember correctly the battery and capacitor contract have expired, and what you’re looking to do is tie up one major contract. What’s the status of that? When do you get that done?

The major contracts for them go through the end of they year, so they’re not expired. In terms of one time effects, we don’t think there a material one time effect in the numbers we reported for the first half or for the guidance we’d give for the second half of the year. So we don’t have any effects factored in, and nor do we think it’s going to be material for us. So it’s at a level much less than 2005 bubble that we gave a little bit of information on on the call here, and right now we don’t have the ability to measure an effect that small.

Thanks, Tom.

Bob Hopkins with Lehman Brothers.

The $7 million increase in medical business guidance for 2006, is all that in other medical?

No. No, it’s not.

Is the majority of it in other medical?

Yes. A significant piece of it is there, but I won’t say it’s all there.

What was the operating margin in the quarter, was it 15%, 16%?

Right. 16.5%, I think.

You guys mentioned stated goals of around 20%, given the makeshift that’s going on within your business, what kind of timeframe, do you think, you can achieve that goal?

I think, Tom will just echo my comment. Our plan is in a current strategic period which is a three year window which we’re, obviously, in the first year we can get to 20%.

Yes. Clearly, I fully agree with Tom. Our projections, now, show that we’ll be within 20% within the next three years.

Thank you, very much.

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

Thanks, and again, I’d just like to remind everybody that we’ve got the audio portion of this call that you can replay as well slide visuals are on our website. There’s two calls in the queue here, so look forward to following up with everybody afterwards. Thank you, very much.

Thank you for participation. That does conclude today’s conference.