Integer Holdings Corp (ITGR) 2007 Q3 法說會逐字稿

Welcome attorney the third quarter Greatbatch, Inc. third quarter earnings conference call. Before we begin I would like to read the Safe Harbor statement. This presentation and our press release contain forward-looking statement 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 assumes no obligation to update forward-looking information included in this conference call to reflect change assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or prospects.

I would likes to turn the call over to today's host, Treasurer and Director of Investor Relations, Tony

Thank you Loren and welcome to the third quarter Greatbatch earnings conference call. On the call today are Thomas Hook, President and Chief Executive Officer and Thomas Mazza, Senior Vice President and Chief Financial Officer. In terms of today's agenda, Tom Hook will start with a review of the strategic rationale for each of the acquisitions made to date and provide our preliminary thoughts regarding our 2008 sales outlook. He'll then turn the call over to Tom Mazza to review our Q3 results and count on our 2007 guidance.

We also thought it would be useful to provide a review of our capital structure to help you in modeling of net interest expense for 2008. Tom will conclude with some commentary on the new FASB legislation which could change the method of accounting for interest expense for the convertible notes that can be settled in cash. As we've done in the past, we are including slide visuals to go along with this presentation in which you can access on our web site. With that let me turn the call over to Tom Hook.

Thank you, Tony. As everyone is aware we have spent the last three years optimizing the operations of the company. We relocated 85% of our operations in which we consolidated 8 facilities, with two of them in progress, built two new world class manufacturing facilities and commenced construction on a new commercial power building. We have accomplished this while simultaneously growing sales and our medical and commercial businesses at rates faster than our underlying markets. Over this three-year period, our sales have increased by 15% compounded annually. Our strategic initiatives have been focused on creating a [leverageable] platform that can support further growth. We remain steadfast in our mission of being a leader in the comprehensive design and manufacture of custom component technologies for the commercial power and implantable medical markets.

Our intent is to grow through innovation, targeted investments and strategic acquisitions that broaden our technology and market base. Earlier this year we put in place over $400 million of financial capacity to facilitate this growth. We commenced execution on our growth strategy with the scheduled completion of five acquisitions in the current year. These acquisitions are very synergistic, with our model being a leading supplier of innovative specialty niche products supported with strong intellectual property. Each of these acquisitions has served to complement our existing business model and add to our current capabilities. Let me provide a brief review of how these acquisitions fit our strategic direction. In April of this year, we purchased BIOMEC in Cleveland, Ohio. BIOMEC provides us with enhanced design service capability and extends our customer reach from device concept through commercial manufacturing. In addition BIOMEC provides the establishment of important clinical relationships that increase our neuro stimulation market presence with a minority ownership in Intelec Medical.

In June of 2007 we acquired Enpath Medical in Minneapolis, Minnesota. This acquisition provides a number of strategic benefits. First, it broadens our reach into the vascular market; second, expands our current product offerings to the existing Greatbatch customer base; third, complements our current CRM business and provides a platform to build on in the vascular neuro stimulation markets; and fourth, leverages the proprietary product portfolio which covers neuro stimulation, catheter, and venous introducer technologies. We've negotiated a series of three additional acquisitions over the past week. First, we acquired Intelesensing based in Buffalo, New York, which designs and manufacturers battery-powered wireless sensing solution. These sensors are used in applications such as oil drilling and provide essential temperature and pressure measurements. This acquisition complements our current oil and gas product offering and enables us to better service our customers through a more comprehensive solution. We believe in the future we will be able too leverage our newly acquired wireless sensor capabilities in the medical market as well. Next we acquired Kwan Emertech based out of Minneapolis, Minnesota. Kwan Emertech adds to our critical mass in the vascular market.

In addition, approximately 50% of their sales come from CRM and neuro stimulation products which further strengthens our position in the current customers in these markets. In addition to the synergy with our base CRM, neuro stimulation and vascular markets, Kwan Emertech also provides for entry into the high growth peripheral coronary and neurovascular market space. The addition of Kwan Emertech's vascular products complements Enpath portfolio to create value for our customers and provides for diversification to Greatbatch's business base. The combination of Kwan Emertech and Enpath portfolio's will create the basis for a therapy delivery product line. Yesterday we announced our fifth acquisition, the asset purchase of EAC based in Teterborough, New Jersey. EAC designs and manufacturers rechargeable battery-pack solutions for customers in the external medical, communication, automatic data collection and environmental and safety markets. This acquisition is synergistic with our strategy of increased product offerings to our existing commercial customers. The addition of EAC enhances our primary sell product portfolio to include rechargeable batteries and design solutions. EAC complements the markets we currently serve such as the military market and allows for expansion into the growing external medical market. On a pro forma basis the addition of these acquisitions will bring our 2007 annual revenue to approximately $360 million.

For 2008 our preliminary sales outlook is as follows. We expect our CRM and neuro sales to increase by approximately 5%. We expect our therapy delivery sales, which consist of Enpath and Quan Emertech to increase by 12 plus percent. We expect our commercial sales including EAC and Intelesensing, to grow at approximately 7%. In summary, we are anticipating our 2008 sales to be approaching $400 million. It is an exciting time for Greatbatch, and we look forward to communicating our progress on the integration of these companies and the value of these acquisitions we'll create. With that, I'll now turn the call over to Tom Mazza, who will review our results for the quarter.

Thanks, Tom. I will provide a brief overview of this quarter's results. I will then talk briefly about our capital structure and finally provide a comment relative to our 2007 guidance. In terms of our third quarter results, we reported sales of $79 million, an increase of 14% over last year. Sales totaling approximately $10 million from Enpath were included in this quarter's results. Excluding these sales, second quarter's results were consistent with last year. As anticipated, sales for the quarter, in particular feed-through sales were impacted by inventory adjustments from CRM customers. Our gross margin was consistent with last year's margin, at 37%. However, our cost of sales for the quarter includes 1.1 million of inventory step-up amortization relative to the Enpath acquisition. Excluding this amortization, our gross margin percentage improved to 38%. As of the end of the quarter, there was no inventory step-up amortization remaining relative to the Enpath acquisition. Operating income adjusted for the on going move related expenses and also for the purchase accounting costs was $9.4 million, a decrease of 9% over the same period last year. Higher RD&E costs and higher SG&A costs offset the improved gross profit generated.

These costs increased primarily as a result of including Enpath operations in the 2007 results. As Tom mentioned, I would like to remind everyone that early in the 2007 we started putting into place a financing package to enable the acquisitions we have been executing over the past several months. Our financing activities included refinancing $118 million of convertible debt and issuing new convertible debt of $80 million. As a result of completing the convertible offering in March of 2007, we are left with a total of $250 million in convertible notes, $52 million in the old convertible notes with an effective maturity date of June 2010 and $198 million in new convertible notes with an effective maturity of June of 2013. Nearly all of our annual interest expense $8.4 million, relates to the $250 million in convertible notes. As of the end of September, subsequent to spending $110 million for the Enpath and BIOMEC acquisitions, cash and short term investments, totaled over $115 million. In the near term, we anticipate spending approximately $75 million for the following. $55 million for the Quan Emertech acquisition, $12 million on EAC and $4 million on Intelesensing, plus related expenses for each of these projects, which should leave us a cash balance of approximately $40 million.

The second piece to our financing package was the establishment of a new credit facility which increased our revolving line of credit to $235 million with an accordion feature that could take it to $335 million. At present, none of this credit line is currently drawn. We expect our cash flow from operations to continue to be strong, our operating cash flows combined with our financing package should allow for successful implementation of our aggressive growth strategy. As many of you are aware, many of you have been reading, the FASB board issued a position paper for comments which could change the method of accounting for interest expense for convertible notes that can be cash settled. If adopted as proposed the amount of interest expense recognized for book purposes relative to the $198 million in new notes could be substantially increased. This could require interest expense to be recognized on a market rate instead of the current 2.25% actually payable on the notes. It should be noted that the true economics and cash flows would not be altered as a result of this change in accounting. Since we are in a process of obtaining purchase price accounting valuations for the acquisition announcements subsequent to quarter end, our guidance has not been updated to reflect the impact on our 2007 results. Excluding these acquisitions we are reiterating our revenue guidance of 305 to 315 and our adjusted earnings per share guidance of $1.37 to $1.41. At this point I would like to turn the call over to the moderator to facilitate questions and answers.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Bob Hopkins with Lehman Brothers.

Thanks and good morning.

Good morning.

A couple things Tom. First how is it that all of these deals are happening in such close proximity to one another? It strikes me that typically M&A doesn't happen that way? Were these all teed up and you guys just came to a decision you wanted to do them all at once and therefore were able to execute them in close proximity? Could you just give us a little bit more of the history there?

Well, if I roll the hands of time back to the beginning of the year, we very consciously, in conjunction with the management team and the board of directors, rolled the strategic plan to grow the company following our consolidation initiatives we've been running for the past three years; and with that, we embarked on a targeted investment and acquisition strategy both medically and commercially to identify candidates for targeted acquisition. And we proceeded down the path to complete those in a timely manner. We have, you know, made sure that from a scheduling standpoint, that we were aggressive to the schedule, did not purposely try to target specific dates, but had a mind-set of wanting to be targeted and aggressive in closing, and have been, you know, very open with the aggressiveness of the process with the board of directors, have garnered their support, and, you know, some of the timing of the deals here over the past couple of weeks -- they're not linked or consciously linked in any way, but the timing worked out to be that they were coincidental over the same week to week and a half.

Okay. And then, as you guys were talking about 2008 guidance, it strikes me that you're talking about things in a little bit different way than you have in the past. Are you guys going to be providing guidance a little differently than you have previously? Because you're talking about CRM and neuro and therapy delivery and commercial. Are you still going to be willing to break down the components of CRM as you had in the past?

I think what we're going to do is now that we've brought some more product lines on, both commercially and medically -- and I'll reiterate that we continue to have an active interest in targeted investments and acquisitions in these segments. We're going to continue to be adding product lines in there, and for -- we are going to shift to report in our principal lines of business around CRM and neuro stimulation, what we're calling therapy delivery now, and also historically what we called commercial Power or under the commercial banner, which is somewhat broader than we have originally described in terms of electrochemical cells. It will include primary and rechargeable batteries and a lot broader range of end market applications. But that's how we're going to, as we move forward, provide color on the segments.

So you won't be disclosing pacer batteries, ICD batteries, capacitor sales, things like that?

That's correct.

And then, Tom, one thing you said earlier this year is you expected Greatbatch to be exiting 2007 at a 20% operating margin. You know, with these deals and the necessary investments required to build out RD&E of these deals, how far is that pushed back -- or pushed out into the future now that -- that 20%? Is it a year? Is it two years? Can you give us some sense there?

Clearly in the base business that we have, the consolidation initiatives will continue to pay following the shutdown of the Columbia plant and the final relocation down to the Greatbatch Mexico facility. But you're correct. With the acquisition of the product lines and the expense that we're taking on and also some strategic moves that we plan on implementing that we have not highlighted yet in the press releases that we've made. We will have to provide more of a walk from a go-forward standpoint. You're correct that our long-term goals have not changed. We'll be reiterating those. We want to grow revenue faster than the market. We are targeting 20% operating income and 15% ROIC. But there will be obviously a difference between the base business, profitability and the product line acquisitions that we bring on, and we're not prepared to provide that breakout yet, but we will provide it going forward, to give kind of the timing of how we see the strategy unfolding.

And then last question from me. As we think about next year, because there's so many moving parts, and I do appreciate the top-line thoughts; but, you know, if you were thinking about '08 from an operating margin perspective, you know, if we were thinking about something in the mid teens is that in the ballpark of what you guys are thinking about, or something below that?

Yeah. It's probably, you know, premature to comment. I felt comfortable enough providing, as we did last year, some general top-line view. You know, we're still in the process of -- you know, we have not closed these transactions yet. We still have work to be done, and we're in the end of year process from the base business. So, it won't be until really the beginning of the year when we'll comment on earnings guidance for 2008 and give more color to that, but we understand with all the moving parts that there's a desire to have that information. But we're not ready for it yet.

Okay. Thanks, guys.

And your next question comes from the line of Alex Arrow with Lazard Capital Markets.

Thank you. On the Columbia plant closure, do you have any more visibility on the exact date that you're shut the doors there? The first quarter '08, I think, is the last thing you said?

Yes. I think, on previous calls, I've said that one of the challenges of shutting down the plants 100% is that with regards to customers, we have to make sure each customer product is transferred completely, and what results is that Columbia really is already partially shut down. So rather than a drop -- you know, stop date, it tends to be phased out over time, and the majority -- the vast majority of manufacturing has already been moved to Greatbatch Mexico. But there's, what I would call, a few product lines that are straggling in the time line that do extend into the first quarter of 2008.

And it's really solely governed by when our customers can gain their regulatory approvals for us to stop manufacturing in Columbia. And right now where we stand is we see three products that have moved into that window, really kind of -- the last few weeks of the year, first few weeks of next year, have largely -- it depends on the regulatory review windows for the actual -- and the testing results that are reviewed for us to actually, so to speak, turn the lights off. So, we're optimistic for early in the first quarter, but we'll support our customers until all the risks have been retired and they're fully satisfied with their approvals to do the shutdown.

Okay. So, for our purposes for modeling the benefits for the operating margin, should -- are -- we -- have already begun to see some of that in your third quarter or is that really starting now in the fourth quarter with the partial shutdown benefiting now, or the --

It's probably safe to see that you've seen an effective, about half of the benefit that we've described back when we started the projects and the remainder of the benefit is still yet to come.

And so half of the benefit already was in play during this third quarter you just announced?

That's right, Alex. We think about it's about half or similar to what we mentioned last quarter. You know, that's our expectations for '07 and in '08 we would hopefully -- once we exit the building in the first quarter, we would achieve the balance of the benefit.

And then the final or maybe the crowning piece of your plant changing program over the last two years, I think, is what you're doing with the electro chem division in mid '08, can you give us the same kind of guidance on that that you just did on this Columbia plant, and what are you doing with that facility? And also now that you've got Intelesensors and anyone else that's adding to the ECP, what effect does that have on that plant?

The facility we're building in a suburb of Boston, in [Ranum] is in process. We actually have already broken ground and are putting in the foundation and really the footers for the building . And that has gone very well. The team has done a magnificent job getting that project started, and the weather has cooperated. So, we're ahead of schedule. Our plan is to have the [Ranum] facility up and operational, this time next year or slightly earlier. Some of it's weather-dependent. But we will continue to run the Canton, Massachusetts, facility, our current facility, until the [Ranum] facility is up and operational. At that time, we'll move whatever final pieces of equipment are required to the new facility and we will exit and sell the existing Canton facility and then not operate in that building any

Okay. So, the real benefit to operating margins from that happens the day you close the Canton facility, which then sounds like it won't be until early '09 if you've got some overlap there as you typically do.

That is correct. And the other half of your question, Alex, that related to the acquisitions, you know, your first priority is to see the closure of the acquisition that we still have on the commercial side pending, which is EAC, which we would plan sometime by the end of the month, and in the process of doing that, they have operations in Teterborough, New Jersey, as well as in China. We will have the ability for us to drive more volume in those facilities. Right now with Canton, we tend to be fairly constrained, and it's a challenge obviously until we get into the new facility to be able to take advantage of opportunities in the market to sell, and with the addition of EAC and rechargeable battery technology and the design work that they do, it opens up a new market opportunity for us to press volume through those facilities and capitalize on a very large market opportunity in commercial power.

So, we're excited about the opportunity to work with the EAC management team and, although Intelesensing is a smaller company, we're equally excited with the Intelesensing team to get into the wireless sensing area and to grow a product line that's really at the beginning of a very large opportunity, and it brings us closer to the end customers in the marketplace to offer not only the batteries, but also a device that's used in the market.

If we're modeling about the same benefit to operating margins from closing Canton as we are from closing Columbia is that about right, or is it more or less?

I would say it's a bit more fair to say, we've been calling out the onetime expenses with regards to the move so that there's visibility on what that cost is, but largely there's not a cost savings for the move to the new facility in Commercial Power. It's more a capacity expansion to allow us to grow the business, which obviously in turn, we hope, drives the operating income from the top line rather from a cost-savings standpoint. There is automation and productivity efforts going on in the plant, which we also think will benefit. But they weren't the primary move for the new facility.

But they will result in lower cost of goods sold, wouldn't they, if you're automating, and --

It will drive the ability for us to enhance profits and drive volume as well; you're correct.

It's more -- this is Tom, Alex. It's more of a longer run play, though. Clearly when we move certain operations to Tijuana, there was, you know, a labor arbitrage that we benefited from immediately that was the primary driver of the cost savings. You know, in Canton, it's really going to be getting the volume to fully utilize the automation into that facility. We basically were constrained in our old facility on how much we could actually -- capacity we could actually get through the facility.

Okay. Thanks. That's helpful. And if I could ask another question. Your Quan acquisition, you said 50% of it is in neuro [stim]. Can you comment on your ability to get the neuro [stim] battery business that Saint Jude has and if you've already, either gotten that or can you comment on if you're going to?

Let me clarify. 50% of Quan's Emertech's revenues are in vascular. The other 50% are in CRM and neuro stimulation combined. In terms of, you know, obviously specific customers, you know, we won't comment on. But in general, we have rechargeable battery programs that we've been highly successful in in the medical power business with neuro stimulation customers. Quan Emertech will only enhance our ability to provide those products to customers in that market segment, and EAC's acquisition brings us a rechargeable battery product for both external medical as well as the other commercial power market.

So, the two acquisitions have done a nice job of enhancing our position in those markets, and certainly by having Quan Emertech's expertise in neuro stimulation, it is a nice leverage point for continued success in the rechargeable battery side of the equation for our medical power segment, which we've done a very nice job on in the last year and a half of winning some key accounts, even though they'll go nameless at this point.

At this point? You mean you'll name them at some point?

Highly unlikely, unless as you know there's a requirement that we would have to issue a disclosure for a major contract. But as a matter of course, we're going to maintain our confidentiality with current customers, as that has been of primary importance with every single one of our customers, and I expect that to continue into the future as well.

Okay. All right. Thank Thank you.

And your next question comes from the line of Jason mills with Canaccord Adams.

Hi, guys -- excuse me, hi guys, good morning.

Good morning, Jason.

Good morning.

I just wanted to ask a few questions stemming off of some of Bob's questions. Most of the acquisitions you have announced this year, you've talked about at least lately, the acquisitions being earnings-neutral in 2007 and 2008. So, a couple questions. First, on the top line, could you break it down a little bit more -- in more detail for us and help us understand what your organic number, organic growth rate would be or organic guidance would be excluding all the acquisitions, maybe including impacts if you want? Because I think most of us have that assimilated into our model. And the second question would be, per Bob's question about going to 20% operating margins. At least in my model, I didn't have you doing that at least until 2009 and 2010. So, I don't have you getting to that level, but we do have you sort of in the upper teens in 2008, and given that you've talked about these acquisitions being earnings-neutral, could you comment perhaps as to sort of a range of operating margins we could expect just on the base business assuming again that what you said is true about the acquisitions being earnings-neutral in 2008?

Sure. Jason, if you look in the presentation, on page 11, that's about the extent of the information on outlook that we feel comfortable providing at this point. You know, CRM and neuro stimulation are effectively the base business that we've been in for implantable medical components for some time, and we're calling that outlook for sales next year around 5%. Therapy delivery is effectively the end path in the Quan Emertech combination. We provided kind of the 12% plus target from an initial standpoint of how we're looking at 2008. Commercial, which is the base commercial business, plus the two acquisitions, we highlighted on the call here, Intelesensing, which is the small sub-$1 million revenue company that we announced a week or so ago. And then EAC, which we said in the press release is kind of $20 to $23 million in size. We're guiding that that segment is going to be about 7%.

We're just not really in a position with the moving parts here at this stage and bringing on these product lines to provide a detailed guidance for 2008. We're going to wait until the first quarter conference call to do that. And we'll give a little bit more color and visibility to our walk to operating income strategically and then also where we'll be from a profitability standpoint as we bake in, what largely you described correctly as, you know, a breakeven deals on these from an economic standpoint going forward. But clearly the combination of all these deals is going to provide us some opportunities for continued expansion in the revenues, potentially some opportunities for consolidation, although that's not the primary purpose. But it will also allow us to cross-leverage between the businesses more effectively. We, at this point, aren't going to describe what those are, but we will provide more color for them starting at the beginning of the year and will also provide really a formal guidance for 2008 as we normally would in the first -- in that end of year conference call we do in the February time frame.

Yeah. I can certainly appreciate you guys have (inaudible) and as Bob mentioned, you know, they've come together and you mentioned coincidentally, here in a short period of time. So, I can appreciate it. I certainly don't have the experience personally of assimilating acquisitions, let alone this many at one time, and I'm sure you can appreciate at the same time, that, you know, your equity is being valued on 2008 numbers, and we as analysts have to come up with some sort of a rational view into 2008, and most of us have that for 2008, sort of before the (inaudible) acquisition pace started, maybe included Enpath, and you've given some good guidance following Enpath. So, I guess I'm pushing you a little bit Tom, in understanding the difficulty you have. I am hoping maybe you can appreciate where we are. And perhaps we could talk about it, sort of, all things being equal. In other words Tom mentioned the potential step-up in interest expense, and there's a lot of moving parts there which really are out of your control at this point. But sort of all things being equal, excluding that and perhaps assuming the earning neutrality of the other acquisitions, it looks like this is somewhere in the, let's call it 160 to to 175 range or operating margins in the 16% to 18% range, on what people are expecting per a revenue based, you know, sort of before these acquisitions? You know, I suppose you may want to defer again, but I just thought I'd give it another shot, because there is a need for us to give our clients some better viewpoint or better sort of rational thinking about 2008.

Sure. I think, when you look at the base business that we've had and have been providing guidance since the beginning of the year, our glide path, although it's slightly affect by the delay in the shutdown of Columbia, is largely on plan. We've done a nice job of moving and doing the revenue growth at the same time and producing results as predicted. When you look at the acquisitions that we've done, the five pieces that have been brought in thus far this year, we've driven, with those acquisitions, some incremental research development and engineering expense, because we want to capitalize on opportunities more aggressively, and we've also largely put those acquisitions into the company, grouped Enpath and Quan Emertech. Obviously Quan Emertech is not closed yet. So, that is still pending. And largely we have to put together that business unit, which is going to take some investment. We have to obviously have EAC and Intelesensing, dovetail into what our existing commercial power business. So, there's some incremental expense there, but not a great deal.

And what will result is after some of that investment, if there is going to be any major projects announced, we would certainly highlight those, but largely we would be importing those product lines and running them as is and trying to drive top-line growth. So beyond, you know, getting down into the deal synergies and initiatives, it's not having closed these deals yet. We're at a little bit of an awkward point at -- we have to move and get these closed, and it's premature to provide really anything below the revenue line in terms of color until we kind of get to the juncture in which we can have the closing dates pass, put our more detailed plans together with the existing management teams that come over and then provide, you know, inputs that are backed with strategy and plan between the two management teams and how to move forward. So, I understand the frustration and the challenging situation that you're in; but I think if you look at just the base business being on the path that we've been executing on, and these product lines that we very strategically targeted and put into the business, although we're driving a little bit of extra expense, we're not doing diluted deals in any of these. It won't be a drag on our earnings and will largely give you ballpark, the answer that you're looking for.

Okay. So, just sort of -- thank you for that. So, just sort of to tie all that together, we had a little bit of incremental expense here in the third quarter from the Enpath being fully integrated. Perhaps the operating margins this quarter are somewhat -- somewhat suppressed versus sort of normal levels from that, and we have the facility closure in the first quarter that should help. And then perhaps a bit of more organic growth, if you will, next year, than we saw this year. So, we should see sort of, net net-operating margins expand and you'll provide more clarity into what type of expansion we should see including all the acquisitions on the fourth quarter call? Is that a fair --

I think that's a very fair way to assess it. I think you're looking at it correctly. I think, you know, you're spot-on with the macro. The micro obviously is where we can have a lot of -- I can't have a lot of discussion.

Jason, one thing we can say, I think which people are underestimating to a certain extent maybe, the level of the RD&E expend. We've mentioned this a couple of times that we are increasing our RD&E expend. Clearly that was not fully -- we have not hired all the people we needed to hire in 2007 to make that come true. So that -- we expect the run rate for the RD&E expense to go up in the fourth quarter and after that.

That's helpful. By the same token, you also talked about bringing SG&A down. Is that also on track?

Yes.

Yes, that's correct.

Okay. Thanks, guys.

You're welcome.

And your next question comes from the line of Tim Nelson with Piper Jaffray.

Hi. Maybe you can elaborate a little bit. When you did the Enpath deal, you talked about a significant RD&E increase and marketing increase to leverage those opportunities. How does the Quan Emertech deal play into that? Were you considering the Quan Emertech deal when you talked about those increase expenses or is Quan Emertech on top of that?

Well, I think where we were with Quan Emertech in running the business, we never really, what I would say, plan or bank on a deal occurring. For us we've identified gaps in areas that we need capability, and we you look at ways to fill those gaps through investments acquisitions as well as internal innovation. In following the Enpath transaction, we have squarely looked at internally funding research and development to innovate and get the technologies that we need to be more competitive in the Enpath product lines, and that in turn obviously is what we're doing to win deals with customers and to drive revenues. The addition of Quan Emertech will help fill some of those gaps quicker, but also because of their technology base, opens us up to do more work for our current customers and Quan Emertech's customers faster. So, we still plan -- although the details have not been ironed out, we still plan to do research and development expansion at both Enpath and Quan Emertech to fuel that growth from the revenue side.

Obviously because of the nature of the projects requiring development, testing and regulatory approval, sometimes there can be a year to two-year separation from design or concept through revenue generation. But we think being aggressive on that side is the correct way to look at the market, and for us that leads with, you know, with innovative technologies that we can bring and cooperatively work with our customers for product development so that they can be successful and us at the same time. So, we see that with Enpath and Quan Emertech together -- working together to be able to leverage those opportunities more effectively and, you know, first and foremost we have to complete the Quan Emertech transaction, so that we can start to enjoy the benefits of what the combined opportunities are.

Okay, on Enpath itself, when will you be able to highlight some of the growth drivers there more fully, for instance, the arterial vascular access and some of the other projects? When are they going to be coming forward into the company?

As the various projects reach fruition. Clearly Enpath's very strong in the venous introducer market, and we have been fortunate enough to acquire Enpath, there is a very keen interest in the arterial vascular reducer market, and, you know, all segments for that. There's been a lot of great work that's been done by the Enpath teams to make progress from those markets, and although we have not highlighted any areas that we are prepared to talk about, from a strategic standpoint, that is an absolute central point of the Enpath strategy and now a central point of the therapy delivery business strategy, and that will plan prominently in terms of communications as we win those opportunities going forward and we highlight the growth opportunities.

So, I don't have an exact date that I would say that we're willing to, you know, commit to that we'd describe it, but definitely they're within the strategy we have been working the challenges, and are very confident in our ability to perform and gain entry into those markets, and that's some of what's driving some of the internal research and development spending is in order to more effectively go after that opportunity at Enpath.

And then a final question on the closing schedule with all these deals, do you think there will be charges out into Q1 '08 or do you think you'll be able to take care of them all in Q4?

We're looking at the valuations now. We think we'll get the lions share of them done in Q4, but obviously I doubt they'll be closed out by the end of the year. I think we'll still have, you know -- still have some true-ups into the first quarter.

Okay. Great, I'll get back in queue. Thanks.

And your next question is a follow-up from the line of Alex Arrow with Lazard Capital Markets.

Thanks. The accounting change that you described that could impact your guidance, you described it as cash settlement accounting. I didn't quite understand how how much of a magnitude that would make. I mean, if it's the difference between cash settlement and when you're booking revenue, do we simply take the amount of your receivables and estimate that that's going to be the magnitude of the change when we look at how that's actually going to play out?

No, I'm sorry, Alex. No, this relates to -- has nothing to do with revenue recognition. It is only interest expense related, and it is the interest expense -- and this has not been fully adopted yet. It's still out for comments from the FASB board. What we're doing is highlighting it. We have -- our convertible -- $198 million of our $250 million convertible notes, have this net cash settlement provisions, which make it more debt like than equity like. Those types of securities -- and they're referred to as Type C securities -- are being looked at by the FASB board to cause people to go rather than the 2.25% interest which we're currently paying on them, to consider what the market rate interest would be. So potentially, they could -- it basically makes no changes in cash flows, no changes in things, but potentially it could be -- it could potentially double the amount of interest expense on those particular items.

On the $198 million of principal --

On $198 million, correct. Like I said, this is all -- absolutely makes no difference in the cash flows, its a non-cash item, and really the true economics are unchanged, and this has not been adopted yet. So, its definitely going to be '08 before we see anything on this.

And you're saying the 2.25% assumed interest rate on that $198, could go up to perhaps double that, perhaps 4.5%?

Yes, potentially double that. It's 2.25% plus the discount, so it could potentially go to, you know, 6% to 8% potentially rather than the 3.5% we're currently experiencing.

Okay. All right. Thank you.

Once again it's a non-cash item.

Alright, so, the total magnitude then would only be about 3% on $200 million or about $6 million of impact?

Its potentially more. It's probably more, its dependent upon whether or not its -- the definition of how it gets calculated, I'm really hesitant to do it, it could be 3% to 5% more interest expense.

And this would effect every company that has --

Every company that's got these, it's all the same. There's hundreds of them out there.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Jeff Englander with Standard and Poor's.

Good morning. Just a quick question. Without talking about specific customers can you give any color on any fallout in the market in general from the Sprint recall?

I couldn't quite understand the question, Jeff. You're cutting in and out when you asked it.

Let me try again. Without talking about specific customers, can you give any color on any fallout in the market in general from the Sprint Fidelis recall?

I think I would say that obviously any news such as this provides an overall chilling effect to the macro market. Certainly from a standpoint of individual companies and individual product line, there can be some short-term shifting. We don't have the visibility really to the degree in terms of the individual product lines to highlight any changes, but just -- I would say just the macro effect is that any bad news tends to be a drag on our ability to get some lift from the market growth rate, and I think that's a trend that is kind of hit us into moving into 2007.

It's obviously been a drag all year with some of the recall news that's been out there before the year started and during the year, and largely what we're doing is a very strong job at maintaining linkage with our customer's production systems so that we're in tight coordination up or down to be as efficient as possible in working to support them with whatever happens. That's our job, and that's, you know, pretty much how we'll continue to grow the company despite the tough market news which we all feel.

Have you seen any increased pace or increased activity on a regulatory front in terms of activities in either tracking components or leads or, you know, product development all the way through? There's been some talk about, you know, additional regulatory measures to take earlier action on recalls of this kind?

I think it's safe to say that a lot of our product lines, we do not do regulatory filings on. We coordinate with our key customers to provide them information for them to do that. We do a very thorough job, and historically have done an extremely thorough job, at testing and providing information, very standardized and time-proven protocols, and with the acquisitions of Enpath in particular and also in BIOMEC, while we have new regulation to the company because those product lines are regulated, I say for us, that while we definitely are increasing our standards because of the nature of the work we are doing, we still have a very strong commitment to quality and reliability, and we do an extensive amount of testing.

It's been that, you know, I would say regulatory hurdles have been very large for us over the past two to three years, because with the number of facility moves that we've been doing, we've been keying those moves to final customer regulatory approvals. So, it does feel like we're subject to more regulation, but the plant moves are really driving that. I couldn't really comment to say that from our experience and our product lines, we see that that regulatory is being driven more, you know, harshly because of the market recalls, per se. I just don't have visibility to that. Ours are more move-related and the acquisitions of product lines we have historically not had.

Great. Thanks very much.

And your next question comes from the line of Tim Nelson with Piper Jaffray.

Yeah. Just as a follow-up to that question, relative to all the uncertainty in the CRM marketplace relative to market shares and whatnot, and your own reconfiguration of your manufacturing facilities, do you have the capacity to respond to short-term needs from any one customer that, you know, might have a quick increase in demand?

That's an excellent question and one of the principal reasons behind relocating our manufacturing facilities into higher capability facilities, is to get exactly at what you're talking about, Tim. We've spent a lot of time making sure we have the bandwidth, so to speak, to efficiently expand production based on what the customers' needs are, and have done a great job in all of our operations to use lean manufacturing technologies as well as Six Sigma quality systems to drive the same quality and reliability we've always had, but also with the responsiveness of lean manufacturing, and largely because of the success of the business units to do these moves, get into new facilities, we have already been able to leverage some nice Shor-term revenue opportunities that historically would have been a lot more challenging if -- maybe not possible at all. So -- and I think that's a central point of having the consolidation done, is we can enjoy those now going forward.

Great. That's all I had.

Thank you, Tim.

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.

Great. Thank you. Again I'd like to remind everyone that both the audio portion of this call and the slide visuals will be archived on our Web site at Greatbatch.com for 90 days. As always I'm here to help, so I appreciate the phone calls and the help with the clarity of these acquisitions. Thanks, everyone.

Thank you.

And thank you for your participation. That does conclude today's conference.