Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Greatbatch, Inc. (NYSE:GB)

Q4 2007 Earnings Call

February 25, 2008 5:00 pm ET

Executives

Tony Borowicz – Treasurer & Director, Investor Relations

Thomas J. Hook - President, Chief Executive Officer & Director

Thomas J. Mazza - Chief Financial Officer & Senior Vice President

Analysts

Keau T. Nakae – Cowan & Stewart

Jason Mills – Canaccord Adams

Bob Hopkins – Lehman Brothers

Stan Mann – Mann Investments

Dan Piper – Magnatar

Operator

The fourth quarter Greatbatch Incorporated 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 10K. The statements are based upon Greatbatch Incorporated’s current expectations and actual results could differ materially from those stated or implied. The company assumes no obligation to update forward-looking information included in this conference call to reflect change, assumptions, the occurrence of unanticipated events or changes in the future operating results, financial conditions or prospects.

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

Tony Borowicz

Welcome everybody to the fourth quarter and year end Greatbatch earnings conference call. On the call today are Thomas J. Hook, President and Chief Executive Officer and Thomas J. Mazza, Senior Vice President and Chief Financial Officer.

In terms of today’s agenda Tom Hook will start by reviewing the 2007 strategic imperatives. Next he will provide an overview of the two orthopedic acquisitions that were recently completed. Tom will then conclude his remarks by providing summary comments on our outlook for 2008. Next Tom Mazza will review our Q4 results and provide commentary on our 2008 guidance. As we’ve done in the past we are including slide visuals that will go along with this presentation which you can access on our website. Let me now turn the call over to Tom Hook.

Thomas J. Hook

Over the past year we have focused our efforts on creating a platform that will support our growth initiatives. Our vision is to be the leader in the comprehensive design and manufacture of custom product technologies for the implantable medical and commercial markets. As a result of these efforts we are now positioned to expand our business through organic growth, innovation and strategic acquisitions that further our technology and competitive positions in the marketplace.

2008 was an extraordinary year in many respects and difficult in others. Before Tom Mazza reviews our financial results, I will take a few minutes to review the six corporate wide strategic imperatives by which we measure our progress.

The first imperative we define as protecting the core business. Looking back at 2007 we achieved organic sales growth of 8% and adjusted net income growth of 17% which represents solid performance given the underlying cardiac rhythm management in commercial markets. Our second imperative is to obtain critical mass. Over the past 10 months we have successfully completed seven acquisitions. These transactions have transformed us from a one market, three customer medical components company to one that has more diverse customer base with expanded markets and product offerings. In addition to our cardiac rhythm management in commercial businesses we have added critical mass in both orthopedics and vascular markets. Additionally we have enhanced our commercial business by adding rechargeable battery and wireless sensing capabilities. For 2008 we anticipate having revenues of approximately $490 to $530 million with a target market mix of approximately 50% for cardiac rhythm management, 23% for orthopedic, 10% for vascular neuron-modulation and 14% for commercial.

Our third imperative is to improve operating profitability. As noted in the tables we distributed with our press release adjusted operating income grew by approximately 11% on a year-over-year basis. We believe that this represents solid performance given the soft cardiac rhythm management and commercial markets and also our high level of mergers and acquisitions activity. In addition our results were impacted by the delay in the closure of our Columbia facility due to customer qualification issues. We now expect this facility will close mid-2008. I would like to add that we are not satisfied with our operating profitability. We plan to focus our 2008 initiatives in this area to drive improvements.

Our fourth imperative is to fill technology gaps. During 2007 we made significant progress under this imperative. Through the acquisition of BIOMEC we obtained design and engineering capabilities for medical devices. This will enable us to provide design and component integration capabilities for early stage and established customers. Through the acquisition of IntelliSensing we obtained wireless sensing capabilities that will allow us to cross sell to our commercial customers and particularly our customers in the oil and gas industry. The EAC acquisition added rechargeable battery capability and entered us into the external medical market. Through the acquisitions of BIOMEC, Quan Emertec, Precimed and Enpath we have greatly expanded our clinical relationships as well as our regulatory capabilities.

Our fifth imperative is to invest in customers. Over the past two years we have acquired several minority ownership positions in development state companies including [Inter-Pulse], [Enelec] and Chambers Medical. We will continue to pursue these types of investments where we can provide them with enabling technology as well as design and manufacturing capabilities. During 2007 you will also note that we signed two long term agreements with our major cardiac rhythm management customers.

Our sixth imperative is to enhance associate performance. As a result of our acquisitions and internal development initiatives we have a team that is ready for the next phase. During 2007 we have been able to place internally approximately 50% of our open professional positions including several key plan operational roles as well as functional positions in finance and human resources.

In summary we have been successful in our plan to expand beyond the cardiac rhythm management market. We expect our concentration in our top three customers to decline from 67% to 50% in 2008. However these major customers continue to be our primary focus and we have established potential cross selling opportunities with them in the four markets we serve.

I would now like to spend a few minutes highlighting the two orthopedic acquisitions that we completed in January and February of this year. The acquisitions of Precimed in the DePuy's Chaumont, France manufacturing facility support our strategic vision of being a key global supplier to the medical device industry. Precimed has broad production capabilities, technology and relationships with orthopedic OEMs. The Precimed transaction serves as our entrée into the attractive orthopedic market segment. This market is a $20+ billion device industry growing at approximately 10% annually with the outsourcing market expected to grow even faster. This transaction provides us with significant market, geographic and customer diversification. The Chaumont, France transaction includes a four year supply agreement with the DePuy, a Johnson & Johnson company which enhances our strategic relationship with one of the largest orthopedic companies in the world. This transaction further extends our offerings to a full range of orthopedic implants notably for the hip and shoulder markets. The Chaumont facility has approximately 200 highly skilled employees with large scale manufacturing expertise.

The Precimed business model is very similar to that of Greatbatch. The strategy is to integrate closer to the customer with broad product offerings of proprietary specialty components. Precimed product offerings include a full complement of instruments, tools, implants and delivery systems which encompass over 90 patents. With the completion of these two transactions we anticipate that the orthopedic market will represent approximately 23% of our total revenue base. We intend to further strengthen the Precimed business by applying our lean manufacturing expertise across all of their manufacturing operations.

As we look forward to 2008 we see a strong focus on integration and creating operational efficiency. Although we anticipate the pace of acquisitions to slow drastically in 2008 there may be targeted opportunities. We will look at these to fill specific technology or product offering gaps. Our plan is to drive operating performance and our operating margin to lean manufacturing initiatives, leveraging top line growth and product offerings that are based on our technologies currently under development. As previously indicated we will also finish our current relocation projects including the Columbia manufacturing facility, our corporate headquarters and our commercial facility. We will maintain the same six strategic imperatives in 2008 and add a serious focus on integration and lean activities. I consider the impact of our growth has had on our customers to be a major accomplishment. With new vertical markets and expanded product offerings in CRM and commercial we’re able to acquire new customers as well as to offer current customers a more in depth product portfolio.

Our acquisitions have brought many new faces to Greatbatch over the past year and have helped to reposition the responsibilities of many long standing associates. Our organization restructuring has led to the creation of a strong management team, one that will be responsible for leading Greatbatch 2008 and beyond. With a platform focused on integration our business leaders will not only work to strengthen their businesses but together work to improve the overall strength of Greatbatch. Tom Mazza, Tim McEvoy and Barb Davis will lead finance, legal and human resources respectively and act as the driving force in the integration process. Susan Campbell will lead our global manufacturing and supply chain organization. Mauricio Arellano will steer the cardiac rhythm management and neuro-modulation business and Sue Bratton will continue her leadership of the commercial business.

Through the acquisition of Quan-Emertec I am pleased to announce that Rich Farrell and John Farrell have joined our executive leadership team. Rich will head our business development group with a major focus on driving growth. John will lead the therapy delivery business which includes the Quan-Emertec and Enpath organization. Also new to our team from the Precimed transaction are Patrick Berdoz who will lead the orthopedics business and John Ayliffe who will in addition to Patrick run the orthopedics business and concentrate on coordinating our European business development. This new expanded executive leadership team is experienced and highly motivated to drive the Greatbatch business going forward.

I’ll now turn the call over to Tom Mazza to review our financials.

Thomas J. Mazza

Good afternoon. For the fourth quarter we reported sales of $84.4 million an increase of 30% over the fourth quarter of 2006. For the full year sales were $319 million an increase of 18% over last year. The fourth quarter and full year results include a $15 million and $26 million respectively in sales attributable to the acquisitions completed in 2007. Adjusting for the impact of the 2007 acquisitions sales increased by 10% for the quarter and 8% for the year. Gross profit increased 19% to $26.6 million, however our gross margin decreased b7 4% to 31.5%. This decrease is primarily attributable due to the inclusion of the new acquisitions which included increased amortization of intangible assets and the purchase accounting inventory step up write offs in the period.

Turning to G&A expense costs increased by $2 million due to the additional amortization expense primarily customer relationships, noncompete agreement and increased personnel from the acquired companies. On a percentage of sales basis SG&A expense declined approximately 2%. RD&E expenses of $8.1 million although up from last year due to the inclusion of the acquired companies as a percentage of sales were consistent with last year’s percentage. This spending is in line with our continued commitment to invest in technology. Earnings per share for the quarter on a GAAP basis were $0.12 per share diluted, on an adjusted basis EPS was $0.21 per share.

Let me now turn to a discussion to the 2008 financial guidance. We expect sales to be in a range of $490 to $530 million. This is based on pro forma growth rates of 5% in the combined CRM, neuro-modulation business, 7% in our commercial business and 10 to 12% in the orthopedic and therapy delivery businesses. US GAAP EPS will be given later in the year after we have completed the purchase accounting valuations of the orthopedic companies we acquired in January and February. Our guidance for adjusted operating income is that it will be in the range of 11 to 13% of sales and that our adjusted EBITDA guidance will be in the range of 21% to 23% of sales. We estimate that interest expense will be approximately $15 million and that capital expenditures will be $50 to $55 million.

Based on the above information we estimate our EPS guidance to be between $1.20 and $1.50 per share.

Let me now turn the call back over to the moderator to take Q&A.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Keau T. Nakae with Cowan and Stewart. Please proceed with your question.

Keau T. Nakae - Cowan and Stewart

Tom, on the revenue guidance it’s a little lower than what you had previously given a couple of months ago. Can you talk about where those declines are coming from?

Thomas J. Hook

It’s really just due to the timing of when we closed the acquisitions in the orthopedic side. We initially had kind of given a preliminary indication in November that was predicated on us getting all the acquisitions closed before the end of 2007. With the Precimed and the DePuy deals not closing until early 08 we made a small adjustment there. So bullish and confident on the business growth.

Keau T. Nakae - Cowan and Stewart

In terms of the combined aggregate acquisitions, what are you looking at in terms of additional amortization expense? Can you give us a little more color there?

Thomas J. Hook

I’ll let Tom Mazza break out the deals that we have but two of the deals, the orthopedics deals, specifically on Precimed and DePuy we have not finished the acquisition accounting with theirs so it’s just the five deals of seven that we have finished.

Thomas J. Mazza

Keau, in estimate it’s approximately about, purchase accounting amortization, is probably about $7.5 million in total that we’ll be adding to the analysis. That is including the two new ones but really those are really rough estimates at this point in time.

Keau T. Nakae - Cowan and Stewart

And thus far you haven’t talked a lot about future costs, savings, consolidation efforts, things of that nature. Without giving a lot of specifics directionally is there anything there?

Thomas J. Hook

It’s a great question. We have aggressively since putting the new executive leadership team together outlined a series of plans and initiatives that next wee we’re going to be reviewing with our Board of Directors who have been highly supportive of these initiatives in the past. We look forward to finalizing those plans and gaining approval for them to implement starting in 2008 and providing more color as to the individual plans and the individual initiatives and over the course of the second quarter we’ll be providing more color on those outside the company. But there’s a lot of work to be done internally to get those plans finalized and communicated to the various businesses within Greatbatch, so it’ll be a couple more months before we actually give a lot of color on those. But it’s a long list and we’re quite optimistic for the impact on the company.

Keau T. Nakae - Cowan and Stewart

One final question if I may, given the look that you’ve had now at the acquisitions compared to what was more cursory before, have you found anything positive or negative that was unexpected?

Thomas J. Hook

Positive wise, a lot of opportunities to cross sell between our major customers. We picked up a lot of smart people in the deals and they have been able to make improvements in our base business and also we found areas where Greatbatch can make improvements in their businesses, so we’re leveraging the skills across the company. It was one of the pieces that led to the reorganization to align manufacturing globally which will give us a lot of nice opportunities. The other thing is that we have a lot to learn in each of the product technology areas in terms of investment priorities so it’s going to be a full year of doing assessments on technologies, where to make investments. So I see a lot of positive coming out of it but a long action item list for the leadership team. A challenging but it will be a rewarding year.

Operator

Your next question comes from the line of Jason Mills with Canaccord Adams. Please proceed with your question.

Jason Mills – Canaccord Adams

Tom, with respect to operating margins, you held your guidance for 2008 it looks like, but missing from the press release was the assertion you made back in, I believe, November at an Investor Conference with respect to your goals and plans for expanding margins as we move forward. Could you address that issue briefly? Is that an omission that means that you’re backing off from expecting a couple hundred basis points or maybe I’ll just stop there and let you answer.

Thomas J. Hook

No, we’re still aggressive in being able to improve our operating margin performance, so not going to back off on being able to drive improvements of a couple hundred basis points for the year. I want to be able to – that was a very general kind of indication in the early winter timeframe – we want to get to the second quarter and give more granularity as to where we’re going to get those improvements, communicate what we’re doing over the 08 and 09 time period by project and by initiative to give you a little bit more granularity and I think that way rather than it being just a kind of general, undesignated initiative while we’re still comfortable in saying it, we want to just back it up with more specifics so that each of you can track each initiative on a quarterly basis and we’ll report its progress both in spend as well as in savings impact and that’ll give more of a tangible nature to that couple hundred basis points improvement each year and then you’ll be able to give us a scorecard where we stand up against it. We just want to get our plans flushed out and approved before we go out and kind of give that walk so to speak sort of in the second quarter timeframe.

Jason Mills – Canaccord Adams

And to Keau’s question with respect to potential cost synergies, just a follow up on that, Tom. You had a lot of success over the last three or four years since you came on board as Chief Operating Officer with the strategy of consolidating plants and increasing automation, was the same game plan a fly to sort of the next three years as you try to drive cost synergies and integrate these seven acquisitions?

Thomas J. Hook

It’s an excellent question. We have 19 facilities now within Greatbatch and we have real subject matter expertise in Sue Campbell’s team and doing lean manufacturing operator process control, plant floor initiatives, consolidations, etcetera and I take the team’s accomplishments at Greatbatch over the past three years s proof that we can do this again. We have a lot to learn in the new businesses and the new operating leaders that have come to the company in orthopedics and therapy delivery are going to help us be successful. We’re going to work with them to do these initiatives and I feel that the same skills and abilities that have allowed us to be successful in the CRM as well as commercial businesses to this point will also allow us to be successful in the same fashion going forward but we’re going to do that working as a team with the new business leaders just like we have in the core business. So quite confident there.

Jason Mills – Canaccord Adams

One quick final question and I’ll get back in queue, with respect to the intangibles amortization, Tom, you mentioned an additional $7 to $7.5 million, correct me if I’m wrong, but I’m estimating that that is in addition to around that much that exists currently on your P&L. So does that imply somewhere in the range of $14 to $15 in total intangibles amortization that they’ll tend to your operating margin guidance at this point?

Thomas J. Mazza

That’s a little high what we kept currently because some of that is interest expense, but yeah that’s close.

Jason Mills – Canaccord Adams

But the $14 million is maybe a little high but close?

Thomas J. Mazza

Correct.

Operator

Your next question comes from Bob Hopkins with Lehman Brothers. Please proceed with your question.

Bob Hopkins – Lehman Brothers

The EPS guidance range that you gave of $1.20 to $1.50, it is I assume obviously that the amortization of around $14 million applies to both the high and the low end of the range or is there any variability in the amortizations calculation as you go forward and get a better sense for GAAP numbers?

Thomas J. Hook

Bob, yes very much so on the two acquisitions we just completed. We have preliminary evaluations on the three that we finished in December and we’re in the process of getting evaluations, the purchase accounting allocations done for the two new ones. We’ll not have a better handle on that for probably about a month or so. So it is a guess on those two so it is subject to change on those. I think everybody understands that with all the accounting literature there is pressure to put more into amortizing intangible as opposed to leaving it in goodwill, so there is pressure to increase those numbers to a certain point.

Bob Hopkins – Lehman Brothers

So your guidance, is there a different amortization assumption in $1.20 versus $1.50 or are there just other –

Thomas J. Mazza

No, no, no. It’s the same.

Thomas J. Hook

It’s the same, Bob. We have one assumption in there and it’s held constant.

Thomas J. Mazza

It’s held constant.

Bob Hopkins – Lehman Brothers

When did you say you’ll have a better handle on all the calculations, in another couple months?

Thomas J. Mazza

Exactly. A couple months. The last one was just closed in the middle of February so by the time we got our outside experts to go through it, it will take at least a month or two.

Thomas J. Hook

Mentioned in kind of the first quarter conference call in the late early April or early May timeframe is when we’ll provide the color on that, Bob.

Bob Hopkins – Lehman Brothers

And then again on that range of $1.20 to $1.50, I assume the bottom end is your $490 and the high end is your $530 on the revenue side, but could you just talk a little bit about it from the other variables that would drive you to the high end versus the low end there?

Thomas J. Hook

The revenue is the primary one and it’s on how fast we can get the cost initiatives to start going through to get to the upper end of the $13.

Bob Hopkins – Lehman Brothers

And then, Tom, what was the reason for the delayed close on the – you were saying now more like mid-year? I’m sorry, your plant closure?

Thomas J. Hook

It really is each – as we’ve said before in each of these plants – is each individual product line has to receive a separate customer approval, FDA approval and just one product line can prevent it from going down. We’ve been proportionalizing the Columbia operations in terms of their scope but there’s still product lines there that customers have made the FDA filings but the FDA has not finalized their approval and for risk mitigation purposes we continue to manufacture there but just those product lines that we’re waiting for those approvals on. In that we’ve both made feature than coded electrodes and there has obviously been some issues in the market with regards to the electrodes pieces, really leads. It doesn’t have anything to do with us, it’s made some of the approval timelines longer.

Bob Hopkins – Lehman Brothers

And then the difference between the bottom end of your revenue guidance for 08 being $490 versus $500 is entirely the orthopedic acquisitions and the timing of the close there?

Thomas J. Hook

It’s just really the timing of the close being mid-January for Precimed, mid-February for the DePuy piece. We just adjusted it. Instead of saying pro forma $500 we thought it would be better to call out the actual revenue which would be $490.

Operator

Your next question comes from the line of Stan Mann with Mann Investments. Please proceed with your question.

Stan Mann – Mann Investments

I have question, I’m trying to compare your guidance for 2008 with your Table C EPS of $146. Can you give a little detail on whether they’re fully comparable, the $1.20 to $1.50? Is it on the same basis as the $1.46 or do we need to make some adjustments?

Thomas J. Hook

There are some adjustments that need to be made. There was about $0.11 investment gain originally included that we spoke about a while ago in there. So the $1.46 that is definitely a differential and there was –

Stan Mann – Mann Investments

Wait a minute. Do you mean the extinguishment of debt? I’m getting –

Thomas J. Hook

No, no. Let’s start over again. The extinguishment of debt is out of the –

Stan Mann – Mann Investments

Right, it’s $1.46.

Thomas J. Hook

Correct.

Stan Mann – Mann Investments

So how do we compare the $1.56 to the $1.20 to $1.50, please?

Thomas J. Hook

The $1.46 has a one time gain of approximately $0.11 due to a one time gain of a sale of investment that was in the second quarter I believe.

Stan Mann – Mann Investments

Second question. The second question on the same basis, the 2008 guidance from your just recent discussion does not have any of the cost saving programs in there? These new programs that you’ll identify for us in Quarter 2?

Thomas J. Hook

That’s correct. We’ll provide some – we have some initiatives – obviously every year we have some initiatives in our base plan, but the initiatives tend to be the ones that are ongoing that we’re already provided information on before. New initiatives that we’re implementing around what basically is a re-scoping of our strategic initiatives based on having the seven acquisitions closing, those new sets of initiatives are the ones that we have not talked to yet.

Stan Mann – Mann Investments

So that would be up in 2008 and of course you haven’t done 2009, but there would be some upside on savings in the 120s to 150.

Thomas J. Hook

I think it’s fair to say that consistent with other consolidation initiatives we’ve had before there is definitely some investments that would be required on these programs but yes, the investments tend to be one time, the savings tend to be re-occurring on an annual basis and as always we would break not only any of the investments we would make out, we would also break out the annualized cost savings and the time that we expect those cost savings to kick in. And we provided a lot of clarity on that historically and we will continue to do that –

Male Analyst

And you’ll do that when you get your programs detail?

Thomas J. Hook

That’s fair –

Male Analyst

But it is upside? Next, what about your operating margin? Does it have a 123R in there?

Thomas J. Hook

Yes

Male Analyst

The 120 to 150 is with or without the 123 option expense?

Thomas J. Hook

All the option expense is in there.

Male Analyst

It is in. So we can add it back if we wanted and that’s approximately –

Thomas J. Hook

We’re estimating the share base cost to be approximately $11 million per annum.

Male Analyst

$11 million divided by 24. Okay. Next question on D&A for 2008 what should we use?

Thomas J. Hook

I’m not willing to give that number because we haven’t done the final valuation, Stan. But we’ll give it out in the first quarter conference call when we’re finishing the valuations on each of the orthopedic seals and then we’ll issue the combined number.

Male Analyst

Can you give us a kind of a hint on the balance sheet as it stands now as far as the debt and the cash? What the balance sheet currently looks like for our modeling.

Thomas J. Mazza

The balance sheet is – I think from our press releases you can determine that we borrowed about $120 million in order to do the transactions, that’s the only really –

Male Analyst

Of convertible?

Thomas J. Mazza

No, not convertible. Off the credit line.

Male Analyst

Straight debt?

Thomas J. Mazza

Correct, straight debt.

Operator

(Operator Instructions) Your next question is a follow up question from the line of Jason Mills with Canaccord Adams. Please proceed with your question.

Jason Mills – Canaccord Adams

Tom, as on the gross margin you mentioned some of the offsets in the quarter versus last year. As you look into 2008 what would you expect the product gross margin run rate to be and gating throughout the year as well as I would assume some of the intangible amortization is baked into the gross profit expectation for the company as well. What should we use for overall gross margin expectations as we build down to that 11 to 13% op margin expectation?

Thomas J. Hook

I really have a difficult time giving you that, Jason, especially because of the valuations not being done. But yes, you’re correct. A large part of the amortization goes into the cost of goods sold as well as into the selling and general administrative expense. So a breakout of that could really do some fairly large swings. So we’re comfortable with the operating margin but unwilling to give the gross margin at the current point in time. I will be less in this year. Obviously the mix of companies is different but that’s as far as we can go at this point in time.

Jason Mills – Canaccord Adams

On the revenue model you gave good detail with respect to the mix in your business, Tom. The component sort of I guess organic Greatbatch if you will on the medical component side sort of implies $250 to $260 million range. If we can delve into that a little further, I know you probably don’t want to too much but specifically on [ICD] front or the management front, the past years met our expectations for the back half of the year but obviously that part of the business declined as 2007 went on. On the flip side ICD batteries were looking for deterioration here in the fourth quarter that didn’t happen. So perhaps you could talk about the dynamics in play as we move into 2008 with respect to sort of a 20,000 foot view, i.e., the market and where sort of you’re modeling your business to come in and sort of with respect to your individual customers why you won’t talk about them, it feels like most of us are expecting one of your customers to go a different direction with one of their products. So is that built into your expectations or how should we think about I guess cardiac rhythm management in your model based on your guidance?

Thomas J. Hook

Certainly. Where I’m thinking of cardiac rhythm management is is that our objective is to grow faster than the market and certainly we’re acutely aware of the challenges of the second industry over the last several years and we’ve been focusing on doing very good work for our customers and winning opportunities. We will not win 100% of the time. We haven’t won 100% of the time historically but despite having some losses, we’ve had a lot of wins and those are wins because we really focused on doing a good job for customers across the board by their product line by component and by technology. We’ve had some nice opportunities to pick up one time gains like we highlighted in the capacitor, the high energy capacitors last year and in general we always have to be cognizant of that the business tends to be a little lumpy quarter-to-quarter as everybody makes inventory adjustments and they really continue even over the year end points as well. They tend to be up and down. So in general from a 20,000 foot level my expectations are we’ll grow faster than the cardiac rhythm management marketplace and we’ll do that by serving our customers well and if there is an area where we’re going to see pressure from a particular customer on a particular component then we’re going to redouble our efforts to show them more value and more technology at a more cost competitive rate and we’re going to use our prowess in the technology areas of perfecting our intellectual property to provide the market with differentiable alternatives. We think the technologies we have are tough to beat and we can work very hard to be the benchmark and the gold standard for a lot of these areas. But obviously we will not win 100% of the time. We’ve had losses over the past couple of years. I expect that we’ll have some losses going forward but I’m also confident that we can cover those in other areas of growth and that’s why from a guidance perspective we’ve indicated that we can take cardiac rhythm management and neuro and grow it a little bit faster than what we think the market is.

Jason Mills – Canaccord Adams

That’s very helpful and clearly your results have proven out and you’ve really executed in line with those comments you made just made. However obviously we know the market, at least the market that I’m talking about, the stock market, investors tend to be a little sticky when it comes to quarter-to-quarter. So I’m really trying to get a sense for or within the [inaudible] medical components business you do have lumpiness and I see capacitors you actually had a really good year 07 over 06 and certainly we wouldn’t expect the $10 million delta probably 08 over 07 unless you’re expecting the ICD market to explode which I don’t think anyone is. So what I’m trying to get a sense for if we just apply year-over-year growth rates in line with kind of what we’re expecting the ICD market to grow then once again in 08 the first half of the year would be heavily weighted versus the back half of the year and that probably isn’t the way it’s going to go. So perhaps you could help us with sort of gating our expectations for the parts of your business that are exposed to CRM so that we have a better sense for and probably better of the business so that we’re not completely exposing ourselves to a quarter that could actually be good but looks like it’s not good relative to our expectations because we’ve mis-modeled it.

Thomas J. Hook

I think that’s fair. As you know the capacitors definitely will follow more of a continuation on the second half year than what occurred in the first half of 07 because the one time effect is in the first half. So that’s stretched a little bit into the third quarter but we also have in the high energy capacitors area some product launches. We have three customers we ship against now. We’ve been qualifying more models for those capacitors. Of course we always offer some price volume curve in the overall structure of a negotiated agreement with a customer. As they drive volume we tend to be able to drive productivity in a manufacturing environment and pass those savings on to them. So we always embody that. So from a high energy capacitor standpoint we’re confident for 2008 to see some continued growth in that area. We have been making very good technology, we’re on the cusp of qualifying high energy density capacitor technology in this year. It’s been interesting to a lot of customers and of course we’ve continued development in the high voltage area. So I think high energy capacitors from a market perspective, because we have such low market penetration there, the opportunities tend to be even larger, more opportunities for work for us to do than in other areas that we have more capitated opportunities because our percentage share is higher. We put a lot of investment dollars in there and are focused on that and have done a good job for our customers but the operating teams needed to be able to deliver those program qualifications for customers and we need to be able to deliver the product to get the revenue and I think our opportunities are greater than what the market can provide in that area just because I think from a technology and a share perspective we’ve got a lot of room to grow. I don’t think we’ll cover a one time opportunity we had in 07 but certainly we’ll do better than the second half of 07 run rate in that product area.

Jason Mills – Canaccord Adams

So the $26.5 million included, remind me how much of sort of one time and then I suppose we back that out and grow whatever we think the IC market grows. You’d be comfortable with that assumption?

Thomas J. Hook

We had called it around $4+ million or so. And again we require a little bit of guestimating on that, but that’s about where we had tagged it.

Jason Mills – Canaccord Adams

And let me ask one quick question since this is a follow up and I’ll get back in queue if there is anyone else. Tom, what does your guidance assume with respect to the effective tax rate to get to the $1.20 to $1.50 and on the other revenue businesses could you help us with the quarterly – I would assume the first half for orthopedics would be much lower in the second half and then on therapy delivery, sort of a three part question, what would the full fourth quarter look like at had Quan-Emertec been involved with Greatbatch the entire quarter and sort of how should we think about sequentially that business into the first quarter?

Thomas J. Mazza

I’ll go first, because mine is easy. We’ve assumed 35%, Jason. We probably have been conservative there but we’ve got foreign operations for the first time and we’ve got to figure out where we’re allocating the asset basis to. So we’ve been conservative and said it’s going to be at 35%. We’re hoping we can work on that to get that better.

Jason Mills – Canaccord Adams

And with respect to sort of gating orthopedics and therapy delivery and the Quan-Emertec question.

Thomas J. Hook

We tried to when we provided some color on each of the deals that we had done last year, provide kind of a revenue size range for the company. That way everybody could kind of determine from a quarterly and annual basis. Certainly for both orthopedics and therapy delivery we feel we can grow faster than the market, a low double digit rate which is what we provided the information on, we said 10 to 12%. So both those organizations we feel throughout the course of the year we’ll continue to build momentum. That represents four acquisitions and have Quan-Emertec, the DePuy plant as well as the Precimed orthopedics trays, tools and instruments. So each one of those areas we have a lot of opportunity for revenue growth. We certainly have a lot of product and customer qualifications to do, so obviously the growth rate will come as we finish up those qualifications that have been well in progress at those companies. I’m not really prepared to kind of provide a real granular break out on the individual product lines because there’s so many underpinning projects for them. There’s no doubt that as the year goes on, we’re going to highlight individual businesses, have the business leaders here in the room and provide more color and answer more questions on the dynamics that we’re seeing in those individual segments and then that way we’ll help answer some more of the specific questions and of course when we get around for investor visits as well as the conferences, we’ll be bringing those business leaders with us to make sure that they have an opportunity to meet with investors and answer more granular questions on it.

Operator

Your next question comes from the line of Dan Piper with Magnatar. Please proceed with your question.

Dan Piper – Magnatar

Can you tell us what the inventory step up costs were from the acquisitions in the quarter?

Thomas J. Mazza

It’s about $400,000.

Dan Piper – Magnatar

And is that included in that $950,000, the acquisition charges in the reconciliation tables?

Thomas J. Mazza

Yes.

Dan Piper – Magnatar

I know it changes a lot with the acquisitions, but can you comment a little bit about the increase in the accounts receivable balance and what the DSOs were tending for the quarter?

Thomas J. Mazza

I don’t want to go into that level of detail but it’s slightly worse than we were before but still good by any account.

Dan Piper – Magnatar

On the bank debt, the interest rate, are you paying a floating rate?

Thomas J. Mazza

Yes.

Dan Piper – Magnatar

And what rate are you assuming in the $15 million guidance number?

Thomas J. Mazza

Approximately 5 to 6.

Operator

Your next question is a follow up question from Keau T. Nakae with Cowan and Stewart. Please proceed with your question.

Keau T. Nakae – Cowan & Stewart

Tom, when we look at the, I’ll call it the legacy Sierran business at this point, where do you expect to see customer wins, which product categories?

Thomas J. Hook

I kind of already highlighted high energy capacitors so I’ll kind of leave that one as it is. One of the universal opportunities we have across the historic Greatbatch business is to continue to drive more integrated business with current customers. We’ve done a lot of investment down in our Tijuana facility, we’ve moved a lot of business down there. We have a driving and active business that does partial assemblies. That’s an active capability we can provide to a lot of customers and I like to focus on the business that way because it not only brings us closer to the customer in terms of servicing them, it also gives us opportunities on new products to provide new components to them and I think clearly when we look at the areas of see through and filtering we have a core capability there that I think that we can provide more product technology to customers that’s only being enhanced by the MRI filtering technology that we’ve developed to do additional work for customers. When we look just in general at the battery business we obviously have very mature business there. The opportunities are somewhat less but because there’s a lot of technology being pushed into that area the product technology tends to generationally mature to higher energy density power systems which also provide us additional growth opportunities. When we look beyond that to what I would call the components business , machining, molding, the coding parts for metalized codings on electrodes as well as enclosures that tends to be hard manufacturing disciplines that we’ve driven a lot of improvements in for the year and we tend to have in some of those areas high market shares and other areas very low market shares. And in some of the acquisitions we picked up with Quan-Emertec we picked up better capabilities in terms of our ability to machine and that’s going to offer us some nice revenue opportunities that are moved to the other revenue category for us. So there’s no area that I think is devoid of growth opportunities, I just think that some of the ones like high energy capacitors, filtering, that other revenue line with the collection of technologies and it just drives better opportunities for us in that core historic Greatbatch business.

Keau T. Nakae – Cowan & Stewart

Let me just push you a little bit on one of your comments. Initially your assembly work down in Mexico was for a customer and it was sort of supposed to be on a tit for tat basis. You’re doing the assembly work but you never got the follow through order on filtered feed through. Is that something that you’re still optimistic about capturing or what are your thoughts there?

Thomas J. Hook

I’m not really comfortable in kind of talking about specific deals but just in general that agreement kind of precedes me here so I don’t know the history of the understanding at the time. Our job is to do a good job in assembly for our customers, it’s also to do a good job of showing how our technology is value driven so that it drives value specifically for our customers. When we do that, we’re going to get opportunities and clearly when we look at our revenue growth over the past several years in those core product lines, we definitely have delivered on that growth. So there’s certainly call it a low light where we have not performed yet and the pressure is on me and the teams to perform for that customer. But there’s definitely areas which we don’t highlight for confidentiality reasons where we definitely have delivered for customers and it has resulted in some nice revenue growth. But you’re very fair in pointing out that there’s areas and specific examples where we haven’t completed the job yet and that’s an opportunity for us in 08 and beyond and I’m putting the right amount of focus on that to deliver those gains for those customers and talk to upper management as well as their project management as well as their procurement organizations to give us an opportunity to be able to do that for them.

Keau T. Nakae – Cowan & Stewart

And then finally with respect to future acquisitions, obviously you have a lot on your plate now, a lot to work through. Are you done there for now or what are your thoughts?

Thomas J. Hook

I think that’s very fair that there may be a targeted one this year, late or early next year. We’re focused on driving operating profitability. I came to the business in 2004, I worked with the Board of Directors and [Ed Vogel] to drive improvements in this area and the base Greatbatch business. The team did a great job doing that through a series of initiatives that investors were very patient with us implementing. That’s the mode we’re back in. We’re back in that 05, 06 mode where we’re going to focus on profitability and customers and driving growth in the businesses that we have now including the seven acquisitions and where there’s a targeted opportunity to make a small investment and potentially an acquisition of a technology we’d like to have the bolus of mergers and acquisition activity has been done and we’ve been very happy was able to completing it in a tight timeframe so we could really focus the majority of our times on acquisition integration and driving synergies. So that’s the mode we’re in. There’s no deal announcements coming.

Operator

Your next question is a follow up question from Stan Mann with Mann Investments. Please proceed with your question.

Stan Mann – Mann Investments

Tom, you now have a footprint overseas with the Precimed, etcetera. Do you plan to move any or take advantage of moving any of the US capabilities into that area and manufacture in that area, spread the footprint at this point?

Thomas J. Hook

Yeah, Stan, I think don’t like to think of it in terms of moving facilities or product lines but there’s definitely capability that we have in Greatbatch to operationally improve the footprint we have in Europe and there’s definitely capabilities in Europe that we’re going to bring to Greatbatch to improve the capabilities here in the US. There is no doubt with 19 facilities globally right now we have them from Europe to Asia all throughout the United States as well as Latin America, we have the ability to drive some consolidation of those facilities and to drive some cost synergies. It’s going to require some investments but historically we’ve made very sharp investments and they’ve paid off in the cost reduction projects. What those will be, we’re not willing – because we haven’t finished the planning on them, but there’s no doubt there will be some that are going to be done US and there will be certainly the potential for doing them in Europe and Asia and we’re going to look at it individually, we’re going to break out the plans for maximum benefit and then we’re going to kind of April, May timeframe provide more color on them. But right now we’re in the preparatory phase. I believe we have five facilities in Europe that are located in a tight geographic area and there’s no doubt there’s opportunities for additional investment there. But we want to be smart about it.

Stan Mann – Mann Investments

You never talk about the more rapid growth overseas than US in our presentations. Can you kind of give us a profile of outside US growth in these markets and I assume substantially higher including CRM versus inside – I think most of the questions on the call seem to be US based from what I can sense and have been.

Thomas J. Hook

That’s fair, Stan, as I think it’s very difficult for us to do this. While we have several very significant European customers in both the historic markets like cardiac rhythm management, we obviously have complemented that now with some very significant customers in orthopedics. But if I just focus on what I think is the source of your question on cardiac rhythm management, yes overseas growth has been healthy. The challenge for us is why we can get a little bit more of a breakdown on that from our European customers is very hard on domestic customers where we ship our products to. They don’t really give us a breakdown in terms of where they’re shipping their end devices. So largely we use the end market data that’s available from the investment community to kind of gauge what those market growth rates are which is kind of a retrospective look and I agree with your statement, those markets especially in implantable defibrillators have tended to continue to be healthy just like the neuro-modulation business both domestically and internationally has continued to be healthy and although the numbers in the neuro-modulation business are definitely much lower than they are in the cardiac rhythm management market, we tend to have been able to look at that as still a healthy market that’s been unaffected by some of the melees domestically in defibrillation.

Stan Mann – Mann Investments

Last question, your commercial battery facility that comes on in the fourth quarter, do you plan on shipping product from that facility and ramping up your sales in that market where you’re limited now?

Thomas J. Hook

That’s correct. In the fourth quarter we’re going to do a start up. We’re going to kind of do what we call a sluice. We’re going to phase out our can facility, move it into the [ranum] facility, kind of product lines at a time, but eventually we’ll phase out clean up and sell the can facility when the [ranum] facility is fully on line and I’ll remind that that facility also has factory automation so it’s not just a facility landscape that provides us capacity improvements it also has the ability for some semi-automation assembly as well of that product and then we also have additional floor space opportunities that we can use to continue to drive organic growth in that business.

Stan Mann – Mann Investments

But do you plan to ship added product over your current limitations in the fourth quarter?

Thomas J. Hook

It would be tough. I don’t want to get ahead of ourselves for 2008. Plant start ups are very complicated, so I don’t want to –

Stan Mann – Mann Investments

Right, I understand that.

Thomas J. Hook

- just don’t want to get too bullish on 08. We’re focused on getting the plant started up and not generating a lot of traps in the process.

Stan Mann – Mann Investments

But 09 that would double our capacity?

Thomas J. Hook

A doubling is definitely fair and that means what we want to do is time the market, being able to go out as we are right now with our current customers and new customers. And obviously we have new product lines as well and we want to get aggressive in the market so that we can pick up some momentum in 2009 with that new facility.

Stan Mann – Mann Investments

But there is business available to double our business potential?

Thomas J. Hook

I think it’s available. What we have to do is we have to win the business just like we focused in 05, 06. We were aggressive. We have to now with our new facility go out with the sales and marketing teams and be aggressive.

Stan Mann – Mann Investments

So you would start that in the second half of this year on qualifications?

Thomas J. Hook

We want to be careful. The qualification windows are different by product line. Some we can start mid-2008 but some will have to wait until customers can actually get products off the new [ranum] facility, get them qualified and approved. The shorter timeframe than we see in the FDA area it certainly is an opportunity for us for 09, less for 08, more for 09.

Operator

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.

Tony Borowicz

Very good questions. Again I’d just like to remind everybody that both the audio portion of this call and the slide visuals will be on our website at www.Greatbatch.com for the next 90 days. Again, thanks everyone for joining us today.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Greatbatch, Inc. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts