) third-quarter 2012 adjusted earnings per share of 46 cents beat
the Zacks Consensus Estimate of 44 cents and exceeded the
year-ago adjusted earnings of 41 cents (up 12%).
Adjusted earnings exclude one-time items such as medical device
design verification testing ("DVT") costs associated with the
development of a neuromodulation platform along with
consolidation and optimization expenses and integration charges.
It also excluded the loss of the Swiss tax holiday due to the
discontinuation of manufacturing in Switzerland.
The company reported net loss of $7.6 million compared to net
income of $7 million in the year-ago quarter. Operational hazards
at Greatbatch's Swiss Orthopedic facilities resulted in the
reported net loss.
Revenues surged 22% year over year to $161.3 million in the third
quarter, beating the Zacks Consensus Estimate of $157 million.
Revenues were driven by the Micro Power acquisition, gains in the
Cardiac Rhythm Management ("CRM")/Neuromodulation segment along
with double-digit growth across the company's Vascular Access
However, on an organic basis, revenues increased 8%, given
operational issues at the Orthopedic product line. Foreign
currency movements adversely impacted Orthopedic revenues by $2
In the reported quarter, revenues from the core Implantable
Medical segment (75% of total sales) grew 7% to $121.1 million.
Within Implantable Medical, CRM/Neuromodulation sales increased
13% year over year to $80.3 million, led by higher level customer
inventory ordering patterns as well as easy year-over-year
comparables. Increased focus on sales and marketing coupled with
product development is expected to further boost CRM sales.
However, management is cautious of short-term headwinds from key
Orthopedic Equipment Manufacturing ("OEM") customers.
Revenues from Vascular Access soared 20% to $13.7 million on the
back of commercialization of new medical devices.
Orthopedic sales plunged 13% year over year (down 6% in constant
currency) to $27.2 million due to lack of product expansion and
development initiatives among other operational issues within the
business. Currency exchange swings negatively impacted orthopedic
sales by $2 million in the quarter. On a sequential basis,
Orthopedic sales declined 17% because of seasonal shut-downs at
the company's European facilities.
Revenues from Greatbatch's smaller Electrochem segment
more-than-doubled on a year- over-year basis to $40.2 million on
the back of the Micro Power acquisition. On an organic basis,
Electrochem revenues grew 5% in the quarter.
The Micro Power product line has been integrated into
Greatbatch as Portable Medical offerings. The segment is
benefiting from shift in focus from clinical settings to cater to
the home and aging population by developing lightweight and
portable devices, which is in high demand in the Portable Medical
market. Management believes that the company's portable medical
offerings will bolster future revenue growth.
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Gross margin remained flat year-over-year at 31.6% as improved
production volumes were offset by operational snags at the Swiss
Orthopedic units. Selling, general and administrative expenses,
as a percentage of sales, fell to 12.6% from 13.5% in the
prior-year quarter led by the company's efforts to optimize
Net research, development and engineering costs (RD&E), as a
percentage of sales, inched down to 8.2% from 8.4% a year ago as
the company is leveraging its RD&E expenses. RD&E
expenses include contributions to the company's acquisitions as
well as investments for the development of complete medical
devices (including DVT costs for the neuromodulation platform).
Adjusted operating margin edged up to 11.6% from 11.2% a year
ago, led by sales growth and improved operating activities.
Balance Sheet and Cash Flows
Greatbatch ended third quarter 2012 with cash and cash
equivalents of $10.8 million, down 74% year over year. The
company reported operating cash flow of $16 million in the
quarter versus $21 million in the year-ago quarter. This allowed
the company to repay an additional long-term debt of $6 million.
Long-term debt in the quarter was $230.2 million, up 16%.
Guidance and Recommendation
Greatbatch reiterated its guidance for full year 2012. The
company expects revenues for 2012 in a band of $645 million and
$665 million, leading to a year-over-year growth of 13% to 17%.
The company expects to achieve its sales growth target on the
back of higher CRM and Portable Medical sales, despite the
probability that the Orthopedic segment will likely trail the
The company forecasts adjusted earnings per share in a range of
$1.75 to $1.85. Moreover, Greatbatch foresees adjusted operating
margin of 11.5%-12.5% for the year. However, given the sluggish
performance of the Orthopedic business, Greatbatch now expects
adjusted operating margin and adjusted diluted sales to be at the
lower end of the guided range.
Driven by the progress made in Greatbatch's productivity and
consolidation initiatives, the company now expects one-time items
excluded from adjusted operating income to total $40 million to
$45 million from the earlier expected range of $20 million and
$30 million in the prior quarter.
The current Zacks Consensus Estimates for revenue and earnings
per share for full year 2012 are $651 million and $1.76,
Greatbatch is a leading producer and supplier of batteries,
capacitors and components used in implantable medical devices.
The company's top customers include
Johnson & Johnson
St. Jude Medical
The company's pipeline is healthy with a number of products
currently in development that are expected to support growth in
the long run. Greatbatch is also focusing on sales and marketing
to improve its legacy business. The company has forged strategic
long-term agreements with its OEM clients in the quarter to
secure healthy revenue growth.
However, a soft Orthopedic market and pricing pressure remain
headwinds. The company is aggressively investing in production
and consolidation initiatives as well as R&D to drive
Greatbatch, Inc. currently retains a Zacks #3 Rank, which
translates into a short-term Hold rating. We maintain our Neutral
recommendation on the stock.