Greatbatch, Inc. (GB)

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Greatbatch, Inc. (GB)

Q2 2013 Earnings Call

July 25, 2013 05:00 PM ET

Executives

Betsy Cowell - VP Finance and Treasurer

Tom Hook - President and CEO

Mike Dinkins - EVP and CFO

Analysts

Charles Haff - Craig-Hallum

Presentation

Operator

Welcome everyone to the Second Quarter 2013 Greatbatch Incorporated 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 involve a number of risks and uncertainties. These risks and uncertainties are described in the company's annual report on Form 10-K. 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 obligations to update forward-looking information included in this conference call to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results, financial conditions or prospects.

I would like to now turn the call over to today's host, Vice President Finance and Treasurer, Betsy Cowell.

Betsy Cowell

Thank you, Lisa. Hello everyone and thank you for joining us today for our 2013 second quarter earnings call. With us today on the call are Thomas J. Hook, President and Chief Executive Officer; and Michael Dinkins, Executive Vice President and CFO.

In terms of today's agenda, Tom Hook will start off with a few comments regarding our second quarter results and provide an update of our strategic objectives including our recently announced reorganization. After that Michael will provide additional comments on the second quarter performance including comments on our working capital, cash flow and confirm our 2013 guidance. We will then open the call to Q&A. As we have done in the past, we are including slide visuals that go along with this presentation, which you can access on our website at www.greatbatch.com.

With that, let me turn the call over now to Tom Hook.

Tom Hook

Thank you, Betsy and welcome to all of you who are listening on our call today. We are pleased to be able to share with you our results for the second quarter. We delivered record quarter sales performance growing 3% to a $171.3 million. Organically we grew 6% driven by three product lines, orthopedics up 14%, portable medical up 9% and cardiac rhythm management up 5%. I will talk more about the drivers of this performance later in the presentation.

Adjusted diluted earnings per share increased for the second quarter to $0.56 per share which represents a 30% increase over the second quarter of 2012. These improvements were fueled by our organic revenue growth of 6%, 220 basis points improvement in gross margin, 2% reduction in our operating expenses and an effective tax rate of 35% for the quarter. This resulted in a 120 basis improvement and our return on invested capital performance to 8.7%. As expected, our CapEx run-rate is decreasing as most of our expenditures for plant consolidations are behind us now. CapEx is reduced by $9 million to $5 million for the quarter.

Our cash flow from operations of -$1million is something we planned to aggressively address. As expected, included in this cash flow are roughly $1 million as severance payments for the Switzerland plant consolidation and then $11 million tax payment for the convertible notes redemption. After adjusting for these two items, our cash flow is a positive of $11 million, still approximately $10 million to $15 million below our expectations because of the higher receivables and inventories, our planned target improvements for the second half of the year

Slide six outlines the organic growth by product line for the quarter. As we have planned, orthopedic portable medical and cardiac rhythm management drove our performance with softness in vascular in energy, environmental and military.

On slide seven, I have some insight on the drivers. Cardiac/Neuromodulation rebounded consistent with the underlying market from the slow start in Q1. We continue to see normalized customer ordering patterns and a new product launch in the second half that continued to deepen our OEM customer relationships.

Orthopedics is approaching 20% of our revenue mix. After adjusting for the disposition of certain non-core products which were $4.4 million for the quarter, the product line grew 14%. For the second quarter in a row we experienced strong demand in hip and shoulder implants and continued to broaden our customer base. Our plants are fully operational and will be working down the backlog to the second half of the year. We remain bullish on this product line.

Our battery packs per portal medical applications were very strong in the quarter, as we experienced growth from several key customers which offsets slower business from a customer rebalancing inventory.

For the second half of the year we expect growth to be driven by over 40 new product introductions but partially offset by changes with one of our customers. Overall our diverse customers base and product introductions of Greatbatch to manage through these various transitions.

The energy environmental and military product lines showed modest decline. We continue to rationalize our product offerings in these markets and apply a disciplined pricing model. These actions provide a stronger base from which Greatbatch can leverage its technical strengths as a strategic part into our customers.

Finally our vascular product line was down $200,000 in the quarter due to the voluntary recall of our two medical devices in late 2012. As we communicated in the first quarter, these products are scheduled to be back in production in the second half of the year.

Read the rest of this transcript for free on seekingalpha.com