Greatbatch, Inc. (GB)

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Greatbatch, Inc. (GB)

Q3 2013 Earnings Call

October 24, 2013, 5:00 PM ET

Executives

Betsy Cowell - Vice President, Finance and Treasurer

Thomas Hook - President and Chief Executive Officer

Michael Dinkins - Executive Vice President & Chief Financial Officer

Analysts

Dan Rutter - Paragon Investment

Chris Sassouni - Eagle Asset Management

Charles Haff - Craig-Hallum

Julia Kufman - RBC Capital Markets

Presentation

Operator

Welcome everyone to the third 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 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, Brae. Hello, everyone, and thank you for joining us today for our 2013 third quarter earnings call. With us today on the call is 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 us off with a few comments regarding our third quarter. After that, Michael will provide additional comments on the third quarter performance, including comments on our working capital, cash flow and 2013 guidance. We will then the open the call to Q&A. As we have done in the past, we are including slide visual accompanying this presentation, which you can access on our website, www.greatbatch.com.

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

Thomas Hook

Thank you, Betsy, and welcome to all of you who are listening to our call today. We are pleased to be able to share with you our results for the third quarter.

Sales for the quarter totaled $167.7 million, growing 5% organically when accounting for the impact of foreign exchange and the divestiture of non-core orthopedic products in 2012. Three product lines contributed to this growth; orthopedics is up 22%, cardiac rhythm management, plus 8%; and energy, plus 4%. I will talk more about the sales performance drivers later in the presentation.

Adjusted diluted earnings per share increased for the third quarter to $0.57 per share, a 24% increase over the third quarter 2012 and the fifth consecutive quarter-over-quarter improvement. These results were fueled by; our organic constant currency revenue growth of 5%; a 170 basis point improvement in gross margin; lower medical device spending; and an effective tax rate of 28.8% for the quarter. This resulted in 110 basis point improvement in our return on invested capital performance to 8.6%.

Our cash flow from operations for the quarter totaled $25 million bringing our year-to-date cash flow total to $60 million. This quarter's performance was driven by higher operating income. As expected, we issued an estimated tax payment of $8 million during the quarter in conjunction with the retirement of our convertible subordinated notes.

This brings our total estimated tax payment for the debt retirement to $20 million for the year. Excluding this tax payment, our quarterly operating cash flow totaled $33 million or $36 million year-to-date. Michael will discuss the changes and programs in place that continue to improve our cash flow performance, later in the call.

Slide 6, shows our constant currency organic growth by product line for the quarter. Most notably were the continued growth in our orthopedic and cardiac rhythm management product lines and a modest improvement in the energy product line during the quarter. We experienced mix performance in portable medical, vascular, environmental and military.

On Slide 7, 8 and 9, we have outlined some insight on the drivers. Cardiac/neuromodulation quarterly growth aggregated 8% versus the same period in 2012. Our year-to-date organic growth is 3% and on a rolling 12 month basis, our organic growth is 1% versus a 1% decline in the market.

Investments in our sales initiatives are driving growth and delivered success in the current quarter. This included an expansion of our sales pipeline through improved leverage of our strong intellectual property portfolio and manufacturing excellence. All of this has contributed to outperforming the market.

Lastly, we have received several increase about the recently released study conducted by Dr. Saba at the University of Pittsburgh. I will address any questions during the Q&A session. However, we do not see the study impacting Greatbatch directly.

Performance in our orthopedic product line, following the disposition of non-core products continues to reap awards, showing 22% organic growth in the quarter and 15% organic growth year-to-date, both adjusted for foreign exchange impacts. Our expanded sales and marketing investments have led to new wins in minimally invasive surgical hip arthroplasty combined with 6% market growth in unit sales for large joints.

We have also expanded our customer base and delivery systems. Backlog from our consolidation activity moves along as planned, and we remain bullish on our performance for the remainder of the year.

Our portable medical product line showed mixed results, as we continue to reposition the product line for growth with a more acceptable return on invested capital book of business. The loss of low margin business impacted the quarter and will impact organic growth for the remainder of the year and into 2014. We believe moving to a higher margin business model is the right approach, given the strength of our research, development and engineering teams and strong customer relations.

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