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Greatbatch Beats Ests, Profits Dip - Analyst Blog

By: Zacks.com
Posted: 10/26/2012 5:51:00 PM
Referenced Stocks: BSX;GB;JNJ;MDT;STJ

Greatbatch, Inc .'s ( GB ) 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

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 business.

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 million.

Segment Review

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.

Margins

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 operational synergies.

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 annual forecast.

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, respectively.

Greatbatch is a leading producer and supplier of batteries, capacitors and components used in implantable medical devices. The company's top customers include Boston Scientific ( BSX ), Johnson & Johnson ( JNJ ), Medtronic ( MDT ) and St. Jude Medical ( STJ ).

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 bottom-line growth.

Greatbatch, Inc. currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We maintain our Neutral recommendation on the stock.



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