Greatbatch Inc.GB reported adjusted earnings of 54 cents per share in the first quarter of 2015, which missed the Zacks Consensus Estimate by a penny and remained flat on a year-over-year basis. First-quarter sales decreased almost 7.5% year over year (in both reported and constant currency basis) to $161.3 million, which lagged the Zacks Consensus Estimate of $165 million.
Following the announcement of dismal first-quarter results, shares of Greatbatch tumbled nearly 3.86% to close at $51.84 in the last trading session. We note that shares of Greatbatch have lost roughly 8.6% in the past one month.
First-quarter sales were primarily impacted by unfavorable foreign currency exchange rate fluctuations as well as persistent weakness in the portable medical product line. The sales decline was partially offset by an 18% constant currency increase in orthopaedic revenues owing to market growth and customer wins.
Revenues from Cardiac/Neuromodulation products plunged 12% to $76.3 million, owing to the end of life impact for two legacy products as well as continued pressure from the cost reduction initiatives by customers, partly mitigated by new product introductions in the quarter.
Revenues from Orthopaedic products came in at $39 million, up 7% on a reported basis and 18% on a constant currency basis. The upside was driven by market growth, customer wins and the benefits from investments in capacity and capabilities at the company's Chaumont, France facility.
Revenues from Portable Medical declined 28.8% to $13.7 million on discontinued or reduced volumes in some lower margin products.
Vascular product revenues decreased 20.6% to $10.4 million due to customer inventory management and lower customer volumes.
Revenues from the Energy, Military and Environmental ("EME") business declined 2.3% on a year-over-year basis to $17.7 million.
Revenues from QiG, which includes sales from CCC Medical Devices acquired in Aug 2014, surged to $5 million from $0.7 million in the year-ago quarter. On an organic constant currency basis, QiG revenues surged 71% on the back of new product launches, including a limited release of the Algovita Spinal Cord Stimulation system in Europe.
Greatbatch proposed a tax free spinoff of Algostim LLC, which will create a newly publicly traded company focused on commercializing the Algovita SCS system. The spin-off is expected to be completed by the end of 2015, subject to conditions.
Gross margin contracted 50 basis points (bps) year over year to 32.5% primarily due to lower sales volume, higher sales mix of lower margin products and the impact of contractual price concessions granted to customers in exchange for long-term agreements.
Selling, general and administrative expenses (SG&A), as a percentage of sales, increased 160 bps, primarily because of higher SG&A costs attributable to the acquisition of CCC Medical Devices, as well as increased legal fees. The impact of these increases was partially offset by lower performance-based compensation.
Research, development & engineering costs, as a percentage of sales, remained flat during the quarter.
Owing to a lower gross margin base and higher operating expenses, adjusted operating margin contracted 210 bps to 10.7% while adjusted earnings before interest, income tax, depreciation & amortization (EBITDA) margin declined 170 bps to 16.4%.
As of Apr 3, 2015, Greatbatch had cash and cash equivalents of $67 million as compared with $76.8 million at the end of the previous quarter. Long-term debt declined to $172.5 million from $176.3 million as of Jan 2, 2015.
In the first quarter, cash flow from operating activities totaled $7.3 million, up 5% from the first quarter of 2014, primarily due to lower working capital levels partially offset by reduced net income.
Capital expenditures totaled $15.4 million, higher than $6 million in the year-ago quarter, primarily due to higher investments in capacity and capabilities.
Greatbatch reiterated its revenue and adjusted EPS guidance for 2015. Adjusted EPS is projected in the band of $2.61-$2.71 while sales are anticipated in the band of $715 million to $730 million.
Adjusted operating margin is expected in the range of 13.7% to 14%. Meanwhile, Greatbatch anticipates capital expenditure in the range of $40 million to $50 million for 2015.
Management anticipates the end of life impact for two legacy products to continue to hurt cardiac/neuromodulation sales. This will be somewhat offset by continued acceleration of recently launched products, as well as current and projected product development opportunities within its cardiac/neuromodulation customers.
Orthopaedic sales are expected to be affected by the strengthening dollar versus the euro in the first half of 2015. Reduced volumes of some of the lower margin products in the portable medical segment are expected to impact sales in the first half of 2015.
Greatbatch's first-quarter results missed the Zacks Consensus Estimate on both fronts which raises concern. Sales were hurt by foreign exchange headwinds as well as persistent weakness in the portable medical product line, both of which may continue to put the top line under pressure going ahead.
Higher investments in R&D, unfavorable product mix and lower volumes will continue to impact margins and profitability at least for the next couple of quarters.
However, manufacturing efficiencies as well as the integration of CCC Medical Devices capabilities and customers into the organization as planned will prove to be accretive to earnings going forward. Despite macroeconomic headwinds, the company maintained its guidance for 2015, which is a positive in our view.
Stocks to Consider
Currently, Greatbatch carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the broader medical sector include RTI Surgical RTIX , Inogen INGN and Fluidigm Corp. FLDM . While RTI Surgical sports a Zacks Rank #1 (Strong Buy), both Inogen and Fluidigm carry a Zacks Rank #2 (Buy).
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