FRISCO, Texas--(BUSINESS WIRE)--Oct. 24, 2013-- Greatbatch, Inc. (NYSE:GB), today announced results for its third quarter ended September 27, 2013 highlighted by 5% constant currency organic revenue growth, 18% improvement in adjusted operating income and 24% improvement in adjusted diluted EPS over the prior year.

• Sales increased to $167.7 million, reflecting 5% constant currency organic growth over the comparable 2012 quarter.
  • Cardiac/neuromodulation revenue increased 8% driven by sustained and deepening relations with OEM partners.
  • Orthopaedic revenue increased 11% over the prior year and 22% after adjusting for the divestiture of certain non-core product lines in Switzerland at the beginning of 2013 and foreign currency exchange rate fluctuations. Share gains in both implants and cases and trays generated the significant sales growth.
  • Electrochem revenue declined $1.9 million as a result of our increased pricing discipline and reduced government funding on military and environmental projects.
• GAAP Operating Income of $17.0 million increased $14.9 million versus the same period last year.
  • Gross margins improved 170 basis points to 33.3% driven by higher volume and a better mix of product sales.
  • Total operating expenses declined $10.0 million or 20% as a result of lower consolidation and optimization charges, partially offset by higher selling and marketing investment and increased performance based compensation.
• Adjusted Operating Income improved 18% to $22.0 million and increased 150 basis points to 13.1% of sales over the comparable 2012 quarter.
  • Gross profit improvement flowed through to adjusted operating income.

CEO Comments

“The third quarter proved to be another solid performance from the team with top line organic growth and operating leverage yielding an 18% increase in adjusted operating income and a 24% improvement in adjusted diluted EPS,” stated Thomas J. Hook, President and CEO, Greatbatch, Inc. “Our sales and marketing investments and consolidation initiatives are contributing to our revenue improvement and operating margin expansion. For the fifth consecutive quarter, we have increased our adjusted operating income and adjusted diluted EPS in comparison to the prior year. We expect these initiatives to continue to pay dividends for the remainder of 2013 and will position Greatbatch to meet its long-term objective of maintaining at least 5% constant currency organic revenue expansion and at least double that growth rate for adjusted diluted EPS over time.”

CFO Comments

“For the fourth consecutive quarter our gross margins have improved in comparison to the prior year and totaled 33.3% for the current quarter. Most notably, increased operational leverage and a better sales mix, as well as productivity enhancements from our Swiss consolidation and business restructuring have led to our continued progress,” commented Michael Dinkins, Executive Vice President & CFO, Greatbatch, Inc. “This volume leverage, along with continued productivity, cost controls, functional alignment and excellent execution also drove a 150 basis point improvement in adjusted operating margins to 13.1% in the quarter. Additionally, adjusted EBITDA improved 10%, which drove adjusted cash flows from operations of $32.7 million for the quarter and $27.0 million of debt repayment. Our third quarter results position us to be at the lower end of our revenue guidance provided at the beginning of the year and at the middle to upper end of our adjusted diluted EPS guidance, which we raised last quarter.”

Third Quarter Results

Third quarter 2013 sales increased $6.4 million to $167.7 million. After adjusting sales by $3.2 million for the divestiture of certain non-core orthopaedic product lines during the first quarter of 2013 and approximately $1 million for the positive impact of foreign currency exchange rate fluctuations in comparison to the prior year, sales increased $8.6 million or 5% organically. This growth was primarily due to above market growth (8% growth) from our cardiac/neuromodulation product line, as well as implant and cases and tray market share gains, which helped drive 22% organic constant currency growth in our orthopaedic product line. This growth was partially offset by a $1.4 million and $1.9 million decline in vascular and Electrochem sales, respectively, due to the previously disclosed voluntary recall of two vascular medical devices and continued pricing discipline in our Electrochem product lines resulting in the loss of some low-margin business. For the remainder of 2013, we expect revenue to remain strong as new product introductions are commercialized, as we further partner across business lines with our large OEM customers, and as we further leverage our sales and marketing resources to drive core business growth.

Gross profit increased $4.9 million to $55.9 million in the third quarter of 2013, compared to $51.0 million for the comparable 2012 period. This improvement was driven by increased operational leverage due to our higher sales volumes, as well as a favorable mix of higher margin products. As a result, gross profit as a percentage of sales for the current quarter increased 170 basis points to 33.3% from 31.6% for the prior year third quarter, representing the fourth consecutive quarter our gross profit margin has increased in comparison to the prior year.

Selling, general and administrative (“SG&A”) expenses increased $1.3 million to $21.6 million for the third quarter 2013 compared to $20.3 million for the same period of 2012. This increase is attributable to the additional investments made in sales and marketing resources to drive core business growth, as well as increased performance-based compensation. Synergies realized from our Swiss orthopaedic facility consolidation of approximately $0.4 million partially offset the rise in expenses.

Net research, development and engineering (“RD&E”) costs for the 2013 third quarter of $13.8 million increased 4% over the $13.2 million incurred during the third quarter of 2012. This increase was primarily attributable to a decrease in customer cost reimbursements compared to the prior year of $0.9 million, due to the timing of achievement of milestones on various projects, as well as higher performance-based compensation. These increases were partially offset by our initiative to refocus our medical device RD&E investment, which began in the third quarter of 2012, and included the discontinuation of certain non-core projects. Current quarter results include $1.5 million of design verification testing (“DVT”) costs incurred in connection with the Company’s development of a neuromodulation platform compared to $1.2 million for the comparable 2012 period. In total, costs incurred in connection with our medical device investments were $7.8 million in the third quarter of 2013, compared to $8.7 million for the 2012 third quarter. The Company’s medical device technology investment is focused on successfully commercializing Algostim and being selective in opportunities that leverage our strengths in our core business units and drive sustainable growth.

GAAP operating income for the third quarter 2013 was $17.0 million compared to $2.1 million for the comparable 2012 period. This increase was primarily due to gross profit improvements and lower consolidation and optimization costs ($11.2 million), partially offset by higher SG&A and RD&E expenses. Adjusted operating income, which excludes other operating and DVT expenses, increased 18% to $22.0 million compared to $18.7 million in third quarter 2012. Refer to Table A at the end of this release for a reconciliation of GAAP operating income to adjusted operating income and the “Use of Non-GAAP Financial Information” section below.

The GAAP effective tax rate for the first nine months of 2013 was 29.6% compared to 93.0% for the same period of 2012. This decrease was primarily attributable to $5.0 million of tax charges recorded during the third quarter of 2012 in connection with our Swiss Orthopaedic consolidation. These charges relate to the loss of our Swiss tax holiday, due to our third quarter 2012 decision to discontinue manufacturing in Switzerland and the valuation allowance established on our Swiss deferred tax assets, as it was more likely than not that they will not be fully realized. The reinstatement of the R&D tax credit in 2013, as well as higher income in lower tax rate jurisdictions also contributed to the more favorable tax rate in 2013.

GAAP and adjusted diluted EPS for the third quarter of 2013 were $0.44 and $0.57, respectively, compared to a loss of $0.32 and income of $0.46, respectively, for the third quarter 2012. Refer to Table B at the end of this release for a reconciliation of GAAP net income (loss) to adjusted net income and the “Use of Non-GAAP Financial Information” section below.

Cash flow from operating activities for the third quarter of 2013 was $24.7 million compared to $16.0 million in the 2012 period. This increase was primarily due to a higher level of cash operating income. During the third quarter of 2013, we made an $8.0 million estimated tax payment related to the retirement of our convertible subordinated notes in the first quarter of 2013. Excluding this tax payment, cash flow from operations totaled $32.7 million for the third quarter of 2013. This excess cash flow from operations was used to pay down $27.0 million of long-term debt during the quarter. Additionally, during the third quarter of 2013, we amended and extended our revolving credit facility in order to extend the maturity date of this facility to 2018, take advantage of favorable pricing and increase the total capacity of our credit facility by $100 million.

Product Line Sales

The following table summarizes the Company’s sales by major product lines (dollars in thousands):

Implantable Medical

Cardiac and neuromodulation sales for the third quarter of 2013 increased 8% compared to the prior year to $87.0 million. This increase was driven by stronger market performance and continued deepening relationships with our OEM partners. More specifically, during the quarter we experienced double digit growth in medical batteries, capacitors, leads and feedthroughs. We continue to see an increased pace of product development opportunities from our cardiac customers. We believe that these opportunities, combined with our increased sales and marketing resources, will allow the Company to continue to grow this product line faster than the underlying market.

Orthopaedic sales of $30.1 million for the third quarter of 2013 increased 11% compared to the third quarter of 2012. During the first quarter of 2013, the Company divested certain non-core orthopaedic product lines, which reduced third quarter 2013 orthopaedic revenue by approximately $3.2 million in comparison to the prior year period. Additionally, foreign currency exchange rate fluctuations benefitted current quarter orthopaedic revenue by approximately $1 million in comparison to the prior year. On a constant currency organic basis, orthopaedic product line sales increased 22% in comparison to the prior year third quarter. This improvement was primarily due to orthopaedic implant, and cases and tray market share gains, which benefitted from our increased sales and marketing efforts to drive organic growth.

Third quarter 2013 vascular sales decreased $1.4 million to $12.3 million in comparison to the prior year period, reflecting the previously communicated voluntary recall of two vascular medical devices near the end of 2012.

Electrochem

Third quarter 2013 Electrochem sales decreased 5% to $38.4 million compared to $40.2 million for the comparable 2012 period. During the quarter, we experienced lower revenue from our portable medical, environmental and military product lines, which are being impacted by our increased pricing discipline, as well as reduced government funding on certain military and environmental projects. We expect these factors to continue to impact our business for the foreseeable future. Partially offsetting these decreases was a 4% increase in our energy product line as customer ordering patterns returned to normalized levels.

Financial Guidance

Based upon our results for the first three quarters, as well as our expectations for the remainder of 2013, we continue to believe that revenue will be at the lower end of our original sales guidance of $660 million to $680 million provided at the beginning of the year. If achieved, this would result in organic revenue growth of 5% - 8% after adjusting for the disposition of $15 million of non-core orthopaedic product lines at the end of 2012. Because of our strong productivity performance and favorable mix of product sales we believe that our adjusted diluted EPS will be at the mid-point or better of our previous $2.05 to $2.15 guidance. Further details will be provided on our earnings call later today.

Conference Call

The Company will host a conference call on Thursday October 24, 2013 at 5:00 p.m. ET to discuss these results. The scheduled conference call will be webcast live and is accessible through the Company’s website at www.greatbatch.com or by dialing 866-318-8615 and entering pass code 22177520. An audio replay will also be available beginning from 9:00 p.m. ET on October 24, 2013 until October 31, 2013. To access the replay, dial 888-286-8010 (U.S.) and enter the pass code 80216557.

About Greatbatch, Inc.

Greatbatch, Inc. (NYSE: GB) provides top-quality technologies to industries that depend on reliable, long-lasting performance through its brands Greatbatch Medical, Electrochem and QiG Group. Greatbatch Medical develops and manufactures critical medical device technologies for the cardiac, neuromodulation, vascular and orthopaedic markets. Electrochem designs and manufactures batteries for high-end niche applications in the portable medical, energy, military, and other markets. The QiG Group empowers the design and development of new medical devices for our core markets. Additional information about the Company is available at www.greatbatch.com.

Use of Non-GAAP Financial Information

In addition to our results reported in accordance with generally accepted accounting principles (“GAAP”), we provide adjusted operating income and margin, adjusted net income, adjusted earnings per diluted share and adjusted EBITDA. These adjusted amounts, other than adjusted EBITDA, consist of GAAP amounts excluding the following adjustments to the extent occurring during the period: (i) acquisition-related charges, (ii) facility consolidation, optimization, manufacturing transfer and system integration charges, (iii) asset write-down and disposition charges, (iv) severance charges in connection with corporate realignments or a reduction in force (v) litigation charges and gains, (vi) the impact of certain non-cash charges to interest expense, (vii) unusual or infrequently occurring items, (viii) certain R&D expenditures (such as medical device DVT expenses in connection with developing our neuromodulation platform), (ix) gain/loss on the sale of investments, (x) the income tax (benefit) related to these adjustments and (xi) certain tax charges related to the consolidation of our Swiss Orthopaedic facility. Adjusted earnings per diluted share were calculated by dividing adjusted net income by diluted weighted average shares outstanding. Adjusted EBITDA consists of adjusted operating income excluding GAAP depreciation and amortization less adjustments included in GAAP depreciation and amortization already excluded from adjusted operating income. We believe that the presentation of adjusted operating income and margin, adjusted net income, adjusted diluted earnings per share and adjusted EBITDA provides important supplemental information to management and investors seeking to understand the financial and business trends relating to our financial condition and results of operations.

Forward-Looking Statements

Some of the statements in this press release, including the information provided under the caption “Financial Guidance,” are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and involve a number of risks and uncertainties. These forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or variations or the negative of these terms or other comparable terminology. These forward-looking statements are based on the Company’s current expectations. The Company’s actual results could differ materially from those stated or implied in such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from those stated or implied by such forward-looking statements include, among others, the following matters affecting the Company: our dependence upon a limited number of customers; customer ordering patterns; product obsolescence; our inability to market current or future products; pricing/vertical integration pressure from customers; our ability to timely and successfully implement our cost reduction and plant consolidation initiatives (including the consolidation of our Swiss orthopaedic operations); our reliance on third party suppliers for raw materials, products and subcomponents; our inability to maintain high quality standards for our products; challenges to our intellectual property rights; product liability claims; our inability to successfully consummate and integrate acquisitions and to realize synergies; our unsuccessful expansion into new markets; our ability to realize a return on our substantial RD&E investments, including system and device products; changes in and challenges related to compliance with governmental laws and regulations, including regulations of the U.S. Food and Drug Administration and foreign government agencies regulating medical device approvals; our inability to obtain licenses to key technology; regulatory changes or consolidation in the healthcare industry; global economic factors including currency exchange rates and interest rates; the resolution of various legal actions and other risks and uncertainties described in the Company’s Annual Report on Form 10-K and in other periodic filings with the Securities and Exchange Commission. The Company assumes no obligation to update forward-looking statements in this press release whether to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial conditions or prospects, or otherwise.

Source: Greatbatch, Inc.

Greatbatch, Inc.
Betsy Cowell, 214-618-4982
VP Finance and Treasurer
ecowell@greatbatch.com