Greatbatch, Inc. (GB) reported second-quarter 2012 adjusted (excluding one-time items) earnings per share of 43 cents, in line with both the Zacks Consensus Estimate and the year-ago adjusted earnings.
Profits (as reported) plunged 55% year over year to roughly $3.9 million (or 16 cents a share) due to higher operating expenses.
Revenues
Revenues rose 14% year over year to a record $166.5 million in the second quarter, beating the Zacks Consensus Estimate of $162 million. Revenues were driven by the Micro Power acquisition, unexpected gains in the Cardiac Rhythm Management (“CRM”)/Neuromodulation segment along with double-digit growth across the company’s Vascular Access business.
Foreign currency movements negatively contributed $3 million to Orthopedic revenues in the quarter. However, on an organic basis, revenues inched up 1%, given lower Orthopedic sales.
Segment Review
In the reported quarter, revenues from the core Implantable Medical segment (75% of total sales) remained roughly flat year over year at $125.4 million.
Within Implantable Medical, CRM/Neuromodulation sales rose 3% year over year to $80 million, led by new product launches. Increased focus on sales and marketing coupled with product development is expected to further boost CRM sales. Revenues from Vascular Access soared 16% to $12.5 million on the back of commercialization of new medical devices.
Orthopedic sales plunged roughly 13% (down 5% in constant currency) to $32.9 million due to pricing pressure, lack of product expansion and development initiatives among other operational issues within the Swiss facility. Currency exchange swings negatively impacted orthopedic sales by $3 million in the quarter. However, on a positive note, Orthopedic revenues rose 6% sequentially and the company expects improved segment performance in the next 18 months.
Revenues from Greatbatch’s smaller Electrochem segment more than doubled year over year to $41.2 million on the back of Micro Power acquisition. The Micro Power product line has been integrated into Greatbatch as Portable Medical offerings.
Margins
Gross margin edged down to 31.2% from 31.8% a year ago. Margin dropped mainly due to pricing pressure, higher sale of lower margin products and operational snags at the European Orthopedic units.
Selling, general and administrative expenses, as a percentage of sales, inched up to 12.5% from 12% in the prior-year quarter, as a result of acquisitions. Net research, development and engineering costs (RD&E), as a percentage of sales, increased to 8.5% from 7.7% a year ago mainly due to investments for the development of complete medical devices. Adjusted operating margin fell to 11.2% from 12.6% a year ago.
Balance Sheet and Cash Flows
Greatbatch ended second quarter 2012 with cash and cash equivalents of $11.1 million, down 69.5% year over year. The company reported operating cash flow of $24 million in the quarter versus $13 million in the year-ago quarter. This allowed the company to repay a long-term debt of $8 million. Long-term debt in the quarter was $233.4 million, down 1%.
Guidance and Recommendation
Greatbatch reiterated its sales 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 Orthopedic segment likely to 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 earnings to be at the lower end of the guided ranges.
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).
Greatbatch has been acquiring complementary businesses over the last few years to expand. The company successfully completed the integration of Micro Power as Portable Medical in the reported quarter. Its 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 recently opened a new Orthopedic manufacturing facility in Fort Wayne, Indiana to improve its Orthopedic operations. Moreover, Greatbatch established a research and development (R&D) center in Singapore to implement its strategy of expanding in the Asia-Pacific region.
However, soft Orthopedic markets and pricing pressure remain headwinds. Greatbatch, Inc. currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We maintain our Neutral recommendation on the shares of GreatBatch.
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