Greatbatch, Inc.’s (GB) fourth-quarter 2013 adjusted earnings per share of 55 cents exceeded the year-ago level of 53 cents by 3.8% but missed the Zacks Consensus Estimate by a penny. Adjusted net earnings rose 11.5% to $14.0 million from $12.6 million in the fourth quarter of 2012.
On a reported basis, GB earned $9.8 million or 38 cents per share in the quarter in contrast to a loss of $5.6 million or 23 cents per share. Following the release of earning results, shares of the company rose 1.1%.
For full year 2013, GB’s adjusted net earnings per share rose 18.6% to $2.10 from $1.77 a year ago while adjusted net earnings grew 25.1% to $53.2 million from $42.5 million in 2012.
Revenues
Net revenues in the quarter improved 11.0% (13% on an organic constant currency basis) to $176.6 million, which was almost in line with the Zacks Consensus Estimate of $176.0 million.
The increase in revenues was attributable to higher cardiac/neuromodulation and orthopaedic product lines sales driven by market share gains due to increased sales and marketing investment, customer product launches and the release of backlog owing to the Swiss consolidation. These were partially offset by an 18% decline in portable medical sales due to the tough comparable versus the year-ago quarter as well as our pricing discipline, which led to a loss of some low-margin businesses.
Net revenues in the year inched up 2.7% (5% on an organic constant currency basis) to $663.9 million driven by above mentioned improvements due to cardiac/neuromodulation and orthopaedic product lines sales.
Results by Product Lines
Revenues from Cardiac/neuromodulation product went up 17.1% and 6.1% to $85.4 million and $325.4 million, for the fourth quarter and full year 2013, respectively. The increase was driven by solid market performance and strong relationships with OEM partners. GB witnessed strong growth in batteries, capacitors, leads, and assembly revenues in the quarter.
Revenues from Orthopaedic product increased 23.3% and 6.7% to $38.2 million and $130.2 million for the fourth quarter and 2013, respectively. Revenues from orthopaedic were reduced by $3 million and $15 million in the fourth quarter and full year, respectively due to divestment of certain non-core orthopaedic product lines in the first quarter of 2013.
On a constant currency organic basis, orthopaedic product line revenues increased 33% and 20% in the fourth quarter and full-year, respectively, driven by above market growth rates on the back of increased sales and marketing efforts, market share gains, product launches, as well as the release of backlog built up owing to the company’s consolidation of Swiss orthopaedic facility at the end of 2012.
Revenues from Vascular product dipped nearly 7.0% in both the quarter and the year to $13.2 million and $48.4 million, respectively due to voluntary recall of two vascular medical devices in the fourth quarter of 2012.
Revenues from Portable Medical dipped 17.7% and 3.6% to $18.4 million and $78.7 million in the fourth quarter and 2013-full year, respectively. This product line business was adversely impacted by higher pricing discipline leading to a loss of some low-margin businesses.
Revenues from Energy business rose 3.2% to$13.5 million in the quarter but declined 2.9% to $52.5 million in the year. Revenues from Other product lines surged 43.4% to $7.12 million in the quarter but fell 6.0% to $25.7 million in the year.
Overall, revenues from Greatbatch Medical (which includes the above-mentioned product lines) escalated 10.9% to $175.7 million and rose 2.7% to $660.9 million in the year. Revenues from QiG, which includes sales of neural interface technology, components and systems to the neuroscience and clinical markets, spiked 12.4% to $886 thousand in the quarter and 24% to $3.0 million in the year, driven by revenues from NeuroNexus Technologies, Inc., which was acquired in February 2012, as well as the high growth nature of the neuroscience and clinical markets.
Margins
Gross profit scaled up 10.6% to $57.4 million in the quarter driven by higher sales volumes. Gross margin remained almost unchanged at 32.5% compared with the 2012-fourth quarter. For the year, gross profit increased 8.8% to $219.3 million driven by higher operational leverage on the back of higher sales volumes and productivity initiatives, as well as a favorable sales mix of higher margin products. Gross margin for the year increased 180 basis points (bps) to 33.0% from 31.2% in 2012.
Adjusted operating income, which excludes other operating and DVT expenses, rose 8.1% to $19.4 million in the quarter and 12.2% to $82.9 million in the year. Adjusted operating margin decreased 230 bps to 11.0% in the quarter but rose 110 bps to 12.5% in the year due to increased operational leverage as well as various consolidation and productivity initiatives implemented over the past year.
Balance Sheet and Cash Flows
GB had cash and cash equivalents of roughly $35.5 million as of Jan 3, 2014, up from $20.3 at the end of 2012. Long-term debt was $197.5 million compared with $225.4 million at the end of 2012. Long-term debt to capitalization ratio fell 520 bps to 26.7% as of Jan 3, 2014 from 31.9% as of Dec 28, 2012.
Cash flow from operating activities for the fourth quarter and full-year of 2013 were $40.7 million and $56.8 million, respectively, versus $25.3 million and $64.8 million, respectively, for the comparable periods in 2012. The quarter over quarter increase was primarily driven by increase in cash operating income.
2014 Outlook
GB expects revenues in the range of $685 to $705 million, reflecting a 3 to 6% rise over 2013. The Zacks Consensus Estimate of $691 million for the year lies within the guided range.
GB anticipates adjusted operating margin between 13.0 and 13.3%, reflecting a 50 to 80 bps rise from 2012. Capital expenditures are expected in the range of $25 to $35 million for the year.
Finally, GB expects adjusted earnings per share in the range of $2.25–$2.35, indicating a 7 to 12% rise over 2013. The current Zacks Consensus Estimate of $2.30 lies within the guided range.
Our Take
We remain impressed by GB’s double-digit bottom line growth in earnings on the back of strategic restructuring efforts along accretive investments in sales and marketing. We believe that the company’s realignment plan will help it to focus on investing in its core business as well as develop innovative products by combining the resources of the integrated unit. However, lack of earnings surprise in the quarter compels us to take a bearish stance at the same time.
Currently, GB retains a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader medical products sector include Enzymotec Ltd. (ENZY), NuVasive, Inc. (NUVA), and Covidien plc (COV). Both Enzymotec and NuVasive carry a Zacks Rank #1 (Strong Buy), while Covidien carries a Zacks Rank #2 (Buy).
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