Greatbatch, Inc. (GB) reported adjusted earnings of 64 cents per share in the third quarter of 2014, which beat the Zacks Consensus Estimate by 7 cents and surged 12.3% from the year-ago quarter.
Revenues
Revenues in the quarter improved 2.4% year over year to $172 million, in line with the Zacks Consensus Estimate. Revenues were driven by robust growth in the orthopaedic and vascular product lines, mainly offset by persistent weakness in the portable medical product line.
Revenues from Cardiac/Neuromodulation product slid 0.8% to $85.6 million, due to the end of life impact for two legacy products, partly offset by new sales opportunities with existing customers.
Revenues from Orthopaedic products came in at $32.5 million, up 8% on a year-over-year basis. The upside was driven by sales force productivity, marketing efforts, and improved market conditions, partially offset by a decline in case and tray sales due to the timing of the customer product launches.
Revenues from Portable Medical declined 11% to $17.2 million. Discontinued or reduced volumes in some lower margin products negatively impacted sales during the quarter and is expected to have an adverse impact on revenues for the remainder of 2014 and the first half of 2015 as well.
Vascular product revenues spiked 21.4% to $15 million, reflecting continued adoption of the company’s medical device products and the re-launch of a vascular medical device at the end of 2013.
Meanwhile, revenues from the Energy, Military and Environmental (EME) business remained flat on a year-over-year basis at $19 million.
Revenues from QiG, which includes sales from CCC Medical Devices acquired in Aug 2014, surged to $2.5 million from $0.7 million in the previous-year quarter.
Operational Details
Gross margin improved 50 basis points (bps) on a year-over-year basis to 33.8% on the back of production efficiencies, higher margin sales mix and the acquisition of CCC Medical Devices, which more than offset the impact of contractual price concessions granted in exchange for long-term agreements with customers.
Adjusted operating margin remained flat at 13.1% on a year-over-year basis, as increased selling, general and administrative expenses and higher consolidation and optimization costs were almost entirely offset by improved gross profit.
Financial Position
At the end of the third quarter, Greatbatch had cash and cash equivalents of $61.6 million as compared with $51.2 million at the end of the previous quarter. Long-term debt declined to $190 million from $192.5 million as of Jul 3, 2014.
In the first nine months of 2014, Greatbatch generated operating cash flow of $54.7 million, positively impacted by stronger operating income and lower tax payments.
2014 Guidance
Based on its third-quarter results, the addition of CCC Medical Devices, and the forecast for the fourth quarter, Greatbatch raised its full-year 2014 revenue and adjusted earnings per share guidance.
Management projects adjusted earnings in the band of $2.32–$2.38 per share, higher than the earlier band of $2.25–$2.35 per share. The current Zacks Consensus Estimate of $2.32 coincides with the lower end of the new range.
Meanwhile, annual revenues are anticipated in the band of $695 to $705 million as against the prior range of $685 to $705 million. The Zacks Consensus Estimate, currently pegged at $699 million, lies within the guided range.
Greatbatch anticipates adjusted operating margin of approximately 13% for 2014.
Our Take
Greatbatch continues to execute on its growth strategies via strategic investments, manufacturing efficiencies, operating cost containment and volume leverage. Over the last three years, the company has invested heavily in research and development to establish itself as a provider of complete medical device systems.
With the acquisition of CCC Medical Devices, Greatbatch aims at enhancing its medical device innovation efforts in the Neuromodulation space by combining the knowledge, talent and customer base of both companies.
We are particularly encouraged with the company’s raised 2014 revenue and adjusted earnings per share guidance. However, Greatbatch continues to face persistent weakness in the portable medical product line which may pressurize the top line.
Currently, Greatbatch carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the medical instruments industry include AngioDynamics Inc. (ANGO), Alphatec Holdings, Inc. (ATEC) and Cynosure, Inc. (CYNO). While AngioDynamics sports a Zacks Rank #1 (Strong Buy), both Alphatec Holdings and Cynosure carry a Zack Rank #2 (Buy).
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