Greatbatch, Inc. (GB) posted adjusted earnings per share of 60 cents for the second quarter of 2014 ended Jul 4, 2014, reflecting a 7.1% rise over the prior-year level of 56 cents. Adjusted earnings per share were in line with the Zacks Consensus Estimate.
Also, adjusted earnings increased 11.5% to $15.5 million from $13.9 million in the year-ago quarter. On a reported basis, GB earned $12.3 million or 48 cents per share compared with $9.6 million or 39 cents per share in the second quarter of 2013.
Revenues
Revenues in the second quarter stood at $172.1 million, reflecting a mere improvement of 0.4% from the prior-year quarter. Revenues missed the Zacks Consensus Estimate of $177 million by 2.8%.
Revenues improved on the back of increased sales force productivity, marketing efforts and market growth. The improvement was also driven by double-digit growth in the orthopaedic and vascular product lines, mainly offset by persistent weakness in the portable medical product line as well as lower cardiac and neuromodulation sales.
Product Lines Results
Revenues from Cardiac/Neuromodulation product slid 3.8% to $80.0 million in the quarter. The decrease was primarily due to the timing of shipments of customer orders as well as the initial end of life impact for two legacy products.
Revenues from Orthopaedic products increased 17.1% to $37.9 million. On an organic constant currency basis, orthopaedic product line sales grew 12% from the second quarter of the prior year. The upside was driven by sales force productivity, marketing efforts, and market growth. Sales in the quarter were also impacted by consolidation of Swiss orthopaedic facility.
Revenues from Portable Medical declined 24.5% to $16.7 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.
Revenues from Vascular products spiked 24.6% to $15.3 million. The increase reflects the continued adoption of GB’s medical device products and the re-launch of a vascular medical device at the end of 2013, which was voluntarily recalled in the fourth quarter of 2012.
Revenues from the Energy, Military and Environmental (EME) business improved 3.9% to $21.4 million in the quarter. The business benefited from strong growth (9%) in energy sales driven by market share gains and a shift to higher value products, partially hurt by a fall in military and environmental sales due to unfavorable timing of customer orders.
Overall, revenues from Greatbatch Medical (which includes the above-mentioned product lines) edged up 0.4% to $171.2 million in the second quarter.
Revenues from QiG, which includes sales of neural interface technology, components and systems to the neuroscience and clinical markets, improved 3.3% to $865 thousand in the quarter.
Margins and Expenses
Gross profit rose 2% to $58.5 million from $57.3 million in the comparable period a year ago. Gross margin improved 60 basis points (bps) to 34% on the back of production efficiencies and lower performance-based compensation in comparison to the prior-year quarter. Margins were partly hurt by lower margin sales mix and contractual price concessions granted in exchange for long-term agreements with customers.
Selling, general and administrative (SG&A) expenses declined 1.7% to $21.9 million primarily led by the operating unit realignment implemented in the second half of 2013 and lower performance-based compensation. The decline was partially offset by continued investments in sales and marketing, and increased legal fees including higher patent filing costs.
Research, development and engineering (RD&E) expenses fell 9.3% to $12.8 million mainly due to lower medical device costs and reduced performance-based compensation from the year-earlier quarter.
Adjusted operating income, which excludes other operating expenses, rose 7.2% to $23.8 million from $22.2 million in the prior-year quarter while adjusted operating margin expanded 80 bps to 13.8% from 13.0% a year ago. The increase was primarily owing to increased gross profit and lower SG&A and RD&E expenses during the quarter.
Financial Position
GB had cash and cash equivalents of $51.2 million as of Jul 4, 2014, up 44.3% from $35.5 million as of Jan 3, 2014. Long-term debt declined 2.5% to $192.5 million from $197.5 million as of Jan 3, 2013. Consequently, the long-term-debt-to-capitalization ratio deteriorated 190 bps to 24.8% from 26.7% as of Jan 3, 2014.
In the quarter, cash flows from operating activities stood at $19.5 million compared with an outflow of $1.0 million in the second quarter of 2013. This increase is primarily attributable to higher operating income, improved working capital management and an $11.5 million estimated tax payment made in the second quarter of 2013 in connection with the retirement of the company’s convertible subordinated notes in 2013.
Meanwhile, capital expenditures in the second quarter increased 25% to $6.0 million from $4.8 million in the comparable year-ago quarter. For the first six months ended Jul 4, 2014, capital expenditures totaled $12.0 million, up 3.4% from $11.6 million in the same period last year.
2014 Guidance
GB reaffirmed its 2014 adjusted earnings and revenue guidance provided at the beginning of the year. Management continues to expect 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 $2.33 lies within the guided range.
For 2014, revenues are anticipated in the range of $685 to $705 million, reflecting a 3 to 6% rise over 2013. The Zacks Consensus Estimate of $705 million coincides with the upper end of the guided range.
GB continues to anticipate adjusted operating margin between 13.0 and 13.3% and capital expenditures in the range of $25 to $35 million for the year.
Zacks Rank
Currently, GB retains a Zacks Rank #3 (Hold). Better-ranked stocks in the medical instruments sector include Accuray Incorporated (ARAY), Heartware International Inc. (HTWR) and RTI Surgical Inc. (RTIX). All three stocks sport a Zacks Rank #1 (Strong Buy).
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