Greatbatch, Inc.’s (GB) second-quarter 2013 adjusted earnings per share (excluding one-time expenses) of 56 cents comfortably beat the Zacks Consensus Estimate by 8 cents. The result exceeded the year-ago adjusted earnings by an impressive 30.2%, driven by solid organic revenue growth, improved gross margins and controlled operating expenses along with benefits from effective tax rate.
Revenues grew 3% year over year to $171.3 million in the second quarter, a record high for Greatbatch. Revenues surpassed the Zacks Consensus Estimate of $168 million. On an organic basis, revenues increased 6% in the quarter. This is quite a turnaround from the 4% decline in organic revenues reported in the sequentially prior quarter.
In the reported quarter, revenues from the core Implantable Medical segment (75% of total sales) increased 2.6% to $128.6 million. Within Implantable Medical, CRM/Neuromodulation sales grew 5% year over year to $84.0 million, reflecting improvement in the underlying market. Normalized customer ordering patterns and strategic relationship with Original Equipment Manufacturers (:OEM) partners drove the sales growth.
Orthopedic sales fell 2% year over year to $32.3 million due to the divestment of certain non-core orthopedic products in early 2013. On an organic constant currency basis, orthopedic sales jumped 14% because of market share gain in implants and greenfield opportunities.
Revenues from the Vascular product line dipped 2.4% to $10.6 million, mainly due to product recall.
Revenues from Greatbatch’s smaller Electrochem segment increased 3.9% to $42.7 million. The Micro Power product line has been integrated into Greatbatch as Portable Medical offerings. Portable medical sales grew an encouraging 9% in the quarter, benefiting from product launches. Sales from Energy and Other product lines remained roughly flat at $13.2 million and $7.5 million, respectively.
Gross margin increased 220 basis points (bps) in the second quarter to 33.4% on the back of improved production volumes, favorable mix and cost savings realized from consolidation of Swiss facilities. Selling, general and administrative expenses increased 7.2% year over year to $22.2 million in the quarter, led by the company’s sales and marketing initiatives, partially offset by synergies realized from the consolidation of the Swiss facility.
Net research, development and engineering costs (RD&E) remained roughly flat at $14.1 million, as the company is leveraging its RD&E expenses. Adjusted operating margin escalated to 13.0% (an expansion of 180 bps) on the back of improved gross margin and better operational efficiency.
Balance Sheet and Cash Flows
Greatbatch ended second quarter 2013 with cash and cash equivalents of $10.2 million compared with $20.3 at the end of 2012. Long-term debt in the quarter was $237.0 million compared with $225.4 million at the end of 2012.
Cash flow used in operating activities were $1 million compared to operating cash flow of $24.0 million at the end of 2012. This is mainly due to tax-related payments.
Moving ahead, Greatbatch reiterated its revenue outlook for 2013 toward the lower end of $660–$680 million due to the disposition of non-core orthopedic assets worth $15 million. On an organic basis, total sales are expected to be up by 5%–8%. The Zacks Consensus Estimate for 2013 is pegged at $661 million.
However, the company raised its adjusted earnings per share guidance to the range of $2.05–$2.15 from $1.90–$2.00 for 2013, mainly due to the company’s strong performance in the first half of 2013. Moreover, Greatbatch expects adjusted operating margin of 13% (earlier 12.0%–12.5%) for the year. The current Zacks Consensus Estimate of $2.08 for 2013 lies within the guided range.
Based on Greatbatch’s solid run in the first half of 2013, the company currently holds a Zacks Rank #1 (Strong Buy). Despite moderate top-line growth, strategic restructuring efforts and operational efficiency aided the company to boost its bottom line. We believe that the company’s realignment plan will help it to emphasize on investing in its core business as well as develop innovative products by combining the resources of the integrated unit.
We are also encouraged by Greatbatch’s effort to transform into a medical devices company. Almost 80% of its revenues are generated from medical devices companies. The company’s pipeline is healthy with a number of products currently in development that are expected to support growth in the long run. The company has forged strategic long-term agreements with its OEM clients to secure healthy revenue growth. Its top customers include leading players such as Medtronic (MDT) and St. Jude Medical (STJ).
The completion of the consolidation of the Swiss facility is encouraging. This in turn is helping to leverage operational efficiency as well as the bottom line. Moreover, we take note of the turnaround in the CRM/Neuro business and improved market fundamentals in this segment.
Other semi-discretes stocks such as Vishay Intertechnology (VSH) also have a Zacks Rank #1 (Strong Buy) and warrant a look. The company is slated to report on Jul 30.
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