Greatbatch Reports 2015 Second Quarter Results

FRISCO, Texas, July 30, 2015 (GLOBE NEWSWIRE) -- Greatbatch, Inc. (NYSE:GB), today announced results for its second quarter ended July 3, 2015.

CEO Comments

“I am very satisfied with our results for the second quarter, which were consistent with our expectations,” said Greatbatch President and CEO, Thomas J. Hook. “During the quarter we continued to drive the implementation of our strategic plan with investments in technology, capacity and capabilities,” continued Hook. “We expect to finish the year strong based upon new and existing customer business pipelines and carry this momentum into 2016. Earlier today, we filed a Form 10 registration statement with the U.S. Securities and Exchange Commission for our proposed spin-off from our QiG Group neuromodulation device business, now named Nuvectra. Nuvectra will be initially focused on the development and commercialization of the Algovita spinal cord stimulation system, the first application of this neurostimulation technology platform.”

“The strategic spin-off of Nuvectra will provide both entities the focus and flexibility needed to execute their growth initiatives, distinct strategies and provide their respective customers with unparalleled service. Furthermore, it will allow each company to better allocate resources to meet the needs of their respective businesses, pursue distinct capital allocation strategies and focus on targeted growth opportunities with a clear investment proposition to attract long-term investors best suited to each company. Greatbatch will retain CCC Medical Devices and GB Ventures to continue driving growth of integrated medical device system sales to OEM customers,” concluded Hook.

CFO Comments

“We are pleased with our second quarter results highlighted by four percent organic constant currency sales growth which was led by our cardiac and neuromodulation and orthopaedic product lines,” said Michael Dinkins, executive vice president and CFO of Greatbatch. “The quarter also saw us deliver $0.64 adjusted diluted EPS which grew 5% for the quarter. Based on our first half results, as well as our expectations for the remainder of the year, we are maintaining our 2015 revenue and adjusted diluted EPS guidance ranges for 2015.”

“Today we took an important step in the process of spinning-off Nuvectra. Once completed, the spin-off will deliver improved shareholder returns through the Nuvectra spin-out share dividend, reduction of $12 million to $16 million in operating expenses (annualized basis) and through a long-term manufacturing agreement with Nuvectra for the Algovita platform. This allows Greatbatch to continue its strategic investment in all of Greatbatch’s markets including the neuromodulation market,” said Dinkins.

Second Quarter Results

Second quarter 2015 sales of $174.9 million increased 2% in comparison to the prior year period. Sales for the second quarter of 2015 include $1.2 million from CCC Medical Devices, which was acquired in August 2014, as well as the impact of foreign currency exchange rate fluctuations, which reduced second quarter sales by approximately $5.5 million in comparison to the prior year due to the strengthening dollar versus the Euro. Excluding the impact of these items, our organic constant currency sales increased 4% for the second quarter of 2015 in comparison to the prior year. This organic constant currency sales increase was primarily due to record sales in our cardiac and neuromodulation product line of $90.2 million for the second quarter of 2015, as well as continued strength in our orthopaedics product line, which increased 8% on an organic constant currency basis over the prior year second quarter. Additionally, as expected, our portable medical product line stabilized during the quarter, increasing 6% over the prior year second quarter. Partially offsetting these increases was a $2.4 million and $4.8 million decrease in our vascular, and energy, military and environmental (“EME”) product lines, respectively, due to the tough comparable versus the prior year and a slowdown in the energy markets, respectively.

Gross profit of $58.0 million for the second quarter of 2015 was consistent with the $58.5 million earned in the prior year period as the benefit of higher sales volumes was offset by continued pricing pressure from our customers and a higher mix of lower margin products during the quarter. As a result, our gross profit as a percentage of sales for the second quarter of 2015 decreased 90 basis points to 33.1% in comparison to the second quarter of 2014.

Selling, general and administrative (“SG&A”) expenses for the second quarter of 2015 increased $2.2 million or 10% in comparison to the prior year period. This increase is primarily attributable to the acquisition of CCC Medical Devices, which added $0.3 million of SG&A costs, as well as higher legal fees in connection with intellectual property (“IP”) related litigation of $1.1 million. Additionally, our QiG medical device business accounted for $0.5 million of this increase as we continue to invest resources in connection with the commercialization of our Algovita spinal cord stimulation (“SCS”) system (“Algovita”).

Net research, development and engineering (“RD&E”) costs for the 2015 second quarter of $13.1 million were consistent with the $12.8 million recorded during the second quarter of 2014. Total RD&E costs incurred in connection with our QiG medical device business were $5.1 million during the second quarter of 2015 compared to $5.4 million in the comparable 2014 period.

GAAP operating income for the second quarter of 2015 decreased 33% to $13.0 million. This decrease was primarily due to higher SG&A costs as discussed above and an increase in costs incurred in connection with our 2014 initiatives to invest in capacity and capabilities, which are included in other operating expenses, net. Adjusted operating income, which excludes IP related litigation expenses, as well as other operating expenses, net decreased $1.9 million, or 8%, to $22.2 million. Refer to Table A at the end of this release for a reconciliation of GAAP operating income to adjusted operating income and the “Use of Non-GAAP Financial Information” section below.

The 2015 second quarter GAAP effective tax rate was 22.2% compared to 31.9% for the same period of 2014. This decrease was primarily attributable to higher income in lower tax rate jurisdictions. The 2015 and 2014 second quarter GAAP effective tax rates do not include the benefit of the Federal research and development tax credit, but we assume the benefit of this credit when calculating our adjusted diluted EPS. If enacted, the research and development tax credit would benefit the current year GAAP provision for income taxes by approximately $1.6 million or $400 thousand per quarter and would be recognized in the quarter the legislation is enacted.

GAAP and adjusted diluted EPS for the second quarter of 2015 were $0.35 and $0.64, respectively, compared to $0.48 and $0.61, respectively, for the second quarter of 2014. Refer to Table B at the end of this release for a reconciliation of GAAP net income to adjusted net income and the “Use of Non-GAAP Financial Information” section below.

Cash flows provided by operating activities for the second quarter of 2015 of $15.2 million decreased 22% in comparison to the second quarter of 2014. This quarter over quarter decrease was primarily due to higher working capital levels ($2.2 million) and lower cash net income ($2.2 million). Our second quarter 2015 capital expenditures were $6.8 million compared to prior year second quarter capital expenditures of $6.0 million. This increase was primarily due to our investments in capacity and capabilities, including transferring our portable medical product manufacturing to a new facility in Tijuana, Mexico. During the second quarter of 2015, we repaid $2.5 million of our long-term debt.

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