Greatbatch, Inc. Reports 2012 Fourth Quarter and Full Year Results
Greatbatch, Inc. Reports 2012 Fourth Quarter and Full Year Results
- 2012 Revenues of $646 million grew 14%; 0% constant currency organic growth
- Portable Medical acquisition contributes $82.4 million; 38% pro-forma organic growth
- GAAP Operating Income of $25.8 million down 58% to prior year
- Continued success with Orthopaedic consolidation
- Adjusted Operating Income of $73.9 million an increase of 9%
- Sales increased 12% over the prior year to $159.2 million and included a 2% organic constant currency decline offset by additional revenue from our recent acquisitions:
- Cardiac/Neuromodulation product line revenue decreased 5% primarily due to the tough comparable versus the prior year quarter, continued market headwinds and strong shipments in the third quarter of 2012.
- Portable medical product line continues to benefit from our acquisition and new product introductions, which contributed $18.8 million to our growth.
- Vascular product line growth of 14% was driven by growth in the underlying market and market share gains.
- Orthopaedics constant currency revenue was consistent with the prior year quarter as stronger implant revenue offset the decline in instrument sales due to the transition of our Swiss facility.
- GAAP net loss of $5.6 million resulted in a diluted EPS loss of $0.23 per share. This loss was primarily due to charges incurred in connection with the consolidation of our Swiss orthopaedic operations, which are expected to improve profitability beginning in the first quarter of 2013.
- Fourth quarter adjusted operating income increased 34% due to gross profit from our acquisitions and a reduction in our RD&E expenses. These increases also contributed to a 36% increase in adjusted diluted EPS to $0.53 per share for the fourth quarter (Refer to Tables A and B at the end of this release).
- Sales increased 14% over the prior year to $646.2 million and included a $1.2 million decline in organic constant currency revenue offset by additional sales from our recent acquisitions:
- Cardiac/Neuromodulation product line revenue increased 2% and benefitted from further adoption of our Q series batteries.
- Portable medical product line benefited from our acquisition and new product introductions, which contributed $72.1 million to our growth.
- Vascular product line growth of 15% included the benefits of the commercialization of medical devices.
- Orthopaedics constant currency revenue declined 8%, as the transition of our Swiss facility, which was completed in the fourth quarter of 2012, negatively impacted our revenues.
- GAAP net loss of $4.8 million resulted in a diluted EPS loss of $0.20 per share. This loss was primarily due to charges incurred in connection with the consolidation of our Swiss orthopaedic operations, which are expected to improve profitability beginning in the first quarter of 2013.
- Adjusted operating income increased 9% due to revenue growth and operating leverage improvements. These resulted in a 5% increase in adjusted diluted EPS to $1.77 per share for the year.
- Cash flows from operations were $25 million for the fourth quarter and $65 million for the full year compared to $31 million and $90 million, respectively, for the comparable 2011 periods. During the 2012 fourth quarter and full year the Company paid down $8 million and $22 million, respectively, of long-term debt.
|Three months ended|
|(Dollars in thousands, except EPS data)||December 28,||December 30,||%||September 28,||%|
|GAAP Operating Income||$||1,405||$||12,542||-89||%||$||2,127||-34||%|
|GAAP Operating Income as % of Sales||0.9||%||8.8||%||1.3||%|
|Adjusted Operating Income*||$||21,121||$||15,748||34||%||$||18,664||13||%|
|Adjusted Operating Income as % of Sales||13.3||%||11.1||%||11.6||%|
|GAAP Diluted EPS||$||(0.23||)||$||0.24||N/A||$||(0.32||)||-28||%|
|Adjusted Diluted EPS*||$||0.53||$||0.39||36||%||$||0.46||15||%|
|(Dollars in thousands, except EPS data)|
|GAAP Operating Income||$||25,821||$||61,699||-58||%|
|GAAP Operating Income as % of Sales||4.0||%||10.8||%|
|Adjusted Operating Income*||$||73,889||$||67,602||9||%|
|Adjusted Operating Income as % of Sales||11.4||%||11.9||%|
|GAAP Diluted EPS||$||(0.20||)||$||1.40||-114||%|
|Adjusted Diluted EPS*||$||1.77||$||1.68||5||%|
|* Refer to Tables A and B at the end of this release for a reconciliation of adjusted amounts to GAAP.|
"Our fourth quarter performance is a step in the right direction," stated Thomas J. Hook, President & CEO, Greatbatch, Inc. "Eliminating the operating losses from our Swiss operation will improve the overall earnings of Greatbatch going forward. While we continually identify and implement cost improvement initiatives, we have now completed all of our major plant consolidations, which began in 2007, so our leadership team can focus on achieving sustainable organic growth to leverage our available capacity. Fourth quarter revenues were up 12% and adjusted diluted EPS was up 36% reflecting a strong gross margin performance of 32.6% and a reduction in our RD&E expense, which included the achievement of milestones on two large customer projects that will commercialize into revenue over the next 12 to 24 months."
Hook continued, "During 2012 we were also able to make significant progress on numerous strategic initiatives which included:
- Completing the integration of Micro Power and Neuro Nexus;
- Reorganizing our sales and marketing teams to drive core business growth;
- Refocusing our medical device RD&E investment and discontinuing non-core RD&E projects;
- Making significant technical progress on our Algostim spinal cord stimulator which is receiving strong interest from numerous world-class medical device companies, who appreciate the unique opportunity to market and distribute this device;
- Negotiating several long-term agreements with OEM customers and actively filling our pipeline of component and device opportunities with those customers; and
- Completing construction and successfully transferring manufacturing to our Fort Wayne, Indiana facility."
"These initiatives are designed to create value for our shareholders through top-line, bottom-line and pipe-line growth. We look forward to providing further details on our strategic initiatives at our Investor Day in New York City on March 18, 2013."
"In order to stop the negative impact of our Swiss orthopaedic operations we targeted and completed a transfer of our production to our Fort Wayne, IN and Tijuana, Mexico facilities by year-end. In aggregate we estimate these operational issues had a negative $0.16 per share of adjusted diluted earnings impact for 2012," commented Michael Dinkins, Senior Vice President & CFO. "We partially offset this with a reduction of our corporate-wide performance-based compensation expense, a reduction in our RD&E expense in the second half of the year and better than expected performance of our portable medical product line. For 2013, we expect revenue, after adjusting for the sale of a portion of our orthopaedic product line, to organically grow 5-8% driven primarily by our portable medical, vascular and orthopaedic product lines along with above market growth in cardiac and neuromodulation. We expect our performance to improve as we progress through 2013, as the first quarter 2013 will be impacted by the startup of our recently transferred orthopaedic production lines. The second half of the year is expected to improve as the orthopaedic backlog is relieved and new product introductions in our portable medical business commercialize. As a result of our consolidation initiatives and refocused medical device R&D investment, we expect improved performance in comparison to the prior year and to achieve adjusted diluted EPS growth of 7-13% for calendar year 2013."
Fourth Quarter and Full-Year Results
Fourth quarter 2012 sales increased 12% over the prior year period to $159.2 million. This increase was driven by our recent acquisitions, which added $20.3 million to sales, as well as 14% growth in vascular revenue. Fourth quarter results included the impact of foreign currency exchange rate fluctuations, which lowered orthopaedic sales by approximately $0.6 million in comparison to the prior year. On an organic constant currency basis, sales for the fourth quarter decreased 2% versus the prior year as the benefits described above were partially offset by lower cardiac and neuromodulation revenue, due to the timing of customer inventory builds. For the year, sales increased 14% to $646.2 million and included $84.8 million of revenue from our acquisitions partially offset by $6.3 million of negative foreign currency exchange rate fluctuations. On an organic constant currency basis, revenue for 2012 was consistent with the prior year as above market growth from our cardiac and vascular product lines was offset by operational issues experienced within our orthopaedics product line.
Gross profit increased $7.2 million to $51.9 million for the fourth quarter of 2012, compared to $44.7 million for the comparable 2011 period. This increase resulted from the higher sales volumes discussed above, as well as a shift in mix to higher margin products. As a result, gross margin for the fourth quarter of 2012 increased 110 basis points to 32.6%. For the year, gross profit increased $21.3 million to $201.6 million, which was primarily due to higher sales volumes. Gross margin for the year of 31.2% was 50 basis points below the prior year, as the benefit of higher production volumes and mix was offset by production inefficiencies at our Swiss Orthopaedic facilities.
Selling, general and administrative ("SG&A") expenses increased $2.4 million to $20.9 million, or 13.2% of sales, for the fourth quarter of 2012 compared to $18.6 million, or 13.1% of sales, for the same period of 2011. For the year, SG&A costs increased $8.4 million to $81.0 million, or 12.5% of sales, versus $72.5 million, or 12.8% of sales for 2011. The increase in SG&A expenses for the quarter and full-year were directly attributable to our acquisitions which added $1.7 million and $9.6 million, respectively, of incremental SG&A costs.
Net research, development and engineering costs ("RD&E") for the 2012 fourth quarter and full-year of 2012 were $11.2 million and $52.5 million, respectively, compared to $12.8 million and $45.5 million, respectively, for the comparable 2011 periods. For the fourth quarter and full-year of 2012, our acquisitions added $0.2 million and $2.6 million, respectively, to RD&E. RD&E amounts for the fourth quarter of 2012 and 2011 include $1.4 million and $2.3 million, respectively, of design verification testing ("DVT") costs in connection with our development of a neuromodulation platform. For the year, DVT expenses were $5.2 million for 2012 and $5.1 million for 2011. RD&E for the second half of 2012 was lower than the first half of 2012 by $3.7 million as the Company refocused its medical device R&D investment and discontinued non-core R&D projects. Additionally, the fourth quarter of 2012 included $1.7 million of additional customer cost reimbursements due to the timing of when milestones on certain projects were achieved. For the year, customer cost reimbursements increased $1.4 million in comparison to 2011. Excluding DVT related expenses, medical device adjusted expenses were $28.5 million for 2012 compared to $22.1 million for 2011. Going forward, the Company intends to continue to look for ways to reduce the RD&E investment impact on its bottom line which will include identifying strategic partners to share these costs, monetizing non-core technology assets and refocusing our medical device technology investment towards Algostim and the portable medical markets.
GAAP operating income for the fourth quarter and full-year 2012 was $1.4 million and $25.8 million, respectively, compared to $12.5 million and $61.7 million for the respective periods of 2011. This decrease was primarily due to the charges incurred in connection with the consolidation of our Swiss orthopaedic operations, as well as other productivity initiatives which are expected to ultimately drive improved profitability. Adjusted operating income, which excludes these costs as well as other charges, was $21.1 million and $73.9 million for the 2012 fourth quarter and full-year, respectively, compared to $15.7 million and $67.6 million, respectively, for the comparable 2011 periods. 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.
As shown on Table A, total adjusted expenditures for 2012 related to our medical device initiatives, which exclude DVT related expenses, increased by $6.4 million to $28.5 million for 2012 from $22.1 million in 2011. This information is provided in order to enhance the reader's understanding of our core business, which is being impacted by our medical device initiatives.
The 2012 full-year effective tax rate was 171.3% compared to 31.6% for the same period of 2011. This increase was primarily attributable to approximately $6.2 million of tax charges recorded in connection with our Swiss orthopaedic consolidation. These charges relate to the loss of our Swiss tax holiday, due to our decision to discontinue manufacturing in Switzerland and the establishment of a valuation allowance on our Swiss deferred tax assets, as it is more likely than not that they will not be fully realized. Additionally, our 2012 effective tax rate includes losses from our Swiss operations, the benefit of which are recorded at a lower effective tax rate, thus increasing the overall effective tax rate of the Company, and does not include the benefit of the U.S. R&D tax credit, which expired at the end of 2011. The U.S. R&D tax credit was reinstated in the first quarter of 2013 retroactive to the beginning of 2012. As required under U.S. GAAP, the benefit of both the 2012 and 2013 U.S. R&D tax credit will be recognized in 2013.
GAAP diluted EPS for the fourth quarter and full-year 2012 were a loss of $0.23 and $0.20 per share, respectively, compared to income of $0.24 and $1.40 per share for the respective 2011 periods. Adjusted diluted EPS for the fourth quarter and full-year 2012 were $0.53 and $1.77 per share, respectively, compared to $0.39 and $1.68 per share for the corresponding 2011 periods. Refer to Table B at the end of this release for a reconciliation of GAAP net income (loss) to adjusted net income and the "Use of Non-GAAP Financial Information" section below.
Despite the GAAP loss for the 2012 fourth quarter and year, cash flows from operations for the fourth quarter and full-year of 2012 were approximately $25 million and $65 million, respectively as a significant portion of the charges recorded in 2012 were non-cash in nature. During the fourth quarter and full-year of 2012, the Company repaid $8 million and $22 million, respectively, of long-term debt.
|Product Line Sales|
|The following table summarizes the Company's sales by major product lines (dollars in thousands):|
|4th Qtr.||4th Qtr.||Chg.||3rd Qtr.||Chg.||Year||Year||Chg.|
In comparison to the prior year, cardiac and neuromodulation sales for the fourth quarter of 2012 decreased 5% but increased 2% for the full-year. During 2012, cardiac and neuromodulation sales benefited from further adoption of our Q series batteries and customer market share shifts partially offset by the timing of customer inventory builds and product launches. Cardiac and neuromodulation revenue growth exceeded our expectations during 2012 but management remains cautiously optimistic over the short-term prospects of this product line given the ongoing challenges surrounding key OEM customers. However, our longer term outlook remains optimistic as we continue to see an increased pace of product development opportunities from our cardiac customers. Management believes that this, combined with our increased focus on sales and marketing, will allow the Company to grow this product line faster than the underlying market.
Fourth quarter and full-year 2012 vascular sales increased 14% and 15%, respectively, over the prior year periods. These increases were primarily attributable to growth in the underlying market and market share gains. Additionally, vascular revenue for the year included $6.6 million from sales of medical devices that were developed under the Greatbatch name compared to $4.5 million for 2011, an increase of 47%.
In comparison to the prior year, orthopaedic sales for the fourth quarter of 2012 declined 2% (0% constant currency) and 13% (8% constant currency) for the full-year. Foreign currency exchange rate fluctuations decreased orthopaedic revenue by approximately $0.6 million in the fourth quarter of 2012 and $6 million for the year. The remaining decline in 2012 orthopaedic sales was a result of fewer customer product launches and development opportunities due to operational issues within our orthopaedic business, which are aggressively being addressed. In comparison to the sequential third quarter, orthopaedic revenue increased 14% primarily due to the seasonal facility shut-downs in our European operations.
Fourth quarter and full-year 2012 sales for Electrochem increased $19.8 million and $83.3 million, respectively versus the comparable 2011 periods. Fourth quarter and full year 2012 Electrochem sales included the benefit of $19.5 million and $82.4 million, respectively, of incremental revenue related to our acquisition. Electrochem's aggressive growth plan met expectations and was driven by successful product launches in the portable medical market. On a pro-forma basis, our portable medical product line grew 38% from 2011 to 2012. The market shift in patient care from clinical settings to the home, and an aging population, is driving the need for lightweight and portable devices for patients and caregivers. Electrochem's technology, customer relationships, and legacy of delivering highly reliable and innovative solutions has enabled it to win in this evolving market and continues to position Electrochem to capture market and share growth. Electrochem continues to secure long-term agreements in this space.
As previously disclosed, for 2013, Greatbatch estimates annual revenue growth rates for its product lines as follows:
|Product Line||Estimated 2013 Annual Growth Rate (%)||2013 Estimated Revenue|
|Cardiac & Neuromodulation||0% - 2%||$309 - $315|
|Vascular||7% - 13%||$55 - $59|
|Orthopaedic(1)||(5%) - 0%||$116 - $122|
|Portable Medical||15% - 20%||$94 - $98|
|Energy & Other||6%||$86 - $86|
|Total Sales(1)||2% - 5%||$660 - $680|
|(1)||Organic revenue growth for orthopaedic product line is 8% - 14% due to disposition of $15 million of non-core product lines at the end of 2012. Total consolidated organic revenue growth is expected to be 5% - 8%.|
|Adjusted Operating Income as a % of Sales||12.0% - 12.5%|
|Adjusted Effective Tax Rate (includes only the 2013 benefit of the recently reenacted U.S. R&D Tax Credit)|
33% to 35%
|Adjusted Diluted EPS||$||1.90 - $2.00|
As previously disclosed, adjusted operating income for 2013 is expected to consist of GAAP operating income minus non-recurring, unusual or infrequently occurring items such as acquisition, consolidation and integration charges, certain RD&E expenditures and asset disposition/write-down charges, totaling approximately $11.5 million to $14.0 million. This range has been significantly reduced from the 2012 level as we have essentially completed our productivity and consolidation initiatives. Included in the above range are residual DVT costs in the range of $4.8 to $5.8 million to complete our Algostim project.
The Company will host a conference call on Monday, February 25, 2013 at 5:00 p.m. ET to discuss these results. The scheduled conference call will be webcast live and is accessible through the Company's website at www.greatbatch.com. An audio replay will also be available beginning from 7:00 p.m. ET on February 25, 2013 until March 4, 2013. To access the replay, dial 888-286-8010 (U.S.) and enter the passcode 27704750.
About Greatbatch, Inc.
Greatbatch, Inc. (NYS: GB) provides top-quality technologies to industries that depend on reliable, long-lasting performance through its brands Greatbatch Medical, Electrochem and QiG Group. Greatbatch Medical develops and manufactures critical medical device technologies for the cardiac, neuromodulation, vascular and orthopaedic markets. Electrochem designs and manufactures batteries for high-end niche applications in the portable medical, energy, military, and other markets. The QiG Group empowers the design and development of new medical devices for our core markets. Additional information about the Company is available at www.greatbatch.com.
Use of Non-GAAP Financial Information
In addition to our results reported in accordance with generally accepted accounting principles ("GAAP"), we provide adjusted operating income and margin, adjusted net income and adjusted earnings per diluted share. These adjusted amounts consist of GAAP amounts excluding the following adjustments to the extent occurring during the period: (i) acquisition-related charges, (ii) facility consolidation, optimization, manufacturing transfer and system integration charges, (iii) asset write-down and disposition charges, (iv) severance charges in connection with corporate realignments or a reduction in force (v) litigation charges and gains, (vi) the impact of non-cash charges to interest expense due to the accounting change for convertible debt, (vii) unusual or infrequently occurring items, (viii) certain R&D expenditures (such as medical device DVT expenses in connection with developing our Neuromodulation platform), (ix) gain/loss on the sale of investments, (x) the income tax (benefit) related to these adjustments and (xi) certain tax charges related to the consolidation of our S