(GB) Greatbatch Third Quarter 2011 Earnings Helped By Medical Business

Greatbatch’s (GB) third-quarter fiscal 2011 adjusted (excluding one-time items) earnings per share of 41 cents outpaced both the Zacks Consensus Estimate and the year-ago adjusted earnings of 34 cents.

Profit (as reported) soared 17% year over year to roughly $7 million (or 30 cents a share) owing to healthy sales from the New York-based company’s Orthopedic and Vascular businesses, supported by lower interest expense and tax.


Revenues rose 3% year over year to $131.7 million, in line with the Zacks Consensus Estimate. Double-digit growth across the Orthopedic and Vascular franchises masked a decline in the Electrochem division. Foreign currency movements contributed $2 million to orthopedic revenues in the quarter.

Segment Review

Sales from the larger Greatbatch Medical division rose 6% year over year to $113.3 million as the company registered growth across all product lines.

Within Greatbatch Medical, CRM/Neuromodulation sales edged up 2% year over year to $70.7 million, benefiting from customer inventory build-up and product rollouts. However, sustained pricing headwind and general sluggishness in the market continue to impact CRM results. Greatbatch expects revenues from this business to be flat year over year in 2011.

Orthopedic revenues spurted 11% to $31.1 million, buoyed by favorable foreign exchange swings. Greatbatch expects these factors to continue to boost orthopedic sales through 2011. Barring the currency impact, orthopedic revenues rose 4%. Greatbatch witnessed higher sales for orthopedic instruments in the quarter.

Revenues from Vascular Access cruised 26% to $11.4 million on the heels of growth in the underlying market and increased market share.

Revenues from Greatbatch’s smaller Electrochem segment, which offers high performance commercial batteries, plummeted 12% year over year to $18.5 million. While sales fell in the quarter, the company noted that the year-ago quarter’s results benefited from customer inventory rebuilds, resulting in record sales for the division.


Gross margin declined to 31.8% from 32.9% a year ago, impacted by unfavorable sales mix and pricing concessions made to large customers. Selling, general and administrative expenses, as a percentage of sales, inched up to 13.5% from 13.4% in the prior-year quarter, as a result of higher professional and consulting expenses and unfavorable currency exchange impact. Adjusted operating margin declined marginally to 11.2% from 11.3% a year-ago.

Balance Sheet and Cash Flows

Greatbatch ended the quarter with cash and cash equivalents of roughly $41.6 million, down 3% year over year. Operating cash flows for the quarter fell roughly 25% year over year to $21 million. The company pared its debt during the third quarter by repaying long-term debt worth $10 million.

As such, its long-term debt reduced roughly 4% sequentially (and 17% year over year) to $198.3 million. Greatbatch plans to continue to use its cash flows to fund R&D initiatives and de-leverage its balance sheet.

Guidance Reaffirmed

Greatbatch has reiterated its financial forecasts for fiscal 2011. The company still expects adjusted earnings per share in the range of $1.60 to $1.70 and revenues between $550 million and $570 million for the fiscal. Moreover, Greatbatch has retained its adjusted operating margin forecast of 12%-13%.

The current Zacks Consensus Estimates for revenue and earnings per share for fiscal 2011 are $566 million and $1.68, respectively.

Greatbatch is a leading producer and supplier of batteries, capacitors and components used in implantable medical devices. The company’s top customers include Boston Scientific (BSX), Johnson & Johnson (JNJ), Medtronic (MDT) and St. Jude Medical (STJ).

Greatbatch has been acquiring complementary businesses over the last few years to expand. Its pipeline is healthy with a number of products currently in development that are expected to support growth in the long run. However, a soft CRM market and pricing pressure remain headwinds. Currently, we are Neutral on the stock.

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