2014 Second Quarter Earnings Call July 31, 2014 1 FORWARD-LOOKING - - PowerPoint PPT Presentation

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2014 second quarter earnings call
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2014 Second Quarter Earnings Call July 31, 2014 1 FORWARD-LOOKING - - PowerPoint PPT Presentation

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2014 Second Quarter Earnings Call July 31, 2014 1 FORWARD-LOOKING STATEMENTS Some of the statements made in this presentation whether written or oral may be forward - looking statements within the meaning of Section 27A of the Securities

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2014 Second Quarter Earnings Call

July 31, 2014

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FORWARD-LOOKING STATEMENTS

Some of the statements made in this presentation whether written or

  • ral may be “forward-looking statements” within the meaning of Section

27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and involve a number of risks and uncertainties. These statements can be identified by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential”, or “continue”, or variations or the negative of these terms or other comparable terminology. These statements are based on the company’s current expectations. The company’s actual results could differ materially from those stated or implied in such forward-looking statements. The company assumes no

  • bligations to update forward-looking information, including information

in this presentation, to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial conditions, prospects or otherwise.

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EARNINGS CALL PARTICIPANTS

Thomas J. Hook President & CEO Michael Dinkins Executive Vice President & CFO Betsy Cowell Vice President Finance & Treasurer

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AGENDA

Thomas J. Hook

  • Second Quarter 2014 Highlights
  • Strategic Update

Michael Dinkins

  • Second Quarter and First Half 2014

Financial Results

  • 2014 Guidance

Question & Answer

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SELECTED Q2 HIGHLIGHTS

($ in millions except for EPS)

* -0.4% organic constant currency sales growth ** See appendix for GAAP reconciliation

Q2 2014 Q2 2013 Variance Sales $172.1 $171.3 0%* Adjusted Operating Income** $23.8 $22.2 7% Adjusted Operating Margin** 13.8% 13.0% 80 bps Adjusted EBITDA** $33.1 $31.3 6% Adjusted EBITDA Margin** 19.2% 18.3% 90 bps Adjusted Diluted EPS** $0.60 $0.56 7% Adjusted ROIC 8.8% 8.4% 40 bps Operating Cash Flow $19.5 $(1.0) Fav

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Q2 ORGANIC SALES GROWTH

($ in thousands)

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2014 2013 Product Lines QTD Actual QTD Actual Growth Greatbatch Medical Cardiac/Neuromodulation 80,005 $ 83,177 $

  • 4%

Orthopaedics 37,865 32,341 17% Portable Medical 16,737 22,167

  • 24%

Vascular 15,257 12,249 25% Energy, Military, Environmental 21,352 20,560 4% Total Greatbatch Medical 171,216 170,494 0% QiG 865 837 3% Total Sales 172,081 $ 171,331 $ 0%

Organic Constant Currency Sales Growth

  • %

6%

Orthopaedic Organic Constant Currency Sales Growth

12% 14%

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Q2 PERFORMANCE

Cardiac/Neuromodulation (CRMN): (46% total revenues; -4% organic growth)

  • Quarterly timing of customer orders
  • Growth in shield assemblies and feedthroughs continues
  • Initial impact of end of life products

Greatbatch – CRMN Sales - Rolling 4 Quarters CRMN Customers Sales - Rolling 4 Quarters*

$ in millions

($ in millions)

*Public data through Q1 2014 reportable companies

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1,800 2,050 2,300 2,550 2,800 3,050 3,300 $ Millions

CRM & Neuro Market Quarterly Trending

CRMN CRMN Rolling 4 Qtr 50 55 60 65 70 75 80 85 90 $ Millions

GB Quarterly Trending

GB GB Rolling 4 Qtr

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Orthopaedics: (22% of total revenues; 12% organic constant currency growth)

  • Growth across all product categories
  • Expanding served customer base

($ in millions)

Greatbatch – Orthopaedics Sales Rolling 4 Quarters 8

Q2 PERFORMANCE

15.0 20.0 25.0 30.0 35.0 40.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014

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Portable Medical: (10% total revenues; -24% organic growth)

  • Continue refining product positioning while up against

tough comparable versus prior year

Vascular: (9% total revenues; 25% organic growth)

  • Catheter momentum continues, powered by steerable

products

EME: (12% total revenues; 4% organic growth)

  • Posted 9% growth from energy applications
  • Gaining ground in rechargeable battery assemblies

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Q2 PERFORMANCE

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STRATEGIC UPDATE

Executing investments in capacity and capabilities aligning resources to meet customer needs

  • Announced $45M investment in Tijuana Mexico to serve the vascular and

portable medical markets

  • Established a R&D hub in the Twin Cities area for Global R&D
  • Creating the Commercial Operations hub at the global headquarters in

Frisco, Texas

AlgoVita, formally Algostim, progressing as expected

  • FDA regulatory process proceeds as planned
  • Granted CE Mark

Delivering results consistent with our strategy, through first half 2014

  • 8% organic constant currency revenue growth
  • 15% adjusted EPS increase
  • 9% adjusted EBITDA improvement
  • 8.5% adjusted ROIC … 60 basis point increase

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FINANCIAL RESULTS

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Q2 FINANCIAL RESULTS

($ in thousands except for EPS)

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* Refer to Tables A, B and C at the end of this presentation for a reconciliation of GAAP to adjusted amounts.

Three Months Ended (Dollars in thousands, except per share data) July 4, June 28, % April 4, % 2014 2013 Change 2014

Change

Sales $172,081 $171,331 —% $174,281 (1)% Organic Constant Currency Sales Growth — % 6 % 17 % GAAP Operating Income $19,539 $17,135 14% $22,524 (13)% GAAP Operating Income as % of Sales 11.4 % 10.0 % 12.9 % Adjusted Operating Income* $23,800 $22,192 7% $22,310 7% Adjusted Operating Income as % of Sales 13.8 % 13.0 % 12.8 % GAAP Diluted EPS $0.48 $0.39 23% $0.58 (17)% Adjusted Diluted EPS* $0.60 $0.56 7% $0.54 11% Adjusted EBITDA* $33,109 $31,281 6% $31,562 5% Adjusted EBITDA as a % Sales 19.2 % 18.3 % 18.1 %

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Adj. EPS Comments

2013 Adjusted EPS $ 0.56 Gross margin 0.03 Operating expenses 0.02

Favorable performance based compensation $0.06 and lower G&A $0.02; partially offset by higher sales and marketing ($0.05) and RD&E/DVT initiatives ($0.01)

Other (0.01)

Lower interest expense $0.01 and adjusted tax rate $0.01; offset by share count change ($0.03)

$0.04 2014 Adjusted EPS $0.60

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Q2 VARIANCE ANALYSIS

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Adj. EPS Comments 2013 Adjusted EPS $ 0.99 Gross margin 0.26 Operating expenses (0.14)

Lower G&A expenses $0.04; offset by DVT ($0.08) and lower NRE ($0.02) and higher sales and marketing ($0.08)

Other 0.03

Lower interest expense $0.05 and adjusted tax rate $0.02;

  • ffset by share count change ($0.04)

$0.15 2014 Adjusted EPS $1.14

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FIRST HALF VARIANCE ANALYSIS

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Q2 OPERATING CASH FLOW

($ in millions)

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Net income $12.3 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 9.3 Debt related amortization included in interest expense 0.2 Stock-based compensation 3.6 Other non-cash gains (0.1) Deferred income taxes (1.1) Changes in operating assets and liabilities: Accounts receivable (7.3) Inventories (2.6) Prepaid expenses and other current assets (1.6) Accounts payable 0.5 Accrued expenses 7.7 Income taxes payable (1.4) Net cash provided by operating activities $19.5

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2014 GUIDANCE

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2013 2014 Guidance Change

Sales $663.9 $685 – $705 3 – 6% Adjusted Operating Margin(1) 12.5% 13.0 – 13.3% 50 - 80 bps Adjusted Diluted EPS(1) $2.10 $2.25 – $2.35 7 – 12%

  • Adj. Operating Cash Flows (2)

$85.5 $90 - $100 5 - 17% Capex $18.6 $25 – $35 34 - 88% ROIC 7.9% 9% 110 bps

2014 GUIDANCE

($ in millions except for EPS)

(1) Refer to Table D in the appendix for a reconciliation of GAAP to adjusted amounts (2) Excludes $28.8 million of tax payments on convertible notes in 2013.

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APPENDIX

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($ in millions except for EPS)

* * Greatbatch organic growth rate: 7.6%; Orthopaedics organic growth rate: 15.9% ** See appendix for GAAP reconciliation

YTD Actuals YTD 2013 Variance

Sales $346.4 $319.6 8%* Adjusted Operating Income** $46.1 $41.5 11% Adjusted Operating Margin** 13.3% 13.0% 30 bps Adjusted EBITDA** $64.7 $59.4 9% Adjusted EBITDA Margin** 18.7% 18.6% 10 bps Adjusted Diluted EPS** $1.14 $0.99 15% Adjusted ROIC 8.5% 7.9% 60 bps Operating Cash Flow $26.5 $(8.6) Fav

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SELECTED JUNE YTD HIGHLIGHTS

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YTD ORGANIC GROWTH

($ in thousands)

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2014 2013 Product Lines YTD Actual YTD Actual Growth Greatbatch Medical Cardiac/Neuromodulation 166,785 $ 153,701 $ 9% Orthopaedics 74,296 61,964 20% Portable Medical 35,940 41,056

  • 12%

Vascular 28,307 22,873 24% Energy & Other 39,483 38,522 2% Total Greatbatch Medical 344,811 318,116 8% QiG 1,551 1,480 5% Total Sales 346,362 $ 319,596 $ 8%

Organic Constant Currency Sales Growth 8% 1% Orthopaedic Organic Constant Currency Sales Growth 16% 12%

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YTD OPERATING CASH FLOW

($ in millions)

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Net income $27.3 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 18.6 Debt related amortization included in interest expense 0.4 Stock-based compensation 6.7 Other non-cash gains (3.9) Deferred income taxes (1.7) Changes in operating assets and liabilities: Accounts receivable (10.7) Inventories (2.1) Prepaid expenses and other current assets (0.1) Accounts payable (2.1) Accrued expenses (9.0) Income taxes payable 3.1 Net cash provided by operating activities $26.5

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Table A: Operating Income Reconciliation

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Three Months Ended Greatbatch Medical QiG Unallocated Total July 4,

June 28, July 4, June 28,

July 4,

June 28,

July 4,

June 28,

(dollars in thousands) 2014 2013 2014 2013 2014 2013 2014 2013 Sales $ 171,216 $ 170,494 $ 865 $ 837 $ — $ — $ 172,081 $ 171,331 Operating income (loss) as reported $ 32,439 $ 29,845 $ (6,173 ) $ (7,377 ) $ (6,727 ) $ (5,333 ) $ 19,539 $ 17,135 Adjustments: Medical device DVT expenses (RD&E)(a) — — — 1,235 — — — 1,235 Consolidation and optimization (income) costs 3,342 3,191 38 — (5 ) 517 3,375 3,708 Acquisition and integration (income) expenses 30 31 (173 ) 40 190 — 47 71 Asset dispositions, severance and

  • ther

3 43 — — 836 — 839 43 Adjusted operating income (loss) $ 35,814 $ 33,110 $ (6,308 ) $ (6,102 ) $ (5,706 ) $ (4,816 ) $ 23,800 $ 22,192 Adjusted operating margin 20.9 % 19.4 % N/A N/A N/A N/A 13.8 % 13.0 %

(a) As a result of the Company's PMA submission to the FDA for Algovita in December 2013, the Company no longer is excluding DVT costs associated with this system from adjusted operating income and adjusted diluted EPS. DVT costs incurred in connection with the development of Algovita during the three and six month periods ending July 4, 2014 were $455 thousand and $1.2 million, respectively.

GAAP RECONCILIATION

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23 Operating Income Reconciliation - 6 Months

(a) As a result of the Company's PMA submission to the FDA for Algovita in December 2013, the Company no longer is excluding DVT costs associated with this system from adjusted operating income and adjusted diluted EPS. DVT costs incurred in connection with the development of Algovita during the three and six month periods ending July 4, 2014 were $455 thousand and $1.2 million, respectively.

Six Months Ended Greatbatch Medical QiG Unallocated Total July 4,

June 28, July 4, June 28,

July 4,

June 28,

July 4,

June 28,

(dollars in thousands) 2014 2013 2014 2013 2014 2013 2014 2013 Sales $ 344,811 $ 318,116 $ 1,551 $ 1,480 $ — $ — $ 346,362 $ 319,596 Operating income (loss) as reported $67,567

$56,360

$ (12,086 ) $ (14,733 ) $ (13,418 ) $ (10,153 ) $ 42,063 $ 31,474 Adjustments: Medical device DVT expenses (RD&E)(a) — — — 2,969 — — — 2,969 Consolidation and optimization costs 2,920 5,951 66 — 232 819 3,218 6,770 Acquisition and integration (income) expenses 30 71 (603 ) 110 192 1 (381 ) 182 Asset dispositions, severance and other (7 ) 108 — — 1,217 — 1,210 108 Adjusted operating income (loss) $ 70,510 $ 62,490 $ (12,623 ) $ (11,654 ) $ (11,777 ) $ (9,333 ) $ 46,110 $ 41,503 Adjusted operating margin 20.4 % 19.6 % N/A N/A N/A N/A 13.3 % 13.0 %

GAAP RECONCILIATION

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Table B: Net Income (loss) and Diluted EPS Reconciliation

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Three Months Ended Six Months Ended July 4, 2014 June 28, 2013 July 4, 2014 June 28, 2013 (in thousands except per share amounts) Net Income Per Diluted Share Net Income Per Diluted Share Net Income Per Diluted Share Net Income Per Diluted Share Net income as reported $ 12,348 $ 0.48 $ 9,752 $ 0.39 $ 27,270 $ 1.06 $ 15,415 $ 0.62 Adjustments: Medical device DVT expenses (RD&E)(a) — — 803 0.03 — — 1,930 0.08 Consolidation and optimization costs(a) 2,181 0.08 2,956 0.12 1,255 0.05 5,296 0.21 Acquisition and integration (income) expenses(a) 31 — 46 — (248 ) (0.01 ) 118 — Asset dispositions, severance and other(a) 545 0.02 26 — 787 0.03 91 — Loss (gain) on cost and equity method investments, net(a)(b) 27 — 352 0.01 (507 ) (0.02 ) 398 0.02 CSN conversion option discount and deferred fee accelerated amortization(a)(c) — — — — — — 2,906 0.12 R&D Tax Credit(d) 400 0.02 — — 800 0.03

(1,500 )

(0.06 ) Adjusted net income and diluted EPS(e) $ 15,532 $ 0.60 $ 13,935 $ 0.56 $ 29,357 $ 1.14 $ 24,654 $ 0.99 Adjusted diluted weighted average shares 25,901

24,922 25,823 24,818

(a) Net of tax amounts computed using a 35% tax rate for all non-Swiss items and a 0% tax rate for Swiss items for both the 2014 and 2013 periods. (b) Pre-tax net income amount is a loss of $42 thousand and a gain of $780 thousand for the 2014 quarter and year-to-date periods, respectively, and a loss of $542 thousand and $612 thousand for the 2013 quarter and year-to-date periods, respectively. (c) Pre-tax net income amount is $4.5 million. (d) The Federal R&D tax credit has not yet been extended for 2014. The 2014 amount assumes that the tax credit will be enacted for the full year 2014. The 2013 amount relates to the 2012 portion of the R&D tax credit which was reinstated in the first quarter of 2013 retroactive back to the beginning of 2012. As required, the impact of the R&D tax credit relating to 2012 was recognized in the first quarter of 2013. (e) The per share data in this table has been rounded to the nearest $0.01 and therefore may not sum to the total.

GAAP RECONCILIATION

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Table C: Adjusted EBITDA reconciliation

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Three Months Ended Six Months Ended July 4, June 28, July 4, June 28, (dollars in thousands) 2014 2013 2014 2013 Sales $ 172,081 $ 171,331 $ 346,362 $ 319,596 Adjusted operating income* $ 23,800 $ 22,192 $ 46,110 $ 41,503 Add: Depreciation and amortization 9,309 9,089 18,561 17,853 Adjusted EBITDA $ 33,109 $ 31,281 $ 64,671 $ 59,356 Adjusted EBITDA as a % of sales 19.2 % 18.3 % 18.7 % 18.6 %

GAAP RECONCILIATION

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2013 2014 Guidance

GAAP Diluted EPS $1.43 $1.94 - $1.99 Adjustments: Other Operating Expense(1) $0.46 $0.31 - $0.35 DVT Builds(1) $0.15 CSN conversion option discount and deferred fee accelerated amortization(1) $0.12 R&D Tax Credits and other Tax Items(1) (0.06) Adjusted Diluted EPS $2.10 $2.25 - $2.35 Table D: EPS Reconciliation

(1) Refer to the company’s previously filed 10-K for further descriptions on the type of items included.

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GAAP RECONCILIATION

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Betsy Cowell Vice President Finance & Treasurer Greatbatch 2595 Dallas Parkway Suite 310 Frisco, Texas 75034 214 618 4982 ecowell@greatbatch.com www.greatbatch.com

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CONTACT INFORMATION