Greatbatch, Inc. Reports First Quarter 2008 Results

Greatbatch, Inc. (the "Company”) (NYSE: GB) today reported its results for the first quarter ended March 28, 2008. Business Highlights Recorded sales of $122.2 million, including acquisitions, for the first quarter of 2008; an increase of 59% compared to $76.9 million in 2007. Electrochem manufacturing facility and the expansion of the Research and Development Center are on schedule for completion in the second half of 2008. Successful entry into the key Orthopedics market with acquisitions of Precimed and the DePuy Chaumont Orthopaedics manufacturing facility. Excluding charges related to other operating expenses and purchase price adjustments; earnings per share were $0.16. (See Table C for US GAAP reconciliation). Thomas J. Hook, President & Chief Executive Officer, stated: "Twelve months ago we initiated our gap fill acquisition strategy into higher growth markets. We successfully completed seven acquisitions that diversified Greatbatch’s revenue base and significantly expanded our product offerings to customers. First quarter sales of $122 million, with CRM market concentration below 50%, is clear evidence of accomplishing one of the prime objectives of our long-term strategy. "We are focused on steadily improving operating profitability across Greatbatch to drive value for our shareholders. This is a straight forward process of consolidation, integration and optimization that we have successfully implemented within Greatbatch over the last three years. We will leverage this experience together with the expertise from the acquired companies to drive core operating profitability improvement in the combined businesses. We have organized our improvement plans into a series of major initiatives and we are aggressively pursuing them. I am pleased the acquisitions have generated more opportunities than originally contemplated and we are confident in our ability to deliver the projected financial performance for 2008.” 1st Quarter Sales Summary The following table summarizes the Company’s sales by major product line for the first quarters of 2008 and 2007 (in thousands): Product Lines   2008   2007   % 1st Qtr.   1st Qtr.   Change Implantable Medical Components ("IMC”): ICD Batteries $ 10,023 $ 11,651 -14 % Pacemaker & Other Batteries 5,598 5,845 -4 % ICD Capacitors 6,498 8,514 -24 % Feedthroughs 16,312 18,393 -11 % Introducers, Catheters and Leads 16,522 - N/A Orthopedic 27,786 - N/A Enclosures 5,128 5,706 -10 % Other Medical   14,650   15,087 -3 % Total Implantable Medical Components 102,517 65,196 57 % Electrochem   19,637   11,664 68 % Total Sales $ 122,154 $ 76,860 59 % 1st Quarter Profit & Loss Summary The following table summarizes selected information derived from the condensed consolidated statements of operations for the first quarters of 2008 and 2007 (in thousands):     2008   2007   % 1st Qtr.   1st Qtr.   Change Cost of Sales $ 95,455 $ 48,236 98 % Cost of Sales as % of Sales 78.1 % 62.8 %   SG&A Expenses $ 18,347 $ 10,033 83 % SG&A Expenses as % of Sales 15.0 % 13.1 %   RD&E Expenses, net $ 9,224 $ 6,452 43 % RD&E Expenses, net as % of Sales 7.6 % 8.4 %   Operating Income (Loss) $ (4,140 ) $ 10,606 N/A Operating Margin (3.4 )% 13.8 %   Effective Tax Rate 41.0 % 32.5 % Sales excluding the acquisitions for the first quarter of 2008 decreased by approximately 8% primarily due to lower sales of capacitor and coated components. Capacitors sales for the first quarter of 2007 included a high level of demand due to a customer supply issue and coated component sales for 2008 reflect the impact of lower demand due to a customer recall issue not relating to Greatbatch products. The first quarter 2008 results include one-time charges for inventory step-up amortization of $6.4 million included in cost of goods sold and write-off of in process research and development of $2.2 million related to the purchase accounting for recent acquisitions that were excluded from our guidance. The cost of sales percentage increased from the prior year primarily due to the increased manufacturing costs at our newly acquired companies. Approximately $7.0 million of the increase in SG&A expenses was related to the acquisitions completed in 2007 and 2008, which includes $1.0 million in additional amortization of intangibles as a result of purchase accounting. Net RD&E expenses were in line with our expectations and decreased as a percentage of sales. The other operating expense in the first quarter consists of: -- Columbia closure/relocations   $ 0.2 million -- Electrochem expansion $ 0.1 million -- Integration and severance $ 0.7 million -- Acquired in process research and development $ 2.2 million As a result of $2.2 million of the acquired in-process research and development write-off not being deductible for tax purposes and expiration of the Research and Development tax credit, the effective tax rate for 2008 is expected to be 39%. Table A: Operating Income Reconciliation (in thousands):       2008 2007   1st Qtr.   1st Qtr. Operating income (loss) as reported: $ (4,140 ) $ 10,606 In-process research and development 2,240 - Acquisition charges(Inventory step-up)   6,422     -   Sub-total   4,522     10,606   Adjustments: Carson City facility closure/relocation - 386 Columbia facility closure/relocation 224 1,303 Electrochem building expansion 106 137 Acquisition integration 660 - Asset dispositions & other   38     (293 ) Operating Income – adjusted $ 5,550   $ 12,139   Operating margin – adjusted   4.5 %   15.8 % Table B: Net Income Reconciliation (in thousands):       2008 2007   1st Qtr.   1st Qtr. Net income (loss) as reported: $ (3,374 ) $ 10,669 In-process research and development 2,240 - Gain on extinguishment of debt - (2,907 ) Acquisition charges   4,110     -   Sub-total   2,976     7,762   Adjustments: Carson City facility closure/relocation - 251 Columbia facility closure/relocation 143 847 Electrochem building expansion 68 89 Acquisition Integration 422 - Asset disposition & other   24     (190 ) Net income adjusted $ 3,633   $ 8,759   Table C: GAAP EPS Reconciliation:       2008 2007   1st Qtr.   1st Qtr. EPS as reported: $ (0.15 ) $ 0.43 In-process research and development 0.10 - Gain on extinguishment of debt - (0.11 ) Acquisition charges   0.18     -   Sub-total   0.13     0.32   Adjustments: Carson City facility closure/relocation - 0.01 Columbia facility closure/relocation 0.01 0.03 Electrochem building expansion - 0.01 Acquisition Integration 0.02 - Asset dispositions & other   -     (0.01 ) Adjusted EPS $ 0.16   $ 0.36     Shares Outstanding (000's)   22,500     26,500   The adjustments to the 2008 net income and EPS calculations have been made based on the full year after-tax impact assuming an effective tax rate of 36.0%, except for the IPR&D write-off. EPS for 2008 includes $0.05 related to a forward contract exchange gain. Conference Call The Company will host a conference call on Wednesday, May 7, 2008 at 8:30 a.m. E.T. 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 10:30 a.m. E.T. on May 7, 2008 until May 14, 2008. To access the replay, dial 888-286-8010 (U.S.) or 617-801-6888 (International) and enter the passcode 48200830. Forward-Looking Statements Some of the statements in this press release and other written and oral statements made from time to time by the Company and its representatives are "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 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. Risks and uncertainties that could cause actual results to differ materially from those stated or implied by such forward-looking statements include, among others, the following matters affecting the Company: dependence upon a limited number of customers; customer ordering patterns; product obsolescence; inability to market current or future products; pricing pressure from customers; our ability to timely and successfully implement our cost reduction and plant consolidation initiatives; reliance on third party suppliers for raw materials, products and subcomponents; fluctuating operating results; inability to maintain high quality standards for our products; challenges to our intellectual property rights; product liability claims; inability to successfully consummate and integrate acquisitions including the recent Precimed and DePuy Chaumont acquisitions and to realize synergies and to operate these acquired businesses in accordance with expectations; unsuccessful expansion into new markets including our expansion into the orthopedics market resulting from the Precimed acquisition; competition; inability to obtain licenses to key technology; regulatory changes or consolidation in the healthcare industry; global economic factors including currency exchange rates and interest rates; and other risks and uncertainties described in the Company’s Annual Report on Form 10-K and in other periodic filings with the Securities and Exchange Commission. The Company assumes no obligation to update forward-looking information in this press release whether to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial conditions or prospects, or otherwise. About Greatbatch, Inc. Greatbatch, Inc. (NYSE: GB) is a leading developer and manufacturer of critical products used in medical devices for the cardiac rhythm management, neurostimulation, vascular, orthopedic and interventional radiology markets. Additionally, Electrochem, a subsidiary of Greatbatch, is a world leader in the design and manufacture of technology solutions for some of the world’s most demanding and extreme applications. Additional information about the Company is available at www.greatbatch.com. GREATBATCH, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited (In thousands except per share amounts)     Three months ended March 28,   March 30, 2008 2007   Sales $ 122,154 $ 76,860 Cost and expenses: Cost of sales - excluding amortization of intangible assets 93,745 47,288 Cost of sales - amortization of intangible assets 1,710 948 Selling, general and administrative expenses 18,347 10,033 Research, development and engineering costs, net 9,224 6,452 Acquired in-process research and development 2,240 - Other operating expense, net   1,028     1,533   Operating income (loss) (4,140 ) 10,606 Interest expense 3,431 1,144 Interest income (396 ) (1,856 ) Gain on extinguishment of debt - (4,473 ) Other income, net   (1,457 )   (16 ) Income (loss) before provision for income taxes (5,718 ) 15,807 Provision (benefit) for income taxes   (2,344 )   5,138   Net income (loss) $ (3,374 ) $ 10,669     Earnings (loss) per share: Basic $ (0.15 ) $ 0.48 Diluted $ (0.15 ) $ 0.43   Weighted average shares outstanding: Basic 22,500 22,000 Diluted 22,500 26,500 GREATBATCH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS - Unaudited (In thousands)     ASSETS March 28, 2008 December 28, 2007 Current assets: Cash and cash equivalents $ 14,307 $ 33,473 Short-term investments available for sale 6,455 7,017 Accounts receivable, net 79,499 56,962 Inventories, net 93,960 71,882 Refundable income taxes 4,249 377 Deferred income taxes 6,715 6,469 Prepaid expenses and other current assets   3,654   5,044   Total current assets 208,839 181,224   Property, plant, and equipment, net 158,321 114,946 Intangible assets, net 99,505 71,268 Trademarks and trade names 34,863 32,582 Goodwill 298,816 248,540 Other assets   14,242   15,291   Total assets $ 814,586 $ 663,851     LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 40,794 $ 33,433 Accrued expenses and other current liabilities 33,121 30,975 Current portion of long-term debt   2,101   -   Total current liabilities 76,016 64,408   Convertible subordinated notes 358,571 241,198 Deferred income taxes 42,593 35,346 Other long-term liabilities   5,155   228   Total liabilities   482,335   341,180     Stockholders' equity: Preferred stock - - Common stock 23 22 Additional paid-in capital 244,604 238,574 Treasury stock - (140 ) Retained earnings 80,841 84,215 Accumulated other comprehensive income   6,783   -   Total stockholders’ equity   322,251   322,671   Total liabilities and stockholders' equity $ 814,586 $ 663,851