Greatbatch, Inc. Reports Second Quarter 2008 Results

Greatbatch, Inc. (NYSE: GB), a manufacturer of technology based products for the commercial and implantable medical markets, today announced the results of operations for the quarter ended June 27, 2008. "We are pleased to report this quarter’s results. We grew revenues, met our integration expectations to begin expanding operating margins, and are on track to further grow profitability. More importantly, we are seeing early returns from our strategy to diversify product lines and geographic mix through acquisitions. We have built a platform to bring important new product technologies to a broader, global customer base and are now methodically working to leverage that platform for growth and profitability,” stated Tom Hook, President and Chief Executive Officer. "We are in the early stages of a two-year plan to recognize the synergies from recent acquisitions. This quarter we grew operating margins through sales growth as well as cost reduction initiatives. Going forward, investors should expect to see both top line growth through the introduction of new product technologies to current and new customers, and bottom line growth as we diligently undertake further consolidation and integration efforts.” Second Quarter Results Consolidated sales in the second quarter were $141.6 million, an increase of 81% over the prior year quarter and 16% sequentially. Our acquisitions generated $64.2 million of revenue for the second quarter of 2008. Selling, general and administrative expenses as a percentage of sales decreased by 50 basis points over the prior year quarter, despite nearly $3.0 million of incremental legal expenses related to a lawsuit from the former Enpath Medical. Research, development and engineering costs for the second quarter were $7.7 million, which as expected, were lower as a percentage of sales versus the prior year. R&D costs also decreased as the Company reorganized its R&D function in an effort to streamline operations. Adjusted operating income grew $8.7 million over the sequential quarter to $14.2 million, which is consistent with the year ago period. Adjusted operating margins expanded 550 basis points to 10% for the second quarter of 2008, up from 4.5% for the first quarter of 2008. Recent improvements in both adjusted operating income and adjusted operating margin were driven by operations streamlining efforts and increased sales. Adjusted amounts exclude the costs incurred related to our consolidation initiatives and integration of our newly acquired businesses. (See Tables A & B for US GAAP reconciliations). Adjusted earnings per diluted share were $0.30 in the current quarter up from $0.16 in the first quarter, but below $0.42 in the second quarter 2007. Earnings per diluted share on a US GAAP basis were $0.25 per share in the quarter compared to a loss of $0.15 per share in the second quarter of 2007. As a result of the acquired in-process research and development write-off not being deductible for tax purposes and the expiration of research and development tax credit, the effective tax rate for 2008 is expected to be approximately 37%. Tom Mazza, Senior Vice President and Chief Financial Officer, stated, "We’re delivering improved operating performance as expected. Operating margin grew from 4.5% to 10% as we executed quickly on short-term action steps to improve sales and generate integration performance. We continue to drive operating margin gains as we realize the benefits of synergies resulting from integrating our acquisitions, and will realize these results over the next several quarters on a non-linear basis. Our team is highly focused on this task, and our track record and expertise gives us confidence we will meet our guidance set at the beginning of the year.” Product Lines The following table summarizes the Company’s sales by major product lines for the second quarters of 2008 and 2007 (in thousands):   2008   2007   % Business Unit/Product Lines 2nd Qtr.   2nd Qtr.   Change Implantable Medical Components ("IMC”): CRM/Neuromodulation $64,781 $66,007 -2% Therapy Delivery 15,781 1,585 NA Orthopedic 40,974 - NA Total Implantable Medical Components 121,536 67,592 80% Electrochem 20,112 10,870 85% Total Sales $141,648 $78,462 81% Implantable Medical Components Second quarter sales for the IMC business segment grew 80% over the prior year quarter to $121.5 million. IMC Results for the second quarter of 2008 include revenue of $56.8 million from our recent acquisitions. The Cardiac Rhythm Management (CRM) and Neuromodulation product line decreased 2% compared to the second quarter of 2007 but increased 11% from the first quarter of 2008. The second quarter’s results benefited from increased adoption of our Q Series high rate ICD batteries as well as higher feedthrough and assembly revenue. These benefits were offset by lower demand for coated components, due to a customer recall unrelated to Greatbatch products, and lower capacitor sales. The second quarter of 2007 includes a higher level of capacitor sales due to a customer supply issue in the first half of 2007. Second quarter revenues for the Therapy Delivery product line were $15.8 million, compared to the prior quarter revenues of $16.5 million. This decrease was primarily due to lower sales of introducers and leads. The Orthopedic product line grew to $41.0 million in sales for the quarter compared to $27.8 million in the first quarter of 2008. This quarter’s results include the full impact of the Chaumont manufacturing facility, which was acquired in February 2008. Electrochem Second quarter sales for the Electrochem business segment nearly doubled to $20.1 million compared to $10.9 million for the prior year. The increase in sales is a result of the acquisition of EAC in November 2007 ($7.4 million) and increased demand from the oil and gas market. Conference Call The Company will host a conference call on Tuesday, August 5, 2008 at 2:30 p.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 4:30 p.m. E.T. on August 5, 2008 until August 12, 2008. To access the replay, dial 888-286-8010 (U.S.) or 617-801-6888 (International) and enter the passcode 79120007. 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, neuromodulation, 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. 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. Use of NON-GAAP Financial Information In addition to our results reported in accordance with accounting principals generally accepted in the United States of America ("GAAP”), we provided adjusted operating income, adjusted net income and adjusted earnings per diluted share. These adjusted amounts consist of GAAP amounts excluding (i) acquisition-related charges, (ii) facility consolidation, manufacturing transfer and system integration charges, (iii) asset disposition and other charges and (iv) the income tax (benefit) related to these adjustments. Adjusted earnings per diluted share is calculated by dividing adjusted net income for diluted earnings per share by diluted weighted average shares outstanding. We believe that the presentation of adjusted operating income, adjusted net income and adjusted earnings per diluted share provides important supplemental information to management and investors regarding financial and business trends relating to our financial condition and results of operations. Table A:  Operating Income Reconciliation (in thousands):         2008 2007 2008 2007     2nd Qtr.   2nd Qtr.   YTD   YTD Operating income (loss) as reported: $ 11,352 $ (6,351 ) $ 7,212 $ 4,255 In-process research and development - 18,353 2,240 18,353 Acquisition charges (inventory step-up)   -     204     6,422     204   Sub-total   11,352     12,206     15,874     22,812   Adjustments: Consolidation costs 1,022 1,705 1,966 3,531 Integration expenses 1,914 - 2,068 - Asset dispositions & other   (55 )   283     (125 )   (10 ) Operating income – adjusted $ 14,233   $ 14,194   $ 19,783   $ 26,333   Operating margin – adjusted   10.0 %   18.1 %   7.5 %   17.0 % Table B:  Net Income & EPS Reconciliation (in thousands):         2008 2007 2008 2007     2nd Qtr.   2nd Qtr.   YTD   YTD Income (loss) before taxes as reported: $ 8,174 $ (1,955 ) $ 2,456 $ 13,852 In-process research and development - 18,353 2,240 18,353 Acquisition charges (inventory step-up)   -     204     6,422     204   Sub-total   8,174     16,602     11,118     32,409   Adjustments: Consolidation costs 1,022 1,705 1,966 3,531 Integration expenses 1,914 - 2,068 - Asset dispositions & other   (55 )   283     (125 )   (10 ) Sub-total   11,055     18,590     15,027     35,930   Gain on sale of investment security - (4,001 ) - (4,001 ) Gain on extinguishment of debt   -     -     -     (4,473 ) Adjusted income before taxes $ 11,055 $ 14,589 $ 15,027 $ 27,456 Adjusted provision for income taxes   4,035     4,741     4,374     8,923   Adjusted net income $ 7,020   $ 9,848   $ 10,653   $ 18,533   Adjusted diluted EPS $ 0.30   $ 0.42   $ 0.46   $ 0.78   Number of Shares (millions) 24,000 23,800 24,000 25,000 Note: 1) Tax rate utilized was approximately 32.5% for 2007. 2) Tax rate utilized for 2nd quarter of 2008 was 36.5% - Rate required for the final three quarters to get the annual adjusted tax provision to 34% (expected annual rate excluding IPR&D charges). GAAP Financial Statements to Follow GREATBATCH, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited (In thousands except per share amounts)         Three months ended Six months ended June 27, June 29, June 27, June 29, 2008 2007 2008 2007   Sales $ 141,648 $ 78,462 $ 263,802 $ 155,322 Cost and expenses: Cost of sales - excluding amortization of intangible assets 99,332 45,762 193,077 93,050 Cost of sales - amortization of intangible assets 1,721 994 3,431 1,942 Selling, general and administrative expenses 18,657 10,735 37,004 20,768 Research, development and engineering costs, net 7,705 6,981 16,929 13,433 Acquired in-process research and development - 18,353 2,240 18,353 Other operating expense, net   2,881     1,988     3,909     3,521   Operating income (loss) 11,352 (6,351 ) 7,212 4,255 Interest expense 3,209 2,089 6,640 3,233 Interest income (125 ) (2,586 ) (521 ) (4,442 ) Gain on sale of investment security - (4,001 ) - (4,001 ) Gain on extinguishment of debt - - - (4,473 ) Other (income) expense, net   94     102     (1,363 )   86   Income (loss) before provision for income taxes 8,174 (1,955 ) 2,456 13,852 Provision for income taxes   2,369     1,444     25     6,582   Net income (loss) $ 5,805   $ (3,399 ) $ 2,431   $ 7,270     Earnings (loss) per share: Basic $ 0.26 $ (0.15 ) $ 0.11 $ 0.33 Diluted $ 0.25 $ (0.15 ) $ 0.11 $ 0.33   Weighted average shares outstanding: Basic 22,500 22,200 22,500 22,100 Diluted 24,000 22,200 22,500 22,350 GREATBATCH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS - Unaudited (In thousands)     ASSETS June 27, December 28, 2008 2007 Current assets: Cash and cash equivalents $ 20,011 $ 33,473 Short-term investments 1,558 7,017 Accounts receivable, net 84,345 56,962 Inventories 93,638 71,882 Refundable income taxes 3,049 377 Deferred income taxes 7,425 6,469 Prepaid expenses and other current assets   6,164   5,044   Total current assets 216,190 181,224   Property, plant, and equipment, net 167,286 114,946 Intangible assets, net 131,473 103,850 Goodwill 298,834 248,540 Other assets   15,797   15,291   Total assets $ 829,580 $ 663,851     LIABILITIES AND STOCKHOLDERS’ EQUITY   Current liabilities: Accounts payable $ 54,479 $ 33,433 Accrued expenses and other current liabilities 32,758 30,975 Current portion of long-term debt   2,000   -   Total current liabilities 89,237 64,408   Long-term debt 355,943 241,198 Deferred income taxes 41,444 35,346 Other long term liabilities   4,523   228   Total liabilities   491,147   341,180     Stockholders' equity: Preferred stock - - Common stock 23 22 Additional paid-in capital 246,139 238,574 Treasury stock - (140 ) Retained earnings 86,646 84,215 Accumulated other comprehensive income   5,625   -   Total stockholders’ equity   338,433   322,671   Total liabilities and stockholders' equity $ 829,580 $ 663,851