2015 Second Quarter Earnings Call
July 30, 2015
Forward-Looking Statements
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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 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
obligations 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.
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
Executive Summary
Second Quarter 2015 Performance
Nuvectra Update
Michael Dinkins
Balance Sheet Review
2015 Guidance Update
Question & Answer
4
Executive Summary
We are confirming 2015 guidance
We delivered solid growth in the Cardiac/Neuro,
Orthopaedics, and Portable Medical product lines resulting
in an overall 4% constant currency organic growth
Our operating margin declined 90 bps this quarter primarily
because of product mix
We filed the Form 10 registration statement with the SEC for
our proposed spin-off, Nuvectra
5
Selected Q2 2015 Highlights
6 * Greatbatch organic constant currency growth rate: 4%; Orthopaedics organic constant currency growth rate:8% ** See appendix for GAAP reconciliation except for ROIC (TTM) 6
Adj. EPS Comments
2014 Q2 Adjusted EPS $ 0.61
Volume/Price (0.01) Neuromodulation growth offset by lower volume in
our core products and price
Operating expenses (0.04) Increased OpEx driven by CCC Medical Devices
acquisition and timing of RDE spending
Taxes 0.08 Tax rate
2015 Q2 Adjusted EPS $0.64
Three Months Ended
(Dollars in thousands, except per share
data)
July 3, July 4, %
2015 2014 Change
Sales $ 174,890
$ 172,081
2 %
Organic Constant Currency Sales Growth 4 % — %
Adjusted Operating Income* $ 22,243
$ 24,188
(8 )%
Adjusted Operating Income as % of Sales 12.7 % 14.1 %
Adjusted Diluted EPS* $ 0.64
$ 0.61
5 %
Adjusted EBITDA* $ 31,259
$ 33,497
(7 )%
Adjusted EBITDA as a % Sales 17.9 % 19.5 %
Q2 2015 Revenue
7
*Intersegment sales between Greatbatch Medical and QiG are eliminated in consolidation and are included in Greatbatch Medical’s cardiac and
neuromodulation product line.
Q2 2015 Q2 2014 % Organic
Actual Actual Change CC Growth
Greatbatch Medical
CN $90,153 $80,005 12.7% 12.7%
Orthopaedics 35,481 37,865 -6.3% 8.2%
Portable Medical 17,700 16,737 5.8% 5.8%
Vascular 12,907 15,257 -15.4% -15.4%
Energy & Other 16,545 21,352 -22.5% -22.5%
Total Greatbatch Medical 172,786 171,216 0.9% 4.1%
QiG 2,741 865 216.9% 73.2%
Elimination of Intersegment Sales* -637 NA
Total Sales $174,890 $172,081 1.6% 4.1%
Cardiac/Neuromodulation
Battery
Feedthrough
Enclosure
Q2 revenue up 18% on a sequential quarter basis … YTD in line
with expectations
Strong Neuromodulation growth
Batteries and shield assemblies continue to deliver strong growth
Coated
Electrode
Q2 YTD R4Q
Revenue $89,516* $165,085* $319,719
% of Total
Revenue
52%* 50%* 48%
Growth 12%* -1%* -6%
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Greatbatch Sustainable Advantages
Strong and expanding customer relationships
90% of the portfolio secured by long term agreements
Sustainable and growing patent portfolio
Innovative product offerings (+20 programs)
*Net of intersegment sales ;reported CN Sales total $90,153 for Q2 and $166,426 for YTD
Orthopaedics
Implant and instruments growing double digits
Reamer
Delivery System
Implant
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Greatbatch Sustainable Advantages
Strong and expanding customer relationships
70% secured by long term agreements
Continued strong market acceptance in bone cutting and
preparation technologies
Q2 YTD R4Q
Revenue $35,481 $74,452 $147,452
% of Total Revenue 21% 23% 22%
Organic CC Growth 8% 13% 11%
Portable Medical
Integrated Power
Supplies
Battery Packs
Amounts in millions
Executing the shift to higher value technologies
Building pipeline with new power solutions technology
Leveraging our global footprint to improve overall competitiveness
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Greatbatch Sustainable Advantages
Focus on innovative proprietary powers solutions
Wireless charging and power
Miniaturization … Batteries and power cells
Value added assembly capabilities
Securing portfolio through LTAs with largest customers
New Product Introductions – 20 active projects
Q2 YTD R4Q
Revenue $17,700 $31,367 $64,470
% of Total
Revenue
10% 10% 10%
Growth 6% -13% -12%
Vascular
Customer inventory management programs easing
New product introductions in the 2nd half will mitigate EOL headwind
On track with product transitions to Mexico
Focus on high growth sectors Complex, steerable catheter shafts for Electrophysiology market
Catheter shafts for peripheral and neuro vascular markets
Introducer
Steerable Sheath
Amounts in millions
Amounts in millions
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Greatbatch Sustainable Advantages
Expanding customer relationships with 50% secured by long-
term agreements
Specialized manufacturing know-how
Leveraging global manufacturing foot print
Innovative product offerings
Q2 YTD R4Q
Revenue $12,907 $23,263 $53,726
% of Total
Revenue
7% 7% 8%
Growth -15% -18% 0%
EME
Amounts in millions
Weak demand in Energy market
Wide range and high temperature battery technologies enhances
the customers exploration and production activity efficiencies
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Greatbatch Sustainable Advantages
Industry leading quality and reliability … 40+ years
experience with critical applications Extensive battery chemistry knowledge/fundamentals
including proprietary electrolytes
Developing technologies, such as monitoring, to provide
product offerings that enhance our customers’ capabilities
Ability to leverage a diversified, enterprise wide, knowledge
base
State-of-the-art production facilities
Battery Packs
Battery Cells
Battery Chargers
Q2 YTD R4Q
Revenue $16,545 $34,255 $76,529
% of Total
Revenue
10% 10% 12%
Growth -23% -13% -3%
Nuvectra Update
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Our platform has the capability to provide treatment to patients
in several established Neurostimulation markets such as SCS,
SNS, DBS and other emerging Neurostimulation markets
Our Algovita SCS system is the first application of our
Neurostimulation technology platform
FDA approval process continues and we expect second half
approval
We expect the spinoff to occur prior to the end of 2015
Nuvectra Update
14
We filed the Form 10 on July 30, 2015
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Dividend of Nuvectra shares to our Greatbatch shareholders
Reduced operating expenses of $12 to $16 million annually
Long term manufacturing agreement with Nuvectra
Nuvectra Spin-off Will Benefit Our Shareholders Three
Different Ways:
Balance Sheet & ROIC
16
Balance Sheet Metrics
($ in millions except for EPS)
17
Q2 2015 Q2 2014 FY2014
Days Sales Outstanding 65 65 66
Days Inventory Outstanding 112 94 103
Leverage Ratio <1.5 <1.5 <1.5
Our balance sheet is solid, inventory is in place to
support second half revenue and our capital
structure continues to be below 1.5
Trailing 12 months Q2 2015 Q2 2014
Adjusted EBITDA $123.8 $125.0
ROIC 7.8% 8.2%
YTD Q2 2015 Q2 2014
Working Capital $256.8 $232.6
Operating Cash Flow $22.5 $26.5
CapEx $22.2 $12.0
2015 Guidance
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2015 Guidance – Confirming Guidance
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(In millions, except for EPS amounts)
2014
2015 Guidance
Sales $687.8 $715 - $730
Adjusted Operating Margin 13.3% 13.7% - 14.0%
Adjusted Diluted EPS $2.42 $2.61 - $2.71
Operating Cash Flows $81.3 $80 - $100
Capex $24.8 $40 - $50
ROIC 8.4% 9.0%
Annualized Adjusted
EBITDA* EPS
Value of Nuvectra shares TBD TBD
Reduced Operating Expenses $12M - $16M $0.29 to $0.39
Incremental revenue from
manufacturing contract with Nuvectra TBD TBD
Nuvectra Spin-off Will Enhance Our Financial Performance
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* Timing of FDA approval will impact the 2015/2016 calendar year results
Management Focused On Delivering Shareholder Value
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Strategic Initiatives
Organic Growth Medical Device Systems
Margin Expansion Targeted Acquisitions
Market
Cap
2014A
P/E
2015E
P/E
2014A
EV/EBITDA
2015E
EV/EBITDA
2014A
EV/Sales
2015E
EV/Sales
$1,375 22.3 19.2 11.6 10.9 2.2 2.1
-10%0%
10%20%30%40%50%60%70%80%90%
100%110%120%130%140%150%
7/2/2012 7/2/2013 7/2/2014 7/2/2015
GB
S&P 500
Dow Jones
NYSE
NASDAQ
Russell 2000
($MM)
Appendix
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Selected 1ST Half 2015 Highlights
23 * Greatbatch organic constant currency growth rate: -2%; Orthopaedics organic constant currency growth rate:13% ** See appendix for GAAP reconciliation except for ROIC (TTM) 23
Adj. EPS Comments
2014 YTD Adjusted EPS $ 1.16
Volume/Price (0.15) Lower volumes partially offset neuromodulation growth
and favorable performance based compensation
Operating expenses (0.02)
Higher operating expenses attributable to CCC Medical
Devices acquisition and Algovita commercialization
partially offset by lower performance based
compensation and favorable RDE spending
Taxes/Other 0.20 Tax rate and favorable FX gains partially offset by
higher share count
2015 YTD Adjusted EPS $1.19
2015 2014
(Amounts in millions except for EPS) YTD YTD Variance
Sales* $336.2 $346.4 -3%
Adjusted:**
Operating Income $40.2 $46.7 -14%
EBITDA $58.4 $65.4 -11%
ROIC (TTM) 7.8% 8.2% -40 BPS
Operating Cash flow $22.5 $26.5 -15%
Diluted EPS $1.19 $1.16 3%
1st Half 2015 Revenue
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*Intersegment sales between Greatbatch Medical and QiG are eliminated in consolidation and are included in Greatbatch Medical’s cardiac and
neuromodulation product line.
1H 2015 1H 2014 % Organic
Actual Actual Change CC Growth
Greatbatch Medical
CN $166,426 $166,785 -0.2% -0.2%
Orthopaedics 74,452 74,296 0.2% 13.0%
Portable Medical 31,367 35,940 -12.7% -12.7%
Vascular 23,263 28,307 -17.8% -17.8%
Energy & Other 34,255 39,483 -13.2% -13.2%
Total Greatbatch Medical 329,763 344,811 -4.4% -1.6%
QiG 7,788 1,551 402.1% 72.2%
Elimination of Intersegment Sales* -1,341 NA
Total Sales $336,210 $346,362 -2.9% -1.7%
Q2 2015 Financial Results
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Three Months Ended
(Dollars in thousands, except per share data)
July 3, July 4, %
2015 2014 Change
Sales $ 174,890
$ 172,081
2 %
Organic Constant Currency Sales Growth 4 % — %
GAAP Operating Income $ 13,034
$ 19,539
(33 )%
GAAP Operating Income as % of Sales 7.5 % 11.4 %
Adjusted Operating Income* $ 22,243
$ 24,188
(8 )%
Adjusted Operating Income as % of Sales 12.7 % 14.1 %
GAAP Diluted EPS $ 0.35
$ 0.48
(27 )%
Adjusted Diluted EPS* $ 0.64
$ 0.61
5 %
Adjusted EBITDA* $ 31,259
$ 33,497
(7 )%
Adjusted EBITDA as a % Sales 17.9 % 19.5 %
1st Half 2015 Cash Flow
($ in millions)
26
Net income* $17.3
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and Amortization 18.2
Debt related Amortization included on Int Expense 0.4
Stock Based Compensation/Discount Amortization 6.0
Other non-cash Gains 0.0
Deferred Income Taxes -1.9
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 3.7
Inventories -10.9
Prepaid expenses and other current assets -1.3
Accounts payable -0.8
Accrued expenses -7.2
Income taxes payable -0.8
Net cash provided by operating activities $ 22.5
* GAAP net income
GAAP Reconciliation
Operating Income Reconciliation – 3 Months
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Three Months Ended
Greatbatch Medical QiG Unallocated Total
July 3, July 4, July 3, July 4, July 3, July 4, July 3, July 4,
(dollars in thousands) 2015 2014 2015 2014 2015 2014 2015 2014
Sales $ 172,786 $ 171,216 $ 2,741 $ 865 $ (637 ) $ — $ 174,890 $ 172,081
Operating income (loss)
as reported $ 28,914
$ 32,439
$ (7,002 ) $ (6,173 ) $ (8,878 ) $ (6,727 ) $ 13,034
$ 19,539
Adjustments:
IP related litigation
(SG&A) —
—
—
—
1,459
388
1,459
388
Consolidation and
optimization (income)
expenses 6,532
3,342
37
38
—
(5 ) 6,569
3,375
Acquisition and
integration (income)
expenses 8
30
53
(173 ) 37
190
98
47
Asset dispositions,
severance and other 106
3
(3 ) —
980
836
1,083
839
Adjusted operating
income (loss) $ 35,560
$ 35,814
$ (6,915 ) $ (6,308 ) $ (6,402 ) $ (5,318 ) $ 22,243
$ 24,188
Adjusted operating
margin 20.6 % 20.9 % NA NA NA NA 12.7 % 14.1 %
GAAP Reconciliation
Operating Income Reconciliation – 6 Months
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Six Months Ended
Greatbatch Medical QiG Unallocated Total
July 3, July 4, July 3, July 4, July 3, July 4, July 3, July 4,
(dollars in thousands) 2015 2014 2015 2014 2015 2014 2015 2014
Sales $ 329,763 $ 344,811 $ 7,788 $ 1,551 $ (1,341 ) $ — $ 336,210 $ 346,362
Operating income (loss)
as reported $ 50,667
$ 67,567
$ (12,452 ) $ (12,086 ) $ (15,792 ) $ (13,418 ) $ 22,423
$ 42,063
Adjustments:
IP related litigation
(SG&A) —
—
—
—
2,159
762
2,159
762
Consolidation and
optimization expenses 13,303
2,920
426
66
—
232
13,729
3,218
Acquisition and
integration (income)
expenses 8
30
97
(603 ) 59
192
164
(381 )
Asset dispositions,
severance and other 222
(7 ) (3 ) —
1,493
1,217
1,712
1,210
Adjusted operating
income (loss) $ 64,200
$ 70,510
$ (11,932 ) $ (12,623 ) $ (12,081 ) $ (11,015 ) $ 40,187
$ 46,872
Adjusted operating
margin 19.5 % 20.4 % NA NA NA NA 12.0 % 13.5 %
Net Income and Diluted EPS Reconciliation
GAAP Reconciliation
a) Net of tax amounts computed using a 35% U.S., Mexico, and France statutory tax rate, a 25% Uruguay statutory tax rate and a 0% tax rate for Swiss adjustments.
b) Pre-tax amount is a gain of $42 thousand and $540 thousand for the 2015 quarter and year-to-date periods, respectively, and a loss of $42 thousand and gain of
$780 thousand for the 2014 quarter and year-to-date periods, respectively.
a) The Federal R&D tax credit has not yet been extended for 2015. The 2014 Federal R&D tax credit was enacted in the fourth quarter of 2014. Amounts assume
that the tax credit was effective at the beginning of the year for 2015 and 2014.
b) The per share data in this table has been rounded to the nearest $0.01 and therefore may not sum to the total.
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Three Months Ended Six Months Ended
July 3,
2015
July 4,
2014
July 3,
2015
July 4,
2014
(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 $ 9,283 $ 0.35 $ 12,348 $ 0.48 $ 17,291 $ 0.66 $ 27,270 $ 1.06
Adjustments:
IP related litigation (SG&A)(a) 948 0.04 252 0.01 1,403 0.05 495 0.02
Consolidation and optimization
expenses(a) 5,361
0.20
2,181
0.08
10,899
0.41
1,255
0.05
Acquisition and integration (income)
expenses(a) 70
—
31
—
116
—
(248 ) (0.01 )
Asset dispositions, severance and
other(a) 698
0.03
545
0.02
1,132
0.04
787
0.03
(Gain) loss on cost and equity
method investments, net(a)(b) (27 ) —
27
—
(351 ) (0.01 ) (507 ) (0.02 )
R&D Tax Credit(c) 400 0.02 400 0.02 800 0.03 800 0.03
Adjusted net income and diluted
EPS(d) $ 16,733
$ 0.64
$ 15,784
$ 0.61
$ 31,290
$ 1.19
$ 29,852
$ 1.16
Adjusted diluted weighted average
shares 26,313
25,901
26,264
25,823
Adjusted EBITDA reconciliation
GAAP Reconciliation
30
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(dollars in thousands) 2015 2014 2015 2014
Sales $ 174,890
$ 172,081
$ 336,210
$ 346,362
Adjusted operating income* $ 22,243
$ 24,188
$ 40,187
$ 46,872
Add: Depreciation and amortization 9,016
9,309
18,194
18,561
Adjusted EBITDA $ 31,259
$ 33,497
$ 58,381
$ 65,433
Adjusted EBITDA as a % of sales 17.9 % 19.5 % 17.4 % 18.9 %
Betsy Cowell Vice President Finance & Treasurer Greatbatch 2595 Dallas Parkway Suite 310 Frisco, Texas 75034 214 618 4982 [email protected] www.greatbatch.com
Contact Information
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