We downgrade our recommendation for Greatbatch Inc (GB) to Underperform following its lower-than-expected third quarter fiscal 2010 results and management’s tepid outlook. Both revenues and earnings for the quarter missed the Zacks Consensus Estimate, impacted by the decline in the company’s CRM/Neuromodulation business.
Higher sales from Electrochem (up 33% year over year), Vascular (up 8%) and Orthopedic (up 21%) businesses in the quarter were partly masked by a weak CRM/Neuromodulation (down 6%) division.
Greatbatch is a leading producer and supplier of batteries, capacitors and components used in implantable medical devices. The company has been acquiring complementary businesses over the last few years to boost sales. Greatbatch has extended its tie-up with St. Jude Medical (STJ), which has provided it an exclusive supplier status of filtered feedthroughs (used in CRM devices) through 2017.
Moving forward, operating results will be supported by the rebound across the Orthopedic, Vascular and Electrochem operations. Moreover, synergies from cost-cutting and restructuring initiatives as well as better sales mix are expected to boost margins.
However, top-line growth for the remainder of fiscal 2010 is expected to remain stalled by soft general market conditions, a sluggish CRM/Neuromodulation business, foreign exchange headwinds and pricing pressure. Unfavorable foreign exchange translation (stemming from a weak euro) reduced sales by roughly $1 million in the third quarter.
Greatbatch recently pared its fiscal 2010 CRM/Neuromodulation revenue growth forecast. The company expects revenues and adjusted operating margin for the year to be at the lower-end of its earlier projected range.
Revenues from the CRM/Neuromodulation division are expected to remain under pressure through 2010, in part, attributable to reduced customer inventory levels and depressed consumer spending on elective procedures due to the lingering effect of the economic softness. We feel a soft CRM market may prove to be challenging for the company at least through fiscal 2010.
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