greatbatch fy 2015 fourth quarter earnings call · q4 2015 financial overview ($ inthousands,...

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GreatbatchFY 2015 Fourth Quarter 

Earnings Call

February 29, 2016

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Forward‐Looking Statement

Some of the statements made in the presentation whether written or oral may be“forward‐looking statements” within the meaning of Section 27A of the Securities Actof 1933, as amended, and Section 21E of Securities Exchange Act of 1934, as amended,and involve a number of risks and uncertainties. These statements can be identified byterminology 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. Thesestatements are based on the company’s current expectations. The company’s actualresults could differ materially from those stated or implied in such forward‐lookingstatements. The company assumes no obligations to update forward‐lookinginformation, including information in this presentation, to reflect changed assumptions,the occurrence of unanticipated events or changes in future operating results, financialconditions or prospects.

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Q4 Earnings Call Presenters

Thomas J. HookPresident & CEO

Michael DinkinsExecutive Vice President & Chief Financial Officer

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Agenda

Thomas J. Hook  2015 Achievements Nuvectra Update Acquisition Update

Michael Dinkins Financials

Thomas J. Hook  Introducing Integer

Question & Answer

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Multiple Achievements in 2015

Completed transformative acquisition of Lake Region Medical

Received FDA approval for the Algovita medical device

Expanded CCC Medical Device manufacturing capacity to meet acceleratingNeurostimulation market demands

Proposed Nuvectra spin and potential upside for GB stockholders

Continued advancement of Manufacturing performance and Quality metrics

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On February 23, Greatbatch Board of Directors approved the spin‐off of Nuvectra

Nuvectra common stock will be distributed on March 14, 2016 to Greatbatch stockholders of record as of the close of the business on March 7, 2016̶ Greatbatch shareholders will receive one share of Nuvectra common stock for every 

three shares of Greatbatch common stock

Nuvectra will launch their Investor Roadshow on March 2, 2016̶ Normal trading expected to commence on March 14, 2016 on the Nasdaq stock exchange 

under the trading symbol NVTR

The spin‐off will provide clear shareholder benefits̶ Dividend of Nuvectra shares to our Greatbatch shareholders̶ Reduced Greatbatch operating expenses of up to $16M annually̶ Long term manufacturing agreement with Integer and Nuvectra

Nuvectra Spin‐off Update

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Acquisition Synergy Plan Update Clear line of sight to deliver 3 year synergy plan of at least

$60m Integration well underway and progressing on track to achieve

targeted first year synergies of $25m. Current focus in the areas of:

– Overlapping organization structures, contract spending and IT costs

Longer focus will be on manufacturing footprint optimization and process improvements

New Integer Executive & Leadership teams in place. Organization centered around four main product lines:

– CRM & Neuro; – Cardio & Vascular; – Advanced Surgical & Ortho; – Electrochem

Regular monitoring in place to enhance customers’ partnerships, operating performance, and associate retention

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Declan SmythPresident – Advanced Surgical & Ortho

Tony GonzalezPresident –CRM & Neuro

Senior Management TeamTom HookPresident &Chief Executive Officer

Jen BoltPresident –Electrochem

Jeremy FriedmanPresident –Cardio & Vascular

President/CEO since 2004;President CTI Solutions Group 2002 – 04; 20 years experience in senior leadership roles

EVP/CFO since 2012; EVP/CFO USI Insurance 2008 – 12; 20 years experience as public company CFO and 15 years as public company Director

EVP/CHRO since 2015; CHRO MTS Systems 2012 – 15; 10 years experience as senior HR executive

EVP Global Operations since 2013; President Greatbatch Medical 2010 -13; 20 years experience in plant management & consolidations

10 years experience in senior leadership roles in managing, expanding and consolidating plants

15 years experience in senior leadership roles in engineering supply chain, operations management and facility optimization

Mauricio ArellanoExecutive Vice President – Global Operations

EVP/COO Cardio Vascular business in Lake Region; 20 years experience in senior leadership roles in Finance, General Management and Operations Management

President Advanced Surgical since 2013; 20 years experience in senior leadership roles in Product Development, Marketing and Strategic Management

Michael DinkinsExecutive Vice President & Chief FinancialOfficer

Kristin TreckerExecutive Vice President & Chief Human Resources Officer

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2015: Acquired Lake 

Region

2015:Announced spin‐off ofNuvectra, the owner of 

Algovita®

2014:Acquired CCCMedical; CE

Mark received for Algovita®

2011 – 2012:AcquiredMicro Power

and NeuroNexus

2007 – 2008:(6) Acquisitions that established Med Device Platform 

2006:Thomas Hook 

Becomes CEO of Integer

2009:Re‐Optimization;Medical Device 

initiative

Established Track Record of Integrating Businesses and Driving Top Line Growth

2007 2015

Market Capitalization: $1.6bn

2015 Sales:~$1,443mm

Cardio & VascularCardiac & Neuromodulation

Advanced Surgical, Orthopedics, & Portable Medical Energy, Environmental & Military

Diversified across six product lines and completed 10 acquisitions, growing revenue by >4x since 2007

Our Capabilities TodayCRM & VascularOur Capabilities Then 

Market Capitalization: $450mm2007 Sales:~$320mm

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Financials

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Q4 2015 Sales PerformanceGB Organic Constant Currency (CC) Growth 

(Sales in $ thousands) GreatbatchQ4 2015

Lake Region Q4 2015

Total Q42015

Total Q42014 % Change

Advanced Surgical, Orthopaedics and Portable Medical $54,729 $37,861 $92,590 $56,415 64%

Cardio and Vascular 17,094 88,796 105,890 15,560 581%

Cardiac/Neuromodulation 93,888 13,726 107,614 74,493 44%

Electrochem 13,217 ‐ 13,217 23,258 (43)%

Elimination of Intercompany Sales ‐ (1,744) (1,744) ‐ NA

Total Sales $178,928 $138,639 $317,567 $169,726 87%

Organic Constant Currency Sales Increase (Decrease) Vs PY 7% (5)%

Advanced Surgical, Orthopaedics and Portable Medical Organic Constant Currency Sales Increase Vs PY 1% 10%

7%

13%

Total GB GB ex Electrochem

Sales of $179 million was a record quarter for legacy Greatbatch

$139M in Sales from Lake Region Medical post acquisition

Organic growth in Cardiac/Neuromodulation business 

Macro economic challenges in Energy market severely impacted Electrochem sales

Continued Fx headwind of $2.5M

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Q4 2015 Financial Overview($ in thousands, except per share data) Three Month Ended

January 1, 2016

January 2, 2015 % Change

SalesOrganic Constant Currency Sales Growth

$317,5677%

$169,726(5)%

87%

GAAP Diluted EPSAdjusted Diluted EPS

$(0.85)$0.92

$0.54$0.77

(257)%19%

EBITDA*Adjusted EBITDAAdjusted EBITDA as % of Sales

$5,592$69,00521.7%

$27,871$36,29521.4%

(80)%90%

Adj. EPS Comments

2014 Adjusted EPS $0.77

GB ‐ Price/Volume/Mix 0.29  Increase in legacy GBM sales volume driven by Neuromodulation growth partially offset by price reductions. 

GB ‐ Adj OpEx 0.10 Lower functional expenses driven by cost controls partially offset by increase in RD&E for organic development programs and Nuvectra commercialization expenses.

GB ‐ G2B 0.14  Lower Funding of the plan compared to prior year

Lake Region Medical (LRM) Impact 0.57  Q4 post acquisition contribution from LRM net of higher interest and weighted average share count was dilutive $0.08 per share.

Interest and Other Gains and Losses (0.78) Primarily higher interest expenses driven by increased debt from LRM acquisition

Share Count (0.14) Increase of share count primarily from LRM acquisition

Tax Rate (0.02)

2015 Adjusted EPS $0.92

The per share data in this table have been rounded to the nearest $0.01 and therefore may not sum to the total.

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2015 Financial Overview($ in thousands, except per share data) Year End

January 1, 2016

January 2, 2015 % Change

SalesOrganic Constant Currency Sales Growth

$800,414(2)%

$687,7873%

16%

GAAP Diluted EPSAdjusted Diluted EPS

$(0.29)$2.90

$2.14$2.86

(114)%1%

EBITDAAdjusted EBITDAAdjusted EBITDA as % of Sales

$62,445$165,874

20.7%

$118,028$147,790

21.5%

(47)%12%

Adj. EPS Comments

2014 Adjusted EPS $2.86

GB ‐ Price/Volume/mix (0.20) Reflects reduction in legacy GBM sales volume, price reductions and impact on productivity. 

GB – Operating Expenses (0.09)Higher Nuvectra commercialization and CCC Medical Devices acquisition/G&A infrastructure costs partially offset by reduction in Nuvectra R&D and functional spending control.

GB – Performance Based Compensation 0.40  Lower funding of the plan compared to prior year.

Lake Region Medical (LRM) Impact 0.57  YTD post acquisition contribution from LRM net of higher interest and weighted average share count was dilutive $0.05 per share

Interest and Other Gains and Losses (0.57) Primarily higher interest expenses driven by increased debt from LRM acquisition.

Share Count (0.15) Increase of share count primarily from LRM acquisition.

Tax Rate 0.08  Improvement driven by a full year impact of the Maquiladora tax structure and the favorable outcome of discrete tax items.

2015 Adjusted EPS $2.90

The per share data in this table have been rounded to the nearest $0.01 and therefore may not sum to the total.

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Balance Sheet Metrics($ in millions except for EPS)

2015 2014

Days Sales Outstanding* 54 66

Days Inventory Outstanding* 86 103

Our balance sheet is solid and will become stronger with the combined companies

2015 2014

Adjusted EBITDA $166 $148

ROIC* 5.0% 8.4%

2015 2014Working Capital $361 $242

Operating Cash Flow $12 $81

* 2015 Metrics calculated based on pro forma financials for combined company

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Lake Region Medical Financing

Term Loan A/Revolver Size $575MPricing Libor + 325 bpsMaturity 6 years (TLA)

5 years (Revolver)

Term Loan B Size $1,025MPricing Libor + 425 bps; 1% libor floorOID 99Maturity 7 years

Senior Unsecured Notes Size $360MPricing 9.13%OID None (par)Maturity 8 years (non-call 3 years)

Financial Covenants

Term Loan A/Revolver Total Net Leverage Maximum net leverage ratio 6.50:1.00

Interest Coverage Minimum ratio of Adj EBITDA to interest expense of not less than 3.00:1.00

Secured $1,760 million financing 

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Imagine What We Wi l lBui ld Together

INTRODUCING

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Introducing IntegerWorld’s Leading Medtech Manufacturing Partner 

>2x Larger than Closest Competitor 

$1.4bn in Revenue 

90% of Neurostimulation devices on market contain an Integer Component

Presence across 100 countries

More than 1,200 patent issued and nearly 1,700 patents filed and pending

Over 50%+ stock price growth since 2007

Medical Device Systems

Early Stage Innovation Partner

Critical Components for Medical Devices

Enhancing the Lives of Patients Worldwide As Our Customers’ Partner of Choice for Innovative Medical Technologies and Services

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39%

29%

4%

28%

$1,443M

Integer’s Diversified Revenue Base

Cardio & Vascular

Cardiac & Neuromodulation

Advanced Surgical, Orthopedics, and Portable 

Medical1

Cardiovascular / Structural Heart

Peripheral Vascular

Neurovascular

Urology

Oncology

Laparoscopy / General Surgery Arthroscopy (knees)

Biopsy / Drug Delivery

1 Orthopedics, Advanced Surgical, and Portable Medical represent 13%, 12%, and 6% of revenue respectively. 

Electrochem

Energy

Military

Environmental

Joint Preservation & Reconstruction

Tachycardia 

Neurostimulation

Bradycardia 

2015 Proforma Sales Mix

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Partner of Choice to MedTech Customers

Well‐Positioned to Partner With Our Customers As They Grow and Evolve

Design & Development Expertise to Facilitate Customer Innovation1

Global Supply Chain Footprint With Established Manufacturing & Quality Standards2

Full Spectrum of Manufacturing Capabilities, Including Ability To Build Complex Products and Work Them Up the Value Chain 3

Ability to Deliver Innovative Products4

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Appendix

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Net Income and Diluted EPS ReconciliationGAAP Reconciliation

(a) Given our acquisition of Lake Region Medical in the fourth quarter of 2015 and in order to present our financial results in a form more comparable to other medical device companies and less acquisitive companies, during the third quarter of 2015, we began excluding intangible asset amortization for purposes of calculating adjusted net income and adjusted diluted EPS. Prior period adjusted amounts have been recalculated to exclude intangible amortization for all periods presented.

(b) In 2013, we filed suit against AVX Corporation alleging they were infringing on our intellectual property. Given the complexity and significant costs incurred pursuing this litigation, during the second quarter of 2015, we began excluding these litigation expenses from adjusted amounts. Total costs incurred in connection with this litigation in 2015 was $4.4 million pre-tax. This matter proceeded to trial during the first quarter of 2016 and a federal jury awarded Greatbatch $37.5 million in damages. Prior period adjusted amounts have been recalculated to exclude these costs for all periods presented.

(c) Net of tax amounts computed using a 35% U.S., Mexico, and France statutory tax rate, a 25% Uruguay statutory tax rate, and a 12.5% Ireland statutory tax rate. Expenses that are not deductible for tax purposes (i.e. permanent tax differences) are added back at 100%.

(d) During 2015 and 2014, we incurred costs primarily related to the transfer of our Beaverton, OR portable medical and Plymouth, MN vascular manufacturing operations to Tijuana, Mexico. Additionally, with the acquisition of Lake Region Medical, these costs now include expenses incurred in connection with the closure of Lake Region Medical’s Arvada, Colorado site and the consolidation of its two Galway, Ireland sites initiated by Lake Region Medical in 2014.

(e) During 2015, we incurred costs related to the acquisition of Lake Region Medical ($28.0 million pre-tax during the fourth quarter of 2015 and $33.1 million pre-tax for fiscal year 2015) and the integration of CCC Medical Devices. During 2014, we incurred costs related to the integration of CCC Medical Devices.

(f) 2015 costs primarily include legal and professional fees incurred in connection with the pending spin-off of Nuvectra ($1.4 million pre-tax during the fourth quarter of 2015 and $6.0 million pre-tax for fiscal year 2015). 2014 costs primarily include costs in connection with our business reorganization to realign our contract manufacturing operations.

(g) We recorded $4.7 million pre-tax and $9.5 million pre-tax for the 2015 fourth quarter and full-year periods, respectively, in transaction costs (i.e. debt commitment fees, interest rate swap termination costs, debt extinguishment charges) in connection with our acquisition of Lake Region Medical.

(h) Pre-tax amount is a loss of $1.8 million and a gain of $3.4 million for the 2015 fourth quarter and full-year periods, respectively, and a gain of $445 thousand and $4.4 million for the 2014 fourth quarter and full-year periods, respectively.(i) The 2015 Federal R&D tax credit was enacted during the fourth quarter of 2015 and 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. (j) The per share data in this table have been rounded to the nearest $0.01 and therefore may not sum to the total.(k) Fourth quarter and full year 2015 adjusted diluted weighted average shares include 947,000 and 941,000 shares of dilution, respectively, related to outstanding equity awards that were not dilutive for GAAP EPS purposes.

Three Months Ended Year EndedJanuary 1,

2016January 2,

2015January 1,

2016January 2,

2015

(in thousands except per share amounts)

NetIncome (Loss)

PerDilutedShare

NetIncome

PerDilutedShare

NetIncome (Loss)

PerDilutedShare

NetIncome

PerDilutedShare

Net income (loss) as reported $ (24,907) $ (0.85) $ 14,176 $ 0.54 $ (7,594) $ (0.29) $ 55,458 $ 2.14Adjustments:

Amortization of intangibles(a)(c) 5,277 0.18 2,432 0.09 12,273 0.45 9,637 0.37Inventory step-up amortization (COS)(c) 15,605 0.52 138 0.01 15,605 0.57 195 0.01IP related litigation (SG&A)(b)(c) 735 0.02 628 0.02 2,871 0.11 1,626 0.06Consolidation and optimization expenses (OOE)(c)(d) 5,736 0.19 2,804 0.11 21,158 0.77 6,567 0.25Acquisition and integration expenses (OOE)(c)(e) 20,924 0.69 222 0.01 25,885 0.95 61 —Asset dispositions, severance and other (OOE)(c)(f) 1,499 0.05 1,187 0.05 5,099 0.19 3,463 0.13Lake Region Medical transaction costs (interest expense)(c)(g) 3,039 0.10 — — 6,151 0.23 — —(Gain) loss on cost and equity method investments, net (other income, net)(c)(h) 1,150 0.04 (290) (0.01) (2,177) (0.08) (2,841) (0.11)R&D Tax Credit(i) (1,200) (0.04) (1,200) (0.05) — — — —Adjusted net income and diluted EPS(j) $ 27,858 $ 0.92 $ 20,097 $ 0.77 $ 79,271 $ 2.90 $ 74,166 $ 2.86

Adjusted diluted weighted average shares(k) 30,125 26,071 27,304 25,975

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Adjusted EBITDA reconciliation

Three Months Ended Year EndedJanuary 1, January 2, January 1, January 2,

(dollars in thousands) 2016 2015 2016 2015Net income (loss) as reported $ (24,907) $ 14,176 $ (7,594) $ 55,458

Interest expense 25,362 1,044 33,513 4,252Provision (benefit) for income taxes (12,554) 3,310 (8,106) 21,121Depreciation 10,203 5,915 27,136 23,320Amortization 7,488 3,426 17,496 13,877

EBITDA 5,592 27,871 62,445 118,028

Inventory step-up amortization 22,986 173 22,986 260IP related litigation 1,131 967 4,417 2,502Stock-based compensation 288 2,655 9,287 12,893Consolidation and optimization expenses 7,191 4,218 26,393 11,188Acquisition and integration expenses 28,083 251 33,449 3Asset dispositions, severance and other 1,741 605 6,622 4,106Noncash (gain) loss on cost and equity method investments 1,993 (445) 275 (1,190)

Adjusted EBITDA $ 69,005 $ 36,295 $ 165,874 $ 147,790Adjusted EBITDA as a % of sales 21.7% 21.4% 20.7% 21.5%

GAAP Reconciliation

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Other Operating Expenses 2015

Q1 Q2 Q3 Q4 YTD

2014 Investments and Capacity and Capabilities $6.5 $6.3 $5.1 $5.2 $23.0

Portable Medical and Vascular product line transfers

Orthopaedic Optimization $0.5 $0.5 $0.4 $1.4

Lake Region Consolidation and Optimization $2.0 $2.0

Acquisition and Integration Costs $0.1 $0.1 $5.2 $28.1 $33.5 Lake Region Medical and CCC Medical Devices

Asset Dispositions and Other $0.8 $0.9 $3.2 $1.7 $6.6 Nuvectra spin off

Total OOE $7.9 $7.8 $13.8 $37.0 $66.5

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Contact Information

Tony BorowiczVice President Business Development 

& Investor Relations

Greatbatchtborowicz@greatbatch.comWork: 716‐759‐5809 Mobile: 716‐572‐9972

www.greatbatch.com