Greatbatch Inc. NEUTRAL ZACKS CONSENSUS ESTIMATES (GB-NYSE) SUMMARY

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1 January 21, 2015 Greatbatch Inc. Current Recommendation Prior Recommendation NEUTRAL Outperform Date of Last Change 04/08/2014 Current Price (01/20/15) $48.45 Target Price $51.00 SUMMARY (GB-NYSE) Greatbatch reported mixed third-quarter 2014 results. Although earnings comfortably surpassed the Zacks Consensus Estimate, revenues were in line with the same. We are particularly encouraged with the company s raised 2014 revenue and adjusted earnings per share guidance. Greatbatch continues to execute on its growth strategies via strategic investments, manufacturing efficiencies, operating cost containment and volume leverage. With the acquisition of CCC Medical Devices, Greatbatch aims at enhancing its medical device innovation efforts in the Neuromodulation space. However, the company continues to face significant foreign currency headwinds and persistent weakness in the portable medical product line, both of which may pressurize the top line. Considering these factors, we maintain our Neutral recommendation and set a price target of $ SUMMARY DATA 52-Week High $ Week Low $40.37 One-Year Return (%) 7.12 Beta 1.12 Average Daily Volume (sh) 99,782 Shares Outstanding (mil) 25 Market Capitalization ($mil) $1,211 Short Interest Ratio (days) 7.75 Institutional Ownership (%) 95 Insider Ownership (%) 7 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 7.2 Earnings Per Share (%) 10.5 Dividend (%) N/A using TTM EPS 20.8 using 2015 Estimate 18.5 using 2016 Estimate 18.5 Zacks Rank *: Short Term 1 3 months outlook * Definition / Disclosure on last page 3 - Hold Risk Level * Type of Stock Low, Mid-Blend Industry Semi-Discretes Zacks Industry Rank * 117 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 171 A 168 A 177 A 664 A A 172 A 172 A 181 E 699 E E 186 E 180 E 186 E 727 E E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.44 A $0.56 A $0.57 A $0.55 A $2.10 A 2014 $0.54 A $0.60 A $0.64 A $0.60 E $2.38 E 2015 $0.62 E $0.69 E $0.63 E $0.68 E $2.62 E 2016 $2.62 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Greatbatch, Inc. (GB), headquartered in Clarence, N.Y., is a leading producer and supplier of batteries, capacitors, and components used in implantable medical devices (IMDs). The company also produces batteries for commercial and industrial applications such as oil and gas exploration, oceanographic equipment, seismic surveying equipment, and others. The National Aeronautics and Space Administration (NASA) uses Greatbatch batteries in various aspects of its aerospace programs. Greatbatch realigned its operating segments in Its businesses are now divided into Greatbatch Medical and QiG. The company reported total revenues of $664 million in 2013, up 2.7% year over year. Total revenues for nine months ended Oct 3, 2014 stood at $518.1 million, up 6.3% year over year. The Greatbatch Medical segment (99.2% of total revenues in the first nine months of 2014) includes the former Implantable Medical and Electrochem Solutions segments, excluding QiG. The larger Implantable Medical business designs and manufactures medical devices and components for the cardiac, neuromodulation, vascular and orthopaedic markets. It offers complete medical devices including design, development, manufacturing, and regulatory submission. The business also offers individual components for implantable medical devices as well as value-added assembly and design engineering services for its component products. Examples of these components include batteries, capacitors, filtered and un-filtered feedthroughs, machined components, enclosures, leads, introducers, catheters, as well as orthopaedic implants, instruments and cases and trays. The smaller Electrochem business designs and manufactures total power solution for critical applications with market-leading original equipment manufacturers (OEMs), largely in the portable medical and energy space. Electrochem offers its customers components, consultation, design, development and testing for medical device applications in high-value markets, including those that support the transition of delivery of health care from clinical to outpatient and home settings, as well as those that enhance the quality of life for an aging population. Examples of these devices include powered surgical tools, automated external defibrillators, portable ultrasound devices, portable oxygen concentrators, and ventilators, among others. Electrochem provides cell and battery pack configurations for rechargeable and non-rechargeable battery power systems, charging and docking stations, and power supplies, for devices where failure is not an option. Implantable Medical customers include leading OEMs, such as Biotronik, Boston Scientific, Johnson & Johnson, Medtronic, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and Zimmer. On the other hand, Electrochem s customers are primarily companies involved in demanding markets with sophisticated total power solutions needs, such as in the portable medical and energy markets. Some of Electrochem s larger OEM customers are Carefusion, Covidien, Ethicon Endo-Surgery, Halliburton, Phillips Healthcare, Physio-Control, and Weatherford International. The QiG segment (0.8%) develops medical device systems by research and development in QiG. The segment invests in three areas - new medical device systems commercialization, collaborative programs with OEM customers, and strategic equity positions in start-up companies - to build a diversified and distinctive portfolio. The medical device systems developed by QiG are manufactured by Greatbatch Medical. Equity Research GB Page 2

3 REASONS TO BUY Greatbatch is primarily a producer and supplier of batteries, capacitors, and components used in implantable medical devices (IMDs). Almost 95% of all active IMDs are developed with Greatbatch s component products. This is encouraging news for the company as management believes that it is now capable of producing complete medical devices for Original Equipment Manufacturer (OEM) customers. Moreover, Greatbatch boasts a vast intellectual property (IP) portfolio of more than 1,000 patents. The IP along with better sales and marketing initiatives will allow the company gain market share in the multi-billion dollar worth cardiac and neuromodulation, portable medical, vascular and orthopedics markets. One of Greatbatch s growth strategies is to develop innovative medical devices. Over the last three years, the company has invested heavily in research and development (R&D) to establish itself as a provider of complete medical devices system. The diversified portfolio approach of the QiG group (the research wing of Greatbatch), which includes strategic equity investments, OEM-initiated medical device projects and independent market driven medical device development to be commercialized through OEM partners, is poised to provide incremental returns on investment. Greatbatch s pipeline is healthy. A number of products are currently in development and are expected to support growth in the long run. The group is also independently working on several medical devices, the most notable of which is the Algovita spinal cord stimulator for chronic pain treatment in trunk and limbs. The company foresees double-digit growth in the Electrochem business on the back of this advanced product in the $1.5 billion spinal cord stimulation market. Greatbatch is making significant progress in the development of Algovita which received the CE Mark approval in Jun 2014 and is now in the early commercialization planning stage in Europe. New products targeted for the vascular, CRM/neuromodulation and orthopedic markets are expected to offer incremental revenue opportunity moving ahead. Greatbatch follows a strategy of acquiring complementary businesses that add new proprietary technologies, manufacturing capabilities, development resources and broaden its customer base. The acquisition of CCC Medical in Aug 2014, in particular, has greatly enhanced the company s medical device innovation efforts. For the three months ended Oct 3, 2014, CCC contributed roughly $1.6 million (nearly 1%) to the company s total revenue. Greatbatch s strategy to expand into emerging markets is garnering increasing opportunities too. The acquisition of Micro Power (Dec 2011) has provided opportunities to diversify Electrochem s revenues by expanding its foothold in the high-growth portable medical devices market and stimulating growth in other key areas. In addition, the acquisition of NeuroNexus (Feb 2012) is expected to boost Greatbatch s presence across cardiovascular and neuromodulation markets. The pooling of NeuroNexus technologies and Greatbatch s capabilities will enable the combined entity to provide new world-class research products and systems to neuroscientists across the globe. Greatbatch has implemented a company-wide migration to a common Enterprise Resource Planning (ERP) platform. The Program, which was initiated in 2011, was completed in the first half of 2014 and has resulted in initial savings through centralized administrative, financial and IT functions. Long-range plans call for improved manufacturing and supply chain efficiencies, as well as sales effort expansion. Further, the company has resorted to facility consolidation to cut costs. Along with the ongoing orthopedic consolidation initiative, Greatbatch has completed the infrastructural expansion of its Plymouth, MN facility to support the manufacturing of medical devices, reflecting a significant achievement toward upgrading the company s global ERP system. The orthopedic and medical devices initiatives are expected to generate roughly $10 $15 million of annual cost savings following its completion at the end of fourth-quarter Equity Research GB Page 3

4 REASONS TO SELL Legislative reforms in the U.S. healthcare industry have significantly altered the healthcare landscape. The implementation of the 2.3% annual medical device excise tax, effective Jan 2013, has increased the tax burden on the industry which could have a material negative impact on the company s financial condition, operating results and cash flows. Markedly, the medical device tax increased Greatbatch s cost of sales by $0.2 million and $0.6 million for the third quarter of 2014 and year-to-date periods, respectively. Additionally, lower reimbursements for medical products and services could result in pricing pressure and decreased demand for the company s products. Greatbatch generates a significant portion of its revenues from the overseas market (55% of total revenues in the first nine months of 2014). We expect foreign currency exchange rates to be a headwind on sales growth in the near term due to the strengthening U.S. dollar versus the Euro and other foreign currencies. Greatbatch faces significant customer concentration. In the first nine months of 2014, the Implantable division s top three customers, namely, Johnson & Johnson, Medtronic and St. Jude Medical collectively accounted for 47% of the company s total sales. Thus, the loss of any of these customers will significantly impact the company s top line. Greatbatch s smaller Electrochem division is experiencing lower revenues from its portable medical, environmental and military customers as a result of the company s increased pricing discipline, as well as reduced government funding on certain military and environmental projects. RECENT NEWS Third Quarter Highlights Greatbatch, Inc. reported adjusted earnings of $0.64 per share in the third quarter of 2014, which beat the Zacks Consensus Estimate by $0.07 and surged 12.3% from the year-ago quarter. Quarter Details Revenues in the quarter improved 2.4% year over year to $172 million, in line with the Zacks Consensus Estimate. Revenues were driven by robust growth in the orthopaedic and vascular product lines, mainly offset by persistent weakness in the portable medical product line. Revenues from Cardiac/Neuromodulation products slid 0.8% to $85.6 million, owing to the end of life impact for two legacy products, partly offset by new sales opportunities from existing customers. Revenues from Orthopaedic products came in at $32.5 million, up 8% on a year-over-year basis. The upside was driven by sales force productivity, marketing efforts, and improved market conditions, partially offset by a decline in case and tray sales due to unfavorable timing of customer product launches. Revenues from Portable Medical declined 11% to $17.2 million. Discontinued or reduced volumes in some lower margin products negatively impacted sales during the quarter and is expected to have an adverse impact on revenues for the remainder of 2014 and the first half of 2015 as well. Equity Research GB Page 4

5 Vascular product revenues spiked 21.4% to $15 million, reflecting continued adoption of the company s medical device products and the re-launch of a vascular medical device at the end of Meanwhile, revenues from the Energy, Military and Environmental (EME) business remained flat on a year-over-year basis at $19 million. Revenues from QiG, which includes sales from CCC Medical Devices acquired in Aug 2014, surged to $2.5 million from $0.7 million in the previous-year quarter. Gross margin improved 50 basis points (bps) on a year-over-year basis to 33.8% on the back of production efficiencies, higher margin sales mix and the acquisition of CCC Medical Devices, which more than offset the impact of contractual price concessions granted in exchange for long-term agreements with customers. Adjusted operating margin remained flat with the year-ago level at 13.1%, as increased selling, general and administrative expenses and higher consolidation and optimization costs were almost entirely offset by higher gross profit. Financial Position At the end of the third quarter, Greatbatch had cash and cash equivalents of $61.6 million as compared with $51.2 million at the end of the previous quarter. Long-term debt declined to $190 million from $192.5 million as of Jul 3, In the first nine months of 2014, Greatbatch generated operating cash flow of $54.7 million, positively impacted by stronger operating income and lower tax payments Guidance Based on its third-quarter results, the addition of CCC Medical Devices, and the forecast for the fourth quarter, Greatbatch raised its full-year 2014 revenue and adjusted earnings per share guidance. Management projects adjusted earnings in the band of $2.32 $2.38 per share, higher than the earlier band of $2.25 $2.35 per share. Meanwhile, annual revenues are anticipated in the band of $695 $705 million as against the prior range of $685 $705 million. Greatbatch anticipates adjusted operating margin of approximately 13% for full-year Equity Research GB Page 5

6 VALUATION Greatbatch shares are trading at 20.8x TTM earnings, a discount to the peer group average of 23x but a premium to the S&P 500 average of 18.6x. The TTM multiple is near to the high-end of the historical range of 11.4x to 21.9x TTM earnings, indicating limited upside potential. The stock is trading at 18.5x our forward earnings estimates for 2015, a 34.7% discount to the peer group average of 28.4x, which is lower than the 50.4% average discount for the historical period, indicating downside risk. However, strategic investments, manufacturing efficiencies, operating cost containment and volume leverage are positives over the long term. Given the mixed signals, we maintain our Neutral recommendation and set a price target of $51.00 (19.5x 2015 earnings). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF (TTM) (TTM) 5-Yr High (TTM) 5-Yr Low (TTM) Greatbatch Inc. (GB) Industry Average S&P Hanwha SolarOne (HSOL) N/A N/A N/A N/A N/A Cree Inc (CREE) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B P/B P/B ROE D/E Div Yield EV/EBITDA Last 5-Yr High 5-Yr Low (TTM) Last Qtr. Last Qtr. (TTM) Qtr. Greatbatch Inc. (GB) Industry Average S&P N/A 2.0 N/A Equity Research GB Page 6

7 Earnings Surprise and Estimate Revision History Equity Research GB Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of GB. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1114 companies covered: Outperform %, Neutral %, Underperform 5.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research GB Page 8