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Greatbatch profits drop, but firm stays optimistic; Forecast for year remains unchanged

Weaker sales of its medical products, coupled with production issues at its European orthopedic products business, caused Greatbatch Inc.'s first-quarter profits to plunge 63 percent.

The profits were much weaker than analysts were expecting, though the Clarence-based company said Thursday it wasn't changing its sales and earnings forecast for the year, noting that profitability is expected to improve in the second half of the year.

In addition to the "operational issues" at Greatbatch's European orthopedics facilities, the company's profits also were hurt by higher spending on its efforts to develop more than 15 medical devices that it expects to pay off in the long run. Greatbatch's plans to consolidate its European orthopedic operations are behind schedule.

Greatbatch's profits fell to $4.5 million, or 19 cents per share, compared with $11.9 million, or 51 cents per share, a year earlier, when the company's sales were bolstered by customers building their inventories in support of product launches.

The company's adjusted operating profits, which exclude some expenses, fell by 38 percent to $11.2 million, or 37 cents per share, from $18 million, or 46 cents per share, a year ago. Analysts expected the company to earn 43 cents.

Greatbatch's sales rose by 7 percent to a record $159 million from $149 million a year earlier, with all of the growth coming from its acquisition of Micro Power, an Oregon battery maker, in December. Greatbatch's commercial battery sales nearly doubled to $41.3 million because of the Micro Power acquisition, which added $20.6 million to its first-quarter sales.

Excluding the Micro Power acquisition and the impact of foreign currency fluctuations, Greatbatch's organic sales fell by 6 percent because of fewer product launches by the orthopedic and cardiac rhythm management device manufacturers they serve.

Thomas J. Hook, Greatbatch's president and chief executive officer, blamed the drop in profits on "tough comparables within our cardiac rhythm management and orthopedic product lines, and the planned increased investment in the development of complete medical devices."

Greatbatch increased its spending on research, development and engineering by a third during the quarter, to $13.9 million, as it worked on more than 15 new products for its own product line and for its customers.

Greatbatch's medical products sales fell by 8 percent, to $118 million from $128 million, as orthopedic revenues dropped 22 percent and cardiac rhythm management sales fell 4 percent. That offset an 11 percent increase in sales of vascular access products.

For this year, Greatbatch said it still expects its profits to range between $1.75 and $1.85 per share. "We expect our results to improve as the year progresses," Hook said during a conference call.

The company expects its sales to rise by about 15 percent, to between $645 million and $665 million, even though achieving the 5 percent to 15 percent increase it forecast for its orthopedic products business "is proving to be more difficult than originally contemplated," said Thomas J. Mazza, Greatbatch's chief financial officer.

"We've got other levers we can pull to deliver the year," Hook said.