FOURTH QUARTER 2012 EARNINGS CALL February 25, 2013 - PowerPoint PPT Presentation

FOURTH QUARTER 2012 EARNINGS CALL February 25, 2013

FORWARD-LOOKING STATEMENTS 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”, “variations”, or “continue” 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. 2

EARNINGS CALL PARTICIPANTS  Thomas J. Hook -President & CEO  Michael Dinkins -Senior Vice President & CFO  Tom Mazza - Vice President & Corporate Controller 3

AGENDA  Thomas J. Hook -Fourth Quarter 2012 Highlights -Strategic Focus  Michael Dinkins -Fourth Quarter 2012 Financial Results -Financial Guidance  Question & Answer 4

Selected Q4 Highlights ($ in millions except for EPS) 4Q 2012 4Q 2011 Change Sales $159 $142 12% Adjusted Operating Margin 13.3% 11.1% 220bps Adjusted Diluted EPS $0.53 $0.39 36% Adj. Operating Cash Flows (a) $29 $33 (12%) Capex $7 $4 75% Adj. ROIC 8.5% 6.8% 170bps (a) Excludes impact of Other Operating Expenses and DVT expenses of $4m(2012) and $2m (2011). 5

Strengthening Our Core, Expanding Our Pipeline Core Pipeline • IP portfolio • Mfg. excellence • Sales & Marketing • Customer R&D projects  Deepen relationships with  New customers, expanded strategic OEMs through geography intellectual property and long term agreements  OEM funded research 6

Orthopaedic Update  Successfully completed customer supplier certification audits  Swiss manufacturing of reamers ceased January 31 st  Mexico  First shipments out of Mexico made in February with aggressive ramp-up plan in place  Additional low volume reamer models are still in transfer process to be completed by May 2013  Fort Wayne –  Straight Reamer Handles validated and on track for February shipments  Offset reamer handles and impactors currently going through process validation 7

STRATEGIC FOCUS 8

STRATEGIC FOCUS  Strengthen Core Business  Sustainable 5% core organic sales growth opportunity  Improve earnings growth  Commercialize Algostim for additional upside 9

STRATEGIC FOCUS Strengthen Core Business - Driver of our financial performance - Protected by long-term contracts - Expanded Neuromodulation component agreement with key customer - Quality system to support medical device growth - Enhanced Orthopaedic operating margins by divesting low margin product lines and consolidation - Major plant consolidations completed; on target to achieve productivity upside 10

STRATEGIC FOCUS Sustainable 5% core organic sales growth opportunity - Upside growth potential exists in each core market - New & optimized sales organization will drive productivity & new contract wins…geographic expansion and new market segments - M&A will supplement organic growth strategy 11

STRATEGIC FOCUS Improve earnings growth - Driving operating margin improvement via: - Orthopaedic margin improvement - Manufacturing productivity improvements - Leveraging SG&A…ERP implementation - Partially offset by increased Sales & Marketing investment - Algostim product development spend decreasing in 2014 - Future complete medical device development will be funded with 3 rd party development agreements - Continued pay for performance architecture 12

STRATEGIC FOCUS Commercialize Algostim for additional upside -Update at Investor Day on March 18 -Represents upside to the core business growth 13

STRATEGIC FOCUS  Strengthen Core Business  Sustainable 5% core organic sales growth opportunity  Improve earnings growth  Commercializing Algostim for additional upside 14

FINANCIAL PERFORMANCE 15

Selected Total Year Highlights ($ in millions except for EPS) 2012 2011 Change Sales $646 $569 14% Adjusted Operating Margin 11.4% 11.9% -50bps Adjusted Diluted EPS $1.77 $1.68 5% Adj. Operating Cash Flows(a) $80 $93 (14%) Capex $41 $22 86% ROIC 7.4% 7.3% 10bps ( a) Excludes Other Operating Expense and DVT expenses impact of $15m (2012) and $4m (2011). 16

Organic Sales ($ in thousands) FX & % Acquisition % 2011 2012 Change 2012 2012 Change Product Lines Implantable Medical CRM/Neuromodulation $303,690 $309,124 2% $2,455 $306,669 1% Vascular 45,098 51,980 15% - 51,980 15% Orthopaedics 140,277 122,061 -13% (6,300) 128,361 -8% Total 489,065 483,165 -1% (3,845) 487,010 0% Electrochem Portable Medical 9,609 81,659 750% 71,807 $9,852 3% Energy/Environmental 58,934 67,046 14% 4,837 62,209 6% Other 11,214 14,307 28% 5,731 8,576 -24% Total 79,757 163,012 104% 82,375 80,637 1% Total Sales $568,822 $646,177 $78,530 $567,647 14% 0% 17

2012 Variance Analysis Adj EPS 2011 Results $ 1.68 Medical Devices Initiatives (0.17) Swiss Ortho Operating Issues (0.16) Investment in Sales & Marketing (0.10) Other 0.06 Performance Based Compensation 0.08 Volume/Productivity* 0.38 2012 Results $ 1.77 * Includes Impact of Acquistions 18

2013 Outlook 19

2013 Guidance Revenue Stronger second half performance Organic growth 5% - 8% Adjusted Operating Margin Productivity and consolidation benefit 12.0% - 12.5% Partially offset by: • Continue investment in sales and marketing • Performance base compensation Other Metrics – Finishing 2012 initiatives Other operating expense $11.5m to $14.0m Leverage existing capacity Capital expenditures $20m to $30m DVT of $4.8m to $5.8m (included in Completion of Algostim other operating expense) 20

APPENDIX 21

GAAP Reconciliation Three months ended Implantable Medical Electrochem Unallocated Total Dec. 28, Dec. 30, Dec. 28, Dec. 30, Dec. 28, Dec. 30, Dec. 28, Dec. 30, 2012 2011 2012 2011 2012 2011 2012 2011 118,889 $ 121,292 $ 40,297 $ 20,454 $ - $ - $ 159,186 $ 141,746 Sales $ Operating income (loss) as reported $ 4,392 $ 13,784 $ 6,344 $ 2,075 $ (9,331) $ (3,317) $ 1,405 $ 12,542 Adjustments: Inventory step-up amortization (COS) - - - 177 - - - 177 Medical device DVT expenses (RD&E) 1,351 2,270 - - - - 1,351 2,270 Consolidation and optimization costs 17,974 - - - 274 - 18,248 - Integration expenses (77) - 249 - 1 - 173 - Asset dispositions, severance and other (131) 152 39 607 36 - (56) 759 (9,020) Adjusted operating income (loss) $ 23,509 $ 16,206 $ 6,632 $ 2,859 $ $ (3,317) $ 21,121 $ 15,748 Adjusted operating margin 19.8% 13.4% 16.5% 14.0% N/A N/A 13.3% 11.1% Medical device related adjusted expenses (excluding DVT) $ 6,313 $ 6,058 $ - $ - $ - $ - $ 6,313 $ 6,058 Adjusted operating income excluding medical device initiatives $ 29,822 $ 22,264 $ 6,632 $ 2,859 $ (9,020) $ (3,317) $ 27,434 $ 21,806 Adjusted operating margin excluding medical device initiatives 25.1% 18.4% 16.5% 14.0% N/A N/A 17.2% 15.4% 22

GAAP RECONCILIATON Year ended Implantable Medical Electrochem Unallocated Total Dec. 28, Dec. 30, Dec. 28, Dec. 30, Dec. 28, Dec. 30, Dec. 28, Dec. 30, 2012 2011 2012 2011 2012 2011 2012 2011 Total sales $ 483,165 $ 489,065 $ 163,012 $ 79,757 $ - $ - $ 646,177 $ 568,822 Operating income (loss) as reported $ 24,908 $ 62,461 $ 21,631 $ 14,965 $ (20,718) $ (15,727) $ 25,821 $ 61,699 Adjustments: Inventory step-up amortization (COS) - - 532 177 - - 532 177 Medical device DVT expenses - (RD&E) 5,190 5,133 - - - - 5,190 5,133 Consolidation and optimization - costs 34,378 425 - - 4,670 - 39,048 425 - Integration expenses 167 - 1,287 - 6 - 1,460 - Asset dispositions, severance and - other 247 51 883 117 708 - 1,838 168 Adjusted operating income (loss) $ 64,890 $ 68,070 $ 24,333 $ 15,259 $ (15,334) $ (15,727) $ 73,889 $ 67,602 Adjusted operating margin 13.4% 13.9% 14.9% 19.1% N/A N/A 11.4% 11.9% Medical device related adjusted expenses (excluding DVT) $ 28,453 $ 22,080 $ - $ - $ - $ - $ 28,453 $ 22,080 Adjusted operating income excluding medical device initiatives $ 93,343 $ 90,150 $ 24,333 $ 15,259 $ (15,334) $ (15,727) $ 102,342 $ 89,682 Adjusted operating margin excluding medical device initiatives 19.3% 18.4% 14.9% 19.1% N/A N/A 15.8% 15.8% 23