CEO Comments
“Our first quarter results are in-line with our expectations given the anticipated lower sales volume compared to first quarter 2014, and a $4 million negative currency impact in the quarter,” said Thomas J. Hook, president and CEO of Greatbatch. “Despite this slower start to the year, we are confident in our strategy and have line-of-sight with new customers and new product introductions that are expected to provide strong performance in the second half of the year. Our overarching goal as a company is to drive profitable growth by leveraging our long-term agreements with our customers for our core products, continuing to expand our margins through operational excellence, pursuing targeted M&A activities and advancing our medical device strategy. During the quarter we continued to move this strategy forward, which included initiating a proposed tax-free spin-off of Algostim, LLC. We will provide additional information on this proposed spin-off during our first quarter earnings conference call.”
CFO Comments 
“Partially offsetting our lower sales was an 18% constant currency increase in our orthopaedics product line,” said Michael Dinkins, executive vice president and CFO. “Manufacturing productivity was also consistent with our expectations given the effects of the unfavorable mix of products and lower volume. The integration of CCC Medical Devices capabilities and customers into our organization continues as planned and was slightly accretive to earnings during the quarter.”
“We are maintaining our 2015 revenue and adjusted diluted EPS guidance ranges for the year. This guidance includes the impact of Algostim as if we will continue to run it through the end of the year. We are excluding deal related costs for the spin-off which is estimated to be $8 million to $12 million,” concluded Dinkins.
First Quarter Results
First quarter 2015 sales of $161.3 million decreased 7% on both an as-reported and on an organic constant currency basis in comparison to the prior year period. Sales for the first quarter of 2015 include $3.9 million from CCC Medical Devices, which was acquired in August 2014, as well as the impact from foreign currency exchange rate fluctuations, which reduced first quarter sales by approximately $4 million in comparison to the prior year primarily due to the strengthening dollar versus the Euro. The organic constant currency sales decrease in comparison to the prior year period was primarily the result of a tough comparable versus the first quarter of 2014, approximately $5 million of impact from end of life products in our cardiac product line, as well as continued weakness in our portable medical product line. Partially offsetting these increases was an 18% constant currency increase in orthopaedic revenue due to market growth, new customer wins, and the benefits from our investments in capacity and capabilities at our Chaumont, France facility.
Gross profit of $52.4 million for the first quarter of 2015 decreased $5.2 million or 9% in comparison to the prior year period. Similarly, gross profit as a percentage of sales decreased 50 basis points to 32.5% in comparison to the first quarter of 2014. These decreases were primarily a result of the lower sales volume during the quarter, as well as a higher sales mix of lower margin products and the impact of contractual price concessions granted to our customers in exchange for long-term agreements.
Selling, general and administrative (“SG&A”) expenses for the first quarter of 2015 increased $0.9 million or 4% in comparison to the prior year period. This increase is primarily attributable to the acquisition of CCC Medical Devices, which added $0.7 million of SG&A costs, as well as higher general and administrative expenses, and legal fees, which includes intellectual property related costs. The impact of these increases was partially offset by lower performance-based compensation, which reflects the lower revenue and adjusted operating income during the quarter.
Net research, development and engineering (“RD&E”) costs for the 2015 first quarter decreased $1.0 million or 7% in comparison to the prior year period. This decrease in expenses was primarily due to lower design verification testing (“DVT”) costs incurred in connection with the development of our Algovita Spinal Cord Stimulation (“SCS”) system, as well as lower performance-based compensation. This reduction in expenses was partially offset by lower customer cost reimbursements due to the timing of the achievement of milestones related to development projects, as well as the expiration of certain government grants in the second half of 2014.
GAAP operating income for the first quarter of 2015 decreased 58% to $9.4 million. This decrease was primarily due to lower gross profit and an increase in consolidation and optimization costs, which are included in other operating expenses, net. Adjusted operating income, which excludes these consolidation and optimization costs, decreased $5.1 million, or 23%, to $17.2 million. Refer to Table A at the end of this release for a reconciliation of adjusted operating income to GAAP operating income and the “Use of Non-GAAP Financial Information” section below.
The 2015 first quarter GAAP effective tax rate was 18.5% compared to 32.4% for the same period of 2014. This decrease was primarily attributable to $0.8 million of discrete tax items recorded during the 2015 first quarter, due to the settlement of tax audits, as well as higher income in lower tax rate jurisdictions. The 2015 and 2014 first quarter GAAP effective tax rates do not include the benefit of the Federal R&D tax credit, but we assume the benefit of this credit when calculating our adjusted diluted EPS. If enacted, the R&D tax credit would benefit the current year GAAP provision for income taxes by approximately $1.6 million or $400 thousand per quarter and would be recognized in the quarter the legislation is enacted.