STJ ST. Jude Medical, Inc.

Greatbatch’s (GB) second-quarter fiscal 2011 adjusted (excluding one-time expenses/gains) earnings per share of 43 cents were in line with the Zacks Consensus Estimate and above the year-ago adjusted earnings of 40 cents. Profit (as reported) jumped 9.8% year over year to roughly $8.6 million (or 36 cents a share) owing to higher sales. The Clarence, New York-based company raised its revenue and earnings forecast for the full year.

Revenues

Revenues rose 4% year over year to $146.5 million on the heels of strong growth at the company’s Orthopedic business backed by favorable foreign exchange translation impact, offsetting a weak CRM business. Sales topped the Zacks Consensus Estimate of $141 million. Foreign currency movements contributed $5 million to revenues.

Segment Review

Revenues from the larger Greatbatch Medical division climbed 5% year over year to $126.4 million. Solid Orthopedic growth was, in part, masked by declines across the Vascular Access and CRM/Neuromodulation franchises.

CRM/Neuromodulation sales inched down 1% year over year to $77.7 million, hit by sustained pricing headwind and general sluggishness in the CRM market.

Orthopedic revenues soared 24% to $37.9 million, buoyed by customer inventory buildup/product launches and market share gains which fueled growth across all product lines. Moreover, favorable foreign exchange swings also meaningfully contributed to the growth. Greatbatch expects these factors to continue to boost orthopedic sales through 2011. Barring the currency impact, orthopedic revenues jumped 8% in the quarter.

Vascular Access sales fell 2% in the quarter to $10.8 million, impacted by tough year over year comparison.

Revenues from Greatbatch’s Electrochem segment, which offers high performance commercial batteries, dipped 2% year over year to $20.1 million. While sales fell in the quarter, the company benefited from customer inventory rebuilds and healthy energy and environmental market conditions. Greatbatch expects seasonality to impact the division’s sales during the second half.

Margins

Gross margin fell to 31.8% from 32.3% year-ago as revenue growth was partly neutralized by unfavorable sales mix and pricing concessions made to large customers. Selling, general and administrative expenses, as a percentage of sales, rose to 12% from 11.7% in the prior-year quarter, as a result of higher professional and consulting expenses and unfavorable currency exchange impact. Adjusted operating margin declined narrowly to 12.6% from 12.7% a year-ago.

Financial Health

Greatbatch exited the second quarter with cash and cash equivalents of roughly $36.9 million, down 19% year over year. Operating cash flows for the quarter dipped roughly 43% year over year to $13 million. The company de-leveraged its balance sheet during the second quarter by repaying long-term debt worth $20 million. As such, its long-term debt reduced roughly 8% sequentially (and 22% year over year) to $205.7 million. Greatbatch plans to continue to use its cash flows to fund R&D initiatives and pare debt.

Outlook

Based on its first half results and expectations for the back half, Greatbatch has lifted its top and bottom line projections for fiscal 2011. The company now expects revenues between $550 million and $570 million compared with its earlier forecast of $540 million and $560 million. Adjusted earnings per share target for the year has been revised to a band of $1.60 and $1.70 from $1.55 to $1.65. However, Greatbatch has retained its adjusted operating margin forecast of 12%-13%.

The current Zacks Consensus Estimates for revenue and earnings per share for fiscal 2011 are $568 million and $1.65, respectively.

Greatbatch is a leading producer and supplier of batteries, capacitors and components used in implantable medical devices. The company’s top customers include Boston Scientific (BSX), Johnson & Johnson (JNJ), Medtronic (MDT) and St. Jude Medical (STJ).

Greatbatch has been acquiring complementary businesses over the last few years to boost sales. Moreover, the company continues to invest in developing medical devices for its major OEM clients and spent $5.6 million on such initiatives in the second quarter. Greatbatch’s pipeline is healthy with a number of products currently in development that are expected to support growth in the long run.

We feel that operating results for the remainder of 2011 will be supported by strength at the company’s Orthopedic business and strategic investments. However, a soft CRM market and pricing pressure remain headwinds. Currently, we are Neutral on Greatbatch, which is in line with a short-term Zacks #3 Rank (Hold).

 
BOSTON SCIENTIF (BSX): Free Stock Analysis Report
 
GREATBATCH INC (GB): Free Stock Analysis Report
 
JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
 
MEDTRONIC (MDT): Free Stock Analysis Report
 
ST JUDE MEDICAL (STJ): Free Stock Analysis Report
 
Zacks Investment Research