STJ ST. Jude Medical, Inc.

Greatbatch’s (GB) fourth-quarter fiscal 2011 adjusted (excluding one-time items) earnings per share of 39 cents came in line with the Zacks Consensus Estimate and trailed the year-ago adjusted earnings of 46 cents.

Profit (as reported) tumbled 59% year over year to roughly $5.6 million (or 24 cents a share). The New York-based company’s profits in the year-ago quarter were boosted by a $9.5 million gain stemming from the settlement of a lawsuit related to its Electrochem unit.

For the fiscal, adjusted earnings of $1.68 a share also matched the Zacks Consensus Estimate while surpassing the year-ago earnings of $1.51.

Revenues

Revenues rose 6% year over year to $141.7 million in the fourth quarter, beating the Zacks Consensus Estimate of $140 million. For the full year, sales climbed 7% year over year to $568.8 million, also ahead of the Zacks Consensus Estimate of $566 million.

Greatbatch saw solid double-digit growth across its Vascular Access business and the Electrochem division in the fourth quarter, in part offset by a weak CRM/Neuromodulation business. Revenues for the quarter  benefited from roughly $3 million of medical devices sales and the company’s takeover of Micro Power Electronics in late 2011. Foreign currency movements contributed roughly $8 million to sales in fiscal 2011.

Segment Review

Revenues from the larger Greatbatch Medical division inched up 2% year over year to $121.3 million in the fourth quarter. Within Greatbatch Medical, CRM/Neuromodulation sales edged down 2% year over year to $77.2 million, impacted by sustained pricing headwind and general sluggishness in the market. Greatbatch expects revenues from this business to be lower in first-half 2012 with a recovery expected in the back half.

Orthopedic revenues crept up 3% to $31.6 million. Currency exchange swings did not have a material impact on orthopedic sales in the quarter.  Revenues from Vascular Access soared 28% to $12.5 million on the back of growth in the underlying market and increased market share.

Revenues from Greatbatch’s smaller Electrochem segment, which offers high performance commercial batteries, zoomed 44% year over year to $20.5 million. The division’s sales were boosted by the contributions from the Micro Power acquisition. Excluding the contribution, Electrochem sales jumped 27%.

Margins

Gross margin, excluding inventory step-up amortization related to acquisition, dipped to 31.7% from 33.4% a year ago. The decline is attributable to pricing concessions made to large customers and an unfavorable mix.

Selling, general and administrative expenses, as a percentage of sales, increased to 13.1% from 11.5% in the prior-year quarter, as a result of higher legal and consulting expenses, increased performance based compensation and unfavorable currency exchange impact. Net research, development and engineering costs (RD&E), as a percentage of sales, inched up to 9% from 8.6% a year ago. Adjusted operating margin fell to 11.1% from 13.3% a year ago.

Balance Sheet and Cash Flows

Greatbatch ended the fiscal with cash and cash equivalents of roughly $36.5 million, up 59% year over year. Operating cash flows increased six-fold year over year to $31 million in the fourth quarter (up 17% year over year to $90 million for the year).

The company repaid long-term debt worth $40 million during fiscal 2011 and borrowed $45 million to partly finance the Micro Power buyout. Its long-term debt increased roughly 7% year over year to $236 million at the end of the year.

Guidance and Recommendation

Moving ahead, Greatbatch expects revenues for fiscal 2012 in the band of $645 million to $665 million, a 13%-17% year-over-year growth. The forecast assumes sales of up to $15 million from medical devices.

The company expects revenues from CRM & Neuromodulation to be flat to down 3% in 2012. Vascular access sales are forecast to climb 10%-20% while orthopedic revenues are expected to increase 5%-15%. Revenues from the Electrochem segment is expected to grow roughly 5% in 2012.

Greatbatch expects adjusted earnings per share in the range of $1.75 to $1.85. Moreover, Greatbatch foresees adjusted operating margin of 11.5%-12.5% for the year. The current Zacks Consensus Estimates for revenue and earnings per share for fiscal 2012 are $611 million and $1.82, 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. Its 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 will be supported by strength at the company’s Orthopedic business and strategic investments. However, a soft CRM market and pricing pressure remain as headwinds. Currently, we have an Outperform rating on the stock.

 
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