St. Jude Beats, Charges Hurt Net

St. Jude Medical’s (STJ - Analyst Report) fourth quarter adjusted earnings per share of 86 cents topped the Zacks Consensus Estimate by a couple of cents and transcended the year-ago earnings of 75 cents.

The adjusted earnings exclude after-tax charges (of $102 million) related to the restructuring of certain activities at the company’s Cardiac Rhythm Management (“CRM”) division, costs related to impairment of intangibles and expenses associated with improvement of sales infrastructure. It also excludes a $9 million charge associated with contributions to the St. Jude Medical Foundation.

Profit (as reported) for the fourth quarter slid roughly 21% year over year to $163.4 million (or 51 cents a share) as higher sales were overshadowed by these special charges.

For fiscal 2011, adjusted earnings of $3.28 a share beat the Zacks Consensus Estimate by a penny and exceeded the year-ago earnings of $3.01 a share. Profit declined roughly 5% year over year to $864 million or $2.64 a share.

The Minnesota-based medical technology giant noted that two of its four divisions posted better-than-expected results in the fourth quarter, despite the weakened MedTech industry fundamentals.

Revenues

Revenues rose 4% (up 3% in constant currency) year over year to $1,406.9 million, just ahead of the Zacks Consensus Estimate of $1,400 million. Double-digit growth across the company’s Atrial Fibrillation, Cardiovascular and Neuromodulation segments was partly offset by the decline in the core CRM division.

For the fiscal, sales climbed 9% (up 5% in constant currency) year over year to $5,611.7 million, modestly beating the Zacks Consensus Estimate of $5,609 million. Foreign currency swings contributed roughly $18 million and $183 million to the top line in the fourth quarter and fiscal 2011, respectively.

Segment Review

Revenues from the CRM division, St. Jude’s mainstay, fell 4% (down 6% in constant currency) year over year to $728 million, indicating sustained softness in the CRM market. ICD revenues clipped 5% (down 6% in constant currency) to $436 million and pacemaker sales declined 4% (down 5% in constant currency) to $292 million.

A still choppy U.S. defibrillator market remains an overhang on St. Jude and its peers Medtronic (MDT - Analyst Report) and Boston Scientific (BSX - Analyst Report), as reflected by sustained implant volume pressure. ICD volume growth has been hindered by a number of factors including the U.S. Department of Justice’s investigation into hospitals' implant practices.

On a positive note, Atrial Fibrillation revenues climbed 13% (up 11% in constant currency) year over year to $218 million. Neuromodulation sales jumped 12% (up 11% in constant currency) to $121 million.

The cardiovascular franchise continues its healthy growth streak with revenues surging 18% (up 16% in constant currency) to $340 million, backed by the contributions of AGA Medical. Within Cardiovascular, vascular products sales rose 8% to $190 million. Structural heart product revenues soared 35% to $150 million.

Margins

Gross margin improved to 71.4% from 70.1% a year ago on higher sales. Selling, general and administrative expenses, as a percentage of sales, fell to 35.2% from 36.1% a year ago.

Research and development expenses (as a percentage of sales) edged down to 12.6% from 12.9%. Operating margins declined to 15.2% from 19.8% a year ago, hit by special charges.

Balance Sheet

St. Jude exited fiscal 2011 with cash and cash equivalents of $985.8 million, a roughly 97% year-over-year increase. However, long-term debt increased nearly 12% year over year to $2,713.3 million.

Outlook and Recommendation

St. Jude has initiated its earnings forecast for fiscal 2012. The company expects adjusted earnings for the year in the band of $3.43 to $3.48. For the first quarter, it envisions earnings in the range of 82 cents to 84 cents a share. The current Zacks Consensus Estimates for the first quarter and fiscal 2012 are 85 cents and $3.51, respectively.

We are impressed with St. Jude’s solid fundamentals, strong product mix and healthy growth trajectory. A spate of new growth drivers are expected to offer opportunities for accelerated sales growth over the next few years. 

St. Jude achieved a major milestone during the fourth quarter as it secured the U.S. approval for its much-awaited Unify Quadra cardiac resynchronization therapy defibrillator (“CRT-D”), the industry's first quadripolar pacing system. The device is expected to help the company win ground in the highly competitive U.S. defibrillator space.

However, we remain wary about competition-driven pricing pressure in a soft CRM market. Our Neutral recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold).

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