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St. Jude Medical’s (STJ - Analyst Report) second-quarter adjusted earnings per share of 96 cents beat the Zacks Consensus Estimate by 2 cents and transcended the year-ago earnings by 9.1%. Adjusted earnings exclude one-time items such as restructuring and acquisition-related charges as well as debt retirement costs. Adjusted earnings remained above the company’s second-quarter guidance of 93–95 cents a share.

However, reported net income for the quarter plunged 52.9% year over year to $115 million (or 40 cents a share), primarily due to higher special charges and other expenses.


Revenues inched down 0.05% (up 2% in constant currency) year over year to $1,403 million in the second quarter. Results comfortably exceeded the Zacks Consensus Estimate of $1,364 million. Unfavorable foreign currency lowered total revenue by $31 million. We note that the rate of decline in revenues improved sequentially (revenues declined 4% in the first quarter of 2013).

Sales in the U.S increased 0.8% to $669 million, while international sales declined 1.6% to $734 million in the reported quarter.

Segment Review

Revenues from the Cardiac Rhythm Management (CRM) division, St. Jude’s mainstay, fell 4% (down 2% in constant currency) year over year to $718 million, indicating sustained softness in the CRM market. ICD revenues slid 1% (flat at constant exchange rate or CER) to $454 million and pacemaker sales dropped 8% (down 6% at CER) to $264 million.

On a positive note, Atrial Fibrillation revenues climbed 9% (up 12% at CER) year over year to $237 million.

Revenues from the Cardiovascular franchise were flat year over year (up 3% at CER) at $340 million. Within Cardiovascular, vascular product sales dipped 1% to $178 million and structural heart product revenues increased 1% to $162 million.

Neuromodulation sales increased 2% (down 4% in constant currency) in the quarter to $108 million.


Gross margin remained flat year over year at 72.8% in the quarter. Selling, general and administrative expenses edged down 1% to $489 million

Research and development expenses remained flat at $173 million in the quarter. However, we note that operating margins contracted 390 basis points (bps) year over year to 20.1%, on account of higher special charges.

Balance Sheet

St. Jude exited the second quarter of 2013 with cash and cash equivalents of $1,220 million, a marginal year-over-year increase of 0.5%. Long-term debt increased 7.4% year over year to $3,095 million.


St. Jude revised its guidance for full year 2013 and also provided its earnings forecast for the third quarter. The company narrowed its adjusted earnings for the year in the band of $3.70–$3.73 (earlier $3.68–$3.73). The current Zacks Consensus Estimate of $3.69 falls within the guided range.

For the third quarter, the company envisions adjusted earnings in the range of 88–90 cents a share. The Zacks Consensus Estimate of $88 cents for the third quarter remains at the lower end of the said band.

Our Take

We are impressed with St. Jude’s revenue results, reflecting better organic growth. New products should further propel the top line in the near term. Guidance too did not disappoint.

A still choppy U.S. defibrillator market remains an overhang on St. Jude, as reflected by sustained implant volume pressure. A number of factors, including the Food and Drug Administration (FDA) warning letter, have hindered ICD volume growth. We are also cognizant about the ongoing stiff global austerity measures and difficult healthcare environment.

St. Jude currently carries a Zacks Rank #4 (Sell). While we remain on the sidelines regarding STJ, medical products companies such as Resmed (RMD - Analyst Report), Alere (ALR - Snapshot Report) and Hanger (HGR - Analyst Report) are expected to do well. While Resmed carries a Zacks Rank #1 (Strong Buy), the other two are Zacks Rank #2 (Buy) stocks.

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