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St. Jude Medical’s (STJ - Analyst Report) first-quarter adjusted earnings per share of 92 cents were in line with the Zacks Consensus Estimate and transcended the year-ago earnings of 86 cents. Adjusted earnings exclude one-time items such as restructuring and acquisition-related charges as well as income tax benefits. Adjusted earnings are within the company’s first-quarter guidance of 91–93 cents a share.

Profit (as reported) for the quarter increased 5.2% year over year to $223 million (or 78 cents a share). Controlled operating expenses managed to dampen sluggish sales and a difficult Med-Tech environment in the quarter.

The Minnesota-based medical technology giant noted that it is comfortably placed with its earnings results and plans to launch 20 new products in 2013 to salvage its declining top line.

Revenues

Revenues dropped 4% (down 3% in constant currency) year over year to $1,338 million in the first quarter. Results were below the Zacks Consensus Estimate of $1,368 million. Unfavorable foreign currency lowered total revenue by $17 million. All segments, except the Atrial Fibrillation (AF) business, reported disappointing results, especially the Cardiac Rhythm Management (CRM) unit.

Segment Review

Revenues from the CRM division, St. Jude’s mainstay, fell 8% (down 7% in constant currency) year over year to $678 million, indicating sustained softness in the CRM market. ICD revenues slid 5% (down 4% in constant currency) to $427 million and pacemaker sales plunged 12% (down 11% in constant currency) to $251 million.

On a positive note, Atrial Fibrillation revenues climbed 5% (up 7% in constant currency) year over year to $233 million. Neuromodulation sales also dropped 4% (down 4% in constant currency) to $99 million.

Revenues from the Cardiovascular franchise declined 2% year over year (flat in constant currency) at $328 million. Within Cardiovascular, vascular products sales dipped 3% to $175 million and structural heart product revenues fell 1% to $153 million.

Margins

Gross margin decreased to 71.8% from 72.7% a year ago. Selling, general and administrative expenses, as a percentage of sales, remained roughly flat at 35%.

Research and development expenses (as a percentage of sales) edged down to 12% from 12.5%. However, it is worthwhile to note that operating margins increased to 23% from 21.6% a year ago, on the back of controlled expenses.

Balance Sheet

St. Jude exited the first quarter of 2013 with cash and cash equivalents of $966 million, a year-over-year decrease of 19.1%. Long-term debt increased 11.1% year over year to $2,833 million.

Outlook

St. Jude has provided its earnings forecast for the second quarter as well as reiterated its guidance for 2013. The company expects adjusted earnings for the year in the band of $3.68–$3.73. For the second quarter, it envisions adjusted earnings in the range of 93–95 cents a share. The current Zacks Consensus Estimates for the second quarter and 2013 are 94 cents and $3.70, respectively.

Our Take

We are concerned regarding St. Jude’s declining top-line growth, although the company’s plan to introduce new products into the market appears encouraging. 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. However, the only factor, which helped the company achieve its bottom-line target, was an improved operating margin on the back of the company’s restructuring efforts to streamline the underlying business.

St. Jude currently carries a Zacks Rank #4 (Sell). While we remain on the sidelines regarding STJ, medical products companies such as NuVasive (NUVA - Snapshot Report), Exactech (EXAC - Snapshot Report) and Perrigo (PRGO - Analyst Report) are expected to do well. While NuVasive carries a Zacks Rank #1 (Strong Buy), the other two are Zacks Rank #2 (Buy) stocks.

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