St. Jude Medical, Inc. (STJ)

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St. Jude Medical (STJ)

Q1 2011 Earnings Call

April 20, 2011 8:00 am ET

Executives

Eric Fain - President of Cardiac Rhythm Management Division

Michael Rousseau - Group President and President of U S division

John Heinmiller - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Daniel Starks - Chairman of the Board, Chief Executive Officer and President

Analysts

David Roman - Goldman Sachs Group Inc.

Robert Hopkins - Lehman Brothers

Michael Weinstein - JP Morgan Chase & Co

Derrick Sung - Sanford C. Bernstein & Co., Inc.

Larry Biegelsen - Wells Fargo Securities, LLC

Kristen Stewart - Deutsche Bank AG

Frederick Wise - Leerink Swann LLC

Joanne Wuensch - BMO Capital Markets U.S.

Presentation

Operator

Welcome to St. Jude Medical's First Quarter Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.

The remarks made during this conference call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involves risks and uncertainties. Such forward-looking statements include expectations, plans and prospects for the company, including potential clinical successes, anticipated regulatory approvals and future product launches and projected revenue, margins, earnings and market shares.

The statements made by the company are based upon management's current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include market conditions and other factors beyond the company's control and the risk factors and other cautionary statements described in the company's filings with the SEC, including those described in the risk factors and cautionary statement sections of the company's annual report on Form 10-K for the fiscal year ended January 1, 2011. The company does not intend to update these statements and undertakes no duty to any person to provide any such update under any circumstance. [Operator Instructions]

It is now my pleasure to turn the floor over to Dan Starks.

Daniel Starks

Thank you, Sarah. Welcome to the St. Jude Medical First Quarter 2011 Earnings Conference Call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer; Eric Fain, President of our Cardiac Rhythm Management Division; Mike Rousseau, Group President; and Angie Craig, Vice President of Corporate Relations and Human Resources.

Our plan this morning is for John Heinmiller to provide his normal review of our financial results for the first quarter 2011 and to give sales and earnings guidance both for the second quarter and full year 2011. I will then address several topics and open it up to your questions. Go ahead, John.

John Heinmiller

Thank you, Dan. Sales for the quarter totaled $1,376,000,000, up approximately 9% over the $1,262,000,000 reported in the first quarter of last year and at the upper end of our total sales guidance range of $1,320,000,000 to $1,385,000,000.

Favorable foreign currency translations versus last year's first quarter increased to this quarter's sales by about $17 million. We will update our currency assumptions in a moment, but the actual average exchange rates during the first quarter were within our previous guidance range.

On a constant currency basis, first quarter sales increased approximately 8% versus last year, and first quarter sales increased approximately 5% on an organic basis. Also, as you may recall, during the first quarter of 2010, a competitor announced the suspension of all sales of their ICD products in the United States. We estimate that this dynamic benefited our first quarter 2010 U.S. ICD sales by approximately $25 million. If we adjust to reflect this one-time benefit, our first quarter 2011 sales were up approximately 10% on a constant currency basis.

Finally, we estimate that the impact of the Japan earthquake and tsunami on our international sales was approximately $5 million in the quarter, primarily in our CRM business.

During the first quarter, we recorded after-tax charges of $19 million, or $0.06 per share, primarily related to AGA Medical integration expenses associated with contract termination costs in international locations. Also, in connection with the AGA Medical acquisition, we continued to amortize the acquired inventory step up to cost of sales.

In the first quarter, we recognized $15 million in cost of sales related to this item, and we expect the remaining $15 million will be absorbed into cost of sales during the second quarter of 2011. Comments during this call referencing first quarter results and guidance for full year 2011 results, including EPS amounts, will be exclusive of these items.

One additional item to note in the first quarter of 2011 was the inclusion of a $7 million expense from the recently enacted excise tax in Puerto Rico that is included in the other expense line item. This additional expense is almost entirely offset by a corresponding $6 million tax benefit reflecting the tax credit available in the United States related to the Puerto Rico excise tax, the net effect of which reduced our income tax rate to 22%. Taken together, these two items, therefore, did not affect earnings per share.

Earnings per share were $0.80 for the first quarter of 2011, a 7% increase over adjusted EPS of $0.75 in the first quarter of 2010 and above our guidance range of $0.77 to $0.79. On a currency neutral basis, and excluding the impact of a competitor's suspension of ICD sales in the first quarter of 2010, we estimate earnings per share increased approximately 8%.

Before we discuss our first quarter 2011 sales results by product category with guidance for the second quarter and the remainder of 2011, let me comment on foreign currency.

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