St. Jude Medical, Inc. (STJ)

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St. Jude Medical (STJ)

Q4 2012 Earnings Call

January 23, 2013 8:00 am ET

Executives

Daniel J. Starks - Chairman, Chief Executive Officer and President

John C. Heinmiller - Executive Vice President

Eric S. Fain - President of Cardiac Rhythm Management Division

Analysts

Kristen M. Stewart - Deutsche Bank AG, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Matthew Taylor - Barclays Capital, Research Division

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

Presentation

Operator

Welcome to the St. Jude Medical Fourth Quarter and Full Year 2012 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.

Before we begin, let me remind you that some of the statements made during this conference call may be considered forward-looking statements. The 10-K for fiscal year 2011 and 10-Q for the fiscal quarter ended September 29, 2012 identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake to update any forward-looking statement as a result of new information or future events or developments. The 10-K and 10-Q are available through the company or online.

During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to most comparable GAAP measures are available in the press release or on the St. Jude Medical website at www.sjm.com.

[Operator Instructions] It is now my pleasure to turn the floor over to Dan Starks.

Daniel J. Starks

Thank you, Tracy. Welcome to the St. Jude Medical Fourth Quarter and Full Year 2012 Earnings Conference Call. With me on the call today are John Heinmiller, Executive Vice President; Mike Rousseau, Group President; Eric Fain, President of our Implantable Electronic Systems Division; Don Zurbay, Vice President and Chief Financial Officer; and Rachel Ellingson, Vice President of Corporate Relations.

Our plan this morning is for John Heinmiller to provide his normal review of our financial results for the fourth quarter and full year 2012 and to give sales and earnings guidance both for the first quarter and full year 2013. I will then address several topics and open it up for your questions. Go ahead, John.

John C. Heinmiller

Thank you, Dan. Sales for the quarter totaled $1,372,000,000, down approximately 2% from the $1,407,000,000 reported in the fourth quarter of last year. Unfavorable foreign currency translations decreased this quarter's sales by approximately $23 million. On a constant currency basis, fourth quarter sales decreased approximately 1% versus last year. We will update our currency assumptions in a moment, but the actual average exchange rates during the fourth quarter were within our previous guidance range.

For the full year 2012, net sales were $5,503,000,000, down approximately 2% from the $5,612,000,000 reported last year. Unfavorable foreign currency translations versus those in 2011 decreased 2012's net sales by approximately $137 million, resulting in constant currency sales growth for the year of approximately 1%.

During the fourth quarter, we recognized $113 million or $0.36 per share in after-tax special charges. Additionally, during the fourth quarter, we recognized $46 million or $0.15 per share in charges related to adjustments to uncertain tax positions associated with the effect of settlement of domestic income tax audits for 2002 through 2009. For further information regarding these charges, please refer to details provided in our press release.

Comments during this call referencing fourth quarter and full year 2012 results, including EPS amounts, will be exclusive of these items.

In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which extended the R&D tax credit for 2012 and 2013 retroactive to the beginning of 2012. At the end of 2011, the federal research and development tax credit had expired. In this circumstance, GAAP requires us to estimate and record our effective income tax rate, assuming that the R&D credit is not extended, and record the tax savings related to the 2012 R&D tax credit in the first quarter of 2013. For purposes of this conference call and our calculation of adjusted net earnings however, we are assuming that the tax credit was extended at the beginning of 2012. As a result, comments referencing fourth quarter and full year 2012 results and our guidance for 2013 including EPS amounts are presented based on an effective income tax rate that contemplates the extension of the tax credit retroactive to January 1, 2012.

Earnings per share were $0.92 for the fourth quarter of 2012, a 7% increase over adjusted EPS of $0.86 in the fourth quarter of 2011 and above our guidance range of $0.86 to $0.88. We primarily attribute this quarter's EPS overperformance to the cost savings resulting from our restructuring and productivity improvement initiatives. In addition, our share repurchase program contributed $0.01 to the EPS overperformance this quarter. For the full year 2012, adjusted earnings per share were $3.48, a 6% increase over adjusted EPS of $3.28 for the full year 2011. We estimate that on a constant currency basis, fourth quarter earnings per share increased 10% and that full year 2012 EPS increased 11%.

Before we discuss our financial results for 2012 and offer our sales and earnings guidance for 2013, let me provide a few comments about currency exchange rates and the assumptions we are using in our outlook for this year. The 2 main currencies influencing St. Jude Medical operations are the euro and the yen. For the fourth quarter, the actual average exchange rates used for the euro and the yen versus the assumptions we used in providing our guidance for the fourth quarter did not result in a material difference in reported sales. In preparing our sales and earnings guidance for the first quarter and full year 2013, we are assuming that each euro will translate into about $1.30 to $1.35 and for the yen, that each JPY 86 to JPY 91 will translate into USD 1. Using these exchange rate assumptions for 2013, we estimate that foreign currency translations will reduce total reported sales for 2013 by approximately $45 million to $65 million, representing about 1% impact based on 2012 sales of $5.5 billion.

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