St. Jude Medical, Inc. (STJ)

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St. Jude Medical (STJ)

Q1 2013 Earnings Call

April 17, 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 Implantable Electronic Systems 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

Bruce M. Nudell - Crédit Suisse AG, Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

Presentation

Operator

Welcome to the St. Jude Medical First Quarter 2013 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.

Before we begin, I'd like to remind you that some of the statements made during this conference call may be considered forward-looking statements. The company's 10-K for the fiscal year ended December 29, 2012, identifies 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 statements as a result of new information or future events or developments. The 10-K as well as the company's other SEC filings are available through the company or online.

During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business and performance. Tables reconciling these measures to most comparable GAAP measures are available in the company's press release issued earlier this morning or on 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, Sara. Welcome to the St. Jude Medical First Quarter 2013 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 first quarter and to give sales and earnings guidance both for the second 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 $1,338,000,000, down approximately 4% from the $1,395,000,000 reported in the first quarter of last year. Unfavorable foreign currency translations decreased this quarter's sales by approximately $17 million. On a constant currency basis, first quarter sales decreased approximately 3% versus last year. 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.

During the first quarter, we recognized $61 million or $0.21 per share in after-tax special items. For further information regarding these items, please refer to the details provided in our press release.

Additionally, in January 2013, the federal research and development tax credit was extended for both 2012 and 2013, retroactive to the beginning of 2012. As a result, during the first quarter of 2012, we recorded a $21 million benefit to income tax expense, which increased earnings per share by $0.07, representing the cumulative catch-up adjustment of this credit for 2012. Comments during this call referencing first quarter and full year 2013 results, including earnings per share amounts, will be exclusive of these items.

Also in the first quarter, based on our ongoing due diligence, we strengthened our strategic relationship with CardioMEMS and provided $28 million in debt financing to fund their operations as they continue to work to obtain FDA approval of the CardioMEMS CHAMPION heart failure monitoring system. As a result, beginning in the first quarter, we will treat CardioMEMS as a variable interest entity and consolidate their results. We estimate that this consolidation will have a negative impact of approximately $0.01 to our full year earnings per share.

Earnings per share were $0.92 for the first quarter of 2013, a 7% increase over adjusted earnings per share of $0.86 in the first quarter of 2012. We estimate that on a constant currency basis, first quarter earnings per share increased 9%.

Before we discuss our first quarter 2013 sales results by product category with guidance for the second quarter and the remainder of 2013, let me comment on foreign currency. As discussed on prior calls, the 2 main currencies influencing St. Jude Medical's operations are the euro and the yen. In preparing our sales and earnings guidance for the first quarter and full year 2013, we used exchange rates which assumed that each euro would translate into about $1.30 to $1.35 and that for the yen, each JPY 86 to JPY 91 would translate into USD 1. For the first quarter, the actual average exchange rates for the euro and the yen were consistent with these assumptions.

In preparing our sales and earnings guidance for the second quarter and the remainder of 2013, we are now assuming that each euro will translate into about $1.28 to $1.33, and we now expect that each JPY 95 to JPY 100 will translate into USD 1. These changes in assumptions regarding currency exchange rates reduced our total forecasted sales for the remainder of 2013 by approximately $60 million to $70 million.

For the first quarter, total cardiac rhythm management, or CRM, sales, which include revenue from both our ICD and pacemaker product lines, were $678 million, down 8% from last year's first quarter, including $6 million in unfavorable foreign currency translations. On a constant currency basis, total CRM product sales for the first quarter decreased 7%.

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