St. Jude Medical, Inc. (STJ)

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St. Jude Medical (STJ)

Q2 2013 Earnings Call

July 17, 2013 8:00 am ET

Executives

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

John C. Heinmiller - Executive Vice President

Michael T. Rousseau - Group President

Eric S. Fain - President of Implantable Electronic Systems Division

Analysts

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

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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

James Francescone - Morgan Stanley, Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

Matthew Taylor - Barclays Capital, Research Division

Presentation

Operator

Good morning. Welcome to the St. Jude Medical Second 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, let me remind you that some of the statements made during this conference call may be considered forward-looking statements. The company's 10-K for fiscal year 2012 and 10-Q for the fiscal quarter ended the 30th of March, 2013, 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 statements as a result of new information or future events or developments. The 10-K and 10-Q, 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 performance. Tables reconciling these measures to the most comparable GAAP measures are available in the company's press release issued earlier this morning, or on the St. Jude Medical's 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, Matt. Welcome to the St. Jude Medical Second 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 second quarter and to give sales and earnings guidance for both the third 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 $1,403,000,000, slightly less than the $1,410,000,000 reported in the second quarter of last year. Unfavorable foreign currency translations versus last year's second quarter reduced this quarter's sales by about $31 million. On a constant currency basis, second quarter sales increased approximately 2% versus last year. We will update our currency assumptions in a moment, but the actual average exchange rates during the second quarter were within our previous guidance range.

During the second quarter, we recognized $160 million or $0.56 per share in after-tax charges, primarily related to the make-whole provisions of outstanding notes that were retired during the quarter, prior to their scheduled maturity. For further information regarding these charges, please refer to details provided in our press release. Comments during this call referencing second quarter and full year 2013 results, including earnings per share amounts, will be exclusive of these items.

As we previously announced, during the second quarter of 2013, we made a $40 million equity investment in Spinal Modulation. Based on the terms of the agreement, and as of the date of the investment, we began treating Spinal Modulation as a variable interest entity and are consolidating their results.

Earnings per share were $0.96 for the second quarter of 2013, a 9% increase over adjusted EPS of $0.88 in the second quarter of 2012. We estimate that on a constant currency basis, EPS increased approximately 14% versus last year.

Before we discuss our second quarter 2013 sales results by product category, with guidance for the third 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 second quarter and full year 2013, we used exchange rates which assumed that each euro would translate into about $1.28 to $1.33 and that each JPY 95 to JPY 100 would translate into USD 1. For the second 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 third quarter and the remainder of 2013, we are assuming that each euro will continue to translate into about $1.28 to $1.33 and that now each JPY 97 to JPY 102 will translate into USD 1.

Additionally, during the second quarter, the U.S. dollar strengthened against several other currencies which we have revised in our latest forecast. The changes in assumptions regarding currency exchange rates decreased total forecasted sales for the second half of 2013 by about $15 million to $20 million, which we estimate will reduce earnings per share for the second half of 2013 by approximately $0.02.

For the second quarter, total cardiac rhythm management, or CRM sales, which include revenue from both our ICD and pacemaker product lines, were $718 million, down 4% from last year's second quarter, including $12 million of unfavorable foreign currency translations. On a constant currency basis, total CRM product sales were down 2% versus the second quarter of last year.

For the second quarter, ICD sales were $454 million, down 1% versus last year's second quarter. On a constant currency basis, second quarter ICD sales were flat versus last year. U.S. ICD sales were $270 million, a 1% increase from last year's second quarter. International ICD sales were $184 million, down 4% versus the second quarter of 2012, including $7 million of unfavorable foreign currency translations. On a constant currency basis, international ICD sales were down 1% versus last year's second quarter.

For low-voltage devices, sales for the second quarter totaled $264 million, down 8% versus last year's second quarter. On a constant currency basis, second quarter pacemaker sales were down 6% versus last year. In the United States, pacemaker sales were $110 million. In our international markets, pacemaker sales were approximately $154 million, including $5 million of unfavorable foreign currency translations. On a constant currency basis, international pacemaker sales decreased 6% versus last year's second quarter.

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