St. Jude Medical, Inc. (STJ)

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St. Jude Medical (STJ)

Q4 2013 Earnings Call

January 22, 2014 8:00 am ET

Executives

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

Donald J. Zurbay - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

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

David R. Lewis - Morgan Stanley, Research Division

Bruce M. Nudell - Crédit Suisse AG, Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

Presentation

Operator

Welcome to the St. Jude Medical Fourth Quarter and Full Year 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 September 28, 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 the 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 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 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 Electronics Systems Division; Don Zurbay, Vice President and Chief Financial Officer; and Rachel Ellingson, Vice President of Corporate Relations. Our plan this morning is for Don Zurbay to provide a review of our financial results for the fourth quarter and full year 2013 and to give sales and earnings guidance, both for the first quarter and full year 2014. I will then address several topics and open it up for your questions. Go ahead, Don.

Donald J. Zurbay

Thank you, Dan. Sales for the quarter totaled $1,422,000,000, up approximately 4% from the $1,372,000,000 reported in fourth quarter of last year. Unfavorable foreign currency translations decreased this quarter's sales by approximately $27 million. On a constant currency basis, fourth quarter sales increased approximately 6% 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 2013, net sales were $5,501,000,000, flat with last year. Unfavorable foreign currency translations decreased 2013's net sales by approximately $101 million, resulting in constant currency sales growth for the year of approximately 2%.

During the fourth quarter, we recognized $171 million or $0.57 per share in after-tax special charges. 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 2013 results, including EPS amounts, will be exclusive of these items. At the end of 2013, the federal research and development tax credit expired and it has not yet been extended for 2014. In this circumstance, GAAP requires us to estimate and record our effective income tax rate, assuming that the R&D credit is not extended. For purposes of this conference call and our calculation of adjusted net earnings, however, we are assuming that the tax credit will be extended for 2014 as in past years. As a result, comments referencing our guidance for 2014, including EPS amounts, are presented based on effective income tax rate that contemplates the extension of the tax credit retroactive to January 1, 2014.

Earnings per share were $0.99 for the fourth quarter of 2013, an 8% increase over adjusted EPS of $0.92 in the fourth quarter of 2012 and above our guidance range of $0.95 to $0.97. For the full year 2013, adjusted earnings per share were $3.76, an 8% increase over adjusted EPS of $3.48 for the full year 2012. We estimate that on a constant currency basis, both fourth quarter and full year 2013 EPS increased 12%. Before we discuss our financial results for 2013 and offer our sales and earnings guidance for 2014, 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 average actual 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 2014, we're assuming that each euro will translate into about $1.33 to $1.38 and, for the yen, each JPY 102 to JPY 107 will translate into $1. Using these exchange rate assumptions, we estimate that the foreign currency translations will reduce total reported sales for 2014 by approximately $40 million to $50 million versus 2013, with slightly more than half of this impact expected in the first quarter of 2014. In addition, we would point out that due to our 52-, 53-week fiscal year convention, 2014 will include an additional week of sales and operations. Given the holiday schedule, we estimate that this will result in approximately 3 additional selling days in the fourth quarter.

Finally, we would like to make a comment regarding our investment in CardioMEMS. For purposes of preparing our sales and earnings guidance, we have assumed the acquisition of CardioMEMS sometime before midyear and, based on this assumption, we estimate sales from CardioMEMS to be approximately $15 million to $20 million, which we have included in the cardiovascular sales category.

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