St. Jude Medical, Inc. (STJ)

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St. Jude Medical (STJ)

Q3 2012 Earnings Call

October 17, 2012 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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

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

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

David R. Lewis - Morgan Stanley, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

Presentation

Operator

Welcome to St. Jude Medical's Third Quarter 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 June 30, 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 statements 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, Christie. Welcome to the St. Jude Medical Third Quarter 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, 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 third quarter 2012 and to give sales and earnings guidance for the fourth quarter and full year 2012. I will then address several topics and open it up to your questions. Go ahead, John.

John C. Heinmiller

Thank you, Dan.

Sales for the quarter totaled $1,326,000,000, down approximately 4% from the $1,383,000,000 reported in the third quarter of last year. Unfavorable foreign currency translations versus last year's third quarter reduced this quarter's sales by about $60 million. We will update our currency assumptions in a moment, but the actual average exchange rates during the third quarter were within our previous guidance range.

On a constant currency basis, third quarter sales increased less than 1% versus last year. During the third quarter, we recognized $80 million or $0.25 per share in after-tax charges, primarily in connection with restructuring activities announced this quarter to streamline our organizational structure, as well as our previously announced restructuring actions initiated during the second quarter of 2011 to streamline manufacturing within our CRM business, which consists primarily of closing down operations at our location in Sweden. Comments during this call referencing third quarter results and guidance for full year 2012 results, including EPS amounts, will be exclusive of these items.

At the end of 2011, the federal research and development tax credit expired, and it has not yet been extended for 2012. 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 2012, as in past years. As a result, comments referencing third quarter results and our guidance for 2012, 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. To the extent that the federal research and development tax credit is not renewed, our effective income tax rate for 2012 would be higher than what is being presented during this call.

Earnings per share were $0.83 for the third quarter of 2012, a 6% increase over adjusted EPS of $0.78 in the third quarter of 2011. We estimate that, on a constant currency basis, EPS increased approximately 15% versus last year.

Before we discuss our third quarter 2012 sales results by product category, with guidance for the fourth quarter of 2012, 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 third quarter of 2012, we used exchange rates which assumed that each euro would translate into about $1.20 to $1.25 and that each JPY 78 to JPY 83 would translate into USD 1. For the third 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 fourth quarter of 2012, we are now assuming that each euro will translate into about $1.27 to $1.32 and that each JPY 76 to JPY 81 will translate into USD 1. This change in assumption regarding currency exchange rates increases total forecasted sales for the fourth quarter of 2012 by approximately $15 million to $20 million.

And now for the sales by product category discussion for the third quarter. Total cardiac rhythm management or CRM sales, which includes revenue from both our ICD and pacemaker product lines, were $691 million, down 8% from last year's third quarter. On a constant currency basis, third quarter CRM sales were down 4% versus the third quarter of last year. For the third quarter, ICD sales were $412 million, down 7% versus last year's third quarter. On a constant currency basis, third quarter ICD sales were down 4% versus last year.

U.S. ICD sales were $247 million, down 4% versus last year's third quarter. International ICD sales were $165 million, down 12% versus the third quarter of 2011, including $17 million of unfavorable foreign currency translations. On a constant currency basis, international ICD sales decreased 3% versus last year's third quarter.

For low-voltage devices, sales for the third quarter totaled $279 million, down 9% versus last year's third quarter. On a constant currency basis, third quarter low-voltage device sales decreased 4% versus last year.

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