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St. Jude Medical (STJ)

Q4 2010 Earnings Call

January 26, 2011 8:00 am ET


John Heinmiller - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Daniel Starks - Chairman of the Board, Chief Executive Officer and President


Robert Hopkins - Lehman Brothers

Michael Weinstein - JP Morgan Chase & Co

Raj Denhoy - Jefferies & Company, Inc.

Larry Biegelsen - Wells Fargo Securities, LLC

Frederick Wise - Leerink Swann LLC

David Lewis - Morgan Stanley

Tao Levy - Collins Stewart LLC



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Welcome to St. Jude Medical's Fourth Quarter and Full Year 2010 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.

The remarks made during this conference call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Such forward-looking statements include the expectations, plans and prospects for the company, including potential clinical success, anticipated regulatory approvals and future product launches and projected revenues, margins, earnings and market shares.

The statements made by the company are based upon management's current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include market conditions, and other factors beyond the company's control and the risk factors and other cautionary statements described in the company's filings with the SEC, including those described in the risk factors and cautionary statement sections of the company's quarterly report on Form 10-K for the fiscal quarter ended October 2, 2010. The company does not intend to update these statements and undertakes no duty to any person to provide any such updates under any circumstance. [Operator Instructions]

It is now my pleasure to turn the floor over to Dan Starks.

Daniel Starks

Thank you, Celeste. Welcome to the St. Jude Medical Fourth Quarter and Full Year 2010 Earnings Conference Call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer; Eric Fain, President of our Cardiac Rhythm Management division; Mike Rousseau, Group President; and Angie Craig, Vice President of Corporate Relations and Human Resources. Our plan this morning is for John Heinmiller to provide his normal review of our financial results for the fourth quarter and full year 2010 and to give sales and earnings guidance both for the first quarter and full year 2011. I will then address several topics and open it up for your questions. Go ahead, John.

John Heinmiller

Thank you, Dan. Sales for the quarter totaled $1,350,000,000, up approximately 12% over the $1,203,000,000 reported in the fourth quarter of last year. On a constant currency basis, fourth quarter sales increased 13% versus last year. Unfavorable foreign currency translations versus last year's fourth quarter decreased this quarter sales by about $14 million.

For the full year 2010, net sales were $5,165,000,000, up 10.3% over 2009. Favorable foreign currency translations versus those used in 2009 increased 2010's net sales by approximately $23 million, resulting in constant currency sales growth for the year of approximately 9.8%.

During the fourth quarter, we recorded several special items. In total, the net impact of all of these items reduced the fourth quarter EPS by $0.13. Each of these items is described in the footnotes to the condensed consolidated statements of earnings that accompanies our press release this morning. Let me take a moment here to briefly explain each item.

First, we recorded after-tax charges of $22 million or $0.07 per share, primarily related to closing and other costs associated with the acquisition of AGA Medical. Also in connection with the acquisition of AGA Medical, as required under Generally Accepted Accounting Principles, we increased the value of AGA Medical's inventory on hand at the date of the acquisition by approximately $30 million.

During the fourth quarter, approximately $7 million of this increase in inventory value was absorbed in cost of sales. This item reduced earnings per share in the fourth quarter by approximately one penny. We expect the remaining $23 million will be absorbed into cost of goods sold over the first six months of 2011.

During the fourth quarter, we reached a settlement with the U.S. Department of Justice and the U.S. Attorney's Office in Boston to resolve the previously disclosed 2005 industry-wide investigation of post-market clinical studies and registries. In connection with this settlement, we recorded after-tax charges of $15 million or $0.05 per share.

During the fourth quarter, we recorded an after-tax inventory obsolescence charge of approximately $18 million or $0.05 per share, primarily related to excess ICD [implantable cardioverter defibrillator] inventory. The overwhelming success of our 2010 launch of the Fortify and Unify high-voltage product line in the United States resulted in an unprecedented shift in customer preference from older models of ICDs, which necessitated the obsolescence charge. By the end of 2010, approximately 95% of our mix of ICD and CRT-D devices in the United States was Fortify and Unify.

During the fourth quarter, we recorded a write-down of $5 million or $0.01 per share, reflecting a decline in the fair market value of an investment. Also during the fourth quarter, the federal research and development tax credit was extended for both 2010 and 2011, retroactive to the beginning of 2010. As a result, during the fourth quarter, we recorded a $20 million benefit to income tax expense, which increased earnings per share by $0.06, representing the cumulative catch-up adjustment of this credit for the first three quarters of 2010.

The net impact of all of these items reduced the fourth quarter EPS by $0.13. Comments during this call referencing fourth quarter and full year 2010 results, including EPS amounts, will be exclusive of these items.

Earnings per share were $0.75 for the fourth quarter of 2010, a 17% increase over adjusted EPS of $0.64 in the fourth quarter of 2009 and above our guidance range of $0.72 to $0.74. For the full year 2010, adjusted earnings per share were $3.01, a 24% increase over adjusted EPS of $2.43 for the full year 2009.

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