Medtronic Meets Expectations

Medtronic, Inc. (MDT - Analyst Report) reported results for the first quarter of fiscal 2010. Earnings per share were 79 cents, higher than the Zacks Consensus Estimate of 78 cents and the year-ago earnings per share of 72 cents.

Sales

Net sales in the quarter were $3.933 billion, increasing 6% year over year. Excluding the impact of a strong U.S. dollar, net sales increased 10% year over year. Growth was witnessed across all seven operating segments – both on a reported and constant-currency basis.

Cardiac Rhythm Disease Management (CRDM) revenues increased approximately 3% year over year to $1.337 billion. Growth was fueled by strong demand for pacemakers and implantable cardiac defibrillators (ICDs) that increased roughly 2% and 1% year over year, respectively.

We believe the company will continue to maintain its strong position in the cardiac market against its closest rivals Boston Scientific Corporation (BSX - Analyst Report) and St. Jude Medical (STJ - Analyst Report).     

Spinal revenues increased 7% year over year to $915 million. Growth was led by strong contribution by the company’s core spinal product, Kyphon.

CardioVascular revenues increased 9% year over year to $689 million. The increase in revenues can be primarily attributed to higher global demand for the Endovascular and Structural Heart Disease products. Higher coronary revenues aided by the launch of the Endeavor Drug-eluting Stent in Japan also contributed to the increase.

Neuromodulation revenues increased 7% year over year to $373 million. Growth was led by a higher demand for the InterStim Therapy, Activa Deep Brain Stimulation Therapy and the launch of Activa PC and RC in the U.S. and Europe.   

Diabetes revenues increased 10% year over year to $295 million. Surgical Technologies revenues increased 12% year over year to $227 million. Physio-Control revenues increased 3% year over year to $97 million.

Margins

Gross margin declined 150 basis points year over year to 75.4%. The decline was due to higher cost of goods sold that increased roughly 13% year over year. Research and development (R&D) expenses as a percentage of sales increased 70 basis points year over year to 9.4%. Selling, general and administrative (SG&A) expenses as a percentage of sales decreased 80 basis points year over year to 34.8%.

Medtronic incurred $444 million of pre-tax litigation charges in connection with the resolution of its outstanding intellectual property litigation with Abbott Laboratories (ABT - Analyst Report) in the reported quarter. This has primarily lowered the company’s operating margin by 1,160 basis points year over year to approximately 18.4%.

Balance Sheet & Cash Flow

Medtronic’s cash balance declined $132 million sequentially to $1,544 million in the quarter. The company’s working capital was $4,152 million, approximately 106% of total revenues for the quarter. Cash flow from operations was $625 million at the end of the reported quarter.

Medtronic is one of the world’s leading medical technology companies, specializing in implantable and interventional therapy devices and products. The company is a market leader in cardiology and spine devices that benefit from scale, resources, and incremental sales synergies within the medical devices industry.

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