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In-Line Earnings, Tighter Outlook at Medtronic

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Medtronic Inc.’s (MDT - Free Report) third-quarter fiscal 2014 adjusted earnings per share (EPS) came in at 91 cents, down 2% year over year but in line with the Zacks Consensus estimate. The year-over-year decline was primarily due to the non-renewal, this year, of a benefit of 3 cents from the extension of the U.S. R&D tax credit.

Also, high interest expense and the U.S. medical device excise tax lowered the bottom line in the reported quarter. However, without any one-time adjustments, the company reported net income of $762 million or 75 cents a share, both down 23% on year-over-year bases. 

Revenues in the reported quarter were $4.163 billion, up 3% year over year (up 4% at constant exchange rates or CER). The result remained marginally above the Zacks Consensus Estimate of $4.155 billion.

International sales (generating 46% of total sales) grew 2% year over year (up 4% at CER) to $1.898 billion in the quarter. Based on Medtronic’s focus on emerging markets, revenues from these regions experienced continued growth momentum and increased 10% (up 12% at CER) to $521 million. This region now represents 13% of the company’s total revenue.

Segment Details

Medtronic earns revenues from two major groups – the Cardiac & Vascular Group and the Restorative Therapies Group. The former encompasses the Cardiac Rhythm Disease Management (CRDM), Coronary, Structural Heart, and Endovascular businesses; while the latter includes the Spine, Neuromodulation, Diabetes, and Surgical Technologies businesses.

CRDM sales were up 1% year over year (up 2% at CER) to $1.184 billion. Revenues from Implantable Cardioverter Defibrillators (ICD) increased 1% at CER to $655 million on the back of strong adoption ofthe Viva XT CRT-D that drove growth in Western Europe and Japan. Pacing system revenues edged down 2% at CER to reach $439 million. AF solutions on the other hand, grew 20% primarily due to a stupendous 30% improvement in the Arctic Front CryoAblation System.

Coronary revenues remained flat year over year at $436 million. On the other hand, Structural Heart and Endovascular recorded growth of 4% (to $281 million) and 4% (to $218 million), respectively, at CER. The company is benefiting from the sale of the drug eluting stent (DES), which grew 5% at CER driven by significant share gains of the Resolute Integrity drug-eluting stent worldwide.

Strong CoreValve transcatheter aortic heart valve sales in the international market led to growth in the Structural Heart business. As expected, in the reported quarter, Medtronic received U.S. approval of CoreValve for extreme risk patients. On the other hand, Endovascular growth was negatively impacted by the divestiture of a reentry catheter product line and elimination of a peripheral below-the-knee product from the market.

Spine revenues maintained the sluggish trend and fell 1% year over year (flat at CER) along with a flat Core Spine revenue growth to $631 million. Excluding sales of balloon kyphoplasty, Core Spine grew in the low single digits, both globally and in the U.S. 

Moreover, BMP (bone morphogenetic protein) revenue declined 1% at CER to $113 million. According to Medtronic, after several quarters of drag in sales, the global and U.S. spine markets have started showing signs of stability.

Meanwhile, Surgical Technologies revenues were $386 million (up 10% year over year and up 11% at CER), while revenues at Neuromodulation were $478 million (up 7%, same at CER) and at Diabetes, $436 million (up 16%, same at CER).


Gross margin during the reported quarter contracted 41 basis points (bps) to 74.8%. Adjusted operating margin contracted 52 bps year over year to 30.1%, with a 3.8% increase in selling, general and administrative expenses (to $1.454 billion), a 4.3% decline in research and development expenses (to $360 million) and a huge 164.7% decline in Other expenses (to $45 million).


Medtronic tightened its EPS outlook for fiscal 2014. The company currently expects full-year EPS in the range of $3.81−$3.83 (implying annualized growth of approximately 6%) from earlier prediction of $3.80−$3.85 (annualized growth of 6%−8%).

However, the company restated its revenue growth outlook for fiscal 2014 at 3%−4% at CER. The current Zacks Consensus Estimate for EPS stands at $3.82 (on revenues of $17.022 billion) and remains within the guided range.

Our Take

Medtronic posted a mixed fiscal third quarter with in-line EPS and a revenue beat. The still sluggish CRDM sales with poor ICD and pacing revenues remain a matter of concern. Margin pressure too poses a major cause of worry. However, Medtronic is trying every means to boost growth. This includes penetration into the international markets, and expansion of portfolio and restructuring initiatives, which should benefit the company over the long term.

Meanwhile, Medtronic has increased its focus on the emerging markets and is targeting higher revenues from this region. The company is also committed to its aim of returning 50% of its free cash flow to its shareholders, along with undertaking suitable acquisitions, to augment growth.

Currently, Medtronic retains a Zacks Rank #3 (Hold). Medical device companies such as NuVasive, Inc. (NUVA - Free Report) , Baxter International Inc. (BAX - Free Report) and Covidien plc  are also expected to do well. While NUVA carries a Zacks Rank #1 (Strong Buy), BAX and COV hold a Zacks Rank #2 (Buy).

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