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Medtronic (MDT) Tops Q2 Earnings, Lowers FY17 Guidance

MDT BAX NXTM BVX

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Medtronic plc (MDT - Free Report) reported financial results for second-quarter fiscal 2017. Adjusted earnings per share (EPS) in the reported quarter came in at $1.12, a penny ahead of the Zacks Consensus Estimate and up 8.7% year over year.

Adjustments in the quarter primarily included certain impact of inventory step-up as well as restructuring charges, intangible asset amortization, acquisition-related items and restructuring charges. After adjusting for unfavorable foreign exchange impact of 6 cents, adjusted EPS in the reported quarter came in at $1.18, up 14.6% year over year.

Without these adjustments, the company reported net income of 80 cents per share, up 122% year over year.

Total Revenue

Worldwide revenues in the reported quarter grossed $7.345 billion, up more than 3% on a constant exchange rate or CER basis (up 4% as reported). The top line, however, missed the Zacks Consensus Estimate of $7.46 billion. Foreign currency fluctuation positively affected Medtronic’s second-quarter revenues by $50 million.

In the quarter under review, U.S. sales (56.5% of total sales) declined 1% year over year to $4.152 billion. Non-U.S. developed market revenues totaled $2.209 billion (30.1% of total sales), a 5% increase at CER (up 8% as reported). Emerging market experienced 10% revenue growth (up 8% as reported) to $984 million at CER.

MEDTRONIC Price, Consensus and EPS Surprise

MEDTRONIC Price, Consensus and EPS Surprise | MEDTRONIC Quote

Segment Details

The combined company currently generates revenues from four major groups, viz. Cardiac & Vascular Group (CVG), Minimally Invasive Therapies Group (MITG), Restorative Therapies Group (RTG) and Diabetes Group.

CVG comprises Cardiac Rhythm & Heart Failure (CRHF), Coronary & Structural Heart (CSH), and Aortic & Peripheral Vascular divisions (APV). MITG includes both the Surgical Solutions division and the Patient Monitoring & Recovery (PMR) division. RTG includes the Spine, Brain Therapies, Specialty Therapies and Pain Therapies segments, while the Diabetes Group incorporates the Intensive Insulin Management (IIM), Non-Intensive Diabetes Therapies (NDT), and Diabetes Service & Solutions (DSS) divisions.

Revenues from CVG improved 3% at CER (or up 4% as reported) to $2.584 billion, driven by strong growth in CRHF on the recent acquisition of HeartWare and strong growth in other CRHF businesses, as well as growth in APV.

CRHF sales were $1.4 billion with 5% year-over-year growth at CER (up 6% as reported). This came on the back of the recent acquisition of HeartWare, high-twenties CER growth in AF Solutions, mid-teens CER growth in Diagnostics, partially offset by declines in core cardiac rhythm implantable.

CSH revenues were flat at CER (flat as reported) to $753 million on the back of high-teens growth in transcatheter valves owing to strong customer adoption of the CoreValveEvolut R. Coronary remained a drag with mid-single digits revenue decline. Drug-eluting stents witnessed double-digit declines in the U.S. and Japan, and mid-single digit growth in Western Europe.

APV revenues registered 4% growth at CER (up 5% as reported) to $431 million, driven by low-single digit growth in Aortic and mid-single digit growth in the Peripheral Vascular business.

In MITG, worldwide sales reached $2.437 billion, marking a 4% year-over-year increase at CER, on growth drivers like Open-to-MIS, Emerging Markets, Renal Care and contributions from recent acquisitions, and strength in Ventilation.

In RTG, worldwide revenues of $1.826 billion were up 3% year over year at CER (up 4% as reported) owing to mid-single digit growth in Brain Therapies and Specialty Therapies and improvement in Spine, mitigating a decline in Pain Therapies. Revenues from the Diabetes group went up 3% at CER (same as reported) to $462 million.

Margins

Gross margin during the reported quarter contracted 75 basis points (bps) to 68.3% despite a 2.9% increase in gross profit to $4.019 billion. Adjusted operating margin also contracted 67 bps year over year to 26.7%, on a 3.1% rise in selling, general and administrative expenses (to $2.42 billion); a 1.6% increase in research and development expenses (to $554 million); and a 56.1% surge in Other income to $89 million.

Guidance

Medtronic has lowered its fiscal 2017 adjusted EPS guidance. Management anticipates adjusted diluted EPS growth of 8%−10% on a constant currency, constant week basis compared to the earlier expectation of 12%−16%. The Zacks Consensus Estimate is pegged at $4.65 per share.

The company has also lowered its revenue growth guidance for fiscal 2017 given the current trends. The company now expects revenue growth for the fiscal to be within the mid-single digit range on a constant currency, constant week basis compared to the earlier expectation of the upper half of the mid-single digit range.  This new guidance is also in line with the company’s long-term, mid-single digit constant currency revenue growth expectation. The Zacks Consensus Estimate for revenues remains at $30.1 billion for fiscal 2017. For the remainder of the fiscal year, foreign exchange rate would negatively affect revenues by $20−$60 million.

Our Take

Medtronic’s posted sluggish fiscal second-quarter results, with earnings edging past the Zacks Consensus Estimate while revenues missed the same. While the consolidated company demonstrated improved segmental performances at CER basis, escalating costs and expenses weighed on margins. The lowered guidance for fiscal 2017 is all the more disappointing, indicating no chance of improvement down the line.

On a positive note, all four major business groups contributed to solid top-line growth at CER, which according to the company, highlighted sustainability across groups and regions, in addition to displayingsuccessful integration and achievement of synergy targets. We are also encouraged by the solid growth trend successfully continuing in the U.S. as well as the healthy global acceptance of its advanced therapies. Apart from product innovation, the company is currently focusing on geographical diversification of its businesses.

Zacks Rank & Key Picks

Medtronic currently carries a Zacks Rank #3 (Hold). Better-ranked medical stocks are NxStage Medical Inc. (NXTM - Free Report) , Baxter International Inc. (BAX - Free Report) and Bovie Medical Corporation (BVX - Free Report) .

NxStage Medical and Baxter International sport a Zacks Rank #1 (Strong Buy), while Bovie Medical carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NxStage Medical surged 30.7% in the last one year compared to the S&P 500’s 5.4% over the same period. The company has a four-quarter average positive earnings surprise of 50.00%.

Baxter International rallied 23.6% over one year, much higher than the S&P 500’s 5.4%. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 130.0% gain in the past one year, way better than the S&P 500’s 5.4%. The company has a trailing four-quarter average positive earnings surprise of 28.7%.

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