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Medtronic's EPS In Line, Revs Beat

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Medtronic Inc. (MDT - Free Report) reported second quarter fiscal 2013 earnings per share (EPS) of 63 cents, down 23% year over year. After taking into account certain one-time items including pre-tax charge of $245 million in the company’s Structural Heart business, the adjusted EPS was 88 cents, up 5% year over year and in line with the Zacks Consensus Estimate.

Revenues were $4.095 billion in the quarter, up 2% year over year (up 5% at constant exchange rates or CER), beating the Zacks Consensus Estimate of $4.043 billion.

Medtronic derived 44% of its total sales from the international market, which climbed 8% year over year at CER (up 1% as reported) to reach $1.806 billion. As a result of the company’s focus on emerging markets, revenues from these regions experienced continued growth momentum and increased 14% (18% at CER) to $464 million. This region now represents 11% of total company revenues.

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.

Maintaining the lackluster trend witnessed in the past few quarters, CRDM continued to remain sluggish with flat year-over-year sales (down 3% at CER) to $1.227 billion with particular weaknesses in Pacing. Revenues from Implantable Cardioverter Defibrillators (ICDs) remained flat at CER to $689 million with stability in the U.S. market, while pacing systems declined 2% at CER to $480 million. However, this was partially offset by growth of atrial fibrillation (“AF”) solutions (up 18.4% year over year) to $58 million.

Coronary, Structural Heart and Endovascular recorded growth of 19%, 6% and 17%, respectively, at CER. The company is benefiting from the sale of the Resolute drug eluting stent (“DES”), which grew 39% at CER due to a strong performance of the Resolute Integrity drug-eluting stent in the U.S. and the launch of the product in Japan in the reported quarter.

While strong CoreValve sales in the international markets led to growth in the Structural Heart business, Endovascular growth was based on solid performances of the Endurant abdominal aortic stent in Japan and Endurant II in the U.S. and Europe. Besides, the Complete SE vascular stent continued to drive worldwide growth.

Spine revenues continued its declining trend with a drop of 7% year over year (down 5% at CER) to $782 million. While revenues from Core Spinal dropped 2% at CER to $649 million, BMP declined 18.9% at CER to $133 million.

Meanwhile, Surgical Technologies revenues were $344 million (up 15% or up 17% at CER), while revenue at Neuromodulation was $454 million (up 8% or 10% at CER) and at Diabetes was $378 million (up 3% or 6% at CER).


Gross margin during the reported quarter contracted 104 basis points (bps) to 75.1%. However, operating margin expanded 111 bps year over year to 29.5% with a 0.4% increase in selling, general and administrative expenses (to $1.417 billion) and a 4.3% rise in research and development expenses (to $387 million) and 55% decline in Other expenses (to $63 million).


Medtronic provided its revenue guidance for Fiscal 2013. The company expects revenue growth in the range of 3−4% at CER, implying revenue growth of 2−4% at CER for the second half of fiscal 2013. The company reiterated its EPS guidance of $3.62−$3.70 for fiscal 2013. The current Zacks Consensus revenues and EPS Estimate stand at $16.454 billion and $3.65, respectively.

Our Take

We remain concerned about Medtronic’s Pacing and Spine business, which has continued to be sluggish and in turn has affected the company’s overall performance. Moreover, headwinds such as unfavorable currency movement and economic uncertainties in Europe remain. These issues had a negative impact on the results of other MedTech players as well, such as Boston Scientific Corporation (BSX - Free Report) and St Jude Medical .

In this backdrop, Medtronic is trying every means to revive growth. This includes penetrating into the international markets, expansion of portfolio and restructuring initiatives, which should benefit the company over the long term.

Moreover, acquisitions completed over the past few years are contributing to total revenues, a positive trend that is expected to continue. Meanwhile, Medtronic has increased its focus on the emerging markets that have been garnering significant growth.

We have a Neutral recommendation on Medtronic. The stock retains a Zacks #2 Rank (Buy) in the short term.

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