) second-quarter fiscal 2014 adjusted earnings per share (EPS)
came in at 91 cents, up 3% year over year and a penny ahead of
the Zacks Consensus estimate. However, without this adjustment,
the company reported net income of $902 million or 89 cents a
share, up 40% and 41%, respectively.
Revenues in the reported quarter were $4.194 billion, up 2.4%
year over year (up 3.3% at constant exchange rates or CER). It
also remained above the Zacks Consensus Estimate of $4.173
International sales (generating 45% of total sales) grew 3%
year over year (up 6% at CER) to $1.867 billion in the reported
quarter. Based on the company's focus on emerging markets,
revenues from these regions experienced continued growth momentum
and increased 11% (up 13% at CER) to $513 million. This region
now represents 12% of the company's total revenue.
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 4% year over year (up 5% at CER) to $1.273
billion. Revenues from Implantable Cardioverter Defibrillators
(ICD) increased 4% at CER to $713 million on the back of
continued signs of stability in the market. Pacing system
revenues increased 2% at CER to reach $477 million.
Coronary, Structural Heart and Endovascular recorded growth of
1% (to $427 million), 4% (to $281 million) and 5% (to $218
million), respectively, at CER. The company is benefiting from
the sale of the drug eluting stent ("DES"), which grew 8% 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. Medtronic expects U.S. approval of CoreValve for
extreme risk patients by the end of the current fiscal.
Endovascular growth was based on strong Aortic and Peripheral
businesses. The strong global acceptance of the Endurant II
aortic abdominal stent graft remained a major upside.
Spine revenues maintained the sluggish trend and fell 5% year
over year (down 3% at CER) along with a 1% decline in Core Spine
revenue to $636 million at CER.The Thoracolumbar, Cervical, and
Other Biologic product lines displayed growth both in the U.S.
and worldwide. However, this was offset by declines in Balloon
Kyphoplasty and Interbody devices. Besides, BMP (bone
morphogenetic protein) revenue declined 17% at CER to $110
Meanwhile, Surgical Technologies revenues were $377 million
(up 11% year over year and up 10% at CER), while revenues at
Neuromodulation were $479 million (up 6%, same at CER) and at
Diabetes were $393 million (up 3%, up 4% at CER).
Gross margin during the reported quarter contracted 108 basis
points (bps) to 74.0%. Operating margin expanded 57 bps year over
year to 30.1%, with a 1.5% increase in selling, general and
administrative expenses (to $1.438 billion), a 3.8% decline in
research and development expenses (to $372 million) and a 47.6%
decline in Other expenses (to $33 million).
Medtronic reiterated its outlook for fiscal 2014. The company
expects full-year EPS in the range of $3.80−$3.85 (annualized
growth of 6%−8%) on revenue growth of 3%−4% at CER. The current
Zacks Consensus Estimate for EPS stands at $3.82 (on revenues of
$16.937 billion) and remains within the guided range.
After a disappointing start for fiscal 2014, Medtronic managed
to beat estimates in the second quarter of fiscal 2013.
We are encouraged with the signs of improvement in Medtronic's
core CRDM and pacing segments. Besides, Medtronic witnessed
strong CoreValve transcatheter aortic heart valve sales in the
international market. This led the upside in its Structural Heart
business. We are also impressed with several recent growth
initiatives taken by Medtronic which includes the company's
attempt to rebuild itself as a health care service provider.
On the tepid side, gross margin pressure still remains a major
concern. We are also concerned about the recent U.S. Food and
Drug Administration's (FDA) warning on certain Medtronic devices.
As per the announcement, the company's recently initiated
voluntary field action related to certain guidewires were
classified as a Class I recall by FDA. Class I recall implies a
situation where there is a reasonable probability of serious
health hazards or death occurring from the use of a violative
Currently, Medtronic retains a Zacks Rank #2 (Buy). Medical
device companies such as
Align Technologies Inc.,
Cardinal Health, Inc.
Natus Medical Inc.
) which carry a Zacks Rank #1 (Strong Buy), are also
expected to do well.
ALIGN TECH INC (ALGN): Free Stock Analysis
NATUS MEDICAL (BABY): Free Stock Analysis
CARDINAL HEALTH (CAH): Free Stock Analysis
MEDTRONIC (MDT): Free Stock Analysis Report
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