) 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
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
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.
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
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
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
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
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.
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
Baxter International Inc.
) 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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