Medtronic (MDT) Q1 Earnings, Revenues Beat; Margins Drop - Analyst Blog

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After adjusting for one-time items including costs related to the pending Covidien plc ( COV ) acquisition and certain restructuring charges, Medtronic Inc. 's ( MDT ) first-quarter fiscal 2015 adjusted earnings per share (EPS) came in at 93 cents, up 5.7% year over year. Also, the figure beat the Zacks Consensus Estimate by a penny.

However, the company's reported net income of $871 million or 87 cents a share were down 8.6% and 6.5%, respectively, on a year-over-year basis. 

Medtronic, Inc - Earnings Surprise | FindTheBest

Revenues in the reported quarter grossed $4.273 billion, up 4.7% year over year (up 4% at constant exchange rates or CER). The results, also, remained marginally ahead of the Zacks Consensus Estimate of $4.249 billion. Following the announcement, the stock price experienced a marginal uptick in the pre-trading session.

International sales (generating 45% of total sales) grew 3% year over year (up 2% at CER) to $1.940 billion in the quarter. Based on Medtronic's focus on emerging markets, revenues from these regions experienced continued growth momentum and increased 9% (up 11% at CER) to $539 million. This region now accounts for 13% of the company's total revenue.

Segment Details

Medtronic generates revenues from two major groups - the Cardiac & Vascular Group and the Restorative Therapies Group. The former encompasses the Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, and Aortic & Peripheral businesses; while the latter includes the Spine, Neuromodulation, and Surgical Technologies segments.

Cardiac Rhythm & Heart Failure sales were up 5% year over year (up 4% at CER) to $1.256 billion.On the other hand, revenues at High Power inched down 5% at CER to $627 million. However, the company is upbeat about therecent U.S. FDA approval of the company`s Viva XT CRT-D, to be used in combination with its AdaptiveCRT algorithm and Attain Performa quadripolar lead.

Meanwhile, Low Power revenues stood at $525 million, up 10% at CER on the strong global launch of the Reveal LINQ insertable cardiac monitor.AF & Other revenues were $104 million, up a substantial 59% year over year on the back of growth at Hospital Solutions and Cardiocom, partially offset by declines in High Power and Coronary. 

Coronary revenues were down 2% at CER to $428 million. On the other hand, Structural Heart recorded revenue growth of 6% (to $338 million) at CER. The company is benefiting from the sales of the drug eluting stent (DES), which grew 2% at CER driven by significant share gains of the Resolute Integrity drug-eluting stent worldwide. Strong Structural Heart sales were supported by the U.S. launch of the CoreValve transcatheter aortic heart valve.

Notably, for Structural Heart, the year-over-year comparisons were tough as adjusting for the German customer advance purchases of CoreValve in the year-ago quarter in anticipation of the since resolved injunction, Structural Heart grew in the upper teens at CER. 

At the Aortic & Peripheral segment, sales came in at $232 million, up 6% year over year and 5% at CER.The ongoing adoption of Endurant II and Valiant Captivia stent grafts globally contributed toward growth in the segment.In Peripheral, the IN.PACTAdmiral and Pacific drug-coated balloons continued to deliver strong growth.

The sluggish trend for Spine revenues persisted and translated into a 3% decline year over year (same at CER) along with drop in Core Spine (2% at CER) and bone morphogenetic protein or BMP (11%) offsetting growth in Interventional Spine (up 4%).

Meanwhile, Surgical Technologies revenues were $381 million (up 5% at CER), while revenues at Neuromodulation were $479 million (up 11%, same at CER) and at Diabetes, $416 million (up 12% at CER).

Margins

Gross margin during the reported quarter contracted 83 basis points (bps) to 74.1%. Adjusted operating margin contracted 123 bps year over year to 29.2%, with a 6.4% increase in selling, general and administrative expenses (to $1.506 billion); a 1.4% improvement in research and development expenses (to $365 million) and a 15.9% rise in Other expenses to $51 million.

Guidance

Medtronic reaffirmed its revenues and EPS outlook for fiscal 2015. The company still expects its full-year EPS in the range of $4.00−$4.10 (implying annualized growth of approximately 6−9%).The current Zacks Consensus Estimate for EPS stands at $4.02, close to the mid-point of the guided range.

Fiscal 2015 revenue growth outlook is expected to remain within 3−5% at CER. The current Zacks Consensus Estimate of $17.706 billion falls at the lower end of the guided range.

Our Take

Medtronic posted an impressive first-quarter 2015 with both EPS and the top line exceeding our expectations. However, the weak core segment performances remain a matter of concern. Also, margin pressure adds to the woes.

Moreover, headwinds such as unfavorable currency movement and global economic uncertainties remain. In addition, the legal settlement with Edwards Lifesciences ( EW ) required Medtronic to make a one-time payment of $750 million. Although the company expects this incident to be beneficial for focusing further on business expansion, the colossal litigation-related compensation is expected to weigh on the stock.

However, Medtronic is striving to return to growth and profitability. In an effort to offset the impact of high U.S. corporate tax rate by shifting its tax base overseas, in June, the company announced its plans to acquire Covidien. This is because the business tax rate in Ireland is a mere 12.5%, much lower than that of 35% in the U.S., the highest in the world.

The deal, valued at $42.9 billion, also marks a solid step toward establishing Medtronic as the world's leading medical technology and services company in over 150 countries. Post-acquisition, the combined entity would generate about $27 billion in total revenue, including $3.7 billion from emerging markets. It is also expected to prove accretive to cash earnings in 2016 and beyond.

Currently, Medtronic carries a Zacks Rank #3 (Hold). However, investors interested in the Medical Product sector can consider Abaxis, Inc. ( ABAX ) carrying a Zacks Rank #2 (Buy).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: EPS , DES , MDT , COV , EW

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