) reported fourth quarter fiscal 2012 earnings per share (EPS) of
94 cents, up 31% year over year. However, adjusted EPS during the
quarter came in at 99 cents, 10% above the year-ago period and a
penny ahead of the Zacks Consensus Estimate. For the full year,
adjusted EPS of $3.46 increased 3% year over year and met the Zacks
Revenues were $4.297 billion in the quarter, up 3% (up 4% at
constant exchange rates or CER) year over year, beating the Zacks
Consensus Estimate of $4.233 billion. Fiscal 2012 revenues came in
at $16.184 billion, up 4% (up 3% at CER) year over year but below
the Zacks Consensus Estimate of $16.268 billion.
Medtronic derived 46% of its total sales from the international
market during the fourth quarter, which climbed 5% year over year
(7% at CER) to reach $1.998 billion. As a result of the company's
focus on the emerging markets, revenues from these regions
increased 19% (20% at CER) to $463 million.
Medtronic earns revenues from the following divisions: Cardiac
Rhythm Disease Management ("CRDM"), CardioVascular, Spinal,
Neuromodulation, Diabetes, and Surgical Technologies. During the
quarter, these segments generated corresponding sales of $1.295
billion (down 2% year over year but flat at CER), $958 million (up
9% or up 10% at CER), $818 million (down 7% or down 6% at CER),
$463 million (up 7% or up 8% at CER), $392 million (up 7% or up 8%
at CER), and $371 million (up 24% or up 25% at CER).
Maintaining the lackluster trend seen in the past few quarters,
CRDM continued to disappoint with particular weaknesses in Pacing
and Implantable Cardioverter Defibrillators (ICDs). During the
quarter revenues from pacing systems declined 2% at CER to $492
million and defibrillator sales declined 1% at CER to $744 million.
However, this was partially offset by growth of atrial fibrillation
(AF) solutions (up 24% year over year at CER) to $59 million.
Revenue growth in the CardioVascular segment was driven by
robust performance in all the three businesses. Within this
segment, revenues from Coronary, Structural Heart and Endovascular
& Peripheral sub-segments increased 12% ($450 million), 7%
($289 million) and 10% ($219 million), respectively, at CER.
While revenues from Core Spinal dropped 3% at CER to $629
million, Biologics declined 16% at CER to $189 million. The
downside in Biologics was due to continuous declines in US sales of
Infuse, partially offset by revenue growth from Other Biologic
Gross margin during the reported quarter contracted 20 basis
points (bps) to 75.6%. Moreover, operating margin declined 44 bps
year over year to 32.5% with 2.08% increase in selling, general and
administrative expenses and 4.15% rise in research and development
Medtronic provided its initial revenue and EPS outlook for
fiscal 2013. The company expects EPS to remain in the range of
$3.62−$3.70 (annualized growth of 5−7%) on revenues of
$16.50−$16.83 billion (2-4%). The Zacks Consensus EPS and revenue
estimates of $3.66 and $16.55 billion, respectively, remain within
the guidance range.
We are disappointed with the company's top-line performance
during the reported quarter. Having witnessed disappointing
performances from the two biggest segments - CRDM and Spinal -
Medtronic is trying every means to revive growth. This includes
penetration of international markets, portfolio expansion and
restructuring initiatives, which should benefit the company over
the long term.
Moreover, acquisitions done 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.
Despite these measures, economic uncertainty is impacting procedure
volume. The competitive scenario is intense with players like
St Jude Medical
As a positive case, we are encouraged with the company's strong
performance in the CardioVascular segment and expect it to further
benefit from the recent launch of the Resolute Integrity drug
eluting stent for the treatment of coronary artery disease.
Medtronic has been recording strong growth in the AF Solutions
business over the past few quarters based on the adoption of Arctic
Front in Europe and its ongoing launch in the US. Longer term, we
have a Neutral recommendation on Medtronic. The stock retains a
Zacks #3 Rank (Hold) in the short term.
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