) 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
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
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
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,
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
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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