(MDT) Medtronic Meets Earnings Forecasts

Medtronic Inc. (MDT) reported first quarter fiscal 2013 earnings per share of 83 cents, up 8% year over year. After taking into account certain one-time items, the adjusted EPS was 85 cents, also up 8% year over year and in line with the Zacks Consensus Estimate.

Revenues were $4.008 billion in the quarter, up 1.6% year over year (up 5% at constant exchange rates or CER), nominally missing the Zacks Consensus Estimate of $4.015 billion.

Medtronic derived 44% of its total sales from the international market, which climbed 6% year over year at CER (down 1% as reported) to reach $1.781 billion. As a result of the company’s focus on the emerging markets, revenues from these regions experienced continued growth momentum and increased 9% (14% at CER) to $438 million. This region now represents 11% of total company revenues.

Segment Details

Medtronic earns revenues from two broad 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 disappoint with a 5% year-over-year drop in sales (down 2% at CER) to $1.193 billion with particular weaknesses in Pacing. Revenues from Implantable Cardioverter Defibrillators (ICDs) remained flat at CER to $675 million with stability in the US market while pacing systems declined 6% at CER to $463 million. However, this was partially offset by growth of atrial fibrillation (“AF”) solutions (up 14.6% year over year) to $55 million.

Coronary, Structural Heart and Endovascular recorded growth of 16%, 7% and 17%, respectively, at CER. The company is benefiting from the recent launch of the Resolute drug eluting stent (“DES”) in the US, which grew 36% at CER. While strong CoreValve sales in the international markets led to growth in the Structural Heart business, Endovascular growth was based on the recent launch of the Endurant abdominal aortic stent in Japan, the launch of Endurant II in the US and Europe, and penetration with the Complete SE vascular stent.

Spinal continued its declining trend with a drop of 5% year-over-year (down 3% at CER) to $786 million. However, we are impressed with the 1% growth (at CER) of Core Spinal on the back of new product launches, which ends the disappointing run of the past few quarters. 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 continued declines in the US sales of Infuse, partially offset by revenue growth from Other Biologic products. Revenues from BMP at $141 million declined 19%.

Meanwhile Surgical Technologies revenues were $324 million (up 22% or up 24% at CER), while Neuromodulation was at $419 million (up 6% or 8% at CER) and Diabetes was $364 million (up 3% or 6% at CER).


Gross margin during the reported quarter contracted 20 basis points (bps) to 75.7%. Moreover, operating margin declined 70 bps year over year to 31.1% with a 1.8% increase in selling, general and administrative expenses (to $1.405 billion) and a 6.3% rise in research and development expenses (to $385 million).


Medtronic reiterated its EPS guidance of between $3.62 and $3.70 for fiscal 2013. The current Zacks Consensus Estimate stands at $3.66.

Our Take

We are impressed that Medtronic witnessed an improving ICD environment during the reported quarter. However, 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 (BSX) and St Jude Medical (STJ).

In this backdrop, Medtronic is trying every means to revive growth. This includes the penetration of international markets, portfolio expansion 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 #3 Rank (Hold) in the short term.

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