Medtronic Posts a Mixed 3Q

Zacks

Medtronic Inc. (MDT) reported third-quarter fiscal 2013 earnings per share (EPS) of 97 cents, up 10% year over year. After taking into account certain one-time items, the adjusted EPS was 93 cents, up 11% year over year and ahead of the Zacks Consensus Estimate of 91 cents.

Revenues were $4.027 billion in the quarter, up 3% year over year (up 4% at constant exchange rates or CER). However, it was lower than the Zacks Consensus Estimate of $4.032 billion.

Medtronic derived 46% of its total sales from the international market, which climbed 8% year over year at CER (up 5% as reported) to reach $1.856 billion. As a result of the company’s focus on emerging markets, revenues from these regions experienced continued growth momentum and increased 20% (21% at CER) to $475 million. This region now represents 12% of the company’s total revenue.

Segment Details

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 remained sluggish, with a 1.8% year-over-year sales decline (down 1% at CER) to $1.171 billion as well as particular weaknesses in Implantable Cardioverter Defibrillators. Revenues from ICDs declined 2% at CER to $654 million, while pacing systems revenues remained flat at CER to $459 million.

However, this was partially offset by encouraging growth of the atrial fibrillation (“AF”) solutions (up 13.7% year over year) to $58 million on the back of continued global acceptance of the Arctic Front Advance balloon with EvenCool Cryo Technology.

Coronary, Structural Heart and Endovascular recorded growth of 19%, 4% and 14%, respectively, at CER. The company is benefiting from the sale of the Resolute drug eluting stent (“DES”), which grew 42% at CER driven by significant share gains of the Resolute Integrity drug-eluting stent in Japan and strong performance the U.S. and other international markets.

While strong CoreValve transcatheter aortic heart valvesales in the international markets led to growth in the Structural Heart business, Endovascular growth was based on solid performances of the Valiant Captivia thoracic stent graft across geographies.The Endurant abdominal aortic stent continues to grow strong in Japan. Moreover, the peripheral stent portfolio, which includes Complete SE vascular stent, showed strong performance.

Spine revenues maintained its downward trend and fell 4% year over year (down 5% at CER) along with a decline in revenues from BMP (bone morphogenetic protein) and BKP (balloon kyphoplasty procedure). At CER, revenues from Core Spinal remained flat at $639 million. However, excluding revenues from BKP, Core Spinal grew in the low-single digit at CER. 

Meanwhile, Surgical Technologies revenues were $350 million (up 10% year over year and at CER), while revenues at Neuromodulation were $447 million (up 7%, same at CER) and at Diabetes were $377 million (up 3% same at CER).

Margins

Gross margin during the reported quarter contracted 104 basis points (bps) to 75.2%. However, operating margin expanded 40 bps year over year to 30.6% with a 2.2% increase in selling, general and administrative expenses (to $1.401 billion) and a 3.3% rise in research and development expenses (to $376 million) and 75% decline in Other expenses (to $17 million).

Guidance

Medtronic reiterated its revenue and EPS guidance for fiscal 2013.  The company continues to expect EPS in the range of $3.66−$3.70 (annualized growth rate of 6%−7%) on revenue growth of 3%−4% at CER. 

Our Take

We remain concerned about Medtronic’s Pacing and Spine business, which remained sluggish and in turn affected the company’s overall performance. Moreover, headwinds such as unfavorable currency movement and global economic uncertainties 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).

However, Medtronic is gradually showing some signs of stability in the US Core Spine business. The companyis trying every means to revive growth. This includes penetrating 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.

Currently, Medtronic retains a Zacks Rank #2 (Buy). Medical products companies such as Acadia Healthcare Company (ACHC), which carries a Zacks Rank #1 (Strong Buy), is expected to do well.

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