Medtronic's CEO Discusses F1Q 2014 Results - Earnings Call Transcript

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Medtronic, Inc. (MDT) F1Q 2014 Earnings Conference Call August 20, 2013 8:00 AM ET

Executives

Jeff Warren - Vice President, Investor Relations

Omar Ishrak - Chairman and Chief Executive Officer

Gary Ellis - Chief Financial Officer

Mike Coyle - President, Cardiac and Vascular Group

Chris O’Connell - President, Restorative Therapies Group

Analysts

Matthew Dodd - Citigroup

David Lewis - Morgan Stanley

Mike Weinstein – JPMorgan

Bob Hopkins - Bank of America

Kristen Stewart – Deutsche Bank

David Roman - Goldman Sachs

Larry Biegelsen - Wells Fargo

Matt Taylor - Barclays Capital

Operator

Good morning. My name is Christie and I will be your conference operator. At this time I would like to welcome everyone to the Medtronic's first quarter earnings release conference call. (Operator Instructions) It is now my pleasure to hand the program over to Mr. Jeff Warren. Please go ahead.

Jeff Warren

Thank you, Christie. Good morning and welcome to Thank you, operator. Good morning and welcome to Medtronic’s first quarter conference call and webcast. During the next hour, Omar Ishrak, Medtronic’s Chairman and Chief Executive Officer; and Gary Ellis, Medtronic’s Chief Financial Officer, will provide comments on the results of our fiscal year 2014's first quarter which ended July 26, 2013. After our prepared remarks, we will be happy to take your questions.

First, a few logistical comments. Earlier this morning, we issued a press release containing our financial statements and revenue by business summary. You should also note that some of the statements made during this call maybe considered forward-looking statements and that actual results might differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC. Therefore, we do not undertake to update any forward-looking statement.

In addition, the reconciliations of any non-GAAP financial measures are available on the Investors portion of our website at medtronic.com. Finally, unless we say otherwise, references to quarterly results, increasing or decreasing, are in comparison to the first quarter of fiscal year 2013 and all year-over-year revenue growth rates are given on a constant currency basis.

With that, I am now pleased to turn the call over to Medtronic's Chairman and Chief Executive Officer, Omar Ishrak.

Omar Ishrak

Good morning and thank you, Jeff, and thank you to everyone joining us today. This morning we reported first quarter revenue of $4.1 billion, representing growth of 3% and non-GAAP diluted earnings per share of $0.88. While our results reflect that we are broadly outperforming the medtech sector, they were at the low end of our annual revenue outlook. However, we delivered on the bottom line, overcoming a number of challenges through strong operating discipline.

Looking ahead, our assumptions for the full fiscal year remained intact and we are confident in both our outlook for the remainder of the year and our long term competitive position in the changing healthcare environment. We continue strengthen and geographically diversify our business in order to deliver consistent and dependable growth. Overall, our Q1 results varied by business and geography with strong performances in some areas offset by challenges in other parts of our business. While our international operations performed well, growing 9%, our U.S. business declined 1%. This was driven by pressures in three distinct areas, CRDM implants, PAINSTIM and diabetes.

We expect full recovery in all three of these businesses within the fiscal year. So let me briefly walk you through the key dynamics. In CRDM we continue to grow our global implantable revenues meaningfully faster than the overall market. But our U.S implantable results were affected by lower levels of bulk sales because of the phase-in timing of our new high power products.

Gary will provide details later, but the net outcome was that the bulk sales were the lowest level in six years, affecting not only high power, but also our pacing business. At the same time, overall pricing dynamics improved and hospital inventory levels came down, which should improve our growth through the balance of the year. We fully expect to have our new technology on contract in our major accounts during Q2 at a price that reflects the proven clinical and economic benefits of our latest devices. This should result in a more typical level of bulk sales in the next quarter.

Turning to Europe, the business had a mixed quarter, with strong performances in DBS and gastro-uro, both posting at or near double digit growth, offset by declines in U.S PAINSTIM. We received FDA approval for our game-changing MRI system much earlier than expected and made the decision to transition manufacturing in Q1 and observed supply constraints in both previous and new products. This family of products is now launching in the U.S., and while it is still early in the quarter, they’re being well received by our customers, and the PAINSTIM business has resumed its growth.

In U.S Diabetes, we had another challenging quarter declining 3%, but this was by no means unexpected. As we mentioned last quarter, the business will remain under pressure until we receive approval of the MiniMed 530G system. We continue to work diligently with the FDA so that we can make this important technology available this fiscal year. Upon launch, we expect our U.S Diabetes business to return to solid growth on the strength of our new products and our ability to recognize revenue we have deferred over the past few quarters.

Now, let me discuss the rest of our business with a number of positive highlights. In our spine business, core spine outperformed a relatively stable market as our new products in enabling technologies continued to make a difference. Our U.S. core spine business, excluding balloon kyphoplasty grew 1% this quarter. In BMP, the declines appear to be tapering, and we saw relative sequential stability again this quarter. The independent reviews of Infuse commissioned by Yale University were completed in Q1, providing further evidence that for approved indications, Infuse is a safe and effective treatment option.

Later this fall, we are expecting final publication of our retrospective analysis of a large, national payer database investigating the cancer incidents in the real world usage of Infuse. The manuscript of that study was recently published online, ahead of print by the Journal Spine. The authors found no evidence that administration of BMP at the time of lumbar fusion surgery was associated with cancer risk. Looking ahead, if current trends continue, we expect our global FY 2014 BMP revenue to be down in the mid-single digits which would be a significant improvement from the 15% decline last fiscal year and would represent a 40 to 50 basis point improvement to our overall company growth.

In U.S coronary, drug-eluting stent sales exceeded our expectations, solidly outperforming the market with 4% growth, despite having annualized the launch of Resolute Integrity. Our international regions continued to deliver solid results. As I mentioned earlier, revenue was up 9%, driven principally by Japan and emerging markets. Our international regions have now grown in the upper single digits for 12 consecutive quarters, which is the type of consistent and balanced performance that we’re looking for. Japan had another outstanding quarter, up 29%, driven by the continued success of our new products, including the Advisa MRI pacemaker, Resolute Integrity DES, and Endurant II AAA Stent Graft.

In Western Europe, while our growth was aided by advanced purchases of CoreValve in Germany, we did see another quarter of relative stabilization across the region. Our European team is navigating through the various market dynamics to unlock potential growth opportunities using innovation as well as our breadth and scale to partner with different stakeholders.

Emerging markets grew 15%, with strong performances from Middle East and Africa and Central and Eastern Europe regions, partially offset by pressure in Latin America and India. Latin America was softer than expected this quarter as we transitioned from some of our dealers to direct sales. Our India region declined as we faced challenges from government imposed pricing reductions for stents as well as temporary disruption from the termination of a coronary distributor. Looking ahead, we remain focused on high-teens growth in emerging markets in the near term while striving for 20% or better over the long term. We believe these markets will continue to provide an independent growth vector for us, becoming an increasingly significant source of consistent and reliable revenue over time.

Let's now turn back to the U.S. region. As I discussed previously, we expect to fully recover from the specific challenges we faced this quarter, but we also have an additional number of exciting growth drivers which should significantly improve our performance in the U.S. over the next seven quarters. And it's worth spending a few moments to briefly highlight them. First, in addition to the recently launched Viva CRT-D, Evera ICD, and Advisa MRI pacemaker products, the CRDM business plans to launch the Reveal LINQ late this fiscal year. This is our next generation implantable loop recorder which would expand our offerings across the patient continuum of care.

In endovascular, we are expecting approval of a dissection indication for the Valiant Captivia Thoracic platform along with obtaining an SFA indication for the complete SE Vascular Stent in peripheral. In spine, similar to our SOLERA platform in thoracolumbar, we are planning a complete refresh of our anterior cervical plate family of products. Starting with expected approval of our PRESTIGE LP Cervical Disc, we will launch a series of additional new products over the coming quarters. Cervical makes up nearly a quarter of our U.S. core spine business and these launches should enhance our competitive position.

In surgical technologies, we are developing the next iteration of our highly successful O-arm Imaging System which will expand a number of supported clinical applications and therefore increase further its economic value proposition for hospitals. I would also like to note that Cardiocom, the new service and solution acquisition that we announced last week will also immediately start contributing to our growth. I will discuss Cardiocom in more detail in a moment.

And finally, we are making excellent progress on three fundamental new therapy areas that meaningfully impact our outlook for FY 2015 and beyond, our CoreValve transcatheter aortic valve, our renal denervation system for treatment resistant hypertension, and our Admiral drug-eluting balloon. These products are market leaders in Europe and we are planning to launch all three of them in the U.S. with CoreValve and Symplicity in FY '15, and Admiral in FY '16. Regarding CoreValve, we have filed with the FDA, all the extreme risk modules for our U.S. pivotal trial, and are preparing for launch in the first half of FY 2015.

Extreme risk data will be included in late breaking clinical trials at TCT later this fall, and the high risk data is expected to be presented at the ACC next spring. With respect to Symplicity, we have completed patient randomization in our U.S. HTN-3 pivotal trial, and we expect the results to be presented sometime in the first half of calendar year 2014, while targeting U.S. approval in FY '15. In addition, we expect the FDA and CMS parallel review program to reduce the time between FDA approval and full reimbursement. For the Admiral DEB program, we completed enrollment in our initial SFA pivotal trial and have submitted our first PMA module.

Turning now to the rest of the P&L. Our organization delivered at the bottom line despite multiple pressures. Revenue came in a little lighter than expected. We had a higher than expected share count. There were significant FX headwinds, and our gross margins were negatively impacted by specific quality issues. Gary will cover all of these items in more detail later, but on the final point I want to emphasize that while diverting resources to enhance our quality systems can be costly, ensuring the highest level of quality and regulatory compliance has and always will be a personal priority for me and a central focus of everything that we do at Medtronic.

At the same time, we continue to make progress in a number of key operating initiatives, including product cost reduction and working capital improvements. We are in the middle of $1.2 billion product cost reduction initiative, which helps us successfully offset pricing pressure and stabilize gross margins. In our working capital improvement program, we have set a goal of increasing our inventory turns by 50% in FY’17. Not only does this instill good fiscal discipline, but it strengthens our already robust levels of free cash flow generation.

Over the next five years, we expect to generate over $25 billion of free cash flow. We remain committed to returning 50% of this to our shareholders through dividends and share repurchases, a commitment level we believe is appropriate given our current mix of U.S. and international free cash flow. We are constrained by U.S tax policy which creates a negative incentive for us to repatriate cash to the U.S. The remaining 50% gives us the flexibility to make the necessary investments for sustainable growth. We continue to be very disciplined in how we deploy our capital with a strong focus on returns. As we have said in the past, we expect any M&A transaction to surpass our mid-teens risk-adjusted hurdle rate, and we do not expect these investments to be dilutive to shareholder EPS growth expectations.

We have spoken in some detail regarding our ongoing strategic commitment to new therapies. But I want to conclude by noting that we continue to take meaningful actions to realize our transformational opportunities of globalization and economic value. We believe successful execution of both of these areas will position us to win in the changing healthcare marketplace and will be instrumental in establishing durability in our long term performance while creating potential upside to our baseline expectations.

Consistent with our focused strategy to generate economic value from multiple stakeholders, we are specifically exploring two areas where we can offer important solutions for healthcare systems around the world; disease management and hospital efficiency. First, in disease management, we announced the acquisition of Cardiocom, a leading developer and provider of integrated solutions for chronic disease management. Cardiocom is an example of how we can pair our existing market-leading therapies with a set of complementary services and technology solutions that treat broader patient populations across the care continuum.

Our combined offerings have the potential to concurrently improve outcomes and lower costs by reducing hospitalizations, improving remote clinical management and increasing patient engagement. These benefits are particularly compelling to a wide set of stakeholders, including governments, payers and hospital systems because they provide enhanced clinical and economic value over the long term. Our initial focus with Cardiocom will be heart failure and hypertension, versus building long term plans to offer complete solutions in our key chronic disease verticals of cardiovascular and Diabetes, striving to not only improve individual patient lives, but also ensuring that the overall healthcare ecosystem remains viable.

The second area where we expect to generate significant economic value for our customers is hospital efficiencies. As we continue to work closely with hospital administrators around the world, we understand that they are deeply concerned with driving efficiency and optimizing the overall cost of operations. We’re working together to develop innovative solutions for these problems, including implementing process improvements, adopting new financing models, deploying new purchasing and venture management strategies, and outsourcing certain functions. In the coming weeks, you will hear more about our hospital efficiency efforts and I look forward to discussing them in more detail as they’re announced.

In closing, I would like to add that the challenges facing healthcare are not easily solved. But we believe we’re uniquely positioned to increase our competitive advantage in the changing healthcare landscape by offering solutions that improve the financial viability of global healthcare systems. Our market leading products, in-hospital systems, healthcare economic expertise, leading (inaudible) resources, and our strong financial position give us unprecedented breadth, global reach and scale, and allow us to offer broad, valuable solutions. We are determined to transform Medtronic from being a primarily device provider today into the premier global medical technology solutions partner of tomorrow.

Let me now ask Gary to take you through a more detailed look at our results before we take any questions.

Gary Ellis

Thanks Omar. First quarter revenue of $4.083 billion increased 2% as reported and 3% on a constant currency basis after adjusting for our $55 million unfavorable impact of foreign currency.

Q4 revenue results by region were as follows. Growth in Middle East and Africa was 24%. Central and Eastern Europe grew 21%. Growth in Asia Pacific was 20% driven by 29% growth in Japan. Growth in greater China was 15%. Latin America grew 12% and western Europe and Canada grew 2%. While the U.S. declined 1% and India declined 7%. The emerging markets grew a combined 15% in Q1 and represented 12% of our total sales mix.

Q1 delivered earnings per share on a non-GAAP basis were $0.88, an increase of 4%. Q1 GAAP diluted earnings per share were $0.93, an increase of 12%. This quarter's non-GAAP pretax adjustments included an $18 million restructuring charge, the final charge related to the initiative we announced last quarter. A $40 million cash charitable donation to the Medtronic Foundation, and a $96 million gain primarily related to the change in fair value of our RDN contingent consideration payments, which are based on annual revenue growth through FY '15.

Given the current slower commercial ramp in Europe and the extended U.S. regulatory process, we now expect our contingent consideration payments to be reduced as addition of the RDN business has now shifted beyond the final revenue milestone date. In our cardiac and vascular group, revenue of $2.160 billion grew 4%. The results were driven by solid growth in Structural Heart, Pacing, Endovascular, AF Solutions and Coronary, partially offset by a modest decline in U.S. ICDs.

CRDM revenue of $1.193 billion grew 2%. Worldwide ICD revenue of $655 million declined 2%, roughly in line with the market. In the U.S., our ICD revenue declined 4% below the market which we estimate declined 2%. As Omar mentioned, due to the phase and timing of our new products, there were many instances where we were not able to get our new products and their associated pricing premiums on new hospital contracts before the end of the quarter. And we were generally unwilling to offer bulk discounts for our latest technology off the previously contracted price.

Concurrently, some hospitals chose to make stocking purchases ahead of our new products being available on their new contract which lead to meaningfully lower levels of bulk sales in the quarter. At the same time, our U.S. ICD implant dynamics changed markedly during the quarter following the mid-quarter release of Viva and Evera with the daily implant growth rate shifting from negative to positive in the back half of the quarter. Our lead differentials remain at elevated levels and our U.S. ICD pricing continues to show signs of relative stability, declining 2% year-over-year as both our Viva CRT-Ds and Evera ICDs received price uplifts in the market.

As Omar mentioned, bulk sales were significantly lower in Q1 and were responsible for our entire revenue decline as daily implant revenue actually grew 1%. We believe our top technology tiers and high power are now significantly differentiated in the market place, which allows to minimize pricing pressure and stay very disciplined on new product pricing. We are seeing good market adoption of Viva and Evera. Viva has our proprietary adaptive CRT algorithm which significantly reduced RV pacing and has been clinically proven to improve response rates of CRT therapy, resulting in improved device longevity and a reduction in the heart failure hospitalizations.

In addition, our Attain Performa quadripolar lead along with our VectorExpress implant optimization algorithm, is driving differentiated CRT-D market share capture in Europe, and will be available in all major markets outside of the U.S. by the end of the fiscal year. Finally, both the Viva CRT-D and Evera ICD contain enhanced shock reduction algorithm, battery and circuit design improvements to extend device longevity, and the unique PhysioCurve design, which meaningfully reduces device size and enhances patient comfort. Pacing revenue of $474 million grew 6%, outperforming the global market by 450 basis points. Our international pacing business grew 14%, driven by the strong customer demand for our Advisa MRI pacemaker in Japan.

AF grew in the mid-teens, driven by over 20% growth of our Arctic Front Advance cryoballoon system as customers continue to adopt this second generation system due to its more efficient, safe and effective treatment for paroxysmal AF.

Coronary revenue of $435 million grew 3%. Worldwide, DES revenue in the quarter was $273 million, including $105 million in the U.S and $25 million in Japan. Resolute integrity’s deliverability, positive data regarding early dual antiplatelet therapy interruption, unique FDA labeling for Diabetes, and long term clinical performance is receiving strong customer acceptance globally, despite competitive product launches of next generation products. Resolute integrity is also the one product line that is featured in virtually every one of the CVG multi-line product contracts we execute.

In renal denervation, while Q1 revenue continued to be modest, we are investing in developing referral networks, reimbursement, technology development and clinical and economic evidence to further strengthen our leadership position for this large, long term opportunity in hypertension. We are now anticipating CE mark for our next-generation Symplicity Spiral multi-electrode catheter before the end of the fiscal year.

On the clinical front, we received IDE approval from the FDA earlier this month for Symplicity HTN-4, which is focused on expanding the indication to include uncontrolled hypertension patients with systolic pressure between 140 mm and 160 mm of mercury.

In structural heart, revenue of $313 million increased 13%, driven by strong growth in our transcatheter valves transacts, including a meaningful acceleration of advanced customer purchases of CoreValve in Germany. Excluding the meaningful acceleration of advanced customer purchases of CoreValve in Germany, excluding this impact, we estimate the international transcatheter valve market grew in the upper single digits. In Germany, the Spenser patent injunction ruling has been a significant disappointment to customers who are concerned about having access to our market leading transfemoral technology, and the increased difficulty they will experience in accessing our unique valve size, catheter size and indications for use options. We respectfully disagreed with and have appealed the court’s decision. We ultimately believe that the Spenser patent should be found to be invalid. And we, along with many others, are challenging the validity of the European Patent Office.

In Q1 we became the first company with CE Mark approval for valve and valve procedures using CoreValve and CoreValve Evolut. We also continued the launch of our Engager valve in Europe, our entry into the transapical segment, which represents approximately 20% of the European TAVI market. In addition, the first implant of Engager direct aortic occurred in July and we expect CE Mark approval for this product in FY15.

In endovascular, revenue of $219 million grew 7%, with solid growth in both our aortic and peripheral businesses. In aortic, strong growth continued in Japan with the launch of our Endurant II AAA Stent Graft system. Our thoracic products grew over 20% on the strength of the Valiant Captivia in the U.S. and international markets.

In peripheral, our market leading drug-eluting balloon posted strong double-digit growth.

Now turning to our Restorative therapies group. Revenue of $1.554 billion grew 3%. Results were driven by growth in surgical technologies, neuromodulation, and Core Spine, partially offset by declines in BMC. It is worth noting that starting this quarter, Diabetes will be reported as a separate group and is no longer part of the Restorative Therapies Group. Spine revenue of $765 million declined 1%.

Core spine revenue of $641 million grew 1%. Excluding BKP, our core spine business grew 3% globally and 1% in the U.S, outperforming the market. The U.S. core spine market continues to show signs of stability, with a low single digit price mix decline and flat procedure volumes. Our new procedures and technologies, including our Solera posterior fixation system, Bryan Artificial Cervical Disk, Premium DBMs and AMT interbody devices are driving growth in our core spine business.

We are also differentiating our spine business from the competition through enabling technologies that we leverage from our surgical technologies business, including O-arm imaging, StealthStation navigation and POWEREASE power surgical instruments. Hospitals are investing in our capital equipment for spine surgery as they seek clear value from improved surgical precision and more efficient procedures. We are still early in realizing this large differentiated opportunity in spine which is resulting in increased revenue and share for our spinal implants as well as solid growth of our capital equipment in our surgical technologies business. Our Kanghui orthopedics business in China continues to perform well with its revenue growing in excess of 20% and offsetting the lost revenue from our former Weigao joint venture.

Turning to surgical technologies. Revenue of $361 million grew 13% with double-digit growth in all three businesses, ENT, neurosurgery, and advanced energy. The strong performance in ENT is attributable to solid growth in image guided surgery and monitoring, as well as the successful launches of TriVantage EMG Tube and the Indigo high-speed Otologic drill. Neurosurgery, which grew 12%, was driven by capital upgrades of the StealthStation S7 surgical navigation system. Advanced energy had another outstanding quarter as it strategies to focus on its four core markets of orthopedics, spine, breast and CRDM replacements resulted in growth of over 20%.

Turning to neuromodulation. Revenue of $428 million increased 3% on solid global growth in DBS and gastro uro. DBS delivered another strong quarter driven by double-digit new implant growth in the U.S. In addition, data from our EARLYSTIM trials which was published earlier this year in the New England Journal of Medicine, is generating significant interest in international market. In gastro euro, we had strong mid-teens growth of InterStim therapy in Western Europe. In PAINSTIM, results came in below our expectations this quarter as customers awaited the launch of the RestoreSensor SureScan MRI spinal cord stimulation system in the U.S. This product launched earlier this month and we expect this innovative technology to drive growth and share gains in the coming quarter.

Now turning to our diabetes group. Revenue of $369 million grew 1% and international markets growth was 8% as we continue to see strong adoption of the Veo pump with low-glucose suspend and Enlite CGM sensor. In the U.S. revenue declined 3% as customers continued to anticipate FDA approval of the MiniMed 530G, the U.S. version of this pump and sensor. We have now deferred $33 million of revenue including $11 million in Q1, as some customers plan to upgrade to the new technology when it's available. We have diverted significant people and resources to do everything possible to address the FDA's quality system findings quickly and effectively. This diversion is negatively affecting the timing of our upcoming product launches and we now expect our next generation pump platform, the MiniMed 640G, to launch in international markets in the second half of this fiscal year.

Turning to the rest of the income statement. The Q1 gross margin was 75%. After adjusting for a 30 basis point negative impact from foreign exchange, the Q1 gross margin on a non-GAAP operational basis was 75.3%. It is also worth noting that the gross margin includes significant spending related to resources diverted to address quality issues in neuromodulation and diabetes, which negatively affected the gross margin by 40 basis points. Looking ahead, we would expect the gross margin for fiscal year 2014 to be in the range of 75% to 75.5% on an operational basis.

Third quarter R&D spending of $316 million was 8.8% of revenue. We continue to invest in new technologies and evidence creation to drive future growth. We would expect R&D expense in fiscal year 2014 to be around 9% due to the tradeoffs we are making go partially offset the device tax, as well as shifting R&D resources to resolve pending quality issues, which gets recognized in cost of goods sold. First quarter SG&A expenditures of $1.416 billion represented 34.7% of sales. After adjusting for the 20 basis point negative impact from foreign exchange, Q1 SG&A was 34.5%.

We continue to focus on several initiatives to leverage our expenses. In FY '14 we would expect to drive 30 to 50 basis points of improvement, which would result in SG&A in the range of 33.8% to 34% on an operational basis. And it is worth mentioning that we typically see most of our leverage in the fourth quarter. Amortization spend for the quarter was $86 million. For FY '14, we would expect amortization expense to be approximately $85 million to $90 million per quarter. Net other expense for the quarter was $44 million. Net gains from our hedging program were $18 million. As you know, we hedge the majority of our operating results in developed market currencies to reduce volatility in our earnings from foreign exchange. However, recent movements in unhedged currency exposures is creating increased headwind for the remainder of the fiscal year.

Based on the current exchange rates, we expect FY14 net other expense to be in the range of $100 million to $220 million, which includes an expected $120 million impact from the U.S. Medical Device tax. For Q2 FY14, we expect net other expense to be in the range of $45 million to $55 million, based on current exchange rates.

Net interest expense for the quarter was $40 million. At the end of Q1, we had approximately $11.3 billion in cash and cash investments, and $11.2 billion in debt. Based on current rates, we would expect FY14 net interest expense to be in the range of $150 million to $160 million.

In Q1, we generated $891 million in free cash flow. As Omar emphasized, we are committed to returning 50% of our free cash flow to shareholders. In Q1, we paid over $280 million in dividends and in June, our board approved an 8% increase in our quarterly dividend which puts our payout ratio at approximately 30% and is the 36 th consecutive year we have increased the dividend. We also repurchased over $1.3 billion of our common stock. As of the end of Q1, we had remaining authorization to repurchase approximately 81 million shares. First quarter average shares outstanding on a diluted basis were 1.021 billion shares.

Our fully diluted share count is higher than expected, primarily due to the recent movements in Medtronic’s share price. Consequently, we have seen an increase in stock options being exercised which has resulted in more shares being issued. However, it’s important to note that the cash we receive from these stock option redemptions which was $560 million in Q1, was used to repurchase shares in the open market to offset some of the dilutive impact. These share repurchases are incremental to our commitment to return 50% of our free cash flow to our shareholders.

Let’s now turn to our tax rate. Our effective tax rate in the first quarter was 17.3%. Excluding the impact of unusual items, our non-GAAP nominal tax rate in the first quarter was 19.5%. Included in our tax rate for the quarter is $3 million net benefit associated with the finalization of certain tax returns and changes to uncertain tax position reserves for the quarter. For fiscal year 2014, we continue to expect a non-GAAP nominal tax rate in the range of 19% to 20%.

Let me conclude by providing our fiscal year 2014 revenue outlook and earnings per share guidance. Based on the stabilization trends in our businesses, as well as our first quarter performance, we continue to believe that full year constant currency revenue growth of 3% to 4% remains reasonable for fiscal year 2014. While we cannot predict the impact of currency movement, to give you a sense of the FX impact, if exchange rates were to remain similar to yesterday for the reminder of the fiscal year, then our FY14 revenue would be negatively affected by approximately $190 million to $230 million, including a negative $40 million to $60 million impact in Q2.

Turning to guidance on the bottom line, we continue to expect FY14 non-GAAP diluted earnings per share in the range of $3.80 to 3.85, which implies annual earnings per share growth of 6% to 8% on an operational basis after adjusting for certain tax benefits that we received in FY13 as well as the headwinds from the medical device tax and incremental interest expense in FY14. It is also worth noting that while we do not providing quarterly guidance, when looking at the quarterly earnings per share consensus and the continued uncertainty on the timing of Diabetes MiniMed 530G approval as well as the FX headwinds, we would not be surprised to see some models shift 2 to 3 pennies from Q2 to Q4. As in the past, my comments on guidance do not include any unusual charges or gains that might occur during the fiscal year.

I will now turn it back over to Omar, who will conclude our prepared remarks. Omar?

Omar Ishrak

Thanks, Gary. Before opening the lines for Q&A, let me briefly conclude by reiterating that in the end, Q1 was a solid quarter, despite a number of challenges. While 3% topline growth is consistent with the outlook we provided at the beginning of the year, it was softer than we expected and fell just below our mid-single digit baseline goals. However, I also want to emphasize that our team executed well to deliver on the bottom line. And looking ahead, we remain confident in our outlook for the remainder of the year.

We continue to focus on strengthening and geographically diversifying our business so that we can deliver consistent and dependable growth. Although there will always be pressures in the dynamic environment, we intend to execute in areas that we can control. Including growing our markets and building our business so that it is resilient enough to offset the variables that are beyond our control. And overtime, we are striving to reliably deliver on our baseline expectation which are, consistent mid-single digit revenue growth, consistent EPS growth, 200 to 400 basis points faster than revenue and returning 50% of our pretax growth to shareholders.

At the same time, we are positioning Medtronic to play a leading role in global healthcare by executing in our transformational opportunities of new therapy development, economic value and globalization. We believe that crisp execution on both our baseline and long-term growth strategy, combined with strong and disciplined capital allocation, will enable us to create long-term dependable value in healthcare.

With that, we would now like to open the phone lines for Q&A. In addition to Gary, I have asked Mike Coyle, President of our Cardiac and Vascular Group, and Chris O’Connell, President of our Restorative Therapies Group, to join us again for the Q&A session. We’re rarely able to get to everyone’s questions, so we respectfully request that you limit yourself to only one question and if necessary, one follow up, so that we can get to as many people as possible. If you have additional questions, please contact our investor relations team after the call.

Operator, first question please.

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