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Medtronic (MDT) Q4 Earnings Beat on Growth in All Lines

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Medtronic plc MDT reported fourth-quarter fiscal 2018 adjusted earnings per share (EPS) of $1.42, beating the Zacks Consensus Estimate by 2.9%. Adjusted Earnings rose 6.8% year over year. 

Adjustments in the quarter primarily included the impact of restructuring charges, intangible asset amortization, debt redemption premium and acquisition-related items. After adjusting for foreign exchange tailwind of 2 cents, adjusted EPS was $1.44.

Without these adjustments, the company’s reported net earnings of $1.07 per share, compared to 84 cents in the previous year.

Full-year adjusted EPS came in at $4.77, a 4% improvement from the year-ago number. This also exceeded the Zacks Consensus Estimate of $4.74 per share.

Total Revenues

Worldwide revenues in the reported quarter grossed $8.14 billion, up 6.5% on an organic basis (up 2.9% on a reported basis). The top line surpassed the Zacks Consensus Estimate of $7.99 billion. Organic revenues in the quarter include adjustments for divestitures of Patient Care, Deep Vein Thrombosis (Compression) and Nutritional Insufficiency businesses to Cardinal Health and a $315 million positive impact from foreign currency.

Fiscal 2018 worldwide revenues were $29.95 billion, up 4.6% on an organic basis (up 0.8% on a reported basis). This also remained ahead of the Zacks Consensus Estimate of $29.76 billion.

In the quarter under review, U.S. sales (52% of total revenues) fell 4.9% year over year (up 5.3% after adjusting for the divestitures) to $4.19 billion. Non-U.S. developed market revenues totaled $2.72 billion (33% of total revenues), reflecting a 4.6% increase organically (up 10.8% as reported). Emerging market revenues (15% of total revenues) amounted to $1.24 billion, up 15.5% organically (up 16.8% as reported).

Segment Details

The company currently generates revenues from four major groups, viz. Cardiac & Vascular Group (CVG), Minimally Invasive Therapies Group (MITG), Restorative Therapies Group (RTG) and Diabetes Group.

CVG comprises Cardiac Rhythm & Heart Failure (CRHF), Coronary & Structural Heart (CSH) and Aortic & Peripheral Vascular divisions (APV). MITG now includes the Surgical Innovations (SI) and the Respiratory, Gastrointestinal & Renal (RGR) divisions after the divestiture of Patient Care, Deep Vein Thrombosis (Compression), and Nutritional Insufficiency (Enteral Feeding) businesses. RTG comprises the Spine, Brain Therapies, Specialty Therapies and Pain Therapies segments, while the Diabetes Group incorporates the Intensive Insulin Management (IIM), Non-Intensive Diabetes Therapies (NDT), and Diabetes Service & Solutions (DSS) divisions.

CVG revenues improved 5.4% at constant exchange rate or CER (up 10.1% as reported) to $3.14 billion, driven by strong, low-teens growth in CSH, mid-single digit growth in APV, and low-single digit growth in CRHF, all at CER.

CRHF sales totaled $1.63 billion, up 1.5% year over year at CER (up 5.8% as reported). This came on the back of low-single digit growth in Arrhythmia Management. This apart, double digit growth in AF Solutions, Mechanical Circulatory Support, and TYRX in Infection Control also contributed to the growth.

CSH revenues were up 12.8% at CER (up 18.7% as reported) to $81.01 billion on the back of low-20s constant currency growth in transcatheter aortic valves as a result of strong global uptake of the CoreValve Evolut PRO platform. Moreover, the continued uptake of the Resolute Onyx drug-eluting stent in the United States and Japan revived the Coronary business.

APV revenues registered 4.8% growth at CER (up 8.8% as reported) to $497 million, driven by low-single digit growth in both Aortic and Peripheral and mid-teens growth in endoVenous.

Medtronic PLC Price, Consensus and EPS Surprise

Medtronic PLC Price, Consensus and EPS Surprise | Medtronic PLC Quote

In MITG, worldwide sales reached $2.24 billion, marking a 4.8% year-over-year increase at CER (down 14.1% on a reported basis) on high-single digit growth in SI, and a low-single digit growth in RGR, both at comparable CER basis.

In RTG, worldwide revenues of $2.13 billion were up 6.1% year over year at CER (up 9% as reported) on low double-digit growth in Brain Therapies and Pain Therapies, mid-single digit growth in Specialty Therapies and low-single digit growth in the Spine business.

Moreover, revenues at the Diabetes group increased 21.3% at CER (26% as reported) to $645 million.

Margins

Gross margin in the reported quarter expanded 136 basis points (bps) to 70.6% on a 4.9% rise in gross profit to $5.7 billion. Adjusted operating margin contracted 64 bps year over year to 29.7% owing to a 7.1% rise in research and development expenses (to $592 million) along with a 2.9% uptick in selling, general and administrative expenses (to $2.55 billion). Other expenses in the reported quarter totaled $188 million as compared with $48 million in the year-ago quarter.

Guidance

The company has provided its fiscal 2019 earnings and revenues guidance. For the full year, organic revenue growth is expected to be in the range of 4-4.5%. Currency fluctuation is expected to negatively impact the top line by $50 million- $150 million. The current Zacks Consensus Estimate for revenues is pegged at $31.05 billion.

Fiscal 2019 adjusted EPS is expected in the range of $5.10 to $5.15, a 10% growth from the year-ago number at the mid-point of the range. This assumes a 5 cent benefit from foreign exchange. The Zacks Consensus Estimate of $5.15 per share falls at the upper end of the guided range.

Our Take

Medtronic exited the fiscal 2018 on a solid note with better-than-expected fourth quarter performances. The company demonstrated improved segmental performances at CER on growth in all business segments. However, escalating costs continue to be a concern.

Moreover, all the major business groups contributed to solid top-line growth at CER, which highlighted sustainability across groups and regions, in addition to displaying successful integration and achievement of synergy targets. We are also encouraged by the company’s solid growth trend in the United States as well as healthy global acceptance of its advanced therapies. Apart from product innovation, the company is focusing on geographical diversification of its businesses.

Zacks Rank & Peer Performances

Medtronic has a Zacks Rank #3 (Hold).

A few better-ranked stocks that reported solid results this earnings season are ABIOMED, Inc. ABMD, Baxter International Inc. BAX and Quest Diagnostics Inc. DGX. While ABIOMED sports a Zacks Rank #1 (Strong Buy), Baxter and Quest Diagnostics carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ABIOMED reported fourth-quarter fiscal 2018 earnings per share of 80 cents, a huge 142.4% improvement from the year-ago quarter. Revenues rose 40% to $174.4 million.

Baxter posted first-quarter 2018 adjusted earnings per share of 70 cents, 20.7% improvement from the year-ago quarter's figure of 58 cents. Revenues of $2.68 billion in the quarter rose 4% on a year-over-year basis at constant exchange rate.

Quest Diagnostics reported first-quarter 2018 adjusted EPS of $1.52, up 24.6% from the year-ago number. Revenues moved up 3.7% year over year to $1.884 billion.

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