Medtronic Tops Q3 Earnings, Revenues; Offers Joint Q4 View
Medtronic plc (MDT - Analyst Report) reported third-quarter fiscal 2015 financial results of the legacy Medtronic Inc., following the completion of the long-awaited $42.9 billion takeover of its Irish counterpart, Covidien, on Jan 26. The merger did not have any impact on the company’s operational results for the fiscal third quarter.
Adjusted earnings per share (EPS) came in at $1.01 in the third quarter, up 10.9% year over year and ahead of the Zacks Consensus Estimate by 4 cents. Adjustments in the reported quarter included special gains related to divestiture recognized in connection with the sale of a product line in the Surgical Technologies division, costs incurred in connection with the Covidien acquisition and the impact of the buyout on interest expense.
The company’s reported net income of $977 million or 98 cents a share were up 28% and 31%, respectively, on a year-over-year basis.
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Revenues in the reported quarter grossed $4.318 billion, up 3.7% year over year (up 8% at constant exchange rates or CER). The top line also surpassed the Zacks Consensus Estimate of $4.260 billion.
International sales (generating 43% of total sales) dropped 2% year over year (up 7% at CER) to $1.859 billion in the quarter. Based on Medtronic’s focus on emerging markets, revenues from these regions experienced continued growth momentum and increased 6% (up 12% at CER) to $542 million. This region now accounts for 12.6% of the company’s total revenue.
Segment Details
Prior to the merger, Medtronic Inc. generated revenues from three groups, viz. Cardiac & Vascular Group (CVG), Restorative Therapies Group (RTG) and Diabetes Group.
The legacy Cardiac and Vascular Group comprised Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, and Aortic & Peripheral Vascular divisions. On the other hand, the Restorative Therapies Group included the Spine, Neuromodulation and Surgical Technologies segments while the legacy Diabetes Group included the Intensive Insulin Management, Non-Intensive Diabetes Therapies, and Diabetes Services & Solutions divisions.
Cardiac Rhythm & Heart Failure sales jumped 7% year over year (up 12% at CER) to $1.269 billion. Revenues at High Power increased 4% at CER to $650 million. Strong market acceptance and share gain of the Viva XT CRT-D, with its AdaptivCRT algorithm and Attain Performa quadripolar lead, contributed to the improvement.
Meanwhile, Low Power revenues stood at $489 million, up 17% at CER on the strong ongoing global release of the Reveal LINQ insertable cardiac monitor. AF & Other revenues reached $130 million, up a substantial 30% year over year owing to solid growth in Arctic Front CryoAblation System.
Coronary revenues were down 2% at CER to $407 million. Late in the third quarter, Medtronic launched the Resolute Onyx drug-eluting stent in the international markets. On the other hand, Structural Heart recorded revenue growth of 22% (to $330 million) at CER. Strong Structural Heart sales were supported by strong domestic performance of the CoreValve transcatheter aortic heart valve.
At the Aortic & Peripheral segment, sales reached $218 million, up 5% year over year at CER. The strong sales in Thoracic and the launch of the Endurant 2S AAA stent graft contributed to growth in Aortic. In Peripheral, the IN.PACT Admiral and Pacific drug-coated balloons continued to deliver strong growth in the international markets. The company is now working on the commercial launch of the IN.PACT Admiral in the U.S.
The sluggish trend for Spine persisted and translated into a 1% year-over-year drop (up 2% at CER) in revenues. Core Spine revenues were up 1% while the bone morphogenetic protein or BMP increased 9% offsetting the flat Interventional Spine business outcome.
Meanwhile, Surgical Technologies revenues grossed $418 million (up 11% at CER). Revenues at Neuromodulation came in at $487 million (up 5% at CER) while at Diabetes, the same stood grossed $449 million (up 6% at CER).
Margins
Gross margin during the reported quarter contracted 90 basis points (bps) to 73.9%. Adjusted operating margin however, expanded 12 bps year over year to 30.2%, with a 2.3% increase in selling, general and administrative expenses (to $1.487 billion); a 3.6% improvement in research and development expenses (to $373 million) and a 47% plunge in Other expenses to $24 million.
Guidance
Medtronic has provided its revenue outlook for the newly formed Medtronic plc, which includes both the legacy Medtronic and Covidien businesses for the rest of fiscal year 2015. In the fourth quarter, the company expects revenue growth in the range of 4% to 6% at CER for the combined business. The current Zacks Consensus Estimate for fiscal fourth quarter revenues is pegged at $4.260 billion.
Our Take
Management at Medtronic, Inc. has recognized this merger with Covidien, probably one of the largest in the MedTech industry, as a momentous event in its history, which will bring forth a unique company combining the extensive and innovative capacities of both Medtronic and Covidien.
The combined business is expected to be categorized into four major groups viz. Cardiac and Vascular Group (CVG), Diabetes Group, Restorative Therapies Group (RTG) and the new Covidien Group. The combined entity will operate in four major regions, namely, Asia Pacific, the Americas, Europe, the Middle East and Africa, and China.
The combined entity, with an official joint force of over 85,000 employees present in more than 160 countries, coupled with annual revenues of $27.4 billion, will now expedite Medtronic's fundamental strategies of therapy innovation, globalization and economic value.
We expect the newly formed Medtronic plc to win a larger market share owing to the combined strength of two MedTech behemoths, and garner more profits in the near term.
To focus on the quarter’s results, Medtronic posted a solid fiscal third quarter with earnings and revenues both beating the respective Zacks Consensus Estimate. We are encouraged by the balanced growth across all of the company’s segments. However, margin pressure raises caution.
Zacks Rank
Currently, Medtronic retains a Zacks Rank #2 (Buy). Some other top-ranked medical products stocks are Abaxis, Inc. (ABAX - Analyst Report), Vascular Solutions Inc. (VASC - Snapshot Report) and Phibro Animal Health Corp. (PAHC - Snapshot Report). All the three stocks sport a Zacks Rank #1 (Strong Buy).
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