Medtronic (MDT) reported an EPS of 72 cents during the fourth quarter of fiscal 2011 compared to 86 cents in the year-ago period. However, considering certain adjustments (primary being restructuring charges of 18 cents per share), the adjusted EPS came in at 90 cents, missing the Zacks Consensus Estimate of 93 cents and a penny higher than the fourth quarter of fiscal 2010. For fiscal 2011, the company reported a 5% growth in adjusted EPS to $3.37, lower than the Zacks Consensus Estimate of $3.40.
Revenues were $4.295 billion in the quarter, up 2% (flat at constant exchange rates or CER) compared with the year-ago quarter and marginally above the Zacks Consensus Estimate of $4.286 billion. For the full year, sales increased 1% to $15.933 billion and were higher than the Zacks Consensus Estimate of $15.925 billion. However, the growth rate is 2% at CER and after considering the $200 million of revenue benefit from the extra week in the first quarter of fiscal 2010.
Medtronic recorded 46% of its total sales from the international market during the quarter, which increased 12% year over year (7% at CER) to reach $1.958 billion. As a result of the company’s focus on emerging markets, revenues from this region increased 24% (20% at CER) to $397 million. Revenues derived from the emerging markets increased 26% to $350 million comprising of overall growth in Greater China (24% at CER), Latin America (22%), India (19%), and the Middle East and Africa (19%).
Segments
Medtronic earns revenues from seven divisions – Cardiac Rhythm Disease Management (CRDM), Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control. During the quarter, these segments generated sales of $1.315 billion (down 7% year over year), $875 million (down 1%), $879 million (up 16%), $432 million (up 5%), $368 million (up 11%), $298 million (up 9%) and $128 million (down 4%), respectively.
Maintaining the trend seen in the past few quarters, CRDM still disappoints. Although pacing systems increased 2% to $506 million, ICD sales declined 14% (16% at CER) to $760 million. However, after considering the shipment hold of Boston Scientific (BSX) in the previous year, the decline in ICD sales was 8%.
Slower market growth of ICD in the US was partially offset by continued acceptance of Protecta ICDs in Europe. Moreover, the product received approval from the US Food and Drug Administration (FDA) late in the fourth quarter. Medtronic also received approval for its Revo MRI SureScan pacemaker, both of which have had positive initial market acceptance and are expected to be key growth drivers going ahead.
Although the Spinal segment recorded a marginal increase in revenues in the fourth quarter, there has been disappointment for the reported quarter. A 5% growth in Biologics ($227 million) was more than offset by a 2% decline in Core Spinal ($648 million). Robust performances of the Solera posterior fixation system, Atlantis Vision Elite cervical plate, and the Osteotech acquisition were offset by declines in Interspinous Process Decompressions Systems (IPDs) and balloon kyphoplasty (BKP). Revenues from BKP have been under pressure for the last few quarters. However in the recent past, to revive the business the company has presented positive data regarding the procedure.
Revenue growth in the CardioVascular segment was driven by robust performance in all three businesses, particularly in emerging markets. Within this segment, revenues from Coronary & Peripheral, Structural Heart, and Endovascular businesses increased 15% ($440 million), 15% ($274 million) and 21% ($165 million), respectively. The growth was primarily driven by the Integrity stent platform, the CoreValve transcatheter heart valve, and the recent US launch of the Endurant stent graft for the treatment of abdominal aortic aneurysms.
Guidance
Medtronic provided its outlook for 2012. The company expects to report a 1%−3% revenue growth at CER resulting in EPS of $3.43−$3.50, which considers 4−6 cents of dilution from the Ardian acquisition. However, after adjusting for Ardian dilution and 10 cents of one-time tax benefits received in fiscal 2011, the company expects to report a 6%−9% growth in EPS. According to the Zacks Consensus Estimate, Medtronic was expected to record an EPS of $3.63 in 2012. Shares of the company were down by more than 3% in pre-market trading.
Recommendation
Medtronic recently announced that, Omar Ishrak will be its new chairman and CEO, effective June 13, 2011. Omar Ishrak has been president and CEO of the $12 billion GE Healthcare Systems, a division of General Electric (GE). Omar Ishrak will replace William A. Hawkins, who had announced in December 2010 his intention to retire at the end of fiscal 2011.
The disappointment of two of Medtronic’s biggest segments – CRDM and Spinal continues to be the major concern. However, the company is increasing its focus on emerging markets and emerging therapies and expects these to be major growth drivers going ahead. Besides, acquisitions should enable the company to record higher revenues in the forthcoming period. During the fourth quarter, the company announced a major restructuring program to make it sustainable for the long-term growth.
There is a lot of insecurity regarding the course of action Omar Ishrak will adopt – whether he will follow the same strategy or embark on something new. Although investors would be looking up to the new CEO for the revival of the core businesses, any immediate solution is not on the cards.
We have a ‘Neutral’ rating on Medtronic.
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