Medtronic plc MDT reported financial results for second-quarter fiscal 2016, which also marked the third quarter of Medtronic-Covidien’s consolidated performance.
Adjusted earnings per share (EPS) came in at $1.03, ahead of the Zacks Consensus Estimate of $1.00 and up 1% year over year. Adjustments in the reported quarter primarily included special charges related to cost synergies initiative, partially offset by a reversal of excess restructuring reserves, intangible asset amortization and acquisition-related items.
The company’s reported net income of $520 million or 36 cents per share was down 37% and 57%, respectively, on a year-over-year basis, driven by a non-recurring certain tax adjustment resulting from the company’s previously disclosed Sep 28 internal reorganization owing to the Covidien integration.
Worldwide revenues in the reported quarter grossed $7.058 billion, up 6% year over year on a comparable basis at constant exchange rates or CER. The top line was marginally in line with the Zacks Consensus Estimate. As reported, revenues were up 62% from $4.366 billion reported by the legacy Medtronic in the year-ago quarter.
In the quarter under review, U.S. sales (58% of total sales) increased 6% year over year (up 67% as reported) to $4.098 billion in the quarter. Non-U.S. developed market revenues totaled $2.052 billion (29% of total sales), up 4% (52% as reported). Emerging market revenues from these regions experienced continued growth momentum and increased 11% (up 61% as reported) to $908 million.
Segment Details
The combined company currently generates revenues from four major groups, viz. Cardiac & Vascular Group (CVG), Minimally Invasive Therapies Group (MITG) (formerly referred to as the Covidien Group), Restorative Therapies Group (RTG) and Diabetes Group.
CVG comprises Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, and Aortic & Peripheral Vascular divisions. MITG includes both the Surgical Solutions division and the Patient Monitoring & Recovery division. RTG includes the Spine, Neuromodulation, Surgical Technologies, and Neurovascular segments while the Diabetes Group includes the Intensive Insulin Management, Non-Intensive Diabetes Therapies, and Diabetes Services & Solutions divisions.
Cardiac Rhythm & Heart Failure sales were up 7% year over year at comparable constant currency (flat as reported) at $1.324 billion, driven by mid-single-digit growth in both High Power and Low Power, high-twenties growth in AF Solutions, and low-thirties growth in Services & Solutions. New product launches, including the U.S. launch of the Evera MRI ICD and the Micra Transcatheter Pacing System, and continued strong adoption of the Reveal LINQ insertable cardiac monitor, the Viva XT CRT-D with its AdaptivCRT algorithm and Attain Performa quadripolar lead and Arctic Front Advance CryoAblation System, contributed to the growth.
Coronary & Structural Heart revenues of $754 million increased 10% (up 1% as reported) on the back of mid-twenties growth in Heart Valve Therapies, mid-single digit growth in Coronary, and low-single digit growth in Extracorporeal Therapies. In the Aortic & Peripheral segment, sales reached $404 million, up 10% year over year (up 81% as reported) driven by mid-single-digit growth in Aortic, low-double digit growth in Peripheral, and mid-teens growth in endoVenous.
In MITG, worldwide sales reached $2.356 billion, up 3% year over year, driven by mid-single-digit growth in Surgical Solutions and low-single digit growth in Patient Monitoring & Recovery. According to Medtronic, MITG`s growth in the second quarter was slightly slower than its historical run rate on difficult comparison due to the legacy Covidien’s fiscal year end in the year-ago period.
In RTG, worldwide revenues of $1.770 billion were up 5% year over year (up 7% as reported) driven by low-thirties growth in Neurovascular and high-single-digit growth in Surgical Technologies, with low-single-digit growth in Neuromodulation and flat year-over-year numbers in Spine.
Margin
Gross margin during the reported quarter contracted 476 basis points (bps) to 69.1% despite a 51.2% increase in gross profit to $4.9 billion. Adjusted operating margin contracted 259 bps year over year to 28.2%, with a 55.5% increase in selling, general and administrative expenses (to $2.3 billion); a 45.7% increase in research and development expenses (to $545 million) and a 9.5% decine in Other expenses to $57 million.
Guidance
Medtronic now expects its fiscal 2016 adjusted diluted EPS in the range of $4.33 to $4.40, which includes an expected 45 cents to 50 cents of negative currency impact based on current exchange rates. The Zacks Consensus Estimate of $4.37 falls within the guided range.
The company also provided its revenue outlook for the second half of fiscal 2016. Medtronic currently expectsrevenues to be in the upper-half of its mid-single-digit revenue growth range. Negative impact from foreign currency translation in the second half is expected to remain in the range of $425 million to $725 million based on current exchange rates, which implies negative impact from foreign currency of $1.45 to $1.65 billion for the entire fiscal.
Bottom Line
Medtronic, in the fiscal second quarter, handily outpaced the Zacks Consensus Estimate of earnings while revenues marginally remained in line with our expectation. The consolidated company has successfully demonstrated strong segmental performances reflecting successful integration and achievement of synergy targets.
All four major business groups contributed solid top-line growth on above-market revenue growth which, according to the company, demonstrated sustainability across groups and regions. We are also impressed with the solid growth trend successfully continuing in the U.S. as well as the healthy global acceptance of its advanced therapies. Apart from product innovation, the company is currently focusing on geographical diversification of its businesses.
The Covidien acquisition is expected to bolster the long-term sustainability and consistency of the company’s revenue growth expectations. Finally, the combined company should generate significant free cash flow, a substantial percentage of which can be deployed further with greater flexibility.
However, margin pressure continues to weigh on the stock. In addition, the company is expected to face severe currency headwind through the second half of fiscal 2016.
Zacks Rank
Currently, Medtronic bears a Zacks Rank #4 (Sell). Some better-ranked medical products stocks are ICU Medical, Inc. ICUI, INSYS Therapeutics, Inc. INSY and Nxstage Medical, Inc. NXTM. All the three stocks sport a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment