Medtronic Q3 Earnings in Line, FY16 EPS View Revised

Zacks

Medtronic plc MDT reported financial results for third-quarter fiscal 20Array6, which also marked a full year of Medtronic-Covidien’s consolidated performance.

Adjusted earnings per share (EPS) came in at $Array.06, in line with the Zacks Consensus Estimate and down 0.9% year over year. Adjustments in the reported quarter primarily included restructuring charges, intangible asset amortization, acquisition-related items and certain tax adjustments.

Without these adjustments, the company’s reported net income of $Array.095 billion or 77 cents per share was down Array2% and 2Array%, respectively, on a year-over-year basis.

Total Revenue

Worldwide revenues in the reported quarter grossed $6.934 billion, up 6% year over year on a comparable basis at constant exchange rates or CER (up 6Array% as reported). The top line, however, missed the Zacks Consensus Estimate of $7.05Array billion. As reported, revenues were up 6Array% from $4.3Array8 billion reported by the legacy Medtronic in the year-ago quarter.

Foreign currency fluctuation adversely affected Medtronic’s third quarter revenues by $344 million.

In the quarter under review, U.S. sales (57.2% of total sales) increased 4% year over year (up 6Array% as reported) to $3.965 billion in the quarter. Non-U.S. developed market revenues totaled $2.066 billion (29.8% of total sales), up 5% (58% as reported). Emerging market revenues experienced continued growth momentum and increased Array4% (up 64% as reported) to $903 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 (CRHF), Coronary & Structural Heart (CSH), and Aortic & Peripheral Vascular divisions (APV). MITG includes both the Surgical Solutions division and the Patient Monitoring & Recovery (PMR) 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.

Revenues from CVG improved 7% (or 8% as reported) to $2.4Array0 billion, driven by strong, balanced growth across all divisions. CRHF sales were up 6% (Array% as reported) to $Array.278 billion, on account of the Evera MRI ICD launch in the U.S., continued adoption of the Reveal LINQ insertable cardiac monitor and mid-thirties growth in AF Solutions.

CSH revenues grew 7% (flat as reported) to $736 million on the back of low-thirties growth in transcatheter valves as a result of strong customer adoption of the CoreValveEvolut R, as well as 3% growth in drug-eluting stents, driven by Resolute Onyx in Europe and Resolute Integrity in the U.S. APV revenues grew Array0% (82% as reported) to $396 million, driven by solid adoption of the Heli-FX EndoAnchor System, continued strength in Valiant Captivia thoracic stent graft sales, and strong growth of the clinically differentiated IN.PACT Admiral drug-coated balloon.

In MITG, worldwide sales reached $2.29Array billion, up 5% year over year, driven by above market growth in Surgical Solutions and PMR growing in line with the market. While Surgical Solutions grew 7% to $Array.264 billion, PMR edged up Array% to $Array.027 billion.

In RTG, worldwide revenues of $Array.759 billion were up 4% year over year (up 7% as reported), driven by strong growth in Neurovascular and Surgical Technologies, offsetting declines in Spine and Neuromodulation. Revenues from the Diabetes group grew ArrayArray% (or 6% as reported) to $474 million, on account of strong, broad-based performance across its three divisions.

Margin

Gross margin during the reported quarter contracted 480 basis points (bps) to 69.Array% despite a 50.3% increase in gross profit to $4.793 billion. Adjusted operating margin contracted 250 bps year over year to 27.7%, with a 55.8% increase in selling, general and administrative expenses (to $2.3 billion); a 46.4% increase in research and development expenses (to $5456 million) and a 62.5% decine in Other expenses to $9 million.

Guidance

Medtronic revised its fiscal 20Array6 adjusted diluted EPS expectation. Management now expects adjusted diluted EPS in the range of $4.36 to $4.40 (compared to the previous range of $4.33–$4.40), which still includes an expected 45–50 cents of negative currency impact based on current exchange rates. The Zacks Consensus Estimate of $4.38 coincides with the mid-point of the guided range.

The company also provided its revenue outlook for the fourth quarter of fiscal 20Array6. Medtronic currently expects revenue growth in the range of 5–5.5% at CER. Negative impact from foreign currency translation in the fourth-quarter is expected to be in the range of $Array80 million to $220 million based on current exchange rates.

Our Take

Medtronic, in the fiscal third quarter, missed the Zacks Consensus Estimate of revenues while earnings were on par with our expectation. On a brighter note, the consolidated company 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 was successful in generating significant free cash flow, which management plans to reinvest in future growth opportunities while also providing strong returns to Medtronic’s shareholders.

However, margin pressure continues to weigh on the stock along with higher expenses. In addition, the company is expected to face substantial currency headwind through the fourth quarter of fiscal 20Array6.

Zacks Rank

Currently, Medtronic holds a Zacks Rank #2 (Buy). Some other well-ranked stocks in the medical sector are Hill-Rom Holdings, Inc. HRC, OraSure Technologies, Inc. OSUR and Vascular Solutions Inc. VASC. All the three stocks sport a Zacks Rank #Array (Strong Buy).

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