Medtronic Inc. (MDT) reported fourth quarter fiscal 2012 earnings per share (EPS) of 94 cents, up 31% year over year. However, adjusted EPS during the quarter came in at 99 cents, 10% above the year-ago period and a penny ahead of the Zacks Consensus Estimate. For the full year, adjusted EPS of $3.46 increased 3% year over year and met the Zacks Consensus Estimate.
Revenues were $4.297 billion in the quarter, up 3% (up 4% at constant exchange rates or CER) year over year, beating the Zacks Consensus Estimate of $4.233 billion. Fiscal 2012 revenues came in at $16.184 billion, up 4% (up 3% at CER) year over year but below the Zacks Consensus Estimate of $16.268 billion.
Medtronic derived 46% of its total sales from the international market during the fourth quarter, which climbed 5% year over year (7% at CER) to reach $1.998 billion. As a result of the company’s focus on the emerging markets, revenues from these regions increased 19% (20% at CER) to $463 million.
Segment Details
Medtronic earns revenues from the following divisions: Cardiac Rhythm Disease Management (“CRDM”), CardioVascular, Spinal, Neuromodulation, Diabetes, and Surgical Technologies. During the quarter, these segments generated corresponding sales of $1.295 billion (down 2% year over year but flat at CER), $958 million (up 9% or up 10% at CER), $818 million (down 7% or down 6% at CER), $463 million (up 7% or up 8% at CER), $392 million (up 7% or up 8% at CER), and $371 million (up 24% or up 25% at CER).
Maintaining the lackluster trend seen in the past few quarters, CRDM continued to disappoint with particular weaknesses in Pacing and Implantable Cardioverter Defibrillators (ICDs). During the quarter revenues from pacing systems declined 2% at CER to $492 million and defibrillator sales declined 1% at CER to $744 million. However, this was partially offset by growth of atrial fibrillation (AF) solutions (up 24% year over year at CER) to $59 million.
Revenue growth in the CardioVascular segment was driven by robust performance in all the three businesses. Within this segment, revenues from Coronary, Structural Heart and Endovascular & Peripheral sub-segments increased 12% ($450 million), 7% ($289 million) and 10% ($219 million), respectively, at CER.
While revenues from Core Spinal dropped 3% at CER to $629 million, Biologics declined 16% at CER to $189 million. The downside in Biologics was due to continuous declines in US sales of Infuse, partially offset by revenue growth from Other Biologic products.
Margins
Gross margin during the reported quarter contracted 20 basis points (bps) to 75.6%. Moreover, operating margin declined 44 bps year over year to 32.5% with 2.08% increase in selling, general and administrative expenses and 4.15% rise in research and development expenses.
Guidance
Medtronic provided its initial revenue and EPS outlook for fiscal 2013. The company expects EPS to remain in the range of $3.62−$3.70 (annualized growth of 5−7%) on revenues of $16.50−$16.83 billion (2-4%). The Zacks Consensus EPS and revenue estimates of $3.66 and $16.55 billion, respectively, remain within the guidance range.
Our Take
We are disappointed with the company’s top-line performance during the reported quarter. Having witnessed disappointing performances from the two biggest segments – CRDM and Spinal – Medtronic is trying every means to revive growth. This includes penetration of international markets, portfolio expansion and restructuring initiatives, which should benefit the company over the long term.
Moreover, acquisitions done over the past few years are contributing to total revenues, a positive trend that is expected to continue. Meanwhile, Medtronic has increased its focus on the emerging markets that have been garnering significant growth. Despite these measures, economic uncertainty is impacting procedure volume. The competitive scenario is intense with players like Boston Scientific (BSX) and St Jude Medical (STJ) around.
As a positive case, we are encouraged with the company’s strong performance in the CardioVascular segment and expect it to further benefit from the recent launch of the Resolute Integrity drug eluting stent for the treatment of coronary artery disease.
Medtronic has been recording strong growth in the AF Solutions business over the past few quarters based on the adoption of Arctic Front in Europe and its ongoing launch in the US. Longer term, we have a Neutral recommendation on Medtronic. The stock retains a Zacks #3 Rank (Hold) in the short term.
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