Medtronic plc MDT reported its fourth-quarter fiscal 2015 financial results, also marking the first quarter of Medtronic-Covidien’s consolidated performance following the completion of the long-awaited $42.9 billion takeover of Covidien on Jan 26.
Adjusted earnings per share (EPS) came in at $1.16 in the fourth quarter, ahead of the Zacks Consensus Estimate by 4 cents. However, earnings fell 1.7% year over year. Adjustments in the reported quarter primarily included charges related to inventory step-up in connection with the Covidien acquisition, intangible asset amortization and acquisition-related items.
The company’s reported net loss of $1 million or breakeven earnings per share compared adversely with the year-ago net income of $448 million and earnings of 44 cents a share.
Worldwide revenues in the reported quarter grossed $7.304 billion, up 7% year over year on a comparable basis at constant exchange rates or CER. The top line also surpassed the Zacks Consensus Estimate of $7.121 billion. As reported, revenues were up 60% compared to $4.566 billion reported by the legacy Medtronic in the year-ago quarter.
In the fourth quarter, U.S. sales (55.5% of total sales) increased 8% year over year (up 67% as reported) to $4.057 billion in the quarter. Non-U.S. developed market revenues totaled $2.324 billion, up 5% (48% as reported). Based on Medtronic’s focus on emerging markets, revenues from these regions experienced continued growth momentum and increased 11% (up 62% as reported) to $932 million.
Segment Details
The combined company is currently generating 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 was formed following the completion of the Covidien acquisition. It includes both the Surgical Solutions division and the Patient Monitoring & Recovery division, formerly referred to as Medical Care Solutions by Covidien prior to the acquisition.
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 jumped 11% year over year at comparable constant currency (up 4% as reported) to $1.398 billion, driven by low-teens growth in Low Power, mid-single digit growth in High Power, and over 30% growth in AF Solutions. Coronary & Structural Heart revenues of $792 million increased 9% (up 1%) on the back of upper-teens growth in Structural Heart and low-single digit growth in Coronary.
Strong Structural Heart sales were supported by the strong domestic performance of the CoreValve transcatheter aortic heart valve. Transcatheter Valves demonstrated strong 50% growth worldwide and 30% growth in the U.S. buoyed by the ongoing success of CoreValve in the U.S. and the launch of the CoreValve Evolut R recapturable system in CE Mark countries.
In the Aortic & Peripheral segment, sales reached $406 million, up 9% year over year (up 69% as reported) driven by strong mid-teens growth in the Peripheral business (which comprises the legacy Medtronic peripheral business and a portion of the legacy Covidien Peripheral business) and low-single digit growth in Aortic. In Peripheral, the IN.PACT Admiral drug-coated balloon delivered strong growth in the U.S. markets. Worldwide Peripheral growth was also driven by strong double-digit growth in Chronic Venous Insufficiency (CVI), which was owing to the continued acceptance of ClosureFast in Japan.
In MITG, worldwide sales reached $2.387 billion, up 6% year over year, driven by strong double-digit growth in Surgical Solutions and low-single digit growth in Patient Monitoring & Recovery.
The sluggish trend for Spine persisted and translated into a 2% year-over-year drop (down 5% as reported) in revenues to $743 million. Core Spine and Interventional revenues both declined in low single digits, offsetting low-single digit growth in Bone Morphogenetic Protein (BMP).
Meanwhile, Surgical Technologies revenues grossed $461 million, up 9% (up 5% as reported). Revenues at Neuromodulation came in at $518 million, up 6% (up 1% as reported). Neurovascular revenues of $132 million reflected growth of 23% while at Diabetes, the same totaled $467 million, up 8% year over year.
Guidance
Medtronic has provided its fiscal 2016 revenue outlook for the newly formed company, which includes both the legacy Medtronic and Covidien businesses. In fiscal 2016, the company expects revenue growth in the range of 4% to 6% at CER for the combined business. Further, it projects incremental 1% to 1.5% full-year revenue growth due to the extra selling week in the first quarter of fiscal 2016. The current Zacks Consensus Estimate for fiscal 2016 revenues is pegged at $28.5 billion.
Medtronic also expects diluted cash EPS in the range of $4.30 to $4.40 for the fiscal, which includes an expected $0.40 to $0.50 negative foreign currency impact based on current exchange rates. This foreign currency impact is 10 cents wider than the company’s earlier projection. The Zacks Consensus Estimate of $4.45 falls outside the guided range.
Our Take
As expected, Medtronic handily outpaced the Zacks Consensus Estimate of both earnings and revenue in the fourth quarter. The combined company, in its first full quarter of consolidated performance, has successfully demonstrated strong segmental performances reflecting successful integration and achieving synergy targets.
Management at Medtronic, Inc. had recognized this merger with Covidien, probably one of the largest in the MedTech industry, as a momentous event in its history, which would bring forth a unique company combining the extensive and innovative capacities of both legacy Medtronic and Covidien.
The deal is also 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.
The combined entity is likely to generate about $27 billion in total revenue, including $3.7 billion from emerging markets. The deal is expected to prove accretive to cash earnings in fiscal 2016 and significantly accretive thereafter. The transaction is also estimated to be neutral to the company’s earnings by fiscal 2019 and accretive thereafter.
Zacks Rank
Currently, Medtronic retains a Zacks Rank #3 (Hold). Some better-ranked medical products stocks are Bio-Rad Laboratories, Inc. BIO, Hospira Inc. HSP and Vascular Solutions Inc. VASC. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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