Medtronic (MDT) Beats On Q2 Earnings, Reiterates FY18 View

Medtronic plc (NYSE:MDT) reported second-quarter fiscal 2018 adjusted earnings per share (EPS) of $1.07, beating the Zacks Consensus Estimate by 8.1%. Earnings however declined 4.5% year over year.

Adjustments in the quarter primarily included the impact of restructuring charges, intangible asset amortization, divestiture-related items, adverse effects of Hurricane Maria and acquisition-related items. After adjusting for unfavorable foreign exchange impact of a penny, adjusted EPS was $1.06.

Without these adjustments, the company’s reported EPS was $1.48, up 85% year over year.

Total Revenues

Worldwide revenues in the reported quarter grossed $7.05 billion, up 3.5% on a constant exchange rate or CER basis (down 4.1% on a reported basis). The top line missed the Zacks Consensus Estimate of $7.07 billion. Foreign currency fluctuation affected Medtronic’s second-quarter revenues by $35 million.

In the quarter under review, U.S. sales (52.9% of total revenues) declined 10.1% year over year to $3.73 billion. Non-U.S. developed market revenues totaled $2.24 billion (31.8% of total revenues), reflecting a 4.7% increase at CER (up 1.4% as reported). Emerging market revenues (15.3% of total revenues) amounted to $1.08 billion, up 12.4% at CER (up 9.8% as reported).

Medtronic PLC Price, Consensus and EPS Surprise

Medtronic PLC Price, Consensus and EPS Surprise | Medtronic PLC Quote

Segment Details

The company currently generates revenues from four major groups, viz. Cardiac & Vascular Group (CVG), Minimally Invasive Therapies Group (MITG), 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 now includes the Surgical Innovations (SI) and the Respiratory, Gastrointestinal & Renal (RGR) divisions after the divestiture of Patient Care, Deep Vein Thrombosis (Compression), and Nutritional Insufficiency (Enteral Feeding) businesses. RTG comprises the Spine, Brain Therapies, Specialty Therapies and Pain Therapies segments, while the Diabetes Group incorporates the Intensive Insulin Management (IIM), Non-Intensive Diabetes Therapies (NDT), and Diabetes Service & Solutions (DSS) divisions.

CVG revenues improved 7% at CER (up 7.4% as reported) to $2.77 billion, driven by strong, balanced growth across all three divisions.

CRHF sales totaled $1.47 billion, up 4% year over year at CER (up 5% as reported). This came on the back of growth in Arrhythmia Management led by high-teens growth in atrial fibrillation Solutions and low-double digit rise in Diagnostics at CER, amplified penetration of the Micra transcatheter pacing system, and strong uptake of the TYRX absorbable antibacterial envelope. This apart, strong demand for the company's suite of quadripolar cardiac resynchronization therapy-pacemakers (CRT-P) along with growth in Mechanical Circulatory Support drove Heart Failure division revenues.

CSH revenues were up 12% at CER (13% as reported) to $854 million on the back of high-30s constant currency growth in transcatheter aortic valves as a result of strong customer uptake of the CoreValve Evolut PRO platform. Moreover, the company's recent launch of the Resolute Onyx drug-eluting stent in the United States and Japan revived the Coronary business.

APV revenues registered 4% growth at CER (up 5% as reported) to $452 million, driven by continued adoption of the Valiant Captiviathoracic stent graft systems and strength in the Heli-FX EndoAnchor System. Peripheral was driven by double-digit growth in percutaneous transluminal angioplasty and drug-coated balloons. Moreover, the recently-launched Concerto 3D detachable coil system drove mid-single digit growth in endoVenous.

In MITG, worldwide sales reached $1.95 billion, marking a 2% year-over-year increase at CER (down 21% on a reported basis) on mid-single digit growth in SI, which was affected by Hurricane Maria, and partially offset by low-single digit decline in RGR.

In RTG, worldwide revenues of $1.86 billion were up 2% year over year at CER (same as reported) on low double-digit growth in Brain Therapies, offsetting declines in Spine, Specialty Therapies and Pain Therapies. Moreover, the Spine and Pain Therapies divisions along with the Pelvic Health business in the Specialty Therapies division in the United States were affected by Hurricane Maria.

However, revenues at the Diabetes group declined 2% at CER (flat as reported) to $462 million.

Margins

Gross margin in the reported quarter expanded 160 basis points (bps) to 69.9% despite a 1.8% decline in gross profit to $4.93 billion. Adjusted operating margin contracted 40 bps year over year to 27.5% owing to a 0.2% rise in research and development expenses (to $555 million) along with a 0.8% uptick in selling, general and administrative expenses (to $2.44 billion). Other expenses in the reported quarter totaled $111 million as compared with $89 million in the year-ago quarter.

Guidance

Medtronic reiterated its fiscal 2018 constant-currency revenue and EPS guidance. The company maintains full-year revenue growth projection in the range of 4-5% at CER. However, the company revised its foreign currency fluctuation estimation, which is now projected to have a positive $275-$375 million impact on fiscal results compared with $380-$480 million estimated earlier. The Zacks Consensus Estimate for 2018 revenues remains at $29.36 billion.

Fiscal 2018 adjusted earnings per share growth is still expected in the range of 9-10% at CER. Currency translation is expected to have an adverse impact of two cents compared with the earlier expectation of a negative effect of 3 cents to a positive impact of a penny. The Zacks Consensus Estimate for fiscal 2018 earnings is pegged at $4.7.

For the third quarter of fiscal 2018, Medtronic expects currency translation to have a favorable impact of $155-$175 million on revenues. Currency translation is expected to contribute a penny to third-quarter earnings per share.

Our Take

Medtronic exited the fiscal second quarter on a mixed note. While the company demonstrated improved segmental performances at CER, escalating costs and expenses continue to weigh on the bottom line. Unfavorable currency translation also acted as a dampener.

On the bright side, all the major business groups contributed to solid top-line growth at CER, which highlighted sustainability across groups and regions, in addition to displaying successful integration and achievement of synergy targets. We are also encouraged by the company’s solid growth trend in the United States as well as healthy global acceptance of its advanced therapies. Apart from product innovation, the company is focusing on geographical diversification of its businesses. Moreover, the company’s recent receipt of FDA approval and commercial launch of Azure pacemakers with BlueSync technology buoy optimism.

Zacks Rank & Peer Performances

Medtronic currently has a Zacks Rank #4 (Sell).

A few better-ranked stocks in the broader medical sector are PetMed Express (NASDAQ:PETS) , Luminex Corporation (NASDAQ:LMNX) and IDEXX Laboratories (NASDAQ:IDXX) .

Notably, PetMed Express sports a Zacks Rank #1 (Strong Buy). The company has a long-term expected earnings growth rate of 10%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Luminex represented a return of 5.1% over a year. The stock has a Zacks Rank #1.

IDEXX Laboratories has a long-term expected earnings growth rate of 19.8%. The stock has climbed 39.2% over a year’s time and has a Zacks Rank #2 (Buy).

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