Medtronic (MDT) Beats Q1 Earnings, Misses Revenue Estimates

Medtronic plc (NYSE:MDT) reported financial results for first-quarter fiscal 2018. Adjusted earnings per share (EPS) in the reported quarter came in at $1.12, surpassing the Zacks Consensus Estimate by 3.7% and up 8.7% year over year.

Adjustments in the quarter primarily included certain impact of restructuring charges, intangible asset amortization and acquisition-related items. After adjusting unfavorable foreign exchange impact of 2 cents, adjusted EPS came in at $1.14, up 11% year over year.

Without these adjustments, the company reported net income of 74 cents per share, up 12.1% year over year.

Total Revenue

Worldwide revenues in the reported quarter grossed $7.39 billion, up 4% on a constant exchange rate or CER basis (up 3% on a reported basis). The top line missed the Zacks Consensus Estimate of $7.45 billion. Foreign currency fluctuation affected Medtronic’s fiscal first quarter revenues by $33 million.

In the quarter under review, U.S. sales (55% of total revenue) increased 1% year over year to $4.04 billion. Non-U.S. developed market revenues totaled $2.31 billion (31% of total revenue), reflecting a 5% increase at CER (up 4% as reported). Emerging markets (14% of total revenue) amounted to $1.04 billion, up 12% at CER (up 11% as reported).

Medtronic PLC Price, Consensus and EPS Surprise

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 includes both the Surgical Solutions and the Patient Monitoring & Recovery (PMR) divisions. RTG includes 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.

Revenues at CVG improved 6% at CER (or up 5% as reported) to $2.65 billion, driven by strong, balanced growth across all three divisions.

CRHF sales were $1.39 billion with 5% year over year at CER (up 4% as reported). This came on the back of growth in Arrhythmia Management led by high-teens growth in atrial fibrillation Solutions at CER, amplified penetration of the Micra transcatheter pacing system, strong uptake of the TYRX absorbable antibacterial envelope and continued worldwide customer demand for the Reveal LINQ insertable cardiac monitor. This apart, the HeartWare International acquisition drove growth in the Heart Failure division.

CSH revenues were up 8% at CER (7% as reported) to $817 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 in the United States and continued demand for the CoreValve Evolut R 34mm valve in the United States as well as Europe.

APV revenues registered 5% growth at CER (up 4% as reported) to $439 million, driven by the continued adoption of the Endurant IIs aortic stent graft and remarkable strength of the Heli-FX EndoAnchor System. Peripheral was driven by low-double digit growth in both atherectomy and drug-coated balloons.

In MITG, worldwide sales reached $2.49 billion, marking a 3% year-over-year increase at CER (same as reported) on mid-single digit growth in Surgical Solutions and low-single digit growth in PMR.

In RTG, worldwide revenues of $1.81 billion were up 2% year over year at CER (same as reported) on high-single digit growth in Brain Therapies, mid-single digit growth in Specialty Therapies and low-single digit growth in Spine, thus mitigating a decline in Pain Therapies. However, revenues from the Diabetes group decreased 1% at CER (same as reported) to $449 million.

Margins

Gross margin during the reported quarter contracted 20 basis points (bps) to 68.2% despite a 2.8% increase in gross profit to $5.04 billion. Adjusted operating margin remained flat year over year at 26.3%. This was owing to a 1.4% decline in research and development expenses (to $548 million) which was offset by a 2.3% rise in selling, general and administrative expenses (to $2.49 billion). Other expenses in the reported quarter were $66 million as compared with $39 million in the year-ago period.

Guidance

Medtronic reiterated its fiscal 2018 constant-currency revenue and EPS guidance. The company still expects full-year revenue growth 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 $380-$480 million impact in the fiscal year compared to an expected positive impact of $75-$175 million stated previously. The Zacks Consensus Estimate for revenues remains at $30.72 billion for fiscal 2018.

Fiscal 2018 adjusted earnings per share growth is still expected in the range of 9-10% at CER. Currency translation is now expected to have an adverse impact of 3 cents to a positive impact of 1 cent compared with the earlier expectation of negative impact of approximately 5-10 cents. The Zacks Consensus Estimate for fiscal 2018 earnings is pegged at $4.89.

Moreover for the second quarter of fiscal 2018, Medtronic expects currency translation to have a favorable impact of $25-$75 million on revenues. Currency translation is expected to have a favorable impact of 0-2 cents on second-quarter earnings per share.

Our Take

Medtronic’s exited the fiscal fourth-quarter on a mixed note with earnings ahead of the Zacks Consensus Estimate and the reported revenues failing to meet the estimates. While the company demonstrated improved segmental performances at CER, escalating costs and expenses continue to weigh on bottom line. Unfavorable currency translation acted as a dampener to the company’s quarterly performance. However, the fiscal guidance represents chances of respite.

On a positive note, three 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 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.

Zacks Rank & Peer Performances

Medtronics currently has a Zacks Rank #3 (Hold). A few better-ranked medical stocks are Edwards Lifesciences Corp. (NYSE:EW) , Haemonetics Corp. (NYSE:HAE) and IDEXX Laboratories, Inc. (NASDAQ:IDXX) . Edwards Lifesciences sports a Zacks Rank #1 (Strong Buy), while Haemonetics and IDEXX carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Edwards Lifesciences’ second-quarter 2017 adjusted earnings improved a stupendous 42.1% year over year, primarily driven by strong sales growth at the company’s transcatheter heart valves business. The stock has gained around 3.5% over the last three months.

IDEXX Laboratories recorded second-quarter 2017 EPS of 95 cents, up 28% (up 30% at CER year over year on a reported basis. Moreover, revenues rose 9% year over year (10% on organic basis) to $509 million.

Haemonetics reported adjusted EPS of 33 cents in the first quarter of fiscal 2018, up 32% year over year. Moreover, revenues inched up 0.5% year over year (up 1% CER) to $210.9 million in the quarter.

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