Medtronic (MDT) reported an adjusted EPS of 86 cents during the third quarter of fiscal 2011, beating the Zacks Consensus Estimate of 83 cents and 12% higher than 77 cents in the year-ago quarter.

Revenues were $3.961 billion, up 3% compared with the year-ago quarter and in line with the Zacks Consensus Estimate. Medtronic recorded 43% of its total sales from the international market during the quarter. Sales derived from the international market increased 5% year over year to reach $1.702 billion. However, excluding the $22 million of negative impact due to currency movement, international revenues have increased 7%. Revenues derived from the emerging markets increased 26% to $350 million.

Segments

Medtronic earns revenues from seven divisions – Cardiac Rhythm Disease Management (CRDM), Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control. These segments generated sales of $1.221 billion (down 2% year over year), $861 million (up 2%), $774 million (up 7%), $401 million (up 2%), $341 million (up 10%), $259 million (up 8%) and $104 million (up 4%), respectively.

Although CRDM revenues continued to decline during the quarter, it is encouraging to note that Spinal recorded growth, though modest. Pacing system and defibrillators recorded sales of $450 million (down 2% year over year) and $735 million (down 3%). Slower market growth was primarily responsible for the decline in CRDM revenues, partially offset by continued acceptance of Protecta ICDs in Europe and growth in AF solutions business. AF sales were partly driven by the US launch of Arctic Front Cardiac CryoAblation Catheter system. Moreover, in February, the US food and Drug Administration (FDA) approved the Revo MRI SureScan pacemaker, which can be used in an MRI environment.

The Spinal segment has been showing some recovery since the previous quarter. An 11% growth in Biologics ($235 million) driven by the acquisition of Osteotech, stability in InFuse sales coupled with a 1% decline in Core Spinal led to the overall growth of the segment.

Revenue growth in the CardioVascular segment was driven by robust performance in all businesses, particularly in emerging markets where revenue increased 30%. Within this segment, revenues from Coronary & Peripheral, Structural Heart, and Endovascular businesses increased 4% ($401 million), 12% ($241 million) and 10% ($132 million), respectively. The strong growth recorded by Structural Heart was driven by growth in transcatheter valves and the acquisition of ATS Medical. Growth in Endovascular revenue was driven by the US launch of the Endurant stent graft for the treatment of abdominal aortic aneurysms.

Guidance

Medtronic updated its outlook for 2011. After tightening the guidance and considering the acquisition of Ardian, Medtronic expects to report adjusted EPS of $3.38-$3.40. Moreover, the company plans to adopt restructuring initiatives to make it sustainable for long-term growth. As a part of this plan, about 4%-5% of the workforce (representing 1500-2000 positions) will be reduced during the fourth quarter. Consequently, Medtronic will incur a one-time charge related to the restructuring during the fourth quarter. 

Recommendation

Medtronic is increasing its focus on emerging markets and emerging therapies and expects these to be major growth drivers going ahead. Besides, acquisitions should enable the company to record higher revenues in the forthcoming period. However, the company operates in a highly competitive environment and is exposed to the risk of currency movement. Moreover, its biggest segment, CRDM, continues to be a drag on its top line.

We have a ‘Neutral’ rating on Medtronic.

 
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