Cardiac and vascular medical giant Medtronic (MDT) reported solid fiscal second quarter results. Revenue advanced 3.3% on a constant-currency basis, while non-GAAP diluted earnings per share jumped to $0.91, up about 3% from last year's period. Both measures were slightly better than expected, though we note margins could have been a bit stronger.
International revenue jumped 5% on a constant currency basis, while emerging market revenue leapt 13% excluding currency. Revenue in the firm's 'Cardiac and Vascular' group performed well (up 4%, excluding currency), as Implantable Cardioverter Defibrillators (ICDs)* grew 4% and drug-eluting stents advanced 8%, the latter bolstered by share gains from the firm's Resolute Integrity drug-eluting stent. Sales in the company's 'Restorative Therapies' segment jumped 2% (excluding currency), despite pressure from core Spine revenue, which declined 3%. 'Diabetes' revenue advanced 3% during the period (excluding currency).
Free cash flow totaled $918 million, or 21.9% of sales during the quarter (a very nice showing). Capital expenditures represented a mere 7.9% of cash from operations, revealing the company's asset-light and cash-rich business model. Cash and investments totaled $12.6 billion, while long-term debt and short-term borrowings totaled $12.3 billion, resulting in a net cash position at the end of the period. The firm's strong balance sheet coupled with its robust free-cash-flow generation will pave the way for continued dividend increases in coming years. The firm's dividend growth history has been very healthy, and its credit rating is solid.
Looking ahead, Medtronic reiterated its revenue outlook and earnings per share guidance for fiscal 2014. For the year, the company expects revenue growth in the range of 3%-4% on a constant-currency basis and diluted earnings per share to be in the range of $3.80-$3.85, which implies non-GAAP expansion of 6%-8% over the previous fiscal year.
* An ICD continually monitors the heart and delivers therapy when an abnormal heart rhythm, such as tachyarrhythmia, or rapid heart rhythm, occurs and leads to sudden cardiac arrest.
We were very encouraged by stabilizing signs in the ICD market, which not only bodes well for Medtronic but also for peers St. Jude (STJ) and Boston Scientific (BSX). Though Medtronic's dividend yield isn't as large as that of others in the portfolio of our Dividend Growth Newsletter, the company's financial strength and solid free-cash-flow generation speak to years of future dividend increases. We don't intend to make any changes to the weighting of the firm in our Dividend Growth portfolio at this time.
Additional disclosure: MDT is included in the portfolio of our Dividend Growth Newsletter.