Medtronic's (NYSE:MDT) recently reported fourth-quarter fiscal 2014 results reflected operational revenue growth of 3.3% year-over-year (y-o-y) to about $4.57 billion, driven by growing acceptance of new products and robust sales in emerging markets. The company's largest divisions, Cardiac Rhythm Disease Management (CRDM) and Cardiovascular, continued to grow in low single digits driven by sales growth of over 50% in Atrial Fibrillation (AF) and 9% in the Structural Heart business. Other businesses such as Neuromodulation, Surgical Technologies and Diabetes also registered robust revenue growth, which offset declines in the Spinal division. International sales accounted for 47% of total revenues for the medical device maker, driven by 14% y-o-y growth in emerging markets. 
In its earnings call, Medtronic also announced that it had negotiated a settlement with Edwards Lifesciences (NYSE:EW) over their patent infringement legal dispute concerning its CoreValve device. The settlement included a one-time charge of $750 million and certain minimum annual royalty payments to be paid by Medtronic to Edwards. As part of these obligations, Medtronic incurred a one-time charge of $589 million in the fourth quarter, increasing its total expenses over 23% y-o-y to about $4.1 billion. This resulted in a 54% decline in net income from the prior year quarter to $448 million. If we adjust for the aforementioned charges and other non-GAAP items, the company's Q4 net earnings were $1.135 billion, an increase of 1% over the same period last year. 
Gross Margins were flat at 74.8% on an operational basis, on the back of certain unfavorable price adjustments in Japan and expenses related to addressing product quality issues in Neuromodulation and Diabetes. For fiscal 2015, the company expects gross margins to be in the range of 74.5-75% on a constant currency basis due to the ongoing quality improvement expenses. 
Our price estimate for Medtronic's stock is currently around $59, which is about in line with the market price.
CRDM Reports Steady Sales Growth
Cardiac Rhythm Disease Management (CRDM), primarily consisting of defibrillators and pacemakers, is Medtronic's largest division, accounting for about 30% of total sales. During Q4 FY 2014, operational sales in the division grew by 2% y-o-y to $1.35 billion as solid growth in Atrial Fibrillation (AF) offset declining implantable cardioverter defibrillator (ICD) sales. Weak demand in the U.S. ICD market offset Medtronic's strong performance in international markets, where its sales grew by 5% y-o-y. Its international ICD sales were driven by growing adoption of the Viva XT CRT-D (ICD with pacing capabilities) and Attain Performa quadripolar lead in Europe and Japan.
Following the growing acceptance of its Attain Performa Quadripolar (APQ) lead in Japan in the last two quarters, the company expects to launch this product in the U.S. this fiscal year. The medical device maker also received CE Mark for its Evera MRI SureScan ICD in the later half of the fiscal fourth quarter and should see meaningful sales in FY15. It is the world's first approved ICD system which can safely pass through a full-body MRI scan.
Growing acceptance of the Reveal LINQ system contributed to sales growth in the diagnostics business. In the AF division, sales grew 20% on a constant currency basis on account of solid growth of the Arctic Front CryoAblation System and the launch of the Pulmonary Vein Ablation Catheter (PVAC) Gold system. Going forward, we expect sluggish U.S. sales to offset international market gains in the overall CRDM business. Medtronic's global market share is unlikely to improve significantly unless its performance in the U.S. improves.
Cardiovascular Sales Cross $1 Billion
Cardiovascular, consisting of the Coronary, Structural Heart and Endovascular businesses, offers products such as stents, heart valves and renal denervation systems for treating hypertension. The Cardiovascular division, contributing over 20% to Medtronic's sales, grew 1.3% y-o-y, registering sales of over $1 billion in the fiscal fourth quarter. Sales of drug eluting stents (DES) increased 2% on an operational basis to $288 million, driven by strong global sales of the company's Resolute Integrity DES. Consistent DES growth was partially offset by a sales decline in bare-metal stents and renal denervation.
The Structural Heart business reported 9% sales growth, as the CoreValve Transcatheter Aortic Valve (TAVR) system continued its strong performance in international markets as well as the U.S. Following its recent settlement with Edwards in the patent infringement issue, Medtronic should be looking to ramp up its training facilities and improve sales in the lucrative U.S. TAVR market.
Diabetes Sales Soar While Spine Suffers
Sales in the Diabetes division grew 13% y-o-y to $460 million, driven by solid uptake of its MiniMed 530G system (with Enlite CGM sensor). The company states that MiniMed is the only system in the market which has a built-in automatic control mechanism to start/stop insulin delivery in the blood based on pre-determined insulin levels. Medtronic estimates that this product could drive sales significantly in the near term, as it expands internationally focusing on the type-2 diabetes market.
Spine revenue declined 2% y-o-y to $786 million on account of flat sales in the Core Spine business and a decline in Balloon Kyphoplasty Procedures (BKP) and Bone Morphogenetic Proteins (BMP) products. Excluding BKP, Spinal division sales improved by 1% over the prior year period. The company's procedural innovation and "surgical synergy program" is driving surgical equipment and spinal implant sales and helping regain acceptance in the U.S. Spine market, where it continues to face legal claims over its bone graft paste Infuse. Spinal sales are expected to get a further boost in the coming quarters, as the company is planning a summer launch of its Prestige LP next-generation cervical disc in the U.S. market this year.
Emerging Markets Remain Key
International sales accounted for 47% of Medtronic's total sales in the fiscal fourth quarter and grew 5% y-o-y on a constant currency basis, better than growth in the U.S. Emerging markets contributed about 27% of overall international revenues and saw robust growth of 14% y-o-y to $571 million. In emerging markets, Africa and the Middle East were strong performers, with revenues growing 29%. However, there were strong headwinds in Russia and India, where sales declined in double digits.
The company expects sales from emerging markets, including Asia-Pacific, Greater China and South Asia, to continue to grow in the mid teens, as it works on optimizing its business channels and establishes sustainable and broader business partnerships with national governments. The medical device major expects emerging markets to contribute 150 to 200 basis points to its overall sales growth in fiscal 2015. 
Disclosure: No positions.