Medtronic (MDT) reported an adjusted EPS of 82 cents during the second quarter of fiscal 2011, beating the Zacks Consensus Estimate by a penny and 6% higher than 77 cents of the year-ago quarter. However, including certain charges, primarily legal, the company reported a 33% decline in EPS to 52 cents.
Revenues were $3.903 billion, up 1.7% compared to the year-ago quarter. However, revenues were marginally lower than the Zacks Consensus Estimate of $3.906 billion. Medtronic recorded 41% of its total sales from the international market. Sales derived from the international market increased 4% year over year to reach $1.608 billion. However, excluding the $29 million of negative impact due to currency movement, international revenues would have increased 6%.
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 $1.248 billion (down 2% year over year), $850 million (down 1%), $738 million (up 6%), $388 million (up 1%), $326 million (up 9%), $244 million (up 9%) and $109 million (up 16%), respectively.
Revenues declined at the two largest segments of Medtronic – CRDM and Spinal which contribute 32% and 22% to the top line. However, the decline in revenues is modest and better compared to the first quarter of 2011. We are encouraged to note that despite a challenging environment, Medtronic has witnessed stability during the quarter. The company has recorded sequential market share gains in ICDs, pacemakers, spine and drug-eluting stents.
Revenues from the CRDM segment declined driven by lower revenues from both pacing systems (5.2% down to $472 million) and defibrillators (down 1.2% to $745 million). 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.
The Spinal segment was also hampered by slowing market growth and pricing pressure. Revenues from both Core Spinal and Biologics declined 1.2% and 1.8%, respectively. However, the extent of decline was much less than the previous quarter. In addition, both Core Spinal and Biologics recorded an increase in revenues on a sequential basis.
Revenue growth in the CardioVascular segment was driven by strong international performance, particularly in Latin America, Greater China and Other Asia. Within this segment, revenues from Coronary & Peripheral, Structural Heart, and Endovascular businesses increased 2.7%, 15% and 1%, respectively. The strong growth recorded by Structural Heart was driven by growth in transcatheter valves and the acquisition of ATS Medical.
Medtronic updated its outlook for 2011. Based on estimated market growth of 2-3%, the company expects revenues and adjusted EPS to increase 2%-4% at constant exchange rates (earlier expectation 2%-5% growth) and 8%-10% (earlier guidance 9%-11%). However, including the impact of acquisition-related dilution (acquisition of Invatec and ATS Medical) and an extra week in the first quarter of fiscal 2010, EPS in 2011 is expected in the range of $3.38-$3.44, down from the earlier guidance of $3.40-$3.48.
Although Medtronic has witnessed an improvement on a sequential basis, the company continues to face challenges such as slowing market growth, pricing pressure among others. Despite these issues, the company is looking at strengthening its product portfolio, expansion in emerging markets and cost control to drive growth.
Moreover, based on a strong cash balance of $1.2 billion at the end of the second quarter, the company is looking at suitable acquisitions. The recent decision to acquire Ardian is an attempt by the company to drive growth through acquisitions.
For the long term, we have a Neutral rating on Medtronic. The stock retains a Zacks #3 Rank (Hold) for the short term.