Medtronic Misses, Lowers Guidance

Medtronic (MDT) began the fiscal 2011 on a disappointing note. The company reported an adjusted EPS of 80 cents, which missed the Zacks Consensus Estimate by two cents but was a penny higher than the year-ago quarter. However, first quarter of fiscal 2010 included an extra week, which had a positive impact of 5 cents. Excluding the impact, the EPS recorded a growth of 8%.

Revenues were $3.77 billion, down 4% compared to the year-ago quarter and missed the Zacks Consensus Estimate of $3.95 billion. However, after considering unfavorable currency movements ($21 million) and the benefit of an extra week in the year-ago quarter ($200 million), revenues would have increased 2%. Medtronic recorded 41% of its total sales from the international market.

The company earns revenues from seven divisions – Cardiac Rhythm Disease Management (CRDM), Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control. These segments generated sales of $1.23 billion (down 8% year over year), $829 million (down 9%), $717 million (up 4%), $370 million (down 1%), $312 million (up 6%), $235 million (up 4%) and $84 million (down 13%), respectively.

Revenues declined at the two largest segments of Medtronic – CRDM and Spinal which contribute 33% and 22% to the top line. Revenues from the CRDM segment are the lowest among the past five quarters driven by a decline in both pacing systems (11.75% down to $473 million) and defibrillators (down 6.8% to $722 million). Slower market growth coupled with pricing pressure was primarily responsible for the decline although the European launch of Protecta implantable cardioverter-defibrillators (ICDs) and growth in AF solutions business provided some cushion.

The Spinal segment was also hampered by slowing market growth and pricing pressure. Revenues from both Core Spinal and Biologics declined 10.6% and 5.5%, respectively.

Within the CardioVascular segment, revenues from Coronary & Peripheral, Structural Heart, and Endovascular businesses increased 5.4%, 2.7% and 2.5%, respectively. Revenue growth was driven by the Invatec acquisition and growth of transcatheter valves.

Guidance

Based on a disappointing first quarter and other challenges, Medtronic lowered its outlook for 2011. The company expects revenues and adjusted EPS to increase 2%-5% at constant exchange rates (earlier expectation 5%-8% growth) and 9%-11% (earlier guidance 10%-13%). However, including the impact of acquisition-related expenses and an extra week in the first quarter of fiscal 2010, EPS in 2011 is expected in the range of $3.40-$3.48, down from the earlier guidance of $3.45-$3.55.

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