Adjusted earnings per share (EPS) came in at $1.01 in the third quarter (ended Jan. 23), up 10.9 percent year-over-year and ahead of the Zacks Consensus Estimate by four cents. Adjustments in the reported quarter included special gains related to divestiture recognized in connection with the sale of a product line in the Surgical Technologies division, costs incurred in connection with the $43 billion acquisition of Covidien plc (which became official on Jan. 26) and the impact of the buyout on interest expense.
The company’s reported net income of $977 million, or 98 cents per share, were up 28 percent and 31 percent, respectively, compared with Q3 2014.
Revenues in the reported quarter grossed $4.31 billion, a 3.7 percent increase year over year (up 8 percent at constant exchange rates, or CER). The top line also surpassed the Zacks Consensus Estimate of $4.26 billion.
International sales (generating 43 percent of total sales) fell 2 percent (up 7 percent at CER) to $1.85 billion in the quarter. Based on Medtronic’s focus on emerging markets, revenues from these regions experienced continued growth momentum and increased 6 percent (rising 12 percent at CER) to $542 million. This region now accounts for 12.6 percent of the company’s total revenue.
"Q3 was a strong quarter, with revenue growth well above our outlook range for the fiscal year and exceeding our mid-single digit baseline goal. All three legacy Medtronic groups contributed to our performance," said Omar Ishrak, Medtronic plc chairman and CEO. "Our teams are executing on product launches around the world, and our customers are responding to our healthcare solutions that seek to demonstrate both clinical and economic value."
Segment Details
Prior to the merger, Medtronic Inc. generated revenues from three groups: Cardiac & Vascular Group (CVG), Restorative Therapies Group (RTG) and Diabetes Group.
The Cardiac and Vascular Group comprised Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, and Aortic & Peripheral Vascular divisions. On the other hand, the Restorative Therapies Group included the Spine, Neuromodulation and Surgical Technologies segments while the legacy Diabetes Group included the Intensive Insulin Management, Non-Intensive Diabetes Therapies, and Diabetes Services & Solutions divisions.
Cardiac Rhythm & Heart Failure sales jumped 7 percent (up 12 percent at CER) to $1.269 billion. Revenues at High Power increased 4 percent at CER to $650 million. Strong market acceptance and share gain of the Viva XT CRT-D, with its AdaptivCRT algorithm and Attain Performa quadripolar lead, contributed to the improvement, the company claims.
Meanwhile, Low Power revenues stood at $489 million, up 17 percent at CER on the strong ongoing global release of the Reveal LINQ insertable cardiac monitor. AF & Other revenues reached $130 million, climbing a substantial 30 percent compared with Q3 2014, owing to solid growth in Arctic Front CryoAblation System.
Coronary revenues slipped 2 percent at CER to $407 million. Late in the third quarter, Medtronic launched the Resolute Onyx drug-eluting stent in the international markets. Structural Heart recorded revenue growth of 22 percent (to $330 million) at CER. Strong Structural Heart sales were supported by strong domestic performance of the CoreValve transcatheter aortic heart valve.
At the Aortic & Peripheral segment, sales reached $218 million, swelling 5 percent at CER. The strong sales in Thoracic and the launch of the Endurant 2S AAA stent graft contributed to growth in Aortic. Executives said the IN.PACT Admiral and Pacific drug-coated balloons continued to deliver strong growth in the international markets in Peripheral. The company currently is working on the commercial launch of the IN.PACT Admiral in the United States.
The sluggish trend for Spine persisted and translated into a 1 percent drop (up 2 percent at CER) in revenues. Core Spine revenues rose 1 percent while the bone morphogenetic protein or BMP increased 9 percent, offsetting the flat Interventional Spine business outcome.
Meanwhile, Surgical Technologies revenues grossed $418 million (ballooning 11 percent at CER). Revenues at Neuromodulation came in at $487 million (jumping 5 percent at CER) while Diabetes grossed $449 million, a 6 percent increase at CER.
Gross margin during the reported quarter contracted 90 basis points (bps) to 73.9 percent. Adjusted operating margin however, expanded 12 bps year over year to 30.2 percent, with a 2.3 percent increase in selling, general and administrative expenses (to $1.487 billion); a 3.6 percent improvement in research and development expenses (to $373 million) and a 47 percent plunge in Other expenses to $24 million.