2nd UPDATE: Medtronic 4Q Profit Falls 19% On Charges

Medtronic Inc.'s (MDT) fiscal fourth-quarter earnings fell 19%, hit by restructuring costs linked to recent job cuts, while sales edged higher despite a drag from continued growth challenges in markets for implantable defibrillators and spinal devices.

The domestic defibrillator market appears particularly soft, and Medtronic said a medical study that showed patients often get implants when they fall outside medical guidelines is taking a toll while an ongoing government probe regarding defibrillator implants adds pressure. Medtronic also noted ongoing growth challenges in the U.S. market for spinal products.

The largest stand-alone medical-devices company still managed to post better quarterly sales than Wall Street expected, thanks to growth among new products and in emerging markets, but its earnings missed analysts expectations. Medtronic also set a weaker-than-expected earnings target for the just-started fiscal year while citing expectations for tepid growth in medical-device markets.

Medtronic shares recently traded down 1.7% to $40.55.

"It's a continuation of the story that we've seen with Medtronic for the last several years," said Aaron Vaughn, an Edward Jones analyst. "Their two largest businesses are facing significant pressures."

This is a common theme within the $200 billion medical-devices sector, where companies are looking for new ways to grow as mature markets for heart and orthopedic devices slow amid pressures like sliding product prices and more aggressive bargaining from hospitals. A big question for Medtronic is whether incoming Chairman and Chief Executive Omar Ishrak will stick with a recent game plan of adding new technology through deals and internal research, beefing up exposure to emerging markets and cutting costs, or will more dramatically shake things up.

Ishrak wasn't on Tuesday's call, though, because the General Electric Co. (GE) veteran isn't starting until next month. Medtronic named a replacement for retiring CEO Bill Hawkins a bit later than first expected, and Hawkins wasn't on the call, either.

Chief Financial Officer Gary Ellis said Ishrak supports the new guidance, but that it came from Medtronic management and the board.

For the quarter ended April 29, Medtronic reported a profit of $776 million, or 72 cents a share, down from $954 million, or 86 cents a share, a year earlier. Excluding items including restructuring charges in the recent quarter, earnings were up at 90 cents a share from 89 cents a share.

Analysts surveyed by Thomson Reuters had forecast, on average, earnings of 92 cents a share in the recent quarter.

Medtronic's restructuring charges are linked to the recent elimination of 2,100 positions, above a job-cutting forecast first made in February. Medtronic on Tuesday said these cuts would lead to $225 million to $250 million in annual savings.

Sales in the recent quarter rose 2.4% to $4.3 billion, helped by favorable foreign currency exchange rate.

The company was helped by better-than-expected results in its Cardiovascular business unit, plus improved sales of devices for treating diabetes and neurological issues.

The company's domestic business for implantable defibrillators struggled, however, with U.S. sales of the heart-shocking devices falling 25% to $425 million. One issue was tough comparisons because Medtronic got a $70 million boost last year when rival Boston Scientific Corp. (BSX) temporarily halted U.S. sales due to a regulatory paperwork issue.

CFO Ellis also said the impact from January's unfavorable medical study and the ongoing DOJ probe of hospitals "has been worse than the industry and we anticipated," although he continues to believe patients are having implants deferred more than cancelled. He also said Medtronic did fewer bulk purchase deals in the quarter in part because it's taking a firmer stance against discounting new products.

Medtronic recently rolled out new defibrillators and pacemakers with special features and expects these devices to trigger market-share and pricing benefits.

Spinal sales edged lower in the recent quarter amid a mix of weaker U.S. sales but stronger international sales.

Looking ahead, the company forecast earnings in a $3.43 to $3.50 per-share range for the recently started fiscal year, including 4-cent to 6-cent dilutive impact from an acquisition. Analysts had forecast higher earnings of $3.62 for fiscal 2012.

Medtronic forecast its sales will grow 1% to 3% excluding the impact of currency, which is expected to boost sales based on current exchange rates. JPMorgan calculated that Medtronic's sales view is mostly below Wall Street's expectations.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

--Tess Stynes contributed to this article.

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