3rd UPDATE: Medtronic 4Q Profit Falls 19% On Charges
May 24 2011 - 3:41PM
Dow Jones News
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 continuing 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 rising technology like catheter-delivered heart valves
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 0.6% to $41.02.
"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. Medtronic also
highlighted the fact that sales of new technologies and in emerging
markets grew more than 20%. Hawkins has made expansion in emerging
markets a priority, and Ishrak is expected to further that
effort.
"The overseas business is the reason we own the stock," said
Charlie Smith, who manages the Fort Pitt Capital Total Return Fund,
which holds Medtronic shares.
The company's domestic business for implantable defibrillators
struggled, with U.S. sales of the heart-shocking devices falling
25% to $425 million. Medtronic faced tough comparisons after
getting 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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