Medtronic Shares Fall on Weak Operating Margins and Forecast

  • Foreign exchange rates, Bellco purchase costs hurt margins
  • Fiscal 2017 earnings forecast on low side of expectations

Medtronic Plc, the world’s biggest maker of heart-rhythm devices, forecast fiscal 2017 earnings at the lower end of analysts’ expectations and said quarterly operating margins missed predictions, sending shares lower.

Shares fell 1.5 percent to close at $80.48 in New York after the company forecast fiscal 2017 earnings of $4.60 to $4.70 a share, compared with the $4.70 average of estimates from analysts surveyed by Bloomberg. A handful of items, including foreign exchange rates on inventory, disposal of obsolete products and charges related to the purchase of Bellco, a privately-held dialysis company, hurt fourth-quarter operating margins more than anticipated, Chief Financial Officer Gary Ellis said.

Profit excluding one-time items was $1.27 a share for the period ended April 29, the Dublin-based company said Tuesday in a statement, beating the $1.26 average of analysts’ estimates gathered by Bloomberg. Doctors favored its redesigned pacemakers and implanted defibrillators, making its biggest division also one of its fastest-growing.

After several years of struggle in a market that has been flat or shrinking, sales in Medtronic’s cardiac rhythm and heart failure unit rose 7 percent to $1.5 billion in the quarter. Demand for the company’s stents used to clear clogged arteries in the brain, which have offered a breakthrough in treating stroke, and diabetes products also drove sales as health reform increased coverage rates in the U.S.

New Products

“Overall health-care demand in the U.S. is something that is on an upward trajectory,” as the population ages and the Affordable Care Act has increased access to insurance, Chief Executive Officer Omar Ishrak said on a conference call.

Medtronic has focused on rolling out next-generation products, including a pacemaker that sits entirely in the heart and a replacement aortic valve that, unlike similar devices, can be adjusted during implantation. The company said it also exceeded its cost-cutting goal for the year related to the acquisition of Covidien Plc in January 2015 and has closed on 14 additional acquisitions worth $1.5 billion in the past year.

“We’ve got strong access to free cash flow and we intend to continue the way in which we are doing acquisitions,” Ishrak said in an interview. “Our different business groups will continue to do tuck-in acquisitions to help us sustain our short and long-term growth.”

Key financial metrics for the fourth-quarter include:

  • Net income totaled $1.1 billion, or 78 cents a share, compared with a $1 million loss a year earlier
  • Sales rose 3.6 percent to $7.57 billion from $7.3 billion a year earlier
  • Cardiac and vascular sales rose 5.4 percent to $2.74 billion
  • Minimally invasive therapies revenue rose 3.1 percent to $2.5 billion
  • Restorative therapies sales rose 1.1 percent to $1.8 billion
  • Diabetes revenue rose 6.2 percent to $496 million
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