By Jeanne Whalen And Chelsey Dulaney
Medtronic PLC reported 28% net income growth in its last quarter
before completing its $43 billion acquisition of Covidien PLC,
buoyed by sales of cardiovascular devices but hit by the strong
U.S. dollar.
The medical-device maker said it expects the combined company to
deliver revenue growth in the mid-single digit percentage range in
fiscal year 2016 and beyond. If current exchange rates remain, the
strong U.S. dollar will reduce sales by $1.2 billion to $1.4
billion for fiscal year 2016, and earnings by 30 cents to 40 cents
a share, the company said.
Chief Executive Omar Ishrak said Medtronic is starting to
deliver on cost reductions it promised from the Covidien
acquisition, including plans for job cuts in administrative and
back-office functions. But he said he wouldn't make big changes too
quickly in the two predecessor companies' sales strategies.
"We don't want to risk any distractions through any complicated
cross-selling methods," or from changes to sales-force incentives
in the short term, Mr. Ishrak told analysts on a conference call.
"The risk of distraction and losing momentum in those areas can be
very high."
The Covidien deal, which combined two of the world's largest
surgical-implant and hospital-supply companies, closed in late
January after drawing scrutiny over a tax-lowering tactic
criticized by U.S. government officials. The acquisition involved
Medtronic reincorporating from Minneapolis to Dublin, a so-called
inversion deal that lowers the company's tax burden.
One large benefit of the deal for Medtronic comes from its
ability to use more of its overseas cash in the U.S. without
incurring U.S. taxes. Now that the deal has closed, about 60% of
Medtronic's cash flow will be available for use in the U.S. without
incurring U.S. taxes, versus about 35% before the acquisition,
Chief Financial Officer Gary Ellis said during Tuesday's conference
call.
Mr. Ellis said that percentage could grow to 65% to 75% of
Medtronic's cash flow over time, as the company shifts where its
cash is being generated.
In an interview, Mr. Ishrak said Medtronic is aiming to boost
its annual sales growth in emerging markets to 15% at constant
currency rates, from the current 12%. The Covidien acquisition will
help by giving the combined company access to more emerging markets
and making it less reliant on China, he said. Medtronic also aims
to boost revenue in these markets by selling more of its products
directly, rather than through distributors, he said, and by
striking more partnerships with hospitals and governments. In one
example in India, Medtronic is working with hospitals to organize
cardiovascular-disease screening for the local population, and
training physicians how to follow up with patients who need care,
Mr. Ishrak said.
For the fiscal third-quarter ended Jan. 23, Medtronic reported
earnings of $977 million, up from $762 million a year earlier.
Per-share earnings were 98 cents a share, up 31% from 75 cents a
year ago.
Revenue grew 4% to $4.32 billion. Excluding a $158 million
negative impact from currency fluctuations, revenue grew 8%.
Medtronic's sales of implanted cardiac defibrillators, or ICDs,
have been hurt recently by competitive pressure from Boston
Scientific Corp. and St. Jude Medical Inc. Medtronic received U.S.
regulatory approval in August for a new type of defibrillator that
it says reduces side effects, and which analysts expect will help
the company better compete.
Write to Jeanne Whalen at jeanne.whalen@wsj.com and Chelsey
Dulaney at Chelsey.Dulaney@wsj.com