Medtronic to Cut Jobs

Despite double-digit earnings in the third quarter, Medtronic Inc. plans to cut jobs.

Fiscal third-quarter earnings climbed 11% (in part thanks to lower taxes, company executives said), but the Minneapolis, Minn.-based medical device giant plans to reduce its workforce by 4-5 percent in the current quarter—roughly 1,500 to 2,000 jobs—due to slower growth in some of the device markets the company serves.

“It could have an impact in terms of not needing as many employees in certain areas,” CEO Bill Hawkins said in an interview with the Wall Street Journal. The cuts will be company-wide, with a primary focus on administrative, back-office costs. Executives provided limited details about expected costs, benefits or targeted areas, but aim to “balance operations” so that they are “in line with market conditions.”

In the recent quarter, Medtronic’s business for heart-rhythm devices shrank slightly, while growth in spinal devices improved, though it remains just below the overall company growth rate. Heart rhythm and orthopedic account for the bulk of Medtronic’s sales. Company officials claim that there are several new products in the pipeline to help the firm combat market-share challenges and pressure on product prices as a result of tougher bargaining from hospitals. But growth rates for top markets where Medtronic operates remain sluggish and continue to challenge the whole industry.

Hawkins announced plans to retire at the end of the fiscal year in late April. Industry analysts and even come company insiders believe his departure could bring a more competitive shakeup of the company’s product portfolio. Some expect more cost-cutting from a new chief executive.

Medtronic has added to its product pipeline through smaller-scale acquisitions, such as last year’s acquisition of heart valve maker ATS Medical for $370 million. In addition, Medtronic has been planning to divest its Physio-Control external defibrillator business for four years. The sale was postponed due to quality issues, but Hawkins recently confirmed that plans for the sale are on again.

Medtronic reported earnings for the quarter ended Jan. 28 of $924 million, or 86 cents a share, up from $831 million, or 75 cents a share, a year ago. Sales of $3.96 billion were up 2.9 percent, compared with analysts’ forecast for $3.97 billion.

Heart-rhythm sales declined 2 percent to $1.2 billion, reflecting lower sales of both pacemakers and defibrillators. The overall market for those devices remains soft, but Medtronic is expecting a benefit from pacemakers the U.S. Food and Drug Administration (FDA) recently cleared that are designed to be safe in MRI scans. The company continues to wait for a key, new defibrillator product, but it remains held back by a warning letter the FDA issued the company in late 2009 due to quality-systems issues. Hawkins told the WSJ that he remains optimistic this would get resolved “sooner rather than later.”

Sales for the Medtronic’s spinal and biologics unit rose 2.3 percent to $861 million, marking an improvement after declines in recent quarters. Medtronic is also rolling out new products in that business, although the overall market has been pressured by price declines and insurers pushing back against certain procedures.