Medtronic plc (MDT) Q4 2012 Earnings Report, Transcript and Summary

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Medtronic Fourth Quarter Earnings Release Conference Call. [Operator Instructions] Thank you. It is now my pleasure to hand the program over to Mr. Jeff Warren. Please go ahead.

Thank you, Christie. Good morning, and welcome to Medtronic's Fourth Quarter Conference Call and Webcast. During the next hour, Omar Ishrak, Medtronic Chairman and Chief Executive Officer; and Gary Ellis, Medtronic Chief Financial Officer, will provide comments on the results of our fourth quarter and fiscal year 2012, which ended April 27, 2012. After our prepared remarks, we'll be happy to take your questions. First, a few logistical comments. Earlier this morning, we issued a press release containing our financial statements and our revenue-by-business summary. You should also note that some of the statements made during this call may be considered forward-looking statements and that actual results might differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC. Therefore, we do not undertake to update any forward-looking statement. In addition, the reconciliations of any non-GAAP financial measures are available on the Investor portion of our website at medtronic.com. Finally, unless we say otherwise, references to quarterly or annual results, increasing or decreasing, are in comparison to the fourth quarter and full year of fiscal year 2011, respectively, and all year-over-year revenue growth rates are given on a constant-currency basis. And with that, I am now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.

Good morning, and thank you, Jeff. And thank you to everyone joining us today. This morning, we reported fourth quarter revenue of $4.3 billion, which represents growth of 4%, with balanced contributions from both our CVG and RTG groups. Q4 non-GAAP earnings of $1,036,000,000 and diluted earnings per share of $0.99 increased 7% and 10%, respectively. Before commenting specifically on our Q4 performance, I would like to recap fiscal year 2012, my first as CEO of Medtronic. Overall, we made progress this year in positioning the company to succeed in the changing healthcare environment. Our constant currency growth improved modestly from 1% in FY '11 to 3% in FY '12. 3/4 of our business posted strong performances, growing a combined 8%. The remainder, consisting of our U.S. ICD and U.S. Spine businesses, declined 10%. While both of these businesses had unique factors affecting their performance, both were showing some signs of stabilization as we exited the year. Looking down the P&L, we grew our operating margins faster than revenue by obtaining some SG&A and R&D leverage while holding our industry-leading gross margins relatively flat. At the same time, we made investments in markets where we see future growth. When I came to Medtronic, I decided that initially our 3 main areas of focus would be accelerating globalization, optimizing innovation and improving execution. We're making notable progress in these areas. First, let's discuss globalization. Our FY '12 international revenue grew 7%, with emerging markets growing 20%. Our team came together nicely, following the global reorganization we implemented in the fall. Over the past year, I've traveled extensively visiting our operations around the world, and I am seeing firsthand the improving alignment between our business units and geographies. Everywhere I go, I'm impressed by our local teams' skill and dedication as well…

Thanks, Omar. Fourth quarter revenue of $4,297,000,000 increased 3% as reported and 4% on a constant currency basis after adjusting for a $42 million unfavorable impact of foreign currency. Q4 revenue results by region were as follows. Growth in Central and Eastern Europe was 27%. South Asia grew 25%. Growth in Greater China was 23%. Middle East and Africa grew 16%. Growth in Latin America was 11%. Asia-Pacific grew 6%, including a 7% growth in Japan. Growth in our Western Europe and Canada region was 4%, while the U.S. grew 2%, which is the highest quarterly growth we have achieved in the U.S. in 2 years. Emerging markets grew a combined 20% in Q4 and represented 11% of our total sales mix. Q4 GAAP earnings and diluted earnings per share were $991 million and $0.94, an increase of 28% and 31%, respectively. After adjusting for certain acquisition-related items, Physio-Control divestiture-related items and net restructuring charges and certain litigation charges and the noncash charge for convertible debt interest expense, fourth quarter earnings and diluted earnings per share on a non-GAAP basis were $1,036,000,000 and $0.99, an increase of 7% and 10%, respectively. In our Cardiac and Vascular Group, revenue of $2,253,000,000 grew 4%. Results were driven by growth in Coronary, transcatheter valves, endovascular, AF Solutions, renal denervation and Peripheral, partially offset by small declines in Pacing and ICDs. CRDM revenue of $1,295,000,000 was flat. Worldwide ICD revenue of $744 million declined 1%, and we estimate that the worldwide ICD market declined in the mid-single digits. Both the market and our results showed sequential improvement in Q4. In addition, our global ICD share improved on both a year-over-year basis and sequential basis. The combination of our Protecta ICD with its shock reduction and lead Integrity alert technologies, along with a proven long-term…

[Operator Instructions] Your first question comes from the line of Matthew Dodds with Citigroup.

First off on the guidance, the 2% to 4% constant currency, Gary, when you look at the major regions, are you assuming this coming year the U.S. grows a little bit versus really not growing last year? And then what's your assumption for Europe?

Yes, well, overall, in the 2% to 4% assumption we have there, basically, it depends on where you're at in the range. If you're at the higher end of the range, obviously, you would assume a slight growth in the U.S. If you're at the lower end, you're probably assuming that the U.S. is more flat at that point. So low single digits at best for the U.S. Europe, we're assuming basically more kind of what they did during the current year, which is more in the mid-single digits. And obviously, within Europe, that will vary by country. A lot of the Northern European countries are still doing very well, Germany, et cetera. Obviously, some of the Southern European countries, we’re a little bit more cautious about, and that's why we're giving guidance more in the middle -- mid-single digits.

And then just one more question on SYMPLICITY. It seemed like everyone and their mother was launching a renal denervation device at EuroPCR. You paid a lot of money for Ardian. At what point does IP become an advantage for you? Do we have to wait for the U.S? Or is it possible in Europe, we could see some movement on the litigation front?

Let me kind of respond, and Omar might have a comment too. But overall, the -- we have strong IP around Ardian and even some things that we have been doing ourselves. We have strong IP ourselves, plus what we've got with Ardian, both in the U.S. and international. So you should -- we do not -- we won't -- we'll address that as we go forward as far as what other people are launching, but we do have strong IP in both the U.S. and outside the U.S.

I think the only thing that I'll add is just to reinforce that we're investing heavily and are committed to keep our leadership in both our technology, as well as in clinical trials and increasing the number of indications.

Your next question comes from the line of Mike Weinstein with JPMorgan.

First, let me just clear up on the quarter. So the decision intra-quarter to increase the SG&A spend, did that reflect as well the knowledge that your tax rate would come in lower than it did? Because that was the principle delta versus street models was tax, not SG&A.

That's correct, Mike. I mean, we saw 2 things. Obviously, as we were going through the quarter, we saw the uplift occurring very strongly in some of the new product launches. But at the same time, we clarified the sale leaseback strategy and saw that we were going to have more of a benefit on the tax line, gave us an opportunity to invest a little bit sooner than what we had initially thought. And so that's -- that was the plan mid-quarter once we knew that the sale leaseback transaction was going to occur.

Okay, that's helpful. Let me ask a couple of questions about the FY '13 guidance. So number one, how are you thinking about INFUSE and the potential outcomes of the Yale study, one? And two, Gary, I thought we'd see more of a benefit in FY '13 from the exclusion of Physio-Control on the gross margin line. Am I off-base there? But I thought that should be about a 50-basis-point impact.

Well, let me -- just first of all, on the gross margin line as far as the impact from Physio-Control, you're right. Physio-Control had a lower gross margin in general than the rest of the corporation, and so that has been pulled out. And you see even on the results now, where all the years have been restated to include Physio-Control out, so there is a slight positive having Physio come out of the numbers because it's a bit of a lower margin. So -- but overall, we still believe we'll maintain those gross margins even, for example, Q4 here, the 75.9 is still comparable with that FX adjustment versus what we had in Q3 with Physio-Control pulled out. So I mean, the reality is they are comparable. But you are correct, Mike, in that with Physio pulled out, it gives us a slight upward pressure on the margin. On the other hand, some of the things that we've been doing thus far is adding some of the newer products, for example, on Surgical Tech and some of those products grow as that business grows. Those are a little bit lower, below the overall corporation's gross margin. So there's a mix benefit that we're having to deal with as we go forward, but physio did have a benefit on the item -- on the gross margin, excuse me, as far as getting rid of that business. And the other question was INFUSE. On INFUSE, as far as what our assumptions are, what we have assumed is, obviously, that until the Yale results come out that we're going to probably -- until we anniversary really the INFUSE against when it started to fall, we are going to continue to see the financial results of that business being down. The good news is we did see -- as we indicated in our comments, we did see it sequentially kind of flat as far as the absolute number, Q4 versus Q3. But I think it's fair to say, INFUSE will continue to be a drag and a headwind for us, and until we see what the results of the Yale study are. And so right now, it is -- it will continue to be a drag for, at least, the next several months, couple of quarters, until we get the Yale results, and then we'll have to assess after that what the potential impact will be.

I think the main thing that we're looking to here to the Yale studies is that the levels of uncertainty before that are somewhat greater. And we hope the Yale study will clarify things factually and will, at least, make things more certain and predictable.

Your next question comes from the line of Bruce Nudell with Crédit Suisse.

Just several -- one very quick housekeeping item. Was there an extra day in the quarter? The next one is the renal denervation deluge at PCR almost suggested that SYMPLICITY is obsolete, and x U.S. with the IP is more of a problem probably. How do you expect to respond to that? And then the advanced study looked solid on the top line, but the pacer issue remained, even with the ACCU TRACK, and there was the French registry suggestion there's more paravalvular leak with CoreValve, at least, with the transfemoral approach. Just any responses to that stuff?

All right. I think there was 3 questions there, but I'll try to get through all of them quickly here. As far as extra day, easy answer there is no. We have same day -- number of days as the prior year. With respect to Ardian and our SYMPLICITY product line, yes, we-- there are a lot of people, obviously, trying to enter this market. We have been in the market. We feel good about where we're at with our product line. I think it's fair to say you should assume that, that's not our -- going to be our only generation. We are looking for enhancements to the product as we go forward, too, and especially with our catheter-based technology and our -- overall, we feel very, very strong about that. Mike will go in more detail next week at the Investor Conference and walk you through kind of exactly what's happening with that business, but the reality is we feel very good about our competitive position. But we've said all along, we knew there would be competition trying to come into this market place that highlights the strength of the potential benefit in this market and the industry in general. And the reality is, as we try to get reimbursement set up, having a few more competitors, helping us with that burden is not necessarily a bad thing. But we feel good about our competitive position and our IP position as we go forward, and we feel very good about our technology. With transcatheter valves, I'm not the one to get real specific about what's happening with the technology part. All I can -- on the pacing issue, we are continuing to focus on that. The focus on the pacing issue that's been out there, the reality is it hasn't impacted anything in the marketplace. We continue to take share in the marketplace, and we continue to work to improve that to have an effect -- minimize that effect if we can as we go forward, which we think we can do. On the other hand, it clearly has not impacted the product line in the marketplace at this point in time, and we feel good about the technology with our transcatheter valve technology.

Your next question comes from the line of Bob Hopkins with Bank of America.

So first, just a follow-up on 2013 guidance. Given that going back in the last year or 2, obviously, ICDs and Spine have been the things hampering your growth the most. I was wondering, can you give us a sense in your 2013 guidance what are you assuming for the ICD and Spine kind of market growth rates? And then growth rates for Medtronic specifically?

Well, let me take a shot at that. This is Gary, and then Omar can maybe add some comments as he gets into it all -- overall also, as you indicated. By the way, I want to clarify one point that I did have in the commentary related to the guidance. I mentioned the foreign exchange impact were up by '13, and I said $330 million to $337 million. That should have been $330 million to $370 million. So I just wanted to clarify that, Bob. It wasn't one of your questions, but I'll throw it in here. With respect to your question about the guidance on the 2% to 4% and what our assumptions are, that -- as we indicated in our comments, that assumes overall that the market kind of grows in that low single digit, kind of 2% to 3% range in general for all of our product lines. That's a little bit faster, slightly faster than what we saw in the current year, and that primarily reflects the fact that we would expect to see some improvement, as we’ve indicated, in the U.S. ICD market as we've seen that stabilizing. Overall, again, obviously, our Q4 results were very strong. And if that trends would continue, we would probably at the higher end of that 2% to 4% even revenue guidance that we've provided. Our point is what we're trying to do on the guidance is just highlight the fact that, as you indicated, we did see some volatility in these markets in the last year. And until we see more stabilization and a continued stabilization really in the ICD and Spine markets, we don't want to get too far ahead of ourselves in the guidance, but basically, this assumes -- this guidance right now would assume that overall, the spine markets, for example, would continue to be down slightly, and we'd be down low- to mid-single digits. That's including INFUSE, obviously, in there, and that our ICDs, again, the market is flat to slightly down, and we'd be the same way, flat to slightly down in -- on the ICDs.

Okay, great. That's very helpful. And then just some quick follow-ups. Gary, can you just help us add up all the guidance you gave on the various line items? And what are you assuming overall for operating margin leverage in 2013? And then for Omar, can you just give us a quick comment on the Analyst Day and what we should expect, especially as it relates to any thoughts you might provide on aspirational growth goals going forward and anything you'd like to highlight about what we should be looking forward to on the Analyst Day?

Yes, let me address just quickly the -- our assumptions for next year. We are assuming some operating leverage, obviously, with a 2% to 4% revenue growth and then earnings per share growing 5% to 7%, even with the share buyback that we would continue to do. We are assuming that there is operating leverage, primarily in the SG&A line, as we indicated in the comments. We're assuming that gross margin basically stays relatively flat with our -- that we can offset the price erosion with the product take -- the cost takeout that we've been continuing to do. And that R&D is actually relatively flat also versus what we have in the current year. So our assumption for next year is SG&A does improve, as we indicated in the comments, 30 to 50 basis points of kind of an improvement overall. And that would be then the operating leverage we would also see. Now at the same time, we're also on the other income and expense line item, having to offset the medical device tax. So even just achieving some leverage of 30 to 50 basis points on the operating margins, we feel pretty strongly, that's pretty good results in this environment with pricing pressures and taking on some additional costs on the med device tax issue. Omar?

Yes. Regarding the Investor Meeting, we're pulling together a pretty good meeting for you. Some things will be the same, as you've experienced before, in the sense that we’ll give you a pretty good walk-through of our product pipeline and technologies, and Mike and Chris will go through that in a fair amount of depth. But in addition, we will also be discussing with you how we are repositioning the company to participate in the changing environment and particularly around how do we translate our focus in economic value to real programs, to real decisions and eventually sustainable growth and why that's so important. The other thing we’ll give you details of is, obviously, our globalization strategy and we're really excited about that, and we want to share with you, again, details around that. So that will be the net mix of it and, overall, details around our strategic changes, as well as depth in our product pipeline.

Your next question comes from the line of Kristen Stewart with Deutsche Bank.

Just a follow-up on Bob's. So it sounds like you will not be giving any sort of longer-term growth goals at the Analyst Meeting?

Kristen, this Gary. I mean, no, I mean, we'll obviously talk about our -- we're giving guidance for FY '13, and we'll walk through that again. I mean, we'll get into some of the things as far as where we think some of the markets are going and what we believe that long-term we could see in some of these objectives and even aspirationally what we'd all like to see as far as when these markets return back. But we're not going to get into long-term guidance right now. I mean, these markets are just too volatile. It's hard to predict even kind of a year out, let alone to give more guidance past that.

Okay. And then just to go back to your comments on gross margin, can you just repeat the guidance for the year on the gross margin line? And I think you had said that was on an operational basis. So is that just, I guess, excluding FX? And what sort of impact would we expect to see if we look at gross margins on a more reported basis?

Yes. I mean, right now, we would say 75.5% to 76% on the gross margin, which is kind of consistent with where we're at in the current year, and we expect to be able to maintain that. And based on where we're currently at, I -- we're probably right in that range still. Obviously, based on the foreign exchange, where the foreign exchange rates would be at, we'd probably be towards the lower end of that range just as we saw this quarter, where we were at more 75.6% because of the negative FX impact aspect of it. If FX currency would happen to turn around and go a little bit more the other way, you could be at the higher end of the range. So it's really more within that range. It's consistent. It just depends on what -- whether you're at the higher or the lower end depends on what happens with the FX rates.

And then just the MedTech tax, that's going to be in other operating expense. A lot of your competitors have said that they expect it to be more within SG&A. Can you maybe just help us understand, I know it's just for one quarter in FY '13, but just kind of what the quarterly run rate is going to be both from a pretax and post-tax basis?

Yes. As we’ve said over -- as we go forward, obviously, first of all, these rules are still getting developed, and so the regulations are not final yet. And even where you actually account for this is not final. There's been a lot of debate back-and-forth between SG&A and other expense. Right now, our assumption is other expense and -- but we'll have to firm that up as we obviously work with this with our -- with the accountants and everybody else. We're obviously the first ones who will be having it, and so that's where we'll have to make sure we get that resolved as we go forward. As we've indicated previously, the overall impact for a full year, we still estimate -- and there's still a big range on this because it is still not clear exactly what is in and out on the revenue side of the equation. But we're expecting a 12-month impact of about $120 million to $150 million, somewhere in that range. So for 4 months, which is what we’ll be covered with for the current -- for FY '13, we have about $40 million to $50 million assumed in our guidance related to FY '13. And as you indicated, it's in that other income and expense line item.

Your next question comes from the line of David Lewis with Morgan Stanley.

Just 2 quick questions, 1 for Gary and 1 for Omar. Gary, thanks for giving us the guidance for the next 5 years in the $1 billion cost restructuring program. I guess, can you just help us understand for this coming year fiscal '13 sort of what are you assuming for price in some of your major franchises, whether that’d be DES, CRM or Spine? If we can't get an absolute basis, just on a relative basis, does sort of fiscal '13 guidance assume price pressure stable with '12? Or does it assume some acceleration versus '12? And as you think about the next 5 years and the $1 billion program versus the last $1 billion program, do you kind of assume similar-type pricing declines? Or do you assume an acceleration in the pricing environment?

Well, overall, I'll just -- as far as the pricing assumptions overall, we're assuming that for FY '13 and as we go forward, the pricing pressure remains somewhat consistent with what we saw, obviously, in FY '12. That will vary by business as we go forward. For example, we have seen some stabilization even, for example, in drug-eluting stent pricing in the U.S. And so maybe that's not going to be quite as extreme as it was in FY '12. On the other hand, you could see continued pressure in other product lines. So our assumption, as we do this, is that you -- again across all of our business, you were probably kind of seeing that in the range of 2% to 3%. But as you know, it varies dramatically between businesses, whether it's drug-eluting stents to obviously some product lines continuing to see price uplifts. And new technology, obviously, gets price uplifts as we continue to see that. So we're assuming it's somewhat consistent with FY '12, not dramatically different than that in that it would continue. And then as a result of that, we do believe that our $1 billion -- over $1 billion cost-out program, going forward, will allow us to continue to maintain kind of the gross margins of where we've been at. Now you should -- I want to make it clear, that's kind of what we're committing to right now on the $1 billion. We're trying to drive that for even more to give us more flexibility, such that if there was even more pricing pressure, or as Omar has mentioned many times, as we go down into -- as we go focus on even going in the value segment, it gives us the opportunity to even tier our products such that we could have different pricing points as we move forward. So the cost-out program is -- the 25%, we feel very good about being able to achieve that. But we are trying to work this to try to be driving them more than that to give us even more flexibility and potentially offsetting any risks that there might even be more pricing pressure than what we've seen in the current year. But right now, our assumption is that it continues, that we will continue to have pricing pressure. But back to what we've seen historically, we've been able to offset that over the last 5 years, and we believe confidently we can continue to do that.

Very helpful. And then Omar, maybe just one more quick question for you. You talked about the value segment, I think. I found those comments pretty interesting. I think a lot of investors think about the value segment as an emerging market concept. Maybe you can talk about what does the value concept mean to you in developed markets? And can you start bringing some of these value device type products and commentary into the U.S. market or the developed European market?

I think, absolutely, there's an opportunity for that. I mean, I think if we go aggressively after emerging markets in creating that value segment, that automatically positions us to create products at a lower tier. And we intend to -- as we look at the U.S. and the developed markets, as we see opportunities, especially where there's heavy pricing pressure and the feature sets are not being used and people aren't paying the price for those, we will go into our resources and product lines and the value segment and introduce them in the U.S. and developed markets. But at the same time, we will differentiate them adequately so that the price of our higher-tier products and the value that they generate remain, and -- but we think that as the pressures on cost savings in the developed world and the healthcare systems increase, there will be room for different tiered service lines. And if we can execute well in our global strategy for value segments, this will give us a significant advantage in developed markets.

Your next question comes from the line of Raj Denhoy with Jefferies.

I wonder if I could ask a little bit more on the ICD business. I think it was in the fourth quarter of last year, you saw a pretty big falloff due to a lack of bulk sales. Did you see any reversal of that in the quarter? Or maybe could you describe what bulk sales look like in the quarter?

Yes. I mean, as we indicated in our comments, the reality is, actually, we saw even continued hospital inventory declines. And actually, the bulk purchases are at -- probably at the lowest level we've seen in 3 years overall. So they're actually even lower than what we saw last quarter -- excuse me, last year during this period of time. So that trend continues. I think that's what even our competitors have been indicating that we are seeing hospitals cutting back a little bit more on their inventory levels. And we've seen that over the last several quarters and as you indicated, even last year, we saw it. So that's our point as we highlight this. Even if you take that in consideration, the reality is we thought that we were happy to see the stabilization in the marketplace overall for ICDs, but to take into consideration the fact that, that was going on between ourselves and the competitors. And the fact is the implant rates are even stronger than what the actual results of ourselves -- the entire industry would show.

Okay. And then you gave a little bit of commentary in terms of within the ICD segment where you're seeing strength and weakness, and I think you mentioned, obviously, that you're seeing a little bit on the core ICD business or perhaps a bit weaker on the CRT-D side of it. I think we sort of probably understand why that is, but maybe you could give us a little more clarity around why you're seeing that discrepancy in those 2 segments.

Well, as you imagine, in CRT-D, there's obviously some trialing of a competitor product going on, and so that's clearly had some impact, and we saw a little bit of share their lost. Now that being said, we feel pretty confident that, that -- after that trialing is over, we will get back to more of a normal CRT-D. In fact, in Europe, where we -- obviously, the product’s been in the marketplace for 2 years, we have the same unit share in CRT-D as we had prior to the competitive launch. So I mean, we feel confident. Yes, there's some trialing, and that has had some slight impact on -- in the CRT-D market or segment of the market. But then on the ICD side, we are obviously picking up share based on the strength of our product line and where we're at with some of its benefits. So net-net, overall, our market share has been basically relatively flat, and that's in spite of some of the trialing that's going on with the competitive product.

And in the core business, there were this highly publicized lead issue that one of your competitors is having, have you seen much of a benefit in both your lead sales on the ICD side and then, taking that a step further, the can business as well because of that?

Well, again, we're not going to get into what's going on with competitive product issues. We have, as we indicated in our comments, because the ICDs, we're seeing an increase in replacement on our share. Our replacement units are up, and we are seeing slight increases in our lead ratios as we look at those. So net-net, there's some impact probably in our business. But it's still to be managed through. Obviously, as I had indicated, we're losing a little bit share on the trialing of one product, but we're gaining share in other areas. I'm not going to speculate on how much of that is related to any one item.

Your next question comes from the line of David Roman with Goldman Sachs.

Gary, I was hoping you'd go into a little bit more detail on the opportunistic SG&A spending that you picked up in the fourth quarter of fiscal 2012. As we think about those spending levels, to what extent is that necessary to generate the 2% to 4% revenue growth that you're guiding to in fiscal 2013? And I guess, the follow -- the sort of corollary to that would be how can you -- can you generate SG&A leverage and keep up the top line growth that you're talking about? Or is it sort of circular?

Well, overall, we -- again, the guidance we gave on the 2% to 4% assumes, obviously, we're going to continue to achieve leverage in the SG&A, because that was also in our guidance. So we're assuming we can do both, that we can continue to grow in that range and still achieve leverage on the SG&A. As far as what happened in the quarter here, again, a lot of what we saw was just on the strength of what was occurring already in the revenue. As you can assume, several of the businesses, Coronary, Structural -- excuse me, Surgical Technologies, as we mentioned in the comments, were having very, very strong quarters. Once you have -- you get above kind of your -- the quotas, et cetera, it becomes -- the incentives become very, very high, and they were resuming some very nice commissions and incentive payouts as a result of that performance overall. So that's higher than you would expect. At the same time, because of the benefit we saw on the tax line, as Omar mentioned in his comments and I said the same thing, is we did move some spending forward that we would -- we hired some sales reps that we were expecting to hire in FY '13 anyhow. We got started on some marketing programs with renal denervation. We accelerated some things in emerging markets that were going to occur in FY '13 and would've been in the expense structure that was in my guidance originally. So you shouldn't assume that -- and some of these items, obviously, in the quarter were also more one-time in nature just because of the strong revenue that was in some of the various businesses that won't be there once you have that in the quotas for next year. So net-net, we still feel very confident that even with the spending we saw here in the quarter that we can manage and can achieve the leverage we have for next year, and that should allow us to continue to grow the business, again, based on the 2% to 4% revenue growth.

That's helpful. And then I think during the quarter, you had issued some debt, and I think in the release, you talked about that as a source to fund working capital. Can we just talk about the cash generation from a U.S., o U.S. perspective and to what extent the issuance of debt might become more the norm as you remain committed to that 50% payout of free cash flow in the context of -- for a greater percentage of revenue coming outside the United States?

Yes, well, as we've indicated, and we've been very clear about this overall, our U.S.-OUS cash split, I mean, we generated again about $4 billion of free cash flow in FY '12. Again, 60% to 65% of that is being generated outside of the United States, with 35% to 40% in the U.S. And so when we are returning 50% back to shareholders, by its very nature, which has to come from the U.S. cash piece, that does require us then at this point in time to, obviously, continue to have the debt levels slightly going up in the U.S. while cash builds outside of the United States. So our net cash position improves, but the reality is we are taking on more debt in the U.S. Now it's relatively low levels. The difference I'm talking about here is about $500 million to $600 million per year, which is well within our financial capability to handle. But as we've talked about, we're taking major efforts across our organization to try to say, "How do we get that back more in line? How do we get back to a better split between the U.S. and OUS cash flow generation? And that includes a lot of initiatives underway to improve our working capital, especially inventory and capital expenditures. We have several initiatives underway across the company to drive that down, which should help drive the initiative. And as we talk through some of the comments and Omar's comments, we are focusing on shifting expenses to outside the United States where we can use that OUS cash. And so we are, in Spine, for example, we are doing R&D and manufacturing in other locations. We are shifting some of our marketing expenses even on the restructuring charges we talked about earlier. Some of what's going on here is we're shifting resources from the U.S. market to the markets that are growing. And so you are going to see a natural shift of some of those expenses outside the United States that will also help the issue. But currently, it is clearly -- creates a situation where we're having to borrow somewhat to continue our 50% commitment.

Your next question comes from Michael Matson with Mizuho Securities.

Yes, so I guess I just had a question on the Resolute Integrity launch. One of your competitors has talked about some trialing of that product going on, and obviously, you had a really strong quarter. But I'm just wondering to what degree do you think that, that type of sales trajectory is sustainable here. And then my second question would just be on the S-ICD product. What are your thoughts on that? What's the potential impact? And is that something that you're working on internally as well?

Okay. Well, with respect to Resolute Integrity and the strength there, obviously, we were very, very pleased with the launch and whenever you can double your share in effect in basically less than a couple of months, and right now, we are still probably only in probably 50% of the accounts that we'd like to be at this point in time. So it's still expanding quite dramatically as we go forward. So there is always -- with any product launch, there will be some who will trial it and might go back to other product lines. But the point you have to remember is this product line has performed well outside the United States. And we've seen people, obviously, try it and stay with it. And it's one of the leading products out -- has one of the leading shares outside the United States where it's been launched. And so as we've indicated before, we have every expectation that this product line, which is very, very competitive, it has on deliverability and, as we indicated, the diabetes indication, several things that are in its favor that it will also continue to be a well-accepted stent in the U.S. marketplace. And as we indicated, actually, the share came very quick, but we're not stopping there either. We believe that we still have opportunities with respect to this, and we think it's a very competitive product and will be one of the leading market share products in the U.S. as we go forward too.

I think if I can just add a few words to that. I think we're only getting started in leveraging our CVG sales force, and we're getting traction from that already, and we expect that to accelerate as we go into accounts with our full value proposition of all our products. We think we've got significant growth ahead of us with that, and Mike will share that with you -- that strategy with you in greater detail at the Investors Conference next week.

And then your second part of the question related to, in effect, I'm assuming you're talking about Cameron Health product line that's out there, and Mike will also talk a little bit -- can talk about that more at the Analyst Meeting in more detail. But we really do see that it's kind of a niche kind of a product line that -- this is obviously the first-generation product that's coming forward. And there's a lot of other features that are in the current ICDs as far as PainFREE termination and pacing are kind of a standard part of it, and why you would want to give up on that, we have a question mark on that. But we're watching the market. We'll see how it plays out. But right now, we think it's more of a niche market.

Your next question comes from the line of Rick Wise with Leerink Swann.

Omar, just a bigger picture question. You highlighted how pleased you are at the impact of the team reorganization, and you indicated you're surprised about -- separately at the opportunity to leverage existing products. Could you expand on this a little more? And am I right in reading this that sort of a year into your role at Medtronic that you're feeling more confident about driving gradually accelerating growth and steadily sustained or improving margins? Just any larger perspective on that?

No, I think you're right. I think our strategy is to execute and to gradually increase our growth levels, but we'll take that a step at a time. We intend to align our strategies with the market realities, and that takes a little time. And when we've completely aligned them, we feel we can get sustained growth because there's growth available in healthcare. And an example of that process is exactly what you mentioned in our globalization effort, where we find that there’s short-term growth available, simply by investing in market creation of existing products, which have high penetration rates in developed markets and have very low penetration rates amongst the affordable population of emerging markets. And by investing in addressing those barriers, we think we can get quick grow, and we're already beginning to see that in emerging markets. And longer-term, we use our cost reduction strategies in our products to create a value-tiered segments, which increases our penetration levels in emerging markets. And at the same time, as was pointed out earlier, we can leverage that capability to come back to developed markets and address the cost issues that are going to emerge in developed markets, and those pressures will increase. So what you'll see from us is a gradual realignment of our business in a step-by-step basis because a lot of things that we do today are of value. We have a product pipeline that's very exciting, and we think we can win in that space. And at the same time, we adjust our overall strategies to adjust to the new market realities that are happening, and we have to understand those, participate in those and lead those changes, and that's the way in which we'll grow and win in the future. Okay, well, thank you very much for your questions. And before I end today's call, I would like to remind you that we will host our Investor Conference next week on June 1 in New York. We look forward to discussing the progress we're making at the company to position ourselves to win like we just mentioned. And with that and on behalf of our entire management team, I'd like to thank you again for your continued support and interest in Medtronic.

This does conclude today's conference call. You may now disconnect.