Source: Seeking Alpha
Medtronic, Inc. (NYSE:MDT)
Q1 2015 Earnings Conference Call
August 19, 2014 08:00 AM ET
Executives
Jeff Warren – IR
Omar Ishrak – Chairman and CEO
Gary Ellis – CFO
Mike Coyle – President of our Cardiac & Vascular Group,
Chris O’Connell – President of our Restorative Therapies Group
Hooman Hakami – President of our Diabetes Group
Analysts
Mike Weinstein – JPMorgan
Matthew Dodds – Citi
David Lewis – Morgan Stanley
Kristen Stewart – Deutsche Bank
Bob Hopkins – Bank of America
Bruce Nudell – Credit Suisse
Matthew Taylor – Barclays
Josh Jennings – Cowen & Company
Larry Biegelsen – Wells Fargo
Operator
Good morning. My name is Vanessa and I will be your conference operator today. At this time I would like to welcome everyone to the Medtronic First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions).
Thank you. I would now like to turn the call over to Mr. Jeff Warren. Please go ahead sir.
Jeff Warren
Thank you, Vanessa. Good morning and welcome to Medtronic’s first 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 fiscal year 2015 first quarter which ended July 25, 2014. After our prepared remarks, we will 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 Investors portion of our website at medtronic.com. Also, unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal year 2014 and all year-over-year revenue growth rates are given on a constant currency basis. And finally, today’s earnings call does not constitute an offer to sell or the solicitation of an offer to buy any securities or solicitation of any vote or approval.
In connection with the proposed Covidien transaction, Medtronic Holdings Limited has filed with the SEC a registration statement on Form S-4 that includes a preliminary joint proxy statement of Medtronic Inc. and Covidien plc that also constitutes our preliminary perspectives of new Medtronic. The registration statement is not complete and will be further amended. After the registration statement has been declared effective by the SEC, the final joint proxy statement perspectives will be mailed to Medtronic shareholders and Covidien shareholders. You should review materials filed with the SEC carefully as they will include important information about regarding post transaction including information about Medtronic and Covidien, the respective directors, executive officers and certain other members of management and employees who may be deemed to be participants in the solicitation of proxy in favor of the proposed transaction.
Please also review the disclaimer page at globalmedtechleader.com for additional information on forward-looking statements and other important information on the proposed transaction. With that, I am now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.
Omar Ishrak
Good morning and thank you, Jeff, and thank you to everyone for joining us today. This morning we reported first quarter revenue of $4.3 billion, which represents growth of 4% and Q1 non-GAAP diluted earnings per share of $0.93, growing 6%. Our Q1 revenue growth is in the middle of our outlook range for the year and within our mid-single-digit baseline goal. Our overall organization again delivered balanced growth with strong performances in some areas offsetting challenges in other parts of our business. Significant this quarter was our performance in the U.S. where we grew 6%, the highest growth in this region for five years. We believe mid-single-digit growth in the U.S. can be sustained over the coming quarters based on the momentum of our new products.
Therapy innovation contributed over half of our global growth this quarter. When combined with our focus on globalization and economic value, further enhanced by our pending acquisition of Covidien, we are well positioned to further improve our competitive position and long-term growth profile. As we have done previously, we intend to quantify, communicate, and execute in each of our independent growth vectors. Our new therapies growth vector contributed 200 basis points to our overall growth in Q1, which was well within our previously stated expectations of 150 basis points to 350 basis points.
As I mentioned earlier, execution on several key new product launches helped drive growth this quarter. And looking ahead, we believe our robust pipeline will contribute significantly to our future growth.
Starting with the cardiac and vascular group, our Reveal LINQ miniaturized cardiac diagnostic monitor along with strong above-market performance in AF Solutions are driving clear growth acceleration. This helps propel our cardiac rhythm and heart failure business to 4% growth, a level of performance that we have generally not seen since the core implantables markets slowed down four years ago.
Over the past few years, the cardiac rhythm and heart failure team has systematically executed on a strategic plan delivering multiple new attractive growth drivers, including AF and heart failure management products and services, predictive diagnostics and deep miniaturization technologies. All of these growth drivers are clearly resonating in the marketplace more than offsetting pricing pressures in the more mature parts of the business.
Another highlight in Q1 was the strong execution by our structural heart team on the ongoing U.S. launch of CoreValve transcatheter valve. With the patent dispute behind us, our team is now laser focused on what really matters ensuring more patients have access to this life-saving therapy. The early results have exceeded expectations as we have been aggressively opening new accounts and have captured over 40% of the U.S. market in just two quarters of launching CoreValve.
Looking ahead in our Cardiac and Vascular group, we will launch our recently approved Attain Performa quadripolar lead system in the U.S. in the next few weeks, which coupled with our proven AdaptiveCRT algorithm, is expected to improve while U.S. High Power share as it already has in Europe and Japan. We also continue to make progress in a number of other meaningful products in our pipeline, including our SEEQ cardiac diagnostic patch, CoreValve Evolut R Transcatheter Valve, Resolute Onyx drug eluting stent, IN.PACT Admiral drug-coated balloon, and Micra leadless pacemaker. It is worth noting that in Q1, we realigned our four CVG businesses into three business units organized around disease states with a specific focus on comprehensive disease management.
These changes allow us to better capitalize on important trends in our global markets, including the general trend among global reimbursement models to focus increasingly on disease outcomes versus discrete episodes of care, the growing importance of longitudinal patient management in the cardiac rhythm and heart failure space, the increasing level of collaboration between physician specialties and the newly formed heart teams in the coronary and structural heart market, and finally the growing focus on new technologies for peripheral vascular disease management in the aortic and peripheral market.
Turning now to our Restorative Therapies group, strong growth in neuromodulation and solid performance of surgical technologies offset modest decline in spine. In neuromodulation, the RestoreSensor SureScan MRI spinal cord stimulation system and Activa DBS system continued to drive growth. We also saw resurgence of growth in Gastro/Uro due to improved procedure volumes.
In surgical technologies, our team has balanced performance across ENT, Neurosurgery, and Advanced Energy. We are excited about the recently launched NuVent sinus balloon system. NuVent marks our first entry into the attractive sinus balloon dilation market, and we expect it to steadily take share in what is currently a $200 million opportunity. We also strengthened the breadth of our neurosurgical portfolio through the acquisition of Visualase last month. Visualase’s MRI guided laser ablation technology is an important addition to our portfolio of therapies for neurosurgeons and broadens our overall market leading RTG neuroscience portfolio.
In spine, while revenue declined 3%, we believe factors weighing on Q1 were temporary and our plan to return to growth in FY15 remains on track. Spine’s overall performance in Q1 was primarily affected by U.S. core spine which faced short-term pressure from inventory rebalancing and the timing of new product launches. In addition to our recently approved PRESTIGE LP artificial cervical disc, we are expecting to completely refresh our anterior cervical plate portfolio and launch new interbodies with advanced materials and functionality over the coming quarters. Our spine performance was also affected by year-over-year decline in BMP. However, we have not seen four quarters of sequential stability and underlying demand for BMP, which should provide easier comparisons starting in Q2.
In diabetes, the strong U.S. launch of the MiniMed 530G system with Enlite is driving solid double-digit growth in both insulin pumps and CGM. Our focus in selling and supporting the pump and sensor as an integrated system is translating into global share gains in insulin pumps and U.S. share gains in CGM. The MiniMed 530G is the only system in the market that automatically stops insulin delivery if glucose levels fall below a predetermined threshold, an important step towards our goal of developing a fully automated artificial pancreas. Multiple peer-reviewed studies have demonstrated the value of our threshold suspend feature including publications in the New England Journal of Medicine and JAMA. Looking ahead, we are preparing to launch the MiniMed 640G and MiniMed 620G in international markets in Q2.
Our next growth vector, emerging markets contributed 130 basis points to our overall Company growth, which fell 20 basis points short of our minimum 150 basis points expectations. The main issues this quarter were in China and India. Our Greater China region grew 6% as we dealt with some near term challenges in the distributed channel and management changes. We expect China to quickly return to double-digit growth for the remainder of the fiscal year. India also had a difficult quarter declining 7% as we face disruption from distributor terminations and inventory rebalancing. We’re executing a definite plan for optimizing our India distributor channels, but this will take the remainder of the fiscal year before we return to double-digit growth. In both India and China, we are developing direct partnerships with healthcare providers of all sizes. In the long term, this will result in the highest levels of business conduct standards, give us more direct contact with our end customers, and unlock significant margins.
While India and China fell below expectations, our Middle East and Africa region continues to be an impressive source of emerging market growth with the result up 30% in Q1. We have a strong strategic plan in EMEA executing on both large tender wins as well as Channel optimization opportunities. Latin America also had a good Q1 with strong double-digit growth in Brazil, Columbia and Mexico. And in our Central and Eastern Europe region we were encouraged to see that Russia return to growth in Q1.
Despite the short term challenges in certain regions, we remain confident and enthusiastic in the long term outlook of emerging markets. We continue to focus in developing new public-private partnerships. For example, I was recently in China finalizing an agreement with a large sub-province. Over the past nine months, we met frequently with local government officials there, quickly aligning around the need to dramatically increase access to Hemodialysis therapy. Our discussions resulted in the comprehensive partnerships whereby we will manufacture Medtronic Hemodialysis products locally in return for manufacturing and commercial incentives including guaranteed purchases and support for accelerated regulatory approvals.
As we execute in these public and private partnerships, as well as market development and channel optimization strategies, we expect our emerging market growth to steadily improve and consistently contribute to 150 basis points to 200 basis points to our overall growth.
Finally, services solutions are third growth factor, contributed 50 basis points to our overall growth which is within the 40 basis points to 60 basis points annual range that we have targeted. Our Cath Lab Managed services business continues to grow in Europe with numerous long term contract representing over $0.5 million of revenue. We continue to grow this business both within Europe and in other regions around the world and are in discussions with an additional 150 healthcare systems. Our Cardiocom business also continues to deliver strong results, driven in part by growth of over 50% in patient access support services for providers. We view Cardiocom as an important healthcare services platform to deliver comprehensive integrated care solutions in the future.
Turning to the P&L, we made appropriate business trade outs in Q1 to deliver on the bottom line. Non-GAAP EPS growth was approximately 200 basis points above our revenue growth in line with our targeted expectations. In addition, we delivered $1 billion of free cash flow in Q1 after adjusting for certain litigation payments. And we increased our dividend by 9%. We remain focused in reliably delivering on our base line financial model, mid-single digit revenue growth, EPS growth 200 basis points to 400 basis points faster than revenue growth and returning 50% of our free cash flow to our shareholders. To achieve these goals, we’ve continued to execute on our three primary strategies; therapy innovation, globalization, and economic value.
We believe the Covidien acquisition will accelerate these strategies, bolstering our long term market competitiveness as well as the sustainability and consistency of our financial performance. In therapy innovation, Covidien’s impressive array of industry leading products enhances our existing portfolio, offers greater breadth across clinical areas and create exciting entry points into promising new diagnostic therapies.
We believe Medtronic’s deep clinical regulatory reimbursement and market development expertise will help accelerate the rapid adoption in markets around the world. Our globalization strategy will also benefit from the power of our combined companies. From a financial perspective, we will have a $3.7 billion emerging markets business that we are confident can sustain double-digit growth over an extended period of time. Covidien has extensive emerging market R&D and manufacturing while Medtronic has well established clinical expertise. These capabilities applied across a much broader product offering will significantly increase the number of attractive solutions that we can offer to governments and major providers.
Finally, this transaction enhances Medtronic’s ability to deliver economic value to a broader range of stakeholders. The value proposition of Covidien’s technologies primarily delivers hospital efficiency. While the value of Medtronic’s chronic disease therapies are generally realized in post-acute settings. When combined, these complementary solutions will create a robust and unmatched integrated health franchise. We feel that our industry leading products, clinical economic expertise, global footprint and financial strength will position us to be the preferred partner for physicians, hospital systems, patients, payers and governments around the world. In addition to being highly strategic, the Covidien acquisition is also extremely attractive financial with achievable cost synergies that are expected to make the transaction accretive in the first year on a cash basis and within two years on a GAAP basis. The combined company will also generate significant free cash flow which can be deployed with much greater flexibility.
While there has been a lot of media and political noise about inversions, let me clarify that when the transaction closes, Medtronic will continue to pay significant U.S. taxes and increase our investments in the U.S. On taxes we will continue to pay federal, state and local income taxes on all U.S. earnings as well as our social security taxes, property taxes and the medical device tax. Cumulatively, these taxes represent more than 45% of U.S. income and we expect to pay a similar rate post close.
In addition, this transaction will put us in an even playing field with foreign companies regarding use of internationally generated profits. This structure will allow us to invest much more aggressively in the U.S. and based on that we have committed to investing in incremental $10 million over the next 10 years. These investments will result in more high-paying U.S. job. We have a proven track record of creating U.S. jobs with our past acquisitions. For example, with Sofamor Danek, AVE and MiniMed, we have created nearly 10,000 U.S. jobs since acquisition. More recently with Cardiocom, we have more than doubled the work force in just 12 months. We also expect additional job creation with our recently completed acquisitions of Visualase and Corventis, two U.S. based companies.
Our level of U.S. job creation will only accelerate following this transaction. In our view, acquiring Covidien is good for Medtronic, for our shareholders, for patients and for the med-tech industry and ultimately good for the U.S. economy. We remain fully committed to the Covidien transaction which we expect to close in calendar fourth quarter of 2014 or early 2015. Our integration planning efforts are well underway led by Geoff Martha who is reporting directly to me. The integration team is staffed with top talent from both Covidien and Medtronic and they are actively developing our comprehensive integration planning. In the end, we understand the success of this transaction will depend on our ability to execute this integration plan upon closure.
Gary will now take you through a more detailed look at our quarterly results. Gary?
Gary Ellis
Thanks, Omar. First quarter revenue of $4.273 billion increased 5% as reported or 4% on a constant currency basis after adjusting for a $34 million favorable impact of foreign currency. Q1 revenue results by region were as follows; Growth in the Middle East and Africa was 30%; Latin American grew 14%; Growth in U.S. was 6%; Greater China grew 6%; Growth in Central and Eastern Europe was 5%; Other Asia Pacific group 4%; with Western Europe and Canada region declining 2%; Japan declined 5% and South Asia declined 7%. Emerging markets grew a combined 11% in Q1 and represented 13% of our total sales mix. It is worth noting that results in Western Europe were negatively affected by our difficult comparison in Germany where customers made advanced purchases of CoreValve product in Q1 last fiscal year in anticipation of the since resolved CoreValve injunction.
Japan’s performance was also affected by difficult comparisons from strong product launches in the prior year as well as the biennial R zone adjustments. Q1 diluted earnings per share on a non-GAAP basis were $0.93, an increase of 6%. Q1 GAAP diluted earnings per share were $0.87, a decrease of 6%, driven primarily by the favorable change in fair value of contingent consideration payments in the prior year. This quarter’s GAAP to non-GAAP pretax adjustments included a $30 million net restructuring charge, the final charge related to the initiative we announced last quarter and a $41 million charge for acquisition related items primarily associated with transaction cost in connection with the pending Covidien acquisition.
It is worth noting that on a cash basis, Q1 diluted earnings per share were $0.99, an increase of 5%. In our cardiac and vascular group, revenue of $2.254 billion grew 3%, results were driven by growth in low power, structural heart, aortic and peripheral and AF and other partially offset by declines in high power and coronary. In Cardiac Rhythm & Heart Failure formerly known as CRDM, revenue of $1.256 billion grew 4% and included $19 million of combined revenue from our Q2 acquisition of Cardiocom and Q3 acquisition of TYRX. High power revenue of $627 million declined 5%. As we have noted over the last several quarters, we believe the best way to view the high and low power markets is on a rolling two quarter basis given the variability and quarter-to-quarter dynamics.
We estimate that the global high power market growth profile is flat to slightly down with low single digit-growth in international markets offsetting low single-digit declines in the U.S. We estimate we gained about a 1 point of international market share on a rolling two quarter sequential basis, driven by the success of our Attain Performa quadripolar CRT-D lead system which was offset by CRT-D share loss in the U.S. Our U.S. growth is also affected by difficult comparisons given where we are in our high power replacement cycle.
Going forward, we expect our U.S. High Power performance to improve as we launch the recently approved d Attain Performa system into the U.S. market during Q2. This system was differentiated AdaptiveCRT algorithm has performed very well in international markets. In fact the markets where we have launched the Attain Performa system are CRT-D share is up a 160 basis points.
Low Power revenue of $525 million up 10% driven by the strong global launch of
Reveal LINQ in our diagnostics business. In June, data from the CRYSTAL AF trial were published in the New England Journal, which showed our Reveal monitor detected AF better compared to our standard care in patients with recent cryptogenic strokes.
We continue to make progress on our global clinical trial for Micra. And expect CE mark by the end of this fiscal year with U.S. approval to follow in FY ’17. Micra, the world’s smallest leadless pacemaker is a true innovation in pacing and features a novel delivery in fixation mechanism specifically designed for this new approach to prevent perforation and dislodgement while still permitting repositioning in capsule retrieval.
Recently, at Cardiostim, one and three-month data were presented on the first patients to receive Micra showing successful implants in all patients with no major post-implant device related complications.
AF solutions grew over 30% as we continue to gain share in the AF market. Results were driven by robust growth of the Arctic Front Advance CryoAblation system which grew over 30% as well as strong double-digit growth from the international launch of our PVAC Gold Phased RF System. We continue to enroll VICTORY AF, our U.S. pivotal study of phased RF technologies in patients with persistent AF.
In our coronary and structural heart business which is the consolidated legacy coronary and structural heart business unites revenue of $766 million grew 1%. Coronary declined 2% although this performance was above market driven by 2% growth in drug eluting stents on the continued strength of our Resolute Integrity DES. Worlwide DES revenue in the quarter was $279 million, including $101 million in the United States and $24 million in Japan. In the U.S., our DES share remains stable sequentially at approximately 30% despite the competitors’ ongoing product launch. Reported revenues in our structural heart business grew 6%.
However, after adjusting for the difficult TAVR comparisons in Germany that I mentioned earlier, our structural heart business grew in the upper teens, driven by exceptional performance from our transcatheter valves. Making the same adjustment, we estimate that the global TAVR market is growing around 30% including over 30% growth in the U.S. Our global transcatheter valve revenue in the quarter was $131 million. The U.S. launch of CoreValve is proceeding extremely well with our U.S. share exceeding 40% in the second quarter of the launch. We received FDA approval for high risk patients in June adding to the extreme risk indemnification we received in late Q3. Our team is aggressively activating new centers with a presence now in a 160 U.S. centers well ahead of our original plans. In international, we have completed enrollment in our CoreValve Evolut R CE mark trial and are expecting approval of this differentiated next generation recapturable system with its 14-French equivalent delivery system later this fiscal year.
In addition, we expect to start enrolling U.S. IDE study for Evolut R later this summer, a 250 patient single-arm study with 30-day follow-up. In our Aortic and Peripheral business, formerly known as endovascular, revenue of $232 million grew 5% or 7% after adjusting for the divestiture of our Pioneer Plus product line and the voluntary product recall of the below the knee DCB. Aortic revenues grew 7% as our market leading Endurant II and Valiant Captivia stent grafts have each gained 2 points of share in the AAA and thoracic markets respectively.
Reported revenues for our Peripheral business declined in the mid-single digits in Q1. However, after adjusting for the discontinued product lines just mentioned, our peripheral business grew in the high-single digits with strong double-digit growth in SFA DCB products.
During the quarter, we submitted our final data to the FDA for the IN.PACT Admiral SFA drug-coated balloon and we were recently informed by the FDA that this PMA updation will be granted expedited review status. We now expect U.S. approval for IN.PACT Admiral by the end of this fiscal year.
Now turning to our Restorative Therapies group, revenue of $1.603 billion grew 3%. Results were driven by growth in neuromodulation and surgical technologies offset by declines in spine. Spine revenue of $743 million declined 3% with declines in Core Spine and BMP offsetting growth in Interventional Spine.
Core Spine declined 2% with U.S. declining offsetting international growth. Both the global and U.S. CoreSpine markets appear relatively flat. Our U.S. CoreSpine business is expecting to launch a number of new products in FY ’15 but only limited set quantities of a few of these products were available in Q1. We believe these new products will help drive a return to growth in our Spine business in FY ’15. In addition to developing leading spine technology, our business continues to focus on procedural innovation and our surgical synergy program which integrates enabling technologies, surgical tools, spinal implants and our expertise.
Interventional spine which primarily consists of our balloon kyphoplasty product lines grew 4%. The U.S. interventional spinal growth was boosted by stabilizing trends in the use of BKP as well as our increasing participation in more segments in the market. In the international markets, double digit growth was led by strong performances in both Germany and Japan. While there is still lot of work to do in this business, we are encouraged by these results.
Turning to surgical technologies, revenue of $381 million grew 5% with steady growth across all three businesses. ENT grew to mid-single digits driven by growth in monitoring and powered systems. ENT recently launched the vent EM Sinus Dilation System which is generating strong customer acceptance and is expected to contribute to growth going forward. Neurosurgery grew 3% with solid growth in Midas Rex power equipment partially offset by fewer upgrades in large capital equipment. In advanced energy, strong adoption of our proprietary Aquamantys tissue sealing and PEAK PlasmaBlade technologies in the orthopedics, spine, breast and cardiac device replacement markets, drove solid double-digit growth.
In neuromodulation, revenue of $479 million increased 11%, driven by solid growth in pain stim, DBS and gastro/uro. In pain stim, our SureScan MRI spinal cord stimulation system continues to show strength in the market, including positive surgical feedback on lead durability and adaptive stim automatic stimulation adjustment. And DBS, our neurologist referral development program in the U.S. and the strength of the early stim data in the international markets, which shows DBS provides superior benefits for patients with early motor complications from Parkinson’s disease, continues to drive double digit new implant growth. Our gastro/uro business had solid growth in Q1 driven by a rebound in the implants in the United States.
In our diabetes group, revenue of $416 million grew 12%, driven by the ongoing U.S. launch of the MiniMed 530G system, which includes the Enlite CGM sensor, a smaller, more comfortable, and more accurate sensor. In Q1, we started the limited launch in Europe of MiniMed Duo with combined CGM sensor and insulating fusion set. Early feedback has been very positive due to the enhanced comfort in single insertion site. At the ADA Scientific Sessions in June, we announced a new strategic alliance with Sanofi focused on developing novel type 2 drug device combinations in care management devices. In July, the results of our OPTIMIZE trial were published in Lancet which show that Medtronic insulin pumps deliver better glucose control for people with insulin dependent type 2 diabetes than multiple daily injections.
Looking ahead, we plan to launch our next generation MiniMed 640G system with predictive low glucose management in international markets in Q2. Our MiniMed 620G Japanese language system is also expected to launch in Q2 which will be the first integrated system in Japan. In addition, we are making good progress in our sensor pipeline as we continue our advancement towards a close loop system.
Turning to rest of the income statement, it is worth noting that all of my forward-looking comments on outlook and guidance do not contemplate the expected closings of the Covidien transaction. The Q1 gross margin was 74.1% after adjusting for a 30 basis point negative impact from foreign currency the Q1 gross margin on a non-GAAP operational basis was 74.4%. The gross margin continues to include significant spending on additional resources mostly diverted from R&D to address quality issues in neuromodulation in diabetes, which negatively affected the Q1 gross margin by approximately 40 basis points. The Q1 gross margin was also negatively affected by product mix shifts in cardiac rhythm in heart failure as well as the R zone pricing adjustments in Japan, two items that will likely affected gross margin for the remainder of the fiscal year.
Looking ahead, we continue to expect the gross margin for fiscal year 2015 to be in the range of 74.5% to 75% on an operational basis with Q2 expected to be at the lower end of this range. First quarter R&D spending of $365 million was 8.5% of revenue. We continue to invest in new technologies as well as generating clinical and economic evidence to drive future growth. We would expect R&D expense in FY15 to remain around 8.5%.
First quarter SG&A expenditures of $1.506 billion represented 35.2% of sales. After adjusting for the 10 basis point positive impact from foreign exchange, Q1 SG&A was 35.3% driven by investments to drive CoreValve sales as well as higher incentive payments due to the outperformance in new product launches. We continue to expect FY15 SG&A to be in the range of 32.7% to 33.9% implying leverage of 50 basis points to 70 basis points on an operational basis. For Q2, we expect SG&A to be around 34.5% on an operational basis.
Amortization expense for the quarter was $87 million. In FY15, we continue to expect amortization expense to remain in the range of $85 million to $90 million per quarter.
Net other expenses at quarter were $51 million including net losses from our hedging program of $9 million. This result was favorable to our prior expectations due to net certain litigation gains, milestone income from diabetes meter partnership and the accounting treatment on TAVR royalties. We hedged the majority of our operating results in developed market currencies to reduce volatility on our earnings from foreign exchange. However, there is a growing portion of our profits that is unhedged especially emerging market currencies which can create some modest volatility in our earnings.
Based on current exchange rates, we expect FY15 net other expense to be in the range of $335 million to $375 million which includes an expected $125 million impact from the U.S. medical device tax, an incremental $13 million over FY14 as well as increased royalty expense from the Edwards agreement.
For Q2, FY15 we expect net other expense to be in the range of $80 million to $90 million based on current exchange rates. Net interest expense for the quarter was $5 million. At the end of Q1, we had approximately $14 billion from cash and investments and $12.8 billion in debt. Based on current rates, we would expect Q2, FY15 net interest expense to be in the range of $5 million to $15 million. Our non-GAAP nominal tax rate in Q1 was 19.1%. For FY15, we continue to expect our non-GAAP nominal tax rate to be in the range of 18% to 20% and we expect to be at the upper end of this range until the presently expired U.S. R&D tax credit is reinstated. In Q1, we generated $1 billion from free cash flow net of certain litigation payments. We remain committed to returning 50% of our free cash flow excluding one-time items to shareholders.
In Q1, we paid $304 million in dividends and repurchased $1.1 billion of our common stock. In June, Medtronic Board of Directors increased the dividend by 9%, the 37th consecutive year of increased dividend payments. As of the end of Q1, we had remaining authorization to repurchase approximately 42 million shares. First quarter average shares outstanding on a diluted basis were 1.5 billion shares. It is important to note that the cash we received from stock option redemptions which was a $154 million in Q1 will also continue to be used to repurchase shares on the open market to partially offset the dilutive impact. These share repurchases are incremental to our commitment to return 50% of our free cash flow to shareholders. For FY15, we would expect diluted weighted average shares outstanding to be approximately 998 million shares including approximately 994 million shares in Q2.
Let me conclude by providing our fiscal year 2015 revenue outlook and earnings per share guidance. We continue to believe that constant currency revenue growth in the range of 3% to 5% is balanced and realistic for fiscal year 2015. While we cannot predict the impact of currency movements to give you a sense of the FX impact of exchange rates were to remain similar to yesterday for the remainder of the fiscal year then our FY15 revenue will be negatively affected by approximately $40 million to flat, including the negative $20 million to nearly zero impact in Q2.
Turning to guidance on the bottom-line, we continue to expect FY15 non-GAAP diluted earnings per share in the range of $4 to $4.10. Based on current exchange rates, this implies earnings per share growth in the range of 6% to 9% on a constant currency basis after taking into account the currently expected $0.05 to $0.07 negative foreign currency impact of earnings. As in the past my comments and guidance do not include any unusual charges or gains that might occur during the fiscal year. In addition, as I mentioned earlier, our outlook and guidance do not contemplate the impact of the expected Covidien transaction.
I will now turn it back to Omar.
Omar Ishrak
Thanks, Gary. And before opening the lines for Q&A let me briefly conclude by stating that Q1 was another successful balanced quarter. We continue to strive to reliably deliver on our baseline expectations. As we presented at our Investor Conference in June, we expect our continued efforts to deliver consistent and reliable performance combined with disciplined capital allocation, will enable is to create long-term dependable value in healthcare. And looking ahead, we believe this will be further strengthened and diversified by our Covidien acquisition.
With that we will now open the phone lines for Q&A. In addition to Gary, I will ask Mike Coyle, President of our Cardiac & Vascular Group, Chris O’Connell, President of our Restorative Therapies Group and Hooman Hakami, President of our Diabetes Group to join us. We are really able to get to everyone’s questions, so please limit yourself to only one question and if needed one related follow-up. If you have additional questions, please contact our Investor Relations team after the call. Operator first question please.
Question-and-Answer Session
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