Medtronic plc — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended July 29, 2022; comparable period ended July 30, 2021. Amounts are in U.S. dollars. Medtronic is a global medical technology company with four reportable businesses: Cardiovascular, Medical Surgical, Neuroscience, and Diabetes.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $7.371 billion | $7.987 billion | Down 8% |
| Operating profit | $1.125 billion | $859 million | Up 31% |
| Net income attributable to Medtronic | $929 million | $763 million | Up 22% |
| Diluted GAAP EPS | $0.70 | $0.56 | Up 25% |
| Diluted non-GAAP EPS | $1.13 | $1.36 | Down 17% |
| Operating cash flow | $1.083 billion | $1.292 billion | Down $209 million |
| Free cash flow (non-GAAP) | $657 million | $914 million | Down $257 million |
GAAP operating margin was approximately 15.3%, compared with 10.8% in the prior-year quarter. The GAAP profit comparison benefited from the prior-year $726 million of Mechanical Circulatory Support (MCS) charges, including $668 million in other operating expense. The company reported $74 million of Renal Care Solutions (RCS)-related impairment and costs in the current quarter. Adjusted results were lower year over year: non-GAAP net income was $1.502 billion versus $1.838 billion.
Sales fell in every segment except Specialty Therapies: Cardiovascular was down 6% to $2.713 billion; Medical Surgical down 14% to $2.001 billion; Neuroscience down 4% to $2.115 billion; and Diabetes down 5% to $541 million. Specialty Therapies sales rose 4% to $667 million. Management attributed the overall decline chiefly to supply constraints, COVID-related lockdowns and procedure impacts, and unfavorable currency translation. Currency reduced non-U.S. developed-market sales by $315 million and emerging-market sales by $35 million.
Cash, debt, and liquidity
At July 29, 2022, cash and cash equivalents were $2.140 billion and current investments were $6.733 billion. Current assets were $22.135 billion against current liabilities of $14.049 billion. Total debt was approximately $23.2 billion, comprising $5.729 billion of current debt and $17.481 billion of long-term debt; total debt was $24.1 billion at April 29, 2022. The company had no commercial paper or revolving credit facility borrowings outstanding and stated that it was in compliance with facility covenants. It described its balance sheet and liquidity as strong and sufficient for foreseeable operating needs.
Operating cash flow decreased mainly because of lower customer collections, partly offset by lower employee payments. Investing cash use included $1.191 billion for acquisitions and $426 million of capital expenditures. The company paid $903 million in dividends and repurchased approximately 3.46 million shares for $333 million during the quarter.
Material developments, outlook, and risks
- Acquisitions and portfolio actions: Medtronic acquired Intersect ENT in May for approximately $1.2 billion, expanding its ENT portfolio. On August 30, after quarter-end, it acquired Affera for consideration of up to $1.0 billion, including up to $250 million of contingent payments. Medtronic and DaVita agreed to form an equally owned kidney-care device company; the transaction involving half of RCS was expected to close in calendar 2023, subject to approvals and conditions. The RCS agreement led to a $67 million non-cash pre-tax impairment, primarily goodwill.
- Tax contingency: A U.S. Tax Court opinion issued August 18, 2022 addressed the allocation of income between Medtronic and its Puerto Rico subsidiary for fiscal 2005 and 2006. If finalized without appeal and applied to subsequent years, Medtronic estimated a potential tax charge, including interest, of up to $2.0 billion and future cash payment of up to $2.5 billion. Management said this scenario was contemplated in fiscal 2023 adjusted EPS guidance reiterated August 23; the filing text does not provide the guidance figure.
- Operating pressures: Management cited continuing supply-chain disruption, inflation and higher freight, labor, and material costs; COVID-19 effects on procedures and hospital staffing; China tender pricing; competition and pricing pressure; and currency and geopolitical risks. The Russia-Ukraine conflict’s first-quarter financial impact was not material; business in the affected countries represented less than 1% of consolidated revenue and assets.
- Regulatory and legal exposure: Medtronic reported approximately $0.3 billion of accrued litigation. It had not accrued damages for hernia mesh lawsuits because losses were not considered probable and reasonably estimable. The company also disclosed a December 2021 FDA warning letter concerning certain Diabetes pumps and controllers; it said the findings could limit U.S. product launches until resolved.
- Other notable items: The company recognized a $53 million loss on early redemption of approximately $2.3 billion of senior notes, funded with a 364-day yen term loan. It remains committed to supporting approximately 3,200 patients implanted with the discontinued HVAD system; related obligations included $217 million of accruals at quarter-end.
Important facts for investors to verify
- Whether supply constraints, hospital staffing shortages, and procedure volumes improve, and whether this translates into sales recovery and margin improvement.
- The final outcome and appeal status of the Puerto Rico tax case, including any resulting tax charge and cash payment.
- Progress, regulatory approvals, closing conditions, and financial effects of the RCS transaction and the Affera acquisition.
- How much of the GAAP earnings increase reflects the prior-year MCS comparison versus ongoing operating performance; compare GAAP results with non-GAAP measures and their reconciliations.
- Developments in product quality, recalls, FDA matters, litigation, and the company’s ability to meet patient-support obligations.