Medtronic plc — Form 10-Q Summary
Business context and reporting period. Medtronic is a global medical technology company reporting for the three and six months ended October 26, 2018, the second quarter and first half of fiscal 2019. Comparatives are the periods ended October 27, 2017. Amounts are in U.S. dollars unless noted.
Key financial results
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $7.481 billion, up 6% year over year | $14.865 billion, up 3% |
| Net income attributable to Medtronic | $1.115 billion, down 45% | $2.190 billion, down 28% |
| Diluted GAAP EPS | $0.82, versus $1.48 | $1.61, versus $2.21 |
| Non-GAAP diluted EPS | $1.22, versus $1.07 | $2.39, versus $2.19 |
| Operating cash flow | Not reported separately | $2.865 billion, versus $1.644 billion |
| Free cash flow | Not reported separately | $2.368 billion, versus $1.120 billion |
Margins and expenses. Gross margin was approximately 70.6% for the quarter and 70.4% for the six months, compared with 69.9% and 69.0%, respectively. GAAP operating profit was $1.544 billion for the quarter and $2.780 billion for the half-year; the prior-year figures included a $697 million divestiture gain. R&D was $590 million for the quarter and $1.175 billion for the half-year. Interest expense declined to $241 million and $483 million, respectively.
Balance sheet and liquidity. At October 26, cash and cash equivalents were $3.911 billion and current investments were $6.222 billion. Working capital was $13.190 billion and the current ratio was 2.6:1. Total debt was approximately $25.0 billion, comprising $1.343 billion current and $23.673 billion long-term debt; cash and current investments totaled $10.133 billion. No commercial paper or revolving credit facility borrowings were outstanding. The $3.5 billion credit facility was available, and the company said liquidity was sufficient for foreseeable operating needs for at least 12 months.
Material changes versus prior comparable periods
- Revenue rose, led by Diabetes Group growth of 26% for the quarter and 27% for the half-year, and Restorative Therapies Group growth of 7% in both periods. Cardiac and Vascular Group sales increased 3% for the quarter and 5% for the half-year.
- Minimally Invasive Therapies Group sales rose 5% in the quarter but fell 8% for the half-year, reflecting the 2017 sale of Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.
- GAAP earnings comparisons were affected by the prior-year $697 million divestiture gain and unusually large prior-year tax benefits. In the prior-year quarter, certain tax adjustments included a $398 million benefit related to intercompany intellectual-property sales. Current-year results also included higher tax provision, restructuring costs, and $103 million of certain litigation charges in the first half.
- Six-month operating cash flow increased by $1.221 billion. Management cited stronger operating performance and collections, lower supplier and vendor payments, and lower interest and pension contributions, partly offset by increased tax payments.
- Total debt declined about $0.8 billion from April 27, 2018, mainly because commercial paper outstanding fell from $698 million to zero. Cash and current investments declined about $1.1 billion over the same date comparison.
Outlook, commentary, and risks
- No consolidated revenue or EPS guidance is stated in the provided filing text. Management described growth priorities as therapy innovation, globalization, and economic value; emerging-market sales grew 7% in both reported periods.
- The Enterprise Excellence restructuring program is expected to generate more than $3.0 billion in annual gross savings by fiscal 2022, with approximately $500–$700 million expected each fiscal year through fiscal 2022. Estimated pretax charges are $1.6–$1.8 billion, mostly by fiscal 2022; related cash outlays are expected to be substantially complete by fiscal 2023.
- Medtronic announced a planned acquisition of Mazor Robotics for approximately $1.6 billion, or $1.3 billion net of its existing stake and cash acquired, with closing anticipated in fiscal Q3 2019. The company intended to fund it with existing cash and cash equivalents.
- Tax accounting under the Tax Cuts and Jobs Act remained provisional. The filing reported a provisional transition-tax charge of $2.5 billion and noted that final calculations could change.
- Accrued litigation was approximately $0.9 billion. The company cautioned that legal, product-liability, environmental, governmental, and tax matters may materially affect earnings, financial position, or cash flows. On November 28, 2018, after quarter-end, a jury returned an approximately $112 million verdict in the Sasso matter; Medtronic said it planned post-trial motions and, if necessary, appeals and had not accrued an expense because it did not consider a loss probable.
- Other cited risks include competition and pricing pressure, reimbursement and procedural-volume changes, product approvals and adoption, supply and quality issues, foreign-exchange movements, cybersecurity, and successful execution of acquisitions and restructuring. Currency had an unfavorable effect on sales of $95 million in the quarter and $17 million for the half-year.
Important facts for investors to verify
- Underlying sales and earnings growth excluding the prior-year divestiture and unusual tax and transaction items; review the company’s non-GAAP reconciliations alongside GAAP results.
- Execution, timing, cash costs, and realized savings from the Enterprise Excellence program.
- Final Tax Act accounting and the outcome and timing of significant tax audits, including the Puerto Rico transfer-pricing dispute.
- Developments in the $0.9 billion litigation accrual, the Sasso verdict and appeal, and the government settlements disclosed after quarter-end.
- Funding and expected benefits of the Mazor acquisition, as well as liquidity and investment-market risks, including illiquid auction-rate securities and unrealized investment losses.