Medtronic plc — Form 10-Q Summary
Business context and reporting period
Medtronic reported its first quarter of fiscal 2021 for the three months ended July 31, 2020, compared with the three months ended July 26, 2019. The quarter reflects the effect of COVID-19 on procedure volumes and customer demand. Fiscal 2021 included an additional selling week; management estimated this added approximately $360 million to $390 million to quarterly sales.
Key financial metrics
| Metric | Quarter ended July 31, 2020 | Prior comparable quarter |
|---|---|---|
| Net sales | $6.507 billion | $7.493 billion |
| Operating profit | $673 million | $1.485 billion |
| Net income attributable to Medtronic | $487 million | $864 million |
| Diluted GAAP EPS | $0.36 | $0.64 |
| Diluted non-GAAP EPS | $0.62 | $1.26 |
| Operating cash flow | $278 million | $1.510 billion |
| Free cash flow | $(56) million | $1.209 billion |
Sales declined 13% year over year despite the extra selling week. Approximate GAAP gross margin was 61.5%, versus 68.4%; operating margin was 10.3%, versus 19.8%. Cost of products sold rose to $2.505 billion from $2.366 billion, with idle manufacturing capacity and product mix contributing to higher cost as a share of sales.
At July 31, 2020, cash and cash equivalents were $6.499 billion and current investments were $6.513 billion. Current debt was $5.823 billion and long-term debt was $22.867 billion. The company reported $13.0 billion of cash and investments and an undrawn $3.5 billion revolving credit facility. A ¥300 billion term loan, approximately $2.8 billion, was drawn in May for general corporate purposes.
Material changes versus the prior period
- Revenue fell across all four reportable groups: Cardiac and Vascular 13%, Minimally Invasive Therapies 14%, Restorative Therapies 15%, and Diabetes 5%. Respiratory, Gastrointestinal, and Renal sales grew 5%, supported by ventilator and patient-monitoring demand.
- Operating cash flow fell by approximately $1.2 billion, mainly because of lower customer collections associated with COVID-19. Investing cash flow was positive $8 million, while financing cash flow was positive $1.959 billion, primarily reflecting the term loan.
- GAAP interest expense decreased to $171 million from $609 million; the prior-year quarter included $413 million of charges related to debt tender and early redemption.
- Current debt increased from $2.776 billion at April 24, 2020, while long-term debt increased from $22.021 billion. The company paid $778 million in dividends and made no share repurchases in the quarter.
Outlook, management commentary, and risks
Management said procedure volumes began recovering from April lows and improved sequentially during the quarter, but the timing of a broad return to pre-pandemic levels remained uncertain. COVID-19 could continue to affect procedures, hospital spending, product launches, clinical-trial enrollment, supply continuity, receivables collection, and inventory levels. No specific near-term revenue or EPS guidance is provided in the filing text.
Management forecast $450 million to $475 million of annual savings from the new Simplification program, with most expected by the end of fiscal 2022; estimated program costs are $400 million to $450 million. The ongoing Enterprise Excellence program targets $500 million to $700 million of gross annual savings through fiscal 2022, against estimated restructuring costs of $1.6 billion to $1.8 billion.
Unusual quarterly items included a $132 million gain from a change in accrued contingent liabilities for a recent acquisition and an $88 million net litigation benefit, mainly from favorable settlements. Litigation accruals were approximately $0.4 billion. The company also disclosed unresolved tax disputes, including a long-running IRS dispute concerning allocation of income to Puerto Rico; outcomes could materially affect results, though the filing does not provide a clear estimate of potential loss. Management described liquidity as sufficient for foreseeable operating needs and reported compliance with debt covenants.
Important facts for investors to verify
- Whether procedure recovery, hospital demand, and supply-chain conditions continue to improve or are disrupted by further COVID-19 impacts.
- How much of the reported sales and earnings trend reflects the extra selling week and the acquisition and litigation benefits, versus underlying operations.
- Whether operating cash flow recovers, and how the $5.8 billion of current debt obligations and the short-term term loan are refinanced or repaid.
- Developments in significant litigation and tax matters, and progress, costs, and realized savings from both restructuring programs.