Medtronic plc — Form 10-Q summary
Business context and period. Medtronic is a global medical technology company. This unaudited report covers the three and six months ended October 30, 2020, the second quarter and first half of fiscal 2021. Results are compared with the corresponding periods ended October 25, 2019. The company said COVID-19 disrupted procedure volumes, customer demand, operations and supply chains; second-quarter procedure volumes recovered from April’s lows, but recovery varied by therapy and geography.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $7.647 billion, down 1% year over year | $14.154 billion, down 7% |
| Operating profit | $930 million, versus $1.351 billion | $1.603 billion, versus $2.836 billion |
| Operating margin | About 12.2%, versus 17.5% | About 11.3%, versus 18.7% |
| Net income attributable to Medtronic | $489 million, versus $1.364 billion | $976 million, versus $2.228 billion |
| Diluted EPS | $0.36, versus $1.01 | $0.72, versus $1.65 |
| Operating cash flow | Not presented as a quarterly figure | $2.139 billion, versus $3.377 billion |
| Free cash flow | Not presented as a quarterly figure | $1.524 billion, versus $2.793 billion |
GAAP earnings were affected by a $308 million charge for early debt redemption in the quarter, restructuring costs, and other items. On the company’s non-GAAP basis, diluted EPS was $1.02 for the quarter versus $1.31 a year earlier, and $1.64 for the half-year versus $2.57. Non-GAAP measures exclude specified charges and benefits and are not substitutes for GAAP results.
Quarterly cost of products sold rose to $2.705 billion from $2.394 billion. Management cited idle-capacity overhead, higher excess and obsolete inventory reserves, and unfavorable product mix. Research and development was $639 million for the quarter; selling, general and administrative expense was $2.600 billion.
Balance sheet, cash flow and liquidity
- At October 30, 2020, cash and cash equivalents were $6.420 billion and current investments were $7.857 billion; together, $14.3 billion of liquidity.
- Current debt obligations were $4.041 billion and long-term debt was $25.967 billion, for total reported debt of about $30.0 billion. Total debt at April 24, 2020 was about $24.8 billion.
- Medtronic issued approximately $7.2 billion of Euro-denominated notes and used proceeds in part to redeem about $6.0 billion of senior notes for $6.3 billion total consideration. It also borrowed approximately $2.8 billion under a Japanese-yen term loan, extended in November 2020 for six months.
- The company reported no commercial paper or revolving credit facility borrowings at quarter-end. Its undrawn credit facility was $3.5 billion; management said liquidity should meet foreseeable operating needs for at least 12 months. About $4.0 billion of debt obligations were due within 12 months.
- Six-month dividends paid were $1.558 billion. No ordinary shares were repurchased in the six-month period.
Material changes and segment trends
- Cardiac and Vascular: quarterly sales fell 5% to $2.725 billion; half-year sales fell 9% to $5.158 billion, largely reflecting lower procedure volumes. Coronary and Structural Heart sales were down 13% for the quarter.
- Minimally Invasive Therapies: quarterly sales rose 7% to $2.285 billion, driven by COVID-related respiratory demand, especially ventilators; half-year sales fell 4% to $4.086 billion as elective procedures were delayed.
- Restorative Therapies: quarterly sales declined 2% to $2.063 billion; half-year sales declined 8% to $3.774 billion, reflecting deferred procedures and lower capital equipment purchases.
- Diabetes: sales declined 4% in both periods, to $574 million for the quarter and $1.136 billion for the half-year, amid delayed new pump starts and competitive pressure.
- Fiscal 2021 includes an extra selling week in the first quarter; management estimated it added approximately $360–$390 million to six-month sales. The company also realigned Restorative Therapies divisions, recasting prior-year comparisons.
Outlook, management commentary and risks
The filing provides no consolidated revenue or EPS forecast. Management said the duration and severity of COVID-19 and the pace of procedure recovery remain uncertain, with renewed outbreaks in the U.S. and Europe potentially delaying or canceling procedures. Hospital financial strain, supply interruptions, inventory obsolescence, receivable collectability and disruption to product launches or regulatory approvals are additional concerns. Management expected ventilator demand to return to pre-pandemic levels in fiscal 2022.
- The Enterprise Excellence program is expected to generate more than $3.0 billion of annual gross savings by the end of fiscal 2022, including approximately $500–$700 million of gross annual savings expected through that date; estimated pre-tax costs are $1.6–$1.8 billion.
- The Simplification program is expected to produce annual savings of approximately $450–$475 million, with estimated pre-tax costs of $400–$450 million, mostly by the end of fiscal 2022.
- Reported restructuring charges included $97 million of incremental pension and post-retirement costs for voluntary early retirement packages during the six-month period.
- Other risks include competition and pricing pressure, reimbursement changes, foreign-exchange exposure, regulatory and product-quality matters, and uncertain litigation and tax outcomes.
Contingencies and unusual items
Accrued litigation was approximately $0.4 billion at quarter-end. The company reported ongoing product-liability, patent, shareholder, environmental and tax matters; it cautioned that ultimate outcomes could materially affect earnings, financial position or cash flows. It had reached settlement agreements for approximately 15,900 of an estimated 16,200 pelvic-mesh claims. Hernia-mesh matters had no recorded damages expense because a loss was not considered probable or reasonably estimable. Gross unrecognized tax benefits were $1.9 billion, with $251 million of accrued gross interest and penalties. A $132 million gain from a change in amounts accrued for acquisition-related contingent liabilities benefited first-half other operating expense.
Most important facts for investors to verify
- Whether procedure volumes recover or deteriorate as COVID-19 resurges, and how that affects sales, margins and cash collection.
- How much of the sales comparison reflects the extra fiscal-week benefit and whether ventilator demand normalizes as management expects.
- Progress against restructuring savings targets, associated charges and the timing of expected benefits.
- Debt maturities and refinancing needs, including repayment of the €750 million floating-rate notes due in March 2021, and the extended yen term loan.
- Developments in significant litigation, environmental remediation and IRS disputes, including potential outcomes beyond recorded accruals.