Medtronic plc — Form 10-Q summary
Business context and period. Medtronic is a global medical technology company. This report covers the third quarter and first nine months of fiscal 2018, ended January 26, 2018; comparisons are to the corresponding periods of fiscal 2017. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 FY18 | Q3 FY17 | Nine months FY18 | Nine months FY17 |
|---|---|---|---|---|
| Net sales | $7.369B | $7.283B | $21.809B | $21.794B |
| Operating profit | $1.426B | $1.147B | $4.716B | $3.699B |
| Net income attributable to Medtronic | $(1.389)B | $821M | $1.644B | $2.865B |
| Diluted EPS | $(1.03) | $0.59 | $1.20 | $2.05 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3.646B | $5.107B |
| Free cash flow | Not provided for quarter | Not provided for quarter | $2.870B | $4.183B |
Q3 operating margin was approximately 19.4%, up from 15.7%; nine-month margin was approximately 21.6%, up from 17.0%. Cost of products sold was 29.7% of sales in Q3 versus 31.1%, and 30.5% year to date versus 31.5%. SG&A rose to 33.9% of Q3 sales from 32.8% and to 34.0% year to date from 33.2%.
Reported Q3 sales increased 1%; nine-month sales were essentially flat. Currency contributed $177M to Q3 and $179M to nine-month sales. Q3 segment sales: Cardiac and Vascular $2.800B (+10%); Minimally Invasive Therapies $2.041B (−16%); Restorative Therapies $1.944B (+7%); Diabetes $584M (+17%). The Minimally Invasive Therapies decline primarily reflects the July 2017 sale of businesses.
Balance sheet and liquidity
- At January 26, 2018, cash and cash equivalents were $6.358B and current investments were $8.078B. Current assets were $26.607B and current liabilities $10.933B; working capital was $15.674B and the current ratio 2.4:1.
- Total debt was $28.820B ($2.902B current and $25.918B long term), down from $33.441B at April 28, 2017. The company repaid approximately $4.2B of debt during the period. Cash plus current investments exceeded total debt by approximately $14.4B.
- A $3.5B revolving credit facility was undrawn; commercial paper outstanding was $504M. Management said available liquidity should cover foreseeable operating needs for at least 12 months. Debt ratings were unchanged at S&P A/A-1 and Moody’s A3/P-2.
Material changes and unusual items
- Tax reform: The Tax Act produced a provisional net tax charge of about $2.2B, including a $2.4B transition-tax charge partly offset by a $155M deferred-tax benefit. The nine-month net tax charge was $1.9B after other tax items. This drove the 235.5% Q3 effective tax rate and GAAP quarterly loss. Tax accounting remained provisional; the company had not completed its analysis, including its treatment of GILTI.
- Other impairments: Medtronic recorded a $227M investment impairment and $63M of Q3 in-process R&D impairment. The latter related to discontinued projects. These items, along with tax reform, materially depressed GAAP earnings.
- Divestiture: The July 29, 2017 sale of Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses generated $6.1B proceeds and a $697M pretax gain. Nine-month results also included $114M of divestiture-related costs. The sold businesses contributed $1.8B of sales in the prior-year nine-month period.
- Cash generation and returns: Nine-month operating cash flow fell to $3.646B from $5.107B; free cash flow declined to $2.870B from $4.183B. Cash flow was affected by higher tax payments, divestiture costs, litigation payments, derivative collateral outflows, and lower customer collections. Dividends and share repurchases totaled $3.834B, exceeding free cash flow.
Outlook, management commentary, and risks
- The new Enterprise Excellence restructuring program is expected to cost $1.6B–$1.8B pretax, with most charges by fiscal 2022 and cash outlays substantially complete by fiscal 2023. Medtronic targets more than $3B in annual gross savings by fiscal 2022, including approximately $500M–$700M per fiscal year through then. The company also reported $850M in Covidien cost synergies achieved and said that program was complete.
- Management cited innovation, globalization, and value-based healthcare as growth priorities. Emerging-market sales grew 12% in Q3 and 11% year to date. It highlighted product launches and demand in cardiac/structural heart, brain therapies, and Diabetes, including the MiniMed 670G.
- Risks include competitive and pricing pressure, procedure volumes, reimbursement and regulatory approvals, product acceptance, supply and manufacturing capacity, currency movements, litigation and investigations, and tax uncertainty. Medtronic disclosed approximately $1.0B of accrued litigation and warned actual outcomes could materially differ from estimates. Ongoing tax disputes include an IRS appeal concerning allocation of income to Puerto Rico.
- The company said a June 2017 IT disruption affecting ordering, distribution, and manufacturing was not material to revenue or EPS for the nine-month period. It reported disclosure controls were effective and no material change in internal financial reporting controls during the quarter.
Key facts investors should verify
- How the final Tax Act accounting, including transition-tax calculations and GILTI policy, changes tax expense, cash payments, and earnings.
- Underlying sales trends excluding the divested businesses and currency effects, particularly in Minimally Invasive Therapies.
- Progress, costs, timing, and realized savings from Enterprise Excellence against the stated targets.
- Whether operating cash flow and free cash flow recover, given lower year-to-date results and shareholder distributions above free cash flow.
- Developments in material litigation, tax disputes, and product/regulatory matters that could affect earnings or cash flows.