Business context and reporting period
This unaudited Form 10-Q covers Medtronic plc’s period ended January 23, 2015, before it acquired Covidien and merged with Medtronic, Inc. on January 26, 2015. Before closing, the plc was a newly formed holding company with no operating business; its statements therefore do not represent the combined company’s operating results. The first periodic report to include both businesses was expected to be the fiscal 2015 Form 10-K.
Financial results and liquidity
| Metric | Reported value |
|---|---|
| Net sales | $0 |
| SG&A expense and net loss | $37.075 million each |
| Cash and total assets, Jan. 23 | $46,000 each |
| Accounts payable and total liabilities | $37.0 million each |
| Shareholders’ equity | $(36.954) million |
| Net cash from operating activities, inception to Jan. 23 | $0; the loss and share-based service expense were offset by the increase in accounts payable |
| Net cash from financing activities | $46,000 |
Margins are not meaningful because the holding company reported no revenue. The reported loss primarily reflected acquisition-related costs. The filing’s basic and diluted loss per share was $(5,296), based on only seven weighted-average ordinary shares; it is not indicative of the combined company’s earnings per share. The plc reported no material off-balance-sheet arrangements or material contingencies as of January 23.
Material changes and transaction financing
On January 26, Covidien shareholders became entitled to $35.19 cash and 0.956 New Medtronic shares per Covidien share; each Medtronic share converted into one New Medtronic share. The transaction was valued at approximately $50 billion, comprising about $16 billion cash and $34 billion stock, using Medtronic’s January 23 closing price. The acquisition will be accounted for using the acquisition method. The initial purchase-price allocation was incomplete, and the filing did not provide the fair values of major acquired asset and liability classes or pro forma combined earnings.
After closing, Medtronic borrowed $3.0 billion under a three-year term loan. The amended revolving facility provides up to $3.5 billion, and a commercial-paper program permits up to $3.5 billion outstanding; no commercial paper was outstanding on January 26. The filing also describes $17.0 billion of Medtronic notes issued in December 2014, $11.375 billion of other Medtronic notes, and $5.0 billion of Covidien notes, all guaranteed by New Medtronic and Medtronic Luxco. Separately, the filing states consolidated external debt was approximately $37.5 billion as of February 24. These are post-closing figures and are not debt balances on the January 23 plc balance sheet.
Unaudited pro forma sales, assuming the acquisition had occurred at the start of fiscal 2015, were $7.004 billion for the three months and $21.065 billion for the nine months ended January 23. The filing cautions that these figures are not indicative of actual or future results.
Outlook, risks, contingencies and unusual items
No numerical operating guidance or specific combined-company outlook is provided. Management highlighted the need to integrate Medtronic and Covidien and cautioned that expected synergies, cost savings and growth may be delayed or not achieved. Disclosed risks include competition and pricing pressure; regulation, product quality and liability; supply disruptions; reimbursement and healthcare-policy changes; cybersecurity; international, currency and tax exposures; and the substantial debt incurred in connection with the transaction. The filing also discusses uncertainty over whether future U.S. tax-law changes could affect the company’s Irish tax status.
Notable acquired-company exposures include Medtronic INFUSE litigation (approximately 800 lawsuits representing about 1,300 filed personal-injury claims, plus an estimated 3,500 potential unfiled claimants); Medtronic had recorded a $140 million expense in fiscal 2014 for probable INFUSE damages. Covidien reported $323 million in accruals for product-liability and other legal matters and $179 million in probable environmental remediation costs as of December 26, 2014; New Medtronic said it was evaluating these amounts after closing. The filing also describes substantial unresolved tax disputes involving Medtronic and Covidien, including the Tyco-related IRS dispute, and notes that outcomes could materially affect results. New Medtronic stated that acquisition accounting and evaluation of acquired reserves remained incomplete.
Most important facts for investors to verify
- Review subsequent filings for the completed purchase-price allocation, goodwill and acquired intangible values, and the actual combined-company results.
- Track total debt, interest expense, maturities, cash generation and use of the revolving and commercial-paper facilities.
- Assess whether integration plans deliver the anticipated benefits without disrupting operations or customer relationships.
- Monitor developments in INFUSE claims, Covidien product-liability and environmental matters, and the companies’ unresolved tax disputes.
- Compare later reported performance and guidance with the filing’s pro forma sales, recognizing that the filing gives no pro forma earnings or operating forecast.