Medtronic plc — Form 10-Q summary
Reporting period: Second quarter and first six months of fiscal 2020, ended October 25, 2019; comparisons are with the corresponding prior-year periods. Amounts are in U.S. dollars unless noted.
Business context and reporting period
Medtronic develops and sells medical devices, therapies, and related services across four reportable groups: Cardiac and Vascular, Minimally Invasive Therapies, Restorative Therapies, and Diabetes. The filing reports unaudited consolidated results.
Financial performance and position
| Metric | Three months ended Oct. 25, 2019 | Prior-year quarter | Six months ended Oct. 25, 2019 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $7.706 billion | $7.481 billion | $15.199 billion | $14.865 billion |
| Operating profit | $1.351 billion | $1.544 billion | $2.836 billion | $2.780 billion |
| Net income attributable to Medtronic | $1.364 billion | $1.115 billion | $2.228 billion | $2.190 billion |
| Diluted EPS | $1.01 | $0.82 | $1.65 | $1.61 |
| Operating cash flow | Not provided separately | Not provided separately | $3.377 billion | $2.865 billion |
| Free cash flow (non-GAAP) | Not provided separately | Not provided separately | $2.793 billion | $2.368 billion |
- Quarterly sales grew 3%; six-month sales grew 2%. Quarterly operating margin was approximately 17.5%, versus 20.6% a year earlier; six-month operating margin was approximately 18.7% in both periods. Cost of products sold rose to 31.1% of quarterly sales from 29.4% and to 31.3% of six-month sales from 29.6%.
- The effective tax rate was (6.0)% for the quarter and 1.0% for six months, versus 17.3% and 13.3%. Net income benefited from a $251 million Swiss tax-law benefit in the quarter; six-month tax adjustments provided a net $281 million benefit. Management’s non-GAAP nominal tax rates were 14.9% for the quarter and 15.0% for six months.
- Six-month cash from operations increased $512 million year over year. Capital expenditures were $584 million; cash dividends were $1.447 billion and share repurchases were $962 million. Cash and equivalents were $3.962 billion at period-end, down from $4.393 billion at fiscal year-end.
- Current investments were $6.436 billion, bringing cash and current investments to approximately $10.4 billion. Current liabilities were $8.170 billion. Total debt was approximately $25.6 billion: $875 million current and $24.752 billion long-term. No commercial paper or revolving credit facility borrowings were outstanding; the facility was $3.5 billion.
Material changes versus the prior comparable period
- Quarterly sales growth was led by Restorative Therapies (+6%) and Minimally Invasive Therapies (+5%); Cardiac and Vascular was essentially flat and Diabetes grew 2%. For six months, the respective group growth rates were 5%, 4%, approximately flat, and 3%.
- Emerging-market sales grew 9% in the quarter and 8% for six months; currency reduced sales by $97 million and $243 million, respectively. Non-U.S. developed-market sales were nearly flat.
- Quarterly operating profit declined despite higher sales, reflecting, among other items, higher litigation charges, a Medtronic Foundation commitment, and increased product costs. Quarterly net income and EPS nevertheless increased, primarily due to the tax benefit and lower interest expense.
- Six-month interest expense rose to $774 million from $483 million, principally due to a $413 million charge associated with tendering and redeeming approximately $5.2 billion of senior notes. The company issued €5.0 billion of Euro-denominated notes, with approximately $5.6 billion net proceeds, to fund the debt transactions.
- Operating cash flow and free cash flow improved, while investing cash flow shifted to a $1.767 billion use, mainly reflecting investment purchases and capital spending. The prior-year period had $764 million of investing cash inflow.
Outlook, management commentary, risks, and unusual items
- The filing does not provide a clear consolidated full-year revenue or EPS guidance figure. Management describes growth strategies focused on therapy innovation, globalization, and value-based healthcare, and highlights product adoption and market expansion opportunities.
- The Enterprise Excellence restructuring program is expected to generate more than $3.0 billion in annual gross savings by the end of fiscal 2022, with approximately $500 million to $700 million expected each fiscal year through then. Estimated pretax charges are $1.6 billion to $1.8 billion; most are expected by fiscal 2022, with cash outlays substantially complete by fiscal 2023.
- Unusual period items include the $251 million Swiss tax benefit; the $413 million debt-extinguishment charge recognized in the first quarter; $121 million of quarterly and $168 million of six-month litigation charges; and an $80 million quarterly commitment to the Medtronic Foundation. Six-month restructuring and associated costs were $218 million.
- Accrued litigation was approximately $0.6 billion at October 25, 2019, compared with $0.5 billion at April 26, 2019. The company warns actual costs could differ materially. Matters include pelvic mesh litigation, a patent and royalty dispute with a prior jury verdict of approximately $112 million under appeal, environmental remediation, a government inquiry, and significant tax disputes.
- Other stated risks include competitive launches and pricing pressure, reimbursement and procedural-volume changes, product and supply challenges, regulatory approval timing, currency and macroeconomic exposures, tax-law changes, and litigation or government proceedings. Management says available liquidity should meet foreseeable operating needs for at least 12 months.
- The company adopted the lease accounting standard in fiscal 2020, recognizing approximately $1.0 billion of right-of-use assets and lease liabilities, without a material income-statement or cash-flow impact. Disclosure controls were concluded effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether underlying sales and operating performance support growth after considering currency, product mix, pricing, and segment-specific declines, including Cardiac Rhythm & Heart Failure and U.S. Diabetes.
- How much of reported earnings growth reflects the Swiss tax benefit, debt-tender charge, litigation, restructuring, and other adjustments; compare GAAP results with the company’s non-GAAP reconciliations.
- Progress, realized savings, remaining charges, and cash requirements for the Enterprise Excellence program.
- Debt repayment and refinancing needs, leverage, and the sustainability of cash generation alongside dividends and share repurchases.
- Developments in major litigation, the Puerto Rico transfer-pricing tax dispute, other tax audits, and environmental and government matters, including potential impacts beyond accrued amounts.
- Product adoption, competitive conditions, regulatory approvals, reimbursement, supply capacity, and currency exposure underlying management’s forward-looking commentary.