Medtronic plc — Form 10-Q summary
Business context and reporting period
Medtronic is a global medical technology company serving cardiac and vascular, minimally invasive therapies, restorative therapies, and diabetes markets. This unaudited filing covers the third quarter and first nine months of fiscal 2019, ended January 25, 2019; comparisons are with periods ended January 26, 2018. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $7.546 billion, up 2% | $22.411 billion, up 3% |
| Operating profit | $1.542 billion, versus $1.436 billion | $4.322 billion, versus $4.712 billion |
| Net income attributable to Medtronic | $1.269 billion, versus a $1.389 billion loss | $3.459 billion, versus $1.644 billion |
| GAAP diluted EPS | $0.94, versus a $1.03 loss | $2.54, versus $1.20 |
| Non-GAAP diluted EPS | $1.29, versus $1.17 | $3.69, versus $3.35 |
| Operating cash flow | Not separately reported for the quarter | $4.920 billion, versus $3.646 billion |
| Free cash flow | Not separately reported for the quarter | $4.121 billion, versus $2.870 billion |
Quarterly operating margin was approximately 20.4%, compared with 19.5% a year earlier; nine-month margin was approximately 19.3%, compared with 21.6%. The prior nine-month period included a $697 million divestiture gain, which affects comparability. Nine-month sales growth also reflects the prior-year divestiture of businesses; currency reduced sales by $166 million for the period. Q3 reported sales increased across all four segments: Cardiac and Vascular was down 1%, while Minimally Invasive Therapies, Restorative Therapies, and Diabetes grew 4%, 4%, and 4%, respectively. For nine months, those segments changed by 3%, down 4%, up 6%, and up 18%, respectively.
Cash and cash equivalents were $3.703 billion and current investments were $5.439 billion at January 25, 2019. Working capital was $12.024 billion and the current ratio was 2.4:1. Total debt was approximately $25.0 billion, down from $25.8 billion at fiscal year-end; long-term debt was $23.674 billion. The company had no commercial paper outstanding and no borrowings under its $3.5 billion revolving credit facility. It paid $2.022 billion in dividends and repurchased $2.728 billion of shares during the nine months.
Material changes and unusual items
- Net income and EPS comparisons are dominated by the prior-year U.S. Tax Act charge: prior-year tax provision was $2.419 billion for Q3 and $2.320 billion for nine months. Current-period effective tax rates were 7.2% and 11.2%, respectively; the filing says the Tax Act measurement period was completed this quarter.
- Medtronic acquired Mazor Robotics in December 2018 for $1.6 billion net of cash acquired, including cash and a previously held investment. Acquisition-related costs included $51 million recognized through January 25; Mazor’s post-acquisition revenue and earnings were not material.
- The Enterprise Excellence restructuring program is expected to generate more than $3.0 billion of annual gross savings by the end of fiscal 2022, with $500–$700 million expected each fiscal year through then. Estimated pre-tax charges are $1.6–$1.8 billion, mostly incurred by fiscal 2022; related cash outlays are expected to be substantially complete by fiscal 2023. Nine-month restructuring and associated costs were $256 million.
- The company announced after quarter-end a cash tender offer for up to $5.0 billion of certain senior notes, subject to conditions including sufficient proceeds from debt financing.
Outlook, commentary and risks
Management describes growth priorities as therapy innovation, globalization, and economic value, and expects available cash, short-term investments, the credit facility, and commercial-paper program to meet foreseeable operating needs for at least 12 months. No consolidated revenue or EPS guidance is provided in the supplied filing text. Management identifies product acceptance and launches, regulatory approvals, competition, pricing pressure, reimbursement, procedure volumes, product replacement cycles, foreign exchange, and macroeconomic conditions as factors that could affect results. It also notes a potential supply risk for Surgical Innovations following the closure of the Sterigenics Willowbrook facility and the need to secure replacement sterilization capacity.
Accrued litigation was approximately $0.8 billion. The filing describes material uncertainty across product-liability, patent, environmental, shareholder, tax, and government matters. A jury returned an approximately $112 million verdict against the company in the Sasso matter; Medtronic appealed and had not accrued an expense because it did not consider a loss probable. A DOJ/HHS inquiry concerning neurovascular product business practices remains ongoing, with no loss accrued because it was not considered probable or reasonably estimable. Tax audits and disputes, including Puerto Rico income-allocation matters, may also have a material adverse effect. The company warns that estimates and outcomes may differ materially from recorded accruals.
Other watch items include $124 million of gross unrealized losses on available-for-sale debt securities, potentially subject to impairment if market conditions worsen; auction-rate securities remain illiquid. The company reported effective disclosure controls. ERP deployment and related control changes in parts of Latin America are continuing, with completion projected in fiscal 2020.
Important facts for investors to verify
- Separate underlying operating trends from the prior-year Tax Act charge, divestiture gain, and other non-GAAP adjustments; compare GAAP and non-GAAP results and their reconciliations.
- Assess segment growth on a comparable basis, particularly Minimally Invasive Therapies’ prior-year divestiture effect and the impact of currency.
- Monitor whether the Enterprise Excellence savings, restructuring charges, and cash-outlay timetable remain on plan.
- Track Mazor integration and the strategic and financial returns from the acquisition, alongside the announced debt tender offer and resulting debt levels.
- Review developments in litigation, tax disputes, government investigations, and sterilization capacity, including any changes to accruals or disclosed exposure.
- Evaluate cash conversion, working-capital movements, shareholder returns, investment liquidity, and debt maturities against the company’s stated liquidity outlook.