Medtronic plc — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended July 27, 2018; comparative quarter ended July 28, 2017. Amounts are in U.S. dollars.
Business context and results
Medtronic develops and sells medical devices, therapies, services, and related products across cardiovascular, minimally invasive therapies, restorative therapies, and diabetes. Reported sales were nearly unchanged year over year; the prior-year comparison includes businesses divested in July 2017.
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $7.384 billion | $7.390 billion |
| Operating profit | $1.236 billion | $1.382 billion |
| Operating margin | 16.7% | 18.7% |
| Net income attributable to Medtronic | $1.075 billion | $1.016 billion |
| Diluted EPS | $0.79 | $0.74 |
| Operating cash flow | $1.702 billion | $737 million |
| Free cash flow | $1.411 billion | $459 million |
Gross margin improved to 70.2% from 68.2%, while R&D was 7.9% of sales versus 7.4%, and SG&A was 35.2% versus 34.9%. GAAP effective tax rate fell to 8.7% from 15.6%. Non-GAAP diluted EPS was $1.17 versus $1.12; non-GAAP nominal tax rate was 13.3% versus 13.0%.
Segments and material changes
- Cardiac and Vascular Group sales increased 6% to $2.811 billion; Segment EBITA rose to $1.051 billion from $1.011 billion.
- Minimally Invasive Therapies Group sales fell 17% to $2.052 billion, largely reflecting the divestiture of Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses. Segment EBITA was $777 million versus $875 million.
- Restorative Therapies Group sales increased 8% to $1.949 billion; Segment EBITA rose to $766 million from $680 million.
- Diabetes Group sales increased 27% to $572 million, led by demand for the MiniMed 670G; Segment EBITA rose to $172 million from $112 million.
Management attributed higher net income and EPS to lower product costs following the divestiture, investment gains, lower interest expense, and a lower tax provision. These benefits were partly offset by litigation, restructuring, and business-exit charges. Operating profit declined despite higher net income, reflecting the mix of unusual items and non-operating gains.
Cash, debt, and liquidity
- Cash and cash equivalents were $4.380 billion and current investments were $6.624 billion at quarter-end, totaling $11.004 billion.
- Current assets were $22.460 billion and current liabilities $9.112 billion; working capital was $13.348 billion and the current ratio 2.5:1.
- Total debt was approximately $25.2 billion, down from $25.8 billion at April 27, 2018; long-term debt was $23.678 billion and current debt $1.545 billion. Commercial paper outstanding was $224 million. No amounts were drawn on the $3.5 billion revolving credit facility.
- Operating cash flow increased substantially year over year, partly due to customer collections, supplier-payment timing and terms, and comparison with prior-year billing and collection delays related to an IT system interruption. Capital expenditures were $291 million.
- Dividends paid were $677 million and share repurchases were $824 million. The company repurchased 9.5 million shares at an average $86.63; approximately $3.2 billion remained authorized.
Outlook, risks, and unusual items
- No consolidated revenue, earnings, or EPS guidance is stated in the supplied filing text. Management expects the Enterprise Excellence program to produce more than $3.0 billion in annual gross savings by fiscal 2022, with approximately $500–$700 million expected each fiscal year through then. Estimated pretax program charges are $1.6–$1.8 billion, mostly by fiscal 2022; related cash outlays are expected to be substantially complete by fiscal 2023.
- Quarterly charges included $103 million for certain litigation, $113 million of restructuring and associated costs, and $80 million related to exiting a business, including $61 million of intangible-asset charges. The company also recorded $110 million of gains on minority investments in the segment reconciliation.
- Accrued litigation was approximately $1.0 billion, up from $0.9 billion at fiscal year-end. The company warns actual outcomes and payments could differ materially; identified matters include product liability, shareholder, environmental, government-investigation, and intellectual-property proceedings.
- The Tax Act accounting remained provisional: the transition-tax liability was approximately $2.5 billion. Unrecognized tax benefits were $1.7 billion, with $150 million of accrued interest and penalties. The IRS tax dispute involving allocation of income with a Puerto Rico subsidiary was remanded for additional factual findings in August 2018.
- Management said cash, investments, and available credit are expected to meet foreseeable operating needs for at least 12 months. Risks include competition and pricing pressure, regulatory and reimbursement changes, product approvals and adoption, procedure volumes, foreign exchange, litigation, tax matters, cybersecurity, supply interruption, and execution of acquisitions, divestitures, and restructuring.
- Currency translation reduced other comprehensive income by $824 million during the quarter. Management also noted some investments, particularly auction-rate securities, have reduced liquidity; gross unrealized losses on available-for-sale debt securities were $162 million.
Important facts for investors to verify
- How much of future sales growth is organic, excluding the divested businesses and currency effects, and how segment trends develop.
- Whether the Enterprise Excellence savings are achieved on schedule and exceed the associated restructuring costs.
- The development of litigation accruals, settlement payments, and the Puerto Rico tax case, including potential effects on cash flow and earnings.
- Final Tax Act accounting and the sustainability of the unusually low 8.7% GAAP tax rate.
- Cash conversion and working-capital trends, alongside dividends, repurchases, and debt reduction.