Medtronic Plc quarterly report, Q3 FY2023

Business context and reporting period

Medtronic plc’s Form 10-Q covers its third quarter and first nine months of fiscal 2023, ended January 27, 2023; comparisons are with the periods ended January 28, 2022. Medtronic is a global medical technology company reporting four segments: Cardiovascular, Medical Surgical, Neuroscience, and Diabetes. Amounts below are in U.S. dollars.

Financial performance and liquidity

Quarterly net margin was approximately 15.8%, versus 19.1% a year earlier; nine-month net margin was 11.4%, versus 15.1%. The nine-month GAAP earnings comparison includes a $764 million tax charge related to a U.S. Tax Court opinion. Nine-month non-GAAP EPS also declined year over year.

At January 27, 2023, cash and cash equivalents were $4.521B and current investments were $6.616B. Current assets were $25.364B against current liabilities of $14.422B. Total debt was approximately $28.1B, up from $24.1B at April 29, 2022; the filing reports $5.918B of current debt and $22.210B of long-term debt. The company had $625M of commercial paper outstanding and no borrowings under its $3.5B revolving credit facility. Management said available liquidity and the balance sheet provide flexibility to meet foreseeable operating needs.

Material changes and management commentary

• Quarterly sales were nearly flat, while nine-month sales declined. Management attributed the pressure mainly to unfavorable currency, China volume-based procurement tenders and COVID-19 effects, and supply-chain disruption. It cited growth in Micra, TAVR, U.S. Core Spine, and international Diabetes as offsets.
• For the quarter, Cardiovascular sales rose 1% and Neuroscience rose 5%; Medical Surgical fell 7% and Diabetes fell 2%. For the nine months, Neuroscience rose 1%, while Cardiovascular fell 2%, Medical Surgical fell 10%, and Diabetes fell 4%.
• Cost of products sold rose faster than quarterly sales, with management citing inflation, higher labor and material costs, freight, and supply constraints. Nine-month operating cash flow fell $1.710B, principally because of lower customer collections, higher tax payments, and increased inventory spending.
• The company acquired Intersect ENT for approximately $1.2B and Affera for approximately $904M, expanding its ENT and cardiac ablation portfolios. It agreed to form an equally owned kidney-care device company with DaVita through the sale of half of Renal Care Solutions (RCS); closing was expected in fiscal Q4, subject to approvals and other conditions. The RCS agreement led to $81M of noncash charges in the first nine months, including $61M of goodwill impairment.
• Management expected its Enterprise Excellence and Simplification restructuring programs to be substantially completed by fiscal year-end, with total expected charges of approximately $1.8B and $450M, respectively. The filing provides no explicit numerical revenue or EPS guidance for the coming period.

Risks, contingencies, and unusual items

• The $764M tax charge followed an August 2022 Tax Court opinion on Puerto Rico/U.S. income allocation. The opinion remains subject to finalization and possible appeal; gross unrecognized tax benefits were $2.6B at quarter-end. The company also made a $300M IRS cash deposit during the quarter.
• On February 8, 2023, after quarter-end, a jury returned an approximately $106M verdict against Medtronic in Colibri patent litigation involving Evolut TAVR devices. Medtronic said it intends to pursue post-trial motions and appeal, and had not accrued an expense because it did not consider a loss probable.
• Accrued litigation was approximately $0.3B. Other legal matters include pelvic mesh, hernia mesh, and insulin-pump retainer-ring claims; the company stated that certain potential losses were not currently probable or reasonably estimable.
• Management identified continued uncertainty from COVID-19 and healthcare staffing, supply constraints, inflation, currency movements, pricing and reimbursement pressure, China tenders, competition, regulatory approvals, and geopolitical events. It said the Russia-Ukraine conflict’s impact in the quarter was not material; business in those countries represented less than 1% of consolidated revenue and assets.
• The company remains committed to supporting patients implanted with its HVAD system after stopping sales in 2021. Related accruals totaled $188M at quarter-end.
• Medtronic announced an intended separation of its Patient Monitoring and Respiratory Interventions businesses from Medical Surgical in October 2022, with completion expected 12–18 months after the announcement.

Most important facts for investors to verify

• Whether sales and operating performance recover as supply constraints, China tender effects, and procedure-volume pressures evolve, and how much reported growth remains affected by currency.
• The cash-flow and working-capital trend, particularly customer collections and inventory, alongside the effect of planned debt maturities and refinancing.
• The final tax outcome and any appeal or subsequent cash payments arising from the Tax Court opinion.
• Developments in the Colibri verdict and other product-liability, tax, and regulatory matters, including any change to accruals or estimated exposure.
• Approvals and closing of the DaVita/RCS transaction, progress on the planned business separation, and actual restructuring charges and savings versus management’s stated plans.
• The assumptions and exclusions in non-GAAP results, which differ from GAAP and include adjustments for specified items.