10-QPeriod: Q1 FY2016

Medtronic plc Quarterly Report for Q1 Ended Jul 31, 2015

Filed September 9, 2015For Securities:MDT

Summary

Medtronic plc reported net sales of $7.274 billion for the three months ended July 31, 2015, a substantial 70% increase year-over-year, primarily driven by the acquisition of Covidien. This acquisition, completed in January 2015 for approximately $50 billion, significantly expanded Medtronic's scale and diversified its product portfolio, particularly in the Minimally Invasive Therapies Group. While net income slightly decreased to $820 million ($0.57 per diluted share) compared to $871 million ($0.87 per diluted share) in the prior year period, this is largely due to non-GAAP adjustments and acquisition-related expenses. The company continues to invest in research and development and is experiencing strong performance in its Cardiac and Vascular Group and Restorative Therapies Group, alongside initial contributions from the newly formed Minimally Invasive Therapies Group. Key financial highlights include a robust increase in net sales, bolstered by the Covidien integration and organic growth across several segments. However, investors should note the significant increase in cost of products sold, partly due to the amortization of the acquired Covidien inventory fair value adjustment and integration costs. Medtronic's financial position remains solid, with a strong cash position and ample liquidity, allowing for continued strategic investments and capital returns to shareholders, including share repurchases and dividends. The company is actively managing foreign currency fluctuations and interest rate risks through various hedging strategies.

Financial Highlights

51 data points
Beta

Revenue

$7.27B

66.2% Gross Margin

Net Income

$820.00M

11.3% Net Margin

EPS (Diluted)

$0.57

Total Assets

$104.63B

Cash & Equivalents

$2.98B

Free Cash Flow

$592.00M

Financial Statements
Beta
Revenue$7.27B
Cost of Revenue$2.46B
Gross Profit$4.82B
SG&A Expenses$2.45B
Operating Income$1.13B
Interest Expense$306.00M
Net Income$820.00M
EPS (Basic)$0.58
EPS (Diluted)$0.57
Shares Outstanding (Basic)1.42B
Shares Outstanding (Diluted)1.44B

Key Highlights

  • 1Net sales surged by 70% to $7.274 billion for the three months ended July 31, 2015, largely due to the acquisition of Covidien.
  • 2Net income decreased to $820 million ($0.57 per diluted share) from $871 million ($0.87 per diluted share) in the prior year period, impacted by acquisition-related costs and inventory step-up adjustments.
  • 3The acquisition of Covidien on January 26, 2015, for approximately $50 billion, significantly expanded Medtronic's business, creating the Minimally Invasive Therapies Group.
  • 4Operating profit increased to $1.131 billion, while income from operations before income taxes decreased to $940 million, influenced by various charges and adjustments.
  • 5Research and development expenses increased to $558 million, reflecting continued investment in innovation.
  • 6The company's cash position decreased to $2.979 billion, with net cash used in financing activities at $1.744 billion, including debt payments and share repurchases.
  • 7Medtronic continues to manage foreign currency exposure through derivative instruments, with a gross notional amount of $9.240 billion in currency exchange rate derivatives outstanding.

Frequently Asked Questions

The primary driver was the acquisition of Covidien, which closed on January 26, 2015. This acquisition significantly expanded Medtronic's operations and created the new Minimally Invasive Therapies Group, contributing $2.456 billion in net sales for the quarter.

The decrease in net income is largely attributable to non-GAAP adjustments and acquisition-related costs. These include a $226 million charge for the amortization of the remaining Covidien inventory fair value adjustment, restructuring charges of $67 million, and acquisition-related items totaling $71 million. When these adjustments are excluded, non-GAAP net income was $1.462 billion.

The acquisition has led to a significant restructuring of Medtronic's reporting segments. The Minimally Invasive Therapies Group was newly formed, incorporating the majority of Covidien's former operations. The Cardiac and Vascular Group and Restorative Therapies Group also saw contributions from Covidien's businesses, with the latter gaining the Neurovascular division.

Medtronic's liquidity position remains solid, with $2.979 billion in cash and cash equivalents and a $3.5 billion revolving credit facility. The company expects existing cash, investments, and credit facilities to meet foreseeable working capital requirements for the next 12 months. Medtronic also anticipates returning 50% of its free cash flow to shareholders in fiscal year 2016 and has substantial share repurchase programs authorized.