SEC Filings

10-Q
MEDTRONIC PLC filed this Form 10-Q on 12/04/2017
Entire Document
 


Net sales declines in the U.S. for the three and six months ended October 27, 2017 were primarily attributable to the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses, as well as the impact of Hurricane Maria, partially offset by growth in the Cardiac and Vascular Group. Net sales growth in non-U.S. developed markets was led by strong performance in the Cardiac and Vascular Group, the Restorative Therapies Group, and the Diabetes Group for the three and six months ended October 27, 2017. Emerging market sales growth was driven by solid performance in all of our groups. Currency had a favorable impact of $35 million and $2 million on net sales for the three and six months ended October 27, 2017, respectively.
COSTS AND EXPENSES
Cost of Products Sold
 
Three months ended
 
Six months ended
(in millions)
October 27, 2017
 
October 28, 2016
 
October 27, 2017
 
October 28, 2016
Net sales
$
7,050

 
$
7,345

 
$
14,440

 
$
14,511

Cost of products sold
2,120

 
2,326

 
4,469

 
4,587

Gross profit
$
4,930

 
$
5,019

 
$
9,971

 
$
9,924

 
 
 
 
 
 
 
 
Gross margin percent
69.9
%
 
68.3
%
 
69.1
%
 
68.4
%
We continue to focus on reducing our costs of production through supplier management, manufacturing improvements, and optimizing our manufacturing network. For the three and six months ended October 27, 2017, gross margin percent was 69.9 percent and 69.1 percent, respectively, as compared to 68.3 percent and 68.4 percent for the three and six months ended October 28, 2016, respectively. The increase in gross margin percent was due primarily to the divestiture of lower-margin products in conjunction with the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses during the three months ended October 27, 2017, partially offset by the infusion set recall in our Diabetes Group and $17 million of costs recognized in relation to restoring operations at our four Puerto Rico manufacturing sites after Hurricane Maria, including idle facility costs, asset write-downs, and other facility-related costs. Further, we incurred a $38 million charge during the three months ended October 28, 2016 related to recognition of the fair value step-up taken on inventory acquired in connection with the HeartWare acquisition.
Research and Development & Selling, General, and Administrative Expense
The following is a summary of research and development and selling, general, and administrative expenses as a percent of net sales:
 
Three months ended
 
Six months ended
 
October 27, 2017
 
October 28, 2016
 
October 27, 2017
 
October 28, 2016
Research and development expense
7.9
%
 
7.5
%
 
7.6
%
 
7.6
%
Selling, general, and administrative expense
34.6
%
 
32.9
%
 
34.1
%
 
33.4
%
Research and Development Expense We remain committed to accelerating the development of meaningful innovations to deliver better patient outcomes at appropriate costs, that lead to enhanced quality of life, and may be validated by clinical and economic evidence. We are also focused on expanding access to quality healthcare.
Research and development expense for the three and six months ended October 27, 2017 was $555 million and $1.1 billion, respectively. Research and development expense increased as a percentage of sales for the three months ended October 27, 2017 primarily due to our sales declining faster than research and development expense declined following the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.
Selling, General, and Administrative Expense Our goal is to continue to leverage selling, general, and administrative expense initiatives and to continue to realize cost synergies expected from our acquisitions. Selling, general, and administrative expense primarily consists of salaries and wages, as well as other administrative costs, such as professional fees and marketing expenses.
Selling, general, and administrative expense for the three and six months ended October 27, 2017 was $2.4 billion and $4.9 billion, respectively. Selling, general, and administrative expense increased as a percentage of net sales for the three and six months ended October 27, 2017 as compared to the three and six months ended October 28, 2016, respectively, as we incurred expenses associated with Transition Service Agreements (TSAs) and new product launches, against a decline in revenue following the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.

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