Tax reform and Medtronic’s 3Q18 results
The Tax Cuts and Jobs Act was enacted in the United States in December 2017, and it seems to have affected healthcare companies’ balance sheets significantly in recently reported quarters. Most medical technology companies, including Abbott Laboratories (ABT), Boston Scientific (BSX), and Thermo Fisher Scientific (TMO), reported one-time balance sheet items related to the reform. However, most of these companies stated that the reform could bring them more financial flexibility and earnings power—the effective tax rate could be substantially lower going forward, and companies with accumulated foreign earnings may repatriate them to the United States and thereby make strategic investments for growth. To learn more, read How US Tax Reforms Could Impact the Healthcare Industry.
During Medtronic’s 3Q18 earnings release on February 20, 2018, the company expressed its views on US tax reform. Medtronic chief financial officer Karen Parkhill stated that “Medtronic has been advocating for U.S. tax reform for many years and we are pleased with the final package included the ability to gain access to our future earnings outside the United States.” Medtronic has $14 billion in cash on its balance sheet. After the tax reform, the company expects to have access to most of these funds. However, the company stated that it would benefit more from access to cash be generated in the future.
Effect on MDT’s tax rate
In 3Q18, Medtronic reported earnings of -$1.4 billion, or -$1.03 per share. However, its adjusted dilutive earnings per share were $1.17. The company attributed most of this adjustment to a one-time transition tax expense of $2.2 billion on foreign earnings related to the Tax Cuts and Jobs Act. Taking tax reform into account, Medtronic estimates that its 3Q18 nominal tax rate was 15.6%. The company expects a tax rate of 15%–16% in fiscal 4Q18.