Medtronic Spending Less On Building, And More On Selling?

Medtronic (NYSE:MDT) spends more money on selling, and less on building. In fact, the company’s selling, general & administrative expenses (SG&A) were 40% of its total expenditure in 2018. This compares with 35% of total expenses on cost of goods sold (COGS), and a mere 9% on research & development. This can be attributed to new product launches in recent years, for which the company incurred higher promotional expenses. Over the recent years, Medtronic has seen steady revenue and expenses growth. However, its total expenses as a percentage of revenue has largely declined. The jump in fiscal 2018 seen can be attributed to the tax reforms. In this note we discuss the key drivers of Medtronic’s total expenses. You can look at our interactive dashboard analysis ~ How Does Medtronic Spend Its Money? ~ for more details.

Medtronic’s Total Expenses As Percentage of Revenue Has Declined In Recent Years

Breaking Down Medtronic’s Total Expenses

SG&A

• SG&A, or selling, general & administrative expenses, includes salary, benefit costs, professional and marketing fees, shipping and handling costs, advertising and product promotions, among others. It accounted for 40% of the company’s total expense in fiscal 2019.
• SG&A as % of revenue grew from 32.8% in fiscal 2016 to 34.1% in fiscal 2019. Trefis estimates the metric to grow further to 34.8% in fiscal 2021. The growth in the recent years can be attributed to higher spending on the company’s new products.

COGS

• COGS or cost of goods sold accounted for 35% of the company’s total expense in fiscal 2019.
• COGS as % of revenue declined from 31.7% in fiscal 2016 to 30.0% in fiscal 2019. Trefis estimates the metric to hover around the 30% mark in the near term.

R&D

• R&D, or research & development expenses, includes the costs of research on healthcare products, and their development, among other related expenses. It accounted for 9% of the company’s total expense in fiscal 2019.
• R&D as % of revenue have remained in the tight range of 7.4% to 7.7% in recent years. Trefis estimates the metric to see modest growth in the near term.

Other Operating Expenses

• Other Operating Expenses accounted for 9% of the company’s total expenses in fiscal 2016.
• Other operating expenses as % of revenue have fluctuated in the recent years, and the figure stood at 7.8% in fiscal 2019. We expect the figure to see slight growth in the near term.

Interest & Other Expenses

• Interest & Other Expense, which includes interest expense and investment income, among others, accounted for 4% of the company’s total expenses in fiscal 2019. Interest & Other Expense as % of revenue grew slightly from 3.3% in fiscal 2016 to 3.5% in fiscal 2019, and we estimate it to be around 3.9% in fiscal 2021.

Income Taxes

• Income Taxes saw a sharp increase in fiscal 2018, due to the impact of the tax reform. The effective tax rate for Medtronic stood at 10.5% in fiscal 2019, and we estimate it to grow toward the 18% mark by fiscal 2021.

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