Medtronic Computer Crash to Crimp Quarterly Sales, CFO Says

  • Sales growth will be at lower end of 4% to 5% forecast
  • Parkhill’s daughter is a diabetic, uses company’s new device

A computer crash that shut down Medtronic Plc’s systems for global ordering, fulfillment and manufacturing for a week last month will crimp quarterly sales at the world’s largest medical technology company, Chief Financial Officer Karen Parkhill said.

Medtronic is still analyzing the issue, which was an internal infrastructure problem, Parkhill said in her first wide-ranging interview since joining Medtronic last summer. While the problem has been fixed and the company is back to its normal operations, it continues to fill back orders, she said.

The delays will push some sales into the next quarter. Medtronic is also dealing with a shortage of blood sugar sensors, partly because of higher-than-expected demand for an artificial pancreas the company has developed. Medtronic is scheduled to report results on Aug. 22.

“We do expect our first-quarter revenue growth on a constant currency basis to be within our guidance of 4 to 5 percent, but at the lower end of that range,” Parkhill said. First-quarter earnings per share should be in the upper end of the company’s high-single-digit range, thanks in part to a tax benefit expected in the quarter, she said.

The CFO said she’s confident that the company will meet its “full fiscal-year guidance of 4 to 5 percent constant-currency revenue growth, and 9 to 10 percent earnings-per-share growth.”

Medtronic stock fell 2.8 percent to $86.06 at 4:17 p.m. in New York, the biggest one-day loss since November. The shares are up 21 percent this year to date compared to a 17 percent gain in the 46-member Bloomberg Intelligence Global Medical Devices & Supplies index.

It’s not the only company to be hit by tech troubles. FedEx Corp. fell the most in two months after the company said its customers are still dealing with the fallout of a cyberattack last month. Medtronic’s computer issue wasn’t a hack, as far as the company knows, but an internal issue.

Good Year

Last month, Medtronic’s diabetes unit launched the first-ever artificial pancreas for type 1 diabetics. The device automatically monitors blood sugar and administers insulin without requiring constant testing and attention from the patient.

“While this no doubt throws a little dampener on the first quarter, the company’s reiteration of 4 percent to 5 percent organic for FY18 should provide some solace,” said Vijay Kumar, an analyst at Evercore ISI in New York. “Once you get the supply back, the numbers are going to go up. No one wants to see numbers come down because of a computer glitch, but this is a fairly decent outcome.”

Parkhill’s 10-year-old daughter was diagnosed with diabetes four years ago, which helped introduce her to the company’s efforts before she was in talks about the CFO role. Her daughter was one of the earliest and youngest users of the device, which Medtronic sells as the 670G.

“We couldn’t be more thrilled with the technology,” Parkhill said. “Her blood sugars are in better control now than they have been in the four years since she has been diagnosed.”

Diabetes Race

Demand for the company’s insulin pumps, glucose monitors and other supplies drove Medtronic to the top spot among diabetes device companies this year, said Jason McGorman, an analyst at Bloomberg Intelligence, displacing Roche Holding AG and Johnson & Johnson. The gap is poised to widen as more patients get the 670G, which is about two years ahead of the competition, he said.

Parkhill, the daughter of an orthopedic surgeon and a nurse, was CFO of the bank Comerica Inc. before joining Medtronic, after putting in almost two decades at JPMorgan Chase & Co., where she began as an investment banker and left as CFO of commercial banking.

Medtronic continues to pay down debt it took on with the 2015 acquisition of Coviden Plc for $52.6 billion. It will use the bulk of the $6.1 billion in cash it gets from the planned sale of a medical supplies unit to Cardinal Health Inc. to further reduce its outstanding debt.

Parkhill said the company will do the same with foreign cash that may be freed up as part of a resolution of a legal case with the Internal Revenue Service about its Puerto Rico operations that is currently winding through the courts. The original ruling, now being appealed by the IRS, would have made $3 billion available to the company that it has earmarked for debt, she said.

Efficiencies

Medtronic is on track to generate $850 million in cost savings from its acquisition of Covidien in 2015, though the effort won’t stop once that goal is reached, Parkhill said. The company, which has a legal address in Dublin and operating headquarters in Minneapolis, can also become more efficient, Parkhill said. She pointed to manufacturing, human resources, finance and legal operations, sourcing and systems integration as areas for improvement.

“Clearly we continue to focus on delivering a far greater bottom line than a top line, and you need margin improvement to do that,” she said. “This quarter is no exception.”

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