Medtronic (MDT)- Pay Now, Expense It Later

A closer look at an unusual decline in MDT’s accrued expenses

A careful review of the movement of balance sheet accounts is a key part of any earnings quality analysis. Under accrual accounting, revenue does not match cash coming in and expenses do not match cash going out. Management must make assumptions that impact when the cash flows will be recognized on the income statement. Therefore, if a liability account such as accrued expenses is declining while revenues are increasing, an analyst should do some digging to find out why. Unfortunately, companies seldom disclose the detailed components of the balance sheet accounts and when they do, it is often only on an annual basis. Clues regarding the major drivers of balance sheet account changes may sometimes be found in various footnote disclosures but often, they will go unexplained.

In this report, we will examine an unusual trend in Medtronic’s (MDT) accrued expense account that we identified for our institutional clients. Footnote disclosures allowed us to see what did NOT drive the decline in the account which seemed at odds with management’s explanation for the change.