UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended | JanuaryOctober 29, 2021 |
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☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from __________ to __________ |
Commission File Number 001-36820
® | | | | | |
MEDTRONIC PUBLIC LIMITED COMPANYMedtronic plc |
(Exact name of registrant as specified in its charter) |
| |
Ireland | 98-1183488 |
(State of incorporation) | (I.R.S. Employer Identification No.) |
20 On Hatch, Lower Hatch Street
Dublin 2, Ireland
(Address of principal executive offices) (Zip Code)
+353 1 438-1700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Ordinary shares, par value $0.0001 per share | MDT | New York Stock Exchange |
Floating Rate Notes due 2021 | MDT/21 | New York Stock Exchange |
0.00% Senior Notes due 2022 | MDT/22B | New York Stock Exchange |
0.375% Senior Notes due 2023 | MDT/23B | New York Stock Exchange |
0.000% Senior Notes due 2023 | MDT/23C | New York Stock Exchange |
0.25% Senior Notes due 2025 | MDT/25 | New York Stock Exchange |
0.000% Senior Notes due 2025 | MDT/25A | New York Stock Exchange |
1.125% Senior Notes due 2027 | MDT/27 | New York Stock Exchange |
0.375% Senior Notes due 2028 | MDT/28 | New York Stock Exchange |
1.625% Senior Notes due 2031 | MDT/31 | New York Stock Exchange |
1.00% Senior Notes due 2031 | MDT/31A | New York Stock Exchange |
0.750% Senior Notes due 2032 | MDT/32 | New York Stock Exchange |
2.250% Senior Notes due 2039 | MDT/39A | New York Stock Exchange |
1.50% Senior Notes due 2039 | MDT/39B | New York Stock Exchange |
1.375% Senior Notes due 2040 | MDT/40A | New York Stock Exchange |
1.75% Senior Notes due 2049 | MDT/49 | New York Stock Exchange |
1.625% Senior Notes due 2050 | MDT/50 | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | Accelerated filer | ☐ | Emerging growth company | ☐ |
Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 1(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of March 3,November 30, 2021, 1,348,072,8471,344,557,784 ordinary shares, par value $0.0001, and 1,872 A preferred shares, par value $1.00, of the registrant were outstanding.
TABLE OF CONTENTS
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Medtronic plc
Consolidated Statements of Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in millions, except per share data) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 |
Net sales | $ | 7,775 | | | $ | 7,717 | | | $ | 21,929 | | | $ | 22,916 | |
Costs and expenses: | | | | | | | |
Cost of products sold | 2,621 | | | 2,400 | | | 7,830 | | | 7,160 | |
Research and development expense | 601 | | | 573 | | | 1,861 | | | 1,763 | |
Selling, general, and administrative expense | 2,537 | | | 2,587 | | | 7,553 | | | 7,750 | |
Amortization of intangible assets | 453 | | | 436 | | | 1,337 | | | 1,317 | |
Restructuring charges, net | 83 | | | 13 | | | 235 | | | 87 | |
Certain litigation charges, net | 122 | | | 108 | | | 118 | | | 276 | |
| | | | | | | |
Other operating expense (income), net | 82 | | | (39) | | | 116 | | | 88 | |
Operating profit | 1,277 | | | 1,639 | | | 2,879 | | | 4,475 | |
Other non-operating income, net | (86) | | | (96) | | | (233) | | | (305) | |
Interest expense | 143 | | | 156 | | | 783 | | | 930 | |
Income before income taxes | 1,220 | | | 1,579 | | | 2,329 | | | 3,850 | |
Income tax provision (benefit) | (59) | | | (340) | | | 65 | | | (317) | |
Net income | 1,279 | | | 1,919 | | | 2,264 | | | 4,167 | |
Net income attributable to noncontrolling interests | (9) | | | (4) | | | (18) | | | (24) | |
Net income attributable to Medtronic | $ | 1,270 | | | $ | 1,915 | | | $ | 2,246 | | | $ | 4,143 | |
Basic earnings per share | $ | 0.94 | | | $ | 1.43 | | | $ | 1.67 | | | $ | 3.09 | |
Diluted earnings per share | $ | 0.94 | | | $ | 1.42 | | | $ | 1.66 | | | $ | 3.07 | |
Basic weighted average shares outstanding | 1,346.4 | | | 1,340.5 | | | 1,344.2 | | | 1,340.7 | |
Diluted weighted average shares outstanding | 1,356.0 | | | 1,351.5 | | | 1,352.7 | | | 1,351.6 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in millions, except per share data) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Net sales | $ | 7,847 | | | $ | 7,647 | | | $ | 15,835 | | | $ | 14,154 | |
Costs and expenses: | | | | | | | |
Cost of products sold | 2,497 | | | 2,705 | | | 5,095 | | | 5,209 | |
Research and development expense | 676 | | | 639 | | | 1,426 | | | 1,260 | |
Selling, general, and administrative expense | 2,615 | | | 2,600 | | | 5,163 | | | 5,017 | |
Amortization of intangible assets | 431 | | | 443 | | | 866 | | | 884 | |
Restructuring charges, net | 10 | | | 97 | | | 21 | | | 150 | |
Certain litigation charges, net | 34 | | | 84 | | | 60 | | | (4) | |
| | | | | | | |
Other operating expense, net | 21 | | | 149 | | | 781 | | | 35 | |
Operating profit | 1,563 | | | 930 | | | 2,422 | | | 1,603 | |
Other non-operating income, net | (66) | | | (65) | | | (177) | | | (147) | |
Interest expense | 136 | | | 470 | | | 273 | | | 641 | |
Income before income taxes | 1,493 | | | 525 | | | 2,326 | | | 1,109 | |
Income tax provision | 176 | | | 31 | | | 240 | | | 124 | |
Net income | 1,317 | | | 494 | | | 2,086 | | | 985 | |
Net income attributable to noncontrolling interests | (6) | | | (5) | | | (12) | | | (9) | |
Net income attributable to Medtronic | $ | 1,311 | | | $ | 489 | | | $ | 2,074 | | | $ | 976 | |
Basic earnings per share | $ | 0.97 | | | $ | 0.36 | | | $ | 1.54 | | | $ | 0.73 | |
Diluted earnings per share | $ | 0.97 | | | $ | 0.36 | | | $ | 1.53 | | | $ | 0.72 | |
Basic weighted average shares outstanding | 1,345.1 | | | 1,344.4 | | | 1,344.8 | | | 1,343.1 | |
Diluted weighted average shares outstanding | 1,355.3 | | | 1,352.1 | | | 1,355.9 | | | 1,351.1 | |
The accompanying notes are an integral part of these consolidated financial statements.
Medtronic plc
Consolidated Statements of Comprehensive Income
(Unaudited)
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| Three months ended | | Nine months ended |
(in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 |
Net income | $ | 1,279 | | | $ | 1,919 | | | $ | 2,264 | | | $ | 4,167 | |
| | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Unrealized gain on investment securities | 24 | | | 20 | | | 137 | | | 93 | |
Translation adjustment | 690 | | | 32 | | | 1,951 | | | (116) | |
Net investment hedge | (587) | | | 35 | | | (1,863) | | | 187 | |
Net change in retirement obligations | 9 | | | 13 | | | 28 | | | 38 | |
Unrealized loss on cash flow hedges | (213) | | | (35) | | | (607) | | | (37) | |
Other comprehensive (loss) income | (78) | | | 65 | | | (354) | | | 165 | |
Comprehensive income including noncontrolling interests | 1,201 | | | 1,984 | | | 1,910 | | | 4,332 | |
Comprehensive income attributable to noncontrolling interests | (11) | | | (4) | | | (27) | | | (24) | |
Comprehensive income attributable to Medtronic | $ | 1,190 | | | $ | 1,980 | | | $ | 1,883 | | | $ | 4,308 | |
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| Three months ended | | Six months ended |
(in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Net income | $ | 1,317 | | | $ | 494 | | | $ | 2,086 | | | $ | 985 | |
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Other comprehensive income (loss), net of tax: | | | | | | | |
Unrealized gain (loss) on investment securities | (56) | | | (12) | | | (44) | | | 113 | |
Translation adjustment | (247) | | | 144 | | | (602) | | | 1,261 | |
Net investment hedge | 356 | | | (164) | | | 780 | | | (1,276) | |
Net change in retirement obligations | 18 | | | 17 | | | 37 | | | 20 | |
Unrealized gain (loss) on cash flow hedges | 95 | | | (45) | | | 269 | | | (395) | |
Other comprehensive income (loss) | 166 | | | (60) | | | 440 | | | (277) | |
Comprehensive income including noncontrolling interests | 1,483 | | | 434 | | | 2,526 | | | 708 | |
Comprehensive income attributable to noncontrolling interests | (5) | | | (6) | | | (9) | | | (15) | |
Comprehensive income attributable to Medtronic | $ | 1,478 | | | $ | 428 | | | $ | 2,517 | | | $ | 693 | |
The accompanying notes are an integral part of these consolidated financial statements.
Medtronic plc
Consolidated Balance Sheets
(Unaudited)
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(in millions) | January 29, 2021 | | April 24, 2020 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 5,077 | | | $ | 4,140 | |
Investments | 9,562 | | | 6,808 | |
Accounts receivable, less allowances and credit losses of $277 and $208, respectively | 5,215 | | | 4,645 | |
Inventories, net | 4,508 | | | 4,229 | |
Other current assets | 1,986 | | | 2,209 | |
Total current assets | 26,347 | | | 22,031 | |
Property, plant, and equipment | 12,398 | | | 11,644 | |
Accumulated depreciation | (7,375) | | | (6,816) | |
Property, plant, and equipment, net | 5,023 | | | 4,828 | |
Goodwill | 42,141 | | | 39,841 | |
Other intangible assets, net | 18,240 | | | 19,063 | |
Tax assets | 3,310 | | | 2,832 | |
Other assets | 2,208 | | | 2,094 | |
Total assets | $ | 97,270 | | | $ | 90,689 | |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Current debt obligations | $ | 3,821 | | | $ | 2,776 | |
Accounts payable | 1,816 | | | 1,996 | |
Accrued compensation | 2,495 | | | 2,099 | |
Accrued income taxes | 403 | | | 502 | |
Other accrued expenses | 3,999 | | | 2,993 | |
Total current liabilities | 12,534 | | | 10,366 | |
Long-term debt | 26,502 | | | 22,021 | |
Accrued compensation and retirement benefits | 2,042 | | | 1,910 | |
Accrued income taxes | 2,263 | | | 2,682 | |
Deferred tax liabilities | 1,232 | | | 1,174 | |
Other liabilities | 1,768 | | | 1,664 | |
Total liabilities | 46,342 | | | 39,817 | |
Commitments and contingencies (Note 16) | 0 | | 0 |
Shareholders’ equity: | | | |
Ordinary shares— par value $0.0001, 2.6 billion shares authorized, 1,347,470,889 and 1,341,074,724 shares issued and outstanding, respectively | 0 | | | 0 | |
Additional paid-in capital | 26,665 | | | 26,165 | |
Retained earnings | 28,015 | | | 28,132 | |
Accumulated other comprehensive loss | (3,922) | | | (3,560) | |
Total shareholders’ equity | 50,758 | | | 50,737 | |
Noncontrolling interests | 170 | | | 135 | |
Total equity | 50,928 | | | 50,872 | |
Total liabilities and equity | $ | 97,270 | | | $ | 90,689 | |
| | | | | | | | | | | |
(in millions) | October 29, 2021 | | April 30, 2021 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 2,900 | | | $ | 3,593 | |
Investments | 7,769 | | | 7,224 | |
Accounts receivable, less allowances and credit losses of $255 and $241, respectively | 5,493 | | | 5,462 | |
Inventories, net | 4,349 | | | 4,313 | |
Other current assets | 2,220 | | | 1,955 | |
Total current assets | 22,731 | | | 22,548 | |
Property, plant, and equipment | 12,978 | | | 12,700 | |
Accumulated depreciation | (7,790) | | | (7,479) | |
Property, plant, and equipment, net | 5,188 | | | 5,221 | |
Goodwill | 41,612 | | | 41,961 | |
Other intangible assets, net | 16,523 | | | 17,740 | |
Tax assets | 3,203 | | | 3,169 | |
Other assets | 2,499 | | | 2,443 | |
Total assets | $ | 91,756 | | | $ | 93,083 | |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Current debt obligations | $ | 16 | | | $ | 11 | |
Accounts payable | 1,917 | | | 2,106 | |
Accrued compensation | 1,934 | | | 2,482 | |
Accrued income taxes | 467 | | | 435 | |
Other accrued expenses | 3,469 | | | 3,475 | |
Total current liabilities | 7,803 | | | 8,509 | |
Long-term debt | 25,607 | | | 26,378 | |
Accrued compensation and retirement benefits | 1,505 | | | 1,557 | |
Accrued income taxes | 2,110 | | | 2,251 | |
Deferred tax liabilities | 1,024 | | | 1,028 | |
Other liabilities | 1,547 | | | 1,756 | |
Total liabilities | 39,596 | | | 41,481 | |
Commitments and contingencies (Note 16) | 0 | | 0 |
Shareholders’ equity: | | | |
Ordinary shares— par value $0.0001, 2.6 billion shares authorized, 1,344,861,769 and 1,345,400,671 shares issued and outstanding, respectively | — | | | — | |
Additional paid-in capital | 26,059 | | | 26,319 | |
Retained earnings | 28,974 | | | 28,594 | |
Accumulated other comprehensive loss | (3,042) | | | (3,485) | |
Total shareholders’ equity | 51,991 | | | 51,428 | |
Noncontrolling interests | 168 | | | 174 | |
Total equity | 52,159 | | | 51,602 | |
Total liabilities and equity | $ | 91,756 | | | $ | 93,083 | |
The accompanying notes are an integral part of these consolidated financial statements.
Medtronic plc
Consolidated Statements of Equity
(Unaudited)
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| | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
(in millions) | | Number | | Par Value | | | | | | |
April 24, 2020 | | 1,341 | | | $ | 0 | | | $ | 26,165 | | | $ | 28,132 | | | $ | (3,560) | | | $ | 50,737 | | | $ | 135 | | | $ | 50,872 | |
Net income | | — | | | — | | | — | | | 487 | | | — | | | 487 | | | 4 | | | 491 | |
Other comprehensive (loss) income | | — | | | — | | | — | | | — | | | (222) | | | (222) | | | 5 | | | (217) | |
Dividends to shareholders ($0.58 per ordinary share) | | — | | | — | | | — | | | (778) | | | — | | | (778) | | | — | | | (778) | |
Issuance of shares under stock purchase and award plans | | 2 | | | — | | | 26 | | | — | | | — | | | 26 | | | — | | | 26 | |
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Stock-based compensation | | — | | | — | | | 70 | | | — | | | — | | | 70 | | | — | | | 70 | |
Changes to noncontrolling ownership interests | | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | 3 | |
Cumulative effect of change in accounting principle(1) | | — | | | — | | | — | | | (24) | | | — | | | (24) | | | — | | | (24) | |
July 31, 2020 | | 1,343 | | | $ | 0 | | | $ | 26,261 | | | $ | 27,817 | | | $ | (3,782) | | | $ | 50,296 | | | $ | 147 | | | $ | 50,443 | |
Net income | | — | | | — | | | — | | | 489 | | | — | | | 489 | | | 5 | | | 494 | |
Other comprehensive (loss) income | | — | | | — | | | — | | | — | | | (61) | | | (61) | | | 1 | | | (60) | |
Dividends to shareholders ($0.58 per ordinary share) | | — | | | — | | | — | | | (780) | | | — | | | (780) | | | — | | | (780) | |
Issuance of shares under stock purchase and award plans | | 2 | | | — | | | 93 | | | — | | | — | | | 93 | | | — | | | 93 | |
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Stock-based compensation | | — | | | — | | | 140 | | | — | | | — | | | 140 | | | — | | | 140 | |
Changes to noncontrolling ownership interests | | — | | | — | | | (13) | | | — | | | — | | | (13) | | | (1) | | | (14) | |
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October 30, 2020 | | 1,345 | | | $ | 0 | | | $ | 26,481 | | | $ | 27,526 | | | $ | (3,843) | | | $ | 50,164 | | | $ | 152 | | | $ | 50,316 | |
Net income | | — | | | — | | | — | | | 1,270 | | | — | | | 1,270 | | | 9 | | | 1,279 | |
Other comprehensive (loss) income | | — | | | — | | | — | | | — | | | (80) | | | (80) | | | 2 | | | (78) | |
Dividends to shareholders ($0.58 per ordinary share) | | — | | | — | | | — | | | (781) | | | — | | | (781) | | | — | | | (781) | |
Issuance of shares under stock purchase and award plans | | 2 | | | — | | | 118 | | | — | | | — | | | 118 | | | — | | | 118 | |
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Stock-based compensation | | — | | | — | | | 65 | | | — | | | — | | | 65 | | | — | | | 65 | |
Changes to noncontrolling ownership interests | | — | | | — | | | 0 | | | — | | | — | | | 0 | | | 6 | | | 6 | |
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January 29, 2021 | | 1,347 | | | $ | 0 | | | $ | 26,665 | | | $ | 28,015 | | | $ | (3,922) | | | $ | 50,758 | | | $ | 170 | | | $ | 50,928 | |
(1) See Note 2 to the consolidated financial statements for discussion regarding the adoption of accounting standards during the first quarter of fiscal year 2021. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
(in millions) | | Number | | Par Value | | | | | | |
April 30, 2021 | | 1,345 | | | $ | — | | | $ | 26,319 | | | $ | 28,594 | | | $ | (3,485) | | | $ | 51,428 | | | $ | 174 | | | $ | 51,602 | |
Net income | | — | | | — | | | — | | | 763 | | | — | | | 763 | | | 6 | | | 769 | |
Other comprehensive (loss) income | | — | | | — | | | — | | | — | | | 276 | | | 276 | | | (2) | | | 274 | |
Dividends to shareholders ($0.63 per ordinary share) | | — | | | — | | | — | | | (846) | | | — | | | (846) | | | — | | | (846) | |
Issuance of shares under stock purchase and award plans | | 2 | | | — | | | 107 | | | — | | | — | | | 107 | | | — | | | 107 | |
Repurchase of ordinary shares | | (2) | | | — | | | (311) | | | — | | | — | | | (311) | | | — | | | (311) | |
Stock-based compensation | | — | | | — | | | 69 | | | — | | | — | | | 69 | | | — | | | 69 | |
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July 30, 2021 | | 1,345 | | | $ | — | | | $ | 26,184 | | | $ | 28,511 | | | $ | (3,209) | | | $ | 51,486 | | | $ | 178 | | | $ | 51,664 | |
Net income | | — | | | — | | | — | | | 1,311 | | | — | | | 1,311 | | | 6 | | | 1,317 | |
Other comprehensive (loss) income | | — | | | — | | | — | | | — | | | 167 | | | 167 | | | (1) | | | 166 | |
Dividends to shareholders ($0.63 per ordinary share) | | — | | | — | | | — | | | (847) | | | — | | | (847) | | | — | | | (847) | |
Issuance of shares under stock purchase and award plans | | 3 | | | — | | | 92 | | | — | | | — | | | 92 | | | — | | | 92 | |
Repurchase of ordinary shares | | (3) | | | — | | | (358) | | | — | | | — | | | (358) | | | — | | | (358) | |
Stock-based compensation | | — | | | — | | | 140 | | | — | | | — | | | 140 | | | — | | | 140 | |
Changes to noncontrolling ownership interests | | — | | | — | | | 1 | | | — | | | — | | | 1 | | | (16) | | | (15) | |
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October 29, 2021 | | 1,345 | | | $ | — | | | $ | 26,059 | | | $ | 28,974 | | | $ | (3,042) | | | $ | 51,991 | | | $ | 168 | | | $ | 52,159 | |
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The accompanying notes are an integral part of these consolidated financial statements.
| | | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity | | Noncontrolling Interests | | Total Equity | | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
(in millions) | (in millions) | | Number | | Par Value | | (in millions) | | Number | | Par Value | |
April 26, 2019 | | 1,341 | | | $ | 0 | | | $ | 26,532 | | | $ | 26,270 | | | $ | (2,711) | | | $ | 50,091 | | | $ | 121 | | | $ | 50,212 | | |
April 24, 2020 | | April 24, 2020 | | 1,341 | | | $ | — | | | $ | 26,165 | | | $ | 28,132 | | | $ | (3,560) | | | $ | 50,737 | | | $ | 135 | | | $ | 50,872 | |
Net income | Net income | | — | | | — | | | — | | | 864 | | | — | | | 864 | | | 13 | | | 877 | | Net income | | — | | | — | | | — | | | 487 | | | — | | | 487 | | | 4 | | | 491 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | 227 | | | 227 | | | — | | | 227 | | |
Dividends to shareholders ($0.54 per ordinary share) | | — | | | — | | | — | | | (724) | | | — | | | (724) | | | — | | | (724) | | |
Other comprehensive (loss) income | | Other comprehensive (loss) income | | — | | | — | | | — | | | — | | | (222) | | | (222) | | | 5 | | | (217) | |
Dividends to shareholders ($0.58 per ordinary share) | | Dividends to shareholders ($0.58 per ordinary share) | | — | | | — | | | — | | | (778) | | | — | | | (778) | | | — | | | (778) | |
Issuance of shares under stock purchase and award plans | Issuance of shares under stock purchase and award plans | | 3 | | | — | | | 205 | | | — | | | — | | | 205 | | | — | | | 205 | | Issuance of shares under stock purchase and award plans | | 2 | | | — | | | 26 | | | — | | | — | | | 26 | | | — | | | 26 | |
Repurchase of ordinary shares | | (3) | | | — | | | (328) | | | — | | | — | | | (328) | | | — | | | (328) | | |
| Stock-based compensation | Stock-based compensation | | — | | | — | | | 61 | | | — | | | — | | | 61 | | | — | | | 61 | | Stock-based compensation | | — | | | — | | | 70 | | | — | | | — | | | 70 | | | — | | | 70 | |
| Changes to noncontrolling ownership interests | | Changes to noncontrolling ownership interests | | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | 3 | |
Cumulative effect of change in accounting principle(1) | Cumulative effect of change in accounting principle(1) | | — | | | — | | | — | | | (33) | | | — | | | (33) | | | — | | | (33) | | Cumulative effect of change in accounting principle(1) | | — | | | — | | | — | | | (24) | | | — | | | (24) | | | — | | | (24) | |
July 26, 2019 | | 1,341 | | | $ | 0 | | | $ | 26,470 | | | $ | 26,377 | | | $ | (2,484) | | | $ | 50,363 | | | $ | 134 | | | $ | 50,497 | | |
July 31, 2020 | | July 31, 2020 | | 1,343 | | | $ | — | | | $ | 26,261 | | | $ | 27,817 | | | $ | (3,782) | | | $ | 50,296 | | | $ | 147 | | | $ | 50,443 | |
Net income | Net income | | — | | | — | | | — | | | 1,364 | | | — | | | 1,364 | | | 7 | | | 1,371 | | Net income | | — | | | — | | | — | | | 489 | | | — | | | 489 | | | 5 | | | 494 | |
Other comprehensive (loss) | Other comprehensive (loss) | | — | | | — | | | — | | | — | | | (127) | | | (127) | | | — | | | (127) | | Other comprehensive (loss) | | — | | | — | | | — | | | — | | | (61) | | | (61) | | | 1 | | | (60) | |
Dividends to shareholders ($0.54 per ordinary share) | | — | | | — | | | — | | | (723) | | | — | | | (723) | | | — | | | (723) | | |
Dividends to shareholders ($0.58 per ordinary share) | | Dividends to shareholders ($0.58 per ordinary share) | | — | | | — | | | — | | | (780) | | | — | | | (780) | | | — | | | (780) | |
Issuance of shares under stock purchase and award plans | Issuance of shares under stock purchase and award plans | | 4 | | | — | | | 145 | | | — | | | — | | | 145 | | | — | | | 145 | | Issuance of shares under stock purchase and award plans | | 2 | | | — | | | 93 | | | — | | | — | | | 93 | | | — | | | 93 | |
Repurchase of ordinary shares | | (5) | | | — | | | (552) | | | — | | | — | | | (552) | | | — | | | (552) | | |
| Stock-based compensation | Stock-based compensation | | — | | | — | | | 108 | | | — | | | — | | | 108 | | | — | | | 108 | | Stock-based compensation | | — | | | — | | | 140 | | | — | | | — | | | 140 | | | — | | | 140 | |
Changes to noncontrolling ownership interests | | Changes to noncontrolling ownership interests | | — | | | — | | | (13) | | | — | | | — | | | (13) | | | (1) | | | (14) | |
| October 30, 2020 | | October 30, 2020 | | 1,345 | | | $ | — | | | $ | 26,481 | | | $ | 27,526 | | | $ | (3,843) | | | $ | 50,164 | | | $ | 152 | | | $ | 50,316 | |
| October 25, 2019 | | 1,340 | | | $ | 0 | | | $ | 26,171 | | | $ | 27,018 | | | $ | (2,611) | | | $ | 50,578 | | | $ | 141 | | | $ | 50,719 | | |
Net income | | — | | | — | | | — | | | 1,915 | | | — | | | 1,915 | | | 4 | | | 1,919 | | |
Other comprehensive income | | — | | | — | | | — | | | — | | | 65 | | | 65 | | | — | | | 65 | | |
Dividends to shareholders ($0.54 per ordinary share) | | — | | | — | | | — | | | (723) | | | — | | | (723) | | | — | | | (723) | | |
Issuance of shares under stock purchase and award plans | | 3 | | | — | | | 143 | | | — | | | — | | | 143 | | | — | | | 143 | | |
Repurchase of ordinary shares | | (2) | | | — | | | (236) | | | — | | | — | | | (236) | | | — | | | (236) | | |
Stock-based compensation | | — | | | — | | | 66 | | | — | | | — | | | 66 | | | — | | | 66 | | |
| January 24, 2020 | | 1,341 | | | $ | 0 | | | $ | 26,144 | | | $ | 28,210 | | | $ | (2,546) | | | $ | 51,808 | | | $ | 145 | | | $ | 51,953 | | |
|
(1) The cumulative effect of the change in accounting principle during the first quarter of fiscal year 20202021 resulted from the adoption of accounting guidance that requires lesseeschanged the methodology to recognize right-of-usebe used when measuring credit losses for certain financial instruments and financial assets, and lease liabilities on the balance sheet.including trade receivables. As a result of the adoption, the Company adjusted the opening balance of retained earnings for $33$24 million as of April 27, 2019.25, 2020.
The accompanying notes are an integral part of these consolidated financial statements.
Medtronic plc
Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| Nine months ended |
(in millions) | January 29, 2021 | | January 24, 2020 |
Operating Activities: | | | |
Net income | $ | 2,264 | | | $ | 4,167 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 2,018 | | | 1,991 | |
| | | |
| | | |
Provision for doubtful accounts and credit losses | 103 | | | 67 | |
Deferred income taxes | (208) | | | (793) | |
Stock-based compensation | 275 | | | 235 | |
Loss on debt extinguishment | 308 | | | 406 | |
| | | |
| | | |
Other, net | 161 | | | 140 | |
Change in operating assets and liabilities, net of acquisitions and divestitures: | | | |
Accounts receivable, net | (450) | | | (119) | |
Inventories, net | (75) | | | (346) | |
Accounts payable and accrued liabilities | 529 | | | 103 | |
Other operating assets and liabilities | (430) | | | (67) | |
| | | |
| | | |
Net cash provided by operating activities | 4,495 | | | 5,784 | |
Investing Activities: | | | |
Acquisitions, net of cash acquired | (976) | | | (199) | |
| | | |
Additions to property, plant, and equipment | (978) | | | (877) | |
Purchases of investments | (9,448) | | | (8,249) | |
Sales and maturities of investments | 6,753 | | | 5,791 | |
Other investing activities | (136) | | | (34) | |
Net cash used in investing activities | (4,785) | | | (3,568) | |
Financing Activities: | | | |
| | | |
Change in current debt obligations, net | (311) | | | 17 | |
| | | |
Proceeds from short-term borrowings (maturities greater than 90 days) | 2,789 | | | 0 | |
Issuance of long-term debt | 7,172 | | | 5,568 | |
Payments on long-term debt | (6,451) | | | (5,606) | |
Dividends to shareholders | (2,339) | | | (2,170) | |
Issuance of ordinary shares | 314 | | | 585 | |
Repurchase of ordinary shares | (77) | | | (1,208) | |
Other financing activities | (104) | | | (74) | |
Net cash provided by (used in) financing activities | 993 | | | (2,888) | |
Effect of exchange rate changes on cash and cash equivalents | 234 | | | (12) | |
Net change in cash and cash equivalents | 937 | | | (684) | |
Cash and cash equivalents at beginning of period | 4,140 | | | 4,393 | |
Cash and cash equivalents at end of period | $ | 5,077 | | | $ | 3,709 | |
| | | |
Supplemental Cash Flow Information | | | |
Cash paid for: | | | |
Income taxes | $ | 813 | | | $ | 639 | |
Interest | 334 | | | 348 | |
|
| | | | | | | | | | | |
| Six months ended |
(in millions) | October 29, 2021 | | October 30, 2020 |
Operating Activities: | | | |
Net income | $ | 2,086 | | | $ | 985 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 1,347 | | | 1,340 | |
Provision for doubtful accounts | 34 | | | 86 | |
Deferred income taxes | (78) | | | (69) | |
Stock-based compensation | 209 | | | 210 | |
Loss on debt extinguishment | — | | | 308 | |
| | | |
| | | |
MCS asset impairment and inventory write-down | 515 | | | — | |
Other, net | 130 | | | 112 | |
Change in operating assets and liabilities, net of acquisitions and divestitures: | | | |
Accounts receivable, net | (171) | | | (669) | |
Inventories | (156) | | | (145) | |
Accounts payable and accrued liabilities | (446) | | | 108 | |
Other operating assets and liabilities | (409) | | | (127) | |
| | | |
| | | |
Net cash provided by operating activities | 3,061 | | | 2,139 | |
Investing Activities: | | | |
Acquisitions, net of cash acquired | (91) | | | (370) | |
| | | |
Additions to property, plant, and equipment | (649) | | | (615) | |
Purchases of investments | (5,311) | | | (5,360) | |
Sales and maturities of investments | 4,637 | | | 4,337 | |
Other investing activities, net | (79) | | | (4) | |
Net cash used in investing activities | (1,493) | | | (2,012) | |
Financing Activities: | | | |
Change in current debt obligations, net | — | | | (57) | |
Proceeds from short-term borrowings (maturities greater than 90 days) | — | | | 2,789 | |
| | | |
Issuance of long-term debt | — | | | 7,172 | |
Payments on long-term debt | (1) | | | (6,336) | |
Dividends to shareholders | (1,693) | | | (1,558) | |
Issuance of ordinary shares | 274 | | | 119 | |
Repurchase of ordinary shares | (744) | | | (68) | |
Other financing activities | (46) | | | (70) | |
Net cash provided by (used in) financing activities | (2,210) | | | 1,991 | |
Effect of exchange rate changes on cash and cash equivalents | (51) | | | 162 | |
Net change in cash and cash equivalents | (693) | | | 2,280 | |
Cash and cash equivalents at beginning of period | 3,593 | | | 4,140 | |
Cash and cash equivalents at end of period | $ | 2,900 | | | $ | 6,420 | |
| | | |
Supplemental Cash Flow Information | | | |
Cash paid for: | | | |
Income taxes | $ | 615 | | | $ | 384 | |
Interest | 280 | | | 321 | |
|
The accompanying notes are an integral part of these consolidated financial statements.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Medtronic plc and its subsidiaries (Medtronic plc, Medtronic, or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.) (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the consolidated financial statements include all of the adjustments necessary for a fair statement in conformity with U.S. GAAP. Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.
Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates.
The Covid-19 pandemic ("COVID-19" or the "pandemic") has had, and may continue to have, an adverse effect on our business, results of operations, financial condition, and cash flows, and its future impacts remain highly uncertain and unpredictable. The Company has considered the disruptions caused by COVID-19, including lower sales and customer demand than the prior year in many businesses and macroeconomic factors, and has assessed the potential impact on certain accounting estimates including, but not limited to, the allowance for doubtful accounts, inventory reserves, return reserves, the valuation of goodwill, intangible assets, other long-lived assets, investments and contingent consideration, as of January 29, 2021 and through the date of this report. While there was not a material impact to the Company’s consolidated financial statements as of and for the three and ninesix months ended JanuaryOctober 29, 2021, changes in the Company’s assessment about the length and severity of the pandemic, as well as other factors, could result in actual results differing from estimates.
The accompanying unaudited consolidated financial statements include the accounts of Medtronic plc, its wholly-owned subsidiaries, entities for which the Company has a controlling financial interest, and variable interest entities for which the Company is the primary beneficiary. Intercompany transactions and balances have been eliminated in consolidation. Amounts reported in millions within this quarterly report are computed based on the amounts in thousands, and therefore, the sum of the components may not equal the total amount reported in millions due to rounding. Additionally, certain columns and rows within tables may not sum due to rounding.
The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 24, 2020.30, 2021. The Company’s fiscal years 2022, 2021, 2020, and 20192020 will end or ended on April 29, 2022, April 30, 2021, and April 24, 2020, and April 26, 2019, respectively. Fiscal year 2021 iswas a 53-week year, with the extra week having occurred in the first fiscal month of the first quarter.
2. New Accounting Pronouncements
Recently Adopted
Current Expected Credit Losses
In June 2016,For the Financial Accounting Standards Board (FASB) issued guidance changing the methodology to be used to measure credit losses for certain financial instrumentsthree and financial assets, including trade receivables. The new methodology requires the recognition of an allowancesix months ended October 29, 2021, there were no newly adopted accounting pronouncements that reflects the current estimate of credit losses expected to be incurred over the life of the financial asset. The Company adopted this guidance using the modified retrospective method in the first quarter of fiscal year 2021. The adoption of this guidance did not havehad a material impact to the Company’sour consolidated financial statements. As of October 29, 2021, there are no recently issued but not yet adopted accounting pronouncements that are expected to materially impact our consolidated financial statements.
3. Revenue
The Company's revenues are principally derived from device-based medical therapies and services related to cardiac rhythm disorders, cardiovascular disease, renal disease, neurological disorders and diseases, spinal conditions and musculoskeletal trauma, chronic pain, urological and digestive disorders, ear, nose, and throat conditions, and diabetes conditions as well as advanced and general surgical care products, respiratory and monitoring solutions, and neurological surgery technologies. The Company's primary customers include hospitals,healthcare systems, clinics, third-party health carehealthcare providers, distributors, and other institutions, including governmental health carehealthcare programs and group purchasing organizations.
During the fourth quarter of fiscal year 2021, the Company realigned its divisions within Cardiovascular. As a result, fiscal year 2021 revenue has been recast to adjust for these realignments. Additionally, the Company implemented a new operating model in fiscal year 2021, which was fully operational beginning in the fourth quarter.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The table below illustrates net sales by segment and division for the three and ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Cardiac Rhythm & Heart Failure | $ | 1,471 | | | $ | 1,426 | | | $ | 2,954 | | | $ | 2,673 | |
Structural Heart & Aortic | 750 | | | 733 | | | 1,537 | | | 1,360 | |
Coronary & Peripheral Vascular | 606 | | | 567 | | | 1,226 | | | 1,125 | |
Cardiovascular | 2,827 | | | 2,725 | | | 5,717 | | | 5,158 | |
Surgical Innovations | 1,497 | | | 1,393 | | | 3,051 | | | 2,473 | |
Respiratory, Gastrointestinal, & Renal | 802 | | | 893 | | | 1,570 | | | 1,613 | |
Medical Surgical | 2,299 | | | 2,285 | | | 4,621 | | | 4,086 | |
Cranial & Spinal Technologies | 1,067 | | | 1,071 | | | 2,189 | | | 2,015 | |
Specialty Therapies | 634 | | | 581 | | | 1,275 | | | 1,035 | |
Neuromodulation | 435 | | | 411 | | | 875 | | | 725 | |
Neuroscience | 2,136 | | | 2,063 | | | 4,340 | | | 3,774 | |
Diabetes | 585 | | | 574 | | | 1,157 | | | 1,136 | |
Total | $ | 7,847 | | | $ | 7,647 | | | $ | 15,835 | | | $ | 14,154 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 |
Cardiac Rhythm & Heart Failure | $ | 1,371 | | | $ | 1,393 | | | $ | 4,045 | | | $ | 4,201 | |
Coronary & Structural Heart | 873 | | | 948 | | | 2,484 | | | 2,844 | |
Aortic, Peripheral, & Venous | 463 | | | 478 | | | 1,336 | | | 1,420 | |
Cardiac & Vascular Group | 2,707 | | | 2,819 | | | 7,865 | | | 8,464 | |
Surgical Innovations | 1,423 | | | 1,474 | | | 3,896 | | | 4,345 | |
Respiratory, Gastrointestinal, & Renal | 890 | | | 702 | | | 2,502 | | | 2,073 | |
Minimally Invasive Therapies Group | 2,313 | | | 2,176 | | | 6,399 | | | 6,418 | |
Cranial & Spinal Technologies | 1,081 | | | 1,117 | | | 3,096 | | | 3,284 | |
Specialty Therapies | 618 | | | 588 | | | 1,653 | | | 1,726 | |
Neuromodulation | 426 | | | 406 | | | 1,152 | | | 1,224 | |
Restorative Therapies Group | 2,126 | | | 2,111 | | | 5,900 | | | 6,235 | |
Diabetes Group | 630 | | | 610 | | | 1,766 | | | 1,798 | |
Total | $ | 7,775 | | | $ | 7,717 | | | $ | 21,929 | | | $ | 22,916 | |
During the first quarter of fiscal year 2021, the Company realigned the divisions within the Restorative Therapies Group to the following: Cranial & Spinal Technologies (includes Core Spine and Biologics, Enabling Technologies, and China Orthopedics), Specialty Therapies (includes ENT, Pelvic Health, and Neurovascular), and Neuromodulation (includes Pain Therapies, Brain Modulation, and Interventional). As a result, net sales for fiscal year 2020 have been recast to adjust for this realignment.
The table below illustrates net sales by market geography for each segment for the three and ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S.(1) | | Non-U.S. Developed Markets(2) | | Emerging Markets(3) |
| Three months ended | | Three months ended | | Three months ended |
(in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 |
Cardiac & Vascular Group | $ | 1,272 | | | $ | 1,366 | | | $ | 941 | | | $ | 915 | | | $ | 493 | | | $ | 538 | |
Minimally Invasive Therapies Group | 959 | | | 934 | | | 868 | | | 791 | | | 486 | | | 451 | |
Restorative Therapies Group | 1,401 | | | 1,409 | | | 444 | | | 436 | | | 280 | | | 266 | |
Diabetes Group | 307 | | | 312 | | | 268 | | | 236 | | | 55 | | | 63 | |
Total | $ | 3,939 | | | $ | 4,021 | | | $ | 2,522 | | | $ | 2,377 | | | $ | 1,314 | | | $ | 1,318 | |
| | | | | | | | | | | |
| U.S.(1) | | Non-U.S. Developed Markets(2) | | Emerging Markets(3) |
| Nine months ended | | Nine months ended | | Nine months ended |
(in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 |
Cardiac & Vascular Group | $ | 3,854 | | | $ | 4,182 | | | $ | 2,739 | | | $ | 2,735 | | | $ | 1,271 | | | $ | 1,547 | |
Minimally Invasive Therapies Group | 2,677 | | | 2,769 | | | 2,425 | | | 2,364 | | | 1,297 | | | 1,285 | |
Restorative Therapies Group | 3,934 | | | 4,187 | | | 1,246 | | | 1,278 | | | 720 | | | 770 | |
Diabetes Group | 879 | | | 930 | | | 733 | | | 693 | | | 154 | | | 176 | |
Total | $ | 11,344 | | | $ | 12,068 | | | $ | 7,143 | | | $ | 7,069 | | | $ | 3,443 | | | $ | 3,778 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S.(1) | | Non-U.S. Developed Markets(2) | | Emerging Markets(3) |
| Three months ended | | Three months ended | | Three months ended |
(in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Cardiovascular | $ | 1,373 | | | $ | 1,377 | | | $ | 948 | | | $ | 945 | | | $ | 506 | | | $ | 404 | |
Medical Surgical | 970 | | | 996 | | | 841 | | | 837 | | | 488 | | | 452 | |
Neuroscience | 1,394 | | | 1,397 | | | 433 | | | 426 | | | 309 | | | 240 | |
Diabetes | 261 | | | 284 | | | 256 | | | 238 | | | 69 | | | 51 | |
Total | $ | 3,997 | | | $ | 4,054 | | | $ | 2,478 | | | $ | 2,446 | | | $ | 1,372 | | | $ | 1,147 | |
| | | | | | | | | | | |
| U.S.(1) | | Non-U.S. Developed Markets(2) | | Emerging Markets(3) |
| Six months ended | | Six months ended | | Six months ended |
(in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Cardiovascular | $ | 2,793 | | | $ | 2,582 | | | $ | 1,952 | | | $ | 1,798 | | | $ | 972 | | | $ | 778 | |
Medical Surgical | 1,959 | | | 1,718 | | | 1,710 | | | 1,556 | | | 951 | | | 811 | |
Neuroscience | 2,840 | | | 2,533 | | | 898 | | | 802 | | | 602 | | | 439 | |
Diabetes | 506 | | | 572 | | | 519 | | | 465 | | | 132 | | | 100 | |
Total | $ | 8,098 | | | $ | 7,405 | | | $ | 5,079 | | | $ | 4,621 | | | $ | 2,658 | | | $ | 2,128 | |
(1)U.S. includes the United States and U.S. territories.
(2)Non-U.S. developed markets include Japan, Australia, New Zealand, Korea, Canada, and the countries within Western Europe.
(3)Emerging markets include the countries of the Middle East, Africa, Latin America, Eastern Europe, and the countries of Asia that are not included in the non-U.S. developed markets, as defined above.
The amount of revenue recognized is reduced by sales rebates and returns. Adjustments to rebates and returns reserves are recorded as increases or decreases to revenue. At JanuaryOctober 29, 2021, $970 million$1.1 billion of rebates were classified as other accrued expenses, and $438518 million of rebates were classified as a reduction of accounts receivable in the consolidated balance sheet. At April 24, 2020, $70630, 2021, $906 million of rebates
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
were classified as other accrued expenses, and $321$485 million of rebates were classified as a reduction of accounts receivable in the consolidated balance sheet. For the three and ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020, adjustments to rebate and return reserves recognized in revenue that were included in the rebate and return reserves at the beginning of the period were not material.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Deferred Revenue and Remaining Performance Obligations
The Company records a deferred revenue liability if a customer pays consideration, or the Company has the right to invoice, before the Company transfers a good or service to the customer. Deferred revenue at JanuaryOctober 29, 2021 and April 24, 202030, 2021 was $357$365 million and $303$368 million, respectively. At JanuaryOctober 29, 2021 and April 24, 2020,30, 2021, $267 million and $213$276 million respectively, was included in other accrued expenses, respectively, and $90$98 million and $93 million was included in other liabilities, for both periods.respectively. During the ninesix months ended JanuaryOctober 29, 2021, the Company recognized $210$155 million of revenue that was included in deferred revenue as of April 24, 2020.30, 2021.
Remaining performance obligations include deferred revenue and amounts the Company expects to receive for goods and services that have not yet been delivered or provided under existing, noncancellable contracts with minimum purchase commitments. At JanuaryOctober 29, 2021, the estimated revenue expected to be recognized in future periods related to unsatisfied performance obligations for executed contracts with an original duration of one year or more was approximately $1.2$1.1 billion. The Company expects to recognize revenue on the majority of these remaining performance obligations over the next four years.
4. Acquisitions
TheDuring the three and six months ended October 29, 2021 and October 30, 2020, the Company had acquisitions during the three and nine months ended January 29, 2021 and during the nine months January 24, 2020 that were accounted for as business combinations. The assets and liabilities of the businesses acquired were recorded and consolidated on the acquisition date at their respective fair values. Goodwill resulting from business combinations is largely attributable to future, yet to be defined technologies, new customer relationships, existing workforce of the acquired businesses, and synergies expected to arise after the Company's acquisition of these businesses. The pro forma impact of these acquisitions was not significant, either individually or in the aggregate, to the consolidated results of the Company for the three and ninesix months ended JanuaryOctober 29, 2021 and for the nine months January 24,October 30, 2020. The results of operations of acquired businesses have been included in the Company's consolidated statements of income since the date each business was acquired. For the three and six months ended October 29, 2021, purchase price allocation adjustments were not significant.
Fiscal Year 2022
The acquisition date fair value of net assets acquired during the six months ended October 29, 2021 was $125 million, consisting of $154 million of assets acquired and $29 million of liabilities assumed. Based upon preliminary valuations, assets acquired were primarily comprised of $50 million of technology-based intangible assets with estimated useful lives ranging from 15 to 16 years and $80 million of goodwill. The goodwill is not deductible for tax purposes. The Company recognized $31 million of contingent consideration liabilities in connection with business combinations during the six months ended October 29, 2021, which are comprised of revenue and product development milestone-based payments.
Fiscal Year 2021
The acquisition date fair value of net assets acquired during the ninesix months ended January 29, 2021October 30, 2020 was $1.2 billion,$539 million, consisting of $1.3 billion$577 million of assets acquired and $159$38 million of liabilities assumed. Based upon preliminary valuations, assetsAssets acquired were primarily comprised of $407$156 million of technology-based intangible assets and $13 million of customer-related intangible assets with estimated useful lives ranging from 810 to 15 years and $805$381 million of goodwill. The goodwill is not deductible for tax purposes. The Company recognized $253$158 million of contingent consideration liabilities in connection with business combinations during the ninesix months ended January 29, 2021,October 30, 2020, which are comprised of revenue and product development milestone-based payments. Additionally, during the ninesix months ended January 29, 2021,October 30, 2020, the Company recognized a gain of $132 million related to a change in amounts accrued for certain contingent liabilities from a recent acquisition. The benefit was recognized in other operating expense, (income), net in the consolidated statements of income as the purchase accounting was finalized in fiscal year 2020. For the three and nine months ended January 29, 2021, purchasePurchase price allocation adjustments were not significant.significant as a result of final valuations.
Fiscal Year 2020Acquired In-Process Research & Development (IPR&D)
The acquisition date fair valueIPR&D with no alternative future use acquired outside of net assets acquired during the nine months ended January 24, 2020 was $272 million, consisting of $324 million of assets acquired and $52 million of liabilities assumed. Assets acquired were primarily comprised of $139 million of technology-based intangible assets and $26 million of customer-related intangible assets with estimated useful lives ranging from 8 to 16 years, $40 million of inventory, and $92 million of goodwill. The goodwilla business combination is not deductible for tax purposes.expensed immediately. The Company recognized $65 million of contingent consideration liabilitiesdid not acquire any IPR&D in connection with business combinationsasset acquisitions during the ninethree months ended January 24, 2020, which are comprised of revenue milestone-based payments. ForOctober 29, 2021. During the ninesix months ended January 24,October 29, 2021, the Company acquired $90 million of IPR&D in connection with asset acquisitions, which was recognized in research and development expense in the consolidated statements of income. During the three and six months ended October 30, 2020, purchase price allocation adjustments wereIPR&D acquired in connection with asset acquisitions was not significant.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Contingent Consideration
Certain of the Company’s business combinations involve potential payment of future consideration that is contingent upon the achievement of certain product development milestones and/or contingent on the acquired business reaching certain performance milestones. A liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period, and the change in fair value is recognized within other operating expense, (income), net in the consolidated statements of income. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.
The fair value of contingent consideration at JanuaryOctober 29, 2021 and April 24, 202030, 2021 was $440$269 million and $280$270 million, respectively. At JanuaryOctober 29, 2021, $328$66 million was recorded in other accrued expenses, and $112$203 million was recorded in other liabilities in the consolidated balance sheet. At April 24, 2020, $11230, 2021, $78 million was recorded in other accrued expenses, and $168$192 million was recorded in other liabilities in the consolidated balance sheet.
The following table provides a reconciliation of the beginning and ending balances of contingent consideration:
| | | Three months ended | | Nine months ended | | Three months ended | | Six months ended |
(in millions) | (in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 | (in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Beginning balance | Beginning balance | $ | 461 | | | $ | 260 | | | $ | 280 | | | $ | 222 | | Beginning balance | $ | 294 | | | $ | 297 | | | $ | 270 | | | $ | 280 | |
Purchase price contingent consideration | Purchase price contingent consideration | 95 | | | 45 | | | 253 | | | 110 | | Purchase price contingent consideration | 31 | | | 158 | | | 31 | | | 158 | |
Purchase price allocation adjustments | | Purchase price allocation adjustments | — | | | — | | | 25 | | | — | |
Payments | Payments | (127) | | | (3) | | | (129) | | | (32) | | Payments | (30) | | | (1) | | | (41) | | | (2) | |
Change in fair value | Change in fair value | 11 | | | 2 | | | 36 | | | 4 | | Change in fair value | (26) | | | 7 | | | (16) | | | 25 | |
Ending balance | Ending balance | $ | 440 | | | $ | 304 | | | $ | 440 | | | $ | 304 | | Ending balance | $ | 269 | | | $ | 461 | | | $ | 269 | | | $ | 461 | |
The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues (for revenue-based consideration). Projected revenues are based on the Company's most recent internal operational budgets and long-range strategic plans. Changes in projected payment dates, discount rates, probabilities of payment, and projected revenues may result in adjustments to the fair value measurement. The recurring Level 3 fair value measurements of contingent consideration for which a liability is recorded include the following significant unobservable inputs:
| | | Fair Value at | | | | | Fair Value at | | | |
(in millions) | (in millions) | | January 29, 2021 | | | Unobservable Input | | Range | | Weighted Average (1) | (in millions) | | October 29, 2021 | | | Unobservable Input | | Range | | Weighted Average (1) |
| | | | | | Discount rate | | 11.2% - 31.6% | | 17.1% | | | | | | Discount rate | | 5.5% - 31.6% | | 16.9% |
Revenue and other performance-based payments | Revenue and other performance-based payments | | $250 | | | Probability of payment | | 30% - 100% | | 99.2% | Revenue and other performance-based payments | | $211 | | | Probability of payment | | 30% - 100% | | 89.7% |
| | | | | | Projected fiscal year of payment | | 2021 - 2027 | | 2024 | | | | | | Projected fiscal year of payment | | 2022 - 2027 | | 2024 |
| | | | | | Discount rate | | 5.5% | | 5.5% | | | | | | Discount rate | | 5.5% | | 5.5% |
Product development and other milestone-based payments | Product development and other milestone-based payments | | $190 | | | Probability of payment | | 95% - 100% | | 98.8% | Product development and other milestone-based payments | | $58 | | | Probability of payment | | 70% - 100% | | 90.6% |
| | | | | | Projected fiscal year of payment | | 2021 - 2027 | | 2024 | | | | | | Projected fiscal year of payment | | 2022 - 2025 | | 2024 |
(1) Unobservable inputs were weighted by the relative fair value of the contingent consideration liability. For projected fiscal year of payment, the amount represents the median of the inputs and is not a weighted average.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
5. Restructuring and Other Costs
Enterprise Excellence
In the third quarter of fiscal year 2018, the Company announced its Enterprise Excellence restructuring program. Further program which is expecteddetails are described in Note 4 to leveragethe consolidated financial statements included in the Company's global size and scale, as well as enhanceAnnual Report on Form 10-K for the customer and employee experience, with a focus on three objectives: global operations, functional optimization, and commercial optimization. Primary activities offiscal year ended April 30, 2021. Since inception, the restructuring program include integrating and enhancing global manufacturing and supply processes, systems and site presence, enhancing and leveraging global operating models across several enabling functions, and optimizing certain commercial processes, systems, and models.
The Company estimates that, in connection with its Enterprise Excellence restructuring program, it will recognizehas incurred pre-tax exit and disposal costs and other costs, across all segments, of $1.4 billion in connection with the Enterprise Excellence program. In total, the Company estimates it will recognize approximately $1.6 billion to $1.8 billion of exit and disposal costs and other costs related to the Enterprise Excellence program, and the majority of whichthe remaining estimated charges are expected to be incurred by the end of this fiscal year 2022. Approximately 40 percent of the estimated charges are related to employee termination benefits. The remainingyear.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
charges are costs associated with the restructuring program, such as salaries for employees supporting the program and consulting expenses. These charges are recognized within restructuring charges, net, cost of products sold, and selling, general, and administrative expense in the consolidated statements of income.
For the three and ninesix months ended JanuaryOctober 29, 2021, the Company recognized net charges of $77$62 million and $241$136 million, respectively, of which $36$31 million and $95$64 million, respectively, were recognized within cost of products sold and $30$27 million and $125$57 million, respectively, were recognized within selling, general, and administrative expense in the consolidated statements of income.
For the three and ninesix months ended January 24,October 30, 2020, the Company recognized net charges of $97$87 million and $315$164 million, respectively, of which $50$32 million and $117$59 million, respectively, were recognized within cost of products sold and $34$48 million and $111$95 million, respectively, were recognized within selling, general, and administrative expense in the consolidated statements of income.
The following table summarizes the activity related to the Enterprise Excellence restructuring program for the ninesix months ended JanuaryOctober 29, 2021:
| (in millions) | (in millions) | Employee Termination Benefits | | | Associated Costs(1) | | | Other Costs | | Total | (in millions) | Employee Termination Benefits | | | Associated Costs(1) | | | Other Costs | | Total |
April 24, 2020 | $ | 89 | | | | $ | 19 | | | | $ | 4 | | | $ | 112 | | |
April 30, 2021 | | April 30, 2021 | $ | 64 | | | | $ | 18 | | | | $ | 1 | | | $ | 83 | |
Charges | Charges | 28 | | | | 216 | | | | 3 | | | 247 | | Charges | 17 | | | | 121 | | | | — | | | 138 | |
Cash payments | Cash payments | (59) | | | | (228) | | | | (4) | | | (291) | | Cash payments | (25) | | | | (123) | | | | — | | | (148) | |
| Accrual adjustments(2) | Accrual adjustments(2) | (4) | | | | 0 | | | | (2) | | | (6) | | Accrual adjustments(2) | (2) | | | | — | | | | — | | | (2) | |
January 29, 2021 | $ | 54 | | | | $ | 7 | | | | $ | 1 | | | $ | 62 | | |
October 29, 2021 | | October 29, 2021 | $ | 54 | | | | $ | 16 | | | | $ | 1 | | | $ | 71 | |
(1)Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.
(2)Accrual adjustments relate to certain employees identified for termination finding other positions within Medtronicthe Company and contract terminations being settled for less than originally estimated.
Simplification
In the first quarter of fiscal year 2021, the Company initiated the Simplification restructuring program. Further program designeddetails are described in Note 4 to make the Company a more nimble and competitive organization focusedconsolidated financial statements included in the Company's Annual Report on accelerating innovation, enhancingForm 10-K for the customer experience, driving revenue growth, and winning market share, while also more efficiently and effectively leveraging the enterprise scale. Under the oversight of the portfolio leaders, this new operating model, which became fully operational the beginning of the fourth quarter of fiscal year 2021, will simplify the Company's organizational structure and accelerate decision-making and execution. Primary activities of the restructuring program will include reorganizing the Company into a portfolio-level structure, including the creation of highly focused, accountable, and empowered Operating Units (OUs), consolidating Operations at the enterprise level, establishing Technology Development Centers in areas whereended April 30, 2021. Since inception, the Company has deep core technology competencies to be leveraged by multiple OUs, and forming dedicated sales organizations that leverage the Company's scale but move with the same agility as smaller, local competitors.
The Company estimates that, in connection with its Simplification restructuring program, it will recognizeincurred pre-tax exit and disposal costs and other costs, across all segments, of $293 million in connection with the Simplification program. In total, the Company estimates it will recognize approximately $400 million to $450 million of exit and disposal costs and other costs related to the Simplification program, and the majority of whichthe remaining estimated charges are expected to be incurred by the end of this fiscal year 2022. Approximatelyyear.
For the three quartersand six months ended October 29, 2021, the Company recognized net charges of the estimated charges are related to employee termination benefits. The remaining charges are costs associated with the restructuring program, such as salaries for employees supporting the program$18 million and consulting expenses. These charges are$25 million, respectively, of which $9 million and $16 million were recognized withinrestructuring charges, net, cost of products sold, and selling, general, and administrative expense in the consolidated statements of income.
For the three and six months ended January 29, 2021,October 30, 2020, the Company recognized net charges of $84 million. For the nine months ended January 29, 2021, the Company recognized net charges of $229$94 million and $145 million, respectively, which included $97 million of incremental defined benefit pension and post-retirement related expenses for employees that accepted voluntary early retirement packages. These costs are not included in the table summarizing restructuringThe net charges below, as they are associated with costs that are accounted for under the pension and post-retirement rules. See Note 14 for further discussion on the incremental defined benefit pension and post-retirement expenses. The charges recognized for the three and ninesix months ended January 29, 2021October 30, 2020 also included $11$2 million and $14$3 million, respectively, recognized withinselling, general, and administrative expense in the consolidated statements of income.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The following table summarizes the activity related to the Simplification restructuring program for the ninesix months ended JanuaryOctober 29, 2021:
| | | | | | | | | | | | | | | | | | | | | |
(in millions) | Employee Termination Benefits | | Associated Costs(1) | | | | | | Total |
April 24, 2020 | $ | 0 | | | $ | 0 | | | | | | | $ | 0 | |
Charges | 123 | | | 15 | | | | | | | 138 | |
Cash payments | (38) | | | (15) | | | | | | | (53) | |
Accrual adjustments(2) | (6) | | | 0 | | | | | | | (6) | |
January 29, 2021 | $ | 79 | | | $ | 0 | | | | | | | $ | 79 | |
| | | | | | | | | | | | | | | | | | | | | |
(in millions) | Employee Termination Benefits | | Associated Costs(1) | | | | | | Total |
April 30, 2021 | $ | 59 | | | $ | 4 | | | | | | | $ | 63 | |
Charges | 13 | | | 16 | | | | | | | 29 | |
Cash payments | (48) | | | (16) | | | | | | | (64) | |
Accrual adjustments(2) | (5) | | | — | | | | | | | (5) | |
October 29, 2021 | $ | 19 | | | $ | 4 | | | | | | | $ | 23 | |
(1) Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.
(2) Accrual adjustments relate to certain employees identified for termination finding other positions within the Company.
Mechanical Circulatory Support (MCS)
On June 3, 2021, the Company announced the decision to stop the distribution and sale of the Medtronic HVAD System in light of a growing body of observational clinical comparisons indicating a lower frequency of neurological adverse events and mortality with another circulatory support device available to patients compared to the HVAD system. In connection with this decision, the Company recorded charges of $726 million (MCS charges) within the Cardiovascular segment during the three months ended July 30, 2021, including $58 million recognized in costs of products sold and $668 million recognized within other operating expense, net in the consolidated statement of income. The charges included $515 million of non-cash impairments and write-downs primarily related to $409 million of intangible asset impairments and $58 million of inventory write-downs. The Company also recorded charges of $211 million for commitments and obligations associated with the decision, which included charges for patient support obligations, restructuring, and other associated costs. As of October 29, 2021, accruals were recorded in the consolidated balance sheet for these obligations, with $86 million reflected in other accrued expenses and $30 million recorded in other liabilities. Medtronic remains committed to serving the needs of the approximately 4,000 patients currently implanted with the HVAD system.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
6. Financial Instruments
Debt Securities
The Company holds investments in marketable debt securities that are classified and accounted for as available-for-sale and held-to-maturity. Investments classified as available-for-sale are remeasured on a recurring basis. Investments classified as held-to-maturity are measured at amortized cost. The following tables summarize the Company's investments in available-for-sale and held-to-maturity debt securities by significant investment category and the related consolidated balance sheet classification at JanuaryOctober 29, 2021 and April 24, 2020: 30, 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 29, 2021 |
| Valuation | | Balance Sheet Classification |
(in millions) | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Investments | | Other Assets |
Level 1: | | | | | | | | | | | |
U.S. government and agency securities | $ | 513 | | | $ | 20 | | | $ | (3) | | | $ | 530 | | | $ | 530 | | | $ | — | |
Level 2: | | | | | | | | | | | |
Corporate debt securities | 5,025 | | | 72 | | | (18) | | | 5,079 | | | 5,079 | | | — | |
U.S. government and agency securities | 918 | | | — | | | (9) | | | 909 | | | 909 | | | — | |
Mortgage-backed securities | 647 | | | 15 | | | (15) | | | 646 | | | 646 | | | — | |
Non-U.S. government and agency securities | 24 | | | 1 | | | — | | | 25 | | | 25 | | | — | |
Certificates of deposit | 15 | | | — | | | — | | | 15 | | | 15 | | | — | |
Other asset-backed securities | 558 | | | 3 | | | (1) | | | 560 | | | 560 | | | — | |
Debt funds | 6 | | | — | | | — | | | 6 | | | 6 | | | — | |
Total Level 2 | 7,193 | | | 91 | | | (44) | | | 7,240 | | | 7,240 | | | — | |
Level 3: | | | | | | | | | | | |
Auction rate securities | 36 | | | — | | | (3) | | | 33 | | | — | | | 33 | |
Total available-for-sale debt securities | $ | 7,741 | | | $ | 111 | | | $ | (49) | | | $ | 7,803 | | | $ | 7,769 | | | $ | 33 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 29, 2021 |
| Valuation | | Balance Sheet Classification |
(in millions) | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Investments | | Other Assets |
Available-for-sale securities: | | | | | | | | | | | |
Level 1: | | | | | | | | | | | |
U.S. government and agency securities | $ | 523 | | | $ | 36 | | | $ | 0 | | | $ | 560 | | | $ | 560 | | | $ | 0 | |
Level 2: | | | | | | | | | | | |
Corporate debt securities | 5,809 | | | 131 | | | (9) | | | 5,931 | | | 5,931 | | | 0 | |
U.S. government and agency securities | 949 | | | 1 | | | 0 | | | 950 | | | 950 | | | 0 | |
Mortgage-backed securities | 652 | | | 27 | | | (17) | | | 662 | | | 662 | | | 0 | |
Non-U.S. government and agency securities | 31 | | | 1 | | | 0 | | | 33 | | | 33 | | | 0 | |
Other asset-backed securities | 510 | | | 4 | | | (1) | | | 513 | | | 513 | | | 0 | |
Total Level 2 | 7,951 | | | 164 | | | (27) | | | 8,089 | | | 8,089 | | | 0 | |
Level 3: | | | | | | | | | | | |
| | | | | | | | | | | |
Auction rate securities | 36 | | | 0 | | | (3) | | | 33 | | | 0 | | | 33 | |
| | | | | | | | | | | |
Total available-for-sale debt securities | 8,511 | | | 200 | | | (30) | | | 8,681 | | | 8,648 | | | 33 | |
Held-to-maturity securities: | | | | | | | | | | | |
Level 2: | | | | | | | | | | | |
Time deposit | 913 | | | 0 | | | 0 | | | 913 | | | 913 | | | 0 | |
Total debt securities | $ | 9,423 | | | $ | 200 | | | $ | (30) | | | $ | 9,594 | | | $ | 9,562 | | | $ | 33 | |
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
| | | April 24, 2020 | | April 30, 2021 |
| | Valuation | | Balance Sheet Classification | | Valuation | | Balance Sheet Classification |
(in millions) | (in millions) | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Investments | | Other Assets | (in millions) | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Investments | | Other Assets |
Level 1: | Level 1: | | | | | | | | | | | | Level 1: | | | | | | | | | | | |
U.S. government and agency securities | U.S. government and agency securities | $ | 542 | | | $ | 47 | | | $ | 0 | | | $ | 589 | | | $ | 589 | | | $ | 0 | | U.S. government and agency securities | $ | 505 | | | $ | 26 | | | $ | (3) | | | $ | 528 | | | $ | 528 | | | $ | — | |
Level 2: | Level 2: | | Level 2: | |
Corporate debt securities | Corporate debt securities | 4,285 | | | 66 | | | (90) | | | 4,261 | | | 4,261 | | | 0 | | Corporate debt securities | 4,557 | | | 103 | | | (13) | | | 4,647 | | | 4,647 | | | — | |
U.S. government and agency securities | U.S. government and agency securities | 746 | | | 1 | | | 0 | | | 747 | | | 747 | | | 0 | | U.S. government and agency securities | 810 | | | — | | | (7) | | | 804 | | | 804 | | | — | |
Mortgage-backed securities | Mortgage-backed securities | 705 | | | 20 | | | (28) | | | 697 | | | 697 | | | 0 | | Mortgage-backed securities | 645 | | | 21 | | | (16) | | | 650 | | | 650 | | | — | |
Non-U.S. government and agency securities | Non-U.S. government and agency securities | 34 | | | 0 | | | 0 | | | 34 | | | 34 | | | 0 | | Non-U.S. government and agency securities | 31 | | | 1 | | | — | | | 33 | | | 33 | | | — | |
Certificates of deposit | | Certificates of deposit | 19 | | | — | | | — | | | 19 | | | 19 | | | — | |
Other asset-backed securities | Other asset-backed securities | 499 | | | 1 | | | (20) | | | 480 | | | 480 | | | 0 | | Other asset-backed securities | 534 | | | 4 | | | (1) | | | 537 | | | 537 | | | — | |
Debt funds | | Debt funds | 7 | | | — | | | — | | | 7 | | | 7 | | | — | |
Total Level 2 | Total Level 2 | 6,269 | | | 88 | | | (138) | | | 6,219 | | | 6,219 | | | 0 | | Total Level 2 | 6,603 | | | 129 | | | (36) | | | 6,696 | | | 6,696 | | | — | |
Level 3: | Level 3: | | Level 3: | |
Auction rate securities | Auction rate securities | 36 | | | 0 | | | (3) | | | 33 | | | 0 | | | 33 | | Auction rate securities | 36 | | | — | | | (3) | | | 33 | | | — | | | 33 | |
Total available-for-sale debt securities | Total available-for-sale debt securities | $ | 6,847 | | | $ | 135 | | | $ | (141) | | | $ | 6,841 | | | $ | 6,808 | | | $ | 33 | | Total available-for-sale debt securities | $ | 7,144 | | | $ | 155 | | | $ | (42) | | | $ | 7,257 | | | $ | 7,224 | | | $ | 33 | |
The amortized cost of debt securities excludes accrued interest, which is reported in other current assets in the consolidated balance sheets.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The following tables present the gross unrealized losses and fair values of the Company’s available-for-sale debt securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category at JanuaryOctober 29, 2021 and April 24, 2020:30, 2021: | | | | | | | | | | | | | | | | | | | | | | | |
| October 29, 2021 |
| Less than 12 months | | More than 12 months |
(in millions) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. government and agency securities | $ | — | | | $ | — | | | $ | 943 | | | $ | (12) | |
Corporate debt securities | — | | | — | | | 3,312 | | | (18) | |
Mortgage-backed securities | — | | | — | | | 645 | | | (15) | |
| | | | | | | |
Other asset-backed securities | — | | | — | | | 542 | | | (1) | |
Auction rate securities | — | | | — | | | 33 | | | (3) | |
Total | $ | — | | | $ | — | | | $ | 5,475 | | | $ | (49) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| January 29, 2021 |
| Less than 12 months | | More than 12 months |
(in millions) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | | | | | |
Corporate debt securities | $ | 51 | | | $ | 0 | | | $ | 659 | | | $ | (9) | |
Mortgage-backed securities | 25 | | | (3) | | | 112 | | | (14) | |
| | | | | | | |
Other asset-backed securities | 0 | | | 0 | | | 177 | | | (1) | |
Auction rate securities | 33 | | | (3) | | | 0 | | | 0 | |
Total | $ | 109 | | | $ | (6) | | | $ | 948 | | | $ | (24) | |
| | | April 24, 2020 | | April 30, 2021 |
| | Less than 12 months | | More than 12 months | | Less than 12 months | | More than 12 months |
(in millions) | (in millions) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | (in millions) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| U.S. government and agency securities | | U.S. government and agency securities | $ | 946 | | | $ | (10) | | | $ | — | | | $ | — | |
Corporate debt securities | Corporate debt securities | $ | 1,368 | | | $ | (2) | | | $ | 2,893 | | | $ | (88) | | Corporate debt securities | — | | | — | | | 3,209 | | | (13) | |
Mortgage-backed securities | Mortgage-backed securities | 35 | | | (1) | | | 663 | | | (27) | | Mortgage-backed securities | — | | | — | | | 650 | | | (16) | |
| Other asset-backed securities | Other asset-backed securities | 17 | | | 0 | | | 463 | | | (20) | | Other asset-backed securities | — | | | — | | | 531 | | | (1) | |
Auction rate securities | Auction rate securities | 33 | | | (3) | | | 0 | | | 0 | | Auction rate securities | — | | | — | | | 33 | | | (3) | |
Total | Total | $ | 1,453 | | | $ | (6) | | | $ | 4,019 | | | $ | (135) | | Total | $ | 946 | | | $ | (10) | | | $ | 4,423 | | | $ | (32) | |
The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no transfers into or out of Level 3 during the three and ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement.
There were no purchases, sales, settlements, or significant gains or losses recognized in earnings or other comprehensive income for debt securities classified as Level 3 during the three and nine months ended January 29, 2021. During the three and nine months ended January 24, 2020, the Company redeemed $11 million worth of level 3 investments at par value. NaN gain or loss was recognized on the redemption.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Activity related to the Company’s available-for-sale debt securities portfolio is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 |
Proceeds from sales | $ | 2,406 | | | $ | 2,531 | | | $ | 6,740 | | | $ | 5,789 | |
Gross realized gains | 4 | | | 9 | | | 12 | | | 17 | |
Gross realized losses | (4) | | | (2) | | | (11) | | | (13) | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Proceeds from sales | $ | 2,299 | | | $ | 1,932 | | | $ | 4,751 | | | $ | 4,335 | |
Gross realized gains | 4 | | | 3 | | | 8 | | | 8 | |
Gross realized losses | (2) | | | (1) | | | (4) | | | (7) | |
| | | | | | | |
The JanuaryOctober 29, 2021 balance of available-for-sale and held-to-maturity debt securities by contractual maturity is shown in the following table. Within the table, maturities of mortgage-backed securities have been allocated based upon timing of estimated cash flows assuming no change in the current interest rate environment. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
| | | | | | | | | | | |
| January 29, 2021 |
(in millions) | Available-For-Sale | | Held-To-Maturity |
Due in one year or less | $ | 3,613 | | | $ | 913 | |
Due after one year through five years | 3,546 | | | 0 | |
Due after five years through ten years | 1,477 | | | 0 | |
Due after ten years | 45 | | | 0 | |
Total | $ | 8,681 | | | $ | 913 | |
| | | | | |
(in millions) | October 29, 2021 |
Due in one year or less | $ | 2,299 | |
Due after one year through five years | 3,199 | |
Due after five years through ten years | 1,646 | |
Due after ten years | 658 | |
Total | $ | 7,803 | |
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Equity Securities, Equity Method Investments, and Other Investments
The Company holds investments in equity securities with readily determinable fair values, equity investments without readily determinable fair values, investments accounted for under the equity method, and other investments. Equity securities with readily determinable fair values are included in Level 1 of the fair value hierarchy, as they are measured using quoted market prices. Equity method investments and investments without readily determinable fair values are included within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. To determine the fair value of these investments, the Company uses all pertinent financial information available related to the investees, including financial statements, market participant valuations from recent and proposed equity offerings, and other third-party data.
The following table summarizes the Company's equity and other investments at JanuaryOctober 29, 2021 and April 24, 2020,30, 2021, which are classified as other assets in the consolidated balance sheets:
| | | | | | | | | | | | | | |
(in millions) | | January 29, 2021 | | April 24, 2020 |
Investments with readily determinable fair value (marketable equity securities) | | $ | 29 | | | $ | 18 | |
Investments without readily determinable fair values | | 513 | | | 391 | |
Equity method and other investments | | 74 | | | 71 | |
Total equity and other investments | | $ | 616 | | | $ | 480 | |
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | |
(in millions) | | October 29, 2021 | | April 30, 2021 |
Investments with readily determinable fair value (marketable equity securities) | | $ | 85 | | | $ | 74 | |
Investments without readily determinable fair values | | 616 | | | 537 | |
Equity method and other investments | | 80 | | | 76 | |
Total equity and other investments | | $ | 781 | | | $ | 687 | |
The table below includes activity related to the Company’s portfolio of equity and other investments. Gains and losses on equity and other investments are recognized in other non-operating income, net in the consolidated statements of income.
| | | | Three months ended | | Nine months ended | | | Three months ended | | Six months ended |
(in millions) | (in millions) | | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 | (in millions) | | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Proceeds from sales | Proceeds from sales | | $ | 10 | | | $ | 0 | | | $ | 11 | | | $ | 2 | | Proceeds from sales | | $ | 14 | | | $ | 2 | | | $ | 66 | | | $ | 2 | |
Gross gains | Gross gains | | 18 | | | 1 | | | 32 | | | 16 | | Gross gains | | 12 | | | 2 | | | 70 | | | 14 | |
Gross losses | Gross losses | | 0 | | | 0 | | | (2) | | | 0 | | Gross losses | | (15) | | | (2) | | | (20) | | | (2) | |
Impairment losses recognized | Impairment losses recognized | | 0 | | | (1) | | | (2) | | | (5) | | Impairment losses recognized | | — | | | — | | | (10) | | | (2) | |
During the three and ninesix months ended JanuaryOctober 29, 2021, there were $17$8 million of net unrealized losses and $28$7 million of net unrealized gains, respectively, on equity securities and other investments still held at October 29, 2021. The net unrealized gains recognized during the three months ended October 30, 2020 were not significant. During the six months ended October 30, 2020, there were $12 million of net unrealized gains on equity securities and other investments still held at January 29, 2021. During the three and nine months ended January 24, 2020, there were $1 million and $16 million, respectively, of net unrealized gains on equity securities and other investments still held at January 24,October 30, 2020.
7. Financing Arrangements
Commercial Paper
The Company maintains commercial paper programs that allow the Company to issue U.S. dollar or Euro-denominated unsecured commercial paper notes. The aggregate amount outstanding at any time under the commercial paper programs may not exceed the equivalent of $3.5 billion. NaNNo commercial paper was outstanding at JanuaryOctober 29, 2021 and April 24, 2020.30, 2021. The issuance of commercial paper reduces the amount of credit available under the Company’s existing Credit Facility, as defined below.
Line of Credit
The Company has a $3.5 billion five-year unsecured revolving credit facility (Credit Facility), which provides back-up funding for the commercial paper programs described above. The Credit Facility includes a multi-currency borrowing feature for certain specified foreign currencies. At JanuaryOctober 29, 2021 and April 24, 2020, 030, 2021, no amounts were outstanding under the Credit Facility.
Interest rates on advances on the Credit Facility are determined by a pricing matrix, based on the Company’s long-term debt ratings, assigned by Standard & Poor’s Ratings Services and Moody’s Investors Service. Facility fees are payable on the Credit Facility and are determined in the same manner as the interest rates. The Company is in compliance with the covenants under the Credit Facility.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Debt Obligations
The Company's debt obligations consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Maturity by Fiscal Year | | January 29, 2021 | | April 24, 2020 |
Current debt obligations | | 2021 - 2022 | | $ | 3,821 | | | $ | 2,776 | |
| | | | | | |
Long-term debt | | | | | | |
3.150 percent seven-year 2015 senior notes | | 2022 | | 0 | | | 1,534 | |
3.200 percent ten-year 2012 senior notes | | 2023 | | 0 | | | 650 | |
2.750 percent ten-year 2013 senior notes | | 2023 | | 0 | | | 530 | |
0.000 percent three-year 2019 senior notes | | 2023 | | 913 | | | 815 | |
0.375 percent four-year 2019 senior notes | | 2023 | | 1,825 | | | 1,631 | |
0.000 percent two-year 2020 senior notes | | 2023 | | 1,521 | | | 0 | |
2.950 percent ten-year 2013 senior notes | | 2024 | | 0 | | | 310 | |
3.625 percent ten-year 2014 senior notes | | 2024 | | 0 | | | 432 | |
3.500 percent ten-year 2015 senior notes | | 2025 | | 1,890 | | | 2,700 | |
0.250 percent six-year 2019 senior notes | | 2026 | | 1,217 | | | 1,087 | |
0.000 percent five-year 2020 senior notes | | 2026 | | 1,217 | | | 0 | |
3.350 percent ten-year 2017 senior notes | | 2027 | | 368 | | | 368 | |
1.125 percent eight-year 2019 senior notes | | 2027 | | 1,825 | | | 1,631 | |
0.375 percent eight-year 2020 senior notes | | 2029 | | 1,217 | | | 0 | |
1.625 percent twelve-year 2019 senior notes | | 2031 | | 1,217 | | | 1,087 | |
1.000 percent twelve-year 2019 senior notes | | 2032 | | 1,217 | | | 1,087 | |
0.750 percent twelve-year 2020 senior notes | | 2033 | | 1,217 | | | 0 | |
4.375 percent twenty-year 2015 senior notes | | 2035 | | 1,932 | | | 1,932 | |
6.550 percent thirty-year 2007 senior notes | | 2038 | | 253 | | | 253 | |
6.500 percent thirty-year 2009 senior notes | | 2039 | | 158 | | | 158 | |
2.250 percent twenty-year 2019 senior notes | | 2039 | | 1,217 | | | 1,087 | |
5.550 percent thirty-year 2010 senior notes | | 2040 | | 224 | | | 224 | |
1.500 percent twenty-year 2019 senior notes | | 2040 | | 1,217 | | | 1,087 | |
1.375 percent twenty-year 2020 senior notes | | 2041 | | 1,217 | | | 0 | |
4.500 percent thirty-year 2012 senior notes | | 2042 | | 105 | | | 105 | |
4.000 percent thirty-year 2013 senior notes | | 2043 | | 305 | | | 305 | |
4.625 percent thirty-year 2014 senior notes | | 2044 | | 127 | | | 127 | |
4.625 percent thirty-year 2015 senior notes | | 2045 | | 1,813 | | | 1,813 | |
1.750 percent thirty-year 2019 senior notes | | 2050 | | 1,217 | | | 1,087 | |
1.625 percent thirty-year 2020 senior notes | | 2051 | | 1,217 | | | 0 | |
Bank borrowings | | 2022 | | 0 | | | 55 | |
Finance lease obligations | | 2022 - 2036 | | 65 | | | 45 | |
Deferred financing costs | | 2021 - 2051 | | (128) | | | (104) | |
Debt discount, net | | 2021 - 2051 | | (78) | | | (15) | |
Long-term debt | | | | $ | 26,502 | | | $ | 22,021 | |
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Maturity by Fiscal Year | | October 29, 2021 | | April 30, 2021 |
Current debt obligations | | 2022 - 2023 | | $ | 16 | | | $ | 11 | |
| | | | | | |
Long-term debt | | | | | | |
0.000 percent three-year 2019 senior notes | | 2023 | | 870 | | | 907 | |
0.375 percent four-year 2019 senior notes | | 2023 | | 1,740 | | | 1,813 | |
0.000 percent two-year 2020 senior notes | | 2023 | | 1,450 | | | 1,511 | |
3.500 percent ten-year 2015 senior notes | | 2025 | | 1,890 | | | 1,890 | |
0.250 percent six-year 2019 senior notes | | 2026 | | 1,160 | | | 1,209 | |
0.000 percent five-year 2020 senior notes | | 2026 | | 1,160 | | | 1,209 | |
1.125 percent eight-year 2019 senior notes | | 2027 | | 1,740 | | | 1,813 | |
3.350 percent ten-year 2017 senior notes | | 2027 | | 368 | | | 368 | |
0.375 percent eight-year 2020 senior notes | | 2029 | | 1,160 | | | 1,209 | |
1.625 percent twelve-year 2019 senior notes | | 2031 | | 1,160 | | | 1,209 | |
1.000 percent twelve-year 2019 senior notes | | 2032 | | 1,160 | | | 1,209 | |
0.750 percent twelve-year 2020 senior notes | | 2033 | | 1,160 | | | 1,209 | |
4.375 percent twenty-year 2015 senior notes | | 2035 | | 1,932 | | | 1,932 | |
6.550 percent thirty-year 2007 CIFSA senior notes | | 2038 | | 253 | | | 253 | |
2.250 percent twenty-year 2019 senior notes | | 2039 | | 1,160 | | | 1,209 | |
6.500 percent thirty-year 2009 senior notes | | 2039 | | 158 | | | 158 | |
1.500 percent twenty-year 2019 senior notes | | 2040 | | 1,160 | | | 1,209 | |
5.550 percent thirty-year 2010 senior notes | | 2040 | | 224 | | | 224 | |
1.375 percent twenty-year 2020 senior notes | | 2041 | | 1,160 | | | 1,209 | |
4.500 percent thirty-year 2012 senior notes | | 2042 | | 105 | | | 105 | |
4.000 percent thirty-year 2013 senior notes | | 2043 | | 305 | | | 305 | |
4.625 percent thirty-year 2014 senior notes | | 2044 | | 127 | | | 127 | |
4.625 percent thirty-year 2015 senior notes | | 2045 | | 1,813 | | | 1,813 | |
1.750 percent thirty-year 2019 senior notes | | 2050 | | 1,160 | | | 1,209 | |
1.625 percent thirty-year 2020 senior notes | | 2051 | | 1,160 | | | 1,209 | |
| | | | | | |
Finance lease obligations | | 2022 - 2036 | | 59 | | | 62 | |
Deferred financing costs | | 2022 - 2051 | | (117) | | | (125) | |
Debt discount, net | | 2022 - 2051 | | (66) | | | (75) | |
Long-term debt | | | | $ | 25,607 | | | $ | 26,378 | |
Senior Notes
The Company has outstanding unsecured senior obligations, described as senior notes in the tables above (collectively, the Senior Notes). The Senior Notes rank equally with all other unsecured and unsubordinated indebtedness of the Company. The Company is in compliance with all covenants related to the Seniors notes. Senior Notes.
In June 2019, Medtronic Luxco issued 6 tranches of Euro-denominated Senior Notes with an aggregate principal of €5.0 billion, with maturities ranging from fiscal year 2021 to fiscal year 2050, resulting in cash proceeds of approximately $5.6 billion, net of discounts and issuance costs. The Company used the net proceeds of the offering to fund the cash tender offer and early redemption of $5.2 billion of Medtronic Inc., CIFSA, and Medtronic Luxco Senior Notes for $5.6 billion of total consideration. The Company recognized a loss on debt extinguishment of $413 million during the first quarter of fiscal year 2020, which primarily included cash premiums and accelerated amortization of deferred financing costs and debt discounts and premiums. The loss was recognized in interest expense in the consolidated statement of income for the nine months ended January 24, 2020.
In September 2020, Medtronic LuxcoGlobal Holdings S.C.A. (Medtronic Luxco) issued an additional 6 tranches of Euro-denominated Senior Notes with an aggregate principal of €6.3 billion, with maturities ranging from fiscal year 2023 to fiscal year 2051, resulting in cash proceeds of approximately $7.2 billion, net of discounts and issuance costs. The Company used the net proceeds of the offering to fund the early redemption of $4.3 billion of Medtronic Inc. and CIFSA Senior Notes and €1.5 billion of Medtronic Luxco Senior Notes for $6.3 billion of total consideration in October 2020. Additionally, the Company intends to useused the proceeds to repay its €750 million floating rate senior notes at maturity in March 2021. The Company recognized a loss on debt extinguishment of $308 million during the second quarter of fiscal year
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
2021, which primarily included cash premiums and accelerated amortization of deferred financing costs and debt discounts and premiums. The loss was recognized in interest expense in the consolidated statement of income for the nine months ended January 29, 2021.income.
The Euro-denominated debt issued in June 2019 and September 2020 is designated as a net investment hedge of certain of the Company's European operations. Refer to Note 8 for additional information regarding the net investment hedge.
Term Loan Agreements
On May 12, 2020, Medtronic Luxco entered into a term loan agreement (Loan Agreement) by and among Medtronic Luxco, Medtronic plc, Medtronic, Inc., and Mizuho Bank, Ltd. as administrative agent and as lender. The Loan Agreement provides an unsecured term loan in an aggregate principal amount of up to ¥300 billion, with a term of six months and the option to extend for an additional six months at Medtronic Luxco’s option. On May 13, 2020, Medtronic Luxco borrowed the entire amount of the term loan under the Loan Agreement. The Japanese Yen-denominated debt was designated as a net investment hedge for certain of the Company's Japanese operations. Borrowings under the Loan Agreement will bearcarried interest at the TIBOR Rate (as defined in the Loan Agreement) plus a margin of 0.50% per annum. Medtronic plc and Medtronic, Inc. have guaranteed the obligations of Medtronic Luxco under the Loan Agreement. On November 12, 2020, the Company exercised its option to extend the term loan for an additional six months. AsDuring the fourth quarter of January 29,fiscal year 2021, the amount outstanding underCompany de-designated the term loan was ¥300 billion, or approximately $2.9 billion. The Japanese Yen-denominated debt is designated as a net investment hedge of certain of our Japanese operations as of January 29, 2021. Refer to Note 8 for additional information regardingand repaid the net investment hedge.term loan in full, including interest.
Financial Instruments Not Measured at Fair Value
At JanuaryOctober 29, 2021, the estimated fair value of the Company’s Senior Notes was $30.8$28.0 billion compared to a principal value of $27.6$25.7 billion. At April 24, 2020,30, 2021, the estimated fair value was $27.1$28.6 billion compared to a principal value of $24.5$26.5 billion. The fair value was estimated using quoted market prices for the publicly registered Senior Notes, which are classified as Level 2 within the fair value hierarchy. The fair values and principal values consider the terms of the related debt and exclude the impacts of debt discounts and hedging activity.
8. Derivatives and Currency Exchange Risk Management
The Company uses operational and economic hedges, including currency exchange rate derivative contracts and interest rate derivative instruments, to manage the impact of currency exchange and interest rate changes on earnings and cash flows. In addition, the Company uses cross currency interest rate swaps to manage currency risk related to certain debt. In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, the Company enters into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets and liabilities. At inception of the contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. Currencies of our derivative instruments include the Euro, Japanese Yen, Chinese Yuan, and others. The Company does not enter into currency exchange rate derivative contracts for speculative purposes. The gross notional amount of all currency exchange rate derivative instruments outstanding was $14.0$15.2 billion and $11.9$14.7 billion at JanuaryOctober 29, 2021 and April 24, 2020,30, 2021, respectively.
The Company also uses derivative and non-derivative instruments to manage the impact of currency exchange rate changes on net investments in foreign currency-denominated operations. The information that follows explains the various types of derivatives and
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
financial instruments used by the Company, reasons the Company uses such instruments, and the impact such instruments have on the Company’s consolidated balance sheets and statements of income.
Freestanding Derivative Contracts
Freestanding derivative contracts are primarily used to offset the Company’s exposure to the change in value of specific foreign-currency-denominated assets and liabilities, and to offset variability of cash flows associated with forecasted transactions denominated in foreign currencies. The gross notional amount of the Company's freestanding currency exchange rate contracts outstanding at JanuaryOctober 29, 2021 and April 24, 202030, 2021 was $6.0$5.1 billion and $4.9$5.7 billion, respectively. The Company's freestanding currency exchange rate contracts are not designated as hedges, and therefore, changes in the value of these contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in value of foreign-currency-denominated assets, liabilities, and cash flows.
The Company also uses total return swaps to hedge the liability of a non-qualified deferred compensation plan. The gross notional amount of the Company's total return swaps outstanding at JanuaryOctober 29, 2021 and April 24, 202030, 2021 was $210$261 million and $181$243 million, respectively. The Company's total return swaps are not designated as hedges, and therefore, changes in the value of these instruments are recognized in earnings. The cash flows related to the Company's freestanding derivative contracts are reported as operating or financing activities, depending on the nature of the underlying hedged item, in the consolidated statements of cash flows.
The amounts and classification of the (gains) losses in the consolidated statements of income related
Medtronic plc
Notes to derivative instruments not designated as hedging instruments for the three and nine months ended January 29, 2021 and January 24, 2020 were as follows:Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three months ended | | Nine months ended |
(in millions) | | Classification | | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 |
Currency exchange rate contracts | | Other operating expense (income), net | | $ | 47 | | | $ | 2 | | | $ | 172 | | | $ | (4) | |
Total return swaps | | Other operating expense (income), net | | (26) | | | (17) | | | (54) | | | (22) | |
Total | | | | $ | 21 | | | $ | (15) | | | $ | 118 | | | $ | (26) | |
(Unaudited)
Cash Flow Hedges
Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted transactions denominated in a foreign currency that will take place in the future. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at JanuaryOctober 29, 2021 and April 24, 202030, 2021 was $8.1$10.1 billion and $7.0$9.0 billion, respectively, and will mature within the subsequent three-year period. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive loss. The gain or loss on the derivative instrument is reclassified into earnings and is included in other operating expense, (income), net or cost of products sold in the consolidated statements of income in the same period or periods during which the hedged transaction affects earnings. Amounts excluded from the measurement of hedge effectiveness are recognized in earnings in the current period. The cash flows related to all of the Company's derivative instruments designated as cash flow hedges are reported as operating activities in the consolidated statements of cash flows. No components of the hedge contracts were excluded in the measurement of hedge effectiveness, and no forward contracts designated as cash flow hedges were derecognized or discontinued during the three and nine months ended January 29, 2021 and January 24, 2020.
The amount of the (gains) losses recognized in accumulated other comprehensive loss (AOCI) related to the currency exchange rate contract derivative instruments designated as cash flow hedges for the three and nine months ended January 29, 2021 and January 24, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
(in millions) | | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 |
Currency exchange rate contracts | | $ | 282 | | | $ | (41) | | | $ | 733 | | | $ | (144) | |
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The amount of the (gains) losses recognized in the consolidated statements of income related to derivative instruments designated as cash flow hedges for the three and nine months ended January 29, 2021 and January 24, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 |
(in millions) | | Other operating expense (income), net | | Other operating expense (income), net | | Other operating expense (income), net | | Other operating expense (income), net |
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of cash flow hedges are recorded | | $ | 82 | | | $ | (39) | | | $ | 116 | | | $ | 88 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Currency exchange rate contracts designated as cash flow hedges: | | | | | | | | |
Amount of (gain) loss reclassified from AOCI into income | | 21 | | | (82) | | | (34) | | | (206) | |
Forecasted Debt Issuance Interest Rate Risk
Forward starting interest rate derivative instruments designated as cash flow hedges are designed to manage the exposure to interest rate volatility with regard to future issuances of fixed-rate debt. The gains or losses on forward starting interest rate derivative instruments that are designated and qualify as cash flow hedges are reported as a component of accumulated other comprehensive loss. Beginning in the period in which the planned debt issuance occurs and the related derivative instruments are terminated, the gains or losses are then reclassified into interest expense over the term of the related debt. For the three and nine months ended January 29, 2021 and January 24, 2020, the reclassifications of net (gains) losses on forward starting interest rate derivative instruments from accumulated other comprehensive loss to interest expense were not significant.
At JanuaryOctober 29, 2021 and April 24, 2020,30, 2021, the Company had $341$16 million in after-tax net unrealized lossesgains and $266$253 million in after-tax net unrealized gains,losses, respectively, associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $175$34 million of after-tax net unrealized lossesgains at JanuaryOctober 29, 2021 will be recognized in the consolidated statements of income over the next 12 months.
Net Investment Hedges
The Company has designated Euro-denominated and Japanese Yen-denominated debt as a net investment hedgeshedge of certain of its European and Japanese operations to manage the exposure to currency and exchange rate movements for foreign currency-denominated net investments in foreign operations. At JanuaryOctober 29, 2021, the Company had €16.0 billion, or $19.5$18.6 billion, of outstanding Euro-denominated debt designated as a hedge of its net investment in certain of its European operations, and ¥300 billion, or $2.9 billion, of outstanding Yen-denominated debt designated as a hedge of its net investment in certain of its Japanese operations. The Euro-denominated debt will mature in fiscal yearsyears 2023 through 2051, and the Yen-denominated debt will mature in fiscal year 2022.
Additionally, during the first quarter of fiscal year 2020, the Company entered into and settled forward currency exchange rate contracts to manage the exposure to exchange rate movements in anticipation of the issuance of Euro-denominated senior notes. Certain of these forward currency exchange rate contracts were designated as a net investment hedge of certain of the Company's European operations. These contracts matured in conjunction with the issuance of Euro-denominated debt in the first quarter of fiscal year 2020.2051.
For instruments that are designated and qualify as net investment hedges, the gains or losses are reported as a component of accumulated other comprehensive loss. The gains or losses are reclassified into earnings upon a liquidation event or deconsolidation of the foreign subsidiary. Amounts excluded from the assessment of effectiveness are recognized in other operating expense, (income), net. The cash flows related to the Company's derivative instruments designated as net investment hedges are reported as investing activities in the consolidated statements of cash flows.
At JanuaryGains and Losses on Hedging Instruments and Derivatives not Designated as Hedging Instruments
The amount of the gains and losses on our hedging instruments and derivative instruments not designated as hedging instruments and the classification of those gains and losses within our consolidated financial statements for the three and six months ended October 29, 2021 and April 24,October 30, 2020 the Company had $1.6 billion in after-tax unrealized losses and $236 million in after-tax unrealized gains, respectively, associated with net investment hedges recorded in accumulated other comprehensive loss. The Company does 0t expect any of the after-tax unrealized gains at January 29, 2021 to be recognized in the consolidated statements of income over the next 12 months.were as follows:
The Company did 0t recognize any gains or losses during the three and nine months ended January 29, 2021 or January 24, 2020 on instruments that no longer qualify as net investment hedges. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Gain) Loss Recognized in Accumulated Other Comprehensive Income | | (Gain) Loss Reclassified into Income | | |
| | | |
| Three months ended | | Six months ended | | Three months ended | | Six months ended | | Location of (Gain) Loss in Income Statement |
(in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 | |
Cash flow hedges | | | | | | | | | | | | | | | | | |
Currency exchange rate contracts | $ | (158) | | | $ | 16 | | | $ | (322) | | | $ | 402 | | | $ | (14) | | | $ | (2) | | | $ | 5 | | | $ | (55) | | | Other operating expense, net |
Currency exchange rate contracts | 39 | | | 47 | | | 43 | | | 49 | | | 14 | | | — | | | 26 | | | — | | | Cost of products sold |
Net investment hedges | (356) | | | 164 | | | (780) | | | 1,276 | | | — | | | — | | | — | | | — | | | Other operating expense, net |
Total | $ | (475) | | | $ | 227 | | | $ | (1,059) | | | $ | 1,727 | | | $ | — | | | $ | (2) | | | $ | 31 | | | $ | (55) | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Gain) Loss Recognized in Income | | (Gain) Loss Recognized in Income | | |
| Three months ended | | Six months ended | | Location of (Gain) Loss in Income Statement |
(in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 | |
Derivatives not designated as hedging instruments | | | | | | | | | |
Currency exchange rate contracts | $ | (16) | | | $ | (2) | | | $ | (34) | | | $ | 125 | | | Other operating expense, net |
Total return swaps | (12) | | | (1) | | | (25) | | | (28) | | | Other operating expense, net |
Total | $ | (28) | | | $ | (3) | | | $ | (59) | | | $ | 97 | | | |
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The amount and classifications of the (gains) losses recognized in the consolidated statements of income for the portion of the net investment hedges excluded from the measurement of hedge effectiveness were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three months ended | | Nine months ended |
(in millions) | | Classification | | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 |
Net investment hedges | | Other operating expense (income), net | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (7) | |
The amount of the (gains) losses recognized in AOCI related to instruments designated as net investment hedges for the three and nine months ended January 29, 2021 and January 24, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
(in millions) | | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 |
Net investment hedges | | $ | 587 | | | $ | (35) | | | $ | 1,863 | | | $ | (187) | |
In February, subsequent to the end of the third quarter of fiscal year 2021, the Company dedesignated ¥300 billion of outstanding Yen-denominated debt previously designated as a net investment hedge, and entered into freestanding forward derivative contracts with a total notional value of ¥300 billion, or approximately $2.9 billion. These forward contracts are not designated as hedges. The Company plans to repay the ¥300 billion of outstanding Yen-denominated debt in conjunction with the maturity of these forward contracts.
Balance Sheet Presentation
The following tables summarize the balance sheet classification and fair value of derivative instruments included in the consolidated balance sheets at JanuaryOctober 29, 2021 and April 24, 2020.30, 2021. The fair value amounts are presented on a gross basis and are segregated between derivatives that are designated and qualify as hedging instruments and those that are not designated and do not qualify as hedging instruments and are further segregated by type of contract within those two categories.
| | | | | | | | | | | | | | | | | | | | | | | |
| January 29, 2021 |
| Derivative Assets | | Derivative Liabilities |
(in millions) | Balance Sheet Classification | | Fair Value | | Balance Sheet Classification | | Fair Value |
Derivatives designated as hedging instruments | | | | | | | |
Currency exchange rate contracts | Other current assets | | $ | 9 | | | Other accrued expenses | | $ | 222 | |
| | | | | | | |
Currency exchange rate contracts | Other assets | | 1 | | | Other liabilities | | 134 | |
Total derivatives designated as hedging instruments | | | 10 | | | | | 356 | |
Derivatives not designated as hedging instruments | | | | | | | |
Currency exchange rate contracts | Other current assets | | 24 | | | Other accrued expenses | | 20 | |
Total return swaps | Other current assets | | 12 | | | Other accrued expenses | | 0 | |
Cross-currency interest rate contracts | Other current assets | | 1 | | | Other accrued expenses | | 0 | |
| | | | | | | |
| | | | | | | |
Total derivatives not designated as hedging instruments | | | 37 | | | | | 20 | |
Total derivatives | | | $ | 47 | | | | | $ | 376 | |
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
| | | April 24, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivative Assets | | Derivative Liabilities | | Fair Value - Assets | | Fair Value - Liabilities |
(in millions) | (in millions) | Balance Sheet Classification | | Fair Value | | Balance Sheet Classification | | Fair Value | (in millions) | October 29, 2021 | | April 30, 2021 | | Classification | | October 29, 2021 | | April 30, 2021 | | Classification |
Derivatives designated as hedging instruments | Derivatives designated as hedging instruments | | | | | | | | Derivatives designated as hedging instruments | | | | | | | | | | | |
Currency exchange rate contracts | Currency exchange rate contracts | Other current assets | | $ | 271 | | | Other accrued expenses | | $ | 2 | | Currency exchange rate contracts | $ | 160 | | | $ | 49 | | | Other current assets | | $ | 101 | | | $ | 190 | | | Other accrued expenses |
| Currency exchange rate contracts | Currency exchange rate contracts | Other assets | | 103 | | | Other liabilities | | 2 | | Currency exchange rate contracts | 75 | | | 22 | | | Other assets | | 50 | | | 94 | | | Other liabilities |
Total derivatives designated as hedging instruments | Total derivatives designated as hedging instruments | | | 374 | | | | | 4 | | Total derivatives designated as hedging instruments | 235 | | | 70 | | | 151 | | | 285 | | |
Derivatives not designated as hedging instruments | Derivatives not designated as hedging instruments | | | | | | | | Derivatives not designated as hedging instruments | | | |
Currency exchange rate contracts | Currency exchange rate contracts | Other current assets | | 25 | | | Other accrued expenses | | 13 | | Currency exchange rate contracts | 8 | | | 14 | | | Other current assets | | 12 | | | 11 | | | Other accrued expenses |
Total return swaps | Total return swaps | Other current assets | | 0 | | | Other accrued expenses | | 25 | | Total return swaps | 10 | | | 18 | | | Other current assets | | — | | | — | | | Other accrued expenses |
Cross-currency interest rate contracts | Other current assets | | 3 | | | Other accrued expenses | | 0 | | |
| | Total derivatives not designated as hedging instruments | Total derivatives not designated as hedging instruments | | | 28 | | | | | 38 | | Total derivatives not designated as hedging instruments | 19 | | | 32 | | | 12 | | | 11 | | |
Total derivatives | Total derivatives | | | $ | 402 | | | | | $ | 42 | | Total derivatives | $ | 254 | | | $ | 102 | | | $ | 163 | | | $ | 296 | | |
The following table provides information by level for the derivative assets and liabilities that are measured at fair value on a recurring basis.
| | | January 29, 2021 | | April 24, 2020 | | October 29, 2021 | | April 30, 2021 |
(in millions) | (in millions) | Level 1 | | Level 2 | | | Level 1 | | Level 2 | | (in millions) | Level 1 | | Level 2 | | | Level 1 | | Level 2 | |
Derivative assets | Derivative assets | $ | 34 | | | $ | 13 | | | | $ | 399 | | | $ | 3 | | | Derivative assets | $ | 244 | | | $ | 10 | | | | $ | 85 | | | $ | 18 | | |
Derivative liabilities | Derivative liabilities | 376 | | | 0 | | | | 17 | | | 25 | | | Derivative liabilities | 163 | | | — | | | | 296 | | | — | | |
The Company has elected to present the fair value of derivative assets and liabilities within the consolidated balance sheets on a gross basis, even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The cash flows related to collateral posted and received are reported gross as investing and financing activities, respectively, in the consolidated statements of cash flows.
The following tables provide information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria as stipulated by the terms of the master netting arrangements with each of the counterparties. Derivatives not subject to master netting arrangements are not eligible for net presentation.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 29, 2021 |
| | | | Gross Amount Not Offset on the Balance Sheet | | | | |
(in millions) | | Gross Amount of Recorded Assets (Liabilities) | | Financial Instruments | | Cash Collateral Posted (Received) | | | | Net Amount |
Derivative assets: | | | | | | | | | | |
Currency exchange rate contracts | | $ | 34 | | | $ | (29) | | | $ | 0 | | | | | $ | 5 | |
| | | | | | | | | | |
Cross-currency interest rate contracts | | 1 | | | 0 | | | 0 | | | | | 1 | |
Total return swaps | | 12 | | | 0 | | | 0 | | | | | 12 | |
| | 47 | | | (29) | | | 0 | | | | | 18 | |
Derivative liabilities: | | | | | | | | | | |
Currency exchange rate contracts | | (376) | | | 29 | | | 148 | | | | | (199) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total | | $ | (329) | | | $ | 0 | | | $ | 148 | | | | | $ | (181) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 29, 2021 |
| | | | Gross Amount Not Offset on the Balance Sheet | | | | |
(in millions) | | Gross Amount of Recorded Assets (Liabilities) | | Financial Instruments | | Cash Collateral Posted (Received) | | | | Net Amount |
Derivative assets: | | | | | | | | | | |
Currency exchange rate contracts | | $ | 244 | | | $ | (100) | | | $ | — | | | | | $ | 144 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total return swaps | | 10 | | | — | | | — | | | | | 10 | |
| | 254 | | | (100) | | | — | | | | | 154 | |
Derivative liabilities: | | | | | | | | | | |
Currency exchange rate contracts | | (163) | | | 100 | | | 27 | | | | | (36) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total | | $ | 91 | | | $ | — | | | $ | 27 | | | | | $ | 118 | |
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 24, 2020 |
| | | | Gross Amount Not Offset on the Balance Sheet | | | | |
(in millions) | | Gross Amount of Recorded Assets (Liabilities) | | Financial Instruments | | Cash Collateral Posted (Received) | | | | Net Amount |
Derivative assets: | | | | | | | | | | |
Currency exchange rate contracts | | $ | 399 | | | $ | (17) | | | $ | (48) | | | | | $ | 334 | |
| | | | | | | | | | |
Cross-currency interest rate contracts | | 3 | | | 0 | | | 0 | | | | | 3 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | 402 | | | (17) | | | (48) | | | | | 337 | |
Derivative liabilities: | | | | | | | | | | |
Currency exchange rate contracts | | (17) | | | 17 | | | 0 | | | | | 0 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total return swaps | | (25) | | | 0 | | | 0 | | | | | (25) | |
| | (42) | | | 17 | | | 0 | | | | | (25) | |
Total | | $ | 360 | | | $ | 0 | | | $ | (48) | | | | | $ | 312 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 30, 2021 |
| | | | Gross Amount Not Offset on the Balance Sheet | | | | |
(in millions) | | Gross Amount of Recorded Assets (Liabilities) | | Financial Instruments | | Cash Collateral Posted (Received) | | | | Net Amount |
Derivative assets: | | | | | | | | | | |
Currency exchange rate contracts | | $ | 85 | | | $ | (83) | | | $ | — | | | | | $ | 1 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total return swaps | | 18 | | | �� | | | — | | | | | 18 | |
| | 102 | | | (83) | | | — | | | | | 19 | |
Derivative liabilities: | | | | | | | | | | |
Currency exchange rate contracts | | (296) | | | 83 | | | 46 | | | | | (167) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total | | $ | (194) | | | $ | — | | | $ | 46 | | | | | $ | (148) | |
9. Inventories
Inventory balances, net of reserves, were as follows:
| | | | | | | | | | | |
(in millions) | January 29, 2021 | | April 24, 2020 |
Finished goods | $ | 2,990 | | | $ | 2,874 | |
Work in-process | 654 | | | 608 | |
Raw materials | 864 | | | 747 | |
Total | $ | 4,508 | | | $ | 4,229 | |
| | | | | | | | | | | |
(in millions) | October 29, 2021 | | April 30, 2021 |
Finished goods | $ | 2,908 | | | $ | 2,906 | |
Work in-process | 622 | | | 611 | |
Raw materials | 819 | | | 796 | |
Total | $ | 4,349 | | | $ | 4,313 | |
10. Goodwill and Other Intangible Assets
Goodwill
The following table presents the changes in the carrying amount of goodwill by segment:
| (in millions) | (in millions) | Cardiac and Vascular Group | | Minimally Invasive Therapies Group | | Restorative Therapies Group | | Diabetes Group | | Total | (in millions) | Cardiovascular | | Medical Surgical | | Neuroscience | | Diabetes | | Total |
April 24, 2020 | $ | 6,831 | | | $ | 20,176 | | | $ | 10,920 | | | $ | 1,914 | | | $ | 39,841 | | |
April 30, 2021 | | April 30, 2021 | $ | 7,209 | | | $ | 21,195 | | | $ | 11,300 | | | $ | 2,257 | | | $ | 41,961 | |
Goodwill as a result of acquisitions | Goodwill as a result of acquisitions | 248 | | | 12 | | | 199 | | | 346 | | | 805 | | Goodwill as a result of acquisitions | 55 | | | — | | | 26 | | | — | | | 80 | |
Purchase accounting adjustments | Purchase accounting adjustments | 0 | | | (5) | | | 3 | | | 0 | | | (2) | | Purchase accounting adjustments | 26 | | | 3 | | | 3 | | | (2) | | | 30 | |
Currency translation and other | Currency translation and other | 139 | | | 1,169 | | | 188 | | | 1 | | | 1,497 | | Currency translation and other | (32) | | | (366) | | | (63) | | | — | | | (459) | |
January 29, 2021 | $ | 7,218 | | | $ | 21,352 | | | $ | 11,310 | | | $ | 2,261 | | | $ | 42,141 | | |
October 29, 2021 | | October 29, 2021 | $ | 7,258 | | | $ | 20,832 | | | $ | 11,266 | | | $ | 2,255 | | | $ | 41,612 | |
The Company assesses goodwill for impairment annually as of the first day of the third quarter of the fiscal year and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment testing for goodwill is performed at the reporting unit level. The test for impairment of goodwill requires the Company to make several estimates about fair value, most of which are based onrelated to projected future cash flows.flows to determine the fair value of the goodwill reporting units. The Company calculates the excess of each reporting unit's fair value over its carrying amount, including goodwill, utilizing a discounted cash flow analysis. Internal operational budgets and long-range strategic plans are used as a basis for the cash flow analysis. The Company also utilizes assumptions for working capital, capital expenditures, and terminal growth rates. The discount rate applied to the cash flow analysis is based on the weighted average cost of capital ("WACC") for each reporting unit. An impairment loss is recognized when the carrying amount of the reporting unit's net assets exceeds the estimated fair value of the reporting unit. The Company did 0tnot recognize any goodwill impairment during the three and ninesix months ended JanuaryOctober 29, 2021 or January 24,October 30, 2020.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Intangible Assets
The following table presents the gross carrying amount and accumulated amortization of intangible assets:
| | | January 29, 2021 | | April 24, 2020 | | October 29, 2021 | | April 30, 2021 |
(in millions) | (in millions) | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization | (in millions) | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Definite-lived: | Definite-lived: | | | | | | | | Definite-lived: | | | | | | | |
Customer-related | Customer-related | $ | 17,035 | | | $ | (5,818) | | | $ | 16,963 | | | $ | (5,065) | | Customer-related | $ | 16,998 | | | $ | (6,536) | | | $ | 17,036 | | | $ | (6,058) | |
Purchased technology and patents | Purchased technology and patents | 11,320 | | | (4,984) | | | 10,742 | | | (4,354) | | Purchased technology and patents | 10,840 | | | (5,327) | | | 11,286 | | | (5,156) | |
Trademarks and tradenames | Trademarks and tradenames | 475 | | | (246) | | | 464 | | | (232) | | Trademarks and tradenames | 475 | | | (259) | | | 475 | | | (251) | |
Other | Other | 80 | | | (62) | | | 75 | | | (53) | | Other | 83 | | | (63) | | | 82 | | | (68) | |
Total | Total | $ | 28,910 | | | $ | (11,110) | | | $ | 28,244 | | | $ | (9,704) | | Total | $ | 28,396 | | | $ | (12,185) | | | $ | 28,879 | | | $ | (11,533) | |
Indefinite-lived: | Indefinite-lived: | | | | | | | | Indefinite-lived: | | | | | | | |
IPR&D | IPR&D | $ | 440 | | | $ | — | | | $ | 523 | | | $ | — | | IPR&D | $ | 312 | | | $ | — | | | $ | 394 | | | $ | — | |
|
The Company assesses definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an intangible asset (asset group) may not be recoverable. When events or changes in circumstances indicate that the carrying value of an intangible asset may not be recoverable, the Company calculates the excess of an intangible asset's carrying value over its undiscounted future cash flows. If the carrying value is not recoverable, an impairment loss is recognized based on the amount by which the carrying value exceeds the fair value. The inputs usedDuring the six months ended October 29, 2021, the Company recognized $409 million of definite-lived intangible asset charges in connection with MCS within the Cardiovascular Portfolio. Refer to Note 5 Restructuring and Other Costs for additional information on what led to the impairment. Intangible asset impairment charges are recognized in other operating expense, net in the fair value analysis fall within Level 3consolidated statements of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value.income. The Company did 0tnot recognize any definite-lived intangible asset charges during the three and nine months ended JanuaryOctober 29, 2021 or duringand the three and six months ended January 24,October 30, 2020. During the nine months ended January 24, 2020, the Company recognized $33 million of definite-lived intangible asset charges in connection with exit of businesses within the Restorative Therapies Group. Intangible asset impairment charges are recognized in
other operating expense (income), net in the consolidated statements of income.
The Company assesses indefinite-lived intangibles for impairment annually in the third quarter of the fiscal year and whenever an event occurs or circumstances change that would indicate that the carrying value may be impaired. The Company did 0tnot recognize any indefinite-lived intangible asset impairments during the three and ninesix months ended JanuaryOctober 29, 2021 or January 24,October 30, 2020. Due to the nature of IPR&D projects, the Company may experience future delays or failures to obtain regulatory approvals to conduct clinical trials, failures of clinical trials, delays or failures to obtain required market clearances, other failures to achieve a commercially viable product, or the discontinuation of certain projects, and as a result, may recognize impairment losses in the future.
Amortization Expense
Intangible asset amortization expense for the three months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020 was $453$431 million and $436$443 million, respectively. IntangibleFor the six months ended October 29, 2021 and October 30, 2020, intangible asset amortization expense for both the nine months ended January 29, 2021was $866 million and January 24, 2020 was $1.3 billion.$884 million, respectively. Estimated aggregate amortization expense by fiscal year based on the carrying value of definite-lived intangible assets at JanuaryOctober 29, 2021, excluding any possible future amortization associated with acquired IPR&D which has not yet met technological feasibility, is as follows:
| (in millions) | (in millions) | Amortization Expense | (in millions) | Amortization Expense |
Remaining 2021 | $ | 448 | | |
2022 | 1,759 | | |
Remaining 2022 | | Remaining 2022 | $ | 862 | |
2023 | 2023 | 1,695 | | 2023 | 1,664 | |
2024 | 2024 | 1,664 | | 2024 | 1,630 | |
2025 | 2025 | 1,637 | | 2025 | 1,607 | |
2026 | 2026 | 1,625 | | 2026 | 1,593 | |
2027 | | 2027 | 1,569 | |
|
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
11. Income Taxes
The Company's effective tax rate for the three and ninesix months ended JanuaryOctober 29, 2021 was (4.8)11.8 percent and 2.810.3 percent, respectively, as compared to (21.5)5.9 percent and (8.2)11.2 percent for the three and ninesix months ended January 24,October 30, 2020, respectively. The increasechange in theour effective tax rate for the three and ninesix months ended JanuaryOctober 29, 2021, as compared to the corresponding periods in the prior fiscal year, was primarily due to the tax impact of certain tax adjustments described belowthe debt tender premium, stock-based compensation benefits, and year-over-year changes in operational results by jurisdiction.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
During
jurisdiction; and specifically impacting the three and ninesix months ended January 29, 2021,comparison are the net benefit from certain tax adjustmentsimpact of $150 millionthe MCS charges and $130 million, respectively, recognized in incomethe tax provision (benefit)cost associated with a change in the consolidated statements of income, included the following. Unless otherwise stated, amounts apply to both the three- and nine-month period.
•A net benefit of $106 million associated with the resolution of an audit at the IRS Appellate level for fiscal years 2012, 2013, and 2014. The issues resolved relate to the utilization of certain net operating losses and the allocation of income between Medtronic, Inc. and its wholly owned subsidiary operating in Puerto Rico for businesses that are not the subject of the U.S. Tax Court Case for fiscal years 2005 and 2006.
•A benefit of $83 million related to the capitalization of certain research and development costs for U.S. income tax purposes and the establishment of a deferred tax asset at the U.S. federal statutory tax rate.
•A net cost of $27 million associated with an internal restructuring and intercompany sale of assets.
•A cost of $12 million and $35 million for the three and nine months ended January 29, 2021, respectively, associated with the amortization of the previously established deferred tax assets from intercompany intellectual property transactions.
•A benefit of $3 million for the nine months ended January 29, 2021 associated with the finalization of an intercompany sale of intellectual property and the establishment of a deferred tax asset. The cumulative amount of deferred tax benefit previously recognized from intercompany intellectual property transactions and recorded as Certain Tax Adjustments is $1.5 billion. The corresponding deferred tax assets will be amortized over a period of approximately 20 years.
During the three and nine months ended January 24, 2020, the net benefit from certain tax adjustments of $558 million and $839 million, respectively, recognized in income tax provision (benefit) in the consolidated statements of income, included the following. Unless otherwise stated, amounts apply to both the three- and nine-month period.
•A benefit of $558 million related to the release of a valuation allowance previously recorded against certain net operating losses. Luxembourg enacted tax legislation during the three months ended January 24, 2020, which required the Company to reassess the realizability of certain net operating losses. The Company evaluated both the positive and negative evidence and released valuation allowance equal to the expected benefit from the utilization of certain net operating losses in connection with a planned intercompany sale of intellectual property.
•A net benefit of $30 million for the nine months ended January 24, 2020 related to U.S. Treasury’s issuance of certain Final Regulations associated with U.S. Tax Reform. The primary impact of these regulations resulted in the Company re-establishing its permanently reinvestedcompany's permanent reinvestment assertion on certain foreign earnings and reversing the previously accrued tax liability. This benefit was partially offset by additional tax associated with a previously executed internal reorganization of certain foreign subsidiaries.
•A benefit of $251 million for the nine months ended January 24, 2020 related to tax legislative changes in Switzerland that abolished certain preferential tax regimes the Company benefited from and replaced them with a new set of internationally accepted measures. The legislation provided for higher effective tax rates, but allowed for a transitional period whereby an amortizable asset was created for Swiss federal income tax purposes that will be amortized and deducted over a 10-year period.historical earnings.
At Januaryboth October 29, 2021 and April 24, 2020,30, 2021, the Company's gross unrecognized tax benefits were $1.6 billion and $1.9 billion, respectively.$1.7 billion. In addition, the Company had accrued gross interest and penalties of $94$110 million at JanuaryOctober 29, 2021. If all the Company’s unrecognized tax benefits were recognized, approximately $1.5$1.6 billion would impact the Company’s effective tax rate. At JanuaryOctober 29, 2021 and April 24, 2020,30, 2021, the amount of the Company's gross unrecognized tax benefits, net of cash advance, recorded as a noncurrent liability within accrued income taxes on the consolidated balance sheets was $773$819 million and $911$809 million, respectively. The Company recognizes interest and penalties related to income tax matters within income tax provision (benefit) in the consolidated statements of income and records the liability within either current or noncurrent accrued income taxes on the consolidated balance sheets.
Refer to Note 16 to the consolidated financial statements for additional information regarding the status of current tax audits and proceedings.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
12. Earnings Per Share
Earnings per share is calculated using the two-class method, as the Company's A Preferred Shares are considered participating securities. Accordingly, earnings are allocated to both ordinary shares and participating securities in determining earnings per ordinary share. Due to the limited number of A Preferred Shares outstanding, this allocation had no effect on the ordinary earnings per share; therefore, it is not presented below. Basic earnings per share is computed based on the weighted average number of ordinary shares outstanding. Diluted earnings per share is computed based on the weighted average number of ordinary shares outstanding, increased by the number of additional shares that would have been outstanding had the potentially dilutive ordinary shares been issued, and reduced by the number of shares the Company could have repurchased with the proceeds from issuance of the potentially dilutive shares. Potentially dilutive ordinary shares include stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan.
The table below sets forth the computation of basic and diluted earnings per share:
| | | Three months ended | | Nine months ended | | Three months ended | | Six months ended |
(in millions, except per share data) | (in millions, except per share data) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 | (in millions, except per share data) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Numerator: | Numerator: | | | | | | | | Numerator: | | | | | | | |
Net income attributable to ordinary shareholders | Net income attributable to ordinary shareholders | $ | 1,270 | | | $ | 1,915 | | | $ | 2,246 | | | $ | 4,143 | | Net income attributable to ordinary shareholders | $ | 1,311 | | | $ | 489 | | | $ | 2,074 | | | $ | 976 | |
Denominator: | Denominator: | | | | | Denominator: | | | | |
Basic – weighted average shares outstanding | Basic – weighted average shares outstanding | 1,346.4 | | | 1,340.5 | | | 1,344.2 | | | 1,340.7 | | Basic – weighted average shares outstanding | 1,345.1 | | | 1,344.4 | | | 1,344.8 | | | 1,343.1 | |
Effect of dilutive securities: | Effect of dilutive securities: | | | | | Effect of dilutive securities: | | | | |
Employee stock options | Employee stock options | 7.3 | | | 8.4 | | | 6.0 | | | 7.8 | | Employee stock options | 8.2 | | | 5.9 | | | 8.4 | | | 5.3 | |
Employee restricted stock units | Employee restricted stock units | 2.0 | | | 2.6 | | | 2.2 | | | 2.9 | | Employee restricted stock units | 1.7 | | | 1.8 | | | 2.0 | | | 2.3 | |
Other | Other | 0.3 | | | 0 | | | 0.3 | | | 0.2 | | Other | 0.4 | | | — | | | 0.7 | | | 0.4 | |
Diluted – weighted average shares outstanding | Diluted – weighted average shares outstanding | 1,356.0 | | | 1,351.5 | | | 1,352.7 | | | 1,351.6 | | Diluted – weighted average shares outstanding | 1,355.3 | | | 1,352.1 | | | 1,355.9 | | | 1,351.1 | |
| | | | | | | | |
Basic earnings per share | Basic earnings per share | $ | 0.94 | | | $ | 1.43 | | | $ | 1.67 | | | $ | 3.09 | | Basic earnings per share | $ | 0.97 | | | $ | 0.36 | | | $ | 1.54 | | | $ | 0.73 | |
Diluted earnings per share | Diluted earnings per share | $ | 0.94 | | | $ | 1.42 | | | $ | 1.66 | | | $ | 3.07 | | Diluted earnings per share | $ | 0.97 | | | $ | 0.36 | | | $ | 1.53 | | | $ | 0.72 | |
The calculation of weighted average diluted shares outstanding excludes options to purchase approximately 24 million and 62 million ordinary shares for the three and ninesix months ended JanuaryOctober 29, 2021, respectively, and 38 million ordinary shares for both the three and ninesix months ended January 24,October 30, 2020, because their effect would have been anti-dilutive on the Company’s earnings per share.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
13. Stock-Based Compensation
The following table presents the components and classification of stock-based compensation expense for stock options, restricted stock, performance share units, and employee stock purchase plan shares recognized for the three and ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020:
| | | Three months ended | | Nine months ended | | | Three months ended | | Six months ended |
(in millions) | (in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 | | (in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Stock options | Stock options | $ | 10 | | | $ | 12 | | | $ | 61 | | | $ | 52 | | | Stock options | $ | 35 | | | $ | 43 | | | $ | 45 | | | $ | 51 | |
Restricted stock | Restricted stock | 48 | | | 46 | | | 186 | | | 159 | | | Restricted stock | 52 | | | 53 | | | 94 | | | 103 | |
| Performance share units | | Performance share units | 43 | | | 35 | | | 50 | | | 35 | |
Employee stock purchase plan | Employee stock purchase plan | 7 | | | 8 | | | 28 | | | 24 | | | Employee stock purchase plan | 9 | | | 9 | | | 20 | | | 21 | |
Total stock-based compensation expense | Total stock-based compensation expense | $ | 65 | | | $ | 66 | | | $ | 275 | | | $ | 235 | | | Total stock-based compensation expense | $ | 140 | | | $ | 140 | | | $ | 209 | | | $ | 210 | |
| Cost of products sold | Cost of products sold | $ | 7 | | | $ | 6 | | | $ | 28 | | | $ | 22 | | | Cost of products sold | $ | 14 | | | $ | 14 | | | $ | 21 | | | $ | 21 | |
Research and development expense | Research and development expense | 7 | | | 9 | | | 30 | | | 29 | | | Research and development expense | 15 | | | 15 | | | 23 | | | 23 | |
Selling, general, and administrative expense | Selling, general, and administrative expense | 51 | | | 51 | | | 217 | | | 184 | | | Selling, general, and administrative expense | 110 | | | 111 | | | 165 | | | 166 | |
Total stock-based compensation expense | Total stock-based compensation expense | 65 | | | 66 | | | 275 | | | 235 | | | Total stock-based compensation expense | 140 | | | 140 | | | 209 | | | 210 | |
Income tax benefits | Income tax benefits | (11) | | | (11) | | | (46) | | | (40) | | | Income tax benefits | (26) | | | (24) | | | (37) | | | (36) | |
Total stock-based compensation expense, net of tax | Total stock-based compensation expense, net of tax | $ | 54 | | | $ | 55 | | | $ | 229 | | | $ | 195 | | | Total stock-based compensation expense, net of tax | $ | 114 | | | $ | 116 | | | $ | 172 | | | $ | 174 | |
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
14. Retirement Benefit Plans
The Company sponsors various retirement benefit plans, including defined benefit pension plans, post-retirement medical plans, defined contribution savings plans, and termination indemnity plans, covering substantially all U.S. employees and many employees outside the U.S. The net periodic benefit cost of the defined benefit pension plans included the following components for the three and ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | | Non-U.S. | | | | | |
| Three months ended | | Three months ended | | | | | |
(in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 | | | | | |
| | | | | | | | | | | | |
Service cost | $ | 26 | | | $ | 26 | | | $ | 17 | | | $ | 15 | | | | | | |
Interest cost | 28 | | | 32 | | | 7 | | | 7 | | | | | | |
Expected return on plan assets | (60) | | | (56) | | | (13) | | | (15) | | | | | | |
Amortization of net actuarial loss | 17 | | | 14 | | | 6 | | | 4 | | | | | | |
| | | | | | | | | | | | |
Net periodic benefit cost | $ | 11 | | | $ | 16 | | | $ | 17 | | | $ | 11 | | | | | | |
| | | U.S. | | Non-U.S. | | | U.S. | | Non-U.S. |
| | Nine months ended | | Nine months ended | | | Three months ended | | Three months ended |
(in millions) | (in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 | | (in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Special termination benefits | Special termination benefits | $ | 80 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | Special termination benefits | $ | — | | | $ | 80 | | | $ | — | | | $ | — | |
Service cost | Service cost | 80 | | | 78 | | | 51 | | | 45 | | | Service cost | 25 | | | 27 | | | 16 | | | 17 | |
Interest cost | Interest cost | 82 | | | 96 | | | 20 | | | 21 | | | Interest cost | 26 | | | 27 | | | 7 | | | 7 | |
Expected return on plan assets | Expected return on plan assets | (182) | | | (168) | | | (41) | | | (45) | | | Expected return on plan assets | (57) | | | (61) | | | (16) | | | (14) | |
| Amortization of net actuarial loss | | Amortization of net actuarial loss | 16 | | | 17 | | | 5 | | | 6 | |
Net periodic benefit cost | | Net periodic benefit cost | $ | 10 | | | $ | 90 | | | $ | 12 | | | $ | 16 | |
| | | | U.S. | | Non-U.S. |
| | | Six months ended | | Six months ended |
(in millions) | | (in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Special termination benefits | | Special termination benefits | $ | — | | | $ | 80 | | | $ | — | | | $ | — | |
Service cost | | Service cost | 50 | | | 54 | | | 32 | | | 34 | |
Interest cost | | Interest cost | 52 | | | 54 | | | 14 | | | 13 | |
Expected return on plan assets | | Expected return on plan assets | (114) | | | (122) | | | (32) | | | (28) | |
| Amortization of net actuarial loss | Amortization of net actuarial loss | 52 | | | 42 | | | 18 | | | 11 | | | Amortization of net actuarial loss | 32 | | | 35 | | | 10 | | | 12 | |
| Net periodic benefit cost | Net periodic benefit cost | $ | 112 | | | $ | 48 | | | $ | 48 | | | $ | 32 | | | Net periodic benefit cost | $ | 20 | | | $ | 101 | | | $ | 24 | | | $ | 31 | |
Components of net periodic benefit cost other than the service component are recognized in other non-operating income, net in the consolidated statements of income.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
During fiscal year 2021, as part of the Simplification restructuring program, the Company offered certain eligible U.S. employees voluntary early retirement packages, resulting in incremental expense of $97 million recognized during the ninethree and six months ended January 29, 2021.October 30, 2020. Of this amount, $80$73 million related to U.S. pension benefits, $11 million related to defined contribution plans, $4$11 million related to U.S. post-retirement benefits, and $2 million related to cash payments and administrative fees. See Note 5 for additional information on the Simplification restructuring program.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
15. Accumulated Other Comprehensive Loss
The following table provides changes in AOCI, net of tax, and by component:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Unrealized Gain (Loss) on Investment Securities | | Cumulative Translation Adjustments | | Net Investment Hedges | | Net Change in Retirement Obligations | | Unrealized Gain (Loss) on Cash Flow Hedges | | Total Accumulated Other Comprehensive (Loss) Income |
April 24, 2020 | $ | 0 | | | $ | (2,210) | | | $ | 236 | | | $ | (1,852) | | | $ | 266 | | | $ | (3,560) | |
Other comprehensive income (loss) before reclassifications | 138 | | | 1,943 | | | (1,863) | | | (26) | | | (589) | | | (397) | |
Reclassifications | (1) | | | 0 | | | 0 | | | 54 | | | (18) | | | 35 | |
Other comprehensive income (loss) | 137 | | | 1,943 | | | (1,863) | | | 28 | | | (607) | | | (362) | |
January 29, 2021 | $ | 137 | | | $ | (267) | | | $ | (1,627) | | | $ | (1,824) | | | $ | (341) | | | $ | (3,922) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(in millions) | Unrealized (Loss) Gain on Investment Securities | | Cumulative Translation Adjustment | | Net Investment Hedges | | Net Change in Retirement Obligations | | Unrealized Gain (Loss) on Cash Flow Hedges | | Total Accumulated Other Comprehensive (Loss) Income |
April 26, 2019 | $ | (45) | | | $ | (1,383) | | | $ | (169) | | | $ | (1,308) | | | $ | 194 | | | $ | (2,711) | |
Other comprehensive income (loss) before reclassifications | 94 | | | (116) | | | 187 | | | (1) | | | 106 | | | 270 | |
Reclassifications | (1) | | | 0 | | | 0 | | | 39 | | | (143) | | | (105) | |
Other comprehensive income (loss) | 93 | | | (116) | | | 187 | | | 38 | | | (37) | | | 165 | |
| | | | | | | | | | | |
January 24, 2020 | $ | 48 | | | $ | (1,499) | | | $ | 18 | | | $ | (1,270) | | | $ | 157 | | | $ | (2,546) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Unrealized Gain (Loss) on Investment Securities | | Cumulative Translation Adjustments | | Net Investment Hedges | | Net Change in Retirement Obligations | | Unrealized Gain (Loss) on Cash Flow Hedges | | Total Accumulated Other Comprehensive (Loss) Income |
April 30, 2021 | $ | 92 | | | $ | (519) | | | $ | (1,458) | | | $ | (1,347) | | | $ | (253) | | | $ | (3,485) | |
Other comprehensive income (loss) before reclassifications | (41) | | | (599) | | | 780 | | | 4 | | | 237 | | | 381 | |
Reclassifications | (3) | | | — | | | — | | | 33 | | | 32 | | | 62 | |
Other comprehensive income (loss) | (44) | | | (599) | | | 780 | | | 37 | | | 269 | | | 443 | |
October 29, 2021 | $ | 48 | | | $ | (1,118) | | | $ | (678) | | | $ | (1,310) | | | $ | 16 | | | $ | (3,042) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(in millions) | Unrealized Gain (Loss) on Investment Securities | | Cumulative Translation Adjustment | | Net Investment Hedges | | Net Change in Retirement Obligations | | Unrealized Gain (Loss) on Cash Flow Hedges | | Total Accumulated Other Comprehensive (Loss) Income |
April 24, 2020 | $ | — | | | $ | (2,210) | | | $ | 236 | | | $ | (1,852) | | | $ | 266 | | | $ | (3,560) | |
Other comprehensive income (loss) before reclassifications | 114 | | | 1,255 | | | (1,276) | | | (14) | | | (359) | | | (280) | |
Reclassifications | (1) | | | — | | | — | | | 34 | | | (36) | | | (3) | |
Other comprehensive income (loss) | 113 | | | 1,255 | | | (1,276) | | | 20 | | | (395) | | | (283) | |
| | | | | | | | | | | |
October 30, 2020 | $ | 113 | | | $ | (955) | | | $ | (1,040) | | | $ | (1,832) | | | $ | (129) | | | $ | (3,843) | |
The income tax on gains and losses on investment securities in other comprehensive income before reclassifications during the ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020 was a benefit of $6 million and an expense of $40 million and $7$31 million, respectively. There was 0 income tax on gains and losses on investment securities reclassified from AOCI forDuring the ninesix months ended JanuaryOctober 29, 2021. During the nine months ended January 24, 2020,2021, realized gains and losses on investment securities reclassified from AOCI were reduced by income taxes of $1 million. During the six months ended October 30, 2020 there was no income tax on realized gains and losses on investment securities reclassified from AOCI. When realized, gains and losses on investment securities reclassified from AOCI are recognized within other non-operating income, net. Refer to Note 6 to the consolidated financial statements for additional information.
TheDuring the six months ended October 29, 2021 there was no income tax on cumulative translation adjustment. For the six months ended October 30, 2020 the income tax on cumulative translation adjustment for the nine months ended January 29, 2021 was an expense of $7$4 million. For the nine months ended January 24, 2020, there was 0 income tax on cumulative translation adjustment.
During the ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020, there were 0no tax impacts on net investment hedges. Refer to Note 8 to the consolidated financial statements for additional information.
The net change in retirement obligations in other comprehensive income includes amortization of net actuarial losses included in net periodic benefit cost. During the ninesix months ended JanuaryOctober 29, 2021 and October 30, 2020, the net change in retirement obligations in other comprehensive income before reclassifications resulted in anincome tax expense of $2 million and income tax benefit of $8 million.$5 million, respectively. During the ninesix months ended January 24, 2020, there was 0 income tax impact on the net change in retirement obligations in other comprehensive income before reclassifications. During the nine months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020, the gains and losses on defined benefit and pension items reclassified from AOCI were reduced by income taxes of $12$7 million and $9$8 million, respectively. When realized, net gains and losses on defined benefit and pension items reclassified from AOCI are recognized within other non-operating income, net. Refer to Note 14 to the consolidated financial statements for additional information.
The income tax on unrealized gains and losses on cash flow hedges in other comprehensive income before reclassifications during the ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020 was an expense of $42 million and a benefit of $145 million and an expense of $38$93 million, respectively. During the ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020, gains and losses on cash flow hedges reclassified from AOCI were reduced by income taxes of $6$1 million and $47$10 million, respectively. When realized, gains and losses on currency exchange rate contracts reclassified from AOCI are recognized within other operating expense, (income), net, and gains and losses on forward starting interest rate derivatives reclassified from AOCI are recognized within interest expense. Refer to Note 8 to the consolidated financial statements for additional information.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
16. Commitments and Contingencies
Legal Matters
The Company and its affiliates are involved in a number of legal actions involving product liability, intellectual property and commercial disputes, shareholder related matters, environmental proceedings, tax disputes, and governmental proceedings and investigations, including those described below. With respect to governmental proceedings and investigations, like other companies in our industry, the Company is subject to extensive regulation by national, state, and local governmental agencies in the United States and in other jurisdictions in which the Company and its affiliates operate. As a result, interaction with governmental agencies is ongoing. The Company’s standard practice is to cooperate with regulators and investigators in responding to inquiries. The outcomes of legal actions are not within the Company’s complete control and may not be known for prolonged periods of time. In some actions, the enforcement agencies or private claimants seek damages, as well as other civil or criminal remedies (including injunctions barring the sale of products that are the subject of the proceeding), that could require significant expenditures, result in lost revenues, or limit the Company's ability to conduct business in the applicable jurisdictions.
The Company records a liability in the consolidated financial statements on an undiscounted basis for loss contingencies related to legal actions when a loss is known or considered probable and the amount may be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. When determining the estimated loss or range of loss, significant judgment is required. Estimates of probable losses resulting from litigation and governmental proceedings involving the Company are inherently difficult to predict, particularly when the matters are in early procedural stages with incomplete scientific facts or legal discovery, involve unsubstantiated or indeterminate claims for damages, potentially involve penalties, fines or punitive damages, or could result in a change in business practice. The Company classifies litigation charges and gains related to significant legal matters as certain litigation charges. During the three and ninesix months ended JanuaryOctober 29, 2021, the Company recognized $122$34 million and $118$60 million, respectively, of certain litigation charges. During the three and ninesix months ended January 24,October 30, 2020, the Company recognized $108charges of $84 million and $276a net benefit of $4 million, respectively, primarily due to favorable settlements in the first quarter of certain litigation charges.fiscal year 2021, partially offset by charges recognized in the second quarter of fiscal year 2021. At JanuaryOctober 29, 2021 and April 24, 2020,30, 2021, accrued litigation was approximately $0.5 billion.$0.3 billion and $0.4 billion, respectively. The ultimate cost to the Company with respect to accrued litigation could be materially different than the amount of the current estimates and accruals and could have a material adverse impact on the Company’s consolidated earnings, financial position, and/or cash flows. The Company includes accrued litigation in other accrued expenses and other liabilities on the consolidated balance sheets. While it is not possible to predict the outcome for most of the legal matters discussed below, the Company believes it is possible that the costs associated with these matters could have a material adverse impact on the Company’s consolidated earnings, financial position, and/or cash flows.
Product Liability Matters
Pelvic Mesh Litigation
The Company is currently involved in litigation in various state and federal courts against manufacturers of pelvic mesh products alleging personal injuries resulting from the implantation of those products. NaN subsidiaries of Covidien supplied pelvic mesh products to 1 of the manufacturers, C.R. Bard (Bard), named in the litigation. The litigation includes a federal multi-district litigation in the U.S. District Court for the Northern District of West Virginia and cases in various state courts and jurisdictions outside the U.S. Generally, complaints allege design and manufacturing claims, failure to warn, breach of warranty, fraud, violations of state consumer protection laws and loss of consortium claims. In fiscal year 2016, Bard paid the Company $121 million towards the settlement of 11,000 of these claims. In May 2017, the agreement with Bard was amended to extend the terms to apply to up to an additional 5,000 claims. That agreement does not resolve the dispute between the Company and Bard with respect to claims that do not settle, if any. As part of the agreement, the Company and Bard agreed to dismiss without prejudice their pending litigation with respect to Bard’s obligation to defend and indemnify the Company. The Company estimates law firms representing approximately 16,200 claimants have asserted or may assert claims involving products manufactured by Covidien’s subsidiaries. As of FebruaryNovember 3, 2021, the Company had reached agreements to settle approximately 15,900 of these claims. The Company's accrued expenses for this matter are included within accrued litigation as discussed above.
Hernia Mesh Litigation
DuringStarting in fiscal year 2020, plaintiffs filed lawsuits against certain subsidiaries of the Company in U.S. state and federal courts alleging personal injury from hernia mesh products sold by those subsidiaries. The majority of the pending cases are in Massachusetts state court, where they have been consolidated before a single judge. Certain plaintiffs' law firms have advised the Company that they may file a large volume of additional cases in the future. The pending lawsuits relate almost entirely to hernia mesh products that have not been subject to recalls, withdrawals, or other adverse regulatory action. The Company has not recorded an expense related to damages in connection with
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
these matters because any potential loss is not currently probable or reasonably estimable under U.S. GAAP.estimable. Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from these matters.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Patent Litigation
Ethicon
On December 14, 2011, Ethicon filed an action against Covidien in the U.S. District Court for the Southern District of Ohio, alleging patent infringement and seeking monetary damages and injunctive relief. On January 22, 2014, the district court entered summary judgment in Covidien's favor, and the majority of this ruling was affirmed by the Federal Circuit on August 7, 2015. Following appeal, the case was remanded back to the District Court with respect to 1 patent. On January 21, 2016, Covidien filed a second action in the U.S. District Court for the Southern District of Ohio, seeking a declaration of non-infringement with respect to a second set of patents held by Ethicon. The court consolidated this second action with the remaining patent issues from the first action. Following consolidation of the cases, Ethicon dismissed 6 of the asserted patents, leaving a single asserted patent. The court has scheduled this matter for a bench trial in the first half of calendar year 2021. The Company's accrued expenses for this matter are included within accrued litigation as discussed above.
Sasso
The Company is involved in litigation in Indiana relating to certain patent and royalty disputes with Dr. Sasso under agreements originally entered into in 1999 and 2001. On November 28, 2018, a jury in Indiana state court returned a verdict against the Company for approximately $112 million. The Company has strong arguments to appeal the verdict and has filed post-trial motions and appeals with the appropriate appellate courts. The Company's accrued expenses for this matter are included within accrued litigation as discussed above.
Shareholder Related Matters
Covidien Acquisition
On July 2, 2014, Lewis Merenstein filed a putative shareholder class action in Hennepin County, Minnesota, District Court seekingJune 15, 2021, pursuant to enjoin the then-potential acquisition of Covidien. The lawsuit named Medtronic, Inc., Covidien, and each member of the Medtronic, Inc. Board of Directors at the time as defendants, and alleged that the directors breached their fiduciary duties to shareholders with regard to the then-potential acquisition. On August 21, 2014, Kenneth Steiner filed a putative shareholder class action in Hennepin County, Minnesota, District Court, also seeking an injunction to prevent the potential Covidien acquisition. In September 2014, the Merenstein and Steiner matters were consolidated and in December 2014, the plaintiffs filed a preliminary injunction motion seeking to enjoin the Covidien transaction. On March 20, 2015, the District Court issued an order and opinion granting Medtronic’s motion to dismissfrom the case. In May 2015, the plaintiffs filed an appeal, and, in January 2016, the Minnesota State Court of Appeals affirmed in part, and reversed in part. On April 19, 2016 the Minnesota Supreme Court granted the Company’s petition to review the issue of whether most of the original claims are properly characterized as direct or derivative under Minnesota law. In August 2017, the Minnesota Supreme Court affirmed the decision of the Minnesota State Court of Appeals, sending the matter back to the trialstate court, for further proceedings, which are ongoing. In April 2020, the District Court issued an order and opinion denying the plaintiffs' motion for class certification. In June 2020, the Minnesota State Court of Appeals denied the plaintiffs' request to review the District Court's denial of class certification, and in September 2020, the Minnesota Supreme Court denied the plaintiffs' request to review the Court of Appeals decision. The Company has not recognized an expense related to damages in connection with this matter because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company paid the judgment plus accrued interest to Dr. Sasso, subject to repayment if the Company's ongoing appeal is unable to reasonably estimate the range of loss, if any, that may result from these matters.successful.
Environmental Proceedings
The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. These projects relate to a variety of activities, including removal of solvents, metals and other hazardous substances from soil and groundwater. The ultimate cost of site cleanup and timing of future cash flows is difficult to predict given uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations, and alternative cleanup methods.
The Company is a successor to a company thatwhich owned and operated a chemical manufacturing facility in Orrington, Maine from 1967 until 1982, and is responsible for the costs of completing an environmental site investigation as required by the Maine Department of Environmental Protection (MDEP). MDEP served a compliance order on Mallinckrodt LLC and U.S. Surgical Corporation, subsidiaries of Covidien, in December 2008, which included a directive to remove a significant volume of soils at the site. After a hearing on the compliance order before the Maine Board of Environmental Protection (Maine Board) to challenge the terms of the compliance order, the Maine Board modified the MDEP order and issued a final order requiring removal of 2 landfills, capping of the remaining 3 landfills, installation of a groundwater extraction system and long-term monitoring of the site and the 3 remaining landfills.
The Company has proceeded with implementation of the investigation and remediation at the site in accordance with the MDEP order as modified by the Maine Board order.
Since the early 2000s, the Company or its predecessors have also been involved in a lawsuit filed in the U.S. District Court for the District of Maine by the Natural Resources Defense Council and the Maine People’s Alliance. Plaintiffs sought an injunction requiring the
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Company's predecessor to conduct extensive studies of mercury contamination of the Penobscot River and Bay and options for remediating such contamination, and to perform appropriate remedial activities, if necessary.
Following a trial in March 2002, the Court held that conditions in the Penobscot River and Bay may pose an imminent and substantial endangerment and that the Company’s predecessor was liable for the cost of performing a study of the River and Bay. Following a second trial in June 2014, the Court ordered that further engineering study and engineering design work was needed to determine the nature and extent of remediation in the Penobscot River and Bay. The Court also appointed an engineering firm to conduct such studies and issue a report on potential remediation alternatives. In connection with these proceedings, reports have been produced including a variety of cost estimates for a variety of potential remedial options. A third trialIn March 2021, the parties notified the Court that they had agreed on a settlement in principle of all issues in this matter. Finalization of the proposed settlement remains subject to determine the course of remediation to be pursued is scheduled to occur in calendar year 2021.Court approval.
The Company's accrued expenses for environmental proceedings are included within accrued litigation as discussed above.
Income Taxes
In March 2009, the IRS issued its audit report on Medtronic, Inc. for fiscal years 2005 and 2006. Medtronic, Inc. reached agreement with the IRS on some, but not all matters related to these fiscal years. The remaining unresolved issue for fiscal years 2005 and 2006 relates to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, which is one of the Company's key manufacturing sites. The U.S. Tax Court reviewed this dispute, and on June 9, 2016, issued its opinion with respect to the allocation of income between the parties for fiscal years 2005 and 2006. The U.S. Tax Court generally rejected the IRS’s position, but also made certain modifications to the Medtronic, Inc. tax returns as filed. On April 21, 2017, the IRS filed their Notice of Appeal to the U.S. Court of Appeals for the 8th Circuit regarding the Tax Court Opinion. Oral argument for the Appeal occurred on March 14, 2018. The 8th Circuit Court of Appeals issued their opinion on August 16, 2018 and remanded the case back to the U.S. Tax Court for additional factual findings. The U.S. Tax Court trial is scheduledrelating to occur inthe issues remanded by the 8th Circuit Court of Appeals concluded during June of 2021. The parties are awaiting the Tax Court decision, which will remain subject to appeal by either party upon its issuance.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The IRS has issued its audit reportreports on Medtronic, Inc. for fiscal years 2007 and 2008.through 2016. Medtronic, Inc. and the IRS have reached agreement with the IRS on some, but not all matters related to these fiscal years. The remaining unresolved issuesignificant issues except for fiscal years 2007 and 2008 relates to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico for the businesses that are the subject of the U.S. Tax Court Case for fiscal years 2005 and 2006.
In April 2014, the IRS issued its audit report on Medtronic, Inc. for fiscal years 2009, 2010, and 2011. Medtronic, Inc. reached agreement with the IRS on some but not all matters related to these fiscal years. The remaining unresolved issue for fiscal years 2009, 2010, and 2011 relates to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico for the businesses that are the subject of the U.S. Tax Court Case for fiscal years 2005 and 2006.
In May 2017, the IRS issued its audit report on Medtronic, Inc. for fiscal years 2012, 2013, and 2014. Medtronic, Inc. reached agreement with the IRS on some but not all matters related to these fiscal years. During January 2021, Medtronic, Inc. and the IRS resolved the outstanding matters related to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico for the businesses that are not the subject of the U.S. Tax Court Case and the utilization of certain net operating losses.The remaining unresolved issue for fiscal years 2012, 2013 and 2014 relates to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico for the businesses that are the subject of the U.S. Tax Court Case for fiscal years 2005 and 2006.
In November 2020, the IRS issued its audit report on Medtronic, Inc. for fiscal years 2015 and 2016. Medtronic, Inc. reached agreement with the IRS on some but not all matters related to these fiscal years. The significant issue that remains unresolved relates to the allocation of income between Medtronic, Inc. and its wholly owned subsidiary operating in Puerto Rico for the businesses that are the subject of the U.S. Tax Court Case for fiscal years 2005 and 2006.
Medtronic, Inc.’s fiscal years 2017, 2018, and 2019 U.S. federal income tax returns are currently being audited by the IRS.
In January 2021, the IRS issued its audit report for Covidien's fiscal year 2015 U.S. federal income tax returns.Covidien LP (a wholly owned subsidiary of Medtronic plc) has either reached agreement with the IRS on all matters related to fiscal year 2015. Theor the statute of limitations for Covidien's 2016 and 2017has lapsed on their U.S. federal income tax returns lapsed during the third quarter ofthrough fiscal year 2020 and 2021, respectively.2017.
While it is not possible to predict the outcome for most of the income tax matters discussed above, the Company believes it is possible that charges associated with these matters could have a material adverse impact on the Company’s consolidated earnings, financial position, and/or cash flows.
Refer to Note 11 for additional discussion of income taxes.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Guarantees
As part of the Company’s sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses to Cardinal on July 29, 2017, the Company has indemnified Cardinal for certain contingent tax liabilities related to the divested businesses that existed prior to the date of divestiture. The actual amounts that the Company may be required to ultimately accrue or pay could vary depending upon the outcome of the unresolved tax matters.
In the normal course of business, the Company and/or its affiliates periodically enter into agreements that require one or more of the Company and/or its affiliates to indemnify customers or suppliers for specific risks, such as claims for injury or property damage arising as a result of the Company or its affiliates’ products, the negligence of the Company's personnel, or claims alleging that the Company's products infringe on third-party patents or other intellectual property. The Company also offers warranties on various products. The Company’s maximum exposure under these guarantees is unable to be estimated. Historically, the Company has not experienced significant losses on these types of guarantees.
The Company believes the ultimate resolution of the above guarantees is not expected to have a material effect on the Company’s consolidated earnings, financial position, and/or cash flows.
17. Segment and Geographic Information
Segment disclosures are on a performance basis consistent with internal management reporting. Net sales of the Company's reportable segments include end-customer revenues from the sale of products the segment develops, manufactures, and distributes. There are certain corporate and centralized expenses that are not allocated to the segments.
The Company’s management evaluates performance of the segments and allocates resources based on net sales and segment operating profit. Segment operating profit represents income before income taxes, excluding interest expense, amortization of intangible assets, centralized distribution costs, non-operating income or expense items, certain corporate charges, and other items not allocated to the segments.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 24, 2020.30, 2021. Certain depreciable assets may be recorded by one segment, while the depreciation expense is allocated to another segment. The allocation of depreciation expense is based on the proportion of the assets used by each segment.
Effective February 1, 2021, the Company implemented a new operating model, moving from a Group structure to a Portfolio structure: Cardiovascular Portfolio (formerly Cardiac and Vascular Group), Neuroscience Portfolio (formerly Restorative Therapies Group), and Medical Surgical Portfolio (formerly Minimally Invasive Therapies Group). The Diabetes GroupOperating Unit (formerly Diabetes Group) remains a separate operating and reportable segment in the new structure. There were no changes to the reportable segments as of and forduring the three and nine months ended January 29, 2021 as a result of the new operating model. The new reportable segments starting in the fourth quarter of fiscal year ended April 30, 2021, such that the 4 principal operating and reportable segments are as follows: Cardiovascular Portfolio, Neuroscience Portfolio, Medical Surgical Portfolio, Neuroscience Portfolio, and Diabetes Operating Unit.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The following tables present reconciliations of financial information from the segments to the applicable line items in the Company's consolidated financial statements:
Segment Operating Profit
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 |
Cardiac and Vascular Group | $ | 994 | | | $ | 1,101 | | | $ | 2,745 | | | $ | 3,284 | |
Minimally Invasive Therapies Group | 890 | | | 860 | | | 2,120 | | | 2,453 | |
Restorative Therapies Group | 861 | | | 898 | | | 2,189 | | | 2,531 | |
Diabetes Group | 177 | | | 158 | | | 412 | | | 456 | |
Segment operating profit | 2,922 | | | 3,017 | | | 7,466 | | | 8,724 | |
Interest expense | (143) | | | (156) | | | (783) | | | (930) | |
Other non-operating income, net | 86 | | | 96 | | | 233 | | | 305 | |
Amortization of intangible assets | (453) | | | (436) | | | (1,337) | | | (1,317) | |
Corporate | (398) | | | (348) | | | (1,222) | | | (1,005) | |
Centralized distribution costs | (458) | | | (348) | | | (1,398) | | | (1,117) | |
Restructuring and associated costs | (160) | | | (97) | | | (466) | | | (315) | |
Acquisition-related items | (35) | | | (28) | | | 33 | | | (74) | |
Certain litigation charges, net | (122) | | | (108) | | | (118) | | | (276) | |
IPR&D charges | 0 | | | 0 | | | (20) | | | 0 | |
Exit of businesses | 0 | | | 0 | | | 0 | | | (41) | |
Debt tender premium and other charges | 0 | | | 0 | | | 0 | | | 7 | |
Medical device regulations | (21) | | | (13) | | | (58) | | | (31) | |
Contribution to Medtronic Foundation | 0 | | | 0 | | | 0 | | | (80) | |
| | | | | | | |
Income before income taxes | $ | 1,220 | | | $ | 1,579 | | | $ | 2,329 | | | $ | 3,850 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Cardiovascular | $ | 1,095 | | | $ | 992 | | | $ | 2,256 | | | $ | 1,751 | |
Medical Surgical | 908 | | | 775 | | | 1,823 | | | 1,230 | |
Neuroscience | 887 | | | 805 | | | 1,850 | | | 1,327 | |
Diabetes | 157 | | | 132 | | | 290 | | | 235 | |
Segment operating profit | 3,047 | | | 2,704 | | | 6,219 | | | 4,543 | |
Interest expense | (136) | | | (470) | | | (273) | | | (641) | |
Other non-operating income, net | 66 | | | 65 | | | 177 | | | 147 | |
Amortization of intangible assets | (431) | | | (443) | | | (866) | | | (884) | |
Corporate | (415) | | | (460) | | | (864) | | | (825) | |
Centralized distribution costs | (516) | | | (542) | | | (981) | | | (940) | |
Restructuring and associated costs | (77) | | | (179) | | | (159) | | | (307) | |
Acquisition-related items | 13 | | | (47) | | | (96) | | | 49 | |
Certain litigation charges, net | (34) | | | (84) | | | (60) | | | 4 | |
MCS impairments / costs | — | | | — | | | (726) | | | — | |
| | | | | | | |
Medical device regulations | (24) | | | (19) | | | (45) | | | (37) | |
Income before income taxes | $ | 1,493 | | | $ | 525 | | | $ | 2,326 | | | $ | 1,109 | |
| | | | | | | |
Geographic Information
Net sales are attributed to the country based on the location of the customer taking possession of the products or in which the services are rendered. The following table presents net sales for the three and ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020 for the Company's country of domicile, countries with significant concentrations, and all other countries:
| | | Three months ended | | Nine months ended | | Three months ended | | Six months ended |
(in millions) | (in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 | (in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Ireland | Ireland | $ | 25 | | | $ | 22 | | | $ | 74 | | | $ | 66 | | Ireland | $ | 27 | | | $ | 24 | | | $ | 52 | | | $ | 49 | |
| United States | United States | 3,939 | | | 4,021 | | | 11,344 | | | 12,068 | | United States | 3,997 | | | 4,054 | | | 8,098 | | | 7,405 | |
Rest of world | Rest of world | 3,811 | | | 3,674 | | | 10,511 | | | 10,782 | | Rest of world | 3,823 | | | 3,569 | | | 7,685 | | | 6,700 | |
Total other countries, excluding Ireland | Total other countries, excluding Ireland | 7,750 | | | 7,695 | | | 21,855 | | | 22,850 | | Total other countries, excluding Ireland | 7,820 | | | 7,623 | | | 15,783 | | | 14,105 | |
Total | Total | $ | 7,775 | | | $ | 7,717 | | | $ | 21,929 | | | $ | 22,916 | | Total | $ | 7,847 | | | $ | 7,647 | | | $ | 15,835 | | | $ | 14,154 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNDERSTANDING OUR FINANCIAL INFORMATION
The following discussion and analysis provides information management believes to be relevant to understanding the financial condition and results of operations of Medtronic plc and its subsidiaries (Medtronic plc, Medtronic, or the Company, or we, us, or our). For a full understanding of financial condition and results of operations, you should read this discussion along with Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended April 24, 2020.30, 2021. In addition, you should read this discussion along with our consolidated financial statements and related notes thereto at and for the three and ninesix months ended JanuaryOctober 29, 2021. Amounts reported in millions within this quarterly report are computed based on the amounts in thousands, and therefore, the sum of the components may not equal the total amount reported in millions due to rounding. Additionally, certain columns and rows within tables may not sum due to rounding.
Financial Trends
Throughout this Management’s Discussion and Analysis, we present certain financial measures that we use to evaluate the operational performance of the Company and as a basis for strategic planning; however, such financial measures are not presented in our financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S.) (U.S. GAAP). These financial measures are considered "non-GAAP financial measures" and are intended to supplement, and should not be considered as superior to, financial measures presented in accordance with U.S. GAAP. We generally use non-GAAP financial measures to facilitate management's review of the operational performance of the Company and as a basis for strategic planning. We believe that non-GAAP financial measures provide information useful to investors in understanding the Company's underlying operational performance and trends and may facilitate comparisons with the performance of other companies in the medical technologies industry.
As presented in the GAAP to Non-GAAP Reconciliations section below, our non-GAAP financial measures exclude the impact of certain charges or benefits that contribute to or reduce earnings and that may affect financial trends and include certain charges or benefits that result from transactions or events that we believe may or may not recur with similar materiality or impact to our operations in future periods (Non-GAAP Adjustments).
In the event there is a Non-GAAP Adjustment recognized in our operating results, the tax cost or benefit attributable to that item is separately calculated and reported. Because the effective rate can be significantly impacted by the Non-GAAP Adjustments that take place during the period, we often refer to our tax rate using both the effective rate and the non-GAAP nominal tax rate (Non-GAAP Nominal Tax Rate). The Non-GAAP Nominal Tax Rate is calculated as the income tax provision, adjusted for the impact of Non-GAAP Adjustments, as a percentage of income before income taxes, excluding Non-GAAP Adjustments.
Free cash flow is a non-GAAP financial measure calculated by subtracting property, plant, and equipment additions from operating cash flows.
Refer to the “GAAP to Non-GAAP Reconciliations," "Income Taxes," and "Free Cash Flow" sections for reconciliations of the non-GAAP financial measures to their most directly comparable financial measures prepared in accordance with U.S. GAAP.
EXECUTIVE LEVEL OVERVIEW
Medtronic is among the world's largest medicalleading global healthcare technology services, and solutions companies –company — alleviating pain, restoring health, and extending life for millions of people around the world. Our primary products include those for cardiac rhythm disorders, cardiovascular disease, advanced and general surgical care, respiratory and monitoring solutions, renal care, neurological disorders, spinal conditions and musculoskeletal trauma, urological and digestive disorders, and ear, nose, and throat, and diabetes conditions.
The global healthcare system is facing ancontinuing to respond to the unprecedented challenge as a result ofposed by the Covid-19 pandemic ("COVID-19" or the "pandemic"). COVID-19 is having, and may continue to have, an adverse impact on significant aspects of our Company and business, including the demand for our products, our operations, supply chains and distribution systems, and our ability to research and develop and bring to market new products and services. While mostMost of our businesses have beenwere affected by a decline in global procedural volumes for the nine months ended January 29,during fiscal year 2021, as compared to the corresponding periodparticularly in the prior fiscal year, our results forfirst and second quarters. During the thirdfirst quarter of fiscal year 2021 reflect2022, most of our businesses performed at or above pre-COVID-19 levels, while also experiencing a slowdown in elective procedures in certain businesses and geographies in the final weeks of the quarter as a result of the Delta variant of COVID-19. In the second quarter of fiscal year 2022, certain international markets saw procedural recovery to date from the depthsresurgence experienced in prior quarters. However, particularly in the U.S., the COVID-19 resurgence as well as healthcare system staffing shortages impacted our revenue results for the three months ended October 29, 2021. While we expect the impact of the Delta variant may be less severe than prior waves of COVID-19 as vaccination rates continue to rise, we cannot predict with confidence the duration and severity of the pandemic that we experienced in April, despite the COVID-19 resurgence in late December and January. To the extent individuals and hospital systems de-prioritize, delay or cancel deferrable medical procedures, our business, cash flows, financial condition and results of operations will continue to be negatively affected.
Further, COVID-19 has strained hospital systems around the world, resulting in adverse financial impacts to those systems, which has resulted in and may continue to result in reduced expenditures for certain products and services we provide. As COVID-19 continues to impact hospital systems and other customers, we may encounter higher inventory levels which could result in inventory obsolescence due to excess and/or expired inventory. Additionally, the pandemic'sits impact on our customers may adversely impact the collectability of our current and future accounts receivable balance. COVID-19 has also disrupted and may continue to disrupt our product launches for our recently approved products and may negatively impact the regulatory approval of new products.
In addition, a number of our global suppliers, vendors, and distributors have been adversely affected by COVID-19, including employee absenteeism which may impact their operations. Therefore, although we work closely with our suppliers to try to ensure continuity of supply while maintaining high quality and reliability, the supply of certain components, raw materials, and services has been and may continue to be interrupted, in certain instances, as a direct result of COVID-19.
procedure volumes. We expect medical procedure recovery rates to continue to vary by therapy and country and to be impacted by regional COVID-19 case volumes, hospital and clinical occupancy and staffing levels, patient’s willingness to schedule deferrable procedures, travel restrictions, transportation limitations, quarantine restrictions, vaccine immunization rates, and new COVID-19 variants, including the COVID-19 resurgence.Omicron variant. Also, we cannot predict the impact healthcare system staffing shortages may have on procedural volumes.
The following is a summary of revenue and diluted earnings per share for the three months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020, and operating cash flow for the ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020:
GAAP to Non-GAAP Reconciliations The tables below present our GAAP to Non-GAAP reconciliations for the three and nine months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020:
| | | Three months ended January 29, 2021 | | Three months ended October 29, 2021 |
(in millions, except per share data) | (in millions, except per share data) | Income Before Income Taxes | | Income Tax Provision (Benefit) | | Net Income Attributable to Medtronic | | Diluted EPS | | Effective Tax Rate | (in millions, except per share data) | Income Before Income Taxes | | Income Tax Provision (Benefit) | | Net Income Attributable to Medtronic | | Diluted EPS | | Effective Tax Rate |
GAAP | GAAP | $ | 1,220 | | | $ | (59) | | | $ | 1,270 | | | $ | 0.94 | | | (4.8) | % | GAAP | $ | 1,493 | | | $ | 176 | | | $ | 1,311 | | | $ | 0.97 | | | 11.8 | % |
Non-GAAP Adjustments: | Non-GAAP Adjustments: | | Non-GAAP Adjustments: | |
Restructuring and associated costs (1) | Restructuring and associated costs (1) | 160 | | | 42 | | | 117 | | | 0.09 | | | 26.9 | | Restructuring and associated costs (1) | 77 | | | 15 | | | 62 | | | 0.05 | | | 19.5 | |
Acquisition-related items (2) | Acquisition-related items (2) | 35 | | | 3 | | | 32 | | | 0.02 | | | 8.6 | | Acquisition-related items (2) | (13) | | | 2 | | | (15) | | | (0.01) | | | (15.4) | |
Certain litigation charges | Certain litigation charges | 122 | | | 21 | | | 101 | | | 0.07 | | | 17.2 | | Certain litigation charges | 34 | | | 4 | | | 30 | | | 0.02 | | | 11.8 | |
(Gain)/loss on minority investments (3) | (Gain)/loss on minority investments (3) | (18) | | | — | | | (15) | | | (0.01) | | | 16.7 | | (Gain)/loss on minority investments (3) | 6 | | | — | | | 6 | | | — | | | — | |
| Medical device regulations (4) | Medical device regulations (4) | 21 | | | 4 | | | 17 | | | 0.01 | | | 19.0 | | Medical device regulations (4) | 24 | | | 4 | | | 20 | | | 0.01 | | | 16.7 | |
Amortization of intangible assets | Amortization of intangible assets | 453 | | | 73 | | | 380 | | | 0.28 | | | 16.1 | | Amortization of intangible assets | 431 | | | 69 | | | 361 | | | 0.27 | | | 16.0 | |
| Certain tax adjustments, net (5) | Certain tax adjustments, net (5) | — | | | 150 | | | (150) | | | (0.11) | | | — | | Certain tax adjustments, net (5) | — | | | (16) | | | 16 | | | 0.01 | | | — | |
Non-GAAP | Non-GAAP | $ | 1,993 | | | $ | 234 | | | $ | 1,753 | | | $ | 1.29 | | | 11.7 | % | Non-GAAP | $ | 2,052 | | | $ | 254 | | | $ | 1,792 | | | $ | 1.32 | | | 12.4 | % |
| | | Three months ended January 24, 2020 | | Three months ended October 30, 2020 |
(in millions, except per share data) | (in millions, except per share data) | Income Before Income Taxes | | Income Tax Provision (Benefit) | | Net Income Attributable to Medtronic | | Diluted EPS | | Effective Tax Rate | (in millions, except per share data) | Income Before Income Taxes | | Income Tax Provision (Benefit) | | Net Income Attributable to Medtronic | | Diluted EPS | | Effective Tax Rate |
GAAP | GAAP | $ | 1,579 | | | $ | (340) | | | $ | 1,915 | | | $ | 1.42 | | | (21.5) | % | GAAP | $ | 525 | | | $ | 31 | | | $ | 489 | | | $ | 0.36 | | | 5.9 | % |
Non-GAAP Adjustments: | Non-GAAP Adjustments: | | Non-GAAP Adjustments: | |
Restructuring and associated costs (1) | Restructuring and associated costs (1) | 97 | | | 16 | | | 81 | | | 0.06 | | | 16.5 | | Restructuring and associated costs (1) | 179 | | | 44 | | | 135 | | | 0.10 | | | 24.6 | |
Acquisition-related items (6) | 28 | | | 3 | | | 25 | | | 0.02 | | | 10.7 | | |
Acquisition-related items (2) | | Acquisition-related items (2) | 47 | | | 8 | | | 39 | | | 0.03 | | | 17.0 | |
Certain litigation charges | Certain litigation charges | 108 | | | 1 | | | 107 | | | 0.08 | | | 0.9 | | Certain litigation charges | 84 | | | 21 | | | 63 | | | 0.05 | | | 25.0 | |
| (Gain)/loss on minority investments (3) | | (Gain)/loss on minority investments (3) | 1 | | | — | | | 1 | | | — | | | — | |
Medical device regulations (4) | Medical device regulations (4) | 13 | | | 2 | | | 11 | | | 0.01 | | | 15.4 | | Medical device regulations (4) | 19 | | | 3 | | | 16 | | | 0.01 | | | 15.8 | |
| Amortization of intangible assets | Amortization of intangible assets | 436 | | | 68 | | | 368 | | | 0.27 | | | 15.6 | | Amortization of intangible assets | 443 | | | 70 | | | 373 | | | 0.28 | | | 15.8 | |
Certain tax adjustments, net (7) | — | | | 558 | | | (558) | | | (0.41) | | | — | | |
Debt tender premium (6) | | Debt tender premium (6) | 308 | | | 60 | | | 248 | | | 0.18 | | | 19.5 | |
Certain tax adjustments, net (5) | | Certain tax adjustments, net (5) | — | | | (16) | | | 16 | | | 0.01 | | | — | |
Non-GAAP | Non-GAAP | $ | 2,261 | | | $ | 308 | | | $ | 1,949 | | | $ | 1.44 | | | 13.6 | % | Non-GAAP | $ | 1,606 | | | $ | 221 | | | $ | 1,380 | | | $ | 1.02 | | | 13.8 | % |
(1)Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.
(2)The charges primarily include business combination costs, and changes in fair value of contingent consideration.consideration, and for the three months ended October 30, 2020, certain license payments for unapproved technology.
(3)We exclude unrealized and realized gains and losses on our minority investments as we do not believe that these components of income or expense have a direct correlation to our ongoing or future business operations.
(4)The charges represent incremental costs of complying with the new European Union (E.U.) medical device regulations for previously registered products and primarily include charges for contractors supporting the project and other direct third-party expenses.
(5)The net benefit primarily relates to the finalization of an audit at the IRS Appellate level for fiscal years 2012 through 2014 and the capitalization of certain research and development costs for U.S. income tax purposes, which are partially offset by the impact of an intercompany sale of assets andcharges include the amortization ofon previously established deferred tax assets from intercompany intellectual property transactions.
(6)The charges primarily include costs incurred in connection with legacy-Covidien enterprise resource planning deployment activities, business combination related costs, and changes in the fair value of contingent consideration.
(7)The benefit relatesrelate to the releaseearly redemption of a valuation allowance on certain net operating losses.approximately $6.0 billion of debt.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended January 29, 2021 |
(in millions, except per share data) | Income Before Income Taxes | | Income Tax Provision (Benefit) | | Net Income Attributable to Medtronic | | Diluted EPS | | Effective Tax Rate |
GAAP | $ | 2,329 | | | $ | 65 | | | $ | 2,246 | | | $ | 1.66 | | | 2.8 | % |
Non-GAAP Adjustments: | | | | | | | | | |
Restructuring and associated costs (1) | 466 | | | 109 | | | 358 | | | 0.26 | | | 23.2 | |
Acquisition-related items (2) | (33) | | | (22) | | | (11) | | | (0.01) | | | 66.7 | |
Certain litigation charges | 118 | | | 23 | | | 95 | | | 0.07 | | | 19.5 | |
(Gain)/loss on minority investments (3) | (28) | | | — | | | (23) | | | (0.02) | | | 17.9 | |
IPR&D charges (4) | 20 | | | 4 | | | 16 | | | 0.01 | | | 20.0 | |
Medical device regulations (5) | 58 | | | 10 | | | 48 | | | 0.04 | | | 17.2 | |
Amortization of intangible assets | 1,337 | | | 214 | | | 1,123 | | | 0.83 | | | 16.0 | |
Debt tender premium and other charges (6) | 308 | | | 60 | | | 248 | | | 0.18 | | | 19.5 | |
Certain tax adjustments, net(7) | — | | | 130 | | | (130) | | | (0.10) | | | — | |
Non-GAAP | $ | 4,576 | | | $ | 593 | | | $ | 3,969 | | | $ | 2.93 | | | 13.0 | % |
| | | | | | | | | |
| Nine months ended January 24, 2020 |
(in millions, except per share data) | Income Before Income Taxes | | Income Tax Provision (Benefit) | | Net Income Attributable to Medtronic | | Diluted EPS | | Effective Tax Rate |
GAAP | $ | 3,850 | | | $ | (317) | | | $ | 4,143 | | | $ | 3.07 | | | (8.2) | % |
Non-GAAP Adjustments: | | | | | | | | | |
Restructuring and associated costs (1) | 315 | | | 47 | | | 268 | | | 0.20 | | | 14.9 | |
Acquisition-related items (8) | 74 | | | 9 | | | 65 | | | 0.05 | | | 12.2 | |
Certain litigation charges | 276 | | | 33 | | | 243 | | | 0.18 | | | 12.0 | |
(Gain)/loss on minority investments (3) | (11) | | | (2) | | | (9) | | | (0.01) | | | 18.2 | |
Debt tender premium and other charges (9) | 406 | | | 86 | | | 320 | | | 0.24 | | | 21.2 | |
Medical device regulations (5) | 31 | | | 4 | | | 27 | | | 0.02 | | | 12.9 | |
Exit of businesses (10) | 41 | | | 6 | | | 35 | | | 0.03 | | | 14.6 | |
Contribution to the Medtronic Foundation | 80 | | | 18 | | | 62 | | | 0.05 | | | 22.5 | |
Amortization of intangible assets | 1,317 | | | 203 | | | 1,114 | | | 0.82 | | | 15.4 | |
Certain tax adjustments, net (11) | — | | | 839 | | | (839) | | | (0.62) | | | — | |
Non-GAAP | $ | 6,379 | | | $ | 926 | | | $ | 5,429 | | | $ | 4.02 | | | 14.5 | % |
The tables below present our GAAP to Non-GAAP reconciliations for the six months ended October 29, 2021 and October 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended October 29, 2021 |
(in millions, except per share data) | Income Before Income Taxes | | Income Tax Provision (Benefit) | | Net Income Attributable to Medtronic | | Diluted EPS | | Effective Tax Rate |
GAAP | $ | 2,326 | | | $ | 240 | | | $ | 2,074 | | | $ | 1.53 | | | 10.3 | % |
Non-GAAP Adjustments: | | | | | | | | | |
Restructuring and associated costs (1) | 159 | | | 31 | | | 128 | | | 0.09 | | | 19.5 | |
Acquisition-related items (2) | 96 | | | 24 | | | 72 | | | 0.05 | | | 25.0 | |
Certain litigation charges | 60 | | | 9 | | | 51 | | | 0.04 | | | 15.0 | |
(Gain)/loss on minority investments (3) | (25) | | | — | | | (22) | | | (0.02) | | | — | |
Medical device regulations (4) | 45 | | | 9 | | | 36 | | | 0.03 | | | 20.0 | |
Amortization of intangible assets | 866 | | | 139 | | | 728 | | | 0.54 | | | 16.1 | |
MCS impairments / costs (5) | 726 | | | 162 | | | 564 | | | 0.42 | | | 22.3 | |
Certain tax adjustments, net (6) | — | | | (69) | | | 69 | | | 0.05 | | | — | |
Non-GAAP | $ | 4,253 | | | $ | 545 | | | $ | 3,699 | | | $ | 2.73 | | | 12.8 | % |
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| Six months ended October 30, 2020 |
(in millions, except per share data) | Income Before Income Taxes | | Income Tax Provision (Benefit) | | Net Income Attributable to Medtronic | | Diluted EPS | | Effective Tax Rate |
GAAP | $ | 1,109 | | | $ | 124 | | | $ | 976 | | | $ | 0.72 | | | 11.2 | % |
Non-GAAP Adjustments: | | | | | | | | | |
Restructuring and associated costs (1) | 307 | | | 66 | | | 241 | | | 0.18 | | | 21.5 | |
Acquisition-related items (2) | (49) | | | (21) | | | (28) | | | (0.02) | | | 42.9 | |
Certain litigation charges | (4) | | | 2 | | | (6) | | | — | | | (50.0) | |
(Gain)/loss on minority investments (3) | (9) | | | 1 | | | (10) | | | (0.01) | | | (11.1) | |
Medical device regulations (4) | 37 | | | 5 | | | 32 | | | 0.02 | | | 13.5 | |
Amortization of intangible assets | 884 | | | 141 | | | 743 | | | 0.55 | | | 16.0 | |
Debt tender premium (7) | 308 | | | 60 | | | 248 | | | 0.18 | | | 19.5 | |
Certain tax adjustments, net (6) | — | | | (20) | | | 20 | | | 0.01 | | | — | |
Non-GAAP | $ | 2,583 | | | $ | 358 | | | $ | 2,216 | | | $ | 1.64 | | | 13.9 | % |
(1)Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.
(2)The charges primarily include business combination costs, changes in the fair value of contingent consideration, acquisitions of, and acertain license payments for, unapproved technology, and specifically for the six months ended October 30, 2020, change in amounts accrued for certain contingent liabilities for recent acquisitions.
(3)We exclude unrealized and realized gains and losses on our minority investments as we do not believe that these components of income or expense have a direct correlation to our ongoing or future business operations.
(4)The charges relate to certain license payments for unapproved technology.
(5)The charges represent incremental costs of complying with the new European UnionE.U. medical device regulations for previously registered products and primarily include charges for contractors supporting the project and other direct third-party expenses.
(5)The charges relate to the Company’s June 2021 decision to stop the distribution and sale of the Medtronic HVAD System within the Mechanical Circulatory Support Operating Unit (MCS). The charges included $515 million of non-cash impairments, primarily related to $409 million of intangible asset impairments, as well as $211 million for commitments and obligations in connection with the decision, including customer support obligations, restructuring, and other associated costs. Medtronic is committed to serving the needs of the approximately 4,000 patients currently implanted with the HVAD System.
(6)The charges include the amortization on previously established deferred tax assets from intercompany intellectual property transactions, and specifically for the six months ended October 29, 2021, charges associated with a change in the company's permanent reinvestment assertion on certain historical earnings.
(7)The charges relate to the early redemption of approximately $6.0 billion of debt.
(7)The net benefit primarily relates to the finalization of an audit at the IRS Appellate level for fiscal years 2012 through 2014 and the capitalization of certain research and development costs for U.S. income tax purposes, which are partially offset by the impact of an intercompany sale of assets and the amortization of previously established deferred tax assets from intercompany intellectual property transactions.
(8)The charges primarily include costs incurred in connection with legacy-Covidien enterprise resource planning deployment activities, business combination related costs, and changes in the fair value of contingent consideration.
(9)The charges, which include $413 million recognized in interest expense and ($7 million) recognized in other operating expense (income), net, primarily related to the early redemption of approximately $5.2 billion of debt.
(10)The net charges relate to the exit of businesses and are primarily comprised of intangible asset impairments.
(11)The net benefit primarily relates to the release of a valuation allowance on certain net operating losses and the impact of tax reform in Switzerland and the United States.
Free Cash Flow
Free cash flow, a non-GAAP financial measure, is calculated by subtracting additions to property, plant, and equipment from net cash provided by operating activities. Management uses this non-GAAP financial measure, in addition to U.S. GAAP financial measures, to evaluate our operating results. Free cash flow should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with U.S. GAAP. Reconciliations between net cash provided by operating activities (the most comparable U.S. GAAP measure) and free cash flow are as follows:
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| Six months ended |
(in millions) | October 29, 2021 | | October 30, 2020 |
Net cash provided by operating activities | $ | 3,061 | | $ | 2,139 |
Additions to property, plant, and equipment | (649) | | (615) |
Free cash flow | $ | 2,412 | | $ | 1,524 |
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Refer to the Summary of Cash Flows section for drivers of the change in cash provided by operating activities.
NET SALES
Segment and Division
The charts below illustrate the percent of net sales by segment for the three months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020:
The table below illustrates net sales by segment and division for the three and ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020:
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| Three months ended | | | | Nine months ended | | |
(in millions) | January 29, 2021 | | January 24, 2020 | | % Change | | January 29, 2021 | | January 24, 2020 | | % Change |
Cardiac Rhythm & Heart Failure | $ | 1,371 | | | $ | 1,393 | | | (2) | % | | $ | 4,045 | | | $ | 4,201 | | | (4) | % |
Coronary & Structural Heart | 873 | | | 948 | | | (8) | | | 2,484 | | | 2,844 | | | (13) | |
Aortic, Peripheral, & Venous | 463 | | | 478 | | | (3) | | | 1,336 | | | 1,420 | | | (6) | |
Cardiac & Vascular Group | 2,707 | | | 2,819 | | | (4) | | | 7,865 | | | 8,464 | | | (7) | |
Surgical Innovations | 1,423 | | | 1,474 | | | (3) | | | 3,896 | | | 4,345 | | | (10) | |
Respiratory, Gastrointestinal, & Renal | 890 | | | 702 | | | 27 | | | 2,502 | | | 2,073 | | | 21 | |
Minimally Invasive Therapies Group | 2,313 | | | 2,176 | | | 6 | | | 6,399 | | | 6,418 | | | — | |
Cranial & Spinal Technologies | 1,081 | | | 1,117 | | | (3) | | | 3,096 | | | 3,284 | | | (6) | |
Specialty Therapies | 618 | | | 588 | | | 5 | | | 1,653 | | | 1,726 | | | (4) | |
Neuromodulation | 426 | | | 406 | | | 5 | | | 1,152 | | | 1,224 | | | (6) | |
Restorative Therapies Group | 2,126 | | | 2,111 | | | 1 | | | 5,900 | | | 6,235 | | | (5) | |
Diabetes Group | 630 | | | 610 | | | 3 | | | 1,766 | | | 1,798 | | | (2) | |
Total | $ | 7,775 | | | $ | 7,717 | | | 1 | % | | $ | 21,929 | | | $ | 22,916 | | | (4) | % |
The increase in net sales for the three months ended January 29, 2021, as compared to the corresponding period in the prior fiscal year, was primarily driven by growth in the Minimally Invasive Therapies Group as demand increased for COVID-19 related diagnostics and therapies. Further contributing to the increase was growth in the Restorative Therapies and Diabetes Groups driven by new product launches. These increases were partially offset by the impact of the COVID-19 resurgence on procedure volumes in late December and January for the Cardiac and Vascular Group, Minimally Invasive Therapies Group, and Restorative Therapies Group.
The decrease in net sales for the nine months ended January 29, 2021, as compared to the corresponding period in the prior fiscal year, was primarily attributable to the decline in procedure volume in the Cardiac and Vascular Group, Minimally Invasive Therapies Group, and Restorative Therapies Group resulting from the impact of COVID-19. Further contributing to the decrease were delays in new patient starts on insulin pumps and continued competitive pressure in Diabetes. Net sales for the nine months ended January 29, 2021 were also impacted by an additional selling week during the first fiscal month of the first quarter of fiscal year 2021 due to our 52/53 week fiscal year calendar. Although we cannot precisely calculate the impact of the extra selling week, we estimate that it benefited net sales for the nine months ended January 29, 2021 by approximately $360 to $390 million.
During the first quarter of fiscal year 2021, we realigned our divisions within the Restorative Therapies Group. As a result, fiscal year 2020 results have been recast to adjust for this realignment. Additionally, we implemented our new operating model, which was fully operational the beginning of the fourth quarter of our fiscal year 2021, that simplifies our organization in order to accelerate decision making, improve commercial execution, and more effectively leverage the scale of our company.
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| Three months ended | | | | Six months ended | | |
(in millions) | October 29, 2021 | | October 30, 2020 | | % Change | | October 29, 2021 | | October 30, 2020 | | % Change |
Cardiac Rhythm & Heart Failure | $ | 1,471 | | | $ | 1,426 | | | 3 | % | | $ | 2,954 | | | $ | 2,673 | | | 11 | % |
Structural Heart & Aortic | 750 | | | 733 | | | 2 | | | 1,537 | | | 1,360 | | | 13 | |
Coronary & Peripheral Vascular | 606 | | | 567 | | | 7 | | | 1,226 | | | 1,125 | | | 9 | |
Cardiovascular | 2,827 | | | 2,725 | | | 4 | | | 5,717 | | | 5,158 | | | 11 | |
Surgical Innovations | 1,497 | | | 1,393 | | | 7 | | | 3,051 | | | 2,473 | | | 23 | |
Respiratory, Gastrointestinal, & Renal | 802 | | | 893 | | | (10) | | | 1,570 | | | 1,613 | | | (3) | |
Medical Surgical | 2,299 | | | 2,285 | | | 1 | | | 4,621 | | | 4,086 | | | 13 | |
Cranial & Spinal Technologies | 1,067 | | | 1,071 | | | — | | | 2,189 | | | 2,015 | | | 9 | |
Specialty Therapies | 634 | | | 581 | | | 9 | | | 1,275 | | | 1,035 | | | 23 | |
Neuromodulation | 435 | | | 411 | | | 6 | | | 875 | | | 725 | | | 21 | |
Neuroscience | 2,136 | | | 2,063 | | | 4 | | | 4,340 | | | 3,774 | | | 15 | |
Diabetes | 585 | | | 574 | | | 2 | | | 1,157 | | | 1,136 | | | 2 | |
Total | $ | 7,847 | | | $ | 7,647 | | | 3 | % | | $ | 15,835 | | | $ | 14,154 | | | 12 | % |
Segment and Market Geography
The charts below illustrate the percent of net sales by market geography for the three months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020:
The table below includes net sales by market geography for each of our segments for the three and ninesix months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020:
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| U.S.(1) | | Non-U.S. Developed Markets(2) | | Emerging Markets(3) |
| Three months ended | | Three months ended | | Three months ended |
(in millions) | January 29, 2021 | | January 24, 2020 | | % Change | | January 29, 2021 | | January 24, 2020 | | % Change | | January 29, 2021 | | January 24, 2020 | | % Change |
Cardiac and Vascular Group | $ | 1,272 | | | $ | 1,366 | | | (7) | % | | $ | 941 | | | $ | 915 | | | 3 | % | | $ | 493 | | | $ | 538 | | | (8) | % |
Minimally Invasive Therapies Group | 959 | | | 934 | | | 3 | | | 868 | | | 791 | | | 10 | | | 486 | | | 451 | | | 8 | |
Restorative Therapies Group | 1,401 | | | 1,409 | | | (1) | | | 444 | | | 436 | | | 2 | | | 280 | | | 266 | | | 5 | |
Diabetes Group | 307 | | | 312 | | | (2) | | | 268 | | | 236 | | | 14 | | | 55 | | | 63 | | | (13) | |
Total | $ | 3,939 | | | $ | 4,021 | | | (2) | % | | $ | 2,522 | | | $ | 2,377 | | | 6 | % | | $ | 1,314 | | | $ | 1,318 | | | — | % |
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| U.S.(1) | | Non-U.S. Developed Markets(2) | | Emerging Markets(3) |
| Nine months ended | | Nine months ended | | Nine months ended |
(in millions) | January 29, 2021 | | January 24, 2020 | | % Change | | January 29, 2021 | | January 24, 2020 | | % Change | | January 29, 2021 | | January 24, 2020 | | % Change |
Cardiac and Vascular Group | $ | 3,854 | | | $ | 4,182 | | | (8) | % | | $ | 2,739 | | | $ | 2,735 | | | — | % | | $ | 1,271 | | | $ | 1,547 | | | (18) | % |
Minimally Invasive Therapies Group | 2,677 | | | 2,769 | | | (3) | | | 2,425 | | | 2,364 | | | 3 | | | 1,297 | | | 1,285 | | | 1 | |
Restorative Therapies Group | 3,934 | | | 4,187 | | | (6) | | | 1,246 | | | 1,278 | | | (3) | | | 720 | | | 770 | | | (6) | |
Diabetes Group | 879 | | | 930 | | | (5) | | | 733 | | | 693 | | | 6 | | | 154 | | | 176 | | | (13) | |
Total | $ | 11,344 | | | $ | 12,068 | | | (6) | % | | $ | 7,143 | | | $ | 7,069 | | | 1 | % | | $ | 3,443 | | | $ | 3,778 | | | (9) | % |
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| U.S.(1) | | Non-U.S. Developed Markets(2) | | Emerging Markets(3) |
| Three months ended | | Three months ended | | Three months ended |
(in millions) | October 29, 2021 | | October 30, 2020 | | % Change | | October 29, 2021 | | October 30, 2020 | | % Change | | October 29, 2021 | | October 30, 2020 | | % Change |
Cardiovascular | $ | 1,373 | | | $ | 1,377 | | | — | % | | $ | 948 | | | $ | 945 | | | — | % | | $ | 506 | | | $ | 404 | | | 25 | % |
Medical Surgical | 970 | | | 996 | | | (3) | | | 841 | | | 837 | | | — | | | 488 | | | 452 | | | 8 | |
Neuroscience | 1,394 | | | 1,397 | | | — | | | 433 | | | 426 | | | 2 | | | 309 | | | 240 | | | 29 | |
Diabetes | 261 | | | 284 | | | (8) | | | 256 | | | 238 | | | 8 | | | 69 | | | 51 | | | 35 | |
Total | $ | 3,997 | | | $ | 4,054 | | | (1) | % | | $ | 2,478 | | | $ | 2,446 | | | 1 | % | | $ | 1,372 | | | $ | 1,147 | | | 20 | % |
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| U.S.(1) | | Non-U.S. Developed Markets(2) | | Emerging Markets(3) |
| Six months ended | | Six months ended | | Six months ended |
(in millions) | October 29, 2021 | | October 30, 2020 | | % Change | | October 29, 2021 | | October 30, 2020 | | % Change | | October 29, 2021 | | October 30, 2020 | | % Change |
Cardiovascular | $ | 2,793 | | | $ | 2,582 | | | 8 | % | | $ | 1,952 | | | $ | 1,798 | | | 9 | % | | $ | 972 | | | $ | 778 | | | 25 | % |
Medical Surgical | 1,959 | | | 1,718 | | | 14 | | | 1,710 | | | 1,556 | | | 10 | | | 951 | | | 811 | | | 17 | |
Neuroscience | 2,840 | | | 2,533 | | | 12 | | | 898 | | | 802 | | | 12 | | | 602 | | | 439 | | | 37 | |
Diabetes | 506 | | | 572 | | | (12) | | | 519 | | | 465 | | | 12 | | | 132 | | | 100 | | | 32 | |
Total | $ | 8,098 | | | $ | 7,405 | | | 9 | % | | $ | 5,079 | | | $ | 4,621 | | | 10 | % | | $ | 2,658 | | | $ | 2,128 | | | 25 | % |
(1)U.S. includes the United States and U.S. territories.
(2)Non-U.S. developed markets include Japan, Australia, New Zealand, Korea, Canada, and the countries within Western Europe.
(3)Emerging markets include the countries of the Middle East, Africa, Latin America, Eastern Europe, and the countries of Asia that are not included in the non-U.S. developed markets, as defined above.
Net sales increasesThe increase in non-U.S. developed marketsnet sales for the three months ended JanuaryOctober 29, 2021, as compared to the corresponding period in the prior fiscal year, werewas driven by strong growth across all groups. Korea, Canada, Australia and New Zealand experiencedstrength in the largest increases in net sales in non-U.S. developed markets. These increases wereinternational markets partially offset by net sales declines in the U.S. forlargely due to the threeCOVID-19 resurgence and healthcare system staffing shortages. For the six months ended JanuaryOctober 29, 2021, primarily attributablemost of our businesses and geographies continue to the reduction of procedure volumes as a result of COVID-19. Net sales remained flat in emerging markets for the three months ended January 29, 2021, as compared to the corresponding period in the prior fiscal year.achieve revenue levels at or above pre-pandemic levels. Currency had a favorable impact on net sales in non-U.S. developed marketsof $32 million and emerging markets of $136$277 million, respectively, for the three and six months ended October 29, 2021. For the three months ended, January 29, 2021.
Net sales increases in non-U.S. developed markets for the nine months ended January 29, 2021, as compared to the corresponding period in the prior fiscal year, were driven by growth in our Diabetes Group and Minimally Invasive Therapies Group, partially offset by declines in our Restorative Therapies Group. Korea, Western Europe, Australia and New Zealand experienced the largest increases in net sales in non-U.S. developed markets. These increases were partially offset by net sales declines in the U.S. and emerging markets for the nine months ended January 29, 2021, primarily attributable to the impact of COVID-19 driven by a combination of deferred procedures and reduced demand for certain products as hospital systems prioritize the treatment of COVID-19 patients. Currencycurrency had a favorable impact on net sales inemerging markets of $37 million partially offset by an unfavorable impact for non-U.S. developed markets andof $5 million. For the six months ended October 29, 2021, currency had a favorable impact for emerging markets and non-U.S. developed markets of $90$100 million forand $177 million, respectively.
During the nine months ended January 29, 2021. Net sales for the nine months ended January 29, 2021 were also impacted by an additional selling week during the first fiscal month of the firstfourth quarter of fiscal year 2021.2021, we realigned our divisions within the Cardiovascular Portfolio. As a result, fiscal year 2021 results have been recast to adjust for this realignment. Additionally, in fiscal year 2021 we implemented our new operating model, which was fully operational the beginning of the fourth quarter. Our new operating model simplifies our organization in order to accelerate decision making, improve commercial execution, and more effectively leverage the scale of our company.
Looking ahead, we expectthe uncertain and uneven impact of COVID-19 on future procedural volumes, supply constraints, healthcare staffing, and resulting demand for our products and therapies could continue to have a significantnegatively impact on our business, noting that it is not possible to accurately predict the length and severity of the pandemic.business. Additionally, our segments are likely tomay face competitive product launches and pricing pressure, geographic macro-economic risks, reimbursement challenges and national tender pricing for certain products, impacts from changes in the mix of our product offerings, the timing ofdelays in product registration approvals, replacement cycle challenges, and fluctuations in currency exchange rates. Additionally, changes in procedural volumes could affect our Cardiac and Vascular, Minimally Invasive Therapies, and Restorative Therapies Groups and changes in new therapy adoptions could affect our Diabetes Group.
Cardiac and Vascular GroupCardiovascular
The Cardiac and Vascular Group’sCardiovascular products include pacemakers, insertable cardiac monitors, cardiac resynchronization therapy devices, (CRT-D), implantable cardioverter defibrillators (ICD), leads and delivery systems, ventricular assist systems, ablation products, electrophysiology catheters, products for the treatment of arrhythmias including atrial fibrillation, information systems for the management of patients with Cardiac Rhythm & Heart Failure devices, products designed to reduce surgical site infections, coronary and peripheral stents and related delivery systems, balloons and related delivery systems, endovascular stent graft systems, heart valve replacement technologies, cardiac tissue ablation systems, and open heart and coronary bypass grafting surgical products. The Cardiac and Vascular GroupCardiovascular also includes Care Management Services and Cath Lab Managed Services (CLMS) within the Cardiac Rhythm & Heart Failure division. The Cardiac and Vascular Group’sCardiovascular's net sales for the three and ninesix months ended JanuaryOctober 29, 2021 were $2.7$2.8 billion and $7.9$5.7 billion, respectively, which represents a declinean increase of 4 percent and 711 percent, respectively, compared to the corresponding periods
in the prior fiscal year. Currency had a favorable impact of $53$11 million and $40$106 million, respectively, on net sales for the three and ninesix months ended JanuaryOctober 29, 2021, respectively. The Cardiac and Vascular Group's2021. Cardiovascular's net sales declines for both periods were a result of a reduction in global procedural volumes due to COVID-19. Prior to the third quarter, the Cardiac and Vascular Group had experienced a modest recovery of procedural volumes. However, the resurgence of COVID-19 experienced in late December and January, particularly in the U.S. and Western Europe, slowed the recovery of elective procedures, negatively impacting the net sales of the Groupincrease for the three months ended JanuaryOctober 29, 2021.2021 was primarily driven by the recovery of procedural volumes in the international markets, with partially offsetting declines experienced in certain businesses in the U.S. due to the COVID-19 resurgence. The increase for the six months ended October 29, 2021 was primarily due to the recovery of global procedure volumes from the downturn experienced in the first and second quarter of fiscal year 2021 resulting from the pandemic along with growth from recent product launches.
The graphs below illustrate the percent of Cardiac and Vascular GroupCardiovascular net sales by division for the three months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020:
Cardiac Rhythm & Heart Failure (CRHF) net sales for the three and ninesix months ended JanuaryOctober 29, 2021 were $1.4 billion and $4.0 billion, respectively, a decrease of 2increased 3 percent and 411 percent, respectively, as compared to the corresponding periods in the prior fiscal year. These decreasesThe increase for the three and six months ended was led by Cardiac Rhythm Management with growth in TYRX antibacterial envelopes, CRT-Ds, and cardiac pacing therapies due to Micra and transvenous pacemakers. Cardiac Ablation Solutions also led growth for both periods with strong sales of Arctic Front cryoablation systems. For the three months ended October 29, 2021, these increases were drivenpartially offset by declines in procedure rateslower growth of Cardiovascular Diagnostics caused by COVID-19 and competitive pressure. For both periods, the net sales growth was partially offset by a decline of Medtronic HVAD System net sales as a result of COVID-19. Partially offsettingour June 2021 decision to stop the negative impact of COVID-19 for both periods was growth in pacemakers, CRT-Ds,distribution and the TYRX antibacterial envelope. Pacemaker growth was led by the Micra leadless pacing system, and CRT-D growth was driven by the launchsale of the Cobalt and Crome CRT-D devices, which include remote programming and remote management capabilities.system.
Coronary & Structural Heart (CSH)& Aortic (SHA) net sales for the three and ninesix months ended JanuaryOctober 29, 2021 were $873 million and $2.5 billion, respectively, a decrease ofincreased 82 percent and 13 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The declines were a result of a decreaseincrease in procedural volumes due to COVID-19. Within Structural Heart, whileboth periods was led by growth in transcatheter aortic valve replacement (TAVR) netsnet sales declined for bothas a result of continued adoption of the three and nine months ended January 29, 2021, procedural volumes increased in the second and third quarters of fiscal year 2021 as comparedCoreValve Evolut. Cardiac Surgery also contributed to the first quarter. Coronary net increase in sales for both periods were negatively impacted byas a result of broad-based growth across the Chinese national tender on drug-eluting stents, which went into effectbusiness. Partially offsetting these increases was a decline in January 2021 and resultednet sales of the Valiant Navion Thoracic Stent Graft System as a result of our voluntary recall of the system in significant price declines.the fourth quarter of fiscal year 2021.
Aortic,Coronary & Peripheral & Venous (APV)Vascular (CPV) net sales for the three and ninesix months ended JanuaryOctober 29, 2021 were $463 million and $1.3 billion, respectively, a decrease of 3increased 7 percent and 69 percent, respectively, as compared to the corresponding periods in the prior fiscal year. These decreases wereThe increase in both periods was led by growth in Peripheral Vascular Health driven by declines in procedure rates as a result of COVID-19. Partially offsetting the declines was growth in drug-coated balloons andour superficial venous product portfolio, including the VenaSeal vein closureand ClosureFast systems, as well as strong performance of the recently launched Abre venous self-expanding stent system for both the three and nine months ended January 29, 2021. Drug-coated balloonDeep Venous disease. Coronary & Renal Denervation also experienced growth was the result of strong adoption of the IN.PACT AV drug-coated balloon driven by its pivotal data published during the second quarter of fiscal year 2021. Additionally, the negative impact of the uncertainty surrounding Paclitaxel on prior year net sales of drug-coated balloons contributed to the growth in the current fiscal year.drug-eluting stents and guide catheters.
In addition to the general impacts of COVID-19 on our Company as described in the Executive Level Overview, looking ahead, we expect our Cardiac and Vascular GroupCardiovascular could be affected by the following:
•While many countries are past their initial peak with COVID-19, many regions experienced a resurgence of COVID-19 cases, particularly in late December and January. As a result, it is not possible to accurately predict the timing of recovery of a broad resumption of deferrable medical procedures to pre-COVID-19 levels, as to date, we are seeing the speed of recovery vary by therapy and geography. Therapies that might be considered more deferrable include Cardiac Ablation Solutions, EndoVenous, and Diagnostics while more urgent therapies include Pacing, Aortic, Coronary, and Cardiac Surgery. Moderately deferrable procedures include ICD’s CRT-D’s, TAVR/Structural Heart, and Peripheral. Extracorporeal Life Support products, including ECMO machines and disposables within our Cardiac Surgery business, are in higher demand as a result of COVID-19.
•Continued growth of our Micra transcatheter pacing system. Micra AV received U.S. FDA approval and CE Mark approval in January and April 2020, respectively.respectfully. Subsequent to the quarter, the Micra AV launched in Japan in November. Micra AV expands the Micra target population from 15 percent to 5545 percent of pacemaker patients.
•AcceptanceContinued acceptance and growth from the Azure XT and S SureScan pacing systems. Azure pacemakers feature Medtronic-exclusive BlueSync technology, which enables automatic, secure wireless remote monitoring with increased device longevity.
•Growth of the Cobalt and Crome portfolio of ICDs and CRT-Ds. These devices received CE Mark approval during the fourth quarter of fiscal year 2020 and U.S. FDA approval during the first quarter of fiscal year 2021.
•Continued acceptance and growthexpansion of the Claria MRI CRT-D system with EffectivCRT Diagnostic and Effective CRT duringEffectivCRT During AF algorithm.Algorithm.
•Continued acceptance and growth from the Azure XT and S SureScan pacing systems. Azure pacemakers feature Medtronic-exclusive BlueSync technology, which enables automatic, secure wireless remote monitoring with increased device longevity.
•Acceptance and growthAdvancement of the LINQ 2II cardiac monitor, which received CE Mark in November 2019 and gained U.S. FDA approval during the first quarter of fiscal year 2021. We are currently experiencing supply constrains for the LINQ II cardiac monitor as we ramp our wafer scale manufacturing.
•Changes in the U.S. heart transplant guidelines as well as a competitor's product launch as it relates to our LVAD business.
•Continued acceptance and growthGrowth of the CRT-P quadripolar pacing system.
•Continued growth, adoption, and utilization of the TYRX Envelope for implantable devices driven by the favorable results of the WRAP-IT clinical study. In the fourth quarter of fiscal year 2020, we received 12-month shelf-life extension for our TYRX Envelope product.
•Continued acceptance and market expansion of Care Management Services and post-acute care services becoming even more critical in bundled payment modelsArctic Front cryoablation for different interventions or therapies.
•The negative impacttreatment of atrial fibrillation. In June 2021, the Chinese national tender on drug-eluting stent prices in China.Arctic Front cryoablation system received a first line therapy designation from the U.S. FDA for the treatment of atrial fibrillation.
•Continued acceptance and growth of the self-expanding CoreValve Evolut transcatheter aortic valve replacement platform into intermediate risk indication globally and for the treatment of patients determined to be at low risk with surgery. The Platform received both CE Mark for low risk and bicuspid labeling indication in Europe during the first quarter of fiscal year 2021. In August 2020, the U.S. FDA approved revised commercial labeling for the platform that modified a precaution for the treatment of patients at low risk.
•Changes to the U.S. Medicare national coverage determination for transcatheter aortic valve replacement that allowed approximately 30 percent more U.S. centers to offer the therapy to patients.
•Continued expansion and training of field support to increase coverage in the U.S. centers performing transcatheter aortic valve replacementTAVR procedures.
•Continued acceptance and growth from Evolut PRO, which provides industry-leading hemodynamics, reliable delivery, and advanced sealing with an excellent safety profile, as well as acceptance of our next generationprofile. In August 2021, the U.S. FDA approved the Evolut PRO PlusFX TAVR, valve which launched latea system enhancement designed to improve the overall procedural experience through enhancements in the second quarter of fiscal year 2020.deliverability, implant visibility and deployment stability.
•The Company's voluntary recall ofChinese national and provincial tenders that have negatively impacted drug-eluting stent and coronary balloon prices in China could impact other products within the Valiant Navion Thoracic Stent Graft System and the ability of the Company to ramp production of its previous generation product, the Valiant Captivia Thoracic Stent Graft System and resume selling this product in markets globally. The Company expects to have Valiant Captivia inventory available in most markets in late March or early April and expects to reach full production capacity in September 2021.division.
•Continued acceptance and growth from the VenaSeal vein closure systemClosure System in the U.S. The VenaSeal systemClosure System is a unique non-thermal solution to address superficial venous disease that provides improved patient comfort, reduces the recovery time, and eliminates the risk of thermal nerve injury.
•Our voluntary recall of the Valiant Navion Thoracic Stent Graft System and our ability to ramp production of our previous generation product, the Valiant Captivia Thoracic Stent Graft System. We are currently ramping production of the Valiant Captivia Thoracic Stent Graft System and plan to reach full production capacity in the fourth quarter of fiscal year 2022.
Minimally Invasive Therapies Group•Our June 2021 decision to stop the distribution and sale of the Medtronic HVAD System in light of a growing body of observational clinical comparisons indicating a lower frequency of neurological adverse events and mortality with another circulatory support device available to patients compared to the HVAD System.
The Minimally Invasive Therapies Group’s•Our ability to successfully develop, obtain regulatory approval of and commercialize the products within our pipeline, which include the Symplicity Spyral Multi-Electrode Renal Denervation Catheter for the treatment of hypertension through a one-time, minimally invasive catheter procedure; Pulse Field Ablation, a novel energy source that is non-thermal, for the treatment of atrial fibrillation; and transcatheter mitral and tricuspid therapy products led by our Intrepid system.
Medical Surgical
Medical Surgical’s products span the entire continuum of patient care from diagnosis to recovery, with a focus on diseases of the gastrointestinal tract, lungs, pelvic region, kidneys, obesity, and preventable complications. The products include those for advanced and general surgical products, surgical stapling devices, vessel sealing instruments, wound closure, products, electrosurgery products, hernia mechanical devices, hernia mesh implants, advanced ablation, interventional lung, devices, ventilators, capnography, airway products, sensors, renal care products, patient monitoring products, and visualization systems. The Minimally Invasive Therapies Group’ssensors and monitors
for pulse oximetry, capnography, level of consciousness and cerebral oximetry. Medical Surgical's net sales for the three and ninesix months ended JanuaryOctober 29, 2021 were $2.3 billion and $6.4$4.6 billion, respectively, an increase of 61 percent and flat,13 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Currency had a favorable impact of $37$8 million and $11$85 million on net sales for the three and ninesix months ended JanuaryOctober 29, 2021, respectively.
Net Medical Surgical's net sales growthincrease for the three months ended JanuaryOctober 29, 2021 as comparedwas driven by the recovery of procedural volumes in the international markets, with partially offsetting declines experienced in the U.S. due to the COVID-19 resurgence. The net sales increase for the six months ended October 29, 2021 was primarily due to the recovery of global procedure volumes from the declines experienced in the corresponding period in the prior fiscal year, was primarily driven by increased demand for COVID-19 related diagnostics and therapies, particularly ventilator and airway products. Additionally, demand for acute catheters and renal access products in the U.S. and China contributed to growth. The net sales growth was partially offset by the impact of the COVID-19 resurgence experienced in late December and January which slowed the recovery of elective procedures.
Net sales remained flat for the nine months ended January 29, 2021, as compared to the corresponding period in the prior fiscal year, reflecting the continued impact of COVID-19, including a decline in procedure volume as elective procedures were delayed. The decline in procedure volume was offset by increased demand for COVID-19 related diagnostics and therapies, particularly within the Respiratory Interventions portfolio.
The graphs below illustrate the percent of Minimally Invasive Therapies GroupMedical Surgical net sales by division for the three months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020:
Surgical Innovations (SI) net sales for the three and ninesix months ended JanuaryOctober 29, 2021 were $1.4 billion and $3.9 billion, respectively, a decrease of 3increased 7 percent and 1023 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The decline in netNet sales growth for the three months ended JanuaryOctober 29, 2021 reflectswas led by the deceleration of worldwide surgicalinternational markets due to strong procedure recovery in certain regions, with growth in advanced stapling and wound closure. This growth was offset by declines in the U.S. largely due to Advanced Energy. The growth for the resurgence of COVID-19 in late December and January. For the ninesix months ended JanuaryOctober 29, 2021 the decline in procedure volumes, particularly Bariatric, Colorectal, Gynecological Health,was experienced worldwide led by Advanced Stapling, Advanced Energy, and Hernia and Thoracic procedures, resulted in lower demand for Advanced Stapling products and General Surgery products, partially offset by new product launches driving growth in Advanced Energy.Wound Management.
Respiratory, Gastrointestinal, & Renal (RGR) net sales for the three and ninesix months ended JanuaryOctober 29, 2021 were $890 million and $2.5 billion, respectively, an increase of 27decreased 10 percent and 213 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Respiratory, Gastrointestinal, & RenalRGR net sales growthdeclines for both periods was attributable to increased demand for Respiratory Interventions productswere largely due to COVID-19,declines in ventilator demands when compared to the corresponding periods in the prior year as demand continues to trend towards pre-pandemic levels. These declines were partially offset by growth in Renal Care Solutions, Patient Monitoring, particularly the Nellcor pulse oximetry system, as well as in Gastrointestinal, driven by the Puritan Bennett high acuity ventilator portfolio.esophageal product portfolio and PillCam capsule endoscopy.
In addition to the general impacts of COVID-19 on our Company as described in the Executive Level Overview, looking ahead we expect our Minimally Invasive Therapies GroupMedical Surgical could be affected by the following:
•While many countries are past their initial peak with COVID-19, many regions experienced a resurgence of COVID-19 cases, particularly in late December and January. As a result, it is not possible to accurately predict the timing of recovery of a broad resumption of deferrable medical procedures to pre-COVID-19 levels, as to date, we are seeing the speed of recovery vary by therapy and geography. Therapies that might be considered more deferrable include Surgical Innovations bariatric, hysterectomy, hernia, advanced parameter monitoring products, and GI while more urgent therapies include Surgical Innovations appendectomy, bowel obstruction, and trauma, Respiratory and Patient Monitoring, and Renal Care. Moderately deferrable procedures include Surgical Innovations CABG and oncology. Ventilators, pulse oximetry and capnography capital within our Respiratory and Patient Monitoring business are in higher demand as a result of COVID-19. We expect ventilator demand to normalize in future quarters, still above pre-COVID-19 levels.
•Continued acceptance and future growth of Open-to-MIS techniques and tools supported by our efforts to transition open surgery to MIS (minimally invasive surgery). The Open-to-MIS initiative focuses on furthering our presence in and working to optimize open surgery globally, while capturing the market opportunity that exists in transitioning open procedures to MIS, whether through traditional MIS, or advanced technologies, including robotics.
•Continued acceptance and future growth of powered stapling and energy platform, along with our ability to execute ongoing strategies to develop, gain regulatory approval, and commercialize new products including our surgical soft tissue robotics platform.
•Our ability to execute ongoing strategies in order to address the competitive pressure of reprocessing of our vessel sealing disposables and growth of surgical soft tissue robotics procedures in the U.S.
•Our ability to create markets and drive products and procedures into emerging markets. We have high quality and cost-effective surgical products designed for customers in emerging markets such as the ValleyLab LS10 single channel
vessel sealing generator, which is compatible with our line of LigaSure instruments and designed for simplified use and affordability.
•Continued acceptance and growth within the end stage renal disease market. The population of patients treated for end stage renal disease globally is expected to double over the next decade. We plan to grow our therapy innovation with scalable and affordable dialysis delivery while investing in vascular creation and maintenance technologies.
•Continued elevation of the standard of care for respiratory compromise, a progressive condition impacting a patient’s ability to breathe effectively, which leverages our market leading MicroStream capnography technology.
•Continued acceptance and growth in patient monitoring, airway, and ventilation management. Key products in this area include the Puritan Bennett 980 ventilator, Microstream Capnography, Nellcor pulse oximetry system with OxiMax technology, Shiley tracheostomy and endotracheal tubes, and McGRATH MAC video laryngoscopes.laryngoscopes, as well as the SonarMed Airway Monitoring System for the NICU that was launched in the U.S during the first quarter of fiscal year 2022.
•Continued and future acceptance of less invasive standards of care in Gastrointestinal and Hepatology products, including the areas of GI Diagnostic and Therapeutic product lines. Recently launched products include the PillCam COLON capsule endoscopy, the Barrx platform through ablation with the Barrx 360 Express catheter, EndoFLIPEndoflip imaging systems, Bravo Calibration-free reflux testing, and the Emprint ablation system with Thermosphere Technology, which maintains predictable spherical ablation zones throughout procedures reducing procedure time and cost.
•Continued and future acceptance of Interventional Lung Solutions. Products include our recently launched Illumisite navigation platform, combined with our portfolio of biopsy tools including the Arcpoint pulmonary needle, and to access lesions outside the airway, the CrossCountry transbronchial access tool. This comprehensive portfolio gives the power to display position and access lung nodules in the periphery of the lungs, in a minimally invasive approach to accessing difficult-to-reach areas of the lung, which may aid in the diagnosis of lung cancer.
•Expanding the use of less invasive treatments and furthering our commitment to improving options for women with abnormal uterine bleeding. Our expanded and strengthened surgical offerings are expected to complement our global gynecology business.
•Continued future growth internationally for the Hugo robotic assisted surgery (RAS) system for urologic and gynecologic procedures, which received CE Mark in October 2021. The Hugo RAS system is designed to help reduce unwanted variability, improve patient outcomes, and by extension, lower per procedure cost.
Restorative Therapies Group•Our ability to successfully develop, obtain regulatory approval of and commercialize the products within our pipeline, which include our Hugo RAS system in the U.S., our NextGen McGrath MAC video laryngoscopes, Signia power stapling devices, and our Ligasure and Sonicion vessel sealing devices.
The Restorative Therapies Group's
Neuroscience
Neuroscience's products focus oninclude various areas of the spine,spinal implants, bone graft substitutes, biologic products, trauma, implantable neurostimulation therapies and drug delivery systems for the treatment of chronic pain, movement disorders, epilepsy, overactive bladder, urinary retention, fecal incontinence and gastroparesis, as well as products to treat conditions of the ear, nose, and throat (ENT), and systems that incorporate advanced energy surgical instruments. The Restorative Therapies Group also manufactures and sells image-guided surgery and intra-operative imaging systems, robotic guidance systems used in robot assistedthe robot-assisted spine procedures, and systems that incorporate advanced energy surgical instruments. Neuroscience's products also focus on the treatment of overactive bladder, urinary retention, fecal incontinence, gastroparesis, as well as products to treat ear, nose, and throat (ENT), and therapies to treat the diseases of the vasculature in and around the brain, including coils, neurovascular stents and flow diversion products. DuringNeuroscience also manufactures products related to implantable neurostimulation therapies and drug delivery systems for the first quartertreatment of fiscal year 2021, the Company realigned the divisions within the Restorative Therapies Group to the following: Cranial & Spinal Technologies (includes Core Spinechronic pain, movement disorders, and Biologics, Enabling Technologies, and China Orthopedics), Specialty Therapies (includes ENT, Pelvic Health, and Neurovascular), and Neuromodulation (includes Pain Therapies, Brain Modulation, and Interventional). The Restorative Therapies Group’sepilepsy. Neuroscience’s net sales for the three and ninesix months ended JanuaryOctober 29, 2021 were $2.1 billion and $5.9$4.3 billion, respectively, which represents an increase of 14 percent and a decrease of 515 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Currency had a favorable impact of $31$10 million and $27$57 million, respectively, on net sales for the three and ninesix months ended JanuaryOctober 29, 2021, respectively. The Restorative Therapies Group’s2021. Neuroscience's net sales increase for the three months ended JanuaryOctober 29, 2021 reflected strength in Specialty Therapies and Neuromodulation, partially offsetwas driven by the impactrecovery of procedural volumes in the international markets, with partially offsetting declines in certain businesses in the U.S. due to the COVID-19 resurgenceresurgence. The net sales growth for the six months ended October 29, 2021 was primarily due to the recovery of global procedure volumes from the declines experienced in late December and January on deferrable proceduresthe corresponding period in the Cranial & Spinal Technologies business. Net sales declines for the nine months ended January 29, 2021 were experienced across all divisions and also reflected the pandemic's impact, including the reduction in capital equipment purchases and declines in deferrable procedures, particularly in the first quarter of fiscal year 2021.prior year.
The graphs below illustrate the percent of Restorative Therapies GroupNeuroscience net sales by division for the three months ended JanuaryOctober 29, 2021 and January 24,October 30, 2020:
Cranial and Spinal Technologies (CST) net sales growth for the three and ninesix months ended JanuaryOctober 29, 2021 were $1.1 billionwas flat and $3.1 billion, respectively, a decrease of 3 percent and 6 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Net sales declines for the three and nine months ended January 29, 2021 were driven by declines in both Core Spine and Enabling Technologies. Enabling Technologies net sales for both periods were impacted by the challenging environment for capital equipment sales due to COVID-19, though for the three months ended January 29, 2021 declines were partially offset by modest recovery on sales of the Midas Rex MR8 high-speed drill system, StealthStation S8 Navigation System, and Mazor robotic systems. Enabling Technologies sales declines for both periods were also partially offset by growth in Advanced Energy, particularly in the U.S. For the three and nine months ended January 29, 2021, Core Spine net sales continued to be impacted by a decline in procedural volumes when compared to the corresponding period in the prior fiscal year, as a result of the pandemic. However, for the three months ended January 29, 2021, Core Spine declines were partially offset by modest growth in Biologics and continued acceptance of the products of Titan Spine, which was acquired in the first quarter of fiscal year 2020.
Specialty Therapies (Specialty) net sales for the three and nine months ended January 29, 2021 were $618 million and $1.7 billion, respectively, an increase of 5 percent and a decrease of 4increased 9 percent, respectively, as compared to the corresponding periods in the prior fiscal year. For both periods, Neurosurgery experienced growth from strong sales of Midas Rex powered surgical instruments, StealthStation Navigation, and O-arm imaging surgery. For the six months ended October 29, 2021, the increase was also driven by Spine and Biologics due to the recovery of global procedural volumes when compared to the corresponding period in the prior year. For the three months ended, January 29, 2021, netthe international markets of Spine and Biologics recovered, resulting in sales growth, was driven by continued recovery in Pelvic Health and strength in Neurovascular, partially offset by declines in ENT. For the nine months ended January 29, 2021, net sales declines were experienced by ENT and Pelvic Health, partially offset by growth in Neurovascular. The Pelvic Health business drove net sales growth for the three months ended January 29, 2021 following the successful launch of the InterStim Micro neurostimulator and SureScan MRI lead in the U.S. Neurovascular's modest growth in both the three and nine months ended January 29, 2021 was driven by strength in coils and aspiration catheters, as well as general strength in emerging markets. This growth was partially offset by declines in flow diversion products due to recent competitive entrants.
Neuromodulation (NM)Specialty Therapies (Specialty) net sales for the three and ninesix months ended JanuaryOctober 29, 2021 were $426 million and $1.2 billion, an increase of 5increased 9 percent and a decrease of 623 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The increase for both periods was driven by growth in Neurovascular led by flow diversion and liquid embolic products. ENT experienced worldwide growth for both periods, including strong performance outside the U.S. in power, navigation, and monitoring. For the three months ended JanuaryOctober 29, 2021, Pelvic Health sales growth was due to the international markets offset by declines in the U.S. For the six months ended October 29, 2021, Pelvic Health saw continued growth led by sales of the recently launched InterStim Micro neurostimulator and SureScan MRI leads.
Neuromodulation (NM) net sales for the three and six months ended October 29, 2021 increased 6 percent and 21 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Sales growth in both periods was driven by both Pain Therapies and Brain Modulation propelledand Interventional businesses. Brain Modulation and Interventional saw net sales growth driven by strong adoption of the DTM (differential target multiplexed) proprietary waveformperformance in Pain Therapies, and the Percept PC deep brain stimulation (DBS) device with BrainSense technology in Brain Modulation. Sales declines fortechnology. For the ninesix months ended JanuaryOctober 29, 2021, were seen across boththe increase was also driven by Pain Stim and Pain Therapies, largely due to strong performance of recent product launches. For the three months ended October 29, 2021, Pain Stim and Brain Modulation and continued to be primarily driven by a decline in procedural volumes particularlyPain Therapies partially offset the sales growth with declines in the spring and early summer, as a result of COVID-19.U.S.
In addition to the general impacts of COVID-19 on our Company as described in the Executive Level Overview, looking ahead we expect our Restorative Therapies GroupNeuroscience could be affected by the following:
•While many countries are past their initial peak with COVID-19, many regions experienced a resurgence of COVID-19 cases, particularly in late December and January. As a result, it is not possible to accurately predict the timing of recovery of deferrable medical procedures and capital equipment sales to pre-COVID-19 levels, as to date, we are seeing the speed of recovery varies by therapy and geography. The Restorative Therapies Group therapies tend to be used in procedures that are more deferrable. Therapies that might be considered more deferrable include Spine, Pain Therapies, Pelvic Health, and ENT while more urgent therapies include Spine trauma and Neurovascular stroke businesses. Moderately deferrable procedures include Brain Modulation. In addition, COVID-19 may continue to result in delayed evaluation and purchases for certain capital equipment including the Enabling Technologies business, which has a high mix of capital sales.
•Continued growth from Enabling Technologies, including StealthStation and O-Arm Imaging Systems, Midas, and ENT Navigation and Power Systems, as well as acceptance of the Stealth Autoguide cranial robotic guidance platform.
•Continued sales of Mazor robotic units and associated market adoption of robot-assisted spine procedures, including the Mazor X Stealth, our integrated robotics and navigation platform.
•Strengthening of our position in theContinued growth from spine titanium interbody implant marketplace as a result of the June 2019 acquisition of Titan Spine.implants.
•Continued adoption of our integrated solutions through the Surgical Synergy strategy which integrates our spinal implants with enabling technologies such as imaging, navigation, power instruments, nerve monitoring, and Mazor robotics.
robotics, as well as AI-driven surgical planning, personalized spinal implants, and robot-assisted surgery due to the newly acquired Medicrea technologies.
•Market acceptance and continued global adoption of innovative new spine products and procedural solutions within our Cranial and Spinal Technologies businessCST division, such as our Infinity OCT System and Prestige LP cervical disc system.
•Growth in the broader vertebral compression fracture (VCF) and adjacent markets as we continue to pursue the development of other therapies to treat more patients with VCF, including continued success of both the Kyphon V vertebroplasty system and the Osteocool RF Spinal Tumor ablation system.
•Continued acceptance and growth of our ENT and Pelvic Health therapies within our Specialty Therapies division, including our InterStim therapy with InterStim II and InterStim Micro neurostimulators which received CE mark approval in January 2020 and U.S. FDA approval in August 2020, for the treatment of the symptoms of overactive bladder, urinary retention, and bowel incontinence, and capital equipment sales of the Stealth Station ENT surgical navigation system and intraoperative NIM nerve monitoring system.
•Continued acceptance and growth of the Solitaire FR revascularization device for treatment of acute ischemic stroke and the Pipeline Embolization Devices, endovascular treatments for large or giant wide-necked brain aneurysms.
•Continued acceptance of our React Catheter and Riptide aspiration system, along with our next-generation Solitaire revascularization device.
•Market acceptance and continued global adoption of our Intellis spinal cord stimulator, DTM proprietary waveform, Evolve workflow algorithm, and Snapshot reporting to treat chronic pain in major markets around the world.
•Continued acceptance and growth of our Percept PC deep brain stimulation (DBS)DBS device with BrainSense technology, which received CE Mark approval in January 2020 and U.S. FDA approval in June 2020, including its treatment of Parkinson's Disease, epilepsy, and other movement disorders.
•Ongoing obligations under the U.S. FDA consent decree entered in April 2015 relating to the SynchroMed drug infusion system and the Neuromodulation quality system. The U.S. FDA lifted its distribution requirements on our implantable drug pump in October 2017 and its warning letter in November 2017.
•Our ability to successfully develop, obtain regulatory approval of and commercialize the products within our pipeline, which include our closed-loop Percept PC and RC devices with adaptive DBS (aDBS) within Neuromodulation, as well as our hemorrhagic stroke intravascular device within Specialty Therapies, and our next-generation spine enabling technologies within CST.
Diabetes Group
The Diabetes Group'sDiabetes' products include insulin pumps, continuous glucose monitoring (CGM) systems, insulin pump consumables, and smart insulin pen systems. The Diabetes Group’sDiabetes' net sales for the three and ninesix months ended JanuaryOctober 29, 2021 were $630$585 million and $1.8$1.2 billion, respectively, an increase of 3 percent and decrease of 2 percent respectively, as compared to the corresponding periods in the prior fiscal year. Currency had a favorable impact of $15$3 million and $12$29 million on net sales for the three and ninesix months ended JanuaryOctober 29, 2021, respectively. The DiabetesDiabetes' net sales increasegrowth for the three months ended January 29, 2021 wereboth periods was primarily attributable to growth in the international markets in durable pumps and integrated CGM due to the launch of the MiniMed 770G insulin pump systemCGM. The growth was also driven by durable pumps in the U.S. and the launch of the advanced hybrid closed loop system in 26 countries on four continents outside the U.S. during the quarter. The net saleswhile CGM experienced declines for the nine months ended January 29, 2021 were primarily attributable to the insulin pump business from new patient start delays associated with COVID-19 and continued competitive pressures in the U.S. The insulin pump business decline is also attributable to COVID-19 pressures in the international markets. The declines were partially offset by growth in the CGM sensors.for both periods.
In addition to the general impacts of COVID-19 on our Company as described in the Executive Level Overview, looking ahead we expect our Diabetes Group could be affected by the following:
•While many countries are past their initial peak with COVID-19, many regions experienced a resurgence of COVID-19 cases, particularly in late December and January. As a result, it is not possible to accurately predict the timing of recovery of deferrable new therapy adoptions to pre-COVID-19 levels, as to date, we are seeing the speed of recovery varies by therapy and geography. Therapies that might be considered more deferrable include new insulin pump starts
while more urgent therapies include ongoing diabetes supplies and consumables, including continuous glucose sensors and infusion sets.
•Strengthening our position in the diabetes market as a result of the September 10, 2020 acquisition of Companion Medical. Companion Medical offers a U.S. FDA cleared InPen smart pen system that combines the freedom of a reusable Bluetooth pen with the intelligence of an intuitive mobile application that helps users administer the appropriate insulin dose. During the quarter, we integrated our CGM data into the Companion Medical InPen Application which allows users to have their CGM readings in real-time alongside insulin dose information, all in one view.
•Patient demand for the MiniMed 770G insulin pump system, which received U.S. FDA approval in August 2020 and launched in November 2020. The system is powered by SmartGuard technology as featured in the MiniMed 670G system, withand features the added benefits of smartphone connectivity and an expanded age indication to children as young as age two.
•Continued future growth internationally for the advanced hybrid closed loopMiniMed 780G insulin pump system. The advanced hybrid closed loopMiniMed 780G system was approved in the European Union (EU) onE.U. in June 5, 2020 and has launched in certainover 40 countries on four continents outside the U.S., primarily starting in Europe, during October 2020. The global adoption of sensor-augmented insulin pump systems has resulted in strong sensor attachment rates.
•Continued acceptance and growth of the Guardian Connect CGM system which displays glucose information directly to a smartphone. During the first quarter of fiscal year 2021, we introduced the Guardian Connect system for Android devicessmartphone to help ensure patients have access to their glucose levels seamlessly and discretely. The Guardian Connect CGM system is available on both Apple iOS and Android devices.
•Our abilityStrengthening our position in the diabetes market as a result of the September 2020 acquisition of Companion Medical. Companion Medical offered a U.S. FDA cleared InPen smart pen system that combines the freedom of a reusable Bluetooth pen with the intelligence of an intuitive mobile application that helps users administer the appropriate insulin
dose. During the third quarter of fiscal year 2021, we integrated our CGM data into the InPen Application, which allows users to execute ongoing strategies to develop, gain regulatory approval, commercialize, and gain customer acceptance of new products, including our adult and pediatric advanced hybrid closed loop system and the Zeus sensor which werehave their CGM readings in real-time alongside insulin dose information, all submitted to the U.S. FDA. These technologies feature our next-generation algorithms by further automating insulin delivery.in one view.
•Continued pump and CGM competition in an expanding global market.
•Changes in medical reimbursement policies and programs, along with additional payor coverage on insulin pumps.
CRITICAL ACCOUNTING ESTIMATES
We•Our ability to successfully develop, obtain regulatory approval of and commercialize the products within our pipeline, which include our MiniMed 780G insulin pump and the Guardian 4 sensor, which have used various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies are disclosed in Note 1been submitted to the consolidated financial statements included inU.S. FDA. These technologies feature our Annual Report on Form 10-K for the fiscal year ended April 24, 2020.
The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires us to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates reflect our best judgment about economic and market conditions and the potential effects on the valuation and/or carrying value of assets and liabilities based upon relevant information available. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our critical accounting estimates include the following:
Litigation Contingencies We are involved in a number of legal actions involving product liability, intellectual property and commercial disputes, shareholder related matters, environmental proceedings, tax disputes, and governmental proceedings and investigations. The outcomes of these legal actions are not completely within our control and may not be known for prolonged periods of time. In some actions, the enforcement agencies or private claimants seek damages, as well as other civil or criminal remedies (including injunctions barring the sale of products that are the subject of the proceeding), that could require significant expenditures or result in lost revenues or limit our ability to conduct business in the applicable jurisdictions. Estimating probable losses from our litigation and governmental proceedings is inherently difficult, particularly when the matters are in early procedural stages, with incomplete scientific facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, or punitive damages; or could result in a change in business practice. Our significant legal proceedings are discussed in Note 16 to the current period's consolidated financial statements.next-generation algorithms by further automating insulin delivery.
Income Tax Reserves We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may or may not prevail. Under U.S. GAAP, if we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50 percent likely of being realized upon settlement. We presume that all tax positions will be examined by a taxing authority with full knowledge of all relevant information. The calculation of our tax liabilities
involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We regularly monitor our tax positions and tax liabilities. We reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit, or derecognize a previously recorded tax benefit, when there is (i) a completion of a tax audit, (ii) effective settlement of an issue, (iii) a change in applicable tax law including a tax case or legislative guidance, or (iv) the expiration of the applicable statute of limitations. Significant judgment is required in accounting for tax reserves. Although we believe that we have adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on our effective tax rate, consolidated earnings, financial position and/or cash flows.
Valuation of Intangible Assets and Goodwill When we acquire a business, the assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. Goodwill is the excess of the purchase price over the estimated fair value of net assets of acquired businesses. Intangible assets primarily include patents, trademarks, tradenames, customer relationships, purchased technology, and in process research and development (IPR&D). Determining the fair value of intangible assets acquired as part of a business combination requires us to make significant estimates. These estimates include the amount and timing of projected future cash flows of each project or technology, the discount rate used to discount those cash flows to present value, the assessment of the asset’s life cycle, and the consideration of legal, technical, regulatory, economic, and competitive risks.
The test for goodwill impairment requires us to make several estimates to determine fair value, most of which are based on projected future cash flows. Our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value. We assess the impairment of goodwill at the reporting unit level annually as of the first day of the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired.
We test definite-lived intangible assets for impairment when an event occurs or circumstances change that would indicate the carrying amount of the assets or asset group may be impaired. Our tests are based on future cash flows that require significant judgment with respect to future revenue and expense growth rates, appropriate discount rates, asset groupings, and other assumptions and estimates. We use estimates that are consistent with the highest and best use of the assets based on a market participant's view of the assets being evaluated. Actual results may differ from our estimates due to a number of factors including, among others, changes in competitive conditions, timing of regulatory approval, results of clinical trials, changes in worldwide economic conditions, and fluctuations in currency exchange rates.
We assess the impairment of indefinite-lived intangible assets annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Our impairment tests of indefinite-lived intangible assets require us to make several estimates to determine fair value, including projected future cash flows and discount rates.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 2 to the current period's consolidated financial statements.
ACQUISITIONS
Information regarding acquisitions is included in Note 4 to the current period's consolidated financial statements.
COSTS AND EXPENSES
The following is a summary of cost of products sold, research and development, and selling, general, and administrative expenses as a percent of net sales for the three and ninesix months ended JanuaryOctober 29, 2021 and January 24, 2020 (dollar amounts in millions):October 30, 2020:
Cost of Products Sold We continue to focus on reducing our costs of production through supplier management, manufacturing improvements, and optimizing our manufacturing network. Cost of products sold for the three and ninesix months ended JanuaryOctober 29, 2021 was $2.6$2.5 billion and $7.8$5.1 billion, respectively.respectively, as compared to $2.7 billion and $5.2 billion for the corresponding periods in the prior fiscal year. The increasedecrease in cost of products sold as a percentage of net sales for the three months ended January 29, 2021, as compared to the corresponding period in the prior fiscal year, was driven by negative impact from mix as products in higher demand had lower margins, charges associated with recent field corrective actions, and increased expenses as a result of COVID, including increased freight costs. The increase in cost of products sold as a percentage of net sales for the nine months ended January 29, 2021, as compared to the corresponding period in the prior fiscal year,both periods was largely due to increased expenses in the prior year comparable periods as a result of COVID-19, primarily due toCOVID-19. During the three and six months ended October 30, 2020, the conditions of the pandemic resulted in period expensing of some of our fixed overhead costs due to idle capacity at certain manufacturing facilities, and increases in our reserves forin our excess and obsolete inventory, as well as negative impact from mix, and chargesas products in higher demand had lower gross margins. The six months ended October 29, 2021 included $58 million of inventory write-downs associated with recent field corrective actions.our June 2021 decision to stop the distribution and sale of Medtronic's HVAD System (MCS charges).
Research and Development Expense We remain committed to acceleratingdeliver the development of meaningful innovationsbest possible experiences for every patient, physician, and caregiver we serve; to create technologies that expand what’s possible across the entire human body to transform lives; to turn data and insights into real action to serve real patient needs, dramatically improving care; and to expand healthcare access and deliver better patientpositive 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.go far beyond our products. Research and development expense for the three and ninesix months ended JanuaryOctober 29, 2021 was $601$676 million and $1.9$1.4 billion, respectively.
Duringrespectively, as compared to $639 million and $1.3 billion, respectively, for the first quartercorresponding periods in the prior fiscal year. The six months ended October 29, 2021 included $90 million of fiscal year 2021, we entered into arrangements with third parties to fund the development ofasset acquisitions and certain technologieslicense payments for unapproved technology primarily in our Diabetes Group. As there is a substantive and genuine transfer of risk to the third parties, the development funding provided is recognized as an obligation to perform contractual services, and therefore is recorded as income in other operating expense (income), net in the consolidated statements of income in the period the corresponding research and development expenses are incurred. If the technologies receive regulatory approval and are successfully commercialized, we will pay royalties to the third parties. For the three and nine months ended January 29, 2021, no projects were significant, either individually or in aggregate, to our consolidated results.segment.
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.initiatives. Selling, general, and administrative expense primarily consists of salaries and wages, other administrative costs, such as professional fees and marketing expenses, and certain acquisition and restructuring expenses.
Selling, general, and administrative expense for the three and ninesix months ended JanuaryOctober 29, 2021 was $2.5$2.6 billion and $7.6$5.2 billion, respectively.as compared to $2.6 billion and $5.0 billion for the corresponding periods in the prior fiscal year. The decrease in selling, general, and administrative expense as a percentage of net sales for the three months ended January 29, 2021, as compared to the corresponding period in the prior fiscal year,both periods was primarily driven by reduced travel and discretionary spending due to the pandemic. The increase in selling, general, and administrative expensenet sales growth as a percentageresult of net sales for the nine months ended January 29, 2021,recovery of procedural volumes as compared to the corresponding periodwell as cost containment measures implemented in the prior fiscal year, was primarily driven by the deleveraging experienced due to the impact of COVID-19 on net sales. The decrease in selling, general, and administrative expense in absolute values was primarily driven by reduced travel and discretionary spending due to the pandemic, offset by higher annual incentive accruals.current year.
The following is a summary of other costs and expenses:expenses (income): | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Amortization of intangible assets | $ | 431 | | | $ | 443 | | | $ | 866 | | | $ | 884 | |
Restructuring charges, net | 10 | | | 97 | | | 21 | | | 150 | |
Certain litigation charges, net | 34 | | | 84 | | | 60 | | | (4) | |
Other operating expense, net | 21 | | | 149 | | | 781 | | | 35 | |
Other non-operating income, net | (66) | | | (65) | | | (177) | | | (147) | |
Interest expense | 136 | | | 470 | | | 273 | | | 641 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 | | |
Amortization of intangible assets | $ | 453 | | | $ | 436 | | | $ | 1,337 | | | $ | 1,317 | | | |
Restructuring charges, net | 83 | | | 13 | | | 235 | | | 87 | | | |
Certain litigation charges, net | 122 | | | 108 | | | 118 | | | 276 | | | |
Other operating expense (income), net | 82 | | | (39) | | | 116 | | | 88 | | | |
Other non-operating income, net | (86) | | | (96) | | | (233) | | | (305) | | | |
Interest expense | 143 | | | 156 | | | 783 | | | 930 | | | |
Amortization of Intangible Assets Amortization of intangible assets includes the amortization expense of our definite-lived intangible assets, consisting of purchased patents, trademarks, tradenames, customer relationships, purchased technology, and other intangible assets. Amortization expense was $453 million and $1.3 billion for the three and nine months ended January 29, 2021, respectively, as compared to $436 million and $1.3 billion for the three and nine months ended January 24, 2020, respectively.
Restructuring Charges, Net
Enterprise Excellence
In the third quarter of fiscal year 2018, we announced a multi-year global Enterprise Excellence Program designed to drive long-term business growth and sustainable efficiency. The Enterprise Excellence Program is expectedFurther program details are described in Note 4 to further leverage our global size and scale as well as enhance the customer and employee experience.
The Enterprise Excellence Program is focusedconsolidated financial statements included in the Company's Annual Report on three objectives:
•Global Operations – integrating and enhancing global manufacturing and supply processes, systems and site presence to improve quality, delivery cost and cash flow
•Functional Optimization – enhancing and leveraging global operating models and systems across several enabling functions to improve productivity and employee experience
•Commercial Optimization – optimizing certain processes, systems and models to improve productivity andForm 10-K for the customer experiencefiscal year ended April 30, 2021.
TheSince inception, the Company has incurred pre-tax exit and disposal costs and other costs, across all segments, of $1.4 billion in connection with the Enterprise Excellence Program is designed to drive operating margin improvement as well as fund investment in strategic growth initiatives, with expected gross savings of more than $3.0 billion from cost reductions and leverage of our fixed infrastructure byprogram. In total, the end of fiscal year 2022. Approximately $500 million to $700 million of gross annual savings are expected to be achieved through the end of fiscal year 2022.
The Enterprise Excellence Program is expected to result in pre-tax restructuring charges ofCompany estimates it will recognize approximately $1.6 billion to $1.8 billion of exit and disposal costs and other costs related to the vastEnterprise Excellence program, the majority of which are expected to be incurred by the end of this fiscal year 2022 and result in cash outlays to be substantially complete by the end of fiscal year 2023. Approximately 40 percent of the estimated charges are related to employee termination benefits. The remaining charges are costs associated with the restructuring program, such as salaries for employees supporting the program and consulting expenses. We expect these costs to be recognized within restructuring charges, net, cost of products sold, and selling, general, and administrative expense in the consolidated statements of income.year.
For the three months and ninesix months ended JanuaryOctober 29, 2021, we recognized net charges of $77$62 million and $241$136 million, respectively, associated with our Enterprise Excellence Program, including $11$4 million and $21$15 million, respectively, recognized within restructuring charges, net in the consolidated statements of income primarily comprised of employee termination benefits. ForNetcharges for the three and ninesix months ended JanuaryOctober 29, 2021 charges also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including $36$31 million and $95$64 million, respectively, recognized within cost of products sold, and $30$27 million and $125$57 million, respectively, recognized within selling, general, and administrative expense in the consolidated statements of income.
For the three and ninesix months ended January 24,October 30, 2020, we recognized net charges of $97$87 million and $315$164 million, respectively, associated with our Enterprise Excellence Program, including $13$7 million and $81$10 million, respectively, recognized within restructuring charges, net in the consolidated statements of income primarily comprised of employee termination benefits. ForNet charges for the three and ninesix months ended January 24, 2020, chargesOctober 29, 2021 also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including $50$32 million and $111$59 million, respectively, recognized within cost of products sold, and $34$48 million and $111$95 million, respectively, recognized
within selling, general and administrative expense in the consolidated statements of income. For the nine months ended January 24, 2020, cost of products sold also included $6 million of fixed asset write-downs.
Simplification
In the first quarter of fiscal year 2021, we initiated our Simplification restructuring program, designed to make the Company a more nimble and competitive organization focusedorganization. Further program details are described in Note 4 to the consolidated financial statements included in the Company's Annual Report on accelerating innovation, enhancingForm 10-K for the customer experience, driving revenue growth, and winning market share, while also more efficiently and effectively leveraging our enterprise scale. Under the oversight of the portfolio leaders, this new operating model, which became fully operational the beginning of the fourth quarter of fiscal year 2021, will simplify our organizational structure and accelerate decision-making and execution. Primary activities ofended April 30, 2021.
Since inception, the restructuring program will include reorganizing our business into a portfolio-level structure, including the creation of highly focused, accountable and empowered Operating Units (OUs), consolidating operations at the enterprise level, establishing Technology Development Centers in areas where we have deep core technology competencies to be leveraged by multiple OUs, and forming dedicated sales organizations that leverage our scale but move with the same agility as our smaller, local competitors.
The Simplification program designed to streamline our operating model, improve competitiveness, and enhance the customer and employee experience will result in substantial reduction in selling, general, and administrative expenses, the majority of which are expected to be achieved through the end of fiscal year 2022. Annual savings of approximately $450 million to $475 million are expected to be realized by the various components of the Simplification program.
We estimate that, in connection with the Simplification restructuring program, we will recognizeCompany has incurred pre-tax exit and disposal costs and other costs, across all segments, of $293 million in connection with the Simplification program. In total, the Company estimates it will recognize approximately $400 million to $450 million of exit and disposal costs and other costs related to the Simplification program, the majority of which are expected to be incurred by the end of this fiscal year 2022. Approximately three quarters of the estimated charges are related to employee termination benefits. The remaining charges are costs associated with the restructuring program, such as salaries for employees supporting the program and consulting expenses. These charges are recognized within restructuring charges, net, cost of products sold, and selling, general, and administrative expense in the consolidated statements of income.year.
For the three and ninesix months ended JanuaryOctober 29, 2021, we recognized net charges of $84$18 million and $229$25 million, respectively, including $73$9 million and $215 million, respectively,recognized within restructuring charges, netin the consolidated statements of income related tofor both periods primarily comprised of employee termination benefits. For the nine months ended January 29, 2021,Net charges also included $97 million of incremental defined benefit pension and post-retirement related expenses for employees that accepted voluntary early retirement packages within restructuring charges, net in the consolidated statements of income. For the three and ninesix months ended JanuaryOctober 29, 2021 charges also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including $11$9 million and $14$16 million, respectively, recognized within selling, general and administrative expense in the consolidated statements of income.
For the three and six months ended October 30, 2020, we recognized net charges of $94 million and $145 million, respectively, including $92 million and $142 million, respectively, recognized within restructuring charges, net in the consolidated statements of income primarily comprised of employee termination benefits, including $97 million of incremental defined benefit pension and post-retirement related expenses for employees that accepted voluntary early retirement packages. Net charges for the three and six months ended October 30, 2020 also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including $2 million and $3 million, respectively, recognized within selling, general and administrative expense in the consolidated statements of income.
For additional information about our restructuring programs, refer to Note 5 to the current period's consolidated financial statements.
Certain Litigation Charges, Net We classify litigation charges and gains related to significant legal matters as certain litigation charges. DuringInformation regarding certain litigation charges, net is included in Note 16 to the three and nine months ended January 29, 2021, we recognized net charges of $122 million and $118 million, respectively, related to probable and estimable damages for significant legal matters. During the three and nine months ended January 24, 2020, we recognized charges of $108 million and $276 million, respectively.current period's consolidated financial statements.
Other Operating Expense, (Income), Net Other operating expense, (income), net primarily includes royalty income and expense, currency remeasurement and derivative gains and losses, Puerto Rico excise taxes, changes in the fair value of contingent consideration, changes in amounts accrued for certain contingent liabilities for a past acquisition, MCS charges, and income from funded research and development arrangements.
For the three months ended October 29, 2021, the change in other operating expense, net is primarily attributable to changes in fair value of contingent consideration, which resulted in a $26 million gain for the three months ended October 29, 2021 as compared to a $7 million loss in the corresponding period in the prior year. Additionally, the change is driven by a $27 million charge for certain personal protective equipment in the three months ended October 30, 2020.
For the six months ended October 29, 2021, the change in other operating expense, net was primarily driven by MCS charges recorded during the three months ended July 30, 2021. The charges of $668 million primarily included $409 million of intangible asset impairments and $211 million for commitments and obligations, including customer support obligations, restructuring, and other associated costs. The change was also driven by a change in amounts accrued for certain contingent liabilities for a recentpast acquisition resulting in a commitment to$132 million gain for the Medtronic Foundation, charges associated with business exits, and income from funded research and development arrangements. For the three and ninesix months ended January 29, 2021, other operatingOctober 30, 2020. Additionally, the net currency impact of remeasurement expense (income),and our hedging programs resulted in a net was $82 million and $116 million, respectively, as compared to $(39) million and $88loss of $36 million for the three and ninesix months ended January 24, 2020, respectively.
For the three months ended JanuaryOctober 29, 2021, the change in other operating expense (income), net was primarily driven by our remeasurement and hedging programs, which, combined, resulted in a $21 million loss, as compared to a $82net gain of $16 million gain for the threesix months ended January 24,October 30, 2020. Additional information regarding the MCS charges is included in Note 5 Restructuring and Other Costs.
For the nine months ended January 29, 2021, the change in other operating expense (income), net was driven by our remeasurement and hedging programs, which, combined, resulted in a $5 million loss, as compared to a $202 million gain for the nine months ended January 24, 2020. Additionally, for the nine months ended January 29, 2021, other operating expense (income), net includes a $132 million gain related to amounts accrued for certain contingent liabilities for a recent acquisition. For the nine months ended January 24, 2020, other operating expense (income), net includes a $41 million charge associated with the exit of businesses and an $80 million charge associated with a commitment to the Medtronic Foundation.
Other Non-Operating Income, Net Other non-operating income, net includes the non-service component of net periodic pension and postretirement benefit cost, investment gains and losses, and interest income. For the three and nine months ended January 29, 2021, other non-operating income, net was $86 million and $233 million, respectively, as compared to $96 million and $305 million for the three and nine months ended January 24, 2020, respectively.
The changeincrease in other non-operating income, net for the six months ended October 29, 2021 when compared to the corresponding in the prior year, is primarily attributable to gains on our equity method and minority investment portfolios partially offset by a decrease in interest income, partially offset by gainsincome. Gains on ourequity method and minority investment portfolio.investments were $38 million and $4 million for the six months ended October 29, 2021 and October 30, 2020, respectively. Interest income was $46$89 million and $144$98 million for the three and ninesix months ended JanuaryOctober 29, 2021 respectively, as compared to $78 million and $238 million for the three and nine months ended January 24, 2020, respectively, with decreases driven by the decline in global interest rates. Gains on minority investments were $18 million and $28 million for the three and nine months ended January 29, 2021, respectively, as compared to a loss of $1 million and gains of $11 million for the three and nine months ended January 24,October 30, 2020, respectively.
Interest Expense Interest expense includes interest incurred on our outstanding borrowings, amortization of debt issuance costs and debt premiums or discounts, amortization of gains or losses on terminated or de-designated interest rate derivative instruments, and charges recognized in connection with the tender and early redemption of senior notes. For the three and nine months ended January 29, 2021, interest expense was $143 million and $783 million, respectively, as compared to $156 million and $930 million for the three and nine months ended January 24, 2020, respectively. The decrease in interest expense for both periods was primarily due to the $308 million charge incurred as a result of the early redemption of approximately $6.0 billion of debt during the three months ended January 29, 2021 was primarily due to a decrease in the weighted-average interest rate of outstanding debt obligations driven by our debt issuance and tender transactions in the first quarter of fiscal year 2020 and second quarter of fiscal year 2021. The decrease in interest expense during the nine months ended January 29, 2021 was primarily due to a decrease in charges related to debt tender and redemption transactions, which were $308 million for the nine months ended January 29, 2021, as compared to $413 million for the nine months ended January 24,October 30, 2020. Also contributing to the decrease in interest expense for the nine months ended January 29, 2021 was a decrease in the weighted-average interest rate of outstanding debt obligations due to the aforementioned debt issuance and tender transactions.
INCOME TAXES
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in millions) | January 29, 2021 | | January 24, 2020 | | January 29, 2021 | | January 24, 2020 | | |
Income tax provision (benefit) | $ | (59) | | | $ | (340) | | | $ | 65 | | | $ | (317) | | | |
Income before income taxes | 1,220 | | | 1,579 | | | 2,329 | | | 3,850 | | | |
Effective tax rate | (4.8) | % | | (21.5) | % | | 2.8 | % | | (8.2) | % | | |
| | | | | | | | | |
Non-GAAP income tax provision | $ | 234 | | | $ | 308 | | | $ | 593 | | | $ | 926 | | | |
Non-GAAP income before income taxes | 1,993 | | | 2,261 | | | 4,576 | | | 6,379 | | | |
Non-GAAP Nominal Tax Rate | 11.7 | % | | 13.6 | % | | 13.0 | % | | 14.5 | % | | |
| | | | | | | | | |
Difference between the effective tax rate and Non-GAAP Nominal Tax Rate | 16.5 | % | | 35.1 | % | | 10.2 | % | | 22.7 | % | | |
INCOME TAXES | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in millions) | October 29, 2021 | | October 30, 2020 | | October 29, 2021 | | October 30, 2020 |
Income tax provision | $ | 176 | | | $ | 31 | | | $ | 240 | | | $ | 124 | |
Income before income taxes | 1,493 | | | 525 | | | 2,326 | | | 1,109 | |
Effective tax rate | 11.8 | % | | 5.9 | % | | 10.3 | % | | 11.2 | % |
| | | | | | | |
Non-GAAP income tax provision | $ | 254 | | | $ | 221 | | | $ | 545 | | | $ | 358 | |
Non-GAAP income before income taxes | 2,052 | | | 1,606 | | | 4,253 | | | 2,583 | |
Non-GAAP Nominal Tax Rate | 12.4 | % | | 13.8 | % | | 12.8 | % | | 13.9 | % |
| | | | | | | |
Difference between the effective tax rate and Non-GAAP Nominal Tax Rate | 0.6 | % | | 7.9 | % | | 2.5 | % | | 2.7 | % |
Our effective tax rate for the three and ninesix months ended JanuaryOctober 29, 2021 was (4.8)11.8 percent and 2.810.3 percent, respectively, as compared to (21.5)5.9 percent and (8.2)11.2 percent for the three and ninesix months ended January 24,October 30, 2020, respectively. The increasechange in our effective tax rate for the three and ninesix months ended JanuaryOctober 29, 2021, as compared to the corresponding periods in the prior fiscal year, was primarily due to the tax impact of certain tax adjustmentsthe debt tender premium, stock-based compensation benefits, and year-over-year changesyear over-year-changes in operational results by jurisdiction.jurisdiction; and specifically impacting the six months ended comparison are the tax impact of the MCS charges and the tax cost associated with a change in the company’s permanent reinvestment assertion on certain historical earnings.
Our Non-GAAP Nominal Tax Rate for the three and ninesix months ended JanuaryOctober 29, 2021 was 11.712.4 percent and 13.012.8 percent, respectively, as compared to 13.613.8 percent and 14.513.9 percent for the three and ninesix months ended January 24,October 30, 2020, respectively. The decrease in our Non-GAAP Nominal Tax Rate was primarily due to the impact of year-over-year changes in stock-based compensation benefits and operational results by jurisdiction. An increase in our Non-GAAP Nominal Tax Rate of 1 percent would result in an additional income tax provision for the three and ninesix months ended JanuaryOctober 29, 2021 of approximately $20$21 million and $46$43 million, respectively.
Certain Tax Adjustments
During the three and nine months ended January 29, 2021, the net benefit from certain tax adjustments of $150 million and $130 million, respectively, recognized in income tax provision (benefit) in the consolidated statements of income, included the following. Unless otherwise stated, amounts apply to both the three- and nine-month period.
•A net benefit of $106 million associated with the resolution of an audit at the IRS Appellate level for fiscal years 2012, 2013, and 2014. The issues resolved relate to the utilization of certain net operating losses and the allocation of income between Medtronic, Inc. and its wholly owned subsidiary operating in Puerto Rico for businesses that are not the subject of the U.S. Tax Court Case for fiscal years 2005 and 2006.
•A benefit of $83 million related to the capitalization of certain research and development costs for U.S. income tax purposes and the establishment of a deferred tax asset at the U.S. federal statutory tax rate.
•A net cost of $27 million associated with an internal restructuring and intercompany sale of assets.
•A cost of $12 million and $35 million for the three and nine months ended January 29, 2021, respectively, associated with the amortization of the previously established deferred tax assets from intercompany intellectual property transactions.
•A benefit of $3 million for the nine months ended January 29, 2021 associated with the finalization of an intercompany sale of intellectual property and the establishment of a deferred tax asset. The cumulative amount of deferred tax benefit previously recognized from intercompany intellectual property transactions and recorded as Certain Tax Adjustments is $1.5 billion. The corresponding deferred tax assets will be amortized over a period of approximately 20 years.
During the three and nine months ended January 24, 2020, the net benefit from certain tax adjustments of $558 million and $839 million, respectively, recognized in income tax provision (benefit) in the consolidated statements of income, included the following. Unless otherwise stated, amounts apply to both the three- and nine-month period.
•A benefit of $558 million related to the release of a valuation allowance previously recorded against certain net operating losses. Luxembourg enacted tax legislation during the three months ended January 24, 2020, which required the Company to reassess the realizability of certain net operating losses. The Company evaluated both the positive and negative evidence and released valuation allowance equal to the expected benefit from the utilization of certain net operating losses in connection with a planned intercompany sale of intellectual property.
•A net benefit of $30 million for the nine months ended January 24, 2020 related to U.S. Treasury’s issuance of certain Final Regulations associated with U.S. Tax Reform. The primary impact of these regulations resulted in the Company re-establishing its permanently reinvested assertion on certain foreign earnings and reversing the previously accrued tax liability. This benefit was partially offset by additional tax associated with a previously executed internal reorganization of certain foreign subsidiaries.
•A benefit of $251 million for the nine months ended January 24, 2020 related to tax legislative changes in Switzerland that abolished certain preferential tax regimes the Company benefited from and replaced them with a new set of internationally accepted measures. The legislation provided for higher effective tax rates, but allowed for a transitional period whereby an amortizable asset was created for Swiss federal income tax purposes that will be amortized and deducted over a 10-year period.
LIQUIDITY AND CAPITAL RESOURCES
We are currently in a strong financial position. Despite the impact from COVID-19 on operating cash flowposition, and net income, we believe our balance sheet and liquidity as of October 29, 2021 provide us with flexibility, and our cash, cash equivalents, and current investments, as well asalong with our credit facility and related commercial paper programs outlined below, will satisfy our foreseeable operating needs. We believe we have ample liquidity, with $14.6 billion of cash and investments as of January 29, 2021, and an undrawn $3.5 billion credit facility, with $3.8 billion of debt obligations due within twelve months of January 29, 2021. Given our strong financial position, we are continuing to focus on making capital allocation decisions to drive our long-term strategies.
Our liquidity and capital structure isare evaluated regularly within the context of our annual operating and strategic planning process.processes. We consider the liquidity necessary to fund our operations, which includes working capital needs, investments in research and development, property, plant, and equipment, and other operating costs. We also consider capital allocation alternatives that balance returning value to shareholders through dividends and share repurchases, satisfying maturing debt, and acquiring businesses and technology.
Summary of Cash Flows
The following is a summary of cash provided by (used in) operating, investing, and financing activities, the effect of exchange rate changes on cash and cash equivalents, and the net change in cash and cash equivalents:
| | | Nine months ended | | Six months ended |
(in millions) | (in millions) | January 29, 2021 | | January 24, 2020 | (in millions) | October 29, 2021 | | October 30, 2020 |
Cash provided by (used in): | Cash provided by (used in): | | | | Cash provided by (used in): | | | |
Operating activities | Operating activities | $ | 4,495 | | | $ | 5,784 | | Operating activities | $ | 3,061 | | | $ | 2,139 | |
Investing activities | Investing activities | (4,785) | | | (3,568) | | Investing activities | (1,493) | | | (2,012) | |
Financing activities | Financing activities | 993 | | | (2,888) | | Financing activities | (2,210) | | | 1,991 | |
Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | 234 | | | (12) | | Effect of exchange rate changes on cash and cash equivalents | (51) | | | 162 | |
Net change in cash and cash equivalents | Net change in cash and cash equivalents | $ | 937 | | | $ | (684) | | Net change in cash and cash equivalents | $ | (693) | | | $ | 2,280 | |
Operating Activities The $1.3 billion decrease$922 million increase in net cash provided was primarily driven by a decreasean increase in cash collected from customers, andpartially offset by an increase in cash paid for income taxes partially offset by a decrease inand cash paid to employees and a decrease in payments made for employer taxes.employees. The decreaseincrease in cash collected from customers was primarily related to COVID-19 driving decreased sales in the fourth quarter of fiscal year 2020 and first quarter of fiscal year 2021, when compared to the corresponding periods in the prior fiscal year. Our relative sales performance in theand second and third quarters of fiscal year 2021 compared to the prior fiscal year did not have a significant impact on our net cash provided.2021. The increase in cash paid for income taxes in the six months ended October 29, 2021 was primarily due to a tax payments
payment associated with IRSa foreign audit settlements in the three months ended January 29, 2021.settlement as well as estimated income tax payments. Cash paid to employees decreasedincreased due to lowerhigher annual incentive plan payouts compared to the corresponding period in the prior fiscal year. Payments made for employee tax withholdings decreased due to the deferral of payment on the Company's share of Social Security taxes allowed by the CARES Act in the current fiscal year.
Investing ActivitiesThe $1.2 billion increase$519 million decrease in net cash used was primarily attributable to an increasea decrease in net purchases of $349 million, and decrease of cash paid for acquisitions of $777 million and an increase in net purchases of investments of $237$279 million during the ninesix months ended JanuaryOctober 29, 2021, as compared to the corresponding period in the prior fiscal year.
Financing Activities The $3.9$4.2 billion increase in net cash providedused was primarily attributable tolargely the result of the Mizuho Bank term loan under which the Company borrowed $2.8 billion in the first quarter of the prior fiscal year, 2021,and as well as the net proceeds from the debt issuance and early redemption described below. Also contributing to the total increase in cash providedused was the decreaseincrease in net cash used for share repurchases of $1.1 billion. Cash flow activity related to share repurchases for$676 million. For the ninesix months ended January 29, 2021 is related to cash remitted to taxing authorities for shares withheld for employee taxes on share-based payment deliveries and exercises; the Company did not repurchase any shares during the nine months ended January 29, 2021. Partially offsetting these items was a net decrease in short-term borrowings of $328 million and a decrease in the issuance of ordinary shares of $271 million when compared to the corresponding period in the prior fiscal year. For the nine months ended January 29, 2021,October 30, 2020 financing cash flows were impacted by the issuance of $7.2 billion of Euro-denominated senior notes offset by the early redemption of $6.0 billion of senior notes for $6.3 billion of total consideration. For comparison, financing cash flows for the nine months ended January 24, 2020 were impacted by the issuance of $5.6 billion of Euro-denominated senior notes, offset by the tender of $5.2 billion of senior notes for $5.6 billion of total consideration. For more information on the aforementioned Mizuho Bank term loan, and issuances and redemptions of senior notes, refer to the Debt and Capital section.
Free Cash Flow
Free cash flow, a non-GAAP financial measure, is calculated by subtracting additions to property, plant, and equipment from net cash provided by operating activities. Management uses this non-GAAP financial measure, in addition to U.S. GAAP financial measures, to evaluate our operating results. Free cash flow should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with U.S. GAAP. Reconciliations between net cash provided by operating activities (the most comparable U.S. GAAP measure) and free cash flow are as follows:
| | | | | | | | | | | |
| Nine months ended |
(in millions) | January 29, 2021 | | January 24, 2020 |
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Net cash provided by operating activities | $ | 4,495 | | $ | 5,784 |
Additions to property, plant, and equipment | (978) | | (877) |
Free cash flow | $ | 3,517 | | $ | 4,907 |
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ReferNote 7 to the Summary of Cash Flows section for drivers of the change in cash provided by operating activities.current period's consolidated financial statements.
Debt and Capital
Our capital structure consists of equity and interest-bearing debt. We use a combination of bank borrowings and commercial paper issuances to fund our short-term financing needs andprimarily utilize unsecured senior debt obligations to meet our long-term financing needs.needs and, to a lesser extent, bank borrowings. From time to time, we may repurchase our outstanding debt obligations in the open market or through privately negotiated transactions. Current
Total debt at JanuaryOctober 29, 2021 including the current portion of our long-term debt and finance lease obligations, was $3.8$25.6 billion as compared to $2.8$26.4 billion at April 24, 2020. Long-term debt at January 29, 2021 was $26.5 billion as compared to $22.0 billion at April 24, 2020.30, 2021. The increasedecrease in total debt was driven by an unsecured term loan agreement with Mizuho Bank and the net impact of issuance and redemption of senior notes, both of which are described below. Additionally, fluctuations in exchangesexchange rates also contributed to the increase in total debt, particularly as it pertains to our Euro-denominated senior notes.
In May 2020, we entered into an unsecured term loan agreement with Mizuho Bank, Ltd. for an aggregate principal amount of up to ¥300 billion, or approximately $2.8 billion, with a term of six months and the option to extend for an additional six months. On May 13, 2020, Medtronic Luxco borrowed the entire amount of the term loan under the Loan Agreement. The proceeds of the loan were used for general corporate purposes. The Japanese Yen denominated debt is designatedWe repurchase our ordinary shares on occasion as a net investment hedge of certainpart of our Japanese operations. On November 12, 2020, we exercisedfocus on returning value to our option to extendshareholders. In March 2019, the termCompany's Board of Directors authorized the loan for an additional six months.
In September 2020, we issued six tranches of Euro-denominated senior notes with an aggregate principal of €6.3 billion, with maturities ranging from fiscal year 2023 to fiscal year 2051, resulting in cash proceeds of approximately $7.2 billion, net of discounts and issuance costs. The Euro-denominated debt is designated as a net investment hedge of certain of our European operations. We used the net proceeds of the offering to fund the early redemptionrepurchase of $6.0 billion of senior notesthe Company's ordinary shares. There is no specific time period associated with these repurchase authorizations. During the six months ended October 29, 2021, the Company repurchased a total of 5 million shares under this program at an average price of $127.49. At October 29, 2021, we had approximately $4.7 billion remaining under the share repurchase program authorized by our Board of Directors.
For more information on credit arrangements, refer to Note 7 to the current period's consolidated financial statements and Note 6 to the consolidated financial statements included in our Annual Report on Form 10-K for $6.3the fiscal year ended April 30, 2021.
Liquidity
Our liquidity sources at October 29, 2021 included $2.9 billion of total consideration in October 2020.cash and cash equivalents and $7.8 billion of current investments. Additionally, we intendmaintain a commercial paper program and a Credit Facility.
Our investments primarily include available-for-sale debt securities, including U.S. and non-U.S. government and agency securities, corporate debt securities, mortgage-backed securities, and other asset-backed securities. Refer to use proceedsNote 6 to repay our €750 million floating rate senior notes at maturity in March 2021. We recognized a loss on debt extinguishment of $308 million during the second quarter of fiscal year 2021, which primarily included cash premiums and accelerated amortization of deferred financing costs and debt discounts and premiums. The loss on debt extinguishment was recognized in interest expense in thecurrent period's consolidated financial statements of income.for additional information regarding fair value measurements.
We maintain multicurrency commercial paper programs for short-term financing, which allow us to issue unsecured commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $3.5 billion. At both JanuaryOctober 29, 2021 and April 24, 2020,30, 2021, we had no commercial paper outstanding. The issuance of commercial paper reduces the amount of credit available under our existing line of credit, as explained below.
We also have a $3.5 billion five-year syndicated credit facility (Credit Facility), which expires in December 2025. The Credit Facility provides backup funding for the commercial paper programs and may also be used for general corporate purposes. The Credit Facility provides us with the ability to increase our borrowing capacity by an additional $1.0 billion at any time during the term of the agreement. At each anniversary date of the Credit Facility, but not more than twice prior to the maturity date, we could also request a one-year extension of the maturity date. At JanuaryOctober 29, 2021 and April 24, 2020,30, 2021, no amounts were outstanding under the Credit Facility.
Interest rates on advances of our Credit Facility are determined by a pricing matrix based on our long-term debt ratings assigned by Standard & Poor's Ratings Services (S&P) and Moody's Investors Service (Moody’s). For additional information on our credit ratings status by S&P and Moody's, refer to the "Liquidity" section of this Management's Discussion and Analysis. Facility fees are payable on the Credit Facility and are determined in the same manner as the interest rates. The agreements also contain covenants, all of which weWe are in compliance with.with all covenants related to the Credit Facility.
We repurchase our ordinary shares from time to time as partThe following table is a summary of our focus on returning value to our shareholders. In March 2019, our Board of Directors authorized an incremental $6.0 billion in excess of prior authorizations for repurchase of our ordinary shares. There is no specific time period associated with these repurchase authorizations. The Company made no repurchases of ordinary shares during the nine months ended January 29, 2021. We had approximately $6.0 billion remaining under the share repurchase program authorized by our Board of Directors as of January 29, 2021.
For more information on credit arrangements, refer to Note 7 to the current period's consolidated financial statementsS&P and Note 7 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 24, 2020.
Liquidity
Our liquidity sources at January 29, 2021 include $5.1 billion of cash and cash equivalents and $9.6 billion of current investments. Additionally, we maintain a commercial paper program and Credit Facility. See discussion above regarding changes in our cash and cash equivalents and commercial paper program and Credit Facility.
Our investments include available-for-sale and held-to-maturity debt securities, including U.S. and non-U.S. government and agency securities, corporate debt securities, mortgage-backed securities, other asset-backed securities, auction rate securities, and term deposits. Some of our investments may experience reduced liquidity due to changes in market conditions and investor demand. Based on our assessment of the credit quality of the underlying collateral and credit support available to each of the remaining securities in which we are invested, we believe we have recognized all necessary impairments as we do not have the intent to sell, nor is it more likely than not that we will be required to sell, before recovery of the amortized cost. At January 29, 2021, we had $30 million of gross unrealized losses on our aggregate available-for-sale debt securities of $8.7 billion. If market conditions deteriorate, some of these holdings may experience impairments in the future, which could adversely affect our financial results. We are required to use estimates and assumptions in our valuation of investments, which requires a high degree of judgment, and therefore, actual results could differ materially from estimates. Refer to Note 6 to the current period's consolidated financial statements for additional information regarding fair value measurements.
The table below includes our short-term andMoody's long-term debt ratings from S&P and Moody's at both January 29, 2021 and April 24, 2020:short-term debt ratings:
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| | Agency Rating(1) |
| | JanuaryOctober 29, 2021 | | April 24, 202030, 2021 |
Standard & Poor's Ratings Services | | | | |
Long-term debt | | A | | A |
Short-term debt | | A-1 | | A-1 |
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Moody's Investors Service | | | | |
Long-term debt | | A3 | | A3 |
Short-term debt | | P-2 | | P-2 |
(1) Agency ratings are subject to change, and there may be no assurance that an agency will continue to provide ratings and/or maintain its current ratings. A security rating is not a recommendation to buy, sell or hold securities, and may be subject to revision or withdrawal at any time by the rating agency, and each rating should be evaluated independently of any other rating.
S&P and Moody's long-term debt ratings and short-term debt ratings at JanuaryOctober 29, 2021 were unchanged as compared to the ratings at April 24, 2020.30, 2021. We do not expect the S&P and Moody's ratings to have a significant impact on our liquidity or future flexibility to access additional liquidity given our balance sheet, and Credit Facility, and related commercial paper program.programs.
We have future contractual obligations and other minimum commercial commitments that are entered into in the normal course of business. We believe our off-balance sheet arrangements do not have a material current or anticipated future effect on our consolidated earnings, financial position, and/or cash flows. Refer to the "Off-Balance Sheet Arrangements and Long-Term Contractual Obligations" section of this Management's Discussion and Analysis for more information on these obligations and commitments.
Note 16 to the current period's consolidated financial statements provides information regarding amounts we have accrued related to legal matters. In accordance with U.S. GAAP, we record a liability in our consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. Actual settlements may be different than estimated and could have a material effect on our consolidated earnings, financial position, and/or cash flows.
We record tax liabilities in our consolidated financial statements for amounts that we expect to repatriate from subsidiaries (to the extent the repatriation would be subject to tax); however, no tax liabilities are recorded for amounts that we consider to be permanently reinvested. We expect to have access to the majority of our cash flows in the future. In addition, we continue to evaluate our legal entity structure supporting our business operations, and to the extent such evaluation results in a change to our overall business structure, we may be required to accrue for additional tax obligations.
We believe our balance sheet and liquidity provide us with flexibility, and that our cash, cash equivalents, and current investments, as well as our Credit Facility and related commercial paper program, will satisfy our foreseeable operating needs for at least the next 12 months. We regularly review our capital needs and consider various investing and financing alternatives to support our requirements.
Off-Balance Sheet Arrangements and Long-Term Contractual Obligations
There have been no material changes to our off-balance sheet arrangements as reported in our most recent Annual Report filed on Form 10-K for the fiscal year ended April 24, 2020. Refer to the Debt and Capital section above for changes in debt obligations during the second quarter of fiscal year 2021; there were no other material changes to our long-term contractual obligations as reported in our most recent Annual Report filed on Form 10-K for the fiscal year ended April 24, 2020.30, 2021.
ACQUISITIONS
Intersect ENT Pending Acquisition
On August 6, 2021, Medtronic and Intersect ENT entered into a definitive agreement in which Medtronic will acquire all outstanding shares of Intersect ENT for $28.25 per share in an all-cash transaction valued at approximately $1.1 billion. The acquisition is expected to close toward the end of fiscal year 2022 pending clearance of anti-trust filings, and other closing conditions.
Additional information regarding acquisitions is included in Note 4 to the current period's consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
We have used various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies are disclosed in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021.
The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires us to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates reflect our best judgment about economic and market conditions and the potential effects on the valuation and/or carrying value of assets and liabilities based upon relevant information available. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
As of October 29, 2021, there were no material changes to our critical accounting estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 2 to the current period's consolidated financial statements.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
Medtronic plc and Medtronic Global Holdings S.C.A. (Medtronic Luxco), a wholly-owned subsidiary guarantor, each have provided full and unconditional guarantees of the obligations of Medtronic, Inc., a wholly-owned subsidiary issuer, under the Senior Notes (Medtronic Senior Notes) and full and unconditional guarantees of the obligations of Covidien International Finance S.A. (CIFSA), a wholly-owned subsidiary issuer, under the Senior Notes (CIFSA Senior Notes). The guarantees of the CIFSA Senior Notes are in addition to the guarantees of the CIFSA Senior Notes by Covidien Ltd. and Covidien Group Holdings Ltd., both of which are wholly-owned subsidiary guarantors of the CIFSA Senior Notes. Medtronic plc and Medtronic, Inc. each have provided a full and unconditional guarantee of the obligations of Medtronic Luxco under the Senior Notes (Medtronic Luxco Senior Notes). The following is a summary of these guarantees:
Guarantees of Medtronic Senior Notes
•Parent Company Guarantor -– Medtronic plc
•Subsidiary Issuer -– Medtronic, Inc.
•Subsidiary Guarantor -– Medtronic Luxco
Guarantees of Medtronic Luxco Senior Notes
•Parent Company Guarantor -– Medtronic plc
•Subsidiary Issuer -– Medtronic Luxco
•Subsidiary Guarantor -– Medtronic, Inc.
Guarantees of CIFSA Senior Notes
•Parent Company Guarantor -– Medtronic plc
•Subsidiary Issuer -– CIFSA
•Subsidiary Guarantors -– Medtronic Luxco, Covidien Ltd., and Covidien Group Holdings Ltd. (CIFSA Subsidiary Guarantors)
The following tables present summarized results of operations for the ninesix months ended JanuaryOctober 29, 2021 and summarized balance sheet information at JanuaryOctober 29, 2021 and April 24, 202030, 2021 for the obligor groups of Medtronic and Medtronic Luxco Senior Notes, and CIFSA Senior Notes. The obligor group consists of the parent company guarantor, subsidiary issuer, and subsidiary guarantors for the applicable senior notes. The summarized financial information is presented after elimination of (i) intercompany transactions and balances among the guarantors and issuers and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor or issuer.
The summarized results of operations information for the ninesix months ended JanuaryOctober 29, 2021 was as follows:
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(in millions) | Medtronic & Medtronic Luxco Senior Notes (1) | | CIFSA Senior Notes (2) |
Net sales | $ | 1,448 | | | $ | — | |
Operating profit (loss) | (301) | | | (59) | |
Loss before income taxes | (1,247) | | | (656) | |
Net loss attributable to Medtronic | (920) | | | (640) | |
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(in millions) | Medtronic & Medtronic Luxco Senior Notes (1) | | CIFSA Senior Notes (2) |
Net sales | $ | 1,004 | | | $ | — | |
Operating profit (loss) | 247 | | | 18 | |
Loss before income taxes | (234) | | | (435) | |
Net loss attributable to Medtronic | (221) | | | (469) | |
The summarized balance sheet information at JanuaryOctober 29, 2021 was as follows:
| (in millions) | (in millions) | Medtronic & Medtronic Luxco Senior Notes (1) | | CIFSA Senior Notes (2) | (in millions) | Medtronic & Medtronic Luxco Senior Notes (1) | | CIFSA Senior Notes (2) |
Total current assets(3) | Total current assets(3) | $ | 21,863 | | | $ | 10,540 | | Total current assets(3) | $ | 18,890 | | | $ | 7,094 | |
Total noncurrent assets(4) | Total noncurrent assets(4) | 11,476 | | | 7,978 | | Total noncurrent assets(4) | 11,706 | | | 8,165 | |
Total current liabilities(5) | Total current liabilities(5) | 38,845 | | | 20,425 | | Total current liabilities(5) | 28,108 | | | 17,322 | |
Total noncurrent liabilities(6) | Total noncurrent liabilities(6) | 54,695 | | | 60,759 | | Total noncurrent liabilities(6) | 56,095 | | | 65,103 | |
Noncontrolling interests | Noncontrolling interests | 170 | | | 170 | | Noncontrolling interests | 168 | | | 168 | |
(1)The Medtronic Senior Notes and Medtronic Luxco Senior Notes obligor group consists of the following entities: Medtronic plc, Medtronic Luxco, and Medtronic, Inc. Please referRefer to the guarantee summary above for further details.
(2)The CIFSA Senior Notes obligor group consists of the following entities: Medtronic plc, Medtronic Luxco, CIFSA, and CIFSA Subsidiary Guarantors. Please referRefer to the guarantee summary above for further details.
(3)Includes receivables due from non-guarantor subsidiaries of $19.7$18.2 billion and $8.9$6.9 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
(4)Includes loans receivable due from non-guarantor subsidiaries of $6.5 billion and $8.1 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
(5)Includes payables due to non-guarantor subsidiaries of $26.4 billion and $17.2 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
(6)Includes loans payable due to non-guarantor subsidiaries of $29.1 billion and $46.0 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
The summarized balance sheet information at April 30, 2021 was as follows:
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(in millions) | Medtronic & Medtronic Luxco Senior Notes (1) | | CIFSA Senior Notes (2) |
Total current assets(3) | $ | 21,901 | | | $ | 9,038 | |
Total noncurrent assets(4) | 11,597 | | | 8,041 | |
Total current liabilities(5) | 28,484 | | | 17,413 | |
Total noncurrent liabilities(6) | 56,772 | | | 63,328 | |
Noncontrolling interests | 174 | | | 174 | |
(1)The Medtronic Senior Notes and Medtronic Luxco Senior Notes obligor group consists of the following entities: Medtronic plc, Medtronic Luxco, and Medtronic, Inc. Refer to the guarantee summary above for further details.
(2)The CIFSA Senior Notes obligor group consists of the following entities: Medtronic plc, Medtronic Luxco, CIFSA, and CIFSA Subsidiary Guarantors. Refer to the guarantee summary above for further details.
(3)Includes receivables due from non-guarantor subsidiaries of $21.4 billion and $9.0 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
(4)Includes loans receivable due from non-guarantor subsidiaries of $6.5 billion and $8.0 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
(5)Includes payables due to non-guarantor subsidiaries of $32.7$26.4 billion and $16.5$17.3 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
(6)Includes loans payable due to non-guarantor subsidiaries of $26.6$29.0 billion and $40.8$43.5 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
The summarized balance sheet information at April 24, 2020 was as follows:
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(in millions) | Medtronic & Medtronic Luxco Senior Notes (1) | | CIFSA Senior Notes (2) |
Total current assets(3) | $ | 19,563 | | | $ | 49 | |
Total noncurrent assets(4) | 18,516 | | | 14,966 | |
Total current liabilities(5) | 41,263 | | | 16,180 | |
Total noncurrent liabilities(6) | 44,480 | | | 50,059 | |
Noncontrolling interests | 135 | | | 135 | |
(1)The Medtronic Senior Notes and Medtronic Luxco Senior Notes obligor group consists of the following entities: Medtronic plc, Medtronic Luxco, and Medtronic, Inc. Please refer to the guarantee summary above for further details.
(2)The CIFSA Senior Notes obligor group consists of the following entities: Medtronic plc, Medtronic Luxco, CIFSA, and CIFSA Subsidiary Guarantors. Please refer to the guarantee summary above for further details.
(3)Includes receivables due from non-guarantor subsidiaries of $19.1 billion and $34 million for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
(4)Includes loans receivable due from non-guarantor subsidiaries of $13.7 billion and $15.0 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
(5)Includes payables due to non-guarantor subsidiaries of $37.0 billion and $13.6 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
(6)Includes loans payable due to non-guarantor subsidiaries of $21.7 billion and $37.9 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
CAUTIONARY NOTE REGARDING FORWARD LOOKINGFORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, and other written reports and oral statements made by or with the approval of one of the Company’s executive officers from time to time, may include “forward-looking” statements. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans, objectives of management for future operations and current expectations or forecasts of future results, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Our forward-looking statements may include statements related to our growth and growth strategies, developments in the markets for our products, therapies and services, financial results, product development launches and effectiveness, research and development strategy, regulatory approvals, competitive strengths, the potential or anticipated direct or indirect impact of COVID-19 on our business, results of operations, and/or financial condition, restructuring and cost-saving initiatives, intellectual property rights, litigation and tax matters, governmental proceedings and investigations, mergers and acquisitions, divestitures, market acceptance of our products, therapies and services, accounting estimates, financing activities, ongoing contractual obligations, working capital adequacy, value of our investments, our effective tax rate, our expected returns to shareholders, and sales efforts. In some cases, such statements may be identified by the use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “looking ahead,” “may,” “plan,” “possible,” “potential,” “project,” “should,” “will,” and similar words or expressions. Forward-looking statements in this Quarterly Report include, but are not limited to, statements regarding our ability to drive long-term shareholder value, development and future launches of products and continued or future acceptance of products, therapies and services in our segments; expected timing for completion of research studies relating to our products; market positioning and performance of our products, including stabilization of certain product markets; divestitures and the potential benefits thereof; the costs and benefits of integrating previous acquisitions; anticipated timing for United States (U.S.) Food and Drug Administration (U.S. FDA) and non-U.S. regulatory approval of new products; increased presence in new markets, including markets outside the U.S.; changes in the market and our market share; acquisitions and investment initiatives, as well as integration of acquired companies into our operations; the resolution of tax matters; the effectiveness of our development activities in reducing patient care costs and hospital stay lengths; our approach towards cost containment; our expectations regarding healthcare costs, including potential changes to reimbursement policies and pricing pressures; our expectations regarding changes to patient standards of care; our ability to identify and maintain successful business partnerships; the elimination of certain positions or costs related to restructuring initiatives; outcomes in our litigation matters and governmental proceedings and investigations; general economic conditions; the adequacy of available working capital and our working capital needs; our payment of dividends and redemption of shares; the continued strength of our balance sheet and liquidity; our accounts receivable exposure; and the potential impact of our compliance with governmental regulations and accounting guidance.
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, results of operations, and/or cash flows. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking
statements as predictions of future events. One must carefully consider forward-looking statements and understand that such forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, and involve a variety of risks and uncertainties, known and unknown, including, among others, those discussed in the sections entitled “Government Regulation and Other Considerations”Regulation” within “Item 1. Business” and “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as well as those related to:
•the COVID-19 pandemic, andincluding new COVID-19 variants that may emerge from time to time, as well as potential impacts of the actions of businesses, communities, and governments in response;pandemic on healthcare staffing levels;
•competition in the medical device industry;
•reduction or interruption in our supply;
•laws and governmental regulations;
•quality problems;
•liquidity shortfalls;
•decreasing prices and pricing pressure;
•fluctuations in currency exchange rates;
•changes in applicable tax rates;
•positions taken by taxing authorities;
•adverse regulatory action;
•delays in regulatory approvals;
•litigation results;
•self-insurance;
•commercial insurance;
•healthcare policy changes;
•international operations;
•cybersecurity incidents;
•failure to complete or achieve the intended benefits of acquisitions or divestitures; or
•disruption of our current plans and operations.
Consequently, no forward-looking statement may be guaranteed, and actual results may vary materially from those projected in the forward-looking statements. We intend to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding our forward-looking statements and are including this sentence for the express purpose of enabling us to use the protections of the safe harbor with respect to all forward-looking statements. While we may elect to update these forward-looking statements at some point in the future, whether as a result of any new information, future events, or otherwise, we have no current intention of doing so except to the extent required by applicable law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
CURRENCY EXCHANGE RATE RISK
Due to the global nature of our operations, we are exposed to currency exchange rate changes, which may cause fluctuations in earnings and cash flows. We use operational and economic hedges, including currency exchange rate derivative instruments to manage the impact of currency exchange rate fluctuations. In order to minimize earnings and cash flow volatility resulting from currency exchange rate fluctuations, we enter into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated transactions in other currencies and changes in the value of specific assets and liabilities. At inception of the contract, the derivative instrument is designated as either a freestanding derivative or a cash flow hedge. Currencies of our derivative instruments include the Euro, Japanese Yen, Chinese Yuan, and others. Fluctuations in the currency exchange rates of currency exposures that are unhedged, such as in certain emerging markets, may result in future earnings and cash flow volatility. We do not enter into currency exchange rate derivative instruments for speculative purposes.
The gross notional amount of all currency exchange rate derivative instruments outstanding at JanuaryOctober 29, 2021 and April 24, 202030, 2021 was $14.0$15.2 billion and $11.9$14.7 billion, respectively. At JanuaryOctober 29, 2021, these contracts were in a net unrealized lossgain position of $342$81 million. Additional information regarding our currency exchange rate derivative instruments is included in Note 8 to the current period's consolidated financial statements.
A sensitivity analysis of changes in the fair value of all currency exchange rate derivative contracts at JanuaryOctober 29, 2021 indicates that, if the U.S. dollar uniformly strengthened/weakened by 10 percent against all currencies, it would have the following impact on the fair value of these contracts:
| | | | | | | | |
| | Increase (decrease) |
(in millions) | | JanuaryOctober 29, 2021 |
10% appreciation in the U.S. dollar | | $ | 9281,119 | |
10% depreciation in the U.S. dollar | | (928)(1,119) | |
Any gains and losses on the fair value of derivative contracts would generally be offset by gains and losses on the underlying transactions. These offsetting gains and losses are not reflected in the above analysis.
In the second quarter of fiscal year 2019, we began accounting for our operations in Argentina as highly inflationary, as the prior three-year cumulative inflation rate exceeded 100 percent. The change did not have a material impact on our results for the three and six months ended JanuaryOctober 29, 2021.
INTEREST RATE RISK
We are subject to interest rate risk on our short-term investments and our borrowings. We manage interest rate risk in the aggregate, while focusing on our immediate and intermediate liquidity needs. Our debt portfolio at JanuaryOctober 29, 2021 was comprised of debt predominately denominated in U.S. dollars Euros, and Japanese Yen,Euros, of which substantially all is fixed rate debt. We are also exposed to interest rate changes affecting our investments in interest rate sensitive instruments, which include our marketable debt securities.
A sensitivity analysis of the impact on our interest rate-sensitive financial instruments of a hypothetical 10 basis point change in interest rates, as compared to interest rates at JanuaryOctober 29, 2021, would have the following impact on the fair value of these instruments:
| | | | | | | | |
| | Increase (decrease) |
(in millions) | | JanuaryOctober 29, 2021 |
10 basis point increase in interest rates | | $ | 1725 | |
10 basis point decrease in interest rates | | (17)(25) | |
For a discussion of current market conditions and the impact on our financial condition and results of operations, please see the “Liquidity” section of the current period's Management's Discussion and Analysis. For additional discussion of market risk, refer to Notes 6 and 8 to the current period's consolidated financial statements.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) and changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) are effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. While there were noThe Company has not experienced any material changes in ourimpacts to its internal controlcontrols over financial reporting we continue to monitor and assess the impact ofdespite the COVID-19 pandemic, which has resulted in many of our employees working remotely.pandemic.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
In August 2020, the Securities and Exchange Commission issued an updated ruling regarding the threshold for disclosure of proceedings under environmental laws to which a governmental authority is a party. In accordance with this updated ruling, we have adopted a disclosure threshold of $1 million in such circumstances, as we believe matters under this threshold are not material to the Company. A discussion of the Company’s policies with respect to legal proceedings is included in the management’s discussion and analysis, and our legal proceedings and other loss contingencies are described in Note 16 to the current period's consolidated financial statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
There were noThe following table provides information about the shares repurchased by the Company during the thirdsecond quarter of fiscal year 2021.2022: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as a Part of Publicly Announced Program | | Maximum Approximate Dollar Value of Shares that may yet be Purchased Under the Program |
7/31/2021-8/27/2021 | | 549,022 | | | $ | 129.19 | | | 549,022 | | | $ | 5,009,710,546 | |
8/28/2021-10/1/2021 | | 1,406,270 | | | 130.96 | | | 1,406,270 | | | 4,825,541,853 | |
10/2/2021-10/29/2021 | | 831,807 | | | 124.27 | | | 831,807 | | | 4,722,175,476 | |
Total | | 2,787,099 | | | $ | 128.62 | | | 2,787,099 | | | $ | 4,722,175,476 | |
In March 2019, the Company's Board of Directors authorized the repurchase of $6.0 billion of the Company's ordinary shares. There is no specific time-period associated with these repurchase authorizations.
Item 5. Other Information
Medtronic has engaged in certain activities that it is required to disclose pursuant to Section 13(r)(1)(D)(ii) of the Securities Exchange Act of 1934, as amended. The activities described herein are expressly authorized by the U.S. Government under applicable economic sanctions regulations.
Specifically, Medtronic’s affiliate in Russia, Medtronic Russia LLC (“Medtronic Russia”), is required under Russian law to complete certain notification and filing requirements to Russia’s Federal Security Service (“FSB”) regarding certain Medtronic medical devices that make use of encryption functionality that are imported into Russia. While the FSB has been included on the Specially Designated Nationals (“SDN”) List administered by the Office of Foreign Assets Control (“OFAC”), these activities are and remain authorized. In particular, Cyber General License No. 1B (“Cyber GL 1B”), issued by OFAC, authorizes all transactions ordinarily incident to obtaining such permits from the FSB, provided that certain conditions are met.
Historically, Medtronic has not been required to disclose these lawful dealings with the FSB. However, on March 2, 2021, OFAC designated the FSB pursuant to an additional sanction's authority. While OFAC amended the applicable general license to confirm that all previously authorized dealings with the FSB remain authorized (notwithstanding the additional designation), the designation of the FSB with a [NPWMD] tag pursuant to Executive Order 13382 means that Medtronic is required under Section 13(r)(1)(D)(ii) of the Securities Exchange Act to disclose certain information as a result of this additional designation, as Section 13(r)(1)(D)(ii) does not contain an exception from its reporting requirements for activities that are authorized by the U.S. Government.
During the second quarter of fiscal year 2022, in the normal course of business and consistent with the authorization of Cyber GL 1B, Medtronic Russia filed three notifications with the FSB, as required under local Russian law for the import of medical devices that make use of encryption functionality. These activities did not directly result in any revenues or profits for Medtronic. Medtronic intends to continue engaging in activities for which it is authorized by Cyber GL 1B (or any successor GL), to the extent necessary to comply with local law requirements in Russia.
Item 6. Exhibits
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(a) | | Exhibits | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | 101.SCH | | Inline XBRL Schema Document. |
| | 101.CAL | | Inline XBRL Calculation Linkbase Document. |
| | 101.DEF | | Inline XBRL Definition Linkbase Document. |
| | 101.LAB | | Inline XBRL Label Linkbase Document. |
| | 101.PRE | | Inline XBRL Presentation Linkbase Document. |
| | 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
authorized officer. | | | | | | | | | | | |
| | MEDTRONIC PUBLIC LIMITED COMPANYMedtronic plc | |
| | (Registrant) | |
| | | |
Date: | March 5,December 2, 2021 | /s/ Geoffrey S. MarthaJennifer M. Kirk | |
| | | Geoffrey S. MarthaJennifer M. Kirk | |
| | | Global Controller and Chief ExecutiveAccounting Officer | |
| | | | |
Date: | March 5, 2021 | /s/ Karen L. Parkhill | |
| | Karen L. Parkhill | |
| | Executive Vice President and | |
| | Chief Financial Officer(Principal Accounting Officer) | |