Medtronic plc 10-Q for FY2022 Q1
Medtronic plc (MDT)
10-Q
2021-09-02
For: 2021-07-30
View Original
Added on
April 07, 2026
About this 10-Q
Medtronic plc filed this 10-Q on September 2, 2021, covering the quarter ended July 30, 2021 (FY2022 Q1).
Headline figures
Quarter ended July 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $7.99B
- up 22.7% from $6.51B a year earlier
- Net income
- $763M
- up 56.7% from net income of $487M a year earlier
- Diluted EPS
- $0.56
- up 55.6% from $0.36 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the quarterly period ended | ||||||||
| 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
®
| (Exact name of registrant as specified in its charter) | |||||
| (State of incorporation) | (I.R.S. Employer Identification No.) | ||||
(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:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
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.
| ☒ | 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 August 31, 2021, 1,345,809,975 ordinary shares, par value $0.0001, and 1,872 A preferred shares, par value $1.00, of the registrant were outstanding.
TABLE OF CONTENTS
| Item | Description | Page | ||||||||||||
| 1. | ||||||||||||||
| 2. | ||||||||||||||
| 3. | ||||||||||||||
| 4. | ||||||||||||||
| 1. | ||||||||||||||
| 2. | ||||||||||||||
| 5. | ||||||||||||||
| 6. | ||||||||||||||
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Medtronic plc
Consolidated Statements of Income
(Unaudited)
| Three months ended | |||||||||||||||||||||||
| (in millions, except per share data) | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||
| Net sales | $ | $ | |||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of products sold | |||||||||||||||||||||||
| Research and development expense | |||||||||||||||||||||||
| Selling, general, and administrative expense | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Restructuring charges, net | |||||||||||||||||||||||
| Certain litigation charges, net | ( | ||||||||||||||||||||||
| Other operating expense (income), net | ( | ||||||||||||||||||||||
| Operating profit | |||||||||||||||||||||||
| Other non-operating income, net | ( | ( | |||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax provision | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Net income attributable to noncontrolling interests | ( | ( | |||||||||||||||||||||
| Net income attributable to Medtronic | $ | $ | |||||||||||||||||||||
| Basic earnings per share | $ | $ | |||||||||||||||||||||
| Diluted earnings per share | $ | $ | |||||||||||||||||||||
| Basic weighted average shares outstanding | |||||||||||||||||||||||
| Diluted weighted average shares outstanding | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
Medtronic plc
Consolidated Statements of Comprehensive Income
(Unaudited)
| Three months ended | |||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Unrealized gain on investment securities | |||||||||||||||||||||||
| Translation adjustment | ( | ||||||||||||||||||||||
| Net investment hedge | ( | ||||||||||||||||||||||
| Net change in retirement obligations | |||||||||||||||||||||||
| Unrealized gain (loss) on cash flow hedges | ( | ||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Comprehensive income including noncontrolling interests | |||||||||||||||||||||||
| Comprehensive income attributable to noncontrolling interests | ( | ( | |||||||||||||||||||||
| Comprehensive income attributable to Medtronic | $ | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Medtronic plc
Consolidated Balance Sheets
(Unaudited)
| (in millions) | July 30, 2021 | April 30, 2021 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Investments | |||||||||||
Accounts receivable, less allowances and credit losses of $ | |||||||||||
| Inventories, net | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant, and equipment | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property, plant, and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Tax assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current debt obligations | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued compensation | |||||||||||
| Accrued income taxes | |||||||||||
| Other accrued expenses | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Accrued compensation and retirement benefits | |||||||||||
| Accrued income taxes | |||||||||||
| Deferred tax liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 16) | |||||||||||
| Shareholders’ equity: | |||||||||||
Ordinary shares— par value $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Medtronic plc
Consolidated Statements of Equity
(Unaudited)
| 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 | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
Dividends to shareholders ($ | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under stock purchase and award plans | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | ( | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| July 30, 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 24, 2020 | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
Dividends to shareholders ($ | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under stock purchase and award plans | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Changes to noncontrolling ownership interests | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| July 31, 2020 | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
(1) The cumulative effect of change in accounting principle during the first quarter of fiscal year 2021 resulted from the adoption of accounting guidance that requires the recognition of an allowance that reflects the current estimate of credit losses expected to be incurred over the life of certain financial instruments and financial assets, including trade receivables. As a result of the adoption, the Company adjusted the opening balance of retained earnings for $24 million as of April 25, 2020.
The accompanying notes are an integral part of these consolidated financial statements.
4
Medtronic plc
Consolidated Statements of Cash Flows
(Unaudited)
| Three months ended | |||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | |||||||||
| Operating Activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Provision for doubtful accounts | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Stock-based compensation | |||||||||||
| MCS asset impairment and inventory write-down | |||||||||||
| Other, net | |||||||||||
| Change in operating assets and liabilities, net of acquisitions and divestitures: | |||||||||||
| Accounts receivable, net | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Accounts payable and accrued liabilities | ( | ( | |||||||||
| Other operating assets and liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Investing Activities: | |||||||||||
| Additions to property, plant, and equipment | ( | ( | |||||||||
| Purchases of investments | ( | ( | |||||||||
| Sales and maturities of investments | |||||||||||
| Other investing activities, net | ( | ( | |||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Financing Activities: | |||||||||||
| Change in current debt obligations, net | ( | ||||||||||
| Proceeds from short-term borrowings (maturities greater than 90 days) | |||||||||||
| Payments on long-term debt | ( | ( | |||||||||
| Dividends to shareholders | ( | ( | |||||||||
| Issuance of ordinary shares | |||||||||||
| Repurchase of ordinary shares | ( | ||||||||||
| Other financing activities | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net change in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental Cash Flow Information | |||||||||||
| Cash paid for: | |||||||||||
| Income taxes | $ | $ | |||||||||
| Interest | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
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. While there was not a material impact to the Company’s consolidated financial statements as of and for the three months ended July 30, 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.
2. New Accounting Pronouncements
3. Revenue
6
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
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.
The table below illustrates net sales by segment and division for the three months ended July 30, 2021 and July 31, 2020:
Three months ended | |||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||
| Cardiac Rhythm & Heart Failure | $ | $ | |||||||||||||||||||||
| Structural Heart & Aortic | |||||||||||||||||||||||
| Coronary & Peripheral Vascular | |||||||||||||||||||||||
| Cardiovascular | |||||||||||||||||||||||
| Surgical Innovations | |||||||||||||||||||||||
| Respiratory, Gastrointestinal, & Renal | |||||||||||||||||||||||
| Medical Surgical | |||||||||||||||||||||||
| Cranial & Spinal Technologies | |||||||||||||||||||||||
| Specialty Therapies | |||||||||||||||||||||||
| Neuromodulation | |||||||||||||||||||||||
| Neuroscience | |||||||||||||||||||||||
| Diabetes | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
The table below illustrates net sales by market geography for each segment for the three months ended July 30, 2021 and July 31, 2020:
U.S.(1) | Non-U.S. Developed Markets(2) | Emerging Markets(3) | |||||||||||||||||||||||||||||||||
| Three months ended | Three months ended | Three months ended | |||||||||||||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | July 30, 2021 | July 31, 2020 | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||||||||||
| Cardiovascular | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Medical Surgical | |||||||||||||||||||||||||||||||||||
| Neuroscience | |||||||||||||||||||||||||||||||||||
| Diabetes | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(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 July 30, 2021, $987 million of rebates were classified as other accrued expenses, and $535 million of rebates were classified as a reduction of accounts receivable in the consolidated balance sheet. At April 30, 2021, $906 million of rebates were classified as other accrued expenses, and $485 million of rebates were classified as a reduction of accounts receivable in the consolidated balance sheet. For the three months ended July 30, 2021 and July 31, 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.
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 July 30, 2021 and April 30, 2021 was $375 million and $368 million, respectively. At July 30, 2021 and April 30, 2021, $278 million and $276 million was included in other accrued expenses, and $96 million and $93 million was included in other liabilities, respectively. During the three months ended July 30, 2021, the Company recognized $84 million of revenue that was included in deferred revenue as of April 30, 2021.
7
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
4. Acquisitions
The Company had no acquisitions that were accounted for as business combinations during the three months ended July 30, 2021 or July 31, 2020. For the three months ended July 30, 2021, purchase price allocation adjustments were not significant. During the three months ended July 31, 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.
Acquired In-Process Research & Development (IPR&D)
IPR&D with no alternative future use acquired outside of a business combination is expensed immediately. During the three months ended July 30, 2021, the Company acquired $90 million in connection with asset acquisitions, which was recognized in research and development expense in the consolidated statements of income. During the three months ended July 31, 2020, IPR&D acquired in connection with asset acquisitions was not significant.
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 July 30, 2021 and April 30, 2021 was $294 million and $270 million, respectively. At July 30, 2021, $99 million was recorded in other accrued expenses, and $195 million was recorded in other liabilities in the consolidated balance sheet. At April 30, 2021, $78 million was recorded in other accrued expenses, and $192 million was recorded in other liabilities in the consolidated balance sheet.
8
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The following table provides a reconciliation of the beginning and ending balances of contingent consideration:
| Three months ended | |||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||
| Beginning balance | $ | ||||||||||||||||||||||
| Purchase price allocation adjustments | |||||||||||||||||||||||
| Payments | ( | ( | |||||||||||||||||||||
| Change in fair value | |||||||||||||||||||||||
| Ending balance | $ | $ | |||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||
| (in millions) | July 30, 2021 | Unobservable Input | Range | Weighted Average (1) | ||||||||||||||||||||||||||||
| Discount rate | ||||||||||||||||||||||||||||||||
| Revenue and other performance-based payments | $ | Probability of payment | ||||||||||||||||||||||||||||||
| Projected fiscal year of payment | 2022 - 2027 | 2024 | ||||||||||||||||||||||||||||||
| Discount rate | ||||||||||||||||||||||||||||||||
| Product development and other milestone-based payments | $ | Probability of payment | ||||||||||||||||||||||||||||||
| Projected fiscal year of payment | 2022 - 2027 | 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.
5. Restructuring and Other Costs
Enterprise Excellence
In the third quarter of fiscal year 2018, the Company announced its Enterprise Excellence restructuring program, which was designed to leverage the Company's global size and scale, as well as enhance the customer and employee experience, with a focus on three objectives: global operations, functional optimization, and commercial optimization. Primary activities of 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.
Since 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. 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, the majority of which are expected to be incurred by the end of this fiscal year. 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 and benefits for employees supporting the program, including program management and transition teams, and strategic and operational consulting services related to the three objectives of the program discussed above. 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 months ended July 30, 2021, the Company recognized net charges of $74 million, of which $33 million were recognized within cost of products sold and $30 million were recognized within selling, general, and administrative expense in the consolidated statements of income.
For the three months ended July 31, 2020, the Company recognized net charges of $77 million, of which $27 million were recognized within cost of products sold and $47 million were recognized within selling, general, and administrative expense in the consolidated statements of income.
9
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The following table summarizes the activity related to the Enterprise Excellence restructuring program for the three months ended July 30, 2021:
| (in millions) | Employee Termination Benefits | Associated Costs(1) | Other Costs | Total | |||||||||||||||||||||||||||||||||||||
| April 30, 2021 | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Charges | |||||||||||||||||||||||||||||||||||||||||
| Cash payments | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
Accrual adjustments(2) | ( | ( | |||||||||||||||||||||||||||||||||||||||
| July 30, 2021 | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
(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 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, designed to make the Company a more nimble and competitive organization focused on accelerating innovation, enhancing 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, simplifies the Company's organizational structure and accelerates decision-making and execution. Primary activities of the restructuring program included 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 where 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.
Since inception, the Company has incurred pre-tax exit and disposal costs and other costs, across all segments, of $274 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. 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.
For the three months ended July 30, 2021, the Company recognized net charges of $7 million, which were all recognized within selling, general, and administrative expense in the consolidated statements of income.
For the three months ended July 31, 2020, the Company recognized net charges of $51 million, which primarily included $50 million recognized within restructuring charges, net in the consolidated statements of income, mostly comprised of employee termination benefits.
The following table summarizes the activity related to the Simplification restructuring program for three months ended July 30, 2021:
| (in millions) | Employee Termination Benefits | Associated Costs(1) | Total | ||||||||||||||||||||||||||
| April 30, 2021 | $ | $ | $ | ||||||||||||||||||||||||||
| Charges | |||||||||||||||||||||||||||||
| Cash payments | ( | ( | ( | ||||||||||||||||||||||||||
Accrual adjustments(2) | ( | ( | |||||||||||||||||||||||||||
| July 30, 2021 | $ | $ | $ | ||||||||||||||||||||||||||
(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.
10
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
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 quarter, including $58 million recognized in costs of products sold and $668 million recognized within other operating expense (income), net in the consolidated statement of income. The charges include $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 include charges for patient support obligations, restructuring, and other associated costs. As of July 30, 2021, accruals were recorded in the consolidated balance sheet for these obligations, with $130 million reflected in other accrued expenses and $41 million recorded in other liabilities. Medtronic remains committed to serving the needs of the approximately 4,000 patients currently implanted with the HVAD system.
6. Financial Instruments
Debt Securities
The Company holds investments in marketable debt securities that are classified and accounted for as available-for-sale and are remeasured on a recurring basis. The following tables summarize the Company's investments in available-for-sale debt securities by significant investment category and the related consolidated balance sheet classification at July 30, 2021 and April 30, 2021:
| July 30, 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 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||
| Level 2: | |||||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||||||||||||||
| U.S. government and agency securities | ( | ||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | ( | ||||||||||||||||||||||||||||||||||
| Non-U.S. government and agency securities | |||||||||||||||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||||||||||||||
| Other asset-backed securities | |||||||||||||||||||||||||||||||||||
| Debt funds | |||||||||||||||||||||||||||||||||||
| Total Level 2 | ( | ||||||||||||||||||||||||||||||||||
| Level 3: | |||||||||||||||||||||||||||||||||||
| Auction rate securities | ( | ||||||||||||||||||||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||
11
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
| April 30, 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 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||
| Level 2: | |||||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||||||||||||||
| U.S. government and agency securities | ( | ||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | ( | ||||||||||||||||||||||||||||||||||
| Non-U.S. government and agency securities | |||||||||||||||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||||||||||||||
| Other asset-backed securities | ( | ||||||||||||||||||||||||||||||||||
| Debt funds | |||||||||||||||||||||||||||||||||||
| Total Level 2 | ( | ||||||||||||||||||||||||||||||||||
| Level 3: | |||||||||||||||||||||||||||||||||||
| Auction rate securities | ( | ||||||||||||||||||||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||
The amortized cost of debt securities excludes accrued interest, which is reported in other current assets in the consolidated balance sheets.
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 July 30, 2021 and April 30, 2021:
| July 30, 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 | $ | $ | ( | $ | $ | ||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| Mortgage-backed securities | ( | ||||||||||||||||||||||
| Auction rate securities | ( | ||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| April 30, 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 | $ | $ | ( | $ | $ | ||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| Mortgage-backed securities | ( | ||||||||||||||||||||||
| Other asset-backed securities | ( | ||||||||||||||||||||||
| Auction rate securities | ( | ||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | |||||||||||||||||
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 months ended July 30, 2021 and July 31, 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.
12
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 | |||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||
| Proceeds from sales | $ | $ | |||||||||||||||||||||
| Gross realized gains | |||||||||||||||||||||||
| Gross realized losses | ( | ( | |||||||||||||||||||||
The July 30, 2021 balance of available-for-sale 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.
| (in millions) | July 30, 2021 | ||||
| Due in one year or less | $ | ||||
| Due after one year through five years | |||||
| Due after five years through ten years | |||||
| Due after ten years | |||||
| Total | $ | ||||
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 July 30, 2021 and April 30, 2021, which are classified as other assets in the consolidated balance sheets:
| (in millions) | July 30, 2021 | April 30, 2021 | ||||||||||||
| Investments with readily determinable fair value (marketable equity securities) | $ | $ | ||||||||||||
| Investments without readily determinable fair values | ||||||||||||||
| Equity method and other investments | ||||||||||||||
| Total equity and other investments | $ | $ | ||||||||||||
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 | ||||||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | ||||||||||||||||||||||||
| Proceeds from sales | $ | $ | ||||||||||||||||||||||||
| Gross gains | ||||||||||||||||||||||||||
| Gross losses | ( | |||||||||||||||||||||||||
| Impairment losses recognized | ( | ( | ||||||||||||||||||||||||
13
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
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. No
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 July 30, 2021 and April 30, 2021, no
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.
14
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 | July 30, 2021 | April 30, 2021 | |||||||||||||||||
| Current debt obligations | 2022 - 2023 | $ | $ | |||||||||||||||||
| Long-term debt | ||||||||||||||||||||
| 2023 | ||||||||||||||||||||
| 2023 | ||||||||||||||||||||
| 2023 | ||||||||||||||||||||
| 2025 | ||||||||||||||||||||
| 2026 | ||||||||||||||||||||
| 2026 | ||||||||||||||||||||
| 2027 | ||||||||||||||||||||
| 2027 | ||||||||||||||||||||
| 2029 | ||||||||||||||||||||
| 2031 | ||||||||||||||||||||
| 2032 | ||||||||||||||||||||
| 2033 | ||||||||||||||||||||
| 2035 | ||||||||||||||||||||
| 2038 | ||||||||||||||||||||
| 2039 | ||||||||||||||||||||
| 2039 | ||||||||||||||||||||
| 2040 | ||||||||||||||||||||
| 2040 | ||||||||||||||||||||
| 2041 | ||||||||||||||||||||
| 2042 | ||||||||||||||||||||
| 2043 | ||||||||||||||||||||
| 2044 | ||||||||||||||||||||
| 2045 | ||||||||||||||||||||
| 2050 | ||||||||||||||||||||
| 2051 | ||||||||||||||||||||
| Finance lease obligations | 2022 - 2036 | |||||||||||||||||||
| Deferred financing costs | 2022 - 2051 | ( | ( | |||||||||||||||||
| Debt discount, net | 2022 - 2051 | ( | ( | |||||||||||||||||
| Long-term debt | $ | $ | ||||||||||||||||||
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 Senior Notes.
15
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
In September 2020, Medtronic Global Holdings S.C.A. (Medtronic Luxco) 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 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 used 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 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.
The Euro-denominated debt issued in 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 carried interest at the TIBOR Rate (as defined in the Loan Agreement) plus a margin of 0.50 % per annum. Medtronic plc and Medtronic, Inc. 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 . During the fourth quarter of fiscal year 2021, the Company de-designated the Yen-denominated debt as a net investment hedge and repaid the term loan in full, including interest.
Financial Instruments Not Measured at Fair Value
At July 30, 2021, the estimated fair value of the Company’s Senior Notes was $29.2 billion compared to a principal value of $26.1 billion. At April 30, 2021, the estimated fair value was $28.6 billion compared to a principal value of $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 $15.0 billion and $14.7 billion at July 30, 2021 and April 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 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 July 30, 2021 and April 30, 2021 was $5.2 billion and $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 July 30, 2021 and April 30, 2021 was $235 million and $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
16
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
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 to derivative instruments not designated as hedging instruments for the three months ended July 30, 2021 and July 31, 2020 were as follows:
| Three months ended | ||||||||||||||||||||||||||||||||
| (in millions) | Classification | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||||||||||
| Currency exchange rate contracts | Other operating expense (income), net | $ | ( | $ | ||||||||||||||||||||||||||||
| Total return swaps | Other operating expense (income), net | ( | ( | |||||||||||||||||||||||||||||
| Total | $ | ( | $ | |||||||||||||||||||||||||||||
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 July 30, 2021 and April 30, 2021 was $9.8 billion and $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 months ended July 30, 2021 and July 31, 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 months ended July 30, 2021 and July 31, 2020 were as follows:
| Three months ended | ||||||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | ||||||||||||||||||||||||
| Currency exchange rate contracts | $ | ( | $ | |||||||||||||||||||||||
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 months ended July 30, 2021 and July 31, 2020 were as follows:
| Three months ended | ||||||||||||||||||||||||||||||||||||||
| July 30, 2021 | July 31, 2020 | |||||||||||||||||||||||||||||||||||||
| (in millions) | Cost of products sold | Other operating expense (income), net | Cost of products sold | 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 | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||||||||
| Currency exchange rate contracts designated as cash flow hedges: | ||||||||||||||||||||||||||||||||||||||
| Amount of (gain) loss reclassified from AOCI into income | ( | |||||||||||||||||||||||||||||||||||||
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 months ended July 30, 2021 and July 31, 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.
17
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
At July 30, 2021 and April 30, 2021, the Company had $79 million and $253 million in after-tax net unrealized losses, respectively, associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $33 million of after-tax net unrealized losses at July 30, 2021 will be recognized in the consolidated statements of income over the next 12 months.
Net Investment Hedges
The Company has designated Euro-denominated debt as a net investment hedge of certain of its European operations to manage the exposure to currency and exchange rate movements for foreign currency-denominated net investments in foreign operations. At July 30, 2021, the Company had €16.0 billion, or $18.9 billion, of outstanding Euro-denominated debt designated as a hedge of its net investment in certain of its European operations. The Euro-denominated debt will mature in fiscal years 2023 through 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 July 30, 2021 and April 30, 2021, the Company had $1.0 billion and $1.5 billion in after-tax unrealized losses, respectively, associated with net investment hedges recorded in accumulated other comprehensive loss. The Company does no t expect any of the after-tax unrealized gains at July 30, 2021 to be recognized in the consolidated statements of income over the next 12 months.
The Company did no
The amount of the (gains) losses recognized in AOCI related to instruments designated as net investment hedges for the three months ended July 30, 2021 were as follows:
| Three months ended | ||||||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | ||||||||||||||||||||||||
| Net investment hedges | $ | ( | $ | |||||||||||||||||||||||
Balance Sheet Presentation
The following tables summarize the balance sheet classification and fair value of derivative instruments included in the consolidated balance sheets at July 30, 2021 and April 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.
| July 30, 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 | $ | Other accrued expenses | $ | |||||||||||||||||||
| Currency exchange rate contracts | Other assets | Other liabilities | |||||||||||||||||||||
| Total derivatives designated as hedging instruments | |||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||
| Currency exchange rate contracts | Other current assets | Other accrued expenses | |||||||||||||||||||||
| Total return swaps | Other current assets | Other accrued expenses | |||||||||||||||||||||
| Total derivatives not designated as hedging instruments | |||||||||||||||||||||||
| Total derivatives | $ | $ | |||||||||||||||||||||
18
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
| April 30, 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 | $ | Other accrued expenses | $ | |||||||||||||||||||
| Currency exchange rate contracts | Other assets | Other liabilities | |||||||||||||||||||||
| Total derivatives designated as hedging instruments | |||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||
| Currency exchange rate contracts | Other current assets | Other accrued expenses | |||||||||||||||||||||
| Total return swaps | Other current assets | Other accrued expenses | |||||||||||||||||||||
| Total derivatives not designated as hedging instruments | |||||||||||||||||||||||
| Total derivatives | $ | $ | |||||||||||||||||||||
The following table provides information by level for the derivative assets and liabilities that are measured at fair value on a recurring basis.
| July 30, 2021 | April 30, 2021 | ||||||||||||||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 1 | Level 2 | |||||||||||||||||||||||||||||||
| Derivative assets | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Derivative liabilities | |||||||||||||||||||||||||||||||||||
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.
| July 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 | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||
| Total return swaps | ||||||||||||||||||||||||||||||||
| ( | ||||||||||||||||||||||||||||||||
| Derivative liabilities: | ||||||||||||||||||||||||||||||||
| Currency exchange rate contracts | ( | ( | ||||||||||||||||||||||||||||||
| Total | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||
19
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
| 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 | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||
| Total return swaps | ||||||||||||||||||||||||||||||||
| ( | ||||||||||||||||||||||||||||||||
| Derivative liabilities: | ||||||||||||||||||||||||||||||||
| Currency exchange rate contracts | ( | ( | ||||||||||||||||||||||||||||||
| Total | $ | ( | $ | $ | $ | ( | ||||||||||||||||||||||||||
9. Inventories
Inventory balances, net of reserves, were as follows:
| (in millions) | July 30, 2021 | April 30, 2021 | |||||||||
| Finished goods | $ | $ | |||||||||
| Work in-process | |||||||||||
| Raw materials | |||||||||||
| Total | $ | $ | |||||||||
10. Goodwill and Other Intangible Assets
Goodwill
The following table presents the changes in the carrying amount of goodwill by segment:
| (in millions) | Cardiovascular | Medical Surgical | Neuroscience | Diabetes | Total | ||||||||||||||||||||||||
| April 30, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Purchase accounting adjustments | ( | ||||||||||||||||||||||||||||
| Currency translation and other | ( | ( | ( | ( | |||||||||||||||||||||||||
| July 30, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
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 on projected future cash flows. 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 no
20
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Intangible Assets
The following table presents the gross carrying amount and accumulated amortization of intangible assets:
| July 30, 2021 | April 30, 2021 | ||||||||||||||||||||||
| (in millions) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||
| Definite-lived: | |||||||||||||||||||||||
| Customer-related | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Purchased technology and patents | ( | ( | |||||||||||||||||||||
| Trademarks and tradenames | ( | ( | |||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Indefinite-lived: | |||||||||||||||||||||||
| IPR&D | $ | $ | — | $ | $ | — | |||||||||||||||||
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. During the three months ended July 30, 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 (income), net in the consolidated statements of income. The Company did no t recognize any definite-lived intangible asset charges during the three months ended July 31, 2020.
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 no
Amortization Expense
Intangible asset amortization expense for the three months ended July 30, 2021 and July 31, 2020 was $436 million and $440 million, respectively. Estimated aggregate amortization expense by fiscal year based on the carrying value of definite-lived intangible assets at July 30, 2021, excluding any possible future amortization associated with acquired IPR&D which has not yet met technological feasibility, is as follows:
| (in millions) | Amortization Expense | ||||
| Remaining 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
21
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
11. Income Taxes
The Company's effective tax rate for the three months ended July 30, 2021 was 7.7 percent, as compared to 15.9 percent for the three months ended July 31, 2020. The decrease in our effective tax rate for the three months ended July 30, 2021, as compared to the corresponding period in the prior fiscal year, was primarily due to the tax impact of the MCS charges and year-over-year changes in operational results by jurisdiction partially offset by a $39 million charge related to a change in the Company's permanent reinvestment assertion on certain historical earnings.
At both July 30, 2021 and April 30, 2021, the Company's gross unrecognized tax benefits were $1.7 104 million at July 30, 2021. If all the Company’s unrecognized tax benefits were recognized, approximately $1.6 billion would impact the Company’s effective tax rate. At July 30, 2021 and April 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 $810 million and $809 million, respectively. The Company recognizes interest and penalties related to income tax matters within income tax provision 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.
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 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 | |||||||||||||||||||||||
| (in millions, except per share data) | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to ordinary shareholders | $ | $ | |||||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic – weighted average shares outstanding | |||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Employee stock options | |||||||||||||||||||||||
| Employee restricted stock units | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Diluted – weighted average shares outstanding | |||||||||||||||||||||||
| Basic earnings per share | $ | $ | |||||||||||||||||||||
| Diluted earnings per share | $ | $ | |||||||||||||||||||||
22
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 months ended July 30, 2021 and July 31, 2020:
| Three months ended | |||||||||||||||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||||||||||||||
| Stock options | $ | $ | |||||||||||||||||||||||||||||||||
| Restricted stock | |||||||||||||||||||||||||||||||||||
| Performance share units | |||||||||||||||||||||||||||||||||||
| Employee stock purchase plan | |||||||||||||||||||||||||||||||||||
| Total stock-based compensation expense | $ | $ | |||||||||||||||||||||||||||||||||
| Cost of products sold | $ | $ | |||||||||||||||||||||||||||||||||
| Research and development expense | |||||||||||||||||||||||||||||||||||
| Selling, general, and administrative expense | |||||||||||||||||||||||||||||||||||
| Total stock-based compensation expense | |||||||||||||||||||||||||||||||||||
| Income tax benefits | ( | ( | |||||||||||||||||||||||||||||||||
| Total stock-based compensation expense, net of tax | $ | $ | |||||||||||||||||||||||||||||||||
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 months ended July 30, 2021 and July 31, 2020:
| U.S. | Non-U.S. | ||||||||||||||||||||||
| Three months ended | Three months ended | ||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | July 30, 2021 | July 31, 2020 | |||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of net actuarial loss | |||||||||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | |||||||||||||||||||
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.
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. Of this amount, $73 million related to U.S. pension benefits, $11 million related to defined contribution plans, $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.
23
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 30, 2021 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ||||||||||||||||||||||||||||||||||
| Reclassifications | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||||||||
| July 30, 2021 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| (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 | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Reclassifications | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||||||||
| July 31, 2020 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
The income tax on gains and losses on investment securities in other comprehensive income before reclassifications during the three months ended July 30, 2021 and July 31, 2020 was an expense of $2 million and $30 million, respectively. There was no
During the three months ended July 30, 2021 there was no income tax on cumulative translation adjustment. For the three months ended July 31, 2020 the income tax on cumulative translation adjustment was an expense of $4 million.
During the three months ended July 30, 2021 and July 31, 2020, there were no
The net change in retirement obligations in other comprehensive income includes amortization of net actuarial losses included in net periodic benefit cost. During the three months ended July 30, 2021 and July 31, 2020, the net change in retirement obligations in other comprehensive income before reclassifications resulted in income tax expense of $1 million and income tax benefit of $5 million, respectively. During the three months ended July 30, 2021 and July 31, 2020, the gains and losses on defined benefit and pension items reclassified from AOCI were reduced by income taxes of $2 million and $4 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 three months ended July 30, 2021 and July 31, 2020 was an expense of $16 million and a benefit of $80 million, respectively. During the three months ended July 30, 2021 and July 31, 2020, gains and losses on cash flow hedges reclassified from AOCI were reduced by income taxes of $1 million and $11 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.
24
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 months ended July 30, 2021, the Company recognized $26 million of certain litigation charges. During the three months ended July 31, 2020, the Company recognized a net benefit of $88 million primarily related to favorable settlements for certain legal matters. At July 30, 2021 and April 30, 2021, accrued litigation was approximately $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. Two subsidiaries of Covidien supplied pelvic mesh products to one 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 August 4, 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
Starting 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 these matters because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from these matters.
25
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Patent Litigation
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. On June 15, 2021, pursuant to an order from the state court, the Company paid the judgment plus accrued interest to Dr. Sasso, subject to repayment if the Company's ongoing appeal is 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 which 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 two landfills, capping of the remaining three landfills, installation of a groundwater extraction system and long-term monitoring of the site and the three 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 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. In 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 a fairness hearing and 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 relating to the issues remanded by the 8th Circuit Court of Appeals concluded during June 2021. The parties are awaiting the Tax Court decision, which will remain subject to appeal by either party upon its issuance.
The IRS has issued its audit reports on Medtronic, Inc. for fiscal years 2007 through 2016. Medtronic, Inc. and the IRS have reached agreement on all significant issues except for 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.
26
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Medtronic, Inc.’s fiscal years 2017, 2018, and 2019 U.S. federal income tax returns are currently being audited by the IRS.
Covidien LP (a wholly owned subsidiary of Medtronic plc) has either reached agreement with the IRS or the statute of limitations has lapsed on their U.S. federal income tax returns through fiscal year 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.
Guarantees
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 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 Operating Unit (formerly Diabetes Group) remains a separate operating and reportable segment in the new structure. There were no changes to the reportable segments during the fiscal year ended April 30, 2021, such that the four
27
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 | |||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||
| Cardiovascular | $ | $ | |||||||||||||||||||||
| Medical Surgical | |||||||||||||||||||||||
| Neuroscience | |||||||||||||||||||||||
| Diabetes | |||||||||||||||||||||||
| Segment operating profit | |||||||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Other non-operating income, net | |||||||||||||||||||||||
| Amortization of intangible assets | ( | ( | |||||||||||||||||||||
| Corporate | ( | ( | |||||||||||||||||||||
| Centralized distribution costs | ( | ( | |||||||||||||||||||||
| Restructuring and associated costs | ( | ( | |||||||||||||||||||||
| Acquisition-related items | ( | ||||||||||||||||||||||
| Certain litigation charges, net | ( | ||||||||||||||||||||||
| MCS impairments / costs | ( | ||||||||||||||||||||||
| Medical device regulations | ( | ( | |||||||||||||||||||||
| Income before income taxes | $ | $ | |||||||||||||||||||||
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 months ended July 30, 2021 and July 31, 2020 for the Company's country of domicile, countries with significant concentrations, and all other countries:
| Three months ended | |||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||
| Ireland | $ | $ | |||||||||||||||||||||
| United States | |||||||||||||||||||||||
| Rest of world | |||||||||||||||||||||||
| Total other countries, excluding Ireland | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
28
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 30, 2021. In addition, you should read this discussion along with our consolidated financial statements and related notes thereto at and for the three months ended July 30, 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 medical technology, services, and solutions companies – 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 continuing to respond to the unprecedented challenge posed by the Covid-19 pandemic ("COVID-19" or the "pandemic"). While most of our businesses were affected by a decline in global procedural volumes during fiscal year 2021, particularly in the first and second quarters, during the first quarter of fiscal year 2022 most of our businesses performed at or above pre-COVID-19 levels. At the same time, we did experience a slowdown in elective procedures in certain businesses and geographies, including some areas of the U.S. during the last few weeks of July as a result of the Delta variant of COVID-19. While we believe the impact of the Delta variant may be less severe than prior waves of COVID-19 as healthcare systems are more prepared and vaccination rates continue to rise, we cannot predict with confidence the duration and severity of its impact on global procedure volumes. We expect medical procedure rates to continue to vary by therapy and country and to be impacted by regional COVID-19 case volumes, vaccine immunization rates, and new COVID-19 variants.
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The following is a summary of revenue, diluted earnings per share, and operating cash flow for the three months ended July 30, 2021 and July 31, 2020:
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GAAP to Non-GAAP Reconciliations The tables below present our GAAP to Non-GAAP reconciliations for the three months ended July 30, 2021 and July 31, 2020:
| Three months ended July 30, 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 | $ | 833 | $ | 64 | $ | 763 | $ | 0.56 | 7.7 | % | |||||||||||||||||||
| Non-GAAP Adjustments: | |||||||||||||||||||||||||||||
Restructuring and associated costs (1) | 81 | 17 | 65 | 0.05 | 21.0 | ||||||||||||||||||||||||
Acquisition-related items (2) | 109 | 22 | 87 | 0.06 | 20.2 | ||||||||||||||||||||||||
| Certain litigation charges | 26 | 5 | 21 | 0.02 | 19.2 | ||||||||||||||||||||||||
(Gain)/loss on minority investments (3) | (31) | — | (29) | (0.02) | — | ||||||||||||||||||||||||
Medical device regulations (4) | 21 | 4 | 17 | 0.01 | 19.0 | ||||||||||||||||||||||||
| Amortization of intangible assets | 436 | 69 | 366 | 0.27 | 15.8 | ||||||||||||||||||||||||
MCS impairments / costs (5) | 726 | 162 | 564 | 0.42 | 22.3 | ||||||||||||||||||||||||
Certain tax adjustments, net (6) | — | (53) | 53 | 0.04 | — | ||||||||||||||||||||||||
| Non-GAAP | $ | 2,201 | $ | 290 | $ | 1,908 | $ | 1.41 | 13.2 | % | |||||||||||||||||||
| Three months ended July 31, 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 | $ | 584 | $ | 93 | $ | 487 | $ | 0.36 | 15.9 | % | |||||||||||||||||||
| Non-GAAP Adjustments: | |||||||||||||||||||||||||||||
Restructuring and associated costs (1) | 128 | 22 | 106 | 0.08 | 17.2 | ||||||||||||||||||||||||
Acquisition-related items (7) | (95) | (28) | (67) | (0.05) | 29.5 | ||||||||||||||||||||||||
| Certain litigation charges | (88) | (18) | (70) | (0.05) | 20.5 | ||||||||||||||||||||||||
(Gain)/loss on minority investments (3) | (10) | — | (10) | (0.01) | — | ||||||||||||||||||||||||
Medical device regulations (4) | 18 | 2 | 16 | 0.01 | 11.1 | ||||||||||||||||||||||||
| Amortization of intangible assets | 440 | 70 | 370 | 0.27 | 15.9 | ||||||||||||||||||||||||
| Certain tax adjustments, net | — | (4) | 4 | — | — | ||||||||||||||||||||||||
| Non-GAAP | $ | 977 | $ | 137 | $ | 836 | $ | 0.62 | 14.0 | % | |||||||||||||||||||
(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 acquisitions of, and certain license payments for, unapproved technology, business combination costs, and changes in fair value of contingent consideration.
(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 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 3, 2021 decision to stop the distribution and sale of the Medtronic HVAD System within the Mechanical Circulatory Support Operating Unit (MCS). The charges include $515 million of noncash impairments, primarily related to $409 million of intangible asset impairments, as well as $211 million for commitments and obligations in connection with our decision, including customer support obligations, restructuring, and other associated costs. Medtronic remains committed to serving the needs of the approximately 4,000 patients currently implanted with the HVAD System.
(6)The charges are associated with a change in the company’s permanent reinvestment assertion on certain historical earnings and the amortization of previously established deferred tax assets from intercompany intellectual property transactions.
(7)The charges primarily include business combination costs, certain license payments for unapproved technology, changes in fair value of contingent consideration, and a change in amounts accrued for certain contingent liabilities for recent acquisitions.
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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:
| Three months ended | |||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | |||||||||
| Net cash provided by operating activities | $ | 1,292 | $ | 278 | |||||||
| Additions to property, plant, and equipment | (378) | (334) | |||||||||
| Free cash flow | $ | 914 | $ | (56) | |||||||
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 July 30, 2021 and July 31, 2020:
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The table below illustrates net sales by segment and division for the three months ended July 30, 2021 and July 31, 2020:
Three months ended | |||||||||||||||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | % Change | ||||||||||||||||||||||||||||||||
| Cardiac Rhythm & Heart Failure | $ | 1,483 | $ | 1,247 | 19 | % | |||||||||||||||||||||||||||||
| Structural Heart & Aortic | 787 | 627 | 26 | ||||||||||||||||||||||||||||||||
| Coronary & Peripheral Vascular | 620 | 558 | 11 | ||||||||||||||||||||||||||||||||
| Cardiovascular | 2,890 | 2,433 | 19 | ||||||||||||||||||||||||||||||||
| Surgical Innovations | 1,554 | 1,080 | 44 | ||||||||||||||||||||||||||||||||
| Respiratory, Gastrointestinal, & Renal | 768 | 720 | 7 | ||||||||||||||||||||||||||||||||
| Medical Surgical | 2,322 | 1,801 | 29 | ||||||||||||||||||||||||||||||||
| Cranial & Spinal Technologies | 1,123 | 944 | 19 | ||||||||||||||||||||||||||||||||
| Specialty Therapies | 641 | 453 | 42 | ||||||||||||||||||||||||||||||||
| Neuromodulation | 440 | 314 | 40 | ||||||||||||||||||||||||||||||||
| Neuroscience | 2,204 | 1,712 | 29 | ||||||||||||||||||||||||||||||||
| Diabetes | 572 | 562 | 2 | ||||||||||||||||||||||||||||||||
| Total | $ | 7,987 | $ | 6,507 | 23 | % | |||||||||||||||||||||||||||||
Segment and Market Geography
The charts below illustrate the percent of net sales by market geography for the three months ended July 30, 2021 and July 31, 2020:
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The table below includes net sales by market geography for each of our segments for the three months ended July 30, 2021 and July 31, 2020:
U.S.(1) | Non-U.S. Developed Markets(2) | Emerging Markets(3) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended | Three months ended | Three months ended | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | % Change | July 30, 2021 | July 31, 2020 | % Change | July 30, 2021 | July 31, 2020 | % Change | ||||||||||||||||||||||||||||||||||||||||||||
| Cardiovascular | $ | 1,420 | $ | 1,206 | 18 | % | $ | 1,003 | $ | 853 | 18 | % | $ | 467 | $ | 374 | 25 | % | |||||||||||||||||||||||||||||||||||
| Medical Surgical | 990 | 722 | 37 | 869 | 719 | 21 | 463 | 359 | 29 | ||||||||||||||||||||||||||||||||||||||||||||
| Neuroscience | 1,446 | 1,136 | 27 | 465 | 376 | 24 | 293 | 199 | 47 | ||||||||||||||||||||||||||||||||||||||||||||
| Diabetes | 245 | 287 | (15) | 263 | 226 | 16 | 63 | 48 | 31 | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 4,101 | $ | 3,351 | 22 | % | $ | 2,601 | $ | 2,175 | 20 | % | $ | 1,286 | $ | 981 | 31 | % | |||||||||||||||||||||||||||||||||||
(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 increase in net sales for the three months ended July 30, 2021, as compared to the corresponding period in the prior fiscal year, was driven by the recovery of global procedural volumes as compared to the decline experienced during three months ended July 31, 2020 as a result of the pandemic. For the three months ended July 30, 2021, most of our businesses and geographies achieved revenue levels at or above pre-pandemic levels. Currency had a favorable impact on net sales of $245 million for the three months ended July 30, 2021, which was comprised of favorable impacts in Non-U.S. developed and emerging markets of $182 million and $63 million, respectively.
During the fourth quarter of fiscal year 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, the uncertain and uneven impact of COVID-19 on future procedural volumes and resulting demand for our products and therapies could negatively impact our business. Additionally, our segments may face competitive product launches and pricing pressure, geographic macro-economic risks, reimbursement challenges, impacts from changes in the mix of our product offerings, delays in product registration approvals, replacement cycle challenges, and fluctuations in currency exchange rates.
Cardiovascular
Cardiovascular products include pacemakers, insertable cardiac monitors, cardiac resynchronization therapy devices, implantable cardioverter defibrillators (ICD), leads and delivery systems, ablation products, electrophysiology catheters, products for the treatment of 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. Cardiovascular also includes Care Management Services and Cath Lab Managed Services (CLMS) within the Cardiac Rhythm & Heart Failure division. Cardiovascular's net sales for the three months ended July 30, 2021 were $2.9 billion, an increase of 19 percent compared to corresponding period in the prior fiscal year. Currency had a favorable impact of $96 million on net sales for the three months ended July 30, 2021. Cardiovascular's net sales increase was primarily due to the recovery of global procedure volumes from the downturn experienced in the first quarter of fiscal year 2021 resulting from the pandemic.
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The graphs below illustrate the percent of Cardiovascular net sales by division for the three months ended July 30, 2021 and July 31, 2020:
Cardiac Rhythm & Heart Failure (CRHF) net sales for the three months ended July 30, 2021 increased 19 percent as compared to the corresponding period in the prior fiscal year. The increase was led by Cardiac Ablation Solutions, including strong sales of Artic Front cryoablation system. Cardiac Rhythm Management and Cardiovascular Diagnostics also contributed to growth as the business benefited from strong sales of the Micra leadless pacing system, Cobalt and Crome ICDs and CRT-Ds, TYRX antibacterial envelopes, and the LINQ family of cardiac monitors. These increases were partially offset by a decline of Medtronic HVAD System net sales as a result of our June 3, 2021 decision to stop the distribution and sale of the system.
Structural Heart & Aortic (SHA) net sales for the three months ended July 30, 2021 increased 26 percent as compared to the corresponding periods in the prior fiscal year. The increase was led by growth in transcatheter aortic valve replacement (TAVR) net sales as a result of continued adoption of the CoreValve Evolut transcatheter aortic valve replacement platform. Cardiac Surgery also contributed to the net increase in sales as a result of broad-based growth across the business. Partially offsetting these increases was a decline in net sales of the Valiant Navion Thoracic Stent Graft System as a result of our voluntary recall of the system in the fourth quarter of fiscal year 2021.
Coronary & Peripheral Vascular (CPV) net sales for the three months ended July 30, 2021 increased 11 percent as compared to the corresponding period in the prior fiscal year. The increase was led by growth in Peripheral Vascular Health driven by strong performance of the recently launched Abre venous self-expanding stent system for Deep Venous disease and our VenaSeal vein closure system. While Coronary & Renal Denervation also experienced growth, the net sales of the business were negatively impacted by Chinese national and provincial tenders which significantly reduced the price of drug-eluting stents and coronary balloons in China.
In addition to the general impacts of COVID-19 on our Company as described in the Executive Level Overview, looking ahead, we expect Cardiovascular could be affected by the following:
•Continued growth of our Micra transcatheter pacing system. Micra AV received U.S. FDA approval and CE Mark approval in January and April 2020, respectfully. Micra AV expands the Micra target population from 15 percent to 45 percent of pacemaker patients.
•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 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 growth of the Claria MRI CRT-D system with EffectivCRT Diagnostic and EffectivCRT During AF Algorithm.
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•Acceptance and growth of the LINQ II 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.
•Continued acceptance and growth 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.
•Continued acceptance and market expansion of Arctic Front cryoablation for treatment of atrial fibrillation. In June, 2021, the 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.
•Continued expansion and training of field support to increase coverage in the U.S. centers performing transcatheter aortic valve replacement procedures.
•Continued acceptance and growth from Evolut PRO, which provides industry-leading hemodynamics, reliable delivery, and advanced sealing with an excellent safety profile. In August 2021, the U.S. FDA approved the Evolut FX TAVR, a system enhancement designed to improve the overall procedural experience through enhancements in deliverability, implant visibility and deployment stability.
•The Chinese national and provincial tenders that have negatively impacted drug-eluting stent and coronary balloon prices in China could impact other products within the division.
•Continued acceptance and growth from the VenaSeal Closure System in the U.S. The VenaSeal Closure 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 and resume selling this product in markets globally. We are currently ramping production of the Valiant Captivia Thoracic Stent Graft System and plan to reach full production capacity in December 2021.
•Our June 3, 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.
•Our ability to successfully develop and obtain regulatory approval of 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, electrosurgery products, hernia mechanical devices, mesh implants, advanced ablation, interventional lung, ventilators, airway products, renal care products, and sensors and monitors for pulse oximetry, capnography, level of consciousness and cerebral oximetry. Medical Surgical's net sales for the three months ended July 30, 2021 were $2.3 billion, an increase of 29 percent as compared to the corresponding period in the prior fiscal year. Currency had a favorable impact of $77 million on net sales for the three months ended July 30, 2021. Medical Surgical's net sales increase was primarily due to the recovery of global procedure volumes from the declines experienced in the first quarter of fiscal year 2021 resulting from the pandemic.
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The graphs below illustrate the percent of Medical Surgical net sales by division for the three months ended July 30, 2021 and July 31, 2020:
Surgical Innovations (SI) net sales for the three months ended July 30, 2021 increased 44 percent as compared to the corresponding period in the prior fiscal year. Net sales growth was led by Advanced Stapling and Vessel Sealing, particularly in the U.S. and Western Europe, driven by the continued adoption of the company’s LigaSure, Sonicision, and Tri-Staple technologies. Hernia and Wound Management also attributed to the sales growth due to strength in sutures and hernia product lines.
Respiratory, Gastrointestinal, & Renal (RGR) net sales for the three months ended July 30, 2021 increased 7 percent as compared to the corresponding period in the prior fiscal year. Respiratory, Gastrointestinal, & Renal net sales growth was led by Patient Monitoring, particularly the Nellcor pulse oximetry system, as well as in Gastrointestinal, driven by the esophageal product portfolio and PillCam capsule endoscopy. The net sales increases were partially offset by Respiratory Interventions due to declines in ventilator demand when compared to the corresponding period in the prior year as demand returns to pre-pandemic levels.
In addition to the general impacts of COVID-19 on our Company as described in the Executive Level Overview, looking ahead we expect Medical Surgical could be affected by the following:
•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.
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•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, McGRATH MAC video laryngoscopes, as well as the SonarMed Airway Monitoring System for the NICU that was launched in the U.S during the quarter.
•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, EndoFLIP 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 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.
•Our ability to successfully develop and obtain regulatory approval of products within our pipeline, which include our Hugo robotic assisted surgery (RAS) system, designed to help reduce unwanted variability, improve patient outcomes, and, by extension, lower per-procedure cost. The Hugo RAS system completed its First in Human Experience in Chile and Panama during the quarter.
Neuroscience
Neuroscience's products include various spinal implants, bone graft substitutes, biologic products, image-guided surgery and intra-operative imaging systems, robotic guidance systems used in the 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. Neuroscience also manufactures products related to implantable neurostimulation therapies and drug delivery systems for the treatment of chronic pain, movement disorders, and epilepsy. Neuroscience’s net sales for the three months ended July 30, 2021 were $2.2 billion, an increase of 29 percent as compared to the corresponding period in the prior fiscal year. Currency had a favorable impact of $47 million on net sales for the three months ended July 30, 2021. Neuroscience's net sales growth was achieved across all divisions and reflected the recovery of global procedural volumes, particularly on deferrable procedures, from the declines experienced in the first quarter of fiscal year 2021 as a result of the pandemic.
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The graphs below illustrate the percent of Neuroscience net sales by division for the three months ended July 30, 2021 and July 31, 2020:
Cranial and Spinal Technologies (CST) net sales for the three months ended July 30, 2021 increased 19 percent as compared to the corresponding period in the prior fiscal year. Growth was experienced by both Enabling Technologies and Spine. Enabling Technologies net sales growth was driven by capital equipment recovery compared to the corresponding period in the prior fiscal year, particularly on sales of the StealthStation Navigation, O-Arm Imaging, and Midas Rex MR8 high-speed drill systems. Spine net sales growth was driven by the aforementioned recovery in procedural volumes and continued strength in Biologics.
Specialty Therapies (Specialty) net sales for the three months ended July 30, 2021 increased 42 percent as compared to the corresponding period in the prior fiscal year. Pelvic Health saw continued strength led by sales of the recently launched InterStim Micro neurostimulator and SureScan MRI leads. Neurovascular's growth was driven by strong performance in emerging markets, as well as strength in flow diversion and liquid embolic products. ENT experienced growth due to the aforementioned recovery in procedure volumes, particularly outside of the U.S.
Neuromodulation (NM) net sales for the three months ended July 30, 2021 increased 40 percent as compared to the corresponding period in the prior fiscal year. Sales grew across all businesses due to the aforementioned recovery in procedural volumes when compared to the corresponding period in the prior fiscal year. Net sales growth was driven by continued strong adoption of the DTM (differential target multiplexed) proprietary waveform in Pain Therapies, and the Percept PC deep brain stimulation (DBS) device with BrainSense technology in Brain Modulation.
In addition to the general impacts of COVID-19 on our Company as described in the Executive Level Overview, looking ahead we expect Neuroscience could be affected by the following:
•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.
•Continued growth from spine titanium interbody 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.
•Market acceptance and continued global adoption of innovative new spine products and procedural solutions within our CST business such as our Infinity OCT System and Prestige LP cervical disc system.
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•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 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 DBS device with BrainSense technology, 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 and obtain regulatory approval of 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 intrasaccular device within Specialty Therapies, and our next-generation spine enabling technologies within CST.
Diabetes
Diabetes' products include insulin pumps, continuous glucose monitoring (CGM) systems, consumables, and smart insulin pen systems. Diabetes' net sales for the three months ended July 30, 2021 were $572 million, an increase of 2 percent as compared to the corresponding period in the prior fiscal year. Currency had a favorable impact of $26 million on net sales for the three months ended July 30, 2021. Diabetes' net sales increase was primarily attributable to international growth in integrated CGM and durable pumps, partially offset by continued competitive pressures in the 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 Diabetes could be affected by the following:
•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 and 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 MiniMed 780G insulin pump system. The MiniMed 780G system was approved in the E.U. in June 2020 and launched in over 30 countries on four continents outside the U.S., primarily in Europe, starting in 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 to help ensure patients have access to their glucose levels seamlessly and discretely. During the first quarter of fiscal year 2021, we introduced the Guardian Connect system for Android devices. The Guardian Connect CGM system is now available on both Apple iOS and Android devices.
•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 third quarter of fiscal year 2021, 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.
•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.
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•Our ability to successfully develop and obtain regulatory approval of the products within our pipeline, which include our MiniMed 780G insulin pump and the Guardian 4 sensor, which have been submitted to the U.S. FDA. These technologies feature our next-generation algorithms by further automating insulin delivery.
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 months ended July 30, 2021 and July 31, 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 months ended July 30, 2021 was $2.6 billion as compared to $2.5 billion for the corresponding period in the prior fiscal year. The decrease in cost of products sold as a percentage of net sales was largely due to increased expenses in the prior year comparable period as a result of COVID-19. During the three months ended July 31, 2020, the conditions of the pandemic resulted in period expensing some of our fixed overhead costs due to idle capacity at certain manufacturing facilities and included a negative impact from mix, as products in higher demand had lower gross margins. The three months ended July 30, 2021 included $58 million of inventory write-downs associated with our June 3, 2021 decision to stop the distribution and sale of Medtronic's HVAD System (MCS charges).
Research and Development Expense We remain committed to accelerating the development of meaningful innovations to deliver better patient 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. Research and development expense for the three months ended July 30, 2021 was $750 million as compared to $621 million for the corresponding period in the prior fiscal year. The three months ended July 30, 2021 included $90 million of asset acquisitions and certain license payments for unapproved technology primarily in our Diabetes segment.
In fiscal year 2021, we entered into arrangements with third parties to fund the development of certain technologies in our Diabetes segment. 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 months ended July 30, 2021, no projects were significant, either individually or in aggregate, to our consolidated results.
Selling, General, and Administrative Expense Our goal is to continue to leverage selling, general, and administrative expense 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 months ended July 30, 2021 was $2.5 billion, as compared to $2.4 billion for the corresponding period in the prior fiscal year. The decrease in selling, general, and administrative expense as a percentage of net sales was primarily driven by net sales growth as a result of the recovery of elective procedures.
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The following is a summary of other costs and expenses (income):
| Three months ended | |||||||||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||||||||
| Amortization of intangible assets | $ | 436 | $ | 440 | |||||||||||||||||||||||||
| Restructuring charges, net | 11 | 53 | |||||||||||||||||||||||||||
| Certain litigation charges, net | 26 | (88) | |||||||||||||||||||||||||||
| Other operating expense (income), net | 760 | (114) | |||||||||||||||||||||||||||
| Other non-operating income, net | (111) | (82) | |||||||||||||||||||||||||||
| Interest expense | 137 | 171 | |||||||||||||||||||||||||||
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.
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 was designed to further leverage our global size and scale as well as enhance the customer and employee experience.
The Enterprise Excellence Program focuses 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 and the customer experience
The Enterprise Excellence Program was 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 by the end of this fiscal year. Approximately $500 million to $700 million of gross annual savings are expected to be achieved through the end of fiscal year 2022.
Since 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. 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, the majority of which are expected to be incurred by the end of this fiscal year. 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 and benefits for employees supporting the program, including program management and transition teams, and strategic and operational consulting services related to the three objectives of the program discussed above. The 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 months ended July 30, 2021, we recognized net charges of $74 million associated with our Enterprise Excellence Program, including $11 million recognized within restructuring charges, net in the consolidated statements of income primarily comprised of employee termination benefits. 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 $33 million recognized within cost of products sold and $30 million recognized within selling, general, and administrative expense in the consolidated statements of income.
For the three months ended July 31, 2020, we recognized net charges of $77 million associated with our Enterprise Excellence Program, including $4 million recognized within restructuring charges, net in the consolidated statements of income primarily comprised of employee termination benefits. 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 $27 million recognized within cost of products sold, and $47 million recognized within selling, general and administrative expense in the consolidated statements of income.
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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 focused on accelerating innovation, enhancing 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, simplifies our organizational structure and accelerates decision-making and execution. Primary activities of the restructuring program included 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 was 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 this fiscal year. Annual savings of approximately $450 million to $475 million are expected to be realized by the various components of the Simplification program.
Since inception, the Company has incurred pre-tax exit and disposal costs and other costs, across all segments, of $274 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. 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.
For the three months ended July 30, 2021, we recognized charges of $7 million which included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses. These charges were recognized within selling, general and administrative expense in the consolidated statements of income.
For the three months ended July 31, 2020, we recognized charges of $51 million, which primarily included $50 million recognized within restructuring charges, net in the consolidated statements of income, mostly comprised of employee termination benefits.
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. Information regarding certain litigation charges, net is included in Note 16 to the 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 July 30, 2021, the change in other operating expense (income), net was primarily driven by MCS charges recorded during the period. 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 past acquisition resulting in a $132 million gain for the three months ended July 31, 2020. Additionally, the change was driven by remeasurement expense and our hedging programs, which combined, resulted in a net loss of $33 million for the three months ended July 30, 2021, as compared to a net gain of $31 million for the three months ended July 31, 2020. Additional information regarding the MCS charges is included in Note 5 Restructuring and Other Costs.
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.
The increase in other non-operating income, net is primarily attributable to gains on our equity method and minority investment portfolios partially offset by a decrease in interest income. Gains on equity method and minority investments were $43 million and $7 million for the three months ended July 30, 2021 and July 31, 2020, respectively. Interest income was $43 million and $52 million for the three months ended July 30, 2021 and July 31, 2020, respectively, with decreases driven by the decline in global interest rates.
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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. The decrease in interest expense during the three months ended July 30, 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 second quarter of fiscal year 2021.
INCOME TAXES
| Three months ended | |||||||||||||||||||||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | |||||||||||||||||||||||||||
| Income tax provision | $ | 64 | $ | 93 | |||||||||||||||||||||||||
| Income before income taxes | 833 | 584 | |||||||||||||||||||||||||||
| Effective tax rate | 7.7 | % | 15.9 | % | |||||||||||||||||||||||||
| Non-GAAP income tax provision | $ | 290 | $ | 137 | |||||||||||||||||||||||||
| Non-GAAP income before income taxes | 2,201 | 977 | |||||||||||||||||||||||||||
| Non-GAAP Nominal Tax Rate | 13.2 | % | 14.0 | % | |||||||||||||||||||||||||
| Difference between the effective tax rate and Non-GAAP Nominal Tax Rate | 5.5 | % | (1.9) | % | |||||||||||||||||||||||||
Our effective tax rate for the three months ended July 30, 2021 was 7.7 percent, as compared to 15.9 percent for the three months ended July 31, 2020. The decrease in our effective tax rate for the three months ended July 30, 2021, as compared to the corresponding period in the prior fiscal year, was primarily due to the tax impact of the MCS charges and year-over-year changes in operational results by jurisdiction partially offset by certain tax adjustments, including a $39 million charge related to a change in the Company's permanent reinvestment assertion on certain historical earnings.
Our Non-GAAP Nominal Tax Rate for the three months ended July 30, 2021 was 13.2 percent, as compared to 14.0 percent for the three months ended July 31, 2020. The decrease in our Non-GAAP Nominal Tax Rate was primarily due to the impact of year-over-year changes in 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 months ended July 30, 2021 of approximately $22 million.
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LIQUIDITY AND CAPITAL RESOURCES
We are currently in a strong financial position, and we believe our balance sheet and liquidity as of July 30, 2021 provide us with flexibility, and our cash, cash equivalents, and current investments, along with our credit facility and related commercial paper programs will satisfy our foreseeable operating needs.
Our liquidity and capital structure are evaluated regularly within the context of our annual operating and strategic planning 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:
| Three months ended | |||||||||||
| (in millions) | July 30, 2021 | July 31, 2020 | |||||||||
| Cash provided by (used in): | |||||||||||
| Operating activities | $ | 1,292 | $ | 278 | |||||||
| Investing activities | (784) | 8 | |||||||||
| Financing activities | (1,055) | 1,959 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (42) | 114 | |||||||||
| Net change in cash and cash equivalents | $ | (589) | $ | 2,359 | |||||||
Operating Activities The $1.0 billion increase in net cash provided was primarily driven by an increase in cash collected from customers, partially offset by an increase in cash paid for income taxes and cash paid to employees. The increase 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. The increase in cash paid for income taxes in the three months ended July 30, 2021 was primarily due to a tax payment associated with a foreign audit settlement. Cash paid to employees increased due to higher annual incentive plan payouts compared the corresponding period in the prior fiscal year.
Investing Activities The $792 million increase in net cash used was primarily attributable to an increase in net purchases of investments of $688 million during the three months ended July 30, 2021, as compared to the corresponding period in the prior fiscal year.
Financing Activities The $3.0 billion increase in net cash used was largely 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. Also contributing to the total increase in cash used was the increase in net cash used for share repurchases of $315 million. For more information on the aforementioned Mizuho Bank term loan, refer to the Debt and Capital section.
Debt and Capital
Our capital structure consists of equity and interest-bearing debt. We primarily utilize unsecured senior debt obligations to meet our financing 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.
Total debt at July 30, 2021 was $26.0 billion as compared to $26.4 billion at April 30, 2021. The decrease in total debt was driven by fluctuations in exchanges rates as it pertains to our Euro-denominated senior notes.
We repurchase our ordinary shares from time to time as part of our focus on returning value to our shareholders. 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. During the three months ended July 30, 2021, the Company repurchased a total of 2 million shares under this program at an average price of $126.23. At July 30, 2021, we had approximately $5.1 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 the fiscal year ended April 30, 2021.
Liquidity
Our liquidity sources at July 30, 2021 included $3.0 billion of cash and cash equivalents and $7.6 billion of current investments. Additionally, we maintain a commercial paper program (no commercial paper outstanding at July 30, 2021) and a Credit Facility.
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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 Note 6 to the current period's consolidated financial statements 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 July 30, 2021 and April 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 July 30, 2021 and April 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). Facility fees are payable on the Credit Facility and are determined in the same manner as the interest rates. We are in compliance with all covenants related to the Credit Facility.
The following table is a summary of our S&P and Moody's long-term debt ratings and short-term debt ratings:
Agency Rating(1) | ||||||||||||||
| July 30, 2021 | April 30, 2021 | |||||||||||||
| Standard & Poor's Ratings Services | ||||||||||||||
| Long-term debt | A | A | ||||||||||||
| Short-term debt | A-1 | A-1 | ||||||||||||
| 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 July 30, 2021 were unchanged as compared to the ratings at April 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, Credit Facility, and related commercial paper 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. There have been no 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 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, approval by Intersect ENT’s stockholders, 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.
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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 July 30, 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.
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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 three months ended July 30, 2021 and summarized balance sheet information at July 30, 2021 and April 30, 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 three months ended July 30, 2021 was as follows:
| (in millions) | Medtronic & Medtronic Luxco Senior Notes (1) | CIFSA Senior Notes (2) | |||||||||
| Net sales | $ | 523 | $ | — | |||||||
| Operating profit (loss) | (8) | 38 | |||||||||
| Loss before income taxes | (236) | (187) | |||||||||
| Net loss attributable to Medtronic | (189) | (224) | |||||||||
The summarized balance sheet information at July 30, 2021 was as follows:
| (in millions) | Medtronic & Medtronic Luxco Senior Notes (1) | CIFSA Senior Notes (2) | |||||||||
Total current assets(3) | $ | 20,913 | $ | 9,445 | |||||||
Total noncurrent assets(4) | 11,522 | 8,101 | |||||||||
Total current liabilities(5) | 29,130 | 19,170 | |||||||||
Total noncurrent liabilities(6) | 56,034 | 62,852 | |||||||||
| Noncontrolling interests | 178 | 178 | |||||||||
(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 $19.8 billion and $8.9 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 $27.4 billion and $19.0 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
(6)Includes loans payable due to non-guarantor subsidiaries of $28.7 billion and $43.4 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
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The summarized balance sheet information at April 30, 2021 was as follows:
| (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 $26.4 billion and $17.3 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
(6)Includes loans payable due to non-guarantor subsidiaries of $29.0 billion and $43.5 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.
CAUTIONARY NOTE REGARDING FORWARD-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
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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” 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;
•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 July 30, 2021 and April 30, 2021 was $15.0 billion and $14.7 billion, respectively. At July 30, 2021, these contracts were in a net unrealized loss position of $35 million. A sensitivity analysis of changes in the fair value of all currency exchange rate derivative contracts at July 30, 2021 indicates that, if the U.S. dollar
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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) | July 30, 2021 | |||||||
| 10% appreciation in the U.S. dollar | $ | 1,095 | ||||||
| 10% depreciation in the U.S. dollar | (1,095) | |||||||
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 months ended July 30, 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 July 30, 2021 was comprised of debt predominately denominated in U.S. dollars and 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 July 30, 2021, would have the following impact on the fair value of these instruments:
| Increase (decrease) | ||||||||
| (in millions) | July 30, 2021 | |||||||
| 10 basis point increase in interest rates | $ | 19 | ||||||
| 10 basis point decrease in interest rates | (19) | |||||||
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. The Company has not experienced any material impacts to its internal controls over financial reporting despite the fact that most of its employees are working remotely due to the COVID-19 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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information about the shares repurchased by the Company during the first quarter of fiscal year 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 | ||||||||||||||||||||||
| 5/1/2021-5/28/2021 | 1,297,191 | $ | 126.83 | 1,297,191 | $ | 5,277,134,958 | ||||||||||||||||||||
| 5/29/2021-7/2/2021 | 644,294 | 124.22 | 644,294 | 5,147,101,211 | ||||||||||||||||||||||
| 7/3/2021-7/30/2021 | 522,484 | 127.20 | 522,484 | 5,080,638,969 | ||||||||||||||||||||||
| Total | 2,463,969 | $ | 126.23 | 2,463,969 | 5,080,638,969 | |||||||||||||||||||||
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 sanctions 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 first quarter of fiscal year 2022, in the normal course of business and consistent with the authorization of Cyber GL 1B, Medtronic Russia filed four 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
| (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) | |||||||||||||
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SIGNATURE
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 authorized officer.
| Medtronic plc | |||||||||||
| (Registrant) | |||||||||||
| Date: | September 2, 2021 | /s/ Jennifer M. Kirk | |||||||||
| Jennifer M. Kirk | |||||||||||
| Global Controller and Chief Accounting Officer | |||||||||||
| (Principal Accounting Officer) | |||||||||||
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