MEDTRONIC PLC 
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 ofMedtronic 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 endedApril 26, 2019 . In addition, you should read this discussion along with our consolidated financial statements and related notes thereto at and for the three and six months endedOctober 25, 2019 . 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 inthe 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 withU.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 gains 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 withU.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 table below presents net income attributable to Medtronic and our diluted earnings per share for the three and six months endedOctober 25, 2019 andOctober 26, 2018 : Three months ended Six months ended October 26, October 25, October 26, (in millions, except per share data) October 25, 2019 2018 % Change 2019 2018 % Change
Net income attributable to Medtronic $ 1,364
22 %$ 2,228 $ 2,190 2 % Diluted earnings per share $ 1.01$ 0.82 23 %$ 1.65 $ 1.61 2 % The increase in net income attributable to Medtronic and diluted earnings per share (EPS) for the three months endedOctober 25, 2019 , as compared to the corresponding period in the prior fiscal year, was primarily attributable to a$251 million tax benefit related to tax reform inSwitzerland and a decrease in interest expense, partially offset by increases in certain litigation charges and other operating expense, net, which included an$80 million charge for our commitment to theMedtronic Foundation . 52 -------------------------------------------------------------------------------- The increase in net income attributable to Medtronic and diluted EPS for the six months endedOctober 25, 2019 , as compared to the corresponding period in the prior fiscal years, was primarily attributable to a$251 million tax benefit related to tax reform inSwitzerland and a decrease in other operating expense, net, offset by the increase in interest expense due to the tender and early redemption of senior notes during the period. Refer to the "Costs and Expenses" section of this Management's Discussion and Analysis for more information on the items impacting net income attributable to Medtronic and diluted EPS during the three and six months endedOctober 25, 2019 . GAAP to Non-GAAP Reconciliations The tables below present our GAAP to Non-GAAP reconciliations for the three and six months endedOctober 25, 2019 andOctober 26, 2018 : Three months ended October 25, 2019 Net Income Income Before Income Attributable to Effective (in millions, except per share data) Income Taxes Tax Provision Medtronic Diluted EPS(1) Tax Rate GAAP$ 1,294 $ (77) $ 1,364 $ 1.01 (6.0) % Non-GAAP Adjustments: Restructuring and associated costs (2) 94 16 78 0.06 17.0 Acquisition-related items (3) 27 4 23 0.02 14.8 Certain litigation charges 121 28 93 0.07 23.1 (Gain)/loss on minority investments (4) (12) (2) (10) (0.01) 16.7 Medical device regulations (5) 10 1 9 0.01 10.0 Exit of businesses (6) 41 6 35 0.03 14.6 Contribution to the Medtronic Foundation 80 18 62 0.05 22.5 Amortization of intangible assets 441 67 374 0.28 15.2 Certain tax adjustments, net (7) - 251 (251) (0.19) - Non-GAAP$ 2,096 $ 312 $ 1,777 $ 1.31 14.9 % Three months ended October 26, 2018 Net Income Income Before Income Attributable to
Effective
(in millions, except per share data) Income Taxes Tax Provision Medtronic Diluted EPS(1) Tax Rate GAAP$ 1,355 $ 235 $ 1,115 $ 0.82 17.3 % Non-GAAP Adjustments: Restructuring and associated costs (2) 77 12 65 0.05 15.6 Acquisition-related items 4 1 3 - 25.0 (Gain)/loss on minority investments (4) 25 (1) 26 0.02 (4.0) IPR&D charges (8) 15 - 15 0.01 - Amortization of intangible assets 445 67 378 0.28 15.1 Certain tax adjustments, net (9) - (58) 58 0.04 - Non-GAAP$ 1,921 $ 256 $ 1,660 $ 1.22 13.3 % (1)Amounts in this column have been intentionally rounded to the nearest$0.01 and, therefore, may not sum. (2)Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses. (3)The charges primarily include costs incurred in connection with legacy-Covidien enterprise resource planning deployment activities, business combination related costs, and changes in the fair value of contingent consideration. (4)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. (5)The charges represent incremental costs of complying with the newEuropean Union medical device regulations for previously registered products and primarily include charges for contractors supporting the project and other direct third-party expenses. (6)The net charge relates to the exit of businesses and is primarily comprised of intangible asset impairments. (7)The net benefit primarily relates to the impact of tax reform inSwitzerland . (8)The charge represents acquired IPR&D in connection with an asset acquisition. (9)The charges relate to the impact of tax reform inthe United States . 53 --------------------------------------------------------------------------------
Six months ended October 25, 2019
Net Income
Income Before Income Attributable to Effective
(in millions, except per share data) Income Taxes Tax Provision Medtronic Diluted EPS(1) Tax Rate
GAAP $ 2,271 $ 23 $ 2,228 $ 1.65 1.0 %
Non-GAAP Adjustments:
Restructuring and associated costs (2) 218 31 187 0.14 14.2
Acquisition-related items (3) 46 6 40 0.03 13.0
Certain litigation charges 168 32 136 0.10 19.0
(Gain)/loss on minority investments (4) (11) (2) (9) (0.01) 18.2
Debt tender premium and other charges (5) 406 86 320 0.24
21.2
Medical device regulations (6) 18 2 16 0.01 11.1 Exit of businesses (7) 41 6 35 0.03 14.6 Contribution to the Medtronic Foundation 80 18 62 0.05
22.5
Amortization of intangible assets 881 135 746 0.55
15.3
Certain tax adjustments, net (8) - 281 (281) (0.21) - Non-GAAP$ 4,118 $ 618 $ 3,480 $ 2.57 15.0 % Six months ended October 26, 2018 Net Income Income Before Income Attributable to Effective (in millions, except per share data) Income Taxes Tax Provision Medtronic Diluted EPS(1) Tax Rate GAAP$ 2,535 $ 338 $ 2,190 $ 1.61 13.3 % Non-GAAP Adjustments: Restructuring and associated costs (2) 190 28 162 0.12 14.7 Acquisition-related items 40 8 32 0.02 20.0 Certain litigation charges 103 12 91 0.07 11.7 (Gain)/loss on minority investments (4) (85) (8) (77) (0.06) 9.4 IPR&D charges (9) 15 - 15 0.01 - Exit of businesses (7) 80 18 62 0.05 22.5 Amortization of intangible assets 891 134 757 0.56
15.0
Certain tax adjustments, net (10) - (29) 29 0.02 - Non-GAAP$ 3,769 $ 501 $ 3,261 $ 2.39 13.3 % (1)Amounts in this column have been intentionally rounded to the nearest$0.01 and, therefore, may not sum. (2)Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses. (3)The charges primarily include costs incurred in connection with legacy-Covidien enterprise resource planning deployment activities, business combination related costs, and changes in the fair value of contingent consideration. (4)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. (5)The charges, which include$413 million recognized in interest expense and ($7 million ) recognized in other operating expense, net, primarily relate to the early redemption of approximately$5.2 billion of senior notes. (6)The charges represent incremental costs of complying with the newEuropean Union medical device regulations for previously registered products and primarily include charges for contractors supporting the project and other direct third-party expenses. (7)The net charges relate to the exit of businesses and are primarily comprised of intangible asset impairments. (8)The net benefit primarily relates to the impact of tax reform inSwitzerland andthe United States . (9)The charges represent acquired IPR&D in connection with an asset acquisition. (10)The net charge relates to the impact of tax reform inthe United States . 54 --------------------------------------------------------------------------------NET SALES Segment and Division The table below illustrates net sales by segment and division for the three and six months endedOctober 25, 2019 andOctober 26, 2018 : Three months ended(1) Six months ended(1) October 26, October 25, October 26, (in millions) October 25, 2019 2018 % Change 2019 2018 % Change Cardiac Rhythm & Heart Failure$ 1,426 $ 1,472 (3) %$ 2,807 $ 2,898 (3) % Coronary & Structural Heart 955 906 5 1,896 1,823
4
Aortic, Peripheral, & Venous 474 480 (1) 942 948
(1)
Cardiac and Vascular Group 2,855 2,858 - 5,645 5,669 - Surgical Innovations 1,454 1,393 4 2,871 2,790 3 Respiratory, Gastrointestinal, & Renal 688 654 5 1,371 1,309
5
Minimally Invasive Therapies Group 2,142 2,047 5 4,242 4,099 4 Brain Therapies 772 701 10 1,512 1,375 10 Spine 692 656 5 1,349 1,308 3 Specialty Therapies 333 322 3 656 631 4 Pain Therapies 315 314 - 607 628 (3) Restorative Therapies Group 2,112 1,993 6 4,124 3,942 5 Diabetes Group 596 583 2 1,188 1,155 3 Total$ 7,706 $ 7,481 3 %$ 15,199 $ 14,865 2 % (1) Revenue amounts have intentionally been rounded to the nearest million and, therefore, may not sum. Our performance displays our continued execution against our three growth strategies: therapy innovation, globalization, and economic value. We continue to allocate our capital to higher growth markets and new opportunities that create competitive advantages and capitalize on the long-term trends in healthcare: namely, the desire to improve clinical outcomes; the growing demand for expanded access to care; and the optimization of cost and efficiency within healthcare systems. We continue to see an acceleration in our innovation cycle within our therapy innovation growth strategy. Our segments invest in a pipeline of groundbreaking medical technology, with several recent product launches and adoption of new therapies contributing to net sales growth. We remain focused on our globalization strategy, as net sales in emerging markets grew 9 percent and 8 percent during the three and six months endedOctober 25, 2019 , respectively, as compared to the corresponding periods in the prior fiscal year. Our emerging market performance continues to benefit from geographic diversification, with strong, balanced results in these markets around the world. Finally, in our third growth strategy, economic value, we continue to execute our value-based healthcare signature programs and aggressively develop unique, value-based healthcare solutions that directly link our therapies to improving outcomes and deliver improved economic value to the payers and providers. We remain focused on leading the shift to healthcare payment systems that reward value and improved patient outcomes over volume. During the first quarter of fiscal year 2020, we realigned our divisions within theRestorative Therapies Group , which included a movement of revenue from Transformative Solutions product lines previously included in Specialty Therapies to a product line under Brain Therapies. As a result, the fiscal year 2019 results have been recast to adjust for this realignment. 55 -------------------------------------------------------------------------------- Segment and Market Geography The table below includes net sales by market geography for each of our segments for the three and six months endedOctober 25, 2019 andOctober 26, 2018 :U.S. (1)(4) Non-U.S. Developed Markets(2)(4) Emerging Markets(3)(4) Three months ended Three months ended Three months ended October 26, October 25, October 26, October 25, October 26, (in millions) October 25, 2019 2018 % Change 2019 2018 % Change 2019 2018 % ChangeCardiac and Vascular Group $ 1,455$ 1,482 (2) %$ 890 $ 895 (1) %$ 510 $ 481 6 % Minimally Invasive Therapies Group 922 872 6 782 772 1 438 403 9 Restorative Therapies Group 1,440 1,357 6 416 412 1 256 224 14 Diabetes Group 311 334 (7) 226 203 11 59 46 28 Total $ 4,129$ 4,045 2 %$ 2,315 $ 2,282 1 %$ 1,262 $ 1,154 9 %U.S. (1)(4) Non-U.S. Developed Markets(2)(4) Emerging Markets(3)(4) Six months ended Six months ended Six months ended October 26, October 25, October 26, October 25, October 26, (in millions) October 25, 2019 2018 % Change 2019 2018 % Change 2019 2018 % ChangeCardiac and Vascular Group $ 2,816$ 2,871 (2) %$ 1,820 $ 1,842 (1) %$ 1,009 $ 956 6 % Minimally Invasive Therapies Group 1,835 1,729 6 1,573 1,600 (2) 834 770 8 Restorative Therapies Group 2,778 2,651 5 842 840 - 504 451 12 Diabetes Group 618 658 (6) 457 406 13 113 91 24 Total $ 8,046$ 7,909 2 %$ 4,692 $ 4,688 - %$ 2,460 $ 2,268 8 % (1)U.S. includesthe United States andU.S. territories. (2)Non-U.S. developed markets includeJapan ,Australia ,New Zealand ,Korea ,Canada , and the countries withinWestern Europe . (3)Emerging markets include the countries of theMiddle East ,Africa ,Latin America ,Eastern Europe , and the countries ofAsia that are not included in the non-U.S. developed markets, as defined above. (4)Revenue amounts have intentionally been rounded to the nearest million and, therefore, may not sum. Net sales increases in theU.S. for the three and six months endedOctober 25, 2019 were primarily attributable to strong growth in ourMinimally Invasive Therapies Group andRestorative Therapies Group , partially offset by declines in ourCardiac and Vascular Group andDiabetes Group . Currency had an unfavorable effect on net sales in non-U.S. developed markets and emerging markets of$97 million and$243 million for the three and six months endedOctober 25, 2019 , respectively. Net sales remained nearly flat in non-U.S. developed markets for the three and six months endedOctober 25, 2019 , attributable to sales declines inWestern Europe , offset by net sales growth inJapan . Net sales growth in emerging markets continues to reflect our broad diversification as we experienced strong performance across the market geography in each of our segments. Looking ahead, our segments are likely to face competitive product launches and pricing pressure, geographic macro-economic risks, reimbursement challenges, impacts from changes in the mix of our product offerings and timing of product registration approvals, replacement cycle challenges, and fluctuations in currency exchange rates. Additionally, changes in procedural volumes could affect our Cardiac and Vascular, Minimally Invasive Therapies, and Restorative Therapies Groups.Cardiac and Vascular Group The Cardiac and Vascular Group's products include pacemakers, insertable and external cardiac monitors, cardiac resynchronization therapy devices (CRT-D), implantable cardioverter defibrillators (ICD), leads and delivery systems, ventricular assist systems, ablation products, electrophysiology catheters, products for the treatment of atrial fibrillation, information systems for the management of patients with Cardiac Rhythm & Heart Failure devices, products designed to reduce surgical site infections, coronary and peripheral stents and related delivery systems, balloons and related delivery systems, endovascular stent graft systems, heart valve replacement technologies, cardiac tissue ablation systems, and open heart and coronary bypass grafting surgical products.The Cardiac and Vascular Group also includes Care Management Services and Cath Lab Managed Services (CLMS) within the Cardiac Rhythm & Heart Failure division.The Cardiac and Vascular Group's net sales for the three and six months endedOctober 25, 2019 were$2.9 billion and$5.6 billion , respectively, which is comparable 56 -------------------------------------------------------------------------------- to the corresponding periods in the prior fiscal year. Currency had an unfavorable impact on net sales for the three and six months endedOctober 25, 2019 of$39 million and$98 million , respectively.The Cardiac and Vascular Group's net sales for the three and six months endedOctober 25, 2019 , as compared to the corresponding periods in the prior fiscal year, were primarily driven by higher sales in Coronary & Structural Heart offset by decreases in Cardiac Rhythm & Heart Failure and Aortic, Peripheral, & Venous. Cardiac Rhythm & Heart Failure net sales for the three and six months endedOctober 25, 2019 were$1.4 billion and$2.8 billion , respectively, a decrease of 3 percent in each period. Cardiac Rhythm & Heart Failure net sales decline for the three and six months endedOctober 25, 2019 was driven by Heart Failure and CLMS. The decline in Heart Failure was driven by the CRT-D and Tachy replacement cycles and LVAD headwinds primarily due to competitive pressures in theU.S. For the three months endedOctober 25, 2019 , we also experienced temporary manufacturing challenges related to our TYRX product. These declines were partially offset by growth in Pacing and AF Solutions within Arrhythmia Management. The growth in Pacing was due to the continued strong adoption of the Micra transcatheter pacing system. The growth in AF Solutions was driven byArtic Front cryoblation products. Coronary & Structural Heart net sales for the three and six months endedOctober 25, 2019 were$955 million and$1.9 billion , respectively, an increase of 5 percent and 4 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Coronary & Structural Heart net sales growth for the three and six months endedOctober 25, 2019 was driven by transcathether aortic valves, reflecting expansion into the low risk patient population, as well as growth of our guide catheters, partially offset by declines in coronary stents sales. Aortic, Peripheral, & Venous net sales for the three and six months endedOctober 25, 2019 were$474 million and$942 million , respectively, a decrease of 1 percent when compared to the corresponding periods in the prior fiscal year, with growth in Aortic and Venous offsetting declines in Peripheral. Aortic net sales growth for the three and six months endedOctober 25, 2019 was driven by the continued momentum from the launch of the Valiant Navion thoracic stent graft system. Venous net sales growth for the three and six months endedOctober 25, 2019 was driven by ongoing adoption of the VenaSeal vein closure system. Peripheral net sales decline for the three and six months endedOctober 25, 2019 was due to drug-coated balloons, as uncertainty around Paclitaxel continues to impact the market. Looking ahead, we expect ourCardiac and Vascular Group could be affected by the following: •Continued acceptance and growth from penetration of the self-expanding CoreValve Evolut transcatheter aortic valve replacement platform into intermediate risk indication globally. •Acceptance and growth of the self-expanding CoreValve Evolut transcatheter aortic valve replacement platform for the treatment of patients determined to be at low risk with surgery. •Changes to theU.S. Medicare national coverage determination for transcatheter aortic valve replacement that will allow approximately 30% moreU.S. centers to offer the therapy to patients. •Continued acceptance and growth from Evolut PRO, which provides industry-leading hemodynamics, reliable delivery, and advanced sealing with an excellent safety profile, as well as acceptance of our next generation Evout Pro Plus TAVR valve which launched late in the current quarter.
•Continued acceptance and growth of the CRT-P quadripolar pacing system.
•Continued acceptance and growth of the Claria MRI CRT-D system with EffectivCRT Diagnostic and Effective CRT during AF algorithm.
•Continued growth of our Micra transcatheter pacing system.
•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.
57
--------------------------------------------------------------------------------
•Continued acceptance of the HVAD System as a Destination Therapy for patients
with advanced heart failure who are not candidates for heart transplants. The
HVAD System, a left ventricular assist device or LVAD, helps the heart pump and
increases the amount of blood that flows through the body. In the U.S. , we
received FDA approval for the Destination Therapy indication in September 2017
and the thoracotomy indication in July 2018 , which allows for a less-invasive
implant via a small surgical incision between the patient's ribs on the left
side of the chest. We expect that future LVAD net sales will continue to be
impacted by a competitor's product launch and the impact of changes in the U.S.
heart transplant guidelines.
•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 of Care Management Services as post-acute care services become even more critical in bundled payment models for different interventions or therapies. •Continued acceptance and growth from the VenaSeal vein closure system inthe United States , for which reimbursement payment was established inJanuary 2018 and payer coverage has been gradually increasing. The VenaSeal 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. •Continued acceptance and growth from the Valiant family of thoracic stent grafts, including the Valiant Navion which receivedU.S. FDA approval inOctober 2018 and CE Mark approval inNovember 2018 . •Ongoing impact of Paclitaxel safety concerns affecting our drug coated balloons.Minimally Invasive Therapies Group The Minimally Invasive Therapies Group'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 including surgical stapling devices, vessel sealing instruments, wound closure, electrosurgery products, hernia mechanical devices, mesh implants, advanced ablation, interventional lung, ventilators, capnography, airway products, sensors, dialysis, and monitors.The Minimally Invasive Therapies Group's net sales for the three and six months endedOctober 25, 2019 were$2.1 billion and$4.2 billion , respectively, an increase of 5 percent and 4 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Currency had an unfavorable impact on net sales for the three and six months endedOctober 25, 2019 of$30 million and$80 million , respectively. Surgical Innovations net sales for the three and six months endedOctober 25, 2019 were$1.5 billion and$2.9 billion , respectively, an increase of 4 percent and 3 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Surgical Innovations net sales growth was driven by strong sales in Advanced Stapling and Advanced Energy, led by the LigaSure vessel sealing instruments with nano-coating, LigaSure Exact Dissector and L-Hook Laparoscopic Sealer/Divider, Valleylab FT10 energy platform, Tri-Staple 2.0 endo stapling specialty reloads, and the EEA circular stapler. Respiratory, Gastrointestinal, & Renal net sales for the three and six months endedOctober 25, 2019 were$688 million and$1.4 billion , respectively, increases of 5 percent as compared to the corresponding periods in the prior fiscal year. Respiratory, Gastrointestinal, & Renal net sales growth was driven by strength in Patient Monitoring, including the continued adoption of MicroStream capnography monitoring products, Nellcor pulse oximetry and BIS brain monitoring consumables, along with growth in Respiratory Interventions, including the continued adoption of ventilators and video laryngoscopy products. Also driving growth for fiscal year 2020 was growth in GI & Hepatology, including PillCam capsule endoscopy systems, Bravo calibration-free reflux testing systems, and EndoFLIP imaging systems, and strength in renal access products. Looking ahead, we expect ourMinimally Invasive Therapies Group 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. 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. 58 -------------------------------------------------------------------------------- •TheJuly 29, 2017 divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses. We have entered into Transition Manufacturing Agreements (TMAs) with Cardinal Health, Inc. (Cardinal). The TMAs will contribute to net sales and are designed to ensure and facilitate an orderly transfer of business operations for a transition period of two to five years, with the ability to extend upon mutual agreement of the parties. •Our ability to execute ongoing strategies in order to address the competitive pressure of reprocessing of our vessel sealing disposables in theU.S. •Our ability to create markets and drive product and procedures into emerging markets. We have high quality and cost-effective surgical products designed for customers in emerging markets such as the ValleyLab LS10 single channel vessel sealing generator, which is compatible with our line of LigaSure instruments and designed for simplified use and affordability. •Continued acceptance and growth within the end stage renal disease market. The population of patients treated for end stage renal disease globally is expected to double over the next decade. We plan to grow our therapy innovation with scalable and affordable dialysis delivery while investing in vascular creation and maintenance technologies. In addition, the HD multi-pass system reduces infrastructure by requiring less water, less start-up costs, and offers high quality ultrapure dialysate treatment. We are expecting regulatory filing in early fiscal year 2021, with launch following regulatory clearance in targeted countries. •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 thePuritan Bennett 980 ventilator, Microstream Capnography, Nellcor pulse oximetry system with OxiMax technology, Shiley tracheostomy and endotracheal tubes, and McGRATH MAC video laryngoscopes. •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, theBarrx platform through ablation with theBarrx 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 the superDimension GenCut core biopsy system and the Triple Needle Cytology Brush, a lung tissue biopsy tool for use with the superDimension navigation system. The superDimension system enables 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.Restorative Therapies Group The Restorative Therapies Group's products focus on various areas of the spine, bone graft substitutes, biologic products, trauma, implantable neurostimulation therapies and drug delivery systems for the treatment of chronic pain, movement disorders, epilepsy, overactive bladder, urinary retention, fecal incontinence and gastroparesis, as well as products to treat conditions of the ear, nose, and throat (ENT), and systems that incorporate advanced energy surgical instruments.The Restorative Therapies Group also manufactures and sells image-guided surgery and intra-operative imaging systems, robotic guidance systems used in robot assisted spine procedures, and therapies to treat diseases of the vasculature in and around the brain, including coils, neurovascular stents and flow diversion products.The Restorative Therapies Group's net sales for the three and six months endedOctober 25, 2019 were$2.1 billion and$4.1 billion , respectively, an increase of 6 percent and 5 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Currency had an unfavorable impact on net sales for the three and six months endedOctober 25, 2019 of$17 million and$43 million , respectively. Net sales growth for the three and six months endedOctober 25, 2019 was driven by the Brain Therapies, Spine, and Specialty Therapies divisions. Net sales growth for the six months endedOctober 25, 2019 was partially offset by modest declines in Pain Therapies. Brain Therapies net sales for the three and six months endedOctober 25, 2019 were$772 million and$1.5 billion , an increase of 10 percent as compared to the corresponding periods in the prior fiscal year. Brain Therapies net sales growth was driven by strong growth in both Neurovascular and Neurosurgery. Neurovascular net sales growth was driven by continued strength in both the Hemorrhagic and Ischemic stroke businesses. The Hemorrhagic stroke business saw growth in flow diversion products, 59 -------------------------------------------------------------------------------- particularly with our Pipeline Flex flow diversion system. The Ischemic stroke business saw continued strong adoption of the recently launched Solitaire X stent retriever products as well as our Riptide aspiration system and React catheters. Neurosurgery net sales growth was driven by continued strong demand for the StealthStation S8 surgical navigation systems, O-Arm Imaging Systems, and Mazor X robotic guidance systems. Specifically, for the three months endedOctober 25, 2019 , Neurosurgery also saw growth due to the strong uptake of the recently launched Midas Rex MR8 high-speed drill system which was fully launched in theU.S. during the quarter. Spine net sales for the three and six months endedOctober 25, 2019 were$692 million and$1.3 billion , respectively, an increase of 5 percent and 3 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Net sales growth for the three and six months endedOctober 25, 2019 was driven by continued success of ourSurgical Synergy strategy, which integrates our spinal implants with enabling technologies such as imaging, navigation, power instruments, nerve monitoring and Mazor robotics sold by our Neurosurgery business. These enabling technologies also contributed to the strong performance in Neurosurgery within our Brain Therapies division. For the three months endedOctober 25, 2019 , Core Spine grew primarily through new product penetration from recently launched products, including the Infinity OCT System, T2 Stratosphere, andPrestige LP cervical disc system. Specialty Therapies net sales for the three and six months endedOctober 25, 2019 were$333 million and$656 million , respectively, an increase of 3 percent and 4 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Net sales growth was driven by capital equipment sales of the StealthStation ENT surgical navigation system, intraoperative NIM nerve monitoring system, and powered ENT instruments in ENT, along with sales of the InterStim II neurostimulator inPelvic Health . Pain Therapies net sales for the three and six months endedOctober 25, 2019 were$315 million and$607 million , respectively, which was flat and a decrease of 3 percent, respectively, as compared to the corresponding periods in the prior fiscal year. For the six months endedOctober 25, 2019 , the decrease in net sales was driven by the continued overall slowdown in theU.S. spinal cord stimulation market. For the three months endedOctober 25, 2019 , Interventional Pain growth partially offset the decline in Pain Stimulation based on continued success of both the Kyphon V vertebroplasty and Osteocool RF Spinal Tumor ablation systems. Looking ahead, we expect ourRestorative Therapies Group could be affected by the following: •Continued acceptance and growth of the Solitare 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. •Continued growth from Neurosurgery StealthStation and O-Arm Imaging Systems, Midas, and ENT Navigation and Power Systems. •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, which received FDA approval inNovember 2018 . •Strengthening of our position as a global leader in enabling technologies for spine surgery as a result of theDecember 2018 acquisition ofMazor Robotics . •Strengthening of our position in the spine titanium interbody implant marketplace as a result of theJune 2019 acquisition of Titan Spine. •Continued adoption of our integrated solutions through theSurgical 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, such as ourInfinity OCT System and Prestige LP cervical disc system. •Growth in the broader vertebral compression fracture (VCF) and adjacent markets, as we continue to pursue the development of other therapies to treat more patients with VCF, including continued success of both the Kyphon V vertebroplasty system and the Osteocool RF Spinal Tumor ablation system. 60 -------------------------------------------------------------------------------- •Continued global adoption of our Intellis spinal cord stimulator, Evolve workflow algorithm, and Snapshot reporting to treat chronic pain in major markets around the world. •Ongoing obligations under theU.S. FDA consent decree entered inApril 2015 relating to the SynchroMed drug infusion system and the Neuromodulation quality system. TheU.S. FDA lifted its distribution requirements on our implantable drug pump inOctober 2017 and its warning letter inNovember 2017 . •Continued acceptance of our devices for the treatment of Parkinson's Disease, epilepsy and other movement disorders. We launched our medically refractory epilepsy device in theU.S. inNovember 2018 . •Continued acceptance and growth of our Specialty Therapies, including InterStim therapy 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.Diabetes Group The Diabetes Group's products include insulin pumps, continuous glucose monitoring (CGM) systems, and insulin pump consumables.The Diabetes Group's net sales for the three and six months endedOctober 25, 2019 were$596 million and$1.2 billion , respectively, an increase of 2 percent and 3 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Currency had an unfavorable impact on net sales for the three and six months endedOctober 25, 2019 of$12 million and$23 million , respectively.The Diabetes Group's net sales growth for the three and six months endedOctober 25, 2019 was primarily attributable to growth in international markets resulting from strong consumer demand of the MiniMed 670G. In addition, continued adoption of the Guardian Connect Smart CGM System contributed to the revenue growth in the period. Our strong international growth was partially offset by declines in ourU.S. business as a result of competitive challenges. Looking ahead, we expect ourDiabetes Group could be affected by the following: •Increasing pump competition in an expanding U.S. market. •Continued patient demand for the MiniMed 670G system, the first hybrid closed loop system in the world. The system is powered by SmartGuard technology, which mimics some of the functions of a healthy pancreas by providing two levels of automated insulin delivery, maximizing Time in Range with reduced user input. Approximately 224,000 trained, active users are benefiting from SmartGuard technology. •Continued acceptance and future growth internationally for the MiniMed 670G system. This system received CE mark inJune 2018 and is now commercialized inCanada ,Australia ,Chile and in select European and Central American countries. The global adoption of sensor-augmented insulin pump systems has resulted in strong sensor attachment rates. Reimbursement inGermany was received inSeptember 2019 and we expect additional launches outside theU.S. in the remainder of fiscal year 2020, includingFrance during the fourth quarter. •Changes in medical reimbursement policies and programs, along with additional payor coverage of the MiniMed 670G system. •Acceptance of the upcoming launch of our advanced hybrid closed loop system, MiniMed 780G, along with the advancement of ourPersonalized Closed Loop system which was just granted "Breakthrough Device" designation by the FDA withinthe United States . These technologies feature our next-generation algorithms designed to improve Time in Range by further automating insulin delivery. •Continued acceptance and growth of the Guardian Connect CGM system which displays glucose information directly to a smartphone. •Continued partnership with UnitedHealthcare as the preferred in-network provider of insulin pumps, giving their members, including pediatric patients 7 years and above, access to our advanced diabetes technology and comprehensive support services. 61 -------------------------------------------------------------------------------- CRITICAL ACCOUNTING ESTIMATES We have used various accounting policies to prepare the consolidated financial statements in accordance withU.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 endedApril 26, 2019 . The preparation of the consolidated financial statements, in conformity withU.S. GAAP, requires us to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates reflect our best judgment about economic and market conditions and the potential effects on the valuation and/or carrying value of assets and liabilities based upon relevant information available. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our critical accounting estimates include the following: Litigation Contingencies We are involved in a number of legal actions involving product liability, intellectual property and commercial disputes, shareholder related matters, environmental proceedings, income tax disputes, and governmental proceedings and investigations. The outcomes of these legal actions are not completely within our control and may not be known for prolonged periods of time. In some actions, the enforcement agencies or private claimants seek damages, as well as other civil or criminal remedies (including injunctions barring the sale of products that are the subject of the proceeding), that could require significant expenditures or result in lost revenues or limit our ability to conduct business in the applicable jurisdictions. Estimating probable losses from our litigation and governmental proceedings is inherently difficult, particularly when the matters are in early procedural stages, with incomplete scientific facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, or punitive damages; or could result in a change in business practice. Our significant legal proceedings are discussed in Note 17 to the current period's consolidated financial statements. Income Tax Reserves We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may or may not prevail. UnderU.S. GAAP, if we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50 percent likely of being realized upon settlement. We presume that all tax positions will be examined by a taxing authority with full knowledge of all relevant information. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We regularly monitor our tax positions and tax liabilities. We reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit, or derecognize a previously recorded tax benefit, when there is (i) a completion of a tax audit, (ii) effective settlement of an issue, (iii) a change in applicable tax law including a tax case or legislative guidance, or (iv) the expiration of the applicable statute of limitations. Significant judgment is required in accounting for tax reserves. Although we believe that we have adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on our effective tax rate, consolidated earnings, financial position and/or cash flows. Valuation of Intangible Assets and Goodwill When we acquire a business, the assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date.Goodwill is the excess of the purchase price over the estimated fair value of net assets of acquired businesses. Intangible assets primarily include patents, trademarks, tradenames, customer relationships, purchased technology, and IPR&D. Determining the fair value of intangible assets acquired as part of a business combination requires us to make significant estimates. These estimates include the amount and timing of projected future cash flows of each project or technology, the discount rate used to discount those cash flows to present value, the assessment of the asset's life cycle, and the consideration of legal, technical, regulatory, economic, and competitive risks. The test for goodwill impairment requires us to make several estimates to determine fair value, most of which are based on projected future cash flows. Our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value. We assess the impairment of goodwill at the reporting unit level annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. We test definite-lived intangible assets for impairment when an event occurs or circumstances change that would indicate the carrying amount of the assets or asset group may be impaired. Our tests are based on future cash flows that require significant judgment with respect to future revenue and expense growth rates, appropriate discount rates, asset groupings, and other assumptions and estimates. We use estimates that are consistent with our business plans and a market participant's view of the assets being evaluated. Actual results may differ from our estimates due to a number of factors including, among others, 62 -------------------------------------------------------------------------------- changes in competitive conditions, timing of regulatory approval, results of clinical trials, changes in worldwide economic conditions, and fluctuations in currency exchange rates. We assess the impairment of indefinite-lived intangible assets annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Our impairment tests of indefinite-lived intangible assets require us to make several estimates to determine fair value, including projected future cash flows and discount rates. NEW ACCOUNTING PRONOUNCEMENTS Information regarding new accounting pronouncements is included in Note 2 to the current period's consolidated financial statements. ACQUISITIONS Information regarding acquisitions is included in Note 4 to the current period's consolidated financial statements. COSTS AND EXPENSES The following is a summary of cost of products sold, research and development, and selling, general, and administrative expenses as a percent of net sales: Three months ended Six months endedOctober 25, 2019
31.1 % 29.4 % 31.3 % 29.6 %
Research and development expense 7.8 % 7.9 % 7.8 % 7.9 %
Selling, general, and administrative expense 34.0 % 34.8 % 34.0 % 35.0 %
Cost of Products Sold We continue to focus on reducing our costs of production
through supplier management, manufacturing improvements, and optimizing our
manufacturing network.
Cost of products sold for the three and six months ended October 25, 2019 was
$2.4 billion and $4.8 billion , respectively. The increase in cost of products
sold as a percentage of net sales for the three and six months ended October 25,
2019 as compared to the corresponding periods in the prior fiscal year was
driven by increased restructuring and associated costs and increased duty,
driven in part by increased China tariffs on inbound products. Additionally, for
the six months ended October 25, 2019 , we incurred increased expenses to
overcome the sterilization shortage in our Minimally Invasive Therapies Group .
Cost of products sold for the three and six months ended October 25, 2019
included $32 million and $67 million , respectively, of restructuring and
associated costs, as compared to $22 million and $37 million , respectively, for
corresponding periods in the prior fiscal year.
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 and six
months ended October 25, 2019 was $603 million and $1.2 billion , respectively.
Selling, General, and Administrative Expense Our goal is to continue to leverage
selling, general, and administrative expense initiatives and to continue to
realize cost synergies expected from our acquisitions. Selling, general, and
administrative expense primarily consists of salaries and wages, other
administrative costs, such as professional fees and marketing expenses, and
certain acquisition and restructuring expenses.
Selling, general, and administrative expense for the three and six months ended
October 25, 2019 was $2.6 billion and $5.2 billion , respectively. The decrease
in selling, general, and administrative expense as a percentage of net sales for
the three and six months ended October 25, 2019 benefited from our Enterprise
Excellence program and continued net sales growth. Selling, general, and
administrative expense for the three and six months ended October 26, 2018 also
included expenses incurred to fulfill our Transition Service Agreements (TSAs)
that we entered into with Cardinal Health in conjunction with the Divestiture.
63
--------------------------------------------------------------------------------The following is a summary of other costs and expenses:
Three months ended Six months ended
(in millions) October 25, 2019
$ 441 $ 445 $ 881 $ 891
Restructuring charges, net 27 24 74 86
Certain litigation charges 121 - 168 103
Other operating expense, net 149 70 127 221
Other non-operating income, net (108) (52) (209) (238)
Interest expense 165 241 774 483
Amortization of Intangible Assets Amortization of intangible assets includes the
amortization expense of our definite-lived intangible assets, consisting of
purchased patents, trademarks, tradenames, customer relationships, purchased
technology, and other intangible assets. Amortization expense was $441 million
and $881 million for the three and six months ended October 25, 2019 ,
respectively, as compared to $445 million and $891 million for the three and six
months ended October 26, 2018 , respectively.
Restructuring Charges, Net
In the third quarter of fiscal year 2018, we announced a multi-year global
Enterprise Excellence Program designed to drive long-term business growth and
sustainable efficiency. The Enterprise Excellence Program is expected to further
leverage our global size and scale as well as enhance the customer and employee
experience.
The Enterprise Excellence Program is focused 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 is designed to drive operating margin
improvement as well as fund investment in strategic growth initiatives, with
expected annual gross savings of more than $3.0 billion from cost reductions and
leverage of our fixed infrastructure by the end of fiscal year 2022.
Approximately $500 million to $700 million of gross annual savings are expected
to be achieved each fiscal year through the end of fiscal year 2022.
The Enterprise Excellence Program is expected to result in pre-tax restructuring
charges of approximately $1.6 billion to $1.8 billion , the vast majority of
which are expected to be incurred by the end of fiscal year 2022 and result in
cash outlays to be substantially complete by the end of fiscal year 2023.
Approximately half of the estimated charges are related to employee termination
benefits. The remaining charges are costs associated with the restructuring
program, such as salaries for employees supporting the program and consulting
expenses. We expect these costs to be recognized within restructuring charges,
net, cost of products sold, and selling, general, and administrative expense in
the consolidated statements of income.
For the three and six months ended October 25, 2019 , we recognized charges of
$95 million and $231 million , respectively. Additionally, we incurred accrual
adjustments of $1 million and $13 million for the three and six months ended
October 25, 2019 , respectively, related to certain employees identified for
termination finding other positions within Medtronic. For the three and six
months ended October 25, 2019 , charges included $28 million and $81 million ,
respectively, recognized within restructuring charges, net in the consolidated
statements of income, primarily comprised of employee termination benefits. For
the three and six months ended October 25, 2019 , 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 $32 million
and $61 million , respectively, recognized within cost of products sold and $35
million and $77 million , respectively, recognized within selling, general, and
administrative expense in the consolidated statements of income. For the six
months ended October 25, 2019 , cost of products sold also included $6 million of
fixed asset write-downs.
For the three and six months ended October 26, 2018 , we recognized charges of
$75 million and $195 million , respectively. Additionally, we incurred accrual
adjustments of $4 million and $2 million for the three and six months ended
October 26 ,
64
--------------------------------------------------------------------------------
2018, respectively, primarily related to employee termination benefits being
more than initially estimated. For the three and six months ended October 26,
2018 , charges included $22 million and $91 million , respectively, recognized
within restructuring charges, net in the consolidated statements of income,
primarily comprised of employee termination benefits. For the three and six
months ended October 26, 2018 , 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 $22 million and $37 million ,
respectively, recognized within cost of products sold and $31 million and $54
million , respectively, recognized within selling, general and administrative
expense in consolidated statements of income. For the six months ended
October 26, 2018 , selling, general and administrative expense also included $13
million of fixed asset write-downs.
For additional information about our restructuring programs, refer to Note 5 to
the current period's consolidated financial statements.
Certain Litigation Charges We classify litigation charges and gains related to
significant legal matters as certain litigation charges. During the three and
six months ended October 25, 2019 we recognized $121 million and $168 million ,
respectively, of certain litigation charges related to probable and estimable
damages for significant legal matters. During the six months ended October 26,
2018 , we recognized $103 million of certain litigation charges. There were no
certain litigation charges recognized during the three months ended October 26,
2018 .
Other Operating Expense, Net Other operating expense, 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, TSA income, a commitment to the Medtronic Foundation , and charges
associated with business exits. For the three and six months ended October 25,
2019 , other operating expense, net was $149 million and $127 million ,
respectively, as compared to $70 million and $221 million for the three and six
months ended October 26, 2018 , respectively. The changes in other operating
expense, net are primarily attributable to our remeasurement and hedging
programs as well as an $80 million charge associated with our commitment to the
Medtronic Foundation during the three and six months ended October 25, 2019 .
Combined, our remeasurement and hedging programs resulted in a $47 million gain
and $121 million gain for the three and six months ended October 25, 2019 ,
respectively, as compared to a $10 million loss and $26 million loss for the
three and six months ended October 26, 2018 , respectively. Additionally, for the
three and six months ended October 25, 2019 , other operating expense, net
includes a $41 million charge associated with the exit of businesses, as
compared to an $80 million charge associated with the exit of a business during
the six months ended October 26, 2018 . There were no charges associated with the
exit of a business during the three months ended October 26, 2018 .
Other Non-Operating Income, Net Other non-operating income, net includes the
non-service component of net periodic pension and postretirement benefit cost,
investment gains and losses, and interest income. For the three and six months
ended October 25, 2019 , other non-operating income, net was $108 million and
$209 million , respectively, as compared to $52 million and $238 million for the
three and six months ended October 26, 2018 , respectively. The change in other
non-operating income, net is primarily attributable to gains and losses on our
minority investment portfolio. Gains (losses) on minority investments were $12
million and $11 million for the three and six months ended October 25, 2019 ,
respectively, as compared to ($25) million and $85 million for the three and six
months ended October 26, 2018 , respectively.
Interest Expense Interest expense includes interest incurred on our outstanding
borrowings, amortization of debt issuance costs and debt premiums or discounts,
amortization of gains or losses on terminated or de-designated interest rate
derivative instruments, and charges recognized in connection with the tender and
early redemption of senior notes. For the three and six months ended October 25,
2019 , interest expense was $165 million and $774 million , respectively, as
compared to $241 million and $483 million for the three and six months ended
October 26, 2018 , respectively. The decrease in interest expense during the
three months ended October 25, 2019 was primarily due to a decrease in the
weighted-average interest rate of outstanding debt obligations, as compared to
the corresponding period in the prior fiscal year, driven by our debt issuance
and tender transactions in the fourth quarter of fiscal year 2019 and first
quarter of fiscal year 2020. The increase in interest expense during the six
months ended October 25, 2019 was primarily driven by $413 million of charges
recognized in connection with the tender and early redemption of $5.2 billion of
senior notes, partially offset by a decrease in the weighted-average interest
rate of outstanding debt obligations due to the aforementioned debt issuance and
tender transactions.
65
--------------------------------------------------------------------------------
INCOME TAXES
Three months ended Six months ended
(in millions) October 25, 2019 October 26, 2018 October 25, 2019 October 26, 2018
Income tax provision $ (77) $ 235 $ 23 $ 338
Income before income taxes 1,294 1,355 2,271 2,535
Effective tax rate (6.0) % 17.3 % 1.0 % 13.3 %
Non-GAAP income tax provision $ 312 $ 256 $ 618 $ 501
Non-GAAP income before income taxes 2,096 1,921 4,118 3,769
Non-GAAP Nominal Tax Rate 14.9 % 13.3 % 15.0 % 13.3 %
Difference between the effective tax rate
and Non-GAAP Nominal Tax Rate 20.9 % (4.0) % 14.0 % - %
Many of the countries we operate in have statutory tax rates lower than our U.S.
statutory rate, thereby resulting in an overall effective tax rate less than the
U.S. statutory rate of 21 percent. A significant portion of our earnings are
generated from operations in Puerto Rico , Switzerland , and Ireland . The
statutory tax rates for these jurisdictions range from 12.5 percent to 45.1
percent. Our earnings in Puerto Rico and Switzerland are subject to certain tax
incentive grants which provide for tax rates lower than the country statutory
tax rates. Unless our tax incentive grants are extended, they will expire
between fiscal years 2020 and 2034. The tax incentive grants scheduled to expire
during fiscal year 2020 are not expected to have a material impact on our
financial results. Refer to Note 14 to the consolidated financial statements
included in our Annual Report on Form 10-K for the fiscal year ended April 26,
2019 for additional information.
Our effective tax rate for the three and six months ended October 25, 2019 was
(6.0) percent and 1.0 percent, respectively, as compared to 17.3 percent and
13.3 percent for the three and six months ended October 26, 2018 , respectively.
The decrease in the effective tax rate for the three and six months ended
October 25, 2019 , as compared to the corresponding period in the prior fiscal
year, was primarily due to the impact of certain tax adjustments.
Our Non-GAAP Nominal Tax Rate for the three and six months ended October 25,
2019 was 14.9 percent and 15.0 percent, respectively, as compared to 13.3
percent for the three and six months ended October 26, 2018 . The change in our
Non-GAAP Nominal Tax Rate was primarily due to the impact of a lapse of federal
statutes of limitations in the prior year and 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 and six months ended October 25, 2019 of approximately $21 million and $41
million , respectively.
Certain Tax Adjustments
During the three months ended October 25, 2019 , the net benefit from certain tax
adjustments of $251 million , recognized in income tax provision in the
consolidated statements of income, included the following:
•A benefit of $251 million related to tax legislative changes in Switzerland
which abolished certain preferential tax regimes the Company benefited from and
replaced them with a new set of internationally accepted measures. The
legislation provided for higher effective tax rates but allowed for a
transitional period whereby an amortizable asset was created for Swiss federal
income tax purposes which will be amortized and deducted over a 10-year period.
During the six months ended October 25, 2019 , the net benefit from certain tax
adjustments of $281 million , recognized in income tax provision in the
consolidated statements of income, included the following:
•A net benefit of $30 million related to U.S. Treasury's issuance of certain
Final Regulations associated with U.S. Tax Reform. The primary impact of these
regulations resulted in the re-establishment of our permanently reinvested
assertion on certain foreign earnings and reversing the previously accrued tax
liability. This benefit was partially offset by additional tax associated with a
previously executed internal reorganization of certain foreign subsidiaries.
•A benefit of $251 million related to tax legislative changes in Switzerland
which abolished certain preferential tax regimes the Company benefited from and
replaced them with a new set of internationally accepted measures. The
legislation provided for higher effective tax rates but allowed for a
transitional period whereby an amortizable asset was created for Swiss federal
income tax purposes which will be amortized and deducted over a 10-year period.
66--------------------------------------------------------------------------------
During the three months endedOctober 26, 2018 , the charge from certain tax adjustments of$58 million , recognized in income tax provision in the consolidated statements of income, included the following: •A charge of$37 million associated with the transition tax liability recorded in connection withU.S. Tax Reform. •A charge of$21 million related to the recognition of a prepaid tax expense resulting from the reduction in theU.S. statutory tax rate due toU.S. Tax Reform and the sale ofU.S. manufactured inventory held as ofApril 27, 2018 . During the six months endedOctober 26, 2018 , the net charge from certain tax adjustments of$29 million , recognized in income tax provision in the consolidated statements of income, included the following: •A benefit of$13 million associated with the transition tax liability recorded in connection withU.S. Tax Reform. •A charge of$42 million related to the recognition of a prepaid tax expense resulting from the reduction in theU.S. statutory tax rate due toU.S. Tax Reform and the sale ofU.S. manufactured inventory held as ofApril 27, 2018 . LIQUIDITY AND CAPITAL RESOURCES Our liquidity and capital structure is evaluated regularly within the context of our annual operating and strategic planning process. 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:
© Edgar Online, source
