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 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 endedJuly 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 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 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 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 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 theU.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. 29 --------------------------------------------------------------------------------
The following is a summary of revenue, diluted earnings per share, and operating
cash flow for the three months ended
30--------------------------------------------------------------------------------
GAAP to Non-GAAP Reconciliations The tables below present our GAAP to Non-GAAP
reconciliations for the three months ended
Three months ended July 30, 2021
Income Net Income
Income Before Tax Provision Attributable to Effective
(in millions, except per share data) Income Taxes (Benefit) Medtronic Diluted EPS 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 Income Net Income Income Before Tax Provision Attributable to Effective (in millions, except per share data) Income Taxes (Benefit) Medtronic Diluted EPS 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 newEuropean 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'sJune 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$211 million for commitments and obligations in connection with our decision, including customer support obligations, restructuring, and other associated costs. Medtronic remains committed to serving the needs of the approximately 4,000 patients currently implanted with the HVAD System. (6)The charges are associated with a change in the company's permanent reinvestment assertion on certain historical earnings and the amortization of previously established deferred tax assets from intercompany intellectual property transactions. (7)The charges primarily include business combination costs, certain license payments for unapproved technology, changes in fair value of contingent consideration, and a change in amounts accrued for certain contingent liabilities for recent acquisitions. 31 -------------------------------------------------------------------------------- Free Cash Flow Free cash flow, a non-GAAP financial measure, is calculated by subtracting additions to property, plant, and equipment from net cash provided by operating activities. Management uses this non-GAAP financial measure, in addition toU.S. GAAP financial measures, to evaluate our operating results. Free cash flow should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance withU.S. GAAP. Reconciliations between net cash provided by operating activities (the most comparableU.S. GAAP measure) and free cash flow are as follows: Three months ended (in millions) July 30, 2021 July 31, 2020 Net cash provided by operating activities$ 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 endedJuly 30, 2021 andJuly 31, 2020 : [[Image Removed: mdt-20210730_g3.jpg]] [[Image Removed: mdt-20210730_g4.jpg]] 32 --------------------------------------------------------------------------------
The table below illustrates net sales by segment and division for the three
months ended
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
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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 endedJuly 30, 2021 andJuly 31, 2020 :
[[Image Removed: mdt-20210730_g5.jpg]][[Image Removed: mdt-20210730_g6.jpg]]
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The table below includes net sales by market geography for each of our segments
for the three months ended
U.S.(1) Non-U.S. Developed Markets(2) Emerging Markets(3)
Three months ended Three months ended Three months ended
July 31, July 30, July 31, July 31,
(in millions) July 30, 2021 2020 % Change 2021 2020 % Change July 30, 2021 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
[[Image Removed: mdt-20210730_g7.jpg]][[Image Removed: mdt-20210730_g8.jpg]] Cardiac Rhythm & Heart Failure (CRHF) net sales for the three months endedJuly 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 ofArtic Front cryoablation system. Cardiac Rhythm Management andCardiovascular 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 ourJune 3, 2021 decision to stop the distribution and sale of the system. Structural Heart & Aortic (SHA) net sales for the three months endedJuly 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 endedJuly 30, 2021 increased 11 percent as compared to the corresponding period in the prior fiscal year. The increase was led by growth inPeripheral 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 inChina . 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 receivedU.S. FDA approval and CE Mark approval in January andApril 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 andU.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. 35 -------------------------------------------------------------------------------- •Acceptance and growth of the LINQ II cardiac monitor, which received CE Mark inNovember 2019 and gainedU.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 ofArctic Front cryoablation for treatment of atrial fibrillation. In June, 2021, theArctic Front cryoablation system received a first line therapy designation from theU.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 inEurope during the first quarter of fiscal year 2021. InAugust 2020 , theU.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 theU.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. InAugust 2021 , theU.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 inChina could impact other products within the division. •Continued acceptance and growth from the VenaSeal Closure System in theU.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 inDecember 2021 . •OurJune 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 endedJuly 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 endedJuly 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. 36 --------------------------------------------------------------------------------
The graphs below illustrate the percent of Medical Surgical net sales by
division for the three months ended
[[Image Removed: mdt-20210730_g9.jpg]][[Image Removed: mdt-20210730_g10.jpg]] Surgical Innovations (SI) net sales for the three months endedJuly 30, 2021 increased 44 percent as compared to the corresponding period in the prior fiscal year. Net sales growth was led by Advanced Stapling andVessel Sealing , particularly in theU.S. andWestern 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 endedJuly 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 theU.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. 37 -------------------------------------------------------------------------------- •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, McGRATH MAC video laryngoscopes, as well as the SonarMed Airway Monitoring System for the NICU that was launched in theU.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, 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 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 inChile andPanama 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 endedJuly 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 endedJuly 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. 38 --------------------------------------------------------------------------------
The graphs below illustrate the percent of Neuroscience net sales by division
for the three months ended
[[Image Removed: mdt-20210730_g11.jpg]][[Image Removed: mdt-20210730_g12.jpg]] Cranial and Spinal Technologies (CST) net sales for the three months endedJuly 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 endedJuly 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 theU.S. Neuromodulation (NM) net sales for the three months endedJuly 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 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 within our CST business such as ourInfinity OCT System and Prestige LP cervical disc system. 39 -------------------------------------------------------------------------------- •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 ourENT 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 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 . •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 endedJuly 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 endedJuly 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 theU.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 receivedU.S. FDA approval inAugust 2020 and launched inNovember 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. inJune 2020 and launched in over 30 countries on four continents outside theU.S. , primarily inEurope , starting inOctober 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 theSeptember 10, 2020 acquisition of Companion Medical. Companion Medical offers aU.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. 40 -------------------------------------------------------------------------------- •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 theU.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 endedJuly 30, 2021 andJuly 31, 2020 : [[Image Removed: mdt-20210730_g13.jpg]] 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 endedJuly 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 endedJuly 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 endedJuly 30, 2021 included$58 million of inventory write-downs associated with ourJune 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 endedJuly 30, 2021 was$750 million as compared to$621 million for the corresponding period in the prior fiscal year. The three months endedJuly 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 endedJuly 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 endedJuly 30, 2021 was$2.5 billion , as compared to$2.4 billion for the corresponding period in the prior fiscal year. The decrease in selling, general, and administrative expense as a percentage of net sales was primarily driven by net sales growth as a result of the recovery of elective procedures. 41 --------------------------------------------------------------------------------
The following is a summary of other costs and expenses (income):
Three months ended
(in millions) July 30, 2021 July 31, 2020
Amortization of intangible assets$ 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 endedJuly 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 endedJuly 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. 42 --------------------------------------------------------------------------------
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 endedJuly 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 endedJuly 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 endedJuly 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 endedJuly 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 endedJuly 30, 2021 , as compared to a net gain of$31 million for the three months endedJuly 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 endedJuly 30, 2021 andJuly 31, 2020 , respectively. Interest income was$43 million and$52 million for the three months endedJuly 30, 2021 andJuly 31, 2020 , respectively, with decreases driven by the decline in global interest rates. 43 -------------------------------------------------------------------------------- Interest Expense Interest expense includes interest incurred on our outstanding borrowings, amortization of debt issuance costs and debt premiums or discounts, amortization of gains or losses on terminated or de-designated interest rate derivative instruments, and charges recognized in connection with the tender and early redemption of senior notes. The decrease in interest expense during the three months endedJuly 30, 2021 was primarily due to a decrease in the weighted-average interest rate of outstanding debt obligations driven by our debt issuance and tender transactions in the second quarter of fiscal year 2021. INCOME TAXES Three months ended (in millions) July 30, 2021 July 31, 2020 Income tax provision$ 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 endedJuly 30, 2021 was 7.7 percent, as compared to 15.9 percent for the three months endedJuly 31, 2020 . The decrease in our effective tax rate for the three months endedJuly 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 endedJuly 30, 2021 was 13.2 percent, as compared to 14.0 percent for the three months endedJuly 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 endedJuly 30, 2021 of approximately$22 million . 44
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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 ofJuly 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:
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