UNDERSTANDING OUR FINANCIAL INFORMATION
The following discussion and analysis provides information management believes to be relevant to understanding the financial condition and results of operations of the Company. The discussion focuses on our financial results for the fiscal year endedApril 29, 2022 (fiscal year 2022) and the fiscal year endedApril 30, 2021 (fiscal year 2021). A discussion on our results of operations for fiscal year 2021 as compared to the year endedApril 24, 2020 (fiscal year 2020) is included in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedApril 30, 2021 , filed with theSEC onJune 25, 2021 , and is incorporated by reference into this Form 10-K. You should read this discussion and analysis along with our consolidated financial statements and related notes thereto atApril 29, 2022 andApril 30, 2021 and for fiscal years 2022, 2021, and 2020, which are presented within "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. Amounts reported in millions within this annual 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 facilitate management's review of 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 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 The global healthcare system is continuing to respond to the unprecedented challenge posed by the COVID-19 pandemic ("COVID-19" or the "pandemic"). 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 fiscal year 2022, the pandemic, to a lesser extent, continued to affect most of our businesses, including the most recent COVID-19 lockdown inChina which began in late March. In addition to the pandemic, our business faced the impacts of healthcare system staffing shortages on procedural volumes and significant supply chain disruptions in certain businesses particularly in the fourth quarter of fiscal year 2022. We cannot predict with confidence the duration and severity of the pandemic and its impact on global procedure volumes. We expect medical procedure rates may continue to vary by therapy and country and to be impacted by regional COVID-19 case volumes, vaccine and booster immunization rates, and new COVID-19 variants. Additionally, we cannot predict the impact healthcare system staffing shortages will have on procedural volumes, and the impact supply chain disruptions will have on the business. 29
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The following is a summary of revenue, diluted earnings per share, and cash flow for fiscal years 2022 and 2021:
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GAAP to Non-GAAP Reconciliations
Starting with the quarter endedApril 29, 2022 , the Company will no longer adjust non-GAAP financial measures for certain license payments for, or acquisitions of, technology not approved by regulators due to recent industry guidance from theU.S. Securities and Exchange Commission . Historical non-GAAP financial measures presented in this Annual Report on Form 10-K have been recast for comparability. The tables below present reconciliations of our Non-GAAP financial measures to the most directly comparable financial measures prepared in accordance withU.S. GAAP for fiscal years 2022 and 2021. Fiscal year ended April 29, 2022 Income Tax Net Income Income Before Provision Attributable to Effective Tax (in millions, except per share data) Income Taxes (Benefit) Medtronic Diluted EPS Rate GAAP$ 5,517 $ 456 $ 5,039$ 3.73 8.3 % Non-GAAP Adjustments: Restructuring and associated costs (1) 335 54 281 0.21 16.1 Acquisition-related items (2) (43) 5 (48) (0.04) (11.6) Certain litigation charges 95 17 78 0.06 17.9 (Gain)/loss on minority investments (3) (12) - (9) (0.01)
-
Medical device regulations (4) 102 16 86 0.06
15.7
Amortization of intangible assets 1,733 266 1,467 1.09 15.3 MCS impairment / costs (5) 881 220 661 0.49 25.0 Certain tax adjustments, net (6) - 50 (50) (0.04) - Non-GAAP$ 8,609 $ 1,084 $ 7,505$ 5.55 12.6 % 30
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Table of Contents Fiscal year ended April 30, 2021 Income Tax Net Income Income Before (Benefit) Attributable to Effective Tax (in millions, except per share data) Income Taxes Provision Medtronic Diluted EPS Rate GAAP$ 3,895 $ 265 $ 3,606$ 2.66 6.8 % Non-GAAP Adjustments: Restructuring and associated costs (1) 617 128 489 0.36 20.7 Acquisition-related items (2) (15) (20) 4 - 126.7 Certain litigation charges 118 23 95 0.07 19.5 (Gain)/loss on minority investments (3) (61) - (57) (0.04) - Impairment charges (7) 76 7 68 0.05 10.5 Medical device regulations (4) 83 15 68 0.05
18.1
Debt tender premium and other charges (8) 308 60 248 0.18
19.5
Amortization of intangible assets 1,783 283 1,500 1.11
15.9
Certain tax adjustments, net (9) - 41 (41) (0.03) - Non-GAAP$ 6,804 $ 802 $ 5,980$ 4.42 11.8 %
(1)Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.
(2)The charges primarily include business combination costs, changes in fair value of contingent consideration, specifically for the fiscal year endedApril 30, 2021 , changes in amounts accrued for certain contingent liabilities for a past acquisition.
(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 estimated 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, which are expected to be substantially complete by the end of fiscal year 2023. (5)The charges relate to the Company'sJune 2021 decision to stop the distribution and sale of the Medtronic HVAD System within the Mechanical Circulatory Support Operating Unit (MCS). The charges included$515 million of non-cash impairments, primarily related to$409 million of intangible asset impairments, as well as$366 million for commitments and obligations in connection with the decision, including patient support obligations, restructuring, and other associated costs. Medtronic is committed to serving the needs of the approximately 3,500 patients currently implanted with the HVAD System. (6)The net benefit primarily relates to the deferred tax impact associated with a step up in tax basis for Swiss Cantonal purposes and a change in tax rates on deferred taxes associated with intellectual property, which are partially offset by the amortization on previously established deferred tax assets from intercompany intellectual property transactions and a charge related to a change in the Company's permanent reinvestment assertion on certain historical earnings.
(7)The charges relate to the abandonment of certain intangible assets in our Neuroscience segment.
(8)The charges relate to the early redemption of approximately
(9)The net benefit primarily relates to the finalization of an audit at theIRS Appellate level for fiscal years 2012 through 2014 and the capitalization of certain research and development costs forU.S. income tax purposes, which are partially offset by the impact of an intercompany sale of assets, and a tax basis adjustment and amortization of previously established deferred tax assets from intercompany intellectual property transactions.
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: Fiscal Year (in millions) 2022 2021
Net cash provided by operating activities
$ 5,978 $ 4,885
Refer to the Summary of Cash Flows section for drivers of the change in cash provided by operating activities.
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Table of ContentsNET SALES Segment and Division
The charts below illustrate the percent of net sales by segment for fiscal years 2022 and 2021:
[[Image Removed: mdt-20220429_g25.jpg]][[Image Removed: mdt-20220429_g26.jpg]]
The table below includes net sales by segment and division for fiscal years 2022 and 2021: Net Sales by Fiscal Year (in millions) 2022 2021 Percent Change Cardiac Rhythm & Heart Failure$ 5,908 $ 5,584 6 % Structural Heart & Aortic 3,055 2,834 8 Coronary & Peripheral Vascular 2,460 2,354 5 Cardiovascular 11,423 10,772 6 Surgical Innovations 6,060 5,438 11 Respiratory, Gastrointestinal, & Renal 3,081 3,298 (7) Medical Surgical 9,141 8,737 5 Cranial & Spinal Technologies 4,456 4,288 4 Specialty Therapies 2,592 2,307 12 Neuromodulation 1,735 1,601 8 Neuroscience 8,784 8,195 7 Diabetes 2,338 2,413 (3) Total$ 31,686 $ 30,117 5 % 32
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Segment and Market Geography
The charts below illustrate the percent of net sales by market geography for fiscal years 2022 and 2021:
[[Image Removed: mdt-20220429_g27.jpg]][[Image Removed: mdt-20220429_g28.jpg]]
The table below includes net sales by market geography for each of our segments for fiscal years 2022 and 2021:
U.S.(1) Non-U.S. Developed Markets(2) Emerging Markets(3) Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year (in millions) 2022 2021 % Change 2022 2021 % Change Fiscal Year 2022 2021 % Change Cardiovascular$ 5,545 $ 5,248 6 %$ 3,866 $ 3,752 3 %$ 2,012 $ 1,773 13 % Medical Surgical 3,862 3,650 6 3,373 3,320 2 1,905 1,766 8 Neuroscience 5,753 5,456 5 1,801 1,724 4 1,229 1,015 21 Diabetes 974 1,171 (17) 1,085 1,019 6 279 222 26 Total$ 16,135 $ 15,526 4 %$ 10,126 $ 9,815 3 %$ 5,426 $ 4,777 14 % (1)U.S. includesthe United States andU.S. territories. (2)Non-U.S. developed markets includeJapan ,Australia ,New Zealand ,Korea ,Canada , and the countries ofWestern 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. The increase in net sales for fiscal year 2022 was primarily due to the recovery of global procedure volumes from the downturn experienced in the first and second quarters of fiscal year 2021 as a result of the COVID-19 pandemic. The net sales increase was partially offset by supply chain challenges, particularly in the fourth quarter of fiscal year 2022, as well as the impact of COVID-19 experienced in fiscal year 2022, particularly in theU.S. andChina . For fiscal year 2022, currency had an unfavorable impact of$107 million on non-U.S. developed markets and a favorable impact of$33 million on emerging markets. 33
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Looking ahead, a number of macro-economic and geopolitical factors could negatively impact our business, including without limitation:
•The uncertain and uneven impact of COVID-19 on future procedural volumes, supply constraints including certain electronic components and semiconductors, healthcare staffing, worker absenteeism with our customers, suppliers, and in our own operations and field teams, and resulting impacts on demand for our products and therapies; •The potential impact that sanctions and other measures being imposed in response to theRussia -Ukraine conflict could have on revenue and supply chain. The financial impact of the conflict in the fourth quarter of fiscal year 2022, including on accounts receivable and inventory reserves, was not material and for the fiscal year endedApril 29, 2022 , the business of the Company in these countries represented less than 1% of the Company's consolidated revenues and assets. Although the implications of this conflict are difficult to predict at this time, the ongoing conflict may increase pressure on the global economy and supply chains, resulting in increased future volatility risk for our business operations and performance. •Competitive product launches and pricing pressure, geographic macro-economic risks including general price inflation, rising interest rates, 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; and
•National and provincial tender pricing for certain products, particularly in
Cardiovascular Cardiovascular products include pacemakers, insertable cardiac monitors, cardiac resynchronization therapy devices, implantable cardioverter defibrillators (ICD), leads and delivery systems, 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 net sales for fiscal year 2022 were$11.4 billion , an increase of 6 percent as compared to fiscal year 2021. Currency had an unfavorable impact on net sales for fiscal year 2022 of$32 million . The net sales increase was primarily due to the recovery of global procedure volumes from the declines experienced in fiscal year 2021 along with growth from recent product launches, partially offset by global supply chain disruptions and declines inChina due to recent COVID-19 lockdowns.
The charts below illustrate the percent of Cardiovascular net sales by division for fiscal years 2022 and 2021:
[[Image Removed: mdt-20220429_g29.jpg]][[Image Removed: mdt-20220429_g30.jpg]]
Cardiac Rhythm & Heart Failure (CRHF) net sales increased 6 percent in fiscal year 2022 as compared to fiscal year 2021. The increase was led by Cardiac Rhythm Management with growth in TYRX antibacterial envelopes, CRT-Ds, and cardiac pacing therapies due to Micra and transvenous pacemakers. Cardiac Ablation Solutions also led growth with strong sales ofArctic Front cryoablation systems. The net sales growth was partially offset by a decline of Medtronic HVAD System net sales as a result of ourJune 2021 decision to stop the 34
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distribution and sale of the system. The net sales for the Medtronic HVAD system
for fiscal year 2021 was
Structural Heart & Aortic (SHA) net sales increased 8 percent in fiscal year 2022 as compared to fiscal year 2021. The increase was led by growth in transcatheter aortic valve replacement (TAVR) net sales as a result of continued adoption of the CoreValve Evolut. Cardiac Surgery also contributed to the net increase in sales as a result of broad growth across the business, particularly from strong sales of Extra-Corporeal Life Support (ECLS) devices. These increases were partially offset by declines within Aortic caused by field corrective actions (FCA) and COVID-19 challenges. The most notable field corrective actions were for the Valiant Navion Thoracic Stent Graft System FCA issued in the fourth quarter of fiscal year 2021 and the Endurant II/IIs Stent Graft Systems FCA issued in the third quarter of fiscal year 2022. Coronary & Peripheral Vascular (CPV) net sales increased 5 percent in fiscal year 2022 as compared to fiscal year 2021. 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, as well as our superficial venous product portfolio, including the VenaSeal and ClosureFast systems. The increase was partially offset by declines in Coronary as well as Atherectomy products due to impacts of COVID-19 on procedural volumes.
In addition to the macro-economic and geopolitical factors 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. The Micra AV launched inJapan inNovember 2021 and received approval inChina inMay 2022 . 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.
•Growth of the Cobalt and Crome portfolio of ICDs and CRT-Ds.
•Continued acceptance and expansion of the Claria MRI CRT-D system with AdaptivCRT and compatibility with TriageHF technology.
•Continued acceptance and expansion of the LINQ II cardiac monitor. Supply for the LINQ II cardiac monitor is improving as we continue to ramp our wafer scale manufacturing. During the third quarter of fiscal year 2022, we launched two AccuRhythm AI algorithms on the LINQ II platform to significantly reduce false positive alerts for Atrial Fibrillation and Pause while retaining sensitivity for true positive detection, and reduce clinic workload and burden.
•Growth of the CRT-P quadripolar pacing system.
•Continued growth, adoption, and utilization of the TYRX Envelope for implantable devices.
•Continued acceptance and market expansion ofArctic Front cryoablation for treatment of atrial fibrillation. InJune 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.
•Continued expansion and training of field support to increase coverage in the
•Continued acceptance and growth from Evolut PRO, which provides industry-leading hemodynamics, reliable delivery, enhanced durability versus SAVR procedures at 5 years, 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. During the third quarter of fiscal year 2022, Evolut PRO received NMPA approval withinChina . •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. •Continued acceptance and growth of the Abre venous self-expanding stent system in theU.S. as well as pressure from competitors re-entering the market. Abre is designed for the unique challenges of venous disease. It offers easy deployment, to let physicians focus on their patient, and delivers demonstrated endurance, to give patients freedom of movement. •Our voluntary recall of the Valiant Navion Thoracic Stent Graft System and our ability to ramp production of our previous generation product, the Valiant Captivia Thoracic Stent Graft System. We are currently ramping production of the Valiant Captivia Thoracic Stent Graft System and plan to reach full production capacity in the first quarter of fiscal year 2023. 35
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•Our
•Our ability to successfully develop, obtain regulatory approval of and commercialize the products within our pipeline, which include, but are not limited to, the Symplicity Spyral Multi-Electrode Renal Denervation Catheter, Pulse Field Ablation, a novel energy source that is non-thermal, Aurora Extravascular ICD 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 fiscal year 2022 were$9.1 billion , an increase of 5 percent as compared to fiscal year 2021. Currency had an unfavorable impact on net sales of$44 million for fiscal year 2022. The net sales increase was primarily due to the recovery of global procedure volumes from the declines experienced in fiscal year 2021 partially offset by global supply chain disruptions and declines inChina due to recent COVID-19 lockdowns.
The charts below illustrate the percent of Medical Surgical net sales by division for fiscal years 2022 and 2021:
[[Image Removed: mdt-20220429_g31.jpg]][[Image Removed: mdt-20220429_g32.jpg]]
Surgical Innovations (SI) net sales for fiscal year 2022 increased 11 percent as compared to fiscal year 2021. Net sales growth was led by Advanced Surgical instruments, driven by the continued adoption of the Company's LigaSure, Sonicision, and Tri-Staple technologies, and Hernia and Wound Management. The increase was partially offset by declines in the fourth quarter of fiscal year 2022 resulting from global supply chain challenges, including resins, semiconductors, and packaging trays, which impacted energy and stapling products. Respiratory, Gastrointestinal, & Renal (RGR) net sales for fiscal year 2022 decreased 7 percent as compared to fiscal year 2021. RGR net sales declines were largely due to declines in ventilator demands when compared fiscal year 2021 as demand returned to pre-pandemic levels in the fourth quarter of fiscal year 2022. These declines were partially offset by growth in Patient Monitoring, led by the Nellcor pulse oximetry sensors and the Bispectral Index (BIS) sensors, Gastrointestinal, driven by the esophageal product portfolio, as well as growth in Renal Care Solutions.
In addition to the macro-economic and geopolitical factors 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 36
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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.
•Our ability to execute ongoing strategies in order to address the competitive
pressure of reprocessing of our vessel sealing disposables and growth of
surgical soft tissue robotics procedures in the
•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 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, SonarMed Airway Monitoring System for the NICU, and the Nellcor Oxysoft pulse oximetry system for neonatal and adult critical care patients, which receivedU.S. FDA clearance during the fourth quarter of fiscal year 2022. •Continued and future acceptance of less invasive standards of care in Gastrointestinal and Hepatology products, including the areas of GI Diagnostic and Therapeutic product lines. Recently launched products include the PillCam COLON capsule endoscopy, 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. •Continued future growth internationally for the Hugo robotic assisted surgery (RAS) system for urologic, bariatric, gynecologic, and general surgery procedures as well as for our easy-to-access Touch Surgery Enterprise surgical video system. The Hugo RAS system, which received CE Mark inOctober 2021 as well as secured additional regulatory approvals in the third and fourth quarters of fiscal year 2022, is designed to help reduce unwanted variability, improve patient outcomes, and by extension, lower per procedure cost. •The pending contribution of our Renal Care Solutions business as a result of theMay 25, 2022 definitive agreement with DaVita Inc. Refer to the "Subsequent Events" section of this Management's Discussion and Analysis for additional information on the divestiture.
•Our ability to successfully develop, obtain regulatory approval of and
commercialize the products within our pipeline, which include, but are not
limited to, our Hugo RAS system in the
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, 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 fiscal year 2022 were$8.8 billion , an increase of 7 percent as compared to fiscal year 2021. Currency had a favorable impact on net sales for fiscal year 2022 of$3 million . The net sales increase was primarily due to the recovery of global procedure volumes from the declines experienced in fiscal year 2021, partially offset by global supply chain disruptions and declines inChina due to COVID-19 lockdowns and reduced sales in advance of potential national volume-based pricing (VBP) tenders. 37
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The graphs below illustrate the percent of Neuroscience net sales by division for fiscal years 2022 and 2021:
[[Image Removed: mdt-20220429_g33.jpg]][[Image Removed: mdt-20220429_g34.jpg]]
Cranial & Spinal Technologies (CST) net sales for fiscal year 2022 increased 4 percent as compared to fiscal year 2021. Net sales growth was primarily driven by Neurosurgery with strong sales of the Midas Rex powered surgical instruments and StealthStation Navigation and O-arm Imaging System. Growth in CST also occurred in Spine and Biologics due to the recovery of global procedural volumes in theU.S. ,Japan , andWestern Europe compared to the prior fiscal year. This growth was partially offset by recent reduced sales inChina in advance of potential national VBP tender in Spine. Specialty Therapies (Specialty) net sales for fiscal year 2022 increased 12 percent as compared to fiscal year 2021. Net sales growth was primarily driven by strength inPelvic Health , ENT, and Neurovascular.Pelvic Health's growth was led by sales of the recently launched InterStim Micro neurostimulator and SureScan MRI leads. ENT growth was driven by the sales of StealthStation ENT Navigation System despite continued supply constraints in disposables, which are recovering. Neurovascular's growth was led by sales of flow diversion, hemorrhagic stroke, and liquid embolic products. Neuromodulation (NM) net sales for fiscal year 2022 increased 8 percent as compared to fiscal year 2021. Sales growth occurred in both Pain Therapies and Brain Modulation and reflected a recovery in procedural volumes. Net sales growth was driven by strong performance of the Percept PC deep brain stimulation (DBS) device with BrainSense technology in Brain Modulation.
In addition to the macro-economic and geopolitical factors described in the Executive Level Overview, looking ahead we expect Neuroscience could be affected by the following:
•Continued growth from Enabling Technologies, including StealthStation Navigation and O-arm Imaging Systems, Midas Rex Powered Surgical Instruments, 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, as well as AI-driven surgical planning, personalized spinal implants, and robot-assisted surgery due toMedicrea technologies, acquired in fiscal year 2021.
•Market acceptance and continued global adoption of innovative new spine
products and procedural solutions within our CST division such as our
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•Growth in the broader vertebral compression fracture (VCF) and adjacent markets as we continue to pursue the development of other therapies to treat more patients with VCF, including continued success of both the Kyphon V vertebroplasty system and the Osteocool RF Spinal Tumor ablation system.
•Continued acceptance and growth of ourENT and Pelvic Health therapies within our Specialty Therapies division, including our InterStim therapy with InterStim II, InterStim Micro and InterStim X 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.
•Market acceptance and growth from SCS therapy for treating Diabetic Peripheral
Neuropathy (DPN) on Intellis rechargeable neurostimulator and Vanta
recharge-free neurostimulator which received
•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, obtain regulatory approval of and commercialize the products within our pipeline, which include, but are not limited to, our closed-loop Percept PC and RC devices with adaptive DBS (aDBS), our hemorrhagic stroke intravascular device, and our next-generation spine enabling technologies.
Diabetes
Diabetes' products include insulin pumps, continuous glucose monitoring (CGM) systems, consumables, and smart insulin pen systems. Diabetes' sales for fiscal year 2022 were$2.3 billion , a decrease of 3 percent as compared to fiscal year 2021. Currency had an unfavorable impact on net sales for fiscal year 2022 of$2 million . Diabetes' net sales decline for fiscal year 2022 was primarily attributable to declines in theU.S. partially offset by growth in the MiniMed 780G insulin pump system and integrated CGM in the international markets.
In addition to the macro-economic and geopolitical factors 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 launched in theU.S. inNovember 2020 and inJapan inJanuary 2022 . 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 growth internationally for the MiniMed 780G insulin pump system. The MiniMed 780G system was approved in the E.U. inJune 2020 and has launched in over 40 countries on four continents outside theU.S. 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. The Guardian Connect CGM system is available on both Apple iOS and Android devices.
•Strengthening our position in the diabetes market as a result of theSeptember 2020 acquisition of Companion Medical. Companion Medical offered 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 InPen application, which allows users to have their Medtronic CGM readings in real-time alongside insulin dose information, all in one view.
•Continued pump and CGM competition in an expanding global market.
•Changes in medical reimbursement policies and programs, along with additional payor coverage on insulin pumps.
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•Resolution of findings contained in aDecember 2021 U.S. FDA warning letter relating to the MiniMed 600 series insulin pump and a remote controller device for MiniMed 508 and Paradigm pumps. We are currently working with theU.S. FDA to resolve the findings. The existence of the warning letter may limit our ability to launch certain new Diabetes products in theU.S. prior to resolution of the findings.
•Our ability to successfully develop, obtain regulatory approval of and
commercialize the products within our pipeline, which include, but are not
limited to, our MiniMed 780G insulin pump and the Guardian 4 sensor, which have
been submitted to the
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:
[[Image Removed: mdt-20220429_g35.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 fiscal year 2022 was$10.1 billion as compared to$10.5 billion for fiscal year 2021. The decrease in cost of products sold as a percentage of net sales was largely due to the conditions of the pandemic during fiscal year 2021, which resulted in recognizing a portion of our fixed overhead costs as period expenses, increases in our reserves in our excess and obsolete inventory, as well as negative impact from mix, as products in higher demand had lower gross margins. The decrease was also attributable to charges from field correction actions in the prior year. Fiscal year 2022 included$58 million of inventory write-downs associated with ourJune 2021 decision to stop the distribution and sale of Medtronic's HVAD System (MCS charges). Looking forward, our cost of products sold likely will be further negatively impacted by inflation and higher labor and direct material costs. Research and Development Expense We remain committed to deliver the best possible experiences for every patient, physician, and caregiver we serve; to create technologies that expand what's possible across the entire human body to transform lives; to turn data and insights into real action to serve real patient needs, dramatically improving care; and to expand healthcare access and deliver positive outcomes that go far beyond our products. Research and development expense for fiscal year 2022 was$2.7 billion as compared to$2.5 billion for fiscal year 2021. Fiscal year 2022 included$101 million of acquisitions of, and license payments for, technology not approved by regulators, primarily in our Diabetes segment. 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 fiscal year 2022 was$10.3 billion as compared to$10.1 billion for fiscal year 2021. 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 procedural volumes partially offset by increases in employee travel as compared to the corresponding period in the prior year when travel was limited. 40
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The following is a summary of other costs and expenses (income):
Fiscal Year (in millions) 2022 2021
Amortization of intangible assets
60 293 Certain litigation charges 95 118 Other operating expense, net 862 315
Other non-operating income, net (318) (336) Interest expense
553 925 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. Further program details are described in Note 4 of the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. Since inception, the Company has incurred pre-tax exit and disposal costs and other costs, across all segments, of$1.6 billion in connection with the Enterprise Excellence program. In total, the Company estimates it will recognize approximately$1.8 billion of exit and disposal costs and other costs related to the Enterprise Excellence program by the end of fiscal year 2023. For fiscal years 2022 and 2021, the Company recognized net charges of$259 million and$349 million , respectively, including$31 million and$52 million , respectively within restructuring charges, net in the consolidated statements of income which were primarily comprised of employee termination benefits. For fiscal years 2022 and 2021, charges also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting, including$116 million and$128 million , respectively, recognized within cost of products sold, and$112 million and$169 million , respectively, recognized within selling, general, and administrative expense in the consolidated statements of income.
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. Further program details are described in Note 4 of the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
Since inception, the Company has incurred pre-tax exit and disposal costs and other costs, across all segments, of$349 million in connection with the Simplification program. In total, the Company estimates it will recognize approximately$450 million of exit and disposal costs and other costs related to the Simplification program by the end of fiscal year 2023. For fiscal years 2022 and 2021, the Company recognized net charges of$82 million and$268 million , respectively, including$35 million and$241 million , respectively, within restructuring charges, net in the consolidated statements of income which were primarily comprised of employee termination benefits. For fiscal years 2022 and 2021, charges also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting, including$45 million and$27 million , respectively, recognized within selling, general, and administrative expense in the consolidated statements of income. The net charges for fiscal year 2021 included$97 million of incremental defined benefit pension and post-retirement related expenses for employees that accepted voluntary early retirement packages. Certain Litigation Charges We classify specified certain litigation charges and gains related to significant legal matters as certain litigation charges in the consolidated statements of income. For additional information, refer to Note 18 of the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. 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, changes in amounts accrued for certain contingent liabilities for a past acquisition, MCS charges, impairment charges, and income from funded research and development arrangements. The increase in other operating expense, net was primarily driven by MCS charges recorded in fiscal year 2022. The charges of$823 million primarily included$409 million of intangible asset impairments and$366 million for commitments and obligations, including 41
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customer support obligations, restructuring, and other associated costs. The increase was partially offset by changes in fair value of contingent consideration, which resulted in$103 million of income for fiscal year 2022 as compared to$36 million of expense in fiscal year 2021. The net currency impact of remeasurement expense and our hedging programs also partially offset the increase with$70 million of income in fiscal year 2022 and$47 million of expense in fiscal year 2021. Finally, contributing to the change was a$132 million gain related to amounts accrued for certain contingent liabilities for a past acquisition and$76 million of impairment charges related to the abandonment of certain intangible assets, both in fiscal year 2021. Additional information regarding the MCS charges is described in Note 4 of the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. 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 decrease in other non-operating income, net for fiscal year 2022 is driven by our equity method and minority investments portfolio offset by an increase in income from the non-service component of net periodic pension and postretirement benefit cost. Gains on equity method and minority investments were$30 million and$61 million for fiscal year 2022 and 2021, respectively, and income related to the non-service component of net periodic pension and postretirement benefits were$107 million and$86 million , 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. The decrease in interest expense for fiscal year 2022 was primarily due to the$308 million charge incurred as a result of the early redemption of approximately$6.0 billion of debt during fiscal year 2021. INCOME TAXES Fiscal Year (in millions) 2022 2021 Income tax provision (benefit)$ 456 $ 265 Income before income taxes 5,517 3,895 Effective tax rate 8.3 % 6.8 % Non-GAAP income tax provision$ 1,084 $ 802 Non-GAAP income before income taxes 8,609 6,804 Non-GAAP Nominal Tax Rate 12.6 % 11.8 %
Difference between the effective tax rate and Non-GAAP Nominal Tax Rate
4.3 % 5.0 % Many of the countries we operate in have statutory tax rates lower than ourU.S. statutory rate, thereby resulting in an overall effective tax rate less than theU.S. statutory rate of 21.0 percent. A significant portion of our earnings are generated from operations inPuerto Rico ,Switzerland , andIreland . The statutory tax rates for these jurisdictions range from 12.5 percent to 37.5 percent. Our earnings inPuerto Rico are subject to certain tax incentive grants which provide for tax rates lower than the country's statutory tax rates. Unless our tax incentive grants are extended, they will expire between fiscal years 2023 and 2034. The tax incentive grants, which expired during fiscal year 2022, did not have a material impact on our financial results. See Note 13 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for additional information. Our effective tax rate for fiscal year 2022 was 8.3 percent, as compared to 6.8 percent in fiscal year 2021. Our Non-GAAP Nominal Tax Rate for fiscal year 2022 was 12.6 percent, as compared to 11.8 percent in fiscal year 2021. The increase in both the effective tax rate and the Non-GAAP Nominal Tax Rate was primarily due to year-over-year changes in operational results by jurisdiction. During fiscal year 2022, we recognized$89 million of operational tax benefits. The operational tax benefits included a$46 million benefit from excess tax benefits associated with stock-based compensation, and a$43 million net benefit associated with the resolution of certain income tax audits, finalization of certain tax returns, changes to uncertain tax position reserves, and changes to certain deferred income tax balances. During fiscal year 2021, we recognized$51 million of operational tax benefits, which included a$46 million benefit from excess tax benefits associated with stock-based compensation. An increase in our Non-GAAP Nominal Tax Rate of one percent would result in an additional income tax provision for fiscal years 2022 and 2021 of approximately$86 million and$68 million , respectively. 42
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Certain Tax Adjustments
During fiscal year 2022, the net benefit from certain tax adjustments of
•A benefit of
•A benefit of
•A cost of
•A cost of
•A net cost of
During fiscal year 2021, the net benefit from certain tax adjustments of
•A net benefit of$106 million associated with the resolution of an audit at theIRS Appellate level for fiscal years 2012, 2013, and 2014. The issues resolved relate to the utilization of certain net operating losses and the allocation of income betweenMedtronic, Inc. and its wholly owned subsidiary operating inPuerto Rico for businesses that are not the subject of theU.S. Tax Court Case for fiscal years 2005 and 2006. •A net cost of$73 million related to a tax basis adjustment of previously established deferred tax assets from intercompany intellectual property transactions. The cumulative amount of deferred tax benefit previously recognized from intercompany intellectual property transactions and recorded as Certain Tax Adjustments is$1.5 billion . The corresponding deferred tax assets will be amortized over a period of approximately 20 years.
•A cost of
•A net cost of
•A benefit of
Certain tax adjustments will affect the comparability of our operating results between periods. Therefore, we consider these Non-GAAP Adjustments. Refer to the "Executive Level Overview" section of this Management's Discussion and Analysis for further discussion of these adjustments. 43
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LIQUIDITY AND CAPITAL RESOURCES
We are currently in a strong financial position, and we believe our balance sheet and liquidity as ofApril 29, 2022 provide us with flexibility, and our cash, cash equivalents, and current investments, along with our credit facility and related commercial paper programs will satisfy our foreseeable operating needs. Our liquidity and capital structure are evaluated regularly within the context of our annual operating and strategic planning processes. We consider the liquidity necessary to fund our operations, which includes working capital needs, investments in research and development, property, plant, and equipment, and other operating costs. We also consider capital allocation alternatives that balance returning value to shareholders through dividends and share repurchases, satisfying maturing debt, and acquiring businesses and technology.
Summary of Cash Flows
The following is a summary of cash provided by (used in) operating, investing, and financing activities, the effect of exchange rate changes on cash and cash equivalents, and the net change in cash and cash equivalents: Fiscal Year (in millions) 2022 2021 Cash provided by (used in): Operating activities$ 7,346 $ 6,240 Investing activities (1,659) (2,866) Financing activities (5,336) (4,136)
Effect of exchange rate changes on cash and cash equivalents (231)
215
Net change in cash and cash equivalents$ 121
Operating Activities The$1.1 billion increase in net cash provided was primarily driven by an increase in cash collected from customers along with a decrease in cash paid for income taxes. The increase in net cash provided was partially offset by an increase in cash paid to employees. The increase in cash collected from customers was primarily related to COVID-19 driving decreased sales in the fourth quarter of fiscal year 2020 and first quarter of fiscal year 2021. The decrease in cash paid for income taxes was primarily due to increased estimated federal tax payments and tax payments associated withIRS audit settlements in fiscal year 2021. Cash paid to employees increased due to higher annual incentive plan payouts compared to the prior fiscal year. Investing Activities The$1.2 billion decrease in net cash used was primarily attributable to a decrease in cash paid for acquisitions of$903 million , as well as a decrease of net purchases of investments of$273 million as compared to fiscal year 2021. Financing Activities The$1.2 billion increase in net cash used was largely the result of the increase of share repurchases of$1.9 billion . The increase in net cash used was offset by a decrease in short-term borrowings of$311 million . For fiscal year 2021, financing cash flows were impacted by theMizuho Bank term loan under which we borrowed ¥300 billion in the first quarter of fiscal year 2021, which was subsequently repaid in the fourth quarter of fiscal year 2021. Fiscal year 2021 financing cash flows were also impacted by the issuance of$7.2 billion of Euro-denominated senior notes offset by the early redemption of$6.0 billion of senior notes for$6.3 billion of total consideration, and repayment of an additional$911 million of Euro-denominated senior notes. For more information on theMizuho Bank term loan, and issuances and redemptions of senior notes, refer to Note 6 of the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. Debt and Capital Our capital structure consists of equity and interest-bearing debt. We primarily utilize unsecured senior debt obligations to meet our financing needs and, to a lesser extent, bank borrowings. From time to time, we may repurchase our outstanding debt obligations in the open market or through privately negotiated transactions.
Total debt at
Subsequent to fiscal year 2022, onMay 2, 2022 , we entered into a term loan agreement (Fiscal 2023 Loan Agreement) withMizuho Bank, Ltd. for an aggregate principal amount of up to ¥300 billion with a term of 364 days. In May andJune 2022 , Medtronic Luxco borrowed an aggregate of ¥297 billion, or approximately$2.3 billion , of the term loan, under the Fiscal 2023 Loan Agreement. The Company used the net proceeds of the borrowings to fund the early redemption of$1.9 billion ofMedtronic Inc. Senior Notes for$1.9 billion of total consideration, and$368 million of Medtronic Luxco Senior Notes for$376 million of total consideration. The Company will recognize a total loss on debt extinguishment of$53 million in the quarter endedJuly 29, 2022 , which primarily includes cash premiums and accelerated amortization of deferred financing costs and debt discounts and premiums. The loss will be recognized in interest expense in the consolidated statements of income. 44
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We repurchase our ordinary shares on occasion as part of our focus on returning value to our shareholders. InMarch 2019 , the Company's Board of Directors authorized the repurchase of$6.0 billion of the Company's ordinary shares. There is no specific time period associated with these repurchase authorizations. During fiscal years 2022 and 2021, we repurchased a total of 22 million and 4 million shares, respectively, under these programs at an average price of$113.11 and$126.80 , respectively. AtApril 29, 2022 , we had approximately$3.0 billion remaining under the share repurchase program authorized by our Board of Directors.
For more information on credit arrangements, see Note 6 of the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
Liquidity
Our liquidity sources atApril 29, 2022 included$3.7 billion of cash and cash equivalents and$6.9 billion of current investments. Additionally, we maintain commercial paper programs and a Credit Facility. Our investments primarily include available-for-sale debt securities, includingU.S. and non-U.S. government and agency securities, corporate debt securities, mortgage-backed securities, certificates of deposit, and other asset-backed securities. See Note 5 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for additional information regarding fair value measurements. We maintain multicurrency commercial paper programs for short-term financing, which allow us to issue unsecured commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of$3.5 billion . At bothApril 29, 2022 andApril 30, 2021 , we had no commercial paper outstanding. The issuance of commercial paper reduces the amount of credit available under our existing line of credit, as explained below. We also have a$3.5 billion five-year syndicated credit facility (Credit Facility), which expires inDecember 2026 . At each anniversary date of the Credit Facility, we can request a one-year extension of the maturity date. The Credit Facility provides backup funding for the commercial paper programs and may also be used for general corporate purposes. The Credit Facility provides us with the ability to increase our borrowing capacity by an additional$1.0 billion at any time during the term of the agreement. AtApril 29, 2022 andApril 30, 2021 , no amounts were outstanding under the Credit Facility. Interest rates on advances of our Credit Facility are determined by a pricing matrix based on our long-term debt ratings assigned byStandard & Poor's Ratings Services (S&P) and Moody's Investors Service (Moody's). Facility fees are payable on the Credit Facility and are determined in the same manner as the interest rates. We are in compliance with all covenants related to the Credit Facility. The following table is a summary of our S&P and Moody's long-term debt ratings and short-term debt ratings: Agency Rating (1) April 29, 2022 April 30, 2021Standard & Poor's Ratings Services Long-term debt A A Short-term debt A-1 A-1 Moody's Investors Service Long-term debt A3 A3 Short-term debt P-2 P-2 (1) Agency ratings are subject to change, and there may be no assurance that an agency will continue to provide ratings and/or maintain its current ratings. A security rating is not a recommendation to buy, sell or hold securities, and may be subject to revision or withdrawal at any time by the rating agency, and each rating should be evaluated independently of any other rating. S&P and Moody's long-term debt ratings and short-term debt ratings atApril 29, 2022 were unchanged as compared to the ratings atApril 30, 2021 . We do not expect the S&P and Moody's ratings to have a significant impact on our liquidity or future flexibility to access additional liquidity given our balance sheet, Credit Facility, and related commercial paper programs. 45 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Cash Requirements We have future contractual obligations and other minimum commercial commitments that are entered into in the normal course of business, some of which are recorded in our consolidated balance sheet. We believe our off-balance sheet arrangements do not have a material current or anticipated future effect on our consolidated earnings, financial position, and/or cash flows. Presented below is a summary of our off-balance sheet contractual obligations and other minimum commercial commitments atApril 29, 2022 , as well as long-term contractual obligations reflected in the balance sheet atApril 29, 2022 . Maturity by Fiscal Year (in millions) Total 2023 2024 2025 2026 2027 Thereafter Contractual obligations related to off-balance sheet arrangements: Commitments to fund minority investments, milestone payments, and royalty obligations(1)$ 233 $ 95 $ 54 $ 30 $ 18 $ 18 $ 19 Interest payments(2) 6,902 466 460 460 394 391 4,732 Other(3) 995 445 235 121 66 34 94 Contractual obligations reflected in the balance sheet(4): Debt obligations(5)$ 24,275 $ 3,744 $ 6 $ 1,895 $ 2,133 $ 1,969 $ 14,528 Operating leases 976 213 164 130 103 82 284 Contingent consideration(6) 119 35 49 33 1 - - Tax obligations(7) 1,496 176 330 440 550 - - (1)Includes commitments related to the funding of minority investments, estimated milestone payments, and royalty obligations. While it is not certain if and/or when payments will be made, the maturity dates included in the table reflect our best estimates. (2)Includes the contractual interest payments on our outstanding debt and excludes the impacts of debt premium and discount amortization. See Note 6 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for additional information on our debt agreements. (3)Includes inventory purchase commitments, research and development, and other arrangements that are legally binding and specify minimum purchase quantities or spending amounts. These purchase commitments do not exceed our projected requirements and are in the normal course of business. Excludes open purchase orders with a remaining term of less than one year. (4)Excludes defined benefit plan obligations, guarantee obligations, uncertain tax positions, non-current tax liabilities, and litigation settlements for which we cannot make a reliable estimate of the period of cash settlement. For further information, see Notes 13, 15, and 18 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. (5)Includes the current and non-current portion of our Senior Notes and bank borrowings. Excludes debt premium and discount, unamortized gains from terminated interest rate swap agreements, and commercial paper. See Notes 6 and 7 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for additional information on our debt agreements and interest rate swap agreements, respectively. (6)Includes the fair value of our current and non-current portions of contingent consideration. While it is not certain if and/or when payments will be made, the maturity dates included in this table reflect our best estimates. (7)Represents the tax obligations associated with the transition tax that resulted fromU.S. Tax Reform. The transition tax will be paid over an eight-year period and will not accrue interest. See Note 13 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for further information. In the normal course of business, we periodically enter into agreements that require us to indemnify customers or suppliers for specific risks, such as claims for injury or property damage arising as a result of our products or the negligence of our personnel or claims alleging that our products infringe third-party patents or other intellectual property. Our maximum exposure under these indemnification provisions is unable to be estimated, and we have not accrued any liabilities within our consolidated financial statements or included any indemnification provisions in the table above. Historically, we have not experienced significant losses on these types of indemnification agreements. Note 18 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K provides information regarding amounts we have accrued related to legal matters. In accordance withU.S. GAAP, we record a liability in our consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. Actual settlements may be different than estimated and could have a material effect on our consolidated earnings, financial position, and/or cash flows. 46
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We record tax liabilities in our consolidated financial statements for amounts that we expect to repatriate from subsidiaries (to the extent the repatriation would be subject to tax); however, no tax liabilities are recorded for amounts we consider to be permanently reinvested. We expect to have access to the majority of our cash flows in the future. In addition, we continue to evaluate our legal entity structure supporting our business operations, and to the extent such evaluation results in a change to our overall business structure, we may be required to accrue for additional tax obligations.
Beyond the contractual obligations and other minimum commercial commitments outlined above, we have recurring cash requirements arising from the normal operation of our business that include capital expenditures, research and developments costs, and other operational costs.
We believe our balance sheet and liquidity provide us with flexibility, and our cash, cash equivalents, current investments, Credit Facility and related commercial paper programs as well as our ability to generate operating cash flows will satisfy our current and future contractual obligations and cash requirements. We regularly review our capital needs and consider various investing and financing alternatives to support our requirements.
ACQUISITIONS
OnJanuary 10, 2022 ,Medtronic and Affera, Inc. (Affera) entered into a definitive agreement in which Medtronic will acquire Affera for$925 million , including up to$250 million of contingent consideration related to certain technical and regulatory milestones. The acquisition is pending clearance of anti-trust filings and other closing conditions.
Intersect ENT Acquisition
Subsequent to fiscal year 2022, onMay 13, 2022 , the Company acquiredIntersect ENT . Total consideration for the transaction was approximately$1.2 billion to acquire all outstanding shares ofIntersect ENT for$28.25 per share.
Additional information regarding acquisitions is included in Note 3 of the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" within this Annual Report on Form 10-K.
SUBSEQUENT EVENTS
OnMay 25, 2022 , the Company and DaVita Inc. ("DaVita") entered into a definitive agreement with the intent to form a new, independent kidney care-focused medical device company ("NewCo") with equal equity ownership. The transaction is expected to close in calendar year 2023, subject to customary regulatory approvals and closing conditions. We are contributing our entire Renal Care Solutions business ("RCS") to NewCo. RCS is part of the Respiratory, Gastrointestinal, and Renal division in our Medical Surgical portfolio, and had revenue of$325 million in fiscal year 2022. We expect to record a non-cash pre-tax impairment of long-lived assets of$60 million to$90 million in the quarter endingJuly 29, 2022 related to goodwill.
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 in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. 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, 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. The Company records a liability in the consolidated financial statements for loss contingencies when a loss is known or 47
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considered probable, and the amount may be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. Our significant legal proceedings are discussed in Note 18 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. 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 in-process research and development. 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, and the assessment of the asset's life cycle. The estimates could be impacted by legal, technical, regulatory, economic, and competitive risks. The test for impairment of goodwill requires us to make several estimates related to projected future cash flows to determine the fair value of the goodwill reporting units. Our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value. We assess the impairment of goodwill at the reporting unit level annually as of the first day of the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. We also 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. 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 tests for goodwill and intangible assets are based on future cash flows that require significant judgment with respect to future revenue and expense growth rates, appropriate discount rates, asset groupings, and other assumptions and estimates. We use estimates that are consistent with the highest and best use of the assets based on a market participant's view of the assets being evaluated. Actual results may differ from our estimates due to a number of factors including, among others, changes in competitive conditions, timing of regulatory approval, results of clinical trials, changes in worldwide economic conditions, and fluctuations in currency exchange rates.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
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SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
Medtronic plc andMedtronic Global Holdings S.C.A . (Medtronic Luxco), a wholly-owned subsidiary guarantor, each have provided full and unconditional guarantees of the obligations ofMedtronic, Inc. , a wholly-owned subsidiary issuer, under the Senior Notes (Medtronic Senior Notes) and full and unconditional guarantees of the obligations ofCovidien International Finance S.A. (CIFSA), a wholly-owned subsidiary issuer, under the Senior Notes (CIFSA Senior Notes). The guarantees of the CIFSA Senior Notes are in addition to the guarantees of the CIFSA Senior Notes byCovidien Ltd. andCovidien Group Holdings Ltd. , both of which are wholly-owned subsidiary guarantors of the CIFSA Senior Notes.Medtronic plc andMedtronic, Inc. each have provided a full and unconditional guarantee of the obligations of Medtronic Luxco under the Senior Notes (Medtronic Luxco Senior Notes). The following is a summary of these guarantees: Guarantees of Medtronic Senior Notes •Parent Company Guarantor -Medtronic plc •Subsidiary Issuer -Medtronic, Inc. •Subsidiary Guarantor - Medtronic Luxco Guarantees of Medtronic Luxco Senior Notes •Parent Company Guarantor -Medtronic plc •Subsidiary Issuer - Medtronic Luxco •Subsidiary Guarantor -Medtronic, Inc. Guarantees of CIFSA Senior Notes •Parent Company Guarantor -Medtronic plc •Subsidiary Issuer - CIFSA •Subsidiary Guarantors - Medtronic Luxco,Covidien Ltd. , andCovidien Group Holdings Ltd. (CIFSA Subsidiary Guarantors) The following tables present summarized financial information for the fiscal year endedApril 29, 2022 for the obligor groups of Medtronic and MedtronicLuxco Senior Notes, and CIFSA Senior Notes. The obligor group consists of the parent company guarantor, subsidiary issuer, and subsidiary guarantors for the applicable senior notes. The summarized financial information is presented after elimination of (i) intercompany transactions and balances among the guarantors and issuers and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor or issuer.
The summarized results of operations information for the fiscal year ended
Medtronic & Medtronic Luxco (in millions) Senior Notes (1) CIFSA Senior Notes (2) Net sales $ 2,063 $ - Operating profit 469 (5) Loss before income taxes (518) (974) Net loss attributable to Medtronic (529) (1,005) The summarized balance sheet information for the fiscal year endedApril 29, 2022 was as follows: Medtronic & Medtronic Luxco CIFSA Senior (in millions) Senior Notes (1) Notes (2) Total current assets(3) $ 20,767$ 6,881 Total noncurrent assets(4) 12,099 8,293 Total current liabilities(5) 32,647 24,302 Total noncurrent liabilities(6) 50,542 60,292 Noncontrolling interests 171 171 (1)The Medtronic Senior Notes and Medtronic Luxco Senior Notes obligor group consists of the following entities:Medtronic plc , Medtronic Luxco, andMedtronic, Inc. Refer to the guarantee summary above for further details. (2)The CIFSA Senior Notes obligor group consists of the following entities:Medtronic plc , Medtronic Luxco, CIFSA, and CIFSA Subsidiary Guarantors. Please refer to the guarantee summary above for further details. (3)Includes receivables due from non-guarantor subsidiaries of$20.2 billion and$6.9 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively. (4)Includes loans receivable due from non-guarantor subsidiaries of$6.5 billion and$8.3 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively. (5)Includes payables due to non-guarantor subsidiaries of$26.4 billion and$20.2 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively. (6)Includes loans payable due to non-guarantor subsidiaries of$29.0 billion and$46.4 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively. 49
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