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 29, 2022 . In addition, you should read this discussion along with our consolidated financial statements and related notes thereto at and for the three and six months endedOctober 28, 2022 . 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 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 Medtronic is the leading global healthcare technology company - alleviating pain, restoring health, and extending life for millions of people around the world. Our primary products include those for cardiac rhythm disorders, cardiovascular disease, advanced and general surgical care, respiratory and monitoring solutions, renal care, neurological disorders, spinal conditions and musculoskeletal trauma, urological and digestive disorders, and ear, nose, and throat, and diabetes conditions. The global healthcare system is continuing to respond to the challenges posed by the COVID-19 pandemic ("COVID-19" or the "pandemic"). Several of our businesses continued to be affected by the pandemic, including the impacts of healthcare system staffing shortages on procedural volumes, and, in the first quarter of fiscal year 2023, the COVID-19 lockdowns inChina , which continued through the end of May. In addition to the impacts of the pandemic, certain businesses continue to be impacted by supply chain disruptions that began during 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 further healthcare system staffing shortages will have on procedural volumes, and the continued impact certain supply chain disruptions will have on the business. 29 -------------------------------------------------------------------------------- The following is a summary of revenue and diluted earnings per share for the three months endedOctober 28, 2022 andOctober 29, 2021 , and operating cash flow for the six months endedOctober 28, 2022 andOctober 29, 2021 :
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--------------------------------------------------------------------------------GAAP to Non-GAAP Reconciliations
Starting with the quarter endedApril 29, 2022 , the Company no longer adjusts 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 quarterly report have been recast for comparability.
The tables below present our GAAP to Non-GAAP reconciliations for the three
months ended
Three months ended October 28, 2022
Income Income Net Income
Before Tax Provision Attributable to Effective
(in millions, except per share data) Income Taxes (Benefit) Medtronic Diluted EPS Tax Rate
GAAP $ 1,395 $ 959 $ 427 $ 0.32 68.7 %
Non-GAAP Adjustments:
Restructuring and associated costs (1) 95 19 76 0.06 20.0
Acquisition-related items (2) 2 8 (6) - 400.0
(Gain)/loss on minority investments (3) (11) - (11) (0.01) -
Medical device regulations (4) 37 7 30 0.02
18.9
Amortization of intangible assets 421 65 356 0.27 15.4 RCS impairments / costs (5) 24 1 24 0.02 4.2 Exit of business (6) 37 - 37 0.03 - Certain tax adjustments, net (7) - (793) 793 0.60 - Non-GAAP$ 1,999 $ 266 $ 1,725$ 1.30 13.3 % Three months ended October 29, 2021 Income Income Net Income Before Tax Provision Attributable to Effective (in millions, except per share data) Income Taxes (Benefit) Medtronic Diluted EPS Tax Rate GAAP$ 1,493 $ 176 $ 1,311$ 0.97 11.8 % Non-GAAP Adjustments: Restructuring and associated costs (1) 77 15 62 0.05 19.5 Acquisition-related items (2) (13) 2 (15) (0.01) (15.4) Certain litigation charges 34 4 30 0.02 11.8 (Gain)/loss on minority investments (3) 6 - 6 -
-
Medical device regulations (4) 24 4 20 0.01
16.7
Amortization of intangible assets 431 69 361 0.27
16.0
Certain tax adjustments, net (8) - (16) 16 0.01 - Non-GAAP$ 2,052 $ 254 $ 1,792$ 1.32 12.4 %
(1)Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.
(2)The charges primarily include business combination costs and changes in fair value of contingent consideration.
(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 (E.U.) medical device regulations for previously registered products and primarily include charges for contractors supporting the project and other direct third-party expenses. We consider these costs to be duplicative of previously incurred costs and/or one-time costs, which are limited to a specific time period. (5)The charges predominantly relate to changes in the carrying amount of the disposal group and other associated costs, as a result of the anticipated sale of half of the Company's Renal Care Solutions (RCS) business related to theMay 25, 2022 agreement with DaVita Inc.
(6)The charges relate to the exit of a business and are primarily comprised of inventory write-downs.
(7)The charge primarily relates to a$764 million reserve adjustment that was a direct result of theU.S. Tax Court opinion, issued onAugust 18, 2022 , on the previously disclosed litigation regarding the allocation of income betweenMedtronic, Inc. and its wholly owned subsidiary operating inPuerto Rico .
(8)The charge includes the amortization on previously established deferred tax assets from intercompany intellectual property transactions.
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The tables below present our GAAP to Non-GAAP reconciliations for the six months
ended
Six months ended October 28, 2022
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 $ 2,438 $ 1,072 $ 1,356 $ 1.02 44.0 %
Non-GAAP Adjustments:
Restructuring and associated costs (1) 171 35 136 0.10 20.5
Acquisition-related items (2) 38 14 23 0.02 36.8
(Gain)/loss on minority investments (3) (15) - (15) (0.01) -
Medical device regulations (4) 70 14 56 0.04
20.0
Amortization of intangible assets 844 129 715 0.54 15.3 RCS impairments / costs (5) 99 2 97 0.07 2.0 Debt redemption premium and other charges (6) 53 11 42 0.03 20.8 Exit of business (7) 37 - 37 0.03 - Certain tax adjustments, net (8) - (780) 780 0.59 - Non-GAAP$ 3,733 $ 497 $ 3,226$ 2.42 13.3 % Six months ended October 29, 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$ 2,326 $ 240 $ 2,074$ 1.53 10.3 % Non-GAAP Adjustments: Restructuring and associated costs (1) 159 31 128 0.09 19.5 Acquisition-related items (2) 6 3 3 - 50.0 Certain litigation charges 60 9 51 0.04 15.0 (Gain)/loss on minority investments (3) (25) - (22) (0.02)
-
Medical device regulations (4) 45 9 36 0.03
20.0
Amortization of intangible assets 866 139 728 0.54 16.1 MCS impairment / costs (9) 726 162 564 0.42 22.3 Certain tax adjustments, net (10) - (69) 69 0.05 - Non-GAAP$ 4,163 $ 524 $ 3,629$ 2.68 12.6 %
(1)Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.
(2)The charges primarily include business combination costs and changes in fair value of contingent consideration.
(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 (E.U.) medical device regulations for previously registered products and primarily include charges for contractors supporting the project and other direct third-party expenses. We consider these costs to be duplicative of previously incurred costs and/or one-time costs, which are limited to a specific time period. (5)The charges predominantly include non-cash pre-tax impairments, primarily related to goodwill, and other associated costs, as a result of the anticipated sale of half of the Company's Renal Care Solutions (RCS) business related to theMay 25, 2022 agreement with DaVita Inc.
(6)The charges relate to the early redemption of approximately
(7)The charges relate to the exit of a business and are primarily comprised of inventory write-downs.
(8)The charge primarily relates to a$764 million reserve adjustment that was a direct result of theU.S. Tax Court opinion, issued onAugust 18, 2022 , on the previously disclosed litigation regarding the allocation of income betweenMedtronic, Inc. and its wholly owned subsidiary operating inPuerto Rico .
(9)The charges relate to the Company's
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--------------------------------------------------------------------------------obligations, restructuring, and other associated costs. Medtronic is committed to serving the needs of the patients currently implanted with the HVAD System.
(10)The charge is associated with a change in the company's permanently reinvestment assertion on certain historical earnings and the amortization on 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: Six months ended (in millions) October 28, 2022 October 29, 2021 Net cash provided by operating activities $ 2,005 $ 3,061 Additions to property, plant, and equipment (749) (649) Free cash flow $ 1,256 $ 2,412
Refer to the Summary of Cash Flows section for drivers of the change in cash provided by operating activities.
Segment and Division
The charts below illustrate the percent of net sales by segment for the three
months ended
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The table below illustrates net sales by segment and division for the three and
six months ended
Three months ended Six months ended
October 29, October 28, October 29,
(in millions) October 28, 2022 2021 % Change 2022 2021 % Change
Cardiac Rhythm & Heart Failure $ 1,431 $ 1,471 (3) % $ 2,824 $ 2,954 (4) %
Structural Heart & Aortic 757 750 1 1,499 1,537 (3)
Coronary & Peripheral Vascular 584 606 (4) 1,163 1,226 (5) Cardiovascular 2,773 2,827 (2) 5,486 5,717 (4) Surgical Innovations 1,398 1,497 (7) 2,736 3,051 (10) Respiratory, Gastrointestinal, & Renal 671 802 (16) 1,335 1,570 (15) Medical Surgical 2,070 2,299 (10) 4,071 4,621 (12) Cranial & Spinal Technologies 1,081 1,067 1 2,124 2,189 (3) Specialty Therapies 686 634 8 1,353 1,275 6 Neuromodulation 419 435 (4) 824 875 (6) Neuroscience 2,186 2,136 2 4,301 4,340 (1) Diabetes 556 585 (5) 1,098 1,157 (5) Total$ 7,585 $ 7,847 (3) %$ 14,955 $ 15,835 (6) %
Segment and Market Geography
The charts below illustrate the percent of net sales by market geography for the
three months ended
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The table below includes net sales by market geography for each of our segments
for the three and six months ended
U.S.(1) Non-U.S. Developed Markets(2) Emerging Markets(3)
Three months ended Three months ended Three months ended
October 28, October 29, October 28, October 29, October 29,
(in millions) 2022 2021 % Change 2022 2021 % Change October 28, 2022 2021 % Change
Cardiovascular $ 1,424 $ 1,373 4 % $ 802 $ 948 (15) % $ 546 $ 506 8 %
Medical Surgical 905 970 (7) 719 841 (15) 446 488 (9)
Neuroscience 1,512 1,394 8 382 433 (12) 292 309 (6)
Diabetes 228 261 (13) 254 256 (1) 74 69 7
Total $ 4,069 $ 3,997 2 % $ 2,157 $ 2,478 (13) % $ 1,359 $ 1,372 (1) %
U.S.(1) Non-U.S. Developed Markets(2) Emerging Markets(3)
Six months ended Six months ended Six months ended
October 28, October 29, October 28, October 29, October 29,(in millions) 2022 2021 % Change 2022 2021 % ChangeOctober 28, 2022 2021 % Change Cardiovascular$ 2,722 $ 2,793 (3) %$ 1,694 $ 1,952 (13) %$ 1,070 $ 972 10 % Medical Surgical 1,748 1,959 (11) 1,485 1,710 (13) 838 951 (12) Neuroscience 2,931 2,840 3 788 898 (12) 582 602 (3) Diabetes 434 506 (14) 518 519 - 145 132 10 Total$ 7,835 $ 8,098 (3) %$ 4,485 $ 5,079 (12) %$ 2,635 $ 2,658 (1) % (1)U.S. includesthe United States andU.S. territories. (2)Non-U.S. developed markets includeJapan ,Australia ,New Zealand ,Korea ,Canada , and the countries withinWestern Europe . (3)Emerging markets include the countries of theMiddle East ,Africa ,Latin America ,Eastern Europe , and the countries ofAsia that are not included in the non-U.S. developed markets, as defined above. The decline in net sales for three and six months endedOctober 28, 2022 , as compared to the corresponding period in the prior fiscal year, was driven primarily by unfavorable currency impact and supply chain challenges in certain businesses, particularly in the first quarter of fiscal year 2023. For the three months endedOctober 28, 2022 , currency had an unfavorable impact on emerging markets and non-U.S. developed markets of$66 million and$390 million , respectively. For the six months endedOctober 28, 2022 , currency had an unfavorable impact on emerging markets and non-U.S. developed markets of$101 million and$705 million , respectively. The decline in net sales for the three and six months endedOctober 28, 2022 was partially offset by growth in certain product lines, including Transcatheter Aortic Valve replacements (TAVR), Core Spine in theU.S. , and Diabetes in international markets.
Looking ahead, a number of macro-economic and geopolitical factors could negatively impact our business, including without limitation:
•Competitive product launches and pricing pressure, geographic macro-economic risks including fluctuations in currency exchange rates, general price inflation, rising interest rates, reimbursement challenges, impacts from changes in the mix of our product offerings, delays in product registration approvals, and replacement cycle challenges;
•National and provincial tender pricing for certain products, particularly in
•The uncertain and uneven impact of COVID-19 on future procedural volumes, supply constraints including certain electronic components and semiconductors, healthcare staffing, and resulting impacts on demand for our products and therapies; and •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 second quarter of fiscal year 2023, including on accounts receivable and inventory reserves, was not material, and for the three and six months endedOctober 28, 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. 35 --------------------------------------------------------------------------------
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's net sales for the three and six months endedOctober 28, 2022 were$2.8 billion and$5.5 billion , respectively, a decrease of 2 percent and 4 percent, respectively, compared to the corresponding periods in the prior fiscal year. Currency had an unfavorable impact of$177 million and$315 million on net sales for the three and six months endedOctober 28, 2022 . The net sales decrease for both periods was primarily driven by unfavorable currency impact and supply chain challenges in certain businesses.
The graphs below illustrate the percent of Cardiovascular net sales by division
for the three months ended
[[Image Removed: mdt-20221028_g7.jpg]][[Image Removed: mdt-20221028_g8.jpg]] Cardiac Rhythm & Heart Failure (CRHF) net sales for the three and six months endedOctober 28, 2022 decreased 3 percent and 4 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The net sales declines were driven by unfavorable currency partially offset by increases from continued adoption of Micra AV, TYRX antibacterial envelopes, and LINQ II implants. Additionally, Cardiac Ablation Solutions net sales for the six months endedOctober 28, 2022 were negatively impacted by competitive pressures inWestern Europe andJapan , as well as the pending volume-based procurement (VBP) inChina . Structural Heart & Aortic (SHA) net sales for the three and six months endedOctober 28, 2022 increased 1 percent and decreased 3 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The net sales for both periods were impacted by unfavorable currency. The net sales for both periods were also impacted by growth in transcatheter aortic valve replacement (TAVR), surgical valves therapies, and perfusion systems. For the three months endedOctober 28, 2022 , Aortic experienced growth due to lessening impacts from previous supply chain challenges. Net sales for the six months endedOctober 28, 2022 were also impacted by a field corrective action with the Harmony Transcatheter Pulmonary Valve and Delivery Catheter System, staffing shortages, and supply shortages of contrast. Coronary & Peripheral Vascular (CPV) net sales for the three and six months endedOctober 28, 2022 decreased 4 percent and 5 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The net sales declines were driven by unfavorable currency, partially offset by strong demand combined with improved product availability of the SpiderFX embolic protection device (EPD) and strong performance of our superficial venous product portfolio, including the VenaSeal system. Coronary & Renal Denervation also experienced growth driven by Coronary Balloons and the launch of the Onyx Frontier DES platform in theU.S. Net sales for the six months endedOctober 28, 2022 were also impacted by market procedural volumes in Coronary remaining below pre-COVID levels in several major 36 --------------------------------------------------------------------------------
markets, headwinds related to
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 in
•Continued acceptance and growth from the Azure XT and S SureScan pacing systems and the 3830 lead. Azure pacemakers feature Medtronic-exclusive BlueSync technology, which enables automatic, secure wireless remote monitoring with increased device longevity. The 3830 lead, previously labeled for His bundle pacing, has now been expanded to include left bundle branch area pacing.
•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. 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. AccuRhythm AI launched inEurope during the first quarter of fiscal year 2023.
•Growth of the CRT-P quadripolar pacing system.
•Continued growth, adoption, and utilization of the TYRX Envelope for implantable devices.
•Continued growth of
•Continued acceptance and growth of the self-expanding CoreValve Evolut transcatheter aortic valve replacement platform. This includes Evolut PRO which provides enhanced hemodynamics, reliable delivery, enhanced durability, advanced sealing, and Evolut FX, a system designed to improve the overall procedural experience through enhancements in deliverability, implant visibility, and deployment stability.
•Continued expansion and training of field support to increase coverage in the
•Continued acceptance and growth of the Onyx Frontier DES platform. The platform launched in theU.S. in the first quarter of fiscal year 2023 and in select international countries in the second quarter of fiscal year 2023. Onyx Frontier is a drug-eluding stent (DES) that introduces an enhanced delivery system and is used for complex percutaneous coronary intervention (PCI). •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. •Acceptance and growth of IN.PACT 018 drug-coated balloons (DCB). The product was launched under limited market release in the first quarter of fiscal year 2023 with full market release expected in the third quarter of fiscal year 2023. IN.PACT 018 is used in endovascular therapies to treat femoropopliteal disease. •Pressure from competitors re-entering the market contributing to the decline in sales of the Abre venous self-expanding stent system. Abre is designed for the unique challenges of venous disease. It offers easy deployment and delivers demonstrated endurance, to give patients freedom of movement. •Strengthening our position in the cardiac ablation technologies market as a result of theAugust 2022 acquisition ofAffera, Inc. The acquisition expands the Cardiovascular segment portfolio of advanced cardiac ablation products and accessories to include its first cardiac mapping and navigation platform to meet physician needs within a growing patient population.
•Our ability to successfully develop, obtain regulatory approval of and commercialize the products within our pipeline, which include, but not limited to, the Symplicity Spyral Multi-Electrode Renal Denervation Catheter, Pulse Field Ablation, a novel energy source that is non-thermal and Aurora Extravascular ICD.
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--------------------------------------------------------------------------------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 and six months endedOctober 28, 2022 were$2.1 billion and$4.1 billion , respectively, a decrease of 10 percent and 12 percent, respectively, compared to the corresponding periods in the prior fiscal year. Currency had an unfavorable impact of$149 million and$264 million on net sales for the three and six months endedOctober 28, 2022 , respectively. The net sales decrease for both periods was primarily driven by unfavorable currency impact, supply chain disruptions particularly in Surgical Innovations, provincial volume-based procurement (VBP) stapling tenders inChina , and a decline in ventilator sales due to the high COVID-19 demand in the corresponding period in the prior fiscal year.
The graphs below illustrate the percent of Medical Surgical net sales by
division for the three months ended
[[Image Removed: mdt-20221028_g9.jpg]][[Image Removed: mdt-20221028_g10.jpg]]
Surgical Innovations (SI) net sales for the three and six months endedOctober 28, 2022 decreased 7 percent and 10 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The decrease for the three months endedOctober 28, 2022 was attributable to slower than expected procedure volumes, and declines in Advanced Stapling primarily driven by provincial VBP stapling tenders inChina , partially offset by growth in Hernia and Wound Management due to supply chain recoveries. The decrease for the six months endedOctober 28, 2022 was led by Advanced Surgical Instruments, driven by global supply chain challenges, including resins, semiconductors, and packaging trays, which impacted energy and stapling products, and provincial VBP stapling tenders and COVID-19 lockdowns inChina . Respiratory, Gastrointestinal, & Renal (RGR) net sales for the three and six months endedOctober 28, 2022 decreased 16 percent and 15 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The decrease for three and six months endedOctober 28, 2022 was largely due to declines in ventilator demand when compared to the corresponding period in the prior fiscal year as demand dropped below pre-pandemic levels. Pulse oximetry products also contributed to the decrease, driven by lower COVID-19 related utilization compared to the prior period.
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:
•The pending separation of the combined Patient Monitoring and Respiratory Interventions businesses from the Medical Surgical Portfolio. The Company announced its intention to pursue a separation inOctober 2022 and expects to complete the separation 12 to 18 months from the announcement date. 38 --------------------------------------------------------------------------------
•The pending contribution of our Renal Care Solutions business as a result of
the
•Acceptance and continued growth of Open-to-MIS (minimally invasive surgery) techniques and tools through our efforts to transition open surgery to MIS. Open-to-MIS initiative focuses on capturing the market opportunity that exists in transitioning open procedures to MIS, whether through traditional MIS, advanced instrumentation, or robotics. Through our approach, in parallel, we also expand our presence and optimize open surgery in current open surgery markets.
•Continued global acceptance and future growth of powered stapling and energy platform.
•Our ability to execute ongoing strategies addressing the competitive pressure
of reprocessing vessel sealing disposables and growth of our surgical soft
tissue robotics procedures in the
•Our ability to create markets and drive products and procedures into emerging markets with our high quality and cost-effective surgical products designed for customers in emerging markets. An example is our ValleyLab LS10 single channel vessel sealing generator, which is compatible with our line of LigaSure instruments and designed for simplified use and affordability.
•Acceptance of less invasive standards of care in gastrointestinal and hepatology products, including products that span the care continuum from diagnostics to therapeutics. Recently launched products include GI Genius and PillCam capsule endoscopy.
•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 complement our global gynecology business. •Global adoption of robotic-assisted surgery and installations of Hugo robotic assisted surgery (RAS) system for urologic, bariatric, gynecologic, and general surgery procedures. This includes continued integration and adoption of Touch Surgery Enterprise with the first artificial intelligence powered surgical videos and analytics platform to make it easier to train and discover new techniques within the robotics platform. The Hugo RAS system, which received CE Mark inOctober 2021 , as well as secured additional regulatory approvals outside theU.S. , is designed to help reduce unwanted variability, improve patient outcomes, and, by extension, lower per procedure cost.
•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 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 the three and six months endedOctober 28, 2022 were$2.2 billion and$4.3 billion , respectively, an increase of 2 percent and a decrease of 1 percent, respectively, compared to the corresponding periods in the prior fiscal year. Currency had an unfavorable impact of$85 million and$149 million on net sales for the three and six months endedOctober 28, 2022 , respectively. The net sales increase for the three months endedOctober 28, 2022 , was primarily due to growth inU.S. Core Spine, ENT, and continued supply risk mitigation, partially offset by unfavorable currency impact. The net sales decrease for the six months endedOctober 28, 2022 , was driven by unfavorable currency impact, supply chain challenges in certain businesses, and prolonged purchasing timelines for large capital. 39 --------------------------------------------------------------------------------
The graphs below illustrate the percent of Neuroscience net sales by division
for the three months ended
[[Image Removed: mdt-20221028_g11.jpg]][[Image Removed: mdt-20221028_g12.jpg]]
Cranial and Spinal Technologies (CST) net sales for the three and six months endedOctober 28, 2022 increased 1 percent and decreased 3 percent, respectively, as compared to the corresponding periods in the prior fiscal year. For the three months endedOctober 28, 2022 , the growth was driven by increased sales in Core Spine products and strong sales of the Infuse Bone Graft in theU.S. The net sales increase was also attributable to strong sales of StealthStation Navigation and Midas Rex powered surgical instruments. For the six months endedOctober 28, 2022 , the net sales decrease was driven by prolonged customer capital purchasing timelines and Biologics, which experienced decreases in customer ordering patterns, when compared to the corresponding period in the prior fiscal year. Specialty Therapies (Specialty) net sales for the three and six months endedOctober 28, 2022 increased 8 percent and 6 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The increase for both periods was driven by growth in hemorrhagic and ischemic stroke, flow diversion and access delivery products. The net sales increase was also driven by benefits from the recentMay 2022 acquisition ofIntersect ENT . For the six months endedOctober 28, 2022 , the growth in ENT growth was partially offset by supply chain disruption in disposables. Neuromodulation (NM) net sales for the three and six months endedOctober 28, 2022 decreased 4 percent and 6 percent, respectively, as compared to the corresponding periods in the prior fiscal year. For both periods, declines were largely due to unfavorable currency impacts, healthcare staffing challenges impacting spinal cord stimulation implant volumes and continued supply chain challenges in Interventional. For the three months endedOctober 28, 2022 , there was growth driven by Pain Stim and Targeted Drug Delivery.
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 and O-arm Imaging Systems, Midas, and ENT Navigation and Power Systems, as well as acceptance of the Stealth Autoguide cranial robotic guidance platform.
•Continued sales of Mazor robotic units and associated market adoption of robot-assisted spine procedures, including the Mazor X Stealth, our integrated robotics and navigation platform.
•Continued growth from spine titanium interbody implants.
•Continued adoption of our integrated solutions through the Aible offering (formerlySurgical 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 to the acquiredMedicrea technologies. 40 --------------------------------------------------------------------------------
•Market acceptance and continued global adoption of innovative new spine
products and procedural solutions within our CST division, such as our
•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, 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 . •Strengthening our position in the ear, nose and throat market as a result of theMay 2022 acquisition ofIntersect ENT , a global ear, nose and throat medical technology leader. The acquisition expands Neuroscience's portfolio of products used during ENT procedures and, combined with the Company's navigation, powered instruments, and existing tissue health products, will offer a broader suite of solutions to assist surgeons treating patients who suffer from chronic rhinosinusitis (CRS). •Our ability to successfully develop, obtain regulatory approval of and commercialize the products within our pipeline, which include our closed-loop Percept PC and RC devices with adaptive DBS (aDBS) and Inceptiv Neurostimulator, as well as 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' net sales for the three and six months endedOctober 28, 2022 were$556 million and$1.1 billion , a decrease of 5 percent as compared to the corresponding periods in the prior fiscal year. Currency had an unfavorable impact of$47 million and$80 million on net sales for the three and six months endedOctober 28, 2022 , respectively. The decrease in net sales for both periods was primarily driven by unfavorable currency impacts and declines in theU.S. across most product lines. The net sales declines were partially offset by strong international growth primarily driven by the continued international expansion of the MiniMed 780G insulin pump system and integrated CGM.
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:
•Continued patient demand for the MiniMed 770G insulin pump system, which 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 acceptance and growth internationally for the MiniMed 780G insulin
pump system. The global adoption of sensor-augmented insulin pump systems has
resulted in strong sensor attachment rates.
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•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.
•Market acceptance and growth of our InPen smart pen system, which allows users to have their Medtronic CGM readings in real-time alongside insulin dose information, all in one view.
•Continued pump, CGM, and consumable competition in an expanding global market.
•Changes in medical reimbursement policies and programs, along with additional payor coverage on insulin pumps.
•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 for the three and six months endedOctober 28, 2022 andOctober 29, 2021 : [[Image Removed: mdt-20221028_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 endedOctober 28, 2022 andOctober 29, 2021 was$2.5 billion and for the six months endedOctober 28, 2022 andOctober 29, 2021 was$5.1 billion . The increase in cost of products sold as a percentage of net sales was primarily attributable to increased labor and direct material manufacturing costs, predominantly due to inflationary pressures and supply chain challenges as well as increased freight due to higher fuel costs and expedited shipments for backorders resulting from supply chain challenges. The six months endedOctober 29, 2021 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, supply chain challenges, and higher labor and direct material costs. Research and Development Expense We remain committed to deliver the best possible experiences for patients, physicians, and caregivers 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 patient needs to improve care; and to expand healthcare access and deliver positive outcomes. Research and development expense for the three months endedOctober 28, 2022 andOctober 29, 2021 was$676 million and for the six months endedOctober 28, 2022 andOctober 29, 2021 was$1.4 billion . The six months endedOctober 29, 2021 included$90 million of acquisitions of, and license payments for, technology not yet approved by regulators, primarily in our Diabetes segment. 42 -------------------------------------------------------------------------------- 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 endedOctober 28, 2022 andOctober 29, 2021 was$2.6 billion and for the six months endedOctober 28, 2022 andOctober 29, 2021 was$5.2 billion . The increase in selling, general, and administrative expense as a percentage of net sales was primarily driven by net sales declines and increased employee travel as compared to the corresponding period in the prior fiscal year when travel was limited, partially offset by reduced incentive accruals.
The following is a summary of other costs and expenses (income):
Three months ended Six months ended
October 28, October 29, October 29,
(in millions) 2022 2021 October 28, 2022 2021
Amortization of intangible assets $ 421 $ 431 $ 844 $ 866
Restructuring charges, net 30 10 44 21
Certain litigation charges, net - 34 - 60
Other operating (income) expense, net (97) 21 (62) 781
Other non-operating income, net (109) (66) (192) (177)
Interest expense 118 136 282 273
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 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year endedApril 29, 2022 . Since inception, the Company has incurred pre-tax exit and disposal costs and other costs, across all segments, of$1.7 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, the majority of which are expected to be incurred by the end of this fiscal year. For the three and six months endedOctober 28, 2022 , we recognized net charges of$53 million and$93 million , respectively, associated with our Enterprise Excellence Program. Net charges for the three and six months endedOctober 28, 2022 included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including$19 million and$38 million , respectively, recognized within cost of products sold and$27 million and$55 million , respectively, recognized within selling, general, and administrative expense in the consolidated statements of income. Charges recognized within restructuring charges, net for the period were not significant. For the three and six months endedOctober 29, 2021 , we recognized net charges of$62 million and$136 million , respectively, associated with our Enterprise Excellence Program, including$4 million and$15 million , respectively, recognized within restructuring charges, net in the consolidated statements of income primarily comprised of employee termination benefits. Net charges for the three and six months endedOctober 29, 2021 also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including$31 million and$64 million , respectively, recognized within cost of products sold, and$27 million and$57 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 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year endedApril 29, 2022 .
Since inception, the Company has incurred pre-tax exit and disposal costs and
other costs, across all segments, of
43
--------------------------------------------------------------------------------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.
For the three and six months endedOctober 28, 2022 , we recognized net charges of$43 million and$78 million , respectively, including$23 million and$44 million , respectively, recognized within restructuring charges, net in the consolidated statements of income primarily comprised of employee termination benefits. Net charges for the three and six months endedOctober 28, 2022 also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including$18 million and$31 million , respectively, recognized within selling, general and administrative expense in the consolidated statements of income. For the three and six months endedOctober 29, 2021 , we recognized net charges of$18 million and$25 million , respectively, including$9 million recognized within restructuring charges, net in the consolidated statements of income for both periods primarily comprised of employee termination benefits. Net charges for the three and six months endedOctober 29, 2021 also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including$9 million and$16 million , respectively, recognized within selling, general and administrative expense in the consolidated statements of income.
For additional information about our restructuring programs, refer to Note 5 to the current period's consolidated financial statements.
Certain Litigation Charges, Net We classify specified certain litigation charges and gains related to significant legal matters as certain litigation charges, net in the consolidated statements of income. For additional information, refer to Note 16 in the current period's consolidated financial statements. Other Operating (Income) Expense, Net Other operating (income) 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, MCS charges, RCS charges, impairment charges, and income from funded research and development arrangements.
For the three months ended
For the six months endedOctober 28, 2022 , the change in other operating (income) expense, net was primarily driven by MCS charges recorded during three months endedJuly 30, 2021 . The charges of$668 million primarily included$409 million of intangible asset impairments and$211 million for commitments and obligations, including customer support obligations, restructuring, and other associated costs. Additionally, the change is driven by the net currency impact of remeasurement expense and our hedging programs, which resulted in a net gain of$219 million combined for the six months endedOctober 28, 2022 as compared to a net loss of$36 million for the corresponding period in the prior year. During the six months endedOctober 28, 2022 , the Company also recorded non-cash pre-tax charges of$81 million , primarily related to impairment of goodwill, as a result of the anticipated sale of half of the Company's RCS business, related to theMay 25, 2022 agreement with DaVita Inc. Other Non-Operating Income, Net Other non-operating income, net includes the non-service component of net periodic pension and postretirement benefit cost, investment gains and losses, and interest income. For the three and six months endedOctober 28, 2022 , the increase in other non-operating income, net is primarily attributable to an increase in interest income, partially offset by reduced gains on our equity method and minority investment portfolios for the six months ended. Interest income was$73 million and$128 million for the three and six months endedOctober 28, 2022 , respectively, and$46 million and$89 million for the three and six months endedOctober 29, 2021 , respectively. Gains on equity method and minority investments were$12 million and$15 million for the three and six months endedOctober 28, 2022 , respectively, compared to a loss of$5 million and gain of$38 million for the three and six months endedOctober 29, 2021 , respectively. Interest Expense Interest expense includes interest incurred on our outstanding borrowings, amortization of debt issuance costs and debt premiums or discounts, amortization of amounts excluded from the effectiveness assessment of certain net investment hedges, and charges recognized in connection with the early redemption of senior notes. For the three months endedOctober 28, 2022 , the decrease in interest expense was primarily due to$27 million in after-tax unrealized gains representing amounts excluded from the effectiveness assessment of certain net investment hedges. For the six months endedOctober 28, 2022 , the increase in interest expense was primarily due to the$53 million charge incurred as a result of the early redemption of approximately$2.3 billion of senior notes, during the three months endedJuly 29, 2022 , partially offset by$47 million in after-tax unrealized gains representing amounts excluded from the effectiveness assessment of certain net investment hedges during the six months endedOctober 28, 2022 . 44 --------------------------------------------------------------------------------
INCOME TAXES
Three months ended Six months ended
(in millions) October 28, 2022 October 29, 2021 October 28, 2022 October 29, 2021
Income tax provision $ 959 $ 176 $ 1,072 $ 240
Income before income taxes 1,395 1,493 2,438 2,326
Effective tax rate 68.7 % 11.8 % 44.0 % 10.3 %
Non-GAAP income tax provision $ 266 $ 254 $ 497 $ 524
Non-GAAP income before income taxes 1,999 2,052 3,733 4,163
Non-GAAP Nominal Tax Rate 13.3 % 12.4 % 13.3 % 12.6 %
Difference between the effective tax rate
and Non-GAAP Nominal Tax Rate (55.4) % 0.6 % (30.7) % 2.3 %
On August 18, 2022 , the U.S. Tax Court (Tax Court) issued its opinion on the
previously disclosed litigation regarding the allocation of income between
Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico for
fiscal years 2005 and 2006 (Opinion). While the Opinion rejected the IRS's
position and the Tax Court determined the methodology advanced by Medtronic was
appropriate for purposes of determining the intercompany royalty rate between
Puerto Rico and the U.S. , it determined that the royalty rate should be higher,
thereby increasing income allocated to the U.S. and consequently subject to U.S.
tax. This case relates only to fiscal years 2005 and 2006. The Opinion remains
subject to finalization by the Tax Court and to appeal by either or both
parties. We have assumed the Tax Court findings will be applied for all years
following fiscal year 2006. As a result, we have recorded a $764 million net tax
charge during the current quarter to recognize the estimated tax impact of the
Tax Court Opinion.
Our effective tax rate for the three and six months ended October 28, 2022 was
68.7% and 44.0%, respectively, as compared to 11.8% and 10.3% for the three and
six months ended October 29, 2021 , respectively. The increase in our effective
tax rate for the three and six months ended October 28, 2022 , as compared to the
corresponding periods in the prior fiscal year, was primarily due to the $764
million net tax charge referenced above.
Our Non-GAAP Nominal Tax Rate for both the three and six months ended
October 28, 2022 was 13.3%, as compared to 12.4% and 12.6% for the three and six
months ended October 29, 2021 , respectively. The change in our Non-GAAP Nominal
Tax Rate was primarily due to the decrease in the stock-based compensation
benefit and 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 and six months ended
October 28, 2022 of approximately $20 million and $37 million , respectively.
LIQUIDITY AND CAPITAL RESOURCES
We are currently in a strong financial position, and we believe our balance sheet and liquidity as ofOctober 28, 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. 45
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