filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
Medtronic plc
Consolidated Statements of Income
(Unaudited)
| Three months ended | Six months ended | ||||||||||||||||||||||
| (in millions, except per share data) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||
| Net sales | $ | 7,847 | $ | 7,647 | $ | 15,835 | $ | 14,154 | |||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of products sold | 2,497 | 2,705 | 5,095 | 5,209 | |||||||||||||||||||
| Research and development expense | 676 | 639 | 1,426 | 1,260 | |||||||||||||||||||
| Selling, general, and administrative expense | 2,615 | 2,600 | 5,163 | 5,017 | |||||||||||||||||||
| Amortization of intangible assets | 431 | 443 | 866 | 884 | |||||||||||||||||||
| Restructuring charges, net | 10 | 97 | 21 | 150 | |||||||||||||||||||
| Certain litigation charges, net | 34 | 84 | 60 | (4) | |||||||||||||||||||
| Other operating expense, net | 21 | 149 | 781 | 35 | |||||||||||||||||||
| Operating profit | 1,563 | 930 | 2,422 | 1,603 | |||||||||||||||||||
| Other non-operating income, net | (66) | (65) | (177) | (147) | |||||||||||||||||||
| Interest expense | 136 | 470 | 273 | 641 | |||||||||||||||||||
| Income before income taxes | 1,493 | 525 | 2,326 | 1,109 | |||||||||||||||||||
| Income tax provision | 176 | 31 | 240 | 124 | |||||||||||||||||||
| Net income | 1,317 | 494 | 2,086 | 985 | |||||||||||||||||||
| Net income attributable to noncontrolling interests | (6) | (5) | (12) | (9) | |||||||||||||||||||
| Net income attributable to Medtronic | $ | 1,311 | $ | 489 | $ | 2,074 | $ | 976 | |||||||||||||||
| Basic earnings per share | $ | 0.97 | $ | 0.36 | $ | 1.54 | $ | 0.73 | |||||||||||||||
| Diluted earnings per share | $ | 0.97 | $ | 0.36 | $ | 1.53 | $ | 0.72 | |||||||||||||||
| Basic weighted average shares outstanding | 1,345.1 | 1,344.4 | 1,344.8 | 1,343.1 | |||||||||||||||||||
| Diluted weighted average shares outstanding | 1,355.3 | 1,352.1 | 1,355.9 | 1,351.1 |
The accompanying notes are an integral part of these consolidated financial statements.
Medtronic plc
Consolidated Statements of Comprehensive Income
(Unaudited)
| Three months ended | Six months ended | ||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||
| Net income | $ | 1,317 | $ | 494 | $ | 2,086 | $ | 985 | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Unrealized gain (loss) on investment securities | (56) | (12) | (44) | 113 | |||||||||||||||||||
| Translation adjustment | (247) | 144 | (602) | 1,261 | |||||||||||||||||||
| Net investment hedge | 356 | (164) | 780 | (1,276) | |||||||||||||||||||
| Net change in retirement obligations | 18 | 17 | 37 | 20 | |||||||||||||||||||
| Unrealized gain (loss) on cash flow hedges | 95 | (45) | 269 | (395) | |||||||||||||||||||
| Other comprehensive income (loss) | 166 | (60) | 440 | (277) | |||||||||||||||||||
| Comprehensive income including noncontrolling interests | 1,483 | 434 | 2,526 | 708 | |||||||||||||||||||
| Comprehensive income attributable to noncontrolling interests | (5) | (6) | (9) | (15) | |||||||||||||||||||
| Comprehensive income attributable to Medtronic | $ | 1,478 | $ | 428 | $ | 2,517 | $ | 693 |
The accompanying notes are an integral part of these consolidated financial statements.
Medtronic plc
Consolidated Balance Sheets
(Unaudited)
| (in millions) | October 29, 2021 | April 30, 2021 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 2,900 | $ | 3,593 | |||||||
| Investments | 7,769 | 7,224 | |||||||||
| Accounts receivable, less allowances and credit losses of $255 and $241, respectively | 5,493 | 5,462 | |||||||||
| Inventories, net | 4,349 | 4,313 | |||||||||
| Other current assets | 2,220 | 1,955 | |||||||||
| Total current assets | 22,731 | 22,548 | |||||||||
| Property, plant, and equipment | 12,978 | 12,700 | |||||||||
| Accumulated depreciation | (7,790) | (7,479) | |||||||||
| Property, plant, and equipment, net | 5,188 | 5,221 | |||||||||
| Goodwill | 41,612 | 41,961 | |||||||||
| Other intangible assets, net | 16,523 | 17,740 | |||||||||
| Tax assets | 3,203 | 3,169 | |||||||||
| Other assets | 2,499 | 2,443 | |||||||||
| Total assets | $ | 91,756 | $ | 93,083 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current debt obligations | $ | 16 | $ | 11 | |||||||
| Accounts payable | 1,917 | 2,106 | |||||||||
| Accrued compensation | 1,934 | 2,482 | |||||||||
| Accrued income taxes | 467 | 435 | |||||||||
| Other accrued expenses | 3,469 | 3,475 | |||||||||
| Total current liabilities | 7,803 | 8,509 | |||||||||
| Long-term debt | 25,607 | 26,378 | |||||||||
| Accrued compensation and retirement benefits | 1,505 | 1,557 | |||||||||
| Accrued income taxes | 2,110 | 2,251 | |||||||||
| Deferred tax liabilities | 1,024 | 1,028 | |||||||||
| Other liabilities | 1,547 | 1,756 | |||||||||
| Total liabilities | 39,596 | 41,481 | |||||||||
| Commitments and contingencies (Note 16) | |||||||||||
| Shareholders’ equity: | |||||||||||
| Ordinary shares— par value $0.0001, 2.6 billion shares authorized, 1,344,861,769 and 1,345,400,671 shares issued and outstanding, respectively | — | — | |||||||||
| Additional paid-in capital | 26,059 | 26,319 | |||||||||
| Retained earnings | 28,974 | 28,594 | |||||||||
| Accumulated other comprehensive loss | (3,042) | (3,485) | |||||||||
| Total shareholders’ equity | 51,991 | 51,428 | |||||||||
| Noncontrolling interests | 168 | 174 | |||||||||
| Total equity | 52,159 | 51,602 | |||||||||
| Total liabilities and equity | $ | 91,756 | $ | 93,083 |
The accompanying notes are an integral part of these consolidated financial statements.
Medtronic plc
Consolidated Statements of Equity
(Unaudited)
| Ordinary Shares | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | Number | Par Value | ||||||||||||||||||||||||||||||||||||||||||||||||
| April 30, 2021 | 1,345 | $ | — | $ | 26,319 | $ | 28,594 | $ | (3,485) | $ | 51,428 | $ | 174 | $ | 51,602 | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 763 | — | 763 | 6 | 769 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | — | — | — | — | 276 | 276 | (2) | 274 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends to shareholders ($0.63 per ordinary share) | — | — | — | (846) | — | (846) | — | (846) | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under stock purchase and award plans | 2 | — | 107 | — | — | 107 | — | 107 | ||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | (2) | — | (311) | — | — | (311) | — | (311) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 69 | — | — | 69 | — | 69 | ||||||||||||||||||||||||||||||||||||||||||
| July 30, 2021 | 1,345 | $ | — | $ | 26,184 | $ | 28,511 | $ | (3,209) | $ | 51,486 | $ | 178 | $ | 51,664 | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 1,311 | — | 1,311 | 6 | 1,317 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | — | — | — | — | 167 | 167 | (1) | 166 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends to shareholders ($0.63 per ordinary share) | — | — | — | (847) | — | (847) | — | (847) | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under stock purchase and award plans | 3 | — | 92 | — | — | 92 | — | 92 | ||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | (3) | — | (358) | — | — | (358) | — | (358) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 140 | — | — | 140 | — | 140 | ||||||||||||||||||||||||||||||||||||||||||
| Changes to noncontrolling ownership interests | — | — | 1 | — | — | 1 | (16) | (15) | ||||||||||||||||||||||||||||||||||||||||||
| October 29, 2021 | 1,345 | $ | — | $ | 26,059 | $ | 28,974 | $ | (3,042) | $ | 51,991 | $ | 168 | $ | 52,159 | |||||||||||||||||||||||||||||||||||
| Ordinary Shares | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | Number | Par Value | ||||||||||||||||||||||||||||||||||||||||||||||||
| April 24, 2020 | 1,341 | $ | — | $ | 26,165 | $ | 28,132 | $ | (3,560) | $ | 50,737 | $ | 135 | $ | 50,872 | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 487 | — | 487 | 4 | 491 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | — | — | — | — | (222) | (222) | 5 | (217) | ||||||||||||||||||||||||||||||||||||||||||
| Dividends to shareholders ($0.58 per ordinary share) | — | — | — | (778) | — | (778) | — | (778) | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under stock purchase and award plans | 2 | — | 26 | — | — | 26 | — | 26 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 70 | — | — | 70 | — | 70 | ||||||||||||||||||||||||||||||||||||||||||
| Changes to noncontrolling ownership interests | — | — | — | — | — | — | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principle(1) | — | — | — | (24) | — | (24) | — | (24) | ||||||||||||||||||||||||||||||||||||||||||
| July 31, 2020 | 1,343 | $ | — | $ | 26,261 | $ | 27,817 | $ | (3,782) | $ | 50,296 | $ | 147 | $ | 50,443 | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 489 | — | 489 | 5 | 494 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) | — | — | — | — | (61) | (61) | 1 | (60) | ||||||||||||||||||||||||||||||||||||||||||
| Dividends to shareholders ($0.58 per ordinary share) | — | — | — | (780) | — | (780) | — | (780) | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under stock purchase and award plans | 2 | — | 93 | — | — | 93 | — | 93 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 140 | — | — | 140 | — | 140 | ||||||||||||||||||||||||||||||||||||||||||
| Changes to noncontrolling ownership interests | — | — | (13) | — | — | (13) | (1) | (14) | ||||||||||||||||||||||||||||||||||||||||||
| October 30, 2020 | 1,345 | $ | — | $ | 26,481 | $ | 27,526 | $ | (3,843) | $ | 50,164 | $ | 152 | $ | 50,316 | |||||||||||||||||||||||||||||||||||
(1) The cumulative effect of the change in accounting principle during the first quarter of fiscal year 2021 resulted from the adoption of accounting guidance that changed the methodology to be used when measuring credit losses for certain financial instruments and financial assets, including trade receivables. As a result of the adoption, the Company adjusted the opening balance of retained earnings for $24 million as of April 25, 2020.
The accompanying notes are an integral part of these consolidated financial statements.
Medtronic plc
Consolidated Statements of Cash Flows
(Unaudited)
| Six months ended | |||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | |||||||||
| Operating Activities: | |||||||||||
| Net income | $ | 2,086 | $ | 985 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 1,347 | 1,340 | |||||||||
| Provision for doubtful accounts | 34 | 86 | |||||||||
| Deferred income taxes | (78) | (69) | |||||||||
| Stock-based compensation | 209 | 210 | |||||||||
| Loss on debt extinguishment | — | 308 | |||||||||
| MCS asset impairment and inventory write-down | 515 | — | |||||||||
| Other, net | 130 | 112 | |||||||||
| Change in operating assets and liabilities, net of acquisitions and divestitures: | |||||||||||
| Accounts receivable, net | (171) | (669) | |||||||||
| Inventories | (156) | (145) | |||||||||
| Accounts payable and accrued liabilities | (446) | 108 | |||||||||
| Other operating assets and liabilities | (409) | (127) | |||||||||
| Net cash provided by operating activities | 3,061 | 2,139 | |||||||||
| Investing Activities: | |||||||||||
| Acquisitions, net of cash acquired | (91) | (370) | |||||||||
| Additions to property, plant, and equipment | (649) | (615) | |||||||||
| Purchases of investments | (5,311) | (5,360) | |||||||||
| Sales and maturities of investments | 4,637 | 4,337 | |||||||||
| Other investing activities, net | (79) | (4) | |||||||||
| Net cash used in investing activities | (1,493) | (2,012) | |||||||||
| Financing Activities: | |||||||||||
| Change in current debt obligations, net | — | (57) | |||||||||
| Proceeds from short-term borrowings (maturities greater than 90 days) | — | 2,789 | |||||||||
| Issuance of long-term debt | — | 7,172 | |||||||||
| Payments on long-term debt | (1) | (6,336) | |||||||||
| Dividends to shareholders | (1,693) | (1,558) | |||||||||
| Issuance of ordinary shares | 274 | 119 | |||||||||
| Repurchase of ordinary shares | (744) | (68) | |||||||||
| Other financing activities | (46) | (70) | |||||||||
| Net cash provided by (used in) financing activities | (2,210) | 1,991 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (51) | 162 | |||||||||
| Net change in cash and cash equivalents | (693) | 2,280 | |||||||||
| Cash and cash equivalents at beginning of period | 3,593 | 4,140 | |||||||||
| Cash and cash equivalents at end of period | $ | 2,900 | $ | 6,420 | |||||||
| Supplemental Cash Flow Information | |||||||||||
| Cash paid for: | |||||||||||
| Income taxes | $ | 615 | $ | 384 | |||||||
| Interest | 280 | 321 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Medtronic plc and its subsidiaries (Medtronic plc, Medtronic, or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.) (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the consolidated financial statements include all the adjustments necessary for a fair statement in conformity with U.S. GAAP. Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.
Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates.
The Covid-19 pandemic ("COVID-19" or the "pandemic") has had, and may continue to have, an adverse effect on our business, results of operations, financial condition, and cash flows, and its future impacts remain highly uncertain and unpredictable. While there was not a material impact to the Company’s consolidated financial statements as of and for the three and six months ended October 29, 2021, changes in the Company’s assessment about the length and severity of the pandemic, as well as other factors, could result in actual results differing from estimates.
The accompanying unaudited consolidated financial statements include the accounts of Medtronic plc, its wholly-owned subsidiaries, entities for which the Company has a controlling financial interest, and variable interest entities for which the Company is the primary beneficiary. Intercompany transactions and balances have been eliminated in consolidation. 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.
The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2021. The Company’s fiscal years 2022, 2021, and 2020 will end or ended on April 29, 2022, April 30, 2021, and April 24, 2020, respectively. Fiscal year 2021 was a 53-week year, with the extra week having occurred in the first fiscal month of the first quarter.
2. New Accounting Pronouncements
Recently Adopted
For the three and six months ended October 29, 2021, there were no newly adopted accounting pronouncements that had a material impact to our consolidated financial statements. As of October 29, 2021, there are no recently issued but not yet adopted accounting pronouncements that are expected to materially impact our consolidated financial statements.
3. Revenue
The Company's revenues are principally derived from device-based medical therapies and services related to cardiac rhythm disorders, cardiovascular disease, renal disease, neurological disorders and diseases, spinal conditions and musculoskeletal trauma, chronic pain, urological and digestive disorders, ear, nose, and throat conditions, and diabetes conditions as well as advanced and general surgical care products, respiratory and monitoring solutions, and neurological surgery technologies. The Company's primary customers include healthcare systems, clinics, third-party healthcare providers, distributors, and other institutions, including governmental healthcare programs and group purchasing organizations.
During the fourth quarter of fiscal year 2021, the Company realigned its divisions within Cardiovascular. As a result, fiscal year 2021 revenue has been recast to adjust for these realignments. Additionally, the Company implemented a new operating model in fiscal year 2021, which was fully operational beginning in the fourth quarter.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The table below illustrates net sales by segment and division for the three and six months ended October 29, 2021 and October 30, 2020:
| Three months ended | Six months ended | ||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||
| Cardiac Rhythm & Heart Failure | $ | 1,471 | $ | 1,426 | $ | 2,954 | $ | 2,673 | |||||||||||||||
| Structural Heart & Aortic | 750 | 733 | 1,537 | 1,360 | |||||||||||||||||||
| Coronary & Peripheral Vascular | 606 | 567 | 1,226 | 1,125 | |||||||||||||||||||
| Cardiovascular | 2,827 | 2,725 | 5,717 | 5,158 | |||||||||||||||||||
| Surgical Innovations | 1,497 | 1,393 | 3,051 | 2,473 | |||||||||||||||||||
| Respiratory, Gastrointestinal, & Renal | 802 | 893 | 1,570 | 1,613 | |||||||||||||||||||
| Medical Surgical | 2,299 | 2,285 | 4,621 | 4,086 | |||||||||||||||||||
| Cranial & Spinal Technologies | 1,067 | 1,071 | 2,189 | 2,015 | |||||||||||||||||||
| Specialty Therapies | 634 | 581 | 1,275 | 1,035 | |||||||||||||||||||
| Neuromodulation | 435 | 411 | 875 | 725 | |||||||||||||||||||
| Neuroscience | 2,136 | 2,063 | 4,340 | 3,774 | |||||||||||||||||||
| Diabetes | 585 | 574 | 1,157 | 1,136 | |||||||||||||||||||
| Total | $ | 7,847 | $ | 7,647 | $ | 15,835 | $ | 14,154 |
The table below illustrates net sales by market geography for each segment for the three and six months ended October 29, 2021 and October 30, 2020:
| U.S.****(1) | Non-U.S. Developed Markets**(2)** | Emerging Markets**(3)** | |||||||||||||||||||||||||||||||||
| Three months ended | Three months ended | Three months ended | |||||||||||||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||||||||||||
| Cardiovascular | $ | 1,373 | $ | 1,377 | $ | 948 | $ | 945 | $ | 506 | $ | 404 | |||||||||||||||||||||||
| Medical Surgical | 970 | 996 | 841 | 837 | 488 | 452 | |||||||||||||||||||||||||||||
| Neuroscience | 1,394 | 1,397 | 433 | 426 | 309 | 240 | |||||||||||||||||||||||||||||
| Diabetes | 261 | 284 | 256 | 238 | 69 | 51 | |||||||||||||||||||||||||||||
| Total | $ | 3,997 | $ | 4,054 | $ | 2,478 | $ | 2,446 | $ | 1,372 | $ | 1,147 | |||||||||||||||||||||||
| U.S.****(1) | Non-U.S. Developed Markets**(2)** | Emerging Markets**(3)** | |||||||||||||||||||||||||||||||||
| Six months ended | Six months ended | Six months ended | |||||||||||||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||||||||||||
| Cardiovascular | $ | 2,793 | $ | 2,582 | $ | 1,952 | $ | 1,798 | $ | 972 | $ | 778 | |||||||||||||||||||||||
| Medical Surgical | 1,959 | 1,718 | 1,710 | 1,556 | 951 | 811 | |||||||||||||||||||||||||||||
| Neuroscience | 2,840 | 2,533 | 898 | 802 | 602 | 439 | |||||||||||||||||||||||||||||
| Diabetes | 506 | 572 | 519 | 465 | 132 | 100 | |||||||||||||||||||||||||||||
| Total | $ | 8,098 | $ | 7,405 | $ | 5,079 | $ | 4,621 | $ | 2,658 | $ | 2,128 |
(1)U.S. includes the United States and U.S. territories.
(2)Non-U.S. developed markets include Japan, Australia, New Zealand, Korea, Canada, and the countries within Western Europe.
(3)Emerging markets include the countries of the Middle East, Africa, Latin America, Eastern Europe, and the countries of Asia that are not included in the non-U.S. developed markets, as defined above.
The amount of revenue recognized is reduced by sales rebates and returns. Adjustments to rebates and returns reserves are recorded as increases or decreases to revenue. At October 29, 2021, $1.1 billion of rebates were classified as other accrued expenses, and $518 million of rebates were classified as a reduction of accounts receivable in the consolidated balance sheet. At April 30, 2021, $906 million of rebates were classified as other accrued expenses, and $485 million of rebates were classified as a reduction of accounts receivable in the consolidated balance sheet. For the three and six months ended October 29, 2021 and October 30, 2020, adjustments to rebate and return reserves recognized in revenue that were included in the rebate and return reserves at the beginning of the period were not material.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Deferred Revenue and Remaining Performance Obligations
The Company records a deferred revenue liability if a customer pays consideration, or the Company has the right to invoice, before the Company transfers a good or service to the customer. Deferred revenue at October 29, 2021 and April 30, 2021 was $365 million and $368 million, respectively. At October 29, 2021 and April 30, 2021, $267 million and $276 million was included in other accrued expenses, respectively, and $98 million and $93 million was included in other liabilities, respectively. During the six months ended October 29, 2021, the Company recognized $155 million of revenue that was included in deferred revenue as of April 30, 2021.
Remaining performance obligations include goods and services that have not yet been delivered or provided under existing, noncancellable contracts with minimum purchase commitments. At October 29, 2021, the estimated revenue expected to be recognized in future periods related to unsatisfied performance obligations for executed contracts with an original duration of one year or more was approximately $1.1 billion. The Company expects to recognize revenue on the majority of these remaining performance obligations over the next four years.
4. Acquisitions
During the three and six months ended October 29, 2021 and October 30, 2020, the Company had acquisitions that were accounted for as business combinations. The assets and liabilities of the businesses acquired were recorded and consolidated on the acquisition date at their respective fair values. Goodwill resulting from business combinations is largely attributable to future, yet to be defined technologies, new customer relationships, existing workforce of the acquired businesses, and synergies expected to arise after the Company's acquisition of these businesses. The pro forma impact of these acquisitions was not significant, either individually or in the aggregate, to the consolidated results of the Company for the three and six months ended October 29, 2021 and October 30, 2020. The results of operations of acquired businesses have been included in the Company's consolidated statements of income since the date each business was acquired. For the three and six months ended October 29, 2021, purchase price allocation adjustments were not significant.
Fiscal Year 2022
The acquisition date fair value of net assets acquired during the six months ended October 29, 2021 was $125 million, consisting of $154 million of assets acquired and $29 million of liabilities assumed. Based upon preliminary valuations, assets acquired were primarily comprised of $50 million of technology-based intangible assets with estimated useful lives ranging from 15 to 16 years and $80 million of goodwill. The goodwill is not deductible for tax purposes. The Company recognized $31 million of contingent consideration liabilities in connection with business combinations during the six months ended October 29, 2021, which are comprised of revenue and product development milestone-based payments.
Fiscal Year 2021
The acquisition date fair value of net assets acquired during the six months ended October 30, 2020 was $539 million, consisting of $577 million of assets acquired and $38 million of liabilities assumed. Assets acquired were primarily comprised of $156 million of technology-based intangible assets with estimated useful lives ranging from 10 to 15 years and $381 million of goodwill. The goodwill is not deductible for tax purposes. The Company recognized $158 million of contingent consideration liabilities in connection with business combinations during the six months ended October 30, 2020, which are comprised of revenue and product development milestone-based payments. Additionally, during the six months ended October 30, 2020, the Company recognized a gain of $132 million related to a change in amounts accrued for certain contingent liabilities from a recent acquisition. The benefit was recognized in other operating expense, net in the consolidated statements of income as the purchase accounting was finalized in fiscal year 2020. Purchase price allocation adjustments were not significant as a result of final valuations.
Acquired In-Process Research & Development (IPR&D)
IPR&D with no alternative future use acquired outside of a business combination is expensed immediately. The Company did not acquire any IPR&D in connection with asset acquisitions during the three months ended October 29, 2021. During the six months ended October 29, 2021, the Company acquired $90 million of IPR&D in connection with asset acquisitions, which was recognized in research and development expense in the consolidated statements of income. During the three and six months ended October 30, 2020, IPR&D acquired in connection with asset acquisitions was not significant.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Contingent Consideration
Certain of the Company’s business combinations involve potential payment of future consideration that is contingent upon the achievement of certain product development milestones and/or contingent on the acquired business reaching certain performance milestones. A liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period, and the change in fair value is recognized within other operating expense, net in the consolidated statements of income. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.
The fair value of contingent consideration at October 29, 2021 and April 30, 2021 was $269 million and $270 million, respectively. At October 29, 2021, $66 million was recorded in other accrued expenses, and $203 million was recorded in other liabilities in the consolidated balance sheet. At April 30, 2021, $78 million was recorded in other accrued expenses, and $192 million was recorded in other liabilities in the consolidated balance sheet.
The following table provides a reconciliation of the beginning and ending balances of contingent consideration:
| Three months ended | Six months ended | ||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||
| Beginning balance | $ | 294 | $ | 297 | $ | 270 | $ | 280 | |||||||||||||||
| Purchase price contingent consideration | 31 | 158 | 31 | 158 | |||||||||||||||||||
| Purchase price allocation adjustments | — | — | 25 | — | |||||||||||||||||||
| Payments | (30) | (1) | (41) | (2) | |||||||||||||||||||
| Change in fair value | (26) | 7 | (16) | 25 | |||||||||||||||||||
| Ending balance | $ | 269 | $ | 461 | $ | 269 | $ | 461 |
The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues (for revenue-based consideration). Projected revenues are based on the Company's most recent internal operational budgets and long-range strategic plans. Changes in projected payment dates, discount rates, probabilities of payment, and projected revenues may result in adjustments to the fair value measurement. The recurring Level 3 fair value measurements of contingent consideration for which a liability is recorded include the following significant unobservable inputs:
| Fair Value at | ||||||||||||||||||||||||||||||||
| (in millions) | October 29, 2021 | Unobservable Input | Range | Weighted Average (1) | ||||||||||||||||||||||||||||
| Discount rate | 5.5% - 31.6% | 16.9% | ||||||||||||||||||||||||||||||
| Revenue and other performance-based payments | $211 | Probability of payment | 30% - 100% | 89.7% | ||||||||||||||||||||||||||||
| Projected fiscal year of payment | 2022 - 2027 | 2024 | ||||||||||||||||||||||||||||||
| Discount rate | 5.5% | 5.5% | ||||||||||||||||||||||||||||||
| Product development and other milestone-based payments | $58 | Probability of payment | 70% - 100% | 90.6% | ||||||||||||||||||||||||||||
| Projected fiscal year of payment | 2022 - 2025 | 2024 |
(1) Unobservable inputs were weighted by the relative fair value of the contingent consideration liability. For projected fiscal year of payment, the amount represents the median of the inputs and is not a weighted average.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
5. Restructuring and Other Costs
Enterprise Excellence
In the third quarter of fiscal year 2018, the Company announced its Enterprise Excellence restructuring program. 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 ended April 30, 2021. Since inception, the Company has incurred pre-tax exit and disposal costs and other costs, across all segments, of $1.4 billion in connection with the Enterprise Excellence program. In total, the Company estimates it will recognize approximately $1.6 billion to $1.8 billion of exit and disposal costs and other costs related to the Enterprise Excellence program, and the majority of the remaining estimated charges are expected to be incurred by the end of this fiscal year.
For the three and six months ended October 29, 2021, the Company recognized net charges of $62 million and $136 million, of which $31 million and $64 million, respectively, were recognized within cost of products sold and $27 million and $57 million, respectively, were recognized within selling, general, and administrative expense in the consolidated statements of income. For the three and six months ended October 30, 2020, the Company recognized net charges of $87 million and $164 million, of which $32 million and $59 million, respectively, were recognized within cost of products sold and $48 million and $95 million, respectively, were recognized within selling, general, and administrative expense in the consolidated statements of income.
The following table summarizes the activity related to the Enterprise Excellence restructuring program for the six months ended October 29, 2021:
| (in millions) | Employee Termination Benefits | Associated Costs**(1)** | Other Costs | Total | |||||||||||||||||||||||||||||||||||||
| April 30, 2021 | $ | 64 | $ | 18 | $ | 1 | $ | 83 | |||||||||||||||||||||||||||||||||
| Charges | 17 | 121 | — | 138 | |||||||||||||||||||||||||||||||||||||
| Cash payments | (25) | (123) | — | (148) | |||||||||||||||||||||||||||||||||||||
| Accrual adjustments(2) | (2) | — | — | (2) | |||||||||||||||||||||||||||||||||||||
| October 29, 2021 | $ | 54 | $ | 16 | $ | 1 | $ | 71 |
(1)Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.
(2)Accrual adjustments relate to certain employees identified for termination finding other positions within the Company and contract terminations being settled for less than originally estimated.
Simplification
In the first quarter of fiscal year 2021, the Company initiated the Simplification restructuring program. 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 ended April 30, 2021. Since inception, the Company has incurred pre-tax exit and disposal costs and other costs, across all segments, of $293 million in connection with the Simplification program. In total, the Company estimates it will recognize approximately $400 million to $450 million of exit and disposal costs and other costs related to the Simplification program, and the majority of the remaining estimated charges are expected to be incurred by the end of this fiscal year.
For the three and six months ended October 29, 2021, the Company recognized net charges of $18 million and $25 million, respectively, of which $9 million and $16 million were recognized within selling, general, and administrative expense in the consolidated statements of income. For the three and six months ended October 30, 2020, the Company recognized net charges of $94 million and $145 million, respectively, which included $97 million of incremental defined benefit pension and post-retirement related expenses for employees that accepted voluntary early retirement packages. The net charges for the three and six months ended October 30, 2020 also included $2 million and $3 million, respectively, within selling, general, and administrative expense in the consolidated statements of income.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The following table summarizes the activity related to the Simplification restructuring program for six months ended October 29, 2021:
| (in millions) | Employee Termination Benefits | Associated Costs**(1)** | Total | ||||||||||||||||||||||||||
| April 30, 2021 | $ | 59 | $ | 4 | $ | 63 | |||||||||||||||||||||||
| Charges | 13 | 16 | 29 | ||||||||||||||||||||||||||
| Cash payments | (48) | (16) | (64) | ||||||||||||||||||||||||||
| Accrual adjustments(2) | (5) | — | (5) | ||||||||||||||||||||||||||
| October 29, 2021 | $ | 19 | $ | 4 | $ | 23 |
(1) Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.
(2) Accrual adjustments relate to certain employees identified for termination finding other positions within the Company.
Mechanical Circulatory Support (MCS)
On June 3, 2021, the Company announced the decision to stop the distribution and sale of the Medtronic HVAD System in light of a growing body of observational clinical comparisons indicating a lower frequency of neurological adverse events and mortality with another circulatory support device available to patients compared to the HVAD system. In connection with this decision, the Company recorded charges of $726 million (MCS charges) within the Cardiovascular segment during the three months ended July 30, 2021, including $58 million recognized in costs of products sold and $668 million recognized within other operating expense, net in the consolidated statement of income*.* The charges included $515 million of non-cash impairments and write-downs primarily related to $409 million of intangible asset impairments and $58 million of inventory write-downs. The Company also recorded charges of $211 million for commitments and obligations associated with the decision, which included charges for patient support obligations, restructuring, and other associated costs. As of October 29, 2021, accruals were recorded in the consolidated balance sheet for these obligations, with $86 million reflected in other accrued expenses and $30 million recorded in other liabilities. Medtronic remains committed to serving the needs of the approximately 4,000 patients currently implanted with the HVAD system.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
6. Financial Instruments
Debt Securities
The Company holds investments in marketable debt securities that are classified and accounted for as available-for-sale and are remeasured on a recurring basis. The following tables summarize the Company's investments in available-for-sale debt securities by significant investment category and the related consolidated balance sheet classification at October 29, 2021 and April 30, 2021:
| October 29, 2021 | |||||||||||||||||||||||||||||||||||
| Valuation | Balance Sheet Classification | ||||||||||||||||||||||||||||||||||
| (in millions) | Cost | Unrealized Gains | Unrealized Losses | Fair Value | Investments | Other Assets | |||||||||||||||||||||||||||||
| Level 1: | |||||||||||||||||||||||||||||||||||
| U.S. government and agency securities | $ | 513 | $ | 20 | $ | (3) | $ | 530 | $ | 530 | $ | — | |||||||||||||||||||||||
| Level 2: | |||||||||||||||||||||||||||||||||||
| Corporate debt securities | 5,025 | 72 | (18) | 5,079 | 5,079 | — | |||||||||||||||||||||||||||||
| U.S. government and agency securities | 918 | — | (9) | 909 | 909 | — | |||||||||||||||||||||||||||||
| Mortgage-backed securities | 647 | 15 | (15) | 646 | 646 | — | |||||||||||||||||||||||||||||
| Non-U.S. government and agency securities | 24 | 1 | — | 25 | 25 | — | |||||||||||||||||||||||||||||
| Certificates of deposit | 15 | — | — | 15 | 15 | — | |||||||||||||||||||||||||||||
| Other asset-backed securities | 558 | 3 | (1) | 560 | 560 | — | |||||||||||||||||||||||||||||
| Debt funds | 6 | — | — | 6 | 6 | — | |||||||||||||||||||||||||||||
| Total Level 2 | 7,193 | 91 | (44) | 7,240 | 7,240 | — | |||||||||||||||||||||||||||||
| Level 3: | |||||||||||||||||||||||||||||||||||
| Auction rate securities | 36 | — | (3) | 33 | — | 33 | |||||||||||||||||||||||||||||
| Total available-for-sale debt securities | $ | 7,741 | $ | 111 | $ | (49) | $ | 7,803 | $ | 7,769 | $ | 33 |
| April 30, 2021 | |||||||||||||||||||||||||||||||||||
| Valuation | Balance Sheet Classification | ||||||||||||||||||||||||||||||||||
| (in millions) | Cost | Unrealized Gains | Unrealized Losses | Fair Value | Investments | Other Assets | |||||||||||||||||||||||||||||
| Level 1: | |||||||||||||||||||||||||||||||||||
| U.S. government and agency securities | $ | 505 | $ | 26 | $ | (3) | $ | 528 | $ | 528 | $ | — | |||||||||||||||||||||||
| Level 2: | |||||||||||||||||||||||||||||||||||
| Corporate debt securities | 4,557 | 103 | (13) | 4,647 | 4,647 | — | |||||||||||||||||||||||||||||
| U.S. government and agency securities | 810 | — | (7) | 804 | 804 | — | |||||||||||||||||||||||||||||
| Mortgage-backed securities | 645 | 21 | (16) | 650 | 650 | — | |||||||||||||||||||||||||||||
| Non-U.S. government and agency securities | 31 | 1 | — | 33 | 33 | — | |||||||||||||||||||||||||||||
| Certificates of deposit | 19 | — | — | 19 | 19 | — | |||||||||||||||||||||||||||||
| Other asset-backed securities | 534 | 4 | (1) | 537 | 537 | — | |||||||||||||||||||||||||||||
| Debt funds | 7 | — | — | 7 | 7 | — | |||||||||||||||||||||||||||||
| Total Level 2 | 6,603 | 129 | (36) | 6,696 | 6,696 | — | |||||||||||||||||||||||||||||
| Level 3: | |||||||||||||||||||||||||||||||||||
| Auction rate securities | 36 | — | (3) | 33 | — | 33 | |||||||||||||||||||||||||||||
| Total available-for-sale debt securities | $ | 7,144 | $ | 155 | $ | (42) | $ | 7,257 | $ | 7,224 | $ | 33 |
The amortized cost of debt securities excludes accrued interest, which is reported in other current assets in the consolidated balance sheets.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The following tables present the gross unrealized losses and fair values of the Company’s available-for-sale debt securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category at October 29, 2021 and April 30, 2021:
| October 29, 2021 | |||||||||||||||||||||||
| Less than 12 months | More than 12 months | ||||||||||||||||||||||
| (in millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
| U.S. government and agency securities | $ | — | $ | — | $ | 943 | $ | (12) | |||||||||||||||
| Corporate debt securities | — | — | 3,312 | (18) | |||||||||||||||||||
| Mortgage-backed securities | — | — | 645 | (15) | |||||||||||||||||||
| Other asset-backed securities | — | — | 542 | (1) | |||||||||||||||||||
| Auction rate securities | — | — | 33 | (3) | |||||||||||||||||||
| Total | $ | — | $ | — | $ | 5,475 | $ | (49) |
| April 30, 2021 | |||||||||||||||||||||||
| Less than 12 months | More than 12 months | ||||||||||||||||||||||
| (in millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
| U.S. government and agency securities | $ | 946 | $ | (10) | $ | — | $ | — | |||||||||||||||
| Corporate debt securities | — | — | 3,209 | (13) | |||||||||||||||||||
| Mortgage-backed securities | — | — | 650 | (16) | |||||||||||||||||||
| Other asset-backed securities | — | — | 531 | (1) | |||||||||||||||||||
| Auction rate securities | — | — | 33 | (3) | |||||||||||||||||||
| Total | $ | 946 | $ | (10) | $ | 4,423 | $ | (32) |
The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no transfers into or out of Level 3 during the three and six months ended October 29, 2021 and October 30, 2020. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement.
Activity related to the Company’s available-for-sale debt securities portfolio is as follows:
| Three months ended | Six months ended | ||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||
| Proceeds from sales | $ | 2,299 | $ | 1,932 | $ | 4,751 | $ | 4,335 | |||||||||||||||
| Gross realized gains | 4 | 3 | 8 | 8 | |||||||||||||||||||
| Gross realized losses | (2) | (1) | (4) | (7) | |||||||||||||||||||
The October 29, 2021 balance of available-for-sale debt securities by contractual maturity is shown in the following table. Within the table, maturities of mortgage-backed securities have been allocated based upon timing of estimated cash flows assuming no change in the current interest rate environment. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
| (in millions) | October 29, 2021 | ||||
| Due in one year or less | $ | 2,299 | |||
| Due after one year through five years | 3,199 | ||||
| Due after five years through ten years | 1,646 | ||||
| Due after ten years | 658 | ||||
| Total | $ | 7,803 |
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Equity Securities, Equity Method Investments, and Other Investments
The Company holds investments in equity securities with readily determinable fair values, equity investments without readily determinable fair values, investments accounted for under the equity method, and other investments. Equity securities with readily determinable fair values are included in Level 1 of the fair value hierarchy, as they are measured using quoted market prices. Equity method investments and investments without readily determinable fair values are included within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. To determine the fair value of these investments, the Company uses all pertinent financial information available related to the investees, including financial statements, market participant valuations from recent and proposed equity offerings, and other third-party data.
The following table summarizes the Company's equity and other investments at October 29, 2021 and April 30, 2021, which are classified as other assets in the consolidated balance sheets:
| (in millions) | October 29, 2021 | April 30, 2021 | ||||||||||||
| Investments with readily determinable fair value (marketable equity securities) | $ | 85 | $ | 74 | ||||||||||
| Investments without readily determinable fair values | 616 | 537 | ||||||||||||
| Equity method and other investments | 80 | 76 | ||||||||||||
| Total equity and other investments | $ | 781 | $ | 687 |
The table below includes activity related to the Company’s portfolio of equity and other investments. Gains and losses on equity and other investments are recognized in other non-operating income, net in the consolidated statements of income.
| Three months ended | Six months ended | |||||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | ||||||||||||||||||||||
| Proceeds from sales | $ | 14 | $ | 2 | $ | 66 | $ | 2 | ||||||||||||||||||
| Gross gains | 12 | 2 | 70 | 14 | ||||||||||||||||||||||
| Gross losses | (15) | (2) | (20) | (2) | ||||||||||||||||||||||
| Impairment losses recognized | — | — | (10) | (2) |
During the three and six months ended October 29, 2021, there were $8 million of net unrealized losses and $7 million of net unrealized gains, respectively, on equity securities and other investments still held at October 29, 2021. The net unrealized gains recognized during the three months ended October 30, 2020 were not significant. During the six months ended October 30, 2020, there were $12 million of net unrealized gains on equity securities and other investments still held at October 30, 2020.
7. Financing Arrangements
Commercial Paper
The Company maintains commercial paper programs that allow the Company to issue U.S. dollar or Euro-denominated unsecured commercial paper notes. The aggregate amount outstanding at any time under the commercial paper programs may not exceed the equivalent of $3.5 billion. No commercial paper was outstanding at October 29, 2021 and April 30, 2021. The issuance of commercial paper reduces the amount of credit available under the Company’s existing Credit Facility, as defined below.
Line of Credit
The Company has a $3.5 billion five-year unsecured revolving credit facility (Credit Facility), which provides back-up funding for the commercial paper programs described above. The Credit Facility includes a multi-currency borrowing feature for certain specified foreign currencies. At October 29, 2021 and April 30, 2021, no amounts were outstanding under the Credit Facility.
Interest rates on advances on the Credit Facility are determined by a pricing matrix, based on the Company’s long-term debt ratings, assigned by Standard & Poor’s Ratings Services and Moody’s Investors Service. Facility fees are payable on the Credit Facility and are determined in the same manner as the interest rates. The Company is in compliance with the covenants under the Credit Facility.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Debt Obligations
The Company's debt obligations consisted of the following:
| (in millions) | Maturity by Fiscal Year | October 29, 2021 | April 30, 2021 | |||||||||||||||||
| Current debt obligations | 2022 - 2023 | $ | 16 | $ | 11 | |||||||||||||||
| Long-term debt | ||||||||||||||||||||
| 0.000 percent three-year 2019 senior notes | 2023 | 870 | 907 | |||||||||||||||||
| 0.375 percent four-year 2019 senior notes | 2023 | 1,740 | 1,813 | |||||||||||||||||
| 0.000 percent two-year 2020 senior notes | 2023 | 1,450 | 1,511 | |||||||||||||||||
| 3.500 percent ten-year 2015 senior notes | 2025 | 1,890 | 1,890 | |||||||||||||||||
| 0.250 percent six-year 2019 senior notes | 2026 | 1,160 | 1,209 | |||||||||||||||||
| 0.000 percent five-year 2020 senior notes | 2026 | 1,160 | 1,209 | |||||||||||||||||
| 1.125 percent eight-year 2019 senior notes | 2027 | 1,740 | 1,813 | |||||||||||||||||
| 3.350 percent ten-year 2017 senior notes | 2027 | 368 | 368 | |||||||||||||||||
| 0.375 percent eight-year 2020 senior notes | 2029 | 1,160 | 1,209 | |||||||||||||||||
| 1.625 percent twelve-year 2019 senior notes | 2031 | 1,160 | 1,209 | |||||||||||||||||
| 1.000 percent twelve-year 2019 senior notes | 2032 | 1,160 | 1,209 | |||||||||||||||||
| 0.750 percent twelve-year 2020 senior notes | 2033 | 1,160 | 1,209 | |||||||||||||||||
| 4.375 percent twenty-year 2015 senior notes | 2035 | 1,932 | 1,932 | |||||||||||||||||
| 6.550 percent thirty-year 2007 CIFSA senior notes | 2038 | 253 | 253 | |||||||||||||||||
| 2.250 percent twenty-year 2019 senior notes | 2039 | 1,160 | 1,209 | |||||||||||||||||
| 6.500 percent thirty-year 2009 senior notes | 2039 | 158 | 158 | |||||||||||||||||
| 1.500 percent twenty-year 2019 senior notes | 2040 | 1,160 | 1,209 | |||||||||||||||||
| 5.550 percent thirty-year 2010 senior notes | 2040 | 224 | 224 | |||||||||||||||||
| 1.375 percent twenty-year 2020 senior notes | 2041 | 1,160 | 1,209 | |||||||||||||||||
| 4.500 percent thirty-year 2012 senior notes | 2042 | 105 | 105 | |||||||||||||||||
| 4.000 percent thirty-year 2013 senior notes | 2043 | 305 | 305 | |||||||||||||||||
| 4.625 percent thirty-year 2014 senior notes | 2044 | 127 | 127 | |||||||||||||||||
| 4.625 percent thirty-year 2015 senior notes | 2045 | 1,813 | 1,813 | |||||||||||||||||
| 1.750 percent thirty-year 2019 senior notes | 2050 | 1,160 | 1,209 | |||||||||||||||||
| 1.625 percent thirty-year 2020 senior notes | 2051 | 1,160 | 1,209 | |||||||||||||||||
| Finance lease obligations | 2022 - 2036 | 59 | 62 | |||||||||||||||||
| Deferred financing costs | 2022 - 2051 | (117) | (125) | |||||||||||||||||
| Debt discount, net | 2022 - 2051 | (66) | (75) | |||||||||||||||||
| Long-term debt | $ | 25,607 | $ | 26,378 |
Senior Notes
The Company has outstanding unsecured senior obligations, described as senior notes in the tables above (collectively, the Senior Notes). The Senior Notes rank equally with all other unsecured and unsubordinated indebtedness of the Company. The Company is in compliance with all covenants related to the Senior Notes.
In September 2020, Medtronic Global Holdings S.C.A. (Medtronic Luxco) issued six tranches of Euro-denominated Senior Notes with an aggregate principal of €6.3 billion, with maturities ranging from fiscal year 2023 to fiscal year 2051, resulting in cash proceeds of approximately $7.2 billion, net of discounts and issuance costs. The Company used the net proceeds of the offering to fund the early redemption of $4.3 billion of Medtronic Inc. and CIFSA Senior Notes and €1.5 billion of Medtronic Luxco Senior Notes for $6.3 billion of total consideration in October 2020. Additionally, the Company used the proceeds to repay its €750 million floating rate senior notes at maturity in March 2021. The Company recognized a loss on debt extinguishment of $308 million during the second quarter of fiscal year
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
2021, which primarily included cash premiums and accelerated amortization of deferred financing costs and debt discounts and premiums. The loss was recognized in interest expense in the consolidated statement of income.
The Euro-denominated debt issued in September 2020 is designated as a net investment hedge of certain of the Company's European operations. Refer to Note 8 for additional information regarding the net investment hedge.
Term Loan Agreements
On May 12, 2020, Medtronic Luxco entered into a term loan agreement (Loan Agreement) by and among Medtronic Luxco, Medtronic plc, Medtronic, Inc., and Mizuho Bank, Ltd. as administrative agent and as lender. The Loan Agreement provides an unsecured term loan in an aggregate principal amount of up to ¥300 billion, with a term of six months and the option to extend for an additional six months at Medtronic Luxco’s option. On May 13, 2020, Medtronic Luxco borrowed the entire amount of the term loan under the Loan Agreement. The Japanese Yen-denominated debt was designated as a net investment hedge for certain of the Company's Japanese operations. Borrowings under the Loan Agreement carried interest at the TIBOR Rate (as defined in the Loan Agreement) plus a margin of 0.50% per annum. Medtronic plc and Medtronic, Inc. guaranteed the obligations of Medtronic Luxco under the Loan Agreement. On November 12, 2020, the Company exercised its option to extend the term loan for an additional six months. During the fourth quarter of fiscal year 2021, the Company de-designated the Yen-denominated debt as a net investment hedge and repaid the term loan in full, including interest.
Financial Instruments Not Measured at Fair Value
At October 29, 2021, the estimated fair value of the Company’s Senior Notes was $28.0 billion compared to a principal value of $25.7 billion. At April 30, 2021, the estimated fair value was $28.6 billion compared to a principal value of $26.5 billion. The fair value was estimated using quoted market prices for the publicly registered Senior Notes, which are classified as Level 2 within the fair value hierarchy. The fair values and principal values consider the terms of the related debt and exclude the impacts of debt discounts and hedging activity.
8. Derivatives and Currency Exchange Risk Management
The Company uses operational and economic hedges, including currency exchange rate derivative contracts and interest rate derivative instruments, to manage the impact of currency exchange and interest rate changes on earnings and cash flows. In addition, the Company uses cross currency interest rate swaps to manage currency risk related to certain debt. In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, the Company enters into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets and liabilities. At inception of the contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. Currencies of our derivative instruments include the Euro, Japanese Yen, Chinese Yuan, and others. The Company does not enter into currency exchange rate derivative contracts for speculative purposes. The gross notional amount of all currency exchange rate derivative instruments outstanding was $15.2 billion and $14.7 billion at October 29, 2021 and April 30, 2021, respectively.
The Company also uses derivative and non-derivative instruments to manage the impact of currency exchange rate changes on net investments in foreign currency-denominated operations. The information that follows explains the various types of derivatives and financial instruments used by the Company, reasons the Company uses such instruments, and the impact such instruments have on the Company’s consolidated balance sheets and statements of income.
Freestanding Derivative Contracts
Freestanding derivative contracts are primarily used to offset the Company’s exposure to the change in value of specific foreign-currency-denominated assets and liabilities, and to offset variability of cash flows associated with forecasted transactions denominated in foreign currencies. The gross notional amount of the Company's freestanding currency exchange rate contracts outstanding at October 29, 2021 and April 30, 2021 was $5.1 billion and $5.7 billion, respectively. The Company's freestanding currency exchange rate contracts are not designated as hedges, and therefore, changes in the value of these contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in value of foreign-currency-denominated assets, liabilities, and cash flows.
The Company also uses total return swaps to hedge the liability of a non-qualified deferred compensation plan. The gross notional amount of the Company's total return swaps outstanding at October 29, 2021 and April 30, 2021 was $261 million and $243 million, respectively. The Company's total return swaps are not designated as hedges, and therefore, changes in the value of these instruments are recognized in earnings. The cash flows related to the Company's freestanding derivative contracts are reported as operating or financing activities, depending on the nature of the underlying hedged item, in the consolidated statements of cash flows.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Cash Flow Hedges
Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted transactions denominated in a foreign currency that will take place in the future. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at October 29, 2021 and April 30, 2021 was $10.1 billion and $9.0 billion, respectively, and will mature within the subsequent three-year period. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive loss. The gain or loss on the derivative instrument is reclassified into earnings and is included in other operating expense, net or cost of products sold in the consolidated statements of income in the same period or periods during which the hedged transaction affects earnings. Amounts excluded from the measurement of hedge effectiveness are recognized in earnings in the current period. The cash flows related to all of the Company's derivative instruments designated as cash flow hedges are reported as operating activities in the consolidated statements of cash flows.
At October 29, 2021 and April 30, 2021, the Company had $16 million in after-tax net unrealized gains and $253 million in after-tax net unrealized losses, respectively, associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $34 million of after-tax net unrealized gains at October 29, 2021 will be recognized in the consolidated statements of income over the next 12 months.
Net Investment Hedges
The Company has designated Euro-denominated debt as a net investment hedge of certain of its European operations to manage the exposure to currency and exchange rate movements for foreign currency-denominated net investments in foreign operations. At October 29, 2021, the Company had €16.0 billion, or $18.6 billion, of outstanding Euro-denominated debt designated as a hedge of its net investment in certain of its European operations. The Euro-denominated debt will mature in fiscal years 2023 through 2051.
For instruments that are designated and qualify as net investment hedges, the gains or losses are reported as a component of accumulated other comprehensive loss. The gains or losses are reclassified into earnings upon a liquidation event or deconsolidation of the foreign subsidiary. Amounts excluded from the assessment of effectiveness are recognized in other operating expense, net. The cash flows related to the Company's derivative instruments designated as net investment hedges are reported as investing activities in the consolidated statements of cash flows.
Gains and Losses on Hedging Instruments and Derivatives not Designated as Hedging Instruments
The amount of the gains and losses on our hedging instruments and derivative instruments not designated as hedging instruments and the classification of those gains and losses within our consolidated financial statements for the three and six months ended October 29, 2021 and October 30, 2020 were as follows:
| (Gain) Loss Recognized in Accumulated Other Comprehensive Income | (Gain) Loss Reclassified into Income | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended | Six months ended | Three months ended | Six months ended | Location of (Gain) Loss in Income Statement | |||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Currency exchange rate contracts | $ | (158) | $ | 16 | $ | (322) | $ | 402 | $ | (14) | $ | (2) | $ | 5 | $ | (55) | Other operating expense, net | ||||||||||||||||||||||||||||||||||||
| Currency exchange rate contracts | 39 | 47 | 43 | 49 | 14 | — | 26 | — | Cost of products sold | ||||||||||||||||||||||||||||||||||||||||||||
| Net investment hedges | (356) | 164 | (780) | 1,276 | — | — | — | — | Other operating expense, net | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | (475) | $ | 227 | $ | (1,059) | $ | 1,727 | $ | — | $ | (2) | $ | 31 | $ | (55) | |||||||||||||||||||||||||||||||||||||
| (Gain) Loss Recognized in Income | (Gain) Loss Recognized in Income | ||||||||||||||||||||||||||||
| Three months ended | Six months ended | Location of (Gain) Loss in Income Statement | |||||||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||
| Currency exchange rate contracts | $ | (16) | $ | (2) | $ | (34) | $ | 125 | Other operating expense, net | ||||||||||||||||||||
| Total return swaps | (12) | (1) | (25) | (28) | Other operating expense, net | ||||||||||||||||||||||||
| Total | $ | (28) | $ | (3) | $ | (59) | $ | 97 |
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Balance Sheet Presentation
The following tables summarize the balance sheet classification and fair value of derivative instruments included in the consolidated balance sheets at October 29, 2021 and April 30, 2021. The fair value amounts are presented on a gross basis and are segregated between derivatives that are designated and qualify as hedging instruments and those that are not designated and do not qualify as hedging instruments and are further segregated by type of contract within those two categories.
| Fair Value - Assets | Fair Value - Liabilities | ||||||||||||||||||||||||||||||||||
| (in millions) | October 29, 2021 | April 30, 2021 | Classification | October 29, 2021 | April 30, 2021 | Classification | |||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Currency exchange rate contracts | $ | 160 | $ | 49 | Other current assets | $ | 101 | $ | 190 | Other accrued expenses | |||||||||||||||||||||||||
| Currency exchange rate contracts | 75 | 22 | Other assets | 50 | 94 | Other liabilities | |||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | 235 | 70 | 151 | 285 | |||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Currency exchange rate contracts | 8 | 14 | Other current assets | 12 | 11 | Other accrued expenses | |||||||||||||||||||||||||||||
| Total return swaps | 10 | 18 | Other current assets | — | — | Other accrued expenses | |||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | 19 | 32 | 12 | 11 | |||||||||||||||||||||||||||||||
| Total derivatives | $ | 254 | $ | 102 | $ | 163 | $ | 296 |
The following table provides information by level for the derivative assets and liabilities that are measured at fair value on a recurring basis.
| October 29, 2021 | April 30, 2021 | ||||||||||||||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 1 | Level 2 | |||||||||||||||||||||||||||||||
| Derivative assets | $ | 244 | $ | 10 | $ | 85 | $ | 18 | |||||||||||||||||||||||||||
| Derivative liabilities | 163 | — | 296 | — |
The Company has elected to present the fair value of derivative assets and liabilities within the consolidated balance sheets on a gross basis, even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The cash flows related to collateral posted and received are reported gross as investing and financing activities, respectively, in the consolidated statements of cash flows.
The following tables provide information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria as stipulated by the terms of the master netting arrangements with each of the counterparties. Derivatives not subject to master netting arrangements are not eligible for net presentation.
| October 29, 2021 | ||||||||||||||||||||||||||||||||
| Gross Amount Not Offset on the Balance Sheet | ||||||||||||||||||||||||||||||||
| (in millions) | Gross Amount of Recorded Assets (Liabilities) | Financial Instruments | Cash Collateral Posted (Received) | Net Amount | ||||||||||||||||||||||||||||
| Derivative assets: | ||||||||||||||||||||||||||||||||
| Currency exchange rate contracts | $ | 244 | $ | (100) | $ | — | $ | 144 | ||||||||||||||||||||||||
| Total return swaps | 10 | — | — | 10 | ||||||||||||||||||||||||||||
| 254 | (100) | — | 154 | |||||||||||||||||||||||||||||
| Derivative liabilities: | ||||||||||||||||||||||||||||||||
| Currency exchange rate contracts | (163) | 100 | 27 | (36) | ||||||||||||||||||||||||||||
| Total | $ | 91 | $ | — | $ | 27 | $ | 118 |
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
| April 30, 2021 | ||||||||||||||||||||||||||||||||
| Gross Amount Not Offset on the Balance Sheet | ||||||||||||||||||||||||||||||||
| (in millions) | Gross Amount of Recorded Assets (Liabilities) | Financial Instruments | Cash Collateral Posted (Received) | Net Amount | ||||||||||||||||||||||||||||
| Derivative assets: | ||||||||||||||||||||||||||||||||
| Currency exchange rate contracts | $ | 85 | $ | (83) | $ | — | $ | 1 | ||||||||||||||||||||||||
| Total return swaps | 18 | — | — | 18 | ||||||||||||||||||||||||||||
| 102 | (83) | — | 19 | |||||||||||||||||||||||||||||
| Derivative liabilities: | ||||||||||||||||||||||||||||||||
| Currency exchange rate contracts | (296) | 83 | 46 | (167) | ||||||||||||||||||||||||||||
| Total | $ | (194) | $ | — | $ | 46 | $ | (148) |
9. Inventories
Inventory balances, net of reserves, were as follows:
| (in millions) | October 29, 2021 | April 30, 2021 | |||||||||
| Finished goods | $ | 2,908 | $ | 2,906 | |||||||
| Work in-process | 622 | 611 | |||||||||
| Raw materials | 819 | 796 | |||||||||
| Total | $ | 4,349 | $ | 4,313 |
10. Goodwill and Other Intangible Assets
Goodwill
The following table presents the changes in the carrying amount of goodwill by segment:
| (in millions) | Cardiovascular | Medical Surgical | Neuroscience | Diabetes | Total | ||||||||||||||||||||||||
| April 30, 2021 | $ | 7,209 | $ | 21,195 | $ | 11,300 | $ | 2,257 | $ | 41,961 | |||||||||||||||||||
| Goodwill as a result of acquisitions | 55 | — | 26 | — | 80 | ||||||||||||||||||||||||
| Purchase accounting adjustments | 26 | 3 | 3 | (2) | 30 | ||||||||||||||||||||||||
| Currency translation and other | (32) | (366) | (63) | — | (459) | ||||||||||||||||||||||||
| October 29, 2021 | $ | 7,258 | $ | 20,832 | $ | 11,266 | $ | 2,255 | $ | 41,612 |
The Company assesses goodwill for impairment annually as of the first day of the third quarter of the fiscal year and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment testing for goodwill is performed at the reporting unit level. The test for impairment of goodwill requires the Company to make several estimates related to projected future cash flows to determine the fair value of the goodwill reporting units. The Company calculates the excess of each reporting unit's fair value over its carrying amount, including goodwill, utilizing a discounted cash flow analysis. Internal operational budgets and long-range strategic plans are used as a basis for the cash flow analysis. The Company also utilizes assumptions for working capital, capital expenditures, and terminal growth rates. The discount rate applied to the cash flow analysis is based on the weighted average cost of capital ("WACC") for each reporting unit. An impairment loss is recognized when the carrying amount of the reporting unit's net assets exceeds the estimated fair value of the reporting unit. The Company did not recognize any goodwill impairment during the three and six months ended October 29, 2021 or October 30, 2020.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
Intangible Assets
The following table presents the gross carrying amount and accumulated amortization of intangible assets:
| October 29, 2021 | April 30, 2021 | ||||||||||||||||||||||
| (in millions) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||
| Definite-lived: | |||||||||||||||||||||||
| Customer-related | $ | 16,998 | $ | (6,536) | $ | 17,036 | $ | (6,058) | |||||||||||||||
| Purchased technology and patents | 10,840 | (5,327) | 11,286 | (5,156) | |||||||||||||||||||
| Trademarks and tradenames | 475 | (259) | 475 | (251) | |||||||||||||||||||
| Other | 83 | (63) | 82 | (68) | |||||||||||||||||||
| Total | $ | 28,396 | $ | (12,185) | $ | 28,879 | $ | (11,533) | |||||||||||||||
| Indefinite-lived: | |||||||||||||||||||||||
| IPR&D | $ | 312 | $ | — | $ | 394 | $ | — | |||||||||||||||
The Company assesses definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an intangible asset (asset group) may not be recoverable. When events or changes in circumstances indicate that the carrying value of an intangible asset may not be recoverable, the Company calculates the excess of an intangible asset's carrying value over its undiscounted future cash flows. If the carrying value is not recoverable, an impairment loss is recognized based on the amount by which the carrying value exceeds the fair value. During the six months ended October 29, 2021, the Company recognized $409 million of definite-lived intangible asset charges in connection with MCS within the Cardiovascular Portfolio. Refer to Note 5 Restructuring and Other Costs for additional information on what led to the impairment. Intangible asset impairment charges are recognized in other operating expense, net in the consolidated statements of income. The Company did not recognize any definite-lived intangible asset charges during the three months ended October 29, 2021 and the three and six months ended October 30, 2020.
The Company assesses indefinite-lived intangibles for impairment annually in the third quarter of the fiscal year and whenever an event occurs or circumstances change that would indicate that the carrying value may be impaired. The Company did not recognize any indefinite-lived intangible asset impairments during the three and six months ended October 29, 2021 or October 30, 2020. Due to the nature of IPR&D projects, the Company may experience future delays or failures to obtain regulatory approvals to conduct clinical trials, failures of clinical trials, delays or failures to obtain required market clearances, other failures to achieve a commercially viable product, or the discontinuation of certain projects, and as a result, may recognize impairment losses in the future.
Amortization Expense
Intangible asset amortization expense for the three months ended October 29, 2021 and October 30, 2020 was $431 million and $443 million, respectively. For the six months ended October 29, 2021 and October 30, 2020, intangible asset amortization expense was $866 million and $884 million, respectively. Estimated aggregate amortization expense by fiscal year based on the carrying value of definite-lived intangible assets at October 29, 2021, excluding any possible future amortization associated with acquired IPR&D which has not yet met technological feasibility, is as follows:
| (in millions) | Amortization Expense | ||||
| Remaining 2022 | $ | 862 | |||
| 2023 | 1,664 | ||||
| 2024 | 1,630 | ||||
| 2025 | 1,607 | ||||
| 2026 | 1,593 | ||||
| 2027 | 1,569 | ||||
11. Income Taxes
The Company's effective tax rate for the three and six months ended October 29, 2021 was 11.8 percent and 10.3 percent, respectively, as compared to 5.9 percent and 11.2 percent for the three and six months ended October 30, 2020, respectively. The change in our effective tax rate for the three and six months ended October 29, 2021, as compared to the corresponding periods in the prior fiscal year, was primarily due to the tax impact of the debt tender premium, stock-based compensation benefits, and year-over-year changes in operational results by
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
jurisdiction; and specifically impacting the six months ended comparison are the tax impact of the MCS charges and the tax cost associated with a change in the company's permanent reinvestment assertion on certain historical earnings.
At both October 29, 2021 and April 30, 2021, the Company's gross unrecognized tax benefits were $1.7 billion. In addition, the Company had accrued gross interest and penalties of $110 million at October 29, 2021. If all the Company’s unrecognized tax benefits were recognized, approximately $1.6 billion would impact the Company’s effective tax rate. At October 29, 2021 and April 30, 2021, the amount of the Company's gross unrecognized tax benefits, net of cash advance, recorded as a noncurrent liability within accrued income taxes on the consolidated balance sheets was $819 million and $809 million, respectively. The Company recognizes interest and penalties related to income tax matters within income tax provision in the consolidated statements of income and records the liability within either current or noncurrent accrued income taxes on the consolidated balance sheets.
Refer to Note 16 to the consolidated financial statements for additional information regarding the status of current tax audits and proceedings.
12. Earnings Per Share
Earnings per share is calculated using the two-class method, as the Company's A Preferred Shares are considered participating securities. Accordingly, earnings are allocated to both ordinary shares and participating securities in determining earnings per ordinary share. Due to the limited number of A Preferred Shares outstanding, this allocation had no effect on the ordinary earnings per share; therefore, it is not presented below. Basic earnings per share is computed based on the weighted average number of ordinary shares outstanding. Diluted earnings per share is computed based on the weighted number of ordinary shares outstanding, increased by the number of additional shares that would have been outstanding had the potentially dilutive ordinary shares been issued, and reduced by the number of shares the Company could have repurchased with the proceeds from issuance of the potentially dilutive shares. Potentially dilutive ordinary shares include stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan.
The table below sets forth the computation of basic and diluted earnings per share:
| Three months ended | Six months ended | ||||||||||||||||||||||
| (in millions, except per share data) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to ordinary shareholders | $ | 1,311 | $ | 489 | $ | 2,074 | $ | 976 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic – weighted average shares outstanding | 1,345.1 | 1,344.4 | 1,344.8 | 1,343.1 | |||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Employee stock options | 8.2 | 5.9 | 8.4 | 5.3 | |||||||||||||||||||
| Employee restricted stock units | 1.7 | 1.8 | 2.0 | 2.3 | |||||||||||||||||||
| Other | 0.4 | — | 0.7 | 0.4 | |||||||||||||||||||
| Diluted – weighted average shares outstanding | 1,355.3 | 1,352.1 | 1,355.9 | 1,351.1 | |||||||||||||||||||
| Basic earnings per share | $ | 0.97 | $ | 0.36 | $ | 1.54 | $ | 0.73 | |||||||||||||||
| Diluted earnings per share | $ | 0.97 | $ | 0.36 | $ | 1.53 | $ | 0.72 |
The calculation of weighted average diluted shares outstanding excludes options to purchase approximately 4 million and 2 million ordinary shares for the three and six months ended October 29, 2021, respectively, and 8 million for both the three and six months ended October 30, 2020, because their effect would have been anti-dilutive on the Company’s earnings per share.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
13. Stock-Based Compensation
The following table presents the components and classification of stock-based compensation expense for stock options, restricted stock, performance share units, and employee stock purchase plan shares recognized for the three and six months ended October 29, 2021 and October 30, 2020:
| Three months ended | Six months ended | ||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||
| Stock options | $ | 35 | $ | 43 | $ | 45 | $ | 51 | |||||||||||||||
| Restricted stock | 52 | 53 | 94 | 103 | |||||||||||||||||||
| Performance share units | 43 | 35 | 50 | 35 | |||||||||||||||||||
| Employee stock purchase plan | 9 | 9 | 20 | 21 | |||||||||||||||||||
| Total stock-based compensation expense | $ | 140 | $ | 140 | $ | 209 | $ | 210 | |||||||||||||||
| Cost of products sold | $ | 14 | $ | 14 | $ | 21 | $ | 21 | |||||||||||||||
| Research and development expense | 15 | 15 | 23 | 23 | |||||||||||||||||||
| Selling, general, and administrative expense | 110 | 111 | 165 | 166 | |||||||||||||||||||
| Total stock-based compensation expense | 140 | 140 | 209 | 210 | |||||||||||||||||||
| Income tax benefits | (26) | (24) | (37) | (36) | |||||||||||||||||||
| Total stock-based compensation expense, net of tax | $ | 114 | $ | 116 | $ | 172 | $ | 174 |
14. Retirement Benefit Plans
The Company sponsors various retirement benefit plans, including defined benefit pension plans, post-retirement medical plans, defined contribution savings plans, and termination indemnity plans, covering substantially all U.S. employees and many employees outside the U.S. The net periodic benefit cost of the defined benefit pension plans included the following components for the three and six months ended October 29, 2021 and October 30, 2020:
| U.S. | Non-U.S. | ||||||||||||||||||||||
| Three months ended | Three months ended | ||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||
| Special termination benefits | $ | — | $ | 80 | $ | — | $ | — | |||||||||||||||
| Service cost | 25 | 27 | 16 | 17 | |||||||||||||||||||
| Interest cost | 26 | 27 | 7 | 7 | |||||||||||||||||||
| Expected return on plan assets | (57) | (61) | (16) | (14) | |||||||||||||||||||
| Amortization of net actuarial loss | 16 | 17 | 5 | 6 | |||||||||||||||||||
| Net periodic benefit cost | $ | 10 | $ | 90 | $ | 12 | $ | 16 | |||||||||||||||
| U.S. | Non-U.S. | ||||||||||||||||||||||
| Six months ended | Six months ended | ||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||
| Special termination benefits | $ | — | $ | 80 | $ | — | $ | — | |||||||||||||||
| Service cost | 50 | 54 | 32 | 34 | |||||||||||||||||||
| Interest cost | 52 | 54 | 14 | 13 | |||||||||||||||||||
| Expected return on plan assets | (114) | (122) | (32) | (28) | |||||||||||||||||||
| Amortization of net actuarial loss | 32 | 35 | 10 | 12 | |||||||||||||||||||
| Net periodic benefit cost | $ | 20 | $ | 101 | $ | 24 | $ | 31 |
Components of net periodic benefit cost other than the service component are recognized in other non-operating income, net in the consolidated statements of income.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
During fiscal year 2021, as part of the Simplification restructuring program, the Company offered certain eligible U.S. employees voluntary early retirement packages, resulting in incremental expense of $97 million recognized during the three and six months ended October 30, 2020. Of this amount, $73 million related to U.S. pension benefits, $11 million related to defined contribution plans, $11 million related to U.S. post-retirement benefits, and $2 million related to cash payments and administrative fees. See Note 5 for additional information on the Simplification restructuring program.
15. Accumulated Other Comprehensive Loss
The following table provides changes in AOCI, net of tax, and by component:
| (in millions) | Unrealized Gain (Loss) on Investment Securities | Cumulative Translation Adjustments | Net Investment Hedges | Net Change in Retirement Obligations | Unrealized Gain (Loss) on Cash Flow Hedges | Total Accumulated Other Comprehensive (Loss) Income | |||||||||||||||||||||||||||||
| April 30, 2021 | $ | 92 | $ | (519) | $ | (1,458) | $ | (1,347) | $ | (253) | $ | (3,485) | |||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (41) | (599) | 780 | 4 | 237 | 381 | |||||||||||||||||||||||||||||
| Reclassifications | (3) | — | — | 33 | 32 | 62 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (44) | (599) | 780 | 37 | 269 | 443 | |||||||||||||||||||||||||||||
| October 29, 2021 | $ | 48 | $ | (1,118) | $ | (678) | $ | (1,310) | $ | 16 | $ | (3,042) | |||||||||||||||||||||||
| (in millions) | Unrealized Gain (Loss) on Investment Securities | Cumulative Translation Adjustment | Net Investment Hedges | Net Change in Retirement Obligations | Unrealized Gain (Loss) on Cash Flow Hedges | Total Accumulated Other Comprehensive (Loss) Income | |||||||||||||||||||||||||||||
| April 24, 2020 | $ | — | $ | (2,210) | $ | 236 | $ | (1,852) | $ | 266 | $ | (3,560) | |||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 114 | 1,255 | (1,276) | (14) | (359) | (280) | |||||||||||||||||||||||||||||
| Reclassifications | (1) | — | — | 34 | (36) | (3) | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 113 | 1,255 | (1,276) | 20 | (395) | (283) | |||||||||||||||||||||||||||||
| October 30, 2020 | $ | 113 | $ | (955) | $ | (1,040) | $ | (1,832) | $ | (129) | $ | (3,843) |
The income tax on gains and losses on investment securities in other comprehensive income before reclassifications during the six months ended October 29, 2021 and October 30, 2020 was a benefit of $6 million and an expense of $31 million, respectively. During the six months ended October 29, 2021, realized gains and losses on investment securities reclassified from AOCI were reduced by income taxes of $1 million. During the six months ended October 30, 2020 there was no income tax on realized gains and losses on investment securities reclassified from AOCI. When realized, gains and losses on investment securities reclassified from AOCI are recognized within other non-operating income, net. Refer to Note 6 to the consolidated financial statements for additional information.
During the six months ended October 29, 2021 there was no income tax on cumulative translation adjustment. For the six months ended October 30, 2020 the income tax on cumulative translation adjustment was an expense of $4 million.
During the six months ended October 29, 2021 and October 30, 2020, there were no tax impacts on net investment hedges. Refer to Note 8 to the consolidated financial statements for additional information.
The net change in retirement obligations in other comprehensive income includes amortization of net actuarial losses included in net periodic benefit cost. During the six months ended October 29, 2021 and October 30, 2020, the net change in retirement obligations in other comprehensive income before reclassifications resulted in income tax expense of $2 million and income tax benefit of $5 million, respectively. During the six months ended October 29, 2021 and October 30, 2020, the gains and losses on defined benefit and pension items reclassified from AOCI were reduced by income taxes of $7 million and $8 million, respectively. When realized, net gains and losses on defined benefit and pension items reclassified from AOCI are recognized within other non-operating income, net. Refer to Note 14 to the consolidated financial statements for additional information.
The income tax on unrealized gains and losses on cash flow hedges in other comprehensive income before reclassifications during the six months ended October 29, 2021 and October 30, 2020 was an expense of $42 million and a benefit of $93 million, respectively. During the six months ended October 29, 2021 and October 30, 2020, gains and losses on cash flow hedges reclassified from AOCI were reduced by income taxes of $1 million and $10 million, respectively. When realized, gains and losses on currency exchange rate contracts reclassified from AOCI are recognized within other operating expense, net, and gains and losses on forward starting interest rate derivatives reclassified from AOCI are recognized within interest expense. Refer to Note 8 to the consolidated financial statements for additional information.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
16. Commitments and Contingencies
Legal Matters
The Company and its affiliates are involved in a number of legal actions involving product liability, intellectual property and commercial disputes, shareholder related matters, environmental proceedings, tax disputes, and governmental proceedings and investigations, including those described below. With respect to governmental proceedings and investigations, like other companies in our industry, the Company is subject to extensive regulation by national, state, and local governmental agencies in the United States and in other jurisdictions in which the Company and its affiliates operate. As a result, interaction with governmental agencies is ongoing. The Company’s standard practice is to cooperate with regulators and investigators in responding to inquiries. The outcomes of legal actions are not within the Company’s complete control and may not be known for prolonged periods of time. In some actions, the enforcement agencies or private claimants seek damages, as well as other civil or criminal remedies (including injunctions barring the sale of products that are the subject of the proceeding), that could require significant expenditures, result in lost revenues, or limit the Company's ability to conduct business in the applicable jurisdictions.
The Company records a liability in the consolidated financial statements on an undiscounted basis for loss contingencies related to legal actions when a loss is known or considered probable and the amount may be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. When determining the estimated loss or range of loss, significant judgment is required. Estimates of probable losses resulting from litigation and governmental proceedings involving the Company are inherently difficult to predict, particularly when the matters are in early procedural stages with incomplete scientific facts or legal discovery, involve unsubstantiated or indeterminate claims for damages, potentially involve penalties, fines or punitive damages, or could result in a change in business practice. The Company classifies litigation charges and gains related to significant legal matters as certain litigation charges. During the three and six months ended October 29, 2021, the Company recognized $34 million and $60 million, respectively, of certain litigation charges. During the three and six months ended October 30, 2020, the Company recognized charges of $84 million and a net benefit of $4 million, respectively, primarily due to favorable settlements in the first quarter of fiscal year 2021, partially offset by charges recognized in the second quarter of fiscal year 2021. At October 29, 2021 and April 30, 2021, accrued litigation was approximately $0.3 billion and $0.4 billion, respectively. The ultimate cost to the Company with respect to accrued litigation could be materially different than the amount of the current estimates and accruals and could have a material adverse impact on the Company’s consolidated earnings, financial position, and/or cash flows. The Company includes accrued litigation in other accrued expenses and other liabilities on the consolidated balance sheets. While it is not possible to predict the outcome for most of the legal matters discussed below, the Company believes it is possible that the costs associated with these matters could have a material adverse impact on the Company’s consolidated earnings, financial position, and/or cash flows.
Product Liability Matters
Pelvic Mesh Litigation
The Company is currently involved in litigation in various state and federal courts against manufacturers of pelvic mesh products alleging personal injuries resulting from the implantation of those products. Two subsidiaries of Covidien supplied pelvic mesh products to one of the manufacturers, C.R. Bard (Bard), named in the litigation. The litigation includes a federal multi-district litigation in the U.S. District Court for the Northern District of West Virginia and cases in various state courts and jurisdictions outside the U.S. Generally, complaints allege design and manufacturing claims, failure to warn, breach of warranty, fraud, violations of state consumer protection laws and loss of consortium claims. In fiscal year 2016, Bard paid the Company $121 million towards the settlement of 11,000 of these claims. In May 2017, the agreement with Bard was amended to extend the terms to apply to up to an additional 5,000 claims. That agreement does not resolve the dispute between the Company and Bard with respect to claims that do not settle, if any. As part of the agreement, the Company and Bard agreed to dismiss without prejudice their pending litigation with respect to Bard’s obligation to defend and indemnify the Company. The Company estimates law firms representing approximately 16,200 claimants have asserted or may assert claims involving products manufactured by Covidien’s subsidiaries. As of November 3, 2021, the Company had reached agreements to settle approximately 15,900 of these claims. The Company's accrued expenses for this matter are included within accrued litigation as discussed above.
Hernia Mesh Litigation
Starting in fiscal year 2020, plaintiffs filed lawsuits against certain subsidiaries of the Company in U.S. state and federal courts alleging personal injury from hernia mesh products sold by those subsidiaries. The majority of the pending cases are in Massachusetts state court, where they have been consolidated before a single judge. Certain plaintiffs' law firms have advised the Company that they may file a large volume of additional cases in the future. The pending lawsuits relate almost entirely to hernia mesh products that have not been subject to recalls, withdrawals, or other adverse regulatory action. The Company has not recorded an expense related to damages in connection with
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
these matters because any potential loss is not currently probable or reasonably estimable. Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from these matters.
Patent Litigation
Sasso
The Company is involved in litigation in Indiana relating to certain patent and royalty disputes with Dr. Sasso under agreements originally entered into in 1999 and 2001. On November 28, 2018, a jury in Indiana state court returned a verdict against the Company for approximately $112 million. On June 15, 2021, pursuant to an order from the state court, the Company paid the judgment plus accrued interest to Dr. Sasso, subject to repayment if the Company's ongoing appeal is successful.
Environmental Proceedings
The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. These projects relate to a variety of activities, including removal of solvents, metals and other hazardous substances from soil and groundwater. The ultimate cost of site cleanup and timing of future cash flows is difficult to predict given uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations, and alternative cleanup methods.
The Company is a successor to a company which owned and operated a chemical manufacturing facility in Orrington, Maine from 1967 until 1982, and is responsible for the costs of completing an environmental site investigation as required by the Maine Department of Environmental Protection (MDEP). MDEP served a compliance order on Mallinckrodt LLC and U.S. Surgical Corporation, subsidiaries of Covidien, in December 2008, which included a directive to remove a significant volume of soils at the site. After a hearing on the compliance order before the Maine Board of Environmental Protection (Maine Board) to challenge the terms of the compliance order, the Maine Board modified the MDEP order and issued a final order requiring removal of two landfills, capping of the remaining three landfills, installation of a groundwater extraction system and long-term monitoring of the site and the three remaining landfills.
The Company has proceeded with implementation of the investigation and remediation at the site in accordance with the MDEP order as modified by the Maine Board order.
Since the early 2000s, the Company or its predecessors have also been involved in a lawsuit filed in the U.S. District Court for the District of Maine by the Natural Resources Defense Council and the Maine People’s Alliance. Plaintiffs sought an injunction requiring the Company's predecessor to conduct extensive studies of mercury contamination of the Penobscot River and Bay and options for remediating such contamination, and to perform appropriate remedial activities, if necessary.
Following a trial in March 2002, the Court held that conditions in the Penobscot River and Bay may pose an imminent and substantial endangerment and that the Company’s predecessor was liable for the cost of performing a study of the River and Bay. Following a second trial in June 2014, the Court ordered that further engineering study and engineering design work was needed to determine the nature and extent of remediation in the Penobscot River and Bay. The Court also appointed an engineering firm to conduct such studies and issue a report on potential remediation alternatives. In connection with these proceedings, reports have been produced including a variety of cost estimates for a variety of potential remedial options. In March 2021, the parties notified the Court that they had agreed on a settlement in principle of all issues in this matter. Finalization of the proposed settlement remains subject to Court approval.
The Company's accrued expenses for environmental proceedings are included within accrued litigation as discussed above.
Income Taxes
In March 2009, the IRS issued its audit report on Medtronic, Inc. for fiscal years 2005 and 2006. Medtronic, Inc. reached agreement with the IRS on some, but not all matters related to these fiscal years. The remaining unresolved issue for fiscal years 2005 and 2006 relates to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, which is one of the Company's key manufacturing sites. The U.S. Tax Court reviewed this dispute, and on June 9, 2016, issued its opinion with respect to the allocation of income between the parties for fiscal years 2005 and 2006. The U.S. Tax Court generally rejected the IRS’s position, but also made certain modifications to the Medtronic, Inc. tax returns as filed. On April 21, 2017, the IRS filed their Notice of Appeal to the U.S. Court of Appeals for the 8th Circuit regarding the Tax Court Opinion. Oral argument for the Appeal occurred on March 14, 2018. The 8th Circuit Court of Appeals issued their opinion on August 16, 2018 and remanded the case back to the U.S. Tax Court for additional factual findings. The U.S. Tax Court trial relating to the issues remanded by the 8th Circuit Court of Appeals concluded during June 2021. The parties are awaiting the Tax Court decision, which will remain subject to appeal by either party upon its issuance.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The IRS has issued its audit reports on Medtronic, Inc. for fiscal years 2007 through 2016. Medtronic, Inc. and the IRS have reached agreement on all significant issues except for the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico for the businesses that are the subject of the U.S. Tax Court Case for fiscal years 2005 and 2006.
Medtronic, Inc.’s fiscal years 2017, 2018, and 2019 U.S. federal income tax returns are currently being audited by the IRS.
Covidien LP (a wholly owned subsidiary of Medtronic plc) has either reached agreement with the IRS or the statute of limitations has lapsed on their U.S. federal income tax returns through fiscal year 2017.
While it is not possible to predict the outcome for most of the income tax matters discussed above, the Company believes it is possible that charges associated with these matters could have a material adverse impact on the Company’s consolidated earnings, financial position, and/or cash flows.
Refer to Note 11 for additional discussion of income taxes.
Guarantees
In the normal course of business, the Company and/or its affiliates periodically enter into agreements that require one or more of the Company and/or its affiliates to indemnify customers or suppliers for specific risks, such as claims for injury or property damage arising as a result of the Company or its affiliates’ products, the negligence of the Company's personnel, or claims alleging that the Company's products infringe on third-party patents or other intellectual property. The Company also offers warranties on various products. The Company’s maximum exposure under these guarantees is unable to be estimated. Historically, the Company has not experienced significant losses on these types of guarantees.
The Company believes the ultimate resolution of the above guarantees is not expected to have a material effect on the Company’s consolidated earnings, financial position, and/or cash flows.
17. Segment and Geographic Information
Segment disclosures are on a performance basis consistent with internal management reporting. Net sales of the Company's reportable segments include end-customer revenues from the sale of products the segment develops, manufactures, and distributes. The Company’s management evaluates performance of the segments and allocates resources based on net sales and segment operating profit. Segment operating profit represents income before income taxes, excluding interest expense, amortization of intangible assets, centralized distribution costs, non-operating income or expense items, certain corporate charges, and other items not allocated to the segments.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2021. Certain depreciable assets may be recorded by one segment, while the depreciation expense is allocated to another segment. The allocation of depreciation expense is based on the proportion of the assets used by each segment.
Effective February 1, 2021, the Company implemented a new operating model, moving from a Group structure to a Portfolio structure: Cardiovascular Portfolio (formerly Cardiac and Vascular Group), Neuroscience Portfolio (formerly Restorative Therapies Group), and Medical Surgical Portfolio (formerly Minimally Invasive Therapies Group). The Diabetes Operating Unit (formerly Diabetes Group) remains a separate operating and reportable segment in the new structure. There were no changes to the reportable segments during the fiscal year ended April 30, 2021, such that the four principal operating and reportable segments are as follows: Cardiovascular Portfolio, Neuroscience Portfolio, Medical Surgical Portfolio, and Diabetes Operating Unit.
Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)
The following tables present reconciliations of financial information from the segments to the applicable line items in the Company's consolidated financial statements:
Segment Operating Profit
| Three months ended | Six months ended | ||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||
| Cardiovascular | $ | 1,095 | $ | 992 | $ | 2,256 | $ | 1,751 | |||||||||||||||
| Medical Surgical | 908 | 775 | 1,823 | 1,230 | |||||||||||||||||||
| Neuroscience | 887 | 805 | 1,850 | 1,327 | |||||||||||||||||||
| Diabetes | 157 | 132 | 290 | 235 | |||||||||||||||||||
| Segment operating profit | 3,047 | 2,704 | 6,219 | 4,543 | |||||||||||||||||||
| Interest expense | (136) | (470) | (273) | (641) | |||||||||||||||||||
| Other non-operating income, net | 66 | 65 | 177 | 147 | |||||||||||||||||||
| Amortization of intangible assets | (431) | (443) | (866) | (884) | |||||||||||||||||||
| Corporate | (415) | (460) | (864) | (825) | |||||||||||||||||||
| Centralized distribution costs | (516) | (542) | (981) | (940) | |||||||||||||||||||
| Restructuring and associated costs | (77) | (179) | (159) | (307) | |||||||||||||||||||
| Acquisition-related items | 13 | (47) | (96) | 49 | |||||||||||||||||||
| Certain litigation charges, net | (34) | (84) | (60) | 4 | |||||||||||||||||||
| MCS impairments / costs | — | — | (726) | — | |||||||||||||||||||
| Medical device regulations | (24) | (19) | (45) | (37) | |||||||||||||||||||
| Income before income taxes | $ | 1,493 | $ | 525 | $ | 2,326 | $ | 1,109 | |||||||||||||||
Geographic Information
Net sales are attributed to the country based on the location of the customer taking possession of the products or in which the services are rendered. The following table presents net sales for the three and six months ended October 29, 2021 and October 30, 2020 for the Company's country of domicile, countries with significant concentrations, and all other countries:
| Three months ended | Six months ended | ||||||||||||||||||||||
| (in millions) | October 29, 2021 | October 30, 2020 | October 29, 2021 | October 30, 2020 | |||||||||||||||||||
| Ireland | $ | 27 | $ | 24 | $ | 52 | $ | 49 | |||||||||||||||
| United States | 3,997 | 4,054 | 8,098 | 7,405 | |||||||||||||||||||
| Rest of world | 3,823 | 3,569 | 7,685 | 6,700 | |||||||||||||||||||
| Total other countries, excluding Ireland | 7,820 | 7,623 | 15,783 | 14,105 | |||||||||||||||||||
| Total | $ | 7,847 | $ | 7,647 | $ | 15,835 | $ | 14,154 |
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