Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

UNDERSTANDING OUR FINANCIAL INFORMATION

The following discussion and analysis provides information management believes to be relevant to understanding the financial condition and results of operations of Medtronic plc and its subsidiaries (Medtronic plc, Medtronic, or the Company, or we, us, or our). For a full understanding of financial condition and results of operations, you should read this discussion along with Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021. In addition, you should read this discussion along with our consolidated financial statements and related notes thereto at and for the three and six months ended October 29, 2021. Amounts reported in millions within this quarterly report are computed based on the amounts in thousands, and therefore, the sum of the components may not equal the total amount reported in millions due to rounding. Additionally, certain columns and rows within tables may not sum due to rounding.

Financial Trends

Throughout this Management’s Discussion and Analysis, we present certain financial measures that we use to evaluate the operational performance of the Company and as a basis for strategic planning; however, such financial measures are not presented in our financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S.) (U.S. GAAP). These financial measures are considered "non-GAAP financial measures" and are intended to supplement, and should not be considered as superior to, financial measures presented in accordance with U.S. GAAP. We generally use non-GAAP financial measures to facilitate management's review of the operational performance of the Company and as a basis for strategic planning. We believe that non-GAAP financial measures provide information useful to investors in understanding the Company's underlying operational performance and trends and may facilitate comparisons with the performance of other companies in the medical technologies industry.

As presented in the GAAP to Non-GAAP Reconciliations section below, our non-GAAP financial measures exclude the impact of certain charges or benefits that contribute to or reduce earnings and that may affect financial trends and include certain charges or benefits that result from transactions or events that we believe may or may not recur with similar materiality or impact to our operations in future periods (Non-GAAP Adjustments).

In the event there is a Non-GAAP Adjustment recognized in our operating results, the tax cost or benefit attributable to that item is separately calculated and reported. Because the effective rate can be significantly impacted by the Non-GAAP Adjustments that take place during the period, we often refer to our tax rate using both the effective rate and the non-GAAP nominal tax rate (Non-GAAP Nominal Tax Rate). The Non-GAAP Nominal Tax Rate is calculated as the income tax provision, adjusted for the impact of Non-GAAP Adjustments, as a percentage of income before income taxes, excluding Non-GAAP Adjustments.

Free cash flow is a non-GAAP financial measure calculated by subtracting property, plant, and equipment additions from operating cash flows.

Refer to the “GAAP to Non-GAAP Reconciliations," "Income Taxes," and "Free Cash Flow" sections for reconciliations of the non-GAAP financial measures to their most directly comparable financial measures prepared in accordance with U.S. GAAP.

EXECUTIVE LEVEL OVERVIEW

Medtronic is the leading global healthcare technology company — alleviating pain, restoring health, and extending life for millions of people around the world. Our primary products include those for cardiac rhythm disorders, cardiovascular disease, advanced and general surgical care, respiratory and monitoring solutions, renal care, neurological disorders, spinal conditions and musculoskeletal trauma, urological and digestive disorders, and ear, nose, and throat, and diabetes conditions.

The global healthcare system is continuing to respond to the unprecedented challenge posed by the Covid-19 pandemic ("COVID-19" or the "pandemic"). Most of our businesses were affected by a decline in global procedural volumes during fiscal year 2021, particularly in the first and second quarters. During the first quarter of fiscal year 2022, most of our businesses performed at or above pre-COVID-19 levels, while also experiencing a slowdown in elective procedures in certain businesses and geographies in the final weeks of the quarter as a result of the Delta variant of COVID-19. In the second quarter of fiscal year 2022, certain international markets saw procedural recovery from the resurgence experienced in prior quarters. However, particularly in the U.S., the COVID-19 resurgence as well as healthcare system staffing shortages impacted our revenue results for the three months ended October 29, 2021. While we expect the impact of the Delta variant may be less severe than prior waves of COVID-19 as vaccination rates continue to rise, we cannot predict with confidence the duration and severity of the pandemic and its impact on global procedure volumes. We expect medical procedure rates to continue to vary by therapy and country and to be impacted by regional COVID-19 case volumes, vaccine immunization rates, and new COVID-19 variants, including the Omicron variant. Also, we cannot predict the impact healthcare system staffing shortages may have on procedural volumes.

The following is a summary of revenue and diluted earnings per share for the three months ended October 29, 2021 and October 30, 2020, and operating cash flow for the six months ended October 29, 2021 and October 30, 2020:

GAAP to Non-GAAP Reconciliations The tables below present our GAAP to Non-GAAP reconciliations for the three months ended October 29, 2021 and October 30, 2020:


	Three months ended October 29, 2021
(in millions, except per share data)	Income Before Income Taxes		Income Tax Provision (Benefit)		Net Income Attributable to Medtronic		Diluted EPS		Effective Tax Rate
GAAP	$	1,493	$	176	$	1,311	$	0.97	11.8	%
Non-GAAP Adjustments:
Restructuring and associated costs (1)	77		15		62		0.05		19.5
Acquisition-related items (2)	(13)		2		(15)		(0.01)		(15.4)
Certain litigation charges	34		4		30		0.02		11.8
(Gain)/loss on minority investments (3)	6		—		6		—		—
Medical device regulations (4)	24		4		20		0.01		16.7
Amortization of intangible assets	431		69		361		0.27		16.0
Certain tax adjustments, net (5)	—		(16)		16		0.01		—
Non-GAAP	$	2,052	$	254	$	1,792	$	1.32	12.4	%

	Three months ended October 30, 2020
(in millions, except per share data)	Income Before Income Taxes		Income Tax Provision (Benefit)		Net Income Attributable to Medtronic		Diluted EPS		Effective Tax Rate
GAAP	$	525	$	31	$	489	$	0.36	5.9	%
Non-GAAP Adjustments:
Restructuring and associated costs (1)	179		44		135		0.10		24.6
Acquisition-related items (2)	47		8		39		0.03		17.0
Certain litigation charges	84		21		63		0.05		25.0
(Gain)/loss on minority investments (3)	1		—		1		—		—
Medical device regulations (4)	19		3		16		0.01		15.8
Amortization of intangible assets	443		70		373		0.28		15.8
Debt tender premium (6)	308		60		248		0.18		19.5
Certain tax adjustments, net (5)	—		(16)		16		0.01		—
Non-GAAP	$	1,606	$	221	$	1,380	$	1.02	13.8	%

(1)Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.

(2)The charges primarily include business combination costs, changes in fair value of contingent consideration, and for the three months ended October 30, 2020, certain license payments for unapproved technology.

(3)We exclude unrealized and realized gains and losses on our minority investments as we do not believe that these components of income or expense have a direct correlation to our ongoing or future business operations.

(4)The charges represent incremental costs of complying with the new European Union (E.U.) medical device regulations for previously registered products and primarily include charges for contractors supporting the project and other direct third-party expenses.

(5)The charges include the amortization on previously established deferred tax assets from intercompany intellectual property transactions.

(6)The charges relate to the early redemption of approximately $6.0 billion of debt.

The tables below present our GAAP to Non-GAAP reconciliations for the six months ended October 29, 2021 and October 30, 2020:


	Six months ended October 29, 2021
(in millions, except per share data)	Income Before Income Taxes		Income Tax Provision (Benefit)		Net Income Attributable to Medtronic		Diluted EPS		Effective Tax Rate
GAAP	$	2,326	$	240	$	2,074	$	1.53	10.3	%
Non-GAAP Adjustments:
Restructuring and associated costs (1)	159		31		128		0.09		19.5
Acquisition-related items (2)	96		24		72		0.05		25.0
Certain litigation charges	60		9		51		0.04		15.0
(Gain)/loss on minority investments (3)	(25)		—		(22)		(0.02)		—
Medical device regulations (4)	45		9		36		0.03		20.0
Amortization of intangible assets	866		139		728		0.54		16.1
MCS impairments / costs (5)	726		162		564		0.42		22.3
Certain tax adjustments, net (6)	—		(69)		69		0.05		—
Non-GAAP	$	4,253	$	545	$	3,699	$	2.73	12.8	%

	Six months ended October 30, 2020
(in millions, except per share data)	Income Before Income Taxes		Income Tax Provision (Benefit)		Net Income Attributable to Medtronic		Diluted EPS		Effective Tax Rate
GAAP	$	1,109	$	124	$	976	$	0.72	11.2	%
Non-GAAP Adjustments:
Restructuring and associated costs (1)	307		66		241		0.18		21.5
Acquisition-related items (2)	(49)		(21)		(28)		(0.02)		42.9
Certain litigation charges	(4)		2		(6)		—		(50.0)
(Gain)/loss on minority investments (3)	(9)		1		(10)		(0.01)		(11.1)
Medical device regulations (4)	37		5		32		0.02		13.5
Amortization of intangible assets	884		141		743		0.55		16.0
Debt tender premium (7)	308		60		248		0.18		19.5
Certain tax adjustments, net (6)	—		(20)		20		0.01		—
Non-GAAP	$	2,583	$	358	$	2,216	$	1.64	13.9	%

(1)Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.

(2)The charges primarily include business combination costs, changes in fair value of contingent consideration, acquisitions of, and certain license payments for, unapproved technology, and specifically for the six months ended October 30, 2020, change in amounts accrued for certain contingent liabilities for recent acquisitions.

(4)The charges represent incremental costs of complying with the new E.U. medical device regulations for previously registered products and primarily include charges for contractors supporting the project and other direct third-party expenses.

(5)The charges relate to the Company’s June 2021 decision to stop the distribution and sale of the Medtronic HVAD System within the Mechanical Circulatory Support Operating Unit (MCS). The charges included $515 million of non-cash impairments, primarily related to $409 million of intangible asset impairments, as well as $211 million for commitments and obligations in connection with the decision, including customer support obligations, restructuring, and other associated costs. Medtronic is committed to serving the needs of the approximately 4,000 patients currently implanted with the HVAD System.

(6)The charges include the amortization on previously established deferred tax assets from intercompany intellectual property transactions, and specifically for the six months ended October 29, 2021, charges associated with a change in the company's permanent reinvestment assertion on certain historical earnings.

(7)The charges relate to the early redemption of approximately $6.0 billion of debt.

Free Cash Flow

Free cash flow, a non-GAAP financial measure, is calculated by subtracting additions to property, plant, and equipment from net cash provided by operating activities. Management uses this non-GAAP financial measure, in addition to U.S. GAAP financial measures, to evaluate our operating results. Free cash flow should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with U.S. GAAP. Reconciliations between net cash provided by operating activities (the most comparable U.S. GAAP measure) and free cash flow are as follows:


	Six months ended
(in millions)	October 29, 2021		October 30, 2020
Net cash provided by operating activities	$	3,061	$	2,139
Additions to property, plant, and equipment	(649)		(615)
Free cash flow	$	2,412	$	1,524

Refer to the Summary of Cash Flows section for drivers of the change in cash provided by operating activities.

NET SALES

Segment and Division

The charts below illustrate the percent of net sales by segment for the three months ended October 29, 2021 and October 30, 2020:

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		% Change		October 29, 2021		October 30, 2020		% Change
Cardiac Rhythm & Heart Failure	$	1,471	$	1,426	3	%	$	2,954	$	2,673	11	%
Structural Heart & Aortic	750		733		2		1,537		1,360		13
Coronary & Peripheral Vascular	606		567		7		1,226		1,125		9
Cardiovascular	2,827		2,725		4		5,717		5,158		11
Surgical Innovations	1,497		1,393		7		3,051		2,473		23
Respiratory, Gastrointestinal, & Renal	802		893		(10)		1,570		1,613		(3)
Medical Surgical	2,299		2,285		1		4,621		4,086		13
Cranial & Spinal Technologies	1,067		1,071		—		2,189		2,015		9
Specialty Therapies	634		581		9		1,275		1,035		23
Neuromodulation	435		411		6		875		725		21
Neuroscience	2,136		2,063		4		4,340		3,774		15
Diabetes	585		574		2		1,157		1,136		2
Total	$	7,847	$	7,647	3	%	$	15,835	$	14,154	12	%

Segment and Market Geography

The charts below illustrate the percent of net sales by market geography for the three months ended October 29, 2021 and October 30, 2020:

The table below includes net sales by market geography for each of our segments 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		% Change		October 29, 2021		October 30, 2020		% Change		October 29, 2021		October 30, 2020		% Change
Cardiovascular	$	1,373	$	1,377	—	%	$	948	$	945	—	%	$	506	$	404	25	%
Medical Surgical	970		996		(3)		841		837		—		488		452		8
Neuroscience	1,394		1,397		—		433		426		2		309		240		29
Diabetes	261		284		(8)		256		238		8		69		51		35
Total	$	3,997	$	4,054	(1)	%	$	2,478	$	2,446	1	%	$	1,372	$	1,147	20	%


	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		% Change		October 29, 2021		October 30, 2020		% Change		October 29, 2021		October 30, 2020		% Change
Cardiovascular	$	2,793	$	2,582	8	%	$	1,952	$	1,798	9	%	$	972	$	778	25	%
Medical Surgical	1,959		1,718		14		1,710		1,556		10		951		811		17
Neuroscience	2,840		2,533		12		898		802		12		602		439		37
Diabetes	506		572		(12)		519		465		12		132		100		32
Total	$	8,098	$	7,405	9	%	$	5,079	$	4,621	10	%	$	2,658	$	2,128	25	%

(1)U.S. includes the United States and U.S. territories.

(2)Non-U.S. developed markets include Japan, Australia, New Zealand, Korea, Canada, and the countries within Western Europe.

(3)Emerging markets include the countries of the Middle East, Africa, Latin America, Eastern Europe, and the countries of Asia that are not included in the non-U.S. developed markets, as defined above.

The increase in net sales for the three months ended October 29, 2021, as compared to the corresponding period in the prior fiscal year, was driven by strength in the international markets partially offset by declines in the U.S. largely due to the COVID-19 resurgence and healthcare system staffing shortages. For the six months ended October 29, 2021, most of our businesses and geographies continue to achieve revenue levels at or above pre-pandemic levels. Currency had a favorable impact on net sales of $32 million and $277 million, respectively, for the three and six months ended October 29, 2021. For the three months ended, currency had a favorable impact on emerging markets of $37 million partially offset by an unfavorable impact for non-U.S. developed markets of $5 million. For the six months ended October 29, 2021, currency had a favorable impact for emerging markets and non-U.S. developed markets of $100 million and $177 million, respectively.

During the fourth quarter of fiscal year 2021, we realigned our divisions within the Cardiovascular Portfolio. As a result, fiscal year 2021 results have been recast to adjust for this realignment. Additionally, in fiscal year 2021 we implemented our new operating model, which was fully operational the beginning of the fourth quarter. Our new operating model simplifies our organization in order to accelerate decision making, improve commercial execution, and more effectively leverage the scale of our company.

Looking ahead, the uncertain and uneven impact of COVID-19 on future procedural volumes, supply constraints, healthcare staffing, and resulting demand for our products and therapies could negatively impact our business. Additionally, our segments may face competitive product launches and pricing pressure, geographic macro-economic risks, reimbursement challenges and national tender pricing for certain products, impacts from changes in the mix of our product offerings, delays in product registration approvals, replacement cycle challenges, and fluctuations in currency exchange rates.

Cardiovascular

Cardiovascular products include pacemakers, insertable cardiac monitors, cardiac resynchronization therapy devices, implantable cardioverter defibrillators (ICD), leads and delivery systems, ablation products, electrophysiology catheters, products for the treatment of atrial fibrillation, information systems for the management of patients with Cardiac Rhythm & Heart Failure devices, products designed to reduce surgical site infections, coronary and peripheral stents and related delivery systems, balloons and related delivery systems, endovascular stent graft systems, heart valve replacement technologies, cardiac tissue ablation systems, and open heart and coronary bypass grafting surgical products. Cardiovascular also includes Care Management Services and Cath Lab Managed Services (CLMS) within the Cardiac Rhythm & Heart Failure division. Cardiovascular's net sales for the three and six months ended October 29, 2021 were $2.8 billion and $5.7 billion, respectively, which represents an increase of 4 percent and 11 percent, respectively, compared to the corresponding periods

in the prior fiscal year. Currency had a favorable impact of $11 million and $106 million, respectively, on net sales for the three and six months ended October 29, 2021. Cardiovascular's net sales increase for the three months ended October 29, 2021 was primarily driven by the recovery of procedural volumes in the international markets, with partially offsetting declines experienced in certain businesses in the U.S. due to the COVID-19 resurgence. The increase for the six months ended October 29, 2021 was primarily due to the recovery of global procedure volumes from the downturn experienced in the first and second quarter of fiscal year 2021 resulting from the pandemic along with growth from recent product launches.

The graphs below illustrate the percent of Cardiovascular net sales by division for the three months ended October 29, 2021 and October 30, 2020:

Cardiac Rhythm & Heart Failure (CRHF) net sales for the three and six months ended October 29, 2021 increased 3 percent and 11 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The increase for the three and six months ended was led by Cardiac Rhythm Management with growth in TYRX antibacterial envelopes, CRT-Ds, and cardiac pacing therapies due to Micra and transvenous pacemakers. Cardiac Ablation Solutions also led growth for both periods with strong sales of Arctic Front cryoablation systems. For the three months ended October 29, 2021, these increases were partially offset by lower growth of Cardiovascular Diagnostics caused by COVID-19 and competitive pressure. For both periods, the net sales growth was partially offset by a decline of Medtronic HVAD System net sales as a result of our June 2021 decision to stop the distribution and sale of the system.

Structural Heart & Aortic (SHA) net sales for the three and six months ended October 29, 2021 increased 2 percent and 13 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The increase in both periods was led by growth in transcatheter aortic valve replacement (TAVR) net sales as a result of continued adoption of the CoreValve Evolut. Cardiac Surgery also contributed to the net increase in sales for both periods as a result of broad-based growth across the business. Partially offsetting these increases was a decline in net sales of the Valiant Navion Thoracic Stent Graft System as a result of our voluntary recall of the system in the fourth quarter of fiscal year 2021.

Coronary & Peripheral Vascular (CPV) net sales for the three and six months ended October 29, 2021 increased 7 percent and 9 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The increase in both periods was led by growth in Peripheral Vascular Health driven by our superficial venous product portfolio, including the VenaSeal and ClosureFast systems, as well as strong performance of the recently launched Abre venous self-expanding stent system for Deep Venous disease. Coronary & Renal Denervation also experienced growth driven by drug-eluting stents and guide catheters.

In addition to the general impacts of COVID-19 on our Company as described in the Executive Level Overview, looking ahead, we expect Cardiovascular could be affected by the following:

Continued growth of our Micra transcatheter pacing system. Micra AV received U.S. FDA approval and CE Mark approval in January and April 2020, respectfully. Subsequent to the quarter, the Micra AV launched in Japan in November. Micra AV expands the Micra target population from 15 percent to 45 percent of pacemaker patients.
Continued acceptance and growth from the Azure XT and S SureScan pacing systems. Azure pacemakers feature Medtronic-exclusive BlueSync technology, which enables automatic, secure wireless remote monitoring with increased device longevity.
Growth of the Cobalt and Crome portfolio of ICDs and CRT-Ds. These devices received CE Mark approval during the fourth quarter of fiscal year 2020 and U.S. FDA approval during the first quarter of fiscal year 2021.
Continued acceptance and expansion of the Claria MRI CRT-D system with EffectivCRT Diagnostic and EffectivCRT During AF Algorithm.
Advancement of the LINQ II cardiac monitor, which received CE Mark in November 2019 and gained U.S. FDA approval during the first quarter of fiscal year 2021. We are currently experiencing supply constrains for the LINQ II cardiac monitor as we ramp our wafer scale manufacturing.
Growth of the CRT-P quadripolar pacing system.
Continued growth, adoption, and utilization of the TYRX Envelope for implantable devices driven by the favorable results of the WRAP-IT clinical study.
Continued acceptance and market expansion of Arctic Front cryoablation for treatment of atrial fibrillation. In June 2021, the Arctic Front cryoablation system received a first line therapy designation from the U.S. FDA for the treatment of atrial fibrillation.
Continued acceptance and growth of the self-expanding CoreValve Evolut transcatheter aortic valve replacement platform into intermediate risk indication globally and for the treatment of patients determined to be at low risk with surgery. The Platform received both CE Mark for low risk and bicuspid labeling indication in Europe during the first quarter of fiscal year 2021. In August 2020, the U.S. FDA approved revised commercial labeling for the platform that modified a precaution for the treatment of patients at low risk.
Continued expansion and training of field support to increase coverage in the U.S. centers performing TAVR procedures.
Continued acceptance and growth from Evolut PRO, which provides industry-leading hemodynamics, reliable delivery, and advanced sealing with an excellent safety profile. In August 2021, the U.S. FDA approved the Evolut FX TAVR, a system enhancement designed to improve the overall procedural experience through enhancements in deliverability, implant visibility and deployment stability.
The Chinese national and provincial tenders that have negatively impacted drug-eluting stent and coronary balloon prices in China could impact other products within the division.
Continued acceptance and growth from the VenaSeal Closure System in the U.S. The VenaSeal Closure System is a unique non-thermal solution to address superficial venous disease that provides improved patient comfort, reduces the recovery time, and eliminates the risk of thermal nerve injury.
Our voluntary recall of the Valiant Navion Thoracic Stent Graft System and our ability to ramp production of our previous generation product, the Valiant Captivia Thoracic Stent Graft System. We are currently ramping production of the Valiant Captivia Thoracic Stent Graft System and plan to reach full production capacity in the fourth quarter of fiscal year 2022.
Our June 2021 decision to stop the distribution and sale of the Medtronic HVAD System in light of a growing body of observational clinical comparisons indicating a lower frequency of neurological adverse events and mortality with another circulatory support device available to patients compared to the HVAD System.
Our ability to successfully develop, obtain regulatory approval of and commercialize the products within our pipeline, which include the Symplicity Spyral Multi-Electrode Renal Denervation Catheter for the treatment of hypertension through a one-time, minimally invasive catheter procedure; Pulse Field Ablation, a novel energy source that is non-thermal, for the treatment of atrial fibrillation; and transcatheter mitral and tricuspid therapy products led by our Intrepid system.

Medical Surgical

Medical Surgical’s products span the entire continuum of patient care from diagnosis to recovery, with a focus on diseases of the gastrointestinal tract, lungs, pelvic region, kidneys, obesity, and preventable complications. The products include those for advanced and general surgical products, surgical stapling devices, vessel sealing instruments, wound closure, electrosurgery products, hernia mechanical devices, mesh implants, advanced ablation, interventional lung, ventilators, airway products, renal care products, and sensors and monitors

for pulse oximetry, capnography, level of consciousness and cerebral oximetry. Medical Surgical's net sales for the three and six months ended October 29, 2021 were $2.3 billion and $4.6 billion, respectively, an increase of 1 percent and 13 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Currency had a favorable impact of $8 million and $85 million on net sales for the three and six months ended October 29, 2021, respectively. Medical Surgical's net sales increase for the three months ended October 29, 2021 was driven by the recovery of procedural volumes in the international markets, with partially offsetting declines experienced in the U.S. due to the COVID-19 resurgence. The net sales increase for the six months ended October 29, 2021 was primarily due to the recovery of global procedure volumes from the declines experienced in the corresponding period in the prior year.

The graphs below illustrate the percent of Medical Surgical net sales by division for the three months ended October 29, 2021 and October 30, 2020:

Surgical Innovations (SI) net sales for the three and six months ended October 29, 2021 increased 7 percent and 23 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Net sales growth for the three months ended October 29, 2021 was led by the international markets due to strong procedure recovery in certain regions, with growth in advanced stapling and wound closure. This growth was offset by declines in the U.S. largely due to Advanced Energy. The growth for the six months ended October 29, 2021 was experienced worldwide led by Advanced Stapling, Advanced Energy, and Hernia and Wound Management.

Respiratory, Gastrointestinal, & Renal (RGR) net sales for the three and six months ended October 29, 2021 decreased 10 percent and 3 percent, respectively, as compared to the corresponding periods in the prior fiscal year. RGR net sales declines for both periods were largely due to declines in ventilator demands when compared to the corresponding periods in the prior year as demand continues to trend towards pre-pandemic levels. These declines were partially offset by growth in Renal Care Solutions, Patient Monitoring, particularly the Nellcor pulse oximetry system, as well as in Gastrointestinal, driven by the esophageal product portfolio and PillCam capsule endoscopy.

In addition to the general impacts of COVID-19 on our Company as described in the Executive Level Overview, looking ahead we expect Medical Surgical could be affected by the following:

Continued acceptance and future growth of Open-to-MIS techniques and tools supported by our efforts to transition open surgery to MIS (minimally invasive surgery). The Open-to-MIS initiative focuses on furthering our presence in and working to optimize open surgery globally, while capturing the market opportunity that exists in transitioning open procedures to MIS, whether through traditional MIS, or advanced technologies, including robotics.
Continued acceptance and future growth of powered stapling and energy platform.
Our ability to execute ongoing strategies in order to address the competitive pressure of reprocessing of our vessel sealing disposables and growth of surgical soft tissue robotics procedures in the U.S.
Our ability to create markets and drive products and procedures into emerging markets. We have high quality and cost-effective surgical products designed for customers in emerging markets such as the ValleyLab LS10 single channel

vessel sealing generator, which is compatible with our line of LigaSure instruments and designed for simplified use and affordability.

Continued acceptance and growth within the end stage renal disease market. The population of patients treated for end stage renal disease globally is expected to double over the next decade.
Continued elevation of the standard of care for respiratory compromise, a progressive condition impacting a patient’s ability to breathe effectively, which leverages our market leading MicroStream capnography technology.
Continued acceptance and growth in patient monitoring, airway, and ventilation management. Key products in this area include the Puritan Bennett 980 ventilator, Microstream Capnography, Nellcor pulse oximetry system with OxiMax technology, Shiley tracheostomy and endotracheal tubes, McGRATH MAC video laryngoscopes, as well as the SonarMed Airway Monitoring System for the NICU that was launched in the U.S during the first quarter of fiscal year 2022.
Continued and future acceptance of less invasive standards of care in Gastrointestinal and Hepatology products, including the areas of GI Diagnostic and Therapeutic product lines. Recently launched products include the PillCam COLON capsule endoscopy, the Barrx platform through ablation with the Barrx 360 Express catheter, Endoflip imaging systems, Bravo Calibration-free reflux testing, and the Emprint ablation system with Thermosphere Technology, which maintains predictable spherical ablation zones throughout procedures reducing procedure time and cost.
Continued and future acceptance of Interventional Lung Solutions. Products include our Illumisite navigation platform, combined with our portfolio of biopsy tools including the Arcpoint pulmonary needle, and to access lesions outside the airway, the CrossCountry transbronchial access tool. This comprehensive portfolio gives the power to display position and access lung nodules in the periphery of the lungs, in a minimally invasive approach to accessing difficult-to-reach areas of the lung, which may aid in the diagnosis of lung cancer.
Expanding the use of less invasive treatments and furthering our commitment to improving options for women with abnormal uterine bleeding. Our expanded and strengthened surgical offerings are expected to complement our global gynecology business.
Continued future growth internationally for the Hugo robotic assisted surgery (RAS) system for urologic and gynecologic procedures, which received CE Mark in October 2021. The Hugo RAS system is designed to help reduce unwanted variability, improve patient outcomes, and by extension, lower per procedure cost.
Our ability to successfully develop, obtain regulatory approval of and commercialize the products within our pipeline, which include our Hugo RAS system in the U.S., our NextGen McGrath MAC video laryngoscopes, Signia power stapling devices, and our Ligasure and Sonicion vessel sealing devices.

Neuroscience

Neuroscience's products include various spinal implants, bone graft substitutes, biologic products, image-guided surgery and intra-operative imaging systems, robotic guidance systems used in the robot-assisted spine procedures, and systems that incorporate advanced energy surgical instruments. Neuroscience's products also focus on the treatment of overactive bladder, urinary retention, fecal incontinence, gastroparesis, as well as products to treat ear, nose, and throat (ENT), and therapies to treat the diseases of the vasculature in and around the brain, including coils, neurovascular stents and flow diversion products. Neuroscience also manufactures products related to implantable neurostimulation therapies and drug delivery systems for the treatment of chronic pain, movement disorders, and epilepsy. Neuroscience’s net sales for the three and six months ended October 29, 2021 were $2.1 billion and $4.3 billion, respectively, which represents an increase of 4 percent and 15 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Currency had a favorable impact of $10 million and $57 million, respectively, on net sales for the three and six months ended October 29, 2021. Neuroscience's net sales increase for the three months ended October 29, 2021 was driven by the recovery of procedural volumes in the international markets, with partially offsetting declines in certain businesses in the U.S. due to the COVID-19 resurgence. The net sales growth for the six months ended October 29, 2021 was primarily due to the recovery of global procedure volumes from the declines experienced in the corresponding period in the prior year.

The graphs below illustrate the percent of Neuroscience net sales by division for the three months ended October 29, 2021 and October 30, 2020:

Cranial and Spinal Technologies (CST) net sales growth for the three and six months ended October 29, 2021 was flat and increased 9 percent, respectively, as compared to the corresponding periods in the prior fiscal year. For both periods, Neurosurgery experienced growth from strong sales of Midas Rex powered surgical instruments, StealthStation Navigation, and O-arm imaging surgery. For the six months ended October 29, 2021, the increase was also driven by Spine and Biologics due to the recovery of global procedural volumes when compared to the corresponding period in the prior year. For the three months ended, the international markets of Spine and Biologics recovered, resulting in sales growth, partially offset by declines in the U.S.

Specialty Therapies (Specialty) net sales for the three and six months ended October 29, 2021 increased 9 percent and 23 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The increase for both periods was driven by growth in Neurovascular led by flow diversion and liquid embolic products. ENT experienced worldwide growth for both periods, including strong performance outside the U.S. in power, navigation, and monitoring. For the three months ended October 29, 2021, Pelvic Health sales growth was due to the international markets offset by declines in the U.S. For the six months ended October 29, 2021, Pelvic Health saw continued growth led by sales of the recently launched InterStim Micro neurostimulator and SureScan MRI leads.

Neuromodulation (NM) net sales for the three and six months ended October 29, 2021 increased 6 percent and 21 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Sales growth in both periods was driven by Brain Modulation and Interventional businesses. Brain Modulation and Interventional saw net sales growth driven by strong performance in the Percept PC deep brain stimulation (DBS) device with BrainSense technology. For the six months ended October 29, 2021, the increase was also driven by Pain Stim and Pain Therapies, largely due to strong performance of recent product launches. For the three months ended October 29, 2021, Pain Stim and Pain Therapies partially offset the sales growth with declines in the U.S.

In addition to the general impacts of COVID-19 on our Company as described in the Executive Level Overview, looking ahead we expect Neuroscience could be affected by the following:

Continued growth from Enabling Technologies, including StealthStation and O-Arm Imaging Systems, Midas, and ENT Navigation and Power Systems, as well as acceptance of the Stealth Autoguide cranial robotic guidance platform.
Continued sales of Mazor robotic units and associated market adoption of robot-assisted spine procedures, including the Mazor X Stealth, our integrated robotics and navigation platform.
Continued growth from spine titanium interbody implants.
Continued adoption of our integrated solutions through the Surgical Synergy strategy which integrates our spinal implants with enabling technologies such as imaging, navigation, power instruments, nerve monitoring, and Mazor

robotics, as well as AI-driven surgical planning, personalized spinal implants, and robot-assisted surgery due to the newly acquired Medicrea technologies.

Market acceptance and continued global adoption of innovative new spine products and procedural solutions within our CST division, such as our Infinity OCT System and Prestige LP cervical disc system.
Growth in the broader vertebral compression fracture (VCF) and adjacent markets as we continue to pursue the development of other therapies to treat more patients with VCF, including continued success of both the Kyphon V vertebroplasty system and the Osteocool RF Spinal Tumor ablation system.
Continued acceptance and growth of our ENT and Pelvic Health therapies within our Specialty Therapies division, including our InterStim therapy with InterStim II and InterStim Micro neurostimulators for the treatment of the symptoms of overactive bladder, urinary retention, and bowel incontinence, and capital equipment sales of the Stealth Station ENT surgical navigation system and intraoperative NIM nerve monitoring system.
Continued acceptance and growth of the Solitaire FR revascularization device for treatment of acute ischemic stroke and the Pipeline Embolization Devices, endovascular treatments for large or giant wide-necked brain aneurysms.
Continued acceptance of our React Catheter and Riptide aspiration system, along with our next-generation Solitaire revascularization device.
Market acceptance and continued global adoption of our Intellis spinal cord stimulator, DTM proprietary waveform, Evolve workflow algorithm, and Snapshot reporting to treat chronic pain in major markets around the world.
Continued acceptance and growth of our Percept PC DBS device with BrainSense technology, including its treatment of Parkinson's Disease, epilepsy, and other movement disorders.
Ongoing obligations under the U.S. FDA consent decree entered in April 2015 relating to the SynchroMed drug infusion system and the Neuromodulation quality system. The U.S. FDA lifted its distribution requirements on our implantable drug pump in October 2017 and its warning letter in November 2017.
Our ability to successfully develop, obtain regulatory approval of and commercialize the products within our pipeline, which include our closed-loop Percept PC and RC devices with adaptive DBS (aDBS) within Neuromodulation, as well as our hemorrhagic stroke intravascular device within Specialty Therapies, and our next-generation spine enabling technologies within CST.

Diabetes

Diabetes' products include insulin pumps, continuous glucose monitoring (CGM) systems, consumables, and smart insulin pen systems. Diabetes' net sales for the three and six months ended October 29, 2021 were $585 million and $1.2 billion, respectively, an increase of 2 percent as compared to the corresponding periods in the prior fiscal year. Currency had a favorable impact of $3 million and $29 million on net sales for the three and six months ended October 29, 2021, respectively. Diabetes' net sales growth for both periods was primarily attributable to growth in the international markets in durable pumps and integrated CGM. The growth was also driven by durable pumps in the U.S. while CGM experienced declines in the U.S. for both periods.

In addition to the general impacts of COVID-19 on our Company as described in the Executive Level Overview, looking ahead we expect Diabetes could be affected by the following:

Patient demand for the MiniMed 770G insulin pump system, which received U.S. FDA approval in August 2020 and launched in November 2020. The system is powered by SmartGuard technology and features the added benefits of smartphone connectivity and an expanded age indication to children as young as age two.
Continued future growth internationally for the MiniMed 780G insulin pump system. The MiniMed 780G system was approved in the E.U. in June 2020 and has launched in over 40 countries on four continents outside the U.S. starting in October 2020. The global adoption of sensor-augmented insulin pump systems has resulted in strong sensor attachment rates.
Continued acceptance and growth of the Guardian Connect CGM system which displays glucose information directly to a smartphone to help ensure patients have access to their glucose levels seamlessly and discretely. The Guardian Connect CGM system is available on both Apple iOS and Android devices.
Strengthening our position in the diabetes market as a result of the September 2020 acquisition of Companion Medical. Companion Medical offered a U.S. FDA cleared InPen smart pen system that combines the freedom of a reusable Bluetooth pen with the intelligence of an intuitive mobile application that helps users administer the appropriate insulin

dose. During the third quarter of fiscal year 2021, we integrated our CGM data into the InPen Application, which allows users to have their CGM readings in real-time alongside insulin dose information, all in one view.

Continued pump and CGM competition in an expanding global market.
Changes in medical reimbursement policies and programs, along with additional payor coverage on insulin pumps.
Our ability to successfully develop, obtain regulatory approval of and commercialize the products within our pipeline, which include our MiniMed 780G insulin pump and the Guardian 4 sensor, which have been submitted to the U.S. FDA. These technologies feature our next-generation algorithms by further automating insulin delivery.

COSTS AND EXPENSES

The following is a summary of cost of products sold, research and development, and selling, general, and administrative expenses as a percent of net sales for the three and six months ended October 29, 2021 and October 30, 2020:

Cost of Products Sold We continue to focus on reducing our costs of production through supplier management, manufacturing improvements, and optimizing our manufacturing network. Cost of products sold for the three and six months ended October 29, 2021 was $2.5 billion and $5.1 billion, respectively, as compared to $2.7 billion and $5.2 billion for the corresponding periods in the prior fiscal year. The decrease in cost of products sold as a percentage of net sales for both periods was largely due to increased expenses in the prior year comparable periods as a result of COVID-19. During the three and six months ended October 30, 2020, the conditions of the pandemic resulted in period expensing some of our fixed overhead costs due to idle capacity at certain manufacturing facilities, and increases in our reserves in our excess and obsolete inventory, as well as negative impact from mix, as products in higher demand had lower gross margins. The six months ended October 29, 2021 included $58 million of inventory write-downs associated with our June 2021 decision to stop the distribution and sale of Medtronic's HVAD System (MCS charges).

Research and Development Expense We remain committed to deliver the best possible experiences for every patient, physician, and caregiver we serve; to create technologies that expand what’s possible across the entire human body to transform lives; to turn data and insights into real action to serve real patient needs, dramatically improving care; and to expand healthcare access and deliver positive outcomes that go far beyond our products. Research and development expense for the three and six months ended October 29, 2021 was $676 million and $1.4 billion, respectively, as compared to $639 million and $1.3 billion, respectively, for the corresponding periods in the prior fiscal year. The six months ended October 29, 2021 included $90 million of asset acquisitions and certain license payments for unapproved technology primarily in our Diabetes segment.

Selling, General, and Administrative Expense Our goal is to continue to leverage selling, general, and administrative expense initiatives. Selling, general, and administrative expense primarily consists of salaries and wages, other administrative costs, such as professional fees and marketing expenses, and certain acquisition and restructuring expenses.

Selling, general, and administrative expense for the three and six months ended October 29, 2021 was $2.6 billion and $5.2 billion, as compared to $2.6 billion and $5.0 billion for the corresponding periods in the prior fiscal year. The decrease in selling, general, and administrative expense as a percentage of net sales for both periods was primarily driven by net sales growth as a result of the recovery of procedural volumes as well as cost containment measures implemented in the current year.

The following is a summary of other costs and expenses (income):


	Three months ended				Six months ended
(in millions)	October 29, 2021		October 30, 2020		October 29, 2021		October 30, 2020
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
Other non-operating income, net	(66)		(65)		(177)		(147)
Interest expense	136		470		273		641

Amortization of Intangible Assets Amortization of intangible assets includes the amortization expense of our definite-lived intangible assets, consisting of purchased patents, trademarks, tradenames, customer relationships, purchased technology, and other intangible assets.

Restructuring Charges, Net

Enterprise Excellence

In the third quarter of fiscal year 2018, we announced a multi-year global Enterprise Excellence Program designed to drive long-term business growth and sustainable efficiency. Further program details are described in Note 4 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year 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, the majority of which are expected to be incurred by the end of this fiscal year.

For the three and six months ended October 29, 2021, we recognized net charges of $62 million and $136 million, respectively, associated with our Enterprise Excellence Program, including $4 million and $15 million, respectively, recognized within restructuring charges, net in the consolidated statements of income primarily comprised of employee termination benefits*.* Net charges for the three and six months ended October 29, 2021 also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including $31 million and $64 million, respectively, recognized within cost of products sold and $27 million and $57 million, respectively, recognized within selling, general, and administrative expense in the consolidated statements of income.

For the three and six months ended October 30, 2020, we recognized net charges of $87 million and $164 million, respectively, associated with our Enterprise Excellence Program, including $7 million and $10 million, respectively, recognized within restructuring charges, net in the consolidated statements of income primarily comprised of employee termination benefits. Net charges for the three and six months ended October 29, 2021 also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including $32 million and $59 million, respectively, recognized within cost of products sold, and $48 million and $95 million, respectively, recognized within selling, general and administrative expense in the consolidated statements of income.

Simplification

In the first quarter of fiscal year 2021, we initiated our Simplification restructuring program, designed to make the Company a more nimble and competitive organization. Further program details are described in Note 4 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year 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, the majority of which are expected to be incurred by the end of this fiscal year.

For the three and six months ended October 29, 2021, we recognized net charges of $18 million and $25 million, respectively, including $9 million recognized within restructuring charges, net in the consolidated statements of income for both periods primarily comprised of employee termination benefits. Net charges for the three and six months ended October 29, 2021 also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including $9 million and $16 million, respectively, recognized within selling, general and administrative expense in the consolidated statements of income.

For the three and six months ended October 30, 2020, we recognized net charges of $94 million and $145 million, respectively, including $92 million and $142 million, respectively, recognized within restructuring charges, net in the consolidated statements of income primarily comprised of employee termination benefits, including $97 million of incremental defined benefit pension and post-retirement related expenses for employees that accepted voluntary early retirement packages. Net charges for the three and six months ended October 30, 2020 also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including $2 million and $3 million, respectively, recognized within selling, general and administrative expense in the consolidated statements of income.

For additional information about our restructuring programs, refer to Note 5 to the current period's consolidated financial statements.

Certain Litigation Charges, Net We classify litigation charges and gains related to significant legal matters as certain litigation charges. Information regarding certain litigation charges, net is included in Note 16 to the current period's consolidated financial statements.

Other Operating Expense, Net Other operating expense, net primarily includes royalty income and expense, currency remeasurement and derivative gains and losses, Puerto Rico excise taxes, changes in the fair value of contingent consideration, changes in amounts accrued for certain contingent liabilities for a past acquisition, MCS charges, and income from funded research and development arrangements.

For the three months ended October 29, 2021, the change in other operating expense, net is primarily attributable to changes in fair value of contingent consideration, which resulted in a $26 million gain for the three months ended October 29, 2021 as compared to a $7 million loss in the corresponding period in the prior year. Additionally, the change is driven by a $27 million charge for certain personal protective equipment in the three months ended October 30, 2020.

For the six months ended October 29, 2021, the change in other operating expense, net was primarily driven by MCS charges recorded during the three months ended July 30, 2021. The charges of $668 million primarily included $409 million of intangible asset impairments and $211 million for commitments and obligations, including customer support obligations, restructuring, and other associated costs. The change was also driven by a change in amounts accrued for certain contingent liabilities for a past acquisition resulting in a $132 million gain for the six months ended October 30, 2020. Additionally, the net currency impact of remeasurement expense and our hedging programs resulted in a net loss of $36 million for the six months ended October 29, 2021, as compared to a net gain of $16 million for the six months ended October 30, 2020. Additional information regarding the MCS charges is included in Note 5 Restructuring and Other Costs.

Other Non-Operating Income, Net Other non-operating income, net includes the non-service component of net periodic pension and postretirement benefit cost, investment gains and losses, and interest income.

The increase in other non-operating income, net for the six months ended October 29, 2021 when compared to the corresponding in the prior year, is primarily attributable to gains on our equity method and minority investment portfolios partially offset by a decrease in interest income. Gains on equity method and minority investments were $38 million and $4 million for the six months ended October 29, 2021 and October 30, 2020, respectively. Interest income was $89 million and $98 million for the six months ended October 29, 2021 and October 30, 2020, respectively.

Interest Expense Interest expense includes interest incurred on our outstanding borrowings, amortization of debt issuance costs and debt premiums or discounts, amortization of gains or losses on terminated or de-designated interest rate derivative instruments, and charges recognized in connection with the tender and early redemption of senior notes. The decrease in interest expense for both periods was primarily due to the $308 million charge incurred as a result of the early redemption of approximately $6.0 billion of debt during the three months ended October 30, 2020.

INCOME TAXES


	Three months ended						Six months ended
(in millions)	October 29, 2021			October 30, 2020			October 29, 2021			October 30, 2020
Income tax provision	$	176		$	31		$	240		$	124
Income before income taxes	1,493			525			2,326			1,109
Effective tax rate	11.8		%	5.9		%	10.3		%	11.2		%

Non-GAAP income tax provision	$	254		$	221		$	545		$	358
Non-GAAP income before income taxes	2,052			1,606			4,253			2,583
Non-GAAP Nominal Tax Rate	12.4		%	13.8		%	12.8		%	13.9		%

Difference between the effective tax rate and Non-GAAP Nominal Tax Rate	0.6		%	7.9		%	2.5		%	2.7		%

Our 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 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.

Our Non-GAAP Nominal Tax Rate for the three and six months ended October 29, 2021 was 12.4 percent and 12.8 percent, respectively, as compared to 13.8 percent and 13.9 percent for the three and six months ended October 30, 2020, respectively. The decrease in our Non-GAAP Nominal Tax Rate was primarily due to the impact of year-over-year changes in stock-based compensation benefits and operational results by jurisdiction. An increase in our Non-GAAP Nominal Tax Rate of 1 percent would result in an additional income tax provision for the three and six months ended October 29, 2021 of approximately $21 million and $43 million, respectively.

LIQUIDITY AND CAPITAL RESOURCES

We are currently in a strong financial position, and we believe our balance sheet and liquidity as of October 29, 2021 provide us with flexibility, and our cash, cash equivalents, and current investments, along with our credit facility and related commercial paper programs will satisfy our foreseeable operating needs.

Our liquidity and capital structure are evaluated regularly within the context of our annual operating and strategic planning processes. We consider the liquidity necessary to fund our operations, which includes working capital needs, investments in research and development, property, plant, and equipment, and other operating costs. We also consider capital allocation alternatives that balance returning value to shareholders through dividends and share repurchases, satisfying maturing debt, and acquiring businesses and technology.

Summary of Cash Flows

The following is a summary of cash provided by (used in) operating, investing, and financing activities, the effect of exchange rate changes on cash and cash equivalents, and the net change in cash and cash equivalents:


	Six months ended
(in millions)	October 29, 2021		October 30, 2020
Cash provided by (used in):
Operating activities	$	3,061	$	2,139
Investing activities	(1,493)		(2,012)
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

Operating Activities The $922 million increase in net cash provided was primarily driven by an increase in cash collected from customers, partially offset by an increase in cash paid for income taxes and cash paid to employees. The increase in cash collected from customers was primarily related to COVID-19 driving decreased sales in the fourth quarter of fiscal year 2020 and first and second quarters of fiscal year 2021. The increase in cash paid for income taxes in the six months ended October 29, 2021 was primarily due to a tax

payment associated with a foreign audit settlement as well as estimated income tax payments. Cash paid to employees increased due to higher annual incentive plan payouts compared to the corresponding period in the prior fiscal year.

Investing Activities The $519 million decrease in cash used was primarily attributable to a decrease in net purchases of $349 million, and decrease of cash paid for acquisitions of $279 million during the six months ended October 29, 2021, as compared to the corresponding period in the prior fiscal year.

Financing Activities The $4.2 billion increase in net cash used was largely the result of the Mizuho Bank term loan under which the Company borrowed $2.8 billion in the first quarter of the prior fiscal year, and as well as the net proceeds from the debt issuance and early redemption described below. Also contributing to the total increase in cash used was the increase in net cash used for share repurchases of $676 million. For the six months ended October 30, 2020 financing cash flows were impacted by the issuance of $7.2 billion of Euro-denominated senior notes offset by the early redemption of $6.0 billion of senior notes for $6.3 billion of total consideration. For more information on the aforementioned Mizuho Bank term loan, refer to Note 7 to the current period's consolidated financial statements.

Debt and Capital

Our capital structure consists of equity and interest-bearing debt. We primarily utilize unsecured senior debt obligations to meet our financing needs and, to a lesser extent, bank borrowings. From time to time, we may repurchase our outstanding debt obligations in the open market or through privately negotiated transactions.

Total debt at October 29, 2021 was $25.6 billion as compared to $26.4 billion at April 30, 2021. The decrease in total debt was driven by fluctuations in exchange rates as it pertains to our Euro-denominated senior notes.

We repurchase our ordinary shares on occasion as part of our focus on returning value to our shareholders. In March 2019, the Company's Board of Directors authorized the repurchase of $6.0 billion of the Company's ordinary shares. There is no specific time period associated with these repurchase authorizations. During the six months ended October 29, 2021, the Company repurchased a total of 5 million shares under this program at an average price of $127.49. At October 29, 2021, we had approximately $4.7 billion remaining under the share repurchase program authorized by our Board of Directors.

For more information on credit arrangements, refer to Note 7 to the current period's consolidated financial statements and Note 6 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021.

Liquidity

Our liquidity sources at October 29, 2021 included $2.9 billion of cash and cash equivalents and $7.8 billion of current investments. Additionally, we maintain a commercial paper program and a Credit Facility.

Our investments primarily include available-for-sale debt securities, including U.S. and non-U.S. government and agency securities, corporate debt securities, mortgage-backed securities, and other asset-backed securities. Refer to Note 6 to the current period's consolidated financial statements for additional information regarding fair value measurements.

We maintain multicurrency commercial paper programs for short-term financing, which allow us to issue unsecured commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $3.5 billion. At both October 29, 2021 and April 30, 2021, we had no commercial paper outstanding. The issuance of commercial paper reduces the amount of credit available under our existing line of credit, as explained below.

We also have a $3.5 billion five-year syndicated credit facility (Credit Facility), which expires in December 2025. The Credit Facility provides backup funding for the commercial paper programs and may also be used for general corporate purposes. The Credit Facility provides us with the ability to increase our borrowing capacity by an additional $1.0 billion at any time during the term of the agreement. At each anniversary date of the Credit Facility, but not more than twice prior to the maturity date, we could also request a one-year extension of the maturity date. At October 29, 2021 and April 30, 2021, no amounts were outstanding under the Credit Facility.

Interest rates on advances of our Credit Facility are determined by a pricing matrix based on our long-term debt ratings assigned by Standard & Poor's Ratings Services (S&P) and Moody's Investors Service (Moody’s). Facility fees are payable on the Credit Facility and are determined in the same manner as the interest rates. We are in compliance with all covenants related to the Credit Facility.

The following table is a summary of our S&P and Moody's long-term debt ratings and short-term debt ratings:


	Agency Rating(1)
	October 29, 2021	April 30, 2021
Standard & Poor's Ratings Services
Long-term debt	A	A
Short-term debt	A-1	A-1

Moody's Investors Service
Long-term debt	A3	A3
Short-term debt	P-2	P-2

(1) Agency ratings are subject to change, and there may be no assurance that an agency will continue to provide ratings and/or maintain its current ratings. A security rating is not a recommendation to buy, sell or hold securities, and may be subject to revision or withdrawal at any time by the rating agency, and each rating should be evaluated independently of any other rating.

S&P and Moody's long-term debt ratings and short-term debt ratings at October 29, 2021 were unchanged as compared to the ratings at April 30, 2021. We do not expect the S&P and Moody's ratings to have a significant impact on our liquidity or future flexibility to access additional liquidity given our balance sheet, Credit Facility, and related commercial paper programs.

We have future contractual obligations and other minimum commercial commitments that are entered into in the normal course of business. We believe our off-balance sheet arrangements do not have a material current or anticipated future effect on our consolidated earnings, financial position, and/or cash flows. There have been no material changes to our long-term contractual obligations as reported in our most recent Annual Report filed on Form 10-K for the fiscal year ended April 30, 2021.

ACQUISITIONS

Intersect ENT Pending Acquisition

On August 6, 2021, Medtronic and Intersect ENT entered into a definitive agreement in which Medtronic will acquire all outstanding shares of Intersect ENT for $28.25 per share in an all-cash transaction valued at approximately $1.1 billion. The acquisition is expected to close toward the end of fiscal year 2022 pending clearance of anti-trust filings, and other closing conditions.

Additional information regarding acquisitions is included in Note 4 to the current period's consolidated financial statements.

CRITICAL ACCOUNTING ESTIMATES

We have used various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies are disclosed in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021.

The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires us to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates reflect our best judgment about economic and market conditions and the potential effects on the valuation and/or carrying value of assets and liabilities based upon relevant information available. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

As of October 29, 2021, there were no material changes to our critical accounting estimates.

NEW ACCOUNTING PRONOUNCEMENTS

Information regarding new accounting pronouncements is included in Note 2 to the current period's consolidated financial statements.

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

Medtronic plc and Medtronic Global Holdings S.C.A. (Medtronic Luxco), a wholly-owned subsidiary guarantor, each have provided full and unconditional guarantees of the obligations of Medtronic, Inc., a wholly-owned subsidiary issuer, under the Senior Notes (Medtronic Senior Notes) and full and unconditional guarantees of the obligations of Covidien International Finance S.A. (CIFSA), a wholly-owned subsidiary issuer, under the Senior Notes (CIFSA Senior Notes). The guarantees of the CIFSA Senior Notes are in addition to the guarantees of the CIFSA Senior Notes by Covidien Ltd. and Covidien Group Holdings Ltd., both of which are wholly-owned subsidiary guarantors of the CIFSA Senior Notes. Medtronic plc and Medtronic, Inc. each have provided a full and unconditional guarantee of the obligations of Medtronic Luxco under the Senior Notes (Medtronic Luxco Senior Notes). The following is a summary of these guarantees:

Guarantees of Medtronic Senior Notes

Parent Company Guarantor – Medtronic plc
Subsidiary Issuer – Medtronic, Inc.
Subsidiary Guarantor – Medtronic Luxco

Guarantees of Medtronic Luxco Senior Notes

Parent Company Guarantor – Medtronic plc
Subsidiary Issuer – Medtronic Luxco
Subsidiary Guarantor – Medtronic, Inc.

Guarantees of CIFSA Senior Notes

Parent Company Guarantor – Medtronic plc
Subsidiary Issuer – CIFSA
Subsidiary Guarantors – Medtronic Luxco, Covidien Ltd., and Covidien Group Holdings Ltd. (CIFSA Subsidiary Guarantors)

The following tables present summarized results of operations for the six months ended October 29, 2021 and summarized balance sheet information at October 29, 2021 and April 30, 2021 for the obligor groups of Medtronic and Medtronic Luxco Senior Notes, and CIFSA Senior Notes. The obligor group consists of the parent company guarantor, subsidiary issuer, and subsidiary guarantors for the applicable senior notes. The summarized financial information is presented after elimination of (i) intercompany transactions and balances among the guarantors and issuers and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor or issuer.

The summarized results of operations information for the six months ended October 29, 2021 was as follows:


(in millions)	Medtronic & Medtronic Luxco Senior Notes (1)		CIFSA Senior Notes (2)
Net sales	$	1,004	$	—
Operating profit (loss)	247		18
Loss before income taxes	(234)		(435)
Net loss attributable to Medtronic	(221)		(469)

The summarized balance sheet information at October 29, 2021 was as follows:


(in millions)	Medtronic & Medtronic Luxco Senior Notes (1)		CIFSA Senior Notes (2)
Total current assets(3)	$	18,890	$	7,094
Total noncurrent assets(4)	11,706		8,165
Total current liabilities(5)	28,108		17,322
Total noncurrent liabilities(6)	56,095		65,103
Noncontrolling interests	168		168

(1)The Medtronic Senior Notes and Medtronic Luxco Senior Notes obligor group consists of the following entities: Medtronic plc, Medtronic Luxco, and Medtronic, Inc. Refer to the guarantee summary above for further details.

(2)The CIFSA Senior Notes obligor group consists of the following entities: Medtronic plc, Medtronic Luxco, CIFSA, and CIFSA Subsidiary Guarantors. Refer to the guarantee summary above for further details.

(3)Includes receivables due from non-guarantor subsidiaries of $18.2 billion and $6.9 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.

(4)Includes loans receivable due from non-guarantor subsidiaries of $6.5 billion and $8.1 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.

(5)Includes payables due to non-guarantor subsidiaries of $26.4 billion and $17.2 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.

(6)Includes loans payable due to non-guarantor subsidiaries of $29.1 billion and $46.0 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.

The summarized balance sheet information at April 30, 2021 was as follows:


(in millions)	Medtronic & Medtronic Luxco Senior Notes (1)		CIFSA Senior Notes (2)
Total current assets(3)	$	21,901	$	9,038
Total noncurrent assets(4)	11,597		8,041
Total current liabilities(5)	28,484		17,413
Total noncurrent liabilities(6)	56,772		63,328
Noncontrolling interests	174		174

(3)Includes receivables due from non-guarantor subsidiaries of $21.4 billion and $9.0 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.

(4)Includes loans receivable due from non-guarantor subsidiaries of $6.5 billion and $8.0 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.

(5)Includes payables due to non-guarantor subsidiaries of $26.4 billion and $17.3 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.

(6)Includes loans payable due to non-guarantor subsidiaries of $29.0 billion and $43.5 billion for Medtronic & Medtronic Luxco Senior Notes, and CIFSA Senior Notes, respectively.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and other written reports and oral statements made by or with the approval of one of the Company’s executive officers from time to time, may include “forward-looking” statements. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans, objectives of management for future operations and current expectations or forecasts of future results, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Our forward-looking statements may include statements related to our growth and growth strategies, developments in the markets for our products, therapies and services, financial results, product development launches and effectiveness, research and development strategy, regulatory approvals, competitive strengths, the potential or anticipated direct or indirect impact of COVID-19 on our business, results of operations, and/or financial condition, restructuring and cost-saving initiatives, intellectual property rights, litigation and tax matters, governmental proceedings and investigations, mergers and acquisitions, divestitures, market acceptance of our products, therapies and services, accounting estimates, financing activities, ongoing contractual obligations, working capital adequacy, value of our investments, our effective tax rate, our expected returns to shareholders, and sales efforts. In some cases, such statements may be identified by the use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “looking ahead,” “may,” “plan,” “possible,” “potential,” “project,” “should,” “will,” and similar words or expressions. Forward-looking statements in this Quarterly Report include, but are not limited to, statements regarding our ability to drive long-term shareholder value, development and future launches of products and continued or future acceptance of products, therapies and services in our segments; expected timing for completion of research studies relating to our products; market positioning and performance of our products, including stabilization of certain product markets; divestitures and the potential benefits thereof; the costs and benefits of integrating previous acquisitions; anticipated timing for United States (U.S.) Food and Drug Administration (U.S. FDA) and non-U.S. regulatory approval of new products; increased presence in new markets, including markets outside the U.S.; changes in the market and our market share; acquisitions and investment initiatives, as well as integration of acquired companies into our operations; the resolution of tax matters; the effectiveness of our development activities in reducing patient care costs and hospital stay lengths; our approach towards cost containment; our expectations regarding healthcare costs, including potential changes to reimbursement policies and pricing pressures; our expectations regarding changes to patient standards of care; our ability to identify and maintain successful business partnerships; the elimination of certain positions or costs related to restructuring initiatives; outcomes in our litigation matters and governmental proceedings and investigations; general economic conditions; the adequacy of available working capital and our working capital needs; our payment of dividends and redemption of shares; the continued strength of our balance sheet and liquidity; our accounts receivable exposure; and the potential impact of our compliance with governmental regulations and accounting guidance.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, results of operations, and/or cash flows. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking

statements as predictions of future events. One must carefully consider forward-looking statements and understand that such forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, and involve a variety of risks and uncertainties, known and unknown, including, among others, those discussed in the sections entitled “Government Regulation” within “Item 1. Business” and “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as well as those related to:

the COVID-19 pandemic, including new COVID-19 variants that may emerge from time to time, as well as potential impacts of the pandemic on healthcare staffing levels;
competition in the medical device industry;
reduction or interruption in our supply;
laws and governmental regulations;
quality problems;
liquidity shortfalls;
decreasing prices and pricing pressure;
fluctuations in currency exchange rates;
changes in applicable tax rates;
positions taken by taxing authorities;
adverse regulatory action;
delays in regulatory approvals;
litigation results;
self-insurance;
commercial insurance;
healthcare policy changes;
international operations;
cybersecurity incidents;
failure to complete or achieve the intended benefits of acquisitions or divestitures; or
disruption of our current plans and operations.

Consequently, no forward-looking statement may be guaranteed, and actual results may vary materially from those projected in the forward-looking statements. We intend to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding our forward-looking statements and are including this sentence for the express purpose of enabling us to use the protections of the safe harbor with respect to all forward-looking statements. While we may elect to update these forward-looking statements at some point in the future, whether as a result of any new information, future events, or otherwise, we have no current intention of doing so except to the extent required by applicable law.

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