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12/1/2023 By: Breyonna Hall, Eduard Hernandez, Emmanuel Johnson, Jacob Kutchey, Deborah Lockley Medtronic - Case Study 3 FINC 460 - 7380

Abstract This case study identifies how Medtronic uses financial and economic strategies by analyzing the company's financial reports and ratios. As a group, we have reviewed Medtronic's financial and stock performances to measure how their performance affects multiple company factors such as currency, tax, and exposure analysis. Our results have shown that Medtronic is driven by building businesses across geographies, innovation, and execution and fundamentally improving the company's organic revenue. This report will provide the study's results and recommend how Medtronic can grow as the world's number-one medical device company. Introduction Medtronic is the number-one company producing medical devices, with more than $30 billion in revenue. Medtronic operates in over 150 countries. Medtronic has four principal subsidiaries in different healthcare segments, focusing on cardiovascular, diabetes, medical- surgical, and neuroscience (Medtronic, 2023). Their most significant revenue comes from cardiovascular at 37.06%, neuroscience at 28.69%, and medical-surgical subsidiary at 27.01% (Figure 1). This report evaluates Medtronic's financial performance in those segments and is based on the fiscal year ending in April 2021, 2022, and 2023. The financials show that the company is strong despite a slight downturn in 2022. The company's strategy is to use investments to fund the operations versus reinvesting from net income to continue its growth pattern. Financial and Economic Strategies Advice Medtronic should comprehensively analyze its operational and investment strategies to enhance ROE and ROI. Identifying the root causes of the decline and implementing targeted measures to improve efficiency, reduce costs, and optimize resource allocation will be essential.

Management attention should be directed toward identifying opportunities for process improvements and innovation that could positively impact these vital financial metrics. ROE has seen a drop of 3%, and the ROI has dropped 2% just over the last year. Before that, neither the ROI nor ROE had seen growth in the previous three years. The increase in the debt-to-equity ratio from 0.73 in 2022 to 0.76 in 2023, while modest, indicates a higher level of leverage. Medtronic must balance leveraging resources for growth and managing financial risk. A careful review of debt management strategies is recommended, exploring options for refinancing or restructuring debt to ensure it aligns with the company's overall financial objectives. This approach will help maintain financial stability while supporting future expansion plans. Financial and stock Performance advice Despite its status as a large-cap and well-established company, Medtronic faces areas for potential improvement and strategic enhancements. According to Graph 1, the decline in stock price from its 52-week high of $92.02 to the current $79.51 suggests the possible need for proactive communication and transparency with investors. The company should provide a detailed analysis of the factors contributing to this decline, addressing concerns and outlining strategies to regain momentum. Clear guidance on future financial performance and growth plans can significantly enhance investor confidence and attract potential shareholders. According to Graph 2, the company's all-time high stock price of $135 in 2021 indicates past success, but the drop in $50 from that high and performance suggests the importance of adapting to changing market dynamics. Medtronic could focus on technological innovation, expanding its product portfolio, and investing in research and development to stay at the forefront of the rapidly evolving medical industry. This proactive approach can maintain a competitive position and attract investors seeking exposure to cutting-edge advancements. Multiple sites, such as Yahoo

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Finance, consider Medtronic to be overvalued right now, which is a cause of concern since the stock is down $13 from the 52-week high and down $50 from the all-time high (Yahoo Finance, 2023). Communication and a clear path must be identified to support the investors and the company. Country Analysis: The evaluation of Medtronic's macroeconomic environment through the Pestle Analysis tool revealed that the main factors that affect the company are politics, the economy, and legal issues. Medtronic operates in a highly regulated industry, subject to evolving healthcare policies and standards across multiple jurisdictions. Medtronic must become engaged in the politics in the countries where they do business to help learn the procedure and the policymakers. This will help mitigate the company's political risk because it will establish a presence in that country, and the company may be able to influence which policies are enacted or at least be aware sooner of what procedures will be passed. Lawsuits have plagued Medtronic in the last ten years. They have paid out more than $500M. Medtronic has written policies to cover principles and ethics, global anti-bribery and corruption, and international business conduct standards policy, to name a few. Despite the different approaches, the company still faces lawsuits due to employee misconduct or failure of a medical device. It's recommended that Medtronic strengthen the Quality Management process to reduce the number of lawsuits. This would include making sure that the same "process, information, methods, skills and controls" (Ideagen.com, 2019) are being adhered to and followed consistently at all levels. Exposure and Hedging Analysis The senior director of treasury, Tim Husnik, clarifies that Medtronic engages in hedging activities to mitigate risk to its balance sheet when a legal entity holds a balance—monetary

assets minus liabilities—in a currency different from its functional currency (Waters, 2022). Such exposure arises when a European legal entity has balances denominated in Swiss francs. When the credits in each currency are substantial, the consideration of utilizing derivatives for hedging comes into play. The overall budget for this initiative is approximately $5 billion (Waters, 2022). The introduction of automation in this hedging process relieved treasurers who manually entered data from their hedging concerns. As part of this enhancement, a treasury services provider was enlisted to create a code that mandated treasurers to upload data onto the F.X. platform after it compiled all F.X. exposure data within thirty minutes (Karwal, 2022). This eliminated the need for the thirty hours of labor-intensive manual work previously required. Currency Analysis Medtronic faced challenges in its fiscal year 2023, with adverse macroeconomic effects and currency fluctuations impacting its financial performance. The use of non-GAAP measures and the suggestion of employing financial derivations demonstrate the company's efforts to manage and navigate these challenges. The reaction of investors, reflected in the decline in stock prices, indicates the significance of such financial developments in influencing market sentiment. Despite the downturn in stock prices, Medtronic has a proven track record in returning capital to its shareholders, including $4.0 billion in the 2023 fiscal year. It is still the company's goal to give back to shareholders at least half of its free cash flow, mainly in the form of dividends and, to a lesser degree, share repurchases. To stockholders of record as of June 23, 2023, at the close of business, the dividend is payable on July 14, 2023 (Trefis Team, 2023). Tax Analysis Medtronic has had issues with transfer pricing as they've tried to find solutions for profit- shifting and low-tax income globally. The problem starts with the separateness for tax purposes

of the U.S. parent corporation operations, which were to be separate from controlled foreign corporations (Yonah, 2022). Medtronic licensed its intellectual property to its subsidiary Medtronic Puerto Rico Operations Co. at a low royalty rate because they ensured maintaining market share quality control in the medical device industry. The IRS refused Medtronic's claims, stating that its I.P. receives most of its gains from where it was initiated. A corporate AMT appears to be the best option as it includes all income from controlled foreign corporations at the same rate and ignores its separateness. Industry and Competitor Analysis Medtronic is the 2 nd biggest company, trailing behind Johnson & Johnson but leading in front of Boston Scientific. Although they are similar companies, they are very different. Johnson & Johnson had their foot in many products and services and didn't have a main thing they focused on. Medtronic only focuses on healthcare technologies, while Johnson & Johnson researches, develops, manufactures, and sells various products in the healthcare field. Johnson and Johnson had many ways to generate revenue, and Medtronic can still compete with them. We recommend sticking to developments in healthcare technologies and therapies since that is what they are known for. When you compare Medtronic to Johnson & Johnson in valuation, they are relatively in the same ballpark. By not expanding into other areas, we focus on producing quality products and services in somewhat different quantities. Medtronic is ranked #1 in medical device companies with more than $30B in revenue. Medtronic has subsidiaries in different countries and different segments in healthcare, focusing on cardiovascular, diabetes, medical-surgical, and the neuroscience field (Medtronic,2023). Medtronic's presence is in over 150 countries. Their most significant revenue comes from cardiovascular at 37.06%, neuroscience at 28.69%, and medical-surgical subsidiary at 27.01% (Graph 4).

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Conclusion To conclude this study, Medtronic's sole purpose is to provide biomedical engineering to human welfare to alleviate pain, restore health, and potentially extend life. Medtronic continues to earn revenue from its operations but finds itself in legal trouble, looking to stay within regulations and operating overseas financially. A testament to Medtronic's explorations, we now have devices such as battery-powered and miniature pacemakers, which are revolutionary. As long as their innovation and execution continue, healthcare can do more for humankind.

Balance Sheet (via Medtronic.com): Income Statement (via Medtronic.com):

Cash Flow (via Medtronic.com): Table 1: Excel sheet of Medtronic's Financials. Source: Medtronic 10k Report. umgc Table 2: Excel sheet of Medtronic's Financials. Source: Medtronic 10k Report . Graph 1: Overview of Medtronic's stock. Source: Yahoo Finance.

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Graph 2: Medtronic's all-time high. Source: Yahoo Finance. Graph 3: Medtronic's versus their competitors

Valuation Estimated Revenue Cost of Goods Gross Profit Net Income 0 50 100 150 200 250 300 350 400 Top companies in healthcare field Johnson & Johnson Medtronic Boston Scientific Graph 4: Pie chart of Medtronic's Revenue and Operating profits by segment.

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Reference: MDT - 10k Report. (n.d.). https://filecache.investorroom.com/mr5ir_medtronic/636/MDT%20- %204.28.2023%2010K%20-%20Final.pdf Yahoo! (2023, December 1). Medtronic Plc (MDT) stock price, news, Quote & History . Yahoo! Finance. https://finance.yahoo.com/quote/MDT/?fr=sycsrp_catchall Peterdy, K.(2023) PESTEL Analysis -A framework to assess political, economic, social, technological, environmental and legal factors. Corporate Finance Institute. Retrieved from https://corporatefinanceinstitute.com/resources/management/pestel-analysis/ Pavlovic, A.(2019, August 21). What is the purpose of a quality management system? .Ideagen.com. Retrieved from https://www.ideagen.com/thought-leadership/blog/what-is-the-purpose-of-a-quality- management-system Karwal, A. (2022, August 9). Retrieved from https://www.eurofinance.com/news/medtronics- journey-to-an-automated-fx-hedging-process/ Waters, M. (2022, December 14). ALM Treasury & Risk . Retrieved from https://www.treasuryandrisk.com/2022/12/14/restoring-health-to-an-ailing-balance-sheet- hedging-program/?slreturn=20231026000120 Trefis Team. (2023, May 31). Retrieved from https://news.medtronic.com/2023-05-25- Medtronic-reports-full-year-and-fourth-quarter-fiscal-2023-financial-results-announces- dividend-increase

Yonah, R. S. (2022, September 5). Medtronic II and the profit-shifting problem: Tax notes . Tax News, Tax Articles and Information - Tax Notes. https://www.taxnotes.com/featured- analysis/medtronic-ii-and-profit-shifting-problem/2022/09/02/7f1df Craft. (2023, Nov 30). Medtronic Competitors and Similar Companies. Retrieved from Craft: https://craft.co/medtronic/competitors