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Medtronic plc - Quarter Report: 2017 July (Form 10-Q)



 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 28, 2017
Commission File Number 001-36820
mdtlogo2a14.jpg®
MEDTRONIC PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
 
 
Ireland
98-1183488
(State of incorporation)
(I.R.S. Employer
Identification No.)
20 On Hatch, Lower Hatch Street
Dublin 2, Ireland
(Address of principal executive offices) (Zip Code)
+353 1 438-1700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Emerging growth company o
Non-accelerated filer o
 
Smaller Reporting Company o
 
 

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 1(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of August 29, 2017, 1,354,591,435 ordinary shares, par value $0.0001, and 1,872 A preferred shares, par value $1.00, of the registrant were outstanding.
 
 





TABLE OF CONTENTS
Item
 
Description
 
Page
 
 
 
 
 
 
 
 
 
1.
 
 
2.
 
 
3.
 
 
4.
 
 
 
 
 
 
1.
 
 
2.
 
 
6.
 
 
 
 
 




PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Medtronic plc
Consolidated Statements of Income
(Unaudited)
 
Three months ended
(in millions, except per share data)
July 28, 2017
 
July 29, 2016
Net sales
$
7,390

 
$
7,166

 
 
 
 
Costs and expenses:
 

 
 

Cost of products sold
2,349

 
2,261

Research and development expense
548

 
556

Selling, general, and administrative expense
2,485

 
2,428

Restructuring charges, net
8

 
94

Certain litigation charges

 
82

Acquisition-related items
44

 
52

Divestiture-related items
47

 

Amortization of intangible assets
454

 
487

Other expense, net
66

 
39

Operating profit
1,389

 
1,167

 
 
 
 
Interest income
(92
)
 
(93
)
Interest expense
286

 
272

Interest expense, net
194

 
179

Income before provision for income taxes
1,195

 
988

Provision for income taxes
186

 
59

Net income
1,009

 
929

Net loss attributable to noncontrolling interests
7

 

Net income attributable to Medtronic
$
1,016

 
$
929

 
 
 
 
Basic earnings per share
$
0.75

 
$
0.67

 
 
 
 
Diluted earnings per share
$
0.74

 
$
0.66

 
 
 
 
Basic weighted average shares outstanding
1,361.9

 
1,392.2

 
 
 
 
Diluted weighted average shares outstanding
1,375.6

 
1,407.1

 
 
 
 
Cash dividends declared per ordinary share
$
0.46

 
$
0.43

The accompanying notes are an integral part of these consolidated financial statements.

1



Medtronic plc
Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
Net income
$
1,009

 
$
929

 
 
 
 
Other comprehensive income (loss), net of tax:
 

 
 

Unrealized gain on available-for-sale securities
30

 
115

Translation adjustment
831

 
(350
)
Net change in retirement obligations
(1
)
 
25

Unrealized (loss) gain on derivatives
(171
)
 
54

Other comprehensive income (loss)
689

 
(156
)
Comprehensive income including noncontrolling interests
1,698

 
773

Comprehensive loss attributable to noncontrolling interests
7

 

Comprehensive income attributable to Medtronic
$
1,705

 
$
773

The accompanying notes are an integral part of these consolidated financial statements.

2



Medtronic plc
Consolidated Balance Sheets
(Unaudited)
(in millions)
July 28, 2017
 
April 28, 2017
ASSETS
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
4,691

 
$
4,967

Investments
8,397

 
8,741

Accounts receivable, less allowances of $168 and $155, respectively
5,784

 
5,591

Inventories, net
3,538

 
3,338

Other current assets
2,000

 
1,865

Current assets held for sale
369

 
371

Total current assets
24,779

 
24,873

 
 
 
 
Property, plant, and equipment
9,890

 
9,691

Accumulated depreciation
(5,503
)
 
(5,330
)
Property, plant, and equipment, net
4,387

 
4,361

Goodwill
39,196

 
38,515

Other intangible assets, net
23,006

 
23,407

Tax assets
1,598

 
1,509

Other assets
1,284

 
1,232

Noncurrent assets held for sale
6,000

 
5,919

Total assets
$
100,250

 
$
99,816

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Current debt obligations
$
8,058

 
$
7,520

Accounts payable
1,759

 
1,731

Accrued compensation
1,304

 
1,860

Accrued income taxes
717

 
633

Other accrued expenses
3,251

 
2,442

Current liabilities held for sale
59

 
34

Total current liabilities
15,148

 
14,220

 
 
 
 
Long-term debt
25,953

 
25,921

Accrued compensation and retirement benefits
1,663

 
1,641

Accrued income taxes
2,170

 
2,405

Deferred tax liabilities
2,610

 
2,978

Other liabilities
1,026

 
1,515

Noncurrent liabilities held for sale
893

 
720

Total liabilities
49,463

 
49,400

 
 
 
 
Commitments and contingencies (Notes 3 and 16)

 

 
 
 
 
Shareholders’ equity:
 

 
 

Ordinary shares— par value $0.0001

 

Additional paid-in capital
28,553

 
29,551

Retained earnings
24,043

 
23,356

Accumulated other comprehensive loss
(1,924
)
 
(2,613
)
Total shareholders’ equity
50,672

 
50,294

Noncontrolling interests
115

 
122

Total equity
50,787

 
50,416

Total liabilities and equity
$
100,250

 
$
99,816

The accompanying notes are an integral part of these consolidated financial statements.

3



Medtronic plc
Consolidated Statements of Cash Flows
(Unaudited)
 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
Operating Activities:
 

 
 

Net income
$
1,009

 
$
929

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
636

 
737

Amortization of debt premium, discount, and issuance costs
(10
)
 
7

Acquisition-related items
(1
)
 
(5
)
Provision for doubtful accounts
10

 
9

Deferred income taxes
58

 
32

Stock-based compensation
92

 
79

Other, net
6

 
(85
)
Change in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable, net
(88
)
 
196

Inventories, net
(164
)
 
(101
)
Accounts payable and accrued liabilities
(392
)
 
(298
)
Other operating assets and liabilities
(419
)
 
50

Net cash provided by operating activities
737

 
1,550

Investing Activities:
 

 
 

Acquisitions, net of cash acquired

 
(12
)
Additions to property, plant, and equipment
(278
)
 
(330
)
Purchases of investments
(615
)
 
(1,044
)
Sales and maturities of investments
971

 
1,104

Other investing activities, net
5

 
(2
)
Net cash provided by (used in) investing activities
83

 
(284
)
Financing Activities:
 

 
 

Acquisition-related contingent consideration
(3
)
 
(11
)
Change in current debt obligations, net
569

 
926

Issuance of long-term debt
18

 
33

Payments on long-term debt
(8
)
 
(17
)
Dividends to shareholders
(625
)
 
(599
)
Issuance of ordinary shares
143

 
214

Repurchase of ordinary shares
(1,233
)
 
(1,763
)
Other financing activities
(2
)
 
57

Net cash used in financing activities
(1,141
)
 
(1,160
)
Effect of exchange rate changes on cash and cash equivalents
45

 
78

Net change in cash and cash equivalents
(276
)
 
184

Cash and cash equivalents at beginning of period
4,967

 
2,876

Cash and cash equivalents at end of period
$
4,691

 
$
3,060

Supplemental Cash Flow Information
 

 
 

Cash paid for:
 

 
 

Income taxes
$
417

 
$
115

Interest
68

 
68


The accompanying notes are an integral part of these consolidated financial statements.

4

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)



1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.) (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, comprehensive income, financial condition, and cash flows in conformity with U.S. GAAP. In the opinion of management, the consolidated financial statements reflect all adjustments considered necessary for a fair statement of the results of Medtronic plc and its subsidiaries (Medtronic plc, Medtronic, or the Company) for the periods presented. Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.
Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 28, 2017.
The accompanying unaudited consolidated financial statements include the accounts of Medtronic plc, its wholly-owned subsidiaries, entities for which the Company has a controlling financial interest, and variable interest entities for which the Company is the primary beneficiary. Intercompany transactions and balances have been fully eliminated in consolidation.
The Company’s fiscal years 2018, 2017, and 2016 will end or ended on April 27, 2018, April 28, 2017, and April 29, 2016, respectively.
2. New Accounting Pronouncements
Recently Adopted
In March 2016, the Financial Accounting Standards Board (FASB) issued guidance to simplify the accounting for share-based payment transactions by requiring all excess tax benefits and deficiencies to be recognized in income tax expense or benefit in earnings; eliminating the requirement to classify the excess tax benefits and deficiencies as additional paid-in capital. Cash flows related to excess tax benefits are to be classified in operating activities in the statement of cash flows rather than financing. Under the new guidance, an entity makes an accounting policy election to either estimate the expected forfeiture awards or account for forfeitures as they occur. The standard also allows an entity to withhold up to the maximum statutory tax rate and classify the awards as equity. The Company prospectively adopted this guidance in the first quarter of fiscal year 2018. The Company has elected to continue to estimate forfeitures. The adoption of this guidance resulted in no cumulative adjustment to retained earnings and increases of $24 million to net income and $0.02 to diluted earnings per share for the three months ended July 28, 2017.
In October 2016, the FASB issued guidance that requires the tax effect of intra-entity transactions, other than sales of inventory, to be recognized when the transaction occurs. Previously, U.S. GAAP prohibited the recognition of current and deferred income taxes associated with an intra-entity asset transfer until an asset had been sold to a third-party. This update requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, such as equipment or intangibles, when the transfer occurs. The adoption of this pronouncement is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company has early adopted this guidance, as permitted, in the first quarter of fiscal year 2018. As a result of this adoption, the Company increased its beginning retained earnings by $296 million. The adoption of this guidance also resulted in decreases of $25 million to net income and $0.02 to diluted earnings per share for the three months ended July 28, 2017.
Not Yet Adopted
In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue in an amount that reflects the consideration to which an entity expects to be entitled in exchange for the transfer of goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2019, and may be applied either retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of the change recognized at the date of initial application (modified retrospective method). The Company intends to adopt this guidance under the modified retrospective method. Based

5

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


on the Company's evaluation performed of the amended revenue recognition guidance to date, the Company does not expect the adoption of the amended guidance to have a material impact on the Company's consolidated financial statements. The Company is continuing to evaluate the impact of the amended guidance, including the new disclosure requirements. Additionally, the Company will continue to monitor any modifications, clarifications, and interpretations communicated by the FASB that may impact its conclusions.
In January 2016, the FASB issued guidance which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The guidance also includes a simplified impairment assessment of equity investments without readily determinable fair values and presentation and disclosure changes. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2019. The Company is unable to estimate the impact of the future adoption of this guidance on its financial statements as it will depend on the equity investments at the adoption date.
In February 2016, the FASB issued guidance which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is evaluating the impact of the lease guidance on the Company's consolidated financial statements and anticipates recording additional assets and corresponding liabilities on its consolidated balance sheets related to operating leases within its lease portfolio upon adoption of the guidance.
In January 2017, the FASB issued guidance which simplifies the accounting for goodwill impairment. The guidance requires a goodwill impairment to be measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The accounting guidance is required for the Company to adopt beginning in the first quarter of fiscal year 2021. Early adoption is permitted, and the guidance should be applied prospectively. The impact of the new guidance will be dependent on the specific facts and circumstances of future impairments, if any.
3. Acquisitions and Acquisition-Related Items
HeartWare International, Inc.
On August 23, 2016, the Company's Cardiac and Vascular Group acquired HeartWare International, Inc. (HeartWare), a medical device company that develops and manufactures miniaturized implantable heart pumps, or ventricular assist devices, to treat patients around the world suffering from advanced heart failure. Total consideration for the transaction was approximately $1.1 billion. The Company accounted for the acquisition as a business combination using the acquisition method of accounting. In accordance with authoritative guidance on business combination accounting, the assets and liabilities of the business acquired are recorded and consolidated on the acquisition date at their respective fair values. Goodwill resulting from the business combination is largely attributable to future yet to be defined technologies, new customer relationships, existing workforce of the acquired business, and post-acquisition synergies. The results of operations of the acquired business have been included in the Company’s consolidated statements of income since the date the business was acquired.

The Company acquired $602 million of technology-based and customer-related intangible assets and $23 million of tradenames, with estimated useful lives of 15 and 5 years, respectively, and $481 million of goodwill. The acquired goodwill is not deductible for tax purposes. In addition, the Company acquired $245 million of debt through the acquisition, of which the Company redeemed $203 million as part of a cash tender offer in August 2016 and the remaining $42 million of debt acquired is due December 2017. During the measurement period, which ended on August 22, 2017, adjustments were made to finalize the allocation of purchase price related to other assets, goodwill, and contingent liabilities.

6

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The acquisition date fair values of the assets and liabilities acquired are as follows:
(in millions)
HeartWare International, Inc.
Other current assets
$
351

Property, plant, and equipment
14

Other intangible assets
625

Goodwill
481

Other assets
84

Total assets acquired
1,555

 
 
Current liabilities
143

Deferred tax liabilities
6

Long-term debt
245

Other liabilities
89

Total liabilities assumed
483

Net assets acquired
$
1,072

For additional information on the Company's fiscal year 2017 acquisitions, refer to Note 2 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 2017.
Acquisition-Related Items
During the three months ended July 28, 2017, the Company recognized acquisition-related items expense of $53 million, including $9 million recognized within cost of products sold in the consolidated statements of income. Acquisition-related items expense includes $46 million of costs associated with the integration of Covidien manufacturing, distribution, and administrative facilities as well as information technology system implementation, benefits harmonization, and accelerated and incremental stock compensation expense. Acquisition-related items expense also includes changes in the fair value of contingent consideration as a result of revised revenue forecasts and the timing of anticipated regulatory payments.
During the three months ended July 29, 2016, the Company recognized acquisition-related items expense of $52 million, including $44 million of costs associated with the integration of Covidien manufacturing, distribution, and administrative facilities as well as information technology system implementation and benefits harmonization, and $8 million of accelerated and incremental stock compensation expense.

7

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Contingent Consideration

Certain of the Company’s business combinations involve potential payments of future consideration that is contingent upon the achievement of certain product development milestones and/or contingent on the acquired business reaching certain performance milestones. A liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period using Level 3 inputs, and the change in fair value is recognized within acquisition-related items in the consolidated statements of income. Contingent consideration payments related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows. Amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.
The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues (for revenue-based considerations). Projected revenues are based on the Company's most recent internal operational budgets and long-range strategic plans. Changes in projected revenues, probabilities of payment, discount rates, and projected payment dates may result in adjustments to the fair value measurement. The recurring Level 3 fair value measurements of contingent consideration include the following significant unobservable inputs:
 
 
Fair Value at
 
 
 
 
 
 
(in millions)
 
July 28, 2017
 
Valuation Technique
 
Unobservable Input
 
Range
 
 
 
 
 
 
Discount rate
 
11% - 32.5%
Revenue-based payments
 
$103
 
Discounted cash flow
 
Probability of payment
 
30% - 100%
 
 
 
 
 
 
Projected fiscal year of payment
 
2018 - 2026
 
 
 
 
 
 
Discount rate
 
0.3% - 5.5%
Product development-based payments
 
$139
 
Discounted cash flow
 
Probability of payment
 
75% - 100%
 
 
 
 
 
 
Projected fiscal year of payment
 
2018 - 2025
The fair value of contingent consideration at July 28, 2017 and April 28, 2017 was $242 million and $246 million, respectively. At July 28, 2017, $173 million was reflected in other liabilities and $69 million was reflected in other accrued expenses in the consolidated balance sheets. At April 28, 2017, $180 million was reflected in other liabilities and $66 million was reflected in other accrued expenses in the consolidated balance sheets.
The following table provides a reconciliation of the beginning and ending balances of contingent consideration:
 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
Beginning Balance
$
246

 
$
377

Purchase price contingent consideration

 
21

Payments
(3
)
 
(14
)
Change in fair value
(1
)
 
(5
)
Ending Balance
$
242

 
$
379

4. Assets and Liabilities Held for Sale
In April 2017, the Company entered into a definitive agreement for the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses within the Minimally Invasive Therapies Group segment. As a result, the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses met the criteria to be classified as held for sale at April 28, 2017 and July 28, 2017, which requires the Company to present the related assets and liabilities as separate line items in the consolidated balance sheets.

8

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following table presents information related to the assets and liabilities that were classified as held for sale in the consolidated balance sheets:
(in millions)
July 28, 2017
 
April 28, 2017
Inventories, net
$
369

 
$
371

Property, plant, and equipment, net
710

 
689

Goodwill
2,971

 
2,910

Other intangible assets, net
2,319

 
2,320

Total assets held for sale
$
6,369

 
$
6,290

 
 
 
 
Other accrued expenses
$
59

 
$
34

Accrued compensation and retirement benefits
12

 
12

Deferred tax liabilities
880

 
707

Other liabilities
1

 
1

Total liabilities held for sale
$
952

 
$
754

The Company determined that the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses does not meet the criteria to be classified as discontinued operations. The divestiture was completed on July 29, 2017, subsequent to the end of the first quarter of fiscal 2018. See Note 19 to the consolidated financial statements for additional information regarding the completion of the divestiture.
Divestiture-Related Items
Divestiture-related items includes expenses incurred in connection with the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses. During the three months ended July 28, 2017, the Company recognized divestiture-related items expense of $47 million, including $22 million of legal and advisory services and $16 million of accelerated stock compensation expense. There were no divestiture-related items expenses for the three months ended July 29, 2016.
5. Restructuring Charges
Cost Synergies Initiative
The cost synergies initiative is the Company's restructuring program primarily related to the integration of Covidien. This initiative contributes to the approximately $850 million in cost synergies expected to be achieved as a result of the integration of the Covidien acquisition through fiscal year 2018, including administrative office optimization, manufacturing and supply chain infrastructure, certain program cancellations, and reduction of general and administrative redundancies. Restructuring charges are primarily related to employee termination costs and costs related to manufacturing and facility closures and affect all reportable segments. Cash outlays for the cost synergies initiative restructuring program are scheduled to be substantially complete by the end of fiscal year 2019.

A summary of the restructuring accrual, recorded within other accrued expenses and other liabilities in the consolidated balance sheets, and related activity is presented below:
(in millions)
Employee Termination Costs
 
Other Costs
 
Total
April 28, 2017
$
261

 
$
30

 
$
291

Charges
12

 
7

 
19

Cash payments
(38
)
 
(10
)
 
(48
)
Accrual adjustments
(6
)
 
1

 
(5
)
July 28, 2017
$
229

 
$
28

 
$
257

For the three months ended July 28, 2017, the Company recognized $19 million in charges, which were partially offset by accrual adjustments of $5 million. Accrual adjustments relate to certain employees identified for termination finding other positions within the Company, cancellations of employee terminations, and employee termination costs being less than initially estimated. For the

9

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


three months ended July 28, 2017, charges included $5 million recognized within cost of products sold and $1 million recognized within selling, general and administrative expense.
For the three months ended July 29, 2016, the Company recognized $111 million in charges, which were partially offset by accrual adjustments of $7 million. Accrual adjustments primarily relate to certain employees identified for termination finding other positions within the Company. For the three months ended July 29, 2016, charges included $10 million recognized within cost of products sold.
6. Financial Instruments
The Company holds investments such as marketable debt and equity securities that are classified and accounted for as available-for-sale and are remeasured on a recurring basis. The Company also holds cost method, equity method, and other investments which are measured at fair value on a nonrecurring basis. For information regarding the valuation techniques and inputs used in the fair value measurements, refer to Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 2017.

10

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following table summarizes the Company's investments by significant investment category and the related consolidated balance sheet classification at July 28, 2017:
 
Valuation
 
Balance Sheet Classification
(in millions)
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Investments
 
Other Assets
Available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
653

 
$
1

 
$
(4
)
 
$
650

 
$
650

 
$

Marketable equity securities
55

 
48

 
(2
)
 
101

 

 
101

Total Level 1
708

 
49

 
(6
)
 
751

 
650

 
101

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
4,157

 
73

 
(18
)
 
4,212

 
4,212

 

U.S. government and agency securities
854

 

 
(9
)
 
845

 
845

 

Mortgage-backed securities
804

 
9

 
(16
)
 
797

 
797

 

Foreign government and agency securities
49

 

 

 
49

 
49

 

Other asset-backed securities
258

 
1

 
(1
)
 
258

 
258

 

Debt funds
1,246

 
7

 
(158
)
 
1,095

 
1,095

 

Total Level 2
7,368

 
90

 
(202
)
 
7,256

 
7,256

 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
1

 

 

 
1

 

 
1

Auction rate securities
47

 

 
(3
)
 
44

 

 
44

Total Level 3
48

 

 
(3
)
 
45

 

 
45

Investments measured at net asset value(1):
 

 
 

 
 

 
 

 
 
 
 
Debt Funds
497

 

 
(6
)
 
491

 
491

 

Total available-for-sale securities
8,621

 
139

 
(217
)
 
8,543

 
8,397

 
146

Cost method, equity method, and other investments:
 
 
 
 
 
 
 
 
 
 
 
Level 3:
 
 
 
 
 
 
 
 
 
 
 
Cost method, equity method, and other investments
627

 

 

 
N/A

 

 
627

Total Level 3
627

 

 

 
N/A

 

 
627

Total cost method, equity method, and other investments
627

 

 

 
N/A

 

 
627

Total investments
$
9,248

 
$
139

 
$
(217
)
 
$
8,543

 
$
8,397

 
$
773

(1) Certain investments that are measured at the net asset value per share (or its equivalent) as a practical expedient are excluded from the fair value hierarchy. The fair value amounts presented herein are intended to permit reconciliation to the consolidated balance sheets.


11

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following table summarizes the Company's investments by significant investment category and the related consolidated balance sheet classification at April 28, 2017:
 
Valuation
 
Balance Sheet Classification
(in millions)
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Investments
 
Other Assets
Available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
613

 
$
2

 
$
(5
)
 
$
610

 
$
610

 
$

Marketable equity securities
58

 
49

 
(4
)
 
103

 

 
103

Total Level 1
671

 
51

 
(9
)
 
713

 
610

 
103

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
4,643

 
62

 
(23
)
 
4,682

 
4,682

 

U.S. government and agency securities
860

 

 
(10
)
 
850

 
850

 

Mortgage-backed securities
766

 
9

 
(16
)
 
759

 
759

 

Foreign government and agency securities
49

 

 

 
49

 
49

 

Other asset-backed securities
228

 
1

 
(1
)
 
228

 
228

 

Debt funds
1,246

 
4

 
(178
)
 
1,072

 
1,072

 

Total Level 2
7,792

 
76

 
(228
)
 
7,640

 
7,640

 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
1

 

 

 
1

 

 
1

Auction rate securities
47

 

 
(3
)
 
44

 

 
44

Total Level 3
48

 

 
(3
)
 
45

 

 
45

Investments measured at net asset value(1):
 

 
 

 
 

 
 

 
 
 
 
Debt funds
497

 

 
(6
)
 
491

 
491

 

Total available-for-sale securities
9,008

 
127

 
(246
)
 
8,889

 
8,741

 
148

Cost method, equity method, and other investments:
 
 
 
 
 
 
 
 
 
 
 
Level 3:
 
 
 
 
 
 
 
 
 
 
 
Cost method, equity method, and other investments
589

 

 

 
N/A

 

 
589

Total Level 3
589

 

 

 
N/A

 

 
589

Total cost method, equity method, and other investments
589

 

 

 
N/A

 

 
589

Total investments
$
9,597

 
$
127

 
$
(246
)
 
$
8,889

 
$
8,741

 
$
737

(1) Certain investments that are measured at the net asset value per share (or its equivalent) as a practical expedient are excluded from the fair value hierarchy. The fair value amounts presented herein are intended to permit reconciliation to the consolidated balance sheets.


12

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Marketable Debt and Equity Securities
The following tables present the gross unrealized losses and fair values of the Company’s available-for-sale securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category at July 28, 2017 and April 28, 2017:
 
July 28, 2017
 
Less than 12 months
 
More than 12 months
(in millions)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate debt securities
$
927

 
$
(13
)
 
$
47

 
$
(5
)
Auction rate securities

 

 
44

 
(3
)
Mortgage-backed securities
270

 
(3
)
 
92

 
(13
)
U.S. government and agency securities
898

 
(13
)
 

 

Debt funds
188

 
(1
)
 
1,126

 
(163
)
Other asset-backed securities
108

 
(1
)
 

 

Marketable equity securities
1

 
(1
)
 
2

 
(1
)
Total
$
2,392

 
$
(32
)
 
$
1,311

 
$
(185
)
 
April 28, 2017
 
Less than 12 months
 
More than 12 months
(in millions)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate debt securities
$
1,263

 
$
(19
)
 
$
46

 
$
(4
)
Auction rate securities

 

 
44

 
(3
)
Mortgage-backed securities
276

 
(4
)
 
95

 
(12
)
U.S. government and agency securities
896

 
(15
)
 

 

Other asset-backed securities
127

 
(1
)
 

 

Debt funds
173

 
(1
)
 
1,125

 
(183
)
Marketable equity securities
14

 
(3
)
 
2

 
(1
)
Total
$
2,749

 
$
(43
)
 
$
1,312

 
$
(203
)

The following table presents the unobservable inputs utilized in the fair value measurement of the auction rate securities classified as Level 3 at July 28, 2017:

 
Valuation Technique
Unobservable Input
Range (Weighted Average)
Auction rate securities
Discounted cash flow
Years to principal recovery
2 yrs. - 12 yrs. (3 yrs.)
Illiquidity premium
6%
The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1, Level 2, or Level 3 during the three months ended July 28, 2017 and July 29, 2016. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement.

13

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following tables provide a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3):
 
Three months ended July 28, 2017
(in millions)
Total Level 3
Investments
 
Corporate debt
securities
 
Auction rate
securities
April 28, 2017
$
45

 
$
1

 
$
44

Total unrealized gains (losses) included in other comprehensive income

 

 

July 28, 2017
$
45

 
$
1

 
$
44

 
 
 
 
 
 
 
Three months ended July 29, 2016
(in millions)
Total Level 3
Investments
 
Corporate debt
securities
 
Auction rate
securities
April 29, 2016
$
45

 
$
1

 
$
44

Total unrealized gains (losses) included in other comprehensive income

 

 

July 29, 2016
$
45

 
$
1

 
$
44

Activity related to the Company’s investment portfolio is as follows:
 
Three months ended
 
July 28, 2017
 
July 29, 2016
(in millions)
Debt(1)
 
Equity(2)
 
Debt(1)
 
Equity(2)
Proceeds from sales
$
971

 
$

 
$
1,098

 
$
6

Gross realized gains
8

 
7

 
7

 
4

Gross realized losses
(3
)
 

 
(12
)
 

Impairment losses recognized

 

 

 
(3
)
(1)
Includes available-for-sale debt securities.
(2)
Includes marketable equity securities, cost and equity method investments, and other investments.
Credit losses represent the difference between the present value of cash flows expected to be collected on certain mortgage-backed securities and auction rate securities and the amortized cost of these securities. Based on the Company’s assessment of the credit quality of the underlying collateral and credit support available to each of the remaining securities in which the Company is invested, the Company believes it has recognized all necessary other-than-temporary impairments, as the Company does not have the intent to sell, nor is it more likely than not that the Company will be required to sell, before recovery of the amortized cost.
At July 28, 2017 and April 28, 2017, the credit loss portion of other-than-temporary impairments on debt securities was not significant. The total reductions of available-for-sale debt securities sold during the three months ended July 28, 2017 and July 29, 2016 were not significant.
The July 28, 2017 balance of available-for-sale debt securities, excluding debt funds which have no single maturity date, by contractual maturity is shown in the following table. Within the table, maturities of mortgage-backed securities have been allocated based upon timing of estimated cash flows assuming no change in the current interest rate environment. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
(in millions)
July 28, 2017
Due in one year or less
$
888

Due after one year through five years
2,681

Due after five years through ten years
3,203

Due after ten years
84

Total
$
6,856


14

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The Company holds investments in marketable equity securities, which are classified as other assets in the consolidated balance sheets. The aggregate carrying amount of these investments was $101 million and $103 million at July 28, 2017 and April 28, 2017, respectively. The Company did not recognize any significant impairment charges related to marketable equity securities during the three months ended July 28, 2017 and July 29, 2016.
Cost method, equity method, and other investments
The Company holds investments in equity and other securities that are accounted for using the cost or equity method, which are classified as other assets in the consolidated balance sheets. At July 28, 2017 and April 28, 2017, the aggregate carrying amount of equity and other securities without a quoted market price and accounted for using the cost or equity method was $627 million and $589 million, respectively. Cost and equity method investments are measured at fair value on a nonrecurring basis. Changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable are assessed quarterly. If events or changes in circumstances are identified that may have a material adverse effect on the fair value of the investment, the investment is assessed for impairment.
Cost and equity method investments fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value, as the investments are in privately-held entities without quoted market prices. To determine the fair value of these investments, the Company uses all pertinent financial information available related to the entities, including financial statements and market participant valuations from recent and proposed equity offerings. During the three months ended July 28, 2017 and July 29, 2016, the Company did not recognize any significant impairment charges related to cost method investments.
7. Financing Arrangements
Commercial Paper
The Company maintains a commercial paper program that allows the Company to have a maximum of $3.5 billion in commercial paper outstanding. Commercial paper outstanding at July 28, 2017 was $1.5 billion, as compared to $901 million at April 28, 2017. During the three months ended July 28, 2017, the weighted average original maturity of the commercial paper outstanding was approximately 32 days, and the weighted average interest rate was 1.22 percent. The issuance of commercial paper reduces the amount of credit available under the Company’s existing Credit Facility, as defined below.
Line of Credit
The Company has a $3.5 billion five year revolving syndicated line of credit facility (Credit Facility) which provides back-up funding for the commercial paper program described above. At July 28, 2017 and April 28, 2017, no amounts were outstanding.
Interest rates on advances on the Credit Facility are determined by a pricing matrix, based on the Company’s long-term debt ratings, assigned by Standard & Poor’s Ratings Services and Moody’s Investors Service. Facility fees are payable on the Credit Facility and are determined in the same manner as the interest rates. The agreements also contain customary covenants, all of which the Company remained in compliance with at July 28, 2017.

15

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Debt Obligations
The Company's debt obligations consisted of the following:
(in millions, except interest rates)
 
Maturity by
Fiscal Year
 
July 28, 2017
 
April 28, 2017
Current debt obligations
 
2018
 
$
8,058

 
$
7,520

 
 
 
 
 
 
 
Long-term debt
 
 
 
 
 
 
5.600 percent ten-year 2009 senior notes
 
2019
 
400

 
400

1.700 percent two-year 2017 senior notes
 
2019
 
1,000

 
1,000

4.450 percent ten-year 2010 senior notes
 
2020
 
766

 
766

2.500 percent five-year 2015 senior notes
 
2020
 
2,500

 
2,500

Floating rate five-year 2015 senior notes
 
2020
 
500

 
500

4.200 percent ten-year 2010 CIFSA senior notes
 
2021
 
600

 
600

4.125 percent ten-year 2011 senior notes
 
2021
 
500

 
500

3.125 percent ten-year 2012 senior notes
 
2022
 
675

 
675

3.150 percent seven-year 2015 senior notes
 
2022
 
2,500

 
2,500

3.200 percent ten-year 2012 CIFSA senior notes
 
2023
 
650

 
650

2.750 percent ten-year 2013 senior notes
 
2023
 
530

 
530

2.950 percent ten-year 2013 CIFSA senior notes
 
2024
 
310

 
310

3.625 percent ten-year 2014 senior notes
 
2024
 
850

 
850

3.500 percent ten-year 2015 senior notes
 
2025
 
4,000

 
4,000

3.350 percent ten-year 2017 senior notes
 
2027
 
850

 
850

4.375 percent twenty-year 2015 senior notes
 
2035
 
2,382

 
2,382

6.550 percent thirty-year 2008 CIFSA senior notes
 
2038
 
374

 
374

6.500 percent thirty-year 2009 senior notes
 
2039
 
300

 
300

5.550 percent thirty-year 2010 senior notes
 
2040
 
500

 
500

4.500 percent thirty-year 2012 senior notes
 
2042
 
400

 
400

4.000 percent thirty-year 2013 senior notes
 
2043
 
325

 
325

4.625 percent thirty-year 2014 senior notes
 
2044
 
650

 
650

4.625 percent thirty-year 2015 senior notes
 
2045
 
4,150

 
4,150

Interest rate swaps (Note 8)
 
2021 - 2022
 
41

 
40

Capital lease obligations
 
2019 - 2025
 
23

 
23

Bank borrowings
 
2019 - 2021
 
171

 
139

Debt premium, net
 
2019 - 2045
 
130

 
135

Deferred financing costs
 
2019 - 2045
 
(124
)
 
(128
)
Long-term debt
 
 
 
$
25,953

 
$
25,921

Senior Notes
The Company had outstanding unsecured senior obligations, including those described as senior notes in the debt obligations table above (collectively, the Senior Notes). The Senior Notes rank equally with all other unsecured and unsubordinated indebtedness of the Company. The indentures under which the Senior Notes were issued contain customary covenants, all of which the Company remained in compliance with at July 28, 2017. For additional information regarding the terms of these agreements, refer to Note 8 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 2017.

16

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Financial Instruments Not Measured at Fair Value
At July 28, 2017, the estimated fair value of the Company’s Senior Notes, including the current portion, was $30.9 billion compared to a principal value of $28.9 billion. At April 28, 2017, the estimated fair value was $30.4 billion compared to a principal value of $28.9 billion. The fair value was estimated using quoted market prices for the publicly registered Senior Notes, which are classified as Level 2 within the fair value hierarchy. The fair values and principal values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.
8. Derivatives and Currency Exchange Risk Management
The Company uses operational and economic hedges, as well as currency exchange rate derivative contracts and interest rate derivative instruments, to manage the impact of currency exchange and interest rate changes on earnings and cash flows. In addition, the Company uses cross currency interest rate swaps to manage currency risk related to certain debt. In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, the Company enters into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets and liabilities. At inception of the contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. The primary currencies of the derivative instruments are the Euro and Japanese Yen. The Company does not enter into currency exchange rate derivative contracts for speculative purposes. The gross notional amount of all currency exchange rate derivative instruments outstanding was $11.8 billion and $10.8 billion at July 28, 2017 and April 28, 2017, respectively.
The information that follows explains the various types of derivatives and financial instruments used by the Company, reasons the Company uses such instruments, and the impact such instruments have on the Company’s consolidated balance sheets, statements of income, and statements of cash flows.
Freestanding Derivative Contracts
Freestanding derivative contracts are used to offset the Company’s exposure to the change in value of specific foreign currency denominated assets and liabilities and to offset variability of cash flows associated with forecasted transactions denominated in foreign currencies. These derivatives are not designated as hedges, and therefore, changes in the value of these contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in value of foreign currency denominated assets, liabilities, and cash flows. The gross notional amount of these contracts outstanding at July 28, 2017 and April 28, 2017 was $5.4 billion and $4.9 billion, respectively.
The amounts and classification of the losses in the consolidated statements of income related to derivative instruments, not designated as hedging instruments, for the three months ended July 28, 2017 and July 29, 2016 were as follows:
 
 
 
 
Three months ended
(in millions)
 
Classification
 
July 28, 2017
 
July 29, 2016
Currency exchange rate contracts losses
 
Other expense, net
 
$
31

 
$
3

Cash Flow Hedges
Currency Exchange Rate Risk
Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted transactions denominated in a foreign currency that will take place in the future. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive loss. The effective portion of the gain or loss on the derivative instrument is reclassified into earnings and is included in other expense, net in the consolidated statements of income in the same period or periods during which the hedged transaction affects earnings.
No gains or losses relating to ineffectiveness of cash flow hedges were recognized in earnings during the three months ended July 28, 2017 and July 29, 2016. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness and no hedges were derecognized or discontinued during the three months ended July 28, 2017 and July 29, 2016. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at July 28, 2017 and April 28, 2017, was $6.3 billion and $5.8 billion, respectively, and will mature within the subsequent three-year period.

17

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The amount of gross gains, classification of the gains in the consolidated statements of income, and the accumulated other comprehensive (loss) income (AOCI) related to the effective portion of currency exchange rate contract derivative instruments designated as cash flow hedges for the three months ended July 28, 2017 and July 29, 2016 were as follows:
 
 
Three months ended July 28, 2017
 
 
Recognized in AOCI
 
Recognized in Income
(in millions)
 
Amount
 
Classification
 
Amount
Currency exchange rate contracts
 
$
(250
)
 
Other expense, net
 
$
22

Total
 
$
(250
)
 
 
 
$
22

 
 
 
 
 
 
 
 
 
Three months ended July 29, 2016
 
 
Recognized in AOCI
 
Recognized in Income
(in millions)
 
Amount
 
Classification
 
Amount
Currency exchange rate contracts
 
$
121

 
Other expense, net
 
$
15

Total
 
$
121

 
 
 
$
15

Forecasted Debt Issuance Interest Rate Risk
Forward starting interest rate derivative instruments designated as cash flow hedges are designed to manage the exposure to interest rate volatility with regard to future issuances of fixed-rate debt. The effective portion of the gains or losses on forward starting interest rate derivative instruments that is designated and qualify as cash flow hedges is reported as a component of accumulated other comprehensive loss. Beginning in the period in which the planned debt issuance occurs and the related derivative instruments are terminated, the effective portion of the gains or losses are then reclassified into interest expense, net over the term of the related debt. Any portion of the gains or losses that is determined to be ineffective is immediately recognized in interest expense, net.
The Company had $300 million of fixed pay, forward starting interest rate swaps with a weighted average fixed rate of 3.10 percent in anticipation of planned debt issuances. During the fourth quarter of fiscal year 2017, in connection with the issuance of the 2017 Senior Notes, these swaps were terminated. For the three months ended July 29, 2016, there were $23 million of unrealized losses recorded in accumulated other comprehensive loss.
No gains or losses relating to ineffectiveness of forward starting interest rate derivative instruments were recognized in interest expense, net during the three months ended July 29, 2016. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness during the three months ended July 29, 2016.
For the three months ended July 28, 2017 and July 29, 2016, the reclassification of the effective portion of the net losses on forward starting interest rate derivative instruments from accumulated other comprehensive loss to interest expense, net was not significant.
At July 28, 2017 and April 28, 2017, the Company had $(134) million and $37 million, respectively, in after-tax net unrealized (losses) gains associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $37 million of after-tax net unrealized losses at July 28, 2017 will be recognized in the consolidated statements of earnings over the next 12 months.
Fair Value Hedges
Interest rate derivative instruments designated as fair value hedges are designed to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.
Changes in the fair value of the derivative instrument are recognized in interest expense, net, and are offset by changes in the fair value of the underlying debt instrument. The gains (losses) from terminated interest rate swap agreements are recognized in long-term debt, increasing (decreasing) the outstanding balances of the debt, and amortized as a reduction of (addition to) interest expense, net over the remaining life of the related debt. The cash flows from the termination of interest rate swap agreements are reported as operating activities in the consolidated statements of cash flows.
At both July 28, 2017 and April 28, 2017, the Company had interest rate swaps in gross notional amounts of $1.2 billion, designated as fair value hedges of underlying fixed-rate senior note obligations, including the Company's $500 million 4.125 percent 2011 Senior Notes due 2021 and the $675 million 3.125 percent 2012 Senior Notes due 2022.

18

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


At both July 28, 2017 and April 28, 2017, the market value of outstanding interest rate swap agreements was an unrealized gain of $41 million, and the market value of the hedged item was an unrealized loss of $41 million. The amounts were recorded in other assets with the offsets recorded in long-term debt on the consolidated balance sheets.
No significant hedge ineffectiveness was recognized as a result of these fair value hedges for the three months ended July 28, 2017 and July 29, 2016. In addition, the Company did not recognize any gains or losses during the three months ended July 28, 2017 or July 29, 2016 on firm commitments that no longer qualify as fair value hedges.
Balance Sheet Presentation
The following tables summarize the balance sheet classification and fair value of derivative instruments included in the consolidated balance sheets at July 28, 2017 and April 28, 2017. The fair value amounts are presented on a gross basis and are segregated between derivatives that are designated and qualify as hedging instruments and those that are not designated and do not qualify as hedging instruments, and are further segregated by type of contract within those two categories.
 
July 28, 2017
 
Derivative Assets
 
Derivative Liabilities
(in millions)
Balance Sheet Classification
 
Fair Value
 
Balance Sheet Classification
 
Fair Value
Derivatives designated as hedging instruments
 
 
 

 
 
 
 

Currency exchange rate contracts
Prepaid expenses and other current assets
 
$
60

 
Other accrued expenses
 
$
124

Interest rate contracts
Other assets
 
41

 
Other liabilities
 

Currency exchange rate contracts
Other assets
 
25

 
Other liabilities
 
76

Total derivatives designated as hedging instruments
 
 
$
126

 
 
 
$
200

Derivatives not designated as hedging instruments
 
 
 

 
 
 
 

Currency exchange rate contracts
Prepaid expenses and other current assets
 
$
22

 
Other accrued expenses
 
$
68

Total return swap
Prepaid expenses and other current assets
 
6

 
Other accrued expenses
 

Cross currency interest rate contracts
Other assets
 
5

 
Other liabilities
 
10

Total derivatives not designated as hedging instruments
 
 
33

 
 
 
78

Total derivatives
 
 
$
159

 
 
 
$
278

 
April 28, 2017
 
Asset Derivatives
 
Liability Derivatives
(in millions)
Balance Sheet Classification
 
Fair Value
 
Balance Sheet Classification
 
Fair Value
Derivatives designated as hedging instruments
 
 
 

 
 
 
 

Currency exchange rate contracts
Prepaid expenses and other current assets
 
$
152

 
Other accrued expenses
 
$
43

Interest rate contracts
Other assets
 
41

 
Other liabilities
 

Currency exchange rate contracts
Other assets
 
48

 
Other liabilities
 
14

Total derivatives designated as hedging instruments
 
 
$
241

 
 
 
$
57

Derivatives not designated as hedging instruments
 
 
 

 
 
 
 

Currency exchange rate contracts
Prepaid expenses and other current assets
 
16

 
Other accrued expenses
 
36

Cross currency interest rate contracts
Other assets
 
5

 
Other liabilities
 
11

Total derivatives not designated as hedging instruments
 
 
21

 
 
 
47

Total derivatives
 
 
$
262

 
 
 
$
104


19

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following table provides information by level for the derivative assets and liabilities that are measured at fair value on a recurring basis.
 
July 28, 2017
 
April 28, 2017
(in millions)
Level 1
 
Level 2
 
Level 1
 
Level 2
Derivative assets
$
107

 
$
52

 
$
216

 
$
46

Derivative liabilities
268

 
10

 
93

 
11

The Company has elected to present the fair value of derivative assets and liabilities within the consolidated balance sheets on a gross basis, even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The following table provides information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria as stipulated by the terms of the master netting arrangements with each of the counterparties. Derivatives not subject to master netting arrangements are not eligible for net presentation.
 
 
July 28, 2017
 
 
 
 
Gross Amount Not Offset on the Balance Sheet
 
 
(in millions)
 
Gross Amount of Recorded Assets (Liabilities)
 
Financial Instruments
 
Collateral (Received) Posted
 
Net Amount
Derivative assets:
 
 
 
 
 
 
 
 
Currency exchange rate contracts
 
$
107

 
$
(106
)
 
$

 
$
1

Interest rate contracts
 
41

 
(27
)
 

 
14

Cross currency interest rate contracts
 
5

 
(2
)
 

 
3

Total return swap
 
6

 

 

 
6

 
 
$
159

 
$
(135
)
 
$

 
$
24

 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Currency exchange rate contracts
 
$
(268
)
 
$
133

 
$

 
$
(135
)
Cross currency interest rate contracts
 
(10
)
 
2

 

 
(8
)
 
 
(278
)
 
135

 

 
(143
)
Total
 
$
(119
)
 
$

 
$

 
$
(119
)
 
 
April 28, 2017
 
 
 
 
Gross Amount Not Offset on the Balance Sheet
 
 
(in millions)
 
Gross Amount of Recorded Assets (Liabilities)
 
Financial Instruments
 
Collateral (Received) Posted
 
Net Amount
Derivative assets:
 
 
 
 
 
 
 
 
Currency exchange rate contracts
 
$
216

 
$
(58
)
 
$
(55
)
 
$
103

Interest rate contracts
 
41

 
(15
)
 
(5
)
 
21

Cross currency interest rate contracts
 
5

 
(2
)
 

 
3

 
 
$
262

 
$
(75
)
 
$
(60
)
 
$
127

 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Currency exchange rate contracts
 
$
(93
)
 
$
73

 
$

 
$
(20
)
Cross currency interest rate contracts
 
(11
)
 
2

 

 
(9
)
 
 
(104
)
 
75

 

 
(29
)
Total
 
$
158

 
$

 
$
(60
)
 
$
98


20

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


9. Inventories
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company reduces the carrying value of inventories for items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors. Inventory balances, net of reserves, were as follows:
(in millions)
July 28, 2017
 
April 28, 2017
Finished goods
$
2,326

 
$
2,211

Work in-process
490

 
458

Raw materials
722

 
669

Total
$
3,538

 
$
3,338

10. Goodwill and Other Intangible Assets
Goodwill
The following table presents the changes in the carrying amount of goodwill by reportable segment:
(in millions)
Cardiac and Vascular Group
 
Minimally Invasive Therapies Group
 
Restorative Therapies Group
 
Diabetes Group
 
Total
April 28, 2017
$
6,651

 
$
20,411

 
$
9,600

 
$
1,853

 
$
38,515

Purchase accounting adjustments
54

 

 

 

 
54

Currency adjustment, net
58

 
514

 
56

 
(1
)
 
627

July 28, 2017
$
6,763

 
$
20,925

 
$
9,656

 
$
1,852

 
$
39,196

The Company assesses goodwill for impairment annually in the third quarter of the fiscal year and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment testing for goodwill is performed at the reporting unit level. The test for impairment of goodwill requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The Company calculates the excess of each reporting unit's fair value over its carrying amount, including goodwill, utilizing a discounted cash flow analysis. The Company did not recognize any goodwill impairment during the three months ended July 28, 2017 or July 29, 2016.
Intangible Assets
The following table presents the gross carrying amount and accumulated amortization of intangible assets:
 
July 28, 2017
 
April 28, 2017
(in millions)
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Definite-lived:
 
 
 
 
 
 
 
Customer-related
$
16,887

 
$
(2,408
)
 
$
16,862

 
$
(2,166
)
Purchased technology and patents
11,514

 
(3,883
)
 
11,461

 
(3,690
)
Trademarks and tradenames
773

 
(480
)
 
772

 
(461
)
Other
79

 
(45
)
 
77

 
(42
)
Total
$
29,253

 
$
(6,816
)
 
$
29,172

 
$
(6,359
)
Indefinite-lived:
 
 
 
 
 
 
 
IPR&D
$
569

 
 
 
$
594

 
 

21

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The Company assesses definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset (asset group) may not be recoverable. When events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable, the Company calculates the excess of an intangible asset's carrying value over its undiscounted future cash flows. If the carrying value is not recoverable, an impairment loss is recognized based on the amount by which the carrying value exceeds the fair value. The inputs used in the fair value analysis fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. The Company did not recognize any definite-lived intangible asset impairments during the three months ended July 28, 2017 or July 29, 2016.
The Company assesses indefinite-lived intangibles for impairment annually in the third quarter of the fiscal year and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The Company did not recognize any significant indefinite-lived intangibles impairments during the three months ended July 28, 2017 and July 29, 2016. Due to the nature of IPR&D projects, the Company may experience future delays or failures to obtain regulatory approvals to conduct clinical trials, failures of such clinical trials, delays or failures to obtain required market clearances or other failures to achieve a commercially viable product, and as a result, may recognize impairment losses in the future.
Amortization Expense
Intangible asset amortization expense for the three months ended July 28, 2017 and July 29, 2016 was $454 million and $487 million, respectively. Estimated aggregate amortization expense by fiscal year based on the current carrying value of definite-lived intangible assets at July 28, 2017, excluding any possible future amortization associated with acquired IPR&D which has not yet met technological feasibility and amortization associated with definite-lived intangible assets classified as held for sale at July 28, 2017, is as follows:
(in millions)
Amortization Expense
Remaining 2018
$
1,365

2019
1,741

2020
1,693

2021
1,674

2022
1,631

2023
1,564

11. Income Taxes
The Company’s effective tax rate for the three months ended July 28, 2017 was 15.6 percent, as compared to 6.0 percent for the three months ended July 29, 2016. The increase in the effective tax rate for the three months ended July 28, 2017 was primarily due to certain tax adjustments, changes in the amount and jurisdiction of restructuring charges, net and certain litigation charges, the finalization of certain tax audits, the lapse of a statute of limitations for federal purposes, excess tax benefits related to stock-based compensation due to the adoption of revised guidance, and year over year changes in operational results by jurisdiction.
During the three months ended July 28, 2017, the Company recognized charges of $60 million primarily related to the tax effect from certain restructuring steps taken during the quarter in anticipation of the divestiture of a portion of the Patient Monitoring & Recovery division to Cardinal Health. These charges were recorded within provision for income taxes in the consolidated statement of income for the three months ended July 28, 2017.
During the three months ended July 29, 2016, the Company recognized a $31 million net benefit from certain tax adjustments. A $431 million tax benefit was recognized as the result of the resolution of Covidien's previously disclosed Tyco International plc intercompany debt issues with the U.S. Tax Court and the Appeals Division of the U.S. Internal Revenue Service (IRS). This benefit was partially offset by a $371 million charge associated with the expected resolution with the IRS for the Ardian, CoreValve, Inc. and Ablation Frontiers, Inc. acquisition-related issues and the allocation of income between Medtronic, Inc. and its wholly owned subsidiary operating in Puerto Rico for certain businesses. This resolution does not include the businesses that are the subject of the Medtronic, Inc. U.S. Tax Court case for fiscal years 2005 and 2006. In addition, the Company recognized a $29 million charge in connection with the redemption of an intercompany minority interest.

22

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


During the three months ended July 28, 2017, the Company's gross unrecognized tax benefits decreased from $1.9 billion to $1.8 billion. In addition, the Company had accrued gross interest and penalties of $384 million at July 28, 2017. If all of the Company’s unrecognized tax benefits were recognized, approximately $1.8 billion would impact the Company’s effective tax rate. At July 28, 2017, the Company had $92 million of gross unrecognized tax benefits recorded as a current liability within accrued income taxes with the balance recorded as a noncurrent liability within accrued income taxes on the consolidated balance sheet. At April 28, 2017, the total balance of the Company's gross unrecognized tax benefits was recorded as a noncurrent liability within accrued income taxes on the consolidated balance sheet. The Company will continue to recognize interest and penalties related to income tax matters within provision for income taxes in the consolidated statements of income and record the liability within either current or noncurrent accrued income taxes on the consolidated balance sheets.
See Note 16 to the consolidated financial statements for additional information regarding the status of current tax audits and proceedings.
12. Earnings Per Share
Earnings per share is calculated using the two-class method, as the Company's A Preferred Shares are considered participating securities. Accordingly, earnings are allocated to both ordinary shares and participating securities in determining earnings per ordinary share. Due to the limited number of A Preferred Shares outstanding, this allocation had no effect on ordinary earnings per share; therefore, it is not presented below. Basic earnings per share is computed based on the weighted average number of ordinary shares outstanding. Diluted earnings per share is computed based on the weighted average number of ordinary shares outstanding, increased by the number of additional shares that would have been outstanding had the potentially dilutive ordinary shares been issued, and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive ordinary shares include stock options and other stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan.
The table below sets forth the computation of basic and diluted earnings per share:
 
Three months ended
(in millions, except per share data)
July 28, 2017
 
July 29, 2016
Numerator:
 

 
 

Net income attributable to ordinary shareholders
$
1,016

 
$
929

Denominator:
 

 
 

Basic – weighted average shares outstanding
1,361.9

 
1,392.2

Effect of dilutive securities:
 

 
 

Employee stock options
9.2

 
10.5

Employee restricted stock units
4.0

 
3.9

Other
0.5

 
0.5

Diluted – weighted average shares outstanding
1,375.6

 
1,407.1

 
 

 
 

Basic earnings per share
$
0.75

 
$
0.67

Diluted earnings per share
$
0.74

 
$
0.66

The calculation of weighted average diluted shares outstanding excludes options to purchase approximately 4 million ordinary shares both for the three months ended July 28, 2017 and July 29, 2016, because their effect would be anti-dilutive on the Company’s earnings per share.

23

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


13. Stock-Based Compensation
The following table presents the components and classification of stock-based compensation expense for stock options, restricted stock, and employee stock purchase plan shares recognized for the three months ended July 28, 2017 and July 29, 2016:
 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
Stock options
$
35

 
$
38

Restricted stock
48

 
34

Employee stock purchase plan
9

 
7

Total stock-based compensation expense
$
92

 
$
79

 
 
 
 
Cost of products sold
$
10

 
$
11

Research and development expense
9

 
9

Selling, general, and administrative expense
55

 
51

Restructuring charges

 
1

Acquisition-related items
2

 
7

Divestiture-related items
16

 

Total stock-based compensation expense
92

 
79

Income tax benefits
(25
)
 
(21
)
Total stock-based compensation expense, net of tax
$
67

 
$
58

14. Retirement Benefit Plans
The Company sponsors various retirement benefit plans, including defined benefit pension plans (pension benefits), post-retirement medical plans, defined contribution savings plans, and termination indemnity plans, covering substantially all U.S. employees and many employees outside the U.S. The net periodic benefit cost of the defined benefit pension plans included the following components for the three months ended July 28, 2017 and July 29, 2016:
 
U.S. Pension Benefits
 
Non-U.S. Pension Benefits
 
Three months ended
 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
 
July 28, 2017
 
July 29, 2016
Service cost
$
29

 
$
29

 
$
17

 
$
19

Interest cost
30

 
27

 
7

 
6

Expected return on plan assets
(52
)
 
(47
)
 
(13
)
 
(12
)
Amortization of net actuarial loss
20

 
23

 
4

 
4

Net periodic benefit cost
$
27

 
$
32

 
$
15

 
$
17



24

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


15. Accumulated Other Comprehensive (Loss) Income and Supplemental Equity Disclosure
The following table provides changes in AOCI, net of tax and by component.
(in millions)
Unrealized Gain (Loss) on Available-for-Sale Securities
 
Cumulative Translation Adjustment
 
Net Change in Retirement Obligations
 
Unrealized Gain (Loss) on Derivative Financial Instruments
 
Total Accumulated Other Comprehensive (Loss) Income
April 28, 2017
$
(69
)
 
$
(1,452
)
 
$
(1,129
)
 
$
37

 
$
(2,613
)
Other comprehensive income (loss) before reclassifications
39

 
831

 
(17
)
 
(159
)
 
694

Reclassifications
(9
)
 

 
16

 
(12
)
 
(5
)
Other comprehensive income (loss)
30

 
831

 
(1
)
 
(171
)
 
689

July 28, 2017
$
(39
)
 
$
(621
)
 
$
(1,130
)
 
$
(134
)
 
$
(1,924
)
 
 
 
 
 
 
 
 
 
 
(in millions)
Unrealized Gain (Loss) on Available-for-Sale Securities
 
Cumulative Translation Adjustment
 
Net Change in Retirement Obligations
 
Unrealized Gain (Loss) on Derivative Financial Instruments
 
Total Accumulated Other Comprehensive (Loss) Income
April 29, 2016
$
(107
)
 
$
(474
)
 
$
(1,197
)
 
$
(90
)
 
$
(1,868
)
Other comprehensive income (loss) before reclassifications
116

 
(350
)
 

 
62

 
(172
)
Reclassifications
(1
)
 

 
25

 
(8
)
 
16

Other comprehensive income (loss)
115

 
(350
)
 
25

 
54

 
(156
)
July 29, 2016
$
8

 
$
(824
)
 
$
(1,172
)
 
$
(36
)
 
$
(2,024
)

The income tax on gains and losses on available-for-sale securities in other comprehensive income before reclassifications during the three months ended July 28, 2017 and July 29, 2016 was an expense of $17 million and $52 million, respectively. During the three months ended July 28, 2017, realized gains and losses on available-for-sale securities reclassified from AOCI were reduced by income taxes of $4 million. During the three months ended July 29, 2016, there was no income tax impact on realized gains and losses on available-for-sale securities reclassified from AOCI. When realized, gains and losses on available-for-sale securities reclassified from AOCI are recognized within other expense, net. Refer to Note 6 to the consolidated financial statements for additional information.

Taxes are not provided on cumulative translation adjustments as substantially all translation adjustments relate to earnings that are intended to be indefinitely reinvested outside the U.S.

The net change in retirement obligations in other comprehensive income includes net amortization of prior service costs and actuarial losses included in net periodic benefit cost. The income tax on the net change in retirement obligations in other comprehensive income before reclassifications during the three months ended July 28, 2017 was a benefit of $4 million. During the three months ended July 29, 2016, there was no income tax impact on the net change in retirement obligations in other comprehensive income before reclassifications. During the three months ended July 28, 2017 and July 29, 2016, the gains and losses on defined benefit and pension items reclassified from AOCI were reduced by income taxes of $8 million and $2 million, respectively. Refer to Note 14 to the consolidated financial statements for additional information.

The income tax on unrealized gains and losses on derivative financial instruments in other comprehensive income before reclassifications during the three months ended July 28, 2017 and July 29, 2016 was a benefit of $91 million and an expense of $36 million, respectively. During the three months ended July 28, 2017 and July 29, 2016, gains and losses on derivative financial instruments reclassified from AOCI were reduced by income taxes of $8 million and $6 million, respectively. When realized, cash flow hedge gains and losses reclassified from AOCI are recognized within other expense, net, and forward starting interest rate derivative financial instrument gains and losses reclassified from AOCI are recognized within interest expense, net. Refer to Note 8 to the consolidated financial statements for additional information.


25

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The supplemental equity schedule below presents changes in the Company's noncontrolling interests and total shareholders' equity for the three months ended July 28, 2017.
(in millions)
 
Total Shareholders' Equity
 
Noncontrolling Interests
 
Total Equity
April 28, 2017
 
$
50,294

 
$
122

 
$
50,416

Net income
 
1,016

 
(7
)
 
1,009

Other comprehensive income
 
689

 

 
689

Dividends to shareholders
 
(625
)
 

 
(625
)
Issuance of shares under stock purchase and award plans
 
138

 

 
138

Repurchase of ordinary shares
 
(1,228
)
 

 
(1,228
)
Stock-based compensation
 
92

 

 
92

Cumulative effect of change in accounting principle
 
296

 

 
296

July 28, 2017
 
$
50,672

 
$
115

 
$
50,787

16. Commitments and Contingencies
The Company and its affiliates are involved in a number of legal actions involving product liability, intellectual property disputes, shareholder related matters, environmental proceedings, income tax disputes, and governmental proceedings and investigations, including those described below. With respect to governmental proceedings and investigations, like other companies in our industry, the Company is subject to extensive regulation by national, state and local governmental agencies in the United States and in other jurisdictions in which the Company and its affiliates operate. As a result, interaction with governmental agencies is ongoing. The Company’s standard practice is to cooperate with regulators and investigators in responding to inquiries. The outcomes of these legal actions are not within the Company’s complete control and may not be known for prolonged periods of time. In some actions, the enforcement agencies or private claimants seek damages, as well as other civil or criminal remedies (including injunctions barring the sale of products that are the subject of the proceeding), that could require significant expenditures, result in lost revenues, or limit the Company's ability to conduct business in the applicable jurisdictions. The Company records a liability in the consolidated financial statements on an undiscounted basis for loss contingencies related to legal actions when a loss is known or considered probable and the amount may be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. When determining the estimated loss or range of loss, significant judgment is required. Estimates of probable losses resulting from litigation and governmental proceedings involving the Company are inherently difficult to predict, particularly when the matters are in early procedural stages, with incomplete scientific facts or legal discovery, involve unsubstantiated or indeterminate claims for damages, potentially involve penalties, fines or punitive damages, or could result in a change in business practice. At July 28, 2017 and April 28, 2017, accrued certain litigation charges were approximately $1.0 billion and $1.1 billion, respectively. The ultimate cost to the Company with respect to accrued certain litigation charges could be materially different than the amount of the current estimates and accruals and could have a material adverse impact on the Company’s consolidated earnings, financial position, and/or cash flows. The Company includes accrued certain litigation charges in other accrued expenses and other liabilities on the consolidated balance sheets.
In addition to litigation contingencies, the Company also has certain income tax and guarantee obligations that may potentially result in future charges. While it is not possible to predict the outcome for most of the matters discussed below, the Company believes it is possible that charges associated with these matters could have a material adverse impact on the Company’s consolidated earnings, financial position, and/or cash flows.
Product Liability Matters
Sprint Fidelis
In 2007, a putative class action was filed in the Ontario Superior Court of Justice in Canada seeking damages for personal injuries allegedly related to the Company's Sprint Fidelis family of defibrillation leads. On October 20, 2009, the court certified a class proceeding but denied class certification on plaintiffs' claim for punitive damages. Pretrial proceedings are underway. The Company has not recognized an expense related to damages in connection with this matter because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from this matter.

26

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


INFUSE Litigation
The Company estimated law firms representing approximately 6,000 claimants asserted or intended to assert personal injury claims against Medtronic in the U.S. state and federal courts involving the INFUSE bone graft product. As of June 1, 2017, the Company had reached agreements to settle substantially all of these claims, resolving this litigation. The Company's accrued expenses for this matter are included within accrued certain litigation charges as discussed above.
Other INFUSE Litigation
On June 5, 2014, Humana, Inc. filed a lawsuit for unspecified monetary damages in the U.S. District Court for the Western District of Tennessee, alleging that Medtronic, Inc. violated federal racketeering (RICO) law and various state laws, by conspiring with physicians to promote unapproved uses of INFUSE. In September of 2015, the Court granted Medtronic’s motion to dismiss the primary allegations, including the RICO claims, in Humana’s complaint. In April of 2016, the Court denied Humana's motion to file an amended complaint. In June of 2017, the Company settled this matter with no admission of liability, bringing this matter to a conclusion. The Company’s accrued expenses for this matter are included within accrued certain litigation charges as discussed above.
Pelvic Mesh Litigation
The Company, through the acquisition of Covidien, is currently involved in litigation in various state and federal courts against manufacturers of pelvic mesh products alleging personal injuries resulting from the implantation of those products. Two subsidiaries of Covidien supplied pelvic mesh products to one of the manufacturers, C.R. Bard (Bard), named in the litigation. The litigation includes a federal multi-district litigation in the U.S. District Court for the Northern District of West Virginia and cases in various state courts and jurisdictions outside the U.S. Generally, complaints allege design and manufacturing claims, failure to warn, breach of warranty, fraud, violations of state consumer protection laws and loss of consortium claims. In fiscal year 2016, Bard paid the Company $121 million towards the settlement of 11,000 of these claims. In May 2017, the agreement with Bard was amended to extend the terms to apply to up to an additional 5,000 claims. That agreement does not resolve the dispute between the Company and Bard with respect to claims that do not settle, if any. As part of the agreement, the Company and Bard agreed to dismiss without prejudice their pending litigation with respect to Bard’s obligation to defend and indemnify the Company. The Company estimates law firms representing approximately 15,800 claimants have asserted or may assert claims involving products manufactured by Covidien’s subsidiaries. As of August 1, 2017, the Company had reached agreements to settle approximately 12,900 of these claims. The Company's accrued expenses for this matter are included within accrued certain litigation charges as discussed above.
Patent Litigation
Ethicon
On December 14, 2011, Ethicon filed an action against Covidien in the U.S. District Court for the Southern District of Ohio, alleging patent infringement and seeking monetary damages and injunctive relief. On January 22, 2014, the district court entered summary judgment in Covidien's favor, and the majority of this ruling was affirmed by the Federal Circuit on August 7, 2015. Following appeal, the case was remanded back to the District Court with respect to one patent. On January 21, 2016, Covidien filed a second action in the U.S. District Court for the Southern District of Ohio, seeking a declaration of non-infringement with respect to a second set of patents held by Ethicon. The court consolidated this second action with the remaining patent issues from the first action. Following consolidation of the cases, Ethicon dismissed 6 of the asserted patents, leaving a single asserted patent. In addition to claims of non-infringement, the Company asserts an affirmative defense of invalidity. The case is currently in the discovery stage. The Company has not recognized an expense related to damages in connection with this matter, because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from this matter.
Shareholder Related Matters
INFUSE
On March 12, 2012, Charlotte Kokocinski (Kokocinski) filed a shareholder derivative action against both Medtronic, Inc. and certain of its current and former officers and directors in the U.S. District Court for the District of Minnesota, setting forth certain allegations, including a claim that defendants violated various purported duties in connection with the INFUSE bone graft product and otherwise. On March 25, 2013, the District Court dismissed the case without prejudice, and Kokocinski subsequently filed an amended complaint. On March 30, 2015, the District Court granted defendants’ motion to dismiss the amended complaint, dismissing the case with prejudice. Kokocinski sought reconsideration of that decision, and, on September 30, 2015, the District Court denied Kokocinski’s request for reconsideration. Kokocinski appealed the District Court’s decision to the U.S. Court of Appeals for the Eighth Circuit. On March 1, 2017, the Eighth Circuit Court of Appeals affirmed the lower Court’s dismissal of

27

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


the case with prejudice, and on April 11, 2017, the Eighth Circuit rejected Kokocinski’s request for reconsideration. The Company has not recognized an expense related to damages in connection with this matter, because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from these matters.
West Virginia Pipe Trades and Phil Pace, on June 27, 2013 and July 3, 2013, respectively, filed putative class action complaints against Medtronic, Inc. and certain of its officers in the U.S. District Court for the District of Minnesota, alleging that the defendants made false and misleading public statements and engaged in a scheme to defraud regarding the INFUSE Bone Graft product during the period of December 8, 2010 through August 3, 2011. The matters were consolidated in September, 2013, and in the consolidated complaint plaintiffs alleged a class period of September 28, 2010 through August 3, 2011. On September 30, 2015, the District Court granted defendants’ motion for summary judgment in the consolidated matters. Plaintiffs appealed the dismissal to the U.S. Court of Appeals for the Eighth Circuit, and in December of 2016 the Eighth Circuit Court reversed and remanded the case to the District Court for further proceedings. The Company has not recognized an expense related to damages in connection with this matter, because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from these matters.
COVIDIEN ACQUISITION
On July 2, 2014, Lewis Merenstein filed a putative shareholder class action in Hennepin County, Minnesota, District Court seeking to enjoin the then-potential acquisition of Covidien. The lawsuit named Medtronic, Inc., Covidien, and each member of the Medtronic, Inc. Board of Directors at the time as defendants, and alleged that the directors breached their fiduciary duties to shareholders with regard to the then-potential acquisition. On August 21, 2014, Kenneth Steiner filed a putative shareholder class action in Hennepin County, Minnesota, District Court, also seeking an injunction to prevent the potential Covidien acquisition. In September 2014, the Merenstein and Steiner matters were consolidated and in December 2014, the plaintiffs filed a preliminary injunction motion seeking to enjoin the Covidien transaction. On December 30, 2014, a hearing was held on plaintiffs’ motion for preliminary injunction and on defendants’ motion to dismiss. On January 2, 2015, the District Court denied the plaintiffs’ motion for preliminary injunction and on January 5, 2015 issued its opinion. On March 20, 2015, the District Court issued its order and opinion granting Medtronic’s motion to dismiss the case. In May of 2015, the plaintiffs filed an appeal, and, in January of 2016, the Minnesota State Court of Appeals affirmed in part, reversed in part, and remanded the case to the District Court for further proceedings. In February of 2016, the Company petitioned the Minnesota Supreme Court to review the decision of the Minnesota State Court of Appeals, and on April 19, 2016 the Minnesota Supreme Court granted the Company’s petition on the issue of whether most of the original claims are properly characterized as direct or derivative under Minnesota law. In August of 2017, the Minnesota Supreme Court affirmed the decision of the Minnesota State Court of Appeals, sending the matter back to the trial court for further proceedings. The Company has not recognized an expense related to damages in connection with this matter, because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from these matters.
HEARTWARE
On January 22, 2016, the St. Paul Teachers’ Retirement Fund Association filed a putative class action complaint (the “Complaint”) in the United States District Court for the Southern District of New York against HeartWare on behalf of all persons and entities who purchased or otherwise acquired shares of HeartWare from June 10, 2014 through January 11, 2016 (the “Class Period”). The Complaint was amended on June 29, 2016 and claims HeartWare and one of its executives violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and misleading statements about, among other things, HeartWare’s response to a June 2014 U.S. FDA warning letter, the development of the Miniaturized Ventricular Assist Device (MVAD) System and the proposed acquisition of Valtech Cardio Ltd. The Complaint seeks to recover damages on behalf of all purchasers or acquirers of HeartWare’s stock during the Class Period. In August of 2016 the Company acquired HeartWare. The Company's accrued expenses for this matter are included within accrued certain litigation charges as discussed above.
Environmental Proceedings
The Company, through the acquisition of Covidien, is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. These projects relate to a variety of activities, including removal of solvents, metals and other hazardous substances from soil and groundwater. The ultimate cost of site cleanup and timing of future cash flows is difficult to predict given uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations, and alternative cleanup methods.

28

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The Company is a successor to a company which owned and operated a chemical manufacturing facility in Orrington, Maine from 1967 until 1982, and is responsible for the costs of completing an environmental site investigation as required by the Maine Department of Environmental Protection (MDEP). MDEP served a compliance order on Mallinckrodt LLC and U.S. Surgical Corporation, subsidiaries of Covidien, in December 2008, which included a directive to remove a significant volume of soils at the site. After a hearing on the compliance order before the Maine Board of Environmental Protection (Maine Board) to challenge the terms of the compliance order, the Maine Board modified the MDEP order and issued a final order requiring removal of two landfills, capping of the remaining three landfills, installation of a groundwater extraction system and long-term monitoring of the site and the three remaining landfills.
The Company has proceeded with implementation of the investigation and remediation at the site in accordance with the MDEP order as modified by the Maine Board order.
The Company has also been involved in a lawsuit filed in the U.S. District Court for the District of Maine by the Natural Resources Defense Council and the Maine People’s Alliance. Plaintiffs sought an injunction requiring Covidien to conduct extensive studies of mercury contamination of the Penobscot River and Bay and options for remediating such contamination, and to perform appropriate remedial activities, if necessary.
On July 29, 2002, following a March 2002 trial, the District Court entered an opinion and order which held that conditions in the Penobscot River and Bay may pose an imminent and substantial endangerment and that Covidien was liable for the cost of performing a study of the river and bay. The District Court subsequently appointed an independent study panel to oversee the study and ordered Covidien to pay costs associated with the study. A report issued by the study panel contains recommendations for a variety of potential remedial options which could be implemented individually or in a variety of combinations, and included preliminary cost estimates for a variety of potential remedial options, which the report describes as “very rough estimates of cost,” ranging from $25 million to $235 million. The report indicates that these costs are subject to uncertainties, and that before any remedial option is implemented, further engineering studies and engineering design work are necessary to determine the feasibility of the proposed remedial options. In June of 2014, a trial was held to determine if remediation was necessary and feasible, and on September 2, 2015, the District Court issued an order concluding that further engineering study and engineering design work is appropriate to determine the nature and extent of remediation in the Penobscot River and Bay. In January of 2016, the Court appointed an engineering firm to conduct the next phase of the study. The study is targeted for completion in calendar year 2018.
The Company's accrued expenses for environmental proceedings are included within accrued certain litigation charges as discussed above.
Government Matters
Medtronic has received subpoenas or document requests from the Attorneys General in Massachusetts, California, Oregon, Illinois, and Washington seeking information regarding sales, marketing, clinical, and other information relating to the INFUSE bone graft product. The Company's accrued expenses for these matters are included within accrued certain litigation charges as discussed above.
On May 2, 2011, the U.S. Attorney’s Office for the District of Massachusetts issued a subpoena to ev3, a subsidiary of the Company, requesting production of documents relating to sales and marketing and other issues in connection with several neurovascular products. The matters under investigation relate to activities prior to Covidien's acquisition of ev3 in 2010. ev3 complied as required with the subpoena and cooperated with the investigation. The Company's accrued expenses for this matter are included within accrued certain litigation charges as discussed above.
On September 2, 2014, the U.S. Department of Health and Human Services, Office of Inspector General and the U.S. Attorney’s Office for the Northern District of California, issued a subpoena requesting production of documents relating to sales and marketing practices associated with certain of ev3’s peripheral vascular products. The Company has not recognized an expense related to damages in connection with this matter, because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from this matter.

29

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Income Taxes
In March 2009, the IRS issued its audit report on Medtronic, Inc. for fiscal years 2005 and 2006. Medtronic, Inc. reached agreement with the IRS on some, but not all matters related to these fiscal years. On December 23, 2010, the IRS issued a statutory notice of deficiency with respect to the remaining issues. Medtronic, Inc. filed a petition with the U.S. Tax Court on March 21, 2011 objecting to the deficiency. During October and November 2012, Medtronic, Inc. reached resolution with the IRS on various matters, including the deductibility of a settlement payment. Medtronic, Inc. and the IRS agreed to hold one issue, the calculation of amounts eligible for the one-time repatriation holiday, because such specific issue was being addressed by other taxpayers in litigation with the IRS. The remaining unresolved issue for fiscal years 2005 and 2006 relates to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, which is one of the Company's key manufacturing sites. The U.S. Tax Court proceeding with respect to this issue began on February 3, 2015 and ended on March 12, 2015. On June 9, 2016, the U.S. Tax court issued its opinion with respect to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico for fiscal years 2005 and 2006. The U.S. Tax Court generally rejected the IRS’s position, but also made certain modifications to the Medtronic, Inc. tax returns as filed. During November 2016, Medtronic and the IRS entered into a Stipulation of Settled Issues with the Tax Court which resolved the one-time repatriation holiday as an outstanding issue unless either party decided to appeal the Tax Court Opinion and a final decision is inconsistent with the U.S. Tax Court Opinion. The U.S. Tax Court entered their final decision on January 25, 2017. On April 21, 2017, the IRS filed their Notice of Appeal to the U.S. Court of Appeals for the 8th Circuit regarding the Tax Court Opinion.  A hearing date for the Appeal has not been set.
In October 2011, the IRS issued its audit report on Medtronic, Inc. for fiscal years 2007 and 2008. Medtronic, Inc. reached agreement with the IRS on some, but not all matters related to these fiscal years. During the first quarter of fiscal year 2016, the Company finalized its agreement with the IRS on the proposed adjustments associated with the tax effects of the Company's acquisition of Kyphon Inc. (Kyphon). The settlement was consistent with the certain tax adjustment recorded during the fourth quarter of fiscal year 2015. During the first quarter of fiscal year 2017, an expected settlement was reached with the IRS for all outstanding issues for fiscal years 2007 and 2008 except for the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico for the businesses that are the subject of the U.S. Tax Court Case for fiscal years 2005 and 2006.
In April 2014, the IRS issued its audit report on Medtronic, Inc. for fiscal years 2009, 2010, and 2011. Medtronic, Inc. reached agreement with the IRS on some but not all matters related to these fiscal years. During the first quarter of fiscal year 2017, an expected settlement was reached with the IRS for all outstanding issues for fiscal years 2009, 2010, and 2011 except for the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico for the businesses that are the subject of the U.S. Tax Court Case for fiscal years 2005 and 2006.
In May 2017, the IRS issued its audit report on Medtronic, Inc. for fiscal years 2012, 2013, and 2014. Medtronic, Inc. reached agreement with the IRS on some but not all matters related to these fiscal years. The significant issues that remain unresolved relate to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, and proposed adjustments associated with the utilization of certain net operating losses. The Company disagrees with the IRS and will attempt to resolve these matters at the IRS Appellate level.
Covidien and the IRS have concluded and reached agreement on its audit of Covidien’s U.S. federal income tax returns for all tax years through 2009. The IRS continues to audit Covidien’s U.S. federal income tax returns for the years 2010 through 2012. The statute of limitations for Covidien’s 2013 U.S. federal income tax returns lapsed during the first quarter of fiscal year 2018.
See Note 11 for additional discussion of income taxes.
Guarantees
As a result of the acquisition of Covidien, the Company has guarantee commitments and indemnifications with Tyco International, TE Connectivity Ltd. (TE Connectivity), and Mallinckrodt plc (Mallinckrodt) which relate to certain contingent tax liabilities.
On June 29, 2007, Covidien entered into the Tax Sharing Agreement, under which Covidien shares responsibility for certain of its, Tyco International’s and TE Connectivity’s income tax liabilities for periods prior to Covidien’s 2007 separation from Tyco International (2007 separation). Covidien, Tyco International and TE Connectivity share 42 percent, 27 percent, and 31 percent, respectively, of U.S. income tax liabilities that arise from adjustments made by tax authorities to Covidien's, Tyco International’s and TE Connectivity’s U.S. income tax returns, certain income tax liabilities arising from adjustments made by tax authorities to intercompany transactions or similar adjustments, and certain taxes attributable to internal transactions undertaken in anticipation of the 2007 separation. If Tyco International and TE Connectivity default on their obligations to the Company under the Tax Sharing Agreement, the Company would be liable for the entire amount of these liabilities. All costs and expenses associated with the management of these tax liabilities are being shared equally among the parties.

30

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


In connection with the 2007 separation, all tax liabilities associated with Covidien business became Covidien’s tax liabilities. Following Covidien’s spin-off of its Pharmaceuticals business to Covidien shareholders through a distribution of all the outstanding ordinary shares of Mallinkrodt (2013 separation), Mallinckrodt became the primary obligor to the taxing authorities for the tax liabilities attributable to its subsidiaries, a significant portion of which relate to periods prior to the 2007 separation. However, Covidien remains the sole party subject to the Tax Sharing Agreement. Accordingly, Mallinckrodt does not share in the Company’s liability to Tyco International and TE Connectivity, nor in the receivable that the Company has from Tyco International and TE Connectivity.
If any party to the Tax Sharing Agreement were to default in its obligation to another party to pay its share of the distribution taxes that arise as a result of no party’s fault, each non-defaulting party would be required to pay, equally with any other non-defaulting party, the amounts in default. In addition, if another party to the Tax Sharing Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such liability to a taxing authority, the Company could be legally liable under applicable tax law for such liabilities and be required to make additional tax payments. Accordingly, under certain circumstances, the Company may be obligated to pay amounts in excess of the Company’s agreed upon share of Covidien's, Tyco International’s and TE Connectivity’s tax liabilities.
The Company has used available information to develop its best estimates for certain assets and liabilities related to periods prior to the 2007 separation, including amounts subject to or impacted by the provisions of the Tax Sharing Agreement. The actual amounts that the Company may be required to ultimately accrue or pay under the Tax Sharing Agreement, however, could vary depending upon the outcome of the unresolved tax matters. Final determination of the balances will be made in subsequent periods, primarily related to certain pre-2007 separation tax liabilities and tax years open for examination. These balances will also be impacted by the filing of final or amended income tax returns in certain jurisdictions where those returns include a combination of Tyco International, Covidien and/or TE Connectivity legal entities for periods prior to the 2007 separation. The resolutions with the U.S. Tax Court and IRS Appeals for fiscal years 1997 through 2007 were finalized during May 2016. However, the Tax Sharing Agreement remains in place with respect to income tax liabilities that are not the subject of such resolution.
In conjunction with the 2013 separation, Mallinckrodt assumed the tax liabilities that are attributable to its subsidiaries, and Covidien indemnified Mallinckrodt to the extent that such tax liabilities arising from periods prior to 2013 exceed $200 million, net of certain tax benefits realized. In addition, in connection with the 2013 separation, Covidien entered into certain other guarantee commitments and indemnifications with Mallinckrodt.
See Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 2017 for additional information.
Except as described above in this note or for certain income tax related matters, the Company has not recognized an expense related to losses in connection with these matters because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from these matters.
In the normal course of business, the Company and/or its affiliates periodically enter into agreements that require one or more of them to indemnify customers or suppliers for specific risks, such as claims for injury or property damage arising out of the Company or its affiliates’ products or the negligence of any of their personnel or claims alleging that any of their products infringe third-party patents or other intellectual property. The Company’s maximum exposure under these indemnification provisions is unable to be estimated, and the Company has not accrued any liabilities within the consolidated financial statements. Historically, the Company has not experienced significant losses on these types of indemnifications.

31

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


17. Segment and Geographic Information
Segment information
The Company’s management evaluates segment performance and allocates resources based on net sales and earnings before interest expense, net, the provision for income taxes, and amortization of intangible assets, not including centralized distribution costs and corporate charges, as presented in the table below. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 2017. The financial information that is regularly reviewed by the Company's chief operating decision maker to assess performance and allocate resources changed during fiscal year 2017. As a result, the Company has revised the disclosure for the prior period to align with current presentation.
Net sales of the Company’s reportable segments include end-customer revenues from the sale of products each reportable segment develops and manufactures or distributes. Segment disclosures are on a performance basis consistent with internal management reporting. Certain items are at corporate and centralized and are not allocated to the segments. Net sales and earnings before interest expense, net, the provision for income taxes, and amortization of intangible assets, not including centralized distribution costs and corporate charges by reportable segments are as follows:
 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
Cardiac and Vascular Group
$
2,646

 
$
2,518

Minimally Invasive Therapies Group
2,486

 
2,424

Restorative Therapies Group
1,809

 
1,772

Diabetes Group
449

 
452

Net Sales
$
7,390

 
$
7,166

 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
Cardiac and Vascular Group
$
1,011

 
$
954

Minimally Invasive Therapies Group
875

 
824

Restorative Therapies Group
680

 
669

Diabetes Group
112

 
159

Reportable segments' EBITA before other adjustments
2,678

 
2,606

Restructuring charges, net
(14
)
 
(104
)
Acquisition-related items
(53
)
 
(52
)
Divestiture-related items
(48
)
 

Certain litigation charges

 
(82
)
Amortization of intangible assets
(454
)
 
(487
)
Centralized distribution costs
(442
)
 
(401
)
Interest expense, net
(194
)
 
(179
)
Corporate
(278
)
 
(313
)
Income before provision for income taxes
$
1,195

 
$
988


32

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Geographic information
Net sales to external customers by geography are as follows:
 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
Americas (1)
$
4,367

 
$
4,297

EMEA (2)
1,732

 
1,650

Asia-Pacific
857

 
822

Greater China
434

 
397

Net Sales
$
7,390

 
$
7,166

(1) The U.S., which is included in the Americas, had net sales to external customers of $4.0 billion for both the three months ended July 28, 2017 and July 29, 2016.
(2) EMEA consists of Europe, Middle East, and Africa. Sales to Ireland were insignificant during all periods presented.
18. 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. under the Senior Notes (Medtronic Senior Notes) and full and unconditional guarantees of the obligations of Covidien International Finance S.A. (CIFSA) 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. Effective March 28, 2017, Medtronic plc and Medtronic, Inc. each provided a full and unconditional guarantee of the obligations of Medtronic Luxco under the 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 presents the Company’s consolidating statements of comprehensive income for the three months ended July 28, 2017 and July 29, 2016, condensed consolidating balance sheets at July 28, 2017 and April 28, 2017, and condensed consolidating statements of cash flows for the three months ended July 28, 2017 and July 29, 2016. The guarantees provided by the parent company guarantor and subsidiary guarantors are joint and several. Condensed consolidating financial information for Medtronic plc, Medtronic Luxco, Medtronic, Inc., CIFSA, and CIFSA Subsidiary Guarantors, on a stand-alone basis, is presented using the equity method of accounting for subsidiaries.

During the first quarter of fiscal year 2018, the Company undertook certain steps to reorganize ownership of various subsidiaries. The transactions were entirely among subsidiaries under the common control of Medtronic. This reorganization has been reflected as of the beginning of the earliest period presented.


33

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Consolidating Statement of Comprehensive Income
Three Months Ended July 28, 2017
Medtronic Senior Notes and Medtronic Luxco Senior Notes
(in millions)
Medtronic plc
 
Medtronic, Inc.
 
Medtronic Luxco
 
Subsidiary Non-guarantors
 
Consolidating
Adjustments
 
Total
Net sales
$

 
$
303

 
$

 
$
7,390

 
$
(303
)
 
$
7,390

 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
222

 

 
2,433

 
(306
)
 
2,349

Research and development expense

 
158

 

 
390

 

 
548

Selling, general, and administrative expense
3

 
301

 

 
2,181

 

 
2,485

Restructuring charges, net

 
1

 

 
7

 

 
8

Acquisition-related items

 
29

 

 
15

 

 
44

Divestiture-related items

 
9

 

 
38

 

 
47

Amortization of intangible assets

 
2

 

 
452

 

 
454

Other (income) expense, net
13

 
(477
)
 

 
530

 

 
66

Operating profit (loss)
(16
)
 
58

 

 
1,344

 
3

 
1,389

 
 
 
 
 
 
 
 
 
 
 
 
Interest income

 
(71
)
 
(110
)
 
(334
)
 
423

 
(92
)
Interest expense
49

 
441

 
35

 
184

 
(423
)
 
286

Interest expense (income), net
49

 
370

 
(75
)
 
(150
)
 

 
194

Equity in net (income) loss of subsidiaries
(1,079
)
 
(815
)
 
(1,004
)
 

 
2,898

 

Income from operations before income taxes
1,014

 
503

 
1,079

 
1,494

 
(2,895
)
 
1,195

Provision (benefit) for income taxes
(2
)
 
(77
)
 

 
265

 

 
186

Net income
1,016

 
580

 
1,079

 
1,229

 
(2,895
)
 
1,009

Net loss attributable to noncontrolling interests

 

 

 
7

 

 
7

Net income attributable to Medtronic
1,016

 
580

 
1,079

 
1,236

 
(2,895
)
 
1,016

Other comprehensive income (loss), net of tax
689

 
(7
)
 
689

 
680

 
(1,362
)
 
689

Other comprehensive loss attributable to non-controlling interests

 

 

 
7

 

 
7

Total comprehensive income
$
1,705

 
$
573

 
$
1,768

 
$
1,916

 
$
(4,257
)
 
$
1,705







34

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Consolidating Statement of Comprehensive Income
Three Months Ended July 29, 2016
Medtronic Senior Notes
(in millions)
Medtronic plc
 
Medtronic, Inc.
 
Medtronic Luxco
 
Subsidiary Non-guarantors
 
Consolidating
Adjustments
 
Total
Net sales
$

 
$
348

 
$

 
$
7,166

 
$
(348
)
 
$
7,166

 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 

Cost of products sold

 
250

 

 
2,365

 
(354
)
 
2,261

Research and development expense

 
163

 

 
393

 

 
556

Selling, general, and administrative expense
3

 
280

 

 
2,145

 

 
2,428

Restructuring charges, net

 
16

 

 
78

 

 
94

Certain litigation charges

 

 

 
82

 

 
82

Acquisition-related items

 
23

 

 
29

 

 
52

Amortization of intangible assets

 
3

 

 
484

 

 
487

Other (income) expense, net
11

 
(640
)
 

 
668

 

 
39

Operating profit (loss)
(14
)
 
253

 

 
922

 
6

 
1,167

 
 
 
 
 
 
 
 
 
 
 
 
Interest income

 
(60
)
 
(156
)
 
(282
)
 
405

 
(93
)
Interest expense
16

 
408

 
1

 
252

 
(405
)
 
272

Interest (income) expense, net
16

 
348

 
(155
)
 
(30
)
 

 
179

Equity in net (income) loss of subsidiaries
(957
)
 
(1,174
)
 
(802
)
 

 
2,933

 

Income from operations before income taxes
927

 
1,079

 
957

 
952

 
(2,927
)
 
988

Provision (benefit) for income taxes
(2
)
 
22

 

 
39

 

 
59

Net income
929

 
1,057

 
957

 
913

 
(2,927
)
 
929

Other comprehensive income (loss), net of tax
(156
)
 
95

 
(156
)
 
(172
)
 
233

 
(156
)
Total comprehensive income
$
773

 
$
1,152

 
$
801

 
$
741

 
$
(2,694
)
 
$
773



35

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Condensed Consolidating Balance Sheet
July 28, 2017
Medtronic Senior Notes and Medtronic Luxco Senior Notes

(in millions)
Medtronic plc
 
Medtronic, Inc.
 
Medtronic Luxco
 
Subsidiary Non-guarantors
 
Consolidating
Adjustments
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
63

 
$
29

 
$
4,599

 
$

 
$
4,691

Investments

 

 

 
8,397

 

 
8,397

Accounts receivable, net

 

 

 
5,784

 

 
5,784

Inventories, net

 
166

 

 
3,547

 
(175
)
 
3,538

Intercompany receivable
94

 

 

 
12,960

 
(13,054
)
 

Other current assets
7

 
278

 

 
1,715

 

 
2,000

Current assets held for sale

 

 

 
369

 

 
369

Total current assets
101

 
507

 
29

 
37,371

 
(13,229
)
 
24,779

Property, plant, and equipment, net

 
1,325

 

 
3,062

 

 
4,387

Goodwill

 

 

 
39,196

 

 
39,196

Other intangible assets, net

 
17

 

 
22,989

 

 
23,006

Tax assets

 
809

 

 
789

 

 
1,598

Investment in subsidiaries
57,874

 
72,950

 
54,584

 

 
(185,408
)
 

Intercompany loans receivable
3,000

 
11,731

 
18,121

 
28,694

 
(61,546
)
 

Other assets

 
452

 

 
832

 

 
1,284

Noncurrent assets held for sale

 

 

 
6,000

 

 
6,000

Total assets
$
60,975

 
$
87,791

 
$
72,734

 
$
138,933

 
$
(260,183
)
 
$
100,250

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Current debt obligations
$

 
$
5,000

 
$
1,473

 
$
1,585

 
$

 
$
8,058

Accounts payable

 
347

 

 
1,412

 

 
1,759

Intercompany payable
13

 
13,041

 

 

 
(13,054
)
 

Accrued compensation
7

 
454

 

 
843

 

 
1,304

Accrued income taxes
13

 

 

 
704

 

 
717

Other accrued expenses
1

 
506

 
16

 
2,728

 

 
3,251

Current liabilities held for sale

 

 

 
59

 

 
59

Total current liabilities
34

 
19,348

 
1,489

 
7,331

 
(13,054
)
 
15,148

Long-term debt

 
21,789

 
1,841

 
2,323

 

 
25,953

Accrued compensation and retirement benefits

 
1,116

 

 
547

 

 
1,663

Accrued income taxes
10

 
1,582

 

 
578

 

 
2,170

Intercompany loans payable
10,259

 
13,161

 
18,533

 
19,593

 
(61,546
)
 

Deferred tax liabilities

 

 

 
2,610

 

 
2,610

Other liabilities

 
154

 

 
872

 

 
1,026

Noncurrent liabilities held for sale

 

 

 
893

 

 
893

Total liabilities
10,303

 
57,150

 
21,863

 
34,747

 
(74,600
)
 
49,463

Shareholders’ equity
50,672

 
30,641

 
50,871

 
104,071

 
(185,583
)
 
50,672

Noncontrolling interests

 

 

 
115

 

 
115

Total equity
50,672

 
30,641

 
50,871

 
104,186

 
(185,583
)
 
50,787

Total liabilities and equity
$
60,975

 
$
87,791

 
$
72,734

 
$
138,933

 
$
(260,183
)
 
$
100,250



36

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Condensed Consolidating Balance Sheet
April 28, 2017
Medtronic Senior Notes and Medtronic Luxco Senior Notes

(in millions)
Medtronic plc
 
Medtronic, Inc.
 
Medtronic Luxco
 
Subsidiary Non-guarantors
 
Consolidating
Adjustments
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
45

 
$
5

 
$
4,917

 
$

 
$
4,967

Investments

 

 

 
8,741

 

 
8,741

Accounts receivable, net

 

 

 
5,591

 

 
5,591

Inventories, net

 
155

 

 
3,361

 
(178
)
 
3,338

Intercompany receivable
63

 

 

 
12,618

 
(12,681
)
 

Other current assets
10

 
227

 

 
1,628

 

 
1,865

Current assets held for sale

 

 

 
371

 

 
371

Total current assets
73

 
427

 
5

 
37,227

 
(12,859
)
 
24,873

Property, plant, and equipment, net

 
1,311

 

 
3,050

 

 
4,361

Goodwill

 

 

 
38,515

 

 
38,515

Other intangible assets, net

 
20

 

 
23,387

 

 
23,407

Tax assets

 
727

 

 
782

 

 
1,509

Investment in subsidiaries
55,833

 
71,909

 
52,618

 

 
(180,360
)
 

Intercompany loans receivable
3,000

 
12,162

 
16,114

 
32,774

 
(64,050
)
 

Other assets

 
434

 

 
798

 

 
1,232

Noncurrent assets held for sale

 

 

 
5,919

 

 
5,919

Total assets
$
58,906

 
$
86,990

 
$
68,737

 
$
142,452

 
$
(257,269
)
 
$
99,816

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Current debt obligations
$

 
$
5,000

 
$
901

 
$
1,619

 
$

 
$
7,520

Accounts payable

 
304

 

 
1,427

 

 
1,731

Intercompany payable
12

 
12,669

 

 

 
(12,681
)
 

Accrued compensation
9

 
734

 

 
1,117

 

 
1,860

Accrued income taxes
13

 

 

 
620

 

 
633

Other accrued expenses

 
352

 
4

 
2,086

 

 
2,442

Current liabilities held for sale

 

 

 
34

 

 
34

Total current liabilities
34

 
19,059

 
905

 
6,903

 
(12,681
)
 
14,220

Long-term debt

 
21,782

 
1,842

 
2,297

 

 
25,921

Accrued compensation and retirement benefits

 
1,120

 

 
521

 

 
1,641

Accrued income taxes
10

 
1,658

 

 
737

 

 
2,405

Intercompany loans payable
8,568

 
13,151

 
17,160

 
25,171

 
(64,050
)
 

Deferred tax liabilities

 

 

 
2,978

 

 
2,978

Other liabilities

 
153

 

 
1,362

 

 
1,515

Noncurrent liabilities held for sale

 

 

 
720

 

 
720

Total liabilities
8,612

 
56,923

 
19,907

 
40,689

 
(76,731
)
 
49,400

Shareholders' equity
50,294

 
30,067

 
48,830

 
101,641

 
(180,538
)
 
50,294

Noncontrolling interests

 

 

 
122

 

 
122

Total equity
50,294

 
30,067

 
48,830

 
101,763

 
(180,538
)
 
50,416

Total liabilities and equity
$
58,906

 
$
86,990

 
$
68,737

 
$
142,452

 
$
(257,269
)
 
$
99,816



37

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Condensed Consolidating Statement of Cash Flows
Three Months Ended July 28, 2017
Medtronic Senior Notes and Medtronic Luxco Senior Notes

(in millions)
Medtronic plc
 
Medtronic, Inc.
 
Medtronic Luxco
 
Subsidiary Non-guarantors
 
Consolidating
Adjustments
 
Total
Operating Activities:
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
24

 
$
(355
)
 
$
86

 
$
982

 
$

 
$
737

Investing Activities:
 
 
 
 
 
 
 
 
 
 
 
Acquisitions, net of cash acquired

 

 

 

 

 

Additions to property, plant, and equipment

 
(68
)
 

 
(210
)
 

 
(278
)
Purchases of investments

 

 

 
(615
)
 

 
(615
)
Sales and maturities of investments

 

 

 
971

 

 
971

Net (increase) decrease in intercompany loans

 
431

 
(2,007
)
 
4,080

 
(2,504
)
 

Other investing activities, net

 

 

 
5

 

 
5

Net cash provided by (used in) investing activities

 
363

 
(2,007
)
 
4,231

 
(2,504
)
 
83

Financing Activities:
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration

 

 

 
(3
)
 

 
(3
)
Change in current debt obligations, net

 

 
572

 
(3
)
 

 
569

Issuance of long-term debt

 

 

 
18

 

 
18

Payments on long-term debt

 

 

 
(8
)
 

 
(8
)
Dividends to shareholders
(625
)
 

 

 

 

 
(625
)
Issuance of ordinary shares
143

 

 

 

 

 
143

Repurchase of ordinary shares
(1,233
)
 

 

 

 

 
(1,233
)
Net intercompany loan borrowings (repayments)
1,691

 
10

 
1,373

 
(5,578
)
 
2,504

 

Intercompany dividend paid

 

 

 

 

 

Other financing activities

 

 

 
(2
)
 

 
(2
)
Net cash provided by (used in) financing activities
(24
)
 
10

 
1,945

 
(5,576
)
 
2,504

 
(1,141
)
Effect of exchange rate changes on cash and cash equivalents

 

 

 
45

 

 
45

Net change in cash and cash equivalents

 
18

 
24

 
(318
)
 

 
(276
)
Cash and cash equivalents at beginning of period

 
45

 
5

 
4,917

 

 
4,967

Cash and cash equivalents at end of period
$

 
$
63

 
$
29

 
$
4,599

 
$

 
$
4,691



38

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Condensed Consolidating Statement of Cash Flows
Three Months Ended July 29, 2016
Medtronic Senior Notes

(in millions)
Medtronic plc
 
Medtronic, Inc.
 
Medtronic Luxco
 
Subsidiary Non-guarantors
 
Consolidating
Adjustments
 
Total
Operating Activities:
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
440

 
$
534

 
$
13

 
$
563

 
$

 
$
1,550

Investing Activities:
 
 
 
 
 
 
 
 
 
 
 
Acquisitions, net of cash acquired

 

 

 
(12
)
 

 
(12
)
Additions to property, plant, and equipment

 

 

 
(330
)
 

 
(330
)
Purchases of investments

 

 

 
(1,206
)
 
162

 
(1,044
)
Sales and maturities of investments

 
162

 

 
1,104

 
(162
)
 
1,104

Net (increase) decrease in intercompany loans

 
(541
)
 
(1,787
)
 
(785
)
 
3,113

 

Capital contribution paid

 
(162
)
 

 

 
162

 

Other investing activities, net

 

 

 
(2
)
 

 
(2
)
Net cash provided by (used in) investing activities

 
(541
)
 
(1,787
)
 
(1,231
)
 
3,275

 
(284
)
Financing Activities:
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration

 

 

 
(11
)
 

 
(11
)
Change in current debt obligations, net

 

 
975

 
(49
)
 

 
926

Issuance of long-term debt

 

 

 
33

 

 
33

Payments on long-term debt

 

 

 
(17
)
 

 
(17
)
Dividends to shareholders
(599
)
 

 

 

 

 
(599
)
Issuance of ordinary shares
214

 

 

 

 

 
214

Repurchase of ordinary shares
(1,763
)
 

 

 

 

 
(1,763
)
Net intercompany loan borrowings (repayments)
1,708

 
(2
)
 
854

 
553

 
(3,113
)
 

Capital contribution received

 

 

 
162

 
(162
)
 

Other financing activities

 

 

 
57

 

 
57

Net cash provided by (used in) financing activities
(440
)
 
(2
)
 
1,829

 
728

 
(3,275
)
 
(1,160
)
Effect of exchange rate changes on cash and cash equivalents

 

 

 
78

 

 
78

Net change in cash and cash equivalents

 
(9
)
 
55

 
138

 

 
184

Cash and cash equivalents at beginning of period

 
55

 

 
2,821

 

 
2,876

Cash and cash equivalents at end of period
$

 
$
46

 
$
55

 
$
2,959

 
$

 
$
3,060



39

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Consolidating Statement of Comprehensive Income
Three Months Ended July 28, 2017
CIFSA Senior Notes
(in millions)
Medtronic plc
 
CIFSA
 
CIFSA Subsidiary Guarantors
 
Subsidiary Non-guarantors
 
Consolidating
Adjustments
 
Total
Net sales
$

 
$

 
$

 
$
7,390

 
$

 
$
7,390

 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 

 

 
2,349

 

 
2,349

Research and development expense

 

 

 
548

 

 
548

Selling, general, and administrative expense
3

 

 

 
2,482

 

 
2,485

Restructuring charges, net

 

 

 
8

 

 
8

Acquisition-related items

 

 

 
44

 

 
44

Divestiture-related items

 

 

 
47

 

 
47

Amortization of intangible assets

 

 

 
454

 

 
454

Other (income) expense, net
13

 
1

 

 
52

 

 
66

Operating profit (loss)
(16
)
 
(1
)
 

 
1,406

 

 
1,389

Interest income

 
(16
)
 
(112
)
 
(112
)
 
148

 
(92
)
Interest expense
49

 
23

 
35

 
327

 
(148
)
 
286

Interest expense (income), net
49

 
7

 
(77
)
 
215

 

 
194

Equity in net (income) loss of subsidiaries
(1,079
)
 
(390
)
 
(1,002
)
 

 
2,471

 

Income from operations before income taxes
1,014

 
382

 
1,079

 
1,191

 
(2,471
)
 
1,195

Provision (benefit) for income taxes
(2
)
 

 

 
188

 

 
186

Net income
1,016

 
382

 
1,079

 
1,003

 
(2,471
)
 
1,009

Net loss attributable to noncontrolling interests

 

 

 
7

 

 
7

Net income attributable to Medtronic
1,016

 
382

 
1,079

 
1,010

 
(2,471
)
 
1,016

Other comprehensive income (loss), net of tax
689

 
94

 
689

 
689

 
(1,472
)
 
689

Other comprehensive loss attributable to non controlling interests

 

 

 
7

 

 
7

Total comprehensive income
$
1,705

 
$
476

 
$
1,768

 
$
1,699

 
$
(3,943
)
 
$
1,705



40

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Consolidating Statement of Comprehensive Income
Three Months Ended July 29, 2016
CIFSA Senior Notes
(in millions)
Medtronic plc
 
CIFSA
 
CIFSA Subsidiary Guarantors
 
Subsidiary Non-guarantors
 
Consolidating
Adjustments
 
Total
Net sales
$

 
$

 
$

 
$
7,166

 
$

 
$
7,166

 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 

 

 
2,261

 

 
2,261

Research and development expense

 

 

 
556

 

 
556

Selling, general, and administrative expense
3

 

 

 
2,425

 

 
2,428

Restructuring charges, net

 

 

 
94

 

 
94

Certain litigation charges

 

 

 
82

 

 
82

Acquisition-related items

 

 

 
52

 

 
52

Amortization of intangible assets

 

 

 
487

 

 
487

Other (income) expense, net
11

 
1

 

 
27

 

 
39

Operating profit (loss)
(14
)
 
(1
)
 

 
1,182

 

 
1,167

Interest income

 
(29
)
 
(157
)
 
(106
)
 
199

 
(93
)
Interest expense
16

 
32

 
1

 
422

 
(199
)
 
272

Interest expense (income), net
16

 
3

 
(156
)
 
316

 

 
179

Equity in net (income) loss of subsidiaries
(957
)
 
(877
)
 
(801
)
 

 
2,635

 

Income from operations before income taxes
927

 
873

 
957

 
866

 
(2,635
)
 
988

Provision (benefit) for income taxes
(2
)
 

 

 
61

 

 
59

Net income
929

 
873

 
957

 
805

 
(2,635
)
 
929

Other comprehensive income (loss), net of tax
(156
)
 
42

 
(156
)
 
(156
)
 
270

 
(156
)
Total comprehensive income
$
773

 
$
915

 
$
801

 
$
649

 
$
(2,365
)
 
$
773




41

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Condensed Consolidating Balance Sheet
July 28, 2017
CIFSA Senior Notes
(in millions)
Medtronic plc
 
CIFSA
 
CIFSA Subsidiary Guarantors
 
Subsidiary Non-guarantors
 
Consolidating
Adjustments
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
30

 
$
4,661

 
$

 
$
4,691

Investments

 

 

 
8,397

 

 
8,397

Accounts receivable, net

 

 

 
5,784

 

 
5,784

Inventories, net

 

 

 
3,538

 

 
3,538

Intercompany receivable
94

 

 
60

 
13

 
(167
)
 

Other current assets
7

 

 

 
1,993

 

 
2,000

Current assets held for sale

 

 

 
369

 

 
369

Total current assets
101

 

 
90

 
24,755

 
(167
)
 
24,779

Property, plant, and equipment, net

 

 

 
4,387

 

 
4,387

Goodwill

 

 

 
39,196

 

 
39,196

Other intangible assets, net

 

 

 
23,006

 

 
23,006

Tax assets

 

 

 
1,598

 

 
1,598

Investment in subsidiaries
57,874

 
31,684

 
53,258

 

 
(142,816
)
 

Intercompany loans receivable
3,000

 
2,795

 
19,390

 
18,634

 
(43,819
)
 

Other assets

 

 

 
1,284

 

 
1,284

Noncurrent assets held for sale

 

 

 
6,000

 

 
6,000

Total assets
$
60,975

 
$
34,479

 
$
72,738

 
$
118,860

 
$
(186,802
)
 
$
100,250

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Current debt obligations
$

 
$
1,163

 
$
1,473

 
$
5,422

 
$

 
$
8,058

Accounts payable

 

 

 
1,759

 

 
1,759

Intercompany payable
13

 

 

 
154

 
(167
)
 

Accrued compensation
7

 

 

 
1,297

 

 
1,304

Accrued income taxes
13

 

 

 
704

 

 
717

Other accrued expenses
1

 
33

 
20

 
3,197

 

 
3,251

Current liabilities held for sale

 

 

 
59

 

 
59

Total current liabilities
34

 
1,196

 
1,493

 
12,592

 
(167
)
 
15,148

Long-term debt

 
2,128

 
1,841

 
21,984

 

 
25,953

Accrued compensation and retirement benefits

 

 

 
1,663

 

 
1,663

Accrued income taxes
10

 

 

 
2,160

 

 
2,170

Intercompany loans payable
10,259

 
1,371

 
18,533

 
13,656

 
(43,819
)
 

Deferred tax liabilities

 

 

 
2,610

 

 
2,610

Other liabilities

 

 

 
1,026

 

 
1,026

Noncurrent liabilities held for sale

 

 

 
893

 

 
893

Total liabilities
10,303

 
4,695

 
21,867

 
56,584

 
(43,986
)
 
49,463

Shareholders’ equity
50,672

 
29,784

 
50,871

 
62,161

 
(142,816
)
 
50,672

Noncontrolling interests

 

 

 
115

 

 
115

Total equity
50,672

 
29,784

 
50,871

 
62,276

 
(142,816
)
 
50,787

Total liabilities and equity
$
60,975

 
$
34,479

 
$
72,738

 
$
118,860

 
$
(186,802
)
 
$
100,250



42

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Condensed Consolidating Balance Sheet
April 28, 2017
CIFSA Senior Notes
(in millions)
Medtronic plc
 
CIFSA
 
CIFSA Subsidiary Guarantors
 
Subsidiary Non-guarantors
 
Consolidating
Adjustments
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
33

 
$
5

 
$
4,929

 
$

 
$
4,967

Investments

 

 

 
8,741

 

 
8,741

Accounts receivable, net

 

 

 
5,591

 

 
5,591

Inventories, net

 

 

 
3,338

 

 
3,338

Intercompany receivable
63

 

 
60

 
12

 
(135
)
 

Other current assets
10

 

 

 
1,855

 

 
1,865

Current assets held for sale

 

 

 
371

 

 
371

Total current assets
73

 
33

 
65

 
24,837

 
(135
)
 
24,873

Property, plant, and equipment, net

 

 

 
4,361

 

 
4,361

Goodwill

 

 

 
38,515

 

 
38,515

Other intangible assets, net

 

 

 
23,407

 

 
23,407

Tax assets

 

 

 
1,509

 

 
1,509

Investment in subsidiaries
55,833

 
31,055

 
51,294

 

 
(138,182
)
 

Intercompany loans receivable
3,000

 
2,978

 
17,383

 
17,260

 
(40,621
)
 

Other assets

 

 

 
1,232

 

 
1,232

Noncurrent assets held for sale

 

 

 
5,919

 

 
5,919

Total assets
$
58,906

 
$
34,066

 
$
68,742

 
$
117,040

 
$
(178,938
)
 
$
99,816

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Current debt obligations
$

 
$
1,176

 
$
901

 
$
5,443

 
$

 
$
7,520

Accounts payable

 

 

 
1,731

 

 
1,731

Intercompany payable
12

 

 

 
123

 
(135
)
 

Accrued compensation
9

 

 

 
1,851

 

 
1,860

Accrued income taxes
13

 

 

 
620

 

 
633

Other accrued expenses

 
23

 
8

 
2,411

 

 
2,442

Current liabilities held for sale

 

 

 
34

 

 
34

Total current liabilities
34

 
1,199

 
909

 
12,213

 
(135
)
 
14,220

Long-term debt

 
2,133

 
1,842

 
21,946

 

 
25,921

Accrued compensation and retirement benefits

 

 

 
1,641

 

 
1,641

Accrued income taxes
10

 

 

 
2,395

 

 
2,405

Intercompany loans payable
8,568

 
1,369

 
17,161

 
13,523

 
(40,621
)
 

Deferred tax liabilities

 

 

 
2,978

 

 
2,978

Other liabilities

 

 

 
1,515

 

 
1,515

Noncurrent liabilities held for sale

 

 

 
720

 

 
720

Total liabilities
8,612

 
4,701

 
19,912

 
56,931

 
(40,756
)
 
49,400

Shareholders' equity
50,294

 
29,365

 
48,830

 
59,987

 
(138,182
)
 
50,294

Noncontrolling interests

 

 

 
122

 

 
122

Total Equity
50,294

 
29,365

 
48,830

 
60,109

 
(138,182
)
 
50,416

Total liabilities and equity
$
58,906

 
$
34,066

 
$
68,742

 
$
117,040

 
$
(178,938
)
 
$
99,816



43

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Condensed Consolidating Statement of Cash Flows
Three Months Ended July 28, 2017
CIFSA Senior Notes
(in millions)
Medtronic plc
 
CIFSA
 
CIFSA Subsidiary Guarantors
 
Subsidiary Non-guarantors
 
Consolidating
Adjustments
 
Total
Operating Activities:
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
24

 
$
234

 
$
88

 
$
641

 
$
(250
)
 
$
737

Investing Activities:
 
 
 
 
 
 
 
 
 
 
 
Acquisitions, net of cash acquired

 

 

 

 

 

Additions to property, plant, and equipment

 

 

 
(278
)
 

 
(278
)
Purchases of investments

 

 

 
(615
)
 

 
(615
)
Sales and maturities of investments

 

 

 
971

 

 
971

Net (increase) decrease in intercompany loans

 
183

 
(2,007
)
 
(1,374
)
 
3,198

 

Capital contribution paid

 
(452
)
 

 

 
452

 

Other investing activities, net

 

 

 
5

 

 
5

Net cash provided by (used in) investing activities

 
(269
)
 
(2,007
)
 
(1,291
)
 
3,650

 
83

Financing Activities:
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration

 

 

 
(3
)
 

 
(3
)
Change in current debt obligations, net

 

 
572

 
(3
)
 

 
569

Issuance of long-term debt

 

 

 
18

 

 
18

Payments on long-term debt

 

 

 
(8
)
 

 
(8
)
Dividends to shareholders
(625
)
 

 

 

 

 
(625
)
Issuance of ordinary shares
143

 

 

 

 

 
143

Repurchase of ordinary shares
(1,233
)
 

 

 

 

 
(1,233
)
Net intercompany loan borrowings (repayments)
1,691

 
2

 
1,372

 
133

 
(3,198
)
 

Intercompany dividend paid

 

 

 
(250
)
 
250

 

Capital contribution received

 

 

 
452

 
(452
)
 

Other financing activities

 

 

 
(2
)
 

 
(2
)
Net cash provided by (used in) financing activities
(24
)
 
2

 
1,944

 
337

 
(3,400
)
 
(1,141
)
Effect of exchange rate changes on cash and cash equivalents

 

 

 
45

 

 
45

Net change in cash and cash equivalents

 
(33
)
 
25

 
(268
)
 

 
(276
)
Cash and cash equivalents at beginning of period

 
33

 
5

 
4,929

 

 
4,967

Cash and cash equivalents at end of period
$

 
$

 
$
30

 
$
4,661

 
$

 
$
4,691



44

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Condensed Consolidating Statement of Cash Flows
Three Months Ended July 29, 2016
CIFSA Senior Notes
(in millions)
Medtronic plc
 
CIFSA
 
CIFSA Subsidiary Guarantors
 
Subsidiary Non-guarantors
 
Consolidating
Adjustments
 
Total
Operating Activities:
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
440

 
$
(7
)
 
$

 
$
1,117

 
$

 
$
1,550

Investing Activities:
 
 
 
 
 
 
 
 
 
 
 
Acquisitions, net of cash acquired

 

 

 
(12
)
 

 
(12
)
Additions to property, plant, and equipment

 

 

 
(330
)
 

 
(330
)
Purchases of investments

 

 

 
(1,044
)
 

 
(1,044
)
Sales and maturities of investments

 

 

 
1,104

 

 
1,104

Net (increase) decrease in intercompany loans

 
4,290

 
(1,774
)
 
3,334

 
(5,850
)
 

Capital contributions paid

 
(325
)
 

 

 
325

 

Other investing activities, net

 

 

 
(2
)
 

 
(2
)
Net cash provided by (used in) investing activities

 
3,965

 
(1,774
)
 
3,050

 
(5,525
)
 
(284
)
Financing Activities:
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration

 

 

 
(11
)
 

 
(11
)
Change in current debt obligations, net

 

 
975

 
(49
)
 

 
926

Issuance of long-term debt

 

 

 
33

 

 
33

Payments on long-term debt

 

 

 
(17
)
 

 
(17
)
Dividends to shareholders
(599
)
 

 

 

 

 
(599
)
Issuance of ordinary shares
214

 

 

 

 

 
214

Repurchase of ordinary shares
(1,763
)
 

 

 

 

 
(1,763
)
Net intercompany loan borrowings (repayments)
1,708

 
(4,081
)
 
854

 
(4,331
)
 
5,850

 

Capital contributions received

 

 

 
325

 
(325
)
 

Other financing activities

 

 

 
57

 

 
57

Net cash provided by (used in) financing activities
(440
)
 
(4,081
)
 
1,829

 
(3,993
)
 
5,525

 
(1,160
)
Effect of exchange rate changes on cash and cash equivalents

 

 

 
78

 

 
78

Net change in cash and cash equivalents

 
(123
)
 
55

 
252

 

 
184

Cash and cash equivalents at beginning of period

 
208

 

 
2,668

 

 
2,876

Cash and cash equivalents at end of period
$

 
$
85

 
$
55

 
$
2,920

 
$

 
$
3,060



45

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


19. Subsequent Events
On July 29, 2017, the Company's Minimally Invasive Therapies Group sold the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses within the Patient Monitoring and Recovery division to Cardinal Health, Inc. (Cardinal) for total consideration of $6.1 billion. Among the product lines included in the divestiture are the dental/animal health, chart paper, wound care, incontinence, electrodes, SharpSafety, thermometry, perinatal protection, blood collection, compression, and enteral feeding offerings. The divestiture also included 17 dedicated manufacturing sites. The after-tax proceeds are estimated to be approximately $5.6 billion to $5.8 billion. In connection with the transaction, the Company has entered into Transition Service Agreements (TSAs) and Transition Manufacturing Agreements (TMAs) with Cardinal designed to ensure and facilitate an orderly transfer of business operations. The TSAs are primarily related to administrative services for terms generally between 6 and 12 months, with an ability to extend upon mutual agreement of both parties. Under the TMAs, both the Company and Cardinal will manufacture and supply certain products to each other for a transition period of up to 5 years. On August 3, 2017, the Company used a portion of the proceeds received from Cardinal to repay its senior unsecured term loan, including accrued interest, for $3.0 billion.
On August 10, 2017 the Company received a tax ruling confirming the treatment of various intercompany transactions which have the effect of utilizing the $12 billion of non-U.S. special deductions previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended April 28, 2017. The ruling will allow the Company to offset some of the gain on the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses as well as recognize an income tax benefit associated with an intercompany sale of intellectual property. The Company is still assessing the financial statement impact of these events.
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 28, 2017. In addition, you should read this discussion along with our consolidated financial statements and related notes thereto at and for the three months ended July 28, 2017.
Early in the week of June 19, 2017, we experienced an information technology system disruption that affected our customer ordering, distribution, and manufacturing processes globally. Our system has been fully restored. While the system disruption had some impact on our overall performance for the three months ended July 28, 2017, we have concluded that the impact was not material to our revenue or earnings per share for the three months ended July 28, 2017 or full fiscal year 2018.
Financial Trends
Throughout this Management’s Discussion and Analysis, we present certain financial measures that management uses 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 generally accepted accounting principles in the United States (U.S.) (U.S. GAAP). These financial measures are considered "non-GAAP financial measures."
Management uses non-GAAP financial measures to facilitate management’s review of the operational performance of the Company and as a basis for strategic planning. Management believes that non-GAAP financial measures provide useful information to investors regarding the underlying business trends and performance of the Company’s ongoing operations and are useful for period over period comparisons of such operations. The non-GAAP financial measures reflect an additional way of viewing aspects of the Company’s operations. Investors should not consider results reflecting non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP and are cautioned that Medtronic may calculate results reflecting non-GAAP financial measures in a way that is different from other companies.
The GAAP to Non-GAAP Reconciliation presents non-GAAP financial measures that exclude the impact of charges or gains that contribute to or reduce earnings and that may affect financial trends, but which include charges or benefits that result from transactions or events that management believes 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 recorded. 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

46



(Non-GAAP Nominal Tax Rate). The Non-GAAP Nominal Tax Rate is calculated as the provision for income taxes, adjusted for the impact of Non-GAAP Adjustments, as a percentage of income before provision for 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 Reconciliation," "Income Taxes," and "Summary of Cash Flows" sections for reconciliations of our results of operations prepared in accordance with U.S. GAAP to the adjusted non-GAAP measurements considered by management.
EXECUTIVE LEVEL OVERVIEW
Medtronic is among the world's largest medical technology, services, and solutions companies - alleviating pain, restoring health, and extending life for millions of people around the world. We employ more than 84,000 full-time employees worldwide, serving physicians, hospitals, and patients in approximately 160 countries. Our primary products include those for cardiac rhythm disorders, cardiovascular disease, advanced and general surgical care, respiratory and monitoring solutions, neurological disorders, spinal conditions and musculoskeletal trauma, urological and digestive disorders, and ear, nose, and throat and diabetes conditions.

Net income attributable to Medtronic for the three months ended July 28, 2017 was $1.0 billion, or $0.74 per diluted share, as compared to net income attributable to Medtronic for the three months ended July 29, 2016 of $929 million, or $0.66 per diluted share, representing increases of 9 percent and 12 percent, respectively.

The table below illustrates net sales by operating segment for the three months ended July 28, 2017 and July 29, 2016:
 
Three months ended
 
 
(in millions)
July 28, 2017
 
July 29, 2016
 
% Change
Cardiac and Vascular Group
$
2,646

 
$
2,518

 
5
 %
Minimally Invasive Therapies Group
2,486

 
2,424

 
3

Restorative Therapies Group
1,809

 
1,772

 
2

Diabetes Group
449

 
452

 
(1
)
Total Net Sales
$
7,390

 
$
7,166

 
3
 %

Currency had an unfavorable impact of $33 million on net sales for the three months ended July 28, 2017, as compared to the three months ended July 29, 2016 when using the average exchange rates in effect during the prior fiscal year period. For the three months ended July 28, 2017, the acquisitions of HeartWare and Smith & Nephew's gynecology business contributed $92 million to our total net sales growth.

Our performance continues to be fueled by our three growth strategies: therapy innovation, globalization, and economic value. We are creating competitive advantages and capitalizing on the long-term trends in healthcare: namely, the desire to improve clinical outcomes; the growing demand for expanded access to care; and the optimization of cost and efficiency within healthcare systems. In our therapy innovation growth strategy, we continue to see strong adoption of our products across all our operating segments. In globalization, net sales in emerging markets and non-U.S. developed markets grew 11 percent and 4 percent, respectively, during the three months ended July 28, 2017 as compared to the corresponding period in the prior fiscal year as we continue to expand access to our products and services around the world. In our third growth strategy, economic value, we continue to execute our value-based healthcare signature programs and aggressively develop unique, value-based healthcare solutions across each of our operating segments. We remain focused on leading the shift to healthcare payment systems that reward value and improved patient outcomes over volume. See our discussion in the “Net Sales” section of this Management's Discussion and Analysis for more information on the results of our operating segments.

47




GAAP to Non-GAAP Reconciliation We provide non-GAAP financial measures to facilitate review of our operational performance and as a basis for strategic planning. Management believes that in order to properly understand its short-term and long-term financial trends, including period over period comparisons of the company’s operations, investors may find it useful to exclude the effect of certain charges or gains that contribute to or reduce earnings but that result from transactions or events that management believes may or may not recur with similar materiality or impact to operations in future periods. Refer to our discussion in the "Costs and Expenses" and "Income Taxes" sections of this Management's Discussion and Analysis for more information on the Non-GAAP Adjustments. Non-GAAP financial measures should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP, and investors are cautioned that Medtronic may calculate non-GAAP financial measures in a way that is different from other companies.
The tables below present our GAAP to Non-GAAP reconciliations for the three months ended July 28, 2017 and July 29, 2016:
 
Three months ended July 28, 2017
(in millions)
Income Before Provision for Income Taxes
 
Diluted EPS (1)
 
Provision for Income Taxes (2)
 
Effective Tax Rate
GAAP
$
1,195

 
$
0.74

 
$
186

 
15.6
%
Non-GAAP Adjustments:
 
 
 
 
 
 
 
Restructuring charges, net
14

 
0.01

 
2


14.3

Acquisition-related items
53

 
0.03

 
14


26.4

Divestiture-related items
48

 
0.03

 
8

 
16.7

Amortization of intangible assets
454

 
0.27

 
80


17.6

Certain tax adjustments

 
0.04

 
(60
)


Non-GAAP
$
1,764

 
$
1.12

 
$
230


13.0
%
 
 
 
 
 
 
 
 
 
Three months ended July 29, 2016
(in millions)
Income Before Provision for Income Taxes
 
Diluted EPS(1)
 
Provision for Income Taxes (2)
 
Effective Tax Rate
GAAP
$
988

 
$
0.66

 
$
59

 
6.0
%
Non-GAAP Adjustments:
 
 
 
 
 
 
 
Restructuring charges, net
104

 
0.06

 
25

 
24.0

Certain litigation charges
82

 
0.04

 
30

 
36.6

Acquisition-related items
52

 
0.03

 
13

 
25.0

Amortization of intangible assets
487

 
0.27

 
111

 
22.8

Certain tax adjustments

 
(0.02
)
 
31

 

Non-GAAP
$
1,713

 
$
1.03

 
$
269

 
15.7
%
(1)
The data in this schedule has been intentionally rounded to the nearest $0.01 and, therefore, may not sum.
(2)
The tax effect of each Non-GAAP Adjustment is based on the jurisdictions in which the expense (income) is incurred and the tax laws in effect for each such jurisdiction.

GAAP diluted EPS and Non-GAAP diluted EPS for the first quarter of fiscal year 2018 were $0.74 and $1.12 per diluted share, respectively, as compared to $0.66 and $1.03 per diluted share, respectively, for the first quarter in the prior fiscal year, representing an increase of 12% and 9%, respectively. A key contributor to the growth in GAAP diluted EPS and Non-GAAP diluted EPS was solid operating margin expansion due to the continued execution on our cost savings initiatives, including cost synergies from the Covidien acquisition, strategic sourcing initiatives, global footprint optimization, and the expansion of share services and centers of excellence. GAAP diluted EPS and Non-GAAP diluted EPS growth was also driven by revenue growth in emerging markets and non-U.S. developed markets, most notably in Latin America, China, and the Middle East. The growth year-over-year reflects the strength of our underlying businesses and stable growth of our markets, as well as the diversification benefit of our groups and regions.

48



CRITICAL ACCOUNTING ESTIMATES
We have used various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Our most 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 28, 2017.
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.
Our critical accounting estimates include the following:
Revenue Recognition Rebates are estimated based on sales terms, historical experience, and trend analysis. In estimating rebates, we consider the lag time between the point of sale and the payment of the rebate claim, contractual commitments, including stated rebate rates, and other relevant information. We adjust reserves to reflect differences between estimated and actual experience and recognize such adjustment as a reduction of sales in the period of adjustment. Adjustments to recorded reserves have not been significant. Price adjustment rebates charged against gross sales for the three months ended July 28, 2017 and July 29, 2016 were $751 million and $736 million, respectively.
Litigation Contingencies We are involved in a number of legal actions involving product liability, intellectual property disputes, shareholder related matters, environmental proceedings, income tax disputes, and governmental proceedings and investigations. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In some actions, the enforcement agencies or private claimants seek damages, as well as other civil or criminal remedies (including injunctions barring the sale of products that are the subject of the proceeding), that could require significant expenditures or result in lost revenues or limit our ability to conduct business in the applicable jurisdictions. Estimates of probable losses resulting from litigation and governmental proceedings involving us are inherently difficult to predict, particularly when the matters are in early procedural stages, with incomplete scientific facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, or punitive damages; or could result in a change in business practice. Our significant legal proceedings are discussed in Note 16 to the current period's consolidated financial statements. While it is not possible to predict the outcome for most of the matters discussed in Note 16 to the current period's consolidated financial statements, we believe it is possible that costs associated with these matters could have a material adverse impact on our consolidated earnings, financial position, and/or cash flows.
Income Tax Reserves We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may or may not prevail. Under U.S. GAAP, if we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50 percent likely of being realized upon settlement. We presume that all tax positions will be examined by a taxing authority with full knowledge of all relevant information. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We regularly monitor our tax positions and tax liabilities. We reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit, or derecognize a previously recorded tax benefit, when there is (i) a completion of a tax audit, (ii) effective settlement of an issue, (iii) a change in applicable tax law including a tax case or legislative guidance, or (iv) an expiration of the statute of limitations. Significant judgment is required in accounting for tax reserves. Although we believe that we have adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on our effective tax rate, consolidated earnings, financial position and/or cash flows.
Valuation of Intangible Assets and Goodwill When we acquire a business, the assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. Goodwill is the excess of the purchase price consideration over the estimated fair value of net assets of acquired businesses. Intangible assets include patents, trademarks, tradenames, customer relationships, purchased technology, and IPR&D. Determining the fair value of intangible assets acquired as part of a business combination requires us to make significant estimates. These estimates include the amount and timing of projected future cash flows of each project or technology, the discount rate used to discount those cash flows to present value, the assessment of the asset’s life cycle, and the consideration of legal, technical, regulatory, economic, and competitive risks.
The test for goodwill impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows. Our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value, including projected future cash

49



flows. We assess the impairment of goodwill at the reporting unit level annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Goodwill was $39.2 billion and $38.5 billion at July 28, 2017 and April 28, 2017, respectively.
We test definite-lived intangible assets for impairment when an event occurs or circumstances change that would indicate the carrying amount of the assets or asset group may be impaired. Our tests are based on future cash flows that require significant judgment with respect to future revenue and expense growth rates, appropriate discount rates, asset groupings, and other assumptions and estimates. We use estimates that are consistent with our business plans and a market participant view of the assets being evaluated. Actual results may differ from our estimates due to a number of factors including, among others, changes in competitive conditions, timing of regulatory approval, results of clinical trials, changes in worldwide economic conditions, and fluctuations in currency exchange rates. Definite-lived intangible assets, net of accumulated amortization, were $22.4 billion and $22.8 billion at July 28, 2017 and April 28, 2017, respectively.
We assess the impairment of indefinite-lived intangibles annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Our impairment tests of indefinite-lived intangibles require us to make several estimates about fair value, including projected future cash flows and the appropriate discount rates. Indefinite-lived intangible assets were $569 million and $594 million at July 28, 2017 and April 28, 2017, respectively.
Contingent Consideration Contingent consideration liabilities are recorded at the acquisition date at estimated fair value and are remeasured each reporting period with the change in fair value recognized within acquisition-related items in our consolidated statements of income. Changes to the fair value of contingent consideration may result from changes in the estimated timing and amount of revenue, estimated timing or probability of achieving the milestones which trigger payment, or discount rates. The fair value of contingent consideration liabilities was $242 million and $246 million at July 28, 2017 and April 28, 2017, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 2 to the current period's consolidated financial statements.
ACQUISITIONS
Information regarding acquisitions is included in Note 3 to the current period's consolidated financial statements.
NET SALES
The table below illustrates net sales by operating segment and division for the three months ended July 28, 2017 and July 29, 2016:
 
Three months ended
 
 
(in millions)
July 28, 2017
 
July 29, 2016
 
% Change
Cardiac Rhythm & Heart Failure
$
1,390

 
$
1,334

 
4
 %
Coronary & Structural Heart
817

 
762

 
7

Aortic & Peripheral Vascular
439

 
422

 
4

Cardiac and Vascular Group
2,646

 
2,518

 
5

Surgical Solutions
1,399

 
1,348

 
4

Patient Monitoring & Recovery
1,087

 
1,076

 
1

Minimally Invasive Therapies Group
2,486

 
2,424

 
3

Spine
649

 
645

 
1

Brain Therapies
522

 
489

 
7

Specialty Therapies
369

 
356

 
4

Pain Therapies
269

 
282

 
(5
)
Restorative Therapies Group
1,809

 
1,772

 
2

Diabetes Group
449

 
452

 
(1
)
Total
$
7,390

 
$
7,166

 
3
 %

50



Cardiac and Vascular Group
The Cardiac and Vascular Group’s products include pacemakers, insertable and external cardiac monitors, cardiac resynchronization therapy devices (CRT-D), implantable cardioverter defibrillators (ICD), leads and delivery systems, ventricular assist 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. The Cardiac and Vascular Group also includes Care Management Services and Cath Lab Managed Services (CLMS) within the Cardiac Rhythm & Heart Failure division. The Cardiac and Vascular Group’s net sales for the three months ended July 28, 2017 were $2.6 billion, an increase of 5 percent as compared to the corresponding period in the prior fiscal year. Currency had an unfavorable impact on net sales for the three months ended July 28, 2017 of $12 million as a result of the change in exchange rates from the three months ended July 29, 2016. The Cardiac and Vascular Group's net sales for the three months ended July 28, 2017, as compared to the corresponding period in the prior fiscal year, benefited from strong net sales growth in all three divisions, as well as the acquisition of HeartWare in the second quarter of fiscal year 2017. See the more detailed discussion of each division's performance below.
Cardiac Rhythm & Heart Failure net sales for the three months ended July 28, 2017 were $1.4 billion, an increase of 4 percent as compared to the corresponding period in the prior fiscal year. Cardiac Rhythm & Heart Failure net sales growth for the three months ended July 28, 2017 was driven by strong growth in Arrhythmia Management and Heart Failure. The strong growth in Arrhythmia Management was driven by growth in AF Solutions, increased penetration of the Micra transcatheter pacing system as a result of receiving final approval for reimbursement in the U.S. from the Centers for Medicare & Medicaid Services during the fourth quarter of fiscal year 2017, the strong adoption of the TYRX absorbable antibacterial envelope, and growth in Diagnostics driven by the continued global demand of the Reveal LINQ insertable cardiac monitor. The strong net sales growth in Heart Failure for the three months ended July 28, 2017 was driven by strong demand for the CRT-P quadripolar pacing system, which launched in in the U.S. in the first quarter of fiscal year 2018, as well as the benefit from the acquisition of HeartWare, which was acquired during the second quarter of fiscal year 2017.
Coronary & Structural Heart net sales for the three months ended July 28, 2017 were $817 million, an increase of 7 percent as compared to the corresponding period in the prior fiscal year. Coronary & Structural Heart net sales growth for the three months ended July 28, 2017 was largely driven by the strong customer adoption of the Evolut PRO Transcatheter Aortic Valve system (Evolut PRO) in the U.S., as well as the continued demand for the Evolut R 34mm transcatheter aortic heart valve in the U.S. and Europe.
Aortic & Peripheral Vascular net sales for the three months ended July 28, 2017 were $439 million, an increase of 4 percent as compared to the corresponding period in the prior fiscal year. Aortic & Peripheral Vascular net sales growth for the three months ended July 28, 2017 was driven by success of the Heli-FX EndoAnchor System and the Endurant IIs aortic stent graft, as well strong performance in drug-coated balloons. Continued strong adoption of the HawkOne 6 French directional atherectomy system also contributed to net sales growth for the three months ended July 28, 2017.
Looking ahead, we expect our Cardiac and Vascular Group could be affected by the following:
Changes in procedural volumes, competitive and pricing pressure, geographic macro-economic risks, reimbursement challenges, impacts from changes in the mix of our product offerings, the timing of product registration approvals, replacement cycle challenges, and fluctuations in currency exchange rates.

Acceptance and future growth of the CRT-P quadripolar pacing system, which received CE Mark approval in February 2017 and launched in Europe during the fourth quarter of fiscal year 2017. In the U.S., we received FDA approval in May 2017, and launched in the first quarter of fiscal year 2018.

Acceptance and future growth of the Claria MRI CRT-D system with EffectivCRT Diagnostic and Effective CRT during AF algorithm, which launched in the U.S. late in the third quarter of fiscal year 2017 and is expected to launch in Japan in fiscal year 2018.

Continued future growth from the Reveal LINQ insertable cardiac monitor, which launched in Japan in the second quarter of fiscal year 2017.

Continued future growth of our Micra transcatheter pacing system, which we started shipping and physician training in the U.S. in the first quarter of fiscal year 2017. Micra is a miniaturized single chamber pacemaker system that is delivered through the femoral vein and is implanted in the right ventricle of the heart. The system does not use a lead and does not have a subcutaneous device pocket underneath the skin as with conventional

51



pacemaker systems. During the fourth quarter of fiscal year 2017, we received final approval for reimbursement in the U.S. from the Centers for Medicare & Medicaid Services for this transformative therapy, which we expect will accelerate sales in the U.S.

Continued acceptance and future growth from Care Management Services as post-acute care services become even more critical in bundled payment models for different interventions or therapies.

Continued acceptance and future growth from Evolut R 34mm transcatheter aortic heart valve, our next-generation recapturable system with differentiated 16 French equivalent delivery system, which was launched in the U.S. in the third quarter of fiscal year 2017.

Acceptance and future growth from Evolut PRO, which provides control during deployment to assist with accurate positioning with the ability to recapture and reposition the valve. Evolut PRO received U.S. FDA approval and launched in the fourth quarter of fiscal year 2017. Evolut PRO also received CE Mark approval at the end of the first quarter of fiscal year 2018 and will launch in Europe during the second quarter of fiscal year 2018.

Acceptance and future growth from the market release of Resolute Onyx, which launched in the first quarter of fiscal year 2018 in the U.S. and in Japan. Resolute Onyx builds on the Resolute Integrity drug-eluting coronary stent with thinner struts to improve deliverability and is the first stent to feature our CoreWire technology, allowing greater visibility during procedures.

Continued acceptance and future growth of the IN.PACT Admiral drug-coated balloon, including the longer length 150mm sizes, for the treatment of peripheral artery disease in the upper leg.

Continued acceptance and future growth from the HawkOne 6 French (6F) for treating patients with peripheral artery disease (PAD), which launched in the U.S. in the third quarter of fiscal year 2017. The HawkOne system is designed to remove plaque from the vessel wall and restore blood flow. The new HawkOne 6F provides an effective and easy-to-use treatment option for patients with PAD both above and below the knee with a single device at a lower profile.
Minimally Invasive Therapies Group
The Minimally Invasive Therapies Group’s products span the entire continuum of care 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 care, wound closure, electrosurgery products, hernia mechanical devices, mesh implants, advanced ablation, interventional lung, ventilators, capnography, airway products, sensors, dialysis, and monitors. Net sales results for the three months ended July 28, 2017 and July 29, 2016 also include sales of compression, enteral feeding, wound care, and medical surgical product lines which were divested to Cardinal Health on July 29, 2017. The Minimally Invasive Therapies Group’s net sales for the three months ended July 28, 2017 were $2.5 billion, an increase of 3 percent as compared to the first quarter in the prior fiscal year. Currency had an unfavorable impact on net sales for the three months ended July 28, 2017 of $14 million as a result of the change in exchange rates from the three months ended July 29, 2016. The Minimally Invasive Therapies Group's net sales for the three months ended July 28, 2017 benefited from the acquisition of Smith & Nephew's gynecology business in the second quarter of fiscal year 2017. See the more detailed discussion of each division's performance below.
Surgical Solutions net sales for the three months ended July 28, 2017 were $1.4 billion, an increase of 4 percent as compared to the corresponding period in the prior fiscal year. Surgical Solutions net sales growth was driven by ongoing new product launches in Advanced Stapling and Advanced Energy. In Advanced Stapling, endo stapling specialty reloads with Tri-Staple technology are driving growth, as well as the continued adoption of the Signia powered stapler, which contributed growth across the regions in which it has been launched. Advanced Energy benefited from the launch of new LigaSure vessel sealing instruments, the Valleylab F10 energy platform, and growth in emerging markets. Surgical Solutions also benefited from the acquisition of Smith & Nephew's gynecology business, which was acquired during the second quarter of fiscal year 2017.

Patient Monitoring & Recovery net sales for the three months ended July 28, 2017 were $1.1 billion, an increase of 1 percent as compared to the three months ended July 29, 2016. Patient Monitoring & Recovery net sales growth was driven by sales of Nellcor pulse oximetry products, Capnostream capnography monitors, capnography disposables, and growth in emerging markets.


52



Looking ahead, we expect our Minimally Invasive Therapies Group could be affected by the following:
Continued acceptance and future growth of Open-to-Minimally Invasive Surgery (MIS) techniques and tools supported by our efforts to transition open surgery to MIS. The Open to MIS initiative focuses on establishing 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. To achieve this transition, we are focused on product training, surgical skill training and continued therapy innovation to advance MIS.
The July 29, 2017 divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses within the Patient Monitoring & Recovery division to Cardinal Health. Net sales of the businesses included in the divestiture were $579 million and $588 million for the three months ended July 28, 2017 and July 29, 2016, respectively. We have entered into Transition Manufacturing Agreements (TMAs) with Cardinal Health designed to ensure and facilitate an orderly transfer of business operations. The TMAs will contribute net sales for a transition period of up to five years.
Changes in procedural volumes, competitive and pricing pressure, geographic macro-economic risks, reprocessing of our products, reimbursement challenges, impacts from changes in the mix of our product offerings, the timing of product registration approvals, and fluctuations in currency exchange rates.
Continued acceptance and future growth of the 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 in the U.S.
Our ability to create markets and drive product 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 future 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. We will grow our therapy innovation with scalable and affordable dialysis delivery while investing in vascular creation and maintenance technologies. In addition, the HD multi-pass system reduces infrastructure by requiring less water, less start-up costs, and offers high quality ultrapure dialysate treatment. The system is expected to launch in late fiscal year 2019 or early fiscal year 2020 depending on regulatory requirements.
Continued elevation of the standard of care for respiratory compromise, a progressive condition impacting a patient’s ability to breathe effectively.
Continued acceptance and growth in Respiratory Care, Airway and Ventilation Management, Patient Monitoring, and Homecare. Key products in this area include the Puritan Bennett 980 ventilator, Microstream Capnography bedside capnography monitor, portable monitor with Nellcor pulse oximetry system with OxiMax technology and the Nellcor Respiratory Compromise monitor with vital signs of SpO2, pulse rate, End-Tidal CO2, and Respiratory Rate.
Continued and future acceptance of less invasive standards of care, including the areas of GI solutions and advanced ablation. Recently launched products include the PillCam COLON capsule endoscopy, the Barrx platform through ablation with the Barrx 360 Express catheter, 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 the superDimension GenCut core biopsy system and the Triple Needle Cytology Brush, a lung tissue biopsy tool for use with the superDimension navigation system. The superDimension system enables 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 with our fiscal year 2017 acquisition of Smith and Nephew's gynecology business. The addition expanded and strengthened the surgical offerings and complemented our global gynecology business.

53



Restorative Therapies Group
The Restorative Therapies Group's products focus on various areas of the spine, bone graft substitutes, biologic products, trauma, implantable neurostimulation therapies and drug delivery systems for the treatment of chronic pain, movement disorders, obsessive-compulsive disorder (OCD), overactive bladder, urinary retention, fecal incontinence and gastroparesis, as well as products to treat conditions of the ear, nose, and throat, and systems that incorporate advanced energy surgical instruments. The Restorative Therapies Group also manufactures and sells image-guided surgery and intra-operative imaging systems and therapies to treat diseases of the vasculature in and around the brain, including coils, neurovascular stents and flow diversion products. The Restorative Therapies Group’s net sales for the three months ended July 28, 2017 were $1.8 billion, an increase of 2 percent as compared to the first quarter in the prior fiscal year. Currency had an unfavorable impact on net sales for the three months ended July 28, 2017 of $7 million as a result of the change in exchange rates from the three months ended July 29, 2016. Net sales growth for the three months ended July 28, 2017 was driven by Brain Therapies, Specialty Therapies, and Spine growth, partially offset by declines in Pain Therapies. See the more detailed discussion of each division’s performance below.
Spine net sales for the three months ended July 28, 2017 were $649 million, an increase of 1 percent as compared to the corresponding period in the prior fiscal year. Spine net sales growth was driven by growth in Core Spine in the U.S., Greater China, and Latin America and the return of InductOs to the European market, partially offset by slight declines in BMP. Growth in Core Spine was driven by the success of our Surgical Synergy strategy, which integrates our spinal implants with imaging and navigation equipment sold by our Neurosurgery business, and launch of new technologies such as the CD Horizon Solera Voyager system and ELEVATE expandable cage. Spine net sales growth was also driven by our "Speed-to-Scale" initiative, which involves faster innovation cycles and the launching of a steady cadence of new products at scale with sets immediately available for the entire market.
Brain Therapies net sales for the three months ended July 28, 2017 were $522 million, an increase of 7 percent as compared to the corresponding period in the prior fiscal year. Brain Therapies net sales growth was driven by strong growth in both Neurovascular and Neursurgery. Neurovascular net sales growth was driven by strong sales of our Solitaire family of revascularization devices for acute ischemic stroke, Axium detachable coils, and Navien intracranial support catheter. Neurosurgery net sales growth was driven by StealthStation S8 surgical navigation system launches in the U.S. and Europe. Net sales growth in Neurovascular and Neurosurgery was partially offset by declines in Brain Modulation due to competitive pressures in the U.S. and Europe.
Specialty Therapies net sales for the three months ended July 28, 2017 were $369 million, an increase of 4 percent as compared to the corresponding period in the prior fiscal year. Specialty Therapies net sales growth was driven by growth in ENT, Pelvic Health, and Transformative Solutions (formerly known as Advanced Energy). ENT net sales growth was driven by continued strong growth in NuVent sinus balloons and image-guided surgery products, Pelvic Health net sales growth was driven by strong InterStim growth in the U.S, and Transformative Solutions net sales growth was driven by the Aquamantys Transcollation and PEAK PlasmaBlade technologies.
Pain Therapies net sales for the three months ended July 28, 2017 were $269 million, a decrease of 5 percent as compared to the corresponding period in the prior fiscal year. The decrease in net sales was driven by decreases in our Spinal Cord Stimulation products due to competitive pressures in the U.S. and Europe, partially offset by growth in Interventional from the OsteoCool RF Spinal Tumor ablation system and strong sales in Japan and China.
Looking ahead, we expect our Restorative Therapies Group could be affected by the following:
Changes in procedural volumes, competitive and pricing pressure, geographic macro-economic risks, reimbursement challenges, impacts from changes in the mix of our product offerings, the timing of product registration approvals, and fluctuations in currency exchange rates.
Continued market acceptance of our new integrated solutions through the Surgical Synergy strategy, which integrates our spinal implants and imaging and navigation equipment.
Continued success of our "Speed-to-Scale" program launches, which involves faster innovation cycles and launching a steady cadence of new products at scale with sets immediately available for the entire market.
Market acceptance and continued global adoption of innovative new Spine products, such as our CD Horizon Solera Voyager system, our ELEVATE expandable interbody cages, and our OLIF25 and OLIF51 procedural solutions.
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.
Acceptance of Kanghui's broad portfolio of trauma, spine, and large-joint reconstruction products focused on the growing global value segment.

54



Continued acceptance and adoption rates of stimulators and leads approved to treat chronic pain in major markets around the world.
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.
Continued and future acceptance of our current indications for Medtronic DBS Therapy for the treatment of movement disorders and epilepsy (approved in Europe). We anticipate continued competitive pressures in Europe and the U.S.
Continued acceptance and growth of our Specialty Therapies, including InterStim therapy for the treatment of the symptoms of overactive bladder, urinary retention, and bowel incontinence, and Transformative Solutions products and strategies to focus on its four core markets of orthopedic, spine, breast surgery, and Cardiac Rhythm Disease Management device replacements.
Continued growth from Neurosurgery StealthStation and O-Arm Imaging Systems, Midas and ENT power systems.
Continued acceptance and growth of the Solitare 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 successful placement of robotic units and associated market adoption of robot-assisted spine procedures, under an exclusive worldwide distributor agreement with Mazor Robotics.
Diabetes Group
The Diabetes Group's products include insulin pumps, continuous glucose monitoring (CGM) systems, insulin pump consumables, and therapy management software. The Diabetes Group’s net sales for the three months ended July 28, 2017 were $449 million, a decrease of 1 percent as compared to the three months ended July 29, 2016. The Diabetes Group's net sales declined for the three months ended July 28, 2017, primarily as a result of a decline in sales in the U.S. due to ongoing sensor supply constraints, partially offset by growth in international markets due to strong sales in Europe and Asia Pacific of the MiniMed 640G system. In the U.S., we continue to experience strong consumer demand and acceptance of our revolutionary 670G hybrid closed loop system, with Guardian Sensor3 CGM.
Looking ahead, we expect our Diabetes Group could be affected by the following:
Competitive and pricing pressure, reimbursement challenges, impacts from changes in the mix of our product offerings, the timing of product registration approvals, and fluctuations in currency exchange rates.
Continued sensor supply constraints, along with higher than expected demand, will impact production as we prioritize fulfillment against our installed base of patients first. We expect new sensor manufacturing lines to be ready for commercial production by the fourth quarter of fiscal year 2018, at which time we expect to have the capacity needed to meet the rapidly growing sensor demand.
Acceptance and future growth of the MiniMed 670G system, the first hybrid closed loop system in the world. The system features our most advanced SmartGuard HCL algorithm, which enables improved glucose control with reduced user input. The MiniMed 670G system received U.S. FDA approval during the second quarter of fiscal year 2017 and launched in the U.S. in June 2017. The sensor supply constraint described above will delay the growth acceleration of the 670G system into the fourth quarter of fiscal year 2018.
Changes in medical reimbursement policies and programs, along with payor coverage of the MiniMed 670G system.
Acceptance of the MiniMed 630G system, which includes the insulin pump and Enlite CGM sensor. This system launched in the U.S. in fiscal year 2017 and combines proprietary SmartGuard technology featured in the MiniMed 530G system with a brand new hardware platform and user-friendly design.
Continued acceptance and future growth of the MiniMed 640G system with SmartGuard predictive low-glucose management, which has launched in Europe, Australia, and select countries in Latin America and Asia, and the MiniMed 620G system, the first integrated system customized for the Japanese market.

55



Continued acceptance and future growth of Guardian Connect continuous glucose monitoring (CGM) system which displays information directly to a smartphone. This system received CE mark in 2016 and has launched internationally, with an expected U.S. launch in the second half of fiscal year 2018.
Continued partnership with UnitedHealthcare as the preferred in-network provider of insulin pumps, giving their members access to our advanced diabetes technology and comprehensive support services.
Continued partnership and future growth of our outcomes-based agreement with Aetna, where a component of our pump reimbursement will now be based on successfully meeting clinical improvement thresholds as part of our value-based healthcare solutions.
OPERATIONS BY MARKET GEOGRAPHY
The tables below include net sales by market geography for each of our operating segments for the three months ended July 28, 2017 and July 29, 2016:
 
Three months ended July 28, 2017
 
Three months ended July 29, 2016
(in millions)
U.S.(1) 
 
Non-U.S. Developed Markets(2)
 
Emerging Markets(3)
 
U.S.(1) 
 
Non-U.S. Developed Markets(2)
 
Emerging Markets(3)
Cardiac and Vascular Group
$
1,333

 
$
887

 
$
426

 
$
1,297

 
$
829

 
$
392

Minimally Invasive Therapies Group
1,245

 
865

 
376

 
1,235

 
863

 
326

Restorative Therapies Group
1,221

 
394

 
194

 
1,207

 
384

 
181

Diabetes Group
243

 
167

 
39

 
263

 
155

 
34

Total
$
4,042

 
$
2,313

 
$
1,035

 
$
4,002

 
$
2,231

 
$
933

(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 of 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
For the three months ended July 28, 2017, net sales in the U.S. increased 1 percent; non-U.S. developed markets increased 4 percent; and emerging markets increased 11 percent, as compared to the corresponding period in the prior fiscal year. Currency had an unfavorable impact of $33 million on net sales for the three months ended July 28, 2017, as compared to the three months ended July 29, 2016 when using the average exchange rates in effect during the prior fiscal year period. Net sales growth in the U.S. was led by growth in the Cardiac and Vascular Group, while growth in non-U.S. developed markets was led by strong performance in the Cardiac and Vascular Group. Emerging market sales growth was driven by solid performance in all of our groups.
COSTS AND EXPENSES
Cost of Products Sold
 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
Net sales
$
7,390

 
$
7,166

Cost of products sold
2,349

 
2,261

Gross profit
$
5,041

 
$
4,905

 
 
 
 
Gross margin percent
68.2
%
 
68.4
%
We continue to focus on reducing our costs of production through channel optimization, supply chain management, and changes to our manufacturing network. For the three months ended July 28, 2017 and July 29, 2016, gross margin percent was 68.2 percent and 68.4 percent, respectively. The slight decrease in gross margin percent in the first quarter of fiscal year 2018 was due to the unfavorable impact of currency exchange.

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Research and Development & Selling, General, and Administrative Expense
The following is a summary of research and development and selling, general, and administrative expenses as a percent of net sales:
 
Three months ended
 
July 28, 2017
 
July 29, 2016
Research and development expense
7.4
%
 
7.8
%
Selling, general, and administrative expense
33.6
%
 
33.9
%
Research and Development Expense We remain committed to accelerating the development of meaningful innovations to deliver better patient outcomes at appropriate costs, that lead to enhanced quality of life, and may be validated by clinical and economic evidence. We are also focused on expanding access to quality healthcare.
Research and development expense for the three months ended July 28, 2017 and July 29, 2016 was $548 million and $556 million, respectively. Research and development expense decreased as a percentage of sales due to the timing of project work and clinical trials.
Selling, General, and Administrative Expense Our goal is to continue to leverage selling, general, and administrative expense initiatives and to continue to realize cost synergies expected from our acquisitions. Selling, general, and administrative expense primarily consists of salaries and wages, as well as other administrative costs, such as professional fees and marketing expenses.
Selling, general, and administrative expense for the three months ended July 28, 2017 and July 29, 2016 was $2.5 billion and $2.4 billion, respectively. Selling, general, and administrative expense decreased as a percentage of net sales for the three months ended July 28, 2017 as compared to the corresponding period in the prior fiscal year due to cost savings associated with selling, general, and administrative expense initiatives. We continue to execute on our cost synergies from the Covidien acquisition, strategic sourcing initiatives, global footprint optimization, and the expansion of share services and centers of excellence.
Other Costs and Expenses
 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
Restructuring charges, net
8

 
94

Certain litigation charges

 
82

Acquisition-related items
44

 
52

Divestiture-related items
47

 

Amortization of intangible assets
454

 
487

Other expense, net
66

 
39

Interest expense, net
194

 
179

Restructuring Charges We incur restructuring charges in connection with our cost-reduction and productivity initiatives or with acquisitions when we implement plans to restructure and integrate the acquired operations.
We began our restructuring program related to the acquisition of Covidien, the cost synergies initiative, in the fourth quarter of fiscal year 2015. We anticipate approximately $850 million in cost synergies to be achieved as a result of the Covidien acquisition through fiscal year 2018, including administrative office optimization, manufacturing and supply chain infrastructure, and certain general and administrative savings. Restructuring charges are primarily related to employee termination costs and costs related to manufacturing and facility closures. Although costs associated with the cost synergies initiative restructuring program are expected be finalized in fiscal year 2018, this initiative has created a catalyst for potential additional operating margin expansion programs. We are committed to areas of improvement that will deliver sustained productivity, including manufacturing consolidation, supply chain and sourcing, customer-facing operations, and enabling functions, such as human resources, finance, and legal operations.
Our restructuring reserve balances at July 28, 2017 and April 28, 2017 were $257 million and $291 million, respectively. During the three months ended July 28, 2017, we recognized restructuring charges of $19 million, which were partially offset by accrual adjustments of $5 million. Accrual adjustments relate to certain employees identified for termination finding other positions within the Company, cancellations of employee terminations, and employee termination costs being less than initially estimated. For the three months ended July 28, 2017, restructuring charges included $5 million recognized within cost of products sold and $1 million recognized within selling, general and administrative expense.

57




During the three months ended July 29, 2016, we recognized restructuring charges of $111 million, which were partially offset by accrual adjustments of $7 million related to certain employees identified for termination finding other positions within the Company. For the three months ended July 29, 2016, restructuring charges included $10 million recognized within cost of products sold.
For additional information about our restructuring program, see Note 5 to the current period's consolidated financial statements.
Certain Litigation Charges We classify litigation charges and gains related to significant legal proceedings as certain litigation charges. During the three months ended July 28, 2017, there were no certain litigation charges. During the three months ended July 29, 2016, we recognized $82 million of certain litigation charges related to probable and estimable damages.
Acquisition-Related Items During the three months ended July 28, 2017, the Company recognized acquisition-related items expense of $53 million, including $9 million recognized within cost of products sold in the consolidated statements of income. Acquisition-related items expense includes $46 million of costs associated with the integration of Covidien manufacturing, distribution, and administrative facilities as well as IT system implementation, benefits harmonization, and accelerated and incremental stock compensation expense. Acquisition-related items expense also includes changes in the fair value of contingent consideration as a result of revised revenue forecasts and the timing of anticipated regulatory payments.
During the three months ended July 29, 2016, the Company recognized acquisition-related items expense of $52 million, including $44 million of costs associated with the integration of Covidien manufacturing, distribution, and administrative facilities as well as IT system implementation and benefits harmonization, and $8 million of accelerated and incremental stock compensation expense.
Divestiture-Related Items Divestiture-related items includes expenses incurred in connection with the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses. During the three months ended July 28, 2017, the Company recognized divestiture-related items expense of $47 million, including $22 million of legal and advisory services and $16 million of accelerated stock compensation expense. There were no divestiture-related items expenses for the three months ended July 29, 2016.
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. Amortization expense was $454 million and $487 million for the three months ended July 28, 2017 and July 29, 2016, respectively. The decrease in amortization expense was primarily attributable to the discontinuation of amortization on the definite-lived intangible assets classified as assets held for sale at April 28, 2017 and July 28, 2017 related to the divestiture of a portion of our Patient Monitoring & Recovery division.
Other Expense, Net Other expense, net includes royalty income and expense, realized equity security gains and losses, currency transaction and derivative gains and losses, impairment charges on equity securities, and Puerto Rico excise tax. For the three months ended July 28, 2017, other expense, net was $66 million as compared to $39 million for the corresponding period in the prior fiscal year. The increase was primarily attributable to the timing of gains and losses realized in each period, and was also due, in part, to foreign exchange remeasurement and our hedging programs, which combined were a $5 million loss for the three months ended July 28, 2017, as compared to a $4 million gain for the corresponding period in the prior fiscal year.
Interest Expense, Net Interest expense, net includes interest earned on our cash, cash equivalents and investments, 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 ineffectiveness on interest rate derivative instruments. For the three months ended July 28, 2017 and July 29, 2016, interest expense, net was $194 million and $179 million, respectively. The increase in interest expense, net during the three months ended July 28, 2017 was largely driven by an increase in total debt obligations, on average, compared to the corresponding period in the prior fiscal year.

58



INCOME TAXES
 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
Provision for income taxes
$
186

 
$
59

Income from operations before taxes
1,195

 
988

Effective tax rate
15.6
 %
 
6.0
%
 
 
 
 
Non-GAAP provision for income taxes
$
230

 
$
269

Non-GAAP income from operations before taxes
1,764

 
1,713

Non-GAAP Nominal Tax Rate
13.0
 %
 
15.7
%
 
 
 
 
Difference between the effective tax rate and Non-GAAP Nominal Tax Rate
(2.6
)%
 
9.7
%
Our effective tax rate for the three months ended July 28, 2017 was 15.6 percent, as compared to 6.0 percent for the first quarter in the prior fiscal year. The increase in our effective tax rate for the three months ended July 28, 2017 was primarily due to certain tax adjustments, changes in the amount and jurisdiction of restructuring charges, net and certain litigation charges, operational tax adjustments described below, and year over year changes in operational results by jurisdiction.
Our Non-GAAP Nominal Tax Rate for the three months ended July 28, 2017 was 13.0 percent, as compared to 15.7 percent for the three months ended July 29, 2016. The decrease in our Non-GAAP Nominal Tax Rate for the three months ended July 28, 2017 was primarily due to the finalization of certain tax audits, the lapse of a statute of limitations for federal purposes, and excess tax benefits related to stock-based compensation due to the adoption of revised guidance. An increase in our Non-GAAP Nominal Tax Rate of 1 percent would result in an additional income tax provision for the three months ended July 28, 2017 of approximately $18 million.
Certain Tax Adjustments During the three months ended July 28, 2017, we recognized charges of $60 million primarily related to the tax effect from certain restructuring steps taken during the quarter in anticipation of the divestiture of a portion of our Patient Monitoring & Recovery division to Cardinal Health.
During the three months ended July 29, 2016, we recognized a $31 million net benefit from certain tax adjustments. A $431 million tax benefit was recognized as the result of the resolution of Covidien's previously disclosed Tyco International plc intercompany debt issues with the U.S. Tax Court and the Appeals Division of the U.S. Internal Revenue Service (IRS). This benefit was partially offset by a $371 million charge associated with the expected resolution with the IRS for the for the Ardian, CoreValve, Inc. and Ablation Frontiers, Inc. acquisition-related issues and the allocation of income between Medtronic, Inc. and its wholly owned subsidiary operating in Puerto Rico for certain businesses. This resolution does not include the businesses that are the subject of the Medtronic, Inc. U.S. Tax Court case for fiscal years 2005 and 2006. In addition, we recognized a $29 million charge in connection with the redemption of an intercompany minority interest.
For additional information about certain tax adjustments, see Notes 11 and 16 to the current period's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
(in millions)
July 28, 2017
 
April 28, 2017
Working capital
$
9,321

 
$
10,316

Current ratio(1)
          1.6:1.0

 
1.7:1.0

Cash, cash equivalents, and current investments
$
13,088

 
$
13,708

Current debt obligations and long-term debt
$
34,011

 
$
33,441

(1)
The ratio of current assets to current liabilities, excluding current assets and current liabilities held for sale, at July 28, 2017 and April 28, 2017.
We believe our balance sheet and liquidity provide us with flexibility in the future. Approximately $6 billion of our cash, cash equivalents, and investments held by certain U.S.-controlled non-U.S. subsidiaries may not represent available liquidity for general corporate purposes. However, we believe our other existing cash, cash equivalents and investments, as well as our $3.5 billion revolving credit facility and related commercial paper program ($1.5 billion of commercial paper outstanding at July 28, 2017),

59



will satisfy our foreseeable operating needs for at least the next 12 months. We regularly review our capital needs and consider various investing and financing alternatives to support our requirements. 
 
 
Agency Rating(1)
 
 
July 28, 2017
 
April 28, 2017
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.

Standard & Poor's Ratings Services (S&P) and Moody's Investors Service (Moody's) long-term debt ratings and short-term debt ratings at July 28, 2017 were unchanged as compared to the ratings at April 28, 2017. 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 and our $3.5 billion revolving credit facility and related commercial paper program.
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.
Note 16 to the consolidated financial statements provides information regarding amounts we have accrued related to significant legal proceedings. In accordance with U.S. GAAP, we record a liability in our consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. Actual settlements may be different than estimated and could have a material impact on our consolidated earnings, financial position, and/or cash flows.
We record tax liabilities in our consolidated financial statements for amounts that we expect to repatriate from subsidiaries (to the extent the repatriation would be subject to tax); however, no tax liabilities are recorded for amounts that we consider to be permanently reinvested. Our current plans do not foresee a need to repatriate funds that are designated as permanently reinvested in order to fund our operations or meet currently anticipated liquidity and capital investment needs. However, we evaluate our legal entity structure supporting our business operations, and to the extent such evaluation results in a change to our overall business structure, we may be required to accrue for additional tax obligations.
We have investments in marketable debt securities that are classified and accounted for as available-for-sale. Our debt securities include U.S. government and agency securities, corporate debt securities, mortgage-backed securities, other asset-backed securities, debt funds, and auction rate securities. Some of our investments may experience reduced liquidity due to changes in market conditions and investor demand. Our auction rate security holdings continue to experience reduced liquidity due to low investor demand. Although our auction rate securities are currently illiquid and other securities could become illiquid, we believe we could liquidate a substantial amount of our portfolio without incurring a material impairment loss.
For the three months ended July 28, 2017, the total other-than-temporary impairment losses on available-for-sale debt securities were not significant. Based on our assessment of the credit quality of the underlying collateral and credit support available to each of the remaining securities in which we are invested, we believe we have recognized all necessary other-than-temporary impairments as we do not have the intent to sell, nor is it more likely than not that we will be required to sell, before recovery of the amortized cost. At July 28, 2017, we have $215 million of gross unrealized losses on our aggregate current and noncurrent available-for-sale debt securities of $8.4 billion. If market conditions deteriorate, some of these holdings may experience other-than-temporary impairment in the future, which could adversely impact our financial results. We are required to use estimates and assumptions in our valuation of investments, which requires a high degree of judgment, and therefore, actual results could differ materially from estimates. See Note 6 to the current period's consolidated financial statements for additional information regarding fair value measurements.

60



Summary of Cash Flows
 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
Cash provided by (used in):
 

 
 

Operating activities
$
737

 
$
1,550

Investing activities
83

 
(284
)
Financing activities
(1,141
)
 
(1,160
)
Effect of exchange rate changes on cash and cash equivalents
45

 
78

Net change in cash and cash equivalents
$
(276
)
 
$
184

Operating Activities The $813 million decrease in net cash provided was primarily driven by an increase in cash paid for income taxes of $302 million, an increase in certain litigation payments of $102 million, net cash outflows for collateral related to our currency exchange rate derivative instruments, and a decrease in cash collected from customers. The increase in cash paid for income taxes was primarily a result of settlement payments for U.S federal income taxes for fiscal years 2012 to 2014 as well as audit settlements outside of the U.S. during the three months ended July 28, 2017. We did not make any significant settlement payments during the three months ended July 29, 2016. The decrease in cash collected from customers is partially attributable to delays in billing and collections stemming from the SAP outage during the three months ended July 28, 2017. For more information on collateral received/posted and contingencies, see Notes 8 and 16, respectively, to the current period's consolidated financial statements.
Investing Activities The $367 million increase in net cash provided was primarily attributable to higher net sales of investments of $296 million and a decrease in capital expenditures of $52 million.
Financing Activities The $19 million decrease in net cash used is primarily attributable to a decrease in share repurchases of $530 million partially offset by a reduction of commercial paper borrowings of $357 million.
Free Cash Flow
Free cash flow, a non-GAAP financial measure, is calculated by subtracting property, plant, and equipment additions from operating cash flows. 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:
 
Three months ended
(in millions)
July 28, 2017
 
July 29, 2016
Net cash provided by operating activities
$
737

 
$
1,550

Net cash used in investing activities
83

 
(284
)
Net cash used in financing activities
(1,141
)
 
(1,160
)
 
 
 
 
Net cash provided by operating activities
$
737

 
$
1,550

Additions to property, plant, and equipment
(278
)
 
(330
)
Free cash flow
$
459

 
$
1,220

 
 
 
 
Dividends to shareholders
$
625

 
$
599

Repurchase of ordinary shares
1,233

 
1,763

Issuances of ordinary shares
(143
)
 
(214
)
Return to shareholders
$
1,715

 
$
2,148

Return of operating cash flow percentage
233
%
 
139
%
Return of free cash flow percentage
374
%
 
176
%

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Debt and Capital
Our capital structure consists of equity and interest-bearing debt. We use a combination of bank borrowings and commercial paper issuances to fund our short-term financing needs. Current debt, including the current portion of our long-term debt and capital lease obligations, was $8.1 billion at July 28, 2017 compared to $7.5 billion at April 28, 2017. We utilize Senior Notes to meet our long-term financing needs. Long-term debt was $26.0 billion at July 28, 2017, as compared to $25.9 billion at April 28, 2017.
Total debt at July 28, 2017 was $34.0 billion, as compared to $33.4 billion at April 28, 2017. The increase in total debt was primarily driven by increased commercial paper borrowings of $572 million.
On August 3, 2017, we used a portion of the proceeds received from Cardinal Health, Inc. in connection with the divestiture of a portion of our Patient Monitoring & Recovery division to repay our senior unsecured term loan, including accrued interest, for $3.0 billion.
We maintain a commercial paper program for short-term financing, which allows 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 July 28, 2017, we had $1.5 billion of commercial paper outstanding, as compared to $901 million at April 28, 2017. During the three months ended July 28, 2017, the weighted average original maturity of the commercial paper outstanding was approximately 32 days, and the weighted average interest rate was 1.22 percent. 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 syndicated line of credit facility ($3.5 Billion Revolving Credit Facility) which expires in January 2020. The $3.5 Billion Revolving Credit Facility provides backup funding for the commercial paper program and may also be used for general corporate purposes. The $3.5 Billion Revolving Credit Facility provides us with the ability to increase our borrowing capacity by an additional $500 million at any time during the term of the agreement. At each anniversary date of the $3.5 Billion Revolving 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 July 28, 2017 and April 28, 2017, no amounts were outstanding on the committed line of credit.
Interest rates on advances of our $3.5 Billion Revolving Credit Facility are determined by a pricing matrix, based on our long-term debt ratings assigned by S&P and Moody’s. For additional information on our credit ratings status by S&P and Moody's, refer to the "Liquidity and Capital Resources" section of this Management's Discussion and Analysis. Facility fees are payable on the credit facility and are determined in the same manner as the interest rates. The agreements also contain customary covenants, all of which we remain in compliance with at July 28, 2017.
We repurchase shares from time to time as part of our focus on returning value to our shareholders. In June 2015, our Board of Directors authorized, subject to the ongoing existence of sufficient distributable reserves, the redemption of 80 million of our ordinary shares. At April 28, 2017, we had used 51 million of the 80 million shares authorized under the June 2015 share redemption program. In June 2017, our Board of Directors authorized the expenditure of up to $5.0 billion for new share repurchases, replacing the previous 2015 repurchase authorization to redeem up to an aggregate number of ordinary shares. During the three months ended July 28, 2017, we repurchased a total of 14 million at an average price per share of $85.28. At July 28, 2017, we had approximately $4.9 billion remaining under the share repurchase program authorized by our Board of Directors.
For more information on credit arrangements, see the "Liquidity and Capital Resources" section of this Management's Discussion and Analysis, Note 7 to the current period's consolidated financial statements, and Note 8 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 28, 2017.

62



CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
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. Forward-looking statements broadly include our current expectations or forecasts of future results. Our forward-looking statements generally relate 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, restructuring and cost-saving initiatives, intellectual property rights, litigation and tax matters, government 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. 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 operating 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 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 health care 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 government 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. One must carefully consider forward-looking statements and understand that such statements may be affected by inaccurate assumptions and may involve a variety of risks and uncertainties, known and unknown, including, among others, risks related to competition in the medical device industry, reduction or interruption in our supply, 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, health care policy changes, international operations, failure to complete or achieve the intended benefits of acquisitions or divestitures, or disruption of our current plans and operations, as well as those discussed in the sections entitled “Risk Factors” and “Government Regulation and Other Considerations” in our Annual Report on Form 10-K for the year ended April 28, 2017.

Consequently, no forward-looking statement may be guaranteed and actual results may vary materially. 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.

We undertake no obligation to update any statement we make, but investors are advised to consult all other disclosures by us in our filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q, and 8-K, in which we discuss in more detail various important factors that could cause actual results to differ from expected or historical results. In addition, actual results may differ materially from those anticipated due to a number of factors, including, among others, those discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended April 28, 2017. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks, uncertainties, or potentially inaccurate assumptions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
CURRENCY EXCHANGE RATE RISK
Due to the global nature of our operations, we are exposed to currency exchange rate changes. In a period in which the U.S. dollar, our functional currency, is strengthening/weakening as compared to other currencies, our revenues, expenses, assets, and liabilities denominated in other currencies may be translated into U.S. dollars at a lower/higher value than they would be in an otherwise constant currency exchange rate environment.
We use operational and economic hedges, as well as currency exchange rate derivative instruments, to manage the impact of currency exchange rate fluctuations on earnings and cash flows. In order to minimize earnings and cash flow volatility resulting

63



from currency exchange rate fluctuations, we enter into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated transactions in other currencies and changes in the value of specific assets and liabilities. At inception of the contract, the derivative instrument is designated as either a freestanding derivative or a cash flow hedge. The primary currencies of the derivative instruments are the Euro and Japanese Yen. Fluctuations in the currency exchange rates of currency exposures that are unhedged, such as in certain emerging markets, may result in future earnings and cash flow volatility. We do not enter into currency exchange rate derivative instruments for speculative purposes.
The gross notional amount of all currency exchange rate derivative instruments outstanding at July 28, 2017 and April 28, 2017 was $11.8 billion and $10.8 billion, respectively. At July 28, 2017, these contracts were in a net unrealized loss position of $166 million. A sensitivity analysis of changes in the fair value of all currency exchange rate derivative contracts at July 28, 2017 indicates that, if the U.S. dollar uniformly strengthened/weakened by 10 percent against all currencies, the fair value of these contracts would increase/decrease by approximately $924 million. Any gains and losses on the fair value of derivative contracts would generally be offset by gains and losses on the underlying transactions. These offsetting gains and losses are not reflected in the above analysis.
INTEREST RATE RISK
We are subject to interest rate risk on our short-term investments and our borrowings. We manage interest rate risk in the aggregate, while focusing on our immediate and intermediate liquidity needs. Our debt portfolio at July 28, 2017 was comprised of debt predominately denominated in U.S. dollars, of which approximately 85% is fixed rate debt and approximately 15% is floating-rate debt. We are also exposed to interest rate changes affecting our investments in interest rate sensitive instruments, which include our marketable debt securities, fixed-to-floating interest rate swap agreements, and forward starting interest rate swap agreements.
A sensitivity analysis of the impact on our investments in interest rate sensitive financial instruments of a hypothetical 10 basis point change in interest rates, compared to interest rates at July 28, 2017, indicates that the fair value of these instruments would correspondingly change by $67 million.
For a discussion of current market conditions and the impact on our financial condition and results of operations, please see the “Liquidity and Capital Resources” section of the current period's Management's Discussion and Analysis. For additional discussion of market risk, see Notes 6 and 8 to the current period's consolidated financial statements.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) and changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) are effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company began deployment of an enterprise resource planning (ERP) software program, SAP, to the Minimally Invasive Therapies Group during fiscal year 2017. Although no specific implementation activity or related changes in internal controls occurred during the period covered by this Quarterly Report on Form 10-Q, the system deployment will continue with projected completion in fiscal year 2020. There have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
A discussion of the Company’s policies with respect to legal proceedings is included in the management’s discussion and analysis and our legal proceedings and other loss contingencies are described in Note 16 to the current period's consolidated financial statements.

64



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information about the shares repurchased by the Company during the first quarter of fiscal year 2018:
Fiscal Period
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as a Part of
Publicly Announced
Program (1)
 
Maximum Number
of Shares that may
yet be Purchased
Under the Program (1)
 
Maximum Approximate Dollar Value of Shares that may yet be Purchased
Under the Program
(2)
4/29/2017-5/26/2017
 
8,361,185

 
$
83.72

 
8,361,185

 
20,835,846

 

5/27/2017-6/30/2017
 
5,150,697

 
87.37

 
5,150,697

 
N/A

 
4,933,651,113

7/1/2017-7/28/2017
 
886,963

 
87.94

 
886,963

 
N/A

 
4,855,658,927

Total
 
14,398,845

 
$
85.28

 
14,398,845

 
N/A

 
4,855,658,927

(1)
In June 2015, the Company’s Board of Directors authorized, subject to the ongoing existence of sufficient distributable reserves, the repurchase of 80 million of the Company’s ordinary shares. As authorized by the Board of Directors, the Company's share redemption program expires when the total number of authorized shares have been redeemed. As noted below, this repurchase authorization was replaced in June 2017 with the repurchase authorization described in footnote (2) below. As such, the maximum number of shares that may yet be purchased under the program is no longer applicable to the repurchase program in place.
(2)
In June 2017, the Company's Board of Directors authorized the repurchase of $5 billion of the Company’s ordinary shares. This authorization replaces the June 2015 authorization described in footnote (1) above. There is no specific time-period associated with this repurchase authorization.
Item 6. Exhibits
(a)
 
Exhibits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document.
 
 
101.SCH
 
XBRL Schema Document.
 
 
101.CAL
 
XBRL Calculation Linkbase Document.
 
 
101.DEF
 
XBRL Definition Linkbase Document.
 
 
101.LAB
 
XBRL Label Linkbase Document.
 
 
101.PRE
 
XBRL Presentation Linkbase Document.

65



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
MEDTRONIC PUBLIC LIMITED COMPANY
 
 
(Registrant)
 
 
 
Date:
September 1, 2017
/s/ Omar Ishrak
 
 
Omar Ishrak
 
 
Chairman and Chief Executive Officer
 
 
 
Date:
September 1, 2017
/s/ Karen L. Parkhill
 
 
Karen L. Parkhill
 
 
Executive Vice President and
 
 
Chief Financial Officer


66