Medtronic plc - Quarter Report: 2018 October (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 October 26, 2018

Commission File Number 001-36820



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, indicate 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 November 27, 2018, 1,343,045,417 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

	PART I
1.	Financial Statements (unaudited)	1
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52
3.	Quantitative and Qualitative Disclosures About Market Risk	74
4.	Controls and Procedures	75
	PART II
1.	Legal Proceedings	75
2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
6.	Exhibits	76
	Signatures	77

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Medtronic plc

Consolidated Statements of Income

(Unaudited)



	Three months ended						Six months ended
(in millions, except per share data)	October 26, 2018			October 27, 2017			October 26, 2018			October 27, 2017
Net sales	$	7,481		$	7,050		$	14,865		$	14,440
Costs and expenses:
Cost of products sold	2,203			2,123			4,407			4,475
Research and development expense	590			556			1,175			1,105
Selling, general, and administrative expense	2,605			2,539			5,202			5,119
Amortization of intangible assets	445			460			891			914
Restructuring charges, net	24			8			86			16
Certain litigation charges	—			—			103			—
Gain on sale of businesses	—			(697		)	—			(697		)
Other operating expense, net	70			167			221			232
Operating profit	1,544			1,894			2,780			3,276
Other non-operating income, net	(52		)	(107		)	(238		)	(206		)
Interest expense	241			273			483			559
Income before income taxes	1,355			1,728			2,535			2,923
Income tax provision (benefit)	235			(285		)	338			(99		)
Net income	1,120			2,013			2,197			3,022
Net (income) loss attributable to noncontrolling interests	(5		)	4			(7		)	11
Net income attributable to Medtronic	$	1,115		$	2,017		$	2,190		$	3,033
Basic earnings per share	$	0.83		$	1.49		$	1.62		$	2.23
Diluted earnings per share	$	0.82		$	1.48		$	1.61		$	2.21
Basic weighted average shares outstanding	1,349.2			1,355.1			1,350.9			1,358.5
Diluted weighted average shares outstanding	1,360.9			1,365.8			1,363.0			1,370.8

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

Medtronic plc

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three months ended						Six months ended
(in millions)	October 26, 2018			October 27, 2017			October 26, 2018			October 27, 2017
Net income	$	1,120		$	2,013		$	2,197		$	3,022

Other comprehensive (loss) income, net of tax:
Unrealized (loss) gain on available-for-sale securities	(9		)	25			(9		)	55
Currency translation	(431		)	(203		)	(1,255		)	628
Net change in retirement obligations	21			15			48			14
Unrealized gain (loss) on derivatives	127			27			340			(144		)
Other comprehensive (loss) income	(292		)	(136		)	(876		)	553
Comprehensive income including noncontrolling interests	828			1,877			1,321			3,575
Comprehensive (income) loss attributable to noncontrolling interests	(2		)	4			(4		)	11
Comprehensive income attributable to Medtronic	$	826		$	1,881		$	1,317		$	3,586

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

Medtronic plc

Consolidated Balance Sheets

(Unaudited)



(in millions)	October 26, 2018			April 27, 2018
ASSETS

Current assets:
Cash and cash equivalents	$	3,911		$	3,669
Investments	6,222			7,558
Accounts receivable, less allowances of $184 and $193, respectively	5,743			5,987
Inventories, net	3,763			3,579
Other current assets	2,014			2,187
Total current assets	21,653			22,980

Property, plant, and equipment	10,512			10,259
Accumulated depreciation	(5,976		)	(5,655		)
Property, plant, and equipment, net	4,536			4,604
Goodwill	38,605			39,543
Other intangible assets, net	20,819			21,723
Tax assets	1,414			1,465
Other assets	1,123			1,078
Total assets	$	88,150		$	91,393

LIABILITIES AND EQUITY

Current liabilities:
Current debt obligations	$	1,343		$	2,058
Accounts payable	1,742			1,628
Accrued compensation	1,663			1,988
Accrued income taxes	536			979
Other accrued expenses	3,179			3,431
Total current liabilities	8,463			10,084

Long-term debt	23,673			23,699
Accrued compensation and retirement benefits	1,301			1,425
Accrued income taxes	2,950			3,051
Deferred tax liabilities	1,325			1,423
Other liabilities	724			889
Total liabilities	38,436			40,571

Commitments and contingencies (Note 17)

Shareholders’ equity:
Ordinary shares— par value $0.0001, 2.6 billion shares authorized, 1,346,179,202 and 1,354,218,154 shares issued and outstanding, respectively	—			—
Additional paid-in capital	27,048			28,127
Retained earnings	25,171			24,379
Accumulated other comprehensive loss	(2,612		)	(1,786		)
Total shareholders’ equity	49,607			50,720
Noncontrolling interests	107			102
Total equity	49,714			50,822
Total liabilities and equity	$	88,150		$	91,393

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

Medtronic plc

Consolidated Statements of Cash Flows

(Unaudited)



	Six months ended
(in millions)	October 26, 2018			October 27, 2017
Operating Activities:
Net income	$	2,197		$	3,022
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,317			1,314
Provision for doubtful accounts	32			20
Deferred income taxes	(80		)	(830		)
Stock-based compensation	168			198
Gain on sale of businesses	—			(697		)
Other, net	55			(41		)
Change in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable, net	(37		)	(68		)
Inventories, net	(312		)	(273		)
Accounts payable and accrued liabilities	24			(307		)
Other operating assets and liabilities	(499		)	(694		)
Net cash provided by operating activities	2,865			1,644
Investing Activities:
Acquisitions, net of cash acquired	(119		)	(76		)
Proceeds from sale of businesses	—			6,058
Additions to property, plant, and equipment	(497		)	(524		)
Purchases of investments	(1,444		)	(1,685		)
Sales and maturities of investments	2,824			2,354
Other investing activities	—			(2		)
Net cash provided by investing activities	764			6,125
Financing Activities:
Change in current debt obligations, net	(700		)	(190		)
Issuance of long-term debt	1			20
Payments on long-term debt	(17		)	(4,161		)
Dividends to shareholders	(1,351		)	(1,247		)
Issuance of ordinary shares	800			230
Repurchase of ordinary shares	(2,047		)	(1,888		)
Other financing activities	11			(41		)
Net cash used in financing activities	(3,303		)	(7,277		)
Effect of exchange rate changes on cash and cash equivalents	(84		)	70
Net change in cash and cash equivalents	242			562
Cash and cash equivalents at beginning of period	3,669			4,967
Cash and cash equivalents at end of period	$	3,911		$	5,529
Supplemental Cash Flow Information
Cash paid for:
Income taxes	$	941		$	674
Interest	482			587

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

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Medtronic plc and its subsidiaries (Medtronic plc, Medtronic, or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.) (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the consolidated financial statements include all of the adjustments necessary for a fair statement in conformity with U.S. GAAP. Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year. For the purpose of providing more concise consolidated statements of income, amounts previously reported in acquisition-related items were reclassified to selling, general, and administrative expense and other operating expense, net; amounts previously reported in divestiture-related items were reclassified to selling, general, and administrative expense; and amounts previously reported in interest income were reclassified to other non-operating income, net.

Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates.

The 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 accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 27, 2018. The Company’s fiscal years 2019, 2018, and 2017 will end or ended on April 26, 2019, April 27, 2018, and April 28, 2017, respectively.

2. New Accounting Pronouncements

Recently Adopted

In May 2014, the Financial Accounting Standards Board (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. The Company adopted this guidance using the modified retrospective method in the first quarter of fiscal year 2019, and elected to apply the guidance only to contracts that were not completed as of the date of initial application. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

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. The Company adopted this guidance in the first quarter of fiscal year 2019 on a prospective basis. As a result of the adoption, the Company reclassified $47 million from accumulated other comprehensive loss to the opening balance of retained earnings as of April 28, 2018.

In March 2017, the FASB issued guidance which changes the financial statement presentation requirements for pension and other postretirement benefit expense. While service cost will continue to be recognized in the same financial statement line items as other current employee compensation costs, the guidance requires all other non-service components of net benefit costs to be classified and presented outside of income from operations. The Company adopted this guidance in the first quarter of fiscal year 2019, and the consolidated statements of income were retrospectively adjusted. For the three and six months ended October 27, 2017, the Company reclassified $7 million and $14 million, respectively, of income from non-service components of net periodic benefit costs, which were previously presented as a component of operating profit, to other non-operating income, net.

In August 2018, the SEC adopted a final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, that amends certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The amendments also expanded the disclosure requirements on the analysis of shareholders' equity for interim financial statements, in which registrants must now analyze changes in shareholders’ equity, in the form of reconciliation, for the current and comparative year-to-date periods, with subtotals for each interim period. This final rule was effective on November 5, 2018. The Company has adopted all

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

relevant disclosure requirements, with the exception of the shareholders’ equity interim disclosures, which is allowed to be adopted in a future interim period.

Not Yet Adopted

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 will be adopted using the modified retrospective method by applying the new guidance as of the transition date with a cumulative-effect adjustment to the opening balance of retained earnings. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. 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.

3. Revenue

The Company's revenues are principally derived from device-based medical therapies and services related to cardiac rhythm disorders, cardiovascular disease, renal disease, neurological disorders and diseases, spinal conditions and musculoskeletal trauma, chronic pain, urological and digestive disorders, ear, nose, and throat conditions, and diabetes conditions as well as advanced and general surgical care products, respiratory and monitoring solutions, and neurological surgery technologies. The Company's primary customers include hospitals, clinics, third-party health care providers, distributors, and other institutions, including governmental health care programs and group purchasing organizations.

The table below illustrates net sales by segment and division for the three and six months ended October 26, 2018 and October 27, 2017:



	Three months ended				Six months ended
(in millions)	October 26, 2018		October 27, 2017		October 26, 2018		October 27, 2017
Cardiac Rhythm & Heart Failure	$	1,472	$	1,467	$	2,898	$	2,857
Coronary & Structural Heart	906		854		1,823		1,671
Aortic, Peripheral & Venous	480		452		948		891
Cardiac and Vascular Group	2,858		2,773		5,669		5,419
Surgical Innovations	1,393		1,334		2,790		2,640
Respiratory, Gastrointestinal, & Renal	654		618		1,309		1,798
Minimally Invasive Therapies Group	2,047		1,952		4,099		4,438
Spine	656		659		1,308		1,308
Brain Therapies	618		575		1,217		1,097
Specialty Therapies	405		365		789		734
Pain Therapies	314		264		628		533
Restorative Therapies Group	1,993		1,863		3,942		3,672
Diabetes Group	583		462		1,155		911
Total	$	7,481	$	7,050	$	14,865	$	14,440

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

The table below illustrates net sales by market geography for each segment for the three and six months ended October 26, 2018 and October 27, 2017:



	U.S.⁽¹⁾				Non-U.S. Developed Markets⁽²⁾				Emerging Markets⁽³⁾
	Three months ended				Three months ended				Three months ended
(in millions)	October 26, 2018		October 27, 2017		October 26, 2018		October 27, 2017		October 26, 2018		October 27, 2017
Cardiac and Vascular Group	$	1,482	$	1,423	$	895	$	895	$	481	$	455
Minimally Invasive Therapies Group	872		795		772		783		403		374
Restorative Therapies Group	1,357		1,258		412		394		224		211
Diabetes Group	334		258		203		169		46		35
Total	$	4,045	$	3,734	$	2,282	$	2,241	$	1,154	$	1,075

	U.S.⁽¹⁾				Non-U.S. Developed Markets⁽²⁾				Emerging Markets⁽³⁾
	Six months ended				Six months ended				Six months ended
(in millions)	October 26, 2018		October 27, 2017		October 26, 2018		October 27, 2017		October 26, 2018		October 27, 2017
Cardiac and Vascular Group	$	2,871	$	2,756	$	1,842	$	1,782	$	956	$	881
Minimally Invasive Therapies Group	1,729		2,040		1,600		1,648		770		750
Restorative Therapies Group	2,651		2,479		840		788		451		405
Diabetes Group	658		501		406		336		91		74
Total	$	7,909	$	7,776	$	4,688	$	4,554	$	2,268	$	2,110


(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.

The Company sells its products through direct sales representatives and independent distributors. Additionally, a portion of the Company's revenue is generated from consignment inventory maintained at hospitals. The Company recognizes revenue when control is transferred to the customer. For products sold through direct sales representatives and independent distributors, control is transferred upon shipment or upon delivery, based on the contract terms and legal requirements. For consignment inventory, control is transferred when the product is used or implanted. Payment terms vary depending on the country of sale, type of customer, and type of product.

If a contract contains more than one performance obligation, the transaction price is allocated to each performance obligation based on relative standalone selling price. Shipping and handling is treated as a fulfillment activity rather than a promised service, and therefore, is not considered a performance obligation. Taxes assessed by a governmental authority that are both imposed on, and concurrent with, a specific revenue producing transaction and collected by the Company from customers (for example, sales, use, value added, and some excise taxes) are not included in revenue. For contracts that have an original duration of one year or less, the Company uses the practical expedient applicable to such contracts and does not adjust the transaction price for the time value of money.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

The amount of revenue recognized reflects sales rebates and returns, which are estimated based on sales terms, historical experience, and trend analysis. In estimating rebates, the Company considers the lag time between the point of sale and the payment of the rebate claim, the stated rebate rates, and other relevant information. The Company records adjustments to rebates and returns reserves as increases or decreases of revenue. At October 26, 2018, $697 million of rebates were classified as other accrued expenses and $410 million of rebates were classified as a reduction of accounts receivable in the consolidated balance sheets. At April 27, 2018, $614 million of rebates were classified as other accrued expenses and $376 million of rebates were classified as a reduction of accounts receivable in the consolidated balance sheets. The Company includes obligations for returns in other accrued expenses in the consolidated balance sheets and the right-of-return asset in other current assets in the consolidated balance sheets. The right-of-return asset at October 26, 2018 and right-of-return liability at October 26, 2018 and April 27, 2018 were not material. There was no right-of-return asset at April 27, 2018 as the liability was recorded net of the asset under previous guidance. For the three and six months ended October 26, 2018, adjustments to rebate and return reserves recognized in revenue that were included in the rebate and return reserves at the beginning of the period were not material.

The Company offers warranties on various products. For standard, assurance-type warranties, the Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the product is sold. The amount of the reserve is equal to the net costs to repair or otherwise satisfy the obligation. The Company includes the warranty obligation in other accrued expenses and other liabilities in the consolidated balance sheets. For extended, service-type warranties, a portion of the transaction price is allocated to the performance obligation. Warranty obligations at October 26, 2018 and April 27, 2018 were not material.

Deferred Revenue and Remaining Performance Obligations

The Company records a deferred revenue liability if a customer pays consideration before the Company transfers a good or service to the customer. Deferred revenue primarily represents remote monitoring services and equipment maintenance, for which consideration is received at the same time as consideration for the device or equipment. Deferred revenue also includes extended, service-type warranties. Revenue related to remote monitoring services, equipment maintenance, and service-type warranties is recognized over the service period as time elapses.

Deferred revenue at October 26, 2018 and April 27, 2018 was $280 million and $289 million, respectively. At October 26, 2018 and April 27, 2018, $186 million and $196 million was included in other accrued expenses, respectively, and $94 million and $93 million was included in other liabilities, respectively. During the six months ended October 26, 2018, the Company recognized $126 million of revenue that was included in deferred revenue as of April 27, 2018.

Remaining performance obligations include deferred revenue and amounts the Company expects to receive for goods and services that have not yet been delivered or provided under existing, noncancellable contracts with minimum purchase commitments, primarily related to consumables for previously sold equipment as well as remote monitoring services and equipment maintenance. For contracts that have an original duration of one year or less, the Company has elected the practical expedient applicable to such contracts and does not disclose the transaction price for remaining performance obligations at the end of each reporting period and when the Company expects to recognize this revenue. At October 26, 2018, the estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied for executed contracts with an original duration of one year or more was approximately $600 million. The Company expects to recognize revenue on the majority of these remaining performance obligations over the next three years.

4. Acquisitions

The Company had acquisitions during the three and six months ended October 26, 2018 that were accounted for as business combinations. The assets and liabilities of the businesses acquired were recorded and consolidated on the acquisition date at their respective fair values. Goodwill resulting from business combinations is largely attributable to future yet to be defined technologies, new customer relationships, existing workforce of the acquired businesses, and synergies expected to arise after the Company's acquisition of these businesses. The pro forma impact of these acquisitions was not significant, either individually or in the aggregate, to the results of the Company for the three or six months ended October 26, 2018. The results of operations of acquired businesses have been included in the Company's consolidated statements of income since the date each business was acquired.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

The acquisition date fair values of the assets and liabilities acquired were as follows:



(in millions)
Current assets	$	6
Other intangible assets	118
Goodwill	60
Other assets	3
Total assets acquired	187

Current liabilities	16
Other liabilities	5
Total liabilities assumed	21
Net assets acquired	$	166

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 27, 2018 for additional information on the Company's fiscal year 2018 acquisitions.

Acquired In-Process Research & Development

In-process research and development (IPR&D) acquired outside of a business combination is expensed immediately. During the three and six months ended October 26, 2018, the Company acquired $15 million of IPR&D in connection with an asset acquisition, which was recognized in other operating expense, net in the consolidated statements of income. During the three and six months ended October 27, 2017, the Company acquired no IPR&D in connection with an asset acquisition.

Subsequent Acquisitions

In September 2018, the Company announced its intention to acquire Mazor Robotics (Mazor), a pioneer in the field of robotic guidance systems, for approximately $1.6 billion, or $1.3 billion net of its existing stake in Mazor and cash acquired. The acquisition of Mazor should strengthen the Company's position as a global leader in enabling technologies for spine surgery. The Company anticipates the transaction will close in the third quarter of fiscal year 2019. The Company intends to fund the acquisition through the use of existing cash and cash equivalents.

Contingent Consideration

Certain of the Company’s business combinations involve potential payment of future consideration that is contingent upon the achievement of certain product development milestones and/or contingent on the acquired business reaching certain performance milestones. A liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period, and the change in fair value is recognized within other operating expense, net in the consolidated statements of income. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.

The fair value of contingent consideration at October 26, 2018 and April 27, 2018 was $203 million and $173 million, respectively. At October 26, 2018, $79 million was recorded in other liabilities and $124 million was recorded in other accrued expenses in the consolidated balance sheets. At April 27, 2018, $65 million was recorded in other liabilities and $108 million was recorded in other accrued expenses in the consolidated balance sheets.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

The following table provides a reconciliation of the beginning and ending balances of contingent consideration:



	Three months ended						Six months ended
(in millions)	October 26, 2018			October 27, 2017			October 26, 2018			October 27, 2017
Beginning Balance	$	208		$	242		$	173		$	246
Purchase price contingent consideration	11			15			46			15
Payments	(1		)	(43		)	(7		)	(46		)
Change in fair value	(15		)	(24		)	(9		)	(25		)
Ending Balance	$	203		$	190		$	203		$	190

The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues (for revenue-based consideration). Projected revenues are based on the Company's most recent internal operational budgets and long-range strategic plans. Changes in projected payment dates, discount rates, probabilities of payment, and projected revenues may result in adjustments to the fair value measurement. The recurring Level 3 fair value measurements of contingent consideration include the following significant unobservable inputs:



	Fair Value at
(in millions)	October 26, 2018	Valuation Technique	Unobservable Input	Range
			Discount rate	11.5% - 32.5%
Revenue and other performance-based payments	$104	Discounted cash flow	Probability of payment	100%
			Projected fiscal year of payment	2019 - 2025
			Discount rate	5.5%
Product development and other milestone-based payments	$99	Discounted cash flow	Probability of payment	75% - 100%
			Projected fiscal year of payment	2019 - 2027

5. Divestitures

Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency Businesses

On July 29, 2017, the Company completed the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses within the Minimally Invasive Therapies Group segment to Cardinal Health, Inc. (Cardinal). As a result of the transaction, the Company received proceeds of $6.1 billion, which was recorded in the line item proceeds from sale of businesses in the consolidated statements of cash flows, and recognized a before-tax gain of $697 million, which was recognized within gain on sale of businesses in the consolidated statements of income. Among the product lines included in the divestiture were dental and 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.

During the three months ended October 27, 2017, the Company recognized expenses incurred in connection with the divestiture of $67 million, primarily comprised of professional services, including banker, legal, tax, and advisory fees. During the six months ended October 27, 2017, the Company recognized expenses incurred in connection with the divestiture of $115 million, primarily comprised of professional services, including banker, legal, tax, and advisory fees, as well as $16 million of accelerated stock compensation expense related to the acceleration of the vesting period for employees that transferred with the divestiture. Expenses incurred in connection with the divestiture were recognized in selling, general, and administrative expense in the consolidated statements of income. There were no divestiture-related expenses during the three and six months ended October 26, 2018.

The divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses did not meet the criteria to be classified as discontinued operations, as such, the results of operations of these businesses are included within net income through the date of the divestiture.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

6. Restructuring

Enterprise Excellence

In the third quarter of fiscal year 2018, the Company announced its Enterprise Excellence restructuring program, which is expected to leverage the Company's global size and scale, as well as enhance the customer and employee experience, with a focus on three objectives: global operations, functional optimization, and commercial optimization. Primary activities of the restructuring program include integrating and enhancing global manufacturing and supply processes, systems and site presence, enhancing and leveraging global operating models across several enabling functions, and optimizing certain commercial processes, systems, and models.

The Company estimates that, in connection with its Enterprise Excellence restructuring program, it will recognize pre-tax exit and disposal costs and other costs associated with the restructuring program across all segments of approximately $1.6 billion to $1.8 billion, the majority of which are expected to be incurred by the end of fiscal year 2022. Approximately half of the estimated charges are related to employee termination benefits. The remaining restructuring charges are costs associated with the restructuring program, such as salaries for employees supporting the program and consulting expenses. These charges are recognized within restructuring charges, net, cost of products sold, and selling, general, and administrative expense in the consolidated statements of income. For the three and six months ended October 26, 2018, the Company recognized $75 million and $195 million in charges, respectively. Additionally, the Company incurred accrual adjustments of $4 million and $2 million for the three and six months ended October 26, 2018, respectively, related to employee termination benefits being more than initially estimated.

The following table summarizes the activity related to the Enterprise Excellence restructuring program for the six months ended October 26, 2018:



(in millions)	Employee Termination Benefits			Associated Costs⁽¹⁾			Asset Write-Downs⁽²⁾			Other Costs			Total
April 27, 2018	$	27		$	2		$	—		$	—		$	29
Charges	78			91			13			13			195
Cash payments	(69		)	(88		)	—			(4		)	(161		)
Settled non-cash	—			—			(13		)	—			(13		)
Accrual adjustments	2			—			—			—			2
October 26, 2018	$	38		$	5		$	—		$	9		$	52

(1)

Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses. For the three and six months ended October 26, 2018, charges included $22 million and $37 million, respectively, recognized within cost of products sold and $31 million and $54 million, respectively, recognized within selling, general, and administrative expense in the consolidated statements of income.


(2)	Recognized within selling, general, and administrative expense in the consolidated statements of income.

Cost Synergies

The cost synergies program related to administrative office optimization, manufacturing and supply chain infrastructure, and certain general and administrative savings was achieved as part of the Covidien plc (Covidien) integration and completed in the third quarter of fiscal year 2018. Restructuring charges incurred throughout the life of the initiative affecting all segments were primarily related to employee termination costs and costs related to manufacturing and facility closures.

A summary of the restructuring accrual and related activity is presented below:



(in millions)	Employee Termination Benefits			Other Costs			Total
April 27, 2018	$	116		$	22		$	138
Cash payments	(28		)	(14		)	(42		)
Accrual adjustments	(7		)	—			(7		)
October 26, 2018	$	81		$	8		$	89

For the three and six months ended October 26, 2018, the Company recognized no charges and accrual adjustments of $2 million and $7 million, respectively. Accrual adjustments relate to certain employees identified for termination finding other positions within the Company, cancellations of employee terminations, and employee termination benefits being less than initially estimated.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

For the three and six months ended October 27, 2017, the Company recognized $26 million and $45 million in charges, respectively, which were partially offset by accrual adjustments of $8 million and $13 million, respectively. Accrual adjustments relate to certain employees identified for termination finding other positions within the Company, cancellations of employee terminations, and employee termination benefits being less than initially estimated. For the three and six months ended October 27, 2017, charges included $7 million and $12 million, respectively, recognized within cost of products sold and $3 million and $4 million, respectively, recognized within selling, general and administrative expense.

7. Financial Instruments

Debt Securities

The Company holds investments in marketable debt securities that are classified and accounted for as available-for-sale and are remeasured on a recurring basis. 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 27, 2018.

The following tables summarize the Company's investments in available-for-sale debt securities by significant investment category and the related consolidated balance sheet classification at October 26, 2018 and April 27, 2018:



	October 26, 2018
	Valuation									Balance Sheet Classification
(in millions)	Cost		Unrealized Gains		Unrealized Losses			Fair Value		Investments		Other Assets
Level 1:
U.S. government and agency securities	$	607	$	—	$	(26	)	$	581	$	581	$	—
Level 2:
Corporate debt securities	3,859		12		(76		)	3,795		3,795		—
U.S. government and agency securities	854		—		(23		)	831		831		—
Mortgage-backed securities	502		1		(34		)	469		469		—
Non-U.S. government and agency securities	112		—		(1		)	111		111		—
Other asset-backed securities	438		—		(3		)	435		435		—
Total Level 2	5,765		13		(137		)	5,641		5,641		—
Level 3:
Auction rate securities	47		—		(3		)	44		—		44
Total available-for-sale debt securities	$	6,419	$	13	$	(166	)	$	6,266	$	6,222	$	44



	April 27, 2018
	Valuation									Balance Sheet Classification
(in millions)	Cost		Unrealized Gains		Unrealized Losses			Fair Value		Investments		Other Assets
Level 1:
U.S. government and agency securities	$	732	$	—	$	(26	)	$	706	$	706	$	—
Level 2:
Corporate debt securities	4,179		20		(75		)	4,124		4,124		—
U.S. government and agency securities	848		—		(24		)	824		824		—
Mortgage-backed securities	725		2		(34		)	693		693		—
Non-U.S. government and agency securities	74		—		(1		)	73		73		—
Other asset-backed securities	358		—		(2		)	356		356		—
Total Level 2	6,184		22		(136		)	6,070		6,070		—
Level 3:
Auction rate securities	47		—		(3		)	44		—		44
Total available-for-sale debt securities	$	6,963	$	22	$	(165	)	$	6,820	$	6,776	$	44

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

The following tables present the gross unrealized losses and fair values of the Company’s available-for-sale debt securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category at October 26, 2018 and April 27, 2018:



	October 26, 2018
	Less than 12 months					More than 12 months
(in millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government and agency securities	$	223	$	(8	)	$	804	$	(41	)
Corporate debt securities	2,538		(47		)	536		(29		)
Mortgage-backed securities	165		(5		)	237		(29		)
Non-U.S. government and agency securities	42		—			36		(1		)
Other asset-backed securities	266		(2		)	115		(1		)
Auction rate securities	—		—			44		(3		)
Total	$	3,234	$	(62	)	$	1,772	$	(104	)



	April 27, 2018
	Less than 12 months					More than 12 months
(in millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government and agency securities	$	762	$	(33	)	$	374	$	(17	)
Corporate debt securities	2,620		(58		)	272		(17		)
Mortgage-backed securities	442		(15		)	102		(19		)
Non-U.S. government and agency securities	32		—			36		(1		)
Other asset-backed securities	238		(1		)	63		(1		)
Auction rate securities	—		—			44		(3		)
Total	$	4,094	$	(107	)	$	891	$	(58	)

The following table presents the unobservable inputs utilized in the fair value measurement of the auction rate securities classified as Level 3 at October 26, 2018:



	Valuation Technique	Unobservable Input	Range (Weighted Average)
Auction rate securities	Discounted cash flow	Years to principal recovery	2 yrs. - 12 yrs. (3 yrs.)
Auction rate securities	Discounted cash flow	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 and six months ended October 26, 2018 and October 27, 2017. 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.

There were no purchases, sales, settlements, or gains or losses recognized in earnings or other comprehensive income for available-for-sale securities classified as Level 3 during the three and six months ended October 26, 2018 and October 27, 2017.

Activity related to the Company’s debt securities portfolio is as follows:



	Three months ended						Six months ended
(in millions)	October 26, 2018			October 27, 2017			October 26, 2018			October 27, 2017
Proceeds from sales	$	804		$	980		$	1,916		$	1,951
Gross realized gains	2			11			8			19
Gross realized losses	(12		)	(11		)	(19		)	(14		)

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

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 October 26, 2018 and April 27, 2018, 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 and six months ended October 26, 2018 and October 27, 2017 were not significant.

The October 26, 2018 balance of available-for-sale debt securities by contractual maturity is shown in the following table. Within the table, maturities of mortgage-backed securities have been allocated based upon timing of estimated cash flows assuming no change in the current interest rate environment. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.



(in millions)	October 26, 2018
Due in one year or less	$	1,103
Due after one year through five years	2,568
Due after five years through ten years	2,479
Due after ten years	116
Total	$	6,266

Equity Securities, Equity Method Investments, and Other Investments

The Company holds investments in equity securities with readily determinable fair values, equity investments without readily determinable fair values, investments accounted for under the equity method, and other investments.

Effective April 28, 2018, the Company adopted accounting standard update (ASU) 2016-01, 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. As a result of the adoption, the Company reclassified $47 million from accumulated other comprehensive loss to the opening balance of retained earnings as of April 28, 2018. The Company uses quoted market prices to determine the fair value of equity securities with readily determinable fair values. For equity investments without readily determinable fair values that do not qualify for the practical expedient to estimate fair value using the net asset value per share or its equivalent, the Company has elected to measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. This election is made for each investment separately and is reassessed at each reporting period as to whether the investment continues to qualify for this election. Additionally, at each reporting period, the Company makes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired.

Equity securities with readily determinable fair values are included within Level 1 of the fair value hierarchy, as they are measured using quoted market prices. Equity method investments and investments without readily determinable fair values, as described above, are included within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. To determine the fair value of these investments, the Company uses all pertinent financial information available related to the investees, including financial statements, market participant valuations from recent and proposed equity offerings, and other third-party data.

The following table summarizes the Company's equity and other investments at October 26, 2018, which are classified as other assets in the consolidated balance sheets:



(in millions)	October 26, 2018
Investments with readily determinable fair values (marketable equity securities)	$	205
Investments without readily determinable fair values	235
Equity method and other investments	71
Total equity and other investments	$	511

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Prior to the adoption of ASU 2016-01, marketable equity securities were classified as available-for-sale and measured at fair value with unrealized changes recognized in accumulated other comprehensive income (AOCI), net of deferred taxes. Gains and losses on available-for-sale marketable equity securities were recognized in net income when realized. The Company also accounted for certain investments without quoted market prices under the cost method of accounting.

The following table summarizes the values of the Company's equity and other investments by significant investment category and the related consolidated balance sheet classification at April 27, 2018:



	Valuation									Balance Sheet Classification
(in millions)	Cost		Unrealized Gains		Unrealized Losses			Fair Value		Investments		Other Assets
Available-for-sale securities
Level 1:
Marketable equity securities	$	63	$	99	$	—		$	162	$	—	$	162
Level 2:
Debt funds	739		—		(154		)	585		585		—
Investments measured at net asset value⁽¹⁾:
Debt funds	199		—		(2		)	197		197		—
Total available-for-sale equity securities	1,001		99		(156		)	944		782		162
Cost method, equity method, and other investments:
Level 3:
Cost method, equity method, and other investments	353		—		—			N/A		—		353
Total equity and other investments	$	1,354	$	99	$	(156	)	$	944	$	782	$	515

(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.

The table below includes activity related to the Company’s portfolio of equity and other investments. Gains and losses on equity and other investments are recognized in other non-operating income, net in the consolidated statements of income.



	Three months ended						Six months ended
(in millions)	October 26, 2018			October 27, 2017⁽¹⁾			October 26, 2018			October 27, 2017⁽¹⁾
Proceeds from sales	$	—		$	403		$	908		$	403
Gross gains	9			—			123			7
Gross losses	(13		)	(1		)	(29		)	(1		)
Impairment losses recognized	(12		)	(1		)	(12		)	(1		)

(1) Gains and losses for the three and six months ended October 27, 2017 represent realized amounts.

Net losses recognized during the three months ended October 26, 2018 were $4 million, comprised of no net realized gains or losses on equity and other investments sold during the period and $4 million of net unrealized losses on equity and other investments still held at October 26, 2018. Net gains recognized during the six months ended October 26, 2018 were $94 million, comprised of $45 million of net realized gains on equity and other investments sold during the period and $49 million of net unrealized gains on equity and other investments still held at October 26, 2018.

8. 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. No commercial paper was outstanding at October 26, 2018, as compared to $698 million at April 27, 2018. During the three and six months ended October 26, 2018, the weighted average original maturity of the commercial paper outstanding was approximately 29 and 27 days, respectively, and the weighted average interest rate was 2.02 percent and 2.05 percent, respectively. The issuance of commercial paper reduces the amount of credit available under the Company’s existing Credit Facility, as defined below.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

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. No amounts were outstanding at October 26, 2018 and April 27, 2018.

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 October 26, 2018.

Debt Obligations

The Company's debt obligations consisted of the following:



(in millions)	Maturity by Fiscal Year	October 26, 2018			April 27, 2018
Current debt obligations	2019 - 2020	$	1,343		$	2,058

Long-term debt
Floating rate five-year 2015 senior notes	2020	500			500
2.500 percent five-year 2015 senior notes	2020	2,500			2,500
4.200 percent ten-year 2010 CIFSA senior notes	2021	600			600
4.125 percent ten-year 2011 senior notes	2021	500			500
3.150 percent seven-year 2015 senior notes	2022	2,500			2,500
3.125 percent ten-year 2012 senior notes	2022	675			675
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
Bank borrowings	2020 - 2022	105			125
Debt premium, net	2020 - 2045	112			120
Capital lease obligations	2020 - 2025	21			21
Interest rate swaps	2021 - 2022	(11		)	(6		)
Deferred financing costs	2020 - 2045	(100		)	(107		)
Long-term debt		$	23,673		$	23,699

Senior Notes

The Company has outstanding unsecured senior debt obligations, described both as senior notes and current debt obligations in the 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 October 26, 2018. For additional information regarding the terms of these agreements,

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

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 27, 2018.

Financial Instruments Not Measured at Fair Value

At October 26, 2018, the estimated fair value of the Company’s Senior Notes was $24.8 billion compared to a principal value of $24.5 billion. At April 27, 2018, the estimated fair value was $25.1 billion compared to a principal value of $24.5 billion. The fair value was estimated using quoted market prices for the publicly registered Senior Notes, which are classified as Level 2 within the fair value hierarchy. The fair values and principal values consider the terms of the related debt and exclude the impacts of debt discounts and hedging activity.

9. 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 cash flows related to all of the Company's derivative instruments are reported as operating activities in the consolidated statement of cash flows. The primary currencies of the derivative instruments are the Euro, Japanese Yen, and British Pound. 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 $10.5 billion and $11.5 billion at October 26, 2018 and April 27, 2018, 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 and statements of income.

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. The gross notional amount of these contracts outstanding at October 26, 2018 and April 27, 2018 was $4.0 billion and $5.2 billion, respectively. The Company's freestanding currency exchange rate contracts are not designated as hedges, and therefore, changes in the value of these contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in value of foreign-currency-denominated assets, liabilities, and cash flows.

The Company also entered into total return swaps in fiscal year 2018, which are used to hedge the liability of a non-qualified deferred compensation plan. The gross notional amount of the Company's total return swaps outstanding at October 26, 2018 and April 27, 2018 was $185 million and $210 million, respectively. The Company's total return swaps are not designated as hedges, and therefore, changes in the value of these instruments are recognized in earnings.

The amounts and classification of the gains (losses) in the consolidated statements of income related to derivative instruments, not designated as hedging instruments, for the three and six months ended October 26, 2018 and October 27, 2017 were as follows:



		Three months ended						Six months ended
(in millions)	Classification	October 26, 2018			October 27, 2017			October 26, 2018		October 27, 2017
Currency exchange rate contracts	Other operating expense, net	$	71		$	(42	)	$	201	$	(137	)
Total return swaps	Other operating expense, net	(11		)	9			—		15
Total		$	60		$	(33	)	$	201	$	(122	)

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

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

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 operating 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 and six months ended October 26, 2018 and October 27, 2017. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness, and no hedges were derecognized or discontinued during the three and six months ended October 26, 2018 and October 27, 2017. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at October 26, 2018 and April 27, 2018, was $6.4 billion and $6.3 billion, respectively, and will mature within the subsequent two-year period.

The amount of gross gains (losses), classification of the gains (losses) in the consolidated statements of income, and the AOCI related to the effective portion of currency exchange rate contract derivative instruments designated as cash flow hedges for the three and six months ended October 26, 2018 and October 27, 2017 were as follows:



	Three months ended October 26, 2018
	Recognized in AOCI			Recognized in Income
(in millions)	Amount			Classification	Amount
Currency exchange rate contracts	$	174		Other operating expense, net	$	11

	Three months ended October 27, 2017
	Recognized in AOCI			Recognized in Income
(in millions)	Amount			Classification	Amount
Currency exchange rate contracts	$	30		Other operating expense, net	$	(10	)

	Six months ended October 26, 2018
	Recognized in AOCI			Recognized in Income
(in millions)	Amount			Classification	Amount
Currency exchange rate contracts	$	444		Other operating expense, net	$	8

	Six months ended October 27, 2017
	Recognized in AOCI			Recognized in Income
(in millions)	Amount			Classification	Amount
Currency exchange rate contracts	$	(220	)	Other operating expense, net	$	12

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 are 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 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.

At October 26, 2018 and April 27, 2018, the Company had $133 million and $(207) million, respectively, in after-tax net unrealized gains (losses) associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $118 million of after-tax net unrealized gains at October 26, 2018 will be recognized in the consolidated statements of income 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 instruments are recognized in interest expense, 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-

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

term debt, increasing (decreasing) the outstanding balances of the debt, and amortized as a reduction of (addition to) interest expense over the remaining life of the related debt.

At both October 26, 2018 and April 27, 2018, 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 fiscal year 2021 and the $675 million 3.125 percent 2012 Senior Notes due fiscal year 2022.

At October 26, 2018 and April 27, 2018, the market value of outstanding interest rate swap agreements was a net unrealized loss of $11 million and $6 million, respectively. The amounts were recorded in other liabilities, 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 and six months ended October 26, 2018 and October 27, 2017. In addition, the Company did not recognize any gains or losses during the three and six months ended October 26, 2018 and October 27, 2017 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 October 26, 2018 and April 27, 2018. 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.



	October 26, 2018
	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	Other current assets	$	172	Other accrued expenses	$	12
Interest rate contracts	Other assets	5		Other liabilities	16
Currency exchange rate contracts	Other assets	88		Other liabilities	3
Total derivatives designated as hedging instruments		265			31
Derivatives not designated as hedging instruments
Currency exchange rate contracts	Other current assets	30		Other accrued expenses	22
Total return swap	Other current assets	—		Other accrued expenses	12
Cross currency interest rate contracts	Other current assets	4		Other accrued expenses	4
Stock warrants	Other assets	17		Other liabilities	—
Cross currency interest rate contracts	Other assets	5		Other liabilities	1
Total derivatives not designated as hedging instruments		56			39
Total derivatives		$	321		$	70

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)



	April 27, 2018
	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	Other current assets	$	37	Other accrued expenses	$	162
Interest rate contracts	Other assets	8		Other liabilities	14
Currency exchange rate contracts	Other assets	11		Other liabilities	51
Total derivatives designated as hedging instruments		56			227
Derivatives not designated as hedging instruments
Currency exchange rate contracts	Other current assets	31		Other accrued expenses	25
Total return swaps	Other current assets	4		Other accrued expenses	—
Stock warrants	Other assets	21		Other liabilities	—
Cross currency interest rate contracts	Other assets	6		Other liabilities	6
Total derivatives not designated as hedging instruments		62			31
Total derivatives		$	118		$	258

The following table provides information by level for the derivative assets and liabilities that are measured at fair value on a recurring basis.



	October 26, 2018				April 27, 2018
(in millions)	Level 1		Level 2		Level 1		Level 2
Derivative assets	$	294	$	27	$	79	$	39
Derivative liabilities	41		29		238		20

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

The Company has elected to present the fair value of derivative assets and liabilities within the consolidated balance sheets on a gross basis, even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The cash flows related to collateral posted and received are reported gross as investing and financing activities, respectively, in the consolidated statements of cash flows. The following tables 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.



	October 26, 2018
				Gross Amount Not Offset on the Balance Sheet
(in millions)	Gross Amount of Recorded Assets (Liabilities)			Financial Instruments			Cash Collateral Posted (Received)			Securities Collateral Posted (Received)		Net Amount
Derivative assets:
Currency exchange rate contracts	$	290		$	(35	)	$	(18	)	$	—	$	237
Interest rate contracts	5			(2		)	—			—		3
Stock warrants	17			—			—			—		17
Cross currency interest rate contracts	9			(1		)	—			—		8
	321			(38		)	(18		)	—		265
Derivative liabilities:
Currency exchange rate contracts	(37		)	25			—			—		(12		)
Interest rate contracts	(16		)	12			—			—		(4		)
Total return swaps	(12		)	—			—			—		(12		)
Cross currency interest rate contracts	(5		)	1			—			—		(4		)
	(70		)	38			—			—		(32		)
Total	$	251		$	—		$	(18	)	$	—	$	233



	April 27, 2018
				Gross Amount Not Offset on the Balance Sheet
(in millions)	Gross Amount of Recorded Assets (Liabilities)			Financial Instruments			Cash Collateral Posted (Received)		Securities Collateral Posted (Received)		Net Amount
Derivative assets:
Currency exchange rate contracts	$	79		$	(61	)	$	—	$	—	$	18
Interest rate contracts	8			(6		)	—		—		2
Total return swaps	4			—			—		—		4
Stock warrants	21			—			—		—		21
Cross currency interest rate contracts	6			(4		)	—		—		2
	118			(71		)	—		—		47
Derivative liabilities:
Currency exchange rate contracts	(238		)	61			—		74		(103		)
Interest rate contracts	(14		)	6			—		2		(6		)
Cross currency interest rate contracts	(6		)	4			—		—		(2		)
	(258		)	71			—		76		(111		)
Total	$	(140	)	$	—		$	—	$	76	$	(64	)

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

10. Inventories

Inventory balances, net of reserves, were as follows:



(in millions)	October 26, 2018		April 27, 2018
Finished goods	$	2,479	$	2,407
Work in-process	562		496
Raw materials	722		676
Total	$	3,763	$	3,579

11. Goodwill and Other Intangible Assets

Goodwill

The following table presents the changes in the carrying amount of goodwill by segment:



(in millions)	Cardiac and Vascular Group			Minimally Invasive Therapies Group			Restorative Therapies Group			Diabetes Group			Total
April 27, 2018	$	6,791		$	21,155		$	9,717		$	1,880		$	39,543
Goodwill as a result of acquisitions	—			20			40			—			60
Currency translation	(82		)	(772		)	(143		)	(1		)	(998		)
October 26, 2018	$	6,709		$	20,403		$	9,614		$	1,879		$	38,605

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 or six months ended October 26, 2018 or October 27, 2017.

Intangible Assets

The following table presents the gross carrying amount and accumulated amortization of intangible assets:



	October 26, 2018					April 27, 2018
(in millions)	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Definite-lived:
Customer-related	$	16,917	$	(3,611	)	$	16,949	$	(3,139	)
Purchased technology and patents	11,553		(4,784		)	11,569		(4,441		)
Trademarks and tradenames	821		(582		)	822		(569		)
Other	89		(55		)	94		(52		)
Total	$	29,380	$	(9,032	)	$	29,434	$	(8,201	)
Indefinite-lived:
IPR&D	$	471				$	490

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 recognized $61 million of definite-lived intangible asset charges during the six months ended October 26, 2018 in connection with the exit of a business within the Cardiac and Vascular Group segment, which were recognized in other operating expense, net in the consolidated statements of income. The Company did not recognize any definite-lived intangible asset charges during the three months ended October 26, 2018 or during the three or six months ended October 27, 2017.

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 or six months ended October 26, 2018 or October 27, 2017. 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, other failures to achieve a commercially viable product, or the discontinuation a certain projects, and as a result, may recognize impairment losses in the future.

Amortization Expense

Intangible asset amortization expense for the three and six months ended October 26, 2018 was $445 million and $891 million, respectively, as compared to $460 million and $914 million for the three and six months ended October 27, 2017, respectively. Estimated aggregate amortization expense by fiscal year based on the carrying value of definite-lived intangible assets at October 26, 2018, excluding any possible future amortization associated with acquired IPR&D which has not yet met technological feasibility, is as follows:



(in millions)	Amortization Expense
Remaining 2019	$	852
2020	1,692
2021	1,676
2022	1,636
2023	1,568
2024	1,526

12. Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"), which significantly revises U.S. corporate income taxation by, among other things, lowering the U.S. corporate income tax rate from 35.0 percent to 21.0 percent, broadening the base of taxation, implementing a territorial tax system, and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. The Company adopted guidance allowing for a measurement period, not to exceed one year, to finalize the accounting for the income tax impacts of the Tax Act. Until the accounting for the income tax impacts of the Tax Act is complete, the reported amounts are based on reasonable estimates and are disclosed as provisional.

As of October 26, 2018, the Company had not fully completed its accounting for the tax effects of the enactment of the Tax Act. The Company’s calculation of the transition tax and the Tax Act impact to deferred tax assets, liabilities, and valuation allowances are based on reasonable estimates. The Company made the following adjustments to the provisional calculations during the three and six months ended October 26, 2018:

•

A $37 million increase to the transition tax liability was recorded during the three months ended October 26, 2018. During the six months ended October 26, 2018, a net $13 million reduction to the transition tax liability was recorded, resulting in a total provisional transition tax charge of $2.5 billion as of October 26, 2018. The Company has not yet completed the calculation of the total post-1986 foreign earnings & profits (E&P) and the income tax pools for all foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

federal taxation and finalizes the amounts held in cash or other specified assets. In addition, further interpretations from U.S. federal and state governments and regulatory organizations may change the provisional tax liability or the accounting treatment of the provisional tax liability.


•	No adjustments were recorded during the three and six months ended October 26, 2018 associated with the remeasurement of deferred tax assets, liabilities, and valuation allowances. The Company continues to report the impact from the remeasurement of deferred tax assets, liabilities, and valuation allowances as provisional.

The Company made the accounting policy election to treat taxes due on U.S. inclusions in taxable income related to Global Intangible Low-Taxed Income (GILTI) as a current period expense when incurred (the "period cost method").

The Company’s effective tax rate for the three and six months ended October 26, 2018 was 17.3 percent and 13.3 percent, respectively, as compared to (16.5) percent and (3.4) percent for the three and six months ended October 27, 2017, respectively. The increase in the effective tax rate for the three and six months ended October 26, 2018, as compared to the corresponding periods in the prior fiscal year, was primarily due to the impacts from certain tax adjustments, the gain on the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses during the second quarter of fiscal year 2018, the finalization of certain tax returns and audits, the impact from the lapse of federal statutes of limitations, excess tax benefits related to stock-based compensation, and year-over-year changes in operational results by jurisdiction.

Certain Tax Adjustments

During the three months ended October 26, 2018, the charge from certain tax adjustments of $58 million, recognized in income tax provision in the consolidated statements of income, included the following:


•	A charge of $37 million associated with the transition tax liability recorded in connection with the Tax Act, as noted above. The income tax provision associated with the impact of the Tax Act is based on a reasonable estimate and will be finalized within the measurement period in accordance with U.S. GAAP.


•	A charge of $21 million related to the recognition of a prepaid tax expense resulting from the reduction in the U.S. statutory tax rate under the Tax Act and the current quarter sale of U.S. manufactured inventory held as of April 27, 2018.

During the six months ended October 26, 2018, the net charge from certain tax adjustments of $29 million, recognized in income tax provision in the consolidated statements of income, included the following:


•	A benefit of $13 million associated with the transition tax liability recorded in connection with the Tax Act, as noted above. The income tax provision associated with the impact of the Tax Act is based on a reasonable estimate and will be finalized within the measurement period in accordance with U.S. GAAP.


•	A charge of $42 million related to the recognition of a prepaid tax expense resulting from the reduction in the U.S. statutory tax rate under the Tax Act and the current year sale of U.S. manufactured inventory held as of April 27, 2018.

During the three months ended October 27, 2017, the net benefit from certain tax adjustments of $404 million, recognized in income tax provision in the consolidated statements of income, included the following:


•	A net benefit of $398 million associated with the intercompany sales of intellectual property.


•	A benefit of $6 million related to the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.

During the six months ended October 27, 2017, the net benefit from certain tax adjustments of $344 million, recognized in income tax provision in the consolidated statements of income, included the following:


•	A net benefit of $398 million associated with the intercompany sales of intellectual property.


•	A net charge of $54 million primarily related to the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

At both October 26, 2018 and April 27, 2018, the Company's gross unrecognized tax benefits were $1.7 billion. In addition, the Company had accrued gross interest and penalties of $170 million at October 26, 2018. If all of the Company’s unrecognized tax benefits were recognized, approximately $1.7 billion would impact the Company’s effective tax rate. At both October 26, 2018 and April 27, 2018, 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 sheets. The Company recognizes interest and penalties related to income tax matters within income tax provision in the consolidated statements of income and records the liability within either current or noncurrent accrued income taxes on the consolidated balance sheets.

Refer to Note 17 to the consolidated financial statements for additional information regarding the status of current tax audits and proceedings.

13. 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 with the proceeds from issuance of the potentially dilutive shares. Potentially dilutive ordinary shares include stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan.

The table below sets forth the computation of basic and diluted earnings per share:



	Three months ended				Six months ended
(in millions, except per share data)	October 26, 2018		October 27, 2017		October 26, 2018		October 27, 2017
Numerator:
Net income attributable to ordinary shareholders	$	1,115	$	2,017	$	2,190	$	3,033
Denominator:
Basic – weighted average shares outstanding	1,349.2		1,355.1		1,350.9		1,358.5
Effect of dilutive securities:
Employee stock options	8.5		7.7		8.4		8.5
Employee restricted stock units	3.1		3.0		3.3		3.5
Other	0.1		—		0.4		0.3
Diluted – weighted average shares outstanding	1,360.9		1,365.8		1,363.0		1,370.8

Basic earnings per share	$	0.83	$	1.49	$	1.62	$	2.23
Diluted earnings per share	$	0.82	$	1.48	$	1.61	$	2.21

The calculation of weighted average diluted shares outstanding excludes options to purchase approximately 7 million and 6 million ordinary shares for the three and six months ended October 26, 2018, respectively, and 5 million and 4 million ordinary shares for the three and six months ended October 27, 2017, respectively, because their effect would have been anti-dilutive on the Company’s earnings per share.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

14. 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 and six months ended October 26, 2018 and October 27, 2017:



	Three months ended						Six months ended
(in millions)	October 26, 2018			October 27, 2017			October 26, 2018			October 27, 2017
Stock options	$	33		$	42		$	51		$	77
Restricted stock	65			59			101			107
Employee stock purchase plan	6			5			16			14
Total stock-based compensation expense	$	104		$	106		$	168		$	198

Cost of products sold	$	12		$	14		$	18		$	24
Research and development expense	13			12			21			21
Selling, general, and administrative expense	79			80			129			153
Total stock-based compensation expense	104			106			168			198
Income tax benefits	(21		)	(32		)	(32		)	(57		)
Total stock-based compensation expense, net of tax	$	83		$	74		$	136		$	141

15. Retirement Benefit Plans

The Company sponsors various retirement benefit plans, including defined benefit pension plans, post-retirement medical plans, defined contribution savings plans, and termination indemnity plans, covering substantially all U.S. employees and many employees outside the U.S. The net periodic benefit cost of the defined benefit pension plans included the following components for the three and six months ended October 26, 2018 and October 27, 2017:



	U.S.						Non-U.S.
	Three months ended						Three months ended
(in millions)	October 26, 2018			October 27, 2017			October 26, 2018			October 27, 2017
Service cost	$	27		$	29		$	15		$	17
Interest cost	33			30			7			7
Expected return on plan assets	(54		)	(52		)	(14		)	(13		)
Amortization of net actuarial loss	19			20			3			4
Net periodic benefit cost	$	25		$	27		$	11		$	15



	U.S.						Non-U.S.
	Six months ended						Six months ended
(in millions)	October 26, 2018			October 27, 2017			October 26, 2018			October 27, 2017
Service cost	$	54		$	58		$	30		$	34
Interest cost	66			60			14			14
Expected return on plan assets	(108		)	(104		)	(28		)	(26		)
Amortization of net actuarial loss	38			40			6			8
Net periodic benefit cost	$	50		$	54		$	22		$	30

Components of net periodic benefit cost other than the service component are recognized in other non-operating income, net in the consolidated statements of income.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

16. Accumulated Other Comprehensive Income and Supplemental Equity Disclosure

The following table provides changes in AOCI, net of tax, and by component:



(in millions)	Unrealized (Loss) Gain on Investment Securities			Cumulative Translation Adjustment			Net Change in Retirement Obligations			Unrealized (Loss) Gain on Derivative Financial Instruments			Total Accumulated Other Comprehensive (Loss) Income
April 27, 2018	$	(194	)	$	(268	)	$	(1,117	)	$	(207	)	$	(1,786	)
Other comprehensive income (loss) before reclassifications	(19		)	(1,252		)	—			343			(928		)
Reclassifications	10			—			48			(3		)	55
Other comprehensive income (loss)	(9		)	(1,252		)	48			340			(873		)
Cumulative effect of change in accounting principle⁽¹⁾	47			—			—			—			47
October 26, 2018	$	(156	)	$	(1,520	)	$	(1,069	)	$	133		$	(2,612	)


(in millions)	Unrealized (Loss) Gain on Investment Securities			Cumulative Translation Adjustment			Net Change in Retirement Obligations			Unrealized (Loss) Gain 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	63			662			(19		)	(140		)	566
Reclassifications	(8		)	(34		)	33			(4		)	(13		)
Other comprehensive income (loss)	55			628			14			(144		)	553
October 27, 2017	$	(14	)	$	(824	)	$	(1,115	)	$	(107	)	$	(2,060	)


(1)	Refer to Note 2 to the consolidated financial statements for discussion regarding the adoption of accounting standards during the six months ended October 26, 2018.

The income tax on gains and losses on investment securities in other comprehensive income before reclassifications during the six months ended October 26, 2018 and October 27, 2017 was a benefit of $1 million and an expense of $27 million, respectively. During the six months ended October 26, 2018, there was no income tax on realized gains and losses on investment securities reclassified from AOCI. During the six months ended October 27, 2017, realized gains and losses on investment securities reclassified from AOCI were reduced by income taxes of $4 million. When realized, gains and losses on investment securities reclassified from AOCI are recognized within other non-operating income, net. Refer to Note 7 to the consolidated financial statements for additional information.

For the six months ended October 26, 2018, the income tax benefit on cumulative translation adjustments was $5 million. Due to recently enacted U.S. Tax Reform and change in permanently reinvested assertion with respect to certain earnings, the Company continues to evaluate the tax impact these events may have on cumulative translation adjustments. For the six months ended October 27, 2017, taxes were not provided on cumulative translation adjustments as substantially all translation adjustments relate to earnings that were intended to be indefinitely reinvested outside the U.S.

The net change in retirement obligations in other comprehensive income includes net amortization of actuarial losses included in net periodic benefit cost. During the six months ended October 26, 2018, there was no income tax impact on the net change in retirement obligations in other comprehensive income before reclassifications. The income tax on the net change in retirement obligations in other comprehensive income before reclassifications during the six months ended October 27, 2017 was a benefit of $4 million. During the six months ended October 26, 2018 and October 27, 2017, the gains and losses on defined benefit and pension items reclassified from AOCI were reduced by income taxes of $10 million and $15 million, respectively. When realized, net gains and losses on defined benefit and pension items reclassified from AOCI are recognized within other non-operating income, net. Refer to Note 15 to the consolidated financial statements for additional information.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

The income tax on unrealized gains and losses on derivative financial instruments in other comprehensive income before reclassifications during the six months ended October 26, 2018 and October 27, 2017 was an expense of $100 million and a benefit of $81 million, respectively. During the six months ended October 26, 2018 and October 27, 2017, gains and losses on derivative financial instruments reclassified from AOCI were reduced by income taxes of $3 million and $4 million, respectively. When realized, cash flow hedge gains and losses reclassified from AOCI are recognized within other operating expense, net, and forward starting interest rate derivative financial instrument gains and losses reclassified from AOCI are recognized within interest expense. Refer to Note 9 to the consolidated financial statements for additional information.

The supplemental equity schedule below presents changes in the Company's total shareholders' equity and noncontrolling interests for the six months ended October 26, 2018 and October 27, 2017.



(in millions)	Total Shareholders' Equity			Noncontrolling Interests			Total Equity
April 27, 2018	$	50,720		$	102		$	50,822
Net income	2,190			7			2,197
Other comprehensive loss	(873		)	(3		)	(876		)
Dividends to shareholders	(1,351		)	—			(1,351		)
Issuance of shares under stock purchase and award plans	744			—			744
Repurchase of ordinary shares	(1,991		)	—			(1,991		)
Stock-based compensation	168			—			168
Changes to noncontrolling ownership interests	—			1			1
October 26, 2018	$	49,607		$	107		$	49,714


(in millions)	Total Shareholders' Equity			Noncontrolling Interests			Total Equity
April 28, 2017	$	50,294		$	122		$	50,416
Net income (loss)	3,033			(11		)	3,022
Other comprehensive income	553			—			553
Dividends to shareholders	(1,247		)	—			(1,247		)
Issuance of shares under stock purchase and award plans	177			—			177
Repurchase of ordinary shares	(1,835		)	—			(1,835		)
Stock-based compensation	198			—			198
Cumulative effect of change in accounting principle	296			—			296
Changes to noncontrolling ownership interests	—			(2		)	(2		)
October 27, 2017	$	51,469		$	109		$	51,578

Cash dividends declared and paid per ordinary share were $0.50 for each quarter in fiscal year 2019 and $0.46 for each quarter in fiscal year 2018.

17. Commitments and Contingencies

Legal Matters

The Company and its affiliates are involved in a number of legal actions involving product liability, intellectual property and commercial disputes, shareholder related matters, environmental proceedings, 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 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.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

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 October 26, 2018 and April 27, 2018, accrued litigation was approximately $0.9 billion. The ultimate cost to the Company with respect to accrued litigation could be materially different than the amount of the current estimates and accruals and could have a material adverse impact on the Company’s consolidated earnings, financial position, and/or cash flows. The Company includes accrued litigation in other accrued expenses and other liabilities on the consolidated balance sheets. While it is not possible to predict the outcome for most of the legal matters discussed below, the Company believes it is possible that the costs associated with these matters could have a material adverse impact on the Company’s consolidated earnings, financial position, and/or cash flows.

Product Liability Matters

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 recognized an expense for probable and estimable damages related to this matter, and accrued expenses for this matter are included within accrued litigation as discussed above.

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 litigation as discussed above.

Pelvic Mesh Litigation

The Company is currently involved in litigation in various state and federal courts against manufacturers of pelvic mesh products alleging personal injuries resulting from the implantation of those products. Two subsidiaries of Covidien supplied pelvic mesh products to one of the manufacturers, C.R. Bard (Bard), named in the litigation. The litigation includes a federal multi-district litigation in the U.S. District Court for the Northern District of West Virginia and cases in various state courts and jurisdictions outside the U.S. Generally, complaints allege design and manufacturing claims, failure to warn, breach of warranty, fraud, violations of state consumer protection laws and loss of consortium claims. In fiscal year 2016, Bard paid the Company $121 million towards the settlement of 11,000 of these claims. In May 2017, the agreement with Bard was amended to extend the terms to apply to up to an additional 5,000 claims. That agreement does not resolve the dispute between the Company and Bard with respect to claims that do not settle, if any. As part of the agreement, the Company and Bard agreed to dismiss without prejudice their pending litigation with respect to Bard’s obligation to defend and indemnify the Company. The Company estimates law firms representing approximately 15,800 claimants have asserted or may assert claims involving products manufactured by Covidien’s subsidiaries. As of November 1, 2018, the Company had reached agreements to settle approximately 15,100 of these claims. The Company's accrued expenses for this matter are included within accrued litigation 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 six of the asserted patents, leaving a single asserted patent.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

In addition to claims of non-infringement, the Company asserts an affirmative defense of invalidity. 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.

Sasso

The Company is involved in litigation in Indiana relating to certain patent and royalty disputes with Dr. Sasso under agreements originally entered into in 1999 and 2001. On November 28, 2018, a jury in Indiana state court returned a verdict against the Company for approximately $112 million. The Company has strong arguments to appeal the verdict and will file post-trial motions and, if necessary, appeals with the appropriate appellate courts. The Company has not recognized an expense in connection with this matter because it does not currently believe a loss is probable under U.S. GAAP.

Shareholder Related Matters

INFUSE

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. On January 30, 2018, the District Court issued an order certifying a class for the period of September 8, 2010 through June 28, 2011. In July of 2018, the parties reached an agreement to settle this matter, and in September of 2018, the Company paid the settlement amount into a qualified settlement fund to be distributed following final court approval.

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 March 20, 2015, the District Court issued an 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, and reversed in part. On April 19, 2016 the Minnesota Supreme Court granted the Company’s petition to review 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, which are ongoing. 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. In October of 2018, the parties reached an agreement to settle this matter. The Company's accrued expenses for this matter are included within accrued litigation as discussed above.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Environmental Proceedings

The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. These projects relate to a variety of activities, including removal of solvents, metals and other hazardous substances from soil and groundwater. The ultimate cost of site cleanup and timing of future cash flows is difficult to predict given uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations, and alternative cleanup methods.

The Company is a successor to a company which owned and operated a chemical manufacturing facility in Orrington, Maine from 1967 until 1982, and is responsible for the costs of completing an environmental site investigation as required by the Maine Department of Environmental Protection (MDEP). MDEP served a compliance order on Mallinckrodt LLC and U.S. Surgical Corporation, subsidiaries of Covidien, in December 2008, which included a directive to remove a significant volume of soils at the site. After a hearing on the compliance order before the Maine Board of Environmental Protection (Maine Board) to challenge the terms of the compliance order, the Maine Board modified the MDEP order and issued a final order requiring removal of two landfills, capping of the remaining three landfills, installation of a groundwater extraction system and long-term monitoring of the site and the three remaining landfills.

The Company has proceeded with implementation of the investigation and remediation at the site in accordance with the MDEP order as modified by the Maine Board order.

Since the early 2000s, the Company or its predecessors have also been involved in a lawsuit filed in the U.S. District Court for the District of Maine by the Natural Resources Defense Council and the Maine People’s Alliance. Plaintiffs sought an injunction requiring the Company's predecessor to conduct extensive studies of mercury contamination of the Penobscot River and Bay and options for remediating such contamination, and to perform appropriate remedial activities, if necessary.

Following a trial in March 2002, the Court held that conditions in the Penobscot River and Bay may pose an imminent and substantial endangerment and that the Company’s predecessor was liable for the cost of performing a study of the River and Bay. Following a second trial in June 2014, the Court ordered that further engineering study and engineering design work was needed to determine the nature and extent of remediation in the Penobscot River and Bay. The Court also appointed an engineering firm to conduct such studies and issue a report on potential remediation alternatives. In connection with these proceedings, reports have been produced including a variety of cost estimates for a variety of potential remedial options. A third trial to determine the course of remediation to be pursued is scheduled to occur in October of 2019.

The Company's accrued expenses for environmental proceedings are included within accrued litigation as discussed above.

Government Matters

Since 2011, the Company or one of its predecessors, including ev3, Inc. (“ev3”), has been responding to requests from the Department of Justice and U.S. Department of Health and Human Services for information about business practices dating back to 2005 relating to several neurovascular and peripheral vascular products developed and first marketed by those predecessors. The Company has provided information in response to these requests, and in November of 2018, the Company reached agreements to resolve certain of these matters through two separate civil settlements and, in the case of sales of one product, a misdemeanor plea agreement by ev3 for conduct between October 2005 and December 2009. The misdemeanor conduct ended prior to the Covidien acquisition of ev3 in 2010 and many years before the Medtronic acquisition of Covidien. The Company’s accrued expenses for the resolved matters are included within accrued litigation as discussed above. The Company continues to provide information to the Department of Justice in responding to requests that were not subject to the resolutions described above. The Company has not recognized an expense in connection with any ongoing investigation, because any such 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 the ongoing information requests.

Income Taxes

In March 2009, the IRS issued its audit report on Medtronic, Inc. for fiscal years 2005 and 2006. Medtronic, Inc. reached agreement with the IRS on some, but not all matters related to these fiscal years. The remaining unresolved issue for fiscal years 2005 and 2006 relates to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, which is one of the Company's key manufacturing sites. The U.S. Tax Court reviewed this dispute, and on June 9, 2016, issued its opinion with respect to the allocation of income between the parties for fiscal years 2005 and 2006. The U.S. Tax Court generally rejected the IRS’s position, but also made certain modifications to the Medtronic, Inc. tax returns as filed. On April 21, 2017, the IRS filed their Notice of Appeal to the U.S. Court of Appeals for the 8th Circuit regarding the Tax Court Opinion. Oral argument for the Appeal occurred on March 14, 2018. The 8th Circuit Court of Appeals issued their opinion on August 16, 2018, and remanded the case back to the U.S. Tax Court for additional factual findings.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

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. The remaining unresolved issue for fiscal years 2007 and 2008 relates to 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. The remaining unresolved issue for fiscal years 2009, 2010, and 2011 relates to 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.

Medtronic, Inc.’s fiscal years 2015 and 2016 U.S. federal income tax returns are currently being audited by the IRS.

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 2012. The statute of limitations for Covidien’s 2013 and 2014 U.S. federal income tax returns lapsed during the first quarter of fiscal years 2018 and 2019, respectively. Covidien's fiscal year 2015 U.S. federal income tax returns are currently being audited by the IRS.

While it is not possible to predict the outcome for most of the income tax matters discussed above, the Company believes it is possible that charges associated with these matters could have a material adverse impact on the Company’s consolidated earnings, financial position, and/or cash flows.

Refer to Note 12 for additional discussion of income taxes.

Guarantees

As a result of the acquisition of Covidien, the Company has a guarantee commitment related to certain contingent tax liabilities as a party to the Tax Sharing Agreement that was entered into on June 29, 2007, between Covidien, Tyco International (now Johnson Controls), and Tyco Electronics (now TE Connectivity), associated with the spin-off from Tyco. The Tax Sharing Agreement covers certain income tax liabilities for periods prior to and including the spin-off. Medtronic’s share of the income tax liabilities for these periods is 42 percent, with Johnson Controls and TE Connectivity share being 27 percent, and 31 percent, respectively. If Johnson Controls 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. The most significant amounts at risk under this Tax Sharing Agreement were resolved with the U.S. Tax Court and IRS Appeals resolutions reached in May 2016. However, the Tax Sharing Agreement remains in place with respect to income tax liabilities that are not the subject of such resolution, including certain state and international tax matters that remain open.

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 tax years that remain 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 Tyco Electronics legal entities for periods prior to the 2007 separation.

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 27, 2018 for additional information.

As part of the Company’s Minimally Invasive Therapies Group sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses to Cardinal on July 29, 2017, the Company has indemnified Cardinal for certain contingent tax liabilities related to the divested businesses that existed prior to the date of divestiture. The actual amounts that the Company may be required to ultimately accrue or pay could vary depending upon the outcome of the unresolved tax matters.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

In the normal course of business, the Company and/or its affiliates periodically enter into agreements that require one or more of the Company and/or its affiliates to indemnify customers or suppliers for specific risks, such as claims for injury or property damage arising as a result of the Company or its affiliates’ products, the negligence of the Company's personnel, or claims alleging that the Company's products infringe on third-party patents or other intellectual property. The Company also offers warranties on various products. The Company’s maximum exposure under these guarantees is unable to be estimated. Historically, the Company has not experienced significant losses on these types of guarantees.

The Company believes the ultimate resolution of the above guarantees is not expected to have a material effect on the Company’s consolidated earnings, financial position, or cash flows.

18. Segment and Geographic Information

Segment disclosures are on a performance basis consistent with internal management reporting. Net sales of the Company's reportable segments include end-customer revenues from the sale of products the segment develops, manufactures, and distributes. There are certain corporate and centralized expenses that are not allocated to the segments.

The Company’s management evaluates performance of the segments and allocates resources based on net sales and segment earnings before interest, taxes, and amortization ("Segment EBITA"). Segment EBITA represents income before income taxes, excluding interest expense, interest income, amortization of intangible assets, centralized distribution costs, certain corporate charges, and other items not allocated to the segments.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2018. Certain depreciable assets may be recorded by one segment, while the depreciation expense is allocated to another segment. The allocation of depreciation expense is based on the proportion of the assets used by each segment.

The following tables present reconciliations of financial information from the segments to the applicable line items in the Company's consolidated financial statements:

Net Sales



	Three months ended				Six months ended
(in millions)	October 26, 2018		October 27, 2017		October 26, 2018		October 27, 2017
Cardiac and Vascular Group	$	2,858	$	2,773	$	5,669	$	5,419
Minimally Invasive Therapies Group	2,047		1,952		4,099		4,438
Restorative Therapies Group	1,993		1,863		3,942		3,672
Diabetes Group	583		462		1,155		911
Total	$	7,481	$	7,050	$	14,865	$	14,440

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Segment EBITA



	Three months ended						Six months ended
(in millions)	October 26, 2018			October 27, 2017			October 26, 2018			October 27, 2017
Cardiac and Vascular Group	$	1,140		$	1,104		$	2,191		$	2,115
Minimally Invasive Therapies Group	792			761			1,569			1,636
Restorative Therapies Group	805			750			1,571			1,430
Diabetes Group	176			91			349			202
Segment EBITA	2,913			2,706			5,680			5,383
Interest expense	(241		)	(273		)	(483		)	(559		)
Interest income	66			100			147			192
Amortization of intangible assets	(445		)	(460		)	(891		)	(914		)
Corporate	(335		)	(339		)	(646		)	(616		)
Centralized distribution costs	(482		)	(486		)	(929		)	(928		)
Restructuring and associated costs	(77		)	(18		)	(190		)	(32		)
Acquisition-related items	(4		)	(18		)	(40		)	(71		)
Gain/(loss) on minority investments	(25		)	—			85			—
IPR&D charges	(15		)	—			(15		)	—
Certain litigation charges	—			—			(103		)	—
Exit of business	—			—			(80		)	—
Divestiture-related items	—			(67		)	—			(115		)
Gain on sale of businesses	—			697			—			697
Contribution to Medtronic Foundation	—			(80		)	—			(80		)
Hurricane Maria	—			(34		)	—			(34		)
Income Before Income Taxes	$	1,355		$	1,728		$	2,535		$	2,923

Geographic Information

Net sales are attributed to the country based on the location of the customer taking possession of the products or in which the services are rendered. The following table presents net sales for the three and six months ended October 26, 2018 and October 27, 2017 for the Company's country of domicile, countries with significant concentrations, and all other countries:



	Three months ended				Six months ended
(in millions)	October 26, 2018		October 27, 2017		October 26, 2018		October 27, 2017
Ireland	$	22	$	22	$	44	$	42

United States	4,045		3,734		7,909		7,776
Rest of world	3,414		3,294		6,912		6,622
Total other countries, excluding Ireland	7,459		7,028		14,821		14,398
Total	$	7,481	$	7,050	$	14,865	$	14,440

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

19. Guarantor Financial Information

Medtronic plc and Medtronic Global Holdings S.C.A. (Medtronic Luxco), a wholly-owned subsidiary guarantor, each have provided full and unconditional guarantees of the obligations of Medtronic, Inc., a wholly-owned subsidiary issuer, under the Senior Notes (Medtronic Senior Notes) and full and unconditional guarantees of the obligations of Covidien International Finance S.A. (CIFSA), a wholly-owned subsidiary issuer, under the Senior Notes (CIFSA Senior Notes). The guarantees of the CIFSA Senior Notes are in addition to the guarantees of the CIFSA Senior Notes by Covidien Ltd. and Covidien Group Holdings Ltd., both of which are wholly-owned subsidiary guarantors of the CIFSA Senior Notes. Additionally, Medtronic plc and Medtronic, Inc. each have 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 and six months ended October 26, 2018 and October 27, 2017, condensed consolidating balance sheets at October 26, 2018 and April 27, 2018, and condensed consolidating statements of cash flows for the six months ended October 26, 2018 and October 27, 2017. 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. The Company has presented the provisional tax impacts related to the Tax Act within the condensed consolidating financial statements for the three and six months ended October 26, 2018, at the subsidiary which the Company reasonably expects to be affected by the Tax Act. Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.

During the six months ended October 26, 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.

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Consolidating Statement of Comprehensive Income

Three Months Ended October 26, 2018

Medtronic Senior Notes and Medtronic Luxco Senior Notes



(in millions)	Medtronic plc			Medtronic, Inc.			Medtronic Luxco			Subsidiary Non-guarantors			Consolidating Adjustments			Total
Net sales	$	—		$	364		$	—		$	7,481		$	(364	)	$	7,481

Costs and expenses:
Cost of products sold	—			280			—			2,162			(239		)	2,203
Research and development expense	—			176			—			414			—			590
Selling, general, and administrative expense	4			413			—			2,188			—			2,605
Amortization of intangible assets	—			2			—			443			—			445
Restructuring charges, net	—			1			—			23			—			24
Other operating expense (income), net	24			(672		)	—			834			(116		)	70
Operating profit (loss)	(28		)	164			—			1,417			(9		)	1,544
Other non-operating (income) expense, net	—			(138		)	(175		)	(429		)	690			(52		)
Interest expense	108			482			113			228			(690		)	241
Equity in net (income) loss of subsidiaries	(1,249		)	(762		)	(1,187		)	—			3,198			—
Income (loss) before income taxes	1,113			582			1,249			1,618			(3,207		)	1,355
Income tax (benefit) provision	(2		)	(15		)	—			252			—			235
Net income (loss)	1,115			597			1,249			1,366			(3,207		)	1,120
Net (income) loss attributable to noncontrolling interests	—			—			—			(5		)	—			(5		)
Net income (loss) attributable to Medtronic	1,115			597			1,249			1,361			(3,207		)	1,115
Other comprehensive income (loss), net of tax	(289		)	(194		)	(289		)	(310		)	790			(292		)
Comprehensive income attributable to noncontrolling interests	—			—			—			(2		)	—			(2		)
Total comprehensive income (loss)	$	826		$	403		$	960		$	1,054		$	(2,417	)	$	826

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Consolidating Statement of Comprehensive Income

Six Months Ended October 26, 2018

Medtronic Senior Notes and Medtronic Luxco Senior Notes



(in millions)	Medtronic plc			Medtronic, Inc.			Medtronic Luxco			Subsidiary Non-guarantors			Consolidating Adjustments			Total
Net sales	$	—		$	726		$	—		$	14,865		$	(726	)	$	14,865

Costs and expenses:
Cost of products sold	—			553			—			4,330			(476		)	4,407
Research and development expense	—			344			—			831			—			1,175
Selling, general, and administrative expense	6			781			—			4,415			—			5,202
Amortization of intangible assets	—			4			—			887			—			891
Restructuring charges, net	—			11			—			75			—			86
Certain litigation charges	—			78			—			25			—			103
Other operating expense (income), net	25			(931		)	—			1,349			(222		)	221
Operating profit (loss)	(31		)	(114		)	—			2,953			(28		)	2,780
Other non-operating (income) expense, net	—			(297		)	(339		)	(934		)	1,332			(238		)
Interest expense	208			946			216			445			(1,332		)	483
Equity in net (income) loss of subsidiaries	(2,425		)	(1,584		)	(2,302		)	—			6,311			—
Income (loss) before income taxes	2,186			821			2,425			3,442			(6,339		)	2,535
Income tax (benefit) provision	(4		)	(119		)	—			461			—			338
Net income (loss)	2,190			940			2,425			2,981			(6,339		)	2,197
Net (income) loss attributable to noncontrolling interests	—			—			—			(7		)	—			(7		)
Net income (loss) attributable to Medtronic	2,190			940			2,425			2,974			(6,339		)	2,190
Other comprehensive income (loss), net of tax	(873		)	(503		)	(873		)	(914		)	2,287			(876		)
Comprehensive income attributable to noncontrolling interests	—			—			—			(4		)	—			(4		)
Total comprehensive income (loss)	$	1,317		$	437		$	1,552		$	2,063		$	(4,052	)	$	1,317

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Consolidating Statement of Comprehensive Income

Three Months Ended October 27, 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	$	—		$	300		$	—		$	7,050		$	(300	)	$	7,050

Costs and expenses:
Cost of products sold	—			231			—			2,093			(201		)	2,123
Research and development expense	—			170			—			386			—			556
Selling, general, and administrative expense	3			413			—			2,123			—			2,539
Amortization of intangible assets	—			2			—			458			—			460
Restructuring charges, net	—			—			—			8			—			8
Gain on sale of businesses	—			—			—			(697		)	—			(697		)
Other operating expense (income), net	12			(216		)	—			482			(111		)	167
Operating profit (loss)	(15		)	(300		)	—			2,197			12			1,894
Other non-operating (income) expense, net	—			(71		)	(103		)	(348		)	415			(107		)
Interest expense	60			425			48			155			(415		)	273
Equity in net (income) loss of subsidiaries	(2,091		)	(1,408		)	(2,036		)	—			5,535			—
Income (loss) before income taxes	2,016			754			2,091			2,390			(5,523		)	1,728
Income tax (benefit) provision	(1		)	(202		)	—			(82		)	—			(285		)
Net income (loss)	2,017			956			2,091			2,472			(5,523		)	2,013
Net loss attributable to noncontrolling interests	—			—			—			4			—			4
Net income (loss) attributable to Medtronic	2,017			956			2,091			2,476			(5,523		)	2,017
Other comprehensive (loss) income, net of tax	(136		)	(56		)	(136		)	(150		)	342			(136		)
Comprehensive loss attributable to noncontrolling interests	—			—			—			4			—			4
Total comprehensive income (loss)	$	1,881		$	900		$	1,955		$	2,326		$	(5,181	)	$	1,881

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Consolidating Statement of Comprehensive Income

Six Months Ended October 27, 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	$	—		$	604		$	—		$	14,439		$	(603	)	$	14,440

Costs and expenses:
Cost of products sold	—			456			—			4,422			(403		)	4,475
Research and development expense	—			329			—			776			—			1,105
Selling, general, and administrative expense	5			752			—			4,362			—			5,119
Amortization of intangible assets	—			4			—			910			—			914
Restructuring charges, net	—			2			—			14			—			16
Gain on sale of businesses	—			—			—			(697		)	—			(697		)
Other operating expense (income), net	25			(586		)	—			1,009			(216		)	232
Operating profit (loss)	(30		)	(353		)	—			3,643			16			3,276
Other non-operating (income) expense, net	—			(149		)	(212		)	(679		)	834			(206		)
Interest expense	109			865			82			337			(834		)	559
Equity in net (income) loss of subsidiaries	(3,169		)	(1,740		)	(3,039		)	—			7,948			—
Income (loss) before income taxes	3,030			671			3,169			3,985			(7,932		)	2,923
Income tax (benefit) provision	(3		)	(320		)	—			224			—			(99		)
Net income (loss)	3,033			991			3,169			3,761			(7,932		)	3,022
Net loss attributable to noncontrolling interests	—			—			—			11			—			11
Net income (loss) attributable to Medtronic	3,033			991			3,169			3,772			(7,932		)	3,033
Other comprehensive income (loss), net of tax	553			520			553			530			(1,603		)	553
Comprehensive loss attributable to noncontrolling interests	—			—			—			11			—			11
Total comprehensive income (loss)	$	3,586		$	1,511		$	3,722		$	4,302		$	(9,535	)	$	3,586

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Balance Sheet

October 26, 2018

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	$	—	$	24	$	495	$	3,392	$	—		$	3,911
Investments	—		—		—		6,222		—			6,222
Accounts receivable, net	—		—		—		5,743		—			5,743
Inventories, net	—		181		—		3,735		(153		)	3,763
Intercompany receivable	67		13,184		—		28,617		(41,868		)	—
Other current assets	11		172		—		1,831		—			2,014
Total current assets	78		13,561		495		49,540		(42,021		)	21,653
Property, plant, and equipment, net	—		1,431		—		3,105		—			4,536
Goodwill	—		1,883		—		36,722		—			38,605
Other intangible assets, net	—		24		—		20,795		—			20,819
Tax assets	—		418		—		996		—			1,414
Investment in subsidiaries	61,711		75,089		62,646		—		(199,446		)	—
Intercompany loans receivable	3,000		6,535		22,128		34,193		(65,856		)	—
Other assets	—		264		—		859		—			1,123
Total assets	$	64,789	$	99,205	$	85,269	$	146,210	$	(307,323	)	$	88,150
LIABILITIES AND EQUITY
Current liabilities:
Current debt obligations	$	—	$	—	$	1,000	$	343	$	—		$	1,343
Accounts payable	—		458		—		1,284		—			1,742
Intercompany payable	—		19,544		9,073		13,251		(41,868		)	—
Accrued compensation	9		709		—		945		—			1,663
Accrued income taxes	—		—		—		536		—			536
Other accrued expenses	20		419		4		2,736		—			3,179
Total current liabilities	29		21,130		10,077		19,095		(41,868		)	8,463
Long-term debt	—		20,602		845		2,226		—			23,673
Accrued compensation and retirement benefits	—		822		—		479		—			1,301
Accrued income taxes	10		627		—		2,313		—			2,950
Intercompany loans payable	15,143		14,332		19,661		16,720		(65,856		)	—
Deferred tax liabilities	—		—		—		1,325		—			1,325
Other liabilities	—		54		—		670		—			724
Total liabilities	15,182		57,567		30,583		42,828		(107,724		)	38,436
Shareholders’ equity	49,607		41,638		54,686		103,275		(199,599		)	49,607
Noncontrolling interests	—		—		—		107		—			107
Total equity	49,607		41,638		54,686		103,382		(199,599		)	49,714
Total liabilities and equity	$	64,789	$	99,205	$	85,269	$	146,210	$	(307,323	)	$	88,150

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Balance Sheet

April 27, 2018

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	$	—	$	20	$	1	$	3,648	$	—		$	3,669
Investments	—		76		—		7,482		—			7,558
Accounts receivable, net	—		—		—		5,987		—			5,987
Inventories, net	—		165		—		3,539		(125		)	3,579
Intercompany receivable	37		23,480		—		33,929		(57,446		)	—
Other current assets	6		178		—		2,003		—			2,187
Total current assets	43		23,919		1		56,588		(57,571		)	22,980
Property, plant, and equipment, net	—		1,426		—		3,178		—			4,604
Goodwill	—		1,883		—		37,660		—			39,543
Other intangible assets, net	—		12		—		21,711		—			21,723
Tax assets	—		385		—		1,080		—			1,465
Investment in subsidiaries	60,381		73,585		61,461		—		(195,427		)	—
Intercompany loans receivable	3,000		6,519		19,337		34,196		(63,052		)	—
Other assets	—		223		—		855		—			1,078
Total assets	$	63,424	$	107,952	$	80,799	$	155,268	$	(316,050	)	$	91,393
LIABILITIES AND EQUITY
Current liabilities:
Current debt obligations	$	—	$	—	$	1,696	$	362	$	—		$	2,058
Accounts payable	—		381		—		1,247		—			1,628
Intercompany payable	—		28,401		5,542		23,503		(57,446		)	—
Accrued compensation	3		787		—		1,198		—			1,988
Accrued income taxes	—		—		—		979		—			979
Other accrued expenses	16		359		4		3,052		—			3,431
Total current liabilities	19		29,928		7,242		30,341		(57,446		)	10,084
Long-term debt	—		20,598		844		2,257		—			23,699
Accrued compensation and retirement benefits	—		902		—		523		—			1,425
Accrued income taxes	10		531		—		2,510		—			3,051
Intercompany loans payable	12,675		14,339		19,335		16,703		(63,052		)	—
Deferred tax liabilities	—		—		—		1,423		—			1,423
Other liabilities	—		68		—		821		—			889
Total liabilities	12,704		66,366		27,421		54,578		(120,498		)	40,571
Shareholders' equity	50,720		41,586		53,378		100,588		(195,552		)	50,720
Noncontrolling interests	—		—		—		102		—			102
Total equity	50,720		41,586		53,378		100,690		(195,552		)	50,822
Total liabilities and equity	$	63,424	$	107,952	$	80,799	$	155,268	$	(316,050	)	$	91,393

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statement of Cash Flows

Six Months Ended October 26, 2018

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	$	147		$	(1,335	)	$	123		$	3,930		$	—		$	2,865
Investing Activities:
Acquisitions, net of cash acquired	—			—			—			(119		)	—			(119		)
Additions to property, plant, and equipment	—			(133		)	—			(364		)	—			(497		)
Purchases of investments	—			—			—			(1,444		)	—			(1,444		)
Sales and maturities of investments	—			76			—			2,748			—			2,824
Capital contribution paid	(18		)	(32		)	—			—			50			—
Net cash provided by (used in) investing activities	(18		)	(89		)	—			821			50			764
Financing Activities:
Change in current debt obligations, net	—			—			(696		)	(4		)	—			(700		)
Issuance of long-term debt	—			—			—			1			—			1
Payments on long-term debt	—			—			—			(17		)	—			(17		)
Dividends to shareholders	(1,351		)	—			—			—			—			(1,351		)
Issuance of ordinary shares	800			—			—			—			—			800
Repurchase of ordinary shares	(2,047		)	—			—			—			—			(2,047		)
Net intercompany loan borrowings (repayments)	2,469			1,428			1,067			(4,964		)	—			—
Capital contribution received	—			—			—			50			(50		)	—
Other financing activities	—			—			—			11			—			11
Net cash provided by (used in) financing activities	(129		)	1,428			371			(4,923		)	(50		)	(3,303		)
Effect of exchange rate changes on cash and cash equivalents	—			—			—			(84		)	—			(84		)
Net change in cash and cash equivalents	—			4			494			(256		)	—			242
Cash and cash equivalents at beginning of period	—			20			1			3,648			—			3,669
Cash and cash equivalents at end of period	$	—		$	24		$	495		$	3,392		$	—		$	3,911

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statement of Cash Flows

Six Months Ended October 27, 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	$	157		$	(743	)	$	162		$	2,068		$	—		$	1,644
Investing Activities:
Acquisitions, net of cash acquired	—			—			—			(76		)	—			(76		)
Proceeds from sale of businesses	—			—			—			6,058			—			6,058
Additions to property, plant, and equipment	—			(132		)	—			(392		)	—			(524		)
Purchases of investments	—			—			—			(1,685		)	—			(1,685		)
Sales and maturities of investments	—			—			—			2,354			—			2,354
Capital contribution paid	—			(12		)	(4,200		)	—			4,212			—
Other investing activities, net	—			—			—			(2		)	—			(2		)
Net cash provided by (used in) investing activities	—			(144		)	(4,200		)	6,257			4,212			6,125
Financing Activities:
Change in current debt obligations, net	—			—			(202		)	12			—			(190		)
Issuance of long-term debt	—			—			—			20			—			20
Payments on long-term debt	—			(3,000		)	—			(1,161		)	—			(4,161		)
Dividends to shareholders	(1,247		)	—			—			—			—			(1,247		)
Issuance of ordinary shares	230			—			—			—			—			230
Repurchase of ordinary shares	(1,888		)	—			—			—			—			(1,888		)
Net intercompany loan borrowings (repayments)	2,748			3,889			5,057			(11,694		)	—			—
Capital contribution received	—			—			—			4,212			(4,212		)	—
Other financing activities	—			—			—			(41		)	—			(41		)
Net cash provided by (used in) financing activities	(157		)	889			4,855			(8,652		)	(4,212		)	(7,277		)
Effect of exchange rate changes on cash and cash equivalents	—			—			—			70			—			70
Net change in cash and cash equivalents	—			2			817			(257		)	—			562
Cash and cash equivalents at beginning of period	—			45			5			4,917			—			4,967
Cash and cash equivalents at end of period	$	—		$	47		$	822		$	4,660		$	—		$	5,529

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Consolidating Statement of Comprehensive Income

Three Months Ended October 26, 2018

CIFSA Senior Notes



(in millions)	Medtronic plc			CIFSA			CIFSA Subsidiary Guarantors			Subsidiary Non-guarantors			Consolidating Adjustments			Total
Net sales	$	—		$	—		$	—		$	7,481		$	—		$	7,481

Costs and expenses:
Cost of products sold	—			—			—			2,203			—			2,203
Research and development expense	—			—			—			590			—			590
Selling, general, and administrative expense	4			—			1			2,600			—			2,605
Amortization of intangible assets	—			—			—			445			—			445
Restructuring charges, net	—			—			—			24			—			24
Other operating expense, net	24			—			—			46			—			70
Operating profit (loss)	(28		)	—			(1		)	1,573			—			1,544
Other non-operating (income) expense, net	—			(9		)	(183		)	(150		)	290			(52		)
Interest expense	108			22			113			288			(290		)	241
Equity in net (income) loss of subsidiaries	(1,249		)	(629		)	(1,180		)	—			3,058			—
Income (loss) before income taxes	1,113			616			1,249			1,435			(3,058		)	1,355
Income tax (benefit) provision	(2		)	—			—			237			—			235
Net income (loss)	1,115			616			1,249			1,198			(3,058		)	1,120
Net loss attributable to noncontrolling interests	—			—			—			(5		)	—			(5		)
Net income (loss) attributable to Medtronic	1,115			616			1,249			1,193			(3,058		)	1,115
Other comprehensive income (loss), net of tax	(289		)	(91		)	(289		)	(295		)	672			(292		)
Comprehensive income attributable to noncontrolling interests	—			—			—			(2		)	—			(2		)
Total comprehensive income (loss)	$	826		$	525		$	960		$	901		$	(2,386	)	$	826

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Consolidating Statement of Comprehensive Income

Six Months Ended October 26, 2018

CIFSA Senior Notes



(in millions)	Medtronic plc			CIFSA			CIFSA Subsidiary Guarantors			Subsidiary Non-guarantors			Consolidating Adjustments			Total
Net sales	$	—		$	—		$	—		$	14,865		$	—		$	14,865

Costs and expenses:
Cost of products sold	—			—			—			4,407			—			4,407
Research and development expense	—			—			—			1,175			—			1,175
Selling, general, and administrative expense	6			—			1			5,195			—			5,202
Amortization of intangible assets	—			—			—			891			—			891
Restructuring charges, net	—			—			—			86			—			86
Certain litigation charges	—			—			—			103			—			103
Other operating expense, net	25			—			—			196			—			221
Operating profit (loss)	(31		)	—			(1		)	2,812			—			2,780
Other non-operating (income) expense, net	—			(19		)	(352		)	(424		)	557			(238		)
Interest expense	208			43			216			573			(557		)	483
Equity in net (income) loss of subsidiaries	(2,425		)	(1,585		)	(2,290		)	—			6,300			—
Income (loss) before income taxes	2,186			1,561			2,425			2,663			(6,300		)	2,535
Income tax (benefit) provision	(4		)	—			—			342			—			338
Net income (loss)	2,190			1,561			2,425			2,321			(6,300		)	2,197
Net loss attributable to noncontrolling interests	—			—			—			(7		)	—			(7		)
Net income (loss) attributable to Medtronic	2,190			1,561			2,425			2,314			(6,300		)	2,190
Other comprehensive income (loss), net of tax	(873		)	(331		)	(873		)	(879		)	2,080			(876		)
Comprehensive income attributable to noncontrolling interests	—			—			—			(4		)	—			(4		)
Total comprehensive income (loss)	$	1,317		$	1,230		$	1,552		$	1,438		$	(4,220	)	$	1,317

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Consolidating Statement of Comprehensive Income

Three Months Ended October 27, 2017

CIFSA Senior Notes



(in millions)	Medtronic plc			CIFSA			CIFSA Subsidiary Guarantors			Subsidiary Non-guarantors			Consolidating Adjustments			Total
Net sales	$	—		$	—		$	—		$	7,050		$	—		$	7,050

Costs and expenses:
Cost of products sold	—			—			—			2,123			—			2,123
Research and development expense	—			—			—			556			—			556
Selling, general, and administrative expense	3			—			—			2,536			—			2,539
Amortization of intangible assets	—			—			—			460			—			460
Restructuring charges, net	—			—			—			8			—			8
Gain on sale of businesses	—			—			—			(697		)	—			(697		)
Other operating expense, net	12			—			—			155			—			167
Operating profit (loss)	(15		)	—			—			1,909			—			1,894
Other non-operating (income) expense, net	—			(16		)	(107		)	(135		)	151			(107		)
Interest expense	60			21			48			295			(151		)	273
Equity in net (income) loss of subsidiaries	(2,091		)	(1,264		)	(2,032		)	—			5,387			—
Income (loss) before income taxes	2,016			1,259			2,091			1,749			(5,387		)	1,728
Income tax (benefit) provision	(1		)	—			—			(284		)	—			(285		)
Net income (loss)	2,017			1,259			2,091			2,033			(5,387		)	2,013
Net loss attributable to noncontrolling interests	—			—			—			4			—			4
Net income (loss) attributable to Medtronic	2,017			1,259			2,091			2,037			(5,387		)	2,017
Other comprehensive (loss) income, net of tax	(136		)	(120		)	(136		)	(136		)	392			(136		)
Comprehensive loss attributable to noncontrolling interests	—			—			—			4			—			4
Total comprehensive income (loss)	$	1,881		$	1,139		$	1,955		$	1,901		$	(4,995	)	$	1,881

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Consolidating Statement of Comprehensive Income

Six Months Ended October 27, 2017

CIFSA Senior Notes



(in millions)	Medtronic plc			CIFSA			CIFSA Subsidiary Guarantors			Subsidiary Non-guarantors			Consolidating Adjustments			Total
Net sales	$	—		$	—		$	—		$	14,440		$	—		$	14,440

Costs and expenses:
Cost of products sold	—			—			—			4,475			—			4,475
Research and development expense	—			—			—			1,105			—			1,105
Selling, general, and administrative expense	5			—			1			5,113			—			5,119
Amortization of intangible assets	—			—			—			914			—			914
Restructuring charges, net	—			—			—			16			—			16
Gain on sale of businesses	—			—			—			(697		)	—			(697		)
Other operating expense, net	25			1			—			206			—			232
Operating profit (loss)	(30		)	(1		)	(1		)	3,308			—			3,276
Other non-operating (income) expense, net	—			(32		)	(219		)	(253		)	298			(206		)
Interest expense	109			44			82			622			(298		)	559
Equity in net (income) loss of subsidiaries	(3,169		)	(2,137		)	(3,033		)	—			8,339			—
Income (loss) before income taxes	3,030			2,124			3,169			2,939			(8,339		)	2,923
Income tax (benefit) provision	(3		)	—			—			(96		)	—			(99		)
Net income (loss)	3,033			2,124			3,169			3,035			(8,339		)	3,022
Net loss attributable to noncontrolling interests	—			—			—			11			—			11
Net income (loss) attributable to Medtronic	3,033			2,124			3,169			3,046			(8,339		)	3,033
Other comprehensive income (loss), net of tax	553			52			553			553			(1,158		)	553
Comprehensive loss attributable to non-controlling interests	—			—			—			11			—			11
Total comprehensive income (loss)	$	3,586		$	2,176		$	3,722		$	3,599		$	(9,497	)	$	3,586

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Balance Sheet

October 26, 2018

CIFSA Senior Notes



(in millions)	Medtronic plc		CIFSA		CIFSA Subsidiary Guarantors		Subsidiary Non-guarantors		Consolidating Adjustments			Total
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	—	$	496	$	3,415	$	—		$	3,911
Investments	—		—		—		6,222		—			6,222
Accounts receivable, net	—		—		—		5,743		—			5,743
Inventories, net	—		—		—		3,763		—			3,763
Intercompany receivable	67		—		1,356		9,096		(10,519		)	—
Other current assets	11		—		1		2,002		—			2,014
Total current assets	78		—		1,853		30,241		(10,519		)	21,653
Property, plant, and equipment, net	—		—		—		4,536		—			4,536
Goodwill	—		—		—		38,605		—			38,605
Other intangible assets, net	—		—		—		20,819		—			20,819
Tax assets	—		—		—		1,414		—			1,414
Investment in subsidiaries	61,711		32,486		61,338		—		(155,535		)	—
Intercompany loans receivable	3,000		1,081		22,128		19,762		(45,971		)	—
Other assets	—		—		—		1,123		—			1,123
Total assets	$	64,789	$	33,567	$	85,319	$	116,500	$	(212,025	)	$	88,150
LIABILITIES AND EQUITY
Current liabilities:
Current debt obligations	$	—	$	—	$	1,000	$	343	$	—		$	1,343
Accounts payable	—		—		—		1,742		—			1,742
Intercompany payable	—		1,295		9,072		152		(10,519		)	—
Accrued compensation	9		—		—		1,654		—			1,663
Accrued income taxes	—		—		—		536		—			536
Other accrued expenses	20		21		8		3,130		—			3,179
Total current liabilities	29		1,316		10,080		7,557		(10,519		)	8,463
Long-term debt	—		2,100		845		20,728		—			23,673
Accrued compensation and retirement benefits	—		—		—		1,301		—			1,301
Accrued income taxes	10		—		—		2,940		—			2,950
Intercompany loans payable	15,143		99		19,663		11,066		(45,971		)	—
Deferred tax liabilities	—		—		—		1,325		—			1,325
Other liabilities	—		—		1		723		—			724
Total liabilities	15,182		3,515		30,589		45,640		(56,490		)	38,436
Shareholders’ equity	49,607		30,052		54,730		70,753		(155,535		)	49,607
Noncontrolling interests	—		—		—		107		—			107
Total equity	49,607		30,052		54,730		70,860		(155,535		)	49,714
Total liabilities and equity	$	64,789	$	33,567	$	85,319	$	116,500	$	(212,025	)	$	88,150

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Balance Sheet

April 27, 2018

CIFSA Senior Notes



(in millions)	Medtronic plc		CIFSA		CIFSA Subsidiary Guarantors		Subsidiary Non-guarantors		Consolidating Adjustments			Total
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	—	$	1	$	3,668	$	—		$	3,669
Investments	—		—		—		7,558		—			7,558
Accounts receivable, net	—		—		—		5,987		—			5,987
Inventories, net	—		—		—		3,579		—			3,579
Intercompany receivable	37		—		1,343		5,560		(6,940		)	—
Other current assets	6		—		—		2,181		—			2,187
Total current assets	43		—		1,344		28,533		(6,940		)	22,980
Property, plant, and equipment, net	—		—		—		4,604		—			4,604
Goodwill	—		—		—		39,543		—			39,543
Other intangible assets, net	—		—		—		21,723		—			21,723
Tax assets	—		—		—		1,465		—			1,465
Investment in subsidiaries	60,381		31,149		60,122		—		(151,652		)	—
Intercompany loans receivable	3,000		1,291		19,337		19,436		(43,064		)	—
Other assets	—		—		—		1,078		—			1,078
Total assets	$	63,424	$	32,440	$	80,803	$	116,382	$	(201,656	)	$	91,393
LIABILITIES AND EQUITY
Current liabilities:
Current debt obligations	$	—	$	—	$	1,696	$	362	$	—		$	2,058
Accounts payable	—		—		—		1,628		—			1,628
Intercompany payable	—		1,283		5,542		115		(6,940		)	—
Accrued compensation	3		—		—		1,985		—			1,988
Accrued income taxes	—		—		—		979		—			979
Other accrued expenses	16		21		8		3,386		—			3,431
Total current liabilities	19		1,304		7,246		8,455		(6,940		)	10,084
Long-term debt	—		2,111		844		20,744		—			23,699
Accrued compensation and retirement benefits	—		—		—		1,425		—			1,425
Accrued income taxes	10		—		—		3,041		—			3,051
Intercompany loans payable	12,675		100		19,335		10,954		(43,064		)	—
Deferred tax liabilities	—		—		—		1,423		—			1,423
Other liabilities	—		—		—		889		—			889
Total liabilities	12,704		3,515		27,425		46,931		(50,004		)	40,571
Shareholders' equity	50,720		28,925		53,378		69,349		(151,652		)	50,720
Noncontrolling interests	—		—		—		102		—			102
Total Equity	50,720		28,925		53,378		69,451		(151,652		)	50,822
Total liabilities and equity	$	63,424	$	32,440	$	80,803	$	116,382	$	(201,656	)	$	91,393

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statement of Cash Flows

Six Months Ended October 26, 2018

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	$	147		$	(35	)	$	136		$	2,617		$	—		$	2,865
Investing Activities:
Acquisitions, net of cash acquired	—			—			—			(119		)	—			(119		)
Additions to property, plant, and equipment	—			—			—			(497		)	—			(497		)
Purchases of investments	—			—			—			(1,444		)	—			(1,444		)
Sales and maturities of investments	—			—			—			2,824			—			2,824
Capital contribution paid	(18		)	(187		)	—			—			205			—
Net cash provided by (used in) investing activities	(18		)	(187		)	—			764			205			764
Financing Activities:
Change in current debt obligations, net	—			—			(697		)	(3		)	—			(700		)
Issuance of long-term debt	—			—			—			1			—			1
Payments on long-term debt	—			—			—			(17		)	—			(17		)
Dividends to shareholders	(1,351		)	—			—			—			—			(1,351		)
Issuance of ordinary shares	800			—			—			—			—			800
Repurchase of ordinary shares	(2,047		)	—			—			—			—			(2,047		)
Net intercompany loan borrowings (repayments)	2,469			222			1,056			(3,747		)	—			—
Capital contribution received	—			—			—			205			(205		)	—
Other financing activities	—			—			—			11			—			11
Net cash provided by (used in) financing activities	(129		)	222			359			(3,550		)	(205		)	(3,303		)
Effect of exchange rate changes on cash and cash equivalents	—			—			—			(84		)	—			(84		)
Net change in cash and cash equivalents	—			—			495			(253		)	—			242
Cash and cash equivalents at beginning of period	—			—			1			3,668			—			3,669
Cash and cash equivalents at end of period	$	—		$	—		$	496		$	3,415		$	—		$	3,911

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statement of Cash Flows

Six Months Ended October 27, 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	$	157		$	997		$	169		$	1,369		$	(1,048	)	$	1,644
Investing Activities:
Acquisitions, net of cash acquired	—			—			—			(76		)	—			(76		)
Proceeds from sale of businesses	—			—			—			6,058			—			6,058
Additions to property, plant, and equipment	—			—			—			(524		)	—			(524		)
Purchases of investments	—			—			—			(1,685		)	—			(1,685		)
Sales and maturities of investments	—			—			—			2,354			—			2,354
Capital contributions paid	—			(531		)	(4,200		)	—			4,731			—
Other investing activities, net	—			—			—			(2		)	—			(2		)
Net cash provided by (used in) investing activities	—			(531		)	(4,200		)	6,125			4,731			6,125
Financing Activities:
Change in current debt obligations, net	—			—			(202		)	12			—			(190		)
Issuance of long-term debt	—			—			—			20			—			20
Payments on long-term debt	—			(1,150		)	—			(3,011		)	—			(4,161		)
Dividends to shareholders	(1,247		)	—			—			—			—			(1,247		)
Issuance of ordinary shares	230			—			—			—			—			230
Repurchase of ordinary shares	(1,888		)	—			—			—			—			(1,888		)
Net intercompany loan borrowings (repayments)	2,748			651			5,051			(8,450		)	—			—
Intercompany dividend paid	—			—			—			(1,048		)	1,048			—
Capital contributions received	—			—			—			4,731			(4,731		)	—
Other financing activities	—			—			—			(41		)	—			(41		)
Net cash provided by (used in) financing activities	(157		)	(499		)	4,849			(7,787		)	(3,683		)	(7,277		)
Effect of exchange rate changes on cash and cash equivalents	—			—			—			70			—			70
Net change in cash and cash equivalents	—			(33		)	818			(223		)	—			562
Cash and cash equivalents at beginning of period	—			33			5			4,929			—			4,967
Cash and cash equivalents at end of period	$	—		$	—		$	823		$	4,706		$	—		$	5,529

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 27, 2018. In addition, you should read this discussion along with our consolidated financial statements and related notes thereto at and for the three and six months ended October 26, 2018.

Financial Trends

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

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

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

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

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

EXECUTIVE LEVEL OVERVIEW

Medtronic is 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. Our primary products include those for cardiac rhythm disorders, cardiovascular disease, advanced and general surgical care, respiratory and monitoring solutions, renal care, neurological disorders, spinal conditions and musculoskeletal trauma, urological and digestive disorders, and ear, nose, and throat, and diabetes conditions.

The table below presents net income attributable to Medtronic and our diluted earnings per share for the three and six months ended October 26, 2018 and October 27, 2017:



	Three months ended						Six months ended
(in millions, except per share data)	October 26, 2018		October 27, 2017		% Change		October 26, 2018		October 27, 2017		% Change
Net income attributable to Medtronic	$	1,115	$	2,017	(45	)%	$	2,190	$	3,033	(28	)%
Diluted earnings per share	$	0.82	$	1.48	(45	)%	$	1.61	$	2.21	(27	)%

The decrease in net income attributable to Medtronic and diluted earnings per share (EPS) for the three and six months ended October 26, 2018 as compared to the corresponding periods in the prior fiscal year, was primarily attributable to the $697 million gain on the sale of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses within the Minimally Invasive Therapies Group on July 29, 2017. Further contributing to the decrease in net income and diluted EPS for the three and six months ended October 26, 2018 were increases in our income tax provision, research and development expense, and restructuring and associated costs. For the three months ended October 26, 2018, the decrease in net income was also attributable to an increase in cost of products sold. For the six months ended October 26, 2018, the decrease in net income was also attributable to an increase in certain litigation charges, partially offset by a decrease in cost of products sold as a result of the divestiture of lower-margin products in conjunction with the divestiture noted above. Refer to the "Costs and Expenses" section of this Management's Discussion and Analysis for more information on the items impacting net income attributable to Medtronic and diluted EPS during the three and six months ended October 26, 2018 and October 27, 2017.

GAAP to Non-GAAP Reconciliations The tables below present our GAAP to Non-GAAP reconciliations for the three and six months ended October 26, 2018 and October 27, 2017:



	Three months ended October 26, 2018
(in millions, except per share data)	Income Before Income Taxes			Income Tax Provision (Benefit)			Net Income Attributable to Medtronic			Diluted EPS⁽¹⁾			Effective Tax Rate
GAAP	$	1,355		$	235		$	1,115		$	0.82		17.3	%
Non-GAAP Adjustments:
Restructuring and associated costs ⁽²⁾	77			12			65			0.05			15.6
Acquisition-related items ⁽³⁾	4			1			3			—			25.0
(Gain)/loss on minority investments ⁽⁴⁾	25			(1		)	26			0.02			(4.0	)
IPR&D charges ⁽⁵⁾	15			—			15			0.01			—
Amortization of intangible assets	445			67			378			0.28			15.1
Certain tax adjustments ⁽⁶⁾	—			(58		)	58			0.04			—
Non-GAAP	$	1,921		$	256		$	1,660		$	1.22		13.3	%

	Three months ended October 27, 2017
(in millions, except per share data)	Income Before Income Taxes			Income Tax Provision (Benefit)			Net Income Attributable to Medtronic			Diluted EPS⁽¹⁾			Effective Tax Rate
GAAP	$	1,728		$	(285	)	$	2,017		$	1.48		(16.5	)%
Non-GAAP Adjustments:
Restructuring charges, net	18			4			14			0.01			22.2
Acquisition-related items ⁽³⁾	18			10			8			0.01			55.6
Divestiture-related items ⁽⁷⁾	67			7			60			0.04			10.4
Gain on sale of businesses ⁽⁸⁾	(697		)	—			(697		)	(0.51		)	—
Hurricane Maria ⁽⁹⁾	34			1			33			0.02			2.9
Contribution to Medtronic Foundation	80			29			51			0.04			36.3
Amortization of intangible assets	460			86			374			0.27			18.7
Certain tax adjustments, net ⁽¹⁰⁾	—			404			(404		)	(0.30		)	—
Non-GAAP	$	1,708		$	256		$	1,456		$	1.07		15.0	%


(1)	Amounts in this column have been intentionally rounded to the nearest $0.01 and, therefore, may not sum.


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


(3)	The charges primarily include integration-related costs incurred in connection with the Covidien acquisition and changes in the fair value of contingent consideration.


(4)	Unrealized and realized gains and losses on our minority investments.


(5)	The charge represents acquired in-process research and development ("IPR&D") in connection with an asset acquisition.


(6)	The charges relate to the impact of U.S. tax reform.


(7)	The transaction expenses incurred in connection with the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.


(8)	The gain on the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.


(9)	The charges represent idle facility costs, asset write-downs, and humanitarian efforts related to Hurricane Maria.


(10)	The net benefit primarily relates to the tax effect from the intercompany sale of intellectual property.

Non-GAAP diluted EPS for the three months ended October 26, 2018 was favorably impacted by an increase in net sales and decreases in other operating expense, net and interest expense when compared to the corresponding period in the prior fiscal year. These decreases were partially offset by an increase in cost of products sold and selling, general, and administrative expense.



	Six months ended October 26, 2018
(in millions, except per share data)	Income Before Income Taxes			Income Tax Provision (Benefit)			Net Income Attributable to Medtronic			Diluted EPS⁽¹⁾			Effective Tax Rate
GAAP	$	2,535		$	338		$	2,190		$	1.61		13.3	%
Non-GAAP Adjustments:
Restructuring and associated costs ⁽²⁾	190			28			162			0.12			14.7
Acquisition-related items ⁽³⁾	40			8			32			0.02			20.0
Certain litigation charges	103			12			91			0.07			11.7
(Gain)/loss on minority investments ⁽⁴⁾	(85		)	(8		)	(77		)	(0.06		)	9.4
IPR&D charges ⁽⁵⁾	15			—			15			0.01			—
Exit of business ⁽⁶⁾	80			18			62			0.05			22.5
Amortization of intangible assets	891			134			757			0.56			15.0
Certain tax adjustments, net ⁽⁷⁾	—			(29		)	29			0.02			—
Non-GAAP	$	3,769		$	501		$	3,261		$	2.39		13.3	%

	Six months ended October 27, 2017
(in millions, except per share data)	Income Before Income Taxes			Income Tax Provision (Benefit)			Net Income Attributable to Medtronic			Diluted EPS⁽¹⁾			Effective Tax Rate
GAAP	$	2,923		$	(99	)	$	3,033		$	2.21		(3.4	)%
Non-GAAP Adjustments:
Restructuring charges, net	32			6			26			0.02			18.8
Acquisition-related items ⁽³⁾	71			24			47			0.03			33.8
Divestiture-related items ⁽⁸⁾	115			15			100			0.07			13.0
Gain on sale of businesses ⁽⁹⁾	(697		)	—			(697		)	(0.51		)	—
Hurricane Maria ⁽¹⁰⁾	34			1			33			0.02			2.9
Contribution to Medtronic Foundation	80			29			51			0.04			36.3
Amortization of intangible assets	914			166			748			0.55			18.2
Certain tax adjustments, net ⁽¹¹⁾	—			344			(344		)	(0.25		)	—
Non-GAAP	$	3,472		$	486		$	2,997		$	2.19		14.0	%


(1)	Amounts in this column have been intentionally rounded to the nearest $0.01 and, therefore, may not sum.


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


(3)	The charges primarily include integration-related costs incurred in connection with the Covidien acquisition and changes in the fair value of contingent consideration.


(4)	Unrealized and realized gains and losses on our minority investments.


(5)	The charge represents acquired in-process research and development ("IPR&D") in connection with an asset acquisition.


(6)	The net charge relates to the exit of a business and is primarily comprised of intangible asset charges.


(7)	The net charge relates to the impact of U.S. tax reform.


(8)	The transaction expenses incurred in connection with the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.


(9)	The gain on the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.


(10)	The charges represent idle facility costs, asset write-downs, and humanitarian efforts related to Hurricane Maria.


(11)	The net benefit primarily relates to the tax effect from the intercompany sale of intellectual property, which is partially offset by the impacts from the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.

Non-GAAP diluted EPS for the six months ended October 26, 2018 was favorably impacted by an increase in net sales and decreases in cost of products sold and interest expense when compared to the corresponding period in the prior fiscal year. These decreases were partially offset by an increase in selling, general, and administrative expense.

NET SALES

Segment and Division

The table below illustrates net sales by segment and division for the three and six months ended October 26, 2018 and October 27, 2017:



	Three months ended						Six months ended
(in millions)	October 26, 2018		October 27, 2017		% Change		October 26, 2018		October 27, 2017		% Change
Cardiac Rhythm & Heart Failure	$	1,472	$	1,467	—	%	$	2,898	$	2,857	1	%
Coronary & Structural Heart	906		854		6		1,823		1,671		9
Aortic, Peripheral & Venous	480		452		6		948		891		6
Cardiac and Vascular Group	2,858		2,773		3		5,669		5,419		5
Surgical Innovations	1,393		1,334		4		2,790		2,640		6
Respiratory, Gastrointestinal, & Renal	654		618		6		1,309		1,798		(27	)
Minimally Invasive Therapies Group	2,047		1,952		5		4,099		4,438		(8	)
Spine	656		659		—		1,308		1,308		—
Brain Therapies	618		575		7		1,217		1,097		11
Specialty Therapies	405		365		11		789		734		7
Pain Therapies	314		264		19		628		533		18
Restorative Therapies Group	1,993		1,863		7		3,942		3,672		7
Diabetes Group	583		462		26		1,155		911		27
Total	$	7,481	$	7,050	6	%	$	14,865	$	14,440	3	%

Our performance displays our continued execution against our three growth strategies: therapy innovation, globalization, and economic value. We continue to allocate our capital to higher growth markets and new opportunities that create competitive advantages and capitalize 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. For the six months ended October 26, 2018, total net sales were affected by the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses within the Minimally Invasive Therapies Group on July 29, 2017.

We continue to see an acceleration in our innovation cycle within therapy innovation growth strategy. Our segments invest in a pipeline of groundbreaking medical technology, with several recent product launches and adoption of new therapies contributing to net sales growth. We remain focused on our globalization strategy, as net sales in emerging markets grew 7 percent during the three and six months ended October 26, 2018, as compared to the corresponding periods in the prior fiscal year. Our emerging market performance continues to benefit from geographic diversification, with strong, balanced results around the world. Finally, 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 that directly link our therapies to improving outcomes and deliver improved economic value to the payers and providers. We remain focused on leading the shift to healthcare payment systems that reward value and improved patient outcomes over volume.

Segment and Market Geography

The tables below includes net sales by market geography for each of our segments for the three and six months ended October 26, 2018 and October 27, 2017:



	U.S.⁽¹⁾						Non-U.S. Developed Markets⁽²⁾						Emerging Markets⁽³⁾
	Three months ended						Three months ended						Three months ended
(in millions)	October 26, 2018		October 27, 2017		% Change		October 26, 2018		October 27, 2017		% Change		October 26, 2018		October 27, 2017		% Change
Cardiac and Vascular Group	$	1,482	$	1,423	4	%	$	895	$	895	—	%	$	481	$	455	6	%
Minimally Invasive Therapies Group	872		795		10		772		783		(1	)	403		374		8
Restorative Therapies Group	1,357		1,258		8		412		394		5		224		211		6
Diabetes Group	334		258		29		203		169		20		46		35		31
Total	$	4,045	$	3,734	8	%	$	2,282	$	2,241	2	%	$	1,154	$	1,075	7	%

	U.S.⁽¹⁾						Non-U.S. Developed Markets⁽²⁾						Emerging Markets⁽³⁾
	Six months ended						Six months ended						Six months ended
(in millions)	October 26, 2018		October 27, 2017		% Change		October 26, 2018		October 27, 2017		% Change		October 26, 2018		October 27, 2017		% Change
Cardiac and Vascular Group	$	2,871	$	2,756	4	%	$	1,842	$	1,782	3	%	$	956	$	881	9	%
Minimally Invasive Therapies Group	1,729		2,040		(15	)	1,600		1,648		(3	)	770		750		3
Restorative Therapies Group	2,651		2,479		7		840		788		7		451		405		11
Diabetes Group	658		501		31		406		336		21		91		74		23
Total	$	7,909	$	7,776	2	%	$	4,688	$	4,554	3	%	$	2,268	$	2,110	7	%


(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.

Net sales increases in the U.S. for the three and six months ended October 26, 2018 were primarily attributable to strong growth in our Diabetes Group and Restorative Therapies Group. Net sales increases in the U.S. for the six months ended October 26, 2018 were partially offset by the impact of the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses within the Minimally Invasive Therapies Group on July 29, 2017. Net sales growth in non-U.S. developed markets for the three and six months ended October 26, 2018 was primarily attributable to consistent growth across our segments in Japan and Western Europe. Net sales growth in emerging markets continues to reflect our broad diversification and was driven by strong performance in China, the Middle East & Africa, Eastern Europe, and both South and Southeast Asia. Currency had an unfavorable effect on net sales of $95 million and $17 million for the three and six months ended October 26, 2018, respectively.

Looking ahead, our segments are likely to face competitive product launches and pricing pressure, geographic macro-economic risks, certain reimbursement challenges, impacts from changes in the mix of our product offerings, the timing of product approvals, replacement cycle challenges, and fluctuations in currency exchange rates. Additionally, changes in procedural volumes could affect our Cardiac and Vascular, Minimally Invasive Therapies, and Restorative Therapies Groups.

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 and six months

ended October 26, 2018 were $2.9 billion and $5.7 billion, respectively, an increase of 3 percent and 5 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Currency had an unfavorable impact on net sales for the three and six months ended October 26, 2018 of $36 million and $2 million, respectively. The Cardiac and Vascular Group's net sales for the three and six months ended October 26, 2018, as compared to the corresponding periods in the prior fiscal year, benefited from strong net sales growth in Coronary & Structural Heart and Aortic, Peripheral & Venous (formerly known as Aortic & Peripheral Vascular) divisions. See the more detailed discussion of each division's performance below.

Cardiac Rhythm & Heart Failure net sales for the three and six months ended October 26, 2018 were $1.5 billion and $2.9 billion, respectively, flat and an increase of 1 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Cardiac Rhythm & Heart Failure net sales growth for the six months ended October 26, 2018 was driven by growth in Arrhythmia Management, partially offset by declines in Heart Failure. The growth in Arrhythmia Management was driven by AF Solutions and Pacing, due to the continued strong adoption of the Micra transcatheter pacing system and Azure wireless pacemaker. Arrhythmia Management net sales growth also benefited from strong adoption of the TYRX absorbable antibacterial envelope through further expansion of value-based health-care arrangements. Heart Failure had strong growth in CRT-P quadripolar pacing devices, which was offset by declines in CRT-D devices due to replacement headwinds from our introduction of longer lasting implants over the last several years.

Coronary & Structural Heart net sales for the three and six months ended October 26, 2018 were $906 million and $1.8 billion, respectively, an increase of 6 percent and 9 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Coronary & Structural Heart net sales growth for the three and six months ended October 26, 2018 was driven by the global strength of the CoreValve Evolut PRO transcatheter aortic valve system (Evolut PRO), the continued global roll-out of the Evolut 34mm transcatheter aortic heart valve, continued penetration into intermediate risk in the U.S., and growth in cannulae, including the Bio-Medicus Next Gen Cannulae. Net sales growth also benefited from growth in drug-eluting stents, including the Resolute Onyx, guide catheters, and coronary balloons.

Aortic, Peripheral & Venous net sales for the three and six months ended October 26, 2018 were $480 million and $948 million, respectively, increases of 6 percent compared to the corresponding periods in the prior fiscal year. Aortic, Peripheral & Venous net sales growth for the three and six months ended October 26, 2018 was driven by strong performance of the VenaSeal vein closure system, for which final approval for reimbursement payment in the U.S. from the Centers for Medicare & Medicaid Services (CMS) was received in January 2018. Net sales growth for the three and six months ended October 26, 2018 was also attributable to growth in Percutaneous Transluminal Angioplasty (PTA) balloons and drug-coated balloon growth in international markets, driven by our recent launch of IN.PACT Admiral drug coated balloon in Japan. For the three months ended October 26, 2018, net sales growth was also driven by improved performance in abdominal aortic stent grafts.

Looking ahead, we expect our Cardiac and Vascular Group could be affected by the following:


•	Acceptance and growth from penetration of the self-expanding CoreValve Evolut transcatheter aortic valve replacement platform into intermediate risk indication in the U.S.

•

Continued acceptance and growth from Evolut PRO, which provides industry-leading hemodynamics, reliable delivery, and advanced sealing with an excellent safety profile. 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 launched in Europe during the second quarter of fiscal year 2018. Evolut PRO launched in Japan and received approval from the Ministry of Health, Labour, and Welfare during the second quarter of fiscal year 2019.


•	Continued acceptance and growth of the CRT-P quadripolar pacing system.


•	Continued acceptance and growth of the Claria MRI CRT-D system with EffectivCRT Diagnostic and Effective CRT during AF algorithm, which launched in Japan during the third quarter of fiscal year 2018.

•

Continued growth of our Micra transcatheter pacing system. 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 pacemaker systems. We received final approval for reimbursement in the U.S. from the CMS and in Japan from the Ministry of Health, Labour, and Welfare during the fourth quarter of fiscal year 2017 and during the second quarter of fiscal year 2018, respectively, for this transformative therapy, which we expect will continue to accelerate sales in the U.S. and in Japan.


•	Acceptance and growth from the Azure XT and S SureScan pacing systems, which launched in the U.S. during the third quarter of fiscal year 2018. Azure pacemakers feature Medtronic-exclusive BlueSync technology, which enables automatic, secure wireless remote monitoring with increased device longevity.

•

Continued acceptance and growth of the HVAD System as a Destination Therapy for patients with advanced heart failure who are not candidates for heart transplants. The HVAD System, a left ventricular assist device or LVAD, helps the heart pump and increases the amount of blood that flows through the body. In the U.S., we received FDA approval for the Destination Therapy indication in September 2017 and the thoracotomy indication in July 2018, which allows for a less-invasive implant via a small surgical incision between the patient's ribs on the left side of the chest. Further, we expect to launch the HVAD system in Japan during fiscal year 2019.


•	Continued acceptance and 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 growth from the market release of Resolute Onyx. 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 growth of the IN.PACT Admiral drug-coated balloon for the treatment of peripheral artery disease in the upper leg.

•

Continued acceptance and growth from the VenaSeal vein closure system in the United States, for which reimbursement payment was established in January 2018 and payer coverage has been gradually increasing. The VenaSeal system is a unique non-thermal solution to address superficial venous disease that provides improved patient comfort, reduces the recovery time, and eliminates the risk of thermal nerve injury.


•	Continued acceptance and growth from the Valiant family of thoracic stent grafts. Building on the success of Valiant Captivia, we expect to launch the next generation Valiant Navion in the United States and Europe during fiscal year 2019.


•	Continued acceptance and growth from the expansion of the Endurant II used with the Heli-FX EndoAnchor for the short neck indication in the U.S., which received FDA approval in October 2017.

Minimally Invasive Therapies Group

The Minimally Invasive Therapies Group’s products span the entire continuum of patient care from diagnosis to recovery, with a focus on diseases of the gastrointestinal tract, lungs, pelvic region, kidneys, obesity, and preventable complications. The products include those for advanced and general surgical care including surgical stapling devices, vessel sealing instruments, wound closure, electrosurgery products, hernia mechanical devices, mesh implants, advanced ablation, interventional lung, ventilators, capnography, airway products, sensors, dialysis, and monitors. Net sales for the three months ended July 28, 2017 also include sales of dental and animal health, chart paper, wound care, incontinence, electrodes, SharpSafety, thermometry, perinatal protection, blood collection, compression, and enteral feeding offerings, which were divested on July 29, 2017.

The Minimally Invasive Therapies Group’s net sales for the three and six months ended October 26, 2018 were $2.0 billion and $4.1 billion, respectively, an increase of 5 percent and a decrease of 8 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Currency had an unfavorable impact on net sales for the three and six months ended October 26, 2018 of $38 million and $16 million, respectively. The Minimally Invasive Therapies Group's net sales for the six months ended October 27, 2017 were affected by the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses on July 29, 2017.

During the second quarter of fiscal year 2018, after the divestiture discussed above, the Surgical Solutions and Patient Monitoring & Recovery divisions were realigned into the Surgical Innovations and Respiratory, Gastrointestinal, & Renal divisions. The Surgical Innovations division consists of the Advanced Surgical and General Surgical businesses. The Advanced Surgical business includes the Advanced Stapling, Advanced Energy, Hernia, Gynecology, and Lung Health product lines. The General Surgical business includes the Wound Closure, Electrosurgery and Instruments product lines.

The Respiratory, Gastrointestinal, & Renal division consists of the Respiratory & Monitoring Solutions and Renal Care Solutions businesses. The Respiratory & Monitoring Solutions business includes the Patient Monitoring, Respiratory Interventions, Advanced Ablation, and GI Solutions product lines. The Renal Care Solutions business includes the Renal Access and Dialyzers product lines.

Surgical Innovations net sales for the three and six months ended October 26, 2018 were $1.4 billion and $2.8 billion, respectively, an increase of 4 percent and 6 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Surgical Innovations net sales growth was driven by new products in Advanced Energy and Advanced Stapling, including the LigaSure vessel sealing instruments with nano-coating, Valleylab FT10 energy platform, and both the Tri-Staple 2.0 endo stapling specialty reloads and Signia powered stapler.

Respiratory, Gastrointestinal, & Renal net sales for the three and six months ended October 26, 2018 were $654 million and $1.3 billion, respectively, an increase of 6 percent and a decrease of 27 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Respiratory, Gastrointestinal, & Renal net sales for the three and six months ended October 26, 2018 benefited from growth in GI and Hepatology, the continued adoption of MicroStream capnography monitoring products, strength in renal access products, and growth in Airway and Ventilation net sales. Net sales performance in Respiratory, Gastrointestinal, & Renal for the six months ended October 26, 2018 declined as a result of the July 29, 2017 divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.

Looking ahead, we expect our Minimally Invasive Therapies Group could be affected by the following:

•

Continued acceptance and future growth of Open-to-MIS techniques and tools supported by our efforts to transition open surgery to MIS. The Open-to-MIS initiative focuses on furthering our presence in and working to optimize open surgery globally, while capturing the market opportunity that exists in transitioning open procedures to MIS, whether through traditional MIS, or advanced technologies including robotics.


•	Continued acceptance and future growth of the powered stapling and energy platform, along with our ability to execute ongoing strategies to develop, gain regulatory approval, and commercialize new products including our surgical robotics platform.

•

The July 29, 2017 divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses. Net sales of the businesses included in the divestiture were $0.6 billion for the three months ended July 28, 2017. We have entered into Transition Manufacturing Agreements (TMAs) with Cardinal Health, Inc. (Cardinal). The TMAs will contribute to net sales and are designed to ensure and facilitate an orderly transfer of business operations for a transition period of two to five years, with the ability to extend upon mutual agreement of the parties.


•	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. We are expecting regulatory filing in late fiscal year 2020, with launch following regulatory clearance in targeted countries.


•	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, and Patient Monitoring. 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, and the Emprint ablation system with Thermosphere Technology, which maintains predictable spherical ablation zones throughout procedures reducing procedure time and cost.

•

Continued and future acceptance of Interventional Lung Solutions. Products include 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. Our expanded and strengthened surgical offerings are expected to complement our global gynecology business.

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, epilepsy, overactive bladder, urinary retention, fecal incontinence and gastroparesis, as well as products to treat conditions of the ear, nose, and throat (ENT), 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 and six months ended October 26, 2018 were $2.0 billion and $3.9 billion, respectively, an increase of 7 percent as compared to the corresponding periods in the prior fiscal year. Currency had an unfavorable impact on net sales for the three months ended October 26, 2018 of $15 million and a favorable impact on net sales for the six months ended October 26, 2018 of $2 million. Net sales growth for the three and six months ended October 26, 2018 was driven by the Brain Therapies, Specialty Therapies and Pain Therapies divisions. See the more detailed discussion of each division’s performance below.

Spine net sales for the three and six months ended October 26, 2018 were $656 million and $1.3 billion, respectively. While net sales were flat as compared to the corresponding periods in the prior fiscal year, our Surgical Synergy strategy, which integrates our spinal implants with enabling technologies such as imaging, navigation, power instruments, nerve monitoring and Mazor robotics, resulted in spine enabling technologies contributing to the strong performance in our Neurosurgery business. Additionally, in line with 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, recently launched products including the Infinity OCT System, Elevate, the Solera Voyager 5.5/6.0 fixation system, and Prestige LP cervical discs contributed incremental net sales.

Brain Therapies net sales for the three and six months ended October 26, 2018 were $618 million and $1.2 billion, respectively, an increase of 7 and 11 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Brain Therapies net sales growth was driven by strong growth in both Neurovascular and Neurosurgery. Neurovascular net sales growth was driven by adoption of our endovascular stroke treatments and our stents, coils, flow diversion, and access products. Neurosurgery net sales growth was driven by strong sales of the StealthStation S8 surgical navigation systems, Mazor X robotic guidance systems, and the Visualase MRI-guided laser ablation systems. Additionally, Neurosurgery net sales for the six months ended October 26, 2018 benefited from strong sales of O-Arm Imaging Systems.

Specialty Therapies net sales for the three and six months ended October 26, 2018 were $405 million and $789 million, respectively, an increase of 11 and 7 percent, respectively, as compared to the corresponding periods in the prior fiscal year. Specialty Therapies net sales growth was driven by growth in Transformative Solutions, ENT and Pelvic Health.

Pain Therapies net sales for the three and six months ended October 26, 2018 were $314 million and $628 million, respectively, an increase of 19 and 18 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The increase in net sales was driven by our Intellis spinal cord stimulation platform, the Evolve workflow algorithm, and Snapshot reports. Also contributing to net sales growth was our SynchroMed targeted drug delivery pump.

Looking ahead, we expect our Restorative Therapies Group could be affected by the following:


•	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.


•	Acceptance of our React Catheter and Riptide aspiration system, along with the expected launch of our next-generation Solitaire revascularization device.


•	Continued growth from Neurosurgery StealthStation and O-Arm Imaging Systems, Midas, and ENT Navigation and Power Systems.


•	Continued sales of Mazor robotic units and associated market adoption of robot-assisted spine procedures, including the Mazor X Stealth, which received FDA approval in November 2018.


•	Closing of our acquisition of Mazor Robotics, a pioneer in the field of robotic guidance systems, which was announced in September 2018. We plan to acquire Mazor for approximately $1.6 billion, or $1.3 billion net of our existing stake in Mazor and cash acquired. Our acquisition of Mazor should strengthen our position as a global leader in enabling technologies for spine surgery.


•	Continued market acceptance of our integrated solutions through the Surgical Synergy strategy, which integrates our spinal implants with enabling technologies such as imaging, navigation, power instruments, nerve monitoring and Mazor robotics.


•	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.


•	Continued market acceptance and global adoption of our Intellis spinal cord stimulator and Evolve workflow algorithm 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. The U.S. FDA lifted its distribution requirements on our implantable drug pump in October and its warning letter in November 2017.


•	Continued acceptance of our devices for the treatment of Parkinson's Disease, epilepsy and other movement disorders.


•	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.

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 and six months ended October 26, 2018 were $583 million and $1.2 billion, respectively, an increase of 26 percent and 27 percent, respectively, as compared to the corresponding periods in the prior fiscal year. The Diabetes Group's net sales growth for the three and six months ended October 26, 2018 was primarily attributable to the continued demand for the MiniMed 670G hybrid closed loop system, which offers the latest in SmartGuard technology, as well as the higher sensor attachment and utilization we are seeing with our integrated pump users. Further, we experienced continued international growth due to strong sales of the MiniMed 640G system in Europe and Asia Pacific.

Looking ahead, we expect our Diabetes Group could be affected by the following:

•

Continued patient demand for the MiniMed 670G system, the first hybrid closed loop system in the world. The system features our most advanced SmartGuard 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. This system received CE mark in June 2018 and has launched in select European countries. The global adoption of sensor-augmented insulin pump systems has resulted in strong sensor attachment rates.


•	Changes in medical reimbursement policies and programs, along with additional payor coverage of the MiniMed 670G system.


•	Continued acceptance and future growth of the MiniMed 640G system with SmartGuard Suspend before Low technology, which has launched in Europe, Australia, and select countries in Latin America and Asia. The MiniMed 640G system received regulatory approval in Japan in the fourth quarter of fiscal year 2018.


•	Continued acceptance and future growth of the MiniMed 620G system, the first integrated system customized for the Japanese market.


•	Continued acceptance and growth of Guardian Connect CGM system which displays glucose information directly to a smartphone. This system has launched internationally and now in the U.S after receiving FDA approval for the system in the fourth quarter 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 select health plans (i.e. Aetna), where a component of our pump reimbursement is based on successfully meeting clinical improvement thresholds as part of our value-based healthcare solutions.

CRITICAL ACCOUNTING ESTIMATES

We have used various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies are disclosed in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 27, 2018.

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:

Litigation Contingencies We are involved in a number of legal actions involving product liability, intellectual property and commercial disputes, shareholder related matters, environmental proceedings, income tax disputes, and governmental proceedings and investigations. The outcomes of these legal actions are not completely within our 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. Estimating probable losses from our litigation and governmental proceedings is inherently difficult, 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 17 to the current period's consolidated financial statements.

Income Tax Reserves and U.S. Tax Reform 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) the expiration of the applicable 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.

impact of the Tax Act may differ from the provisional amounts recognized in the current period, possibly materially, due to, among other things, changes in our interpretation of the Tax Act, legislative or administrative actions to clarify the intent of the statutory language provided that differ from our current interpretation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have utilized to calculate the impacts.

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 primarily 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 to determine 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 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.

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's 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.

We assess the impairment of indefinite-lived intangible assets 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 intangible assets require us to make several estimates to determine fair value, including projected future cash flows and discount rates.

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 4 to the current period's consolidated financial statements.

COSTS AND EXPENSES

The following is a summary of cost of products sold, research and development, and selling, general, and administrative expenses as a percent of net sales:



	Three months ended				Six months ended
	October 26, 2018		October 27, 2017		October 26, 2018		October 27, 2017
Cost of products sold	29.4	%	30.1	%	29.6	%	31.0	%
Research and development expense	7.9	%	7.9	%	7.9	%	7.7	%
Selling, general, and administrative expense	34.8	%	36.0	%	35.0	%	35.5	%

Cost of Products Sold We continue to focus on reducing our costs of production through supplier management, manufacturing improvements, and optimizing our manufacturing network.

Cost of products sold during the three and six months ended October 26, 2018 was $2.2 billion and $4.4 billion, respectively. The decrease in cost of products sold as a percentage of net sales for the three and six months ended October 26, 2018, as compared to the corresponding periods in the prior fiscal year, was favorably affected by the infusion set recall in our Diabetes Group, along with $17 million of costs recognized in relation to restoring operations at our four Puerto Rico manufacturing sites after Hurricane Maria, including idle facility costs, asset write-downs, and other facility-related costs incurred during the three and six months ended October 27, 2017. The decrease in cost of products sold as a percentage of net sales for the six months ended October 26, 2018 was also driven by the divestiture of lower-margin products in conjunction with the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses on July 29, 2017.

Research and Development Expense Research and development expense during the three and six months ended October 26, 2018 was $590 million and $1.2 billion, respectively. 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.

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, other administrative costs, such as professional fees and marketing expenses, and certain acquisition, restructuring, and divestiture-related expenses.

Selling, general, and administrative expense during the three and six months ended October 26, 2018 was $2.6 billion and $5.2 billion, respectively. Selling, general, and administrative expense decreased as a percentage of net sales for the three and six months ended October 26, 2018, as compared to the corresponding periods in the prior fiscal year. Selling, general, and administrative expense for the three and six months ended October 26, 2018 includes $20 million and $43 million, respectively, of acquisition-related items, as compared to $31 million and $76 million for the three and six months ended October 27, 2017, respectively. Additionally, during the three and six months ended October 27, 2017, we recognized $67 million and $115 million, respectively, of expenses incurred in connection with the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.

The following is a summary of other costs and expenses:



	Three months ended						Six months ended
(in millions)	October 26, 2018			October 27, 2017			October 26, 2018			October 27, 2017
Amortization of intangible assets	$	445		$	460		$	891		$	914
Restructuring charges, net	24			8			86			16
Certain litigation charges	—			—			103			—
Gain on sale of businesses	—			(697		)	—			(697		)
Other operating expense, net	70			167			221			232
Other non-operating income, net	(52		)	(107		)	(238		)	(206		)
Interest expense	241			273			483			559

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 $445 million and $891 million for the three and six months ended October 26, 2018, respectively, as compared to $460 million and $914 million for the three and six months ended October 27, 2017, respectively.

Restructuring Charges, Net

Enterprise Excellence

In the third quarter of fiscal year 2018, we announced a multi-year global Enterprise Excellence Program designed to drive long-term business growth and sustainable efficiency. The Enterprise Excellence Program is expected to further leverage our global size and scale as well as enhance the customer and employee experience.

The Enterprise Excellence Program is focused on three objectives:


•	Global Operations - integrating and enhancing global manufacturing and supply processes, systems and site presence to improve quality, delivery cost and cash flow


•	Functional Optimization - enhancing and leveraging global operating models and systems across several enabling functions to improve productivity and employee experience


•	Commercial Optimization - optimizing certain processes, systems and models to improve productivity and the customer experience

The Enterprise Excellence Program is designed to drive operating margin improvement as well as fund investment in strategic growth initiatives, with expected annual gross savings of more than $3.0 billion from cost reductions and leverage of our fixed infrastructure by the end of fiscal year 2022. Approximately $500 million to $700 million of gross annual savings are expected to be achieved each fiscal year through the end of fiscal year 2022.

The Enterprise Excellence Program is expected to result in pre-tax restructuring charges of approximately $1.6 billion to $1.8 billion, the vast majority of which are expected to be incurred by the end of fiscal year 2022 and result in cash outlays to be substantially complete by the end of fiscal year 2023. Approximately half of the estimated restructuring charges are related to employee termination benefits. The remaining restructuring charges are costs associated with the restructuring program, such as salaries for employees supporting the program and consulting expenses. We expect these costs to be recognized within restructuring charges, net, cost of products sold, and selling, general, and administrative expense in the consolidated statements of income.

For the three and six months ended October 26, 2018, we recognized restructuring charges of $75 million and $195 million, respectively. Additionally, we incurred accrual adjustments of $4 million and $2 million for the three and six months ended October 26, 2018, primarily attributable to employee termination benefits being more than initially estimated. For the three and six months ended October 26, 2018, restructuring charges included $22 million and $91 million, respectively, recognized within restructuring charges, net in the consolidated statements of income, primarily comprised of employee termination benefits. For the three and six months ended October 26, 2018, restructuring charges also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including $22 million and $37 million, respectively, recognized within cost of products sold and $31 million and $54 million, respectively, recognized within selling, general, and administrative expense in the consolidated statements of income. For the six months ended October 26, 2018, selling, general, and administrative expense also includes $13 million of fixed asset write-downs.

Cost Synergies

In the third quarter of fiscal year 2018, we achieved $850 million in cost synergies related to the acquisition of Covidien plc. The costs synergies related to administrative office optimization, manufacturing and supply chain infrastructure, and certain general and administrative savings. Cash outlays for the cost synergies program are scheduled to be substantially complete by the end of fiscal year 2019.

During the three and six months ended October 26, 2018, we recognized no restructuring charges and accrual adjustments of $2 million and $7 million, respectively. Accrual adjustments relate to certain employees identified for termination finding other positions within Medtronic, cancellations of employee terminations, and employee termination benefits being less than initially estimated.

For the three and six months ended October 27, 2017, we recognized $26 million and $45 million, respectively, in restructuring charges, which were partially offset by accrual adjustments of $8 million and $13 million, respectively. Accrual adjustments relate to certain employees identified for termination finding other positions within Medtronic, cancellations of employee terminations, and employee termination benefits being less than initially estimated. For the three and six months ended October 27, 2017, restructuring charges included $7 million and $12 million, respectively, recognized within cost of products sold and $3 million and $4 million, respectively, recognized within selling, general and administrative expense.

For additional information about our restructuring programs, refer to Note 6 to the current period's consolidated financial statements.

Certain Litigation Charges We classify litigation charges and gains related to significant legal matters as certain litigation charges. During the six months ended October 26, 2018, we recognized $103 million of litigation charges related to probable and estimable damages for significant legal matters. There were no certain litigation charges recognized during the three and six months ended October 27, 2017.

Gain on Sale of Businesses We recognized a pre-tax gain of $697 million on the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses during the three and six months ended October 27, 2017. There were no sales of businesses during the three or six months ended October 26, 2018.

Other Operating Expense, Net Other operating expense, net includes royalty income and expense, Transition Service Agreement income, intangible asset charges, currency transaction and derivative gains and losses, contributions to the Medtronic Foundation, Puerto Rico excise taxes, and changes in the fair value of contingent consideration. For the three and six months ended October 26, 2018, other operating expense, net was $70 million and $221 million, respectively, as compared to $167 million and $232 million for the three and six months ended October 27, 2017, respectively. For the three months ended October 26, 2018, the decrease in

other operating expense, net is primarily attributable to the $80 million charge recognized in connection with a commitment to fund the Medtronic Foundation during the three months ended October 27, 2017. For the six months ended October 26, 2018, the decrease in other operating expense, net was partially offset by intangible asset and other charges of $80 million associated with the exit of a business. The decrease in net expense was also driven by our remeasurement and hedging programs, which, combined, were a $10 million and $26 million loss for the three and six months ended October 26, 2018, respectively, as compared to a $30 million and $35 million loss for the three and six months ended October 27, 2017, respectively.

Other Non-Operating Income, Net Other non-operating income, net includes the non-service component of net periodic pension and postretirement benefit cost, investment gains and losses, and interest income. For the three and six months ended October 26, 2018, other non-operating income, net was $52 million and $238 million, respectively, as compared to $107 million and $206 million for the three and six months ended October 27, 2017, respectively. The decrease in other non-operating income, net for the three months ended October 26, 2018 as compared to the corresponding period in the prior fiscal year was driven primarily by investment losses on our minority investment portfolio and a decrease in interest income.

The increase in other non-operating income, net for the six months ended October 26, 2018 as compared to the corresponding period in the prior fiscal year was primarily driven by an increase in investment gains on our minority investment portfolio, partially due to the adoption of new accounting guidance in the first quarter of fiscal year 2019, offset by a decrease in interest income. Refer to Note 2 to the current period's consolidated financial statements for more information on recently adopted accounting pronouncements.

Interest Expense Interest expense includes interest incurred on our outstanding borrowings, amortization of debt issuance costs and debt premiums or discounts, amortization of gains or losses on terminated or de-designated interest rate derivative instruments, and ineffectiveness on interest rate derivative instruments. For the three and six months ended October 26, 2018, interest expense was $241 million and $483 million, respectively, as compared to $273 million and $559 million for the three and six months ended October 27, 2017, respectively. The decrease in interest expense during the three and six months ended October 26, 2018 was primarily driven by a decrease in total debt obligations, on average, compared to the corresponding periods in the prior fiscal year.

INCOME TAXES



	Three months ended						Six months ended
(in millions)	October 26, 2018			October 27, 2017			October 26, 2018			October 27, 2017
Income tax provision (benefit)	$	235		$	(285	)	$	338		$	(99	)
Income before income taxes	1,355			1,728			2,535			2,923
Effective tax rate	17.3		%	(16.5		)%	13.3		%	(3.4		)%

Non-GAAP income tax provision	$	256		$	256		$	501		$	486
Non-GAAP income before income taxes	1,921			1,708			3,769			3,472
Non-GAAP Nominal Tax Rate	13.3		%	15.0		%	13.3		%	14.0		%

Difference between the effective tax rate and Non-GAAP Nominal Tax Rate	(4.0		)%	31.5		%	—		%	17.4		%

On December 22, 2017, the U.S. government enacted the Tax Act. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. The Company adopted guidance allowing for a measurement period, not to exceed one year, to finalize the accounting for the income tax impacts of the Tax Act. Until the accounting for the income tax impacts of the Tax Act is complete, the reported amounts are based on reasonable estimates and are disclosed as provisional. Refer to Note 12 to the current period's consolidated financial statements for additional information.

Many of the countries we operate in have statutory tax rates lower than our U.S. statutory rate, thereby resulting in an overall effective tax rate less than the U.S. statutory rate of 21 percent. A significant portion of our earnings are generated from operations in Puerto Rico, Switzerland, and Ireland. The statutory tax rates for these jurisdictions range from 12.5 percent to 45.1 percent. Our earnings in Puerto Rico and Switzerland are subject to certain tax incentive grants which provide for tax rates lower than the country statutory tax rates. Unless our tax incentive grants are extended, they will expire between fiscal years 2019 and 2029. The tax incentive grants scheduled to expire during fiscal year 2019 are not expected to have a material impact on our financial results. Refer to Note 14 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 27, 2018 for additional information.

Our effective tax rate for the three and six months ended October 26, 2018 was 17.3 percent and 13.3 percent, respectively, as compared to (16.5) percent and (3.4) percent for the three and six months ended October 27, 2017, respectively. The increase in

our effective tax rate for the three and six months ended October 26, 2018, as compared to the corresponding periods in the prior fiscal year, was primarily due to the impacts from certain tax adjustments, the gain on the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses during the second quarter of fiscal year 2018, and operational tax adjustments described below, along with year-over-year changes in operational results by jurisdiction.

Our Non-GAAP Nominal Tax Rate for the three and six months ended October 26, 2018 was 13.3 percent, as compared to 15.0 percent and 14.0 percent for the three and six months ended October 27, 2017, respectively. The change in our Non-GAAP Nominal Tax Rate was primarily due to the finalization of certain tax returns and audits, the impact from the lapse of federal statutes of limitations, excess tax benefits related to stock-based compensation, and year-over-year changes in operational results by jurisdiction. An increase in our Non-GAAP Nominal Tax Rate of 1 percent would result in an additional income tax provision for the three and six months ended October 26, 2018 of approximately $19 million and $38 million, respectively.

Certain Tax Adjustments


•	A charge of $37 million associated with the transition tax liability recorded in connection with the Tax Act. Our income tax provision associated with the impact of the Tax Act is based on a reasonable estimate and will be finalized within the measurement period in accordance with U.S. GAAP.


•	A charge of $21 million related to the recognition of a prepaid tax expense resulting from the reduction in the U.S. statutory tax rate under the Tax Act and the current quarter sale of U.S. manufactured inventory held as of April 27, 2018.


•	A benefit of $13 million associated with the transition tax liability recorded in connection with the Tax Act. Our income tax provision associated with the impact of the Tax Act is based on a reasonable estimate and will be finalized within the measurement period in accordance with U.S. GAAP.


•	A charge of $42 million related to the recognition of a prepaid tax expense resulting from the reduction in the U.S. statutory tax rate under the Tax Act and the current quarter sale of U.S. manufactured inventory held as of April 27, 2018.


•	A net benefit of $398 million associated with the intercompany sales of intellectual property.


•	A benefit of $6 million related to the sale of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.


•	A net benefit of $398 million associated with the intercompany sales of intellectual property.


•	A net charge of $54 million primarily related to the sale of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.

LIQUIDITY AND CAPITAL RESOURCES

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

Summary of Cash Flows

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



	Six months ended
(in millions)	October 26, 2018			October 27, 2017
Cash provided by (used in):
Operating activities	$	2,865		$	1,644
Investing activities	764			6,125
Financing activities	(3,303		)	(7,277		)
Effect of exchange rate changes on cash and cash equivalents	(84		)	70
Net change in cash and cash equivalents	$	242		$	562

Operating Activities The $1.2 billion increase in net cash provided was primarily driven by our operating margin expansion, an increase in cash collected from customers, as well as decreases in cash paid to suppliers and other vendors, certain litigation payments, cash paid for interest, and retirement benefit plan contributions, partially offset by an increase in cash paid for taxes. The increase in cash collected from customers reflects collections on higher sales during the six months ended October 26, 2018 as compared to the six months ended October 27, 2017, and the decrease in cash paid to suppliers is primarily due to our continued progress in extending supplier payment terms. The decrease in certain litigation payments resulted from changes in the timing of payments across fiscal quarters. Cash paid for interest for the six months ended October 26, 2018 decreased compared to the corresponding period in the prior fiscal year primarily due to a decrease in total debt obligations. The decrease in retirement benefit plant contributions reflects lower contributions to the U.S. pension plan in fiscal year 2019 as compared to fiscal year 2018. The increase in cash paid for taxes is primarily due to our transition tax payment in the second quarter of fiscal year 2019.

Investing Activities The $5.4 billion decrease in net cash provided was primarily attributable to the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses during the six months ended October 27, 2017, which resulted in net proceeds of $6.1 billion, partially offset by higher net sales of investments of $711 million during the six months ended October 26, 2018 as compared to the corresponding period in the prior fiscal year.

Financing Activities The $4.0 billion decrease in net cash used was primarily attributable to the repayment of our senior unsecured term loan, including accrued interest, for $3.0 billion and the repayment of our 6.000 percent ten-year 2008 CIFSA senior notes, including accrued interest, for $1.2 billion during the six months ended October 27, 2017, partially offset by higher repayments of commercial paper borrowings of $510 million and an increase in issuances of ordinary shares of $570 million.

Free Cash Flow

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



	Six months ended
(in millions)	October 26, 2018			October 27, 2017
Net cash provided by operating activities	$	2,865		$	1,644
Net cash provided by investing activities	764			6,125
Net cash used in financing activities	(3,303		)	(7,277		)

Net cash provided by operating activities	$	2,865		$	1,644
Additions to property, plant, and equipment	(497		)	(524		)
Free cash flow	$	2,368		$	1,120

Dividends to shareholders	$	1,351		$	1,247
Repurchase of ordinary shares	2,047			1,888
Issuances of ordinary shares	(800		)	(230		)
Return to shareholders	$	2,598		$	2,905
Return of operating cash flow percentage	91		%	177		%
Return of free cash flow percentage	110		%	259		%

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 $1.3 billion at October 26, 2018 as compared to $2.1 billion at April 27, 2018. Long-term debt was $23.7 billion at both October 26, 2018 and April 27, 2018. We utilize unsecured senior debt obligations to meet our long-term financing needs. From time to time, we may repurchase our outstanding debt obligations in the open market or through privately negotiated transactions.

Total debt at October 26, 2018 was $25.0 billion, as compared to $25.8 billion at April 27, 2018. The decrease in total debt was primarily driven by a reduction in our commercial paper borrowings of $698 million.

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 October 26, 2018, we had no commercial paper outstanding, as compared to $698 million at April 27, 2018. During the three and six months ended October 26, 2018, the weighted average original maturity of the commercial paper outstanding was approximately 29 and 27 days, respectively, and the weighted average interest rate was 2.02 percent and 2.05 percent, respectively. 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 (Credit Facility) which expires in January 2020. The Credit Facility provides backup funding for the commercial paper program and may also be used for general corporate purposes. The Credit Facility provides us with the ability to increase our borrowing capacity by an additional $500 million at any time during the term of the agreement. At each anniversary date of the Credit Facility, but not more than twice prior to the maturity date, we could also request a one-year extension of the maturity date. At October 26, 2018 and April 27, 2018, no amounts were outstanding on the committed line of credit.

Interest rates on advances of our 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" 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 October 26, 2018.

We repurchase shares from time to time as part of our focus on returning value to our shareholders. In June 2017, our Board of Directors authorized the expenditure of up to $5.0 billion for new share repurchases. During the three and six months ended October 26, 2018, we repurchased a total of 12.4 million and 21.8 million shares, respectively, at an average price per share of $94.75 and $91.23, respectively. At October 26, 2018, we had approximately $2.0 billion remaining under the share repurchase program authorized by our Board of Directors.

For more information on credit arrangements, refer to Note 8 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 27, 2018.

Liquidity

The following table is a summary of our cash, cash equivalents, and current investments, working capital, and current ratio:



(in millions)	October 26, 2018		April 27, 2018
Cash, cash equivalents, and current investments	$	10,133	$	11,227
Working capital	13,190		12,896
Current ratio	2.6:1.0		2.3:1.0

Our liquidity sources at October 26, 2018 include $3.9 billion of cash and cash equivalents and $6.2 billion of current investments. Additionally, we maintain a commercial paper program (no commercial paper outstanding at October 26, 2018) and Credit Facility. See discussion above regarding changes in our cash and cash equivalents and commercial paper program and Credit Facility.

Our current investments include marketable debt and equity securities. Our debt and equity securities include U.S. and non-U.S. government and agency securities, corporate debt securities, mortgage-backed securities, other asset-backed securities, equity securities, 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 and six months ended October 26, 2018, 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 October 26, 2018, we have $166 million of gross unrealized losses on our aggregate available-for-sale debt securities of $6.3 billion. If market conditions deteriorate, some of these holdings may experience other-than-temporary impairment in the future, which could adversely affect 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. Refer to Note 7 to the current period's consolidated financial statements for additional information regarding fair value measurements.



	Agency Rating⁽¹⁾
	October 26, 2018	April 27, 2018
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 October 26, 2018 were unchanged as compared to the ratings at April 27, 2018. 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 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. Refer to the "Off-Balance Sheet Arrangements and Long-Term Contractual Obligations" section of this Management's Discussion and Analysis for more information on these obligations and commitments.

Note 17 to the current period's consolidated financial statements provides information regarding amounts we have accrued related to legal matters. 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 effect 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. As a result of the Tax Act, we have removed our permanently reinvested assertion on the historical earnings through April 27, 2018 for legal entities with accumulated earnings subject to the transition tax. We continue to evaluate our permanently reinvested assertion for certain legal entities. We expect to have access to the majority of our cash flows in the future. In addition, we continue to 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 believe our balance sheet and liquidity provide us with flexibility in the future, and that our cash, cash equivalents, and short-term investments, as well as our Credit Facility and related commercial paper program, 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.

Off-Balance Sheet Arrangements and Long-Term Contractual Obligations

There have been no material changes to our off-balance sheet arrangements and long-term contractual obligations as reported in our most recent Annual Report filed on Form 10-K for the fiscal year ended April 27, 2018.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and other written reports and oral statements made by or with the approval of one of the Company’s executive officers from time to time, may include “forward-looking” statements. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans, objectives of management for future operations and current expectations or forecasts of future results, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Our forward-looking statements may include statements related to our growth and growth strategies, developments in the markets for our products, therapies and services, financial results, product development launches and effectiveness, research and development strategy, regulatory approvals, competitive strengths, 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. In some cases, such statements may be identified by the use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “looking ahead,” “may,” “plan,” “possible,” “potential,” “project,” “should,” “will,” and similar words or expressions. Forward-looking statements in this Quarterly Report include, but are not limited to, statements regarding our ability to drive long-term shareholder value, development and future launches of products and continued or future acceptance of products, therapies and services in our segments; expected timing for completion of research studies relating to our products; market positioning and performance of our products, including stabilization of certain product markets; divestitures and the potential benefits thereof; the costs and benefits of integrating previous acquisitions; anticipated timing for 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.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. One must carefully consider forward-looking statements and understand that such forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, and involve a variety of risks and uncertainties, known and unknown, including, among others, those discussed in the sections entitled “Government Regulation and Other Considerations” within “Item 1. Business” and “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as well as those 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;


•	cybersecurity incidents;


•	failure to complete or achieve the intended benefits of acquisitions or divestitures; or


•	disruption of our current plans and operations.

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

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 which may cause fluctuations in earnings and cash flows. We use operational and economic hedges, as well as currency exchange rate derivative instruments, to manage the impact of currency exchange rate fluctuations. In order to minimize earnings and cash flow volatility resulting 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 our derivative instruments are the Euro, Japanese Yen, and British Pound. 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 October 26, 2018 and April 27, 2018 was $10.5 billion and $11.5 billion, respectively. At October 26, 2018, these contracts were in a net unrealized gain position of $257 million. A sensitivity analysis of changes in the fair value of all currency exchange rate derivative contracts at October 26, 2018 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 $912 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.

In the second quarter of fiscal year 2019, we began accounting for our operations in Argentina as highly inflationary, as the prior three-year cumulative inflation rate exceeded 100 percent. The change did not have a material impact on our results for the three months ended October 26, 2018.

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 October 26, 2018 was comprised of debt predominately denominated in U.S. dollars, of which substantially all is fixed 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 interest rate-sensitive financial instruments of a hypothetical 10 basis point change in interest rates, compared to interest rates at October 26, 2018, indicates that the fair value of these instruments would correspondingly change by $62 million.

For a discussion of current market conditions and the impact on our financial condition and results of operations, please see the “Liquidity” section of the current period's Management's Discussion and Analysis. For additional discussion of market risk, refer to Notes 7 and 9 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, has 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 is deploying an enterprise resource planning (ERP) software program, SAP, to the Minimally Invasive Therapies Group. During fiscal year 2019, the Company continued the deployment of this software along with other enterprise systems, which resulted in changes to the internal controls over financial reporting for the Minimally Invasive Therapies Group in Latin America. The internal controls were updated to reflect these changes. These system deployments 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 17 to the current period's consolidated financial statements.

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 second quarter of fiscal year 2019:



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 Approximate Dollar Value of Shares that may yet be Purchased Under the Program ⁽¹⁾
7/28/2018-8/24/2018	4,809,045	$	92.27	4,809,045	$	2,723,035,812
8/25/2018-9/28/2018	4,714,422	96.71		4,714,422	2,267,103,682
9/29/2018-10/26/2018	2,831,320	95.71		2,831,320	1,996,123,740
Total	12,354,787	$	94.75	12,354,787	$	1,996,123,740


(1)	In June 2017, the Company's Board of Directors authorized the repurchase of $5 billion of the Company’s ordinary shares. There is no specific time-period associated with this repurchase authorization.

Item 6. Exhibits



(a)	Exhibits
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	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.

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:	November 29, 2018	/s/ Omar Ishrak
		Omar Ishrak
		Chairman and Chief Executive Officer

Date:	November 29, 2018	/s/ Karen L. Parkhill
		Karen L. Parkhill
		Executive Vice President and
		Chief Financial Officer