SEC Filings

10-Q
MEDTRONIC PLC filed this Form 10-Q on 09/09/2015
Entire Document
 
10-Q


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
ý
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2015
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 ý 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
ý 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”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller Reporting Company 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 ý
As of September 3, 2015, 1,413,614,665 ordinary shares, par value $0.0001, 40,000 Euro deferred shares, par value €1.00, and 1,872 A preferred shares, par value $1.00, of the registrant were outstanding.
 
 




TABLE OF CONTENTS




PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
MEDTRONIC PLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three months ended
 
July 31, 2015
 
July 25, 2014
 
(in millions, except per share data)
Net sales
$
7,274

 
$
4,273

 
 
 
 
Costs and expenses:
 

 
 

Cost of products sold
2,456

 
1,105

Research and development expense
558

 
365

Selling, general, and administrative expense
2,449

 
1,506

Restructuring charges, net
67

 
30

Acquisition-related items
71

 
41

Amortization of intangible assets
481

 
87

Other expense, net
61

 
51

Operating Profit
1,131

 
1,088

 
 
 
 
Interest income
(115
)
 
(92
)
Interest expense
306

 
97

Interest expense, net
191

 
5

Income from operations before income taxes
940

 
1,083

 
 
 
 
Provision for income taxes
120

 
212

 
 
 
 
Net income
$
820

 
$
871

 
 
 
 
Basic earnings per share
$
0.58

 
$
0.88

 
 
 
 
Diluted earnings per share
$
0.57

 
$
0.87

 
 
 
 
Basic weighted average shares outstanding
1,418.1

 
992.6

 
 
 
 
Diluted weighted average shares outstanding
1,436.4

 
1,005.2

 
 
 
 
Cash dividends declared per ordinary share
$
0.380

 
$
0.305

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

1



MEDTRONIC PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended
 
July 31, 2015
 
July 25, 2014
 
(in millions)
Net income
$
820

 
$
871

 
 
 
 
Other comprehensive (loss) income, net of tax:
 

 
 

Unrealized (loss) gain on available-for-sale securities, net of tax (benefit) expense of $(74) and $32, respectively
(131
)
 
54

Translation adjustment
(26
)
 
1

Net change in retirement obligations, net of tax expense of $10 and $6, respectively
13

 
17

Unrealized (loss) gain on derivatives, net of tax (benefit) expense of $(20) and $21, respectively
(28
)
 
37

 
 
 
 
Other comprehensive (loss) income
(172
)
 
109

 
 
 
 
Comprehensive income
$
648

 
$
980

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

2



MEDTRONIC PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
July 31, 2015
 
April 24, 2015
 
(in millions, except per share data)
ASSETS
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
2,979

 
$
4,843

Investments
15,003

 
14,637

Accounts receivable, less allowances of $141 and $144, respectively
4,811

 
5,112

Inventories
3,404

 
3,463

Tax assets
1,490

 
1,335

Prepaid expenses and other current assets
1,460

 
1,454

Total current assets
29,147

 
30,844

 
 
 
 
Property, plant, and equipment
9,026

 
8,863

Accumulated depreciation
(4,354
)
 
(4,164
)
Property, plant, and equipment, net
4,672

 
4,699

Goodwill
40,657

 
40,530

Other intangible assets, net
27,699

 
28,101

Long-term tax assets
772

 
774

Other assets
1,679

 
1,737

Total assets
$
104,626

 
$
106,685

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Short-term borrowings
$
1,850

 
$
2,434

Accounts payable
1,321

 
1,610

Accrued compensation
1,171

 
1,611

Accrued income taxes
477

 
935

Deferred tax liabilities
120

 
119

Other accrued expenses
2,721

 
2,464

Total current liabilities
7,660

 
9,173

 
 
 
 
Long-term debt
33,709

 
33,752

Long-term accrued compensation and retirement benefits
1,549

 
1,535

Long-term accrued income taxes
2,541

 
2,476

Long-term deferred tax liabilities
4,701

 
4,700

Other long-term liabilities
1,657

 
1,819

Total liabilities
51,817

 
53,455

 
 
 
 
Commitments and contingencies (Notes 3 and 16)

 

 
 
 
 
Shareholders’ equity:
 

 
 

Ordinary shares— par value $0.0001

 

Retained earnings
54,165

 
54,414

Accumulated other comprehensive loss
(1,356
)
 
(1,184
)
Total shareholders’ equity
52,809

 
53,230

Total liabilities and shareholders’ equity
$
104,626

 
$
106,685

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

3



MEDTRONIC PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three months ended
 
July 31, 2015
 
July 25, 2014
 
(in millions)
Operating Activities:
 

 
 

Net income
$
820

 
$
871

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

 
 

Depreciation and amortization
701

 
215

Acquisition-related items
232

 
2

Provision for doubtful accounts
10

 
8

Deferred income taxes
(159
)
 
98

Stock-based compensation
96

 
34

Other, net
(32
)
 
(9
)
Change in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable, net
279

 
94

Inventories
(207
)
 
(96
)
Accounts payable and accrued liabilities
(424
)
 
(163
)
Other operating assets and liabilities
(408
)
 
17

Certain litigation payments
(92
)
 
(761
)
Net cash provided by operating activities
816

 
310

Investing Activities:
 

 
 

Acquisitions, net of cash acquired
(179
)
 
(146
)
Additions to property, plant, and equipment
(224
)
 
(109
)
Purchases of marketable securities
(1,851
)
 
(1,600
)
Sales and maturities of marketable securities
1,266

 
1,853

Other investing activities, net
2

 
(4
)
Net cash used in investing activities
(986
)
 
(6
)
Financing Activities:
 

 
 

Acquisition-related contingent consideration
(3
)
 
(5
)
Change in short-term borrowings, net
429

 
862

Payments on long-term debt
(1,004
)
 
(3
)
Dividends to shareholders
(538
)
 
(304
)
Issuance of ordinary shares
98

 
154

Repurchase of ordinary shares
(750
)
 
(1,065
)
Other financing activities, net
24

 
6

Net cash used in financing activities
(1,744
)
 
(355
)
Effect of exchange rate changes on cash and cash equivalents
50

 
(16
)
Net change in cash and cash equivalents
(1,864
)
 
(67
)
Cash and cash equivalents at beginning of period
4,843

 
1,403

Cash and cash equivalents at end of period
$
2,979

 
$
1,336

Supplemental Cash Flow Information
 

 
 

Cash paid for:
 

 
 

Income taxes
$
636

 
$
146

Interest
76

 
22

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

4

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Note 1 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.) (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, comprehensive income, financial condition, and cash flows in conformity with U.S. GAAP. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results of Medtronic plc and its subsidiaries (Medtronic plc, Medtronic or the Company) for the periods presented. Medtronic plc is the successor registrant to Medtronic, Inc.
Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended April 24, 2015.
The Company’s fiscal years 2016, 2015, and 2014 will end or ended on April 29, 2016, April 24, 2015, and April 25, 2014, respectively. Fiscal year 2016 is a 53-week year, and the extra week occured during the first quarter.
Note 2 – New Accounting Pronouncements
Recently Adopted
In April 2014, the Financial Accounting Standards Board (FASB) issued amended guidance for reporting discontinued operations. The amended guidance changes the criteria for determining when the results of operations are to be reported as discontinued operations and expands the related disclosure requirements. The guidance defines a discontinued operation as a component or group of components that is disposed of or classified as held for sale, which is a strategic shift that has, or will have, a major effect on financial position and results of operations. The Company prospectively adopted this accounting guidance in the first quarter of fiscal year 2016. Its adoption did not have a material impact on the Company's condensed consolidated financial statements.
Not Yet Adopted
In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue in an amount that reflects the consideration to which an entity expects to be entitled in exchange for the transfer of goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In July 2015, the FASB voted to approve a one year deferral of the effective date of the amended revenue recognition guidance. As a result, this accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2019 using one of two prescribed retrospective methods. The Company is evaluating the impact of the amended revenue recognition guidance on the Company’s condensed consolidated financial statements.


5

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 3 – Acquisitions and Acquisition-Related Items
The Company had various acquisitions and other acquisition-related activity during the first quarter of fiscal years 2016 and 2015. Certain acquisitions were accounted for as business combinations as noted below. In accordance with authoritative guidance on business combination accounting, the assets and liabilities of the companies acquired were recorded and consolidated as of the acquisition date at their respective fair values. Unless otherwise disclosed, 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 months ended July 31, 2015 or July 25, 2014. The results of operations related to each company acquired have been included in the Company's condensed consolidated statements of income since the date each company was acquired.
Acquisition of Covidien public limited company
On January 26, 2015 (Acquisition Date), pursuant to the transaction agreement, dated as of June 15, 2014 (the Transaction Agreement), the Company acquired Covidien plc (Covidien), and Covidien and Medtronic, Inc. became subsidiaries of Medtronic (collectively, the Transactions). In connection with the consummation of the Transactions, Medtronic re-registered as a public limited company organized under the laws of Ireland.
On January 26, 2015, (a) each Covidien ordinary share was converted into the right to receive $35.19 in cash and 0.956 of a newly issued Medtronic plc ordinary share (the Arrangement Consideration) in exchange for each Covidien share held by such shareholders, and (b) each share of Medtronic, Inc. common stock was converted into the right to receive one Medtronic plc ordinary share. Total consideration was approximately $50 billion, consisting of $16 billion cash and $34 billion of non-cash consideration. Based on the number of outstanding shares of Medtronic, Inc. and Covidien as of January 23, 2015 (the last business day prior to the close of the transaction), former Medtronic, Inc. and Covidien shareholders held approximately 69 percent and 31 percent, respectively, of the Company's ordinary shares after giving effect to the acquisition.
Covidien is a global leader in the development, manufacture, and sale of healthcare products for use in clinical and home settings. The operating results for Covidien are included in the Minimally Invasive Therapies Group, Cardiac and Vascular Group and Restorative Therapies Group segments.
Fair Value of Assets Acquired and Liabilities Assumed
The Company accounted for the acquisition of Covidien as a business combination using the acquisition method of accounting. The assets acquired and liabilities assumed were recorded at their respective fair values as of the Acquisition Date. Based upon a preliminary acquisition valuation, the Company acquired $18.3 billion of customer-related intangible assets, $7.0 billion of technology-based intangible assets, $0.4 billion of tradenames, with weighted average estimated useful lives of 18, 16, and 6 years, respectively, $0.4 billion of in-process research and development (IPR&D), and $29.6 billion of goodwill.
During the three months ended July 31, 2015, the Company made opening balance sheet adjustments to update estimates primarily related to other current assets, intangible assets, goodwill, certain property values, and the related deferred tax impacts. The largest opening balance sheet adjustment related to a $121 million receivable as a result of the settlement reached with C.R. Bard, Inc. (Bard). For additional information on the Company's pelvic mesh litigation, see Note 16 to the condensed consolidated financial statements. The fair value of assets acquired and liabilities assumed continues to be evaluated. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional opening balance sheet adjustments will be recorded. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations. The finalization of the opening balance sheet will result in a change in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company's results of operations and financial position.

6

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The preliminary fair values of the assets acquired and liabilities assumed in connection with the Transactions are as follows:
(estimated in millions)
January 26, 2015
(as previously reported)
 
Adjustments
 
January 26, 2015
(as adjusted)
Accounts receivable
$
1,349

 
$

 
$
1,349

Inventories
2,222

 

 
2,222

Other current assets
2,949

 
123

 
3,072

Property, plant, and equipment
2,354

 
(22
)
 
2,332

Goodwill
29,586

 
33

 
29,619

Intangible assets
26,265

 
(71
)
 
26,194

Other assets
747

 
(25
)
 
722

Total assets acquired
65,472

 
38

 
65,510

 
 
 
 
 
 
Short-term borrowings
1,011

 

 
1,011

Other current liabilities
2,331

 
9

 
2,340

Long-term debt
4,623

 

 
4,623

Long-term deferred tax liabilities
4,736

 
41

 
4,777

Other long-term liabilities
2,783

 
(12
)
 
2,771

Total liabilities assumed
15,484

 
38

 
15,522

Net assets acquired
$
49,988

 
$

 
$
49,988

Contingent liabilities assumed as part of the Transactions total $2.2 billion and are included within accrued income taxes, other accrued expenses, long-term accrued income taxes, and other long-term liabilities in the condensed consolidated balance sheet. These contingent liabilities include $1.5 billion related to income taxes (including uncertain tax positions and guarantee commitments), $0.5 billion related to legal claims (including product liability), and $0.2 billion related to environmental matters. Contingent liabilities are recorded at their estimated fair values, aside from those pertaining to uncertainty in income taxes which are an exception to the fair value basis of accounting. Legal matters and certain environmental matters that are legal in nature are recorded at their respective probable and estimable amounts. See Note 16 to the condensed consolidated financial statements for additional background on contingent liabilities. The estimated fair values noted above are preliminary and are subject to change upon finalization of the purchase accounting assessment and may have a material impact on the Company's results of operations and financial position.
For additional information related to the Transactions, see Note 2 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended April 24, 2015.


7

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Fiscal Year 2016
The fair values of the assets acquired and liabilities assumed during the first quarter of fiscal year 2016 are as follows:
(in millions)
CardioInsight Technologies, Inc.
 
Aptus Endosystems, Inc.
 
All Other
 
Total
Other current assets
$
11

 
$
5

 
$

 
$
16

Property, plant, and equipment

 
1

 

 
1

IPR&D
48

 
14

 

 
62

Other intangible assets

 
78

 
6

 
84

Goodwill
80

 
15

 

 
95

Other assets
6

 

 

 
6

Total assets acquired
145

 
113

 
6

 
264

 
 
 
 
 
 
 
 
Current liabilities
4

 
1

 
1

 
6

Long-term deferred tax liabilities, net
18

 

 

 
18

Total liabilities assumed
22

 
1

 
1

 
24

Net assets acquired
$
123

 
$
112

 
$
5

 
$
240

CardioInsight Technologies, Inc.
On June 18, 2015, the Company's Cardiac Rhythm & Heart Failure division acquired CardioInsight Technologies, Inc. (CardioInsight), a privately-held medical device company that has developed a new approach to improve the mapping of electrical disorders of the heart. Total consideration for the transaction was approximately $123 million, which included an upfront payment of $73 million, settlement of outstanding debt to Medtronic of $25 million, and the estimated fair value of revenue-based contingent consideration of $25 million. Based upon a preliminary acquisition valuation, the Company acquired $48 million of IPR&D and $80 million of goodwill. The acquired goodwill is not deductible for tax purposes.
Aptus Endosystems, Inc.
On June 19, 2015, the Company's Aortic & Peripheral Vascular division acquired certain assets and liabilities of Aptus Endosystems, Inc. (Aptus), a privately-held medical device company focused on developing advanced technology for endovascular aneurysm repair and thoracic endovascular aneurysm repair. Total consideration for the transaction was approximately $112 million. Based upon a preliminary acquisition valuation, the Company acquired $78 million of technology-based intangible assets with an estimated useful life of 18 years at the time of acquisition, $14 million of IPR&D, and $15 million of goodwill. The acquired goodwill is deductible for tax purposes.
The Company accounted for the acquisitions of CardioInsight and Aptus as business combinations using the acquisition method of accounting.
Subsequent and Pending Acquisitions
On August 11, 2015, the Company's Surgical Solutions division acquired RF Surgical Systems, Inc., a medical device company focused on the detection and prevention of retained surgical sponges. Total consideration for the transaction was approximately $240 million.
On August 25, 2015, the Company's Coronary & Structural Heart division entered into a definitive agreement to acquire Twelve, Inc., a privately-held medical device company focused on the development of a transcatheter mitral valve replacement device. Medtronic has agreed to pay up to approximately $458 million, including a $408 million upfront payment and $50 million upon achievement of CE Mark.
On August 31, 2015, the Company's Neurovascular division acquired Medina Medical (Medina), a privately-held medical device company focused on commercializing treatments for vascular abnormalities of the brain, including cerebral aneurysms. Medtronic had previously invested in Medina and held an 11 percent ownership position. Total consideration for the transaction includes an initial payment of $150 million, net of cash acquired, plus additional payments upon achievement of key milestones.

8

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Acquisition-Related Items
During the three months ended July 31, 2015, the Company recorded acquisition-related items of $71 million primarily due to integration related costs incurred in connection with the Covidien acquisition.
Fiscal Year 2015
The fair values of the assets acquired and liabilities assumed from acquisitions during fiscal year 2015, other than the Covidien acquisition, are as follows:
(in millions)
NGC Medical S.p.A.
 
Sapiens Steering Brain Stimulation
 
Corventis, Inc.
 
All Other
 
Total
Other current assets
$
55

 
$
3

 
$
2

 
$
10

 
$
70

Property, plant, and equipment
15

 
1

 
1

 
1

 
18

IPR&D

 
30

 

 
41

 
71

Other intangible assets
159

 

 
80

 
77

 
316

Goodwill
197

 
170

 
48

 
58

 
473

Other assets
3

 
3

 
31

 
18

 
55

Total assets acquired
429

 
207

 
162

 
205

 
1,003

 
 
 
 
 
 
 
 
 
 
Current liabilities
34

 
4

 
2

 
4

 
44

Long-term deferred tax liabilities, net
51

 

 
29

 
37

 
117

Other liabilities
4

 

 

 

 
4

Total liabilities assumed
89

 
4

 
31

 
41

 
165

Net assets acquired
$
340

 
$
203

 
$
131

 
$
164

 
$
838

The Company accounted for the acquisitions above as business combinations using the acquisition method of accounting.
Other Acquisitions and Acquisition-Related Items
During the three months ended July 25, 2014, the Company's recorded acquisition-related items of $41 million primarily due to costs incurred in connection with the Covidien acquisition.
Contingent Consideration
Certain of the Company’s business combinations and purchases of intellectual property involve the potential for the payment of future contingent consideration upon the achievement of certain product development milestones and/or various other favorable operating conditions. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels or achieving product development targets. For business combinations subsequent to April 24, 2009, a liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. For business combinations or purchases of intellectual property prior to April 24, 2009, the estimated maximum amount of undiscounted future contingent consideration payments that the Company expected to make was approximately $191 million at July 31, 2015. The Company estimates the milestones or other conditions associated with the contingent consideration will be reached in fiscal year 2016 and thereafter.
The fair value of the contingent consideration is remeasured at each reporting period and the change in fair value recognized as income or expense within acquisition-related items in the condensed consolidated statements of income. The Company measures the liability on a recurring basis using Level 3 inputs. The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues (for revenue-based considerations). Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected revenues are based on the Company’s most recent internal operational budgets and long-range strategic plans. Increases (decreases) in projected revenues, probabilities of payment, discount rates, or projected payment dates may result in a higher (lower) fair value measurement. Fluctuations in any of the inputs may result in a significantly lower (higher) fair value measurement.

9

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The recurring Level 3 fair value measurements of contingent consideration include the following significant unobservable inputs:
 
 
Fair Value at
 
 
 
 
 
 
($ in millions)
 
July 31, 2015
 
Valuation Technique
 
Unobservable Input
 
Range
 
 
 
 
 
 
Discount rate
 
11% - 27%
Revenue-based payments
 
$184
 
Discounted cash flow
 
Probability of payment
 
55% - 100%
 
 
 
 
 
 
Projected fiscal year of payment
 
2016 - 2025
 
 
 
 
 
 
Discount rate
 
0.3% - 5.5%
Product development-based payments
 
$107
 
Discounted cash flow
 
Probability of payment
 
15% - 100%
 
 
 
 
 
 
Projected fiscal year of payment
 
2016 - 2020
The fair value of contingent consideration associated with acquisitions subsequent to April 24, 2009, as of July 31, 2015 and April 24, 2015, was $291 million and $264 million, respectively. As of July 31, 2015, $226 million was reflected in other long-term liabilities and $65 million was reflected in other accrued expenses in the condensed consolidated balance sheets. As of April 24, 2015, $242 million was reflected in other long-term liabilities and $22 million was reflected in other accrued expenses in the condensed consolidated balance sheets. The portion of the contingent consideration paid related to the acquisition date fair value is reported as financing activities in the condensed consolidated statements of cash flows. Amounts paid in excess of the original acquisition date fair value are reported as operating activities in the condensed consolidated statements of cash flows. The following table provides a reconciliation of the beginning and ending balances of contingent consideration associated with acquisitions subsequent to April 24, 2009:
 
Three months ended
(in millions)
July 31, 2015
 
July 25, 2014
Beginning Balance
$
264

 
$
68

Purchase price contingent consideration
26

 
23

Contingent consideration payments
(3
)
 
(5
)
Change in fair value of contingent consideration
4

 
1

Ending Balance
$
291

 
$
87

Note 4 – Restructuring Charges, Net
Cost Synergies Initiative
The cost synergies initiative, initially referred to as the fiscal year 2015 initiative, was the beginning of the Company's restructuring program primarily related to the acquisition of Covidien. This initiative is expected to contribute to the approximately $850 million in cost synergies expected to be achieved as a result of the Covidien acquisition through fiscal year 2018, including administrative office optimization, manufacturing and supply chain infrastructure, certain program cancellations, and certain general and administrative savings. Restructuring charges are expected to be incurred on a quarterly basis throughout fiscal year 2016 and in future fiscal years as cost synergy initiatives are finalized.
In the fourth quarter of fiscal year 2015, the Company recorded a $248 million restructuring charge, which consisted of employee termination costs of $213 million, asset write-downs of $28 million, contract termination costs of $6 million, and other related costs of $1 million. Of the $28 million of asset write-downs, $15 million related to inventory write-offs of discontinued product lines and production-related asset impairments, and therefore, was recorded within cost of products sold in the consolidated statements of income. In the first quarter of fiscal year 2016, the Company recorded a $67 million restructuring charge in connection with the cost synergies initiative, which consisted primarily of employee termination costs of $52 million and other related costs of $15 million. Restructuring accruals resulting from quarterly restructuring charges incurred within the cost synergies initiative are scheduled to be substantially complete within one year from the quarter the restructuring charge was initially incurred.

10

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


A summary of the activity related to the cost synergies initiative is presented below:
(in millions)
Employee
Termination
Costs
 
Other Costs
 
Total
Balance as of April 24, 2015
$
136

 
$
7

 
$
143

Restructuring charges
52

 
15

 
67

Payments/write-downs
(76
)
 
(7
)
 
(83
)
Balance as of July 31, 2015
$
112

 
$
15

 
$
127

Covidien Initiative
Covidien's pre-acquisition restructuring program is designed to improve legacy Covidien's cost structure. The program consists of reducing corporate expenses, expanding shared services, consolidating manufacturing locations, and optimizing distribution centers. The Covidien restructuring initiative is scheduled to be substantially complete by the end of fiscal year 2018.
At the Acquisition Date, the Company reserved $103 million in connection with the Covidien initiative, which consisted of employee termination costs of $76 million and other costs of $27 million. In the fourth quarter of fiscal year 2015, the Company recorded a reversal of excess restructuring reserves related to the Covidien initiative of $5 million. The reversal was primarily the result of certain employees identified for elimination finding other positions within the Company and revisions to particular strategies.
A summary of the activity related to the Covidien initiative is presented below:
(in millions)
Employee
Termination
Costs
 
Other Costs
 
Total
Balance as of April 24, 2015
$
61

 
$
17

 
$
78

Payments
(13
)
 
(5
)
 
(18
)
Balance as of July 31, 2015
$
48

 
$
12

 
$
60


11

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 5 – Investments
The Company holds investments consisting primarily of marketable debt and equity securities.
Information regarding the Company’s investments at July 31, 2015 is as follows:
(in millions)
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Available-for-sale securities:
 

 
 

 
 

 
 

Corporate debt securities
$
6,579

 
$
54

 
$
(32
)
 
$
6,601

Auction rate securities
109

 

 
(7
)
 
102

Mortgage-backed securities
1,543

 
14

 
(13
)
 
1,544

U.S. government and agency securities
3,249

 
10

 
(10
)
 
3,249

Foreign government and agency securities
63

 

 

 
63

Certificates of deposit
45

 

 

 
45

Other asset-backed securities
500

 
2

 

 
502

Debt funds
3,149

 
8

 
(236
)
 
2,921

Marketable equity securities
40

 
22

 
(1
)
 
61

Trading securities:
 

 
 

 
 

 
 

Exchange-traded funds
62

 
17

 

 
79

Cost method, equity method, and other investments
497

 

 

 
NA

Total investments
$
15,836

 
$
127

 
$
(299
)
 
$
15,167

Information regarding the Company’s investments at April 24, 2015 is as follows:
(in millions)
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Available-for-sale securities:
 

 
 

 
 

 
 

Corporate debt securities
$
6,283

 
$
105

 
$
(10
)
 
$
6,378

Auction rate securities
109

 

 
(4
)
 
105

Mortgage-backed securities
1,462

 
22

 
(6
)
 
1,478

U.S. government and agency securities
3,122

 
21

 
(4
)
 
3,139

Foreign government and agency securities
85

 

 

 
85

Certificates of deposit
44

 

 

 
44

Other asset-backed securities
504

 
3

 

 
507

Debt funds
3,061

 
19

 
(150
)
 
2,930

Marketable equity securities
64

 
35

 
(19
)
 
80

Trading securities:
 

 
 

 
 

 
 

Exchange-traded funds
58

 
19

 

 
77

Cost method, equity method, and other investments
520

 

 

 
NA

Total investments
$
15,312

 
$
224

 
$
(193
)
 
$
14,823

Information regarding the Company’s condensed consolidated balance sheets presentation at July 31, 2015 and April 24, 2015 is as follows:
 
July 31, 2015
 
April 24, 2015
(in millions)
Investments
 
Other Assets
 
Investments
 
Other Assets
Available-for-sale securities
$
14,924

 
$
164

 
$
14,560

 
$
186

Trading securities
79

 

 
77

 

Cost method, equity method, and other investments

 
497

 

 
520

Total
$
15,003

 
$
661

 
$
14,637

 
$
706


12

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following tables show the gross unrealized losses and fair values of the Company’s available-for-sale securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category as of July 31, 2015 and April 24, 2015:
 
July 31, 2015
 
Less than 12 months
 
More than 12 months
(in millions)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate debt securities
$
2,677

 
$
(29
)
 
$
71

 
$
(3
)
Auction rate securities

 

 
102

 
(7
)
Mortgage-backed securities
642

 
(9
)
 
242

 
(4
)
U.S. government and agency securities
958

 
(7
)
 
263

 
(3
)
Debt funds
1,676

 
(131
)
 
715

 
(105
)
Marketable equity securities
4

 
(1
)
 

 

Total
$
5,957

 
$
(177
)
 
$
1,393

 
$
(122
)
 
April 24, 2015
 
Less than 12 months
 
More than 12 months
(in millions)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate debt securities
$
944

 
$
(9
)
 
$
34

 
$
(1
)
Auction rate securities

 

 
105

 
(4
)
Mortgage-backed securities
346

 
(3
)
 
206

 
(3
)
U.S. government and agency securities
356

 
(1
)
 
267

 
(3
)
Debt funds
1,291

 
(109
)
 
559

 
(41
)
Marketable equity securities
4

 
(19
)
 

 

Total
$
2,941

 
$
(141
)
 
$
1,171

 
$
(52
)

Activity related to the Company’s investment portfolio is as follows:
 
Three months ended
 
July 31, 2015
 
July 25, 2014
(in millions)
Debt (a)
 
Equity (b)
 
Debt (a)
 
Equity (b)
Proceeds from sales
$
1,237

 
$
29

 
$
1,830

 
$
23

Gross realized gains
5

 
12

 
11

 
19

Gross realized losses
(5
)
 

 
(3
)
 

Impairment losses recognized

 
(23
)
 

 
(1
)
(a) Includes available-for-sale debt securities.
(b) Includes marketable equity securities, cost method, equity method, exchange-traded funds, and other investments.
Credit losses represent the difference between the present value of cash flows expected to be collected on certain mortgage-backed securities and auction rate securities and the amortized cost of these securities. Based on the Company’s assessment of the credit quality of the underlying collateral and credit support available to each of the remaining securities in which invested, the Company believes it has recorded 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.
As of July 31, 2015 and April 24, 2015, the credit loss portion of other-than temporary impairments on debt securities was not significant. The total reductions for available-for-sale debt securities sold during the three months ended July 31, 2015 and July 25, 2014 were not significant. The total other-than-temporary impairment losses on available-for-sale debt securities for the three months ended July 31, 2015 and July 25, 2014 were not significant.

13

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The July 31, 2015 balance of available-for-sale debt securities, excluding debt funds which have no single maturity date, by contractual maturity is shown in the following table. Within the table, maturities of mortgage-backed securities have been allocated based upon timing of estimated cash flows assuming no change in the current interest rate environment. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
(in millions)
July 31, 2015
Due in one year or less
$
2,165

Due after one year through five years
6,559

Due after five years through ten years
3,191

Due after ten years
191

Total
$
12,106

The Company holds investments in marketable equity securities which are classified as investments in the condensed consolidated balance sheets. The aggregate carrying amount of these investments was $61 million and $80 million as of July 31, 2015 and April 24, 2015, respectively. During the three months ended July 31, 2015, the Company determined that the fair value of certain marketable equity securities were below their carrying values and that the carrying values of these investments were not expected to be recoverable within a reasonable period of time. As a result, the Company recognized $20 million in impairment charges for the three months ended July 31, 2015, which were recorded within other expense, net in the condensed consolidated statements of income. The Company did not record any significant impairment charges related to marketable equity securities during the three months ended July 25, 2014.
As of July 31, 2015 and April 24, 2015, the aggregate carrying amount of equity and other securities without a quoted market price and accounted for using the cost or equity method was $497 million and $520 million, respectively. The total carrying value of these investments is reviewed quarterly for changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable. The value of cost or equity method investments is not adjusted if there are no identified events or changes in circumstances that may have a material adverse effect on the fair value of the investment. The Company did not record any significant impairment charges related to cost method investments during the three months ended July 31, 2015.
Note 6 – Fair Value Measurements
Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis
The authoritative guidance is principally applied to financial assets and liabilities such as marketable equity securities and debt and equity securities that are classified and accounted for as trading and available-for-sale, as well as derivative instruments and contingent consideration associated with acquisitions subsequent to April 24, 2009. Derivatives include cash flow hedges, freestanding derivative forward contracts, and fair value hedges. These items are marked-to-market at each reporting period.

14

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis:
 
Fair Value as of July 31, 2015
 
Fair Value Measurements
Using Inputs Considered as
(in millions)
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

Corporate debt securities
$
6,601

 
$

 
$
6,600

 
$
1

Auction rate securities
102

 

 

 
102

Mortgage-backed securities
1,544

 

 
1,544

 

U.S. government and agency securities
3,249

 
1,600

 
1,649

 

Foreign government and agency securities
63

 

 
63

 

Certificates of deposit
45

 

 
45

 

Other asset-backed securities
502

 

 
502

 

Debt funds
2,921

 

 
2,921

 

Marketable equity securities
61

 
61

 

 

Exchange-traded funds
79

 
79

 

 

Derivative assets
594

 
527

 
67

 

Total assets
$
15,761

 
$
2,267

 
$
13,391

 
$
103

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
114

 
73

 
41

 

Contingent consideration associated with acquisitions subsequent to April 24, 2009
291

 

 

 
291

Total liabilities
$
405

 
$
73

 
$
41

 
$
291

 
Fair Value as of April 24, 2015
 
Fair Value Measurements
Using Inputs Considered as
(in millions)
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

Corporate debt securities
$
6,378

 
$

 
$
6,377

 
$
1

Auction rate securities
105

 

 

 
105

Mortgage-backed securities
1,478

 

 
1,478

 

U.S. government and agency securities
3,139

 
1,541

 
1,598

 

Foreign government and agency securities
85

 

 
85

 

Certificates of deposit
44

 

 
44

 

Other asset-backed securities
507

 

 
507

 

Debt funds
2,930

 

 
2,930

 

Marketable equity securities
80

 
80

 

 

Exchange-traded funds
77

 
77

 

 

Derivative assets
733

 
644

 
89

 

Total assets
$
15,556

 
$
2,342

 
$
13,108

 
$
106

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivative liabilities
$
116

 
$
45

 
$
71

 
$

Contingent consideration associated with acquisitions subsequent to April 24, 2009
264

 

 

 
264

Total liabilities
$
380

 
$
45

 
$
71

 
$
264



15

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table represents the range of the unobservable inputs utilized in the fair value measurement of the auction rate securities classified as Level 3 as of July 31, 2015:
 
Valuation Technique
Unobservable Input
Range (Weighted Average)
Auction rate securities
Discounted cash flow
Years to principal recovery
2 yrs. - 12 yrs. (3 yrs.)
Illiquidity premium
6%
The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1, Level 2, or Level 3 during the three months ended July 31, 2015 or July 25, 2014. 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.
The following tables provide a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3):
Three months ended July 31, 2015
 

 
 

 
 

(in millions)
Total Level 3
Investments
 
Corporate Debt
Securities
 
Auction Rate
Securities
Balance as of April 24, 2015
$
106

 
$
1

 
$
105

Total unrealized (losses) included in other comprehensive income
(3
)
 

 
(3
)
Balance as of July 31, 2015
$
103

 
$
1

 
$
102

 
 
 
 
 
 
Three months ended July 25, 2014
 

 
 

 
 

(in millions)
Total Level 3
Investments
 
Corporate Debt
Securities
 
Auction Rate
Securities
Balance as of April 25, 2014
$
106

 
$
9

 
$
97

Total unrealized gains included in other comprehensive income
2

 

 
2

Balance as of July 25, 2014
$
108

 
$
9

 
$
99

Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis
Non-financial assets such as equity and other securities that are accounted for using the cost or equity method, goodwill and IPR&D, intangible assets, and property, plant, and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized.
The Company holds investments in equity and other securities that are accounted for using the cost or equity method, which are classified as other assets in the condensed consolidated balance sheets. The aggregate carrying amount of these investments was $497 million as of July 31, 2015 and $520 million as of April 24, 2015. These cost or equity method investments are measured at fair value on a nonrecurring basis. The fair value of the Company’s cost or equity method investments is not estimated if there are no identified events or changes in circumstance that may have a significant adverse effect on the fair value of these investments. The Company did not record any significant impairment charges related to cost method investments during the three months ended July 31, 2015. The Company recognized $9 million in impairment charges during the three months ended July 25, 2014. These investments fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value, as the investments are privately-held entities without quoted market prices. To determine the fair value of these investments, the Company used all pertinent financial information available related to the entities, including financial statements and market participant valuations from recent and proposed equity offerings.
The Company assesses the impairment of goodwill annually in the third quarter at the reporting unit level and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The aggregate carrying amount of goodwill was $40.657 billion and $40.530 billion as of July 31, 2015 and April 24, 2015, respectively. The Company did not record any goodwill impairment during the three months ended July 31, 2015 or July 25, 2014.
The Company assesses IPR&D for impairment annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The aggregate carrying amount of IPR&D was $556 million and $470 million as of July 31, 2015 and April 24, 2015, respectively. Similar to the goodwill impairment test, the IPR&D impairment test 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 IPR&D asset fair values over their carrying values utilizing a

16

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


discounted future cash flow analysis. During the three months ended July 31, 2015 and July 25, 2014, the Company did not record any significant IPR&D impairments. Due to the nature of IPR&D projects, the Company may experience future delays or failures to obtain regulatory approvals to conduct clinical trials, failures of such clinical trials, delays or failures to obtain required market clearances or other failures to achieve a commercially viable product, and as a result, may record impairment losses in the future.
The Company assesses 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. The aggregate carrying amount of intangible assets, excluding IPR&D and non-amortizable tradenames, was $27.143 billion as of July 31, 2015 and $27.381 billion as of April 24, 2015. 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 recorded based on the amount by which the carrying value exceeds the fair value. The inputs used in the fair value analysis fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. The Company did not record any significant intangible asset impairments during the three months ended July 31, 2015 or July 25, 2014.
The Company assesses property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of property, plant, and equipment assets may not be recoverable. The Company did not record any significant impairments of property, plant, and equipment during the three months ended July 31, 2015. As part of the Company’s restructuring initiatives, the Company recorded property, plant, and equipment impairments of $9 million during the three months ended July 25, 2014 within restructuring charges, net in the condensed consolidated statements of income. For further discussion of the restructuring initiatives refer to Note 4 to the condensed consolidated financial statements.
Financial Instruments Not Measured at Fair Value
As of July 31, 2015, the total estimated fair value of the Company’s long-term debt, including the short-term portion, was $31.924 billion compared to a principal value of $31.125 billion; as of April 24, 2015, the total estimated fair value was $34.637 billion compared to a principal value of $32.125 billion.The fair value was estimated using quoted market prices for the publicly registered senior notes, which are classified as Level 2 within the fair value hierarchy. The fair values and principal values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.
Note 7 – Financing Arrangements
Commercial Paper
The Company maintains a commercial paper program that allows the Company to have a maximum of $3.500 billion in commercial paper outstanding, with maturities up to 364 days from the date of issuance. Commercial paper amounts outstanding as of July 31, 2015 totaled $425 million. No amounts were outstanding as of April 24, 2015. During the three months ended July 31, 2015, the weighted average original maturity of the commercial paper outstanding was approximately 37 days, and the weighted average interest rate was 0.33 percent. The issuance of commercial paper proportionately reduced the amount of credit available under the Company’s existing Credit Facility, as defined below.
Line of Credit
The Company has a $3.500 billion five year credit facility (Credit Facility) which provides back up funding for the commercial paper program described above. As of July 31, 2015 and April 24, 2015, no amounts were outstanding.
Interest rates 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 agreement also contains customary covenants, all of which the Company remained in compliance with as of July 31, 2015.

17

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Long-Term Debt
Long-term debt consisted of the following:
(in millions, except interest rates)
 
Maturity by
Fiscal Year
 
Payable as of July 31, 2015
 
Payable as of April 24, 2015
Floating rate three-year 2014 senior notes
 
2017
 
$
250

 
$
250

0.875 percent three-year 2014 senior notes
 
2017
 
250

 
250

6.000 percent ten-year 2008 CIFSA senior notes
 
2018
 
1,150

 
1,150

1.500 percent three-year 2015 senior notes
 
2018
 
1,000

 
1,000

1.375 percent five-year 2013 senior notes
 
2018
 
1,000

 
1,000

5.600 percent ten-year 2009 senior notes
 
2019
 
400

 
400

4.450 percent ten-year 2010 senior notes
 
2020
 
1,250

 
1,250

4.200 percent ten-year 2010 CIFSA senior notes
 
2020
 
600

 
600

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

 
2,500

Floating rate five-year 2015 senior notes
 
2020
 
500

 
500

4.125 percent ten-year 2011 senior notes
 
2021
 
500

 
500

3.125 percent ten-year 2012 senior notes
 
2022
 
675

 
675

3.200 percent ten-year 2012 CIFSA senior notes
 
2022
 
650

 
650

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

 
2,500

2.750 percent ten-year 2013 senior notes
 
2023
 
1,250

 
1,250

2.950 percent ten-year 2013 CIFSA senior notes
 
2023
 
750

 
750

3.625 percent ten-year 2014 senior notes
 
2024
 
850

 
850

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

 
4,000

4.375 percent twenty-year 2015 senior notes
 
2035
 
2,500

 
2,500

6.550 percent thirty-year 2007 CIFSA senior notes
 
2037
 
850

 
850

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
 
750

 
750

4.625 percent thirty-year 2014 senior notes
 
2044
 
650

 
650

4.625 percent thirty-year 2015 senior notes
 
2045
 
4,000

 
4,000

Three-year term loan
 
2018
 
3,000

 
3,000

Interest rate swaps (Note 8)
 
2017 - 2022
 
62

 
79

Deferred gains from interest rate swap terminations, net
 
-
 
1

 
3

Capital lease obligations
 
2017 - 2025
 
125

 
129

Bank borrowings
 
2021
 
38

 
17

Debt premium
 
2017 - 2045
 
458

 
499

Total Long-Term Debt
 
 
 
$
33,709

 
$
33,752

Senior Notes
The Company has outstanding unsecured senior obligations including those indicated as senior notes in the long-term debt 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 remains in compliance with as of July 31, 2015. The Company used the net proceeds from the sale of the Senior Notes primarily for working capital and general corporate uses, which includes the repayment of other indebtedness of the Company, and to fund the acquisition of Covidien in fiscal year 2015. For additional information regarding the terms of these agreements, refer to Note 8 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended April 24, 2015.

18

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 8 – Derivatives and Foreign 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 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 forward contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. The primary currencies of the derivative instruments are the Euro and Japanese Yen. The Company does not enter into currency exchange rate derivative contracts for speculative purposes. The gross notional amount of all currency exchange rate derivative instruments outstanding at July 31, 2015 and April 24, 2015 was $9.240 billion and $9.782 billion, respectively. The aggregate currency exchange rate gains (losses) for the three months ended July 31, 2015 and July 25, 2014 were $43 million and $(12) million, respectively.
The information that follows explains the various types of derivatives and financial instruments used by the Company, how and why the Company uses such instruments, and how such instruments impact the Company’s condensed consolidated balance sheets, statements of income, and statements of cash flows.
Freestanding Derivative Forward Contracts
Freestanding derivative forward 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 a foreign currency. The gross notional amount of these contracts, not designated as hedging instruments, outstanding at July 31, 2015 and April 24, 2015, was $3.447 billion and $4.713 billion, respectively.
The amount and location of the gains (losses) in the condensed consolidated statements of income related to derivative instruments, not designated as hedging instruments, for the three months ended July 31, 2015 and July 25, 2014 are as follows:
(in millions)
 
 
 
Three months ended
Derivatives Not Designated as Hedging Instruments
 
Location
 
July 31, 2015
 
July 25, 2014
Foreign currency exchange rate contracts gains (losses)
 
Other expense, net
 
$
20

 
$
(24
)
 
 
 
 
 
 
 
Cash Flow Hedges
Foreign 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. No gains or losses relating to ineffectiveness of foreign currency cash flow hedges were recognized in earnings during the three months ended July 31, 2015 or July 25, 2014. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness and no hedges were derecognized or discontinued during the three months ended July 31, 2015 or July 25, 2014. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at July 31, 2015 and April 24, 2015, was $5.793 billion and $5.069 billion, respectively, and will mature within the subsequent three and two-year period, respectively.

19

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The amount of gains (losses) and location of the gains (losses) in the condensed consolidated statements of income and other comprehensive income (OCI) related to foreign currency exchange rate contract derivative instruments designated as cash flow hedges for the three months ended July 31, 2015 and July 25, 2014 are as follows:
Three months ended July 31, 2015
 
 

 
 
 
 

 
 
Gross Gains (Losses) Recognized in OCI
on Effective Portion of Derivative
 
Effective Portion of Gains (Losses) on Derivative Reclassified from
AOCI into Income
(in millions)
 
 
Derivatives in Cash Flow
Hedging Relationships
 
Amount
 
Location
 
Amount
Foreign currency exchange rate contracts
 
$
(14
)
 
Other expense, net
 
$
95

 
 
 

 
Cost of products sold
 
(21
)
Total
 
$
(14
)
 
 
 
$
74

Three months ended July 25, 2014
 
 

 
 
 
 

 
 
Gross Gains (Losses) Recognized in OCI
on Effective Portion of Derivative
 
Effective Portion of Gains (Losses) on Derivative Reclassified from
AOCI into Income
(in millions)
 
 
Derivatives in Cash Flow
Hedging Relationships
 
Amount
 
Location
 
Amount
Foreign currency exchange rate contracts
 
$
62

 
Other expense, net
 
$
2

 
 
 

 
Cost of products sold
 
(3
)
Total
 
$
62

 
 
 
$
(1
)
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. As of July 31, 2015, the Company had $800 million of fixed pay, forward starting interest rate swaps with a weighted average fixed-rate of 2.99 percent in anticipation of planned debt issuances.
For the three months ended July 31, 2015, the Company reclassified $3 million of the effective portion of the net losses on forward starting interest rate derivative instruments from accumulated other comprehensive loss to interest expense, net. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness, and no significant hedge ineffectiveness was recorded for the three months ended July 31, 2015.
For the three months ended July 25, 2014, the Company reclassified $2 million of the effective portion of the net losses on forward starting interest rate derivative instruments from accumulated other comprehensive loss to interest expense, net.
The unrealized losses on outstanding forward starting interest rate swap derivative instruments as of July 31, 2015 and April 24, 2015 were $40 million and $71 million, respectively. Unrealized losses on outstanding forward starting interest rate swap derivative instruments were recorded in other long-term liabilities, with the offset recorded in accumulated other comprehensive loss in the condensed consolidated balance sheets.
As of July 31, 2015 and April 24, 2015, the Company had $182 million and $210 million, respectively, in after-tax net unrealized gains associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $197 million of after-tax net unrealized gains as of July 31, 2015 will be reclassified into the condensed 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.
As of both July 31, 2015 and April 24, 2015, the Company had interest rate swaps in gross notional amounts of $2.025 billion designated as fair value hedges of underlying fixed-rate senior note obligations. For additional information regarding the terms of the Company’s interest rate swap agreements, refer to Note 9 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended April 24, 2015.

20

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The market value of outstanding interest rate swap agreements was a net $25 million unrealized gain, and the market value of the hedged item was a net $25 million unrealized loss at July 31, 2015, which were recorded in other assets, prepaid expenses and other current assets, and other long-term liabilities with the offsets recorded in long-term debt and short-term borrowings in the condensed consolidated balance sheets. No hedge ineffectiveness was recorded as a result of these fair value hedges for the three months ended July 31, 2015 or July 25, 2014.
During the three months ended July 31, 2015 and July 25, 2014, the Company did not have any significant ineffective fair value hedging instruments. In addition, the Company did not recognize any significant gains or losses during the three months ended July 31, 2015 or July 25, 2014 on firm commitments that no longer qualify as fair value hedges.
Balance Sheet Presentation
The following tables summarize the location and fair value amounts of derivative instruments reported in the condensed consolidated balance sheets as of July 31, 2015 and April 24, 2015. 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 and are further segregated by type of contract within those two categories.
July 31, 2015
 
 
 

 
 
 
 

 
Asset Derivatives
 
Liability Derivatives
(in millions)
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments
 
 
 

 
 
 
 

Interest rate contracts
Prepaid expenses and
other current assets
 
$
5

 
Other accrued expenses
 
$

Foreign currency exchange rate contracts
Prepaid expenses and
other current assets
 
343

 
Other accrued expenses
 
30

Interest rate contracts
Other assets
 
62

 
Other long-term liabilities
 
41

Foreign currency exchange rate contracts
Other assets
 
111

 
Other long-term liabilities
 
7

Total derivatives designated as hedging instruments
 
 
$
521

 
 
 
$
78

Derivatives not designated as hedging instruments
 
 
 

 
 
 
 

Foreign currency exchange rate contracts
Prepaid expenses and
other current assets
 
$
73

 
Other accrued expenses
 
$
36

Total derivatives not designated as hedging instruments
 
 
$
73

 
 
 
$
36

 
 
 
 
 
 
 
 
Total derivatives
 
 
$
594

 
 
 
$
114


21

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


April 24, 2015
 
 
 

 
 
 
 

 
Asset Derivatives
 
Liability Derivatives
(in millions)
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments
 
 
 

 
 
 
 

Interest rate contracts
Prepaid expenses and
other current assets
 
$
10

 
Other accrued expenses
 
$

Foreign currency exchange rate contracts
Prepaid expenses and
other current assets
 
382

 
Other accrued expenses
 
12

Interest rate contracts
Other assets
 
79

 
Other long-term liabilities
 
71

Foreign currency exchange rate contracts
Other assets
 
143

 
Other long-term liabilities
 
3

Total derivatives designated as hedging instruments
 
 
$
614

 
 
 
$
86

Derivatives not designated as hedging instruments
 
 
 

 
 
 
 

Foreign currency exchange rate contracts
Prepaid expenses and
other current assets
 
$
119

 
Other accrued expenses
 
$
30

Total derivatives not designated as hedging instruments
 
 
$
119

 
 
 
$
30

 
 
 
 
 
 
 
 
Total derivatives
 
 
$
733

 
 
 
$
116

The Company has elected to present the fair value of derivative assets and liabilities within the condensed consolidated balance sheets on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The following table provides information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria as stipulated by the terms of the master netting arrangements with each of the counterparties. Derivatives not subject to master netting arrangements are not eligible for net presentation.
July 31, 2015
 
 
 
Gross Amount Not Offset on the Balance Sheet
 
 
(in millions)
 
Gross Amount of Recognized Assets (Liabilities)
 
Financial Instruments
 
Collateral (Received) or Posted
 
Net Amount
Derivative Assets
 
 
 
 
 
 
 
 
Foreign currency exchange rate contracts
 
$
527

 
$
(75
)
 
$
(270
)
 
$
182

Interest rate contracts
 
67

 
(6
)
 
(13
)
 
48

 
 
$
594

 
$
(81
)
 
$
(283
)
 
$
230

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
 
 
 
 
 
 
Foreign currency exchange rate contracts
 
$
(73
)
 
$
58

 
$

 
$
(15
)
Interest rate contracts
 
(41
)
 
23

 

 
(18
)
 
 
$
(114
)
 
$
81

 
$

 
$
(33
)
Total
 
$
480

 
$

 
$
(283
)
 
$
197


22

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


April 24, 2015
 
 
 
Gross Amount Not Offset on the Balance Sheet
 
 
(in millions)
 
Gross Amount of Recognized Assets (Liabilities)
 
Financial Instruments
 
Collateral (Received) or Posted
 
Net Amount
Derivative Assets
 
 
 
 
 
 
 
 
Foreign currency exchange rate contracts
 
$
644

 
$
(61
)
 
$
(325
)
 
$
258

Interest rate contracts
 
89

 
(10
)
 
(13
)
 
66

 
 
$
733

 
$
(71
)
 
$
(338
)
 
$
324

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
 
 
 
 
 
 
Foreign currency exchange rate contracts
 
$
(45
)
 
$
31

 
$

 
$
(14
)
Interest rate contracts
 
(71
)
 
40

 
8

 
(23
)