SEC Filings

10-Q
MEDTRONIC PLC filed this Form 10-Q on 12/04/2017
Entire Document
 
Document


 
 
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 27, 2017
Commission File Number 001-36820
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11923245&doc=12®
MEDTRONIC PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
 
 
Ireland
98-1183488
(State of incorporation)
(I.R.S. Employer
Identification No.)
20 On Hatch, Lower Hatch Street
Dublin 2, Ireland
(Address of principal executive offices) (Zip Code)
+353 1 438-1700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Emerging growth company o
Non-accelerated filer o
 
Smaller Reporting Company o
 
 

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 1(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of November 28, 2017, 1,353,498,000 ordinary shares, par value $0.0001, 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
Consolidated Statements of Income
(Unaudited)
 
Three months ended
 
Six months ended
(in millions, except per share data)
October 27, 2017
 
October 28, 2016
 
October 27, 2017
 
October 28, 2016
Net sales
$
7,050

 
$
7,345

 
$
14,440

 
$
14,511

 
 
 
 
 
 
 
 
Costs and expenses:
 

 
 

 
 

 
 
Cost of products sold
2,120

 
2,326

 
4,469

 
4,587

Research and development expense
555

 
554

 
1,103

 
1,110

Selling, general, and administrative expense
2,438

 
2,416

 
4,923

 
4,844

Amortization of intangible assets
460

 
500

 
914

 
987

Restructuring charges, net
8

 
47

 
16

 
141

Acquisition-related items
7

 
28

 
51

 
80

Certain litigation charges

 

 

 
82

Divestiture-related items
67

 

 
114

 

Gain on sale of businesses
(697
)
 

 
(697
)
 

Special charge
80

 

 
80

 

Other expense, net
111

 
89

 
177

 
128

Operating profit
1,901

 
1,385

 
3,290

 
2,552

 
 
 
 
 
 
 
 
Interest income
(100
)
 
(91
)
 
(192
)
 
(184
)
Interest expense
273

 
264

 
559

 
536

Interest expense, net
173

 
173

 
367

 
352

Income before income taxes
1,728

 
1,212

 
2,923

 
2,200

Income tax (benefit) provision
(285
)
 
101

 
(99
)
 
160

Net income
2,013

 
1,111

 
3,022

 
2,040

Net loss attributable to noncontrolling interests
4

 
4

 
11

 
4

Net income attributable to Medtronic
$
2,017

 
$
1,115

 
$
3,033

 
$
2,044

 
 
 
 
 
 
 
 
Basic earnings per share
$
1.49

 
$
0.81

 
$
2.23

 
$
1.47

 
 
 
 
 
 
 
 
Diluted earnings per share
$
1.48

 
$
0.80

 
$
2.21

 
$
1.46

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
1,355.1

 
1,380.0

 
1,358.5

 
1,386.5

 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding
1,365.8

 
1,392.5

 
1,370.8

 
1,400.2

 
 
 
 
 
 
 
 
Cash dividends declared per ordinary share
$
0.46

 
$
0.43

 
$
0.92

 
$
0.86

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

1



Medtronic plc
Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three months ended
 
Six months ended
(in millions)
October 27, 2017
 
October 28, 2016
 
October 27, 2017
 
October 28, 2016
Net income
$
2,013

 
$
1,111

 
$
3,022

 
$
2,040

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 

 
 

 
 
 
 
Unrealized gain (loss) on available-for-sale securities
25

 
(40
)
 
55

 
75

Translation adjustment
(203
)
 
(336
)
 
628

 
(686
)
Net change in retirement obligations
15

 
19

 
14

 
44

Unrealized gain (loss) on derivatives
27

 
53

 
(144
)
 
107

Other comprehensive (loss) income
(136
)
 
(304
)
 
553

 
(460
)
Comprehensive income including noncontrolling interests
1,877

 
807

 
3,575

 
1,580

Comprehensive loss attributable to noncontrolling interests
4

 
4

 
11

 
4

Comprehensive income attributable to Medtronic
$
1,881

 
$
811

 
$
3,586

 
$
1,584

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

2



Medtronic plc
Consolidated Balance Sheets
(Unaudited)
(in millions)
October 27, 2017
 
April 28, 2017
ASSETS
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
5,529

 
$
4,967

Investments
7,997

 
8,741

Accounts receivable, less allowances of $168 and $155, respectively
5,752

 
5,591

Inventories, net
3,638

 
3,338

Other current assets
2,246

 
1,865

Current assets held for sale

 
371

Total current assets
25,162

 
24,873

 
 
 
 
Property, plant, and equipment
10,115

 
9,691

Accumulated depreciation
(5,674
)
 
(5,330
)
Property, plant, and equipment, net
4,441

 
4,361

Goodwill
39,077

 
38,515

Other intangible assets, net
22,625

 
23,407

Tax assets
1,749

 
1,509

Other assets
1,404

 
1,232

Noncurrent assets held for sale

 
5,919

Total assets
$
94,458

 
$
99,816

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Current debt obligations
$
3,131

 
$
7,520

Accounts payable
1,718

 
1,731

Accrued compensation
1,502

 
1,860

Accrued income taxes
872

 
633

Other accrued expenses
3,273

 
2,442

Current liabilities held for sale

 
34

Total current liabilities
10,496

 
14,220

 
 
 
 
Long-term debt
25,941

 
25,921

Accrued compensation and retirement benefits
1,475

 
1,641

Accrued income taxes
2,194

 
2,405

Deferred tax liabilities
1,841

 
2,978

Other liabilities
933

 
1,515

Noncurrent liabilities held for sale

 
720

Total liabilities
42,880

 
49,400

 
 
 
 
Commitments and contingencies (Note 17)

 

 
 
 
 
Shareholders’ equity:
 

 
 

Ordinary shares— par value $0.0001, 2.6 billion shares authorized, 1,353,591,988 and 1,369,424,818 shares issued and outstanding, respectively

 

Additional paid-in capital
28,091

 
29,551

Retained earnings
25,438

 
23,356

Accumulated other comprehensive loss
(2,060
)
 
(2,613
)
Total shareholders’ equity
51,469

 
50,294

Noncontrolling interests
109

 
122

Total equity
51,578

 
50,416

Total liabilities and equity
$
94,458

 
$
99,816

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

3



Medtronic plc
Consolidated Statements of Cash Flows
(Unaudited)
 
Six months ended
(in millions)
October 27, 2017
 
October 28, 2016
Operating Activities:
 

 
 

Net income
$
3,022

 
$
2,040

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

 
 

Depreciation and amortization
1,314

 
1,469

Amortization of debt premium, discount, and issuance costs
(20
)
 
14

Acquisition-related items
(25
)
 
(47
)
Provision for doubtful accounts
20

 
18

Deferred income taxes
(830
)
 
(50
)
Stock-based compensation
198

 
190

Gain on sale of businesses
(697
)
 

Other, net
4

 
(105
)
Change in operating assets and liabilities, net of acquisitions and divestitures:
 

 
 

Accounts receivable, net
(68
)
 
(89
)
Inventories, net
(273
)
 
(187
)
Accounts payable and accrued liabilities
(307
)
 
(306
)
Other operating assets and liabilities
(694
)
 
75

Net cash provided by operating activities
1,644

 
3,022

Investing Activities:
 

 
 

Acquisitions, net of cash acquired
(76
)
 
(1,306
)
Proceeds from sale of businesses
6,058

 

Additions to property, plant, and equipment
(524
)
 
(598
)
Purchases of investments
(1,685
)
 
(2,110
)
Sales and maturities of investments
2,354

 
3,625

Other investing activities, net
(2
)
 
32

Net cash provided by (used in) investing activities
6,125

 
(357
)
Financing Activities:
 

 
 

Acquisition-related contingent consideration
(39
)
 
(36
)
Change in current debt obligations, net
(190
)
 
1,154

Proceeds from short-term borrowings (maturities greater than 90 days)

 
4

Issuance of long-term debt
20

 
131

Payments on long-term debt
(4,161
)
 
(252
)
Dividends to shareholders
(1,247
)
 
(1,192
)
Issuance of ordinary shares
230

 
260

Repurchase of ordinary shares
(1,888
)
 
(2,794
)
Other financing activities
(2
)
 
74

Net cash used in financing activities
(7,277
)
 
(2,651
)
Effect of exchange rate changes on cash and cash equivalents
70

 
64

Net change in cash and cash equivalents
562

 
78

Cash and cash equivalents at beginning of period
4,967

 
2,876

Cash and cash equivalents at end of period
$
5,529

 
$
2,954

Supplemental Cash Flow Information
 

 
 

Cash paid for:
 

 
 

Income taxes
$
674

 
$
258

Interest
587

 
559


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

4

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)



1. Basis of Presentation
The accompanying unaudited consolidated financial statements 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.
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 28, 2017. The Company’s fiscal years 2018, 2017, and 2016 will end or ended on April 27, 2018, April 28, 2017, and April 29, 2016, respectively.
2. New Accounting Pronouncements
Recently Adopted
In March 2016, the Financial Accounting Standards Board (FASB) issued guidance to simplify the accounting for share-based payment transactions by requiring all excess tax benefits and deficiencies to be recognized in income tax expense or benefit in earnings; eliminating the requirement to classify the excess tax benefits and deficiencies as additional paid-in capital. Cash flows related to excess tax benefits are to be classified in operating activities in the statement of cash flows rather than financing. Under the new guidance, an entity makes an accounting policy election to either estimate the expected forfeiture awards or account for forfeitures as they occur. The standard also allows an entity to withhold up to the maximum statutory tax rate and classify the awards as equity. The Company prospectively adopted this guidance in the first quarter of fiscal year 2018. The Company has elected to continue to estimate forfeitures. The adoption of this guidance resulted in no cumulative adjustment to retained earnings and increases to net income of $17 million and $41 million, respectively, and increases to diluted earnings per share of $0.01 and $0.03, respectively, for the three and six months ended October 27, 2017.
In October 2016, the FASB issued guidance that requires the tax effect of intra-entity transactions, other than sales of inventory, to be recognized when the transaction occurs. Previously, U.S. GAAP prohibited the recognition of current and deferred income taxes associated with an intra-entity asset transfer until an asset had been sold to a third-party. This update requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, such as equipment or intangibles, when the transfer occurs. The adoption of this pronouncement is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company has early adopted this guidance, as permitted, in the first quarter of fiscal year 2018. As a result of this adoption, the Company increased its beginning retained earnings by $296 million. The adoption of this guidance also resulted in increases to net income of $582 million and $557 million, respectively, and increases to diluted earnings per share of $0.43 and $0.41, respectively, for the three and six months ended October 27, 2017.
Not Yet Adopted
In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue in an amount that reflects the consideration to which an entity expects to be entitled in exchange for the transfer of goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2019, and may be applied either retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of the change recognized at the date of initial application (modified retrospective method). The Company intends to adopt this guidance under the modified retrospective method. Based

5

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


on the Company's evaluation performed of the amended revenue recognition guidance to date, the Company does not expect the adoption of the amended guidance to have a material impact on the Company's consolidated financial statements. The Company is continuing to evaluate the impact of the amended guidance in the areas of performance obligations, presentation, and new disclosure requirements. Additionally, the Company will continue to monitor any modifications, clarifications, and interpretations communicated by the FASB that may impact its conclusions.
In January 2016, the FASB issued guidance which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The guidance also includes a simplified impairment assessment of equity investments without readily determinable fair values and presentation and disclosure changes. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2019. The Company is unable to estimate the impact of the future adoption of this guidance on its financial statements as it will depend on the equity investments at the adoption date.
In February 2016, the FASB issued guidance which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is evaluating the impact of the lease guidance on the Company's consolidated financial statements and anticipates recording additional assets and corresponding liabilities on its consolidated balance sheets related to operating leases within its lease portfolio upon adoption of the guidance.
In January 2017, the FASB issued guidance which simplifies the accounting for goodwill impairment. The guidance requires a goodwill impairment to be measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company is required to adopt this guidance beginning in the first quarter of fiscal year 2021. Early adoption is permitted, and the guidance must be applied prospectively. The Company is unable to estimate the impact of the future adoption of this guidance on its financial statements, as it is dependent on the specific facts and circumstances of future impairments, if any.
3. Acquisitions and Acquisition-Related Items
The Company had acquisitions and other acquisition-related activity during the six months ended October 27, 2017. The Company accounted for the acquisitions as business combinations using the acquisition method of accounting. 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 and six months ended October 27, 2017. 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.
HeartWare International, Inc.
On August 23, 2016, the Company's Cardiac and Vascular Group acquired HeartWare International, Inc. (HeartWare), a medical device company that develops and manufactures miniaturized implantable heart pumps, or ventricular assist devices, to treat patients around the world suffering from advanced heart failure. Total consideration for the transaction was approximately $1.1 billion. The Company acquired $602 million of technology-based and customer-related intangible assets and $23 million of tradenames, with estimated useful lives of 15 and 5 years, respectively, and $481 million of goodwill. The acquired goodwill is not deductible for tax purposes. In addition, the Company acquired $245 million of debt through the acquisition, of which the Company redeemed $203 million as part of a cash tender offer in August 2016 and the remaining $42 million of debt acquired is due December 2017. During the measurement period, which ended on August 22, 2017, adjustments were made to finalize the allocation of purchase price related to other assets, goodwill, and contingent liabilities.

6

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


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

 
$
2

Property, plant, and equipment
14

 
6

Other intangible assets
625

 
68

Goodwill
481

 
15

Other assets
84

 

Total assets acquired
1,555

 
91

 
 
 
 
Current liabilities
143

 
1

Deferred tax liabilities
6

 

Long-term debt
245

 

Other liabilities
89

 

Total liabilities assumed
483

 
1

Net assets acquired
$
1,072

 
$
90

For additional information on the Company's fiscal year 2017 acquisitions, refer to Note 2 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 2017.
Acquisition-Related Items
Acquisition-related items includes expenses incurred in connection with the integration of Covidien, our $50.0 billion acquisition completed in the fourth quarter of fiscal year 2015, expenses incurred in connection with business acquisitions, and changes in fair value of contingent consideration. During the three and six months ended October 27, 2017, the Company recognized acquisition-related items expense of $18 million and $71 million, respectively, including $11 million and $20 million, respectively, recognized within cost of products sold in the consolidated statements of income. For the three and six months ended October 27, 2017, acquisition-related items expense includes $44 million and $90 million, respectively, of costs associated with the integration of Covidien manufacturing, distribution, and administrative facilities as well as IT system implementation, partially offset by changes in fair value of contingent consideration as a result of revised revenue forecasts and the timing of anticipated regulatory payments.
During the three and six months ended October 28, 2016, the Company recognized acquisition-related items expense of $28 million and $80 million, respectively. For the three and six months ended October 28, 2016, acquisition-related items expense includes $59 million and $102 million, respectively, of costs associated with the integration of Covidien manufacturing, distribution, and administrative facilities as well as IT system implementation and benefits harmonization, and $9 million and $16 million, respectively, of accelerated and incremental stock compensation expense, partially offset by changes in fair value of contingent consideration as a result of revised revenue forecasts and the timing of anticipated regulatory payments.
Contingent Consideration

Certain of the Company’s business combinations involve potential payments of future consideration that is contingent upon the achievement of product development milestones and/or contingent on the acquired business reaching performance milestones. A liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period using Level 3 inputs, and the change in fair value is recognized within acquisition-related items in the consolidated statements of income. Contingent consideration payments related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows. Amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.

7

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


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 revenues, probabilities of payment, discount rates, and projected payment dates may result in adjustments to the fair value measurement. The recurring Level 3 fair value measurements of contingent consideration include the following significant unobservable inputs:
 
 
Fair Value at
 
 
 
 
 
 
(in millions)
 
October 27, 2017
 
Valuation Technique
 
Unobservable Input
 
Range
 
 
 
 
 
 
Discount rate
 
11% - 32.5%
Revenue-based payments
 
$85
 
Discounted cash flow
 
Probability of payment
 
30% - 100%
 
 
 
 
 
 
Projected fiscal year of payment
 
2018 - 2026
 
 
 
 
 
 
Discount rate
 
0.7% - 5.5%
Product development and other milestone-based payments
 
$105
 
Discounted cash flow
 
Probability of payment
 
50% - 100%
 
 
 
 
 
 
Projected fiscal year of payment
 
2018 - 2025
The fair value of contingent consideration at October 27, 2017 and April 28, 2017 was $190 million and $246 million, respectively. At October 27, 2017, $70 million was recorded in other liabilities and $120 million was recorded in other accrued expenses in the consolidated balance sheets. At April 28, 2017, $180 million was recorded in other liabilities and $66 million was recorded in other accrued expenses in the consolidated balance sheets.
The following table provides a reconciliation of the beginning and ending balances of contingent consideration:
 
Three months ended
 
Six months ended
(in millions)
October 27, 2017
 
October 28, 2016
 
October 27, 2017
 
October 28, 2016
Beginning Balance
$
242

 
$
379

 
$
246

 
$
377

Purchase price contingent consideration
15

 
11

 
15

 
32

Payments
(43
)
 
(25
)
 
(46
)
 
(39
)
Change in fair value
(24
)
 
(80
)
 
(25
)
 
(85
)
Ending Balance
$
190

 
$
285

 
$
190

 
$
285

4. Divestiture and Divestiture-Related Items
Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency Businesses
In April 2017, the Company entered into a definitive agreement for the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses within the Minimally Invasive Therapies Group segment to Cardinal Health, Inc. (Cardinal). The divestiture was completed on July 29, 2017. 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 are the 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. In connection with the transaction, the Company entered into Transition Service Agreements (TSAs) and Transition Manufacturing Agreements (TMAs) with Cardinal designed to ensure and facilitate an orderly transfer of business operations. The TSAs are primarily related to administrative services and are expected to continue for 12 months from the divestiture date, with an ability to extend upon mutual agreement of both parties. Under the TMAs, both the Company and Cardinal will manufacture and supply certain products to each other for a transition period of up to 5 years.
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. The Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses met the criteria to be classified as held for sale in the fourth quarter of fiscal year 2017, at which time the Company ceased depreciation and amortization of property, plant, and equipment and intangible assets classified as held for sale. The following table presents information related to the assets and liabilities that were classified as held for sale in the consolidated balance sheets:

8

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


(in millions)
 
April 28, 2017
Inventories, net
 
$
371

Property, plant, and equipment, net
 
689

Goodwill
 
2,910

Other intangible assets, net
 
2,320

Total assets held for sale
 
$
6,290

 
 
 
Other accrued expenses
 
$
34

Accrued compensation and retirement benefits
 
12

Deferred tax liabilities
 
707

Other liabilities
 
1

Total liabilities held for sale
 
$
754

Divestiture-Related Items
Divestiture-related items includes expenses incurred in connection with the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses. During the three months ended October 27, 2017, the Company recognized divestiture-related items expense of $67 million primarily comprised of expenses incurred for professional services, including banker, legal, tax, and advisory fees. During the six months ended October 27, 2017, the Company recognized divestiture-related items expense of $114 million, primarily comprised of expenses incurred for 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. There were no divestiture-related items expenses for the three or six months ended October 28, 2016.
5. Special Charge
During the three and six months ended October 27, 2017, continuing the Company's commitment to improve the health of people and communities throughout the world, the Company recognized a charge of $80 million for a commitment to fund the Medtronic Foundation. During the three and six months ended October 28, 2016, the Company did not recognize a special charge. 
6. Restructuring Charges
Cost Synergies Initiative
The cost synergies initiative is the Company's restructuring program primarily related to the integration of Covidien. This initiative contributes to the approximately $850 million in cost synergies expected to be achieved as a result of the integration of the Covidien acquisition through fiscal year 2018, including administrative office optimization, manufacturing and supply chain infrastructure, certain program cancellations, and reduction of general and administrative redundancies. Restructuring charges are primarily related to employee termination costs and costs related to manufacturing and facility closures and affect all reportable segments. Cash outlays for the cost synergies initiative restructuring program are scheduled to be substantially complete by the end of fiscal year 2019.

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

 
$
30

 
$
291

Charges
25

 
20

 
45

Cash payments
(85
)
 
(26
)
 
(111
)
Accrual adjustments
(14
)
 
1

 
(13
)
October 27, 2017
$
187

 
$
25

 
$
212


9

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 costs 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.
For the three and six months ended October 28, 2016, the Company recognized $47 million and $158 million in charges, respectively. The Company recognized no reversals of excess restructuring reserves for the three months ended October 28, 2016. As a result of certain employees identified for termination finding other positions within the Company, the Company recognized a $7 million reversal of excess restructuring reserves for the six months ended October 28, 2016. For the three months and six months ended October 28, 2016, charges included asset write-downs included $3 million and $7 million, respectively, related to property, plant, and equipment impairments, and $10 million related to inventory write-offs recognized within cost of products sold in the consolidated statements of income. 
7. Financial Instruments
The Company holds investments such as marketable debt and equity securities that are classified and accounted for as available-for-sale and are remeasured on a recurring basis. The Company also holds cost method, equity method, and other investments which are measured at fair value on a nonrecurring basis. For information regarding the valuation techniques and inputs used in the fair value measurements, refer to Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 2017.

10

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following table summarizes the Company's investments by significant investment category and the related consolidated balance sheet classification at October 27, 2017:
 
Valuation
 
Balance Sheet Classification
(in millions)
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Investments
 
Other Assets
Available-for-sale securities:
 

 
 

 
 

 
 

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

 
$
1

 
$
(8
)
 
$
606

 
$
606

 
$

Marketable equity securities
84

 
115

 
(1
)
 
198

 

 
198

Total Level 1
697

 
116

 
(9
)
 
804

 
606

 
198

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
4,165

 
64

 
(16
)
 
4,213

 
4,213

 

U.S. government and agency securities
870

 

 
(12
)
 
858

 
858

 

Mortgage-backed securities
768

 
7

 
(19
)
 
756

 
756

 

Foreign government and agency securities
52

 

 

 
52

 
52

 

Other asset-backed securities
341

 
1

 
(1
)
 
341

 
341

 

Debt funds
939

 
6

 
(168
)
 
777

 
777

 

Total Level 2
7,135

 
78

 
(216
)
 
6,997

 
6,997

 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
1

 

 

 
1

 

 
1

Auction rate securities
47

 

 
(3
)
 
44

 

 
44

Total Level 3
48

 

 
(3
)
 
45

 

 
45

Investments measured at net asset value(1):
 

 
 

 
 

 
 

 
 
 
 
Debt Funds
400

 

 
(6
)
 
394

 
394

 

Total available-for-sale securities
8,280

 
194

 
(234
)
 
8,240

 
7,997

 
243

Cost method, equity method, and other investments:
 
 
 
 
 
 
 
 
 
 
 
Level 3:
 
 
 
 
 
 
 
 
 
 
 
Cost method, equity method, and other investments
626

 

 

 
N/A

 

 
626

Total Level 3
626

 

 

 
N/A

 

 
626

Total cost method, equity method, and other investments
626

 

 

 
N/A

 

 
626

Total investments
$
8,906

 
$
194

 
$
(234
)
 
$
8,240

 
$
7,997

 
$
869

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


11

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


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

 
 

 
 

 
 

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

 
$
2

 
$
(5
)
 
$
610

 
$
610

 
$

Marketable equity securities
58

 
49

 
(4
)
 
103

 

 
103

Total Level 1
671

 
51

 
(9
)
 
713

 
610

 
103

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
4,643

 
62

 
(23
)
 
4,682

 
4,682

 

U.S. government and agency securities
860

 

 
(10
)
 
850

 
850

 

Mortgage-backed securities
766

 
9

 
(16
)
 
759

 
759

 

Foreign government and agency securities
49

 

 

 
49

 
49

 

Other asset-backed securities
228

 
1

 
(1
)
 
228

 
228

 

Debt funds
1,246

 
4

 
(178
)
 
1,072

 
1,072

 

Total Level 2
7,792

 
76

 
(228
)
 
7,640

 
7,640

 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
1

 

 

 
1

 

 
1

Auction rate securities
47

 

 
(3
)
 
44

 

 
44

Total Level 3
48

 

 
(3
)
 
45

 

 
45

Investments measured at net asset value(1):
 

 
 

 
 

 
 

 
 
 
 
Debt funds
497

 

 
(6
)
 
491

 
491

 

Total available-for-sale securities
9,008

 
127

 
(246
)
 
8,889

 
8,741

 
148

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

 

 

 
N/A

 

 
589

Total Level 3
589

 

 

 
N/A

 

 
589

Total cost method, equity method, and other investments
589

 

 

 
N/A

 

 
589

Total investments
$
9,597

 
$
127

 
$
(246
)
 
$
8,889

 
$
8,741

 
$
737

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


12

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Marketable Debt and Equity Securities
The following tables present the gross unrealized losses and fair values of the Company’s available-for-sale securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category at October 27, 2017 and April 28, 2017:
 
October 27, 2017
 
Less than 12 months
 
More than 12 months
(in millions)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate debt securities
$
946

 
$
(9
)
 
$
209

 
$
(7
)
Auction rate securities

 

 
44

 
(3
)
Mortgage-backed securities
296

 
(4
)
 
97

 
(15
)
U.S. government and agency securities
877

 
(15
)
 
216

 
(5
)
Debt funds
7

 
(1
)
 
958

 
(173
)
Other asset-backed securities
201

 
(1
)
 

 

Marketable equity securities

 

 
2

 
(1
)
Total
$
2,327

 
$
(30
)
 
$
1,526

 
$
(204
)
 
April 28, 2017
 
Less than 12 months
 
More than 12 months
(in millions)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate debt securities
$
1,263

 
$
(19
)
 
$
46

 
$
(4
)
Auction rate securities

 

 
44

 
(3
)
Mortgage-backed securities
276

 
(4
)
 
95

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

 
(15
)
 

 

Other asset-backed securities
127

 
(1
)
 

 

Debt funds
173

 
(1
)
 
1,125

 
(183
)
Marketable equity securities
14

 
(3
)
 
2

 
(1
)
Total
$
2,749

 
$
(43
)
 
$
1,312

 
$
(203
)

The following table presents the unobservable inputs utilized in the fair value measurement of the auction rate securities classified as Level 3 at October 27, 2017:

 
Valuation Technique
Unobservable Input
Range (Weighted Average)
Auction rate securities
Discounted cash flow
Years to principal recovery
2 yrs. - 12 yrs. (3 yrs.)
Illiquidity premium
6%
The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended October 27, 2017 and October 28, 2016. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement.

13

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following tables provide a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3):
 
Three months ended October 27, 2017
(in millions)
Total Level 3
Investments
 
Corporate Debt
Securities
 
Auction Rate
Securities
July 28, 2017
$
45

 
$
1

 
$
44

Total unrealized gains (losses) included in other comprehensive income

 

 

October 27, 2017
$
45

 
$
1

 
$
44

 
 
 
 
 
 
 
Three months ended October 28, 2016
(in millions)
Total Level 3
Investments
 
Corporate Debt
Securities
 
Auction Rate
Securities
July 29, 2016
$
45

 
$
1

 
$
44

Total unrealized gains (losses) included in other comprehensive income

 

 

October 28, 2016
$
45

 
$
1

 
$
44

 
 
 
 
 
 
 
Six months ended October 27, 2017
(in millions)
Total Level 3
Investments
 
Corporate Debt
Securities
 
Auction Rate
Securities
April 28, 2017
$
45

 
$
1

 
$
44

Total unrealized gains (losses) included in other comprehensive income

 

 

October 27, 2017
$
45

 
$
1

 
$
44

 
 
 
 
 
 
 
Six months ended October 28, 2016
(in millions)
Total Level 3
Investments
 
Corporate Debt
Securities
 
Auction Rate
Securities
April 29, 2016
$
45

 
$
1

 
$
44

Total unrealized gains (losses) included in other comprehensive income

 

 

October 28, 2016
$
45

 
$
1

 
$
44

Activity related to the Company’s investment portfolio is as follows:
 
Three months ended
 
October 27, 2017
 
October 28, 2016
(in millions)
Debt(1)
 
Equity(2)
 
Debt(1)
 
Equity(2)
Proceeds from sales
$
1,383

 
$

 
$
2,444

 
$
76

Gross realized gains
11

 

 
57

 
25

Gross realized losses
(12
)
 

 
(37
)
 

Impairment losses recognized

 
(1
)
 

 
(7
)
 
 
 
 
 
 
 
 
 
Six months ended
 
October 27, 2017
 
October 28, 2016
(in millions)
Debt(1)
 
Equity(2)
 
Debt(1)
 
Equity(2)
Proceeds from sales
$
2,354

 
$

 
$
3,542

 
$
82

Gross realized gains
19

 
7

 
64

 
29

Gross realized losses
(15
)
 

 
(49
)
 

Impairment losses recognized

 
(1
)
 

 
(10
)
(1)
Includes available-for-sale debt securities and debt funds.
(2)
Includes marketable equity securities and cost and equity method investments.

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 27, 2017 and April 28, 2017, the credit loss portion of other-than-temporary impairments on debt securities was not significant. The total reductions of available-for-sale debt securities sold during the three and six months ended October 27, 2017 and October 28, 2016 were not significant.
The October 27, 2017 balance of available-for-sale debt securities, excluding debt funds which have no single maturity date, by contractual maturity is shown in the following table. Within the table, maturities of mortgage-backed securities have been allocated based upon timing of estimated cash flows assuming no change in the current interest rate environment. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
(in millions)
October 27, 2017
Due in one year or less
$
865

Due after one year through five years
2,601

Due after five years through ten years
3,298

Due after ten years
107

Total
$
6,871

The Company holds investments in marketable equity securities, which are classified as other assets in the consolidated balance sheets. The aggregate carrying amount of these investments was $198 million and $103 million at October 27, 2017 and April 28, 2017, respectively. The Company did not recognize any significant impairment charges related to marketable equity securities during the three and six months ended October 27, 2017 and October 28, 2016.
Cost method, equity method, and other investments
The Company holds investments in equity and other securities that are accounted for using the cost or equity method, which are classified as other assets in the consolidated balance sheets. At October 27, 2017 and April 28, 2017, the aggregate carrying amount of equity and other securities without a quoted market price and accounted for using the cost or equity method was $626 million and $589 million, respectively. Cost and equity method investments are measured at fair value on a nonrecurring basis. Changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable are assessed quarterly. If events or changes in circumstances are identified that may have a material adverse effect on the fair value of the investment, the investment is assessed for impairment.
Cost and equity method investments fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value, as the investments are in privately-held entities without quoted market prices. To determine the fair value of these investments, the Company uses all pertinent financial information available related to the entities, including financial statements and market participant valuations from recent and proposed equity offerings. During the three and six months ended October 27, 2017, the Company did not recognize any significant impairment charges related to cost method investments. During the three and six months ended October 28, 2016, the Company determined that the fair values of certain cost method investments 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 $7 million and $10 million in impairment charges during the three and six months ended October 28, 2016, respectively, which were recognized in other expense, net in the consolidated statements of income.


15

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


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. Commercial paper outstanding at October 27, 2017 was $700 million, as compared to $901 million at April 28, 2017. During the three and six months ended October 27, 2017, the weighted average original maturity of the commercial paper outstanding was approximately 30 and 31 days, respectively, and the weighted average interest rate was 1.31 percent and 1.27 percent, respectively. The issuance of commercial paper reduces the amount of credit available under the Company’s existing Credit Facility, as defined below.
Line of Credit
The Company has a $3.5 billion five year revolving syndicated line of credit facility (Credit Facility) which provides back-up funding for the commercial paper program described above. At October 27, 2017 and April 28, 2017, no amounts were outstanding.
Interest rates on advances on the Credit Facility are determined by a pricing matrix, based on the Company’s long-term debt ratings, assigned by Standard & Poor’s Ratings Services and Moody’s Investors Service. Facility fees are payable on the Credit Facility and are determined in the same manner as the interest rates. The agreements also contain customary covenants, all of which the Company remained in compliance with at October 27, 2017.

16

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Debt Obligations
The Company's debt obligations consisted of the following:
(in millions, except interest rates)
 
Maturity by
Fiscal Year
 
October 27, 2017
 
April 28, 2017
Current debt obligations
 
2018
 
$
3,131

 
$
7,520

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

 
400

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

 
1,000

4.450 percent ten-year 2010 senior notes
 
2020
 
766

 
766

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

 
2,500

Floating rate five-year 2015 senior notes
 
2020
 
500

 
500

4.200 percent ten-year 2010 CIFSA senior notes
 
2021
 
600

 
600

4.125 percent ten-year 2011 senior notes
 
2021
 
500

 
500

3.125 percent ten-year 2012 senior notes
 
2022
 
675

 
675

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

 
2,500

3.200 percent ten-year 2012 CIFSA senior notes
 
2023
 
650

 
650

2.750 percent ten-year 2013 senior notes
 
2023
 
530

 
530

2.950 percent ten-year 2013 CIFSA senior notes
 
2024
 
310

 
310

3.625 percent ten-year 2014 senior notes
 
2024
 
850

 
850

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

 
4,000

3.350 percent ten-year 2017 senior notes
 
2027
 
850

 
850

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

 
2,382

6.550 percent thirty-year 2008 CIFSA senior notes
 
2038
 
374

 
374

6.500 percent thirty-year 2009 senior notes
 
2039
 
300

 
300

5.550 percent thirty-year 2010 senior notes
 
2040
 
500

 
500

4.500 percent thirty-year 2012 senior notes
 
2042
 
400

 
400

4.000 percent thirty-year 2013 senior notes
 
2043
 
325

 
325

4.625 percent thirty-year 2014 senior notes
 
2044
 
650

 
650

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

 
4,150

Interest rate swaps (Note 9)
 
2021 - 2022
 
30

 
40

Capital lease obligations
 
2019 - 2025
 
22

 
23

Bank borrowings
 
2019 - 2021
 
169

 
139

Debt premium, net
 
2019 - 2045
 
127

 
135

Deferred financing costs
 
2019 - 2045
 
(119
)
 
(128
)
Long-term debt
 
 
 
$
25,941

 
$
25,921

Senior Notes
The Company has outstanding unsecured senior obligations, described as senior notes as well as included within current debt obligations in the debt obligations table above (collectively, the Senior Notes). The Senior Notes rank equally with all other unsecured and unsubordinated indebtedness of the Company. The indentures under which the Senior Notes were issued contain customary covenants, all of which the Company remained in compliance with at October 27, 2017. For additional information regarding the terms of these agreements, refer to Note 8 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 2017.

17

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Financial Instruments Not Measured at Fair Value
At October 27, 2017, the estimated fair value of the Company’s Senior Notes, including the current portion, was $29.5 billion compared to a principal value of $27.8 billion. At April 28, 2017, the estimated fair value was $30.4 billion compared to a principal value of $28.9 billion. The fair value was estimated using quoted market prices for the publicly registered Senior Notes, which are classified as Level 2 within the fair value hierarchy. The fair values and principal values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.
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 primary currencies of the derivative instruments are the Euro and Japanese Yen. The Company does not enter into currency exchange rate derivative contracts for speculative purposes. The gross notional amount of all currency exchange rate derivative instruments outstanding was $12.0 billion and $10.8 billion at October 27, 2017 and April 28, 2017, respectively.
The information that follows explains the various types of derivatives and financial instruments used by the Company, reasons the Company uses such instruments, and the impact such instruments have on the Company’s consolidated balance sheets, statements of income, and statements of cash flows.
Freestanding Derivative Contracts
Freestanding derivative contracts are used to offset the Company’s exposure to the change in value of specific foreign currency denominated assets and liabilities and to offset variability of cash flows associated with forecasted transactions denominated in foreign currencies. These derivatives are not designated as hedges, and therefore, changes in the value of these contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in value of foreign currency denominated assets, liabilities, and cash flows. The gross notional amount of these contracts outstanding at October 27, 2017 and April 28, 2017 was $5.7 billion and $4.9 billion, respectively.
The amounts and classification of the losses in the consolidated statements of income related to derivative instruments, not designated as hedging instruments, for the three and six months ended October 27, 2017 and October 28, 2016 were as follows:
 
 
 
 
Three months ended
 
Six months ended
(in millions)
 
Classification
 
October 27, 2017
 
October 28, 2016
 
October 27, 2017
 
October 28, 2016
Currency exchange rate contract losses
 
Other expense, net
 
$
42

 
$
38

 
$
137

 
$
41

Cash Flow Hedges
Currency Exchange Rate Risk
Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted transactions denominated in a foreign currency that will take place in the future. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive loss. The effective portion of the gain or loss on the derivative instrument is reclassified into earnings and is included in other expense, net in the consolidated statements of income in the same period or periods during which the hedged transaction affects earnings.
No gains or losses relating to ineffectiveness of cash flow hedges were recognized in earnings during the three and six months ended October 27, 2017 and October 28, 2016. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness and no hedges were derecognized or discontinued during the three and six months ended October 27, 2017 and October 28, 2016. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at October 27, 2017 and April 28, 2017, was $6.2 billion and $5.8 billion, respectively, and will mature within the subsequent three-year period.

18

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The amount of gross gains (losses), classification of the gains (losses) in the consolidated statements of income, and the accumulated other comprehensive income (loss) (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 27, 2017 and October 28, 2016 were as follows:
 
 
Three months ended October 27, 2017
 
 
Recognized in AOCI
 
Recognized in Income
(in millions)
 
Amount
 
Classification
 
Amount
Currency exchange rate contracts
 
$
30

 
Other expense, net
 
$
(10
)
Total
 
$
30

 
 
 
$
(10
)
 
 
 
 
 
 
 
 
 
Three months ended October 28, 2016
 
 
Recognized in AOCI
 
Recognized in Income
(in millions)
 
Amount
 
Classification
 
Amount
Currency exchange rate contracts
 
$
69

 
Other expense, net
 
$
6

Total
 
$
69

 
 
 
$
6

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

Total
 
$
(220
)
 
 
 
$
12

 
 
 
 
 
 
 
 
 
Six months ended October 28, 2016
 
 
Recognized in AOCI
 
Recognized in Income
(in millions)
 
Amount
 
Classification
 
Amount
Currency exchange rate contracts
 
$
190

 
Other expense, net
 
$
22

Total
 
$
190

 
 
 
$
22

Forecasted Debt Issuance Interest Rate Risk
Forward starting interest rate derivative instruments designated as cash flow hedges are designed to manage the exposure to interest rate volatility with regard to future issuances of fixed-rate debt. The effective portion of the gains or losses on forward starting interest rate derivative instruments that is designated and qualify as cash flow hedges is reported as a component of accumulated other comprehensive loss. Beginning in the period in which the planned debt issuance occurs and the related derivative instruments are terminated, the effective portion of the gains or losses are then reclassified into interest expense, net over the term of the related debt. Any portion of the gains or losses that is determined to be ineffective is immediately recognized in interest expense, net.
The Company had $300 million of fixed pay, forward starting interest rate swaps with a weighted average fixed rate of 3.10 percent in anticipation of planned debt issuances. During the fourth quarter of fiscal year 2017, in connection with the issuance of the 2017 Senior Notes, these swaps were terminated. For the three and six months ended October 28, 2016, there were $17 million and $(6) million, respectively, of unrealized gains (losses) recorded in accumulated other comprehensive loss.
No gains or losses relating to ineffectiveness of forward starting interest rate derivative instruments were recognized in interest expense, net during the three and six months ended October 28, 2016. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness during the three and six months ended October 28, 2016. For the three and six months ended October 28, 2016, the reclassification of the effective portion of the net losses on forward starting interest rate derivative instruments from accumulated other comprehensive loss to interest expense, net was not significant.
At October 27, 2017 and April 28, 2017, the Company had $(107) million and $37 million, respectively, in after-tax net unrealized (losses) gains associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $33 million of after-tax net unrealized losses at October 27, 2017 will be recognized in the consolidated statements of income over the next 12 months.

19

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


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, net, and are offset by changes in the fair value of the underlying debt instrument. The gains (losses) from terminated interest rate swap agreements are recognized in long-term debt, increasing (decreasing) the outstanding balances of the debt, and amortized as a reduction of (addition to) interest expense, net over the remaining life of the related debt. The cash flows from the termination of interest rate swap agreements are reported as operating activities in the consolidated statements of cash flows.
At both October 27, 2017 and April 28, 2017, the Company had interest rate swaps in gross notional amounts of $1.2 billion, designated as fair value hedges of underlying fixed-rate senior note obligations, including the Company's $500 million 4.125 percent 2011 Senior Notes due 2021 and the $675 million 3.125 percent 2012 Senior Notes due 2022.
At October 27, 2017 and April 28, 2017, the market value of outstanding interest rate swap agreements was an unrealized gain of $30 million and $41 million, respectively, and the market value of the hedged item was an unrealized loss of $30 million and $41 million, respectively. The amounts were recorded in other assets with the offsets recorded in long-term debt on the consolidated balance sheets.
No significant hedge ineffectiveness was recognized as a result of these fair value hedges for the three and six months ended October 27, 2017 and October 28, 2016. In addition, the Company did not recognize any gains or losses during the three and six months ended October 27, 2017 and October 28, 2016 on firm commitments that no longer qualify as fair value hedges.

20

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


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 27, 2017 and April 28, 2017. The fair value amounts are presented on a gross basis and are segregated between derivatives that are designated and qualify as hedging instruments and those that are not designated and do not qualify as hedging instruments, and are further segregated by type of contract within those two categories.
 
October 27, 2017
 
Derivative Assets
 
Derivative Liabilities
(in millions)
Balance Sheet Classification
 
Fair Value
 
Balance Sheet Classification
 
Fair Value
Derivatives designated as hedging instruments
 
 
 

 
 
 
 

Currency exchange rate contracts
Prepaid expenses and other current assets
 
$
61

 
Other accrued expenses
 
$
113

Interest rate contracts
Other assets
 
30

 
Other liabilities
 

Currency exchange rate contracts
Other assets
 
41

 
Other liabilities
 
63

Total derivatives designated as hedging instruments
 
 
$
132

 
 
 
$
176

Derivatives not designated as hedging instruments
 
 
 

 
 
 
 

Currency exchange rate contracts
Prepaid expenses and other current assets
 
$
35

 
Other accrued expenses
 
$
27

Total return swap
Prepaid expenses and other current assets
 
8

 
Other accrued expenses
 

Stock warrants
Other assets
 
25

 
Other liabilities
 

Cross currency interest rate contracts
Other assets
 
6

 
Other liabilities
 
8

Total derivatives not designated as hedging instruments
 
 
$
74

 
 
 
$
35

Total derivatives
 
 
$
206

 
 
 
$
211

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

 
 
 
 

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

 
Other accrued expenses
 
$
43

Interest rate contracts
Other assets
 
41

 
Other liabilities
 

Currency exchange rate contracts
Other assets
 
48

 
Other liabilities
 
14

Total derivatives designated as hedging instruments
 
 
$
241

 
 
 
$
57

Derivatives not designated as hedging instruments
 
 
 

 
 
 
 

Currency exchange rate contracts
Prepaid expenses and other current assets
 
16

 
Other accrued expenses
 
36

Cross currency interest rate contracts
Other assets
 
5

 
Other liabilities
 
11

Total derivatives not designated as hedging instruments
 
 
$
21

 
 
 
$
47

Total derivatives
 
 
$
262

 
 
 
$
104


21

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following table provides information by level for the derivative assets and liabilities that are measured at fair value on a recurring basis.
 
October 27, 2017
 
April 28, 2017
(in millions)
Level 1
 
Level 2
 
Level 1
 
Level 2
Derivative assets
$
137

 
$
69

 
$
216

 
$
46

Derivative liabilities
203

 
8

 
93

 
11

The Company has elected to present the fair value of derivative assets and liabilities within the consolidated balance sheets on a gross basis, even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The following table provides information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria as stipulated by the terms of the master netting arrangements with each of the counterparties. Derivatives not subject to master netting arrangements are not eligible for net presentation.
 
 
October 27, 2017
 
 
 
 
Gross Amount Not Offset on the Balance Sheet