UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 29, 2016

Commission File Number 001-36820

MEDTRONIC PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
Ireland	98-1183488
(State of incorporation)	(I.R.S. Employer Identification No.)

20 On Hatch, Lower Hatch Street

Dublin 2, Ireland

(Address of principal executive offices) (Zip Code)

+353 1 438-1700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, 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 x

As of August 26, 2016, 1,381,935,603 ordinary shares, par value $0.0001, and 1,872 A preferred shares, par value $1.00, of the registrant were outstanding.

TABLE OF CONTENTS

Item	Description	Page
	PART I
1.	Financial Statements (unaudited)	1
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
3.	Quantitative and Qualitative Disclosures About Market Risk	60
4.	Controls and Procedures	61
	PART II
1.	Legal Proceedings	62
2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
6.	Exhibits	62
	Signatures	63

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Medtronic plc

Consolidated Statements of Income

(Unaudited)

	Three months ended
(in millions, except per share data)	July 29, 2016			July 31, 2015
Net sales	$	7,166		$	7,274
Costs and expenses:
Cost of products sold	2,261			2,456
Research and development expense	556			558
Selling, general, and administrative expense	2,428			2,449
Restructuring charges, net	94			67
Certain litigation charges	82			—
Acquisition-related items	52			71
Amortization of intangible assets	487			481
Other expense, net	39			61
Operating profit	1,167			1,131
Interest income	(93		)	(115		)
Interest expense	272			306
Interest expense, net	179			191
Income from operations before income taxes	988			940
Provision for income taxes	59			120
Net income	$	929		$	820
Basic earnings per share	$	0.67		$	0.58
Diluted earnings per share	$	0.66		$	0.57
Basic weighted average shares outstanding	1,392.2			1,418.1
Diluted weighted average shares outstanding	1,407.1			1,436.4
Cash dividends declared per ordinary share	$	0.43		$	0.38

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

1

Medtronic plc

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three months ended
(in millions)	July 29, 2016			July 31, 2015
Net income	$	929		$	820
Other comprehensive loss, net of tax:
Unrealized gain (loss) on available-for-sale securities, net of tax expense (benefit) of $52 and $(74), respectively	115			(131		)
Currency adjustment, net	(350		)	(26		)
Net change in retirement obligations, net of tax expense of and $2 and $10, respectively	25			13
Unrealized gain (loss) on derivatives, net of tax expense (benefit) of $30 and $(20), respectively	54			(28		)
Other comprehensive loss	(156		)	(172		)
Comprehensive income	$	773		$	648

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

2

Medtronic plc

Consolidated Balance Sheets

(Unaudited)

(in millions)	July 29, 2016			April 29, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	3,060		$	2,876
Investments	9,750			9,758
Accounts receivable, less allowances of $161 and $161, respectively	5,357			5,562
Inventories	3,580			3,473
Other current assets	1,751			1,931
Total current assets	23,498			23,600
Property, plant, and equipment	9,917			9,714
Accumulated depreciation	(5,103		)	(4,873		)
Property, plant, and equipment, net	4,814			4,841
Goodwill	41,309			41,500
Other intangible assets, net	26,437			26,899
Tax assets	1,232			1,383
Other assets	1,311			1,421
Total assets	$	98,601		$	99,644
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current debt obligations	$	1,947		$	993
Accounts payable	1,615			1,709
Accrued compensation	1,205			1,712
Other accrued expenses	3,129			2,751
Total current liabilities	7,896			7,165
Long-term debt	30,124			30,109
Accrued compensation and retirement benefits	1,770			1,759
Accrued income taxes	2,344			2,903
Deferred tax liabilities	3,790			3,729
Other liabilities	1,785			1,916
Total liabilities	47,709			47,581
Commitments and contingencies (Notes 3 and 15)
Shareholders’ equity:
Ordinary shares— par value $0.0001	—			—
Retained earnings	52,848			53,931
Accumulated other comprehensive loss	(2,024		)	(1,868		)
Total shareholders’ equity	50,824			52,063
Noncontrolling interests	68			—
Total equity	50,892			52,063
Total liabilities and equity	$	98,601		$	99,644

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

3

Medtronic plc

Consolidated Statements of Cash Flows

(Unaudited)

	Three months ended
(in millions)	July 29, 2016			July 31, 2015
Operating Activities:
Net income	$	929		$	820
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	737			701
Amortization of debt discount and issuance costs	7			7
Acquisition-related items	(5		)	232
Provision for doubtful accounts	9			10
Deferred income taxes	32			(159		)
Stock-based compensation	79			96
Other, net	(85		)	(39		)
Change in operating assets and liabilities, net of acquisitions:
Accounts receivable, net	196			279
Inventories	(101		)	(207		)
Accounts payable and accrued liabilities	(361		)	(424		)
Other operating assets and liabilities	50			(408		)
Certain litigation charges	82			—
Certain litigation payments	(19		)	(92		)
Net cash provided by operating activities	1,550			816
Investing Activities:
Acquisitions, net of cash acquired	(12		)	(179		)
Additions to property, plant, and equipment	(330		)	(224		)
Purchases of investments	(1,044		)	(1,851		)
Sales and maturities of investments	1,104			1,266
Other investing activities, net	(2		)	2
Net cash used in investing activities	(284		)	(986		)
Financing Activities:
Acquisition-related contingent consideration	(11		)	(3		)
Change in current debt obligations, net	926			429
Issuance of long-term debt	33			—
Payments on long-term debt	(17		)	(1,004		)
Dividends to shareholders	(599		)	(538		)
Issuance of ordinary shares	214			98
Repurchase of ordinary shares	(1,763		)	(750		)
Other financing activities	57			24
Net cash used in financing activities	(1,160		)	(1,744		)
Effect of exchange rate changes on cash and cash equivalents	78			50
Net change in cash and cash equivalents	184			(1,864		)
Cash and cash equivalents at beginning of period	2,876			4,843
Cash and cash equivalents at end of period	$	3,060		$	2,979
Supplemental Cash Flow Information
Cash paid for:
Income taxes	$	115		$	636
Interest	68			76

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

4

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.) (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, comprehensive income, financial condition, and cash flows in conformity with U.S. GAAP. In the opinion of management, the consolidated financial statements reflect all adjustments (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. Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.

Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 29, 2016.

The accompanying unaudited consolidated financial statements include the accounts of Medtronic plc, its wholly-owned subsidiaries, entities for which the Company has a controlling financial interest, and variable interest entities for which the Company is the primary beneficiary. Intercompany transactions and balances have been fully eliminated in consolidation.

The Company’s fiscal years 2017, 2016, and 2015 will end or ended on April 28, 2017, April 29, 2016, and April 24, 2015, respectively.

2. New Accounting Pronouncements

Recently Adopted

In April 2015, the Financial Accounting Standards Board (FASB) issued accounting guidance that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the related debt liability. Prior to this amendment, debt issuance costs were recognized as an asset in the balance sheet and did not offset the related debt liability. The Company retrospectively adopted this guidance in the first quarter of fiscal year 2017. Its adoption had an impact of $133 million and $138 million on the Company's consolidated balance sheets at July 29, 2016 and April 29, 2016, respectively.

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 using one of two prescribed retrospective methods. The Company is evaluating the impact of the amended revenue recognition guidance on the Company’s consolidated financial statements.

In January 2016, the FASB issued guidance which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The guidance also includes a simplified impairment assessment of equity investments without readily determinable fair values and presentation and disclosure changes. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2019. The Company is evaluating the impact of the equity investment guidance on the Company's consolidated financial statements.

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.

5

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

In March 2016, the 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 benefit and deficiencies as additional paid-in capital. For the three months ended July 29, 2016, the Company recognized $57 million of excess tax benefits in additional paid-in capital. 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. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2018.

3. Acquisitions and Acquisition-Related Items

The Company had various acquisitions and other acquisition-related activity during the first quarter of fiscal years 2017 and 2016. 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 businesses 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 29, 2016 or July 31, 2015. The results of operations related to each business acquired have been included in the Company's consolidated statements of income since the date each business was acquired.

Fiscal Year 2017

The fair values of the assets acquired and liabilities assumed during the three months ended July 29, 2016 were as follows:

(in millions)
Other current assets	$	8
Property, plant, and equipment	5
Other intangible assets	48
Goodwill	56
Total assets acquired	117
Current liabilities	3
Deferred tax liabilities	3
Other liabilities	3
Total liabilities assumed	9
Net assets acquired	$	108

The Company accounted for the acquisitions above as business combinations using the acquisition method of accounting.

Acquisition-Related Items

During the three months ended July 29, 2016 and July 31, 2015, the Company recognized acquisition-related items expense of $52 million and $71 million, respectively, primarily due to integration-related costs incurred in connection with the Covidien acquisition.

Subsequent Acquisitions

On August 23, 2016, the Company's Cardiac and Vascular Group acquired HeartWare International, Inc. for total consideration of approximately $1.1 billion. The addition of HeartWare International, Inc.'s portfolio of heart failure products expands and strengthens the Company's heart failure product offerings and further complements its existing global cardiac rhythm and heart failure business. 

On August 5, 2016, the Company's Minimally Invasive Therapies Group acquired Smith & Nephew's gynecology business for total consideration of approximately $350 million. The addition of Smith & Nephew's gynecology business expands and strengthens Medtronic's minimally invasive surgical offerings and further complements its existing global gynecology business.

6

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Contingent Consideration

Certain of the Company’s business combinations involve the potential for the payment of future 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 business 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. 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 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. Changes in projected revenues, probabilities of payment, discount rates, or projected payment dates may result in adjustments to the fair value measurement.

The recurring Level 3 fair value measurements of contingent consideration include the following significant unobservable inputs:

	Fair Value at
(in millions)	July 29, 2016	Valuation Technique	Unobservable Input	Range
			Discount rate	11% - 32.5%
Revenue-based payments	$194	Discounted cash flow	Probability of payment	30% - 100%
			Projected fiscal year of payment	2017 - 2025
			Discount rate	0.3% - 5.5%
Product development-based payments	$185	Discounted cash flow	Probability of payment	75% - 100%
			Projected fiscal year of payment	2017 - 2025

At July 29, 2016, the estimated maximum potential amount of undiscounted future contingent consideration payments that the Company is expected to make associated with all completed business combinations or purchases of intellectual property prior to April 24, 2009 was approximately $175 million. The Company estimates the milestones or other conditions associated with the contingent consideration will be reached in fiscal year 2017 and thereafter.

The fair value of contingent consideration associated with acquisitions subsequent to April 24, 2009, at July 29, 2016 and April 29, 2016, was $379 million and $377 million, respectively. At July 29, 2016, $321 million was reflected in other liabilities and $58 million was reflected in other accrued expenses in the consolidated balance sheets. At April 29, 2016, $311 million was reflected in other liabilities and $66 million was reflected in other accrued expenses in the consolidated balance sheets. The portion of the contingent consideration paid related to the acquisition date fair value is reported as financing activities in the consolidated statements of cash flows. Amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.

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

	Three months ended
(in millions)	July 29, 2016			July 31, 2015
Beginning Balance	$	377		$	264
Purchase price contingent consideration	21			26
Payments	(14		)	(3		)
Change in fair value	(5		)	4
Ending Balance	$	379		$	291

7

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

4. Restructuring Charges, Net

Cost Synergies Initiative

The cost synergies initiative is the Company's restructuring program primarily related to the integration 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 integration 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 2017 and in future fiscal years as cost synergy strategies are finalized.

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			Asset Write-downs			Other Costs			Total
April 29, 2016	$	213		$	—		$	37		$	250
Restructuring charges	77			14			20			111
Payments/write-downs	(68		)	(14		)	(16		)	(98		)
Reversal of excess accrual	(8		)	—			1			(7		)
July 29, 2016	$	214		$	—		$	42		$	256

As a result of certain employees identified for termination finding other positions within the Company, the Company recorded a $7 million reversal of excess restructuring reserves for the three months ended July 29, 2016.

As part of the cost synergies initiative, the Company recorded $14 million of asset write-downs for the three months ended July 29, 2016, which included $10 million related to inventory write-offs of discontinued product lines, and, therefore, was recognized within cost of products sold in the consolidated statements of income. For the three months ended July 29, 2016, asset write-downs included $4 million related to property, plant, and equipment impairments. The Company did not recognize any significant impairments during the three months ended July 31, 2015.

5. Financial Instruments

The Company holds investments consisting primarily of marketable debt and equity securities. 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 and are measured on a recurring basis. Further, we also hold cost or equity method investments which are measured at fair value on a nonrecurring basis.

8

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Company's investments by significant investment category and the related consolidated balance sheet classification at July 29, 2016:

	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	$	675	$	28	$	—		$	703	$	703	$	—
Marketable equity securities	85		45		(1		)	129		—		129
Total Level 1	760		73		(1		)	832		703		129
Level 2:
Corporate debt securities	4,113		123		(14		)	4,222		4,222		—
U.S. government and agency securities	914		3		—			917		917		—
Mortgage-backed securities	917		26		(16		)	927		927		—
Foreign government and agency securities	15		—		—			15		15		—
Other asset-backed securities	230		3		—			233		233		—
Debt funds	2,872		14		(246		)	2,640		2,640		—
Total Level 2	9,061		169		(276		)	8,954		8,954		—
Level 3:
Corporate debt securities	1		—		—			1		—		1
Auction rate securities	47		—		(3		)	44		—		44
Total Level 3	48		—		(3		)	45		—		45
Total available-for-sale securities	$	9,869	$	242	$	(280	)	$	9,831	$	9,657	$	174
Trading securities:
Level 1:
Exchange-traded funds	75		19		(1		)	93		93		—
Total Level 1	75		19		(1		)	93		93		—
Total trading securities	$	75	$	19	$	(1	)	$	93	$	93	$	—
Cost method, equity method, and other investments:
Level 3:
Cost method, equity method, and other investments	546		—		—			N/A		—		546
Total Level 3	546		—		—			N/A		—		546
Total cost method, equity method, and other investments	$	546	$	—	$	—		N/A		$	—	$	546
Total investments	$	10,490	$	261	$	(281	)	$	9,924	$	9,750	$	720

9

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 29, 2016:

	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	$	792	$	14	$	(1	)	$	805	$	805	$	—
Marketable equity securities	75		21		(11		)	85		—		85
Total Level 1	867		35		(12		)	890		805		85
Level 2:
Corporate debt securities	3,935		85		(24		)	3,996		3,996		—
U.S. government and agency securities	902		2		—			904		904		—
Mortgage-backed securities	1,016		17		(18		)	1,015		1,015		—
Other asset-backed securities	192		3		—			195		195		—
Debt funds	3,040		5		(281		)	2,764		2,764		—
Total Level 2	9,085		112		(323		)	8,874		8,874		—
Level 3:
Corporate debt securities	1		—		—			1		—		1
Auction rate securities	47		—		(3		)	44		—		44
Total Level 3	48		—		(3		)	45		—		45
Total available-for-sale securities	$	10,000	$	147	$	(338	)	$	9,809	$	9,679	$	130
Trading securities:
Level 1:
Exchange-traded funds	65		15		(1		)	79		79		—
Total Level 1	65		15		(1		)	79		79		—
Total trading securities	$	65	$	15	$	(1	)	$	79	$	79	$	—
Cost method, equity method, and other investments:
Level 3:
Cost method, equity method, and other investments	506		—		—			N/A		—		506
Total Level 3	506		—		—			N/A		—		506
Total cost method, equity method, and other investments	$	506	$	—	$	—		N/A		$	—	$	506
Total investments	$	10,571	$	162	$	(339	)	$	9,888	$	9,758	$	636

10

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Marketable Debt and Equity Securities

The following tables represents the gross unrealized losses and fair values of the Company’s available-for-sale securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category at July 29, 2016 and April 29, 2016:

	July 29, 2016
	Less than 12 months					More than 12 months
(in millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate debt securities	$	494	$	(6	)	$	216	$	(8	)
Auction rate securities	—		—			44		(3		)
Mortgage-backed securities	208		(6		)	121		(10		)
Debt funds	851		—			1,789		(246		)
Marketable equity securities	$	4	$	(1	)	$	—	$	—
Total	$	1,557	$	(13	)	$	2,170	$	(267	)

	April 29, 2016
	Less than 12 months					More than 12 months
(in millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate debt securities	$	756	$	(18	)	$	136	$	(6	)
Auction rate securities	—		—			44		(3		)
Mortgage-backed securities	196		(5		)	92		(5		)
U.S. government and agency securities	308		(4		)	67		(5		)
Debt funds	670		(26		)	1,601		(256		)
Marketable equity securities	45		(11		)	—		—
Total	$	1,975	$	(64	)	$	1,940	$	(275	)

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 at July 29, 2016:

	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 29, 2016 or July 31, 2015. 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.

11

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):

(in millions)	Total Level 3 Investments			Corporate Debt Securities		Auction Rate Securities
April 29, 2016	$	45		$	1	$	44
Total unrealized losses included in other comprehensive income	—			—		—
July 29, 2016	$	45		$	1	$	44
(in millions)	Total Level 3 Investments			Corporate Debt Securities		Auction Rate Securities
April 24, 2015	$	106		$	1	$	105
Total unrealized losses included in other comprehensive income	(3		)	—		(3		)
July 31, 2015	$	103		$	1	$	102

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

	Three months ended
	July 29, 2016						July 31, 2015
(in millions)	Debt (1)			Equity (2)			Debt (1)			Equity (2)
Proceeds from sales	$	1,098		$	6		$	1,237		$	29
Gross realized gains	7			4			5			12
Gross realized losses	(12		)	—			(5		)	—
Impairment losses recognized	—			(3		)	—			(23		)

(1) Includes available-for-sale debt securities.

(2) 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 the Company is invested, the Company believes it has recognized all necessary other-than-temporary impairments, as the Company does not have the intent to sell, nor is it more likely than not that the Company will be required to sell, before recovery of the amortized cost.

At July 29, 2016 and April 29, 2016, the credit loss portion of other-than temporary impairments on debt securities was not significant. The total reductions of available-for-sale debt securities sold during the three months ended July 29, 2016 and July 31, 2015 were not significant. The total other-than-temporary impairment losses on available-for-sale debt securities for the three months ended July 29, 2016 and July 31, 2015 were not significant.

The July 29, 2016 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 29, 2016
Due in one year or less	$	969
Due after one year through five years	3,188
Due after five years through ten years	2,845
Due after ten years	60
Total	$	7,062

12

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

The Company holds investments in marketable equity securities, which are classified as other assets in the consolidated balance sheets. The aggregate carrying amount of these investments was $129 million and $85 million at July 29, 2016 and April 29, 2016, respectively. The Company did not recognize any significant impairment charges related to marketable equity securities during the three months ended July 29, 2016. During the three months ended July 31, 2015, the Company determined that the fair values of certain marketable equity securities were below the 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 recognized within other expense, net in the consolidated statements of income.

Cost method, equity method, and other investments

The Company holds investments in equity and other securities that are accounted for using the cost or equity method, which are classified as other assets in the consolidated balance sheets. At July 29, 2016 and April 29, 2016, the aggregate carrying amount of equity and other securities without a quoted market price and accounted for using the cost or equity method was $546 million and $506 million, respectively. Cost and equity method investments are measured at fair value on a nonrecurring basis. 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 values of cost and equity method investments are not assessed for impairment if there are no identified events or changes in circumstances that may have a material adverse effect on the fair value of the investment.

During the three months ended July 29, 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 $3 million in impairment charges during the three months ended July 29, 2016, which were recognized in other expense, net in the consolidated statements of income. The Company did not recognize any significant impairment charges related to cost method investments during the three months ended July 31, 2015. Cost 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.

6. 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 amounts outstanding at July 29, 2016 totaled $975 million. No amounts were outstanding at April 29, 2016. During the three months ended July 29, 2016, the weighted average original maturity of the commercial paper outstanding was approximately 21 days, and the weighted average interest rate was 0.73 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 $3.5 billionfive year credit facility (Credit Facility) which provides back up funding for the commercial paper program described above. At July 29, 2016 and April 29, 2016, 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 at July 29, 2016.

13

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Long-Term Debt

Long-term debt consisted of the following:

(in millions, except interest rates)	Maturity by Fiscal Year	July 29, 2016			April 29, 2016
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	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
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	4,000			4,000
Three-year term loan	2018	3,000			3,000
Interest rate swaps (Note 7)	2018 - 2022	106			89
Capital lease obligations	2018 - 2025	25			26
Bank borrowings	2021	66			56
Debt premium	2018 - 2045	198			214
Deferred Financing Costs (1)	2018-2045	(133		)	(138		)
Total Long-Term Debt		$	30,124		$	30,109

(1) We retrospectively adopted the guidance to simplify the presentation of deferred issuance costs in the quarter ending July 29, 2016. As a result deferred issuance costs have been reclassified from other assets to long-term debt. See Note 2 to the consolidated financial statements for additional information.

Senior Notes

The Company has outstanding unsecured senior obligations including those described 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 remained in compliance with at July 29, 2016. 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 7 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 29, 2016.

14

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

Financial Instruments Not Measured at Fair Value

At July 29, 2016, the total estimated fair value of the Company’s long-term debt, including the current portion, was $30.5 billion compared to a principal value of $27.4 billion; at April 29, 2016, the total estimated fair value was $29.8 billion compared to a principal value of $27.4 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.

7. 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 at July 29, 2016 and April 29, 2016 was $10.7 billion and $10.8 billion, 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 a foreign currency. The gross notional amount of these contracts, not designated as hedging instruments, outstanding at July 29, 2016 and April 29, 2016, was $4.9 billion and $5.0 billion, respectively.

The amounts and classification of the (losses) gains in the consolidated statements of income related to derivative instruments, not designated as hedging instruments, for the three months ended July 29, 2016 and July 31, 2015 were as follows:

(in millions)		Three months ended
Derivatives Not Designated as Hedging Instruments	Classification	July 29, 2016			July 31, 2015
Currency exchange rate contracts (losses) gains	Other expense, net	$	(3	)	$	20

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. No gains or losses relating to ineffectiveness of foreign currency cash flow hedges were recognized in earnings during the three months ended July 29, 2016 or July 31, 2015. 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 29, 2016 or July 31, 2015. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at July 29, 2016 and April 29, 2016, was $5.8 billion and $5.7 billion, respectively, and will mature within the subsequent three-year period.

15

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

The amount of gains (losses) and location of the gains (losses) in the consolidated statements of income and other comprehensive (loss) income (OCI) related to currency exchange rate contract derivative instruments designated as cash flow hedges for the three months ended July 29, 2016 and July 31, 2015 were as follows:

Three months ended July 29, 2016
	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			Classification	Amount
Currency exchange rate contracts	$	121		Other expense, net	$	15
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			Classification	Amount
Currency exchange rate contracts	$	(14	)	Other expense, net	$	95
				Cost of products sold	(21		)
Total	$	(14	)		$	74

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. No gains or losses relating to ineffectiveness of forward starting interest rate derivative instruments were recognized in earnings during the three months ended July 29, 2016 or July 31, 2015. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness during the three months ended July 29, 2016 or July 31, 2015. At July 29, 2016, 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 in fiscal year 2017.

For the three months ended July 29, 2016 and July 31, 2015, 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.

The unrealized losses on outstanding forward starting interest rate swap derivative instruments at July 29, 2016 and April 29, 2016 were $71 million and $48 million, respectively. Unrealized losses on outstanding forward starting interest rate swap derivative instruments were recorded in other liabilities, with the offset recorded in accumulated other comprehensive loss in the consolidated balance sheets.

At July 29, 2016 and April 29, 2016, the Company had $36 million and $90 million, respectively, in after-tax net unrealized losses associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $53 million of after-tax net unrealized gains as of July 29, 2016 will be reclassified into the consolidated statements of income over the next 12 months.

Fair Value Hedges

Interest rate derivative instruments designated as fair value hedges are designed to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.

At July 29, 2016 and April 29, 2016, the Company had interest rate swaps in gross notional amounts of $1.2 billion and $1.2 billion, respectively, 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 8 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 29, 2016.

At July 29, 2016, the market value of outstanding interest rate swap agreements was a net $106 million unrealized gain, and the market value of the hedged item was a net $106 million unrealized loss. The amounts which were recorded in other assets, other current assets, and other liabilities with the offsets recorded in long-term debt and current debt obligations in the consolidated

16

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

balance sheets. No significant hedge ineffectiveness was recorded as a result of these fair value hedges for the three months ended July 29, 2016 or July 31, 2015.

During the three months ended July 29, 2016 and July 31, 2015, the Company did not have any significant ineffective fair value hedging instruments. In addition, during the three months ended July 29, 2016 and July 31, 2015, the Company did not recognize any significant gains or losses on firm commitments that no longer qualify as fair value hedges.

Balance Sheet Presentation

The following tables summarize the balance sheet classification and fair value amounts of derivative instruments reported in the consolidated balance sheets at July 29, 2016 and April 29, 2016. 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 29, 2016
	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	Other current assets	191		Other accrued expenses	101
Interest rate contracts	Other assets	106		Other liabilities	71
Currency exchange rate contracts	Other assets	55		Other liabilities	55
Total derivatives designated as hedging instruments		$	352		$	227
Derivatives not designated as hedging instruments
Currency exchange rate contracts	Other current assets	$	26	Other accrued expenses	$	13
Cross currency interest rate contracts	Other assets	10		Other liabilities	10
Total derivatives not designated as hedging instruments		$	36		$	23
Total derivatives		$	388		$	250

April 29, 2016
	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	Other current assets	$	123	Other accrued expenses	$	89
Interest rate contracts	Other assets	89		Other liabilities	48
Currency exchange rate contracts	Other assets	9		Other liabilities	54
Total derivatives designated as hedging instruments		$	221		$	191
Derivatives not designated as hedging instruments
Commodity derivatives	Other current assets	$	—	Other accrued expenses	$	1
Currency exchange rate contracts	Other current assets	13		Other accrued expenses	23
Cross currency interest rate contracts	Other assets	14		Other liabilities	4
Total derivatives not designated as hedging instruments		$	27		$	28
Total derivatives		$	248		$	219

17

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 at July 29, 2016 and April 29, 2016.

	July 29, 2016				April 29, 2016
(in millions)	Level 1		Level 2		Level 1		Level 2
Derivative assets	$	272	$	116	$	145	$	103
Derivative liabilities	169		81		166		53

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

July 29, 2016				Gross Amount Not Offset on the Balance Sheet
(in millions)	Gross Amount of Recognized Assets (Liabilities)			Financial Instruments			Collateral (Received) Posted		Net Amount
Derivative Assets
Currency exchange rate contracts	$	272		$	(189	)	$	—	$	83
Interest rate contracts	106			(20		)	—		86
Cross currency interest rate contracts	10			(5		)	—		5
	$	388		$	(214	)	$	—	$	174
Derivative Liabilities
Currency exchange rate contracts	$	(169	)	$	146		$	—	$	(23	)
Interest rate contracts	(71		)	63			—		(8		)
Cross currency interest rate contracts	(10		)	5			—		(5		)
	$	(250	)	$	214		$	—	$	(36	)
Total	$	138		$	—		$	—	$	138

April 29, 2016				Gross Amount Not Offset on the Balance Sheet
(in millions)	Gross Amount of Recognized Assets (Liabilities)			Financial Instruments			Collateral (Received) Posted			Net Amount
Derivative Assets
Currency exchange rate contracts	$	145		$	(98	)	$	(1	)	$	46
Interest rate contracts	89			(20		)	—			69
Cross currency interest rate contracts	14			—			—			14
	$	248		$	(118	)	$	(1	)	$	129
Derivative Liabilities
Currency exchange rate contracts	$	(166	)	$	85		$	26		$	(55	)
Interest rate contracts	(48		)	34			—			(14		)
Cross currency interest rate contracts	(4		)	—			—			(4		)
Commodity contracts	(1		)	—			—			(1		)
	$	(219	)	$	119		$	26		$	(74	)
Total	$	29		$	1		$	25		$	55

18

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

8. Inventories

Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. The Company reduces the carrying value of inventories for those items that are potentially excess, obsolete, or slow-moving based on changes in customer demand, technology developments, or other economic factors. Inventory balances were as follows:

(in millions)	July 29, 2016		April 29, 2016
Finished goods	$	2,346	$	2,242
Work in-process	497		499
Raw materials	737		732
Total	$	3,580	$	3,473

9. Goodwill and Other Intangible Assets, Net

Goodwill

The changes in the carrying amount of goodwill by reporting unit for the three months endedJuly 29, 2016 were as follows:

(in millions)	Cardiac and Vascular Group			Minimally Invasive Therapies Group			Restorative Therapies Group			Diabetes Group		Total
April 29, 2016	$	6,243		$	23,784		$	9,620		$	1,853	$	41,500
Goodwill as a result of acquisitions	27			(3		)	32			—		56
Currency adjustment, net	(11		)	(231		)	(5		)	—		(247		)
July 29, 2016	$	6,259		$	23,550		$	9,647		$	1,853	$	41,309

The Company assesses goodwill 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. Impairment testing for goodwill is performed at the reporting unit level. The test for impairment of goodwill requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The Company calculates the excess of each reporting unit's fair value over its carrying amount, including goodwill, utilizing a discounted cash flow analysis. The Company did not recognize any goodwill impairment during the three months ended July 29, 2016 or July 31, 2015.

Intangible Assets

The gross carrying amount and accumulated amortization of intangible assets at July 29, 2016 and April 29, 2016 were as follows:

	July 29, 2016					April 29, 2016
(in millions)	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Definite-lived:
Customer-related	$	18,614	$	(1,596	)	$	18,596	$	(1,331	)
Purchased technology and patents	11,537		(3,173		)	11,397		(2,976		)
Trademarks and tradenames	804		(425		)	854		(403		)
Other	72		(34		)	72		(31		)
Total	$	31,027	$	(5,228	)	$	30,919	$	(4,741	)
Indefinite-lived:
IPR&D	$	638				$	721

19

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

The Company assesses definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset (asset group) may not be recoverable. When events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable, the Company calculates the excess of an intangible asset's carrying value over its undiscounted future cash flows. If the carrying value is not recoverable, an impairment loss is recognized based on the amount by which the carrying value exceeds the fair value. The inputs used in the fair value analysis fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. The Company did not recognize any intangible asset impairments during the three months ended July 29, 2016 or July 31, 2015.

The Company assesses indefinite-lived intangibles 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 indefinite-lived intangibles impairment test requires the Company to perform an assessment involving several estimates about fair value. The Company calculates the excess of indefinite-lived intangibles asset fair values over their carrying values utilizing a discounted future cash flow analysis. During the three months ended July 29, 2016 and July 31, 2015, the Company did not recognize any indefinite-lived intangibles 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 recognize impairment losses in the future.

Amortization Expense

Intangible asset amortization expense for the three months ended July 29, 2016 and July 31, 2015, was $487 million and $481 million, respectively.

Estimated aggregate amortization expense by fiscal year based on the current carrying value of definite-lived intangible assets at July 29, 2016, excluding any possible future amortization associated with acquired IPR&D, which has not met technological feasibility, is as follows:

(in millions)	Amortization Expense
Remaining 2017	$	1,449
2018	1,905
2019	1,811
2020	1,763
2021	1,746
2022	1,705

10. Income Taxes

During the first quarter of fiscal year 2017, the Company recognized a $31 million net benefit from certain tax adjustments. This net benefit was recognized within provision for income taxes in the consolidated statements of income. A $431 million tax benefit was recognized as the result of the resolution of Covidien’s previously disclosed Tyco International plc intercompany debt issues with the U.S. Tax Court and the Appeals Division of the U.S. Internal Revenue Service (IRS). This benefit was partially offset by a $371 million charge associated with the expected resolution with the IRS for the Ardian, CoreValve, Inc. and Ablation Frontiers, Inc. acquisition-related issues and the allocation of income between Medtronic, Inc. and its wholly owned subsidiary operating in Puerto Rico for certain businesses. This resolution does not include the businesses that are the subject of the Medtronic, Inc. U.S. Tax Court case for fiscal years 2005 and 2006. In addition, a $29 million charge was recognized in connection with the redemption of an intercompany minority interest.

The Company’s effective tax rate for the three months ended July 29, 2016 was 6.0 percent compared to 12.8 percent for the three months ended July 31, 2015. The decrease in the effective tax rate for the three months ended July 29, 2016 was primarily due to certain tax adjustments recognized during the quarter, finalization of certain tax returns, and changes to uncertain tax position reserves.

At July 29, 2016, the Company's gross unrecognized tax benefits were $1.9 billion, compared to $2.7 billion at April 29, 2016. In addition, the Company accrued gross interest and penalties of $261 million at July 29, 2016. If all of the Company’s unrecognized tax benefits were recognized, approximately $1.8 billion would impact the Company’s effective tax rate. The Company has recorded all of the gross unrecognized tax benefits as a non-current liability within accrued income taxes in the consolidated balance sheets. The Company will continue to recognize interest and penalties related to income tax matters within provision for income taxes in the consolidated statements of income and record the liability within accrued income taxes in the consolidated balance sheets.

20

Medtronic plc

Notes to Consolidated Financial Statements

(Unaudited)

See Note 15to the consolidated financial statements for additional information regarding the status of current tax audits and proceedings.

11. Earnings Per Share

Earnings per share is calculated using the two-class method, as the Company's A Preferred Shares are considered participating securities. Accordingly, earnings are allocated to both ordinary shares and participating securities in determining earnings per ordinary share. Due to the limited number of A Preferred Shares outstanding, this allocation had no effect on ordinary earnings per share; therefore, it is not presented below. Basic earnings per share is computed based on the weighted average number of ordinary shares outstanding. Diluted earnings per share is computed based on the weighted average number of ordinary shares outstanding, increased by the number of additional shares that would have been outstanding had the potentially dilutive ordinary shares been issued, and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive ordinary shares include stock options and other stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan.

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

	Three months ended
(in millions, except per share data)	July 29, 2016		July 31, 2015
Numerator:
Net income attributable to ordinary shareholders	$	929	$	820
Denominator:
Basic – weighted average shares outstanding	1,392.2		1,418.1
Effect of dilutive securities:
Employee stock options	10.5		13.2
Employee restricted stock units	3.9		5.0
Other	0.5		0.1
Diluted – weighted average shares outstanding	1,407.1		1,436.4
Basic earnings per share	$	0.67	$	0.58
Diluted earnings per share