10-K 1 mdt-2018427x10k.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.
For the fiscal year ended April 27, 2018.
 
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from __________ to __________
Commission File No. 1-36820
mdtlogo2a41.jpg®
MEDTRONIC PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
Ireland
 
98-1183488
(Jurisdiction of incorporation)
 
(I.R.S. Employer Identification No.)
20 On Hatch, Lower Hatch Street
Dublin 2, Ireland
(Address of principal executive office)
+353 1 438-1700
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Ordinary shares, par value $0.0001 per share
New York Stock Exchange, Inc.
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o  No x
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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition 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  Non-accelerated filer o  Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(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
Aggregate market value of voting and non-voting common equity of Medtronic plc held by non-affiliates of the registrant as of October 27, 2017, based on the closing price of $81.30, as reported on the New York Stock Exchange: approximately $110.0 billion. Number of Ordinary Shares outstanding on June 20, 2018: 1,351,709,097
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 2018 Annual General Meeting are incorporated by reference into Part III hereof.
 



TABLE OF CONTENTS
Item
 
Description
 
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, and other written reports of Medtronic public limited company, organized under the laws of Ireland (together with its consolidated subsidiaries, Medtronic, the Company, or we, us, or our), and oral statements made by or with the approval of one of the Company’s executive officers from time to time, may include “forward-looking” statements. All statements other than statements of historical fact contained in this Annual Report on Form 10-K, including statements regarding our future results of operations and financial position, business strategy and plans, objectives of management for future operations and current expectations or forecasts of future results, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Our forward-looking statements may include statements related to our growth and growth strategies, developments in the markets for our products, therapies and services, financial results, product development launches and effectiveness, research and development strategy, regulatory approvals, competitive strengths, restructuring and cost-saving initiatives, intellectual property rights, litigation and tax matters, government investigations, mergers and acquisitions, divestitures, market acceptance of our products, therapies and services, accounting estimates, financing activities, ongoing contractual obligations, working capital adequacy, value of our investments, our effective tax rate, our expected returns to shareholders, and sales efforts. In some cases, such statements may be identified by the use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “looking ahead,” “may,” “plan,” “possible,” “potential,” “project,” “should,” “will,” and similar words or expressions. Forward-looking statements in this Annual Report include, but are not limited to, statements regarding our ability to drive long-term shareholder value, development and future launches of products and continued or future acceptance of products, therapies and services in our segments; expected timing for completion of research studies relating to our products; market positioning and performance of our products, including stabilization of certain product markets; divestitures and the potential benefits thereof; the costs and benefits of integrating previous acquisitions; anticipated timing for United States (U.S.) Food and Drug Administration (FDA) and non-U.S. regulatory approval of new products; increased presence in new markets, including markets outside the U.S.; changes in the market and our market share; acquisitions and investment initiatives, as well as integration of acquired companies into our operations; the resolution of tax matters; the effectiveness of our development activities in reducing patient care costs and hospital stay lengths; our approach towards cost containment; our expectations regarding health care costs, including potential changes to reimbursement policies and pricing pressures; our expectations regarding changes to patient standards of care; our ability to identify and maintain successful business partnerships; the elimination of certain positions or costs related to restructuring initiatives; outcomes in our litigation matters and government investigations; general economic conditions; the adequacy of available working capital and our working capital needs; our payment of dividends and redemption of shares; the continued strength of our balance sheet and liquidity; our accounts receivable exposure; and the potential impact of our compliance with governmental regulations and accounting guidance.
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Annual Report on Form 10-K and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. One must carefully consider forward-looking statements and understand that such forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, and involve a variety of risks and uncertainties, known and unknown, including, among others, those discussed in the sections entitled “Government Regulation and Other Considerations” within “Item 1. Business” and “Item 1A. Risk Factors” in this Annual Report on Form 10-K, as well as those related to:

competition in the medical device industry;
reduction or interruption in our supply;
quality problems, liquidity shortfalls;
decreasing prices and pricing pressure;
fluctuations in currency exchange rates;
changes in applicable tax rates;
positions taken by taxing authorities;
adverse regulatory action;
delays in regulatory approvals;
litigation results;

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self-insurance;
commercial insurance;
health care policy changes;
international operations;
cybersecurity incidents;
failure to complete or achieve the intended benefits of acquisitions or divestitures; or
disruption of our current plans and operations.

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


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PART I
Item 1. Business
OVERVIEW
Medtronic plc, headquartered in Dublin, Ireland, is among the world's largest medical technology, services, and solutions companies - alleviating pain, restoring health, and extending life for millions of people around the world. Medtronic was founded in 1949 and today serves hospitals, physicians, clinicians, and patients in more than 150 countries worldwide. We remain committed to a mission written by our founder in 1960 that directs us “to contribute to human welfare by the application of biomedical engineering in the research, design, manufacture, and sale of products to alleviate pain, restore health, and extend life.”
With innovation and market leadership, we have pioneered advances in medical technology in all of our businesses. Our commitment to enhance our offerings by developing and acquiring new products, wrap-around programs, and solutions to meet the needs of a broader set of stakeholders is driven by the following primary strategies:
Therapy Innovation: Delivering a strong launch cadence of meaningful therapies and procedures.
Globalization: Addressing the inequity in health care access globally, primarily in emerging markets.
Economic Value: Becoming a leader in value-based health care by offering new services and solutions to improve outcomes and efficiencies, lower costs by reducing hospitalizations, improve remote clinical management, and increase patient engagement.
Our primary customers include hospitals, clinics, third-party health care providers, distributors, and other institutions, including governmental health care programs and group purchasing organizations (GPOs).
Medtronic plc is the successor to Medtronic, Inc., a Minnesota corporation. Medtronic, Inc. and Covidien plc (Covidien) were combined under and became subsidiaries of Medtronic plc on January 26, 2015.
On July 29, 2017, we completed the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses. Among the product lines included in the divestiture were the dental and animal health, chart paper, wound care, incontinence, electrodes, SharpSafety, thermometry, perinatal protection, blood collection, compression, and enteral feeding offerings. Prior to the divestiture, these businesses were included within the Minimally Invasive Therapies Group segment.
We have four operating and reportable segments that primarily develop, manufacture, distribute, and sell device-based medical therapies and services. Our segments and their portion of our total reported net sales for fiscal year 2018 of $30.0 billion are as follows:
Cardiac and Vascular Group ($11.4 billion)
Minimally Invasive Therapies Group ($8.7 billion)
Restorative Therapies Group ($7.7 billion)
Diabetes Group ($2.1 billion)
For more information regarding our segments, please see Note 21 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.

CARDIAC AND VASCULAR GROUP

The Cardiac and Vascular Group is made up of the Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, and Aortic & Peripheral Vascular divisions. The primary medical specialists who use our Cardiac and Vascular products include electrophysiologists, implanting cardiologists, heart failure specialists, cardiovascular, cardiothoracic, and vascular surgeons, and interventional cardiologists and radiologists.


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Cardiac Rhythm & Heart Failure
Our Cardiac Rhythm & Heart Failure division develops, manufactures, and markets products for the diagnosis, treatment, and management of heart rhythm disorders and heart failure. Our products include implantable devices, leads and delivery systems, products for the treatment of atrial fibrillation (AF), products designed to reduce surgical site infections, information systems for the management of patients with Cardiac Rhythm & Heart Failure devices, ventricular assist systems, and an integrated health solutions business. Principal products and services offered include:
Implantable cardiac pacemakers including the Azure, Adapta, Advisa MRI SureScan, and Micra Transcatheter Pacing System, which is leadless and does not have a subcutaneous device pocket like a conventional pacemaker.
Implantable cardioverter defibrillators (ICDs), including the Visia AF and Evera MRI SureScan, which is paired with the reliable Sprint Quattro Secure lead, the only defibrillator lead with more than 12 years of proven performance with active monitoring.
Implantable cardiac resynchronization therapy devices (CRT-Ds and CRT-Ps) including the Claria/Amplia/Compia family of MRI Quad CRT-D SureScan systems and the Percepta/Serena/Solara family of MRI Quad CRT-P SureScan systems. The Claria CRT-D MRI and Percepta CRT-P MRI devices feature EffectivCRT, which is an algorithm that verifies left ventricular pacing effectiveness and automatically tailors the therapy to individual patients, and the AdaptivCRT algorithm, which reduces a patient's odds of a 30-day heart failure readmission and has demonstrated a reduction in AF risk compared to echo-optimized biventricular pacing.
AF ablation products including the Arctic Front Advance Cardiac Cryoballoon System, which includes the Arctic Front Advance ST Cryoablation Catheter, designed for pulmonary vein isolation in the treatment of patients with drug refractory paroxysmal AF and the second-generation Phased RF System, PVAC Gold, which uses duty cycled, phased radio frequency energy for the treatment of symptomatic paroxysmal persistent and long-standing persistent AF.
Insertable cardiac monitor systems including the Reveal LINQ, which is used to record the heart’s electrical activity before, during, and after transient symptoms such as syncope (i.e., fainting) and palpitations to assist in diagnosis.
Mechanical circulatory support products including miniaturized implantable heart pumps, or ventricular assist devices, patient accessories and surgical tools to treat patients suffering from advanced heart failure.
TYRX products including the Absorbable Antibacterial Envelope and the TYRX Neuro Absorbable Antibacterial Envelope, which are designed to stabilize electronic implantable devices and help prevent infection associated with implantable pacemakers, defibrillators, and spinal cord neurostimulators.
Remote monitoring services and patient-centered software to enable efficient care coordination and specialized telehealth nurse support as well as services related to hospital operational efficiency.
Coronary & Structural Heart
Our Coronary & Structural Heart division includes therapies to treat coronary artery disease and heart valve disorders. Our products include coronary stents and related delivery systems, including a broad line of balloon angioplasty catheters, guide catheters, guide wires, diagnostic catheters, and accessories as well as products for the repair and replacement of heart valves, perfusion systems, positioning and stabilization systems for beating heart revascularization surgery, and surgical ablation products. Principal products and services offered include:
CoreValve family of aortic valves, including our second-generation recapturable TCV system, CoreValve Evolut R, and our third-generation system, CoreValve Evolut PRO.
Percutaneous Coronary Intervention stent products including our Resolute Integrity and Resolute Onyx drug-eluting stent systems.
Surgical valve replacement and repair products for damaged or diseased heart valves, including both tissue and mechanical valves, blood-handling products that form a circulatory support system to maintain and monitor blood circulation and coagulation status, oxygen supply, and body temperature during arrested heart surgery, and surgical ablation systems and positioning and stabilization technologies.
Aortic & Peripheral Vascular
Our Aortic & Peripheral Vascular division is comprised of a comprehensive line of products and therapies to treat aortic disease (such as aneurysms, dissections, and transections) as well as peripheral vascular disease, and venous disease. Our products include endovascular stent graft systems, peripheral drug coated balloons, stent and angioplasty systems, and carotid embolic protection

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systems for the treatment of vascular disease outside the heart, and products for superficial and deep venous disease. Principal products and services offered include:
Endovascular stent grafts and accessories including the Endurant Abdominal Aortic Aneurysm Stent Graft System family of products, the Valiant Captivia Thoracic Aortic Aneurysm stent graft system, and the Heli-FX EndoAnchor System.
Percutaneous angioplasty balloons including the IN.PACT family of drug-coated balloons, vascular stents, such as the Protégé and Everflex self-expanding stents and Visi-Pro balloon expandable stents, directional atherectomy products, such as the HawkOne plaque excision system, and other procedure support tools.
Products to treat superficial venous diseases in the lower extremities including the ClosureFast RF ablation system and the VenaSeal medical adhesive closure system.

MINIMALLY INVASIVE THERAPIES GROUP

The Minimally Invasive Therapies Group is made up of the Surgical Innovations and Respiratory, Gastrointestinal, & Renal divisions. Products and therapies of this group are used primarily by hospitals, physicians' offices, ambulatory care centers, and other alternate site healthcare providers. While less frequent, some products and therapies are also used in home settings.
Surgical Innovations
Our Surgical Innovations division develops, manufactures, and markets advanced and general surgical products including surgical stapling devices, vessel sealing instruments, wound closure, electrosurgery products, hernia mechanical devices, mesh implants, and gynecology products and therapies to treat diseases and conditions that are typically, but not exclusively, addressed by surgeons. Principal products and services offered include:
Advanced stapling products, including the Tri-Staple technology platform for endoscopic stapling, including the Endo GIA reloads and reinforced reloads with Tri-Staple Technology and the Endo GIA ultra universal stapler, the Signia and iDrive powered stapling systems, the LigaSure vessel sealing system with nano-coating, and the Sonicision cordless ultrasonic dissection system.
Electrosurgical hardware and instruments, including the Valleylab FT10 energy platform, and the Force TriVerse electrosurgical pencil.
Products designed for the treatment of hernias, including the AbsorbaTack absorbable mesh fixation device for hernia repair, the Symbotex composite mesh for surgical laparoscopic and open ventral hernia repair, and Parietex ProGrip, a self-gripping, biocompatible solution for inguinal hernias.
Respiratory, Gastrointestinal, & Renal
Our Respiratory, Gastrointestinal, & Renal division develops, manufactures, and markets products in the emerging fields of minimally invasive gastrointestinal diagnostics and therapies, respiratory monitoring, airway management and ventilation therapies, and for the treatment of renal disease. Principal products and services offered include:
Gastrointestinal and endoscopy products, including the PillCam COLON, the Emprint ablation system with Thermosphere Technology, the HET Bipolar System, the Cool-tip radiofrequency ablation system, the Barrx platform with the Barrx 360 Express catheter, and the HALO ablation catheters for treatment of Barrett’s esophagus.
Airway, ventilation, and inhalation therapies products, including the Puritan Bennett 980 ventilator, the Newport e360 and HT70 ventilators, the TaperGuard Evac tube, Shiley Endotracheal Tubes, Shiley Tracheostomy Tubes, and DAR Filters.
Products focused on patient monitoring, including the Capnostream with Microstream technology capnography monitors, the Nellcor Bedside SpO2 patient monitoring system, the Bispectral Index (BIS) brain monitoring technology, and the INVOS Cerebral/Somatic Oximeter.
Products providing solutions for the treatment of renal disease, including Palindrome, Mahurkar and Mahurkar Elite Dialysis Access Catheters for renal therapy, and other products designed for use in treatment of both acute and chronic renal failure conditions.


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RESTORATIVE THERAPIES GROUP

The Restorative Therapies Group is made up of the Spine, Brain, Specialty Therapies and Pain Therapies divisions. The primary medical specialists who use the products of this group include spinal surgeons, neurosurgeons, neurologists, pain management specialists, anesthesiologists, orthopedic surgeons, urologists, colorectal surgeons, urogynecologists, interventional radiologists, and ear, nose, and throat specialists.
Spine
Our Spine division develops, manufactures, and markets a comprehensive line of medical devices and implants used in the treatment of the spine and musculoskeletal system. Our Spine division also provides biologic solutions for the orthopedic and dental markets and, in concert with our Neurosurgery business, offers unique and highly differentiated imaging, navigation, power instruments, nerve monitoring, and Mazor robotics integrated for our spine procedures. Principal products and services offered include:
Products to treat a variety of conditions affecting the spine, including degenerative disc disease, spinal deformity, spinal tumors, fractures of the spine, and stenosis. These products include our CD HORIZON SOLERA and LEGACY Systems, and the CAPSTONE, CLYDESDALE, and ELEVATE interbody spacers.
Products that facilitate less invasive thoracolumbar surgeries, including the CD HORIZON VOYAGER, SOLERA SEXTANT and LONGITUDE Percutaneous Fixation Systems.
Products to treat conditions in the cervical region of the spine, including the ZEVO and ATLANTIS VISION ELITE Anterior Cervical Plate Systems, the VERTEX SELECT Reconstruction System, and the PRESTIGE and BRYAN Cervical Artificial Discs.
Biologic solutions products, including our INFUSE Bone Graft (InductOs in the European Union (E.U.)), which contains a recombinant human bone morphogenetic protein, rhBMP-2, for certain spinal, trauma, and oral maxillofacial applications. Demineralized Bone Matrix products, including MagniFuse, Grafton/Grafton Plus, and PROGENIX, and the MASTERGRAFT family of synthetic bone graft products - Matrix, Putty, and Granules.
Brain Therapies
Our Brain Therapies division develops, manufactures, and markets an integrated portfolio of devices and therapies for the treatment of neurological disorders and diseases, as well as surgical technologies designed to improve the precision and workflow of neuro procedures. Principal products and services offered include:
Neurovascular products to treat diseases of the vasculature in and around the brain. This includes coils, neurovascular stents, and flow diversion products, as well as access and delivery products to support procedures. Products also include the Pipeline Flex Embolization Devices, endovascular treatments for large or giant wide-necked brain aneurysms, the portfolio of Solitaire revascularization devices for treatment of acute ischemic stroke, and a portfolio of access catheters.
Brain modulation products, including those for the treatment of the disabling symptoms of Parkinson's disease, essential tremor, refractory epilepsy (outside the U.S.), severe, treatment-resistant obsessive compulsive disorder (approved under a Humanitarian Device Exemption (HDE) in the U.S.), and chronic, intractable primary dystonia (approved under a HDE in the U.S.). Specifically, this includes our family of Activa Neurostimulators, including Activa SC (single-channel primary cell battery), Activa PC (dual channel primary cell battery), and Activa RC (dual channel rechargeable battery).
Neurosurgery products, including platform technologies and implant therapies. Our StealthStation S8 Navigation System and O-arm Imaging System are both platforms used in cranial, spinal, sinus, and orthopedic procedures. Our Midas Rex Surgical Drills are used in cranial, spinal, and orthopedic procedures. Our CSF Management Portfolio is used in treating hydrocephalus and other conditions impacting the intracranial pressure, and our Visualase MRI-guided laser ablation is used in cranial procedures. The Mazor X robotic guidance systems are used in robot-assisted spine procedures under an exclusive worldwide distributor agreement with Mazor Robotics.
Specialty Therapies
Our Specialty Therapies division develops, manufactures, and markets products and therapies to treat diseases of the ear, nose and throat (ENT), help control the systems of overactive bladder, (non-obstructive) urinary retention, and chronic fecal incontinence. Additionally, our Specialty Therapies division includes products in the emerging field of transformative solutions surgical incision technology, as well as the haemostatic sealing of soft tissue and bone. Principal products and services offered include:
Pelvic health and gastric therapies products, including InterStim, a neurostimulator, to help control the systems of overactive bladder, (non-obstructive) urinary retention, and chronic fecal incontinence. Our percutaneous tibial

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neuromodulation uses the NURO device for the treatment of overactive bladder and associated symptoms of urinary urge incontinence, urinary urgency, and urinary frequency. The Enterra gastric neurostimulator is approved as a humanitarian device and is used for the treatment of chronic, intractable nausea and vomiting due to gastroparesis.
ENT products, including the Straightshot M5 Microdebrider Handpiece, the IPC system, NIM Nerve Monitoring Systems, ENT Navigation System, as well as products for hearing restoration and obstructive sleep apnea.
Transformative solutions products, including our PEAK Surgery System and Aquamantys System. Our PEAK Surgery System is a tissue dissection system that consists of the PEAK PlasmaBlade and PULSAR Generator and is cleared for use in a variety of settings, including plastic reconstructive surgery, general surgery, and certain conditions of ENT. Our Aquamantys System uses patented transcollation technology to provide haemostatic sealing of soft tissue and bone and is cleared for use in a variety of surgical procedures, including orthopedic surgery, spine, solid organ resection and thoracic procedures.
Pain Therapies
Our Pain Therapies division develops, manufactures, and markets spinal cord stimulation systems, implantable drug infusion systems for chronic pain, as well as interventional products. Principal products and services offered include:
Spinal cord stimulation products for chronic pain, including rechargeable and non-rechargeable devices and a large selection of leads used to treat chronic back and/or limb pain. This includes systems with SureScan MRI Technology and the Evolve workflow algorithm, including the Intellis (rechargeable) SureScan MRI. Products also include our RestoreSensor (rechargeable) SureScan MRI, with its proprietary AdaptiveStim technology.
Implantable drug infusion systems, including our SynchroMed II Implantable Infusion System, that deliver small quantities of drug directly into the intrathecal space surrounding the spinal cord.
Interventional products, including the Xpander II Balloon Kyphoplasty system, the Kyphon-V vertebroplasty system and the OsteoCool RF Tumor ablation system.

DIABETES GROUP

The Diabetes Group develops, manufactures, and markets products and services for the management of Type I and Type II diabetes. The primary medical specialists who use and/or prescribe our Diabetes products are endocrinologists and primary care physicians. Principal products and services offered include:
Insulin pumps, including the MiniMed 670G system, featuring the first hybrid closed loop system in the world and the most advanced SmartGuard algorithm. The MiniMed 640G system, offered outside the U.S., is an integrated system with the Enhanced Enlite CGM sensor that features SmartGuard technology, which automatically suspends insulin delivery when sensor glucose levels are predicted to approach a low limit and then resumes insulin delivery once levels recover.
Continuous glucose monitoring (CGM) systems, including the Guardian Connect standalone CGM system and the iPro2 professional CGM, is a product worn by patients to capture glucose data that is later uploaded in a physician’s office to reveal glucose patterns and potential problems, such as hyperglycemic and hypoglycemic episodes.
Therapy management software, including CareLink software for patients and for healthcare professionals, with advanced web technology to help patients and their health care providers control their diabetes and improve engagement.


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OTHER FACTORS IMPACTING OUR OPERATIONS

Research and Development
The chart below illustrates our research and development (R&D) expense and R&D expense as a percentage of net sales during fiscal years 2018, 2017, and 2016:
chart-a3b3c98a744e80b6ae0.jpg
The markets in which we participate are subject to rapid technological advances. Constant improvement of existing products and introduction of new products are necessary to maintain market leadership. Our R&D efforts are directed toward maintaining or achieving technological leadership in each of the markets we serve in order to help ensure that patients using our devices and therapies receive the most advanced and effective treatment possible. We remain committed to developing technological enhancements and new indications for existing products, and less invasive and new technologies for new and emerging markets to address unmet patient needs. That commitment leads to our initiation and participation in many clinical trials each fiscal year as the demand for clinical and economic evidence remains high. Furthermore, our development activities are intended to help reduce patient care costs and the length of hospital stays in the future. We have not engaged in significant customer or government-sponsored research.
Our R&D activities include improving existing products and therapies, expanding their indications and applications for use, and developing new therapies and procedures. We continue to focus on optimizing innovation, improving our R&D productivity, driving growth in emerging markets, clinical evidence generation, and assessing our R&D programs based on their ability to deliver economic value to our customers.
Intellectual Property
We rely on a combination of patents, trademarks, tradenames, copyrights, trade secrets, and non-disclosure and non-competition agreements to establish and protect our proprietary technology. In addition, we have entered into exclusive and non-exclusive licenses relating to a wide array of third-party technologies. In the aggregate, these intellectual property assets and licenses are of material importance to our business; however, we believe that no single patent, technology, trademark, intellectual property asset or license is material in relation to any segment of our business or to our business as a whole.
We operate in an industry characterized by extensive patent litigation. Patent litigation may result in significant damage awards and injunctions that could prevent the manufacture and sale of affected products or result in significant royalty payments in order to continue selling the products. At any given time, we are involved as both a plaintiff and a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time. For additional information, see Note 19 to the consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

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Sales and Distribution
We sell most of our medical devices and therapies through direct sales representatives in the U.S. and a combination of direct sales representatives and independent distributors in markets outside the U.S. For certain portions of our business, we also sell through distributors in the U.S. Our medical supplies products are used primarily in hospitals, surgi-centers and alternate care facilities, such as home care and long-term care facilities, and are marketed to materials managers, GPOs and integrated delivery networks (IDNs) primarily through third-party distributors, although we also have direct sales representatives. We often negotiate with GPOs and IDNs, which enter into supply contracts for the benefit of their member facilities. Our four largest markets are the U.S., Western Europe, Japan, and China. Emerging markets are an area of increasing focus and opportunity, as we believe they remain under-penetrated.
Our marketing and sales strategy is focused on rapid, cost-effective delivery of high-quality products to a diverse group of customers worldwide. To achieve this objective, we organize our marketing and sales teams around physician specialties. This focus enables us to develop highly knowledgeable and dedicated sales representatives who are able to foster strong relationships with physicians and other customers and enhance our ability to cross-sell complementary products.
We are not dependent on any single customer for more than 10 percent of our total net sales.
Competition, Industry and Cost Containment
We compete in both the therapeutic and diagnostic medical markets in more than 150 countries throughout the world. These markets are characterized by rapid change resulting from technological advances and scientific discoveries. Our product lines face a mix of competitors ranging from large manufacturers with multiple business lines to small manufacturers offering a limited selection of products. In addition, we face competition from providers of other medical therapies, such as pharmaceutical companies.
Major shifts in industry market share have occurred in connection with product problems, physician advisories, safety alerts, and publications about our products, reflecting the importance of product quality, product efficacy and quality systems in the medical device industry. In the current environment of managed care, economically motivated customers, consolidation among health care providers, increased competition, and declining reimbursement rates, we have been increasingly required to compete on the basis of price. In order to continue to compete effectively, we must continue to create or acquire advanced technology, incorporate this technology into proprietary products, obtain regulatory approvals in a timely manner, maintain high-quality manufacturing processes, and successfully market these products.
Government and private sector initiatives to limit the growth of health care costs, including price regulation, competitive pricing, bidding and tender mechanics, coverage and payment policies, comparative effectiveness of therapies, technology assessments and managed-care arrangements are continuing in many countries where we do business, including the U.S. These changes put increased emphasis on the delivery of more cost-effective medical devices and therapies. Government programs, including Medicare and Medicaid, private health care insurance and managed-care plans have attempted to control costs by limiting the amount of reimbursement they will pay for particular procedures or treatments, tying reimbursement to outcomes, shifting to population health management, and other mechanisms. Hospitals, which purchase implants, are also seeking to reduce costs through a variety of mechanisms, including, for example, centralized purchasing, and in some cases, limiting the number of vendors that may participate in the purchasing program. Hospitals are also aligning interests with physicians through employment and other arrangements, such as gainsharing, where a hospital agrees with physicians to share any realized cost savings resulting from changes in practice patterns such as device standardization. This has created an increasing level of price sensitivity among customers for our products.
Worldwide Operations
Our global operations are accompanied by certain financial and other risks. Relationships with customers and effective terms of sale vary by country. Exchange rate fluctuations may affect revenues, earnings, and cash flows from operations. We use operational and economic hedges, as well as derivative contracts, to manage the impact of currency exchange rate changes on earnings and cash flow. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” and Note 9 to the consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
Net sales and property, plant, and equipment attributable to significant geographic areas are presented in Note 21 to the consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.



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Production and Availability of Raw Materials
We manufacture products at manufacturing facilities located in various countries throughout the world. We purchase many of the components and raw materials used in manufacturing our products from numerous suppliers in various countries. Certain components and raw materials are available only from a sole supplier. We work closely with our suppliers to help ensure continuity of supply while maintaining high quality and reliability. Generally, we have been able to obtain adequate supplies of such raw materials and components. However, due to the U.S. FDA’s manufacturing requirements, we may not be able to quickly establish additional or replacement sources for certain components or materials if we experience a sudden or unexpected reduction or interruption in supply and are unable to develop alternative sources.
For additional information related to our manufacturing facilities refer to “Item 2. Properties” in this Annual Report on Form 10-K.
Quality Management and Product Liability
Our business success depends on the quality of our products, and we have global processes, procedures and programs, including our “Quality Begins with Me” program, that are intended to help us maintain the highest possible level of quality in all products. We operate in an industry susceptible to significant product liability claims. These claims may be brought by individuals seeking relief on their own behalf or purporting to represent a class.
Working Capital
Our goal is to carry sufficient levels of inventory to meet the product delivery needs of our customers. We also provide payment terms to customers in the normal course of business and rights to return product under warranty to meet the operational demands of our customers.
Employees
On April 27, 2018, we employed more than 86,000 full-time employees. Our employees are vital to our success. We believe we have been successful in attracting and retaining qualified personnel in a highly competitive labor market due to our competitive compensation and benefits and our rewarding work environment.
Seasonality
Worldwide sales do not reflect a significant degree of seasonality. However, the number of medical procedures incorporating Medtronic products is generally lower during summer months due to summer vacation schedules in the northern hemisphere, particularly in European countries.
Government Regulation
Our operations and products are subject to extensive regulation by numerous government agencies, including the U.S. FDA, European regulatory authorities such as the Medicines and Healthcare Products Regulatory Agency in the United Kingdom (U.K.) and the Federal Institute for Drugs and Medical Devices in Germany, the China Food and Drug Administration (CFDA), and other government agencies inside and outside the U.S. To varying degrees, each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing, labeling, marketing, distribution and post-marketing surveillance of our products. Our business is also affected by patient privacy laws and government payer cost containment initiatives, as well as environmental health and safety laws and regulations.
Product Approval and Monitoring
Many countries where we sell medical devices subject such medical devices and technologies to their own approval and other regulatory requirements regarding performance, safety, and quality of our products. Authorization to commercially distribute a new medical device in the U.S. is generally obtained in one of two ways. The first, known as pre-market notification or the 510(k) process, requires us to demonstrate that our new medical device is substantially equivalent to a legally marketed medical device. The second, more rigorous process, known as pre-market approval, requires us to independently demonstrate that a medical device is safe and effective for its intended use. This process is generally much more time-consuming and expensive than the 510(k) process.
In the E.U., a single regulatory approval process exists, and conformity with the legal requirements is represented by the CE Mark. To obtain a CE Mark, defined products must meet minimum standards of performance, safety, and quality (i.e., the essential requirements), and then, according to their classification, comply with one or more of a selection of conformity assessment routes. The competent authorities of the E.U. countries separately regulate the clinical research for medical devices and the market surveillance of products once they are placed on the market. A new Medical Device Regulation was published by the E.U. in 2017 which will impose significant additional premarket and postmarket requirements. The regulation has a three-year implementation

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period to May 2020. After that time, medical devices marketed in the E.U. will require certification according to these new requirements, except that devices with valid CE certificates, issued pursuant to the Medical Device Directives before May 2020, can be placed on the market until May 2024.
The global regulatory environment is increasingly stringent and unpredictable. Several countries that did not have regulatory requirements for medical devices have established such requirements in recent years, and other countries have expanded, or plan to expand, their existing regulations. While harmonization of global regulations has been pursued, requirements continue to differ significantly among countries. We expect this global regulatory environment will continue to evolve, which could impact the cost, the time needed to approve, and ultimately, our ability to maintain existing approvals or obtain future approvals for our products. Regulations of the U.S. FDA and other regulatory agencies in and outside the U.S. impose extensive compliance and monitoring obligations on our business. These agencies review our design and manufacturing practices, labeling, record keeping, and manufacturers’ required reports of adverse experiences and other information to identify potential problems with marketed medical devices. We are also subject to periodic inspections for compliance with applicable quality system regulations, which govern the methods used in, and the facilities and controls used for, the design, manufacture, packaging, and servicing of finished medical devices intended for human use. In addition, the U.S. FDA and other regulatory bodies, both in and outside the U.S. (including the Federal Trade Commission, the Office of the Inspector General of the Department of Health and Human Services, the U.S. Department of Justice, and various state Attorneys General), monitor the promotion and advertising of our products. Any adverse regulatory action, depending on its magnitude, may limit our ability to effectively market and sell our products, limit our ability to obtain future premarket approvals or result in a substantial modification to our business practices and operations. For additional information, see "Item 1A. Risk Factors" We are subject to costly and complex laws and governmental regulations and any adverse regulatory action may materially adversely affect our financial condition and business operations.
In April 2015, we entered into a consent decree with the U.S. FDA relating to our Pain Therapies division's SynchroMed drug infusion system and the Neuromodulation quality system. The consent decree requires us to complete certain corrections and enhancements to the SynchroMed pump and the Neuromodulation quality system. The consent decree’s limitations on our ability to manufacture and distribute the SynchroMed drug infusion system were lifted by the U.S. FDA in September 2017. Following the successful completion of the required third-party expert audits, and in coordination with the FDA, the consent decree will be vacated. The Company must undergo third-party audits and submit audit reports to the U.S. FDA through 2020.
In June 2016, TYRX received a Warning Letter from the U.S. FDA following an inspection at the TYRX facility in Monmouth Junction, New Jersey. The U.S. FDA completed its follow up inspection to the Warning Letter in March 2018 and issued a 483 with observations, although the U.S. FDA noted in its closing meeting that there had been significant improvements made since the prior inspection. We continue to make progress on our commitments and continuously report the progress to the U.S. FDA. In June 2014, HeartWare Inc. received a Warning Letter from the U.S. FDA following an inspection at the HeartWare facility in Miami Lakes, Florida. We acquired HeartWare in August 2016, and have been implementing actions and process improvements to address the items in the Warning Letter. Upon completing implementation of actions and process improvements to address the items in the Warning Letters and reinspection by the U.S. FDA, we expect that the TYRX and HeartWare Warning Letters will be lifted.
Trade Regulations
The movement of products, services, and investment across borders subject us to extensive trade regulations. A variety of laws and regulations in the countries in which we transact business apply to the sale, shipment and provision of goods, services and technology across borders. These laws and regulations govern, among other things, our import, export and other business activities. We are also subject to the risk that these laws and regulations could change in a way that would expose us to additional costs, penalties or liabilities. Some governments also impose economic sanctions against certain countries, persons or entities. In addition to our need to comply with such regulations in connection with our direct activities, we also sell and provide goods, technology and services to agents, representatives and distributors who may export such items to customers and end-users. If we, or the third parties through which we do business, are not in compliance with applicable import, export control or economic sanctions laws and regulations, we may be subject to civil or criminal enforcement action, and varying degrees of liability. Such actions may disrupt or delay sales of our products or services or result in restrictions on our distribution and sales of products or services that may materially impact our business.
Anti-Boycott Laws
Under U.S. laws and regulations, U.S. companies and their subsidiaries and affiliates outside the U.S. are prohibited from participating or agreeing to participate in unsanctioned foreign boycotts in connection with certain business activities, including the sale, purchase, transfer, shipping or financing of goods or services within the U.S. or between the U.S. and countries outside of the U.S. If we, or certain third parties through which we sell or provide goods or services, violate anti-boycott laws and regulations, we may be subject to civil or criminal enforcement action and varying degrees of liability.

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Data Privacy and Security Laws and Regulations
As a business with a significant global footprint, compliance with evolving regulations and standards in data privacy and cybersecurity has resulted, and may continue to result, in increased costs, new compliance challenges, and the threat of increased regulatory enforcement activity. Our business relies on the secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property and other sensitive information related to our customers and workforce.
For example, in the U.S., the collection, maintenance, protection, use, transmission, disclosure and disposal of certain personal information and the security of medical devices are regulated at the U.S. federal and state, international and industry levels. U.S. federal and state laws protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by health care providers. Privacy and Security Rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended, and the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH), govern the use, disclosure, and security of protected health information by “Covered Entities,” (which are health care providers that submit electronic claims, health plans, and health care clearinghouses) and by their “Business Associates” (which is anyone that performs a service on behalf of a Covered Entity involving the use or disclosure of protected health information and is not a member of the Covered Entity’s workforce). Rules under HIPAA and HITECH include specific security standards and breach notification requirements. The U.S. Department of Health and Human Services (HHS) (through the Office of Civil Rights) has direct enforcement authority against Covered Entities and Business Associates with regard to both the Security and Privacy Rules, including civil and criminal liability. With the exception of certain of its operations in its Diabetes and care management services businesses, Medtronic is generally not a Covered Entity. Medtronic also operates as a Business Associate to Covered Entities in a limited number of instances. There are comparable state laws governing the use and protection of personal health information by health care providers, and Medtronic may be subject to these laws in certain of its businesses.
In addition to the regulation of personal health information, a number of states have also adopted laws and regulations that may affect our privacy and data security practices for other kinds of personally identifiable information, such as state laws that govern the use, disclosure and protection of sensitive personal information, such as social security numbers, or that are designed to protect credit card account data. State consumer protection laws may also establish privacy and security standards for use and management of personally identifiable information, including information related to consumers and care providers.
Outside the U.S., we are impacted by the privacy and data security requirements at the international, national and regional level, and on an industry specific basis. We serve customers in more than 150 countries. Legal requirements in these countries relating to the collection, storage, handling and transfer of personal data and potentially intellectual property continue to evolve with increasingly strict enforcement regimes. More privacy and security laws and regulations are being adopted, and more are being enforced, with potential for significant financial penalties. In the E.U., increasingly stringent data protection and privacy rules that will have substantial impact on the use of patient data across the healthcare industry became effective in May 2018. The new E.U. General Data Protection Regulation (GDPR) applies uniformly across the E.U. and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. The GDPR also requires companies processing personal data of individuals residing in the E.U. to comply with E.U. privacy and data protection rules.
Because the laws and regulations continue to expand, differ from jurisdiction to jurisdiction, and are subject to evolving (and at times inconsistent) governmental interpretation, compliance with these laws and regulations may require significant additional cost expenditures or changes in products or business that increase competition or reduce revenue. Noncompliance could result in the imposition of fines, penalties, or orders to stop noncompliant activities.
Regulations Governing Reimbursement
The delivery of our devices is subject to regulation by HHS and comparable state and non-U.S. agencies responsible for reimbursement and regulation of health care items and services. U.S. laws and regulations are imposed primarily in connection with the Medicare and Medicaid programs, as well as the government’s interest in regulating the quality and cost of health care. Other governments also impose regulations in connection with their health care reimbursement programs and the delivery of health care items and services.
U.S. federal health care laws apply when we or customers submit claims for items or services that are reimbursed under Medicare, Medicaid, or other federally-funded health care programs, including laws related to kickbacks, false claims, self-referrals and health care fraud. There are often similar state false claims, anti-kickback, and anti-self-referral and insurance laws that apply to state-funded Medicaid and other health care programs and private third-party payers. In some circumstances, insurance companies can attempt to bring a private cause of action against a manufacturer for a pattern of causing false claims to be filed under the federal Racketeer Influenced and Corrupt Organizations Act, or RICO. In addition, as a manufacturer of U.S. FDA-approved

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devices reimbursable by federal healthcare programs, we are subject to the Physician Payments Sunshine Act, which requires us to annually report certain payments and other transfers of value we make to U.S.-licensed physicians or U.S. teaching hospitals. Any failure to comply with these laws and regulations could subject us or our officers and employees to criminal and civil financial penalties.
Implementation of further legislative or administrative reforms to reimbursement systems, or adverse decisions relating to our products by administrators of these systems in coverage or reimbursement, could significantly reduce reimbursement or result in the denial of coverage, which could have an impact on the acceptance of and demand for our products and the prices that our customers are willing to pay for them. Further, as a result of the Patient Protection and Affordable Care Act (the “ACA”), the U.S. is implementing value-based payment methodologies and seeking to create alternate payment models, such as bundled payments, to continue to drive improved value.
Environmental Health and Safety Laws
We are also subject to various environmental health and safety laws and regulations both within and outside the U.S. Like other companies in our industry, our manufacturing and other operations involve the use and transportation of substances regulated under environmental health and safety laws including those related to the transportation of hazardous materials.
Available Information
We maintain a website at www.medtronic.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act) are made available under the “About Medtronic - Investors” caption and “Financial Information - SEC Filings” subcaption of our website free of charge as soon as reasonably practicable after we electronically file them with, or furnish them to, the Securities and Exchange Commission (SEC).
Information relating to our corporate governance, including our Principles of Corporate Governance, Code of Conduct (including our Code of Ethics for Senior Financial Officers), Code of Business Conduct and Ethics for Members of the Board of Directors, and information concerning our executive officers, directors and Board committees (including committee charters) is available through our website at www.medtronic.com under the “About Medtronic - Corporate Governance” caption. Information relating to transactions in Medtronic securities by directors and officers is available through our website at www.medtronic.com under the “About Medtronic - Investors” caption and the “Financial Information - SEC Filings” subcaption.
The information listed above may also be obtained upon request from the Medtronic Investor Relations Department, 710 Medtronic Parkway, Minneapolis, MN 55432 USA.
Our website and the information contained on or connected to our website are not incorporated by reference into this Form 10-K.
The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public may obtain any documents that we file with the SEC at http://www.sec.gov. We file annual reports, quarterly reports, proxy statements, and other documents with the SEC under the Exchange Act. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 800-SEC-0330.
Item 1A. Risk Factors
Investing in our securities involves a variety of risks and uncertainties, known and unknown, including, among others, those discussed below. Each of the following risks should be carefully considered, together with all the other information included in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes and in our other filings with the SEC. Furthermore, additional risks and uncertainty not presently known to us or that we currently believe to be immaterial may also adversely affect our business. Our business, financial condition, operating results, cash flow and prospects could be materially and adversely affected by any of these risks or uncertainties.  

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Risks Relating to the Company
We operate in a highly competitive industry and we may be unable to compete effectively.
We compete in both the therapeutic and diagnostic medical markets in more than 150 countries throughout the world. These markets are characterized by rapid change resulting from technological advances and scientific discoveries. In the product lines in which we compete, we face a range of competitors from large companies with multiple business lines to small, specialized manufacturers that offer a limited selection of niche products. Development by other companies of new or improved products, processes, technologies, or the introduction of reprocessed products or generic versions when our proprietary products lose their patent protection may make our existing or planned products less competitive. In addition, we face competition from providers of alternative medical therapies, such as pharmaceutical companies.
We believe our ability to compete depends upon many factors both within and beyond our control, including:

product performance and reliability,
product technology and innovation,
product quality and safety,
breadth of product lines,
product support services,
customer support,
cost-effectiveness and price, and
reimbursement approval from health care insurance providers.
Competition may increase as additional companies enter our markets or modify their existing products to compete directly with ours. In addition, academic institutions, governmental agencies and other public and private research organizations also may conduct research, seek patent protection and establish collaborative arrangements for discovery, research, clinical development and marketing of products similar to ours. These companies and institutions compete with us in recruiting and retaining qualified scientific and management personnel, as well as in acquiring necessary product technologies. From time to time we have lost, and may in the future lose, market share in connection with product problems, physician advisories, safety alerts and publications about our products, which highlights the importance of product quality, product efficacy and quality systems to our business. In the current environment of managed care, consolidation among health care providers, increased competition, and declining reimbursement rates, we have been increasingly required to compete on the basis of price. Further, our continued growth and success depend on our ability to develop, acquire and market new and differentiated products, technologies and intellectual property, and as a result we also face competition for marketing, distribution, and collaborative development agreements, establishing relationships with academic and research institutions and licenses to intellectual property. In order to continue to compete effectively, we must continue to create, invest in or acquire advanced technology, incorporate this technology into our proprietary products, obtain regulatory approvals in a timely manner, and manufacture and successfully market our products. Given these factors, we cannot guarantee that we will be able to compete effectively or continue our level of success.
Reduction or interruption in supply or other manufacturing difficulties may adversely affect our manufacturing operations and related product sales.
The manufacture of our products requires the timely delivery of sufficient amount of quality components and materials and is highly exacting and complex, due in part to strict regulatory requirements. We manufacture the majority of our products at numerous manufacturing facilities worldwide. We purchase many of the components and raw materials used in manufacturing these products from numerous suppliers in various countries. We have generally been able to obtain adequate supplies of such raw materials and components. However, for reasons of quality assurance, cost effectiveness, or availability, certain components and raw materials used in our products are obtained from a sole supplier. Although we work closely with our suppliers to try to ensure continuity of supply while maintaining high quality and reliability, the supply of these components and raw materials may be interrupted or insufficient. In addition, due to the stringent regulations and requirements of regulatory agencies, including the U.S. FDA, regarding the manufacture of our products, we may not be able to quickly establish additional or replacement sources. Furthermore, the prices of commodities and other materials used in our products, which are often volatile and outside of our control, could adversely impact our supply. We use resins, other petroleum-based materials and pulp as raw materials in some of our products, and the prices of oil and gas also significantly affect our costs for freight and utilities. A reduction or interruption in supply, and an inability to develop alternative sources for such supply, could adversely affect our ability to manufacture our products in a timely or cost-effective manner and could result in lost sales.
Other disruptions in the manufacturing process or product sales and fulfillment systems for any reason, including equipment malfunction, failure to follow specific protocols and procedures, defective raw materials, natural disasters such as hurricanes, tornadoes or wildfires, and other environmental factors, could lead to launch delays, product shortage, unanticipated costs, lost revenues and damage to our reputation. For example, in June 2017 we experienced a global information technology systems

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interruption that affected our customer ordering, distribution, and manufacturing processes. Furthermore, any failure to identify and address manufacturing problems prior to the release of products to our customers could result in quality or safety issues.
In addition, several of our key products are manufactured at a particular manufacturing facility, with limited alternate facilities. If an event occurs that results in damage to one or more of such facilities, such as the damage caused by Hurricane Maria in Puerto Rico in September 2017, we may be unable to manufacture the relevant products at the previous levels or at all. Because of the time required to approve and license a manufacturing facility, a third-party manufacturer may not be available on a timely basis to replace production capacity in the event manufacturing capacity is lost.
We are subject to costly and complex laws and governmental regulations and any adverse regulatory action may materially adversely affect our financial condition and business operations.
Our medical devices and technologies, as well as our business activities, are subject to a complex set of regulations and rigorous enforcement, including by the U.S. FDA, U.S. Department of Justice, Health and Human Services-Office of the Inspector General, and numerous other federal, state, and non-U.S. governmental authorities. To varying degrees, each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of our products. As a part of the regulatory process of obtaining marketing clearance for new products and new indications for existing products, we conduct and participate in numerous clinical trials with a variety of study designs, patient populations, and trial endpoints. Unfavorable or inconsistent clinical data from existing or future clinical trials or the market’s or U.S. FDA’s perception of this clinical data, may adversely impact our ability to obtain product approvals, our position in, and share of, the markets in which we participate, and our business, financial condition, results of operations and cash flows. We cannot guarantee that we will be able to obtain or maintain marketing clearance for our new products or enhancements or modifications to existing products, and the failure to maintain approvals or obtain approval or clearance could have a material adverse effect on our business, results of operations, financial condition and cash flows. Even if we are able to obtain approval or clearance, it may:
take a significant amount of time,
require the expenditure of substantial resources,
involve stringent clinical and pre-clinical testing, as well as increased post-market surveillance,
involve modifications, repairs or replacements of our products, and
limit the proposed uses of our products.
Both before and after a product is commercially released, we have ongoing responsibilities under U.S. FDA and other applicable non-U.S. government agency regulations. For instance, many of our facilities and procedures and those of our suppliers are also subject to periodic inspections by the U.S. FDA to determine compliance with applicable regulations. The results of these inspections can include inspectional observations on U.S. FDA’s Form-483, warning letters, or other forms of enforcement. If the U.S. FDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical products are ineffective or pose an unreasonable health risk, the U.S. FDA could ban such medical products, detain or seize adulterated or misbranded medical products, order a recall, repair, replacement, or refund of such products, refuse to grant pending pre-market approval applications or require certificates of non-U.S governments for exports, and/or require us to notify health professionals and others that the devices present unreasonable risks of substantial harm to the public health. The U.S. FDA and other non-U.S. government agencies may also assess civil or criminal penalties against us, our officers or employees and impose operating restrictions on a company-wide basis. The U.S. FDA may also recommend prosecution to the U.S. Department of Justice. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively marketing and selling our products and limit our ability to obtain future pre-market clearances or approvals, and could result in a substantial modification to our business practices and operations. Furthermore, we occasionally receive subpoenas or other requests for information from state and federal governmental agencies, and while these investigations typically relate primarily to financial arrangements with health care providers, regulatory compliance and product promotional practices, we cannot predict the timing, outcome or impact of any such investigations. Any adverse outcome in one or more of these investigations could include the commencement of civil and/or criminal proceedings, substantial fines, penalties, and/or administrative remedies, including exclusion from government reimbursement programs and/or entry into Corporate Integrity Agreements (CIAs) with governmental agencies. In addition, resolution of any of these matters could involve the imposition of additional, costly compliance obligations. These potential consequences, as well as any adverse outcome from government investigations, could have a material adverse effect on our business, results of operations, financial condition, and cash flows.
In addition, the U.S. FDA has taken the position that device manufacturers are prohibited from promoting their products other than for the uses and indications set forth in the approved product labeling, and any failure to comply could subject us to significant civil or criminal exposure, administrative obligations and costs, and/or other potential penalties from, and/or agreements with, the federal government.
Governmental regulations outside the U.S. have, and may continue to, become increasingly stringent and common. In the European Union, for example, a new Medical Device Regulation was published in 2017 which, when it enters into full force in 2020, will

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include significant additional premarket and post-market requirements. Penalties for regulatory non-compliance could be severe, including fines and revocation or suspension of a company’s business license, mandatory price reductions and criminal sanctions. Future laws and regulations may have a material adverse effect on us.
Our failure to comply with laws and regulations relating to reimbursement of health care goods and services may subject us to penalties and adversely impact our reputation, business, results of operations, financial condition and cash flows.
Our devices, products and therapies are purchased principally by hospitals or physicians that typically bill various third-party payers, such as governmental programs (e.g., Medicare, Medicaid and comparable non-U.S. programs), private insurance plans and managed care plans, for the healthcare services provided to their patients. The ability of our customers to obtain appropriate reimbursement for products and services from third-party payers is critical because it affects which products customers purchase and the prices they are willing to pay. As a result, our devices, products and therapies are subject to regulation regarding quality and cost by HHS, including the Centers for Medicare & Medicaid Services (CMS), as well as comparable state and non-U.S. agencies responsible for reimbursement and regulation of health care goods and services, including laws and regulations related to kickbacks, false claims, self-referrals and health care fraud. Many states have similar laws that apply to reimbursement by state Medicaid and other funded programs as well as in some cases to all payers. In certain circumstances, insurance companies can attempt to bring a private cause of action against a manufacturer for causing a false claim to be filed under the federal Racketeer Influenced and Corrupt Organizations Act. In addition, as a manufacturer of U.S. FDA-approved devices reimbursable by federal healthcare programs, we are subject to the Physician Payments Sunshine Act, which requires us to annually report certain payments and other transfers of value we make to U.S.-licensed physicians or U.S. teaching hospitals. Any failure to comply with these laws and regulations could subject us or our officers and employees to criminal and civil financial penalties.
We are also subject to risks relating to changes in government and private medical reimbursement programs and policies, and changes in legal regulatory requirements in the U.S. and around the world. Implementation of further legislative or administrative reforms to these reimbursement systems, or adverse decisions relating to coverage of or reimbursement for our products by administrators of these systems, could have an impact on the acceptance of and demand for our products and the prices that our customers are willing to pay for them.
We are substantially dependent on patent and other proprietary rights and failing to protect such rights or to be successful in litigation related to our rights or the rights of others may result in our payment of significant monetary damages and/or royalty payments, negatively impact our ability to sell current or future products, or prohibit us from enforcing our patent and other proprietary rights against others.
We are substantially dependent on patent and other proprietary rights and rely on a combination of patents, trade secrets, and non-disclosure and non-competition agreements to protect our proprietary intellectual property. We also operate in an industry characterized by extensive patent litigation. Patent litigation can result in significant damage awards and injunctions that could prevent our manufacture and sale of affected products or require us to pay significant royalties in order to continue to manufacture or sell affected products. At any given time, we are generally involved as both a plaintiff and a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time. While it is not possible to predict the outcome of patent litigation, it is possible that the results of such litigation could require us to pay significant monetary damages and/or royalty payments, negatively impact our ability to sell current or future products, or prohibit us from enforcing our patent and proprietary rights against others, any of which could have a material adverse impact on our business, results of operations, financial condition, and cash flows.
While we intend to defend against any threats to our intellectual property, our patents, trade secrets or other agreements may not adequately protect our intellectual property. Further, pending patent applications may not result in patents being issued to us, patents issued to or licensed by us may be challenged or circumvented by competitors and such patents may be found invalid, unenforceable or insufficiently broad to protect our technology or provide us with any competitive advantage. Third parties could obtain patents that may require us to negotiate licenses to conduct our business, and these licenses may not be available on reasonable terms or at all. We also rely on non-disclosure and non-competition agreements with certain employees, consultants and other parties to protect, in part, trade secrets and other proprietary rights. We cannot be certain that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information, or that third parties will not otherwise gain access to our trade secrets or proprietary knowledge.
In addition, the laws of certain countries in which we market some of our products do not protect our intellectual property rights to the same extent as the laws of the U.S., which could make it easier for competitors to capture market position in those countries. Competitors also may harm our sales by designing products that mirror the capabilities of our products or technology without infringing our intellectual property rights. If we are unable to protect our intellectual property in these countries, it could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

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Quality problems and product liability claims could lead to recalls or safety alerts, reputational harm, adverse verdicts or costly settlements, and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Quality is extremely important to us and our customers due to the serious and costly consequences of product failure, and our business exposes us to potential product liability risks that are inherent in the design, manufacture, and marketing of medical devices. In addition, many of our products are often used in intensive care settings with seriously ill patients and some of the medical devices we manufacture and sell are designed to be implanted in the human body for long periods of time or indefinitely. Component failures, manufacturing defects, design flaws, off-label use, or inadequate disclosure of product-related risks or product-related information with respect to our products could result in an unsafe condition or injury to, or death of, a patient. These problems could lead to recall of, or issuance of a safety alert relating to, our products, and could result in product liability claims and lawsuits, including class actions, which could ultimately result, in certain cases, in the removal from the body of such products and claims regarding costs associated therewith. Due to the strong name recognition of the Medtronic and Covidien brands, a material adverse event involving one of our products could result in reduced market acceptance and demand for all products within that brand, and could harm our reputation and ability to market products in the future.
Strong product quality is critical to the success of our goods and services. If we fail to meet these standards and our products are the subject of recalls or safety alerts, our reputation could be damaged, we could lose customers and our revenue and results of operations could decline. Our success also can depend on our ability to manufacture to exact specification precision-engineered components, subassemblies and finished devices from multiple materials. If our components fail to meet these standards or fail to adapt to evolving standards, our reputation, competitive advantage and market share could be harmed. In certain situations, we may undertake a voluntary recall of products or temporarily shut down production lines based on performance relative to our own internal safety and quality monitoring and testing data.
Any of the foregoing problems, including future product liability claims or recalls, regardless of their ultimate outcome, could harm our reputation and have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our research and development efforts rely upon investments and investment collaborations, and we cannot guarantee that any previous or future investments or investment collaborations will be successful.
Our mission is to provide a broad range of therapies to restore patients to fuller, healthier lives, which requires a wide variety of technologies, products and capabilities. The rapid pace of technological development in the medical industry and the specialized expertise required in different areas of medicine make it difficult for one company alone to develop a broad portfolio of technological solutions. In addition to internally generated growth through our research and development efforts, historically we have relied, and expect to continue to rely, upon investments and investment collaborations to provide us access to new technologies both in areas served by our existing businesses as well as in new areas.
We expect to make future investments where we believe that we can stimulate the development or acquisition of new technologies and products to further our strategic objectives and strengthen our existing businesses. Investments and investment collaborations in and with medical technology companies are inherently risky, and we cannot guarantee that any of our previous or future investments or investment collaborations will be successful or will not materially adversely affect our business, results of operations, financial condition and cash flows.
Health care policy changes may have a material adverse effect on us.
In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the federal government, state governments, regulators and third-party payers to control these costs and, more generally, to reform the health care system, including U.S. health care reform legislation. Certain of these proposals could, among other things, limit the prices we are able to charge for our products or the amounts of reimbursement available for our products and could limit the acceptance and availability of our products. The adoption of some or all of these proposals could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our insurance program may not be adequate to cover future losses.
We have elected to self-insure most of our insurable risks across the Company, and we made this decision based on cost and availability factors in the insurance marketplace. We manage and maintain a portion of our self-insured program through a wholly-owned captive insurance company. We continue to maintain a directors and officers liability insurance policy with a third-party insurer that provides coverage for the directors and officers of the Company. We continue to monitor the insurance marketplace to evaluate the value of obtaining insurance coverage for other categories of losses in the future. Although we believe, based on historical loss trends, that our self-insurance program accruals and our existing insurance coverage will be adequate to cover future losses, historical trends may not be indicative of future losses. The absence of third-party insurance coverage for other categories of losses increases our exposure to unanticipated claims and these losses could have a material adverse impact on our business, results of operations, financial condition and cash flows.

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If we experience decreasing prices for our goods and services and we are unable to reduce our expenses, there may be a material adverse effect on our business, results of operations, financial condition and cash flows.
We have experienced, and may continue to experience, decreasing prices for our goods and services due to pricing pressure from managed care organizations and other third-party payers on our customers, increased market power of our customers as the medical device industry consolidates and increased competition among medical engineering and manufacturing services providers. If the prices for our goods and services decrease and we are unable to reduce our expenses, our business, results of operations, financial condition and cash flows will be adversely affected.
We are subject to a variety of risks associated with global operations that could adversely affect our profitability and operating results.
We develop, manufacture, distribute and sell our products globally. Operations in countries outside of the U.S. are accompanied by certain risks. We intend to continue to expand our operations and to pursue growth opportunities outside the U.S., especially in emerging markets, which could expose us to additional and greater risks. Our profitability and global operations are, and will continue to be, subject to a number of risks and potential costs, including:
fluctuations in currency exchange rates,
healthcare reform legislation,
the need to comply with different regulatory regimes worldwide that are subject to change and that could restrict our ability to manufacture and sell our products,
local product preferences and product requirements,
longer-term receivables than are typical in the U.S.,
trade protection measures, tariffs and other border taxes, and import or export licensing requirements,
less intellectual property protection in some countries outside the U.S. than exists in the U.S.,
different labor regulations and workforce instability,
political and economic instability,
the expiration and non-renewal of foreign tax rulings and/or grants,
potentially negative consequences from changes in or interpretations of tax laws, and
economic instability and inflation, recession or interest rate fluctuations.
On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the E.U., commonly referred to as “Brexit”.  As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the E.U. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on imports and exports between the U.K. and E.U. countries and increased regulatory complexities. Similarly, from time to time proposals are made in the U.S. to significantly change existing trade agreements and relationships between the U.S. and other countries, although we cannot currently predict whether or how these changes will be implemented. Changes to trade policy may adversely affect our business, results of operations, financial condition and cash flows.
In addition, a significant amount of our trade receivables are with national health care systems in many countries. Repayment of these receivables is dependent upon the political and financial stability of those countries. In light of these global economic fluctuations, we continue to monitor the creditworthiness of customers. Failure to receive payment of all or a significant portion of these receivables could adversely affect our business, results of operations, financial condition and cash flows.
Finally, changes in currency exchange rates may impact the reported value of our revenues, expenses, and cash flows. We cannot predict changes in currency exchange rates, the impact of exchange rate changes, nor the degree to which we will be able to manage the impact of currency exchange rate changes.
The failure to comply with anti-bribery laws could materially adversely affect our business and result in civil and/or criminal sanctions.
The U.S. Foreign Corrupt Practices Act (FCPA) and similar anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Because of the predominance of government-administered healthcare systems in many jurisdictions around the world, many of our customer relationships outside of the U.S. are with governmental entities and are therefore potentially subject to such laws. We also participate in public-private partnerships and other commercial and policy arrangements with governments around the globe.
Global enforcement of anti-corruption laws has increased substantially in recent years, with more frequent voluntary self-disclosures by companies, aggressive investigations and enforcement proceedings by U.S. and non-U.S. governmental agencies, and assessment of significant fines and penalties against companies and individuals. Our international operations create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents, or distributors. It is our policy

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to implement safeguards to educate our employees and agents on these legal requirements and prohibit improper practices. However, existing safeguards and any future improvements may not always be effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we could be held responsible. In addition, the government may seek to hold us liable for FCPA violations committed by companies in which we invest or that we acquire. Any alleged or actual violations of these regulations may subject us to government scrutiny, criminal or civil sanctions and other liabilities, including exclusion from government contracting, and could disrupt our business, adversely affect our reputation and result in a material adverse effect on our business, results of operations, financial condition and cash flows.
Laws and regulations governing international business operations could adversely impact our business.
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), and the Bureau of Industry and Security at the U.S. Department of Commerce (BIS), administer certain laws and regulations that restrict U.S. persons and, in some instances, non-U.S. persons, in conducting activities, transacting business with or making investments in certain countries, governments, entities and individuals subject to U.S. economic sanctions. Our international operations subject us to these laws and regulations, which are complex, restrict our business dealings with certain countries and individuals, and are constantly changing. Further restrictions may be enacted, amended, enforced or interpreted in a manner that materially impacts our operations.
From time to time, certain of our subsidiaries have limited business dealings in countries subject to comprehensive sanctions, including Iran, Sudan, Syria, Cuba and the region of Crimea. Certain of our subsidiaries sell medical devices, and may provide related services, to distributors and other purchasing bodies in such countries. These business dealings represent an insignificant amount of our consolidated revenues and income, but expose us to a heightened risk of violating applicable sanctions regulations. Violations of these regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment. We have established policies and procedures designed to assist with our compliance with such laws and regulations. However, there can be no assurance that our policies and procedures will prevent us from violating these regulations in every transaction in which we may engage, and such a violation could adversely affect our reputation, business, financial condition, results of operations and cash flows.
Consolidation in the health care industry could have an adverse effect on our revenues and results of operations.
Many health care industry companies, including health care systems, distributors, manufacturers, providers, and insurers, are consolidating or have formed strategic alliances. As the health care industry consolidates, competition to provide goods and services to industry participants will become more intense. Further, this consolidation creates larger enterprises with greater negotiating power, which they can use to negotiate price concessions. If we must reduce our prices because of industry consolidation, or if we lose customers as a result of consolidation, our business, financial condition, results of operations and cash flows could be adversely affected.
Health care industry cost-containment measures could result in reduced sales of our medical devices and medical device components.
Most of our customers, and the health care providers to whom our customers supply medical devices, rely on third-party payers, including government programs and private health insurance plans, to reimburse some or all of the cost of the procedures in which medical devices that incorporate components we manufacture or assemble are used. The continuing efforts of governmental authorities, insurance companies and other payers of health care costs to contain or reduce these costs could lead to patients being unable to obtain approval for payment from these third-party payers. If third-party payer payment approval cannot be obtained by patients, sales of finished medical devices that include our components may decline significantly and our customers may reduce or eliminate purchases of our components. The cost-containment measures that health care providers are instituting, both in the U.S. and outside of the U.S., could harm our ability to operate profitably. For example, managed care organizations have successfully negotiated volume discounts for pharmaceuticals, and GPOs and IDNs have also concentrated purchasing decisions for some customers, which has led to downward pricing pressure for medical device companies, including us.
We are subject to environmental laws and regulations and the risk of environmental liabilities, violations and litigation.
We are subject to numerous U.S. federal, state, local and non-U.S. environmental, health and safety laws and regulations concerning, among other things, the health and safety of our employees, the generation, storage, use and transportation of hazardous materials, emissions or discharges of substances into the environment, investigation and remediation of hazardous substances or materials at various sites, chemical constituents in medical products and end-of-life disposal and take-back programs for medical devices. Our operations involve the use of substances subject to these laws and regulations, primarily those used in manufacturing and sterilization processes. If we violate these environmental laws and regulations, we could be fined, criminally charged or otherwise sanctioned. Furthermore, environmental laws outside of the U.S. are becoming more stringent, resulting in increased costs and compliance burdens.

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In addition, certain environmental laws assess liability on current or previous owners or operators of real property for the costs of investigation, removal or remediation of hazardous substances or materials at their properties or at properties which they have disposed of hazardous substances. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances. The ultimate cost of site cleanup and timing of future cash outflows is difficult to predict, given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations, and alternative cleanup methods.
The costs of complying with current or future environmental protection and health and safety laws and regulations, or liabilities arising from past or future releases of, or exposures to, hazardous substances, may exceed our estimates, or have a material adverse effect on our business, results of operations, financial condition, and cash flows.
The continuing development of many of our products depends upon us maintaining strong relationships with health care professionals.
If we fail to maintain our working relationships with health care professionals, many of our products may not be developed and marketed in line with the needs and expectations of the professionals who use and support our products, which could cause a decline in our earnings and profitability. The research, development, marketing and sales of many of our new and improved products depends on our maintaining working relationships with health care professionals. We rely on these professionals to provide us with considerable knowledge and experience regarding the development, marketing and sale of our products. Physicians assist us as researchers, marketing and product consultants, inventors and public speakers. If we are unable to maintain strong relationships with these professionals, the development and marketing of our products could suffer, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We rely on the proper function, security and availability of our information technology systems and data to operate our business, and a breach, cyber-attack or other disruption to these systems or data could materially and adversely affect our business, results of operations, financial condition, cash flows, reputation or competitive position.
We are increasingly dependent on sophisticated information technology systems to operate our business, including to process, transmit and store sensitive data, and many of our products and services include integrated software and information technology that collects data regarding patients or connects to our systems. Like other large multi-national corporations, we could experience, and in the past have experienced, attempted or actual interference with the integrity of, and interruptions in, our technology systems, as well as data breaches, such as cyber-attacks, malicious intrusions, breakdowns, interference with the integrity of our products and data or other significant disruptions. Furthermore, we rely on third-party vendors to supply and/or support certain aspects of our information technology systems. These third-party systems could also become vulnerable to cyber-attack, malicious intrusions, breakdowns, interference or other significant disruptions, and may contain defects in design or manufacture or other problems that could result in system disruption or compromise the information security of our own systems. In addition, we continue to grow in part through new business acquisitions and, as a result, may face risks associated with defects and vulnerabilities in their systems, or difficulties or other breakdowns or disruptions in connection with the integration of the acquisitions into our information technology systems.
Our worldwide operations mean that we are subject to laws and regulations, including data protection and cybersecurity laws and regulations, in many jurisdictions. The variety of U.S. and international privacy and cybersecurity laws and regulations impacting our operations are described in “Item 1. Business" - Other Factors Impacting Our Operations - Data Privacy and Cybersecurity Laws and Regulations. For example, in the E.U. the Data Protection Directive requires us to manage individually identifiable information in the E.U., and the new General Data Protection Regulation may impose fines of up to four percent of our global revenue in the event of violations occurring after its implementation in May 2018. Furthermore, there has been a developing trend of civil lawsuits and class actions relating to breaches of consumer data held by large companies or incidents arising from other cyber-attacks. Any data security breaches, cyber-attacks, malicious intrusions or significant disruptions could result in actions by regulatory bodies and/or civil litigation, any of which could materially and adversely affect our business, results of operations, financial condition, cash flows, reputation or competitive position.
In addition, our information technology systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving legal and regulatory standards, the increasing need to protect patient and customer information, changes in the techniques used to obtain unauthorized access to data and information systems, and the information technology needs associated with our changing products and services. There can be no assurance that our process of consolidating, protecting, upgrading and expanding our systems and capabilities, continuing to build security into the design of our products, and developing new systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future.

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If our information technology systems, products or services or sensitive data are compromised, patients or employees could be exposed to financial or medical identity theft or suffer a loss of product functionality, and we could lose existing customers, have difficulty attracting new customers, have difficulty preventing, detecting, and controlling fraud, be exposed to the loss or misuse of confidential information, have disputes with customers, physicians, and other health care professionals, suffer regulatory sanctions or penalties under federal laws, state laws, or the laws of other jurisdictions, experience increases in operating expenses or an impairment in our ability to conduct our operations, incur expenses or lose revenues as a result of a data privacy breach, product failure, information technology outages or disruptions, or suffer other adverse consequences including lawsuits or other legal action and damage to our reputation.
Our substantial leverage and debt service obligations could adversely affect our business.
At April 27, 2018, we had approximately $2.1 billion of current debt obligations and $23.7 billion of long-term debt outstanding. We may also incur additional indebtedness in the future. Our substantial indebtedness could have adverse consequences, including:
making it more difficult for us to satisfy our financial obligations,
increasing our vulnerability to adverse economic, regulatory and industry conditions, and placing us at a disadvantage compared to our competitors that are less leveraged,
limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate,
limiting our ability to borrow additional funds for working capital, capital expenditures, acquisitions and general corporate or other purposes, and
exposing us to greater interest rate risk since the interest rate on borrowings under our floating rate notes and revolving credit facility is variable.
Our debt service obligations require us to use a portion of our operating cash flow to pay interest and principal on indebtedness instead of for other corporate purposes, including funding future expansion of our business, acquisitions, and ongoing capital expenditures, which could impede our growth. If our operating cash flow and capital resources are insufficient to service our debt obligations, we may be forced to sell assets, seek additional equity or debt financing or restructure our debt, which could harm our long-term business prospects. Our failure to comply with the terms of our revolving credit facility and other indebtedness could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.
Failure to integrate acquired businesses into our operations successfully could adversely affect our business.
As part of our strategy to develop and identify new products and technologies, we have made several significant acquisitions in recent years, and may make additional acquisitions in the future. Our integration of the operations of acquired businesses requires significant efforts, including the coordination of information technologies, research and development, sales and marketing, operations, manufacturing, and finance. These efforts result in additional expenses and involve significant amounts of management’s time that cannot then be dedicated to other projects. Our failure to manage and coordinate the growth of acquired companies successfully could also have an adverse impact on our business. In addition, we cannot be certain that the businesses we acquire will become profitable or remain so. Factors that will affect the success of our acquisitions include:
the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies,
our ability or inability to integrate information technology systems of acquired companies in a secure and reliable manner,
adverse developments arising out of investigations by governmental entities of the business practices of acquired companies, including potential FCPA liability,
any decrease in customer loyalty and product orders caused by dissatisfaction with the combined companies’ product lines and sales and marketing practices, including price increases,
our ability to retain key employees, and
the ability to achieve synergies among acquired companies, such as increasing sales of the integrated company’s products, achieving cost savings, and effectively combining technologies to develop new products.
We also could experience negative effects on our business, financial condition, results of operations and cash flows from acquisition-related charges, amortization of intangible assets and asset impairment charges. These effects, individually or in the aggregate, could cause a deterioration of our credit rating and result in increased borrowing costs and interest expense.

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Changes in tax laws or exposure to additional income tax liabilities could have a material impact on our business, results of operations, financial condition and cash flows.
We are subject to income taxes, as well as non-income based taxes, in the U.S., Ireland, and various other jurisdictions in which we operate. The tax laws in the U.S., Ireland and other countries in which we and our affiliates do business could change on a prospective or retroactive basis, and any such changes could materially adversely affect our business and our effective tax rate. For example, on December 22, 2017, the U.S. enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"), which resulted in a significant charge to tax expense during our quarter ending January 2018 associated with the U.S. taxation of accumulated foreign earnings as well as the requirement to revalue U.S. deferred tax assets and liabilities resulting from the reduction in the U.S. corporate tax rate.
Certain elements of the Tax Act impact fiscal year 2018 while other portions of the legislation are not effective until future fiscal years. The U.S. Treasury has issued additional guidance subsequent to the enactment of the Tax Act, and we expect ongoing guidance to be provided which could change the impact on our tax reserves. We made reasonable estimates of the effect of the Tax Act and recorded provisional amounts in the financial statements for fiscal year 2018. Additional guidance, as well as future changes to these rules, may result in adjustments to these estimates which could materially affect our financial results.
In 2013, the Organization for Economic Cooperation and Development (OECD) published an action plan called Base Erosion and Profit Shifting (BEPS) with a view to tackling perceived tax abuse and inconsistency between taxing authorities and their approach to International tax matters. The final BEPS Action report was published in October 2015 and subsequently many taxing authorities have adopted the guidelines provided within their local laws. The EU expanded upon these guidelines with Anti-Tax Avoidance Directives (ATAD) to be applied by its member states. We continue to monitor any and all changes to local country legislation resulting from this guidance. One specific change is a requirement for increased disclosures of financial information on a local and global basis. This information could lead to disagreements between jurisdictions associated with the proper allocation of profits between such jurisdictions.
We are subject to ongoing tax audits in the various jurisdictions in which we operate. Tax authorities may disagree with certain positions we have taken and assess additional taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits could have a material impact on our business, financial condition, results of operations, and cash flows.
We have recorded reserves for potential payments of tax to various tax authorities related to uncertain tax positions. However, the calculation of such tax liabilities involves the application of complex tax regulations in many jurisdictions. Therefore, any dispute with a tax authority may result in a payment that is significantly different from current estimates. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities generally would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the amount for which it is ultimately liable, we would incur additional charges, and such charges could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
The Medtronic, Inc. tax court proceeding outcome could have a material adverse impact on our financial condition.
In March 2009, the IRS issued its audit report for Medtronic Inc. for fiscal years 2005 and 2006. Medtronic, Inc. reached agreements with the IRS on some, but not all matters related to these fiscal years. The remaining unresolved issue for fiscal years 2005 and 2006 relates to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, which is one of our key manufacturing sites. An adverse outcome in this matter could materially and adversely affect our business, financial condition, results of operations and cash flows. See Note 19 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
Future potential changes to the U.S. tax laws could result in us being treated as a U.S. corporation for U.S. federal tax purposes, and the IRS may not agree with the conclusion that we should be treated as a foreign corporation for U.S federal income tax purposes.
Because Medtronic plc is organized under the laws of Ireland, we would generally be classified as a foreign corporation under the general rule that a corporation is considered tax resident in the jurisdiction of its organization or incorporation for U.S. federal income tax purposes. Even so, the IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal income tax purposes pursuant to Section 7874 of the U.S. Internal Revenue Code of 1986, as amended (the Code).
Under Section 7874 of the Code, if Medtronic Inc.’s shareholders immediately prior to the Covidien transaction held 80% or more of the vote or value of our shares by reason of holding stock in Medtronic, Inc. immediately after the transaction (the ownership

22


test), and our expanded affiliated group after the transaction did not have substantial business activities in Ireland relative to its worldwide activities (the substantial business activities test), we would have been treated as a U.S. corporation for U.S. federal income tax purposes. Based on the rules for determining share ownership under Section 7874 of the Code, Medtronic, Inc.’s shareholders received approximately 70% of our ordinary shares (by both vote and value) by reason of holding stock in Medtronic, Inc. Therefore, under current law, we should not be treated as a U.S. corporation for U.S. federal income tax purposes. However, there is limited guidance regarding the application of Section 7874, including the application of the ownership test. If we were to be treated as a U.S. corporation for federal tax purposes, we could be subject to substantially greater U.S. tax liability than currently contemplated as a non-U.S. corporation.
Legislative or other governmental action relating to the denial of U.S. federal or state governmental contracts to U.S. companies that redomicile abroad could adversely affect our business.
Various U.S. federal and state legislative proposals that would deny governmental contracts to U.S. companies that move their corporate location abroad may affect us. We are unable to predict the likelihood that, or final form in which, any such proposed legislation might become law, the nature of the regulations that may be promulgated under any future legislative enactments, or the effect such enactments and increased regulatory scrutiny may have on our business.
Risks Relating to Our Jurisdiction of Incorporation
We are incorporated in Ireland, and Irish law differs from the laws in effect in the U.S. and may afford less protection to holders of our securities.
Our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction of the United States. It may not be possible to enforce court judgments obtained in the U.S. against us in Ireland based on the civil liability provisions of the U.S. federal or state securities laws. In addition, there is some uncertainty as to whether the courts of Ireland would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on the civil liabilities provisions of the U.S. federal or state securities laws or hear actions against us or those persons based on those laws. We have been advised that the U.S. currently does not have a treaty with Ireland providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any U.S. federal or state court based on civil liability, whether or not based solely on U.S. federal or state securities laws, would not automatically be enforceable in Ireland.
As an Irish company, we are governed by the Irish Companies Act 2014, which differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including, among others, differences relating to interested director and officer transactions and shareholder lawsuits. Likewise, the duties of directors and officers of an Irish company generally are owed to the company only. Shareholders of Irish companies generally do not have a personal right of action against directors or officers of the company and may exercise such rights of action on behalf of the company only in limited circumstances. Accordingly, holders of our securities may have more difficulty protecting their interests than would holders of securities of a corporation incorporated in the U.S.
As an Irish public limited company, certain capital structure decisions require shareholder approval, which may limit Medtronic’s flexibility to manage its capital structure.
Under Irish law, our authorized share capital can be increased by an ordinary resolution of our shareholders and the directors may issue new ordinary or preferred shares up to a maximum amount equal to the authorized but unissued share capital, without shareholder approval, once authorized to do so by our articles of association or by an ordinary resolution of our shareholders. Additionally, subject to specified exceptions, Irish law grants statutory preemption rights to existing shareholders where shares are being issued for cash consideration but allows shareholders to disapply such statutory preemption rights either in our articles of association or by way of special resolution. Such disapplication can either be generally applicable or be in respect of a particular allotment of shares. Accordingly, our articles of association contain, as permitted by Irish company law, provisions authorizing the board to issue new shares, and to disapply statutory preemption rights. The authorization of the directors to issue shares and the disapplication of statutory preemption rights must both be renewed by the shareholders at least every five years, and we cannot provide any assurance that these authorizations will always be approved, which could limit our ability to issue equity and thereby adversely affect the holders of our securities.
A transfer of our shares, other than ones effected by means of the transfer of book-entry interests in the Depository Trust Company, may be subject to Irish stamp duty.
Transfers of our shares effected by means of the transfer of book entry interests in the Depository Trust Company (DTC) will not be subject to Irish stamp duty. However, if a shareholder holds our shares directly rather than beneficially through DTC, any transfer of shares could be subject to Irish stamp duty (currently at the rate of 1% of the higher of the price paid or the market

23


value of the shares acquired). Payment of Irish stamp duty is generally a legal obligation of the transferee. The potential for stamp duty could adversely affect the price of shares.
In certain limited circumstances, dividends we pay may be subject to Irish dividend withholding tax and dividends received by Irish residents and certain other shareholders may be subject to Irish income tax.
In certain limited circumstances, dividend withholding tax (currently at a rate of 20%) may arise in respect of dividends paid on our shares. A number of exemptions from dividend withholding tax exist such that shareholders resident in the U.S. and other specified countries may be entitled to exemptions from dividend withholding tax.
Shareholders resident in the U.S. that hold their shares through DTC will not be subject to dividend withholding tax, provided the addresses of the beneficial owners of such shares in the records of the brokers holding such shares are recorded as being in the U.S. (and such brokers have further transmitted the relevant information to a qualifying intermediary appointed by us). However, other shareholders may be subject to dividend withholding tax, which could adversely affect the price of their shares.
Shareholders entitled to an exemption from Irish dividend withholding tax on dividends received from us will not be subject to Irish income tax in respect of those dividends unless they have some connection with Ireland other than their shareholding in our Company (for example, they are resident in Ireland). Shareholders who receive dividends subject to Irish dividend withholding tax generally have no further liability to Irish income tax on those dividends.
Our shares received by means of a gift or inheritance could be subject to Irish capital acquisitions tax.
Irish capital acquisitions tax (CAT) could apply to a gift or inheritance of our shares irrespective of the place of residence, ordinary residence or domicile of the parties. This is because our shares will be regarded as property situated in Ireland. The person who receives the gift or inheritance has primary liability for CAT. Gifts and inheritances passing between spouses are exempt from CAT. Children have a tax-free threshold which Irish Revenue typically updates annually in respect of taxable gifts or inheritances received from their parents.
Item 1B. Unresolved Staff Comments
None.

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Item 2. Properties
Medtronic's principal executive office is located in Dublin, Ireland and is leased by the Company, while its main operational offices are located in the Minneapolis, Minnesota metropolitan area and are owned by the Company.
The Company's total manufacturing and research space is approximately 10 million square feet. Approximately 36 percent of the manufacturing and research facilities are owned by Medtronic and the balance is leased. The following is a summary of the Company's largest manufacturing and research facilities by location:
Location Country or State
 
Square Feet (in thousands)
Connecticut
 
1,098

China
 
985

Minnesota
 
969

Puerto Rico
 
831

Mexico
 
762

California
 
495

Italy
 
454

Ireland
 
446

Texas
 
431

Dominican Republic
 
304

Arizona
 
294

Switzerland
 
283

Colorado
 
276

Medtronic also maintains sales and administrative offices in the U.S. at 12 locations in 10 states and outside the U.S. at 168 locations in 70 countries. Most of these locations are leased. The Company is using substantially all of its currently available productive space to develop, manufacture, and market products. The Company's facilities are well-maintained, suitable for their respective uses, and adequate for current needs.
Item 3. Legal Proceedings
A discussion of the Company’s legal proceedings is contained in Note 19 to the consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.

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PART II
Item 5. Market for Medtronic’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
The Company’s ordinary shares are listed on the New York Stock Exchange under the symbol “MDT.”
The following table provides information about the shares repurchased by the Company during the fourth quarter of fiscal year 2018:
Fiscal Period
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as a Part of
Publicly Announced
Program
 
Maximum Approximate Dollar Value of Shares that may yet be Purchased Under the Program
1/27/2018 - 2/23/2018
 
232,323

 
$
86.09

 
232,323

 
$
4,166,826,968

2/24/2018 - 3/30/2018
 
1,007,445

 
79.58

 
1,007,445

 
4,086,673,551

3/31/2018 - 4/27/2018
 
1,270,691

 
78.70

 
1,270,691

 
3,986,698,992

Total
 
2,510,459

 
$
79.74

 
2,510,459

 
$
3,986,698,992

In June 2015, the Company’s Board of Directors authorized, subject to the ongoing existence of sufficient distributable reserves, the repurchase of 80 million of the Company’s ordinary shares. As authorized by the Board of Directors, the Company's share repurchase program expires when the total number of authorized shares have been repurchased. This repurchase authorization was replaced in June 2017 with the repurchase authorization described below. As such, the maximum number of shares that may yet be purchased under the June 2015 share repurchase program is no longer applicable to the repurchase program in place.
In June 2017, the Company's Board of Directors authorized the repurchase of $5.0 billion of the Company’s ordinary shares. This authorization replaces the June 2015 authorization described above. There is no specific time-period associated with this repurchase authorization.
On June 20, 2018, there were approximately 29,965 shareholders of record of the Company’s ordinary shares. Ordinary cash dividends declared and paid totaled 46.0 cents per share for each quarter of fiscal year 2018 and 43.0 cents per share for each quarter of fiscal year 2017. The following prices are the high and low market sales quotations per share of the Company’s ordinary shares for the fiscal years and quarters indicated:
Fiscal Year
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
2018 High
 
$
89.72

 
$
85.07

 
$
87.93

 
$
87.30

2018 Low
 
81.50

 
76.52

 
77.06

 
76.41

2017 High
 
89.27

 
88.65

 
85.09

 
84.00

2017 Low
 
78.63

 
80.71

 
69.35

 
74.27


26


Stock Performance Graph
The following graph compares the cumulative total shareholder return on Medtronic’s ordinary shares with the cumulative total shareholder return on the Standard & Poor’s (S&P) 500 Index and the S&P 500 Health Care Equipment Index for the last five fiscal years. The graph assumes that $100 was invested at market close on April 26, 2013 in Medtronic’s ordinary shares, the S&P 500 Index, and the S&P 500 Health Care Equipment Index and that all dividends were reinvested.
chart-cdaeb1ce70225d17a0f.jpg
Company/Index
 
April 2013
 
April 2014
 
April 2015
 
April 2016
 
April 2017
 
April 2018
Medtronic, Inc. / Medtronic plc
 
$
100.00

 
$
128.10

 
$
173.85

 
$
180.96

 
$
194.03

 
$
194.16

S&P 500 Index
 
100.00

 
120.27

 
139.48

 
139.05

 
163.96

 
187.24

S&P 500 Health Care Equipment Index
 
100.00

 
119.09

 
156.85

 
166.19

 
194.71

 
234.34

For information on the Company's equity compensation plans, see "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters" in this Annual Report on Form 10-K.
Irish Restrictions on Import and Export of Capital
Except as indicated below, there are no restrictions on non-residents of Ireland dealing in Irish domestic securities, which includes ordinary shares of Irish companies. Except as indicated below, dividends and redemption proceeds also continue to be freely transferable to non-resident holders of such securities. The Financial Transfers Act, 1992, provides that the Irish Minister for Finance can make provision for the restriction of financial transfers between Ireland and other countries. For the purposes of this Act, “financial transfers” include all transfers which would be movements of capital or payments within the meaning of the treaties governing the EU if they had been made between Member States of the EU. This Act has been used by the Minister for Finance to implement European Council Directives, which provide for the restriction of financial transfers to certain countries, organizations and people including the Al-Qaeda network and the Taliban, Afghanistan, Belarus, Burma (Myanmar), Democratic People’s Republic of Korea, Democratic Republic of Congo, Egypt, Eritrea, Iran, Iraq, Ivory Coast, Lebanon, Liberia, Libya, Republic of Guinea, Somalia, Sudan, Syria, Tunisia and Ukraine.

27


Any transfer of, or payment in respect of, a share or interest in a share involving the government of any country that is currently the subject of United Nations sanctions, any person or body controlled by any of the foregoing, or by any person acting on behalf of the foregoing, may be subject to restrictions pursuant to such sanctions as implemented into Irish law.
Irish Taxes Applicable to U.S. Holders
Dividends paid by Medtronic will generally be subject to Irish dividend withholding tax at the standard rate of income tax (currently 20 percent) unless an exemption applies.
Dividends paid to U.S. residents will not be subject to Irish dividend withholding tax provided that:

in the case of a beneficial owner of Medtronic shares held in the Depository Trust Company (DTC), the address of the beneficial owner in the records of his or her broker is in the United States and this information is provided by the broker to the Company’s qualifying intermediary; or

in the case of a record owner, the record owner has provided to the Company’s transfer agent a valid U.S Certification of Residence (Form 6166) or valid Irish Non-Resident Form V2.
Irish income tax may also arise with respect to dividends paid on Medtronic’s ordinary shares. A U.S. resident who meets one of the exemptions from dividend withholding tax described above and who does not hold Medtronic shares through a branch or agency in Ireland through which a trade is carried on generally will not have any Irish income tax liability on a dividend paid by Medtronic. In addition, if a U.S. shareholder is subject to the dividend withholding tax, the withholding payment discharges any Irish income tax liability, provided the shareholder furnishes to the Irish Revenue authorities a statement of the dividend withholding tax imposed.
While the U.S./Ireland Double Tax Treaty contains provisions regarding withholding, due to the wide scope of the exemptions from dividend withholding tax available under Irish domestic law, it would generally be unnecessary for a U.S. resident shareholder to rely on the treaty provisions.

28


Item 6. Selected Financial Data
Our fiscal year-end is the last Friday in April, and therefore, the total weeks in a fiscal year fluctuates between 52 and 53 weeks. Fiscal years 2018, 2017, 2015, and 2014 were 52-week years. Fiscal year 2016 was a 53-week year, with the additional week occurring in the first quarter. The table below illustrates operating results and other selected financial data for fiscal years 2014 to 2018:
 
Fiscal Year
(in millions, except per share data and additional information)
2018
 
2017
 
2016
 
2015(1)
 
2014
Operating Results:
 
 
 
 
 
 
 
 
 
Net sales
$
29,953

 
$
29,710

 
$
28,833

 
$
20,261

 
$
17,005

Cost of products sold
9,055

 
9,291

 
9,142

 
6,309

 
4,333

Research and development expense
2,253

 
2,193

 
2,224

 
1,640

 
1,477

Selling, general, and administrative expense
9,974

 
9,711

 
9,469

 
6,904

 
5,847

Amortization of intangible assets
1,823

 
1,980

 
1,931

 
733

 
349

Restructuring charges, net
30

 
363

 
290

 
237

 
78

Acquisition-related items
104

 
220

 
283

 
550

 
117

Certain litigation charges
61

 
300

 
26

 
42

 
770

Divestiture-related items
114

 

 

 

 

Gain on sale of businesses
(697
)
 

 

 

 

Special charge (gain), net
80

 
100

 

 
(38
)
 
40

Other expense, net
505

 
222

 
107

 
118

 
181

Operating profit
6,651

 
5,330

 
5,361

 
3,766

 
3,813

Operating profit margin percent
22.2
%
 
17.9
%
 
18.6
%
 
18.6
%
 
22.4
%
Investment loss
227

 

 
70

 

 

Interest expense, net
749

 
728

 
955

 
280

 
108

Income before income taxes
5,675

 
4,602

 
4,336

 
3,486

 
3,705

Income tax provision
2,580

 
578

 
798

 
811

 
640

Net income
3,095

 
4,024

 
3,538

 
2,675

 
3,065

Net loss attributable to noncontrolling interests
9

 
4

 

 

 

Net income attributable to Medtronic
$
3,104

 
$
4,028

 
$
3,538

 
$
2,675

 
$
3,065

Per Ordinary Share:
 

 
 

 
 

 
 

 
 

Basic - Net income attributable to Medtronic
$
2.29

 
$
2.92

 
$
2.51

 
$
2.44

 
$
3.06

Diluted - Net income attributable to Medtronic
2.27

 
2.89

 
2.48

 
2.41

 
3.02

Cash dividends declared per ordinary share
1.84

 
1.72

 
1.52

 
1.22

 
1.12

Financial Position at Fiscal Year-end:
 

 
 

 
 

 
 

 
 

Working capital(2)
$
12,896

 
$
10,272

 
$
16,391

 
$
21,627

 
$
15,607

Current ratio(2)(3)
   2.3:1.0
 
   1.7:1.0
 
   3.3:1.0
 
   3.3:1.0
 
   3.8:1.0
Total assets(2)
91,393

 
99,857

 
99,685

 
106,726

 
37,984

Long-term debt
23,699

 
25,921

 
30,109

 
33,752

 
10,315

Shareholders’ equity(2)
50,720

 
50,208

 
51,977

 
53,144

 
19,357

Additional Information:
 

 
 

 
 

 
 

 
 

Full-time employees at year-end
86,368

 
91,267

 
88,063

 
85,573

 
43,305

Full-time equivalent employees at year-end
98,003

 
102,688

 
98,017

 
92,500

 
49,247

(1)
Covidien plc was acquired on January 26, 2015. As such, for the fiscal year ended April 24, 2015, the results of operations of Covidien are reflected in Medtronic’s results of operations for only the fourth quarter due to the timing of the acquisition, which affects comparability.
(2)
Amounts and ratios have been immaterially revised as necessary for prior periods, as discussed in Note 1 to the consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
(3)
The ratio of current assets to current liabilities. The current ratio at April 28, 2017 excludes current assets and current liabilities held for sale.

29


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information management believes to be relevant to understanding the financial condition and results of operations of the Company. You should read this discussion and analysis along with our consolidated financial statements and related notes thereto at April 27, 2018 and April 28, 2017 and for each of the three fiscal years ended April 27, 2018 (fiscal year 2018), April 28, 2017 (fiscal year 2017), and April 29, 2016 (fiscal year 2016), which are presented within "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. Our fiscal year-end is the last Friday in April, and therefore, the total weeks in a fiscal year fluctuates between 52 and 53 weeks. Fiscal years 2018 and 2017 were 52-week years. Fiscal year 2016 was a 53-week year, with the additional week occurring in the first quarter.
Throughout this Management’s Discussion and Analysis, we present certain financial measures that we use to evaluate the operational performance of the Company and as a basis for strategic planning; however, such financial measures are not presented in our financial statements prepared in accordance with generally accepted accounting principles in the U.S. (U.S. GAAP). These financial measures are considered "non-GAAP financial measures" and are intended to supplement, and should not be considered as superior to, financial measures presented in accordance with U.S. GAAP. We generally use non-GAAP financial measures to facilitate management's review of the operational performance of the Company and as a basis for strategic planning. We believe that non-GAAP financial measures provide information useful to investors in understanding the Company's underlying operational performance and trends and may facilitate comparisons with the performance of other companies in the medical technologies industry.

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

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

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

Refer to the “GAAP to Non-GAAP Reconciliations," "Income Taxes," and "Free Cash Flow" sections for reconciliations of the non-GAAP financial measures to their most directly comparable financial measures prepared in accordance with U.S. GAAP.
EXECUTIVE LEVEL OVERVIEW
Medtronic is among the world's largest medical technology, services, and solutions companies - alleviating pain, restoring health, and extending life for millions of people around the world. Our primary products include those for cardiac rhythm disorders, cardiovascular disease, advanced and general surgical care, respiratory and monitoring solutions, renal care, neurological disorders, spinal conditions and musculoskeletal trauma, urological and digestive disorders, and ear, nose, and throat and diabetes conditions.
The table below presents net income attributable to Medtronic and diluted earnings per share for fiscal years 2018, 2017, and 2016:
 
 
Fiscal Year
 
 Percent Change
(in millions, except per share data)
 
2018
 
2017
 
2016
 
2018
 
2017
Net income attributable to Medtronic
 
$
3,104

 
$
4,028

 
$
3,538

 
(23
)%
 
14
%
Diluted earnings per share
 
$
2.27

 
$
2.89

 
$
2.48

 
(21
)%
 
17
%
Diluted earnings per share (EPS) for fiscal year 2018 as compared to fiscal year 2017 was unfavorably affected by the net $2.4 billion tax charge related to the enactment of U.S. comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the Tax Act), which had a significant effect on the income tax provision in fiscal year 2018. Further, diluted EPS for fiscal year 2018 was unfavorably affected by an investment loss related to the impairment of certain cost and equity method investments of $227 million, along with impairments of IPR&D of $68 million. Additionally, for fiscal year 2018, diluted EPS was unfavorably affected by the July 29, 2017 sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses within the Minimally Invasive Therapies Group. Net sales of these businesses for fiscal years 2018 and 2017 were $0.6 billion and $2.4

30


billion, respectively. For fiscal year 2018, diluted EPS was partially offset by a $697 million gain on the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.
Diluted EPS for fiscal year 2017 as compared to 2016 was favorably affected by the recognition of certain tax adjustments of $417 million, including a charge of $442 million in fiscal year 2016 primarily related to the U.S. income tax expense resulting from our completion of an internal reorganization of the ownership of certain legacy Covidien businesses that reduced the cash and investments held by our U.S. controlled non-U.S. subsidiaries, partially offset by a benefit related to the establishment of a deferred tax asset on the tax basis in excess of book basis of a wholly owned U.S. subsidiary of which we disposed. Further, diluted EPS was also affected by a $226 million charge in fiscal year 2016 related to the recognition of the fair value step-up of acquired Covidien inventory.
GAAP to Non-GAAP Reconciliations The tables below present reconciliations of our Non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with U.S. GAAP for fiscal years 2018, 2017, and 2016:
 
Fiscal year ended April 27, 2018
(in millions, except per share data)
Income before
income taxes
 
Income tax provision (benefit)
 
Net income attributable to Medtronic
 
Diluted EPS (1)
 
Effective tax rate
GAAP
$
5,675

 
$
2,580

 
$
3,104

 
$
2.27

 
45.5
 %
Non-GAAP Adjustments:
 
 
 
 
 
 
 
 
 
Restructuring and associated costs (2)
107

 
20

 
87

 
0.06

 
18.7

Acquisition-related items
132

 
42

 
90

 
0.07

 
31.8

Debt redemption premium (3)
38

 
12

 
26

 
0.02

 
31.6

Divestiture-related items (4)
115

 
12

 
103

 
0.08

 
10.4

Certain litigation charges
61

 
8

 
53

 
0.04

 
13.1

Investment loss (5)
227

 
(1
)
 
228

 
0.17

 
(0.4
)
IPR&D impairment
46

 
5

 
41

 
0.03

 
10.9

Gain on sale of businesses (6)
(697
)
 

 
(697
)
 
(0.51
)
 

Hurricane Maria (7)
34

 
1

 
33

 
0.02

 
2.9

Special charge (8)
80

 
26

 
54

 
0.04

 
32.5

Amortization of intangible assets
1,823

 
322

 
1,501

 
1.10

 
17.7

Certain tax adjustments, net (9)

 
(1,907
)
 
1,907

 
1.39

 

Non-GAAP
$
7,641

 
$
1,120

 
$
6,530

 
$
4.77

 
14.7
 %

 
Fiscal year ended April 28, 2017
(in millions, except per share data)
Income before
income taxes
 
Income tax provision (benefit)
 
Net income attributable to Medtronic
 
Diluted EPS (1)
 
Effective tax rate
GAAP
$
4,602

 
$
578

 
$
4,028

 
$
2.89

 
12.6
%
Non-GAAP Adjustments:
 
 
 
 
 
 
 
 
 
Restructuring charges, net
373

 
101

 
272

 
0.20

 
27.1

Acquisition-related items
230

 
74

 
156

 
0.11

 
32.2

Certain litigation charges
300

 
110

 
190

 
0.14

 
36.7

Special charge (8)
100

 
37

 
63

 
0.05

 
37.0

Impact of inventory step-up (10)
38

 
14

 
24

 
0.02

 
36.8

Amortization of intangible assets
1,980

 
520

 
1,460

 
1.05

 
26.3

Certain tax adjustments, net (11)

 
(202
)
 
202

 
0.15

 

Non-GAAP
$
7,623

 
$
1,232

 
$
6,395

 
$
4.60

 
16.2
%


31


 
Fiscal year ended April 29, 2016
(in millions, except per share data)
Income before
income taxes
 
Income tax provision (benefit)
 
Net income attributable to Medtronic
 
Diluted EPS (1)
 
Effective tax rate
GAAP
$
4,336

 
$
798

 
$
3,538

 
$
2.48

 
18.4
%
Non-GAAP Adjustments:
 
 
 
 
 
 
 
 
 
Restructuring charges, net
299

 
78

 
221

 
0.15

 
26.1

Acquisition-related items
283

 
71

 
212

 
0.15

 
25.1

Debt tender premium
183

 
65

 
118

 
0.08

 
35.5

Certain litigation charges
26

 
9

 
17

 
0.01

 
34.6

Investment loss (12)
70

 
26

 
44

 
0.03

 
37.1

Impact of inventory step-up (13)
226

 
61

 
165

 
0.12

 
27.0

Loss on previously held forward starting interest rate swaps
45

 
16

 
29

 
0.02

 
35.6

Amortization of intangible assets
1,931

 
464

 
1,467

 
1.03

 
24.0

Certain tax adjustments, net (14)

 
(417)

 
417

 
0.29

 

Non-GAAP
$
7,399

 
$
1,171

 
$
6,228

 
$
4.37

 
15.8
%
(1)
Amounts in this column have been intentionally rounded to the nearest $0.01 and, therefore, may not sum.
(2)
Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.
(3)
The charge, included within interest expense, net in our consolidated statements of income, was recognized in connection with the early redemption of approximately $1.2 billion of Medtronic Inc. senior notes.
(4)
The transaction expenses incurred in connection with the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.
(5)
The charge was recognized in connection with the impairment of certain cost and equity method investments.
(6)
The gain on the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.
(7)
The charges represent idle facility costs, asset write-downs, and humanitarian efforts related to Hurricane Maria.
(8)
The charge represents a contribution to the Medtronic Foundation.
(9)
The net charge primarily relates to the impact of U.S. tax reform, inclusive of the transition tax, remeasurement of deferred tax assets and liabilities, and the decrease in the U.S. statutory tax rate. Additionally, the net charge includes the impacts from the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses, and the tax cost associated with an internal reorganization, which were partially offset by the tax effects from the intercompany sale of intellectual property.
(10)
The charge represents the amortization of step-up in fair value of inventory acquired in connection with the HeartWare acquisition.
(11)
The net charge primarily relates to the tax effect from the recognition of the outside basis of certain subsidiaries which were included in the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses completed during the second quarter of fiscal year 2018, along with certain tax charges recorded in connection with the redemption of an intercompany minority interest, and the resolution of various tax matters from prior periods.
(12)
The charge represents the impairment of a debt investment.
(13)
The charge represents the amortization of step-up in fair value of inventory acquired in connection with the Covidien acquisition.
(14)
The net charge primarily relates to U.S. income tax expense resulting from our completion of an internal reorganization of the ownership of certain legacy Covidien businesses that reduced the cash and investments held by Medtronic’s U.S.-controlled non-U.S. subsidiaries, partially offset by a benefit related to the establishment of a deferred tax asset on the tax basis in excess of book basis of a wholly owned U.S. subsidiary of which we disposed.

32


NET SALES
Segment and Division
The table below illustrates net sales by segment and division for fiscal years 2018, 2017, and 2016:
 
 Net Sales by Fiscal Year
 
Percent Change 
(in millions)
2018
 
2017
 
2016
 
2018
 
2017
Cardiac Rhythm & Heart Failure
$
5,947

 
$
5,649

 
$
5,465

 
5
 %
 
3
 %
Coronary & Structural Heart
3,562

 
3,113

 
3,093

 
14

 
1

Aortic & Peripheral Vascular
1,845

 
1,736

 
1,638

 
6

 
6

Cardiac and Vascular Group
11,354

 
10,498

 
10,196

 
8

 
3

Surgical Innovations(1)
5,537

 
5,145

 
4,851

 
8

 
6

Respiratory, Gastrointestinal, & Renal(1)
3,179

 
4,774

 
4,712

 
(33
)
 
1

Minimally Invasive Therapies Group
8,716

 
9,919

 
9,563

 
(12
)
 
4

Spine
2,668

 
2,641

 
2,629

 
1

 

Brain Therapies
2,354

 
2,098

 
1,980

 
12

 
6

Specialty Therapies
1,556

 
1,491

 
1,419

 
4

 
5

Pain Therapies
1,165

 
1,136

 
1,182

 
3

 
(4
)
Restorative Therapies Group
7,743

 
7,366

 
7,210

 
5

 
2

Diabetes Group
2,140

 
1,927

 
1,864

 
11

 
3

Total
$
29,953

 
$
29,710

 
$
28,833

 
1
 %
 
3
 %
(1)
During the second quarter of fiscal year 2018, the Surgical Solutions and Patient Monitoring & Recovery divisions of the Minimally Invasive Therapies Group were realigned into the Surgical Innovations and Respiratory, Gastrointestinal, & Renal divisions. Refer to the "Minimally Invasive Therapies Group" discussion within this Management's Discussion and Analysis for more information on the composition of the Surgical Innovations and Respiratory, Gastrointestinal, & Renal divisions.
For fiscal year 2018, total net sales were unfavorably affected by the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses within the Minimally Invasive Therapies Group which closed on the first day of the second quarter of fiscal year 2018. Our performance continues to be fueled by our three growth strategies: therapy innovation, globalization, and economic value. We are creating competitive advantages and capitalizing on the long-term trends in healthcare: namely the desire to improve clinical outcomes, the growing demand for expanded access to care, and the optimization of cost and efficiency within healthcare systems. In our therapy innovation growth strategy, we continue to see clear acceleration in our innovation cycle, with several meaningful new product launches during fiscal year 2018 across all of our segments. We advanced a pipeline of groundbreaking medical technology, and we are creating new markets, disrupting existing markets, and leading in several of the fastest growth markets. In globalization, net sales in emerging markets grew 12% during fiscal year 2018 as compared to fiscal year 2017. Our consistent emerging market performance continues to benefit from geographic diversification, with strong, balanced results around the world. In our third growth strategy, economic value, we continue to execute our value-based healthcare signature programs and aggressively develop unique, value-based healthcare solutions that directly link our therapies to improving outcomes across each of our segments. We remain focused on leading the shift to healthcare payment systems that reward value and improved patient outcomes over volume.

33


Segment and Market Geography
operationsbymarketfy2018.jpg
The tables below include net sales by market geography for each of our segments for fiscal years 2018, 2017, and 2016:
 
U.S.(1) 
 
Non-U.S. Developed Markets(2)
 
Emerging Markets(3)
(in millions)
Fiscal Year 2018
 
Fiscal Year 2017
 
% Change
 
Fiscal Year 2018
 
Fiscal Year 2017
 
% Change
 
Fiscal Year 2018
 
Fiscal Year 2017
 
% Change
Cardiac and Vascular Group
$
5,681

 
$
5,454

 
4
 %
 
$
3,790

 
$
3,393

 
12
 %
 
$
1,883

 
$
1,651

 
14
%
Minimally Invasive Therapies Group
3,804

 
5,049

 
(25
)
 
3,378

 
3,479

 
(3
)
 
1,534

 
1,391

 
10

Restorative Therapies Group
5,164

 
5,012

 
3

 
1,720

 
1,588

 
8

 
859

 
766

 
12

Diabetes Group
1,226

 
1,148

 
7

 
739

 
625

 
18

 
175

 
154

 
14

Total
$
15,875

 
$
16,663

 
(5
)%
 
$
9,627

 
$
9,085

 
6
 %
 
$
4,451

 
$
3,962

 
12
%
 
U.S.(1) 
 
Non-U.S. Developed Markets(2)
 
Emerging Markets(3)
(in millions)
Fiscal Year 2017
 
Fiscal Year 2016
 
% Change
 
Fiscal Year 2017
 
Fiscal Year 2016
 
% Change
 
Fiscal Year 2017
 
Fiscal Year 2016
 
% Change
Cardiac and Vascular Group
$
5,454

 
$
5,347

 
2
%
 
$
3,393

 
$
3,283

 
3
%
 
$
1,651

 
$
1,566

 
5
%
Minimally Invasive Therapies Group
5,049

 
5,014

 
1

 
3,479

 
3,299

 
5

 
1,391

 
1,250

 
11

Restorative Therapies Group
5,012

 
4,921

 
2

 
1,588

 
1,542

 
3

 
766

 
747

 
3

Diabetes Group
1,148

 
1,140

 
1

 
625

 
584

 
7

 
154

 
140

 
10

Total
$
16,663

 
$
16,422

 
1
%
 
$
9,085

 
$
8,708

 
4
%
 
$
3,962

 
$
3,703

 
7
%
(1)
U.S. includes the United States and U.S. territories.
(2)
Non-U.S. developed markets include Japan, Australia, New Zealand, Korea, Canada, and the countries of Western Europe.
(3)
Emerging markets include the countries of the Middle East, Africa, Latin America, Eastern Europe, and the countries of Asia that are not included in the non-U.S. developed markets, as defined above.
For fiscal year 2018, net sales for the U.S. decreased 5 percent, developed markets outside the U.S. increased 6 percent, and emerging markets increased 12 percent as compared to fiscal year 2017. Net sales declines in the U.S. were impacted by the July 29, 2017 divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses within the Minimally Invasive Therapies Group, partially offset by growth in the other segments. Net sales growth in non-U.S. developed markets was led by strong performance in Western Europe. Emerging market sales growth was driven by solid performance in all of our segments, with strong performance in China, Latin America, Eastern Europe and the Middle East & Africa. Currency had a favorable effect of $494 million on net sales for fiscal year 2018.
For fiscal year 2017, net sales for the U.S. increased 1 percent, non-U.S. developed markets increased 4 percent, and emerging markets increased 7 percent as compared to fiscal year 2016. Net sales growth across all markets was driven by meaningful product

34


launches and introduction of groundbreaking new technologies, partially offset by an unfavorable impact of an additional selling week during the first quarter of fiscal year 2016. Net sales growth in the U.S. was led by strong growth in the Cardiac and Vascular Group and Minimally Invasive Therapies Group and solid growth in the Restorative Therapies Group and Diabetes Group. In Emerging Markets, net sales growth was also attributable to the expansion of access to our therapies.
Looking ahead, our segments are likely to face competitive product launches and pricing pressure, geographic macro-economic risks, reimbursement challenges, impacts from changes in the mix of our product offerings, the timing of product registration approvals, replacement cycle challenges, and fluctuations in currency exchange rates. Additionally, changes in procedural volumes could affect our Cardiac and Vascular, Minimally Invasive Therapies, and Restorative Therapies Groups.
Cardiac and Vascular Group
The Cardiac and Vascular Group’s products include pacemakers, insertable and external cardiac monitors, cardiac resynchronization therapy devices (CRT-D), implantable cardioverter defibrillators (ICD), leads and delivery systems, ventricular assist systems, ablation products, electrophysiology catheters, products for the treatment of atrial fibrillation, information systems for the management of patients with Cardiac Rhythm & Heart Failure devices, products designed to reduce surgical site infections, coronary and peripheral stents, balloons, and related delivery systems, endovascular stent graft systems, heart valve replacement technologies, cardiac tissue ablation systems, and open heart and coronary bypass grafting surgical products. The Cardiac and Vascular Group also includes Care Management Services and Cath Lab Managed Services (CLMS) within the Cardiac Rhythm & Heart Failure division. The Cardiac and Vascular Group's net sales for fiscal year 2018 were $11.4 billion, an increase of 8 percent as compared to fiscal year 2017. Currency had a favorable impact on net sales for fiscal year 2018 of $215 million. Cardiac and Vascular Group's net sales for fiscal year 2018, as compared to fiscal year 2017, benefited from strong net sales in all three divisions. See the more detailed discussion of each division's performance below.
Cardiac Rhythm & Heart Failure net sales for fiscal year 2018 were $5.9 billion, an increase of 5 percent as compared to fiscal year 2017. Cardiac Rhythm & Heart Failure net sales growth for fiscal year 2018 was driven by strong growth in Arrhythmia Management and Heart Failure. The strong growth in Arrhythmia Management was largely due to growth in AF Solutions, driven by the continued global acceptance of our Arctic Front Advance Cardiac CryoAblation Catheter (Arctic Front) system, growth in Diagnostics, driven by the continued adoption of the Reveal LINQ insertable cardiac monitor, as well as strong adoption of the Micra transcatheter pacing system and TYRX absorbable antibacterial envelope. The strong growth in Heart Failure was driven by growth in Mechanical Circulatory Support from sales of the HVAD system, as well as continued demand for the CRT-P quadripolar pacing system, which launched in the U.S. in the first quarter of fiscal year 2018.
Coronary & Structural Heart net sales for fiscal year 2018 were $3.6 billion, an increase of 14 percent as compared to fiscal year 2017. Coronary & Structural Heart net sales growth for fiscal year 2018 was largely driven by the continued strong customer adoption of the Evolut PRO Transcatheter Aortic Valve system (Evolut PRO) and the Evolut R 34mm transcatheter aortic heart valve, as well as continued penetration into intermediate risk in the U.S., which received approval late in the first quarter of fiscal year 2018. Net sales growth was also driven by the continued strong demand for the Resolute Onyx drug-eluting stent in the U.S. and Japan, which launched in the first quarter of fiscal year 2018.
Aortic & Peripheral Vascular net sales for fiscal year 2018 were $1.8 billion, an increase of 6 percent as compared to fiscal year 2017. Aortic & Peripheral Vascular net sales growth for fiscal year 2018 was driven by growth in Valiant Captivia Thoracic stent grafts, Percutaneous Transluminal Angioplasty (PTA) balloons and drug-coated balloons, as well as success of the Heli-FX EndoAnchor System. Net sales growth was further driven by strong performance in EndoVenous due to accelerated growth of the VenaSeal vein closure system, for which approval for reimbursement payment in the U.S. from the Centers for Medicare & Medicaid Services (CMS) was initiated in January 2018.
The Cardiac and Vascular Group's net sales for fiscal year 2017 were $10.5 billion, an increase of 3 percent as compared to fiscal year 2016. The Cardiac and Vascular Group’s net sales for fiscal year 2017 were unfavorably affected by an additional selling week during the first quarter fiscal year 2016. The Cardiac and Vascular Group's net sales for fiscal year 2017, as compared to fiscal year 2016, benefited from strong net sales in Arrhythmia Management within Cardiac Rhythm & Heart Failure, largely due to growth in AF Solutions and Diagnostics, Coronary & Structural Heart, largely due to the transcatheter aortic heart valve in the U.S. and Europe, and in Aortic & Peripheral Vascular, as well as the acquisition of HeartWare in the second quarter of fiscal year 2017. See the more detailed discussion of each division's performance below.
Cardiac Rhythm & Heart Failure net sales for fiscal year 2017 were $5.6 billion, an increase of 3 percent as compared to fiscal year 2016. Cardiac Rhythm & Heart Failure net sales growth for fiscal year 2017 was driven by strong growth in Arrhythmia Management, largely due to growth in AF Solutions and Diagnostics. The strong growth in AF Solutions was driven by the continued global acceptance of our Arctic Front Advance Cardiac CryoAblation Catheter (Arctic Front) system, including strong growth in Japan. The strong growth in Diagnostics was driven by the continued adoption of the Reveal LINQ insertable cardiac

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monitor. Cardiac Rhythm & Heart Failure also benefited from the acquisition of HeartWare, which was acquired during the second quarter of fiscal year 2017.
Coronary & Structural Heart net sales for fiscal year 2017 were $3.1 billion, an increase of 1 percent as compared to fiscal year 2016. Coronary & Structural Heart net sales growth for fiscal year 2017 was largely driven by the continued launch of the Evolut R 34mm transcatheter aortic heart valve in the U.S. and Europe. Net sales growth was partially offset by challenges with drug-eluting stents in both the U.S. and Japan due to competitive pressures related to the anticipated approval of the Resolute Onyx drug-eluting stents in these countries, which received U.S. FDA approval, as well as approval in Japan, during the first quarter of fiscal year 2018. Net sales growth was also partially offset by continued pricing pressures and competition worldwide in our Coronary business.
Aortic & Peripheral Vascular net sales for fiscal year 2017 were $1.7 billion, an increase of 6 percent as compared to fiscal year 2016. Aortic & Peripheral Vascular net sales growth for fiscal year 2017 was driven by the continued strong worldwide growth of the IN.PACT Admiral drug-coated balloon as well as success of the Heli-FX EndoAnchor System and the Endurant IIs aortic stent graft. Net sales growth as compared to fiscal year 2016 was also driven by the launch of the HawkOne 6 French directional atherectomy system in the third quarter of fiscal year 2017.
Looking ahead, we expect our Cardiac and Vascular Group could be affected by the following:
Continued acceptance and growth of the CRT-P quadripolar pacing system, which received CE Mark approval in February 2017 and launched in Europe during the fourth quarter of fiscal year 2017. In the U.S., we received Food and Drug Administration (FDA) approval in May 2017, and launched in the first quarter of fiscal year 2018.

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

Continued growth from the Reveal LINQ insertable cardiac monitor.

Continued growth of our Micra transcatheter pacing system. Micra is a miniaturized single chamber pacemaker system that is delivered through the femoral vein and is implanted in the right ventricle of the heart. The system does not use a lead and does not have a subcutaneous device pocket underneath the skin as with conventional pacemaker systems. We received final approval for reimbursement in the U.S. from the CMS and in Japan from the Ministry of Health, Labour, and Welfare during the fourth quarter of fiscal year 2017 and during the second quarter of fiscal year 2018, respectively, for this transformative therapy, which we expect will continue to accelerate sales in the U.S. and in Japan.

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

Continued acceptance and growth of the HVAD System as a Destination Therapy for patients with advanced heart failure who are not candidates for heart transplants. The HVAD System, a left ventricular assist device or LVAD, helps the heart pump and increases the amount of blood that flows through the body. In the U.S., we received FDA approval in September 2017 for this Destination Therapy indication, and expect to receive thoracotomy indication during fiscal year 2019. Further, we expect to launch the HVAD system in Japan during fiscal year 2019.

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

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

Acceptance and growth from penetration of the self-expanding CoreValve Evolut Transcatheter Aortic Valve Replacement platform into intermediate risk indication in the U.S., which received FDA approval during the first quarter of fiscal year 2018.


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Continued acceptance and growth from Evolut PRO, which provides control during deployment to assist with accurate positioning with the ability to recapture and reposition the valve. Evolut PRO received U.S. FDA approval and launched in the fourth quarter of fiscal year 2017. Evolut PRO also received CE Mark approval at the end of the first quarter of fiscal year 2018 and launched in Europe during the second quarter of fiscal year 2018. Further, Evolut PRO is expected to launch in Japan during the first half of fiscal year 2019.

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

Continued acceptance and growth of the IN.PACT Admiral drug-coated balloon for the treatment of peripheral artery disease in the upper leg.

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

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

Continued acceptance and growth from the expansion of the Endurant II used with the Heli-FX EndoAnchor for the short neck indication in the U.S., which received FDA approval in October 2017.
Minimally Invasive Therapies Group
The Minimally Invasive Therapies Group’s products span the entire continuum of patient care with a focus on diseases of the gastrointestinal tract, lungs, pelvic region, kidneys, obesity, and preventable complications. The products include those for advanced and general surgical products including surgical stapling devices, vessel sealing instruments, wound closure, electrosurgery products, hernia mechanical devices, mesh implants, advanced ablation, interventional lung, ventilators, capnography, airway products, sensors, dialysis, and monitors. Net sales for the three months ended July 28, 2017 and fiscal years 2017 and 2016 also include sales of dental and animal health, chart paper, wound care, incontinence, electrodes, SharpSafety, thermometry, perinatal protection, blood collection, compression, and enteral feeding offerings, which were divested on July 29, 2017.
The Minimally Invasive Therapies Group’s net sales for fiscal year 2018 were $8.7 billion, a decrease of 12 percent as compared to fiscal year 2017. Currency had a favorable impact on net sales of $147 million for fiscal year 2018. The Minimally Invasive Therapies Group's net sales for fiscal year 2018 were affected by the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses on July 29, 2017.
Subsequent to the divestiture, during the second quarter of fiscal year 2018, the Surgical Solutions and Patient Monitoring & Recovery divisions were realigned into the Surgical Innovations and Respiratory, Gastrointestinal, & Renal divisions. The Surgical Innovations division consists of the Advanced Surgical and General Surgical businesses. The Advanced Surgical business includes the Advanced Stapling, Advanced Energy, Hernia, Gynecology, and Interventional Lung product lines. The General Surgical business includes the Wound Closure, Electrosurgery, and Instrument product lines.
The Respiratory, Gastrointestinal, & Renal division consists of the Respiratory & Monitoring Solutions and Renal Care Solutions businesses. The Respiratory & Monitoring Solutions business includes the Patient Monitoring, Respiratory Solutions, Advanced Ablation, and GI Solutions product lines. The Renal Care Solutions business includes the Renal Access and Dialyzers product lines.
Surgical Innovations net sales for fiscal year 2018 were $5.5 billion, an increase of 8 percent as compared to fiscal year 2017. Surgical Innovations net sales growth was driven by new products in Advanced Stapling and Advanced Energy, including the Signia powered surgical stapling system and endo stapling specialty reloads. Also driving net sales was our Valleylab FT10 energy platform and new iterations of our LigaSure vessel sealing instruments, and growth in emerging markets.
Respiratory, Gastrointestinal, & Renal net sales for fiscal year 2018 were $3.2 billion, a decrease of 33 percent as compared to fiscal year 2017. Respiratory, Gastrointestinal, & Renal net sales declined as a result of the July 29, 2017 divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses. Apart from the decline in net sales due to the divestiture, net sales performance in Respiratory, Gastrointestinal, & Renal benefited from growth in GI Solutions, the strength in Nellcor

37


pulse oximetry products due to the intensity of the flu season in the U.S., the continued adoption of MicroStream capnography monitoring product, and growth in Airway and Ventilation net sales.
Surgical Innovations net sales for fiscal year 2017 were $5.1 billion, an increase of 6 percent as compared to fiscal year 2016. Surgical Innovations net sales growth was driven by Advanced Stapling and Advanced Energy. Advanced Stapling growth resulted from strong adoption of endo stapling specialty reloads with Tri-Staple technology, growth in emerging markets, and the release of the Signia power stapling system. Advanced Energy growth resulted from the launch of the LigaSure vessel sealing instruments and continued adoption of the Valleylab FT10 energy platform. The launch of the LigaSure vessel sealing instruments along with the Valleylab FT10 energy platform helped mitigate the negative impact of reprocessing. Surgical Innovations also benefited from the acquisition of Smith & Nephew's gynecology business, which was acquired during the second quarter of fiscal year 2017.
Respiratory, Gastrointestinal, & Renal net sales for fiscal year 2017 were $4.8 billion, an increase of 1 percent as compared to fiscal year 2016. Respiratory, Gastrointestinal, & Renal net sales growth was driven by strong Respiratory & Monitoring Services sales of the Puritan Bennett 980 and Nellcor pulse oximetry products, along with growth in emerging markets. Respiratory, Gastrointestinal, & Renal also benefited from the acquisition of Bellco, which was acquired during the fourth quarter of fiscal year 2016.
Looking ahead, we expect our Minimally Invasive Therapies Group could be affected by the following:
Continued acceptance and growth of Open-to-Minimally Invasive Surgery (MIS) techniques and tools supported by our efforts to transition open surgery to MIS. The Open-to-MIS initiative focuses on establishing our presence in and working to optimize open surgery globally, while capturing the market opportunity that exists in transitioning open procedures to MIS, whether through traditional MIS, or advanced technologies including robotics. To achieve this transition, we are focused on product training, surgical skill training and continued therapy innovation to advance MIS.
Our ability to execute ongoing strategies to develop, gain regulatory approval, and commercialize new products, including our surgical robotics platform.
The July 29, 2017 divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses. Net sales of the businesses included in the divestiture were $2.4 billion for fiscal years 2017 and 2016. We have entered into Transition Manufacturing Agreements (TMAs) with Cardinal Health, Inc. (Cardinal). The TMAs will contribute to net sales and are designed to ensure and facilitate an orderly transfer of business operations for a transition period of two to five years, with the ability to extend upon mutual agreement of the parties.
Continued acceptance and growth of the powered stapling and energy platform.
Our ability to execute ongoing strategies in order to address the competitive pressure of reprocessing of our vessel sealing disposables in the U.S.
Our ability to create markets and drive product and procedures into emerging markets. We have high quality and cost-effective surgical products designed for customers in emerging markets such as the ValleyLab LS10 single channel vessel sealing generator, which is compatible with our line of LigaSure instruments and designed for simplified use and affordability.
Continued acceptance and growth within the end stage renal disease market. The population of patients treated for end stage renal disease globally is expected to double over the next decade. We will grow our therapy innovation with scalable and affordable dialysis delivery while investing in vascular creation and maintenance technologies. In addition, the HD multi-pass system reduces infrastructure by requiring less water, less start-up costs, and offers high quality ultrapure dialysate treatment. The system is expected to launch in late fiscal year 2020, but timing may shift depending on regulatory requirements.
Continued elevation of the standard of care for respiratory compromise, a progressive condition impacting a patient’s ability to breathe effectively.
Continued acceptance and growth in respiratory care, airway and ventilation management, and Patient Monitoring. Key products in this area include the Puritan Bennett 980 ventilator, Microstream Capnography bedside capnography monitor, portable monitor with Nellcor pulse oximetry system with OxiMax technology and the Nellcor Respiratory Compromise monitor with vital signs of SpO2, pulse rate, End-Tidal CO2, and Respiratory Rate.

38


Continued acceptance of less invasive standards of care, including the areas of GI Solutions and Advanced Ablation. Recently launched products include the PillCam COLON capsule endoscopy, the Barrx platform through ablation with the Barrx 360 Express catheter, and the Emprint ablation system with Thermosphere Technology, which maintains predictable spherical ablation zones throughout procedures reducing procedure time and cost.
Continued acceptance of Interventional Lung Solutions. Products include the superDimension GenCut core biopsy system and the Triple Needle Cytology Brush, a lung tissue biopsy tool for use with the superDimension navigation system. The superDimension system enables a minimally invasive approach to accessing difficult-to-reach areas of the lung, which may aid in the diagnosis of lung cancer.
Expanding the use of less invasive treatments and furthering our commitment to improving options for women with abnormal uterine bleeding with our fiscal year 2017 acquisition of Smith & Nephew's gynecology business. The addition expanded and strengthened the surgical offerings and complemented our global gynecology business.
Restorative Therapies Group
The Restorative Therapies Group's products focus on various areas of the spine, bone graft substitutes, biologic products, trauma, implantable neurostimulation therapies and drug delivery systems for the treatment of chronic pain, movement disorders, obsessive-compulsive disorder (OCD), overactive bladder, urinary retention, fecal incontinence and gastroparesis, as well as products to treat conditions of the ear, nose, and throat, and systems that incorporate advanced energy surgical instruments. The Restorative Therapies Group also manufactures and sells image-guided surgery and intra-operative imaging systems and therapies to treat diseases of the vasculature in and around the brain, including coils, neurovascular stents and flow diversion products. The Restorative Therapies Group’s net sales for fiscal year 2018 were $7.7 billion, an increase of 5 percent as compared to fiscal year 2017. Currency had a favorable impact on net sales for fiscal year 2018 of $85 million. The Restorative Therapies Group’s performance for fiscal year 2018 was driven by strong growth in Brain Therapies and solid growth in Specialty Therapies and Pain Therapies. See the more detailed discussion of each division's performance below.
Spine net sales for fiscal year 2018 were $2.7 billion, an increase of 1 percent as compared to fiscal year 2017. Spine net sales growth was driven by growth in bone morphogenetic protein (composed of INFUSE bone graft (InductOs in the European Union)), partially offset by a slight decline in Core Spine. Core Spine net sales declined due to continued overall market softness in the U.S. and Europe, partially offset by the continued success of our Surgical Synergy strategy, which integrates our spinal implants with enabling technologies such as imaging, navigation, power instruments, nerve monitoring and Mazor robotics sold by our Neurosurgery business, and our "Speed-to-Scale" initiative, which involves faster innovation cycles and the launching of a steady cadence of new products at scale with sets immediately available for the entire market.
Brain Therapies net sales for fiscal year 2018 were $2.4 billion, an increase of 12 percent as compared to fiscal year 2017. Brain Therapies net sales growth was driven by strong growth in both Neurovascular and Neurosurgery. Neurovascular net sales growth was driven by strength across our stroke portfolio, specifically in stents, as a result of our leading role in the development of the endovascular therapy market for treatment of ischemic stroke. Neurosurgery net sales growth was driven by strong sales of the StealthStation S8 surgical navigation system, O-arm O2 surgical imaging system, Visualase MRI-guided laser ablation system, Midas disposables, as well as disposables revenue from placement of capital equipment through our distributor agreement with Mazor. Net sales growth in Neurovascular and Neurosurgery for fiscal year 2018 was partially offset by slight declines in Brain Modulation due to competitive pressures in major markets.
Specialty Therapies net sales for fiscal year 2018 were $1.6 billion, an increase of 4 percent as compared to fiscal year 2017. Specialty Therapies net sales growth was driven by growth in ENT, Pelvic Health, and Transformative Solutions.
Pain Therapies net sales for fiscal year 2018 were $1.2 billion, an increase of 3 percent as compared to fiscal year 2017. Pain Therapies net sales growth was driven by Interventional from the OsteoCool RF Spinal Tumor ablation system. Within Spinal Cord Stimulation, the Intellis Platform launch and ongoing roll-out of the Evolve workflow algorithm contributed to net sales in fiscal year 2018 and helped mitigate competitive pressures in the U.S. and Europe.
Spine net sales for fiscal year 2017 were $2.6 billion, flat as compared to fiscal year 2016. Spine net sales were driven by growth in BMP due to strong U.S. sales, offset by declines in Europe due to the InductOs stop shipment due to suspension in the E.U. Core Spine had net sales growth in the U.S due to new product launches including the Solera Voyager and Elevate expandable cage in conjunction with the "Speed to Scale" initiative, offset by market softness in Europe and the Middle East driven by the macro-economic conditions. Inductos returned to the European market in the first quarter of fiscal year 2018.

39


Brain Therapies net sales for fiscal year 2017 were $2.1 billion, an increase of 6 percent as compared to fiscal year 2016. The increase in net sales was driven by strong growth in both Neurovascular and Neurosurgery. Neurovascular net sales growth was driven by growth in coils from the Axium Prime Extra Soft detachable coil, growth in flow diversion from the Pipeline Flex embolization device, and growth in stents due to the Solitaire revascularization device, partially offset by declines due to a voluntary recall of certain product lines in the second quarter. Neurosurgery net sales growth was driven by strong sales of navigation capital equipment, disposables, and the O-arm O2 surgical imaging system. Despite competitive pressure, Brain Modulation drove net sales growth with U.S. sales of the MR Conditional Activa DBS portfolio and through updated Parkinson’s Disease labeling for patients with Recent Onset of Motor Complications.
Specialty Therapies net sales for fiscal year 2017 were $1.5 billion, an increase of 5 percent as compared to fiscal year 2016. The increase in net sales was driven by strong growth in Transformative Solutions and Pelvic Health and growth in ENT. Net sales growth in Transformative Solutions was driven by the sales of the Aquamantys Transcollation and PEAK PlasmaBlade products. Net sales growth in Pelvic Health was driven by strong InterStim implant growth in the U.S. Net sales growth in ENT benefited from strong adoption of new products, including NuVent balloons and Fusion Compact navigation.
Pain Therapies net sales for fiscal year 2017 were $1.1 billion, a decrease of 4 percent as compared to fiscal year 2016. The decrease in net sales was driven by declines in sales of spinal cord stimulation products due to competitive pressures in the U.S., partially offset by growth in Interventional from the OsteoCool RF Spinal Tumor ablation system.
Looking ahead, we expect our Restorative Therapies Group could be affected by the following:
Continued acceptance and growth of the Solitare FR revascularization device for treatment of acute ischemic stroke and the Pipeline Embolization Devices, endovascular treatments for large or giant wide-necked brain aneurysms.
Continued growth from Neurosurgery StealthStation and O-Arm Imaging Systems, Midas, and ENT power systems.
Continued sales of robotic units and associated market adoption of robot-assisted spine procedures, under an exclusive worldwide distributor agreement with Mazor Robotics.
Continued market acceptance of our new integrated solutions through the Surgical Synergy strategy, which integrates our spinal implants with enabling technologies such as imaging, navigation, power instruments, nerve monitoring and Mazor robotics.
Continued success of our "Speed-to-Scale" program launches, which involves faster innovation cycles and launching a steady cadence of new products at scale with sets immediately available for the entire market.
Market acceptance and continued global adoption of innovative new Spine products, such as our CD Horizon Solera Voyager system, our ELEVATE expandable interbody cages, and our OLIF25 and OLIF51 procedural solutions.
Growth in the broader vertebral compression fracture (VCF) and adjacent markets, as we continue to pursue the development of other therapies to treat more patients with VCF, including continued success of both the Kyphon V vertebroplasty system and the Osteocool RF Spinal Tumor ablation system.
Continued acceptance and adoption rates of stimulators and leads approved to treat chronic pain in major markets around the world. Our Intellis spinal cord stimulator and Evolve workflow algorithm have received positive customer reaction since their launch in the second quarter of fiscal year 2018.
Ongoing obligations under the U.S. FDA consent decree entered in April 2015 relating to the SynchroMed drug infusion system and the Neuromodulation quality system. The U.S. FDA lifted its distributor requirements on our implantable drug pump in October and its warning letter in November 2017.
Continued acceptance of our devices for the treatment of Parkinson's Disease and other movement disorders.
Continued acceptance and growth of our Specialty Therapies, including InterStim therapy for the treatment of the symptoms of overactive bladder, urinary retention, and bowel incontinence, and Transformative Solutions products and strategies to focus on its four core markets of orthopedic, spine, breast surgery, and Cardiac Rhythm Disease Management device replacements.


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Diabetes Group
The Diabetes Group's products include insulin pumps, continuous glucose monitoring (CGM) systems, insulin pump consumables, and therapy management software. The Diabetes Group’s net sales for fiscal year 2018 were $2.1 billion, an increase of 11 percent as compared to fiscal year 2017. The Diabetes Group's net sales increased for fiscal year 2018, primarily as a result of an increase in sales in the U.S. due to continued growth in our customer base through the continued adoption of the MiniMed 670G hybrid closed loop system. Further, we experienced continued growth in international markets due to strong sales of the MiniMed 640G system in Europe and Asia Pacific.
The Diabetes Group’s net sales for fiscal year 2017 were $1.9 billion, an increase of 3 percent as compared to fiscal year 2016. The Diabetes Group's net sales for fiscal year 2017 benefited from growth in both the U.S. and international markets due to strong U.S. sales of the MiniMed 630G system and interest in the Priority Access Program for the MiniMed 670G hybrid closed loop system, as well as strong international sales in Europe, Latin America, and Asia Pacific of the MiniMed 640G system with the Enhanced Enlite sensor.
Looking ahead, we expect our Diabetes Group could be affected by the following:
Continued increases in sensor manufacturing capacity to benefit from rapidly growing demands. In the fourth quarter of 2018, sensor expansion efforts were met with unconstrained capacity and completed with no back orders. We expect to keep sensor utilization strong and continue commercial expansion into the new fiscal year.
Continued acceptance and growth of the MiniMed 670G system, the first hybrid closed loop system in the world. The system features our most advanced SmartGuard algorithm, which enables improved glucose control with reduced user input. The MiniMed 670G system received U.S. FDA approval during the second quarter of fiscal year 2017 and launched in the U.S. in June 2017.
Changes in medical reimbursement policies and programs, along with payor coverage of the MiniMed 670G system.
Continued acceptance and growth of the MiniMed 640G system with SmartGuard Suspend before Low technology, which has launched in Europe, Australia, and select countries in Latin America and Asia, and the MiniMed 620G system, the first integrated system customized for the Japanese market. The MiniMed 640G system received regulatory approval in Japan in the fourth quarter of fiscal year 2018.
Continued acceptance and growth of Guardian Connect CGM system which displays information directly to a smartphone. This system received CE mark in 2016 and has launched both internationally and now in the U.S. after receiving FDA approval in the fourth quarter of fiscal year 2018.
Continued partnership with UnitedHealthcare as the preferred in-network provider of insulin pumps, giving their members access to our advanced diabetes technology and comprehensive support services.
Continued partnership and growth of our outcomes-based agreement with Aetna, where a component of our pump reimbursement is based on successfully meeting clinical improvement thresholds as part of our value-based healthcare solutions.
CRITICAL ACCOUNTING ESTIMATES
We have used various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies are disclosed in Note 1 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires us to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates reflect our best judgment about economic and market conditions and the potential effects on the valuation and/or carrying value of assets and liabilities based upon relevant information available. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our critical accounting estimates include the following:
Litigation Contingencies We are involved in a number of legal actions involving product liability, intellectual property and commercial disputes, shareholder related matters, environmental proceedings, income tax disputes, and governmental proceedings and investigations. The outcomes of these legal actions are not completely within our control and may not be known for prolonged

41


periods of time. In some actions, the enforcement agencies or private claimants seek damages, as well as other civil or criminal remedies (including injunctions barring the sale of products that are the subject of the proceeding), that could require significant expenditures or result in lost revenues or limit our ability to conduct business in the applicable jurisdictions. Estimating probable losses from our litigation and governmental proceedings is inherently difficult, particularly when the matters are in early procedural stages, with incomplete scientific facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, or punitive damages; or could result in a change in business practice. Our significant legal proceedings are discussed in Note 19 to the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
Income Tax Reserves and U.S. Tax Reform We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may or may not prevail. Under U.S. GAAP, if we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50 percent likely of being realized upon settlement. We presume that all tax positions will be examined by a taxing authority with full knowledge of all relevant information. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We regularly monitor our tax positions and tax liabilities. We reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit, or derecognize a previously recorded tax benefit, when there is (i) a completion of a tax audit, (ii) effective settlement of an issue, (iii) a change in applicable tax law including a tax case or legislative guidance, or (iv) the expiration of the applicable statute of limitations. Significant judgment is required in accounting for tax reserves. Although we believe that we have adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on our effective tax rate, consolidated earnings, financial position and/or cash flows.
On December 22, 2017, the U.S. government enacted the Tax Act, which significantly revises U.S. corporate income taxation by, among other things, lowering the U.S. corporate income tax rate, broadening the base of taxation, and implementing a territorial tax system. We have a measurement period of up to one year after the enactment date of the Tax Act to finalize the recognition of the related tax impacts. The final impact of the Tax Act may differ from the provisional amounts recognized in the current period, possibly materially, due to, among other things, changes in our interpretation of the Tax Act, legislative or administrative actions to clarify the intent of the statutory language provided that differ from our current interpretation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have utilized to calculate the impacts, including changes to current year earnings estimates and applicable foreign exchange rates.
Valuation of Intangible Assets and Goodwill When we acquire a business, the assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. Goodwill is the excess of the purchase price consideration over the estimated fair value of net assets of acquired businesses. Intangible assets primarily include patents, trademarks, tradenames, customer relationships, purchased technology, and IPR&D. Determining the fair value of intangible assets acquired as part of a business combination requires us to make significant estimates. These estimates include the amount and timing of projected future cash flows of each project or technology, the discount rate used to discount those cash flows to present value, the assessment of the asset’s life cycle, and the consideration of legal, technical, regulatory, economic, and competitive risks.
The test for goodwill impairment requires us to make several estimates to determine fair value, most of which are based on projected future cash flows. Our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value, including projected future cash flows. We assess the impairment of goodwill at the reporting unit level annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired.
We test definite-lived intangible assets for impairment when an event occurs or circumstances change that would indicate the carrying amount of the assets or asset group may be impaired. Our tests are based on future cash flows that require significant judgment with respect to future revenue and expense growth rates, appropriate discount rates, asset groupings, and other assumptions and estimates. We use estimates that are consistent with our business plans and a market participant's view of the assets being evaluated. Actual results may differ from our estimates due to a number of factors including, among others, changes in competitive conditions, timing of regulatory approval, results of clinical trials, changes in worldwide economic conditions, and fluctuations in currency exchange rates.
We assess the impairment of indefinite-lived intangibles annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Our impairment tests of indefinite-lived intangibles require us to make several estimates to determine fair value, including projected future cash flows and discount rates.

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ACQUISITIONS AND DIVESTITURES
Information regarding acquisitions and divestitures is included in Notes 2 and 3, respectively, to the consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1 to the consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
COSTS AND EXPENSES
The following is a summary of cost of products sold, research and development, and selling, general, and administrative expenses as a percent of net sales:
 
Fiscal Year
 
2018
 
2017
 
2016
Cost of products sold
30.2
%
 
31.3
%
 
31.7
%
Research and development expense
7.5
%
 
7.4
%
 
7.7
%
Selling, general, and administrative expense
33.3
%
 
32.7
%
 
32.8
%
Cost of Products Sold We continue to focus on reducing our costs of production through supplier management, manufacturing improvements, and optimizing our manufacturing network.
Cost of products sold was $9.1 billion, $9.3 billion, and $9.1 billion during fiscal years 2018, 2017, and 2016, respectively. The decrease in cost of products sold as a percentage of sales from fiscal year 2018 as compared to 2017 was due primarily to the divestiture of lower-margin products in conjunction with the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses during fiscal year 2018 and a $38 million charge during fiscal year 2017 related to the recognition of the fair value step-up taken on inventory acquired in connection with the HeartWare acquisition. The decrease in cost of products sold as a percentage of sales due to the divestiture and fair-value step-up on HeartWare inventory was partially offset by $17 million of costs recognized in relation to restoring operations at four Puerto Rico manufacturing sites after Hurricane Maria, including idle facility costs, asset write-downs, and other facility-related costs, and the infusion set recall in our Diabetes Group. The decrease in fiscal year 2017 as compared to fiscal year 2016 was largely due to a $226 million charge in fiscal year 2016 related to the recognition of the fair value step-up of acquired Covidien inventory.
Research and Development Expense We remain committed to accelerating the development of meaningful innovations to deliver better patient outcomes at appropriate costs that lead to enhanced quality of life and may be validated by clinical and economic evidence. We are also focused on expanding access to quality healthcare.
Research and development expense was $2.3 billion, $2.2 billion, and $2.2 billion during fiscal years 2018, 2017, and 2016, respectively. Research and development expense remained fairly consistent as a percentage of net sales with a slight decrease from fiscal year 2016 to 2018 due, in part, to the timing of clinical trials and product approvals, as well as our sales increasing at a slower rate than the increase in research and development following the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses.
Selling, General, and Administrative Expense Our goal is to continue to leverage selling, general, and administrative expense initiatives and to continue to realize cost synergies expected from our acquisitions. Selling, general, and administrative expense primarily consist of salaries and wages, as well as other administrative costs, such as professional fees and marketing expenses.
Selling, general, and administrative expense was $10.0 billion, $9.7 billion, and $9.5 billion during fiscal years 2018, 2017, and 2016, respectively. Selling, general, and administrative expense increased a percentage of net sales from fiscal year 2017 to 2018, as we incurred expenses associated with new product launches and Transition Service Agreements (TSAs). In conjunction with the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses on July 29, 2017, we entered into TSAs with Cardinal to ensure and facilitate an orderly transfer of business operations. Expenses associated with the TSA agreements are recognized in selling, general, and administrative expenses; however, TSA revenue is recognized in other expense, net, thereby contributing to an increase in selling, general, and administrative expense as a percentage of revenue.
Selling, general, and administrative expense remained fairly flat as a percentage of net sales from fiscal year 2016 to 2017, with a slight decrease due to cost savings associated with selling, general, and administrative expense initiatives.

43


The following is a summary of other costs and expenses:
 
 
Fiscal Year
(in millions)
 
2018
 
2017
 
2016
Amortization of intangible assets
 
$
1,823

 
$
1,980

 
$
1,931

Restructuring charges, net
 
30

 
363

 
290

Acquisition-related items
 
104

 
220

 
283

Certain litigation charges
 
61

 
300

 
26

Divestiture-related items
 
114

 

 

Gain on sale of businesses
 
(697
)
 

 

Special charge
 
80

 
100

 

Other expense, net
 
505

 
222

 
107

Investment loss
 
227

 

 
70

Interest expense, net
 
749

 
728

 
955

Amortization of Intangible Assets Amortization of intangible assets includes the amortization expense of our definite-lived intangible assets, consisting of purchased patents, trademarks, tradenames, customer relationships, purchased technology, and other intangible assets. Amortization expense was $1.8 billion, $2.0 billion, and $1.9 billion in fiscal years 2018, 2017, and 2016, respectively. The decrease in amortization expense from fiscal year 2017 to fiscal year 2018 is primarily attributable to the discontinuation of amortization on the definite-lived intangible assets classified as assets held for sale at April 28, 2017 and through the first quarter of fiscal year 2018 related to the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses. This divestiture was completed during the second quarter of fiscal year 2018.
Restructuring
Enterprise Excellence
In the third quarter of fiscal year 2018, we announced a multi-year global Enterprise Excellence Program designed to drive long-term business growth and sustainable efficiency. The Enterprise Excellence Program is expected to further leverage our global size and scale as well as enhance the customer and employee experience.
The Enterprise Excellence Program is focused on three objectives:
Global Operations - integrating and enhancing global manufacturing and supply processes, systems and site presence to improve quality, delivery cost and cash flow
Functional Optimization - enhancing and leveraging global operating models and systems across several enabling functions to improve productivity and employee experience
Commercial Optimization - optimizing certain processes, systems and models to improve productivity and the customer experience

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

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

During fiscal year 2018, we recognized restructuring charges of $96 million. For fiscal year 2018, restructuring charges included $35 million of employee termination benefits recognized within restructuring charges, net in the consolidated statements of income. For fiscal year 2018, restructuring charges also included costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses, including $28 million recognized within cost of products sold and $33 million recognized within selling, general and administrative expense in the consolidated statements of income.

44



Cost Synergies

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

During fiscal year 2018, we recognized restructuring charges of $45 million, partially offset by accrual adjustments of $34 million. Accrual adjustments relate to certain employees identified for termination finding other positions within Medtronic, cancellations of employee terminations, and employee termination benefits being less than initially estimated. For fiscal year 2018, restructuring charges included $29 million of employee termination benefits and contract termination costs recognized within restructuring charges, net in the consolidated statements of income. Restructuring charges also included other costs of $12 million recognized within cost of products sold and $4 million recognized within selling, general and administrative expense.

For fiscal years 2017 and 2016, we recognized restructuring charges of $441 million and $332 million, respectively, partially offset by accrual adjustments of $68 million and $18 million, respectively. Accrual adjustments relate to certain employees identified for termination finding other positions within Medtronic, cancellations of employee terminations, and employee termination benefits being less than initially estimated. For fiscal years 2017 and 2016, restructuring charges included asset write-downs of $17 million and $14 million, respectively, related to property, plant, and equipment impairments, and $10 million and $9 million, respectively, related to inventory write-offs recognized within cost of products sold in the consolidated statements of income. Additionally, fiscal year 2017 restructuring charges included $73 million of incremental defined benefit pension and post-retirement related expenses for employees that accepted voluntary early retirement packages.

For additional information, see Note 4 to the consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
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, transaction expenses incurred in connection with business combinations, and changes in fair value of contingent consideration. During fiscal year 2018, we recognized acquisition-related items expense of $132 million, including $28 million recognized within cost of products sold in the consolidated statements of income. During fiscal year 2018, acquisition-related items expense includes $172 million of costs associated with the integration of Covidien manufacturing, distribution, and administrative facilities as well as information technology system implementation and benefits harmonization, partially offset by the change in fair value of contingent consideration as a result of revised revenue forecasts and the timing of anticipated regulatory milestones.
During fiscal year 2017, we recognized acquisition-related items expense of $230 million, including $10 million recognized within cost of products sold in the consolidated statements of income. During fiscal year 2017, acquisition-related items expense primarily includes $225 million of costs associated with the integration of Covidien manufacturing, distribution, and administrative facilities as well as information technology system implementation and benefits harmonization, $23 million of accelerated or incremental stock compensation expense, and expenses incurred in connection with the HeartWare acquisition and planned divestiture of the Patient Care, Deep Vein, Thrombosis, and Nutritional Insufficiency businesses, partially offset by the change in fair value of contingent consideration as a result of revised revenue forecasts and the timing of anticipated regulatory milestones.
During fiscal year 2016, we recognized acquisition-related items expense of $283 million, including $219 million of costs associated with the integration of Covidien manufacturing, distribution, and administrative facilities as well as information technology system implementation and benefits harmonization and $58 million of accelerated or incremental stock compensation expense.
Certain Litigation Charges We classify litigation charges and gains related to significant legal matters as certain litigation charges. During fiscal years 2018, 2017, and 2016, we recognized $61 million, $300 million, and $26 million, respectively, of certain litigation charges related to probable and estimable damages for significant legal matters.
Divestiture-Related Items Divestiture-related items include expenses incurred in connection with the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses. During fiscal year 2018, we recognized divestiture-related items expense of $114 million, primarily comprised of expenses incurred for professional services, including banker, legal, tax, and advisory fees, and $16 million of accelerated stock compensation expense related to the acceleration of the vesting period for employees that transferred with the divestiture. There was no divestiture-related items expense for fiscal years 2017 and 2016.
Gain on Sale of Businesses We recognized a pre-tax gain of $697 million on the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses during fiscal year 2018. No businesses were sold during fiscal years 2017 or 2016.

45


Special Charge Continuing our commitment to improve the health of people and communities throughout the world, we recognized a charge of $80 million in fiscal year 2018 and $100 million in fiscal year 2017 for charitable contributions to the Medtronic Foundation.
Other Expense, Net Other expense, net includes royalty income and expense, realized equity security gains and losses, TSA income, intangible asset impairments, currency transaction and derivative gains and losses, and Puerto Rico excise tax. In fiscal year 2018, other expense, net was $505 million as compared to $222 million in fiscal year 2017. The increase from fiscal year 2017 to fiscal year 2018 was primarily attributable to remeasurement and our hedging programs, which resulted in a $176 million loss for fiscal year 2018 as compared to an $81 million gain in fiscal year 2017, losses of $68 million related to the impairment of IPR&D assets in fiscal year 2018, and $15 million of humanitarian aid provided to our employees affected by Hurricane Maria in fiscal year 2018. The increase from fiscal year 2017 to 2018 was partially offset by $74 million of TSA income.
In fiscal year 2017, other expense, net was $222 million as compared to $107 million in fiscal year 2016. The increase from fiscal year 2016 to 2017 was primarily attributable to remeasurement and our hedging programs, which resulted in an $81 million gain for fiscal year 2017 as compared to a $314 million gain in fiscal year 2018, partially offset by the decrease in U.S. medical device tax due to the suspension of the U.S. medical device tax beginning January 1, 2016.
Investment Loss We recognized losses of $227 million and $70 million during fiscal years 2018 and 2016, respectively, related to the impairment of certain cost and equity method investments. We remain committed to future strategic and focused investments in the areas of medical device technologies, services, and solutions.
Interest Expense, Net Interest expense, net includes interest earned on our cash, cash equivalents and investments, interest incurred on our outstanding borrowings, amortization of debt issuance costs and debt premiums or discounts, amortization of gains or losses on terminated or de-designated interest rate derivative instruments, charges recognized in connection with the early redemption of senior notes, and ineffectiveness on interest rate derivative instruments. In fiscal year 2018, interest expense, net was $749 million as compared to $728 million in fiscal year 2017. The increase in interest expense, net for fiscal year 2018 was primarily driven by modestly higher average interest rates on total debt obligations outstanding and a $38 million charge recognized in connection with the early redemption of approximately $1.2 billion of Medtronic Inc. senior notes, partially offset by a slight increase in interest income as compared to fiscal year 2017.
In fiscal year fiscal year 2017, interest expense, net was $728 million as compared to $955 million in fiscal year 2016. The decrease in interest expense, net for fiscal year 2017 was the result of a $183 million charge recorded in connection with the cash tender offer and redemption of certain debt securities in fiscal year 2016 and a $45 million loss on interest rate swaps which were entered into in advance of a planned debt issuance that was no longer anticipated in fiscal year 2016.
INCOME TAXES
 
Fiscal Year
(in millions)
2018
 
2017
 
2016
Income tax provision
$
2,580

 
$
578

 
$
798

Income before income taxes
5,675

 
4,602

 
4,336

Effective tax rate
45.5
 %
 
12.6
%
 
18.4
 %
 
 
 
 
 
 
Non-GAAP income tax provision
$
1,120

 
$
1,232

 
$
1,171

Non-GAAP income before income taxes
7,641

 
7,623

 
7,399

Non-GAAP Nominal Tax Rate
14.7
 %
 
16.2
%
 
15.8
 %
 
 
 
 
 
 
Difference between the effective tax rate and Non-GAAP Nominal Tax Rate
(30.8
)%
 
3.6
%
 
(2.6
)%
On December 22, 2017, the U.S. government enacted the Tax Act, which significantly revises U.S. corporate income taxation by, among other things, lowering the U.S. corporate income tax rate from 35.0 percent to 21.0 percent, broadening the base of taxation, implementing a territorial tax system, and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The decrease in the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent results in a blended statutory tax rate of 30.5 percent for our fiscal year ended April 27, 2018.

46


Many of the countries we operate in have statutory tax rates lower than our blended U.S. statutory rate, thereby resulting in an overall effective tax rate less than the U.S. statutory rate of 30.5 percent for fiscal year 2018. A significant portion of our earnings are generated from operations in Puerto Rico, Switzerland, and Ireland. The statutory tax rates for these jurisdictions range from 12.5 percent to 45.1 percent. Our earnings in Puerto Rico and Switzerland are subject to certain tax incentive grants which provide for tax rates lower than the country statutory tax rates. Unless our tax incentive grants are extended, they expire between fiscal years 2019 and 2029. The tax incentive grants which expired during fiscal year 2018 did not have a material impact on our financial results. See Note 14 to the consolidated financial statements for additional information.
Our effective tax rate for fiscal year 2018 was 45.5 percent, as compared to 12.6 percent in fiscal year 2017. The increase in the effective tax rate was primarily due to the impacts from U.S. tax reform, the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses, the utilization of non-U.S. special deductions, the net tax cost associated with an internal reorganization, excess tax benefits associated with stock-based compensation, and the tax effect from the intercompany sales of certain intellectual property.
Our Non-GAAP Nominal Tax Rate for fiscal year 2018 was 14.7 percent, as compared to 16.2 percent in fiscal year 2017. The decrease in our Non-GAAP Nominal Tax Rate for fiscal year 2018 as compared to fiscal year 2017 was primarily due to operational tax benefits and year-over-year changes in operational results by jurisdiction.
During fiscal year 2018, we recognized $135 million of operational tax benefits. The operational tax benefits included a $61 million benefit from excess tax benefits associated with stock-based compensation and a $74 million net benefit associated with the resolution of certain income tax audits, finalization of certain tax returns, changes to uncertain tax position reserves, and changes to certain deferred income tax balances.
Our effective tax rate for fiscal year 2017 was 12.6 percent, as compared to 18.4 percent in fiscal year 2016. The decrease in our effective tax rate for fiscal year 2017 as compared to fiscal year 2016 was due to the net tax impact of inventory step-up, debt tender premium, certain litigation payments, certain tax adjustments, operational tax benefits described below, and year-over-year changes in operational results by jurisdiction.
Our Non-GAAP Nominal Tax Rate for fiscal year 2017 was 16.2 percent, as compared to 15.8 percent in fiscal year 2016. The increase in our Non-GAAP Nominal Tax Rate for fiscal year 2017 as compared to fiscal year 2016 was primarily due to operational tax benefits and year-over-year changes in operational results by jurisdiction.
During fiscal year 2017, we recognized $95 million of operational tax benefits. The operational tax benefits included a $44 million benefit from the reversal of a valuation allowance associated with foreign net operating losses and a $51 million net benefit associated with the resolution of certain income tax audits, finalization of certain tax returns, changes to uncertain tax position reserves, and changes to certain deferred income tax balances.
An increase in our Non-GAAP Nominal Tax Rate of 1 percent would result in an additional income tax provision for fiscal years 2018, 2017, and 2016 of approximately $77 million, $76 million, and $74 million, respectively.
Certain Tax Adjustments
During fiscal year 2018, certain tax adjustments of $1.9 billion, recognized in income tax provision in the consolidated statement of income, included the following:
A net charge of $2.4 billion associated with U.S. tax reform, inclusive of the transition tax, remeasurement of U.S. Federal deferred tax assets and liabilities, and the decrease in the U.S. statutory tax rate. Our income tax provision associated with the impact of the Tax Act for fiscal year 2018 is based on a reasonable estimate and will be finalized within the measurement period in accordance with U.S. GAAP. See Note 14 to the consolidated financial statements for additional information.
A charge of $73 million associated with an internal reorganization of certain foreign subsidiaries.
A net benefit of $579 million associated with the intercompany sale of intellectual property.
During fiscal year 2017, certain tax adjustments of $202 million, recognized in income tax provision in the consolidated statement of income, included the following:
A charge of $404 million associated with the IRS resolution for the Ardian, CoreValve, Inc., Ablation Frontiers, Inc., PEAK Surgical, Inc. and Salient Surgical Technologies, 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.

47


A net charge of $125 million associated with the divestiture of our Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses to Cardinal. The net charge primarily relates to the tax effect from the recognition of the outside basis difference of certain subsidiaries which were included in the divestiture.
A charge of $86 million associated with the IRS’s disallowance of the utilization of certain net operating losses, along with the recognition of a valuation allowance against the net operating loss deferred tax asset, was recognized during the year.
A charge of $18 million as a result of the redemption of an intercompany minority interest during the year.
A benefit of $431 million 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 IRS.
During fiscal year 2016, certain tax adjustments of $417 million, recognized in income tax provision in the consolidated statement of income, included the following:
A charge of $442 million primarily related to the U.S. income tax expense resulting from our completion of an internal reorganization of the ownership of certain legacy Covidien businesses that reduced the cash and investments held by our U.S.-controlled non-U.S. subsidiaries. As a result of this internal reorganization, approximately $9.7 billion of cash, cash equivalents and investments in marketable debt and equity securities previously held by U.S.-controlled non-U.S. subsidiaries became available for general corporate purposes.
A $25 million tax benefit associated with the disposition of a wholly-owned U.S. subsidiary.
Certain tax adjustments will affect the comparability of our operating results between periods. Therefore, we consider these Non-GAAP Adjustments. Refer to the "Executive Level Overview" section of this Management's Discussion and Analysis for further discussion of these adjustments.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital structure is evaluated regularly within the context of our annual operating and strategic planning process. We consider the liquidity necessary to fund our operations, which includes working capital needs, investments in research and development, property, plant, and equipment, and other operating costs. We also consider capital allocation alternatives that balance returning value to shareholders through dividends and share repurchases, satisfying maturing debt, and acquiring businesses and technology.
Summary of Cash Flows
The following is a summary of cash provided by (used in) operating, investing, and financing activities, the effect of exchange rate changes on cash and cash equivalents, and the net change in cash and cash equivalents:
 
Fiscal Year
(in millions)
2018
 
2017
 
2016
Cash provided by (used in):
 

 
 

 
 

Operating activities
$
4,684

 
$
6,880

 
$
5,218

Investing activities
5,858

 
(1,571
)
 
2,245

Financing activities
(11,954
)
 
(3,283
)
 
(9,543
)
Effect of exchange rate changes on cash and cash equivalents
114

 
65

 
113

Net change in cash and cash equivalents
$
(1,298
)
 
$
2,091

 
$
(1,967
)
Operating Activities The $2.2 billion decrease in net cash provided in fiscal year 2018 as compared to fiscal year 2017 was primarily driven by an increase in cash paid for taxes of $1.5 billion, an increase in net cash outflows for collateral related to our derivative instruments of $145 million, cash paid for divestiture-related expenses of approximately $100 million, an increase in certain litigation payments of $60 million, and a decrease in cash collected from customers. The increase in cash paid for income taxes was primarily a result of a $1.1 billion pre-payment we elected to make to the U.S. IRS related to in-process litigation on Puerto Rico transfer pricing, tax payments related to the intercompany sale of intellectual property and sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses as well as settlement payments for U.S. federal income taxes for fiscal years 2012 to 2014 and audit settlements outside of the U.S.
The $1.7 billion increase in net cash provided in fiscal year 2017 as compared to fiscal year 2016 was primarily attributable to an increase in cash collected from customers, as well as a decrease in cash paid for income taxes and interest of $350 million and

48


$132 million, respectively, and a $191 million payment in fiscal year 2016 related to the Covidien Tax Sharing Agreement. The increase in cash collected from customers was primarily attributable to an increase in revenue. The decrease in cash paid for income taxes was primarily a result of payments made for the resolution of the Kyphon acquisition-related matters, as well as Covidien income tax extension payments in fiscal year 2016. We did not make any significant tax audit settlement payments or significant extension payments in fiscal year 2017. The decrease in cash paid for interest was the result of less debt, on average, in fiscal year 2017 as compared to fiscal year 2016.
Investing Activities The $7.4 billion increase in net cash provided in fiscal year 2018 as compared to fiscal year 2017 was primarily attributable to the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses on July 29, 2017, resulting in net proceeds of $6.1 billion, a decrease in cash paid for acquisitions of $1.2 billion, primarily due to the acquisition of Heartware during fiscal year 2017, and a decrease in additions to property, plant, and equipment.
The $3.8 billion increase in net cash used in fiscal year 2017 as compared to fiscal year 2016 was primarily attributable to a decrease in net proceeds from purchases and sales and maturities of investments in fiscal year 2017.
Financing Activities The $8.7 billion increase in net cash used in fiscal year 2018 as compared to fiscal year 2017 was primarily attributable to the repayment of our senior unsecured term loan, including accrued interest, for $3.0 billion in August 2017, the repayment of our 6.000 percent ten-year 2008 CIFSA senior notes, including accrued interest, for $1.2 billion in October 2017, the repayment of our 3.500 percent seven-year 2010 HTWR senior notes, including accrued interest, for $43 million in December 2017, the repayment of our 1.500 percent three-year 2015 senior notes, including accrued interest, for $1.0 billion in March 2018, repayment of our 1.375 percent five-year 2013 senior notes, including accrued interest, for $1.0 billion in April 2018, repayment of our 4.450 percent ten-year 2010 senior notes, including accrued interest and early redemption premium, for $795 million in April 2018, and repayment of our 5.600 percent ten-year 2009 senior notes, including accrued interest and early redemption premium, for $413 million in April 2018. The increase in net cash used was also due to the issuance of $2.0 billion of Senior Notes in fiscal year 2017 and a reduction of commercial paper borrowings in fiscal year 2018 as compared to fiscal year 2017, partially offset by a decrease in share repurchases of $1.4 billion.
The $6.3 billion decrease in net cash used in financing activities in fiscal year 2017 as compared to fiscal year 2016 was primarily attributable to the issuance of $2.0 billion of Senior Notes in fiscal year 2017, an increase in commercial paper borrowings, and lower payments on maturing and extinguished debt, partially offset by increases in dividends to shareholders and repurchases of ordinary shares.
Free Cash Flow
Free cash flow, a non-GAAP financial measure, is calculated by subtracting additions to property, plant, and equipment from net cash provided by operating activities. Management uses this non-GAAP financial measure, in addition to U.S. GAAP financial measures, to evaluate our operating results. Free cash flow should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with U.S. GAAP. Reconciliations between net cash provided by operating activities (the most comparable U.S. GAAP measure) and free cash flow are as follows:
 
Fiscal Year
(in millions)
2018
 
2017
 
2016
Net cash provided by operating activities
$
4,684

 
$
6,880

 
$
5,218

Net cash provided by (used in) investing activities
5,858

 
(1,571
)
 
2,245

Net cash used in financing activities