10-Q 1 mdt-2019q3x10q.htm 10-Q Document


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 25, 2019
Commission File Number 001-36820
mdtlogo2a66.jpg®
MEDTRONIC PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
 
 
Ireland
98-1183488
(State of incorporation)
(I.R.S. Employer
Identification No.)
20 On Hatch, Lower Hatch Street
Dublin 2, Ireland
(Address of principal executive offices) (Zip Code)
+353 1 438-1700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Emerging growth company o
Non-accelerated filer o
 
Smaller Reporting Company o
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 1(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of February 27, 2019, 1,341,150,970 ordinary shares, par value $0.0001, and 1,872 A preferred shares, par value $1.00, of the registrant were outstanding.
 
 





TABLE OF CONTENTS




PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Medtronic plc
Consolidated Statements of Income
(Unaudited)
 
Three months ended
 
Nine months ended
(in millions, except per share data)
January 25, 2019
 
January 26, 2018
 
January 25, 2019
 
January 26, 2018
Net sales
$
7,546

 
$
7,369

 
$
22,411

 
$
21,809

Costs and expenses:
 

 
 

 
 

 
 

Cost of products sold
2,265

 
2,194

 
6,672

 
6,669

Research and development expense
561

 
559

 
1,736

 
1,664

Selling, general, and administrative expense
2,596

 
2,523

 
7,798

 
7,642

Amortization of intangible assets
436

 
461

 
1,327

 
1,375

Restructuring charges, net
26

 
7

 
112

 
23

Certain litigation charges
63

 
61

 
166

 
61

Gain on sale of businesses

 

 

 
(697
)
Other operating expense, net
57

 
128

 
278

 
360

Operating profit
1,542

 
1,436

 
4,322

 
4,712

Other non-operating (income) expense, net
(71
)
 
139

 
(309
)
 
(67
)
Interest expense
243

 
270

 
726

 
829

Income before income taxes
1,370

 
1,027

 
3,905

 
3,950

Income tax provision
99

 
2,419

 
437

 
2,320

Net income (loss)
1,271

 
(1,392
)
 
3,468

 
1,630

Net (income) loss attributable to noncontrolling interests
(2
)
 
3

 
(9
)
 
14

Net income (loss) attributable to Medtronic
$
1,269

 
$
(1,389
)
 
$
3,459

 
$
1,644

Basic earnings (loss) per share
$
0.95

 
$
(1.03
)
 
$
2.57

 
$
1.21

Diluted earnings (loss) per share
$
0.94

 
$
(1.03
)
 
$
2.54

 
$
1.20

Basic weighted average shares outstanding
1,342.8

 
1,354.0

 
1,348.1

 
1,357.2

Diluted weighted average shares outstanding
1,352.7

 
1,354.0

 
1,359.5

 
1,368.9

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

1



Medtronic plc
Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three months ended
 
Nine months ended
(in millions)
January 25, 2019
 
January 26, 2018
 
January 25, 2019
 
January 26, 2018
Net income (loss)
$
1,271

 
$
(1,392
)
 
$
3,468

 
$
1,630

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 

 
 

 
 
 
 
Unrealized gain (loss) on available-for-sale securities
32

 
(14
)
 
23

 
41

Currency translation
128

 
897

 
(1,127
)
 
1,525

Net change in retirement obligations
17

 
(3
)
 
65

 
11

Unrealized (loss) gain on derivatives
(23
)
 
(202
)
 
317

 
(346
)
Other comprehensive income (loss)
154

 
678

 
(722
)
 
1,231

Comprehensive income (loss) including noncontrolling interests
1,425

 
(714
)
 
2,746

 
2,861

Comprehensive (income) loss attributable to noncontrolling interests
(2
)
 
3

 
(6
)
 
14

Comprehensive income (loss) attributable to Medtronic
$
1,423

 
$
(711
)
 
$
2,740

 
$
2,875

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

2



Medtronic plc
Consolidated Balance Sheets
(Unaudited)
(in millions)
January 25, 2019
 
April 27, 2018
ASSETS
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
3,703

 
$
3,669

Investments
5,439

 
7,558

Accounts receivable, less allowances of $197 and $193, respectively
5,854

 
5,987

Inventories, net
3,866

 
3,579

Other current assets
2,015

 
2,187

Total current assets
20,877

 
22,980

 
 
 
 
Property, plant, and equipment
10,746

 
10,259

Accumulated depreciation
(6,153
)
 
(5,655
)
Property, plant, and equipment, net
4,593

 
4,604

Goodwill
40,003

 
39,543

Other intangible assets, net
20,835

 
21,723

Tax assets
1,496

 
1,465

Other assets
926

 
1,078

Total assets
$
88,730

 
$
91,393

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Current debt obligations
$
1,356

 
$
2,058

Accounts payable
1,706

 
1,628

Accrued compensation
1,796

 
1,988

Accrued income taxes
648

 
979

Other accrued expenses
3,347

 
3,431

Total current liabilities
8,853

 
10,084

 
 
 
 
Long-term debt
23,674

 
23,699

Accrued compensation and retirement benefits
1,313

 
1,425

Accrued income taxes
2,874

 
3,051

Deferred tax liabilities
1,356

 
1,423

Other liabilities
719

 
889

Total liabilities
38,789

 
40,571

 
 
 
 
Commitments and contingencies (Note 17)

 

 
 
 
 
Shareholders’ equity:
 

 
 

Ordinary shares— par value $0.0001, 2.6 billion shares authorized, 1,340,592,569 and 1,354,218,154 shares issued and outstanding, respectively

 

Additional paid-in capital
26,518

 
28,127

Retained earnings
25,769

 
24,379

Accumulated other comprehensive loss
(2,458
)
 
(1,786
)
Total shareholders’ equity
49,829

 
50,720

Noncontrolling interests
112

 
102

Total equity
49,941

 
50,822

Total liabilities and equity
$
88,730

 
$
91,393

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

3



Medtronic plc
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine months ended
(in millions)
January 25, 2019
 
January 26, 2018
Operating Activities:
 

 
 

Net income
$
3,468

 
$
1,630

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

 
 

Depreciation and amortization
1,992

 
1,980

Provision for doubtful accounts
55

 
36

Deferred income taxes
(205
)
 
(1,042
)
Stock-based compensation
228

 
270

Gain on sale of businesses

 
(697
)
Investment loss

 
227

Other, net
111

 
12

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

 
 

Accounts receivable, net
(140
)
 
19

Inventories, net
(367
)
 
(318
)
Accounts payable and accrued liabilities
211

 
13

Other operating assets and liabilities
(433
)
 
1,516

Net cash provided by operating activities
4,920

 
3,646

Investing Activities:
 

 
 

Acquisitions, net of cash acquired
(1,615
)
 
(111
)
Proceeds from sale of businesses

 
6,058

Additions to property, plant, and equipment
(799
)
 
(776
)
Purchases of investments
(1,987
)
 
(2,479
)
Sales and maturities of investments
4,159

 
3,060

Other investing activities
(3
)
 
(5
)
Net cash (used in) provided by investing activities
(245
)
 
5,747

Financing Activities:
 

 
 

Change in current debt obligations, net
(696
)
 
(391
)
Issuance of long-term debt
3

 
21

Payments on long-term debt
(29
)
 
(4,167
)
Dividends to shareholders
(2,022
)
 
(1,870
)
Issuance of ordinary shares
891

 
333

Repurchase of ordinary shares
(2,728
)
 
(1,964
)
Other financing activities
10

 
(88
)
Net cash used in financing activities
(4,571
)
 
(8,126
)
Effect of exchange rate changes on cash and cash equivalents
(70
)
 
124

Net change in cash and cash equivalents
34

 
1,391

Cash and cash equivalents at beginning of period
3,669

 
4,967

Cash and cash equivalents at end of period
$
3,703

 
$
6,358

 
 
 
 
Supplemental Cash Flow Information
 

 
 

Cash paid for:
 

 
 

Income taxes
$
1,206

 
$
911

Interest
540

 
651


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

4

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)



1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Medtronic plc and its subsidiaries (Medtronic plc, Medtronic, or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.) (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the consolidated financial statements include all of the adjustments necessary for a fair statement in conformity with U.S. GAAP. Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year. For the purpose of providing more concise consolidated statements of income, amounts previously reported in acquisition-related items were reclassified to selling, general, and administrative expense and other operating expense, net; amounts previously reported in divestiture-related items were reclassified to selling, general, and administrative expense; amounts previously reported in special charge were reclassified to other operating expense, net, and amounts previously reported in investment loss and interest income were reclassified to other non-operating (income) expense, net.
Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates.
The accompanying unaudited consolidated financial statements include the accounts of Medtronic plc, its wholly-owned subsidiaries, entities for which the Company has a controlling financial interest, and variable interest entities for which the Company is the primary beneficiary. Intercompany transactions and balances have been fully eliminated in consolidation.
The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 27, 2018. The Company’s fiscal years 2019, 2018, and 2017 will end or ended on April 26, 2019, April 27, 2018, and April 28, 2017, respectively.
2. New Accounting Pronouncements
Recently Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue in an amount that reflects the consideration to which an entity expects to be entitled in exchange for the transfer of goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The Company adopted this guidance using the modified retrospective method in the first quarter of fiscal year 2019, and elected to apply the guidance only to contracts that were not completed as of the date of initial application. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
In January 2016, the FASB issued guidance which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The guidance also includes a simplified impairment assessment of equity investments without readily determinable fair values and presentation and disclosure changes. The Company adopted this guidance in the first quarter of fiscal year 2019 on a prospective basis. As a result of the adoption, the Company reclassified $47 million from accumulated other comprehensive loss to the opening balance of retained earnings as of April 28, 2018.
In March 2017, the FASB issued guidance which changes the financial statement presentation requirements for pension and other postretirement benefit expense. While service cost will continue to be recognized in the same financial statement line items as other current employee compensation costs, the guidance requires all other non-service components of net benefit costs to be classified and presented outside of income from operations. The Company adopted this guidance in the first quarter of fiscal year 2019, and the consolidated statements of income were retrospectively adjusted. For the three and nine months ended January 26, 2018, the Company reclassified $10 million of expense and $4 million of income, respectively, of non-service components of net periodic benefit costs, which were previously presented as a component of operating profit, to other non-operating (income) expense, net.
In August 2018, the SEC adopted a final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, that amends certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The amendments also expanded the disclosure requirements on the analysis of shareholders' equity for interim financial statements, in which registrants

5

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


must now analyze changes in shareholders’ equity, in the form of reconciliation, for the current and comparative year-to-date periods, with subtotals for each interim period. This final rule was effective on November 5, 2018. The Company has adopted all relevant disclosure requirements, with the exception of the shareholders’ equity interim disclosures, which is allowed to be adopted in a future interim period.
Not Yet Adopted
In February 2016, the FASB issued guidance which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet. The guidance will be adopted using the modified retrospective method by applying the new guidance as of the transition date with a cumulative-effect adjustment to the opening balance of retained earnings. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. The Company is evaluating the impact of the lease guidance on the Company's consolidated financial statements and anticipates recording additional assets and corresponding liabilities on its consolidated balance sheets related to operating leases within its lease portfolio upon adoption of the guidance.
3. Revenue
The Company's revenues are principally derived from device-based medical therapies and services related to cardiac rhythm disorders, cardiovascular disease, renal disease, neurological disorders and diseases, spinal conditions and musculoskeletal trauma, chronic pain, urological and digestive disorders, ear, nose, and throat conditions, and diabetes conditions as well as advanced and general surgical care products, respiratory and monitoring solutions, and neurological surgery technologies. The Company's primary customers include hospitals, clinics, third-party health care providers, distributors, and other institutions, including governmental health care programs and group purchasing organizations.
The table below illustrates net sales by segment and division for the three and nine months ended January 25, 2019 and January 26, 2018:
 
Three months ended
 
Nine months ended
(in millions)
January 25, 2019
 
January 26, 2018
 
January 25, 2019
 
January 26, 2018
Cardiac Rhythm & Heart Failure
$
1,397

 
$
1,457

 
$
4,295

 
$
4,314

Coronary & Structural Heart
913

 
886

 
2,736

 
2,557

Aortic, Peripheral & Venous
476

 
457

 
1,424

 
1,348

Cardiac and Vascular Group
2,786

 
2,800

 
8,455

 
8,219

Surgical Innovations
1,434

 
1,384

 
4,224

 
4,024

Respiratory, Gastrointestinal, & Renal
690

 
657

 
1,999

 
2,455

Minimally Invasive Therapies Group
2,124

 
2,041

 
6,223

 
6,479

Spine
655

 
661

 
1,963

 
1,969

Brain Therapies
650

 
585

 
1,867

 
1,682

Specialty Therapies
407

 
398

 
1,196

 
1,132

Pain Therapies
314

 
300

 
942

 
833

Restorative Therapies Group
2,026

 
1,944

 
5,968

 
5,616

Diabetes Group
610

 
584

 
1,765

 
1,495

Total
$
7,546

 
$
7,369

 
$
22,411

 
$
21,809


6

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The table below illustrates net sales by market geography for each segment for the three and nine months ended January 25, 2019 and January 26, 2018:
 
U.S.(1) 
 
Non-U.S. Developed Markets(2)
 
Emerging Markets(3)
 
Three months ended
 
Three months ended
 
Three months ended
(in millions)
January 25, 2019
 
January 26, 2018
 
January 25, 2019
 
January 26, 2018
 
January 25, 2019
 
January 26, 2018
Cardiac and Vascular Group
$
1,369

 
$
1,395

 
$
924

 
$
934

 
$
493

 
$
471

Minimally Invasive Therapies Group
930

 
862

 
796

 
807

 
398

 
372

Restorative Therapies Group
1,354

 
1,300

 
435

 
429

 
237

 
215

Diabetes Group
348

 
355

 
213

 
185

 
49

 
44

Total
$
4,001

 
$
3,912

 
$
2,368

 
$
2,355

 
$
1,177

 
$
1,102

 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.(1)
 
Non-U.S. Developed Markets(2)
 
Emerging Markets(3)
 
Nine months ended
 
Nine months ended
 
Nine months ended
(in millions)
January 25, 2019
 
January 26, 2018
 
January 25, 2019
 
January 26, 2018
 
January 25, 2019
 
January 26, 2018
Cardiac and Vascular Group
$
4,240

 
$
4,151

 
$
2,766

 
$
2,716

 
$
1,449

 
$
1,352

Minimally Invasive Therapies Group
2,659

 
2,902

 
2,396

 
2,455

 
1,168

 
1,122

Restorative Therapies Group
4,005

 
3,779

 
1,275

 
1,217

 
688

 
620

Diabetes Group
1,006

 
856

 
619

 
521

 
140

 
118

Total
$
11,910

 
$
11,688

 
$
7,056

 
$
6,909

 
$
3,445

 
$
3,212

(1)
U.S. includes the United States and U.S. territories.
(2)
Non-U.S. developed markets include Japan, Australia, New Zealand, Korea, Canada, and the countries of Western Europe.
(3)
Emerging markets include the countries of the Middle East, Africa, Latin America, Eastern Europe, and the countries of Asia that are not included in the non-U.S. developed markets, as defined above.
The Company sells its products through direct sales representatives and independent distributors. Additionally, a portion of the Company's revenue is generated from consignment inventory maintained at hospitals. The Company recognizes revenue when control is transferred to the customer. For products sold through direct sales representatives and independent distributors, control is transferred upon shipment or upon delivery, based on the contract terms and legal requirements. For consignment inventory, control is transferred when the product is used or implanted. Payment terms vary depending on the country of sale, type of customer, and type of product.
If a contract contains more than one performance obligation, the transaction price is allocated to each performance obligation based on relative standalone selling price. Shipping and handling is treated as a fulfillment activity rather than a promised service, and therefore, is not considered a performance obligation. Taxes assessed by a governmental authority that are both imposed on, and concurrent with, a specific revenue producing transaction and collected by the Company from customers (for example, sales, use, value added, and some excise taxes) are not included in revenue. For contracts that have an original duration of one year or less, the Company uses the practical expedient applicable to such contracts and does not adjust the transaction price for the time value of money.
The amount of revenue recognized reflects sales rebates and returns, which are estimated based on sales terms, historical experience, and trend analysis. In estimating rebates, the Company considers the lag time between the point of sale and the payment of the rebate claim, the stated rebate rates, and other relevant information. The Company records adjustments to rebates and returns reserves as increases or decreases of revenue. At January 25, 2019, $715 million of rebates were classified as other accrued expenses and $426 million of rebates were classified as a reduction of accounts receivable in the consolidated balance sheets. At April 27, 2018, $614 million of rebates were classified as other accrued expenses and $376 million of rebates were classified as a reduction of accounts receivable in the consolidated balance sheets. The Company includes obligations for returns in other accrued expenses in the consolidated balance sheets and the right-of-return asset in other current assets in the consolidated balance sheets. The right-of-return asset at January 25, 2019 and right-of-return liability at January 25, 2019 and April 27, 2018 were not material. There was no right-of-return asset at April 27, 2018 as the liability was recorded net of the asset under previous guidance. For the three and nine months ended January 25, 2019, adjustments to rebate and return reserves recognized in revenue that were included in the rebate and return reserves at the beginning of the period were not material.

7

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The Company offers warranties on various products. For standard, assurance-type warranties, the Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the product is sold. The amount of the reserve is equal to the net costs to repair or otherwise satisfy the obligation. The Company includes the warranty obligation in other accrued expenses and other liabilities in the consolidated balance sheets. For extended, service-type warranties, a portion of the transaction price is allocated to the performance obligation. Warranty obligations at January 25, 2019 and April 27, 2018 were not material.
Deferred Revenue and Remaining Performance Obligations
The Company records a deferred revenue liability if a customer pays consideration before the Company transfers a good or service to the customer. Deferred revenue primarily represents remote monitoring services and equipment maintenance, for which consideration is received at the same time as consideration for the device or equipment. Deferred revenue also includes extended, service-type warranties. Revenue related to remote monitoring services, equipment maintenance, and service-type warranties is recognized over the service period as time elapses.
Deferred revenue at January 25, 2019 and April 27, 2018 was $308 million and $289 million, respectively. At January 25, 2019 and April 27, 2018, $209 million and $196 million was included in other accrued expenses, respectively, and $99 million and $93 million was included in other liabilities, respectively. During the nine months ended January 25, 2019, the Company recognized $170 million of revenue that was included in deferred revenue as of April 27, 2018.
Remaining performance obligations include deferred revenue and amounts the Company expects to receive for goods and services that have not yet been delivered or provided under existing, noncancellable contracts with minimum purchase commitments, primarily related to consumables for previously sold equipment as well as remote monitoring services and equipment maintenance. For contracts that have an original duration of one year or less, the Company has elected the practical expedient applicable to such contracts and does not disclose the transaction price for remaining performance obligations at the end of each reporting period and when the Company expects to recognize this revenue. At January 25, 2019, the estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied for executed contracts with an original duration of one year or more was approximately $700 million. The Company expects to recognize revenue on the majority of these remaining performance obligations over the next three years.
4. Acquisitions
The Company had acquisitions during the three and nine months ended January 25, 2019 that were accounted for as business combinations. The assets and liabilities of the businesses acquired were recorded and consolidated on the acquisition date at their respective fair values. Goodwill resulting from business combinations is largely attributable to future yet to be defined technologies, new customer relationships, existing workforce of the acquired businesses, and synergies expected to arise after the Company's acquisition of these businesses. The pro forma impact of these acquisitions was not significant, either individually or in the aggregate, to the results of the Company for the three or nine months ended January 25, 2019 and January 26, 2018. The results of operations of acquired businesses have been included in the Company's consolidated statements of income since the date each business was acquired.

8

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The acquisition date fair values of the assets acquired and liabilities assumed were as follows:
(in millions)
Mazor Robotics
 
All Other
 
Total
Cash and cash equivalents
$
109

 
$
3

 
$
112

Investments
52

 

 
52

Accounts receivable
10

 
2

 
12

Inventory
8

 
27

 
35

Other current assets
2

 
3

 
5

Property, plant, and equipment
3

 
29

 
32

Goodwill
1,214

 
146

 
1,360

Other intangible assets
400

 
211

 
611

Tax assets

 
6

 
6

Total assets acquired
1,798

 
427

 
2,225

 
 
 
 
 
 
Current liabilities
56

 
45

 
101

Accrued income taxes
3

 
5

 
8

Deferred tax liabilities
65

 

 
65

Total liabilities assumed
124

 
50

 
174

Net assets acquired
$
1,674

 
$
377

 
$
2,051

Mazor Robotics
On December 18, 2018, the Company's Restorative Therapies Group acquired Mazor Robotics (Mazor), a pioneer in the field of robotic guidance systems. The acquisition of Mazor strengthens the Company's position as a global leader in enabling technologies for spine surgery. The Company offers a fully-integrated procedural solution for surgical planning, execution and confirmation by combining the Company's spine implants, navigation, and intra-operative imaging technology with Mazor's robotic-assisted surgery systems. Total consideration for the transaction, net of cash acquired, was $1.6 billion, consisting of $1.3 billion of cash and $246 million of a previously-held equity investment in Mazor. Based upon a preliminary acquisition valuation, the Company acquired $384 million of technology-based intangible assets and $16 million of tradenames with estimated useful lives of 10 years and $1.2 billion of goodwill. The goodwill is primarily attributable to pull-through revenue, future yet to be defined technologies, and assembled workforce. The goodwill is not deductible for tax purposes.
During the three and nine months ended January 25, 2019, the Company recognized $51 million of costs incurred in connection with the acquisition of Mazor, including payouts for unvested stock options and investment banker and other transaction fees, which were recognized in selling, general, and administrative expense in the consolidated statements of income. Revenue and net income (loss) attributable to Mazor since the date of acquisition included in the consolidated statements of income were not material for the three or nine months ended January 25, 2019.
Refer to Note 2 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2018 for additional information on the Company's fiscal year 2018 acquisitions.
Acquired In-Process Research & Development
In-process research and development (IPR&D) acquired outside of a business combination is expensed immediately. During the nine months ended January 25, 2019, the Company acquired $15 million of IPR&D in connection with an asset acquisition, which was recognized in other operating expense, net in the consolidated statements of income. The Company did not acquire any IPR&D in connection with an asset acquisition during the three months ended January 25, 2019 or the three and nine months ended January 26, 2018.

9

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Contingent Consideration
Certain of the Company’s business combinations involve potential payment of future consideration that is contingent upon the achievement of certain product development milestones and/or contingent on the acquired business reaching certain performance milestones. A liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period, and the change in fair value is recognized within other operating expense, net in the consolidated statements of income. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.
The fair value of contingent consideration at January 25, 2019 and April 27, 2018 was $148 million and $173 million, respectively. At January 25, 2019, $99 million was recorded in other accrued expenses and $49 million was recorded in other liabilities in the consolidated balance sheets. At April 27, 2018, $108 million was recorded in other accrued expenses and $65 million was recorded in other liabilities in the consolidated balance sheets.
The following table provides a reconciliation of the beginning and ending balances of contingent consideration:
 
Three months ended
 
Nine months ended
(in millions)
January 25, 2019
 
January 26, 2018
 
January 25, 2019
 
January 26, 2018
Beginning balance
$
203

 
$
190

 
$
173

 
$
246

Purchase price contingent consideration
5

 
13

 
51

 
28

Payments
(1
)
 
(20
)
 
(8
)
 
(66
)
Change in fair value
(59
)
 
(12
)
 
(68
)
 
(37
)
Ending balance
$
148

 
$
171

 
$
148

 
$
171

The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues (for revenue-based consideration). Projected revenues are based on the Company's most recent internal operational budgets and long-range strategic plans. Changes in projected payment dates, discount rates, probabilities of payment, and projected revenues may result in adjustments to the fair value measurement. The recurring Level 3 fair value measurements of contingent consideration for which a liability is recorded include the following significant unobservable inputs:
 
 
Fair Value at
 
 
 
 
 
 
(in millions)
 
January 25, 2019
 
Valuation Technique
 
Unobservable Input
 
Range
 
 
 
 
 
 
Discount rate
 
11.5% - 32.5%
Revenue and other performance-based payments
 
$97
 
Discounted cash flow
 
Probability of payment
 
100%
 
 
 
 
 
 
Projected fiscal year of payment
 
2019 - 2025
 
 
 
 
 
 
Discount rate
 
5.5%
Product development and other milestone-based payments
 
$51
 
Discounted cash flow
 
Probability of payment
 
75% - 100%
 
 
 
 
 
 
Projected fiscal year of payment
 
2019 - 2027
5. Divestitures
On July 29, 2017, the Company completed the sale of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses within the Minimally Invasive Therapies Group segment to Cardinal Health, Inc. (Cardinal). As a result of the transaction, the Company received proceeds of $6.1 billion, which was recorded in proceeds from sale of businesses in the consolidated statements of cash flows, and recognized a before-tax gain of $697 million, which was recognized within gain on sale of businesses in the consolidated statements of income. Among the product lines included in the divestiture were dental and animal health, chart paper, wound care, incontinence, electrodes, SharpSafety, thermometry, perinatal protection, blood collection, compression, and enteral feeding offerings. The divestiture also included 17 dedicated manufacturing sites.

During the nine months ended January 26, 2018, the Company recognized expenses incurred in connection with the divestiture of $115 million, primarily comprised of professional services, including banker, legal, tax, and advisory fees, as well as $16 million of accelerated stock compensation expense related to the acceleration of the vesting period for employees that transferred

10

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


with the divestiture. Expenses incurred in connection with the divestiture were recognized in selling, general, and administrative expense in the consolidated statements of income. There were no divestiture-related expenses during the three months ended January 26, 2018 or the three and nine months ended January 25, 2019.

The divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses did not meet the criteria to be classified as discontinued operations, as such, the results of operations of these businesses are included within net income through the date of the divestiture.
6. Restructuring
For the three and nine months ended January 25, 2019, the Company recognized $66 million and $256 million in restructuring charges, net of $3 million and $8 million of accrual adjustments, respectively.
For the three and nine months ended January 26, 2018, the Company recognized $30 million and $62 million in restructuring charges, net of $2 million and $15 million of accrual adjustments, respectively. For the three and nine months ended January 26, 2018, the Company recognized $32 million of charges related to the Enterprise Excellence restructuring program, and for the three and nine months ended January 26, 2018, the Company recognized no charges and $45 million of charges, respectively, related to the Cost Synergies restructuring program.
Accrual adjustments relate to certain employees identified for termination finding other positions within the Company, cancellations of employee terminations, and employee termination benefits being less than initially estimated.
Enterprise Excellence
In the third quarter of fiscal year 2018, the Company announced its Enterprise Excellence restructuring program, which is expected to leverage the Company's global size and scale, as well as enhance the customer and employee experience, with a focus on three objectives: global operations, functional optimization, and commercial optimization. Primary activities of the restructuring program include integrating and enhancing global manufacturing and supply processes, systems and site presence, enhancing and leveraging global operating models across several enabling functions, and optimizing certain commercial processes, systems, and models.
The Company estimates that, in connection with its Enterprise Excellence restructuring program, it will recognize pre-tax exit and disposal costs and other costs associated with the restructuring program across all segments of approximately $1.6 billion to $1.8 billion, the majority of which are expected to be incurred by the end of fiscal year 2022. Approximately half of the estimated charges are related to employee termination benefits. The remaining restructuring charges are costs associated with the restructuring program, such as salaries for employees supporting the program and consulting expenses. These charges are recognized within restructuring charges, net, cost of products sold, and selling, general, and administrative expense in the consolidated statements of income.

For the three and nine months ended January 25, 2019, the Company recognized $69 million and $264 million in charges, respectively. Restructuring charges included $21 million and $58 million, respectively, recognized within cost of products sold and $19 million and $73 million, respectively, recognized within selling, general, and administrative expense in the consolidated statements of income.

For the three and nine months ended January 26, 2018, the Company recognized $32 million in charges. Restructuring charges included $13 million recognized within cost of products sold and $10 million recognized within selling, general, and administrative expense in the consolidated statements of income.


11

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following table summarizes the activity related to the Enterprise Excellence restructuring program for the nine months ended January 25, 2019:
(in millions)
Employee Termination Benefits
 
Associated Costs(1)
 
Asset Write-Downs(2)
 
Other Costs
 
Total
April 27, 2018
$
27

 
$
2

 
$

 
$

 
$
29

Charges
107

 
131

 
13

 
13

 
264

Cash payments
(97
)
 
(128
)
 

 
(5
)
 
(230
)
Settled non-cash

 

 
(13
)
 

 
(13
)
January 25, 2019
$
37

 
$
5

 
$

 
$
8

 
$
50

(1)
Associated costs include costs incurred as a direct result of the restructuring program, such as salaries for employees supporting the program and consulting expenses.
(2)
Recognized within selling, general, and administrative expense in the consolidated statements of income.
Cost Synergies
The cost synergies program related to administrative office optimization, manufacturing and supply chain infrastructure, and certain general and administrative savings was achieved as part of the Covidien plc (Covidien) integration and completed in the third quarter of fiscal year 2018. Restructuring charges incurred throughout the life of the initiative affecting all segments were primarily related to employee termination costs and costs related to manufacturing and facility closures.
A summary of the restructuring accrual and related activity is presented below:
(in millions)
Employee Termination Benefits
 
Other Costs
 
Total
April 27, 2018
$
116

 
$
22

 
$
138

Cash payments
(34
)
 
(18
)
 
(52
)
Accrual adjustments
(8
)
 

 
(8
)
January 25, 2019
$
74

 
$
4

 
$
78

For the three and nine months ended January 25, 2019, the Company recognized accrual adjustments of $1 million and $8 million, respectively.
For the three months ended January 26, 2018, the Company recognized no charges, and for the nine months ended January 26, 2018, the Company recognized $45 million in charges. During the three and nine months ended January 26, 2018, the Company recognized accrual adjustments of $2 million and $15 million, respectively. For the nine months ended January 26, 2018, charges included $12 million recognized within cost of products sold and $4 million recognized within selling, general and administrative expense in the consolidated statements of income.
7. Financial Instruments
Debt Securities
The Company holds investments in marketable debt securities that are classified and accounted for as available-for-sale and are remeasured on a recurring basis. For information regarding the valuation techniques and inputs used in the fair value measurements, refer to Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2018.

12

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following tables summarize the Company's investments in available-for-sale debt securities by significant investment category and the related consolidated balance sheet classification at January 25, 2019 and April 27, 2018:    
 
January 25, 2019
 
Valuation
 
Balance Sheet Classification
(in millions)
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Investments
 
Other Assets
Level 1:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
523

 
$

 
$
(15
)
 
$
508

 
$
508

 
$

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
3,259

 
3

 
(60
)
 
3,202

 
3,202

 

U.S. government and agency securities
841

 

 
(14
)
 
827

 
827

 

Mortgage-backed securities
464

 
1

 
(28
)
 
437

 
437

 

Non-U.S. government and agency securities
5

 

 

 
5

 
5

 

Other asset-backed securities
464

 

 
(4
)
 
460

 
460

 

Total Level 2
5,033

 
4

 
(106
)
 
4,931

 
4,931

 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
Auction rate securities
47

 

 
(3
)
 
44

 

 
44

Total available-for-sale debt securities
$
5,603

 
$
4

 
$
(124
)
 
$
5,483

 
$
5,439

 
$
44

 
April 27, 2018
 
Valuation
 
Balance Sheet Classification
(in millions)
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Investments
 
Other Assets
Level 1:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
732

 
$

 
$
(26
)
 
$
706

 
$
706

 
$

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
4,179

 
20

 
(75
)
 
4,124

 
4,124

 

U.S. government and agency securities
848

 

 
(24
)
 
824

 
824

 

Mortgage-backed securities
725

 
2

 
(34
)
 
693

 
693

 

Non-U.S. government and agency securities
74

 

 
(1
)
 
73

 
73

 

Other asset-backed securities
358

 

 
(2
)
 
356

 
356

 

Total Level 2
6,184

 
22

 
(136
)
 
6,070

 
6,070

 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
Auction rate securities
47

 

 
(3
)
 
44

 

 
44

Total available-for-sale debt securities
$
6,963

 
$
22

 
$
(165
)
 
$
6,820

 
$
6,776

 
$
44

The following tables present the gross unrealized losses and fair values of the Company’s available-for-sale debt securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category at January 25, 2019 and April 27, 2018:
 
January 25, 2019
 
Less than 12 months
 
More than 12 months
(in millions)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
U.S. government and agency securities
$
42

 
$

 
$
812

 
$
(29
)
Corporate debt securities
1,543

 
(21
)
 
1,168

 
(39
)
Mortgage-backed securities
87

 
(1
)
 
287

 
(27
)
Other asset-backed securities
313

 
(3
)
 
81

 
(1
)
Auction rate securities

 

 
44

 
(3
)
Total
$
1,985

 
$
(25
)
 
$
2,392

 
$
(99
)

13

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


 
April 27, 2018
 
Less than 12 months
 
More than 12 months
(in millions)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
U.S. government and agency securities
$
762

 
$
(33
)
 
$
374

 
$
(17
)
Corporate debt securities
2,620

 
(58
)
 
272

 
(17
)
Mortgage-backed securities
442

 
(15
)
 
102

 
(19
)
Non-U.S. government and agency securities
32

 

 
36

 
(1
)
Other asset-backed securities
238

 
(1
)
 
63

 
(1
)
Auction rate securities

 

 
44

 
(3
)
Total
$
4,094

 
$
(107
)
 
$
891

 
$
(58
)
The following table presents the unobservable inputs utilized in the fair value measurement of the auction rate securities classified as Level 3 at January 25, 2019:
 
Valuation Technique
Unobservable Input
Range (Weighted Average)
Auction rate securities
Discounted cash flow
Years to principal recovery
2 yrs. - 12 yrs. (3 yrs.)
Illiquidity premium
6%
The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1, Level 2, or Level 3 during the three and nine months ended January 25, 2019 and January 26, 2018. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement.
There were no purchases, sales, settlements, or gains or losses recognized in earnings or other comprehensive income for available-for-sale securities classified as Level 3 during the three and nine months ended January 25, 2019 and January 26, 2018.
Activity related to the Company’s debt securities portfolio is as follows:
 
Three months ended
 
Nine months ended
(in millions)
January 25, 2019
 
January 26, 2018
 
January 25, 2019
 
January 26, 2018
Proceeds from sales
$
1,301

 
$
667

 
$
3,217

 
$
2,618

Gross realized gains
9

 
3

 
17

 
22

Gross realized losses
(36
)
 
(2
)
 
(55
)
 
(16
)
Credit losses represent the difference between the present value of cash flows expected to be collected on certain mortgage-backed securities and auction rate securities and the amortized cost of these securities. Based on the Company’s assessment of the credit quality of the underlying collateral and credit support available to each of the remaining securities in which the Company is invested, the Company believes it has recognized all necessary other-than-temporary impairments, as the Company does not have the intent to sell, nor is it more likely than not that the Company will be required to sell, before recovery of the amortized cost.
At January 25, 2019 and April 27, 2018, the credit loss portion of other-than-temporary impairments on debt securities was not significant. The total reductions of available-for-sale debt securities sold during the three and nine months ended January 25, 2019 and January 26, 2018 were not significant.

14

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The January 25, 2019 balance of available-for-sale debt securities by contractual maturity is shown in the following table. Within the table, maturities of mortgage-backed securities have been allocated based upon timing of estimated cash flows assuming no change in the current interest rate environment. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
(in millions)
January 25, 2019
Due in one year or less
$
1,139

Due after one year through five years
1,867

Due after five years through ten years
2,358

Due after ten years
119

Total
$
5,483

Equity Securities, Equity Method Investments, and Other Investments
The Company holds investments in equity securities with readily determinable fair values, equity investments without readily determinable fair values, investments accounted for under the equity method, and other investments.
Effective April 28, 2018, the Company adopted accounting standards update (ASU) 2016-01, which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. As a result of the adoption, the Company reclassified $47 million from accumulated other comprehensive loss to the opening balance of retained earnings as of April 28, 2018. The Company uses quoted market prices to determine the fair value of equity securities with readily determinable fair values. For equity investments without readily determinable fair values that do not qualify for the practical expedient to estimate fair value using the net asset value per share or its equivalent, the Company has elected to measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. This election is made for each investment separately and is reassessed at each reporting period as to whether the investment continues to qualify for this election. Additionally, at each reporting period, the Company makes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired.
Equity securities with readily determinable fair values are included within Level 1 of the fair value hierarchy, as they are measured using quoted market prices. Equity method investments and investments without readily determinable fair values, as described above, are included within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. To determine the fair value of these investments, the Company uses all pertinent financial information available related to the investees, including financial statements, market participant valuations from recent and proposed equity offerings, and other third-party data.
The following table summarizes the Company's equity and other investments at January 25, 2019, which are classified as other assets in the consolidated balance sheets:
(in millions)
 
January 25, 2019
Investments with readily determinable fair values (marketable equity securities)
 
$
20

Investments without readily determinable fair values
 
240

Equity method and other investments
 
70

Total equity and other investments
 
$
330

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

15

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following table summarizes the values of the Company's equity and other investments by significant investment category and the related consolidated balance sheet classification at April 27, 2018:
 
Valuation
 
Balance Sheet Classification
(in millions)
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Investments
 
Other Assets
Available-for-sale securities
 

 
 

 
 

 
 

 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
Marketable equity securities
$
63

 
$
99

 
$

 
$
162

 
$

 
$
162

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Debt funds
739

 

 
(154
)
 
585

 
585

 

Investments measured at net asset value(1):
 
 
 
 
 
 
 
 
 
 
 
Debt funds
199

 

 
(2
)
 
197

 
197

 

Total available-for-sale equity securities
1,001

 
99

 
(156
)
 
944

 
782

 
162

Cost method, equity method, and other investments:
 
 
 
 
 
 
 
 
 
 
 
Level 3:
 
 
 
 
 
 
 
 
 
 
 
Cost method, equity method, and other investments
353

 

 

 
N/A

 

 
353

Total equity and other investments
$
1,354

 
$
99

 
$
(156
)
 
$
944

 
$
782

 
$
515

(1) Certain investments that are measured at the net asset value per share (or its equivalent) as a practical expedient are excluded from the fair value hierarchy. The fair value amounts presented herein are intended to permit reconciliation to the consolidated balance sheets.
The table below includes activity related to the Company’s portfolio of equity and other investments. Gains and losses on equity and other investments are recognized in other non-operating (income) expense, net in the consolidated statements of income.    
 
 
Three months ended
 
Nine months ended
(in millions)
 
January 25, 2019
 
January 26, 2018(1)
 
January 25, 2019
 
January 26, 2018(1)
Proceeds from sales
 
$
33

 
$
39

 
$
941

 
$
442

Gross gains
 
8

 
8

 
131

 
15

Gross losses
 
(1
)
 

 
(30
)
 
(1
)
Impairment losses recognized
 

 
(227
)
 
(12
)
 
(228
)
(1) Gains and losses for the three and nine months ended January 26, 2018 represent realized amounts.
Net gains recognized during the three months ended January 25, 2019 were $7 million, comprised of $1 million net realized gains on equity and other investments sold during the period and $6 million of net unrealized gains on equity and other investments still held at January 25, 2019. Net gains recognized during the nine months ended January 25, 2019 were $101 million, comprised of $71 million of net realized gains on equity and other investments sold during the period and $30 million of net unrealized gains on equity and other investments still held at January 25, 2019.
During the three months ended January 26, 2018, the Company received bids from potential buyers and investors for some or all of its ownership in a portfolio of selected investments, which indicated that the fair values of certain of the underlying cost and equity method investments in the portfolio may be below the respective carrying values. The Company determined that the decline in the fair values was other-than-temporary given the uncertainty regarding the Company’s intent to hold the investments for a period of time that would be sufficient to recover the carrying values. As a result, the Company recognized impairment charges of $227 million during the three and nine months ended January 26, 2018, which were recognized in other non-operating (income) expense, net in the consolidated statements of income. The fair values of the investments were determined based on Level 3 inputs. The carrying values of the investments prior to recognizing the impairment charges was $317 million. There were no other significant impairments charges recognized during the three and nine months ended January 26, 2018 and January 25, 2019.


16

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


8. Financing Arrangements
Commercial Paper
The Company maintains a commercial paper program that allows the Company to have a maximum of $3.5 billion in commercial paper outstanding. No commercial paper was outstanding at January 25, 2019, as compared to $698 million at April 27, 2018. There was no commercial paper activity during the three months ended January 25, 2019. During the nine months ended January 25, 2019, the weighted average original maturity of the commercial paper outstanding was approximately 28 days, and the weighted average interest rate was 2.10 percent. The issuance of commercial paper reduces the amount of credit available under the Company’s existing Credit Facility, as defined below.
Line of Credit
On December 12, 2018, Medtronic Global Holdings S.C.A. (Medtronic Luxco), as borrower, entered into an amended and restated credit agreement (Credit Facility), by and among Medtronic, Medtronic, Inc., Medtronic Luxco, the lenders from time to time party thereto and Bank of America, N.A., as administrative agent and issuing bank, which expires in December 2023. The Credit Facility replaces the previous credit agreement dated November 7, 2014 and effective as of January 26, 2015.
The Credit Facility provides for a $3.5 billion five-year unsecured revolving credit facility, subject to two one-year extension options. The commitments are intended to be used for general corporate purposes, including to backstop the Company's $3.5 billion commercial paper program described above. The Company and Medtronic, Inc. have guaranteed the obligations of the borrowers under the Credit Facility, and Medtronic Luxco will also guarantee the obligations of any designated borrower. The Credit Facility includes a multi-currency borrowing feature for certain specified foreign currencies. No amounts were outstanding under the original and amended credit facilities at January 25, 2019 and April 27, 2018.
Interest rates on advances under the Credit Facility are based on the Company’s long-term debt ratings, assigned by Standard & Poor’s Ratings Services and Moody’s Investors Service. Facility fees are payable on the Credit Facility and are determined in the same manner as the interest rates. The agreement also contains customary covenants, all of which the Company was in compliance with at January 25, 2019.

17

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Debt Obligations
The Company's debt obligations consisted of the following:
(in millions)
 
Maturity by
Fiscal Year
 
January 25, 2019
 
April 27, 2018
Current debt obligations
 
2019 - 2020
 
$
1,356

 
$
2,058

 
 
 
 
 
 
 
Long-term debt
 
 
 
 
 
 
Floating rate five-year 2015 senior notes
 
2020
 
500

 
500

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

 
2,500

4.200 percent ten-year 2010 CIFSA senior notes
 
2021
 
600

 
600

4.125 percent ten-year 2011 senior notes
 
2021
 
500

 
500

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

 
2,500

3.125 percent ten-year 2012 senior notes
 
2022
 
675

 
675

3.200 percent ten-year 2012 CIFSA senior notes
 
2023
 
650

 
650

2.750 percent ten-year 2013 senior notes
 
2023
 
530

 
530

2.950 percent ten-year 2013 CIFSA senior notes
 
2024
 
310

 
310

3.625 percent ten-year 2014 senior notes
 
2024
 
850

 
850

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

 
4,000

3.350 percent ten-year 2017 senior notes
 
2027
 
850

 
850

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

 
2,382

6.550 percent thirty-year 2008 CIFSA senior notes
 
2038
 
374

 
374

6.500 percent thirty-year 2009 senior notes
 
2039
 
300

 
300

5.550 percent thirty-year 2010 senior notes
 
2040
 
500

 
500

4.500 percent thirty-year 2012 senior notes
 
2042
 
400

 
400

4.000 percent thirty-year 2013 senior notes
 
2043
 
325

 
325

4.625 percent thirty-year 2014 senior notes
 
2044
 
650

 
650

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

 
4,150

Bank borrowings
 
2020 - 2022
 
94

 
125

Debt premium, net
 
2020 - 2045
 
108

 
120

Capital lease obligations
 
2020 - 2025
 
21

 
21

Interest rate swaps
 
2021 - 2022
 

 
(6
)
Deferred financing costs
 
2020 - 2045
 
(95
)
 
(107
)
Long-term debt
 
 
 
$
23,674

 
$
23,699

Senior Notes
The Company has outstanding unsecured senior debt obligations, described both as senior notes and current debt obligations in the table above (collectively, the Senior Notes). The Senior Notes rank equally with all other unsecured and unsubordinated indebtedness of the Company. The indentures under which the Senior Notes were issued contain customary covenants, all of which the Company remained in compliance with at January 25, 2019. For additional information regarding the terms of these agreements, refer to Note 8 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2018.
On February 20, 2019, the Company announced the commencement of a cash tender offer for up to $5.0 billion of certain of our outstanding Senior Notes. The tender offer will expire on March 19, 2019 unless extended or terminated. The tender offer is subject to a number of conditions, including the condition that the Company receives net proceeds from one or more debt financings sufficient to fund the purchase of tendered notes.

18

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Financial Instruments Not Measured at Fair Value
At January 25, 2019, the estimated fair value of the Company’s Senior Notes was $25.2 billion compared to a principal value of $24.5 billion. At April 27, 2018, the estimated fair value was $25.1 billion compared to a principal value of $24.5 billion. The fair value was estimated using quoted market prices for the publicly registered Senior Notes, which are classified as Level 2 within the fair value hierarchy. The fair values and principal values consider the terms of the related debt and exclude the impacts of debt discounts and hedging activity.
9. Derivatives and Currency Exchange Risk Management
The Company uses operational and economic hedges, as well as currency exchange rate derivative contracts and interest rate derivative instruments, to manage the impact of currency exchange and interest rate changes on earnings and cash flows. In addition, the Company uses cross currency interest rate swaps to manage currency risk related to certain debt. In order to minimize earnings and cash flow volatility resulting from currency exchange rates changes, the Company enters into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets and liabilities. At inception of the contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. The cash flows related to all of the Company's derivative instruments are reported as operating activities in the consolidated statement of cash flows. The primary currencies of the derivative instruments are the Euro, Japanese Yen, and British Pound. The Company does not enter into currency exchange rate derivative contracts for speculative purposes. The gross notional amount of all currency exchange rate derivative instruments outstanding was $12.2 billion and $11.5 billion at January 25, 2019 and April 27, 2018, respectively.
The information that follows explains the various types of derivatives and financial instruments used by the Company, reasons the Company uses such instruments, and the impact such instruments have on the Company’s consolidated balance sheets and statements of income.
Freestanding Derivative Contracts
Freestanding derivative contracts are used to offset the Company’s exposure to the change in value of specific foreign-currency-denominated assets and liabilities and to offset variability of cash flows associated with forecasted transactions denominated in foreign currencies. The gross notional amount of these contracts outstanding was $5.1 billion and $5.2 billion at January 25, 2019 and April 27, 2018 , respectively. The Company's freestanding currency exchange rate contracts are not designated as hedges, and therefore, changes in the value of these contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in value of foreign-currency-denominated assets, liabilities, and cash flows.
The Company also entered into total return swaps in fiscal year 2018, which are used to hedge the liability of a non-qualified deferred compensation plan. The gross notional amount of the Company's total return swaps outstanding was $174 million and $210 million at January 25, 2019 and April 27, 2018, respectively. The Company's total return swaps are not designated as hedges, and therefore, changes in the value of these instruments are recognized in earnings.
The amounts and classification of the gains (losses) in the consolidated statements of income related to derivative instruments not designated as hedging instruments for the three and nine months ended January 25, 2019 and January 26, 2018 were as follows:
 
 
 
 
Three months ended
 
Nine months ended
(in millions)
 
Classification
 
January 25, 2019
 
January 26, 2018
 
January 25, 2019
 
January 26, 2018
Currency exchange rate contracts
 
Other operating expense, net
 
$
(30
)
 
$
(181
)
 
$
171

 
$
(318
)
Total return swaps
 
Other operating expense, net
 

 
23

 

 
38

Total
 
 
 
$
(30
)
 
$
(158
)
 
$
171

 
$
(280
)
Cash Flow Hedges
Currency Exchange Rate Risk
Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted transactions denominated in a foreign currency that will take place in the future. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive loss. The effective portion of the gain or loss on the derivative instrument is reclassified into earnings and is included in other operating expense, net in the consolidated statements of income in the same period or periods during which the hedged transaction affects earnings.
No gains or losses relating to ineffectiveness of cash flow hedges were recognized in earnings during the three and nine months ended January 25, 2019 and January 26, 2018. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness, and no hedges were derecognized or discontinued during the three and nine months ended January 25, 2019 and January 26, 2018. The gross notional amount of these contracts, designated as cash flow hedges, outstanding was $7.0 billion and $6.3 billion at January 25, 2019 and April 27, 2018, respectively, and will mature within the subsequent three-year period.

19

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The amounts of the gains (losses) recognized in the consolidated statements of income related to derivative instruments designated as cash flow hedges for the three and nine months ended January 25, 2019 and January 26, 2018 were as follows:
 
 
 
 
Three months ended
 
Nine months ended
(in millions)
 
Classification
 
January 25, 2019
 
January 26, 2018
 
January 25, 2019
 
January 26, 2018
Currency exchange rate contracts
 
Other operating expense, net
 
$
48

 
$
(11
)
 
$
56

 
$
1

The amount of the gains (losses) recognized in AOCI related to the effective portion of currency exchange rate contract derivative instruments designated as cash flow hedges for the three and nine months ended January 25, 2019 and January 26, 2018 were as follows:
 
 
Three months ended
 
Nine months ended
(in millions)
 
January 25, 2019
 
January 26, 2018
 
January 25, 2019
 
January 26, 2018
Currency exchange rate contracts
 
$
25

 
$
(287
)
 
$
469

 
$
(507
)
Forecasted Debt Issuance Interest Rate Risk
Forward starting interest rate derivative instruments designated as cash flow hedges are designed to manage the exposure to interest rate volatility with regard to future issuances of fixed-rate debt. The effective portion of the gains or losses on forward starting interest rate derivative instruments that are designated and qualify as cash flow hedges is reported as a component of accumulated other comprehensive loss. Beginning in the period in which the planned debt issuance occurs and the related derivative instruments are terminated, the effective portion of the gains or losses are then reclassified into interest expense over the term of the related debt. Any portion of the gains or losses that is determined to be ineffective is immediately recognized in interest expense. For the three and nine months ended January 25, 2019, the reclassifications of the effective portion of net gains (losses) on forward starting interest rate derivative instruments from accumulated other comprehensive loss to interest expense were not significant.
The Company had $110 million and $(207) million at January 25, 2019 and April 27, 2018, respectively, in after-tax net unrealized gains (losses) associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $114 million of after-tax net unrealized gains at January 25, 2019 will be recognized in the consolidated statements of income over the next 12 months.
Fair Value Hedges
Interest rate derivative instruments designated as fair value hedges are designed to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.
Changes in the fair value of the derivative instruments are recognized in interest expense, and are offset by changes in the fair value of the underlying debt instrument. The gains (losses) from terminated interest rate swap agreements are recognized in long-term debt, increasing (decreasing) the outstanding balances of the debt, and amortized as a reduction of (addition to) interest expense over the remaining life of the related debt.
At both January 25, 2019 and April 27, 2018, the Company had interest rate swaps in gross notional amounts of $1.2 billion, designated as fair value hedges of underlying fixed-rate senior note obligations, including the Company's $500 million 4.125 percent 2011 Senior Notes due fiscal year 2021 and the $675 million 3.125 percent 2012 Senior Notes due fiscal year 2022.
At January 25, 2019, the market value of outstanding interest rate swap agreements was in a net zero position, as compared to a net unrealized loss of $6 million at April 27, 2018. The amounts were recorded in other liabilities, with the offsets recorded in long-term debt on the consolidated balance sheets.
No significant hedge ineffectiveness was recognized as a result of these fair value hedges for the three and nine months ended January 25, 2019 and January 26, 2018. In addition, the Company did not recognize any gains or losses during the three and nine months ended January 25, 2019 and January 26, 2018 on firm commitments that no longer qualify as fair value hedges.

20

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Balance Sheet Presentation
The following tables summarize the balance sheet classification and fair value of derivative instruments included in the consolidated balance sheets at January 25, 2019 and April 27, 2018. The fair value amounts are presented on a gross basis, and are segregated between derivatives that are designated and qualify as hedging instruments and those that are not designated and do not qualify as hedging instruments and are further segregated by type of contract within those two categories.
 
January 25, 2019
 
Derivative Assets
 
Derivative Liabilities
(in millions)
Balance Sheet Classification
 
Fair Value
 
Balance Sheet Classification
 
Fair Value
Derivatives designated as hedging instruments
 
 
 

 
 
 
 

Currency exchange rate contracts
Other current assets
 
$
169

 
Other accrued expenses
 
$
7

Interest rate contracts
Other assets
 
7

 
Other liabilities
 
7

Currency exchange rate contracts
Other assets
 
68

 
Other liabilities
 
7

Total derivatives designated as hedging instruments
 
 
244

 
 
 
21

Derivatives not designated as hedging instruments
 
 
 

 
 
 
 

Currency exchange rate contracts
Other current assets
 
16

 
Other accrued expenses
 
25

Total return swap
Other current assets
 

 
Other accrued expenses
 
4

Cross currency interest rate contracts
Other current assets
 
8

 
Other accrued expenses
 
3

Cross currency interest rate contracts
Other assets
 
1

 
Other liabilities
 
1

Total derivatives not designated as hedging instruments
 
 
25

 
 
 
33

Total derivatives
 
 
$
269

 
 
 
$
54

 
April 27, 2018
 
Derivative Assets
 
Derivative Liabilities
(in millions)
Balance Sheet Classification
 
Fair Value
 
Balance Sheet Classification
 
Fair Value
Derivatives designated as hedging instruments
 
 
 

 
 
 
 

Currency exchange rate contracts
Other current assets
 
$
37

 
Other accrued expenses
 
$
162

Interest rate contracts
Other assets
 
8

 
Other liabilities
 
14

Currency exchange rate contracts
Other assets
 
11

 
Other liabilities
 
51

Total derivatives designated as hedging instruments
 
 
56

 
 
 
227

Derivatives not designated as hedging instruments
 
 
 

 
 
 
 

Currency exchange rate contracts
Other current assets
 
31

 
Other accrued expenses
 
25

Total return swaps
Other current assets
 
4

 
Other accrued expenses
 

Stock warrants
Other assets
 
21

 
Other liabilities
 

Cross currency interest rate contracts
Other assets
 
6

 
Other liabilities
 
6

Total derivatives not designated as hedging instruments
 
 
62

 
 
 
31

Total derivatives
 
 
$
118

 
 
 
$
258

The following table provides information by level for the derivative assets and liabilities that are measured at fair value on a recurring basis.
 
January 25, 2019
 
April 27, 2018
(in millions)
Level 1
 
Level 2
 
Level 1
 
Level 2
Derivative assets
$
253

 
$
16

 
$
79

 
$
39

Derivative liabilities
39

 
15

 
238

 
20


21

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The Company has elected to present the fair value of derivative assets and liabilities within the consolidated balance sheets on a gross basis, even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The cash flows related to collateral posted and received are reported gross as investing and financing activities, respectively, in the consolidated statements of cash flows.
The following tables provides information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria as stipulated by the terms of the master netting arrangements with each of the counterparties. Derivatives not subject to master netting arrangements are not eligible for net presentation.
 
 
January 25, 2019
 
 
 
 
Gross Amount Not Offset on the Balance Sheet
 
 
(in millions)
 
Gross Amount of Recorded Assets (Liabilities)
 
Financial Instruments
 
Cash Collateral Posted (Received)
 
Securities Collateral Posted (Received)
 
Net Amount
Derivative assets:
 
 
 
 
 
 
 
 
 
 
Currency exchange rate contracts
 
$
253

 
$
(33
)
 
$
(17
)
 
$

 
$
203

Interest rate contracts
 
7

 
(4
)