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Medtronic 10-Q 2015
10-Q


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 2015
Commission File Number 001-36820
MEDTRONIC PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
 
 
Ireland
98-1183488
(State of incorporation)
(I.R.S. Employer
Identification No.)
20 On Hatch, Lower Hatch Street
Dublin 2, Ireland
(Address of principal executive offices) (Zip Code)
+353 1 438-1700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of December 3, 2015, 1,406,155,722 ordinary shares, par value $0.0001, 40,000 Euro deferred shares, par value €1.00, and 1,872 A preferred shares, par value $1.00, of the registrant were outstanding.
 
 




TABLE OF CONTENTS




PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
MEDTRONIC PLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three months ended
 
Six months ended
 
October 30, 2015
 
October 24, 2014
 
October 30, 2015
 
October 24, 2014
 
(in millions, except per share data)
Net sales
$
7,058

 
$
4,366

 
$
14,332

 
$
8,639

 
 
 
 
 
 
 
 
Costs and expenses:
 

 
 

 
 

 
 

Cost of products sold
2,182

 
1,142

 
4,638

 
2,247

Research and development expense
545

 
374

 
1,103

 
739

Selling, general, and administrative expense
2,343

 
1,507

 
4,792

 
3,013

Special charges

 
100

 

 
100

Restructuring charges, net
73

 

 
140

 
30

Certain litigation charges
26

 

 
26

 

Acquisition-related items
49

 
61

 
120

 
102

Amortization of intangible assets
483

 
89

 
964

 
176

Other expense, net
57

 
63

 
118

 
114

Operating profit
1,300

 
1,030

 
2,431

 
2,118

 
 
 
 
 
 
 
 
Interest income
(107
)
 
(86
)
 
(222
)
 
(178
)
Interest expense
324

 
94

 
630

 
191

Interest expense, net
217

 
8

 
408

 
13

Income from operations before income taxes
1,083

 
1,022

 
2,023

 
2,105

 
 
 
 
 
 
 
 
Provision for income taxes
563

 
194

 
683

 
406

 
 
 
 
 
 
 
 
Net income
$
520

 
$
828

 
$
1,340

 
$
1,699

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.37

 
$
0.84

 
$
0.95

 
$
1.72

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.36

 
$
0.83

 
$
0.94

 
$
1.70

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
1,412.9

 
981.9

 
1,415.6

 
987.5

 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding
1,428.8

 
993.0

 
1,432.7

 
999.4

 
 
 
 
 
 
 
 
Cash dividends declared per ordinary share
$
0.380

 
$
0.305

 
$
0.760

 
$
0.610

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

1



MEDTRONIC PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended
 
Six months ended
 
October 30, 2015
 
October 24, 2014
 
October 30, 2015
 
October 24, 2014
 
(in millions)
Net income
$
520

 
$
828

 
$
1,340

 
$
1,699

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 

 
 

 
 
 
 
Unrealized (loss) gain on available-for-sale securities, net of tax (benefit) expense of $(41), $(19), $(115), and $13, respectively
(76
)
 
(34
)
 
(207
)
 
20

Translation adjustment
(33
)
 
(130
)
 
(59
)
 
(129
)
Net change in retirement obligations, net of tax expense of $10, $6, $20, and $12, respectively
22

 
25

 
35

 
42

Unrealized (loss) gain on derivatives, net of tax (benefit) expense of $(13), $68, $(33), and $89, respectively
(28
)
 
121

 
(56
)
 
158

 
 
 
 
 
 
 
 
Other comprehensive (loss) income
(115
)
 
(18
)
 
(287
)
 
91

 
 
 
 
 
 
 
 
Comprehensive income
$
405

 
$
810

 
$
1,053

 
$
1,790

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

2



MEDTRONIC PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
October 30, 2015
 
April 24, 2015
 
(in millions, except per share data)
ASSETS
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
2,378

 
$
4,843

Investments
14,851

 
14,637

Accounts receivable, less allowances of $158 and $144, respectively
5,044

 
5,112

Inventories
3,516

 
3,463

Tax assets
1,619

 
1,335

Prepaid expenses and other current assets
1,315

 
1,454

Total current assets
28,723

 
30,844

 
 
 
 
Property, plant, and equipment
9,215

 
8,863

Accumulated depreciation
(4,537
)
 
(4,164
)
Property, plant, and equipment, net
4,678

 
4,699

Goodwill
41,274

 
40,530

Other intangible assets, net
27,731

 
28,101

Long-term tax assets
825

 
774

Other assets
1,714

 
1,737

Total assets
$
104,945

 
$
106,685

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Short-term borrowings
$
2,158

 
$
2,434

Accounts payable
1,447

 
1,610

Accrued compensation
1,389

 
1,611

Accrued income taxes
533

 
935

Deferred tax liabilities
142

 
119

Other accrued expenses
2,457

 
2,464

Total current liabilities
8,126

 
9,173

 
 
 
 
Long-term debt
33,690

 
33,752

Long-term accrued compensation and retirement benefits
1,577

 
1,535

Long-term accrued income taxes
2,771

 
2,476

Long-term deferred tax liabilities
4,766

 
4,700

Other long-term liabilities
1,746

 
1,819

Total liabilities
52,676

 
53,455

 
 
 
 
Commitments and contingencies (Notes 3 and 16)

 

 
 
 
 
Shareholders’ equity:
 

 
 

Ordinary shares— par value $0.0001

 

Retained earnings
53,740

 
54,414

Accumulated other comprehensive loss
(1,471
)
 
(1,184
)
Total shareholders’ equity
52,269

 
53,230

Total liabilities and shareholders’ equity
$
104,945

 
$
106,685

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

3



MEDTRONIC PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six months ended
 
October 30, 2015
 
October 24, 2014
 
(in millions)
Operating Activities:
 

 
 

Net income
$
1,340

 
$
1,699

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

 
 

Depreciation and amortization
1,397

 
423

Acquisition-related items
222

 
6

Provision for doubtful accounts
30

 
17

Deferred income taxes
(274
)
 
(61
)
Stock-based compensation
209

 
82

Other, net
(70
)
 
(8
)
Change in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable, net
(1
)
 
(64
)
Inventories
(326
)
 
(170
)
Accounts payable and accrued liabilities
(369
)
 
26

Other operating assets and liabilities
73

 
73

Certain litigation charges
26

 

Certain litigation payments
(162
)
 
(800
)
Net cash provided by operating activities
2,095

 
1,223

Investing Activities:
 

 
 

Acquisitions, net of cash acquired
(997
)
 
(578
)
Additions to property, plant, and equipment
(446
)
 
(210
)
Purchases of marketable securities
(3,370
)
 
(3,024
)
Sales and maturities of marketable securities
2,752

 
2,665

Other investing activities, net
(13
)
 
(6
)
Net cash used in investing activities
(2,074
)
 
(1,153
)
Financing Activities:
 

 
 

Acquisition-related contingent consideration
(19
)
 
(5
)
Change in short-term borrowings, net
1,277

 
1,611

Proceeds from short-term borrowings (maturities greater than 90 days)
48

 
150

Payments on long-term debt
(1,608
)
 
(7
)
Dividends to shareholders
(1,075
)
 
(602
)
Issuance of ordinary shares
263

 
312

Repurchase of ordinary shares
(1,460
)
 
(1,620
)
Other financing activities, net
49

 
34

Net cash used in financing activities
(2,525
)
 
(127
)
Effect of exchange rate changes on cash and cash equivalents
39

 
(59
)
Net change in cash and cash equivalents
(2,465
)
 
(116
)
Cash and cash equivalents at beginning of period
4,843

 
1,403

Cash and cash equivalents at end of period
$
2,378

 
$
1,287

Supplemental Cash Flow Information
 

 
 

Cash paid for:
 

 
 

Income taxes
$
1,021

 
$
357

Interest
652

 
250

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

4

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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


5

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 3Acquisitions and Acquisition-Related Items
The Company had various acquisitions and other acquisition-related activity during the first two quarters of fiscal years 2016 and 2015. Certain acquisitions were accounted for as business combinations as noted below. In accordance with authoritative guidance on business combination accounting, the assets and liabilities of the companies acquired were recorded and consolidated as of the acquisition date at their respective fair values. Unless otherwise disclosed, the pro forma impact of these acquisitions was not significant, either individually or in the aggregate, to the results of the Company for the three and six months ended October 30, 2015 or October 24, 2014. The results of operations related to each company acquired have been included in the Company's condensed consolidated statements of income since the date each company was acquired.
Acquisition of Covidien public limited company
On January 26, 2015 (Acquisition Date), pursuant to the transaction agreement, dated as of June 15, 2014 (the Transaction Agreement), the Company acquired Covidien plc (Covidien), and Covidien and Medtronic, Inc. became subsidiaries of Medtronic (collectively, the Transactions). In connection with the consummation of the Transactions, Medtronic re-registered as a public limited company organized under the laws of Ireland.
On January 26, 2015, (a) each Covidien ordinary share was converted into the right to receive $35.19 in cash and 0.956 of a newly issued Medtronic plc ordinary share (the Arrangement Consideration) in exchange for each Covidien share held by such shareholders, and (b) each share of Medtronic, Inc. common stock was converted into the right to receive one Medtronic plc ordinary share. Total consideration was approximately $50 billion, consisting of $16 billion cash and $34 billion of non-cash consideration. Based on the number of outstanding shares of Medtronic, Inc. and Covidien as of January 23, 2015 (the last business day prior to the close of the transaction), former Medtronic, Inc. and Covidien shareholders held approximately 69 percent and 31 percent, respectively, of the Company's ordinary shares after giving effect to the acquisition.
Covidien is a global leader in the development, manufacture, and sale of healthcare products for use in clinical and home settings. The operating results for Covidien are included in the Minimally Invasive Therapies Group, Cardiac and Vascular Group, and Restorative Therapies Group segments.
Fair Value of Assets Acquired and Liabilities Assumed
The Company accounted for the acquisition of Covidien as a business combination using the acquisition method of accounting. The assets acquired and liabilities assumed were recorded at their respective fair values as of the Acquisition Date. Based upon a preliminary acquisition valuation, the Company acquired $18.3 billion of customer-related intangible assets, $7.0 billion of technology-based intangible assets, $0.4 billion of tradenames, with weighted average estimated useful lives of 18, 16, and 6 years, respectively, $0.4 billion of in-process research and development (IPR&D), and $29.6 billion of goodwill.
During the six months ended October 30, 2015, the Company made opening balance sheet adjustments to update estimates primarily related to other current assets, intangible assets, goodwill, certain property values, other current liabilities, and the related deferred tax impacts. The largest opening balance sheet adjustment related to a $121 million receivable as a result of the settlement reached with C.R. Bard, Inc. (Bard) related to the Company's pelvic mesh litigation. For additional information on the Company's pelvic mesh litigation, see Note 16 to the condensed consolidated financial statements. The fair value of assets acquired and liabilities assumed continues to be evaluated. Management is still in the process of verifying and finalizing information related to the valuation and recording of long-lived assets, contingencies, tax accounts, and the resulting effects on the value of goodwill. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional opening balance sheet adjustments will be recorded. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations. The finalization of the opening balance sheet will result in a change in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company's results of operations and financial position.

6

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

 
$

 
$
1,349

Inventories
2,222

 
(1
)
 
2,221

Other current assets
2,949

 
185

 
3,134

Property, plant, and equipment
2,354

 
(21
)
 
2,333

Goodwill
29,586

 
22

 
29,608

Intangible assets
26,265

 
(71
)
 
26,194

Other assets
747

 
24

 
771

Total assets acquired
65,472

 
138

 
65,610

 
 
 
 
 
 
Short-term borrowings
1,011

 

 
1,011

Other current liabilities
2,331

 
87

 
2,418

Long-term debt
4,623

 

 
4,623

Long-term deferred tax liabilities
4,736

 
73

 
4,809

Other long-term liabilities
2,783

 
(22
)
 
2,761

Total liabilities assumed
15,484

 
138

 
15,622

Net assets acquired
$
49,988

 
$

 
$
49,988

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


7

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Fiscal Year 2016
The fair values of the assets acquired and liabilities assumed during the six months ended October 30, 2015 are as follows:
(in millions)
Twelve, Inc.
 
RF Surgical Systems, Inc.
 
Medina Medical
 
All Other
 
Total
Other current assets
$
60

 
$
43

 
$
11

 
$
33

 
$
147

Property, plant, and equipment

 
3

 

 
4

 
7

IPR&D
192

 

 
122

 
108

 
422

Other intangible assets

 
115

 

 
120

 
235

Goodwill
301

 
132

 
126

 
170

 
729

Other assets

 
2

 

 
6

 
8

Total assets acquired
553

 
295

 
259

 
441

 
1,548

 
 
 
 
 
 
 
 
 
 
Current liabilities
37

 
28

 
6

 
17

 
88

Long-term deferred tax liabilities, net
44

 
27

 
34

 
29

 
134

Other liabilities

 

 

 
2

 
2

Total liabilities assumed
81

 
55

 
40

 
48

 
224

Net assets acquired
$
472

 
$
240

 
$
219

 
$
393

 
$
1,324

Twelve, Inc.
On October 2, 2015, the Company's Coronary & Structural Heart division acquired Twelve, Inc. (Twelve), a privately-held medical device company focused on the development of a transcatheter mitral valve replacement device. Total consideration for the transaction was approximately $472 million, which included an upfront payment of $428 million and the estimated fair value of product development-based contingent consideration of $44 million. Based upon a preliminary acquisition valuation, the Company acquired $192 million of IPR&D and $301 million of goodwill. The acquired goodwill is not deductible for tax purposes.
RF Surgical Systems, Inc.
On August 11, 2015, the Company's Surgical Solutions division acquired RF Surgical Systems, Inc. (RF Surgical), a medical device company focused on the detection and prevention of retained surgical sponges. Total consideration for the transaction was approximately $240 million. Based upon a preliminary acquisition valuation, the Company acquired $68 million of technology-based intangible assets, $47 million of customer-related intangible assets, with estimated useful lives of 18 and 15 years, respectively, and $132 million of goodwill. The acquired goodwill is not deductible for tax purposes.
Medina Medical
On August 31, 2015, the Company's Neurovascular division acquired Medina Medical (Medina), a privately-held medical device company focused on commercializing treatments for vascular abnormalities of the brain, including cerebral aneurysms. Total consideration for the transaction was approximately $219 million, which includes an upfront payment of $155 million and the estimated fair value of revenue-based and product development-based contingent consideration of $64 million. Medtronic had previously invested in Medina and held an 11 percent ownership position. Net of this ownership position, the transaction value was approximately $195 million. Based upon a preliminary acquisition valuation, the Company acquired $122 million of IPR&D and $126 million of goodwill. The acquired goodwill is not deductible for tax purposes.
The Company accounted for the acquisitions of Twelve, RF Surgical, and Medina and all other acquisitions as business combinations using the acquisition method of accounting.
Acquisition-Related Items
During the three and six months ended October 30, 2015, the Company recorded acquisition-related items of $49 million and $120 million, respectively, primarily due to integration related costs incurred in connection with the Covidien acquisition, partially offset by income related to the change in fair value of contingent consideration associated with acquisitions subsequent to April 29, 2009.

8

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Fiscal Year 2015
The fair values of the assets acquired and liabilities assumed from acquisitions during fiscal year 2015, other than the Covidien acquisition, are as follows:
(in millions)
NGC Medical S.p.A.
 
Sapiens Steering Brain Stimulation
 
All Other
 
Total
Other current assets
$
55

 
$
3

 
$
12

 
$
70

Property, plant, and equipment
15

 
1

 
2

 
18

IPR&D

 
30

 
41

 
71

Other intangible assets
159

 

 
157

 
316

Goodwill
197

 
170

 
106

 
473

Other assets
3

 
3

 
49

 
55

Total assets acquired
429

 
207

 
367

 
1,003

 
 
 
 
 
 
 
 
Current liabilities
34

 
4

 
6

 
44

Long-term deferred tax liabilities, net
51

 

 
66

 
117

Other liabilities
4

 

 

 
4

Total liabilities assumed
89

 
4

 
72

 
165

Net assets acquired
$
340

 
$
203

 
$
295

 
$
838

The Company accounted for the acquisitions above as business combinations using the acquisition method of accounting.
Other Acquisitions and Acquisition-Related Items
During the three and six months ended October 24, 2014, the Company recorded acquisition-related items of $61 million and $102 million, respectively, primarily due to costs incurred in connection with the Covidien acquisition.
Contingent Consideration
Certain of the Company’s business combinations and purchases of intellectual property involve the potential for the payment of future contingent consideration upon the achievement of certain product development milestones and/or various other favorable operating conditions. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels or achieving product development targets. For business combinations subsequent to April 24, 2009, a liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. For business combinations or purchases of intellectual property prior to April 24, 2009, the estimated maximum amount of undiscounted future contingent consideration payments that the Company expected to make was approximately $191 million at October 30, 2015. The Company estimates the milestones or other conditions associated with the contingent consideration will be reached in fiscal year 2016 and thereafter.
The fair value of the contingent consideration is remeasured at each reporting period and the change in fair value recognized as income or expense within acquisition-related items in the condensed consolidated statements of income. The Company measures the liability on a recurring basis using Level 3 inputs. The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues (for revenue-based considerations). Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected revenues are based on the Company’s most recent internal operational budgets and long-range strategic plans. Increases (decreases) in projected revenues, probabilities of payment, discount rates, or projected payment dates may result in a higher (lower) fair value measurement. Fluctuations in any of the inputs may result in a significantly lower (higher) fair value measurement.

9

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The recurring Level 3 fair value measurements of contingent consideration include the following significant unobservable inputs:
 
 
Fair Value at
 
 
 
 
 
 
($ in millions)
 
October 30, 2015
 
Valuation Technique
 
Unobservable Input
 
Range
 
 
 
 
 
 
Discount rate
 
11% - 27.2%
Revenue-based payments
 
$203
 
Discounted cash flow
 
Probability of payment
 
30% - 100%
 
 
 
 
 
 
Projected fiscal year of payment
 
2016 - 2025
 
 
 
 
 
 
Discount rate
 
0.6% - 5.5%
Product development-based payments
 
$165
 
Discounted cash flow
 
Probability of payment
 
15% - 100%
 
 
 
 
 
 
Projected fiscal year of payment
 
2016 - 2020
The fair value of contingent consideration associated with acquisitions subsequent to April 24, 2009, as of October 30, 2015 and April 24, 2015, was $368 million and $264 million, respectively. As of October 30, 2015, $313 million was reflected in other long-term liabilities and $55 million was reflected in other accrued expenses in the condensed consolidated balance sheets. As of April 24, 2015, $242 million was reflected in other long-term liabilities and $22 million was reflected in other accrued expenses in the condensed consolidated balance sheets. The portion of the contingent consideration paid related to the acquisition date fair value is reported as financing activities in the condensed consolidated statements of cash flows. Amounts paid in excess of the original acquisition date fair value are reported as operating activities in the condensed consolidated statements of cash flows. The following table provides a reconciliation of the beginning and ending balances of contingent consideration associated with acquisitions subsequent to April 24, 2009:
 
Three months ended
 
Six months ended
(in millions)
October 30, 2015
 
October 24, 2014
 
October 30, 2015
 
October 24, 2014
Beginning Balance
$
291

 
$
87

 
$
264

 
$
68

Purchase price contingent consideration
109

 

 
135

 
23

Contingent consideration payments
(17
)
 

 
(20
)
 
(5
)
Change in fair value of contingent consideration
(15
)
 
4

 
(11
)
 
5

Ending Balance
$
368

 
$
91

 
$
368

 
$
91

Note 4Special Charges and Certain Litigation Charges
Special Charges
During the three and six months ended October 30, 2015, there were no special charges.
During the three and six months ended October 24, 2014, continuing the Company's commitment to improving the health of people and communities throughout the world, the Company made a $100 million charitable cash contribution to meet the multi-year funding needs of the Medtronic Foundation, a related party non-profit organization.
Certain Litigation Charges
The Company classifies material litigation reserves and gains recognized as certain litigation charges. During the three and six months ended October 30, 2015, we recorded certain litigation charges of $26 million, which relates to probable and reasonably estimable INFUSE product liability litigation.
During the three and six months ended October 24, 2014, there were no certain litigation charges.
Note 5Restructuring Charges, Net
Cost Synergies Initiative
The cost synergies initiative, initially referred to as the fiscal year 2015 initiative, was the beginning of the Company's restructuring program primarily related to the acquisition of Covidien. This initiative is expected to contribute to the approximately $850 million in cost synergies expected to be achieved as a result of the Covidien acquisition through fiscal year 2018, including administrative office optimization, manufacturing and supply chain infrastructure, certain program cancellations, and certain general and administrative savings. Restructuring charges are expected to be incurred on a quarterly basis throughout fiscal year 2016 and in future fiscal years as cost synergy initiatives are finalized.

10

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In the second quarter of fiscal year 2016, the Company recorded an $86 million restructuring charge in connection with the cost synergies initiative, which consisted primarily of employee termination costs of $64 million, asset write-downs of $10 million, and other related costs of $12 million. In the fourth quarter of fiscal year 2015, the Company recorded a $248 million restructuring charge, which consisted of employee termination costs of $213 million, asset write-downs of $28 million, contract termination costs of $6 million, and other related costs of $1 million. Of the $28 million of asset write-downs, $15 million related to inventory write-offs of discontinued product lines and production-related asset impairments, and therefore, was recorded within cost of products sold in the consolidated statements of income. In the first quarter of fiscal year 2016, the Company recorded a $67 million restructuring charge in connection with the cost synergies initiative, which consisted primarily of employee termination costs of $52 million and other related costs of $15 million. Restructuring accruals resulting from quarterly restructuring charges incurred within the cost synergies initiative are scheduled to be substantially complete within one year from the quarter the restructuring charge was initially incurred.
As a result of certain employees identified for elimination finding other positions within the Company and revisions to particular strategies, the Company recorded a $13 million reversal of excess restructuring reserves in the second quarter of fiscal year 2016.
As part of the cost synergies initiative, the Company recorded a $10 million impairment of property, plant, and equipment during the three and six months ended October 30, 2015. The Company did not record any significant impairments of property, plant, and equipment during the three months ended October 24, 2014. As part of the Company’s restructuring initiatives, the Company recorded property, plant, and equipment impairments of $9 million during the six months ended October 24, 2014.
A summary of the activity related to the cost synergies initiative is presented below:
(in millions)
Employee
Termination
Costs
 
Asset Write-downs
 
Other Costs
 
Total
Balance as of April 24, 2015
$
136

 
$

 
$
7

 
$
143

Restructuring charges
52

 

 
15

 
67

Payments/write-downs
(76
)
 

 
(7
)
 
(83
)
Balance as of July 31, 2015
$
112

 
$

 
$
15

 
$
127

Restructuring charges
64

 
10

 
12

 
86

Payments/write-downs
(28
)
 
(10
)
 
(6
)
 
(44
)
Reversal of excess accrual
(13
)
 

 

 
(13
)
Balance as of October 30, 2015
$
135

 
$

 
$
21

 
$
156

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

 
$
17

 
$
78

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

 
$
12

 
$
60

Payments
(8
)
 
(6
)
 
(14
)
Balance as of October 30, 2015
$
40

 
$
6

 
$
46


11

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 6Financial Instruments
The Company holds investments consisting primarily of marketable debt and equity securities. The authoritative guidance is principally applied to financial assets and liabilities such as marketable equity securities and debt and equity securities that are classified and accounted for as trading and available-for-sale and are measured on a recurring basis. Further, we also hold cost or equity method investments which are measured at fair value on a nonrecurring basis.
The following table summarizes the Company's investments by significant investment categories and the related condensed consolidated balance sheets presentation at October 30, 2015:
 
Valuation
 
Balance Sheet Classification
(in millions)
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Investments
 
Other Assets
Available-for-sale securities
 

 
 

 
 

 
 

 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
1,696

 
$
7

 
$
(4
)
 
$
1,699

 
$
1,699

 
$

Marketable equity securities
79

 
23

 
(3
)
 
99

 

 
99

Total Level 1
1,775

 
30

 
(7
)
 
1,798

 
1,699

 
99

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
6,618

 
50

 
(56
)
 
6,612

 
6,612

 

U.S. government and agency securities
1,537

 
3

 
(3
)
 
1,537

 
1,537

 

Mortgage-backed securities
1,466

 
14

 
(14
)
 
1,466

 
1,466

 

Foreign government and agency securities
65

 

 

 
65

 
65

 

Certificates of deposit
47

 

 

 
47

 
47

 

Other asset-backed securities
510

 
2

 

 
512

 
512

 

Debt funds
3,148

 
6

 
(322
)
 
2,832

 
2,832

 

Total Level 2
13,391

 
75

 
(395
)
 
13,071

 
13,071

 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
1

 

 

 
1

 

 
1

Auction rate securities
109

 

 
(7
)
 
102

 

 
102

Total Level 3
110

 

 
(7
)
 
103

 

 
103

Total available-for-sale securities
15,276

 
105

 
(409
)
 
14,972

 
14,770

 
202

Trading securities:
 

 
 

 
 

 
 

 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
Exchange-traded funds
65

 
16

 

 
81

 
81

 

Total Level 1:
65

 
16

 

 
81

 
81

 

Total trading securities
65

 
16

 

 
81

 
81

 

Cost method, equity method, and other investments:
 
 
 
 
 
 
 
 
 
 
 
Level 3:
 
 
 
 
 
 
 
 
 
 
 
Cost method, equity method, and other investments
484

 

 

 
N/A

 

 
484

Total Level 3:
484

 

 

 
N/A

 

 
484

Total cost method, equity method, and other investments
484

 

 

 
N/A

 

 
484

Total investments
$
15,825

 
$
121

 
$
(409
)
 
$
15,053

 
$
14,851

 
$
686


12

MEDTRONIC PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table summarizes the Company's investments by significant investment categories and the related condensed consolidated balance sheets presentation at April 24, 2015:
 
Valuation
 
Balance Sheet Classification
(in millions)
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Investments
 
Other Assets
Available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
1,525

 
$
17

 
$
(1
)
 
$
1,541

 
$
1,541

 
$

Marketable equity securities
64

 
35

 
(19
)
 
80

 

 
80

Total Level 1
1,589

 
52

 
(20
)
 
1,621

 
1,541

 
80

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
6,282

 
105

 
(10
)
 
6,377

 
6,377

 

U.S. government and agency securities
1,597

 
4

 
(3
)
 
1,598

 
1,598

 

Mortgage-backed securities
1,462

 
22

 
(6
)
 
1,478

 
1,478

 

Foreign government and agency securities
85

 

 

 
85

 
85

 

Certificates of deposit
44

 

 

 
44

 
44

 

Other asset-backed securities
504

 
3

 

 
507

 
507

 

Debt funds
3,061

 
19

 
(150
)
 
2,930

 
2,930

 

Total Level 2
13,035

 
153

 
(169
)
 
13,019

 
13,019

 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
1

 

 

 
1

 

 
1

Auction rate securities
109

 

 
(4
)
 
105

 

 
105

Total Level 3
110

 

 
(4
)
 
106

 

 
106

Total available-for-sale securities
14,734

 
205

 
(193
)
 
14,746

 
14,560

 
186

Trading securities:
 

 
 

 
 

 
 

 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
Exchange-traded funds
58

 
19

 

 
77

 
77

 

Total Level 1
58

 
19

 

 
77

 
77

 

Total trading securities
58

 
19

 

 
77

 
77

 

Cost method, equity method, and other investments:
 
 
 
 
 
 
 
 
 
 
 
Level 3:
 
 
 
 
 
 
 
 
 
 
 
Cost method, equity method, and other investments
520

 

 

 
N/A

 

 
520

Total Level 3
520

 

 

 
N/A

 

 
520

Total cost method, equity method, and other investments
520

 

 

 
N/A