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Medtronic 10-Q 2016
Document


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 2016
Commission File Number 001-36820
mdtlogo2a10.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”, 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 1, 2016, 1,373,047,310 ordinary shares, par value $0.0001, and 1,872 A preferred shares, par value $1.00, of the registrant were outstanding.
 
 





TABLE OF CONTENTS




PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Medtronic plc
Consolidated Statements of Income
(Unaudited)
 
Three months ended
 
Six months ended
(in millions, except per share data)
October 28, 2016
 
October 30, 2015
 
October 28, 2016
 
October 30, 2015
Net sales
$
7,345

 
$
7,058

 
$
14,511

 
$
14,332

 
 
 
 
 
 
 
 
Costs and expenses:
 

 
 

 
 

 
 

Cost of products sold
2,326

 
2,182

 
4,587

 
4,638

Research and development expense
554

 
545

 
1,110

 
1,103

Selling, general, and administrative expense
2,416

 
2,343

 
4,844

 
4,792

Restructuring charges, net
47

 
73

 
141

 
140

Certain litigation charges

 
26

 
82

 
26

Acquisition-related items
28

 
49

 
80

 
120

Amortization of intangible assets
500

 
483

 
987

 
964

Other expense, net
89

 
57

 
128

 
118

Operating profit
1,385

 
1,300

 
2,552

 
2,431

 
 
 
 
 
 
 
 
Interest income
(91
)
 
(107
)
 
(184
)
 
(222
)
Interest expense
264

 
324

 
536

 
630

Interest expense, net
173

 
217

 
352

 
408

Income from operations before income taxes
1,212

 
1,083

 
2,200

 
2,023

Provision for income taxes
101

 
563

 
160

 
683

Net income
1,111

 
520

 
2,040

 
1,340

Net loss attributable to noncontrolling interests
(4
)
 

 
(4
)
 

Net income attributable to Medtronic
$
1,115

 
$
520

 
$
2,044

 
$
1,340

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.81

 
$
0.37

 
$
1.47

 
$
0.95

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.80

 
$
0.36

 
$
1.46

 
$
0.94

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
1,380.0

 
1,412.9

 
1,386.5

 
1,415.6

 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding
1,392.5

 
1,428.8

 
1,400.2

 
1,432.7

 
 
 
 
 
 
 
 
Cash dividends declared per ordinary share
$
0.43

 
$
0.38

 
$
0.86

 
$
0.76

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

1



Medtronic plc
Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three months ended
 
Six months ended
(in millions)
October 28, 2016
 
October 30, 2015
 
October 28, 2016
 
October 30, 2015
Net income
$
1,111

 
$
520

 
$
2,040

 
$
1,340

 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax:
 

 
 

 
 
 
 
Unrealized (loss) gain on available-for-sale securities, net of tax (benefit) expense of $(15), $(41), $37, and $(115) respectively
(40
)
 
(76
)
 
75

 
(207
)
Currency adjustment, net
(336
)
 
(33
)
 
(686
)
 
(59
)
Net change in retirement obligations, net of tax expense of $8, $10, $10, and $20, respectively
19

 
22

 
44

 
35

Unrealized gain (loss) on derivatives, net of tax expense (benefit) of $28, $(13), $58 and $(33), respectively
53

 
(28
)
 
107

 
(56
)
 
 
 
 
 
 
 
 
Other comprehensive loss
(304
)
 
(115
)
 
(460
)
 
(287
)
 
 
 
 
 
 
 
 
Comprehensive income including noncontrolling interests
807

 
405

 
1,580

 
1,053

Comprehensive loss attributable to noncontrolling interests
(4
)
 

 
(4
)
 

Comprehensive income attributable to Medtronic
$
811

 
$
405

 
$
1,584

 
$
1,053

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

2



Medtronic plc
Consolidated Balance Sheets
(Unaudited)
(in millions)
October 28, 2016
 
April 29, 2016
ASSETS
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
2,954

 
$
2,876

Investments
8,303

 
9,758

Accounts receivable, less allowances of $162 and $161, respectively
5,661

 
5,562

Inventories
3,717

 
3,473

Other current assets
1,891

 
1,931

Total current assets
22,526

 
23,600

 
 
 
 
Property, plant, and equipment
10,200

 
9,714

Accumulated depreciation
(5,309
)
 
(4,873
)
Property, plant, and equipment, net
4,891

 
4,841

Goodwill
41,707

 
41,500

Other intangible assets, net
26,739

 
26,899

Tax assets
1,250

 
1,383

Other assets
1,293

 
1,421

Total assets
$
98,406

 
$
99,644

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Current debt obligations
$
3,367

 
$
993

Accounts payable
1,659

 
1,709

Accrued compensation
1,477

 
1,712

Other accrued expenses
3,098

 
2,751

Total current liabilities
9,601

 
7,165

 
 
 
 
Long-term debt
29,010

 
30,109

Accrued compensation and retirement benefits
1,768

 
1,759

Accrued income taxes
2,381

 
2,903

Deferred tax liabilities
3,754

 
3,729

Other liabilities
1,599

 
1,916

Total liabilities
48,113

 
47,581

 
 
 
 
Commitments and contingencies (Notes 3 and 15)

 

 
 
 
 
Shareholders’ equity:
 

 
 

Ordinary shares— par value $0.0001

 

Retained earnings
52,514

 
53,931

Accumulated other comprehensive loss
(2,328
)
 
(1,868
)
Total shareholders’ equity
50,186

 
52,063

Noncontrolling interests
107

 

Total equity
50,293

 
52,063

Total liabilities and equity
$
98,406

 
$
99,644

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

3



Medtronic plc
Consolidated Statements of Cash Flows
(Unaudited)
 
Six months ended
(in millions)
October 28, 2016
 
October 30, 2015
Operating Activities:
 

 
 

Net income
$
2,040

 
$
1,340

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

 
 

Depreciation and amortization
1,469

 
1,397

Amortization of debt discount and issuance costs
14

 
15

Acquisition-related items
(47
)
 
222

Provision for doubtful accounts
18

 
30

Deferred income taxes
(50
)
 
(274
)
Stock-based compensation
190

 
209

Other, net
(105
)
 
(85
)
Change in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable, net
(89
)
 
(1
)
Inventories
(187
)
 
(326
)
Accounts payable and accrued liabilities
(271
)
 
(369
)
Other operating assets and liabilities
75

 
73

Certain litigation charges
82

 
26

Certain litigation payments
(117
)
 
(162
)
Net cash provided by operating activities
3,022

 
2,095

Investing Activities:
 

 
 

Acquisitions, net of cash acquired
(1,306
)
 
(997
)
Additions to property, plant, and equipment
(598
)
 
(446
)
Purchases of investments
(2,110
)
 
(3,370
)
Sales and maturities of investments
3,625

 
2,752

Other investing activities, net
32

 
(13
)
Net cash used in investing activities
(357
)
 
(2,074
)
Financing Activities:
 

 
 

Acquisition-related contingent consideration
(36
)
 
(19
)
Change in current debt obligations, net
1,154

 
1,277

Proceeds from short-term borrowings (maturities greater than 90 days)
4

 
48

Issuance of long-term debt
131

 

Payments on long-term debt
(252
)
 
(1,608
)
Dividends to shareholders
(1,192
)
 
(1,075
)
Issuance of ordinary shares
260

 
263

Repurchase of ordinary shares
(2,794
)
 
(1,460
)
Other financing activities
74

 
49

Net cash used in financing activities
(2,651
)
 
(2,525
)
Effect of exchange rate changes on cash and cash equivalents
64

 
39

Net change in cash and cash equivalents
78

 
(2,465
)
Cash and cash equivalents at beginning of period
2,876

 
4,843

Cash and cash equivalents at end of period
$
2,954

 
$
2,378

Supplemental Cash Flow Information
 

 
 

Cash paid for:
 

 
 

Income taxes
$
258

 
$
1,021

Interest
559

 
652

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

4

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)



1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.) (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, comprehensive income, financial condition, and cash flows in conformity with U.S. GAAP. In the opinion of management, the consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results of Medtronic plc and its subsidiaries (Medtronic plc, Medtronic or the Company) for the periods presented. Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.
Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 29, 2016.
The accompanying unaudited consolidated financial statements include the accounts of Medtronic plc, its wholly-owned subsidiaries, entities for which the Company has a controlling financial interest, and variable interest entities for which the Company is the primary beneficiary. Intercompany transactions and balances have been fully eliminated in consolidation.
The Company’s fiscal years 2017, 2016, and 2015 will end or ended on April 28, 2017, April 29, 2016, and April 24, 2015, respectively.
2. New Accounting Pronouncements
Recently Adopted
In April 2015, the Financial Accounting Standards Board (FASB) issued accounting guidance that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the related debt liability. Prior to this amendment, debt issuance costs were recognized as an asset in the balance sheet and did not offset the related debt liability. The Company retrospectively adopted this guidance in the first quarter of fiscal year 2017. Its adoption resulted in a reduction of assets and an increase in liabilities of $138 million on the Company's consolidated balance sheet at April 29, 2016 as previously filed in the 2016 Annual Report on Form 10-K.
Not Yet Adopted
In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue in an amount that reflects the consideration to which an entity expects to be entitled in exchange for the transfer of goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2019 using one of two prescribed retrospective methods. The Company is evaluating the impact of the amended revenue recognition guidance on the Company’s consolidated financial statements.
In January 2016, the FASB issued guidance which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The guidance also includes a simplified impairment assessment of equity investments without readily determinable fair values and presentation and disclosure changes. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2019. The Company is evaluating the impact of the equity investment guidance on the Company's consolidated financial statements.
In February 2016, the FASB issued guidance which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is evaluating the impact of the lease guidance on the Company's consolidated financial statements.

5

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


In March 2016, the FASB issued guidance to simplify the accounting for share-based payment transactions by requiring all excess tax benefits and deficiencies to be recognized in income tax expense or benefit in earnings; eliminating the requirement to classify the excess tax benefit and deficiencies as additional paid-in capital. For the three and six months ended October 28, 2016, the Company recognized $18 million and $75 million, respectively, of excess tax benefits in additional paid-in capital. Under the new guidance, an entity makes an accounting policy election to either estimate the expected forfeiture awards or account for forfeitures as they occur. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2018.
In October 2016, the FASB issued guidance that requires the tax effect of inter-entity transactions, other than sales of inventory, to be recognized when the transaction occurs. This would eliminate the exception under the current guidance in which the tax effects of inter-entity asset transactions are deferred until the transferred asset is sold to a third party or otherwise recovered through use. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2019. The Company is evaluating the impact of the inter-entity transaction guidance on the Company's consolidated financial statements.
3. Acquisitions and Acquisition-Related Items
The Company had various acquisitions during the first two quarters of fiscal year 2017. Certain acquisitions were accounted for as business combinations as noted below. In accordance with authoritative guidance on business combination accounting, the assets and liabilities of the businesses acquired were recorded and consolidated on the acquisition date at their respective fair values. Unless otherwise noted, 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 28, 2016 and October 30, 2015. The results of operations related to each business acquired have been included in the Company's consolidated statements of income since the date each business was acquired.
The preliminary fair values of the assets acquired and liabilities assumed during the six months ended October 28, 2016 were as follows:
(in millions)
HeartWare International, Inc.
 
Smith & Nephew's Gynecology Business
 
All Other
 
Total
Other current assets
$
351

 
$

 
$
17

 
$
368

Property, plant, and equipment
13

 
3

 
5

 
21

Other intangible assets
625

 
167

 
65

 
857

Goodwill
479

 
180

 
113

 
772

Other assets
55

 

 
15

 
70

Total assets acquired
1,523

 
350

 
215

 
2,088

 
 
 
 
 
 
 
 
Current liabilities
144

 

 
9

 
153

Deferred tax liabilities
60

 

 
6

 
66

Long-term debt
245

 

 

 
245

Other liabilities
2

 

 
4

 
6

Total liabilities assumed
451

 

 
19

 
470

Net assets acquired
$
1,072

 
$
350

 
$
196

 
$
1,618

HeartWare International, Inc.

On August 23, 2016, the Company's Cardiac and Vascular Group acquired HeartWare International, Inc. (HeartWare), a medical device company that develops and manufactures miniaturized implantable heart pumps, or ventricular assist devices, to treat patients around the world suffering from advanced heart failure. Total consideration for the transaction was approximately $1.1 billion. Based upon a preliminary acquisition valuation, the Company acquired $602 million of technology-based and customer-related intangible assets and $23 million of tradenames, with estimated useful lives of 15 and 5 years, respectively, and $479 million of goodwill. The acquired goodwill is not deductible for tax purposes. In addition, we acquired $245 million of debt through the acquisition, of which we redeemed $203 million as part of a cash tender offer in August 2016. The remaining $42 million of debt acquired is due December 2017 and is recorded within long term debt on the consolidated balance sheets.


6

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Smith & Nephew's Gynecology Business

On August 5, 2016, the Company's Minimally Invasive Therapies Group acquired Smith & Nephew's gynecology business, which expands and strengthens Medtronic's minimally invasive surgical offerings and further complements its existing global gynecology business. Total consideration for the transaction was approximately $350 million, which primarily related to an upfront payment. Based upon a preliminary acquisition valuation, the Company acquired $167 million of other intangible assets, which primarily consisted of customer-related and technology related intangible assets with useful lives of 13 years, and $180 million of goodwill. The acquired goodwill is deductible for tax purposes.
The Company accounted for the acquisitions above as business combinations using the acquisition method of accounting.
For information on the Company's fiscal year 2016 acquisitions, refer to Note 2 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 29, 2016.
Acquisition-Related Items
During the three and six months ended October 28, 2016, the Company recognized acquisition-related items expense of $28 million and $80 million, primarily due to integration-related costs incurred in connection with the Covidien acquisition and acquisition-related costs incurred in connection with the HeartWare acquisition, partially offset by the change in fair value of contingent consideration as a result of revised revenue forecasts and anticipated regulatory milestones.
During the three and six months ended October 30, 2015, the Company recognized acquisition-related items expense 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 24, 2009.
Contingent Consideration

Certain of the Company’s business combinations involve the potential for the payment of future consideration upon the achievement of certain product development milestones and/or various other favorable operating conditions. Payment of the additional consideration is generally contingent on the acquired business reaching certain performance milestones, including attaining specified revenue levels or achieving product development targets. For business combinations subsequent to April 24, 2009, a liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period using Level 3 inputs, and the change in fair value recognized as income or expense within acquisition-related items in the consolidated statements of income.
The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues (for revenue-based considerations). Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected revenues are based on the Company’s most recent internal operational budgets and long-range strategic plans. Changes in projected revenues, probabilities of payment, discount rates, and projected payment dates may result in adjustments to the fair value measurement. The recurring Level 3 fair value measurements of contingent consideration include the following significant unobservable inputs:
 
 
Fair Value at
 
 
 
 
 
 
(in millions)
 
October 28, 2016
 
Valuation Technique
 
Unobservable Input
 
Range
 
 
 
 
 
 
Discount rate
 
11% - 32.5%
Revenue-based payments
 
$125
 
Discounted cash flow
 
Probability of payment
 
30% - 100%
 
 
 
 
 
 
Projected fiscal year of payment
 
2017 - 2025
 
 
 
 
 
 
Discount rate
 
0.3% - 5.5%
Product development-based payments
 
$160
 
Discounted cash flow
 
Probability of payment
 
0% - 100%
 
 
 
 
 
 
Projected fiscal year of payment
 
2017 - 2025
At October 28, 2016, there were no future contingent consideration payments that the Company expects to make associated with all completed business combinations or purchases of intellectual property prior to April 24, 2009.

7

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The fair value of contingent consideration associated with acquisitions subsequent to April 24, 2009, at October 28, 2016 and April 29, 2016, was $285 million and $377 million, respectively. At October 28, 2016, $246 million was reflected in other liabilities and $39 million was reflected in other accrued expenses in the consolidated balance sheet. At April 29, 2016, $311 million was reflected in other liabilities and $66 million was reflected in other accrued expenses in the consolidated balance sheet. The portion of the contingent consideration paid related to the acquisition date fair value is reported as financing activities in the consolidated statements of cash flows. Amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.
The following table provides a reconciliation of the beginning and ending balances of contingent consideration:
 
Three months ended
 
Six months ended
(in millions)
October 28, 2016
 
October 30, 2015
 
October 28, 2016
 
October 30, 2015
Beginning Balance
$
379

 
$
291

 
$
377

 
$
264

Purchase price contingent consideration
11

 
109

 
32

 
135

Payments
(25
)
 
(17
)
 
(39
)
 
(20
)
Change in fair value
(80
)
 
(15
)
 
(85
)
 
(11
)
Ending Balance
$
285

 
$
368

 
$
285

 
$
368

4. Restructuring Charges, Net
Cost Synergies Initiative
The cost synergies initiative is the Company's restructuring program primarily related to the integration of Covidien. This initiative is expected to contribute to the approximately $850 million in cost synergies expected to be achieved as a result of the integration of the Covidien acquisition through fiscal year 2018, including administrative office optimization, manufacturing and supply chain infrastructure, certain program cancellations, and reduction of general and administrative redundancies. Restructuring charges are expected to be incurred on a quarterly basis throughout fiscal year 2017 and in future fiscal years as cost synergy strategies are finalized.

A summary of the restructuring accrual, recorded within other accrued expenses and other liabilities in the consolidated balance sheets, and related activity is presented below:
(in millions)
Employee
Termination
Costs
 
Asset Write-downs
 
Other Costs
 
Total
April 29, 2016
$
213

 
$

 
$
37

 
$
250

Restructuring charges
117

 
17

 
24

 
158

Payments/write-downs
(121
)
 
(17
)
 
(36
)
 
(174
)
Reversal of excess accrual
(8
)
 

 
1

 
(7
)
October 28, 2016
$
201

 
$

 
$
26

 
$
227

As part of the cost synergies initiative, for the three and six months ended October 28, 2016, the Company recognized $47 million and $158 million in restructuring charges, respectively. For the three and six months ended October 28, 2016, restructuring charges consisted primarily of employee termination costs. For the three months and six months ended October 28, 2016, asset write-downs included $3 million and $7 million, respectively, related to property, plant, and equipment impairments. For the six months ended October 28, 2016, asset write-downs also included $10 million related to inventory write-offs of discontinued product lines, which were recognized within cost of products sold in the consolidated statements of income. The Company did not record any reversal of excess restructuring reserves for the three months ended October 28, 2016. As a result of certain employees identified for termination finding other positions within the Company, the Company recognized a $7 million reversal of excess restructuring reserves for the six months ended October 28, 2016.
As part of the cost synergies initiative, for the three and six months ended October 30, 2015, the Company recognized $86 million and $153 million in restructuring charges, respectively. For the three and six months ended October 30, 2015, restructuring charges consisted primarily of employee termination costs. As a result of certain employees identified for termination finding other positions within the Company, the Company recognized a $13 million reversal of excess restructuring reserves for the three and six months ended October 30, 2015.

8

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


5. Financial Instruments
The Company holds investments consisting primarily of marketable debt and equity securities. The authoritative guidance is principally applied to financial assets and liabilities, such as marketable equity securities and debt and equity securities, that are classified and accounted for as trading and available-for-sale and are measured on a recurring basis. The Company also holds cost method, equity method, and other investments which are measured at fair value on a nonrecurring basis.
The following table summarizes the Company's investments by significant investment category and the related consolidated balance sheet classification at October 28, 2016:
 
Valuation
 
Balance Sheet Classification
(in millions)
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Investments
 
Other Assets
Available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
587

 
$
10

 
$
(1
)
 
$
596

 
$
596

 
$

Marketable equity securities
59

 
29

 
(3
)
 
85

 

 
85

Total Level 1
646

 
39

 
(4
)
 
681

 
596

 
85

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
4,109

 
93

 
(15
)
 
4,187

 
4,187

 

U.S. government and agency securities
887

 

 
(1
)
 
886

 
886

 

Mortgage-backed securities
817

 
17

 
(14
)
 
820

 
820

 

Foreign government and agency securities
50

 

 

 
50

 
50

 

Other asset-backed securities
215

 
2

 
(1
)
 
216

 
216

 

Debt funds
1,743

 

 
(195
)
 
1,548

 
1,548

 

Total Level 2
7,821

 
112

 
(226
)
 
7,707

 
7,707

 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
1

 

 

 
1

 

 
1

Auction rate securities
47

 

 
(3
)
 
44

 

 
44

Total Level 3
48

 

 
(3
)
 
45

 

 
45

Total available-for-sale securities
$
8,515

 
$
151

 
$
(233
)
 
$
8,433

 
$
8,303

 
$
130

Cost method, equity method, and other investments:
 
 
 
 
 
 
 
 
 
 
 
Level 3:
 
 
 
 
 
 
 
 
 
 
 
Cost method, equity method, and other investments
599

 

 

 
N/A

 

 
599

Total Level 3
599

 

 

 
N/A

 

 
599

Total cost method, equity method, and other investments
$
599

 
$

 
$

 
N/A

 
$

 
$
599

Total investments
$
9,114

 
$
151

 
$
(233
)
 
$
8,433

 
$
8,303

 
$
729


9

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following table summarizes the Company's investments by significant investment category and the related consolidated balance sheet classification at April 29, 2016:
 
Valuation
 
Balance Sheet Classification
(in millions)
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Investments
 
Other Assets
Available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
792

 
$
14

 
$
(1
)
 
$
805

 
$
805

 
$

Marketable equity securities
75

 
21

 
(11
)
 
85

 

 
85

Total Level 1
867

 
35

 
(12
)
 
890

 
805

 
85

Level 2:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
3,935

 
85

 
(24
)
 
3,996

 
3,996

 

U.S. government and agency securities
902

 
2

 

 
904

 
904

 

Mortgage-backed securities
1,016

 
17

 
(18
)
 
1,015

 
1,015

 

Other asset-backed securities
192

 
3

 

 
195

 
195

 

Debt funds
3,040

 
5

 
(281
)
 
2,764

 
2,764

 

Total Level 2
9,085

 
112

 
(323
)
 
8,874

 
8,874

 

Level 3:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
1

 

 

 
1

 

 
1

Auction rate securities
47

 

 
(3
)
 
44

 

 
44

Total Level 3
48

 

 
(3
)
 
45

 

 
45

Total available-for-sale securities
$
10,000

 
$
147

 
$
(338
)
 
$
9,809

 
$
9,679

 
$
130

Trading securities:
 

 
 

 
 

 
 

 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
Exchange-traded funds
65

 
15

 
(1
)
 
79

 
79

 

Total Level 1
65

 
15

 
(1
)
 
79

 
79

 

Total trading securities
$
65

 
$
15

 
$
(1
)
 
$
79

 
$
79

 
$

Cost method, equity method, and other investments:
 
 
 
 
 
 
 
 
 
 
 
Level 3:
 
 
 
 
 
 
 
 
 
 
 
Cost method, equity method, and other investments
506

 

 

 
N/A

 

 
506

Total Level 3
506

 

 

 
N/A

 

 
506

Total cost method, equity method, and other investments
$
506

 
$

 
$

 
N/A

 
$

 
$
506

Total investments
$
10,571

 
$
162

 
$
(339
)
 
$
9,888

 
$
9,758

 
$
636


10

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


Marketable Debt and Equity Securities
The following tables represent the gross unrealized losses and fair values of the Company’s available-for-sale securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category at October 28, 2016 and April 29, 2016:
 
October 28, 2016
 
Less than 12 months
 
More than 12 months
(in millions)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate debt securities
$
807

 
$
(9
)
 
$
190

 
$
(6
)
Auction rate securities

 

 
44

 
(3
)
Mortgage-backed securities
191

 
(4
)
 
127

 
(10
)
U.S. government and agency securities
386

 
(2
)
 

 

Debt funds
499

 
(8
)
 
1,049

 
(187
)
Asset-backed securities
48

 
(1
)
 

 

Marketable equity securities
1

 
(1
)
 
1

 
(2
)
Total
$
1,932

 
$
(25
)
 
$
1,411

 
$
(208
)
 
April 29, 2016
 
Less than 12 months
 
More than 12 months
(in millions)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate debt securities
$
756

 
$
(18
)
 
$
136

 
$
(6
)
Auction rate securities

 

 
44

 
(3
)
Mortgage-backed securities
196

 
(5
)
 
92

 
(5
)
U.S. government and agency securities
308

 
(4
)
 
67

 
(5
)
Debt funds
670

 
(26
)
 
1,601

 
(256
)
Marketable equity securities
45

 
(11
)
 

 

Total
$
1,975

 
$
(64
)
 
$
1,940

 
$
(275
)

The following table represents the range of the unobservable inputs utilized in the fair value measurement of the auction rate securities classified as Level 3 at October 28, 2016:

 
Valuation Technique
Unobservable Input
Range (Weighted Average)
Auction rate securities
Discounted cash flow
Years to principal recovery
2 yrs. - 12 yrs. (3 yrs.)
Illiquidity premium
6%
The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended October 28, 2016 and October 30, 2015. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement.

11

Medtronic plc
Notes to Consolidated Financial Statements
(Unaudited)


The following tables provide a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3):
Three months ended October 28, 2016
 

 
 

 
 

(in millions)
Total Level 3
Investments
 
Corporate debt
securities
 
Auction rate
securities
July 29, 2016
$
45

 
$
1

 
$
44

Total unrealized gains included in other comprehensive income

 

 

October 28, 2016
$
45

 
$
1

 
$
44

 
 
 
 
 
 
Three months ended October 30, 2015
 

 
 

 
 

(in millions)
Total Level 3
Investments
 
Corporate debt
securities
 
Auction rate
securities
July 31, 2015
$
103

 
$
1

 
$
102

Total unrealized gains included in other comprehensive income

 

 

October 30, 2015
$
103

 
$
1

 
$
102

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

 
$
1

 
$
44

Total unrealized losses included in other comprehensive income

 

 

October 28, 2016
$
45

 
$
1

 
$
44

 
 
 
 
 
 
Six months ended October 30, 2015
 

 
 

 
 

(in millions)
Total Level 3
Investments
 
Corporate Debt
Securities
 
Auction Rate
Securities
April 24, 2015
$
106

 
$
1

 
$
105

Total unrealized losses included in other comprehensive income
(3
)
 

 
(3
)
October 30, 2015
$
103

 
$
1

 
$
102

Activity related to the Company’s investment portfolio is as follows:
 
Three months ended
 
October 28, 2016
 
October 30, 2015
(in millions)
Debt (1)
 
Equity (2)
 
Debt (1)
 
Equity (2)
Proceeds from sales
$
2,444

 
$
76

 
$
1,481

 
$
5

Gross realized gains
57

 
25

 
4

 
20

Gross realized losses
(37
)
 

 
(7
)
 

Impairment losses recognized

 
(7
)
 

 
(19
)
 
 
 
 
 
 
 
 
 
Six months ended
 
October 28, 2016
 
October 30, 2015
(in millions)
Debt (1)
 
Equity (2)
 
Debt (1)
 
Equity (2)
Proceeds from sales
$
3,542

 
$