Edgar Filing: MEDTRONIC INC

MDT-2014Q2-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q



ý	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 25, 2013

Commission File Number 1-7707



MEDTRONIC, INC.
(Exact name of registrant as specified in its charter)

Minnesota	41-0793183
(State of incorporation)	(I.R.S. Employer Identification No.)

710 Medtronic Parkway

Minneapolis, Minnesota 55432

(Address of principal executive offices) (Zip Code)

(763) 514-4000

(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 ý 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 ý 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 ý

Shares of common stock, $.10 par value, outstanding on November 25, 2013: 998,350,244

TABLE OF CONTENTS



Item	Description	Page

	PART I
1.	Financial Statements	1
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
3.	Quantitative and Qualitative Disclosures About Market Risk	50
4.	Controls and Procedures	51
	PART II
1.	Legal Proceedings	52
2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
6.	Exhibits	52
	Signatures	53

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

MEDTRONIC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)



	Three months ended				Six months ended
	October 25, 2013		October 26, 2012		October 25, 2013			October 26, 2012
	(in millions, except per share data)
Net sales	$	4,194	$	4,095	$	8,277		$	8,103

Costs and expenses:
Cost of products sold	1,090		1,020		2,112			1,993
Research and development expense	372		387		732			772
Selling, general, and administrative expense	1,438		1,417		2,854			2,822
Special charges	—		—		40			—
Restructuring charges	—		—		18			—
Certain litigation charges, net	24		245		24			245
Acquisition-related items	—		6		(96		)	11
Amortization of intangible assets	88		79		174			159
Other expense, net	33		63		77			102
Interest expense, net	33		24		73			57
Total costs and expenses	3,078		3,241		6,008			6,161

Earnings before income taxes	1,116		854		2,269			1,942

Provision for income taxes	214		208		414			432

Net earnings	$	902	$	646	$	1,855		$	1,510

Basic earnings per share	$	0.90	$	0.63	$	1.85		$	1.47

Diluted earnings per share	$	0.89	$	0.63	$	1.83		$	1.46

Basic weighted average shares outstanding	998.9		1,019.4		1,004.5			1,024.4
Diluted weighted average shares outstanding	1,009.4		1,027.8		1,015.5			1,032.2

Cash dividends declared per common share	$	0.2800	$	0.2600	$	0.5600		$	0.5200

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

MEDTRONIC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended						Six months ended
	October 25, 2013			October 26, 2012			October 25, 2013			October 26, 2012
	(in millions)
Net earnings	$	902		$	646		$	1,855		$	1,510

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities, net of tax expense (benefit) of $17, $1, $(37), and $4, respectively	31			1			(64		)	7
Translation adjustment	56			89			51			(27		)
Net change in retirement obligations, net of tax expense (benefit) of $8, $6, $17, and $19, respectively	15			5			29			35
Unrealized loss on derivatives, net of tax expense (benefit) of $(53), $(36), $(52), and $(16), respectively	(93		)	(64		)	(91		)	(26		)

Other comprehensive income (loss)	9			31			(75		)	(11		)

Comprehensive income	$	911		$	677		$	1,780		$	1,499

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

MEDTRONIC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	October 25, 2013			April 26, 2013
	(in millions, except per share data)
ASSETS

Current assets:
Cash and cash equivalents	$	1,066		$	919
Investments	11,518			10,211
Accounts receivable, less allowance of $110 and $98, respectively	3,792			3,727
Inventories	1,825			1,712
Tax assets	602			539
Prepaid expenses and other current assets	680			744

Total current assets	19,483			17,852

Property, plant, and equipment	6,323			6,152
Accumulated depreciation	(3,875		)	(3,662		)

Property, plant, and equipment, net	2,448			2,490

Goodwill	10,464			10,329
Other intangible assets, net	2,608			2,673
Long-term tax assets	228			232
Other assets	1,237			1,324

Total assets	$	36,468		$	34,900

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Short-term borrowings	$	2,647		$	910
Accounts payable	620			681
Accrued compensation	773			1,011
Accrued income taxes	202			88
Deferred tax liabilities	16			16
Other accrued expenses	1,238			1,244

Total current liabilities	5,496			3,950

Long-term debt	9,637			9,741
Long-term accrued compensation and retirement benefits	794			752
Long-term accrued income taxes	1,211			1,168
Long-term deferred tax liabilities	355			340
Other long-term liabilities	231			278

Total liabilities	17,724			16,229

Commitments and contingencies (Notes 3 and 19)

Shareholders’ equity:
Preferred stock— par value $1.00	—			—
Common stock— par value $0.10	100			102
Retained earnings	19,211			19,061
Accumulated other comprehensive loss	(567		)	(492		)

Total shareholders’ equity	18,744			18,671

Total liabilities and shareholders’ equity	$	36,468		$	34,900

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

MEDTRONIC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six months ended
	October 25, 2013			October 26, 2012
	(in millions)
Operating Activities:
Net earnings	$	1,855		$	1,510

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	421			396
Amortization of debt discount and issuance costs	4			46
Acquisition-related items	(96		)	3
Provision for doubtful accounts	24			26
Deferred income taxes	(19		)	52
Stock-based compensation	75			85
Other, net	(12		)	—
Change in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net	(16		)	123
Inventories	(111		)	(71		)
Accounts payable and accrued liabilities	(540		)	(126		)
Other operating assets and liabilities	413			28
Certain litigation charges, net	24			245
Certain litigation payments	(3		)	(91		)

Net cash provided by operating activities	2,019			2,226

Investing Activities:
Acquisitions, net of cash acquired	(210		)	(23		)
Additions to property, plant, and equipment	(196		)	(211		)
Purchases of investments	(5,719		)	(6,642		)
Sales and maturities of investments	4,291			5,955
Other investing activities, net	(18		)	(6		)

Net cash used in investing activities	(1,852		)	(927		)

Financing Activities:
Acquisition-related contingent consideration	(1		)	(15		)
Change in short-term borrowings, net	1,546			(525		)
Repayment of short-term borrowings (maturities greater than 90 days)	(125		)	(650		)
Proceeds from short-term borrowings (maturities greater than 90 days)	310			1,950
Payments on long-term debt	(6		)	(8		)
Dividends to shareholders	(560		)	(533		)
Issuance of common stock	817			103
Repurchase of common stock	(2,053		)	(1,084		)
Other financing activities	13			—

Net cash used in financing activities	(59		)	(762		)

Effect of exchange rate changes on cash and cash equivalents	39			(25		)

Net change in cash and cash equivalents	147			512

Cash and cash equivalents at beginning of period	919			1,172

Cash and cash equivalents at end of period	$	1,066		$	1,684

Supplemental Cash Flow Information
Cash paid for:
Income taxes	$	225		$	364
Interest	197			164

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

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis 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 presentation of the results of Medtronic, Inc. and its subsidiaries (Medtronic or the Company) for the periods presented. 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 26, 2013.

In the first quarter of fiscal 2014, the Company revised the classification of certain outstanding checks previously classified as a reduction of cash and cash equivalents in the prior period condensed consolidated balance sheet to accounts payable and revised the prior period condensed consolidated statement of cash flows for the associated impact. These revisions are considered immaterial.

The Company’s fiscal years 2014, 2013, and 2012 will end or ended on April 25, 2014, April 26, 2013, and April 27, 2012, respectively.

Note 2 – New Accounting Pronouncements

Recently Adopted

In December 2011 and January 2013, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to disclosures on offsetting assets and liabilities on the balance sheet. This newly issued accounting standard requires an entity to disclose both gross and net information about instruments and transactions eligible for offset in the balance sheet as well as instruments and transactions executed under a master netting or similar arrangement and was issued to enable users of financial statements to understand the effects or potential effects of those arrangements on its financial position. The Company retrospectively adopted this accounting guidance in the first quarter of fiscal year 2014. The required disclosures are included in Note 9. Since the accounting guidance only requires disclosure, its adoption did not have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB updated the accounting guidance related to annual and interim indefinite-lived intangible asset impairment testing. The updated accounting guidance allows entities to first assess qualitative factors before performing a quantitative assessment of the fair value of indefinite-lived intangible assets. If it is determined on the basis of qualitative factors that the fair value of indefinite-lived intangible assets is more likely than not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. The Company adopted this accounting guidance in the first quarter of fiscal year 2014 and its adoption did not have a material impact on the Company’s consolidated financial statements. As indefinite-lived intangible assets are tested for impairment annually in the third quarter, the amended guidance will not be applied until the third quarter of fiscal year 2014.

In February 2013, the FASB expanded the disclosure requirements with respect to changes in accumulated other comprehensive income (AOCI). Under this new guidance, companies are required to disclose the amount of income (or loss) reclassified out of AOCI to each respective line item on the statements of earnings where net income is presented. The guidance allows companies to elect whether to disclose the reclassification either in the notes to the financial statements or parenthetically on the face of the financial statements. In the first quarter of fiscal year 2014, the Company prospectively adopted this guidance. The required disclosures are included in Note 18. Since the accounting guidance only impacts disclosure requirements, its adoption did not have a material impact on the Company’s consolidated financial statements.

Not Yet Adopted

In March 2013, the FASB issued amended guidance on a parent company's accounting for the cumulative translation adjustment (CTA) recorded in AOCI associated with a foreign entity. The amendment requires a parent to release into net income the CTA related to its investment in a foreign entity when it either sells a part or all of its investment in, or no longer

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2015, with early adoption permitted. Subsequent to adoption, this amended guidance would impact the Company's financial position and results of operations prospectively in the instance of an event or transaction described above.

In July 2013, the FASB issued amended guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented as a reduction of a deferred tax asset when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists, with certain exceptions. This accounting guidance is effective prospectively for the Company beginning in the first quarter of fiscal year 2015, with early adoption permitted. While the Company is currently evaluating the impact, its adoption is not expected to have a material impact on the Company’s consolidated financial statements.

Note 3 – Acquisitions and Acquisition-Related Items

The Company had various acquisitions and other acquisition-related activity during the first two quarters of fiscal years 2014 and 2013. 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 company acquired were recorded as of the acquisition date, at their respective fair values, and consolidated. The pro forma impact of these acquisitions was not significant, individually or in the aggregate, to the results of the Company for the three and six months ended October 25, 2013 or October 26, 2012. The results of operations related to each company acquired have been included in the Company's condensed consolidated statements of earnings since the date each company was acquired.

Three and six months ended October 25, 2013

Cardiocom, LLC

On August 7, 2013, the Company acquired Cardiocom, LLC (Cardiocom), a privately held developer and provider of integrated solutions for the management of chronic diseases such as heart failure, diabetes, and hypertension. Cardiocom's products and services include remote monitoring and patient-centered software to enable efficient care coordination and specialized telehealth nurse support. Total consideration for the transaction was approximately $193 million. Based upon the preliminary acquisition valuation, the Company acquired $61 million of customer-related intangible assets with an estimated useful life of 7 years at the time of acquisition and $123 million of goodwill. Acquired goodwill is deductible for tax purposes.

The Company accounted for the acquisition of Cardiocom as a business combination. The purchase price allocation is based on estimates of the fair value of the assets acquired and liabilities assumed. The preliminary purchase price has been allocated as follows:



(in millions)
Current assets	$	14
Property, plant, and equipment	7
Intangible assets	61
Goodwill	123
Total assets acquired	205

Current liabilities	12
Total liabilities assumed	12
Net assets acquired	$	193

Acquisition-Related Items

During the three months ended October 25, 2013, the Company's acquisition-related items were not significant. During the six months ended October 25, 2013, the Company recorded net income from acquisition-related items of $96 million primarily related to the reduction in the fair value of contingent consideration associated with the Ardian, Inc. (Ardian) acquisition. The Ardian contingent earn-out is based on annual revenue growth through fiscal year 2015, and the reduction in fair value is due to a continued slower commercial ramp in Europe and the extended U.S. regulatory process.

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the three and six months ended October 26, 2012, the Company recorded net charges from acquisition-related items of $6 million and $11 million, respectively, including income of $2 million and charges of $3 million, respectively, related to the change in fair value of contingent consideration associated with acquisitions subsequent to April 29, 2009. Additionally, during the three and six months ended October 26, 2012, the Company incurred transaction costs of $3 million in connection with the acquisition of China Kanghui Holdings (Kanghui) and $5 million of transaction costs related to the divestiture of the Physio-Control business.

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. The fair value of the contingent consideration liability 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 earnings. The Company measures the liability on a recurring basis using Level 3 inputs. See Note 7 for further information regarding fair value measurements.

The fair value of contingent consideration liabilities are 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 higher (lower) fair value measurements. Fluctuations in any of the inputs may result in a significantly lower (higher) fair value measurement.

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



($ in millions)	Fair Value at October 25, 2013	Valuation Technique	Unobservable Input	Range
			Discount rate	13% - 24%
Revenue-based payments	$41	Discounted cash flow	Probability of payment	100%
			Projected fiscal year of payment	2014 - 2019
			Discount rate	5.9%
Product development-based payments	$4	Discounted cash flow	Probability of payment	100%
			Projected fiscal year of payment	2017

At October 25, 2013, the estimated maximum amount of undiscounted future contingent consideration that the Company is expected to make associated with all completed business combinations or purchases of intellectual property prior to April 24, 2009 was approximately $199 million. The Company estimates the milestones or other conditions associated with the contingent consideration will be reached in fiscal year 2014 and thereafter.

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The fair value of contingent consideration associated with acquisitions subsequent to April 24, 2009 as of October 25, 2013 and April 26, 2013 was $45 million and $142 million, respectively. As of October 25, 2013, $36 million was reflected in other long-term liabilities and $9 million was reflected in other accrued expenses in the condensed consolidated balance sheets. As of April 26, 2013, $120 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 related to the acquisition date fair value has been reported as financing activities in the condensed consolidated statements of cash flows. Amounts paid in excess of the original acquisition date fair value have been 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 25, 2013		October 26, 2012			October 25, 2013			October 26, 2012
Beginning Balance	$	45	$	215		$	142		$	231
Purchase price contingent consideration	—		—			—			5
Contingent consideration payments	—		—			(1		)	(26		)
Change in fair value of contingent consideration	—		(2		)	(96		)	3
Ending Balance	$	45	$	213		$	45		$	213

Note 4 – Special Charges and Certain Litigation Charges, Net

Special Charges

During the six months ended October 25, 2013, consistent with the Company's commitment to improving the health of people and communities throughout the world, the Company made a $40 million charitable contribution to the Medtronic Foundation, which is a related party non-profit organization.

During the three months ended October 25, 2013 and the three and six months ended October 26, 2012, there were no special charges.

Certain Litigation Charges, Net

The Company classifies material litigation reserves and gains recognized as certain litigation charges, net.

During the three and six months ended October 25, 2013, the Company recorded certain litigation charges, net of $24 million, which includes $12 million related to patent litigation and $12 million related to Other Matters litigation described in Note 19.

During the three and six months ended October 26, 2012, the Company recorded certain litigation charges, net of $245 million related to probable and reasonably estimated damages resulting from patent litigation with Edwards Lifesciences, Inc. See Note 19 for further information.

Note 5 – Restructuring Charges

The fiscal year 2013 initiative was designed to scale back the Company's infrastructure in slower growing areas of the business, while continuing to invest in geographies, businesses, and products where faster growth is anticipated. A number of factors have contributed to ongoing challenging market dynamics, including increased pricing pressure, various governmental austerity measures, and the U.S. medical device excise tax. In the fourth quarter of fiscal year 2013, the Company recorded a $192 million restructuring charge, which consisted of employee termination costs of $150 million, asset write-downs of $13 million, contract termination costs of $18 million, and other related costs of $11 million. Of the $13 million of asset write-downs, $10 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 earnings. In the first quarter of fiscal year 2014, the Company recorded an $18 million restructuring charge, which was the final charge related to the fiscal year 2013 initiative and consisted primarily of contract termination costs of $14 million and other related costs of $4 million.The fiscal year 2013 initiative is scheduled to be substantially complete by the end of the fourth quarter of fiscal year 2014.

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A summary of the activity related to the fiscal year 2013 initiative is presented below:



(in millions)	Employee Termination Costs			Other Costs			Total
Balance as of April 26, 2013	$	147		$	23		$	170
Restructuring charges	—			18			18
Payments/write-downs	(41		)	(17		)	(58		)
Balance as of July 26, 2013	$	106		$	24		$	130
Payments/write-downs	(22		)	(16		)	(38		)
Balance as of October 25, 2013	$	84		$	8		$	92

Note 6 – Investments

The Company holds investments consisting primarily of marketable debt and equity securities. The carrying amount of cash and cash equivalents approximate fair value due to their short maturities.

Information regarding the Company’s investments at October 25, 2013 is as follows:



(in millions)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available-for-sale securities:
Corporate debt securities	$	4,984	$	48	$	(23	)	$	5,009
Auction rate securities	114		—		(9		)	105
Mortgage-backed securities	1,305		8		(8		)	1,305
U.S. government and agency securities	3,512		8		(38		)	3,482
Foreign government and agency securities	55		—		—			55
Certificates of deposit	6		—		—			6
Other asset-backed securities	597		2		(1		)	598
Debt funds	997		27		(7		)	1,017
Marketable equity securities	63		43		—			106
Trading securities:
Exchange-traded funds	50		10		—			60
Cost method, equity method, and other investments	629		—		—			NA
Total	$	12,312	$	146	$	(86	)	$	11,743

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Information regarding the Company’s investments at April 26, 2013 is as follows:



(in millions)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available-for-sale securities:
Corporate debt securities	$	4,587	$	78	$	(4	)	$	4,661
Auction rate securities	118		—		(15		)	103
Mortgage-backed securities	1,050		8		(5		)	1,053
U.S. government and agency securities	3,882		17		(1		)	3,898
Foreign government and agency securities	38		—		—			38
Certificates of deposit	6		—		—			6
Other asset-backed securities	539		2		—			541
Marketable equity securities	82		75		(2		)	155
Trading securities:
Exchange-traded funds	45		5		—			50
Cost method, equity method, and other investments	549		—		—			NA
Total	$	10,896	$	185	$	(27	)	$	10,505

Information regarding the Company’s condensed consolidated balance sheets presentation at October 25, 2013 and April 26, 2013 is as follows:



	October 25, 2013				April 26, 2013
(in millions)	Investments		Other Assets		Investments		Other Assets
Available-for-sale securities	$	11,458	$	225	$	10,161	$	294
Trading securities	60		—		50		—
Cost method, equity method, and other investments	—		629		—		549
Total	$	11,518	$	854	$	10,211	$	843

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables show the gross unrealized losses and fair value 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 as of October 25, 2013 and April 26, 2013:



	October 25, 2013
	Less than 12 months					More than 12 months
(in millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate debt securities	$	1,629	$	(20	)	$	14	$	(3	)
Auction rate securities	—		—			105		(9		)
Mortgage-backed securities	642		(7		)	31		(1		)
U.S. government and agency securities	1,326		(38		)	—		—
Other asset-backed securities	215		(1		)	—		—
Debt funds	158		(7		)	—		—
Total	$	3,970	$	(73	)	$	150	$	(13	)



	April 26, 2013
	Less than 12 months					More than 12 months
(in millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate debt securities	$	544	$	(1	)	$	13	$	(3	)
Auction rate securities	—		—			103		(15		)
Mortgage-backed securities	195		(1		)	44		(4		)
U.S. government and agency securities	291		(1		)	—		—
Marketable equity securities	14		(2		)	—		—
Total	$	1,044	$	(5	)	$	160	$	(22	)

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



	Three months ended
	October 25, 2013					October 26, 2012
(in millions)	Debt (a)			Equity (b)		Debt (a)			Equity (b)
Proceeds from sales	$	2,072		$	24	$	4,019		$	41
Gross realized gains	—			15		24			29
Gross realized losses	(1		)	—		(3		)	—
Impairment losses recognized	—			—		—			(4		)



	Six months ended
	October 25, 2013					October 26, 2012
(in millions)	Debt (a)			Equity (b)		Debt (a)			Equity (b)(c)
Proceeds from sales	$	4,235		$	56	$	5,890		$	65
Gross realized gains	6			33		41			37
Gross realized losses	(6		)	—		(7		)	—
Impairment losses recognized	—			—		—			(10		)

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

(b) Includes marketable equity securities, cost method, equity method, exchange-traded funds, and other investments.

Credit losses represent the difference between the present value of cash flows expected to be collected on certain mortgage-backed securities and auction rate securities and the amortized cost of these securities. Based on the Company’s assessment of the credit quality of the underlying collateral and credit support available to each of the remaining securities in which invested, the Company believes it has recorded 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.

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of October 25, 2013 and April 26, 2013, the credit loss portion of other-than-temporary impairments on debt securities was $8 million and $9 million, respectively. The total other-than-temporary impairment losses on available-for-sale debt securities for the three and six months ended October 25, 2013 and October 26, 2012 were not significant.

The October 25, 2013 balance of available-for-sale debt securities, excluding debt funds which have no single maturity date, by contractual maturity is shown in the following table. Within the table, maturities of mortgage-backed securities have been allocated based upon timing of estimated cash flows, assuming no change in the current interest rate environment. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.



(in millions)	October 25, 2013
Due in one year or less	$	1,408
Due after one year through five years	6,822
Due after five years through ten years	2,226
Due after ten years	104
Total	$	10,560

As of October 25, 2013 and April 26, 2013, the aggregate carrying amount of equity and other securities without a quoted market price and accounted for using the cost or equity method was $629 million and $549 million, respectively. The total carrying value of these investments is reviewed quarterly for changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable. The value of cost or equity method investments is not adjusted if there are no identified events or changes in circumstances that may have a material adverse effect on the fair value of the investment.

Gains and losses realized on trading securities and available-for-sale debt securities are recorded in interest expense, net in the condensed consolidated statements of earnings. Gains and losses realized on marketable equity securities, cost method, equity method, and other investments are recorded in other expense, net in the condensed consolidated statements of earnings. In addition, unrealized gains and losses on available-for-sale debt securities are recorded in other comprehensive income (loss) in the condensed consolidated statements of comprehensive income and unrealized gains and losses on trading securities are recorded in interest expense, net in the condensed consolidated statements of earnings. Gains and losses from the sale of investments are calculated based on the specific identification method.

Note 7 – Fair Value Measurements

The Company follows the authoritative guidance on fair value measurements and disclosures, with respect to assets and liabilities that are measured at fair value on both a recurring and non-recurring basis. Under this guidance, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available in the circumstances. The hierarchy is broken down into three levels. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Descriptions of the three levels of the fair value hierarchy are discussed in Note 6 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended April 26, 2013.

See the section below titled Valuation Techniques for further discussion of how the Company determines fair value for investments.

Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis

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, available-for-sale, and derivative instruments. Derivatives include cash flow hedges, freestanding derivative forward contracts, and fair value hedges. These items are marked-to-market at each reporting period.

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis:



	Fair Value as of October 25, 2013		Fair Value Measurements Using Inputs Considered as
(in millions)	Fair Value as of October 25, 2013		Level 1		Level 2		Level 3
Assets:
Corporate debt securities	$	5,009	$	—	$	5,000	$	9
Auction rate securities	105		—		—		105
Mortgage-backed securities	1,305		—		1,301		4
U.S. government and agency securities	3,482		1,500		1,982		—
Foreign government and agency securities	55		—		55		—
Certificates of deposit	6		—		6		—
Other asset-backed securities	598		—		598		—
Debt funds	1,017		—		1,017		—
Marketable equity securities	106		106		—		—
Exchange-traded funds	60		60		—		—
Derivative assets	242		123		119		—
Total assets	$	11,985	$	1,789	$	10,078	$	118

Liabilities:
Derivative liabilities	$	135	$	131	$	4	$	—
Contingent consideration associated with acquisitions subsequent to April 24, 2009	45		—		—		45
Total liabilities	$	180	$	131	$	4	$	45



	Fair Value as of April 26, 2013		Fair Value Measurements Using Inputs Considered as
(in millions)	Fair Value as of April 26, 2013		Level 1		Level 2		Level 3
Assets:
Corporate debt securities	$	4,661	$	—	$	4,651	$	10
Auction rate securities	103		—		—		103
Mortgage-backed securities	1,053		—		1,039		14
U.S. government and agency securities	3,898		1,833		2,065		—
Foreign government and agency securities	38		—		38		—
Certificates of deposit	6		—		6		—
Other asset-backed securities	541		—		541		—
Marketable equity securities	155		155		—		—
Exchange-traded funds	50		50		—		—
Derivative assets	394		213		181		—
Total assets	$	10,899	$	2,251	$	8,521	$	127

Liabilities:
Derivative liabilities	$	58	$	40	$	18	$	—
Contingent consideration associated with acquisitions subsequent to April 24, 2009	142		—		—		142
Total liabilities	$	200	$	40	$	18	$	142

Valuation Techniques

Financial assets that are classified as Level 1 securities include highly liquid government bonds within U.S. government and agency securities, marketable equity securities, and exchange-traded funds for which quoted market prices are available. In

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

addition, the Company has determined that foreign currency forward contracts will be included in Level 1 as these are valued using quoted market prices in active markets which have identical assets or liabilities.

The valuation for most fixed maturity securities are classified as Level 2. Financial assets that are classified as Level 2 include corporate debt securities, U.S. government and agency securities, foreign government and agency securities, certificates of deposit, other asset-backed securities, debt funds, and certain mortgage-backed securities whose value is determined using inputs that are observable in the market or can be derived principally from or corroborated by, observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves, and benchmark securities. In addition, interest rate swaps are included in Level 2 as the Company uses inputs other than quoted prices that are observable for the asset. The Level 2 derivative instruments are primarily valued using standard calculations and models that use readily observable market data as their basis.

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. Level 3 financial assets also include certain investment securities for which there is limited market activity such that the determination of fair value requires significant judgment or estimation. Level 3 investment securities primarily include certain corporate debt securities, auction rate securities, and certain mortgage-backed securities. With the exception of auction rate securities, these securities were valued using third-party pricing sources that incorporate transaction details such as contractual terms, maturity, timing, and amount of expected future cash flows, as well as assumptions about liquidity and credit valuation adjustments by market participants. The fair value of auction rate securities is estimated by the Company using a discounted cash flow model, which incorporates significant unobservable inputs. The significant unobservable inputs used in the fair value measurement of the Company’s auction rate securities are years to principal recovery and the illiquidity premium that is incorporated into the discount rate. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value of the securities. Additionally, the Company uses level 3 inputs in the measurement of contingent consideration and related liabilities for all acquisitions subsequent to April 24, 2009. See Note 3 for further information regarding contingent consideration.

The following table represents the range of unobservable inputs utilized in the fair value measurement of auction rate securities classified as Level 3 as of October 25, 2013:



	Valuation Technique	Unobservable Input	Range (Weighted Average)
Auction rate securities	Discounted cash flow	Years to principal recovery	2 yrs. - 12 yrs. (3 yrs.)
Auction rate securities	Discounted cash flow	Illiquidity premium	6%

The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1, Level 2, or Level 3 during the three months ended October 25, 2013 or October 26, 2012. 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.

MEDTRONIC, INC.

NOTES TO CONDENSED 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) for the three and six months ended October 25, 2013 and October 26, 2012:



Three months ended October 25, 2013
(in millions)	Total Level 3 Investments			Corporate debt securities			Auction rate securities			Mortgage- backed securities			Other asset- backed securities
Balance as of July 26, 2013	$	132		$	10		$	107		$	15		$	—
Total realized losses and other-than-temporary impairment losses included in earnings	(2		)	—			(2		)	—			—
Total unrealized gains (losses) included in other comprehensive income	1			—			1			—			—
Settlements	(13		)	(1		)	(1		)	(11		)	—
Balance as of October 25, 2013	$	118		$	9		$	105		$	4		$	—

Three months ended October 26, 2012
(in millions)	Total Level 3 Investments			Corporate debt securities			Auction rate securities			Mortgage- backed securities			Other asset- backed securities
Balance as of July 27, 2012	$	173		$	10		$	129		$	28		$	6
Total unrealized gains (losses) included in other comprehensive income	(1		)	—			—			—			(1		)
Settlements	(1		)	—			—			(1		)	—
Balance as of October 26, 2012	$	171		$	10		$	129		$	27		$	5

Six months ended October 25, 2013
(in millions)	Total Level 3 Investments			Corporate debt securities			Auction rate securities			Mortgage- backed securities			Other asset- backed securities
Balance as of April 26, 2013	$	127		$	10		$	103		$	14		$	—
Total realized losses and other-than-temporary impairment losses included in earnings	(2		)	—			(2		)	—			—
Total unrealized gains (losses) included in other comprehensive income	6			—			5			1			—
Settlements	(13		)	(1		)	(1		)	(11		)	—
Balance as of October 25, 2013	$	118		$	9		$	105		$	4		$	—

Six months ended October 26, 2012
(in millions)	Total Level 3 Investments			Corporate debt securities			Auction rate securities			Mortgage- backed securities			Other asset- backed securities
Balance as of April 27, 2012	$	172		$	10		$	127		$	29		$	6
Total unrealized gains (losses) included in other comprehensive income	1			—			2			—			(1		)
Settlements	(2		)	—			—			(2		)	—
Balance as of October 26, 2012	$	171		$	10		$	129		$	27		$	5

Assets and Liabilities that are Measured at Fair Value on a Non-recurring Basis

Non-financial assets such as equity and other securities that are accounted for using the cost or equity method, goodwill and in-process research and development (IPR&D), intangible assets, and property, plant, and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized.

The Company holds investments in equity and other securities that are accounted for using the cost or equity method, which are classified as other assets in the condensed consolidated balance sheets. The aggregate carrying amount of these investments was $629 million as of October 25, 2013 and $549 million as of April 26, 2013. These cost or equity method investments are measured at fair value on a non-recurring basis. The fair value of the Company’s cost or equity method investments is not estimated if there are no identified events or changes in circumstance that may have a significant adverse effect on the fair value of these investments. The Company did not record any impairment charges related to cost method investments during the three and six months ended October 25, 2013 and the three months ended October 26, 2012. During the six months ended

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

October 26, 2012, the Company determined that the fair values of certain cost method investments were below their carrying values and that the carrying values of these investments were not expected to be recoverable within a reasonable period of time. As a result, the Company recognized $6 million in impairment charges during the six months ended October 26, 2012, which were recorded in other expense, net in the condensed consolidated statements of earnings. These investments fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value, as the investments are privately-held entities without quoted market prices. To determine the fair value of these investments, the Company used all pertinent financial information that was available related to the entities, including financial statements and market participant valuations from recent and proposed equity offerings.

The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset (asset group) may not be recoverable. The aggregate carrying amount of intangible assets, excluding IPR&D, was $2.283 billion as of October 25, 2013 and $2.310 billion as of April 26, 2013. When events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable, the Company calculates the excess of an intangible asset's carrying value over its undiscounted future cash flows. If the carrying value is not recoverable, an impairment loss is recorded based on the amount by which the carrying value exceeds the fair value. The inputs used in the fair value analysis fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. The Company did not record any significant intangible asset impairments during the three and six months ended October 25, 2013 or October 26, 2012.

The Company assesses the impairment of goodwill and IPR&D annually in the third quarter and whenever events or changes in circumstances indicate that the carrying amount may be impaired. The aggregate carrying amount of goodwill was $10.464 billion as of October 25, 2013 and $10.329 billion as of April 26, 2013. The aggregate carrying amount of IPR&D was $325 million as of October 25, 2013 and $363 million as of April 26, 2013. The fair value of the Company's goodwill and IPR&D is not estimated if there is no change in events or circumstances that indicate the carrying amount of goodwill or IPR&D may be impaired. The Company did not record any goodwill or IPR&D impairments during the three and six months ended October 25, 2013 or October 26, 2012. However, due to the nature of IPR&D projects, the Company may experience future delays or failures to obtain regulatory approvals to conduct clinical trials, failures of such clinical trials, delays or failures to obtain required market clearances or other failures to achieve a commercially viable product, and as a result, may record impairment losses in the future.

The Company assesses the impairment of property, plant, and equipment whenever events or changes in circumstances indicate that the carrying amount of property, plant, and equipment assets may not be recoverable. The Company did not record any significant impairments of property, plant, and equipment during the three and six months ended October 25, 2013 or October 26, 2012.

Financial Instruments Not Measured at Fair Value

The estimated fair value of the Company’s long-term debt, including the short-term portion, as of October 25, 2013 was $10.287 billion compared to a principal value of $9.928 billion, and as of April 26, 2013 was $10.820 billion compared to a principal value of $9.928 billion. Fair value was estimated using quoted market prices for the publicly registered senior notes, classified as Level 1 within the fair value hierarchy. The fair values and principal values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.

Note 8 – Financing Arrangements

Commercial Paper

The Company maintains a commercial paper program that allows the Company to have a maximum of $2.250 billion in commercial paper outstanding, with maturities up to 364 days from the date of issuance. As of October 25, 2013 and April 26, 2013, outstanding commercial paper totaled $1.725 billion and $125 million, respectively. During the three and six months ended October 25, 2013, the weighted average original maturity of the commercial paper outstanding was approximately 50 days and 37 days, respectively, and the weighted average interest rate was 0.10 percent and 0.09 percent, respectively. The issuance of commercial paper reduces the amount of credit available under the Company’s existing lines of credit.

Lines of Credit

The Company has a $2.250 billion syndicated credit facility which expires on December 17, 2017 (Credit Facility). The Credit Facility provides the Company with the ability to increase its borrowing capacity by an additional $750 million at any time during the term of the agreement. At each anniversary date of the Credit Facility, but not more than twice prior to the maturity date, the Company can also request a one-year extension of the maturity date. The Credit Facility provides backup funding for

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the commercial paper program. As of October 25, 2013 and April 26, 2013, no amounts were outstanding on the committed lines of credit.

Interest rates are determined by a pricing matrix, based on the Company’s long-term debt ratings, assigned by Standard & Poor’s Ratings Services and Moody’s Investors Service. Facility fees are payable on the credit facilities and are determined in the same manner as the interest rates. The agreements also contain customary covenants, all of which the Company remains in compliance with as of October 25, 2013.

Bank Borrowings

Bank borrowings consist primarily of borrowings at interest rates considered favorable by management and where natural hedges can be gained for foreign exchange purposes.

Long-Term Debt

Long-term debt consisted of the following:



(in millions, except interest rates)	Maturity by Fiscal Year	Payable as of October 25, 2013			Payable as of April 26, 2013
3.000 percent five-year 2010 senior notes	2015	$	1,250		$	1,250
4.750 percent ten-year 2005 senior notes	2016	600			600
2.625 percent five-year 2011 senior notes	2016	500			500
1.375 percent five-year 2013 senior notes	2018	1,000			1,000
5.600 percent ten-year 2009 senior notes	2019	400			400
4.450 percent ten-year 2010 senior notes	2020	1,250			1,250
4.125 percent ten-year 2011 senior notes	2021	500			500
3.125 percent ten-year 2012 senior notes	2022	675			675
2.750 percent ten-year 2013 senior notes	2023	1,250			1,250
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	750			750
Interest rate swaps	2015 - 2022	99			181
Deferred gains from interest rate swap terminations	-	35			50
Capital lease obligations	2015 - 2025	145			152
Bank borrowings	2015	3			3
Discount	2018-2043	(20		)	(20		)
Total Long-Term Debt		$	9,637		$	9,741

Senior Notes

The Company has outstanding unsecured senior obligations including those indicated as "senior notes" in the long-term debt table above (collectively, the Senior Notes). The Senior Notes rank equally with all other unsecured and unsubordinated indebtedness of the Company. The indentures under which the Senior Notes were issued contain customary covenants, all of which the Company remains in compliance with as of October 25, 2013. The Company used the net proceeds from the sale of the Senior Notes primarily for working capital and general corporate uses, which include the repayment of other indebtedness of the Company. 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 year ended April 26, 2013.

As of October 25, 2013, the Company had interest rate swap agreements designated as fair value hedges of certain underlying fixed rate obligations including the Company’s $1.250 billion 3.000 percent 2010 Senior Notes, $600 million 4.750 percent 2005 Senior Notes, $500 million 2.625 percent 2011 Senior Notes, $500 million 4.125 percent 2011 Senior Notes, and $675 million 3.125 percent 2012 Senior Notes. For additional information regarding the interest rate swap agreements, refer to Note 9.

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9 – Derivatives and Foreign 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 order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, the Company enters into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets and liabilities. At inception of the forward contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. The primary currencies of the derivative instruments are the Euro and Japanese Yen. The Company does not enter into currency exchange rate derivative contracts for speculative purposes. The gross notional amount of all currency exchange rate derivative instruments outstanding at October 25, 2013 and April 26, 2013 was $7.289 billion and $6.812 billion, respectively. The aggregate currency exchange rate gains for the three and six months ended October 25, 2013 were less than $1 million and $3 million, respectively. The aggregate currency exchange rate (losses) for the three and six months ended October 26, 2012 were $(25) million and $(6) million, respectively. These gains (losses) represent the net impact to the condensed consolidated statements of earnings for the exchange rate derivative instruments presented below, as well as the remeasurement gains (losses) on foreign currency denominated assets and liabilities.

The information that follows explains the various types of derivatives and financial instruments used by the Company, how and why the Company uses such instruments, how such instruments are accounted for, and how such instruments impact the Company’s condensed consolidated balance sheets, statements of earnings, and statements of cash flows.

Freestanding Derivative Forward Contracts

Freestanding derivative forward contracts are used to offset the Company’s exposure to the change in value of specific foreign currency denominated assets and liabilities. These derivatives are not designated as hedges, and therefore, changes in the value of these forward contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in value of foreign currency denominated assets and liabilities. The cash flows from these contracts are reported as operating activities in the condensed consolidated statements of cash flows. The gross notional amount of these contracts, not designated as hedging instruments, outstanding as of October 25, 2013 and April 26, 2013, was $2.091 billion and $2.059 billion, respectively.

The amount and location of the (losses) in the condensed consolidated statements of earnings related to derivative instruments, not designated as hedging instruments, for the three and six months ended October 25, 2013 and October 26, 2012 are as follows:



(in millions)		Three months ended
Derivatives Not Designated as Hedging Instruments	Location	October 25, 2013			October 26, 2012
Foreign currency exchange rate contracts	Other expense, net	$	(46	)	$	(67	)



(in millions)		Six months ended
Derivatives Not Designated as Hedging Instruments	Location	October 25, 2013			October 26, 2012
Foreign currency exchange rate contracts	Other expense, net	$	(17	)	$	(20	)

Cash Flow Hedges

Foreign 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 is reported as a component of accumulated other comprehensive loss and reclassified into earnings 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 six months ended October 25, 2013 or October 26, 2012. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness and no hedges were derecognized or discontinued during the three months and six ended October 25, 2013 or October 26, 2012. The cash flows from these contracts are reported as operating activities in the condensed consolidated statements of cash flows. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at October 25, 2013 and April 26, 2013, was $5.198 billion and $4.753 billion, respectively, and will mature within the subsequent three-year period.

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The amount of (losses) gains and location of the (losses) gains in the condensed consolidated statements of earnings and other comprehensive income (OCI) related to foreign currency exchange rate contract derivative instruments designated as cash flow hedges for the three months ended October 25, 2013 and October 26, 2012 are as follows:



Three months ended October 25, 2013
	Gross (Losses) Gains Recognized in OCI on Effective Portion of Derivative			Effective Portion of (Losses) Gains on Derivative Reclassified from Accumulated Other Comprehensive Loss into Income
(in millions)
Derivatives in Cash Flow Hedging Relationships	Amount			Location	Amount
Foreign currency exchange rate contracts	$	(130	)	Other expense, net	$	23
				Cost of products sold	(14		)
Total	$	(130	)		$	9
Three months ended October 26, 2012
	Gross (Losses) Gains Recognized in OCI on Effective Portion of Derivative			Effective Portion of (Losses) Gains on Derivative Reclassified from Accumulated Other Comprehensive Loss into Income
(in millions)
Derivatives in Cash Flow Hedging Relationships	Amount			Location	Amount
Foreign currency exchange rate contracts	$	(110	)	Other expense, net	$	19
				Cost of products sold	3
Total	$	(110	)		$	22
Six months ended October 25, 2013
	Gross (Losses)/Gains Recognized in OCI on Effective Portion of Derivative			Effective Portion of (Losses) Gains on Derivative Reclassified from Accumulated Other Comprehensive Loss into Income
(in millions)
Derivatives in Cash Flow Hedging Relationships	Amount			Location	Amount
Foreign currency exchange rate contracts	$	(154	)	Other expense, net	$	55
				Cost of products sold	(29		)
Total	$	(154	)		$	26
Six months ended October 26, 2012
	Gross (Losses)/Gains Recognized in OCI on Effective Portion of Derivative			Effective Portion of (Losses) Gains on Derivative Reclassified from Accumulated Other Comprehensive Loss into Income
(in millions)
Derivatives in Cash Flow Hedging Relationships	Amount			Location	Amount
Foreign currency exchange rate contracts	$	(1	)	Other expense, net	$	42
				Cost of products sold	1
Total	$	(1	)		$	43

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. For forward starting interest rate derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and beginning in the period or periods in which the planned debt issuance occurs, the gain or loss is then reclassified into interest expense, net over the term of the related debt. As of October 25, 2013, the Company had $500 million of fixed pay, forward starting interest rate swaps with a weighted average fixed rate of 2.68 percent in anticipation of planned debt issuances.

During the three and six months ended October 25, 2013, the Company reclassified $2 million and $4 million, respectively, of the effective portion of losses on forward starting interest rate derivative instruments from accumulated other comprehensive loss to interest expense, net. During the three and six months ended October 26, 2012, there were no significant amounts related to the effective portion of gains (losses) on forward starting interest rate derivative instruments reclassified from accumulated other comprehensive loss to interest expense, net.

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The market value of outstanding forward starting interest rate swap derivative instruments at October 25, 2013 and April 26, 2013 was an unrealized gain (loss) of $16 million and $(18) million, respectively. These unrealized gains (losses) were recorded in other assets and other long-term liabilities, respectively, with the offsets recorded in accumulated other comprehensive loss in the condensed consolidated balance sheets.

As of October 25, 2013 and April 26, 2013, the Company had $(33) million and $58 million, respectively, in after-tax net unrealized (losses) gains associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $4 million of after-tax net unrealized gains as of October 25, 2013 will be reclassified into the condensed consolidated statements of earnings over the next 12 months.

Fair Value Hedges

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. The gains (losses) from terminating the interest rate swap agreements are recorded in long-term debt, increasing (decreasing) the outstanding balances of the related debt, and amortized as a reduction (addition) of interest expense, net over the remaining life of the debt. The cash flows from the termination of the interest rate swap agreements are reported as operating activities in the condensed consolidated statements of cash flows.

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.

As of both October 25, 2013 and April 26, 2013, the Company had interest rate swaps in gross notional amounts of $2.625 billion designated as fair value hedges of underlying fixed rate obligations. As of October 25, 2013, the Company had interest rate swap agreements designated as fair value hedges of underlying fixed rate obligations including the Company’s $1.250 billion 3.000 percent 2010 Senior Notes, the $600 million 4.750 percent 2005 Senior Notes, the $500 million 2.625 percent 2011 Senior Notes, the $500 million 4.125 percent 2011 Senior Notes, and the $675 million 3.125 percent 2012 Senior Notes. For additional information regarding the terms of the Company’s interest rate swap agreements, refer to Note 9 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended April 26, 2013.

The market value of outstanding interest rate swap agreements was a net $99 million unrealized gain and the market value of the hedged item was a net $99 million unrealized loss at October 25, 2013, which were recorded in other assets and other long-term liabilities with the offsets recorded in long-term debt in the condensed consolidated balance sheet. No hedge ineffectiveness was recorded as a result of these fair value hedges for the three and six months ended October 25, 2013 or October 26, 2012.

During the three and six months ended October 25, 2013 and October 26, 2012, the Company did not have any ineffective fair value hedging instruments. In addition, the Company did not recognize any gains or losses during the three and six months ended October 25, 2013 or October 26, 2012 on firm commitments that no longer qualify as fair value hedges.

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Balance Sheet Presentation

The following table summarizes the location and fair value amounts of derivative instruments reported in the condensed consolidated balance sheets as of October 25, 2013 and April 26, 2013. The fair value amounts are presented on a gross basis and are segregated between derivatives that are designated and qualify as hedging instruments and those that are not, and are further segregated by type of contract within those two categories.



October 25, 2013
	Asset Derivatives			Liability Derivatives
(in millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign currency exchange rate contracts	Prepaid expenses and other current assets	$	99	Other accrued expenses	$	85
Interest rate contracts	Other assets	119		Other long-term liabilities	4
Foreign currency exchange rate contracts	Other assets	24		Other long-term liabilities	45
Total derivatives designated as hedging instruments		$	242		$	134
Derivatives not designated as hedging instruments
Foreign currency exchange rate contracts	Prepaid expenses and other current assets	$	—	Other accrued expenses	$	1
Total derivatives not designated as hedging instruments		$	—		$	1

Total derivatives		$	242		$	135



April 26, 2013
	Asset Derivatives			Liability Derivatives
(in millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign currency exchange rate contracts	Prepaid expenses and other current assets	$	150	Other accrued expenses	$	34
Interest rate contracts	Other assets	181		Other long-term liabilities	18
Foreign currency exchange rate contracts	Other assets	63		Other long-term liabilities	5
Total derivatives designated as hedging instruments		$	394		$	57
Derivatives not designated as hedging instruments
Foreign currency exchange rate contracts	Prepaid expenses and other current assets	$	—	Other accrued expenses	$	1
Total derivatives not designated as hedging instruments		$	—		$	1

Total derivatives		$	394		$	58

MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



October 25, 2013			Gross Amount Not Offset on the Balance Sheet
(in millions)	Gross Amount of Recognized Assets (Liabilities)		Financial Instruments			Cash Collateral (Received) or Posted		Net Amount
Derivative Assets
Foreign currency exchange rate contracts	$	123	$	(74	)	$	—	$	49
Interest rate contracts	119		(31		)	—		88