MDT-2014Q3-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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ý | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 24, 2014 |
Commission File Number 1-7707
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MEDTRONIC, INC. |
(Exact name of registrant as specified in its charter) |
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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.
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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 February 25, 2014: 1,000,814,792
TABLE OF CONTENTS
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Item | | Description | | Page |
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2. | | | | |
3. | | | | |
4. | | | | |
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1. | | | | |
2. | | | | |
6. | | | | |
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
MEDTRONIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| January 24, 2014 | | January 25, 2013 | | January 24, 2014 | | January 25, 2013 |
| (in millions, except per share data) |
Net sales | $ | 4,163 |
| | $ | 4,027 |
| | $ | 12,440 |
| | $ | 12,130 |
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| | | | | | | |
Costs and expenses: | |
| | |
| | |
| | |
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Cost of products sold | 1,050 |
| | 999 |
| | 3,162 |
| | 2,992 |
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Research and development expense | 360 |
| | 376 |
| | 1,092 |
| | 1,148 |
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Selling, general, and administrative expense | 1,454 |
| | 1,401 |
| | 4,308 |
| | 4,223 |
|
Special charges | — |
| | — |
| | 40 |
| | — |
|
Restructuring (credits) charges, net | (15 | ) | | — |
| | 3 |
| | — |
|
Certain litigation charges, net | — |
| | — |
| | 24 |
| | 245 |
|
Acquisition-related items | 200 |
| | (55 | ) | | 104 |
| | (44 | ) |
Amortization of intangible assets | 89 |
| | 88 |
| | 263 |
| | 247 |
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Other expense, net | 45 |
| | 17 |
| | 122 |
| | 119 |
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Interest expense, net | 25 |
| | 46 |
| | 98 |
| | 103 |
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Total costs and expenses | 3,208 |
| | 2,872 |
| | 9,216 |
| | 9,033 |
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| | | | | | | |
Earnings before income taxes | 955 |
| | 1,155 |
| | 3,224 |
| | 3,097 |
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| | | | | | | |
Provision for income taxes | 193 |
| | 167 |
| | 607 |
| | 599 |
|
| | | | | | | |
Net earnings | $ | 762 |
| | $ | 988 |
| | $ | 2,617 |
| | $ | 2,498 |
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| | | | | | | |
Basic earnings per share | $ | 0.76 |
| | $ | 0.98 |
| | $ | 2.61 |
| | $ | 2.45 |
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| | | | | | | |
Diluted earnings per share | $ | 0.75 |
| | $ | 0.97 |
| | $ | 2.58 |
| | $ | 2.43 |
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| | | | | | | |
Basic weighted average shares outstanding | 998.3 |
| | 1,012.5 |
| | 1,002.7 |
| | 1,020.7 |
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Diluted weighted average shares outstanding | 1,010.0 |
| | 1,021.0 |
| | 1,014.0 |
| | 1,028.7 |
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| | | | | | | |
Cash dividends declared per common share | $ | 0.28 |
| | $ | 0.26 |
| | $ | 0.84 |
| | $ | 0.78 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MEDTRONIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| January 24, 2014 | | January 25, 2013 | | January 24, 2014 | | January 25, 2013 |
| (in millions) |
Net earnings | $ | 762 |
| | $ | 988 |
| | $ | 2,617 |
| | $ | 2,498 |
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| | | | | | | |
Other comprehensive income (loss), net of tax: | |
| | |
| | | | |
Unrealized loss on available-for-sale securities, net of tax benefit of $(34), $(19), $(71), and $(15), respectively | (63 | ) | | (33 | ) | | (127 | ) | | (26 | ) |
Translation adjustment | (50 | ) | | 40 |
| | 1 |
| | 13 |
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Net change in retirement obligations, net of tax expense of $8, $7, $25, and $26, respectively | 14 |
| | 10 |
| | 43 |
| | 45 |
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Unrealized gain (loss) on derivatives, net of tax expense (benefit) of $27, $(2), $(25), and $(18), respectively | 48 |
| | (5 | ) | | (43 | ) | | (31 | ) |
| | | | | | | |
Other comprehensive income (loss) | (51 | ) | | 12 |
| | (126 | ) | | 1 |
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| | | | | | | |
Comprehensive income | $ | 711 |
| | $ | 1,000 |
| | $ | 2,491 |
| | $ | 2,499 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MEDTRONIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| January 24, 2014 | | April 26, 2013 |
| (in millions, except per share data) |
ASSETS | |
| | |
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Current assets: | |
| | |
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Cash and cash equivalents | $ | 1,304 |
| | $ | 919 |
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Investments | 12,363 |
| | 10,211 |
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Accounts receivable, less allowance of $114 and $98, respectively | 3,619 |
| | 3,727 |
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Inventories | 1,782 |
| | 1,712 |
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Tax assets | 618 |
| | 539 |
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Prepaid expenses and other current assets | 700 |
| | 744 |
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| | | |
Total current assets | 20,386 |
| | 17,852 |
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Property, plant, and equipment | 6,355 |
| | 6,152 |
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Accumulated depreciation | (3,947 | ) | | (3,662 | ) |
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Property, plant, and equipment, net | 2,408 |
| | 2,490 |
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| | | |
Goodwill | 10,593 |
| | 10,329 |
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Other intangible assets, net | 2,372 |
| | 2,673 |
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Long-term tax assets | 237 |
| | 232 |
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Other assets | 1,235 |
| | 1,324 |
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| | | |
Total assets | $ | 37,231 |
| | $ | 34,900 |
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| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
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Current liabilities: | |
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Short-term borrowings | $ | 2,618 |
| | $ | 910 |
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Accounts payable | 567 |
| | 681 |
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Accrued compensation | 936 |
| | 1,011 |
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Accrued income taxes | 235 |
| | 88 |
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Deferred tax liabilities | 13 |
| | 16 |
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Other accrued expenses | 1,263 |
| | 1,244 |
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| | | |
Total current liabilities | 5,632 |
| | 3,950 |
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Long-term debt | 9,601 |
| | 9,741 |
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Long-term accrued compensation and retirement benefits | 805 |
| | 752 |
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Long-term accrued income taxes | 1,246 |
| | 1,168 |
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Long-term deferred tax liabilities | 358 |
| | 340 |
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Other long-term liabilities | 235 |
| | 278 |
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| | | |
Total liabilities | 17,877 |
| | 16,229 |
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Commitments and contingencies (Notes 3 and 19) |
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Shareholders’ equity: | |
| | |
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Preferred stock— par value $1.00 | — |
| | — |
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Common stock— par value $0.10 | 100 |
| | 102 |
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Retained earnings | 19,872 |
| | 19,061 |
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Accumulated other comprehensive loss | (618 | ) | | (492 | ) |
| | | |
Total shareholders’ equity | 19,354 |
| | 18,671 |
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Total liabilities and shareholders’ equity | $ | 37,231 |
| | $ | 34,900 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MEDTRONIC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
| | | | | | | |
| Nine months ended |
| January 24, 2014 | | January 25, 2013 |
| (in millions) |
Operating Activities: | |
| | |
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Net earnings | $ | 2,617 |
| | $ | 2,498 |
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| | | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | |
| | |
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Depreciation and amortization | 635 |
| | 610 |
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Amortization of debt discount and issuance costs | 6 |
| | 69 |
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Acquisition-related items | 99 |
| | (67 | ) |
Provision for doubtful accounts | 34 |
| | 34 |
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Deferred income taxes | (61 | ) | | 39 |
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Stock-based compensation | 108 |
| | 119 |
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Other, net | (17 | ) | | — |
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Change in operating assets and liabilities, net of effect of acquisitions: | |
| | |
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Accounts receivable, net | 86 |
| | 255 |
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Inventories | (119 | ) | | (58 | ) |
Accounts payable and accrued liabilities | (301 | ) | | (51 | ) |
Other operating assets and liabilities | 523 |
| | 70 |
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Certain litigation charges, net | 24 |
| | 245 |
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Certain litigation payments | (3 | ) | | (91 | ) |
| | | |
Net cash provided by operating activities | 3,631 |
| | 3,672 |
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| | | |
Investing Activities: | |
| | |
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Acquisitions, net of cash acquired | (369 | ) | | (820 | ) |
Additions to property, plant, and equipment | (291 | ) | | (336 | ) |
Purchases of investments | (7,992 | ) | | (9,517 | ) |
Sales and maturities of investments | 5,606 |
| | 8,163 |
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Other investing activities, net | (23 | ) | | (4 | ) |
| | | |
Net cash used in investing activities | (3,069 | ) | | (2,514 | ) |
| | | |
Financing Activities: | |
| | |
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Acquisition-related contingent consideration | (1 | ) | | (17 | ) |
Change in short-term borrowings, net | 935 |
| | (9 | ) |
Repayment of short-term borrowings (maturities greater than 90 days) | (385 | ) | | (1,850 | ) |
Proceeds from short-term borrowings (maturities greater than 90 days) | 1,176 |
| | 2,625 |
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Payments on long-term debt | (10 | ) | | (10 | ) |
Dividends to shareholders | (839 | ) | | (797 | ) |
Issuance of common stock | 1,056 |
| | 158 |
|
Repurchase of common stock | (2,153 | ) | | (1,247 | ) |
Other financing activities | 20 |
| | (2 | ) |
| | | |
Net cash used in financing activities | (201 | ) | | (1,149 | ) |
| | | |
Effect of exchange rate changes on cash and cash equivalents | 24 |
| | 11 |
|
| | | |
Net change in cash and cash equivalents | 385 |
| | 20 |
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| | | |
Cash and cash equivalents at beginning of period | 919 |
| | 1,172 |
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| | | |
Cash and cash equivalents at end of period | $ | 1,304 |
| | $ | 1,192 |
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Supplemental Cash Flow Information | |
| | |
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Cash paid for: | |
| | |
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Income taxes | $ | 382 |
| | $ | 422 |
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Interest | 226 |
| | 196 |
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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 year 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.
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, or no longer holds a controlling financial interest, in a subsidiary or group of assets within a foreign entity. This accounting guidance is effective
MEDTRONIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 three 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 nine months ended January 24, 2014 or January 25, 2013. 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 nine months ended January 24, 2014
TYRX, Inc.
On December 30, 2013, the Company acquired TYRX, Inc. (TYRX), a privately held developer of antibiotic drug and implanted medical device combinations. TYRX's products include those designed to reduce surgical site infections associated with implantable pacemakers, defibrillators, and spinal cord neurostimulators. Under the terms of the agreement, the transaction included an initial up-front payment of $159 million, representing a purchase price amount that was net of acquired cash, including the assumption and settlement of existing TYRX debt and direct acquisition costs. Total consideration for the transaction was approximately $222 million, which included estimated fair values for product development-based and revenue-based contingent consideration of $25 million and $35 million, respectively. The product development-based contingent consideration includes a future potential payment of $40 million upon achieving certain milestones, and the revenue-based contingent consideration payments would be equal to TYRX's actual annual revenue growth for the Company's fiscal years 2015 and 2016. Based upon the preliminary acquisition valuation, the Company acquired $94 million of technology-based intangible assets with an estimated useful life of 14 years at the time of acquisition and $141 million of goodwill. The acquired goodwill is not deductible for tax purposes.
The Company accounted for the acquisition of TYRX as a business combination using the acquisition method of accounting. The assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date. The fair values of the assets acquired and liabilities assumed are as follows:
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(in millions) | |
Current assets | $ | 6 |
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Property, plant, and equipment | 1 |
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Intangible assets | 94 |
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Goodwill | 141 |
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Total assets acquired | 242 |
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| |
Current liabilities | 4 |
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Long-term deferred tax liabilities, net | 16 |
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Total liabilities assumed | 20 |
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Net assets acquired | $ | 222 |
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MEDTRONIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. The acquired goodwill is deductible for tax purposes.
The Company accounted for the acquisition of Cardiocom as a business combination using the acquisition method of accounting. The assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date. The fair values of the assets acquired and liabilities assumed are as follows:
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(in millions) | |
Current assets | $ | 14 |
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Property, plant, and equipment | 7 |
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Intangible assets | 61 |
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Goodwill | 123 |
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Total assets acquired | 205 |
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| |
Current liabilities | 12 |
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Total liabilities assumed | 12 |
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Net assets acquired | $ | 193 |
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Acquisition-Related Items
During the three and nine months ended January 24, 2014, the Company recorded acquisition-related items of $200 million and $104 million, respectively, primarily including in-process research and development (IPR&D) and long-lived asset impairment charges of $236 million related to the Ardian, Inc. (Ardian) acquisition and income of $39 million and $135 million, respectively, related to the change in fair value of contingent consideration associated with acquisitions subsequent to April 29, 2009. The Ardian impairment resulted from the Company's January 2014 announcement that the U.S. pivotal trial in renal denervation for treatment-resistant hypertension, Symplicity HTN-3, failed to meet its primary efficacy endpoint. Based on the results of the trial, we have suspended enrollment of our renal denervation hypertension trials that are being conducted in the U.S., Japan, and India. These impairment charges recorded by the Company consisted of $192 million related to IPR&D and $44 million related to other long-lived assets. For additional information regarding these impairment assessments, refer to Note 7. The change in fair value of contingent consideration payments primarily related to adjustments in Ardian contingent consideration, which are based on annual revenue growth through fiscal year 2015. In the first quarter of fiscal year 2014, the Company recorded income of $96 million related to the change in fair value of contingent consideration payments due to a slower commercial ramp in Europe and an extended U.S. regulatory process. In the third quarter of fiscal year 2014, the Company recorded income of $39 million related to the change in fair value of contingent consideration payments based on the unfavorable U.S. pivotal trial results, as there is no projected revenue growth through fiscal year 2015 and no contingent consideration remains as of January 24, 2014.
Three and nine months ended January 25, 2013
China Kanghui Holdings
On November 1, 2012, the Company acquired China Kanghui Holdings (Kanghui). For additional information regarding this acquisition, refer to Note 4 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended April 26, 2013.
Acquisition-Related Items
During the three and nine months ended January 25, 2013, the Company recorded net income from acquisition-related items of $55 million and $44 million, respectively, including income of $70 million and $67 million, respectively, related to the change in fair value of contingent consideration associated with acquisitions subsequent to April 29, 2009. The change in fair value of contingent consideration payments was primarily related to the reduction in fair value of contingent consideration associated
MEDTRONIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
with the Ardian acquisition due to a slower commercial ramp in Europe. Additionally, during the three and nine months ended January 25, 2013, the Company incurred transaction costs of $10 million and $13 million, respectively, in connection with the acquisition of Kanghui and an IPR&D impairment charge of $5 million related to a technology recently acquired by the Structural Heart business. During the nine months ended January 25, 2013, the Company incurred $5 million of transaction costs related to the divestiture of the Physio-Control business.
Contingent Consideration
Certain of the Company’s business combinations and purchases of intellectual property involve the potential for the payment of future contingent consideration upon the achievement of certain product development milestones and/or various other favorable operating conditions. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels or achieving product development targets. For business combinations subsequent to April 24, 2009, a liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period and the change in fair value recognized as income or expense within acquisition-related items in the condensed consolidated statements of earnings. The Company measures the liability on a recurring basis using Level 3 inputs. See Note 7 for further information regarding fair value measurements.
The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues (for revenue-based considerations). Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected revenues are based on the Company’s most recent internal operational budgets and long-range strategic plans. Increases (decreases) in projected revenues, probabilities of payment, discount rates, or projected payment dates may result in higher (lower) fair value measurements. Fluctuations in any of the inputs may result in a significantly lower (higher) fair value measurement.
The recurring Level 3 fair value measurements of contingent consideration include the following significant unobservable inputs: |
| | | | | | | | |
($ in millions) | | Fair Value at January 24, 2014 | | Valuation Technique | | Unobservable Input | | Range |
| | | | | | Discount rate | | 13.5% - 24% |
Revenue-based payments | | $37 | | Discounted cash flow | | Probability of payment | | 100% |
| | | | | | Projected fiscal year of payment | | 2014 - 2019 |
| | | | | | Discount rate | | 5.5% - 5.9% |
Product development-based payments | | $29 | | Discounted cash flow | | Probability of payment | | 75% - 100% |
| | | | | | Projected fiscal year of payment | | 2017 - 2018 |
At January 24, 2014, 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 January 24, 2014 and April 26, 2013, was $66 million and $142 million, respectively. As of January 24, 2014, $56 million was reflected in other long-term liabilities and $10 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 is reported as financing activities in the condensed consolidated statements of cash flows. Amounts paid in excess of the original acquisition date fair value are reported as operating activities in the condensed consolidated statements of cash flows. The following table provides a reconciliation of the beginning and ending balances of contingent consideration associated with acquisitions subsequent to April 24, 2009: |
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in millions) | January 24, 2014 | | January 25, 2013 | | January 24, 2014 | | January 25, 2013 |
Beginning Balance | $ | 45 |
| | $ | 213 |
| | $ | 142 |
| | $ | 231 |
|
Purchase price contingent consideration | 60 |
| | — |
| | 60 |
| | 5 |
|
Contingent consideration payments | — |
| | (2 | ) | | (1 | ) | | (28 | ) |
Change in fair value of contingent consideration | (39 | ) | | (70 | ) | | (135 | ) | | (67 | ) |
Ending Balance | $ | 66 |
| | $ | 141 |
| | $ | 66 |
| | $ | 141 |
|
Note 4 – Special Charges and Certain Litigation Charges, Net
Special Charges
During the nine months ended January 24, 2014, 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 January 24, 2014 and the three and nine months ended January 25, 2013, 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 months ended January 24, 2014, there were no certain litigation charges, net. During the nine months ended January 24, 2014, 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 months ended January 25, 2013, there were no certain litigation charges, net. During the nine months ended January 25, 2013, 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. (Edwards). See Note 19 for further information.
MEDTRONIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 – Restructuring (Credits) Charges, Net
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.
In the third quarter of fiscal year 2014, the Company recorded a $15 million reversal of excess restructuring reserves related to the fiscal year 2013 initiative. The reversal was primarily a result of revisions to particular strategies and certain employees identified for elimination finding other positions within the Company.
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 |
|
Payments/write-downs | (7 | ) | | (4 | ) | | (11 | ) |
Reversal of excess accrual | (14 | ) | | (1 | ) | | (15 | ) |
Balance as of January 24, 2014 | $ | 63 |
| | $ | 3 |
| | $ | 66 |
|
MEDTRONIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 January 24, 2014 is as follows: |
| | | | | | | | | | | | | | | |
(in millions) | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Available-for-sale securities: | |
| | |
| | |
| | |
|
Corporate debt securities | $ | 5,484 |
| | $ | 45 |
| | $ | (22 | ) | | $ | 5,507 |
|
Auction rate securities | 108 |
| | — |
| | (12 | ) | | 96 |
|
Mortgage-backed securities | 1,392 |
| | 7 |
| | (9 | ) | | 1,390 |
|
U.S. government and agency securities | 3,572 |
| | 6 |
| | (38 | ) | | 3,540 |
|
Foreign government and agency securities | 44 |
| | — |
| | — |
| | 44 |
|
Certificates of deposit | 6 |
| | — |
| | — |
| | 6 |
|
Other asset-backed securities | 656 |
| | 1 |
| | (2 | ) | | 655 |
|
Debt funds | 1,229 |
| | 1 |
| | (61 | ) | | 1,169 |
|
Marketable equity securities | 52 |
| | 40 |
| | (4 | ) | | 88 |
|
Trading securities: | |
| | |
| | |
| | |
|
Exchange-traded funds | 54 |
| | 11 |
| | — |
| | 65 |
|
Cost method, equity method, and other investments | 670 |
| | — |
| | — |
| | NA |
|
Total | $ | 13,267 |
| | $ | 111 |
| | $ | (148 | ) | | $ | 12,560 |
|
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 January 24, 2014 and April 26, 2013 is as follows: |
| | | | | | | | | | | | | | | |
| January 24, 2014 | | April 26, 2013 |
(in millions) | Investments | | Other Assets | | Investments | | Other Assets |
Available-for-sale securities | $ | 12,298 |
| | $ | 197 |
| | $ | 10,161 |
| | $ | 294 |
|
Trading securities | 65 |
| | — |
| | 50 |
| | — |
|
Cost method, equity method, and other investments | — |
| | 670 |
| | — |
| | 549 |
|
Total | $ | 12,363 |
| | $ | 867 |
| | $ | 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 January 24, 2014 and April 26, 2013: |
| | | | | | | | | | | | | | | |
| January 24, 2014 |
| Less than 12 months | | More than 12 months |
(in millions) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Corporate debt securities | $ | 1,578 |
| | $ | (19 | ) | | $ | 48 |
| | $ | (3 | ) |
Auction rate securities | — |
| | — |
| | 96 |
| | (12 | ) |
Mortgage-backed securities | 741 |
| | (8 | ) | | 30 |
| | (1 | ) |
U.S. government and agency securities | 1,520 |
| | (38 | ) | | — |
| | — |
|
Other asset-backed securities | 268 |
| | (2 | ) | | — |
| | — |
|
Debt funds | 906 |
| | (61 | ) | | — |
| | — |
|
Marketable equity securities | 12 |
| | (4 | ) | | — |
| | — |
|
Total | $ | 5,025 |
| | $ | (132 | ) | | $ | 174 |
| | $ | (16 | ) |
|
| | | | | | | | | | | | | | | |
| 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 |
| January 24, 2014 | | January 25, 2013 |
(in millions) | Debt (a) | | Equity (b) | | Debt (a) | | Equity (b) |
Proceeds from sales | $ | 1,280 |
| | $ | 35 |
| | $ | 2,183 |
| | $ | 25 |
|
Gross realized gains | — |
| | 26 |
| | 9 |
| | 16 |
|
Gross realized losses | (3 | ) | | — |
| | (5 | ) | | — |
|
Impairment losses recognized | — |
| | — |
| | — |
| | — |
|
|
| | | | | | | | | | | | | | | |
| Nine months ended |
| January 24, 2014 | | January 25, 2013 |
(in millions) | Debt (a) | | Equity (b) | | Debt (a) | | Equity (b)(c) |
Proceeds from sales | $ | 5,515 |
| | $ | 91 |
| | $ | 8,073 |
| | $ | 90 |
|
Gross realized gains | 6 |
| | 59 |
| | 51 |
| | 52 |
|
Gross realized losses | (9 | ) | | — |
| | (12 | ) | | — |
|
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 January 24, 2014 and April 26, 2013, the credit loss portion of other-than-temporary impairments on debt securities was $4 million and $9 million, respectively. The total other-than-temporary impairment losses on available-for-sale debt securities for the three and nine months ended January 24, 2014 and January 25, 2013 were not significant.
The January 24, 2014 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) | January 24, 2014 |
Due in one year or less | $ | 1,510 |
|
Due after one year through five years | 6,802 |
|
Due after five years through ten years | 2,798 |
|
Due after ten years | 128 |
|
Total | $ | 11,238 |
|
As of January 24, 2014 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 $670 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 January 24, 2014 | | Fair Value Measurements Using Inputs Considered as |
(in millions) | Level 1 | | Level 2 | | Level 3 |
Assets: | |
| | |
| | |
| | |
|
Corporate debt securities | $ | 5,507 |
| | $ | — |
| | $ | 5,498 |
| | $ | 9 |
|
Auction rate securities | 96 |
| | — |
| | — |
| | 96 |
|
Mortgage-backed securities | 1,390 |
| | — |
| | 1,390 |
| | — |
|
U.S. government and agency securities | 3,540 |
| | 1,523 |
| | 2,017 |
| | — |
|
Foreign government and agency securities | 44 |
| | — |
| | 44 |
| | — |
|
Certificates of deposit | 6 |
| | — |
| | 6 |
| | — |
|
Other asset-backed securities | 655 |
| | — |
| | 655 |
| | — |
|
Debt funds | 1,169 |
| | — |
| | 1,169 |
| | — |
|
Marketable equity securities | 88 |
| | 88 |
| | — |
| | — |
|
Exchange-traded funds | 65 |
| | 65 |
| | — |
| | — |
|
Derivative assets | 263 |
| | 156 |
| | 107 |
| | — |
|
Total assets | $ | 12,823 |
| | $ | 1,832 |
| | $ | 10,886 |
| | $ | 105 |
|
| | | | | | | |
Liabilities: | |
| | |
| | |
| | |
|
Derivative liabilities | $ | 111 |
| | $ | 97 |
| | $ | 14 |
| | $ | — |
|
Contingent consideration associated with acquisitions subsequent to April 24, 2009 | 66 |
| | — |
| | — |
| | 66 |
|
Total liabilities | $ | 177 |
| | $ | 97 |
| | $ | 14 |
| | $ | 66 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value as of April 26, 2013 | | Fair Value Measurements Using Inputs Considered as |
(in millions) | 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 January 24, 2014: |
| | | |
| 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 or nine months ended January 24, 2014 or January 25, 2013. 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 nine months ended January 24, 2014 and January 25, 2013: |
| | | | | | | | | | | | | | | | | | | |
Three months ended January 24, 2014 | |
| | |
| | |
| | |
| | |
|
(in millions) | Total Level 3 Investments | | Corporate debt securities | | Auction rate securities | | Mortgage- backed securities | | Other asset- backed securities |
Balance as of October 25, 2013 | $ | 118 |
| | $ | 9 |
| | $ | 105 |
| | $ | 4 |
| | $ | — |
|
Total realized losses and other-than-temporary impairment losses included in earnings | (3 | ) | | — |
| | (3 | ) | | — |
| | — |
|
Total unrealized gains (losses) included in other comprehensive income | (3 | ) | | — |
| | (3 | ) | | — |
| | — |
|
Settlements | (7 | ) | | — |
| | (3 | ) | | (4 | ) | | — |
|
Balance as of January 24, 2014 | $ | 105 |
| | $ | 9 |
| | $ | 96 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | |
Three months ended January 25, 2013 | |
| | |
| | |
| | |
| | |
|
(in millions) | Total Level 3 Investments | | Corporate debt securities | | Auction rate securities | | Mortgage- backed securities | | Other asset- backed securities |
Balance as of October 26, 2012 | $ | 171 |
| | $ | 10 |
| | $ | 129 |
| | $ | 27 |
| | $ | 5 |
|
Total unrealized gains (losses) included in other comprehensive income | 5 |
| | (1 | ) | | 5 |
| | — |
| | 1 |
|
Balance as of January 25, 2013 | $ | 176 |
| | $ | 9 |
| | $ | 134 |
| | $ | 27 |
| | $ | 6 |
|
| | | | | | | | | |
Nine months ended January 24, 2014 | |
| | |
| | |
| | |
| | |
|
(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 | (5 | ) | | — |
| | (5 | ) | | — |
| | — |
|
Total unrealized gains (losses) included in other comprehensive income | 3 |
| | — |
| | 2 |
| | 1 |
| | — |
|
Settlements | (20 | ) | | (1 | ) | | (4 | ) | | (15 | ) | | — |
|
Balance as of January 24, 2014 | $ | 105 |
| | $ | 9 |
| | $ | 96 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | |
Nine months ended January 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 27, 2012 | $ | 172 |
| | $ | 10 |
| | $ | 127 |
| | $ | 29 |
| | $ | 6 |
|
Total unrealized gains (losses) included in other comprehensive income | 6 |
| | (1 | ) | | 7 |
| | — |
| | — |
|
Settlements | (2 | ) | | — |
| | — |
| | (2 | ) | | — |
|
Balance as of January 25, 2013 | $ | 176 |
| | $ | 9 |
| | $ | 134 |
| | $ | 27 |
| | $ | 6 |
|
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 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 $670 million as of January 24, 2014 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 their fair value. The Company did not record any impairment charges related to cost method investments during the three and nine months ended January 24, 2014 and the three months ended January 25, 2013. During the nine months ended January 25, 2013, the Company determined that the fair values of certain cost method investments were below their carrying values and that the
MEDTRONIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 nine months ended January 25, 2013, 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 assesses the impairment of goodwill annually in the third quarter or whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The aggregate carrying amount of goodwill was $10.593 billion and $10.329 billion as of January 24, 2014 and April 26, 2013, respectively.
Impairment testing for goodwill is performed at the reporting unit level. The test for impairment of goodwill requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The Company calculated the excess of each reporting unit's fair value over its carrying amount, including goodwill, utilizing a discounted cash flow analysis. As a result of the analysis performed, the fair value of each reporting unit's goodwill was deemed to be greater than the carrying value. The Company did not record any goodwill impairments during the three and nine months ended January 24, 2014 or January 25, 2013.
The recently acquired businesses of Cardiocom and Kanghui are separate reporting units and are tested for goodwill impairment independently; therefore, they are more sensitive to changes in assumptions impacting fair value. The carrying amount of goodwill was $417 million and $123 million for the Kanghui and Cardiocom reporting units, respectively, as of January 24, 2014. As of the date of the goodwill testing, the fair values of these two reporting units exceeded their respective carrying values by more than 10 percent.
The Company assesses the impairment of IPR&D annually in the third quarter or whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The aggregate carrying amount of IPR&D was $130 million and $363 million as of January 24, 2014 and April 26, 2013, respectively. The majority of our IPR&D at January 24, 2014 is related to our In Pact family of drug-eluting balloons. Similar to the goodwill impairment test, the IPR&D impairment test requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The Company calculated the excess of IPR&D asset fair values over their carrying values utilizing a discounted future cash flow analysis. As a result of the analysis performed during the three months ended January 24, 2014, the fair value of certain IPR&D assets were deemed to be less than their carrying value, resulting in a pre-tax impairment loss of $194 million, primarily related to the Ardian acquisition, that was recorded in acquisition-related items in the condensed consolidated statement of earnings. The Ardian impairment resulted from the Company's January 2014 announcement that the U.S. pivotal trial in renal denervation for treatment-resistant hypertension, Symplicity HTN-3, failed to meet its primary efficacy endpoint. Based on the results of the trial, we have suspended enrollment of our renal denervation hypertension trials that are being conducted in the U.S., Japan, and India. The annual goodwill impairment test performed in the third quarter of fiscal year 2014 included the projected future cash flows of Ardian, which resides in the Coronary reporting unit. See discussion below for additional information on impairments recorded on the Ardian long-lived asset group. During the three months ended January 25, 2013, the fair value of IPR&D assets related to a technology acquired by the Structural Heart business was deemed to be less than the carrying value, resulting in a pre-tax impairment loss of $5 million that was recorded in acquisition-related items in the condensed consolidated statement of earnings. The Company did not record any additional IPR&D impairments during the nine months ended January 24, 2014 or January 25, 2013. 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 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 $2.242 billion as of January 24, 2014 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. During the three months ended January 24, 2014 and January 25, 2013, the Company determined that a change in events and circumstances indicated that the carrying amount of certain intangible assets, representing less than five percent of the total aggregate carrying amount of intangible assets, may not be fully recoverable. During the three months ended January 24, 2014, the carrying amount of Ardian intangible assets was less than the undiscounted future cash flows, therefore
MEDTRONIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the Company assessed the fair value of the assets and recorded an impairment of $41 million that was included in acquisition-related items in the condensed consolidated statement of earnings. During the three months ended January 25, 2013, the carrying amount of one intangible asset was less than the undiscounted future cash flows, therefore the Company assessed the asset's fair value and recorded an impairment of $2 million. The Company did not record any additional significant intangible asset impairments during the three or nine months ended January 24, 2014 or January 25, 2013.
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. During the three months ended January 24, 2014, the Company determined that a change in events and circumstances indicated that the carrying amount of Ardian property, plant, and equipment may not be fully recoverable and recorded an impairment of $3 million that was recorded in acquisition-related items in the condensed consolidated statement of earnings. The Company did not record any additional impairments of property, plant, and equipment during the nine months ended January 24, 2014 or January 25, 2013.
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 January 24, 2014 was $10.251 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 January 24, 2014 and April 26, 2013, outstanding commercial paper totaled $1.710 billion and $125 million, respectively. During the three and nine months ended January 24, 2014, the weighted average original maturity of the commercial paper outstanding was approximately 83 days and 52 days, respectively, and the weighted average interest rate was 0.11 percent and 0.10 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 the commercial paper program. As of January 24, 2014 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 January 24, 2014.
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.
MEDTRONIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long-Term Debt
Long-term debt consisted of the following: |
| | | | | | | | | | |
(in millions, except interest rates) | | Maturity by Fiscal Year | | Payable as of January 24, 2014 | | 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 | | 73 |
| | 181 |
|
Deferred gains from interest rate swap terminations | | - | | 28 |
| | 50 |
|
Capital lease obligations | | 2015 - 2025 | | 141 |
| | 152 |
|
Bank borrowings | | 2015 | | 3 |
| | 3 |
|
Discount | | 2018 - 2043 | | (19 | ) | | (20 | ) |
Total Long-Term Debt | | | | $ | 9,601 |
| | $ | 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 January 24, 2014. 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.
In February 2014, the Company issued four tranches of Senior Notes (collectively the 2014 Senior Notes) with an aggregate face value of $2.000 billion. The first tranche consisted of $250 million of floating rate Senior Notes due 2017 (the 2017 floating rate notes). The second tranche consisted of $250 million of 0.875 percent Senior Notes due 2017 (the 2017 notes). The third tranche consisted of $850 million of 3.625 percent Senior Notes due 2024 (the 2024 notes). The fourth tranche consisted of $650 million of 4.625 percent Senior Notes due 2044 (the 2044 notes). Interest on the 2017 floating rate notes is payable quarterly and interest on the 2017 notes, 2024 notes, and 2044 notes are payable semi-annually. The Company intends to use the net proceeds for working capital and general corporate purposes, which may include repayment of our indebtedness.
As of January 24, 2014, 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 January 24, 2014 and April 26, 2013 was $7.323 billion and $6.812 billion, respectively. The aggregate currency exchange rate gains for the three and nine months ended January 24, 2014 were less than $1 million and $3 million, respectively. The aggregate currency exchange rate gains for the three and nine months ended January 25, 2013 were $17 million and $11 million, respectively. These gains 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 January 24, 2014 and April 26, 2013, was $2.091 billion and $2.059 billion, respectively.
The amount and location of the gains (losses) in the condensed consolidated statements of earnings related to derivative instruments, not designated as hedging instruments, for the three and nine months ended January 24, 2014 and January 25, 2013 are as follows: |
| | | | | | | | | | |
(in millions) | | | | Three months ended |
Derivatives Not Designated as Hedging Instruments | | Location | | January 24, 2014 | | January 25, 2013 |
Foreign currency exchange rate contracts | | Other expense, net | | $ | 75 |
| | $ | (4 | ) |
|
| | | | | | | | | | |
(in millions) | | | | Nine months ended |
Derivatives Not Designated as Hedging Instruments | | Location | | January 24, 2014 | | January 25, 2013 |
Foreign currency exchange rate contracts | | Other expense, net | | $ | 58 |
| | $ | (24 | ) |
| | | | | | |
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 nine months ended January 24, 2014 or January 25, 2013. 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 nine ended January 24, 2014 or January 25, 2013. 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 January 24, 2014 and April 26, 2013, was $5.232 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 gains (losses) and location of the gains (losses) 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 January 24, 2014 and January 25, 2013 are as follows: |
| | | | | | | | | | |
Three months ended January 24, 2014 | | |
| | | | |
|
| | Gross Gains (Losses) Recognized in OCI on Effective Portion of Derivative | | Effective Portion of Gains (Losses) 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 | | $ | 80 |
| | Other expense, net | | $ | 16 |
|
| | |
| | Cost of products sold | | (4 | ) |
Total | | $ | 80 |
| | | | $ | 12 |
|
Three months ended January 25, 2013 | | |
| | | | |
|
| | Gross Gains (Losses) Recognized in OCI on Effective Portion of Derivative | | Effective Portion of Gains (Losses) 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 | | $ | (20 | ) | | Other expense, net | | $ | 22 |
|
| | |
| | Cost of products sold | | 4 |
|
Total | | $ | (20 | ) | | | | $ | 26 |
|
Nine months ended January 24, 2014 | | |
| | | | |
|
| | Gross Gains (Losses) Recognized in OCI on Effective Portion of Derivative | | Effective Portion of Gains (Losses) 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 | | $ | (74 | ) | | Other expense, net | | $ | 71 |
|
| | |
| | Cost of products sold | | (33 | ) |
Total | | $ | (74 | ) | | | | $ | 38 |
|
Nine months ended January 25, 2013 | | |
| | | | |
|
| | Gross Gains (Losses) Recognized in OCI on Effective Portion of Derivative | | Effective Portion of Gains (Losses) 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 | | $ | (21 | ) | | Other expense, net | | $ | 64 |
|
| | |
| | Cost of products sold | | 5 |
|
Total | | $ | (21 | ) | | | | $ | 69 |
|
Forecasted Debt Issuance Interest Rate Risk
Forward starting interest rate derivative instruments designated as cash flow hedges are designed to manage the exposure to interest rate volatility with regard to future issuances of fixed-rate debt. The effective portion of the gain or loss on the forward starting interest rate derivative instruments that are designated and qualify as a cash flow hedge, 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 January 24, 2014, 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 nine months ended January 24, 2014, the Company reclassified $2 million and $6 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 nine months ended January 25, 2013, 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 January 24, 2014 and April 26, 2013 was an unrealized gain (loss) of $20 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 January 24, 2014 and April 26, 2013, the Company had $15 million and $58 million, respectively, in after-tax net unrealized gains associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $25 million of after-tax net unrealized gains as of January 24, 2014 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 terminated 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 January 24, 2014 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 January 24, 2014, 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 $73 million unrealized gain and the market value of the hedged item was a net $73 million unrealized loss at January 24, 2014, 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 nine months ended January 24, 2014 or January 25, 2013.
During the three and nine months ended January 24, 2014 and January 25, 2013, 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 nine months ended January 24, 2014 or January 25, 2013 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 January 24, 2014 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. |
| | | | | | | | | | | |
January 24, 2014 | | | |
| | | | |
|
| 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 | | $ | 118 |
| | Other accrued expenses | | $ | 75 |
|
Interest rate contracts | Other assets | | 107 |
| | Other long-term liabilities | | 14 |
|
Foreign currency exchange rate contracts | Other assets | | 38 |
| | Other long-term liabilities | | 22 |
|
Total derivatives designated as hedging instruments | | | $ | 263 |
| | | | $ | 111 |
|
Derivatives not designated as hedging instruments | | | |
| | | | |
|
Total derivatives not designated as hedging instruments | | | $ | — |
| | | | $ | — |
|
| | | | | | | |
Total derivatives | | | $ | 263 |
| | | | $ | 111 |
|
|
| | | | | | | | | | | |
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 | |