Medtronic 2016 Annual Report Download - page 57

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Table of Contents
54
in connection with the cash tender offer and redemption of certain outstanding debt securities, as discussed within the “Liquidity
and Capital Resources" section of this management’s discussion and analysis. In addition, during the second quarter of fiscal year
2016 we incurred a $45 million loss on interest rate swaps, which were previously entered into in advance of a planned debt
issuance that is no longer expected after the internal reorganization of the ownership of certain legacy Covidien businesses
completed in the second quarter of fiscal year 2016. The Company treats this interest expense charge, as well as the $183 million
charge associated with the cash tender offer and redemption as Non-GAAP Adjustments. The increase in interest expense, net
during fiscal year 2016 was partially offset by increased interest income earned on higher investment balances, as compared to
fiscal year 2015. Based on current expected rates, we expect interest expense, net to increase in future quarters as our investment
balances decline resulting from the deployment of capital, including incremental share repurchases and net debt reduction.
In fiscal year 2015, interest expense, net was $280 million, as compared to $108 million in fiscal year 2014. For fiscal year 2015,
the increase in interest expense, net was primarily due to the impact of the incremental interest expense resulting from the issuance
of $17.0 billion of debt to fund the Covidien acquisition and the $3.0 billion term loan funded in January 2015. The $17.0 billion
debt resulted in $77 million of incremental interest expense in the third quarter of fiscal year 2015 prior to the close of the Covidien
transaction. The Company treated this interest expense item as a Non-GAAP Adjustment.
See our discussion in the “Liquidity and Capital Resources” section of this management’s discussion and analysis for more
information regarding our investment portfolio.
Income Taxes
Fiscal Year
(in millions) 2016 2015 2014
Provision for income taxes $ 798 $ 811 $ 640
Income from operations before taxes $ 4,336 $ 3,486 $ 3,705
Effective tax rate 18.4 % 23.3 % 17.3%
Non-GAAP provision for income taxes $ 1,171 $ 1,055 $ 971
Non-GAAP income from operations before taxes $ 7,399 $ 5,799 $ 5,069
Non-GAAP Nominal Tax Rate 15.8 % 18.2 % 19.2%
Difference between the effective tax rate and Non-GAAP Nominal Tax Rate (2.6)% (5.1)% 1.9%
Our effective tax rate for fiscal year 2016 was 18.4 percent compared to 23.3 percent in the prior fiscal year. The decrease in our
effective tax rate was due to the net tax impact of inventory step-up, debt tender premium, acquisition-related items, certain tax
adjustments, amortization of intangible assets, the impact from the acquisition of Covidien, operational tax benefits described
below, and year-over-year changes in operational results by jurisdiction.
Our Non-GAAP Nominal Tax Rate for fiscal year 2016 was 15.8 percent compared to 18.2 percent in the prior fiscal year. The
decrease in our Non-GAAP Nominal Tax Rate for fiscal year 2016 as compared to the prior fiscal year was primarily due to the
impact of the Covidien acquisition, operational tax benefits, and year-over-year changes in operational results by jurisdiction.
During fiscal year 2016, we recorded $97 million in operational tax benefits. The retroactive renewal and extension of the U.S.
federal research and development tax credit resulted in a $16 million operational tax benefit for fiscal year 2016. In addition, we
recorded a $40 million benefit from the reversal of a valuation allowance associated with foreign net operating losses, and a $41
million net benefit associated with the resolution of certain income tax audits, finalization of certain tax returns, and changes to
uncertain tax position reserves.
Our effective tax rate for fiscal year 2015 was 23.3 percent compared to 17.3 percent from the prior fiscal year. The increase in
our effective tax rate was due to the net tax impact of special charges (gains), net, restructuring charges, net, certain litigation
charges, net, acquisition-related items, certain tax adjustments, the impact from the acquisition of Covidien, the operational tax
benefits described below.
Our Non-GAAP Nominal Tax Rate for fiscal year 2015 was 18.2 percent compared to 19.2 percent in the prior fiscal year. The
decrease in our Non-GAAP Nominal Tax Rate for fiscal year 2015 as compared to the prior fiscal year was primarily due to the
impact of the Covidien acquisition, operational tax benefits described below, and year-over-year changes in operational results by
jurisdiction.