Derivatives and Foreign Exchange Risk Management

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

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

Freestanding Derivative Forward Contracts

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

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



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



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

Cash Flow Hedges

Foreign Currency Exchange Rate Risk

Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted transactions denominated in a foreign currency that will take place in the future. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. No gains or losses relating to ineffectiveness of cash flow hedges were recognized in earnings during the three and six months ended October 25, 2013 or October 26, 2012. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness and no hedges were derecognized or discontinued during the three months and six ended October 25, 2013 or October 26, 2012. The cash flows from these contracts are reported as operating activities in the condensed consolidated statements of cash flows. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at October 25, 2013 and April 26, 2013, was $5.198 billion and $4.753 billion, respectively, and will mature within the subsequent three-year period.

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



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

Forecasted Debt Issuance Interest Rate Risk

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

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

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

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

Fair Value Hedges

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

Interest rate derivative instruments designated as fair value hedges are designed to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.

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

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

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

Balance Sheet Presentation

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



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

Total derivatives		$	242		$	135



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

Total derivatives		$	394		$	58

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



October 25, 2013				Gross Amount Not Offset on the Balance Sheet
(in millions)	Gross Amount of Recognized Assets (Liabilities)			Financial Instruments			Cash Collateral (Received) or Posted		Net Amount
Derivative Assets
Foreign currency exchange rate contracts	$	123		$	(74	)	$	—	$	49
Interest rate contracts	119			(31		)	—		88
	$	242		$	(105	)	$	—	$	137

Derivative Liabilities
Foreign currency exchange rate contracts	$	(131	)	$	101		$	—	$	(30	)
Interest rate contracts	(4		)	4			—		—
	$	(135	)	$	105		$	—	$	(30	)
Total	$	107		$	—		$	—	$	107



April 26, 2013				Gross Amount Not Offset on the Balance Sheet
(in millions)	Gross Amount of Recognized Assets (Liabilities)			Financial Instruments			Cash Collateral (Received) or Posted			Net Amount
Derivative Assets
Foreign currency exchange rate contracts	$	213		$	(42	)	$	(24	)	$	147
Interest rate contracts	181			(16		)	(6		)	159
	$	394		$	(58	)	$	(30	)	$	306

Derivative Liabilities
Foreign currency exchange rate contracts	$	(40	)	$	40		$	—		$	—
Interest rate contracts	(18		)	18			—			—
	$	(58	)	$	58		$	—		$	—
Total	$	336		$	—		$	(30	)	$	306

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of interest-bearing investments, forward exchange derivative contracts, and trade accounts receivable.

The Company maintains cash and cash equivalents, investments, and certain other financial instruments (including currency exchange rate and interest rate derivative contracts) with various major financial institutions. The Company performs periodic evaluations of the relative credit standings of these financial institutions and limits the amount of credit exposure with any one institution. In addition, the Company has collateral credit agreements with its primary derivatives counterparties. Under these agreements, either party is required to post eligible collateral when the market value of transactions covered by the agreement exceeds specific thresholds, thus limiting credit exposure for both parties. As noted in the above table, as of October 25, 2013 no collateral was received or posted and as of April 26, 2013 collateral was received by its counterparties. The collateral received was recorded in cash and cash equivalents, with the offset recorded in other accrued expenses on the condensed consolidated balance sheets.

Global concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers and their dispersion across many geographic areas. The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. However, a significant amount of trade receivables are with hospitals that are dependent upon governmental health care systems in many countries. The current economic conditions in many countries outside the U.S. (particularly the economic challenges faced by Italy, Spain, Portugal, and Greece) may continue to increase the average length of time it takes the Company to collect on its outstanding trade receivables in these countries as certain payment patterns have been impacted. As of October 25, 2013 and April 26, 2013, the Company’s aggregate accounts receivable balance for Italy, Spain, Portugal, and Greece, net of the allowance for doubtful accounts, was $757 million and $770 million, respectively. The Company continues to monitor the creditworthiness of customers located in these and other geographic areas. In the past, trade receivable balances with certain customers in these countries have accumulated over time and were subsequently settled as large lump-sum payments. In the first quarter of fiscal year 2013, the Company received a $212 million payment in Spain. Although the Company does not currently foresee a significant credit risk associated with the outstanding accounts receivable, repayment is dependent upon the financial stability of the economies of these countries. For certain Greece customers, collectability is not reasonably assured for revenue transactions and the Company defers revenue recognition until all revenue recognition criteria are met. As of October 25, 2013 and April 26, 2013, the Company's deferred revenue balance for certain Greece customers was $13 million and $21 million, respectively. As of October 25, 2013 and April 26, 2013, no one customer represented more than 10 percent of the Company’s outstanding accounts receivable.