EX-13 16 medtronic092639s2_ex13.htm ANNUAL REPORT

Exhibit 13

TABLE OF CONTENTS

 

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

1

Reports of Management

 

28

Report of Independent Registered Public Accounting Firm

 

29

Consolidated Statements of Earnings

 

30

Consolidated Balance Sheets

 

31

Consolidated Statements of Shareholders’ Equity

 

32

Consolidated Statements of Cash Flows

 

33

Notes to Consolidated Financial Statements

 

34

Selected Financial Data

 

80

Price Range of Medtronic Stock

 

80




Management’s Discussion and Analysis of Financial Condition and Results of Operations

Understanding Our Financial Information

          The following discussion and analysis provides information management believes to be relevant to understanding the financial condition and results of operations of Medtronic, Inc. (Medtronic or the Company). You should read this discussion and analysis along with our consolidated financial statements and related Notes thereto as of April 24, 2009 and April 25, 2008 and for each of the three fiscal years ended April 24, 2009, April 25, 2008 and April 27, 2007.

          Organization of Financial Information Management’s discussion and analysis, presented on pages 1 to 27 of this report, provides material historical and prospective disclosures designed to enable investors and other users to assess our financial condition and results of operations.

          The consolidated financial statements are presented on pages 30 to 79 of this report, and include the consolidated statements of earnings, consolidated balance sheets, consolidated statements of shareholders’ equity, consolidated statements of cash flows and the related Notes, which are an integral part of the consolidated financial statements.

          Financial Trends Throughout this financial information, you will read about transactions or events that materially contribute to or reduce earnings and materially affect financial trends. We refer to these transactions and events as either special (such as asset impairment or contributions to The Medtronic Foundation), restructuring, certain litigation and purchased in-process research and development (IPR&D) charges, or certain tax adjustments. These charges, or benefits, result from facts and circumstances that vary in frequency and/or impact to operations. While understanding these charges or benefits is important to understanding and evaluating financial trends, other transactions or events may also have a material impact on financial trends. A complete understanding of the special, restructuring, certain litigation and IPR&D charges and certain tax adjustments is necessary in order to estimate the likelihood that financial trends will continue.

          Our fiscal year-end is the last Friday in April, and, therefore, the total weeks in a fiscal year can fluctuate between fifty-two and fifty-three weeks. Fiscal years 2009, 2008 and 2007 consisted of fifty-two weeks. Fiscal year 2010 will be a fifty-three week year.

Executive Level Overview

          We are the global leader in medical technology - alleviating pain, restoring health and extending life for millions of people around the world. We function in seven operating segments, consisting of Cardiac Rhythm Disease Management (CRDM), Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control.

          Through these seven operating segments, we develop, manufacture, and market our medical devices in more than 120 countries. Our primary products include those for cardiac rhythm disorders, cardiovascular disease, neurological disorders, spinal conditions and musculoskeletal trauma, urological and digestive disorders, diabetes, and ear, nose, and throat conditions.

          Net earnings for the fiscal year ended April 24, 2009 were $2.169 billion, a 3 percent decrease from net earnings of $2.231 billion for the fiscal year ended April 25, 2008. Diluted earnings per share were $1.93 and $1.95 for the fiscal years ended April 24, 2009 and April 25, 2008, respectively. Fiscal year 2009 net earnings included after-tax special, restructuring, certain litigation and IPR&D charges and certain tax adjustments that decreased net earnings by $1.114 billion and had a $0.99 impact on diluted earnings per share. Fiscal year 2008 net earnings included after-tax special, restructuring, certain litigation and IPR&D charges that decreased net earnings by $742 million and had a $0.65 impact on diluted earnings per share. See further discussion of these charges/benefits in the “Special, Restructuring, Certain Litigation and IPR&D Charges and Certain Tax Adjustments” section of this management’s discussion and analysis.

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

Fiscal Year

 

 

 

 

(dollars in millions)

 

2009

 

2008

 

% Change

 

Cardiac Rhythm Disease Management

 

$

5,014

 

$

4,963

 

 

1

%

Spinal

 

 

3,400

 

 

2,982

 

 

14

 

CardioVascular

 

 

2,437

 

 

2,131

 

 

14

 

Neuromodulation

 

 

1,434

 

 

1,311

 

 

9

 

Diabetes

 

 

1,114

 

 

1,019

 

 

9

 

Surgical Technologies

 

 

857

 

 

780

 

 

10

 

Physio-Control

 

 

343

 

 

329

 

 

4

 

Total Net Sales

 

$

14,599

 

$

13,515

 

 

8

%

1



          Net sales in fiscal year 2009 were $14.599 billion, an increase of 8 percent from the prior fiscal year. Foreign currency translation had an unfavorable impact of $100 million on net sales when compared to the prior fiscal year. The net sales increase in the current fiscal year was driven by the addition of Kyphon to our Spinal business in the third quarter of fiscal year 2008 and double digit sales growth in the CardioVascular and Surgical Technologies businesses. Sales outside the United States (U.S.) were $5.602 billion compared to $5.179 billion for the prior fiscal year. Growth outside the U.S. continued to be positive, where three of our operating segments had strong double digit growth rates. See our discussion in the “Net Sales” section of this management’s discussion and analysis for more information on the results of our significant operating segments.

          We remain committed to our Mission of developing lifesaving and life enhancing therapies to alleviate pain, restore health and extend life. The diversity and depth of our current product offerings enable us to provide medical therapies to patients worldwide. We work to improve patient access through well planned studies, which show the safety, efficacy and cost-effectiveness of our therapies, and our alliance with patients, clinicians, regulators and reimbursement agencies. Our investments in research and development, strategic acquisitions, expanded clinical trials and infrastructure provide the foundation for our growth. We are confident in our ability to drive long-term shareholder value using principles of our Mission, our strong product pipelines and continued commitment to innovative research and development.

Certain Litigation Charges Recorded – Subsequent Event

          On June 1, 2009, the U.S. Court of Appeals for the Federal Circuit affirmed a December 2007 ruling of infringement stemming from the Vertex line of multiaxial screws in our litigation with DePuy Spine (formerly DePuy/AcroMed), a subsidiary of Johnson & Johnson (J&J) , and Biedermann Motech GMbH (collectively, DePuy). As a result of the U.S. Court of Appeals’ decision, we recorded a reserve of $178 million which is expected to cover the revised damages award and pre- and post-judgment interest. Since the ruling provided additional evidence about conditions that existed at the balance sheet date, the charge was included in the consolidated financial statements for the fiscal year ended April 24, 2009. See the “Special, Restructuring, Certain Litigation and IPR&D Charges and Certain Tax Adjustments” section of this management’s discussion and analysis and Note 16 to the consolidated financial statements for additional information.

Other Matters

          In January 2007, we announced a voluntary suspension of U.S. shipments of Physio-Control products manufactured at our facility in Redmond, Washington in order to address quality system issues. In the months following the suspension of U.S. shipments, we worked diligently with the U.S. Food and Drug Administration (FDA) to address the quality system issues and resumed limited shipments to critical need customers. On May 9, 2008, the U.S. District Court for the Western District of Washington approved the consent decree that was signed with the FDA regarding quality system improvements for our external defibrillator products. The agreement addresses issues raised by the FDA during inspections regarding Physio-Control’s quality system processes and outlines the actions Physio-Control must take in order to resume unrestricted distribution of our external defibrillators. We continue to work diligently to implement the required actions necessary to resolve the quality issues addressed by the FDA.

Critical Accounting Estimates

          We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP). Our most significant accounting policies are disclosed in Note 1 to the consolidated financial statements.

          The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying Notes. Our estimates and assumptions, including those related to bad debts, inventories, intangible assets, asset impairment, legal proceedings, IPR&D, warranty obligations, product liability, self-insurance, pension and post-retirement obligations, sales returns and discounts, stock-based compensation, valuation of equity and debt securities and income tax reserves are updated as appropriate, which in most cases is quarterly. We base our estimates on historical experience, actuarial valuations or various assumptions that are believed to be reasonable under the circumstances.

          Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:

          Legal Proceedings We are involved in a number of legal actions involving both product liability and intellectual property disputes. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages as well as other relief, including injunctions barring the sale of products that are the subject of the lawsuit, that could require significant expenditures or result in lost revenues. In accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies,” (SFAS No. 5) we record a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. Our significant legal proceedings are discussed in Note 16 to the consolidated financial statements. While it is not possible to predict the outcome for most of the matters discussed in Note 16 to the consolidated financial statements, we believe it is possible that costs associated with them could have a material adverse impact on our consolidated earnings, financial position or cash flows.

2



          Tax Strategies Our effective tax rate is based on income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may or may not prevail. These reserves are established and adjusted in accordance with the principles of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN No. 48). Under FIN No. 48, if we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50 percent likely of being realized upon settlement. We presume that all tax positions will be examined by a taxing authority with full knowledge of all relevant information. We regularly monitor our tax positions and FIN No. 48 tax liabilities. We reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit, or derecognize a previously recorded tax benefit, when (i) there is a completion of a tax audit, (ii) there is a change in applicable tax law including a tax case or legislative guidance, or (iii) there is an expiration of the statute of limitations. Significant judgment is required in accounting for tax reserves. Although we believe that we have adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on our effective tax rate in future periods.

          In the event there is a special, restructuring, certain litigation and/or IPR&D charge recognized in our operating results, the tax cost or benefit attributable to that item is separately calculated and recorded. Because the effective rate can be significantly impacted by these discrete items that take place in the period, we often refer to our tax rate using both the effective rate and the non-GAAP nominal tax rate. The non-GAAP nominal tax rate is defined as the income tax provision as a percentage of earnings before income taxes, excluding special, restructuring, certain litigation and IPR&D charges and certain tax adjustments. We believe that this resulting non-GAAP financial measure provides useful information to investors because it excludes the effect of these discrete items so that investors can compare our recurring results over multiple periods.

          Tax regulations require certain items to be included in the tax return at different times than when those items are required to be recorded in the consolidated financial statements. As a result, our effective tax rate reflected in our consolidated financial statements is different than that reported in our tax returns. Some of these differences are permanent, such as expenses that are not deductible on our tax return, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax benefit in our consolidated statements of earnings. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent tax expense recognized in our consolidated financial statements for which payment has been deferred or expense has already been taken as a deduction on our tax return but has not yet been recognized as an expense in our consolidated statements of earnings.

          The Company’s overall tax rate including the tax impact of special, restructuring, certain litigation and IPR&D charges and certain tax adjustments has resulted in an effective tax rate of 16.4 percent for fiscal year 2009. Excluding the impact of the special, restructuring, certain litigation and IPR&D charges and certain tax adjustments, our operational and tax strategies have resulted in a non-GAAP nominal tax rate of 20.9 percent versus the U.S. Federal statutory rate of 35.0 percent. An increase in our nominal tax rate of 1.0 percent would have resulted in an additional income tax provision for the fiscal year ended April 24, 2009 of approximately $42 million. See the discussion of our tax rate and tax adjustments in the “Income Taxes” section of this management’s discussion and analysis.

          Valuation of IPR&D, Goodwill and Other Intangible Assets When we acquire a company, the purchase price is allocated, as applicable, between IPR&D, other identifiable intangible assets, net tangible assets and goodwill as required by U.S. GAAP. IPR&D is defined as the value assigned to those projects for which the related products have not received regulatory approval and have no alternative future use. Determining the portion of the purchase price allocated to IPR&D and other intangible assets requires us to make significant estimates. The amount of the purchase price allocated to IPR&D and other intangible assets is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time of the acquisition in accordance with accepted valuation methods. For IPR&D, these valuation methodologies include consideration of the risk of the project not achieving commercial feasibility.

          Goodwill represents the excess of the aggregate purchase price over the fair value of net assets, including IPR&D, of acquired businesses. Goodwill is tested for impairment annually, or more frequently if changes in circumstance or the occurrence of events suggest that the carrying amount may be impaired.

          The test for impairment requires us to make numerous estimates about fair value, most of which are based on projected future cash flows. Our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining assumptions necessary to estimate fair value, including projected future cash flows. Goodwill was $8.195 billion and $7.519 billion as of April 24, 2009 and April 25, 2008, respectively.

3



          Other intangible assets consist primarily of purchased technology, patents and trademarks which are amortized using the straight-line or accelerated basis, as appropriate, over their estimated useful lives, ranging from 3 to 20 years. As of April 24, 2009, all of our intangible assets have definite lives and are amortized on a straight-line basis. We review these intangible assets for impairment annually or as changes in circumstance or the occurrence of events suggest the remaining value may not be recoverable. Other intangible assets, net of accumulated amortization, were $2.477 billion and $2.193 billion as of April 24, 2009 and April 25, 2008, respectively.

Net Sales

The table below illustrates net sales by product line and operating segment for fiscal years 2009, 2008 and 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

Net Sales

 

 

 

 

 

 

Fiscal Year

 

 

 

 

Fiscal Year

 

 

 

 

(dollars in millions)

 

2009

 

2008

 

Change

 

2008

 

2007

 

Change

 

Defibrillation Systems

 

$

2,962

 

$

2,897

 

 

2

%

$

2,897

 

$

2,917

 

 

(1

)%

Pacing Systems

 

 

1,984

 

 

2,008

 

 

(1

)

 

2,008

 

 

1,895

 

 

6

 

Other

 

 

68

 

 

58

 

 

17

 

 

58

 

 

64

 

 

(9

)

CARDIAC RHYTHM DISEASE MANAGEMENT

 

 

5,014

 

 

4,963

 

 

1

 

 

4,963

 

 

4,876

 

 

2

 

Core Spinal

 

 

1,951

 

 

1,869

 

 

4

 

 

1,869

 

 

1,713

 

 

9

 

Biologics

 

 

840

 

 

815

 

 

3

 

 

815

 

 

704

 

 

16

 

Kyphon

 

 

609

 

 

298

 

 

104

 

 

298

 

 

 

 

N/A

 

SPINAL

 

 

3,400

 

 

2,982

 

 

14

 

 

2,982

 

 

2,417

 

 

23

 

Coronary Stents

 

 

844

 

 

710

 

 

19

 

 

710

 

 

560

 

 

27

 

Other Coronary/Peripheral

 

 

448

 

 

408

 

 

10

 

 

408

 

 

386

 

 

6

 

Endovascular

 

 

398

 

 

285

 

 

40

 

 

285

 

 

259

 

 

10

 

Revascularization and Surgical Therapies

 

 

447

 

 

431

 

 

4

 

 

431

 

 

417

 

 

3

 

Structural Heart Disease

 

 

300

 

 

297

 

 

1

 

 

297

 

 

287

 

 

3

 

CARDIOVASCULAR

 

 

2,437

 

 

2,131

 

 

14

 

 

2,131

 

 

1,909

 

 

12

 

Neuro Implantables

 

 

1,145

 

 

1,069

 

 

7

 

 

1,069

 

 

962

 

 

11

 

Gastroenterology and Urology

 

 

289

 

 

242

 

 

19

 

 

242

 

 

221

 

 

10

 

NEUROMODULATION

 

 

1,434

 

 

1,311

 

 

9

 

 

1,311

 

 

1,183

 

 

11

 

DIABETES

 

 

1,114

 

 

1,019

 

 

9

 

 

1,019

 

 

863

 

 

18

 

Core Ear, Nose and Throat (ENT)

 

 

352

 

 

323

 

 

9

 

 

323

 

 

278

 

 

16

 

Neurologic Technologies

 

 

320

 

 

298

 

 

7

 

 

298

 

 

261

 

 

14

 

Navigation

 

 

185

 

 

159

 

 

16

 

 

159

 

 

127

 

 

25

 

SURGICAL TECHNOLOGIES

 

 

857

 

 

780

 

 

10

 

 

780

 

 

666

 

 

17

 

PHYSIO-CONTROL

 

 

343

 

 

329

 

 

4

 

 

329

 

 

385

 

 

(15

)

TOTAL

 

$

14,599

 

$

13,515

 

 

8

%

$

13,515

 

$

12,299

 

 

10

%

          In fiscal years 2009 and 2008, net sales were (unfavorably)/favorably impacted by foreign currency translation of $(100) million and $400 million, respectively. The primary exchange rate movements that impact our consolidated net sales growth are the U.S. dollar as compared to the Euro and the Japanese Yen. The impact of foreign currency fluctuations on net sales is not indicative of the impact on net earnings due to the offsetting foreign currency impact on operating costs and expenses and our hedging activities. See the “Market Risk” section of this management’s discussion and analysis and Note 9 to the consolidated financial statements for further details on foreign currency instruments and our related risk management strategies.

          Forward-looking statements are subject to risk factors (see “Risk Factors” set forth in our Form 10-K).

          Cardiac Rhythm Disease Management CRDM products consist primarily of pacemakers, implantable defibrillators, leads, ablation products, electrophysiology catheters, products for the treatment of atrial fibrillation and information systems for the management of patients with our devices. CRDM fiscal year 2009 net sales were $5.014 billion, an increase of 1 percent over the prior fiscal year. Foreign currency translation had an unfavorable impact on net sales of approximately $25 million when compared to the prior fiscal year.

4



          Worldwide net sales of Defibrillation Systems, our largest product line, for fiscal year 2009 were $2.962 billion, an increase of 2 percent when compared to the prior fiscal year. Foreign currency had an unfavorable impact on net sales of $18 million when compared to the prior fiscal year. Net sales growth was primarily a result of worldwide net sales of Secura implantable cardioverter defibrillators (ICDs) and Consulta cardiac resynchronization therapy-defibrillators (CRT-Ds), both of which are included within our Vision 3D portfolio. Both the Secura ICDs and Consulta CRT-Ds feature Conexus wireless technology which allows for remote transfer of patient data and enables easier communication between the implanted device and programmer at the time of implant, during follow-up in a clinician’s office, or remotely using a patient home monitor. In addition, net sales for the comparative period were negatively impacted by our voluntary suspension of worldwide distribution of Sprint Fidelis (Fidelis) leads in the second quarter of fiscal year 2008.

          Pacing Systems net sales for fiscal year 2009 were $1.984 billion, a decrease of 1 percent when compared to the prior fiscal year. The decrease in net sales was primarily a result of a decrease in net sales in the U.S. due to significant competition, partially offset by sales growth outside the U.S. Net sales growth outside the U.S. for fiscal year 2009 was led by the acceptance of the Adapta family of pacemakers, including the Adapta and Sensia models. The Adapta family of pacemakers incorporates an array of automatic features to help physicians improve pacing therapy and streamline the patient follow-up process, potentially minimizing the amount of time spent in a physician’s office. Adapta offers Managed Ventricular Pacing, or MVP, which is an atrial-based pacing mode that significantly reduces unnecessary pacing in the right ventricle while providing the safety of a dual chamber backup if necessary. Clinical studies have suggested that reducing this unnecessary pacing in the right ventricle may decrease the risk of developing heart failure and atrial fibrillation, a potentially life-threatening irregular heartbeat.

          Fiscal year 2009 Defibrillation and Pacing Systems sales benefited from the continued acceptance of the Medtronic CareLink Service. The Medtronic CareLink Service enables clinicians to review data about implanted cardiac devices in real time and access stored patient and device diagnostics through a secure Internet website. The data, which is comparable to information provided during an in-clinic device follow-up, provides the patient’s medical team with a comprehensive view of how the device and patient’s heart are operating. Today, over 360,000 patients are being monitored through Medtronic’s CareLink Service worldwide, up from approximately 250,000 patients being monitored a year ago.

          CRDM fiscal year 2008 net sales grew by 2 percent from the prior fiscal year to $4.963 billion. Foreign currency translation had a favorable impact on net sales of approximately $160 million when compared to the prior fiscal year.

          Defibrillation Systems net sales of $2.897 billion for fiscal year 2008 decreased 1 percent when compared to fiscal year 2007. The decrease in net sales was the result of sales declines in the U.S., offset by sales growth outside the U.S. Global sales were driven by the Virtuoso ICD and the Concerto CRT-D. Both of these devices feature Conexus wireless technology. Net sales from Defibrillation Systems in the U.S. were $1.955 billion, a decrease of 6 percent in comparison to the prior year. The decrease in U.S. Defibrillation Systems net sales in fiscal year 2008 was primarily the result of the suspension of worldwide distribution of the Fidelis lead in the second quarter of fiscal year 2008. The distribution of the Fidelis lead was suspended because of the potential for lead fractures at higher than anticipated rates. Leads are sophisticated “wires” that connect an electronic pulse generator to the heart and are the pathway for therapy delivery between the device and heart. The Fidelis leads are applicable to therapy delivery in defibrillators only, including ICDs and CRT-Ds. Although the U.S. Defibrillation Systems market appeared to have stabilized from the impact of the Fidelis lead issue in the fourth quarter of fiscal year 2008, the rebound was not enough to offset the negative impact that the Fidelis lead issue had in the second and third quarters of fiscal year 2008. Outside the U.S., net sales from Defibrillation Systems were $942 million, an increase of 13 percent over the prior fiscal year. This growth was partially driven by favorable foreign currency translation as compared to the prior year, but was principally the result of strong market acceptance of the Virtuoso ICD and Concerto CRT-D. Outside the U.S., net sales were also impacted by the Fidelis lead issue. In particular, for most of the third quarter of fiscal year 2008, we did not have an approved high power lead on the market in Japan, and, as of the close of the fourth quarter of fiscal year 2008, we still did not have an approved single coil lead, which is a more popular lead design in certain Western European markets. However, in November 2008, we launched our Sprint Quattro Secure S single coil lead in markets outside the U.S.

          Pacing Systems net sales for fiscal year 2008 increased by 6 percent over the prior fiscal year to $2.008 billion. This increase was attributable primarily to continued worldwide acceptance of the Adapta family of pacemakers, including the Adapta, Versa and Sensia models, which were launched in the U.S. in the second quarter of fiscal year 2007 and have been available outside the U.S. since late fiscal year 2006. Net sales from Pacing Systems in the U.S. were $940 million, an increase of 1 percent. The revenue growth in the U.S. was slowed in the second and third quarters of fiscal year 2008 by the suspension of worldwide distribution of the Fidelis lead, as our field organization focused their efforts on serving Fidelis customers and patients. Outside the U.S., net sales from Pacing Systems were $1.068 billion, an increase of 11 percent over the prior fiscal year due primarily to foreign currency translation which had an $86 million favorable impact on net sales outside the U.S.

          Looking ahead, we expect our CRDM operating segment should be impacted by the following:

 

 

 

 

The further launch and acceptance of our Vision 3D portfolio, which represents a common technology platform comprised of a full line of ICDs, CRT-Ds, pacemakers and cardiac resynchronization therapy-pacemakers (CRT-Ps) to address the needs of patients with arrhythmias, heart failure and those at risk of sudden cardiac arrest. The Secura ICD and the Consulta CRT-D, the portfolio’s first ICD and CRT-D devices, became commercially available in the U.S. in the second quarter of fiscal year 2009. The Secura ICD and Consulta CRT-D were commercially available in Western Europe beginning in the first quarter of fiscal year 2009 and we successfully launched the Secura ICD and the Consulta CRT-D in Japan in the fourth quarter of fiscal year 2009. The devices within the Vision 3D portfolio provide enhanced follow-up and automaticity features and create meaningful manufacturing synergies.

5



 

 

 

 

Increased use in the U.S. of devices with OptiVol Fluid Status Monitoring as a result of recently published clinical evidence and reimbursement, which became effective January 1, 2009. OptiVol Fluid Status Monitoring is found on certain Medtronic CRT-Ds and ICDs and uses low electrical pulses that travel across the thoracic cavity to measure the level of resistance, indicating fluid in the chest which is a common symptom of heart failure. OptiVol’s ability to measure fluid status trends over time can provide important insights that are used in conjunction with ongoing monitoring of other patient symptoms.

 

 

 

 

The launch and acceptance of Magnetic Resonance Imaging (MRI) safe pacing systems. In November 2008, we launched the EnRhythm MRI SureScan pacing system (EnRhythm MRI) in certain European countries and in June 2009 we received CE Mark approval for the Advisa DR MRI, which is part of our Vision 3D portfolio. EnRhythm MRI was the first pacemaker system to be developed and tested specifically for safe use in MRI machines under specified scanning conditions. Both EnRhythm MRI and Advisa DR MRI are designed to address and mitigate interactions between the pacing system and the magnetic resonance environment. EnRhythm MRI is expected to launch in the U.S. in fiscal year 2010. Advisa DR MRI is expected to launch in Europe during the first half of fiscal year 2010.

 

 

 

 

The recent U.S. launch of the Reveal XT Insertable Cardiac Monitor (ICM), which offers comprehensive remote monitoring capabilities via the Medtronic CareLink Service and allows physicians to confirm or rule out an abnormal heart rhythm. The Reveal XT ICM became commercially available in the U.S. in February 2009.

 

 

 

 

The recent U.S. launch of the Attain Ability left-heart lead, which offers a thin lead body, providing physicians a tool to deliver therapy to hard-to-reach areas of the heart in heart failure patients. The Attain Ability left-heart lead became commercially available in the U.S. in May 2009. Following the launch in the U.S., the Attain Ability left-heart lead is commercially available in every major market in the world.

 

 

 

 

Our recent investments in two breakthrough atrial fibrillation therapy systems. In November 2008, we acquired CryoCath Technologies Inc. (CryoCath), a medical technology company that develops cryotherapy products to treat cardiac arrhythmias. CryoCath’s Arctic Front product is a minimally invasive cryo-balloon catheter designed specifically to treat atrial fibrillation and is currently approved in certain markets outside the U.S. In addition, in February 2009, we acquired Ablation Frontiers, Inc. (Ablation Frontiers), a company that develops RF ablation solutions for treatment of atrial fibrillation. Ablation Frontiers’ system of ablation catheters and RF generator is currently approved in certain markets outside the U.S. See Note 4 to the consolidated financial statements for additional information.

 

 

 

 

Our ability to grow consistently with the market. Our growth in CRDM has been and will continue to be contingent upon continued market growth and our ability to increase our market position. The CRDM market is characterized by significant competition, and in fiscal year 2009, we believe that Medtronic’s growth has been slightly slower than that of the overall market.

          Spinal Spinal products include thoracolumbar, cervical, interbody devices, bone graft substitutes and biologic products. Spinal net sales for fiscal year 2009 were $3.400 billion, an increase of 14 percent over the same period of the prior fiscal year. Foreign currency translation had an unfavorable impact on net sales of approximately $11 million when compared to the prior fiscal year. The growth in fiscal year 2009 was partially driven by the third quarter fiscal year 2008 acquisition of Kyphon Inc. (Kyphon), which generated revenue of $609 million and $298 million in fiscal years 2009 and 2008, respectively. See below and Note 4 to the consolidated financial statements for further discussion about the acquisition of Kyphon.

          Core Spinal net sales for fiscal year 2009 were $1.951 billion, an increase of 4 percent when compared to the prior fiscal year. Growth in the period was primarily driven by continued acceptance of our products for the thoracolumbar region of the spine. Thoracolumbar net sales growth for fiscal year 2009 was driven by net sales of the CD HORIZON LEGACY family of products (CD HORIZON) outside the U.S., and net sales growth in the U.S. was augmented by demand for our CD HORIZON LEGACY PEEK Rod System, which allows for a less rigid implant as compared to traditional metal rod systems. CD HORIZON is designed to provide procedural solutions for degenerative, deformity or trauma applications using color coded implants, unique minimally invasive instruments and ergonomic designs. Net sales growth in the U.S. was also driven by our MAST family of products, which includes a comprehensive offering of minimal-access procedural solutions. Our market share in the Core Spinal business continues to experience pressure from the proliferation of smaller, public and privately held companies competing in this market. In addition, Core Spinal net sales growth for the fiscal year was positively impacted from our joint venture with Shandong Weigao Group Medical Polymer Company Limited (Weigao). The joint venture entity, which distributes Medtronic’s spinal products and Weigao’s orthopedic products in China, commenced operations in September 2008.

6



          Biologics net sales for fiscal year 2009 were $840 million, an increase of 3 percent when compared to the prior fiscal year. This increase was primarily driven by worldwide net sales growth of INFUSE Bone Graft in the first quarter of fiscal year 2009. Net sales of INFUSE Bone Graft during the remainder of fiscal year 2009 were flat because of the negative impact of several external factors including: a public health notice from the FDA regarding off-label use of recombinant human bone morphogenic protein in the cervical spine that was issued in July 2008, a previously disclosed government investigation, negative newspaper stories and a whistleblower lawsuit filed against a number of spine surgeons and distributors of INFUSE Bone Graft. INFUSE Bone Graft contains a recombinant human bone morphogenetic protein, or rhBMP-2, that induces the body to grow its own bone, eliminating the need for a painful second surgery to harvest bone from elsewhere in the body.

          Kyphon net sales for fiscal year 2009 were $609 million, an increase of 104 percent when compared to the prior fiscal year. Kyphon was acquired in the third quarter of fiscal year 2008 and therefore net sales for the prior period only included six months of net sales. Kyphon net sales were driven primarily by continued worldwide acceptance of balloon kyphoplasty procedures for treating vertebral compression fractures. Balloon kyphoplasty, using Kyphon instruments, is presently used primarily by spine specialists, including orthopedic surgeons and neurosurgeons, interventional radiologists and interventional neuroradiologists, who repair compression fractures of the spine caused by osteoporosis, cancer, benign lesions or trauma, through minimally invasive spine surgeries.

          Spinal net sales for fiscal year 2008 increased by 23 percent from the prior fiscal year to $2.982 billion. Foreign currency translation had a favorable impact on net sales of $44 million when compared to the prior fiscal year. The growth in fiscal year 2008 was primarily driven by the November 2007 close of the acquisition of Kyphon, which generated revenue of $298 million during the fiscal year.

          Core Spinal net sales for fiscal year 2008 were $1.869 billion, an increase of 9 percent from the prior fiscal year. Growth in the period was primarily based on continued acceptance of our products for the thoracolumbar and cervical regions of the spine. Net sales in fiscal year 2008 were hampered by the trend of small companies increasing their presence and placing pressure on the Core Spinal market. Thoracolumbar net sales growth for fiscal year 2008 was driven by net sales of the CD HORIZON and the CAPSTONE Vertebral Body Spacer (CAPSTONE) outside the U.S., net sales of the VERTE-STACK CRESCENT Vertebral Body Spacer (CRESCENT) for thoracolumbar stabilization in the U.S. and worldwide net sales growth of lumbar products. The CAPSTONE and CRESCENT are minimal access devices and techniques designed to replace and restore vertebral height in the thoracolumbar spine. The growth in net sales in our cervical products during the fiscal year was led by the continued acceptance of the VERTEX Max Reconstruction System for cervical stabilization outside the U.S.

          Biologics net sales for fiscal year 2008 increased 16 percent from the prior fiscal year to $815 million. This increase was primarily driven by continued strong acceptance of INFUSE Bone Graft in the U.S. In addition to FDA approval for use of INFUSE Bone Graft for lumbar spinal fusion, we received FDA approval to use INFUSE Bone Graft for the treatment of certain types of acute, open fractures of the tibial shaft in fiscal year 2005, and for certain oral maxillofacial and dental regenerative bone grafting procedures late in fiscal year 2007. Additionally, although on a smaller base, we experienced strong fiscal year 2008 growth in the sales of InductOs Bone Graft, the outside the U.S. equivalent of INFUSE Bone Graft.

          Kyphon, which was acquired in November 2007, had net sales of $298 million for fiscal year 2008 that were driven by continued acceptance of balloon kyphoplasty procedures for treating vertebral compression fractures and acceptance of Kyphon’s interspinous products for treating lumbar spinal stenosis. Kyphon’s interspinous products for treating lumbar spinal stenosis include the commercially available X-STOP IPD technology available in both the U.S. and outside the U.S. and Aperius PercLID available outside the U.S.

          Looking ahead, we expect our Spinal operating segment should be impacted by the following:

 

 

 

 

Continued acceptance of our products for stabilization of the thoracolumbar region of the spine, including the CD HORIZON LEGACY 5.5 and PEEK Rod Systems.

 

 

 

 

 

 

 

Increased presence in China as a result of our joint venture with Weigao to distribute Medtronic’s spinal products and Weigao’s orthopedic products in China.

 

 

 

 

The recent U.S. launch of the PEEK Prevail Cervical Interbody Device and the VERTEX SELECT Reconstruction System Occipitocervical Module. The PEEK Prevail Cervical Interbody Device offers stability during a spinal fusion for patients that are treated for a degenerative condition that affects the patient’s neck. The VERTEX SELECT Reconstruction System Occipitocervical Module offers adjustability through multiple plate designs, rods, screws and hooks that gives surgeons more options during surgery, enabling them to tailor the procedure to each patient’s needs. The PEEK Prevail Cervical Interbody Device and VERTEX SELECT Reconstruction System Occipitocervical Module became commercially available in the U.S. in May 2009.

7



 

 

 

 

Continued regulatory scrutiny of off-label use in medical devices. During fiscal year 2009, the FDA issued a public health notice regarding use of bone morphogenic protein in cervical procedures, which was received negatively by both physicians and payors. As a result, this negatively impacted the sales of our INFUSE Bone Graft in fiscal year 2009. It is uncertain if this trend will continue in subsequent periods.

          CardioVascular CardioVascular products consist of coronary and peripheral stents and related delivery systems, endovascular stent graft systems, heart valve replacement technologies and tissue ablation systems, and open heart and coronary bypass grafting surgical products. CardioVascular net sales for fiscal year 2009 were $2.437 billion, an increase of 14 percent over the prior fiscal year. Foreign currency translation had an unfavorable impact of approximately $23 million when compared to the prior fiscal year.

          Coronary Stent and Other Coronary/Peripheral net sales for fiscal year 2009 were $1.292 billion, an increase of 16 percent when compared to the prior fiscal year. The increase in net sales was primarily the result of the launch of the Endeavor drug-eluting stent (Endeavor) in the U.S. which began during the fourth quarter of fiscal year 2008. We received regulatory approval in Japan during the fourth quarter of fiscal year 2009 and commercially launched Endeavor in Japan in May 2009. Endeavor and the Endeavor Resolute drug-eluting stent (Endeavor Resolute) generated worldwide revenue of $603 million for the fiscal year compared to $418 million for the prior year.

          Endovascular net sales for fiscal year 2009 were $398 million, an increase of 40 percent when compared to the prior fiscal year. Growth in the Endovascular business was primarily driven by net sales in the U.S. of the Talent Abdominal Aortic Aneurysm Stent Graft System (Talent AAA Stent Graft System) and Thoracic Stent Graft System and by the launch of our Endurant Abdominal Stent Graft System outside the U.S. in the first quarter of fiscal year 2009. The Endurant Abdominal Stent System expands the applicability of endovascular aortic repair to more patients with abdominal aortic aneurysms (AAA) by addressing those AAA patients whose aortas are highly angulated or whose aneurysms have short necks.

          Revascularization and Surgical Therapies net sales for fiscal year 2009 were $447 million, an increase of 4 percent when compared to the prior fiscal year. The increase was primarily the result of positive growth outside the U.S. associated with our cannulae and beating heart products.

          Structural Heart Disease net sales for fiscal year 2009 were $300 million, an increase of 1 percent when compared to the prior fiscal year. The increase was primarily the result of net sales growth outside the U.S. which benefited from the return of the Advantage Mechanical Valve to markets from which it had been suspended for a portion of the prior fiscal year. Net sales of our atrial fibrillation technologies outside the U.S. also contributed to the increase in net sales for fiscal year 2009. Growth outside the U.S. was partially offset by a decrease in net sales in the U.S. due to the entrance of three new competitive tissue valve products into the market during the past twelve months.

          CardioVascular net sales for fiscal year 2008 increased 12 percent from the prior fiscal year to $2.131 billion. Foreign currency translation had a favorable impact of $101 million on net sales when compared to the prior fiscal year.

          Coronary Stent and Other Coronary/Peripheral net sales for fiscal year 2008 increased 18 percent in comparison to the prior fiscal year to $1.118 billion. The growth in Coronary Stent and Other Coronary/Peripheral net sales was primarily a result of the successful launch of Endeavor in the U.S., strong sales of Endeavor and Endeavor Resolute outside the U.S. and continued acceptance of the Driver family of bare metal stents. Although the market for stents and drug-eluting stents had declined, Endeavor and Endeavor Resolute continued to benefit from favorable safety and efficacy data, along with their ease of delivery. In the U.S., Endeavor generated net sales of $81 million in fiscal year 2008. Outside the U.S., Endeavor and Endeavor Resolute generated net sales of $337 million in fiscal year 2008, an increase of 12 percent over the prior year. Endeavor Resolute received CE Mark approval in October 2007 and is currently available in more than 100 countries. We also recognized net sales of $292 million in fiscal year 2008 from the Driver family of bare metal stents, which experienced strong growth in the U.S. as a result of reduced penetration of drug-eluting stents in the U.S. marketplace. The Driver bare metal stent, which is also the base stent used in Endeavor and Endeavor Resolute, is a cobalt-chromium coronary stent which has thinner struts and provides greater maneuverability in placing the stent.

          Endovascular net sales for fiscal year 2008 grew 10 percent when compared to the prior fiscal year. Growth in the Endovascular business was driven in part by net sales of the Talent AAA Stent Graft System and the Valiant Thoracic Stent Graft System outside the U.S. The Valiant Thoracic Stent Graft System is a next-generation stent graft used for the minimally invasive repair of the thoracic aorta, the body’s largest artery, for several disease states including aneurysms, penetrating ulcers, acute or chronic dissections and contained or traumatic ruptures. Net sales in the U.S. decreased in fiscal year 2008 as compared to the prior fiscal year as a result of a voluntary field action on the AneuRx AAAdvantage Stent Graft System that required physician and patient notification of a product packaging issue. As of the end of fiscal year 2008, the issue had been corrected.

8



          Revascularization and Surgical Therapies net sales for fiscal year 2008 were $431 million, an increase of 3 percent in comparison to the prior fiscal year. The increase is the result of net sales growth outside the U.S., which increased 13 percent primarily from sales of our cannulae and beating heart products. The strong growth outside the U.S. was partially offset by a decrease in net sales in the U.S.

          Structural Heart Disease net sales for fiscal year 2008 grew 3 percent in comparison to the prior fiscal year to $297 million. The increase in net sales for the fiscal year was driven by net sales outside the U.S., which offset slightly negative growth in the U.S. Net sales growth outside the U.S. was driven by sales of our Mosaic and Mosaic Ultra tissue values and our Melody Transcatheter Pulmonary Valve and Ensemble Transcatheter Delivery System. The growth outside the U.S. was tempered by the suspension of sales of the Advantage mechanical heart valve in the first quarter of fiscal year 2008. The Advantage valve was reintroduced to the market during the third quarter of fiscal year 2008. The Mosaic and Mosaic Ultra tissue valves incorporate several design features to facilitate implantation and improve durability. The Melody Transcatheter Pulmonary Valve and Ensemble Transcatheter Delivery System provide a catheter-based approach to pulmonic valve replacement for patients with congenital heart defects, with the goal of reducing the invasiveness and risk associated with pulmonic valve replacement.

          Looking ahead, we expect our CardioVascular operating segment should be impacted by the following:

 

 

 

 

Future acceptance of Endeavor in the Japan market. Endeavor received approval by the Japanese Ministry of Health, Labor and Welfare in the fourth quarter of fiscal year 2009 and was launched in May 2009. Following the launch in Japan, Endeavor is commercially available for the treatment of coronary artery disease in every major market in the world.

 

 

 

 

Continued acceptance of Endeavor Resolute in markets outside the U.S. Endeavor Resolute combines the proven drug and stent components of Endeavor with Biolinx, a proprietary biocompatible polymer specifically engineered for drug-eluting stent use. Biolinx facilitates the slower absorption of Zotarolimus while providing excellent biocompatibility. The design goal of Endeavor Resolute is enhanced safety and efficacy in the most complex lesions and patients.

 

 

 

 

Further acceptance in the U.S. of the Talent AAA Stent Graft System. The Talent AAA Stent Graft System received FDA approval in April 2008 and was launched in the first quarter of fiscal year 2009. Additionally, we anticipate further growth in the U.S. and in Japan from the Talent Thoracic Stent Graft System, which was initially released in the first quarter and fourth quarter of fiscal year 2009, respectively.

 

 

 

 

Sales growth outside the U.S. with continued acceptance of our next generation Endurant AAA stent graft and Valiant Thoracic Stent Graft System. The Endurant AAA stent graft received CE Mark approval and was commercially launched late in the first quarter of fiscal year 2009.

 

 

 

 

The integration of Ventor Technologies Ltd. (Ventor) and CoreValve, Inc. (CoreValve) into our CardioVascular business. In the fourth quarter of fiscal year 2009, we acquired Ventor and CoreValve. Both Ventor and CoreValve are medical technology companies that develop transcatheter heart valve technologies for replacement of the aortic valve. CoreValve’s Percutaneous Revalving System has received CE Mark approval and is currently available outside the U.S., while Ventor is a development stage company and does not yet have a product commercially available. We expect these acquisitions will allow us to pursue opportunities that have natural synergies with our existing heart valve franchise and leverage our global footprint. See Note 4 to the consolidated financial statements for additional information.

          Neuromodulation Neuromodulation products consist of therapeutic and diagnostic devices, including implantable neurostimulation systems, implantable drug delivery devices and urology and gastroenterology products. Neuromodulation net sales for fiscal year 2009 were $1.434 billion, an increase of 9 percent when compared to the prior fiscal year. Foreign currency translation had an unfavorable impact on net sales of approximately $10 million when compared to the prior fiscal year.

          Neuro Implantables is comprised of two product lines: Pain Management and Movement Disorders. Net sales from Pain Management and Movement Disorders products for fiscal year 2009 were $1.145 billion, an increase of 7 percent when compared to the prior fiscal year. The growth was driven by sales of products in Pain Management including worldwide sales of the RestoreULTRA neurostimulation system for pain management and sales in the U.S. of our Specify 5-6-5 surgical lead for spinal cord stimulation. RestoreULTRA, which was launched in March 2008, is our next generation rechargeable neurostimulator with advanced programming capabilities and is the thinnest 16-electrode neurostimulator on the market. Additionally, revenue growth was negatively impacted by the launch of a competitive product and a short-term supply shortfall with our implantable pumps during the fiscal year. Movement Disorders revenue was driven by worldwide net sales of Activa Deep Brain Stimulation (DBS) Therapy. Activa DBS Therapy is used for the treatment of common movement disorders including Parkinson’s disease, essential tremor and dystonia.

          Net sales of Gastroenterology and Urology products for fiscal year 2009 were $289 million, an increase of 19 percent when compared to the prior fiscal year. The growth in Gastroenterology and Urology was led by worldwide sales of our InterStim II product.

9



          Neuromodulation net sales for fiscal year 2008 increased 11 percent from the prior fiscal year to $1.311 billion. Foreign currency translation had a favorable impact of $32 million on net sales when compared to the prior fiscal year. In the third quarter of fiscal year 2007, we divested our Urology diagnostics product line and in the first quarter of fiscal year 2008 we completed the divestiture of our Gastroenterology and Neurological diagnostics product lines. The loss of these product lines had a negative net sales growth impact of 4 percent for fiscal year 2008.

          Net sales for fiscal year 2008 from Pain Management and Movement Disorders products were $1.069 billion, an increase of 11 percent over the prior period. The growth was driven by key products in Pain Management including RestoreULTRA, RestoreADVANCED and PrimeADVANCED neurostimulation systems for pain management, our SynchroMed II drug delivery pump and our surgical lead for spinal cord stimulation, the Specify 5-6-5. Movement Disorder revenue was driven by growth in worldwide net sales of Activa DBS Therapy.

          Net sales of Gastroenterology and Urology products increased 10 percent over fiscal year 2007 to $242 million. The growth in Gastroenterology and Urology was led by net sales of our InterStim II product, which experienced its first full fiscal year on the market, and was partially offset by the impact of the divestitures of the Gastroenterology and Urology diagnostic product lines.

          Looking ahead, we expect our Neuromodulation operating segment should be impacted by the following:

 

 

 

 

Continued acceptance of RestoreULTRA, our most advanced rechargeable neurostimulator. RestoreULTRA also offers an innovative patient programmer that gives patients the ability to customize their pain control.

 

 

 

 

Continued acceptance of our Activa DBS Therapy for the treatment of common movement disorders. We continue to educate neurologists and the patient population on the benefits that our Activa DBS Therapy offers them. Additionally, Activa PC and RC, our next generation neurostimulators, received FDA approval in April 2009; we look forward to the anticipated launch in the U.S. in the first quarter of fiscal year 2010. Activa PC and RC were launched in Europe in January 2009. Activa PC is a primary cell device and Activa RC is the therapy’s first rechargeable device.

 

 

 

 

Continued acceptance of InterStim Therapy for the treatment of overactive bladder and urinary incontinence.

 

 

 

 

Continued acceptance of InterStim Therapy for the treatment of fecal incontinence outside the U.S., and future launch and acceptance within the U.S. We have submitted a pre-market approval for InterStim Therapy for the treatment of fecal incontinence and expect approval in the first half of fiscal year 2010.

          Diabetes Diabetes products consist of external insulin pumps and related consumables (together referred to as Durable Pump Systems), and subcutaneous continuous glucose monitoring systems. Diabetes net sales for fiscal year 2009 were $1.114 billion, an increase of 9 percent when compared to the prior fiscal year. Foreign currency translation had an unfavorable impact on net sales of approximately $13 million when compared to the prior fiscal year.

          Durable Pump Systems net sales for fiscal year 2009 were $983 million, an increase of 5 percent when compared to the prior fiscal year. The increase in net sales resulted from demand for the MiniMed Paradigm REAL-Time System that integrates continuous glucose monitoring and insulin pump functionality and related consumables. Net sales of Continuous Glucose Monitoring systems (CGM) and other accessories were $131 million, an increase of 56 percent when compared to the prior fiscal year. Growth was driven by strong acceptance of CGM in the U.S. and an increase in U.S. sales of glucose test strips.

          Diabetes net sales in fiscal year 2008 increased 18 percent over the prior fiscal year to $1.019 billion. Foreign currency translation had a favorable impact of $29 million on net sales when compared to the prior fiscal year.

          Durable Pump Systems net sales for fiscal year 2008 were $935 million, representing growth of 15 percent over the prior fiscal year. The increase in net sales resulted from strong worldwide market acceptance of the MiniMed Paradigm REAL-Time System and related consumables. The sales increase of 35 percent outside the U.S. was especially strong, driven by growth in the markets in which the MiniMed Paradigm REAL-Time System was launched. The strong growth outside the U.S. was offset by slowed growth in the U.S., as we experienced a modest slowdown in replacement business given the timing of upgrades to our latest technology. Net sales of CGM and other accessories were $84 million, an increase of 75 percent when compared to the prior fiscal year. Growth was driven by strong acceptance of CGM in the U.S.

          Looking ahead, we expect our Diabetes operating segment should be impacted by the following:

 

 

 

 

Continued acceptance from both physicians and patients of the MiniMed Paradigm REAL-Time System.

10



 

 

 

 

Continued acceptance and improved U.S. reimbursement of the iPro CGM, a professional CGM recorder that provides physicians valuable insight into their patients’ glucose levels. The iPro CGM was launched in the U.S. in July 2008.

 

 

 

 

Future acceptance and customer preference for Medtronic products due to the strategic marketing collaboration with Eli Lilly (Lilly), which was announced on May 19, 2009. The alliance reached with Lilly provides for marketing and sales operations in the U.S. to improve the delivery of diabetes education for insulin-taking patients and their caregivers. This will include the development of new educational resources and classes around the initiation and intensive management of insulin, insulin pump therapy and continuous glucose monitoring.

 

 

 

 

Continued acceptance and customer preference for Medtronic products due to the alliances with LifeScan, Inc. (LifeScan), a J&J company, and Bayer Diabetes Care (Bayer), a member of the Bayer group, which we announced on August 21, 2007. The alliances reached with LifeScan (for the U.S. market) and Bayer (for markets outside the U.S.) provide for the distribution and marketing of blood glucose meters that communicate with Medtronic’s insulin pumps. These alliances provide our customers an integrated solution for managing diabetes, thereby improving the quality of life and ease of use. We launched our co-developed blood glucose meters with Bayer and LifeScan in February 2008 and April 2008, respectively.

 

 

 

 

The future launch and acceptance of a series of new insulin pumps, including the Paradigm Veo, which offers low glucose suspend that assists in protecting against the risk of hypoglycemia by automatically suspending insulin delivery when glucose falls below a specified threshold set by the user. The Paradigm Veo was launched in the United Kingdom in June 2009 and is expected to be launched in other markets outside the U.S. in fiscal year 2010.

 

 

 

 

Potential slowdown in consumer spending. Given the elective nature of an insulin pump for the management of diabetes and the possible high out-of-pocket costs to the customer, there is potential exposure to macroeconomic pressures which could negatively impact the near-term sales growth within Diabetes.

          Surgical Technologies Surgical Technologies products are used to treat conditions of the ear, nose and throat, and certain neurological disorders. Additionally, we manufacture and sell image-guided surgery and intra-operative imaging systems. Our portfolio consists of powered tissue-removal systems and other microendoscopy instruments, implantable devices, nerve monitoring systems, disposable fluid-control products, a Ménière’s disease therapy device, hydrocephalus shunt devices, external drainage systems, cranial fixation devices, neuroendoscopes, dura repair products and image-guided surgery and intra-operative imaging systems. Surgical Technologies net sales for fiscal year 2009 were $857 million, an increase of 10 percent when compared to the prior fiscal year. Foreign currency translation had an unfavorable impact on net sales of approximately $11 million when compared to the prior fiscal year.

          Core ENT net sales for fiscal year 2009 were $352 million, an increase of 9 percent when compared to the prior fiscal year. The increase reflected the continued success of Fusion EM IGS, an advanced electromagnetic-based image-guided surgery system to facilitate sinus surgeries. In addition, there was strong performance in nerve monitoring and drill disposables.

          Neurologic Technologies net sales for fiscal year 2009 were $320 million, an increase of 7 percent when compared to the prior fiscal year. The primary driver of growth was worldwide increased sales of disposables associated with high-speed drill systems including the EHS Stylus high-speed powered surgical drill system. Additionally, the Strata valves, used in the treatment of hydrocephalus, contributed to the revenue growth.

          Navigation net sales for fiscal year 2009 were $185 million, an increase of 16 percent when compared to the prior fiscal year. The increase in net sales was based on strong worldwide net sales of the O-Arm Imaging System, a multi-dimensional surgical imaging platform that is optimized for use in spine and orthopedic surgery, and increased service revenue in the U.S. Additionally, the StealthStation S7 System, launched in the first quarter of fiscal year 2009, contributed to the revenue growth. The StealthStation S7 System offers personalized navigation support for surgeons and surgical staff in the operating room.

          Surgical Technologies net sales for fiscal year 2008 increased by 17 percent over the prior fiscal year to $780 million. Foreign currency translation had a favorable impact of $20 million on net sales when compared to the prior fiscal year.

          Core ENT net sales grew 16 percent to $323 million in fiscal year 2008 led by strong growth of sales outside the U.S. of the Straightshot M4 Microdebrider and endoscopy sales. In the U.S., there was an increase in net sales of our Image Guided Surgery Systems which was partially due to the launch of the Fusion EM IGS System for use in sinus surgical procedures. Net sales of monitoring disposables also experienced strong worldwide growth.

          Neurologic Technologies net sales grew 14 percent to $298 million in fiscal year 2008. The primary driver of growth in Neurologic Technologies was continued acceptance of high-speed powered surgical drill systems, including the EHS Stylus system.

11



          Navigation net sales for fiscal year 2008 increased 25 percent from the prior fiscal year to $159 million based on strong U.S. net sales of the O-Arm Imaging System and increased worldwide service revenue.

          Looking ahead, we expect our Surgical Technologies operating segment should be impacted by the following:

 

 

 

 

Continued acceptance of our Fusion EM IGS System, which was launched in the U.S. in the third quarter of fiscal year 2008.

 

 

 

 

Continued acceptance of the StealthStation S7 System and the Synergy Cranial 2.0 software which were launched in the first and fourth quarters of fiscal year 2009, respectively. The StealthStation S7 System offers personalized navigation support for surgeons and surgical staff in the operating room. The Synergy Cranial 2.0 software completed the software offering for cranial procedures on the StealthStation S7 system hardware platform.

 

 

 

 

Continued adoption of power systems for sinus procedures outside the U.S., as well as continued global adoption of nerve monitoring for ENT and thyroid procedures.

 

 

 

 

Launch of new products, including the Integrated Power Console, Spine Shaver and the NIM 3.0, a next generation nerve monitoring system.

 

 

 

 

Continued acceptance of the O-Arm Imaging System.

 

 

 

 

Further integration of Restore Medical, Inc.’s (Restore) Pillar Palatal Implant System (Pillar System) and Influent’s Repose System (Repose System) for the treatment of sleep breathing disorders. We anticipate the Pillar System and Repose System will deliver new growth by providing us with proven office-based procedures in a very fast growing segment of the obstructive sleep apnea market.

 

 

 

 

Potential slowdown in consumer and hospital spending as a result of the recent economic downturn. Given the elective nature of many of the underlying ENT procedures and the large capital equipment component of the Surgical Technologies businesses, there is potential exposure to macroeconomic pressures that could negatively impact the near-term sales growth within Surgical Technologies.

Continued net sales growth in all operating segments is contingent on our ability to gain further market share, penetrate existing markets, develop new products, improve existing products and develop new markets.

Costs and Expenses

The following is a summary of major costs and expenses as a percent of net sales:

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

2009

 

2008

 

2007

 

Cost of products sold

 

24.1

%

25.5

%

25.8

%

Research and development

 

9.3

 

9.4

 

10.1

 

Selling, general and administrative

 

35.3

 

34.8

 

33.8

 

Special charges

 

0.7

 

0.6

 

0.8

 

Restructuring charges

 

0.8

 

0.3

 

0.2

 

Certain litigation charges

 

4.9

 

2.7

 

0.3

 

IPR&D charges

 

4.3

 

2.9

 

 

Other expense, net

 

2.7

 

3.2

 

1.7

 

Interest expense/(income), net

 

0.2

 

(0.8

)

(1.3

)

          Cost of Products Sold Cost of products sold was $3.518 billion in fiscal year 2009 representing 24.1 percent of net sales, a decrease of 1.4 percentage points from fiscal year 2008. Cost of products sold as a percentage of net sales was positively impacted by 0.4 of a percentage point of favorable foreign currency translation, 0.2 of a percentage point of favorable manufacturing variances, 0.1 of a percentage point of favorable product mix, and 0.4 of a percentage point of favorable scrap and other product costs. In addition, cost of products sold as a percentage of net sales for the fiscal year ended April 25, 2008 was negatively impacted by 0.3 of a percentage point as a result of the $34 million increase in cost of products sold associated with the fair value adjustment for the inventory acquired in the Kyphon acquisition.

12



          Cost of products sold was $3.446 billion in fiscal year 2008 representing 25.5 percent of net sales, a decrease of 0.3 of a percentage point from fiscal year 2007. The cost of products sold was positively impacted by 0.7 of a percentage point of favorable foreign currency translation and 0.3 of a percentage point for reduced other product costs and favorable manufacturing variances. These decreases were offset by 0.3 of a percentage point associated with the impact of the $34 million fair value adjustment for the inventory acquired in the Kyphon acquisition and 0.4 of a percentage point of unfavorability for scrap and other product costs associated with the suspension of the worldwide distribution of the Fidelis lead and scrap costs at our Physio-Control business segment.

          Research and Development Consistent with prior periods, we have continued to invest in the future by spending aggressively on research and development efforts. Research and development spending was $1.355 billion in fiscal year 2009, representing 9.3 percent of net sales, a decrease of 0.1 of a percentage point from fiscal year 2008. The decrease is primarily the result of a reclassification of certain expenses to selling, general and administrative of $46 million for the fiscal year that would have otherwise been included in research and development in the prior years.

          Research and development spending was $1.275 billion in fiscal year 2008, representing 9.4 percent of net sales, a decrease of 0.7 of a percentage point from fiscal year 2007. While our fiscal year 2008 research and development spending increased over the prior fiscal year, our restructuring initiatives and our efforts to prioritize projects with the greatest potential for future growth impacted the fiscal year 2008 rate of spending.

          We remain committed to developing technological enhancements and new indications for existing products, and less invasive and new technologies to address unmet medical needs. That commitment leads to our initiation and participation in many clinical trials each fiscal year. Furthermore, we expect our development activities to help reduce patient care costs and the length of hospital stays in the future. In addition to our investment in research and development, we continue to access new technologies in areas served by our existing businesses, as well as in new areas, through acquisitions, licensing agreements, alliances and certain strategic equity investments.

          Selling, General and Administrative Fiscal year 2009 selling, general and administrative expense as a percentage of net sales increased by 0.5 of a percentage point from fiscal 2008 to 35.3 percent. For fiscal year 2009, the reclassification of certain expenses from research and development had a negative impact of 0.3 of a percentage point on selling, general and administrative expense. In addition, foreign exchange had a negative impact of 0.2 of a percentage point on fiscal year 2009 selling, general and administrative expense. We continue to drive our initiatives to leverage our cost structure in order to help reduce selling, general and administrative expense.

          Fiscal year 2008 selling, general and administrative expense as a percentage of net sales increased by 1.0 percentage point from fiscal year 2007 to 34.8 percent. The increase in selling, general and administrative expense for fiscal year 2008 was predominantly driven by the acquisition of Kyphon, which increased selling, general and administrative expense by 0.6 of a percentage point. The remainder of the increase was due to expenses associated with our previously communicated investment in selling and marketing activities related to the U.S. launches of the Prestige Cervical Disc System and Endeavor, and the continued implementation of our global information technology system, which included the full conversion of our U.S. distribution systems in the second quarter of fiscal year 2008. These increases were offset by our continual cost control measures across all of our businesses and attempts to leverage the general and administrative expense categories.

          Special, Restructuring, Certain Litigation and IPR&D Charges and Certain Tax Adjustments We believe that in order to properly understand our short-term and long-term financial trends, investors may find it useful to consider the impact of special, restructuring, certain litigation and IPR&D charges and certain tax adjustments. Special (such as asset impairment or contributions to The Medtronic Foundation), restructuring, certain litigation and IPR&D charges and certain tax adjustments recorded during the previous three fiscal years were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(dollars in millions)

 

2009

 

2008

 

2007

 

Special charges:

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

 

$

 

$

78

 

$

98 

 

Medtronic Foundation contribution

 

 

100

 

 

 

 

 

Total special charges

 

 

100

 

 

78

 

 

98 

 

Restructuring charges

 

 

123

 

 

45

 

 

36 

 

Certain litigation charges

 

 

714

 

 

366

 

 

40 

 

IPR&D charges

 

 

621

 

 

390

 

 

 

Total special, restructuring, certain litigation and IPR&D charges

 

 

1,558

 

 

879

 

 

174 

 

Net tax impact of special, restructuring, certain litigation and IPR&D charges and certain tax adjustments

 

 

(444

)

 

(137

)

 

(179

)

Total special, restructuring, certain litigation and IPR&D charges and certain tax adjustments, net of tax

 

$

1,114

 

$

742

 

$

(5

)

13



          Special Charges In fiscal year 2009, consistent with our ongoing commitment to improving the health of people and communities throughout the world, we recorded a $100 million contribution to The Medtronic Foundation, which is a related party non-profit organization. The contribution to The Medtronic Foundation was paid in the fourth quarter of fiscal year 2009.

          In fiscal year 2008, we recorded a special charge related to the impairment of intangible assets associated with our benign prostatic hyperplasia, or enlarged prostate, product line purchased in fiscal year 2002. The development of the market, relative to our original assumptions, has changed as a result of the broad acceptance of a new line of drugs to treat the symptoms of an enlarged prostate. After analyzing the estimated future cash flows utilizing this technology, based on the market development, we determined that the carrying value of these intangible assets was impaired and a write-down of $78 million was necessary.

          In fiscal year 2007, we concluded two intangible assets were fully impaired due to inadequate clinical results and the resulting delays in product development. As a result, we recorded a $98 million special charge relating to the impairments of intangible assets stemming from the July 1, 2005 acquisition of Transneuronix, Inc. (TNI) and the November 1, 2004 acquisition of Angiolink Corporation (Angiolink). TNI focused on the development of an implantable gastric stimulator to treat obesity. Angiolink focused on the development of wound closure devices for vascular procedures.

          See Note 2 to the consolidated financial statements for further discussion of special charges.

          Restructuring

          Fiscal Year 2009 Initiative 

          In the fourth quarter of fiscal year 2009, we recorded a $34 million restructuring charge, which consisted of employee termination costs of $29 million and asset write-downs of $5 million. As part of our “One Medtronic” strategy, we continue to pursue opportunities to streamline the organization and standardize or centralize certain functional activities which are not unique to individual businesses. In connection with these efforts to create “One Medtronic,” this initiative is designed to streamline operations, by further consolidating manufacturing and eliminating certain non-core product lines, and to further align resources around our higher growth opportunities. This initiative impacts most businesses and certain corporate functions. Of the $5 million of asset write-downs, $3 million relates to inventory write-offs and production-related asset impairments and therefore was recorded within cost of products sold in the consolidated statement of earnings. The employee termination costs of $29 million consist of severance and the associated costs of continued medical benefits and outplacement services.

          The fiscal year 2009 initiative will result in charges being recognized in both the fourth quarter of fiscal year 2009 and the first quarter of fiscal year 2010, and we expect that when complete, will eliminate approximately 1,500 – 1,800 positions. We anticipate that the additional expense that we will recognize in the first quarter of fiscal year 2010 related to this initiative will be in the range of $60 million to $80 million.

          Of the 1,500 – 1,800 positions that will be eliminated as part of this initiative, approximately 975 were identified for elimination in the fourth quarter of fiscal year 2009 and will be achieved through early retirement packages offered to employees, voluntary separation and involuntary separation. Of these 975 positions, approximately 280 positions have been eliminated as of April 24, 2009. The restructuring initiatives are scheduled to be substantially complete by the end of fiscal year 2010, and are expected to produce annualized operating savings in the range of $80 million to $90 million related to the 975 positions currently identified. These savings will arise mostly from reduced compensation expense.

          Global Realignment Initiative

          In the fourth quarter of fiscal year 2008, as part of a global realignment initiative, we recorded a $31 million restructuring charge, which consisted of employee termination costs of $27 million and asset write-downs of $4 million. The asset write-downs were recorded within cost of products sold in the consolidated statement of earnings. The global realignment initiative focused on shifting resources to those areas where we have the greatest opportunities for growth and streamlining operations to drive operating leverage. The global realignment initiative impacted most businesses and certain corporate functions.

          As a continuation of the global realignment initiative that began in fiscal year 2008, in the first quarter of fiscal year 2009 we incurred $96 million of incremental restructuring charges, which consisted of employee termination costs of $91 million and asset write-downs of $5 million. The majority of the expense recognized in the first quarter of fiscal year 2009 was related to the execution of our global realignment initiative outside the U.S. This included the realignment and elimination of personnel throughout Europe and the Emerging Markets and the closure of an existing facility in the Netherlands that has been integrated into the U.S. operations. The remainder of the expense was associated with enhanced severance benefits provided to employees identified in the fourth quarter of fiscal year 2008. These incremental costs were not accrued in fiscal year 2008 because the enhanced benefits had not yet been communicated to the impacted employees.

14



          In the fourth quarter of fiscal year 2009, we recorded a $7 million reversal of excess reserves related to the global realignment initiative. This reversal is primarily a result of favorable severance negotiations with certain employee populations outside the U.S. as well as a higher than expected percentage of employees identified for elimination finding positions elsewhere within the Company.

          As of the end of the first quarter of fiscal year 2009, the Company had identified approximately 900 positions for elimination which were to be achieved through both voluntary and involuntary separation. Of the 900 positions identified, approximately 740 have been eliminated as of April 24, 2009. The restructuring initiatives are scheduled to be substantially complete by the end of the first quarter of fiscal year 2010, and are expected to produce annualized operating savings of approximately $96 million. These savings will arise mostly from reduced compensation expense.

          Fiscal Year 2007 Initiative

          In the fourth quarter of fiscal year 2007, we recorded a $36 million restructuring charge, which consisted of employee termination costs of $28 million and asset write-downs of $8 million. The asset write-downs consisted of a $5 million charge for inventory write-downs and a $3 million charge for non-inventory asset write-downs. The inventory and asset write-downs were recorded within cost of products sold in the consolidated statement of earnings. These initiatives were designed to drive manufacturing efficiencies in our CardioVascular business, downsize our Physio-Control business due to our voluntary suspension of U.S. shipments and rebalance resources within our CRDM business in response to market dynamics.

          As a continuation of our fiscal year 2007 initiative, in the first quarter of fiscal year 2008 we incurred $14 million of incremental restructuring charges associated with compensation provided to employees whose employment terminated with the Company in the first quarter of fiscal year 2008. These incremental costs were not accrued in fiscal year 2007 because these benefits had not yet been communicated to the impacted employees. Included in the total $14 million restructuring charge is $4 million of incremental defined benefit pension and post-retirement related expense for those employees who accepted early retirement packages. For further discussion on the incremental defined benefit pension and post-retirement related expense, see Note 14 to the consolidated financial statements.

          When the restructuring initiative began in fiscal year 2007, we identified approximately 900 positions for elimination which were achieved through early retirement packages offered to employees, voluntary separation and involuntary separation. As of April 25, 2008, the initiatives begun in the fourth quarter of fiscal year 2007 were substantially complete. This restructuring initiative is expected to produce annualized operating savings of approximately $125 million mostly from reduced compensation expense.

          For additional information, see Note 3 to the consolidated financial statements.

          Certain Litigation Charges We classify material litigation reserves recognized as certain litigation charges.

          During fiscal year 2009, we incurred four certain litigation charges totaling $714 million. The first charge in the amount of $178 million relates to litigation with DePuy regarding patent infringement claims stemming from the Vertex line of multiaxial screws. On June 1, 2009, the U.S. Court of Appeals for the Federal Circuit affirmed the December 2007 ruling of infringement and awarded damages based on lost profits, but reversed certain elements of the original 2007 award. Prior to the U.S. Court of Appeals’ decision, we had not recorded expense related to the damages awarded in 2007 as we did not believe that an unfavorable outcome in this matter was probable under SFAS No. 5. As a result of the U.S. Court of Appeals’ decision, we have now recorded a reserve of $178 million which is expected to cover the revised damages award and pre- and post-judgment interest. Since the DePuy litigation originated prior to April 24, 2009, we have appropriately recognized this charge in the consolidated financial statements for the fiscal year ended April 24, 2009. See Note 16 to the consolidated financial statements for additional information.

          The second charge in the amount of $270 million relates to a settlement of royalty disputes with J&J which concern Medtronic’s licensed use of certain patents. The agreement reached in the fourth quarter of fiscal year 2009 ended all current and potential disputes between the two parties under their 1997 settlement and license agreement relating to coronary angioplasty stent design and balloon material patents. The settlement amount was paid in May 2009. See Note 16 to the consolidated financial statements for additional information.

15



          The third charge in the amount of $229 million relates to litigation with Cordis Corporation (Cordis), a subsidiary of J&J. The Cordis litigation originated in October 1997 and pertains to patent infringement claims on previous generations of bare metal stents that are no longer on the market. On September 30, 2008, the U.S. District Court entered final judgment including accrued interest, totaling approximately $521 million, to Cordis. We had previously recorded a charge of $243 million related to this litigation in the third quarter of fiscal year 2008. At the time the $243 million charge was recorded, the range of potential loss related to this matter was subject to a high degree of estimation. The amount recorded represented an estimate of the low end of the range of probable outcomes related to the matter. Given that the Company and J&J were involved in a number of litigation matters which span across businesses, we entered into negotiations with J&J in an attempt to settle some of the additional litigation simultaneous with the payment of this judgment. Ultimately, the agreement reached with Cordis required a total cash payment of $472 million, which included the settlement of several outstanding legal matters between the parties. The charge of $229 million in the second quarter of fiscal year 2009 is the net result of $472 million in cash payments, offset by the existing reserves on the balance sheet including interest accrued on the $243 million since the date established. As of April 24, 2009, the settlement amount of $472 million was paid.

          The fourth charge recognized in fiscal year 2009 relates to litigation that originated in May 2006 with Fastenetix LLC (Fastenetix), a patent holding company. The agreement reached with Fastenetix required a total cash payment of $125 million for the settlement of ongoing litigation and the purchase of patents. Of the $125 million, $37 million was assigned to past damages in the case and the remaining $88 million was recorded as purchased intellectual property that has an estimated useful life of 7 years. As of April 24, 2009, the settlement amount of $125 million was paid.

          During fiscal year 2008, we incurred certain litigation charges of $366 million. Of that amount, $123 million related to the settlement of certain lawsuits relating to the Marquis line of ICDs and CRT-Ds that were subject to a field action announced on February 10, 2005. As discussed in detail above, the remainder of the charge, $243 million, relates to an estimated reserve established for litigation with Cordis. In May 2008, we paid substantially all of the settlement for certain lawsuits relating to the Marquis line of ICDs and CRT-Ds. See Note 16 to the consolidated financial statements for additional information.

          During fiscal year 2007, we recorded a certain litigation charge of $40 million related to a settlement agreement with the U.S. Department of Justice which requires the government to obtain dismissal of two qui tam civil suits pending against us, and is conditioned upon such dismissal being obtained. The two suits were based upon allegations about certain sales and marketing practices in the Spinal business. The settlement agreement reflects our assertion that the Company and its current employees have not engaged in any wrongdoing or illegal activity. The settlement amount was paid in May 2009.

          See Note 2 to the consolidated financial statements for further discussion of these cases.

          IPR&D Charges During fiscal year 2009, we recorded $621 million of IPR&D charges of which $307 million related to the acquisition of Ventor, $123 million related to the acquisition of CoreValve, $97 million related to the acquisition of Ablation Frontiers, $72 million related to the acquisition of CryoCath and $22 million was for the purchase of certain intellectual property for use in our Spinal and Diabetes businesses. These payments were expensed as IPR&D since technological feasibility of the underlying projects had not yet been reached and such technology has no future alternative use.

          During fiscal year 2008, we recorded $390 million of IPR&D charges of which $42 million related to the acquisition of NDI Medical, Inc. (NDI), a development stage company, $290 million related to a technology acquired through the purchase of Kyphon, $20 million related to the purchase of intellectual property from Setagon, Inc., $25 million related to a milestone payment under the existing terms of a royalty bearing, non-exclusive patent cross-licensing agreement with NeuroPace, Inc. and $13 million was for unrelated purchases of certain intellectual property. These payments were expensed as IPR&D since technological feasibility of the underlying projects had not yet been reached and such technology has no future alternative use.

          There were no IPR&D charges for fiscal year 2007.

          See Note 4 to the consolidated financial statements for further discussion on IPR&D charges.

          We are responsible for the valuation of IPR&D charges. The values assigned to IPR&D are based on valuations that have been prepared using methodologies and valuation techniques consistent with those used by independent appraisers. All values were determined by identifying research projects in areas for which technological feasibility had not been established. Additionally, the values were determined by estimating the revenue and expenses associated with a project’s sales cycle and the amount of after-tax cash flows attributable to these projects. The future cash flows were discounted to present value utilizing an appropriate risk-adjusted rate of return. The rate of return included a factor that takes into account the uncertainty surrounding the successful development of the IPR&D.

          At the time of acquisition, we expect all acquired IPR&D will reach technological feasibility, but there can be no assurance that the commercial viability of these products will actually be achieved. The nature of the efforts to develop the acquired technologies into commercially viable products consists principally of planning, designing and conducting clinical trials necessary to obtain regulatory approvals. The risks associated with achieving commercialization include, but are not limited to, delay or failure to obtain regulatory approvals to conduct clinical trials, delay or failure to obtain required market clearances and patent litigation. If commercial viability were not achieved, we would likely look to other alternatives to provide these therapies.

16



          See the “Acquisitions” section of this management’s discussion and analysis for detailed discussion of each material acquisition in fiscal years 2009 and 2008.

          Certain Tax Adjustments We classify the material recognition or derecognition of uncertain tax positions as certain tax adjustments.

          In fiscal year 2009, we recorded a $132 million certain tax benefit associated with the reversal of excess tax accruals in connection with the settlement of certain issues reached with the U.S. Internal Revenue Service (IRS) involving the review of our fiscal year 2005 and fiscal year 2006 domestic income tax returns, the resolution of various state audit proceedings covering fiscal years 1997 through 2007 and the completion of foreign audits covering various years. The $132 million certain tax benefit was recorded in the provision for income taxes in the consolidated statement of earnings for fiscal year 2009.

          There were no certain tax adjustments in fiscal year 2008.

          In fiscal year 2007, we recorded a $129 million certain tax benefit associated with the reversal of excess tax accruals in connection with the settlement reached with the IRS with respect to their review of our fiscal years 2003 and 2004 domestic income tax returns and the resolution of competent authority issues for fiscal years 1992 through 2000. The $129 million certain tax benefit was recorded in the provision for income taxes in the consolidated statement of earnings for fiscal year 2007.

          See the “Income Taxes” section of this management’s discussion and analysis for further discussion of the certain tax adjustments.

          Other Expense, Net Other expense, net includes intellectual property amortization expense, royalty income and expense, realized equity security gains and losses, realized foreign currency transaction and derivative gains and losses and impairment charges on equity securities. In fiscal year 2009, other expense, net was $396 million, a decrease of $40 million from $436 million in the prior fiscal year. The decrease of $40 million for fiscal year 2009 was primarily due to the impact of foreign currency gains and losses. Total foreign currency losses recorded in other expense, net in fiscal year 2009 were $28 million as compared to losses of $148 million in the prior fiscal year. Additionally, other expense, net was partially offset by incremental expense from royalties on the sales of Endeavor products and $92 million of amortization on intangible assets related to the Kyphon acquisition in the current fiscal year compared to $46 million in the prior fiscal year.

          In fiscal year 2008, other expense, net was $436 million, an increase of $224 million from $212 million in fiscal year 2007. This change is primarily due to the impact of foreign currency gains and losses, which resulted in losses in fiscal year 2008 of $148 million versus gains in fiscal year 2007 of $20 million, and $46 million of amortization on intangible assets resulting from the Kyphon acquisition. Additionally, prior year other expense, net was offset by $55 million due to the accelerated amortization of deferred income in connection with a product supply agreement in the CardioVascular business, where the other party elected not to exercise its option to extend the agreement.

          Interest Expense/(Income), Net Interest expense/(income), net includes interest earned on our investments, interest paid on our borrowings, amortization of debt issuance costs and the net realized gain or loss on the sale or impairment of available-for-sale (AFS) debt securities. In fiscal year 2009, interest expense/(income), net was $29 million, as compared to $(109) million in fiscal year 2008. The change from interest income, net of $109 million in fiscal year 2008 to interest expense, net of $29 million in fiscal year 2009 is the result of lower average cash and investment balances during fiscal year 2009 as a result of the cash utilized to finance the Kyphon acquisition that took place in the third quarter of fiscal year 2008 and lower interest rates being earned on our short- and long-term investments during the twelve months ended April 24, 2009. Interest expense also decreased in fiscal year 2009 as a result of having lower interest rates on our outstanding debt in comparison to fiscal year 2008. See our discussion in the “Liquidity and Capital Resources” section of this management’s discussion and analysis for more information regarding our investment portfolio.

          In fiscal year 2008, interest income, net was $109 million, a decrease of $45 million from interest income, net of $154 million in fiscal year 2007. The decrease in interest income, net in fiscal year 2008 as compared to fiscal year 2007 was a result of the impact of the cash utilized to finance the Kyphon acquisition, increased borrowings outstanding and a decline in interest rates being received on our short- and long-term investments. The decrease was partially offset by recognition of $26 million in net gains on the sale of AFS debt securities.

17



Income Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

Percentage Point
Increase/(Decrease)

 

(dollars in millions)

 

2009

 

2008

 

2007

 

FY09/08

 

FY08/07

 

Provision for income taxes

 

$

425

 

$

654

 

$

713

 

 

N/A

 

 

N/A

 

Effective tax rate

 

 

16.4

%

 

22.7

%

 

20.3

%

 

(6.3

)

 

2.4

 

Impact of special, restructuring, certain litigation and IPR&D charges and certain tax adjustments

 

 

(4.5

)

 

1.7

 

 

(3.9

)

 

(6.2

)

 

5.6

 

Non-GAAP nominal tax rate (1)

 

 

20.9

%

 

21.0

%

 

24.2

%

 

(0.1

)

 

(3.2

)


 

 

 

   

 

(1)

Non-GAAP nominal tax rate is defined as the income tax provision as a percentage of earnings before income taxes, excluding special, restructuring, certain litigation and IPR&D charges and certain tax adjustments. We believe that the resulting non-GAAP financial measure provides useful information to investors because it excludes the effect of these discrete items so that investors can compare our recurring results over multiple periods.

          The effective tax rate of 16.4 percent decreased by 6.3 percentage points from fiscal year 2008 to fiscal year 2009. The change in our effective tax rate was primarily due to the impact of special, restructuring, certain litigation and IPR&D charges and certain tax adjustments. The 6.2 percentage points decrease in the impact from special, restructuring, certain litigation and IPR&D charges and certain tax adjustments is largely due to the $132 million benefit from the certain tax adjustment associated with the reversal of excess tax accruals in connection with the settlement of certain issues reached with the U.S. Internal Revenue Service (IRS) involving the review of the Company’s fiscal year 2005 and fiscal year 2006 domestic income tax returns, the resolution of various state audit proceedings covering fiscal years 1997 through 2007 and the completion of foreign audits covering various years recorded in fiscal year 2009. Our non-GAAP nominal tax rate for fiscal year 2009 was 20.9 percent compared to 21.0 percent from the prior fiscal year. The decrease in our non-GAAP nominal tax rate for fiscal year 2009 as compared to the prior fiscal year was due to the impact of tax benefits derived from our international operations and operational tax benefits described below.

          During fiscal year 2009, we recorded $44 million in operational tax benefits. This included a $16 million operational tax benefit associated with the retroactive renewal and extension of the research and development credit enacted by the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 which related to the first seven months of calendar year 2008. The remaining $28 million of operational tax benefit related to the finalization of certain tax returns, changes to uncertain tax position reserves and the impact of a state law change in 2009. During fiscal year 2008, we recorded $37 million in operational tax benefits related to the finalization of certain tax returns and changes to uncertain tax position reserves. These tax adjustments are operational in nature and are recorded in the provision for income taxes on the consolidated statements of earnings. Excluding the impact of the operational tax adjustments, our non-GAAP nominal tax rate would have been 22.0 percent for fiscal years 2009 and 2008.

          The fiscal year 2008 effective tax rate of 22.7 percent increased by 2.4 percentage points from fiscal year 2007. The change in our effective tax rate was due to the tax impact of special, restructuring, certain litigation and IPR&D charges and certain tax adjustments partially offset by the tax benefits derived from our international operations. The 5.6 percentage points increase in the tax impact from special, restructuring, certain litigation and IPR&D charges and certain tax adjustments is largely due to the non-deductible IPR&D charges incurred during fiscal year 2008 compared to the $129 million benefit from the certain tax adjustment recorded in fiscal year 2007 associated with the reversal of excess tax accruals in connection with the settlement reached with the IRS with respect to their review of our fiscal years 2003 and 2004 domestic income tax returns and the resolution of competent authority issues for fiscal years 1992 through 2000. Our non-GAAP nominal tax rate for fiscal year 2008 was 21.0 percent compared to 24.2 percent from the prior fiscal year. The decrease in the non-GAAP nominal tax rate of 3.2 percentage points is mainly due to increased benefits from our international operations subject to tax rates lower than the U.S. statutory rates.

          Tax audits associated with the allocation of income, and other complex issues, may require an extended period of time to resolve and may result in income tax adjustments if changes to our allocation are required between jurisdictions with different tax rates. Tax authorities periodically review our tax returns and propose adjustments to our tax filings. The IRS has settled its audits with us for all years through fiscal year 1996. Tax years settled with the IRS may remain open for foreign tax audits and competent authority proceedings. Competent authority proceedings are a means to resolve intercompany pricing disagreements between countries.

          In August 2003, the IRS proposed adjustments arising out of its audit of the fiscal years 1997, 1998 and 1999 tax returns. We initiated a defense of these adjustments at the IRS appellate level, and in the second quarter of fiscal year 2006 we reached settlement on most, but not all matters. The remaining issue relates to the allocation of income between Medtronic, Inc., and its wholly owned subsidiary in Switzerland. On April 16, 2008, the IRS issued a statutory notice of deficiency with respect to this remaining issue. We filed a Petition with the U.S. Tax Court on July 14, 2008 objecting to the deficiency and intend to defend our position vigorously.

          In September 2005, the IRS issued its audit report for fiscal years 2000, 2001 and 2002. In addition, the IRS issued its audit report for fiscal years 2003 and 2004 in March 2007. We have reached agreement with the IRS on substantially all of the proposed adjustments for these fiscal years 2000 through 2004. The only item of significance that remains open for these years relates to the carryover impact of the allocation of income issue proposed for fiscal years 1997 through 1999.

18



          In March 2009, the IRS issued its audit report for fiscal years 2005 and 2006. We have reached agreement with the IRS on many, but not all, of the proposed adjustments for fiscal years 2005 and 2006. The significant issues that remain unresolved relate to the allocation of income between Medtronic, Inc. and its wholly owned subsidiaries and the timing of the deductibility of a settlement payment. For the proposed adjustments that we do not agree with, we have filed our protest with the IRS.

          Our reserve for the uncertain tax positions related to these significant unresolved matters with the IRS, described above, is subject to a high degree of estimation and management judgment. Resolution of these significant unresolved matters, or positions taken by the IRS or foreign tax authorities during future tax audits, could have a material impact on our financial results in future periods. We continue to believe that our reserves for uncertain tax positions are appropriate and have meritorious defenses for our tax filings and will vigorously defend them during the audit process, appellate process and through litigation in courts, as necessary.

          See Note 13 to the consolidated financial statements for additional information.

Liquidity and Capital Resources

 

 

 

 

 

 

 

 

 

 

Fical Year

 

(dollars in millions)

 

2009

 

2008

 

Working capital

 

$

4,313

 

$

3,787

 

Current ratio*

 

 

2.4:1.0

 

 

2.1:1.0

 

Cash, cash equivalents, and short-term investments

 

$

1,676

 

$

1,613

 

Long-term investments in debt securities**

 

 

2,242

 

 

2,078

 

Cash, cash equivalents, short-term investments and long-term debt securities

 

$

3,918

 

$

3,691

 

Short-term borrowings and long-term debt

 

$

7,294

 

$

6,956

 

Net cash position***

 

$

(3,376

)

$

(3,265

)


 

 

 

*

 

Current ratio is the ratio of current assets to current liabilities.

**

 

Long-term investments include debt securities with a maturity date greater than one year from the end of the period.

***

 

Net cash position is the sum of cash, cash equivalents, short-term investments and long-term investments in debt securities less short-term borrowings and long-term debt.

          We believe our liquidity remains strong as of April 24, 2009 and our strong balance sheet and liquidity provide us with flexibility in the future. We believe our existing cash and investments, as well as our unused lines of credit and commercial paper capacity of $2.799 billion, if needed, will satisfy our foreseeable working capital requirements for at least the next twelve months. However, we periodically consider various financing alternatives and may, from time to time, seek to take advantage of favorable interest rate environments or other market conditions. At April 24, 2009, our Standard and Poor’s Ratings Group and Moody’s Investors Service ratings remain unchanged as compared to the fiscal year ended April 25, 2008 with long-term debt ratings of AA- and A1, respectively, and strong short-term debt ratings of A-1+ and P-1.

          The decrease in our net cash position in fiscal year 2009 as compared to fiscal year 2008 was primarily due to the fiscal year 2009 issuance of new debt partially offset by positive cash flow from operations. For further information see the “Summary of Cash Flows” section of this management’s discussion and analysis.

          We have future contractual obligations and other minimum commercial commitments that are entered into in the normal course of business. We believe our off-balance sheet arrangements do not have a material current or anticipated future effect on our consolidated earnings, financial position or cash flows. See the “Off-Balance Sheet Arrangements and Long-Term Contractual Obligations” section of this management’s discussion and analysis for further information.

          When applicable, Note 16 to the consolidated financial statements provides information regarding amounts we have accrued related to significant legal proceedings. In accordance with SFAS No. 5, we record a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. For the fiscal year ended April 24, 2009, we have made significant payments related to certain legal proceedings. For information regarding these payments, please see the “Special, Restructuring, Certain Litigation and IPR&D Charges and Certain Tax Adjustments” section of this management’s discussion and analysis for further information.

          At April 24, 2009 and April 25, 2008, approximately $3.628 billion and $3.317 billion, respectively, of cash, cash equivalents, short-term investments and long-term investments in debt securities were held by our non-U.S. subsidiaries. These funds are available for use by worldwide operations; however, if these funds were repatriated to the U.S. or used for U.S. operations, the amounts would generally be subject to U.S. tax. As a result, we have not chosen to repatriate this cash but instead use cash generated from U.S. operations and short- and long-term borrowings to meet our U.S. cash needs. Long-term investments at April 24, 2009 also include $100 million of cash invested in government securities held in an indemnification trust established for self-insurance coverage for our directors and officers. These investments are restricted and can only be used to indemnify or advance expenses related to claims against our directors and/or officers.

19



          We have investments in marketable debt securities that are classified and accounted for as available-for-sale. Our debt securities include corporate debt securities, government and agency securities, certificates of deposit and mortgage backed and other asset backed securities including auction rate securities. Market conditions during fiscal year 2009 and subsequent to our April 24, 2009 year-end continue to indicate significant uncertainty on the part of investors on the economic outlook for the U.S. and for financial institutions. This uncertainty has created reduced liquidity across the fixed income investment market, including certain securities in which we have invested. As a result, some of our investments have experienced reduced liquidity including unsuccessful monthly auctions for our auction rate security holdings. Although certain securities are illiquid, if we required capital we believe we could liquidate a substantial amount of our portfolio and incur no material impairment loss or borrow under our commercial paper program or lines of credit.

          For the fiscal year ended April 24, 2009, we recognized an other-than-temporary impairment loss on AFS debt securities of $38 million. In determining this other-than-temporary impairment loss, we considered the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and related guidance. This guidance specifies that we consider a variety of factors, including the quality and estimated value of the underlying credit support for our holding and the financial condition and credit rating of the issuer. Based on our assessment of the credit quality of the underlying collateral and credit support available to each of the remaining securities in which we are invested, we believe we have recorded all necessary other-than-temporary impairments as we have the ability and the intent to hold these investments long enough to avoid realizing further losses. However, as of April 24, 2009, we have $175 million of gross unrealized losses on our aggregate short-term and long-term investments of $2.647 billion; if market conditions continue to deteriorate further, some of these holdings may experience other-than-temporary impairment in the future which could have a material impact on our financial results. Management is required to use estimates and assumptions in its valuation of our investments, which requires a high degree of judgment, and therefore actual results could differ materially from those estimates. See Note 6 to the consolidated financial statements for additional information regarding fair value measurements under SFAS No. 157, “Fair Value Measurements.”

Summary of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(dollars in millions)

 

2009

 

2008

 

2007

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

     Operating activities

 

$

3,878

 

$

3,489

 

$

2,979

 

     Investing activities

 

 

(2,740

)

 

(2,790

)

 

(1,701

)

     Financing activities

 

 

(845

)

 

(835

)

 

(3,011

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(82

)

 

(60

)

 

(5

)

Net change in cash and cash equivalents

 

$

211

 

$

(196

)

$

(1,738

)

          Operating Activities Our net cash provided by operating activities was $3.878 billion for the fiscal year ended April 24, 2009 compared to $3.489 billion provided by operating activities for the same period of the prior year. The $389 million increase in net cash provided by operating activities is primarily attributable to the increase in earnings and due to the timing of receipts and payments for disbursements in the ordinary course of business.

          Our net cash provided by operating activities was $3.489 billion for the fiscal year ended April 25, 2008 compared to net cash provided by operating activities of $2.979 billion in the same period of the prior year. The $510 million increase in net cash provided by operating activities was primarily attributable to a $442 million decrease in cash used for operating assets and liabilities. The decrease in cash used was led by our improved management of outstanding accounts receivable and inventory.

          Investing Activities Our net cash used in investing activities was $2.740 billion for the fiscal year ended April 24, 2009 compared to $2.790 billion used in investing activities for the fiscal year ended April 25, 2008. Although we had a number of acquisitions which took place in fiscal year 2009, overall cash used for acquisitions decreased in comparison to the prior fiscal year which included the acquisition of Kyphon. The reduction in acquisition spending was largely offset by increased investing in marketable securities in fiscal year 2009 which resulted in net purchases of $115 million as compared to net proceeds of $2.124 billion in the prior year as we readied our cash position for the acquisition of Kyphon. Lastly, fiscal year 2009 included increased other investing activities which primarily relate to the purchase of minority investments. Although we generally invest in a number of early stage companies each year, fiscal year 2009 included the use of $221 million in cash for the purchase of a 15 percent interest in Weigao which is a component of our strategy to increase investment in China.

          Our net cash used in investing activities was $2.790 billion for the fiscal year ended April 25, 2008 compared to $1.701 billion used in investing activities for the fiscal year ended April 27, 2007. The $1.089 billion increase in net cash used in investing activities was primarily attributable to the $4.185 billion increase in cash used for acquisitions and the purchase of intellectual property, principally the Kyphon acquisition, partially offset by $3.067 billion in incremental cash generated through the liquidation of marketable securities as compared to the prior year.

20



          Financing Activities Our net cash used in financing activities was consistent with the prior year at $845 million for the fiscal year ended April 24, 2009 compared to $835 million for the fiscal year ended April 25, 2008. Proceeds from net short- and long-term borrowing were approximately $500 million lower in fiscal year 2009 as compared to fiscal year 2008, primarily due to the lower acquisition related cash needs in the current fiscal year. Our cash returned to shareholders in the form of dividends and the repurchase of common stock was approximately $500 million lower in fiscal year 2009 as compared to fiscal year 2008. Although dividends were up during fiscal year 2009 by approximately $300 million due to an increase in the amount of dividends per share, this increase was more than offset by approximately $800 million in lower share repurchases as compared to fiscal year 2008.

          Our net cash used in financing activities was $835 million for the fiscal year ended April 25, 2008, compared to net cash used in financing activities of $3.011 billion for the fiscal year ended April 27, 2007. The $2.176 billion decrease in net cash used in financing activities was primarily attributable to the fact that in the prior year $1.877 billion in cash was used to repurchase long-term debt as the bond holders put the Contingent Convertible Debentures to us and in fiscal year 2008 we generated proceeds of $843 million from net short- and long-term borrowings. These cash inflows were offset by a $505 million increase in cash used for share repurchases.

Off-Balance Sheet Arrangements and Long-Term Contractual Obligations

          We acquire assets still in development, enter into research and development arrangements and sponsor certain clinical trials that often require milestone and/or royalty payments to a third-party, contingent upon the occurrence of certain future events. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of a product or upon certain pre-designated levels of achievement in clinical trials. In addition, if required by the arrangement, we may have to make royalty payments based on a percentage of sales related to the product under development or in the event that regulatory approval for marketing is obtained. In situations where we have no ability to influence the achievement of the milestone or otherwise avoid the payment, we have included those milestone or minimum royalty payments in the following table. However, the majority of these arrangements give us the discretion to unilaterally make the decision to stop development of a product or cease progress of a clinical trial, which would allow us to avoid making the contingent payments. Although we are unlikely to cease development if a device successfully achieves clinical testing objectives, these payments are not included in the table of contractual obligations because of the contingent nature of these payments and our ability to avoid them if we decided to pursue a different path of development or testing.

          In the normal course of business, we periodically enter into agreements that require us to indemnify customers or suppliers for specific risks, such as claims for injury or property damage arising out of our products or the negligence of our personnel or claims alleging that our products infringe third-party patents or other intellectual property. Our maximum exposure under these indemnification provisions cannot be estimated, and we have not accrued any liabilities within our consolidated financial statements or included any indemnification provisions in our commitments table. Historically, we have not experienced significant losses on these types of indemnification obligations.

          We believe our off-balance sheet arrangements do not have a material current or anticipated future effect on our consolidated earnings, financial position or cash flows. Presented below is a summary of contractual obligations and other minimum commercial commitments as of April 24, 2009. See Notes 8, 9 and 15 to the consolidated financial statements for additional information regarding long-term debt, foreign currency contracts and lease obligations, respectively. Additionally, see Note 13 to the consolidated financial statements for additional information regarding accrued income tax obligations, which are not reflected in the table below.

21



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity by Fiscal Year

 

 

 

Total

 

2010

 

2011

 

2012

 

2013

 

2014

 

Thereafter

 

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual obligations related to off-balance sheet arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts (1)

 

$

5,296

 

$

3,546

 

$

1,501

 

$

249

 

$

 

$

 

$

 

Operating leases (2)

 

 

237

 

 

77

 

 

50

 

 

31

 

 

23

 

 

21

 

 

35

 

Inventory purchases (3)

 

 

509

 

 

296

 

 

132

 

 

36

 

 

17

 

 

12

 

 

16

 

Commitments to fund minority investments/contingent acquisition consideration (4)

 

 

491

 

 

89

 

 

214

 

 

90

 

 

25

 

 

8

 

 

65

 

Interest payments (5)

 

 

1,354

 

 

182

 

 

173

 

 

131

 

 

131

 

 

95

 

 

642

 

Other (6)

 

 

213

 

 

63

 

 

48

 

 

36

 

 

19

 

 

15

 

 

32

 

Total

 

$

8,100

 

$

4,253

 

$

2,118

 

$

573

 

$

215

 

$

151

 

$

790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual obligations reflected in the balance sheet:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, excluding capital leases (7)

 

$

6,665

 

$

 

$

2,600

 

$

15

 

$

2,200

 

$

550

 

$

1,300

 

Capital leases (8)

 

 

67

 

 

14

 

 

16

 

 

17

 

 

20

 

 

 

 

 

Total

 

$

6,732

 

$

14

 

$

2,616

 

$

32

 

$

2,220

 

$

550

 

$

1,300

 


 

 

(1)

As these obligations were entered into as hedges, the majority of these obligations will be offset by losses/gains on the related assets, liabilities and transactions being hedged.

 

 

(2)

Certain leases require us to pay real estate taxes, insurance, maintenance and other operating expenses associated with the leased premises. These future costs are not included in the schedule above.

 

 

(3)

We have included inventory purchase commitments which are legally binding and specify minimum purchase quantities. These purchase commitments do not exceed our projected requirements and are in the normal course of business. These commitments do not include open purchase orders.

 

 

(4)

Certain commitments related to the funding of minority investments and/or previous acquisitions are contingent upon the achievement of certain product-related milestones and various other favorable operational conditions. While it is not certain if and/or when these payments will be made, the maturity dates included in this table reflect our best estimates.

 

 

(5)

Interest payments in the table above reflect the interest on our outstanding debt, including the $1.250 billion of New Senior Notes, $4.400 billion of Senior Convertible Notes, $1.000 billion of Senior Notes and $15 million of Contingent Convertible Debentures. The interest rate on each outstanding obligation varies and interest is payable semi-annually. The interest rate is 4.500 percent on $550 million of the New Senior Notes, 5.600 percent on $400 million of the New Senior Notes, 6.500 percent on $300 million of the New Senior Notes, 1.500 percent on the $2.200 billion Senior Convertible Notes due 2011 and 1.625 percent on the $2.200 billion Senior Convertible Notes due 2013, 4.375 percent on the $400 million of Senior Notes due 2010, 4.750 percent on the $600 million of Senior Notes due 2015 and 1.250 percent on the Contingent Convertible Debentures due 2021.

 

 

(6)

These obligations include certain research and development arrangements.

 

 

(7)

Long-term debt in the table above includes $1.250 billion New Senior Notes, $4.400 billion Senior Convertible Notes issued in April 2006, and $1.000 billion Senior Notes issued in September 2005 and $15 million related to our Contingent Convertible Debentures. The table above excludes the remaining fair value from the five year interest rate swap entered into in November 2005 and the eight year interest rate swap agreement entered into in June 2007 that were terminated in December 2008. See Note 8 to the consolidated financial statements for additional information regarding the interest rate swap agreement terminations.

 

 

(8)

Capital lease obligations include a sale-leaseback agreement entered into in fiscal year 2006 whereby certain manufacturing equipment was sold and is being leased by us over a seven year period.

Debt and Capital

          In June 2007, our Board of Directors authorized the repurchase of up to 50 million shares of our common stock. In addition, in April 2006, the Board of Directors made a special authorization for the repurchase of up to 50 million shares in connection with the $4.400 billion Senior Convertible Note offering (see below for further discussion).

          Shares are repurchased from time to time to support our stock-based compensation programs and to take advantage of favorable market conditions. During fiscal years 2009 and 2008, we repurchased approximately 16.5 million shares and 30.7 million shares at an average price of $45.94 and $50.28, respectively. As of April 24, 2009, we have approximately 17.8 million shares remaining under current buyback authorizations approved by the Board of Directors. On June 18, 2009, our Board of Directors authorized the repurchase of an additional 60 million shares of our common stock.

          In March 2009, we issued three tranches of Senior Notes (New Senior Notes) with the aggregate face value of $1.250 billion. The first tranche consisted of $550 million of 4.500 percent Senior Notes due 2014, the second tranche consisted of $400 million of 5.600 percent Senior Notes due 2019 and the third tranche consisted of $300 million of 6.500 percent Senior Notes due 2039. The first tranche was issued at par, the second tranche was issued at a discount which resulted in an effective interest rate of 5.609 percent and the third tranche was issued at a discount which resulted in an effective interest rate of 6.519 percent. Interest on each series of New Senior Notes is payable semi-annually, on March 15 and September 15 of each year, commencing September 15, 2009. The New Senior Notes are unsecured senior obligations that rank equally with all other unsecured and unsubordinated indebtedness. The indentures under which the New Senior Notes were issued contain customary covenants, all of which we remain in compliance with as of April 24, 2009. We used the net proceeds from the sale of the New Senior Notes for repayment of a portion of our outstanding commercial paper and for general corporate uses.

22



          In April 2006, we issued $2.200 billion of 1.500 percent Senior Convertible Notes due 2011 and $2.200 billion of 1.625 percent Senior Convertible Notes due 2013, collectively the Senior Convertible Notes. The Senior Convertible Notes were issued at par and pay interest in cash semi-annually in arrears on April 15 and October 15 of each year. The Senior Convertible Notes are unsecured unsubordinated obligations and rank equally with all other unsecured and unsubordinated indebtedness. The Senior Convertible Notes have an initial conversion price of $56.14 per share. The Senior Convertible Notes may only be converted: (i) during any calendar quarter if the closing price of our common stock reaches 140 percent of the conversion price for 20 trading days during a specified period, or (ii) if specified distributions to holders of our common stock are made or specified corporate transactions occur, or (iii) during the last month prior to maturity of the applicable notes. Upon conversion, a holder would receive: (i) cash equal to the lesser of the principal amount of the note or the conversion value and (ii) to the extent the conversion value exceeds the principal amount of the note, shares of our common stock, cash or a combination of common stock and cash, at our option. In addition, upon a change in control, as defined, the holders may require us to purchase for cash all or a portion of their notes for 100 percent of the principal amount of the notes plus accrued and unpaid interest, if any, plus a number of additional make-whole shares of our common stock, as set forth in the applicable indenture. The indentures under which the Senior Convertible Notes were issued contain customary covenants, all of which we remain in compliance with as of April 24, 2009. A total of $2.500 billion of the net proceeds from these note issuances were used to repurchase common stock. As of April 24, 2009, pursuant to provisions in the indentures relating to our increase of its quarterly dividend to shareholders, the conversion rates for each of the Senior Convertible Notes is now 18.0474, which correspondingly changed the conversion price per share for each of the Senior Convertible Notes to $55.41. See Note 8 to the consolidated financial statements for further discussion of the accounting treatment of these Senior Convertible Notes.

          Concurrent with the issuance of the Senior Convertible Notes, we purchased call options on our common stock in private transactions. The call options allow us to receive shares of our common stock and/or cash from counterparties equal to the amounts of common stock and/or cash related to the excess conversion value that we would pay to the holders of the Senior Convertible Notes upon conversion. These call options will terminate upon the earlier of the maturity dates of the related Senior Convertible Notes or the first day all of the related Senior Convertible Notes are no longer outstanding due to conversion or otherwise. The call options, which cost an aggregate $1.075 billion ($699 million net of tax benefit), were recorded as a reduction of shareholders’ equity. See Note 8 to the consolidated financial statements for further discussion of the accounting treatment of these call options.

          In separate transactions, we sold warrants to issue shares of our common stock at an exercise price of $76.56 per share in private transactions. Pursuant to these transactions, warrants for 41 million shares of our common stock may be settled over a specified period beginning in July 2011 and warrants for 41 million shares of our common stock may be settled over a specified period beginning in July 2013 (the “settlement dates”). If the average price of our common stock during a defined period ending on or about the respective settlement dates exceeds the exercise price of the warrants, the warrants will be settled in shares of our common stock. Proceeds received from the issuance of the warrants totaled approximately $517 million and were recorded as an addition to shareholders’ equity. See Note 8 to the consolidated financial statements for further discussion of the accounting treatment. In April 2009, certain of the holders requested adjustment to the exercise price of the warrants from $76.30 to $75.56 pursuant to the anti-dilution provisions of the warrants relating to our payment of dividends to common shareholders.

          In September 2005, we issued two tranches of Senior Notes with the aggregate face value of $1.000 billion. The first tranche consisted of $400 million of 4.375 percent Senior Notes due 2010 and the second tranche consisted of $600 million of 4.750 percent Senior Notes due 2015. Each tranche was issued at a discount which resulted in an effective interest rate of 4.433 percent and 4.760 percent for the five and ten year Senior Notes, respectively. Interest on each series of Senior Notes is payable semi-annually, on March 15 and September 15 of each year. The Senior Notes are unsecured unsubordinated obligations and rank equally with all other unsecured and unsubordinated indebtedness. The indentures under which the Senior Notes were issued contain customary covenants, all of which we remain in compliance with as of April 24, 2009. We used the net proceeds from the sale of the Senior Notes for repayment of a portion of our outstanding commercial paper.

          In November 2005 and June 2007, we entered into a five year interest rate swap agreement with a notional amount of $200 million, and an eight year interest rate swap agreement with a notional amount of $300 million, respectively. These interest rate swap agreements were designated as fair value hedges of the changes in fair value of a portion of our fixed-rate $400 million Senior Notes due 2010 and fixed-rate $600 million Senior Notes due 2015, respectively. The outstanding market values of these swap agreements were $8 million and $27 million of unrealized gains, respectively, at April 25, 2008. The unrealized gains of $8 million and $27 million at April 25, 2008 were recorded in long-term debt with the offset recorded in other assets on the consolidated balance sheets.

          In December 2008, we terminated the interest rate swap agreements. At that time, the contracts were in an asset position, resulting in cash receipts of $62 million, which included $3 million of accrued interest. The gain from terminating the interest rate swap agreements increased the outstanding balance of the Senior Notes and is being amortized as a reduction of interest expense over the remaining life of the Senior Notes. The cash flows from the termination of these interest rate swap agreements have been reported as operating activities in the consolidated statement of cash flows.

23



          As of April 24, 2009, we have $15 million remaining in aggregate principal amount of 1.250 percent Contingent Convertible Debentures, Series B due 2021 (the Debentures) outstanding. Interest is payable semi-annually. Each Debenture is convertible into shares of common stock at an initial conversion price of $61.81 per share; however, the Debentures are not convertible before their final maturity unless the closing price of the Company’s common stock reaches 110 percent of the conversion price for 20 trading days during a consecutive 30 trading day period. Upon conversion of the Debentures, we will pay holders cash equal to the lesser of the principal amount of the Debentures or their conversion value, and shares of the Company’s common stock to the extent the conversion value exceeds the principal amount of the Debentures. We may be required to repurchase the remaining debentures at the option of the holders in September 2011 or 2016. For put options exercised by the holders of the Debentures, the purchase price is equal to the principal amount of the applicable debenture plus any accrued and unpaid interest thereon to the repurchase date. If the put option is exercised, we will pay holders the repurchase price solely in cash. In September 2008, as a result of certain holders of the Debentures exercising their put options, we repurchased $79 million of the Debentures for cash. We can redeem the remaining debentures for cash at any time.

          We maintain a commercial paper program that allows us to have a maximum of $2.250 billion in commercial paper outstanding, with maturities up to 364 days from the date of issuance. At April 24, 2009 and April 25, 2008, outstanding commercial paper totaled $385 million and $874 million, respectively. During fiscal years 2009 and 2008, the weighted average original maturity of the commercial paper outstanding was approximately 50 and 35 days, respectively, and the weighted average interest rate was 1.60 percent and 4.46 percent, respectively.

          In connection with the issuance of the contingent convertible debentures, New Senior Notes, Senior Notes, Senior Convertible Notes and commercial paper, Standard and Poor’s Ratings Group and Moody’s Investors Service issued us strong long-term debt ratings of AA- and A1, respectively, and strong short-term debt ratings of A-1+ and P-1, respectively. These ratings remain unchanged from the same periods of the prior year.

          We have existing unsecured lines of credit of approximately $2.807 billion with various banks at April 24, 2009. The existing lines of credit include a five-year $1.750 billion syndicated credit facility dated December 20, 2006 that will expire on December 20, 2011 (Credit Facility). The Credit Facility provides backup funding for the commercial paper program and may also be used for general corporate purposes. The Credit Facility provides us with the ability to increase its capacity by an additional $500 million at any time during the life of the five-year term of the agreement.

          On November 2, 2007, we entered into a new Credit Agreement (the “New Credit Agreement”) with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (the “New Lender”). The New Credit Agreement provides for a $300 million unsecured revolving credit facility (the “New Facility”) maturing November 2, 2010. In addition to certain initial fees, we are obligated to pay a commitment fee based on the total revolving commitment.

          As of April 24, 2009 and April 25, 2008, $508 million and $1.350 billion, respectively, were outstanding on all lines of credit.

          Interest rates on advances on our lines of credit are determined by a pricing matrix, based on our long-term debt ratings, assigned by Standard and Poor’s Ratings Group 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 other customary covenants, all of which we remain in compliance with as of April 24, 2009.

          As of April 24, 2009, we have unused credit lines and commercial paper capacity of approximately $2.799 billion.

Acquisitions

          In April 2009, we acquired CoreValve. Under the terms of the agreement, the transaction included an initial up-front payment of $700 million plus potential additional payments contingent upon achievement of certain clinical and revenue milestones. CoreValve develops percutaneous, catheter-based transfemoral aortic valve replacement products.

          In February 2009, we acquired Ventor, a development stage company focused on transcatheter heart valve technologies for the treatment of aortic valve disease. Total consideration for the transaction, net of cash acquired, was approximately $308 million, of which $307 million was expensed as IPR&D since technological feasibility of the underlying project had not yet been reached and such technology has no future alternative use. This acquisition adds two technologies to our transcatheter valve portfolio: a minimally invasive, surgical transapical technology and a next generation percutaneous, transfemoral technology.

          It is expected that the acquisitions of CoreValve and Ventor will allow us to pursue opportunities that have natural synergies with our existing heart valve franchise in our CardioVascular business and leverage our global footprint.

          In February 2009, we also acquired Ablation Frontiers. Under the terms of the agreement, the transaction included an initial up-front payment of $225 million plus potential additional payments contingent upon achievement of certain clinical and revenue milestones. Total consideration for the transaction was approximately $235 million including the assumption and settlement of existing Ablation Frontiers debt and payment of direct acquisition costs. Ablation Frontiers develops radiofrequency (RF) ablation solutions for treatment of atrial fibrillation.

24



          In November 2008, we acquired CryoCath. Under the terms of the agreement, CryoCath shareholders received $8.75 Canadian dollars per share in cash for each share of CryoCath common stock that they owned. Total consideration for the transaction, net of cash acquired, was approximately $352 million U.S. dollars including the purchase of outstanding CryoCath common stock, the assumption and settlement of existing CryoCath debt and the payment of direct acquisition costs. CyroCath develops cryotherapy products to treat cardiac arrhythmias. CryoCath’s Arctic Front product is a minimally invasive cryo-balloon catheter designed specifically to treat atrial fibrillation and is currently approved in markets outside the U.S.

          It is expected that the acquisitions of Ablation Frontiers and CryoCath will allow our CRDM business to extend its reach into the under-penetrated market of catheter based treatment of atrial fibrillation.

          In July 2008, we acquired Restore. Under the terms of the agreement, Restore shareholders received $1.60 per share in cash for each share of Restore common stock they owned. Total consideration for the transaction, net of cash acquired, was approximately $29 million. Restore’s Pillar System will provide us with a minimally invasive, implantable medical device used to treat the soft palate component of sleep breathing disorders, including mild to moderate obstructive sleep apnea and snoring.

          The pro forma impact of the above acquisitions were not significant, individually or in the aggregate, to our results for the fiscal years ended April 24, 2009 or April 25, 2008. The results of operations related to each company have been included in our consolidated statements of earnings since the date each company was acquired.

          In April 2008, we recorded an IPR&D charge of $42 million related to the acquisition of NDI, a development stage company focused on commercially developing technology to stimulate the dorsal genital nerve as a means to treat urinary incontinence. Total consideration for NDI was approximately $42 million which included $39 million in cash and the forgiveness of $3 million of pre-existing loans provided to NDI. The acquisition will provide us with exclusive rights to develop and use NDI’s technology in the treatment of urinary urge incontinence. This payment was expensed as IPR&D since technological feasibility of the underlying projects had not yet been reached and such technology has no future alternative use.

          In November 2007, we acquired Kyphon and it became our wholly owned subsidiary. Kyphon develops and markets medical devices designed to restore and preserve spinal function using minimally invasive technology. Kyphon’s primary products are used in balloon kyphoplasty for the treatment of spinal compression fractures caused by osteoporosis or cancer, and in the interspinous process decompression (IPD) procedure for treating the symptoms of lumbar spinal stenosis. It is expected that the acquisition of Kyphon will add to the growth of our existing Spinal business by extending its product offerings and enabling us to provide physicians with a broader range of therapies for use at all stages of the care continuum.

          Under the terms of the agreement announced in July 2007, Kyphon shareholders received $71 per share in cash for each share of Kyphon common stock they owned. Total consideration for the transaction was $4.203 billion which includes payments to Kyphon shareholders for the cancellation of outstanding shares, the assumption and settlement of existing Kyphon debt and payment of direct acquisition costs. Total debt assumed relates to Kyphon’s obligations under existing credit and term loan facilities and outstanding senior convertible notes. As of the date of the transaction, the existing credit and term loan facilities were fully paid and terminated. The senior convertible notes were converted by the holders in the weeks following the close of the transaction and have been included in the total purchase consideration above. In addition, the total consideration includes the proceeds of unwinding the related convertible note hedges and cancellation and payment of the warrants to the hedge participants that were originally issued by Kyphon in February 2007.

          The transaction was financed through a combination of $3.303 billion cash on hand, the issuance of $600 million short-term commercial paper and borrowing $300 million through a new long-term unsecured revolving credit facility.

          The results of operations related to Kyphon have been included in our consolidated statements of earnings since the date of the acquisition and include the full amortization of a $34 million inventory write-up recorded as part of the Kyphon acquisition accounting. The pro forma impact of Kyphon was significant to our results for fiscal year 2008. See Note 4 to the consolidated financial statements for the unaudited pro forma results of operations for fiscal years 2008 and 2007.

          In November 2007, we also acquired Setagon, Inc. (Setagon), a development stage company focused on commercially developing metallic nanoporous surface modification technology. The acquisition will provide us with exclusive rights to use and develop Setagon’s Controllable Elution Systems technology in the treatment of cardiovascular disease. Total consideration for Setagon was approximately $20 million in cash, subject to purchase price increases, which would be triggered by the achievement of certain milestones. The $20 million was expensed as IPR&D since technological feasibility of the underlying projects had not yet been reached and such technology has no future alternative use.

25



          In June 2007, we acquired substantially all of the O-Arm Imaging System (O-Arm) assets of Breakaway Imaging, LLC (Breakaway), a privately held company. Prior to the acquisition, we had the exclusive rights to distribute and market the O-Arm. The O-Arm provides multi-dimensional surgical imaging for use in spinal and orthopedic surgical procedures. The acquisition is expected to bring the O-Arm into a broad portfolio of image guided surgical solutions. Total consideration for Breakaway was approximately $26 million in cash, subject to purchase price increases, which would be triggered by the achievement of certain milestones. The pro forma impact of Breakaway was not significant to our results for the fiscal year ended April 25, 2008.

          In addition to the acquisitions above, we periodically acquire certain tangible or intangible assets from enterprises that do not otherwise qualify for accounting as a business combination. These transactions are largely reflected in the consolidated statements of cash flows as a component of investing activities under purchase of intellectual property.

New Accounting Pronouncements

          Information regarding new accounting pronouncements is included in Note 1 to the consolidated financial statements.

Operations Outside of the United States

          The table below illustrates U.S. net sales versus net sales outside the U.S. for fiscal years April 24, 2009, April 25, 2008 and April 27, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years

 

(dollars in millions)

 

2009 

 

2008 

 

2007 

 

U.S. net sales

 

$

8,997

 

$

8,336

 

$

7,900

 

Non-U.S. net sales

 

 

5,602

 

 

5,179

 

 

4,399

 

Total net sales

 

$

14,599

 

$

13,515

 

$

12,299

 

          From fiscal year 2008 to fiscal 2009, consolidated net sales growth in the U.S. and outside the U.S. both grew 8 percent. Foreign currency had a negative impact of $100 million on net sales for fiscal year 2009. Outside the U.S., net sales growth was led by strong performance in Spinal, Diabetes and Surgical Technologies. Spinal net sales growth was led by growth in Core Spinal due to increased sales of the CD HORIZON family of products. Also, the acquisition of Kyphon in the third quarter of fiscal year 2008 increased the sales growth for Spinal as the comparative period only includes six months of Kyphon net sales. Diabetes growth outside the U.S. was led by the continued acceptance of the MiniMed Paradigm REAL-Time System. Increased sales of the O-Arm Imaging System led to the growth within the Surgical Technologies business outside the U.S.

          From fiscal year 2007 to fiscal year 2008, consolidated net sales in the U.S. grew 6 percent compared to 18 percent growth in net sales outside the U.S. The slower U.S. growth was primarily a result of the voluntary suspension of the Fidelis lead and the voluntary suspension of U.S. shipments of Physio-Control products from our Redmond, Washington facility. Outside the U.S., net sales growth was strong across all businesses and led by strong performance in CardioVascular, Diabetes and CRDM, the benefit of the addition of Kyphon in Spinal and a favorable impact of foreign currency translation which added 9 percentage points to the outside the U.S. growth rate. CardioVascular net sales were led by market share gains with Endeavor and Endeavor Resolute. Diabetes sales increased as a result of further acceptance of the MiniMed Paradigm REAL-Time System. Increased sales of Defibrillation Systems and Pacing Systems led the increase within our CRDM business.

          Net sales outside the U.S. are accompanied by certain financial risks, such as collection of receivables, which typically have longer payment terms. Outstanding receivables from customers outside the U.S. totaled $1.592 billion at April 24, 2009, or 50 percent, of total outstanding accounts receivable, and $1.800 billion at April 25, 2008, or 53 percent, of total outstanding accounts receivable.

Market Risk

          Due to the global nature of our operations, we are subject to the exposures that arise from foreign currency exchange rate fluctuations. In a period where the U.S. dollar is strengthening as compared to other currencies, our revenues and expenses denominated in foreign currency are translated into a lower value than they would be in an otherwise constant environment. We manage these exposures using operational and economic hedges as well as derivative financial instruments. The primary currencies hedged are the Euro and the Japanese Yen.

26



          Our objective in managing exposure to foreign currency fluctuations is to minimize earnings and cash flow volatility associated with foreign exchange rate changes. We enter into various contracts, principally forward contracts that change in value as foreign exchange rates change, to protect the value of existing foreign currency assets, liabilities, net investments and probable commitments. The gains and losses on these contracts offset changes in the value of the related exposures. It is our policy to enter into foreign currency hedging transactions only to the extent true exposures exist; we do not enter into foreign currency transactions for speculative purposes.

          We had foreign exchange derivative contracts outstanding in notional amounts of $5.296 billion and $6.613 billion at April 24, 2009 and April 25, 2008, respectively. The fair value of these contracts at April 24, 2009 was $405 million more than the original contract value. A sensitivity analysis of changes in the fair value of all foreign exchange derivative contracts at April 24, 2009 indicates that, if the U.S. dollar uniformly strengthened/weakened by 10 percent against all currencies, the fair value of these contracts would increase/decrease by $495 million, respectively. Any gains and losses on the fair value of derivative contracts would be largely offset by gains and losses on the underlying transactions. These offsetting gains and losses are not reflected in the above analysis. We are also exposed to interest rate changes affecting principally our investments in interest rate sensitive instruments. A sensitivity analysis of the impact on our interest rate sensitive financial instruments of a hypothetical 10 percent change in short-term interest rates compared to interest rates at April 24, 2009 indicates that the fair value of these instruments would correspondingly change by $22 million.

          We have investments in marketable debt securities that are classified and accounted for as available-for-sale. Our debt securities include corporate debt securities, government and agency securities, certificates of deposit and mortgage backed and other asset backed securities including auction rate securities. For a discussion of current market conditions and the impact on Medtronic, please see the “Liquidity and Capital Resources” section of this management’s discussion and analysis.

          We historically lent certain fixed income securities to enhance our investment income. These lending activities were indemnified against counterparty risk and collateralized at an average rate of 102 percent, with the collateral determined based on the underlying securities and creditworthiness of the borrowers. The value of the securities on loan at April 25, 2008 was $610 million. Due to our concerns about the liquidity condition in the fixed income markets, we suspended our lending program in the second quarter of fiscal year 2009 and had no lending activity during the third and fourth quarters of fiscal year 2009.

Cautionary Factors That May Affect Future Results

          This Annual Report may include “forward-looking” statements. Forward-looking statements broadly involve our current expectations or forecasts of future results. Our forward-looking statements generally relate to our growth and growth strategies, financial results, product development, regulatory approvals, competitive strengths, intellectual property rights, litigation and tax matters, mergers and acquisitions, market acceptance of our products, accounting estimates, financing activities, ongoing contractual obligations and sales efforts. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “should,” “will” and similar words or expressions. Forward-looking statements in this Annual Report include, but are not limited to, growth in our Spinal business related to the Kyphon acquisition and our intended reorganization and consolidation of certain activities; future launches of products and continued acceptance of products in our operating segments; the effectiveness of our development activities in reducing patient care costs; the elimination of certain positions or costs related to restructuring initiatives; outcomes in our litigation matters; the continued strength of our balance sheet and liquidity; and the potential impact of our compliance with governmental regulations. One must carefully consider forward-looking statements and understand that such statements may be affected by inaccurate assumptions and may involve a variety of risks and uncertainties, known and unknown, including, among others, those discussed in the section titled “Government Regulation and Other Considerations” in our Form 10-K, in the section entitled “Risk Factors” in our Form 10-K, as well as those related to competition in the medical device industry, reduction or interruption in our supply, quality problems, liquidity, decreasing prices, adverse regulatory action, litigation success, self-insurance, healthcare policy changes and international operations. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. We intend to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding our forward-looking statements, and are including this sentence for the express purpose of enabling us to use the protections of the safe harbor with respect to all forward-looking statements.

          We undertake no obligation to update any statement we make, but investors are advised to consult any further disclosures by us in our filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K, in which we discuss in more detail various important factors that could cause actual results to differ from expected or historical results. In addition, actual results may differ materially from those anticipated due to a number of factors, including, among others, those discussed in the section entitled “Risk Factors” in our Form 10-K. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions.

27



Reports of Management

Management’s Report on the Financial Statements

          The management of Medtronic, Inc. is responsible for the integrity of the financial information presented in this Annual Report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Where necessary, and as discussed under Critical Accounting Estimates on pages 2-4, the consolidated financial statements reflect estimates based on management’s judgment.

          The consolidated financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, who conducted their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). The independent registered public accounting firm’s responsibility is to express an opinion that such financial statements present fairly, in all material respects, our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.

Management’s Report on Internal Control over Financial Reporting

          Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of April 24, 2009. Our internal control over financial reporting as of April 24, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, who has also audited our consolidated financial statements.

/s/ William A. Hawkins
William A. Hawkins
Chairman and Chief Executive Officer

/s/ Gary L. Ellis
Gary L. Ellis
Senior Vice President and Chief Financial Officer

28



Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Medtronic, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Medtronic, Inc. and its subsidiaries (the Company) at April 24, 2009 and April 25, 2008, and the results of their operations and their cash flows for each of the three fiscal years in the period ended April 24, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 24, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Notes 6 and 14 to the consolidated financial statements, in 2009 the Company changed the manner in which it determines fair value in certain situations as a result of adopting the required provisions of Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements” and changed the date it uses to measure the funded status of its defined benefit pension and other postretirement plans as a result of adopting the remaining provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” As discussed in Note 13 to the consolidated financial statements, in 2008 the Company changed the manner in which it accounts for income taxes as a result of adopting the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 18, 2009

29



Medtronic, Inc.
Consolidated Statements of Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

2009

 

2008

 

2007

 

(in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

14,599

 

$

13,515

 

$

12,299

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

3,518

 

 

3,446

 

 

3,168

 

Research and development expense

 

 

1,355

 

 

1,275

 

 

1,239

 

Selling, general and administrative expense

 

 

5,152

 

 

4,707

 

 

4,153

 

Special charges

 

 

100

 

 

78

 

 

98

 

Restructuring charges

 

 

120

 

 

41

 

 

28

 

Certain litigation charges

 

 

714

 

 

366

 

 

40

 

Purchased in-process research and development (IPR&D) charges

 

 

621

 

 

390

 

 

 

Other expense, net

 

 

396

 

 

436

 

 

212

 

Interest expense/(income), net

 

 

29

 

 

(109

)

 

(154

)

Total costs and expenses

 

 

12,005

 

 

10,630

 

 

8,784

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

 

2,594

 

 

2,885

 

 

3,515

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

425

 

 

654

 

 

713

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

2,169

 

$

2,231

 

$

2,802

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.94

 

$

1.97

 

$

2.44

 

Diluted

 

$

1.93

 

$

1.95

 

$

2.41

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

1,117.8

 

 

1,130.7

 

 

1,149.7

 

Diluted

 

 

1,124.0

 

 

1,142.1

 

 

1,161.8

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.75

 

$

0.50

 

$

0.44

 

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

30



Medtronic, Inc.
Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

April 24,
2009 

 

April 25,
2008 

 

(in millions, except per share data)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,271

 

$

1,060

 

Short-term investments

 

 

405

 

 

553

 

Accounts receivable, less allowances of $61 and $99, respectively

 

 

3,123

 

 

3,287

 

Income tax receivable

 

 

 

 

73

 

Inventories

 

 

1,426

 

 

1,280

 

Deferred tax assets, net

 

 

605

 

 

600

 

Prepaid expenses and other current assets

 

 

630

 

 

469

 

 

 

 

 

 

 

 

 

Total current assets

 

 

7,460

 

 

7,322

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

2,279

 

 

2,221

 

Goodwill

 

 

8,195

 

 

7,519

 

Other intangible assets, net

 

 

2,477

 

 

2,193

 

Long-term investments

 

 

2,769

 

 

2,322

 

Long-term deferred tax assets, net

 

 

65

 

 

103

 

Other assets

 

 

416

 

 

518

 

 

 

 

 

 

 

 

 

Total assets

 

$

23,661

 

$

22,198

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term borrowings

 

$

522

 

$

1,154

 

Accounts payable

 

 

382

 

 

383

 

Accrued compensation

 

 

901

 

 

789

 

Accrued income taxes

 

 

130

 

 

 

Other accrued expenses

 

 

1,212

 

 

1,209

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

3,147

 

 

3,535

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

6,772

 

 

5,802

 

Long-term accrued compensation and retirement benefits

 

 

329

 

 

304

 

Long-term accrued income taxes

 

 

475

 

 

519

 

Other long-term liabilities

 

 

87

 

 

502

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

10,810

 

 

10,662

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock— par value $1.00; 2.5 million shares authorized, none outstanding

 

 

 

 

 

 

Common stock— par value $0.10; 1.6 billion shares authorized, 1,119,140,192 and 1,124,926,775 shares issued and outstanding, respectively

 

 

112

 

 

112

 

Retained earnings

 

 

12,941

 

 

11,710

 

Accumulated other comprehensive loss

 

 

(202

)

 

(286

)

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

 

12,851

 

 

11,536

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

23,661

 

$

22,198

 

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

31



Medtronic, Inc.
Consolidated
Statements of Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common
Shares

 

Common
Stock

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
(Loss)/Income

 

Total
Shareholders’
Equity

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance April 28, 2006

 

 

1,155

 

$

116

 

$

9,112

 

$

155

 

$

9,383

 

Net earnings

 

 

 

 

 

 

2,802

 

 

 

 

2,802

 

Other comprehensive (loss)/income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

20

 

 

20

 

Translation adjustment

 

 

 

 

 

 

 

 

18

 

 

18

 

Minimum pension liability

 

 

 

 

 

 

 

 

24

 

 

24

 

Unrealized loss on foreign exchange derivatives

 

 

 

 

 

 

 

 

(70

)

 

(70

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,794

 

Dividends to shareholders

 

 

 

 

 

 

(504

)

 

 

 

(504

)

Issuance of common stock under stock purchase and award plans

 

 

10

 

 

1

 

 

330

 

 

 

 

331

 

Adjustment to adopt SFAS No. 158

 

 

 

 

 

 

 

 

(209

)

 

(209

)

Repurchase of common stock

 

 

(22

)

 

(3

)

 

(1,036

)

 

 

 

(1,039

)

Excess tax benefit from exercise of stock-based awards

 

 

 

 

 

 

36

 

 

 

 

36

 

Stock-based compensation

 

 

 

 

 

 

185

 

 

 

 

185

 

Balance April 27, 2007

 

 

1,143

 

$

114

 

$

10,925

 

$

(62

)

$

10,977

 

Net earnings

 

 

 

 

 

 

2,231

 

 

 

 

2,231

 

Other comprehensive (loss)/income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on investments

 

 

 

 

 

 

 

 

(47

)

 

(47

)

Translation adjustment

 

 

 

 

 

 

 

 

14

 

 

14

 

Net change in retirement obligations

 

 

 

 

 

 

 

 

37

 

 

37

 

Unrealized loss on foreign exchange derivatives

 

 

 

 

 

 

 

 

(211

)

 

(211

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,024

 

Dividends to shareholders

 

 

 

 

 

 

(565

)

 

 

 

(565

)

Issuance of common stock under stock purchase and award plans

 

 

13

 

 

1

 

 

402

 

 

 

 

403

 

Adjustment to deferred tax benefit recorded on adoption of SFAS No. 158

 

 

 

 

 

 

 

 

(17

)

 

(17

)

Repurchase of common stock

 

 

(31

)

 

(3

)

 

(1,541

)

 

 

 

(1,544

)

Excess tax benefit from exercise of stock-based awards

 

 

 

 

 

 

40

 

 

 

 

40

 

Stock-based compensation

 

 

 

 

 

 

217

 

 

 

 

217

 

Cumulative effect adjustment to retained earnings related to the adoption of FIN No. 48 (Note 13)

 

 

 

 

 

 

1

 

 

 

 

1

 

Balance April 25, 2008

 

 

1,125

 

$

112

 

$

11,710

 

$

(286

)

$

11,536

 

Net earnings

 

 

 

 

 

 

2,169

 

 

 

 

2,169

 

Other comprehensive (loss)/income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on investments

 

 

 

 

 

 

 

 

(54

)

 

(54

)

Translation adjustment

 

 

 

 

 

 

 

 

(147

)

 

(147

)

Net change in retirement obligations

 

 

 

 

 

 

 

 

(210

)

 

(210

)

Unrealized gain on foreign exchange derivatives

 

 

 

 

 

 

 

 

494

 

 

494

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,252

 

Dividends to shareholders

 

 

 

 

 

 

(843

)

 

 

 

(843

)

Issuance of common stock under stock purchase and award plans

 

 

11

 

 

2

 

 

414

 

 

 

 

416

 

Adjustment for change in plan measurement date pursuant to SFAS No. 158 (Note 14)

 

 

 

 

 

 

(13

)

 

1

 

 

(12

)

Repurchase of common stock

 

 

(17

)

 

(2

)

 

(757

)

 

 

 

(759

)

Excess tax benefit from exercise of stock-based awards

 

 

 

 

 

 

24

 

 

 

 

24

 

Stock-based compensation

 

 

 

 

 

 

237

 

 

 

 

237

 

Balance April 24, 2009

 

 

1,119

 

$

112

 

$

12,941

 

$

(202

)

$

12,851

 

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

32



Medtronic, Inc.
Consolidated
Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

 

2009

 

2008

 

2007

 

(in millions)

 

 

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

2,169

 

$

2,231

 

$

2,802

 

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

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

699

 

 

637

 

 

583

 

Special charges

 

 

 

 

78

 

 

98

 

IPR&D charges

 

 

621

 

 

390

 

 

 

Provision for doubtful accounts

 

 

23

 

 

31

 

 

31

 

Deferred income taxes

 

 

(116

)

 

(49

)

 

(236

)

Stock-based compensation

 

 

237

 

 

217

 

 

185

 

Excess tax benefit from exercise of stock-based awards

 

 

(24

)

 

(40

)

 

(36

)

Change in operating assets and liabilities, net of effect of acquisitions:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

108

 

 

(461

)

 

(326

)

Inventories

 

 

(212

)

 

30

 

 

(24

)

Prepaid expenses and other assets

 

 

(121

)

 

92

 

 

(45

)

Accounts payable and accrued liabilities

 

 

520

 

 

61

 

 

17

 

Other operating assets and liabilities

 

 

(26

)

 

272

 

 

(70

)

Net cash provided by operating activities

 

 

3,878

 

 

3,489

 

 

2,979

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(1,624

)

 

(4,221

)

 

(8

)

Purchase of intellectual property

 

 

(165

)

 

(93

)

 

(121

)

Additions to property, plant and equipment

 

 

(498

)

 

(513

)

 

(573

)

Purchases of marketable securities

 

 

(2,960

)

 

(6,433

)

 

(11,837

)

Sales and maturities of marketable securities

 

 

2,845

 

 

8,557

 

 

10,894

 

Other investing activities, net

 

 

(338

)

 

(87

)

 

(56

)

Net cash used in investing activities

 

 

(2,740

)

 

(2,790

)

 

(1,701

)

 

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

 

 

Change in short-term borrowings, net

 

 

(633

)

 

543

 

 

45

 

Payments on long-term debt

 

 

(300

)

 

(12

)

 

(1,880

)

Issuance of long-term debt

 

 

1,250

 

 

300

 

 

 

Dividends to shareholders

 

 

(843

)

 

(565

)

 

(504

)

Issuance of common stock under stock purchase and award plans

 

 

416

 

 

403

 

 

331

 

Excess tax benefit from exercise of stock-based awards

 

 

24

 

 

40

 

 

36

 

Repurchase of common stock

 

 

(759

)

 

(1,544

)

 

(1,039

)

Net cash used in financing activities

 

 

(845

)

 

(835

)

 

(3,011

)

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(82

)

 

(60

)

 

(5

)

Net change in cash and cash equivalents

 

 

211

 

 

(196

)

 

(1,738

)

Cash and cash equivalents at beginning of period

 

 

1,060

 

 

1,256

 

 

2,994

 

Cash and cash equivalents at end of period

 

$

1,271

 

$

1,060

 

$

1,256

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

 

Income taxes

 

$

436

 

$

717

 

$

1,034

 

Interest

 

 

208

 

 

258

 

 

230

 

Supplemental noncash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

Reclassification of debentures from short-term to long-term debt

 

$

15

 

$

 

$

94

 

Reclassification of debentures from long-term to short-term debt

 

 

 

 

94

 

 

 

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

33



Medtronic, Inc.
Notes to Consolidated Financial Statements

1.       Summary of Significant Accounting Policies

          Nature of Operations   Medtronic, Inc. (Medtronic or the Company) is the global leader in medical technology - alleviating pain, restoring health, and extending life for millions of people around the world. The Company provides innovative products and therapies for use by medical professionals to meet the healthcare needs of their patients. Primary products include those for cardiac rhythm disorders, cardiovascular disease, neurological disorders, spinal conditions and musculoskeletal trauma, urological and digestive disorders, diabetes and ear, nose and throat conditions.

          The Company is headquartered in Minneapolis, Minnesota, and markets its products primarily through a direct sales force in the United States (U.S.) and a combination of direct sales representatives and independent distributors in international markets. The primary markets for products are the U.S., Western Europe and Japan.

          Principles of Consolidation   The consolidated financial statements include the accounts of Medtronic, Inc., and all of its subsidiaries. All significant intercompany transactions and accounts have been eliminated. The principles of Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” and Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements” are considered when determining whether an entity is subject to consolidation.

          Fiscal Year-End   The Company utilizes a 52/53-week fiscal year, ending the last Friday in April. The Company’s fiscal years 2009, 2008 and 2007 ended on April 24, 2009, April 25, 2008 and April 27, 2007, respectively, all of which were fifty-two week years. Fiscal year 2010 will be a fifty-three week year.

          Use of Estimates   The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.

          Cash Equivalents   The Company considers highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value.

          Investments   Investments in marketable equity securities and debt securities are classified and accounted for as available-for-sale (AFS) at April 24, 2009 and April 25, 2008. AFS debt securities are recorded at fair value in both short-term and long-term investments and marketable equity securities are recorded at fair value in long-term investments on the consolidated balance sheets. The change in fair value for AFS securities is recorded, net of taxes, as a component of accumulated other comprehensive (loss)/income on the consolidated balance sheets. Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date.

          Certain of the Company’s investments in equity and other securities are long-term, strategic investments in companies that are in varied stages of development. The Company accounts for these investments under the cost or the equity method of accounting, as appropriate. The valuation of equity and other securities accounted for under the cost method considers all available financial information related to the investee, including valuations based on recent third-party equity investments in the investee. If an unrealized loss for any investment is considered to be other-than-temporary, the loss will be recognized in the consolidated statements of earnings in the period the determination is made. Equity securities accounted for under the equity method are initially recorded at the amount of the Company’s investment and adjusted each period for the Company’s share of the investee’s income or loss and dividends paid. Equity securities accounted for under both the cost and equity methods are reviewed quarterly for changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable. See Note 5 for discussion of the gains and losses recognized on equity and other securities.

          Accounts Receivable   The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support its receivables. The Company maintains an allowance for doubtful accounts for potential credit losses. Uncollectible accounts are written-off against the allowance when it is deemed that a customer account is uncollectible. The allowance for doubtful accounts was $61 million at April 24, 2009 and $99 million at April 25, 2008.

34



Medtronic, Inc.
Notes to Consolidated Financial Statements

          Inventories Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. Inventory balances are as follows:

 

 

 

 

 

 

 

 

(in millions)

 

April 24,
2009

 

April 25,
2008

 

Finished goods

 

$

854

 

$

784

 

Work in process

 

 

251

 

 

250

 

Raw materials

 

 

321

 

 

246

 

Total

 

$

1,426

 

$

1,280

 

          Property, Plant and Equipment Property, plant and equipment is stated at cost. Additions and improvements that extend the lives of the assets are capitalized while expenditures for repairs and maintenance are expensed as incurred. Depreciation is provided using the straight-line method over the estimated useful lives of the various assets. Property, plant and equipment balances and corresponding lives are as follows:

 

 

 

 

 

 

 

 

 

 

(in millions)

 

April 24,
2009

 

April 25,
2008

 

Lives
(in years)

 

Land and land improvements

 

$

124

 

$

123

 

Up to 20

 

Buildings and leasehold improvements

 

 

1,296

 

 

1,240

 

Up to 40

 

Equipment

 

 

3,144

 

 

3,066

 

3-7

 

Construction in progress

 

 

323

 

 

314

 

 

Subtotal

 

 

4,887

 

 

4,743

 

 

 

Less: Accumulated depreciation

 

 

(2,608

)

 

(2,522

)

 

 

Property, plant and equipment, net

 

$

2,279

 

$

2,221

 

 

          Depreciation expense of $418 million, $417 million and $401 million was recognized in fiscal years 2009, 2008 and 2007, respectively.

          Goodwill Goodwill is the excess of purchase price of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized. Goodwill is tested for impairment annually and when an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. An impairment loss is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The estimated fair value is determined using a discounted future cash flows analysis. The Company completed its annual goodwill impairment test in the third quarter of fiscal years 2009, 2008 and 2007 and determined that no goodwill was impaired.

          Intangible Assets Intangible assets include patents, trademarks and purchased technology. Intangible assets with a definite life are amortized on a straight-line or accelerated basis, as appropriate, with estimated useful lives ranging from 3 to 20 years. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that a carrying amount of an asset (asset group) may not be recoverable. Impairment is calculated as the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted future cash flows analysis. As of April 24, 2009, all of the Company’s intangible assets are definite lived and amortized on a straight-line basis.

          Warranty Obligation The Company offers a warranty on various products. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the product is sold. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The amount of the reserve recorded is equal to the costs to repair or otherwise satisfy the claim. The Company includes the covered costs associated with field actions, if any, in warranty expense.

35



Medtronic, Inc.
Notes to Consolidated Financial Statements

          Changes in the Company’s product warranty obligations during the years ended April 24, 2009 and April 25, 2008 consisted of the following:

 

 

 

 

 

(in millions)

 

 

 

 

Balance April 27, 2007

 

$

34

 

Warranty claims provision

 

 

22

 

Settlements made

 

 

(13

)

Balance April 25, 2008

 

$

43

 

Warranty claims provision

 

 

23

 

Settlements made

 

 

(31

)

Balance April 24, 2009

 

$

35

 

          Self-Insurance It is the Company’s policy to self-insure the vast majority of its insurable risks including medical and dental costs, disability coverage, physical loss to property, business interruptions, workers’ compensation, comprehensive general, director and officer and product liability. Insurance coverage is obtained for those risks required to be insured by law or contract. A provision for losses under the self-insured program is recorded and revised quarterly. The Company uses claims data and historical experience, as applicable, to estimate liabilities associated with the exposures that the Company has self-insured. Based on historical loss trends, the Company believes that its self-insurance program accruals are adequate to cover future losses. Historical trends, however, may not be indicative of future losses. These losses could have a material adverse impact on the Company’s consolidated financial statements.

          Retirement Benefit Plan Assumptions The Company sponsors various retirement benefit plans, including defined benefit pension plans (pension benefits), post-retirement medical plans (post-retirement benefits), defined contribution savings plans and termination indemnity plans, covering substantially all U.S. employees and many employees outside the U.S. Pension benefit plan costs include assumptions for the discount rate, retirement age, compensation rate increases and the expected return on plan assets. Post-retirement medical plan costs include assumptions for the discount rate, retirement age, expected return on plan assets and healthcare cost trend rate assumptions.

          The Company evaluates the discount rate, retirement age, compensation rate increases, expected return on plan assets and healthcare cost trend rates of its pension benefit and post-retirement medical plans annually. In evaluating these assumptions, many factors are considered, including an evaluation of assumptions made by other companies, historical assumptions compared to actual results, current market conditions, asset allocations and the views of leading financial advisors and economists. In evaluating the expected retirement age assumption, the Company considers the retirement ages of past employees eligible for pension and medical benefits together with expectations of future retirement ages.

          It is reasonably possible that changes in these assumptions will occur in the near term and, due to the uncertainties inherent in setting assumptions, the effect of such changes could be material to the Company’s consolidated financial statements. Refer to Note 14 for additional information regarding the Company’s retirement benefit plans.

          Revenue Recognition The Company sells its products primarily through a direct sales force in the U.S. and a combination of direct sales representatives and independent distributors in international markets. The Company recognizes revenue when title to the goods and risk of loss transfers to customers, provided there are no material remaining performance obligations required of the Company or any matters requiring customer acceptance. In cases where the Company utilizes distributors or ships product directly to the end user, it recognizes revenue upon shipment provided all revenue recognition criteria have been met. A portion of the Company’s revenue is generated from inventory maintained at hospitals or with field representatives. For these products, revenue is recognized at the time that the product has been used or implanted. The Company records estimated sales returns, discounts and rebates as a reduction of net sales in the same period revenue is recognized.

          Research and Development Research and development costs are expensed when incurred. Research and development costs include costs of all basic research activities as well as other research, engineering and technical effort required to develop a new product or service or make significant improvement to an existing product or manufacturing process. Research and development costs also include pre-approval regulatory and clinical trial expenses.

          IPR&D When the Company acquires another entity, the purchase price is allocated, as applicable, between IPR&D, other identifiable intangible assets, net tangible assets and goodwill. The Company’s policy defines IPR&D as the value assigned to those projects for which the related products have not received regulatory approval and have no alternative future use. Determining the portion of the purchase price allocated to IPR&D requires the Company to make significant estimates. The amount of the purchase price allocated to IPR&D is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time of acquisition in accordance with accepted valuation methods. These methodologies include consideration of the risk of the project not achieving commercial feasibility.

36



Medtronic, Inc.
Notes to Consolidated Financial Statements

          Other Expense, Net Other expense, net includes intellectual property amortization expense, royalty income and expense, realized equity security gains and losses, realized foreign currency transaction and derivative gains and losses and impairment charges on equity securities.

          Stock-Based Compensation The Company’s compensation programs include share-based payments. All awards under share-based payment programs are accounted for at fair value and these fair values are generally amortized on a straight-line basis over the vesting terms into cost of products sold, research and development expense and selling, general and administrative expense in the consolidated statement of earnings, as appropriate. Refer to Note 12 for additional information.

          Foreign Currency Translation Assets and liabilities are translated to U.S. dollars at period-end exchange rates, and the resulting gains and losses arising from the translation of net assets located outside the U.S. are recorded as a cumulative translation adjustment, a component of accumulated other comprehensive (loss)/income on the consolidated balance sheets. Elements of the consolidated statements of earnings are translated at average exchange rates in effect during the period and foreign currency transaction gains and losses are included in other expense, net in the consolidated statements of earnings.

          Comprehensive Income and Accumulated Other Comprehensive (Loss)/Income In addition to net earnings, comprehensive income includes changes in foreign currency translation adjustments (including the change in current exchange rates, or spot rates, of net investment hedges), unrealized gains and losses on foreign exchange derivative contracts qualifying and designated as cash flow hedges, net changes in retirement obligation funded status and unrealized gains and losses on AFS marketable securities. Comprehensive income in fiscal years 2009, 2008 and 2007 was $2.252 billion, $2.024 billion and $2.794 billion, respectively.

          Presented below is a summary of activity for each component of accumulated other comprehensive (loss)/income for fiscal years 2009, 2008 and 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Unrealized
Gain/(Loss) on
Investments

 

Cumulative
Translation
Adjustments

 

Net Change in
Retirement
Obligations

 

Unrealized
Gain/(Loss) on
Foreign Exchange
Derivatives

 

Accumulated Other
Comprehensive
Income/(Loss)

 

Balance April 28, 2006

 

$

(14

)

$

177

 

$

(24

)

$

15

 

$

155

 

Other comprehensive (loss)/income

 

 

20

 

 

18

 

 

24

 

 

(70

)

 

(8

)

Adoption of SFAS No. 158

 

 

 

 

 

 

(209

)

 

 

 

(209

)

Balance April 27, 2007

 

$

6

 

$

195

 

$

(209

)

$

(55

)

$

(62

)

Other comprehensive (loss)/income

 

 

(47

)

 

14

 

 

37

 

 

(211

)

 

(207

)

Adjustment to deferred tax benefit recorded on adoption of SFAS No. 158

 

 

 

 

 

 

(17

)

 

 

 

(17

)

Balance April 25, 2008

 

$

(41

)

$

209

 

$

(189

)

$

(266

)

$

(286

)

Other comprehensive (loss)/income

 

 

(54

)

 

(147

)

 

(210

)

 

494

 

 

83

 

Adjustment for change in plan measurement date pursuant to SFAS No. 158

 

 

 

 

 

 

1

 

 

 

 

1

 

Balance April 24, 2009

 

$

(95

)

$

62

 

$

(398

)

$

228

 

$

(202

)

          Translation adjustments are not adjusted for income taxes as substantially all translation adjustments relate to permanent investments in non-U.S. subsidiaries. The tax expense/(benefit) on the unrealized gain/(loss) on foreign exchange derivatives in fiscal years 2009, 2008 and 2007 was $320 million, $(132) million and $(38) million, respectively. The minimum pension liability was eliminated at the end of fiscal year 2007 as a result of the Company’s adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS No. 158). The tax benefit related to SFAS No. 158 was $109 million, $17 million and $92 million in fiscal years 2009, 2008 and 2007, respectively. The Company adopted the new measurement date provisions of SFAS No. 158 in the fourth quarter of fiscal year 2009 which resulted in a one-time adjustment to retained earnings and accumulated other comprehensive income in that period. The tax expense on the adjustment to other comprehensive income for the change in measurement date was less than $1 million. The tax expense/(benefit) on the unrealized gain/(loss) on investments in fiscal years 2009, 2008 and 2007 was $(33) million, $(26) million and $11 million, respectively.

37




Medtronic, Inc.
Notes to Consolidated Financial Statements

          Derivatives SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS No. 133) as amended, requires companies to recognize all derivatives as assets and liabilities on the balance sheet and to measure the instruments at fair value through earnings unless the derivative qualifies as a hedge. If the derivative is a hedge, depending on the nature of the hedge and hedge effectiveness, changes in the fair value of the derivative will either be recorded currently through earnings or recognized in accumulated other comprehensive (loss)/income on the consolidated balance sheets until the hedged item is recognized in earnings upon settlement/termination. The changes in the fair value of the derivative will offset the change in fair value of the hedged asset, liability, net investment or probable commitment. The Company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded in earnings.

          The Company uses derivative instruments, primarily forward exchange contracts, to manage its exposure related to foreign exchange rate changes. The Company enters into contracts with major financial institutions that change in value as foreign exchange rates change. These contracts are designated either as cash flow hedges, net investment hedges or freestanding derivatives. It is the Company’s policy to enter into forward exchange derivative contracts only to the extent true exposures exist; the Company does not enter into forward exchange derivative contracts for speculative purposes. Principal currencies hedged are the Euro and the Japanese Yen. All derivative instruments are recorded at fair value on the consolidated balance sheets, as a component of prepaid expenses and other current assets, other long-term assets, other accrued expenses or other long-term liabilities depending upon the gain or loss position of the contract and contract maturity date.

          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. Changes in value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive (loss)/income on the consolidated balance sheets until earnings are affected by the variability of the underlying cash flows. At that time, the applicable amount of gain or loss from the derivative instrument, that is deferred in shareholders’ equity, is reclassified to earnings and is included in other expense, net or cost of products sold in the consolidated statements of earnings, depending on the underlying transaction that is being hedged.

          The purpose of net investment hedges is to hedge the long-term investment (equity) in foreign operations. The gains and losses related to the change in the forward exchange rates of the net investment hedges are recorded currently in earnings as other expense, net. The gains and losses based on changes in the current exchange rates, or spot rates, are recorded as a cumulative translation adjustment, a component of accumulated other comprehensive (loss)/income on the consolidated balance sheets.

          The Company uses forward exchange contracts to offset its exposure to the change in value of certain foreign currency denominated intercompany assets and liabilities. These forward exchange contracts are not designated as hedges, and therefore, changes in the value of these freestanding derivatives are recognized currently in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities.

          In addition, the Company uses interest rate derivative instruments to manage its exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. The objective of the instruments is to more effectively balance the Company’s borrowing costs and interest rate risk. These derivative instruments are designated as fair value hedges under SFAS No. 133. Changes in the fair value of the derivative instrument are recorded in other expense, net, and are offset by gains or losses on the underlying debt instrument. Interest expense includes interest payments made or received under interest rate derivative instruments.

          Earnings Per Share Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding increased by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options and other stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan.

38



Medtronic, Inc.
Notes to Consolidated Financial Statements

          The table below sets forth the computation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(in millions, except per share data)

 

2009

 

2008

 

2007

 

Numerator:

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

2,169

 

$

2,231

 

$

2,802

 

Denominator:

 

 

 

 

 

 

 

 

 

 

Basic – weighted average shares outstanding

 

 

1,117.8

 

 

1,130.7

 

 

1,149.7

 

    Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

            Employee stock options

 

 

2.4

 

 

9.7

 

 

9.9

 

            Employee restricted stock and restricted stock units

 

 

3.0

 

 

0.9

 

 

1.0

 

            Other

 

 

0.8

 

 

0.8

 

 

1.2

 

Diluted – weighted average shares outstanding

 

 

1,124.0

 

 

1,142.1

 

 

1,161.8

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.94

 

$

1.97

 

$

2.44

 

Diluted earnings per share

 

$

1.93

 

$

1.95

 

$

2.41

 

          The calculation of weighted average diluted shares outstanding excludes options for approximately 62 million, 22 million and 35 million common shares in fiscal years 2009, 2008 and 2007, respectively, as the exercise price of those options was greater than the average market price, resulting in an anti-dilutive effect on diluted earnings per share.

          New Accounting Standards

          Effective April 26, 2008, the Company adopted the required provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a framework for measuring fair value in accordance with generally accepted accounting principles, clarifies the definition of fair value within that framework and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, except for the measurement of share-based payments. SFAS No. 157 does not expand the use of fair value in any new circumstances. For certain types of financial instruments, SFAS No. 157 required a limited form of retrospective transition, whereby the cumulative impact of the change in principle is recognized in the opening balance in retained earnings in the fiscal year of adoption. All other provisions of SFAS No. 157 will be applied prospectively. On February 12, 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP FAS No. 157-2). FSP FAS No. 157-2 defers the implementation of SFAS No. 157 for certain nonfinancial assets and nonfinancial liabilities. Accordingly, the Company adopted the required provisions of SFAS No. 157 at the beginning of fiscal year 2009 and the remaining provisions will be adopted by the Company at the beginning of fiscal year 2010. The fiscal year 2009 adoption did not result in a material impact to the Company’s financial statements (see Note 6). The adoption of the remaining parts of SFAS No. 157 in fiscal year 2010 in accordance with FSP FAS No. 157-2 is not expected to be material to the consolidated financial statements.

          Additionally, in April 2009, the FASB issued FSP SFAS No. 157-4, “Determining Fair Value When the Volume and Level and Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP SFAS No. 157-4). FSP SFAS No. 157-4 provides guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability (or similar assets or liabilities) and for identifying circumstances that indicate a transaction is not orderly. Additionally, FSP SFAS No. 157-4 amends SFAS No. 157 to require disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value. FSP SFAS No. 157-4 is effective for the Company beginning in the first quarter of fiscal year 2010 and is required to be applied prospectively. The Company is currently evaluating the impact that FSP SFAS No. 157-4 will have on the consolidated financial statements.

          In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)). SFAS No. 141(R) replaces SFAS No. 141, “Business Combinations.” SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interests in the acquiree and the goodwill acquired. Some of the key changes under SFAS No. 141(R) will impact the accounting treatment for certain acquisition related items including: (1) accounting for IPR&D as an indefinite-lived intangible asset until approved or discontinued rather than as an immediate expense; (2) expensing acquisition costs rather than adding them to the cost of an acquisition; (3) expensing restructuring costs in connection with an acquisition rather than adding them to the cost of an acquisition; and (4) including the fair value of contingent consideration at the date of an acquisition in the cost of an acquisition. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) will be effective for the Company beginning fiscal year 2010 and must be applied prospectively to all new acquisitions closing on or after April 25, 2009. SFAS No. 141(R) is expected to have a material impact on how the Company will identify, negotiate and value future acquisitions and a material impact on how an acquisition will affect the Company’s consolidated financial statements.

39



Medtronic, Inc.
Notes to Consolidated Financial Statements

          In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS No. 160). SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity as compared to a liability today. This new consolidation method will significantly change the accounting for partial and/or step acquisitions. SFAS No. 160 will be effective for the Company in the first quarter of fiscal year 2010. The adoption of SFAS No. 160 will not have a material impact to the Company’s consolidated financial statements.

          In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1 requires the proceeds from the issuance of such convertible debt instruments to be allocated between a liability component (issued at a discount) and an equity component. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. The change in accounting treatment is effective for the Company beginning in fiscal year 2010, and will be applied retrospectively to prior periods. FSP APB 14-1 changes the accounting treatment for the Company’s $2.200 billion of 1.500 percent and $2.200 billion of 1.625 percent Senior Convertible Notes due in 2011 and 2013, respectively, which were issued in April 2006, and the $15 million remaining balance of the Company’s Contingent Convertible Debentures due 2021. Based on the Company’s evaluation, upon adoption of FSP APB 14-1 in fiscal year 2010, the convertible debt liability will decrease by approximately $520 million and 2009 and 2010 interest expense for the convertible debt will increase by approximately $154 million and $167 million, respectively. Using diluted weighted average shares outstanding for the twelve months ended April 24, 2009, the impact to diluted earnings per share is a decrease of $0.09 for fiscal year 2009. Using an estimate of diluted weighted average shares outstanding, the Company estimates the impact to diluted earnings per share is a decrease of $0.10 for fiscal year 2010.

          In June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF No. 03-6-1). FSP EITF No. 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. FSP EITF No. 03-6-1 is effective for the Company beginning in the first quarter of fiscal year 2010. Upon adoption, all prior-period EPS data is required to be adjusted retrospectively (including interim financial statements, summaries of earnings and selected financial data) to conform with the provisions of FSP EITF No. 03-6-1. The Company calculated that FSP EITF No. 03-6-1 will not have a material impact to diluted earnings per share for the fiscal year ended April 24, 2009.

          In November 2008, the FASB ratified EITF Issue No. 08-6, “Equity Method Investment Accounting Considerations” (EITF No. 08-6). EITF No. 08-6 applies to all investments accounted for under the equity method and clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF No. 08-6 is effective for the Company beginning in the first quarter of fiscal year 2010. The adoption of EITF No. 08-6 will not be material to the consolidated financial statements.

          In November 2008, the FASB ratified EITF Issue No. 08-7, “Accounting for Defensive Intangible Assets” (EITF No. 08-7). EITF No. 08-7 applies to defensive intangible assets, which are acquired intangible assets that an entity does not intend to actively use but does intend to prevent others from obtaining access to the asset. EITF No. 08-7 requires an entity to account for defensive intangible assets as a separate unit of accounting. Defensive intangible assets should not be included as part of the cost of an entity’s existing intangible assets because the defensive intangible assets are separately identifiable. Defensive intangible assets must be recognized at fair value in accordance with SFAS No. 141(R) and SFAS No. 157. EITF No. 08-7 is effective for intangible assets acquired by the Company beginning in the first quarter of fiscal year 2010. The adoption of EITF No. 08-7 is not expected to be material to the consolidated financial statements.

          In December 2008, the FASB issued FSP SFAS No. 132(R)-1, “Employers’ Disclosures About Postretirement Benefit Plan Assets” (FSP SFAS No. 132(R)-1). FSP SFAS No. 132(R)-1 requires increased disclosures about an entity’s postretirement benefit plan assets. Specifically, FSP SFAS No. 132(R)-1 requires an entity to disclose information regarding its investment policies and strategies, its categories of plan assets, its fair value measurements of plan assets and any significant concentrations of risk in plan assets. FSP SFAS No. 132(R)-1 is effective for the Company beginning in the first quarter of fiscal year 2010 but only requires the revised disclosures on a prospective basis. The Company will provide the additional disclosures necessary to the consolidated financial statements beginning in the Company’s fourth quarter of fiscal year 2010.

40



Medtronic, Inc.
Notes to Consolidated Financial Statements

          In April 2009, the FASB issued FSP SFAS No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (FSP SFAS No. 141(R)-1). FSP SFAS No. 141(R)-1 amends and clarifies the initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination under SFAS No. 141(R). FSP SFAS No. 141(R)-1 is effective for the Company beginning fiscal year 2010 and must be applied to assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after April 25, 2009. The adoption of FSP SFAS No. 141(R)-1 will not be material to the consolidated financial statements.

          In April 2009, the FASB issued FSP SFAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP SFAS No. 107-1 and APB 28-1). FSP SFAS No. 107-1 and APB 28-1 requires disclosures about fair value of financial instruments for interim period reporting as well as in annual financial statements. Additionally, this FSP requires disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. FSP SFAS No. 107-1 and APB 28-1 is effective for the Company beginning in the first quarter of fiscal year 2010 but only requires the revised disclosures on a prospective basis. The Company will provide the additional disclosures necessary to the consolidated financial statements beginning in the Company’s first quarter of fiscal year 2010.

          In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP SFAS Nos. 115-2 and 124-2). FSP SFAS Nos. 115-2 and 124-2 amends the other-than-temporary guidance for debt securities and requires additional interim and annual disclosures of other-than-temporary impairments on debt and equity securities. Under FSP SFAS Nos. 115-2 and 124-2, an other-than-temporary impairment of a debt security shall be considered to have occurred if an entity (1) intends to sell the debt security, (2) more likely than not will be required to sell the security before recovery of its amortized cost basis or (3) does not expect to recover the entire amortized cost basis of the security even if it does not intend to sell the security. Once it is determined that an other-than-temporary impairment has occurred, FSP SFAS Nos. 115-2 and 124-2 provides guidance on when to recognize the other-than-temporary impairment in earnings or in other comprehensive income. Depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. FSP SFAS Nos. 115-2 and 124-2 is effective for the Company beginning in the first quarter of fiscal year 2010 and is required to be applied retrospectively to existing investments with a cumulative adjustment to retained earnings and prospectively to new investments purchased after the effective date. The Company is currently evaluating the impact that FSP SFAS Nos. 115-2 and 124-2 will have on the consolidated financial statements.

          In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS No. 165). SFAS No. 165 requires an entity to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet. For nonrecognized subsequent events that must be disclosed to keep the financial statements from being misleading, an entity will be required to disclose the nature of the event as well as an estimate of its financial effect, or a statement that such an estimate cannot be made. In addition, SFAS No. 165 requires an entity to disclose the date through which subsequent events have been evaluated. SFAS No. 165 is effective for the Company beginning in the first quarter of fiscal year 2010 and is required to be applied prospectively. The adoption of SFAS No. 165 will not be material to the consolidated financial statements.

2.       Special and Certain Litigation Charges

Special Charges

          In fiscal year 2009, consistent with the Company’s commitment to improving the health of people and communities throughout the world, the Company recorded a $100 million contribution to The Medtronic Foundation, which is a related party non-profit organization. The contribution to The Medtronic Foundation was paid in the fourth quarter of fiscal year 2009.

          In fiscal year 2008, the Company recorded a special charge of $78 million related to the impairment of intangible assets associated with its benign prostatic hyperplasia, or enlarged prostate, product line purchased in fiscal year 2002. The development of the market, relative to the Company’s original assumptions, has changed as a result of the broad acceptance of a new line of drugs to treat the symptoms of an enlarged prostate. After analyzing the estimated future cash flows utilizing this technology, based on the market development, the Company determined that the carrying value of these intangible assets was impaired and a write-down was necessary.

41



Medtronic, Inc.
Notes to Consolidated Financial Statements

          In fiscal year 2007, the Company concluded two intangible assets were fully impaired due to inadequate clinical results and the resulting delays in product development. As a result, the Company recorded a $98 million special charge related to the impairments of intangible assets stemming from the July 1, 2005 acquisition of Transneuronix, Inc. (TNI) and the November 1, 2004 acquisition of Angiolink Corporation (Angiolink). TNI focused on the development of an implantable gastric stimulator to treat obesity. Angiolink focused on the development of wound closure devices for vascular procedures.

Certain Litigation Charges

          The Company classifies material litigation reserves recognized as certain litigation charges. In fiscal year 2009, the Company incurred four certain litigation charges totaling $714 million. The first charge in the amount of $178 million relates to litigation with DePuy Spine (formerly DePuy/AcroMed), a subsidiary of J&J, and Biedermann Motech GmbH (collectively, DePuy) regarding patent infringement claims stemming from the Vertex line of multiaxial screws. On June 1, 2009, the U.S. Court of Appeals for the Federal Circuit affirmed the December 2007 ruling of infringement and awarded damages based on lost profits, but reversed certain elements of the original 2007 award. Prior to the U.S. Court of Appeals’ decision, the Company had not recorded expense related to the damages awarded in 2007 as the Company did not believe that an unfavorable outcome in this matter was probable under SFAS No. 5, “Accounting for Contingencies” (SFAS No. 5). As a result of the U.S. Court of Appeals’ decision, the Company has now recorded a reserve of $178 million which is expected to cover the revised damages award and pre- and post-judgment interest. Since the DePuy litigation originated prior to April 24, 2009, the Company has appropriately recognized this charge in the consolidated financial statements for the fiscal year ended April 24, 2009. See Note 16 for additional information.

          The second charge in the amount of $270 million relates to a settlement of royalty disputes with Johnson & Johnson (J&J) which concern Medtronic’s licensed use of certain patents. The agreement reached in the fourth quarter of fiscal year 2009 ended all current and potential disputes between the two parties under their 1997 settlement and license agreement relating to coronary angioplasty stent design and balloon material patents. The Company paid the settlement in May 2009. See Note 16 for additional information.

          The third charge in the amount of $229 million relates to litigation with Cordis Corporation (Cordis), a subsidiary of J&J. The Cordis litigation originated in October 1997 and pertains to patent infringement claims on previous generations of bare metal stents that are no longer on the market. On September 30, 2008, the U.S. District Court entered final judgment including accrued interest, totaling approximately $521 million, to Cordis. The Company had previously recorded a charge of $243 million related to this litigation in the third quarter of fiscal year 2008. At the time the $243 million charge was recorded, the range of potential loss related to this matter was subject to a high degree of estimation. The amount recorded represented an estimate of the low end of the range of probable outcomes related to the matter. Given that the Company and J&J were involved in a number of litigation matters which span across businesses, the Company entered into negotiations with J&J in an attempt to settle some of the additional litigation simultaneous with the payment of this judgment. Ultimately, the agreement reached with Cordis required a total cash payment of $472 million, which included the settlement of several outstanding legal matters between the parties. The charge of $229 million in fiscal year 2009 is the net result of $472 million in cash payments, offset by the existing reserves on the balance sheet including interest accrued on the $243 million since the date established. As of April 24, 2009, the settlement amount of $472 million was paid.

          The fourth charge recognized in fiscal year 2009 relates to litigation that originated in May 2006 with Fastenetix LLC (Fastenetix), a patent holding company. The litigation related to an alleged breach of a royalty agreement in the Spinal business. The agreement reached with Fastenetix required total cash payment of $125 million for the settlement of ongoing litigation and the purchase of patents. Of the $125 million, $37 million was assigned to past damages in the case and the remaining $88 million was recorded as purchased intellectual property that has an estimated useful life of 7 years. As of April 24, 2009, the settlement amount of $125 million was paid.

          In fiscal year 2008, the Company incurred certain litigation charges of $366 million. Of that amount, $123 million related to the settlement of certain lawsuits relating to the Marquis line of implantable cardioverter defibrillators (ICDs) and cardiac resynchronization therapy-defibrillators (CRT-Ds) that were subject to a field action announced on February 10, 2005. As discussed above, the remainder of the charge, $243 million, relates to an estimated reserve established for litigation with Cordis. In May 2008, the Company paid substantially all of the settlement for certain lawsuits relating to the Marquis line of ICDs and CRT-Ds. See Note 16 for additional information.

          In fiscal year 2007, the Company recorded a certain litigation charge of $40 million related to a settlement agreement with the U.S. Department of Justice which requires the government to obtain dismissal of the two qui tam civil suits and is conditioned upon such dismissal being obtained. To resolve the matter, Medtronic has entered into a five-year corporate integrity agreement effective upon dismissal of the two suits that further strengthens its employee training and compliance systems surrounding sales and marketing practices. The settlement agreement also reflects Medtronic’s assertion that the Company and its current employees have not engaged in any wrongdoing or illegal activity. The settlement amount was paid in May 2009.

42



Medtronic, Inc.
Notes to Consolidated Financial Statements

3.       Restructuring Charges

Fiscal Year 2009 Initiative

          In the fourth quarter of fiscal year 2009, the Company recorded a $34 million restructuring charge, which consisted of employee termination costs of $29 million and asset write-downs of $5 million. As part of the Company’s ”One Medtronic” strategy, the Company continues to pursue opportunities to streamline the organization and standardize or centralize certain functional activities which are not unique to individual businesses. In connection with these efforts to create “One Medtronic,” this initiative is designed to streamline operations, by further consolidating manufacturing and eliminating certain non-core product lines, and to further align resources around the Company’s higher growth opportunities. This initiative impacts most businesses and certain corporate functions. Of the $5 million of asset write-downs, $3 million relates to inventory write-offs and production-related asset impairments and therefore was recorded within cost of products sold in the consolidated statement of earnings. The employee termination costs of $29 million consist of severance and the associated costs of continued medical benefits and outplacement services.

          The fiscal year 2009 initiative will result in charges being recognized in both the fourth quarter of fiscal year 2009 and the first quarter of fiscal year 2010, and the Company expects that when complete, will eliminate approximately 1,500 – 1,800 positions.

          Of the 1,500 – 1,800 positions that will be eliminated as part of this initiative, approximately 975 were identified for elimination in the fourth quarter of fiscal year 2009 and will be achieved through early retirement packages offered to employees, voluntary separation and involuntary separation. Of these 975 positions, approximately 280 positions have been eliminated as of April 24, 2009. The restructuring initiatives are scheduled to be substantially complete by the end of fiscal year 2010.

          A summary of the activity related to the fiscal year 2009 initiative is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2009 Initiative

 

(in millions)

 

Employee
Termination
Costs

 

Asset
Write-downs

 

Total

 

Balance April 25, 2008

 

$

 

$

 

$

 

Restructuring charges

 

 

29

 

 

5

 

 

34

 

Payments/write-downs

 

 

(1

)

 

(5

)

 

(6

)

Balance April 24, 2009

 

$

28

 

$

 

$

28

 

Global Realignment Initiative

          In fiscal year 2008, as part of a global realignment initiative, the Company recorded a $31 million restructuring charge, which consisted of employee termination costs of $27 million and asset write-downs of $4 million. This initiative began in the fourth quarter of fiscal year 2008 and focuses on shifting resources to those areas where the Company has the greatest opportunities for growth and streamlining operations to drive operating leverage. The global realignment initiative impacts most businesses and certain corporate functions. Within the Company’s Cardiac Rhythm Disease Management (CRDM) business, the Company reduced research and development infrastructure by closing a facility outside the U.S., reprioritizing research and development projects to focus on the core business and consolidating manufacturing operations to drive operating leverage. Within Spinal, the Company reorganized and consolidated certain activities where Medtronic’s existing infrastructure, resources and systems could be leveraged to obtain greater operational synergies. The global realignment initiative was also designed to further consolidate manufacturing of CardioVascular products, streamline distribution of products in select businesses and to reduce general and administrative costs in the Company’s corporate functions. The asset write-downs were recorded within cost of products sold in the consolidated statement of earnings. The employee termination costs of $27 million consist of severance and the associated costs of continued medical benefits and outplacement services.

          As a continuation of the global realignment initiative that began in fiscal year 2008, in the first quarter of fiscal year 2009 the Company incurred $96 million of incremental restructuring charges, which consisted of employee termination costs of $91 million and asset write-downs of $5 million. The majority of the expense recognized in the first quarter of fiscal year 2009 was related to the execution of the Company’s global realignment initiative outside the U.S. This included the realignment and elimination of personnel throughout Europe and the Emerging Markets and the closure of an existing facility in the Netherlands that has been integrated into the U.S. operations. The remainder of the expense was associated with enhanced severance benefits provided to employees identified in the fourth quarter of fiscal year 2008. These incremental costs were not accrued in fiscal year 2008 because the enhanced benefits had not yet been communicated to the impacted employees.

43



Medtronic, Inc.
Notes to Consolidated Financial Statements

          In the fourth quarter of fiscal year 2009, the Company recorded a $7 million reversal of excess reserves related to the global realignment initiative. This reversal is primarily a result of favorable severance negotiations with certain employee populations outside the U.S. as well as a higher than expected percentage of employees identified for elimination finding positions elsewhere within the Company.

          As of the end of the first quarter of fiscal year 2009, the Company had identified approximately 900 positions for elimination which were to be achieved through both voluntary and involuntary separation. Of the 900 positions identified, approximately 740 have been eliminated as of April 24, 2009. The restructuring initiatives are scheduled to be substantially complete by the end of the first quarter of fiscal year 2010.

          A summary of the activity related to the global realignment initiative is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Realignment Initiative

 

(in millions)

 

Employee
Termination
Costs

 

Asset
Write-downs

 

Total

 

Balance April 27, 2007

 

$

 

$

 

$

 

Restructuring charges

 

 

27

 

 

4

 

 

31

 

Payments/write-downs

 

 

(2

)

 

(4

)

 

(6

)

Balance April 25, 2008

 

$

25

 

$

 

$

25

 

Restructuring charges

 

 

91

 

 

5

 

 

96

 

Reversal of excess accrual

 

 

(7

)

 

 

 

(7

)

Payments/write-downs

 

 

(89

)

 

(5

)

 

(94

)

Currency adjustment, net

 

 

(5

)

 

 

 

(5

)

Balance April 24, 2009

 

$

15

 

$

 

$

15

 

Fiscal Year 2007 Initiative

          In the fourth quarter of fiscal year 2007, the Company recorded a $36 million restructuring charge, which consisted of employee termination costs of $28 million and asset write-downs of $8 million. These initiatives were designed to drive manufacturing efficiencies in the Company’s CardioVascular business, downsize the Physio-Control business due to the Company’s voluntary suspension of U.S. shipments and rebalance resources within the CRDM business in response to market dynamics. The employee termination costs consist of severance and the associated costs of continued medical benefits, and outplacement services. The asset write-downs consisted of a $5 million charge for inventory write-downs and a $3 million charge for non-inventory asset write-downs. The inventory and non-inventory asset write-downs were recorded within cost of products sold in the consolidated statement of earnings.

           As a continuation of the fiscal year 2007 initiative, in the first quarter of fiscal year 2008 the Company incurred $14 million of incremental restructuring charges associated with compensation provided to employees whose employment terminated with the Company in the first quarter of fiscal year 2008. These incremental costs were not accrued in fiscal year 2007 because these benefits had not yet been communicated to the impacted employees. Included in the total $14 million restructuring charge is $4 million of incremental defined benefit pension and post-retirement related expense for those employees who accepted early retirement packages. These costs are not included in the table summarizing restructuring costs below because they are associated with costs that are accounted for under the pension and postretirement rules. For further discussion on the incremental defined benefit pension and post-retirement related expense, see Note 14.

          When the restructuring initiative began in fiscal year 2007, the Company identified approximately 900 positions for elimination which were achieved through early retirement packages offered to employees, voluntary separation and involuntary separation, as necessary. As of April 25, 2008, the initiatives begun in the fourth quarter of fiscal year 2007 were substantially complete.

44



Medtronic, Inc.
Notes to Consolidated Financial Statements

           A summary of the activity related to the fiscal year 2007 initiative is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2007 Initiative

 

(in millions)

 

Employee
Termination
Costs

 

Asset
Write-downs

 

Total

 

Balance April 28, 2006

 

$

 

$

 

$

 

Restructuring charges

 

 

28

 

 

8

 

 

36

 

Payments/write-downs

 

 

(5

)

 

(8

)

 

(13

)

Balance April 27, 2007

 

$

23

 

$

 

$

23

 

Restructuring charges

 

 

10

 

 

 

 

10

 

Payments

 

 

(33

)

 

 

 

(33

)

Balance April 25, 2008

 

$

 

$

 

$

 

4.       Acquisitions and IPR&D Charges

          When the Company acquires another company or a group of assets, the purchase price is allocated, as applicable, between IPR&D, other identifiable intangible assets, net tangible assets and goodwill as required by U.S. GAAP. Goodwill represents the excess of the aggregate purchase price over the fair value of net assets, including IPR&D, of acquired businesses. The values assigned to IPR&D and other identifiable intangible assets are based on valuations that have been prepared using methodologies and valuation techniques consistent with those used by independent appraisers. These techniques include estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values utilizing an appropriate risk-adjusted rate of return (discount rate). The discount rate used is determined at the time of the acquisition in accordance with accepted valuation methods. For IPR&D, these methodologies include consideration of the risk of the project not achieving commercial feasibility and include a factor that takes into account the uncertainty surrounding the successful development of the IPR&D.

          At the time of acquisition, the Company expects all acquired IPR&D will reach technological feasibility, but there can be no assurance that the commercial viability of these products will actually be achieved. The nature of the efforts to develop the acquired technologies into commercially viable products consists principally of planning, designing and conducting clinical trials necessary to obtain regulatory approvals. The risks associated with achieving commercialization include, but are not limited to, delay or failure to obtain regulatory approvals to conduct clinical trials, delay or failure to obtain required market clearances, and patent issuance, validity and litigation, if any. If commercial viability were not achieved, the Company would likely look to other alternatives to provide these therapies.

Fiscal Year 2009

CoreValve, Inc.

          In April 2009, the Company acquired privately held CoreValve Inc. (CoreValve). Under the terms of the agreement announced in February 2009, the transaction included an initial up-front payment, including direct acquisition costs, of $700 million plus potential additional payments contingent upon achievement of certain clinical and revenue milestones. CoreValve develops percutaneous, catheter-based transfemoral aortic valve replacement products that are approved in certain markets outside the U.S.

          The Company has accounted for the acquisition of CoreValve as a business combination. Under business combination accounting, the assets and liabilities of CoreValve were recorded as of the acquisition date, at their respective fair values, and consolidated with the Company. The purchase price allocation is based on estimates of the fair value of assets acquired and liabilities assumed. The preliminary purchase price has been allocated as follows:

 

 

 

 

 

(in millions)

 

 

 

 

Current assets

 

$

20

 

Property, plant and equipment

 

 

7

 

IPR&D

 

 

123

 

Other intangible assets

 

 

291

 

Goodwill

 

 

433

 

Total assets acquired

 

 

874

 

 

 

 

 

 

Current liabilities

 

 

66

 

Long-term deferred tax liabilities

 

 

108

 

Total liabilities assumed

 

 

174

 

Net assets acquired

 

$

700

 

45



Medtronic, Inc.
Notes to Consolidated Financial Statements

          In connection with the acquisition of CoreValve, the Company acquired $291 million of technology-based intangible assets with an estimated useful life of 12 years. Also as part of the acquisition, the Company recognized, in total, $123 million and $433 million for IPR&D and goodwill, respectively. The IPR&D was expensed on the date of acquisition and primarily relates to the future launch of CoreValve’s catheter-based transfemoral aortic valve into the U.S. market. For purposes of valuing the acquired IPR&D, the Company estimated total costs to complete of approximately $80 million. The establishment of goodwill was primarily due to the expected revenue growth that is attributable to increased market penetration from future products and customers. The goodwill is not deductible for tax purposes.

          In conjunction with the acquisition, the Company began to assess and formulate a plan for the elimination of duplicative positions and the termination of certain contractual obligations. The purchase accounting liabilities recorded in connection with these activities were approximately $39 million and are included as current liabilities in the purchase price allocation. The Company continues to assess these liabilities and until the plan is finalized and the integration activities are complete, the allocation of the purchase price is subject to adjustment.

Ablation Frontiers, Inc.

          In February 2009, the Company acquired privately held Ablation Frontiers, Inc. (Ablation Frontiers). Under the terms of the agreement announced in January 2009, the transaction included an initial up-front payment of $225 million plus potential additional payments contingent upon achievement of certain clinical and revenue milestones. Total consideration for the transaction was approximately $235 million including the assumption and settlement of existing Ablation Frontiers debt and payment of direct acquisition costs. Ablation Frontiers develops radiofrequency (RF) ablation solutions for treatment of atrial fibrillation. Ablation Frontiers’ system of ablation catheters and RF generator is currently approved in certain markets outside the U.S.

          The Company has accounted for the acquisition of Ablation Frontiers as a business combination. Under business combination accounting, the assets and liabilities of Ablation Frontiers were recorded as of the acquisition date, at their respective fair values, and consolidated with the Company. The purchase price allocation is based on estimates of the fair value of assets acquired and liabilities assumed. The purchase price has been allocated as follows:

 

 

 

 

 

(in millions)

 

 

 

 

Current assets

 

$

7

 

Property, plant and equipment

 

 

1

 

IPR&D

 

 

97

 

Other intangible assets

 

 

63

 

Goodwill

 

 

109

 

Total assets acquired

 

 

277

 

 

 

 

 

 

Current liabilities

 

 

19

 

Long-term deferred tax liabilities

 

 

23

 

Total liabilities assumed

 

 

42

 

Net assets acquired

 

$

235

 

          In connection with the acquisition of Ablation Frontiers, the Company acquired $63 million of technology-based intangible assets with an estimated useful life of 11 years. Also as part of the acquisition, the Company recognized, in total, $97 million and $109 million for IPR&D and goodwill, respectively. The IPR&D was expensed on the date of acquisition and primarily relates to the future launch of Ablation Frontiers’ system of ablation catheters and RF generator into the U.S. market. For purposes of valuing the acquired IPR&D, the Company estimated total costs to complete of approximately $3 million. The establishment of goodwill was primarily due to the expected revenue growth that is attributable to increased market penetration from future products and customers. The goodwill is not deductible for tax purposes.

46



Medtronic, Inc.
Notes to Consolidated Financial Statements

CryoCath Technologies Inc.

          In November 2008, the Company acquired all of the outstanding stock of CryoCath Technologies Inc. (CryoCath). Under the terms of the agreement announced in September 2008, CryoCath shareholders received $8.75 Canadian dollars per share in cash for each share of CryoCath common stock that they owned. Total consideration for the transaction, net of cash acquired, was approximately $352 million U.S. dollars including the purchase of outstanding CryoCath common stock, the assumption and settlement of existing CryoCath debt and payment of direct acquisition costs. CryoCath develops cryotherapy products to treat cardiac arrhythmias. CryoCath’s Arctic Front product is a minimally invasive cryo-balloon catheter designed specifically to treat atrial fibrillation and is currently approved in certain markets outside the U.S.

          The Company has accounted for the acquisition of CryoCath as a business combination. Under business combination accounting, the assets and liabilities of CryoCath were recorded as of the acquisition date, at their respective fair values, and consolidated with the Company. The purchase price allocation is based on estimates of the fair value of assets acquired and liabilities assumed. The purchase price has been allocated as follows:

 

 

 

 

 

(in millions)

 

 

 

 

Current assets

 

$

24

 

Property, plant and equipment

 

 

2

 

IPR&D

 

 

72

 

Other intangible assets

 

 

57

 

Goodwill

 

 

179

 

Long-term deferred tax assets

 

 

61

 

Total assets acquired

 

 

395

 

 

 

 

 

 

Current liabilities

 

 

25

 

Long-term deferred tax liabilities

 

 

15

 

Total liabilities assumed

 

 

40

 

Net assets acquired

 

$

355

 

          In connection with the acquisition of CryoCath, the Company acquired $57 million of technology-based intangible assets with an estimated useful life of 11 years. Also as part of the acquisition, the Company recognized $72 million and $179 million for IPR&D and goodwill, respectively. The IPR&D was expensed on the date of acquisition and primarily relates to the future launch of Arctic Front into the U.S. market. For purposes of valuing the acquired IPR&D, the Company estimated total costs to complete of approximately $3 million. The establishment of goodwill was primarily due to the expected revenue growth that is attributable to increased market penetration from future products and customers. The goodwill is not deductible for tax purposes.

Restore Medical Acquisition

          In July 2008, the Company acquired Restore Medical, Inc. (Restore). Restore’s Pillar Palatal Implant System provides the Company with a minimally invasive, implantable medical device used to treat the soft palate component of sleep breathing disorders, including mild to moderate obstructive sleep apnea and snoring. The Company accounted for the acquisition as a business combination. Restore shareholders received $1.60 per share in cash for each share of Restore common stock they owned. Total consideration for the transaction, net of cash acquired, was approximately $29 million. In connection with the acquisition of Restore, the Company acquired $17 million of technology-based intangible assets with an estimated useful life of 10 years, $8 million of net tangible assets and $5 million of goodwill. The goodwill is not deductible for tax purposes.

          The pro forma impact of the above acquisitions was not significant, individually or in the aggregate, to the results of the Company for the fiscal years ended April 24, 2009 and April 25, 2008. The results of operations related to each company have been included in the Company’s consolidated statements of earnings since the date each company was acquired.

Other Acquisitions and IPR&D Charges

          In February 2009, the Company recorded an IPR&D charge of $307 million related to the acquisition of privately held Ventor Technologies Ltd. (Ventor), a development stage company focused on transcatheter heart valve technologies for the treatment of aortic valve disease. This acquisition adds two technologies to the Company’s transcatheter valve portfolio: a minimally invasive, surgical transapical technology and a next generation percutaneous, transfemoral technology. Total consideration for the transaction, net of cash acquired, was approximately $308 million. Of the $308 million, $307 million was expensed as IPR&D since technological feasibility of the underlying project had not yet been reached and such technology has no future alternative use and $1 million related to other net assets acquired.

47



Medtronic, Inc.
Notes to Consolidated Financial Statements

          During the second and fourth quarters of fiscal year 2009, the Company recorded IPR&D charges of $22 million related to the purchase of certain intellectual property for use in the Spinal and Diabetes businesses. These payments were expensed as IPR&D since technological feasibility of the underlying product had not yet been reached and such technology has no future alternative use.

Fiscal Year 2008

Kyphon Acquisition

          In November 2007, the Company acquired Kyphon Inc. (Kyphon) and it became a wholly owned subsidiary of the Company. Kyphon develops and markets medical devices designed to restore and preserve spinal function using minimally invasive technology. Kyphon’s primary products are used in balloon kyphoplasty for the treatment of spinal compression fractures caused by osteoporosis or cancer, and in the interspinous process decompression procedure for treating the symptoms of lumbar spinal stenosis. It is expected that the acquisition of Kyphon will add to the growth of the Company’s existing Spinal business by extending its product offerings and enabling the Company to provide physicians with a broader range of therapies for use at all stages of the care continuum.

          Under the terms of the agreement announced in July 2007, Kyphon shareholders received $71 per share in cash for each share of Kyphon common stock they owned. Total consideration for the transaction was approximately $4.203 billion, which includes payments to Kyphon shareholders for the cancellation of outstanding shares, the assumption and settlement of existing Kyphon debt and payment of direct acquisition costs. Total debt assumed relates to Kyphon’s obligations under existing credit and term loan facilities and outstanding senior convertible notes. In addition, the total consideration includes the proceeds of unwinding the related convertible note hedges and cancellation and payment of the warrants to the hedge participants that were originally issued by Kyphon in February 2007. The transaction was financed through a combination of approximately $3.303 billion cash on hand, the issuance of $600 million short-term commercial paper and borrowing $300 million through a new long-term unsecured revolving credit facility.

          The Company has accounted for the acquisition of Kyphon as a business combination. Under business combination accounting, the assets and liabilities of Kyphon were recorded as of the acquisition date, at their respective fair values, and consolidated with the Company. The breakdown of the purchase price of Kyphon is as follows:

 

 

 

 

 

(in millions)

 

 

 

 

Cash acquisition of Kyphon outstanding common stock

 

$

3,300

 

Cash settlement of vested stock-based awards

 

 

218

 

Debt assumed and settled

 

 

570

 

Cash settlement of convertible debt warrants, net of proceeds from convertible note hedges

 

 

87

 

Direct acquisition costs

 

 

28

 

Total purchase price

 

$

4,203

 

          The purchase price allocation is based on estimates of the fair value of assets acquired and liabilities assumed. The purchase price has been allocated as follows:

 

 

 

 

 

(in millions)

 

 

 

 

Current assets

 

$

379

 

Property, plant and equipment

 

 

39

 

IPR&D

 

 

290

 

Other intangible assets

 

 

996

 

Goodwill

 

 

3,148

 

Other long-term assets

 

 

10

 

Total assets acquired

 

 

4,862

 

 

Current liabilities

 

 

344

 

Deferred tax liabilities

 

 

282

 

Other long-term liabilities

 

 

33

 

Total liabilities assumed

 

 

659

 

Net assets acquired

 

$

4,203

 

48



Medtronic, Inc.
Notes to Consolidated Financial Statements

          In connection with the acquisition, the Company acquired $996 million of intangible assets that had a weighted average useful life of approximately 10.5 years. The intangible assets include $887 million of technology-based assets and $109 million of tradenames with weighted average lives of 10.5 years and 11 years, respectively. Also as part of the acquisition, the Company recognized, in total, $290 million and $3.148 billion for IPR&D and goodwill, respectively. The IPR&D was expensed on the date of acquisition. Various factors contributed to the establishment of goodwill, including: the benefit of adding existing products of the Company to the portfolio of products already sold by Kyphon sales representatives; the value of Kyphon’s highly trained assembled workforce; and the expected revenue growth that is attributable to expanded indications and increased market penetration from future products and customers. The goodwill is not deductible for tax purposes.

          The $290 million IPR&D charge primarily relates to three projects: 1) future launch of the balloon kyphoplasty (kyphoplasty) procedure into the Japanese market, 2) future launch of the Aperius product into the U.S. market and 3) the development of the next generation kyphoplasty balloon technology. Kyphoplasty is Kyphon’s minimally invasive approach to treat spinal fractures including vertebral compression fractures due to osteoporosis and cancer. Aperius is Kyphon’s internally developed interspinous spacing device which provides a minimally invasive approach to treat lumbar spinal stenosis. For purposes of valuing the acquired IPR&D, the Company estimated total costs to complete of approximately $19 million.

          As required, the Company recognized a $34 million fair value adjustment related to inventory acquired from Kyphon. Inventory fair value is defined as the estimated selling price less the sum of (a) cost to complete (b) direct costs to sell and (c) a reasonable profit allowance for the selling effort. The $34 million fair value adjustment was fully expensed through cost of products sold during the third quarter of fiscal year 2008, which reflects the estimated period over which the acquired inventory was sold to customers.

          In connection with the acquisition, the Company began to assess and formulate a plan for the elimination of duplicative positions, employee relocations, the exit of certain facilities and the termination of certain contractual obligations. The purchase accounting liabilities recorded in connection with these activities were approximately $68 million and included approximately $48 million for termination benefits and employee relocation and approximately $20 million of estimated costs to cancel contractual obligations. During the fourth quarter of fiscal year 2009, the Company reversed $15 million of the purchase accounting liabilities due to a favorable outcome in negotiating the termination of contractual obligations. The reversal of these liabilities was recorded as a reduction of goodwill. As of April 24, 2009, the purchase accounting liabilities related to the activities noted above have been fully utilized.

          The Company’s consolidated financial statements include Kyphon’s operating results from the date of acquisition, November 2, 2007. The following unaudited pro forma information sets forth the combined results of Medtronic’s and Kyphon’s operations for fiscal years 2008 and 2007, as if the acquisition had occurred at the beginning of each of the periods presented. The unaudited pro forma results of operations for the fiscal year ended April 25, 2008 is comprised of (i) Kyphon’s historical financial information for the six months ended September 30, 2007, (ii) Medtronic’s pre-Kyphon historical financial information for the six months ended October 27, 2007 and (iii) Medtronic’s post-Kyphon historical financial information for the six month period that includes the three months ended January 25, 2008 and the three months ended April 25, 2008. The unaudited pro forma results of operations for the fiscal year ended April 27, 2007 includes the results of Medtronic’s fiscal year 2007 historical financial information and the operations for Kyphon for the twelve month period ended March 31, 2007.

          The pro forma information gives effect to actual operating results prior to the acquisition, adjusted to reflect, among other things, reduced interest income, additional intangible asset amortization and interest expense that would have resulted from the change in the accounting basis of certain assets and liabilities due to the acquisition. Pro forma adjustments are tax-effected at the Company’s statutory tax rate. No effect has been given to cost reductions or operating synergies in this presentation. These pro forma amounts are not necessarily indicative of the results that would have been obtained if the acquisition had occurred as of the beginning of the periods presented or that may occur in the future, and does not reflect future synergies, integration costs or other such costs or savings. The unaudited pro forma condensed consolidated financial information is presented for informational purposes only.

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(in millions, except per share data)

 

2008

 

2007

 

Net sales

 

$

13,804

 

$

12,744

 

Net earnings

 

$

2,093

 

$

2,321

 

 

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

1.85

 

$

2.02

 

Diluted

 

$

1.83

 

$

2.00

 

49



Medtronic, Inc.
Notes to Consolidated Financial Statements

          The unaudited pro forma financial information for fiscal years 2008 and 2007 include a $290 million IPR&D charge and a $34 million increase in cost of products sold related to the step-up to fair value of inventory acquired, both of which are non-recurring.

Other Acquisitions and IPR&D Charges

          In April 2008, the Company recorded an IPR&D charge of $42 million related to the acquisition of NDI Medical (NDI), a development stage company focused on commercially developing technology to stimulate the dorsal genital nerve as a means to treat urinary incontinence. Total consideration for NDI was approximately $42 million which included $39 million in cash and the forgiveness of $3 million of pre-existing loans provided to NDI. The acquisition will provide the Company with exclusive rights to develop and use NDI’s technology in the treatment of urinary urge incontinence. This payment was expensed as IPR&D since technological feasibility of the underlying projects had not yet been reached and such technology has no future alternative use.

          In November 2007, the Company recorded an IPR&D charge of $20 million related to the acquisition of Setagon, Inc. (Setagon), a development stage company focused on commercially developing metallic nanoporous surface modification technology. The acquisition will provide the Company with exclusive rights to use and develop Setagon’s Controllable Elution Systems technology in the treatment of cardiovascular disease. Total consideration for Setagon was approximately $20 million in cash, subject to purchase price increases, which would be triggered by the achievement of certain milestones. This payment was expensed as IPR&D since technological feasibility of the underlying project had not yet been reached and such technology has no future alternative use.

          In June 2007, the Company exercised a purchase option and acquired substantially all of the O-Arm Imaging System (O-Arm) assets of Breakaway Imaging, LLC (Breakaway), a privately held company. Prior to the acquisition, the Company had the exclusive rights to distribute and market the O-Arm. The O-Arm provides multi-dimensional surgical imaging for use in spinal and orthopedic surgical procedures. The acquisition is expected to bring the O-Arm into a broad portfolio of image guided surgical solutions. Total consideration for Breakaway was approximately $26 million in cash, subject to purchase price increases, which would be triggered by the achievement of certain milestones.

          In connection with the acquisition of Breakaway, the Company acquired $22 million of technology-based intangible assets that had an estimated useful life of 15 years at the time of acquisition, $1 million of tangible assets and $3 million of goodwill. The goodwill is deductible for tax purposes. The pro forma impact of the acquisition of Breakaway was not significant to the results of the Company for the fiscal years 2008 and 2007.

          Additionally, during fiscal year 2008, the Company recorded IPR&D charges of $25 million related to a milestone payment under the existing terms of a royalty bearing, non-exclusive patent cross-licensing agreement with NeuroPace, Inc. and $13 million for unrelated purchases of certain intellectual property. These payments were expensed as IPR&D since technological feasibility of the underlying projects had not yet been reached and such technology has no future alternative use.

Fiscal Year 2007

          In March 2007, the Company acquired manufacturing assets, know-how, and an exclusive license to intellectual property related to the manufacture and distribution of EndoSheath products from Vision–Sciences, Inc. (VSI), which was accounted for as a purchase of assets. The license acquired from VSI expanded the Company’s existing U.S. distribution rights of EndoSheath products to worldwide distribution rights. The EndoSheath is a sterile disposable sheath that fits over a fiberoptic endoscope preventing contamination of the scope during procedures and allowing reuse of the scope without further sterilization. The consideration paid was $27 million in cash which was primarily allocated to technology-based intangible assets with an estimated useful life of 10 years at the time of acquisition. The purchase price is subject to increases triggered by the achievement of certain milestones.

          In September 2006, the Company acquired and/or licensed selected patents and patent applications owned by Dr. Eckhard Alt (Dr. Alt), or certain of his controlled companies in a series of transactions. In connection therewith, the Company also resolved all outstanding litigation and disputes with Dr. Alt and certain of his controlled companies. The agreements required the payment of total consideration of $75 million, $74 million of which was capitalized as technology based intangible assets that had an estimated useful life of 11 years at the time of acquisition. The acquired patents or licenses pertain to the cardiac rhythm disease management field and have both current application and potential for future patentable commercial products.

50



Medtronic, Inc.
Notes to Consolidated Financial Statements  

          In July 2006, the Company acquired substantially all of the assets of Odin Medical Technologies, Ltd. (Odin), a privately held company. Prior to the acquisition, the Company had an equity investment in Odin, which was accounted for under the cost method of accounting. Odin focused on the manufacture of the PoleStar intra-operative Magnetic Resonance Image (iMRI)-Guidance System which was already exclusively distributed by the Company. This acquisition was expected to help the Company further drive the acceptance of iMRI guidance in neurosurgery. The consideration for Odin was approximately $21 million, which included $6 million in upfront cash and a $2 million milestone payment made in the three months ended October 27, 2006. The $8 million in net cash paid resulted from the $21 million in consideration less the value of the Company’s prior investment in Odin and Odin’s existing cash balance. In connection with the acquisition of Odin, the Company acquired $9 million of technology-based intangible assets that had an estimated useful life of 12 years at the time of acquisition. Total goodwill was $12 million and was deductible for tax purposes. The results of operations related to Odin have been included in the Company’s consolidated statements of earnings since the date of the acquisition. The pro forma impact of Odin was not significant to the results of the Company for the fiscal year ended April 27, 2007.

Contingent Consideration

          Certain of the Company’s business combinations or 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. While it is not certain if and/or when these payments will be made, the Company has developed an estimate of the potential contingent consideration for each of its acquisitions with an outstanding potential obligation. At April 24, 2009, the estimated potential amount of future contingent consideration that the Company is expected to make associated with all business combinations or purchases of intellectual property is approximately $397 million. The milestones associated with the contingent consideration must be reached in future periods ranging from fiscal years 2010 to 2016 in order for the consideration to be paid.

 

 

5.

Investments

          The carrying amounts of cash and cash equivalents approximate fair value due to their short maturities.

          Information regarding the Company’s short-term and long-term investments at April 24, 2009 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

 

Corporate debt securities

 

$

817

 

$

8

 

$

(20

)

$

805

 

Auction rate securities

 

 

199

 

 

 

 

(80

)

 

119

 

Mortgage backed securities

 

 

789

 

 

9

 

 

(52

)

 

746

 

Government and agency securities

 

 

693

 

 

5

 

 

(1

)

 

697

 

Certificates of deposit

 

 

2

 

 

 

 

 

 

2

 

Other asset backed securities

 

 

297

 

 

3

 

 

(22

)

 

278

 

Marketable equity securities

 

 

12

 

 

 

 

 

 

12

 

Cost method, equity method and other investments (1)

 

 

515

 

 

 

 

 

 

515

 

Total short-term and long-term investments

 

$

3,324

 

$

25

 

$

(175

)

$

3,174

 

(1) Includes $221 million for the 15 percent equity interest in Shandong Weigao Group Medical Polymer Company Limited (Weigao), which was acquired on December 18, 2008. The cash paid for the investment was included in other investing activities, net on the consolidated statement of cash flows.

51



Medtronic, Inc.
Notes to Consolidated Financial Statements  

          Information regarding the Company’s short-term and long-term investments at April 25, 2008 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

 

Corporate debt securities

 

$

942

 

$

2

 

$

(15

)

$

929

 

Auction rate securities

 

 

198

 

 

 

 

(22

)

 

176

 

Mortgage backed securities

 

 

693

 

 

3

 

 

(17

)

 

679

 

Government and agency securities

 

 

478

 

 

1

 

 

(3

)

 

476

 

Other asset backed securities

 

 

382

 

 

1

 

 

(12

)

 

371

 

Marketable equity securities

 

 

14

 

 

 

 

(1

)

 

13

 

Cost method, equity method and other investments

 

 

231

 

 

 

 

 

 

231

 

Total short-term and long-term investments

 

$

2,938

 

$

7

 

$

(70

)

$

2,875

 

          Activity related to the Company’s short-term and long-term investment portfolio is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

2009

 

2008

 

2007

 

(in millions)

 

Debt (1)

 

Equity (2)

 

Debt (1)

 

Equity (2)

 

Debt (1)

 

Equity (2)

 

Proceeds from sales

 

$

2,845

 

$

 

$

8,531

 

$

26

 

$

10,870

 

$

24

 

Gross realized gains

 

$

35

 

$

 

$

31

 

$

16

 

$

3

 

$

16

 

Gross realized losses

 

$

(8

)

$

 

$

(5

)

$

 

$

(1

)

$

 

Impairment losses recognized

 

$

38

 

$

4

 

$

3

 

$

4

 

$

 

$

26

 


 

 

(1)

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

(2)

Includes marketable equity securities, cost method, equity method and other investments.

          The April 24, 2009 balance of AFS debt securities 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)

 

April 24, 2009

 

Due in one year or less

 

$

732

 

Due after one year through five years

 

 

1,724

 

Due after five years through ten years

 

 

50

 

Due after ten years

 

 

141

 

Total debt securities

 

$

2,647

 

          As of April 24, 2009, the Company has $421 million in debt securities that have been in an unrealized loss position for more than twelve months. The aggregate amount of unrealized losses for these investments is $154 million. As of April 24, 2009, the Company has $682 million in debt securities that have been in an unrealized loss position for less than twelve months. The aggregate amount of unrealized losses for these investments is $21 million. The majority of these investments are in high quality, investment grade securities. The Company does not consider these unrealized losses to be other-than-temporary as it has the intent and ability to hold these investments long enough to avoid realizing any significant losses.

          The investments in marketable debt securities detailed above are classified and accounted for as available-for-sale and include corporate debt securities, government and agency securities, certificates of deposit and mortgage backed and other asset backed securities including auction rate securities. Market conditions during fiscal year 2009 and subsequent to the Company’s fiscal year end continue to indicate significant uncertainty on the part of investors on the economic outlook for the U.S. and for financial institutions. This uncertainty has created reduced liquidity across the fixed income investment market, including certain securities in which the Company has invested. As a result, some of the Company’s investments have experienced reduced liquidity including unsuccessful monthly auctions for auction rate security holdings.

          For the fiscal year ended April 24, 2009, the Company recognized other-than-temporary impairment losses on AFS debt securities of $38 million. 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 has the ability and the intent to hold these investments long enough to avoid realizing any further losses. For additional discussion, see the “Liquidity and Capital Resources” section of management’s discussion and analysis.

52



Medtronic, Inc.
Notes to Consolidated Financial Statements  

          As of April 24, 2009 and April 25, 2008, the aggregate carrying amount of equity and other securities without a quoted market price and accounted for using the cost or equity method was $515 million and $231 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 fair value of cost or equity method investments is not estimated 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 recognized on debt instruments are recorded in interest expense/(income), net in the consolidated statements of earnings. Gains and losses recognized on equity instruments are recorded in other expense, net in the consolidated statements of earnings. Gains and losses from the sale of investments are calculated based on the specific identification method.

          The Company historically lent certain fixed income securities to enhance its investment income. Those lending activities were indemnified against counterparty risk and collateralized at an average rate of 102 percent, with the collateral determined based on the underlying securities and creditworthiness of the borrowers. The value of the securities on loan at April 25, 2008 was $610 million. Due to the Company’s concerns about the liquidity condition in the fixed income markets, the Company suspended its securities lending program in the second quarter of fiscal year 2009.

 

 

6.

Fair Value Measurements

          As discussed in Note 1, the Company adopted SFAS No. 157 effective April 26, 2008, with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements.

          Under SFAS No. 157, 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. SFAS No. 157 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 developed based upon the best information available in the circumstances. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels defined as follows:

 

 

 

 

Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets include money market funds, treasury bonds, marketable equity securities and foreign currency hedges that are valued using quoted market prices.

 

 

 

 

Level 2 - Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. The Company’s Level 2 assets and liabilities primarily include government agency bonds, corporate debt securities, asset backed securities 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.

 

 

 

 

Level 3 - Inputs are unobservable inputs for the asset or liability. The Company’s Level 3 assets include certain corporate debt securities, auction rate securities, certain mortgage backed securities and certain asset backed securities. See the section below titled Level 3 Valuation Techniques for further discussion of how the Company determines fair value for investments classified as Level 3.

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

          For the Company, effective April 26, 2008, fair value under SFAS No. 157 is principally applied to financial assets and liabilities such as marketable equity securities and debt securities that are classified and accounted for as available-for-sale, and derivative instruments. Derivatives include cash flow hedges, freestanding derivative forward contracts and net investment hedges. These items were previously and will continue to be marked-to-market at each reporting period; however, the definition of fair value is now applied using SFAS No. 157. The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and liabilities. Separately, there were no material fair value measurements with respect to nonfinancial assets or liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis subsequent to the effective date of SFAS No. 157.

53



Medtronic, Inc.
Notes to Consolidated Financial Statements  

          The following table provides information by level for assets and liabilities that are measured at fair value, as defined by SFAS No. 157, on a recurring basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value
at
April 24, 2009

 

Fair Value Measurements
Using Inputs Considered as

 

 

 

 

 

(in millions)

 

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

805

 

$

8

 

$

771

 

$

26

 

Auction rate securities

 

 

119

 

 

 

 

 

 

119

 

Mortgage backed securities

 

 

746

 

 

 

 

709

 

 

37

 

Government and agency securities

 

 

697

 

 

174

 

 

523

 

 

 

Certificates of deposit

 

 

2

 

 

 

 

2

 

 

 

Other asset backed securities

 

 

278

 

 

 

 

255

 

 

23

 

Marketable equity securities

 

 

12

 

 

12

 

 

 

 

 

Derivative assets

 

 

436

 

 

436

 

 

 

 

 

Total assets

 

$

3,095

 

$

630

 

$

2,260

 

$

205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

31

 

$

31

 

$

 

$

 

Total liabilities

 

$

31

 

$

31

 

$

 

$

 

Level 3 Valuation Techniques

          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, certain mortgage backed securities and certain asset backed securities for which there was a decrease in the observability of market pricing for these investments. At April 24, 2009, these securities were valued primarily using broker pricing models that incorporate transaction details such as contractual terms, maturity, timing and amount of future cash flows, as well as assumptions about liquidity and credit valuation adjustments of marketplace participants at April 24, 2009.

          The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3).

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

Balance at April 26, 2008

 

$

448

 

Total realized losses and other-than-temporary impairment losses included in earnings

 

 

(38

)

 

Total unrealized losses included in other comprehensive income

 

 

(84

)

 

Net purchases, issuances, and settlements

 

 

(209

)

Net transfers in (out) of Level 3

 

 

88

 

Balance at April 24, 2009

 

$

205

 

          Realized gains or losses included in earnings are included in interest expense/(income), net in the consolidated statement of earnings.

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

          The Company had no financial assets or liabilities that are measured on a nonrecurring basis subsequent to their initial recognition during fiscal year 2009.

54



Medtronic, Inc.
Notes to Consolidated Financial Statements

          The aspects of SFAS No. 157 for which the effective date was deferred under FSP No. 157-2 until fiscal year 2010 relate to nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. This deferral applies to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or nonfinancial long-lived asset groups measured at fair value for an impairment assessment.

7.       Goodwill and Other Intangible Assets

          The changes in the carrying amount of goodwill for fiscal years 2009 and 2008 are as follows:

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(in millions)

 

2009

 

2008

 

Beginning balance

 

$

7,519

 

$

4,327

 

Goodwill as a result of acquisitions

 

 

731

 

 

3,178

 

Purchase accounting adjustments, net

 

 

(40

)

 

(10

)

Currency adjustment, net

 

 

(15

)

 

24

 

Ending balance

 

$

8,195

 

$

7,519

 

          The Company completed its impairment test of all goodwill for fiscal years ended April 24, 2009, April 25, 2008 and April 27, 2007 and concluded there were no impairments.

          Balances of acquired intangible assets, excluding goodwill, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Purchased
Technology and
Patents

 

Trademarks
and
Tradenames

 

Other

 

Total

 

Amortizable intangible assets as of April 24, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

Original cost

 

$

3,057

 

$

373

 

$

238

 

$

3,668

 

Accumulated amortization

 

 

(801

)

 

(217

)

 

(173

)

 

(1,191

)

Carrying value

 

$

2,256

 

$

156

 

$

65

 

$

2,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average original life (in years)

 

 

12.5

 

 

10.3

 

 

9.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets as of April 25, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

Original cost

 

$

2,538

 

$

373

 

$

244

 

$

3,155

 

Accumulated amortization

 

 

(616

)

 

(181

)

 

(165

)

 

(962

)

Carrying value

 

$

1,922

 

$

192

 

$

79

 

$

2,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average original life (in years)

 

 

12.9

 

 

10.3

 

 

9.7

 

 

 

 

          Amortization expense for fiscal years 2009, 2008 and 2007 was $281 million, $220 million and $182 million, respectively.

55



Medtronic, Inc.
Notes to Consolidated Financial Statements

          Estimated aggregate amortization expense based on the current carrying value of amortizable intangible assets is as follows:

 

 

 

 

(in millions)
Fiscal Year

 

Amortization
Expense

 

2010

 

$

302

 

2011

 

 

293

 

2012

 

 

265

 

2013

 

 

250

 

2014

 

 

242

 

Thereafter

 

 

1,125

 

 

 

$

2,477

 

8.       Financing Arrangements

          Debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 24, 2009

 

April 25, 2008

 

(in millions)

 

Maturity by Fiscal
Year

 

Payable

 

Average
Interest
Rate

 

Payable

 

Average
Interest
Rate

 

Short-Term Borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent convertible debentures

 

 

2010-2022

 

$

 

 

 

$

94

 

 

1.25

%

Bank borrowings

 

 

2010

 

 

123

 

 

0.92

%

 

175

 

 

0.87

%

Commercial paper

 

 

2010

 

 

385

 

 

0.44

%

 

874

 

 

2.42

%

Capital lease obligations

 

 

2010

 

14

 

 

5.29

%

 

11

 

 

5.33

%

Total Short-Term Borrowings

 

 

 

 

$

522

 

 

 

 

$

1,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent convertible debentures

 

 

2011-2022

 

$

15

 

 

1.25

%

$

 

 

 

Five-year senior convertible notes

 

 

2011

 

 

2,200

 

 

1.50

%

 

2,200

 

 

1.50

%

Five-year senior notes

 

 

2011

 

 

400

 

 

4.38

%

 

400

 

 

4.38

%

New credit agreement

 

 

2011

 

 

 

 

 

 

300

 

 

2.90

%

Seven-year senior convertible notes

 

 

2013

 

 

2,200

 

 

1.63

%

 

2,200

 

 

1.63

%

Five-year new senior notes

 

 

2014

 

 

550

 

 

4.50

%

 

 

 

 

Ten-year senior notes

 

 

2016

 

 

600

 

 

4.75

%

 

600

 

 

4.75

%

Ten-year new senior notes

 

 

2019

 

 

400

 

 

5.60

%

 

 

 

 

Thirty-year new senior notes

 

 

2039

 

 

300

 

 

6.50

%

 

 

 

 

Interest rate swaps

 

 

2011/2016

 

 

 

 

 

 

35

 

 

2.04

%

Gain from interest rate swap termination

 

 

N/A

 

 

54

 

 

 

 

 

 

 

Capital lease obligations

 

 

2010-2014

 

53

 

 

5.38

%

 

67

 

 

5.37

%

Total Long-Term Debt

 

 

 

$

6,772

 

 

 

 

$

5,802

 

 

 

 

          Senior Convertible Notes In April 2006, the Company issued $2.200 billion of 1.500 percent Senior Convertible Notes due 2011 and $2.200 billion of 1.625 percent Senior Convertible Notes due 2013 (collectively, the Senior Convertible Notes). The Senior Convertible Notes were issued at par and pay interest in cash semi-annually in arrears on April 15 and October 15 of each year. The Senior Convertible Notes are unsecured unsubordinated obligations and rank equally with all other unsecured and unsubordinated indebtedness. The Senior Convertible Notes had an initial conversion price of $56.14 per share. The Senior Convertible Notes may only be converted: (i) during any calendar quarter if the closing price of the Company’s common stock reaches 140 percent of the conversion price for 20 trading days during a specified period, or (ii) if specified distributions to holders of the Company’s common stock are made or specified corporate transactions occur, or (iii) during the last month prior to maturity of the applicable notes. Upon conversion, a holder would receive: (i) cash equal to the lesser of the principal amount of the note or the conversion value and (ii) to the extent the conversion value exceeds the principal amount of the note, shares of the Company’s common stock, cash or a combination of common stock and cash, at the Company’s option. In addition, upon a change in control, as defined in the applicable indentures, the holders may require the Company to purchase for cash all or a portion of their notes for 100 percent of the principal amount of the notes plus accrued and unpaid interest, if any, plus a number of additional make-whole shares of the Company’s common stock, as set forth in the applicable indenture. The indentures under which the Senior Convertible Notes were issued contain customary covenants. A total of $2.500 billion of the net proceeds from these note issuances were used to repurchase common stock. As of April 24, 2009, pursuant to provisions in the indentures relating to the Company’s increase of its quarterly dividend to shareholders, the conversion rates for each of the Senior Convertible Notes is now 18.0474, which correspondingly changed the conversion price per share for each of the Senior Convertible Notes to $55.41.

56



Medtronic, Inc.
Notes to Consolidated Financial Statements

          Under EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (EITF No. 00-19), the notes are accounted for similar to traditional convertible debt (that is, as a combined instrument) because the conversion spread meets the requirements of EITF No. 00-19, including the provisions contained in paragraphs 12–32 of EITF No. 00-19. Accordingly, the “conversion spread” is not separated as a derivative.

          Concurrent with the issuance of the Senior Convertible Notes, the Company purchased call options on its common stock in private transactions. The call options allow the Company to receive shares of the Company’s common stock and/or cash from counterparties equal to the amounts of common stock and/or cash related to the excess conversion value that it would pay to the holders of the Senior Convertible Notes upon conversion. These call options will terminate upon the earlier of the maturity dates of the related Senior Convertible Notes or the first day all of the related Senior Convertible Notes are no longer outstanding due to conversion or otherwise. The call options, which cost an aggregate $1.075 billion ($699 million net of tax benefit), were recorded as a reduction of shareholders’ equity.

          In separate transactions, the Company sold warrants to issue shares of the Company’s common stock at an exercise price of $76.56 per share in private transactions. Pursuant to these transactions, warrants for 41 million shares of the Company’s common stock may be settled over a specified period beginning in July 2011 and warrants for 41 million shares of the Company’s common stock may be settled over a specified period beginning in July 2013 (the “settlement dates”). If the average price of the Company’s common stock during a defined period ending on or about the respective settlement dates exceeds the exercise price of the warrants, the warrants will be settled in shares of the Company’s common stock. Proceeds received from the issuance of the warrants totaled approximately $517 million and were recorded as an addition to shareholders’ equity. In April 2009, certain of the holders requested adjustment to the exercise price of the warrants from $76.30 to $75.56 pursuant to the anti-dilution provisions of the warrants relating to the Company’s payment of dividends to common shareholders.

          EITF No. 00-19 provides that contracts are initially classified as equity if (1) the contract requires physical settlement or net-share settlement, or (2) the contract gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The settlement terms of the Company’s purchased call options and sold warrant contracts provide for net cash settlement for the particular contract or net share settlement, depending on the method of settlement, as discussed above, which is at the option of the Company. Based on the guidance from EITF No. 00-19 and SFAS No. 133, the purchased call option contracts were recorded as a reduction of equity and the warrants were recorded as an addition to equity as of the trade date. SFAS No. 133 states that a reporting entity shall not consider contracts to be derivative instruments if the contract issued or held by the reporting entity is both indexed to its own stock and classified in shareholders’ equity in its statement of financial position. The Company concluded the purchased call option contracts and the warrant contracts should be accounted for in shareholders’ equity.

          Senior Notes In March 2009, the Company issued three tranches of Senior Notes (New Senior Notes) with the aggregate face value of $1.250 billion. The first tranche consisted of $550 million of 4.500 percent Senior Notes due 2014, the second tranche consisted of $400 million of 5.600 percent Senior Notes due 2019 and the third tranche consisted of $300 million of 6.500 percent Senior Notes due 2039. The first tranche was issued at par, the second tranche was issued at a discount which resulted in an effective interest rate of 5.609 percent and the third tranche was issued at a discount which resulted in an effective interest rate of 6.519 percent. Interest on each series of New Senior Notes is payable semi-annually, on March 15 and September 15 of each year, commencing September 15, 2009. The New Senior Notes are unsecured senior obligations of the Company and rank equally with all other unsecured and unsubordinated indebtedness of the Company. The indentures under which the New Senior Notes were issued contain customary covenants. The Company used the net proceeds from the sale of the New Senior Notes for repayment of a portion of its commercial paper and for general corporate uses.

          In September 2005, the Company issued two tranches of Senior Notes with the aggregate face value of $1.000 billion. The first tranche consisted of $400 million of 4.375 percent Senior Notes due 2010 and the second tranche consisted of $600 million of 4.750 percent Senior Notes due 2015. Each tranche was issued at a discount which resulted in an effective interest rate of 4.433 percent and 4.760 percent for the five and ten year Senior Notes, respectively. Interest on each series of Senior Notes is payable semi-annually, on March 15 and September 15 of each year. The Senior Notes are unsecured unsubordinated obligations of the Company and rank equally with all other unsecured and unsubordinated indebtedness of the Company. The indentures under which Senior Notes were issued contain customary covenants. The Company used the net proceeds from the sale of the Senior Notes for repayment of a portion of its commercial paper.

57



Medtronic, Inc.
Notes to Consolidated Financial Statements

          In November 2005 and June 2007, the Company entered into a five year interest rate swap agreement with a notional amount of $200 million, and an eight year interest rate swap agreement with a notional amount of $300 million, respectively. These interest rate swap agreements were designated as fair value hedges of the changes in fair value of a portion of the Company’s fixed-rate $400 million Senior Notes due 2010 and fixed-rate $600 million Senior Notes due 2015, respectively. The outstanding market values of these swap agreements were $8 million and $27 million of unrealized gains, respectively, at April 25, 2008. The unrealized gains of $8 million and $27 million at April 25, 2008 were recorded in long-term debt with the offset recorded in other assets on the consolidated balance sheets.

          In December 2008, the Company terminated the interest rate swap agreements. At that time, the contracts were in an asset position, resulting in cash receipts of $62 million, which included $3 million of accrued interest. The gain from terminating the interest rate swap agreements increased the outstanding balance of the Senior Notes and is being amortized as a reduction of interest expense over the remaining life of the Senior Notes. The cash flows from the termination of these interest rate swap agreements have been reported as operating activities in the consolidated statement of cash flows.

          Contingent Convertible Debentures As of April 24, 2009, the Company has $15 million remaining in aggregate principal amount of 1.250 percent Contingent Convertible Debentures, Series B due 2021 (the Debentures) outstanding. Interest is payable semi-annually. Each Debenture is convertible into shares of common stock at an initial conversion price of $61.81 per share; however, the Debentures are not convertible before their final maturity unless the closing price of our common stock reaches 110 percent of the conversion price for 20 trading days during a consecutive 30 trading day period. Upon conversion of the Debentures, the Company will pay holders cash equal to the lesser of the principal amount of the Debentures or their conversion value, and shares of the Company’s common stock to the extent the conversion value exceeds the principal amount of the Debentures. The Company may be required to repurchase the remaining debentures at the option of the holders in September 2011 or 2016. For put options exercised by the holders of the Debentures, the purchase price is equal to the principal amount of the applicable debenture plus any accrued and unpaid interest thereon to the repurchase date. If the put option is exercised, the Company will pay holders the repurchase price solely in cash. The Company can redeem the debentures for cash at any time.

          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. At April 24, 2009 and April 25, 2008, outstanding commercial paper totaled $385 million and $874 million, respectively. During fiscal years 2009 and 2008, the weighted average original maturity of the commercial paper outstanding was approximately 50 and 35 days, respectively, and the weighted average interest rate was 1.60 percent and 4.46 percent, respectively. The issuance of commercial paper reduces the amount of credit available under our existing lines of credit.

          Bank Borrowings Bank borrowings consist primarily of borrowings from non-U.S. banks at interest rates considered favorable by management and where natural hedges can be gained for foreign exchange purposes.

          Lines of Credit The Company has existing unsecured lines of credit of approximately $2.807 billion with various banks at April 24, 2009. The existing lines of credit include a five-year $1.750 billion syndicated credit facility dated December 20, 2006 that will expire on December 20, 2011 (Credit Facility). The Credit Facility provides backup funding for the commercial paper program and may also be used for general corporate purposes. The Credit Facility provides the Company with the ability to increase its capacity by an additional $500 million at any time during the life of the five-year term of the agreement.

          On November 2, 2007, the Company entered into a new Credit Agreement (New Credit Agreement) with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (New Lender). The New Credit Agreement provides for a $300 million unsecured revolving credit facility (New Facility) maturing November 2, 2010. In addition to certain initial fees, the Company is obligated to pay a commitment fee based on the total revolving commitment.

          As of April 24, 2009 and April 25, 2008, $508 million and $1.350 billion, respectively, were outstanding on all lines of credit.

          Interest rates on these borrowings are determined by a pricing matrix, based on the Company’s long-term debt ratings, assigned by Standard and Poor’s Ratings Group and Moody’s Investors Service. Facility fees are payable on the credit facilities and are determined in the same manner as the interest rates.

          As of April 24, 2009, the Company has unused credit lines and commercial paper of approximately $2.799 billion.

58



Medtronic, Inc.
Notes to Consolidated Financial Statements

          Maturities of long-term debt, including capital leases, for the next five fiscal years are as follows:

 

 

 

 

 

(in millions)

 

 

 


Fiscal Year

 

Obligation

 

2010

 

$

14

 

2011

 

 

2,616

 

2012

 

 

32

 

2013

 

 

2,220

 

2014

 

 

550

 

Thereafter

 

 

1,300

 

Total long-term debt

 

 

6,732

 

Less: Current portion of long-term debt

 

 

14

 

Long-term portion of long-term debt

 

$

6,718

 

9.       Derivatives and Foreign Exchange Risk Management

          In the fourth quarter of fiscal year 2009, the Company adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.”

          The Company uses operational and economic hedges, as well as forward exchange derivative contracts to manage the impact of foreign exchange rate changes on earnings and cash flows. In order to reduce the uncertainty of foreign exchange rate movements, the Company enters into derivative instruments, primarily forward exchange contracts, to manage its exposure related to foreign exchange rate changes. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets, liabilities, net investments and probable commitments. At inception of the forward contract, the derivative is designated as either a freestanding derivative, net investment hedge or cash flow hedge. Principal currencies hedged are the Euro and the Japanese Yen. The Company does not enter into forward exchange derivative contracts for speculative purposes. The gross notional amount of these contracts outstanding at April 24, 2009 and April 25, 2008 was $5.296 billion and $6.613 billion, respectively. The aggregate foreign currency gains/(losses) were $(53) million, $(134) million and $22 million in fiscal years 2009, 2008 and 2007, respectively. These gains/(losses) represent the net impact to the consolidated statements of earnings for the derivative instruments presented below offset by 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 consolidated balance sheets and statements of earnings.

Freestanding Derivative Forward Contracts

          Freestanding derivative forward contracts are used to offset the Company’s exposure to the change in value of certain 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 currently in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities. The cash flows from these contracts are reported as operating activities in the consolidated statements of cash flows. The gross notional amount of these contracts, not designated as hedging instruments, outstanding at April 24, 2009 was $1.162 billion.

          The amount of gains and location of the gains in the consolidated statement of earnings related to derivative instruments not designated as hedging instruments for the fiscal year ended April 24, 2009 were as follows:

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments under
SFAS No. 133

 

Location

 

Amount

Foreign exchange contracts

 

Other expense, net

 

$

208

Net Investment Hedges

          Net investment hedges are used to hedge the long-term investment (equity) in foreign operations. For hedges that meet effectiveness requirements, the net gains/(losses) related to changes in the current rates, or spot rates, are recorded as a cumulative translation adjustment, a component of accumulated other comprehensive (loss)/ income (AOCI) on the consolidated balance sheets. Net gains/(losses) associated with changes in forward rates of the contracts are reflected in other expense, net in the consolidated statements of earnings. Recognition in earnings of amounts previously recorded as a cumulative translation adjustment is limited to circumstances such as complete or substantially complete liquidation of the long-term investment (equity) in foreign operations. The cash flows from these contracts are reported as investing activities in the consolidated statements of cash flows. As of April 24, 2009, there were no open derivative contracts.

59



Medtronic, Inc.
Notes to Consolidated Financial Statements

          The amount of gains and location of the gains in the consolidated statement of earnings and AOCI related to derivative instruments designated as net investment hedges for the fiscal year ended April 24, 2009 are presented in the table below. There were no reclassifications of the effective portion of net investment hedges out of AOCI into income for the fiscal year ended April 24, 2009.

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Gain Recognized as Cumulative
Translation within AOCI on Effective
Portion of Derivative

 

Ineffective Portion of Gain Recognized in Income on
Derivative and Amount Excluded from Effectiveness
Testing

 

 

 

 

 

 

 

Derivatives in SFAS No. 133 Net Investment Hedging Relationships

 

Amount

 

Location

 

Amount

Foreign exchange contracts

 

$

27

 

 

Other expense, net

 

$

5

 

Cash Flow Hedges

          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 AOCI 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 fiscal years 2009, 2008 and 2007. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness and no hedges were derecognized or discontinued during fiscal years 2009, 2008 and 2007. The cash flows from these contracts are reported as operating activities in the consolidated statements of cash flows. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at April 24, 2009 was $4.134 billion and will mature within the subsequent 36-month period.

          The amount of gains/(losses) and location of the gains/(losses) in the consolidated statement of earnings and other comprehensive income (OCI) related to derivative instruments designated as cash flow hedges for the fiscal year ended April 24, 2009 are as follows:

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Gross Gain Recognized in OCI on Effective
Portion of Derivative

 

Effective Portion of (Loss) on Derivative Reclassified from AOCI
into Income

 

 

 

 

 

 

 

 

 

Derivatives in SFAS No. 133 Cash
Flow Hedging Relationships

 

Amount

 

Location

 

Amount

 

Foreign exchange contracts

 

$

814

 

 

Other expense, net

 

$

(16

)

 

 

 

 

 

 

Cost of products sold

 

(25

)

Total

 

$

814

 

 

 

 

$

(41

)

          As of April 24, 2009, the Company had a balance of $228 million in after-tax net unrealized gains associated with cash flow hedging instruments recorded in AOCI. The Company expects that $135 million of this balance will be reclassified into the consolidated statement of earnings over the next twelve months.

Fair Value Hedges

          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. As of April 24, 2009, the Company did not have any fair value hedges outstanding because, in December 2008, the Company terminated the existing interest rate swap agreements. At that time, the contracts were in an asset position, resulting in cash receipts of $62 million, which included $3 million of accrued interest. The $59 million gain from terminating the interest rate swap agreements increased the outstanding balance of the Senior Notes and is being amortized as a reduction of interest expense over the remaining life of the Senior Notes. The cash flows from the termination of these interest swap agreements are reported as operating activities in the consolidated statements of cash flows.

60



Medtronic, Inc.
Notes to Consolidated Financial Statements

          During fiscal years 2009, 2008 and 2007, the Company did not have any ineffective fair value hedging instruments. In addition, the Company did not recognize any gains or losses during fiscal years 2009, 2008 and 2007 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 consolidated balance sheet as of April 24, 2009. 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

Liability Derivatives

 

(in millions)

 

Balance Sheet
Location

 

Fair Value

 

Balance Sheet
Location

 

Fair Value

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Prepaid expenses and other current assets

 

$

249

 

Other accrued expenses

 

$

27

 

Foreign exchange contracts

 

Other assets

 

 

187

 

Other long-term liabilities

 

 

3

 

Total derivatives designated as hedging instruments

 

 

 

 

$

436

 

 

 

 

$

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Prepaid expenses and other current assets

 

$

 

Other accrued expenses

 

$

1

 

Total derivatives not designated as hedging instruments

 

 

 

 

$

 

 

 

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

 

 

$

436

 

 

 

 

$

31

 

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 forward exchange 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.

          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 national healthcare systems in many countries. Although the Company does not currently foresee a credit risk associated with these receivables, repayment is dependent upon the financial stability of the economies of those countries. As of April 24, 2009 and April 25, 2008, no customer represented more than 10 percent of the outstanding accounts receivable.

61



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

10.

Interest Expense/(Income), net

          Interest income and interest expense for fiscal years 2009, 2008 and 2007 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(in millions)

 

2009

 

2008

 

2007

 

Interest income

 

$

(188

)

$

(364

)

$

(382

)

Interest expense

 

 

217

 

 

255

 

 

228 

 

Interest expense/(income), net

 

$

29

 

$

(109

)

$

(154

)

          Interest income includes interest earned on the Company’s cash and cash equivalents, short- and long-term investments and the net realized gains or losses on the sale or impairment of AFS debt securities. See Note 5 for further discussion of these items.

          Interest expense includes the expense associated with the interest that the Company pays on its outstanding borrowings, including short- and long-term instruments and the amortization of debt issuance costs.

 

 

11.

Shareholders’ Equity

          Repurchase of Common Stock In June 2007, the Company’s Board of Directors authorized the repurchase of up to 50 million shares of the Company’s stock. In addition, in April 2006, the Board of Directors made a special authorization for the repurchase of up to 50 million shares in connection with the $4.400 billion Senior Convertible Note offering (see Note 8 for further discussion). Shares are repurchased from time to time to support the Company’s stock-based compensation programs and to take advantage of favorable market conditions. The Company repurchased approximately 16.5 million and 30.7 million shares at an average price of $45.94 and $50.28, respectively, during fiscal years 2009 and 2008. As of April 24, 2009, the Company has approximately 17.8 million shares remaining under the buyback authorizations approved by the Board of Directors. The Company accounts for repurchases of common stock using the par value method and shares repurchased are cancelled.

          Shareholder Rights Plan On October 26, 2000, the Company’s Board of Directors adopted a Shareholder Rights Plan and declared a dividend of one preferred share purchase right (a “right”) for each outstanding share of common stock with a par value of $ 0 .10 per share. Each right will allow the holder to purchase 1/5000 of a share of Series A Junior Participating Preferred Stock at an exercise price of $400 per share, once the rights become exercisable. The rights are not exercisable or transferable apart from the common stock until 15 days after the public announcement that a person or group (the Acquiring Person) has acquired 15 percent or more of the Company’s common stock or 15 business days after the announcement of a tender offer which would increase the Acquiring Person’s beneficial ownership to 15 percent or more of the Company’s common stock. After any person or group has become an Acquiring Person, each right entitles the holder (other than the Acquiring Person) to purchase, at the exercise price, common stock of the Company having a market price of two times the exercise price. If the Company is acquired in a merger or other business combination transaction, each exercisable right entitles the holder to purchase, at the exercise price, common stock of the acquiring company or an affiliate having a market price of two times the exercise price of the right.

          The Board of Directors may redeem the rights for $0.005 per right at any time before any person or group becomes an Acquiring Person. The Board may also reduce the threshold at which a person or group becomes an Acquiring Person from 15 percent to no less than 10 percent of the outstanding common stock. The rights expire on October 26, 2010.

 

 

12.

Stock Purchase and Award Plans

          Effective April 29, 2006, the Company adopted SFAS No. 123(R) which replaced SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123) and supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB Opinion No. 25). Under the fair value recognition provisions of SFAS No. 123(R), the Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognizes the compensation expense over the requisite service period, which is generally the vesting period. The Company elected the modified-prospective method of adopting SFAS No. 123(R), under which prior periods are not retroactively restated. The provisions of SFAS No. 123(R) apply to awards granted after the April 29, 2006 effective date. Stock-based compensation expense for the non-vested portion of awards granted prior to the effective date is being recognized over the remaining service period using the fair-value based compensation cost estimated for SFAS No. 123 pro forma disclosures.

62



Medtronic, Inc.
Notes to Consolidated Financial Statements

          Stock Options Stock option awards are granted at exercise prices equal to the closing price of the Company’s common stock on the grant date. The majority of the Company’s stock option awards are non-qualified stock options with a 10-year life and a four-year ratable vesting term. In fiscal year 2009, the Company granted stock options under the Medtronic, Inc. 2008 Stock Award and Incentive Plan (2008 Plan), the Medtronic, Inc. 2003 Long-Term Incentive Plan (2003 Plan) and the Medtronic, Inc. 1998 Outside Directors Stock Compensation Plan (Directors Plan). The 2008 and 2003 Plans were approved by the Company’s shareholders in August 2008 and August 2003, respectively, and provide for the grant of nonqualified and incentive stock options, stock appreciation rights, restricted stock, performance awards, and other stock and cash-based awards. The Directors Plan, a stock compensation plan for outside directors, was adopted in fiscal year 1998 and replaced the provisions in the 1994 stock award plan relating to awards granted to outside directors. Upon adoption of the 2008 Plan, Medtronic no longer grants awards from any prior plan. As of April 24, 2009, there were approximately 31 million shares available for future grants under the 2008 Plan.

          Restricted Stock Awards Restricted stock and restricted stock units (collectively referred to as restricted stock awards) are granted to officers and key employees. Restricted stock awards are subject to forfeiture if employment terminates prior to the lapse of the restrictions. The Company grants restricted stock awards that typically cliff vest between three and five years. Restricted stock awards are expensed over the vesting period. The Company also grants shares of performance-based restricted stock that will cliff vest only if the Company has also achieved certain performance objectives. Performance awards are expensed over the performance period based on the probability of achieving the performance objectives. Shares of restricted stock are considered issued and outstanding shares of the Company at the grant date and have the same dividend and voting rights as other common stock. Restricted stock units are not considered issued or outstanding common stock of the Company. Dividend equivalent units are accumulated on restricted stock units during the vesting period. In fiscal year 2009, the Company granted restricted stock awards under the 2008 Plan and the 2003 Plan.

          Employee Stock Purchase Plan The Medtronic, Inc. 2005 Employee Stock Purchase Plan (ESPP) allows participating employees to purchase shares of the Company’s common stock at a discount through payroll deductions. Employees can contribute up to the lesser of 10 percent of their wages or the statutory limit under the U.S. Internal Revenue Code toward the purchase of the Company’s common stock at 85 percent of its market value at the end of the calendar quarter purchase period. Employees purchased 3 million shares at an average price of $33.05 per share in the fiscal year ended April 24, 2009. As of April 24, 2009, plan participants have had approximately $6 million withheld to purchase Company common stock at 85 percent of its market value on June 30, 2009, the last trading day before the end of the calendar quarter purchase period. At April 24, 2009, approximately 2 million shares of common stock were available for future purchase under the ESPP.

          Valuation Assumptions The Company uses the Black-Scholes option pricing model (Black-Scholes model) to determine the fair value of stock options as of the grant date. The fair value of stock options under the Black-Scholes model requires management to make assumptions regarding projected employee stock option exercise behaviors, risk-free interest rates, volatility of the Company’s stock price and expected dividends.

          The expense recognized for shares purchased under the Company’s ESPP is equal to the 15 percent discount the employee receives at the end of the calendar quarter purchase period. The expense recognized for restricted stock awards is equal to the grant date fair value, which is equal to the closing stock price on the date of grant.

          The following table provides the weighted average fair value of options granted to employees and the related assumptions used in the Black-Scholes model: 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

2009

 

2008

 

2007

 

Weighted average fair value of options granted

 

$

8.96

 

$

15.29

 

$

11.72

 

Assumptions used:

 

 

 

 

 

 

 

 

 

 

Expected life (years)(a)

 

 

6.05

 

 

5.42

 

 

4.83

 

Risk-free interest rate (b)

 

 

3.11

%

 

4.02

%

 

4.66

%

Volatility (c)

 

 

25.64

%

 

22.27

%

 

19.90

%

Dividend yield (d)

 

 

2.03

%

 

1.05

%

 

0.90

%


 

 

(a)

Expected life: The Company analyzes historical employee stock option exercise and termination data to estimate the expected life assumption. Beginning in the third quarter of fiscal year 2008, the Company began to calculate the expected life assumption using the midpoint scenario, which combines historical exercise data with hypothetical exercise data, as the Company believes this data currently represents the best estimate of the expected life of a new employee option. Prior to the third quarter of fiscal year 2008, the Company calculated the expected life based solely on historical data. The Company also stratifies its employee population into two groups based upon distinctive exercise behavior patterns. Prior to adopting SFAS No. 123(R), the Company used one pool, the entire employee population, for estimating the expected life assumptions.

63



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

(b)

Risk-free interest rate: The rate is based on the grant date yield of a zero-coupon U.S. Treasury bond whose maturity period equals or approximates the option’s expected term.

 

 

(c)

Volatility: Beginning in the third quarter of fiscal year 2007, the expected volatility is based on a blend of historical volatility and an implied volatility of the Company’s common stock. Implied volatility is based on market traded options of the Company’s common stock. Prior to the third quarter of fiscal year 2007, the Company calculated the expected volatility based exclusively on historical volatility.

 

 

(d)

Dividend yield: The dividend yield rate is calculated by dividing the Company’s annual dividend, based on the most recent quarterly dividend rate, by the closing stock price on the grant date.

          Stock-Based Compensation Expense Upon the adoption of SFAS No. 123(R), the Company changed its method of recognition and now recognizes stock-based compensation expense based on the substantive vesting period for all new awards. As a result, compensation expense related to stock options granted prior to fiscal year 2007 is being recognized over the stated vesting term of the grant rather than being accelerated upon retirement eligibility.

          The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates pre-vesting forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense recognized over the vesting period will equal the fair value of awards that actually vest.

          The following table presents the components and classification of stock-based compensation expense, for options, restricted stock awards and ESPP recognized for fiscal years 2009, 2008 and 2007:

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

2009

 

2008

 

2007

 

Stock options

 

$

140

 

$

138

 

$

135

 

Restricted stock awards

 

 

82

 

 

63

 

 

35

 

Employee stock purchase plan

 

 

15

 

 

16

 

 

15

 

Total stock-based compensation expense

 

$

237

 

$

217

 

$

185

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

$

28

 

$

24

 

$

19

 

Research and development expense

 

 

58

 

 

52

 

 

39

 

Selling, general and administrative expense

 

 

151

 

 

141

 

 

127

 

Total stock-based compensation expense

 

$

237

 

$

217

 

$

185

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefits

 

 

(69

)

 

(64

)

 

(58

)

 

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense, net of tax

 

$

168

 

$

153

 

$

127

 

          In connection with the acquisition of Kyphon in November 2007, the Company assumed Kyphon’s unvested stock-based awards. These awards are amortized over 2.5 years, which was their remaining weighted average vesting period at the time of acquisition. For fiscal years 2009 and 2008, the Company recognized $21 million and $24 million, respectively, of stock-based compensation expense associated with the assumed Kyphon awards, which is included in the amounts presented above.

64



Medtronic, Inc.
Notes to Consolidated Financial Statements

          Stock Options The following table summarizes all stock option activity, including activity from options assumed or issued as a result of acquisitions, during fiscal years April 24, 2009, April 25, 2008 and April 27, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

2009

 

2008

 

2007

 

 

 

Options (in thousands)

 

Wtd. Avg. Exercise Price

 

Options (in thousands)

 

Wtd. Avg. Exercise Price

 

Options (in thousands)

 

Wtd. Avg. Exercise Price

 

Beginning balance

 

92,444

 

$

47.21

 

90,906

 

$

46.99

 

88,838

 

$

46.23

 

Granted

 

12,447

 

 

37.25

 

9,436

 

 

48.13

 

10,529

 

 

48.64

 

Assumed from Kyphon acquisition

 

 

 

 

3,486

 

 

27.73

 

 

 

 

Exercised

 

(8,046

)

 

39.01

 

(9,111

)

 

37.80

 

(6,089

)

 

37.37

 

Canceled

 

(3,451

)

 

47.59

 

(2,273

)

 

50.18

 

(2,372

)

 

50.22

 

Outstanding at year-end

 

93,394

 

$

46.57

 

92,444

 

$

47.21

 

90,906

 

$

46.99

 

Exercisable at year-end

 

67,795

 

$

47.78

 

67,741

 

$

46.80

 

67,017

 

$

45.47

 

          For options outstanding and exercisable at April 24, 2009, the weighted average remaining contractual life was 5.41 years and 4.20 years, respectively. The total intrinsic value, calculated as the closing stock price at year-end less the option exercise price, of options exercised during fiscal years 2009, 2008 and 2007 was $105 million, $138 million and $88 million, respectively. For options outstanding and exercisable at April 24, 2009, the total intrinsic value of in-the-money options was $7 million and $6 million, respectively. The Company issues new shares when stock option awards are exercised. Cash received from the exercise of stock options for the fiscal year ended April 24, 2009 was $305 million. The Company’s tax deductions related to the exercise of stock options for fiscal year 2009 were $33 million. Unrecognized compensation expense related to outstanding stock options as of April 24, 2009 was $200 million and is expected to be recognized over a weighted average period of 2.5 years and will be adjusted for any future changes in estimated forfeitures.

          Restricted Stock Awards The following table summarizes restricted stock award activity during fiscal years 2009, 2008 and 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

2009

 

2008

 

2007

 

 

 

Awards (in thousands)

 

Wtd. Avg.
Grant Price

 

Awards (in thousands)

 

Wtd. Avg.
Grant Price

 

Awards (in thousands)

 

Wtd. Avg.
Grant Price

 

Nonvested, beginning balance

 

5,789

 

$

49.24

 

3,982

 

$

50.16

 

2,008

 

$

51.64 

 

Granted

 

3,520

 

 

36.47

 

2,204

 

 

47.74

 

2,192

 

 

48.19 

 

Assumed from Kyphon acquisition

 

 

 

 

402

 

 

46.88

 

 

 

 

Vested

 

(564

)

 

47.42

 

(492

)

 

47.60

 

(112

)

 

47.57 

 

Forfeited

 

(399

)

 

51.17

 

(307

)

 

49.88

 

(106

)

 

51.16 

 

Nonvested at year-end

 

8,346

 

$

43.88

 

5,789

 

$

49.24

 

3,982

 

$

50.16 

 

          Unrecognized compensation expense related to restricted stock awards as of April 24, 2009 was $173 million and is expected to be recognized over a weighted average period of 2.8 years and will be adjusted for any future changes in estimated forfeitures.

 

 

13.

Income Taxes

          The provision for income taxes is based on earnings before income taxes reported for financial statement purposes. The components of earnings before income taxes are:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(in millions)

 

2009

 

2008

 

2007

 

U.S.

 

$

1,138

 

$

713

 

$

1,579

 

International

 

 

1,456

 

 

2,172

 

 

1,936

 

Earnings before income taxes

 

$

2,594

 

$

2,885

 

$

3,515

 

65



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

          The provision for income taxes consists of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(in millions)

 

2009

 

2008

 

2007

 

Current tax expense:

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

264

 

$

458

 

$

712

 

International

 

 

291

 

 

267

 

 

239

 

Total current tax expense

 

 

555

 

 

725

 

 

951

 

Deferred tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

4

 

 

(40

)

 

(216

)

International

 

 

(134

)

 

(31

)

 

(22

)

Net deferred tax expense (benefit)

 

 

(130

)

 

(71

)

 

(238

)

Total provision for income taxes

 

$

425

 

$

654

 

$

713

 

          Deferred taxes arise because of the different treatment of transactions for financial statement accounting and income tax accounting, known as “temporary differences.” The Company records the tax effect of these temporary differences as “deferred tax assets” and “deferred tax liabilities.” Deferred tax assets generally represent items that can be used as a tax deduction or credit in a tax return in future years for which the Company has already recorded the tax benefit in the consolidated statements of earnings. The Company establishes valuation allowances for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. The Company has established valuation allowances for federal, state and foreign net operating losses, credit carryforwards, capital loss carryforwards and deferred tax assets which are capital in nature in the amount of $234 million and $177 million at April 24, 2009 and April 25, 2008, respectively. These carryover attributes expire at various points in time, from within a year to no expiration date. These valuation allowances would result in a reduction to the provision for income taxes in the consolidated statement of earnings, if they are ultimately not required. Deferred tax liabilities generally represent tax expense recognized in the consolidated financial statements for which payment has been deferred or expense has already been taken as a deduction on the Company’s tax return but has not yet been recognized as an expense in the consolidated statements of earnings. Deferred tax assets/(liabilities) are comprised of the following:

 

 

 

 

 

 

 

 

(in millions)

 

April 24, 2009

 

April 25, 2008

 

Deferred tax assets:

 

 

 

 

 

 

 

Inventory (intercompany profit in inventory and excess of tax over book valuation)

 

$

315

 

$

265

 

Convertible debt interest

 

 

215

 

 

254

 

Unrealized loss on available for sale securities and derivative financial instruments

 

 

 

 

186

 

Stock-based compensation

 

 

185

 

 

130

 

Accrued liabilities

 

 

143

 

 

128

 

Federal and state benefit on uncertain tax positions

 

 

111

 

 

112

 

Accrued legal reserves

 

 

156

 

 

90

 

Net operating loss and credit carryforwards

 

 

136

 

 

15

 

Pension and post-retirement benefits

 

 

76

 

 

 

Unrealized currency loss

 

 

43

 

 

6

 

Allowance for doubtful accounts

 

 

12

 

 

24

 

Unrealized loss on equity investments

 

 

15

 

 

14

 

Warranty reserves

 

 

7

 

 

15

 

Other

 

 

113

 

 

98

 

Total deferred tax assets (net of valuation allowance)

 

 

1,527

 

 

1,337

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

Intangible assets

 

 

(595

)

 

(488

)

Realized loss on derivative financial instruments

 

 

(113

)

 

(103

)

Unrealized gain on available for sale securities and derivative financial instruments

 

 

(100

)

 

 

Accumulated depreciation

 

 

(28

)

 

(8

)

Pension and post-retirement benefits

 

 

 

 

(8

)

Other

 

 

(21

)

 

(27

)

Total deferred tax liabilities

 

 

(857

)

 

(634

)

 

 

 

 

 

 

 

 

Deferred tax assets, net

 

$

670

 

$

703

 

66



Medtronic, Inc.
Notes to Consolidated Financial Statements

          The Company’s effective income tax rate varied from the U.S. Federal statutory tax rate as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

2009

 

2008

 

2007

 

U.S. Federal statutory tax rate

 

 

35.0

%

 

35.0

%

 

35.0

%

Increase (decrease) in tax rate resulting from:

 

 

 

 

 

 

 

 

 

 

U.S. state taxes, net of Federal tax benefit

 

 

0.6

 

 

1.1

 

 

1.2

 

Research and development credit

 

 

(1.5

)

 

(0.6

)

 

(0.4

)

Domestic production activities

 

 

(0.5

)

 

(0.4

)

 

(0.2

)

International

 

 

(19.5

)

 

(18.3

)

 

(12.9

)

 

 

 

 

 

 

 

 

 

 

 

Impact of special, restructuring, certain litigation and IPR&D charges

 

 

9.0

 

 

5.9

 

 

0.3

 

Reversal of excess tax accruals

 

 

(5.1

)

 

 

 

(3.7

)

Other, net

 

 

(1.6

)

 

 

 

1.0

 

 

 

 

 

 

 

 

 

 

 

 

Effective tax rate

 

 

16.4

%

 

22.7

%

 

20.3

%

          In fiscal year 2009, the Company recorded a $132 million certain tax benefit associated with the reversal of excess tax accruals in connection with the settlement of certain issues reached with the U.S. Internal Revenue Service (IRS) involving the review of the Company’s fiscal year 2005 and fiscal year 2006 domestic income tax returns, the resolution of various state audit proceedings covering fiscal years 1997 through 2007 and the completion of foreign audits covering various years. The $132 million certain tax benefit was recorded in the provision for income taxes in the consolidated statement of earnings for fiscal year 2009.

          In fiscal year 2007, the Company recorded a $129 million certain tax benefit associated with the reversal of excess tax accruals in connection with the settlement reached with the IRS involving the review of the Company’s fiscal year 2003 and fiscal year 2004 domestic income tax returns, and the resolution of competent authority issues for fiscal year 1992 through fiscal year 2000. The $129 million certain tax benefit was recorded in the provision for income taxes in the consolidated statement of earnings for fiscal year 2007.

          The Company has not provided U.S. income taxes on certain of its non-U.S. subsidiaries’ undistributed earnings as such amounts are permanently reinvested outside the U.S. At April 24, 2009 and April 25, 2008, such earnings were approximately $9.738 billion and $8.338 billion, respectively. Currently, the Company’s operations in Puerto Rico, Switzerland and Ireland have various tax incentive grants. Unless these grants are extended, they will expire between fiscal years 2010 and 2027.

          As a result of the implementation of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN No. 48), effective April 28, 2007, the Company recognized a $1 million decrease in its existing liabilities for uncertain tax positions which has been recorded as an increase to the opening balance of retained earnings for fiscal year 2008. The Company had $431 million and $455 million of gross unrecognized tax benefits as of April 24, 2009 and April 25, 2008, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal years 2009 and 2008 is as follows:

 

 

 

 

 

 

 

 

 

 

Fiscal Years

 

(in millions)

 

2009

 

2008

Gross unrecognized tax benefits at beginning of fiscal year

 

$

455

 

$

408

 

Gross increases:

 

 

 

 

 

 

 

Prior year tax positions

 

 

3

 

 

21

 

Current year tax positions

 

 

106

 

 

51

 

Gross decreases:

 

 

 

 

 

 

 

Prior year tax positions

 

 

(116

)

 

(23

)

Settlements

 

 

(15

)

 

(2

)

Statute of limitation lapses

 

 

(2

)

 

 

Gross unrecognized tax benefits at end of fiscal year

 

$

431

 

$

455

 

67



Medtronic, Inc.
Notes to Consolidated Financial Statements

          If all of the Company’s unrecognized tax benefits as of April 24, 2009 and April 25, 2008 were recognized, $360 million and $370 million would impact the Company’s effective tax rate, respectively. Although the Company believes that it has adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on the Company’s effective tax rate in future periods. The Company has recorded the FIN No. 48 liability as a long-term liability, as it does not expect significant payments to occur or the total amount of unrecognized tax benefits to change significantly over the next 12 months. Prior to the adoption of FIN No. 48, the Company classified uncertain tax positions in current accrued income taxes on the consolidated balance sheet.

          The Company recognizes interest and penalties related to income tax matters in the provision for income taxes in the consolidated statement of earnings and records the liability in the current or long-term income taxes payable, as appropriate. The Company had $114 million and $126 million of accrued gross interest and penalties as of April 24, 2009 and April 25, 2008, respectively. During the fiscal year ended April 24, 2009, the Company recognized interest expense, net of tax benefit, of approximately $18 million in the provision for income taxes in the consolidated statement of earnings.

          Tax audits associated with the allocation of income, and other complex issues, may require an extended period of time to resolve and may result in income tax adjustments if changes to the Company’s allocation are required between jurisdictions with different tax rates. Tax authorities periodically review the Company’s tax returns and propose adjustments to the Company’s tax filings. The IRS has settled its audits with the Company for all years through fiscal year 1996. Tax years settled with the IRS may remain open for foreign tax audits and competent authority proceedings. Competent authority proceedings are a means to resolve intercompany pricing disagreements between countries.

          In August 2003, the IRS proposed adjustments arising out of its audit of the fiscal years 1997, 1998 and 1999 tax returns. The Company initiated defense of these adjustments at the IRS appellate level and in the second quarter of fiscal year 2006 the Company reached settlement on most, but not all matters. The remaining issue relates to the allocation of income between Medtronic, Inc., and its wholly owned subsidiary in Switzerland. On April 16, 2008, the IRS issued a statutory notice of deficiency with respect to this remaining issue. The Company filed a Petition with the U.S. Tax Court on July 14, 2008 objecting to the deficiency and intends to defend its position vigorously.

          In September 2005, the IRS issued its audit report for fiscal years 2000, 2001 and 2002. In addition, the IRS issued its audit report for fiscal years 2003 and 2004 in March 2007. The Company has reached agreement with the IRS on substantially all of the proposed adjustments for these fiscal years 2000 through 2004. The only item of significance that remains open for these years relates to the carryover impact of the allocation of income issue proposed for fiscal years 1997 through 1999.

          In March 2009, the IRS issued its audit report for fiscal years 2005 and 2006. The Company has reached agreement with the IRS on many, but not all, of the proposed adjustments for fiscal years 2005 and 2006. The significant issues that remain unresolved relate to the allocation of income between Medtronic, Inc. and its wholly owned subsidiaries and the timing of the deductibility of a settlement payment. For the proposed adjustments that the Company does not agree with, the Company has filed its protest with the IRS.

          The Company’s reserve for the uncertain tax positions related to these significant unresolved matters with the IRS, described above, is subject to a high degree of estimation and management judgment. Resolution of these significant unresolved matters, or positions taken by the IRS or foreign tax authorities during future tax audits, could have a material impact on the Company’s financial results in future periods. The Company continues to believe that its reserves for uncertain tax positions are appropriate and has meritorious defenses for its tax filings and will vigorously defend them during the audit process, appellate process and through litigation in courts, as necessary.

14.     Retirement Benefit Plans

          The Company sponsors various retirement benefit plans, including defined benefit pension plans (pension benefits), post-retirement medical plans (post-retirement benefits), defined contribution savings plans and termination indemnity plans, covering substantially all U.S. employees and many employees outside the U.S. The cost of these plans was $223 million, $222 million and $184 million in fiscal years 2009, 2008 and 2007, respectively. The Company adopted the measurement date provisions of SFAS No. 158 effective April 26, 2008. The U.S. plans and some plans outside the U.S. previously had a measurement date of January 31. All plans now measure their funded status as of the Company’s year end. The adoption of the measurement date provisions of SFAS No. 158 resulted in an after-tax decrease to shareholders’ equity of $13 million, a decrease to other long-term assets of $5 million and an increase to long-term accrued compensation and retirement benefits of $8 million.

68



Medtronic, Inc.
Notes to Consolidated Financial Statements

          In the U.S., the Company maintains a qualified pension plan designed to provide guaranteed minimum retirement benefits to all eligible U.S. employees. Pension coverage for non-U.S. employees of the Company is provided, to the extent deemed appropriate, through separate plans. In addition, U.S. and Puerto Rico employees of the Company are also eligible to receive specified Company paid healthcare and life insurance benefits through the Company’s post-retirement medical plans. In addition to the benefits provided under the qualified pension plan, retirement benefits associated with wages in excess of the IRS allowable limits are provided to certain employees under a non-qualified plan.

          As of April 24, 2009 and 2008, the net (underfunded)/overfunded status of the Company’s benefit plans was $(157) million and $90 million, respectively.

          The change in benefit obligation and funded status of the Company’s employee retirement plans follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.
Pension Benefits

 

Non-U.S.
Pension Benefits

 

Post-Retirement
Benefits

 

 

 

Fiscal Year

 

Fiscal Year

 

Fiscal Year

 

(in millions)

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

 

Accumulated benefit obligation at end of year:

 

$

759

 

$

751

 

$

308

 

$

324

 

$

174

 

$

184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in projected benefit obligation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected benefit obligation at beginning of year

 

$

902

 

$

868

 

$

400

 

$

353

 

$

184

 

$

196

 

Adjustment due to adoption of SFAS No. 158 measurement date provisions

 

 

34

 

 

 

 

4

 

 

 

 

6

 

 

 

Service cost

 

 

74

 

 

72

 

 

29

 

 

32

 

 

14

 

 

16

 

Interest cost

 

 

60

 

 

52

 

 

19

 

 

16

 

 

12

 

 

12

 

Employee contributions

 

 

 

 

 

 

10

 

 

9

 

 

5

 

 

4

 

Plan amendments

 

 

 

 

1

 

 

 

 

1

 

 

 

 

 

Actuarial gain

 

 

(199

)

 

(70

)

 

(8

)

 

(49

)

 

(36

)

 

(35

)

Benefits paid

 

 

(29

)

 

(24

)

 

(8

)

 

(14

)

 

(12

)

 

(10

)

Medicare Part D reimbursements

 

 

 

 

 

 

 

 

 

 

1

 

 

 

Special termination benefits

 

 

 

 

3

 

 

 

 

 

 

 

 

1

 

Foreign currency exchange rate changes