-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vpw9a3rx43eWJsaJ5nl+d8ylSxC1GfojVP2ZFooJLt7NEdAqjhO9mh7LdA+eRBbe bb97lGJkKoxTCev+yApBZw== 0000897101-10-001328.txt : 20100629 0000897101-10-001328.hdr.sgml : 20100629 20100629153757 ACCESSION NUMBER: 0000897101-10-001328 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 29 CONFORMED PERIOD OF REPORT: 20100430 FILED AS OF DATE: 20100629 DATE AS OF CHANGE: 20100629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDTRONIC INC CENTRAL INDEX KEY: 0000064670 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 410793183 STATE OF INCORPORATION: MN FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07707 FILM NUMBER: 10923145 BUSINESS ADDRESS: STREET 1: 710 MEDTRONIC PKWY STREET 2: MS LC300 CITY: MINNEAPOLIS STATE: MN ZIP: 55432 BUSINESS PHONE: 7635144000 MAIL ADDRESS: STREET 1: 710 MEDTRONIC PKWY CITY: MINNEAPOLIS STATE: MN ZIP: 55432 10-K 1 medtronic103067s1_10k.htm FORM 10K FOR THE FISCAL YEAR ENDED APRIL 30, 2010 MEDTRONIC, INC. FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2010

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 


 

 

FORM 10-K

 

 

x

Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.
For the fiscal year ended April 30, 2010.

 

 

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from __________ to __________

Commission File No. 1-7707


 

 

Medtronic, Inc.

(Exact name of registrant as specified in charter)


 

 

 

Minnesota

 

41-0793183

(State of incorporation)

 

(I.R.S. Employer Identification No.)

710 Medtronic Parkway
Minneapolis, Minnesota 55432
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (763) 514-4000

Securities registered pursuant to section 12(b) of the Act:

 

 

Title of each class

Name of each exchange on which registered

Common stock, par value $0.10 per share

New York Stock Exchange, Inc.

 

Preferred stock purchase rights

New York Stock Exchange, Inc.

Securities registered pursuant to section 12(g) of the Act:
None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x  No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o  No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x  Accelerated filer o  Non-accelerated filer o  Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

Aggregate market value of voting stock of Medtronic, Inc. held by nonaffiliates of the registrant as of October 30, 2009, based on the closing price of $35.70, as reported on the New York Stock Exchange: approximately $39.5 billion. Shares of Common Stock outstanding on June 24, 2010: 1,082,967,846

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s 2010 Annual Report filed as Exhibit 13 hereto are incorporated by reference into Parts I and II hereto and portions of Registrant’s Proxy Statement for its 2010 Annual Meeting are incorporated by reference into Part III hereto.

 
 


TABLE OF CONTENTS

 

 

 

 

 

 

 

Item

 

 

Description

 

 

Page

 

 

 

 

 

 

 

PART I

 

 

 

 

 

 

 

1.

 

Business

 

1

1A.

 

Risk Factors

 

17

1B.

 

Unresolved Staff Comments

 

23

2.

 

Properties

 

23

3.

 

Legal Proceedings

 

23

4.

 

Reserved

 

23

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

5.

 

Market for Medtronic’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

23

6.

 

Selected Financial Data

 

24

7.

 

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

 

24

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

24

8.

 

Financial Statements and Supplementary Data

 

24

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

24

9A.

 

Controls and Procedures

 

24

9B.

 

Other Information

 

25

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

10.

 

Directors, Executive Officers and Corporate Governance

 

25

11.

 

Executive Compensation

 

25

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

25

13.

 

Certain Relationships and Related Transactions and Director Independence

 

26

14.

 

Principal Accounting Fees and Services

 

26

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

15.

 

Exhibits, Financial Statement Schedules

 

31



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Annual Meeting and Record Dates

          Medtronic, Inc.’s (Medtronic or the Company) Annual Meeting of Shareholders will be held on Wednesday, August 25, 2010 at 10:30 a.m., Central Daylight Time at the Company’s World Headquarters, 710 Medtronic Parkway, Minneapolis (Fridley), Minnesota. The record date for the Annual Meeting is June 28, 2010 and all shareholders of record at the close of business on that day will be entitled to vote at the Annual Meeting.

Medtronic Website

          Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through our website (www.medtronic.com under the “Investors” caption and “Financial Information – SEC Filings” subcaption) free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC).

          Information relating to corporate governance at Medtronic, including our Principles of Corporate Governance, Code of Conduct (including our Code of Ethics for Senior Financial Officers), Code of Business Conduct and Ethics for Members of the Board of Directors and information concerning our executive Officers, directors and Board committees (including committee charters) and transactions in Medtronic securities by directors and Officers, is available on or through our website at www.medtronic.com under the “Investors” caption.

          We are not including the information on our website as a part of, or incorporating it by reference into, our Form 10-K.

Available Information

          The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company files annual reports, quarterly reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580 Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.


Table of Contents

PART I

Item 1. Business

Overview

          Medtronic is the global leader in medical technology — alleviating pain, restoring health and extending life for millions of people around the world. Medtronic was founded in 1949, incorporated as a Minnesota corporation in 1957, and today serves physicians, clinicians and patients in more than 120 countries worldwide. We remain committed to a mission written by our founder 50 years ago that directs us “to contribute to human welfare by the application of biomedical engineering in the research, design, manufacture and sale of products to alleviate pain, restore health and extend life.”

          We currently function in seven operating segments that manufacture and sell device-based medical therapies. Our operating segments are:

 

 

 

 

 

Cardiac Rhythm Disease Management

(PIE CHART)

 

 

 

 

Spinal

 

 

 

 

CardioVascular

 

 

 

 

Neuromodulation

 

 

 

 

Diabetes

 

 

 

 

Surgical Technologies

 

 

 

 

Physio-Control

          In December 2009, Medtronic consolidated its businesses into two operating groups: one which combined its Cardiac Rhythm Disease Management, Cardio Vascular and Physio-Control businesses, the other which combined its Spinal, Neuromodulation, Diabetes and Surgical Technologies businesses. Subsequent to April 30, 2010 the operating groups were formally named the Cardiac and Vascular Group and the Restorative Therapies Group, respectively. The creation of these two operating groups did not change how Medtronic internally manages and reports the results of these businesses. As a result, for fiscal year 2010 we continue to function in seven operating segments, consisting of Cardiac Rhythm Disease Management, Spinal, Cardio Vascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control. As of April 30, 2010, in accordance with U.S. GAAP authoritative guidance, these operating segments are aggregated into one reportable segment. The chart above shows the net sales and percentage of total net sales contributed by each of our operating segments for the fiscal year ended April 30, 2010 (fiscal year 2010). Please see note 19 to the consolidated financial statements set forth in Exhibit 13 hereto and included in our 2010 Annual Report for more information on our operating segments.

          With innovation and market leadership, we have pioneered advances in medical technology in all of our businesses and enjoyed steady overall growth. Over the last five years, our net sales on a compounded annual growth basis have increased more than 9 percent, from $10.055 billion in fiscal year 2005 to $15.817 billion in fiscal year 2010. We attribute this growth to our commitment to develop or acquire new products to treat an expanding array of medical conditions.

          We will accomplish this commitment by operating as ONE Medtronic, reaching within and across our operating segments to make the whole of Medtronic greater than the sum of its parts. The main tenets of this approach are:

 

 

 

 

Driving sustainable long-term growth through innovation

 

 

 

 

Maintaining a strong focus on improving operating margins

 

 

 

 

Delivering earnings per share growth and disciplined capital allocation

 

 

 

 

Aligning the organization for market-leading and consistent execution

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          Our primary customers include hospitals, clinics, third party healthcare providers, distributors and other institutions, including governmental healthcare programs and group purchasing organizations.

Cardiac Rhythm Disease Management (CRDM)

          CRDM offers products for the diagnosis, treatment and management of heart rhythm disorders and heart failure, including implantable devices, leads and delivery systems that specifically address complex combinations of arrhythmias, ablation products, electrophysiology catheters, products for the treatment of atrial fibrillation (AF) and information systems for the management of patients with our devices.

          The following are the principal products offered by our CRDM operating segment:

          Implantable Cardioverter-Defibrillators (ICDs). An ICD continually monitors the heart and delivers therapy when an abnormal heart rhythm, such as tachyarrhythmia, or rapid heart rhythm occur, which may lead to sudden cardiac arrest. Medtronic’s ICDs include the Virtuoso model and the Vision 3D portfolio, consisting of the Secura, Virtuoso II and Maximo II models.

          Implantable Cardiac Resynchronization Therapy Devices (CRT-Ds and CRT-Ps) Implantable cardiac resynchronization therapy devices, or CRT-D or CRT-P, treat heart failure patients by altering the abnormal electrical sequence of cardiac contractions. Medtronic’s CRT-Ds include the Concerto model and the Vision 3D portfolio of products, the Consulta, Concerto II and Maximo II models. In addition to these devices, Medtronic has a unique offering of left heart leads, featuring the Attain family of products.

          Implantable Cardiac Pacemakers (Pacemakers). A pacemaker is a battery-powered device implanted in the chest that delivers electrical impulses to treat bradycardia, a condition of abnormally slow or unsteady heart rhythms, usually less than 60 beats per minute, or unsteady heart rhythms that cause symptoms such as dizziness, fainting, fatigue and shortness of breath. Our Vision 3D pacemaker portfolio consists of the Adapta product family, which includes the Adapta, Versa, Sensia and Relia models. We also have CE Mark approval for certain pacemaker systems compatible with MRI machines, which include the EnRhythm MRI SureScan and Advisa MRI SureScan models.

          AF Products. AF is a condition in which the atria quivers instead of pumping blood effectively. In November 2008, we acquired CryoCath Technologies Inc. (CryoCath), and its flagship product, the CE Mark approved Arctic Front, a minimally invasive cryo-balloon catheter designed specifically to treat paroxysmal AF by performing pulmonary vein isolation. Additionally, we acquired Ablation Frontiers, Inc. in February 2009, and its portfolio of anatomically shaped ablation catheters using its duty cycled, phased radio frequency energy system, which is CE Mark approved for the treatment of permanent and persistent AF. We also offer the Reveal XT Insertable Cardiac Monitor, which is designed to identify and quantify episodes of AF.

          Diagnostics and Monitoring Devices. The Reveal DX and Reveal XT Insertable Cardiac Monitors are small, memory-stick sized devices that are placed under the skin and can continuously monitor the heart. The devices are used to record the heart’s electrical activity before, during and after transient symptoms such as syncope (i.e., fainting) and palpitations to help provide a diagnosis. The latest generation product, Reveal XT, adds the capability to detect atrial fibrillation and provides long-term trending information to help inform the ongoing management of AF.

          Patient Management Tools. We have a number of patient management tools, such as CareLink, Paceart and CardioSight Service. CareLink enables patients to transmit data from their pacemaker, ICD or CRT-D using a portable monitor that is connected to a standard telephone line. Paceart organizes and archives data for cardiac devices from major device manufacturers, serving as the central hub for patients’ device data. CardioSight Service is an in-clinic data access tool available to physicians treating heart failure patients who have one of several types of Medtronic CRT-Ds or ICDs.

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          The charts below set forth net sales of our CRDM products as a percentage of our total net sales for each of the last three fiscal years:

(PIE CHART)

          Customers and Competitors

          The primary medical specialists who use our CRDM products include electrophysiologists, implanting cardiologists, heart failure specialists and cardiovascular surgeons. Our primary competitors in the CRDM operating segment are Boston Scientific Corporation, St. Jude Medical, Inc., Biotronik, Inc. and Sorin Group.

Spinal

          Our Spinal operating segment is a leading supplier of innovative medical devices and implants used in the treatment of the spine and the musculoskeletal system. Today, we offer a wide range of products and therapies to treat a variety of conditions, primarily in the spine such as herniated discs, degenerative disc disease, spinal deformity, spinal tumors and fracture of the spine and stenosis. Our Spinal operating segment also provides biologic solutions for trauma and dental markets.

          The following are the principal products offered by our Spinal operating segment.

          Thoracolumbar Products. The thoracolumbar region of the spine refers to the mid to lower vertebrae. Products used to treat conditions in this region of the spine include our CD HORIZON Spinal Systems Solera and Legacy, TSRH Spinal System 3Dx, T2 XVBR, LT-Cage, X-STOP and Verte-Stack.

          Cervical Products. The cervical region of the spine refers to the upper spine and neck vertebrae. Products used to treat conditions in this region of the spine include our Bryan and Prestige Cervical Disc, Vertex Select, Peek Prevail and Atlantis.

          Minimal Access Spinal Technologies (MAST). Our MAST platform includes products that facilitate spinal surgeries. Products in this platform include our CD HORIZON Sextant and Longitude Systems, Balloon Kyphoplasty, Direct Lateral Interbody Fusion, NIM-Eclipse, METRx System and MAST Quadrant System.

          Biologics Products. Products in our Biologics platform, which are principally bone growth substances, include our INFUSE Bone Graft, Progenix DBM Putty, Osteofil Allograft Paste and our MasterGraft family of products – Granules, Matrix and Putty.

          The charts below set forth net sales of our Spinal products as a percentage of our total net sales for each of the last three fiscal years:

(PIE CHART)

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          Customers and Competitors

          The primary medical specialists who use our Spinal products are spinal surgeons, orthopedic surgeons, neurosurgeons and interventional radiologists. Our competitors in the Spinal operating segment include Johnson & Johnson, Synthes-Stratec, Inc., Stryker Corporation, Zimmer, Inc., NuVasive, Inc. and over 200 smaller physician-owned companies.

CardioVascular

          CardioVascular offers a comprehensive line of products and therapies to treat coronary artery disease (CAD), peripheral vascular disease (PVD), abdominal and thoracic aortic aneurysms and heart valve disorders. Our products include coronary and peripheral stents and related delivery systems, endovascular stent graft systems, distal embolic protection systems, perfusion systems, positioning and stabilization systems for beating heart revascularization surgery, products for the repair and replacement of heart valves, surgical ablation products and a broad line of balloon angioplasty catheters, guide catheters, guidewires, diagnostic catheters and accessories.

          The following are our principal products offered by our CardioVascular operating segment:

          Percutaneous Coronary Intervention (PCI). PCI encompasses a variety of procedures used to treat patients with CAD. CAD is commonly treated with balloon angioplasty, which is performed to open narrowed peripheral vessels by inserting a balloon catheter into the vessel and advancing it to the site of the blockage where it is inflated to widen the obstructed vessel. Balloon angioplasty can be followed up with a coronary stent, a support device which works as scaffolding to keep the vessel open following the intervention. Medtronic’s PCI products include our Driver, Micro-Driver and Integrity bare metal stent systems as well as our Endeavor drug-eluting coronary stent system and Resolute drug-eluting coronary stent system featuring BioLinx.

          Peripheral Vascular Intervention (PVI). PVI encompasses a variety of procedures to treat patients with PVD, a narrowing or blockage of vessels outside the heart which impedes blood supply to the brain, kidneys, legs and other vital organs. Similar to CAD, PVD is commonly treated with balloon angioplasty which can be followed up with a peripheral stent. Our PVI products include the Complete SE stent and Pioneer Plus lumen re-entry device as well as various angioplasty balloons. In April 2010, we completed the acquisition of Invatec, S.p.A. (Invatec), a developer of innovative medical technologies for the interventional treatment of cardiovascular disease. Through this acquisition, we have obtained a portfolio of innovative solutions for both coronary and peripheral vascular disease, including percutaneous angioplasty balloons and stents for use below-the-knee. This portfolio also features drug-eluting balloons for coronary and lower-extremity vessels as well as embolic protection devices and stents for the treatment of carotid artery disease.

          Endovascular Stent Grafts. An endovascular stent graft is a minimally invasive device to repair an aortic aneurysm, which is a weakened and bulging area in the aorta, the major blood vessel that feeds blood to the body. Our product line includes a range of endovascular stent grafts including the market-leading Talent and Endurant (available in select markets outside the United States (U.S.)). Abdominal stent grafts for minimally invasive abdominal aortic aneurysm repair and the Talent and Valiant (available in select markets outside the U.S.) thoracic stent grafts for minimally invasive thoracic aortic aneurysm repair.

          Arrested Heart Surgery. In conventional coronary artery bypass graft procedures and heart valve surgery, the patient’s heart is temporarily stopped, or arrested. The patient is placed on a circulatory support system that temporarily functions as the patient’s heart and lungs and provides blood flow to the body. We offer a complete line of blood-handling products that form this circulatory support system and maintain and monitor blood circulation and coagulation status, oxygen supply and body temperature during arrested heart surgery.

          Beating Heart Surgery. To assist physicians performing beating heart surgery, we offer positioning and stabilization technologies. These technologies include our Starfish 2 and Urchin heart positioners, which are designed to work in concert with our family of Octopus tissue stabilizers.

          Surgical Ablation. Our Cardioblate surgical ablation system, which includes the Cardioblate LP surgical ablation system and Cardioblate navigator tissue dissector, allows cardiac surgeons to create ablation lines during cardiac surgery.

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          Surgical Heart Valves. We offer a comprehensive line of surgical valve replacement and repair products for damaged or diseased heart valves. Our replacement tissue valve product offerings include the Mosaic bioprosthetic stented, Freestyle stentless and Hancock II stented valves. Our valve repair products include the Duran Flexible and CG Future Band, the CG Composite Annuloplasty Systems and the Profile 3D Annuloplasty Ring.

          Transcatheter Heart Valves. Transcatheter valve (TCV) technology represents a less invasive means to treat heart valve disease and is designed to allow physicians to deliver replacement valves via a catheter through the body’s cardiovascular system, eliminating the need to open the chest. Our TCVs include the Melody pulmonary valve and the CoreValve aortic valve. The Melody has received CE Mark approval as well as U.S. Food and Drug Administration (FDA) approval under a Humanitarian Device Exemption (HDE). CoreValve has received CE Mark approval.

          The charts below set forth net sales of our CardioVascular products as a percentage of our total net sales for each of the last three fiscal years:

(PIE CHART)

          Customers and Competitors

          The primary medical specialists who use our catheter-based products for treating coronary artery disease are interventional cardiologists, while products treating peripheral vascular disease and aortic aneurysms may be used by interventional radiologists, vascular surgeons, cardiac surgeons and interventional cardiologists. Our primary competitors in the coronary and peripheral vascular business are Abbott Laboratories, Boston Scientific Corporation and Johnson & Johnson. Our primary competitors in the endovascular business are Cook, Inc. and W. L. Gore & Associates, Inc.

          The principal medical specialists who use our cardiac surgery products are cardiac surgeons. Our primary competitors in the structural heart disease business are Edwards LifeSciences Corporation, St. Jude Medical, Inc., Terumo Medical Corporation and Sorin Group.

Neuromodulation

          Our Neuromodulation operating segment offers devices for the treatment of pain, movement disorders, urological and gastroenterological disorders and psychological disorders. The following are the principal products offered by our Neuromodulation operating segment:

          Neurostimulators for Chronic Pain. We have the largest portfolio of neurostimulation systems in the industry, including rechargeable and non-rechargeable devices and a large selection of leads used to treat chronic back and leg pain. Our portfolio of products includes the RestoreULTRA and RestoreADVANCED (rechargeable), and PrimeADVANCED (non-rechargeable) neurostimulation systems.

          Implantable Drug Delivery Systems. Our SynchroMed II Implantable Infusion System delivers small quantities of drug directly into the intrathecal space in the spine. These devices are used to treat chronic, intractable pain and severe spasticity associated with cerebral palsy, multiple sclerosis, spinal cord and traumatic brain injuries and stroke.

          Deep Brain Stimulation (DBS) Systems. Deep brain stimulation is approved for treating the symptoms of movement disorders like Parkinson’s disease and essential tremor, as well as dystonia under a HDE. Our most advanced neurostimulators, Activa RC and Activa PC received FDA approval in May 2009. Medtronic also has a HDE approval for the use of Reclaim DBS Therapy for treatment resistant obsessive-compulsive disorder.

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          Urology and Gastroenterology Devices. Our therapeutic portfolio for urology and gastroenterology include the InterStim Therapy, which treats the symptoms of overactive bladder and urinary retention; Prostiva RF Therapy, which uses low-level radio frequency energy to treat benign prostatic hyperplasia, or enlarged prostate; and Enterra Therapy for the treatment of chronic gastroparesis under a HDE.

          The charts below set forth net sales of our Neuromodulation products as a percentage of our total net sales for each of the last three fiscal years:

(PIE CHART)

          Customers and Competitors

          The primary medical specialists who use our pain management and movement disorders products are neurosurgeons, neurologists, pain management specialists, anesthesiologists, physiatrists and orthopedic spine surgeons. Our primary competitors for pain management and movement disorders are Boston Scientific Corporation and St. Jude Medical, Inc.

          The primary medical specialists who use our urology and gastroenterology products are urologists, urogynecologists and gastroenterologists. Our primary competitors for urology and gastroenterology products are Boston Scientific Corporation, Urologix, Inc. and American Medical Systems, Inc.

Diabetes

          Our Diabetes operating segment offers advanced diabetes management solutions. We offer integrated diabetes management solutions including insulin pump therapy, continuous glucose monitoring systems and therapy management software.

          Integrated Diabetes Management Solutions. The MiniMed Paradigm REAL-Time System is an integrated insulin pump and continuous glucose monitoring (CGM) system. Our products include the Paradigm Veo System, which includes a Low Glucose Suspend feature that automatically suspends insulin delivery when glucose levels become too low and is offered outside the U.S. and the Paradigm REAL-Time Revel System, which includes predictive alerts and is offered in the U.S.

          Professional CGM. Medtronic offers physicians a Professional CGM product, the iPro CGM. Physicians send patients home wearing the iPro recorder to collect glucose data, which is later uploaded in a physician’s office to reveal glucose patterns and potential problems.

          CareLink Therapy Management Software. We offer web-based therapy management software solutions, including CareLink Personal software for patients and CareLink Pro software, to help patients and their healthcare providers control their diabetes.

          Blood Glucose Meters. We have an alliance with LifeScan, Inc., a Johnson & Johnson company, to distribute and co-market blood glucose meters developed by LifeScan for Medtronic patients in the U.S. In addition, we have an alliance with a division of Bayer HealthCare LLC, a member of the Bayer Group, to distribute and co-market blood glucose meters for Medtronic patients outside the U.S. We also have an alliance with Eli Lilly and Company to help people with diabetes manage their blood sugar using insulin therapy. This includes the development of new educational resources and classes around the initiation and intensive management of insulin, insulin pump therapy and CGM.

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          The charts below set forth net sales of our Diabetes products as a percentage of our total net sales for each of the last three fiscal years:

(PIE CHART)

          Customers and Competitors

          The primary medical specialists who use and/or prescribe our diabetes products are endocrinologists, diabetologists and internists. Our primary competitors for diabetes products are Abbott Laboratories, DexCom, Inc., Insulet Corporation, Johnson & Johnson and Roche Ltd.

Surgical Technologies

          Our Surgical Technologies operating segment develops, manufactures and markets products and therapies to treat diseases and conditions of the ear, nose and throat (ENT) and certain neurological disorders. In addition, the segment manufactures and markets image-guided surgery and intra-operative imaging systems that facilitate surgical planning during precision cranial, spinal, sinus and orthopedic surgeries.

          The following are the principal products offered by our Surgical Technologies operating segment:

          ENT. The following products treat ENT diseases and conditions: Hydrodebrider System, MeroGel Dressing, PEAK PlasmaBlade TnA Tonsil and Adenoid Tissue Dissection Device (which is used under license from Peak Surgical, Inc.), FUSION ENT Image Guidance System, Straightshot M4 Microdebrider and Integrated Power Console (IPC) System, NIM 3.0 Nerve Monitoring System, NIM Contact EMG Endotracheal Tubes, Meniett Low-Pressure Pulse Generator, Pillar System and Repose Tongue and Hyoid Suspension for benign snoring and obstructive sleep apnea.

          Neurological Technologies. The following products treat certain neurological disorders and conditions: Strata Adjustable Hydrocephalus Valves and Shunts, Duet External Drainage & Monitoring System, ventricular and distal catheters, endoscopy products, reservoirs and ports, MacroPore, INVISx Cranial Fixation System and BioGlide, powered pneumatic and electric drill systems with standardized tools and attachments, such as the Midas Rex Legend EHS Stylus Drill.

          Navigation. The following products are used in cranial, spinal, sinus and orthopedic surgeries: StealthStation Navigation System, O-ARM Multi-Dimensional Surgical Imaging System and PoleStar iMRI Navigation Suite.

          The charts below set forth net sales of our Surgical Technologies products as a percentage of our total net sales for each of the last three fiscal years:

(PIE CHART)

7


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          Customers and Competitors

          Our primary customers for products relating to our ENT diseases and conditions are ENT surgeons and the hospitals and clinics where they perform surgery. The most significant competitors in this part of our Surgical Technologies business are Gyrus ACMI (a group company of Olympus Corporation), Stryker Corporation and Johnson & Johnson.

          Our primary customers for our neurosurgical products are neurosurgeons, spinal surgeons and the hospitals and clinics where they perform surgery. Our significant competitors are Johnson & Johnson, Stryker Corporation and Integra LifeSciences Holdings Corporation.

          Our primary customers for our image-guided surgery and intra-operative imaging systems are hospitals and clinics. The primary competitors of our image-guided surgery products are BrainLAB, Inc., Stryker Corporation, GE Healthcare, Siemens and Philips.

Physio-Control

          Physio-Control offers external defibrillators, including manual defibrillator/monitors used by hospitals and emergency response personnel and automated external defibrillators (AEDs) used in commercial and public settings for the treatment of sudden cardiac arrest. Our principal products include our LIFEPAK products, including the LIFEPAK 20e defibrillator/monitor for hospitals and the LIFEPAK 15 monitor/defibrillator for emergency responders. In addition to the portfolio of external defibrillation and emergency response systems, we offer related data management solutions and support services.

          In January 2007, we announced a voluntary suspension of U.S. shipments of Physio-Control products, and in April 2008, we announced that we had reached an agreement on a consent decree with the FDA regarding quality system improvements for our external defibrillator products. As of February 19, 2010, after receiving notice from the FDA that, we successfully met requirements for improvements to the quality system, we resumed unrestricted global shipments of Physio-Control products.

          The charts below set forth net sales of our Physio-Control products as a percentage of our total net sales for each of the last three fiscal years:

(PIE CHART)

          Customers and Competitors

          The primary customers for our manual external defibrillators are emergency medical services personnel, emergency care doctors and highly-trained nurses. Our primary competitors in the manual external defibrillator business are Zoll Medical Corporation and Philips Medical Systems.

          The primary customers for our AED products are hospitals, schools, governments, businesses and any other public facilities. Our primary competitors in the AED business are Cardiac Science, Inc., Zoll Medical Corporation, Philips Medical Systems and Defibtech, LLC.

Research and Development

          The markets in which we participate are subject to rapid technological advances. Constant improvement of products and introduction of new products is necessary to maintain market leadership. Our research and development efforts are directed toward maintaining or achieving technological leadership in each of the markets we serve in order to help ensure that patients using our devices and therapies receive the most advanced and effective treatment possible. We are committed to developing technological enhancements and new indications for existing products, as well as less invasive and new technologies to address unmet patient needs and to help reduce patient care costs and length of hospital stays. We have not engaged in significant customer or government-sponsored research.

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          During fiscal years 2010, 2009 and 2008, we spent $1.460 billion (9.2 percent of net sales), $1.355 billion (9.3 percent of net sales) and $1.275 billion (9.4 percent of net sales) on research and development, respectively. Our research and development activities include improving existing products and therapies, expanding their indications and applications for use and developing new products. While we continue to make substantial investments for the expansion of our existing product lines and for the search of new innovative products, we have also focused heavily on carefully planned clinical trials, which lead to market expansion and enable further penetration of our life changing therapies.

Acquisitions and Investments

          Our strategy to provide a broad range of therapies to restore patients to fuller, healthier lives requires a wide variety of technologies, products and capabilities. The rapid pace of technological development in the medical industry and the specialized expertise required in different areas of medicine make it difficult for one company alone to develop a broad portfolio of technological solutions. In addition to internally generated growth through our research and development efforts, historically we have relied, and expect to continue to rely, upon acquisitions, investments and alliances to provide access to new technologies both in areas served by our existing businesses as well as in new areas.

          We expect to make future investments or acquisitions where we believe that we can stimulate the development of, or acquire new technologies and products to further our strategic objectives and strengthen our existing businesses. Mergers and acquisitions of medical technology companies are inherently risky and no assurance can be given that any of our previous or future acquisitions will be successful or will not materially adversely affect our consolidated results of operations, financial condition or cash flows.

          On April 29, 2010, we announced the signing of a definitive agreement to acquire ATS Medical, Inc. (ATS Medical). ATS Medical is a leading developer, manufacturer and marketer of products and services focused on cardiac surgery, including heart valves and surgical cryoablation technology. The terms of the transaction include us paying $4.00 per share in cash for each share of ATS Medical stock. The total value of the transaction is expected to be approximately $370 million, which includes the purchase of ATS Medical stock and assumption of net debt. The transaction is expected to close this summer and is subject to customary closing conditions, including approval by ATS Medical’s shareholders and U.S. and foreign regulatory clearances.

          During April 2010, we acquired Invatec. Under the terms of the agreement, the transaction included an initial up-front payment of $350 million, which includes the assumption and settlement of existing Invatec debt. The agreement also includes potential additional payments of up to $150 million contingent upon achievement of certain milestones. Invatec is a developer of innovative medical technologies for the interventional treatment of cardiovascular disease.

          During April 2009, we acquired privately held CoreValve, Inc. (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.

          During February 2009, we acquired 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 our 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.

          During February 2009, we acquired privately held Ablation Frontiers, Inc. (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 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.

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          During November 2008, we acquired substantially all of the outstanding stock of 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 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.

          During July 2008, we acquired all of the outstanding stock of Restore Medical, Inc. (Restore Medical). Restore Medical shareholders received $1.60 per share in cash for each share of Restore Medical’s common stock they owned. Total consideration for the transaction, net of cash acquired, was approximately $29 million. Restore Medical’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.

Patents and Licenses

          We rely on a combination of patents, trademarks, copyrights, trade secrets and nondisclosure and non-competition agreements to establish and protect our proprietary technology. We have filed and obtained numerous patents in the U.S. and abroad, and regularly file patent applications worldwide in our continuing effort to establish and protect our proprietary technology. In addition, we have entered into exclusive and non-exclusive licenses relating to a wide array of third-party technologies. We have also obtained certain trademarks and tradenames for our products to distinguish our genuine products from our competitors’ products, and we maintain certain details about our processes, products and strategies as trade secrets. Our efforts to protect our intellectual property and avoid disputes over proprietary rights have included ongoing review of third-party patents and patent applications. See “Item 1A. Risk Factors” in this Annual Report on Form 10-K and Note 17 to the consolidated financial statements set forth in Exhibit 13 hereto and included in our 2010 Annual Report for additional information.

Markets and Distribution Methods

          We sell most of our medical devices through direct sales representatives in the U.S. and a combination of direct sales representatives and independent distributors in markets outside the U.S. The three largest markets for our medical devices are the U.S., Western Europe and Japan. Markets outside the U.S. are an area of increasing focus and opportunity as we believe they remain underpenetrated.

          Our marketing and sales strategy is focused on rapid, cost-effective delivery of high-quality products to a diverse group of customers worldwide – including physicians, hospitals, other medical institutions and group purchasing organizations. To achieve this objective, we organize our marketing and sales teams around physician specialties. This focus enables us to develop highly knowledgeable and dedicated sales representatives who are able to foster strong relationships with physicians and other customers and enhance our ability to cross-sell complementary products. We believe that we maintain excellent working relationships with physicians and others in the medical industry that enable us to gain a detailed understanding of therapeutic and diagnostic developments, trends and emerging opportunities and respond quickly to the changing needs of physicians and patients. We attempt to enhance our presence in the medical community through active participation in medical meetings and by conducting comprehensive training and educational activities. We believe that these activities contribute to physician expertise.

          In keeping with the increased emphasis on cost-effectiveness in healthcare delivery, the current trend among hospitals and other customers of medical device manufacturers is to consolidate into larger purchasing groups to enhance purchasing power. As a result, transactions with customers have become increasingly significant, more complex and tend to involve more long-term contracts than in the past. This enhanced purchasing power may also lead to pressure on pricing and increased use of preferred vendors. We are not dependent on any single customer for more than 10 percent of our total net sales.

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Competition and Industry

          We compete in both the therapeutic and diagnostic medical markets in more than 120 countries throughout the world. These markets are characterized by rapid change resulting from technological advances and scientific discoveries. In the product lines in which we compete, we face a mixture of competitors ranging from large manufacturers with multiple business lines to small manufacturers that offer a limited selection of products. In addition, we face competition from providers of alternative medical therapies such as pharmaceutical companies.

          Major shifts in industry market share have occurred in connection with product problems, physician advisories and safety alerts, refiecting the importance of product quality in the medical device industry. In the current environment of managed care, economically motivated buyers, consolidation among healthcare providers, increased competition and declining reimbursement rates, we have been increasingly required to compete on the basis of price. In order to continue to compete effectively, we must continue to create or acquire advanced technology, incorporate this technology into proprietary products, obtain regulatory approvals in a timely manner and manufacture and successfully market these products.

Worldwide Operations

          For financial reporting purposes, net sales and long-lived assets attributable to significant geographic areas are presented in Note 19 to the consolidated financial statements set forth in Exhibit 13 hereto and will be included in our 2010 Annual Report.

(PIE CHART)

Impact of Business Outside of the U.S.

          Our operations in countries outside the U.S. are accompanied by certain financial and other risks. Relationships with customers and effective terms of sale vary by country, often with longer-term receivables than are typical in the U.S. Inventory management is an important business concern due to the potential for obsolescence, long lead times from sole source providers and currency exposure. Currency exchange rate fluctuations can affect net sales from, and profitability of, operations outside the U.S. We attempt to hedge these exposures to reduce the effects of foreign currency fluctuations on net earnings. See the “Market Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 10 to the consolidated financial statements set forth in Exhibit 13 hereto and will be included in our 2010 Annual Report. In addition, the repatriation of certain earnings of our foreign subsidiaries’ may result in substantial U.S. tax cost.

Production and Availability of Raw Materials

          We manufacture most of our products at 22 manufacturing facilities located in various countries throughout the world. The largest of these manufacturing facilities are located in Arizona, California, Florida, Indiana, Ireland, Massachusetts, Mexico, Minnesota, Puerto Rico, Switzerland, Texas and Washington. We purchase many of the components and raw materials used in manufacturing these products from numerous suppliers in various countries. For reasons of quality assurance, sole source availability, or cost effectiveness, certain components and raw materials are available only from a sole supplier. We work closely with our suppliers to help ensure continuity of supply while maintaining high quality and reliability. Due to the FDA’s requirements regarding manufacturing of our products, we may not be able to quickly establish additional or replacement sources for certain components or materials. Generally, we have been able to obtain adequate supplies of such raw materials and components. However, the reduction or interruption in supply, and an inability to develop alternative sources for such supply, could adversely affect our operations.

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Employees

          On April 30, 2010, we employed approximately 43,000 employees (including full-time equivalent employees). Our employees are vital to our success. We believe we have been successful in attracting and retaining qualified personnel in a highly competitive labor market due to our competitive compensation and benefits, and our rewarding work environment. We believe our employee relations are excellent.

Seasonality

          Worldwide sales, including U.S. sales, do not reflect any significant degree of seasonality.

Government Regulation and Other Considerations

          Our medical devices are subject to regulation by numerous government agencies, including the FDA and comparable foreign agencies. To varying degrees, each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of our medical devices.

          Authorization to commercially distribute a new medical device in the U.S. is generally received in one of two ways. The first, known as pre-market notification or the 510(k) process, requires us to demonstrate that our new medical device is substantially equivalent to a legally marketed medical device. In this process, we must submit data that supports our equivalence claim. If human clinical data is required, it must be gathered in compliance with FDA investigational device exemption regulations. We must receive an order from the FDA finding substantial equivalence to another legally marketed medical device before we can commercially distribute the new medical device. Modifications to cleared medical devices can be made without using the 510(k) process if the changes do not significantly affect safety or effectiveness. A very small number of our devices are exempt from pre-market review.

          The second, more rigorous process, known as pre-market approval (PMA), requires us to independently demonstrate that the new medical device is safe and effective. We do this by collecting data regarding design, materials, bench and animal testing and human clinical data for the medical device. The FDA will authorize commercial release if it determines there is reasonable assurance that the medical device is safe and effective. This determination is based on the benefit outweighing the risk for the population intended to be treated with the device. This process is much more detailed, time-consuming and expensive than the 510(k) process. A third, seldom used, process for approval exists for products intended for orphan populations, which is less than 4,000 patients per year in the U.S. This exemption is similar to the PMA process; however, a full showing of product effectiveness from large clinical trials is not required. The threshold for approving these products is probable benefit and safety.

          Both before and after a product is commercially released, we have ongoing responsibilities under FDA regulations. The FDA reviews design and manufacturing practices, labeling and record keeping and manufacturers’ required reports of adverse experiences and other information to identify potential problems with marketed medical devices. We are also subject to periodic inspection by the FDA for compliance with the FDA’s quality system regulations among other FDA requirements, such as restrictions on advertising and promotion. The quality system regulations govern the methods used in, and the facilities and controls used for, the design, manufacture, packaging and servicing of all finished medical devices intended for human use. If the FDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical devices are ineffective or pose an unreasonable health risk, the FDA could require us to notify health professionals and others that the devices present unreasonable risks of substantial harm to the public health, order a recall, repair, replacement or refund of such devices, detain or seize adulterated or misbranded medical devices or ban such medical devices. The FDA may also impose operating restrictions, enjoin and restrain certain conduct resulting in violations of applicable law pertaining to medical devices and assess civil or criminal penalties against our officers, employees or us. The FDA may also recommend prosecution to the Department of Justice.

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          The FDA, in cooperation with U.S. Customs and Border Protection (CBP), administers controls over the import of medical devices into the U.S. The CBP imposes its own regulatory requirements on the import of our products, including inspection and possible sanctions for noncompliance. Medtronic is also subject to foreign trade controls administered by several U.S. government agencies, including the Bureau of Industry and Security within the Commerce Department and the Office of Foreign Assets Control within the Treasury Department.

          The FDA also administers certain controls over the export of medical devices from the U.S. International sales of our medical devices that have not received FDA approval are subject to FDA export requirements. Many foreign countries to which we export medical devices also subject such medical devices to their own regulatory requirements. Frequently, we obtain regulatory approval for medical devices in foreign countries first because their regulatory approval is faster than that of the FDA. However, as a general matter, foreign regulatory requirements are becoming increasingly common and more stringent.

          In the European Union, a single regulatory approval process exists, and conformity with the legal requirements is represented by the CE Mark. To obtain a CE Mark, defined products must meet minimum standards of performance, safety and quality (i.e., the essential requirements) and then, according to their classification, comply with one or more of a selection of conformity assessment routes. A notified body assesses the quality management systems of the manufacturer and the product conformity to the essential and other requirements within the medical device directive. Medtronic is subject to inspection by notified bodies for compliance. The competent authorities of the European Union countries, generally in the form of their ministries or departments of health, oversee the clinical research for medical devices and are responsible for market surveillance of products once they are placed on the market. We are required to report device failures and injuries potentially related to product use to these authorities in a timely manner. Various penalties exist for non-compliance with the laws transcribing the medical device directives.

          To be sold in Japan, most medical devices must undergo thorough safety examinations and demonstrate medical efficacy before they are granted approval, or “shonin.” The Japanese government, through the Ministry of Health, Labour and Welfare (MHLW), regulates medical devices under the Pharmaceutical Affairs Law (PAL). Oversight for medical devices is conducted with participation by the Pharmaceutical and Medical Devices Agency (PMDA), a quasi government organization performing many of the review functions for MHLW. Penalties for a company’s noncompliance with PAL could be severe, including revocation or suspension of a company’s business license and criminal sanctions. MHLW and PMDA also assess the quality management systems of the manufacturer and the product conformity to the requirements of the PAL. Medtronic is subject to inspection for compliance by these agencies.

          The process of obtaining approval to distribute medical products is costly and time-consuming in virtually all of the major markets where we sell medical devices. We cannot assure that any new medical devices we develop will be approved in a timely or cost-effective manner or approved at all.

          Federal and state laws protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by healthcare providers. In particular, in April 2003, the U.S. Department of Health and Human Services (HHS) published patient privacy rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA privacy rule) and, in April 2005, published security rules for protected health information. The HIPAA privacy and security rules govern the use, disclosure and security of protected health information by “Covered Entities,” which are healthcare providers that submit electronic claims, health plans and healthcare clearinghouses. In 2009, Congress passed the HITECH Act, which modified certain provisions of the HIPAA privacy and security rules for Covered Entities and their Business Associates (which is anyone that performs a service on behalf of a Covered Entity involving the use or disclosure of protected health information and is not a member of the covered entity’s workforce).These included directing HHS to publish more specific security standards, and increasing breach notification requirements, as well as tightening certain aspects of the privacy rules. In addition, the HITECH Act provided that Business Associates will now be subject to the same security requirements as Covered Entities, and that with regard to both the security and privacy rule, Business Associates will be subject to direct enforcement by HHS, including civil and criminal liability, just as Covered Entities are. In the past, HIPAA has generally affected us indirectly. Medtronic is generally not a Covered Entity, except for a few units such as our Diabetes operating segment and our health insurance plans. Medtronic only operates as a Business Associate to Covered Entities in a limited number of instances.

In those cases, the patient data that we receive and analyze may include protected health information. We are committed to maintaining the security and privacy of patients’ health information and believe that we meet the expectations of the HIPAA rules. Some modifications to our systems and policies may be necessary, but the framework is already in place. However, the potential for enforcement action against us is now greater, as HHS can take action directly against Business Associates. Thus, while we believe we are and will be in compliance with all HIPAA standards, there is no guarantee that the government will not disagree. Enforcement actions can be costly and interrupt regular operations of our business. Nonetheless, these new requirements affect only a small portion of our business. We believe the ongoing costs and impacts of assuring compliance with the HIPAA privacy and security rules are not material to our business.

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          Government and private sector initiatives to limit the growth of healthcare costs, including price regulation, competitive pricing, coverage and payment policies, comparative effectiveness of therapies, technology assessments and managed-care arrangements, are continuing in many countries where we do business, including the U.S. These changes are causing the marketplace to put increased emphasis on the delivery of more cost-effective medical devices. Government programs, including Medicare and Medicaid, private healthcare insurance and managed-care plans have attempted to control costs by limiting the amount of reimbursement they will pay for particular procedures or treatments, and other mechanisms designed to constrain utilization and contain costs, including, for example, gainsharing, where a hospital agrees with physicians to share any realized cost savings resulting from the physicians’ collective change in practice patterns such as standardization of devices where medically appropriate. This has created an increasing level of price sensitivity among customers for our products. Some third-party payors must also approve coverage for new or innovative devices or therapies before they will reimburse healthcare providers who use the medical devices or therapies. Even though a new medical device may have been cleared for commercial distribution, we may find limited demand for the device until reimbursement approval has been obtained from governmental and private third-party payors. In addition, some private third-party payors require that certain procedures or that the use of certain products be authorized in advance as a condition of reimbursement. As a result of our manufacturing efficiencies and cost controls, we believe we are well-positioned to respond to changes resulting from the worldwide trend toward cost-containment; however, uncertainty remains as to the nature of any future legislation, making it difficult for us to predict the potential impact of cost-containment trends on future operating results.

          The delivery of our devices is subject to regulation by HHS and comparable state and foreign agencies responsible for reimbursement and regulation of healthcare items and services. U.S. laws and regulations are imposed primarily in connection with the Medicare and Medicaid programs, as well as the government’s interest in regulating the quality and cost of healthcare. Foreign governments also impose regulations in connection with their healthcare reimbursement programs and the delivery of healthcare items and services.

          Federal healthcare laws apply when we or customers submit claims for items or services that are reimbursed under Medicare, Medicaid or other federally-funded healthcare programs. The principal federal laws include: (1) the False Claims Act which prohibits the submission of false or otherwise improper claims for payment to a federally-funded health care program; (2) the Anti-Kickback Statute which prohibits offers to pay or receive remuneration of any kind for the purpose of inducing or rewarding referrals of items or services reimbursable by a Federal healthcare program; (3) the Stark law which prohibits physicians from referring Medicare or Medicaid patients to a provider that bills these programs for the provision of certain designated health services if the physician (or a member of the physician’s immediate family) has a financial relationship with that provider; and (4) healthcare fraud statutes that prohibit false statements and improper claims to any third-party payor. There are often similar state false claims, anti-kickback and anti-self referral and insurance laws that apply to state-funded Medicaid and other healthcare programs and private third-party payors. In addition, the U.S. Foreign Corrupt Practices Act can be used to prosecute companies in the U.S. for arrangements with physicians, or other parties outside the U.S. if the physician or party is a government official of another country and the arrangement violates the law of that country.

          The laws applicable to us are subject to change, and to evolving interpretations. If a governmental authority were to conclude that we are not in compliance with applicable laws and regulations, Medtronic and its officers and employees could be subject to severe criminal and civil penalties including substantial penalties, fines and damages and exclusion from participation as a supplier of product to beneficiaries covered by Medicare or Medicaid.

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          We operate in an industry characterized by extensive patent litigation. Patent litigation can result in significant damage awards and injunctions that could prevent the manufacture and sale of affected products or result in significant royalty payments in order to continue selling the products. At any given time, we are involved as both a plaintiff and a defendant in a number of patent infringement actions. While it is not possible to predict the outcome of patent litigation incident to our business, we believe the costs associated with this type of litigation could have a material adverse impact on our consolidated results of operations, financial position or cash flows. See Note 17 to the consolidated financial statements set forth in Exhibit 13 hereto as well as our 2010 Annual Report for additional information.

          We operate in an industry susceptible to significant product liability claims. These claims may be brought by individuals seeking relief on their own behalf or purporting to represent a class. In addition, product liability claims may be asserted against us in the future based on events we are not aware of at the present time.

          We are also subject to various environmental laws and regulations both within and outside the U.S. Like other medical device companies, our operations involve the use of substances regulated under environmental laws, primarily manufacturing and sterilization processes. To the best of our knowledge at this time, we do not expect that compliance with environmental protection laws will have a material impact on our consolidated results of operations, financial position or cash flows.

          We have elected to self-insure most of our insurable risks, including medical and dental costs, physical loss to property, business interruptions, workers’ compensation, comprehensive general, director and officer and product liability. Decisions to self-insure are based on comparisons between the price, availability and value of insurance coverage. We continue to monitor the insurance marketplace to evaluate the value to the Company of obtaining insurance coverage in the future. Based on historical loss trends, we believe that our self-insurance program accruals will be adequate to cover future losses. Historical trends, however, may not be indicative of future losses. These losses could have a material adverse impact on our consolidated results of operations, financial position or cash flows.

Executive Officers of Medtronic

          Set forth below are the names and ages of current executive officers of Medtronic, Inc., as well as information regarding their positions with Medtronic, their periods of service in these capacities and their business experiences. There are no family relationships among any of the officers named, nor is there any arrangement or understanding pursuant to which any person was selected as an officer.

          William A. Hawkins, age 56, has been a Director of Medtronic since March 2007 and Chairman and Chief Executive Officer since August 2008. He served as President and Chief Executive Officer of Medtronic from August 2007 to August 2008 and as President and Chief Operating Officer from May 2004 to August 2007. He served as Senior Vice President and President, Medtronic Vascular, from January 2002 to May 2004. He served as President and Chief Executive Officer of Novoste Corporation from 1998 to 2002. He is also a member of the board of visitors of the Engineering School of Duke University and a member of the board of directors of the Guthrie Theatre and the University of Minnesota Foundation.

          Jean-Luc Butel, age 53, has been Executive Vice President and Group President, International since August 2009. Prior to that, he was Senior Vice President and President, International from May 2008 to August 2009, Senior Vice President and President, Asia Pacific from August 2003 to May 2008 and President of Independence Technology, a Johnson & Johnson company, from 1999 to 2003. From 1991 to 1999, he worked for Becton, Dickinson and Company, initially as General Manager of its Microbiology business in Japan and then as President of Nippon Becton Dickinson. His last assignment at Becton, Dickinson and Company was President, Worldwide Consumer Healthcare.

          Michael J. Coyle, age 47, has been Executive Vice President and Group President, Cardiac Rhythm Disease Management, CardioVascular and Physio-Control, now called the Cardiac and Vascular Group, since December 2009. Prior to that, he served as President of the Cardiac Rhythm Management division at St. Jude Medical, Inc. (St. Jude) from 2001 to 2007, and prior positions included serving St. Jude as President of the company’s Daig Catheter division and numerous leadership positions at Eli Lilly & Company. Mr. Coyle serves on the board of directors of Volcano Corporation.

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          H. James Dallas, age 51, has been Senior Vice President, Quality and Operations since April 2008. Prior to that he was Senior Vice President and Chief Information Officer of Medtronic from April 2006 to April 2008. He was Vice President and Chief Information Officer of Georgia Pacific Corporation from December 2002 to December 2005; General Manager of the Transportation Division and President of the Lumber Division of Georgia Pacific Corporation from October 2001 to December 2002; and Vice President, Building Products Distribution Sales and Logistics, Georgia Pacific Corporation from October 2000 to October 2001.

          Gary L. Ellis, age 53, has been Senior Vice President and Chief Financial Officer since May 2005. Prior to that, he was Vice President, Corporate Controller and Treasurer since October 1999 and Vice President Corporate Controller from August 1994 to October 1999. Mr. Ellis joined Medtronic in 1989 as Assistant Corporate Controller and was promoted to Vice President of Finance for Medtronic Europe in 1992, until being named as Corporate Controller in 1994. Mr. Ellis is a member of the board of directors of The Toro Company and past chairman of the American Heart Association.

          D. Cameron Findlay, age 50, has been Senior Vice President, General Counsel and Corporate Secretary since August 2009. Prior to that, Mr. Findlay was Executive Vice President and General Counsel of Aon Corporation from August 2003 to August 2009. Prior to joining Aon, Mr. Findlay served as the U.S. Deputy Secretary of Labor. Before joining the Labor Department in June 2001, Mr. Findlay was a partner at the law firm now known as Sidley Austin LLP.

          Richard Kuntz, M.D., age 53, has been Senior Vice President and Chief Scientific, Clinical and Regulatory Officer since August 2009. Prior to that, he was Senior Vice President and President, Neuromodulation from October 2005 to August 2009, and prior to that he was an interventional cardiologist and Chief of the Division of Clinical Biometrics at Brigham and Women’s Hospital, Associate Professor of Medicine and Chief Scientific Officer of the Harvard Clinical Research Institute.

          James P. Mackin, age 43, has been Senior Vice President and President CRDM since August 2007. Prior to that, he was Vice President, CRDM Commercial Operations from November 2006 to August 2007 and Vice President, Vascular, Western Europe, from July 2004 to November 2006. He was Vice President and General Manager of Medtronic Vascular’s Endovascular business from October 2002 to July 2004. Prior to joining Medtronic, he served in a number of sales and executive positions at Genzyme Corporation from 1996 to 2004.

          Christopher J. O’Connell, age 43, has been Executive Vice President and Group President, Spinal, Neuromodulation, Diabetes, and Surgical Technologies, now called the Restorative Therapies Group, since August 2009. Prior to that, he was Senior Vice President and President, Diabetes from October 2006 to August 2009, President of Medtronic’s Emergency Response Systems division from May 2005 to October 2006, and Vice President of Sales and Marketing of Medtronic’s Cardiac Rhythm Disease Management division from November 2001 to May 2005. Mr. O’Connell has served in various management positions since joining the Company in 1994.

          Caroline Stockdale, age 46, has been Senior Vice President of Human Resources since April 2010. Prior to that she served as Vice President of Revenue Cycle Operations at Accretive Health from January 2009 to May 2010. From 2005 to 2009, she served as Executive Vice President of Global Human Resources at Warner Music Group; from 2002 to 2005, she was Senior Vice President, Human Resources, at American Express Financial Advisors (Ameriprise) and from 1997 to 2002, she was Executive Vice President and Global HR Leader at GE Capital.

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Item 1A. Risk Factors

          Investing in Medtronic involves a variety of risks and uncertainties, known and unknown, including, among others, those discussed below.

          The medical device industry is highly competitive and we may be unable to compete effectively.

          We compete in both the therapeutic and diagnostic medical markets in more than 120 countries throughout the world. These markets are characterized by rapid change resulting from technological advances and scientific discoveries. In the product lines in which we compete, we face a mixture of competitors ranging from large manufacturers with multiple business lines to small manufacturers that offer a limited selection of products. Development by other companies of new or improved products, processes or technologies may make our products or proposed products less competitive. In addition, we face competition from providers of alternative medical therapies such as pharmaceutical companies. Competitive factors include:

 

 

 

 

product reliability,

 

 

 

 

product performance,

 

 

 

 

product technology,

 

 

 

 

product quality,

 

 

 

 

breadth of product lines,

 

 

 

 

product services,

 

 

 

 

customer support,

 

 

 

 

price, and

 

 

 

 

reimbursement approval from healthcare insurance providers.

          Major shifts in industry market share have occurred in connection with product problems, physician advisories and safety alerts, reflecting the importance of product quality in the medical device industry. In the current environment of managed care, consolidation among healthcare providers, increased competition and declining reimbursement rates, we have been increasingly required to compete on the basis of price. In order to continue to compete effectively, we must continue to create, invest in or acquire advanced technology, incorporate this technology into our proprietary products, obtain regulatory approvals in a timely manner and manufacture and successfully market our products. Given these factors, we cannot guarantee that we will be able to continue our level of success in the industry.

          Reduction or interruption in supply and an inability to develop alternative sources for supply may adversely affect our manufacturing operations and related product sales.

          We manufacture most of our products at 22 manufacturing facilities located throughout the world. We purchase many of the components and raw materials used in manufacturing these products from numerous suppliers in various countries. Generally we have been able to obtain adequate supplies of such raw materials and components. However, for reasons of quality assurance, cost effectiveness or availability, we procure certain components and raw materials from a sole supplier. While we work closely with our suppliers to try to ensure continuity of supply while maintaining high quality and reliability, we cannot guarantee that these efforts will be successful. In addition, due to the stringent regulations and requirements of the FDA regarding the manufacture of our products, we may not be able to quickly establish additional or replacement sources for certain components or materials. A reduction or interruption in supply, and an inability to develop alternative sources for such supply, could adversely affect our ability to manufacture our products in a timely or cost effective manner and to make our related product sales.

          Our industry is experiencing greater scrutiny and regulation by governmental authorities, which may lead to greater governmental regulation in the future.

          Our medical devices and our business activities are subject to rigorous regulation, including by the FDA and numerous other federal, state and foreign governmental authorities. These authorities and members of Congress have been increasing their scrutiny of our industry. For example, we have received inquiries from members of Congress and other government agencies regarding a variety of matters. In addition, certain states have recently passed or are considering legislation restricting our interactions with health care providers and requiring disclosure of certain payments to them. Also, while recent case law has clarified that the FDA’s authority over medical devices preempts state tort laws, legislation has been introduced at the federal level to allow state intervention. We anticipate that the government will continue to scrutinize our industry closely, and that additional regulation by governmental authorities may increase compliance costs, exposure to litigation and other adverse effects to our operations.

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          We are subject to many laws and governmental regulations and any adverse regulatory action may materially adversely affect our financial condition and business operations.

          Our medical devices are subject to regulation by numerous government agencies, including the FDA and comparable foreign agencies. To varying degrees, each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of our medical devices. We cannot guarantee that we will be able to obtain marketing clearance for our new products, or enhancements or modifications to existing products, and if we do, such approval may:

 

 

 

 

take a significant amount of time,

 

 

 

 

require the expenditure of substantial resources,

 

 

 

 

involve stringent clinical and pre-clinical testing,

 

 

 

 

involve modifications, repairs or replacements of our products and

 

 

 

 

result in limitations on the proposed uses of our products.

          Both before and after a product is commercially released, we have ongoing responsibilities under FDA regulations. We are also subject to periodic inspections by the FDA to determine compliance with the FDA’s requirements, including primarily the quality system regulations and medical device reporting regulations. The results of these inspections can include inspectional observations on FDA’s Form-483, warning letters or other forms of enforcement. Since 2009, the FDA has significantly increased its oversight of companies subject to its regulations, including medical device companies, by hiring new investigators and stepping up inspections of manufacturing facilities. The FDA has recently also significantly increased the number of warning letters issued to companies. If the FDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical devices are ineffective or pose an unreasonable health risk, the FDA could ban such medical devices, detain or seize adulterated or misbranded medical devices, order a recall, repair, replacement, or refund of such devices, refuse to grant pending premarket approval applications or require certificates of foreign governments for exports and/or require us to notify health professionals and others that the devices present unreasonable risks of substantial harm to the public health. The FDA may also impose operating restrictions, enjoin and restrain certain violations of applicable law pertaining to medical devices and assess civil or criminal penalties against our officers, employees or us. The FDA may also recommend prosecution to the Department of Justice. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively marketing and selling our products. Currently, we are aware of three active outstanding warning letters from the FDA: one issued in June 2009 to one of our facilities in Puerto Rico; one issued in November 2009 to our CRDM Mounds View facility; and another one issued in May 2010 to our Surgical Technologies facility in Louisville, Colorado.

          Foreign governmental regulations have become increasingly stringent and more common, and we may become subject to more rigorous regulation by foreign governmental authorities in the future. Penalties for a company’s noncompliance with foreign governmental regulation could be severe, including revocation or suspension of a company’s business license and criminal sanctions. Any domestic or foreign governmental law or regulation imposed in the future may have a material adverse effect on us.

          We are also subject to various environmental laws and regulations both within and outside the U.S. Our operations involve the use of substances regulated under environmental laws, primarily those used in manufacturing and sterilization processes. We cannot guarantee that compliance with environmental protection laws and regulations will not have a material impact on our consolidated earnings, financial condition and/or cash flows.

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          Our failure to comply with rules relating to reimbursement and regulation of healthcare goods and services may subject us to penalties and adversely impact our reputation and business operations.

          Our devices are subject to regulation regarding quality and cost by the HHS, including the Centers for Medicare & Medicaid Services (CMS) as well as comparable state and foreign agencies responsible for reimbursement and regulation of healthcare goods and services. Foreign governments also impose regulations in connection with their healthcare reimbursement programs and the delivery of healthcare goods and services. U.S. federal government healthcare laws apply when we submit a claim on behalf of a U.S. federal healthcare program beneficiary, or when a customer submits a claim for an item or service that is reimbursed under a U.S. federal government funded healthcare program, such as Medicare or Medicaid. The principal U.S. federal laws implicated include those that prohibit the filing of false or improper claims for federal payment, known as false claims law, those that prohibit unlawful inducements for the referral of business reimbursable under federally-funded healthcare programs, known as the anti-kickback laws, and those that prohibit healthcare service providers seeking reimbursement for providing certain services to a patient who was referred by a physician that has certain types of direct or indirect financial relationships with the service provider, known as the Stark law.

          The laws applicable to us are subject to evolving interpretations. If a governmental authority were to conclude that we are not in compliance with applicable laws and regulations, we and our officers and employees could be subject to severe criminal and civil penalties, including, for example, exclusion from participation as a supplier of product to beneficiaries covered by CMS. If we are excluded from participation based on such an interpretation it could adversely affect our reputation and business operations.

          Quality problems with our processes, goods and services could harm our reputation for producing high quality products and erode our competitive advantage.

          Quality is extremely important to us and our customers due to the serious and costly consequences of product failure. Our quality certifications are critical to the marketing success of our goods and services. If we fail to meet these standards our reputation could be damaged, we could lose customers and our revenue and results of operations could decline. Aside from specific customer standards, our success depends generally on our ability to manufacture to exact tolerances precision engineered components, subassemblies and finished devices from multiple materials. If our components fail to meet these standards or fail to adapt to evolving standards, our reputation as a manufacturer of high quality components will be harmed, our competitive advantage could be damaged and we could lose customers and market share.

          We are substantially dependent on patent and other proprietary rights and failing to be successful in patent litigation or other litigation may result in our payment of significant monetary damages and/or royalty payments, negatively impact our ability to sell current or future products or prohibit us from enforcing our patent and proprietary rights against others.

          We operate in an industry characterized by extensive patent litigation. Patent litigation can result in significant damage awards and injunctions that could prevent our manufacture and sale of affected products or require us to pay significant royalties in order to continue to manufacture or sell affected products. At any given time, we are generally involved as both a plaintiff and a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time. While it is not possible to predict the outcome of patent litigation incidents to our business, we believe the results associated with any litigation could result in our payment of significant monetary damages and/or royalty payments, negatively impact our ability to sell current or future products or prohibit us from enforcing our patent and proprietary rights against others, which would generally have a material adverse impact on our consolidated earnings, financial condition and/or cash flows.

          We rely on a combination of patents, trade secrets and nondisclosure and non-competition agreements to protect our proprietary intellectual property, and we will continue to do so. While we intend to defend against any threats to our intellectual property, there can be no assurance that these patents, trade secrets or other agreements will adequately protect our intellectual property. There can also be no assurance that pending patent applications owned by us will result in patents being issued to us, that patents issued to or licensed by us in the past or in the future will not be challenged or circumvented by competitors or that such patents will be found to be valid or sufficiently broad to protect our technology or to provide us with any competitive advantage. Third parties could also obtain patents that may require us to negotiate licenses to conduct our business, and there can be no assurance that the required licenses would be available on reasonable terms or at all. We also rely on nondisclosure and non-competition agreements with certain employees, consultants and other parties to protect, in part, trade secrets and other proprietary rights. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information or that third parties will not otherwise gain access to our trade secrets or proprietary knowledge.

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          Product liability claims could adversely impact our financial condition and our earnings and impair our reputation.

          Our business exposes us to potential product liability risks which are inherent in the design, manufacture and marketing of medical devices. In addition, many of the medical devices we manufacture and sell are designed to be implanted in the human body for long periods of time. Component failures, manufacturing defects, design flaws or inadequate disclosure of product-related risks or product-related information with respect to these or other products we manufacture or sell could result in an unsafe condition or injury to, or death of, a patient. The occurrence of such a problem could result in product liability claims or a recall of, or safety alert relating to, one or more of our products which could ultimately result, in certain cases, in the removal from the body of such products and claims regarding costs associated therewith. We have elected to self-insure with respect to product liability risks. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business and reputation and on our ability to attract and retain customers for our products.

          Healthcare policy changes, including recent federal legislation to reform the U.S. healthcare system, may have a material adverse effect on us.

          In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the federal government, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the prices we are able to charge for our products or the amounts of reimbursement available for our products and could limit the acceptance and availability of our products. Moreover, as discussed below, recent federal legislation would impose significant new taxes on medical device makers such as us. The adoption of some or all of these proposals, including the recent federal legislation, could have a material adverse effect on our financial position and results of operations.

          On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act. The legislation imposes significant new taxes on medical device makers. Under the legislation, the total cost to the medical device industry would be approximately $20 billion over ten years. These taxes will result in a significant increase in the tax burden on our industry, which could have a material, negative impact on our results of operations and our cash flows. Other elements of this legislation such as comparative effectiveness research, an independent payment advisory board, payment system reforms including shared savings pilots and other provisions could meaningfully change the way healthcare is developed and delivered, and may materially impact numerous aspects of our business.

          Our self-insurance program may not be adequate to cover future losses.

          We have elected to self-insure most of our insurable risks. We made this decision based on conditions in the insurance marketplace that have led to increasingly higher levels of self-insurance retentions, increasing numbers of coverage limitations and dramatically higher insurance premium rates. We continue to monitor the insurance marketplace to evaluate the value to us of obtaining insurance coverage in the future. While based on historical loss trends we believe that our self-insurance program accruals will be adequate to cover future losses, we cannot guarantee that this will remain true. Historical trends may not be indicative of future losses. These losses could have a material adverse impact on our consolidated earnings, financial condition and/or cash flows.

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          If we experience decreasing prices for our goods and services and we are unable to reduce our expenses, our results of operations will suffer.

          We may experience decreasing prices for the goods and services we offer due to pricing pressure experienced by our customers from managed care organizations and other third-party payors, increased market power of our customers as the medical device industry consolidates and increased competition among medical engineering and manufacturing services providers. If the prices for our goods and services decrease and we are unable to reduce our expenses, our results of operations will be adversely affected.

          We are subject to a variety of risks due to our international operations that could adversely affect those operations or our profitability and operating results.

          Our operations in countries outside the U.S., which accounted for 41 percent of our net sales for the year ended April 30, 2010, are accompanied by certain financial and other risks. We intend to continue to pursue growth opportunities in sales outside the U.S., which could expose us to greater risks associated with international sales and operations. Our profitability and international operations are, and will continue to be, subject to a number of risks and potential costs, including:

 

 

 

 

changes in foreign medical reimbursement programs and policies,

 

 

 

 

changes in foreign regulatory requirements,

 

 

 

 

local product preferences and product requirements,

 

 

 

 

longer-term receivables than are typical in the U.S.,

 

 

 

 

fluctuations in foreign currency exchange rates,

 

 

 

 

less protection of intellectual property in some countries outside the U.S.,

 

 

 

 

trade protection measures and import and export licensing requirements,

 

 

 

 

work force instability,

 

 

 

 

political and economic instability, and

 

 

 

 

the potential payment of U.S. income taxes on certain earnings of our foreign subsidiaries’ upon repatriation.

          In particular, the Obama administration has announced potential legislative proposals to tax profits of U.S. companies earned abroad. While it is impossible for us to predict whether these and other proposals will be implemented, or how they will ultimately impact us, they may materially impact our results of operations if, for example, our profits earned abroad are subject to U.S. income tax or we are otherwise disallowed deductions as a result of these profits.

          In addition, a significant amount of trade receivables are with national healthcare systems in many countries. In light of the current economic state of many foreign countries, we continue to monitor their creditworthiness; however, repayment is dependent upon the financial stability of the economies of those countries.

          Consolidation in the healthcare industry could have an adverse effect on our revenues and results of operations.

          Many healthcare industry companies, including medical device companies, are consolidating to create new companies with greater market power. As the healthcare industry consolidates, competition to provide goods and services to industry participants will become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions for medical devices that incorporate components produced by us. If we are forced to reduce our prices because of consolidation in the healthcare industry, our revenues would decrease and our consolidated earnings, financial condition and/or cash flows would suffer.

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          Our business is indirectly subject to healthcare industry cost containment measures that could result in reduced sales of medical devices containing our components.

          Most of our customers, and the healthcare providers to whom our customers supply medical devices, rely on third-party payors, including government programs and private health insurance plans, to reimburse some or all of the cost of the procedures in which medical devices that incorporate components we manufacture or assemble are used. The continuing efforts of government, insurance companies and other payors of healthcare costs to contain or reduce these costs could lead to patients being unable to obtain approval for payment from these third-party payors. If that were to occur, sales of finished medical devices that include our components may decline significantly and our customers may reduce or eliminate purchases of our components. The cost containment measures that healthcare providers are instituting, both in the U.S. and internationally, could harm our ability to operate profitably. For example, managed care organizations have successfully negotiated volume discounts for pharmaceuticals. While this type of discount pricing does not currently exist for medical devices, if managed care or other organizations were able to affect discount pricing for devices, it may result in lower prices to our customers from their customers and, in turn, reduce the amounts we can charge our customers for our medical devices.

          Our research and development efforts rely upon investments and alliances, and we cannot guarantee that any previous or future investments or alliances will be successful.

          Our strategy to provide a broad range of therapies to restore patients to fuller, healthier lives requires a wide variety of technologies, products and capabilities. The rapid pace of technological development in the medical industry and the specialized expertise required in different areas of medicine make it difficult for one company alone to develop a broad portfolio of technological solutions. In addition to internally generated growth through our research and development efforts, historically we have relied, and expect to continue to rely, upon investments and alliances to provide us access to new technologies both in areas served by our existing businesses as well as in new areas.

          We expect to make future investments where we believe that we can stimulate the development of, or acquire, new technologies and products to further our strategic objectives and strengthen our existing businesses. Investments and alliances in and with medical technology companies are inherently risky, and we cannot guarantee that any of our previous or future investments or alliances will be successful or will not materially adversely affect our consolidated earnings, financial condition and/or cash flows.

          The success of many of our products depends upon strong relationships with physicians.

          If we fail to maintain our working relationships with physicians, many of our products may not be developed and marketed in line with the needs and expectations of the professionals who use and support our products, which could cause a decline in earnings and profitability. The research, development, marketing and sales of many of our new and improved products is dependent upon our maintaining working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and the marketing of our products. Physicians assist us as researchers, marketing and product consultants, inventors and public speakers. If we are unable to maintain our strong relationships with these professionals and continue to receive their advice and input, the development and marketing of our products could suffer, which could have a material effect on our consolidated earnings, financial condition and/or cash flows.

          Negative conditions in the global credit market may impair our commercial paper program, our auction rate securities and our other fixed income securities, which may cause losses and cause us to face liquidity issues.

          We have investments in marketable debt securities which are classified and accounted for as available-for-sale. Our debt securities include U.S. and foreign government and agency securities, corporate debt securities, certificates of deposit and mortgage backed and other asset backed securities including auction rate securities. Market conditions over the past several years have included periods of significant economic uncertainty and at times general market distress especially in the banking and financial services sector. During these periods of economic uncertainty, we may experience reduced liquidity across the fixed income investment market, including the securities that we invest in. In the event we need to sell these securities, we may not be able to do so in a timely manner or for a value that is equal to the underlying principal. In addition, we may be required to adjust the carrying value of the securities and record an impairment charge. If we determine that the fair value of the securities is temporarily impaired, we would record a temporary impairment within other comprehensive income, a component of shareholders’ equity. If it is determined that the fair value of these securities is other-than-temporarily impaired, we would record a loss in our consolidated statements of earnings, which could materially adversely impact our results of operations and financial condition.

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          Negative market conditions may also impair our ability to access the capital markets through the issuance of commercial paper or debt securities, or may impact our ability to sell such securities at a reasonable price and may negatively impact our ability to borrow from financial institutions.

Item 1B. Unresolved Staff Comments

          None.

Item 2. Properties

          Our principal offices are owned by us and located in the Minneapolis, Minnesota metropolitan area. Manufacturing or research facilities are located in Arizona, California, Colorado, Connecticut, Florida, Indiana, Massachusetts, Michigan, Minnesota, Tennessee, Texas, Washington, Puerto Rico, China, France, Ireland, Mexico, The Netherlands and Switzerland. Our total manufacturing and research space is approximately 3.4 million square feet, of which approximately 75 percent is owned by us and the balance is leased.

          We also maintain sales and administrative offices in the U.S. at approximately 90 locations in 40 states or jurisdictions and outside the U.S. at approximately 126 locations in over 40 countries. Most of these locations are leased. We are using substantially all of our currently available productive space to develop, manufacture, and market our products. Our facilities are in good operating condition, suitable for their respective uses and adequate for current needs.

Item 3. Legal Proceedings

          A discussion of the Company’s policies with respect to legal proceedings is discussed in our legal proceedings and other loss contingencies footnote as described in Note 17 to the consolidated financial statements set forth in Exhibit 13 hereto and included in our 2010 Annual Report.

Item 4. Reserved

PART II

Item 5. Market for Medtronic’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

          The information in the section entitled “Price Range of Medtronic Stock” is incorporated by reference herein set forth in Exhibit 13 hereto and will be included in our 2010 Annual Report. The Company’s common stock is listed on the New York Stock Exchange under the symbol “MDT.”

          In June 2007 and June 2009, the Company’s Board of Directors authorized the repurchase of 50 million and 60 million shares of the Company’s stock, respectively. As authorized by the Board of Directors our program expires when its total number of authorized shares has been repurchased.

          The following table provides information about the shares repurchased by Medtronic during fourth quarter of fiscal year 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Period

 

Total Number of
Shares Purchased

 

Average Price
Paid per Share

 

Total Number of
Shares Purchased as a
Part of Publicly
Announced Program

 

Maximum Number
of Shares that May
Yet Be Purchased
Under the Program

 

01/30/10-02/26/10

 

 

3,974,500

 

$

42.78

 

 

3,974,500

 

 

55,809,069

 

02/27/10-04/02/10

 

 

1,987,639

 

 

45.10

 

 

1,987,639

 

 

53,821,430

 

04/03/10-04/30/10

 

 

2,989,777

 

 

45.42

 

 

2,989,777

 

 

50,831,653

 

Total

 

 

8,951,916

 

 

44.18

 

 

8,951,916

 

 

50,831,653

 

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          On June 28, 2010, there were approximately 52,970 shareholders of record of the Company’s common stock. Cash dividends declared and paid totaled 20.50 cents per share for each quarter of fiscal year 2010 and 18.75 cents per share for each quarter of fiscal year 2009. Stock price comparison follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Qtr.

 

1st Qtr.

 

2nd Qtr.

 

3rd Qtr.

 

4th Qtr.

 

2010 High

 

$

35.83

 

$

39.06

 

$

46.03

 

$

45.81

 

2010 Low

 

 

26.96

 

 

35.58

 

 

35.99

 

 

41.67

 

2009 High

 

 

54.41

 

 

56.55

 

 

40.69

 

 

34.56

 

2009 Low

 

 

46.98

 

 

37.81

 

 

28.67

 

 

24.38

 

Item 6. Selected Financial Data

          The information for fiscal years 2006 through 2010 in the section entitled “Selected Financial Data” is incorporated herein by reference to Exhibit 13 hereto and will be included in our 2010 Annual Report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          The information in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference to Exhibit 13 hereto and will be included in our 2010 Annual Report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

          The information in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Market Risk” as well as Note 6 to the consolidated financial statements is incorporated herein by reference to Exhibit 13 hereto and will be included in our 2010 Annual Report.

Item 8. Financial Statements and Supplementary Data

          The Consolidated Financial Statements and Notes thereto, together with the report of independent registered public accounting firm, are incorporated herein by reference to Exhibit 13 hereto and will be included in our 2010 Annual Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

          Not applicable.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

          Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) and changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) are effective and are adequately designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the SEC’s applicable rules and forms.

Management’s Annual Report on Internal Control Over Financial Reporting

          Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company (as defined in Exchange Act Rule 13a-15(f)). Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated 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 30, 2010. Our internal control over financial reporting as of April 30, 2010, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm who has also audited our consolidated financial statements, as stated in their report in the section entitled “Report of Independent Registered Public Accounting Firm,” which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of April 30, 2010, which is incorporated by reference to Exhibit 13 hereto and will be included in our 2010 Annual Report.

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Changes in Internal Control over Financial Reporting

          There have been no changes in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

          None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

          The sections entitled “Proposal 1 — Election of Directors — Directors and Nominees,” “Governance of Medtronic — Committees of the Board and Meetings,” “Governance of Medtronic — Audit Committee,” “Governance of Medtronic — Audit Committee Independence and Financial Experts,” “Governance of Medtronic — Corporate Governance Committee” and “Share Ownership Information — Section 16(a) Beneficial Ownership Reporting Compliance” of our Proxy Statement for our 2010 Annual Shareholders’ Meeting are incorporated herein by reference. See also “Executive Officers of Medtronic” on page 15 herein.

          We have adopted a written Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer, Corporate Treasurer, Corporate Controller and other senior financial officers performing similar functions who are identified from time to time by the Chief Executive Officer. We have also adopted a written Code of Business Conduct and Ethics for Members of the Board of Directors. The Code of Ethics for Senior Financial Officers, which is part of our broader Code of Conduct applicable to all employees, and the Code of Business Conduct and Ethics for Board members are posted on our website, www.medtronic.com under the “Investors” caption and then under the “Corporate Governance” caption. Any amendments to, or waivers for executive officers or directors of, these ethics codes will be disclosed on our website promptly following the date of such amendment or waiver.

Item 11. Executive Compensation

          The sections entitled “Governance of Medtronic — Director Compensation,” “Governance of Medtronic — Compensation Committee — Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” and “Executive Compensation” in our Proxy Statement for our 2010 Annual Shareholders’ Meeting are incorporated herein by reference. The section entitled “Compensation Discussion and Analysis – Compensation Committee Report” in our Proxy Statement for our 2010 Annual Shareholders’ Meeting is furnished herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

          The sections entitled “Share Ownership Information – Significant Shareholders,” “Share Ownership Information – Beneficial Ownership and Management” and “Executive Compensation — Equity Compensation Plan Information” in our Proxy Statement for our 2010 Annual Shareholders’ Meeting are incorporated herein by reference.

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Item 13. Certain Relationships and Related Transactions, and Director Independence

          The sections entitled “Proposal 1 — Election of Directors — Related Transactions and Other Matters” and “Proposal 1 — Election of Directors — Director Independence” in our Proxy Statement for our 2010 Annual Shareholders’ Meeting are incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

          The sections entitled “Governance of Medtronic — Audit Committee — Audit Committee Pre-Approval Policies” and “Report of the Audit Committee — Audit and Non-Audit Fees” in our Proxy Statement for our 2010 Annual Shareholders’ Meeting are incorporated herein by reference.

 

 

 

 

3. Exhibits

 

 

 

 

 

 

2.1

 

 

Agreement and Plan of Merger Among Medtronic, Inc., Jets Acquisition Corporation and Kyphon Inc. (Dated as of July 26, 2007) (Exhibit 2.1). (u)

 

 

 

 

3.1

 

 

Medtronic, Inc. Restated Articles of Incorporation, as amended (Exhibit 3.1).(v)

 

 

 

 

3.2

 

 

Medtronic, Inc. Bylaws, as amended to date (Exhibit 3.2).(b)

 

 

 

 

4.1

 

 

Rights Agreement, dated as of October 26, 2000, between Medtronic, Inc. and Wells Fargo Bank Minnesota, N.A., including as: Exhibit A thereto the form of Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Shares of Medtronic, Inc.; Exhibit B the form of Preferred Stock Purchase Right Certificate; and Exhibit C the Summary of Rights to Purchase Preferred Shares (Exhibit 4).(c)

 

 

 

 

4.2

 

 

Indenture, dated as of September 11, 2001, between Medtronic, Inc. and Wells Fargo Bank Minnesota, National Association. (Exhibit 4.2).(d)

 

 

 

 

4.3

 

 

Credit Agreement ($1,000,000,000 Five Year Revolving Credit Facility) dated as of January 20, 2005, among Medtronic, Inc. as Borrower, certain of its subsidiaries as Guarantors, Citicorp USA, Inc., as Administrative Agent and Bank of America, N.A. as Syndication Agent, and Citigroup Global Markets Inc. and Banc of America Securities LLC as Joint Lead Arrangers and Joint Book Managers (Exhibit 4.1).(e)

 

 

 

 

4.4

 

 

Form of Indenture between Medtronic, Inc. and Wells Fargo Bank, National Association (Exhibit 4.1).(f)

 

 

 

 

4.5

 

 

Indenture dated as of September 15, 2005 between Medtronic, Inc. and Wells Fargo Bank, N. A., as Trustee, with respect to the 4.375% Senior Notes due 2010 and 4.750% Senior Notes due 2015 (including the Forms of Notes thereof) (Exhibit 4.1).(g)

 

 

 

 

4.6

 

 

Form of 4.375% Senior Notes, Series B due September 15, 2010 (Exhibit 4.2).(g)

 

 

 

 

4.7

 

 

Form of 4.750% Senior Notes, Series B due September 15, 2015 (Exhibit 4.3).(g)

 

 

 

 

4.8

 

 

Indenture by and between Medtronic, Inc. and Wells Fargo Bank, N.A., as trustee dated as of April 18, 2006 (including the Form of Convertible Senior Notes thereof) (Exhibit 4.1).(h)

 

 

 

 

4.9

 

 

Credit Agreement dated as of December 20, 2006, among Medtronic, Inc., as Borrower, the Lenders party thereto, Bank of America N.A., as Issuing Bank, and Citicorp USA, Inc., as Administrative Agent, Issuing Bank and Swingline Lender (Exhibit 4.1).(i)

 

 

 

 

4.10

 

 

Form of Indenture between Medtronic, Inc. and Wells Fargo Bank, National Association (Exhibit 4.1).(aa)

 

 

 

 

4.11

 

 

First Supplemental Indenture Dated March 12, 2009 between Medtronic, Inc. and Wells Fargo Bank, National Association (Exhibit 4.1).(bb)

 

 

 

 

4.12

 

 

Second Supplemental Indenture Dated March 16, 2010 between Medtronic, Inc. and Wells Fargo Bank, National Association (Exhibit 4.1) (ff)

 

 

 

 

*10.1

 

 

1994 Stock Award Plan (amended and restated as of January 1, 2008) (Exhibit 10.1).(t)

26


Table of Contents


 

 

 

 

*10.2

 

 

Medtronic Incentive Plan (amended and restated effective January 1, 2008) (Exhibit 10.2).(t)

 

 

 

 

*10.3

 

 

Medtronic, Inc. Executive Incentive Plan (Appendix C).(l)

 

 

 

 

*10.4

 

 

Form of Employment Agreement for Medtronic executive officers (Exhibit 10.5).(a)

 

 

 

 

*10.5

 

 

Medtronic, Inc. Capital Accumulation Plan Deferral Program (as restated generally effective January 1, 2008)(Exhibit 10.5)(w)

 

 

 

 

*10.6

 

 

Stock Option Replacement Program (Exhibit 10.8).(a)

 

 

 

 

*10.7

 

 

Medtronic, Inc. 1998 Outside Director Stock Compensation Plan (as amended and restated effective as of January 1, 2008) (Exhibit 10.3).(t)

 

 

 

 

*10.8

 

 

Amendment effective October 2001, regarding change in control provisions in the Management Incentive Plan (Exhibit 10.10).(j)

 

 

 

 

10.9

 

 

Indemnification Trust Agreement (Exhibit 10.11).(b)

 

 

 

 

10.10

 

 

Asset Purchase and Settlement Agreement dated as of April 21, 2005 among Medtronic, Inc., Medtronic Sofamor Danek, Inc., SDGI Holdings, Inc., Gary K. Michelson, M.D. and Karlin Technology, Inc. (Exhibit 10.13).(o)

 

 

 

 

*10.11

 

 

Form of Restricted Stock Award Agreement under 2003 Long-Term Incentive Plan (Exhibit 10.3).(e)

 

 

 

 

*10.12

 

 

Form of Non-Qualified Stock Option Agreement under 2003 Long-Term Incentive Plan (four year vesting) (Exhibit 10.1).(e)

 

 

 

 

*10.13

 

 

Form of Non-Qualified Stock Option Agreement under 2003 Long-Term Incentive Plan (immediate vesting) (Exhibit 10.2).(e)

 

 

 

 

*10.14

 

 

Form of Initial Option Agreement under the Medtronic, Inc. 1998 Outside Director Stock Compensation Plan (Exhibit 10.17).(o)

 

 

 

 

*10.15

 

 

Form of Annual Option Agreement under the Medtronic, Inc. 1998 Outside Director Stock Compensation Plan (Exhibit 10.18).(o)

 

 

 

 

*10.16

 

 

Form of Replacement Option Agreement under the Medtronic, Inc. 1998 Outside Director Stock Compensation Plan (Exhibit 10.19).(o)

 

 

 

 

*10.17

 

 

Form of Restricted Stock Units Award Agreement under 2003 Long-Term Incentive Plan (Exhibit 10.20).(o)

 

 

 

 

*10.18

 

 

Form of Performance Share Award Agreement under 2003 Long-Term Incentive Plan (Exhibit 10.21).(o)

 

 

 

 

*10.19

 

 

Medtronic, Inc. Supplemental Executive Retirement Plan (as restated generally effective January 1, 2008) (Exhibit 10.1).(s)

 

 

 

 

10.20

 

 

Purchase Agreement by and among Medtronic, Inc. and the Initial Purchasers named therein dated as of April 12, 2006 (Exhibit 10.1).(h)

 

 

 

 

10.21

 

 

Registration Rights Agreement between Medtronic, Inc. and Banc of America Securities LLC and Morgan Stanley & Co. Incorporated dated as of April 18, 2006 (Exhibit 4.2).(h)

 

 

 

 

*10.22

 

 

2003 Long-Term Incentive Plan (as amended and restated effective January 1, 2008) (Exhibit 10.4).(t)

 

 

 

 

*10.23

 

 

Form of Non-Qualified Stock Option Agreement under 2003 Long-Term Incentive Plan effective June 22, 2006 (Exhibit 10.23).(q)

 

 

 

 

*10.24

 

 

Form of Restricted Stock Award Agreement under 2003 Long-Term Incentive Plan effective June 22, 2006 (Exhibit 10.24).(q)

 

 

 

 

*10.25

 

 

Form of Restricted Stock Unit Award Agreement under 2003 Long-Term Incentive Plan effective June 22, 2006 (Exhibit 10.25).(q)

27


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*10.26

 

 

Form of Performance Award Agreement under 2003 Long-Term Incentive Plan effective June 22, 2006 (Exhibit 10.26).(q)

 

 

 

 

10.27†

 

 

Form of Confirmations of Convertible Note Hedge related to Convertible Senior Debentures issued on April 12, 2006, including Schedule thereto (Exhibit 10.27).(q)

 

 

 

 

10.28†

 

 

Form of Warrants issued on April 12, 2006, including Schedule thereto (Exhibit 10.28).(q)

 

 

 

 

10.29†

 

 

Form of Amendment to Confirmation issued on April 13, 2006 to Form of Warrants issued on April 12, 2006, including Schedule thereto (Exhibit 10.29).(q)

 

 

 

 

10.30

 

 

Amendment No. 1 dated September 5, 2006, to Indemnification Trust Agreement (Exhibit 10.1).(r)

 

 

 

 

*10.31

 

 

Form of Restricted Stock Award Agreement under 2003 Long-Term Incentive Plan (Exhibit 10.3).(s)

 

 

 

 

*10.32

 

 

Form of Restricted Stock Unit Award Agreement under 2003 Long-Term Incentive Plan (Exhibit 10.4).(s)

 

 

 

 

*10.33

 

 

Medtronic, Inc. Israeli Amendment to the 2003 Long-Term Incentive Plan (Exhibit 10.5).(t)

 

 

 

 

*10.34

 

 

Medtronic, Inc. – Kyphon Inc. 2002 Stock Plan (Amended and Restated July 26, 2007, as further amended on October 18, 2007) (Exhibit 10.6).(t)

 

 

 

 

*10.35

 

 

Addendum: Medtronic, Inc. – Kyphon Inc. 2002 Stock Plan (dated December 13, 2007) (Exhibit 10.7).(t)

 

 

 

 

*10.36

 

 

Letter Agreement dated April 29, 2008 between Michael DeMane and Medtronic, Inc. (Exhibit 10.37).(w)

 

 

 

 

*10.37

 

 

Medtronic, Inc. 2008 Stock Award and Incentive Plan (Exhibit 10.2).(ee)

 

 

 

 

*10.38

 

 

Form of Non-Qualified Stock Option Agreement under 2003 Long-Term Incentive Plan (Exhibit 10.39).(w)

 

 

 

 

*10.39

 

 

Form of Restricted Stock Unit Award Agreement under 2003 Long-Term Incentive Plan (Exhibit 10.40).(w)

 

 

 

 

*10.40

 

 

Form of Restricted Stock Unit Award Agreement under 2003 Long-Term Incentive Plan (Exhibit 10.41).(w)

 

 

 

 

*10.41

 

 

Form of Restricted Stock Unit Award Agreement under 2008 Stock Award and Incentive Plan (Exhibit 10.2).(x)

 

 

 

 

*10.42

 

 

Form of Restricted Stock Award Agreement under 2008 Stock Award and Incentive Plan (Exhibit 10.3).(x)

 

 

 

 

*10.43

 

 

Form of Restricted Stock Award Agreement under 2008 Stock Award and Incentive Plan (Exhibit 10.4).(x)

 

 

 

 

*10.44

 

 

Form of Restricted Stock Unit Award Agreement under 2008 Stock Award and Incentive Plan (Exhibit 10.5).(x)

 

 

 

 

*10.45

 

 

Form of Non-Qualified Stock Option Agreement under 2008 Stock Award and Incentive Plan (Exhibit 10.6).(x)

 

 

 

 

*10.46

 

 

Terms of Non-Employee Director Compensation under the Medtronic, Inc. 2008 Stock Award and Incentive Plan (Exhibit 10.7).(x)

 

 

 

 

*10.47

 

 

Form of Non-Employee Director Initial Option Agreement under the Medtronic, Inc. 2008 Stock Award and Incentive Plan (Exhibit 10.1).(y)

 

 

 

 

*10.48

 

 

Form of Non-Employee Director Annual Option Agreement under the Medtronic, Inc. 2008 Stock Award and Incentive Plan (Exhibit 10.2).(y)

 

 

 

 

*10.49

 

 

Form of Non-Employee director Deferred Unit Award Agreement under the Medtronic, Inc. 2008 Stock Award and Incentive Plan (Exhibit 10.3).(y)

28


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*10.50

 

 

Form of Change of Control Employment Agreement for Medtronic Executive Officers (Exhibit 10.38).(w)

 

 

 

 

*10.51

 

 

Amendment to Change of Control Agreement for Medtronic Executive Officers (Exhibit 10.1).(z)

 

 

 

 

*10.52

 

 

Amendment No. 2 dated April 27, 2009, to Indemnification Trust Agreement (Exhibit 10.53). (cc)

 

 

 

 

*10.53

 

 

Form of Amended and Restated Change of Control Employment Agreement for Medtronic Executive Officers (Exhibit 10.1).(dd)

 

 

 

 

*10.54

 

 

Form of Change of Control Employment Agreement for Medtronic Executive Officers (Exhibit 10.1).(ee)

 

 

 

 

*10.55

 

 

Medtronic, Inc. 2005 Employee Stock Purchase Plan (Exhibit 10.3).(ee)

 

 

 

 

*10.56

 

 

Bonus Agreement by and between Medtronic, Inc. and Christopher J. O’Connell dated December 23, 2009

 

 

 

 

*10.57

 

 

Amendment dated December 18, 2008 to the Medtronic, Inc. Capital Accumulation Plan Deferral Program and Supplemental Executive Retirement Plan

 

 

 

 

12.1

 

 

Computation of ratio of earnings to fixed charges

 

 

 

 

13

 

 

This exhibit contains the information referenced under Part II, Items 5, 6, 7, 7A and 8

 

 

 

 

21

 

 

List of Subsidiaries

 

 

 

 

23

 

 

Consent of Independent Registered Public Accounting Firm

 

 

 

 

24

 

 

Powers of Attorney

 

 

 

 

31.1

 

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

31.2

 

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32.1

 

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32.2

 

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

101

 

 

The following materials from Medtronic’s Annual Report on Form 10-K for year ended April 30, 2010, formatted in Extensive Business Reporting Language (XBRL), (i) condensed consolidated statements of earnings, (ii) condensed consolidated balance sheets, (iii) condensed consolidated statements of cash flows, and (iv) the notes to the condensed consolidated financial statements.


 

 

 

 

(a)

Incorporated herein by reference to the cited exhibit in our Annual Report on Form 10-K for the year ended April 27, 2001, filed with the Commission on July 26, 2001.

 

 

(b)

Incorporated herein by reference to the cited exhibit in our Annual Report on Form 10-K for the year ended April 30, 2004, filed with the Commission on June 30, 2004.

 

 

(c)

Incorporated herein by reference to the cited exhibit in our registration statement on Form 8-A, including the exhibits thereto, filed with the Commission on November 3, 2000.

 

 

(d)

Incorporated herein by reference to the cited exhibit in our amended Current Report on Form 8-K/A, filed with the Commission on November 13, 2001.

 

 

(e)

Incorporated herein by reference to the cited exhibit in our Quarterly Report on Form 10-Q for the quarter ended January 28, 2005, filed with the Commission on March 7, 2005.

29


Table of Contents


 

 

(f)

Incorporated herein by reference to the cited exhibit in our registration statement on Amendment No. 2 to Form S-4, filed with the Commission on January 10, 2005.

 

 

(g)

Incorporated herein by reference to the cited exhibit in our registration statement on Form S-4, filed with the Commission on December 6, 2005.

 

 

(h)

Incorporated herein by reference to the cited exhibit in our Current Report on Form 8-K, filed with the Commission on April 18, 2006.

 

 

(i)

Incorporated herein by reference to the cited exhibit in our Quarterly Report on Form 10-Q for the quarter ended January 26, 2007, filed with the Commission on March 6, 2007.

 

 

(j)

Incorporated herein by reference to the cited exhibit in our Annual Report on Form 10-K for the year ended April 26, 2002, filed with the Commission on July 19, 2002.

 

 

(k)

Incorporated herein by reference to the cited exhibit in our Annual Report on Form 10-K for the year ended April 25, 2003, filed with the Commission on July 14, 2003.

 

 

(l)

Incorporated herein by reference to the cited appendix to our 2003 Proxy Statement, filed with the Commission on July 28, 2003.

 

 

(m)

Incorporated herein by reference to the cited exhibit in our registration statement on Form S-8, filed with the Commission on November 21, 2005.

 

 

(n)

Incorporated herein by reference to the cited appendix to our 2005 Proxy Statement, filed with the Commission on July 21, 2005.

 

 

(o)

Incorporated herein by reference to the cited exhibit in our Annual Report on Form 10-K for the year ended April 29, 2005, filed with the Commission on June 29, 2005.

 

 

(p)

Incorporated herein by reference to the cited exhibit in our Quarterly Report on Form 10-Q for the quarter ended October 28, 2005, filed with the Commission on December 6, 2005.

 

 

(q)

Incorporated herein by reference to the cited exhibit in our Annual Report on Form 10-K for the year ended April 28, 2006, filed with the Commission on June 28, 2006.

 

 

(r)

Incorporated herein by reference to the cited exhibit in our Quarterly Report on Form 10-Q for the quarter ended October 27, 2006, filed with the Commission on December 5, 2006.

 

 

(s)

Incorporated herein by reference to the cited exhibit in our Quarterly Report on Form 10-Q for the quarter ended October 26, 2007, filed with the Commission on December 4, 2007.

 

 

(t)

Incorporated herein by reference to the cited exhibit in our Quarterly Report on Form 10-Q for the quarter ended January 25, 2008, filed with the Commission on March 4, 2008.

 

 

(u)

Incorporated herein by reference to the cited exhibit in our Current Report on Form 8-K, filed with the Commission on July 30, 2007.

 

 

(v)

Incorporated herein by reference to the cited exhibit in our Quarterly Report on Form 10-Q for the quarter ended July 27, 2007, filed with the Commission on September 5, 2007.

 

 

(w)

Incorporated herein by reference to the cited exhibit in our Annual Report on Form 10-K for the year ended April 25, 2008, filed with the Commission on June 24, 2008.

 

 

(x)

Incorporated herein by reference to the cited exhibit in our Quarterly Report on Form 10-Q for the quarter ended July 25, 2008, filed with the Commission on September 3, 2008.

 

 

(y)

Incorporated herein by reference to the cited exhibit in our Quarterly Report on Form 10-Q for the quarter ended October 24, 2008, filed with the Commission on December 3, 2008.

 

 

(z)

Incorporated herein by reference to the cited exhibit in our Quarterly Report on Form 10-Q for the quarter ended January 23, 2009, filed with the Commission on March 4, 2009.

 

 

(aa)

Incorporated herein by reference to the cited exhibit in our registration statement on Form S-3, filed with the Commission on March 9, 2009.

 

 

(bb)

Incorporated herein by reference to the cited exhibit in our Current Report on Form 8-K, filed with the Commission on March 12, 2009.

30


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(cc)

Incorporated herein by reference to the cited exhibit in our Annual Report on Form 10-K for the year ended April 24, 2009, filed with the Commission on June 23, 2009.

 

 

(dd)

Incorporated herein by reference to the cited exhibit in our Quarterly Report on Form 10-Q for the quarter ended July 31, 2009, filed with the Commission on September 9, 2009.

 

 

(ee)

Incorporated herein by reference to the cited exhibit in our Quarterly Report on Form 10-Q for the quarter ended October 30, 2009, filed with the Commission on December 9, 2009.

 

 

(ff)

Incorporated herein by reference to the cited exhibit in our Current Report on Form 8-K, filed with the Commission on March 16, 2010.

*Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 15(a)(3) of Form 10-K.

†Confidential treatment requested as to portions of the exhibit. Confidential portions omitted and filed separately with the Securities and Exchange Commission.

PART IV

 

 

 

Item 15. Exhibits, Financial Statement Schedules

 

 

 

(a)

1.

Financial Statements

 

 

 

 

 

The following report and consolidated financial statements are incorporated herein by reference in Item 8.

 

 

 

 

 

The sections entitled “Report of Independent Registered Public Accounting Firm” and “Consolidated Statements of Earnings” — years ended April 30, 2010, April 24, 2009, and April 25, 2008 are set forth in Exhibit 13 hereto and will be included in our 2010 Annual Report.

 

 

 

 

 

The section entitled “Consolidated Balance Sheets” — April 30, 2010 and April 24, 2009 is set forth in Exhibit 13 hereto and will be included in our 2010 Annual Report.

 

 

 

 

 

The section entitled “Consolidated Statements of Shareholders’ Equity” — years ended April 30, 2010, April 24, 2009, and April 25, 2008 is set forth in Exhibit 13 hereto and will be included in our 2010 Annual Report.

 

 

 

 

 

The section entitled “Consolidated Statements of Cash Flows” — years ended April 30, 2010, April 24, 2009, and April 25, 2008 is set forth in Exhibit 13 hereto and will be included in our 2010 Annual Report.

 

 

 

 

 

The section entitled “Notes to Consolidated Financial Statements” is set forth in Exhibit 13 hereto and will be included in our 2010 Annual Report.

 

 

 

2.

 

Financial Statement Schedules

 

 

 

 

 

Section II. Valuation and Qualifying Accounts — years ended April 30, 2010, April 24, 2009, and April 25, 2008 (set forth on page 33 of this report).

 

 

 

 

 

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or Notes thereto.

31


Table of Contents

SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

MEDTRONIC, INC.

 

 

 

Dated: June 29, 2010

By:

/s/ William A. Hawkins

 

 

William A. Hawkins

 

 

Chairman and

 

 

Chief Executive Officer

          Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

 

 

MEDTRONIC, INC.

 

 

 

Dated: June 29, 2010

By:

/s/ William A. Hawkins

 

 

William A. Hawkins

 

 

Chairman and

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Dated: June 29, 2010

By:

/s/ Gary L. Ellis

 

 

Gary L. Ellis

 

 

Senior Vice President and

 

 

Chief Financial Officer

 

 

(Principal Financial and

 

 

Accounting Officer)

 

 

 

 

Directors

 

 

 

 

 

Richard H. Anderson

 

 

David L. Calhoun

 

 

Victor J. Dzau, M.D.

 

 

William A. Hawkins

 

 

Shirley Ann Jackson, Ph.D

 

 

James T. Lenehan

 

 

Denise M. O’Leary

 

 

Kendall J. Powell

 

 

Robert C. Pozen

 

 

Jean-Pierre Rosso

 

 

Jack W. Schuler

          D. Cameron Findlay, by signing his name hereto, does hereby sign this document on behalf of each of the above named directors of the registrant pursuant to powers of attorney duly executed by such persons.

 

 

 

Dated: June 29, 2010

By:

/s/ D. Cameron Findlay

 

 

D. Cameron Findlay

32


Table of Contents

MEDTRONIC, INC. AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at
Beginning of
Fiscal Year

 

Charges to
Earnings

 

Other
Changes
(Debit) Credit

 

Balance
at End of
Fiscal Year

 

Allowance for doubtful accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended 4/30/10

 

$

61

 

$

36

 

$

(38

)(a)

$

67

 

 

 

 

 

 

 

 

 

$

8

(b)

 

 

 

Year ended 4/24/09

 

$

99

 

$

39

 

$

(61

)(a)

$

61

 

 

 

 

 

 

 

 

 

$

(16

)(b)

 

 

 

Year ended 4/25/08

 

$

160

 

$

31

 

$

(101

)(a)

$

99

 

 

 

 

 

 

 

 

 

$

9

(b)

 

 

 


 

 

(a)

Uncollectible accounts written off, less recoveries.

 

(b)

Reflects primarily the effects of foreign currency fluctuations.

33


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(FSC LOGO)


EX-10.57 2 medtronic103067s1_ex10-56.htm BONUS AGREEMENT BY AND BETWEEN MEDTRONIC, INC. AND CHRISTOPHER J. O'CONNELL EXHIBIT 10.56 TO MEDTRONIC, INC. FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2010

Exhibit 10.56

December 23, 2009

Mr. Christopher O’Connell

710 Medtronic Parkway

Minneapolis, MN 55432

Dear Mr. O’Connell:

          In recognition of your continued service as Executive Vice President and Group President for Medtronic, Inc. (the “Company”) and in recognition of your home equity loss in connection with your required relocation to the Company’s World Headquarters in Minnesota, we are awarding you a one-time bonus subject to the terms and conditions set forth in this letter agreement (the “Agreement”). All capitalized terms used and not defined herein shall have the meaning given to such terms in the Change of Control Employment Agreement between you and the Company dated February 14, 2008 and amended on December 19, 2008 (the “COC Employment Agreement”).

          Subject to your active employment with the Company on the Payment Date (as defined below) and the closing of the third-party buyout offer facilitated by Primacy Relocation on your residence in California, the Company agrees to pay you a one-time gross cash bonus of one million four hundred thousand dollars ($1,400,000) (the “Bonus”), which I anticipate will be paid to you (subject to any tax withholding requirements) on or about the date of closing on the third-party buyout offer (the “Payment Date”). You agree that if your employment with the Company is terminated on or prior to the fifth anniversary of the Payment Date for any reason other than by the Company for death, Disability or without Cause, you shall immediately reimburse the Company a pro-rata portion of the Bonus based on the number of months remaining in the sixty month period ending on fifth anniversary of the Payment Date.

          Following the fifth anniversary of the Payment Date or if you are terminated by the Company for death, Disability or without Cause, you shall not be required to reimburse the Company for any amount of the Bonus. In the event that you fail to fully reimburse the Company for the applicable amount described in the preceding paragraph, in addition to any other legal or equitable remedies available to the Company, the Company shall be entitled to offset, subject to the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), the amounts owed by you to the Company pursuant to this Agreement against any amounts otherwise payable by the Company to you.

          This Agreement constitutes the entire agreement between you and the Company with respect to the Bonus, and supersedes and is in full substitution for any and all prior understandings or agreements, whether written or oral, with respect to the Bonus, including without limitation any and all Medtronic policies with respect to home equity losses on sale. All terms, conditions, and restrictions of Sections 11, 12(a), 12(b), 12(c), 12(d), and 12(e) of the COC Employment Agreement are incorporated herein and made part hereof as if stated herein. Notwithstanding anything in this Agreement to the contrary, the Company expressly reserves the right to amend this Agreement to the extent necessary to comply with Code Section 409A, as it may be amended from time to time, and the regulations, notices and other guidance of general applicability issued thereunder.

          If the terms of this Agreement meet with your approval, please sign and return one copy to me.

 

 

 

 

 

Sincerely,

 

 

 

 

 

/s/ Scott Sherman

 

 

Scott Sherman

 

 

Vice President, Global Rewards and HR Operations

 

 

 

AGREED TO AND ACCEPTED:

 

 

 

 

 

/s/ Christopher O’Connell

 

 

Christopher O’Connell

 

 

 

 

 

Date: December 23, 2009

 

 



EX-10.58 3 medtronic103067s1_ex10-57.htm AMENDMENT TO THE MEDTRONIC, INC. CAPITAL ACCUMULATION PLAN DEFERRAL PROGRAM AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10.57 TO MEDTRONIC, INC. FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2010

Exihibit 10.57

RESOLUTION FOR ADOPTION BY THE
SENIOR VICE PRESIDENT, CHIEF TALENT OFFICER OF
MEDTRONIC, INC.

Amending the Medtronic, Inc. Capital Accumulation Plan Deferral Program and
Supplemental Executive Retirement Plan

          WHEREAS, Medtronic, Inc. (the “Company”) sponsors the Medtronic, Inc. Capital Accumulation Plan Deferral Program (the “CAP”) and the Medtronic, Inc. Supplemental Executive Retirement Plan (the “SERP”), together referred to herein as the “Plans;” and

          WHEREAS, pursuant to Section 10.1 of the CAP and Section 11.1 of the SERP the Senior Vice President, Chief Talent Officer of the Company is authorized to amend each of the Plans on behalf of the Company to the extent authorized by the Compensation Committee of the Company’s Board of Directors (the “Committee”); and

          WHEREAS, the Committee has previously authorized the Chief Talent Officer to amend each of the Plans in any manner that she deems necessary or desirable, provided that such amendment does not materially increase the cost of the Plan to the Company; and

          WHEREAS, the Plans are subject to Section 409A of the Internal Revenue Code (“Section 409A”), which, among other things, places certain restrictions on the manner in which Plan benefits may be distributed; and

          WHEREAS, Section 409A contains transition rules which permit Plan participants to enter into elections to change the form and timing of their Plan distributions, provided that such election is entered into before January 1, 2009, and does not affect benefits that are otherwise payable in 2008; and

          WHEREAS, due to changes in the income tax laws of the state of Minnesota, the Chief Talent Officer has determined that it is in the Company’s best interest to allow certain participants in the CAP to enter into one or more elections to change the form and timing of distribution of certain of their CAP benefits in accordance with the Section 409A transition rules, and wishes to amend the Plan to provide for such elections; and

          WHEREAS, the Chief Talent Officer has also determined that it is in the Company’s best interest to make certain other minor changes in the terms of the Plans to more clearly comply with the final regulations issued under Section 409A; and

          WHEREAS, the Chief Talent Officer has determined that these amendment are primarily ministerial and will not materially increase the cost of either Plan to the Company; and

          WHEREAS, a form of each of the Plans incorporating such changes, attached hereto, has been submitted to the Chief Talent Officer for her review and approval, and the Chief Talent Officer find them to be satisfactory.


          NOW, THEREFORE, BE IT RESOLVED, that the revised Plans attached hereto are hereby approved and adopted by the Company, effective as of the date set forth below.

Executed this 18th day of December, 2008

 

 

 

/s/ Martha Goldberg Aronson

 

Martha Goldberg Aronson

 

Senior Vice President, Chief Talent Officer



EX-12.1 4 medtronic103067s1_ex12-1.htm COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 TO MEDTRONIC, INC. FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2010

 

 

Medtronic, Inc.

Notes to Consolidated Financial Statements  

 

 

 

Exhibit 12.1

MEDTRONIC, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

The ratio of earnings to fixed charges for the fiscal years ended April 30, 2010, April 24, 2009, April 25, 2008, April 27, 2007, April 28, 2006 and April 29, 2005 was computed based on Medtronic’s historical consolidated financial information included in Medtronic’s most recent Annual Report incorporated by reference on Form 10-K.

 

 

 

 

Year ended
April 30,
2010

 

Year ended
April 24,
2009

 

Year ended
April 25,
2008

 

Year ended
April 27,
2007

 

Year ended
April 28,
200

 

Year ended
April 29,
2005

 

Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

      

$

3,099

      

$

2,070

       

$

2,138

      

$

2,703

      

$

2,519

      

$

1,797

 

Income taxes

 

 

 870

 

 

 370

 

 

 602

 

 

 658

 

 

 598

 

 

 736

 

Minority interest (loss)/income

 

 

 7

 

 

 1

 

 

 

 

 

 

 

 

 (1

)

Capitalized interest (1)

 

 

 (4

)

 

 (5

)

 

 (10

)

 

 (3

)

 

 (3

)

 

 (1

)

 

 

$

3,972

 

$

2,436

 

$

2,730

 

$

3,358

 

$

3,114

 

$

2,531

 

Fixed Charges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense (2)

 

$

402

 

$

371

 

$

400

 

$

383

 

$

162

 

$

66

 

Capitalized interest (1)

 

 

 4

 

 

 5

 

 

 10

 

 

 3

 

 

 3

 

 

 1

 

Amortization of debt issuance costs (3)

 

 

 11

 

 

 15

 

 

 15

 

 

 17

 

 

 7

 

 

 1

 

Rent interest factor (4)

 

 

 46

 

 

 45

 

 

 41

 

 

 34

 

 

 26

 

 

 24

 

 

 

$

463

 

$

436

 

$

466

 

$

437

 

$

198

 

$

92

 

Earnings before income taxes and fixed charges

 

$

4,435

 

$

2,872

 

$

3,196

 

$

3,795

 

$

3,312

 

$

2,623

 

Ratio of earnings to fixed charges

 

 

 10

 

 

 7

 

 

 7

 

 

 9

 

 

 17

 

 

 29

 

 

(1) Capitalized interest relates to construction projects in process.

(2) Interest expense consists of interest on indebtedness.

(3) Represents the amortization of debt issuance costs incurred in connection with the Company's registered debt securities.  See Note 9 to the consolidated financial statements for further information regarding the debt securities.

(4) Approximately one-third of rental expense is deemed representative of the interest factor.

 

 


EX-13 5 medtronic103067s1_ex13.htm PART II, ITEMS 5, 6, 7, 7A AND 8 EXHIBIT 13 TO MEDTRONIC, INC. FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2010

 

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 30, 2010 and April 24, 2009 and for each of the three fiscal years ended April 30, 2010, April 24, 2009 and April 25, 2008.

 

Organization of Financial Information Management’s discussion and analysis, presented on pages 1 to  26 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 29 to 86 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 management’s discussion and analysis, 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 charges (such as asset impairments or contributions to The Medtronic Foundation), restructuring charges, certain litigation charges, net, purchased in-process research and development (IPR&D) and certain acquisition-related costs, 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 under standing of the special charges, restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs and certain tax adjustments is necessary in order to estimate the likelihood that financial trends may continue.

 

Our fiscal year-end is the last Friday in April, and, therefore, the total weeks in a fiscal year can fluctuate between 52 and 53 weeks. Fiscal years 2009 and 2008 consisted of 52 weeks.  Fiscal year 2010 was a 53-week year, resulting in a favorable impact on our net sales compared to the prior fiscal 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 30, 2010 were $3.099 billion, a 50 percent increase from net earnings of $2.070 billion for the fiscal year ended April 24, 2009.  Diluted earnings per share were $2.79 and $1.84 for the fiscal years ended April 30, 2010 and April 24, 2009, respectively.  Fiscal year 2010 net earnings included after-tax restructuring charges, certain litigation charges, net, and IPR&D and certain acquisition-related costs that decreased net earnings by $374 million and had a $0.34 impact on diluted earnings per share.  Fiscal year 2009 net earnings included after-tax special charges, restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs and certain tax adjustments that decreased net earnings by $1.114 billion and had a $0.99 impact on diluted earnings per share.  See further discussion of these charges/benefits in the “Special Cha rges, Restructuring Charges, Certain Litigation Charges, Net, IPR&D and Certain Acquisition-Related Costs and Certain Tax Adjustments” section of this management’s discussion and analysis.

 

 

 

Net Sales

 

 

 

 

 

Fiscal Year

 

 

 

(dollars in millions) 

 

2010 

 

2009 

 

% Change

 

Cardiac Rhythm Disease Management

 

$

5,268

 

$

5,014

 

5

%

Spinal

 

 

3,500

 

 

3,400

 

3

 

CardioVascular

 

 

2,864

 

 

2,437

 

18

 

Neuromodulation

 

 

1,560

 

 

1,434

 

9

 

Diabetes

 

 

1,237

 

 

1,114

 

11

 

Surgical Technologies

 

 

963

 

 

857

 

12

 

Physio-Control

 

 

425

 

 

343

 

24

 

Total Net Sales

 

$

15,817

 

$

14,599

 

8

%

 

 

1

 


 

 

Net sales in fiscal year 2010 were $15.817 billion, an increase of 8 percent from the prior fiscal year. Foreign currency translation had a favorable impact of $113 million on net sales when compared to the prior fiscal year. The net sales increase in the current fiscal year was driven by double digit sales growth in four of our operating segments.  Sales outside the United States (U.S.) were $6.451 billion compared to $5.612 billion for the prior fiscal year.  Growth outside the U.S. continued to be strong, with six of our operating segments achieving 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 alliances 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.

 

Other Matters

 

We routinely interact with physicians and other healthcare providers in order to foster innovations in support of our Mission to improve the lives of individuals. In particular, we pay consulting fees for education and training, clinical trial design and administration, and product design and safety, and we pay royalties to physicians who make inventive contributions. To increase transparency about our policies relating to payments to physicians, we have voluntarily decided to disclose our payments of $5,000 or more made to U.S. physicians for consulting fees, royalties or honoraria, beginning in May 2010. The registry of physician payments can be accessed at www.medtronic.com/collaboration.

 

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 U.S. GAAP, 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 a ccrued. 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 17 to the consolidated financial statements. While it is not possible to predict the outcome for most of the matters discussed in Note 17 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 U.S. GAAP. Under U.S. GAAP, 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. W e regularly monitor our tax positions and 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 or restructuring charge, certain litigation charge, net and/or IPR&D and certain acquisition-related costs 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 and restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs 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 r esults over multiple periods. Investors should consider this non-GAAP measure in addition to, and not as a substitute for, financial performance measures prepared in accordance with U.S. GAAP. In addition, this non-GAAP financial measure may not be the same as similar measures presented by other companies.

 

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. D eferred 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 restructuring charges, certain litigation charges, net, and IPR&D and certain acquisition-related costs has resulted in an effective tax rate of 21.9 percent for fiscal year 2010. Excluding the impact of the restructuring charges, certain litigation charges, net, and IPR&D and certain acquisition-related costs, our operational and tax strategies have resulted in a non-GAAP nominal tax rate of 21.5 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 30, 2010 of approximately $44 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, Contingent Consideration, Goodwill and Other Intangible Assets  When we acquire a business, 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 wit h accepted valuation methods. For IPR&D, these valuation methodologies include consideration of the risk of the project not achieving commercial feasibility.

 

Contingent consideration is recorded at the acquisition date at the estimated fair value of the contingent milestone payments for all acquisitions subsequent to April 24, 2009. The acquisition date fair value is measured based on the consideration expected to be transferred (probability-weighted), discounted back to present value. The discount rate used is determined at the time of the acquisition in accordance with accepted valuation methods. The fair value of the contingent milestone consideration is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense in our consolidated statements of earnings.

 

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.

 

 

3

 


 

 

The test for impairment requires us to make several 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 $8.391 billion and $8.195 billion as of April 30, 2010 and April 24, 2009, respectively.

 

Other intangible assets include patents, trademarks, purchased technology and IPR&D. Intangible assets with a definite life are amortized on a straight-line or accelerated basis, as appropriate, with estimated useful lives ranging from three to 20 years. We review all 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 $2.559 billion and $2.477 billion as of April 30, 2010 and April 24, 2009, respectively.

 

Net Sales

 

The table below illustrates net sales by product line and operating segment for fiscal years 2010, 2009 and 2008:

 

 

 

Net Sales

 

 

 

Net Sales

 

 

 

 

 

Fiscal Year

 

 

 

Fiscal Year

 

 

 

(dollars in millions) 

 

2010 

 

2009 

 

% Change

 

2009 

 

2008 

 

% Change

 

Defibrillation Systems

 

$

3,167

 

$

2,962

 

7

%

$

2,962

 

$

2,897

 

2

%

Pacing Systems

 

 

1,987

 

 

1,984

 

 

 

1,984

 

 

2,008

 

(1

)

Other

 

 

114

 

 

68

 

68

 

 

68

 

 

58

 

17

 

CARDIAC RHYTHM DISEASE MANAGEMENT

 

 

5,268

 

 

5,014

 

5

 

 

5,014

 

 

4,963

 

1

 

Core Spinal

 

 

2,632

 

 

2,560

 

3

 

 

2,560

 

 

2,167

 

18

 

Biologics

 

 

868

 

 

840

 

3

 

 

840

 

 

815

 

3

 

SPINAL

 

 

3,500

 

 

3,400

 

3

 

 

3,400

 

 

2,982

 

14

 

Coronary

 

 

1,489

 

 

1,292

 

15

 

 

1,292

 

 

1,118

 

16

 

Structural Heart

 

 

880

 

 

747

 

18

 

 

747

 

 

728

 

3

 

Endovascular

 

 

495

 

 

398

 

24

 

 

398

 

 

285

 

40

 

CARDIOVASCULAR

 

 

2,864

 

 

2,437

 

18

 

 

2,437

 

 

2,131

 

14

 

NEUROMODULATION

 

 

1,560

 

 

1,434

 

9

 

 

1,434

 

 

1,311

 

9

 

DIABETES

 

 

1,237

 

 

1,114

 

11

 

 

1,114

 

 

1,019

 

9

 

SURGICAL TECHNOLOGIES

 

 

963

 

 

857

 

12

 

 

857

 

 

780

 

10

 

PHYSIO-CONTROL

 

 

425

 

 

343

 

24

 

 

343

 

 

329

 

4

 

TOTAL

 

$

15,817

 

$

14,599

 

8

%

$

14,599

 

$

13,515

 

8

%

 

In fiscal years 2010 and 2009, net sales were favorably/(unfavorably) impacted by foreign currency translation of $113 million and $(100) 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 10 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 Annual Report on Form 10-K and “Cautionary Factors That May Affect Future Results” in this management’s discussion and analysis for more information on these important risk factors.

 

Cardiac Rhythm Disease Management  CRDM products consist primarily of pacemakers, implantable defibrillators, leads and delivery systems, ablation products, electrophysiology catheters, products for the treatment of atrial fibrillation (AF) and information systems for the management of patients with our CRDM devices. CRDM fiscal year 2010 net sales were $5.268 billion, an increase of 5 percent over the prior fiscal year. Foreign currency translation had a favorable impact on net sales of approximately $41 million when compared to the prior fiscal year.

 

 

4

 


 

 

Worldwide net sales of Defibrillation Systems, our largest product line, for fiscal year 2010 were $3.167 billion, an increase of 7 percent when compared to the prior fiscal year. Foreign currency translation had a favorable impact on net sales of approximately $16 million when compared to the prior fiscal year. Net sales growth was primarily a result of worldwide net sales of our Vision 3D portfolio, specifically from worldwide sales of Secura implantable cardioverter defibrillators (ICDs) and Consulta cardiac resynchronization therapy-defibrillators (CRT-Ds), but was partially impacted by continued pricing pressures. We continue to see a shift in product mix toward CRT-Ds. Both the Secura ICDs and Consulta CRT-Ds feature OptiVol Fluid Status Monitoring (OptiVol) and 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 i mplant, during follow-up in a clinician’s office or remotely using a patient home monitor. Additionally, net sales in the U.S. were positively impacted by the temporary suspension of sales of a competitor’s products during a portion of the fourth quarter of fiscal year 2010 and also the Attain Ability left-heart lead. The Attain Ability left-heart lead, which became commercially available in the U.S. in the first quarter of fiscal year 2010, offers a thin lead body, providing physicians a tool to deliver therapy to hard-to-reach areas of the heart in heart failure patients.

 

Pacing Systems net sales for fiscal year 2010 remained flat at $1.987 billion when compared to the prior fiscal year. Foreign currency translation had a favorable impact on net sales of approximately $21 million when compared to the prior fiscal year. Net sales remained flat for the fiscal year primarily as a result of modest growth outside the U.S. in the Adapta family of pacemakers, but were offset by continued pressure in the Japan market as a result of the Kappa/Sigma field action that was announced early in fiscal year 2010, as well as continued pricing pressures. The Adapta family of pacemakers incorporates several 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, which is an atrial based pacing mode that significantly reduces unnecessary pacing in the rig ht 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 2010 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, approximately 500,000 patients are being monitored through Medtronic’s CareLink Service worldwide, up from approximately 400,000 patients being monitored a year ago.

 

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.

 

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. Net sales growth was primarily a result of worldwide net sales of Secura ICDs and Consulta CRT-Ds. In addition, net sales for the comparative period were negatively impacted by our voluntary suspension of worldwide distribution of Sprint Fidelis leads in the second quarter of fiscal year 2008.

 

Pacing Systems net sales for fiscal year 2009 were $1.984 million, 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.

 

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

Ÿ

The future and continued 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. and outside the U.S. in fiscal year 2009. The devices within the Vision 3D portfolio provide enhanced follow-up and automaticity features and create meaningful manufacturing synergies.

Ÿ

The future market acceptance of our Protecta SmartShock (Protecta) family of devices which was launched outside the U.S. late in the fourth quarter of fiscal year 2010. The Protecta portfolio will leverage the already established Vision 3D platform to deliver a full suite of single, dual and triple chamber defibrillators that represent a significant new algorithm technology that should reduce the delivery of inappropriate shocks, which is a leading clinical request from physicians. Protecta is pending U.S. Food and Drug Administration (FDA) approval.

Ÿ

Increased use in the U.S. of devices with OptiVol, which was granted reimbursement effective fiscal year 2009.  OptiVol 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.

 

 

5

 


 

 

Ÿ

The launch and acceptance of the first Magnetic Resonance Imaging (MRI) pacing system to be developed and tested specifically for use in MRI machines.  In November 2008, we launched our first generation MRI pacing system, EnRhythm MRI SureScan pacing system (EnRhythm MRI), in certain European countries. During the fourth quarter of fiscal year 2010 we launched Advisa MRI SureScan, our next generation MRI pacing system in Europe and in the first half of fiscal year 2011 we expect to launch Revo MRI SureScan, our first generation MRI pacing system in the U.S. Both Advisa MRI SureScan and Revo MRI SureScan are designed to address and mitigate interactions between the pacing system and the magnetic resonance environment.

Ÿ

Continued U.S. acceptance 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 fiscal year 2009.

Ÿ

The continued U.S. acceptance of the Attain Ability left-heart lead. The Attain Ability left-heart lead is commercially available in every major market in the world.

Ÿ

The continued market development of our fiscal year 2009 investments in what we believe are 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. Arctic Front is expected to launch in the U.S. in the second half of fiscal year 2011. In addition, in February 2009 we acquired Ablation Frontiers, Inc. (Ablation Frontiers), a company that 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. and is anticipated to launch in the U.S . in the second half of fiscal year 2011.

Ÿ

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 or maintain our market position.  The current CRDM market is impacted by pricing pressures and significant competition, and in fiscal year 2010, we believe that Medtronic’s growth exclusive of the temporary suspension of sales of a competitor’s products was stable compared to the overall market.   

Ÿ

Final timing of resolution of our Mounds View FDA warning letter. We are currently awaiting the FDA’s follow-up inspection. The future launch timing of Protecta, Revo MRI SureScan, U.S. Arctic Front and the Ablation Frontiers’ system of ablation catheters and RF generators is dependent on the resolution of our Mounds View FDA warning letter.

 

Spinal  Spinal products include thoracolumbar, cervical, neuro monitoring, surgical access, bone graft substitutes and biologic products. Spinal net sales for fiscal year 2010 were $3.500 billion, an increase of 3 percent over the same period of the prior fiscal year. Foreign currency translation had a favorable impact on net sales of approximately $16 million when compared to the prior fiscal year.

 

Core Spinal net sales for fiscal year 2010 were $2.632 billion, an increase of 3 percent when compared to the prior fiscal year. Growth in the period was primarily driven by further acceptance of our products for the thoracolumbar region of the spine. Thoracolumbar net sales growth for fiscal year 2010 was driven by worldwide net sales of the CD HORIZON LEGACY (CD HORIZON) and TSRH family of products. CD HORIZON net sales increased primarily from the increased use of our MAST line of less invasive technologies in the U.S. and outside the U.S. 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. Our market share in the Core Spinal business continues to experience pressure from the proliferation of smaller, public and privately held companies competing in the market. Core Spinal net sales growth outside the U.S. for the year was positively impacted from our joint venture with Shandong Weigao Group Medical Polymer Company Limited (Weigao). The joint venture, which distributes Medtronic’s spinal products and Weigao’s orthopedic products in China, commenced operations at the end of the second quarter of fiscal year 2009. In addition, net sales growth was negatively impacted by the decrease in demand for Kyphon Balloon Kyphoplasty (BKP) driven in large part by the vertebroplasty articles in the New England Journal of Medicine. BKP procedures are used to treat vertebral compression fractures. BKP using Kyphon instruments is presently used 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.

 

Biologics net sales for fiscal year 2010 were $868 million, an increase of 3 percent when compared to the prior fiscal year. Growth in the period was primarily driven by strong growth in other biologics, including MasterGraft and Progenix products. In addition, INFUSE Bone Graft sales modestly increased for the fiscal year, but were impacted by the negative mix due to growth in smaller kits. INFUSE Bone Graft contains a recombinant human 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. INFUSE Bone Graft is indicated for use in spinal fusion with certain Medtronic titanium interbody fusion devices for single level lumbar degenerative disc disease, augmentations and for localized ridge augmentations for defects associated with extraction sockets.

 

 

6

 


 

 

Spinal net sales for fiscal year 2009 were $3.400 billion, an increase of 14 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. The growth in fiscal year 2009 was partially driven by the third quarter fiscal year 2008 acquisition of Kyphon, Inc. (Kyphon).

 

Core Spinal net sales for fiscal year 2009 were $2.560 billion, an increase of 18 percent from the prior fiscal year. Growth in the period was primarily driven by continued adoption 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 family of products 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.  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 continued to experience pressure from the proliferation of smaller, public and privately held companies competing in the market.  Also, Core Spinal net sales growth for the fiscal year was positively impacted from our joint venture with Weigao.  In addition, Kyphon was acquired in the third quarter of fiscal year 2008; therefore, net sales for the prior period only included six months of net sales. Kyphon net sales were driven primarily by BKP.

 

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.

 

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

Ÿ

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

Ÿ

Continued acceptance of the TSRH 3Dx Spinal System, which was launched in November 2009. The TSRH 3Dx Spinal System offers two screws designed to address multiple pathologies. The Multi Planar Adjusting Screw option provides surgeons a variable angle posted screw for targeted, controlled correction maneuvers. The OSTEOGRIP Screw enhances bone fixation by incorporating a dual-lead thread pattern that reduces toggle at the bone-screw interface. This next generation pedicle screw system includes competitive differentiating technology for addressing multiple spinal pathologies, from degenerative disc disease to spinal deformity.

Ÿ

Improved procedural integration of our thoracolumbar and cervical fixation and interbody implant products with proprietary NIM neuro monitoring technologies and MAST Quadrant and METRx access technologies.

Ÿ

Full launch of the Solera Legacy products. At the end of the second quarter of fiscal year 2010, we began a limited launch and anticipate the broader roll-out of these products in the second half of fiscal year 2011.

Ÿ

Continued and future acceptance of our BKP technology. While we have been most recently encouraged by our return to growth in Europe, we believe worldwide growth continues to be negatively impacted by the vertebroplasty articles in the New England Journal of Medicine. In addition, a new competitor entered into the U.S. marketplace during the fourth quarter of fiscal year 2010.

 

Future growth opportunities will be supported by the anticipated launch of high pressure balloons and syringes, curettes and fixation materials in fiscal year 2011. In addition, the KYPHON Cement Delivery System (CDS) was launched in the U.S. in September 2009. CDS allows physicians to keep a farther distance from the radiation source during the cement delivery phase than with Medtronic’s current delivery system used in the balloon kyphoplasty procedure. It allows for the delivery of KYPHON HV-R Bone Cement with one-handed operation, preserving some tactile feel during delivery with the ability to halt bone cement flow on demand with the quick-release button. Additionally, we expect a positive impact from regulatory clearance and reimbursement approval for BKP in Japan during fiscal year 2011.

Ÿ

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.

 

 

7

 


 

 

Ÿ

Continued and expected future growth in our Biologics franchise, driven by new products such as AMPLIFY, which has been submitted for FDA approval for indications within and outside the spine.

Ÿ

The continued acceptance of the Atlantis Translational Cervical Plate System, the VERTEX SELECT Reconstruction System and the future acceptance of the recently launched PEEK PREVAIL Cervical Interbody Device. The Atlantis Translational Plate provides expanded options for our market leading anterior cervical portfolio.  The VERTEX SELECT Reconstruction System 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 offers surgeons another option for cervical interbody fusion procedures.

 

CardioVascular  CardioVascular products consist of coronary and peripheral stents and related delivery systems, endovascular stent graft systems, heart valve replacement technologies, tissue ablation systems and open heart and coronary bypass grafting surgical products. CardioVascular net sales for fiscal year 2010 were $2.864 billion, an increase of 18 percent over the prior fiscal year. Foreign currency translation had a favorable impact on net sales of approximately $27 million when compared to the prior fiscal year.

 

Coronary net sales for fiscal year 2010 were $1.489 billion, an increase of 15 percent when compared to the prior fiscal year. The increase in net sales was primarily the result of the fiscal year 2010 launch of Endeavor in Japan and strong sales of Endeavor and the Resolute drug-eluting stent outside the U.S. Endeavor and Resolute generated worldwide revenue of $767 million for the fiscal year compared to $603 million for the prior year. In addition, during fiscal year 2010 we entered into a buyout agreement with our coronary distributor in Japan. In order to settle a preexisting relationship with this distributor, a revenue reversal of $18 million was recorded in the first quarter of fiscal year 2010 related to inventory previously sold to the distributor.

 

Endovascular net sales for fiscal year 2010 were $495 million, an increase of 24 percent when compared to the prior fiscal year.  The increase in net sales was primarily the result of increased sales in the U.S. of the Talent Abdominal Aortic Aneurysm Stent Graft System and Thoracic Stent Graft System and the Endurant Abdominal Stent Graft System outside the U.S. The Endurant Abdominal Stent Graft 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. The Endurant Abdominal Stent Graft System also enables treatment of patients with small or tortuous iliac arteries due to lower crossing profile of the delivery system.

 

Structural Heart net sales for fiscal year 2010 were $880 million, an increase of 18 percent when compared to the prior fiscal year. The increase was primarily the result of net sales growth outside the U.S. from our CoreValve transcatheter valve, tissue surgical valves and cannulae products.

 

CardioVascular net sales for fiscal year 2009 were $2.437 billion, an increase of 14 percent when compared to the prior fiscal year. Foreign currency translation had an unfavorable impact on net sales of approximately $23 million when compared to the prior fiscal year.

 

Coronary net sales for fiscal year 2009 were $1.292 billion, an increase of 16 percent when compared to the prior fiscal year. The growth in Coronary net sales was primarily a result of the launch of Endeavor in the U.S., which began during 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 Resolute generated worldwide revenue of $603 million for the fiscal year 2009 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. The growth in Endovascular was primarily driven by net sales in the U.S. of the Talent Abdominal Aortic Aneurysm 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.

 

Structural Heart net sales for fiscal year 2009 were $747 million, an increase of 3 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, our surgical ablation and from our cannulae and beating heart products. 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 in the market during the fiscal year. 

 

 

8

 


 

 

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

Ÿ

Continued acceptance of Endeavor in the Japan market. Endeavor was launched in Japan in the first quarter of fiscal year 2010. We anticipate increased competition in the Japan marketplace as a result of two competitive products that were launched in the fourth quarter of fiscal year 2010.

Ÿ

Continued acceptance of Resolute in markets outside the U.S.  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 elution of Zotarolimus while providing excellent biocompatibility.  Resolute demonstrated similar one-year rates of cardiac death, heart attacks related to the treated vessel and the need for repeat procedures in the same location in a large randomized trial compared to our competitor’s market leading drug eluting stent in unselected, complex patients.

Ÿ

Launch of new Integrity bare metal stent and Resolute Integrity coronary stent in certain international markets. The Integrity platform features a unique laser fused sinusoidal technology that is designed to significantly improve flexibility and conform ability to Driver and other technologies.

Ÿ

Further growth in the U.S. and Japan from the Talent Thoracic Stent Graft System, which was initially released in fiscal year 2009 and the first quarter of fiscal year 2010, respectively. In addition, we expect to launch our Talent Abdominal Aortic Aneurysm Stent Graft System and improved delivery system, Xcelerant, for our Thoracic Stent Graft System in Japan and an improved delivery system, Captivia, for our Thoracic Stent Graft System in the U.S.; all in the second half of fiscal year 2011.

Ÿ

Sales growth outside the U.S. with continued acceptance of our next generation Endurant Abdominal Stent Graft System and the launch of our Valiant Thoracic Stent Graft System on the recently released Captivia delivery system. Valiant Captivia received CE Mark approval and was commercially launched in the second quarter of fiscal year 2010, and the Endurant Abdominal Stent Graft System was commercially launched in fiscal year 2009.

Ÿ

The integration of Invatec S.p.A. (Invatec) and its affiliated Companies into our CardioVascular operating segment. We acquired Invatec and its affiliated Companies in the fourth quarter of fiscal year 2010. Invatec is a developer of innovative medical technologies for interventional treatment of cardiovascular disease. Invatec’s two affiliated companies are Fogazzi, which provides polymer technology to Invatec and Krauth Cardiovascular, which distributes Invatec products in Germany. This acquisition should increase our competitive position in the peripheral vascular market.

Ÿ

Continued integration of Ventor Technologies Ltd. (Ventor) and CoreValve, Inc. (CoreValve) into our CardioVascular operating segment. We acquired Ventor and CoreValve in the fourth quarter of fiscal year 2009. 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 in development stage 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 CardioVascular operating segment and leverage our global footprint. 

Ÿ

Our ability to consistently grow with the drug-eluting stent market that is characterized by pricing pressures and significant competition. Our growth in this market has been and will continue to be contingent upon continued market growth and our ability to increase or maintain market share upon the entrance of competitors’ products into the marketplace.

 

Neuromodulation  Neuromodulation products consist of implantable neurostimulation therapies and drug delivery devices for the treatment of chronic pain, movement disorders, obsessive-compulsive disorder (OCD), overactive bladder and urinary retention, gastroparesis and benign prostatic hyperplasia. Neuromodulation net sales for fiscal year 2010 were $1.560 billion, an increase of 9 percent when compared to the prior fiscal year. Foreign currency translation had a favorable impact on net sales of approximately $7 million when compared to the prior fiscal year. Net sales were driven by increased worldwide sales of InterStim and Medtronic Deep Brain Stimulation (DBS) Therapies, with ongoing momentum from Activa PC and Activa RC neurostimulator sales in Europe and the fiscal year 2010 launch in the U.S.

 

Neuromodulation net sales for fiscal year 2009 were $1.434 billion, an increase of 9 percent from 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. Net sales were driven by increased 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 fiscal year 2008, is our next generation rechargeable neurostimulator with advanced programming capabilities and is the thinnest 16-electrode neurostimulator on the market. In addition, revenue growth increased by worldwide sales of DBS and InterStim Therapies, but was negatively impacted by the launch of a competitive product in the pain stimulation market and a short-term supply shortfall with our implantable pumps during the fiscal year. 

 

 

9

 


 

 

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

Ÿ

Market leadership as a result of having a comprehensive portfolio of primary cell and rechargeable neurostimulation systems, including surgical and percutaneous leads used in spinal cord stimulation. The RestoreULTRA neurostimulation system offers an innovative patient programmer that allows patients to customize their pain control. 

Ÿ

Our ability to consistently grow with the pain stimulation market, which is characterized by significant competition. We remain focused on a number of key initiatives in the areas of sales and marketing growth execution as well as therapy adoption growth, which we expect will sustain our market leadership.

Ÿ

Continued and future acceptance of our current indications for Medtronic DBS Therapy for the treatment of the most common movement disorders, OCD, as well as a planned indication for epilepsy, which is now under review by the FDA. The DBS Therapy portfolio includes Activa PC, our smallest and most advanced primary cell battery, and Activa RC, the only rechargeable DBS device. We continue to educate neurologists and the patient population on the treatment options that Medtronic DBS Therapy offers them.

Ÿ

Continued acceptance of InterStim Therapy for the treatment of the symptoms of overactive bladder and urinary retention. InterStim Therapy for Bowel Control is also approved in Europe and is pending FDA approval in the U.S.

Ÿ

Future acceptance of the RestoreSensor, which was launched in Europe during the fourth quarter of fiscal year 2010. The RestoreSensor is an innovative spinal cord stimulator that includes our AdaptiveStim feature, which automatically adapts stimulation by responding to changes in body position and activity.

Ÿ

Continued leadership in the Intrathecal Drug Delivery market as we anticipate future competition.

 

Diabetes  Diabetes products consist of external insulin pumps and related consumables (together referred to as Durable Pump Systems) and subcutaneous continuous glucose monitoring (CGM) systems. Diabetes net sales for fiscal year 2010 were $1.237 billion, an increase of 11 percent when compared to the prior fiscal year. Foreign currency translation had a favorable impact on net sales of approximately $7 million when compared to the prior fiscal year. 

 

Durable Pump Systems net sales for fiscal year 2010 were $1.061 billion, an increase of 8 percent when compared to the prior fiscal year.  The increase in net sales resulted from the launch of the MiniMed Paradigm Veo outside the U.S. and the launch of the MiniMed Paradigm Revel in the U.S. during the third and fourth quarter of fiscal year 2010, respectively.  There was also an increase in worldwide net sales of related consumables.  Net sales of CGM and other accessories were $176 million, an increase of 34 percent when compared to the prior fiscal year. Growth was driven by strong acceptance of CGM systems worldwide.  During fiscal year 2010, we reached settlement with the suppliers involved in the July 2009 recall of specific lots of Quick-set infusion sets that are used with the MiniMed Paradigm insulin pumps.  The recall was initiated because the affected infusion sets may not allow the insulin pump to ve nt air pressure properly, which could potentially result in the device delivering too much or too little insulin.  The recall did not have a significant impact to total net sales for fiscal year 2010. 

 

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 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. 

 

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

Ÿ

Continued acceptance from both physicians and patients of insulin-pump therapy and CGM therapy.

Ÿ

The continued acceptance and expanded launch of a series of new insulin pumps, including the MiniMed Paradigm Veo System, 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 MiniMed Paradigm Veo System was launched in select markets in Asia and Europe in the third quarter of fiscal year 2010 and was launched throughout Asia and Europe in the fourth quarter of fiscal year 2010. In addition, the next MiniMed Revel System was launched in the U.S. in the fourth quarter of fiscal year 2010. The launch of this system extended our line of sensor-augmented therapy options available on the market.

 

 

10

 


 

 

Ÿ

Continued acceptance and improved reimbursement of CGM technologies, which provide patients and physicians valuable insight into glucose levels.

Ÿ

Our ability to increase or maintain market share through the successful introduction of future products within the competitive pump market.

Ÿ

Given the elective nature of an insulin pump and CGM 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 (ENT), 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 including those for obstructive sleep apnea and benign snoring, 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 2010 were $963 million, an increase of 12 percent when compared to the prior fiscal year. Foreign currency translation had a favorable impact on net sales of approximately $8 million when compared to the prior fiscal year. The increase in net sales for fiscal year 2010 was driven by strong performance worldwide in nerve monitoring products with the launch of the NIM 3.0 Nerve Monitoring System, power disposables and the continued success of the Fusion EM IGS System and the MR7 next generation pneumatic system, which is an advanced electromagnetic-based image-guided surgery system to facilitate sinus surgeries. Additionally, net sales for fiscal year 2010 increased as a result of service revenue worldwide, the continued adoption of the O-Arm Imaging System outside the U.S and the StealthStation S7 worldwide with the launch of the Synergy Cranial 2.1 software. The O-Arm Imaging System is a multi-dimensional surgical imaging platform that is optimized for use in spine and orthopedic surgery. The StealthStation S7 System, launched in the first quarter of fiscal year 2009, offers personalized navigation support for surgeons and surgical staff in the operating room.

 

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. The increase in net sales was driven by the continued success of the Fusion EM IGS System. Additionally, net sales for fiscal year 2009 increased as a result of service revenue in the U.S. and strong worldwide sales of the O-Arm Imaging System and the StealthStation S7 System.

 

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

Ÿ

Continued acceptance in the U.S. of our Fusion EM IGS System.

Ÿ

Continued acceptance of the StealthStation S7 System. In addition, we look forward to the continued acceptance of the Synergy Cranial 2.1 software for cranial procedures on the StealthStation S7 System hardware platform, which was launched in the second quarter of fiscal year 2010.

Ÿ

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

Ÿ

Continued acceptance of new products, including the NIM 3.0, a next generation nerve monitoring system, which we launched in the first quarter of fiscal year 2010, the MR7 Pneumatic Drill, which was launched in the second quarter of fiscal year 2010 and the Peak next generation RF Ablation technology, which was launched in the fourth quarter of fiscal year 2010.

Ÿ

Continued and future worldwide acceptance of the O-Arm Imaging System. The O-Arm Imaging System was launched in Japan during the first quarter of fiscal year 2010.

Ÿ

Potential improvement in consumer and hospital spending. As the economy shows signs of improvement and the financial health of hospitals improve this could lead to an increase in spending on revenue generating capital.

 

Physio-Control Physio-Control products consist of external defibrillators, including manual defibrillator/monitors used by hospitals and emergency response personnel and automated external defibrillators (AED) used in commercial and public settings for the treatment of sudden cardiac arrest. Physio-Control fiscal year 2010 net sales were $425 million, an increase of 24 percent over the prior fiscal year. Foreign currency translation had a favorable impact on net sales of approximately $7 million when compared to the prior fiscal year. Net sales were driven by the LIFEPAK 15 monitor/defibrillator and by the resumption of unrestricted global shipments early in fourth quarter of fiscal year 2010 following the lifting of FDA restrictions.

Physio-Control fiscal year 2009 net sales were $343 million, an increase of 4 percent over the prior fiscal year. Foreign currency translation had an unfavorable impact on net sales of approximately $7 million when compared to the prior fiscal year. Net sales were negatively impacted by the restrictions placed on shipments of certain defibrillators during the period while improvements were being made in the quality system.

Looking ahead, we expect our Physio-Control operating segment should be impacted by the following:

Ÿ

Resumption of shipments of devices into the AED market.

Ÿ

Continued acceptance of our external defibrillator products, primarily driven by the LIFEPAK 15 monitor/defibrillator.

Ÿ

Our previously announced intention to pursue a spin-off of Physio-Control into an independent, publicly traded company. Our plans have been delayed as a result of our suspension of shipments of certain Physio-Control products from January 2007 to February 2010 to address quality system issues. As a result, our current focus is to meet customer back orders and future product needs. Therefore, we do not anticipate spinning-off Physio-Control in fiscal year 2011.

Ÿ

Our ability to increase or maintain market share through the successful introduction of future products.

 

 

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Costs and Expenses

 

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

 

 

 

Fiscal Year

 

 

 

2010 

 

2009 

 

2008 

 

Cost of products sold

 

24.1

%

24.1

%

25.5

%

Research and development

 

9.2

 

9.3

 

9.4

 

Selling, general and administrative

 

34.2

 

35.3

 

34.8

 

Special charges

 

 

0.7

 

0.6

 

Restructuring charges

 

0.3

 

0.8

 

0.3

 

Certain litigation charges, net

 

2.4

 

4.9

 

2.7

 

IPR&D and certain acquisition-related costs

 

0.1

 

4.3

 

2.9

 

Other expense, net

 

3.0

 

2.7

 

3.2

 

Interest expense, net

 

1.6

 

1.3

 

0.3

 

 

Cost of Products Sold  Cost of products sold was $3.812 billion in fiscal year 2010 representing 24.1 percent of net sales, reflecting no change from fiscal year 2009. Cost of products sold as a percent of net sales was positively impacted by 0.4 of a percentage point of favorable margin variance and 0.4 of a percentage point of favorable scrap and other product costs offset by 0.4 of a percentage point of unfavorable inventory revaluation variance, 0.3 of a percentage point of unfavorable foreign currency translation and 0.1 of a percentage point of unfavorable product mix variance.  We continue to execute our broad initiatives to reduce our costs 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 percent 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.

 

Research and Development   Consistent with prior periods, we have continued to invest in new technologies to drive long-term future growth by spending aggressively on research and development efforts. Research and development spending was $1.460 billion in fiscal year 2010, representing 9.2 percent of net sales, a decrease of 0.1 of a percentage point from fiscal year 2009.

 

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 prior years.

 

We remain committed to developing technological enhancements and new indications for existing products, and less invasive and new technologies for new and emerging markets to address unmet medical needs. That commitment leads to our initiation and participation in many clinical trials each fiscal year as the demand for clinical and economic evidence increases. 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 2010 selling, general and administrative expense was $5.415 billion, which as a percent of net sales decreased by 1.1 percentage points from fiscal year 2009 to 34.2 percent.  For fiscal year 2010, our initiatives to leverage our cost structure helped reduce selling, general and administrative expense. This decrease was partially offset by an increase in legal expenses driven by an increasing amount of government scrutiny on the medical device industry compared to the prior fiscal year. We continue to drive our initiatives to leverage our size and scale in order to help reduce our cost structure.

 

Fiscal year 2009 selling, general and administrative expense was $5.152 billion, which as a percent of net sales increased by 0.5 of a percentage point from fiscal year 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.

 

 

12

 


 

 

Special Charges, Restructuring Charges, Certain Litigation Charges, Net, IPR&D and Certain Acquisition-Related Costs 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 charges, restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs and certain tax adjustments. Special charges (such as asset impairments or contributions to The Medtronic Foundation), restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs and certain tax adjustments recorded during the previous three fiscal years were as follows:

 

 

Fiscal Year

 

(in millions)

2010 

 

2009 

 

2008 

 

Special charges:

 

 

 

 

 

 

 

 

 

Asset impairment charges

$

 

$

 

$

78

 

Medtronic Foundation contribution

 

 

 

100

 

 

 

Total special charges

 

 

 

100

 

 

78

 

Restructuring charges

 

57

 

 

123

 

 

45

 

Certain litigation charges, net

 

374

 

 

714

 

 

366

 

IPR&D and certain acquisition-related costs

 

23

 

 

621

 

 

390

 

Total special charges, restructuring charges, certain litigation charges, net and IPR&D and certain acquisition-related costs

 

454

 

 

1,558

 

 

879

 

Net tax impact of special charges, restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs and certain tax adjustments

 

(80

)

 

(444

)

 

(137

)

Total special charges, restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs and certain tax adjustments, net of tax

$

374

 

$

1,114

 

$

742

 

 

Special Charges  In fiscal year 2010, there were no 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.

 

Restructuring Charges

 

Fiscal Year 2009 Initiative 

 

In the fourth quarter of fiscal year 2009, as part of our “One Medtronic” strategy, we recorded a $34 million restructuring charge, which consisted of employee termination costs of $29 million and asset write-downs of $5 million. The “One Medtronic” strategy focused on streamlining the organization and standardizing or centralizing certain functional activities which were not unique to individual businesses. In connection with these efforts to create “One Medtronic,” this initiative was 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 impacted most businesses and certain corporate functions.  Of the $5 million of asset write-downs, $3 million related to inventory write-offs and production-related asset impairments and therefore was record ed within cost of products sold in the consolidated statement of earnings. The employee termination costs of $29 million consisted of severance and the associated costs of continued medical benefits and outplacement services.

 

As a continuation of the fiscal year 2009 initiative, in the first quarter of fiscal year 2010 we incurred $72 million of incremental restructuring charges, which consisted of employee termination costs of $62 million and asset write-downs of $10 million.  Of the $10 million of asset write-downs, $7 million related to inventory write-offs and production-related asset impairments and therefore was recorded within cost of products sold in the consolidated statement of earnings.  Included in the $62 million restructuring charge was $9 million of incremental defined benefit pension and post-retirement related expenses for those employees who accepted early retirement packages.  For further discussion on the incremental defined benefit pension and post-retirement related expense, see Note 15 to the consolidated financial statements.

 

 

13

 


 

 

In the fourth quarter of fiscal year 2010, we recorded a $12 million reversal of excess restructuring reserves related to the fiscal year 2009 initiative. This reversal was primarily a result of a higher than expected percentage of employees identified for elimination finding positions elsewhere within the Company.

 

In connection with the fiscal year 2009 initiative, as of the end of the first quarter of fiscal year 2010, we had identified approximately 1,500 positions for elimination to be achieved through early retirement packages offered to employees, voluntary separation and involuntary separation.  Of these 1,500 positions, approximately 1,400 positions had been eliminated as of April 30, 2010.  The fiscal year 2009 initiative is scheduled to be substantially complete by the end of the first quarter of fiscal year 2011 and is expected to produce annualized operating savings of approximately $125 million. These savings will arise mostly from reduced compensation expense.

 

Global Realignment Initiative

 

In the fourth quarter of fiscal year 2008, we began a global realignment initiative which focused on shifting resources to those areas where we had the greatest opportunities for growth and streamlining operations to drive operating leverage. The global realignment initiative impacted most businesses and certain corporate functions. Within the Company’s CRDM operating segment, we 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 our Spinal operating segment, we 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 CardioVascul ar products, streamline distribution of products in select businesses and to reduce general and administrative costs in our corporate functions.

 

In the first quarter of fiscal year 2009, as a continuation of the global realignment initiative, 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 related to the execution of our global realignment initiative outside the U.S. This included the realignment and elimination of certain 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. 

 

In the fourth quarter of fiscal year 2009, we recorded a $7 million reversal of excess restructuring reserves related to the global realignment initiative.  This reversal was 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.

 

In the first quarter of fiscal year 2010, we recorded an $8 million reversal of excess restructuring reserves primarily as a result of favorable severance negotiations as well as a higher than expected percentage of employees identified for elimination finding positions elsewhere in the Company.  This $8 million reversal of excess reserves was partially offset by a $5 million charge we recorded in the first quarter of fiscal year 2010 related to the further write-down of a non-inventory related asset resulting from the continued decline in the international real estate market. 

 

In connection with the global realignment initiative, as of the end of the first quarter of fiscal year 2009, we had identified approximately 900 positions for elimination which were achieved through both voluntary and involuntary separation.  As of October 30, 2009 the restructuring initiatives were substantially complete and are expected to produce annualized operating savings of approximately $96 million. These savings will arise mostly from reduced compensation expense. 

 

For additional information, see Note 4 to the consolidated financial statements.

 

Certain Litigation Charges, Net  We classify material litigation reserves and gains recognized as certain litigation charges, net.

 

During fiscal year 2010, we recorded certain litigation charges, net totaling $374 million related to settlements with Abbott Laboratories (Abbott) and W.L. Gore & Associates (Gore). The Abbott settlement accounted for $444 million in litigation charges and the Gore settlement accounted for a $70 million certain litigation gain. The Abbott settlement related to the global resolution of all outstanding intellectual property litigation. The terms of the agreement stipulate that neither party will sue each other in the field of coronary stent and stent delivery systems for a period of at least 10 years, subject to certain conditions. Both parties also agreed to a cross-license of the disputed patents within the defined field. The $444 million settlement amount included a $400 million payment made to Abbott and a $42 million success payment made to evYsio Medical Devices, LLC (evYsio). In addition, a $2 million payment was made to evYsio in connection with an amendment to the parties’ existing agreement in order to expand the scope of the definition of the license field from evYsio. The settlement was paid in the second quarter of fiscal year 2010. The Gore settlement related to the resolution of outstanding patent litigation related to selected patents in Medtronic’s Jervis and Wiktor patent families. The terms of the agreement stipulate that neither party will sue each other in the defined field of use, subject to certain conditions. We granted Gore a worldwide, irrevocable, non-exclusive license in the defined field of use. In addition and subject to certain conditions, Gore will pay us quarterly payments that began in January 2010 through the fiscal quarter ending October 2018.

 

 

14

 


 

 

During fiscal year 2009, we incurred four certain litigation charges, net totaling $714 million. The first charge in the amount of $178 million related to litigation with DePuy Spine (formerly DePuy/AcroMed), a subsidiary of Johnson & Johnson (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, 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 U.S. GAAP. As a result of the U.S. Court of Appeals’ decision, we recorded a reserve of $178 million which covered the rev ised damages award and pre- and post-judgment interest. The settlement amount was paid in June 2009.

 

The second charge in fiscal year 2009 in the amount of $270 million related 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.

 

The third charge in fiscal year 2009 in the amount of $229 million related 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 at 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 litigati on 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. The settlement amount of $472 million was paid in fiscal year 2009.   

 

The fourth charge in fiscal year 2009 related 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. The settlement amount of $125 million was paid in fiscal year 2009.

 

During fiscal year 2008, we incurred certain litigation charges, net 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, related 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 17 to the consolidated financial statements for additional information.

 

IPR&D and Certain Acquisition-Related Costs During fiscal year 2010, we recorded $23 million of IPR&D and certain acquisition-related costs of which $11 million related to the Arbor Surgical Technologies, Inc. IPR&D asset purchase and $12 million related to certain acquisition-related costs associated with the acquisition of Invatec. In the above IPR&D charge, the payment was expensed as IPR&D since technological feasibility of the underlying project had not yet been reached and such technology had no future alternative use.

 

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 operating segments.  These payments were expensed as IPR&D since technological feasibility of the underlying projects had not yet been reached and such technology had no future alternative use.

 

See Note 5 to the consolidated financial statements for further discussion on IPR&D charges. 

 

 

15

 


 

 

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.

 

See the “Acquisitions” section of this management’s discussion and analysis for detailed discussion of each material acquisition in fiscal years 2010 and 2009.

 

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

 

In fiscal year 2010, there were no 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.

 

In fiscal year 2008, there were no certain tax adjustments.

 

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 2010, other expense, net was $468 million, an increase of $72 million from $396 million in the prior fiscal year. The increase of $72 million for fiscal year 2010 was primarily due to an increase in the amortization of intangible assets related to the acquisitions of Ablation Frontiers and CoreValve, a decrease in Diabetes royalty income, an increase in royalty expense within our CardioVascular operating segment and minority investment write-downs. This was partially offset by the gain on the sale of our ophthalmic business and the net impact of foreign currency gains. Total foreign currency gains re corded in fiscal year 2010 were $11 million compared to $28 million in losses in the prior fiscal year.

 

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. 

 

Interest Expense, Net  Interest expense, net includes interest earned on our investments, interest paid on our borrowings, amortization of debt issuance costs and debt discounts, the net realized and unrealized gain or loss on trading securities and the net realized gain or loss on the sale or impairment of available-for-sale debt securities. In fiscal year 2010, interest expense, net was $246 million, as compared to $183 million in fiscal year 2009. The increase in interest expense, net of $63 million in fiscal year 2010 is the result of an increase in interest paid on borrowings due to the $1.250 billion debt issuance in the fourth quarter of fiscal year 2009, which was slightly offset by lower interest rates on our outstanding debt in comparison to fiscal year 2009.  Interest income decreased as a result of having lower interest rates being earned on our short- and long-term investments during the twelve months ended April 30, 2010. See our discussion in the “Liquidity and Capital Resources” section of this management’s discussion and analysis for more information regarding our investment portfolio.

 

 

16

 


 

 

In fiscal year 2009 interest expense, net was $183 million, as compared to $36 million in fiscal year 2008. The increase in interest expense, net of $147 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. 

 

Income Taxes

 

 

 

Fiscal Year

 

 

Percentage Point Increase/(Decrease)

 

(dollars in millions) 

 

2010 

 

2009 

 

2008 

 

 

FY10/09

 

FY09/08

 

Provision for income taxes

 

$

870

 

$

370

 

$

602

 

 

N/A

 

N/A

 

Effective tax rate

 

 

21.9

%

 

15.2

%

 

22.0

%

 

6.7

 

(6.8

)

Impact of special charges, restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs and certain tax adjustments

 

 

0.4

 

 

(5.2

)

 

1.6

 

 

5.6

 

(6.8

)

Non-GAAP nominal tax rate (1)

 

 

21.5

%

 

20.4

%

 

20.4

%

 

1.1

 

 

_________

 

(1) 

Non-GAAP nominal tax rate is defined as the income tax provision as a percentage of earnings before income taxes, excluding special charges, restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs 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.  Investors should consider the non-GAAP measure in addition to, and not as a substitute for, financial performance measures prepared in accordance with U.S. GAAP.  In addition, this non-GAAP financial measure may not be the same as similar measures presented by other companies.

 

The effective tax rate of 21.9 percent increased by 6.7 percentage points from fiscal year 2009 to fiscal year 2010. The change in our effective tax rate was primarily due to the impact of special charges, restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs and certain tax adjustments.  The 5.6 percentage point increase in the impact from special charges, restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs 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.  This reversal related to the settlement of certain issues reached with the 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 th rough 2007 and the completion of foreign audits covering various years recorded in fiscal year 2009.  Our non-GAAP nominal tax rate for fiscal year 2010 was 21.5 percent compared to 20.4 percent from the prior fiscal year. The increase in our non-GAAP nominal tax rate for fiscal year 2010 as compared to the prior fiscal year was due to the operational tax benefits described below and the impact of tax benefits derived from our international operations. 

 

During fiscal year 2010 we recorded $5 million in operational tax benefits. This included a $20 million operational tax benefit associated with certain Irish research and development credit claims, the deductibility of a settlement expense, the finalization of certain foreign and domestic tax returns and changes to uncertain tax position reserves.  This benefit was partially offset by the $15 million tax cost associated with the U.S. healthcare reform legislation eliminating the federal tax benefit for government subsidies of retiree prescription drug benefits.

 

The fiscal year 2009 effective tax rate of 15.2 percent decreased by 6.8 percentage points from fiscal year 2008. The change in our effective tax rate was due to the tax impact of special charges, restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs and certain tax adjustments. The 6.8 percentage point decrease in the impact of special charges, restructuring charges, certain litigation charges, net, IPR&D and certain acquisition-related costs and certain tax adjustments is largely due to the $132 million benefit from certain tax adjustments associated with the reversal of excess tax accruals.  This reversal related to the settlement of certain issues reached with the 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 years 2009 and 2008 was 20.4 percent.

 

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.  These tax adjustments are operational in nature and are recorded in the provision for income taxes on the consolidated statements of earnings. 

 

 

17

 


 

 

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. The Company filed a Petition with the U.S. Tax Court on July 14, 2008 objecting to the deficiency.  We are in settlement discussions with the IRS as it relates to the outstanding issue; however, a settlement has not yet been reached.

 

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 between Medtronic, Inc. and its wholly owned subsidiary in Switzerland for fiscal years 1997 through 1999.

 

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. As the statute of limitations for these tax years expire in December 2010, we expect that the IRS will issue a Notice of Deficiency for these remaining issues during our fiscal year ending April 29, 2011 and we will proceed to attempt to resolve these matters either at the IRS Appellate level or in the courts, if necessary. 

 

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 14 to the consolidated financial statements for additional information.

 

Liquidity and Capital Resources

 

 

 

Fiscal Year

 

(dollars in millions)

2010 

 

2009 

 

Working capital

 

$

4,718

 

$

4,305

 

Current ratio*

 

 

1.9:1.0

 

 

2.4:1.0

 

Cash, cash equivalents and short-term investments

 

$

3,775

 

$

1,676

 

Long-term investments in debt and trading securities**

 

 

4,089

 

 

2,242

 

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

 

$

7,864

 

$

3,918

 

Short-term borrowings and long-term debt

 

$

9,519

 

$

6,775

 

Net cash position***

 

$

(1,655

)

$

(2,857

)

 

*

 

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 and trading securities and exclude minority investments.

***

 

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

 

 

18

 


 

 

We believe our liquidity remains strong as of April 30, 2010 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 $3.274 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 30, 2010, our Standard and Poor’s Ratings Group and Moody’s Investors Service ratings remain unchanged as compared to the fiscal year ended April 24, 2009 with long-term debt ratings of AA- and A1, respectively, and strong short-term debt ratings of A-1+ and P-1, respectively.

 

The increase in our net cash position in fiscal year 2010 as compared to fiscal year 2009 was primarily due to the fiscal year 2010 issuance of new debt, which we used to pay off a portion of our short-term borrowings and invest in debt securities.  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 17 to the consolidated financial statements provides information regarding amounts we have accrued related to significant legal proceedings. In accordance with U.S. GAAP, 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 30, 2010, we have made significant payments related to certain legal proceedings.  For information regarding these payments, please see the “Special Charges, Restructuring Charges, Certain Litigation Charges, Net, IPR&D and Certain Acquisition-Related Costs and Certain Tax Adjustments” section of this management’s discussion and analysis.

 

At April 30, 2010 and April 24, 2009, approximately $5.576 billion and $3.628 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 30, 2010 also include $156 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.

We have investments in marketable debt securities that are classified and accounted for as available-for-sale. Our debt securities include U.S. and foreign government and agency securities, corporate debt securities, certificates of deposit and mortgage backed and other asset backed securities including auction rate securities. Market conditions over the past several years have included periods of significant economic uncertainty and at times general market distress especially in the banking and financial services sector.  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 liquidat e 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 30, 2010, other-than-temporary impairment losses on available-for-sale debt securities were $29 million, of which $15 million was recognized in other comprehensive income resulting in $14 million of charges being recognized in earnings. In determining this other-than-temporary impairment loss, U.S. GAAP specifies that we consider a variety of factors, including the quality and estimated value of the underlying credit support for our holdings and the financial condition and credit rating of the issuer in estimating the credit loss portion of other-than-temporary impairment losses. 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 do not have the intent to sell nor is it more likely than not that we will be requi red to sell before recovery of the amortized cost. However, as of April 30, 2010, we have $83 million of gross unrealized losses on our aggregate short-term and long-term available-for-sale debt securities of $6.434 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. Therefore actual results could differ materially from those estimates. See Note 7 to the consolidated financial statements for additional information regarding fair value measurements.

 

 

19

 


 

 

Summary of Cash Flows

 

 

 

Fiscal Year

 

(in millions)

 

2010 

 

2009 

 

2008 

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

4,131

 

$

3,878

 

$

3,489

 

Investing activities

 

 

(4,759

)

 

(2,740

)

 

(2,790

)

Financing activities

 

 

764

 

 

(845

)

 

(835

)

Effect of exchange rate changes on cash and cash equivalents

 

(7

)

 

(82

)

 

(60

)

Net change in cash and cash equivalents

 

$

129

 

$

211

 

$

(196

)

 

Operating Activities  Our net cash provided by operating activities was $4.131 billion for the fiscal year ended April 30, 2010 compared to $3.878 billion provided by operating activities for the same period of the prior year. The $253 million increase in net cash provided by operating activities is primarily attributable to the increase in earnings offset by an increase in certain litigation payments.  For more information regarding these payments, refer to Note 3 of the consolidated financial statements.

 

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

 

Investing Activities  Our net cash used in investing activities was $4.759 billion for the fiscal year ended April 30, 2010 compared to $2.740 billion used in investing activities for the fiscal year ended April 24, 2009.  Cash used for acquisitions decreased in comparison to the prior fiscal year as the prior fiscal year included the acquisitions of Restore Medical, Inc. (Restore), CryoCath, Ablation Frontiers and CoreValve.  The reduction in acquisition spending was more than offset by increased investing in marketable securities in fiscal year 2010 which resulted in net purchases of $3.687 billion as compared to net purchases of $115 million in the prior year.  The increased investing in marketable securities resulted from investing the proceeds of our fiscal year 2010 $3.000 billion debt issuance.

 

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 20 09 included the use of $221 million in cash for the purchase of a 15 percent interest in Weigao which was a component of our strategy to increase investment in China.     

 

Financing Activities  We had net cash provided by financing activities of $764 million for the fiscal year ended April 30, 2010 compared to net cash used in financing activities of $845 million for the fiscal year ended April 24, 2009.  Proceeds from net short- and long-term borrowings were approximately $2.219 billion higher in fiscal year 2010 as compared to fiscal year 2009, primarily due to the debt issuance of $3.000 billion during fiscal year 2010.  Our cash returned to shareholders in the form of dividends and the repurchase of common stock was approximately $335 million higher in fiscal year 2010 as compared to fiscal year 2009.  Both dividends and share repurchases were up compared to fiscal year 2009.  

 

Our net cash used in financing activities was $845 million for the fiscal year ended April 24, 2009 compared to $835 billion for the fiscal year ended April 25, 2008. Proceeds from net short- and long-term borrowings 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.  

 

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.

 

 

20

 


 

 

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 30, 2010. See Notes 9 and 16 to the consolidated financial statements for additional information regarding long-term debt and lease obligations, respectively.  Additionally, see Note 14 to the consolidated financial statements for additional information regarding accrued income tax obligations, which are not reflected in the table below.

 

 

Maturity by Fiscal Year

(in millions)

Total

 

2011 

 

2012 

 

2013 

 

2014 

 

2015 

 

Thereafter

Contractual obligations related to off-balance sheet arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases (1)

$

360

 

$

106

 

$

78

 

$

58

 

$

44

 

$

27

 

$

47

Inventory purchases (2)

 

399

 

 

242

 

 

123

 

 

10

 

 

10

 

 

10

 

 

4

Commitments to fund minority investments/contingent acquisition consideration (3)

 

441

 

 

270

 

 

92

 

 

16

 

 

11

 

 

17

 

 

35

Interest payments (4)

 

2,749

 

 

294

 

 

252

 

 

252

 

 

216

 

 

191

 

 

1,544

Other (5)

 

204

 

 

77

 

 

49

 

 

23

 

 

17

 

 

15

 

 

23

Total

$

4,153

 

$

989

 

$

594

 

$

359

 

$

298

 

$

260

 

$

1,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual obligations reflected in the balance sheet:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, including current portion (6)

$

9,744

 

$

2,600

 

$

48

 

$

2,220

 

$

568

 

$

1,254

 

$

3,054

Capital leases

 

18

 

 

-

 

 

1

 

 

1

 

 

1

 

 

1

 

 

14

Total

$

9,762

 

$

2,600

 

$

49

 

$

2,221

 

$

569

 

$

1,255

 

$

3,068

 

(1)

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.

(2)

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.

(3)

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. In accordance with new authoritative accounting guidance on business combinations effective in fiscal year 2010, we are required to record the fair value of contingent acquisition considerations as a liability on the consolidated balance sheet on a prospective basis, therefore, contingent acquisition considerations are not included in the off-balance sheet disclosure for acquisitions subsequent to April 24, 2009. The table above excludes our pending acquisition of ATS Medical, Inc.

(4)

Interest payments in the table above reflect the interest on our outstanding debt, including the $3.000 billion of 2010 Senior Notes, $1.250 billion of 2009 Senior Notes, $4.400 billion of Senior Convertible Notes, $1.000 billion of 2005 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 3.000 percent on $1.250 billion of the 2010 Senior Notes due 2015, 4.450 percent on $1.250 billion of the 2010 Senior Notes due 2020, 5.550 percent on $500 million of the 2010 Senior Notes due 2040, 4.500 percent on $550 million of the 2009 Senior Notes due 2014, 5.600 percent on $400 million of the 2009 Senior Notes due 2019, 6.500 percent on $300 million of the 2009 Senior Notes due 2039, 1.500 percent on the $2.200 billion Senior Convertible Notes due 2011, 1.625 percent on the $2.200 billion Senior Convertible Notes due 2013, 4.750 percent on the $400 million of 2005 Senior Notes due 2010, 4.750 percent on the $600 million of 2005 Senior Notes due 2015 and 1.250 percent on the Contingent Convertible Debentures due 2021. The table above excludes the impact of the debt discount amortization, due to the adoption of the new authoritative guidance for convertible debt accounting, on the Senior Convertible Notes.

 

 

21

 


 

 

(5)

These obligations include certain research and development arrangements.

(6)

Long-term debt in the table above includes $3.000 billion 2010 Senior Notes, $1.250 billion 2009 Senior Notes, $4.400 billion Senior Convertible Notes, $1.000 billion 2005 Senior Notes and $15 million related to our Contingent Convertible Debentures. The table above excludes the remaining fair value from the five-year interest rate swap agreements entered into in November 2005 and the eight-year interest rate swap agreement entered into in June 2007 that were terminated in December 2008.  The table above includes the impact of the five-year interest rate swap agreements entered into in June 2009, December 2009 and March 2010 along with the three-year interest rate swap agreements entered into in March 2010. See Notes 9 and 10 to the consolidated financial statements for additional information regarding the interest rate swap agreement terminations.

 

Debt and Capital

 

In June 2007 and June 2009, our Board of Directors authorized the repurchase of up to 50 million and 60 million shares of our common stock, respectively.

 

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 2010 and 2009, we repurchased approximately 27.0 million shares and 16.5 million shares at an average price of $38.10 and $45.94, respectively. As of April 30, 2010, we have approximately 50.8 million shares remaining under current buyback authorizations approved by the Board of Directors.

 

In March 2010, we issued three tranches of Senior Notes (collectively, the 2010 Senior Notes) with the aggregate face value of $3.000 billion.  The first tranche consisted of $1.250 billion of 3.000 percent Senior Notes due 2015, the second tranche consisted of $1.250 billion of 4.450 percent Senior Notes due 2020 and the third tranche consisted of $500 million of 5.550 percent Senior Notes due 2040.  All three tranches were issued at a discount which resulted in an effective interest rate of 3.002 percent, 4.470 percent and 5.564 percent, respectively.  Interest on each series of 2010 Senior Notes is payable semi-annually, on March 15 and September 15 of each year, commencing September 15, 2010.  The 2010 Senior Notes are unsecured senior obligations that rank equally with all other unsecured and unsubordinated indebtedness.  The indentures under which the 2010 Senior Notes were issued contain customa ry covenants, all of which we remain in compliance with as of April 30, 2010.  We used the net proceeds from the sale of the 2010 Senior Notes for working capital and general corporate uses, which may include repayment of our indebtedness that matures in fiscal year 2011. This includes the $2.200 billion of 1.500 percent Senior Convertible Notes due 2011 and the $400 million of 2005 Senior Notes due 2010.

 

In March 2009, we issued three tranches of Senior Notes (collectively, the 2009 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 2009 Senior Notes is payable semi-annually, on March 15 and September 15 of each year. The 2009 Senior Notes are unsecured senior obligations that rank equally with all other unsecured and unsubordinated indebtedness. The indentures under which the 2009 Senior Notes wer e issued contain customary covenants, all of which we remain in compliance with as of April 30, 2010. We used the net proceeds from the sale of the 2009 Senior Notes for repayment of a portion of our outstanding commercial paper and for general corporate uses.

 

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 m onth 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 in the applicable indentures, 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 30, 2010. A total of $2.500 billion of the net proceeds from these note issuances were used to repurchase common stock. As of April 30, 2010, p ursuant to provisions in the indentures relating to the increase of our quarterly dividend to shareholders, the conversion rates for each of the Senior Convertible Notes is now 18.2508, which correspondingly changed the conversion price per share for each of the Senior Convertible Notes to $54.79. See Note 9 to the consolidated financial statements for further discussion of the accounting treatment of these Senior Convertible Notes.

 

 

22

 


 

 

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.

 

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 9 to the consolidated financial statements for further discussion of the accounting treatment. During the fourth quarter of fiscal year 201 0, certain of the holders requested adjustment to the exercise price of the warrants from $75.30 to $74.71 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 (collectively, the 2005 Senior Notes) with the aggregate face value of $1.000 billion. The first tranche consisted of $400 million of 4.375 percent 2005 Senior Notes due 2010 and the second tranche consisted of $600 million of 4.750 percent 2005 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 2005 Senior Notes, respectively. Interest on each series of 2005 Senior Notes is payable semi-annually, on March 15 and September 15 of each year. The 2005 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 30, 2010. We used the net proceeds from the sale of the 2005 Senior Notes for repayment of a portion of our outstanding commercial paper.

 

As of April 30, 2010, we had interest rate swap agreements designated as fair value hedges of underlying fixed rate obligations including our $1.250 billion 3.000 percent Senior Notes due 2015, our $600 million 4.750 percent Senior Notes due 2015, our $2.200 billion 1.625 percent Senior Convertible Notes due 2013 and our $550 million 4.500 percent Senior Notes due 2014. We did not have any interest rate swap agreements outstanding as of April 24, 2009. For additional information regarding the interest rate swap agreements, refer to Note 10 of the consolidated financial statements.

 

As of April 30, 2010, we had $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. 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. There was no outstanding commercial paper as of April 30, 2010. At April 24, 2009, outstanding commercial paper totaled $385 million. During fiscal years 2010 and 2009, the weighted average original maturity of the commercial paper outstanding was approximately 63 and 50 days, respectively, and the weighted average interest rate was 0.44 percent and 1.60 percent, respectively.

 

In connection with the issuance of the Debentures, 2010 Senior Notes, 2009 Senior Notes, 2005 Senior Notes, Senior Convertible Notes and commercial paper, Standard and Poor’s Ratings Group and Moody’s Investors Service issued long-term debt ratings of AA- and A1, respectively, and short-term debt ratings of A-1+ and P-1, respectively. These ratings remain unchanged from the same periods of the prior year.

 

 

23

 


 

 

We have existing unsecured lines of credit of approximately $2.839 billion with various banks at April 30, 2010. 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. 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 credit agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd. The credit agreement provides for a $300 million unsecured revolving credit 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 30, 2010 and April 24, 2009, $65 million and $508 million, 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 30, 2010.

 

As of April 30, 2010, we have unused credit lines and commercial paper capacity of approximately $3.274 billion.

 

Pending Acquisition

 

On April 29, 2010 we announced the signing of a definitive agreement to acquire ATS Medical, Inc. (ATS Medical).  ATS Medical is a leading developer, manufacturer and marketer of products and services focused on cardiac surgery, including heart valves and surgical cryoablation technology.  Under the terms of the agreement, we will pay $4.00 per share in cash for each share of ATS Medical stock.  The total value of the transaction is expected to be approximately $370 million, which includes the purchase of ATS Medical stock and assumption of net debt.  The transaction is expected to close this summer and is subject to customary closing conditions, including approval by ATS Medical’s shareholders and U.S. and foreign regulatory clearances. 

 

Acquisitions

 

In April 2010, we acquired Invatec.  Under the terms of the agreement, the transaction included an initial up-front payment of $350 million, which includes the assumption and settlement of existing Invatec debt. The agreement also includes potential additional payments of up to $150 million contingent upon achievement of certain milestones.  Invatec is a developer of innovative medical technologies for the interventional treatment of cardiovascular disease. 

 

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 that are approved in certain markets outside the U.S.

 

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 ablation solutions for treatment of atrial fibrillation.  Ablation Frontiers’ system of ablation catheters and radiofrequency generator is currently approved in certain markets outside the U.S.    

 

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.   

 

 

24

 


 

 

It is expected that the acquisitions of Ablation Frontiers and CryoCath will allow our CRDM operating segment 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 30, 2010, 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 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 2010, 2009 and 2008:

 

 

 

Fiscal Years

(in millions) 

 

2010 

 

2009 

 

2008 

U.S. net sales

 

$

9,366

 

$

8,987

 

$

8,336

Non-U.S. net sales

 

 

6,451

 

 

5,612

 

 

5,179

Total net sales

 

$

15,817

 

$

14,599

 

$

13,515

 

From fiscal year 2009 to fiscal year 2010, consolidated net sales growth in the U.S. and outside the U.S. grew 4 percent and 15 percent, respectively.  Foreign currency had a positive impact of $113 million on net sales for fiscal year 2010.  Outside the U.S., net sales growth was strong across all of our operating segments and led by strong performance in CardioVascular, Neuromodulation, Diabetes, Spinal and Surgical Technologies.  CardioVascular net sales were led by increased sales of Resolute, Endeavor, CoreValve transcatheter valves and Endovascular. Pain Stim, DBS and Uro/Gastro led the increase within our Neuromodulation operating segment. Diabetes sales increased as a result of strong pump sales driven by the expanded launch of Veo. Spinal net sales growth was led by growth in balloon kyphoplasty. Increased sales of the O-Arm Imaging System led to the growth within the Surgical Technologies business outside the U .S. 

 

From fiscal year 2008 to fiscal year 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 included 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 operating segment outside the U.S. 

 

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 $1.855 billion at April 30, 2010, or 55 percent, of total outstanding accounts receivable, and $1.592 billion at April 24, 2009, or 50 percent, of total outstanding accounts receivable.

 

 

25

 


 

 

Market Risk

 

Due to the global nature of our operations, we are subject to the exposures that arise from currency exchange rate fluctuations. In a period where the U.S. dollar is strengthening/weakening as compared to other currencies, our revenues and expenses denominated in foreign currencies are translated into U.S. dollars at a lower/higher value than they would otherwise be in a constant currency exchange rate 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.

 

Our objective in managing exposure to currency exchange rate fluctuations is to minimize earnings and cash flow volatility associated with currency exchange rate changes. We enter into various contracts, principally forward contracts that change in value as currency exchange rates change, to protect the U.S. dollar 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 currency exchange rate hedging transactions only to the extent true exposures exist; we do not enter into currency exchange rate hedging transactions for speculative purposes.

 

We had currency exchange rate derivative contracts outstanding in notional amounts of $5.495 billion and $5.296 billion at April 30, 2010 and April 24, 2009, respectively. The fair value of these contracts at April 30, 2010 was $217 million more than the original contract value. A sensitivity analysis of changes in the fair value of all currency exchange rate derivative contracts at April 30, 2010 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 $489 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, which include our fixed-to-floating interest rate swap agreements. 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 30, 2010 indicates that the fair value of these instruments would correspondingly change by $34 million.

 

We have investments in marketable debt securities that are classified and accounted for as available-for-sale. Our debt securities include U.S. government and agency securities, foreign government and agency securities, corporate debt 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.

 

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,” “looking ahead,” “may,” “plan,” “possible,” “potential,” “project,” “should,” “will” and similar w ords or expressions. Forward-looking statements in this Annual Report include, but are not limited to, future launches of products and continued or future acceptance of products in our operating segments; market positioning and performance of our products; increased presence in new markets; integration of acquired companies into our operations; the resolution of tax matters; 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; general economic conditions; the adequacy of available working capital and our working capital needs; 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, incl uding, among others, those discussed in the section entitled “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.

 

 

26

 


 

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 Annual 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 30, 2010. Our internal control over financial reporting as of April 30, 2010 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

 

 

 

 

27

 


 

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 30, 2010 and April 24, 2009, and the results of their operations and their cash flows for each of the three fiscal years in the period ended April 30, 2010 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 30, 2010, 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 Annual 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 stateme nts, 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 Note 2 to the consolidated financial statements, in fiscal 2010 the Company retrospectively changed the manner in which it accounts for certain convertible debt instruments and share-based payments.  Also as discussed in Note 5 to the consolidated financial statements, in fiscal 2010 the Company changed the manner in which it accounts for business combinations.  As discussed in Notes 7 and 15 to the consolidated financial statements, in fiscal 2009 the Company changed the manner in which it determines fair value in certain situations and changed the date it uses to measure the funded status of its defined benefit pension and other postretirement plans.  As discussed in Note 14 to the consolidated financial statements, in fiscal 2008 the Company changed the manner in which it accounts for uncertain 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 29, 2010

 

 

 

28

 


 

Medtronic, Inc.
Consolidated
Statements of Earnings

 

 

Fiscal Year

 

 

2010 

 

2009 

 

2008 

(in millions, except per share data)

 

 

 

 

 

 

 

 

 

Net sales

 

$

15,817

 

$

14,599

 

$

13,515

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

3,812

 

 

3,518

 

 

3,446

Research and development expense

 

 

1,460

 

 

1,355

 

 

1,275

Selling, general and administrative expense

 

 

5,415

 

 

5,152

 

 

4,707

Special charges

 

 

 

 

100

 

 

78

Restructuring charges

 

 

50

 

 

120

 

 

41

Certain litigation charges, net

 

 

374

 

 

714

 

 

366

Purchased in-process research and development  (IPR&D) and certain acquisition-related costs

 

 

23

 

 

621

 

 

390

Other expense, net

 

 

468

 

 

396

 

 

436

Interest expense, net

 

 

246

 

 

183

 

 

36

Total costs and expenses

 

 

11,848

 

 

12,159

 

 

10,775

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

 

3,969

 

 

2,440

 

 

2,740

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

870

 

 

370

 

 

602

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

3,099

 

$

2,070

 

$

2,138

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.80

 

$

1.85

 

$

1.89

Diluted

 

$

2.79

 

$

1.84

 

$

1.87

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

1,106.3

 

 

1,121.9

 

 

1,133.0

Diluted

 

 

1,109.4

 

 

1,126.3

 

 

1,143.8

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.82

 

$

0.75

 

$

0.50

 

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

 

 

 

29

 


 

Medtronic, Inc.
Consolidated
Balance Sheets

 

 

April 30,
2010 

 

April 24,
2009 

 

(in millions, except per share data)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,400

 

$

1,271

 

Short-term investments

 

 

2,375

 

 

405

 

Accounts receivable, less allowances of $67 and $61, respectively

 

 

3,335

 

 

3,123

 

Inventories

 

 

1,481

 

 

1,426

 

Deferred tax assets, net

 

 

544

 

 

605

 

Prepaid expenses and other current assets

 

 

704

 

 

622

 

 

 

 

 

 

 

 

 

Total current assets

 

 

9,839

 

 

7,452

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

2,421

 

 

2,279

 

Goodwill

 

 

8,391

 

 

8,195

 

Other intangible assets, net

 

 

2,559

 

 

2,477

 

Long-term investments

 

 

4,632

 

 

2,769

 

Other assets

 

 

248

 

 

416

 

 

 

 

 

 

 

 

 

Total assets

 

$

28,090

 

$

23,588

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term borrowings

 

$

2,575

 

$

522

 

Accounts payable

 

 

420

 

 

382

 

Accrued compensation

 

 

1,001

 

 

901

 

Accrued income taxes

 

 

235

 

 

130

 

Other accrued expenses

 

 

890

 

 

1,212

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

5,121

 

 

3,147

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

6,944

 

 

6,253

 

Long-term accrued compensation and retirement benefits

 

 

516

 

 

329

 

Long-term accrued income taxes

 

 

595

 

 

475

 

Long-term deferred tax liabilities, net

 

 

89

 

 

115

 

Other long-term liabilities

 

 

196

 

 

87

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

13,461

 

 

10,406

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Notes 5, 16 and 17)

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 1,097,342,586 and 1,119,140,192 shares issued and outstanding, respectively

 

 

110

 

 

112

 

Retained earnings

 

 

14,826

 

 

13,272

 

Accumulated other comprehensive loss

 

 

(307

)

 

(202

)

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

 

14,629

 

 

13,182

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

28,090

 

$

23,588

 

 

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

 

30

 


 

Medtronic, Inc.
Consolidated
Statements of Shareholders’ Equity

 

 

Common
Shares

 

Common
Stock

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total
Shareholders’
Equity

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance April 27, 2007

 

1,143

 

$

114

 

$

11,448

 

$

 (62)

 

$

11,500

 

Net earnings

 

 

 

 

 

2,138

 

 

 

 

2,138

 

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 currency exchange rate derivatives

 

 

 

 

 

 

 

 (211

)

 

(211

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

1,931

 

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 new authoritative guidance for accounting for defined benefit pension and other post-retirement plans

 

 

 

 

 

 

 

 (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 to initially apply guidance concerning uncertainty in income taxes (Note 14)

 

 

 

 

 

1

 

 

 

 

1

 

Balance April 25, 2008

 

1,125

 

$

112

 

$

12,140

 

$

 (286

)

$

11,966

 

Net earnings

 

 

 

 

 

2,070

 

 

 

 

2,070

 

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 currency exchange rate derivatives

 

 

 

 

 

 

 

 494 

 

 

494

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

2,153

 

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 the new authoritative guidance for accounting for defined benefit pension and other post-retirement plans

 

 

 

 

 

(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

 

$

13,272

 

$

 (202

)

$

13,182

 

Net earnings

 

 

 

 

 

3,099

 

 

 

 

3,099

 

Other comprehensive (loss)/income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments

 

 

 

 

 

 

 

 68

 

 

68

 

Translation adjustment

 

 

 

 

 

 

 

 181

 

 

181

 

Net change in retirement obligations

 

 

 

 

 

 

 

 (214

)

 

(214

)

Unrealized loss on foreign currency exchange rate derivatives

 

 

 

 

 

 

 

 (137

)

 

(137

)

Reclassification of other-than-temporary losses on marketable securities included in net income

 

 

 

 

 

3

 

 

 (3

)

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

2,997

 

Dividends to shareholders

 

 

 

 

 

(907

)

 

 

 

(907

)

Issuance of common stock under stock purchase and award plans

 

5

 

 

1

 

 

164

 

 

 

 

165

 

Repurchase of common stock

 

(27

)

 

(3

)

 

(1,027

)

 

 

 

(1,030

)

Excess tax benefit from exercise of stock-based awards

 

 

 

 

 

(3

)

 

 

 

(3

)

Stock-based compensation

 

 

 

 

 

225

 

 

 

 

225

 

Balance April 30, 2010

 

1,097

 

$

110

 

$

14,826

 

$

(307

)

$

14,629

 

 

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

 

31

 


 

Medtronic, Inc.
Consolidated
Statements of Cash Flows

 

 

Fiscal Year

 

 

 

2010 

 

2009 

 

2008 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

3,099

 

$

2,070

 

$

2,138

 

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

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

772

 

 

699

 

 

637

 

Amortization of discount on senior convertible notes

 

 

167

 

 

154

 

 

145

 

Special charges

 

 

 

 

 

 

78

 

IPR&D charges

 

 

11

 

 

621

 

 

390

 

Provision for doubtful accounts

 

 

36

 

 

23

 

 

31

 

Deferred income taxes

 

 

144

 

 

(171

)

 

(101

)

Stock-based compensation

 

 

225

 

 

237

 

 

217

 

Excess tax benefit from exercise of stock-based awards

 

 

 

 

(24

)

 

(40

)

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

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(271

)

 

108

 

 

(461

)

Inventories

 

 

158

 

 

(212

)

 

30

 

Prepaid expenses and other assets

 

 

33

 

 

(121

)

 

92

 

Accounts payable and accrued liabilities

 

 

225

 

 

510

 

 

(305

)

Other operating assets and liabilities

 

 

97

 

 

(26

)

 

272

 

Certain litigation charges, net

 

 

374

 

 

714

 

 

366

 

Certain litigation payments

 

 

(939

)

 

(704

)

 

 

Net cash provided by operating activities

 

 

4,131

 

 

3,878

 

 

3,489

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(350

)

 

(1,624

)

 

(4,221

)

Purchase of intellectual property

 

 

(62

)

 

(165

)

 

(93

)

Additions to property, plant and equipment

 

 

(573

)

 

(498

)

 

(513

)

Purchases of marketable securities

 

 

(7,478

)

 

(2,960

)

 

(6,433

)

Sales and maturities of marketable securities

 

 

3,791

 

 

2,845

 

 

8,557

 

Other investing activities, net

 

 

(87

)

 

(338

)

 

(87

)

Net cash used in investing activities

 

 

(4,759

)

 

(2,740

)

 

(2,790

)

 

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

 

 

Change in short-term borrowings, net

 

 

(444

)

 

(633

)

 

543

 

Payments on long-term debt

 

 

(20

)

 

(300

)

 

(12

)

Issuance of long-term debt

 

 

3,000

 

 

1,250

 

 

300

 

Dividends to shareholders

 

 

(907

)

 

(843

)

 

(565

)

Issuance of common stock under stock purchase and award plans

 

 

165

 

 

416

 

 

403

 

Excess tax benefit from exercise of stock-based awards

 

 

 

 

24

 

 

40

 

Repurchase of common stock

 

 

(1,030

)

 

(759

)

 

(1,544

)

Net cash provided by (used in) financing activities

 

 

764

 

 

(845

)

 

(835

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(7

)

 

(82

)

 

(60

)

Net change in cash and cash equivalents

 

 

129

 

 

211

 

 

(196

)

Cash and cash equivalents at beginning of period

 

 

1,271

 

 

1,060

 

 

1,256

 

Cash and cash equivalents at end of period

 

$

1,400

 

$

1,271

 

$

1,060

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

 

Income taxes

 

$

571

 

$

436

 

$

717

 

Interest

 

 

386

 

 

208

 

 

258

 

Supplemental non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

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

 

$

 

$

15

 

$

 

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

 

 

 

 

 

 

94

 

Reclassification of senior notes from long-term to short-term debt

 

 

400

 

 

 

 

 

Reclassification of senior convertible notes from long-term to short-term debt

 

 

2,200

 

 

 

 

 

 

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

 

32

 



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. U.S. generally accepted accounting principles (U.S. GAAP) are applied 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 and 2008 ended on April 24, 2009 and April 25, 2008, respectively, both of which were 52-week years.  Fiscal year 2010 ended April 30, 2010 and was a 53-week year.

 

Use of Estimates   The preparation of the financial statements in conformity with 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 that are classified and accounted for as available-for-sale at April 30, 2010 and April 24, 2009 include corporate debt securities, U.S. and foreign government and agency securities, certificates of deposit and mortgage backed and other asset backed securities including auction rate securities. The Company invests in available-for-sale securities to promote business and strategic objectives. Available-for-sale 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 available-for-sale securities is recorded, net of taxes, as a component of accumulated other comprehensive loss on the consolidated balance sheets.

 

Investments in securities that are classified and accounted for as trading securities at April 30, 2010 include exchange-traded funds. The Company did not have any trading securities at April 24, 2009. Trading securities are recorded at fair value in long-term investments on the consolidated balance sheets. The Company’s trading securities seek to offset changes in liabilities related to equity and other market risks of certain deferred compensation arrangements. The change in fair value for trading securities is recorded as a component of interest expense, net on the consolidated statements of earnings. 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. Equi ty 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 6 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.

 

 

33

 



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 30,
2010 

 

April 24,
2009 

Finished goods

 

$

896

 

$

854

Work in process

 

 

269

 

 

251

Raw materials

 

 

316

 

 

321

Total

 

$

1,481

 

$

1,426

 

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 30,
2010 

 

April 24,
2009 

 

Lives
(in years)

Land and land improvements

 

$

137

 

$

124

 

Up to 20

Buildings and leasehold improvements

 

 

1,427

 

 

1,296

 

Up to 40

Equipment

 

 

3,525

 

 

3,144

 

3-7

Construction in progress

 

 

269

 

 

323

 

Subtotal

 

 

5,358

 

 

4,887

 

 

Less: Accumulated depreciation

 

 

(2,937

)

 

(2,608

)

 

Property, plant and equipment, net

 

$

2,421

 

$

2,279

 

 

 

Depreciation expense of $454 million, $418 million and $417 million was recognized in fiscal years 2010, 2009 and 2008, 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 U.S. GAAP, 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 2010, 2009 and 2008 and determined that no goodwill was impaired.

 

Intangible Assets   Intangible assets include patents, trademarks, purchased technology and IPR&D (since April 25, 2009). 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 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.

 

IPR&D   When the Company acquires another entity, the purchase price is allocated, as applicable, between IPR&D, other identifiable intangible assets and net tangible assets, with the remainder recognized as goodwill. During the fiscal year 2010, the Company adopted new authoritative guidance related to business combinations.  Under this new guidance, IPR&D is capitalized.  Prior to the adoption of this guidance, IPR&D was immediately expensed. The adoption of the new authoritative guidance did not change the requirement to expense IPR&D immediately with respect to asset acquisitions.  IPR&D has an indefinite life and is not amortized until completion and development of the project which at that time the IPR&D becomes an amortizable asset.  If the related project is not completed in a timely manner, the Company may have an impairm ent related to the IPR&D. 

 

 

34

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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.

 

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, and validity and litigation, if any.  If commercial viability were not achieved, the Company would likely look to other alternatives to provide these therapies.

 

Contingent Consideration During fiscal year 2010, as mentioned above, the Company adopted new authoritative guidance related to business combinations.  Under this new guidance, the Company must recognize contingent purchase price consideration at fair value at the acquisition date.  Prior to the adoption of this guidance, contingent consideration was not included on the balance sheet and was expensed as incurred.  The acquisition date fair value is measured based on the consideration expected to be transferred (probability-weighted), discounted back to present value.  The discount rate used is determined at the time of the acquisition in accordance with accepted valuation methods.  The fair value of the contingent milestone consideration is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense in the Company’s consolidated statements of earnings. Therefore, any changes in the fair value will impact the Company’s earnings in such reporting period thereby resulting in potential variability in the Company’s earnings until contingencies are resolved.  

 

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 net costs to repair or otherwise satisfy the claim. The Company includes the covered costs associated with field actions, if any, in warranty expense.

 

Changes in the Company’s product warranty obligations during the years ended April 30, 2010 and April 24, 2009 consisted of the following:

 

(in millions)

 

 

 

 

Balance April 25, 2008

 

$

43

 

Warranty claims provision

 

 

23

 

Settlements made

 

 

(31

)

Balance April 24, 2009

 

$

35

 

Warranty claims provision

 

 

50

 

Settlements made

 

 

(40

)

Balance April 30, 2010

 

$

45

 

 

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 benefits costs include assumptions for the discount rate, retirement age, compensation rate increases and the expected return on plan assets. Post-retirement medical benefits costs include assumptions for the discount rate, retirement age, expected return on plan assets and healthcare cost trend rate assumptions.

 

 

35

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

The Company evaluates the discount rate, retirement age, compensation rate increases, expected return on plan assets and healthcare cost trend rates of its pension benefits and post-retirement benefits 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 15 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 the product has been used or implanted. For multiple-element arrangements, the Company a llocates revenue from the arrangement to the elements based on the relative fair value of each element, which is based on reliable and objective evidence. The fair value is generally based on the relative sales price of each element when sold separately. 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.

 

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 statements of earnings, as appropriate. Refer to Note 13 for additional information.

 

Foreign Currency Translation   Assets and liabilities of non-U.S. functional currency entities are translated to U.S. dollars at period-end exchange rates, and the resulting gains and losses arising from the translation of those net assets are recorded as a cumulative translation adjustment, a component of accumulated other comprehensive loss on the consolidated balance sheets. Elements of the consolidated statements of earnings are translated at average currency 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   In addition to net earnings, comprehensive income includes changes in currency exchange rate translation adjustments (including the change in current exchange rates, or spot rates, of net investment hedges), unrealized gains and losses on currency exchange rate derivative contracts qualifying and designated as cash flow hedges, net changes in retirement obligation funded status and unrealized gains and losses on available-for-sale marketable securities. Comprehensive income in fiscal years 2010, 2009 and 2008 was $2.997 billion, $2.153 billion and $1.931 billion, respectively.

 

 

36

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

Presented below is a summary of activity for each component of accumulated other comprehensive loss for fiscal years 2010, 2009 and 2008:

 

(in millions)

 

Unrealized
Gain/(Loss) on
Investments

 

Cumulative
Translation
Adjustments

 

Net Change in
Retirement
Obligations

 

Unrealized
Gain/(Loss) on
Foreign Currency
Exchange Rate
Derivatives

 

Accumulated Other
Comprehensive
(Loss)/Income

 

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 new authoritative guidance for accounting for defined benefit pension and other post-retirement plans

 

 

 

 

 

 

(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 the new authoritative guidance for accounting for defined benefit pension and other post-retirement plans

 

 

 

 

 

 

1

 

 

 

 

1

 

Balance April 24, 2009

 

$

(95

)

$

62

 

$

(398

)

$

228

 

$

(202

)

Other comprehensive (loss)/income

 

 

68

 

 

181

 

 

(214

)

 

(137

)

 

(102

)

Reclassification of other-than-temporary losses on marketable securities included in net income

 

 

(3

)

 

 

 

 

 

 

 

(3

)

Balance April 30, 2010

 

$

(30

)

$

243

 

$

(612

)

$

91

 

$

(307

)

 

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 2010, 2009 and 2008 was $(75) million, $320 million and $(132) million, respectively. The tax benefit related to the net change in retirement obligations was $112 million, $109 million and $17 million in fiscal years 2010, 2009 and 2008, respectively. The Company adopted new measurement date authoritative guidance for defined benefit plans 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 2010, 2009 and 2008 was $35 million, $(33) million and $(26) million, respectively.

 

Derivatives   U.S. GAAP 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 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 are intended to 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 currency exchange rate contracts, to manage its exposure related to currency exchange rate changes. The Company enters into contracts with major financial institutions that change in value as currency 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 currency exchange rate derivative contracts only to the extent true exposures exist; the Company does not enter into forward currency exchange rate derivative contracts for speculative purposes. Principal currency exchange rates hedged to the U.S. dollar 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 asset s, other accrued expenses or other long-term liabilities depending upon the gain or loss position of the contract and contract maturity date.

 

 

37

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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 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, d epending 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 currency 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 on the consolidated balance sheets.

 

The Company uses forward currency exchange rate contracts to offset its exposure to the change in value of certain foreign currency denominated intercompany assets and liabilities. These forward currency exchange rate 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.

 

The Company uses interest rate derivative instruments to manage its exposure to interest rate movements 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 U.S. GAAP. 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.

 

In addition, the Company has collateral credit agreements with its primary derivatives counterparties. Under these agreements, either party is required to post eligible collateral when the market value of transactions covered by the agreement exceeds specific thresholds, thus limiting credit exposure for both parties.

 

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.

 

In June 2008 the FASB issued new authoritative guidance for determining whether instruments granted in share-based payment transactions, such as options, restricted stock units and restricted stock, are participating securities. This new guidance 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 earnings per share pursuant to the two-class method. The Company adopted the new guidance in the first quarter of fiscal year 2010 and was required to retrospectively adjust all prior period earnings per share data.

 

See Note 2 for additional information regarding the adoption of this new authoritative guidance.

 

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

 

 

 

Fiscal Year

(in millions, except per share data)

 

2010 

 

2009 

 

2008 

Numerator:

 

 

 

 

 

 

 

 

 

Net earnings

 

$

3,099

 

$

2,070

 

$

2,138

Denominator:

 

 

 

 

 

 

 

 

 

Basic – weighted average shares outstanding

 

 

1,106.3

 

 

1,121.9

 

 

1,133.0

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options

 

 

0.9

 

 

2.4

 

 

9.7

Employee restricted stock units

 

 

1.9

 

 

1.2

 

 

0.3

Other

 

 

0.3

 

 

0.8

 

 

0.8

Diluted – weighted average shares outstanding

 

 

1,109.4

 

 

1,126.3

 

 

1,143.8

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

2.80

 

$

1.85

 

$

1.89

Diluted earnings per share

 

$

2.79

 

$

1.84

 

$

1.87

 

 

38

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

The calculation of weighted average diluted shares outstanding excludes options for approximately 65 million, 62 million and 22 million common shares in fiscal years 2010, 2009 and 2008, 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

 

In October 2009, the Financial Accounting Standards Board (FASB) updated the revenue recognition accounting guidance relating to the accounting for revenue arrangements that involve more than one deliverable or unit of accounting. The updated guidance requires companies to allocate arrangement considerations in multiple deliverable arrangements in a manner that better reflects the economics of the transaction by revising certain thresholds for separation, and providing criteria for allocation of revenue among deliverables. The updated guidance is effective for the Company beginning in fiscal year 2012. The Company may elect to adopt the provisions prospectively to new or materially modified arrangements beginning on the effective date or retrospectively for all periods presented. The Company is currently evaluating the impact of adoption of this accounting guidance on its consolidated financial statements.

 

In January 2010, the FASB updated the disclosure requirements for fair value measurements. The updated guidance requires companies to disclose separately the investments that transfer in and out of Levels 1 and 2 and the reasons for those transfers. Additionally, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), companies should present separately information about purchases, sales, issuances and settlements. The updated guidance was effective for the Company beginning in the fourth quarter of fiscal year 2010, except for the disclosures about purchases, sales, issuances and settlements in the Level 3 reconciliation, which are effective for the Company beginning in the first quarter of fiscal year 2012. The fiscal year 2010 adoption did not result in a material impact to the Company’s financial statements. Refer to Note 7 for additional information on Levels 1, 2 and 3.

 

2.  Retrospective Adoption of Accounting Pronouncements

 

In May 2008, the FASB issued new authoritative accounting guidance for convertible debt.  The new guidance requires the proceeds from the issuance of applicable 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 new guidance 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 2011 and 2013, respectively, which were issued in April 2006 (collectively, the Senior Convertible Notes), and the $15 million remaining balance of the Company’s 1.250 percent Contingent Convertible Debentures, Series B due 2021 (the Debentures). 

 

The effect of the adoption of the new convertible debt authoritative guidance on the Senior Convertible Notes at April 2006 was a debt discount of $967 million and an increase of $614 million, net of tax, to shareholders’ equity.

 

The resulting debt discount for the Company’s Debentures was to be amortized over the period from the effective date, January 2005, through the first date holders of the Debentures had the ability to put them back to the Company, September 2006.  Therefore, the retrospective adoption of the new convertible debt authoritative guidance for the Debentures had no impact on results of operations for periods following fiscal year 2007.   

 

In addition, in June 2008 the FASB issued new authoritative guidance for determining whether instruments granted in share-based payment transactions, such as options, restricted stock units and restricted stock awards, are participating securities.  This new guidance 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 earnings per share pursuant to the two-class method.  The Company adopted the new guidance in the first quarter of fiscal year 2010 and was required to retrospectively adjust all prior-period earnings per share data.  The resulting impact of the adoption of the new guidance was to include 2.9 million, 4.1 million and 2.3 million of unvested restricted stock awards in the basic weighted average shares outstanding calculation for fiscal years 2010, 2009 and 2008, respectively.     

 

 

39

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

The following table illustrates the impact of the adoption of new authoritative accounting guidance for convertible debt and the new share-based payment authoritative guidance on certain financial statement line items in the consolidated statements of earnings for fiscal years 2010, 2009 and 2008:

 

 

Fiscal Year 2010

 

(in millions, except per share data)

Previous
Method

 

Impact of New Convertible
Debt Guidance

 

Impact of New Share-Based
Payment Guidance

 

As Reported

 

Interest expense, net

$

79

 

$

167

 

$

 

$

246

 

Provision for income taxes

 

933

 

 

(63

)

 

 

 

870

 

Net earnings

$

3,203

 

$

(104

)

$

 

$

3,099

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

2.90

 

$

(0.09

)

$

(0.01

)

$

2.80

 

Diluted

$

2.89

 

$

(0.09

)

$

 

$

2.79

(a)

 

(a) The data in this schedule has been intentionally rounded to the nearest $0.01 and therefore may not sum.

 

 

Fiscal Year 2009

 

(in millions, except per share data)

As Originally
Reported

 

Impact of New Convertible
Debt Guidance

 

Impact of New Share-Based
Payment Guidance

 

As Adjusted

 

Interest expense, net

$

 29 

 

$

154 

 

$

 

$

 183 

 

Provision for income taxes

 

425 

 

 

 (55)

 

 

 

 

 370 

 

Net earnings

$

 2,169 

 

$

 (99)

 

$

 

$

 2,070 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.94 

 

$

 (0.09)

 

$

 

$

 1.85 

 

Diluted

$

1.93 

 

$

 (0.09)

 

$

 

$

 1.84 

 

 

 

 

Fiscal Year 2008

 

(in millions, except per share data)

As Originally
Reported

 

Impact of New Convertible
Debt Guidance

 

Impact of New Share-Based
Payment Guidance

 

As Adjusted

 

Interest expense/(income), net

$

 (109)

 

$

145 

 

$

 

$

 36 

 

Provision for income taxes

 

654 

 

 

 (52)

 

 

 

 

 602 

 

Net earnings

$

 2,231 

 

$

 (93)

 

$

 

$

 2,138 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.97 

 

$

 (0.08)

 

$

 

$

 1.89 

 

Diluted

$

1.95 

 

$

 (0.08)

 

$

 

$

 1.87 

 

 

The following tables illustrate the impact of the adoption of the new convertible debt guidance on certain financial statement line items in the consolidated balance sheet as of April 30, 2010 and April 24, 2009:

 

 

April 30, 2010

 

(in millions)

Previous Method

 

Effect of Change

 

As Reported

 

Assets:

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets (debt issuance costs)

$

709

 

$

(5

)

$

704

 

Long-term deferred tax assets, net

 

28

 

 

(28

)

 

 

Total assets

$

28,123

 

$

(33

)

$

28,090

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

Long-term debt

$

7,293

 

$

(349

)

$

6,944

 

Long-term deferred tax liabilities, net

 

 

 

89

 

 

89

 

Total liabilities

 

13,721

 

 

(260

)

 

13,461

 

Retained earnings

 

14,599

 

 

227

 

 

14,826

 

Total shareholders' equity

 

14,402

 

 

227

 

 

14,629

 

Total liabilities and shareholders' equity

$

28,123

 

$

(33

)

$

28,090

 

 

 

40

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

 

April 24, 2009

 

(in millions)

As Originally
Reported

 

Effect of Change

 

As Adjusted

 

Assets:

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets (debt issuance costs)

$

630

 

$

(8

)

$

622

 

Long-term deferred tax assets, net

 

65

 

 

(65

)

 

 

Total assets

$

23,661

 

$

(73

)

$

23,588

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

Long-term debt

$

6,772

 

$

(519

)

$

6,253

 

Long-term deferred tax liabilities, net

 

 

 

115

 

 

115

 

Total liabilities

 

10,810

 

 

(404

)

 

10,406

 

Retained earnings

 

12,941

 

 

331

 

 

13,272

 

Total shareholders' equity

 

12,851

 

 

331

 

 

13,182

 

Total liabilities and shareholders' equity

$

23,661

 

$

(73

)

$

23,588

 

 

The following tables illustrate the impact of the adoption of the new convertible debt guidance on certain financial statement line items in the consolidated statement of cash flows for fiscal years 2010, 2009 and 2008:

 

 

Fiscal Year 2010

 

(in millions)

Previous
Method

 

Effect of Change

 

As Reported

 

Operating Activities

 

 

 

 

 

 

 

 

 

Net earnings

$

3,203

 

$

(104

)

$

3,099

 

Amortization of discount on senior convertible notes

 

 

 

167

 

 

167

 

Deferred income taxes

 

207

 

 

(63

)

 

144

 

Net cash provided by operating activities

$

4,131

 

$

 

$

4,131

 

 

 

Fiscal Year 2009

 

(in millions)

As Originally
Reported

 

Effect of Change

 

As Adjusted

 

Operating Activities

 

 

 

 

 

 

 

 

 

Net earnings

$

2,169

 

$

(99

)

$

2,070

 

Amortization of discount on senior convertible notes

 

 

 

154

 

 

154

 

Deferred income taxes

 

(116)

 

 

(55

)

 

(171

)

Net cash provided by operating activities

$

3,878

 

$

 

$

3,878

 

 

 

Fiscal Year 2008

 

(in millions)

As Originally
Reported

 

Effect of Change

 

As Adjusted

 

Operating Activities

 

 

 

 

 

 

 

 

 

Net earnings

$

2,231

 

$

(93

)

$

2,138

 

Amortization of discount on senior convertible notes

 

 

 

145

 

 

145

 

Deferred income taxes

 

(49

)

 

(52

)

 

(101

)

Net cash provided by operating activities

$

3,489

 

$

 

$

3,489

 

 

 

41

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

3.  Special Charges and Certain Litigation Charges, Net

 

Special Charges

 

In fiscal year 2010, there were no 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.

 

Certain Litigation Charges, Net

 

The Company classifies material litigation reserves and gains recognized as certain litigation charges, net. In fiscal year 2010, the Company incurred two certain litigation charges, net totaling $374 million related to settlements with Abbott Laboratories (Abbott) and W.L. Gore & Associates (Gore). The Abbott settlement accounted for $444 million in litigation charges and the Gore settlement accounted for a $70 million certain litigation gain. The Abbott settlement related to the global resolution of all outstanding intellectual property litigation. The terms of the Abbott agreement stipulate that neither party will sue each other in the field of coronary stent and stent delivery systems for a period of at least 10 years, subject to certain conditions. Both parties also agreed to a cross-license of the disputed patents within the defined field. The $444 million settlement amount included a $400 million payment made to Abbott and a $42 million success payment made to evYsio Medical Devices, LLC (evYsio). In addition, a $2 million payment was made to evYsio in connection with an amendment to the parties’ existing agreement in order to expand the scope of the definition of the license field from evYsio. The Company paid the settlement in the second quarter fiscal year 2010. The Gore settlement related to the resolution of outstanding patent litigation related to selected patents in Medtronic’s Jervis and Wiktor patent families. The terms of the agreement stipulate that neither party will sue each other in the defined field of use, subject to certain conditions. The Company granted Gore a worldwide, irrevocable, non-exclusive license in the defined field of use. In addition and subject to certain conditions, Gore will pay the Company quarterly payments that began in January 2010 through the fiscal quarter ending October 2018.

 

In fiscal year 2009 the Company incurred four certain litigation charges, net totaling $714 million. The first charge in fiscal year 2009 in the amount of $178 million related to litigation with DePuy Spine (formerly DePuy/AcroMed), a subsidiary of Johnson & Johnson (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 U.S. GAAP. As a result of the U.S. Court of Appeals’ decision, the Company recor ded a reserve of $178 million which covered the revised damages award and pre- and post-judgment interest. The Company paid the settlement in June 2009.

 

The second charge in fiscal year 2009 in the amount of $270 million related 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 Company paid the settlement in May 2009.

 

The third charge in fiscal year 2009 in the amount of $229 million related 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 at 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. The settlement amount of $472 million was paid in fiscal year 2009.

 

 

42

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

The fourth charge recognized in fiscal year 2009 related 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 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.  The settlement amount of $125 million was paid in fiscal year 2009.

 

In fiscal year 2008, the Company incurred certain litigation charges, net 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, related 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 17 for additional information.

 

4.  Restructuring Charges

 

Fiscal Year 2009 Initiative

 

In the fourth quarter of fiscal year 2009, as part of the Company’s “One Medtronic” strategy, the Company recorded a $34 million restructuring charge, which consisted of employee termination costs of $29 million and asset write-downs of $5 million. The “One Medtronic” strategy focused on streamlining the organization and standardizing or centralizing certain functional activities which were not unique to individual businesses. In connection with these efforts to create “One Medtronic,” this initiative was 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 impacted most businesses and certain corporate functions.  Of the $5 million of asset write-downs, $3 million related to inventory write-offs and production-related ass et impairments and therefore was recorded within cost of products sold in the consolidated statement of earnings. The employee termination costs of $29 million consisted of severance and the associated costs of continued medical benefits and outplacement services.

 

As a continuation of the fiscal year 2009 initiative, in the first quarter of fiscal year 2010, the Company incurred $72 million of incremental restructuring charges, which consisted of employee termination costs of $62 million and asset write-downs of $10 million.  Of the $10 million of asset write-downs, $7 million related to inventory write-offs and production-related asset impairments and therefore was recorded within cost of products sold in the consolidated statement of earnings.  Included in the $62 million restructuring charge was $9 million of incremental defined benefit pension and post-retirement related expenses 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 post-retirement rules.  For further discussion on the incremental defined benefit pension and post-retirement related expenses, see Note 15.

 

In the fourth quarter of fiscal year 2010, the Company recorded a $12 million reversal of excess restructuring reserves related to the fiscal year 2009 initiative. This reversal was primarily a result of a higher than expected percentage of employees identified for elimination finding positions elsewhere within the Company.

 

In connection with the fiscal year 2009 initiative, as of the end of the first quarter of fiscal year 2010, the Company had identified approximately 1,500 positions for elimination to be achieved through early retirement packages offered to employees, voluntary separation and involuntary separation.  Of the 1,500 positions identified, approximately 1,400 positions have been eliminated as of April 30, 2010.  The fiscal year 2009 initiative is scheduled to be substantially complete by the end of the first quarter of fiscal year 2011.

 

 

43

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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

 

Restructuring charges

 

 

53

 

 

10

 

 

63

 

Reversal of excess accrual

 

 

(12

)

 

 

 

(12

)

Payments

 

 

(64

)

 

(10

)

 

(74

)

Balance April 30, 2010

 

$

5

 

$

 

$

5

 

 

Global Realignment Initiative

 

In the fourth quarter of fiscal year 2008, the Company began a global realignment initiative which focused 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 impacted most businesses and certain corporate functions. Within the Company’s Cardiac Rhythm Disease Management operating segment, 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 the Company’s Spinal operating segment, 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 i nitiative 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.

 

In the first quarter of fiscal year 2009, as a continuation of the global realignment initiative, 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 related to the execution of the Company’s global realignment initiative outside the U.S. This included the realignment and elimination of certain 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 impacte d employees. 

 

In the fourth quarter of fiscal year 2009, the Company recorded a $7 million reversal of excess restructuring reserves related to the global realignment initiative.  This reversal was 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. 

 

In the first quarter of fiscal year 2010, the Company recorded an $8 million reversal of excess restructuring reserves primarily as a result of favorable severance negotiations as well as a higher than expected percentage of employees identified for elimination finding positions elsewhere in the Company.  This $8 million reversal of excess reserves was partially offset by a $5 million charge the Company recorded in the first quarter of fiscal year 2010 related to the further write-down of a non-inventory related asset resulting from the continued decline in the international real estate market. 

 

In connection with the global realignment initiative, as of the end of the first quarter of fiscal year 2009, the Company identified approximately 900 positions for elimination which were achieved through both voluntary and involuntary separation.  As of October 30, 2009, the global realignment initiative was substantially complete.

 

 

44

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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 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

 

Restructuring charges

 

 

-

 

 

5

 

 

5

 

Reversal of excess accrual

 

 

(8

)

 

 

 

(8

)

Payments/write-downs

 

 

(9

)

 

(5

)

 

(14

)

Currency adjustment, net

 

 

2

 

 

 

 

2

 

Balance October 30, 2009

 

$

 

$

 

$

 

 

5.  Acquisitions, IPR&D and Certain Acquisition-Related Costs

 

During the first quarter of fiscal year 2010, the Company adopted the new authoritative guidance related to business combinations. The new authoritative guidance 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. The underlying purchase method of accounting for acquisitions was retained, but the new guidance incorporates a number of changes. These changes include the capitalization of IPR&D, expensing of acquisition related costs and the recognition of contingent purchase price consideration at fair value at the acquisition date. In addition, changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period will be recognized in earnings rather than as an adjustment to the cost of the acquisition. This accounting treatment for taxes is applicable to acquisitions consummated both prior to and subsequent to the adoption of the new authoritative guidance. The adoption of the new authoritative guidance did not change the requirement to expense IPR&D immediately with respect to asset acquisitions. With the exception of deferred tax asset valuation allowances and acquired income tax uncertainties related to previous acquisitions, this new authoritative guidance has been applied prospectively to business combinations beginning in fiscal year 2010.

 

Pending Acquisition

 

On April 29, 2010 the Company announced the signing of a definitive agreement to acquire ATS Medical, Inc. (ATS Medical).  ATS Medical is a leading developer, manufacturer and marketer of products and services focused on cardiac surgery, including heart valves and surgical cryoablation technology.  Under the terms of the agreement, the Company will pay $4.00 per share in cash for each share of ATS Medical stock.  The total value of the transaction is expected to be approximately $370 million, which includes the purchase of ATS Medical stock and assumption of net debt.  The transaction is expected to close this summer and is subject to customary closing conditions, including approval by ATS Medical’s shareholders and U.S. and foreign regulatory clearances. 

 

Fiscal Year 2010

 

Invatec S.p.A

 

In April 2010, the Company acquired privately held Invatec S.p.A (Invatec), a developer of innovative medical technologies for the interventional treatment of cardiovascular disease, and two affiliated companies.  Invatec’s two affiliated companies are Fogazzi, which provides polymer technology to Invatec; and Krauth Cardiovascular, which distributes Invatec products in Germany.  Under the terms of the agreement, the transaction included an initial up-front payment of $350 million, which includes the assumption and settlement of existing Invatec debt. The agreement also includes potential additional payments of up to $150 million contingent upon achievement of certain milestones.  Total consideration for the transaction was valued at approximately $468 million, which includes the $350 million up-front payment plus the estimated fair value of a dditional milestone based contingent consideration of $118 million.  

 

The potential contingent payments consist of up to $75 million upon reaching a revenue milestone in fiscal year 2011 and up to $75 million upon reaching a product development milestone by fiscal year 2013.  The Company has recorded the acquisition date estimated fair value of the contingent milestone payments of $118 million as a component of the consideration transferred as part of the acquisition of Invatec. 

 

 

45

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

The Company has accounted for the acquisition of Invatec as a business combination. Under business combination accounting, the assets and liabilities 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. Due to the short period of time that elapsed between the close of the acquisition and year end, the entire purchase price is considered preliminary.  The preliminary purchase price has been allocated as follows:

 

(in millions)

 

 

 

Current assets

 

$

89

Property, plant and equipment

 

 

32

IPR&D

 

 

114

Other intangible assets

 

 

228

Goodwill

 

 

150

Long-term deferred tax assets

 

 

9

Total assets acquired

 

 

622

 

 

 

 

Current liabilities

 

 

46

Long-term deferred tax liabilities, net

 

 

108

Total liabilities assumed

 

 

154

Net assets acquired

 

$

468

 

In connection with the acquisition of Invatec, the Company acquired $228 million of technology-based intangible assets with an estimated useful life of 12 years.  Also as part of the acquisition, the Company recorded, in total, $114 million and $150 million for IPR&D and goodwill, respectively. The value attributable to IPR&D has been capitalized as an indefinite-lived intangible asset.   The IPR&D primarily relates to the future launch of Invatec’s drug eluting balloons into the U.S. market.  Development costs incurred on the project, estimated to be approximately $44 million, will be expensed as incurred.  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 connection 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. As a result, the Company incurred approximately $12 million of acquisition related expenses in fiscal year 2010 which were classified as purchased IPR&D and certain acquisition-related costs.

 

The pro forma impact of the above acquisition was not significant to the results of the Company for the fiscal years ended April 30, 2010, April 24, 2009 and April 25, 2008.  The results of operations related to the acquisition have been included in the Company’s consolidated statements of earnings since the date the company was acquired.

 

Other Acquisitions and IPR&D Charges

 

In February 2010, the Company recorded an IPR&D charge of $11 million related to the asset acquisition of Arbor Surgical Technologies, Inc.’s bovine pericardial heart valve technology.   

 

In August 2009, the Company acquired certain intangible assets related to the distribution of coronary products within the CardioVascular Japan business. In connection with the acquisition, the Company recorded $29 million of intangible assets with an estimated useful life of five years.

 

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.

 

 

46

 




Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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 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

 

 

424

Total assets acquired

 

 

865

 

 

 

 

Current liabilities

 

 

65

Long-term deferred tax liabilities

 

 

100

Total liabilities assumed

 

 

165

Net assets acquired

 

$

700

 

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 $424 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 at the time of acquisition. The remaining costs to complete was approximately $58 million at April 30, 2010. 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 connection 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 was approximately $39 million.  As of April 30, 2010, these purchase accounting liabilities have been fully utilized.   

 

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

 

 

107

Total assets acquired

 

 

275

 

 

 

 

Current liabilities

 

 

19

Long-term deferred tax liabilities

 

 

21

Total liabilities assumed

 

 

40

Net assets acquired

 

$

235

 

 

47

 




Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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 $107 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.

 

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

 

 

184

Long-term deferred tax assets

 

 

61

Total assets acquired

 

 

400

 

 

 

 

Current liabilities

 

 

30

Long-term deferred tax liabilities

 

 

15

Total liabilities assumed

 

 

45

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 $184 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, Inc.

 

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.

 

 

48

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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 asset 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.    

 

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 products had not yet been reached and such technology has no future alternative use.

 

Fiscal Year 2008

 

Kyphon Inc.

 

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 pap er 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

 

 

49

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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

 

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 goodwi ll 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 at the time of acquisition. The remaining costs to complete was approximately $3 million at April 30, 2010.

 

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 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 year 2008, as if the acquisition had occurred at the beginning of the period 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.

 

 

50

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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 period 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.

 

(in millions, except per share data)

 

Fiscal Year

2008 

Net sales

 

$

13,804

Net earnings

 

$

2,093

 

 

 

 

Earnings per share:

 

 

 

Basic

 

$

1.85

Diluted

 

$

1.83

 

The unaudited pro forma financial information for fiscal year 2008 includes 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 fiscal year 2008.

 

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 products had not yet been reached and such technology has no future alternative use.

 

 

51

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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 maximum undiscounted potential contingent consideration for each of its acquisitions with an outstanding potential obligation. At April 30, 2010, the estimated maximum potential amount of undiscounted future contingent consideration that the Company is expected to make associated with all business combinations or purchases of intellectual property is approximately $375 million. The milestones associated with the contingent consideration must be reached in future periods ranging from fiscal years 2011 to 2016 in order for the consideration to be paid.

 

6.  Investments

 

In April 2009, the FASB issued new authoritative guidance for the recognition and presentation of other-than-temporary impairments, which amended the existing guidance on determining whether an impairment for investments in debt securities is other-than-temporary as well as requiring additional annual and interim disclosures. Under the new guidance, impairment on debt securities will be considered other-than-temporary if the Company (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its costs or (3) does not expect to recover the security’s fair value versus its amortized cost basis. The new guidance further indicates that, 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 recognize d in earnings while the remaining shortfall would be recognized in other comprehensive income. The new guidance requires the Company to initially apply the provisions of the standard to previously other-than-temporary impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment reclassifies the non-credit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulated other comprehensive loss. The new guidance was effective for the Company in the first quarter of fiscal year 2010 and resulted in a cumulative-effect adjustment of $3 million as of the beginning of fiscal year 2010.

 

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 30, 2010 is as follows:

 

 

 

 

 

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

(in millions)

 

Cost

 

 

 

Available-for-sale securities:

 

 

 

         

 

 

          

 

 

         

 

 

Corporate debt securities

 

$

2,130

     

$

16

 

$

(12

)

$

2,134

Auction rate securities

 

 

194

 

 

 

 

(52

)

 

142

Mortgage backed securities  

 

 

724

 

 

8

 

 

(15

)

 

717

U.S. government and agency securities

 

 

2,745

 

 

9

 

 

(1

)

 

2,753

Foreign government and agency securities

 

 

118

 

 

1

 

 

 

 

119

Certificates of deposit

 

 

256

 

 

 

 

 

 

256

Other asset backed securities  

 

 

315

 

 

1

 

 

(3

)

 

313

Marketable equity securities

 

 

1

 

 

 

 

 

 

1

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

Exchange-traded funds

 

 

29

 

 

1

 

 

 

 

30

Cost method, equity method and other investments

 

 

542

 

 

 

 

 

 

542

Total short-term and long-term investments

 

$

7,054

 

$

36

 

$

(83

)

$

7,007

 

 

52

 




Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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

 

 

 

 

 

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

(in millions)

 

Cost

 

 

 

Available-for-sale securities:

 

 

 

         

 

 

         

 

 

         

 

 

Corporate debt securities

 

$

817

 

$

8

 

$

(20

)

$

805

Auction rate securities

 

 

199

 

 

 

 

(80

)

 

119

Mortgage backed securities  

 

 

789

 

 

9

 

 

(52

)

 

746

U.S. government and agency securities

 

 

680

 

 

5

 

 

(1

)

 

684

Foreign government and agency securities

 

 

13

 

 

 

 

 

 

13

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

 

 

515

 

 

 

 

 

 

515

Total short-term and long-term investments

 

$

3,324

 

$

25

 

$

(175

)

$

3,174

 

Information regarding the Company’s available-for-sale and trading securities at April 30, 2010 and April 24, 2009 is as follows: 

 

 

 

April 30, 2010

 

April 24, 2009

(in millions)

 

Short-term

 

Long-term

 

Short-term

 

Long-term

Available-for-sale securities

 

$

2,375

 

$

4,060

 

$

405

 

$

2,254

Trading securities

 

 

 

 

30

 

 

 

 

Total investments

 

$

2,375

 

$

4,090

 

$

405

 

$

2,254

 

The following table shows the gross unrealized losses and fair values of the Company’s available-for-sale investments in individual securities that have been in a continuous unrealized loss position deemed to be temporary for less than 12 months and for more than 12 months, aggregated by investment category as of April 30, 2010:

 

 

 

Less than 12 months

 

More than 12 months

 

(in millions)

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Corporate debt securities

 

$

890

         

$

(3

)       

$

39

      

$

(9

)

Auction rate securities

 

 

 

 

 

 

142

 

 

(52

)

Mortgage backed securities  

 

 

97

 

 

 

 

92

 

 

(15

)

U.S. government and agency securities

 

 

853

 

 

(1

)

 

 

 

 

Other asset backed securities  

 

 

95

 

 

(1

)

 

19

 

 

(2

)

Total short-term and long-term investments

 

$

1,935

 

$

(5

)

$

292

 

$

(78

)

 

The Company’s investments in marketable debt securities detailed above are classified and accounted for as available-for-sale and include corporate debt securities, U.S. government and agency securities, and mortgage backed and other asset backed securities including auction rate securities. Market conditions during fiscal year 2010 and subsequent to the Company’s year-end continue to indicate some uncertainty on the part of investors on the world economic outlook. This uncertainty has 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. At April 30, 2010, the Company concluded that the unrealized losses associated with the remaining securities were not other-than-temporary as the Company does n ot have the intent to sell, nor is it more likely than not that the Company will be required to sell, before recovery of the amortized cost.

 

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

 

 

 

Fiscal Year

 

 

 

2010

 

2009

 

2008

 

(in millions)

 

Debt (1)

 

Equity (2)

 

Debt (1)

 

Equity (2)

 

Debt (1)

 

Equity (2)

 

Proceeds from sales

      

$

3,791

      

$

     27

      

$

2,845

      

$

     —

      

$

8,531

      

$

     26

 

Gross realized gains

 

$

44

 

$

10

 

$

35

 

$

 

$

31

 

$

16

 

Gross realized losses

 

$

(6

)

$

 

$

(8

)

$

 

$

(5

)

$

 

Impairment losses recognized

 

$

(14

)

$

(40

)

$

(38

)

$

(4

)

$

(3

)

$

(4

)

 

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

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

 

 

53

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

The total other-than-temporary impairment losses on available-for-sale debt securities for the April 30, 2010 were $29 million, of which $15 million was recognized in other comprehensive income resulting in $14 million of charges being recognized in earnings.  These charges relate to credit losses on certain mortgage backed securities, other corporate securities and auction rate securities.  The amount of credit losses represents the difference between the present value of cash flows expected to be collected on these securities and the amortized cost. In determining this other-than-temporary impairment loss, U.S. GAAP specifies that the Company consider a variety of factors, including the quality and estimated value of the underlying credit support for the Company’s holdings and the financial condition and credit quality of the underlying collateral and credit support available to each of the remaining securities in which the Company is invested, the Company believes it has recorded all necessary other-than-temporary impairments as the Company does not have the intent to sell nor is it more likely than not that the Company will be required to sell before recovery of the amortized cost.

 

The following table shows the credit loss portion of other-than-temporary impairments on debt securities held by the Company as of the dates indicated and the corresponding changes in such amounts:

 

(in millions)

 

 

 

 

Balance at April 24, 2009

 

$

 

Credit losses remaining in retained earnings upon adoption

 

 

 4

 

Credit losses recognized on securities previously not impaired

 

 

 10

 

Additional credit losses recognized on securities previously impaired

 

 

4

 

Reductions for securities sold during the period

 

 

(1

)

Balance at April 30, 2010

 

$

 17

 

 

The April 30, 2010 balance of available-for-sale debt securities by contractual maturity is shown in the following table at fair value. 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 30, 2010

Due in one year or less

 

$

2,639 

Due after one year through five years

 

 

3,522 

Due after five years through ten years

 

 

129 

Due after ten years

 

 

144 

Total debt securities

 

$

6,434 

 

As of April 30, 2010 and April 24, 2009, the aggregate carrying amount of equity and other securities without a quoted market price and accounted for using the cost or equity method was $542 million and $515 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 realized on trading securities and available-for-sale debt securities are recorded in interest expense, net in the consolidated statements of earnings. Gains and losses realized on marketable equity securities, cost method, equity method and other investments are recorded in other expense, net in the consolidated statements of earnings. In addition, unrealized gains and losses on available-for-sale debt securities are recorded in accumulated other comprehensive loss in the consolidated balance sheets and unrealized gains and losses on trading securities are recorded in interest expense, net in the con solidated statements of earnings. Gains and losses from the sale of investments are calculated based on the specific identification method.

 

 

54

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

7.  Fair Value Measurements

 

Under the authoritative guidance for fair value measurements, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability 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:

 

Ÿ

Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.

 

 

Ÿ

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.

 

 

Ÿ

Level 3 – Inputs are unobservable inputs for the asset or liability.

 

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

 

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

 

The authoritative guidance is principally applied to financial assets and liabilities such as marketable equity securities and debt securities that are classified and accounted for as trading, available-for-sale and derivative instruments. Derivatives include cash flow hedges, freestanding derivative forward contracts, net investment hedges and interest rate swaps. 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 the new authoritative guidance for fair value measurements. 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 this authoritative guidance.

 

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

 

(in millions)

 

Fair Value
at
April 30, 2010

 

Fair Value Measurements
Using Inputs Considered as

 

 

Level 1

 

Level 2

 

Level 3

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

2,134

 

$

 

$

2,118

 

$

16

Auction rate securities

 

 

142

 

 

 

 

 

 

142

Mortgage backed securities

 

 

717

 

 

 

 

678

 

 

39

U.S. government and agency securities

 

 

2,753

 

 

782

 

 

1,971

 

 

Foreign government and agency securities

 

 

119

 

 

 

 

119

 

 

Certificates of deposit

 

 

256

 

 

 

 

256

 

 

Other asset backed securities

 

 

313

 

 

 

 

297

 

 

16

Marketable equity securities

 

 

1

 

 

1

 

 

 

 

Derivative assets

 

 

296

 

 

265

 

 

31

 

 

Exchange-traded funds

 

 

30

 

 

30

 

 

 

 

Total assets

 

$

6,761

 

$

1,078

 

$

5,470

 

$

213

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

47

 

$

47

 

$

 

$

Total liabilities

 

$

47

 

$

47

 

$

 

$

 

 

55

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

(in millions)

 

Fair Value
at
April 24, 2009

 

Fair Value Measurements
Using Inputs Considered as

 

 

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

U.S. government and agency securities

 

 

684

 

 

174

 

 

510

 

 

Foreign government and agency securities

 

 

13

 

 

 

 

13

 

 

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

 

$

 

$

 

Valuation Techniques

 

Financial assets that are classified as Level 1 securities include highly liquid government bonds within the U.S. government and agency securities, marketable equity securities and exchange-traded funds category for which quoted market prices are available. In addition, the Company has determined that foreign currency forward contracts will be included in Level 1 as these are valued using quoted market prices in active markets which have identical assets or liabilities.

 

The valuation for most fixed maturity securities are classified as Level 2. Financial assets that are classified as Level 2 include corporate debt securities, U.S. and foreign government and agency securities, certificates of deposit, other 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 such as pricing for similar securities, recently executed transactions, cash flow models with yield curves and benchmark securities. In addition, the Company has determined that interest rate swaps will be included in Level 2 as the Company uses inputs other than quoted prices that are observable for the asset. The Level 2 derivative positions are primarily valued using standard calculations and models that use readily observable market data as their basis.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial assets also include certain investment securities for which there is limited market activity such that the determination of fair value requires significant judgment or estimation. Level 3 investment securities primarily include certain corporate debt securities, auction rate securities, certain mortgage backed securities and certain other asset backed securities for which there was a decrease in the observability of market pricing for these investments. At April 30, 2010, these securities were valued primarily using broker pricing models that incorporate transaction details such as contractual terms, maturity, timing and amount of expected future cash flows, as well as assumptions about liquid ity and credit valuation adjustments of marketplace participants.

 

The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no significant transfers between Level 1 and Level 2 during the fiscal years ended April 30, 2010 or April 24, 2009. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. 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 sign ificant unobservable inputs (Level 3).

 

 

56

 




Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

 

Fiscal Year

 

(in millions)

2010

 

2009

 

Beginning Balance

$

205

      

$

448

 

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

 

(9

)

 

(38

)

Total unrealized gains/(losses) included in other comprehensive income

 

58

 

 

(84

)

Net purchases, issuances and settlements

 

(41

)

 

(209

)

Net transfers into (out of) Level 3

 

 

 

88

 

Ending Balance

$

213

 

$

205

 

 

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

 

Effective in fiscal year 2010, the authoritative guidance for fair value measurements also applied to certain non-financial assets and liabilities that are measured at fair value on a nonrecurring basis. Non-financial assets such as goodwill, intangible assets and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. With the exception of the property, plant and equipment impairment charges recorded as part of the Company’s fiscal year 2009 and global realignment restructuring initiatives of $8 million and $7 million as of April 30, 2010 and April 24, 2009, respectively, no impairments were recognized as of April 30, 2010 or April 24, 2009. For further discussion of the property, plant and equipment impairment charges recorded due to the restructuring initiatives refer to Note 4.

 

The Company holds investments in equity and other securities that are accounted for using the cost or equity method, which are classified as long-term investments in the consolidated balance sheets. The aggregate carrying amount of these investments approximated $542 million at April 30, 2010 and $515 million at April 24, 2009. These cost or equity method investments are measured at fair value on a nonrecurring basis. The fair value of the Company’s cost or equity method investments is not estimated if there are no identified events or changes in circumstance that may have a significant adverse effect on the fair value of these investments. During fiscal year 2010, the Company determined that the fair values of certain cost method investments were below their carrying values and that the carrying values of these investments were not expected to be rec overable within a reasonable period of time. As a result, the Company recognized $40 million in impairment charges in fiscal year 2010. The Company recognized $4 million in impairment charges in fiscal years 2009 and 2008. The impairment charges related to the cost method investments were recorded in other expense, net in the consolidated statement of earnings. For further discussion on the impairment charge refer to Note 6.  These investments fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value, as the investments are privately held entities without quoted market prices. To determine the fair value of these investments, the Company used all pertinent financial information that was available related to the entities, including financ ial statements and market participant valuations from recent and proposed equity offerings.  

 

Financial Instruments Not Measured at Fair Value

 

The estimated fair value of the Company’s long-term debt, including the short-term portion, at April 30, 2010 was $10.047 billion compared to a carrying value of $9.711 billion and $6.375 billion compared to a carrying value of $6.665 billion at April 24, 2009.  Fair value was estimated using quoted market prices for the same or similar instruments.  The fair values and carrying values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.

 

8.  Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill for fiscal years 2010 and 2009 are as follows:

 

 

 

Fiscal Year

 

(in millions)

 

2010

 

2009

 

Beginning balance

 

$

8,195

 

$

7,519

 

Goodwill as a result of acquisitions

 

 

155

 

 

731

 

Purchase accounting adjustments, net

 

 

(8

)

 

(40

)

Currency adjustment, net

 

 

49

 

 

(15

)

Ending balance

 

$

8,391

 

$

8,195

 

 

 

57

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

The Company completed its annual impairment test during the third quarter for all goodwill for fiscal years ending April 30, 2010, April 24, 2009 and April 25, 2008 and concluded there were no impairments or reporting units that were considered at risk.

 

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

 

(in millions)

 

Purchased
Technology and
Patents

 

Trademarks
and
Tradenames

 

Acquired
IPR&D

 

Other

 

Total

 

Amortizable intangible assets as of April 30, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original cost

 

$

3,296

 

$

373

 

$

118

 

$

252

 

$

4,039

 

Accumulated amortization

 

 

(1,040

)

 

(254

)

 

 

 

(186

)

 

(1,480

)

Carrying value

 

$

2,256

 

$

119

 

$

118

 

$

66

 

$

2,559

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average original life (in years)

 

 

12.6

 

 

10.3

 

 

N/A

 

 

8.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

N/A

 

 

9.4

 

 

 

 

 

Amortization expense for fiscal years 2010, 2009 and 2008 was $318 million, $281 million and $220 million, respectively. 

 

Estimated aggregate amortization expense based on the current carrying value of amortizable intangible assets, excluding any possible future amortization associated with acquired IPR&D which has not met technological feasibility, is as follows:

 

(in millions)

 

 

 

Fiscal Year

 

Amortization
Expense

2011 

 

$

317

2012 

 

 

294

2013 

 

 

277

2014 

 

 

267

2015 

 

 

253

Thereafter

 

 

1,033

 

 

$

2,441

 

 

58

 




Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

9.  Financing Arrangements

 

Debt consisted of the following:

 

 

 

 

 

April 30, 2010

 

April 24, 2009

 

(in millions, except interest rates)

 

Maturity by
Fiscal Year

 

Payable

 

Average
Interest
Rate

 

Payable

 

Average
Interest
Rate

 

Short-Term Borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

2010

 

 

 

 

 

385

 

0.44

%

Capital lease obligations

 

2010

 

 

 

 

 

14

 

5.29

%

Bank borrowings

 

2010-2011

 

 

65

 

1.20

%

 

123

 

0.92

%

Five-year senior convertible notes

 

2011

 

 

2,200

 

1.50

%

 

 

 

Five-year 2005 senior notes

 

2011

 

 

400

 

4.38

%

 

 

 

Debt discount

 

2011

 

 

(90

)

 

 

 

 

Total Short-Term Borrowings

 

 

 

$

2,575

 

 

 

$

522

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent convertible debentures

 

2012-2022

 

$

15

 

1.25

%

$

15

 

1.25

%

Five-year senior convertible notes

 

2011

 

 

 

 

 

2,200

 

1.50

%

Five-year 2005 senior notes

 

2011

 

 

 

 

 

400

 

4.38

%

Seven-year senior convertible notes

 

2013

 

 

2,200

 

1.63

%

 

2,200

 

1.63

%

Five-year 2009 senior notes

 

2014

 

 

550

 

4.50

%

 

550

 

4.50

%

Five-year 2010 senior notes

 

2015

 

 

1,250

 

3.00

%

 

 

 

Ten-year 2005 senior notes

 

2016

 

 

600

 

4.75

%

 

600

 

4.75

%

Ten-year 2009 senior notes

 

2019

 

 

400

 

5.60

%

 

400

 

5.60

%

Ten-year 2010 senior notes

 

2020

 

 

1,250

 

4.45

%

 

 

 

Thirty-year 2009 senior notes

 

2039

 

 

300

 

6.50

%

 

300

 

6.50

%

Thirty-year 2010 senior notes

 

2040

 

 

500

 

5.55

%

 

 

 

Interest rate swaps

 

2013-2016

 

 

33

 

 

 

 

 

Gain from interest rate swap termination

 

N/A

 

 

41

 

 

 

54

 

 

Capital lease obligations

 

2010-2014

 

 

18

 

4.21

%

 

53

 

5.38

%

Bank borrowings

 

2012-2013

 

 

46

 

5.60

%

 

 

 

Debt discount

 

2013

 

 

(259

)

 

 

(519)

 

 

Total Long-Term Debt

 

 

 

$

6,944

 

 

 

$

6,253

 

 

 

 

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 hol ders 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, all of which the Comp any remains in compliance with as of April 30, 2010. A total of $2.500 billion of the net proceeds from these note issuances were used to repurchase common stock. As of April 30, 2010, 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 18.2508, which correspondingly changed the conversion price per share for each of the Senior Convertible Notes to $54.79.

 

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.

 

 

59

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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. During the fourth quarter of fiscal year 2010, certain of the ho lders requested adjustment to the exercise price of the warrants from $75.30 to $74.71 pursuant to the anti-dilution provisions of the warrants relating to the Company’s payment of dividends to common shareholders.

 

In June 2008, the FASB issued new authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. This new authoritative guidance provides guidance for determining whether an entity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock and classified in shareholders’ equity or whether it should be bifurcated and classified as a separate asset or liability and marked-to-market through earnings. The Company adopted this new authoritative guidance in the first quarter of fiscal year 2010. In applying this guidance, the Company concluded that the purchased call options and sold warrants were indexed to its own stock and should continue to be classified in shareholders’ equity; thus consistent with prior periods, the existing guidance for accounting for derivative financial instruments indexed to and potentially settled in, a company&# 146;s own stock would still apply.

 

Under this existing guidance, the Senior Convertible Notes are accounted for as a combined instrument because the conversion spread meets the requirements to not be separated as a derivative.

 

Existing guidance 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 existing guidance, 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. Existing guidance 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 i ts 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.

 

Effective the first day of the Company’s fiscal year 2010, the Company accounted for the Senior Convertible Notes in accordance with the new authoritative guidance for convertible debt. The new guidance requires the proceeds from the issuance of the Senior Convertible Notes 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 Senior Convertible Notes are expected to be outstanding as additional non-cash interest expense. This change in accounting for the Senior Convertible Notes has been applied to the Company’s prior period financial statements on a retrospective basis, as required by the new guidance. For additional information on the impact of this change to the Company’s financial statement, refer to Note 2.

 

The following table provides equity and debt information for the Senior Convertible Notes under the convertible debt guidance.

 

 

Senior Convertible Notes due 2011

 

Senior Convertible Notes due 2013

 

(in millions)

April 30,
2010 

 

April 24,
2009 

 

April 30,
2010 

 

April 24,
2009 

 

 

 

 

Carrying amount of the equity component

$

420

 

$

420

 

$

547

 

$

547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal amount of the Senior Convertible Notes

$

 2,200

 

$

 2,200

 

$

 2,200

 

$

 2,200

 

Unamortized discount

 

 (90

)

 

 (181

)

 

 (259

)

 

 (338

)

Net carrying amount

$

 2,110

 

$

 2,019

 

$

 1,941

 

$

 1,862

 

 

At April 30, 2010, the unamortized balance of the debt discount will be amortized over the remaining life of the Senior Convertible Notes, which is approximately one year for the 2011 Senior Convertible Notes and three years for the 2013 Senior Convertible Notes.  The following table provides interest rate and interest expense amounts related to the Senior Convertible Notes.

 

 

Senior Convertible Notes due 2011

 

Senior Convertible Notes due 2013

 

 

Fiscal Year

 

Fiscal Year

 

(in millions, except interest rates)

2010 

 

2009 

 

2010 

 

2009 

 

Effective interest rate

 

 5.97

%   

 

 5.97

%   

 

 6.03

%   

 

 6.03

%

Interest cost related to contractual interest coupon

$

34

 

$

33

 

$

36

 

$

36

 

Interest cost related to amortization of the discount

$

90

 

$

84

 

$

79

 

$

73

 

 

 

60

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

Senior Notes  In March 2010, the Company issued three tranches of Senior Notes (collectively, the 2010 Senior Notes) with the aggregate face value of $3.000 billion.  The first tranche consisted of $1.250 billion of 3.000 percent Senior Notes due 2015, the second tranche consisted of $1.250 billion of 4.450 percent Senior Notes due 2020 and the third tranche consisted of $500 million of 5.550 percent Senior Notes due 2040.  All three tranches were issued at a discount which resulted in an effective interest rate of 3.002 percent, 4.470 percent and 5.564 percent, respectively.  Interest on each series of the 2010 Senior Notes is payable semi-annually, on March 15 and September 15 of each year, commencing September 15, 2010.  The 2010 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 2010 Senior Notes were issued contain customary covenants, all of which the Company remains in compliance with as of April 30, 2010.  The Company used the net proceeds from the sale of the 2010 Senior Notes for working capital and general corporate uses, which may include repayment of its indebtedness that matures in fiscal year 2011. This includes the $2.200 billion of 1.500 percent Senior Convertible Notes due 2011 and the $400 million of 2005 Senior Notes due 2010.   

 

In March 2009, the Company issued three tranches of Senior Notes (collectively, the 2009 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 2009 Senior Notes is payable semi-annually, on March 15 and September 15 of each year. The 2009 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 2009 Senior Notes were issued contain customary covenants, all of which the Company remains in compliance with as of April 30, 2010. The Company used the net proceeds from the sale of the 2009 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 (collectively, the 2005 Senior Notes) with the aggregate face value of $1.000 billion. The first tranche consisted of $400 million of 4.375 percent 2005 Senior Notes due 2010 and the second tranche consisted of $600 million of 4.750 percent 2005 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 2005 Senior Notes, respectively. Interest on each series of 2005 Senior Notes is payable semi-annually, on March 15 and September 15 of each year. The 2005 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 2005 Senior Notes were issued contain customary covenants, all of which the Company remains in compliance with as of April 30, 2010. The Company used the net proceeds from the sale of the 2005 Senior Notes for repayment of a portion of its commercial paper.

 

As of April 30, 2010, the Company had interest rate swap agreements designated as fair value hedges of underlying fixed rate obligations including the Company’s $1.250 billion 3.000 percent Senior Notes due 2015, the Company’s $600 million 4.750 percent Senior Notes due 2015, the Company’s $2.200 billion 1.625 percent Senior Convertible Notes due 2013 and the Company’s $550 million 4.500 percent Senior Notes due 2014. The Company did not have any interest rate swap agreements outstanding as of April 24, 2009. For additional information regarding the interest rate swap agreements, refer to Note 10.

 

Contingent Convertible Debentures  As of April 30, 2010, 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 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, 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 Debenture s. 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. There was no outstanding commercial paper as of April 30, 2010.  At April 24, 2009, outstanding commercial paper totaled $385 million. During fiscal years 2010 and 2009, the weighted average original maturity of the commercial paper outstanding was approximately 63 and 50 days, respectively, and the weighted average interest rate was 0.44 percent and 1.60 percent, respectively. The issuance of commercial paper reduces the amount of credit available under the Company’s existing lines of credit.

 

 

61

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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 and borrowings from U.S. banks.

 

Lines of Credit  The Company has existing unsecured lines of credit of approximately $2.839 billion with various banks at April 30, 2010. 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. 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 credit agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd. The credit agreement provides for a $300 million unsecured revolving credit 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 30, 2010 and April 24, 2009, $65 million and $508 million, respectively, were outstanding on all lines of credit and commercial paper.

 

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.  The agreements also contain customary covenants, all of which the Company remains in compliance with as of April 30, 2010.

 

As of April 30, 2010, the Company has unused credit lines and commercial paper of approximately $3.274 billion.

 

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

 

(in millions)

Fiscal Year

 

Obligation

2011 

 

$

 2,600

2012 

 

 

 49

2013 

 

 

 2,221

2014 

 

 

 569

2015 

 

 

 1,255

Thereafter

 

 

 3,068

Total long-term debt

 

 

9,762

Less: Current portion of long-term debt

 

 

 2,600

Long-term portion of long-term debt

 

$

7,162

 

10.  Derivatives and Foreign Exchange Risk Management

 

The Company uses operational and economic hedges, as well as forward currency exchange rate derivative contracts and interest rate derivative instruments to manage the impact of currency exchange and interest rate changes on earnings and cash flows. The gross notional amount of all derivative contracts outstanding at April 30, 2010 and April 24, 2009 was $10.095 billion and $5.296 billion, respectively. In order to reduce the uncertainty of currency exchange rate movements, the Company enters into derivative instruments, primarily forward currency exchange rate contracts, to manage its exposure related to currency 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 currency exchange rate derivative contracts for speculative purposes. The gross notional amount of these contracts outstanding at April 30, 2010 and April 24, 2009 was $5.495 billion and $5.296 billion, respectively. The aggregate currency exchange rate gains/(losses) were $56 million, $(53) million and $(134) million, in fiscal years 2010, 2009 and 2008, 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.

 

 

62

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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 change in U.S. dollar value of 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 30, 2010 and April 24, 2009 was $1.839 billion and $1.162 billion, respectively.

 

The amount of (losses)/gains and location of the (losses)/gains in the consolidated statement of earnings related to derivative instruments not designated as hedging instruments for the fiscal years ended April 30, 2010 and April 24, 2009 were as follows:

 

April 30, 2010

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments

 

 

Location

 

Amount

 

Foreign currency exchange rate contracts

 

 

Other expense, net

 

$

 (118

) 

 

 

 

 

 

 

 

April 24, 2009

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments

 

 

Location

 

Amount

 

Foreign currency exchange rate 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 exchange rates, or spot rates, are recorded as a cumulative translation adjustment, a component of accumulated other comprehensive loss on the consolidated balance sheets. Net gains/(losses) associated with changes in forward currency exchange 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 30, 2010, there were no open net investment hedge contracts. For the fiscal year ended April 30, 2010, there were no reclassifications of the effective portion of net investment hedges out of accumulated other comprehensive loss into income; therefore, consistent with the fourth quarter of fiscal year 2009, $27 million in gains remained in cumulative translation within accumulated other comprehensive loss.

 

Cash Flow Hedges

 

Forecasted Debt Issuance Interest Rate Risk

 

During fiscal year 2010, the Company entered into $1.100 billion of pay-fixed, forward starting interest rate swaps with a weighted average fixed rate of 4.130 percent in anticipation of the fixed-rate debt issuance that occurred during the fourth quarter of fiscal year 2010. All of these forward-starting interest rate swaps were cash settled for $7 million coinciding with the issuance of the 2010 Senior Notes. A $6 million pre-tax loss will be reclassified to earnings over the term of the related debt and the ineffective portion of $1 million was recorded in interest expense, net on the consolidated statement of earnings. The Company did not have any forward starting interest rate swaps outstanding at April 30, 2010, April 24, 2009 and April 25, 2008.

 

 

63

 




Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

Foreign Currency Exchange Rate Risk

 

Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted transactions denominated in a foreign currency that will take place in the future. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. No gains or losses relating to ineffectiveness of cash flow hedges were recognized in earnings during fiscal years 2010, 2009 and 2008. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness and no hedges were derecogni zed or discontinued during fiscal years 2010, 2009 and 2008. 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 30, 2010 and April 24, 2009 was $3.656 billion and $4.134 billion, respectively, and will mature within the subsequent 36-month period.

 

The amount of gains/(losses) and location of the gains/(losses) in the consolidated statements of earnings and other comprehensive income (OCI) related to derivative instruments designated as cash flow hedges for the fiscal years ended April 30, 2010 and April 24, 2009 are as follows:

 

April 30, 2010

 

 

 

 

 

 

 

 

 

(in millions)

 

Gross (Losses) Recognized in OCI on
Effective Portion of Derivative

 

 

Effective Portion of Gains on Derivative Reclassified from
Accumulated Other Comprehensive Loss into Income

Derivatives in Cash Flow Hedging Relationships

 

Amount

 

 

Location

 

Amount

Foreign currency exchange rate contracts

 

$

 (212

)

 

Other expense, net

 

$

 1 

 

 

 

 

 

 

Cost of products sold

 

 

 45 

Total

 

$

 (212

)

 

 

 

$

 46 

 

 

 

 

 

 

 

 

 

 

April 24, 2009

 

 

 

 

 

 

 

 

 

(in millions)

 

Gross Gains Recognized in OCI on Effective
Portion of Derivative

 

 

Effective Portion of (Losses) on Derivative Reclassified from
Accumulated Other Comprehensive Loss into Income

Derivatives in Cash Flow Hedging Relationships

 

Amount

 

 

Location

 

Amount

Foreign currency exchange rate contracts

 

$

 814

 

 

Other expense, net

 

$

 (16)

 

 

 

 

 

 

Cost of products sold

 

 

 (25)

Total

 

$

 814

 

 

 

 

$

 (41)

 

As of April 30, 2010 and April 24, 2009, the Company had a balance of $91 million and $228 million, respectively, in after-tax net unrealized gains associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $90 million of the balance will be reclassified into the consolidated statement of earnings over the next 12 months.

 

Fair Value Hedges

 

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings.

 

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

 

As of April 30, 2010, the Company had interest rate swaps designated as fair value hedges of underlying fixed rate obligations. The Company did not have any fair value hedges outstanding as of April 24, 2009.

 

 

64

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

In March 2010, the Company entered into 12 five-year fixed-to-floating interest rate swap agreements with a consolidated notional amount of $1.850 billion. Nine of these interest rate swap agreements were designated as fair value hedges of the fixed interest rate obligation under the Company’s $1.250 billion 3.000 percent Senior Notes due 2015. The remaining three interest rate swap agreements were designated as fair value hedges of the fixed interest rate obligation under the Company’s $600 million 4.750 percent Senior Notes due 2015. On the first nine interest rate swap agreements, the Company pays variable interest equal to the three-month London Interbank Offered Rate (LIBOR) plus 36.00 basis points and it receives a fixed interest rate of 3.000 percent. On the remaining three interest rate swap agreements, the Company pays variable interest equal to the LIBOR plus 185 basis points and it receives a fixed interest rate of 4.750 percent.

 

Additionally, in March 2010, the Company entered into nine three-year fixed-to-floating interest rate swap agreements with a consolidated notional amount of $2.200 billion. These interest rate swap agreements were designated as fair value hedges of the fixed interest rate obligation under the Company’s $2.200 billion 1.625 percent Senior Convertible Notes due 2013. The Company pays variable interest equal to the three-month LIBOR minus 19.70 basis points and it receives a fixed interest rate of 1.625 percent.

 

In December 2009, the Company entered into three five-year fixed-to-floating interest rate swap agreements, two with notional amounts of $75 million each and one with a notional amount of $100 million. These interest rate swap agreements were designated as fair value hedges of the fixed interest rate obligation under the Company’s $550 million 4.500 percent Senior Notes due 2014. On the first $75 million interest rate swap agreement, the Company pays variable interest equal to the three-month LIBOR plus 181.25 basis points and it receives a fixed interest rate of 4.500 percent. For the second $75 million interest rate swap agreement, the Company pays variable interest equal to the three-month LIBOR plus 196.50 basis points and it receives a fixed interest rate of 4.500 percent.  For the $100 million interest rate swap agreement, the Company pays variable interest equal to the three-month LIBOR plus 198.10 basis points and it receives a fixed interest rate of 4.500 percent.

 

In June 2009, the Company entered into two five-year fixed-to-floating interest rate swap agreements with notional amounts of $150 million each. These interest rate swap agreements were designated as fair value hedges of the fixed interest rate obligation under the Company’s $550 million 4.500 percent Senior Notes due 2014. On the first interest rate swap agreement, the Company pays variable interest equal to the one-month LIBOR plus 134.00 basis points and it receives a fixed interest rate of 4.500 percent. For the second interest rate swap agreement, the Company pays variable interest equal to the one-month LIBOR plus 137.25 basis points and it receives a fixed interest rate of 4.500 percent.

 

The market value of these interest rate swap agreements was a $31 million unrealized gain and the market value of the hedged item was a $33 million unrealized loss at April 30, 2010 which were recorded in long-term debt with the offset recorded in other assets on the consolidated balance sheet. These fair value hedges resulted in $(2) million of ineffectiveness which was recorded as an increase in interest expense, net on the consolidated statement of earnings. The gross notional amount of these contracts, designated as fair value hedges outstanding at April 30, 2010 was $4.600 billion.

 

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. 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. As of April 30, 2010, the unamortized gain was $41 million.

 

During fiscal years 2009 and 2008, 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 2010, 2009 and 2008 on firm commitments that no longer qualify as fair value hedges.

 

 

65

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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 30, 2010 and 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.

 

April 30, 2010

Asset Derivatives

 

Liability Derivatives

(in millions)

Balance Sheet
Location

 

Fair Value

 

Balance Sheet
Location

 

Fair Value

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency exchange rate contracts

Prepaid expenses
and other current
assets

 

$

198

 

Other accrued
expenses

 

$

44

Interest rate contracts

Other assets

 

 

31

 

 

 

 

 

Foreign currency exchange rate contracts

Other assets

 

 

65

 

Other long-term
liabilities

 

 

2

Total derivatives designated as hedging instruments

 

 

$

294

 

 

 

$

46

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency exchange rate contracts

Prepaid expenses
and other current
assets

 

$

2

 

Other accrued
expenses

 

$

 1

Total derivatives not designated as hedging instruments

 

 

$

2

 

 

 

$

1

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

$

 296

 

 

 

$

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 24, 2009

Asset Derivatives

 

Liability Derivatives

(in millions)

Balance Sheet
Location

 

Fair Value

 

Balance Sheet
Location

 

Fair Value

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency exchange rate contracts

Prepaid expenses
and other current
assets

 

$

249

 

Other accrued
expenses

 

$

27

Foreign currency exchange rate contracts

Other assets

 

 

187

 

Other long-term
liabilities

 

 

3

Total derivatives designated as hedging instruments

 

 

$

436

 

 

 

$

30

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency exchange rate contracts

Prepaid expenses
and other current
assets

 

$

 

Other accrued
expenses

 

$

1

Total derivatives not designated as hedging instruments

 

 

$

 

 

 

$

1

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

$

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.

 

 

66

 




Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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. Beginning in fiscal year 2010, the Company entered into collateral credit agreements with its primary derivatives counterparties. Under these agreements either party is required to post eligible collateral when the market value of transactions covered by the agreement exceeds specific thresholds, thus limiting credit exposure for both parties. As of April 30, 2010 the Company received cash collateral of $123 million from its counterparty. The collateral primarily supports the approximate fair value of the Company’s derivative contracts. The collateral received obligation was recor ded as an increase in cash and cash equivalents with the offset recorded as an increase in other accrued expenses on the consolidated balance sheet.

 

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. In light of the current economic state of many foreign countries, the Company continues to monitor their creditworthiness. 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 30, 2010 and April 24, 2009, no customer represented more than 10 percent of the outstanding accounts receivable.

 

11.  Interest Expense, Net

 

Interest income and interest expense for fiscal years 2010, 2009 and 2008 are as follows:

 

 

 

Fiscal Year

 

(in millions)

 

2010

 

2009

 

2008

 

Interest income

 

$

(156

)

$

(188

)

$

(364

)

Interest expense

 

 

402

      

 

371

      

 

400

 

Interest expense, net

 

$

246

 

$

183

 

$

36

 

 

Interest expense, net for fiscal years 2010, 2009 and 2008 has been retrospectively adjusted for the impact of the adoption of the new authoritative guidance for convertible debt. See Note 2 for additional information.

 

Interest income includes interest earned on the Company's cash and cash equivalents, short- and long-term investments, the net realized and unrealized gain or loss on trading securities and the net realized gain or loss on the sale or impairment of available-for-sale debt securities.  See Note 6 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 and debt discounts.

 

12.  Shareholders’ Equity

 

Repurchase of Common Stock    In June 2007 and June 2009, the Company’s Board of Directors authorized the repurchase of up to 50 million and 60 million shares of the Company’s stock, respectively.  Shares are repurchased from time to time to support the Company’s stock-based compensation programs and to return capital to shareholders. The Company repurchased approximately 27.0 million and 16.5 million shares at an average price of $38.10 and $45.94, respectively, during fiscal years 2010 and 2009. As of April 30, 2010, the Company has approximately 50.8 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.

 

 

67

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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.

 

13.  Stock Purchase and Award Plans

 

Under the fair value recognition provision of U.S. GAAP for accounting for stock-based compensation, the Company measures stock-based compensation expense 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-perspective method of adopting this guidance, under which prior periods were not retroactively restated. The provisions of this guidance 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 under the prior guidance’s pro forma disclosures.

 

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 2010, the Company granted stock options under the Medtronic, Inc. 2008 Stock Award and Incentive Plan (2008 Plan).  The 2008 Plan was approved by the Company’s shareholders in August 2008, 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. As of April 30, 2010, there were approximately 66 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 co mmon 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 2010, the Company granted restricted stock awards under the 2008 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 2 million shares at an average price of $33.19 per share in the fiscal year ended April 30, 2010.  As of April 30, 2010, plan participants have had approximately $9 million withheld to purchase Company common stock at 85 percent of its market value on June 30, 2010, the last trading day before the end of the calendar quarter purchase period.  At April 30, 2010, approximately 15 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.

 

 

68

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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

 

 

 

2010 

 

2009 

 

2008 

 

Weighted average fair value of options granted

 

$

 8.77

 

$

8.96

 

$

15.29

 

Assumptions used:

 

 

 

 

 

 

 

 

 

 

Expected life (years)(a)

 

 

 6.16

 

 

6.05

 

 

5.42

 

Risk-free interest rate (b)

 

 

 3.17

%

 

3.11

%

 

4.02

%

Volatility (c)

 

 

 26.91

%

 

25.64

%

 

22.27

%

Dividend yield (d)

 

 

 2.29

%

 

2.03

%

 

1.05

%

 

(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.

 

(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:   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.

 

(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 the fair value recognition provisions of U.S. GAAP for accounting for stock-based compensation, 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 shares recognized for fiscal years 2010, 2009 and 2008:

 

 

Fiscal Year

 

(in millions)

2010

 

2009

 

2008

 

Stock options

$

112

 

$

140

 

$

138

 

Restricted stock awards

 

98

 

 

82

 

 

63

 

Employee stock purchase plan

 

15

 

 

15

 

 

16

 

Total stock-based compensation expense

$

225

 

$

237

 

$

217

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

$

26

 

$

28

 

$

24

 

Research and development expense

 

55

 

 

58

 

 

52

 

Selling, general and administrative expense

 

144

 

 

151

 

 

141

 

Total stock-based compensation expense

$

225

 

$

237

 

$

217

 

 

 

 

 

 

 

 

 

 

 

Income tax benefits

 

(67

)     

 

(69

)     

 

(64

)

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense, net of tax

$

158

 

$

168

 

$

153

 

 

 

69

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

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 2010, 2009 and 2008 the Company recognized $12 million, $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.

 

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 2010, 2009 and 2008:

 

 

Fiscal Year

 

2010 

 

2009 

 

2008 

 

Options (in
thousands)

 

Wtd. Avg.
Exercise Price

 

Options (in
thousands)

 

Wtd. Avg.
Exercise Price

 

Options (in
thousands)

 

Wtd. Avg.
Exercise Price

Beginning balance

 

93,394

 

$

46.57

 

 

92,444

 

$

47.21

 

 

90,906

 

$

46.99

Granted

 

7,863

 

 

35.81

 

 

12,447

 

 

37.25

 

 

9,436

 

 

48.13

Assumed from Kyphon acquisition

 

 

 

 

 

 

 

 

 

3,486

 

 

27.73

Exercised

 

(3,126

)

 

32.96

 

 

(8,046

)

 

39.01

 

 

(9,111

)

 

37.80

Canceled

 

(8,518

)

 

46.27

 

 

(3,451

)

 

47.59

 

 

(2,273

)

 

50.18

Outstanding at year-end

 

89,613

 

$

46.13

 

 

93,394

 

$

46.57

 

 

92,444

 

$

47.21

Exercisable at year-end

 

67,944

 

$

48.24

 

 

67,795

 

$

47.78

 

 

67,741

 

$

46.80

 

For options outstanding and exercisable at April 30, 2010, the weighted average remaining contractual life was 5.04 years and 3.97 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 2010, 2009 and 2008 was $19 million, $105 million and $138 million, respectively. For options outstanding and exercisable at April 30, 2010, the total intrinsic value of in-the-money options was $159 million and $39 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 30, 2010 was $98 million.  The Company’s tax benefit related to the exercise of stock options for fiscal year 2010 was $6 million. Unrecognized compensation expense related to outstanding stock options as of April 30, 2010 was $144 million and is expected to be recognized over a weighted average period of 2.3 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 2010, 2009 and 2008:

 

 

Fiscal Year

 

2010 

 

2009 

 

2008 

 

Awards (in
thousands)

 

Wtd. Avg.
Grant Price

 

Awards (in
thousands)

 

Wtd. Avg.
Grant Price

 

Awards (in
thousands)

 

Wtd. Avg.
Grant Price

Nonvested, beginning balance

 

8,346

 

$

43.88

 

 

5,789

 

$

49.24

 

 

3,982

 

$

50.16

Granted

 

2,783

 

 

34.92

 

 

3,520

 

 

36.47

 

 

2,204

 

 

47.74

Assumed from Kyphon acquisition

 

 

 

 

 

 

 

 

 

402

 

 

46.88

Vested

 

(1,632

)

 

35.36

 

 

(564

)

 

12.26

 

 

(492

)

 

47.60

Forfeited

 

(588

)

 

43.52

 

 

(399

)

 

51.17

 

 

(307

)

 

49.88

Nonvested at year-end

 

8,909

 

$

42.67

 

 

8,346

 

$

43.88

 

 

5,789

 

$

49.24

 

Unrecognized compensation expense related to restricted stock awards as of April 30, 2010 was $154 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.

 

 

70

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

14.  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, based on tax jurisdiction, are:

 

 

 

Fiscal Year

 

(in millions)

 

2010

 

2009

 

2008

 

U.S.

 

$

1,557

 

$

984

 

$

568

 

International

 

 

2,412

 

 

1,456

 

 

2,172

 

Earnings before income taxes

 

$

3,969

 

$

2,440

 

$

2,740

 

 

 

 

 

 

 

 

 

 

 

 

The provision for income taxes consists of:

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(in millions)

 

2010

 

2009

 

2008

 

Current tax expense:

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

527

 

$

264

 

$

458

 

International

 

 

239

 

 

291

 

 

267

 

Total current tax expense

 

 

766

 

 

555

 

 

725

 

Deferred tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

106

 

 

(51

)

 

(92

)

International

 

 

(2

)

 

(134

)

 

(31

)

Net deferred tax expense (benefit)

 

 

104

 

 

(185

)

 

(123

)

Total provision for income taxes

 

$

870

 

$

370

 

$

602

 

 

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 $ 238 million and $234 million at April 30, 2010 and April 24, 2009, 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 30, 2010

 

April 24, 2009

 

Deferred tax assets:

 

 

     

 

 

 

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

$

426

 

$

315

 

Stock-based compensation

 

214

 

 

185

 

Pension and post-retirement benefits

 

150

 

 

76

 

Federal and state benefit on uncertain tax positions

 

133

 

 

111

 

Accrued liabilities

 

130

 

 

143

 

Net operating loss and credit carryforwards

 

119

 

 

136

 

Unrealized currency loss

 

28

 

 

43

 

Unrealized loss on equity investments

 

16

 

 

15

 

Allowance for doubtful accounts

 

14

 

 

12

 

Convertible debt interest

 

14

 

 

35

 

Warranty reserves

 

11

 

 

7

 

Accrued legal reserves

 

 

 

156

 

Other

 

118

 

 

113

 

Total deferred tax assets (net of valuation allowance)

 

1,373

 

 

1,347

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

Intangible assets

 

(652

)

 

(595

)

Realized loss on derivative financial instruments

 

(113

)

 

(113

)

Unrealized gain on available for sale securities and derivative financial instruments

 

(62

)

 

(100

)

Accumulated depreciation

 

(43

)

 

(28

)

Other

 

(48

)

 

(21

)

Total deferred tax liabilities

 

(918

)

 

(857

)

 

 

 

 

 

 

 

Deferred tax assets, net

$

455

 

$

490

 

 

 

71

 



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

 

 

2010 

 

2009 

 

2008 

 

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

 

0.5

 

 

0.6

 

 

1.1

 

Research and development credit

 

(0.6

)

 

(1.6

)

 

(0.7

)

Domestic production activities

 

(0.3

)

 

(0.5

)

 

(0.4

)

International

 

(16.7

)

 

(20.7

)

 

(19.2

)

Impact of special charges, restructuring charges, certain litigation charges, net and IPR&D and certain acquisition-related costs

 

2.0

 

 

9.5

 

 

6.2

 

Reversal of excess tax accruals

 

 

 

(5.4

)

 

 

Retiree medical subsidy law change

 

0.4

 

 

 

 

 

Other, net

 

1.6

 

 

(1.7

)

 

 

Effective tax rate

 

21.9

%

 

15.2

%

 

22.0

%

 

In fiscal year 2010 the Company recorded a $15 million tax cost associated with the U.S. healthcare reform legislation eliminating the federal tax benefit for government subsidies of retiree prescription drug benefits.  The $15 million tax cost was recorded in the provision for income taxes in the consolidated statement of earnings for fiscal year 2010.

 

In fiscal year 2009 the Company recorded a $132 million certain tax benefit associated with the reversal of excess tax accruals.  This reversal related to 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. 

 

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 30, 2010 and April 24, 2009, such earnings were approximately $12.373 billion and $9.738 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 2011 and 2027. The expiration of the Ireland tax incentive grant on December 31, 2010 is not expected to have a material impact on the Company’s financial results.

 

The Company had $538 million, $431 million and $455 million of gross unrecognized tax benefits as of April 30, 2010, April 24, 2009 and April 25, 2008, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal years 2010, 2009 and 2008 is as follows:

 

 

Fiscal Year

 

 

2010 

 

2009 

 

2008 

 

Gross unrecognized tax benefits at beginning of fiscal year

431

 

$

455

 

$

408

 

Gross increases: 

 

 

 

 

 

 

 

 

 

Prior year tax positions

 

51

 

 

3

 

 

21

 

Current year tax positions

 

74

 

 

106

 

 

51

 

Gross decreases:

 

 

 

 

 

 

 

 

 

Prior year tax positions

 

(14

)

 

(116

)

 

(23

)

Settlements

 

(4

)

 

(15

)

 

(2

)

Statute of limitation lapses

 

 

 

(2

)

 

 

Gross unrecognized tax benefits at end of fiscal year

538

 

$

431

 

$

455

 

 

 

72

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

If all of the Company’s unrecognized tax benefits as of April 30, 2010, April 24, 2009 and April 25, 2008 were recognized, $459 million, $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 and the IRS are in settlement discussions as it relates to the IRS audit of fiscal years 1997, 1998 and 1999 and the allocation of income between Medtronic, Inc. and its wholly owned subsidiary in Switzerland.  Based on these discussions, the Company has made a $70 million deposit with the IRS.  As no settlement has been reached with the IRS, the Company continues to record the gross unrecognized tax benefit as a long-term liability as it relates to this uncertain tax position.  The Company has recorded all remaining gross unrecognized tax benefits as a long-term liability as well, 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.

 

The Company recognizes interest and penalties related to income tax matters in the provision for income taxes in the consolidated statements of earnings and records the liability in the current or long-term income taxes payable, as appropriate. The Company had $94 million, $73 million and $91 million of accrued gross interest and penalties as of April 30, 2010, April 24, 2009 and April 25, 2008, respectively. During the fiscal years ended April 30, 2010, April 24, 2009 and April 25, 2008, the Company recognized interest expense, net of tax benefit, of approximately $14 million, $18 million and $24 million in the provision for income taxes in the consolidated statement of earnings, respectively.

 

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.  The Company is in settlement discussions with the IRS as it relates to the outstanding issue; however, a settlement has not yet been reached.

 

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 between Medtronic, Inc. and its wholly owned subsidiary in Switzerland 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. As the statute of limitations for these tax years expire in December 2010, the Company expects that the IRS will issue a Notice of Deficiency for these remaining issues during the Company’s fiscal year ending April 29, 2011 and Medtronic will proceed to attempt to resolve these matters either at the IRS Appellate level or in the courts, if necessary. 

 

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.

 

 

73

 




Medtronic, Inc.
Notes to Consolidated Financial Statements

 

15. 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 $237 million, $223 million and $222 million in fiscal years 2010, 2009 and 2008, respectively.  The Company adopted the new measurement date authoritative guidance for pension benefits effective April 26, 2008. The adoption of this guidance in fiscal year 2009 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.

 

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 benefits. 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 30, 2010 and April 24, 2009, the net underfunded status of the Company’s benefit plans was $411 million and $157 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)

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

Accumulated benefit obligation at end of year:

 

$

1,146

     

$

759

     

$

434

     

$

308

     

$

270

     

$

174

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in projected benefit obligation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected benefit obligation at beginning of year

 

$

842

 

$

902

 

$

373

 

$

400

 

$

174

 

$

184

 

Adjustment due to adoption of new measurement date guidance

 

 

 

 

34

 

 

 

 

4

 

 

 

 

6

 

Service cost

 

 

63

 

 

74

 

 

27

 

 

29

 

 

12

 

 

14

 

Interest cost

 

 

68

 

 

60

 

 

22

 

 

19

 

 

14

 

 

12

 

Employee contributions

 

 

 

 

 

 

10

 

 

10

 

 

7

 

 

5

 

Plan amendments

 

 

 

 

 

 

3

 

 

 

 

 

 

 

Plan curtailments

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

Actuarial loss/(gain)

 

 

336

 

 

(199

)

 

112

 

 

(8

)

 

74

 

 

(36

)

Benefits paid

 

 

(32

)

 

(29

)

 

(17

)

 

(8

)

 

(13

)

 

(12

)

Medicare Part D reimbursements

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Special termination benefits

 

 

7

 

 

 

 

 

 

 

 

2

 

 

 

Foreign currency exchange rate changes

 

 

 

 

 

 

11

 

 

(73

)

 

 

 

 

Projected benefit obligation at end of year

 

 

1,284

 

 

842

 

 

539

 

 

373

 

 

270

 

 

174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in plan assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

 

 

833

 

 

1,100

 

 

291

 

 

335

 

 

108

 

 

141

 

Adjustment due to adoption of new measurement date guidance

 

 

 

 

(25

)

 

 

 

1

 

 

 

 

(3

)

Actual (loss)/return on plan assets

 

 

222

 

 

(302

)

 

79

 

 

(49

)

 

30

 

 

(41

)

Employer contributions

 

 

81

 

 

89

 

 

47

 

 

66

 

 

26

 

 

18

 

Employee contributions

 

 

 

 

 

 

10

 

 

10

 

 

7

 

 

5

 

Benefits paid

 

 

(32

)

 

(29

)

 

(17

)

 

(8

)

 

(13

)

 

(12

)

Foreign currency exchange rate changes

 

 

 

 

 

 

10

 

 

(64

)

 

 

 

 

Fair value of plan assets at end of year

 

 

1,104

 

 

833

 

 

420

 

 

291

 

 

158

 

 

108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funded status at end of year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets 

 

 

1,104

 

 

833

 

 

420

 

 

291

 

 

158

 

 

108

 

Benefit obligations

 

 

1,284

 

 

842

 

 

539

 

 

373

 

 

270

 

 

174

 

Underfunded status of the plan

 

 

(180

)

 

(9

)

 

(119

)

 

(82

)

 

(112

)

 

(66

)

Recognized liability

 

$

(180

)

$

(9

)

$

(119

)

$

(82

)

$

(112

)

$

(66

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts recognized on the consolidated balance sheet consist of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current assets

 

$

 

$

82

 

$

 

$

1

 

$

 

$

 

Current liabilities

 

 

(5

)

 

(5

)

 

(2

)

 

(1

)

 

 

 

 

Non-current liabilities

 

 

(175

)

 

(86

)

 

(117

)

 

(82

)

 

(112

)

 

(66

)

Recognized liability

 

$

(180

)

$

(9

)

$

(119

)

$

(82

)

$

(112

)

$

(66

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts recognized in accumulated other comprehensive (loss)/income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service (benefit)/cost

 

$

(6

)

$

(7

)

$

10

 

$

7

 

$

95

 

$

2

 

Net actuarial loss

 

 

677

 

 

465

 

 

148

 

 

90

 

 

2

 

 

44

 

Ending balance

 

$

671

 

$

458

 

$

158

 

$

97

 

$

97

 

$

46

 

 

74

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

In certain countries outside the U.S., fully funding pension plans is not a common practice, as funding provides no income tax benefit. Consequently, certain pension plans were partially funded as of April 30, 2010 and April 24, 2009. U.S. and non-U.S. plans with accumulated benefit obligations in excess of plan assets consist of the following:

 

 

 

Fiscal Year

(in millions)

 

2010 

 

2009 

Accumulated benefit obligation

 

$

363

 

$

239

Projected benefit obligation

 

 

393

 

 

256

Plan assets at fair value

 

 

183

 

 

104

 

 

 

 

 

 

 

Plans with projected benefit obligations in excess of plan assets:

 

 

 

 

 

 

 

 

Fiscal Year

(in millions)

 

2010 

 

2009 

Projected benefit obligation

 

$

675

 

$

432

Plan assets at fair value

 

 

420

 

 

258

 

The net periodic benefit costs of the plans include the following components:

 

 

 

U.S. Pension Benefits

 

Non-U.S. Pension Benefits

 

Post-Retirement Benefits

 

 

 

Fiscal Year

 

Fiscal Year

 

Fiscal Year

 

(in millions)

 

2010

 

2009

 

2008

 

2010

 

2009

 

2008

 

2010

 

2009

 

2008

 

Service cost

 

$

63

     

$

74

     

$

72

     

$

27

     

$

29

     

$

32

     

$

12

     

$

14

     

$

16

 

Interest cost

 

 

68

 

 

60

 

 

52

 

 

22

 

 

19

 

 

16

 

 

14

 

 

12

 

 

12

 

Expected return on plan assets

 

 

(100

)

 

(99

)

 

(87

)

 

(24

)

 

(20

)

 

(18

)

 

(9

)

 

(12

)

 

(11

)

Amortization of prior service costs

 

 

(1

)

 

(1

)

 

(1

)

 

1

 

 

1

 

 

1

 

 

 

 

 

 

 

Amortization of net actuarial loss

 

 

2

 

 

6

 

 

15

 

 

1

 

 

 

 

2

 

 

2

 

 

 

 

2

 

Curtailment gain

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

 

32

 

 

40

 

 

51

 

 

26

 

 

29

 

 

33

 

 

19

 

 

14

 

 

19

 

Special termination benefits

 

 

7

 

 

 

 

3

 

 

 

 

 

 

 

 

2

 

 

 

 

1

 

Total cost for period

 

$

39

 

$

40

 

$

54

 

$

26

 

$

29

 

$

33

 

$

21

 

$

14

 

$

20

 

 

The other changes in plan assets and projected benefit obligation recognized in other comprehensive income for fiscal year 2010 are as follows:

 

(in millions)

U.S. Pension
Benefits

 

Non-U.S. Pension
Benefits

 

Post-Retirement
Benefits

 

Net actuarial loss

$

214

 

$

58

 

$

53

 

Prior service cost

 

 

 

3

 

 

 

Amortization of prior service costs

 

1

 

 

(1

)

 

 

Amortization of net actuarial loss

 

(2

)

 

(1

)

 

(2

)

Effect of exchange rates

 

 

 

2

 

 

 

Total recognized in other comprehensive income

$

213

 

$

61

 

$

51

 

Total recognized in net periodic pension cost and other comprehensive income

$

252

 

$

87

 

$

72

 

 

 

 

 

 

 

 

 

 

 

   The estimated amounts that will be amortized from accumulated other comprehensive (loss)/income into net periodic benefit cost, before tax, in fiscal year 2011 are as follows:

 

 

 

 

 

 

 

 

 

 

(in millions)

U.S. Pension
Benefits

 

Non-U.S. Pension
Benefits

 

Post-Retirement
Benefits

 

Amortization of prior service cost

$

(2

)

$

1

 

$

 

Amortization of net actuarial loss

 

33

 

 

5

 

 

5

 

 

$

31

 

$

6

 

$

5

 

 

 

75

 




Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

The actuarial assumptions were as follows:

 

 

 

U.S. Pension Benefits

 

Non-U.S. Pension Benefits

 

Post-Retirement Benefits

 

 

 

Fiscal Year

 

Fiscal Year

 

Fiscal Year

 

 

       

2010 

 

2009 

 

2008 

 

2010 

 

2009 

 

2008 

 

2010 

 

2009 

 

2008 

 

Weighted average assumptions – projected benefit obligation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

6.05

%

8.25

%

6.75

%

4.68

%

5.41

%

5.37

%

6.05

%

8.25

%

6.75

%

Rate of compensation increase

 

3.80

%

4.00

%

4.24

%

3.05

%

2.90

%

3.10

%

N/A

 

N/A

 

N/A

 

Initial healthcare cost trend rate pre-65

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

8.00

%

8.50

%

9.00

%

Initial healthcare cost trend rate post-65

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

7.75

%

8.50

%

9.00

%

Weighted average assumptions – net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

8.25

%

6.75

%

6.00

%

5.41

%

5.37

%

4.42

%

8.25

%

6.75

%

6.00

%

Expected return on plan assets

 

8.25

%

8.75

%

8.75

%

5.78

%

5.97

%

5.76

%

8.25

%

8.75

%

8.75

%

Rate of compensation increase

 

4.00

%

4.24

%

4.24

%

2.90

%

3.10

%

3.09

%

N/A

 

N/A

 

N/A

 

Initial healthcare cost trend rate pre-65

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

8.50

%

9.00

%

10.00

%

Initial healthcare cost trend rate post-65

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

8.00

%

9.00

%

10.00

%

 

The Company’s discount rates are determined by considering current yield curves representing high quality, long-term fixed income instruments. The resulting discount rates are consistent with the duration of plan liabilities.

 

The expected long-term rate of return on plan assets assumptions are determined using a building block approach, considering historical averages and real returns of each asset class. In certain countries, where historical returns are not meaningful, consideration is given to local market expectations of long-term returns.

 

Retirement Benefit Plan Investment Strategy   The Company has an account that holds the assets for both the U.S. pension plan and other post-retirement benefits, primarily retiree medical. For investment purposes, the plans are managed in an identical way, as their objectives are similar.

 

The Company has a Qualified Plan Committee (the Plan Committee) that sets investment guidelines with the assistance of an external consultant. These guidelines are established based on market conditions, risk tolerance, funding requirements and expected benefit payments. The Plan Committee also oversees the investment allocation process, selects the investment managers and monitors asset performance. As pension liabilities are long-term in nature, the Company employs a long-term total return approach to maximize the long-term rate of return on plan assets for a prudent level of risk. An annual analysis on the risk versus the return of the investment portfolio is conducted to justify the expected long-term rate of return assumption.

 

The investment portfolio contains a diversified portfolio of investment categories, including equities, fixed income securities, hedge funds and private equity. Securities are also diversified in terms of domestic and international securities, short- and long-term securities, growth and value styles, large cap and small cap stocks, active and passive management and derivative-based styles. The Plan Committee believes with prudent risk tolerance and asset diversification, the account should be able to meet its pension and other post-retirement obligations in the future.

 

Outside the U.S., pension plan assets are typically managed by decentralized fiduciary committees. There is significant variation in policy asset allocation from country to country. Local regulations, local funding rules and local financial and tax considerations are part of the funding and investment allocation process in each country.

 

Plan assets also include investments in the Company’s common stock of $56 million and $38 million at April 30, 2010 and April 24, 2009, respectively.

 

76

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

The Company’s pension plan target allocations at April 30, 2010 and April 24, 2009, by asset category, is as follows:

 

U.S. Plans

 

Target Allocation

 

2010 

2009

Asset Category

 

 

 

 

 

 

Equity securities

 

55

%

 

60

%

Debt securities

 

20

 

 

10

 

Other

 

25

 

 

30

 

Total

 

100

%

 

100

%

 

 

 

 

 

 

 

Non-U.S. Plans

 

 

 

 

 

 

Target Allocation

2010

2009

Asset Category

 

 

 

 

 

 

Equity securities

 

40

%

 

37

%

Debt securities

 

15

 

 

15

 

Other

 

45

 

 

48

 

Total

 

100

%

 

100

%

 

Retirement Benefit Plan Asset Fair Values  The following is a description of the valuation methodologies used for retirement benefit plan assets measured at fair value. 

 

Short-term investments, Medtronic, Inc. common stock and fixed income mutual funds:  Valued at the quoted market prices of shares held by the plans at year-end in the active market on which the individual securities are traded. 

 

U.S. government securities:  Certain U.S. government securities are valued at the closing price reported in the active markets in which the individual security is traded.  Other U.S. government securities are valued based on inputs other than quoted prices that are observable for the securities.

 

Registered investment companies:  Valued at the quoted market prices of shares held by the plan at year-end in the active market on which the individual securities are traded.

 

Municipal debt securities and corporate debt securities:  Valued based on inputs other than quoted prices that are observable for the securities.

 

Other common stocks:  Valued at the closing price reported in the active markets in which the individual security is traded.  

 

Partnership units:  Valued based on the year-end net asset values of the underlying partnerships.  The net asset values of the partnerships are based on the fair values of the underlying investments of the partnerships.  Quoted market prices are used to value the underlying investments of the partnerships, where available. Investments in this category primarily include collective funds, absolute return strategies and private equity funds. The collective funds in the Company’s retirement benefit plans can be redeemed monthly with notice periods ranging from one to 30 days. The absolute return strategies in the Company’s retirement benefit plans can be redeemed quarterly with notice periods ranging from 45 to 95 days. There are two absolute return strategy funds totaling $29 million that are in the process of liquidation, which the Company expects to receive the majority of the proceeds over the next five years. For private equity funds, the sum of the unfunded commitments is $34 million and the estimated liquidation period of these funds is expected to be one to 10 years. If a quoted market price is not available for a partnership investment, other valuation procedures are utilized to arrive at a fair value. 

 

Insurance Contracts:  Comprised of investments in collective (group) insurance contracts, consisting of individual insurance policies.  The policyholder is the employer and each member is the owner/beneficiary of their individual insurance policy.  These policies are a part of the insurance company’s general portfolio and participate in the insurer’s profit-sharing policy on an excess yield basis. 

 

The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values.  Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

 

 

77

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

The following tables provide information by level for the retirement benefit plan assets that are measured at fair value, as defined by U.S. GAAP.  See Note 7 for discussion of the fair value measurement terms of Levels 1, 2 and 3. 

 

U.S. Pension Benefits

 

 

Fair Value
at
April 30, 2010

 

Fair Value Measurements
Using Inputs Considered as

 

 

 

 

Level 1

 

Level 2

 

Level 3

Short-term investments

$

39

 

$

39

 

$

 

$

U.S. government and agency securities

 

29

 

 

15

 

 

14

 

 

Corporate debt securities

 

24

 

 

 

 

24

 

 

Medtronic, Inc. common stock

 

49

 

 

49

 

 

 

 

Other common stock

 

195

 

 

195

 

 

 

 

Fixed income mutual funds

 

167

 

 

167

 

 

 

 

Partnership units

 

601

 

 

 

 

 

 

601

 

$

1,104

 

$

465

 

$

38

 

$

601

 

The following table provides a reconciliation of the beginning and ending balances of U.S. pension benefits assets measured at fair value that used significant unobservable inputs (Level 3):

 

 

April 30,
2010

 

Beginning Balance

$

528

 

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

 

(14

)

Total unrealized losses included in other comprehensive income

 

126

 

Purchases, issuances and settlements

 

(39

)

Ending Balance

$

601

 

 

Non-U.S. Benefits

 

 

Fair Value
at
April 30, 2010

 

Fair Value Measurements
Using Inputs Considered as

 

 

 

 

Level 1

 

Level 2

 

Level 3

Registered investment companies

$

413

 

$

413

 

$

 

$

Insurance contracts

 

7

 

 

 

 

 

 

7

 

$

420

 

$

413

 

$

 

$

7

 

The following table provides a reconciliation of the beginning and ending balances of non-U.S. pension benefits assets measured at fair value that used significant unobservable inputs (Level 3):

 

 

April 30,
2010

 

Beginning Balance

$

5

 

Purchases, issuances and settlements

 

2

 

Ending Balance

$

7

 

 

Post-Retirement Benefits

 

 

Fair Value
at
April 30, 2010

 

Fair Value Measurements
Using Inputs Considered as

 

 

 

 

Level 1

 

Level 2

 

Level 3

Short-term investments

$

6

 

$

6

 

$

 

$

U.S. government securities

 

4

 

 

2

 

 

2

 

 

Corporate debt securities

 

4

 

 

 

 

4

 

 

Medtronic, Inc. common stock

 

7

 

 

7

 

 

 

 

Other common stock

 

29

 

 

29

 

 

 

 

Fixed income mutual funds

 

25

 

 

25

 

 

 

 

Partnership units

 

89

 

 

 

 

 

 

89

Total

 

164

 

$

69

 

$

6

 

$

89

Other items to reconcile to fair value of plan assets

 

(6)

 

 

 

 

 

 

 

 

 

 

$

158

 

 

 

 

 

 

 

 

 

 

 

78

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

The following table provides a reconciliation of the beginning and ending balances of post-retirement benefits assets measured at fair value that used significant unobservable inputs (Level 3):

 

 

April 30,
2010

 

Beginning Balance

$

69

 

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

 

(2

)

Total unrealized losses included in other comprehensive income

 

19

 

Purchases, issuances and settlements

 

3

 

Ending Balance

$

89

 

 

Retirement Benefit Plan Funding  It is the Company’s policy to fund retirement costs within the limits of allowable tax deductions. During fiscal year 2010, the Company made discretionary contributions of approximately $81 million to the U.S. pension plan and approximately $26 million to fund post-retirement benefits. Internationally, the Company contributed approximately $47 million for pension benefits during fiscal year 2010. During fiscal year 2011, the Company anticipates that its contribution for pension benefits and post-retirement benefits will be consistent with those contributions made during fiscal year 2010. Based on the guidelines under the U.S. Employee Retirement Income Security Act of 1974 and the various guidelines which govern the plans outside the U.S., the majority of anticipated fiscal year 2011 contributions will be discretionary.

 

Retiree benefit payments, which reflect expected future service, are anticipated to be paid as follows:

 

(in millions)

 

U.S. Pension Benefits

 

Non-U.S. Pension Benefits

 

Post-Retirement Benefits

Fiscal Year

 

Gross Payments

 

Gross Payments

 

Gross Payments

 

Gross Medicare Part D
Receipts

2011 

 

$

36

 

$

14

 

$

9

 

$

1

2012 

 

 

41

 

 

15

 

 

10

 

 

1

2013 

 

 

46

 

 

16

 

 

11

 

 

1

2014 

 

 

50

 

 

18

 

 

13

 

 

1

2015 

 

 

54

 

 

19

 

 

14

 

 

1

2015 – 2019

 

 

341

 

 

115

 

 

109

 

 

14

Total

 

$

568

 

$

197

 

$

166

 

$

19

 

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA) and the Reconciliation Act. Included among the major provisions of these laws is a change in the tax treatment of the Medicare Part D subsidy. The subsidy came into existence with the enactment of the Medicare Modernization Act (MMA) in 2003 and is available to sponsors of retiree health benefit plans with a prescription drug benefit that is actuarially equivalent to the benefit provided by the Medicare Part D program. Prior to the enactment of the PPACA and the Reconciliation Act, the Company was allowed to deduct the full cost of its retiree drug plans without reduction for subsidies received.

 

Under U.S. GAAP, the Company records a liability on its balance sheet for the expected cost of earned future retiree health benefits. When MMA was enacted in 2003, this liability was reduced to reflect expected future subsidies from the Medicare Part D program. In addition, the Company recorded a reduction to the deferred tax liability on the balance sheet for the value of future tax deductions for these retiree health benefits. Each year, as additional benefits are earned and benefit payments are made, the Company adjusts the postretirement benefits liability and deferred tax liability.

 

After the passage of the PPACA and the Reconciliation Act, the Company must reduce the tax deduction for retiree drug benefits paid by the amount of the Medicare Part D subsidy beginning in 2013. U.S. GAAP requires the impact of a change in tax law to be recognized immediately in the income statement in the period that includes the enactment date, regardless of the effective date of the change in tax law. As a result of this change in tax law, the Company recorded a non-cash charge of $15 million in fiscal year 2010 to increase the deferred tax liability. As a result of this legislation, the Company will be evaluating prospective changes to the active and retiree healthcare benefits offered by the Company.

 

 

79

 




Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

In August 2006, the Pension Protection Act was signed into law in the U.S. The Pension Protection Act replaces the funding requirements for defined benefit pension plans by subjecting defined benefit plans to 100 percent of the current liability funding target. Defined benefit plans with a funding status of less than 80 percent of the current liability are defined as being “at risk.” The Pension Protection Act was effective for the 2008 plan year. The Company’s U.S. qualified defined benefit plans are funded in excess of 80 percent, and therefore the Company expects that the plans will not be subject to the “at risk” funding requirements of the Pension Protection Act and that the law will not have a material impact on future contributions.

 

The initial healthcare cost trend rates for post-retirement benefit plans was 8.00 percent for pre-65 and 7.75 percent for post-65 at April 30, 2010. Based on actuarial data, the trend rates are expected to decline to 5.0 percent over a five-year period. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:

 

(in millions)

One-Percentage
Point Increase

 

One-Percentage
Point Decrease

 

Effect on post-retirement benefit cost

$

2

 

$

(1

)

Effect on post-retirement benefit obligation

 

9

 

 

(8

)

 

Defined Contribution Savings Plans    The Company has defined contribution savings plans that cover substantially all U.S. employees and certain non-U.S. employees. The general purpose of these plans is to provide additional financial security during retirement by providing employees with an incentive to make regular savings. Company contributions to the plans are based on employee contributions and Company performance and starting in fiscal year 2006 the entire match is made in cash. Expense under these plans was $110 million, $103 million and $85 million in fiscal years 2010, 2009 and 2008, respectively.

 

Effective May 1, 2005, the Company froze participation in the existing defined benefit pension plan in the U.S. and implemented two new plans including an additional defined benefit pension plan and a new defined contribution pension plan, respectively: the Personal Pension Account (PPA) and the Personal Investment Account (PIA). Employees in the U.S. hired on or after May 1, 2005 have the option to participate in either the PPA or the PIA. Participants in the PPA receive an annual allocation of their salary and bonus on which they will receive an annual guaranteed rate of return which is based on the 10-year Treasury bond rate. Participants in the PIA also receive an annual allocation of their salary and bonus; however, they are allowed to determine how to invest their funds among identified fund alternatives. The cost associated with the PPA is included in the U.S. Pension Benefits in the tables presented earlier. The defined contrib ution cost associated with the PIA was approximately $41 million, $37 million and $30 million in fiscal years 2010, 2009 and 2008, respectively.

 

16. Leases

 

The Company leases office, manufacturing and research facilities and warehouses, as well as transportation, data processing and other equipment under capital and operating leases. A substantial number of these leases contain options that allow the Company to renew at the fair rental value on the date of renewal.

 

Future minimum payments under capitalized leases and non-cancelable operating leases at April 30, 2010 are:

 

(in millions)

 

Capitalized
Leases

 

Operating
Leases

 

Fiscal Year

 

 

 

2011 

 

$

 

$

106

 

2012 

 

 

1

 

 

78

 

2013 

 

 

1

 

 

58

 

2014 

 

 

1

 

 

44

 

2015 

 

 

1

 

 

27

 

2016 and thereafter

 

 

20

 

 

47

 

Total minimum lease payments

 

$

24

 

$

360

 

Less amounts representing interest

 

 

(6

)

 

N/A

 

Present value of net minimum lease payments

 

$

18

 

 

N/A

 

 

 

80

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

Rent expense for all operating leases was $154 million, $150 million and $135 million in fiscal years 2010, 2009 and 2008, respectively.

 

In April 2006, the Company entered into a sale-leaseback agreement with a financial institution whereby certain manufacturing equipment was sold to the financial institution and is being leased by the Company over a seven-year period. The transaction was recorded as a capital lease. Payments for the remaining balance of the sale-leaseback agreement were due semi-annually. The lease provided for an early buyout option whereby the Company, at its option, could repurchase the equipment at a predetermined fair market value in calendar year 2009. The Company exercised its early buyout option in fiscal year 2010 which resulted in converting the lease to a term loan. The balance of the related term loan at April 30, 2010 was $46 million. 

 

17.  Contingencies

 

The Company is involved in a number of legal actions. The outcomes of these legal actions are not within the Company’s 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 U.S. GAAP, the Company records a liability in the 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 mos t cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. While it is not possible to predict the outcome for most of the matters discussed, the Company believes it is possible that costs associated with them could have a material adverse impact on the Company’s consolidated earnings, financial position or cash flows.

 

Litigation with Wyeth and Cordis Corporation

 

On February 22, 2008, Wyeth and Cordis Corporation (Cordis) filed a lawsuit against the Company and its subsidiary, Medtronic AVE, Inc., in U.S. District Court for the District of New Jersey, alleging that Medtronic’s Endeavor drug-eluting stent infringes three U.S. “Morris” patents alleged to be owned by Wyeth and exclusively licensed to Cordis. A trial date has not been set.  The Company is indemnified for the claims made by Wyeth and Cordis. The Company has not recorded an expense related to damages in connection with these matters because any potential loss is not currently probable or reasonably estimable under U.S. GAAP.

 

Litigation with Edwards Lifesciences, Inc.

 

On March 19, 2010, the U.S. District Court for the District of Delaware added Medtronic CoreValve LLC (CoreValve) as a party to litigation pending between Edwards Lifesciences, Inc. (Edwards) and CoreValve, Inc.  In the litigation, Edwards asserted that CoreValve’s transcatheter aortic valve replacement product infringed three U.S. “Andersen” patents owned by Edwards.  Before trial, the Court granted summary judgment to Medtronic as to two of the three patents.  Trial started on March 23, 2010 on Edwards’ claims of infringement on the remaining patent.  On April 1, 2010, a jury found that CoreValve willfully infringed a claim on the remaining Andersen patent and awarded total lost profit and royalty damages of $74 million. On May 28, 2010, Edwards filed a motion seeking an injunction against CoreValve. Medtronic has filed motions with the trial court judge to overturn the jury's verdict and will defend Edward's injunction motion.

 

On March 12, 2010, Edwards served a second lawsuit in Delaware upon Medtronic CoreValve LLC, Medtronic Vascular and Medtronic, asserting that Medtronic’s transcatheter aortic valve replacement product from CoreValve infringed three U.S. Andersen patents owned by Edwards, including two of the patents that were the subject of the first lawsuit.  Medtronic filed a motion to dismiss or stay the second lawsuit on May 24, 2010.

 

Edwards also previously asserted that the CoreValve product infringed an Andersen patent in Germany and the United Kingdom, which is a counterpart to the U.S. Andersen patents. Courts in both countries found that the CoreValve product does not infringe the European Andersen patent. On February 11, 2010, a German appellate court issued its opinion affirming the trial court ruling that the CoreValve product does not infringe the Andersen patent in Germany.  On May 11, 2010, a United Kingdom appellate court issued an oral ruling from the bench affirming a trial court ruling that the CoreValve product does not infringe the Andersen patent in the United Kingdom.  Edwards can seek leave for further appeals in Germany and the United Kingdom.

 

 

81

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

The Company has not recorded an expense related to damages in connection with these matters because any potential loss is not currently probable or reasonably estimable under U.S. GAAP.

 

Marquis/Maximo/InSync Matters

 

On February 10, 2005, Medtronic voluntarily began to advise physicians about the possibility that a specific battery shorting mechanism might manifest itself in a subset of implantable cardioverter defibrillators (ICDs) and cardiac resynchronization therapy-defibrillators (CRT-Ds). These included certain Marquis VR/DR and Maximo VR/DR ICDs and certain InSync I/II/III CRT-D devices. Subsequent to this voluntary field action, a number of lawsuits were filed against the Company alleging a variety of claims, including individuals asserting claims of personal injury and third-party payors alleging entitlement to reimbursement. Many of these lawsuits were settled, and in the third quarter of fiscal year 2008, the Company recorded an expense of $123 million relating to the settlement in accordance with U.S. GAAP as the potential loss was both probable and reasonably estimable. The Company paid substantially all of the $123 million in the first quarter of fiscal year 2009. One third-party payor, Kinetic Knife, dismissed its original action without prejudice and on November 5, 2008 filed a putative class action relating to the same subject matter. After removing the case to the United States District Court for the District of Minnesota, Medtronic filed a motion to dismiss. That motion was denied on December 4, 2009.  Pretrial proceedings are underway.

 

In addition, class action product liability suits pending in Canada are consolidated in the Ontario Superior Court of Justice. That court certified a class of individual implant recipients and their family members for proceeding on December 6, 2007. In addition, the subrogated claims of the provincial health insurers to recover costs incurred in providing medical services to the implant class are claimed in the class proceeding. Pretrial proceedings are underway. The Company has not recorded an expense related to damages for the remaining suits because any potential loss is not currently probable or reasonably estimable under U.S. GAAP.

 

Sprint Fidelis Product Liability Matters

 

On October 15, 2007, the Company voluntarily suspended worldwide distribution of its Sprint Fidelis (Fidelis) family of defibrillation leads. The leads are used to deliver therapy in patients with ICDs, but are generally not used in pacemaker patients. The U.S. Food and Drug Administration (FDA) subsequently classified the Company’s action as a Class I recall. As of June 15, 2010, approximately 3,600 lawsuits regarding the Fidelis leads have been filed against the Company, including approximately 47 putative class action suits reflecting a total of approximately 8,000 individual personal injury cases. In general, the suits allege claims of product liability, warranty, negligence, unjust enrichment, emotional distress and consumer protection violations. One lawsuit includes a claim by an individual purporting to act as a surrogate for the Center for Medicare and Medicaid Services, and one lawsuit has been brought by a third-party payor as a putative class action suit. Approximately 2,500 of the lawsuits have been commenced in state court, generally alleging similar causes of action. Of those state court actions, almost all are pending before a single judge in Hennepin County District Court in the state of Minnesota. On October 22, 2009, that court granted, on grounds of federal preemption, Medtronic’s motion to dismiss ten cases that the parties had agreed represented all claims asserted in the cases pending before the Minnesota court. Plaintiffs have appealed the dismissals to the Minnesota Court of Appeals. The federal court cases have been consolidated for pretrial proceedings before a single federal judge in the U.S. District Court for the District of Minnesota pursuant to the Multi-District Litigation (MDL) rules. On January 5, 2009, the MDL court dismissed with prejudice the master consolidated complaint for individuals and the master consolidated complaint for third-party payors on grounds of federal preemption. On May 12, 2009, the MDL court dismissed with prejudice 229 cases that adopted the master consolidated complaint and stayed all other cases pending further order of the court. Plaintiffs’ appeal to the Eighth Circuit Court of Appeals was argued on April 12, 2010.  In addition, one putative class action has been filed in the Ontario Superior Court of Justice in Canada. On October 20, 2009, that court certified a class proceeding, but denied class certification on plaintiffs’ claim for punitive damages, which the plaintiffs have appealed. A hearing on plaintiffs’ appeal was heard on June 10, 2010.  The Company has not recorded an expense related to damages in connection with the matter because any potential loss is not currently probable or reasonably estimable under U.S. GAAP.

 

Shareholder Related Matters

 

On November 8, 2007, Stanley Kurzweil filed a putative class action complaint against the Company and certain of its officers in the U.S. District Court for the District of Minnesota, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act) and Rule 10b-5 thereunder. The complaint is brought on behalf of persons or entities who purchased securities of Medtronic during the period of June 25, 2007 through October 15, 2007. The complaint alleges that “materially false and misleading” representations were made as to the market acceptance and use of the Fidelis defibrillator leads to artificially inflate Medtronic’s stock price. Pursuant to court order, the caption of the case was changed to Medtronic, Inc., Securities Litigation, and a consolidated putative class action complaint was filed on April 18, 2008. On March 10, 2009, the court dismissed the complaint with prejudice and denied p laintiffs’ leave to amend. Plaintiffs’ appeal to the Eighth Circuit Court of Appeals was argued on May 12, 2010.

 

 

82

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

On November 29 and December 14, 2007, respectively, Feivel Gottlieb and Alan Weinberg filed shareholder derivative actions in Hennepin County District Court in the state of Minnesota against both the Company and certain of its officers and directors, alleging breach of fiduciary duty, waste of corporate assets and other claims arising from the same subject matter as the consolidated class action complaint. On July 28, 2008, the state court stayed these actions pending final resolution of the related consolidated class action complaint.

 

In addition, on August 11, 2008, Mark Brown filed a putative class action complaint against the Company and certain directors, officers and other company personnel in the U.S. District Court for the District of Minnesota, alleging violations of the Employee Retirement Income Security Act of 1974 (ERISA) arising from the same subject matter as the Kurzweil consolidated putative class complaint. On December 29, 2008, the plaintiff amended the complaint to add similar allegations relating to alleged off-label promotion of INFUSE Bone Graft and to amend the class. The defendants’ motion to dismiss was granted without prejudice on May 26, 2009 on the grounds plaintiff lacked standing to assert his claims. Plaintiffs’ appeal to the Eighth Circuit Court of Appeals was argued on May 12, 2010.

 

On December 10, 2008, the Minneapolis Firefighters’ Relief Association filed a putative class action complaint against the Company and two of its officers in the U.S. District Court for the District of Minnesota, alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaint alleges that the defendants made false and misleading public statements concerning the INFUSE Bone Graft product which artificially inflated Medtronic’s stock price during the period. On August 21, 2009, plaintiffs filed a consolidated putative class action complaint expanding the class. Medtronic’s motion to dismiss the consolidated complaint was denied on February 3, 2010, and pretrial proceedings are underway.

 

On February 24, 2009, Christin Wright filed a putative class action complaint against the Company and certain directors, officers and other company personnel in the U.S. District Court for the District of Minnesota, alleging violations of ERISA. The plaintiff claimed the defendants breached fiduciary duties by allegedly failing to properly disclose the September 2008 settlement of the litigation with Fastenetix and the October 2008 settlement of the Cordis litigation. On March 17, 2010, defendants’ motion to dismiss the allegations in the original complaint was granted without prejudice.  On May 14, 2010, plaintiffs filed an amended complaint to add allegations similar to those made in the Brown case.  Defendants’ motion to dismiss that amended complaint is scheduled for hearing on September 16, 2010.

 

The Company has not recorded an expense related to damages in connection with these shareholder related matters because any potential loss is not currently probable or reasonably estimable under U.S. GAAP.

 

Mirowski

 

Medtronic is a licensee to the RE 38,119 patent (‘119 Patent) and RE 38,897 patent (‘897 Patent) owned by Mirowski Family Ventures, LLC (Mirowski) relating to the treatment of hemodynamic dysfunction. Medtronic and Mirowski dispute the application of the ‘119 and ‘897 Patents to certain Medtronic cardiac resynchronization products. On December 17, 2007, Medtronic filed an action in U.S. District Court for the District of Delaware seeking a declaration that none of its products infringe any valid claims of either the ‘119 or ‘897 Patents. If certain conditions are fulfilled, the ‘119 and/or ‘897 Patents are determined to be valid and the Medtronic products are found to infringe the ‘119 and/or ‘897 Patents, Medtronic will be obligated to pay royalties to Mirowski based upon sales of certain CRT-D products. A bench trial concluded on March 13, 2010.  As of April 30, 2010, the amount of disputed royalties and interest related to CRT-D products was $109 million. This amount has not been accrued because the outcome is not currently probable under U.S. GAAP.

 

In addition, Medtronic is a licensee to the 4,407,288 Patent (‘288 Patent) owned by Mirowski relating to ICDs. Until November 2001, Medtronic accrued and paid royalties under the license based on a percentage of ICD sales. Medtronic and Mirowski dispute the application of the ‘288 Patent to certain Medtronic ICD products. In November 2001, Medtronic ceased paying royalties and entered into an agreement with Mirowski to pay putative royalties into an interest-bearing escrow account through the expiration of the ‘288 Patent in December of 2003. As of April 30, 2010, the current balance in the interest-bearing escrow account was $89 million. The parties also entered into a tolling agreement deferring and conditioning any litigation of the obligation to pay royalties upon certain conditions precedent. If these conditions are fulfilled and the ‘288 Patent is determined to be invalid or Medtronic’s products are found not to infringe, the escrowed funds will be released to Medtronic.

 

Other Matters

 

On March 12, 2010, the Company received a civil investigative demand from the U.S. Department of Justice pursuant to the federal False Claims Act seeking information regarding the Company’s knowledge about claims to Medicare for the implantation of ICDs, including reimbursement advice given by the Company, payments to persons or entities involved in decisions about implantation of ICDs, and the national coverage determination relating to ICDs. The Company is fully cooperating with this investigation.

 

 

83

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

On February 22, 2010, the Company received a civil investigative demand from the United States Attorney’s Office for the District of Massachusetts pursuant to the federal False Claims Act seeking documents relating to the CoreValve clinical trial and Medtronic's interactions with hospitals, other medical institutions, and physicians. The Company is fully cooperating with this investigation.

 

On September 16, 2009, the Company received a subpoena from the Office of Inspector General for the Department of Health and Human Services in the District of California requesting production of documents relating to the Company’s cardiac rhythm medical devices, including revenue, sales, marketing and promotional documents, documents relating to reimbursement communications to customers pertaining to the devices, documents relating to scientific studies and registries pertaining to the devices and documents relating to payments or items of value provided to customers. The Company is fully cooperating with this inquiry.

 

On June 16, 2009, the Company received an administrative subpoena from the New Jersey Attorney General, Division of Consumer Affairs, requesting production of documents relating to the Company’s clinical studies, its financial arrangements with certain physicians and healthcare providers and clinical research done by certain physicians and healthcare providers. The Company is fully cooperating with this inquiry.

 

On May 21, 2009, the Company received a subpoena from the United States Attorney’s Office for the District of Massachusetts pursuant to the Health Insurance Portability & Accountability Act of 1996 (HIPAA) seeking documents related to a study published in the British volume of the Journal of Bone & Joint Surgery, and contracts, research grants, speaking and education programs and payments for certain named physicians. The Company is fully cooperating with this inquiry.

 

On April 13, 2009, the Company received an administrative healthcare subpoena from the United States Attorney’s Office for the Northern District of Indiana requesting documents relating to the Company’s relationship with customers, as well as documents relating to certain employees. The Company is fully cooperating with this inquiry.

 

On February 9, 2009, the Company received letter notice that the United States Department of Justice in the Southern District of Texas is investigating marketing practices, reimbursement advice of the Company and appropriateness of therapy delivery relating to the Company’s cardiac surgical ablation devices. On July 2, 2009, the United States District Court for the Southern District of Texas ordered the unsealing of a qui tam complaint related to the same matter that was filed against Medtronic on November 17, 2008. On August 21, 2009, the Department of Justice decided not to intervene at that time but reserved the right to intervene in the future. The qui tam complaint was served on October 1, 2009. On December 16, 2009, Medtronic filed a motion to dismiss the complaint.

 

On December 18, 2008, the Company received a civil investigative demand from the Massachusetts Attorney General’s Office, requesting production of documents related to Medtronic’s INFUSE Bone Graft product. The Company is fully cooperating with this investigation.

 

On October 6, 2008, the Company received a subpoena from the United States Attorney’s Office for the District of Massachusetts pursuant to HIPAA requesting production of documents relating to Medtronic’s INFUSE Bone Graft product. The Company is fully cooperating with this inquiry.

 

In late June 2008, the Company received a subpoena issued by the United States Attorney’s Office for the District of Massachusetts pursuant to HIPAA, relating to the Company’s marketing of biliary stents. The Company is fully cooperating with this inquiry. On February 19, 2010, a complaint captioned United States of America ex rel Tricia Nowak and Enda Dodd v. Medtronic, filed in the United States District Court for the District of Massachusetts and relating to similar issues was unsealed.  On April 23, 2010, Medtronic filed a motion to dismiss the complaint.

 

On or about October 31, 2007, the Company received a letter from the United States Attorney’s Office for the Eastern District of Pennsylvania requesting documents relating to the Company’s relationship with one of its customers and any payments or things of value provided by the Company to physicians, physician groups, hospitals, medical practices or other entities relating to the purchase of the Company’s cardiac resynchronization therapy devices and cardiac stents. The Company is fully cooperating with this inquiry.

 

On September 25, 2007 and November 16, 2007, the Company received letters from the U.S. Securities and Exchange Commission (SEC) and U.S. Department of Justice, respectively, requesting information relating to any potential violations of the U.S. Foreign Corrupt Practices Act in connection with the sale of medical devices in several non-U.S. countries. A number of competitors have publicly disclosed receiving similar letters.  Subsequently, the SEC and Department of Justice have made additional requests for information from the Company. The Company is fully cooperating with the requests.

 

 

84

 



Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

Beginning on September 20, 2007, the Company has received letter requests from Senator Grassley of the U.S. Senate Finance Committee requesting information on a variety of subjects, including financial ties between the medical device industry and physicians; the Company’s decision to suspend distribution of its Fidelis family of defibrillation leads; financial ties between the Company and physicians who use INFUSE Bone Graft; the Cardiac Research Foundation and Columbia University; certain communications regarding INFUSE Bone Graft and the Company’s clinical research projects with the U.S. military and compensation paid to physicians working for the U.S. military.  The Company is fully cooperating with these requests.

 

On October 24, 2005, the Company received a subpoena from the United States Attorney’s Office for the District of Massachusetts issued under HIPAA requesting documents the Company may have, if any, relating to pacemakers and defibrillators and related components; monitoring equipment and services; a provision of benefits, if any, to persons in a position to recommend purchases of such devices; and the Company’s training and compliance materials relating to the fraud and abuse and federal Anti-Kickback statutes. In September 2008, the United States Attorney’s office for the District of Massachusetts informed Medtronic that it is no longer pursuing its investigation of Medtronic, related to the October 24, 2005 subpoena. On September 5, 2008, Medtronic received a subpoena from the Office of Inspector General for the Department of Health and Human Services in the District of Minnesota, requesting production of substantially the same materials covered in the 2005 Massachusetts subpoena. The Company is fully cooperating with this inquiry.

 

In the normal course of business, the Company periodically enters into agreements that require it to indemnify customers or suppliers for specific risks, such as claims for injury or property damage arising out of the Company’s products or the negligence of its personnel or claims alleging that its products infringe third-party patents or other intellectual property. The Company’s maximum exposure under these indemnification provisions cannot be estimated, and the Company has not accrued any liabilities within the consolidated financial statements. Historically, the Company has not experienced significant losses on these types of indemnifications.

 

18. Quarterly Financial Data (unaudited)

 

(in millions, except per share data)

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Fiscal
Year

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          2010 

 

$

3,933

 

$

3,838

 

$

3,851

 

$

4,196

 

$

15,817

          2009 

 

 

3,706

 

 

3,570

 

 

3,494

 

 

3,829

 

 

14,599

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          2010 

 

$

2,967

 

$

2,916

 

$

2,939

 

$

3,184

 

$

12,005

          2009 

 

 

2,851

 

 

2,687

 

 

2,646

 

 

2,897

 

 

11,081

Net Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          2010 

 

$

445

 

$

868

 

$

831

 

$

954

 

$

3,099

          2009 

 

 

723

 

 

547

 

 

698

 

 

103

 

 

2,070

Basic Earnings per Share

 

 

 

 

 

 

 

 

 

 

          2010 

 

$

0.40

 

$

0.78

 

$

0.75

 

$

0.87

 

$

2.80

          2009 

 

 

0.64

 

 

0.49

 

 

0.62

 

 

0.09

 

 

1.85

Diluted Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

          2010 

 

$

0.40

 

$

0.78

 

$

0.75

 

$

0.86

 

$

2.79

          2009 

 

 

0.64

 

 

0.48

 

 

0.62

 

 

0.09

 

 

1.84

 

The data in the schedule above has been intentionally rounded to the nearest million and therefore the quarterly amounts may not sum to the fiscal year to date amounts.

 

 

85

 




Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

19.  Segment and Geographic Information 

 

In December 2009, the Company consolidated its businesses into two operating groups: one which combined its Cardiac Rhythm Disease Management, CardioVascular and Physio-Control businesses, the other which combined its Spinal, Neuromodulation, Diabetes and Surgical Technologies businesses. Subsequent to April 30, 2010 the operating groups were formally named the Cardiac and Vascular Group and the Restorative Therapies Group, respectively. The creation of these two operating groups did not change how the Company internally manages and reports the results of these businesses. As a result, for fiscal year 2010 the Company continued to function in seven operating segments, consisting of Cardiac Rhythm Disease Management, Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control.  As of April 30, 2010, in accordance with authoritative guidance, these operating segments are aggregated into one reportable segment.

 

Each of the Company’s operating segments has similar economic characteristics, technology, manufacturing processes, customers, distribution and marketing strategies, regulatory environments and shared infrastructures. Net sales by operating segment are as follows:

 

 

 

Fiscal Year

(in millions)

 

2010 

 

2009 

 

2008 

Cardiac Rhythm Disease Management

 

$

5,268

 

$

5,014

 

$

4,963

Spinal

 

 

3,500

 

 

3,400

 

 

2,982

CardioVascular

 

 

2,864

 

 

2,437

 

 

2,131

Neuromodulation

 

 

1,560

 

 

1,434

 

 

1,311

Diabetes

 

 

1,237

 

 

1,114

 

 

1,019

Surgical Technologies

 

 

963

 

 

857

 

 

780

Physio-Control

 

 

425

 

 

343

 

 

329

Total Net Sales

 

$

15,817

 

$

14,599

 

$

13,515

 

In December 2006, the Company announced its intention to pursue a spin-off of Physio-Control into an independent, publicly traded company.  However, the Company announced, in January 2007, a voluntary suspension of U.S. shipments of Physio-Control products manufactured at its facility in Redmond, Washington in order to address quality system issues. As of February 19, 2010, after receiving notice from the FDA that, having successfully met requirements for improvements to the quality system, the Company resumed unrestricted global shipments of Physio-Control products. As a result, the Company’s immediate focus will be to ramp up its manufacturing capabilities to meet customer back orders and future product needs. The Company’s plans to pursue a spin-off of Physio-Control will be re-evaluated thereafter. As additional information, Physio-Control’s income/(loss) before interest and income taxes for fiscal years 2010, 2 009 and 2008 was $24 million, $(17) million and $(28) million, respectively. Physio-Control’s long-lived assets for fiscal years 2010, 2009 and 2008 were $53 million, $51 million and $63 million, respectively.

 

Geographic Information

 

Net sales to external customers by geography are as follows:

 

(in millions)

 

United States

 

Europe

 

Asia Pacific

 

Other Foreign

 

Consolidated

Fiscal Year 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

 

$

9,366

 

$

4,014

 

$

1,903

 

$

534

 

$

15,817

Long-lived assets*

 

$

7,573

 

$

5,431

 

$

253

 

$

362

 

$

13,619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

 

$

8,987

 

$

3,564

 

$

1,558

 

$

490

 

$

14,599

Long-lived assets*

 

$

7,236

 

$

5,660

 

$

185

 

$

286

 

$

13,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

 

$

8,336

 

$

3,288

 

$

1,437

 

$

454

 

$

13,515

Long-lived assets*

 

$

7,456

 

$

4,791

 

$

168

 

$

36

 

$

12,451

 

*  Excludes other long-term financial instruments and long-term deferred tax assets, net, as applicable.

 

No single customer represents over 10 percent of the Company’s consolidated net sales in fiscal years 2010, 2009 or 2008.

 

 

86

 




Medtronic, Inc.
Notes to Consolidated Financial Statements

 

Selected  Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

2010 

 

2009 

 

2008 

 

2007 

 

2006 

 

(in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Results for the Fiscal Year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

15,817

 

$

14,599

 

$

13,515

 

$

12,299

 

$

11,292

 

Cost of products sold

 

 

3,812

 

 

3,518

 

 

3,446

 

 

3,168

 

 

2,815

 

Gross margin percentage

 

 

75.9

%

 

75.9

%

 

74.5

%

 

74.2

%

 

75.1

%

Research and development expense

 

$

1,460

 

$

1,355

 

$

1,275

 

$

1,239

 

$

1,113

 

Selling, general and administrative expense

 

 

5,415

 

 

5,152

 

 

4,707

 

 

4,153

 

 

3,659

 

Special charges

 

 

 

 

100

 

 

78

 

 

98

 

 

100

 

Restructuring charges

 

 

50

 

 

120

 

 

41

 

 

28

 

 

 

Certain litigation charges, net

 

 

374

 

 

714

 

 

366

 

 

40

 

 

 

Purchased in-process research and development and certain acquisition-related costs

 

 

23

 

 

621

 

 

390

 

 

 

 

364

 

Other expense, net

 

 

468

 

 

396

 

 

436

 

 

212

 

 

167

 

Interest expense/(income)

 

 

246

 

 

183

 

 

36

 

 

 

 

(43

)

Earnings before income taxes

 

 

3,969

 

 

2,440

 

 

2,740

 

 

3,361

 

 

3,117

 

Provision for income taxes

 

 

870

 

 

370

 

 

602

 

 

658

 

 

598

 

Net earnings

 

$

3,099

 

$

2,070

 

$

2,138

 

$

2,703

 

$

2,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share of Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

2.80

 

$

1.85

 

$

1.89

 

$

2.35

 

$

2.09

 

Diluted earnings

 

 

2.79

 

 

1.84

 

 

1.87

 

 

2.32

 

 

2.07

 

Cash dividends declared

 

 

0.82

 

 

0.75

 

 

0.50

 

 

0.44

 

 

0.39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Position at Fiscal Year-end:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

4,718

 

$

4,305

 

$

3,777

 

$

5,342

 

$

5,956

 

Current ratio

 

 

1.9:1.0

 

 

2.4:1.0

 

 

2.1:1.0

 

 

3.1:1.0

 

 

2.4:1.0

 

Total assets

 

$

28,090

 

$

23,588

 

$

22,085

 

$

19,295

 

$

19,650

 

Long-term debt

 

 

6,944

 

 

6,253

 

 

5,127

 

 

4,755

 

 

4,507

 

Shareholders’ equity

 

 

14,629

 

 

13,182

 

 

11,966

 

 

11,500

 

 

1,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Full-time employees at year-end

 

 

39,273

 

 

37,665

 

 

36,484

 

 

34,554

 

 

32,280

 

Full-time equivalent employees at year-end

 

 

43,321

 

 

41,158

 

 

40,351

 

 

37,800

 

 

35,733

 

 

Price Range of Medtronic Stock

 

 

 

Fiscal Quarter

 

 

First Quarter

 

Second Quarter

 

Third Quarter

 

Fourth Quarter

2010 High

 

$

35.83

 

$

39.06

 

$

46.03

 

$

45.81

2010 Low

 

 

29.96

 

 

35.58

 

 

35.99

 

 

41.67

2009 High

 

$

54.41

 

$

56.55

 

$

40.69

 

$

34.56

2009 Low

 

 

46.98

 

 

37.81

 

 

28.67

 

 

24.38

 

Prices are closing quotations. On June 28, 2010, there were approximately 52,970 shareholders of record of the Company’s common stock. The regular quarterly cash dividend was 20.50 cents per share for fiscal year 2010 and 18.75 cents per share for fiscal year 2009.

 

 

87

 


EX-21 6 medtronic103067s1_ex21.htm LIST OF SUBSIDIARIES EXHIBIT 21 TO MEDTRONIC, INC. FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2010

Exhibit 21

 

 

 

 

 

Medtronic, Inc. and Subsidiaries

 

As of April 30, 2010

 

 

 

Company

 

 

Jurisdiction of Formation

 

 

 

 

7157240 Canada Inc.

 

Canada

Ablation Development, LLC

 

Delaware

Ablation Frontiers BVBA

 

Belgium

Ablation Frontiers L.L.C.

 

Delaware

Arterial Vascular Engineering Canada, Company

 

Nova Scotia

Arterial Vascular Engineering Netherlands Holding B.V.

 

Netherlands

Arterial Vascular Engineering UK Limited

 

United Kingdom

Atreo Medical Inc.

 

Canada

B.V. Medtronic FSC

 

Netherlands

Cardiotron G.m.b.H.

 

Germany

Carmel Biosensors Ltd.

 

Israel

CorMedica Corporation

 

Delaware

CryoCath Europe B.V.

 

Netherlands

CryoCath Technologies, Inc.

 

Quebec

CryoCath Technologies USA Inc.

 

Delaware

Fogazzi S.r.l.

 

Italy

Fondazione Medtronic Italia

 

Italy

Fundacion Medtronic Aula Miguel Servet

 

Spain

IGN GmbH

 

Germany

India Medtronic Private Limited

 

India

Invatec Italia S.r.l.

 

Italy

Invatec Japan KK

 

Japan

Invatec S.p.A.

 

Italy

Invatec Technology Center GmbH

 

Switzerland

Invatec, Inc.

 

Delaware

Krauth Cardio-Vascular GmbH

 

Germany

Kyphon Americas, Inc.

 

Delaware

Kyphon Australia Pty Ltd.

 

Australia

Kyphon Cayman Ltd.

 

Cayman Islands

Kyphon Ireland Research Holding Limited

 

Ireland

Kyphon South Africa (Proprietary) Ltd.

 

South Africa

Kyphon Sàrl

 

Switzerland

MD Start S.A.

 

Switzerland

Kyphon UK Limited

 

United Kingdom

MG Biotherapeutics LLC

 

Delaware

Magnolia Medical, LLC

 

Delaware

Medical Education Y.K.

 

Japan

Medtronic (Africa) (Proprietary) Limited

 

South Africa

Medtronic (Schweiz) A.G. (Medtronic (Suisse) S.A.)

 

Switzerland

Medtronic (Shanghai) Ltd.

 

China

Medtronic (Taiwan) Ltd.

 

Taiwan

Medtronic (Thailand) Limited

 

Thailand

Medtronic A/S

 

Denmark

Medtronic Ablation Frontiers LLC

 

Delaware

Medtronic Ablation Reorganization LLC

 

Delaware




 

 

 

 

 

Company

 

 

Jurisdiction of Formation

 

 

 

 

 

 

Medtronic AF Acquisition LLC

 

Delaware

Medtronic AF Luxembourg S.a.r.l.

 

Luxembourg

Medtronic Aktiebolag

 

Sweden

Medtronic Angiolink, Inc.

 

Delaware

Medtronic Asia, Ltd.

 

Minnesota

Medtronic Australasia E.S.P. Company Pty. Limited

 

Australia

Medtronic Australasia Pty. Limited

 

New South Wales

Medtronic B.V.

 

Netherlands

Medtronic Bakken Research Center B.V.

 

Netherlands

Medtronic Belgium S.A./N.V.

 

Belgium

Medtronic Bio-Medicus, Inc.

 

Minnesota

Medtronic BioPharma B.V.

 

Netherlands

Medtronic BioPharma Sarl

 

Switzerland

Medtronic CV, LLC

 

Delaware

Medtronic CV Luxembourg S.a.r.l.

 

Luxembourg

Medtronic CV Reorganization LLC

 

Delaware

Medtronic China, Ltd.

 

Minnesota

Medtronic Comercial Ltda.

 

Brazil

Medtronic CoreValve LLC

 

Delaware

Medtronic CryoCath Inc.

 

Canada

Medtronic CryoCath LP

 

Canada

Medtronic Czechia s.r.o.

 

Czech Republic

Medtronic Danmark A/S

 

Denmark

Medtronic Europe BVBA/SPRL

 

Belgium

Medtronic Europe Sàrl

 

Switzerland

Medtronic Fabrication SAS

 

France

Medtronic Finland Oy

 

Finland

Medtronic France S.A.S.

 

France

Medtronic G.m.b.H.

 

Germany

Medtronic Hellas Medical Device Commercial S.A.

 

Greece

Medtronic Holding Switzerland G.m.b.H.

 

Switzerland

Medtronic Hungaria Kereskedelmi Kft

 

Hungary

Medtronic IP Holding International Luxembourg S.a.r.l.

 

Luxembourg

Medtronic Ibérica S.A.

 

Spain

Medtronic International Technology, Inc.

 

Minnesota

Medtronic International Trading Pte. Ltd.

 

Singapore

Medtronic International Trading Sàrl

 

Switzerland

Medtronic International Trading, Inc.

 

Minnesota

Medtronic International, Ltd.

 

Delaware

Medtronic Interventional Vascular, Inc.

 

Massachusetts

Medtronic Invatec LLC

 

Delaware

Medtronic Ireland Limited

 

Ireland

Medtronic Ireland Manufacturing Limited

 

Ireland

Medtronic Italia S.p.A.

 

Italy

Medtronic Japan Co., Ltd.

 

Japan

Medtronic Korea Co. Ltd.

 

Korea

Medtronic LLC

 

Russia

Medtronic Latin America Inc. Sucursal Columbia

 

Columbian/Amer.

Medtronic Latin America, Inc.

 

Minnesota




 

 

 

 

 

Company

 

 

Jurisdiction of Formation

 

 

 

 

 

 

Medtronic Lifelink MD, Inc.

 

Delaware

Medtronic Limited

 

United Kingdom

Medtronic Medical Appliance Technology and Service (Shanghai) Ltd.

 

China

Medtronic Medical Technology Ticaret Limited Sirketi

 

Turkey

Medtronic Mediterranean SAL

 

Beirut, Lebanon

Medtronic Mexico S. de R.L. de C.V. (Tijuana)

 

Mexico

Medtronic Micro Motion Sciences, Inc.

 

Delaware

Medtronic MiniMed, Inc.

 

Delaware

Medtronic Navigation Israel Ltd.

 

Israel

Medtronic Navigation, Inc.

 

Delaware

Medtronic New Zealand Limited

 

New Zealand

Medtronic Norge AS

 

Norway

Medtronic Oesterreich G.m.b.H.

 

Austria

Medtronic PS Medical, Inc.

 

California

Medtronic Pacific Trading, Inc.

 

Minnesota

Medtronic Physio-Control Limited

 

United Kingdom

Medtronic Poland Sp. z o.o.

 

Poland

Medtronic Portugal - Comércio e Distribuiçao de Aparelhos Médicos Lda

 

Portugal

Medtronic Puerto Rico Operations Co.

 

Cayman Islands

Medtronic R&D Diabetes Denmark A/S

 

Denmark

Medtronic S. de R.L. de C.V. (Mexico City)

 

Mexico

Medtronic S.A.I.C.

 

Argentina

Medtronic Servicios S. de R.L. de C.V.

 

Mexico

Medtronic Singapore Operations Pte. Ltd.

 

Singapore

Medtronic Sofamor Danek (NZ) Limited

 

New Zealand

Medtronic Sofamor Danek Australia Pty. Ltd.

 

Australia

Medtronic Sofamor Danek Co., Ltd.

 

Japan

Medtronic Sofamor Danek Deggendorf GmbH

 

Germany

Medtronic Sofamor Danek South Africa (Proprietary) Limited

 

South Africa

Medtronic Sofamor Danek USA, Inc.

 

Tennessee

Medtronic Sofamor Danek, Inc.

 

Indiana

Medtronic Spinal and Biologics Europe BVBA

 

Belgium

Medtronic Spine International Holding Company

 

Cayman Islands

Medtronic Spine LLC

 

Delaware

Medtronic Synectics Aktiebolag

 

Sweden

Medtronic Trading NL BV

 

Netherlands

Medtronic Transneuronix, Inc.

 

Delaware

Medtronic Urinary Solutions, Inc.

 

Ohio

Medtronic USA, Inc.

 

Minnesota

Medtronic VT, LLC

 

Delaware

Medtronic Vascular Connaught

 

Ireland

Medtronic Vascular Galway Limited

 

Ireland

Medtronic Vascular Holdings Limited

 

Ireland

Medtronic Vascular, Inc.

 

Delaware

Medtronic Ventor Technologies Ltd.

 

Israel

Medtronic Vertelink, Inc.

 

California

Medtronic VidaMed, Inc.

 

Delaware

Medtronic Weigao Orthopaedic Device Company Ltd.

 

China

Medtronic World Trade Corporation

 

Minnesota




 

 

 

 

 

Company

 

 

Jurisdiction of Formation

 

 

 

 

 

 

Medtronic Xomed Instrumentation SAS

 

France

Medtronic Xomed, Inc.

 

Delaware

Medtronic do Brasil Ltda.

 

Brazil

Medtronic of Canada Ltd.

 

Canada

Medtronic, Inc.

 

Minnesota

MiniMed Distribution Corp.

 

Delaware

MiniMed Pty Ltd.

 

Australia

Physio-Control International, Inc.

 

Washington

Physio-Control Manufacturing, Inc.

 

Washington

Physio-Control, Inc.

 

Washington

Pilgrim Merger Corporation

 

Minnesota

S.F.M.T. Europe B.V.

 

Netherlands

Sanatis GmbH

 

Germany

Setagon, Inc.

 

Delaware

Societe De Fabrication de Material Orthopedique En Abrege Sofamor

 

France

SpinalGraft Technologies, LLC

 

Tennessee

Transneuronix International GmbH

 

Germany

Vitatron A.G.

 

Switzerland

Vitatron Belgium S.A./N.V.

 

Belgium

Vitatron Czechia s.r.o.

 

Czech Republic

Vitatron Finland Oy

 

Finland

Vitatron GmbH

 

Austria

Vitatron Holding B.V.

 

Netherlands

Vitatron Medical España, S.A.

 

Spain

Vitatron Nederland B.V.

 

Netherlands

Vitatron Portugal - Comércio e Distribuição de Dispositivos Médicos, Lda

 

Portugal

Vitatron Sweden Aktiebolag

 

Sweden

Warsaw Orthopedic, Inc.

 

Indiana



EX-23 7 medtronic103067s1_ex23.htm CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23 TO MEDTRONIC, INC. FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2010

 

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-157777) and on Form S-8 (Nos. 33-55329, 33-63805, 333-04099, 333-07385, 333-65227, 333-71259, 333-71355, 333-74229, 333-75819, 333-90381, 333-44766, 333-52840, 333-66978, 333-68594, 333-100624, 333-106566, 333-112267, 333-128531, 333-129872, 333-147399, 333-148672, 333-153636, 333-162500 and 333-162501) of Medtronic, Inc. of our report dated June 29, 2010 relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in Exhibit 13 to this 2010 Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated June 29, 2010 relating to the financial statement schedule, which appears in this Form 10-K.

 

 

 

 

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 29, 2010

 

Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule

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

Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated June 29, 2010 included in the fiscal 2010 Annual Report on Form 10-K of Medtronic, Inc. (which report and consolidated financial statements are included in Exhibit 13 to this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

 

 

 

 

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 29, 2010

 

 


EX-24 8 medtronic103067s1_ex24.htm POWER OF ATTORNEY EXHIBIT 24 TO MEDTRONIC, INC. FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2010

 

Exhibit 24

 

 

POWER OF ATTORNEY

 

 

Each of the undersigned directors of Medtronic, Inc., a Minnesota corporation, hereby constitutes and appoints each of WILLIAM A. HAWKINS and D. CAMERON FINDLAY, acting individually or jointly, their true and lawful attorneys-in-fact and agents, with full power to act for them and in their name, place and stead, in any and all capacities, to do any and all acts and execute any and all documents which either such attorney and agent may deem necessary or desirable to enable Medtronic, Inc. to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing with the Commission of Medtronic’s Annual Report on Form 10-K for the fiscal year ended April 30, 2010, including specifically, but without limiting the generality of the foregoing, power and authority to sign the names of the undersigned directors to the Form 10-K and to any instruments and documents filed as part of or in connection with the Form 10-K or any amendments thereto; and the undersigned hereby ratify and confirm all actions taken and documents signed by each said attorney and agent as provided herein.

 

The undersigned have set their hands this 24th day of June, 2010.

 

 

/s/ Richard H. Anderson

 

/s/ Denise M. O’Leary

Richard H. Anderson

 

Denise M. O’Leary

 

 

 

/s/ David L. Calhoun

 

/s/ Kendall J. Powell

David L. Calhoun

 

Kendall J. Powell

 

 

 

/s/ Victor J. Dzau

 

/s/ Robert C. Pozen

Victor J. Dzau, M.D.

 

Robert C. Pozen

 

 

 

/s/ William A. Hawkins

 

/s/ Jean-Pierre Rosso

William A. Hawkins

 

Jean-Pierre Rosso

 

 

 

/s/ Shirley Ann Jackson

 

/s/ Jack W. Schuler

Shirley Ann Jackson, Ph.D.

 

Jack W. Schuler

 

 

 

/s/ James T. Lenehan

 

 

James T. Lenehan

 

 

 

 

 


EX-31.1 9 medtronic103067s1_ex31-1.htm CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 TO MEDTRONIC, INC. FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2010

EXHIBIT 31.1

Certification of Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

I, William A. Hawkins, certify that:

 

 

 

 

 

1.

I have reviewed this Annual Report on Form 10-K of Medtronic, Inc.;

 

 

 

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

 

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

 

 

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

 

 

 

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

 

 

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

 

 

 

 

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

 

 

 

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

 

 

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

 

 

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

 

 

 

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


 

 

Date: June 29, 2010

/s/ William A. Hawkins

 

William A. Hawkins
Chairman and Chief Executive Officer



EX-31.2 10 medtronic103067s1_ex31-2.htm CERTIFICATION OF CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 TO MEDTRONIC, INC. FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2010

EXHIBIT 31.2

Certification of Chief Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

I, Gary L. Ellis, certify that:

 

 

 

 

 

1.

I have reviewed this Annual Report on Form 10-K of Medtronic, Inc.;

 

 

 

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

 

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

 

 

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

 

 

 

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

 

 

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

 

 

 

 

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

 

 

 

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

 

 

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

 

 

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

 

 

 

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


 

 

Date: June 29, 2010

/s/ Gary L. Ellis

 

Gary L. Ellis
Senior Vice President and
Chief Financial Officer



EX-32.1 11 medtronic103067s1_ex32-1.htm CERTIFICATION OF CEO PURSUANT TO SECTION 906 EXHIBIT 32.1 TO MEDTRONIC, INC. FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2010

EXHIBIT 32.1

Certification of Chief Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

In connection with this annual report on Form 10-K of Medtronic, Inc. for the fiscal year ended April 30, 2010, the undersigned hereby certifies, in his capacity as Chief Executive Officer of Medtronic, Inc., for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

 

 

(1)

The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

 

 

 

(2)

The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Medtronic, Inc.


 

 

Date: June 29, 2010

/s/ William A. Hawkins

 

William A. Hawkins
Chairman and Chief Executive Officer



EX-32.2 12 medtronic103067s1_ex32-2.htm CERTIFICATION OF CFO PURSUANT TO SECTION 906 EXHIBIT 32.2 TO MEDTRONIC, INC. FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2010

EXHIBIT 32.2

Certification of Chief Financial Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

In connection with this annual report on Form 10-K of Medtronic, Inc. for the fiscal year ended April 30, 2010, the undersigned hereby certifies, in his capacity as Chief Financial Officer of Medtronic, Inc., for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

 

 

(1)

The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

 

 

 

(2)

The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Medtronic, Inc.


 

 

Date: June 29, 2010

/s/ Gary L. Ellis

 

Gary L. Ellis
Senior Vice President and
Chief Financial Officer



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The new authoritative guidance 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. The underlying purchase method of accounting for acquisitions was retained, but the new guidance incorporates a number of changes. These changes include the c</font><font style="font-family:Times New Roman;font-size:10pt;">apitalization of IPR&amp;D</font><font style="font-family:Times New Roman;font-size:10pt;">, expensing of acquisition related costs and the recognition of contingent purchase price consideration at fair value at the acquisition date. In addition, changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period will be recognized in earnings rather than as an adjustment to the cost of the acquisition. This accounting treatment for taxes is applicable to acquisitions consummated both prior to and subsequent to the adoption of the new authoritative guidance. The adoption of the new authoritative guidance did not change the requirement to expense IPR&amp;D immediately with respect to asset acquisitions. 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(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 u se at all stages of the care continuum.</font></p><p style='margin-top:0pt; margin-bottom:0pt'><font style="font-family:Times New Roman;font-size:10pt;margin-left:18px;">&#160;</font></p><p style='margin-top:0pt; margin-bottom:0pt'><font style="font-family:Times New Roman;font-size:10pt;margin-left:18px;">Under the te</font><font style="font-family:Times New Roman;font-size:10pt;">rms of the agreement announced i</font><font style="font-family:Times New Roman;font-size:10pt;">n July 2007, Kyphon shareholders received $71 per share in cash for each share of Kyphon common stock they owned. 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margin-bottom: 0pt;'></p><p style='margin-top:12pt; margin-bottom:5pt'><font style="font-family:Times New Roman;font-size:10pt;margin-left:18px;">The Company's investments in marketable debt securities detailed above are classified and accounted for as available-for-sale and include corporate debt securities, </font><font style="font-family:Times New Roman;font-size:10pt;">U.S.</font><font style="font-family:Times New Roman;font-size:10pt;"> government and agency securities, and mortgage backed and other asset backed securities including auction rate securities. Market conditions during fiscal year 2010 and subsequent to the Company's year-end continue to indicate some uncertainty on the part of investors on the world economic outlook. This uncertainty has 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. At April 30, 2010, the Company concluded that the unrealized losses associated with the remaining securities were not other-than-temporary as the Company does not have the intent to sell, nor is it more likely than not that the Company will be required to sell, before recovery of the amortized cost.</font></p><p style='margin-top: 0pt; margin-bottom: 0pt;'></p><div><table style="border-collapse:collapse;margin-top:20px;"><tr style="height: 17px"><td colspan="13" style="width: 532px; text-align:left;border-color:#000000;min-width:532px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;"> Activity related to the Company&#8217;s short-term and long-term investment portfolio is as follows:</font></td><td style="width: 11px; text-align:left;border-color:#000000;min-width:11px;">&#160;</td><td style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 64px; text-align:left;border-color:#000000;min-width:64px;">&#160;</td><td style="width: 10px; text-align:left;border-color:#000000;min-width:10px;">&#160;</td><td style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 64px; text-align:left;border-color:#000000;min-width:64px;">&#160;</td></tr><tr style="height: 17px"><td style="width: 162px; text-align:left;border-color:#000000;min-width:162px;">&#160;</td><td style="width: 9px; text-align:left;border-color:#000000;min-width:9px;">&#160;</ td><td style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 64px; text-align:left;border-color:#000000;min-width:64px;">&#160;</td><td style="width: 9px; text-align:left;border-color:#000000;min-width:9px;">&#160;</td><td style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 64px; text-align:left;border-color:#000000;min-width:64px;">&#160;</td><td style="width: 10px; text-align:left;border-color:#000000;min-width:10px;">&#160;</td><td style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 64px; text-align:left;border-color:#000000;min-width:64px;">&#160;</td><td style="width: 10px; text-align:left;border-color:#000000;min-width:10px;">&#160;</td><td style="width: 19px; text-align:left;border-colo r:#000000;min-width:19px;">&#160;</td><td style="width: 64px; text-align:left;border-color:#000000;min-width:64px;">&#160;</td><td style="width: 11px; text-align:left;border-color:#000000;min-width:11px;">&#160;</td><td style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 64px; text-align:left;border-color:#000000;min-width:64px;">&#160;</td><td style="width: 10px; text-align:left;border-color:#000000;min-width:10px;">&#160;</td><td style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 64px; text-align:left;border-color:#000000;min-width:64px;">&#160;</td></tr><tr style="height: 17px"><td style="width: 162px; 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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. 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text-align:left;border-color :#000000;min-width:247px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: left;"> Foreign government and agency securities</font></td><td style="width: 4px; text-align:left;border-color:#000000;min-width:4px;">&#160;</td><td style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 85px; text-align:right;border-color:#000000;min-width:85px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> 119</font></td><td style="width: 31px; text-align:left;border-color:#000000;min-width:31px;">&#160;</td><td style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 58px; text-align:right;border-color:#000000;min-width:58px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> -</font></td><td style="width: 31px; text-align:left;border-color:#000000;min-width:31px;">&#160;</td><td style="width: 19px; 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text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 19px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><t d style="width: 19px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 58px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:58px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> -</font></td></tr><tr style="height: 17px"><td style="width: 247px; text-align:left;border-color:#000000;min-width:247px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: left;"> Other asset backed securities</font></td><td style="width: 4px; text-align:left;border-color:#000000;min-width:4px;">&#160;</td><td style="width: 19px; text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 85px; text-align:right;border-color:#000000;min-width:85px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000 000;TEXT-ALIGN: right;"> 313</font></td><td style="width: 31px; text-align:left;border-color:#000000;min-width:31px;">&#160;</td><td style="width: 19px; text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 58px; text-align:right;border-color:#000000;min-width:58px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> -</font></td><td style="width: 31px; text-align:left;border-color:#000000;min-width:31px;">&#160;</td><td style="width: 19px; text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 58px; text-align:right;border-color:#000000;min-width:58px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> 297</font></td><td style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><t d style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 19px; text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 58px; text-align:right;border-color:#000000;min-width:58px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> 16</font></td></tr><tr style="height: 17px"><td style="width: 247px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:247px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: left;"> Marketable equity securities</font></td><td style="width: 4px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:4px;">&#160;</td><td style="width: 19px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 85px ; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:85px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> 1</font></td><td style="width: 31px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:31px;">&#160;</td><td style="width: 19px; 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text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:31px;">&#160;</td><td style="width: 19px; border-bottom-style:solid;border-bottom-width:1px;text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 58px; border-bottom-style:solid;border-bottom-width:1px;text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:58px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> -</font></td><td style="width: 19px; text-align:left;background-color:#C0C0C0;border-color:#00000 0;min-width:19px;">&#160;</td><td style="width: 19px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 19px; border-bottom-style:solid;border-bottom-width:1px;text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 58px; border-bottom-style:solid;border-bottom-width:1px;text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:58px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> -</font></td></tr><tr style="height: 18px"><td style="width: 247px; 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text-align:left;border-color:#000000;min-width:31px;">&#160;</td><td style="width: 19px; text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 58px; text-align:right;border-color:#000000;min-width:58px;">&#160;</td><td style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 19px; text-align:left;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 19px; text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 58px; text-align:right;border-color:#000000;min-width:58px;">&#160;</td></tr><tr style="height: 17px"><td style="width: 247px; text-align:lef t;background-color:#C0C0C0;border-color:#000000;min-width:247px;"><font style="FONT-WEIGHT: bold;FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;">Liabilities:</font></td><td style="width: 4px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:4px;">&#160;</td><td style="width: 19px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 85px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:85px;">&#160;</td><td style="width: 31px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:31px;">&#160;</td><td style="width: 19px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 58px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:58px;">&#160;</td><td style="width: 31 px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:31px;">&#160;</td><td style="width: 19px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 58px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:58px;">&#160;</td><td style="width: 19px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 19px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 19px; 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text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 57px; text-align:right;border-color:#000000;min-width:57px;">&#160;</td><td style="width: 13px; text-align:left;border-color:#000000;min-width:13px;">&#160;</td><td style="width: 19px; text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 57px; text-align:right;border-color:#000000;min-width:57px;">&#160;</td><td style="width: 13px; text-align:left;border-color:#000000;min-width:13px;">&#160;</td><td style="width: 19px; text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 57px; text-align:right;border-color:#000000;min-width:57px;">&#160;</td><td style="width: 9px; text-align:left;border-color:#000000;min-width:9px;">&#160;< /td><td style="width: 19px; text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 57px; text-align:right;border-color:#000000;min-width:57px;">&#160;</td></tr><tr style="height: 18px"><td style="width: 289px; 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text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 57px; text-align:right;bo rder-color:#000000;min-width:57px;">&#160;</td><td style="width: 13px; text-align:left;border-color:#000000;min-width:13px;">&#160;</td><td style="width: 19px; text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 57px; text-align:right;border-color:#000000;min-width:57px;">&#160;</td><td style="width: 13px; text-align:left;border-color:#000000;min-width:13px;">&#160;</td><td style="width: 19px; text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 57px; text-align:right;border-color:#000000;min-width:57px;">&#160;</td><td style="width: 9px; text-align:left;border-color:#000000;min-width:9px;">&#160;</td><td style="width: 19px; text-align:right;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 57px; text-align:right;border-color:#000000;min-width:57px;">&#160;</td ></tr><tr style="height: 34px"><td style="width: 289px; 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text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 57px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:57px;">&#160;</td><td style="width: 13px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:13px;">&#160;</td><td style="width: 19px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 57px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:57px;">&#160;</td><td style="width: 9px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:9px;"& gt;&#160;</td><td style="width: 19px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:19px;">&#160;</td><td style="width: 57px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:57px;">&#160;</td></tr><tr style="height: 17px"><td style="width: 289px; text-align:left;border-color:#000000;min-width:289px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: left;"> Original cost</font></td><td style="width: 9px; 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In applying this guidance, the Company concluded that the purchased call options and sold warrants were indexed to its own stock and should continue to be classified in shareholders' equity; thus consistent with prior periods, the existing guidance for accounting for derivative financial instruments indexed to and potentially settled in, a company's own stock would still apply.</font></p><p style='margin-top:0pt; margin-bottom:0pt'>&#160;</p><p style='margin-top:0pt; margin-bottom:0pt'><font style="font-family:Times New Roman;font-size:10pt;margin-left:18px;">Under this existing guidance, the Senior Convertible Notes are accounte d for as a combined instrument because the conversion spread meets the requirements to not be separated as a derivative.</font></p><p style='margin-top:0pt; margin-bottom:0pt'>&#160;</p><p style='margin-top:0pt; margin-bottom:0pt'><font style="font-family:Times New Roman;font-size:10pt;margin-left:18px;">Existing guidance</font><font style="font-family:Times New Roman;font-size:10pt;"> provides that contracts are initially classified as equity if (1)&#160;the </font><font style="font-family:Times New Roman;font-size:10pt;">c</font><font style="font-family:Times New Roman;font-size:10pt;">ontract requires physical settlement or net-share settlement, or (2)&#160;the </font><font style="font-family:Times New Roman;font-size:10pt;">c</font><font style="font-family:Times New Roman;font-size:10pt;">ontract gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). 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The Company concluded the purchased call option contracts and the warrant contracts should be accounted for in shareholders' equity.</font></p><p style='margin-top:0pt; margin-bottom:0pt'>&#160;</p><p style='margin-top:0pt; margin-bottom:0pt'><font style="font-family:Times New Roman;font-size:10pt;margin-left:18px;">Effective the first day of the Company's fiscal year 2010, the Company accounted for the Senior Convertible Notes in accordance with the new authoritative guidance for convertible debt. The new guidance requires the proceeds from the issu</font><font style="font-family:Times New Roman;font-size:10pt;">ance of the Senior Convertible N</font><font style="font-family:Times New Roman;font-size:10pt;">otes 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 Senior Convertible Notes are expected to be outstanding as additional non-cash interest expense. 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For additional information on the impact of this change to the Company's financial statement, refer to </font><font style="font-family:Times New Roman;font-size:10pt;">Note </font><font style="font-family:Times New Roman;font-size:10pt;">2</font><font style="font-family:Times New Roman;font-size:10pt;">.</font><font style="font-family:Times New Roman;font-size:10pt;"> </font></p><p style='margin-top:0pt; margin-bottom:0pt'>&#160;</p><p style='margin-top:0pt; margin-bottom:0pt'><font style="font-family:Times New Roman;font-size:10pt;margin- left:18px;">The following table provides equity and debt information for the Senior Convertible Notes under the convertible debt guidance.</font></p><p style='margin-top: 0pt; margin-bottom: 0pt;'></p><div><table style="border-collapse:collapse;margin-top:20px;"><tr style="height: 17px"><td style="width: 341px; text-align:left;border-color:#000000;min-width:341px;">&#160;</td><td colspan="5" style="width: 180px; border-bottom-style:solid;border-bottom-width:1px;text-align:center;border-color:#000000;min-width:180px;"><font style="FONT-WEIGHT: bold;FONT-FAMILY: Times New Roman;FONT-SIZE: 8pt;COLOR: #000000;TEXT-ALIGN: center;">Senior Convertible Notes due 2011</font></td><td style="width: 16px; 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text-align:left;border-color:#000000;min-width:96px;">&#160;</td><td style="width: 18px; text-align:left;border-color:#000000;min-width:18px;">&#160;</td><td style="width: 106px; text-align:left;border-color:#000000;min-width:106px;">&#160;</td><td style="width: 11px; text-align:left;border-color:#000000;min-width:11px;">&#160;</td><td style="width: 15px; text-align:right;border-color:#000000;min-width:15px;">&#160;</td><td style="width: 96px; text-align:left;border-color:#000000;min-width:96px;">&#160;</td></tr><tr style="height: 18px"><td style="width: 264px; text-align:left;border-color:#000000;min-width:264px;"><font style="FONT-WEIGHT: bold;FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;">Total derivatives</font></td><td style="width: 106px; text-align:left;border-color:#000000;min-width:106px;">&#1 60;</td><td style="width: 10px; text-align:left;border-color:#000000;min-width:10px;">&#160;</td><td style="width: 15px; border-bottom-style:double;border-bottom-width:3px;text-align:right;border-color:#000000;min-width:15px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;">$</font></td><td style="width: 96px; 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text-align:left;border-color:#000000;min-width:106px;">&#160;</td><td style="width: 10px; text-align:left;border-color:#000000;min-width:10px;">&#160;</td><td style="width: 15px; text-align:right;border-color:#000000;min-width:15px;">&#160;</td><td style="width: 96px; text-align:left;border-color:#000000;min-width:96px;">&#160;</td>&l t;td style="width: 18px; text-align:left;border-color:#000000;min-width:18px;">&#160;</td><td style="width: 106px; text-align:left;border-color:#000000;min-width:106px;">&#160;</td><td style="width: 11px; text-align:left;border-color:#000000;min-width:11px;">&#160;</td><td style="width: 15px; text-align:right;border-color:#000000;min-width:15px;">&#160;</td><td style="width: 96px; text-align:left;border-color:#000000;min-width:96px;">&#160;</td></tr><tr style="height: 17px"><td style="width: 264px; text-align:left;border-color:#000000;min-width:264px;">&#160;</td><td style="width: 106px; text-align:left;border-color:#000000;min-width:106px;">&#160;</td><td style="width: 10px; text-align:left;border-color:#000000;min-width:10px;">&#160;</td><td style="width: 15px; text-align:right;border-color:#000000;min-width:15px;">&#160;</td><td sty le="width: 96px; text-align:left;border-color:#000000;min-width:96px;">&#160;</td><td style="width: 18px; text-align:left;border-color:#000000;min-width:18px;">&#160;</td><td style="width: 106px; text-align:left;border-color:#000000;min-width:106px;">&#160;</td><td style="width: 11px; text-align:left;border-color:#000000;min-width:11px;">&#160;</td><td style="width: 15px; text-align:right;border-color:#000000;min-width:15px;">&#160;</td><td style="width: 96px; text-align:left;border-color:#000000;min-width:96px;">&#160;</td></tr><tr style="height: 17px"><td style="width: 264px; text-align:left;border-color:#000000;min-width:264px;">&#160;</td><td style="width: 106px; text-align:left;border-color:#000000;min-width:106px;">&#160;</td><td style="width: 10px; text-align:left;border-color:#000000;min-width:10px;">&#160;</td><td style="width: 15px; text-align:right;border-color:#000000;min-width:15px;">&#160;</td><td style="width: 96px; text-align:left;border-color:#000000;min-width:96px;">&#160;</td><td style="width: 18px; text-align:left;border-color:#000000;min-width:18px;">&#160;</td><td style="width: 106px; text-align:left;border-color:#000000;min-width:106px;">&#160;</td><td style="width: 11px; text-align:left;border-color:#000000;min-width:11px;">&#160;</td><td style="width: 15px; text-align:right;border-color:#000000;min-width:15px;">&#160;</td><td style="width: 96px; text-align:left;border-color:#000000;min-width:96px;">&#160;</td></tr><tr style="height: 17px"><td style="width: 264px; border-color:#000000;min-width:264px;"><font style="FONT-WEIGHT: bold;FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: left;">April 24, 2009</font></td><td colspan="4" style ="width: 227px; border-bottom-style:solid;border-bottom-width:1px;text-align:center;border-color:#000000;min-width:227px;"><font style="FONT-WEIGHT: bold;FONT-FAMILY: Times New Roman;FONT-SIZE: 8pt;COLOR: #000000;TEXT-ALIGN: center;">Asset Derivatives</font></td><td style="width: 18px; 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The total intrinsic value, calculated as the closing stock price at year-end less the option exercise price, of options exercised during fiscal years</font><font style="font-family:Times New Roman;font-size:10pt;"> </font><font style="font-family:Times New Roman;font-size:10pt;">2010, 2009 and 2008</font><font style="font-family:Times New Roman;font-size:10pt;"> </font><font style="font-family:Times New Roman;font-size:10pt;">was $</font><font style="font-family:Times New Roman;font-size:10pt;"> ;19</font><font style="font-family:Times New Roman;font-size:10pt;"> million</font><font style="font-family:Times New Roman;font-size:10pt;">, $</font><font style="font-family:Times New Roman;font-size:10pt;">105</font><font style="font-family:Times New Roman;font-size:10pt;"> million</font><font style="font-family:Times New Roman;font-size:10pt;"> and $</font><font style="font-family:Times New Roman;font-size:10pt;">13</font><font style="font-family:Times New Roman;font-size:10pt;">8</font><font style="font-family:Times New Roman;font-size:10pt;"> million</font><font style="font-family:Times New Roman;font-size:10pt;">, respectively. For options outstanding and exercisable at </font><font style="font-family:Times New Roman;font-size:10pt;">April 30, 2010</font><font style="font-family:Times New Roman;font-size:10pt;">, the total intrinsic value of in-the-money options was $< /font><font style="font-family:Times New Roman;font-size:10pt;">159</font><font style="font-family:Times New Roman;font-size:10pt;"> million</font><font style="font-family:Times New Roman;font-size:10pt;"> and $</font><font style="font-family:Times New Roman;font-size:10pt;">39</font><font style="font-family:Times New Roman;font-size:10pt;"> million</font><font style="font-family:Times New Roman;font-size:10pt;">, respectively. The Company issues new shares when stock option awards are exercised. 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text-align:left;border-color:#000000;min-width:8px;">&#160;</td><td style="width: 64px; text-align:left;border-color:#000000;min-width:64px;">&#160;</td><td style="width: 8px; text-align:left;border-color:#000000;min-width:8px;">&#160;</ td><td style="width: 14px; text-align:left;border-color:#000000;min-width:14px;">&#160;</td><td style="width: 53px; text-align:left;border-color:#000000;min-width:53px;">&#160;</td></tr><tr style="height: 39px"><td colspan="18" style="width: 688px; text-align:left;border-color:#000000;min-width:688px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: left;"> Unrecognized compensation expense related to restricted stock awards as of April 30, 2010 was $154 million and is expected to be recognized over a weighted average period of 2.5 years and will be adjusted for any future changes in estimated forfeitures.</font></td></tr></table></div> <p style='margin-top:0pt; margin-bottom:0pt'><font style="font-family:Times New Roman;font-size:10pt;font-weight:bold;margin-left:0px;">14</font><font style="font-family:Times New Roman;font-size:10pt;font-weight:bold;">. </font><font style="font-family:Times New Roman;font-size:10pt;font-weight:bold;">Income Taxes</font></p><p style='margin-top:0pt; margin-bottom:0pt'>&#160;</p><p style='margin-top:0pt; margin-bottom:0pt'><font style="font-family:Times New Roman;font-size:10pt;margin-left:18px;">The provision for income taxes is based on earnings before income taxes reported for financial statement purposes. 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text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:389px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: left;">Amortization of prior service cost</font></td><td style="width: 15px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:15px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;">$</font></td><td style="width: 64px; text-align:right;backgro und-color:#C0C0C0;border-color:#000000;min-width:64px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> (2)</font></td><td style="width: 10px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:10px;">&#160;</td><td style="width: 18px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:18px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;">$</font></td><td style="width: 64px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:64px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> 1</font></td><td style="width: 12px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 19px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:19px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;">$</font></td><td style="width: 64px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:64px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> -</font></td></tr><tr style="height: 17px"><td style="width: 389px; text-align:left;background-color:#FFFFFF;border-color:#000000;min-width:389px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: left;">Amortization of net actuarial loss</font></td><td style="width: 15px; text-align:left;background-color:#FFFFFF;border-color:#000000;min-width:15px;">&#160;</td><td style="width: 64px; text-align:right;background-color:#FFFFFF;border-color:#000000;min-width:64px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> 33</font></td><td style="width: 10px; 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text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 19px; border-top-style:solid;border-top-width:1px;border-bottom-style:double;border-bottom-width:3px;text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:19px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;">$</font></td><td style="width: 64px; bo rder-top-style:solid;border-top-width:1px;border-bottom-style:double;border-bottom-width:3px;text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:64px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: right;"> 5</font></td></tr></table></div><p style='margin-top: 0pt; margin-bottom: 0pt;'></p><div><table style="border-collapse:collapse;margin-top:20px;"><tr style="height: 17px"><td colspan="19" style="width: 657px; text-align:left;border-color:#000000;min-width:657px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;TEXT-ALIGN: left;"> The actuarial assumptions were as follows:</font></td><td style="width: 12px; 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text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:40px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">3.80</font></td><td style="width: 12px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;">%</font></td><td style="width: 45px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:45px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">4.00</font></td><td style="width: 12px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;"><font style="FONT- FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;">%</font></td><td style="width: 45px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:45px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">4.24</font></td><td style="width: 12px; 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text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;">%</font></td><td style="width: 41px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:41px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">N/A</font></td><td style="width: 12px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 48px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:48px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">N/A</font></td><td style="width: 12px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 42px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:42px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">N/A</font></td><td style="width: 12px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;">&#160;</td></tr><tr style="height: 34px"><td style="widt h: 156px; text-align:left;border-color:#000000;min-width:156px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;">Initial healthcare cost trend rate pre-65</font></td><td style="width: 11px; text-align:right;border-color:#000000;min-width:11px;">&#160;</td><td style="width: 40px; text-align:right;border-color:#000000;min-width:40px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">N/A</font></td><td style="width: 12px; text-align:left;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 45px; text-align:right;border-color:#000000;min-width:45px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">N/A</font></td><td style="width: 12px; text-align:left;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 45px; text-align:right;border-color:#000 000;min-width:45px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">N/A</font></td><td style="width: 12px; 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text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:11px;">&#160;</td><td style="width: 40px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:40px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;"> ;N/A</font></td><td style="width: 12px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 45px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:45px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">N/A</font></td><td style="width: 12px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 45px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:45px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">N/A</font></td><td style="width: 12px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 39px; 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text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;">%</font></td><td style="width: 48px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:48px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">8.50</font></td><td style="width: 12px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;">%</font></td><td style="width: 42px; text-align:right;background-color:#C0C0C0;border-color:#000000;min-width:42px;"><font style="FONT-FAMILY: Times New Roman ;FONT-SIZE: 9pt;COLOR: #000000;TEXT-ALIGN: right;">9.00</font></td><td style="width: 12px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:12px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 9pt;COLOR: #000000;">%</font></td></tr><tr style="height: 46px"><td style="width: 156px; text-align:left;border-color:#000000;min-width:156px;"><font style="FONT-WEIGHT: bold;FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;">Weighted average assumptions &#8211; net periodic benefit cost:</font></td><td style="width: 11px; text-align:right;border-color:#000000;min-width:11px;">&#160;</td><td style="width: 40px; text-align:right;border-color:#000000;min-width:40px;">&#160;</td><td style="width: 12px; text-align:left;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 45px; text-align:right;border-color:#000000;min-width:45px; ">&#160;</td><td style="width: 12px; text-align:left;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 45px; text-align:right;border-color:#000000;min-width:45px;">&#160;</td><td style="width: 12px; text-align:left;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 39px; text-align:right;border-color:#000000;min-width:39px;">&#160;</td><td style="width: 12px; text-align:left;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 46px; text-align:right;border-color:#000000;min-width:46px;">&#160;</td><td style="width: 12px; text-align:left;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 48px; text-align:right;border-color:#000000;min-width:48px;">&#160;</td><td style="width: 12px; text-align:left;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 41px; t ext-align:right;border-color:#000000;min-width:41px;">&#160;</td><td style="width: 12px; text-align:left;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 48px; text-align:right;border-color:#000000;min-width:48px;">&#160;</td><td style="width: 12px; text-align:left;border-color:#000000;min-width:12px;">&#160;</td><td style="width: 42px; text-align:right;border-color:#000000;min-width:42px;">&#160;</td><td style="width: 12px; text-align:left;border-color:#000000;min-width:12px;">&#160;</td></tr><tr style="height: 17px"><td style="width: 156px; text-align:left;background-color:#C0C0C0;border-color:#000000;min-width:156px;"><font style="FONT-FAMILY: Times New Roman;FONT-SIZE: 10pt;COLOR: #000000;">Discount rate</font></td><td style="width: 11px; 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The general purpose of these plans is to provide additional financial security during retirement by providing employees with an incentive to make regular savings. Company contributions to the plans are based on employee contributions and Company performance and starting in fiscal year 2006 the entire match is made in cash. 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Employees in the </font><font style="font-family:Times New Roman;font-size:10pt;">U.S.</font><font style="font-family:Times New Roman;font-size:10pt;"> hired on or after May 1, 2005 have the option to participate in either the PPA or the PIA. Participants in the PPA receive an annual allocation of their salary and bonus on which they will receive an annual guaranteed rate of return which is based on the 10-year Treasury bond rate. Participants in the PIA also receive an annual allocation of their salary and bonus; however, they are allowed to determine how to invest their funds among identified fund alternatives. The cost associated with the PPA is included in the U.S. Pension Benefits in the tables presented earlier. 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On October 20, 2009, that court certified a class proceeding, but denied class certification on plaintiffs' claim for punitive damages, which the plaintiffs have appealed. A hearing on plaintiffs' appeal was heard on June 10, 2010. 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The complaint is brought on behalf of persons or entities who purchased securities of Medtronic during the period of June 25, 2007 through October 15, 2007. The complaint alleges that "materially false and misleading" representations were made as to the market acceptance and use of the Fidelis defibrillator leads to artificially inflate Medtronic's stock price. Pursuant to court order, the caption of the case was changed to Medtronic, Inc., Securities Litigation, and a consolidated putative class action complaint was filed on April 18, 2008. On March 10, 2009, the court dismissed the complaint with prejudice and denied plaintiffs' leave to amend. 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research and development charges and certain acquisition-related costs The amount of purchased research and development assets that are acquired in a business combination or in a transaction other than a business combination that have no alternative future use and are therefore written off in the period of acquisition and certain acquistion-related costs, which include legal fees, severance costs and contract termination costs that were expensed in the period. Certain litigation charges, net Amount related to material litigation reserves and gains recognized in the period in the statement of earnings. Excludes the amount of expense provided in the period for legal fees. Certain Litigation Charges Acquisitions, IPR&D and Certain Acquisition-Related Costs Description of a business acquisition (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. This disclosure also includes a description of the amount written off in the period of purchased research and development assets that are acquired in a business combination or in a transaction other than a business combination that have no alternative future use. This disclosure also presents certain acquisition-related costs, which include legal fees, severance costs and contract termination costs that were expensed in the period. 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Interest expense, net Supplemental Cash Flow Information Long-term accrued compensation and retirement benefits This represents the noncurrent liability for underfunded plans recognized in the balance sheet that is associated with the defined benefit pension plans and other postretirement defined benefit plans, the aggregate carrying value as of the balance sheet date of the liabilities for all deferred compensation arrangements payable beyond one year (or the operating cycle, if longer), and the carrying amount as of the balance sheet date of the portion of the obligations recognized for the various benefits provided to former or inactive employees, their beneficiaries, and covered dependents after employment but before retirement that is payable after one year (or beyond the operating cycle if longer). Interest Expense (Income), net [Text Block] Discloses the gross amounts of interest income and expense recognized during the period. 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Special charges for fiscal year 2008 relate to the impairment of intangible assets and the special charge for fiscal year 2009 relates to a charitable contribution that the Company recorded. Certain litigation charges are amounts related to material litigation recognized in the statement of earnings. Special Charges And Certain Litigation Charges Text Block Certain litigation (payments) receipts Net amount related to material litigation paid or received in the period. Excludes amount paid in the period for legal fees. 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