EX-13 3 medtronic113060s1_ex13.htm PART II, ITEMS 5, 6, 7, 7A AND 8

Exhibit 13

TABLE OF CONTENTS

 

 

 

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

 

1

Reports of Management

 

26

Report of Independent Registered Public Accounting Firm

 

27

Consolidated Statements of Earnings

 

28

Consolidated Balance Sheets

 

29

Consolidated Statements of Shareholders’ Equity

 

30

Consolidated Statements of Cash Flows

 

31

Notes to Consolidated Financial Statements

 

32

Selected Financial Data

 

85

Price Range of Medtronic Common Stock

 

85



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, or we, us, or our). You should read this discussion and analysis along with our consolidated financial statements and related Notes thereto as of April 29, 2011 and April 30, 2010 and for each of the three fiscal years ended April 29, 2011, April 30, 2010, and April 24, 2009.

          Organization of Financial Information Management’s discussion and analysis, presented on pages 1 to 25 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 28 to 84 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 special charges (such as asset impairments or contributions to The Medtronic Foundation), restructuring charges, certain litigation charges, net, acquisition-related items, or certain tax adjustments. These charges, or benefits, result from facts and circumstances that vary in frequency and/or impact to operations. While understanding these charges or benefits is important to understanding and evaluating financial trends, other transactions or events may also have a material impact on financial trends. A complete understanding of the special charges, restructuring charges, certain litigation charges, net, acquisition-related items, 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 2011 and 2009 were 52-week years. Fiscal year 2010 was a 53-week year. As a result, fiscal year 2011 results included one less week than the same period in the prior year, resulting in an unfavorable impact on our fiscal year 2011 net sales growth.

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 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.

          In the third quarter of fiscal year 2010, we consolidated our businesses into two operating groups. This structure further advances our goal to capitalize on existing synergies related to customers and technologies across each business. The creation of these two operating groups did not change how we internally managed and reported the results of these businesses in fiscal year 2010. Starting in the first quarter of fiscal year 2011, due to changes in how we internally manage and report the results of these businesses, we began to operate under two reportable segments and two operating segments, the Cardiac and Vascular Group (composed of the Cardiac Rhythm Disease Management (CRDM), CardioVascular, and Physio-Control businesses) and the Restorative Therapies Group (composed of the Spinal, Neuromodulation, Diabetes, and Surgical Technologies businesses).

          Net earnings for the fiscal year ended April 29, 2011 were $3.096 billion, or flat compared to net earnings of $3.099 billion for the fiscal year ended April 30, 2010. Diluted earnings per share were $2.86, or an increase of 3 percent compared to diluted earnings per share of $2.79 for the fiscal years ended April 29, 2011 and April 30, 2010, respectively. Fiscal year 2011 net earnings included after-tax restructuring charges, certain litigation charges, net, and acquisition-related items that decreased net earnings by $432 million and had a $0.39 impact on diluted earnings per share. Fiscal year 2010 net earnings included after-tax restructuring charges, certain litigation charges, net, and acquisition-related items that decreased net earnings by $374 million and had a $0.34 impact on diluted earnings per share. See further discussion of these charges/benefits in the “Special Charges, Restructuring Charges, Certain Litigation Charges, Net, Acquisition-Related Items, and Certain Tax Adjustments” section of this management’s discussion and analysis.

1



 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

Fiscal Year

 

 

 

(dollars in millions) 

 

2011

 

2010

 

% Change

 

Cardiac and Vascular Group

 

$

8,544

 

$

8,557

 

 

%

Restorative Therapies Group

 

 

7,389

 

 

7,260

 

 

2

 

Total Net Sales

 

$

15,933

$

15,817

  

1

 

          Net sales in fiscal year 2011 were $15.933 billion, an increase of 1 percent from the prior fiscal year. Foreign currency translation had a favorable impact of $12 million on net sales when compared to the prior fiscal year. The extra selling week in the prior fiscal year had an unfavorable impact on current fiscal year net sales growth. Although we cannot precisely calculate the effect of the extra selling week across each of our businesses, we estimate it had a $200 million unfavorable impact on net sales when comparing the current fiscal year to the prior fiscal year. Net sales growth for fiscal year 2011 was driven by a 2 percent increase in the Restorative Therapies Group compared to the prior fiscal year. The Cardiac and Vascular Group’s performance was flat compared to the prior fiscal year. The Restorative Therapies Group’s performance was primarily a result of strong net sales in Diabetes and Surgical Technologies partially offset by softer net sales in Spinal. Specifically, performance was also impacted by the continued macroeconomic downturn, increased payor scrutiny, competition, and the recent launch of notable products. The Cardiac and Vascular Group’s performance was a result of strong sales in our CardioVascular and Atrial Fibrillation Solutions (AF Solutions) businesses, offset by declines in CRDM defibrillation systems and pacing systems. Additionally, performance was impacted by pricing pressures due to competition, slowing of certain market growth rates, and reduced reimbursement in certain countries including Japan, where R-Zone and foreign reference pricing changes resulted in a decline in our selling prices. Net sales growth for fiscal year 2011 was also impacted by a CRDM competitor’s stop shipment in the prior fiscal year. Net sales outside the United States (U.S.) were $6.813 billion compared to $6.451 billion for the prior fiscal year. Growth outside the U.S. continued to be strong, with five of our businesses achieving positive growth rates as well as three of those businesses 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 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 our continued commitment to innovative research and development.

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, in-process research and development (IPR&D), contingent consideration, 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 accrued. If a loss is possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. Our significant legal proceedings are discussed in Note 16 to the consolidated financial statements. While it is not possible to predict the outcome for most of the matters discussed in Note 16 to the consolidated financial statements, we believe it is possible that costs associated with them could have a material adverse impact on our consolidated earnings, financial position, or cash flows.

2


          Tax Strategies Our effective tax rate is based on income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may or may not prevail. These reserves are established and adjusted in accordance with the principles of 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. We 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 acquisition-related items 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, acquisition-related items, and certain tax adjustments. We believe this resulting non-GAAP financial measure provides useful information to investors because it excludes the effect of these discrete items so that investors can compare our recurring results over multiple periods. 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. Deferred tax liabilities generally represent tax expense recognized in our consolidated financial statements for which payment has been deferred or expense has already been taken as a deduction on our tax return but has not yet been recognized as an expense in our consolidated statements of earnings.

          The Company’s overall tax rate including the tax impact of restructuring charges, certain litigation charges, net, and acquisition-related items has resulted in an effective tax rate of 16.8 percent for fiscal year 2011. Excluding the impact of the restructuring charges, certain litigation charges, net, and acquisition-related items, our operational and tax strategies have resulted in a non-GAAP nominal tax rate of 17.1 percent versus the U.S. Federal statutory rate of 35.0 percent. An increase in our non-GAAP nominal tax rate of 1.0 percent would have resulted in an additional income tax provision for the fiscal year ended April 29, 2011 of approximately $43 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, among IPR&D, other identifiable intangible assets, net tangible assets, and goodwill as required by U.S. GAAP. IPR&D is defined as the value assigned to those projects for which the related products have not received regulatory approval and have no alternative future use. Determining the portion of the purchase price allocated to IPR&D and other intangible assets requires us to make significant estimates. The amount of the purchase price allocated to IPR&D and other intangible assets is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time of the acquisition in accordance with accepted valuation methods. For IPR&D, these valuation methodologies include consideration of the risk of the project not achieving commercial feasibility.

          Contingent consideration is recorded at the acquisition date at the estimated fair value of the contingent consideration 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 recorded as income or expense in the acquisition-related items within our consolidated statements of earnings.

3


          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 triggering events suggest that the carrying amount may be impaired.

          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 fair value, including projected future cash flows. Goodwill was $9.537 billion and $8.391 billion as of April 29, 2011 and April 30, 2010, 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 $2.777 billion and $2.559 billion as of April 29, 2011 and April 30, 2010, respectively.

Net Sales

The table below illustrates net sales by product line and operating segment for fiscal years 2011, 2010, and 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

Net Sales

 

 

 

 

 

Fiscal Year

 

 

 

Fiscal Year

 

 

 

(dollars in millions) 

 

2011

 

2010

 

% Change

 

2010

 

2009

 

% Change

 

Defibrillation Systems

 

$

2,962 

 

$

3,167 

 

 

(6)

%

$

3,167 

 

$

2,962 

 

 

%

Pacing Systems

 

 

1,901 

 

 

1,987 

 

 

(4)

 

 

1,987 

 

 

1,984 

 

 

— 

 

Other

 

 

147 

 

 

114 

 

 

29 

 

 

114 

 

 

68 

 

 

68 

 

CARDIAC RHYTHM DISEASE MANAGEMENT

 

 

5,010 

 

 

5,268 

 

 

(5)

 

 

5,268 

 

 

5,014 

 

 

 

Coronary and Peripheral

 

 

1,591 

 

 

1,489 

 

 

 

 

1,489 

 

 

1,292 

 

 

15 

 

Structural Heart

 

 

977 

 

 

880 

 

 

11 

 

 

880 

 

 

747 

 

 

18 

 

Endovascular

 

 

541 

 

 

495 

 

 

 

 

495 

 

 

398 

 

 

24 

 

CARDIOVASCULAR

 

 

3,109 

 

 

2,864 

 

 

 

 

2,864 

 

 

2,437 

 

 

18 

 

PHYSIO-CONTROL

 

 

425 

 

 

425 

 

 

— 

 

 

425 

 

 

343 

 

 

24 

 

     TOTAL CARDIAC AND VASCULAR GROUP

 

 

8,544 

 

 

8,557 

 

 

— 

 

 

8,557 

 

 

7,794 

 

 

10 

 

Core Spinal

 

 

2,530 

 

 

2,632 

 

 

(4)

 

 

2,632 

 

 

2,560 

 

 

 

Biologics

 

 

884 

 

 

868 

 

 

 

 

868 

 

 

840 

 

 

 

SPINAL

 

 

3,414 

 

 

3,500 

 

 

(2)

 

 

3,500 

 

 

3,400 

 

 

 

NEUROMODULATION

 

 

1,592 

 

 

1,560 

 

 

 

 

1,560 

 

 

1,434 

 

 

 

DIABETES

 

 

1,347 

 

 

1,237 

 

 

 

 

1,237 

 

 

1,114 

 

 

11 

 

SURGICAL TECHNOLOGIES

 

 

1,036 

 

 

963 

 

 

 

 

963 

 

 

857 

 

 

12 

 

     TOTAL RESTORATIVE THERAPIES GROUP

 

 

7,389 

 

7,260 

 

 

 

7,260 

 

6,805 

 

 

 

TOTAL

 

$

15,933 

$

15,817 

 

1 

 

$

15,817 

$

14,599 

 

8 

 

          In fiscal years 2011 and 2010, net sales were favorably impacted by foreign currency translation of $12 million and $113 million, respectively. The primary exchange rate movements that impact our consolidated net sales growth are the U.S. dollar as compared to the Euro and the Japanese Yen. The impact of foreign currency fluctuations on net sales is not indicative of the impact on net earnings due to the offsetting foreign currency impact on operating costs and expenses and our hedging activities. See the “Market Risk” section of this management’s discussion and analysis and Note 9 to the consolidated financial statements for further details on foreign currency instruments and our related risk management strategies.

          Forward-looking statements are subject to risk factors. See “Risk Factors” set forth in our 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.

4


          Cardiac and Vascular Group The Cardiac and Vascular Group is composed of the CRDM, CardioVascular, and Physio-Control businesses. The Cardiac and Vascular Group’s products include pacemakers, implantable defibrillators, leads and delivery systems, ablation products, electrophysiology catheters, products for the treatment of atrial fibrillation, information systems for the management of patients with CRDM devices, coronary and peripheral stents and related delivery systems, therapies for uncontrolled hypertension, endovascular stent graft systems, heart valve replacement technologies, tissue ablation systems, open heart and coronary bypass grafting surgical products, external defibrillators including manual defibrillator/monitors used by hospitals and emergency response personnel, and automated external defibrillators used in commercial and public settings for the treatment of cardiac arrest. The Cardiac and Vascular Group net sales for fiscal year 2011 were $8.544 billion, which is flat over the same period in the prior fiscal year. Foreign currency translation had a favorable impact on net sales of approximately $4 million compared to the prior fiscal year. The Cardiac and Vascular Group’s performance was a result of strong sales in Coronary and Peripheral, Structural Heart, Endovascular, and AF Solutions, offset by declines in CRDM defibrillation systems and pacing systems. The Cardiac and Vascular Group’s performance was impacted by strong international results from the AF Solutions, Structural Heart, Endovascular, and Coronary and Peripheral businesses offset by the continued macroeconomic downturn, pricing pressures due to competition, slowing of certain market growth rates, and reduced reimbursement in certain countries including Japan, where R-Zone and foreign reference pricing changes resulted in a decline in our selling prices. Net sales growth for fiscal year 2011 was negatively impacted by a CRDM competitor’s stop shipment in the prior fiscal year and due to the extra selling week in the prior fiscal year, which impacted all businesses. See more detailed discussion of each business’s performance below.

          CRDM net sales for fiscal year 2011 were $5.010 billion, a decrease of 5 percent over the same period in the prior fiscal year. Worldwide net sales of our defibrillation system products declined primarily due to continued pricing pressures and a decline in the U.S. market in the second half of fiscal year 2011. Net sales growth for fiscal year 2011 was negatively impacted by a CRDM competitor’s stop shipment in the prior fiscal year and due to the extra selling week in the prior fiscal year. Pricing pressures included negative impacts from the delay in the launch of the Protecta SmartShock (Protecta) family of devices in the U.S. and a shift in product mix from initial to replacement implants. The U.S. launch of Protecta was delayed as we awaited final resolution of the Mounds View U.S. Food and Drug Administration (FDA) warning letter and subsequent approval, which occurred in the fourth quarter of fiscal year 2011. Net sales of defibrillation system products were also negatively impacted by competitor product launches in certain international markets. The decline in worldwide net sales of our defibrillation system products was partially offset by net sales growth from the launch of Protecta outside the U.S., which received Conformité Européene (CE) Mark approval late in fiscal year 2010. Additionally, worldwide net sales of our pacing system products declined due to continued pricing pressures and an extra selling week in the prior fiscal year. Pricing pressures included a negative impact from R-Zone pricing changes in Japan and the delayed FDA approval and U.S. launch of the Revo Magnetic Resonance Imaging (MRI) pacing system. The decline in worldwide net sales of our defibrillation and pacing system products was partially offset by worldwide net sales growth of our other products primarily due to the U.S. launch of the Arctic Front Cardiac CryoAblation Catheter system (Arctic Front system) in the third quarter of fiscal year 2011 and strong AF Solutions growth in certain international markets.

          CardioVascular net sales for fiscal year 2011 were $3.109 billion, an increase of 9 percent over the same period in the prior fiscal year. The increase in CardioVascular net sales was primarily due to growth outside the U.S. in our Coronary and Peripheral, Structural Heart, and Endovascular businesses. The primary contributors to net sales growth were driven by new product introductions including the Resolute drug-eluting stent and our Integrity bare metal stent within Coronary and Peripheral, the Endurant Abdominal and Valiant Captivia Thoracic Stent Graft Systems within Endovascular, as well as the recent launch in the U.S. of the Endurant Abdominal Stent Graft, and the continued acceptance outside the U.S. of our transcatheter valves within Structural Heart. Additionally, the acquisitions of ATS Medical, Inc. (ATS Medical) and Invatec S.p.A. (Invatec) contributed to the overall growth in net sales of the CardioVascular business.

          Physio-Control net sales for fiscal year 2011 were $425 million, which is flat versus the same period in the prior fiscal year. Physio-Control’s performance was impacted by pent-up demand upon resuming unrestricted global shipments in the fourth quarter of the prior fiscal year. Physio-Control’s performance also continues to be affected by the slowdown in capital spending by certain governments as a result of the current global economic environment.

          The Cardiac and Vascular Group net sales for fiscal year 2010 were $8.557 billion, an increase of 10 percent over the same period in the prior fiscal year. Foreign currency translation had a favorable impact on net sales of approximately $75 million compared to the prior fiscal year. The Cardiac and Vascular Group’s performance was a result of strong sales across CardioVascular, CRDM, and Physio-Control. The Cardiac and Vascular Group’s performance was impacted by balanced growth across each business and geography. Net sales growth for fiscal year 2010 also benefited from a CRDM competitor’s stop shipment and due to the extra selling week in the first quarter, which impacted all businesses.

5


          CRDM net sales for fiscal year 2010 were $5.268 billion, an increase of 5 percent over the same period in the prior fiscal year. Worldwide net sales of our defibrillation system products increased primarily due to net sales growth of our Vision 3D portfolio, primarily due to strong sales of Secura implantable cardioverter defibrillators (ICDs) and Consulta cardiac resynchronization therapy-defibrillators (CRT-Ds), the first quarter 2010 U.S. launch of the Attain Ability left-heart lead, and a continued shift in product mix towards CRT-Ds. Net sales growth for fiscal year 2010 was also impacted by a CRDM competitor’s stop shipment in the fourth quarter and due to an extra selling week in the first quarter. 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 implant, during follow-up in a clinician’s office, or remotely using a patient home monitor. 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. Additionally, worldwide net sales performance of our pacing system products were flat for the fiscal year primarily due to modest growth outside the U.S. in the Adapta family of pacemakers offset by continued pricing pressures in the Japan market as a result of the Kappa/Sigma field action that was announced in early fiscal year 2010. 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 right ventricle while providing the safety of a dual chamber backup if necessary. Clinical studies have suggested that reducing this unnecessary pacing in the right ventricle may decrease the risk of developing heart failure and atrial fibrillation, a potentially life-threatening irregular heartbeat.

          CardioVascular net sales for fiscal year 2010 were $2.864 billion, an increase of 18 percent over the same period in the prior fiscal year. The increase in CardioVascular net sales was primarily due to growth outside the U.S. in our Coronary and Peripheral, Structural Heart, and Endovascular businesses. 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 fiscal 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. The increase in Endovascular 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. Additionally, the increase in Structural Heart net sales was primarily the result of net sales growth outside the U.S. from our transcatheter valves, tissue surgical valves, and cannulae products.

          Physio-Control net sales for fiscal year 2010 were $425 million, an increase of 24 percent over the same period in the prior fiscal year. Net sales were driven by the LIFEPAK 15 monitor/defibrillator and by the resumption of unrestricted global shipments early in the fourth quarter of fiscal year 2010 following the lifting of FDA restrictions.

          Looking ahead, we expect our Cardiac and Vascular Group should be impacted by the following:

 

 

 

 

The recent slowdown in market growth rates. Our performance in the Cardiac and Vascular Group has been and will continue to be affected by continued market growth and our ability to increase or maintain our market position. The current Cardiac and Vascular Group market is impacted by increasing pricing pressures, competition, and slowing procedure growth.

 

 

 

 

The recent slowdown in market growth rates for our U.S. defibrillation system products. We believe the U.S. market could be impacted during fiscal year 2012 by the ICD utilization article in the Journal of the American Medical Association and the hospital utilization investigation by the Department of Justice.

 

 

 

 

Market acceptance of our Protecta family of devices which was launched outside the U.S. late in the fourth quarter of fiscal year 2010 and in the U.S. in the fourth quarter of fiscal year 2011. The Protecta portfolio leverages the already established Vision 3D platform to deliver a full suite of single, dual, and triple chamber defibrillators that include SmartShock Technology, a family of new Medtronic-exclusive algorithms that reduces the delivery of inappropriate shocks, which is a leading clinical request from physicians.

 

 

 

 

Continued and future growth of the first pacing system developed specifically for use in MRI machines. During the fourth quarter of fiscal year 2010 we launched Advisa MRI SureScan, our next generation MRI pacing system in Europe and, early in the fourth quarter of fiscal year 2011, we received FDA approval for the 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 imaging environment. We believe these MRI compatible products will help drive potential share gains and alleviate pricing pressures.

 

 

 

 

Future growth from the launch of the Arctic Front system in the U.S. The Arctic Front system is a cryoballoon indicated for the treatment of drug refractory paroxysmal atrial fibrillation. The cryoballoon treatment involves a minimally invasive procedure that efficiently creates circumferential lesions around the pulmonary vein, which is the source of erratic electrical signals that cause irregular heartbeat.

 

 

 

 

Continued acceptance of the Resolute drug eluting stent in markets outside the U.S.

6



 

 

 

 

Launch of the new Integrity bare metal stent and Resolute Integrity drug eluting coronary stent in certain international markets. The Integrity platform features a laser-fused sinusoidal technology that is designed to significantly improve flexibility and conformability compared to the Driver stent and other technologies. Additionally, the Resolute Integrity drug eluting coronary stent was launched in Europe in August 2010. While the global stent market continues to experience year-over-year declines, to date we have been successful in gaining share with this stent platform in those geographies where the product has been approved.

 

 

 

 

Future growth in the U.S. from the launch of the Endurant Abdominal Stent Graft System, which was approved and launched in the third quarter of fiscal year 2011. Early results indicate strong market acceptance.

 

 

 

 

Further and future growth in the U.S. and Japan from the Talent Thoracic Stent Graft System. In the U.S., the Talent Thoracic Stent Graft System, on an improved delivery system, Captivia, was launched in the third quarter of fiscal year 2011. In addition, our Talent Abdominal Aortic Aneurysm Stent Graft System and improved delivery system, Xcelerant, for our Thoracic Stent Graft System was approved in Japan in the third quarter of fiscal year 2011.

 

 

 

 

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

 

 

 

 

Continued acceptance of our CoreValve transcatheter heart valve technologies for the replacement of the aortic valve. CoreValve’s Percutaneous Revalving System has received CE Mark approval and is currently available outside the U.S. Additionally, during the third quarter of fiscal year 2011 we started the CoreValve U.S. pivotal study.

 

 

 

 

Continued contributions from Invatec and its affiliated companies into our CardioVascular business. 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. We believe this acquisition has increased our competitive position in the peripheral vascular market.

 

 

 

 

Continued integration of ATS Medical, which was acquired in the second quarter of fiscal year 2011. ATS Medical is a leading developer, manufacturer, and marketer of products and services focused on cardiac surgery, including heart valves and surgical cryoablation technology. We believe this acquisition should increase our competitive position in the structural heart market.

 

 

 

 

Continued integration of Ardian, Inc. (Ardian), which was acquired near the end of the third quarter of fiscal year 2011. Ardian develops catheter-based therapies to treat uncontrolled hypertension and related conditions. Ardian’s Symplicity Catheter System addresses uncontrolled hypertension through renal denervation, or ablation of the nerves lining the renal arteries. It has received CE Mark approval and Australia’s Therapeutic Goods Administration listing. We believe this acquisition offers the opportunity to lead the development of renal denervation, augments our existing interventional therapies, and complements our catheter design and ablation technologies.

 

 

 

 

Future divestiture of Physio-Control. In February 2011, we announced our intention to reinitiate our efforts to divest Physio-Control. We are pursuing a dual-path strategy, investigating both the option of an asset sale and the option to spin off the business to our shareholders.

          Restorative Therapies Group The Restorative Therapies Group is composed of the Spinal, Neuromodulation, Diabetes, and Surgical Technologies businesses. Products in the Restorative Therapies Group include products for various areas of the spine, bone graft substitutes, biologic products, implantable neurostimulation therapies and drug delivery devices for the treatment of chronic pain, movement disorders, obsessive-compulsive disorder (OCD), overactive bladder, urinary retention, and gastroparesis, external insulin pumps, subcutaneous continuous glucose monitoring (CGM) systems, and products to treat conditions of the ear, nose, and throat. Additionally, this group manufactures and sells primarily image-guided surgery and intra-operative imaging systems. The Restorative Therapies Group net sales for fiscal year 2011 were $7.389 billion, an increase of 2 percent over the same period in 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 Restorative Therapies Group’s performance was primarily a result of strong net sales in Diabetes and Surgical Technologies partially offset by softer net sales in Spinal. The Restorative Therapies Group’s performance was impacted by the continued macroeconomic downturn, increased payor scrutiny, competition, and the recent launch of notable products. Net sales growth for fiscal year 2011 was also negatively affected by the extra selling week in the prior fiscal year, which impacted all businesses. See more detailed discussion of each business’s performance below.

7


          Spinal net sales for fiscal year 2011 were $3.414 billion, a decrease of 2 percent over the same period in the prior fiscal year. The decrease in Spinal net sales was primarily due to the decline in INFUSE Bone Graft sales and the continued decrease in demand for Kyphon Balloon Kyphoplasty (BKP) driven in part by articles on vertebroplasty in the New England Journal of Medicine, partially offset by growth in our Solera products and Biologics, which benefited from our acquisition of Osteotech, Inc. (Osteotech) during the third quarter of fiscal year 2011. We have also seen a decrease in the number of Spinal procedures as certain patients are postponing elective procedures due to the current macroeconomic and other factors. In addition, Spinal net sales were negatively impacted by continued pricing pressures and a challenging reimbursement environment in many of our major markets. These decreases were slightly offset by growth outside the U.S. including the positive impact from the joint venture with Shandong Weigao Group Medical Polymer Company Limited (Weigao). The joint venture distributes Medtronic’s spinal products and Weigao’s orthopedic products in China.

          Neuromodulation net sales for fiscal year 2011 were $1.592 billion, an increase of 2 percent over the same period in the prior fiscal year. The increase in net sales was primarily due to the growth of Activa PC and RC deep brain stimulation (DBS) systems for movement disorders and InterStim Therapy for overactive bladder, urinary retention, and bowel control (outside the U.S.), partially offset by declines in pain management products.

          Diabetes net sales for fiscal year 2011 were $1.347 billion, an increase of 9 percent over the same period in the prior fiscal year. Net sales increased worldwide led by international sales growth of 13 percent over the same period of the prior fiscal year. This was the result of continued growth for our MiniMed Paradigm Veo System (Veo) in certain markets outside the U.S. In addition, the MiniMed Revel System (Revel) contributed to the growth in the U.S. market. We also saw an increase in CGM sales worldwide.

          Surgical Technologies net sales for fiscal year 2011 were $1.036 billion, an increase of 8 percent over the same period in the prior fiscal year. The increase in net sales was driven by strong performance worldwide across the portfolio of ENT, Power Systems, and Navigation product lines, as well as growth across capital equipment, disposables, and service.

          The Restorative Therapies Group net sales for fiscal year 2010 were $7.260 billion, an increase of 7 percent over the same period in the prior fiscal year. Foreign currency translation had a favorable impact on net sales of approximately $38 million when compared to the prior fiscal year. The Restorative Therapies Group’s performance was a result of strong net sales in Neuromodulation, Diabetes, and Surgical Technologies. The Restorative Therapies Group’s performance was impacted by balanced growth across each business and geography. Net sales growth for fiscal year 2010 also benefited from the extra selling week in the first quarter, which impacted all businesses.

          Spinal net sales for fiscal year 2010 were $3.500 billion, an increase of 3 percent over the same period in the prior fiscal year. The increase in net sales 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 fiscal year was positively impacted from our joint venture with 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 BKP driven in large part by articles on vertebroplasty 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. Net sales were also driven by strong growth in 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.

          Neuromodulation net sales for fiscal year 2010 were $1.560 billion, an increase of 9 percent over the same period in the prior fiscal year. Net sales were driven by increased worldwide sales of InterStim and Medtronic DBS Therapies, with ongoing momentum from Activa PC neurostimulator sales in Europe and its fiscal year 2010 launch in the U.S.

8


          Diabetes net sales for fiscal year 2010 were $1.237 billion, an increase of 11 percent over the same period in the prior fiscal year. The increase in net sales resulted from the launch of Veo outside the U.S. and the launch of 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 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 vent 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.

          Surgical Technologies net sales for fiscal year 2010 were $963 million, an increase of 12 percent 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.

          Looking ahead, we expect our Restorative Therapies Group should be impacted by the following:

 

 

 

 

Growth of the various markets and our ability to grow consistently within those markets. Our performance in the Restorative Therapies Group has been and will continue to be affected by continued market growth and our ability to increase or maintain our market position. The current Restorative Therapies Group market is impacted by growth in procedural volumes partially offset by increasing pricing pressures and competition within the Spinal and Neuromodulation businesses.

 

 

 

 

Market acceptance of innovative new products, including the Vertex Select product line, which was launched in the first quarter of fiscal year 2011, and our new Solera product line, which began a limited launch in the U.S. at the end of the second quarter of fiscal year 2010. During the fourth quarter of fiscal year 2011, we ramped up our launch of the Solera 4.75 system with a full market release. By the end of the fourth quarter of fiscal year 2011, the Solera 4.75 system had penetrated 30 percent of our U.S. Legacy system accounts.

 

 

 

 

Continued acceptance of our BKP technology. We believe worldwide growth continues to be negatively impacted by the vertebroplasty articles in the New England Journal of Medicine. In addition, two new competitors entered the U.S. marketplace in fiscal year 2011.

 

 

 

 

Market acceptance of new high pressure BKP balloons and syringes, curettes, and fixation materials in the Spinal business, which were launched during the second quarter of fiscal year 2011. In the fourth quarter of fiscal year 2010, we received regulatory clearance in Japan for BKP. Subsequent to receiving reimbursement approval, BKP was launched in Japan during the third quarter of fiscal year 2011. We expect a positive impact over time from the improvement in certain international markets, such as Japan. Market growth potential in Japan will be dependent upon additional investment and development of the market.

 

 

 

 

 

Additionally, we remain focused on generating evidence to support the clinical and economic benefits for BKP. In February 2011, results from three BKP clinical studies were published, which continue to build the body of clinical evidence demonstrating the benefits of BKP over other surgical and non-surgical treatment options.

 

 

 

 

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.

 

 

 

 

Expected future growth in our Biologics business, driven by new products and by our acquisition of Osteotech, which closed in the third quarter of fiscal year 2011. Osteotech develops innovative biologic products for regenerative healing.

 

 

 

 

We continue to seek the FDA’s approval to market our new bone graft product, AMPLIFY rhBMP-2 Matrix (AMPLIFY) for single-level, posterolateral spinal fusion procedures in patients with degenerative disc disease. In the third quarter of fiscal year 2011, the FDA sent us a letter advising that the FDA was not able to approve AMPLIFY at that time without additional information from us. We remain in active dialogue with the FDA to address the issues in its letter and are hopeful that the FDA will ultimately approve AMPLIFY.

 

 

 

 

Any effects on our business from discussions in the medical literature, or inquiries from governmental authorities, relating to our INFUSE Bone Graft product. In June 2011, articles in a medical journal suggested that some physicians’ peer-reviewed studies may have underreported complications and adverse events associated with INFUSE. These articles did not question the integrity of the data provided by Medtronic to the FDA for product approval or the disclosure of safety issues on the product’s Instructions for Use for approved indications.

 

 

 

 

Ability to consistently grow within the pain management market, which is characterized by significant competition. We remain focused on a number of key initiatives in the areas of product development and sales execution as well as therapy adoption growth, which we expect will sustain our market leadership.

 

 

 

 

Continued and future acceptance of our current indications for Medtronic DBS Therapy for the treatment of movement disorders, Epilepsy (approved in Europe) and OCD. The DBS Therapy portfolio includes Activa PC, our small and advanced primary cell battery, and Activa RC, a rechargeable DBS device. Additionally, Activa SC was approved in the U.S. and Europe in fiscal year 2011.

9



 

 

 

 

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. InterStim Therapy for Bowel Control was approved by the FDA in the fourth quarter of fiscal year 2011 and launched in the first quarter of fiscal year 2012. Approximately 18 million patients suffer from fecal incontinence in the U.S., and very few treatment options exist for this condition.

 

 

 

 

Continued acceptance of the RestoreSensor, which was launched in Europe during the fourth quarter of fiscal year 2010. In the U.S., a clinical trial was completed to support submission for FDA approval. Additionally, RestoreSensor was launched in Canada and Australia during fiscal year 2011. RestoreSensor is an innovative spinal cord stimulator featuring our exclusive AdaptiveStim technology, which addresses the need for spinal cord stimulation patients through automatically adapting stimulation to changes in body position and activity, and minimizes the need for manual stimulation adjustments.

 

 

 

 

Continued acceptance from both physicians and patients of insulin-pump therapy and CGM therapy and continued acceptance and improved reimbursement of CGM technologies. Additionally, the Enlite sensor was launched in certain international markets in the fourth quarter of fiscal year 2011.

 

 

 

 

Continued acceptance of new insulin pumps, including Veo, which offers low-glucose suspend that assists in protecting against the risk of hypoglycemia by automatically suspending insulin delivery when glucose falls below a specified threshold set by the user. Veo was launched throughout Asia and Europe during fiscal year 2010. In addition, Revel 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.

 

 

 

 

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, macroeconomic pressures could negatively impact the near-term sales growth within the Diabetes business.

 

 

 

 

Continued acceptance of the StealthStation S7 and O-Arm Imaging Systems, especially with the launch of Synergy Spine 2.0 and the O-Arm 3.1.2 during fiscal year 2011.

 

 

 

 

Market acceptance of the NIM 3.0 Nerve Monitoring System.

Costs and Expenses

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

2011 

 

2010 

 

2009 

 

Cost of products sold

 

 

24.6

%

 

24.1

%

 

24.1

%

Research and development

 

 

9.5

 

 

9.2

 

 

9.3

 

Selling, general, and administrative

 

 

34.7

 

 

34.2

 

 

35.3

 

Special charges

 

 

 

 

 

 

0.7

 

Restructuring charges

 

 

1.6

 

 

0.3

 

 

0.8

 

Certain litigation charges, net

 

 

1.5

 

 

2.4

 

 

4.9

 

Acquisition-related items

 

 

0.1

 

 

0.1

 

 

4.3

 

Other expense, net

 

 

2.9

 

 

3.0

 

 

2.7

 

Interest expense, net

 

 

1.7

 

 

1.6

 

 

1.3

 

          Cost of Products Sold Cost of products sold was $3.912 billion in fiscal year 2011, representing 24.6 percent of net sales, reflecting an increase of 0.5 percentage points from fiscal year 2010. Cost of products sold as a percent of net sales was negatively impacted by 0.3 of a percentage point due to a shift in product mix, 0.3 of a percentage point primarily driven by unfavorable manufacturing variances, and 0.1 of a percentage point due to the $11 million cost of sales component of our fiscal year 2011 restructuring initiative, partially offset by 0.2 of a percentage point of favorable foreign currency translation. We continue to execute our five-year planned broad initiatives to reduce our cost of products sold by $1 billion by fiscal year 2012.

          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.

10


          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 $1.508 billion in fiscal year 2011, representing 9.5 percent of net sales, an increase of 0.3 of a percentage point from fiscal year 2010.

          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.

          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 2011 selling, general, and administrative expense was $5.533 billion, which as a percent of net sales increased by 0.5 percentage points from fiscal year 2010 to 34.7 percent. This increase was primarily driven by the effects of recent acquisitions, executive separation costs, and additional bad debt reserves in certain markets, including Greece. We continue to focus on several initiatives to leverage our expenses while continuing to invest in new product launches and adding to our sales force in faster growing businesses and emerging markets.

          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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(in millions)

 

2011 

 

2010 

 

2009 

 

Special charges:

 

 

 

 

 

 

 

 

 

 

Medtronic Foundation contribution

 

$

 

$

 

$

100

 

Total special charges

 

 

 

 

 

 

100

 

Restructuring charges

 

 

272

 

 

57

 

 

123

 

Certain litigation charges, net

 

 

245

 

 

374

 

 

714

 

Acquisition-related items

 

 

14

 

 

23

 

 

621

 

Total special charges, restructuring charges, certain litigation charges, net, and acquisition-related items

 

 

531

 

 

454

 

 

1,558

 

Net tax impact of special charges, restructuring charges, certain litigation charges, net, acquisition-related items, and certain tax adjustments

 

 

(99

) 

 

(80

)

 

(444

)

Total special charges, restructuring charges, certain litigation charges, net, acquisition-related items, and certain tax adjustments, net of tax

 

$

432

 

$

374

 

$

1,114

 

          Special Charges In fiscal years 2011 and 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.

11


          Restructuring Charges

          Fiscal Year 2011 Initiative

          In the fourth quarter of fiscal year 2011, we recorded a $272 million restructuring charge, which consisted of employee termination costs of $177 million, asset write-downs of $24 million, contract termination fees of $45 million, and other related costs of $26 million. The fiscal year 2011 initiative was designed to restructure the business to align its cost structure to current market conditions and continue to position us for long-term sustainable growth. To reshape the business for growth, we scaled back our infrastructure in slower growing areas while continuing to invest in geographies, businesses, and products where faster growth is anticipated, such as emerging markets and new technologies. This initiative impacted most businesses and certain corporate functions. Included in the $177 million of employee termination costs were severance and the associated costs of continued medical benefits and outplacement services, as well as $15 million of incremental defined benefit pension and post-retirement related expenses for employees that accepted voluntary early retirement packages. For further discussion on the incremental defined benefit pension and post-retirement related expenses, see Note 14 to the consolidated financial statements. Of the $24 million of asset write-downs, $11 million related to inventory write-offs of discontinued product lines and production-related asset impairments and therefore was recorded within cost of products sold in the consolidated statement of earnings. Additionally, included in the other related costs is a $19 million intangible asset impairment related to the discontinuance of a product line within the CardioVascular business.

          In connection with the fiscal year 2011 initiative, as of the end of the fourth quarter of fiscal year 2011, we had identified approximately 2,100 positions for elimination to be achieved through voluntary early retirement packages offered to employees, voluntary separation, and involuntary separation. Of the 2,100 positions identified, approximately 120 positions have been eliminated as of April 29, 2011. The fiscal year 2011 initiative is scheduled to be substantially complete by the end of the fourth quarter of fiscal year 2012 and is expected to produce annualized operating savings of approximately $225 million to $250 million. These savings will arise mostly from reduced compensation expense.

          Fiscal Year 2009 Initiative

          In the fourth quarter of fiscal year 2009, we recorded a $34 million restructuring charge, which consisted of employee termination costs of $29 million and asset write-downs of $5 million. The fiscal year 2009 initiative focused on streamlining the organization and standardizing or centralizing certain functional activities which were not unique to individual businesses. 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 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, we incurred $72 million of incremental restructuring charges, which consisted of employee termination costs of $62 million and asset write-downs of $10 million. Included in the $62 million of employee termination costs 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 expenses, see Note 14 to the consolidated financial statements. 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.

          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 which were achieved through early retirement packages offered to employees, voluntary separation, and involuntary separation. As of July 30, 2010, the fiscal year 2009 initiative was substantially complete and is expected to produce annualized operating savings of approximately $125 million, 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 our CRDM business, 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 business, 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 CardioVascular products, streamline distribution of products in select businesses, and reduce general and administrative costs in our corporate functions.

12


          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 was 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 global realignment initiative was substantially complete and is expected to produce annualized operating savings of approximately $96 million. These savings will arise mostly from reduced compensation expense.

          For additional information, see Note 3 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 2011, we recorded certain litigation charges, net of $245 million related primarily to a $221 million settlement involving the Sprint Fidelis family of defibrillation leads and accounting charges for Other Matters litigation. The Sprint Fidelis settlement related to the resolution of certain outstanding product liability litigation related to the Sprint Fidelis family of defibrillation leads that were subject to a field action announced October 15, 2007.

          During fiscal year 2010, we recorded certain litigation charges, net of $374 million related to settlements with Abbott Laboratories (Abbott) and W.L. Gore & Associates, Inc. (Gore). The Abbott settlement accounted for $444 million in litigation charges and the Gore settlement accounted for a $70 million 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 the 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. We paid the settlement 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 the 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 began paying us quarterly payments in January 2010 that will continue through the fiscal quarter ending October 2018.

          During fiscal year 2009, we incurred four certain litigation charges, net totaling $714 million. The first charge 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 revised damages award and pre- and post-judgment interest. The settlement amount was paid in June 2009.

13


          The second charge in fiscal year 2009 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 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 litigation matters which span across businesses, we entered into negotiations with J&J in an attempt to settle some of the additional litigation simultaneous with the payment of this judgment. Ultimately, the agreement reached with Cordis required a total cash payment of $472 million, which included the settlement of several outstanding legal matters between the parties. The charge of $229 million in 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 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 seven years. The settlement amount of $125 million was paid in fiscal year 2009.

          Acquisition-Related Items During fiscal year 2011, we recorded $14 million of acquisition-related items. This amount includes $99 million of costs, of which $55 million related to certain acquisition-related costs that were incurred related to the acquisitions of ATS Medical, Osteotech, and Ardian, $30 million related to IPR&D charges, and $14 million related to the change in fair value of contingent milestone payments associated with acquisitions subsequent to April 24, 2009. These costs were partially offset by an $85 million gain recognized on the acquisition of Ardian. IPR&D charges of $15 million related to asset purchases in the CardioVascular and Surgical Technologies businesses and $15 million of IPR&D charges related to a milestone payment under the existing terms of a royalty-bearing, non-exclusive patent cross-licensing agreement with NeuroPace, Inc. Since product commercialization of these assets had not yet been achieved, in accordance with authoritative guidance, the payments were immediately expensed as IPR&D since technological feasibility had not yet been reached and such technology had no future alternative use. The acquisition-related costs included legal fees, severance costs, change in control costs, banker fees, contract termination costs, and other professional services fees that were expensed in the period. In accordance with authoritative guidance, and as a result of the acquisition of Ardian, we recognized an $85 million gain related to our previously-held 11.3 percent ownership position.

          During fiscal year 2010, we recorded $23 million of acquisition-related items, of which $11 million related to the Arbor Surgical Technologies, Inc. IPR&D asset purchase and $12 million related to 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 Technologies Ltd. (Ventor), $123 million related to the acquisition of CoreValve, Inc. (CoreValve), $97 million related to the acquisition of Ablation Frontiers, Inc. (Ablation Frontiers), $72 million related to the acquisition of CryoCath Technologies, Inc. (CryoCath), and $22 million was for the purchase of certain intellectual property for use in our Spinal and Diabetes businesses. These payments were expensed as IPR&D since technological feasibility of the underlying projects had not yet been reached and such technology had no future alternative use.

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

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

14


          At the time of acquisition, we expect that 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 2011, 2010, and 2009.

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

          In fiscal years 2011 and 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.

          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, impairment charges on equity securities, and the Puerto Rico excise tax. In fiscal year 2011, other expense, net was $459 million, a decrease of $9 million from $468 million in the prior fiscal year. The decrease was impacted by foreign currency gains of $61 million in fiscal year 2011 compared to $11 million in the prior fiscal year. Also contributing to the decrease was higher royalty income and licensing payments that we received in our CardioVascular business compared to the prior fiscal year. These decreases for fiscal year 2011 were partially offset by an increase in the amortization of intangible assets, primarily related to the acquisitions of Invatec and ATS Medical, and an increase of $38 million related to a Puerto Rico excise tax for fiscal year 2011, which was substantially offset by a corresponding tax benefit which was recorded within provision for income taxes in the consolidated statement of earnings.

          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 business, 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 recorded in fiscal year 2010 were $11 million compared to $28 million in losses 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, changes in the fair value of interest rate derivative instruments, and the net realized gain or loss on the sale or impairment of available-for-sale debt securities. In fiscal year 2011, interest expense, net was $278 million, as compared to $246 million in fiscal year 2010. The increase of $32 million in fiscal year 2011 is the result of an increase in interest paid on borrowings due to the $3.000 billion debt issuance in the fourth quarter of fiscal year 2010, which was offset by lower interest rates on our outstanding debt in comparison to fiscal year 2010. Interest income decreased as a result of having lower interest rates being earned on our short- and long-term investments during fiscal year 2011.

          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 was 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 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 fiscal year 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.

15


Income Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

Percentage Point
Increase/(Decrease)

 

(dollars in millions) 

 

2011 

 

2010 

 

2009 

 

FY11/10

 

FY10/09

 

Provision for income taxes

 

$

627

 

$

870

 

$

370

 

 

N/A

 

 

N/A

 

Effective tax rate

 

 

16.8

%

 

21.9

%

 

15.2

%

 

(5.1

)

 

6.7

 

Net tax impact of special charges, restructuring charges, certain litigation charges, net, acquisition-related items, and certain tax adjustments

 

 

(0.3

)

 

0.4

 

 

(5.2

)

 

(0.7

)

 

5.6

 

Non-GAAP nominal tax rate (1)

 

 

17.1

%

 

21.5

%

 

20.4

%

 

(4.4

)

 

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, acquisition-related items, 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 16.8 percent decreased by 5.1 percentage points from fiscal year 2010 to fiscal year 2011. The change in our effective tax rate was primarily due to the tax benefits derived from the resolution of U.S. federal, state, and foreign income tax audits, the retroactive renewal and extension of the U.S. federal research and development tax credit, finalization of certain tax returns, changes to uncertain tax position reserves, foreign dividend distributions, the impact of restructuring charges, certain litigation charges, net, acquisition-related items, and the benefit associated with the Puerto Rico excise tax. Our non-GAAP nominal tax rate for fiscal year 2011 was 17.1 percent compared to 21.5 percent from the prior fiscal year. The decrease in our non-GAAP nominal tax rate for fiscal year 2011 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 2011, we recorded $187 million in operational tax benefits. This included a $67 million net benefit associated with the resolution of U.S. federal, state, and foreign income tax audits, finalization of certain tax returns, and changes to uncertain tax position reserves. As a result of the retroactive renewal and extension of the U.S. federal research and development tax credit, a $27 million benefit was also recorded as an operational tax benefit during the current fiscal year. In addition, we recorded a $59 million benefit associated with foreign dividend distributions and a $34 million U.S. tax credit associated with the recently enacted Puerto Rico excise tax, which substantially offsets the corresponding excise tax recorded within other expense, net in the consolidated statement of earnings.

          The fiscal year 2010 effective tax rate of 21.9 percent increased by 6.7 percentage points from fiscal year 2009. The change in our effective tax rate was primarily due to the impact of special charges, restructuring charges, certain litigation charges, net, acquisition-related items, and certain tax adjustments. The 5.6 percentage point increase in the impact from special charges, restructuring charges, certain litigation charges, net, acquisition-related items, 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 through 2007 and the completion of foreign audits covering various years recorded in fiscal year 2009. Our non-GAAP nominal tax rate for fiscal year 2010 was 21.5 percent compared to 20.4 percent from fiscal year 2009. The increase in our non-GAAP nominal tax rate for fiscal year 2010 as compared to fiscal year 2009 was due to the operational tax benefits in fiscal year 2009 described above and the impact of tax benefits derived from our international operations in fiscal year 2009.

          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. health care reform legislation eliminating the federal tax benefit for government subsidies of retiree prescription drug benefits.

          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 1999. 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.

          On December 7, 2010, we reached settlement with the IRS with respect to the audits of fiscal years 1997, 1998, and 1999 and the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary in Switzerland. The impact from this settlement has been recorded in the provision for income taxes in the consolidated statement of earnings for the fiscal year ended April 29, 2011.

16


          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. Following the resolution on December 7, 2010 of the issue associated with the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary in Switzerland, we have reached agreement with the IRS on substantially all of the proposed adjustments for fiscal years 2000 through 2004. The remaining open issues are not significant and are expected to be resolved within the next 12 months.

          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 could effect our tax payments that remain unresolved relate to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico and the timing of the deductibility of a settlement payment. On December 23, 2010, the IRS issued a statutory notice of deficiency with respect to the remaining issues. We filed a Petition with the U.S. Tax Court on March 21, 2011 objecting to the deficiency.

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

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

Liquidity and Capital Resources

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(dollars in millions)

 

2011

 

2010

 

Working capital

 

$

4,403

 

$

4,718

 

Current ratio*

 

 

1.9:1.0

 

 

1.9:1.0

 

Cash, cash equivalents, and short-term investments

 

$

2,428

 

$

3,775

 

Long-term investments in debt, marketable equity, and trading securities**

 

 

5,464

 

 

4,090

 

Total

 

$

7,892

 

$

7,865

 

Short-term borrowings and long-term debt

 

$

9,835

 

$

9,519

 

Net cash position***

 

$

(1,943

)

$

(1,654

)


 

 

*

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, marketable equity securities, 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, marketable equity, and trading securities less short-term borrowings and long-term debt.

          As of April 29, 2011, we believe our strong balance sheet and liquidity provide us with flexibility in the future. We believe our existing cash and investments, as well as our $2.250 billion syndicated credit facility and related commercial paper program ($1.500 billion of commercial paper outstanding as of April 29, 2011), 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 29, 2011, our Standard and Poor’s Ratings Group and Moody’s Investors Service ratings remain unchanged as compared to the fiscal year ended April 30, 2010, with long-term debt ratings of AA- and A1, respectively, and strong short-term debt ratings of A-1+ and P-1, respectively.

          The decrease in our net cash position in fiscal year 2011 as compared to fiscal year 2010 was primarily due to changes in working capital needs compared to the prior fiscal year. For further information see the “Summary of Cash Flows” section of this management’s discussion and analysis.

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

          When applicable, Note 16 to the consolidated financial statements provides information regarding amounts we have accrued related to significant legal proceedings. In accordance with 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 29, 2011, 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, Acquisition-Related Items, and Certain Tax Adjustments” section of this management’s discussion and analysis.

17


          A significant amount of our earnings occur outside the U.S. and are deemed to be permanently reinvested in non-U.S. subsidiaries, resulting in a majority of our cash, cash equivalents, and investments being held by such non-U.S. subsidiaries. At April 29, 2011 and April 30, 2010, approximately $7.215 billion and $5.576 billion, respectively, of cash, cash equivalents, and short- and long-term investments in marketable debt and equity securities were held by our non-U.S. subsidiaries. These funds are available for use by our 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 continue to accumulate earnings overseas for investment outside the U.S. and to use cash generated from U.S. operations and short- and long-term borrowings to meet our U.S. cash needs. Should we require more capital in the U.S. than is generated by our domestic operations, we could elect to repatriate earnings from our non-U.S. subsidiaries or raise additional capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates, increased interest expense, or other dilution of our earnings.

          Long-term investments at April 29, 2011 also include $155 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. government and agency securities, foreign government and agency securities, corporate debt securities, certificates of deposit, mortgage-backed securities, other asset-backed securities, and auction rate securities. Some of our investments may experience reduced liquidity due to changes in market conditions and investor demand. Our auction rate security holdings have experienced reduced liquidity due to the change in investor demand. Although our auction rate securities are currently illiquid and other securities could become illiquid, we believe we could liquidate a substantial amount of our portfolio without incurring a material impairment loss.

          For the fiscal year ended April 29, 2011, other-than-temporary impairment losses on available-for-sale debt securities were $18 million, of which $13 million was recognized in other comprehensive income resulting in $5 million of charges being recognized in earnings. 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 these other-than-temporary impairment losses, 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 required to sell before recovery of the amortized cost. However, as of April 29, 2011, we have $56 million of gross unrealized losses on our aggregate short-term and long-term available-for-sale debt securities of $6.471 billion; if market conditions deteriorate, some of these holdings may experience other-than-temporary impairment in the future which could have a material impact on our financial results. Management is required to use estimates and assumptions in its valuation of our investments, which requires a high degree of judgment, and therefore actual results could differ materially from those estimates. See Note 6 to the consolidated financial statements for additional information regarding fair value measurements.

Summary of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(in millions)

 

2011

 

2010

 

2009

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

3,741

 

$

4,131

 

$

3,878

 

Investing activities

 

 

(1,815

)

 

(4,759

)

 

(2,740

)

Financing activities

 

 

(2,006

)

 

764

 

 

(845

)

Effect of exchange rate changes on cash and cash equivalents

 

 

62

 

 

(7

)

 

(82

)

Net change in cash and cash equivalents

 

$

(18

)

$

129

 

$

211

 

          Operating Activities Our net cash provided by operating activities was $3.741 billion for the fiscal year ended April 29, 2011 compared to $4.131 billion for the same period of the prior year. The $390 million decrease in net cash provided by operating activities is primarily attributable to changes in working capital needs resulting from increased accounts receivable balances in certain European Union countries and increased global pension contributions compared to the prior fiscal year.

18


          Our net cash provided by operating activities was $4.131 billion for the fiscal year ended April 30, 2010 compared to $3.878 billion for the fiscal year ended April 24, 2009. The $253 million increase in net cash provided by operating activities was primarily attributable to the increase in earnings offset by an increase in certain litigation payments.

          Investing Activities Our net cash used in investing activities was $1.815 billion for the fiscal year ended April 29, 2011 compared to $4.759 billion for the fiscal year ended April 30, 2010. Cash used for acquisitions increased in comparison to the prior fiscal year as a result of the current year acquisitions primarily driven by ATS Medical, Osteotech, and Ardian. The increase in acquisition spending was more than offset by decreased investing in marketable securities in fiscal year 2011 which resulted in net sales of $194 million as compared to net purchases of $3.687 billion in the prior fiscal year. The increased investing in marketable securities in fiscal year 2010 resulted primarily from investing the proceeds from the $3.000 billion debt issuance.

          Our net cash used in investing activities was $4.759 billion for the fiscal year ended April 30, 2010 compared to $2.740 billion for the same period of the prior fiscal year. Cash used for acquisitions decreased in comparison to the fiscal year ended April 24, 2009 as the acquisitions of Restore Medical, Inc. (Restore), CryoCath, Ablation Frontiers, and CoreValve were included in fiscal year 2009. 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 fiscal year 2009. The increased investing in marketable securities resulted from investing the proceeds of the fiscal year 2010 $3.000 billion debt issuance.

          Financing Activities We had net cash used in financing activities of $2.006 billion for the fiscal year ended April 29, 2011 compared to net cash provided by financing activities of $764 million for the fiscal year ended April 30, 2010. Proceeds from net short- and long-term borrowings were approximately $2.518 billion lower in fiscal year 2011 as compared to fiscal year 2010, primarily due to the lesser $1.000 billion debt issuance in fiscal year 2011 compared to the $3.000 billion debt issuance in the prior fiscal year. Additionally, during fiscal year 2011 we repaid $2.200 billion of our Senior Convertible Notes that were due in April 2011 and $400 million of our 2005 Senior Notes that were due in September 2010. Our cash returned to shareholders in the form of dividends and the repurchase of common stock was $172 million higher compared to fiscal year 2010.

          Our net cash provided by financing activities was $764 million for the fiscal year ended April 30, 2010 compared to $845 million used in financing activities 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 $335 million higher in fiscal year 2010 as compared to fiscal year 2009.

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. See Note 4 for additional information regarding contingent consideration.

          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.

19


          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 29, 2011. See Notes 8 and 15 to the consolidated financial statements for additional information regarding long-term debt and lease obligations, respectively. Additionally, see Note 13 to the consolidated financial statements for additional information regarding accrued income tax obligations, which are not reflected in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity by Fiscal Year

 

 

(in millions)

 

Total

 

2012

 

2013

 

2014

 

2015

 

2016

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual obligations related to off-balance sheet arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases (1)

 

$

358

 

$

118

 

$

86

 

$

63

 

$

34

 

$

22

 

$

35

 

Inventory purchases (2)

 

 

314

 

 

227

 

 

62

 

 

12

 

 

10

 

 

 

 

3

 

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

 

 

282

 

 

37

 

 

116

 

 

8

 

 

83

 

 

13

 

 

25

 

Interest payments (4)

 

 

2,727

 

 

286

 

 

286

 

 

250

 

 

225

 

 

173

 

 

1,507

 

Other (5)

 

 

165

 

 

69

 

 

36

 

 

22

 

 

18

 

 

4

 

 

16

 

Total

 

$

3,846

 

$

737

 

$

586

 

$

355

 

$

370

 

$

212

 

$

1,586

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual obligations reflected in the balance sheet:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, including current portion (6)

 

$

8,096

 

$

32

 

$

2,214

 

$

550

 

$

1,250

 

$

1,100

 

$

2,950

 

Capital leases

 

 

34

 

 

2

 

 

2

 

 

2

 

 

2

 

 

2

 

 

24

 

Total

 

$

8,130

 

$

34

 

$

2,216

 

$

552

 

$

1,252

 

$

1,102

 

$

2,974

 


 

 

(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 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 sheets on a prospective basis, therefore, contingent acquisition considerations are not included in the off-balance sheet disclosure for acquisitions subsequent to April 24, 2009. During fiscal year 2011, the table above was adjusted to reflect the achievement and subsequent $81 million payment of a revenue milestone to the former shareholders of CoreValve, Inc. in accordance with the fiscal year 2009 acquisition agreement.

(4)

Interest payments in the table above reflect the interest on our outstanding debt, including $1.000 billion of 2011 Senior Notes, $3.000 billion of 2010 Senior Notes, $1.250 billion of 2009 Senior Notes, $2.200 billion of Senior Convertible Notes, $600 million 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 2.625 percent on $500 million of the 2011 Senior Notes due 2016, 4.125 percent on $500 million of 2011 Senior Notes due 2021, 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, 1.625 percent on the $2.200 billion Senior Convertible Notes due 2013, 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 on the Senior Convertible Notes.

(5)

These obligations include certain research and development arrangements.

(6)

Long-term debt in the table above includes the $1.000 billion of 2011 Senior Notes, $3.000 billion of 2010 Senior Notes, $1.250 billion of 2009 Senior Notes, $2.200 billion of Senior Convertible Notes, $600 million of 2005 Senior Notes, $15 million related to our Contingent Convertible Debentures, and certain bank borrowings. The table above excludes the debt discount, the fair value impact of outstanding interest rate swap agreements, and the remaining gains from terminated interest rate swap agreements. See Notes 8 and 9 to the consolidated financial statements for additional information regarding the interest rate swap agreements.

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.

          As part of our focus on returning value to our shareholders, shares are repurchased from time to time. During fiscal years 2011 and 2010, we repurchased approximately 30.1 million shares and 27.0 million shares at an average price of $37.86 and $38.10, respectively. As of April 29, 2011, we have approximately 20.7 million shares remaining under current buyback authorizations approved by the Board of Directors. In June 2011, our Board of Directors authorized the repurchase of an additional 75 million shares of our common stock.

20


          We periodically issue Senior Notes that are unsecured, senior obligations that rank equally with all other secured 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 29, 2011. We used the net proceeds from the sale of the Senior Notes primarily for working capital and general corporate uses.

          In March 2011, we issued two tranches of Senior Notes (collectively, the 2011 Senior Notes) with an aggregate face value of $1.000 billion. The first tranche consisted of $500 million of 2.625 percent Senior Notes due 2016. The second tranche consisted of $500 million of 4.125 percent Senior Notes due 2021. Interest on each series of 2011 Senior Notes is payable semi-annually, on March 15 and September 15 of each year, commencing September 15, 2011. We used the net proceeds from the sale of the 2011 Senior Notes for working capital and general corporate uses.

          In September 2010, we repaid the $400 million 4.375 percent 2005 Senior Notes due 2010.

          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 $2.200 billion 1.500 percent Senior Convertible Notes due 2011 were repaid in April 2011. The Senior Convertible Notes are unsecured, senior 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. As of April 29, 2011, pursuant to provisions in the indentures relating to the increase of the quarterly dividend to shareholders, the conversion rate for the Senior Convertible Notes is now 18.5175, which correspondingly changed the conversion price per share for the Senior Convertible Notes to $54.00.

          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 it would pay to the holders of the Senior Convertible Notes upon conversion. These call options will terminate upon the earlier of the maturity dates of the related Senior Convertible Notes or the first day all of the related Senior Convertible Notes are no longer outstanding due to conversion or otherwise. The call options, which cost an aggregate $1.075 billion ($699 million net of tax benefit), were recorded as a reduction of shareholders’ equity.

          In separate transactions, we sold warrants to issue shares of our common stock at an exercise price of $76.56 per share in private transactions. Pursuant to these transactions, warrants for 41 million shares of our common stock may be settled over a specified period beginning in July 2011 and warrants for 41 million shares of our common stock may be settled over a specified period beginning in July 2013 (the settlement dates). If the average price of our common stock during a defined period ending on or about the respective settlement dates exceeds the exercise price of the warrants, the warrants will be settled in shares of our common stock. Proceeds received from the issuance of the warrants totaled approximately $517 million and were recorded as an addition to shareholders’ equity. See Note 8 to the consolidated financial statements for further discussion of the accounting treatment. During the fourth quarter of fiscal year 2010, 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 shareholders of our common stock.

          As of April 29, 2011 and April 30, 2010, we had interest rate swap agreements designated as fair value hedges of underlying fixed-rate obligations, including the $1.250 billion 3.000 percent 2010 Senior Notes due 2015, the $600 million 4.750 percent 2005 Senior Notes due 2015, the $2.200 billion 1.625 percent Senior Convertible Notes due 2013, and the $550 million 4.500 percent 2009 Senior Notes due 2014. Additionally, as of April 29, 2011 we had interest rate swap agreements designated as fair value hedges of underlying fixed-rate obligations, including the $500 million 2.625 percent 2011 Senior Notes due 2016 and the $500 million 4.125 percent 2011 Senior Notes due 2021. For additional information regarding the interest rate swap agreements, refer to Note 9 to the consolidated financial statements.

          As of April 29, 2011, 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 our common stock reaches 110 percent of the conversion price for 20 trading days during a consecutive 30 trading day period. Upon conversion of the Debentures, we will pay holders cash equal to the lesser of the principal amount of the Debentures or their conversion value, and shares of our 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.

21


          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. As of April 29, 2011, outstanding commercial paper totaled $1.500 billion. There was no outstanding commercial paper as of April 30, 2010. During fiscal years 2011 and 2010, the weighted average original maturity of the commercial paper outstanding was approximately 73 and 63 days, respectively, and the weighted average interest rate was 0.25 percent and 0.21 percent, respectively. The issuance of commercial paper reduces the amount of credit available under our existing lines of credit.

          In connection with the issuance of the Debentures, 2011 Senior Notes, 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.

          We have committed and uncommitted lines of credit with various banks. The committed lines of credit include a new four-year $2.250 billion syndicated credit facility dated December 9, 2010 that will expire on December 9, 2014 (New Facility). This New Facility replaced our five-year $1.750 billion syndicated credit facility which was scheduled to expire in December 2011. The New Facility provides us with the ability to increase its capacity by an additional $500 million at any time during the life of the four-year term of the agreement. We can also request the extension of the New Facility maturity date for one additional year, at the first and second anniversary of the date of the New Facility. The New Facility provides backup funding for the commercial paper program and may also be used for general corporate purposes. As of April 29, 2011 and April 30, 2010, there were no outstanding borrowings on the committed lines of credit.

          We have bank borrowings primarily 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. Approximately $201 million of the $236 million outstanding bank borrowings as of April 29, 2011 were short-term advances to certain subsidiaries under credit agreements with various banks. These advances are guaranteed by the Company. 

          On November 2, 2007, we entered into a credit agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd. The credit agreement provided for a $300 million unsecured committed revolving credit facility which matured on November 2, 2010, with no outstanding balance as of that date.

          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 29, 2011.

Acquisitions

          On February 25, 2011, we acquired Jolife AB (Jolife), a privately-held company. Jolife develops, manufactures, and markets the LUCAS Chest Compression System together with complementary technologies. Total consideration for the transaction was approximately $53 million.

          On January 13, 2011, we acquired Ardian, a privately-held company. We had previously invested in Ardian and held an 11.3 percent ownership position prior to the acquisition. Ardian develops catheter-based therapies to treat uncontrolled hypertension and related conditions. Total consideration for the transaction was $1.020 billion which includes the estimated fair value of revenue-based contingent consideration of $212 million. The terms of the transaction included an up-front cash payment of $717 million, excluding our pro-rata share in Ardian, plus potential future commercial milestone payments equal to the annual revenue growth beginning in fiscal year 2012 through the end of our fiscal year 2015. We recorded a gain of $85 million on our previously held investment.

          On November 16, 2010, we acquired Osteotech. Osteotech develops innovative biologic products for regenerative medicine. Under the terms of the agreement announced August 17, 2010, we paid shareholders $6.50 per share in cash for each share of Osteotech common stock that they owned. Total consideration for the transaction was approximately $123 million.

          On September 14, 2010, we acquired a developer of vascular suturing products used in connection with cardiovascular and vascular procedures that require a puncture or incision to the artery. Total consideration for the transaction was valued at approximately $21 million.

          On August 12, 2010, we acquired 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, ATS Medical shareholders received $4.00 per share in cash for each share of ATS Medical common stock that they owned. Total consideration for the transaction was approximately $394 million which includes the assumption of existing ATS Medical debt and acquired contingent consideration.

          On June 2, 2010, we acquired substantially all of the assets of Axon Surgical (Axon), a privately-held company. Prior to the acquisition, we distributed a large portion of Axon’s products. We believe this acquisition will allow us to bring to market the next generation of surgeon-directed and professionally supported spinal neuromonitoring technology and expand the availability of this technology. Total consideration for the transaction, net of cash acquired, was $62 million, which includes the settlement of existing Axon debt.

22


          In April 2010, we acquired Invatec. Under the terms of the agreement, the transaction included an initial up-front payment of $350 million, which included the assumption and settlement of existing Invatec debt. The agreement also included 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.

          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 radio frequency ablation solutions for treatment of atrial fibrillation. Ablation Frontiers’ system of ablation catheters with a radio frequency 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.

          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 that they owned. Total consideration for the transaction, net of cash acquired, was approximately $29 million. Restore’s Pillar System provides 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 was not significant, individually or in the aggregate, to our results for the fiscal years ended April 29, 2011, April 30, 2010, or April 24, 2009. The results of operations related to each company acquired 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 2011, 2010, and 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years

 

(in millions)

 

2011

 

2010

 

2009

 

U.S. net sales

 

$

9,120

 

$

9,366

 

$

8,987

 

Non-U.S. net sales

 

 

6,813

 

 

6,451

 

 

5,612

 

Total net sales

 

$

15,933

 

$

15,817

 

$

14,599

 

 

 

 

 

 

 

 

 

 

 

 

23


          From fiscal year 2010 to fiscal year 2011, net sales in the U.S. decreased 3 percent and net sales outside the U.S. increased 6 percent. Foreign currency had a favorable impact of $12 million on net sales for fiscal year 2011. The prior year also had approximately $200 million of revenue benefit from the extra week in the first quarter of fiscal year 2010. Outside the U.S., net sales growth was led by strong double-digit growth in CardioVascular, Diabetes, and Surgical Technologies. CardioVascular net sales were led by increased sales of Resolute and Resolute Integrity, contributions from the acquisitions of Invatec and ATS Medical, CoreValve transcatheter valves, and Endovascular. Diabetes net sales increased as a result of strong Veo pump sales. Increased sales of the O-Arm Imaging System led to the Surgical Technologies growth. Additionally, outside the U.S. net sales in Japan were negatively impacted by approximately $15 million in the fourth quarter of fiscal year 2011 due to the earthquake and tsunami.

          From fiscal year 2009 to fiscal year 2010, consolidated net sales 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 businesses and was 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 Stimulation products, DBS and Urology and Gastroenterology led the increase within our Neuromodulation business. 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 BKP and from our joint venture with Weigao. Increased sales of the O-Arm Imaging System led to the growth within the Surgical Technologies business 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. We monitor the creditworthiness of our customers to which we grant credit terms in the normal course of business. However, a significant amount of our outstanding accounts receivables are with national health care systems in many countries. In light of the economic state of many foreign countries, we continue to monitor their creditworthiness. During fiscal year 2011, we established additional bad debt reserves in certain markets, including Greece. Although we do not foresee a significant credit risk associated with these receivables, repayment is dependent upon the financial stability of the economies of those countries. Outstanding receivables from customers outside the U.S. totaled $2.345 billion at April 29, 2011 or 60 percent, of total outstanding accounts receivable, and $1.855 billion at April 30, 2010, or 55 percent of total outstanding accounts receivable.

Market Risk

          Due to the global nature of our operations, we are exposed to currency exchange rate changes. In a period where the U.S. dollar is strengthening/weakening as compared to other currencies, our foreign currency revenues, net of foreign currency expenses, are translated into U.S. dollars at a lower/higher value than they would be in an otherwise constant currency exchange rate environment.

          We use operational and economic hedges, as well as currency exchange rate derivative instruments to manage the impact of currency exchange rate changes on earnings and cash flows. In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, we enter into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets, liabilities, and probable commitments. At inception of the contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. The primary currencies of the derivative instruments are the Euro and Japanese Yen. We do not enter currency exchange rate derivative instruments for speculative purposes.

          We had foreign exchange rate derivative contracts outstanding in notional amounts of $6.834 billion and $5.495 billion at April 29, 2011 and April 30, 2010, respectively. At April 29, 2011, these contracts were in an unrealized loss position of $283 million. A sensitivity analysis of changes in the fair value of all foreign exchange rate derivative contracts at April 29, 2011 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 approximately $579 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 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 29, 2011 indicates that the fair value of these instruments would correspondingly change by $32 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, mortgage-backed securities, other asset-backed securities, and auction rate securities. For a discussion of current market conditions and the impact on our financial condition and results from operations, please see the “Liquidity and Capital Resources” section of this management’s discussion and analysis.

24


Cautionary Factors That May Affect Future Results

          This Annual Report, and other written reports and oral statements made by or with the approval of one of the Company’s executive officers from time to time, 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, restructuring initiatives, intellectual property rights, litigation and tax matters, mergers and acquisitions, market acceptance of our products, accounting estimates, financing activities, ongoing contractual obligations, working capital adequacy, 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 words or expressions. Forward-looking statements in this Annual Report include, but are not limited to, development and future launches of products and continued or future acceptance of products in our operating segments; market positioning and performance of our products, including unanticipated issues that may affect FDA and foreign regulatory approval of new products; increased presence in new markets, as well as changes in the market and our market share; the completion of planned acquisitions, divestitures and strategic investments, as well as integration of acquired companies into our operations; the resolution of tax matters; the effectiveness of our development activities in reducing patient care costs; our expectations regarding health care costs; the elimination of certain positions or costs related to restructuring initiatives; outcomes in our litigation matters and government investigations; 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 and accounting guidance. One must carefully consider forward-looking statements and understand that such statements may be affected by inaccurate assumptions and may involve a variety of risks and uncertainties, known and unknown, including, among others, those discussed in the sections entitled “Government Regulation and Other Considerations” and “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, health care 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 all other 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.

25


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 as to whether 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 29, 2011. Our internal control over financial reporting as of April 29, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, who has also audited our consolidated financial statements.

/s/ Omar Ishrak
Omar Ishrak
Chairman and Chief Executive Officer

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

26


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 29, 2011 and April 30, 2010, and the results of their operations and their cash flows for each of the three fiscal years in the period ended April 29, 2011 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 29, 2011, 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 statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 8 to the consolidated financial statements, in fiscal 2010 the Company retrospectively changed the manner in which it accounts for certain convertible debt instruments. As discussed in Note 1 to the consolidated financial statements, in fiscal 2010 the Company changed the manner in which it accounts for business combinations.

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 28, 2011

27


Medtronic, Inc.
Consolidated Statements of Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

2009 

 

(in millions, except per share data)

 

 

 

 

 

 

 

Net sales

 

$

15,933

 

$

15,817

 

$

14,599

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

3,912

 

 

3,812

 

 

3,518

 

Research and development expense

 

 

1,508

 

 

1,460

 

 

1,355

 

Selling, general, and administrative expense

 

 

5,533

 

 

5,415

 

 

5,152

 

Special charges

 

 

 

 

 

 

100

 

Restructuring charges

 

 

261

 

 

50

 

 

120

 

Certain litigation charges, net

 

 

245

 

 

374

 

 

714

 

Acquisition-related items

 

 

14

 

 

23

 

 

621

 

Other expense, net

 

 

459

 

 

468

 

 

396

 

Interest expense, net

 

 

278

 

 

246

 

 

183

 

Total costs and expenses

 

 

12,210

 

 

11,848

 

 

12,159

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

 

3,723

 

 

3,969

 

 

2,440

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

627

 

 

870

 

 

370

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

3,096

 

$

3,099

 

$

2,070

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.87

 

$

2.80

 

$

1.85

 

Diluted

 

$

2.86

 

$

2.79

 

$

1.84

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

1,077.4

 

 

1,106.3

 

 

1,121.9

 

Diluted

 

 

1,081.7

 

 

1,109.4

 

 

1,126.3

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.90

 

$

0.82

 

$

0.75

 

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

28


Medtronic, Inc.
Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

April 29,
2011

 

April 30,
2010 

 

(in millions, except per share data)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,382

 

$

1,400

 

Short-term investments

 

 

1,046

 

 

2,375

 

Accounts receivable, less allowances of $97 and $67, respectively

 

 

3,822

 

 

3,335

 

Inventories

 

 

1,695

 

 

1,481

 

Deferred tax assets, net

 

 

605

 

 

544

 

Prepaid expenses and other current assets

 

 

567

 

 

704

 

 

 

 

 

 

 

 

 

Total current assets

 

 

9,117

 

 

9,839

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

 

2,511

 

 

2,421

 

Goodwill

 

 

9,537

 

 

8,391

 

Other intangible assets, net

 

 

2,777

 

 

2,559

 

Long-term investments

 

 

6,120

 

 

4,632

 

Other assets

 

 

362

 

 

248

 

 

 

 

 

 

 

 

 

Total assets

 

$

30,424

 

$

28,090

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term borrowings

 

$

1,723

 

$

2,575

 

Accounts payable

 

 

511

 

 

420

 

Accrued compensation

 

 

896

 

 

1,001

 

Accrued income taxes

 

 

50

 

 

235

 

Other accrued expenses

 

 

1,534

 

 

890

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

4,714

 

 

5,121

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

8,112

 

 

6,944

 

Long-term accrued compensation and retirement benefits

 

 

480

 

 

516

 

Long-term accrued income taxes

 

 

496

 

 

595

 

Long-term deferred tax liabilities, net

 

 

220

 

 

89

 

Other long-term liabilities

 

 

434

 

 

196

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

14,456

 

 

13,461

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Notes 4, 15 and 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

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

 

 

 

 

 

Common stock— par value $0.10; 1.6 billion shares authorized, 1,070,162,109 and 1,097,342,586 shares issued and outstanding, respectively

 

 

107

 

 

110

 

Retained earnings

 

 

16,085

 

 

14,826

 

Accumulated other comprehensive loss

 

 

(224

)

 

(307

)

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

 

15,968

 

 

14,629

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

30,424

 

$

28,090

 

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

29


Medtronic, Inc.
Consolidated Statements of Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common
Shares

 

Common
Stock

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total
Shareholders’
Equity

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Balance as of 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 

 

 

 

 

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)

 

 

 

 

(12)

 

Repurchase of common stock

 

 

(17)

 

 

(2)

 

 

(757)

 

 

— 

 

 

(759)

 

Tax benefit/(deficit) from exercise of stock-based awards

 

 

— 

 

 

— 

 

 

24 

 

 

— 

 

 

24 

 

Stock-based compensation

 

 

— 

 

 

— 

 

 

237 

 

 

— 

 

 

237 

 

Balance as of 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 earnings

 

 

— 

 

 

— 

 

 

 

 

(3)

 

 

— 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,997 

 

Dividends to shareholders

 

 

— 

 

 

— 

 

 

(907)

 

 

— 

 

 

(907)

 

Issuance of common stock under stock purchase and award plans

 

 

 

 

 

 

164 

 

 

— 

 

 

165 

 

Repurchase of common stock

 

 

(27)

 

 

(3)

 

 

(1,027)

 

 

— 

 

 

(1,030)

 

Tax benefit/(deficit) from exercise of stock-based awards

 

 

— 

 

 

— 

 

 

(3)

 

 

— 

 

 

(3)

 

Stock-based compensation

 

 

— 

 

 

— 

 

 

225 

 

 

— 

 

 

225 

 

Balance as of April 30, 2010

 

 

1,097 

 

$

110 

 

$

14,826 

 

$

(307)

 

$

14,629 

 

Net earnings

 

 

 

 

 

 

 

 

3,096 

 

 

 

 

 

3,096 

 

Other comprehensive (loss)/income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

226 

 

 

226 

 

Translation adjustment

 

 

 

 

 

 

 

 

 

 

 

200 

 

 

200 

 

Net change in retirement obligations

 

 

 

 

 

 

 

 

 

 

 

5 

 

 

5 

 

Unrealized loss on foreign currency exchange rate derivatives

 

 

 

 

(348)

 

 

(348)

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,179 

 

Dividends to shareholders

 

 

 

 

 

 

 

 

(969) 

 

 

 

 

 

(969) 

 

Issuance of common stock under stock purchase and award plans

 

 

3 

 

 

 

 

 

85 

 

 

 

 

 

85 

 

Repurchase of common stock

 

 

(30)

 

 

(3)

 

 

(1,137)

 

 

 

 

 

(1,140)

 

Tax benefit/(deficit) from exercise of stock-based awards

 

 

 

 

 

 

 

 

(14)

 

 

 

 

 

(14)

 

Stock-based compensation

 

 

 

 

 

 

198 

 

 

 

198 

Balance as of April 29, 2011

 

 

1,070 

$

107 

$

16,085 

$

(224) 

 

$

15,968 


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

30


Medtronic, Inc.
Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

2009 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

3,096 

 

$

3,099 

 

$

2,070 

 

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

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

804 

 

 

772 

 

 

699 

 

Amortization of discount on senior convertible notes

 

 

171 

 

 

167 

 

 

154 

 

Acquisition-related items

 

 

44 

 

 

11 

 

 

621 

 

Provision for doubtful accounts

 

 

47 

 

 

36 

 

 

23 

 

Deferred income taxes

 

 

153 

 

 

144 

 

 

(171)

 

Stock-based compensation

 

 

198 

 

 

225 

 

 

237 

 

Excess tax benefit from exercise of stock-based awards

 

 

— 

 

 

— 

 

 

(24)

 

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

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(342)

 

 

(271)

 

 

108 

 

Inventories

 

 

(101)

 

 

158 

 

 

(212)

 

Accounts payable and accrued liabilities

 

 

(37)

 

 

225 

 

 

510 

 

Other operating assets and liabilities

 

 

(532)

 

 

130 

 

 

(147)

 

Certain litigation charges, net

 

 

245 

 

 

374 

 

 

714 

 

Certain litigation payments

 

 

(5)

 

 

(939)

 

 

(704)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

3,741 

 

 

4,131 

 

 

3,878 

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(1,332)

 

 

(350)

 

 

(1,624)

 

Purchase of intellectual property

 

 

(47)

 

 

(62)

 

 

(165)

 

Additions to property, plant, and equipment

 

 

(501)

 

 

(573)

 

 

(498)

 

Purchases of marketable securities

 

 

(6,249)

 

 

(7,478)

 

 

(2,960)

 

Sales and maturities of marketable securities

 

 

6,443 

 

 

3,791 

 

 

2,845 

 

Other investing activities, net

 

 

(129)

 

 

(87)

 

 

(338)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(1,815)

 

 

(4,759)

 

 

(2,740)

 

 

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

 

 

Change in short-term borrowings, net

 

 

1,621 

 

 

(444)

 

 

(633)

 

Issuance of long-term debt

 

 

1,000 

 

 

3,000 

 

 

1,250 

 

Payments on long-term debt

 

 

(2,603)

 

 

(20)

 

 

(300)

 

Dividends to shareholders

 

 

(969)

 

 

(907)

 

 

(843)

 

Issuance of common stock

 

 

85 

 

 

165 

 

 

416 

 

Excess tax benefit from exercise of stock-based awards

 

 

— 

 

 

— 

 

 

24 

 

Repurchase of common stock

 

 

(1,140)

 

 

(1,030)

 

 

(759)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

(2,006)

 

 

764 

 

 

(845)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

62 

 

 

(7)

 

 

(82)

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(18)

 

 

129 

 

 

211 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

1,400 

 

 

1,271 

 

 

1,060 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

1,382 

 

$

1,400 

 

$

1,271 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

 

Income taxes

 

$

826 

 

$

571 

 

$

436 

 

Interest

 

 

447 

 

 

386 

 

 

208 

 

Supplemental noncash financing activities:

 

 

 

 

 

 

 

 

 

 

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

 

$

— 

 

$

— 

 

$

15 

 

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.

31


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 health care 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 2011 and 2009 ended on April 29, 2011 and April 24, 2009, respectively, both of which were 52-week years. Fiscal year 2010 ended on 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 29, 2011 and April 30, 2010 include corporate debt securities, U.S. and foreign government and agency securities, certificates of deposit, mortgage-backed securities, other asset-backed securities, and 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 29, 2011 and April 30, 2010 include exchange-traded funds. 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. Equity securities accounted for under both the cost and equity methods are reviewed quarterly for changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable. See Note 5 for discussion of the gains and losses recognized on equity and other securities.

          Accounts Receivable The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support its receivables. The Company maintains an allowance for doubtful accounts for potential credit losses. Uncollectible accounts are written off against the allowance when it is deemed that a customer account is uncollectible.

32


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 29,
2011

 

 

April 30,
2010

 

 

Finished goods

 

$

1,067

 

 

$

896

 

 

Work in process

 

 

263

 

 

 

269

 

 

Raw materials

 

 

365

 

 

 

316

 

 

Total

 

$

1,695

 

$

1,481

 

          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 29,
2011

 

 

 

April 30,
2010

 

 

Lives
(in years)

 

Land and land improvements

 

 

$

137

 

 

 

$

137

 

 

Up to 20

 

Buildings and leasehold improvements

 

 

 

1,489

 

 

 

 

1,427

 

 

Up to 40

 

Equipment

 

 

 

3,888

 

 

 

 

3,525

 

 

3-7

 

Construction in progress

 

 

 

303

 

 

 

 

269

 

 

 

Subtotal

 

 

 

5,817

 

 

 

 

5,358

 

 

 

 

Less: Accumulated depreciation

 

 

 

(3,306

)

 

 

 

(2,937

)

 

 

 

Property, plant, and equipment, net

 

 

$

2,511

 

 

 

$

2,421

 

 

 

 

          Depreciation expense of $464 million, $454 million, and $418 million was recognized in fiscal years 2011, 2010, and 2009, respectively.

          Goodwill Goodwill is the excess of purchase price of an acquired business 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 or whenever 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 exceed the estimated fair value of the reporting unit. The estimated fair value is determined using a discounted future cash flow analysis. The Company completed its annual goodwill impairment test in the third quarter of fiscal years 2011, 2010, and 2009 and determined that no goodwill was impaired.

          Intangible Assets Intangible assets include patents, trademarks, purchased technology, and in-process research and development (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 three to 20 years. Intangible assets are tested for impairment annually or 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 flow 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 fiscal year 2010, the Company adopted authoritative guidance related to business combinations. Under this guidance, IPR&D is capitalized. Prior to the adoption of this guidance, IPR&D was immediately expensed. The adoption of the authoritative guidance did not change the requirement to expense IPR&D immediately with respect to asset acquisitions. These IPR&D charges are included within acquisition-related items in the Company’s consolidated statements of earnings. IPR&D has an indefinite life and is not amortized until completion and development of the project at which time the IPR&D becomes an amortizable asset. If the related project is not completed in a timely manner, the Company may have an impairment related to the IPR&D, calculated as the excess of the asset’s carrying value over its fair value.

33


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 authoritative guidance related to business combinations. Under this 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 recorded 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 within acquisition-related items 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 cost of products sold in the Company’s consolidated statements of earnings. The Company includes the warranty obligation in other accrued expenses and other long-term liabilities on the Company’s consolidated balance sheets.

          Changes in the Company’s product warranty obligations during the years ended April 29, 2011 and April 30, 2010 consisted of the following:

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Balance as of April 24, 2009

 

$

35

 

 

Warranty claims provision

 

 

50

 

 

Settlements made

 

 

(40

)

 

Balance as of April 30, 2010

 

$

45

 

 

Warranty claims provision

 

 

28

 

 

Settlements made

 

 

(29

)

 

Balance as of April 29, 2011

 

$

44

 

 

          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.

34


Medtronic, Inc.
Notes to Consolidated Financial Statements

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

          The Company evaluates the discount rate, retirement age, compensation rate increases, expected return on plan assets, and health care 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. Refer to Note 14 for additional information regarding the Company’s retirement benefit plans.

          Revenue Recognition The Company sells its products primarily through a direct sales force in the U.S. and a combination of direct sales representatives and independent distributors in international markets. The Company recognizes revenue when title to the goods and risk of loss transfers to customers, provided there are no material remaining performance obligations required of the Company or any matters requiring customer acceptance. In cases where the Company utilizes distributors or ships product directly to the end user, it recognizes revenue upon shipment provided all revenue recognition criteria have been met. A portion of the Company’s revenue is generated from inventory maintained at hospitals or with field representatives. For these products, revenue is recognized at the time the product has been used or implanted. For multiple-element arrangements, the Company allocates 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, impairment charges on equity securities, and the Puerto Rico excise tax.

          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 12 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, 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 2011, 2010, and 2009 was $3.179 billion, $2.997 billion, and $2.153 billion, respectively.

35


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 2011, 2010, and 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

Balance as of 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 as of 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 earnings

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

(3

)

Balance as of April 30, 2010

 

$

(30

)

 

$

243

 

 

$

(612

)

 

$

91

 

 

$

(307

)

Other comprehensive (loss)/income

 

 

226

 

 

 

200

 

 

 

5

 

 

 

(348

)

 

 

83

Balance as of April 29, 2011

 

$

196

 

 

$

443

 

 

$

(607

)

 

$

(257

)

 

$

(224

)

          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 2011, 2010, and 2009 was $(183) million, $(75) million, and $320 million, respectively. The tax expense/(benefit) related to the net change in retirement obligations was $3 million, $(112) million, and $(109) million in fiscal years 2011, 2010, and 2009, respectively. The Company adopted 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 loss in that period. The tax expense on the adjustment to other comprehensive loss 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 2011, 2010, and 2009 was $130 million, $35 million, and $(33) million, respectively. During fiscal year 2011, the Company received shares in the form of a dividend related to a previous cost method investment, and in accordance with authoritative guidance, the Company recorded these shares as an investment and correspondingly recorded an unrealized gain.

          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, 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 operational and economic hedges, as well as currency exchange rate derivative instruments, to manage the impact of currency exchange rate changes on earnings and cash flows. In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, the Company enters into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets, liabilities, and probable commitments. At inception of the contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. The primary currencies of the derivative instruments are the Euro and the Japanese Yen. The Company does not enter into currency exchange rate derivative instruments for speculative purposes. All derivative instruments are recorded at fair value on the consolidated balance sheets, as a component of prepaid expenses and other current assets, other assets, other accrued expenses, or other long-term liabilities depending upon the gain or loss position of the contract and contract maturity date.

36


Medtronic, Inc.
Notes to Consolidated Financial Statements

          Forward currency exchange rate 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, depending on the underlying transaction that is being hedged.

          The Company uses forward currency exchange rate contracts to offset its exposure to the change in value of specific foreign currency denominated 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 change in U.S. dollar value of 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 manage 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 interest expense, net, and are offset by changes in the fair value on the underlying debt instrument. Interest expense, net includes interest payments made or received under interest rate derivative instruments.

          In addition, the Company has collateral credit agreements with its primary derivative 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 with 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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

(in millions, except per share data)

 

2011

 

 

2010

 

 

2009

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

3,096

 

 

$

3,099

 

 

$

2,070

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic – weighted average shares outstanding

 

 

1,077.4

 

 

 

1,106.3

 

 

 

1,121.9

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options

 

 

0.6

 

 

 

0.9

 

 

 

2.4

 

 

Employee restricted stock units

 

 

3.4

 

 

 

1.9

 

 

 

1.2

 

 

Other

 

 

0.3

 

 

 

0.3

 

 

 

0.8

 

 

Diluted – weighted average shares outstanding

 

 

1,081.7

 

 

1,109.4

 

 

1,126.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

2.87

 

$

2.80

 

$

1.85

 

Diluted earnings per share

 

$

2.86

 

$

2.79

 

$

1.84

 

          The calculation of weighted average diluted shares outstanding excludes options for approximately 59 million, 65 million, and 62 million shares of common stock in fiscal years 2011, 2010, and 2009, 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. For the fiscal years 2011, 2010, and 2009, common share equivalents related to the Company’s $2.200 billion of Senior Convertible Notes were anti-dilutive as the market price of the Company’s stock was below the conversion price of the Senior Convertible Notes and, therefore, were excluded from the calculation of weighted average diluted shares.

          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 the first quarter of fiscal year 2012. The Company is electing to adopt the provisions prospectively to new or materially modified arrangements beginning on the effective date. The Company has evaluated the adoption of this guidance and it is not expected to have a material impact on the Company’s consolidated financial statements.

37


Medtronic, Inc.
Notes to 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. As this guidance only requires additional disclosures, the adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements. Refer to Note 6 for additional information on Levels 1, 2, and 3.

          In December 2010, the FASB updated the accounting guidance relating to the annual goodwill impairment test. The updated guidance requires companies to perform the second step of the impairment test to measure the amount of impairment loss, if any, when it is more likely than not that goodwill impairment exists when the carrying amount of a reporting unit is zero or negative. In considering whether it is more likely than not that goodwill impairment exists, an entity shall evaluate whether there are adverse qualitative factors. The updated guidance is effective for the Company beginning in the first quarter of fiscal year 2012. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

          In May 2011, the FASB updated the accounting guidance related to fair value measurements. The updated guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (IFRS). The updated guidance is effective for the Company beginning in the third quarter of fiscal year 2012. The Company is currently evaluating the impact of adoption of this accounting guidance on its consolidated financial statements.

          In June 2011, the FASB updated the disclosure requirements for comprehensive income. The updated guidance requires companies to disclose the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance does not affect how earnings per share is calculated or presented. The updated guidance is effective for the Company beginning in the fourth quarter of fiscal year 2012. The Company is currently evaluating the impact of adoption of this accounting guidance on its consolidated financial statements.

2. Special Charges and Certain Litigation Charges, Net

Special Charges

          In fiscal years 2011 and 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.

Certain Litigation Charges, Net

          The Company classifies material litigation reserves and gains recognized as certain litigation charges, net. In fiscal year 2011, the Company recorded certain litigation charges, net of $245 million related primarily to a $221 million settlement involving the Sprint Fidelis family of defibrillation leads and accounting charges for Other Matters litigation. The Sprint Fidelis settlement related to the resolution of certain outstanding product liability litigation related to the Sprint Fidelis family of defibrillation leads that were subject to a field action announced October 15, 2007. Refer to Note 16 for additional information.

38


Medtronic, Inc.
Notes to Consolidated Financial Statements

          In fiscal year 2010, the Company recorded certain litigation charges, net of $374 million related to settlements with Abbott Laboratories (Abbott) and W.L. Gore & Associates, Inc. (Gore). The Abbott settlement accounted for $444 million in litigation charges and the Gore settlement accounted for a $70 million litigation gain. The Abbott settlement related to the resolution of all outstanding intellectual property litigation. The terms of the Abbott agreement stipulate that neither party will sue the 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 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 the 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 began paying the Company quarterly payments in January 2010, that will continue 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 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 recorded 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 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 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.

          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 seven years. The settlement amount of $125 million was paid in fiscal year 2009.

39


Medtronic, Inc.
Notes to Consolidated Financial Statements

3. Restructuring Charges

Fiscal Year 2011 Initiative

          In the fourth quarter of fiscal year 2011, the Company recorded a $272 million restructuring charge, which consisted of employee termination costs of $177 million, asset write-downs of $24 million, contract termination fees of $45 million, and other related costs of $26 million. The fiscal year 2011 initiative was designed to restructure the business to align its cost structure to current market conditions and to continue to position the Company for long-term sustainable growth. To reshape for growth, the Company scaled back its infrastructure in slower growing areas while continuing to invest in geographies, businesses, and products where faster growth is anticipated, such as emerging markets and new technologies. This initiative impacted most businesses and certain corporate functions. Included in the $177 million of employee termination costs were severance and the associated costs of continued medical benefits and outplacement services, as well as $15 million of incremental defined benefit pension and post-retirement related expenses for employees that accepted voluntary early retirement packages. These costs are not included in the table summarizing the 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 14. Of the $24 million of asset write-downs, $11 million related to inventory write-offs of discontinued product lines and production-related asset impairments and therefore was recorded within cost of products sold in the consolidated statement of earnings. Additionally, included in the other related costs is a $19 million intangible asset impairment related to the discontinuance of a product line within the CardioVascular business.

          In connection with the fiscal year 2011 initiative, as of the end of the fourth quarter of fiscal year 2011, the Company had identified approximately 2,100 positions for elimination to be achieved through voluntary early retirement packages offered to employees, voluntary separation, and involuntary separation. Of the 2,100 positions identified, approximately 120 positions have been eliminated as of April 29, 2011. The fiscal year 2011 initiative is scheduled to be substantially complete by the end of the fourth quarter of fiscal year 2012.

          A summary of the activity related to the fiscal year 2011 initiative is presented below:

   Fiscal Year 2011 Initiative
(in millions)  Employee
Termination
Costs
  Asset
Write-downs
  Other
Costs
  Total
Balance as of April 30, 2010  $      $   $ 
Restructuring charges   162    24    71    257 
Payments/write—downs   (5)   (24)   (24)   (53)
Balance as of April 29, 2011  $157      $47   $204 

Fiscal Year 2009 Initiative

          In the fourth quarter of fiscal year 2009, the Company recorded a $34 million restructuring charge, which consisted of employee termination costs of $29 million and asset write-downs of $5 million. The fiscal year 2009 initiative focused on streamlining the organization and standardizing or centralizing certain functional activities which were not unique to individual businesses. 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 asset 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. Included in the $62 million of employee termination costs 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 14. 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.

40


Medtronic, Inc.
Notes to Consolidated Financial Statements

          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 which were achieved through early retirement packages offered to employees, voluntary separation, and involuntary separation. As of July 30, 2010, the fiscal year 2009 initiative was substantially complete.

          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 as of April 25, 2008

 

$

 

 

$

 

 

$

 

 

Restructuring charges

 

 

29

 

 

 

5

 

 

 

34

 

 

Payments/write-downs

 

 

(1

)

 

 

(5

)

 

(6

)

Balance as of April 24, 2009

 

$

28

 

 

$

 

 

$

28

 

 

Restructuring charges

 

 

53

 

 

 

10

 

 

 

63

 

 

Reversal of excess accrual

 

 

(12

)

 

 

 

 

 

(12

)

 

Payments

 

 

(64

)

 

(10

)

 

(74

)

Balance as of April 30, 2010

 

$

5

 

 

$

 

 

$

5

 

 

Payments/write-downs

 

 

(5

)

 

 

 

(5

)

Balance as of July 30, 2010

 

$

 

$

 

$

 

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 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 Cardiac Rhythm Disease Management business, the Company reduced research and development infrastructure by closing a facility outside the U.S., reprioritizing research and development projects to focus on the core business and consolidating manufacturing operations to drive operating leverage. Within the Company’s Spinal business, the Company reorganized and consolidated certain activities where Medtronic’s existing infrastructure, resources, and systems could be leveraged to obtain greater operational synergies. The global realignment initiative was also designed to further consolidate manufacturing of CardioVascular products, streamline distribution of products in select businesses and to reduce general and administrative costs in the Company’s corporate functions.

          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 impacted 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.

41


Medtronic, Inc.
Notes to Consolidated Financial Statements

          In connection with the global realignment initiative, as of the end of the first quarter of fiscal year 2009, the Company had 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.

          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 as of 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 as of 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 as of October 30, 2009  $       

4. Acquisitions and Acquisition-Related Items

The Company had various acquisitions and other acquisition-related activity during fiscal years 2011, 2010, and 2009. Certain acquisitions were accounted for as business combinations as noted below. In accordance with authoritative guidance on business combination accounting, the assets and liabilities of the company acquired were recorded as of the acquisition date, at their respective fair values, and consolidated with the Company. The purchase price allocation is based on estimates of the fair value of assets acquired and liabilities assumed. The pro forma impact of these acquisitions was not significant, individually or in the aggregate, to the results of the Company for the fiscal years ended April 29, 2011, April 30, 2010, or April 24, 2009. The results of operations related to each company acquired have been included in the Company’s consolidated statements of earnings since the date each company was acquired.

Fiscal Year 2011

Jolife AB

          On February 25, 2011, the Company acquired Jolife AB (Jolife), a privately-held company. Jolife develops, manufactures, and markets the LUCAS Chest Compression System together with complementary technologies. Prior to the acquisition, the Company distributed a large portion of Jolife’s product. Total consideration for the transaction was approximately $53 million. In connection with the acquisition of Jolife, the Company acquired $46 million of technology-based intangible assets that had an estimated useful life of 10 years at the time of acquisition, $11 million of net tangible liabilities, and $18 million of goodwill. The goodwill is not deductible for tax purposes. The Company has accounted for the acquisition of Jolife as a business combination.

Ardian, Inc.

          On January 13, 2011, the Company acquired Ardian, Inc. (Ardian), a privately-held company. The Company had previously invested in Ardian and held an 11.3 percent ownership position prior to the acquisition. Ardian develops catheter-based therapies to treat uncontrolled hypertension and related conditions. Total consideration for the transaction was $1.020 billion, which includes the estimated fair value of revenue-based contingent consideration of $212 million. The terms of the transaction included an up-front cash payment of $717 million, excluding the Company’s pro-rata share in Ardian, plus potential future commercial milestone payments equal to the annual revenue growth beginning in fiscal year 2012 through the end of the Company’s fiscal year 2015. Based upon the acquisition valuation, the Company acquired $55 million of technology-based intangible assets that had an estimated useful life of 12 years at the time of acquisition, $191 million of IPR&D, $33 million of net liabilities, and $807 million of goodwill. 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 Ardian’s Simplicity Catheter System into the U.S. and Japan markets. Development costs needed to complete the project, estimated to be approximately $50 million, will be expensed as incurred. The goodwill is not deductible for tax purposes.

42


Medtronic, Inc.
Notes to Consolidated Financial Statements

          The Company has accounted for the acquisition of Ardian as a business combination. The purchase price has been allocated as follows:

 

 

 

 

 

(in millions)

 

 

 

 

Current assets

 

$

12

 

Property, plant, and equipment

 

 

1

 

IPR&D

 

 

191

 

Other intangible assets

 

 

55

 

Goodwill

 

 

807

 

Total assets acquired

 

 

1,066

 

 

 

 

 

 

Current liabilities

 

 

10

 

Long-term deferred tax liabilities, net

 

 

36

 

Total liabilities assumed

 

 

46

 

Net assets acquired

 

$

1,020

 

Osteotech, Inc.

          On November 16, 2010, the Company acquired Osteotech, Inc. (Osteotech). Osteotech develops innovative biologic products for regenerative medicine. Under the terms of the agreement, Osteotech shareholders received $6.50 per share in cash for each share of Osteotech common stock that they owned. Total consideration for the transaction was $123 million. Based upon the acquisition valuation, the Company acquired $46 million of technology-based intangible assets that had an estimated useful life of nine years at the time of acquisition, $1 million of IPR&D, $57 million of net tangible assets, and $19 million of goodwill. The value attributable to IPR&D has been capitalized as an indefinite-lived intangible asset. The goodwill is not deductible for tax purposes.

          The Company has accounted for the acquisition of Osteotech as a business combination. The purchase price has been allocated as follows:

 

 

 

 

 

(in millions)

 

 

 

 

Current assets

 

$

34

 

Property, plant, and equipment

 

 

21

 

IPR&D

 

 

1

 

Other intangible assets

 

 

46

 

Goodwill

 

 

19

 

Inventory

 

 

41

 

Other long-term assets

 

 

3

 

Total assets acquired

 

 

165

 

 

 

 

 

 

Current liabilities

 

 

19

 

Other long-term liabilities

 

 

15

 

Long-term deferred tax liabilities, net

 

 

8

 

Total liabilities assumed

 

 

42

 

Net assets acquired

 

$

123

 

43


Medtronic, Inc.
Notes to Consolidated Financial Statements

ATS Medical, Inc.

          On August 12, 2010, the Company acquired 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, ATS Medical shareholders received $4.00 per share in cash for each share of ATS Medical common stock that they owned. Total consideration for the transaction was $394 million, which includes $30 million of ATS Medical debt and acquired contingent consideration of $10 million. In connection with the acquisition, the Company acquired $101 million of technology-based intangible assets that had an estimated useful life of 11 years at the time of acquisition, $6 million of IPR&D, $78 million of net tangible assets, and $209 million of goodwill. The value attributable to IPR&D has been capitalized as an indefinite-lived intangible asset. The goodwill is not deductible for tax purposes.

          The Company has accounted for the acquisition of ATS Medical as a business combination. The purchase price has been allocated as follows:

 

 

 

 

 

(in millions)

 

 

 

 

Current assets

 

$

51

 

Property, plant, and equipment

 

 

7

 

IPR&D

 

 

6

 

Other intangible assets

 

 

101

 

Goodwill

 

 

209

 

Long-term deferred tax assets, net

 

 

34

 

Total assets acquired

 

 

408

 

 

 

 

 

 

Current liabilities

 

 

14

 

Total liabilities assumed

 

 

14

 

Net assets acquired

 

$

394

 

Axon Surgical

          On June 2, 2010, the Company acquired substantially all of the assets of Axon Surgical (Axon), a privately-held company. Prior to the acquisition, the Company distributed a large portion of Axon’s products. The agreement will allow the Company to bring to market the next generation of surgeon-directed and professionally supported spinal neuromonitoring technology and expand the availability of this technology. Total consideration for the transaction, net of cash acquired, was $62 million, which includes the settlement of existing Axon debt. In connection with the acquisition of Axon, the Company acquired $41 million of technology-based intangible assets that had an estimated useful life of 10 years at the time of acquisition, $5 million of tangible assets, and $16 million of goodwill. The goodwill is deductible for tax purposes. The Company has accounted for the acquisition of Axon as a business combination.

Other Acquisitions and Acquisition-Related Items

          On September 14, 2010, the Company acquired a developer of vascular suturing products used in connection with cardiovascular and vascular procedures that require a puncture or incision to the artery. The terms of the transaction included an up-front payment of $15 million and additional payments of up to $10 million contingent upon achievement of certain milestones. Total consideration for the transaction was valued at approximately $21 million, which includes the estimated fair value of additional milestone-based contingent consideration of $6 million. The Company has accounted for this acquisition as a business combination.

          During fiscal year 2011, the Company incurred a $15 million IPR&D charge related to two asset purchases in the CardioVascular and Surgical Technologies businesses. The Company also incurred a $15 million IPR&D charge related to a milestone payment under the existing terms of a royalty-bearing, non-exclusive patent cross-licensing agreement with NeuroPace, Inc. Product commercialization related to this technology had not yet been achieved. As a result, in accordance with authoritative guidance, the payments for these transactions were immediately expensed as IPR&D since technological feasibility had not yet been reached and such technology has no future alternative use. These amounts are included within acquisition-related items in the consolidated statement of earnings.

          In connection with the Ardian acquisition, the Company recognized a gain of $85 million on its previously held investment and incurred approximately $10 million of certain acquisition-related costs, which include banker fees and other professional service fees, which were recorded within acquisition-related items in the consolidated statement of earnings.

44


Medtronic, Inc.
Notes to Consolidated Financial Statements

          In connection with acquisitions of ATS Medical and Osteotech, 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 $24 million and $21 million, respectively, of certain acquisition-related costs, which include legal fees and severance costs, change in control costs, and contract termination costs, which were recorded within acquisition-related items in the consolidated statement of earnings.

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 additional 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, as of the acquisition date, the 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.

          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 $114 million and $161 million of 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.

          The Company has accounted for the acquisition of Invatec as a business combination. The purchase price has been allocated as follows:

 

 

 

 

 

(in millions)

 

 

 

 

Current assets

 

$

77

 

Property, plant, and equipment

 

 

32

 

IPR&D

 

 

114

 

Other intangible assets

 

 

228

 

Goodwill

 

 

161

 

Other assets

 

 

1

 

Total assets acquired

 

 

613

 

 

 

 

 

 

Current liabilities

 

 

46

 

Long-term deferred tax liabilities, net

 

 

99

 

Total liabilities assumed

 

 

145

 

Net assets acquired

 

$

468

 

Other Acquisitions and Acquisition-Related Items

          In connection with the acquisition of Invatec, 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 costs in fiscal year 2010. 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. These amounts were recorded within acquisition-related items in the consolidated statement of earnings.

45


Medtronic, Inc.
Notes to Consolidated Financial Statements

          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 CoreValve Inc. (CoreValve), a privately-held company. 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.

          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 recorded $123 million and $424 million of 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 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.

          The Company has accounted for the acquisition of CoreValve as a business combination. 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, 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 Ablation Frontiers, Inc. (Ablation Frontiers), a privately-held company. 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 radio frequency (RF) ablation solutions for treatment of atrial fibrillation. Ablation Frontiers’ system of ablation catheters with a RF generator is currently approved in certain markets outside the U.S.

46


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 recorded $97 million and $107 million of 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.

          The Company has accounted for the acquisition of Ablation Frontiers as a business combination. 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

 

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. In addition, the Arctic Front system was approved in the U.S. in the third quarter of fiscal year 2011.

          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 recorded $72 million and $184 million of 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.

          The Company has accounted for the acquisition of CryoCath as a business combination. 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

 

47


Medtronic, Inc.
Notes to Consolidated Financial Statements

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 that 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.

Other Acquisitions and Acquisition-Related Items

          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. These amounts were recorded within acquisition-related items in the consolidated statement of earnings.

          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. These amounts were recorded within acquisition-related items in the consolidated statements of earnings.

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. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels, achieving product development targets, or obtaining regulatory approvals. As a result of the Company adopting new authoritative guidance in fiscal year 2010 related to business combinations, contingent consideration is recorded at the acquisition date estimated fair value of the contingent milestone payments for all acquisitions subsequent to April 24, 2009. 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 within acquisition-related items in the consolidated statements of earnings. The Company measures the initial liability and remeasures the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements. See Note 6 for further information regarding fair value measurements.

          During the third quarter of fiscal year 2011, the Company decreased the undiscounted future contingent consideration by $81 million to reflect the achievement and subsequent payment of a revenue milestone to the former shareholders of CoreValve in accordance with the fiscal year 2009 acquisition agreement. At April 29, 2011, the estimated maximum potential amount of undiscounted future contingent consideration that the Company is expected to make associated with all completed business combinations or purchases of intellectual property prior to April 24, 2009 was approximately $240 million. The milestones associated with the contingent consideration must be reached in future periods ranging from fiscal years 2012 to 2016 in order for the consideration to be paid.

48


Medtronic, Inc.
Notes to Consolidated Financial Statements

          The fair value of contingent milestone payments associated with acquisitions subsequent to April 24, 2009 was remeasured as of April 29, 2011 and April 30, 2010 at $335 million and $118 million, respectively. As of April 29, 2011, $269 million was reflected in other long-term liabilities and $66 million was reflected in other accrued expenses in the consolidated balance sheet. As of April 30, 2010, $118 million was reflected in other long-term liabilities. The following table provides a reconciliation of the beginning and ending balances of contingent milestone payments associated with acquisitions subsequent to April 24, 2009 measured at fair value that used significant unobservable inputs (Level 3):

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

(in millions)

 

2011

 

2010

Beginning Balance

 

$

118

 

 

$

 

Purchase price contingent consideration

 

 

203

 

 

 

118

 

Change in fair value of contingent consideration

 

 

14

 

 

Ending Balance

 

$

335

$

118

 

5. Investments

          The Company invests in short-term and long-term investments, which consist primarily of marketable debt and equity securities. 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 29, 2011 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

1,947

 

 

$

20

 

 

$

(6

)

 

$

1,961

 

Auction rate securities

 

 

167

 

 

 

 

 

 

(34

)

 

 

133

 

Mortgage-backed securities

 

 

783

 

 

 

10

 

 

 

(8

)

 

 

785

 

U.S. government and agency securities

 

 

2,731

 

 

 

26

 

 

 

(1

)

 

 

2,756

 

Foreign government and agency securities

 

 

130

 

 

 

1

 

 

 

 

 

 

131

 

Certificates of deposit

 

 

119

 

 

 

 

 

 

 

 

 

119

 

Other asset-backed securities

 

 

351

 

 

 

1

 

 

 

(3

)

 

 

349

 

Marketable equity securities

 

 

186

 

 

 

55

 

 

 

(4

)

 

 

237

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange-traded funds

 

 

33

 

 

 

6

 

 

 

 

 

 

39

 

Cost method, equity method, and other investments

 

 

656

 

 

 

 

 

 

 

 

 

656

 

Total short-term and long-term investments

 

$

7,103

 

 

$

119

 

 

$

(56

)

 

$

7,166

 

          Information regarding the Company’s short-term and long-term investments at April 30, 2010 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

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

 

49


Medtronic, Inc.
Notes to Consolidated Financial Statements

          Information regarding the Company’s available-for-sale and trading securities at April 29, 2011 and April 30, 2010 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 29, 2011

 

April 30, 2010

(in millions)

 

Short-term

 

Long-term

 

Short-term

 

Long-term

Available-for-sale securities

 

$

1,046

 

 

$

5,425

 

 

$

2,375

 

 

$

4,060

 

Trading securities

 

 

 

 

 

39

 

 

 

 

 

 

30

 

Total

 

$

1,046

 

 

$

5,464

 

 

$

2,375

 

 

$

4,090

 

          The following tables show 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 29, 2011 and April 30, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 29, 2011

 

 

Less than 12 months

 

More than 12 months

(in millions)

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

Corporate debt securities

 

$

256

 

 

$

(1

)

 

$

16

 

 

$

(5

)

Auction rate securities

 

 

 

 

 

 

 

 

133

 

 

 

(34

)

Mortgage-backed securities

 

 

161

 

 

 

(1

)

 

 

67

 

 

 

(7

)

U.S. government and agency securities

 

 

267

 

 

 

(1

)

 

 

 

 

 

 

Other asset-backed securities

 

 

74

 

 

 

(1

)

 

 

12

 

 

 

(2

)

Marketable equity securities

 

 

92

 

 

 

(4

)

 

 

 

 

 

 

Total

 

$

850

 

 

$

(8

)

 

$

228

 

 

$

(48

)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1,935

 

 

$

(5

)

 

$

292

 

 

$

(78

)

          At April 29, 2011, the Company concluded that the unrealized losses associated with the available-for-sale securities detailed above 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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

2011

 

2010

 

2009

(in millions)

 

Debt (a)

 

Equity (b) (c)

 

Debt (a)

 

Equity (b)

 

Debt (a)

 

Equity (b)

Proceeds from sales

 

$

6,443

 

 

$

31

 

 

$

3,791

 

 

$

27

 

 

$

2,845

 

 

$

 

Gross realized gains

 

$

28

 

 

$

85

 

 

$

44

 

 

$

10

 

 

$

35

 

 

$

 

Gross realized losses

 

$

(15

)

 

$

 

 

$

(6

)

 

$

 

 

$

(8

)

 

$

 

Impairment losses recognized

 

$

(5

)

 

$

(24

)

 

$

(14

)

 

$

(40

)

 

$

(38

)

 

$

(4

)

(a) Includes available-for-sale debt securities.
(b) Includes marketable equity securities, cost method, equity method, exchange-traded funds, and other investments.
(c) As a result of the Ardian acquisition that occurred during fiscal year 2011, the Company recognized an $85 million non-cash gain on its previously held minority investment.

50


Medtronic, Inc.
Notes to Consolidated Financial Statements

          The total other-than-temporary impairment losses on available-for-sale debt securities for the fiscal years ended April 29, 2011 and April 30, 2010 were $18 million and $29 million, respectively, of which $13 million and $15 million, respectively, were recognized in accumulated other comprehensive loss resulting in $5 million and $14 million, respectively, of charges being recognized in earnings. These charges relate to credit losses on certain mortgage-backed 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. Based on the Company’s assessment of the credit quality of the underlying collateral and credit support available to each of the remaining securities in which invested, the Company believes it has recorded all necessary other-than-temporary impairments as the Company does not have the intent to sell, nor is it more likely than not that the Company will be required to sell before recovery of the amortized cost.

          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 as of 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 as of April 30, 2010

 

 

17

 

Credit losses recognized on securities previously not impaired

 

 

2

 

Additional credit losses recognized on securities previously impaired

 

 

3

 

Reductions for securities sold during the period

 

 

(2

)

Balance as of April 29, 2011

 

$

20

 

          The April 29, 2011 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 29, 2011

Due in one year or less

 

$

1,252

 

Due after one year through five years

 

 

4,507

 

Due after five years through ten years

 

 

325

 

Due after ten years

 

 

150

 

Total debt securities

 

$

6,234

 

          As of April 29, 2011 and April 30, 2010, the aggregate carrying amount of equity and other securities without a quoted market price and accounted for using the cost or equity method was $656 million and $542 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 adjusted if there are no identified events or changes in circumstances that may have a material adverse effect on the fair value of the investment. During fiscal year 2011, in accordance with authoritative guidance, the Company transferred investments accounted for as cost method investments with a cost basis of $163 million to available-for-sale marketable equity securities, due to restrictions on a public company investment being within one year from expiration as well as the initial public offering of two other companies in which the Company holds investments. The April 29, 2011 cost method, equity method, and other investments balance includes $316 million of investments in a public company with trading restrictions through December 31, 2013. These investments will be reclassified to available-for-sale marketable equity securities within one year of the restriction lapsing.

          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 and marketable equity 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 consolidated statements of earnings. Gains and losses from the sale of investments are calculated based on the specific identification method.

51


Medtronic, Inc.
Notes to Consolidated Financial Statements

6. 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:

 

 

 

 

 

 

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

 

 

 

 

 

 

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.

 

 

 

 

 

 

Level 3 – Inputs are unobservable 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, and interest rate swaps. These items are marked-to-market at each reporting period. The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and liabilities.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements
Using Inputs Considered as

(in millions)

 

Fair Value at
April 29, 2011

 

Level 1

 

Level 2

 

Level 3

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

1,961

 

 

$

 

 

$

1,944

 

 

$

17

 

Auction rate securities

 

 

133

 

 

 

 

 

 

 

 

 

133

 

Mortgage-backed securities

 

 

785

 

 

 

 

 

 

750

 

 

 

35

 

U.S. government and agency securities

 

 

2,756

 

 

 

1,453

 

 

 

1,303

 

 

 

 

Foreign government and agency securities

 

 

131

 

 

 

 

 

 

131

 

 

 

 

Certificates of deposit

 

 

119

 

 

 

 

 

 

119

 

 

 

 

Other asset-backed securities

 

 

349

 

 

 

 

 

 

343

 

 

 

6

 

Marketable equity securities

 

 

237

 

 

 

237

 

 

 

 

 

 

 

Exchange-traded funds

 

 

39

 

 

 

39

 

 

 

 

 

 

 

Derivative assets

 

 

130

 

 

 

21

 

 

 

109

 

 

 

 

Total assets

 

$

6,640

 

 

$

1,750

 

 

$

4,699

 

 

$

191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

$

303

 

 

$

303

 

 

$

 

 

$

 

Total liabilities

$

303

 

 

$

303

 

 

$

 

 

$

 


52


Medtronic, Inc.
Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements
Using Inputs Considered as

(in millions)

 

Fair Value at
April 30, 2010

 

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

 

 

 

 

 

 

 

Exchange-traded funds

 

 

30

 

 

 

30

 

 

 

 

 

 

 

Derivative assets

 

296

 

 

 

265

 

 

 

31

 

 

 

 

Total assets

 

$

6,761

 

 

$

1,078

 

 

$

5,470

 

 

$

213

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

$

47

 

 

$

47

 

 

$

 

 

$

 

Total liabilities

 

$

47

 

 

$

47

 

 

$

 

 

$

 

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 for which quoted market prices are available. In addition, the Company has determined that foreign currency forward contracts are included in Level 1 as these are valued using quoted market prices in active markets which have identical assets or liabilities.

          The valuation for most fixed maturity securities are classified as Level 2. Financial assets that are classified as Level 2 include corporate debt securities, U.S. government and agency securities, foreign government and agency securities, certificates of deposit, other asset-backed securities, 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 determined that interest rate swaps are included in Level 2 as the Company uses inputs other than quoted prices that are observable for the asset. The Level 2 derivative 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 29, 2011, 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 liquidity 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, Level 2, or Level 3 during the fiscal years ended April 29, 2011 or April 30, 2010. 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 tables above that used significant unobservable inputs (Level 3):

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

(in millions)

 

2011

 

2010

Beginning Balance

 

$

213

 

 

$

205

 

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

 

 

(6

)

 

 

(9

)

Total unrealized gains included in other comprehensive income

 

 

27

 

 

 

58

 

Net purchases, issuances, and settlements

 

 

(43

)

 

 

(41

)

Ending Balance

 

$

191

 

 

$

213

 

53


Medtronic, Inc.
Notes to Consolidated Financial Statements

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.

          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 $656 million at April 29, 2011 and $542 million at April 30, 2010. 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 years 2011, 2010, and 2009, 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 recoverable within a reasonable period of time. As a result, the Company recognized $24 million, $40 million, and $4 million in impairment charges in fiscal years 2011, 2010, and 2009, respectively. The impairment charges related to the cost method investments were recorded in other expense, net in the consolidated statements of earnings. These investments fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value, as the investments are privately-held entities without quoted market prices. To determine the fair value of these investments, the Company used all pertinent financial information that was available related to the entities, including financial statements and market participant valuations from recent and proposed equity offerings.

          The Company assesses the impairment of intangible assets annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. The aggregate carrying amount of intangible assets approximated $2.777 billion as of April 29, 2011 and $2.559 billion as of April 30, 2010. These assets are measured at fair value on a nonrecurring basis. The fair value of the Company’s intangible assets is not estimated if there is no change in events or circumstances that indicate the carrying amount of an intangible asset may not be recoverable. During fiscal year 2011, the Company determined that changes in events and circumstances indicated that the carrying amounts of certain intangible assets may not be fully recoverable. To determine the impairment, the Company calculated the excess of the intangible asset’s carrying value over its fair value utilizing a discounted future cash flow analysis. As a result of the analysis performed in fiscal year 2011, the fair values of the intangible assets were deemed to be less than the carrying values, resulting in pre-tax impairment losses of $28 million of which $19 million is related to the fiscal year 2011 restructuring initiative and was recorded in restructuring charges and $9 million was recorded in other expense, net in the Company’s consolidated statement of earnings. The Company did not record any intangible asset impairments during fiscal years 2010 or 2009. The inputs used in the fair value analysis fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value.

          The Company assesses the impairment of property, plant, and equipment whenever events or changes in circumstances indicate that the carrying amount of property, plant, and equipment assets may not be recoverable. As part of the Company’s restructuring initiatives, the Company recorded property, plant, and equipment impairments of $13 million, $8 million, and $7 million during fiscal years 2011, 2010, and 2009, respectively. For further discussion of the restructuring initiatives refer to Note 3.

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 29, 2011 was $8.524 billion compared to a principal value of $8.096 billion, and $10.047 billion compared to a principal value of $9.711 billion at April 30, 2010. Fair value was estimated using quoted market prices for the same or similar instruments. The fair values and principal values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.

7. Goodwill and Other Intangible Assets

          The changes in the carrying amount of goodwill for fiscal years 2011 and 2010 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

Cardiac and
Vascular Group

 

Restorative
Therapies Group

 

Total

 

Balance as of April 24, 2009

 

 

$

1,392

 

 

$

6,803

 

 

$

8,195

 

 

Goodwill as a result of acquisitions

 

 

 

155

 

 

 

 

 

 

155

 

 

Purchase accounting adjustments, net

 

 

 

(5

)

 

 

(3

)

 

 

(8

)

 

Currency adjustment, net

 

 

 

46

 

 

 

3

 

 

 

49

 

 

Balance as of April 30, 2010

 

 

$

1,588

 

 

$

6,803

 

 

$

8,391

 

 

Goodwill as a result of acquisitions

 

 

 

1,046

 

 

 

33

 

 

 

1,079

 

 

Purchase accounting adjustments, net

 

 

 

25

 

 

 

4

 

 

 

29

 

 

Currency adjustment, net

 

 

 

20

 

 

 

18

 

 

 

38

 

 

Balance as of April 29, 2011

 

 

$

2,679

 

 

$

6,858

 

 

$

9,537

 

 

54


Medtronic, Inc.
Notes to Consolidated Financial Statements

          The Company completed its annual goodwill impairment test during the third quarter for fiscal years ending April 29, 2011, April 30, 2010, and April 24, 2009 and concluded that there were no impairments or reporting units that were considered at risk of impairment.

          Balances of 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 29, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original cost

 

$

3,565

 

 

$

373

 

 

$

338

 

 

$

150

 

 

$

4,426

 

 

Accumulated amortization

 

 

(1,265

)

 

 

(290

)

 

 

 

 

 

(94

)

 

 

(1,649

)

 

Carrying value

 

$

2,300

 

 

$

83

 

 

$

338

 

 

$

56

 

 

$

2,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average original life (in years)

 

 

12.3

 

 

 

10.3

 

 

 

N/A

 

 

 

8.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets as of April 30, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original cost

 

$

3,300

 

 

$

373

 

 

$

114

 

 

$

252

 

 

$

4,039

 

 

Accumulated amortization

 

 

(1,040

)

 

 

(254

)

 

 

 

 

 

(186

)

 

 

(1,480

)

 

Carrying value

 

$

2,260

 

 

$

119

 

 

$

114

 

 

$

66

 

 

$

2,559

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average original life (in years)

 

 

12.6

 

 

 

10.3

 

 

 

N/A

 

 

 

8.6

 

 

 

 

 

 

          Amortization expense for fiscal years 2011, 2010, and 2009 was $340 million, $318 million, and $281 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

 

2012

 

$

321

 

 

2013

 

 

304

 

 

2014

 

 

294

 

 

2015

 

 

279

 

 

2016

 

 

268

 

 

Thereafter

 

 

973

 

 

 

 

$

2,439

 

 

55


Medtronic, Inc.
Notes to Consolidated Financial Statements

8. Financing Arrangements

          Debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 29, 2011

 

April 30, 2010

 

(in millions, except interest rates)

 

Maturity by
Fiscal Year

 

Payable

 

Average
Interest
Rate

 

Effective
Interest
Rate

 

Payable

 

Average
Interest
Rate

 

Effective
Interest
Rate

 

Short-Term Borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

2012

 

$

 

1,500

 

 

 

0.22

%

 

 

 

$

 

 

 

 

 

 

Capital lease obligations

 

 

2012

 

 

 

2

 

 

 

7.47

%

 

 

 

 

 

 

 

 

 

 

 

Bank borrowings

 

 

2011-2013

 

 

 

222

 

 

 

1.25

%

 

 

 

 

 

65

 

 

 

1.20

%

 

 

Five-year senior convertible notes

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

2,200

 

 

 

1.50

%

 

5.97

%

Five-year 2005 senior notes

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

400

 

 

 

4.38

%

 

4.43

%

Debt discount

 

 

2011-2012

 

 

 

(1

)

 

 

 

 

 

 

 

 

(90

)

 

 

 

 

 

Total Short-Term Borrowings

 

 

 

 

$

 

1,723

 

 

 

 

 

 

 

 

$

 

2,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent convertible debentures

 

 

2012-2022

 

$

15

 

 

 

1.25

%

 

 

 

$

15

 

 

 

1.25

%

 

 

Seven-year senior convertible notes

 

 

2013

 

 

 

2,200

 

 

 

1.63

%

 

6.03

%

 

 

 

2,200

 

 

 

1.63

%

 

6.03

%

Five-year 2009 senior notes

 

 

2014

 

 

 

550

 

 

 

4.50

%

 

4.50

%

 

 

 

550

 

 

 

4.50

%

 

4.50

%

Five-year 2010 senior notes

 

 

2015

 

 

 

1,250

 

 

 

3.00

%

 

3.00

%

 

 

 

1,250

 

 

 

3.00

%

 

3.00

%

Ten-year 2005 senior notes

 

 

2016

 

 

 

600

 

 

 

4.75

%

 

4.76

%

 

 

 

600

 

 

 

4.75

%

 

4.76

%

Five-year 2011 senior notes

 

 

2016

 

 

 

500

 

 

 

2.63

%

 

2.72

%

 

 

 

 

 

 

 

 

 

Ten-year 2009 senior notes

 

 

2019

 

 

 

400

 

 

 

5.60

%

 

5.61

%

 

 

 

400

 

 

 

5.60

%

 

5.61

%

Ten-year 2010 senior notes

 

 

2020

 

 

 

1,250

 

 

 

4.45

%

 

4.47

%

 

 

 

1,250

 

 

 

4.45

%

 

4.47

%

Ten-year 2011 senior notes

 

 

2021

 

 

 

500

 

 

 

4.13

%

 

4.19

%

 

 

 

 

 

 

 

 

 

Thirty-year 2009 senior notes

 

 

2039

 

 

 

300

 

 

 

6.50

%

 

6.52

%

 

 

 

300

 

 

 

6.50

%

 

6.52

%

Thirty-year 2010 senior notes

 

 

2040

 

 

 

500

 

 

 

5.55

%

 

5.56

%

 

 

 

500

 

 

 

5.55

%

 

5.56

%

Interest rate swaps

 

 

2013-2021

 

 

 

110

 

 

 

 

 

 

 

 

 

33

 

 

 

 

 

 

Gains from interest rate swap terminations

 

 

2011-2016

 

 

 

68

 

 

 

 

 

 

 

 

 

41

 

 

 

 

 

 

Capital lease obligations

 

 

2013-2025

 

 

 

32

 

 

 

6.28

%

 

 

 

 

 

18

 

 

 

4.21

%

 

 

Bank borrowings

 

 

2013

 

 

 

14

 

 

 

5.60

%

 

 

 

 

 

46

 

 

 

5.60

%

 

 

Debt discount

 

 

2011-2013

 

 

 

(177

)

 

 

 

 

 

 

 

 

(259

)

 

 

 

 

 

Total Long-Term Debt

 

 

 

 

$

 

8,112

 

 

 

 

 

 

 

 

 

$

 

6,944

 

 

 

 

 

 

 

 

          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 $2.200 billion 1.500 percent Senior Convertible Notes due 2011 were repaid in April 2011. 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. As of April 29, 2011, pursuant to provisions in the indentures relating to the Company’s increase of its quarterly dividend to shareholders, the conversion rate for the Senior Convertible Notes is now 18.5175, which correspondingly changed the conversion price per share for the Senior Convertible Notes to $54.00.

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

          In separate transactions, the Company sold warrants to issue shares of the Company’s common stock at an exercise price of $76.56 per share in private transactions. Pursuant to these transactions, warrants for 41 million shares of the Company’s common stock may be settled over a specified period beginning in July 2011 and warrants for 41 million shares of the Company’s common stock may be settled over a specified period beginning in July 2013 (the settlement dates). If the average price of the Company’s common stock during a defined period ending on or about the respective settlement dates exceeds the exercise price of the warrants, the warrants will be settled in shares of the Company’s common stock. Proceeds received from the issuance of the warrants totaled approximately $517 million and were recorded as an addition to shareholders’ equity. During the fourth quarter of fiscal year 2010, 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 the Company’s payment of dividends to shareholders of the Company’s common stock.

56


Medtronic, Inc.
Notes to Consolidated Financial Statements

          Under authoritative 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 and not be separated as a derivative; 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.

          Authoritative 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 its own stock and classified in shareholders’ equity in its statement of financial position. The Company concluded that 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 authoritative guidance for convertible debt. The 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 guidance.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013 Senior Convertible Notes

 

2011 Senior Convertible Notes

 

(in millions)

 

April 29,
2011 

 

April 30,
2010 

 

April 29,
2011 

 

April 30,
2010 

 

Carrying amount of the equity component

 

$

547

 

 

$

547

 

 

$

 

 

$

420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal amount of the Senior Convertible Notes

 

$

 

2,200

 

 

$

 

2,200

 

 

$

 

 

 

$

 

2,200

 

 

Unamortized discount

 

 

 

(177

)

 

 

 

(259

)

 

 

 

 

 

 

 

(90

)

 

Net carrying amount of the debt component

 

$

 

2,023

 

 

$

 

1,941

 

 

$

 

 

 

$

 

2,110

 

 


As of April 29, 2011, the unamortized balance of the debt discount for the 2013 Senior Convertible Notes will be amortized over the remaining life of such debt, which is approximately two years for the 2013 Senior Convertible Notes. The 2011 Senior Convertible Notes were repaid in April 2011. The following table provides interest expense amounts related to the Senior Convertible Notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013 Senior Convertible Notes

 

2011 Senior Convertible Notes

 

 

 

2011 

 

2010 

 

2011 

 

2010 

 

Interest cost related to contractual interest coupon

 

$

36

 

 

$

36

 

 

$

32

 

 

$

 

34

 

 

Interest cost related to amortization of the discount

 

 

 

82

 

 

 

 

79

 

 

 

 

90

 

 

 

 

90

 

 

          Senior Notes Senior Notes are unsecured, senior obligations of the Company and rank equally with all other secured and unsubordinated indebtedness of the Company. The indentures under which the Senior Notes were issued contain customary covenants, all of which the Company remains in compliance with as of April 29, 2011. The Company used the net proceeds from the sale of the Senior Notes primarily for working capital and general corporate uses.

          In March 2011, the Company issued two tranches of Senior Notes (collectively, the 2011 Senior Notes) with an aggregate face value of $1.000 billion. The first tranche consisted of $500 million of 2.625 percent Senior Notes due 2016. The second tranche consisted of $500 million of 4.125 percent Senior Notes due 2021. Interest on each series of 2011 Senior Notes is payable semi-annually, on March 15 and September 15 of each year, commencing September 15, 2011. The Company used the net proceeds from the sale of the 2011 Senior Notes for working capital and general corporate uses.

57


Medtronic, Inc.
Notes to Consolidated Financial Statements

          In September 2010, the Company repaid the $400 million 4.375 percent 2005 Senior Notes due 2010.

          As of April 29, 2011 and April 30, 2010, the Company had interest rate swap agreements designated as fair value hedges of underlying fixed-rate obligations, including the $1.250 billion 3.000 percent 2010 Senior Notes due 2015, the $600 million 4.750 percent 2005 Senior Notes due 2015, the $2.200 billion 1.625 percent Senior Convertible Notes due 2013, and the $550 million 4.500 percent 2009 Senior Notes due 2014. Additionally, as of April 29, 2011 the Company had interest rate swap agreements designated as fair value hedges of underlying fixed-rate obligations including the $500 million 2.625 percent 2011 Senior Notes due 2016 and the $500 million 4.125 percent 2011 Senior Notes due 2021. For additional information regarding the interest rate swap agreements, refer to Note 9.

          Contingent Convertible Debentures As of April 29, 2011 and April 30, 2010, the Company 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, the Company will pay holders cash equal to the lesser of the principal amount of the Debentures or their conversion value, and shares of the Company’s common stock to the extent the conversion value exceeds the principal amount of the Debentures. The Company may be required to repurchase the remaining Debentures at the option of the holders in September 2011 or 2016. For put options exercised by the holders of the Debentures, the purchase price is equal to the principal amount of the applicable Debenture plus any accrued and unpaid interest thereon to the repurchase date. If the put option is exercised, the Company will pay holders the repurchase price solely in cash. The Company can redeem the Debentures for cash at any time.

          Commercial Paper The Company maintains a commercial paper program that allows the Company to have a maximum of $2.250 billion in commercial paper outstanding, with maturities up to 364 days from the date of issuance. As of April 29, 2011, outstanding commercial paper totaled $1.500 billion. There was no outstanding commercial paper as of April 30, 2010. During fiscal years 2011 and 2010, the weighted average original maturity of the commercial paper outstanding was approximately 73 and 63 days, respectively, and the weighted average interest rate was 0.25 percent and 0.21 percent, respectively. The issuance of commercial paper reduces the amount of credit available under the Company’s existing lines of credit.

          Bank Borrowings Bank borrowings consist primarily of borrowings from non-U.S. banks at interest rates considered favorable by management and where natural hedges can be gained for foreign exchange purposes and borrowings from U.S. banks. Approximately $201 million of the $236 million outstanding bank borrowings as of April 29, 2011 were short-term advances to certain subsidiaries under credit agreements with various banks. These advances are guaranteed by the Company.

          Lines of Credit The Company has committed and uncommitted lines of credit with various banks. The committed lines of credit include a new four-year $2.250 billion syndicated credit facility dated December 9, 2010 that will expire on December 9, 2014 (New Facility). This New Facility replaced the Company’s five-year $1.750 billion syndicated credit facility which was scheduled to expire in December 2011. The New Facility provides the Company with the ability to increase its capacity by an additional $500 million at any time during the life of the four-year term of the agreement. The Company can also request the extension of the New Facility maturity date for one additional year, at the first and second anniversary of the date of the New Facility. The New Facility provides backup funding for the commercial paper program and may also be used for general corporate purposes. As of April 29, 2011 and April 30, 2010, no amounts were outstanding on the committed lines of credit.

          On November 2, 2007, the Company entered into a credit agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd. The credit agreement provided for a $300 million unsecured, committed revolving credit facility which matured on November 2, 2010, with no outstanding balance as of that date.

          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 29, 2011.

58


Medtronic, Inc.
Notes to Consolidated Financial Statements

          Contractual maturities of long-term debt for the next five fiscal years and thereafter, including the current portion and capital leases, and excluding the debt discount, the fair value impact of outstanding interest rate swap agreements, and the remaining gains from terminated interest rate swap agreements are as follows:

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Fiscal Year

 

Obligation

 

2012

 

$

34

 

 

2013

 

 

2,216

 

 

2014

 

 

552

 

 

2015

 

 

1,252

 

 

2016

 

 

1,102

 

 

Thereafter

 

 

2,974

 

 

Total long-term debt

 

 

8,130

 

 

Less: Current portion of long-term debt

 

 

34

 

 

Long-term portion of long-term debt

 

$

8,096

 

 

9. Derivatives and Foreign Exchange Risk Management

          The Company uses operational and economic hedges, as well as currency exchange rate derivative contracts and interest rate derivative instruments to manage the impact of currency exchange and interest rate changes on earnings and cash flows. In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, the Company enters into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets, liabilities, and probable commitments. At inception of the forward contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. The primary currencies of the derivative instruments are the Euro and the Japanese Yen. The Company does not enter into currency exchange rate derivative instruments for speculative purposes. The gross notional amount of all currency exchange rate derivative instruments outstanding at April 29, 2011 and April 30, 2010 was $6.834 billion and $5.495 billion, respectively. The aggregate currency exchange rate gains/(losses) were $92 million, $56 million, and $(53) million, in fiscal years 2011, 2010, and 2009, respectively. These gains/(losses) represent the net impact to the consolidated statements of earnings for the derivative instruments presented below offset by remeasurement gains/(losses) on foreign currency denominated assets and liabilities.

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

Freestanding Derivative Forward Contracts

          Freestanding derivative forward contracts are used to offset the Company’s exposure to the change in value of specific foreign currency denominated assets and liabil