Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MDT > SEC Filings for MDT > Form 10-Q on 3-Dec-2013All Recent SEC Filings

Show all filings for MEDTRONIC INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MEDTRONIC INC


3-Dec-2013

Quarterly Report


Item 2. 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. and its subsidiaries (Medtronic or the Company). For a full understanding of financial condition and results of operations, you should read this discussion along with management's discussion and analysis of financial condition and results of operations in our Annual Report on Form 10-K for the year ended April 26, 2013. In addition, you should read this discussion along with our condensed consolidated financial statements and related notes thereto as of October 25, 2013.
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), 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 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 such financial trends will continue.
EXECUTIVE LEVEL OVERVIEW
Medtronic is 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 140 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 first quarter of fiscal year 2014, we amended the way in which we evaluate performance and allocate resources for the Diabetes business including separating the Diabetes business from the Restorative Therapies Group. As a result, we began to operate under three reportable segments and three operating segments, the Cardiac and Vascular Group (composed of the CRDM, Coronary, Structural Heart, and Endovascular businesses), the Restorative Therapies Group (composed of the Spine, Neuromodulation, and Surgical Technologies businesses), and the Diabetes Group. See Note 20 to the current period's condensed consolidated financial statements for additional discussion related to our segment reporting.
Net earnings for the second quarter of fiscal year 2014 were $902 million, or $0.89 per diluted share, as compared to net earnings of $646 million, or $0.63 per diluted share for the same period in the prior fiscal year, representing an increase of 40 percent and 41 percent, respectively. Net earnings for the three months ended October 25, 2013 included after-tax certain litigation charges, net, that decreased net earnings by $17 million ($24 million pre­tax). Net earnings for the three months ended October 26, 2012 included after-tax certain litigation charges, net and acquisition-related items that decreased net earnings by $241 million ($251 million pre-tax). See further discussion of these items in the "Special Charges, Restructuring Charges, Certain Litigation Charges, Net, and Acquisition-Related Items" section of this management's discussion and analysis.
Net earnings for the six months ended October 25, 2013 were $1.855 billion, or $1.83 per diluted share, as compared to net earnings of $1.510 billion, or $1.46 per diluted share for the same period in the prior fiscal year, representing an increase of 23 percent and 25 percent, respectively. Net earnings for the six months ended October 25, 2013 included after-tax special charges, restructuring charges, certain litigation charges, net, and acquisition-related items that increased net earnings by an aggregate of $38 million ($14 million pre­tax). Net earnings for the six months ended October 26, 2012 included after-tax certain litigation charges, net, and acquisition-related items that decreased net earnings by $246 million ($256 million pre-tax). See further discussion of these items in the "Special Charges, Restructuring Charges, Certain Litigation Charges, Net, and Acquisition-Related Items" section of this management's discussion and analysis.


The table below illustrates net sales by operating segment for the three and six months ended October 25, 2013 and October 26, 2012:

                                     Three months ended                                  Six months ended
                                                   October 26,                                         October 26,
(dollars in millions)         October 25, 2013        2012         % Change      October 25, 2013         2012         % Change
Cardiac and Vascular Group   $      2,199         $     2,137         3 %      $            4,359     $     4,252         3 %
Restorative Therapies Group         1,602               1,580         1                     3,156           3,109         2
Diabetes Group                        393                 378         4                       762             742         3
Total Net Sales              $      4,194         $     4,095         2 %      $            8,277     $     8,103         2 %

Net sales for the three and six months ended October 25, 2013 were $4.194 billion and $8.277 billion, respectively, an increase of 2 percent over the same periods in the prior fiscal year. Foreign currency translation had an unfavorable impact of $38 million and $93 million on net sales for the three and six months ended October 25, 2013, respectively, when compared to the same periods in the prior fiscal year. The net sales increase for the three and six months ended October 25, 2013 was driven by 3 percent growth in our Cardiac and Vascular Group, 1 percent and 2 percent growth, respectively, in our Restorative Therapies Group, and 4 percent and 3 percent growth, respectively, in our Diabetes Group when compared to the same periods in the prior fiscal year. The Cardiac and Vascular Group's performance for the three and six months ended October 25, 2013 was primarily a result of strong net sales in AF Solutions, and solid growth in Structural Heart and Endovascular. Solid net sales growth of CRDM defibrillation system products also contributed to growth in the three months ended October 25, 2013. Additionally, the Cardiac and Vascular Group's performance for the three and six months ended October 25, 2013 was favorably affected by new products and the acquisition of Cardiocom on August 7, 2013, partially offset by pricing pressures. The Restorative Therapies Group's performance for the three and six months ended October 25, 2013 was favorably impacted by strong net sales in Surgical Technologies and growth in Neuromodulation, partially offset by declines in Spine, primarily driven by BMP (composed of INFUSE bone graft (InductOs in the European Union)) and balloon kyphoplasty (BKP). The Diabetes Group's performance for the three and six months ended October 25, 2013 was primarily a result of strong net sales in international markets, partially offset by flat and slightly declining net sales in the U.S. for the three and six months ended October 25, 2013 as we awaited U.S. Food and Drug Administration (FDA) approval of the MiniMed 530G system. Approval was obtained late in the second quarter of fiscal year 2014. 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.
CRITICAL ACCOUNTING ESTIMATES
We have adopted various accounting policies to prepare the condensed 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 included in our Annual Report on Form 10-K for the year ended April 26, 2013. The preparation of the condensed consolidated financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to bad debts, inventories, intangible assets, asset impairment, legal proceedings, IPR&D, 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 product liability, intellectual property disputes, shareholder derivative actions, securities class actions, and other class actions. 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 condensed consolidated financial statements for loss contingencies 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 reasonably 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 condensed consolidated financial statements. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings involving the Company are inherently difficult to predict, particularly when the matters are in early procedural stages, with incomplete scientific facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, or punitive damages; or could result in a change in business practice. Our significant legal proceedings are discussed in Note 19 to the current period's condensed consolidated financial statements. While it is not possible to predict the outcome for most of the matters discussed in Note 19 to the current period's condensed 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. 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 charge, 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 charges, 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 or similar to 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 condensed consolidated financial statements. As a result, our effective tax rate reflected in our condensed 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 condensed 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 condensed 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 condensed consolidated statements of earnings.
The Company's overall tax rate including the tax impact of special charges, restructuring charges, certain litigation charges, net, and acquisition-related items resulted in an effective tax rate of 19.2 percent and 18.2 percent for the three and six months ended October 25, 2013, respectively. Excluding the impact of the special charges, restructuring charges, and acquisition-related items for the three and six months ended October 25, 2013, our operational and tax strategies have resulted in a non-GAAP nominal tax rate of 19.4 percent, versus the U.S. Federal statutory rate of 35.0 percent. An increase in our nominal tax rate of 1 percent would result in an additional income tax provision for the three and six months ended October 25, 2013 of approximately $11 million and $23 million, respectively. See discussion of our tax rate and the tax adjustments in the "Income Taxes" section of this management's discussion and analysis.


Valuation of Other Intangible Assets, Including IPR&D, Goodwill, and Contingent Consideration
When we acquire a business, the purchase price is allocated, as applicable, among identifiable intangible assets, including IPR&D, net tangible assets, and goodwill as required by U.S. GAAP. Our 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 other intangible assets and IPR&D requires us to make significant estimates. These estimates include the amount and timing of projected future cash flows, the discount rate used to discount those cash flows to present value, the assessment of the asset's life cycle, and the consideration of legal, technical, regulatory, economic, and competitive risks. The amount of the purchase price allocated to other intangible assets, including IPR&D, and net tangible 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 measurement in accordance with accepted valuation standards.
IPR&D included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred. Upon receipt of regulatory approval, the indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the research and development project is subsequently abandoned, the indefinite-lived intangible asset is charged to expense. IPR&D acquired outside of a business combination is expensed immediately.
Due to the uncertainty associated with research and development projects, there is risk that actual results will differ materially from the original cash flow projections and that the research and development project will result in a successful commercial product. 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, delays or issues with patent issuance, or validity and litigation.
Contingent consideration is recorded at the acquisition date at the estimated fair value of the contingent consideration 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 measurement in accordance with accepted valuation methods. The fair value of the contingent 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 our condensed consolidated statements of earnings. Changes to the fair value of contingent consideration liabilities can result from changes in discount rates, the timing and amount of revenue estimates, or in the timing or likelihood of achieving the milestones which trigger payment. Using different valuation assumptions including revenue or cash flow projections, growth rates, discount rates, or probabilities of achieving the milestones result in different purchase price allocations, future amortization expense, and expense in the current or future periods. Goodwill is the excess of the purchase price over the fair value of net assets, including IPR&D, of acquired businesses. Goodwill is tested for impairment annually or whenever an event occurs or circumstances change that would indicate 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 condensed consolidated balance sheets and the judgment required in determining fair value, including projected future cash flows. Goodwill was $10.464 billion and $10.329 billion as of October 25, 2013 and April 26, 2013, respectively.

Other intangible assets include patents, trademarks, purchased technology, and IPR&D (since April 25, 2009). Intangible assets with a definite life are amortized on a straight-line or accelerated basis, as appropriate, with estimated useful lives ranging from three to 20 years. IPR&D is tested for impairment annually and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. We review other definite-lived intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. Our impairment reviews are based on an estimated future cash flow approach that requires significant judgment with respect to future revenue and expense growth rates, selection of appropriate discount rate, asset groupings, and other assumptions and estimates. We use estimates that are consistent with our business plans and a market participant view of the assets being evaluated. Actual results may differ from our estimates due to a number of factors including, among others, changes in competitive conditions, timing of regulatory approval, changes in worldwide economic conditions, and fluctuations in foreign currency exchange rates. These risk factors are discussed in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended April 26, 2013. Other intangible assets, net of accumulated amortization, were $2.608 billion and $2.673 billion as of October 25, 2013 and April 26, 2013, respectively.


NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 2 to the current period's condensed consolidated financial statements.
ACQUISITIONS
Three and six months ended October 25, 2013 On August 7, 2013, we acquired Cardiocom, a privately held developer and provider of integrated solutions for the management of chronic diseases such as heart failure, diabetes, and hypertension. Cardiocom's products and services include remote monitoring and patient-centered software to enable efficient care coordination and specialized telehealth nurse support. Total consideration for the transaction was approximately $193 million. Three and six months ended October 26, 2012 We had no significant acquisitions during the three and six months ended October 26, 2012 that were accounted for as business combinations. In addition to the acquisition above, we periodically acquire certain tangible and intangible assets from enterprises that do not otherwise qualify for accounting as a business combination. These transactions are largely reflected in the condensed consolidated statements of cash flows as a component of investing activities under other investing activities, net.

NET SALES
The table below illustrates net sales by product line and operating segment for
the three and six months ended October 25, 2013 and October 26, 2012:
                                         Three months ended                               Six months ended
                                                       October 26,       %                              October 26,       %
(dollars in millions)              October 25, 2013        2012        Change      October 25, 2013         2012        Change
Defibrillation Systems            $        713         $      689        3%      $            1,369     $    1,365        -%
Pacing Systems                             477                480       (1)                     950            943        1
AF and Other                                83                 58        43                     147            112        31
CARDIAC RHYTHM DISEASE MANAGEMENT        1,273              1,227        4                    2,466          2,420        2
CORONARY                                   427                429        -                      862            862        -
STRUCTURAL HEART                           281                271        4                      594            551        8
ENDOVASCULAR                               218                210        4                      437            419        4
TOTAL CARDIAC AND VASCULAR GROUP         2,199              2,137        3                    4,359          4,252        3
Core Spine                                 636                649       (2)                   1,277          1,294       (1)
BMP                                        110                133       (17)                    234            274       (15)
SPINE                                      746                782       (5)                   1,511          1,568       (4)
NEUROMODULATION                            479                454        6                      907            873        4
SURGICAL TECHNOLOGIES                      377                344        10                     738            668        10
TOTAL RESTORATIVE THERAPIES GROUP        1,602              1,580        1                    3,156          3,109        2
DIABETES GROUP                             393                378        4                      762            742        3
TOTAL                             $      4,194         $    4,095        2%      $            8,277     $    8,103        2%

Net sales for the three and six months ended October 25, 2013 were unfavorably impacted by foreign currency translation of $38 million and $93 million, respectively, when compared to the same periods of the prior fiscal year. The primary exchange rate movements that impacted our consolidated net sales growth were the U.S. dollar as compared to the Euro and Japanese Yen. The impact of foreign currency fluctuations on net sales was 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 "Item 3 - Quantitative and Qualitative Disclosures About Market Risk", Note 9 to the current period's condensed consolidated financial statements, and our Annual Report on Form 10-K for the year ended April 26, 2013 for further details on foreign currency instruments and our related risk management strategies.


Cardiac and Vascular Group
The Cardiac and Vascular Group is composed of the CRDM, Coronary, Structural Heart, and Endovascular 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 (AF), 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, cardiac tissue ablation systems, and open heart . . .

  Add MDT to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MDT - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.