Medtronic 2008 Annual Report Download - page 79

Employees purchased 2 million shares at an average price of $43.73 per
share in the fiscal year ended April 25, 2008. As of April 25, 2008, plan
participants have had approximately $6 withheld to purchase Company
common stock at 85 percent of its market value on June 27, 2008, the
last trading day before the end of the calendar quarter purchase period.
At April 25, 2008, approximately 5 million shares of common stock were
available for future purchase under the ESPP.
Valuation Assumptions The Company uses the Black-Scholes option
pricing model (Black-Scholes model) to determine the fair value of
stock options as of the grant date. The fair value of stock options
under the Black-Scholes model requires management to make
assumptions regarding projected employee stock option exercise
behaviors, risk-free interest rates, volatility of the Company’s stock price
and expected dividends.
The expense recognized for shares purchased under the Company’s
ESPP is equal to the 15 percent discount the employee receives at the
end of the calendar quarter purchase period. The expense recognized
for restricted stock awards is equal to the grant date fair value, which is
equal to the closing stock price on the date of grant.
The following table provides the weighted average fair value of
options granted to employees and the related assumptions used in the
Black-Scholes model:
Fiscal Year
2008 2007 2006
Weighted average fair value of
options granted $ 15.29 $ 11.72 $ 15.53
Assumptions used:
Expected life (years)(a) 5.42 4.83 5.00
Risk-free interest rate(b) 4.02% 4.66% 4.28%
Volatility(c) 22.27% 19.90% 25.00%
Dividend yield(d) 1.05% 0.90% 0.69%
(a) Expected life: The Company analyzes historical employee stock option exercise and
termination data to estimate the expected life assumption. Beginning in the third
quarter of fiscal year 2008, the Company began to calculate the expected life assumption
using the midpoint scenario, which combines historical exercise data with hypothetical
exercise data, as the Company believes this data currently represents the best estimate
of the expected life of a new employee option. Prior to the third quarter of fiscal year
2008, the Company calculated the expected life based solely on historical data. The
Company also stratifies its employee population into two groups based upon distinctive
exercise behavior patterns. Prior to adopting SFAS No. 123(R), the Company used one
pool, the entire employee population, for estimating the expected life assumptions.
(b) Risk-free interest rate: The rate is based on the grant date yield of a zero-coupon
U.S. Treasury bond whose maturity period equals or approximates the option’s
expected term.
(c) Volatility: Beginning in the third quarter of fiscal year 2007, the expected volatility is
based on a blend of historical volatility and an implied volatility of the Company’s
common stock. Implied volatility is based on market traded options of the Company’s
common stock. Prior to the third quarter of fiscal year 2007, the Company calculated the
expected volatility based exclusively on historical volatility.
(d) Dividend yield: The dividend yield rate is calculated by dividing the Company’s
annual dividend, based on the most recent quarterly dividend rate, by the closing stock
price on the grant date.
Stock-Based Compensation Expense Prior to adopting SFAS No. 123(R),
the Company accounted for stock-based compensation under APB
Opinion No. 25 using the intrinsic value method and the impact of the
fair value method on the Company’s net earnings was disclosed on a
pro forma basis in the Notes to the consolidated financial statements.
In the pro forma disclosures, the Company recognized stock-based
compensation expense based on the stated vesting period, rather than
the time to achieve retirement eligibility. Upon adopting SFAS No. 123(R),
the Company changed its method of recognition and now recognizes
stock-based compensation expense based on the substantive vesting
period for all new awards. As a result, compensation expense related
to stock options granted prior to fiscal year 2007 is being recognized
over the stated vesting term of the grant rather than being accelerated
upon retirement eligibility. If the Company had historically accounted
for stock-based awards made to retirement eligible individuals
under the requirements of SFAS No. 123(R), the pro forma expense
disclosed below would have been increased by $2 for fiscal year 2006.
There was no stock-based compensation expense capitalized as it was
deemed immaterial.
The amount of stock-based compensation expense recognized
during a period is based on the portion of the awards that are ultimately
expected to vest. The Company estimates pre-vesting forfeitures at the
time of grant by analyzing historical data and revises those estimates in
subsequent periods if actual forfeitures differ from those estimates.
Ultimately, the total expense recognized over the vesting period will
equal the fair value of awards that actually vest.
The following table presents the components and classification of
pre-tax stock-based compensation expense, for options, ESPP and
restricted stock awards, recognized for fiscal years 2008 and 2007:
Fiscal Year
2008 2007
Stock options $ 138 $ 135
Restricted stock awards 63 35
Employee stock purchase plan 16 15
Total stock-based compensation expense
$ 217
$ 185
Cost of sales $ 24 $ 19
Research and development expense 52 39
Selling, general and administrative expense 141 127
Total stock-based compensation expense
$ 217
$ 185
75Medtronic, Inc.