Medtronic 2009 Annual Report Download - page 34

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30 Medtronic, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
Neurologic Technologies was continued acceptance of high-speed
powered surgical drill systems, including the EHS Stylus system.
Navigation net sales for fiscal year 2008 increased 25 percent
from the prior fiscal year to $159 million based on strong U.S. net
sales of the O-Arm Imaging System and increased worldwide
service revenue.
Looking ahead, we expect our Surgical Technologies operating
segment should be impacted by the following:
• Continued acceptance of our Fusion EM IGS System, which
was launched in the U.S. in the third quarter of fiscal
year 2008.
• Continued acceptance of the StealthStation S7 System and
the Synergy Cranial 2.0 software which were launched in the
first and fourth quarters of fiscal year 2009, respectively. The
StealthStation S7 System offers personalized navigation
support for surgeons and surgical staff in the operating room.
The Synergy Cranial 2.0 software completed the software
offering for cranial procedures on the StealthStation S7 system
hardware platform.
• Continued adoption of power systems for sinus procedures
outside the U.S., as well as continued global adoption of
nerve monitoring for ENT and thyroid procedures.
• Launch of new products, including the Integrated Power
Console, Spine Shaver and the NIM 3.0, a next generation
nerve monitoring system.
• Continued acceptance of the O-Arm Imaging System.
• Further integration of Restore Medical, Inc.’s (Restore) Pillar
Palatal Implant System (Pillar System) and Influent’s Repose
System (Repose System) for the treatment of sleep breathing
disorders. We anticipate the Pillar System and Repose System
will deliver new growth by providing us with proven office-
based procedures in a very fast growing segment of the
obstructive sleep apnea market.
• Potential slowdown in consumer and hospital spending as a
result of the recent economic downturn. Given the elective
nature of many of the underlying ENT procedures and the
large capital equipment component of the Surgical
Technologies businesses, there is potential exposure to
macroeconomic pressures that could negatively impact the
near-term sales growth within Surgical Technologies.
Continued net sales growth in all operating segments is
contingent on our ability to gain further market share, penetrate
existing markets, develop new products, improve existing
products and develop new markets.
Costs and Expenses
The following is a summary of major costs and expenses as a
percent of net sales:
Fiscal Year
2009 2008 2007
Cost of products sold 24.1% 25.5% 25.8%
Research and development 9.3 9.4 10.1
Selling, general and administrative 35.3 34.8 33.8
Special charges 0.7 0.6 0.8
Restructuring charges 0.8 0.3 0.2
Certain litigation charges 4.9 2.7 0.3
IPR&D charges 4.3 2.9 —
Other expense, net 2.7 3.2 1.7
Interest expense/(income), net 0.2 (0.8) (1.3)
Cost of Products Sold Cost of products sold was $3.518 billion in
fiscal year 2009 representing 24.1 percent of net sales, a decrease
of 1.4 percentage points from fiscal year 2008. Cost of products
sold as a percentage of net sales was positively impacted by 0.4
of a percentage point of favorable foreign currency translation,
0.2 of a percentage point of favorable manufacturing variances,
0.1 of a percentage point of favorable product mix, and 0.4 of a
percentage point of favorable scrap and other product costs.
In addition, cost of products sold as a percentage of net sales for
the fiscal year ended April 25, 2008 was negatively impacted by
0.3 of a percentage point as a result of the $34 million increase
in cost of products sold associated with the fair value adjustment
for the inventory acquired in the Kyphon acquisition.
Cost of products sold was $3.446 billion in fiscal year 2008
representing 25.5 percent of net sales, a decrease of 0.3 of a
percentage point from fiscal year 2007. The cost of products sold
was positively impacted by 0.7 of a percentage point of favorable
foreign currency translation and 0.3 of a percentage point
for reduced other product costs and favorable manufacturing
variances. These decreases were offset by 0.3 of a percentage
point associated with the impact of the $34 million fair value
adjustment for the inventory acquired in the Kyphon acquisition
and 0.4 of a percentage point of unfavorability for scrap and other
product costs associated with the suspension of the worldwide
distribution of the Fidelis lead and scrap costs at our Physio-
Control business segment.
Research and Development Consistent with prior periods, we
have continued to invest in the future by spending aggressively
on research and development efforts. Research and development
spending was $1.355 billion in fiscal year 2009, representing 9.3
percent of net sales, a decrease of 0.1 of a percentage point
from fiscal year 2008. The decrease is primarily the result of