Medtronic 2009 Annual Report Download - page 37

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Medtronic, Inc.
and involuntary separation. Of the 900 positions identified,
approximately 740 have been eliminated as of April 24, 2009.
The restructuring initiatives are scheduled to be substantially
complete by the end of the first quarter of fiscal year 2010,
and are expected to produce annualized operating savings of
approximately $96 million. These savings will arise mostly from
reduced compensation expense.
Fiscal Year 2007 Initiative In the fourth quarter of fiscal year 2007,
we recorded a $36 million restructuring charge, which consisted
of employee termination costs of $28 million and asset write-
downs of $8 million. The asset write-downs consisted of a $5
million charge for inventory write-downs and a $3 million charge
for non-inventory asset write-downs. The inventory and asset
write-downs were recorded within cost of products sold in the
consolidated statement of earnings. These initiatives were
designed to drive manufacturing efficiencies in our CardioVascular
business, downsize our Physio-Control business due to our
voluntary suspension of U.S. shipments and rebalance resources
within our CRDM business in response to market dynamics.
As a continuation of our fiscal year 2007 initiative, in the first
quarter of fiscal year 2008 we incurred $14 million of incremental
restructuring charges associated with compensation provided to
employees whose employment terminated with the Company in
the first quarter of fiscal year 2008. These incremental costs were
not accrued in fiscal year 2007 because these benefits had not yet
been communicated to the impacted employees. Included in the
total $14 million restructuring charge is $4 million of incremental
defined benefit pension and post-retirement related expense
for those employees who accepted early retirement packages.
For further discussion on the incremental defined benefit
pension and post-retirement related expense, see Note 14 to the
consolidated financial statements.
When the restructuring initiative began in fiscal year 2007, we
identified approximately 900 positions for elimination which were
achieved through early retirement packages offered to employees,
voluntary separation and involuntary separation. As of April 25,
2008, the initiatives begun in the fourth quarter of fiscal year
2007 were substantially complete. This restructuring initiative
is expected to produce annualized operating savings of
approximately $125 million mostly from reduced compensation
expense.
For additional information, see Note 3 to the consolidated
financial statements.
Certain Litigation Charges We classify material litigation reserves
recognized as certain litigation charges.
During fiscal year 2009, we incurred four certain litigation
charges totaling $714 million. The first charge in the amount
of $178 million relates to litigation with 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 SFAS No.
5. As a result of the U.S. Court of Appeals’ decision, we have now
recorded a reserve of $178 million which is expected to cover the
revised damages award and pre- and post-judgment interest.
Since the DePuy litigation originated prior to April 24, 2009, we
have appropriately recognized this charge in the consolidated
financial statements for the fiscal year ended April 24, 2009. See
Note 16 to the consolidated financial statements for additional
information.
The second charge in the amount of $270 million relates 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. See Note 16 to the consolidated financial
statements for additional information.
The third charge in the amount of $229 million relates 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 of 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