Medtronic 2010 Annual Report Download - page 38

34Medtronic, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
had not yet been reached and such technology had no future
alternative use.
See Note 5 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 identif ying 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.
At the time of acquisition, we expect 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 2010 and 2009.
Certain Tax Adjustments We classify the material recognition or
derecognition of uncertain tax positions as certain tax adjustments.
In fiscal year 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.
In fiscal year 2008, there were no certain tax adjustments.
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 and impairment
charges on equity securities. 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 operating segment 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.
In fiscal year 2009 other expense, net was $396 million, a
decrease of $40 million from $436 million in the prior fiscal year.
The decrease of $40 million for fiscal year 2009 was primarily due
to the impact of foreign currency gains and losses. Total foreign
currency losses recorded in other expense, net in fiscal year 2009
were $28 million as compared to losses of $148 million in the prior
fiscal year. Additionally, other expense, net was partially offset by
incremental expense from royalties on the sales of Endeavor
products and $92 million of amortization on intangible assets
related to the Kyphon acquisition in the current fiscal year
compared to $46 million 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 and the net realized
gain or loss on the sale or impairment of available-for-sale debt
securities. 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
is 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 slightly 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 the twelve