Medtronic 2010 Annual Report Download - page 39

35
Medtronic, Inc.
months ended April 30, 2010. See our discussion in the “Liquidity
and Capital Resources” section of this management’s discussion and
analysis for more information regarding our investment portfolio.
In fiscal year 2009 interest expense, net was $183 million, as
compared to $36 million in fiscal year 2008. The increase in interest
expense, net of $147 million in fiscal year 2009 is the result of
lower average cash and investment balances during fiscal year
2009 as a result of the cash utilized to finance the Kyphon
acquisition that took place in the third quarter of fiscal year 2008
and lower interest rates being earned on our short- and long-term
investments during the twelve months ended April 24, 2009.
Interest expense also decreased in fiscal year 2009 as a result of
having lower interest rates on our outstanding debt in comparison
to fiscal year 2008.
Income Taxes
Fiscal Year
Percentage Point
Increase/
(Decrease)
(dollars in millions) 2010 2009 2008 FY10/09 FY09/08
Provision for income
taxes $870 $370 $602 N/A N/A
Effective tax rate 21.9% 15.2% 22.0% 6.7 (6.8)
Impact of special
charges,
restructuring
charges, certain
litigation charges,
net, IPR&D and
certain acquisition-
related costs and
certain tax
adjustments 0.4 (5.2) 1.6 5.6 (6.8)
Non-GAAP nominal
tax rate(1) 21.5% 20.4% 20.4% 1.1 —
(1) 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, IPR&D and certain
acquisition-related costs and certain tax adjustments. We believe that the
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
the 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 as similar measures
presented by other companies.
The effective tax rate of 21.9 percent increased by 6.7 percentage
points from fiscal year 2009 to fiscal year 2010. The change in our
effective tax rate was primarily due to the impact of special
charges, restructuring charges, certain litigation charges, net,
IPR&D and certain acquisition-related costs and certain tax
adjustments. The 5.6 percentage point increase in the impact from
special charges, restructuring charges, certain litigation charges,
net, IPR&D and certain acquisition-related costs and certain tax
adjustments is largely due to the $132 million benefit from the
certain tax adjustment associated with the reversal of excess tax
accruals. This reversal related to the settlement of certain issues
reached with the IRS involving the review of the Company’s 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 recorded in fiscal year 2009. Our non-GAAP nominal
tax rate for fiscal year 2010 was 21.5 percent compared to 20.4
percent from the prior fiscal year. The increase in our non-GAAP
nominal tax rate for fiscal year 2010 as compared to the prior fiscal
year was due to the operational tax benefits described below and
the impact of tax benefits derived from our international operations.
During fiscal year 2010 we recorded $5 million in operational tax
benefits. This included a $20 million operational tax benefit
associated with certain Irish research and development credit
claims, the deductibility of a settlement expense, the finalization
of certain foreign and domestic tax returns and changes to
uncertain tax position reserves. This benefit was partially offset by
the $15 million tax cost associated with the U.S. healthcare reform
legislation eliminating the federal tax benefit for government
subsidies of retiree prescription drug benefits.
The fiscal year 2009 effective tax rate of 15.2 percent decreased
by 6.8 percentage points from fiscal year 2008. The change in our
effective tax rate was due to the tax impact of special charges,
restructuring charges, certain litigation charges, net, IPR&D and
certain acquisition-related costs and certain tax adjustments. The
6.8 percentage point decrease in the impact of special charges,
restructuring charges, certain litigation charges, net, IPR&D and
certain acquisition-related costs and certain tax adjustments is
largely due to the $132 million benefit from certain tax adjustments
associated with the reversal of excess tax accruals. This reversal
related to the settlement of certain issues reached with the IRS
involving the review of the Company’s 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
recorded in fiscal year 2009. Our non-GAAP nominal tax rate for
fiscal years 2009 and 2008 was 20.4 percent.
During fiscal year 2009 we recorded $44 million in operational
tax benefits. This included a $16 million operational tax benefit
associated with the retroactive renewal and extension of the
research and development credit enacted by the Tax Extenders
and Alternative Minimum Tax Relief Act of 2008 which related to