Medtronic 2010 Annual Report Download - page 61

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Medtronic, Inc.
Forward contracts designated as cash flow hedges are designed
to hedge the variability of cash flows associated with forecasted
transactions denominated in a foreign currency that will take
place in the future. Changes in value of derivatives designated as
cash flow hedges are recorded in accumulated other comprehensive
loss on the consolidated balance sheets until earnings are affected
by the variability of the underlying cash flows. At that time, the
applicable amount of gain or loss from the derivative instrument,
that is deferred in shareholders’ equity, is reclassified to earnings
and is included in other expense, net or cost of products sold in the
consolidated statements of earnings, depending on the underlying
transaction that is being hedged.
The purpose of net investment hedges is to hedge the long-
term investment (equity) in foreign operations. The gains and
losses related to the change in the forward currency exchange
rates of the net investment hedges are recorded currently in
earnings as other expense, net. The gains and losses based on
changes in the current exchange rates, or spot rates, are recorded
as a cumulative translation adjustment, a component of accumulated
other comprehensive loss on the consolidated balance sheets.
The Company uses forward currency exchange rate contracts to
offset its exposure to the change in value of certain foreign
currency denominated intercompany assets and liabilities. These
forward currency exchange rate contracts are not designated as
hedges, and therefore, changes in the value of these freestanding
derivatives are recognized currently in earnings, thereby offsetting
the current earnings effect of the related foreign currency
denominated assets and liabilities.
The Company uses interest rate derivative instruments to
manage its exposure to interest rate movements by converting
fixed-rate debt into floating-rate debt. The objective of the
instruments is to more effectively balance the Company’s
borrowing costs and interest rate risk. These derivative instruments
are designated as fair value hedges under U.S. GAAP. Changes in
the fair value of the derivative instrument are recorded in other
expense, net, and are offset by gains or losses on the underlying
debt instrument. Interest expense includes interest payments
made or received under interest rate derivative instruments.
In addition, the Company has collateral credit agreements with
its primary derivatives counterparties. Under these agreements,
either party is required to post eligible collateral when the market
value of transactions covered by the agreement exceeds specific
thresholds, thus limiting credit exposure for both parties.
Earnings Per Share Basic earnings per share is computed based on
the weighted average number of common shares outstanding.
Diluted earnings per share is computed based on the weighted
average number of common shares outstanding increased by the
number of additional shares that would have been outstanding
had the potentially dilutive common shares been issued and
reduced by the number of shares the Company could have
repurchased from the proceeds from issuance of the potentially
dilutive shares. Potentially dilutive shares of common stock
include stock options and other stock-based awards granted
under stock-based compensation plans and shares committed to
be purchased under the employee stock purchase plan.
In June 2008 the FASB issued new authoritative guidance for
determining whether instruments granted in share-based payment
transactions, such as options, restricted stock units and restricted
stock, are participating securities. This new guidance provides
that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included
in the computation of earnings per share pursuant to the two-
class method. The Company adopted the new guidance in the
first quarter of fiscal year 2010 and was required to retrospectively
adjust all prior period earnings per share data.
See Note 2 for additional information regarding the adoption of
this new authoritative guidance.
The table below sets forth the computation of basic and diluted
earnings per share:
Fiscal Year
(in millions, except per share data) 2010 2009 2008
Numerator:
Net earnings $3,099 $2,070 $2,138
Denominator:
Basic—weighted average shares outstanding 1,106.3 1,121.9 1,133.0
Effect of dilutive securities:
Employee stock options 0.9 2.4 9.7
Employee restricted stock units 1.9 1.2 0.3
Other 0.3 0.8 0.8
Diluted—weighted average
shares outstanding 1,109.4 1,126.3 1,143.8
Basic earnings per share $ 2.80 $ 1.85 $ 1.89
Diluted earnings per share $ 2.79 $ 1.84 $ 1.87
The calculation of weighted average diluted shares outstanding
excludes options for approximately 65 million, 62 million and
22 million common shares in fiscal years 2010, 2009 and 2008,
respectively, as the exercise price of those options was greater
than the average market price, resulting in an anti-dilutive effect
on diluted earnings per share.