Medtronic 2010 Annual Report Download - page 89

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85
Medtronic, Inc.
Stock-Based Compensation Expense Upon the adoption of the fair
value recognition provisions of U.S. GAAP for accounting for
stock-based compensation, the Company changed its method of
recognition and now recognizes stock-based compensation
expense based on the substantive vesting period for all new
awards. As a result, compensation expense related to stock
options granted prior to fiscal year 2007 is being recognized over
the stated vesting term of the grant rather than being accelerated
upon retirement eligibility.
The amount of stock-based compensation expense recognized
during a period is based on the portion of the awards that
are ultimately expected to vest. The Company estimates pre-
vesting forfeitures at the time of grant by analyzing historical data
and revises those estimates in subsequent periods if actual
forfeitures differ from those estimates. Ultimately, the total
expense recognized over the vesting period will equal the fair
value of awards that actually vest.
The following table presents the components and classification
of stock-based compensation expense, for options, restricted
stock awards and ESPP shares recognized for fiscal years 2010,
2009 and 2008:
Fiscal Year
(in millions) 2010 2009 2008
Stock options $ 112 $ 140 $ 138
Restricted stock awards 98 82 63
Employee stock purchase plan 15 15 16
Total stock-based compensation expense $ 225 $ 237 $ 217
Cost of products sold $ 26 $ 28 $ 24
Research and development expense 55 58 52
Selling, general and administrative expense 144 151 141
Total stock-based compensation expense $ 225 $ 237 $ 217
Income tax benefits (67) (69) (64)
Total stock-based compensation expense,
net of tax $ 158 $ 168 $ 153
In connection with the acquisition of Kyphon in November
2007, the Company assumed Kyphon’s unvested stock-based
awards. These awards are amortized over 2.5 years, which was
their remaining weighted average vesting period at the time of
acquisition. For fiscal years 2010, 2009 and 2008 the Company
recognized $12 million, $21 million and $24 million respectively,
of stock-based compensation expense associated with the
assumed Kyphon awards, which is included in the amounts
presented above.
Stock Options The following table summarizes all stock option activity, including activity from options assumed or issued as a result of
acquisitions, during fiscal years 2010, 2009 and 2008:
Fiscal Year
2010 2009 2008
Options
(in thousands)
Wtd. Avg.
Exercise Price
Options
(in thousands)
Wtd. Avg.
Exercise Price
Options
(in thousands)
Wtd. Avg.
Exercise Price
Beginning balance 93,394 $46.57 92,444 $47.21 90,906 $46.99
Granted 7,863 35.81 12,447 37.25 9,436 48.13
Assumed from Kyphon acquisition — — — — 3,486 27.73
Exercised (3,126) 32.96 (8,046) 39.01 (9,111) 37.80
Canceled (8,518) 46.27 (3,451) 47.59 (2,273) 50.18
Outstanding at year-end 89,613 $46.13 93,394 $46.57 92,444 $47.21
Exercisable at year-end 67,944 $48.24 67,795 $47.78 67,741 $46.80
For options outstanding and exercisable at April 30, 2010, the weighted average remaining contractual life was 5.04 years and 3.97
years, respectively. The total intrinsic value, calculated as the closing stock price at year-end less the option exercise price, of options
exercised during fiscal years 2010, 2009 and 2008 was $19 million, $105 million and $138 million, respectively. For options outstanding
and exercisable at April 30, 2010, the total intrinsic value of in-the-money options was $159 million and $39 million, respectively. The
Company issues new shares when stock option awards are exercised. Cash received from the exercise of stock options for the fiscal year
ended April 30, 2010 was $98 million. The Company’s tax benefit related to the exercise of stock options for fiscal year 2010 was $6
million. Unrecognized compensation expense related to outstanding stock options as of April 30, 2010 was $144 million and is expected
to be recognized over a weighted average period of 2.3 years and will be adjusted for any future changes in estimated forfeitures.