Medtronic 2011 Annual Report Download - page 57

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Medtronic, Inc.
and discounting the net cash flows back to their present values.
The discount rate used is determined at the time of acquisition
in accordance with accepted valuation methods. These
methodologies include consideration of the risk of the project not
achieving commercial feasibility.
At the time of acquisition, the Company expects 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 issuance, and validity and litigation, if any. If commercial
viability were not achieved, the Company would likely look to
other alternatives to provide these therapies.
Contingent Consideration During fiscal year 2010, as mentioned
above, the Company adopted authoritative guidance related to
business combinations. Under this guidance, the Company must
recognize contingent purchase price consideration at fair value
at the acquisition date. Prior to the adoption of this guidance,
contingent consideration was not included on the balance sheet
and was recorded as incurred. The acquisition date fair value is
measured based on the consideration expected to be transferred
(probability-weighted), discounted back to present value. The
discount rate used is determined at the time of the acquisition
in accordance with accepted valuation methods. The fair value
of the contingent milestone consideration is remeasured at the
estimated fair value at each reporting period with the change in
fair value recognized as income or expense within acquisition-
related items in the Company’s consolidated statements of
earnings. Therefore, any changes in the fair value will impact the
Company’s earnings in such reporting period thereby resulting in
potential variability in the Company’s earnings until contingencies
are resolved.
Warranty Obligation The Company offers a warranty on various
products. The Company estimates the costs that may be incurred
under its warranties and records a liability in the amount of such
costs at the time the product is sold. Factors that affect the
Company’s warranty liability include the number of units sold,
historical and anticipated rates of warranty claims, and cost per
claim. The Company periodically assesses the adequacy of its
recorded warranty liabilities and adjusts the amounts as necessary.
The amount of the reserve recorded is equal to the net costs to
repair or otherwise satisfy the claim. The Company includes
the covered costs associated with field actions, if any, in cost of
products sold in the Company’s consolidated statements of
earnings. The Company includes the warranty obligation in other
accrued expenses and other long-term liabilities on the Company’s
consolidated balance sheets.
Changes in the Company’s product warranty obligations during
the years ended April 29, 2011 and April 30, 2010 consisted of
the following:
(in millions)
Balance as of April 24, 2009 $ 35
Warranty claims provision 50
Settlements made (40)
Balance as of April 30, 2010 $ 45
Warranty claims provision 28
Settlements made (29)
Balance as of April 29, 2011 $ 44
Self-Insurance It is the Company’s policy to self-insure the vast
majority of its insurable risks including medical and dental
costs, disability coverage, physical loss to property, business
interruptions, workers’ compensation, comprehensive general,
director and officer, and product liability. Insurance coverage is
obtained for those risks required to be insured by law or contract.
A provision for losses under the self-insured program is recorded
and revised quarterly. The Company uses claims data and
historical experience, as applicable, to estimate liabilities
associated with the exposures that the Company has self-insured.
Based on historical loss trends, the Company believes that its self-
insurance program accruals are adequate to cover future losses.
Historical trends, however, may not be indicative of future losses.
These losses could have a material adverse impact on the
Company’s consolidated financial statements.
Retirement Benefit Plan Assumptions The Company sponsors
various retirement benefit plans, including defined benefit
pension plans (pension benefits), post-retirement medical plans
(post-retirement benefits), defined contribution savings plans,
and termination indemnity plans, covering substantially all U.S.
employees and many employees outside the U.S. Pension benefit
costs include assumptions for the discount rate, retirement age,
compensation rate increases, and the expected return on plan
assets. Post-retirement medical benefit costs include assumptions
for the discount rate, retirement age, expected return on plan
assets, and health care cost trend rate assumptions.