Medtronic 2011 Annual Report Download - page 78

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74 Medtronic, Inc.
Notes to Consolidated Financial Statements
(continued)
Authoritative guidance provides that contracts are initially
classified as equity if (1) the contract requires physical settlement
or net-share settlement, or (2) the contract gives the Company a
choice of net-cash settlement or settlement in its own shares
(physical settlement or net-share settlement). The settlement
terms of the Company’s purchased call options and sold warrant
contracts provide for net-cash settlement for the particular
contract or net-share settlement, depending on the method of
settlement, as discussed above, which is at the option of the
Company. Based on existing guidance, the purchased call option
contracts were recorded as a reduction of equity and the warrants
were recorded as an addition to equity as of the trade date.
Existing guidance states that a reporting entity shall not consider
contracts to be derivative instruments if the contract issued or
held by the reporting entity is both indexed to its own stock and
classified in shareholders’ equity in its statement of financial
position. The Company concluded that the purchased call option
contracts and the warrant contracts should be accounted for in
shareholders’ equity.
Effective the first day of the Company’s fiscal year 2010,
the Company accounted for the Senior Convertible Notes in
accordance with the authoritative guidance for convertible debt.
The guidance requires the proceeds from the issuance of the
Senior Convertible Notes to be allocated between a liability
component (issued at a discount) and an equity component. The
resulting debt discount is amortized over the period the Senior
Convertible Notes are expected to be outstanding as additional
non-cash interest expense. This change in accounting for the
Senior Convertible Notes has been applied to the Company’s prior
period financial statements on a retrospective basis, as required
by the guidance.
The following table provides equity and debt information for
the Senior Convertible Notes under the convertible debt guidance:
2013 Senior
Convertible Notes
2011 Senior
Convertible Notes
(in millions)
April 2 9,
2011
April 30,
2010
April 29,
2011
April 30,
2010
Carrying amount of the
equity component $ 547 $ 547 $— $ 420
Principal amount of the
Senior Convertible Notes $2,200 $2,200 $— $2,200
Unamortized discount (177) (259) — (90)
Net carrying amount of the
debt component $2,023 $1,941 $— $2,110
As of April 29, 2011, the unamortized balance of the debt
discount for the 2013 Senior Convertible Notes will be amortized
over the remaining life of such debt, which is approximately two
years for the 2013 Senior Convertible Notes. The 2011 Senior
Convertible Notes were repaid in April 2011. The following table
provides interest expense amounts related to the Senior
Convertible Notes:
2013 Senior
Convertible
Notes
2011 Senior
Convertible
Notes
2011 2010 2011 2010
Interest cost related to contractual
interest coupon $36 $36 $32 $34
Interest cost related to amortization
of the discount 82 79 90 90
Senior Notes Senior Notes are unsecured, senior obligations
of the Company and rank equally with all other secured and
unsubordinated indebtedness of the Company. The indentures
under which the Senior Notes were issued contain customary
covenants, all of which the Company remains in compliance with
as of April 29, 2011. The Company used the net proceeds from the
sale of the Senior Notes primarily for working capital and general
corporate uses.
In March 2011, the Company issued two tranches of Senior
Notes (collectively, the 2011 Senior Notes) with an aggregate face
value of $1.000 billion. The first tranche consisted of $500 million
of 2.625 percent Senior Notes due 2016. The second tranche
consisted of $500 million of 4.125 percent Senior Notes due 2021.
Interest on each series of 2011 Senior Notes is payable semi-
annually, on March 15 and September 15 of each year, commencing
September 15, 2011. The Company used the net proceeds from
the sale of the 2011 Senior Notes for working capital and general
corporate uses.
In September 2010, the Company repaid the $400 million 4.375
percent 2005 Senior Notes due 2010.
As of April 29, 2011 and April 30, 2010, the Company had
interest rate swap agreements designated as fair value hedges of
underlying fixed-rate obligations, including the $1.250 billion
3.000 percent 2010 Senior Notes due 2015, the $600 million 4.750
percent 2005 Senior Notes due 2015, the $2.200 billion 1.625
percent Senior Convertible Notes due 2013, and the $550 million
4.500 percent 2009 Senior Notes due 2014. Additionally, as of
April 29, 2011 the Company had interest rate swap agreements
designated as fair value hedges of underlying fixed-rate
obligations including the $500 million 2.625 percent 2011 Senior
Notes due 2016 and the $500 million 4.125 percent 2011 Senior
Notes due 2021. For additional information regarding the interest
rate swap agreements, refer to Note 9.