Medtronic 2013 Annual Report Download - page 113

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75732me_10K.indd 98 6/25/13 6:39 PM
Table of Contents
Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)
The following table provides the weighted average fair value of options granted to employees and the related assumptions used
in the Black-Scholes model:
Fiscal Year
2013 2012 2011
Weighted average fair value of options granted $ 7.42 $ 6.88 $ 8.19
Assumptions used:
Expected life (years)(a) 6.50 6.40 6.30
Risk-free interest rate(b) 0.94% 1.82% 2.25%
Volatility(c) 26.22% 25.97% 26.03%
Dividend yield(d) 2.64% 2.78% 2.40%
(a) Expected life: The Company analyzes historical employee stock option exercise and termination data to estimate the expected life
assumption. The Company calculates the expected life assumption using the midpoint scenario, which combines historical exercise
data with hypothetical exercise data, as the Company believes this data currently represents the best estimate of the expected life of a
new employee option. The Company also stratifies its employee population into two groups based upon distinctive exercise behavior
patterns.
(b) Risk-free interest rate: The rate is based on the grant date yield of a zero-coupon U.S. Treasury bond whose maturity period equals
the expected term of the option.
(c) Volatility: Expected volatility is based on a blend of historical volatility and an implied volatility of the Company’s common stock.
Implied volatility is based on market traded options of the Company’s common stock.
(d) Dividend yield: The dividend yield rate is calculated by dividing the Company’s annual dividend, based on the most recent quarterly
dividend rate, by the closing stock price on the grant date.
Stock-Based Compensation Expense Under the fair value recognition provisions of U.S. GAAP for accounting for stock-based
compensation, the Company measures stock-based compensation expense at the grant date based on the fair value of the award
and recognizes the compensation expense over the requisite service period, which generally is the vesting period.
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 stock options, restricted
stock awards, and ESPP shares recognized for fiscal years 2013, 2012, and 2011:
Fiscal Year
(in millions) 2013 2012 2011
Stock options $ 44 $ 60 $ 87
Restricted stock awards 96 86 97
Employee stock purchase plan 12 13 14
Physio-Control award acceleration — 2 —
Total stock-based compensation expense $ 152 $ 161 $ 198
Cost of products sold $ 12 $ 12 $ 22
Research and development expense 31 29 49
Selling, general, and administrative expense 109 118 127
Physio-Control divestiture-related costs — 2 —
Total stock-based compensation expense 152 161 198
Income tax benefits (43) (45) (58)
Total stock-based compensation expense, net of tax $ 109 $ 116 $ 140
95