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Annual Report
SEC 10-K Filing for Fiscal Year 2014
Fiscal Year 2014

Table of contents

  • Page 1
    Annual Report SEC 10-K Filing for Fiscal Year 2014 Fiscal Year 2014

  • Page 2
    ... therapy innovation Increasing access to existing therapies through globalization, especially in emerging markets Leading the transformation to a value-based healthcare company, leveraging the economic value of our products and services Enhancing shareholder value through best-in-class financial...

  • Page 3
    ... points into new therapies. We also believe that Medtronic's deep clinical, regulatory, reimbursement, and market development expertise will help accelerate both their introduction, as well as their rapid adoption, in markets around the world. Our globalization strategy will benefit from the power...

  • Page 4
    ... preserve U.S. global leadership in medical technology innovation, and ultimately will lead to better healthcare systems in the U.S. and around the world. We are extremely excited about this acquisition, and believe that the combination of Covidien with Medtronic gives us an even better platform to...

  • Page 5
    ..., such non-GAAP financial measures may not be the same as, or similar to, measures presented by other companies. RECONCILIATION OF REVENUE GROWTH TO CONSTANT CURRENCY GROWTH (Unaudited) (In millions) Fiscal year ended April 25, April 26, 2014 2013 Currency Impact on Growth Reported Growth Dollar...

  • Page 6
    ...No.) 710 Medtronic Parkway Minneapolis, Minnesota 55432 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (763) 514-4000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common stock, par value $0.10 per share Name...

  • Page 7
    ... Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors, Executive Officers, and Corporate Governance Executive Compensation Security...

  • Page 8
    ... public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Stock Transfer Agent and Registrar Wells Fargo Shareowner ServicesSM acts as transfer agent and registrar, dividend paying agent, and direct stock purchase plan agent for Medtronic and...

  • Page 9
    ... Group Cardiac Rhythm Disease Management (CRDM) Coronary Structural Heart 38% Total Restorative Therapies Group $6,501 Fiscal Year 2014 (dollars in millions) Endovascular ‰ Restorative Therapies Group 10% 52% Spine Neuromodulation Surgical Technologies ‰ Diabetes Group Total Diabetes Group...

  • Page 10
    ...care programs and group purchasing organizations. CARDIAC AND VASCULAR GROUP Cardiac Rhythm Disease Management CRDM develops, manufactures, and markets products for the diagnosis, treatment, and management of heart rhythm disorders and heart failure, including implantable devices, leads and delivery...

  • Page 11
    ... surgical site infections associated with implantable pacemakers, defibrillators, and spinal cord neurostimulators. Our Cath Lab Managed Services business is focused on developing novel partnerships with hospitals to provide services directly related to hospital operational efficiency. The business...

  • Page 12
    ... surgery, and surgical ablation products. The following are the principal products offered by our Structural Heart business: Transcatheter Heart Valves (TCVs). TCV technology represents a less invasive means to treat heart valve disease and is designed to allow physicians to deliver replacement...

  • Page 13
    ... use our Structural Heart products are cardiac surgeons and interventional cardiologists. Our primary competitors in the Structural Heart business are Edwards Lifesciences Corporation (Edwards), St. Jude, Sorin, Maquet Medical Systems, which is part of the publicly-listed Swedish group of companies...

  • Page 14
    ... GROUP Spine Our Spine business develops, manufactures, and markets a comprehensive line of medical devices and implants used in the treatment of the spine and musculoskeletal system. Our products and therapies treat a variety of conditions affecting the spine, including degenerative disc disease...

  • Page 15
    .... Neurostimulation uses an implantable medical device, similar to a pacemaker, called a neurostimulator. The following are the principal products offered by our Neuromodulation business: Neurostimulation Systems for Chronic Pain. Neurostimulation therapy for chronic pain uses a neurostimulator...

  • Page 16
    ..., and markets image-guided surgery and intra-operative imaging systems that facilitate surgical planning during precision cranial, spinal, sinus, and orthopedic surgeries. Our Advanced Energy business includes products in the emerging field of advanced energy surgical incision technology, as well as...

  • Page 17
    ... Medical Inc. DIABETES GROUP Our Diabetes business develops, manufactures, and markets advanced, integrated diabetes management solutions that include insulin pump therapy, continuous glucose monitoring (CGM) systems, and therapy management software. The following are the principal products offered...

  • Page 18
    ...of new products is necessary to maintain market leadership. Our research and development (R&D) efforts are directed toward maintaining or achieving technological leadership in each of the markets we serve in order to help ensure that patients using our devices and therapies receive the most advanced...

  • Page 19
    ... our Current Report on Form 8-K filed with the SEC on June 16, 2014. Fiscal Year 2014 On December 30, 2013, the Company acquired TYRX, Inc. (TYRX), a privately-held developer of antibiotic drug and implanted medical device combinations. TYRX's products include those designed to reduce surgical site...

  • Page 20
    ... payments equal TYRX's actual annual revenue growth for the Company's fiscal years 2015 and 2016. On August 7, 2013, the Company acquired Cardiocom, LLC (Cardiocom), a privately-held developer and provider of integrated solutions for the management of chronic diseases such as heart failure, diabetes...

  • Page 21
    ... or acquire advanced technology, incorporate this technology into proprietary products, obtain regulatory approvals in a timely manner, maintain high-quality manufacturing processes, and successfully market these products. Worldwide Operations For financial reporting purposes, net sales and property...

  • Page 22
    ... adequate supply of raw materials from suppliers and meet the product delivery needs of our customers. We also provide payment terms to customers in the normal course of business and rights to return product under warranty to meet the operational demands of our customers. Employees On April 25, 2014...

  • Page 23
    ... medical device before we can commercially distribute the new medical device. Modifications to cleared medical devices can be made without using the 510(k) process if the changes do not significantly affect safety or effectiveness. A very small number of our devices are exempt from pre-market review...

  • Page 24
    ... the Inspector General of the Department of Health and Human Services, the Department of Justice (DOJ), and various state Attorneys General) monitor the manner in which we promote and advertise our products. Although surgeons are permitted to use their medical judgment to employ medical devices for...

  • Page 25
    ... a few units such as our Diabetes business and our health insurance plans. Medtronic only operates as a Business Associate to Covered Entities in a limited number of instances. In those cases, the patient data that we receive and analyze may include protected health information. We are committed to...

  • Page 26
    ... U.S. These changes are causing the marketplace to put increased emphasis on the delivery of more cost-effective medical devices and therapies. Government programs, including Medicare and Medicaid, private health care insurance, and managed-care plans have attempted to control costs by limiting the...

  • Page 27
    ... damage awards and injunctions that could prevent the manufacture and sale of affected products or result in significant royalty payments in order to continue selling the products. At any given time, we are involved as both a plaintiff and a defendant in a number of patent infringement actions, the...

  • Page 28
    ... of Medtronic's Emergency Response Systems division from May 2005 to October 2006; and Vice President of Sales and Marketing of Medtronic's Cardiac Rhythm Disease Management division from November 2001 to May 2005. Mr. O'Connell has served in various management positions since joining the Company in...

  • Page 29
    ... from providers of alternative medical therapies such as pharmaceutical companies. Competitive factors include: product reliability, product performance, product technology, product quality, breadth of product lines, product services, customer support, price, and reimbursement approval from...

  • Page 30
    ... the approved product labeling. A number of enforcement actions have been taken against manufacturers that promote products for "off-label" uses, including actions alleging that federal health care program reimbursement of products promoted for "off-label" uses are false and fraudulent claims to the...

  • Page 31
    ... and business operations. Quality problems with our processes, goods, and services could harm our reputation for producing high-quality products and erode our competitive advantage, sales, and market share. Quality is extremely important to us and our customers due to the serious and costly...

  • Page 32
    ...our business and reputation and on our ability to attract and retain customers for our products. Health care policy changes, including U.S. health care reform legislation signed in 2010, may have a material adverse effect on us. In response to perceived increases in health care costs in recent years...

  • Page 33
    ...improving quality and decreasing costs. It is uncertain at this point what negative unintended consequences these provisions will have on patient access to new technologies. The Medicare provisions include value-based payment programs, increased funding of comparative effectiveness research, reduced...

  • Page 34
    ... have an adverse effect on our revenues and results of operations. Many health care industry companies, including health care systems, are consolidating to create new companies with greater market power. As the health care industry consolidates, competition to provide goods and services to industry...

  • Page 35
    ... marketed in line with the needs and expectations of the professionals who use and support our products, which could cause a decline in our earnings and profitability. The research, development, marketing, and sales of many of our new and improved products is dependent upon our maintaining working...

  • Page 36
    ... its constituent companies, such as increasing sales of the combined company's products, achieving cost savings, and effectively combining technologies to develop new products. • • • • For additional information regarding risks relating to the Pending Acquisition of Covidien plc, see...

  • Page 37
    ...sophisticated information technology for its products and infrastructure. As a result of technology initiatives, recently enacted regulations, changes in our system platforms and integration of new business acquisitions, we have been consolidating and integrating the number of systems we operate and...

  • Page 38
    ... in order to obtain any approvals required to consummate the Pending Acquisition, these requirements, limitations, costs, divestitures or restrictions could adversely affect New Medtronic's ability to integrate Medtronic's operations with Covidien's operations or reduce the anticipated benefits of...

  • Page 39
    ... or may disrupt our current plans and operations. There can be no assurance that we will be able to successfully integrate the businesses of Medtronic and Covidien or otherwise realize the expected benefits of the Pending Acquisition. The expected cost savings and synergies of the merger may not be...

  • Page 40
    ... II Item 5. Market for Medtronic's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities The Company's common stock is listed on the New York Stock Exchange under the symbol "MDT." In June 2013 and June 2011, the Company's Board of Directors authorized the repurchase...

  • Page 41
    ... the cumulative total shareholder return on Medtronic's common stock with the cumulative total shareholder return on the Standard & Poor's (S&P) 500 Index and the S&P 500 Health Care Equipment Index for the last five fiscal years. The graph assumes that $100 was invested at market close on April 24...

  • Page 42
    ... - Net earnings Cash dividends declared Financial Position at Fiscal Year-end: Working capital Current ratio Total assets Long-term debt Shareholders' equity Additional Information:* Full-time employees at year-end Full-time equivalent employees at year-end * Employee counts include continuing...

  • Page 43
    ... 53 weeks. Fiscal years 2014, 2013, and 2012 were 52-week years. Fiscal year 2016 will be the next 53-week year. Executive Level Overview Medtronic is the global leader in medical technology - alleviating pain, restoring health, and extending life for millions of people around the world. We develop...

  • Page 44
    ...Covidien), Kalani I Limited, a private limited company organized under the laws of Ireland (New Medtronic), Makani II Limited, a private limited company organized under the laws of Ireland and a wholly-owned subsidiary of New Medtronic (IrSub), Aviation Acquisition Co., Inc., a Minnesota corporation...

  • Page 45
    ..., legal proceedings, inprocess research and development (IPR&D), contingent consideration, warranty obligations, product liability, self-insurance, pension and post-retirement obligations, sales returns and discounts, stock-based compensation, valuation of equity and debt securities, and income tax...

  • Page 46
    ... the assets acquired, including IPR&D, and liabilities assumed are recorded at their respective fair values as of the acquisition date. Our policy defines IPR&D as the fair value of those projects for which the related products have not received regulatory approval and have no alternative future use...

  • Page 47
    ... the net cash flows back to their present values. The discount rate used is determined at the time of measurement in accordance with accepted valuation methodologies. IPR&D acquired in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after...

  • Page 48
    ... systems, heart valve replacement technologies, cardiac tissue ablation systems, and open heart and coronary bypass grafting surgical products. The Cardiac and Vascular Group also includes Cardiocom and Cath Lab Managed Services (CLMS). The Cardiac and Vascular Group's net sales for fiscal year 2014...

  • Page 49
    ... 7 percent compared to the prior fiscal year. The increase in Structural Heart net sales was primarily driven by strong sales of the CoreValve transcatheter aortic heart valves in Western Europe and of our perfusion system and blood management products in emerging markets. Growth was also driven by...

  • Page 50
    ... of fiscal year 2012, as well as the Valiant Captivia Thoracic Stent Graft System, which launched in the U.S. in the fourth quarter of fiscal year 2012 and in Japan and China in the first quarter of fiscal year 2013. Strong worldwide sales of our peripheral stent products and drug-eluting balloons...

  • Page 51
    ... of Cardiocom's integrated solutions for the management of chronic diseases such as heart failure, diabetes, and hypertension. Cardiocom was acquired in August 2013. In the third quarter of fiscal year 2014, Cardiocom launched Re30, a 30-day readmission reduction program focused on minimizing...

  • Page 52
    ..., products to treat conditions of the ear, nose, and throat, and systems that incorporate advanced energy surgical instruments. Additionally, this group manufactures and sells image-guided surgery and intra-operative imaging systems. The Restorative Therapies Group's net sales for fiscal year 2014...

  • Page 53
    ... year 2013 were $1.426 billion, an increase of 14 percent over the prior fiscal year. The increase in net sales was driven by sales of capital equipment, including O-arm imaging and StealthStation S7 surgical navigation systems, Midas Rex powered surgical equipment, and Advanced Energy products...

  • Page 54
    ... the NIM Eclipse system during spinal surgical procedures. • • • • • • • • Diabetes Group The Diabetes Group products include insulin pumps, CGM systems, insulin pump consumables, and therapy management software. The Diabetes Group's net sales for fiscal year 2014 were $1.657...

  • Page 55
    ... of net sales, a decrease of 0.7 of a percentage point from fiscal year 2013. The decrease for fiscal year 2014 was driven by a shift in research and development resources to investment in product support to enhance our quality systems in the Neuromodulation business and Diabetes Group, which is...

  • Page 56
    ... and development, we continue to access new technologies in areas served by our existing businesses, as well as in new areas, through acquisitions, licensing agreements, alliances, and certain strategic equity investments. Selling, General, and Administrative Fiscal year 2014 selling, general, and...

  • Page 57
    ... financial statements in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for additional information. During fiscal year 2012, we recorded certain litigation charges, net of $90 million related to the agreement to settle the federal securities class action...

  • Page 58
    ... Internal Revenue Service (IRS) relating to their review of our fiscal year 2009 through 2011 domestic income tax returns. The $63 million certain tax benefit was recorded in the provision for income taxes in the consolidated statement of earnings for fiscal year 2014. In fiscal years 2013 and 2012...

  • Page 59
    ...expense from higher average outstanding long-term debt. See our discussion in the "Liquidity and Capital Resources" section of this management's discussion and analysis for more information regarding our investment portfolio. Income Taxes Fiscal Year 2013 Percentage Point Increase (Decrease) FY14/13...

  • Page 60
    ... of certain tax returns, and changes to uncertain tax position reserves. As a result of the retroactive renewal and extension of the U.S. federal research and development tax credit, a $12 million benefit was also recorded as an operational tax benefit during fiscal year 2013. In addition, we...

  • Page 61
    ... Report on Form 10-K for additional information. Liquidity and Capital Resources Fiscal Year (dollars in millions) 2014 2013 Working capital Current ratio* Cash, cash equivalents, and current investments Non-current investments in debt, marketable equity, and trading securities** Total Short-term...

  • Page 62
    ... "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for additional information regarding our planned acquisition of Covidien and related Credit Agreements. Our net cash position in fiscal year 2014 increased by $1.696 billion as compared to fiscal year 2013. See...

  • Page 63
    ...in this Annual Report on Form 10-K for additional information regarding fair value measurements. Summary of Cash Flows (in millions) 2014 Fiscal Year 2013 2012 Cash provided by (used in): Operating activities Investing activities Financing activities Effect of exchange rate changes on cash and cash...

  • Page 64
    ... business. These commitments do not include open purchase orders. Certain commitments related to the funding of cost or equity method investments and/or previous acquisitions are contingent upon the achievement of certain product-related milestones and various other favorable operational conditions...

  • Page 65
    ... to the completion of the Covidien shareholder meeting. For further information regarding the Pending Acquisition, see the "Executive Overview - Pending Acquisition of Covidien plc" section of this management's discussion and analysis. Debt and Capital Our capital structure consists of equity and...

  • Page 66
    ... 25, 2014. Acquisitions Fiscal Year 2014 On December 30, 2013, we acquired TYRX, a privately-held developer of antibiotic drug and implanted medical device combinations. TYRX's products include those designed to reduce surgical site infections associated with implantable pacemakers, defibrillators...

  • Page 67
    On August 7, 2013, we acquired Cardiocom, a privately-held developer and provider of integrated solutions for the management of chronic diseases such as heart failure, diabetes, and hypertension. Cardiocom's products and services include remote monitoring and patient-centered software to enable ...

  • Page 68
    ... 1. Business" and "Item 1A. Risk Factors" in this Annual Report on Form 10-K, as well as those related to competition in the medical device industry, reduction or interruption in our supply, quality problems, liquidity, decreasing prices, changes in applicable tax rates, adverse regulatory action...

  • Page 69
    ... a number of factors, including, among others, those discussed in the section entitled "Item 1A. Risk Factors" in this Annual Report on Form 10-K. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement...

  • Page 70
    ... point change in interest rates, compared to interest rates as of April 25, 2014, indicates that the fair value of these instruments would correspondingly change by $75 million. We have investments in marketable debt securities that are classified and accounted for as available-for-sale. Our debt...

  • Page 71
    ... balance sheets and the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Medtronic, Inc. and its subsidiaries (the Company) at April 25, 2014 and April 26, 2013, and the results...

  • Page 72
    Medtronic, Inc. Consolidated Statements of Earnings 2014 (in millions, except per share data) Fiscal Year 2013 2012 Net sales Costs and expenses: Cost of products sold Research and development expense Selling, general, and administrative expense Special charges Restructuring charges, net Certain ...

  • Page 73
    Medtronic, Inc. Consolidated Statements of Comprehensive Income 2014 (in millions) Fiscal Year 2013 2012 Net earnings Other comprehensive income (loss), net of tax: Unrealized loss on available-for-sale securities, net of tax benefit... an integral part of these consolidated financial statements. 65

  • Page 74
    ...LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings Accounts payable Accrued compensation Accrued income taxes Deferred tax liabilities Other accrued expenses Total current liabilities Long-term debt Long-term accrued compensation and retirement benefits Long-term accrued...

  • Page 75
    ... compensation Balance as of April 26, 2013 Net earnings Other comprehensive loss Dividends to shareholders Issuance of common stock under stock purchase and award plans Repurchase of common stock Tax benefit from exercise of stock-based awards Stock-based compensation Balance as of April 25, 2014...

  • Page 76
    ... of Cash Flows Fiscal Year 2013 2014 (in millions) Operating Activities: Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization Amortization of debt discount and issuance costs Gain on sale of Physio-Control Acquisition-related...

  • Page 77
    ... of Operations Medtronic, Inc. (Medtronic or the Company) is the global leader in medical technology - alleviating pain, restoring health, and extending life for millions of people around the world. The Company provides innovative products and therapies for use by medical professionals to meet the...

  • Page 78
    ...498 million was recognized in fiscal years 2014, 2013, and 2012, respectively. Goodwill Goodwill is the excess of the purchase price (consideration) over the estimated fair value of net assets, including inprocess research and development (IPR&D), of acquired businesses. In accordance with U.S. GAAP...

  • Page 79
    ... value. Fair value is generally determined using a discounted future cash flow analysis. IPR&D During fiscal year 2010, the Company adopted authoritative guidance related to business combinations. Subsequent to the adoption of this guidance, IPR&D acquired in a business combination is capitalized...

  • Page 80
    Medtronic, Inc. Notes to Consolidated Financial Statements (Continued) Changes in the Company's product warranty obligations during the years ended April 25, 2014 and April 26, 2013 consisted of the following: (in millions) Balance as of April 27, 2012 Warranty claims provision Settlements made ...

  • Page 81
    ... The Company's compensation programs include share-based payments. All awards under sharebased payment programs are accounted for at fair value and these fair values are generally amortized on a straight-line basis over the vesting terms into cost of products sold, research and development expense...

  • Page 82
    ... reported as operating activities in the consolidated statements of cash flows. The Company uses interest rate derivative instruments designated as fair value hedges to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt...

  • Page 83
    ... stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan. The table below sets forth the computation of basic and diluted earnings per share: (in millions, except per share data) 2014 Fiscal Year 2013 2012 Numerator...

  • Page 84
    ... of fiscal year 2014 and its adoption did not have a material impact on the Company's consolidated financial statements. In February 2013, the FASB expanded the disclosure requirements with respect to changes in accumulated other comprehensive income (AOCI). Under this new guidance, companies are...

  • Page 85
    ..., was recorded within cost of products sold in the consolidated statements of earnings. The fiscal year 2014 initiative primarily relates to the Company's renal denervation business, certain manufacturing shut-downs, and a reduction of back-office support functions in Europe. As of the end of the...

  • Page 86
    ... production-related asset impairments, and therefore, was recorded within cost of products sold in the consolidated statements of earnings. In the first quarter of fiscal year 2014, the Company recorded an $18 million restructuring charge, which was the final charge related to the fiscal year 2013...

  • Page 87
    ... the date each company was acquired. Fiscal Year 2014 TYRX, Inc. On December 30, 2013, the Company acquired TYRX, Inc. (TYRX), a privately-held developer of antibiotic drug and implanted medical device combinations. TYRX's products include those designed to reduce surgical site infections associated...

  • Page 88
    ... 2013, the Company acquired Cardiocom, LLC (Cardiocom), a privately-held developer and provider of integrated solutions for the management of chronic diseases such as heart failure, diabetes, and hypertension. Cardiocom's products and services include remote monitoring and patient-centered software...

  • Page 89
    ...11 923 29 77 1 107 $ 816 During fiscal year 2013, the Company recorded net income from acquisition-related items of $49 million, primarily including income of $62 million related to the change in fair value of contingent consideration associated with acquisitions subsequent to April 29, 2009. The...

  • Page 90
    Medtronic, Inc. Notes to Consolidated Financial Statements (Continued) Fiscal Year 2012 Salient Surgical Technologies, Inc. On August 31, 2011, the Company acquired Salient Surgical Technologies, Inc. (Salient). Salient develops and markets devices for haemostatic sealing of soft tissue and bone ...

  • Page 91
    ... the current period using a discounted cash flow model. Projected revenues are based on the Company's most recent internal operational budgets and long-range strategic plans. Increases (decreases) in projected revenues, probabilities of payment, discount rates, or projected payment dates may result...

  • Page 92
    ... fair value are reported as operating activities in the consolidated statements of cash flows. The following table provides a reconciliation of the beginning and ending balances of contingent consideration associated with acquisitions subsequent to April 24, 2009: Fiscal Year (in millions) 2014 2013...

  • Page 93
    Medtronic, Inc. Notes to Consolidated Financial Statements (Continued) Information regarding the Company's investments at April 25, 2014 is as follows: (in millions) Cost Unrealized Gains Unrealized Losses Fair Value Available-for-sale securities: Corporate debt securities Auction rate securities ...

  • Page 94
    ... (21) $ Includes available-for-sale debt securities. Includes marketable equity securities, cost method, equity method, exchange-traded funds, and other investments. As a result of the Salient and PEAK acquisitions that occurred during fiscal year 2012, the Company recognized a noncash gain of $38...

  • Page 95
    ..., 2014 and April 26, 2013, the aggregate carrying amount of equity and other securities without a quoted market price and accounted for using the cost or equity method was $666 million and $549 million, respectively. The total carrying value of these investments is reviewed quarterly for changes in...

  • Page 96
    ... such as marketable equity securities and debt and equity securities that are classified and accounted for as trading, available-for-sale, and derivative instruments and contingent consideration associated with acquisitions subsequent to April 24, 2009. Derivatives include cash flow hedges...

  • Page 97
    ... such as contractual terms, maturity, timing, and amount of expected future cash flows, as well as assumptions about liquidity and credit valuation adjustments by market participants. The fair value of auction rate securities is estimated by the Company using a discounted cash flow model, which...

  • Page 98
    ... 25, 2014: Valuation Technique Unobservable Input Range (Weighted Average) Auction rate securities Discounted cash flow Years to principal recovery Illiquidity premium 2 yrs. - 12 yrs. (3 yrs.) 6% The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the...

  • Page 99
    ... on the Ardian long-lived asset group. As a result of the analysis performed during fiscal year 2013, the fair value of IPR&D assets were deemed to be less than the carrying value, resulting in a pre-tax impairment loss of $5 million that was recorded in acquisition-related items in the consolidated...

  • Page 100
    ...values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity. 7. Goodwill and Other Intangible Assets, Net The changes in the carrying amount of goodwill for fiscal years 2014 and 2013 are as follows: (in millions) Cardiac and Vascular Group...

  • Page 101
    ... Financial Statements (Continued) Balances of other intangible assets, net, for fiscal years 2014 and 2013 are as follows: Purchased Technology and Patents Trademarks and Tradenames (in millions) Acquired IPR&D Other Total Other intangible assets as of April 25, 2014 Original cost Accumulated...

  • Page 102
    ... Debt consisted of the following: April 25, 2014 Effective Interest Payable Rate April 26, 2013 Effective Interest Payable Rate (in millions, except interest rates) Maturity by Fiscal Year Short-Term Borrowings: Commercial paper Capital lease obligations Bank borrowings 3.000 percent five-year...

  • Page 103
    ...October 1, 2013. The Company used the net proceeds from the sale of the 2013 Senior Notes for working capital and general corporate purposes, including repayment of indebtedness. As of April 25, 2014 and April 26, 2013, the Company had interest rate swap agreements designated as fair value hedges of...

  • Page 104
    ... million, $25 million, and $(183) million, in fiscal years 2014, 2013, and 2012, respectively. These (losses) gains represent the net impact to the consolidated statements of earnings for the exchange rate derivative instruments presented below, as well as the remeasurement (losses) gains on foreign...

  • Page 105
    ...) gains and location of the (losses) gains in the consolidated statements of earnings and other comprehensive income (OCI) related to foreign currency exchange rate contract derivative instruments designated as cash flow hedges for the fiscal years ended April 25, 2014, April 26, 2013, and April...

  • Page 106
    ... of planned debt issuances. For the fiscal years ended April 25, 2014 and April 26, 2013, the Company reclassified $8 million and $1 million, respectively, of the effective portion of the net losses on forward starting interest rate derivative instruments from accumulated other comprehensive...

  • Page 107
    ... Company did not recognize any gains or losses during fiscal years 2014, 2013, or 2012 on firm commitments that no longer qualify as fair value hedges. Balance Sheet Presentation The following tables summarize the location and fair value amounts of derivative instruments reported in the consolidated...

  • Page 108
    ... to Consolidated Financial Statements (Continued) April 25, 2014 Asset Derivatives (in millions) Balance Sheet Location Fair Value Liability Derivatives Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Foreign currency exchange rate contracts...

  • Page 109
    ... of credit risk, consist principally of interest-bearing investments, forward exchange derivative contracts, and trade accounts receivable. The Company maintains cash and cash equivalents, investments, and certain other financial instruments (including currency exchange rate and interest rate...

  • Page 110
    ...agreements, and the amortization of debt issuance costs and debt discounts. 11. Shareholders' Equity Shares are repurchased from time to time to support the Company's stock-based compensation programs and to return capital to shareholders. In June 2013 and June 2011, the Company's Board of Directors...

  • Page 111
    ... limit under the U.S. Internal Revenue Code toward the purchase of the Company's common stock at 85 percent of its market value at the end of the calendar quarter purchase period. Employees purchased 2 million shares at an average price of $47.32 per share in the fiscal year ended April 25, 2014...

  • Page 112
    ... for fiscal years 2014, 2013, and 2012: (in millions) 2014 Fiscal Year 2013 2012 Stock options Restricted stock awards Employees stock purchase plan Physio-Control award acceleration Total stock-based compensation expense Cost of products sold Research and development expense Selling, general, and...

  • Page 113
    ... issues new shares when stock option awards are exercised. Cash received from the exercise of stock options for the fiscal year ended April 25, 2014 was $1.273 billion. The Company's tax benefit related to the exercise of stock options for fiscal year 2014 was $78 million. Unrecognized compensation...

  • Page 114
    ... effect of these temporary differences as "deferred tax assets" and "deferred tax liabilities." Deferred tax assets generally represent items that can be used as a tax deduction or credit in a tax return in future years for which the Company has already recorded the tax benefit in the consolidated...

  • Page 115
    ...Other Accumulated depreciation Unrealized gain on available-for-sale securities and derivative financial instruments Total deferred tax liabilities Prepaid income taxes Income tax receivables Tax assets, net Reported as (after valuation allowance and jurisdictional netting): Tax assets Long-term tax...

  • Page 116
    ...income taxes in the consolidated statement of earnings for fiscal year 2014. In fiscal year 2012, the Company entered into a sale-leaseback agreement that was recorded as a capital lease and as a result of the transaction, the Company recorded a $33 million tax benefit associated with the release of...

  • Page 117
    ... between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, which is one of the Company's key manufacturing sites. In October 2011, the IRS issued its audit report for fiscal years 2007 and 2008. The Company reached agreement with the IRS on some but not all matters related to...

  • Page 118
    ... to these fiscal years. The significant issues that remain unresolved relate to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, and proposed adjustments associated with the tax effects of its acquisition structures for Ardian, CoreValve, Inc...

  • Page 119
    ... Benefits Fiscal Year 2014 2013 Post-Retirement Benefits Fiscal Year 2014 2013 (in millions) Accumulated benefit obligation at end of year: Change in projected benefit obligation: Projected benefit obligation at beginning of year Service cost Interest cost Employee contributions Plan amendments...

  • Page 120
    ... Pension Benefits (in millions) 2014 Fiscal Year 2013 2012 $ 2,864 2,419 $ 2,637 2,104 Non-U.S. Pension Benefits Fiscal Year 2014 2013 2012 Post-Retirement Benefits Fiscal Year 2014 2013 2012 Service cost Interest cost Expected return on plan assets Amortization of prior service cost (credit...

  • Page 121
    ... using a building block approach, considering historical averages and real returns of each asset class. In certain countries, where historical returns are not meaningful, consideration is given to local market expectations of long-term returns. Retirement Benefit Plan Investment Strategy The Company...

  • Page 122
    ...securities Debt securities Other Total 41% 22 37 100% 40% 22 38 100% Retirement Benefit Plan Asset Fair Values The following is a description of the valuation methodologies used for retirement benefit plan assets measured at fair value. Short-term investments: Valued at the closing price reported...

  • Page 123
    ... to 95 days. As of April 25, 2014, there are two absolute return strategy funds totaling $5 million that are in the process of liquidation. The Company expects to receive the majority of the proceeds over the next five years. Private equity investments consist of common stock and debt instruments of...

  • Page 124
    Medtronic, Inc. Notes to Consolidated Financial Statements (Continued) The following tables provide a reconciliation of the beginning and ending balances of U.S. pension benefit assets measured at fair value that used significant unobservable inputs (Level 3): (in millions) Total Level 3 Investments...

  • Page 125
    ...-Retirement Benefits Fair Value as of April 25, 2014 $ 16 1 1 $ 9 - 1 $ 7 1 - $ 18 $ 10 $ 8 (in millions) Fair Value Measurements Using Inputs Considered as Level 1 Level 2 Level 3 Short-term investments U.S. government securities Corporate debt securities Other common stock Equity...

  • Page 126
    ... loss Purchases and sales, net Balance as of April 26, 2013 $ 108 5 4 3 $ 28 4 - - $ 80 1 4 3 $ 120 $ 32 $ 88 Retirement Benefit Plan Funding It is the Company's policy to fund retirement costs within the limits of allowable tax deductions. During fiscal year 2014, the Company made...

  • Page 127
    ... be recognized immediately in the income statement in the period that includes the enactment date, regardless of the effective date of the change in tax law. As a result of this change in tax law, the Company recorded a non-cash charge of $15 million in fiscal year 2010 to increase the deferred tax...

  • Page 128
    ...48 million in fiscal years 2014, 2013, and 2012, respectively. 15. Leases The Company leases office, manufacturing, and research facilities and warehouses, as well as transportation, data processing, and other equipment under capital and operating leases. A substantial number of these leases contain...

  • Page 129
    ...as discontinued operations. On January 30, 2012, the Company completed the sale of the Physio-Control business to Bain Capital Partners, LLC. The Company sold $164 million in net assets and received $386 million in net cash. Additionally, the Company entered into a Transition Services Agreement (TSA...

  • Page 130
    ... divestiture-related costs previously recorded in acquisition-related items within continuing operations on the consolidated statements of earnings in the first and second quarters of fiscal year 2012 to discontinued operations. 18. Contingencies The Company is involved in a number of legal actions...

  • Page 131
    ...for eight years in the field of transcatheter valves and related accessories. Sprint Fidelis Product Liability Matters In 2007, a putative class action was filed in the Ontario Superior Court of Justice in Canada seeking damages for personal injuries allegedly related to the Company's Sprint Fidelis...

  • Page 132
    ...the Company received a subpoena from the Office of Inspector General for the Department of Health and Human Services in the Eastern District of California requesting production of documents relating to the Company's cardiac rhythm medical devices, including revenue, sales, marketing, and promotional...

  • Page 133
    ... by the U.S. Attorney's Office for the Western District of New York pursuant to the Health Insurance Portability & Accountability Act of 1996, relating to the Company's sales, marketing, and reimbursement support practices regarding certain neurostimulation devices. The Company is fully cooperating...

  • Page 134
    ...Diabetes business operating as a separate group. Accordingly, the segment information for the prior years has been restated to present three reportable segments. The Company's Cardiac and Vascular Group consists of four businesses: Cardiac Rhythm Disease Management (CRDM), Coronary, Structural Heart...

  • Page 135
    ... consolidated net sales in fiscal years 2014, 2013, or 2012. 21. Subsequent Events On June 15, 2014, Medtronic, Inc., a Minnesota corporation (Medtronic), entered into a Transaction Agreement (the Transaction Agreement) by and among Medtronic, Covidien public limited company, an Irish public limited...

  • Page 136
    ... care products company that creates innovative medical solutions for better patient outcomes and delivers value through clinical leadership and excellence. Covidien develops, manufactures, and sells a diverse range of industry-leading medical device and supply products. On June 15, 2014, Medtronic...

  • Page 137
    ... Financial Statements (Continued) For further information regarding the Pending Acquisition and the Credit Agreements, please see the full text of the Transaction Agreement, a copy of which is filed as exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on June 16, 2014...

  • Page 138
    ... Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) are effective. Management's Annual Report on Internal Control Over Financial...

  • Page 139
    ...Statement for our 2014 Annual Shareholders' Meeting are incorporated herein by reference. See also "Executive Officers of Medtronic" on pages 19 to 20 herein. We have adopted a written Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer, Corporate Treasurer, Corporate...

  • Page 140
    ... the required information is shown in the financial statements or notes thereto. 2. Exhibits Exhibit No. 2.1 Description Transaction Agreement, dated as of June 15, 2014, by and among Covidien public limited company, Medtronic, Inc., Kalani I Limited, Makani II Limited, Aviation Acquisition Co., Inc...

  • Page 141
    ...of Annual Option Agreement under the Medtronic, Inc. 1998 Outside Director Stock Compensation Plan (Exhibit 10.18).(i) Form of Replacement Option Agreement under the Medtronic, Inc. 1998 Outside Director Stock Compensation Plan (Exhibit 10.19).(i) Form of Restricted Stock Units Award Agreement under...

  • Page 142
    ... Employment Agreement for Medtronic Executive Officers (Exhibit 10.1).(s) Medtronic, Inc. 2005 Employees Stock Purchase Plan, as amended and restated effective August 27, 2009 (Exhibit 10.3).(s) Amendment dated December 18, 2008 to the Medtronic, Inc. Capital Accumulation Plan Deferral Program and...

  • Page 143
    ... of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The following materials from Medtronic's Annual Report on Form 10-K for the year ended April 25, 2014, formatted in Extensible Business Reporting Language (XBRL), (i) consolidated statements of earnings...

  • Page 144
    ... to the cited exhibit in our Annual Report on Form 10-K for the year ended April 27, 2012, filed with the Commission on June 26, 2012. (bb) Incorporated herein by reference to the cited exhibit in our Current Report on Form 8-K, filed with the Commission on June 16, 2014. (cc) Incorporated herein by...

  • Page 145
    MEDTRONIC, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in millions) Additions Balance at Beginning of Fiscal Year* Charges to Earnings* Deductions Other Charges to Other Changes Accounts* (Debit) Credit* Balance at End of Fiscal Year* Allowance for doubtful accounts: Year...

  • Page 146
    ... Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. MEDTRONIC, INC. Dated: June 20, 2014 By: /s/ Omar Ishrak Omar Ishrak Chairman and Chief Executive Officer (Principal Executive Officer...

  • Page 147
    World Headquarters Medtronic, Inc. 710 Medtronic Parkway Minneapolis, MN 55432-5604 USA Tel: +1.763.514.4000 Fax: +1.763.514.4879 www.medtronic.com UC201501004 EN ©2014 Medtronic, Inc. All Rights Reserved Printed in USA