Medtronic 2008 Annual Report Download - page 34

Costs and Expenses
The following is a summary of major costs and expenses as a percent
of net sales:
Fiscal Year
2008 2007 2006
Cost of products sold
25.5 % 25.8 % 24.9 %
Research and development expense 9.4 10.1 9.9
Selling, general and administrative expense 34.8 33.8 32.4
Special charges 0.6 0.8 0.9
Restructuring charges 0.3 0.2 —
Certain litigation charges 2.7 0.3 —
IPR&D charges 2.9 —3.2
Other expense, net 3.2 1.7 1.5
Interest income, net (0.8)(1.3)(0.8)
Cost of Products Sold Cost of products sold was $3.446 billion in fiscal
year 2008 representing 25.5 percent of net sales, a decrease of 0.3 of a
percentage point from fiscal year 2007. The cost of products sold was
positively impacted by 0.7 of a percentage point of favorable foreign
currency translation and 0.3 of a percentage point for reduced product
costs and favorable manufacturing variances. These decreases were
offset by 0.3 of a percentage point associated with the impact of the
$34 million fair value adjustment for the inventory acquired in the
Kyphon acquisition and 0.4 of a percentage point of unfavorability for
scrap and other product costs associated with the suspension of
the worldwide distribution of the Fidelis lead and scrap costs at our
Physio-Control business segment.
Cost of products sold was $3.168 billion in fiscal year 2007 representing
25.8 percent of net sales, an increase of 0.9 of a percentage point from
fiscal year 2006. The increase in cost of products sold as a percentage
of net sales was due to 0.1 of a percentage point increase for the
recognition of $15 million of incremental stock-based compensation
expense in fiscal year 2007, 0.2 of a percentage point increase for
unfavorable manufacturing variances, and 0.9 of a percentage point
increase relating to geographic and product mix shifts. The product mix
impact was the result of decreased sales of higher margin ICDs in the
U.S. and increased sales of INFUSE Bone Graft and certain tissue products
in our Spinal business which have margins that are below our average
gross margins. These increases were offset by 0.3 of a percentage point
of favorable foreign currency translation.
Research and Development Consistent with prior years, we continue to
invest heavily in the future by spending aggressively on research and
development efforts. Research and development spending was $1.275
billion in fiscal year 2008, representing 9.4 percent of net sales, a
decrease of 0.7 of a percentage point from fiscal year 2007. While our
fiscal year 2008 research and development spending increased over the
prior fiscal year, our restructuring initiatives and our efforts to prioritize
projects with the greatest potential for future growth have impacted
the current year rate of spending.
Research and development spending was $1.239 billion in fiscal year
2007 representing 10.1 percent of net sales, an increase of 0.2 of a
percentage point over fiscal year 2006. The 0.2 of a percentage point
increase over the prior year was the result of the recognition of
$31 million of incremental stock-based compensation expense in fiscal
year 2007. Excluding the incremental stock-based compensation
expense, research and development expense was flat as a percentage
of sales as compared to fiscal year 2006, but on a gross basis increased
$95 million, or 9.0 percent as compared to the prior fiscal year.
We remain committed to developing technological enhancements
and new indications for existing products and new, less invasive,
technologies to address unmet medical needs. That commitment leads
to our initiation and participation in numerous clinical trials in every
fiscal year. Furthermore, we expect our development activities to help
reduce patient care costs and the length of hospital stays in the future.
In addition to our investment in research 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 2008 selling, general and
administrative expense as a percentage of net sales increased by
1.0 percentage point from fiscal year 2007 to 34.8 percent. The increase
in selling, general and administrative expense for fiscal year 2008 was
predominantly driven by the acquisition of Kyphon which increased
selling, general and administrative expense by 0.6 of a percentage
point. The remainder of the increase was due to expenses associated
with our previously communicated investment in selling and marketing
activities related to the U.S. launches of the Prestige Cervical Disc System
and Endeavor, and the continued implementation of our global
information technology system, which included the full conversion of
our U.S. distribution systems in the second quarter of fiscal year 2008.
These increases were offset by our continual cost control measures
across all of our businesses and attempts to leverage the general and
administrative expense categories.
Fiscal year 2007 selling, general and administrative expense as a
percentage of net sales increased by 1.4 percentage points from fiscal
year 2006 to 33.8 percent. The recognition of incremental stock-based
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
30 Medtronic, Inc.