Medtronic 2009 Annual Report Download - page 85

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Medtronic, Inc.
Valuation Assumptions The Company uses the Black-Scholes
option pricing model (Black-Scholes model) to determine the fair
value of stock options as of the grant date. The fair value of stock
options under the Black-Scholes model requires management to
make assumptions regarding projected employee stock option
exercise behaviors, risk-free interest rates, volatility of the
Company’s stock price and expected dividends.
The expense recognized for shares purchased under the
Company’s ESPP is equal to the 15 percent discount the employee
receives at the end of the calendar quarter purchase period. The
expense recognized for restricted stock awards is equal to the
grant date fair value, which is equal to the closing stock price on
the date of grant.
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
2009 2008 2007
Weighted average fair value of
options granted $8.96 $15.29 $11.72
Assumptions used:
Expected life (years)(a) 6.05 5.42 4.83
Risk-free interest rate(b) 3.11% 4.02% 4.66%
Volatility(c) 25.64% 22.27% 19.90%
Dividend yield(d) 2.03% 1.05% 0.90%
(a) Expected life: The Company analyzes historical employee stock option exercise
and termination data to estimate the expected life assumption. Beginning in the
third quarter of fiscal year 2008, the Company began to calculate 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. Prior
to the third quarter of fiscal year 2008, the Company calculated the expected life
based solely on historical data. The Company also stratifies its employee
population into two groups based upon distinctive exercise behavior patterns.
Prior to adopting SFAS No. 123(R), the Company used one pool, the entire
employee population, for estimating the expected life assumptions.
(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 or approximates the
option’s expected term.
(c) Volatility: Beginning in the third quarter of fiscal year 2007, the 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. Prior to the third quarter of fiscal year
2007, the Company calculated the expected volatility based exclusively on
historical volatility.
(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 Upon the adoption of SFAS
No. 123(R), the Company changed its method of recognition and
now recognizes stock-based compensation expense based on
the substantive vesting period for all new awards. As a result,
compensation expense related to stock options granted prior
to fiscal year 2007 is being recognized over the stated vesting
term of the grant rather than being accelerated upon retirement
eligibility.
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 options, restricted
stock awards and ESPP recognized for fiscal years 2009, 2008
and 2007:
(in millions) 2009 2008 2007
Stock options $ 140 $ 138 $ 135
Restricted stock awards 82 63 35
Employee stock purchase plan 15 16 15
Total stock-based compensation expense $ 237 $ 217 $ 185
Cost of products sold $ 28 $ 24 $ 19
Research and development expense 58 52 39
Selling, general and administrative expense 151 141 127
Total stock-based compensation expense $ 237 $ 217 $ 185
Income tax benefits (69) (64) (58)
Total stock-based compensation expense,
net of tax $ 168 $ 153 $ 127
In connection with the acquisition of Kyphon in November
2007, the Company assumed Kyphon’s unvested stock-based
awards. These awards are amortized over 2.5 years, which was
their remaining weighted average vesting period at the time
of acquisition. For fiscal years 2009 and 2008, the Company
recognized $21 million and $24 million, respectively, of stock-
based compensation expense associated with the assumed
Kyphon awards, which is included in the amounts presented
above.