Medtronic 2010 Annual Report Download - page 40

36 Medtronic, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
the first seven months of calendar year 2008. The remaining
$28 million of operational tax benefit related to the finalization of
certain tax returns, changes to uncertain tax position reserves and
the impact of a state law change in 2009. These tax adjustments
are operational in nature and are recorded in the provision for
income taxes on the consolidated statements of earnings.
Tax audits associated with the allocation of income, and other
complex issues, may require an extended period of time to resolve
and may result in income tax adjustments if changes to our
allocation are required between jurisdictions with different tax
rates. Tax authorities periodically review our tax returns and
propose adjustments to our tax filings. The IRS has settled its
audits with us for all years through fiscal year 1996. Tax years
settled with the IRS may remain open for foreign tax audits and
competent authorit y proceedings. Competent authority
proceedings are a means to resolve intercompany pricing
disagreements between countries.
In August 2003, the IRS proposed adjustments arising out of its
audit of the fiscal years 1997, 1998 and 1999 tax returns. We
initiated a defense of these adjustments at the IRS appellate level,
and in the second quarter of fiscal year 2006 we reached settlement
on most, but not all matters. The remaining issue relates to the
allocation of income between Medtronic, Inc., and its wholly
owned subsidiary in Switzerland. On April 16, 2008, the IRS issued
a statutory notice of deficiency with respect to this remaining
issue. The Company filed a Petition with the U.S. Tax Court on July
14, 2008 objecting to the deficiency. We are in settlement
discussions with the IRS as it relates to the outstanding issue;
however, a settlement has not yet been reached.
In September 2005, the IRS issued its audit report for fiscal years
2000, 2001 and 2002. In addition, the IRS issued its audit report for
fiscal years 2003 and 2004 in March 2007. We have reached
agreement with the IRS on substantially all of the proposed
adjustments for these fiscal years 2000 through 2004. The only
item of significance that remains open for these years relates to
the carryover impact of the allocation of income between
Medtronic, Inc. and its wholly owned subsidiary in Switzerland for
fiscal years 1997 through 1999.
In March 2009, the IRS issued its audit report for fiscal years
2005 and 2006. We have reached agreement with the IRS on many,
but not all, of the proposed adjustments for fiscal years 2005 and
2006. The significant issues that remain unresolved relate to the
allocation of income between Medtronic, Inc. and its wholly
owned subsidiaries and the timing of the deductibility of a
settlement payment. For the proposed adjustments that we do
not agree with, we have filed our protest with the IRS. As the
statute of limitations for these tax years expire in December 2010,
we expect that the IRS will issue a Notice of Deficiency for these
remaining issues during our fiscal year ending April 29, 2011 and
we will proceed to attempt to resolve these matters either at the
IRS Appellate level or in the courts, if necessary.
Our reserve for the uncertain tax positions related to these
significant unresolved matters with the IRS, described above, is
subject to a high degree of estimation and management judgment.
Resolution of these significant unresolved matters, or positions
taken by the IRS or foreign tax authorities during future tax audits,
could have a material impact on our financial results in future
periods. We continue to believe that our reserves for uncertain tax
positions are appropriate and have meritorious defenses for our
tax filings and will vigorously defend them during the audit
process, appellate process and through litigation in courts, as
necessary.
See Note 14 to the consolidated financial statements for
additional information
Liquidity and Capital Resources
Fiscal Year
(dollars in millions) 2010 2009
Working capital $ 4,718 $ 4,305
Current ratio* 1.9:1.0 2.4:1.0
Cash, cash equivalents and short-term
investments $ 3,775 $ 1,676
Long-term investments in debt and trading
securities** 4,089 2,242
Cash, cash equivalents, short-term investments
and long-term debt and trading securities $ 7,864 $ 3,918
Short-term borrowings and long-term debt $ 9,519 $ 6,775
Net cash position*** $ (1,655) $ (2,857)
* Current ratio is the ratio of current assets to current liabilities.
** Long-term investments include debt securities with a maturity date greater than
one year from the end of the period and trading securities and exclude minority
investments.
*** Net cash position is the sum of cash, cash equivalents, short-term investments
and long-term investments in debt and trading securities less short-term
borrowings and long-term debt.
We believe our liquidity remains strong as of April 30, 2010 and
our strong balance sheet and liquidity provide us with flexibility in
the future. We believe our existing cash and investments, as well
as our unused lines of credit and commercial paper capacity of
$3.274 billion, if needed, will satisfy our foreseeable working
capital requirements for at least the next twelve months. However,
we periodically consider various financing alternatives and may,
from time to time, seek to take advantage of favorable interest
rate environments or other market conditions. At April 30, 2010,
our Standard and Poor’s Ratings Group and Moody’s Investors