Medtronic 2010 Annual Report Download - page 65

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Medtronic, Inc.
Appeals for the Federal Circuit affirmed the December 2007 ruling
of infringement and awarded damages based on lost profits, but
reversed certain elements of the original 2007 award. Prior to the
U.S. Court of Appeals’ decision, the Company had not recorded
expense related to the damages awarded in 2007 as the Company
did not believe that an unfavorable outcome in this matter was
probable under U.S. GAAP. As a result of the U.S. Court of Appeals’
decision, the Company recorded a reserve of $178 million which
covered the revised damages award and pre- and post-judgment
interest. The Company paid the settlement in June 2009.
The second charge in fiscal year 2009 in the amount of $270
million related to a settlement of royalty disputes with J&J which
concern Medtronic’s licensed use of certain patents. The agreement
reached in the fourth quarter of fiscal year 2009 ended all current
and potential disputes between the two parties under their 1997
settlement and license agreement relating to coronary angioplasty
stent design and balloon material patents. The Company paid the
settlement in May 2009.
The third charge in fiscal year 2009 in the amount of $229
million related to litigation with Cordis Corporation (Cordis),
a subsidiary of J&J. The Cordis litigation originated in October
1997 and pertains to patent infringement claims on previous
generations of bare metal stents that are no longer on the market.
On September 30, 2008, the U.S. District Court entered final
judgment including accrued interest, totaling approximately $521
million, to Cordis. The Company had previously recorded a charge
of $243 million related to this litigation in the third quarter of
fiscal year 2008. At the time the $243 million charge was recorded,
the range of potential loss related to this matter was subject to a
high degree of estimation. The amount recorded represented an
estimate at the low end of the range of probable outcomes
related to the matter. Given that the Company and J&J were
involved in a number of litigation matters which span across
businesses, the Company entered into negotiations with J&J in an
attempt to settle some of the additional litigation simultaneous
with the payment of this judgment. Ultimately, the agreement
reached with Cordis required a total cash payment of $472 million,
which included the settlement of several outstanding legal
matters between the parties. The charge of $229 million in fiscal
year 2009 is the net result of $472 million in cash payments, offset
by the existing reserves on the balance sheet including interest
accrued on the $243 million since the date established. The
settlement amount of $472 million was paid in fiscal year 2009.
The fourth charge recognized in fiscal year 2009 related to
litigation that originated in May 2006 with Fastenetix LLC
(Fastenetix), a patent holding company. The litigation related to
an alleged breach of a royalty agreement in the Spinal business.
The agreement reached with Fastenetix required a total cash
payment of $125 million for the settlement of ongoing litigation
and the purchase of patents. Of the $125 million, $37 million was
assigned to past damages in the case and the remaining
$88 million was recorded as purchased intellectual property that
has an estimated useful life of 7 years. The settlement amount of
$125 million was paid in fiscal year 2009.
In fiscal year 2008, the Company incurred certain litigation
charges, net of $366 million. Of that amount, $123 million related
to the settlement of certain lawsuits relating to the Marquis line
of implantable cardioverter defibrillators (ICDs) and cardiac
resynchronization therapy-defibrillators (CRT-Ds) that were subject
to a field action announced on February 10, 2005. As discussed
above, the remainder of the charge, $243 million, related to an
estimated reserve established for litigation with Cordis. In May
2008, the Company paid substantially all of the settlement for
certain lawsuits relating to the Marquis line of ICDs and CRT-Ds.
See Note 17 for additional information.
4. Restructuring Charges
Fiscal Year 2009 Initiative
In the fourth quarter of fiscal year 2009, as part of the Company’s
“One Medtronic” strategy, the Company recorded a $34 million
restructuring charge, which consisted of employee termination
costs of $29 million and asset write-downs of $5 million. The “One
Medtronic” strategy focused on streamlining the organization and
standardizing or centralizing certain functional activities which
were not unique to individual businesses. In connection with these
efforts to create “One Medtronic,” this initiative was designed to
streamline operations, by further consolidating manufacturing
and eliminating certain non-core product lines, and to further
align resources around the Company’s higher growth opportunities.
This initiative impacted most businesses and certain corporate
functions. Of the $5 million of asset write-downs, $3 million related
to inventory write-offs and production-related asset impairments
and therefore was recorded within cost of products sold in the
consolidated statement of earnings. The employee termination
costs of $29 million consisted of severance and the associated
costs of continued medical benefits and outplacement services.
As a continuation of the fiscal year 2009 initiative, in the first
quarter of fiscal year 2010, the Company incurred $72 million of
incremental restructuring charges, which consisted of employee
termination costs of $62 million and asset write-downs of $10