Medtronic 2011 Annual Report Download - page 60

56 Medtronic, Inc.
Notes to Consolidated Financial Statements
(continued)
Forward currency exchange rate contracts designated as cash
flow hedges are designed to hedge the variability of cash flows
associated with forecasted transactions denominated in a foreign
currency that will take place in the future. Changes in value of
derivatives designated as cash flow hedges are recorded in
accumulated other comprehensive loss on the consolidated balance
sheets until earnings are affected by the variability of the
underlying cash flows. At that time, the applicable amount of
gain or loss from the derivative instrument that is deferred in
shareholders’ equity is reclassified to earnings and is included in
other expense, net or cost of products sold in the consolidated
statements of earnings, depending on the underlying transaction
that is being hedged.
The Company uses forward currency exchange rate contracts
to offset its exposure to the change in value of specific foreign
currency denominated assets and liabilities. These forward
currency exchange rate contracts are not designated as hedges,
and therefore, changes in the value of these freestanding
derivatives are recognized currently in earnings, thereby offsetting
the current earnings effect of the related change in U.S. dollar
value of foreign currency denominated assets and liabilities.
The Company uses interest rate derivative instruments to
manage its exposure to interest rate movements by converting
fixed-rate debt into floating-rate debt. The objective of the
instruments is to more effectively manage the Company’s
borrowing costs and interest rate risk. These derivative
instruments are designated as fair value hedges under U.S. GAAP.
Changes in the fair value of the derivative instrument are recorded
in interest expense, net, and are offset by changes in the fair value
on the underlying debt instrument. Interest expense, net includes
interest payments made or received under interest rate derivative
instruments.
In addition, the Company has collateral credit agreements with
its primary derivative counterparties. Under these agreements,
either party is required to post eligible collateral when the market
value of transactions covered by the agreement exceeds specific
thresholds, thus limiting credit exposure for both parties.
Earnings Per Share Basic earnings per share is computed based on
the weighted average number of common shares outstanding.
Diluted earnings per share is computed based on the weighted
average number of common shares outstanding increased by the
number of additional shares that would have been outstanding
had the potentially dilutive common shares been issued and
reduced by the number of shares the Company could have
repurchased with proceeds from issuance of the potentially
dilutive shares. Potentially dilutive shares of common stock
include stock options and other 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:
Fiscal Year
(in millions, except per share data) 2011 2010 2009
Numerator:
Net earnings $3,096 $3,099 $2,070
Denominator:
Basic — weighted average shares
outstanding 1,077.4 1,106.3 1,121.9
Effect of dilutive securities:
Employee stock options 0.6 0.9 2.4
Employee restricted stock units 3.4 1.9 1.2
Other 0.3 0.3 0.8
Diluted — weighted average
shares outstanding 1,081.7 1,109.4 1,126.3
Basic earnings per share $ 2.87 $ 2.80 $ 1.85
Diluted earnings per share $ 2.86 $ 2.79 $ 1.84
The calculation of weighted average diluted shares outstanding
excludes options for approximately 59 million, 65 million, and 62
million shares of common stock in fiscal years 2011, 2010, and
2009, respectively, as the exercise price of those options was
greater than the average market price, resulting in an anti-dilutive
effect on diluted earnings per share. For fiscal years 2011, 2010,
and 2009, common share equivalents related to the Company’s
$2.200 billion of Senior Convertible Notes were anti-dilutive as the
market price of the Company’s stock was below the conversion
price of the Senior Convertible Notes and, therefore, were
excluded from the calculation of weighted average diluted shares.
New Accounting Standards
In October 2009, the Financial Accounting Standards Board (FASB)
updated the revenue recognition accounting guidance relating to
the accounting for revenue arrangements that involve more than
one deliverable or unit of accounting. The updated guidance
requires companies to allocate arrangement considerations in
multiple deliverable arrangements in a manner that better reflects
the economics of the transaction by revising certain thresholds
for separation, and providing criteria for allocation of revenue
among deliverables. The updated guidance is effective for the
Company beginning in the first quarter of fiscal year 2012. The
Company is electing to adopt the provisions prospectively to new
or materially modified arrangements beginning on the effective
date. The Company has evaluated the adoption of this guidance