Medtronic 2012 Annual Report Download - page 118

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Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)
101
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
______________________________________
2012 2011 2010
_______ _______ _______
Weighted average fair value of options granted . . . . . . . . . . . . $6.88 $8.19 $8.77
Assumptions used:
Expected life (years)(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.40 6.30 6.16
Risk-free interest rate(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.82% 2.25% 3.17%
Volatility(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.97% 26.03% 26.91%
Dividend yield(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.78% 2.40% 2.29%
(a) Expected life: The Company analyzes historical employee stock option exercise and termination data to estimate the expected
life assumption. The Company calculates 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. The Company also stratifies its employee population into two groups based upon
distinctive exercise behavior patterns.
(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 the expected term of the option.
(c) Volatility: 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.
(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 Under the fair value recognition provisions of U.S. GAAP for
accounting for stock-based compensation, the Company measures stock-based compensation expense at the
grant date based on the fair value of the award and recognizes the compensation expense over the requisite
service period, which generally is the vesting period.
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 stock options, restricted stock awards, and ESPP shares recognized for fiscal years 2012, 2011, and 2010:
Fiscal Year
__________________________________________
(in millions) 2012 2011 2010
___________ ___________ ___________ ___________
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60 $ 87 $ 112
Restricted stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 97 98
Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . 13 14 15
Physio-Control award acceleration . . . . . . . . . . . . . . . . . . . . . . 2––
___________ ___________ ___________
Total stock-based compensation expense . . . . . . . . . . . . . . . . . $ 161 $ 198 $ 225
___________ ___________ ___________
___________ ___________ ___________
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12 $ 22 $ 26
Research and development expense . . . . . . . . . . . . . . . . . . . . . 29 49 55
Selling, general, and administrative expense . . . . . . . . . . . . . . . 118 127 144
Physio-Control divestiture-related costs . . . . . . . . . . . . . . . . . . 2––
___________ ___________ ___________
Total stock-based compensation expense . . . . . . . . . . . . . . . . . $ 161 $ 198 $ 225
___________ ___________ ___________
___________ ___________ ___________
Income tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (45) (58) (67)
___________ ___________ ___________
Total stock-based compensation expense, net of tax . . . . . . . . $ 116 $ 140 $ 158
___________ ___________ ___________
___________ ___________ ___________
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 2012, 2011, and 2010, the
Company recognized less than $1 million, $4 million, and $12 million, respectively, of stock-based
compensation expense associated with the assumed Kyphon awards, which is included in the amounts
presented above.