Medtronic 2015 Annual Report Download - page 51

Net Income GAAP to Non-GAAP Reconciliation The following is a reconciliation of our results of operations prepared in
accordance with U.S. GAAP to those results after giving effect to adjustments relating to items or charges considered by
management to be unusual or infrequent. Refer to our discussion in the “Cost and Expenses” section of this management’s
discussion and analysis for more information on these reconciling items.
Fiscal year ended April 24, 2015
(in millions) Net Sales
Cost of
Products
Sold
Operating
Profit
Income from
Operations
Before Taxes Net Income
GAAP $ 20,261 $ 6,309 $ 3,766 $ 3,486 $ 2,675
Non-GAAP Adjustments:
Impact of inventory step-up — (623) 623 623 455
Impact of product technology upgrade commitment — (74) 74 74 61
Special gains, net — — (38) (38) (23)
Restructuring charges, net — (15) 252 252 180
Certain litigation charges, net — — 42 42 27
Acquisition-related items — — 550 550 433
Amortization of intangible assets — — 733 733 538
Impact of acquisition on interest expense ———7749
Certain tax adjustments ————349
Non-GAAP $ 20,261 $ 5,597 $ 6,002 $ 5,799 $ 4,744
Critical Accounting Estimates
The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires management to use judgment
in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These
estimates reflect managements’ best judgment about economic and market conditions and their potential effects on the valuation
and/or carrying value of assets and liabilities based upon relevant information available. We base our estimates on historical
experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
See also Note 1 to the consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” in this
Annual Report on Form 10-K, which discusses our most significant accounting policies.
Our critical accounting estimates include the following:
Revenue Recognition The Company records price adjustment rebates as a reduction of net sales in the same period revenue is
recognized. We estimate rebates based on sales terms, historical experience, and trend analyses. Subsequent to the January 26,
2015 acquisition of Covidien, we reevaluated the judgments used by management of the Company in making estimates and
assumptions that affect the reported amounts for revenues, expenses, assets, and liabilities related to revenue recognition. Based
upon the lag time between the original sale to distributors at list price and the related distributor rebate claim earned at time of
sale to the end customer, and the judgments involved in estimating such rebates, we consider price adjustment rebates for
Covidien to be a critical accounting estimate. We adjust reserves to reflect differences between estimated and actual experience,
and record such adjustment as a reduction of sales in the period of adjustment. Adjustments to recorded reserves have not been
significant. Covidien price adjustment rebates charged against gross sales in the fourth quarter of fiscal year 2015 were $679
million.
Legal Proceedings We are involved in a number of legal actions involving product liability, intellectual property disputes,
shareholder derivative actions, securities class actions, other class actions, income tax matters, and environmental matters. The
outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In
some actions, the claimants seek damages, as well as other relief (including injunctions barring the sale of products that are the
subject of the lawsuit), that could require significant expenditures or result in lost revenues. Estimates of probable losses
resulting from litigation, governmental proceedings, and income tax matters involving the Company are inherently difficult to
predict, particularly when the matters are in early procedural stages, with incomplete scientific facts or legal discovery; involve
unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, or punitive damages; or could result in
a change in business practice. Our significant legal proceedings are discussed in Note 16 to the consolidated financial statements
in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. While it is not possible to
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