Medtronic 2016 Annual Report Download - page 54

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Net sales outside the U.S. are accompanied by certain financial risks, such as changes in currency exchange rates and collection
of receivables, which typically have longer payment terms. We monitor the creditworthiness of our customers to which we grant
credit terms in the normal course of business. However, a significant amount of our outstanding accounts receivable are with
international customers. We continue to monitor the economic conditions in many countries outside the U.S. and the average
length of time it takes to collect on our outstanding accounts receivable in these countries. Although we do not currently foresee
a significant credit risk associated with a material portion of these receivables, repayment is dependent upon the financial stability
of the economies of those countries.
Costs and Expenses
The following is a summary of major costs and expenses as a percent of net sales:
Fiscal Year
2016 2015 2014
Cost of products sold 31.7% 31.1% 25.5%
Research and development expense 7.7 8.1 8.7
Selling, general, and administrative expense 32.8 34.1 34.4
Cost of Products Sold We continue to focus on reducing our costs of production through channel optimization, supply chain
management, and review of our manufacturing network. Beginning in fiscal year 2015, our product mix has substantially changed
with the acquisition of Covidien in fiscal year 2015. The Patient Monitoring & Recovery division within Minimally Invasive
Therapies Group, which accounts for approximately 45 percent of Minimally Invasive Therapies Group's net sales, generally
realizes a lower average margin due to the type products sold within the division. Therefore, cost of products sold as a percentage
of net sales has increased in fiscal years 2016 and 2015. Cost of products sold was $9.1 billion, $6.3 billion, and $4.3 billion in
fiscal years 2016, 2015, and 2014, respectively.
We have recognized amortization of the adjustment related to inventory fair value from the Covidien acquisition to cost of products
sold totaling $226 million and $623 million in fiscal years 2016 and 2015, respectively. Additionally, in fiscal year 2015, cost of
products sold included a $74 million charge related to a CRHF global comprehensive program for home based monitors due to
industry conversion from analog to digital technology. Restructuring charges included in cost of products sold totaled $9 million,
$15 million, and $10 million in fiscal years 2016, 2015, and 2014, respectively, for inventory write-offs of discontinued product
lines. These charges affect the comparability of our operating results between periods, therefore, we consider this a Non-GAAP
Adjustment, refer to the "Executive Level Overview" section of this Management's Discussion and Analysis for further analysis
related to these charges.
Research and Development We remain committed to accelerating the development of meaningful innovations to deliver better
patient outcomes at appropriate costs, lead to enhanced quality of life, and can be validated by clinical and economic evidence.
We are also focused on expanding access to quality healthcare. During fiscal year 2016, we continued to invest in new technologies
to support our mission with several new acquisitions, as well as, continued product growth within our business units.
Research and development expense for fiscal year 2016, 2015, and 2014 was $2.2 billion, $1.6 billion, and $1.5 billion, respectively.
Research and development expense remained fairly flat as a percentage of net sales over the three-year period.
Selling, General, and Administrative Our goal is to continue selling, general, and administrative expense leverage initiatives
and to continue to realize cost synergies expected from the acquisition of Covidien. During fiscal year 2016, we realized a 1.3
percentage point decrease in our selling, general, and administrative expense percentage to net sales as a result of these initiatives.
Selling, general, and administrative expense was $9.5 billion, $6.9 billion, and $5.8 billion during fiscal years 2016, 2015, and
2014, respectively.