Medtronic 2008 Annual Report Download - page 62

The Company uses forward exchange contracts to offset its exposure
to the change in value of certain foreign currency denominated
intercompany assets and liabilities. These forward exchange 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 foreign
currency denominated assets and liabilities.
In addition, the Company uses interest rate derivative instruments to
manage its exposure to interest rate movements and to reduce
borrowing costs by converting fixed-rate debt into floating-rate debt.
The objective of the instruments is to more effectively balance the
Company’s borrowing costs and interest rate risk. These derivative
instruments are designated as fair value hedges under SFAS No. 133.
Changes in the fair value of the derivative instrument are recorded in
other expense, net, and are offset by gains or losses on the underlying
debt instrument. Interest expense includes interest payments made or
received under interest rate derivative instruments.
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 from the 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
(shares in millions) 2008 2007 2006
Numerator:
Net earnings $ 2,231 $ 2,802 $ 2,547
Denominator:
Basic — weighted average shares outstanding
1,130.7 1,149.7 1,204.5
Effect of dilutive securities:
Employee stock options 9.7 9.9 10.4
Shares issuable upon conversion of
Contingent Convertible Debentures —0.2 0.7
Other 1.7 2.0 1.7
Diluted — weighted average
shares outstanding
1,142.1
1,161.8
1,217.3
Basic earnings per share
$ 1.97
$ 2.44
$ 2.11
Diluted earnings per share
$ 1.95
$ 2.41
$ 2.09
The calculation of weighted average diluted shares outstanding
excludes options for approximately 22 million, 35 million and 12 million
common shares in fiscal years 2008, 2007 and 2006, 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.
New Accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (SFAS No. 157). SFAS No. 157 establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, clarifies the definition of fair value within that framework and
expands disclosures about fair value measurements. SFAS No. 157
applies whenever other standards require (or permit) assets or liabilities
to be measured at fair value, except for the measurement of share-
based payments. SFAS No. 157 does not expand the use of fair value in
any new circumstances. For certain types of financial instruments,
SFAS No. 157 requires a limited form of retrospective transition, whereby
the cumulative impact of the change in principle is recognized in the
opening balance in retained earnings in the fiscal year of adoption. All
other provisions of SFAS No. 157 will be applied prospectively. On
February 12, 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2,
“Effective Date of FASB Statement No. 157” (FSP FAS 157-2). FSP FAS 157-2
defers the implementation of SFAS No. 157 for certain nonfinancial
assets and nonfinancial liabilities. The remainder of SFAS No. 157 is
effective, for the Company, beginning in the first quarter of fiscal year
2009. The aspects that have been deferred by FSP FAS 157-2 will be
effective for the Company beginning in the first quarter of fiscal year
2010. The fiscal year 2009 adoption is not expected to have a material
impact on the consolidated financial statements. The Company is
currently evaluating the impact that FSP FAS 157-2 will have on the
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158 which requires the
recognition of an asset or liability for the funded status of defined
benefit pension and other post-retirement benefit plans in the
statement of financial position. The funded status of a defined benefit
plan is measured as the difference between plan assets at fair value and
the benefit obligation. For a defined benefit pension plan, the benefit
obligation is the projected benefit obligation (PBO); for any other
defined benefit post-retirement plan, such as a retiree healthcare plan,
the benefit obligation is the accumulated post-retirement benefit
obligation. The initial incremental recognition of the funded status
under SFAS No. 158 of the Company’s defined pension and other post-
retirement benefit plans, as well as subsequent changes in the
Company’s funded status that are not included in net periodic benefit
Notes to Consolidated Financial Statements
(continued)
(dollars in millions, except per share data)
58 Medtronic, Inc.