Medtronic 2009 Annual Report Download - page 61

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Medtronic, Inc.
inception and on an ongoing basis. If a derivative is no longer
expected to be highly effective, hedge accounting is discontinued.
Hedge ineffectiveness, if any, is recorded in earnings.
The Company uses derivative instruments, primarily forward
exchange contracts, to manage its exposure related to foreign
exchange rate changes. The Company enters into contracts with
major financial institutions that change in value as foreign
exchange rates change. These contracts are designated either
as cash flow hedges, net investment hedges or freestanding
derivatives. It is the Company’s policy to enter into forward
exchange derivative contracts only to the extent true exposures
exist; the Company does not enter into forward exchange
derivative contracts for speculative purposes. Principal currencies
hedged are the Euro and the Japanese Yen. All derivative
instruments are recorded at fair value on the consolidated balance
sheets, as a component of prepaid expenses and other current
assets, other long-term assets, other accrued expenses or other long-
term liabilities depending upon the gain or loss position of the
contract and contract maturity date.
Forward 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)/income 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 purpose of net investment hedges is to hedge the long-
term investment (equity) in foreign operations. The gains and
losses related to the change in the forward exchange rates of
the net investment hedges are recorded currently in earnings as
other expense, net. The gains and losses based on changes in the
current exchange rates, or spot rates, are recorded as a cumulative
translation adjustment, a component of accumulated other
comprehensive (loss)/income on the consolidated balance sheets.
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
(in millions, except per share data) 2009 2008 2007
Numerator:
Net earnings $2,169 $2,231 $2,802
Denominator:
Basic—weighted average shares outstanding 1,117.8 1,130.7 1,149.7
Effect of dilutive securities:
Employee stock options 2.4 9.7 9.9
Employee restricted stock and
restricted stock units 3.0 0.9 1.0
Other 0.8 0.8 1.2
Diluted—weighted average
shares outstanding 1,124.0 1,142.1 1,161.8
Basic earnings per share $ 1.94 $ 1.97 $ 2.44
Diluted earnings per share $ 1.93 $ 1.95 $ 2.41
The calculation of weighted average diluted shares outstanding
excludes options for approximately 62 million, 22 million and 35
million common shares in fiscal years 2009, 2008 and 2007,
respectively, as the exercise price of those options was greater