Medtronic 2010 Annual Report Download - page 34

30 Medtronic, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
Costs and Expenses
The following is a summary of major costs and expenses as a
percent of net sales:
Fiscal Year
2010 2009 2008
Cost of products sold 24.1% 24.1% 25.5%
Research and development 9.2 9.3 9.4
Selling, general and administrative 34.2 35.3 34.8
Special charges —0.7 0.6
Restructuring charges 0.3 0.8 0.3
Certain litigation charges, net 2.4 4.9 2.7
IPR&D and certain acquisition-related costs 0.1 4.3 2.9
Other expense, net 3.0 2.7 3.2
Interest expense, net 1.6 1.3 0.3
Cost of Products Sold Cost of products sold was $3.812 billion in
fiscal year 2010 representing 24.1 percent of net sales, reflecting
no change from fiscal year 2009. Cost of products sold as a
percent of net sales was positively impacted by 0.4 of a percentage
point of favorable margin variance and 0.4 of a percentage point
of favorable scrap and other product costs offset by 0.4 of a
percentage point of unfavorable inventory revaluation variance,
0.3 of a percentage point of unfavorable foreign currency
translation and 0.1 of a percentage point of unfavorable product
mix variance. We continue to execute our broad initiatives to
reduce our costs of products sold.
Cost of products sold was $3.518 billion in fiscal year 2009
representing 24.1 percent of net sales, a decrease of 1.4 percentage
points from fiscal year 2008. Cost of products sold as a percent of
net sales was positively impacted by 0.4 of a percentage point of
favorable foreign currency translation, 0.2 of a percentage point
of favorable manufacturing variances, 0.1 of a percentage point of
favorable product mix and 0.4 of a percentage point of favorable
scrap and other product costs. In addition, cost of products sold
as a percentage of net sales for the fiscal year ended April 25,
2008 was negatively impacted by 0.3 of a percentage point as a
result of the $34 million increase in cost of products sold
associated with the fair value adjustment for the inventory
acquired in the Kyphon acquisition.
Research and Development Consistent with prior periods, we
have continued to invest in new technologies to drive long-
term future growth by spending aggressively on research and
development efforts. Research and development spending
was $1.460 billion in fiscal year 2010, representing 9.2 percent of
net sales, a decrease of 0.1 of a percentage point from fiscal
year 2009.
Research and development spending was $1.355 billion in fiscal
year 2009, representing 9.3 percent of net sales, a decrease of 0.1
of a percentage point from fiscal year 2008. The decrease is
primarily the result of a reclassification of certain expenses to
selling, general and administrative of $46 million for the fiscal
year that would have otherwise been included in research and
development in prior years.
We remain committed to developing technological enhancements
and new indications for existing products, and less invasive and
new technologies for new and emerging markets to address
unmet medical needs. That commitment leads to our initiation
and participation in many clinical trials each fiscal year as the
demand for clinical and economic evidence increases. Furthermore,
we expect our development activities to help reduce patient care
costs and the length of hospital stays in the future. In addition to
our investment in research and development, we continue to
access new technologies in areas served by our existing
businesses, as well as in new areas, through acquisitions, licensing
agreements, alliances and certain strategic equity investments.
Selling, General and Administrative Fiscal year 2010 selling,
general and administrative expense was $5.415 billion, which as a
percent of net sales decreased by 1.1 percentage points from
fiscal year 2009 to 34.2 percent. For fiscal year 2010, our initiatives
to leverage our cost structure helped reduce selling, general and
administrative expense. This decrease was partially offset by an
increase in legal expenses driven by an increasing amount of
government scrutiny on the medical device industry compared
to the prior fiscal year. We continue to drive our initiatives
to leverage our size and scale in order to help reduce our
cost structure.
Fiscal year 2009 selling, general and administrative expense
was $5.152 billion, which as a percent of net sales increased by 0.5
of a percentage point from fiscal year 2008 to 35.3 percent. For
fiscal year 2009, the reclassification of certain expenses from
research and development had a negative impact of 0.3 of a
percentage point on selling, general and administrative expense.
In addition, foreign exchange had a negative impact of 0.2 of a
percentage point on fiscal year 2009 selling, general and
administrative expense.
Special Charges, Restructuring Charges, Certain Litigation Charges,
Net, IPR&D and Certain Acquisition-Related Costs and Certain Tax
Adjustments We believe that in order to properly understand our
short-term and long-term financial trends, investors may find it
useful to consider the impact of special charges, restructuring