Medtronic 2010 Annual Report Download - page 88

84Medtronic, Inc.
Notes to Consolidated Financial Statements
(continued)
over the remaining service period using the fair-value based
compensation cost estimated under the prior guidance’s pro
forma disclosures.
Stock Options Stock option awards are granted at exercise prices
equal to the closing price of the Company’s common stock on the
grant date. The majority of the Company’s stock option awards
are non-qualified stock options with a 10-year life and a four-year
ratable vesting term. In fiscal year 2010, the Company granted
stock options under the Medtronic, Inc. 2008 Stock Award and
Incentive Plan (2008 Plan). The 2008 Plan was approved by the
Company’s shareholders in August 2008, and provide for the
grant of nonqualified and incentive stock options, stock
appreciation rights, restricted stock, performance awards and
other stock and cash-based awards. As of April 30, 2010, there
were approximately 66 million shares available for future grants
under the 2008 Plan.
Restricted Stock Awards Restricted stock and restricted stock
units (collectively referred to as restricted stock awards) are
granted to officers and key employees. Restricted stock awards
are subject to forfeiture if employment terminates prior to the
lapse of the restrictions. The Company grants restricted stock
awards that typically cliff vest between three and five years.
Restricted stock awards are expensed over the vesting period.
The Company also grants shares of performance-based restricted
stock that will cliff vest only if the Company has also achieved
certain performance objectives. Performance awards are expensed
over the performance period based on the probability of
achieving the performance objectives. Shares of restricted stock
are considered issued and outstanding shares of the Company at
the grant date and have the same dividend and voting rights as
other common stock. Restricted stock units are not considered
issued or outstanding common stock of the Company. Dividend
equivalent units are accumulated on restricted stock units during
the vesting period. In fiscal year 2010, the Company granted
restricted stock awards under the 2008 Plan.
Employee Stock Purchase Plan The Medtronic, Inc. 2005 Employee
Stock Purchase Plan (ESPP) allows participating employees to
purchase shares of the Company’s common stock at a discount
through payroll deductions. Employees can contribute up to the
lesser of 10 percent of their wages or the statutory limit under the
U.S. Internal Revenue Code toward the purchase of the Company’s
common stock at 85 percent of its market value at the end of the
calendar quarter purchase period. Employees purchased 2 million
shares at an average price of $33.19 per share in the fiscal year
ended April 30, 2010. As of April 30, 2010, plan participants have
had approximately $9 million withheld to purchase Company
common stock at 85 percent of its market value on June 30, 2010,
the last trading day before the end of the calendar quarter
purchase period. At April 30, 2010, approximately 15 million
shares of common stock were available for future purchase
under the ESPP.
Valuation Assumptions The Company uses the Black-Scholes
option pricing model (Black-Scholes model) to determine the fair
value of stock options as of the grant date. The fair value of stock
options under the Black-Scholes model requires management to
make assumptions regarding projected employee stock option
exercise behaviors, risk-free interest rates, volatility of the
Company’s stock price and expected dividends.
The expense recognized for shares purchased under the
Company’s ESPP is equal to the 15 percent discount the employee
receives at the end of the calendar quarter purchase period. The
expense recognized for restricted stock awards is equal to the
grant date fair value, which is equal to the closing stock price on
the date of grant.
The following table provides the weighted average fair value of
options granted to employees and the related assumptions used
in the Black-Scholes model:
Fiscal Year
2010 2009 2008
Weighted average fair value of
options granted $8.77 $8.96 $15.29
Assumptions used:
Expected life (years)(a) 6.16 6.05 5.42
Risk-free interest rate(b) 3.17% 3.11% 4.02%
Volatility(c) 26.91% 25.64% 22.27%
Dividend yield(d) 2.29% 2.03% 1.05%
(a) Expected life: The Company analyzes historical employee stock option exercise
and termination data to estimate the expected life assumption. Beginning in the
third quarter of fiscal year 2008, the Company began to calculate the expected
life assumption using the midpoint scenario, which combines historical exercise
data with hypothetical exercise data, as the Company believes this data currently
represents the best estimate of the expected life of a new employee option. Prior
to the third quarter of fiscal year 2008, the Company calculated the expected life
based solely on historical data. The Company also stratifies its employee
population into two groups based upon distinctive exercise behavior patterns.
(b) Risk-free interest rate: The rate is based on the grant date yield of a zero-
coupon U.S. Treasury bond whose maturity period equals or approximates the
option’s expected term.
(c) Volatility: Expected volatility is based on a blend of historical volatility and an
implied volatility of the Company’s common stock. Implied volatility is based on
market traded options of the Company’s common stock.
(d) Dividend yield: The dividend yield rate is calculated by dividing the Company’s
annual dividend, based on the most recent quarterly dividend rate, by the
closing stock price on the grant date.