Medtronic 2008 Annual Report Download - page 38

2007 of $20 million versus gains in fiscal year 2006 of $92 million. Fiscal
year 2007 was also positively impacted by $55 million due to the
accelerated amortization of deferred income in connection with a
product supply agreement in the CardioVascular business.
Interest Income, Net Interest income, net includes interest earned on
our investments, interest paid on our borrowings, amortization of debt
issuance costs and the net realized gain or loss on sales of available
for sale (AFS) debt securities. In fiscal year 2008, net interest income
was $109 million, a decrease of $45 million from net interest income of
$154 million in fiscal year 2007. The decrease in net interest income
in fiscal year 2008 as compared to fiscal year 2007 is a result of the
impact of the cash utilized to finance the Kyphon acquisition,
increased borrowings outstanding and a decline in interest rates being
received on our short- and long-term investments. The decrease was
partially offset by recognition of $26 million in net gains on the sale of
AFS debt securities.
In fiscal year 2007, net interest income was $154 million, an increase
of $67 million from net interest income of $87 million in fiscal year 2006.
The increase in net interest income in fiscal year 2007 as compared to
fiscal year 2006 was a result of higher average cash and cash investment
balances as compared to prior periods. Interest income increased, as we
maintained our ability to generate rates of return on our investments that
exceeded the interest rates we were paying on our outstanding debt.
Income Taxes
Fiscal Year
Percentage Point
Increase/(Decrease)
(dollars in millions) 2008 2007 2006 FY08/07 FY07/06
Provision for income tax $ 654 $ 713 $ 614
N/A N/A
Effective tax rate 22.7% 20.3% 19.4% 2.4 0.9
Impact of special,
restructuring, certain
litigation and IPR&D
charges and certain
tax adjustments 1.7 (3.9) (6.6) (5.6) (2.7)
Non-GAAP nominal
tax rate
(1)
21.0
%
24.2
%
26.0
%
(3.2
)
(1.8
)
(1) Non-GAAP nominal tax rate is defined as the income tax (benefit) provision as a percentage
of taxable income, excluding special, restructuring, certain litigation and IPR&D charges and
certain tax adjustments. We believe that the resulting non-GAAP financial measure provides
useful information to investors because it excludes the effect of these discrete items so that
investors can compare our recurring results over multiple periods.
The effective tax rate of 22.7 percent increased by 2.4 percentage
points from fiscal year 2007 to fiscal year 2008. This increase reflects the
5.6 percentage points increase from the tax impact of special,
restructuring, certain litigation and IPR&D charges and certain tax
adjustments partially offset by a 3.2 percentage points decrease in the
non-GAAP nominal tax rate. The 5.6 percentage points increase is
largely due to the non-deductible IPR&D charges incurred during fiscal year
2008 compared to the $129 million certain tax benefit recorded in fiscal year
2007 associated with the reversal of excess tax accruals in connection
with the settlement reached with the IRS with respect to their review
of our fiscal years 2003 and 2004 domestic income tax returns and the
resolution of competent authority issues for fiscal years 1992 through
2000. The non-GAAP nominal tax rate decrease of 3.2 percentage points
is mainly due to increased benefits from our international operations
subject to tax rates lower than our U.S. statutory rates.
The fiscal year 2007 effective tax rate of 20.3 percent increased by 0.9
of a percentage point from fiscal year 2006. This increase reflects a
2.7 percentage points increase from the tax impact of special,
restructuring, certain litigation and IPR&D charges and certain tax
adjustments partially offset by a 1.8 percentage points decrease in the
non-GAAP nominal tax rate. The 2.7 percentage points increase is largely
due to the $129 million certain tax adjustment recorded in fiscal year 2007
compared to the $225 million certain tax adjustment recorded in fiscal
year 2006 associated with favorable agreements reached with the IRS
involving the review of our fiscal years 1997 through 2002 domestic income
tax returns. The non-GAAP nominal tax rate decrease of 1.8 percentage
points is mainly due to increased benefits from our international
operations subject to tax rates lower than our U.S. statutory rate.
Tax audits associated with the allocation of income, and other
complex issues, may require an extended period of time to resolve and
may result in income tax adjustments if changes to our allocation are
required between jurisdictions with different tax rates. Tax authorities
periodically review our tax returns and propose adjustments to our tax
filings. The IRS has settled its audits with us for all years through fiscal
year 1996. Tax years settled with the IRS may remain open for foreign
tax audits and competent authority proceedings. Competent authority
proceedings are a means to resolve intercompany pricing disagreements
between countries.
In August 2003, the IRS proposed adjustments arising out of its audit
of the fiscal years 1997, 1998 and 1999 tax returns. We initiated a defense
of these adjustments at the IRS appellate level, and in the second
quarter of fiscal year 2006 we reached settlement on most, but not all
matters. The remaining issue relates to the allocation of income
between Medtronic, Inc., and its wholly owned subsidiary in Switzerland.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
34 Medtronic, Inc.