20.11.2006 21:05:00

Medtronic Reports Second Quarter Revenue Growth of 11 Percent

Medtronic, Inc. (NYSE:MDT) today announced financial results for its second quarter of fiscal year 2007, which ended October 27, 2006. Medtronic recorded second quarter revenue of $3.075 billion, an 11 percent increase over the $2.765 billion reported in the second quarter of the prior fiscal year. On a constant currency basis, revenue growth was 10 percent with a positive currency translation impact of $33 million. As reported, second quarter fiscal year 2007 net earnings were $681 million, or $0.59 per diluted share, representing a decrease of 12 percent over the same quarter last year. However, EPS grew 13 percent after adjusting last year’s second quarter for stock option expensing and special gains and charges to make a more meaningful comparison. "Revenue in all major businesses grew over the prior year period and sequentially over the first quarter as we gained share in all of our major product lines,” said Art Collins, Medtronic chairman and chief executive officer. "These results reflect the strength of our broad and diversified business portfolio that serves many of the fastest growing segments in medical technology.” Unless otherwise noted, the comparisons made are on an "as reported basis,” not on a constant currency basis. Any references to quarterly revenue figures increasing or decreasing are in comparison to the second quarter of fiscal year 2006. Cardiac Rhythm Disease Management Cardiac Rhythm Disease Management (CRDM) revenue of $1.363 billion grew 6 percent. Medtronic’s largest product line, ICDs, generated second quarter revenue of $764 million, an increase of 4 percent over the same quarter last year and 14 percent over the first quarter, resulting in strong product market share gains worldwide. Worldwide pacing revenue of $473 million in the quarter grew 3 percent. Medtronic now holds an estimated 56 percent of the worldwide ICD market and more than 50 percent of the worldwide pacemaker market. Emergency Response Systems second quarter revenue of $111 million, increased 37 percent. CRDM quarterly highlights include: Solid share gains in both the U.S. and international ICD markets reflect the positive acceptance of the Concerto™/Virtuoso™ ICD and CRT-D, which feature Medtronic’s Connexus wireless telemetry. Data from the CARE-HF (Cardiac Resynchronization in Heart Failure) study presented at the 2006 European Society of Cardiology/World Congress of Cardiology in September, demonstrated that Cardiac Resynchronization Therapy significantly reduces mortality in heart failure patients. Medtronic launched its newest pacing platform, the Adapta™, Versa™ and Sensia™ family of products, which incorporates unique capabilities, including MVP, automaticity and the connection to CareLink®. The Medtronic Carelink Network, available on both pacing and ICD platforms, continues to expand, with more than 1,000 clinics monitoring nearly 95,000 patients in the U.S. Spinal and Navigation Spinal and Navigation revenue of $625 million grew 16 percent. Spinal revenue increased 16 percent with the Biologics product line growing 33 percent. All major geographies achieved double digit revenue growth. Spinal and Navigation quarterly highlights include: Worldwide INFUSE® Bone Graft revenue grew 36 percent, driven by expanded surgeon adoption. On November 9, a U.S. Food and Drug Administration (FDA) advisory panel recommended approval of INFUSE Bone Graft for use in oral maxillofacial procedures. An FDA advisory panel unanimously voted to recommend approval of the PRESTIGE® Cervical Disc System. The PRESTIGE Disc is the first in a portfolio of artificial disc replacements designed to maintain motion while replacing a diseased disc that is removed from a patient’s cervical spine. Approval is anticipated in the U.S. before the end of the fiscal year. ARCUATE™ and ARCUATE™ XP, which provide new treatments for patients who suffer from painful and often disabling symptoms associated with a vertebral compression fracture, were launched in the U.S. The CD HORIZON® product line was expanded with the worldwide launch of CD HORIZON LEGACY™ PEEK Rod System for posterior spinal fusion procedures, the CD HORIZON ENGAGE PLATE System for lumbar fusion surgery and the CD HORIZON LEGACY™ VCM Instrument Set to treat scoliosis. Vascular Vascular revenue of $287 million grew 28 percent. Strong second quarter results were driven by Coronary Vascular which generated revenue of $217 million, representing growth of 29 percent. The Endovascular and Peripheral Vascular business reported revenue growth of 23 percent. Vascular quarterly highlights include: The Endeavor®Drug-Eluting Coronary Stent, now commercially released in more than 100 countries outside the U.S., continued to gain global product market share, as a result of favorable safety and efficacy data and its ease of deliverability. The final module of the Endeavor PMA was submitted this month and FDA approval and U.S. launch is anticipated in calendar 2007. Positive clinical results from the ENDEAVOR II pivotal trial were published in the medical journal CIRCULATION. The results provided further evidence of the safety and effectiveness of the Endeavor drug-eluting stent, with a clinically and statistically significant treatment effect that is being sustained over time. Additionally, Medtronic reported excellent patient safety data on Endeavor at last Month’s Transcatheter Cardiovascular Therapeutics symposium in Washington, D.C. Medtronic also announced the initiation of the largest ever randomized stent trial. The PROTECT clinical study will assess and compare key safety measures of two drug-eluting stents. The trial will compare the Medtronic Endeavor drug-eluting coronary stent versus a competing stent. Neurological Neurological revenue of $291 million grew 15 percent. The segment’s largest business, which includes implantable pumps and neuro stimulators, generated second quarter revenue of $238 million, increasing 17 percent. Revenue in the Gastroenterology and Urological business grew 10 percent. Neurological quarterly highlights include: RestoreADVANCED™ and PrimeADVANCED™, two new neurostimulation systems for the treatment of chronic pain, were launched in the U.S. Enhanced programming capabilities will help aid physicians in targeting the specific stimulation area on the spinal cord to provide optimal pain relief. Results of a major randomized controlled multi-center study were published in the August 31 issue of the New England Journal of Medicine demonstrating that Activa deep brain stimulation therapy combined with medication is significantly more effective than medication alone in treating motor symptoms of advanced Parkinson’s disease. The launch of InterStim® II was completed, which drove U.S. InterStim revenue growth of 41 percent. The InterStim II neurostimulation system is used for the treatment of overactive bladder and urinary retention. Diabetes Diabetes revenue of $212 million grew 19 percent. Second quarter results were driven by strong sales of insulin pumps with solid double digit growth reported in all geographies. Diabetes quarterly highlights include: Insulin pump sales were driven by strong demand for the Paradigm® REAL-time System, the only product on the market that integrates continuous glucose monitoring and insulin pump functionality. A non-sensor augmented pump that operates in 16 languages was launched, targeting markets in Europe and the Middle East. Additionally, the 712E insulin pump with Chinese language capability was launched in China. The GuardControl study evaluating continuous glucose monitoring versus self monitored blood glucose meters was accepted by Diabetes Care Journal for publication. Cardiac Surgery Cardiac Surgery revenue of $168 million grew 4 percent. Cardiac Surgery quarterly highlights include: Melody™ and Ensemble™, the world’s first transcatheter pulmonic valve system, received CE Mark approval for commercial sale in Europe. This technology provides a catheter-based approach to pulmonic valve replacement for patients with congenital heart defects, thereby reducing the number of open-heart surgeries required during their lifetime. Two new products, the Performer™ Cardio Bypass System (CPB) and the Octopus® Evolution tissue stabilizer were fully launched. The Performer CPB is a more compact console, one-third the size of traditional heart-lung machines. The Octopus Evolution continues Medtronic’s series of innovative cardiac surgery instruments for revascularization surgery. Ear, Nose and Throat (ENT) ENT revenue of $129 million grew 7 percent. Power Systems, including powered drills and endoscopic shavers and Nerve Integrity Monitoring, all reported double digit growth. Neurologic Technology second quarter revenue increased 12 percent due to strong growth from cranial and spinal surgical tools as well as continued success of the Strata™ Valve, which is increasingly being used to treat Normal Pressure Hydrocephalus. Webcast Information Medtronic will host a webcast today, Nov. 20 at 4:30 pm EST (3:30 CST), to provide information about its businesses for the public, analyst and news media. This quarterly webcast can be accessed by clicking on the Investor Relations link on the Medtronic home page at www.medtronic.com., and this earnings release will be archived at www.medtronic.com/newsroom. Within 24 hours, a replay of the webcast and a transcript of the company’s prepared remarks will be available in the "Presentations & Transcripts” section of the Investor Relations homepage. Medtronic, Inc., headquartered in Minneapolis, is the world’s leading medical technology company, alleviating pain, restoring health and extending life for people with chronic disease. Its Internet address is www.medtronic.com. This press release contains forward-looking statements, including statements regarding clinical trials, new products, market growth and market acceptance and other developments, which are subject to risks and uncertainties, such as competitive factors, difficulties and delays inherent in the development, manufacturing, marketing and sale of medical products, government regulation, general economic conditions and other risk and uncertainties described in Medtronic’s Annual Report on Form 10-K for the year ended April 28, 2006. Actual results may differ materially from anticipated results. Medtronic does not undertake to update its forward-looking statements. MEDTRONIC, INC. REVENUE BY OPERATING SEGMENT - WORLD WIDE (Unaudited)     ($ millions)                                         FY 06 FY 06 FY 06 FY 06 FY 06 FY 07 FY 07 FY 07 FY 07 FY 07     QTR 1   QTR 2   QTR 3   QTR 4   Total   QTR 1   QTR 2   QTR 3   QTR 4   Total REPORTED REVENUE : CARDIAC RHYTHM DISEASE MANAGEMENT $ 1,268  $ 1,289  $ 1,263  $ 1,385  $ 5,206  $ 1,250  $ 1,363  $ -  $ -  $ 2,613  Low Power Pacing 446  459  426  464  1,795  460  473  -  -  933  High Power Defibrillation 718  733  723  758  2,932  673  764  -  -  1,436  Emergency Response Systems 87  81  99  144  412  101  111  -  -  212  Other 17  16  15  19  67  16  15  -  -  32    SPINAL & NAVIGATION $ 524  $ 539  $ 563  $ 619  $ 2,244  $ 599  $ 625  $ -  $ -  $ 1,224  Spinal Instrumentation 376  382  387  420  1,566  412  421  -  -  833  Spinal Biologics 128  134  147  163  570  163  178  -  -  341  Navigation 20  23  29  36  108  24  26  -  -  50    NEUROLOGICAL $ 235  $ 252  $ 247  $ 283  $ 1,016  $ 276  $ 291  $ -  $ -  $ 567  Neuro Implantables 186  204  202  241  833  226  238  -  -  464  Gastroenterology & Urology 49  48  45  42  183  50  53  -  -  103    VASCULAR $ 205  $ 225  $ 236  $ 274  $ 940  $ 280  $ 287  $ -  $ -  $ 567  Stents 65  90  96  114  366  120  132  -  -  252  Other Coronary 81  78  83  92  334  92  85  -  -  177  Endovascular/Peripheral 59  57  57  68  240  68  70  -  -  138    DIABETES $ 173  $ 178  $ 182  $ 188  $ 722  $ 196  $ 212  $ -  $ -  $ 408    CARDIAC SURGERY $ 165  $ 161  $ 154  $ 183  $ 663  $ 168  $ 168  $ -  $ -  $ 336  Valves 58  56  52  63  229  59  59  -  -  119  Perfusion 79  78  75  89  321  80  81  -  -  161  Cardiac Surgery Technologies 28  27  27  31  113  29  28  -  -  56    EAR, NOSE & THROAT (ENT) $ 120  $ 121  $ 125  $ 135  $ 501  $ 128  $ 129  $ -  $ -  $ 257  ENT 65  64  65  72  266  65  65  -  -  131  Neurologic Technologies 55  57  60  63  235  63  64  -  -  126    TOTAL $ 2,690    $ 2,765    $ 2,770    $ 3,067    $ 11,292  $ 2,897    $ 3,075    $ -    $ -    $ 5,972    ADJUSTMENTS :   CURRENCY (1) $ 26  $ (3) $ (72) $ (69) $ (118) $ 6  $ 33  $ 39    COMPARABLE OPERATIONS (1) $ 2,664    $ 2,768    $ 2,842    $ 3,136    $ 11,410  $ 2,891    $ 3,042    $ -    $ -    $ 5,933                                            (1) Medtronic management believes that in order to properly understand Medtronic's short-term and long-term financial trends, investors may wish to consider the impact of foreign currency translation on revenue. In addition, Medtronic management uses results of operations before currency translation to evaluate the operational performance of the Company and as a basis for strategic planning. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP.   Note: The data in this schedule has been intentionally rounded to the nearest million and therefore the quarterly revenues may not sum to the fiscal year to date revenues. MEDTRONIC, INC. REVENUE BY OPERATING SEGMENT - US (Unaudited)   ($ millions)                                         FY 06 FY 06 FY 06 FY 06 FY 06 FY 07 FY 07 FY 07 FY 07 FY 07     QTR 1   QTR 2   QTR 3   QTR 4   Total   QTR 1   QTR 2   QTR 3   QTR 4   Total REPORTED REVENUE : CARDIAC RHYTHM DISEASE MANAGEMENT $ 857  $ 879  $ 862  $ 899  $ 3,496  $ 793  $ 880  $ -  $ -  $ 1,672  Low Power Pacing 218  235  223  227  902  228  244  -  -  471  High Power Defibrillation 571  579  565  569  2,283  495  554  -  -  1,049  Emergency Response Systems 59  54  65  94  273  60  73  -  -  133  Other 9  11  9  9  38  10  9  -  -  19    SPINAL & NAVIGATION $ 437  $ 454  $ 477  $ 511  $ 1,881  $ 497  $ 522  $ -  $ -  $ 1,019  Spinal Instrumentation 300  308  315  328  1,252  322  333  -  -  655  Spinal Biologics 124  131  143  158  557  158  172  -  -  329  Navigation 13  15  19  25  72  17  17  -  -  35    NEUROLOGICAL $ 162  $ 185  $ 182  $ 197  $ 726  $ 196  $ 215  $ -  $ -  $ 411  Neuro Implantables 126  148  149  169  592  157  173  -  -  331  Gastroenterology & Urology 36  37  33  28  134  39  42  -  -  80    VASCULAR $ 66  $ 66  $ 67  $ 76  $ 275  $ 79  $ 83  $ -  $ -  $ 162  Stents 6  6  6  6  24  9  12  -  -  21  Other Coronary 26  26  27  32  111  31  30  -  -  62  Endovascular/Peripheral 34  34  34  38  140  39  41  -  -  79    DIABETES $ 130  $ 134  $ 136  $ 134  $ 534  $ 140  $ 154  $ -  $ -  $ 294    CARDIAC SURGERY $ 92  $ 90  $ 84  $ 100  $ 366  $ 91  $ 91  $ -  $ -  $ 183  Valves 35  33  31  38  138  35  35  -  -  70  Perfusion 41  41  38  44  163  40  40  -  -  81  Cardiac Surgery Technologies 16  16  15  18  65  16  16  -  -  32    EAR, NOSE & THROAT (ENT) $ 84  $ 85  $ 88  $ 92  $ 348  $ 87  $ 88  $ -  $ -  $ 175  ENT 46  45  46  49  184  43  44  -  -  87  Neurologic Technologies 38  40  42  43  164  44  44  -  -  88    TOTAL $ 1,828    $ 1,893    $ 1,896    $ 2,009    $ 7,626  $ 1,883    $ 2,033    $ -    $ -    $ 3,916    ADJUSTMENTS :   CURRENCY $ -  $ -  $ -  $ -  $ -  $ -  $ -  $ -  $ -  $ -    COMPARABLE OPERATIONS $ 1,828    $ 1,893    $ 1,896    $ 2,009    $ 7,626  $ 1,883    $ 2,033    $ -    $ -    $ 3,916                                            Note: The data in this schedule has been intentionally rounded to the nearest million and therefore the quarterly revenues may not sum to the fiscal year to date revenues. MEDTRONIC, INC. REVENUE BY OPERATING SEGMENT - INTERNATIONAL (Unaudited)     ($ millions)                                         FY 06 FY 06 FY 06 FY 06 FY 06 FY 07 FY 07 FY 07 FY 07 FY 07     QTR 1   QTR 2   QTR 3   QTR 4   Total   QTR 1   QTR 2   QTR 3   QTR 4   Total REPORTED REVENUE : CARDIAC RHYTHM DISEASE MANAGEMENT $ 411  $ 410  $ 401  $ 486  $ 1,710  $ 457  $ 483  $ -  $ -  $ 941  Low Power Pacing 228  224  203  237  893  232  229  -  -  462  High Power Defibrillation 147  154  158  189  649  178  210  -  -  387  Emergency Response Systems 28  27  34  50  139  41  38  -  -  79  Other 8  5  6  10  29  6  6  -  -  13    SPINAL & NAVIGATION $ 87  $ 85  $ 86  $ 108  $ 363  $ 102  $ 103  $ -  $ -  $ 205  Spinal Instrumentation 76  74  72  92  314  90  88  -  -  178  Spinal Biologics 4  3  4  5  13  5  6  -  -  12  Navigation 7  8  10  11  36  7  9  -  -  15    NEUROLOGICAL $ 73  $ 67  $ 65  $ 86  $ 290  $ 80  $ 76  $ -  $ -  $ 156  Neuro Implantables 60  56  53  72  241  69  65  -  -  133  Gastroenterology & Urology 13  11  12  14  49  11  11  -  -  23    VASCULAR $ 139  $ 159  $ 169  $ 198  $ 665  $ 201  $ 204  $ -  $ -  $ 405  Stents 59  84  90  108  342  111  120  -  -  231  Other Coronary 55  52  56  60  223  61  55  -  -  115  Endovascular/Peripheral 25  23  23  30  100  29  29  -  -  59    DIABETES $ 43  $ 44  $ 46  $ 54  $ 188  $ 56  $ 58  $ -  $ -  $ 114    CARDIAC SURGERY $ 73  $ 71  $ 70  $ 83  $ 297  $ 77  $ 77  $ -  $ -  $ 153  Valves 23  23  21  25  91  24  24  -  -  49  Perfusion 38  37  37  45  158  40  41  -  -  80  Cardiac Surgery Technologies 12  11  12  13  48  13  12  -  -  24    EAR, NOSE & THROAT (ENT) $ 36  $ 36  $ 37  $ 43  $ 153  $ 41  $ 41  $ -  $ -  $ 82  ENT 19  19  19  23  82  22  21  -  -  44  Neurologic Technologies 17  17  18  20  71  19  20  -  -  38    TOTAL $ 862    $ 872    $ 874    $ 1,058    $ 3,666  $ 1,014    $ 1,042    $ -    $ -    $ 2,056    ADJUSTMENTS :   CURRENCY (1) $ 26  $ (3) $ (72) $ (69) $ (118) $ 6  $ 33  $ -  $ -  $ 39    COMPARABLE OPERATIONS (1) $ 836    $ 875    $ 946    $ 1,127    $ 3,784  $ 1,008    $ 1,009    $ -    $ -    $ 2,017                                            (1) Medtronic management believes that in order to properly understand Medtronic's short-term and long-term financial trends, investors may wish to consider the impact of foreign currency translation on revenue. In addition, Medtronic management uses results of operations before currency translation to evaluate the operational performance of the Company and as a basis for strategic planning. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP.   Note: The data in this schedule has been intentionally rounded to the nearest million and therefore the quarterly revenues may not sum to the fiscal year to date revenues. MEDTRONIC, INC. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (in millions, except per share data)     Three months ended Six months ended October 27,2006 October 28,2005 October 27,2006 October 28,2005     Net sales $ 3,075  $ 2,765  $ 5,972  $ 5,456    Costs and expenses: Cost of products sold 795  695  1,527  1,349  Research and development expense 320  275  619  538  Selling, general, and administrative expense 1,036  903  2,020  1,786  Special charges -  100  -  100  Certain litigation charges -  -  40  -  Purchased in-process research and development (IPR&D) -  -  -  364  Other expense, net 50  41  116  91  Interest income (37) (14) (76) (29) Total costs and expenses 2,164  2,000  4,246  4,199    Earnings before income taxes 911  765  1,726  1,257    Provision for income taxes 230  (52) 446  120    Net earnings $ 681  $ 817  1,280  $ 1,137      Earnings per share: Basic $ 0.59  $ 0.68  $ 1.11  $ 0.94  Diluted $ 0.59  $ 0.67  $ 1.10  $ 0.93      Weighted average shares outstanding: Basic 1,149.3  1,208.6  1,151.4  1,209.6  Diluted 1,159.4  1,222.5  1,161.9  1,222.4  MEDTRONIC, INC. RECONCILIATION OF CONSOLIDATED GAAP NET EARNINGS TO CONSOLIDATED ADJUSTED NET EARNINGS (Unaudited) (in millions, except per share data)     Three months ended Three months ended October 27, 2006 October 28, 2005   Net earnings, as reported $ 681  $ 817  Special charges -  66  (a) Income tax adjustments -  (225) (b) Stock-based awards -  (25) (c) Adjusted net earnings $ 681  $ 633  MEDTRONIC, INC. RECONCILIATION OF CONSOLIDATED GAAP DILUTED EPS TO CONSOLIDATED ADJUSTED DILUTED EPS (Unaudited)     Three months ended Three months ended October 27, 2006 October 28, 2005   Diluted EPS, as reported $ 0.59  $ 0.67  Special charges -  0.05  (a) Income tax adjustments -  (0.18) (b) Stock-based awards -  (0.02) (c) Adjusted diluted EPS $ 0.59  $ 0.52  (a) The $66 million ($0.05 per share) special charge represents an after-tax charitable donation ($100 million pre-tax) made to The Medtronic Foundation. In addition to disclosing special charges that are determined in accordance with GAAP, Medtronic management believes that in order to properly understand its short-term and long-term financial trends, investors may find it useful to consider the impact of excluding this donation. The Company has not made a similar donation to The Medtronic Foundation since fiscal year 2002. Management believes that the resulting non-GAAP financial measure provides useful information to investors regarding the underlying business trends and performance of the Company's ongoing operations and is useful for period over period comparisons of such operations. Medtronic management eliminates this donation when evaluating the operating performance of the Company. Investors should consider this non-GAAP measure in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be the same as similar measures presented by other companies. (b) The $225 million ($0.18 per share) tax adjustment represents a $225 million tax benefit associated with the reversal of reserves resulting from favorable agreements reached with the U.S. Internal Revenue Service involving the review of fiscal years 1997 through 2002 domestic income tax returns. In addition to disclosing the provision for income taxes that is determined in accordance with GAAP, Medtronic management believes that in order to properly understand its short-term and long-term financial trends, investors may find it useful to consider the impact of excluding this tax adjustment. Management believes that the resulting non-GAAP financial measure provides useful information to investors regarding the underlying business trends and performance of the Company's ongoing operations and is useful for period over period comparisons of such operations, specifically the effective tax rate. Medtronic management eliminates this tax adjustment when evaluating the operating performance of the Company. Investors should consider this non-GAAP measure in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be the same as similar measures presented by other companies. (c) The Company adopted SFAS No. 123(R) effective April 29, 2006 and began to recognize compensation expense associated with all stock-based awards. Prior to fiscal year 2007, the Company accounted for stock-based awards under APB No. 25, and thus the Company only recognized compensation expense related to restricted stock awards and restricted stock units. Under SFAS No. 123(R) compensation expense is recognized on all stock-based awards including stock options, employee stock purchase plans and restricted stock awards/units. The $25 million ($0.02 per share), net of statutory tax ($35 million pre-statutory tax), represents the incremental expense that would have been recorded had the Company accounted for stock-based awards in accordance with SFAS No. 123(R) in fiscal year 2006. Total stock-based compensation including stock options, restricted stock awards/units and employee stock purchase plans was $44 million (pre-statutory tax) in the second quarter of fiscal year 2007 and pro-forma total stock-based compensation including stock options, restricted stock awards/units and employee stock purchase plan was $41 million (pre-statutory tax) in the second quarter of fiscal year 2006. Below is a listing, by income statement line item, of the pre-statutory tax total stock-based compensation expense recognized in second quarter of fiscal year 2007 and the pro forma stock-based compensation expense for second quarter of fiscal year 2006. Three months ended Three months ended October 27, 2006 October 28, 2005   Cost of products sold $ 4  $ 4  Research and development expense 10  10  Selling, general, and administrative expense 30  27  $ 44  $ 41  Management believes that the resulting non-GAAP financial measure provides useful information to investors regarding the underlying business trends and performance of the Company's ongoing operations and is useful for period over period comparisons of such operations. Medtronic management applies the provisions of SFAS No. 123(R) to fiscal years 2006 and prior when evaluating the operating performance of the Company. Investors should consider this non-GAAP measure in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be the same as similar measures presented by other companies. MEDTRONIC, INC. RECONCILIATION OF CONSOLIDATED GAAP NET EARNINGS TO CONSOLIDATED ADJUSTED NET EARNINGS (Unaudited) (in millions, except per share data)   Six months ended Six months ended October 27, 2006 October 28, 2005   Net earnings, as reported $ 1,280  $ 1,137  Special charges -  66  (b) Certain litigation charges 40  (a) -  IPR&D charges -  295  (c) Income tax adjustments -  (225) (d) Stock-based awards -  (57) (e) Adjusted net earnings $ 1,320  $ 1,216  MEDTRONIC, INC. RECONCILIATION OF CONSOLIDATED GAAP DILUTED EPS TO CONSOLIDATED ADJUSTED DILUTED EPS (Unaudited)   Six months ended Six months ended October 27, 2006 October 28, 2005   Diluted EPS, as reported $ 1.10  $ 0.93  Special charges -  0.05  (b) Certain litigation charges 0.04  (a) -  IPR&D charges -  0.24  (c) Income tax adjustments -  (0.18) (d) Stock-based awards -  (0.05) (e) Adjusted diluted EPS $ 1.14  $ 0.99  (a) The $40 million ($0.04 per share) after-tax certain litigation charge is related to the settlement agreement reached with the United States (U.S.) Department of Justice which requires the government to seek dismissal of two qui tam civil suits pending against Medtronic. In addition to disclosing certain litigation charges that are determined in accordance with U.S. generally accepted accounting principles (GAAP), Medtronic management believes that in order to properly understand its short-term and long-term financial trends, investors may find it useful to consider the impact of excluding these litigation charges. Management believes that the resulting non-GAAP financial measure provides useful information to investors regarding the underlying business trends and performance of the Company's ongoing operations and is useful for period over period comparisons of such operations. Medtronic management eliminates these litigation charges when evaluating the operating performance of the Company. Investors should consider this non-GAAP measure in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be the same as similar measures presented by other companies. (b) The $66 million ($0.05 per share) special charge represents an after-tax charitable donation ($100 million pre-tax) made to The Medtronic Foundation. In addition to disclosing special charges that are determined in accordance with GAAP, Medtronic management believes that in order to properly understand its short-term and long-term financial trends, investors may find it useful to consider the impact of excluding this donation. The Company has not made a similar donation to The Medtronic Foundation since fiscal year 2002. Management believes that the resulting non-GAAP financial measure provides useful information to investors regarding the underlying business trends and performance of the Company's ongoing operations and is useful for period over period comparisons of such operations. Medtronic management eliminates this donation when evaluating the operating performance of the Company. Investors should consider this non-GAAP measure in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be the same as similar measures presented by other companies. (c) The $295 million ($0.24 per share) after-tax IPR&D charges ($364 million pre-tax) represents the cumulative impact of pre-tax charges of $169 million related to a technology acquired through the purchase of Transneuronix, Inc. that had not yet reached technological feasibility and had no future alternative use, $175 million related to the purchase of spinal technology based devices owned by Gary Michelson and Karlin Technology, Inc. that had not yet reached technological feasibility and had no future alternative use, and $20 million related to a cross-licensing agreement with NeuroPace, Inc. for patent and patent applications on products that had not yet reached technological feasibility and had no future alternative use, collectively the IPR&D charges. In addition to disclosing IPR&D charges that are determined in accordance with GAAP, Medtronic management believes that in order to properly understand its short-term and long-term financial trends, investors may find it useful to consider the impact of excluding these IPR&D charges. These IPR&D charges resulted from facts and circumstances that vary in frequency and/or impact on continuing operations. Management believes that the resulting non-GAAP financial measure provides useful information to investors regarding the underlying business trends and performance of the Company's ongoing operations and is useful for period over period comparisons of such operations. Medtronic management eliminates these IPR&D charges when evaluating the operating performance of the Company. Investors should consider this non-GAAP measure in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be the same as similar measures presented by other companies. (d) The $225 million ($0.18 per share) tax adjustment represents a $225 million tax benefit associated with the reversal of reserves resulting from favorable agreements reached with the U.S. Internal Revenue Service involving the review of fiscal years 1997 through 2002 domestic income tax returns. In addition to disclosing the provision for income taxes that is determined in accordance with GAAP, Medtronic management believes that in order to properly understand its short-term and long-term financial trends, investors may find it useful to consider the impact of excluding this tax adjustment. Management believes that the resulting non-GAAP financial measure provides useful information to investors regarding the underlying business trends and performance of the Company's ongoing operations and is useful for period over period comparisons of such operations, specifically the effective tax rate. Medtronic management eliminates this tax adjustment when evaluating the operating performance of the Company. Investors should consider this non-GAAP measure in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be the same as similar measures presented by other companies. (e) The Company adopted SFAS No. 123(R) effective April 29, 2006 and began to recognize compensation expense associated with all stock-based awards. Prior to fiscal year 2007, the Company accounted for stock-based awards under APB No. 25, and thus the Company only recognized compensation expense related to restricted stock awards and restricted stock units. Under SFAS No. 123(R) compensation expense is recognized on all stock-based awards including stock options, employee stock purchase plans and restricted stock awards/units. The $57 million ($0.05 per share), net of statutory tax ($78 million pre-statutory tax), represents the incremental expense that would have been recorded had the Company accounted for stock-based awards in accordance with SFAS No. 123(R) in fiscal year 2006. Total stock-based compensation including stock options, restricted stock awards/units and employee stock purchase plans was $94 million (pre-statutory tax) for the six months ended October 27, 2006 and pro-forma total stock-based compensation including stock options, restricted stock awards/units and employee stock purchase plans was $90 million (pre-statutory tax) for the six months ended October 28, 2005. Below is a listing, by income statement line item, of the pre-statutory tax total stock-based compensation expense recognized in six months ended October 28, 2006 and the pro forma stock-based compensation expense for six months ended October 28, 2005. Six months ended Six months ended October 27, 2006 October 28, 2005   Cost of products sold $10  $10  Research and development expense 22  22  Selling, general, and administrative expense 62  58  $94  $90  Management believes that the resulting non-GAAP financial measure provides useful information to investors regarding the underlying business trends and performance of the Company's ongoing operations and is useful for period over period comparisons of such operations. Medtronic management applies the provisions of SFAS No. 123(R) to fiscal years 2006 and prior when evaluating the operating performance of the Company. Investors should consider this non-GAAP measure in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be the same as similar measures presented by other companies. MEDTRONIC, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In millions, except per share data)   October 27,2006 April 28,2006     ASSETS   Current assets: Cash and cash equivalents $1,090  $2,994  Short-term investments 2,515  3,107  Accounts receivable, less allowances of $194 and $184, respectively 2,590  2,429  Inventories 1,318  1,177  Deferred tax assets, net 414  197  Prepaid expenses and other current assets 496  473    Total current assets 8,423  10,377    Property, plant and equipment 4,048  3,794  Accumulated depreciation (2,100) (1,913)   Net property, plant and equipment 1,948  1,881    Goodwill 4,361  4,346  Other intangible assets, net 1,608  1,592  Long-term investments 2,056  957  Long-term deferred tax assets, net 12  -  Other long-term assets 488  512    Total assets $18,896  $19,665      LIABILITIES AND SHAREHOLDERS’ EQUITY   Current liabilities: Short-term borrowings $623  $2,437  Accounts payable 319  319  Accrued compensation 622  723  Accrued income taxes 696  461  Other accrued expenses 529  466    Total current liabilities 2,789  4,406    Long-term debt 5,487  5,486  Long-term deferred tax liabilities, net -  22  Long-term accrued compensation 186  189  Other long-term liabilities 157  179    Total liabilities 8,619  10,282    Commitments and contingencies -  -    Shareholders’ equity: Preferred stock— par value $1.00 -  -  Common stock— par value $0.10 115  116  Retained earnings 9,960  9,112  Accumulated other non-owner changes in equity 202  155    Total shareholders’ equity 10,277  9,383      Total liabilities and shareholders’ equity $18,896  $19,665  MEDTRONIC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)   Six months ended   October 27,2006 October 28,2005   (dollars in millions) OPERATING ACTIVITIES: Net earnings $1,280  $1,137  Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 277  268  Purchased in-process research and development -  364  Provision for doubtful accounts 21  4  Deferred income taxes (251) 192  Stock-based compensation 94  12  Excess tax benefit from exercise of stock-based awards (11) Change in operating assets and liabilities: Accounts receivable (179) (74) Inventories (143) (189) Accounts payable and accrued liabilities 199  (740) Other operating assets and liabilities 20  45      Net cash provided by operating activities 1,307  1,019    INVESTING ACTIVITIES: Acquisitions, net of cash acquired (8) (285) Purchase of intellectual property (102) (794) Additions to property, plant and equipment (251) (229) Purchases of marketable securities (7,275) (1,922) Sales and maturities of marketable securities 6,787  1,013  Other investing activities, net (44) (12)     Net cash used in investing activities (893) (2,229)   FINANCING ACTIVITIES: (Decrease) increase in short-term borrowings, net (1,814) 386  Increase in long-term debt, net 1  994  Dividends to shareholders (254) (232) Issuance of common stock 113  254  Excess tax benefit from exercise of stock-based awards 11  -  Repurchase of common stock (398) (564)     Net cash (used in) provided by financing activities (2,341) 838    Effect of exchange rate changes on cash and cash equivalents 23  88    Net change in cash and cash equivalents (1,904) (284)   Cash and cash equivalents at beginning of period 2,994  2,232      Cash and cash equivalents at end of period $1,090  $1,948      Supplemental Cash Flow Information Cash Paid For: Income taxes $462  $106  Interest 112  44  Supplemental Noncash Investing and Financing Activities: Deferred payments for purchases of intellectual property $-  $30  Reclassification of debentures from long-term to short-term debt -  1,971 

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