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Medtronic Case Questions: Medtronic Inc. 2014 Annual Report
Below are a series of questions to answer connected with
Medtronics 2014 annual report. Youshould use the financial
statements and footnotes directly obtained from the Medtronic
annualreport (i.e., not Mergent, Yahoo! Finance or other sources)
as other sources may not be accurate.
1. Revenue Recognition
How many days does it currently take Medtronic to turn products
into cash? Part of Medtronicsrevenue is recognized when a medical
device is actually implanted in a patient (see Footnote 1).
Suppose management wishes to reduce the average inventory
holding period to 140 days in orderto improve its cashflow
management. Management believes this can be achieved by changingthe
revenue recognition policies so that revenue is recorded when the
medical device is deliveredto the hospital rather than being
implanted in a patient.
Assuming no change in 2014 COGS or 2013 ending inventory, what
would the 2014 endinginventory balance need to be in order to
achieve this goal? Would this change in revenuerecognition improve
the stated goal of decreasing the time required to turn a product
into a cashcollection? Explain your answer.
2. Inventory
The Company currently uses the FIFO inventory method (see
Footnote 1). Suppose the endingLIFO inventory values are $1,575
million and $1,612 million for 2014 and 2013,
respectively.Management is interested in whether they should adopt
LIFO and has asked you for yourrecommendation. Prepare an analysis
of whether LIFO would benefit shareholders. Youranalysis should
consider both the impact on COGS and net income as well as
cashflows. Whichmethod do you recommend the Company use and
why?
(Note: net income is an after tax number. Using the terminology
of the course, net income isearnings before taxes less income
taxes. )
3. Property, Plant and Equipment
For a company like Medtronic, an adequate capital budget is
crucial for maintaining the capitalbase of the Company. Below are a
series of questions to help determine the average age of
theCompanys capital base and capital budget plan. Does Medtronic
use straight-line or anaccelerated depreciation method for
reporting purposes? How can you tell? What is thedepreciation
expense for reporting purposes for 2013 and 2014? Where did you get
thesenumbers? Using this information, calculate the average age of
the PPE for 2013 and 2014. Whatare capital expenditures for
property, plant and equipment for 2013 and 2014?
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4. Allowance for Doubtful Accounts
The Company sells to customers on credit. For Fiscal 2014, the
Company has reported $3.811billion as the amount for accounts
receivable. What does this amount represent? What is theactual
amount in the accounts receivable account? Where did you get this
information? Supposemanagement is worried about the potential
credit worthiness of its customers and determines thatthe allowance
account should have been $250 million at the end of Fiscal 2014.
What would theimpact of this change be on net income and basic
earnings per share?
5. Intangibles and Intellectual Property
Footnote 4 details acquisitions that Medtronic has made. In
fiscal 2014 the company acquiredanother company called Cardiocom.
What was the purchase price? What percentage of thispurchase price
is represented by intangible assets? Please explain how this
transaction affectedthe 2014 income statement as well as various
assets and liabilities on Medtronics Balance Sheet.
6. Footnotes 6 and 7 provide details on goodwill amounts. What
was the total amount ofgoodwill on the balance sheet in 2014? What
was the total amount of goodwill impairmentreported by
Medtronic?
7. Taxes
For 2014, what is the provision for income taxes (or tax expense
per books)? What part arecurrent taxes and what part are deferred
taxes? The cumulative effects of the individualdifferences between
taxes per book and per tax return are summarized in Footnote 13.
Explainhow a deferred tax asset is created when the Company records
an estimate for credit losses.
8. Contingencies
Footnote 1 deals with disclosures for contingencies and
commitments. Because of its products,the Company has significant
obligations for product warranties. Based on the
informationprovided in the footnote, what was the total amount paid
for warranty claims in Fiscal 2014?What is the outstanding balance
that has been set aside to pay for future claims?
9. Financing
Footnote 8 details the financing arrangements that the company
has engaged in. Whatproportion of the companys debt is short-term
and what proportion is long term? Describe thechange in the debt
structure of the company during 2014. What adjustment would the
company
have to make if they were to convert the operating leases to
capital leases (see footnote 15)?
10. Investments
Medtronic has a substantial investment portfolio. What portion
of 2014 securities (includingOther Assets) is held with the intent
to sell the securities in the near future, but not to activelytrade
in the securities? What are the net gains/losses on this portion of
the portfolio? What
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proportion of all securities being valued at fair value have had
their values determined usingprices obtained from identical
securities trading in an active market?
