Medtronic 2009 Annual Report Download - page 71

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Medtronic, Inc.
In connection with the acquisition, the Company acquired $996
million of intangible assets that had a weighted average useful
life of approximately 10.5 years. The intangible assets include
$887 million of technology-based assets and $109 million of
tradenames with weighted average lives of 10.5 years and 11
years, respectively. Also as part of the acquisition, the Company
recognized, in total, $290 million and $3.148 billion for IPR&D and
goodwill, respectively. The IPR&D was expensed on the date
of acquisition. Various factors contributed to the establishment of
goodwill, including: the benefit of adding existing products of
the Company to the portfolio of products already sold by
Kyphon sales representatives; the value of Kyphon’s highly trained
assembled workforce; and the expected revenue growth that is
attributable to expanded indications and increased market
penetration from future products and customers. The goodwill is
not deductible for tax purposes.
The $290 million IPR&D charge primarily relates to three
projects: 1) future launch of the balloon kyphoplasty (kyphoplasty)
procedure into the Japanese market, 2) future launch of the
Aperius product into the U.S. market and 3) the development of
the next generation kyphoplasty balloon technology. Kyphoplasty
is Kyphon’s minimally invasive approach to treat spinal fractures
including vertebral compression fractures due to osteoporosis
and cancer. Aperius is Kyphon’s internally developed interspinous
spacing device which provides a minimally invasive approach to
treat lumbar spinal stenosis. For purposes of valuing the acquired
IPR&D, the Company estimated total costs to complete of
approximately $19 million.
As required, the Company recognized a $34 million fair value
adjustment related to inventory acquired from Kyphon. Inventory
fair value is defined as the estimated selling price less the sum of
(a) cost to complete (b) direct costs to sell and (c) a reasonable
profit allowance for the selling effort. The $34 million fair value
adjustment was fully expensed through cost of products sold
during the third quarter of fiscal year 2008, which reflects the
estimated period over which the acquired inventory was sold
to customers.
In connection with the acquisition, the Company began to
assess and formulate a plan for the elimination of duplicative
positions, employee relocations, the exit of certain facilities and
the termination of certain contractual obligations. The purchase
accounting liabilities recorded in connection with these activities
were approximately $68 million and included approximately $48
million for termination benefits and employee relocation and
approximately $20 million of estimated costs to cancel contractual
obligations. During the fourth quarter of fiscal year 2009,
the Company reversed $15 million of the purchase accounting
liabilities due to a favorable outcome in negotiating the
termination of contractual obligations. The reversal of these
liabilities was recorded as a reduction of goodwill. As of April 24,
2009, the purchase accounting liabilities related to the activities
noted above have been fully utilized.
The Company’s consolidated financial statements include
Kyphon’s operating results from the date of acquisition, November
2, 2007. The following unaudited pro forma information sets forth
the combined results of Medtronic’s and Kyphon’s operations for
fiscal years 2008 and 2007, as if the acquisition had occurred at
the beginning of each of the periods presented. The unaudited
pro forma results of operations for the fiscal year ended April 25,
2008 is comprised of (i) Kyphon’s historical financial information
for the six months ended September 30, 2007, (ii) Medtronic’s pre-
Kyphon historical financial information for the six months ended
October 27, 2007 and (iii) Medtronic’s post-Kyphon historical
financial information for the six month period that includes the
three months ended January 25, 2008 and the three months
ended April 25, 2008. The unaudited pro forma results of
operations for the fiscal year ended April 27, 2007 includes
the results of Medtronic’s fiscal year 2007 historical financial
information and the operations for Kyphon for the twelve month
period ended March 31, 2007.
The pro forma information gives effect to actual operating
results prior to the acquisition, adjusted to reflect, among other
things, reduced interest income, additional intangible asset
amortization and interest expense that would have resulted from
the change in the accounting basis of certain assets and liabilities
due to the acquisition. Pro forma adjustments are tax-effected at
the Company’s statutory tax rate. No effect has been given to cost
reductions or operating synergies in this presentation. These pro
forma amounts are not necessarily indicative of the results that
would have been obtained if the acquisition had occurred as of
the beginning of the periods presented or that may occur in the
future, and does not reflect future synergies, integration costs or
other such costs or savings. The unaudited pro forma condensed