Medtronic 2008 Annual Report Download - page 67

The purchase price allocation is based on estimates of the fair value
of assets acquired and liabilities assumed. The purchase price has been
allocated as follows:
Current assets $ 367
Property, plant and equipment 39
In-process research and development 290
Other intangible assets 996
Goodwill 3,175
Other long-term assets 10
Total assets acquired 4,877
Current liabilities 359
Deferred tax liabilities 282
Other long-term liabilities 33
Total liabilities assumed 674
Net assets acquired
$ 4,203
In connection with the acquisition, the Company acquired $996 of
intangible assets that had a weighted average useful life of approximately
10.5 years. The intangible assets include $887 of technology-based
assets and $109 of trade names with weighted average lives of 10.5 years
and 11 years, respectively. Also as part of the acquisition, the Company
recognized, in total, $290 and $3,175 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 Medtronic products 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 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.
As required, the Company recognized a $34 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 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 and included
approximately $48 for termination benefits and employee relocation
and approximately $20 of estimated costs to cancel contractual
obligations. The remaining balance of these liabilities as of April 25, 2008
was approximately $63. The Company continues to assess these
liabilities and until the plan is finalized and the integration activities are
complete, the allocation of the purchase price is subject to adjustment.
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 ending April 25, 2008 is comprised of (i) Kyphon’s historical
financial information for the six months ended September 30, 2007,
(ii) Medtronic’s historical financial information for the six months ended
October 27, 2007 and (iii) the Company’s actual results for the six month
period comprised of 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 include the results of
Medtronic’s historical financial information for Medtronic’s fiscal year
2007 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
consolidated financial information is presented for informational
purposes only.
63Medtronic, Inc.