Goodwill and Other Intangible Assets

12 Months Ended

Dec. 31, 2011

Goodwill and Other Intangible Assets [Abstract]

Goodwill and Other Intangible Assets

9. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the changes in the carrying amount of goodwill (in millions):

	Americas			Europe			Asia Pacific		Total
Balance at January 1, 2010
Goodwill	$	1,547.9		$	1,173.1		$	135.5	$	2,856.5
Accumulated impairment losses		(73.0	)		–			–		(73.0	)
		1,474.9			1,173.1			135.5		2,783.5
U.S. Spine reporting unit impairment		(204.0	)		–			–		(204.0	)
Acquisitions		13.1			3.7			37.3		54.1
Currency translation		1.8			(69.7	)		15.1		(52.8	)
Balance at December 31, 2010
Goodwill		1,562.8			1,107.1			187.9		2,857.8
Accumulated impairment losses		(277.0	)		–			–		(277.0	)
		1,285.8			1,107.1			187.9		2,580.8
Acquisitions		26.7			6.6			–		33.3
Currency translation		(0.8	)		4.7			8.0		11.9
Balance at December 31, 2011
Goodwill		1,588.7			1,118.4			195.9		2,903.0
Accumulated impairment losses		(277.0	)		–			–		(277.0	)
	$	1,311.7		$	1,118.4		$	195.9	$	2,626.0

We conduct our annual impairment test in the fourth quarter of every year or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During our 2009 and 2010 annual impairment tests, it was determined that our U.S. Spine reporting unit’s carrying value was in excess of its estimated fair value. Fair value was determined using an equal weighting of income and market approaches.

In the 2009 period, factors that contributed to the estimated fair value of the reporting unit being below its carrying value included a decrease in projected revenues related to the Dynesys Dynamic Stabilization System. This product line experienced increased competition and insurance reimbursement issues in 2009. We had been seeking approval from the FDA to market this product differently in the U.S., which would have enhanced its position in the market. However, in November 2009 an FDA advisory panel issued a non-approvable recommendation, increasing the uncertainty of the estimated future cash flows at that time. In addition to the Dynesys product, revenues from other products had been affected as we worked through the integration of the sales channel following an acquisition.

For our annual impairment testing in 2010, factors in the broader U.S. spine marketplace as well as company specific factors contributed to a further decrease in the estimated fair value of the reporting unit. At the time of our 2009 impairment test, we estimated that the U.S. spine market was experiencing year-over-year revenue growth in the low double digits that would continue into the foreseeable future. Since the time of our 2009 test, year-over-year growth continued to decelerate and after multiple quarters of deceleration we estimated this may be a longer-term trend instead of a temporary phenomenon. In our 2010 impairment test, we concluded that year-over-year growth had fallen to the low to mid single digits which we estimate to be the trend in the near-term. A portion of this decrease has come from lower pricing as hospitals try to reduce their costs.

Another factor in the lower growth trend included increased scrutiny from insurance companies and continued discussion in the healthcare community on whether certain spine procedures are necessary. As an example, late in the third quarter of 2010 in one state an insurer provided notice that starting January 1, 2011, the insurer would require prior review and certification that the patient has met specific clinical criteria before the procedure would be covered. While revenues from these procedures in this one state are not significant to our overall revenues, it caused uncertainty on whether more insurers may take similar actions.

As discussed above, we believed such deceleration and uncertainty as to revenue growth also decreased the valuations of other spine companies in the U.S. market and thus affected our estimated fair value of our U.S. Spine reporting unit.

In addition, following the FDA advisory panel decision in November 2009 we continued to evaluate our regulatory options for marketing the Dynesys product differently. In 2010, we concluded that obtaining regulatory approval would take more time and cost more money than originally expected. This conclusion also contributed to the decrease in our estimated fair value of the reporting unit.

As a result, we recorded goodwill impairment charges of $204.0 million and $73.0 million during the years ended December 31, 2010 and 2009, respectively.

In our 2011 impairment test, we concluded that the estimated fair value of the U.S. Spine reporting unit was 13 percent higher than its carrying value.

We have six other reporting units with goodwill assigned to them. We estimate the fair value of those reporting units using the income approach by discounting to present value the estimated future cash flows of the reporting unit. For three of those reporting units, in 2011 we only performed a qualitative assessment of changes in fair value as allowed by a new accounting pronouncement as discussed in Note 2. For each of those six reporting units, the estimated fair value substantially exceeded its carrying value.

We will continue to monitor the fair value of our U.S. Spine reporting unit as well as our other six reporting units in our interim and annual reporting periods. If our estimated cash flows for these reporting units decrease, we may have to record further impairment charges in the future. Factors that could result in our cash flows being lower than our current estimates include: 1) decreased revenues caused by unforeseen changes in the healthcare market, or our inability to generate new product revenue from our research and development activities, and 2) if we are not able to achieve the estimated operating margins in our forecasts due to unforeseen factors. Additionally, changes in the broader economic environment could cause changes to our estimated discount rates, which will impact our estimated fair values.

The components of identifiable intangible assets are as follows (in millions):

	Core Technology			Developed Technology			Intellectual Property Rights			Trademarks and Trade Names			Customer Relationships			Other			Total
As of December 31, 2011:
Intangible assets subject to amortization:
Gross carrying amount	$	144.1		$	530.8		$	172.5		$	40.4		$	164.3		$	82.7		$	1,134.8
Accumulated amortization		(59.9	)		(255.5	)		(100.2	)		(26.9	)		(46.7	)		(39.4	)		(528.6	)
Intangible assets not subject to amortization:
Gross carrying amount		–			–			–			192.3			–			–			192.3
Total identifiable intangible assets	$	84.2		$	275.3		$	72.3		$	205.8		$	117.6		$	43.3		$	798.5
As of December 31, 2010:
Intangible assets subject to amortization:
Gross carrying amount	$	144.1		$	511.5		$	153.7		$	36.8		$	147.7		$	70.0		$	1,063.8
Accumulated amortization		(52.0	)		(219.3	)		(73.4	)		(23.4	)		(32.8	)		(33.1	)		(434.0	)
Intangible assets not subject to amortization:
Gross carrying amount		–			–			–			197.3			–			–			197.3
Total identifiable intangible assets	$	92.1		$	292.2		$	80.3		$	210.7		$	114.9		$	36.9		$	827.1

We currently have and anticipate future product development efforts that may replace the current products that use our trademarks and trade names. While it is anticipated, it is not certain that these new products will utilize these trademarks and trade names. If these new products do not use these trademarks and trade names, these assets may be impaired and/or their useful lives may need adjusted.

Intangible amortization expense was recorded as follows (in millions):

For the Years Ended December 31,	2011		2010		2009
Cost of products sold	$	26.7	$	33.1	$	33.6
Selling, general and administrative		67.1		59.2		59.6
Total intangible amortization	$	93.8	$	92.3	$	93.2

Estimated annual amortization expense based upon intangible assets recognized as of December 31, 2011 for the years ending December 31, 2012 through 2016 is (in millions):

For the Years Ending December 31,
2012	$	94.1
2013		88.1
2014		84.9
2015		71.4
2016		67.1