Acquisitions and Acquisition-Related Items

The Company had various acquisitions and other acquisition-related activity during fiscal years 2015, 2014, and 2013. Certain acquisitions were accounted for as business combinations as noted below. In accordance with authoritative guidance on business combination accounting, the assets and liabilities of the companies acquired were recorded as of the acquisition date, at their respective fair values, and consolidated. With the exception of the Covidien acquisition and unless otherwise disclosed, the pro forma impact of these acquisitions was not significant, either individually or in the aggregate, to the results of the Company for the fiscal years ended April 24, 2015, April 25, 2014, or April 26, 2013. The results of operations related to each company acquired have been included in the Company’s consolidated statements of income since the date each company was acquired.

Fiscal Year 2015

Covidien public limited company

On January 26, 2015, pursuant to the transaction agreement, dated as of June 15, 2014 (the Transaction Agreement), by and among Medtronic, Inc., Covidien, Medtronic plc (formerly known as Medtronic Limited, Medtronic Holdings Limited and Kalani I Limited), Makani II Limited, a private limited company organized under the laws of Ireland and a wholly-owned subsidiary of Medtronic (IrSub), Aviation Acquisition Co., Inc., a Minnesota corporation (U.S. AcquisitionCo), and Aviation Merger Sub, LLC, a Minnesota limited liability company and a wholly-owned subsidiary of U.S. AcquisitionCo (MergerSub), (i) Medtronic and IrSub acquired Covidien (the Acquisition) pursuant to the Irish Scheme of Arrangement under Section 201 (the Arrangement), and a capital reduction under Sections 72 and 74, of the Irish Companies Act of 1963 and (ii) MergerSub merged with and into Medtronic Inc., with Medtronic Inc. as the surviving corporation in the merger (the Merger and, together with the Acquisition, the Transactions). Following the consummation of the Transactions on January 26, 2015, Medtronic Inc. and Covidien became subsidiaries of Medtronic. In connection with the consummation of the Transactions, Medtronic re-registered as a public limited company organized under the laws of Ireland.

On January 26, 2015, (a) each Covidien ordinary share was converted into the right to receive $35.19 in cash and 0.956 of a newly issued Medtronic plc share (the Arrangement Consideration) in exchange for each Covidien share held by such shareholders, and (b) each share of Medtronic, Inc. common stock was converted into the right to receive one Medtronic plc ordinary share. Based on the number of outstanding shares of Medtronic, Inc. and Covidien as of January 23, 2015 (the last business day prior to the close of the transaction), former Medtronic, Inc. and Covidien shareholders held approximately 69 percent and 31 percent, respectively, of the Company's ordinary shares after giving effect to the acquisition.

Covidien is a global leader in the development, manufacture, and sale of healthcare products for use in clinical and home settings. The operating results for Covidien are included in the Minimally Invasive Therapies Group, Cardiac and Vascular Group and Restorative Therapies Group segments.

The acquisition of Covidien continues the Company's mission to create a medical technology and services company with a comprehensive product portfolio and a broad global reach that is better able to improve healthcare outcomes. Medtronic's management believes the acquisition of Covidien will provide substantial synergies including, but not limited to, enhanced operational cost efficiencies, incremental revenue opportunities, acceleration of long-term growth potential through broader geographic reach, and increased earnings and cash flow.

Fair Value of Consideration Transferred

Total consideration was approximately $50 billion, consisting of $16 billion cash and $34 billion of non-cash consideration. Total consideration is comprised of the equity value of the shares that were outstanding as of January 23, 2015 and the portion of Covidien's share awards and share options earned as of January 23, 2015 ($559 million). Share awards and share options not earned ($496 million) as of January 23, 2015 will be expensed over the remaining future vesting period, including $189 million and $70 million recognized in acquisition-related items and restructuring charges, net, respectively, for the fiscal year ended April 24, 2015.

The following table summarizes the total fair value of consideration transferred:



(in millions, except $ per share data)
Cash consideration paid to Covidien shareholders ($35.19 per share)	$	15,994
Cash consideration paid for vested Covidien share awards ($35.19 per share)	33
Total cash consideration	$	16,027

Covidien shares outstanding as of January 23, 2015	455
Exchange ratio per share	0.956
Total Medtronic shares issued to Covidien shareholders (a)	435
Medtronic per share value as of January 23, 2015	$	76.95
Fair value of Medtronic shares issued to Covidien shareholders	$	33,435
Fair value of shares issued to Covidien share award holders (a)	70
Fair value of share options and awards issued to Covidien share option and award holders	456
Total fair value of consideration transferred	$	49,988

(a) 1 million ordinary shares were issued, net, to Covidien share award holders.

Fair Value of Assets Acquired and Liabilities Assumed

The Company accounted for the acquisition of Covidien as a business combination using the acquisition method of accounting. The assets acquired and liabilities assumed were recorded at their respective fair values as of the Acquisition Date. Based upon a preliminary acquisition valuation, the Company acquired $18.3 billion of customer-related intangible assets, $7.1 billion of technology-based intangible assets, $0.5 billion of tradenames, with weighted average estimated useful lives of 18, 16, and 3 years, respectively, $0.4 billion of IPR&D, and $29.6 billion of goodwill.

As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments will be recorded during the measurement period in fiscal year 2016. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations. The finalization of the purchase accounting assessment will result in a change in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company's results of operations and financial position.

The preliminary fair values of the assets acquired and liabilities assumed are as follows:



(estimated in millions)
Accounts receivable	$	1,349
Inventories	2,222
Other current assets	2,949
Property, plant, and equipment	2,354
Goodwill	29,586
Intangible assets	26,265
Other assets	747
Total assets acquired	65,472

Short-term borrowings	1,011
Other current liabilities	2,331
Long-term debt	4,623
Long-term deferred tax liabilities	4,736
Other long-term liabilities	2,783
Total liabilities assumed	15,484
Net assets acquired	$	49,988

Goodwill has been allocated to the Minimally Invasive Therapies Group, Cardiac and Vascular Group, Restorative Therapies Group, and Diabetes Group. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company, which are further described above. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. See Note 7 for additional information about goodwill and other intangible assets.

Contingent liabilities assumed as part of the Acquisition total $2.2 billion and are included in accrued income taxes, other accrued expenses, long-term accrued income taxes, and other long-term liabilities. These contingent liabilities include $1.5 billion related to income taxes (including uncertain tax positions and guarantee commitments), $0.5 billion related to legal claims (including product liability), and $0.2 billion related to environmental matters. Contingent liabilities are recorded at their estimated fair values, aside from those pertaining to uncertainty in income taxes which are an exception to the fair value basis of accounting. Legal matters and certain environmental matters that are legal in nature are recorded at their respective probable and estimable amounts. See Note 16 for additional background on contingent liabilities. The estimated fair values noted above are preliminary and are subject to change upon finalization of the purchase accounting assessment and may have a material impact on the Company's results of operations and financial position.

Actual and Pro Forma Impact

The Company's consolidated financial statements for the fiscal year ended April 24, 2015 include Covidien's results of operations from the Acquisition Date through April 24, 2015. Net sales and operating loss attributable to Covidien during this period and included in Medtronic's consolidated financial statements for the fiscal year ended April 24, 2015 total $2.683 billion and $423 million, respectively. The $423 million operating loss includes $623 million of amortization from the step-up in fair value of inventory acquired, $379 million of intangible asset amortization, $218 million of acquisition-related charges, and $142 million of restructuring charges, net, all of which relate to the Covidien acquisition.

The following unaudited pro forma information gives effect to Medtronic's acquisition of Covidien as if the acquisition had occurred on April 27, 2013, the first day of fiscal year 2014, and had been included in the Company's consolidated statements of income for fiscal years 2015 and 2014.



(in millions)	2015		2014
Pro forma net sales	$	28,369	$	27,380
Pro forma net income	$	3,944	$	3,280

The historical consolidated financial information of the Company and Covidien has been adjusted in the pro forma information to give effect to pro forma events that are (1) directly attributable to the transaction, (2) factually supportable, and (3) expected to have a continuing impact on the combined results. In order to reflect the occurrence of the acquisition on April 27, 2013 as required, the unaudited pro forma results include adjustments to reflect, among other things, the amortization of the inventory step-up, the incremental intangible asset amortization to be incurred based on the preliminary values of each identifiable intangible asset, and interest expense from debt financing obtained to fund the cash consideration transferred. Pro forma adjustments were tax-effected at the Company's statutory rate. 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 period presented or that may occur in the future, and does not reflect future synergies, integration costs, or other such costs or savings.

Other Fiscal Year 2015 Acquisitions

The fair values of the assets acquired and liabilities assumed from other acquisitions during fiscal year 2015 are as follows:



(in millions)	NGC Medical S.p.A.		Sapiens Steering Brain Stimulation		All Other		Total
Other current assets	$	55	$	3	$	12	$	70
Property, plant, and equipment	15		1		2		18
IPR&D	—		30		41		71
Other intangible assets	159		—		157		316
Goodwill	197		170		105		472
Other assets	3		3		50		56
Total assets acquired	429		207		367		1,003

Current liabilities	34		4		6		44
Long-term deferred tax liabilities, net	51		—		66		117
Other liabilities	4		—		—		4
Total liabilities assumed	89		4		72		165
Net assets acquired	$	340	$	203	$	295	$	838

Sophono, Inc.

On March 26, 2015, the Company acquired Sophono, Inc. (Sophono), a privately-held developer and manufacturer of minimally invasive, transcutaneous bone conduction hearing implants. Total consideration for the transaction was approximately $17 million, which included an upfront payment of $6 million and the estimated fair value of revenue-based contingent consideration of $11 million. Based upon a preliminary acquisition valuation, the Company acquired $11 million of technology-based intangible assets with an estimated useful life of 13 years at the time of the acquisition, $2 million of IPR&D, and $5 million of goodwill. The acquired goodwill is not deductible for tax purposes.

Diabeter

On March 26, 2015, the Company acquired Diabeter, an innovative Netherlands-based diabetes clinic and research center dedicated to providing comprehensive and individualized care for children and young adults with diabetes. Total consideration for the transaction was approximately $10 million. Based upon a preliminary acquisition valuation, the Company acquired $9 million of goodwill. The acquired goodwill is not deductible for tax purposes.

NGC Medical S.p.A

On August 26, 2014, the Company acquired NGC Medical S.p.A. (NGC), a privately-held Italian company that offers a broad suite of hospital managed services. Total consideration for this transaction was approximately $340 million. Medtronic had previously invested in NGC and held a 30 percent ownership position in that company. Net of this ownership position, the transaction value was approximately $238 million. Based upon a preliminary acquisition valuation, the Company acquired $159 million of customer-related intangible assets and tradenames with an estimated useful life of 20 years at the time of acquisition and $197 million of goodwill. The acquired goodwill is not deductible for tax purposes. During fiscal year 2015, the Company recorded adjustments to goodwill, other intangible assets, net, and long-term deferred tax liabilities.

Sapiens Steering Brain Stimulation

On August 25, 2014, the Company acquired Sapiens Steering Brain Stimulation (Sapiens), a privately-held developer of deep brain stimulation technologies. Total consideration for the transaction was approximately $203 million. Based upon a preliminary acquisition valuation, the Company acquired $30 million of IPR&D and $170 million of goodwill. The acquired goodwill is not deductible for tax purposes.

Visualase, Inc.

On July 25, 2014, the Company acquired Visualase, Inc. (Visualase), a privately-held developer of minimally invasive MRI guided laser ablation for surgical applications. Total consideration for the transaction was approximately $97 million. Based upon a preliminary acquisition valuation, the Company acquired $66 million of technology-based intangible assets with an estimated useful life of 10 years at the time of acquisition and $43 million of goodwill. The acquired goodwill is not deductible for tax purposes. During fiscal year 2015, the Company recorded minor adjustments to goodwill and other assets.

Corventis, Inc.

On June 20, 2014, the Company acquired Corventis, Inc. (Corventis), a privately-held developer of wearable, wireless technologies for cardiac disease. Total consideration for the transaction was approximately $131 million, including settlement of outstanding debt to Medtronic of $50 million. Based upon the acquisition valuation, the Company acquired $80 million of technology-based intangible assets with an estimated useful life of 16 years at the time of acquisition and $48 million of goodwill. The acquired goodwill is not deductible for tax purposes. During fiscal year 2015, the Company recorded minor adjustments to goodwill and long-term deferred tax liabilities.

The Company accounted for the acquisitions of Sophono, Diabeter, NGC, Sapiens, Visualase, and Corventis as business combinations using the acquisition method of accounting.

Subsequent Acquisitions

On June 18, 2015, the Company acquired CardioInsight Technologies, Inc (CardioInsight), a privately-held medical device company that has developed a new approach to improve the mapping of electrical disorders of the heart. Consideration consisted of an initial cash payment of $75 million, and retirement of a Medtronic loan outstanding to CardioInsight in the amount of $25 million, plus performance-based contingent consideration that may be paid post-closing.

On June 19, 2015, the Company acquired Aptus Endosystems, Inc. (Aptus), a privately-held medical device company focused on developing advanced technology for endovascular aneurysm repair and thoracic endovascular aneurysm repair. The total consideration for the transaction was approximately $110 million.

Other Acquisitions and Acquisition-Related Items

On December 19, 2014, the Company acquired a business in the Neuromodulation division. Total consideration for the transaction was approximately $39 million, which included an upfront payment of $33 million and the estimated fair value of revenue-based contingent consideration of $6 million. Based upon a preliminary acquisition valuation, the Company acquired $39 million of IPR&D. The Company accounted for the acquisition as a business combination using the acquisition method of accounting.

During fiscal year 2015, the Company recorded charges from acquisition-related items of $550 million, primarily related to costs incurred in connection with the Covidien acquisition. The charges incurred in connection with the Covidien acquisition include $275 million of professional services and integration costs, $189 million of accelerated or incremental stock compensation expense, and $69 million of incremental officer and director excise tax. These amounts are included within acquisition-related items in the consolidated statements of income.

Fiscal Year 2014

The fair values of the assets acquired and liabilities assumed during fiscal year 2014 are as follows:



(in millions)	TYRX, Inc.		Cardiocom, LLC
Current assets	$	6	$	14
Property, plant, and equipment	1		7
Intangible assets	94		61
Goodwill	132		123
Total assets acquired	233		205

Current liabilities	4		12
Long-term deferred tax liabilities, net	7		—
Total liabilities assumed	11		12
Net assets acquired	$	222	$	193

TYRX, Inc.

On December 30, 2013, the Company acquired TYRX, Inc. (TYRX), a privately-held developer of antibiotic drug and implanted medical device combinations. TYRX's products include those designed to reduce surgical site infections associated with implantable pacemakers, defibrillators, and spinal cord neurostimulators. Under the terms of the agreement, the transaction included an initial up-front payment of $159 million, representing a purchase price amount that was net of acquired cash, including the assumption and settlement of existing TYRX debt and direct acquisition costs. Total consideration for the transaction was approximately $222 million, which included estimated fair values for product development-based and revenue-based contingent consideration of $25 million and $35 million, respectively. The product development-based contingent consideration includes a future potential payment of $40 million upon achieving certain milestones, and the revenue-based contingent consideration payments equal TYRX's actual annual revenue growth for the Company's fiscal years 2015 and 2016. Based upon the acquisition valuation, the Company acquired $94 million of technology-based intangible assets with an estimated useful life of 14 years and $132 million of goodwill. The acquired goodwill is not deductible for tax purposes.

Cardiocom, LLC

On August 7, 2013, the Company acquired Cardiocom, LLC (Cardiocom), a privately-held developer and provider of integrated solutions for the management of chronic diseases such as heart failure, diabetes, and hypertension. Cardiocom's products and services include remote monitoring and patient-centered software to enable efficient care coordination and specialized telehealth nurse support. Total consideration for the transaction was approximately $193 million. Based upon the acquisition valuation, the Company acquired $61 million of customer-related intangible assets with an estimated useful life of 7 years and $123 million of goodwill. The acquired goodwill is deductible for tax purposes.

The Company accounted for the acquisitions of TYRX and Cardiocom as business combinations using the acquisition method of accounting.

Acquisition-Related Items

During fiscal year 2014, the Company recorded net charges from acquisition-related items of $117 million, primarily including IPR&D and long-lived asset impairment charges of $236 million related to the Ardian, Inc. (Ardian) acquisition recorded in the third quarter of fiscal year 2014. The impairment charges were partially offset by income of $138 million related to the change in fair value of contingent consideration associated with acquisitions subsequent to April 29, 2009. These amounts are included within acquisition-related items in the consolidated statements of income.

Fiscal Year 2013

The fair values of the assets acquired and liabilities assumed for acquisitions accounted for as business combinations during fiscal year 2013 are as follows:



(in millions)	China Kanghui Holdings
Current assets	$	106
Property, plant, and equipment	56
Intangible assets	341
Goodwill	409
Other assets	11
Total assets acquired	923

Current liabilities	29
Long-term deferred tax liabilities, net	77
Other long-term liabilities	1
Total liabilities assumed	107
Net assets acquired	$	816

China Kanghui Holdings

On November 1, 2012, the Company acquired China Kanghui Holdings (Kanghui). Kanghui is a Chinese manufacturer and distributor of orthopedic products in trauma, spine, and joint reconstruction. Total consideration for the transaction was approximately $816 million. The total value of the transaction, net of Kanghui's cash, was approximately $797 million. Based on the acquisition valuation, the Company acquired $288 million of technology-based assets and $53 million of tradenames and customer-related intangible assets that each had a weighted average estimated useful life of 11 years and $409 million of goodwill. The acquired goodwill is not deductible for tax purposes.

The Company accounted for the acquisition of Kanghui as business combinations using the acquisition method of accounting.

Acquisition-Related Items

During fiscal year 2013, the Company recorded net income from acquisition-related items of $49 million, primarily including income of $62 million related to the change in fair value of contingent consideration associated with acquisitions subsequent to April 29, 2009. The change in fair value of contingent consideration primarily related to adjustments in Ardian contingent consideration. Additionally, the Company recorded transaction-related expenses of $13 million. These amounts are included within acquisition-related items in the consolidated statements of income.

Contingent Consideration

Certain of the Company’s business combinations and purchases of intellectual property involve the potential for the payment of future contingent consideration upon the achievement of certain product development milestones and/or various other favorable operating conditions. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels or achieving product development targets. For business combinations subsequent to April 24, 2009, a liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period with the change in fair value recognized as income or expense within acquisition-related items in the consolidated statements of income. The Company measures the liability on a recurring basis using Level 3 inputs. See Note 6 for further information regarding fair value measurements.

The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues (for revenue-based considerations). Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected revenues are based on the Company’s most recent internal operational budgets and long-range strategic plans. Increases (decreases) in projected revenues, probabilities of payment, discount rates, or projected payment dates may result in higher (lower) fair value measurements. Fluctuations in any of the inputs may result in a significantly lower (higher) fair value measurement.

The recurring Level 3 fair value measurements of contingent consideration include the following significant unobservable inputs:



($ in millions)	Fair Value at April 24, 2015		Valuation Technique	Unobservable Input	Range
				Discount rate	0% - 27%
Revenue-based payments	$	159	Discounted cash flow	Probability of payment	70% - 100%
				Projected fiscal year of payment	2016 - 2025
				Discount rate	0.5% - 5.5%
Product development-based payments	$	105	Discounted cash flow	Probability of payment	75% - 100%
				Projected fiscal year of payment	2016 - 2020

At April 24, 2015, the estimated maximum potential amount of undiscounted future contingent consideration that the Company is expected to make associated with all completed business combinations or purchases of intellectual property prior to April 24, 2009 was approximately $193 million. The Company estimates the milestones or other conditions associated with the contingent consideration will be reached in fiscal year 2016 and thereafter.

The fair value of contingent consideration associated with acquisitions subsequent to April 24, 2009, as of April 24, 2015 and April 25, 2014, was $264 million and $68 million, respectively. As of April 24, 2015, $242 million was reflected in other long-term liabilities and $22 million was reflected in other accrued expenses in the consolidated balance sheets. As of April 25, 2014, $51 million was reflected in other long-term liabilities and $17 million was reflected in other accrued expenses in the consolidated balance sheets. The portion of the contingent consideration related to the acquisition date fair value is reported as financing activities in the consolidated statements of cash flows. Amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows. The following table provides a reconciliation of the beginning and ending balances of contingent consideration:



	Fiscal Year
(in millions)	2015			2014
Beginning Balance	$	68		$	142
Acquired contingent consideration	236			—
Purchase price contingent consideration	40			65
Contingent consideration payments	(85		)	(1		)
Change in fair value of contingent consideration	5			(138		)
Ending Balance	$	264		$	68