Acquisitions and Acquisition-Related Items

The Company had various acquisitions and other acquisition-related activity during the first quarter of fiscal years 2016 and 2015. 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 and consolidated as of the acquisition date at their respective fair values. 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 three months ended July 31, 2015 or July 25, 2014. The results of operations related to each company acquired have been included in the Company's condensed consolidated statements of income since the date each company was acquired.

Acquisition of Covidien public limited company

On January 26, 2015 (Acquisition Date), pursuant to the transaction agreement, dated as of June 15, 2014 (the Transaction Agreement), the Company acquired Covidien plc (Covidien), and Covidien and Medtronic, Inc. became subsidiaries of Medtronic (collectively, the Transactions). 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 ordinary 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. Total consideration was approximately $50 billion, consisting of $16 billion cash and $34 billion of non-cash consideration. 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.

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, $7.0 billion of technology-based intangible assets, $0.4 billion of tradenames, with weighted average estimated useful lives of 18, 16, and 6 years, respectively, $0.4 billion of in-process research and development (IPR&D), and $29.6 billion of goodwill.

During the three months ended July 31, 2015, the Company made opening balance sheet adjustments to update estimates primarily related to other current assets, intangible assets, goodwill, certain property values, and the related deferred tax impacts. The largest opening balance sheet adjustment related to a $121 million receivable as a result of the settlement reached with C.R. Bard, Inc. (Bard). For additional information on the Company's pelvic mesh litigation, see Note 16 to the condensed consolidated financial statements. The fair value of assets acquired and liabilities assumed continues to be evaluated. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional opening balance sheet adjustments will be recorded. 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 opening balance sheet 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 in connection with the Transactions are as follows:



(estimated in millions)	January 26, 2015 (as previously reported)		Adjustments			January 26, 2015 (as adjusted)
Accounts receivable	$	1,349	$	—		$	1,349
Inventories	2,222		—			2,222
Other current assets	2,949		123			3,072
Property, plant, and equipment	2,354		(22		)	2,332
Goodwill	29,586		33			29,619
Intangible assets	26,265		(71		)	26,194
Other assets	747		(25		)	722
Total assets acquired	65,472		38			65,510

Short-term borrowings	1,011		—			1,011
Other current liabilities	2,331		9			2,340
Long-term debt	4,623		—			4,623
Long-term deferred tax liabilities	4,736		41			4,777
Other long-term liabilities	2,783		(12		)	2,771
Total liabilities assumed	15,484		38			15,522
Net assets acquired	$	49,988	$	—		$	49,988

Contingent liabilities assumed as part of the Transactions total $2.2 billion and are included within accrued income taxes, other accrued expenses, long-term accrued income taxes, and other long-term liabilities in the condensed consolidated balance sheet. 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 to the condensed consolidated financial statements 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.

For additional information related to the Transactions, see Note 2 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended April 24, 2015.

Fiscal Year 2016

The fair values of the assets acquired and liabilities assumed during the first quarter of fiscal year 2016 are as follows:



(in millions)	CardioInsight Technologies, Inc.		Aptus Endosystems, Inc.		All Other		Total
Other current assets	$	11	$	5	$	—	$	16
Property, plant, and equipment	—		1		—		1
IPR&D	48		14		—		62
Other intangible assets	—		78		6		84
Goodwill	80		15		—		95
Other assets	6		—		—		6
Total assets acquired	145		113		6		264

Current liabilities	4		1		1		6
Long-term deferred tax liabilities, net	18		—		—		18
Total liabilities assumed	22		1		1		24
Net assets acquired	$	123	$	112	$	5	$	240

CardioInsight Technologies, Inc.

On June 18, 2015, the Company's Cardiac Rhythm & Heart Failure division 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. Total consideration for the transaction was approximately $123 million, which included an upfront payment of $73 million, settlement of outstanding debt to Medtronic of $25 million, and the estimated fair value of revenue-based contingent consideration of $25 million. Based upon a preliminary acquisition valuation, the Company acquired $48 million of IPR&D and $80 million of goodwill. The acquired goodwill is not deductible for tax purposes.

Aptus Endosystems, Inc.

On June 19, 2015, the Company's Aortic & Peripheral Vascular division acquired certain assets and liabilities of Aptus Endosystems, Inc. (Aptus), a privately-held medical device company focused on developing advanced technology for endovascular aneurysm repair and thoracic endovascular aneurysm repair. Total consideration for the transaction was approximately $112 million. Based upon a preliminary acquisition valuation, the Company acquired $78 million of technology-based intangible assets with an estimated useful life of 18 years at the time of acquisition, $14 million of IPR&D, and $15 million of goodwill. The acquired goodwill is deductible for tax purposes.

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

Subsequent and Pending Acquisitions

On August 11, 2015, the Company's Surgical Solutions division acquired RF Surgical Systems, Inc., a medical device company focused on the detection and prevention of retained surgical sponges. Total consideration for the transaction was approximately $240 million.

On August 25, 2015, the Company's Coronary & Structural Heart division entered into a definitive agreement to acquire Twelve, Inc., a privately-held medical device company focused on the development of a transcatheter mitral valve replacement device. Medtronic has agreed to pay up to approximately $458 million, including a $408 million upfront payment and $50 million upon achievement of CE Mark.

On August 31, 2015, the Company's Neurovascular division acquired Medina Medical (Medina), a privately-held medical device company focused on commercializing treatments for vascular abnormalities of the brain, including cerebral aneurysms. Medtronic had previously invested in Medina and held an 11 percent ownership position. Total consideration for the transaction includes an initial payment of $150 million, net of cash acquired, plus additional payments upon achievement of key milestones.

Acquisition-Related Items

During the three months ended July 31, 2015, the Company recorded acquisition-related items of $71 million primarily due to integration related costs incurred in connection with the Covidien acquisition.

Fiscal Year 2015

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



(in millions)	NGC Medical S.p.A.		Sapiens Steering Brain Stimulation		Corventis, Inc.		All Other		Total
Other current assets	$	55	$	3	$	2	$	10	$	70
Property, plant, and equipment	15		1		1		1		18
IPR&D	—		30		—		41		71
Other intangible assets	159		—		80		77		316
Goodwill	197		170		48		58		473
Other assets	3		3		31		18		55
Total assets acquired	429		207		162		205		1,003

Current liabilities	34		4		2		4		44
Long-term deferred tax liabilities, net	51		—		29		37		117
Other liabilities	4		—		—		—		4
Total liabilities assumed	89		4		31		41		165
Net assets acquired	$	340	$	203	$	131	$	164	$	838

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

Other Acquisitions and Acquisition-Related Items

During the three months ended July 25, 2014, the Company's recorded acquisition-related items of $41 million primarily due to costs incurred in connection with the Covidien acquisition.

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. For business combinations or purchases of intellectual property prior to April 24, 2009, the estimated maximum amount of undiscounted future contingent consideration payments that the Company expected to make was approximately $191 million at July 31, 2015. 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 the contingent consideration is remeasured at each reporting period and the change in fair value recognized as income or expense within acquisition-related items in the condensed consolidated statements of income. The Company measures the liability on a recurring basis using Level 3 inputs. 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 a higher (lower) fair value measurement. 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:



	Fair Value at
($ in millions)	July 31, 2015	Valuation Technique	Unobservable Input	Range
			Discount rate	11% - 27%
Revenue-based payments	$184	Discounted cash flow	Probability of payment	55% - 100%
			Projected fiscal year of payment	2016 - 2025
			Discount rate	0.3% - 5.5%
Product development-based payments	$107	Discounted cash flow	Probability of payment	15% - 100%
			Projected fiscal year of payment	2016 - 2020

The fair value of contingent consideration associated with acquisitions subsequent to April 24, 2009, as of July 31, 2015 and April 24, 2015, was $291 million and $264 million, respectively. As of July 31, 2015, $226 million was reflected in other long-term liabilities and $65 million was reflected in other accrued expenses in the condensed consolidated balance sheets. 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 condensed consolidated balance sheets. The portion of the contingent consideration paid related to the acquisition date fair value is reported as financing activities in the condensed consolidated statements of cash flows. Amounts paid in excess of the original acquisition date fair value are reported as operating activities in the condensed consolidated statements of cash flows. The following table provides a reconciliation of the beginning and ending balances of contingent consideration associated with acquisitions subsequent to April 24, 2009:



	Three months ended
(in millions)	July 31, 2015			July 25, 2014
Beginning Balance	$	264		$	68
Purchase price contingent consideration	26			23
Contingent consideration payments	(3		)	(5		)
Change in fair value of contingent consideration	4			1
Ending Balance	$	291		$	87