Acquisitions and Acquisition-Related Items

The Company had various acquisitions and other acquisition-related activity during fiscal years 2016, 2015, and 2014. 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 29, 2016, April 24, 2015, or April 25, 2014. 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.

Acquisition of Covidien public limited company in Fiscal Year 2015

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 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.

Fair Value of Consideration Transferred

Total consideration was $50.0 billion, consisting of $16.0 billion cash and $34.0 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. Share award and share options of $58 million and $18 million were recognized in acquisition-related items and restructuring charges, net, respectively, for the fiscal year ended April 29, 2016.

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⁽¹⁾	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⁽¹⁾	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

(1) 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. The fair value of assets acquired and liabilities assumed was finalized during the third quarter of fiscal year 2016. During the measurement period, which ended January 26, 2016, adjustments were made to finalize Covidien's preliminary fair value estimates related primarily to other current assets, intangible assets, goodwill, certain property value, contingent liabilities and the related deferred tax impacts. Based upon the acquisition valuation, the Company acquired $18.3 billion of customer-related intangible assets, $7.1 billion of technology-based intangible assets, $430 million of tradenames, with weighted average estimated useful lives of 18, 16, and 6 years, respectively, $420 million of IPR&D, and $30.0 billion of goodwill.

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



(estimated in millions)
Accounts receivable	$	1,349
Inventories	2,219
Other current assets	3,181
Property, plant, and equipment	2,293
Goodwill	29,979
Intangible assets	26,210
Other assets	761
Total assets acquired	65,992

Short-term borrowings	1,011
Other current liabilities	2,434
Long-term debt	4,623
Long-term deferred tax liabilities	4,745
Other long-term liabilities	3,191
Total liabilities assumed	16,004
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 6 for additional information about goodwill and other intangible assets.

Contingent liabilities assumed as part of the Acquisition total $2.7 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), and $1.2 billion related to legal claims (including product liability and 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 15 for additional background on contingent liabilities.

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 $2.7 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 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.

Fiscal Year 2016

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



(in millions)	Twelve, Inc.		RF Surgical Systems, Inc.		Medina Medical		All Other		Total
Other current assets	$	60	$	40	$	11	$	134	$	245
Property, plant, and equipment	—		2		—		39		41
IPR&D	192		—		122		143		457
Other intangible assets	—		115		—		199		314
Goodwill	291		135		126		304		856
Other assets	—		2		—		15		17
Total assets acquired	543		294		259		834		1,930

Current liabilities	37		27		6		91		161
Long-term deferred tax liabilities, net	34		27		34		53		148
Other liabilities	—		—		—		50		50
Total liabilities assumed	71		54		40		194		359
Net assets acquired	$	472	$	240	$	219	$	640	$	1,571

Twelve, Inc.

On October 2, 2015, the Company's Coronary & Structural Heart division acquired Twelve, Inc. (Twelve), a privately-held medical device company focused on the development of a transcatheter mitral valve replacement device. Total consideration for the transaction was approximately $472 million, which included an upfront payment of $428 million and the estimated fair value of product development-based contingent consideration of $44 million. Based upon the acquisition valuation, the Company acquired $192 million of IPR&D and $291 million of goodwill. The acquired goodwill is not deductible for tax purposes.

RF Surgical Systems, Inc.

On August 11, 2015, the Company's Surgical Solutions division acquired RF Surgical Systems, Inc. (RF Surgical), a medical device company focused on the detection and prevention of retained surgical sponges. Total consideration for the transaction was approximately $240 million. Based upon the acquisition valuation, the Company acquired $68 million of technology-based intangible assets, $47 million of customer-related intangible assets, with estimated useful lives of 18 and 16 years, respectively, and $135 million of goodwill. The acquired goodwill is not deductible for tax purposes.

Medina Medical

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. Total consideration for the transaction was approximately $219 million, which includes an upfront payment of $155 million and the estimated fair value of revenue-based and product development-based contingent consideration of $64 million. Medtronic had previously invested in Medina and held an 11 percent ownership position. Net of this ownership position, the transaction value was approximately $195 million. Based upon the acquisition valuation, the Company acquired $122 million of IPR&D and $126 million of goodwill. The acquired goodwill is not deductible for tax purposes.

The Company accounted for the acquisitions of Twelve, RF Surgical, and Medina and all other acquisitions as business combinations using the acquisition method of accounting.

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		All Other		Total
Other current assets	$	55	$	3	$	12	$	70
Property, plant, and equipment	15		1		2		18
IPR&D	—		30		39		69
Other intangible assets	159		—		157		316
Goodwill	197		170		108		475
Other assets	3		3		49		55
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

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 the 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 the acquisition valuation, the Company acquired $30 million of IPR&D and $170 million of goodwill. The acquired goodwill is not deductible for tax purposes.

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

Fiscal Year 2014

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



(in millions)	TYRX, Inc.		All Other		Total
Current assets	$	6	$	14	$	20
Property, plant, and equipment	1		7		8
Intangible assets	94		61		155
Goodwill	132		123		255
Total assets acquired	233		205		438

Current liabilities	4		12		16
Long-term deferred tax liabilities, net	7		—		7
Total liabilities assumed	11		12		23
Net assets acquired	$	222	$	193	$	415

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.

The Company accounted for the acquisition of TYRX as a business combination using the acquisition method of accounting.

Acquisition-Related Items

During fiscal year 2016, the Company recorded charges from acquisition-related items of $283 million, primarily related to costs incurred in connection with the Covidien acquisition. The charges incurred in connection with the Covidien acquisition include $219 million of professional services and integration costs and $58 million of accelerated or incremental stock compensation expense.

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.

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.

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.

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 29, 2016		Valuation Technique	Unobservable Input	Range
				Discount rate	11% - 27%
Revenue-based payments	$	195	Discounted cash flow	Probability of payment	30% - 100%
				Projected fiscal year of payment	2017 - 2025
				Discount rate	0.3% - 5.5%
Product development-based payments	$	182	Discounted cash flow	Probability of payment	75% - 100%
				Projected fiscal year of payment	2017 - 2025

At April 29, 2016, 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 $175 million. The Company estimates the milestones or other conditions associated with the contingent consideration will be reached in fiscal year 2017 and thereafter.

The fair value of contingent consideration associated with acquisitions subsequent to April 24, 2009, as of April 29, 2016 and April 24, 2015, was $377 million and $264 million, respectively. As of April 29, 2016, $311 million was reflected in other long-term liabilities and $66 million was reflected in other accrued expenses in the 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 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)	2016			2015
Beginning Balance	$	264		$	68
Acquired contingent consideration	—			236
Purchase price contingent consideration	149			40
Contingent consideration payments	(22		)	(85		)
Change in fair value of contingent consideration	(14		)	5
Ending Balance	$	377		$	264