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Acquisitions and Acquisition-Related Items
 6 Months Ended
Oct. 26, 2012
Business Combinations [Abstract]  
Acquisitions and Acquisition-Related Items Disclosure

Note 4 – Acquisitions and Acquisition-Related Items

 

The Company had no significant acquisitions during the three and six months ended October 26, 2012. The Company had various acquisitions and other acquisition-related activity during the first two quarters of fiscal year 2012. 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 company acquired were recorded as of the acquisition date, at their respective fair values, and consolidated with the Company. The purchase price is recorded based on estimates of the fair values of assets acquired and liabilities assumed. The pro forma impact of these acquisitions was not significant, individually or in the aggregate, to the results of the Company for the three and six months ended October 28, 2011. The results of operations related to each company acquired have been included in the Company's consolidated statements of earnings since the date each company was acquired.

 

Three and six months ended October 26, 2012

 

Subsequent Acquisition

 

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 $755 million.

 

Acquisition-Related Items

During the three and six months ended October 26, 2012, the Company recorded acquisition-related items of $6 million and $11 million, respectively, including income of $2 million and charges of $3 million, respectively, related to the change in fair value of contingent milestone payments associated with acquisitions subsequent to April 29, 2009. Additionally, during the three and six months ended October 26, 2012, the Company incurred charges of $3 million in connection with the acquisition of Kanghui and $5 million of transaction costs related to the divestiture of the Physio-Control business.

Three and six months ended October 28, 2011

Salient Surgical Technologies, Inc.

On August 31, 2011, the Company acquired Salient Surgical Technologies, Inc. (Salient). Salient develops and markets devices for haemostatic sealing of soft tissue and bone incorporating advanced energy technology. Salient's devices are used in a variety of surgical procedures including orthopedic surgery, spine, open abdominal, and thoracic procedures. Total consideration for the transaction was approximately $497 million. Medtronic had previously invested in Salient and held an 8.9 percent ownership position in the company. Net of this ownership position, the transaction value was approximately $452 million. Based upon the acquisition valuation, the Company acquired $154 million of technology-based intangible assets that had an estimated useful life of 12 years at the time of acquisition, $44 million of in-process research and development (IPR&D), $49 million of net tangible liabilities, and $348 million of goodwill. The value attributable to IPR&D has been capitalized as an indefinite-lived intangible asset. The IPR&D primarily relates to the future launch of Salient's concentric wire product. Acquired goodwill is not deductible for tax purposes.

The Company accounted for the acquisition of Salient as a business combination. During fiscal year 2012, the Company recorded minor adjustments to other intangible assets, goodwill, and long-term deferred tax liabilities as a result of finalizing the valuation for fair value of intangible assets acquired. The Company recorded the identifiable assets acquired and liabilities assumed at fair value as follows:

(in millions)   
Current assets $20
Property, plant, and equipment  11
IPR&D  44
Other intangible assets  154
Goodwill  348
Other assets  1
Total assets acquired  578
    
Current liabilities  43
Long-term deferred tax liabilities, net  38
Total liabilities assumed  81
Net assets acquired $497

PEAK Surgical, Inc.

 

On August 31, 2011, the Company acquired PEAK Surgical, Inc. (PEAK). PEAK develops and markets tissue dissection devices incorporating advanced energy technology. Total consideration for the transaction was approximately $113 million. Medtronic had previously invested in PEAK and held an 18.9 percent ownership position in the company. Net of this ownership position, the transaction value was approximately $96 million. Based upon the acquisition valuation, the Company acquired $74 million of technology-based intangible assets that had an estimated useful life of 12 years at the time of acquisition, $17 million of net tangible liabilities, and $56 million of goodwill. Acquired goodwill is not deductible for tax purposes.

 

The Company accounted for the acquisition of PEAK as a business combination. The Company recorded the identifiable assets acquired and liabilities assumed at fair value on the acquisition date as follows:

(in millions)   
Current assets $5
Property, plant, and equipment  5
Other intangible assets  74
Goodwill  56
Total assets acquired  140
    
Current liabilities  10
Long-term deferred tax liabilities, net  17
Total liabilities assumed  27
Net assets acquired $113

Acquisition-Related Items

 

During the three and six months ended October 28, 2011, the Company recorded a net gain from acquisition-related items of $24 million and $16 million, respectively. In connection with the acquisitions of Salient and PEAK, the Company recognized gains of $32 million and $6 million, respectively, during the three months ended October 28, 2011 on its previously held investments. In connection with these acquisitions, the Company began to assess and formulate a plan for the elimination of duplicative positions and the termination of certain contractual obligations. As a result, the Company incurred approximately $5 million of certain acquisition-related costs, which include legal fees, severance costs, change in control costs, and contract termination costs. Additionally, during the three and six months ended October 28, 2011 the Company recorded charges of $9 million and $17 million, respectively, related to the change in fair value of contingent milestone payments associated with acquisitions subsequent to April 29, 2009.

 

Contingent Consideration

 

Certain of the Company's business combinations or 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. Contingent consideration is recorded at the estimated fair value of the contingent milestone payments on the acquisition date for all acquisitions subsequent to April 24, 2009. The fair value of the contingent milestone consideration is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense within acquisition-related items in the condensed consolidated statements of earnings. The Company measures the initial liability and remeasures the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements. See Note 8 for further information regarding fair value measurements.

 

Contingent consideration liabilities are remeasured to fair value each reporting period using projected revenues, discount rates, probabilities of payment, and projected payment dates. 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 in projected revenues and probabilities of payment may result in higher fair value measurements. Increases in discount rates and the projected time to payment may result in lower fair value measurements. Increases (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement.

 

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

($ in millions)Fair Value at October 26, 2012 Valuation Technique Unobservable Input Range
     Discount rate 13% - 24%
Revenue-based payments$208Discounted cash flowProbability of payment 25% - 100%
   Projected fiscal year of payment 2013 - 2019
     Discount rate 5.9%
Product development-based payments$5Discounted cash flowProbability of payment 100%
   Projected fiscal year of payment 2013

At October 26, 2012, 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 $226 million. The milestones associated with the contingent consideration must be reached in future periods ranging from fiscal years 2013 to 2018 in order for the consideration to be paid.

 

The fair value of contingent milestone payments associated with acquisitions subsequent to April 24, 2009 was remeasured as of October 26, 2012 and April 27, 2012 at $213 million and $231 million, respectively. As of October 26, 2012, $195 million was reflected in other long-term liabilities and $18 million was reflected in other accrued expenses in the condensed consolidated balance sheet. As of April 27, 2012, $200 million was reflected in other long-term liabilities and $31 million was reflected in other accrued expenses in the condensed consolidated balance sheet. The portion of the milestone payments related to the acquisition date fair value of contingent consideration has been reported as financing activities in the condensed consolidated statements of cash flows. Amounts paid in excess of the original acquisition date fair value of contingent consideration have been 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 milestone payments associated with acquisitions subsequent to April 24, 2009 measured at fair value that used significant unobservable inputs (Level 3):

 Three months ended Six months ended
(in millions)October 26, 2012 October 28, 2011 October 26, 2012 October 28, 2011
Beginning Balance$ 215 $ 343 $ 231 $ 335
Purchase price contingent consideration  -   2   5   2
Contingent milestone payments  -   (66)   (26)   (66)
Change in fair value of contingent consideration  (2)   9   3   17
Ending Balance$ 213 $ 288 $ 213 $ 288