Goodwill and Other Intangible Assets Goodwill (Tables)

6 Months Ended

Jun. 30, 2016

Note D - Goodwill and Other Intangible Assets [Abstract]

Goodwill and Intangible Assets Disclosure [Text Block]

GOODWILL AND OTHER INTANGIBLE ASSETS

The gross carrying amount of goodwill and other intangible assets and the related accumulated amortization for intangible assets subject to amortization and accumulated write-offs of goodwill as of June 30, 2016 and December 31, 2015 are as follows:



	As of
	June 30, 2016					December 31, 2015
	Gross Carrying		Accumulated Amortization/			Gross Carrying		Accumulated Amortization/
(in millions)	Amount		Write-offs			Amount		Write-offs
Amortizable intangible assets
Technology-related	$	8,948	$	(4,257	)	$	8,948	$	(4,054	)
Patents	522		(366		)	520		(358		)
Other intangible assets	1,531		(666		)	1,529		(610		)
	$	11,001	$	(5,289	)	$	10,997	$	(5,022	)
Unamortizable intangible assets
Goodwill	$	16,375	$	(9,900	)	$	16,373	$	(9,900	)
In-process research and development (IPR&D)	98		—			99		—
Technology-related	120		—			120		—
	$	16,593	$	(9,900	)	$	16,592	$	(9,900	)

Our technology-related intangible assets that are not subject to amortization represent technical processes, intellectual property and/or institutional understanding acquired through business combinations that are fundamental to the on-going operations of our business and have no limit to their useful life. Our technology-related intangible assets that are not subject to amortization are comprised primarily of certain acquired balloon and other technology, which is foundational to our continuing operations within the Cardiovascular market and other markets within interventional medicine. We assess our indefinite-lived intangible assets at least annually for impairment and reassess their classification as indefinite-lived assets. We assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that our indefinite-lived intangible assets are impaired. If we conclude that it is more likely than not that the asset is impaired, we then determine the fair value of the intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying value in accordance with ASC Topic 350, Intangibles - Goodwill and Other.

The following represents our goodwill balance by global reportable segment:



(in millions)	Cardiovascular		Rhythm Management		MedSurg		Total
Balance as of December 31, 2015	$	3,451	$	292	$	2,730	$	6,473
Purchase price adjustments	—		—		2		2
Balance as of June 30, 2016	$	3,451	$	292	$	2,732	$	6,475

Goodwill Impairment Testing

In the second quarter of 2016, we performed our annual goodwill impairment test for all of our reporting units and concluded the fair value of each reporting unit exceeded its carrying value. Based on the criteria prescribed in FASB ASC Topic 350 - Intangibles - Goodwill and Other, we assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. In 2016 and 2015, we identified six operating segments including Interventional Cardiology, Peripheral Interventions, Rhythm Management, Endoscopy, Urology and Pelvic Health, and Neuromodulation. For purposes of identifying our reporting units, we then assessed whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. We identified Rhythm Management as having two components: Cardiac Rhythm Management and Electrophysiology.

For our 2016 and 2015 annual impairment assessment, we identified seven reporting units, which align to our seven core businesses: Interventional Cardiology, Peripheral Interventions, Cardiac Rhythm Management, Electrophysiology, Endoscopy, Urology and Pelvic Health, and Neuromodulation. For our 2016 annual impairment assessment the Cardiac Rhythm Management and Electrophysiology reporting units, components of the Rhythm Management operating segment, were aggregated due to a reorganization commencing in 2015 which resulted in integrated leadership, shared resources and consolidation of certain sites in 2016. Because our global Electrophysiology reporting unit was identified as being at higher risk of potential goodwill impairment during our 2015 annual test, it was tested for impairment on a stand-alone basis in the second quarter of 2016, immediately prior to aggregating it with our global Cardiac Rhythm Management reporting unit. The fair value exceeded the carrying value by approximately 36 percent. In comparison, the global Electrophysiology reporting unit had excess fair value of approximately 28 percent as of our 2015 annual test.

As of the date of our 2016 annual goodwill impairment test, the aggregated global Electrophysiology and Cardiac Rhythm Management reporting unit (Rhythm Management) had excess fair value over carrying value of approximately 70 percent and held $292 million of allocated goodwill. As such, it was not deemed at higher risk of future impairment. Changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses could result in future impairments of goodwill within our reporting units. Refer to Critical Accounting Policies and Estimates within our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Item 2 of this Quarterly Report on Form 10-Q for a discussion of key assumptions used in our testing.

On a quarterly basis, we monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill. The key variables that drive the cash flows of our reporting units and amortizable intangibles are estimated revenue growth rates and levels of profitability. Terminal value growth rate assumptions, as well as the Weighted Average Cost of Capital (WACC) rate applied are additional key variables for reporting unit cash flows. These assumptions are subject to uncertainty, including our ability to grow revenue and improve profitability levels. The estimates used for our future cash flows and discount rates represent management's best estimates, which we believe to be reasonable, but future declines in business performance may impair the recoverability of our goodwill.

Future events that could have a negative impact on the levels of excess fair value over carrying value of our reporting units include, but are not limited to:


•	decreases in estimated market sizes or market growth rates due to greater-than-expected declines in procedural volumes, pricing pressures, reductions in reimbursement levels, product actions, and/or competitive technology developments;


•	declines in our market share and penetration assumptions due to increased competition, an inability to develop or launch new and next-generation products and technology features in line with our commercialization strategies, and market and/or regulatory conditions that may cause significant launch delays or product recalls;


•	decreases in our forecasted profitability due to an inability to successfully implement and achieve timely and sustainable cost improvement measures consistent with our expectations;


•	negative developments in intellectual property litigation that may impact our ability to market certain products or increase our costs to sell certain products;


•	the level of success of ongoing and future research and development efforts, including those related to recent acquisitions, and increases in the research and development costs necessary to obtain regulatory approvals and launch new products;


•	the level of success in managing the growth of acquired companies, achieving sustained profitability consistent with our expectations, establishing government and third-party payer reimbursement, supplying the market, and increases in the costs and time necessary to integrate acquired businesses into our operations successfully;


•	changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses; and


•	increases in our market-participant risk-adjusted WACC, and increases in our market-participant tax rate, and/or changes in tax laws or macroeconomic conditions.

Negative changes in one or more of these factors, among others, could result in impairment charges.

The following is a rollforward of accumulated goodwill write-offs by global reportable segment:



(in millions)	Cardiovascular			Rhythm Management			MedSurg			Total
Accumulated write-offs as of December 31, 2015	$	(1,479	)	$	(6,960	)	$	(1,461	)	$	(9,900	)
Goodwill written off	—			—			—			—
Accumulated write-offs as of June 30, 2016	$	(1,479	)	$	(6,960	)	$	(1,461	)	$	(9,900	)

Intangible Asset Impairment Testing

On a quarterly basis, we monitor for events or other potential indicators of impairment that would warrant an interim impairment test of our intangible assets. We did not record any intangible asset impairment charges during the six months ended June 30, 2016.

2015 Charges

During the second quarter of 2015, in conjunction with our annual strategic planning process and annual goodwill impairment test, we performed an interim impairment test on certain of our IPR&D projects and core technology assets. Based on our impairment assessment, we recorded an impairment charge of $9 million in the second quarter of 2015.

The nonrecurring Level 3 fair value measurements of our intangible asset impairment analysis included the following significant unobservable inputs:



Intangible Asset	Valuation Date	Fair Value	Valuation Technique	Unobservable Input	Rate
In-Process R&D	June 30, 2015	$6 million	Income Approach - Excess Earnings Method	Discount Rate	16.5 - 20%



Intangible Asset	Valuation Date	Fair Value		Valuation Technique	Unobservable Input	Rate
In-Process R&D	June 30, 2015	$	6	Income Approach - Excess Earnings Method	Discount Rate - low	16.5	%
					Discount Rate - high	20	%

Goodwill



	As of
	June 30, 2016					December 31, 2015
	Gross Carrying		Accumulated Amortization/			Gross Carrying		Accumulated Amortization/
(in millions)	Amount		Write-offs			Amount		Write-offs
Amortizable intangible assets
Technology-related	$	8,948	$	(4,257	)	$	8,948	$	(4,054	)
Patents	522		(366		)	520		(358		)
Other intangible assets	1,531		(666		)	1,529		(610		)
	$	11,001	$	(5,289	)	$	10,997	$	(5,022	)
Unamortizable intangible assets
Goodwill	$	16,375	$	(9,900	)	$	16,373	$	(9,900	)
In-process research and development (IPR&D)	98		—			99		—
Technology-related	120		—			120		—
	$	16,593	$	(9,900	)	$	16,592	$	(9,900	)

Schedule of Goodwill [Table Text Block]

The following is a rollforward of accumulated goodwill write-offs by global reportable segment:



(in millions)	Cardiovascular			Rhythm Management			MedSurg			Total
Accumulated write-offs as of December 31, 2015	$	(1,479	)	$	(6,960	)	$	(1,461	)	$	(9,900	)
Goodwill written off	—			—			—			—
Accumulated write-offs as of June 30, 2016	$	(1,479	)	$	(6,960	)	$	(1,461	)	$	(9,900	)

The following represents our goodwill balance by global reportable segment:



(in millions)	Cardiovascular		Rhythm Management		MedSurg		Total
Balance as of December 31, 2015	$	3,451	$	292	$	2,730	$	6,473
Purchase price adjustments	—		—		2		2
Balance as of June 30, 2016	$	3,451	$	292	$	2,732	$	6,475

Description of unobservable inputs used in Level 3 fair value measurements [Table Text Block]

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



Contingent Consideration Liabilities	Fair Value as of June 30, 2016	Valuation Technique	Unobservable Input	Range
R&D, regulatory and commercialization-based Milestones	$17 million	Discounted Cash Flow	Discount Rate	2.0% - 2.9%
			Probability of Payment	0% - 64%
			Projected Year of Payment	2018 - 2021
Revenue-based Payments	$41 million	Discounted Cash Flow	Discount Rate	14% - 15%
	$41 million	Discounted Cash Flow	Projected Year of Payment	2017 - 2020
	$149 million	Monte Carlo	Revenue Volatility	20%
			Risk Free Rate	LIBOR Term Structure & Cost of Debt Structure
			Projected Year of Payment	2016 - 2022

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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