Acquisitions

9 Months Ended

Jan. 24, 2020

The Company had acquisitions during the nine months ended January 24, 2020 and January 25, 2019 that were accounted for as business combinations. The assets and liabilities of the businesses acquired were recorded and consolidated on the acquisition date at their respective fair values. Goodwill resulting from business combinations is largely attributable to future yet to be defined technologies, new customer relationships, existing workforce of the acquired businesses, and synergies expected to arise after the Company's acquisition of these businesses. The pro forma impact of these acquisitions was not significant, either individually or in the aggregate, to the consolidated results of the Company for the three and nine months ended January 24, 2020 and January 25, 2019. The results of operations of acquired businesses have been included in the Company's consolidated statements of income since the date each business was acquired.

Fiscal Year 2020

The acquisition date fair value of net assets acquired during the nine months ended January 24, 2020 was $272 million, consisting of $324 million of assets acquired and $52 million of liabilities assumed. Based upon preliminary valuations, assets acquired were primarily comprised of $139 million of technology-based intangible assets and $26 million of customer-related intangible assets with estimated useful lives ranging from 8 to 16 years, $92 million of goodwill, and $40 million of inventory. The goodwill is not deductible for tax purposes. The Company recognized $65 million of contingent consideration liabilities in connection with business combinations during the nine months ended January 24, 2020, which are comprised of revenue milestone-based payments. For the nine months ended January 24, 2020, purchase price allocation adjustments for fiscal year 2020 business combinations were not significant.

Fiscal Year 2019

Mazor Robotics

On December 18, 2018, the Company's Restorative Therapies Group acquired Mazor Robotics (Mazor), a pioneer in the field of robotic guidance systems. The acquisition of Mazor strengthened the Company's position as a global leader in enabling technologies for spine surgery. The Company offers a fully-integrated procedural solution for surgical planning, execution and confirmation by combining the Company's spine implants, navigation, and intra-operative imaging technology with Mazor's robotic-assisted surgery systems. Total consideration for the transaction, net of cash acquired, was $1.6 billion, consisting of $1.3 billion of cash and $246 million of a previously-held equity investment in Mazor. Net assets acquired includes $383 million of technology-based intangible assets and $16 million of tradenames with estimated useful lives of 10 years. Goodwill was primarily attributable to pull-through revenue, future yet to be defined technologies, and an assembled workforce and was not deductible for tax purposes.

During the three and nine months ended January 25, 2019, the Company recognized $51 million of costs incurred in connection with the acquisition of Mazor, including payouts for unvested stock options and investment banker and other transaction fees, which were recognized in selling, general, and administrative expense in the consolidated statements of income.

The Company made certain adjustments to the allocation of purchase price for the Mazor acquisition during the fourth quarter of fiscal year 2019 and nine months ended January 24, 2020, primarily related to estimates for certain contingent liabilities and deferred taxes, which resulted in a net increase to goodwill of $105 million. The measurement period for the Mazor acquisition closed during the quarter ended January 24, 2020.

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


(in millions)	Mazor Robotics
Cash and cash equivalents	$	109
Investments	52
Accounts receivable	9
Inventory	5
Other current assets	1
Property, plant, and equipment	3
Goodwill	1,318
Other intangible assets	399
Tax assets	9
Total assets acquired	1,905

Current liabilities	210

Deferred tax liabilities	21
Total liabilities assumed	231
Net assets acquired	$	1,674

Other Fiscal Year 2019 Acquisitions

The remaining acquisition date fair value of net assets acquired during the nine months ended January 25, 2019 was $377 million, consisting of $427 million of assets acquired and $50 million of liabilities assumed. Assets acquired were primarily comprised of $146 million of goodwill, $161 million of technology-based intangible assets with estimated useful lives ranging from 4 to 15 years, and $40 million of customer-related intangible assets with estimated useful lives ranging from 10 to 13 years. The Company recognized $51 million of contingent consideration liabilities in connection with business combinations during the nine months ended January 25, 2019. For the nine months ended January 25, 2019, purchase price allocation adjustments were not significant.

Acquired In-Process Research & Development

In-process research and development (IPR&D) acquired outside of a business combination is expensed immediately. During the three and nine months ended January 25, 2019, the Company acquired $15 million of IPR&D in connection with an asset acquisition, which was recognized in other operating (income) expense, net in the consolidated statements of income. The Company did not acquire any IPR&D in connection with an asset acquisition during the three and nine months ended January 24, 2020.

Contingent Consideration

Certain of the Company’s business combinations and intangible asset acquisitions involve potential payment of future consideration that is contingent upon the achievement of certain product development milestones and/or contingent on the acquired business reaching certain performance milestones. 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, and the change in fair value is recognized within other operating (income) expense, net in the consolidated statements of income. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.

The fair value of contingent consideration at January 24, 2020 and April 26, 2019 was $304 million and $222 million, respectively. At January 24, 2020, $147 million was recorded in other accrued expenses and $157 million was recorded in other liabilities in the consolidated balance sheets. At April 26, 2019, $73 million was recorded in other accrued expenses and $149 million was recorded in other liabilities in the consolidated balance sheets.

The following table provides a reconciliation of the beginning and ending balances of contingent consideration:


	Three months ended						Nine months ended
(in millions)	January 24, 2020		January 25, 2019		January 24, 2020		January 25, 2019
Beginning balance	$	260	$	203	$	222	$	173
Purchase price contingent consideration	45		5		110		51
Payments	(3)		(1)		(32)		(8)
Change in fair value	2		(59)		4		(68)
Ending balance	$	304	$	148	$	304	$	148

The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues (for revenue-based consideration). Projected revenues are based on the Company's most recent internal operational budgets and long-range strategic plans. Changes in projected payment dates, discount rates, probabilities of payment, and projected revenues may result in adjustments to the fair value measurement. The recurring Level 3 fair value measurements of contingent consideration for which a liability is recorded include the following significant unobservable inputs:

Fair Value at

(in millions)

January 24, 2020

Valuation Technique

Unobservable Input

Range

Discount rate

11.5% - 32.5%

Revenue and other performance-based payments

$123

Discounted cash flow

Probability of payment

30% - 100%

Projected fiscal year of payment

2020 - 2026

Discount rate

5.5%

Product development and other milestone-based payments

$181

Discounted cash flow

Probability of payment

75% - 100%

Projected fiscal year of payment

2020 - 2027