Acquisitions

3 Months Ended

Jul. 31, 2020

Fiscal Year 2021

The Company had no acquisitions that were accounted for as business combinations during the three months ended July 31, 2020. During the three months ended July 31, 2020, the Company recognized a gain of $132 million related to a change in amounts accrued for certain contingent liabilities for a recent acquisition. The benefit was recognized in other operating income, net in the consolidated statements of income as the purchase accounting was finalized in fiscal year 2020. Purchase price allocation adjustments during the first quarter of fiscal year 2021 were not significant.

Fiscal Year 2020

The Company had acquisitions during the three months ended July 26, 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 months ended July 26, 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.

The acquisition date fair value of net assets acquired in the first quarter of fiscal year 2020 was $206 million, consisting of $247 million of assets acquired and $41 million of liabilities assumed. Assets acquired were primarily comprised of $91 million of technology-based intangible assets and $26 million of customer-related intangible assets with estimated useful lives of 8 years, $40 million of inventory, and $65 million of goodwill. The goodwill is not deductible for tax purposes. The Company recognized $58 million of contingent consideration liabilities in connection with business combinations during the first quarter of fiscal year 2020, which are comprised of revenue milestone-based payments.

Acquired In-Process Research & Development (IPR&D)

IPR&D acquired outside of a business combination is expensed immediately. During the three months ended July 31, 2020, the Company acquired $10 million of IPR&D in connection with asset acquisitions, which was recognized in other operating income, net in the consolidated statements of income. During the three months ended July 26, 2019, the Company did not acquire any IPR&D in connection with asset acquisitions.

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, 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 July 31, 2020 and April 24, 2020 was $297 million and $280 million, respectively. At July 31, 2020, $225 million was recorded in other accrued expenses and $72 million was recorded in other liabilities in the consolidated balance sheets. At April 24, 2020, $112 million was recorded in other accrued expenses and $168 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
(in millions)	July 31, 2020		July 26, 2019
Beginning balance	$	280	$	222
Purchase price contingent consideration	—		58
Payments	(1)		(14)
Change in fair value	18		3
Ending balance	$	297	$	269

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)	July 31, 2020	Unobservable Input	Range	Weighted Average ⁽¹⁾
		Discount rate	14.0% - 32.4%	22.3%
Revenue and other performance-based payments	$116	Probability of payment	100%	100%
		Projected fiscal year of payment	2021 - 2027	2024
		Discount rate	5.5%	5.5%
Product development and other milestone-based payments	$181	Probability of payment	50% - 100%	90.5%
		Projected fiscal year of payment	2021 - 2027	2024

(1) Unobservable inputs were weighted by the relative fair value of the contingent consideration liability. For projected fiscal year of payment, the amount represents the median of the inputs and is not a weighted average.