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Acquisitions and Acquisition-Related Items
 6 Months Ended
Oct. 28, 2011
Business Combinations [Abstract]  
Acquisitions and Acquisition-Related Items

Note 3 – Acquisitions and Acquisition-Related Items

 

The Company had various acquisitions and other acquisition-related activity during the first two quarters of fiscal years 2012 and 2011. 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 allocation is based on estimates of the fair value 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 or October 29, 2010. 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 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 $162 million of technology-based intangible assets that had an estimated useful life of 12 years at the time of acquisition, $46 million of in-process research and development (IPR&D), $53 million of net tangible liabilities, and $342 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. The Company recorded the identifiable assets acquired and liabilities assumed at fair values on the acquisition date as follows:

 

(in millions)   
Current assets $20
Property, plant, and equipment  11
IPR&D  46
Other intangible assets  162
Goodwill  342
Other assets  1
Total assets acquired  582
    
Current liabilities  43
Long-term deferred tax liabilities, net  42
Total liabilities assumed  85
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 values 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

Other Acquisitions and Acquisition-Related Items

 

During the three and six months ended October 28, 2011, the Company recorded a net gain from acquisition-related items of $17 million and $4 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 and transaction costs of $7 million and $12 million, respectively, related to the pending divestiture of the Physio-Control business. These amounts are included within acquisition-related items in the condensed consolidated statement of earnings.

 

Three and six months ended October 29, 2010

 

ATS Medical, Inc.

 

On August 12, 2010, the Company acquired ATS Medical, Inc. (ATS Medical).  ATS Medical is a leading developer, manufacturer, and marketer of products and services focused on cardiac surgery, including heart valves and surgical cryoablation technology.  Under the terms of the agreement, ATS Medical shareholders received $4.00 per share in cash for each share of ATS Medical common stock that they owned. Total consideration for the transaction was $394 million which includes $30 million of ATS Medical debt and acquired contingent consideration of $10 million. In connection with the acquisition, the Company acquired $101 million of technology-based intangible assets that had an estimated useful life of 11 years at the time of acquisition, $6 million of IPR&D, $78 million of net tangible assets, and $209 million of goodwill. The value attributable to IPR&D, which relates to the future launch of ATS Medical's next generation surgical ablation and 3f tissue valve products, has been capitalized as an indefinite-lived intangible asset. The goodwill is not deductible for tax purposes.

 

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

 

(in millions)   
Current assets $51
Property, plant, and equipment  7
IPR&D  6
Other intangible assets  101
Goodwill  209
Long-term deferred tax assets, net  34
Total assets acquired  408
    
Current liabilities  14
Total liabilities assumed  14
Net assets acquired $394

Axon Surgical

 

On June 2, 2010, the Company acquired substantially all of the assets of Axon Surgical (Axon), a privately-held company. Prior to the acquisition, the Company distributed a large portion of Axon's products. The agreement will allow the Company to bring to market the next generation of surgeon-directed and professionally supported spinal neuromonitoring technology and expand the availability of this technology. Total consideration for the transaction, net of cash acquired, was $62 million, which includes the settlement of existing Axon debt. In connection with the acquisition of Axon, the Company acquired $41 million of technology-based intangible assets that had an estimated useful life of 10 years at the time of acquisition, $5 million of tangible assets, and $16 million of goodwill. The goodwill is deductible for tax purposes. The Company accounted for the acquisition of Axon as a business combination.

 

Other Acquisitions and Acquisition-Related Items

 

On September 14, 2010, the Company acquired a developer of vascular suturing products used in connection with cardiovascular and vascular procedures that require a puncture or incision to the artery. The terms of the transaction included an upfront payment of $15 million and additional payments of up to $10 million contingent upon achievement of certain milestones. Total consideration for the transaction was valued at approximately $21 million, which includes the estimated fair value of additional milestone-based contingent consideration of $6 million. The Company accounted for this acquisition as a business combination.

 

During the six months ended October 29, 2010, the Company incurred a $15 million IPR&D charge related to a milestone payment under the existing terms of a royalty bearing, non-exclusive patent cross-licensing agreement with NeuroPace, Inc. Product commercialization related to this technology had not yet been achieved. As a result, in accordance with authoritative guidance, the payments for these transactions were immediately expensed as IPR&D since technological feasibility had not yet been reached and such technology has no future alternative use. This amount was recorded within acquisition-related items in the condensed consolidated statement of earnings.

 

In connection with the ATS Medical acquisition, 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, during the three and six months ended October 29, 2010 the Company incurred approximately $24 million of certain acquisition-related costs, which include acquisition-related legal fees and severance costs, change in control costs, and contract termination costs which were recorded within acquisition-related items in the condensed consolidated statement of earnings.

 

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, achieving product development targets, or obtaining regulatory approvals. As a result of the Company adopting new authoritative guidance in fiscal year 2010 related to business combinations, contingent consideration is recorded at the estimated fair value of the contingent milestone payment 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 7 for further information regarding fair value measurements.

 

At October 28, 2011, 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 $235 million. The milestones associated with the contingent consideration must be reached in future periods ranging from fiscal years 2012 to 2016 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 28, 2011 and April 29, 2011 at $288 million and $335 million, respectively. As of October 28, 2011, $263 million was reflected in other long-term liabilities and $25 million was reflected in other accrued expenses in the condensed consolidated balance sheet. As of October 29, 2010, $269 million was reflected in other long-term liabilities and $66 million was reflected in other accrued expenses in the condensed consolidated balance sheet. 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 28, 2011 October 29, 2010 October 28, 2011 October 29, 2010
Beginning Balance$ 343 $ 120 $ 335 $ 118
Purchase price contingent consideration  2   16   2   16
Contingent milestone payments  (66)   -   (66)   -
Change in fair value of contingent consideration  9   -   17   2
Ending Balance$ 288 $ 136 $ 288 $ 136