Medtronic 2012 Annual Report Download - page 98

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contingent milestone payments 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 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.
The recurring Level 3 fair value measurements of the contingent consideration liability include the
following significant unobservable inputs:
Fair Value at Valuation
($ in millions) April 27, 2012 Technique Unobservable Input Range
Revenue-based payments $226 Discounted Discount rate 13% - 24%
cash flow Probability of payment 25% - 100%
Projected fiscal year of payment 2013 - 2019
Product development- $5 Discounted Discount rate 5.9%
based payments cash flow Probability of payment 100%
Projected fiscal year of payment 2013
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 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.
At April 27, 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 $228 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 April 27, 2012 and April 29, 2011 at $231 million and $325 million, respectively.
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 consolidated balance sheet. As of April 29, 2011, $259 million was reflected in
other long-term liabilities and $66 million was reflected in other accrued expenses in the consolidated balance
sheet. The portion of the milestone payments related to the acquisition date fair value of contingent
consideration have been reported as financing activities in the 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 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):
Fiscal Year
__________________________
(in millions) 2012 2011
___________ _________ _________
Beginning Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 325 $ 118
Purchase price contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 193
Contingent milestone payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (141) –
Change in fair value of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . 45 14
_________ _________
Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 231 $ 325
_________ _________
_________ _________
81
Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)