Acquisitions | 6 Months Ended |
Mar. 31, 2015 |
Business Combinations [Abstract] | |
Acquisitions | Note 9 – Acquisitions |
CareFusion Corporation |
Overview of Transaction and Consideration Transferred |
On March 17, 2015, pursuant to a definitive agreement announced on October 5, 2014, the Company acquired a 100% interest in CareFusion, a global medical technology company with a comprehensive portfolio of products in the areas of medication management, infection prevention, operating room and procedural effectiveness, and respiratory care, to create a global leader in medication management and patient safety solutions. Under the terms of the transaction, CareFusion shareholders received $49.00 in cash and 0.0777 of a share of the Company for each share of CareFusion. The value of the total consideration transferred for accounting purposes was based on the closing share price of the Company’s stock on the last trading day prior to the closing date of the transaction. The fair value of consideration transferred was $12.538 billion and consisted of the components below. |
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(Millions of dollars) | | | | | | | | | | | | | |
Cash consideration | | $ | 10,085 | | | | | | | | | | | | | |
Noncash consideration-fair value of shares issued | | | 2,269 | | | | | | | | | | | | | |
Noncash consideration-fair value of stock options and other equity awards | | | 184 | | | | | | | | | | | | | |
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Total consideration transferred | | $ | 12,538 | | | | | | | | | | | | | |
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The acquisition date fair value of the Company’s ordinary shares issued to CareFusion shareholders was calculated per the following (shares in millions): |
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(Millions of dollars, except per share data) | | | | | | | | | | | | | |
Total CareFusion shares outstanding | | | 205.3 | | | | | | | | | | | | | |
Conversion factor | | | 0.0777 | | | | | | | | | | | | | |
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Number of the Company’s shares issued | | | 15.9 | | | | | | | | | | | | | |
Closing price of the Company’s stock on March 16, 2015 | | $ | 142.29 | | | | | | | | | | | | | |
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Fair value of the Company’s issued shares | | $ | 2,269 | | | | | | | | | | | | | |
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Additional disclosures regarding the financing arrangements the Company entered into to fund the cash portion of the consideration transferred relative to this acquisition are provided in Note 13. |
Allocation of Consideration Transferred to Net Assets Acquired |
The Company is in the process of finalizing the allocation of the purchase price to the individual assets acquired and liabilities assumed. The preliminary allocations of the purchase price below as of March 31, 2015 provide a reasonable basis for estimating the fair values of assets acquired and liabilities assumed. These provisional estimates will be adjusted upon the availability of further information regarding events or circumstances which existed at the acquisition date and such adjustments may be significant. |
All of the assets acquired and liabilities assumed in this acquisition have been allocated to the Company’s Medical segment. |
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(Millions of dollars) | | | | | | | | | | | | | | | |
Cash and equivalents | | $ | 1,903 | | | | | | | | | | | | | |
Trade receivables, net | | | 486 | | | | | | | | | | | | | |
Inventories | | | 822 | | | | | | | | | | | | | |
Net investment in sales-type leases | | | 1,209 | | | | | | | | | | | | | |
Property, plant and equipment | | | 496 | | | | | | | | | | | | | |
Customer relationships | | | 3,550 | | | | | | | | | | | | | |
Developed technology | | | 2,510 | | | | | | | | | | | | | |
Trade name and trademarks | | | 450 | | | | | | | | | | | | | |
Other intangible assets | | | 228 | | | | | | | | | | | | | |
Other assets | | | 344 | | | | | | | | | | | | | |
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Total identifiable assets acquired | | | 11,998 | | | | | | | | | | | | | |
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Long-term debt | | | (2,181 | ) | | | | | | | | | | | | |
Deferred tax liabilities | | | (3,081 | ) | | | | | | | | | | | | |
Other liabilities | | | (760 | ) | | | | | | | | | | | | |
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Total liabilities assumed | | | (6,022 | ) | | | | | | | | | | | | |
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Net identifiable assets acquired | | | 5,976 | | | | | | | | | | | | | |
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Goodwill | | | 6,562 | | | | | | | | | | | | | |
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Net assets acquired | | $ | 12,538 | | | | | | | | | | | | | |
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Net Investment in Sales-Type Leases Acquired |
The fair value of the net investment in sales-type leases acquired was based upon a determination that the interest rate implicit in the lease contract portfolio represented a market interest rate as well as a determination that the residual value of the overall lease contract portfolio represents fair market value. |
Identifiable Intangible Assets Acquired |
The customer relationships asset acquired represented CareFusion’s contractual relationships with its customers. The fair value of these customer relationships was determined based on the present value of projected cash flows utilizing an income approach with a risk-adjusted discount rate of 11%. The amortization period of the customer relationships was determined to be 15 years and this period corresponds with the weighted average of lives determined for the product technology which underlies the customer contracts. |
The developed technology assets acquired represented CareFusion’s developed technologies in the areas of medication management, infection prevention, operating room and procedural effectiveness, and respiratory care. The technologies’ fair values were determined based on the present value of projected cash flows utilizing an income approach with a risk-adjusted discount rate of 11%. The technologies will be amortized over a weighted-average amortization period of 12 years, which is the weighted average period over which the technologies are expected to generate substantial cash flows. |
The trade name and trademark assets acquired represented the value of registered trademarks protecting the intellectual property underlying CareFusion’s product technologies. The fair value of the trade name and trademark represents the present value of projected cash flows, specifically the estimated cost savings from not being required to pay royalties for use of these intellectual properties, utilizing an income approach with a risk-adjusted discount rate of 11%. |
Other intangible assets acquired included $150 million relating to acquired in-process research and development assets representing development projects relating to various product technologies. The probability of success associated with the projects, based upon the applicable technological and commercial risk, was assumed to be 80% to 85%, depending upon the project. The projects’ fair values were determined based on the present value of projected cash flows utilizing an income approach with a risk-adjusted discount rate of 12%. The launches of the various projects are expected to occur from 2016 to 2022. |
Other Liabilities Assumed |
The balance of other liabilities assumed included a $36 million liability recorded due to a recall relating to AVEA® ventilators, which is one of CareFusion’s respiratory solutions products. The liability represents the costs expected to be incurred in connection with voluntary field corrections for a portion of the installed base of ventilators. |
Goodwill |
Goodwill typically results through expected synergies from combining operations of an acquiree and an acquirer, as well as from intangible assets that do not qualify for separate recognition. The goodwill recognized as a result of this acquisition includes, among other things, the value of combining the complementary product portfolios of the Company and CareFusion to offer integrated medication management solutions and smart devices. Synergies are expected from combining the two companies’ products to meet unmet needs in hospitals, hospital pharmacies and alternate sites of care to increase efficiencies, reduce medication administration errors and improve patient and healthcare worker safety. Synergies are also expected to result from solid positions in patient safety to maximize outcomes in infection prevention, respiratory care, and acute care procedural effectiveness. No portion of goodwill from this acquisition is currently expected to be deductible for tax purposes. |
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Financing, Transaction, Integration and Restructuring Costs |
In connection with the acquisition, the Company incurred financing, transaction, integration and restructuring costs throughout the first six months of fiscal year 2015. The financing costs totaled $58 million and $102 million for the three and six months ended March 31, 2015, respectively, and were recorded as Interest expense. Transaction costs of $33 million and $43 million for the three and six months ended March 31, 2015, respectively, and integration costs of $18 million and $31 million for the three and six months ended March 31, 2015, respectively, were recorded as Acquisition-related costs, and consisted of legal, advisory and other costs. Restructuring costs were $62 million for both the three and six-month periods ended March 31, 2015. These costs were also recorded as Acquisition-related costs, and included $34 million of employee termination costs, $18 million of accelerated share-based compensation expense, and $10 million of other restructuring costs. See Note 8 for further discussion of the employee termination costs. The Company is in the process of executing its integration plans to combine businesses, sales organizations, systems and locations and, as a result, the Company is expected to continue to incur fairly substantial integration costs through to fiscal year 2016. |
Unaudited Pro Forma Information |
The acquisition was accounted for under the acquisition method of accounting for business combinations. The operating activities from the acquisition date through March 31, 2015 were not material to the Company’s consolidated results of operations. As such, CareFusion’s operating results will be included in the Company’s consolidated results of operations beginning on April 1, 2015. |
The following table provides the pro forma results for the three and six-month periods ended March 31, 2015 and 2014 as if CareFusion had been acquired as of October 1, 2013. |
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| | Three Months Ended | | | Six Months Ended | |
March 31, | March 31, |
(Millions of dollars, except per share data) | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
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Revenues | | $ | 3,048 | | | $ | 3,040 | | | $ | 6,168 | | | $ | 5,976 | |
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Net Income | | $ | 273 | | | $ | 287 | | | $ | 644 | | | $ | 560 | |
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Diluted Earnings per Share | | $ | 1.27 | | | $ | 1.34 | | | $ | 3 | | | $ | 2.61 | |
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The pro forma results above reflect the following adjustments, which were adjusted for the applicable tax impact to derive the net income amounts above: |
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| • | | Additional amortization expense related to the fair value of intangible assets acquired; | | | | | | | | | | | | | |
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| • | | Additional depreciation expense related to the fair value of property, plant and equipment acquired; | | | | | | | | | | | | | |
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| • | | Additional interest expense and financing costs associated with the Company’s financing arrangements relating to this acquisition, as well as the adjustment to interest expense relating to the fair value of long-term debt assumed; | | | | | | | | | | | | | |
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| • | | Elimination of one-time financing fees, transaction, integration and restructuring costs incurred relative to this acquisition; | | | | | | | | | | | | | |
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| • | | Exclusion of the income statement effects of the fair value adjustments to inventory and deferred revenue obligations acquired as such adjustments are not recurring in nature. | | | | | | | | | | | | | |
The pro forma results do not include any anticipated cost savings or other effects of the planned integration of CareFusion. Accordingly, the pro forma results above are not necessarily indicative of the results that would have been if the acquisition had occurred on the dates indicated, nor are the pro forma results indicative of results which may occur in the future. |
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Other Transactions |
During the first quarter of fiscal year 2015, the Company acquired GenCell Biosystems (“GenCell”), a privately-held Irish biotech company that has developed proprietary technologies that address key biological analysis protocols including library preparation of Next Generation Sequencing and genotyping applications. During the second quarter of fiscal year 2015, the Company acquired CRISI, a San Diego-based medical technology company dedicated to improving the safety and delivery of IV injectable medications. |