Exhibit 99.2
Unaudited pro forma combined balance sheet of IPSCO Inc. as of September 30, 2006 and the unaudited pro forma combined statements of income for the nine months ended September 30, 2006 and for the year ended December 31, 2005
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
On December 1, 2006, IPSCO Inc. (IPSCO) through its wholly owned subsidiary PI Acquisition Company completed the purchase of the shares of NS Group, Inc. (NS Group). The total purchase price was approximately $1.5 billion, including transaction costs, and was funded through a combination of cash on hand and funds obtained through a bank financing.
The Unaudited Pro Forma Combined Statements of Income for the year ended December 31, 2005 and the nine-months ended September 30, 2006 combine the historical consolidated statements of income of IPSCO and the historical consolidated statements of income of NS Group, giving effect to the merger as if it had been competed on January 1, 2005. The Unaudited Pro Forma Combined Balance Sheet combines the historical consolidated balance sheet of IPSCO and the historical consolidated balance sheet of NS Group, giving effect to the merger as if it had been completed on September 30, 2006. This information should be read in conjunction with the:
· Accompanying notes to the unaudited pro forma combined financial statements
· Historical financial statements of IPSCO as of and for the year ended December 31, 2005 included in IPSCO’s Form 10-K for the year ended December 31, 2005
· Historical financial statements of IPSCO as of and for the nine-months ended September 30, 2006 included in IPSCO’s Form 10-Q for the nine-months ended September 30, 2006
· Historical financial statements of NS Group as of and for the year ended December 31, 2005 included in NS Group’s Form 10-K for the year ended December 31, 2005
· Historical financial statements of NS Group as of and for the nine-months ended September 30, 2006 included in NS Group’s Form 10-Q for the nine-months ended September 30, 2006
The unaudited pro forma combined financial information was prepared using the purchase method of accounting with IPSCO treated as the acquirer. Under this method of accounting, the purchase price is allocated to the fair values of assets acquired and liabilities assumed. The purchase price for NS Group was preliminarily allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. IPSCO is in the process of determining the fair values of identifiable intangible assets and certain tangible assets. Such a valuation requires significant estimates and assumptions including but not limited to estimating future cash flows and developing appropriate discount rates. The Company believes the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. The purchase price and fair value estimates for the purchase price allocation will be refined as additional information becomes available. Accordingly, the purchase allocation pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma combined financial information and are subject to revision based on a final determination of fair value.
The unaudited pro forma combined financial statements are provided for informational purposes only. The unaudited pro forma combined financial statements are not necessarily and should not be assumed to be an indication of the results that would have been achieved had the transaction been completed as of the dates indicated or that may be achieved in the future. Furthermore, no effect has been given in the unaudited pro forma combined financial statements of income for synergistic benefits that may be realized through the combination of the two companies or the costs that may be incurred in integrating their operations.
Unaudited Pro Forma Combined Balance Sheet
September 30, 2006
(thousands of U.S. dollars)
|
| IPSCO Inc. |
| NS Group |
| Adjustments |
|
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| Pro Forma |
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Current Assets |
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Cash and cash equivalents |
| $ | 743,546 |
| $ | 76,982 |
| $ | (799,400 | ) | 1.,2. |
| $ | 21,128 |
|
Accounts receivable, net |
| 376,334 |
| 74,615 |
| — |
|
|
| 450,949 |
| ||||
Inventories |
| 764,053 |
| 185,141 |
| 30,892 |
| 1. |
| 980,086 |
| ||||
Prepaid expenses |
| 5,406 |
| 8,430 |
| — |
|
|
| 13,836 |
| ||||
Deferred income taxes |
| 37,999 |
| 8,332 |
| (11,900 | ) | 1. |
| 34,431 |
| ||||
|
| 1,927,338 |
| 353,500 |
| (780,408 | ) |
|
| 1,500,430 |
| ||||
Non-Current Assets |
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Capital assets |
| 1,063,291 |
| 79,970 |
| 152,500 |
| 1. |
| 1,295,761 |
| ||||
Amortizable intangible assets |
| — |
| 69,659 |
| 635,800 |
| 1. |
| 705,459 |
| ||||
Goodwill |
| — |
| 4,558 |
| 596,300 |
| 1. |
| 600,858 |
| ||||
Other |
| 56,710 |
| 4,453 |
| 4,400 |
| 2. |
| 65,563 |
| ||||
|
| 1,120,001 |
| 158,640 |
| 1,389,000 |
|
|
| 2,667,641 |
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Total Assets |
| $ | 3,047,339 |
| $ | 512,140 |
| $ | 608,592 |
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| $ | 4,168,071 |
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Current Liabilities |
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Bank indebtedness |
| $ | — |
| $ | — |
| $ | 100,000 |
| 2. |
| $ | 100,000 |
|
Accounts payable |
| 335,975 |
| 90,527 |
| — |
|
|
| 426,502 |
| ||||
Taxes payable |
| — |
| 6,231 |
| — |
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|
| 6,231 |
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Current portion of long-term debt |
| 20,879 |
| — |
| — |
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| 20,879 |
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|
| 356,854 |
| 96,758 |
| 100,000 |
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|
| 553,612 |
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Long-Term Liabilities |
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Long-term debt |
| 292,175 |
| — |
| 600,000 |
| 2. |
| 892,175 |
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Other |
| 44,538 |
| 11,456 |
| 1,700 |
| 1. |
| 57,694 |
| ||||
Deferred income taxes |
| 189,939 |
| 3,418 |
| 307,400 |
| 1. |
| 500,757 |
| ||||
|
| 526,652 |
| 14,874 |
| 909,100 |
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| 1,450,626 |
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Shareholders’ Equity |
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Common shares |
| 414,499 |
| 270,697 |
| (270,697 | ) | 1. |
| 414,499 |
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Contributed surplus |
| 22,202 |
| — |
| — |
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|
| 22,202 |
| ||||
Retained earnings |
| 1,744,297 |
| 129,783 |
| (129,783 | ) | 1. |
| 1,744,297 |
| ||||
Accumulated other comprehensive loss |
| (17,165 | ) | 28 |
| (28 | ) | 1. |
| (17,165 | ) | ||||
|
| 2,163,833 |
| 400,508 |
| (400,508 | ) |
|
| 2,163,833 |
| ||||
Total Liabilities and Equity |
| $ | 3,047,339 |
| $ | 512,140 |
| $ | 608,592 |
|
|
| $ | 4,168,071 |
|
Unaudited Pro Forma Combined Statement of Income
For the Nine Months Ended September 30, 2006
(thousands of U.S. dollars)
|
| IPSCO Inc. |
| NS Group |
| Adjustments |
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| Pro Forma |
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Sales |
| $ | 2,793,321 |
| $ | 566,867 |
| $ | — |
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|
| $ | 3,360,188 |
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Cost of sales |
| 1,937,726 |
| 404,945 |
| 19,700 |
| 3. |
| 2,362,371 |
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Gross income |
| 855,595 |
| 161,922 |
| (19,700 | ) |
|
| 997,817 |
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Selling, general and administration |
| 76,776 |
| 23,404 |
| 41,100 |
| 4. |
| 141,280 |
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Operating income |
| 778,819 |
| 138,518 |
| (60,800 | ) |
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| 856,537 |
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Other income (expense) |
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Interest on long-term debt |
| (17,661 | ) | (428 | ) | (31,700 | ) | 2. |
| (49,789 | ) | ||||
Interest income, net |
| 24,705 |
| 5,142 |
| (24,700 | ) | 5. |
| 5,147 |
| ||||
Foreign exchange |
| 1,262 |
| — |
| — |
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|
| 1,262 |
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Other |
| 353 |
| 265 |
| — |
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|
| 618 |
| ||||
Income before income taxes |
| 787,478 |
| 143,497 |
| (117,200 | ) |
|
| 813,775 |
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Income taxes |
| 283,320 |
| 54,529 |
| (45,200 | ) | 6. |
| 292,649 |
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Net Income |
| $ | 504,158 |
| $ | 88,968 |
| $ | (72,000 | ) |
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| $ | 521,126 |
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Earnings per share |
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Basic |
| $ | 10.61 |
| $ | 3.96 |
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| $ | 10.97 |
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Diluted |
| $ | 10.51 |
| $ | 3.94 |
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| $ | 10.87 |
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Weighted average shares outstanding (000’s) |
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Basic |
| 47,497 |
| 22,468 |
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| 47,497 |
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Diluted |
| 47,949 |
| 22,576 |
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| 47,949 |
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Unaudited Pro Forma Combined Statement of Income
For the Year Ended December 31, 2005
(thousands of U.S. dollars)
|
| IPSCO Inc. |
| NS Group |
| Adjustments |
|
|
| Pro Forma |
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Sales |
| $ | 3,032,727 |
| $ | 600,895 |
| $ | — |
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| $ | 3,633,622 |
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Cost of sales |
| 2,051,491 |
| 439,361 |
| 57,092 |
| 3. |
| 2,547,944 |
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Gross income |
| 981,236 |
| 161,534 |
| (57,092 | ) |
|
| 1,085,678 |
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Selling, general and administration |
| 83,334 |
| 22,949 |
| 55,500 |
| 4. |
| 161,783 |
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Operating income |
| 897,902 |
| 138,585 |
| (112,592 | ) |
|
| 923,895 |
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Other income (expense) |
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Interest on long-term debt |
| (35,631 | ) | (621 | ) | (45,900 | ) | 2. |
| (82,152 | ) | ||||
Interest income, net |
| 16,626 |
| 2,933 |
| (16,600 | ) | 5. |
| 2,959 |
| ||||
Foreign exchange |
| 9,448 |
| — |
| — |
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| 9,448 |
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Loss on early extinguishment of debt |
| (16,423 | ) | — |
| — |
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| (16,423 | ) | ||||
Gain on assets held for sale |
| 1,863 |
| — |
| — |
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| 1,863 |
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Other |
| 9,760 |
| 311 |
| — |
|
|
| 10,071 |
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Income before income taxes |
| 883,545 |
| 141,208 |
| (175,092 | ) |
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| 849,661 |
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Income taxes |
| 297,729 |
| 14,113 |
| (67,500 | ) | 6. |
| 244,342 |
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Net Income |
| $ | 585,816 |
| $ | 127,095 |
| $ | (107,592 | ) |
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| $ | 605,319 |
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Earnings per share |
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Basic |
| $ | 12.07 |
| $ | 5.70 |
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| $ | 12.47 |
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Diluted |
| $ | 11.96 |
| $ | 5.62 |
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| $ | 12.35 |
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Weighted average shares outstanding (000’s) |
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Basic |
| 48,548 |
| 22,303 |
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| 48,548 |
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Diluted |
| 49,001 |
| 22,604 |
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| 49,001 |
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Unaudited Pro Forma Combined Financial Information
Notes
(thousands of U.S. dollars)
1. Purchase price allocation
The aggregate purchase price, based on the number of shares of NS Group common stock outstanding at a purchase price of $66 per share, plus transaction costs, was approximately $1.5 billion. The acquisition was financed through a combination of cash on hand and funds obtained through a syndicated bank credit facility.
IPSCO has completed a preliminary assessment of the fair value of assets and liabilities of NS Group and the related business integration plans. The information below represents a preliminary allocation of the total consideration to NS Group’s tangible and intangible assets and liabilities based on IPSCO management’s preliminary estimate of their respective fair values.
| (in thousands) |
| ||
NS Group’s historical equity |
| $ | 400,508 |
|
Adjustment to fair value inventory |
| 30,892 |
| |
Adjustment to fair value capital assets |
| 152,500 |
| |
Adjustment to fair value identifiable intangible assets |
| 635,800 |
| |
Adjustment to fair value lease obligation |
| (1,700 | ) | |
Deferred income tax impact of purchase accounting adjustments |
| (319,300 | ) | |
Residual goodwill created from the merger |
| 596,300 |
| |
Total consideration allocated |
| $ | 1,495,000 |
|
Upon completion of the fair value assessment, the ultimate purchase price allocation may differ materially from the preliminary assessment outlined above. Any changes to the initial estimates of the fair value of the assets and liabilities will be allocated to goodwill.
2. Financing of the acquisition
The acquisition was financed through a combination of cash on hand and funds obtained through a syndicated 5-year bank credit facility as follows:
| (in thousands) |
| ||
Operating line |
| $ | 100,000 |
|
Term loan |
| 250,000 |
| |
Bridge financing |
| 350,000 |
| |
Total external financing |
| $ | 700,000 |
|
Borrowings under the facility bears interest at LIBOR plus a spread based on the Company’s credit ratings. For purposes of these pro forma financial statements, the Company has assumed a weighted average interest rate of 6.13%. A change of 0.125% in the assumed interest rate would change the annual interest cost included in the pro forma financial statements by $875.
As the Company has the ability and intent to convert the bridge financing, due on November 20, 2007, to a long-term facility, the bridge financing has been classified as long-term debt for purposes of these pro forma financial statements.
The Company incurred an additional $4,400 of debt issue costs in connection with the financing.
3. Capital assets
For purposes of the preliminary allocation of the purchase price, the Company has estimated a fair value adjustment for NS Group’s capital assets based on a review of NS Group’s historical costs and management’s intended future use. The fair value adjustment will be depreciated over estimated useful lives of four to thirteen years depending on the asset.
The impact of the adjustment to fair value inventory has been fully realized in the pro forma combined statement of income for the year ended December 31, 2005.
4. Intangible assets
The Company has preliminarily estimated the fair value of NS Group’s identifiable intangible assets as $635,800. The allocation of the preliminary fair values is as follows:
|
|
| Amortization |
| ||
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|
|
| Period |
| |
Trade name and trademarks |
| $ | 5,900 |
| 3 - 5 years |
|
Customer relationships |
| 612,300 |
| 10 -15 years |
| |
Non-compete agreements |
| 17,600 |
| 3 years |
| |
|
| $ | 635,800 |
|
|
|
The majority of the intangible valuation relates to customer relationships having an estimated average remaining life of 10-15 years based on low historical and projected customer attrition rates among NS Group’s customer base.
5. Interest income
IPSCO’s interest income has been eliminated as the acquisition resulted in no cash balances available for investment.
6. Income taxes
The deferred income tax impacts as a result of purchase accounting adjustments are estimated at the statutory income tax rate for the periods presented.