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EX-99.1 - EX-99.1 - OWENS & MINOR INC/VA/d540841dex991.htm
EX-23.1 - EX-23.1 - OWENS & MINOR INC/VA/d540841dex231.htm
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Exhibit 99.2

OWENS & MINOR, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On April 30, 2018, Owens & Minor acquired substantially all of the Surgical and Infection Prevention (“S&IP”) business of Halyard Health, Inc. (“Halyard”), the name “Halyard Health” (and all variations of that name and related intellectual property rights) and Halyard’s information technology system (the “S&IP Acquisition”). In connection with the S&IP Acquisition, Owens & Minor paid $710.0 million in cash, subject to certain adjustments for cash, indebtedness and net working capital transferred.

The unaudited pro forma condensed combined financial statements are based on our historical consolidated financial statements and S&IP’s historical combined financial statements as adjusted to give effect to the S&IP Acquisition. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 give effect to the S&IP Acquisition as if it had occurred on January 1, 2017. The unaudited pro forma condensed combined balance sheet for the period ended December 31, 2017 gives effect to the S&IP Acquisition as if it had occurred on December 31, 2017.

The pro forma financial statements were prepared in accordance with Article 11 of SEC Regulation S-X. The pro forma adjustments reflecting the completion of the acquisition are based upon the acquisition method of accounting in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), and upon the assumptions set forth in the notes to the pro forma financial statements.

The preliminary estimated purchase consideration, as calculated and described in Footnote 2 to the unaudited pro forma condensed combined financial statements, has been allocated to net tangible assets and intangible assets acquired based on their respective estimated fair values. We have made significant assumptions and estimates in determining the preliminary estimated purchase price consideration and the preliminary allocation of the estimated purchase price in the unaudited pro forma condensed combined financial statements. These preliminary estimates and assumptions are subject to change during the estimated purchase price allocation period (not to exceed one year from the S&IP Acquisition date) as we finalize the valuations of the net tangible assets and intangible assets. Differences between these preliminary estimates and the final acquisition accounting could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the combined company’s future results of operations and financial position. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed combined financial statements.

The pro forma financial statements are not intended to represent or be indicative of the consolidated results of operations or financial position that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial position of the combined company following the acquisition. The pro forma financial statements are based upon available information and certain assumptions that management believes are reasonable.

No pro forma adjustments have been included for the Transition Service Agreement in the pro forma condensed combined financial statements because the agreement has not been executed.


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017

 

(in thousands, except per share data)

   Historical
Owens &
Minor, Inc.
FY17
    Historical
S&IP

FY17
    Financing     Note
Reference
    Transaction &
Transaction
Perimeter
Adjustments
    Note
Reference
    Pro Forma
Condensed
Combined
    Note
Reference

Net revenue

   $ 9,318,275     $ 1,012,700     $ —         $ (233,681     3(e)     $ 10,097,294    

Cost of goods sold

     8,146,409       808,800       —           (233,681     3(e)       8,721,528    
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Gross Margin

     1,171,866       203,900       —           —           1,375,766    

Distribution, selling and administrative expenses

     1,016,978       168,148       —           18,724       3(d)       1,203,850    

Acquisition-related and exit and realignment charges

     60,707       25,252       —           (35,952     3(b)       50,007    

Other operating income, net

     4,930       16,500       —           —           21,430    
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Operating earnings

     89,251       (6,000     —           17,228         100,479    

Interest expense, net

     31,773       —         46,633       3(a)       —           78,406    
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Income before income taxes

     57,478       (6,000     (46,633       17,228         22,073    

Income tax (benefit) provision

     (15,315     (6,200     (17,254     3(c)       6,375       3(c)       (32,395  
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Net income

   $ 72,793     $ 200     $ (29,379     $ 10,854       $ 54,468    
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Net income attributable to common shareholders:

                

Basic

   $ 1.20               $ 0.89     3(f)

Diluted

   $ 1.20               $ 0.89     3(f)

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements


UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AT DECEMBER 31, 2017

 

(in thousands, except per share data)

  Historical
Owens &
Minor, Inc.
Dec-17
    Historical
S&IP
Dec-17
    Transaction
Perimeter
Adjustments
    Note
Reference
    Financing     Note
Reference
    Transaction
Adjustments
    Note
Reference
    Pro Forma
Condensed
Combined
 

Assets

                 

Current Assets

                 

Cash and cash equivalents

  $ 104,522     $ 51,200     $ (46,539     4(a)     $ 742,010       4(b)     $ (736,421     4(c)     $ 114,772  

Accounts receivable, net

    758,936       117,900       (115,955     4(a)       —           —           760,881  

Merchandise inventories

    990,193       190,800       —         4(a)       —           22,896       4(d)       1,203,889  

Other current assets

    328,254       2,500       (636     4(a)       —           —           330,118  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total current assets

    2,181,905       362,400       (163,130       742,010         (713,525       2,409,659  

Property and equipment, net

    206,490       144,800       6,332       4(a)       —           —           357,622  

Goodwill, net

    713,811       267,300       —         4(a)       —           (39,455     4(f)       941,656  

Intangible assets, net

    184,468       800       —         4(a)       —           190,200       4(e)       375,468  

Other assets, net

    89,619       9,000       (419     4(a)       —           —           98,200  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total Assets

  $ 3,376,293     $ 784,300     $ (157,218     $ 742,010       $ (562,780     $ 4,182,605  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Liabilities and equity

                 

Current liabilities

                 

Accounts payable

  $ 947,572     $ 100,800     $ (83,752     4(a)     $ —         $ —         $ 964,620  

Accrued payroll and related liabilities

    30,416       85,300       (76,297     4(a)       —           (5,112     4(g)       34,307  

Other current liabilities

    331,745       —         —           —           —           331,745  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total current liabilities

    1,309,733       186,100       (160,049       —           (5,112       1,330,672  

Long-term debt, excluding current portion

    900,744       —         —           742,010       4(b)       —           1,642,754  

Deferred income taxes

    74,247       4,400       —           —           56,684       4(h)       135,331  

Other liabilities

    76,090       4,200       (611     4(a)       —           —           79,679  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total liabilities

    2,360,814       194,700       (160,660       742,010         51,572         3,188,435  

Commitments and contingencies

                 

Equity

                 

Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 61,476 shares

    122,952       590,200       —           —           (590,200     4(i)       122,952  

Paid-in capital

    226,937       —         —           —           —           226,937  

Retained earnings

    690,674       —         3,442       4(a)       —           (24,752     4(i)       669,365  

Accumulated other comprehensive income (loss)

    (25,084     (600     —           —           600       4(i)       (25,084
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total equity

    1,015,479       589,600       3,442         —           (614,352       994,170  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total liabilities and equity

  $ 3,376,293     $ 784,300     $ (157,218     $ 742,010       $ (562,780     $ 4,182,605  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements


NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

1. Description of the Transaction and Basis of Presentation

Description of the Transaction

On April 30, 2018, Owens & Minor acquired the S&IP business from Halyard. In connection with the S&IP Acquisition, Owens & Minor paid $710.0 million in cash, subject to certain adjustments for cash, indebtedness and net working capital transferred.

Basis of Presentation

The unaudited pro forma condensed combined financial statements are based on Owens & Minor’s historical consolidated financial statements and S&IP’s historical combined financial statements as adjusted to give effect to the S&IP Acquisition. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 gives effect to the S&IP Acquisition as if it had occurred on January 1, 2017. The unaudited pro forma condensed balance sheet for the period ended December 31, 2017 gives effect to the S&IP Acquisition as if it had occurred on December 31, 2017.

The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting based on the historical financial information of Owens & Minor and the historical carve-out financial information of S&IP. The acquisition method of accounting in accordance with ASC 805 requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair value as of the acquisition date, as defined in ASC 820, “Fair Value Measurement” (ASC 820). The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the transaction, (2) factually supportable, and (3) with respect to the unaudited pro forma condensed combined statement of operations, expected to have a continuing impact on the consolidated results.

Under ASC 805, acquisition-related transaction costs are not included as a component of consideration transferred but are accounted for as expenses in the periods in which such costs are incurred, or if related to the issuance of debt, capitalized as debt issuance costs. Acquisition-related transaction costs expected to be incurred as part of the S&IP Acquisition include estimated fees related to advisory, legal and accounting fees. Fees will also be incurred related to the issuance of long-term debt to finance the transaction which have been deferred and will be amortized.

The unaudited pro forma condensed combined financial statements have been compiled using the significant accounting policies as set forth in the audited consolidated financial statements incorporated by reference in this prospectus supplement. During the preparation of the unaudited pro forma condensed combined financial information, Owens & Minor’s management performed an analysis of accounting policies at S&IP, and is not aware of any differences that could have a material impact on the unaudited pro forma condensed combined financial statements.

 

2. Preliminary Estimate of Purchase Price Consideration and Related Allocation

The preliminary purchase price is based on a purchase price of approximately $710.0 million, which is subject to adjustment as described below as well as adjustments for cash, indebtedness and net working capital transferred.

The preliminary purchase price allocation and the estimated fair value of the assets acquired and liabilities assumed is based on management’s best estimates of fair value. The Company has assumed for the purpose of the pro forma financials that the fair value of property, plant, and equipment is equivalent to book value. A fair value analysis of property, plant, and equipment will be completed in connection with the finalization of the purchase price allocation.


The final allocation of the purchase consideration will be determined after completion of a thorough analysis to determine the fair value of all assets acquired and liabilities assumed but in no event later than one year following completion of the Acquisition. Accordingly, the final acquisition accounting adjustments could differ materially from the unaudited pro forma adjustments presented herein. Any increase or decrease in the fair value of the assets acquired or liabilities assumed, as compared to the information shown herein, could also change the portion of the purchase price consideration allocable to goodwill and could impact the operating results of the Company following the acquisition due to differences in depreciation, amortization and cost of sales.

Preliminary Allocation of Estimated Purchase Price to Assets Acquired and Liabilities Assumed

The following represents the preliminary allocation of the purchase price to the assets acquired and the liabilities assumed in the business combination.

PRELIMINARY ALLOCATION

 

(in thousands)

   Fair Value
December 31, 2017
 

Cash proceeds

   $ 710,000  

Net tangible & identifiable intangible assets acquired:

  

Cash

     4,661  

Accounts receivable

     1,945  

Inventory after step up

     213,696  

Other current assets

     1,864  

Property, plant, & equipment

     151,132  

Other long-term assets

     8,581  

Less: Liabilities assumed

     (90,724
  

 

 

 

Net tangible assets

     291,155  (a) 

Identifiable intangible assets

     191,000  (b) 
  

 

 

 

Net tangible & identifiable intangible assets

     482,155  
  

 

 

 

Goodwill allocation

   $ 227,845  
  

 

 

 

 

(a) Net tangible assets - Represents all other acquired tangible assets, including cash and cash equivalents, accounts receivable, inventories, other current assets, other long-term assets, property, plant, and equipment, and liabilities assumed. Liabilities assumed are comprised of accrued expenses, accounts payable, deferred tax liabilities, and other long-term liabilities.
(b) Intangible assets – As of the effective date of the acquisition, identified intangible assets are required to be measured at fair value. For purposes of these unaudited pro forma condensed combined financial statements, it is assumed that all assets will be used and that all assets will be used in the manner that represents the highest and best use of those assets. The definite-lived intangible assets include trade name portfolio, technology portfolio, and customer relationships. The Company used a relief of royalty method to estimate the preliminary fair value of the trade name portfolio and the technology portfolio, and used the excess of earnings method to estimate the preliminary fair value of the customer relationships. The definite-lived acquired intangibles have an estimated weighted-average useful life of approximately 10.8 years and will be amortized using the straight-line method. There were no indefinite-lived intangible assets apart from Goodwill.

Refer to Footnote 3(d) within the Pro Forma Adjustments to the Pro Forma Condensed Combined Statement of Operations and Footnote 4(e) within the Pro Forma Adjustments to the Pro Forma Condensed Combined Balance Sheet section for additional information on the intangible assets adjustment.


3. Pro-Forma Adjustments to the Pro Forma Condensed Combined Statements of Operations

 

  (a) Financing Costs

We financed the S&IP Acquisition with $696.0 million principal amount of the term loans as well as a $54.0 million increase in an existing revolver. Refer to the balance sheet adjustment within the Pro Forma Adjustments to the Pro Forma Condensed Combined Balance Sheet in Footnote 4(b).

SOURCES & USES

 

(in thousands)

   December 31, 2017  

New term loan A

   $ 196,000  

New term loan B

     500,000  

Revolver

     54,000  
  

 

 

 

Total Sources

   $ 750,000  
  

 

 

 

Purchase proceeds

     (710,000

OMI incurred and to be incurred transaction expenses

     (40,000
  

 

 

 

Total Uses

   $ (750,000
  

 

 

 

INTEREST EXPENSE, NET ADJUSTMENT - DEBT

 

(in thousands)

   Year-ended
December 31, 2017
 

Change in Interest Expense - Old debt

   $ 743  (1) 

Additional Interest Expense - New debt

     44,892  (2) 

Change in Amortization Expense - Deferred Financing Costs

     —    (3) 

Amortization Expense - New Deferred Financing Costs

     999 (4) 
  

 

 

 

Total Adjustment

   $ 46,633  
  

 

 

 

 

1. Adjusts for the change in interest expense related to an increase in an existing revolver.
2. Adds the additional interest expense incurred as a result of the new debt obtained. The interest rate used is 6.45% which represents LIBOR plus 450 bps.
3. Adjusts for the change in deferred financing cost amortization related to previous debt held as a result of the refinancing related to the transaction. There was no existing deferred financing written-off as a result of the debt incurred to finance the transaction.
4. Adds the deferred financing costs amortization incurred as a result of the new debt obtained.

 

  (b) Transaction Related Costs

Owens & Minor incurred approximately $10.7 million in transaction related expenses for the twelve months ended December 31, 2017. Additionally, S&IP incurred approximately $25.3 million in transaction related expenses for the twelve months ended December 31, 2017. These expenses are non-recurring in nature and removed from the Pro Forma Condensed Combined Statement of Operations for the twelve months ended December 31, 2017.

 

  (c) Tax Adjustments

The statutory tax rate was applied, as appropriate, to each income statement and balance sheet adjustment based on the jurisdiction in which the adjustment was expected to occur. The tax effect of the temporary differences between the book and tax bases of assets and liabilities acquired and the estimated tax benefit from tax net operating losses of S&IP are reported as deferred tax assets and liabilities in the consolidated balance sheets. To the extent we have estimated that it is more likely than not that S&IP will not realize the benefit of its deferred tax assets in a particular jurisdiction, we have reduced the carrying amount of the net deferred tax asset with a valuation allowance, and adjusted the associated tax expense or benefit in the Pro Forma Condensed Combined Statement of Operations.


The adjustment reflects the impact on the Pro Forma Condensed Combined Statement of Operations from the pro forma adjustments utilizing the effective tax rate of 37%.

Although not reflected in the unaudited Pro Forma Condensed Combined Financial Statements, the effective tax rate of Owens & Minor could be significantly different depending on post-acquisition activities, such as geographical mix of taxable income affecting state and foreign taxes, among other factors.

Refer to Footnote 4(h) within the Pro Forma Adjustments to the Pro Forma Condensed Combined Balance Sheet section for additional detail as the deferred income taxes associated with the change in the tax rate.

 

  (d) Amortization and Depreciation Expense

Represents the adjustment to record the incremental intangible asset amortization expense as well as incremental depreciation associated with the conveyed property and equipment. Adjustment for incremental intangible asset amortization is as follows:

IDENTIFIABLE INTANGIBLES ADJUSTMENT

 

(in thousands)

   Preliminary Fair
Value
     Preliminary
Estimated Useful
Life
     Amortization
Expense Year-ended
December 31, 2017
 

Trade name portfolio

   $ 66,000        12      $ 5,500  

Technology portfolio

     32,000        8        4,000  

Customer relationships

     93,000        11        8,455  
  

 

 

    

 

 

    

 

 

 

Total

     191,000        10.8        17,955  

Amounts as reported

     800           813  
  

 

 

       

 

 

 

Step Up Adjustment

   $ 190,200         $ 17,141  
  

 

 

       

 

 

 

Amortization expense of intangible assets is reflected within distribution, selling and administrative expenses on the Pro Forma Condensed Combined Statements of Operations.

Refer to Footnote 4(e) within the Pro Forma Adjustments to the Pro Forma Condensed Combined Balance Sheet section for additional detail as to the computation of the step up adjustment for intangible assets required.

There are certain shared property and equipment assets between Halyard and S&IP that do not reside on the S&IP carveout financials, but will transfer to Owens & Minor based on the terms of the Purchase Agreement. An adjustment was made to adjust the Pro Forma Condensed Combined Statement of Operations for the depreciation impact of the incremental conveyed assets that will transfer.

PROPERTY AND EQUIPMENT ADJUSTMENT

 

(in thousands)

   December 31, 2017  

Assets to be conveyed

   $ 151,132  

Property and equipment per carveout financials

     144,800  
  

 

 

 

Property and equipment adjustment

   $ 6,332  
  

 

 

 

Estimated useful life in years

     4  
  

 

 

 

Estimated depreciation expense per year

   $ 1,583  
  

 

 

 


PRO FORMA DEPRECIATION & AMORTIZATION ADJUSTMENT

 

(in thousands)

      

Definite-lived intangible step up amortization

   $ 17,141  

Property and equipment adjustment

     1,583  
  

 

 

 

Total pro forma depreciation & amortization adjustment

   $ 18,724  
  

 

 

 

Refer to Footnote 4(a) within the Pro Forma Adjustments to the Pro Forma Condensed Combined Balance Sheet section for additional detail as to the computation of the conveyed property and equipment.

 

  (e) Intercompany Sales and Cost of Goods Sold Adjustment

Adjustment to remove the impact of the net sales and cost of goods sold related to intercompany sales transactions between S&IP and Owens & Minor.

 

  (f) Earnings Per Share

The net income attributable to common shareholders (basic and diluted) is adjusted in the Pro Forma Combined Condensed Statement of Operations for the year ended December 31, 2017 to reflect the pro forma adjustments discussed above.

 

4. Pro-Forma Adjustments to the Pro Forma Condensed Combined Balance Sheet

 

  (a) Transaction Perimeter Adjustments

The unaudited Pro Forma Condensed Combined Financial Statements includes adjustments to remove assets and liabilities from the S&IP carveout financial statements as of December 31, 2017 that did not transfer as part of the transaction. Such balances have been excluded in accordance with the transaction terms outlined in the Purchase Agreement between Owens & Minor and Halyard. This includes an adjustment to cash balances for the expected settlement of intercompany loans between S&IP entities and Halyard entities. Furthermore, property and equipment has been adjusted to reflect the property and equipment balance to be conveyed.

 

  (b) Financing

Represents the liability associated with the additional debt incurred to finance the acquisition.

DEBT ADJUSTMENT

 

(in thousands)

   December 31, 2017  

New term loan A

   $ 196,000  

New term loan B

     500,000  

Revolver

     54,000  

Less: New deferred financing

     (7,990
  

 

 

 

Total change in debt

   $ 742,010  
  

 

 

 

Refer to Footnote 3(a) for the interest expense and deferred financing costs amortization adjustments on the Pro Forma Condensed Combined Statement of Operations.

 

  (c) Cash and cash equivalents

Represents the cash proceeds paid for the transaction of $710.0 million plus transaction related expenses of $26.4 million as of December 31, 2017.


  (d) Inventory step up adjustment

Represents the adjustment to increase the inventory balance by $22.9 million to its preliminary fair value of $213.7 million.

INVENTORY ADJUSTMENT

 

(in thousands)

   December 31, 2017  

Inventory, preliminary fair value

   $ 213,696  

Inventory, historical

     190,800  
  

 

 

 

Step Up Adjustment

   $ 22,896  
  

 

 

 

 

  (e) Intangible assets step up adjustment

Represents the adjustment to increase the intangible assets balance by $190.2 million to its preliminary fair value of $191.0 million.

Refer to Footnote 3(d) within the Pro Forma Adjustments to the Pro Forma Condensed Combined Statements of Operations section for information on the amortization expense associated with the intangible assets.

 

  (f) Goodwill

Represents the adjustment to goodwill based on the preliminary purchase price allocation. Refer to Footnote 2 within the Preliminary Estimate of Purchase Price Consideration and Related Allocation section for additional detail as to the purchase price calculation.

GOODWILL ADJUSTMENT

 

(in thousands)

   December 31, 2017  

Elimination of S&IP’s historical goodwill

   $ (267,300

Goodwill from preliminary allocation of purchase consideration

     227,845  
  

 

 

 

Net adjustment to goodwill

   $ (39,455
  

 

 

 

 

  (g) Accrued payroll and related liabilities

Represents the payment of accrued transaction expenses.

 

  (h) Deferred income taxes

Represents the adjustment to deferred income taxes based on the Pro Forma adjustments to the Pro Forma Condensed Combined Balance Sheet related to the Purchase Price Allocation adjustment for Identifiable Intangible Assets and Inventory, utilizing the effective tax rate of 26.6%, which represents the estimated 2018 effective tax rate for Owens & Minor.

DEFERRED TAX ADJUSTMENT

 

(in thousands)

   Step Up Adjustment as
of December 31, 2017
 

Fair Value Adjustment for Identifiable Intangible Assets

   $ 190,200  

Tax rate

     26.6
  

 

 

 

Recorded deferred tax liability - Identifiable Intangible Assets

   $ 50,593  

Fair Value Adjustment for Inventory

   $ 22,896  

Tax rate

     26.6
  

 

 

 

Recorded deferred tax liability - inventory

   $ 6,090  
  

 

 

 

Total deferred tax liability

   $ 56,684  
  

 

 

 


  (i) Equity

Represents adjustments to record the elimination of S&IP’s historical stockholders’ equity including the elimination of common stock issued and outstanding, and accumulated other comprehensive loss, and the adjustment for Owens & Minor transaction expenses incurred for the twelve months ended December 31, 2017.