Business Combinations
Fiscal 2013
On February 22, 2013, we acquired all of the outstanding shares of PSS World Medical, Inc. (“PSS World Medical”) of Jacksonville, Florida for $29.00 per share plus the assumption of PSS World Medical's debt, or approximately $1.9 billion in aggregate, consisting of cash consideration of $1.3 billion, net of cash acquired, and the assumption of long-term debt with a fair value of $0.6 billion. The cash paid at acquisition was funded from cash on hand and the issuance of long-term debt. PSS World Medical markets and distributes medical products and services throughout the United States. The acquisition of PSS World Medical expands our existing Medical-Surgical business.
The following table summarizes the preliminary recording of the fair values of the assets acquired and liabilities assumed as of the acquisition date. Due to the recent timing of the acquisition, these amounts are subject to change within the measurement period as our fair value assessments are finalized.
|
| | | |
(In millions) | Amounts Recognized as of Acquisition Date
(Provisional) |
Current assets, net of cash and cash equivalents acquired | $ | 706 |
|
Goodwill | 1,145 |
|
Intangible assets | 557 |
|
Other long-term assets | 183 |
|
Current liabilities | (376 | ) |
Current portion of long-term debt | (635 | ) |
Other long-term liabilities | (281 | ) |
Net assets acquired, less cash and cash equivalents | $ | 1,299 |
|
Included in the purchase price allocation are acquired identifiable intangibles of $557 million, the fair value of which was primarily determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 inputs under the fair value measurements and disclosure guidance. Acquired intangibles primarily consist of $529 million of customer lists and $15 million of trademarks and trade names. The estimated weighted average lives of the customer lists, trademarks and trade names and total intangible assets are nine years, two years and nine years. The fair values of the debt acquired was determined using quoted market prices and other inputs that were derived from available market information, which are considered to be Level 2 inputs under the fair value measurements and disclosure guidance. Refer to Financial Note 14, "Debt and Financing Activities," for additional information on the assumption and redemption of acquired debt and long-term debt issued to fund a portion of this acquisition. The excess of the purchase price over the net tangible and intangible assets of approximately $1,145 million was recorded as goodwill, which primarily reflects the expected future benefits to be realized upon integrating the business. Most of the goodwill is not expected to be deductible for tax purposes.
Financial results for PSS World Medical since the acquisition date are included in the results of operations for the fourth quarter and year ended March 31, 2013 within our Medical-Surgical distributions and services business, which is part of our Distribution Solutions segment, and the effects were not material to the consolidated financial statements.
On April 6, 2012, we purchased the remaining 50% ownership interest in our corporate headquarters building located in San Francisco, California, for $90 million, which was funded from cash on hand. We previously held a 50% ownership interest and were the primary tenant in this building. This transaction was accounted for as a step acquisition, which required that we re-measure our previously held 50% ownership interest to fair value and record the difference between the fair value and carrying value as a gain in the consolidated statements of operations. The re-measurement to fair value resulted in a non-cash pre-tax gain of $81 million ($51 million after-tax), which was recorded as a gain on business combination within Corporate in the consolidated statements of operations during the first quarter of 2013.
The total fair value of the net assets acquired was $180 million, which was allocated as follows: building and improvements of $113 million and land of $58 million with the remainder allocated for settlement of our pre-existing lease and lease intangible assets. The fair value of the building and improvements was determined based on current market replacement costs less depreciation and unamortized tenant improvement costs, as well as, other relevant market information, which are considered to be Level 3 inputs under the fair value measurements and disclosure guidance. The building and improvements have a weighted average useful life of 30 years. The fair value of the land was determined using comparable sales of land within the surrounding market, which is considered to be a Level 2 input.
Fiscal 2012
On March 25, 2012, we acquired substantially all of the assets of Drug Trading Company Limited, the independent banner business of the Katz Group Canada Inc. (“Katz Group”), and Medicine Shoppe Canada Inc., the franchise business of the Katz Group (collectively, “Katz Assets”) for $925 million, which was funded from cash on hand. The acquisition of the assets from the Drug Trading Company Limited consists of a marketing and purchasing arm of independently owned pharmacies in Canada. The acquisition of Medicine Shoppe Canada Inc. consists of the franchise business of providing services to independent pharmacies in Canada. Financial results for the acquired Katz Assets have been included in the results of operations within our Canadian pharmaceutical distribution and services business, which is part of our Distribution Solutions segment, beginning in the first quarter of 2013.
During the second quarter of 2013, the fair value measurements of assets acquired and liabilities assumed of the Katz Assets as of the acquisition date were completed. The following table summarizes the final amounts of the fair values recognized for the assets acquired and liabilities assumed as of the acquisition date, as well as measurement period adjustments made in the first six months of 2013, to the amounts initially recorded in 2012. The measurement period adjustments during the first six months of 2013 did not have a material impact on our consolidated statements of operations, balance sheets or cash flows in any period, and, therefore, we have not retrospectively adjusted our financial statements.
|
| | | | | | | | | | | |
(In millions) | Amounts Previously Recognized as of Acquisition Date
(Provisional) (1) | | Measurement Period Adjustments | | Amounts Recognized as of Acquisition Date (Final as Adjusted) |
Current assets, net of cash and cash equivalents acquired | $ | 33 |
| | $ | (1 | ) | | $ | 32 |
|
Goodwill | 506 |
| | 6 |
| | 512 |
|
Intangible assets | 441 |
| | 1 |
| | 442 |
|
Other long-term assets | 15 |
| | (1 | ) | | 14 |
|
Current liabilities | (37 | ) | | 1 |
| | (36 | ) |
Long-term deferred tax liabilities | (39 | ) | | — |
| | (39 | ) |
Net assets acquired, less cash and cash equivalents | $ | 919 |
| | $ | 6 |
| | $ | 925 |
|
| |
(1) | As previously reported in our Form 10-K for the year ended March 31, 2012. |
Included in the purchase price allocation are acquired identifiable intangibles of $442 million, the fair value of which was determined by applying the income approach, using several unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 inputs under the fair value measurement and disclosure guidance. Acquired intangibles primarily consist of $318 million of service agreements and $114 million of trademarks and trade names. Service agreements, trademarks and trade names and total acquired intangibles assets each has an estimated weighted average life of 20 years. The excess of the purchase price over the net tangible and intangible assets of approximately $512 million was recorded as goodwill, which primarily reflects the expected future benefits to be realized upon integrating the business. The amount of goodwill expected to be deductible for tax purposes is $290 million.
Fiscal 2011
On December 30, 2010, we acquired all of the outstanding shares of US Oncology Holdings, Inc. (“US Oncology”) for approximately $2.1 billion, consisting of cash consideration of $0.2 billion, net of cash acquired, and the assumption of liabilities with a fair value of $1.9 billion. The cash paid at acquisition was funded from cash on hand. As an integrated oncology company, US Oncology is affiliated with community-based oncologists, and works with patients, hospitals, payers and the medical industry across all phases of the cancer research and delivery continuum. The acquisition of US Oncology expands our existing specialty pharmaceutical distribution business and adds practice management services for oncologists. Financial results for US Oncology have been included in the results of operations within our Distribution Solutions segment beginning in the fourth quarter of 2011.
During the third quarter of 2012, the fair value measurements of assets acquired and liabilities assumed as of the acquisition date were completed. The following table summarizes the final amounts of the fair values recognized for the assets acquired and liabilities assumed as of the acquisition date, as well as measurement period adjustments made in the first nine months of 2012 to the amounts initially recorded in 2011. The measurement period adjustments during the first nine months of 2012 did not have a material impact on our consolidated statements of operations, balance sheets or cash flows in any period, and, therefore, we have not retrospectively adjusted our financial statements.
|
| | | | | | | | | | | |
(In millions) | Amounts Previously Recognized as of Acquisition Date (Provisional) (1) | | Measurement Period Adjustments | | Amounts Recognized as of Acquisition Date (Final as Adjusted) |
Current assets, net of cash and cash equivalents acquired | $ | 662 |
| | $ | (13 | ) | | $ | 649 |
|
Goodwill | 808 |
| | 20 |
| | 828 |
|
Intangible assets | 1,007 |
| | (14 | ) | | 993 |
|
Other long-term assets | 354 |
| | (6 | ) | | 348 |
|
Current liabilities | (489 | ) | | (1 | ) | | (490 | ) |
Current portion of long-term debt | (1,735 | ) | | — |
| | (1,735 | ) |
Other long-term liabilities | (338 | ) | | 16 |
| | (322 | ) |
Other stockholders' equity | (25 | ) | | (2 | ) | | (27 | ) |
Net assets acquired, less cash and cash equivalents | $ | 244 |
| | $ | — |
| | $ | 244 |
|
| |
(1) | As previously reported in our Form 10-K for the year ended March 31, 2011. |
Included in the purchase price allocation are acquired identifiable intangibles of $993 million, the fair value of which was determined by applying the income approach, using several unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 inputs under the fair value measurement and disclosure guidance. Acquired intangible assets primarily consist of $721 million of service agreements and $185 million of customer lists. The estimated weighted average lives of the service agreements, customer lists and total acquired intangible assets are 18 years, 10 years and 16 years. The fair value of the debt acquired was determined primarily by using Level 2 inputs. Refer to Financial Note 14, “Debt and Financing Activities,” for additional information on the assumption and redemption of acquired debt. The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill, which primarily reflects the expected future benefits to be realized upon integrating the business. This goodwill is not expected to be deductible for tax purposes.
During the last three years, we also completed a number of other smaller acquisitions within both of our operating segments. Financial results for our business acquisitions have been included in our consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition.
We incurred the following acquisition expenses and related adjustments:
|
| | | | | | | | | | | |
| Years Ended March 31, |
(In millions) | 2013 | | 2012 | | 2011 |
Operating Expenses | | | | | |
Transaction closing expenses | $ | 16 |
| | $ | 3 |
| | $ | 22 |
|
Restructuring, severance and relocation | 31 |
| | 6 |
| | 9 |
|
Other integration related expenses | 25 |
| | 22 |
| | 12 |
|
Gain on business combination | (81 | ) | | — |
| | — |
|
Total | (9 | ) | | 31 |
| | 43 |
|
Other Income: reimbursement of post-acquisition interest expense from former US Oncology shareholders | — |
| | — |
| | (16 | ) |
Interest Expense: bridge loan fees | 11 |
| | — |
| | 25 |
|
Total Acquisition Expenses and Related Adjustments | $ | 2 |
| | $ | 31 |
| | $ | 52 |
|
The acquisition expenses and related adjustments by segment is as follows:
|
| | | | | | | | | | | |
| Years Ended March 31, |
(In millions) | 2013 | | 2012 | | 2011 |
Operating Expenses | | | | | |
Distribution Solutions | $ | 47 |
| | $ | 24 |
| | $ | 41 |
|
Technology Solutions | 8 |
| | 6 |
| | — |
|
Corporate | (64 | ) | | 1 |
| | 2 |
|
Total | (9 | ) | | 31 |
| | 43 |
|
Corporate - Other Income | — |
| | — |
| | (16 | ) |
Corporate - Interest Expense | 11 |
| | — |
| | 25 |
|
Total Acquisition Expenses and Related Adjustments | $ | 2 |
| | $ | 31 |
| | $ | 52 |
|
Acquisition expenses and related adjustments incurred in 2013 were primarily related to our acquisition of PSS World Medical and our gain on business combination from our acquisition of the remaining 50% ownership interest in our corporate headquarters building. Expenses for 2012 and 2011 were primarily incurred to acquire and integrate US Oncology. Additional acquisition-related expenses are expected to be incurred as we integrate our businesses.
Goodwill recognized for our business acquisitions is generally not expected to be deductible for tax purposes. However, if we acquire the assets of a company, the goodwill may be deductible for tax purposes. The pro forma results of operations for our business acquisitions and the results of operations for these acquisitions since the acquisition date have not been presented because the effects were not material to the consolidated financial statements on either an individual or an aggregate basis.
