Baxter International Inc 8-K, filed Nov 15, 2021
Baxter International Inc (BAX)
8-K
2021-11-15
For: 2021-11-15
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Added on
April 11, 2026
About this 8-K
Baxter International Inc filed this 8-K on November 15, 2021.
Items reported
- Item 7.01: Regulation FD disclosure
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 15, 2021
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Item 7.01 Regulation FD Disclosure.
As previously announced, on September 1, 2021, Baxter International Inc. (“Baxter”) entered into a definitive merger agreement with Hill-Rom Holdings, Inc. (“Hillrom”), pursuant to which Baxter will acquire Hillrom for cash consideration of $156.00 per share of Hillrom common stock for a total equity value of approximately $10.4 billion. The merger is currently expected to close by early 2022, subject to the satisfaction or waiver of the closing conditions specified in the merger agreement.
Baxter is furnishing as Exhibit 99.1 to this Current Report on Form 8-K the unaudited pro forma condensed combined financial statements of Baxter and Hillrom as of and for the nine months ended September 30, 2021 and the year ended December 31, 2020.
The information in this Current Report on Form 8-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (as amended, the “Exchange Act”) or otherwise subject to the liabilities of that Section, and shall not be or be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, regardless of any general incorporation language in such filing.
Forward-Looking Statements
This communication includes “forward-looking statements” within the meaning of within the meaning of the federal securities laws. Use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent Baxter’s current judgment about possible future events.
These forward-looking statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that Baxter believes are appropriate in the circumstances. While these statements represent our judgment on what the future may hold, and Baxter believes these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond Baxter’s control: conditions to the consummation of the merger, including Hillrom’s shareholder approval of the merger, may not be satisfied or the regulatory approvals required for the merger may not be obtained on the terms expected or on the anticipated schedule; successful integration of Hillrom with Baxter and the realization of anticipated benefits of the merger (including anticipated synergies and net leverage targets) within the expected timeframes or at all; the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement between the parties to the merger; potential adverse reactions to the Hillrom acquisition by the company or Hillrom’s strategic partners; demand for and market acceptance risks for and competitive pressures related to new and existing products (including challenges with Baxter’s ability to accurately predict these pressures and the resulting impact on customer inventory levels and the impact of reduced hospital admission rates and elective surgery volumes), and the impact of those products on quality and patient safety concerns; product development risks, including any delays in required regulatory approvals, satisfactory clinical performance, the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle; Baxter’s ability to finance and develop new products or enhancements on commercially acceptable terms or at all; Baxter’s ability to identify business development and growth opportunities and to successfully execute on business development strategies (including the proposed acquisition of Hillrom); product
quality or patient safety issues, leading to product recalls, withdrawals, launch delays, warning letters, import bans, sanctions, seizures, litigation or declining sales; the impact of global economic conditions (including potential trade wars) and continuing public health crises, pandemics and epidemics, such as the COVID-19 pandemic, including related resurgences, on us and Baxter’s employees, customers and suppliers, including foreign governments in countries in which we operate; the continuity, availability and pricing of acceptable raw materials and component supply, and the related continuity of Baxter’s manufacturing and distribution (including the impacts from COVID-19); inability to create additional production capacity in a timely manner or the occurrence of other manufacturing, sterilization or supply difficulties (including as a result of natural disaster, public health crises and epidemics/pandemics, regulatory actions or otherwise); breaches or failures of Baxter’s information technology systems or products, including by cyber-attack, data leakage, unauthorized access or theft (as a result of increased remote working arrangements or otherwise); future actions of (or failures to act or delays in acting by) the U.S. Food and Drug Administration, the European Medicines Agency or any other regulatory body or government authority (including the U.S. Securities and Exchange Commission (“SEC”), the U.S. Department of Justice or the Attorney General of any State) that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, monetary sanctions or criminal or civil liabilities, including the SEC’s investigation of the misstatements in previously reported non-operating income related to foreign exchange gains and losses or the continued delay in lifting the warning letter at Baxter’s Ahmedabad facility; failures with respect to Baxter’s quality, compliance or ethics programs; future actions of third parties, including third-party payers, the impact of healthcare reform and its implementation, suspension, repeal, replacement, amendment, modification and other similar actions undertaken by the United States or foreign governments, including with respect to pricing, reimbursement, taxation and rebate policies; legislation, regulation and other governmental pressures in the United States or globally, including the cost of compliance and potential penalties for purported noncompliance thereof, all of which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of Baxter’s business, including new or amended laws, rules and regulations (such as the California Consumer Privacy Act of 2018, the European Union’s General Data Protection Regulation and proposed regulatory changes of the U.S. Department of Health and Human Services in kidney health policy and reimbursement, which may substantially change the U.S. end stage renal disease market and demand for Baxter’s peritoneal dialysis products, necessitating significant multi-year capital expenditures, which are difficult to estimate in advance); the outcome of pending or future litigation, including the opioid litigation and current or future ethylene oxide litigation; failure to achieve Baxter’s long-term financial improvement goals; the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies; global regulatory, trade and tax policies; the ability to protect or enforce Baxter’s owned or in-licensed patent or other proprietary rights (including trademarks, copyrights, trade secrets and know-how) or patents of third parties preventing or restricting Baxter’s manufacture, sale or use of affected products or technology; the impact of any goodwill or other intangible asset impairments on Baxter’s operating results; any failure by Shire plc (“Shire”) or Baxalta Incorporated (“Baxalta”) to satisfy their obligations under the separation agreements, including the tax matters agreement, or that certain letter agreement entered into with Shire and Baxalta; fluctuations in foreign exchange and interest rates; any changes in law concerning the taxation of income (whether with respect to current or future tax reform), including income earned outside the United States and potential taxes associated with the Base Erosion and Anti-Abuse Tax; actions by tax authorities in connection with ongoing tax audits; loss of key employees or inability to identify and recruit new employees; and those factors identified in Baxter’s filings with the SEC, including those factors described under the caption “Item 1A. Risk Factors” in Baxter’s Annual Report on Form 10-K for the year ended December 31, 2020 and Baxter’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021.
Actual results may differ materially from those projected in the forward-looking statements. Baxter does not undertake to update any forward-looking statements, except as required by law.
Item 9.01 Financial Statements and Exhibits.
(d)Exhibits.
| Exhibit Number | Description | |||||||
| 99.1 | ||||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: November 15, 2021
| BAXTER INTERNATIONAL INC. | ||||||||
| By: | /s/ James K. Saccaro | |||||||
| Name: | James K. Saccaro | |||||||
| Title: | Executive Vice President and | |||||||
| Chief Financial Officer | ||||||||
Exhibit 99.1
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On September 2, 2021, Baxter International Inc. (we or our) announced that we have entered into a definitive agreement to acquire all of the outstanding equity interests of Hill-Rom Holdings, Inc. (Hillrom) for total cash consideration of approximately $10.4 billion. Including the assumption of Hillrom's outstanding debt obligations, the enterprise value of the transaction will be approximately $12.5 billion. Under the terms of the transaction agreement, Hillrom shareholders will receive $156.00 in cash for each Hillrom share. The transaction is expected to close by early 2022, subject to the approval of Hillrom shareholders and the satisfaction of customary closing conditions, including regulatory approvals.
The following unaudited pro forma condensed combined financial information has been derived by the application of pro forma adjustments to our historical consolidated financial statements to give effect to the following:
•the completion of the proposed acquisition of Hillrom; and
•debt issuances of approximately $11.8 billion, net of financing costs, to (i) finance the acquisition consideration, (ii) pay certain transaction expenses in connection with the proposed acquisition and (iii) refinance substantially all of Hillrom’s pre-acquisition debt.
The unaudited pro forma condensed combined balance sheet as of September 30, 2021 is presented as if the proposed acquisition and related debt financing transactions had occurred on September 30, 2021. The unaudited pro forma condensed combined statements of income for the nine months ended September 30, 2021 and for the year ended December 31, 2020 are presented as if the proposed acquisition and related debt financing transactions had occurred on January 1, 2020. The unaudited pro forma condensed combined financial information is being provided for illustrative purposes only and does not purport to represent what our results of operations or financial position would have been if the proposed acquisition had occurred on the dates indicated and is not intended to project our results of operations or financial position for any future period.
The proposed acquisition has been accounted for in the unaudited pro forma condensed combined financial information using the acquisition method of accounting with Baxter as the acquirer. Under the acquisition method, the total acquisition price has been preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Acquired goodwill represents the premium that we expect to pay over the acquisition-date fair values of the tangible and intangible assets acquired and the liabilities assumed. Certain current market-based assumptions were used in the preliminary allocation of the acquisition price, which will be updated upon completion of the proposed acquisition. The unaudited pro forma condensed combined financial information does not reflect the costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies, or any revenue or other synergies that may result from the acquisition.
The unaudited pro forma adjustments and primary assumptions are described in the accompanying notes. Those unaudited pro forma adjustments are based on preliminary estimates, available information, and certain assumptions that we believe are reasonable. However, any of the factors underlying the estimates and assumptions used in preparing the unaudited pro forma condensed combined financial information may change or prove to be materially different and may not be representative of facts existing upon finalization of the proposed acquisition.
The unaudited pro forma condensed combined financial information has been derived from and should be read in conjunction with (a) our unaudited condensed consolidated financial statements as of and for the nine months ended September 30, 2021 (included in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021), (b) the audited consolidated financial statements of Hillrom as of and for the years ended September 30, 2021 and 2020 (included in Hillrom’s Annual Report on Form 10-K for the year ended September 30, 2021), (c) our audited consolidated financial statements for the year ended December 31, 2020 (included in our Current Report on Form 8-K (File No. 001-04448) dated April 29,
2021), and (d) the unaudited condensed consolidated financial statements of Hillrom for the three months ended December 31, 2020 (included in Hillrom’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2020).
1
Baxter International Inc. Unaudited Pro Forma Condensed Combined Balance Sheet
As of September 30, 2021
| Transaction Adjustments | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | Historical Baxter | Historical Hillrom | Reclassifications | Debt Financing | Hillrom Acquisition | Note References | Pro Forma Combined | |||||||||||||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 3,258 | $ | 272 | $ | 9,744 | $ | (10,638) | 5a, 5b, 5g, 5i, 5l | $ | 2,636 | |||||||||||||||||||||||||||||||||
| Accounts receivable, net | 2,074 | 671 | 2,745 | |||||||||||||||||||||||||||||||||||||||||
| Inventories | 2,025 | 320 | 175 | 5c | 2,520 | |||||||||||||||||||||||||||||||||||||||
| Prepaid expenses and other current assets | 810 | 101 | (32) | 5d | 879 | |||||||||||||||||||||||||||||||||||||||
| Total current assets | 8,167 | 1,364 | 9,744 | (10,495) | 8,780 | |||||||||||||||||||||||||||||||||||||||
| Property, plant and equipment, net | 4,582 | 288 | 74 | 130 | 4a, 5e | 5,074 | ||||||||||||||||||||||||||||||||||||||
| Goodwill | 3,098 | 2,222 | 5,624 | 5j | 10,944 | |||||||||||||||||||||||||||||||||||||||
| Other intangible assets, net | 1,876 | 955 | (74) | 3,789 | 4a, 5f | 6,546 | ||||||||||||||||||||||||||||||||||||||
| Operating lease right-of-use assets | 581 | 69 | 4b | 650 | ||||||||||||||||||||||||||||||||||||||||
| Deferred income taxes | 32 | (32) | 4c | — | ||||||||||||||||||||||||||||||||||||||||
| Other non-current assets | 1,503 | 138 | (37) | (27) | (405) | 4b, 4c, 5d, 5h, 5l | 1,172 | |||||||||||||||||||||||||||||||||||||
| Total assets | $ | 19,807 | $ | 4,999 | $ | — | $ | 9,717 | $ | (1,357) | $ | 33,166 | ||||||||||||||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||||||||||||||||||||||||||
| Short-term debt | $ | 301 | $ | 235 | $ | (235) | $ | — | 5g | $ | 301 | |||||||||||||||||||||||||||||||||
| Current maturities of long-term debt and finance lease obligations | 209 | 209 | ||||||||||||||||||||||||||||||||||||||||||
| Accounts payable | 999 | 230 | 1,229 | |||||||||||||||||||||||||||||||||||||||||
| Accrued compensation | 182 | (182) | 4d | — | ||||||||||||||||||||||||||||||||||||||||
| Accrued product warranties | 30 | (30) | 4d | — | ||||||||||||||||||||||||||||||||||||||||
| Accrued rebates | 51 | (51) | 4d | — | ||||||||||||||||||||||||||||||||||||||||
| Deferred revenue | 113 | (113) | 4d | — | ||||||||||||||||||||||||||||||||||||||||
| Accrued expenses and other current liabilities | 1,932 | 150 | 376 | (17) | 4d, 5i | 2,441 | ||||||||||||||||||||||||||||||||||||||
| Total current liabilities | 3,441 | 991 | — | (235) | (17) | 4,180 | ||||||||||||||||||||||||||||||||||||||
| Long-term debt and finance lease obligations | 5,446 | 1,825 | 9,952 | — | 5g, 5l | 17,223 | ||||||||||||||||||||||||||||||||||||||
| Accrued pension and postretirement benefits | 74 | (74) | 4e | — | ||||||||||||||||||||||||||||||||||||||||
| Deferred income taxes | 65 | (65) | 4e | — | ||||||||||||||||||||||||||||||||||||||||
| Operating lease liabilities | 484 | 51 | 4f | 535 | ||||||||||||||||||||||||||||||||||||||||
| Other non-current liabilities | 1,621 | 164 | 88 | 627 | 4e, 4f, 5h | 2,500 | ||||||||||||||||||||||||||||||||||||||
| Total liabilities | 10,992 | 3,119 | — | 9,717 | 610 | 24,438 | ||||||||||||||||||||||||||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||||||||||||||||||||||||||
| Equity: | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock | 683 | 4 | (4) | 5k | 683 | |||||||||||||||||||||||||||||||||||||||
| Common stock in treasury | (11,529) | (1,012) | 1,012 | 5k | (11,529) | |||||||||||||||||||||||||||||||||||||||
| Additional contributed capital | 6,131 | 708 | (708) | 5k | 6,131 | |||||||||||||||||||||||||||||||||||||||
| Retained earnings | 16,967 | 2,316 | (2,403) | 5i, 5k | 16,880 | |||||||||||||||||||||||||||||||||||||||
| Accumulated other comprehensive (loss) income | (3,482) | (136) | 136 | 5k | (3,482) | |||||||||||||||||||||||||||||||||||||||
| Total stockholders’ equity | 8,770 | 1,880 | (1,967) | 8,683 | ||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests | 45 | 45 | ||||||||||||||||||||||||||||||||||||||||||
| Total equity | 8,815 | 1,880 | (1,967) | 8,728 | ||||||||||||||||||||||||||||||||||||||||
| Total liabilities and equity | $ | 19,807 | $ | 4,999 | $ | — | $ | 9,717 | $ | (1,357) | $ | 33,166 | ||||||||||||||||||||||||||||||||
2
Baxter International Inc. Unaudited Pro Forma Condensed Combined Statement of Income
For the Nine Months Ended September 30, 2021
| Transaction Adjustments | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except per share data) | Historical Baxter | Historical Hillrom | Reclassifications | Debt Financing | Hillrom Acquisition | Note References | Pro Forma Combined | |||||||||||||||||||||||||||||||||||||
| Net sales | $ | 9,270 | $ | 2,278 | $ | 11,548 | ||||||||||||||||||||||||||||||||||||||
| Cost of sales | 5,571 | 1,069 | (20) | 139 | 4g, 4j, 6a, 6c | 6,759 | ||||||||||||||||||||||||||||||||||||||
| Gross margin | 3,699 | 20 | — | (139) | 4g | 4,789 | ||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 1,982 | 678 | 123 | 106 | 4g, 4h, 4j, 6a, 6c | 2,889 | ||||||||||||||||||||||||||||||||||||||
| Research and development expenses | 396 | 110 | 1 | 6c | 507 | |||||||||||||||||||||||||||||||||||||||
| Acquisition-related intangible asset amortization | 83 | (83) | 4g | — | ||||||||||||||||||||||||||||||||||||||||
| Special charges | 20 | (20) | 4h | — | ||||||||||||||||||||||||||||||||||||||||
| Other operating income, net | (6) | (6) | ||||||||||||||||||||||||||||||||||||||||||
| Operating income | 1,327 | 318 | — | (246) | 1,399 | |||||||||||||||||||||||||||||||||||||||
| Interest expense, net | 118 | 48 | 253 | 6e | 419 | |||||||||||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | 10 | (10) | 4i | — | ||||||||||||||||||||||||||||||||||||||||
| Other expense, net | 15 | 29 | 10 | 4i | 54 | |||||||||||||||||||||||||||||||||||||||
| Income before income taxes | 1,194 | 231 | — | (253) | (246) | 926 | ||||||||||||||||||||||||||||||||||||||
| Income tax expense | 141 | 41 | (56) | (62) | 6f | 64 | ||||||||||||||||||||||||||||||||||||||
| Net income | 1,053 | 190 | (197) | (184) | 862 | |||||||||||||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | 7 | — | 7 | |||||||||||||||||||||||||||||||||||||||||
| Net income attributable to Baxter stockholders | $ | 1,046 | $ | 190 | $ | (197) | $ | (184) | $ | 855 | ||||||||||||||||||||||||||||||||||
| Net income per common share | ||||||||||||||||||||||||||||||||||||||||||||
| Basic | $ | 2.08 | $ | 1.70 | ||||||||||||||||||||||||||||||||||||||||
| Diluted | $ | 2.06 | $ | 1.68 | ||||||||||||||||||||||||||||||||||||||||
| Weighted-average number of common shares outstanding | ||||||||||||||||||||||||||||||||||||||||||||
| Basic | 503 | 503 | ||||||||||||||||||||||||||||||||||||||||||
| Diluted | 509 | 509 | ||||||||||||||||||||||||||||||||||||||||||
3
Baxter International Inc. Unaudited Pro Forma Condensed Combined Statement of Income
For the Year Ended December 31, 2020
| Transaction Adjustments | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except per share data) | Historical Baxter | Historical Hillrom (Note 2) | Reclassifications | Debt Financing | Hillrom Acquisition | Note References | Pro Forma Combined | |||||||||||||||||||||||||||||||||||||
| Net sales | $ | 11,673 | $ | 2,881 | $ | — | $ | — | $ | — | $ | 14,554 | ||||||||||||||||||||||||||||||||
| Cost of sales | 7,086 | 1,406 | (32) | — | 368 | 4g, 4j, 6a, 6b, 6c | 8,828 | |||||||||||||||||||||||||||||||||||||
| Gross margin | 4,587 | 32 | — | (368) | 4g | 5,726 | ||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 2,469 | 820 | 182 | — | 339 | 4g, 4h, 4j, 6a, 6c, 6d | 3,810 | |||||||||||||||||||||||||||||||||||||
| Research and development expenses | 521 | 137 | — | — | 1 | 6c | 659 | |||||||||||||||||||||||||||||||||||||
| Acquisition-related intangible asset amortization | — | 109 | (109) | — | — | 4g | — | |||||||||||||||||||||||||||||||||||||
| Special charges | — | 41 | (41) | — | — | 4h | — | |||||||||||||||||||||||||||||||||||||
| Other operating income, net | (19) | — | — | — | — | (19) | ||||||||||||||||||||||||||||||||||||||
| Operating income | 1,616 | 368 | — | — | (708) | 1,276 | ||||||||||||||||||||||||||||||||||||||
| Interest expense, net | 134 | 74 | — | 406 | — | 6e | 614 | |||||||||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | — | 16 | (16) | — | — | 4i | — | |||||||||||||||||||||||||||||||||||||
| Other expense, net | 190 | 7 | 16 | — | — | 4i | 213 | |||||||||||||||||||||||||||||||||||||
| Income before income taxes | 1,292 | 271 | — | (406) | (708) | 449 | ||||||||||||||||||||||||||||||||||||||
| Income tax expense (benefit) | 182 | 48 | — | (91) | (172) | 6f | (33) | |||||||||||||||||||||||||||||||||||||
| Net income | 1,110 | 223 | — | (315) | (536) | 482 | ||||||||||||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | 8 | — | — | — | — | 8 | ||||||||||||||||||||||||||||||||||||||
| Net income attributable to Baxter stockholders | $ | 1,102 | $ | 223 | $ | — | $ | (315) | $ | (536) | $ | 474 | ||||||||||||||||||||||||||||||||
| Net income per common share | ||||||||||||||||||||||||||||||||||||||||||||
| Basic | $ | 2.17 | $ | 0.93 | ||||||||||||||||||||||||||||||||||||||||
| Diluted | $ | 2.13 | $ | 0.92 | ||||||||||||||||||||||||||||||||||||||||
| Weighted-average number of common shares outstanding | ||||||||||||||||||||||||||||||||||||||||||||
| Basic | 509 | 509 | ||||||||||||||||||||||||||||||||||||||||||
| Diluted | 517 | 517 | ||||||||||||||||||||||||||||||||||||||||||
4
Note 1 - Description of the Transaction
On September 2, 2021, we announced that we have entered into a definitive agreement to acquire all of the outstanding equity interests of Hillrom for total cash consideration of approximately $10.4 billion. Including the assumption of Hillrom's outstanding debt obligations, the enterprise value of the transaction will be approximately $12.5 billion. Under the terms of the transaction agreement, Hillrom shareholders will receive $156.00 in cash for each Hillrom share. The transaction is expected to close by early 2022, subject to the approval of Hillrom shareholders and the satisfaction of customary closing conditions, including regulatory approvals. Upon completion of the proposed acquisition, Hillrom would become a wholly owned subsidiary of us.
We expect to fund the cash portion of the transaction with any combination of cash on hand, borrowings under credit facilities and the proceeds from the sale of debt securities. On September 1, 2021, we entered into a bridge facility commitment letter with JPMorgan Chase Bank, N.A. (JP Morgan) and Citigroup Global Markets Inc. (Citi) pursuant to which JP Morgan and Citi committed to provide a 364-day senior unsecured bridge term loan facility in an aggregate principal amount of $11.4 billion (the Bridge Facility) for the purpose of funding the consideration for the Hillrom acquisition, refinancing certain indebtedness of Hillrom, and paying fees and expenses related to the foregoing. Loans under the Bridge Facility will bear interest at variable rates, will be due 364 days after the loan is issued and contain various covenants, including a maximum net leverage ratio. The Bridge Facility included upfront fees of $40 million that will increase to $53 million if the Bridge Facility is not terminated within 120 days of the date the Bridge Facility was executed. The commitments in respect of the Bridge Facility were syndicated to additional financial institutions on September 30, 2021.
Undrawn commitments in respect of the Bridge Facility will be subject to a ticking fee commencing on the later of (x) the date that definitive documentation with respect to the Bridge Facility is executed and (y) November 30, 2021 at a rate per annum equal to 0.125%. Loans under the Bridge Facility, if funded, will bear interest at variable rates, will be due 364 days after the initial funding of such loans and contain various covenants, including a maximum net leverage ratio. In addition, loans drawn under the Bridge Facility will be subject to a duration fee equal to (i) 0.5% of the outstanding loans on the 90th day after the initial funding of such loans, (ii) 0.75% of the outstanding loans on the 180th day after the initial funding of such loans and (iii) 1% of the outstanding loans on the 270th day after the initial funding of such loans.
On September 30, 2021, we entered into a term loan credit agreement (the Term Loan Credit Agreement), pursuant to which a syndicate of financial institutions has committed to provide us with a senior unsecured term loan facility in an aggregate principal amount of $4.0 billion (the Term Loan Facility), consisting of a $2.0 billion three-year term loan and a $2.0 billion five-year term loan. Loans under the Term Loan Facility will be available on the closing date of the Hillrom acquisition to fund the consideration for the Hillrom acquisition, refinance certain indebtedness of Hillrom, and pay fees and expenses related to the foregoing. Loans under the Term Loan Facility will bear interest at variable rates, will be subject to amortization at an annual rate of 0.625% for the first year and 1.25% thereafter (with loans outstanding under the five-year tranche subject to amortization at an annual rate of 1.875% after the second anniversary of the commencement of amortization and 2.500% after the third anniversary of the commencement of amortization). The Term Loan Credit Agreement contains various covenants, including a maximum net leverage ratio. Undrawn commitments under the Term Loan Facility are subject to a ticking fee commencing on November 30, 2021 at a rate per annum equal to 0.125%.
The aggregate principal amount of the commitments under the Term Loan Facility have replaced a corresponding amount under the commitment letter in respect of the Bridge Facility, in accordance with the terms of the commitment letter. As a result, there are now $7.4 billion in bridge facility commitments remaining. We do not intend to draw down on the Bridge Facility and currently expect to replace the
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remaining commitments under the Bridge Facility prior to the closing of the Hillrom transaction with permanent financing that we currently expect will consist of proceeds from the issuance of senior notes.
Note 2 - Basis of Presentation
The unaudited pro forma condensed combined financial information of the combined company is prepared in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP) and Article 11 of Regulation S-X. Our and Hillrom’s historical financial statements were prepared in accordance with U.S. GAAP.
As Hillrom’s fiscal year-end of September 30 is within one quarter of our December 31 fiscal year-end, the pro forma condensed combined statement of income for the year ended December 31, 2020 includes our consolidated statement of income for the year ended December 31, 2020 and Hillrom’s statement of consolidated income for its fiscal year ended September 30, 2020. Additionally, for purposes of presenting the pro forma condensed combined statement of income for the nine months ended September 30, 2021, Hillrom’s results of operations for the nine months ended September 30, 2021 were derived from its statement of consolidated income for the three months ended December 31, 2020 subtracted from its statement of consolidated income for its fiscal year ended September 30, 2021 as follows:
| (in millions) | Year Ended September 30, 2021 | Less: Three Months Ended December 31, 2020 | Nine Months Ended September 30, 2021 | |||||||||||||||||
| Net sales | $ | 3,019 | $ | 741 | $ | 2,278 | ||||||||||||||
| Cost of sales | 1,431 | 362 | 1,069 | |||||||||||||||||
| Selling, general and administrative expenses | 887 | 209 | 678 | |||||||||||||||||
| Research and development expenses | 145 | 35 | 110 | |||||||||||||||||
| Acquisition-related intangible asset amortization | 109 | 26 | 83 | |||||||||||||||||
| Special charges | 47 | 27 | 20 | |||||||||||||||||
| Operating profit | 400 | 82 | 318 | |||||||||||||||||
| Interest expense, net | 65 | 17 | 48 | |||||||||||||||||
| Loss on extinguishment of debt | 10 | — | 10 | |||||||||||||||||
| Other expense (income), net | 22 | (7) | 29 | |||||||||||||||||
| Income before income taxes | 303 | 72 | 231 | |||||||||||||||||
| Income tax expense | 54 | 13 | 41 | |||||||||||||||||
| Net income | $ | 249 | $ | 59 | $ | 190 | ||||||||||||||
Note 3 - Accounting Policies
During preparation of the unaudited pro forma condensed combined financial information, we have performed a preliminary analysis comparing the accounting policies, including financial statement classification, of Hillrom to those of us. Except for the financial statement reclassifications described in Note 4, we are not aware of any other material accounting policy differences. Accordingly, the unaudited pro forma condensed combined financial information does not adjust for any material differences in accounting policies between the two companies other than those reclassifications. Following the completion of the proposed acquisition, we will conduct a final review of Hillrom’s accounting policies in order to determine if differences in accounting policies require adjustments or reclassifications to conform to our accounting policies. As a result of this review, we may identify differences that, when conformed, could have a material impact on the unaudited pro forma condensed combined financial information.
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Note 4 - Reclassification of Hillrom historical financial information
Certain reclassifications have been made to Hillrom’s historical financial statements to conform to our presentation, as follows.
Balance Sheet (as of September 30, 2021)
a.Reclassified $74 million of software assets from Other intangible assets, net to Property, plant and equipment, net.
b.Reclassified $69 million of operating lease right-of-use assets from Other non-current assets to Operating lease right-of-use assets.
c.Reclassified $32 million of Deferred income taxes to Other non-current assets.
d.Reclassified $182 million of Accrued compensation, $30 million of Accrued product warranties, $51 million of Accrued rebates and $113 million of Deferred revenue to Accrued expenses and other current liabilities.
e.Reclassified $74 million of Accrued pension and postretirement benefits and $65 million of deferred income taxes to Other non-current liabilities.
f.Reclassified $51 million of operating lease liabilities from Other non-current liabilities to Operating lease liabilities.
Income Statement
g. For the nine months ended September 30, 2021, reclassified $39 million and $44 million of Acquisition-related intangible asset amortization to Cost of sales and Selling, general and administrative expenses, respectively. For the year ended December 31, 2020, reclassified $43 million and $66 million of Acquisition-related intangible asset amortization to Cost of sales and Selling, general and administrative expenses, respectively. Gross margin is not presented for historical Hillrom as acquisition-related intangible asset amortization is presented on a separate financial statement line item and is not allocated to cost of sales.
h. For the nine months ended September 30, 2021, reclassified $20 million of Special charges to Selling, general and administrative expenses. For the year ended December 31, 2020, reclassified $41 million of Special charges to Selling, general and administrative expenses.
i. For the nine months ended September 30, 2021, reclassified a $10 million Loss on extinguishment of debt to Other expense, net. For the year ended December 31, 2020, reclassified a $16 million Loss on extinguishment of debt to Other expense, net.
j. For the nine months ended September 30, 2021, reclassified $59 million of shipping costs included in Cost of sales to Selling, general and administrative expenses. For the year ended December 31, 2020, reclassified $75 million of shipping costs included in Cost of sales to Selling, general and administrative expenses.
Note 5 - Unaudited Pro Forma Condensed Combined Balance Sheet Adjustments
The estimated pro forma adjustments to record assets acquired and liabilities assumed at their fair values are preliminary. The final allocation of the purchase price will be determined at a later date and is dependent on a number of factors, including the final valuation of Hillrom’s tangible and intangible assets acquired and liabilities assumed. The final valuation of assets acquired and liabilities assumed may be materially different than the estimated values assumed in the unaudited pro forma condensed combined financial information.
At this time, we do not have sufficient information necessary to make a reasonable preliminary estimate of the fair value of Hillrom’s operating leases or deferred revenue. Additionally, the fair value adjustment to acquired debt is not expected to be significant. Therefore, no adjustment has been recorded to modify the current book values for these items.
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The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the pro forma acquisition date.
| (in millions) | |||||||||||
| Cash and cash equivalents | $ | 155 | |||||||||
| Accounts receivable | 671 | ||||||||||
| Inventories | 495 | ||||||||||
| Prepaid expenses and other current assets | 69 | ||||||||||
| Property, plant and equipment | 492 | ||||||||||
| Goodwill | 7,846 | ||||||||||
| Other intangible assets | 4,670 | ||||||||||
| Operating lease right-of-use assets | 69 | ||||||||||
| Other non-current assets | 93 | ||||||||||
| Short-term debt | (235) | ||||||||||
| Accounts payable | (230) | ||||||||||
| Accrued expenses and other current liabilities | (526) | ||||||||||
| Long-term debt and finance lease obligations | (1,825) | ||||||||||
| Operating lease liabilities | (51) | ||||||||||
| Other non-current liabilities | (1,276) | ||||||||||
| Total assets acquired and liabilities assumed | $ | 10,417 | |||||||||
(a)Reflects the anticipated cash consideration to be transferred of $10.4 billion, which reflects $156.00 per outstanding Hillrom share based on 67 million Hillrom shares outstanding, including outstanding equity awards under Hillrom’s share-based compensation programs, as of September 30, 2021.
(b)Reflects $117 million of acquisition-related transaction costs expected to be incurred by Hillrom after September 30, 2021. The unaudited pro forma condensed combined balance sheet reflects those costs as a reduction of cash acquired.
(c)Reflects the estimated fair value step-up related to Hillrom’s inventory of $175 million. We will recognize the increased value of inventory in cost of sales as the acquired inventory is sold, which we expect to occur within the first year after acquisition.
(d)Reflects the elimination of Hillrom historical costs of obtaining and fulfilling contracts of $32 million within prepaid expenses and other current assets and $8 million within other non-current assets that were deferred in accordance with Accounting Standards Codification Topic 606.
(e)Reflects the estimated fair value step-up related to Hillrom’s property, plant and equipment of $130 million. We expect to recognize the increased value of property, plant and equipment as additional depreciation expense over the weighted-average estimated useful lives of the assets of 10 years.
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(f)Reflects the estimated fair value adjustment related to the Hillrom intangible assets acquired. Identifiable intangible assets expected to be acquired consist of the following:
| (in millions) | As of September 30, 2021 | |||||||
| Identifiable intangible assets | ||||||||
| Developed technology (estimated 6 year useful life) | $ | 785 | ||||||
| Trade names (estimated 10 year useful life) | 965 | |||||||
| Customer relationships (estimated 15 year useful life) | 2,920 | |||||||
| Estimated fair value of identified intangible assets | 4,670 | |||||||
| Less: historical Hillrom intangible assets | 881 | |||||||
| Pro forma adjustment for estimated fair value of identifiable intangible assets | $ | 3,789 | ||||||
(g)Reflects the elimination of pre-acquisition debt of Hillrom of $2.0 billion that we expect to refinance at closing or shortly thereafter.
(h)Reflects the estimated adjustments to deferred income taxes of $1.0 billion resulting from fair value adjustments to acquired assets related to acquisition accounting. Additionally, we reclassified our pre-acquisition net deferred tax asset in the U.S. of $397 million from other non-current assets to other non-current liabilities as we expect the deferred taxes recorded as a result of the Hillrom acquisition will result in a net deferred tax liability in that jurisdiction.
(i)Reflects $87 million of acquisition-related transaction costs expected to be incurred by us after September 30, 2021. The unaudited pro forma condensed combined balance sheet reflects those costs as a reduction of cash with a corresponding decrease to retained earnings. Additionally, the unaudited pro forma condensed combined balance sheet reflects an additional $17 million of acquisition-related transaction costs that were accrued in accrued expenses and other current liabilities as of September 30, 2021 as a reduction of cash.
(j)Goodwill is calculated as the difference between the fair value of the consideration expected to be transferred and the values assigned to the tangible and identifiable intangible assets acquired and liabilities assumed. The estimated increase to goodwill is as follows:
| (in millions) | As of September 30, 2021 | |||||||
| Goodwill | $ | 7,846 | ||||||
| Less: historical Hillrom goodwill | 2,222 | |||||||
| Pro forma adjustment | $ | 5,624 | ||||||
(k)Reflects the elimination of Hillrom historical common stock, additional contributed capital, accumulated other comprehensive income, common stock in treasury and retained earnings.
(l)We expect to fund the cash portion of the transaction with any combination of cash on hand, including existing cash of $3.3 billion, borrowings under our credit facilities and the net proceeds from the sale of debt securities. For purposes of the unaudited pro forma condensed combined financial information, it is assumed that $7.4 billion of commitments available under the 364-day Bridge Facility, $4.0 billion of commitments available under the Term Loan Facility and $450 million of commitments available under our U.S. dollar-denominated revolving credit facility will be drawn, less applicable unpaid issuance fees of $60 million as of September 30, 2021. We do not intend to draw down on the Bridge Facility or our U.S. dollar-denominated revolving credit facility and currently expect to replace the remaining commitments under the Bridge Facility prior to the closing of the Hillrom transaction with permanent financing that we currently expect will consist of proceeds from the issuance of senior notes. The unaudited pro forma condensed combined balance sheet presents
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borrowings under the Term Loan Facility as long-term debt based on contractual maturity dates. The unaudited pro forma condensed combined balance sheet presents borrowings under the Bridge Facility and the U.S. dollar-denominated revolving credit facility as long-term debt under the assumption that we have the intent and ability to replace the Bridge Facility and borrowings under the U.S. dollar-denominated revolving credit facility with long-term debt financing (including through the issuance of senior notes). The unaudited pro forma condensed combined balance sheet also reflects the reclassification of unamortized issuance fees incurred as of September 30, 2021 of $27 million related to the Bridge Facility and Term Loan Facility that were presented as other non-current assets to a reduction in the carrying value of the related debt obligations. The unaudited pro forma condensed combined financial information does not reflect any potential future cash generated by us subsequent to September 30, 2021 through the expected completion date of the acquisition. As such, the actual amount of debt incurred could differ from the amount of debt reflected in the unaudited pro forma condensed combined financial information.
Note 6 - Unaudited Pro Forma Condensed Combined Statements of Earnings Adjustments
(a) To record estimated pro forma amortization expense on definite-lived intangible assets. Pro forma amortization has been estimated on a preliminary basis using the straight-line method over their estimated useful lives and is as follows:
| (in millions) | For the nine months ended September 30, 2021 | For the year ended December 31, 2020 | ||||||||||||
| Estimated amortization of acquired definite-lived intangible assets | $ | 317 | $ | 422 | ||||||||||
| Less: historical Hillrom definite-lived intangible amortization | 83 | 109 | ||||||||||||
| Pro forma adjustments | $ | 234 | $ | 313 | ||||||||||
The weighted-average estimated useful life for acquired definite-lived intangible assets is 12 years. A five percent (5%) increase or decrease in the fair value of definite-lived identifiable intangible assets would increase or decrease amortization by approximately $16 million for the nine months ended September 30, 2021 and approximately $21 million for the year ended December 31, 2020. The incremental amortization expense was allocated to the unaudited pro forma condensed combined statements of income as follows:
| (in millions) | For the nine months ended September 30, 2021 | For the year ended December 31, 2020 | ||||||||||||
| Cost of sales | $ | 132 | $ | 184 | ||||||||||
| Selling, general and administrative expenses | 102 | 129 | ||||||||||||
| Pro forma adjustments | $ | 234 | $ | 313 | ||||||||||
(b) Represents the estimated increase to cost of sales of $175 million from inventory step-ups. We will recognize the increased value of inventory in cost of sales as the acquired inventory is sold, which for purposes of these unaudited pro forma condensed combined financial statements is expected to occur within the first year after acquisition. We do not expect the inventory step-up to affect our income statement beyond 12 months after the acquisition date.
(c) Represents incremental depreciation expense of $12 million for the nine months ended September 30, 2021 and $16 million for the year ended December 31, 2020 related to the fair value step-up on acquired property, plant and equipment. The incremental depreciation expense was allocated to the unaudited pro forma condensed combined statements of income as follows:
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| (in millions) | For the nine months ended September 30, 2021 | For the year ended December 31, 2020 | ||||||||||||
| Cost of sales | $ | 7 | $ | 9 | ||||||||||
| Selling, general and administrative expenses | 4 | 6 | ||||||||||||
| Research and development expenses | 1 | 1 | ||||||||||||
| Pro forma adjustments | $ | 12 | $ | 16 | ||||||||||
(d) Represents additional transaction costs of $87 million that we currently expect to incur after September 30, 2021 and $117 million of transaction costs Hillrom currently expects to incur after September 30, 2021. These costs will not affect our income statement beyond 12 months after the acquisition date.
(e) Represents additional interest expense resulting from the incremental debt issuances as follows:
| (in millions) | For the nine months ended September 30, 2021 | For the year ended December 31, 2020 | ||||||||||||
| Estimated interest expense on new debt issuances | $ | 301 | $ | 480 | ||||||||||
| Less: historical Hillrom interest expense | 48 | 74 | ||||||||||||
| Pro forma adjustments | $ | 253 | $ | 406 | ||||||||||
For pro forma purposes, interest expense, including amortization of upfront fees, is calculated based on contractual terms under the Bridge Facility, the Term Loan Facility and our U.S. dollar-denominated revolving credit facility, which assume LIBOR plus an applicable margin, resulting in a weighted-average interest rate of 4%. A 1/8% change in the variable interest rate would result in a change in total interest expense of $11 million for the nine months ended September 30, 2021 and $15 million for the year ended December 31, 2020.
We do not intend to draw down on the Bridge Facility or our U.S. dollar-denominated revolving credit facility and currently expect to replace the remaining commitments under the Bridge Facility prior to the closing of the Hillrom transaction with permanent financing that we currently expect will consist of proceeds from the issuance of senior notes. However, there are no assurances that we will be able to do so, as any such financings would be subject to prevailing market conditions at that time.
(f) Statutory tax rates were applied, as appropriate, to each acquisition and financing adjustment based on the jurisdiction in which the adjustment is expected to occur. In situations in which jurisdictional detail was not available, a weighted-average statutory rate of 25 percent was applied to the adjustment. The total effective tax rate of the combined company could be significantly different depending on the post-acquisition geographical mix of income and other factors.
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