Acquisitions

6 Months Ended

Jun. 28, 2019

NOTE 2. ACQUISITIONS

For a description of our material acquisition activity refer to Note 3 of our 2018 Annual Report on Form 10-K.

We continually evaluate potential mergers, acquisitions and divestitures that align with our strategy and expedite the evolution of our portfolio of businesses into new and attractive areas. We have completed a number of acquisitions that have been accounted for as purchases and resulted in the recognition of goodwill in our financial statements. This goodwill arises because the purchase price for each acquired business reflects a number of factors including the complimentary fit, acceleration of our strategy and synergies the business brings with respect to our existing operations, the future earnings and cash flow potential of the business, the potential to add other strategically complimentary acquisitions to the acquired business, the scarce or unique nature of the business in its markets, competition to acquire the business, the valuation of similar businesses in the marketplace (as reflected in a multiple of revenues, earnings or cash flows) and the avoidance of the time and costs which would be required (and the associated risks that would be encountered) to enhance our existing offerings to key target markets and develop new and profitable businesses.

We make an initial allocation of the purchase price at the date of acquisition based on our understanding of the fair value of the acquired assets and assumed liabilities. We obtain this information during due diligence and through other sources. In the months after closing, as we obtain additional information about these assets and liabilities, including through tangible and intangible asset appraisals, and learn more about the newly acquired business, we are able to refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date are considered for subsequent adjustment. We are in the process of obtaining valuations of certain acquired assets and evaluating the tax impact of certain acquisitions. We make appropriate adjustments to purchase price allocations prior to completion of the applicable measurement period, as required.

During the six months ended June 28, 2019, we recorded certain adjustments to the preliminary purchase price allocation of acquisitions that closed during 2018 resulting in a net increase to goodwill of $40.4 million.

Completed Acquisitions in 2019

Advanced Sterilization Products

On April 1, 2019 (the “Principal Closing Date”), we acquired the advanced sterilization products business (“ASP”) of Johnson & Johnson, a New Jersey corporation (“Johnson & Johnson”) for an aggregate purchase price of $2.7 billion (the “Transaction”), subject to certain post-closing adjustments set forth in a Stock and Asset Purchase Agreement, dated effective as of June 6, 2018 (the “Purchase Agreement”), between the Company and Ethicon, Inc., a New Jersey corporation (“Ethicon”) and a wholly owned subsidiary of Johnson & Johnson. ASP engages in the research, development, manufacture, marketing, distribution and sale of low-temperature terminal sterilization and high-level disinfection products. ASP generated annual revenues of approximately $800 million in 2018.

On the Principal Closing Date, we paid $2.7 billion in cash and obtained the transferred assets and assumed liabilities in 20 countries (“Principal Countries”), general patent and trademark assignments, and all transferred equity interests in ASP. ASP has operations in an additional 39 countries (“Non-Principal Countries”). The assets and liabilities associated with these operations will close when requirements of country-specific agreements or regulatory approvals are satisfied.

The $2.7 billion purchase price was paid in exchange for ASP’s businesses in both Principal and Non-Principal Countries. As of June 28, 2019, we have closed 20 Principal Countries and 3 Non-Principal Countries that, in aggregate, accounted for approximately 96% of the preliminary valuation of ASP. The remaining Non-Principal Countries represent approximately 4% of the preliminary valuation of ASP, or $105.1 million, which is included as a prepaid asset in Other assets in the Condensed Consolidated Balance Sheet. As each Non-Principal Country closes, we will reduce the prepaid asset and record the fair value of the assets acquired and liabilities assumed. All of the provisional goodwill associated with the Transaction is included in goodwill at June 28, 2019; the majority of the provisional goodwill is tax deductible.

In addition, the Company entered into a transition services agreement with Johnson & Johnson for certain administrative and operational services, and distribution agreements in the Non-Principal Countries. Under the distribution agreements, ASP will sell finished goods to Ethicon at prices agreed by the parties. ASP will recognize these sales as revenue when the conditions for revenue recognition are met. Following the sale of finished goods by ASP, Ethicon obtains title of the finished goods, has full authority to sell and market the finished goods to end customers as it sees fit, and retains any revenue and profit from sale.

The following table summarizes the provisional fair value estimates of the assets acquired and liabilities assumed of Principal Countries that have been transferred to ASP as of June 28, 2019; we did not acquire accounts receivable or accounts payable from Johnson & Johnson:



	Advanced Sterilization Products
Inventory	$	164.2
Property, plant and equipment	45.2
Goodwill	1,299.9
Other intangible assets, primarily customer relationships, trade names and technology	1,149.0
Other assets and liabilities, net	(63.4		)
Total consideration allocated to Principal Countries	2,594.9
Prepaid acquisition asset related to Non-Principal Countries	105.1
Net cash consideration	$	2,700.0

Revenue and operating loss attributable to ASP for the three months ended June 28, 2019 were $164.9 million and $63.9 million, respectively, and are included in our Professional Instrumentation segment. Operating losses include amortization of intangible assets and transaction costs associated with the Transaction. We incurred approximately $25 million and $51 million of pretax transaction-related costs recorded in selling, general, and administrative expenses for the three and six months ended June 28, 2019, respectively, which were primarily for banking fees, legal fees and amounts paid to other third-party advisers.

Other Acquisition

In addition to the ASP acquisition, we acquired one business during 2019, in the second quarter, for $537.1 million in cash, net of cash acquired. The business acquired complements an existing unit of our Professional Instrumentation segment. The aggregate annual sales of this business in 2018 were approximately $63 million. We incurred approximately $2.9 million of pretax transaction-related costs recorded in selling, general, and administrative expenses for the three and six months ended June 28, 2019, which were primarily for banking fees, legal fees, and amounts paid to other third-party advisers. The goodwill associated with this acquisition is not tax deductible. The revenue and operating profit from this acquisition included in our results during the three and six months ended June 28, 2019 was immaterial.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:



Accounts receivable	$	14.7
Property, plant and equipment	1.8
Goodwill	265.8
Other intangible assets	304.3
Other assets and liabilities, net	(49.5		)
Net cash consideration	$	537.1

Pro Forma Financial Information

The pro forma information for the periods set forth below gives effect to the acquisitions made in 2019 and 2018 as if they had occurred on January 1, 2018. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time ($ in millions except per share amounts):



	Three Months Ended				Six Months Ended
	June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Sales	$	1,894.5	$	1,907.6	$	3,737.1	$	3,699.2
Net earnings	$	226.1	$	151.7	$	388.7	$	287.3
Diluted net earnings per share	$	0.67	$	0.43	$	1.14	$	0.81