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Business Combinations | 9 Months Ended
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Aug. 02, 2019
Business Combinations [Abstract] |
Business Combinations | Business Combinations The Charles Machine Works, Inc. On April 1, 2019 ("closing date"), pursuant to the Agreement and Plan of Merger dated February 14, 2019 ("merger agreement"), the company completed the acquisition of CMW, a privately held Oklahoma corporation. CMW designs, manufactures, and sells a range of professional products to serve the underground construction market, including horizontal directional drills, walk and ride trenchers, utility loaders, vacuum excavators, asset locators, pipe rehabilitation solutions, and after-market tools. CMW provides innovative product offerings that broaden and strengthen the company's Professional segment product portfolio and expands its dealer network, while also providing a complementary geographic manufacturing footprint. The transaction was structured as a merger, pursuant to which a wholly-owned subsidiary of the company merged with and into CMW, with CMW continuing as the surviving entity and a wholly-owned subsidiary of the company. As a result of the merger, all of the outstanding equity securities of CMW were canceled and now only represent the right to receive the applicable consideration as described in the merger agreement. The preliminary aggregate merger consideration was $679.3 million ("purchase price"), and remains subject to customary adjustments based on, among other things, the amount of actual cash, debt and working capital in the business of CMW at the closing date. Such customary adjustments are expected to be completed during fiscal 2019. The company funded the preliminary purchase price for the acquisition by using a combination of cash proceeds from the issuance of borrowings under the company's unsecured senior term loan credit agreement and borrowings from the company's unsecured senior revolving credit facility. For additional information regarding the financing agreements utilized to fund the purchase price, refer to Note 6, Indebtedness. The company has incurred approximately $0.5 million and $10.2 million of acquisition-related transaction costs during the three and nine month periods ended August 2, 2019, respectively. These acquisition-related transaction costs are recorded within selling, general and administrative expense within the Condensed Consolidated Statements of Earnings. Preliminary Purchase Price Allocation The company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the total preliminary purchase price was allocated to the acquired net tangible and intangible assets of CMW based on their fair values as of the closing date. The company believes that the information available as of the closing date provides a reasonable basis for estimating the fair values of the assets acquired and liabilities assumed; however, the company is continuing to finalize these amounts, particularly with respect to income taxes and valuations of inventories, fixed assets, and intangible assets. Thus, the preliminary measurements of fair value reflected are subject to change as additional information becomes available and as additional analysis is performed. The company expects to finalize the valuation and complete the allocation of the purchase price as soon as practicable, but no later than one year from the closing date of the acquisition, as required. The following table summarizes the allocation of the preliminary purchase price to the values assigned to the CMW assets acquired and liabilities assumed. These values are based on internal company and independent external third-party valuations and are subject to change as certain asset and liability valuations are finalized:
(Dollars in thousands) |  | April 1, 2019
Cash and cash equivalents |  | $ | 16,341 |
Receivables |  | 65,674 |
Inventories |  | 242,594 |
Prepaid expenses and other current assets |  | 9,218 |
Property, plant and equipment |  | 142,405 |
Goodwill |  | 154,040 |
Other intangible assets |  | 227,280 |
Other long-term assets |  | 7,971 |
Accounts payable |  | (36,655 | )
Accrued liabilities |  | (46,866 | )
Deferred income tax liabilities |  | (79,628 | )
Other long-term liabilities |  | (6,709 | )
Total fair value of net assets acquired |  | 695,665 |
Less: cash and cash equivalents acquired |  | (16,341 | )
Total purchase price |  | $ | 679,324 |
The goodwill recognized is primarily attributable to the value of the workforce, the reputation of CMW and its family of brands, customer and dealer growth opportunities, and expected synergies. Key areas of expected cost synergies include increased purchasing power for commodities and component parts, supply chain consolidation, and administrative efficiencies. The goodwill resulting from the acquisition of CMW was recognized within the company's Professional segment and increased Professional segment goodwill to $368.6 million as of August 2, 2019 from $214.8 million as of October 31, 2018. Goodwill is expected to be mostly non-deductible for tax purposes. As permitted under the accounting standards codification guidance for business combinations, the company recorded a change in the carrying amount of goodwill for the three months ended August 2, 2019 as a result of purchase accounting adjustments primarily related to changes in the preliminary fair value calculations of acquired trade name intangible assets of $5.7 million, other long-term assets of $5.0 million, and deferred income tax liabilities of $4.1 million. Such purchase accounting adjustments did not have a material impact on the company's Condensed Consolidated Statements of Earnings for the three and nine month periods ended August 2, 2019. Other Intangible Assets Acquired The allocation of the preliminary purchase price to the net assets acquired resulted in the recognition of $227.3 million of other intangible assets as of the closing date. The preliminary fair values of the acquired trade name, customer-related, developed technology and backlog intangible assets were estimated using the income approach. Under the income approach, an intangible asset's fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. The preliminary fair values of the trade names were estimated using the relief from royalty method, which is based on the hypothetical royalty stream that would be received if the company were to license the trade name and was based on expected future revenues. The preliminary fair values of the customer-related, developed technology, and backlog intangible assets were determined using the excess earnings method. The preliminary fair values of such other intangible assets under the excess earnings method are based on the expected operating cash flows attributable to the respective other intangible asset, which were estimated by deducting economic costs, including operating expenses and contributory asset charges, from revenue expected to be generated from the respective other intangible asset. The preliminary useful lives of the intangible assets were determined based on the period of expected cash flows used to measure the preliminary fair value of the intangible assets adjusted as appropriate for entity-specific factors including legal, regulatory, contractual, competitive, economic, and/or other factors that may limit the useful life of the respective intangible asset. The preliminary fair values of the other intangible assets acquired on the closing date, related accumulated amortization from the closing date through August 2, 2019, and preliminary weighted-average useful lives were as follows:
(Dollars in thousands) |  | Weighted-Average Useful Life |  | Gross Carrying Amount |  | Accumulated Amortization |  | Net
Customer-related |  | 18.2 |  | $ | 105,700 |  |  | $ | (2,180 | ) |  | $ | 103,520 |
Developed technology |  | 7.7 |  | 19,300 |  |  | (1,064 | ) |  | 18,236 |
Trade names |  | 20.0 |  | 5,300 |  |  | (88 | ) |  | 5,212 |
Backlog |  | 0.5 |  | 6,580 |  |  | (4,387 | ) |  | 2,193 |
Total amortizable |  | 15.9 |  | 136,880 |  |  | (7,719 | ) |  | 129,161 |
Non-amortizable - trade names |  |  |  | 90,400 |  |  | — |  |  | 90,400 |
Total other intangible assets, net |  |  |  | $ | 227,280 |  |  | $ | (7,719 | ) |  | $ | 219,561 |
Amortization expense for the definite-lived intangible assets resulting from the acquisition of CMW for the three and nine month periods ended August 2, 2019 was $5.8 million and $7.7 million, respectively. Estimated amortization expense for the remainder of fiscal 2019 and succeeding fiscal years is as follows: fiscal 2019 (remainder), $4.7 million; fiscal 2020, $10.0 million; fiscal 2021, $10.0 million; fiscal 2022, $9.4 million; fiscal 2023, $8.5 million; fiscal 2024, $8.1 million; and after fiscal 2024, $78.5 million. Results of Operations CMW's results of operations have been included within the Professional segment in the company's Condensed Consolidated Financial Statements from the closing date. During the three month period ended August 2, 2019, the company recognized $199.6 million and $8.4 million of net sales and segment loss from CMW's operations, respectively. During the nine month period ended August 2, 2019, the company recognized $270.5 million and $12.5 million of net sales and segment loss from CMW's operations, respectively. Segment loss for the three and nine month periods ended August 2, 2019 includes charges of $26.2 million and $35.7 million, respectively, for the take-down of the inventory fair value step-up amount and amortization of the backlog intangible asset resulting from purchase accounting adjustments. Unaudited Pro Forma Financial Information Unaudited pro forma financial information has been prepared as if the acquisition had taken place on November 1, 2017 and has been prepared for comparative purposes only. The unaudited pro forma financial information is not necessarily indicative of the results that would have been achieved had the acquisition actually taken place on November 1, 2017 and the unaudited pro forma financial information does not purport to be indicative of future Consolidated Results of Operations. The unaudited pro forma financial information does not reflect any synergies, operating efficiencies, and/or cost savings that may be realized from the integration of the acquisition. The unaudited pro forma results for the three and nine month periods ended August 2, 2019 and August 3, 2018 have been adjusted to exclude the pro forma impact of the take-down of the inventory fair value step-up amount and amortization of the backlog intangible asset; include the pro forma impact of amortization of other intangible assets, excluding backlog, based on the estimated purchase price allocations and estimated useful lives; include the pro forma impact of the depreciation of property, plant, and equipment based on the estimated purchase price allocations and estimated useful lives; include the pro forma impact of additional interest expense relating to the acquisition; exclude the pro forma impact of transaction costs incurred by the company directly attributable to the acquisition; and include the pro forma tax effect of both earnings before income taxes and the pro forma adjustments. The following table presents the unaudited pro forma financial information:
|  | Three Months Ended |  | Nine Months Ended
(Dollars in thousands, except per share data) |  | August 2, 2019 |  | August 3, 2018 |  | August 2, 2019 |  | August 3, 2018
Net sales |  | $ | 838,713 |  |  | $ | 854,314 |  |  | $ | 2,702,956 |  |  | $ | 2,603,850 |
Net earnings 1 |  | 87,180 |  |  | 85,647 |  |  | 320,740 |  |  | 237,935 |
Basic net earnings per share of common stock |  | 0.81 |  |  | 0.81 |  |  | 3.01 |  |  | 2.23 |
Diluted net earnings per share of common stock 1 |  | $ | 0.81 |  |  | $ | 0.79 |  |  | $ | 2.97 |  |  | $ | 2.18 |
1 | On January 1, 2019, CMW amended its retiree medical plans so that no employee hired, or rehired, after that date would be eligible for such retiree medical plans. CMW further amended its retiree medical plans on February 14, 2019 so that no employee who terminates employment after February 14, 2019 is eligible to participate in the retiree medical plans and to terminate its retiree medical plans effective December 31, 2019. The amendments and resulting termination of CMW's retiree medical plans resulted in a gain of approximately $45.8 million. This gain is reflected within net earnings in the unaudited pro forma financial information for the nine month period ended August 2, 2019. The impact on diluted net earnings per share of common stock for the nine month period ended August 2, 2019 was $0.42 per diluted share of common stock.
Northeastern U.S. Distribution Company Effective November 30, 2018, during the first quarter of fiscal 2019, the company completed the acquisition of substantially all of the assets of, and assumed certain liabilities of, a Northeastern U.S. distribution company. The purchase price of this acquisition was allocated to the identifiable assets acquired and liabilities assumed based on estimates of their fair value, with the excess purchase price recorded as goodwill. This acquisition was immaterial based on the company's Consolidated Financial Condition and Results of Operations. Additional purchase accounting disclosures have been omitted given the immateriality of this acquisition in relation to the company's Consolidated Financial Condition and Results of Operations. L.T. Rich Products, Inc. Effective March 19, 2018, during the second quarter of fiscal 2018, the company completed the acquisition of substantially all of the assets of, and assumed certain liabilities of, L.T. Rich Products, Inc., a manufacturer of professional zero-turn spreader/sprayers, aerators, and snow and ice management equipment. The addition of these products has broadened and strengthened the company’s Professional segment solutions for landscape contractors and grounds professionals. The purchase price of this acquisition was allocated to the identifiable assets acquired and liabilities assumed based on estimates of their fair value, with the excess purchase price recorded as goodwill. This acquisition was immaterial based on the company's Consolidated Financial Condition and Results of Operations. Additional purchase accounting disclosures have been omitted given the immateriality of this acquisition in relation to the company's Consolidated Financial Condition and Results of Operations.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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