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Business Combinations | 3 Months Ended
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Apr. 01, 2023
Business Combination and Asset Acquisition [Abstract] |
Business Combinations | 18. Business Combinations Sound United Acquisition On April 11, 2022, the Company completed the previously announced acquisition of Sound United, pursuant to a Merger Agreement dated as of February 15, 2022 (Merger Agreement), by and among the Company, Sonic Boom Acquisition Corp., a wholly-owned subsidiary of the Company (Merger Sub), Viper Holdings Corporation (Sound United), and, solely in its capacity as the Seller Representative, Viper Holdings, LLC, Merger Sub merged with and into Sound United, with Sound United continuing as a wholly-owned subsidiary of the Company (Merger). Sound United is a leading innovator of premium, high-performance audio products for consumers around the world, which operates iconic consumer brands: Bowers & Wilkins®, Denon™, Marantz™, HEOS™, Classé™, Polk Audio™, Boston Acoustics™ and Definitive Technology™. The brands are linked by a commitment to the highest production standards and a focus on unparalleled audio quality and audio performance. Sound United delivers significant competitive benefits through its platform advantages including global distribution across online, retail and custom installation channels; a cloud-connected home ecosystem; and a state-of-the-art research and development function focused on creating the highest-quality consumer products with world-class industrial design. The Company acquired 100% of the equity interests of Sound United for $1.0575 billion in cash, subject to adjustments based on Sound United’s net working capital, transaction expenses, cash and debt as of the closing of the Merger (Closing), payable by the Company in cash. The transaction was primarily funded with the proceeds from the Credit Facility. See Note 15, “Debt”, for additional information about the Credit Facility. There was no contingent consideration resulting from the transaction. The results of operations of Sound United subsequent to the acquisition date and the acquired assets and assumed liabilities, including the provisional allocation of goodwill and intangible assets, are included in the non-healthcare segment, including revenue of $216.6 million and a net loss of $3.3 million for the period of January 1, 2023 to April 1, 2023. Acquisition costs The Company recognized no transaction costs related to the Sound United Acquisition for the three months ended April 1, 2023. Purchase price allocations The purchase price allocation for the Sound United Acquisition is provisional, pending the finalization of the valuation and analysis of certain tax assets and liabilities, and goodwill: specifically for tax uncertainties in jurisdictions such as Japan and the United Kingdom. Based on additional supportable information and changes in assumptions during the period, the Company recorded certain measurement period adjustments during the three months ended April 1, 2023. The valuations of the assets acquired and liabilities assumed have not yet been finalized as of April 1, 2023. The purchase price allocation is provisional and subject to change, including measurement period adjustments, the valuation of certain tax assets, liabilities and goodwill. The purchase price allocation will be finalized as the information necessary to complete the required analysis is obtained, which the Company will complete within one year from the acquisition date. Goodwill was calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired in a business combination and represents the future economic benefits expected to arise from intangible assets acquired that do not qualify for separate recognition, including the assembled workforce. Goodwill is not expected to be deductible for tax purposes. Measurement period adjustments for the period ended April 1, 2023, included changes to the purchase price allocation and total consideration, resulting in a net decrease of approximately $7.3 million to goodwill. The measurement period adjustments resulted primarily from valuation inputs pertaining to certain acquired assets based on facts and circumstances that existed as of the acquisition date and did not result from events subsequent to the acquisition date. The fair values assigned to assets acquired and liabilities assumed as of April 1, 2023 are based on management’s best estimates and assumptions as of the reporting date and are considered provisional pending finalization of the valuation of certain tax assets, liabilities and goodwill. The table below summarizes the provisional allocation of fair value of assets acquired and liabilities assumed, inclusive of measurement period adjustments as of April 1, 2023:
(in millions) |  | Sound United
Cash consideration(1) |  | $ | 1,057.5 |
Purchase price |  | $ | 1,057.5 |
Assets acquired: |  |
Cash and cash equivalents |  | $ | 82.6 |
Accounts receivables |  | 108.5 |
Inventories |  | 238.6 |
Prepaid expenses and other current assets |  | 30.0 |
Property, plant and equipment |  | 113.2 |
Intangible asset |  | 649.0 |
Goodwill |  | 325.8 |
Long-term other assets |  | 7.4 |
Total assets acquired |  | $ | 1,555.1 |
Liabilities assumed: |  |
Accounts payable |  | $ | (118.8) |
Accrued liabilities and other current liabilities |  | (148.9) |
Deferred tax liabilities |  | (152.9) |
Other long-term liabilities |  | (77.0) |
Total liabilities assumed |  | $ | (497.6) |
______________ (1) The purchase price allocation for the Sound United Acquisition is provisional, pending finalization of the valuation of certain tax assets, liabilities, and goodwill. Identifiable Intangible Assets The following table sets forth the components of identifiable intangible assets acquired and the weighted average amortization period as of the acquisition date:
|  | Weighted average amortization period (in years) |  | April 11, 2022 (in millions)
Trademarks/tradenames |  | 10 |  | $ | 6.0 |
Customer relationships |  | 17 |  | 196.0 |
Developed technology |  | 8 |  | 156.0 |
Contractual license agreements |  | 15 |  | 29.0 |
Subtotal |  | 14 years |  | $ | 387.0 |
Indefinite trademarks/tradenames |  | N/A |  | 262.0 |
Total |  |  |  | $ | 649.0 |
In determining the fair value of the identifiable intangible assets, the Company utilized various forms of the income approach, depending on the asset being valued. The estimation of fair value requires significant judgment related to cash flow forecasts, discount rates reflecting the risk inherent in each cash flow stream, competitive trends, market comparables and other factors. Other inputs included historical data, current and anticipated market conditions, and growth rates. Contractual license agreements have a weighted-average amortization period of five years until the next renewal term. The intangible assets were valued using the following valuation approaches: Customer relationships The fair value of customer relationships was determined using the multi-period excess earnings method. The multi-period excess earnings method involves forecasting the net earnings expected to be generated by the asset, reducing them by appropriate returns on contributory assets, and then discounting the resulting net cash flows to a present value using an appropriate discount rate. Trademarks/tradenames The fair values of the trademark/tradenames were determined using the relief-from-royalty method under the income approach. This involves forecasting avoided royalties, reducing them by taxes, and discounting the resulting net cash flows to a present value using an appropriate discount rate. Judgment was applied for a number of assumptions in valuing the identified intangible assets, including revenue and cash flow forecasts, survival rates, technology life, royalty rate, obsolescence and discount rate. Developed technology The fair values of the developed technology was determined using the relief-from-royalty method under the income approach. This involves forecasting avoided royalties, reducing them by taxes, and discounting the resulting net cash flows to a present value using an appropriate discount rate. Judgment was applied for a number of assumptions in valuing the identified intangible assets including revenue and cash flow forecasts, survival rates, technology life, royalty rate, obsolescence and discount rate. Contractual licensing agreements The fair value of the contractual license agreements was determined using a variation of the multi-period excess earnings method. This method involves forecasting the net earnings expected to be generated by the asset and then discounting the resulting net cash flows to a present value using an appropriate discount rate. Unaudited pro forma financial information The supplemental pro forma financial information has been prepared using the acquisition method of accounting and is based on the historical financial information of Masimo and Sound United, assuming the transaction occurred on January 1, 2021. The supplemental pro forma financial information does not necessarily represent what the combined companies’ revenue or results of operations would have been had the acquisition of Sound United been completed on January 1, 2021, nor is it intended to be a projection of future operating results of the combined company. It also does not reflect any operating efficiencies or potential cost savings that might be achieved from synergies of combining Masimo and Sound United. The unaudited supplemental pro forma financial information has been calculated after applying Masimo’s accounting policies and adjusting the results of the combined company to reflect incremental amortization and depreciation expense resulting from the fair value adjustments for acquired intangible assets, inventory, property, plant and equipment as well as the net decrease to interest expense resulting from the elimination of the historical interest expense on Sound United’s debt that was paid off at closing partially offset by incremental interest expense resulting from the external debt borrowed by Masimo to fund the acquisition, and the corresponding income tax impact of these adjustments. Also, during the three months ended April 1, 2023, Masimo and Sound United incurred $1.7 million of integration costs. These expenses are not reflected in pro forma net (loss) income for the three months ended April 1, 2023, in the table below and the acquisition related integration expenses incurred by Masimo are included in selling, general and administrative, in the Company’s condensed consolidated statements of comprehensive income for the three months ended April 1, 2023. There are no other material non-recurring pro forma adjustments directly attributable to the Sound United Acquisition included in the reported pro forma revenue and pro forma net income.
|  | Three Months Ended |  |
|  | April 1, 2023 |  | April 2, 2022 |  |  |  |
(in millions) |  | Actual |  | Pro forma |  |  |  |
Net revenue |  | $ | 565.0 |  |  | $ | 554.9 |  |  |  |  |
Net income |  | $ | 21.0 |  |  | $ | 49.2 |  |  |  |  |

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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 https://asc.fasb.org/topic&trid=2303972 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 5 -Subparagraph (b) -URI https://asc.fasb.org/extlink&oid=128092470&loc=d3e4946-128472 + Details
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