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Acquisition - Erwin Hymer Group | 9 Months Ended
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Apr. 30, 2019
Business Combinations [Abstract] |
Business Combination Disclosure |
2. | Acquisition — Erwin Hymer Group
On February 1, 2019, the Company and the shareholders of Erwin Hymer Group SE (“EHG”) closed on a transaction via which the Company acquired EHG. EHG is headquartered in Bad Waldsee, Germany, and is one of the largest RV manufacturers in Europe by revenue. The Company acquired EHG in order to expand its operations into the growing European market with a long-standing European industry leader. EHG will be managed as a stand-alone operating entity that will be included in the European recreational vehicle operating segment. At the closing, the Company paid cash consideration of approximately 1.53 billion Euro (approximately $1.76 billion at the exchange rate as of February 1, 2019) and issued 2,256,492 shares of the Company’s common stock to the sellers valued at $144.2 million. The cash consideration was funded through a combination of available cash on hand of approximately $95 million and debt financing consisting of two credit facility agreements, a 7 year, $2.1 billion term loan, consisting of an approximate $1.4 billion U.S. dollar-denominated tranche and an approximate 0.6 billion Euro tranche (approximately $0.7 billion at the exchange rate at February 1, 2019), and $100 million utilized at closing from a 5 year, $750.0 million asset-based credit facility (ABL) as more fully described in Note 14 to the Condensed Consolidated Financial Statements. The obligations of the Company under each facility are secured by liens on substantially all the assets of the Company, and both agreements contain certain customary representations, warranties and covenants of the Company. The following table summarizes the estimated fair values of the EHG assets acquired and liabilities assumed at the acquisition date. The Company is in the process of finalizing internal and third-party valuations of tangible and intangible assets and certain liabilities, therefore, the provisional estimates of intangible assets, fixed assets, goodwill, deferred income tax liabilities, income taxes payable and certain accrued liabilities are subject to change. The Company expects to finalize these values as soon as practical and no later than one year from the acquisition date.
Cash |  | $ | 97,887 |
Inventory |  |  | 593,053 |
Other assets |  |  | 420,941 |
Property, plant and equipment, rental vehicles |  |  | 80,132 |
Property, plant and equipment |  |  | 452,654 |
Amortizable intangible assets: |  |  |  |
Dealer network |  |  | 355,601 |
Trademarks |  |  | 126,181 |
Technology assets |  |  | 183,536 |
Backlog |  |  | 11,471 |
Goodwill |  |  | 994,427 |
Guarantee liabilities related to former EHG North American subsidiaries |  |  | (115,668 | )
Other current liabilities |  |  | (841,631 | )
Debt - Unsecured notes |  |  | (114,710 | )
Debt - Other |  |  | (166,196 | )
Deferred income tax liabilities |  |  | (147,634 | )
Other long-term liabilities |  |  | (17,205 | )
Non-controlling interests |  |  | (12,207 | )
Total fair value of net assets acquired |  |  | 1,900,632 |
Less: cash acquired |  |  | (97,887 | )
Total fair value of net assets acquired, less cash acquired |  | $ | 1,802,745 |
On the acquisition date, amortizable intangible assets had a weighted-average useful life of 17 years. The dealer network was valued based on the Discounted Cash Flow method and is amortized on an accelerated basis over 20 years. The trademarks and technology assets were valued on the Relief of Royalty method and are amortized on a straight-line basis over 20 years and 10 years, respectively. The backlog was valued based on the Discounted Cash Flow method and is amortized on a straight-line basis over a five-month period. We have recognized $994,427 of goodwill as a result of this transaction, of which approximately $238,000 will be deductible for tax purposes. In connection with the closing of the acquisition, Thor and EHG entered into an amendment to the original September 18, 2018 purchase agreement to reflect the exclusion of EHG’s North American subsidiaries from the business operations acquired by Thor. The acquisition date balance sheet includes guarantee liabilities related to the former EHG North American subsidiaries totaling $115,668. Historically, EHG had provided guarantees for certain of its former North American subsidiaries that were assumed by Thor in the acquisition and which related to bank loans, foreign currency derivatives, certain specified supplier contracts and dealer financing arrangements, as well as a specific lease agreement. While the original term of these guarantees were generally long term in nature, the Company sought to settle these guarantees as soon as practical after the closing of the acquisition. As of April 30, 2019, the only remaining guarantees related to dealer financing and to a specific lease agreement. The Company has an accrued liability of approximately $10,300 outstanding at April 30, 2019 related to the remaining guarantees, which is included in Other current liabilities on the Condensed Consolidated Balance Sheets. This balance includes dealer financing guarantee accruals of approximately $6,700 and a lease guarantee accrual of approximately $3,600. The maximum obligation under the dealer financing guarantee as of April 30, 2019 was approximately $17,000, which is the total outstanding notional balance under the various dealer financing agreements (this amount does not consider the recovery that may be realized through the resale of repossessed vehicles). The maximum obligation for the lease guarantee approximates the accrual, which is based on the stated contract value. The results of EHG are included in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income since the February 1, 2019 acquisition date. During this period, EHG recorded net sales of $767,509, gross profit of $53,981 and a net loss before income taxes of $30,947. Gross profit and net loss before income taxes includes the impact of $61,418 related to the step-up in purchase accounting of acquired inventory that was subsequently sold during the period, and net loss before tax also includes $6,743 for the amortization expense of backlog and the amortization expense of the other acquired amortizable intangibles of $6,041. The following unaudited pro forma information represents the Company’s results of operations as if the fiscal 2019 acquisition of EHG had occurred at the beginning of fiscal 2018. These performance results may not be indicative of the actual results that would have occurred under the ownership and management of the Company.
|  | Three Months Ended April 30, |  |  | Nine Months Ended April 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Net sales |  | $ | 2,506,583 |  |  | $ | 3,083,887 |  |  | $ | 6,766,664 |  |  | $ | 8,577,872 |
Net income |  | $ | 42,579 |  |  | $ | 100,613 |  |  | $ | 61,418 |  |  | $ | 237,472 |
Basic earnings per common share |  | $ | 0.77 |  |  | $ | 1.84 |  |  | $ | 1.15 |  |  | $ | 4.34 |
Diluted earnings per common share |  | $ | 0.77 |  |  | $ | 1.83 |  |  | $ | 1.14 |  |  | $ | 4.33 |
The supplemental pro forma earnings for the nine-month period ended April 30, 2019 and three-month period ended April 30, 2019 were adjusted to exclude $112,511 and $13,363 of acquisition-related costs. Nonrecurring expenses related to management fees of $15,952, $1,684 and $5,451 were excluded from pro forma earnings for the nine-month period ended April 30, 2018, nine-month period ended April 30, 2019 and three-month period ended April 30, 2018, respectively. The periods presented exclude $61,418 of nonrecurring expense related to the fair value adjustment to acquisition-date inventory. EHG’s historical net income included in the totals above include nonrecurring charges related to its former North American operations in the amounts of $0 and $27,838 during the three months ended April 30, 2019 and April 30, 2018, and $52,501 and $80,070 during the nine months ended April 30, 2019 and April 30, 2018, respectively. These charges primarily consist of EHG’s guarantees to third parties for certain North American subsidiary obligations and the impairment of loan receivables due to EHG from their former North American subsidiaries. Net costs incurred during the three months ended April 30, 2019 related specifically to this acquisition totaled $13,363 and are included in Acquisition-related costs in the Condensed Consolidated Statements of Income and Comprehensive Income. This total includes costs of $16,293, consisting primarily of bank fees, professional and advisory integration fees and the write-off of the remaining unamortized debt fees of $3,794 related to the Company’s previous asset-based facility that was terminated on February 1, 2019 in conjunction with the new financing obtained with the EHG acquisition. These costs are partially offset by a gain of $2,930 from the change in the fair value of the foreign currency forward contract on February 1, 2019 discussed in Note 5 to the Condensed Consolidated Financial Statements. Net costs incurred during the nine months ended April 30, 2019 related specifically to this acquisition totaled $112,511 and are included in Acquisition-related costs in the Condensed Consolidated Statements of Income and Comprehensive Income. These costs include the losses on the foreign currency forward contract of $70,777 discussed in Note 5 below, and $41,734 of other expenses, consisting primarily of bank fees, ticking fees, legal, professional and advisory fees related to financial due diligence and implementation costs, regulatory review costs and the write-off of the remaining unamortized debt fees related to the Company’s previous asset-based facility.

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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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