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ACQUISITIONS | 6 Months Ended
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Apr. 03, 2022
Business Combination and Asset Acquisition [Abstract] |
ACQUISITIONS | ACQUISITIONS Tristar Business Acquisition On February 18, 2022, the Company acquired all of the membership interests in HPC Brands, LLC, which consist of the home appliances and cookware business of Tristar Products, Inc. (the "Tristar Business") for a purchase price of $325.0 million, net of customary purchase price adjustments and transaction costs, plus a potential earn-out payment of up to $100.0 million if certain gross profit targets are achieved in calendar year 2022, and another earn-out payment of $25.0 million if certain other gross profit targets are achieved in calendar year 2023. The acquisition of the Tristar Business was funded by a combination of cash on hand and incremental borrowings incurred as a new tranche under the Company's existing credit agreement. See Note 10 - Debt for further detail on the amendment to the credit agreement. The Tristar Business includes a portfolio of home appliances and cookware products sold under the PowerXL®, Emeril Legasse®, and Copper Chef® brands. The PowerXL® and Copper Chef® brands were acquired outright by the Company while the Emeril Legasse® brand remains subject to a trademark license agreement with the license holder (the "Emeril License"). Pursuant to the Emeril License, the Company will continue to license the Emeril Lagasse® brands in the US, Canada, Mexico, and the United Kingdom for certain designated product categories of household appliances within the HPC segment, including small kitchen food preparation products, indoor and outdoor grills and grill accessories, and cookbooks. The Emeril License is set to expire effective December 31, 2022 with options of up to three one-year renewal periods following the initial expiration. Under the terms of the agreement, we agreed to pay the license holder a percentage of sales, with minimum annual royalty payments of $1.5 million, increasing to $1.8 million in subsequent renewal periods. The net assets and operating results of the Tristar Business, since the acquisition date of February 18, 2022, are included in the Company’s Condensed Consolidated Statements of Income and reported within the HPC reporting segment for the three and six month periods ended April 3, 2022. The Company has recorded an allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the February 18, 2022 acquisition date. The excess of the purchase price over the fair value of the net tangible assets and identifiable intangible assets of $103.7 million was recorded as goodwill, which is deductible for tax purposes. Goodwill includes value associated with profits earned from market and expansion capabilities including the success of new product launches through direct response television and direct to consumer channels, new brand development and products brought to market by the Company, synergies from integration and streamlining operational activities, and the going concern of the business and the value of the assembled workforce. The preliminary fair values recorded were determined based upon a valuation with estimates and assumptions used in such valuation that are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of acquisition account that are not finalized relate to amounts for purchase price, intangible assets, deferred taxes, goodwill, and components of working capital. The calculation of preliminary purchase price is as follows:
(in millions) |  | Amount
Cash paid |  | $ | 314.6 |
Estimated purchase price settlement |  | (39.1) |
Contingent consideration |  | 30.0 |
Total purchase price |  | $ | 305.5 |
The Company recorded a contingent consideration liability of $30.0 million as of the date of the acquisition to reflect the estimated fair value of the contingent consideration for the earn-out payments. The fair value was determined using a Monte Carlo simulation model to value the earn-out based on the likelihood of reaching specific targets. The fair value measurement is determined based on significant unobservable inputs and thus represents a Level 3 fair value measurement. The key assumptions considered include the estimated amount and timing of projected gross profits, volatility, estimated discount rates, and risk-free interest rate. In each reporting period after the acquisition, the Company will reassess the value of the contingent consideration liability and may recognize an increase or decrease in the fair value in its consolidated statements of earnings after the measurement period. Changes may result from changes in actual results and projected forecasts. The inputs and assumptions may not be observable in the market, but reflect the assumptions the Company believes would be made by a market participant. There were no changes in the contingent consideration liability during the three and six month periods ended April 3, 2022 following the acquisition date of February 18, 2022. As of April 3, 2022, the current portion of the contingent consideration was classified as Other Current Liabilities for the calendar year 2022 payment of $25.0 million and the long-term portion as Other Long-Term Liabilities for the calendar year 2023 payment of $5.0 million on the Company’s Condensed Consolidated Statements of Financial Position. The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the date of acquisition:
(in millions) |  | Purchase Price Allocation
Cash and cash equivalents |  | $ | 0.3 |
Trade receivables, net |  | 58.4 |
Other receivables |  | 0.4 |
Inventories |  | 102.0 |
Prepaid expenses and other current assets |  | 4.4 |
Property, plant and equipment, net |  | 0.4 |
Operating lease assets |  | 23.3 |
Goodwill |  | 103.7 |
Intangible assets, net |  | 95.0 |
Accounts payable |  | (51.7) |
Accrued wages and salaries |  | (0.6) |
Other current liabilities |  | (19.0) |
Long-term operating lease liabilities |  | (11.1) |
Net assets acquired |  | $ | 305.5 |
The values allocated to intangible assets and the weighted average useful lives are as follows:
(in millions) |  | Carrying Amount |  | Weighted Average Useful Life (Years)
Tradenames |  | $ | 66.0 |  |  | Indefinite
Customer relationships |  | 29.0 |  |  | 13 years
Total intangibles acquired |  | $ | 95.0 |  |  |
The Company performed a valuation of the acquired inventories, tradenames, and customer relationships. The fair value measurements are based on significant inputs not observable in the market, and therefore, represent Level 3 measurements. The following is a summary of significant inputs to the valuation: Inventory – Acquired inventory consists of branded finished goods that were valued based on the comparative sales method, which estimates the expected sales price of the finished goods inventory, reduced for all costs expected to be incurred in its completion or disposition and a profit on those costs. Tradename – The Company valued the PowerXL® tradename, using an income approach, the relief-from-royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the tradenames were not owned. Royalty rate of 3% for valuation of PowerXL® was selected based on consideration of several factors, including prior transactions, related trademarks and tradenames, other similar trademark licensing, and transaction agreements and the relative profitability and perceived contribution of the tradenames. The discount rate applied to the projected cash flow was 16% based on the implied transaction internal rate of return for the overall business, excluding cost synergies. The resulting discounted cash flows were then tax-effected at the applicable statutory rate. Customer relationships – The Company values customer relationships using the multi-period excess earnings method under a market participant distributor method of the income approach. In determining the fair value of the customer relationships, the multi-period excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. Only expected sales from current retail customers were used, which are estimated using average annual expected growth rate of 2.7%. The Company assumed a customer attrition rate of 5%, which is supported by historical attrition rates. The discount rate applied to the projected cash flow was 12% based upon a weighted average cost of capital for the overall business and income taxes were estimated at the applicable statutory rate. The following pro forma financial information summarizes the combined results of operations for the Company and the acquired Tristar Business, as though the companies were combined as of the beginning of the Company’s fiscal 2021. The unaudited pro forma financial information was as follows:
|  | Three Month Period Ended |  | Six Month Period Ended
(in millions) |  | April 3, 2022 |  | April 4, 2021 |  | April 3, 2022 |  | April 4, 2021
Proforma net sales |  | $ | 853.7 |  |  | $ | 902.8 |  |  | $ | 1,765.1 |  |  | $ | 1,848.0 |
Proforma net (loss) income from continuing operations |  | (26.0) |  |  | 6.1 |  |  | (33.3) |  |  | 21.2 |
Proforma net income |  | 15.1 |  |  | 45.5 |  |  | 46.1 |  |  | 118.8 |
Proforma diluted earnings from continuing operations per share |  | $ | (0.64) |  |  | $ | 0.14 |  |  | $ | (0.77) |  |  | $ | 0.49 |
Proforma diluted earnings per share |  | 0.37 |  |  | 1.07 |  |  | 1.07 |  |  | 2.77 |
The pro forma financial information includes, where applicable, adjustments for: (i) additional amortization expense that would have been recognized related to the acquired intangible assets, (ii) additional operating expense from the excess fair value adjustments on ROU operating lease assets for below market rents (iv) additional cost of sales related to the inventory valuation adjustment, (v) transaction costs and other one-time non-recurring costs and (vi) the estimated income tax effect on the acquired Tristar Business and pro forma adjustments. Through the acquisition of the Tristar Business, the Company acquired substantially all of the operations, employees and net assets of Tristar Products, Inc. and entered into a series of TSAs for various shared back office administrative functions including finance, sales and marketing, information technology, human resources, real estate and supply chain, customer service and procurement, to support the excluded product groups that did not convey with the transaction. Charges associated with TSAs are recognized as bundled service charges under a fixed fee structure by the respective service or function along with one-time pass-through charges, including warehousing, and freight, among others, from the acquired Tristar Business that settle on a net basis between the two parties. Charges for TSA services are recognized as a reduction to the respective operating costs as a component of operating expense or cost of goods sold depending upon the functions supported by the acquired Tristar Business. During the three and six month periods ended April 3, 2022, the Company recognized TSA income of $0.5 million. Additionally, the Company assumed the cash accounts supporting both the acquired Tristar Business and the excluded product groups, and due to the commingled nature of operations, cash would be received and/or paid on behalf of the excluded product groups' operations, resulting in cash flow being commingled with operating cash flow of the Company which would settle on a net basis with TSA charges. As of April 3, 2022, there was an outstanding payable to Tristar Products, Inc. of $0.7 million included within Other Current Liabilities on the Company’s Condensed Consolidated Statements of Financial Position.

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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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