Business Combinations

12 Months Ended

Oct. 31, 2019



2	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 markets a range of professional products to serve the underground construction market, including horizontal directional drills, walk and ride trenchers, compact utility loaders/skid steers, vacuum excavators, asset locators, pipe rehabilitation solutions, and after-market tools. CMW provides innovative product offerings that broadened and strengthened the company's Professional segment product portfolio and expanded 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. At the closing date, we paid preliminary merger consideration of $679.3 million that was 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. During the fourth quarter of fiscal 2019, we finalized such customary adjustments that resulted in an additional $5.7 million of merger consideration being paid and an aggregate merger consideration of $685.0 million ("purchase price"). The company funded the 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 $10.2 million of acquisition-related transaction costs during the fiscal year ended October 31, 2019. These acquisition-related transaction costs are recorded within selling, general and administrative expense within the Consolidated Statements of Earnings.

Purchase Price Allocation

The company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the total purchase price was allocated to the acquired net tangible and intangible assets of CMW based on their estimated fair values as of the closing date. As of October 31, 2019, the company has substantially completed its process for measuring the fair values of the assets acquired and liabilities assumed based on information available as of the closing date, with the exception of the company's valuation of income taxes as the company requires additional information to finalize its valuation of income taxes. Thus, the preliminary measurements of fair value reflected for income taxes are

subject to change as additional information becomes available and as additional analysis is performed. The company expects to finalize its preliminary valuation of income taxes 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 purchase price to the fair values assigned to the CMW assets acquired and liabilities assumed. These fair values are based on internal company and independent external third-party valuations (in thousands):



	April 1, 2019
Cash and cash equivalents	$	16,341
Receivables	65,674
Inventories	241,429
Prepaid expenses and other current assets	9,218
Property, plant and equipment	142,779
Goodwill	135,521
Other intangible assets	264,190
Other long-term assets	7,971
Accounts payable	(36,655		)
Accrued liabilities	(52,258		)
Deferred income tax liabilities	(86,231		)
Other long-term liabilities	(6,665		)
Total fair value of net assets acquired	701,314
Less: cash and cash equivalents acquired	(16,341		)
Total purchase price	$	684,973

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, components, parts, and accessories, 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 $350.3 million as of October 31, 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 as of October 31, 2019 as a result of purchase accounting adjustments due to finalizing certain inputs and assumptions related to the fair value calculations of other intangible assets, deferred income tax liabilities, warranty accruals, and inventories. Such purchase accounting adjustments did not have a material impact on the company's Consolidated Statements of Earnings for the fiscal year ended October 31, 2019.

Other Intangible Assets Acquired

The allocation of the purchase price to the net assets acquired resulted in the recognition of $264.2 million of other intangible assets as of the closing date. The fair values of the acquired trade name, customer-related, developed technology and

backlog intangible assets were determined 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 fair values of the trade names were determined 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 fair values of the customer-related, developed technology, and backlog intangible assets were determined using the excess earnings method and were based on the expected operating cash flows attributable to the respective other intangible asset, which were determined by deducting expected economic costs, including operating expenses and contributory asset charges, from revenue expected to be generated from the respective other intangible asset. The useful lives of the other intangible assets were determined based on the period of expected cash flows used to measure the 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 fair values of the other intangible assets acquired on the closing date, related accumulated amortization from the closing date through October 31, 2019, and weighted-average useful lives were as follows (in thousands, except weighted-average useful life):



	Weighted-Average Useful Life	Gross Carrying Amount		Accumulated Amortization			Net
Customer-related	18.3	$	130,800	$	(4,981	)	$	125,819
Developed technology	7.8	20,900		(2,019		)	18,881
Trade names	20.0	5,200		(152		)	5,048
Backlog	0.5	3,590		(3,590		)	—
Total amortizable	16.6	160,490		(10,742		)	149,748
Non-amortizable - trade names		103,700		—			103,700
Total other intangible assets, net		$	264,190	$	(10,742	)	$	253,448

Amortization expense for the definite-lived intangible assets resulting from the acquisition of CMW for the fiscal year ended October 31, 2019 was $10.7 million. Estimated amortization expense for the succeeding fiscal years is as follows: fiscal 2020, $12.6 million; fiscal 2021, $12.6 million; fiscal 2022, $11.5 million; fiscal 2023, $10.1 million; fiscal 2024, $9.4 million; and after fiscal 2024, $93.5 million.

Results of Operations

CMW's results of operations have been included within the Professional segment in the company's Consolidated Financial Statements from the closing date. During the fiscal year ended October 31, 2019, the company recognized $465.2 million of net sales and $5.4 million of segment loss from CMW's operations. Segment loss for the fiscal year ended October 31, 2019 includes charges of $43.0 million, 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 fiscal years ended October 31, 2019 and October 31, 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 purchase price allocations and useful lives; include the pro forma impact of the depreciation of property, plant, and equipment based on the purchase price allocations and 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 unaudited pro forma financial information for fiscal 2019 and 2018 (in thousands, except per share data):



	October 31, 2019		October 31, 2018
Net sales	$	3,437,335	$	3,332,636
Net earnings¹	363,452		276,722
Basic net earnings per share of common stock	3.40		2.60
Diluted net earnings per share of common stock¹	$	3.36	$	2.55

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 fiscal year ended October 31, 2019. The impact on diluted net earnings per share of common stock for the fiscal year ended October 31, 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 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. As of October 31, 2019, the company has finalized the purchase accounting for this acquisition. This acquisition was immaterial based on the company's Consolidated Financial Condition and Results of Operations.

Regnerbau Calw GmbH

Effective January 1, 2017, during the first quarter of fiscal 2017, the company completed the acquisition of all the outstanding shares of Regnerbau Calw GmbH ("Perrot"), a privately held manufacturer of professional irrigation equipment. The addition of these products broadened and strengthened the company's irrigation solutions for the sport, agricultural, and industrial markets. The acquisition was funded with existing foreign cash and cash equivalents. 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.