Business Combinations

9 Months Ended

Sep. 30, 2022

4. BUSINESS COMBINATIONS AND INVESTMENTS

Aircraft Wheel & Brake

On September 16, 2022, the Company acquired all of the assets and related liabilities of Parker-Hannifin Corporation's ("Parker") Aircraft Wheel and Brake division ("the Acquisition"), of Avon, Ohio, at a purchase price of $441.3 million. Aircraft Wheel and Brake is a leader in the design, development, qualification, manufacturing and assembly, product support and repair of wheels, brakes and related hydraulic components for fixed-wing aircraft and rotorcraft. With this acquisition, the Company has expanded its portfolio of engineered products, broadening the number of offerings available to serve customers across a range of critical applications and has increased the Company's exposure within the aerospace and defense end markets.

This acquisition was accounted for under the acquisition method. The assets acquired and liabilities assumed were recorded based on their fair values at the date of acquisition as follows (in thousands):


Accounts receivable	$	7,635
Contract assets	171
Inventories	11,246
Property, plant and equipment	7,686
Goodwill	162,390
Other intangible assets	257,900
Contract costs, noncurrent	41
Liabilities	(5,729)
Net assets acquired	441,340
Less cash received	—
Net consideration	$	441,340

The preliminary purchase price allocation for the Acquisition was based upon a preliminary valuation and the Company's estimates and assumptions for this acquisition are subject to change as the Company obtains additional information during the measurement period. The principal areas of the purchase price allocation that are not yet finalized relate to the validation of certain forecasted cash flows used to value the identifiable intangible assets. These purchase price allocations will be finalized within the one-year measurement period.

The goodwill associated with this acquisition is tax deductible and is the result of expected synergies from combining the operations of the acquired business with the Company's operations and intangible assets that do not qualify for separate recognition, such as an assembled workforce. The goodwill associated with this acquisition was recognized in the Engineered Products segment. The Company is evaluating the assignment of goodwill to a reporting unit.

The fair value of the identifiable intangible assets totaling $257.9 million, consisting of customer relationships and acquired backlog, was determined using the income approach, specifically, a multi-period excess earnings method. The fair values of the customer relationships and backlog of $244.5 million and $13.4 million, respectively, are being amortized based on the economic period of benefit over a period of 24 years and two years, respectively. These amortization periods represent the estimated useful life of the assets.

Aircraft Wheel and Brake's results of operations have been included in the Company's financial statements for the period subsequent to the completion of the acquisition on September 16, 2022. Aircraft Wheel and Brake contributed $2.7 million of revenue and $1.1 million of operating loss for both the three-month and nine-month fiscal periods ended September 30, 2022. The following table reflects the pro forma operating results of the Company for the three-month and nine-month fiscal periods ended September 30, 2022 and October 1, 2021, which gives effect to the Acquisition as if the company had been acquired on January 1, 2021. The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of the operating results that would have occurred had the Acquisition been effective January 1, 2021, nor are they intended to be indicative of results that may occur in the future. The underlying pro forma information includes the historical financial results of the Company and the acquired business adjusted for certain items discussed below. The pro forma information does not include the effects of any synergies, cost reduction initiatives or anticipated integration costs related to the Acquisition.

4. BUSINESS COMBINATIONS AND INVESTMENTS (CONTINUED)

Aircraft Wheel & Brake - continued


	For the Three Months Ended		For the Nine Months Ended
	September 30, 2022	October 1, 2021	September 30, 2022	October 1, 2021
In thousands
Net sales	188,554	197,154	543,817	584,693
Net earnings	9,855	13,553	18,384	19,475

These pro forma results include adjustments such as inventory step-up, amortization of acquired intangible assets, depreciation of acquired plant, property, and equipment and interest expense on debt financing in connection with the Acquisition. Material pro forma adjustments directly attributable to the Acquisition for the three-month and nine-month fiscal period ended September 30, 2022 include:

•Increases in depreciation of $0.1 million and $0.5 million relating to fixed assets acquired;

•Increases in amortization of $1.8 million and $7.9 million relating to intangible assets acquired;

•Decreases in selling, general & administrative costs of $10.1 million and $12.1 million relating to transaction costs for the Acquisition;

•Increases in interest expense of $3.4 million and $11.4 million relating to debt financing in connection with the Acquisition; and

•Increase in income tax expense of $1.0 million for the three-month fiscal period and decrease in income tax expense of $1.6 million for the nine-month fiscal period relating to the above adjustments.

Material pro forma adjustments directly attributable to the Acquisition for the three-month fiscal period ended September 30, 2021 include:

•Increase in depreciation of $0.2 million relating to fixed assets acquired;

•Increase in amortization of $3.8 million relating to intangible assets acquired;

•Increase in interest expense of $4.1 million relating to debt financing in connection with the Acquisition; and

•Decrease in income tax expense of $1.7 million relating to the above adjustments.

Material pro forma adjustments directly attributable to the Acquisition for the nine-month fiscal period ended September 30, 2021 include:

•Increase in depreciation of $0.5 million relating to fixed assets acquired;

•Increase in amortization of $11.3 million relating to intangible assets acquired;

•Increase in selling, general & administrative costs of $12.1 million relating to transaction costs for the Acquisition;

•Increase in interest expense of $12.2 million relating to debt financing in connection with the Acquisition;

•Increase in cost of sales of $2.3 million relating to the step-up of acquired inventory; and

•Decrease in income tax expense of $8.0 million relating to the above adjustments.

Near Earth Autonomy

On June 22, 2022, the Company invested $10.0 million in Near Earth Autonomy, Inc. ("Near Earth"), in exchange for a minority interest in the outstanding equity of Near Earth and one seat on its Board of Directors. This investment supports Near Earth's mission to accelerate its technology to establish an industry standard in autonomous solutions for the next generation of aviation and leverages the Company's core competency in precision parts manufacturing as the preferred manufacturer of autonomous parts and components for Near Earth. Since 2019, Near Earth has been a partner on the autonomous technology for the Company's K-MAX TITAN unmanned aerial system and the KARGO UAV unmanned aerial system, a purpose built autonomous medium lift logistics vehicle.

In accordance with ASC 321, Investments - Equity Securities, the Company elected to apply the measurement alternative and accounted for the investment as an equity interest, initially measured at cost. The investment was included in Investment in Near Earth Autonomy on the Company's Condensed Consolidated Balance Sheets as of September 30, 2022. Upon observable transaction prices or impairment, the Company will remeasure the investment at fair value.

4. BUSINESS COMBINATIONS AND INVESTMENTS (CONTINUED)

Bal Seal

On January 3, 2020, the Company acquired all of the equity interests of Bal Seal Engineering ("Bal Seal"), of Foothill Ranch, California, at a purchase price of $317.5 million. Upon closing, the Company funded $24.7 million associated with employee retention plans at Bal Seal. This amount and related interest was included in restricted cash on the Company's Consolidated Balance Sheets as of December 31, 2020. Eligible participants received an allocation of the escrow balance one year following the acquisition date, which was reflected in the Company's cash flows from operating activities for the nine-month fiscal period ended October 1, 2021.