Business Combinations

6 Months Ended

May 01, 2020



2	Business Combinations

Venture Products, Inc. ("Venture Products")

On March 2, 2020 ("Venture Products closing date"), pursuant to an Agreement and Plan of Merger ("Venture Products merger agreement") and an agreement to purchase the real property used by Venture Products ("Venture Products purchase agreement") both dated January 20, 2020, the company completed its acquisition of Venture Products, a privately held Ohio corporation and

the manufacturer of Ventrac-branded products. Venture Products designs, manufactures, and markets articulating turf, landscape, and snow and ice management equipment for grounds, landscape contractor, golf, municipal, and rural acreage customers and provides innovative product offerings that broadened and strengthened the company's Professional segment and expanded its dealer network.

The Venture Products transaction was structured as a merger, pursuant to which a wholly-owned subsidiary of the company merged with and into Venture Products, with Venture Products 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 Venture Products were canceled and now only represent the right to receive the applicable consideration as described in the Venture Products merger agreement. The Venture Products purchase agreement was with an affiliate of Venture Products and was for the real estate used by Venture Products. The aggregate preliminary consideration was $165.9 million ("Venture Products purchase price"), which consisted of a cash payment of $136.4 million and a $29.5 million holdback to satisfy any indemnification or certain other obligations of Venture Products to TTC. The aggregate preliminary consideration remains subject to certain customary adjustments based on, among other things, the amount of actual cash, debt, and working capital in the business of Venture Products at the Venture Products closing date. Such customary adjustments are expected to be completed during fiscal 2020. The holdback is expected to expire during the company's fourth quarter of fiscal 2021. The company funded the cash payment with borrowings under its existing unsecured senior revolving credit facility. For additional information regarding the company's unsecured senior revolving credit facility utilized to fund the Venture Products purchase price, refer to Note 6, Indebtedness. As a result of the acquisition, the company incurred approximately $0.3 million and $0.6 million of acquisition-related transaction costs during the three and six month periods ended May 1, 2020, respectively. These acquisition-related transaction costs are recorded within selling, general and administrative expense within the Condensed Consolidated Statements of Earnings.

Preliminary Venture Products Purchase Price Allocation

The company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the aggregate preliminary Venture Products purchase price was allocated to the acquired net tangible and intangible assets of Venture Products based on their fair values as of the Venture Products closing date. As of May 1, 2020, 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 Venture Products 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 preliminary Venture Products 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 preliminary Venture Products purchase price to the fair values assigned to the Venture Products assets acquired and liabilities assumed. These fair values are based on internal company and independent external third-party valuations and are subject to change as certain asset and liability valuations are finalized:



(Dollars in thousands)	March 2, 2020
Cash and cash equivalents	$	3,476
Receivables	6,342
Inventories	23,000
Prepaid expenses and other current assets	239
Property, plant and equipment	26,976
Goodwill	65,185
Other intangible assets	75,300
Accounts payable	(4,075		)
Accrued liabilities	(6,186		)
Deferred income tax liabilities	(20,850		)
Total fair value of net assets acquired	169,407
Less: cash and cash equivalents acquired	(3,476		)
Total preliminary Venture Products purchase price	$	165,931

The goodwill recognized is primarily attributable to the value of the workforce, the reputation of Venture Products, expected future cash flows, and expected synergies, including customer and dealer growth opportunities and integrating and expanding existing product lines. Key areas of expected cost synergies include increased purchasing power for commodities, components, parts, and accessories, and supply chain consolidation. The goodwill resulting from the acquisition of Venture Products was recognized

within the company's Professional segment and is the primary driver for the increase in the company's Professional segment goodwill to $414.3 million as of May 1, 2020 from $350.3 million as of October 31, 2019. Goodwill is non-deductible for tax purposes.

Other Intangible Assets Acquired

The allocation of the preliminary Venture Products purchase price to the net assets acquired resulted in the recognition of $75.3 million of other intangible assets as of the Venture Products closing date. The fair values of the acquired trade name and customer-related 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 value of the trade name was 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 value of the customer-related intangible asset was determined using the excess earnings method and was based on the expected operating cash flows attributable to the customer-related 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 customer-related intangible asset. The useful lives of the trade name and customer-related intangible assets were determined based on the period of expected cash flows used to measure the fair value of the respective 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 Venture Products closing date, related accumulated amortization from the Venture Products closing date through May 1, 2020, and weighted-average useful lives were as follows:



(Dollars in thousands)	Weighted-Average Useful Life	Gross Carrying Amount		Accumulated Amortization			Net
Finite-lived - customer-related	16.0	$	19,100	$	(199	)	$	18,901
Indefinite-lived - trade name		56,200		—			56,200
Total other intangible assets, net		$	75,300	$	(199	)	$	75,101

Amortization expense for the finite-lived intangible assets resulting from the acquisition of Venture Products for the three and six months periods ended May 1, 2020 was $0.2 million. Estimated amortization expense for the remainder of fiscal 2020 and succeeding fiscal years is as follows: fiscal 2020 (remainder), $0.6 million; fiscal 2021, $1.2 million; fiscal 2022, $1.2 million; fiscal 2023, $1.2 million; fiscal 2024, $1.2 million; fiscal 2025, $1.2 million; and after fiscal 2025, $12.3 million.

Results of Operations

Venture Product's results of operations are included within the company's Professional reportable segment in the company's Condensed Consolidated Financial Statements from the Venture Products closing date. During the three and six month periods ended May 1, 2020, the company recognized $11.2 million of net sales from Venture Product's operations. Venture Product's operations had an immaterial impact on Professional segment earnings for the three and six month periods ended May 1, 2020. Unaudited pro forma financial information is not disclosed as the Venture Products acquisition was not considered material to the company's Consolidated Results of Operations.

The Charles Machine Works, Inc.

On April 1, 2019 ("CMW closing date"), pursuant to the Agreement and Plan of Merger dated February 14, 2019 ("CMW 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 CMW merger agreement. At the CMW closing date, the company 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 CMW closing date. During the fourth quarter of fiscal 2019, the company finalized such cash, debt and working capital adjustments and these adjustments resulted in an aggregate merger consideration of $685.0 million ("CMW purchase price"). The company funded the CMW purchase price by using a combination of cash proceeds from the issuance of borrowings under the company's unsecured senior term loan credit agreement and borrowings

under the company's unsecured senior revolving credit facility. For additional information regarding the financing agreements utilized to fund the CMW purchase price, refer to Note 6, Indebtedness. As a result of the acquisition, the company incurred approximately $10.2 million of acquisition-related transaction costs, all of which were incurred during the fiscal year ended October 31, 2019 and recorded within selling, general and administrative expense within the Consolidated Statements of Earnings for such fiscal period. During the three and six month periods ended May 3, 2019, the company recorded acquisition-related transaction costs of $8.0 million and $9.7 million, respectively.

CMW Purchase Price Allocation

The company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the total CMW purchase price was allocated to the acquired net tangible and intangible assets of CMW based on their fair values as of the CMW closing date. As of May 1, 2020, the company had completed its process for measuring the fair values of the assets acquired and liabilities assumed based on information available as of the CMW closing date.

The following table summarizes the allocation of the CMW 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:



(Dollars in thousands)	April 1, 2019
Cash and cash equivalents	$	16,341
Receivables	65,674
Inventories	241,429
Prepaid expenses and other current assets	8,050
Property, plant and equipment	142,779
Goodwill	134,657
Other intangible assets	264,190
Other long-term assets	7,971
Accounts payable	(35,892		)
Accrued liabilities	(51,943		)
Deferred income tax liabilities	(85,277		)
Other long-term liabilities	(6,665		)
Total fair value of net assets acquired	701,314
Less: cash and cash equivalents acquired	(16,341		)
Total CMW 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. During the second quarter of fiscal 2020, the company completed its valuation of income taxes to finalize the CMW purchase price allocation, which resulted in a decrease to the carrying amount of goodwill of $0.9 million from the amounts reported within the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2019. Goodwill is mostly non-deductible for tax purposes.

Other Intangible Assets Acquired

The allocation of the CMW purchase price to the net assets acquired resulted in the recognition of $264.2 million of other intangible assets as of the CMW 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 respective 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 assets. 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 CMW closing date, related accumulated amortization from the CMW closing date through May 1, 2020, and weighted-average useful lives were as follows:



(Dollars in thousands)	Weighted-Average Useful Life	Gross Carrying Amount		Accumulated Amortization			Net
Customer-related	18.3	$	130,800	$	(9,405	)	$	121,395
Developed technology	7.8	20,900		(3,750		)	17,150
Trade names	20.0	5,200		(282		)	4,918
Backlog	0.5	3,590		(3,590		)	—
Total finite-lived	16.6	160,490		(17,027		)	143,463
Indefinite-lived - trade names		103,700		—			103,700
Total other intangible assets, net		$	264,190	$	(17,027	)	$	247,163

Amortization expense for the finite-lived intangible assets resulting from the acquisition of CMW for the three and six month periods ended May 1, 2020 was $3.1 million and $6.3 million, respectively. Estimated amortization expense for the remainder of fiscal 2020 and succeeding fiscal years is as follows: fiscal 2020 (remainder), $6.3 million; fiscal 2021, $12.6 million; fiscal 2022, $11.5 million; fiscal 2023, $10.1 million; fiscal 2024, $9.4 million; fiscal 2025, $7.7 million; and after fiscal 2025, $85.9 million.

Results of Operations

CMW's results of operations are included within the company's Professional reportable segment in the company's Condensed Consolidated Financial Statements and the net sales and segment loss amounts for the three and six month periods ended May 3, 2019 reflect one month of CMW's results subsequent to the April 1, 2019 acquisition date. During the three month periods ended May 1, 2020 and May 3, 2019, the company recognized $177.6 million and $70.9 million of net sales from CMW's operations, respectively. During the three month periods ended May 1, 2020 and May 3, 2019, the company recognized $18.6 million of segment earnings and $4.1 million of segment loss from CMW's operations, respectively. During the six month periods ended May 1, 2020 and May 3, 2019, the company recognized $338.5 million and $70.9 million of net sales from CMW's operations. During the six month periods ended May 1, 2020 and May 3, 2019, the company recognized $28.0 million of segment earnings and $4.1 million of segment loss from CMW's operations, respectively.