Acquisition (Notes)

6 Months Ended

Jan. 31, 2014

Acquisition [Abstract]

Acquisition

ACQUISITION

On November 1, 2013, we acquired certain assets of MFM, a company engaged in the manufacturing, marketing and distribution of primarily private label cat litter. MFM and its parent company, MFM Delaware, Inc., had filed for bankruptcy in May 2013. The purchase of MFM’s cat litter business assets was a strategic business decision intended to expand our private label cat litter business. We did not acquire any land or mineral rights nor did we operate the MFM plant. MFM’s customers’ orders were transitioned to our existing cat litter manufacturing plants which had available capacity and were producing similar cat litter products.

This transaction qualifies as a business combination for accounting purposes, therefore the assets acquired were recorded at their respective estimated fair values at the date of acquisition. The excess of the purchase price over those fair values is recorded as goodwill. The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed at the acquisition date. The fair values are subject to refinement within the measurement period as we finalize our valuations.

	Estimated Fair Value as of November 1, 2013
	(in thousands)
Consideration transferred:
Cash	$	12,505
Contingent Consideration	500
Fair value of total consideration transferred	13,005
Recognized amounts of identifiable assets acquired:
Inventories	$	664
Current assets	630
Deferred taxes - current	190
Equipment	299
Deferred taxes - noncurrent	46
Customer list	7,785
Total identifiable net assets	9,614
Goodwill	$	3,391

Inventories acquired included finished goods, packaging supplies and raw materials. The inventory fair value was determined using the comparative sales method approach.

The MFM purchase agreement provides that we will receive half of the proceeds upon the sale of the real property retained by MFM. The receivable was valued at $500,000 based upon the fair value of the real property, which was determined using a market valuation approach, which may not be the ultimate sale price of the property. We expect to receive these proceeds within a year since MFM is required to sell the real property in order to resolve its bankruptcy proceedings. This receivable is included in current assets on the condensed Consolidated Balance Sheets. Current assets also includes a $130,000 prepaid asset for MFM deposits held by packaging suppliers to which we are entitled.

Various machinery and equipment purchased was valued primarily using a market valuation approach; however, a cost approach was used for certain equipment for which appropriate market comparisons were not available.

We deposited $500,000 in an escrow account to fund our maximum obligation to indemnify MFM for expenses incurred to prepare and sell the real property retained by MFM. We expect the full escrow amount to be spent within a year. The cash held in escrow is shown as restricted cash and the corresponding liability is included in current liabilities on the condensed Consolidated Balance Sheets.

We acquired a customer list which was recorded as an intangible asset at fair value using an income valuation approach. The valuation process estimated the present value of the anticipated benefits in excess of the returns on the contributory assets required to realize those benefits. The value of the customer list will be amortized over a period of 10 years with an accelerated amortization rate in the earlier years to reflect the expected pattern of decline in the related benefits over time. This customer list is related to the Retail and Wholesale Products Group segment.

The goodwill recorded from the acquisition is primarily attributable to anticipated synergies of our product portfolios. All of the goodwill recognized is deductible for tax purposes. This goodwill is related to the Retail and Wholesale Products Group segment.

Deferred taxes reflects primarily the difference between the book basis and tax basis of the accrued expense to indemnify MFM for costs incurred to prepare and sell the real property retained by MFM.

We incurred $120,000 of acquisition-related costs, primarily in the first quarter of fiscal 2014, which are included in selling, general and administrative expenses on the condensed Consolidated Statements of Income and Retained Earnings.

The summarized proforma financial information below presents the combined results of operations as if the acquisition of MFM had occurred as of August 1, 2012. MFM’s pre-acquisition results have been added to Oil-Dri’s historical results and include certain adjustments related to the acquisition, such as amortization of intangible assets and depreciation expense. These proforma results do not include any anticipated cost synergies and do not reflect the actual results of operations that would have been achieved, nor are they indicative of future results of operations. The following proforma results are presented for comparative purposes only (unaudited) (in thousands, except per share amounts):

	Three months ended				Six months ended
	January 31,				January 31,
	2014		2013		2014		2013
Proforma net sales	$	69,305	$	66,697	$	137,817	$	133,794
Proforma net income	$	4,209	$	2,057	$	6,802	$	6,335
Proforma net income per share - Basic Common	$	0.64	$	0.32	$	1.04	$	0.98
Proforma net income per share - Basic Class B	$	0.48	$	0.24	$	0.78	$	0.74
Proforma net income per share - Diluted	$	0.59	$	0.29	$	0.96	$	0.90

The net sales for MFM-related customers after the acquisition that are included in our condensed consolidated financial statements for the second quarter of fiscal 2014 were approximately $3,000,000. The amount of net income specifically attributed to these customers cannot be determined because MFM’s customers’ orders were fulfilled in our existing cat litter manufacturing plants and with our existing sales team and logistics processes.