Quarterly report pursuant to Section 13 or 15(d)

Acquisition

v3.21.2
Acquisition
 9 Months Ended
Sep. 30, 2021
Business Combination and Asset Acquisition [Abstract]  
Acquisition Acquisition
On June 4, 2021 (“acquisition date” or “closing date”), the Company acquired Spartan Surfaces, Inc. (“Spartan”), a commercial specialty hard-surface flooring distribution company, for total estimated purchase consideration of $77.7 million. The acquisition was accounted for in accordance with ASC 805, Business Combinations, and, accordingly, Spartan’s results of operations, financial position, and cash flows have been consolidated in the Company’s condensed consolidated financial statements since the date of acquisition. Net sales and net earnings for fiscal 2021 attributable to Spartan since the completion of the acquisition were immaterial. Results of operations would not be materially different as a result of the acquisition and therefore pro forma information is not presented. During the thirteen and thirty-nine weeks ended September 30, 2021, we recognized acquisition-related costs totaling $0.1 million and $3.3 million, respectively, within general and administrative expenses within the Condensed Consolidated Statements of Operations and Comprehensive Income.
The following table summarizes the fair values of the components of the purchase price as of the acquisition date:
in thousands
Cash, net of cash acquired $ 63,567 
Floor and Decor Class A common stock 5,000 
Contingent consideration 9,090 
Total purchase price $ 77,657 
The contingent consideration represents the estimated fair value associated with potential earn-out payments to the seller of up to $18.0 million subject to Spartan's achievement of certain financial performance targets in fiscal years 2021 through 2024. Of the total earn-out consideration, $9.0 million is related to the achievement of certain annual adjusted EBITDA margin targets, and $9.0 million is related to the achievement of certain annual gross profit targets. A portion of these earn-out opportunities are payable each year subject to achievement of the applicable performance targets for that year, with the maximum payout requiring that each of the individual annual targets are met. The Company determined the fair value of the contingent earn-out consideration (“contingent earn-out liability”) with assistance from a third-party valuation specialist using a Monte Carlo valuation method. Significant assumptions included the amount and timing of projected cash flows, growth rates, volatility, and the discount factor. The contingent earn-out liability is classified as Level 3 within the fair value hierarchy due to the use of unobservable inputs that are significant to its valuation and is required to be remeasured at each reporting date through the applicable earn-out periods, with any resulting gains or losses recognized in general and administrative expenses in the period of remeasurement.
For the thirteen and thirty-nine weeks ended September 30, 2021, a $0.3 million net increase in the fair value of the contingent earn-out liability was recognized in general and administrative expense within the Condensed Consolidated Statements of Operations and Comprehensive Income. As of September 30, 2021, the estimated fair value of the contingent earn-out consideration totaled $9.4 million, of which $2.5 million is included in accrued expenses and other current liabilities and the remaining $6.9 million is included in other liabilities within the Condensed Consolidated Balance Sheets.
The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed at the acquisition date:
in thousands Fair Value
Current assets $ 16,467 
Fixed assets, net
 970 
Right-of-use assets 3,300 
Intangible assets, net 44,400 
Goodwill 28,026 
Total assets acquired $ 93,163 
Current liabilities $ 12,393 
Lease liabilities 2,725 
Other liabilities 388 
Total liabilities assumed $ 15,506 
Net assets acquired $ 77,657 
The purchase price allocation reflected above is preliminary and may be subject to change as final fair values are determined. Accordingly, there may be adjustments to the assigned values of acquired assets and liabilities, including, but not limited to, intangible assets and contingent earn-out consideration. The final determination of acquisition-date fair values will be completed as soon as practicable, which is generally within the measurement period of up to one year from the acquisition date in accordance with ASC 805, Business Combinations. Any adjustments to provisional amounts that are identified during the measurement period will be recognized in the reporting period in which the adjustment is determined.
The preliminary fair values of identifiable intangible assets were determined with assistance from a third-party valuation specialist using the multi-period excess earnings method for customer relationships, the relief-from-royalty method for the trade name, and an incremental income method for the non-compete agreement. These valuation methodologies included significant assumptions such as the amount and timing of projected cash flows, growth rates, customer attrition rates, discount rates, royalty rates (for use in estimating the fair value of the Spartan trade name), and the assessment of each asset’s life cycle. Following are the preliminary estimated fair values and estimated remaining useful lives of identifiable intangibles assets as of the acquisition date:
in thousands Useful Life (Years) Preliminary Fair Value
Identifiable intangible assets:
Customer relationships 12 $ 34,900 
Trade name Indefinite $ 9,200 
Non-compete agreement
 5 $ 300 
Total identifiable intangible assets $ 44,400 
The goodwill arising from the acquisition is primarily attributable to operational synergies and acceleration of growth strategies. The goodwill and intangible assets from the Spartan acquisition are expected to be deductible for U.S. federal and state tax purposes.
The gross carrying amount of goodwill and other intangible assets and the related accumulated amortization for amortizable intangible assets as of September 30, 2021 and December 31, 2020 are as follows:
September 30, 2021 December 31, 2020
in thousands Gross carrying amount Accumulated amortization Net carrying value Gross carrying amount Accumulated amortization Net carrying value
Amortizable intangible assets:
Customer relationships $ 34,900  $ (969) $ 33,931  $ —  $ —  $ — 
Non-compete agreement
 300  (22) 278  —  —  — 
Total amortizable intangible assets 35,200  (991) 34,209  —  —  — 
Unamortizable intangible assets:
Trade names - Floor & Decor 109,269  —  109,269  109,269  —  109,269 
Trade names - Spartan 9,200  —  9,200  —  —  — 
Total intangible assets: $ 153,669  $ (991) $ 152,678  $ 109,269  $ —  $ 109,269 
Goodwill $ 255,473  $ —  $ 255,473  $ 227,447  $ —  $ 227,447 
The estimated aggregate future amortizable expense for the intangible assets is as follows:
in thousands Amount
Thirteen weeks ending December 30, 2021 $ 743 
2022 2,974 
2023 2,974 
2024 2,974 
2025 2,974 
Thereafter 21,570 
Total $ 34,209