Floor & Decor Holdings, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Acquisition

Acquisition

12 Months Ended

Dec. 30, 2021

Business Combination and Asset Acquisition [Abstract]

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 consolidated financial statements since the date of acquisition. The Company determined that Spartan is not a significant subsidiary as defined in Rule 1-02(w), Securities Act Rule 405, and Exchange Act Rule 12b-2. The acquisition was not material to the Company’s consolidated results of operations or financial position for the periods presented and, therefore, pro forma information has not been presented. During the fiscal year ended December 30, 2021, we recognized business acquisition and integration costs totaling $3.4 million within general and administrative expenses within the Consolidated Statements of Operations and Comprehensive Income. The Company incurred no business acquisition or integration costs in fiscal 2020 or 2019.

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 is 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 discount factors. 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.

The following table summarizes the estimated 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 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 estimated fair values, which are classified within Level 3 of the fair value hierarchy, and estimated remaining useful lives of identifiable intangibles assets as of the acquisition date:


in thousands	Useful Life (Years)	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.