Quarterly report pursuant to Section 13 or 15(d)

ACQUISTION

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ACQUISTION
 9 Months Ended
Oct. 31, 2015
Business Combinations [Abstract]  
ACQUISITION
ACQUISITION

On July 27, 2014, the Company executed an Agreement and Plan of Merger to acquire Family Dollar in a cash and stock transaction (the "Acquisition"). On July 6, 2015 (the "Acquisition Date"), the Company completed the Acquisition and Family Dollar became a direct, wholly-owned subsidiary of the Company. Under the Acquisition, the Family Dollar shareholders received $59.60 in cash and 0.2484 shares of the Company's common stock for each share of Family Dollar common stock they owned, plus cash in lieu of fractional shares (the "Merger Consideration").
As of the Acquisition Date, each outstanding performance share right of Family Dollar common stock was canceled in exchange for the right of the holder to receive the Merger Consideration (the "PSR Payment"). The aggregate amount paid by the Company for the Merger Consideration and PSR Payment was $6.8 billion in cash and the Company issued 28.5 million shares of the Company's common stock, valued at $2.3 billion based on the closing price of the Company's common stock on July 2, 2015. Additionally, outstanding Family Dollar stock options and restricted stock units were converted into mirror awards exercisable or to be earned in the Company's common stock. The value of these awards was apportioned between total Merger Consideration and unearned compensation to be recognized over the remaining original vesting periods of the awards.
The Company's common stock continues to trade on the Nasdaq Exchange under the symbol "DLTR." Following the Acquisition Date, Family Dollar's common stock ceased trading on, and was delisted from, the New York Stock Exchange. Family Dollar's results from the Acquisition Date through October 31, 2015 are included in the Condensed Consolidated Income Statements.
The following table summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed as of the Acquisition Date of July 6, 2015. The preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in adjustments to the preliminary values presented below, when management's appraisals and estimates are finalized:
 
Preliminary Estimates
 
 
As Reported
As Revised
 
(in millions)
August 1, 2015
October 31, 2015
Adjustments
Cash
$
307.4

$
305.3

$
(2.1
)
Short-term investments
4.0

4.0

—

Accounts receivable
71.4

71.1

(0.3
)
Inventory
1,764.5

1,764.5

—

Other current assets
94.2

94.7

0.5

Property, plant and equipment
1,912.8

1,897.3

(15.5
)
Assets available for sale
—

10.1

10.1

Goodwill
4,819.0

4,860.3

41.3

Intangible assets, net
3,570.3

3,570.2

(0.1
)
Other assets
77.7

77.7

—

Long-term debt, including current portion
(485.2
)
(497.0
)
(11.8
)
Accounts payable
(633.4
)
(633.5
)
(0.1
)
Other current liabilities
(550.4
)
(574.8
)
(24.4
)
Deferred tax liabilities, net
(1,644.7
)
(1,643.5
)
1.2

Other liabilities
(202.2
)
(201.0
)
1.2

   Total purchase price
$
9,105.4

$
9,105.4

$
—

Less: Cash acquired
(307.4
)
(305.3
)
2.1

   Total purchase price, net of cash acquired
8,798.0

8,800.1

2.1

Acquisition cost paid in common stock
(2,272.4
)
(2,272.4
)
—

Acquisition cost paid in cash, net of cash acquired
$
6,525.6

$
6,527.7

$
2.1


The adjustments recorded in the 13 weeks ended October 31, 2015 to the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed as of July 6, 2015 are due to continued refinement of management's appraisals and estimates. The adjustments recorded did not have a material impact on results reported in prior reporting periods. The adjustment to other current liabilities was due to new information available to the Company related to the store divestitures.
On November 1, 2015, the Company completed the transaction pursuant to which it divested 330 Family Dollar stores to Dollar Express LLC, a portfolio company of Sycamore Partners. The divestiture satisfied a condition as required by the Federal Trade Commission in connection with the Acquisition. The divested stores represent approximately $45.5 million of annual operating income and will operate under the Dollar Express banner. The table above reflects the effect of the divestiture as required by purchase accounting as the divestiture was a condition of the Acquisition. As part of the divestiture, the Company was required to guarantee payments under 316 store leases. The amount of the guarantee is not known at this time. Included in other current liabilities is approximately $91.4 million related to the transition of inventory and working capital associated with the divestiture.
Goodwill is calculated as the excess of the purchase price over the net assets acquired. The goodwill recognized is attributable to growth opportunities and expected synergies.
Intangible assets, net consist of three separately identified assets and one liability. First, the Company identified the Family Dollar tradename as an indefinite-lived intangible asset with a fair value of $3.1 billion. The tradename is not subject to amortization but will be evaluated annually for impairment. Second, the Company recognized an intangible asset of $629.2 million for favorable Family Dollar leases and a liability of $164.5 million for unfavorable Family Dollar leases (as compared to prevailing market rates) which will be amortized over the remaining lease terms, including, in some cases, an assumed renewal. Lastly, the Company recognized an intangible asset of $5.5 million for a customer list. The allocation of the purchase price to intangible assets as well as their estimated useful lives is preliminary and may be adjusted.
The Company assumed the liability for Family Dollar's $185.2 million of private placement unsecured senior notes due September 27, 2015, Family Dollar's $300.0 million of 5% unsecured senior notes due February 1, 2021 and Family Dollar's unsecured revolving credit facilities. Following the Acquisition, the Company repaid the $185.2 million outstanding under the Family Dollar private placement unsecured senior notes and terminated the unsecured revolving credit facilities.
The results of operations of Family Dollar are included in the Company's results of operations beginning on July 6, 2015. From July 6, 2015 through October 31, 2015, Family Dollar generated net sales of $3,485.1 million and a net loss of $115.2 million. These results included: $73.0 million of inventory markdowns due to sku rationalization and planned liquidations; $101.4 million of expenses related to purchase accounting, primarily amortization of the step-up of the inventory value, amortization of intangible assets and higher depreciation expense; and $11.3 million of severance and integration costs.
The following unaudited consolidated pro forma summary has been prepared by adjusting the Company's historical data to give effect to the Acquisition as if it had occurred on February 2, 2014:
 
 
Pro Forma - Unaudited
 
 
13 Weeks Ended
 
39 Weeks Ended
(in millions, except per share data)
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Net sales
 
$
4,945.2

 
$
4,613.9

 
$
14,803.0

 
$
13,998.6

Net income
 
$
107.9

 
$
103.9

 
$
344.1

 
$
396.8

Basic net income per share
 
$
0.46

 
$
0.44

 
$
1.47

 
$
1.69

Diluted net income per share
 
$
0.46

 
$
0.44

 
$
1.46

 
$
1.69



The unaudited consolidated pro forma financial information was prepared in accordance with existing standards and is not necessarily indicative of the results of operations that would have occurred if the Acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.
Material non-recurring adjustments excluded from the pro forma financial information above consists of the step up of Family Dollar inventory to its fair value. The unfavorable adjustment to cost of goods sold of $38.4 million and $49.5 million was based on the acquired inventory sold in the 13 and 39 weeks ended October 31, 2015, respectively. Also excluded were $33.4 million and $90.1 million of expenses related to Family Dollar's restructuring for the 13 and 39 weeks ended November 1, 2014, respectively.
The unaudited pro forma results do not reflect events that either have occurred or may occur after the Acquisition, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods. They also do not give effect to certain charges that the Company expects to incur in connection with the Acquisition, including, but not limited to, additional professional fees, employee integration, retention and severance costs, potential asset impairments, accelerated depreciation and amortization or product rationalization charges.
The Company has incurred $38.7 million in acquisition-related expenses in 2015, excluding acquisition-related interest expense. The Company also expended approximately $165.7 million in remaining capitalizable debt issuance costs related to the financing of the Acquisition and $153.9 million was included as a reduction in "Long-term debt, net" at October 31, 2015.
For additional discussion of the Acquisition, please see the "Acquisition" section included in "Part I. Financial Information, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-Q.