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49
PART II
Description Judgments and Uncertainties Effect if Actual Results Differ From
Assumptions
Acquisitions — Purchase Price Allocation
In accordance with accounting for business
combinations, we allocate the purchase
price of an acquired business to its
identifiable assets and liabilities based on
estimated fair values. Minority interests’
proportionate ownership of assets and
liabilities are recorded at historical carrying
values. The excess of the purchase price
over the amount allocated to the assets and
liabilities, if any, is recorded as goodwill.
We use all available information to estimate
fair values. We typically engage outside
appraisal firms to assist in the fair value
determination of inventory, identifiable
intangible assets such as tradenames, and
any other significant assets or liabilities. We
adjust the preliminary purchase price
allocation, as necessary, up to one year
after the acquisition closing date as we
obtain more information regarding asset
valuations and liabilities assumed.
Our purchase price allocation methodology
contains uncertainties because it requires
management to make assumptions and to
apply judgment to estimate the fair value of
acquired assets and liabilities. Management
estimates the fair value of assets and
liabilities based upon quoted market prices,
the carrying value of the acquired assets
and widely accepted valuation techniques,
including discounted cash flows and market
multiple analyses. Unanticipated events or
circumstances may occur which could affect
the accuracy of our fair value estimates,
including assumptions regarding industry
economic factors and business strategies.
During the last three fiscal years, we
completed two significant acquisitions. On
March 7, 2006, we acquired Pacific Sales
for $411 million including transaction costs.
On June 8, 2006, we acquired a 75%
interest in Five Star for $184 million,
including a working capital injection of
$122 million and transaction costs. See
Note 3, Acquisitions,totheNotesto
Consolidated Financial Statements, included
in Item 8, Financial Statements and
Supplementary Data, of this Annual Report
on Form 10-K, for the complete purchase
price allocation calculations.
We do not believe there is a reasonable
likelihood that there will be a material
change in the future estimates or
assumptions we use to complete the
purchase price allocation and estimate the
fair value of acquired assets and liabilities.
However, if actual results are not consistent
with our estimates or assumptions, we may
be exposed to losses or gains that could be
material.