| Acquisitions | 4. Acquisitions
When appropriate, the Company accounts for business combinations in
accordance with ASC 805, Business Combinations
The estimated fair values of assets acquired and liabilities
assumed are based on the information that was available through the
date of the most recent balance sheet, and are provisional, until
the Company has completed the required analysis of fair values to
be assigned to the assets acquired and liabilities assumed. The
ultimate determination of fair values assigned to the assets
acquired and liabilities assumed requires management to make
significant assumptions and estimates. The more significant
assumptions include estimating future cash flows and developing
appropriate discount rates. These estimates and assumptions of the
fair value allocation will be subject to change upon the
finalization of all valuation analyses. When required, independent
valuation specialists conduct valuations to assist management of
the Company in determining the estimated fair values of trade
receivables, inventory, machinery and equipment, intangible assets
and liabilities assumed, including contingent consideration. The
determination of these estimated fair values, the assets’
useful lives and the amortization and depreciation methods are
subject to finalization of the work performed by the independent
valuation specialists. Fair value measurements can be highly
subjective, and the reasonable application of measurement
principles may result in a range of alternative estimates using the
same facts and circumstances. The final allocation could be
materially different from the preliminary allocation recorded in
the Company’s unaudited condensed consolidated balance sheet.
However, the Company’s management is ultimately responsible
for the values assigned. Although the final determinations may
result in asset fair values that are materially different from the
preliminary estimates of the amounts included in the
Company’s unaudited condensed consolidated financial
statements, the Company believes that the fair values ultimately
assigned to the assets acquired and liabilities assumed will not
materially differ from amounts initially recorded in the
Company’s unaudited condensed consolidated financial
statements.
Acquisition of Powertrain Integration, LLC
On May 4, 2015, the Company entered into an Asset Purchase
Agreement (“APA”) with Powertrain Integration, LLC
(“Powertrain”) and its owners, to acquire the assets of
Powertrain. The acquisition closed on May 19, 2015
(“Powertrain Date of Acquisition”). Powertrain provides
on-highway powertrain solutions, including systems, components and
services for niche OEM automakers and fleets. Powertrain
specializes in alternative-fuel as well as gasoline and diesel
systems and offers design, engineering, testing and production
capabilities to deliver one-stop vehicle integration. At closing,
the Company paid cash of $20,873,000 representing the initial cash
consideration adjusted for estimated working capital. The purchase
price is subject to further adjustments for the final working
capital acquired, assumed liabilities, a Base Earn-out Payment and
Additional Earn-out Payment, all as described in the APA.
Accordingly, the Company also recorded a liability of $8,200,000 as
of the Powertrain Date of Acquisition representing the contingent
consideration associated with the Base Earn-out Payment and
Additional Earn-out Payment for a provisional aggregate purchase
price of $29,073,000. The actual amount of the contingent
consideration attributable to the Base Earn-out will be based upon
the 2015 full year net sales of Powertrain. The Base Earn-out
Payment is payable in cash while the Additional Earn-out Payment is
payable, at the Company’s discretion, in cash or shares of
the Company’s common stock. The Additional Earn-out Payment
is defined as the greater of a 5% per annum return on the Base
Earn-out Payment and the incremental growth of the Company’s
stock price since the acquisition was announced as determined in
accordance with the formula defined in the APA. Under the terms of
the APA, the Base Earn-out Payment and the Additional Earn out
Payment are expected to be settled and paid during the first
quarter of 2016. The Company’s liability for the contingent
consideration was measured at fair value based on unobservable
inputs, and thus was considered a Level 3 financial instrument. The
fair value of the liability was primarily driven by the
Company’s expectations of achieving the performance targets
required by the APA. The expected performance targets were used in
a Monte Carlo simulation which provided for the most likely
earn-out payment which was then discounted to present value in
order to derive a fair value of the Base Earn-out Payment. A
Modified Black-Scholes call option model considering the actual and
forecasted share price, the measurement period and a volatility
factor was used to derive a fair value of the Additional Earn-out
Payment. The aggregate purchase price, inclusive of all potential
payments has not yet been finalized.
The Company has accounted for this acquisition as a business
combination in accordance with ASC 805, Business Combinations
The purchase price for this acquisition has been provisionally
allocated to the assets acquired and liabilities assumed based on
their estimated fair values as follows:
May 19, 2015 (Date
Assets acquired:
Accounts receivable $ 4,942
Inventories 1,890
Prepaid expenses and other current assets 23
Property, plant & equipment 315
Other non-current assets 24
Total tangible assets 7,194
Intangible assets:
Intangible assets 13,600
Goodwill 14,471
Total assets acquired 35,265
Liabilities assumed:
Accounts payable 5,951
Accrued liabilities 241
Total liabilities assumed 6,192
Net assets acquired $ 29,073
Cash paid at date of acquisition $ 20,873
Contingent consideration 8,200
Aggregate provisional consideration $ 29,073
The above estimated fair values of assets acquired and liabilities
assumed were based on the information that was available through
June 30, 2015 and are provisional. There are inherent
uncertainties and management judgment required in these
determinations. The fair value measurements of certain assets
acquired and liabilities assumed were based on valuations involving
significant unobservable inputs that are Level 3 inputs in the
fair value hierarchy. The Company believes that these inputs
provided a reasonable basis for estimating the fair values but is
waiting for certain additional information necessary to finalize
those amounts. Thus, the provisional measurements of fair value
reflected are subject to change. Except as discussed below, the
assets acquired and the liabilities assumed were stated at their
estimated fair values at the Powertrain Date of Acquisition.
The fair value of accounts receivable acquired was adjusted for
amounts known or highly likely to be uncollectible based upon an
assessment of known facts and circumstances as of the Powertrain
Date of Acquisition and additional information arising subsequent
to the Powertrain Date of Acquisition with respect to these known
facts and circumstances.
The inventory acquired was revalued to its fair value. While the
cost of raw materials generally approximates fair value, the value
of finished goods inventory was “stepped up” by
$22,000, representing the estimated selling price of that inventory
less the sum of costs to complete and a reasonable allowance for
the Company’s selling efforts. The Company recognized all of
this “stepped up” inventory value within cost of sales
in the three and six months ended June 30, 2015.
The identifiable intangible assets as a result of the acquisition
will be amortized over their respective estimated useful lives as
follows:
Asset Estimated
Backlog $ 600 3 months
Customer relationships 13,000 12 years
Total identifiable intangible assets $ 13,600
The weighted average useful life of the intangibles identified
above is approximately 11.5 years. The fair value of backlog and
customer relationships was derived using the multi-period excess
earnings method.
The fair value of property, plant and equipment was based upon the
acquisition costs of assets acquired as of the Powertrain Date of
Acquisition adjusted for any known facts and circumstances
necessary to approximate fair value.
Goodwill largely consists of geographic expansion of product sales,
manufacturing and other synergies of the combined companies, and
the value of the assembled workforce.
Acquisition of Bi-Phase Technologies, LLC
On May 1, 2015, the Company acquired all of the membership
interests in Bi-Phase Technologies, LLC, a Minnesota limited
liability company (“Bi-Phase”) and wholly-owned
subsidiary of TPB, Inc, a Minnesota corporation. Bi-Phase is
engaged in the design and manufacture of liquid propane electronic
fuel injection systems to allow for the conversion of vehicles from
gasoline to propane. The initial purchase price was approximately
$3.5 million in cash plus certain working capital, assumption of
certain liabilities and Earn-out Payments as defined in the
Membership Interest Purchase Agreement. The cash paid at the date
of acquisition was $3,619,000 including estimated working capital.
The Company also recorded a contingent consideration liability of
$540,000 representing an estimate of the Earn-out Payments expected
to be payable in connection with the acquisition of Bi-Phase. This
contingent consideration, payable to TPB, Inc, is based upon
certain sales of Bi-Phase fuel systems over a period of three to
five years. The provisional purchase price also includes $104,000
relating to the true-up of the final working capital acquired, net
of other adjustments as provided in the Membership Interest
Purchase Agreement, which amount was unpaid as of June 30,
2015, pending agreement between the Company and the seller.
Accordingly, the provisional aggregate purchase price approximated
$4,263,000.
The Company has accounted for this acquisition as a business
combination in accordance with ASC 805, Business Combinations
The purchase price for this acquisition has been provisionally
allocated to the assets acquired and liabilities assumed based on
their estimated fair values as follows:
May 1, 2015 (Date
Assets acquired:
Accounts receivable $ 153
Inventories 2,103
Prepaid expenses 4
Property, plant & equipment 113
Total tangible assets 2,373
Intangible assets:
Intangible assets 860
Goodwill 1,343
Total assets acquired 4,576
Liabilities assumed:
Accounts payable 266
Accrued liabilities 47
Total liabilities assumed 313
Net assets acquired $ 4,263
Initial cash paid at date of acquisition $ 3,619
Contingent consideration 540
Additional consideration - unpaid 104
Aggregate provisional consideration $ 4,263
The above estimated fair values of assets acquired and liabilities
assumed were based on the information that was available through
June 30, 2015 and are provisional. There are inherent
uncertainties and management judgment required in these
determinations. The fair value measurements of certain assets
acquired and liabilities assumed were based on valuations involving
significant unobservable inputs that are Level 3 inputs in the
fair value hierarchy. The Company believes that these inputs
provided a reasonable basis for estimating the fair values but is
waiting for certain additional information necessary to finalize
those amounts. Thus, the provisional measurements of fair value
reflected are subject to change. Except as discussed below, the
assets acquired and the liabilities assumed were stated at their
estimated fair values at the Bi-Phase date of acquisition.
The fair value of accounts receivable acquired was adjusted for
amounts known or highly likely to be uncollectible based upon an
assessment of known facts and circumstances as of the Bi-Phase date
of acquisition and additional information arising subsequent to
that date with respect to these known facts and circumstances.
The inventory acquired was revalued to its fair value. While the
cost of raw materials generally approximates fair value, the value
of finished goods inventory was “stepped up” by
$226,000, representing the estimated selling price of that
inventory less the sum of costs to complete and a reasonable
allowance for the Company’s selling efforts. The Company
recognized $56,000 of this “stepped up” inventory value
within cost of sales in the three and six months ended
June 30, 2015.
The identifiable intangible assets as a result of the acquisition
will be amortized over their respective estimated useful lives as
follows:
Asset Estimated
Developed technology $ 700 7 years
Customer relationships 160 15 years
Total identifiable intangible assets $ 860
The weighted average useful life of the intangibles identified
above is approximately 8.5 years. The fair value of developed
technology and customer relationships was derived using the relief
from royalty method and the multi-period excess earnings method,
respectively.
The fair value of property, plant and equipment was based upon the
acquisition costs of assets acquired as of the Bi-Phase date of
acquisition adjusted for any known facts and circumstances
necessary to approximate fair value.
Goodwill largely consists of geographic expansion of product sales,
manufacturing and other synergies of the combined companies, and
the value of the assembled workforce.
Acquisition of Bucks Acquisition Company, LLC
On March 18, 2015, the Company acquired all of the membership
interests in Buck’s Acquisition Company, LLC,
(“Buck’s”) from UE Powertrain d/b/a Buck’s
Engines and United Holdings, LLC, for an initial cash purchase
price of approximately $9,735,000, subject to certain adjustments
as defined by the purchase agreement. Buck’s is a
manufacturer of alternative-fuel engines for industrial markets and
was formerly a product line of United Engines, LLC. Buck’s
supplies a range of alternative-fuel engines that run on natural
gas, propane and liquid propane gas fuels. Buck’s targets an
extensive range of industrial applications, including irrigation,
gas compression, oil production, industrial equipment, power
generation, mobile equipment, wind turbines, and re-power
applications. The acquisition of Buck’s has been accounted
for as a business combination in accordance with ASC
805, Business
Combinations
The purchase price for this acquisition has been provisionally
allocated to the assets acquired and liabilities assumed based on
their estimated fair values as follows:
March 18, 2015 (Date
Assets acquired:
Inventories $ 6,611
Property, plant & equipment 218
Total tangible assets 6,829
Intangible assets:
Intangible assets 1,380
Goodwill 1,526
Total assets acquired $ 9,735
The above estimated fair values of assets acquired were based on
the information that was available through June 30, 2015 and
are provisional. There are inherent uncertainties and management
judgment required in these determinations. The fair value
measurements of certain assets acquired were based on valuations
involving significant unobservable inputs that is Level 3
inputs in the fair value hierarchy. The Company believes that these
inputs provided a reasonable basis for estimating the fair values
but is waiting for certain additional information necessary to
finalize those amounts. Thus, the provisional measurements of fair
value reflected are subject to change. Except as discussed below,
the assets acquired and the liabilities assumed were stated at
their estimated fair values at acquisition.
The inventory acquired was revalued to its fair value. While the
cost of raw materials generally approximates fair value, the value
of finished goods inventory was “stepped up” by
$290,000, representing the estimated selling price of that
inventory less the sum of costs to complete and a reasonable
allowance for the Company’s selling efforts. The Company
recognized $145,000 of this “stepped up” inventory
value within cost of sales in the three and six months ended
June 30, 2015. The identifiable intangible assets as a result
of the acquisition will be amortized over their respective
estimated useful lives as follows:
Asset Estimated
Customer relationships $ 1,380 10 years
The weighted average useful life of the intangibles identified
above is approximately 10 years. The fair value of customer
relationships was derived using the multi-period excess earnings
method.
The fair value of property, plant and equipment was based upon the
acquisition costs of assets acquired as of the date of acquisition
adjusted for any known facts and circumstances necessary to
approximate fair value.
Goodwill largely consists of geographic expansion of product sales,
manufacturing and other synergies of the combined companies, and
the value of the assembled workforce.
The assets, liabilities, and operating results of Powertrain,
Bi-Phase and Buck’s have been included in the Company’s
unaudited condensed consolidated financial statements from their
respective dates of acquisition to June 30, 2015.
Acquisition of Professional Power Products, Inc.
On April 1, 2014, the Company acquired Professional Power
Products, Inc. (“3PI”), pursuant to a stock purchase
agreement with Carl L. Trent and Kenneth C. Trent (collectively the
“Trents”) and CKT Holdings Inc., a Wisconsin
corporation owned by the Trents. 3PI is a leading designer and
manufacturer of large, custom engineered integrated electrical
power generation systems serving the global diesel and natural gas
power generation markets. The Company treated the acquisition of
3PI as a purchase of assets for income tax purposes. The
acquisition of 3PI was financed through the Company’s
revolving line of credit and from proceeds received from a secured
term loan.
The following table provides a summary of the initial consideration
for 3PI:
Fair value of assets acquired $ 60,104
Less liabilities assumed (5,805 )
Net assets acquired 54,299
Less value of shares of Company common stock expected to be issued
at date of acquisition (8,900 )
Less cash acquired (1,277 )
Cash paid $ 44,122
The accompanying unaudited condensed consolidated statements of
operations includes 3PI’s sales of $3,848,000 and $8,800,000
for the three and six months ended June 30, 2015,
respectively, and $7,272,000 for the three months ended
June 30, 2014. 3PI’s operating loss was $2,345,000 and
$4,460,000, for the three and six months ended June 30, 2015,
respectively, and $31,000 for the three months ended June 30,
2014. Amortization expense related to identifiable intangible
assets associated with the acquisition and expense attributable to
the stepped-up value of inventory acquired, in the unaudited
condensed consolidated financial statements, approximated $841,000
and $1,681,000 for the three and six months ended June 30,
2015, respectively and approximated $1,037,000 for the three months
ended June 30, 2014.
The following supplemental pro forma information presents the
financial results as if the transaction had occurred on
January 1, 2013 as follows:
Three months ended Six months ended
June 30, June 30, June 30,
Net sales $ 83,378 $ 180,768 $ 155,293
Net income 3,883 3,465 6,199
Earnings per share, basic $ 0.37 $ 0.32 $ 0.59
Earnings per share, diluted $ 0.34 $ 0.32 $ 0.56
The historical operating results of 3PI included in the proforma
information above has been adjusted to exclude certain
non-recurring expenses, principally transaction expenses which
amount approximated to $3,474,000 in 2014.
The pro forma information presented above is for information
purposes only and is not indicative of the results of operations
that would have been achieved if the acquisition had taken place at
an earlier date, nor are these results necessarily indicative of
future consolidated results of operations of the Company.
Transaction fees and expenses
The Company incurred total transaction costs related to its
acquisition activities of $247,000 and $447,000 for the three and
six months ended June 30, 2015, respectively, all of which was
recognized as an operating expense and classified within general
and administrative expenses in the Company’s unaudited
condensed consolidated statements of operations in accordance with
GAAP. The Company incurred total transaction costs related to the
3PI acquisition of $811,000 for the six months ended June 30
2014, all of which was recognized in the three months ended
March 31, 2014 in accordance with GAAP. |
