Acquisitions | NOTE 6. ACQUISITIONS MARTIN DOORS On October 14, 2022 , we completed the acquisition of the Martin Doors brand. The acquisition was done by WWS Acquisition, LLC, a Missouri limited liability company, indirectly wholly-owned by PGT Innovations, Inc., which acquired all of the shares of stock of Martin Door Holdings, Inc., a Utah corporation, headquartered in Salt Lake City, Utah, a custom manufacturer of overhead garage doors and hardware serving the Western U.S. (the "Martin Acquisition"), pursuant to that certain Share Purchase Agreement dated as of October 14, 2022 (the “Martin Purchase Agreement”). The fair value of consideration transferred in the Martin Acquisition was $ 188.5 million, composed entirely of cash, including $ 185.0 million for purchase price and $ 3.5 million in working capital adjustments, of which $ 2.8 million was estimated and paid at closing, and approximately $ 0.7 million was paid in the first quarter of 2023 upon finalization of the net working capital calculation. The cash portion of the Martin Acquisition was financed with borrowings under the revolving credit facility ("New Revolving Credit Facility") established under fifth amendment ("Fifth Amendment") to the 2016 Credit Agreement ("2016 Credit Agreement due 2027") of $ 98.4 million, with the remaining $ 90.1 million, which includes the approximately $ 0.7 million final net working capital adjustment paid in the first quarter of 2023, funded with cash on hand. Generally, cash on hand for the Martin Acquisition was provided by cash generated through operations. Purchase Price Allocation The preliminary estimated fair value of assets acquired, liabilities assumed and subsequent adjustments to that allocation as of our reporting date, are as follows : Initial Adjustments to Preliminary Accounts receivable $ 6,653 $ ( 194 ) $ 6,459 Inventories 9,543 ( 364 ) 9,179 Contract assets, net 5,242 — 5,242 Prepaid expenses and other assets 90 — 90 Property and equipment 11,422 ( 493 ) 10,929 Operating lease right-of-use asset 12,259 — 12,259 Intangible assets 91,900 — 91,900 Total assets acquired 137,109 ( 1,051 ) 136,058 Accounts payable ( 2,482 ) — ( 2,482 ) Accrued and other liabilities ( 1,270 ) 283 ( 987 ) Deferred tax liabilities ( 23,604 ) — ( 23,604 ) Operating lease liability ( 12,259 ) — ( 12,259 ) Total liabilities assumed ( 39,615 ) 283 ( 39,332 ) Net assets acquired 97,494 ( 768 ) 96,726 Goodwill 90,300 1,512 91,812 Fair value of consideration transferred $ 187,794 $ 744 $ 188,538 Consideration: Cash $ 187,794 $ 744 $ 188,538 Fair value of consideration transferred $ 187,794 $ 744 $ 188,538 The fair value of certain working capital related items, including Martin’s accounts receivable, prepaid expenses and other assets, and accounts payable and accrued and other liabilities, approximated their book values at the date of the Martin Acquisition. The fair value of inventory was estimated by major category, at net realizable value, which we believe approximates the price a market participant could achieve in a current sale. The substantial majority of inventories at the acquisition date was comprised of raw materials. The fair value of property and equipment and remaining useful lives were estimated by management, with the assistance of a third-party valuation firm, using the cost approach. Valuations of the intangible assets were done using income and royalty relief approaches based on projections provided by management, which we consider to be Level 3 inputs, with the assistance of a third-party valuation firm. During the first half of 2023, we made immaterial adjustments to our purchase allocation relating to accounts receivable, inventories and accrual and other liabilities. We incurred acquisition costs totaling $ 4.8 million relating to legal expenses, representations and warranties insurance, diligence, accounting and other services in the Martin Acquisition in the year ended December 31, 2022. Because the Martin Acquisition was an acquisition of stock, Martin's assets and liabilities retain their tax bases at the time of the acquisition. Therefore, none of the identifiable intangible assets or goodwill acquired in the Martin Acquisition are deductible for tax purposes. As of July 1, 2023, goodwill is estimated to be $ 91.8 million. Martin's goodwill is included as part of the Western reporting unit. We believe Martin's goodwill relates to the expansion of our footprint in a key, strategic market we have identified as a geographic area of growth for our Company, as well as being a key component of our strategy to expand into adjacent building material products, other than windows and doors. Pro forma results of operations, as well as net sales and income attributable to the Martin Acquisition are not presented as it did not have a material impact on our results of operations. Valuation of Identified Intangible Assets The valuation of the identifiable intangible assets acquired in the Martin Acquisition and our estimate of their respective useful lives are as follows: Initial Preliminary Useful Life Valuation (in years) (in thousands) Trade name $ 24,000 indefinite Customer relationships 52,700 15 Customer-related backlog (amortized in 2022) 400 < 1 Developed technology 14,600 3 - 14 Non-compete-related intangible 200 5 Intangible assets $ 91,900 ANLIN WINDOWS & DOORS On October 25, 2021 , we completed the acquisition of Anlin Windows & Doors. The acquisition was done by Western Window Holding LLC, a Delaware limited liability company, indirectly wholly-owned by PGT Innovations, Inc., which acquired substantially all of the assets, properties and rights owned, used or held for use in the business, as operated by Anlin Industries, a California corporation, of manufacturing vinyl windows and doors for the replacement market and the new construction market, and all activities conducted in connection therewith (the "Anlin Acquisition"), pursuant to that certain Asset Purchase Agreement dated as of September 1, 2021 (the “Anlin Purchase Agreement”), by and among the Company, and Anlin Industries. The fair value of consideration transferred in the Anlin Acquisition was $ 121.7 million, composed of $ 115.0 million in cash, including $ 113.5 million for purchase price and $ 1.5 million in working capital adjustments, including $ 0.8 million paid during the three months ended October 1, 2022, and fair value of contingent consideration of $ 6.7 million, discussed in greater detail below. The Anlin Purchase Agreement provided for the potential for earn-out contingency payments to the sellers should Anlin achieve a certain level of earnings before interest, taxes, depreciation and amortization, ("Anlin EBITDA"), as defined in the Anlin Purchase Agreement, for its fiscal years of 2021 and 2022, of up to $ 3.2 million to be paid out by March 31, 2022, and of up to $ 9.5 million to be paid out by March 31, 2023, respectively. We had recorded a preliminary earn-out contingent liability of $ 5.9 million as of our 2021 fiscal year ended January 1, 2022, which represented its then estimated fair value based on probability adjusted levels of estimated Anlin EBITDA. Estimated Anlin EBITDA is a significant input that is not observable in the market, which ASC 820 considers to be a Level 3 input. In the first quarter of 2022, we finalized the fair value of the earn-out contingency, which we adjusted by an additional $ 0.8 million, to a total of $ 6.7 million of estimated fair value of contingent consideration as of the effective date of the Anlin Acquisition. This amount included $ 2.4 million for the contingent consideration relating to 2021 Anlin EBITDA and $ 4.3 million for the contingent consideration relating to the 2022 Anlin EBITDA. The first contingent consideration payment was agreed to be $ 2.7 million, which exceeded its estimated fair value by $ 0.3 million. This excess is classified as selling, general and administrative expenses in our 2022 fiscal year ended December 31, 2022. The payment was made during the second quarter of 2022 after both parties agreed to extend the deadline for the first payment past the March 31, 2022 due date stated in the Anlin Purchase Agreement. As of the end of 2022, we updated our estimate of the fair value of the contingent consideration relating to 2022 Anlin EBITDA to $ 9.5 million, which was the maximum potential payout for fiscal year 2022 under the Anlin Purchase Agreement, which we paid-out in the first quarter of 2023. As such, we recognized an expense of approximately $ 5.1 million, representing the difference between this updated estimated fair value, and the fair value estimated in our purchase price allocation, classified as selling, general and administrative expenses in the year ended December 31, 2022. Having paid all contingent consideration in the Anlin Acquisition, which combined totaled $ 12.1 million and which exceeds the $ 6.7 million fair value on contingent consideration established in the purchase allocation, we believe that our tax basis in the goodwill of the Anlin Acquisition is equal to its book basis of $ 9.6 million. |