Acquisitions | 9 Months Ended |
Sep. 30, 2013 |
Acquisitions [Abstract] | ' |
Acquisitions | ' |
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4. Acquisitions |
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Acquisition of Encari – On October 8, 2013, we acquired substantially all of the assets and business of Encari, LLC, an Illinois limited liability company (“Encari”), which is engaged in the business of providing cyber security consulting and compliance services to the utility industry. Encari helps large investor-owned utilities, municipalities and cooperative utilities assess, improve and maintain their compliance with the North American Electric Reliability Corporation’s (NERC) Critical Infrastructure Protection (CIP) Reliability Standards. |
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The purchase price for this acquisition was $4.8 million in cash, plus potential additional earn-out consideration which is dependent upon the pre-tax net income of the acquired Encari business exceeding certain thresholds over the 12 month period ending December 31, 2013. The potential additional consideration is an amount of up to an additional $1.2 million, of which half would be payable in cash and the other half payable in shares of our common stock. The number of common shares to be issued by us to Encari in such an earn-out would be based on their value-weighted average closing price over the 30 business days preceding the closing date. |
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The purchase price allocation and pro forma financial information have not yet been completed. We expect that the operations of the Encari business acquired will be included within our Utility and Energy Technologies operating segment commencing from the date of acquisition. |
Acquisition of Solais Lighting – On April 12, 2013, we acquired Solais Lighting, Inc., a Delaware corporation ("Solais"). Solais is a Connecticut-based LED lighting company with a proprietary portfolio of LED lamps and fixtures for commercial and industrial applications. Solais' innovative designs, which are covered by a variety of patents and patents pending, provide their products with enhanced light output, thermal management, optics and light quality, and aesthetics. |
The acquisition of Solais strengthens and complements our existing LED business through the addition of new product lines and new skill sets around product design, product commercialization, and manufacturing and sourcing capabilities. In addition, Solais adds to our capabilities in marketing LED lighting through distributor channels. |
The acquisition was accomplished through a merger of Solais into Brite Idela, Inc., a Delaware corporation and wholly-owned subsidiary we formed to effectuate the merger and renamed "Solais Lighting, Inc." after the merger ("Solais PowerSecure"). As a result of the merger, the assets, properties, business, debts, liabilities and obligations of Solais prior to the merger became those of Solais PowerSecure. |
The merger was consummated pursuant to an Agreement and Plan of Merger, dated as of April 12, 2013 (the "Solais Merger Agreement"), by and among Solais, the stockholders of Solais (the "Solais Stockholders"), us and Solais PowerSecure. The merger consideration paid by us to the stockholders of Solais was valued under the Solais Merger Agreement at an aggregate of $15 million, less an adjustment deducting the working capital deficit of approximately $0.2 million, and was subject to a post-closing "true up" adjustment of the final closing working capital balance. As a result, the aggregate merger consideration paid by us consisted of approximately $6.5 million in cash plus 675,160 shares of our common stock. For purposes of the Merger and the merger consideration, the shares of common stock we issued in the acquisition of Solais were valued at $12.22 per share, which was their volume-weighted average closing sale price as reported on the Nasdaq Global Select Market over the five trading days immediately preceding the date the merger was completed. For purposes of applying the purchase accounting provisions of ASC 805, Business Combinations (ASC 805), the shares of common stock we issued in the acquisition were valued at $12.52 per share, which was the closing sale price of our common stock as reported on the Nasdaq Global Select Market on the date of acquisition. All outstanding shares of capital stock of Solais were converted into and exchanged for the merger consideration. The merger became effective on April 12, 2013. |
Total revenues and pre-tax loss from the Solais business since the date of acquisition included in the accompanying consolidated statements of income for the nine months ended September 30, 2013 were $4.5 million and $0.6 million, respectively. In addition, acquisition related costs incurred by us in the amount of $0.4 million were recognized as an expense during the nine months ended September 30, 2013, and are included in general and administrative expense in the accompanying consolidated statements of income. |
The Solais Merger Agreement contains customary representations and warranties as well as indemnification obligations, and limitations thereon, by us and the Solais Stockholders to each other, including a $1.5 million two year escrow out of the cash portion of the merger consideration to support the indemnification obligations of the Solais Stockholders. The following table summarizes the consideration paid to the Solais Stockholders and the fair value allocation of the purchase price: |
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| Consideration paid to Seller: | | | | | | | |
| Cash | | $ | 6,535 | | | | |
| Shares of Company common stock | | | 8,453 | | | | |
| Total consideration paid | | $ | 14,988 | | | | |
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| Cash and cash equivalents | | $ | 165 | | | | |
| Accounts receivable, net | | | 625 | | | | |
| Inventories | | | 249 | | | | |
| Other current assets | | | 62 | | | | |
| Property, plant and equipment, net | | | 286 | | | | |
| Deferred tax asset | | | 898 | | | | |
| Identifiable intangible assets: | | | | | | | |
| Customer relationships | | | 1,900 | | | | |
| Noncompetition agreement | | | 140 | | | | |
| Developed technology | | | 1,200 | | | | |
| Accounts payable | | | -665 | | | | |
| Accrued and other liabilities | | | -1,011 | | | | |
| Total identifiable net assets | | | 3,849 | | | | |
| Goodwill | | | 11,139 | | | | |
| | | $ | 14,988 | | | | |
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As part of the purchase price allocation, we determined that the separately identifiable intangible assets acquired consisted of customer relationships, developed technology and noncompetition agreements. We used the income approach to value the customer relationships, developed technology and noncompetition agreements. This approach calculates the fair value by discounting the forecasted after-tax cash flows for each intangible asset back to a present value at an appropriate risk-adjusted rate of return. The data for these analyses was the cash flow estimates used to price the transaction. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. |
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In estimating the useful lives of the acquired assets, we considered ASC 350-30-35, General Intangibles Other Than Goodwill, and reviewed the following factors: the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the assets. We amortize these intangible assets over their estimated useful lives on a straight-line basis. |
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The goodwill of $11.1 million arising from the acquisition consists largely of the assembled workforce of Solais, and the synergies and economies of scale expected from combining the operations of our PowerSecure subsidiary and Solais. All of the goodwill was assigned to our Utility and Energy Technologies segment. None of the acquired goodwill is expected to be deductible for tax purposes. As part of the purchase price allocation process, the amount of the purchase price allocated to goodwill was increased by $89 thousand from our initial allocation. |
Supplemental pro forma information, as if the acquisition had occurred on January 1, 2012, is as follows: |
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| | | PowerSecure International, Inc. | |
| | | Acquisition of Solais Lighting, Inc. | |
| | | Pro Forma Results of Operations | |
| | | Nine Months Ended September 30, | |
| | | 2013 | | 2012 | |
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| Revenues | | $ | 198,364 | | $ | 118,396 | |
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| Earnings Attributable to PowerSecure International, Inc.: | | | | | | | |
| Income (loss) from continuing operations | | $ | 6,048 | | $ | -612 | |
| Net income | | $ | 6,229 | | $ | 145 | |
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| Diluted earnings per common share: | | | | | | | |
| Income from continuing operations | | $ | 0.32 | | $ | 0.01 | |
| Net income | | $ | 0.32 | | $ | 0.01 | |
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The supplemental pro forma information above is based on estimates and assumptions that we believe are reasonable. The pro forma information presented is not necessarily indicative of the consolidated results of operations in future periods or the results that actually would have been realized had the acquisition occurred on January 1, 2012. The supplemental pro forma results above exclude any benefits that may result from the acquisition due to synergies that are expected to be derived from the elimination of any duplicative costs. In addition, the pro forma results for the nine months ended September 30, 2013 were adjusted to exclude aggregate acquisition-related cost of $1.2 million incurred by PowerSecure and Solais, collectively, in 2013. |
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Acquisition of ESCO Energy Efficiency Business – On February 28, 2013, we acquired certain assets, including contracts with customers relating to energy efficiency projects, of the ESCO business of Lime Energy Services Co. (“LESCO”), a Massachusetts corporation and wholly-owned subsidiary of Lime Energy Co., a Delaware corporation (“Lime”). The acquired ESCO business involves the design, installation and maintenance of energy conservation measures, primarily as a subcontractor to large energy service company providers, for the benefit of commercial, industrial and institutional customers as end users. The acquisition expanded our portfolio of energy efficient facility technologies and expertise, which now includes lighting solutions, HVAC system upgrades, building envelope upgrades, transformer efficiency upgrades and water conservation systems. The acquired business serves other larger ESCOs by providing energy efficiency solutions across a range of facilities, including high-rise office buildings, distribution facilities, manufacturing plants, retail sites, mixed use complexes, and large government sites. |
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The acquisition was consummated pursuant to an Asset Purchase and Sale Agreement, dated as of February 28, 2013 (the “LESCO Purchase Agreement”), by and among LESCO, as the seller, Lime, as the seller’s parent, and PowerSecure, as the purchaser. Pursuant to the LESCO Purchase Agreement, we completed the acquisition of certain assets and working capital liabilities and the assumption of customer contracts of LESCO, for cash. The assigned contracts required the consent of the customers to complete the assignment, so PowerSecure and LESCO entered into a subcontracting arrangement in the interim to facilitate our obtaining the rights and benefits, and taking on the duties and obligations, of LESCO under the assumed contracts after the closing. In connection with the acquisition, we entered into certain indemnifications to the surety on the bonds for certain projects that were bonded prior to the closing by LESCO, and have continued to do so after the closing with respect to the assumed contracts until the projects are completed or until the consents are obtained and the bonding can be completed in our name directly. |
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The acquisition was effective as of the end of the day on February 28, 2013. Total revenues and pre-tax income from the ESCO business since the date of acquisition included in the accompanying consolidated statements of income for the nine months ended September 30, 2013 were $22.9 million and $2.1 million, respectively. In addition, acquisition related costs in the amount of $0.1 million were recognized as an expense during the nine months ended September 30, 2013, and are included in general and administrative expense in the accompanying consolidated statements of income. |
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The LESCO Purchase Agreement contains customary representations and warranties as well as indemnification obligations by LESCO and Lime, on the one hand, and by us, on the other hand, to each other. In addition, the LESCO Purchase Agreement contains a five year covenant not to compete by LESCO and Lime against us and our affiliates in the acquired business, subject to certain exceptions related to their retained businesses, and related customary restrictive covenants. Correspondingly, the LESCO Purchase Agreement contains a five year covenant not to compete by us against LESCO and Lime and their affiliates in their retained business relating to small business direct install programs and related customary restrictive covenants, subject to certain exceptions such as for our current business. |
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The following table summarizes the consideration paid to LESCO, including amounts paid as part of a post-closing true-up adjustment, for the ESCO business and the components and the fair value allocation of the purchase price. |
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| Consideration paid to Seller: | | | | | | | |
| Cash | | $ | 1,971 | | | | |
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| Accounts receivable | | $ | 5,728 | | | | |
| Inventories | | | 558 | | | | |
| Property, plant and equipment, net | | | 135 | | | | |
| Identifiable intangible assets: | | | | | | | |
| Customer relationships | | | 1,400 | | | | |
| Trademarks | | | 160 | | | | |
| Backlog | | | 120 | | | | |
| Noncompetition agreement | | | 90 | | | | |
| Databases | | | 90 | | | | |
| Accounts payable | | | -1,259 | | | | |
| Accrued and other liabilities | | | -8,852 | | | | |
| Total identifiable net assets (liabilities) | | | -1,830 | | | | |
| Goodwill | | | 3,801 | | | | |
| | | $ | 1,971 | | | | |
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As part of the purchase price allocation, we determined that the separately identifiable intangible assets acquired consisted of customer relationships, trademarks, backlog, noncompetition agreement and a database and software license to use certain proprietary software tools that LESCO had developed, which are used to assist in the preparation of contract pricing. |
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We used the income approach to value the customer relationships, noncompetition agreements, trademarks, technology-based assets and order backlog. This approach calculates the fair value by discounting the forecasted after-tax cash flows for each intangible asset back to a present value at an appropriate risk-adjusted rate of return. The data for these analyses was the cash flow estimates used to price the transaction. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. |
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In estimating the useful lives of the acquired assets, we considered ASC 350-30-35, General Intangibles Other Than Goodwill, and reviewed the following factors: the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the assets. We amortize these intangible assets over their estimated useful lives on a straight-line basis. |
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The goodwill of $3.8 million arising from the acquisition consists largely of the assembled workforce of the ESCO business, and the synergies and economies of scale expected from combining the operations of our PowerSecure subsidiary and the ESCO business. All of the goodwill was assigned to our Utility and Energy Technologies segment and is expected to be deductible for tax purposes. As part of the post-closing true-up adjustment, the amount of the purchase price allocated to goodwill was reduced by $18 thousand from our initial allocation. |
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We have concluded that the acquisition of the ESCO business did not constitute a significant business for purposes of Rule 3-05 of Regulation S-X of the SEC, and thus no acquired business historical financial statements are required to be filed with the SEC. Pro forma financial disclosures required under ASC 805 for the nine months ended September 30, 2013 and 2012 have not been included herein because the relevant quarterly financial information for the ESCO business is not yet available from the seller. We plan to provide such pro forma financial disclosures in a subsequent report promptly after the relevant financial information becomes available to us from the seller. Our net income for the three and nine months ended September 30, 2013, includes the results of operations of the ESCO business since the date of acquisition. |
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Acquisition of PowerLine – On May 20, 2013, we acquired the business and certain assets of Powerline EHV & Safety Training, LLC, a Georgia limited liability company (“PowerLine”). The acquired PowerLine business involves safety training in the electrical utility industry. The acquisition was consummated pursuant to an Asset Purchase Agreement, dated May 20, 2013 (the “PowerLine Purchase Agreement”) between PowerLine, as the seller, and PowerSecure, as the purchaser. Pursuant to the PowerLine Purchase Agreement, we acquired certain training materials and property, plant and equipment for a cash payment of $0.6 million at closing and annual cash installment payments of $0.1 million over the next five years. |
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We intend to use the assets and resources of PowerLine to conduct safety training for our Utility Infrastructure personnel. The PowerLine acquisition provides us with dedicated efficient and effective safety resources for our employees, enhancing our overall safety programs. We do not intend to provide safety training services to third-parties and others outside of our Energy and Utility Services segment. Accordingly, there have been no revenues associated with the PowerLine acquisition since the date of acquisition. In addition, acquisition related costs in the amount of $16 thousand were recognized as an expense during the nine months ended September 30, 2013, and are included in general and administrative expense in the accompanying consolidated statements of income. |
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The following table summarizes the consideration paid to the PowerLine Stockholder and the preliminary fair value allocation of the purchase price. |
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| Consideration paid to Seller: | | | | | | | |
| Cash | | $ | 550 | | | | |
| Installment payments payable, discounted value | | | 497 | | | | |
| Total consideration paid | | $ | 1,047 | | | | |
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| Property, plant and equipment, net | | $ | 10 | | | | |
| Identifiable intangible assets: | | | | | | | |
| Training materials | | | 200 | | | | |
| Noncompetition agreement | | | 500 | | | | |
| Total identifiable net assets | | | 710 | | | | |
| Goodwill | | | 337 | | | | |
| | | $ | 1,047 | | | | |
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The goodwill of $0.3 million arising from the acquisition consists largely of the cost efficiencies we expect to derive from a dedicated safety training program. All of the goodwill was assigned to our Utility and Energy Technologies segment and is expected to be deductible for tax purposes. |
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The operating costs of the PowerLine resources have been included within our Utility and Energy Technologies operating segment since the date of acquisition. Pro forma results of operations for the nine months ended September 30, 2013 and 2012 have not be included herein as the effects of the acquisition were not material to our results of operations. |
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