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Business Combinations | 6 Months Ended
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Jun. 30, 2019
Business Combinations [Abstract] |
Business Combinations | Business Combinations VRV Acquisition On November 15, 2018, Chart completed the acquisition of VRV pursuant to the terms of the Amended and Restated Share Purchase Agreement (the “Amendment”) with the original parties as well as VRV that replaced in full the original Purchase Agreement. Immediately thereafter, we assigned all of our rights and obligations under the Amendment to VRV Holdings S.r.l. (“Holdings”), a newly formed Italian subsidiary of Chart. The Amendment provided a revised transaction structure pursuant to which Holdings acquired VRV Technoservice S.r.l. (“VRV Technoservice”), a newly formed Italian company wholly owned by VRV (the “Acquisition”). Prior to the Acquisition, as contemplated in the Amendment, VRV contributed substantially all of its business to VRV Technoservice. VRV Technoservice changed its name to VRV S.r.l. following the Acquisition. The Acquisition purchase price was 191.1 million euros (equivalent to $216.1), net of cash assumed of 1.3 million euros (equivalent to $1.4), is inclusive of the base purchase price of 125.0 million euros (equivalent to $141.3) paid in cash, assumed indebtedness of VRV, which was paid off immediately at closing or shortly thereafter, of 63.7 million euros (equivalent to $72.0), and net working capital and other agreed-upon purchase price adjustments finalized during the first half of 2019 of 3.7 million euros (equivalent to $4.2) which was settled early in the second quarter of 2019. Additional indebtedness of VRV of 4.4 million euros (equivalent to $4.9) was assumed at the acquisition date and paid off during the first and second quarters of 2019. All U.S. dollar equivalent dollar amounts are based on the exchange rate as of the acquisition date. We funded the Acquisition, including the subsequent payoff of assumed indebtedness, with borrowings of 140.0 million euros (equivalent to $160.3) from our senior secured revolving credit facility and the remainder with cash on hand. VRV, which has operations in Italy, France and India, is a diversified multinational corporation with highly automated, purpose-built facilities for the design and manufacture of pressure equipment serving the cryogenic and energy & petrochemical end markets. VRV’s results are included in our E&C and D&S East segments from the date of Acquisition. As defined in our significant accounting policy for business combinations in Note 2, of our Annual Report on Form 10-K for the year ended December 31, 2018, we preliminarily allocated the Acquisition consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary estimated fair values as of the Acquisition date. The preliminary fair value of the acquired tangible and identifiable intangible assets were determined based on inputs that are unobservable and significant to the overall fair value measurement. It is also based on estimates and assumptions made by management at the time of the Acquisition. As such, this was classified as Level 3 fair value hierarchy measurements and disclosures. The Acquisition consideration allocation below is preliminary, pending completion of the fair value analyses of acquired assets and liabilities as well as certain other analyses. Given the acquisition closed late in the fourth quarter of 2018, we expect significant adjustments in the purchase price allocation. Those areas that are subject to change, include the following:
• | researching and analyzing the differences between Chart accounting policies and those used by VRV,
• | finalizing the valuation of working capital accounts,
• | completing our review of VRV’s revenue recognition policies, including assessing estimates utilized for projects using the percentage of completion method,
• | gathering sufficient information to estimate the fair value of acquired intangible assets, including assessing projections and other assumptions used in our valuation models, and determining whether the intangible assets identified below represent a complete listing of acquired intangible assets, and
• | evaluating income tax accounting considerations, including income tax effects of the above matters.
Where we are still in process of completing our analysis, we used our best estimate based on currently available information. The preliminary estimated useful lives of identifiable finite-lived intangible assets range from 2 to 12 years. The excess of the purchase price over the estimated fair values is assigned to goodwill. The preliminary estimated goodwill was established due to benefits including the combination of strong engineering and manufacturing cultures which will continue to further develop full service solutions for our worldwide customer base, as well as the benefits derived from the anticipated synergies of VRV integrating with Chart’s E&C and D&S East segments. Goodwill recorded for the VRV acquisition is not expected to be deductible for tax purposes. As additional information becomes available, we will further revise the preliminary Acquisition consideration allocation during the remainder of the measurement period, which shall not exceed twelve months from the closing of the Acquisition, and we believe such revisions or changes may be material. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed in the VRV acquisition as of the acquisition date:
| June 30, 2019 |  | Adjustments |  | As Previously Reported December 31, 2018
Net assets acquired: |  |  |  |  |
Identifiable intangible assets | $ | 66.6 |  |  | $ | — |  |  | $ | 66.6 |
Property, plant and equipment | 70.5 |  |  | — |  |  | 70.5 |
Goodwill | 84.9 |  |  | 21.7 |  |  | 63.2 |
Other net assets | 0.4 |  |  | (17.5 | ) |  | 17.9 |
Debt | (4.9 | ) |  | — |  |  | (4.9 | )
Net assets acquired | $ | 217.5 |  |  | $ | 4.2 |  |  | $ | 213.3 |
During the first half of 2019, net assets acquired included adjustments to other net assets and goodwill based on U.S. GAAP purchase accounting primarily due to inventory valuation and balance sheet accounts related to revenue recognition. Net assets acquired, including goodwill, was also adjusted to reflect the net working capital and other agreed-upon purchase price adjustments of $4.2 negotiated during the first half of 2019. Information regarding preliminary identifiable intangible assets acquired in the VRV acquisition is presented below:
| Weighted-average Estimated Useful Life |  | Preliminary Estimated Asset Fair Value
Finite-lived intangible assets: |  |  |
Customer relationships | 12.0 years |  | $ | 28.1 |
Unpatented technology | 12.0 years |  | 15.9 |
Other identifiable intangible assets (1) | 4.0 years |  | 11.8 |
Trademarks and trade names | 14.0 years |  | 10.8 |
Total finite-lived intangible assets acquired | 9.0 years |  | $ | 66.6 |
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(1) | Other identifiable intangible assets is included in “Patents and other” in Note 6, “Goodwill and Intangible Assets”.
The following unaudited supplemental pro forma sales are based on our historical consolidated financial statements and VRV’s historical consolidated financial statements as adjusted to give effect to the November 15, 2018 acquisition of VRV. The unaudited supplemental pro forma sales information for the periods presented gives effect to the Acquisition as if it had occurred on January 1, 2018. The unaudited supplemental pro forma sales for the three and six months ended June 30, 2018 for the Company including VRV would have been approximately $302.9 and $581.1. It is impracticable to disclose the pro forma net income and pro forma net income per share information because of significant differences between Chart accounting policies following U.S. GAAP and those followed by VRV. The unaudited pro forma sales information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have resulted had the Acquisition been in effect at the beginning of the period presented. In addition, the unaudited pro forma sales results are not intended to be a projection of future results and do not reflect any operating efficiencies or cost savings that might be achievable. Skaff Acquisition On January 2, 2018, we acquired 100% of the equity interests of Skaff Cryogenics and Cryo-Lease, LLC (together “Skaff”) for an approximate purchase price of $12.5, net of cash acquired. Skaff provides quality repair service and re-manufacturing of cryogenic and liquefied natural gas storage tanks and trailers and also maintains a portfolio of cryogenic storage equipment that is leased to customers for temporary and permanent needs. Skaff is headquartered in Brentwood, New Hampshire and provides services and equipment to customers in North America. Skaff’s results are included in the D&S West operating segment. During the first quarter of 2019, the Skaff purchase price allocation was finalized, which resulted in an adjustment to the opening balance sheet increasing long-term deferred tax liabilities and goodwill each by $0.8. Additional information related to the Skaff acquisition has not been presented because the impact on our consolidated results of operations and financial position is not material. Harsco Corporation’s Air-X-Changers Acquisition (Subsequent Event) On July 1, 2019, we completed the acquisition of AXC pursuant to the previously disclosed Asset Purchase Agreement dated as of May 8, 2019. The purchase price for AXC was approximately $592, which is subject to a post-closing purchase price adjustment with respect to working capital. The Company incurred $1.2 in transaction related costs during the second quarter of 2019 related to the acquisition which are recorded in selling, general and administrative expenses on the condensed consolidated statement of income. We financed the purchase price for the Acquisition with proceeds from the common stock offering and borrowings under the Fourth Amended and Restated Credit Agreement, dated June 14, 2019. See Note 7 and Note 10 for more information. AXC is a leading supplier of custom engineered and manufactured air cooled heat exchangers (“ACHX”) for the natural gas compression and processing industry and refining and petrochemical industry in the United States. The ACHX offered by AXC is used in conditioning natural gas during recovery, compression and transportation from underground reserves through major pipeline distribution channels. In addition to natural gas compression and processing, AXC’s products are also used in the turbine lube oil cooling, landfill gas compression and liquids cooling industries. AXC’s end markets include process industries, power generation and refineries. In connection with this acquisition, we expect a change in our reportable segments from three segments to four segments: (i) D&S East, (ii) D&S West, (iii) Energy & Chemicals Cryogenics (“E&C Cryogenics”), and (iv) Energy & Chemicals FinFans (“E&C FinFans”). AXC will be combined with Chart’s Hudson products business and Cooler Services businesses from the existing E&C segment to create a new segment called E&C FinFans. The E&C FinFans segment will focus on our unique and broad product offering and capabilities in ACHX and fans. The Company preliminarily allocated the acquisition consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary estimated fair values as of the acquisition date. The preliminary fair value of the acquired tangible and identifiable intangible assets were determined based on inputs that are unobservable and significant to the overall fair value measurement. It is also based on estimates and assumptions made by management at the time of the acquisition. As such, this was classified as Level 3 fair value hierarchy measurements and disclosures. The Company estimated the preliminary fair value of acquired developed technology and trademarks using the relief from royalty method. The preliminary fair values of acquired customer backlog and customer relationships were estimated using the multi-period excess earnings method. Under both the relief from royalty and multi-period excess earnings methods, the fair value models incorporate estimates of future cash flows, estimates of allocations of certain assets and cash flows, estimates of future growth rates, and management’s judgment regarding the applicable discount rates to use to discount such estimates of cash flows. The estimated useful lives of identifiable finite-lived intangible assets range from one to 12 years. The acquisition consideration allocation below is preliminary, pending completion of the fair value analysis of acquired assets and liabilities as well as certain other analysis. This purchase price allocation is presented below for disclosure purposes and is not reflected in our condensed consolidated balance sheet at June 30, 2019. The excess of the purchase price over the estimated fair values is assigned to goodwill. As additional information becomes available, the Company may further revise the preliminary acquisition consideration allocation during the remainder of the measurement period, which shall not exceed twelve months from the closing of the acquisition. Any such revisions or changes may be material. The following table summarizes the estimated fair values of the assets and liabilities assumed in the AXC acquisition:
Net assets acquired: |
Identifiable intangible assets | $ | 310.0 |
Property, plant and equipment | 34.4 |
Goodwill | 239.3 |
Other assets | 42.5 |
Liabilities | (34.2 | )
Net assets acquired | $ | 592.0 |
Information regarding identifiable intangible assets acquired in the AXC acquisition is presented below:
| Weighted-average Estimated useful life |  | Preliminary Estimated Asset Fair Value
Finite-lived intangible assets: |  |  |
Customer Relationships | 12.0 years |  | $ | 179.1 |
Developed Technology | 10.0 years |  | 47.0 |
Backlog | 1.0 year |  | 27.3 |
Non-compete agreements | 4.0 years |  | 1.1 |
Total finite-lived intangible assets acquired | 11.0 years |  | 254.5 |
Indefinite-lived intangible assets: |  |  |
Trademarks |  |  | 55.5 |
Total identifiable intangible assets acquired |  |  | $ | 310.0 |
Supplemental Pro Forma Information The following unaudited supplemental pro forma financial information is based on our historical condensed consolidated financial statements and AXC’s historical condensed consolidated financial statements as adjusted to give effect to the July 1, 2019 acquisition of AXC’s. The unaudited supplemental pro forma financial information for the periods presented gives effect to the acquisition as if it had occurred on January 1, 2018. The following adjustments are reflected in the pro forma financial table below: •Adjustment for depreciation related to the step-up in basis of the acquired property, plant and equipment and change in estimated useful lives. •Adjustment for amortization of acquired intangible assets. •Adjustment for the change from Last In First Out to weighted average cost for the acquired inventory and the associated reduction of Cost of sales. •Adjustment to reflect increase in interest expense resulting from interest on the new term debt to finance the Harsco acquisition and amortization of related debt issuance costs. •Adjustment to reflect the change in the estimated income tax rate for federal and state. •Adjustment to reflect the increase in weighted average shares in connection with the equity issuance. This unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have resulted had the acquisition been in effect at the beginning of the periods presented. In addition, the unaudited pro forma results are not intended to be a projection of future results and do not reflect any operating efficiencies or cost savings that might be achievable. The following table presents pro forma sales, net income attributable to Chart Industries, Inc., and net income attributable to Chart Industries, Inc. per common share data assuming AXC was acquired at the beginning of the 2018 fiscal year:
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2019 |  | 2018 |  | 2019 |  | 2018
Pro forma sales | $ | 382.1 |  |  | $ | 326.5 |  |  | $ | 747.7 |  |  | $ | 614.8 |
Pro forma net income attributable to Chart Industries, Inc. | 19.4 |  |  | 8.0 |  |  | 25.2 |  |  | 9.3 |
Pro forma net income attributable to Chart Industries, Inc. per common share, basic | $ | 0.54 |  |  | $ | 0.23 |  |  | $ | 0.71 |  |  | $ | 0.27 |
Pro forma net income attributable to Chart Industries, Inc. per common share, diluted | 0.51 |  |  | 0.22 |  |  | 0.66 |  |  | 0.26 |
Contingent Consideration The estimated fair value of contingent consideration related to the 2015 Thermax acquisition of our D&S West segment, was $1.8 at the date of acquisition and was valued according to a discounted cash flow approach, which included assumptions regarding the probability of achieving certain earnings targets and a discount rate applied to the potential payments. Potential payments were due to be paid before July 1, 2019 based on the attainment of certain earnings targets. The earnings targets for Thermax were below the minimum threshold so no contingent consideration was paid for the final year of the four year earn-out period.

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