Acquisitions

9 Months Ended

Sep. 30, 2019

Acquisition of Sierra Monitor Corporation

On May 20, 2019, we acquired 100% of the common stock in Sierra Monitor Corporation ("SMC") in an all-cash transaction valued at $33.2 million, net of cash acquired. Additionally, we converted outstanding stock options and restricted stock units into MSA stock options and restricted stock units which resulted in additional goodwill of approximately $0.9 million based on the fair value of the awards identified as transaction consideration.

Based in Milpitas, California, in the heart of Silicon Valley, SMC is a leading provider of fixed gas and flame detection instruments and Industrial Internet of Things solutions that connect and help protect high-value infrastructure assets. The acquisition enables MSA to accelerate its strategy to enhance worker safety and accountability through the use of cloud technology and wireless connectivity; a key focus of the Company's recently established Safety io^TM subsidiary. MSA launched Safety io^TM in 2018, primarily to leverage the capabilities of its portable gas detection portfolio as it relates to cloud connectivity. The transaction was funded through borrowings on our unsecured senior revolving credit facility.

SMC operating results are included in our unaudited condensed consolidated financial statements from the acquisition date as part of the Americas reportable segment. The acquisition qualifies as a business combination and will be accounted for using the acquisition method of accounting.

The following table summarizes the fair values of the SMC assets acquired and liabilities assumed at the date of acquisition:



(In millions)	May 20, 2019
Current assets (including cash of $2.1 million)	$	10.5
Property, plant and equipment and other noncurrent assets	1.3
Customer relationships	9.6
Acquired technology	1.4
Goodwill	19.8
Total assets acquired	42.6
Total liabilities assumed	6.4
Net assets acquired	$	36.2

The amounts in the table above are subject to change upon completion of the valuation of the assets acquired and liabilities assumed. This valuation is expected to be completed by the end of the first quarter in 2020.

Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values. Fair values were determined by management, based, in part on an independent valuation performed by a third-party valuation specialist. The valuation methods used to determine the fair value of intangible assets included the relief from royalty method for technology related intangible assets; the excess earnings approach for customer relationships using customer inputs and contributory charges; and the cost method for assembled workforce which is included in goodwill. A number of significant assumptions and estimates were involved in the application of these valuation methods, including sales volumes and prices, royalty rates, costs to produce, tax rates, capital spending, discount rates, and working capital changes. Cash flow forecasts were generally based on SMC pre-acquisition forecasts coupled with estimated MSA sales synergies. Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives. The customer relationships acquired in the SMC transaction will be amortized over a period of 10 years and the technology will be amortized over 5 years. Estimated future amortization expense related to the identifiable intangible assets is approximately $0.3 million for the remainder of 2019, $1.2 million in each of the next four years 2020 through 2023 and $5.3 million thereafter. The step up to fair value of acquired inventory as part of the purchase price allocation totaled $1.6 million. We recognized $1.1 million of amortization expense related to the step up during the nine months ended September 30, 2019 and the remaining $0.5 million will be recognized in the fourth quarter.

Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an assembled workforce, the expected synergies and other benefits that we believe will result from combining the operations of SMC with our operations. Goodwill of $19.8 million related to the SMC acquisition has been recorded in the Americas reportable segment and is non-deductible for tax purposes.

Our results for the three and nine months ended September 30, 2019, include strategic transaction costs of approximately $1.0 million and $2.9 million, respectively, including costs related to the acquisition of SMC. Our results for the three and nine months ended September 30, 2018, include an immaterial amount of strategic transaction costs. These costs are reported in selling, general and administrative expenses.

The operating results of the SMC acquisition have been included in our unaudited condensed consolidated financial statements from the acquisition date through September 30, 2019. Our results for the nine months ended September 30, 2019, include SMC sales and net loss of $8.2 million and $3.0 million, respectively. Excluding purchase accounting amortization for intangible assets and inventory step up of $1.5 million, transaction costs of $2.1 million, and stock compensation cost related to converted options and excess performance on PSUs related to the acquisition of $1.5 million, adjusted earnings for SMC for the nine months ended September 30, 2019 was $0.9 million.

The following unaudited pro forma information presents our combined results as if the SMC acquisition had occurred on January 1, 2019. The unaudited pro forma financial information was prepared to give effect to events that are (1) directly attributable to the acquisition; (2) factually supportable; and (3) expected to have a continuing impact on the combined company’s results. There were no material transactions between MSA and SMC during the periods presented that are required to be eliminated. Intercompany transactions between SMC companies during the periods presented have been eliminated in the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined financial information does not reflect any cost savings, operating synergies or revenue enhancements that the combined companies may achieve as a result of the acquisition or the costs to integrate the operations or the costs necessary to achieve cost savings, operating synergies or revenue enhancements.

Pro forma condensed combined financial information (Unaudited)



	Three months ended September 30,		Nine months ended September 30,
(In thousands, except per share amounts)	2018		2019		2018
Net sales	$	337.1	$	1,035.0	$	1,013.0
Net income	34.1		104.2		99.8
Basic earnings per share	0.89		2.70		2.60
Diluted earnings per share	0.87		2.66		2.56

The unaudited pro forma condensed combined financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations or financial position that we would have reported had the acquisition been completed as of the date and for the period presented, and should not be taken as representative of our condensed consolidated results of operations or financial condition following the acquisition. In addition, the unaudited proforma condensed combined financial information is not intended to project the future financial position or results of operations of the combined company.

The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting under existing U.S. GAAP. MSA has been treated as the acquirer.