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Acquisition of Professional Power Products, Inc. | 6 Months Ended
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Jun. 30, 2014
Business Combinations [Abstract] |
Acquisition of Professional Power Products, Inc. | 2. Acquisition of Professional Power Products, Inc. On April 1, 2014 (the “Date of Acquisition”), the Company acquired Professional Power Products, Inc. (“PPPI”), pursuant to a Stock Purchase Agreement, with Carl L. Trent and Kenneth C. Trent (each individually as “Shareholder” and collectively as “Shareholders”) and CKT Holdings Inc., a Wisconsin corporation (the “Seller”) owned by the Shareholders. PPPI is a leading designer and manufacturer of large, custom engineered integrated electrical power generation systems serving the global diesel and natural gas power generation market. On the Date of Acquisition, the Company purchased from the Seller all of the issued and outstanding stock of PPPI, an Illinois corporation and wholly-owned subsidiary of the Seller, for cash of $45.4 million, including cash acquired of $1.3 million, plus contingent consideration initially valued at $8.9 million, for an initial purchase price of $54.3 million, as of the Date of Acquisition. The value of the contingent consideration to be paid ranges from $5.0 million to $15.0 million, with a final determination based upon PPPI’s 2014 full year operating results. The contingent consideration will be payable in shares of the Company’s common stock, based upon a common share value of $76.02 as determined by the terms of the Stock Purchase Agreement. The Stock Purchase Agreement includes a provision by and among the Company, Shareholders and Seller to treat the purchase of the PPPI stock as an acquisition of assets for income tax purposes. The Acquisition was approved by the Company’s Board of Directors. The Company incurred total transaction costs related to the acquisition of approximately $811,000, all of which was recognized in the six months ended June 30, 2014 in accordance with U.S. GAAP. To facilitate the transaction, the Company entered into an amended and restated credit agreement with Wells Fargo Bank, N.A. increasing its revolving line of credit from $75.0 million to $90.0 million and securing a $5.0 million term loan, among other things. Refer to Note 9, “Revolving line of credit and term loan” for a further description of these obligations. The acquisition of PPPI has been accounted for as a business combination in accordance with ASC 805, Business Combinations, and, as such, assets acquired and liabilities assumed have been recorded at their respective fair values. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed was allocated to goodwill. The determination of the estimated fair values required management to make significant estimates and assumptions. The more significant assumptions included estimating future cash flows and developing appropriate discount rates. These estimates and assumptions of the fair value allocation are preliminary and subject to change upon the finalization of all valuation analyses, which are in the process of being completed. Independent valuation specialists conducted a valuation to assist management of the Company in determining the estimated fair values of inventory, machinery and equipment, intangible assets and contingent consideration. The Company’s management is responsible for the internal and third party valuations and appraisals. The work performed by the independent valuation specialists, while not yet completed and finalized, has been considered in management’s estimates of fair values reflected. The determinations of these estimated fair values, the assets’ useful lives and the amortization 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 set forth below. Although the final determinations may result in asset and liability fair values that are materially different than the preliminary estimates of the amounts included herein, it is not expected that those differences will be material to an understanding of the impact of this transaction on the financial results of the Company. 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:
|  | April 1, 2014 (Date of Acquisition) |
Assets acquired: |  |  |  |
Cash |  | $ | 1,277 |
Accounts receivable |  |  | 3,989 |
Inventories |  |  | 5,073 |
Prepaid expenses and other current assets |  |  | 243 |
Property, plant & equipment |  |  | 2,596 |
Total tangible assets |  | $ | 13,178 |
Intangible assets: |  |  |  |
Intangible assets |  | $ | 23,500 |
Goodwill |  |  | 22,372 |
Total assets acquired |  | $ | 59,050 |
Liabilities assumed: |  |  |  |
Accounts payable |  | $ | 1,494 |
Accrued liabilities |  |  | 3,257 |
Total liabilities assumed |  | $ | 4,751 |
Net assets acquired |  | $ | 54,299 |
The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available through June 30, 2014 and are provisional. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of the assets acquired and liabilities assumed were based on valuations involving significant unobservable inputs, or Level 3 in the fair value hierarchy. The Company believes that this information provides 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 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 Date of Acquisition and additional information arising subsequent to the 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 work in process and finished goods inventory was “stepped up” by $482,000, 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. This “stepped up” inventory value was recognized within the Company’s cost of sales in the three months ended June 30, 2014. The identifiable intangible assets as a result of the acquisition will be amortized over their respective estimated useful lives as follows:
|  | Asset amount |  |  | Estimated life
Backlog |  | $ | 1,200 |  |  | 18 months
Customer relationships |  |  | 20,600 |  |  | 13 years
Trade names and trademarks |  |  | 1,700 |  |  | 13 years
Total identifiable intangible assets |  | $ | 23,500 |  |  |
The amortization period based on the estimated useful lives of the intangible assets has been presented above. The fair value of backlog and customer relationships was derived using the multi-period excess earnings method. The fair value of the trade names and trademarks was derived using the relief from royalty method. The fair value of property, plant and equipment was based upon an appraisal of these assets or the acquisition costs of assets acquired immediately prior to the acquisition date. 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 measures required by the Stock Purchase Agreement, the resulting shares expected to be issued, and the share price of the Company’s common stock. The expected performance metrics and resulting shares expected to be issued were estimated based on a Monte Carlo simulation model considering actual and forecasted results over the measurement period. Goodwill largely consists of geographic expansion of product sales, manufacturing and other synergies of the combined companies, and the value of the assembled workforce. As a result of the provisions within the Stock Purchase Agreement, the Company treated the acquisition of PPPI as a purchase of assets for income tax purposes. Accordingly, the financial and income tax bases of the assets and liabilities were the same at the Date of Acquisition, and a provision for deferred income tax was not required to be recorded in connection with the purchase price allocation. Goodwill is expected to be deductible for tax purposes. The assets, liabilities, and operating results of PPPI have been included in the Company’s unaudited condensed consolidated financial statements from the Date of Acquisition to June 30, 2014, which is all of the three month period ended June 30, 2014. For such period, PPPI contributed sales, net of intercompany transactions, of $7,272,000 and operating loss of $31,000 to the Company’s consolidated results. The impact of PPPI’s net loss and basic and diluted earnings per share loss amounts are not material to the Company’s unaudited condensed consolidated financial statements for the three months ended June 30, 2014. Amortization expense related to identifiable intangible assets associated with the acquisition, included in the table above and the unaudited condensed consolidated financial statements, approximated $555,000 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, 2013 |  |  | June 30, 2014 |  |  | June 30, 2013 |
Net sales |  | $ | 67,567 |  |  | $ | 155,293 |  |  | $ | 128,699 |
Net (loss) income |  | $ | (2,343 | ) |  | $ | 6,199 |  |  | $ | (4,684 | )
(Loss) earnings per share, basic |  | $ | (0.25 | ) |  | $ | 0.59 |  |  | $ | (0.51 | )
(Loss) earnings per share, diluted |  | $ | (0.25 | ) |  | $ | 0.56 |  |  | $ | (0.51 | )
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.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1383-128463 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e6996-128479 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4922-128472 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4934-128472 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4926-128472 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e7000-128479 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1392-128463 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1486-128463 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e6927-128479 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1497-128463 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1490-128463 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e7008-128479 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4845-128472 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1500-128463 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1524-128463 + Details
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