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Acquisitions | 12 Months Ended
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Dec. 31, 2015
Business Combinations [Abstract] |
Acquisitions | 3. Acquisitions When appropriate, the Company accounts for business combinations in accordance with ASC 805, Business Combinations, and, as such, assets acquired and liabilities assumed are recorded at their respective fair values. The excess of the acquisition consideration over the fair value of tangible and intangible assets acquired and liabilities assumed, if any, is then allocated to goodwill. Any goodwill ultimately recorded is generally attributable to one or more values ascribed to geographic expansion of product sales, manufacturing and other synergies of the combined businesses. The estimated fair values of assets acquired and liabilities assumed are based on the information that was available through the date of the most recent balance sheet, and are provisional, until the Company has completed the required analysis of fair values to be assigned to the assets acquired and liabilities assumed. The ultimate determination of fair values assigned to the assets acquired and liabilities assumed requires management to make significant assumptions and estimates. The more significant assumptions include estimating future cash flows and developing appropriate discount rates. These estimates and assumptions of the fair value allocation are subject to change upon the finalization of all valuation analyses. When required, independent valuation specialists conduct valuations to assist management of the Company in determining the estimated fair values of trade receivables, inventory, machinery and equipment, intangible assets and liabilities assumed, including contingent consideration. The determination of these estimated fair values, the assets’ useful lives and the amortization and depreciation 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 recorded in the Company’s consolidated balance sheet. However, the Company’s management is ultimately responsible for the values assigned. Although the final determinations may result in asset fair values that are materially different from the preliminary estimates of the amounts included in the Company’s consolidated financial statements until the Company has finalized its analysis, the Company believes that the fair values ultimately assigned to the assets acquired and liabilities assumed will not materially differ from amounts initially recorded in the Company’s consolidated financial statements. The consolidated financial statements as of and for the years ended December 31, 2015 and 2014, include the assets, liabilities and operating results of each acquired business since the date of each respective acquisition. There were no such business combinations during the year ended December 31, 2013. Acquisition of Powertrain Integration, LLC On May 4, 2015, the Company entered into an Asset Purchase Agreement (“APA”) with Powertrain Integration, LLC (“Powertrain”) and its owners to acquire the assets of Powertrain. The acquisition closed on May 19, 2015 (“Powertrain Date of Acquisition”). Powertrain provides on-road powertrain solutions, including systems, components and services for niche OEM automakers and fleets. Powertrain specializes in alternative-fuel as well as gasoline and diesel systems and offers design, engineering, testing and production capabilities to deliver one-stop vehicle integration. At closing, the Company paid cash of $20,873,000 representing the initial cash consideration adjusted for estimated working capital. Subsequently, the Company recorded a $97,000 favorable final working capital adjustment that reduced the cash paid to $20,776,000. The purchase price was subject to further adjustments for assumed liabilities, and contingent consideration consisting of a Base Earn-out Payment and Additional Earn-out Payment, all as described in the APA. The contingent consideration attributable to the Base Earn-out was based upon the 2015 full year net sales of Powertrain and the Additional Earn-out Payment was defined as the greater of a 5.0% per annum return on the Base Earn-out Payment and the incremental growth of the Company’s stock price since the acquisition was announced as determined in accordance with the formula defined in the APA. The Base Earn-out Payment and the Additional Earn-out Payment were initially determined using a Modified Black-Scholes call option model because the inputs to determine these amounts were unobservable and thus considered a Level 3 financial instrument. The resultant initial contingent consideration of $8,200,000 and the cash paid at closing along with the final working capital adjustment resulted in a purchase price of $28,976,000 subject to the final determination of the contingent consideration. As of December 31, 2015, the final Base Earn-out and Additional Earn-out Payment were finalized and the contingent consideration was adjusted to $8,248,000. The additional liability was recorded as an adjustment within “Other (income) expense” within the Company’s statement of operations for the year ended December 31, 2015. Under the terms of the APA, the Base Earn-out and the Additional Earn-out payments are expected to be paid in cash during 2016. The Company accounted for this acquisition as a business combination in accordance with ASC 805, Business Combinations, and as such, the excess of the purchase price over the fair values assigned to the assets acquired and liabilities assumed was provisionally allocated to goodwill at the Powertrain Date of Acquisition and deemed final as of December 31, 2015. The Company has treated the acquisition of Powertrain as a purchase of assets for income tax purposes. Accordingly, the financial and income tax bases of the assets and liabilities have been assumed to be the same at the Powertrain Date of Acquisition, and therefore, a provision for deferred income tax was not recorded in connection with the purchase price allocation. Additionally, any excess of the purchase price over the fair value of the assets acquired is expected to be deductible for income tax purposes. The acquisition was funded by certain proceeds received from the issuance of the 5.50% Senior Notes described in Note 8, “Debt”. The purchase price for this acquisition had been provisionally allocated as of May 19, 2015, and deemed final as of December 31, 2015, to the assets acquired and liabilities assumed based on their estimated fair values as follows:
|  | May 19, 2015 (As initially reported) |  |  | Measurement period adjustment |  |  | May 19, 2015 (As adjusted) |
Assets acquired: |  |  |  |  |  |  |  |  |  |  |  |
Accounts receivable |  | $ | 4,942 |  |  | $ | (11 | ) |  | $ | 4,931 |
Inventories |  |  | 1,890 |  |  |  | — |  |  |  | 1,890 |
Prepaid expenses and other current assets |  |  | 23 |  |  |  | — |  |  |  | 23 |
Property, plant & equipment |  |  | 315 |  |  |  | (1 | ) |  |  | 314 |
Other non-current assets |  |  | 24 |  |  |  | — |  |  |  | 24 |
Total tangible assets |  |  | 7,194 |  |  |  | (12 | ) |  |  | 7,182 |
Intangible assets: |  |  |  |  |  |  |  |  |  |  |  |
Intangible assets |  |  | 13,600 |  |  |  | — |  |  |  | 13,600 |
Goodwill |  |  | 14,471 |  |  |  | 506 |  |  |  | 14,977 |
Total assets acquired |  |  | 35,265 |  |  |  | 494 |  |  |  | 35,759 |
Liabilities assumed: |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable |  |  | 5,951 |  |  |  | — |  |  |  | 5,951 |
Accrued liabilities |  |  | 241 |  |  |  | 591 |  |  |  | 832 |
Total liabilities assumed |  |  | 6,192 |  |  |  | 591 |  |  |  | 6,783 |
Net assets acquired |  | $ | 29,073 |  |  | $ | (97 | ) |  | $ | 28,976 |
Cash paid at Powertrain Date of Acquisition |  | $ | 20,873 |
Contingent consideration |  |  | 8,200 |
Working capital adjustment |  |  | (97 | )
Aggregate consideration |  | $ | 28,976 |
The above estimated fair values of assets acquired and liabilities assumed were initially provisional, but deemed final as of December 31, 2015. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of certain assets acquired and liabilities assumed were based on valuations involving significant unobservable inputs that are Level 3 inputs in the fair value hierarchy. The Company believes that these inputs provided a reasonable basis for estimating the fair values and has finalized these amounts as of December 31, 2015. Except as discussed below, the assets acquired and the liabilities assumed were stated at their estimated fair values at the Powertrain 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 Powertrain Date of Acquisition and additional information arising subsequent to the Powertrain 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 approximated fair value, the value of finished goods inventory was “stepped up” by $22,000, 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, thereby reducing the margin on certain acquired inventory sold. The Company recognized all of this “stepped up” inventory value within cost of sales in the year ended December 31, 2015. The identifiable intangible assets as a result of the acquisition are amortized over their respective estimated useful lives as follows:
|  | Asset amount |  |  | Estimated life |
Backlog |  | $ | 600 |  |  |  | 3 months |
Customer relationships |  |  | 13,000 |  |  |  | 12 years |
Total identifiable intangible assets |  | $ | 13,600 |  |  |  |  |
The weighted average useful life of the intangibles identified above is approximately 11.5 years. The fair value of backlog and customer relationships was derived using the multi-period excess earnings method. The fair value of property, plant and equipment was based upon the acquisition costs of assets acquired as of the Powertrain Date of Acquisition adjusted for any known facts and circumstances necessary to approximate fair value. Goodwill largely consists of geographic expansion of product sales, manufacturing and other synergies of the combined companies, and the value of the assembled workforce. The accounts payable and accrued liabilities assumed were based on their book values which approximated their fair values at the Powertrain Date of Acquisition. Subsequent to the Powertrain Date of Acquisition, the accrued liabilities were further adjusted by $591,000 primarily related to additional warranty reserves to more accurately reflect the liabilities assumed as of that date. The following supplemental pro forma information presents the financial results as if the Powertrain transaction had occurred on January 1, 2014 as follows:
|  | Year ended (unaudited) |
|  | December 31, 2015 |  |  | December 31, 2014 |
Net sales |  | $ | 402,718 |  |  | $ | 400,585 |
Net income |  |  | 14,868 |  |  | $ | 26,320 |
Earnings per share, basic |  | $ | 1.38 |  |  | $ | 2.46 |
Earnings per share, diluted |  | $ | 0.50 |  |  | $ | 1.81 |
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. Acquisition of Bi-Phase Technologies, LLC On May 1, 2015 (“Bi-Phase Date of Acquisition”), the Company acquired all of the membership interests in Bi-Phase Technologies, LLC, a Minnesota limited liability company (“Bi-Phase”) and wholly-owned subsidiary of TPB, Inc., a Minnesota corporation. Bi-Phase is engaged in the design and manufacture of liquid propane electronic fuel injection systems to allow for the conversion of vehicles from gasoline to propane. The initial purchase price was approximately $3.5 million in cash plus certain working capital adjustments, assumption of certain liabilities and Earn-out Payments as defined in the Membership Interest Purchase Agreement. The cash paid at the Bi-Phase Date of Acquisition was $3,619,000 including estimated working capital. Subsequently, the Company paid an additional $266,000 representing the final working capital adjustment for total cash consideration of $3,885,000 before the contingent consideration. The Company also recorded a contingent consideration liability of $540,000 representing an estimate of the Earn-out Payments expected to be payable in connection with the acquisition of Bi-Phase. This contingent consideration, payable to TPB, Inc., is based upon certain sales of Bi-Phase fuel systems over a period of three to five years. Accordingly, the aggregate purchase price approximated $4,425,000 as of December 31, 2015. The Company accounted for this acquisition as a business combination in accordance with ASC 805, Business Combinations, and as such, the excess of the purchase price over the fair values assigned to the assets acquired and liabilities assumed was initially provisionally allocated to goodwill at the Bi-Phase Date of Acquisition and then deemed final as of December 31, 2015. The Company has treated the acquisition of Bi-Phase as a purchase of assets for income tax purposes. Accordingly, the financial and income tax bases of the assets and liabilities have been assumed to be the same at the Bi-Phase Date of Acquisition, and therefore, a provision for deferred income tax was not recorded in connection with the purchase price allocation. Additionally, any excess of the purchase price over the fair value of the assets acquired is expected to be deductible for income tax purposes. The acquisition was funded by the proceeds received from the issuance of the 5.50% Senior Notes described in Note 8, “Debt”. The purchase price for this acquisition had been provisionally allocated at the Bi-Phase Date of Acquisition, and deemed final as of December 31, 2015, to the assets acquired and liabilities assumed based on their estimated fair values as follows:
|  | May 1, 2015 (Bi-Phase Date of Acquisition) |
Assets acquired: |  |  |  |
Accounts receivable |  | $ | 212 |
Inventories |  |  | 2,103 |
Prepaid expenses |  |  | 4 |
Property, plant & equipment |  |  | 113 |
Other assets |  |  | 162 |
Total tangible assets |  |  | 2,594 |
Intangible assets: |  |  |  |
Intangible assets |  |  | 860 |
Goodwill |  |  | 1,217 |
Total assets acquired |  |  | 4,671 |
Liabilities assumed: |  |  |  |
Accounts payable |  |  | 199 |
Accrued liabilities |  |  | 47 |
Total liabilities assumed |  |  | 246 |
Net assets acquired |  | $ | 4,425 |
Initial cash paid at Bi-Phase Date of Acquisition |  | $ | 3,619 |
Contingent consideration |  |  | 540 |
Working capital adjustment |  |  | 266 |
Aggregate consideration |  | $ | 4,425 |
The fair value measurements of certain assets acquired and liabilities assumed were based on valuations involving significant unobservable inputs that are Level 3 inputs in the fair value hierarchy. There are inherent uncertainties and management judgment required in these determinations. The Company believes that these inputs provided a reasonable basis for estimating the fair values and has finalized these amounts as of December 31, 2015. Except as discussed below, the assets acquired and the liabilities assumed were stated at their estimated fair values at the Bi-Phase 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 Bi-Phase Date of Acquisition and additional information arising subsequent to that date with respect to these known facts and circumstances. The inventory acquired was revalued to its fair value. While the cost of raw materials generally approximated fair value, the value of finished goods inventory was “stepped up” by $226,000, 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, thereby reducing the margin on certain acquired inventory sold. The Company recognized all of this “stepped up” inventory value within cost of sales in the year ended December 31, 2015. The identifiable intangible assets as a result of the acquisition are amortized over their respective estimated useful lives as follows:
|  | Asset amount |  |  | Estimated life |
Developed technology |  | $ | 700 |  |  |  | 7 years |
Customer relationships |  |  | 160 |  |  |  | 15 years |
Total identifiable intangible assets |  | $ | 860 |  |  |  |  |
The weighted average useful life of the intangibles identified above is approximately 8.5 years. The fair value of developed technology and customer relationships was derived using the relief from royalty method and the multi-period excess earnings method, respectively. The fair value of property, plant and equipment was based upon the acquisition costs of assets acquired as of the Bi-Phase Date of Acquisition adjusted for any known facts and circumstances necessary to approximate fair value. Goodwill largely consists of geographic expansion of product sales, manufacturing and other synergies of the combined companies, and the value of the assembled workforce. Acquisition of Buck’s Acquisition Company, LLC On March 18, 2015 (“Buck’s Date of Acquisition”), the Company acquired all of the membership interests in Buck’s Acquisition Company, LLC, (“Buck’s”) from UE Powertrain d/b/a Buck’s Engines and United Holdings, LLC, for an initial cash purchase price of approximately $9,735,000, subject to certain adjustments as defined by the purchase agreement. Buck’s is a manufacturer of alternative-fuel engines for industrial markets and was formerly a product line of United Engines, LLC. Buck’s supplies a range of alternative-fuel engines that run on natural gas, propane and liquid propane gas fuels. Buck’s targets an extensive range of industrial applications, including irrigation, gas compression, oil production, industrial equipment, power generation, mobile equipment, wind turbines, and re-power applications. The acquisition of Buck’s was accounted for as a business combination in accordance with ASC 805, Business Combinations, and as such, the excess of the purchase price over the fair values assigned to the assets acquired and liabilities assumed had been provisionally allocated to goodwill at the Buck’s Date of Acquisition and deemed final as of December 31, 2015. The Company treated the acquisition of Buck’s as a purchase of assets for income tax purposes. Accordingly, the financial and income tax bases of the assets and liabilities have been assumed to be the same at the Buck’s Date of Acquisition, and therefore, a provision for deferred income tax was not recorded in connection with the purchase price allocation. Any excess of the purchase price over the fair value of the assets acquired is expected to be deductible for income tax purposes. The acquisition of Buck’s was funded through the Company’s revolving line of credit. The purchase price for this acquisition had been provisionally allocated at the Bucks Date of Acquisition, and deemed final as of December 31, 2015, to the assets acquired and liabilities assumed based on their estimated fair values as follows:
|  | March 18, 2015 (Buck’s Date of Acquisition) |
Assets acquired: |  |  |  |
Inventories |  | $ | 6,598 |
Property, plant & equipment |  |  | 231 |
Total tangible assets |  |  | 6,829 |
Intangible assets: |  |  |  |
Intangible assets |  |  | 1,380 |
Goodwill |  |  | 1,526 |
Total assets acquired |  | $ | 9,735 |
The fair value measurements of certain assets acquired were based on valuations involving significant unobservable inputs that are Level 3 inputs in the fair value hierarchy. There are inherent uncertainties and management judgment required in these determinations. The Company believes that these inputs provided a reasonable basis for estimating the fair values and has finalized these amounts as of December 31, 2015. Except as discussed below, the assets acquired and the liabilities assumed were stated at their estimated fair values at acquisition. The inventory acquired was revalued to its fair value. While the cost of raw materials generally approximated fair value, the value of finished goods inventory was “stepped up” by $290,000, 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, thereby reducing the margin on certain acquired inventory sold. The Company recognized all of this “stepped up” inventory value within cost of sales in the year ended December 31, 2015. The identifiable intangible asset as a result of the acquisition is amortized over its respective estimated useful life as follows:
|  | Asset amount |  |  | Estimated life |
Customer relationships |  | $ | 1,380 |  |  |  | 10 years |
The fair value of customer relationships was derived using the multi-period excess earnings method. The fair value of property, plant and equipment was based upon the acquisition costs of assets acquired as of the Buck’s Date of Acquisition adjusted for any known facts and circumstances necessary to approximate fair value. Goodwill largely consists of geographic expansion of product sales, manufacturing and other synergies of the combined companies, and the value of the assembled workforce. The consolidated financial statements as of and for the years ended December 31, 2015 and 2014, include the assets, liabilities and operating results of each acquired business since the date of each respective acquisition. There were no such business combinations during the year ended December 31, 2013. Acquisition of Professional Power Products, Inc. On April 1, 2014 (“Date of Acquisition”), the Company acquired Professional Power Products, Inc. (“3PI”), pursuant to a stock purchase agreement with Carl L. Trent and Kenneth C. Trent (collectively the “Trents”) and CKT Holdings Inc., a Wisconsin corporation owned by the Trents. 3PI is a designer and manufacturer of large, custom engineered integrated electrical power generation systems serving the global diesel and natural gas power generation markets. The Company treated the acquisition of 3PI as a purchase of assets for income tax purposes. The acquisition of 3PI was financed through the Company’s revolving line of credit and from proceeds received from a secured term loan. On the Date of Acquisition, the Company acquired all of the issued and outstanding stock of 3PI, an Illinois corporation and wholly-owned subsidiary of CKT Holdings Inc., for cash of $45.4 million, including cash acquired of $1.3 million, and agreed to pay to the sellers additional consideration of between $5,000,000 and $15,000,000 in shares of the Company’s common stock, valued at $76.02 per share (i.e., between 65,772 and 197,316 shares), based upon, and following the final determination in accordance with the Stock Purchase Agreement of, the 3PI EBITDA (as defined in the Stock Purchase Agreement). As of the Date of Acquisition, this consideration was valued at $8.9 million, and accordingly the total consideration payable for 3PI was valued at $54.3 million. The consideration payable in shares of the Company’s common stock consisted of (i) fixed consideration and (ii) contingent consideration. The Stock Purchase Agreement included a provision by and among the Company, Shareholders and Seller to treat the purchase of the 3PI stock as an acquisition of assets for income tax purposes. The fixed portion of the consideration, representing 65,772 shares of the Company’s common stock valued at $5,060,000 at the Date of Acquisition was classified as a component of equity in the Company’s consolidated balance sheet as of December 31, 2014. The fixed portion of the consideration was not subject to revaluation adjustment for financial reporting purposes. The contingent portion of the consideration (i.e., the earn-out consideration) was up to 131,544 shares of the Company’s common stock (i.e., the difference between the maximum number of shares issuable of 197,316 and the fixed number of shares issuable of 65,772). The earn-out portion of consideration was initially valued at $3,840,000 as of the Date of Acquisition and recognized as a liability on the Company’s consolidated balance sheet. The measurement period for determining the amount of contingent consideration ultimately payable to the sellers was based upon the 2014 full calendar-year performance of 3PI as defined in the Stock Purchase Agreement. The minimum threshold for payout of the earn-out consideration was not met as of December 31, 2014. Accordingly, the Company reversed the liability that had been recorded and recognized a gain of $3,840,000 which amount has been classified as “Other income” in the Company’s consolidated results of operations for the year ended December 31, 2014. The Company incurred total transaction costs related to the acquisition of approximately $811,000, all of which was recognized and classified within general and administration expense in the Company’s consolidated statements of operations in 2014. To facilitate the transaction, the Company entered into an amended and restated credit agreement with Wells Fargo Bank, N.A. on April 1, 2014, to increase its revolving line of credit and secured a $5.0 million term loan to finance this acquisition. Refer to Note 8, “Debt” for a further description of these obligations. The acquisition of 3PI was accounted for as a business combination in accordance with ASC 805, Business Combinations, and, as such, assets acquired and liabilities assumed were recorded at their respective fair values. The purchase price for this acquisition allocated to the assets acquired and liabilities assumed based on their estimated fair values was as follows:
|  | April 1, 2014 (As initially reported) |  |  | Measurement period adjustment |  |  | April 1, 2014 (As adjusted) |
Assets acquired: |  |  |  |  |  |  |  |  |  |  |  |
Cash |  | $ | 1,277 |  |  | $ | — |  |  | $ | 1,277 |
Accounts receivable |  |  | 3,989 |  |  |  | — |  |  |  | 3,989 |
Inventories |  |  | 5,073 |  |  |  | (120 | ) |  |  | 4,953 |
Prepaid expenses and other current assets |  |  | 243 |  |  |  | — |  |  |  | 243 |
Property, plant & equipment |  |  | 2,596 |  |  |  | — |  |  |  | 2,596 |
Total tangible assets |  |  | 13,178 |  |  |  | (120 | ) |  |  | 13,058 |
Intangible assets: |  |  |  |  |  |  |  |  |  |  |  |
Intangible assets |  |  | 23,500 |  |  |  | — |  |  |  | 23,500 |
Goodwill |  |  | 22,372 |  |  |  | 1,174 |  |  |  | 23,546 |
Total assets acquired |  |  | 59,050 |  |  |  | 1,054 |  |  |  | 60,104 |
Liabilities assumed: |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable |  |  | 1,494 |  |  |  | — |  |  |  | 1,494 |
Accrued liabilities |  |  | 3,257 |  |  |  | 1,054 |  |  |  | 4,311 |
Total liabilities assumed |  |  | 4,751 |  |  |  | 1,054 |  |  |  | 5,805 |
Net assets acquired |  | $ | 54,299 |  |  | $ | — |  |  | $ | 54,299 |
The following table provides a summary of the initial consideration for 3PI:
Fair value of assets acquired |  | $ | 60,104 |
Less liabilities assumed |  |  | (5,805 | )
Net assets acquired |  |  | 54,299 |
Less value of shares of Company common stock expected to be issued at date of acquisition |  |  | (8,900 | )
Less cash acquired |  |  | (1,277 | )
Cash paid |  | $ | 44,122 |
The above estimated fair values of assets acquired and liabilities assumed were based on known information as of April 1, 2014, were provisionally allocated to the assets acquired and liabilities assumed and deemed final as of December 31, 2014. 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. 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 gross amount of accounts receivable acquired was approximately $4,332,000 of which $343,000 is expected to be uncollectible. 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 during 2014. Subsequent to the Date of Acquisition, the inventory was further adjusted by approximately $120,000, reflecting the value of the inventory acquired as of April 1, 2014. See Note 6, “Goodwill and other intangibles,” for detail describing the intangible assets acquired and the amortization period based on the estimated useful lives of the intangible assets. 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 Date of Acquisition. Goodwill largely consists of geographic expansion of product sales, manufacturing and other synergies of the combined companies, and the value of the assembled workforce. The accounts payable and accrued liabilities assumed were based on their book values which approximated their fair values at the Date of Acquisition. Subsequent to the Date of Acquisition, the accrued liabilities were further adjusted by $1,054,000. During the year ended December 31, 2014, the Company’s liability for the contingent consideration associated with the acquisition was measured at fair value based on unobservable inputs, and was thus, considered a Level 3 financial instrument. The fair value of the liability determined by this analysis 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. For the year ended December 31, 2014, the Company recognized income of $3,840,000 due to a decrease in the estimated fair value of the Company’s contingent consideration liability. This valuation adjustment was recorded as “Contingent consideration” in the Company’s consolidated statements of operations for the year ended December 31, 2014. As of December 31, 2014, the Company’s contingent consideration liability was determined to be zero. As a result of the provisions within the Stock Purchase Agreement, the Company treated the acquisition of 3PI as a purchase of assets for income tax purposes. Accordingly, the financial and income tax bases of the assets and liabilities were initially the same at the Date of Acquisition. The write-off of the earn-out portion of the contingent consideration and the difference in the book and tax basis of the fixed portion of the consideration resulted in a lower amount of goodwill that is deductible by the Company for income tax purposes. Accordingly, the Company recognized deferred income tax liabilities arising from these differences which amounted to $1,570,000 and $681,000, respectively. The $1,570,000 was recognized in the Company’s income tax expense while the $681,000 was recognized as an adjustment to the Company’s additional paid-in-capital as of and for the year ended December 31, 2014. The total amount of goodwill that is expected to be deductible for income tax purposes was approximately $18.0 million at December 31, 2014. The assets, liabilities, and operating results of 3PI have been included in the Company’s consolidated financial statements from the Date of Acquisition to December 31, 2014. 3PI’s sales, net of intercompany sales, included in the Company’s operating results from the Date of Acquisition to December 31, 2014 were $20.4 million and 3PI reported an operating loss of approximately $2.0 million for the same period. Amortization expense related to identifiable intangible assets associated with the acquisition, further described in Note 6, “Goodwill and other intangibles,” and included in the consolidated financial statements, approximated $2,108,000 from the Date of Acquisition through December 31, 2014 and was included in the aforementioned loss from operations. The following supplemental unaudited pro forma information presents the financial results as if the 3PI transaction had occurred on January 1, 2013 as follows:
|  | Year ended (unaudited) |
|  | December 31, 2014 |  |  | December 31, 2013 |
Net sales |  | $ | 353,175 |  |  | $ | 278,117 |
Net (loss) income |  | $ | 23,671 |  |  | $ | (16,557 | )
(Loss) earnings per share, basic |  | $ | 2.21 |  |  | $ | (1.69 | )
(Loss) earnings per share, diluted |  | $ | 1.57 |  |  | $ | (1.69 | )
The historical operating results of 3PI included in the proforma information above was adjusted to exclude certain non-recurring expenses, principally transaction expenses which amount approximated $3,474,000 in 2014 and none in 2013. 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. Transaction fees and expenses The Company incurred total transaction costs related to its acquisition activities of $526,000, excluding lease termination expenses associated with the Buck’s and Bi-Phase facilities, for the year ended December 31, 2015, respectively, all of which was recognized as an operating expense and classified within general and administrative expenses in the Company’s consolidated statements of operations. The Company incurred total transaction costs related to the 3PI acquisition of $811,000 in the year ended December 31, 2014.

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