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DelStar Acquisition
 12 Months Ended
Dec. 31, 2013
Business Combinations [Abstract]  
DelStar Acquisition
DelStar Acquisition

On December 12, 2013, the Company completed the acquisition of DelStar, Inc., or DelStar, through a merger of SWM Acquisition Corp. II, an indirect wholly-owned subsidiary of the Company, or SWM II, with and into DelStar, pursuant to the November 18, 2013 Agreement and Plan of Merger. As a result of the merger, DelStar became a wholly-owned, indirect subsidiary of the Company. The acquisition of DelStar diversifies SWM’s global presence in advanced materials, focused in large part in filtration.

As consideration, the Company paid $231.3 million in cash using borrowings under the revolving credit facility, or Credit Agreement, see Note 12. Debt, for additional information.

As of December 31, 2013, the fair values of the assets acquired and liabilities assumed for the acquisition of DelStar are provisional because final appraisals have not yet been completed. The cash paid for DelStar and the preliminary fair values of the assets acquired and liabilities assumed as of the December 12, 2013 acquisition date are as follows ($ in millions):
 
Fair value as of December 12, 2013
Cash and cash equivalents
$
1.6

Accounts receivable
17.3

Inventory
21.2

Income taxes receivable
5.7

Deferred income tax benefits
1.5

Other current assets
0.8

Property, plant and equipment
41.5

Other noncurrent assets
0.7

Identifiable intangible assets
80.9

Total Assets
171.2

 
 
Accounts payable
4.8

Accrued expenses
6.7

Deferred income tax liabilities
40.4

Other liabilities
0.7

 
 
Net assets acquired
118.6

 
 
Goodwill
112.7

 
 
Cash paid
$
231.3



The Company used the income, market, or cost approach (or a combination thereof) for the preliminary valuation as appropriate, and used valuation inputs in these models and analyses that were based on market participant assumptions. Market participants are considered to be buyers and sellers in the principal or most advantageous market for the asset or liability. For certain items, the carrying amount was determined to be a reasonable approximation of fair value based on information available to SWM management. The fair value of receivables acquired from DelStar on December 12, 2013 was $17.3 million, with gross contractual amounts receivable of $17.6 million. Acquired inventories and property, plant and equipment were recorded at their preliminary fair values. Acquired intangible assets are primarily trade names, customer relationships and developed technology.

Properties acquired included a number of manufacturing and related facilities, land and leased sites that include leasehold improvements, and machinery and equipment for use in manufacturing operations. Management valued properties using the cost approach supported where available by observable market data which included consideration of obsolescence.

Intangible assets acquired included a number of trade names that are both business-to-business and business-to-consumer. Also acquired was technology related to products subject to a number of existing patents and trade know-how. In addition to these intangible assets, the Company acquired a number of customer relationships in water filtration, industrial filtration and healthcare industries. Management valued intangible assets using the relief from royalty and multi-period excess earnings methods, both forms of the income approach supported by observable market data for peer companies. The following table shows the preliminary fair values assigned to intangible assets ($ in millions):

 
Preliminary
Fair Value as of December 12, 2013
 
Weighted-Average Amortization Period (Years)
Amortizable intangible assets:
 
 
 
Customer relationships
$
45.3

 
23
Developed Technology
13.8

 
12.8
Indefinite-lived intangible assets:
 
 
 
Trade names
21.8

 
Indefinite
Total
$
80.9

 
21


In connection with the acquisition, the Company recorded goodwill, which represents the excess of the consideration transferred over the estimated preliminary fair value of tangible and intangible assets acquired, net of liabilities assumed. The goodwill is attributed primarily to DelStar's revenue growth from combining the SWM and DelStar business and workforce as well as the benefits of access to different markets and customers. Goodwill from the DelStar acquisition will be assigned to its own reportable segment Filtration. None of the goodwill is expected to be deductible for tax purposes.

The goodwill was determined on the basis of the provisional fair values of the assets and liabilities identified as of the acquisition date. It may be adjusted, within a period of no more than 12 months from the acquisition date, if the provisional fair values change as a result of circumstances existing at the acquisition date. Such fair value adjustments may arise in respect to property, plant and equipment, intangible assets and inventories, upon completion of the necessary valuations and physical verifications of such assets. The amount of provisions may also be adjusted as a result of ongoing procedures to identify and measure liabilities and contingent liabilities, including tax, environmental risks and litigation. The amount of deferred taxes may also be adjusted during the measurement period.

In 2013, the Company recognized $1.1 million in direct and indirect acquisition-related costs and $2.0 million in financing costs related to the acquisition. Direct and indirect acquisition-related costs were expensed as incurred and are included in the General Expense line item in the Consolidated Statements of Income. Financing costs related to expanding the Credit Agreement have been capitalized and will be amortized in Interest Expense over the life of the Credit Agreement.

The amounts of DelStar's Net Sales and Income from Continuing Operations included in the Company's Consolidated Statements of Income for the year ended December 31, 2013, and the unaudited pro forma Net Sales and Income from Continuing Operations of the combined entity had the acquisition date been January 1, 2012 are as follows ($ in millions):
 
 
Net Sales
 
(Loss) Income from Continuing Operations
Actual from December 13, 2013 - December 31, 2013
 
$
4.2

 
$
(0.1
)
 
 
 
 
 
2013 Supplemental Pro Forma from January 1, 2013 - December 31, 2013
 
$
886.0

 
$
84.3

 
 
 
 
 
2012 Supplemental Pro Forma from January 1, 2012 - December 31, 2012
 
$
889.0

 
$
105.2



The 2013 Supplemental Pro Forma Income from Continuing Operations was adjusted to exclude $1.1 million of acquisition-related costs incurred in 2013 and $0.9 million of nonrecurring expense related to the fair value adjustment to acquisition-date inventory. The 2012 Supplemental Pro Forma Income from Continuing Operations was adjusted to include $1.1 million of acquisition-related costs incurred in 2013 and $4.2 million of nonrecurring expense related to the fair value adjustment to acquisition-date inventory.

For the year ended December 31, 2013, Income from Continuing Operations included $0.9 million of additional costs of acquired inventories and $1.1 million in charges primarily associated with the acquisition and integration of DelStar. The unaudited pro forma financial results for the years ended December 31, 2013 and 2012 combine the consolidated results of SWM and DelStar giving effect to the acquisition of DelStar as if it had been completed on January 1, 2012, the beginning of the comparable prior annual reporting period presented. The unaudited pro forma financial results do not include any anticipated synergies or other expected benefits of the acquisition. This unaudited pro forma financial information is presented for informational purposes only and is not indicative of future operations or results had the acquisition been completed as of January 1, 2012.

The unaudited pro forma financial results include certain adjustments for depreciation and amortization expense based upon the fair value step-up and estimated useful lives of DelStar depreciable fixed assets and definite-life amortizable assets acquired in the transaction. The unaudited pro forma results also include adjustments to net interest expense historically recorded by DelStar based upon the retirement of DelStar’s debt and issuance of additional debt related to the transaction. The provision for income taxes from continuing operations has also been adjusted for all periods, based upon the foregoing adjustments to historical results, as well as the elimination of historical net changes in valuation allowances against certain deferred tax assets of DelStar.