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BUSINESS COMBINATIONS | 6 Months Ended
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Jun. 30, 2015
BUSINESS COMBINATIONS [Abstract] |
BUSINESS COMBINATIONS | 3. BUSINESS COMBINATIONS The Company’s acquisitions were accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Estimates of fair value included in the condensed consolidated financial statements, in conformity with ASC No. 820, “Fair Value Measurements and Disclosures” (“ASC 820”), represent the Company’s best estimates and valuations developed with the assistance of independent appraisers and, where such valuations have not yet been completed or are not available, industry data and trends and by reference to relevant market rates and transactions. The following estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, the Company cannot provide assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill. In accordance with ASC 805 “Business Combinations”, if additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), including finalization of asset appraisals, the Company will refine its estimates of fair value to allocate the purchase price more accurately. Schuff On May 29, 2014, the Company completed the acquisition of 2.5 million shares of common stock of Schuff, a steel fabrication and erection company and negotiated an agreement to purchase an additional 198,411 shares, representing an approximately 65% interest in Schuff. Schuff repurchased a portion of its outstanding common stock in June 2014, which had the effect of increasing the Company’s ownership interest to 70%. During the fourth quarter of 2014 and first quarter of 2015, the final results of a tender offer for all outstanding shares of Schuff were announced and various open-market purchases were made, which resulted in the acquisition of 815,843 shares and an increase in our ownership interest to 91%. The Company acquired Schuff to expand the business that it engages in and saw Schuff as an opportunity to enter the steel fabrication and erection market. The table below summarizes the fair value of the Schuff assets acquired and liabilities assumed as of the acquisition date. The Company purchased 2.5 million shares of common stock of Schuff for $78.75 million. The purchase price of Schuff was valued at $31.50 per share which represented both the cash paid by the Company for its 60% interest, and the fair value of the noncontrolling interest of 40%. The purchase price allocation is as follows (in thousands):
Cash and cash equivalents |  | $ | (627 | )
Investments |  |  | 1,714 |
Accounts receivable |  |  | 130,622 |
Costs and recognized earnings in excess of billings on uncompleted contracts |  |  | 27,126 |
Prepaid expenses and other current assets |  |  | 3,079 |
Inventories |  |  | 14,487 |
Property and equipment, net |  |  | 85,662 |
Goodwill |  |  | 24,490 |
Trade names |  |  | 4,478 |
Other assets |  |  | 2,947 |
Total assets acquired |  |  | 293,978 |
Accounts payable |  |  | 37,621 |
Accrued payroll and employee benefits |  |  | 11,668 |
Accrued expenses and other current liabilities |  |  | 12,532 |
Billings in excess of costs and recognized earnings on uncompleted contracts |  |  | 65,985 |
Accrued income taxes |  |  | 1,202 |
Accrued interest |  |  | 76 |
Current portion of long-term debt |  |  | 15,460 |
Long-term debt |  |  | 4,375 |
Deferred tax liability |  |  | 7,693 |
Other liabilities |  |  | 604 |
Noncontrolling interest |  |  | 4,365 |
Total liabilities assumed |  |  | 161,581 |
Enterprise value |  |  | 132,397 |
Less fair value of noncontrolling interest |  |  | 53,647 |
Purchase price attributable to controlling interest |  | $ | 78,750 |
The acquisition of Schuff resulted in goodwill of approximately $24.5 million. Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill was recognized as a new stand-alone reporting unit. Goodwill is not amortized and is not deductible for tax purposes. Amortizable Intangible Assets The trade name was valued using a relief from royalty methodology. An estimated 60% of revenue is generated from Schuff’s relationship with general contractors. Thus, a value of the Schuff trade name was calculated based on the present value of Schuff’s projected revenues for 15 years multiplied by 60%. The trade name was valued at $4.5 million and is being amortized over a 15 year life. ASC 810 requires that transactions that result in an increase in ownership of a subsidiary be accounted for as equity transactions. The carrying amount of the noncontrolling interest is adjusted to reflect the controlling interest’s decreased ownership interest in the subsidiary’s net assets and any difference between the consideration paid by the parent to a noncontrolling interest holder (or contributed by the parent to the net assets of the subsidiary) and the adjustment to the carrying amount of the noncontrolling interest in the subsidiary is recognized directly in equity attributable to the controlling interest. Due to the increase of the Company’s ownership to 91% from the acquisition date through December 31, 2014, the Company recorded an adjustment of Schuff’s noncontrolling interest by $3.4 million and recorded as excess book value over fair value of purchased noncontrolling interest in the Company’s condensed consolidated statement of stockholders’ equity. In the six months ended June 30, 2015, the Company acquired an additional 6,800 shares of Schuff that resulted in less than $0.1 million of excess book value over fair value of purchased noncontrolling interest in the Company’s condensed consolidated statement of stockholders’ equity. The ownership interest of 91% did not change. ANG On August 1, 2014, the Company paid $15.5 million to acquire 15,500 shares of Series A Convertible Preferred Stock of ANG (the “ANG Preferred Stock”), representing an approximately 51% interest in ANG. The ANG Preferred Stock is convertible into 1,033,333 shares of common stock and also has voting rights. The noncontrolling interest represents 1,000,000 shares of common stock; thereby the Company has a controlling interest. The Company acquired ANG for its strong growth potential which is in line with the Company’s strategy to find businesses that it can operate to generate high returns and significant cash flow. The table below summarizes the preliminary estimate of fair value of the ANG assets acquired and liabilities assumed as of the acquisition date. The purchase price of ANG was valued at $17.7 million which represented both the cash paid by the Company for its 51% interest ($15.5 million), and the fair value of the noncontrolling interest of 49%, which we determined to be $2.2 million. The preliminary purchase price allocation is as follows (in thousands):
Cash and cash equivalents |  | $ | 15,704 |
Accounts receivable |  |  | 306 |
Prepaid expenses and other current assets |  |  | 31 |
Inventories |  |  | 27 |
Property and equipment, net |  |  | 1,921 |
Customer contracts |  |  | 2,700 |
Trade names |  |  | 6,300 |
Other assets |  |  | 2 |
Total assets acquired |  |  | 26,991 |
Accounts payable |  |  | 49 |
Accrued payroll and employee benefits |  |  | 5 |
Accrued expenses and other current liabilities |  |  | 26 |
Billings in excess of costs and recognized earnings on uncompleted contracts |  |  | 114 |
Current portion of long-term debt |  |  | 34 |
Long-term debt |  |  | 870 |
Deferred tax liability |  |  | 3,530 |
Total liabilities assumed |  |  | 4,628 |
Fair value of net assets acquired |  |  | 22,363 |
Less purchase price |  |  | 15,500 |
Less fair value of noncontrolling interest |  |  | 2,189 |
Excess of fair value of net assets over purchase price |  | $ | 4,674 |
The acquisition of ANG resulted in an excess of the fair value of the net assets acquired over the purchase price of $4.7 million. The Company does not believe that the circumstances surrounding the transaction give rise to a bargain purchase. The existing shareholders of ANG continue to manage the day-to-day operations and own the noncontrolling interest. Accordingly, due to the related party nature of the transaction, management has recorded the excess of the fair value of the assets acquired over the purchase price in additional paid-in capital. Amortizable Intangible Assets The trade name was valued using a relief from royalty methodology. The value of the ANG trade name was calculated based on ANG’s projected revenues for 10 years. An estimated royalty of 4% (looking at other market participants) was calculated net of tax based upon those revenues and present valued over 10 years. The trade name was preliminarily valued at $6.3 million and will be amortized over a 10 year life. Customer contracts were valued using a multi-period excess earnings methodology. The value of the customer contracts ANG holds for its owned and operated facilities was calculated based on the present value of ANG’s net income from those contracts for 10 years. The customer contracts were preliminarily valued at $2.7 million and will be amortized over a 10 year life. GMSL On September 22, 2014, the Company completed the acquisition of Bridgehouse Marine Limited and its subsidiary, GMSL. The purchase price reflects an enterprise value of approximately $260 million, including assumed indebtedness of approximately $130 million leaving a net enterprise value of approximately $130 million. GMSL is a leading provider of engineering and underwater services on submarine cables. The Company acquired GMSL for its attractive valuation and strong cash position. The table below summarizes the preliminary estimates of fair value of the GMSL assets acquired and liabilities assumed as of the acquisition date. The net enterprise value of GMSL was valued at $130.4 million which represented both the cash paid by the Company for its 97% interest, and the fair value of the noncontrolling interest of 3%. The preliminary purchase price allocation is as follows (in thousands):
Cash and cash equivalents |  | $ | 62,555 |
Accounts receivable |  |  | 26,183 |
Prepaid expenses and other current assets |  |  | 9,886 |
Inventories |  |  | 7,395 |
Restricted cash |  |  | 4,682 |
Property and equipment, net |  |  | 156,976 |
Customer contracts |  |  | 7,796 |
Trade name |  |  | 1,137 |
Developed technology |  |  | 1,624 |
Investments |  |  | 24,266 |
Other assets |  |  | 7,482 |
Total assets acquired |  |  | 309,982 |
Accounts payable |  |  | 8,965 |
Accrued expenses and other current liabilities |  |  | 34,767 |
Accrued income taxes |  |  | 1,251 |
Current portion of long-term debt |  |  | 8,140 |
Long-term debt |  |  | 78,356 |
Pension liability |  |  | 45,923 |
Deferred tax liability |  |  | 1,013 |
Other liabilities |  |  | 1,179 |
Total liabilities assumed |  |  | 179,594 |
Enterprise value |  |  | 130,388 |
Less fair value of noncontrolling interest |  |  | 3,803 |
Purchase price attributable to controlling interest |  | $ | 126,585 |
The values for customer contracts, trade name, developed technology and investments are estimates and may change. Amortizable Intangible Assets
| ● | Customer contracts were valued using a multi-period excess earnings methodology. Projected revenues and margins were used to forecast the earnings for each contract taking into consideration probabilities of contract renewals. Three customer contracts were preliminarily valued at £4.8 million ($7.8 million using the exchange rate in effect at the time of acquisition) and will be amortized over a 15 year life.
| ● | The trade name was valued using a relief from royalty methodology. Given an element of uncertainty surrounding the GMSL trade name, and consistent with likely market participant use, a probability of continuing use was applied to the projected revenue stream. The trade name was preliminarily valued £0.7 million ($1.1 million using the exchange rate in effect at the time of acquisition) and will be amortized over a 3 year life.
| ● | The developed technology was valued using a relief from royalty methodology. The fair value was estimated based on the revenue attributable to developed technology and the hypothetical royalties avoided by owning the technology as well as the current royalties earned, the revenue stream was adjusted for technology obsolescence, as the technology will decay over time and be replaced by new technologies. The developed technology was preliminarily valued £1.0 million ($1.6 million using the exchange rate in effect at the time of acquisition) and will be amortized over a 4 year life.
Investments (accounted for under the Equity Method)
| ● | Sino British Submarine Systems (“SBSS”) – This investment was valued using an income approach (income capitalization method) and market approach (guideline public company method) and weighted each 50-50 to arrive at an operating value. From there, debt was added and a 35% ‘discount for the lack of marketability’ was applied to arrive at a fair value. That fair value was multiplied by GMSL’s ownership percentage to arrive a fair value applicable to GMSL. The income approach used year end 2014 results as acquisition-date financials as projections were not available. The multiples applied under the market approach were based on EBITDA and revenue multiples for entities operating in the same industry. The valuation resulted in a preliminary fair value of £10.4 million ($16.9 million using the exchange rate in effect at the time of acquisition).
| ● | Huawei Marine Networks (“HMN”) – This investment was valued using a market approach (guideline public company method) and cost approach (book value of equity) and weighted each 50-50 to arrive at an operating value. There was no debt but a 30% ‘discount for the lack of marketability’ was applied to arrive at a fair value. That fair value was multiplied by GMSL’s ownership percentage to arrive a fair value applicable to GMSL. The multiples applied under the market approach were based on EBITDA and revenue multiples for entities operating in the same industry. The valuation resulted in a preliminary fair value of £4.3 million ($7.0 million using the exchange rate in effect at the time of acquisition).
| ● | International Cableship (“ICPL”) – This investment was valued using a cost approach (book value of equity) to arrive at an operating value. There was no debt but a 20% ‘discount for the lack of marketability’ was applied to arrive at a fair value. That fair value was multiplied by GMSL’s ownership percentage to arrive a fair value applicable to GMSL. The valuation resulted in a preliminary fair value of £2.8 million ($4.5 million using the exchange rate in effect at the time of acquisition).
| ● | Sembawang Cable Depot Pte Ltd (“SCDPL”) – This investment was valued using an income approach (income capitalization method) and market approach (guideline public company method) and weighted each 50-50 to arrive at an operating value. There was no debt, but a 20% ‘discount for the lack of marketability’ was applied to arrive at a fair value. That fair value was multiplied by GMSL’s ownership percentage to arrive a fair value applicable to GMSL. The income approach used year end 2014 results as acquisition-date financials as projections were not available. The multiples applied under the market approach were based on EBITDA and revenue multiples for entities operating in the same industry. The valuation resulted in a preliminary fair value of £0.7 million. ($1.1 million using the exchange rate in effect at the time of acquisition).
| ● | Other investments were preliminarily valued at £0.3 million. ($0.5 million using the exchange rate in effect at the time of acquisition). The fair value was determined to approximate carrying value.
| ● | Basis Differences – The total preliminary fair values of the named investments above was £18.2 million, while the carrying value (based on GMSL’s ownership percentage and using the balance sheets as of December 31, 2014) was £25.2 million. This resulted in a basis difference of £7.0 million ($11.4 million using the exchange rate in effect at the time of acquisition), of which the majority of was attributable to SBSS. This basis difference will be accreted up over a 10 year period which will result in the increase to the investment in SBSS.
Pro Forma Adjusted Summary The results of operations for Schuff, ANG, and GMSL have been included in the consolidated financial statements subsequent to their acquisition dates. The following schedule presents unaudited consolidated pro forma results of operations data as if the acquisitions had occurred on January 1, 2014. This information does not purport to be indicative of the actual results that would have occurred if the acquisitions had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company (in thousands):
|  | Three Months Ended June 30, 2014 |  |  | Six Months Ended June 30, 2014 |
Net revenue |  | $ | 212,518 |  |  | $ | 406,108 |
Net income (loss) from continuing operations |  |  | 6,489 |  |  |  | 12,645 |
Net income (loss) from discontinued operations |  |  | (52 | ) |  |  | (48 | )
Gain (loss) from sale of discontinued operations |  |  | - |  |  |  | (784 | )
Net income (loss) attributable to HC2 Holdings, Inc. |  | $ | 6,437 |  |  | $ | 11,813 |
All expenditures incurred in connection with the acquisitions were expensed and are included in selling, general and administrative expenses. The Company recorded net revenue and net income (loss) as follows (in thousands):
|  | Three Months Ended June 30, 2015 |  |  | Six Months Ended June 30, 2015 |
|  | Net Revenue |  |  | Net Income (Loss) |  |  | Net Revenue |  |  | Net Income (Loss) |
Schuff |  | $ | 130,985 |  |  | $ | 5,889 |  |  | $ | 257,851 |  |  | $ | 9,086 |
ANG |  |  | 1,368 |  |  |  | (134 | ) |  |  | 2,591 |  |  |  | (247 | )
GMSL |  |  | 43,875 |  |  |  | 10,360 |  |  |  | 70,877 |  |  |  | 11,967 |

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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 5 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1497-128463 Reference 2: 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=56956515&loc=d3e1490-128463 Reference 3: 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=56956515&loc=d3e1392-128463 Reference 4: 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=35744584&loc=d3e7008-128479 Reference 5: 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=56956515&loc=d3e1486-128463 Reference 6: 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=35744584&loc=d3e6927-128479 Reference 7: 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=56956791&loc=d3e4845-128472 Reference 8: 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=56956515&loc=d3e1500-128463 Reference 9: 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=56956515&loc=d3e1524-128463 Reference 10: 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=35744584&loc=d3e7000-128479 Reference 11: 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=56956791&loc=d3e4922-128472 Reference 12: 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=56956791&loc=d3e4934-128472 Reference 13: 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=56956791&loc=d3e4926-128472 Reference 14: 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=56956515&loc=d3e1383-128463 Reference 15: 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=35744584&loc=d3e6996-128479 + Details
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