Acquisitions

ITW

On March 31, 2015, the Company, through its indirect subsidiary, OMG, Inc. ("OMG"), acquired certain assets and assumed certain liabilities of ITW Polymers Sealants North America Inc. ("ITW"), which are used in the business of manufacturing two-component polyurethane adhesive for the roofing industry, for a cash purchase price of $27.4 million, reflecting a final working capital adjustment of $0.4 million. The assets acquired and liabilities assumed primarily included net working capital of inventories and accrued liabilities; property, plant and equipment; and intangible assets, primarily developed technology, valued at $1.7 million, $0.1 million and $4.4 million, respectively. ITW was the exclusive supplier of certain adhesive products to OMG, and this acquisition will provide OMG with greater control of its supply chain and allow OMG to expand its product development initiatives. The results of operations of the acquired business are reported within the Company's Building Materials segment. In connection with the ITW acquisition, the Company has recorded goodwill totaling approximately $21.3 million, which is expected to be deductible for income tax purposes.

JPS

Effective July 2, 2015, H&H Group completed the acquisition of JPS Industries, Inc. ("JPS") pursuant to an agreement and plan of merger, dated as of May 31, 2015, by and among the Company, H&H Group, HNH Group Acquisition LLC, a Delaware limited liability company and a subsidiary of H&H Group ("H&H Acquisition Sub"), HNH Group Acquisition Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of H&H Acquisition Sub ("Sub"), and JPS. JPS is a manufacturer of mechanically formed glass, quartz and aramid substrate materials for specialty applications in a wide expanse of markets requiring highly engineered components. At the effective time of the Merger (as defined below), Sub was merged with and into JPS ("Merger"), with JPS being the surviving corporation in the Merger, and each outstanding share of JPS common stock (other than shares held by the Company and its affiliates, including SPH Group Holdings LLC ("SPH Group Holdings"), a subsidiary of Steel Partners Holdings L.P. ("SPLP"), the parent company of the Company, and a significant stockholder of JPS), was converted into the right to receive $11.00 in cash. The aggregate merger consideration of $70.3 million was funded by H&H Group and SPH Group Holdings. H&H Group's funding of the aggregate merger consideration totaled approximately $65.7 million, which was financed through additional borrowings under the Company's senior secured revolving credit facility.

As a result of the closing of the Merger, JPS was indirectly owned by both H&H Group and SPH Group Holdings. Following the expiration of the 20-day period provided in Section 262(d)(2) of the Delaware General Corporation Law for JPS stockholders to exercise appraisal rights in connection with the Merger, and in accordance with an exchange agreement, dated as of May 31, 2015, by and between H&H Group and SPH Group Holdings, on July 31, 2015, the Company issued ("Issuance") to H&H Group 1,429,407 shares of the Company's common stock with a value of $48.7 million and, following the Issuance, H&H Group exchanged ("Exchange") those shares of Company common stock for all shares of JPS common stock held by SPH Group Holdings. As a result of the Exchange, H&H Group owned 100% of JPS and merged JPS with and into its wholly-owned subsidiary, HNH Acquisition LLC, a Delaware limited liability company, which was the surviving entity in the merger and was renamed JPS Industries Holdings LLC.

The following table summarizes the amounts of the assets acquired and liabilities assumed at the acquisition date (in thousands):



Cash and cash equivalents	$	22
Trade and other receivables	21,201
Inventories	27,126
Prepaid and other current assets	4,961
Property, plant and equipment	45,384
Goodwill	32,162
Other intangibles	9,120
Deferred income tax assets	19,788
Other non-current assets	3,112
Total assets acquired	162,876
Trade payables	(10,674		)
Accrued liabilities	(5,838		)
Long-term debt	(1,500		)
Accrued pension liabilities	(30,367		)
Other non-current liabilities	(4		)
Net assets acquired	$	114,493

The goodwill of $32.2 million arising from the acquisition was assigned to the Company's Performance Materials segment, of which $24.1 million was not expected to be deductible for income tax purposes. Other intangibles consist primarily of acquired trade names of $4.3 million, customer relationships of $3.1 million and developed technology of $1.7 million. These intangible assets have been assigned useful lives ranging from 10 to 15 years based on the long operating history, broad market recognition and continued demand for the associated brands, and the limited turnover and long-standing relationships JPS has with its existing customer base. The valuations of acquired trade names and developed technology were performed utilizing a relief from royalty method, and significant assumptions used in the valuation included the royalty rate assumed and the expected level of future sales, as well as the rate of technical obsolescence for the developed technology. The acquired customer relationships were valued using an excess earnings approach, and significant assumptions used in the valuation included the customer attrition rate assumed and the expected level of future sales.

The amount of net sales and operating loss of the acquired business included in the consolidated statement of operations for the year ended December 31, 2016 were approximately $101.6 million and $32.1 million, respectively. The operating loss reflects a goodwill impairment charge of $24.3 million (see Note 9 - "Goodwill and Other Intangibles"). The amount of net sales and operating loss of the acquired business included in the consolidated statement of operations for the year ended December 31, 2015 were approximately $59.5 million and $2.2 million, which included $3.4 million of nonrecurring expense related to the fair value adjustment to acquisition-date inventories. The results of operations of the acquired business are reported within the Company's Performance Materials segment, which is currently comprised solely of the operations of JPS.

SLI

On April 6, 2016, the Company entered into a definitive merger agreement with SLI, pursuant to which it commenced a cash tender offer to purchase all the outstanding shares of SLI's common stock, at a purchase price of $40.00 per share in cash ("Offer"). SLI designs, manufactures and markets power electronics, motion control, power protection, power quality electromagnetic equipment, and custom gears and gearboxes used in a variety of medical, commercial and military aerospace, computer, datacom, industrial, architectural and entertainment lighting, and telecom applications. Consummation of the Offer was subject to certain conditions, including the tender of a number of shares that constituted at least (1) a majority of SLI's outstanding shares and (2) 60% of SLI's outstanding shares not owned by HNH or any of its affiliates, as well as other customary conditions. SPLP beneficially owned approximately 25.1% of SLI's outstanding shares at the time of the Offer.

On June 1, 2016, the conditions noted above, as well as all other conditions to the Offer were satisfied, and the Company successfully completed its tender offer through a wholly owned subsidiary. Pursuant to the terms of the merger agreement, the wholly-owned subsidiary merged with and into SLI, with SLI being the surviving corporation ("SLI Merger"). Upon completion of the SLI Merger, SLI became a wholly owned subsidiary of the Company.

The aggregate consideration paid by the Company in the Offer and SLI Merger was approximately $162.0 million, excluding related transaction fees and expenses. The funds necessary to consummate the Offer, the Merger and to pay related fees and expenses were financed with additional borrowings under the Company's senior secured revolving credit facility.

The following table summarizes the amounts of the assets acquired and liabilities assumed at the acquisition date on a preliminary basis (in thousands):



Cash and cash equivalents	$	4,985
Trade and other receivables	32,680
Inventories	24,088
Prepaid and other current assets	8,254
Property, plant and equipment	23,950
Goodwill	54,150
Other intangibles	92,326
Other non-current assets	257
Total assets acquired	240,690
Trade payables	(18,433		)
Accrued liabilities	(18,521		)
Long-term debt	(9,500		)
Deferred income tax liabilities	(26,469		)
Other non-current liabilities	(5,782		)
Net assets acquired	$	161,985

The preliminary purchase price allocation is subject to finalization of valuations of certain acquired assets and liabilities. The goodwill of $54.2 million arising from the acquisition consists largely of the synergies expected from combining the operations of HNH and SLI. The goodwill is assigned to the Company's Electrical Products segment and is not expected to be deductible for income tax purposes. Other intangibles consist primarily of acquired trade names of $14.7 million, customer relationships of $59.9 million, developed technology and patents of $10.7 million, and customer order backlog of $6.9 million. The customer order backlog is being amortized based on the expected period over which the orders will be fulfilled, ranging from two to eight months. The remaining intangible assets have been assigned useful lives ranging from 10 to 15 years based on the long operating history, broad market recognition and continued demand for the associated brands, and the limited turnover and long-standing relationships SLI has with its existing customer base. The valuations of acquired trade names, developed technology and patents were performed utilizing a relief from royalty method, and significant assumptions used in the valuation included the royalty rate assumed and the expected level of future sales, as well as the rate of technical obsolescence for the developed technology and patents. The acquired customer relationships were valued using an excess earnings approach, and significant assumptions used in the valuation included the customer attrition rate assumed and the expected level of future sales. Included in accrued liabilities and other non-current liabilities above is a total of $8.1 million for existing and contingent liabilities relating to SLI's environmental matters, which are further discussed in Note 19 - "Commitments and Contingencies."

The amount of net sales and operating loss of the acquired business included in the consolidated statement of operations for the year ended December 31, 2016 were approximately $112.7 million and $1.8 million, respectively, which includes $1.9 million of expenses associated with the amortization of the fair value adjustment to acquisition-date inventories and also $1.9 million of expenses associated with the acceleration of SLI's previously outstanding stock-based compensation awards, which became fully vested on the date of acquisition pursuant to the terms of the merger agreement, and which are included in selling, general and administrative expenses in the 2016 consolidated statement of operations. SLI's results of operations are reported within the Company's Electrical Products segment.

EME

On September 30, 2016, SL Montevideo Technology, Inc. ("SMTI"), a subsidiary of SLI, entered into an asset purchase agreement ("Purchase Agreement") with Hamilton. Pursuant to the Purchase Agreement, SMTI acquired from Hamilton certain assets of EME used or useful in the design, development, manufacture, marketing, service, distribution, repair and sale of electric motors, starters and generators for certain commercial applications, including for use in commercial hybrid electric vehicles and refrigeration and in the aerospace and defense sectors. The acquisition of EME expands SLI's product portfolio and diversifies its customer base. SMTI purchased the acquired net assets for $62.6 million in cash and assumption of certain ordinary-course business liabilities, subject to adjustments related to working capital at closing and quality of earnings of the acquired business for the period of January 1, 2016 to June 30, 2016, each as provided in the Purchase Agreement. The Purchase Agreement includes a guarantee by Hamilton of a minimum level of product purchases from SMTI by an affiliate of Hamilton for calendar years 2017, 2018 and 2019, in exchange for compliance by SMTI with certain operating covenants. The transaction was financed with additional borrowings under the Company's senior secured revolving credit facility.

The following table summarizes the amounts of the assets acquired and liabilities assumed at the acquisition date on a preliminary basis (in thousands):



Trade and other receivables	$	4,249
Inventories	3,047
Prepaid and other current assets	265
Property, plant and equipment	2,321
Goodwill	30,645
Other intangibles	28,370
Total assets acquired	68,897
Trade payables	(3,440		)
Accrued liabilities	(2,882		)
Net assets acquired	$	62,575

The preliminary purchase price allocation is subject to finalization of valuations of certain acquired assets and liabilities. The goodwill of $30.6 million arising from the acquisition consists largely of the synergies expected from combining the operations of SLI and EME. The goodwill is assigned to the Company's Electrical Products segment and is expected to be deductible for income tax purposes. Other intangibles consist of customer relationships of $27.2 million and customer order backlog of $1.2 million. The customer order backlog is being amortized based on the expected period over which the orders will be fulfilled of four months. The customer relationships have been assigned a useful life of 15 years based on the limited turnover and long-standing relationships EME has with its existing customer base. The acquired customer relationships were valued using an excess earnings approach, and significant assumptions used in the valuation included the customer attrition rate assumed and the expected level of future sales. The amount of net sales and operating loss of the acquired business included in the consolidated statement of operations for the year ended December 31, 2016 were approximately $15.9 million and $0.1 million, respectively. EME's results of operations are reported within the Company's Electrical Products segment.

Pro Forma Disclosures

Unaudited pro forma net sales and income from continuing operations, net of tax, of the combined entities is presented below as if JPS had been acquired January 1, 2014, and SLI and EME had both been acquired January 1, 2015.



	Year Ended
	December 31,
(in thousands, except per share)	2016			2015		2014
Net sales	$	961,644		$	987,105	$	759,578
(Loss) income from continuing operations, net of tax	$	(4,226	)	$	19,998	$	13,228
(Loss) income from continuing operations, net of tax, per share	$	(0.35	)	$	1.64	$	0.96
Weighted-average number of common shares outstanding	12,242			12,214		13,763

This unaudited pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the JPS acquisition taken place on January 1, 2014 and both the SLI and EME acquisitions taken place on January 1, 2015. The information for the years ended December 31, 2016, 2015 and 2014 is based on historical financial information with respect to the acquisitions and does not include operational or other changes which might have been effected by the Company. The unaudited pro forma earnings for all periods reflect incremental depreciation and amortization expense based on the fair value adjustments for the acquired property, plant and equipment and intangible assets, which are amortized using the double-declining balance method for customer relationships and the straight line method for other intangibles, over periods principally ranging from 10 to 15 years, except for the customer order backlog, which is amortized over periods ranging from two to eight months. The unaudited pro forma earnings were also adjusted to reflect incremental interest expense on the borrowings made to finance the acquisitions.

The 2016 unaudited pro forma earnings exclude a total of $9.2 million of acquisition-related costs incurred by both the Company and the acquired entities during the year ended December 31, 2016. Of these costs that were excluded from 2016 pro forma expenses, an expense of $1.9 million from the amortization of the fair value adjustment to acquisition-date inventories and an expense of $1.9 million associated with the acceleration of SLI's previously outstanding stock-based compensation awards were reflected in 2015 and reduced the 2015 unaudited pro forma earnings.

The 2015 unaudited pro forma earnings also reflect adjustments to exclude a total of $7.5 million of acquisition-related costs incurred by both the Company and the acquired entities during the year ended December 31, 2015 and $3.4 million of nonrecurring expense related to JPS's amortization of the fair value adjustment to acquisition-date inventories. The 2014 unaudited pro forma earnings were adjusted to include the fair value adjustment to acquisition-date inventories for JPS.