Acquisitions

On April 30, 2014, the Company completed the acquisition of the heating, ventilation and air conditioning business of Thomas & Betts Corporation ("Reznor") for approximately $260.0 million in cash, plus additional payments of approximately $1.9 million for preliminary working capital and other post-closing adjustments. The Company expects to pay an additional working capital adjustment of approximately $0.3 million during the third quarter of 2014. The acquisition was financed with a combination of cash on hand and a portion of the borrowings under a new $350.0 million senior secured term loan facility (see Note E, "Notes, Mortgage Notes and Obligations Payable").

Reznor manufactures industrial and commercial HVAC products, including an extended range of gas fired air heaters, air handling units, condensing units and rooftop units. The results of Reznor have been included in the Company's results of operations since the date of acquisition and have been included in the Company's Residential Heating and Cooling ("RHC") segment.

The following is a summary of the preliminary estimates of the fair value of the assets acquired and liabilities assumed (amounts in millions):




Current assets (1)	$	46.6
Property and equipment, net	20.8
Goodwill	110.6
Intangible assets	117.1
Current liabilities (2)	(19.5		)
Deferred income taxes	(13.0		)
Other long-term liabilities	(0.7		)
Estimated purchase price	$	261.9

(1)

Includes cash of approximately $7.0 million, accounts receivable of approximately $17.2 million, inventories of approximately $20.5 million, prepaid and other current assets of approximately $1.0 million, and current deferred taxes of approximately $0.9 million. Inventories include a fair value adjustment to the historical carrying value of approximately $1.8 million, of which approximately $1.5 million increased cost of products sold for the second quarter of 2014.


(2)	Includes accounts payable of approximately $12.3 million and accrued expenses and taxes of approximately $7.2 million.

The excess of the purchase price paid over the fair value of Reznor's net assets is recorded as goodwill, which is primarily attributable to the Company's belief that the acquisition of Reznor positions Nortek to service a broader portion of the HVAC market. Approximately $91.2 million of goodwill associated with the acquisition will be deductible for income tax purposes. This estimate is subject to refinement until all pertinent information has been obtained.

The Company has made preliminary estimates of the fair value of the assets and liabilities of Reznor, including inventory, property and equipment, intangible assets, and prepaid and deferred taxes, utilizing information available at the time that the Company's unaudited condensed consolidated financial statements were prepared and these estimates are subject to refinement until all pertinent information has been obtained. These non-recurring fair value measurements are primarily determined using unobservable inputs. Accordingly, these fair value measurements are classified within Level 3 of the fair value hierarchy.

The Company will complete the following procedures, among others, prior to finalizing the acquisition method of accounting for Reznor:


•	Make a final determination of the purchase price based on the final working capital adjustments.


•	Finalize the appraisals of property and equipment and intangible assets.


•	Finalize the deferred tax analysis for prepaid and deferred income taxes, including determining the deferred tax consequences for any changes in the fair value adjustments discussed above.

The total preliminary fair value of intangible assets was approximately $117.1 million. The Company has determined that all of the intangible assets are subject to amortization and that they will have no residual value at the end of the amortization periods. The following is a summary of the estimated fair values and weighted average useful lives by intangible asset class (amounts in millions, except for weighted average useful lives):



	Fair Value		Weighted Average Useful Lives
Customer relationships	$	58.2	10.5
Completed Technology	20.5		7.0
Trademarks	38.4		20.0
	$	117.1	11.3

Total intangible asset amortization for the second quarter of 2014 relating to Reznor was approximately $1.7 million. Based upon current fair value estimates, annual amortization related to these acquired intangible assets is expected to be approximately $10.4 million.

In connection with the acquisition of Reznor, during the second quarter and first half of 2014, the Company also incurred approximately $3.7 million and $5.7 million, respectively, of fees and expenses, which have been recorded in selling, general and administrative expense, net ("SG&A") in the accompanying unaudited condensed consolidated statement of operations.

The unaudited pro forma net sales, operating earnings (loss), net loss, basic and diluted loss per share, and depreciation and amortization expense for the Company as a result of the acquisition of Reznor for the periods presented were as follows:



	Year Ended			First half of
	Dec. 31, 2013			2014			2013
	(Dollar amounts in millions)
Net sales	$	2,447.1		$	1,318.5		$	1,221.6
Operating earnings (loss)	100.9			(7.5		)	48.0
Net loss	(4.5		)	(47.4		)	(4.1		)
Basic loss per share	(0.29		)	(3.05		)	(0.27		)
Diluted loss per share	(0.29		)	(3.05		)	(0.27		)
Depreciation & amortization expense	111.1			53.9			55.7
Impairment of long-lived assets and goodwill	—			80.4			—

These amounts were determined assuming that the acquisition of Reznor had occurred on January 1, 2013 and include preliminary pro forma adjustments to reflect (i) additional depreciation and amortization expense related to the preliminary estimates of the fair values of acquired tangible and intangible assets, which is subject to change as the Company completes its review and appraisal work, (ii) changes in interest expense related to financing transactions due, in part, to funding the acquisition, and (iii) other pro forma adjustments that the Company considered appropriate related to the acquisition of Reznor. The transaction costs of approximately $5.7 million related to the acquisition of Reznor for the first half of 2014 have been excluded from the unaudited pro forma operating earnings (loss), net loss, and basic and diluted loss per share. These preliminary pro forma amounts are not necessarily indicative of the amounts that would have been achieved had the acquisition taken place as of January 1, 2013, nor are they necessarily indicative of the results for future periods. These preliminary pro forma financial statements are subject to change as additional information becomes available.

The acquisition of Reznor contributed approximately $23.8 million to net sales and a loss of approximately $1.4 million (which includes depreciation and amortization expense of approximately $3.8 million, including approximately $1.5 million of increased cost of goods sold due to the recognition of inventory at its acquisition date fair value) to operating loss for the second quarter and first half of 2014.

On April 1, 2013, the Company acquired all of the outstanding common stock of 2GIG Technologies, Inc. (“2GIG”) from APX Group, Inc. The purchase price was approximately $164.2 million, which consisted of a cash payment at the date of acquisition of approximately $135.0 million, working capital adjustments of approximately $13.9 million (of which approximately $12.3 million and $1.6 million were paid during the second and third quarter of 2013, respectively) and the settlement of a receivable due from 2GIG to the Company as of the acquisition date of approximately $15.3 million.

2GIG is a designer and supplier of residential security and home automation systems. Developed with the assistance of Nortek's Linear® business, 2GIG's Go!Control® touch-screen panel is a self-contained, all-in-one home security and automation control panel. 2GIG also provides wireless interactive home security services and a wide range of peripheral hardware devices and system components for home security and automation solutions. The results of 2GIG have been included in the Company's results of operations since the date of acquisition and have been included in the Company's Technology Solutions ("TECH") segment. During 2013, the operations of 2GIG were integrated into the Company's existing security and access control products business, as such, net sales and operating earnings for the first quarter of 2014 for 2GIG have not been separately presented.

The unaudited pro forma net sales, operating earnings, net loss, basic and diluted loss per share, and depreciation and amortization expense for the Company as a result of the acquisition of 2GIG for the first quarter of 2013 were as follows (dollar amounts in millions):



Net sales	$	551.1
Operating earnings	9.0
Net loss	(12.7		)
Basic loss per share	(0.83		)
Diluted loss per share	(0.83		)
Depreciation & amortization expense	26.1

These amounts were determined assuming that the acquisition of 2GIG had occurred on January 1, 2013 and include pro forma adjustments to reflect (i) the elimination of intercompany transactions between the Company and 2GIG, (ii) additional depreciation and amortization expense related to acquired assets, (iii) increased interest expense related to the amounts borrowed to fund the acquisition and (iv) other pro forma adjustments that the Company considered appropriate related to the acquisition of 2GIG. These pro forma amounts are not necessarily indicative of the amounts that would have been achieved had the acquisition taken place as of January 1, 2013, nor are they necessarily indicative of the results for future periods.

On February 22, 2013, the Company, through an indirect wholly-owned foreign subsidiary, acquired certain assets and assumed certain liabilities of Gefen Distribution Verwaltungs GmbH ("Gefen Distribution") for total consideration of approximately $2.9 million, consisting of cash payments of approximately $0.9 million, a holdback amount of approximately $0.2 million to be paid 18 months subsequent to the closing of the acquisition, and the settlement of a receivable due from Gefen Distribution to the Company as of the acquisition date of approximately $1.8 million. Gefen Distribution is the principal distributor of Gefen products in Europe and the acquisition expands the Company's European distribution of the Company's products. Gefen Distribution is included in the Company's TECH segment. Pro forma results related to the acquisition of Gefen Distribution have not been presented, as the effect is not significant to the Company's consolidated operating results.