Acquisitions

Reznor Acquisition

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 $2.6 million for preliminary working capital and other post-closing adjustments, of which approximately $1.9 million was paid in the second quarter of 2014 and approximately $0.7 million will be paid during the fourth 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 and Commercial HVAC ("RCH") segment.

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




Current assets (1)	$	47.1
Property and equipment	20.7
Goodwill	105.3
Intangible assets	119.7
Other assets	0.4
Current liabilities (2)	(18.9		)
Deferred income taxes	(11.0		)
Other long-term liabilities	(0.7		)
Estimated purchase price	$	262.6

(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 $1.5 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 $0.3 million and $1.8 million increased cost of products sold for the third quarter and nine months of 2014, respectively.


(2)	Includes accounts payable of approximately $12.3 million and accrued expenses and taxes of approximately $6.6 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. Goodwill associated with the acquisition of Reznor decreased approximately $5.3 million between the second and third quarter of 2014. This decrease primarily relates to assumption changes for intangible assets and deferred income taxes of approximately $2.6 million and $2.0 million, respectively. Approximately $83.0 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, and intangible assets 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:


•	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.


•	Finalize evaluation of the fair value of pre-acquisition contingencies.

The total preliminary fair value of intangible assets was approximately $119.7 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 (dollar amounts in millions, except for weighted average useful lives):



	Fair Value		Weighted Average Useful Lives
Customer relationships	$	59.6	11.0
Completed Technology	20.4		7.0
Trademarks	39.7		20.0
	$	119.7	11.6

Total intangible asset amortization for the third quarter and nine months of 2014 relating to Reznor was approximately $2.6 million and $4.3 million, respectively. Based upon current fair value estimates, estimated future intangible asset amortization expense related to these acquired intangible assets is expected to aggregate approximately $115.4 million as follows:



Year Ended December 31,	Annual Amortization Expense
	(Dollar amounts in millions)

Remainder of 2014	$	2.6
2015	10.3
2016	10.3
2017	10.3
2018	10.3
2019 and thereafter	71.6

In connection with the acquisition of Reznor, the Company also incurred approximately $6.1 million 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 for the nine months of 2014.

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 Reznor for the periods presented were as follows:



	Year Ended			Nine Months of
	Dec. 31, 2013			2014			2013
	(Dollar amounts in millions, except per share data)
Net sales	$	2,447.1		$	1,961.4		$	1,846.3
Operating earnings	100.6			26.6			82.4
Net loss	(4.7		)	(42.1		)	(0.1		)
Basic loss per share	(0.31		)	(2.70		)	(0.01		)
Diluted loss per share	(0.31		)	(2.70		)	(0.01		)
Depreciation & amortization expense	111.0			79.9			82.1
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 $6.1 million related to the acquisition of Reznor for the nine months of 2014 have been excluded from the unaudited pro forma operating earnings, 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 $38.0 million and $61.8 million to net sales for the third quarter and nine months of 2014, respectively, and approximately $1.8 million (which includes depreciation and amortization expense of approximately $3.8 million, including approximately $0.3 million of increased cost of goods sold due to the recognition of inventory at its acquisition date fair value) and $0.4 million (which includes depreciation and amortization expense of approximately $7.6 million, including approximately $1.8 million of increased cost of goods sold due to the recognition of inventory at its acquisition date fair value) to operating earnings for the third quarter and nine months of 2014, respectively.

2GIG Acquisition

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 SCS 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 nine months of 2014 for 2GIG have not been separately presented.

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



Net sales	$	1,771.0
Operating earnings	89.1
Net earnings	7.4
Basic earnings per share	0.48
Diluted earnings per share	0.47
Depreciation & amortization expense	69.4

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. The transaction costs of approximately $1.8 million related to the acquisition of 2GIG for the nine months of 2013 have been excluded from the unaudited pro forma operating earnings, net earnings, and basic and diluted earnings per share. 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.

Other Acquisitions

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, 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. Gefen Distribution is included in the Company's AVC segments. 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.

On October 8, 2014, the Company completed the acquisition of the HVAC distribution business of privately owned Phoenix Wholesale, Inc. ("Phoenix") for an initial purchase price of approximately $14.5 million, of which approximately $1.0 million was placed into escrow and approximately $2.2 million was held back subject to final purchase price adjustments. The acquisition of Phoenix was funded from borrowings under the Company's senior secured asset-based revolving credit facility. The acquisition of Phoenix expands the RCH segment's distribution footprint in regions where there is minimal market penetration. Phoenix will be included in the Company's RCH segment and goodwill related to the acquisition will be deductible for income tax purposes. Pro forma results related to the acquisition of Phoenix have not been presented, as the effect is not significant to the Company's consolidated operating results.