Acquisitions and Dispositions

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 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 was paid during the fourth quarter of 2014.

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 RCH segment.

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



Current assets (1)	$	46.9
Property and equipment	17.0
Goodwill	103.8
Intangible assets	125.0
Current liabilities (2)	(18.8		)
Deferred income taxes	(9.7		)
Other long-term liabilities	(1.6		)
	$	262.6


(1)	Includes cash of approximately $7.0 million, accounts receivable of approximately $17.5 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.


(2)	Includes accounts payable of approximately $12.3 million and accrued expenses and taxes of approximately $6.5 million.

The excess of the purchase price paid over the net assets acquired 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 $76.1 million of goodwill associated with the acquisition will be deductible for income tax purposes. The Company completed its valuation process and the related accounting for this acquisition in the first quarter of 2015. There were no material changes to its provisional acquisition accounting.

The total fair value of intangible assets was approximately $125.0 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):



	Fair Value		Weighted Average Useful Lives
Customer relationships	$	64.8	11.1
Completed Technology	20.4		5.0
Trademarks	39.7		20.0
Other	0.1		3.8
	$	125.0	12.9

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 nine months of 2014 were as follows (amounts in millions, except loss per share data):



Net sales	$	1,961.4
Operating earnings	23.9
Net loss	(44.3		)
Basic loss per share	(2.84		)
Diluted loss per share	(2.84		)
Depreciation & amortization expense	82.7

These amounts were determined assuming that the acquisition of Reznor had occurred on January 1, 2014 and include pro forma adjustments to reflect (i) additional depreciation and amortization expense related to the estimates of the fair values of acquired tangible and intangible assets, (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 incurred in the nine months of 2014 of approximately $6.1 million related to the acquisition of Reznor have been excluded from the unaudited pro forma operating earnings, net loss, and basic and diluted loss 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, 2014, nor are they necessarily indicative of the results for future periods.

The acquisition of Reznor contributed approximately $35.5 million and $38.0 million to net sales for the third quarter of 2015 and 2014, respectively, and contributed approximately $109.0 million and $61.8 million to net sales for the nine months of 2015 and 2014, respectively. The acquisition of Reznor contributed operating earnings of approximately $1.0 million (which includes depreciation and amortization expense of approximately $4.4 million) and $1.8 million (which includes depreciation and amortization expense of approximately $3.5 million and approximately $0.3 million of increased cost of products sold due to the recognition of inventory at its acquisition date fair value) to the operating results for the third quarter of 2015 and 2014, respectively, and contributed operating earnings of approximately $3.4 million (which includes depreciation and amortization expense of approximately $12.2 million) and $0.4 million (which includes depreciation and amortization expense of approximately $5.8 million and approximately $1.8 million of increased cost of products sold due to the recognition of inventory at its acquisition date fair value) to the operating results for the nine months of 2015 and 2014, respectively.

Phoenix Acquisition

On October 8, 2014, one of the Company's subsidiaries in the RCH segment completed the acquisition of substantially all of the assets of the HVAC distribution business of privately owned Phoenix Wholesale, Inc. ("Phoenix").

The Company acquired this business for an aggregate purchase price of approximately $13.9 million, all of which was paid in cash. Approximately $1.6 million of the purchase price was retained by the Company as deferred acquisition consideration to be paid upon finalization of certain working capital and other purchase price adjustments and was included in accrued expenses, taxes, and deferred revenue in the Company’s consolidated balance sheet as of December 31, 2014. These working capital and other purchase price adjustments were finalized and paid in February 2015. In addition, approximately $1.0 million of the purchase price is held in escrow to cover general business representations and warranties. This amount will be paid 18 months after the closing date.

The Company completed its valuation process and the related accounting for this acquisition in the first quarter of 2015. There were no material changes to its provisional acquisition accounting.

The acquisition of Phoenix contributed approximately $5.6 million to net sales for the third quarter of 2015 and an operating loss of approximately $1.0 million (which includes depreciation and amortization expense of approximately $0.3 million) to the operating results for the third quarter of 2015. The acquisition of Phoenix contributed approximately $15.3 million to net sales for the nine months of 2015 and an operating loss of approximately $3.5 million (which includes depreciation and amortization expense of approximately $0.8 million) to the operating results for the nine months of 2015.

The results of Phoenix have been included in the Company’s consolidated financial statements since the date of acquisition within the RCH segment. 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.

Anthro Acquisition

On January 21, 2015, one of the Company's subsidiaries in the Ergonomic and Productivity Solutions ("ERG") segment completed the acquisition of all of the outstanding stock of Anthro Corporation (“Anthro”), a fully integrated business with in-house capability to design/develop, manufacture and market its technology furniture products. Anthro’s key products include charging carts (for electronics, including tablets, laptops and other mobile devices) and height adjustable desks and technology carts. Anthro has been integrated into the Company’s ERG segment. The Company completed the acquisition of Anthro to expand its technology and product offerings of the ERG segment.

The Company acquired this business for an initial aggregate purchase price of approximately $51.0 million, of which approximately $50.8 million was paid in cash and an additional $0.2 million related to the amount of consideration being paid in excess of the fair value of certain services provided by the former stockholders of Anthro. Approximately $5.0 million of the purchase price is held in escrow to cover general business representations and warranties. This amount will be paid 18 months after the closing date. During the third quarter of 2015, the Company received approximately $0.7 million for working capital and other purchase price adjustments. As a result, the final adjusted purchase price was approximately $50.3 million. Acquisition-related costs were expensed as incurred within selling, general and administrative expense, net ("SG&A") in the Company’s consolidated statement of operations and were not material.

The Company has made preliminary estimates of the fair value of the assets and liabilities of Anthro, including certain tangible and intangible assets and liabilities, 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 Anthro:


•	Finalize the appraisals of intangible assets


•	Finalize the analysis of certain acquired liabilities and assets based on gathering additional information from the time of the acquisition

Based on the Company’s preliminary evaluation of the assets and liabilities acquired, the Company determined that the fair value of tangible net assets acquired was approximately $5.2 million, including cash of approximately $0.6 million and a fair value adjustment related to inventory acquired of approximately $0.5 million which was recognized in cost of products sold during the first quarter of 2015. In addition, approximately $19.6 million was recognized for definite-lived intangible assets, and approximately $25.5 million was recorded to goodwill.

The following is a summary of the estimated fair values and weighted average useful lives by intangible asset class (dollar amounts in millions):



	Fair Value		Weighted Average Useful Lives
Developed technology	$	13.3	4.0
Customer relationships	2.2		4.5
Trade names	3.9		5.0
Favorable lease arrangements	0.2		3.0
	$	19.6	4.3

The factors contributing to the recognition of goodwill were based upon the Company’s determination that several strategic and synergistic benefits are expected to be realized from the combination. Although this transaction was the acquisition of stock, the parties agreed that pursuant to the applicable tax regulations that the purchase and sale of shares in connection with the acquisition will be treated for U.S. federal and applicable state and local income tax purposes as a transfer of assets. Therefore, substantially all of the goodwill is expected to be deductible for tax purposes.

The acquisition of Anthro contributed approximately $12.5 million to net sales for the third quarter of 2015 and operating earnings of approximately $1.2 million (which includes depreciation and amortization expense of approximately $1.3 million) to the operating results for the third quarter of 2015. The acquisition of Anthro contributed approximately $29.2 million to net sales for the nine months of 2015 and operating earnings of approximately $1.1 million (which includes depreciation and amortization expense of approximately $3.5 million and approximately $0.5 million of increased cost of products sold due to the recognition of inventory at its acquisition date fair value) to the operating results for the nine months of 2015.

The results of Anthro have been included in the Company’s consolidated financial statements since the date of acquisition within the ERG segment. Pro forma results related to the acquisition of Anthro have not been presented, as the effect is not significant to the Company's consolidated operating results.

Numera Acquisition

On June 30, 2015, one of the Company’s wholly-owned subsidiaries completed the acquisition of certain assets and liabilities related to the mobile personal emergency response system and telehealth business of Numera, Inc. (“Numera”), a privately held company. The acquired operations have been integrated into the Company’s Security and Controls Solutions (“SCS”) segment. The Company completed the acquisition to expand its technology and product offerings of the SCS segment.

The Company acquired certain assets and liabilities of Numera for an aggregate initial all cash purchase price of approximately $12.0 million, of which approximately $1.5 million was deposited into an escrow account with a third party escrow agent.

In addition to the initial purchase price consideration, the Company could be required to pay an additional purchase price of up to $28.0 million, which is based on the amount by which future sales, as defined under the purchase agreement, exceed $12.1 million during the period from March 29, 2015 through March 26, 2016. The fair value of the contingent consideration was determined to be approximately $3.7 million as of the acquisition date resulting in a total purchase price of approximately $15.7 million. Any prospective changes in the fair value of the contingent consideration as a result to changes of the inputs used in the estimate of fair value will be recorded to cost of products sold in the Company’s condensed consolidated statements of operations. The Company recorded its estimate of the fair value of the contingent consideration based on the evaluation of the likelihood of the achievement of the contractual conditions that would result in the payment of the contingent consideration. The Company’s fair value of the contingent consideration was determined using an option pricing model. The real option approach methodology applies option pricing theory to a “real” stream, such as revenue. Utilization of this methodology allows running of a high number of simulations and therefore, the Company believes that this valuation methodology was most appropriate.

The Company notes that the key Level 3 inputs utilized in determining the fair value were:


•	Forecasted revenue, including forecasts of 10^th and 90^th percentiles


•	Real option approach methodology simulation inputs, including volatility, risk premiums and betas, which are utilized to derive the total market risk adjustment in the real option approach valuation model simulations


•	Comparable company analysis, which is utilized to support and determine the reasonableness of certain of the option simulation inputs


•	Discount factor, which is utilized to present value the risk-adjusted expected earn-out payment

Through September 26, 2015, the Company determined that there were no material changes in any of the Level 3 inputs. The accrued contingent consideration liability is included in accrued expenses, taxes, and deferred revenue in the Company’s unaudited condensed consolidated balance sheet at September 26, 2015.

Acquisition-related costs were expensed as incurred within SG&A in the Company’s consolidated statement of operations and were not material.

The Company has made preliminary estimates of the fair value of the assets and liabilities of Numera, including certain tangible and intangible assets and liabilities, 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 Numera:


•	Finalize the appraisals of intangible assets


•	Finalize the analysis of certain acquired liabilities and assets based on gathering additional information from the time of the acquisition

Based on the Company’s preliminary evaluation of the assets and liabilities acquired, the Company determined that the fair value of tangible net assets acquired was approximately $0.3 million, principally related to certain prepaids, inventory, and property and equipment. In addition, approximately $11.0 million was recognized for definite-lived intangible assets, and approximately $4.4 million was recorded to goodwill. Substantially all of the goodwill is expected to be deductible for tax purposes.

The following is a summary of the estimated fair values and weighted average useful lives by intangible asset class (dollar amounts in millions):



	Fair Value		Weighted Average Useful Lives
Developed technology	$	5.6	4.8
Customer relationships	4.0		5.8
Trade names	1.1		5.5
Non-compete arrangements	0.3		3.3
	$	11.0	5.1

Due to the fact that the fees that Numera receives for hardware sales and related hardware activations were not deemed separate units of accounting, these fees are deferred until such time as the hardware units are activated and then recognized ratably over the estimated period of economic benefit which has been initially determined to be three years for hardware units and two years for activations. In addition, Numera capitalizes the direct and incremental costs related to hardware and activation sales and recognizes these costs over the same period that the associated revenue is recognized. As a result, the acquisition of Numera did not contribute any significant amount to net sales in the third quarter or first nine months of 2015. As of September 26, 2015, Numera had approximately $1.6 million of deferred revenue and approximately $1.2 million of capitalized direct and incremental costs. The acquisition of Numera contributed operating losses of approximately $1.1 million (which includes depreciation and amortization expense of approximately $0.6 million) to the operating results for the third quarter and nine months of 2015.

The results of Numera have been included in the Company’s consolidated financial statements since the date of acquisition within the SCS segment. Pro forma results related to the acquisition of Numera have not been presented, as the effect is not significant to the Company's consolidated operating results.

Sale of TV One Business

In July 2015, the Company received an unsolicited inquiry regarding the purchase of its TV One businesses ("TV One") that were part of the audio, video and control ("AVC") entities and the Company commenced an evaluation of the potential sale of TV One. On July 28, 2015, the Company’s Board of Directors approved the plan to sell the stock of TV One to a consortium of TV One's management on July 31, 2015. Under the terms of the agreement, the Company has no ongoing involvement or obligations with respect to TV One and the Company is not obligated to indemnify the purchasers in connection with this transaction. There was no substantial cash consideration received in connection with the transaction. The Company recorded a loss on sale of assets of approximately $2.9 million in the third quarter of 2015. The Company concluded that the sale of TV One did not meet the criteria to be reported as a discontinued operations under ASC 205-20, "Discontinued Operations", due to the fact that its disposition does not represent a strategic shift that has (or will have) a major effect on the Company's operations and financial results.