Acquisitions

6 Months Ended

Jun. 30, 2020

Acquisition of Sierra Monitor Corporation

On May 20, 2019, we acquired 100% of the common stock in Sierra Monitor Corporation ("SMC") in an all-cash transaction valued at $33.2 million, net of cash acquired. Additionally, we converted outstanding stock options and restricted stock units into MSA stock options and restricted stock units which resulted in additional goodwill of approximately $0.9 million based on the fair value of the awards identified as transaction consideration.

Based in Milpitas, California, in the heart of Silicon Valley, SMC is a leading provider of fixed gas and flame detection instruments and Industrial Internet of Things solutions that connect and help protect high-value infrastructure assets. The acquisition enables MSA to accelerate its strategy to enhance worker safety and accountability through the use of cloud technology and wireless connectivity. This acquisition enhances a key focus of the Company's recently established Safety io subsidiary, launched in 2018 primarily to leverage the capabilities of its portable gas detection portfolio as it relates to cloud connectivity. The transaction was funded through borrowings on our unsecured senior revolving credit facility. The acquisition qualifies as a business combination and was accounted for using the acquisition method of accounting.

We finalized the purchase price allocation as of December 31, 2019. The following table summarizes the fair values of the SMC assets acquired and liabilities assumed at the date of acquisition:


(In millions)	May 20, 2019
Current assets (including cash of $2.1 million)	$	10.5
Property, plant and equipment and other noncurrent assets	1.3
Customer relationships	9.6
Acquired technology	1.4
Goodwill	19.9
Total assets acquired	42.7
Total liabilities assumed	6.5
Net assets acquired	$	36.2

Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values. Fair values were determined by management, based in part on an independent valuation performed by a third-party valuation specialist. The valuation methods used to determine the fair value of intangible assets included the relief from royalty method for technology related intangible assets; the excess earnings approach for customer relationships using customer inputs and contributory charges; and the cost method for assembled workforce which is included in goodwill. A number of significant assumptions and estimates were involved in the application of these valuation methods, including sales volumes and prices, royalty rates, costs to produce, tax rates, capital spending, discount rates, and working capital changes. Cash flow forecasts were generally based on SMC pre-acquisition forecasts coupled with estimated MSA sales synergies. Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives. The customer relationships acquired in the SMC transaction will be amortized over a period of 10 years and the technology will be amortized over 5 years. Estimated future amortization expense related to the identifiable intangible assets is approximately $0.6 million for the remainder of 2020, $1.2 million in each of the next three years, $1.1 million in 2024 and $4.2 million thereafter. The step up to fair value of acquired inventory as part of the purchase price allocation totaled $1.6 million which was fully recognized as amortization expense during the year ended December 31, 2019.

Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an assembled workforce, the expected synergies and other benefits that we believe will result from combining the operations of SMC with our operations. Goodwill of $19.9 million related to the SMC acquisition has been recorded in the Americas reportable segment and is non-deductible for tax purposes.

Our results for the six months ended June 30, 2020, include $0.2 million in strategic transaction costs compared to $2.0 million for the for the six months ended June 30, 2019. These costs are reported in selling, general and administrative expenses.

The operating results of the SMC acquisition have been included in our consolidated financial statements from the acquisition date as part of the Americas reportable segment. Our results for the six months ended June 30, 2020, include SMC sales and net income of $11.1 million and $1.4 million, respectively. Excluding purchase accounting amortization for intangible assets of $0.6 million, adjusted earnings for SMC for the six months ended June 30, 2020, was $2.0 million.

The following unaudited pro forma information presents our combined results as if the SMC acquisition had occurred on January 1, 2019. The unaudited pro forma financial information was prepared to give effect to events that are (1) directly attributable to the acquisition; (2) factually supportable; and (3) expected to have a continuing impact on the combined company’s results. There were no material transactions between MSA and SMC during the period presented that are required to be eliminated. Intercompany transactions between SMC companies during the periods presented have been eliminated in the unaudited pro forma combined financial information. The unaudited pro forma financial information does not reflect any cost savings, operating synergies or revenue enhancements that the combined companies may achieve as a result of the acquisitions or the costs to integrate the operations or the costs necessary to achieve cost savings, operating synergies or revenue enhancements.


(In millions, except per share amounts)	Three months ended June 30, 2019		Six months ended June 30, 2019
Net sales	$	352.4	$	684.0
Net income	38.7		62.0
Basic earnings per share	1.00		1.61
Diluted earnings per share	0.99		1.58

The unaudited pro forma combined financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations or financial position that we would have reported had the acquisitions been completed as of the date and for the periods presented, and should not be taken as representative of our consolidated results of operations or financial condition following the acquisitions. In addition, the unaudited pro forma combined financial information is not intended to project the future financial position or results of operations of the combined company.

The unaudited pro forma financial information was prepared using the acquisition method of accounting under existing U.S. GAAP. MSA has been treated as the acquirer.