3.  BUSINESS ACQUISITION

On December 5, 2016 (the “Acquisition Date”), the Company completed the acquisition of Enovation Controls, LLC, a global provider of electronic control, display and instrumentation solutions.  Historically Enovation Controls sold products to four customer markets: natural gas production controls (NGPC), engine controls and fuel systems (ECFS), power controls (PC) and vehicle technologies (VT).  Prior to the closing date, and pursuant to an Asset Transfer Agreement, Enovation Controls transferred the assets and liabilities of their lines of business associated with the NGPC and ECFS customer markets to a separate legal entity, leaving Enovation Controls with only the lines of business associated with the PC and VT customer markets and the related agreed upon assets and liabilities to be acquired by Sun.  

Pursuant to a Unit Purchase Agreement, Sun acquired all of the outstanding membership units of Enovation Controls for initial cash consideration of $201,020 and additional cash earn-out potential of $50,000.  The consideration paid for the acquisition was funded with cash on hand and proceeds from the existing revolving line of credit as discussed in further detail in Note 10.  

The acquisition of Enovation enables the Company to expand the current complete system solution portfolio and develop product and end market diversification.  The results of Enovation’s operations have been included in the consolidated financial statements since the Acquisition Date.  

The acquisition date fair value of the consideration transferred consisted of the following:

Total consideration for the acquisition is subject to a post-closing adjustment for working capital in accordance with the terms of the Purchase Agreement.  

The contingent consideration arrangement requires the Company to pay up to $50,000 of additional consideration to Enovation Controls’ former owners based on defined revenue and EBITDA targets. The payments are due in three installments which are to be paid during the 9, 18 and 27 month periods after closing. The preliminary fair value of the contingent consideration arrangement at the acquisition date was $35,077 and was estimated using a risk-adjusted probability analysis as of the Acquisition Date.  

The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values.  The fair value of identifiable intangible assets acquired was based on estimates and assumptions made by management at the time of the acquisition. Management is currently awaiting additional information to complete the valuation of contingent consideration, identified intangible assets and related deferred income taxes. As additional information, as of the acquisition date, becomes available and as management completes their evaluation, the preliminary purchase price allocation may be revised during the remainder of the measurement period (which will not exceed 12 months from the Acquisition Date). Any such revisions or changes may be material as the fair values of the tangible and intangible assets acquired and liabilities assumed is finalized.

The preliminary allocation of the total purchase price, net of cash acquired, is as follows:

Goodwill is primarily attributable to the assembled workforce, new product development capabilities and anticipated synergies and economies of scale expected from the operations of the combined company. The synergies include certain cost savings, operating efficiencies, and other strategic benefits projected to be achieved as a result of the acquisition.  All goodwill is expected to be deductible for tax purposes.

Transaction costs of $1,537 incurred in connection with the acquisition are included in selling, engineering and administrative expenses in the Consolidated Statement of Operations for the year ended December 31, 2016.

The net sales and loss before income taxes of Enovation Controls, included in the Consolidated Statement of Operations for the period from December 5, 2016 through December 31, 2016 totaled approximately $4,136 and $2,151, respectively.  Included in Enovation Controls’ loss for the period are $2,006 of charges related to the purchase accounting effects of inventory step-up to fair value and amortization of acquisition-related intangible assets.

Intangible Assets

The preliminary fair value of identified intangible assets and their respective useful lives are as follows:

Enovation sells products under the following brands: Enovation Controls, Murphy and Zero Off. The fair value of brands acquired was determined by using the relief from royalty income approach methodology.  This method reflects the present value of savings resulting from the right to manufacture or sell products under the brand names without having to pay a license fee for their use.  This valuation method is based on the application of a royalty rate to forecasted revenue of the brands.  The economic useful life was determined based on the expected life of the trade name and the cash flows anticipated over the forecasted periods.

Developed technology relates to two technology platforms, Vehicle Technologies and Power Controls.  The VT platform designs and manufactures recreational vehicle and recreational marine technologies including displays, GPS devices, gages and controls.  The PC platform designs and manufactures industrial controls, instrumentations, panels and related software for engines, pumps and other industrial applications.  The developed technology was valued using the relief from royalty income approach methodology.  This method reflects the present value of savings resulting from the right to manufacture or sell products that incorporate the technology without having to pay a license fee for its use and is based on the application of a royalty rate to forecasted revenue from the technology.  The economic useful life was determined based on the technology cycle related to each developed technology platform.

The supply agreement intangible asset relates to favorable terms for inventory purchases that provide a competitive advantage over other market participants.  At the Acquisition Date, Enovation entered into a supply agreement with the separate legal entity that holds the lines of business associated with Enovation Controls’ NGPC and ECFs customer markets, which were not acquired by Sun, to purchase and sell certain products at discounted pricing.  The supply agreement was valued using an income approach methodology which estimated the fair value of the supply agreement by applying a discounted cash flow analysis whereby the value is the present value of forecasted cash flows applicable.  The economic useful life is in line with the terms of the agreement.  

Customer relationships are based upon the fair value of future projected operations that will be derived from sales of products to existing customers of Enovation Controls. Customer relationships were valued using the excess earnings income approach methodology.  Under this approach the fair value was measured as the present value of forecasted cash flows net of pro-forma charges for tangible and intangible assets employed.  The economic useful life was determined based on historical customer turnover rates.

Unaudited Pro Forma Information

The following unaudited pro forma financial information presents combined results of operations for each of the periods presented, as if Enovation Controls had been acquired as of the beginning of 2015.  The financial results of Enovation Controls included in the pro forma information provided below reflect net sales and direct costs and operating expenses related to the acquired lines of business only.

The PC and VT lines of business are not separate legal entities and were never operated as stand-alone businesses, divisions or subsidiaries and Enovation Controls has never maintained the distinct and separate accounts necessary to prepare full carve out financial statements. Due to the impracticability of obtaining full financial information for the carve-out operations, certain costs of Enovation Controls, primarily related to corporate overhead, foreign currency translation gains and losses and interest expense are not included in the pro forma results prior to the Acquisition Date.

The pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment acquired and net sales and cost of sales for the effects of the supply agreement entered into at the Acquisition Date. Non-recurring pro forma adjustments directly attributable to the acquisition were not included in the pro forma financial information presented below.  These adjustments included the purchase accounting effect of inventory step-up to fair value of $1,021 and acquisition costs of $1,537. The pro forma information does not reflect any operating efficiencies or potential cost savings that may result from the acquisition. Accordingly, the pro forma information is for illustrative purposes only and is not intended to present or be indicative of the actual results of operations of the combined company that may have been achieved had the acquisition actually occurred at the beginning of 2015, nor is it intended to represent or be indicative of future results of operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below: