| ACQUISITION |
4. ACQUISITION
Acquisition Summary – On December 1, 2021 (“Acquisition Date”), we entered into a definitive agreement and acquired (“DSS Acquisition”) the services and industrial staffing businesses (“DSS Business”) of Dynamic Industries, Inc. (“Dynamic”) for $7.6 million (“Purchase Price”). We also hired substantially all of the employees of the DSS Business.
Preliminary Purchase Price Allocation – The Purchase Price was allocated to the major categories of assets and liabilities acquired based upon preliminary estimates of their fair values at the Acquisition Date, which were based, in part, upon outside appraisals for certain assets, including property, machinery and equipment and specifically-identifiable intangible assets. The excess of the Purchase Price over the estimated fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill. The factors contributing to the goodwill (which is all deductible for tax purposes) include the acquired established workforce, estimated future cost savings and revenue synergies associated with the DSS Business.
The following table summarizes our preliminary purchase price allocation at the Acquisition Date:
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Tangible assets and liabilities:
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Land and buildings(1)
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$
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475
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Machinery and equipment(2)
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2,557
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Right-of-use asset(3)
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2,000
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Accrued expenses and other liabilities
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(672
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)
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Net tangible assets and liabilities
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4,360
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Intangible assets - customer relationships(4)
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996
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Goodwill
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2,217
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Purchase Price(5)
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$
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7,573
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(1)
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Land and buildings – Represents an acquired operating facility located in Ingleside, Texas (“Ingleside Facility”). The fair value of the facility was estimated based on a third-party appraisal.
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(2)
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Machinery and equipment – Represents acquired machinery, equipment and vehicles. The fair values of the assets were estimated based on third-party appraisals.
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(3)
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Right-of-use asset – Represents a fabrication and operating facility located in Harvey, Louisiana (“Harvey Facility”) that was subject to both a lease arrangement with Dynamic and a separate purchase option that enabled us to buy the facility from Dynamic prior to December 2, 2022 for a nominal amount (“Harvey Option”). We believed it was probable we would exercise the Harvey Option, and accordingly, concluded that the arrangement represented a finance lease under the guidance of ASC 842,“Leases”, due to the Harvey Option representing a bargain purchase option. Therefore, we reflected the estimated fair value of the Harvey Facility plus future lease payment obligations as a right-of-use asset in our preliminary purchase price allocation, with the estimated fair value based on a combination of a third-party appraisal, third-party indications of interest for the facility, and indications of value communicated by and between us and Dynamic during the due diligence process. We subsequently determined that the Harvey Facility was no longer necessary for our future operations, and during the third quarter 2022, we sold the Harvey Option to a third party for $2.1 million ($1.9 million, net of transaction and other costs). No material gain or loss was recognized on the sale of the Harvey Option as the net proceeds approximated the carrying value of the underlying right-of-use asset. The net proceeds from the sale are reflected on our Statement of Cash Flows within proceeds from the sale of property and equipment.
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(4)
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Customer relationships – Represents the estimated fair value of existing underlying customer relationships with estimated lives of 7 years. The fair value was estimated based on a multi-period excess earnings method which incorporated Level 3 inputs. The significant assumptions used in estimating fair value included revenue and income projections for the DSS Business and the estimated discount rate that reflects the level of risk associated with receiving future cash flows. For the three and nine months ended September 30, 2022, amortization expense for our intangible assets was less than $0.1 million and $0.1 million, respectively, and our amortization expense is estimated to be $0.1 million to $0.2 million for each of 2022, 2023, 2024, 2025 and 2026, and $0.3 million thereafter.
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(5)
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Purchase Price – Represents a base cash purchase price of $8.0 million, less $0.4 million attributable to assumed employee vacation obligations.
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Supplemental Pro Forma Financial Information – The following unaudited pro forma condensed combined financial information (“Pro Forma Information”) gives effect to the DSS Acquisition, accounted for as a business combination using the purchase method of accounting. The Pro Forma Information reflects the DSS Acquisition and related events as if they occurred on January 1, 2020 (the earliest period presented in our 2021 Annual Report), and gives effect to pro forma events that are directly attributable to the DSS Acquisition, factually supportable and expected to have a continuing impact on the combined results of the Company and the DSS Business following the DSS Acquisition. The Pro Forma Information for the three and nine months ended September 30, 2021, reflects adjustments to include: (1) incremental intangibles amortization and depreciation expense of $0.1 and $0.2 million, respectively, associated with fair value adjustments related to the DSS Acquisition, and (2) the historical results of the DSS Business for the periods. Revenue attributable to the DSS Business for the three and nine months ended September 30, 2021 was $12.1 million and $35.7 million, respectively, and net income was $0.6 million and $1.3 million, respectively. The Pro Forma Information has been presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on the dates indicated. Further, the Pro Forma Information does not purport to project the future operating results of the combined Company following the DSS Acquisition.
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Three Months Ended September 30, 2021
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Nine Months Ended September 30, 2021
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Pro forma revenue from continuing operations
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$
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31,663
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$
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103,299
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Pro forma net income from continuing operations
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5,970
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2,650
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Per share data:
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Basic and diluted income from continuing operations
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$
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0.38
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$
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0.17
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