Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v2.4.0.8
Acquisitions
 9 Months Ended
Dec. 31, 2013
Business Combinations [Abstract]  
Business Combination Disclosure [Text Block]
Acquisitions
Kentrox Business Acquisition
On April 1, 2013, the Company's wholly-owned subsidiary, Westell, Inc. acquired 100% of the outstanding shares of Kentrox, Inc. ("Kentrox") for a purchase price of $30.0 million in cash, plus a $1.3 million working capital adjustment, pursuant to an agreement dated March 15, 2013.  Kentrox is a worldwide leader in intelligent site management solutions, providing comprehensive monitoring, management and control of any site. The machine-to-machine communications Kentrox provides enable service providers, tower operators, and other network operators to reduce operating costs while improving network performance. Kentrox provides solutions to customers in North and South America, Australia, Africa, and Europe. The acquisition was attractive to the Company as it adds a highly complementary product line that is wireless focused, software centric and globally deployed.
The Company incurred $0.3 million of related acquisition costs in the fourth quarter of fiscal year 2013 which were reflected in general and administrative costs in the Condensed Consolidated Statement of Operations.
The results of Kentrox's operations have been included in the Condensed Consolidated Financial Statements since the date of acquisition and are reported as a separate operating segment. Kentrox contributed $14.7 million and $42.8 million to revenue and $5.2 million and$9.5 million to operating income in the three and nine months ended December 31, 2013, respectively. Operating income reflects amortization of intangibles based on the estimated fair value.
The following unaudited summary information is presented on a consolidated pro forma basis as if the Kentrox acquisition had occurred on April 1, 2012.
(in thousands)
 
Nine months ended December 31, 2013
 
Nine months ended December 31, 2012
Consolidated pro forma revenue
 
$
79,250

 
$
52,548

Consolidated pro forma operating income (loss)
 
$
4,660

 
$
(12,400
)

The pro forma amounts reflect conforming accounting adjustments, amortization of intangibles based on the estimated fair value and the impact of other fair value purchase accounting impacts such as inventory valuation step-up, deferred revenue reduction and the add back of interest expense. The pro forma results are not necessarily indicative of the combined results had the acquisition been completed at April 1, 2012, nor are they indicative of future combined results.
In accordance with the acquisition method of accounting for business combinations, the Company preliminarily allocated the total purchase consideration transferred to identifiable tangible and intangible assets acquired and liabilities assumed at the acquisition date based on each element’s estimated fair value with the remaining unallocated amounts recorded as goodwill. Certain estimated values are not yet finalized and are subject to change, which could be significant. Specifically, amounts for deferred taxes are pending finalization of valuation efforts. During the three months ended September 30, 2013, the Company obtained new information regarding the acquisition date fair value of certain assets acquired and liabilities assumed that resulted in a $54,000 increase to goodwill in the quarter. The most significant adjustment was a result of a change in estimate on the life of the trade name, from indefinite to 7 years. The Company expects to finalize these amounts as soon as possible but no later than one year from the acquisition date. Purchased intangibles will be amortized over their respective estimated useful lives. Goodwill represents the expected synergies and other benefits from this acquisition that relate to the Company’s market position, customer relationships and supply chain capabilities. All goodwill recorded on the Kentrox acquisition is expected to be amortized and deductible for U.S. federal and state income tax purposes.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed on the April 1, 2013, acquisition date:
(in thousands)
 
Cash
$
2,355

Inventory
5,045

Accounts receivable
4,325

Assets available-for-sale
1,044

Other assets
882

Intangible assets
15,980

Deferred revenue
(2,963
)
Accounts payable and accruals
(3,393
)
Goodwill
8,025

Total consideration
$
31,300


The fair value of intangible assets is as follows:
(in thousands)
 
Fair Value
 
Life in years
Backlog
 
$
1,440

 
1
Customer relationships
 
8,960

 
10
Trade name
 
1,170

 
7
Developed technology
 
4,410

 
9
Total intangible assets
 
$
15,980

 
 

Intangibles will be amortized over the consumption period based on expected cash flows from the underlying intangible asset. The expected amortization by fiscal year is as follows:
(in thousands)
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
Intangible amortization
expense
$
3,268

 
$
2,390

 
$
2,107

 
$
1,857

 
$
1,654

 
$
4,704


ANTONE Business Acquisition
On May 15, 2012, the Company acquired certain assets and liabilities of ANTONE Wireless Corporation (“ANTONE”), including rights to ANTONE products, for $2.5 million cash, subject to an adjustment for working capital, plus contingent cash consideration of up to an additional $3.5 million (the "ANTONE acquisition").  The contingent consideration is based upon profitability of the acquired products for post-closing periods through June 30, 2016, and may be offset by working capital adjustments and indemnification claims.  The acquisition included inventories, property and equipment, contract rights, customer relationships, technology, and certain specified operating liabilities that existed at the closing date.  ANTONE products include high-performance tower-mounted amplifiers, and cell-site antenna sharing products which are sold through the Company's Westell segment. The acquisition qualified as a business combination and is accounted for using the acquisition method of accounting.
The results of ANTONE’s operations have been included in the Condensed Consolidated Financial Statements since the date of acquisition and are reported as part of the Westell segment.
In accordance with the acquisition method of accounting for business combinations, the Company allocated the total purchase consideration transferred to identifiable tangible and intangible assets acquired and liabilities assumed at the acquisition date based on each element’s estimated fair value with the remaining unallocated amounts recorded as goodwill. Purchased intangibles are being amortized over their respective estimated useful lives. Goodwill represents the expected synergies and other benefits from this acquisition that relate to the Company’s market position, customer relationships and supply chain capabilities. All goodwill recorded on the ANTONE acquisition is expected to be amortized and deductible for U.S. federal and state income tax purposes. In the fourth quarter of fiscal year 2013, the Company's annual goodwill test concluded that this goodwill, which was evaluated on the basis of the Westell reporting segment as a whole, was impaired and recorded as a charge to Results of Operation in that quarter.
The following table summarizes the fair values of the assets and liabilities assumed on the May 15, 2012, acquisition date:
(in thousands)
 
Inventories
$
326

Deposit
3

Intangibles
3,230

Liabilities
(612
)
Goodwill
2,086

Net assets acquired
$
5,033

Cash consideration transferred
$
2,524

Contingent consideration
3,038

Working capital adjustment (shortfall)
(529
)
Total consideration
$
5,033


The identifiable intangible assets include $2.8 million designated to technology and $0.4 million designated to customer relationships, each with an estimated useful life of 8 years. The Company calculated values based on the present value of the future estimated cash flows derived from operations attributable to technology and existing customer contracts and relationships.
In the three months ended September 30, 2012, the Company recorded a $303,000 warranty obligation for pre-acquisition sales made by ANTONE related to a specific product failure. See Note 7, Product Warranties. Pre-acquisition warranty costs in excess of $25,000 are indemnified by the seller and have been adjusted in the valuation of the contingent consideration. Refer to further discussion of the contingent consideration in Note 12, Fair Value Measurements.