Presidio, Inc. - 10-K filing on 2017-09-21

Acquisitions

12 Months Ended

Jun. 30, 2017

Netech Corporation

On February 1, 2016, pursuant to an asset purchase agreement dated as of December 31, 2015, a wholly-owned subsidiary of the Company acquired certain assets and assumed certain liabilities of the Netech Corporation (“Netech Acquisition”) comprising the Netech business (“Netech”). Total consideration was $250.5 million, which included $240.1 million paid in cash and $11.0 million paid in 1,257,142 shares of the Company’s common stock. In the absence of a public trading market for our common stock at the time of the acquisition, the value of the common stock provided as consideration was determined contemporaneously using a combination of the market approach valuation method of comparable companies and an income approach valuation method based on discounted cash flows. The Netech Acquisition enables the Company to further broaden its portfolio of services and solutions and significantly expand its capabilities within the midwestern United States.

The Netech Acquisition was funded through the combination of a new $150.0 million senior credit facility, an incremental $25.0 million term loan borrowing under the Company’s existing senior credit facility, a borrowing under the Company’s accounts receivable securitization facility and available cash on hand. Refer to Note 11 for a further discussion of the credit facility borrowings.

In accordance with the acquisition method, the acquired assets and assumed liabilities of the Netech business have been recognized at fair value as of February 1, 2016. The fair values assigned to the assets and liabilities were derived using a combination of the income approach, the market approach and the cost approach. The significant estimates that were used in calculating the fair values include useful lives, estimated selling prices, disposal costs, costs to complete, and reasonable profit. The fair values assigned to intangible assets were determined through the use of the relief from royalty method and the excess earnings method. The goodwill recognized from the transaction is primarily associated with Netech’s specialized and technical workforce, its positioning in the marketplace, potential synergies and the Company’s belief in its potential for continued growth. The Netech Acquisition was a taxable transaction, and as a result, the goodwill and acquired intangible assets are deductible for income tax purposes.

The following table summarizes the purchase price allocation for the Netech Acquisition (in millions):



Computation of purchase price:
Cash paid to sellers	$	240.1
Receivable due from escrow	(0.6		)
Fair value of equity consideration	11.0
Total consideration	$	250.5
Allocation of purchase price:
Fair value of assets acquired:
Accounts receivable	$	70.2
Unbilled accounts receivable	7.5
Inventory	9.0
Prepaid expenses and other current assets	5.0
Property and equipment	2.3
Goodwill	108.2
Identifiable intangible assets	107.0
Other assets	2.4
Fair value of liabilities assumed:
Accounts payable - trade	(2.3		)
Accounts payable - floor plan	(40.5		)
Accrued expenses and other current liabilities	(18.3		)
Total net assets acquired	$	250.5

Gross contractual receivables acquired were $70.4 million of accounts receivable and $7.5 million of unbilled receivables.

The Company incurred $4.5 million of acquisition related costs during the fiscal year ended June 30, 2016 associated with the Netech Acquisition, which are presented as part of transaction costs in the consolidated statements of operations. In August 2016, the Company collected the $0.6 million that was due back to the Company from escrow accounts as a result of final post-closing purchase price adjustments related to the net working capital as of the closing date of February 1, 2016.

Sequoia Worldwide LLC

On November 23, 2015, the Company acquired certain assets and assumed certain liabilities of Sequoia Worldwide LLC (“Sequoia”) for total consideration of approximately $12.6 million, which included $11.2 million paid in cash and $1.4 million paid in 159,890 shares of the Company’s common stock. In the absence of a public trading market for our common stock at the time of acquisition, the value of the common stock provided as consideration was determined contemporaneously using a market approach valuation method of comparable companies. The acquisition of Sequoia, a firm with deep cloud consulting and integration domain expertise, allows the Company to provide hybrid cloud strategies and service delivery models for our clients.

The fair values assigned to intangible assets were determined through the use of the relief from royalty method and the excess earnings method. The goodwill recognized from the transaction is primarily associated with Sequoia’s specialized and technical workforce. The acquisition of Sequoia was a taxable transaction and as a result, the goodwill and acquired intangible assets are deductible for income tax purposes. Transaction costs associated with the acquisition were immaterial.

The following table summarizes the purchase price allocation for the Sequoia acquisition (in millions):



Computation of purchase price:
Cash paid to sellers	$	11.2
Fair value of equity consideration	1.4
Total consideration	$	12.6
Allocation of purchase price:
Assets assumed	$	0.1
Purchased identifiable intangible assets	1.0
Goodwill	11.5
Total net assets acquired	$	12.6

Presidio Holdings Inc.

As previously discussed, on February 2, 2015, Presidio, Inc. acquired Presidio Holdings. The acquisition was pursuant to an agreement and plan of merger dated as of November 26, 2014, by and between Presidio Holdings, Presidio, Inc., Aegis Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Aegis Holdings, Inc. (“Merger Sub”), and AS Presidio Holdings, LLC, a Delaware limited liability company, solely as Securityholder Representative (the “Merger Agreement”). In accordance with the terms of the Merger Agreement, Merger Sub merged with and into Presidio Holdings, with Presidio Holdings surviving as a wholly-owned subsidiary of Presidio, Inc.

As part of the Presidio Acquisition, Presidio, Inc. entered into rollover agreements related to Presidio Holdings common stock and outstanding stock options in Presidio Holdings that were held by certain members of management of Presidio Holdings (the “Rollover”). Pursuant to these rollover agreements, 15,564,968 shares of the common stock of Presidio Holdings were exchanged for 2,931,948 shares of common stock of Presidio, Inc. and 9,400,028 options to acquire common stock of Presidio Holdings were exchanged for 1,770,688 options to acquire common stock of Presidio, Inc. The shares and options that were exchanged had an aggregate fair value of approximately $14.7 million and $6.5 million, respectively. The fair value of the shares and options exchanged was based on the value per share as determined by the total consideration provided to equity holders as part of the Presidio Acquisition.

The cash consideration paid in the Presidio Acquisition was $652.5 million, exclusive of cash acquired, cash paid for the repayment of Presidio LLC’s existing term loan and revolving credit facility and the repayment of the accounts receivable securitization facility. Additionally, Presidio Holdings’ former shareholders were eligible to receive an additional $7.5 million of merger consideration (the “hold-back amount”), subject to certain adjustments for indemnification obligations under the Merger Agreement, and an estimated $3.4 million of income tax refunds, as determined in conjunction with the Merger Agreement. The $7.5 million hold-back was payable one year after the closing of the Presidio Acquisition and the estimated income tax refunds were payable as received by the Company. These amounts were recognized at fair value as an acquisition-related liability in the consolidated balance sheet. The fair values of the hold-back and tax refunds were based on the present value of expected future payments as of the acquisition date. During the fiscal year ended June 30, 2016, the Company paid $10.3 million associated with the hold-back and income tax refunds. As of June 30, 2017, the Company had a $0.3 million acquisition-related liability recorded in the consolidated balance sheet associated with income tax refunds not yet received. The difference between the amounts initially estimated as due to the former shareholders for income tax refunds and the amounts actually paid or accrued was recorded as a measurement period adjustment to goodwill during the fiscal year ended June 30, 2016.

As further described in Note 11, on February 2, 2015, concurrent with the closing of the Presidio Acquisition, the Company also entered into the following financing transactions:

•

Presidio LLC, as borrower, obtained a new $650.0 million credit facility, which includes (1) a five-year $50.0 million senior secured revolving credit facility that remained undrawn at the closing of the Presidio Acquisition and (2) a seven-year $600.0 million senior secured term loan credit facility. The credit facilities are guaranteed by, and secured by the assets of, Presidio LLC and its subsidiaries, subject to certain exceptions. Presidio LLC’s wholly-owned subsidiary, PNS, is a co-borrower of the senior facilities.


•	The existing term loan and revolver facilities were repaid and the commitments thereunder were terminated as of the closing of the Presidio Acquisition.


•	The existing $150.0 million accounts receivable securitization facility was upsized to a three-year $200.0 million facility. Additionally, concurrent with the closing of the Presidio Acquisition, $40.0 million was repaid on the accounts receivable securitization facility.

•

Merger Sub, which was merged into Presidio Holdings in the Presidio Acquisition, issued $400.0 million aggregate principal amount of notes, which included $250.0 million in aggregate principal amount of 10.25% senior notes due February 2023 and $150.0 million in aggregate principal amount of 10.25% senior subordinated notes due February 2023. Concurrent with the closing of the Presidio Acquisition, Presidio Holdings assumed all of the obligations of Merger Sub under the senior notes, the senior subordinated notes an the related indentures by operation of law.

As a result of the Presidio Acquisition, the assets and liabilities of Presidio Holdings were recognized at fair value as of February 2, 2015; this primarily impacted non-current assets and liabilities. The fair values assigned to tangible assets and liabilities were derived using a combination of the income approach, the market approach and the cost approach. The significant estimates that were used in calculating the fair value of the tangible assets and liabilities include replacement cost, useful lives, estimated selling prices, disposal costs, costs to complete and reasonable profit. The fair value assigned to intangible assets was determined through the use of the relief from royalty method, the excess earnings method and the replacement cost method. The goodwill recognized from this transaction is primarily associated with the Presidio Holdings’ specialized and technical workforce, its positioning in the marketplace and the belief in its potential for continued growth.

The Presidio Acquisition was a non-taxable transaction and as a result, the goodwill, acquired intangible assets, and other fair value adjustments are nondeductible for income tax purposes. Accordingly, deferred tax assets and liabilities have been established for the fair value adjustments with the exception of goodwill, for which a deferred tax liability is prohibited from recognition.

For the Successor period ended June 30, 2015 and the Predecessor period ended February 1, 2015, the Company incurred $18.5 million and $42.1 million of acquisition-related costs, respectively. These costs were associated with the Presidio Acquisition and are presented as part of transaction costs in the consolidated statements of operations.

The following table summarizes the purchase price allocation for the Presidio Acquisition (in millions):



Computation of purchase price:
Cash paid to sellers	$	652.5
Fair value of management equity rolled forward	21.2
Fair value of consideration to be paid in the future	10.8
Total consideration	$	684.5
Allocation of purchase price:
Fair value of assets acquired:
Cash and cash equivalents	$	7.0
Accounts receivable	439.7
Unbilled accounts receivable	105.7
Financing receivables	162.5
Inventory	29.2
Deferred income tax assets	10.2
Prepaid expenses and other current assets	75.0
Property and equipment	28.2
Equipment under operating leases	4.5
Goodwill	662.2
Identifiable intangible assets	837.5
Other assets	15.8
Fair value of liabilities assumed:
Accounts payable - trade	(375.1		)
Accounts payable - floor plan	(111.1		)
Accrued expenses and other current liabilities	(115.0		)
Discounted financing receivables	(140.3		)
Long-term indebtedness	(588.4		)
Deferred income tax liabilities	(329.7		)
Other liabilities	(33.4		)
Total net assets acquired	$	684.5

Gross contractual receivables acquired were $446.2 million of accounts receivable, $105.7 million of unbilled receivables, $33.8 million of other receivables and $163.2 million of financing receivables.

The above purchase price allocation table is exclusive of $0.7 million in immaterial measurement period adjustments recorded during the fiscal year ended June 30, 2016. The $0.7 million of measurement period adjustments were recorded in the reporting period they were determined. There was no effect to the Company’s consolidated statement of operations as a result of the measurement period adjustments.

The following table provides unaudited supplemental pro forma results of operations for the year ended June 30, 2015 (in millions):



(unaudited)	Fiscal Year Ended June 30, 2015
Total revenue	$	2,379.4
Net income	$	12.6

These results have been derived from our historical consolidated financial statements and have been prepared to give effect to the Presidio Acquisition, assuming that the Presidio Acquisition occurred on July 1, 2013. The unaudited pro forma information presented is for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Presidio Acquisition been consummated at the beginning of the respective period, nor is it necessarily indicative of future operating results.

The 2015 supplemental pro forma net income was adjusted to exclude $62.2 million ($41.6 million, net of pro forma income tax impact) of acquisition-related costs and $41.5 million ($25.3 million, net of pro forma income tax impact) of non-recurring expenses and adjusted to include an additional $40.8 million ($24.9 million, net of pro forma income tax impact) of recurring expenses associated with reflecting the Presidio Acquisition as occurring on July 1, 2013.

The $41.5 million ($25.3 million, net of pro forma income tax impact) of non-recurring expenses consists primarily of $8.2 million related to loss on extinguishment of debt, $18.5 million related to share-based compensation expense, $3.1 million of expenses related to revaluation of existing inventory and $11.7 million related to one-time interest expenses related to the acquisition of Presidio Holdings. The adjustments related to recurring expenses primarily relate to increased interest expense associated with pro forma debt and increased amortization expense associated with acquired intangible assets. The pro forma results do not include any anticipated synergies or other anticipated benefits of the Presidio Acquisition.

Other Acquisitions

On March 13, 2015, the Company acquired certain assets and certain liabilities of an immaterial business for $0.4 million. The acquisition resulted in a $0.3 million increase in goodwill.