Business Acquisition

9 Months Ended

Sep. 30, 2016

Business Combinations [Abstract]

Business Acquisition

BUSINESS ACQUISITION

On December 31, 2015, we acquired all of the outstanding capital stock of OF Holdings, Inc., sole parent of Octane Fitness, LLC ("Octane"), for an aggregate base purchase price of $115.0 million, plus net adjustments for working capital and cash acquired on the closing date. We funded the acquisition through an $80.0 million term loan and cash on hand.

For the three and nine months ended September 30, 2016, Octane contributed net sales of $16.2 million and $40.9 million, respectively. Octane contributed net income of $1.1 million for the third quarter of 2016 and $0.3 million for the first nine months of 2016. Operating results for the current three-month and year-to-date periods included amortization of acquired assets of $0.8 million and $2.3 million, respectively, and purchase accounting related inventory step-up charges of $0.1 million and $1.1 million, respectively. Working capital and other measurement period adjustments as of September 30, 2016 totaled $0.7 million and are detailed in the preliminary valuation table shown below.

Total acquisition costs incurred for the nine months endedSeptember 30, 2016 were $0.3 million, and cumulative-to-date costs total $0.9 million. These charges were expensed as incurred in general and administrative costs.

Purchase Price Allocation

Acquired assets and liabilities were recorded at estimated fair value as of the acquisition date. The excess of the purchase price over the estimated fair value of identifiable net assets resulted in the recognition of goodwill of $58.3 million, all of which was assigned to the Retail segment, and is attributed primarily to Octane's intellectual property base, benefits of access to different markets and customers, and employee workforce. The goodwill is not expected to be deductible for income tax purposes.

The following table summarizes the preliminary fair values of the net assets acquired and liabilities assumed and measurement period adjustments since December 31, 2015, the acquisition date (in thousands):

	Preliminary valuation at December 31, 2015		Measurement period adjustments			Adjusted preliminary valuation at September 30, 2016
Cash	$	7,759	$	—		$	7,759
Accounts receivable	12,507		—			12,507
Inventories	12,168		1,515			13,683
Prepaid expenses	1,028		(143		)	885
Deferred tax assets	1,287		(527		)	760
Property, plant and equipment	3,240		132			3,372
Intangible assets	63,100		—			63,100
Total assets acquired	101,089		977			102,066
Accounts payable	6,215		282			6,497
Accrued liabilities	1,614		(8		)	1,606
Warranty obligations	5,550		—			5,550
Deferred tax liabilities, non-current	20,914		98			21,012
Other non-current liabilities	519		(129		)	390
Total liabilities assumed	34,812		243			35,055
Net identifiable assets acquired	66,277		734			67,011
Goodwill	58,357		(63		)	58,294
Net assets acquired	$	124,634	$	671		$	125,305

The allocation of the purchase price is preliminary and is based upon valuation information available and estimates and assumptions made as of September 30, 2016. We are still in the process of verifying data and finalizing information including valuation and recording of the assets acquired and liabilities assumed, and the resulting amount of recognized goodwill.

The following table sets forth the components of identifiable intangible assets and their estimated fair values and useful lives as of December 31, 2015, the acquisition date (dollars in thousands):

	Estimated fair value		Estimated useful life (years)	Weighted-average amortization period (years)
Trade name - Octane Fitness	$	23,000	Indefinite	N/A
Trade name - others	2,600		10 - 15	12.5
Patents	12,800		11 - 24	18
Customer relationships	24,700		10 - 15	13
Definite-lived intangible assets	40,100
Total intangible assets	$	63,100

Summary of Unaudited Pro Forma Information

The following table reflects the unaudited pro forma consolidated results of operations for the periods presented, as though the acquisition of Octane had occurred on January 1, 2015 (in thousands, except per share amounts):

		(unaudited)
		Three Months Ended September 30,				Nine Months Ended September 30,
		2016		2015		2016		2015
Net sales		$	80,818	$	83,931	$	280,275	$	268,422
Net income		7,308		3,691		23,682		17,053
Net income per share:
	Basic	$	0.23	$	0.12	$	0.76	$	0.54
	Diluted	0.23		0.12		0.76		0.54

The unaudited pro forma financial information is presented for illustrative purposes only and is not indicative of the results of operations that would have been realized if the acquisition had been completed on the date indicated, nor is it indicative of future operating results.