Business Combinations

12 Months Ended

Dec. 31, 2019

NOTE E—BUSINESS COMBINATIONS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the underlying net assets acquired.

Trade Names

A trade name is a legally protected trade or similar mark. Acquired trade names are valued using an income method approach, generally the relief-from-royalty valuation method. The method uses a royalty rate based on comparable marketplace royalty agreements for similar types of trade names and applies it to the after-tax discounted free cash flow attributed to the trade name. The discount rate used is based on an estimated weighted average cost of capital and the anticipated risk for intangible assets.

The valued trade names have an indefinite life based on our plans and expectations for the trade names going forward and are reviewed for impairment under ASC 350-30-35.

Intellectual Property and Technology

Intellectual property and technology (“IP”) is a design, work or invention that is the result of creativity to which one has ownership rights that may be protected through a patent, copyright, trademark or service mark. IP is valued using the relief from royalty valuation method. The method uses a royalty rate based on comparable market-place royalty agreements for similar types of IP and applies it to the after-tax discounted free cash flow attributed to the IP. The discount rate used is based on an estimated weighted average cost of capital and the anticipated risk for intangible assets.

The IP is amortized following the pattern in which the expected benefits will be consumed or otherwise used up over each component’s useful life, based on our plans and expectations for the IP going forward, which is generally the underlying IP’s legal expiration dates. IP is reviewed for impairment under ASC 360-10.

Customer Relationships

Customer relationships are intangible assets that consist of historical and factual information about customers and contacts collected from repeat transactions with customers, with or without any underlying contracts. The information is generally organized as customer lists or customer databases. We have the expectation of repeat patronage from these customers based on the customers’ historical purchase activity, which creates the intrinsic value over a finite period of time and translates into the expectation of future revenue, income, and cash flow.

Customer relationships are valued using projected operating income, adjusted for estimated future existing customer growth less estimated future customer attrition, net of charges for net tangible assets, IP charge, trade name charge and work force. The concluded value is the after-tax discounted free cash flow. Customer relationships are reviewed for impairment under ASC 360-10.

2018 Acquisition:

On May 1, 2018, we completed the acquisition of all of the outstanding capital stock of EP Acquisition Parent, Inc., a Delaware corporation (“EPAP”), and the ultimate parent of EP Minerals, LLC ("EPM"). Contemporaneous with the merger, EPAP was renamed EP Minerals Holdings, Inc. ("EPMH"). The consideration paid consisted of $743.2 million of cash, net of cash acquired of $19.1 million, including $0.5 million of post-closing adjustments. EPM is a global producer of engineered materials derived from industrial minerals, including diatomaceous earth, clay (calcium bentonite and calcium montmorillonite) and perlite. EPM's industrial minerals are used as filter aids, absorbents and functional additives for a variety of industries including food and beverage, biofuels, recreational water, oil and gas, farm and home, landscape, sports turf, paint, plastics, and insecticides. The acquisition of EPM increased our industrial materials product offering in our Industrial & Specialty Products business segment.

We have accounted for the acquisition of EPMH under the acquisition method of accounting in accordance with ASC 805, Business Combinations, and have accounted for measurement period adjustments in accordance with ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. Estimates of fair value included in the Consolidated Financial Statements represent our best estimates and valuations. In accordance with the acquisition method of accounting, the allocation of consideration value was subject to adjustment until we completed our analysis in the second quarter of 2019.

The following table sets forth the final allocation of the purchase price to EPMH's identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments (in thousands):



Final allocation of purchase price:	Estimate as of December 31, 2018		Measurement Period Adjustments			Purchase Price Allocation
Accounts receivable, net	$	43,305	$	—		$	43,305
Inventories	86,112		—			86,112
Property, plant and mine development	148,495		(1,937		)	146,558
Mineral rights	419,469		(10,580		)	408,889
Identifiable intangible assets - finite lived	10,270		(1,500		)	8,770
Identifiable intangible assets - indefinite lived	38,050		(1,250		)	36,800
Prepaids and deposits	2,072		(245		)	1,827
Other assets	7,474		—			7,474
Goodwill	150,628		12,184			162,812
Total assets acquired	905,875		(3,328		)	902,547
Accounts payable	13,435		—			13,435
Accrued expenses and other current liabilities	10,304		—			10,304
Deferred tax liabilities	122,811		(3,328		)	119,483
Long term obligations	16,076		—			16,076
Total liabilities assumed	$	162,626	$	(3,328	)	$	159,298
Net assets acquired	$	743,249	$	—		$	743,249

The acquired intangible assets and the related estimated useful lives consist of the following:



	Approximate Fair Value		Estimated Useful Life
	(in thousands)		(in years)
Technology and intellectual property	$	1,400	15
Customer relationships	7,370		15
Total identifiable intangible assets - finite lived	$	8,770

Trade names	$	36,800
Total identifiable intangible assets - indefinite lived	$	36,800

Goodwill represents the excess of the purchase price over the fair value of the underlying net assets acquired. Goodwill in this transaction is attributable to planned growth in our industrial materials product offering in our Industrial & Specialty Products business segment. Intangibles and goodwill are not expected to be deductible for tax purposes.

Our Income Statement included revenue of $158.8 million and a net loss of $0.6 million for the year ended December 31, 2018, associated with EPMH following the date of acquisition. We incurred $13.6 million of acquisition-related charges, excluding debt issuance costs, for the year ended December 31, 2018, which are included in selling, general and administrative expenses on our Income Statement.

Unaudited Pro Forma Results

The results of EPMH's operations have been included in the Consolidated Financial Statements subsequent to the acquisition date. EPMH's fiscal year end was November 30 and the Company's fiscal year end was December 31. Under SEC regulations, if a target's fiscal year end varies by more than 93 days from the acquirer's fiscal year end, it is required to adjust interim periods until it is within 93 days. Since EPMH’s fiscal year end was within 93 days of the Company's fiscal year end, no adjustment is necessary and EPMH’s fiscal year end and interim period ends are used as if they coincided with the Company's fiscal year end and interim period end. The following unaudited pro forma consolidated financial information reflects the results of operations as if the EPMH acquisition had occurred on January 1, 2017, after giving effect to certain purchase accounting adjustments. Material non-recurring transaction costs attributable to the business combination were $15.2 million. Pro forma net income includes incremental interest expense due to the related debt financing, incremental depreciation and depletion expense related to the fair value adjustment of property, plant and mine development, amortization expense related to identifiable intangible assets, and tax expense related to the combined tax provisions. This information does not purport to be indicative of the actual results that would have occurred if the acquisition had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company (in thousands, except per share amounts):



	For the year ended December 31,
	2018			2017
Sales	$	1,659,775		$	1,454,070
Net (loss) income	$	(179,220	)	$	116,899
Basic (loss) earnings per share	$	(2.34	)	$	1.44
Diluted (loss) earnings per share	$	(2.34	)	$	1.43

2017 Acquisitions:

White Armor Acquisition:

On April 1, 2017, we completed the acquisition of White Armor, a product line of cool roof granules used in industrial roofing applications, for cash consideration of $18.6 million. The final purchase price was allocated to goodwill of approximately $3.9 million, identifiable intangible assets of $12.8 million and other net assets of approximately $1.9 million.

Goodwill in this transaction is attributable to planned growth in our specialty industrial sand business segment. The goodwill amount is included in our Industrial & Specialty Products business segment. Identifiable definite lived intangibles, including customer relationships, and goodwill are expected to be deductible for tax purposes.

We incurred $0.2 million of acquisition-related charges which are included in selling, general and administrative expenses during the year ended December 31, 2017. Revenue and earnings for White Armor after the acquisition date are not presented as the business was integrated into our operations subsequent to the acquisition and therefore impracticable to quantify.

MS Sand Acquisition:

On August 16, 2017, we completed the acquisition of Mississippi Sand, LLC ("MS Sand"), a Missouri limited liability company, for cash consideration of approximately $95.4 million, net of cash acquired of $2.2 million. As is normal and customary, subsequent adjustments were made including $(0.5) million of net working capital adjustments plus an additional $6.1 million consideration paid related to a pre-existing contracted asset sale, which was entered into prior to our acquisition, for total cash consideration of $101.0 million. MS Sand is a frac sand mining and logistics company based in St. Louis, Missouri. The acquisition of MS Sand increased our regional frac sand product offering in our Oil & Gas Proppants business segment.

We have accounted for the acquisition of MS Sand under the acquisition method of accounting in accordance with ASC 805, Business Combinations, and have accounted for measurement period adjustments in accordance with ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. In accordance with the acquisition method of accounting, the allocation of consideration value was subject to adjustment until we completed our analysis in the third quarter of 2018.

The following table sets forth the final allocation of the purchase price to MS Sands' identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments (in thousands):



	Estimate as of December 31, 2017		Measurement Period Adjustments			Purchase Price Allocation
Accounts receivable	$	11,201	$	—		$	11,201
Inventories	8,067		—			8,067
Other current assets	362		—			362
Assets held for sale	9,453		—			9,453
Property, plant and mine development	27,458		—			27,458
Mineral rights	26,300		(2,800		)	23,500
Other non-current assets	1,136		—			1,136
Goodwill	22,522		2,800			25,322
Customer relationships	1,840		—			1,840
Total assets acquired	108,339		—			108,339
Accounts payable and accrued expenses	3,761		—			3,761
Unfavorable leasehold positions	2,237		—			2,237
Notes Payable	866		—			866
Other long term liabilities	—		—			—
Asset retirement obligations	474		—			474
Total liabilities assumed	7,338		—			7,338
Net assets acquired	$	101,001	$	—		$	101,001

The acquired intangible assets and the related estimated useful lives consist of the following:



	Approximate Fair Value		Estimated Useful Life
	(in thousands)		(in years)
Customer relationships	$	1,840	15

Goodwill in this transaction is attributable to planned growth in our regional frac sand product offering in our Oil & Gas Proppants business segment. The goodwill amount is included in our Oil & Gas Proppants business segment. Identifiable definite lived intangibles, including customer relationships, and goodwill are expected to be deductible for tax purposes.

We incurred $1.0 million of acquisition-related charges which are included in selling, general and administrative expenses. Revenue and earnings for MS Sand after the acquisition date are not presented as the business was integrated into our operations subsequent to the acquisition and therefore impracticable to quantify.

Unaudited Pro Forma Results

The results of MS Sand’s operations have been included in the Consolidated Financial Statements subsequent to the acquisition dates. The following unaudited pro forma consolidated financial information reflects the results of operations as if the MS Sand Acquisition had occurred on January 1, 2016, after giving effect to certain purchase accounting adjustments. These adjustments mainly include incremental depreciation expense related to the fair value adjustment of property, plant, equipment and mine development, amortization expense related to identifiable intangible assets and tax expense related to the combined tax provisions. This information does not purport to be indicative of the actual results that would have occurred if the acquisition had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company (in thousands, except per share amounts):



	For the year ended December 31,
	2017
Sales	$	1,287,202
Net income	$	143,604
Basic earnings per share	$	1.77
Diluted earnings per share	$	1.75