Acquisitions

Ultra Chem Acquisition

On April 3, 2017, the Company completed the Ultra Chem Acquisition for $56.7 million, net of cash acquired of $0.5 million, pursuant to the Ultra Chem Stock Purchase Agreement. As of June 30, 2018, $9.3 million of the purchase price may remain in escrow for a period of up to five years from the closing of the acquisition and relates to indemnification obligations under the Ultra Chem Stock Purchase Agreement. The escrow amount will be released pursuant to the terms of the Ultra Chem Stock Purchase Agreement and related documentation. The Ultra Chem Acquisition was financed with approximately $58.0 million of borrowings under the ABL Facility. There is no contingent consideration related to the Ultra Chem Acquisition.

Purchase Price Allocation

The Ultra Chem Acquisition is accounted for under the acquisition method, which requires the Company to perform an allocation of the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase consideration over the estimated fair values is recorded as goodwill. The following table summarizes the Company’s allocation of the purchase consideration to assets acquired and liabilities assumed at the Ultra Chem Closing Date:



	Purchase Consideration Allocation
Accounts receivable	$	13.7
Inventory	9.1
Other current assets	2.4
Property and equipment	0.5
Customer-related intangible	24.0
Trade name	0.3
Non-compete agreements	3.9
Other non-current assets	2.5
Goodwill	28.0
Total assets acquired	84.4

Short-term borrowings	0.9
Accounts payable	12.1
Other current liabilities	4.1
Deferred tax liability — non-current	8.4
Other non-current liabilities	2.2
Total liabilities assumed	27.7

Net assets acquired	$	56.7

During the three months ended March 31, 2018, the Company completed its assessment of the fair values of the assets acquired and liabilities assumed in the Ultra Chem Acquisition. The Company recorded no material adjustments to the fair value estimates of assets and liabilities during the current period.

There were no transaction costs incurred by the Company associated with the Ultra Chem Acquisition during the three months ended June 30, 2018. Transaction costs incurred by the Company associated with the Ultra Chem Acquisition were $0.1 million during the nine months ended June 30, 2018 and $0.3 million and $1.2 million during the three and nine months ended June 30, 2017, respectively.

A summary and description of the acquired assets and assumed liabilities fair valued in conjunction with applying the acquisition method of accounting follows:

Accounts Receivable

Accounts and notes receivable consisted of receivables related to the customers of the acquired business, as well as various other miscellaneous receivables. The accounts receivable and other miscellaneous receivables were recorded at their approximate fair value based on expected collections of the Ultra Chem Group. Accordingly, accounts receivable included an adjustment of $1.5 million to reduce gross receivables to their net value after consideration of expected uncollectable amounts at the Ultra Chem Closing Date.

Inventory

Inventory consisted primarily of finished products to be distributed to the acquired business’s customers. The fair value of inventory was established through application of the income approach, using estimates of selling prices and costs such as selling and marketing expenses to be incurred in order to dispose of the finished products and arriving at the future profitability expected to be generated once the inventory is sold (net realizable value). The inventory fair value step up of $1.0 million was recognized in Cost of sales and operating expenses during the fiscal year ended September 30, 2017.

Other Current Assets

Other current assets consisted primarily of prepaid expenses and did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value. Other current assets also include indemnification assets recorded in connection with the recognition of tax-related contingent liabilities assumed. The indemnification assets represent the reimbursement the Company would reasonably expect to receive from funds initially held in escrow pursuant to the purchase agreement if the liabilities were asserted by the relevant tax authority.

Property and Equipment

Property and equipment acquired consists primarily of leasehold improvements, computer and office equipment as well as furniture and fixtures. The purchase price allocation for property and equipment was based on the carrying value of such assets as it was determined to approximate fair value.

Customer-Related Intangible

Customer relationships were valued through the application of the income approach. Under this approach, revenue, operating expenses and other costs associated with existing customers were estimated in order to derive cash flows attributable to the existing customer relationships. The resulting estimated cash flows were then discounted to present value to arrive at the fair value of existing customer relationships as of the valuation date. The value associated with customer relationships will be amortized on a straight-line basis over a ten-year period, which represents the approximate point in the projection period in which a majority of the asset’s cash flows are expected to be realized based on assumed attrition rates. The Company recognized $24.0 million for these intangible assets as part of the allocation of the purchase consideration.

Trade Name

The "Ultra Chem" trade name was valued through application of the income approach, involving the estimation of likely future sales and an estimated royalty rate reflective of the rate that a market participant would pay to use the "Ultra Chem" name. The fair value of this asset will be amortized on a straight-line basis over a two-year period, estimated based on the period in which the Company would expect a market participant to use the name prior to rebranding. The Company recognized $0.3 million for this intangible asset as part of the allocation of the purchase consideration.

Non-Compete Agreements

In connection with the Ultra Chem Acquisition, the former equityholders of the Ultra Chem Group agreed to non-compete agreements. The terms of the non-compete agreements prohibit the equityholders from competing in the chemical distribution space for three years after the Ultra Chem Closing Date. The income approach was used to value the non-compete agreements through a comparative discounted cash flow analysis based on the impact of competition absent these agreements. The Company recognized $3.9 million for this intangible asset as part of the allocation of the purchase consideration. This intangible is amortized on a straight-line basis over a three-year period.

Other Non-Current Assets

Other non-current assets acquired represented certain long-term deposits and other assets, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value. Other non-current assets also included indemnification assets recorded in connection with the recognition of tax-related contingent liabilities assumed, and the expected value of certain assets pledged as a guarantee to the Ultra Chem Group in connection with transactions with a particular customer. The indemnification assets represent the reimbursement the Company reasonably expects to receive from funds initially held in escrow pursuant to the purchase agreement if the related liabilities were asserted by the relevant tax authority.

Goodwill

Goodwill represents the excess of the total purchase price over the fair value of the underlying net assets, largely arising from synergies expected as a result of the Ultra Chem Acquisition. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least annually, absent any indicators of impairment. The Company does not expect any goodwill from the Ultra Chem Acquisition to be deductible for tax purposes.

Short-Term Borrowings

Short-term borrowings included short-term borrowings of the Ultra Chem Group prior to the Ultra Chem Acquisition, which did not have a fair value adjustment as part of acquisition accounting as their carrying value approximated fair value. The balance was paid off immediately after the closing of the Ultra Chem Acquisition.

Accounts Payable

Accounts payable represented short-term obligations owed to the vendors of the acquired business, which were assumed in the Ultra Chem Acquisition. These obligations did not have a fair value adjustment as part of acquisition accounting as their carrying value approximated fair value.

Other Current Liabilities

Other current liabilities represented primarily accrued expenses, including accrued payroll, certain accrued taxes, the current portion of assumed tax-related contingent liabilities and various other liabilities arising out of the normal operations of the acquired business. The majority of these liabilities did not have a fair value adjustment as their carrying value approximated fair value.

Other Non-Current Liabilities

Other non-current liabilities represent assumed tax-related contingent liabilities, and the expected value of certain assets pledged as a guarantee to the Ultra Chem Group which would have to be returned to the third party under certain circumstances.

Deferred Taxes

Deferred tax assets and liabilities are attributable to the difference between the estimated fair values allocated to inventory, property and equipment and identified intangibles acquired for financial reporting purposes and the amounts determined for tax reporting purposes and give rise to temporary differences. The deferred tax assets and liabilities will reverse in future periods or have reversed as the related tangible and intangible assets are amortized, acquired inventory is sold, or if goodwill is impaired.

Impact of the Ultra Chem Acquisition on the Company’s Condensed Consolidated Financial Information

For the three and six months ended March 31, 2018, the Company’s consolidated sales and operating revenues include $19.8 million and $40.4 million, respectively, related to the operations of the acquired business. For the three and six months ended March 31, 2018, the Company’s consolidated net income includes less than $0.1 million and $0.3 million, respectively, related to the operations of the acquired business. Beginning on April 1, 2018, the operations of Ultra Chem were fully integrated into the Company’s operations and ERP system.

Unaudited Consolidated Pro Forma Financial Information

The unaudited consolidated pro forma results presented below include the effects of the Ultra Chem Acquisition as if it had occurred as of October 1, 2015, the beginning of the fiscal year prior to the date the Ultra Chem Acquisition occurred. The unaudited consolidated pro forma results reflect certain adjustments related to this acquisition, primarily reflecting a full period of Ultra Chem Group’s results of operations for each period presented, amortization expense associated with estimates for the acquired intangible assets, the effects of inventory step up from the acquisition, transaction costs, interest expense and income taxes.

The unaudited consolidated pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the Ultra Chem Acquisition occurred on October 1, 2015.



	Three Months Ended June 30,				Nine Months Ended June 30,
	2018		2017		2018		2017
Sales and operating revenues	$	1,046.4	$	942.7	$	3,017.0	$	2,690.4
Operating income	$	40.1	$	26.1	97.9		38.4
Net income from continuing operations	$	17.5	$	11.7	44.4		3.1
Net income	$	17.5	$	11.7	44.4		3.1
Basic net income per share	$	0.23	$	0.15	0.58		0.04
Diluted net income per share	$	0.23	$	0.15	0.58		0.04

Pro forma weighted average number of common shares outstanding
Basic	76,797,414		76,743,853		76,795,551		76,745,396
Diluted	76,983,350		76,828,868		76,952,758		76,830,296

Asset Acquisitions

In December 2016, the Company acquired customer contracts and a customer list. Additionally, in connection with this transaction, the Company entered into a supply agreement and a licensing agreement granting the Company the non-exclusive use of a certain trademark. The total consideration associated with this transaction was $8.5 million, of which $5.1 million was paid at closing. Of the remaining consideration, the Company paid $1.7 million in January 2018 and the remaining $1.7 million will be paid in January 2019. At June 30, 2018, this amount is included in Accrued expenses and other liabilities on the Company’s condensed consolidated balance sheets. In connection with this transaction, the Company recognized intangible assets totaling $8.5 million which are included in Other intangible assets, net of amortization on the Company’s condensed consolidated balance sheets. The acquired intangible assets will be fully amortized over estimated useful lives ranging between 10 and 13 years.

In April 2017, the Company completed an asset acquisition whereby it obtained certain customer contracts, a customer list and inventory. The total consideration associated with this transaction was approximately $1.9 million, with $1.6 million paid at closing. The remaining consideration was paid in April 2018. In connection with this transaction, the Company recognized an intangible asset related to the customer list of approximately $1.1 million which is included in Other intangible assets, net of amortization on the Company’s condensed consolidated balance sheet. The customer list will be amortized over an estimated useful life of five years.

In February 2018, the Company acquired customer contracts and a customer list. As part of this transaction, the Company entered into a supply agreement and agreements granting the Company the non-exclusive use of certain trademarks and patents for the products covered by the supply agreement. The total consideration associated with this transaction was $9.0 million, and the Company recognized intangible assets of the same amount, which are included in Other intangible assets, net of amortization on the Company's condensed consolidated balance sheet. The Company paid $6.0 million of the consideration during the three months ended March 31, 2018, and paid the remaining $3.0 million in April 2018. The acquired intangible assets will be fully amortized over estimated useful lives ranging between 5 and 13 years.