20. Acquisition of the New Business

On April 14, 2016, the Company entered into an agreement where it made an irrevocable offer to purchase the New Business. The parties executed a definitive Asset and Share Purchase Agreement on July 25, 2016, with the completion of the transaction subject to various customary conditions and regulatory clearances. The New Business which primarily serves food and beverage, industrial and pharmaceutical customers in Europe and Asia has approximately 300 employees. The Company completed this acquisition for $157.4 million on November 2, 2016 (acquisition date) and financed the transaction through borrowings under the Amended Revolver. Refer to Note 8 for further information related to the U.S. Amended Credit Agreement. The Company’s consolidated financial statements include the New Business’ results of operations from the acquisition date through December 31, 2016. Net sales and loss from operations during this period were $12.1 million and $(8.8) million, respectively.

The transaction was accounted for under the acquisition method of accounting in accordance with ASC 805 “Business Combinations.” Under the acquisition method of accounting, the tangible and identifiable intangible assets acquired and liabilities assumed are recorded based on their fair value at the acquisition date, with excess consideration paid over the net assets acquired recorded as goodwill.

The Company has completed the preliminary detailed valuation analyses necessary to assess the fair values of the tangible and intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the acquisition date. The amounts shown below for certain assets and liabilities are preliminary in nature and are subject to adjustment as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The final determination of the fair values will be completed within the measurement period of up to one year from the acquisition date as permitted, and any adjustments to provisional amounts that are identified during the measurement period will be recorded in the reporting period in which the adjustment is determined. Fair value estimates are based on a series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed can materially impact the results of operations. In addition, the preliminary purchase price is subject to customary post closing adjustments.

The following table summarizes the allocation of the preliminary purchase price as of the acquisition date:


	November 2
	2016
Assets
Cash and cash equivalents	$	3,826
Receivables		10,077
Inventories		20,895
Other current assets		1,171
Property, plant, and equipment		67,697
Intangibles		37,248
Goodwill		42,844
Other assets		179
Total assets	$	183,937

Liabilities
Accounts payable and accrued liabilities	$	6,151
Payroll and benefits payable		4,360
Accrued income taxes		581
Deferred income taxes - long term		7,406
Accrued pension and other liabilities		8,014
Total liabilities	$	26,512

Net assets	$	157,425
Cash paid for acquisition	$	157,425

The estimated fair values of certain assets and liabilities, including but not limited to, property, plant and equipment, intangibles, goodwill, deferred income taxes, and accrued pension and other liabilities are provisional amounts based, in part, on third party valuations. Given the relatively short time period between the acquisition date and December 31, 2016, these third party valuations are still under review and as such, the estimated fair values continue to be subject to final adjustments.

The Company determined the fair value of the majority of the current assets and current liabilities approximated their carrying value given the highly liquid and short-term nature of these assets and liabilities. The fair value of finished goods inventory was determined based on the estimated selling price of the inventory less the costs of disposal and a reasonable profit allowance for the selling effort. The estimated step-up in fair value of inventory of $2.1 million increased cost of products sold by $1.5 million from the acquisition date to December 31, 2016. The preliminary fair value of property, plant and equipment was determined by using certain estimates and assumptions that are not observable in the market and thus represent a Level 3 fair value measurement.

As part of the preliminary purchase price allocation, the Company determined that the separately identifiable intangible assets consisted of trade names and trademarks, unpatented technology and know-how, and customer relationships, in the amounts of $7.3 million, $14.2 million, and $15.7 million, respectively. Unpatented technology and know-how, as well as customer relationships are being amortized over a weighted-average estimated useful life of 20 years. Trade names and trademarks are considered to have an indefinite life and will be tested for impairment annually or when events or changes in the business environment indicate that the carrying value of the intangible assets may exceed their fair value. The Company used the income approach valuation technique to measure the preliminary fair value of the intangible assets, based on the present value of their future economic benefits reflecting current market expectations. Specifically, the relief from royalty method was used to value the trade names and trademarks as well as the unpatented technology and know-how. The customer relationships were valued using a multi-period excess earnings method. The assumptions used in these fair value measurements are not observable in active markets and thus represent Level 3 fair value measurements. Refer to Note 4 for further information related to intangibles.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents growth opportunities and expected cost synergies of the combined company. The combined company is expected to be an industry leader in the activated carbon and filtration media markets, with enhanced diversification, a strong presence in Europe, and an expanded reach into emerging markets. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. Refer to Note 4 for further information related to goodwill.

Contingent liabilities assumed include $1.9 million related to AROs for legal obligations associated with the normal operation of the acquired silica mining facilities up to the end of the quarries’ exploration. The Company evaluated the ARO to determine the cost associated with mine reclamation and landfill closures and applied an appropriate discount rate to determine the fair value. The assumptions used in these fair value measurements are not observable in active markets and thus represent Level 3 fair value measurements. Refer to Note 3 for further information related to AROs.

The Company incurred approximately $14.0 million of acquisition-related transaction costs and $0.2 million of integration costs in 2016. The transaction costs primarily relate to advisory, legal, and accounting fees, as well as transfer taxes and the integration costs related to a transition services agreement. These costs are included in the selling, general and administrative expenses line item in the consolidated statement of comprehensive income.

Pro Forma Information (Unaudited)

The Company’s consolidated financial statements include the New Business’ results of operations from the acquisition date through December 31, 2016. The following unaudited pro forma results of operations assume the New Business had been acquired on January 1, 2015. These unaudited pro forma results reflect adjustments that are directly attributable to the business combination, and are factually supportable. The unaudited pro forma results do not include any synergies or other effects of the planned integration that would have occurred had the New Business been acquired on January 1, 2015. The unaudited pro forma results are not necessarily indicative of the actual results of operations that would have been realized nor are they necessarily indicative of future results of the combined operations.


	Year Ended December 31
	2016		2015
Net sales	$	601,153	$	636,211
Net income		29,326		33,119
Net income per common share
Basic	$	0.58	$	0.64
Diluted	$	0.57	$	0.63

These unaudited pro forma amounts have been calculated after adjusting for the incremental depreciation and amortization expenses of $3.2 million associated with the step-up fair value adjustments to property, plant and equipment and intangible assets in each of the years ended December 31, 2016 and 2015.

The Company financed the acquisition of the New Business by borrowing $160 million under the Amended Revolver. The unaudited pro forma amounts have been calculated after adjusting for the incremental interest expense of $3.3 million and $3.9 million for the years ended December 31, 2016 and 2015, respectively.

The unaudited pro forma results for 2016 were adjusted to eliminate the $1.5 million incremental cost of products sold recognized from the acquisition date to December 31, 2016 as a result of the step-up of inventory. The 2015 unaudited pro forma results were adjusted to include $2.1 million of incremental cost of products sold to reflect the total step up of inventory.

The unaudited pro forma net income for 2016 excludes non-recurring transaction expenses directly attributable to the acquisition of $14.0 million that were incurred by the Company in 2016, while the 2015 results were adjusted to include these expenses.