15. Acquisition of the New Business

In April 2016, the Company entered into an agreement where it made an irrevocable offer to purchase the New Business, which primarily serves food and beverage, industrial and pharmaceutical customers in Europe and Asia, and 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 Revolver. During the second quarter of 2017, the Company paid an additional $1.2 million as a result of the working capital adjustment associated with the purchase price of the New Business. The Company’s condensed consolidated financial statements for the three and six months ended June 30, 2017 include the New Business’ results of operations, consisting of net sales of $24.4 million and $48.6 million and income from operations of $1.7 million and $2.4 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. Post closing adjustments made within the measurement period thus far were not material and are reflected in the following table.

The following table summarizes the allocation of the purchase price as of the November 2, 2016 acquisition date:


Assets
Cash and cash equivalents	$	3,826
Receivables		10,077
Inventories		20,439
Other current assets		1,215
Property, plant, and equipment		67,697
Intangibles		37,248
Goodwill		45,410
Other assets		188
Total assets	$	186,100

Liabilities
Accounts payable and accrued liabilities	$	6,151
Payroll and benefits payable		3,315
Accrued income taxes		581
Deferred income taxes - long term		6,188
Accrued pension and other liabilities		11,207
Total liabilities	$	27,442

Net assets	$	158,658

Cash paid for acquisition		158,658
Cash acquired		(3,826)
Net cash paid for acquisition	$	154,832

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. 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 $0.6 million during the six months ended June 30, 2017. 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.

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. With the incorporation of the New Business into the existing business and the resulting change in reportable segments, $27.7 million of goodwill has been reported in the Activated Carbon segment and $17.7 million in the Alternative Materials segment.

Contingent liabilities assumed include $1.9 million related to asset retirement obligations (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.

During the three months ended June 30, 2017 and 2016, the Company incurred approximately $0.7 million and $1.3 million of acquisition-related integration and transaction costs, respectively. During the six months ended June 30, 2017 and 2016, the Company incurred approximately $2.8 million and $2.9 million of acquisition-related integration and transaction costs, respectively. These costs include advisory, legal, accounting transition services and information technology integration efforts, and are included in the selling, general and administrative expenses line item in the condensed consolidated statements of comprehensive income.

Pro Forma Information (Unaudited)

The Company’s condensed consolidated financial statements for the three and six months ended June 30, 2017 include the New Business’ results of operations. The following unaudited pro forma results of operations assume the New Business had been acquired on January 1, 2016. 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, 2016. 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.


	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Net sales	$	152,998	$	158,640	$	295,701	$	304,882
Net income		5,864		11,811		8,326		15,340
Net income per common share
Basic	$	0.12	$	0.24	$	0.17	$	0.31
Diluted	$	0.12	$	0.23	$	0.16	$	0.30

These unaudited pro forma amounts have been calculated after adjusting for the incremental depreciation and amortization expenses of $1.0 million and $1.9 million associated with the step-up fair value adjustments to property, plant and equipment and intangible assets for the three and six months ended June 30, 2016, respectively.

The Company financed the acquisition of the New Business by borrowing $160 million under the Revolver. The unaudited pro forma amounts have been calculated after adjusting for the incremental interest expense of $1.0 million and $2.0 million for the three and six months ended June 30, 2016, respectively.

The unaudited pro forma results for the six months ended June 30, 2017 were adjusted to eliminate the $0.6 million incremental cost of products sold recognized as a result of the step-up of inventory. The unaudited pro forma results for the six months ended June 30, 2016 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 the six months ended June 30, 2017 excludes non-recurring acquisition-related transaction expenses of $2.1 million that were incurred by the Company in 2017, while the results for the six months ended June 30, 2016 were adjusted to include these expenses. The unaudited pro forma results for the three and six months ended June 30, 2016 were also adjusted to exclude the $1.3 million and $2.9 million of transaction costs that were incurred by the Company in 2016.