Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.10.0.1
Acquisitions
 9 Months Ended
Sep. 30, 2018
Business Combinations [Abstract]  
Acquisition
6. Acquisition:
Acquisitions are accounted for using the acquisition method of accounting. Under the acquisition method, the purchase price is allocated to the identifiable net assets acquired based on the fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date. The excess of the purchase price over the fair values of the identifiable net assets acquired is recorded as goodwill.
On June 12, 2017 (the “Acquisition Date”), the Company acquired the facilities of Sovitec Mondial S.A. (“Sovitec”) located in Belgium, Spain, Argentina and France as part of a stock transaction (the “Acquisition”) for $41,572 in cash, excluding assumed debt. Based in Fleurus, Belgium, Sovitec is a high quality producer of engineered glass products used in transportation safety, metal finishing and polymer additives. The results of operations of Sovitec have been included in the Company’s consolidated financial statements since the Acquisition Date.
The following table sets forth the calculation and allocation of the purchase price to the identifiable net assets acquired with respect to the Acquisition, which was complete as of March 31, 2018.
 
 
Provisional Purchase
Price Allocation
 
Adjustments
 
Purchase
Price Allocation
Total consideration, net of cash acquired
 
$
41,572

 
$
—

 
$
41,572

 
 
 

 
 
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
 

 
 
 
 
Receivables
 
$
14,305

 
$
—

 
$
14,305

Inventories
 
7,645

 
1,603

 
9,248

Prepaid and other current assets
 
400

 
—

 
400

Property, plant and equipment
 
9,020

 
15,960

 
24,980

Other intangible assets
 
—

 
5,753

 
5,753

Other long-term assets
 
129

 
15,921

 
16,050

 
 
 

 
 
 
 
Fair value of assets acquired
 
31,499

 
39,237

 
70,736

Current debt
 
(6,420
)
 
—

 
(6,420
)
Accounts payable
 
(10,748
)
 
—

 
(10,748
)
Long-term debt
 
(10,189
)
 
—

 
(10,189
)
Deferred income taxes
 
—

 
(4,426
)
 
(4,426
)
Other long-term liabilities
 
(154
)
 
—

 
(154
)
 
 
 

 
 
 
 
Fair value of net assets acquired
 
3,988

 
34,811

 
38,799

Goodwill
 
37,584

 
(34,811
)
 
2,773

 
 
$
41,572

 
$
—

 
$
41,572

 
 
 
 
 
 
 

As of the Acquisition Date, the fair value of accounts receivable approximated historical cost. The gross contractual amount of accounts receivable at the Acquisition Date was $14,607, of which $302 was deemed uncollectible. The fair value of inventory is defined as estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity, which was $1,603 higher than the historical cost.
The Company’s cost of goods sold for the nine months ended September 30, 2018 includes a pre-tax charge of $1,603 relating to the step-up on inventory, $108 of additional amortization expense related to identified intangible assets and $421 of additional depreciation expense, which would have been recorded during the year ended December 31, 2017 if the adjustments to the provisional amounts had been recognized as of the Acquisition Date. The Company’s other expense, net for the nine months ended September 30, 2018 includes additional amortization expense related to identified intangible assets of $101 which would have been recorded during the year ended December 31, 2017 if the adjustments to the provisional amounts had been recognized as of the Acquisition Date. The Company’s provision for income taxes for the nine months ended September 30, 2018 includes an additional $990 tax benefit associated with the year ended December 31, 2017, to reflect impacts as if the adjustments to the provisional amounts had been recognized as of the Acquisition Date. This amount is primarily a result of opening balance sheet adjustments recorded during the nine months ended September 30, 2018, which needed to be re-measured through the income statement because of income tax rate changes that occurred subsequent to the Acquisition Date.
The Company believes that the Acquisition will enable it to offer a more comprehensive, cost-effective and high-quality portfolio of products and services to its customers worldwide when, combined with anticipated synergies within its existing business, contributed to a total purchase price that resulted in the recognition of goodwill. All of the goodwill was assigned to the Company’s PM&C reporting segment. The goodwill associated with the Acquisition is not deductible for tax purposes.
The valuation of the intangible assets acquired and the related weighted-average amortization periods are as follows:
 
 
Amount
 
Weighted-Average
Expected Useful Life
(in years)
Intangible assets subject to amortization:
 
 
 
 
Trademarks
 
$
1,767

 
11
Technical know-how
 
1,892

 
11
Total intangible assets subject to amortization
 
3,659

 
 
Trade names, not subject to amortization
 
2,094

 
Indefinite
Total
 
$
5,753

 
 
 
 
 
 
 

Net sales and net income generated by the Sovitec legal entities included in the Company’s condensed consolidated statements of operations are as follows:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net sales
 
$
16,455

 
$
13,490

 
$
46,702

 
$
17,194

Net income
 
386

 
644

 
1,200

 
1,148


Acquisition costs were immaterial for the three and nine months ended September 30, 2018 and were $737 and $2,065 for the three and nine months ended September 30, 2017, respectively. Acquisition costs are included in other operating expense, net in the Company’s condensed consolidated statements of operations.
Pro Forma Financial Information
The unaudited pro forma financial information for the nine months ended September 30, 2017 has been derived from the Company’s historical consolidated financial statements and prepared to give effect to the Acquisition, assuming that the Acquisition occurred on January 1, 2016. The unaudited pro forma consolidated results of operations are provided for illustrative purposes only and are not indicative of the Company’s actual consolidated results of operations had the Acquisition been made as of January 1, 2016. The unaudited pro forma results of operations do not reflect any operating efficiencies or potential cost savings which may result from the Acquisition.
 
Unaudited
 
Nine months ended September 30, 2017
Pro forma sales
$
1,130,454

Pro forma net loss
(6,865
)
Pro forma net loss attributable to PQ Group Holdings Inc.
(7,272
)
Pro forma basic and diluted net loss per share
$
(0.07
)

The results of operations for the three months ended September 30, 2017 and for the three and nine months ended September 30, 2018 include the operating results of the combined company for the full period and therefore, there is no pro forma presentation for such periods included in the table above.
Certain non-recurring charges included in the Company’s results of operations for the nine months ended September 30, 2017 were allocated to the respective prior year periods for pro forma purposes. For the nine months ended September 30, 2017, non-recurring charges allocated to the prior year period include transaction fee charges of $2,065 which were excluded from pro forma net loss. Also included in pro forma net loss for the nine months ended September 30, 2017 is amortization expense of $272 and depreciation expense of $521 associated with the fair value step-up of identifiable intangible assets and property, plant and equipment, respectively.