Ecovyst, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

Acquisitions

6 Months Ended

Jun. 30, 2018

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 six months ended June 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 six months ended June 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 six months ended June 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 six months ended June 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 June 30,				Six months ended June 30,
	2018		2017		2018		2017
Net sales	$	19,326	$	3,704	$	30,247	$	3,704
Net income	2,585		503		814		503

Acquisition costs were immaterial for the three and six months ended June 30, 2018 and were $454 and $1,328 for the three and six months ended June 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 three and six months ended June 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
	Three months ended June 30, 2017			Six months ended June 30, 2017
Pro forma sales	$	397,251		$	738,625
Pro forma net loss	(2,629		)	(4,162		)
Pro forma net loss attributable to PQ Group Holdings Inc.	(2,568		)	(4,240		)
Pro forma basic and diluted net loss per share	$	(0.02	)	$	(0.04	)

The results of operations for the three and six months ended June 30, 2018 include the operating results of the combined company for the full period and therefore, there is no pro forma presentation included in the table above.

Certain non-recurring charges included in the Company’s results of operations for the three and six months ended June 30, 2017 were allocated to the respective prior year periods for pro forma purposes. For the three months ended June 30, 2017, non-recurring charges allocated to the prior year period include transaction fee charges of $454 which were excluded from pro forma net loss. Also included in pro forma net loss for the three months ended June 30, 2017 is amortization expense of $90 and depreciation expense of $149 associated with the fair value step-up of identifiable intangible assets and property, plant and equipment, respectively. For the six months ended June 30, 2017, non-recurring charges allocated to the prior year period include transaction fee charges of $1,328 which were excluded from pro forma net loss. Also included in pro forma net loss for the six months ended June 30, 2017 is amortization expense of $176 and depreciation expense of $353 associated with the fair value step-up of identifiable intangible assets and property, plant and equipment, respectively.