Annual report pursuant to Section 13 and 15(d)

Business Combination

v3.10.0.1
Business Combination
12 Months Ended
Dec. 31, 2018
Business Combinations [Abstract]  
Business Combination
7. Business Combination:
As described in Note 1 to these consolidated financial statements, on May 4, 2016, the Company, PQ Holdings, Eco Services, certain investment funds affiliated with CCMP and certain other stockholders of PQ Holdings and Eco Services completed the Business Combination. The Business Combination was accounted for using the acquisition method of accounting. Under the acquisition method, the purchase price is allocated to the net assets acquired based on the fair values of assets acquired and liabilities assumed as of the acquisition date. The excess of the purchase price over the fair values of these net assets is recorded as goodwill.
The following table sets forth the calculation and allocation of the purchase price to the net assets acquired of PQ Holdings with respect to the Business Combination, which was complete as of December 31, 2016.
Total consideration, net of cash acquired
$
2,689,941

 
 

Recognized amounts of identifiable assets acquired and liabilities assumed:
 

Receivables
$
161,110

Inventories
254,770

Prepaid and other current assets
19,295

Investments in affiliated companies
472,994

Property, plant and equipment
683,673

Other intangible assets
754,000

Other long-term assets
48,127

Fair value of assets acquired
2,393,969

 
 
Revolver, notes payable & current debt
(2,441
)
Accounts payable
(93,222
)
Accrued liabilities
(98,621
)
Long-term debt
(20,470
)
Deferred income taxes
(327,296
)
Other long-term liabilities
(113,936
)
Noncontrolling interest
(6,569
)
Fair value of net assets acquired
1,731,414

 
 
Goodwill
958,527

 
$
2,689,941

 
 

Total consideration for the Business Combination included $1,777,740 of cash, $910,800 of equity in the acquired PQ Holdings entities and $1,400 of assumed stock awards of PQ Holdings. The fair value of the equity consideration was determined based on an estimated enterprise value using a market approach as of the date of the Business Combination, reduced by borrowings to arrive at the fair value of equity. The existing PQ Holdings credit facilities were not legally assumed as part of the Business Combination, and the extinguishment of the debt concurrent with the Business Combination was included as part of the consideration transferred (see Note 16 to these consolidated financial statements for further information). Acquisition costs of $1,583 are included in other operating expense, net in the Company’s consolidated statement of operations for the year ended December 31, 2016.
The Company believes that its diverse range of industrial, consumer and governmental applications in which its products are used were the primary reasons that contributed to a total purchase price that resulted in the recognition of goodwill. The goodwill associated with the Business Combination 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
 
$
35,400

 
15.0
Technical know-how
 
189,300

 
20.0
Contracts
 
19,800

 
5.3
Customer relationships
 
268,700

 
10.6
In-process research and development
 
6,800

 
 
 
 
 

 
 
Total intangible assets subject to amortization
 
520,000

 
 
Trade names, not subject to amortization
 
151,100

 
Indefinite
Trademarks, not subject to amortization
 
82,900

 
Indefinite
 
 
 

 
 
Total
 
$
754,000

 
 
 
 
 
 
 

In accordance with the requirements of the purchase method of accounting for acquisitions, inventories were recorded at fair market value (which 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 $58,683 higher than the historical cost. The Company’s cost of goods sold includes a pre-tax charge of $871 and $29,086 for the years ended December 31, 2017 and 2016, respectively, relating to the portion of the step-up on inventory sold during the period. A separate portion of the fair value step-up related to the domestic inventory accounted for under the LIFO method was included in inventory on the consolidated balance sheet as of December 31, 2016 as part of the new LIFO base layer on the acquired inventory (see Note 10 to these consolidated financial statements for further information).
The Company’s consolidated financial statements include PQ Holdings results of operations from May 4, 2016 through December 31, 2016. Sales and net loss attributable to PQ Holdings during this period are included in the Company’s consolidated financial statements for the year ended December 31, 2016 and total $690,459 and $17,991, respectively.
Pro Forma Financial Information
The unaudited pro forma information has been derived from the Company’s historical consolidated financial statements and has been prepared to give effect to the Business Combination, assuming that the Business Combination occurred on January 1, 2015. These pro forma adjustments primarily relate to depreciation expense on stepped up fixed assets, amortization of acquired intangibles, cost of goods sold expense related to the sale of stepped up inventory, interest expense related to additional debt that would be needed to fund the Business Combination, and the estimated impact of these adjustments on the Company’s tax provision. The unaudited pro forma consolidated results of operations are provided for illustrative purposes and are not indicative of the Company’s actual consolidated results of operations or consolidated financial position. The unaudited pro forma results of operations do not reflect any operating efficiencies or potential cost savings which may result from the acquisitions.
 
 
Year ended
December 31, 2016
Pro forma sales
 
$
1,403,041

Pro forma net loss
 
(76,994
)
 
 
 
The pro forma net loss for the year ended December 31, 2016 excludes certain charges that were allocated to the pro forma results for the year ended December 31, 2015. These non-recurring charges include a debt prepayment penalty of $26,250, one-time refinancing charges of $4,747 and transaction fee charges of $1,795.
8. 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 to 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 year ended December 31, 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 year ended December 31, 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 year ended December 31, 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 year ended December 31, 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

 
 
 
 
 
 
 

The Company’s consolidated financial statements include Sovitec’s results of operations from June 12, 2017 through December 31, 2017. Sales and net income attributable to Sovitec during this period are included in the Company’s consolidated financial statements for the year ended December 31, 2017 and total $26,257 and $1,370, respectively.
Acquisition costs were immaterial for the year ended December 31, 2018 and were $2,515 for the year ended December 31, 2017. Acquisition costs are included in other operating expense, net in the Company’s consolidated statements of operations.
Pro Forma Financial Information
The unaudited pro forma financial information for the years ended December 31, 2017 and 2016 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.
 
 
Years ended
December 31,
 
 
2017
 
2016
Pro forma sales
 
$
1,488,528

 
$
1,105,479

Pro forma net income (loss)
 
58,774

 
(78,234
)
Pro forma net income (loss) attributable to PQ Group Holdings Inc.
 
57,814

 
(78,822
)
Pro forma basic income (loss) per share
 
$
0.52

 
$
(1.01
)
Pro forma diluted income (loss) per share
 
$
0.52

 
$
(1.01
)
 
 
 
 
 
The results of operations for the year ended December 31, 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 year ended December 31, 2017 were allocated to the respective prior year periods for pro forma purposes. For the year ended December 31, 2017, non-recurring charges allocated to the prior year period include transaction fee charges of $2,515 which were excluded from the pro forma net income for the year ended December 31, 2017. Included in pro forma net income for the year ended December 31, 2017 is amortization expense of $367 and depreciation expense of $760 associated with the fair value step-up of identifiable intangible assets and property, plant and equipment, respectively. Included in pro forma net loss for the year ended December 31, 2016 is amortization expense of $364 and depreciation expense of $467 associated with the fair value step-up of identifiable intangible assets and property, plant and equipment, respectively.