Business Combinations

Acquisition of Stauber Performance Ingredients: On December 23, 2015, we acquired Stauber Performance Ingredients (“Stauber”) for $157.0 million on a cash-free, debt-free basis subject to a customary working capital adjustment. The total consideration for the acquisition was $158.2 million ($156.7 million net of cash acquired). We paid $156.0 million in cash at closing and paid an additional $2.2 million during the first quarter of fiscal 2017 based upon closing cash, debt and working capital balances. The purchase was funded with $131.0 million of proceeds from the credit facility described more fully in Note 8 as well as cash on hand.

Stauber operates out of facilities in New York and California and blends and distributes specialty products and ingredients to the nutritional, food, pharmaceutical, cosmetic and pet care industries. The acquisition expanded our portfolio of value-added specialty products within new markets. Stauber had revenues of approximately $118.0 million for the twelve months ended December 23, 2015, the date of the acquisition. The results of operations since the acquisition date, and the assets, including the goodwill associated with the acquisition, are included in our recently-formed Health and Nutrition operating segment.

The acquisition was accounted for under the acquisition method of accounting. Accordingly, the cost to acquire Stauber was allocated to the underlying net assets in proportion to estimates of their respective fair values.

The fair value of acquired property, plant and equipment of $11.0 million was valued using a cost approach with consideration given to the continuation of the property in the current operation at the present locations. The fair value of acquired identifiable intangible assets was $71.5 million. The acquired intangible assets, all of which are finite-lived, have a weighted average useful life of 16.3 years and are being amortized on a straight-line basis. The intangible assets include customer relationships of $66.0 million (17 year life), trade name of $4.0 million (10 year life), non-competition agreements of $1.3 million (3.3 year weighted average life) and order backlog of $0.1 million.

The fair value of acquired identifiable intangible assets was determined using the income approach. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and expectations and assumptions that have been deemed reasonable by management. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of the assets acquired were based on valuations involving significant unobservable inputs, or Level 3 in the fair value hierarchy. None of the intangible assets are deductible for income tax purposes. As a result, a $28.6 million deferred tax liability was recorded on the opening balance sheet for the amount of non-deductible amortization expense.

The purchase price of Stauber exceeded the acquisition-date amounts of the identifiable assets acquired less the liabilities assumed by $84.1 million. Cash flows used to determine the purchase price included strategic and synergistic benefits (investment value) specific to our businesses, which resulted in a purchase price in excess of the fair value of identifiable net assets. The purchase price also included the fair values of other assets that were not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) or of immaterial value in addition to a going-concern element that represents our ability to earn a higher rate of return on the group of assets than would be expected on the separate assets as determined during the valuation process. None of the goodwill is deductible for income tax purposes.

The following table summarizes the fair value measurement of the assets acquired and liabilities assumed as of the acquisition date:



(In thousands)	Amount
Cash and cash equivalents (a)	$	1,502
Trade receivables	16,023
Inventories	10,207
Other assets	900
Property, plant, and equipment	10,989
Intangible assets	71,459
Accounts payable	(5,398		)
Accrued expenses and other current liabilities (a)	(2,925		)
Deferred income taxes	(28,565		)
Other non-current liabilities	(79		)
Net assets acquired	74,113
Goodwill	84,063
Total preliminary purchase price	158,176
Less acquired cash	(1,502		)
Preliminary purchase price, net of cash acquired	$	156,674

(a) In addition to these balances, $7.3 million of cash and current accrued liabilities that relate to stock and other acquisition-related compensation payments were recorded by Stauber as of the acquisition date but were paid subsequent to the acquisition date.

The following pro forma information has been prepared as if the Stauber acquisition and the borrowing to finance the acquisition had occurred as of the beginning of fiscal 2016. The pro forma information is not necessarily indicative of what our consolidated results of operations actually would have been had the acquisition occurred at the beginning of the fiscal year, nor is it indicative of our future operational results. There is no pro forma information presented for the three and nine months ended January 1, 2017 as Stauber’s results are included in those periods.



	Three Months Ended December 27, 2015
(In thousands, except per share data)	As Reported		Pro Forma Stauber Adjustments		Combined Pro Forma Results
Pro forma net sales	$	88,375	$	25,989	$	114,364
Pro forma net income	$	815	$	2,406	$	3,221

Pro forma basic earnings per share	$	0.08	$	0.23	$	0.31
Pro forma diluted earnings per share	$	0.08	$	0.23	$	0.31
	Nine Months Ended December 27, 2015
(In thousands, except per share data)	As Reported		Pro Forma Stauber Adjustments		Combined Pro Forma Results
Pro forma net sales	$	284,463	$	87,691	$	372,154
Pro forma net income	$	13,284	$	4,041	$	17,325

Pro forma basic earnings per share	$	1.26	$	0.38	$	1.64
Pro forma diluted earnings per share	$	1.25	$	0.38	$	1.63

Included in pro forma net income for the nine months ended December 27, 2015 was a $0.9 million pre-tax non-operating gain recorded by Stauber, or $0.05 per fully diluted share, after tax. The unaudited pro forma financial information above is adjusted to reflect the following: (a) interest expense, including amortization of debt issuance costs, related to the $131.0 million of debt used to fund the acquisition; (b) amortization expense related to the $71.5 million of identifiable intangible assets recognized in conjunction with the acquisition; (c) elimination of amortization of intangibles and interest expense previously reflected on Stauber’s financial statements; (d) elimination of stock and other acquisition-related compensation recorded by Stauber, and $2.7 million of pre-tax transaction-related expenses recorded by us; and (e) recording income taxes at an estimated statutory rate of 37.5% on the pro forma adjustments.

Acquisition of Davis Supply, Inc.: On September 18, 2015, we acquired substantially all of the assets of Davis Supply, Inc. (“Davis”) under the terms of an asset purchase agreement with Davis and its shareholders. We paid $4.5 million cash at closing, using available cash on hand to fund the acquisition. Davis was a water treatment chemical distribution company operating in Florida with revenues of approximately $5.0 million in calendar year 2014. We integrated this business into our existing Florida locations. The results of operations after the date of acquisition and the acquired assets are included in our Water Treatment Segment.

The acquisition has been accounted for under the acquisition method of accounting, under which the total purchase price is allocated to the net tangible and intangible assets acquired based on their estimated fair values. We estimated the fair values of the assets acquired and liabilities assumed using a discounted cash flow analysis (income approach). The following table summarizes the allocation of the purchase price to the fair values assigned to the assets acquired and liabilities assumed as of the acquisition date:



(In thousands)	Amount
Inventories	$	145
Property, plant, and equipment	78
Intangible assets	2,532
Net assets acquired	2,755
Goodwill	1,745
Total purchase price	$	4,500

Intangible assets recognized in connection with this acquisition consist of $2.4 million related to customer relationships to be amortized over 20 years, and $0.1 million related to a non-compete agreement to be amortized over five years. The goodwill recognized as a result of this acquisition is primarily attributable to strategic and synergistic benefits, as well as the assembled workforce. This goodwill is expected to be deductible for tax purposes.