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Business Combinations | 12 Months Ended
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Dec. 31, 2017
Business Combinations |
Business Combinations | 17. BUSINESS COMBINATIONS As part of our strategy to supplement our organic growth and expand our access to additional markets and products, we made six acquisitions during the year ended December 31, 2017 and one acquisition during the year ended December 31, 2016. Each acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” Acquisition related costs for the years ended December 31, 2017 and 2016, were $1.3 million and 0.1 million, respectively, and are included in selling, general, and administrative expense in our Consolidated Statements of Operations. Acquisitions On August 16, 2016, we acquired substantially all of the assets of Valley, a Virginia-based residential insulation installer. The purchase price of approximately $3.5 million was funded by cash on hand. The Valley acquisition was immaterial to the Company’s financial position and results of operations. On January 16, 2017, we acquired substantially all of the assets of Midwest, a heavy commercial fireproofing and insulation company with locations in Chicago, Illinois and Indianapolis, Indiana. The purchase price of approximately $12.2 million was funded by cash on hand. On February 27, 2017, we acquired substantially all of the assets of EcoFoam, a residential and light commercial insulation installation company with locations in Colorado Springs and Denver, Colorado. The purchase price of approximately $22.3 million was funded by cash on hand of $20.2 million and contingent consideration of $2.1 million. On February 27, 2017, we acquired substantially all of the assets of MR Insulfoam, a residential insulation installation company located in Norwalk, Connecticut. The purchase price of approximately $1.5 million was funded by cash on hand. On March 29, 2017, we acquired substantially all of the assets of Capital, a residential insulation installation company located in Sacramento, California. The purchase price of approximately $7.3 million was funded by cash on hand. On April 20, 2017, we acquired substantially all of the assets of Superior, a residential insulation installation company located in Seattle, Washington. The purchase price of approximately $10.9 million was funded by cash on hand. On June 8, 2017, we acquired substantially all of the assets of Canyon, a heavy commercial insulation and firestopping company with locations in Corona, San Diego, and Livermore, California. The purchase price of approximately $34.4 million was originally funded by cash on hand of $30.0 million and deferred purchase price consideration of $4.4 million. During the year ended December 31, 2017 we paid $1.8 million of the $4.4 million of the deferred purchase price consideration. Revenue and net income since the respective acquisition dates included in our Consolidated Statements of Operations were as follows, in thousands:
|  | Year ended December 31, 2017
|  | Net Sales |  | Net Income
Midwest |  | $ | 17,122 |  | $ | 304
EcoFoam |  | $ | 22,315 |  | $ | 1,747
Superior |  | $ | 9,508 |  | $ | 922
Canyon |  | $ | 13,333 |  | $ | 1,279
All others |  | $ | 8,412 |  | $ | 892
Pro Forma Results The following unaudited pro forma information has been prepared as if the 2017 acquisitions described above had taken place on January 1, 2016. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transactions actually taken place on January 1, 2016. Further, the pro forma information does not purport to be indicative of future financial operating results. Our pro forma results are presented below, in thousands:
|  | Pro forma for the year ended December 31,
|  | 2017 |  |  | 2016
Net sales |  | $ | 1,928,082 |  | $ | 1,829,026
Net income |  | $ | 159,440 |  | $ | 76,894
The following table details the additional expense included in the unaudited pro forma net income that would have been recorded had the acquisitions taken place on January 1, 2016, in thousands:
|  | Pro forma for the year ended December 31,
|  | 2017 |  | 2016
Amortization of intangible assets |  | $ | 1,131 |  | $ | 3,663
Income tax expense (using normalized 38% ETR) |  | $ | 801 |  | $ | 2,628
Purchase Price Allocations The estimated fair values of the assets acquired and liabilities assumed for the acquisitions, as well as total consideration paid, approximated the following as of December 31, in thousands:
|  | 2017
|  | Midwest |  | EcoFoam |  | Superior |  | Canyon |  | All others |  | Total
Estimated fair values: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Accounts receivable |  | $ | 6,576 |  | $ | 3,819 |  | $ | 2,012 |  | $ | 8,222 |  | $ | 678 |  | $ | 21,307
Inventories |  |  | 75 |  |  | 1,119 |  |  | 321 |  |  | 575 |  |  | 141 |  |  | 2,231
Prepaid and other assets |  |  | — |  |  | 27 |  |  | 1 |  |  | 6 |  |  | 6 |  |  | 40
Property and equipment |  |  | 655 |  |  | 1,544 |  |  | 361 |  |  | 460 |  |  | 357 |  |  | 3,377
Intangible assets |  |  | 2,740 |  |  | 6,700 |  |  | 5,280 |  |  | 15,220 |  |  | 3,640 |  |  | 33,580
Goodwill |  |  | 3,538 |  |  | 10,796 |  |  | 3,662 |  |  | 10,095 |  |  | 4,037 |  |  | 32,128
Accounts payable |  |  | (1,359) |  |  | (1,378) |  |  | (681) |  |  | (163) |  |  | (26) |  |  | (3,607)
Accrued liabilities |  |  | — |  |  | (302) |  |  | (4) |  |  | — |  |  | — |  |  | (306)
Net assets acquired |  | $ | 12,225 |  | $ | 22,325 |  | $ | 10,952 |  | $ | 34,415 |  | $ | 8,833 |  | $ | 88,750
The following table details the fair value of consideration transferred as of December 31, in thousands:
|  | 2017
|  | Midwest |  | EcoFoam |  | Superior |  | Canyon |  | All others |  | Total
Fair value of consideration: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash |  | $ | 12,225 |  | $ | 20,215 |  | $ | 10,952 |  | $ | 31,865 |  | $ | 8,833 |  | $ | 84,090
Deferred consideration |  |  | — |  |  | — |  |  | — |  |  | 2,550 |  |  | — |  |  | 2,550
Contingent consideration |  |  | — |  |  | 2,110 |  |  | — |  |  | — |  |  | — |  |  | 2,110
Total consideration transferred |  | $ | 12,225 |  | $ | 22,325 |  | $ | 10,952 |  | $ | 34,415 |  | $ | 8,833 |  | $ | 88,750
Estimates of acquired intangible assets related to the acquisitions are as follows, as of December 31, in thousands:
|  | 2017
|  | Estimated Fair Value |  | Weighted Average Estimated Useful Life (Years)
Fair value of intangibles: |  |  |  |  |  |
Customer relationships |  | $ | 26,170 |  |  | 10
Trademarks and trade names |  |  | 1,780 |  |  | 10
Non-competition agreements |  |  | 5,630 |  |  | 5
Total intangible assets |  | $ | 33,580 |  |  | 9
As third party or internal valuations are finalized, certain tax aspects of the transaction are completed, and customer post-closing reviews are concluded, adjustments may be made to the fair value of assets acquired, and in some cases total purchase price, through the end of each measurement period, generally one year from the acquisition date. Various insignificant adjustments to the fair value of assets acquired, and in some cases total purchase price, have been made to certain business combinations since the date of acquisition. Goodwill to be recognized in connection with these acquisitions is attributable to the synergies expected to be realized and improvements in the businesses after the acquisitions. The goodwill will be recognized entirely by our Installation segment. All of the $32.1 million of goodwill is expected to be deductible for income tax purposes. Contingent Consideration The acquisition of EcoFoam includes a contingent consideration arrangement that requires additional consideration to be paid by TopBuild to the sellers of EcoFoam based on certain future revenues of EcoFoam over a three-year period. The range of the undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between zero and $2.5 million. The fair value of the contingent consideration recognized on the acquisition date of $2.1 million was estimated by applying the income approach using discounted cash flows. That measure is based on significant Level 3 inputs not observable in the market. The significant assumption includes a discount rate of 9.5%. Contingent consideration is recorded in the Consolidated Balance Sheets in accrued liabilities and other liabilities. Adjustments to the fair value of contingent consideration are reflected in selling, general, and administrative expense in the Consolidated Statements of Operations and are included in the acquisition related costs above. The following table presents the fair value of contingent consideration as of December 31, 2017, in thousands:
|  | Fair Value of Contingent Consideration Recognized at Acquisition Date |  | Settlement of Contingent Consideration |  | Adjustment to Contingent Consideration Charged to Expense |  | Liability Balance for Contingent Consideration
EcoFoam |  | $ | 2,110 |  | $ | — |  | $ | 149 |  | $ | 2,259

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