NOTE 15 – BUSINESS COMBINATIONS

As part of our ongoing strategy to expand geographically and increase market share in certain markets, we completed ten, nine and eight business combinations during the years ended December 31, 2017, 2016 and 2015, respectively, as well as insignificant tuck-in acquisitions merged into existing operations in 2017 and 2015, in which we acquired 100% of the voting equity interests in each acquired entity. Acquisition-related costs amounted to $3.9 million, $2.3 million and $1.1 million for the years ended December 31, 2017, 2016 and 2015, respectively, and are included in Administrative expenses on the Consolidated Statements of Operations and Comprehensive Income. The goodwill to be recognized in conjunction with these business combinations represents the excess cost of the acquired entity over the net amount assigned to assets acquired and liabilities assumed. We expect to deduct $47.2 million of goodwill for tax purposes as a result of 2017 acquisitions.

The largest of our 2017 acquisitions were Alpha, Columbia Shelving & Mirror Inc. and Charleston Shelving & Mirror, Inc. (collectively, “Columbia”) and All In Insulation, LLC d/b/a Astro Insulation (collectively, “Astro”). The remaining acquisitions were individually insignificant but material in the aggregate, as follows. Net Income (Loss), as noted below, includes amortization, taxes and interest allocations.

For the twelve months ended December 31, 2017 (in thousands):


Name	Date		Acquisition Type		Cash Paid		Seller Obligations		Fair Value of Common Stock Issued		Total Purchase Price		Revenue		Net Income (Loss)
Alpha (1)		1/5/2017		Share	$	103,810	$	2,002	$	10,859	$	116,671	$	116,070	$	(1,148	)
Columbia		6/26/2017		Asset		8,768		225		—		8,993		6,046		86
Astro		9/18/2017		Asset		9,144		482		—		9,626		1,829		11
Other		Various		Asset		15,645		2,419		—		18,064		20,457		573

Total					$	137,367	$	5,128	$	10,859	$	153,354	$	144,402	$	(478	)

(1)

The cash paid included $21.7 million in contingent consideration to satisfy purchase price adjustments related to cash and net working capital requirements, earnout consideration based on Alpha’s change in EBITDA from 2015 and a customary holdback. These payments were based on fair value of each contingent payment at the time of acquisition and subsequently adjusted during the measurement period. We issued 282,577 shares of our common stock with a fair value of $10.9 million.

For the twelve months ended December 31, 2016 (in thousands):


Name	Date		Acquisition Type		Cash Paid		Seller Obligations		Total Purchase Price		Revenue		Net Income (Loss)
Alpine Insulation Co., Inc.		4/12/2016		Asset	$	21,151	$	1,560	$	22,711	$	21,359	$	1,370
East Coast		10/17/2016		Asset		15,589		600		16,189		4,701		21
Other		Various		Asset		18,753		2,299		21,052		19,974		(592	)

Total					$	55,493	$	4,459	$	59,952	$	46,034	$	799

For the twelve months ended December 31, 2015 (in thousands):


Name	Date		Acquisition Type		Cash Paid		Seller Obligations		Total Purchase Price		Revenue		Net Income (Loss)
BDI		3/12/2015		Stock	$	30,680	$	5,765	$	36,445	$	32,505	$	2,023
CQ		4/6/2015		Stock		5,193		2,319		7,512		7,839		556
Layman		6/1/2015		Asset		9,088		600		9,688		8,211		516
Eastern		8/10/2015		Stock		24,199		2,875		27,074		7,368		312
Other		Various		Asset		16,040		1,621		17,661		6,349		(97	)

Total					$	85,200	$	13,180	$	98,380	$	62,272	$	3,310

Purchase Price Allocations

The estimated fair values of the assets acquired and liabilities assumed for the acquisitions, as well as total purchase prices and cash paid, approximated the following (in thousands):


	2017
	Alpha			Columbia			Astro			Other			Total
Estimated fair values:
Cash	$	247		$	—		$	—		$	—		$	247
Accounts receivable		29,851			1,004			924			3,195			34,974
Inventories		1,852			704			296			1,544			4,396
Other current assets		4,500			8			36			96			4,640
Property and equipment		1,528			659			640			1,820			4,647
Intangibles		57,200			4,760			5,168			9,688			76,816
Goodwill		38,511			2,184			2,926			4,106			47,727
Other non-current assets		383			32			—			234			649
Accounts payable and other current liabilities		(17,401	)		(358	)		(364	)		(2,619	)		(20,742	)

Fair value of assets acquired		116,671			8,993			9,626			18,064			153,354
Less fair value of common stock issued		10,859			—			—			—			10,859
Less seller obligations		2,002			225			482			2,419			5,128

Cash paid	$	103,810		$	8,768		$	9,144		$	15,645		$	137,367


	2016
	Alpine			East Coast			Other			Total
Estimated fair values:
Cash	$	—		$	2,181		$	—		$	2,181
Accounts receivable		3,959			3,093			2,502			9,554
Inventories		700			332			1,183			2,215
Other current assets		—			1			24			25
Property and equipment		656			666			1,616			2,938
Intangibles		12,800			6,400			11,067			30,267
Goodwill		6,642			4,346			5,933			16,921
Other non-current assets		—			116			345			461
Accounts payable and other current liabilities		(2,046	)		(946	)		(1,618	)		(4,610	)

Fair value of assets acquired		22,711			16,189			21,052			59,952
Less seller obligations		1,560			600			2,299			4,459

Cash paid	$	21,151		$	15,589		$	18,753		$	55,493


	2015
	BDI			CQ			Layman			Eastern			Other			Total
Estimated fair values:
Cash	$	661		$	100		$	—		$	165		$	—		$	926
Accounts receivable		4,735			1,423			1,245			2,768			4,093			14,264
Inventories		980			152			267			335			720			2,454
Other current assets		368			39			—			109			32			548
Property and equipment		1,006			190			733			1,364			1,574			4,867
Intangibles		21,280			4,350			5,330			13,871			10,534			55,365
Goodwill		16,213			3,035			3,143			9,904			4,809			37,104
Other non-current assets		3,736			—			—			322			60			4,118
Accounts payable and other current liabilities		(3,303	)		(1,539	)		(1,030	)		(1,681	)		(2,220	)		(9,773	)
Deferred income tax liabilities		(5,495	)		—			—			—			(825	)		(6,320	)
Long-term debt		—			—			—			(82	)		—			(82	)
Other long-term liabilities		(3,736	)		(238	)		—			(1	)		—			(3,975	)

Fair value of assets acquired		36,445			7,512			9,688			27,074			18,777			99,496
Gain on bargain purchase		—			—			—			—			(1,116	)		(1,116	)

Total purchase price		36,445			7,512			9,688			27,074			17,661			98,380
Less seller obligations		5,765			2,319			600			2,875			1,621			13,180

Cash paid	$	30,680		$	5,193		$	9,088		$	24,199		$	16,040		$	85,200

Contingent consideration is included as “seller obligations” in the above table or within “fair value of assets acquired” if subsequently paid during the period presented. These contingent payments consist primarily of amounts based on working capital calculations, earnouts based on performance, and non-compete agreements, all of which are based on fair value at the time of acquisition. When these payments are expected to be made over one year from the acquisition date, the contingent consideration is discounted to net present value using our weighted average cost of capital (WACC).

Further adjustments to the allocation for each acquisition still under its measurement period are expected as third-party or internal valuations are finalized, certain tax aspects of the transaction are completed, contingent consideration is settled, and customary post-closing reviews are concluded during the measurement period attributable to each individual business combination. As a result, 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 and future adjustments may be made through the end of each measurement period. Goodwill and intangibles per the above table do not agree to the total gross increases of these assets as shown in Note 5, Goodwill and Intangibles, during the years ended December 31, 2017 and 2016 due to minor adjustments to goodwill for the allocation of certain acquisitions still under measurement, an immaterial goodwill reclassification in the year ended December 31, 2016 related to the prior period, as well as other immaterial intangible assets added during the ordinary course of business. In addition, goodwill and intangibles increased during the years ended December 31, 2017, 2016 and 2015 due to various immaterial tuck-in acquisitions that do not appear in the above tables.

The provisional amounts for Alpha originally reported in our Condensed Consolidated Balance Sheets included in our Quarterly Report on Form 10-Q for the period ended March 31, 2017 were adjusted to reflect the review and ongoing analysis of the fair value measurements. As a result of our continued evaluation during the measurement period, we increased goodwill by approximately $2.1 million, offset by a corresponding net reduction in various working capital accounts.

The provisional amounts for Columbia originally reported in our Condensed Consolidated Balance Sheets included in our Quarterly Report on Form 10-Q for the period ended June 30, 2017 were adjusted to reflect the review and ongoing analysis of the fair value measurements. As a result of our continued evaluation during the measurement period, we increased goodwill by approximately $0.5 million and our seller obligations by approximately $0.4 million for an adjustment to the fair value of a working capital contingent liability. These adjustments, as well as various other insignificant adjustments, resulted in a total purchase price increase for Columbia of approximately $0.6 million as reflected within the above table and were within applicable measurement period guidelines.

The fair value of the net assets acquired, including identifiable intangible assets, relating to one of the 2015 business combinations included in the “Other” column in the above table was approximately $4.8 million, which exceeds the purchase price of $3.7 million. Accordingly, we recognized the excess of the fair value of the net assets acquired over purchase price paid of approximately $1.1 million as a gain on bargain purchase. The gain on bargain purchase is included in other income in our Consolidated Statements of Operations and Comprehensive Income. Prior to recognizing the gain, we reassessed the fair value of the assets acquired and liabilities assumed in the business combination including consultation with our external valuation experts. Assets were valued using the same methodology as our other business combinations, including the use of a discounted cash flow model as well as several other factors. We believe we were able to acquire this entity for less than the fair value of its net assets due to an absence of multiple bidders combined with the significant improvement of our purchasing power.

Included in other noncurrent assets in the above table as of the year ended December 31, 2015 is an insurance receivable of $2.0 million and an indemnification asset in the amount of $1.7 million associated with the 2015 acquisition of BDI. These assets offset equal liabilities included in other long-term liabilities in the above table, which represent additional insurance reserves for which we may be liable. All amounts are measured at their acquisition date fair value. The indemnification asset has been reduced to $0.9 million as of December 31, 2017 due to an adjustment to an uncertain tax position related to this item.

Estimates of acquired intangible assets related to the acquisitions are as follows (dollars in thousands):


	2017				2016				2015
Acquired intangibles assets	Estimated Fair Value		Weighted Average Estimated Useful Life (yrs)		Estimated Fair Value		Weighted Average Estimated Useful Life (yrs)		Estimated Fair Value		Weighted Average Estimated Useful Life (yrs)
Customer relationships	$	39,922		8	$	18,511		9	$	36,129		8
Trademarks and trade names		20,667		15		8,983		15		14,567		15
Non-competition agreements		2,628		5		2,773		5		4,668		5
Backlog		13,600		1.5		—		—		—		—

Pro Forma Information (unaudited)

The unaudited pro forma information has been prepared as if the 2017 acquisitions had taken place on January 1, 2016, the 2016 acquisitions had taken place on January 1, 2015 and the 2015 acquisitions had taken place on January 1, 2014. 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, 2015 and 2014 and the unaudited pro forma information does not purport to be indicative of future financial operating results (in thousands, except for per share data).


	Unaudited Pro Forma for the years ended December 31,
	2017		2016		2015
Net revenue	$	1,169,061	$	1,058,707	$	786,144
Net income		43,179		43,891		29,463
Basic and diluted net income per share		1.36		1.39		0.94

Unaudited pro forma net income reflects additional intangible asset amortization expense of $1.3 million, $17.5 million and $6.6 million for the years ended December 31, 2017, 2016 and 2015, respectively, as well as additional income tax expense of $0.7 million, $3.0 million and $1.7 million for the years ended December 31, 2017, 2016 and 2015, respectively, and additional interest expense of $1.8 million for the year ended December 31, 2016 that would have been recorded had the 2017 acquisitions taken place on January 1, 2016, the 2016 acquisitions taken place on January 1, 2015 and the 2015 acquisitions taken place on January 1, 2014.