Business Combinations

6 Months Ended

Jun. 30, 2019

NOTE 15 - BUSINESS COMBINATIONS

As part of our ongoing strategy to expand geographically and increase market share in certain markets, we completed

two

business combination and two insignificant

tuck-in

acquisitions merged into existing operations during the six months ended June 30, 2019 and five business combinations and one insignificant

tuck-in

acquisition merged into existing operations during the six months ended June 30, 2018, respectively, in which we acquired 100% of the ownership interests in each.

The largest of these acquisitions were 1st State Insulation, LLC (“1st State Insulation”) in March 2019, Expert Insulation, Inc. and Expert Insulation of Brainerd, Inc. (collectively, “Expert Insulation”) in June 2019 and Custom Overhead Door, LLC dba Custom Door & Gate (collectively, “CDG”) in March 2018. Net Income, as noted below, includes amortization, taxes and interest allocations when appropriate. Below is a summary of each significant acquisition by year, including revenue and net income (loss) since date of acquisition, shown for the year of acquisition (in thousands):


									Total		Three months ended June 30, 2019					Six months ended June 30, 2019
2019 Acquisitions	Date		Acquisition Type		Cash Paid		Seller Obligations		Purchase Price		Revenue		Net Income (Loss)			Revenue		Net Income (Loss)
1st State Insulation		3/18/2019		Asset	$	5,125	$	1,380	$	6,505	$	2,942	$	177		$	3,430	$	200
Expert Insulation		6/24/2019		Asset		16,165		1,782		17,947		192		(33	)		192		(33	)

Total					$	21,290	$	3,162	$	24,452	$	3,134	$	144		$	3,622	$	167

									Total		Three months ended				Six months ended
			Acquisition				Seller		Purchase		June 30, 2018				June 30, 2018
2018 Acquisitions	Date		Type		Cash Paid		Obligations		Price		Revenue		Net Income		Revenue		Net Income
CDG		3/19/2018		Asset	$	9,440	$	1,973	$	11,413	$	3,324	$	80	$	3,724	$	65
Other		Various		Asset		9,186		1,826		11,012		4,508		315		5,779		381

Total					$	18,626	$	3,799	$	22,425	$	7,832	$	395	$	9,503	$	446

Acquisition-related costs recorded within administrative expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income amounted to $

0.5

million and $

1.1

million for the three and six months ended June 30, 2019, respectively, and $

0.7

million and $

1.2

million for the three and six months ended June 30, 2018, respectively. The goodwill 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 approximately $9.9 million of goodwill for tax purposes as a result of 2019 acquisitions.

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):


	As of June 30, 2019									As of June 30, 2018
	1st State			Expert			Total			CDG			Other			Total
Estimated fair values:
Accounts receivable	$	—		$	1,796		$	1,796		$	1,731		$	585		$	2,316
Inventories		291			667			958			514			914			1,428
Other current assets		—			—			—			28			64			92
Property and equipment		989			235			1,224			933			1,252			2,185
Intangibles		3,382			6,740			10,122			3,711			6,160			9,871
Goodwill		1,882			8,390			10,272			4,898			2,223			7,121
Other non-current assets		—			161			161			36			—			36
Accounts payable and other current liabilities		(39	)		(42	)		(81	)		(438	)		(186	)		(624	)

Fair value of assets acquired and purchase price		6,505			17,947			24,452			11,413			11,012			22,425
Less seller obligations		1,380			1,782			3,162			1,973			1,826			3,799

Cash paid	$	5,125		$	16,165		$	21,290		$	9,440		$	9,186		$	18,626

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 earnouts based on performance that are recorded at fair value at the time of acquisition, and/or

non-complete

agreements and amounts based on working capital calculations. 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), when appropriate.

Further adjustments to the allocation for each acquisition still under its measurement period are expected as third-party and internal valuations are finalized, certain tax aspects of the transaction are completed 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 each of the three months ended June 30, 2019 and 2018 due to minor adjustments to goodwill for the allocation of certain acquisitions still under measurement as well as other immaterial intangible assets added during the ordinary course of business. In addition, goodwill and intangibles increased during each of the three months ended June 30, 2019 and 2018 due to small

tuck-in

acquisitions merged into existing operations that do not appear in the above table as discussed above.

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


	For the six months ended June 30,
	2019				2018
Acquired intangibles assets	Estimated Fair Value		Weighted Average Estimated Useful Life (yrs.)		Estimated Fair Value		Weighted Average Estimated Useful Life (yrs.)
Customer relationships	$	7,100		8	$	6,481		8
Trademarks and trade names		1,999		15		2,740		15
Non-competition agreements		1,023		5		650		5

Pro Forma Information

The unaudited pro forma information for the combined results of the Company has been prepared as if the 2019 acquisitions had taken place on January 1, 2018 and the 2018 acquisitions had taken place on January 1, 2017. 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, 2018 and 2017, respectively, and the unaudited pro forma information does not purport to be indicative of future financial operating results (in thousands, except per share data):


	Unaudited pro forma for the three months ended June 30,				Unaudited pro forma for the six months ended June 30,
	2019		2018		2019		2018
Net revenue	$	374,496	$	350,072	$	721,822	$	675,298
Net income		19,013		17,330		27,865		25,027
Basic net income per share		0.64		0.55		0.94		0.80
Diluted net income per share		0.64		0.55		0.93		0.79

Unaudited pro forma net income reflects additional intangible asset amortization expense of $0.1 million and $0.4 million for the three and six months ended June 30, 2019, respectively, and $1.2 million and $2.6 million for the three and six months ended June 30, 20 18, respectively, as well as additional income tax expense of $30 thousand and $39 thousand for the three and six months ended June 30, 2019, respectively, and $0.3 million and $0.8 million for the three and six months ended June 30, 2018, respectively, that would have been recorded had the 2019 acquisitions taken place on January 1, 2018 and the 2018 acquisitions taken place on January 1, 2017.