Acquisitions

For all acquisitions, we allocate the purchase price to assets acquired and liabilities assumed as of the date of acquisition based on the estimated fair values at the date of acquisition. The excess of the fair value of the purchase consideration over the fair values of the identifiable assets and liabilities is recorded as goodwill. Management makes significant estimates and assumptions when determining the fair value of assets acquired and liabilities assumed. These estimates include, but are not limited to, discount rates, projected future net sales, projected future expected cash flows and useful lives. When necessary, we will engage third-party valuation firms to assist us in determining fair values of acquired assets and assumed liabilities.

Merger with Stock Building Supply Holdings, Inc.

As described in Note 1, SBS and BMC were merged in an all-stock transaction on December 1, 2015. The Merger was accounted for as a reverse acquisition with BMC deemed to be the acquirer solely for accounting purposes. Accordingly, the consideration transferred has been allocated to the acquired assets and liabilities of SBS based upon their estimated fair values. The consideration transferred was calculated as the number of SBS common shares outstanding immediately prior to the Merger multiplied by the closing stock price of SBS on the closing date of the Merger. In addition, consideration transferred includes the fair value of outstanding SBS restricted stock units and stock options that vested upon consummation of the Merger, as well as the fair value of unvested SBS stock options multiplied by the portion of the requisite service period that elapsed prior to the closing date of the Merger.

The calculation of consideration transferred is as follows:



(in thousands, except share and per share data)
Number of SBS shares outstanding on the closing date of the Merger	26,186,111
SBS common stock price per share on the closing date of the Merger	$	16.99
Deemed (for accounting purposes only) issuance of BMC stock to SBS shareholders	444,902
Fair value of SBS equity awards	8,488
Total consideration transferred	$	453,390

The preliminary allocated fair values of acquired assets and assumed liabilities is summarized as follows:



(in thousands)
Cash and cash equivalents	$	6,342
Accounts receivable	124,526
Inventories	115,888
Other current assets	26,314
Property and equipment	126,057
Customer relationships	129,800
Trademarks	4,500
Non-compete agreements	6,112
Favorable lease agreements	5,050
Other long-term assets	1,302
Accounts payable	(77,062		)
Accrued expenses and other liabilities	(40,652		)
Unfavorable lease agreements	(4,550		)
Current portion of capital lease obligations	(3,275		)
Other current liabilities	(6,664		)
Long-term debt	(67,713		)
Deferred income taxes	(75,006		)
Long-term portion of capital lease obligations	(11,612		)
Other long-term liabilities	(5,666		)
Identifiable net assets acquired	253,691
Goodwill	199,699
Total net assets acquired	$	453,390

The gross contractual value and fair value of accounts receivable acquired were $129.2 million and $124.5 million, respectively.

Inventory was valued at its estimated net realizable value, which is defined as expected sales price less cost to sell, plus a reasonable margin for the selling effort. The step-up in the basis of SBS's inventory totaled $13.2 million. Of this amount, $10.3 million was recognized in cost of goods sold in the Company's consolidated statement of operations for the year ended December 31, 2015. The remaining $2.9 million is expected to be recognized in cost of goods sold during the first quarter of 2016 as the remaining acquired inventory is sold.

Personal property assets were valued using the cost approach and/or market approach, real property assets were valued using the sales comparison and/or cost approach, customer relationships were valued using the excess earnings method, trademarks were valued using the relief from royalty method and non-compete agreements were valued using the lost profit method. In estimating the fair value of favorable and unfavorable lease agreements, market rents were estimated for each of SBS’s leased locations. If the contractual rents were considered to be below/above the market rent, a favorable/unfavorable lease agreement was valued by discounting the difference between the contractual rent and estimated market rates over the remaining lease term.

The customer relationships, trademarks and non-compete agreements are expected to be amortized over weighted average periods of 16.5 years, 4.2 years and 1.0 year, respectively. Acquired property and equipment will be depreciated on a straight-line basis over the respective estimated remaining useful lives.

The purchase price allocation is based upon all information available to the Company at the present time and is subject to change, and such changes could be material. Due to the size and complexity of the Merger and the consummation of the Merger shortly before the Company's fiscal 2015 year-end, the initial purchase accounting for intangible assets, fixed assets and inventory is not complete. As we receive additional information during the measurement period, these amounts may be adjusted.

Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed, and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. None of the goodwill recognized is expected to be be tax deductible.

Net sales and estimated pre-tax loss of Legacy SBS included in the consolidated statements of operations for the year ended December 31, 2015 were $103.6 million and $18.6 million, respectively.

Acquisition of Robert Bowden, Inc.

On September 1, 2015, Legacy BMC purchased certain assets (excluding cash) and assumed certain liabilities of Marietta, Georgia-based Robert Bowden Inc. ("RBI") for an initial purchase price of $102.4 million in cash (subject to certain adjustments). RBI has three locations in the Atlanta, Georgia area, including its manufacturing facility in Marietta. RBI sells millwork and window products to homebuilders and residential contractors primarily in the Atlanta metro market. Legacy BMC funded the transaction through borrowings under the Legacy BMC Revolver. The acquisition was accounted for using the acquisition method of accounting under ASC 805.

The allocated fair values of acquired assets and assumed liabilities is summarized as follows:



(in thousands)
Accounts receivable	$	8,343
Inventories	6,702
Prepaid expenses and other current assets	122
Property and equipment	5,524
Customer relationships	39,900
Non-compete agreements	400
Accounts payable and other accrued liabilities	(3,182		)
Identifiable net assets acquired	57,809
Goodwill	44,541
Total net assets acquired	$	102,350

Inventory and property and equipment were valued using the cost approach and/or market approach, customer relationships were valued using the excess earnings method and non-compete agreements were valued using the lost profit method. The customer relationships and non-compete agreements are expected to be amortized over periods of 10 years and 3 years, respectively.

The purchase price allocation is based upon all information available to the Company at the present time and is subject to change, and such changes could be material. As we receive additional information during the measurement period, these assets and liabilities may be adjusted.

Goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. All of the goodwill recognized is expected to be be tax deductible.

Net sales and estimated pre-tax income of RBI included in the consolidated statements of operations for the year ended December 31, 2015 were $27.0 million and $1.2 million, respectively.

Acquisition of VNS Corporation

On May 1, 2015, Legacy BMC completed the acquisition of Vidalia, Georgia-based VNS Corporation (“VNS”), enabling Legacy BMC to expand its product offerings into the southeastern United States. Legacy BMC funded the transaction through the use of available cash and borrowings on the Legacy BMC Revolver. The final purchase price was $47.1 million, net of $2.3 million of acquired cash. The acquisition was accounted for using the acquisition method of accounting under ASC 805, Business Combinations.

The allocated fair values of acquired assets and assumed liabilities is summarized as follows:



(in thousands)
Cash	$	2,344
Accounts receivable	19,594
Inventories	10,665
Prepaid expenses and other current assets	952
Property and equipment	11,643
Customer relationships	10,000
Trademarks	850
Other long-term assets	59
Accounts payable	(7,464		)
Accrued payable and other accrued liabilities	(4,087		)
Deferred taxes	(4,364		)
Identifiable net assets acquired	40,192
Goodwill	9,287
Total net assets acquired	$	49,479

Inventory and property and equipment were valued using the cost approach and/or market approach, customer relationships were valued using the excess earnings method and trademarks were valued using the relief from royalty method. The customer relationships and trademarks are expected to be amortized over periods of 10 years and 2 years, respectively.

Goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. None of the goodwill recognized is expected to be be deductible for tax purposes.

Net sales and estimated pre-tax income of VNS included in the consolidated statements of operations for the year ended December 31, 2015 were $104.5 million and $4.7 million, respectively.

Pro Forma Financial Information (Unaudited)

The following unaudited pro forma combined results of operations give effect to the Merger and acquisitions of RBI and VNS by the Company as if SBS, RBI and VNS had been acquired on January 1, 2014, the beginning of the comparable prior annual period, applying certain assumptions and pro forma adjustments. 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 acquisitions and the estimated impact of these adjustments on the Company's income tax provision. 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 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 Merger and acquisitions of RBI and VNS.

Unaudited pro forma financial information is as follows:



	Pro Forma Year Ended December 31,
(in thousands)	2015		2014
Net sales	$	2,890,163	$	2,819,398
Net income	15,098		56,710
Basic net income per share	0.23		0.87
Diluted net income per share	0.23		0.86

Western Building Supply

On November 11, 2013, the Company acquired certain assets of Western Building Supply, a millwork business located in northern California for $6.7 million in cash. The acquisition provides us with millwork manufacturing capability to serve new customers in the northern California region.

The impact of this acquisition on our operating results was not considered material for the reporting of pro forma financial information.