Business Combinations

9 Months Ended

Sep. 30, 2020

Business Combinations [Abstract]

Business Combinations

NOTE 16 - BUSINESS COMBINATIONS

As part of our ongoing strategy to expand geographically and increase market share in certain markets, we completed five business combinations during the nine months ended September 30, 2020 and four business combinations and four insignificant tuck-in acquisitions merged into existing operations during the nine months ended September 30, 2019, in which we acquired 100% of the voting equity interests in each.

The largest of these acquisitions were Royals Commercial Services, Inc. (“Royals”) in February 2020, Storm Master Gutters (“Storm Master”) in August 2020, Energy One America, LLC (“Energy One”) in August 2020, 1st State Insulation, LLC (“1st State Insulation”) in March 2019 and Expert Insulation of Brainerd, Inc. (collectively “Expert Insulation”) in June 2019. 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. Where noted, “Other” represents acquisitions that were individually immaterial in that year. Net income/(loss), as noted below, includes amortization, taxes and interest allocations when appropriate.

For the three and nine months ended September 30, 2020 (in thousands):

											Three months ended September 30, 2020					Nine months ended September 30, 2020
2020 Acquisitions	Date		Acquisition Type		Cash Paid		Seller Obligations		Total Purchase Price		Revenue		Net Income (Loss)			Revenue		Net Income (Loss)
Royals		2/29/2020		Asset	$	7,590	$	2,500	$	10,090	$	2,843	$	279		$	6,650	$	628
Energy One		8/10/2020		Asset		13,200		1,591		14,791		2,853		(202	)		2,853		(202	)
Storm Master		8/31/2020		Asset		13,000		1,336		14,336		2,055		85			2,055		85
Other		Various		Asset		5,035		1,538		6,573		1,879		(252	)		2,643		(291	)
					$	38,825	$	6,965	$	45,790	$	9,630	$	(90	)	$	14,201	$	220

For the three and nine months ended September 30, 2019 (in thousands):

											Three months ended September 30, 2019				Nine months ended September 30, 2019
2019 Acquisitions	Date		Acquisition Type		Cash Paid		Seller Obligations		Total Purchase Price		Revenue		Net Income		Revenue		Net Income
1st State Insulation		3/18/2019		Asset	$	5,125	$	1,355	$	6,480	$	3,156	$	174	$	6,586	$	374
Expert Insulation		6/24/2019		Asset		16,165		1,993		18,158		3,147		193		3,339		160
Other		Various		Asset		3,450		974		4,424		7,262		591		7,262		591
					$	24,740	$	4,322	$	29,062	$	13,565	$	958	$	17,187	$	1,125

Acquisition-related costs recorded within administrative expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income amounted to $0.8 million and $2.0 million for the three and nine months ended September 30, 2020 respectively, and $0.3 million and $1.3 million for the three and nine months ended September 30, 2019, 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 $11.3 million of goodwill for tax purposes as a result of 2020 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 September 30, 2020															As of September 30, 2019
	Royals			Energy One			Storm Master			Other			Total			1st State			Expert			Other			Total
Estimated fair values:
Accounts receivable	$	2,848		$	3,657		$	2,362		$	1,370		$	10,237		$	—		$	1,796		$	254		$	2,050
Inventories		305			838			175			278			1,596			291			723			338			1,352
Other current assets		430			12			—			145			587			—			—			3			3
Property and equipment		598			2,319			798			350			4,065			989			235			667			1,891
Intangibles		3,930			6,500			8,720			2,996			22,146			3,382			6,740			2,242			12,364
Goodwill		3,015			2,859			3,631			1,745			11,250			1,857			8,545			930			11,332
Other non-current assets		58			—			—			16			74			—			161			13			174
Accounts payable and other current liabilities		(1,059	)		(1,375	)		(1,336	)		(196	)		(3,966	)		(39	)		(42	)		(23	)		(104	)
Deferred income tax liabilities		(35	)		—			—			—			(35	)		—			—			—			—
Other long-term liabilities		—			(19	)		(14	)		(131	)		(164	)		—			—			—			—
Fair value of assets acquired and purchase price		10,090			14,791			14,336			6,573			45,790			6,480			18,158			4,424			29,062
Less seller obligations		2,500			1,591			1,336			1,538			6,965			1,355			1,993			974			4,322
Cash paid	$	7,590		$	13,200		$	13,000		$	5,035		$	38,825		$	5,125		$	16,165		$	3,450		$	24,740

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 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 may not agree to the total gross increases of these assets as shown in Note 6, Goodwill and Intangibles, during each of the nine months ended September 30, 2020 and 2019 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 the nine months ended September 30, 2019 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 nine months ended September 30,
	2020				2019
Acquired intangibles assets	Estimated Fair Value		Weighted Average Estimated Useful Life (yrs.)		Estimated Fair Value		Weighted Average Estimated Useful Life (yrs.)
Customer relationships	$	14,528		8	$	8,566		8
Trademarks and trade names		3,796		15		2,615		15
Non-competition agreements		1,946		5		1,183		5
Backlog		1,876		1.5		—		—

Pro Forma Information

The unaudited pro forma information for the combined results of the Company has been prepared as if the 2020 acquisitions had taken place on January 1, 2019 and the 2019 acquisitions had taken place on January 1, 2018. 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, 2019 and 2018, 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 September 30,				Unaudited pro forma for the nine months ended September 30,
	2020		2019		2020		2019
Net revenue	$	426,601	$	421,270	$	1,241,506	$	1,189,470
Net income		28,183		22,627		69,656		52,828
Basic net income per share		0.96		0.76		2.36		1.78
Diluted net income per share		0.95		0.76		2.34		1.77

Unaudited pro forma net income reflects additional intangible asset amortization expense of $0.3 million and $1.8 million for the three and nine months ended September 30, 2020, respectively, and $1.4 million and $4.8 million for the three and nine months ended September 30, 2019, respectively, as well as additional income tax expense of $38 thousand and $0.1 million for the three and nine months ended September 30, 2020 and $0.5 million and $1.3 million for the three and nine months ended September 30, 2019, respectively, that would have been recorded had the 2020 acquisitions taken place on January 1, 2019 and the 2019 acquisitions taken place on January 1, 2018.