Business Combinations

3 Months Ended

Mar. 31, 2021

BUSINESS COMBINATIONS

As part of our ongoing strategy to expand geographically and increase market share in certain markets, we completed one business combination during the three months ended March 31, 2021 and two business combinations during the three months ended March 31, 2020.

The largest of these acquisitions were I.W. International Insulation, Inc., dba Intermountain West Insulation (“Intermountain West”) in March 2021 and Royals Commercial Services, Inc. (“Royals”) in February 2020. 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) includes amortization, taxes and interest allocations when appropriate.

For the three months ended March 31, 2021 (in thousands):


									Three months ended March 31, 2021
2021 Acquisition	Date	Acquisition Type	Cash Paid		Seller Obligations		Total Purchase Price		Revenue		Net Income
Intermountain West	3/1/2021	Share	$	42,098	$	5,959	$	48,057	$	3,608	$	450

For the three months ended March 31, 2020 (in thousands):


									Three months ended March 31, 2020
2020 Acquisitions	Date	Acquisition Type	Cash Paid		Seller Obligations		Total Purchase Price		Revenue		Net Loss
Royals	2/29/2020	Asset	$	7,590	$	2,500	$	10,090	$	784	$	(87)
Other	1/13/2020	Asset	911		70		981		226		(21)
			$	8,501	$	2,570	$	11,071	$	1,010	$	(108)

Acquisition-related costs recorded within administrative expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income amounted to $1.2 million and $0.7 million for the three months ended March 31, 2021 and 2020, 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 do not expect to take any tax deductions for the goodwill associated with the 2021 business combination unless we decide to make an asset election in the future which would make a portion of the goodwill deductible for tax purposes.

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 March 31, 2021		As of March 31, 2020
	Intermountain West		Royals		Other		Total
Estimated fair values:
Cash	$	168	$	—	$	—	$	—
Accounts receivable	5,122		2,848		—		2,848
Inventories	1,157		305		70		375
Other current assets	2,354		430		11		441
Property and equipment	796		598		118		716
Intangibles	25,200		3,930		582		4,512
Goodwill	25,141		3,015		206		3,221
Other non-current assets	264		58		8		66
Accounts payable and other current liabilities	(3,278)		(1,059)		(14)		(1,073)
Deferred income tax liabilities	(6,537)		—		—		—
Long-term debt	(2,036)		—		—		—
Other long-term liabilities	(294)		(35)		—		(35)
Fair value of assets acquired and purchase price	48,057		10,090		981		11,071
Less seller obligations	5,959		2,500		70		2,570
Cash paid	$	42,098	$	7,590	$	911	$	8,501

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-compete 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 of future payments based on a weighted average of various future forecast scenarios.

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 three months ended March 31, 2021 and 2020 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.

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


	For the three months ended March 31,
	2021			2020
Acquired intangibles assets	Estimated Fair Value		Weighted Average Estimated Useful Life (yrs.)	Estimated Fair Value		Weighted Average Estimated Useful Life (yrs.)
Customer relationships	$	18,200	12	$	2,611	8
Trademarks and tradenames	4,400		15	1,145		15
Non-competition agreements	2,600		5	227		5
Backlog	—		0	529		2

Pro Forma Information

The unaudited pro forma information for the combined results of the Company has been prepared as if the 2021 acquisitions had taken place on January 1, 2020 and the 2020 acquisitions had taken place on January 1, 2019. 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, 2020 and 2019, 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 March 31,
	2021		2020
Net revenue	$	443,217	$	431,379
Net income	18,403		17,638
Basic net income per share	0.63		0.59
Diluted net income per share	0.62		0.59

Unaudited pro forma net income reflects additional intangible asset amortization expense of $0.4 million and $2.5 million for the three months ended March 31, 2021, and 2020, respectively, as well as additional income tax expense of $0.4 million and $0.6 million for the three months ended March 31, 2021 and 2020, respectively, that would have been recorded had the 2021 acquisitions taken place on January 1, 2020 and the 2020 acquisitions taken place on January 1, 2019.