Quarterly report pursuant to Section 13 or 15(d)

Business Combinations

v3.19.3
Business Combinations
9 Months Ended
Sep. 30, 2019
Business Combinations  
Business Combinations

12. BUSINESS COMBINATIONS

As part of our strategy to supplement our organic growth and expand our access to additional markets and products, we completed three acquisitions during 2018 and one acquisition to date in 2019.  Each acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” There were no acquisition related costs for the three months ended September 30, 2019. Acquisition related costs for the nine months ended September 30, 2019, were $0.1 million.  Acquisition related costs for the three and nine months ended September 30, 2018, were $0.6 million and $13.9 million, respectively.  Acquisition costs are included in selling, general, and administrative expense in our condensed consolidated statements of operations.

Acquisitions

On January 10, 2018, we acquired ADO, a distributor of insulation accessories, located in Plymouth, Minnesota.  The purchase price of approximately $23.0 million was funded by cash on hand of $22.2 million and contingent consideration of $0.8 million.

On January 18, 2018, we acquired substantially all of the assets of Santa Rosa, a residential and commercial insulation company located in Miami, Florida.  The purchase price of approximately $5.8 million was funded by cash on hand of $5.6 million and contingent consideration of $0.2 million.

On May 1, 2018, we acquired USI, a leading distributor and installer of insulation in both residential and commercial construction markets.  Our payment of $486.5 million, which included the purchase price of $475.0 million and adjustments for cash and working capital, was funded through net proceeds from the issuance on April 25, 2018, of the Senior Notes together with the net proceeds from the $100.0 million delayed draw term loan commitment under our Amended Credit Agreement.  For additional information see Note 4 – Long-Term Debt.

On July 15, 2019, we acquired Viking, an insulation company located in Burbank, California. The purchase price of approximately $7.7 million was funded by cash on hand of $6.5 million and contingent consideration of $1.2 million.

Revenue and net income since the respective 2018 acquisition dates included in our condensed consolidated statements of operations were as follows, in thousands:

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

    

Net Sales

    

Net Income

Net Sales

Net Income

ADO

7,181

58

20,057

129

Santa Rosa

2,377

338

6,919

939

USI

96,368

8,327

284,757

26,223

$

105,926

$

8,723

$

311,733

$

27,291

Pro Forma Results

The following unaudited pro forma information has been prepared as if the 2018 acquisitions described above 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, 2017.  Further, the pro forma information does not purport to be indicative of future financial operating results.  The pro forma results for the three and nine months ended September 30, 2019 do not include any adjustments from our actual results as all 2018 acquisitions were wholly-owned for the entire period.  Our pro forma results are presented below, in thousands:

Unaudited Pro Forma for the

Nine Months Ended September 30,

    

2019

    

2018

Net sales

$

1,961,771

$

1,878,179

Net income

$

145,011

$

105,410

The following table details the additional expense included in the unaudited pro forma net income as if the 2018 acquisitions described above had taken place on January 1, 2017.  Our pro forma results are presented below, in thousands:

Unaudited Pro Forma for the

Nine Months Ended September 30,

    

2019

    

2018

Amortization of intangible assets

$

$

5,039

Income tax expense (using 26.5% and 27.0% effective tax rate in 2019 and 2018, respectively)

$

$

3,407

Purchase Price Allocations

The estimated fair values of the assets acquired and liabilities assumed for the 2018 acquisitions, as well as the fair value of consideration transferred, are presented below as of September 30, 2019, in thousands:

2018 Acquisitions

Completed During the Year Ended December 31, 2018

    

ADO

    

Santa Rosa

    

USI

Total

Estimated fair values:

Cash

$

939

$

$

14,817

$

15,756

Accounts receivable

3,434

1,433

61,445

66,312

Inventories

2,337

104

14,029

16,470

Prepaid and other assets

135

7

3,439

3,581

Property and equipment

951

522

33,126

34,599

Intangible assets

14,090

1,850

165,400

181,340

Goodwill

2,631

3,014

281,364

287,009

Accounts payable

(908)

(1,099)

(17,927)

(19,934)

Accrued liabilities

(609)

(34,686)

(35,295)

Deferred tax liability

(34,469)

(34,469)

Net assets acquired

$

23,000

$

5,831

$

486,538

$

515,369

2018 Acquisitions

Completed During the Year Ended December 31, 2018

  

ADO

  

Santa Rosa

  

USI

  

Total

Fair value of consideration transferred:

Cash

$

22,172

$

5,831

$

486,538

$

514,541

Deferred consideration

Contingent consideration

828

828

Total consideration transferred

$

23,000

$

5,831

$

486,538

$

515,369

Estimates of acquired intangible assets related to the 2018 acquisitions are as follows, as of September 30, 2019, dollars in thousands:

    

Estimated Fair Value

    

Weighted Average Estimated Useful Life (Years)

2018 Acquisitions:

Customer relationships

$

168,820

12

Trademarks and trade names

11,260

9

Non-competition agreements

1,260

5

Total intangible assets for 2018 acquisitions

$

181,340

11

As third party or internal valuations are finalized, certain tax aspects of the foregoing transactions are completed, and customer post-closing reviews are concluded, adjustments may be made to the fair value of assets acquired, and in some cases total purchase price, through the end of each measurement period, generally one year following the applicable acquisition date.  Various 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 respective dates of acquisition.

Goodwill to be recognized in connection with these acquisitions is attributable to the synergies expected to be realized and improvements in the businesses after the acquisitions. Of the $287.0 million of goodwill recorded from the 2018 acquisitions, $33.2 million is expected to be deductible for income tax purposes.

Contingent Consideration

On February 27, 2017, we acquired substantially all of the assets of EcoFoam, a residential and light commercial insulation installation company with locations in Colorado Springs and Denver, Colorado.  The purchase price of approximately $22.3 million was funded by cash on hand of $20.2 million and contingent consideration of $2.1 million. The contingent consideration arrangement requires additional consideration to be paid by TopBuild to the sellers of EcoFoam based on EcoFoam’s attainment of annual revenue targets over a three-year period.  The total amount of undiscounted contingent consideration which TopBuild may be required to pay under the arrangement is $2.5 million.  The fair value of $2.1 million contingent consideration recognized on the acquisition date was estimated by applying the income approach using discounted cash flows.  That measure is based on significant Level 3 inputs not observable in the market.  The significant assumption includes a discount rate of 9.5%.  Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets.  We made contingent payments of $0.8 million in the second quarters of 2019 and 2018.

The acquisition of ADO included a contingent consideration arrangement that requires additional consideration to be paid by TopBuild to the sellers of ADO based on the achievement of certain EBITDA thresholds over a two-year period.  The range of the undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between zero and $1.0 million.  The fair value of the contingent consideration recognized on the acquisition date of $0.8 million was estimated by applying the income approach using discounted cash flows.  That measure is based on significant Level 3 inputs not observable in the market.  The significant assumption includes a discount rate of 9.5%.  Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets.

The acquisition of Santa Rosa included a contingent consideration arrangement that required additional consideration to be paid by TopBuild based on the achievement of a gross revenue target for 2018. The range of undiscounted amounts TopBuild could be required to pay under the contingent consideration was between zero and $0.25 million, which also represents the fair value recognized on the acquisition date. In the first quarter of 2019, we paid $0.25 million in full and had no remaining contingent consideration obligation related to Santa Rosa as of March 31, 2019. 

Contingent consideration is recorded in the condensed consolidated balance sheets in accrued liabilities and other liabilities.  Adjustments to the fair value of contingent consideration are reflected in selling, general, and administrative expense in the condensed consolidated statements of operations and are included in the acquisition related costs above.

The following table presents the fair value of contingent consideration, in thousands:

    

EcoFoam

    

ADO

    

Santa Rosa

Date of Acquisition

February 27, 2017

January 10, 2018

January 18, 2018

Fair value of contingent consideration recognized at acquisition date

$

2,110

$

828

$

250

Contingent consideration at December 31, 2018

$

1,573

$

343

$

250

Additions

Change in fair value of contingent consideration during the nine months ended September 30, 2019

71

(220)

Payment of contingent consideration during the nine months ended September 30, 2019

(841)

(250)

Liability balance for contingent consideration at September 30, 2019

$

803

$

123

$