3.	ACQUISITION

On July 31, 2017, through its newly-formed, wholly-owned subsidiary, Trex Commercial Products, Inc., the Company acquired certain assets and assumed certain liabilities of SC Company for $71.8 million in cash. The Company used cash on hand and $30.0 million of funding from its existing revolving credit facility, which was fully paid on August 17, 2017, to acquire the assets. The acquired business designs, engineers and markets modular architectural railing and staging systems for the commercial and multi- family market, including sports stadiums and performing arts venues. As a result of the purchase, the Company gained access to growing commercial markets, expanded its custom design and engineering capabilities, and added the contract architect and specifier communities as new channels for its products.

The acquisition was accounted for using the acquisition method of accounting under U.S. Generally Accepted Accounting Principles, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The fair values of consideration transferred and net assets acquired were determined using a combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820, “Fair Value Measurements and Disclosures.” The Company believes that the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. The Company’s consolidated results of operations include the operating results of the acquired business from the date of acquisition. The Company’s consolidated balance sheets at December 31, 2018 and December 31, 2017 includes the acquired assets and any liabilities assumed.

Based on the Company’s valuation, total consideration of $71.8 million was allocated to the assets acquired and liabilities assumed, as follows (in thousands):


Accounts receivable, net	$	8,357
Contract retainage		1,948
Inventories, net		2,344
Prepaid expenses and other assets		1,223
Revenues in excess of billings		3,463
Fixed assets, net		1,264
Intangible assets		4,900
Goodwill		57,938
Accounts payable		(3,990	)
Accrued liabilities and other expenses		(2,329	)
Billings in excess of revenues		(1,752	)
Customer deposits		(1,562	)

Total consideration	$	71,804

Goodwill of $57.9 million is primarily attributable to the potential opportunity for the Company to offer full service railing systems in the growing commercial and multi-family markets, access to a complementary product category with a track record of substantial revenue growth, the ability to achieve economies of scale around raw material procurement, an increase in the range of products the Company may offer its core customers, and intangible assets that do not qualify for separable or legal criterion, such as an assembled workforce. The amount of goodwill that was amortized and deductible for tax purposes in 2018 and 2017 was $3.9 million and $1.6 million, respectively. Primarily all of the goodwill was recorded to Trex Commercial. The fair value attributed to intangible assets, which consists of production backlog and trade names and trademarks, is being amortized straight line over 12 months and is based on the estimated economics of the assets. The fair value attributed to the intangible assets acquired and goodwill was based on assumptions and other information compiled by management, including independent valuations that utilized established valuation techniques.

During the year ended December 31, 2018, Trex Commercial generated $71.0 million of net sales and $2.7 million of net income, which included amortization expense of $2.9 million. From July 31, 2017, through December 31, 2017, Trex Commercial generated $21.8 million in net sales and incurred a net loss of $2.3 million, and which included $0.5 million of acquisition-related expenses and $2.0 million of amortization expense during the year ended December 31, 2017, which are included in selling, general and administrative expense.