Note 6 - Acquisitions and Divestitures

9 Months Ended

Oct. 01, 2022

Notes to Financial Statements

Business Combination Disclosure [Text Block]

6.     Acquisitions and Divestitures

Future Contingent Payments

As of October 1, 2022, the Company had one active acquisition agreement whereby additional contingent consideration may be earned by the former shareholders: effective September 30, 2018, the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC (together, “TKE”). The Company estimates future contingent payments at October 1, 2022 as follows:

Fiscal Year Ending	Total
December 31, 2022	$	-
December 30, 2023		300
December 29, 2024		304
Estimated future contingent consideration payments	$	604

For acquisitions that involve contingent consideration, the Company records a liability equal to the fair value of the estimated contingent consideration obligation as of the acquisition date. The Company determines the acquisition date fair value of the contingent consideration based on the likelihood of paying the additional consideration. The fair value is estimated using projected future operating results and the corresponding future earn-out payments that can be earned upon the achievement of specified operating objectives and financial results by acquired companies using Level 3 inputs and the amounts are then discounted to present value. These liabilities are measured quarterly at fair value, and any change in the fair value of the contingent consideration liability is recognized in the consolidated statements of operations. During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in the consolidated statements of operations.

Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates.  The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of October 1, 2022.  Contingent consideration related to acquisitions is recorded at fair value (level 3) with changes in fair value recorded in other (expense) income, net.

In the fourth quarter of 2021, the Company remeasured the value of its contingent consideration. The primary driver for remeasuring the contingent consideration was the performance by TKE.  This remeasurement led to a $1.7 million reduction to the contingent consideration liability relating to the TKE acquisition. TKE had high yearly performance targets to achieve earn-out consideration.  Two factors primarily contributed to TKE not hitting its performance targets.  The first was the COVID-19 pandemic which overlapped earn-out years two and three.  TKE had numerous projects in its pipeline that were delayed or eliminated by prospective clients.   The second factor relates to a specific client in earn-out year three.  This client was dissatisfied with the product output, and TKE agreed to fix the equipment. The additional cost caused TKE to miss its earn-out target.  Based on these factors, the Company determined to amend its asset purchase agreement with TKE, whereby TKE may receive maximum contingent consideration of $0.7 million, with portions earnable based on performance in fiscal years 2022 and 2023.

Potential future contingent payments to be made to all active acquisitions after October 1, 2022 are capped at a cumulative maximum of $0.6 million. The Company paid $0.1 million and $0.5 million of contingent consideration during the thirty-nine weeks ended October 1, 2022 and October 2, 2021, respectively. 

Sale of Assets

On July 30, 2021, the Company sold the principal assets and certain liabilities of its Pickering and Kincardine offices, located in Ontario, Canada. These two offices were often referred to as Canada Power Systems and principally provided engineering services to two major nuclear power providers in Canada. The two Canada Power Systems offices were part of a reporting unit within the Company’s Engineering segment. The Company will continue to offer other engineering services in Canada and similar services in the United States.  The Company evaluated this transaction under ASC 205-20, discontinued operations and determined it did not meet the requirements to be treated as such.  For the thirty-nine weeks ended October 2, 2021, these two offices generated revenue of $4.9 million. The purchase agreement provided for a typical indemnity escrow held by an independent escrow agent in the amount of $0.8 million. The Company received a portion of the escrow during the thirteen weeks ended October 1, 2022.  The remaining escrow balance has not been recognized in the Company’s financial statements, as the Company does not control the escrow. Provided there are no asserted indemnity claims, the Company expects to receive up to $0.5 million during the first half of fiscal 2023.