Mergers and Acquisitions

9 Months Ended

Jul. 01, 2012

Mergers and Acquisitions

Mergers and Acquisitions

3.Mergers and Acquisitions

In fiscal 2012, we made acquisitions that enhanced our service offerings and expanded our geographic presence in our Engineering and Consulting Services (“ECS”) and Technical Support Services (“TSS”) segments.  The aggregate fair value of the purchase price for these acquisitions was approximately $65 million.  Of this amount, $19 million of estimated contingent earn-outs as of the respective acquisition dates was recorded as a liability on our condensed consolidated balance sheet at July 1, 2012.  Goodwill additions resulting from business combinations are largely attributable to the existing workforce of the acquired companies and synergies expected to arise after the acquisitions.  No pro forma results are presented for the respective interim periods as the effect of these acquisitions was not considered material, individually or in aggregate, to our condensed consolidated financial statements.

At the beginning of the first quarter of fiscal 2011, we acquired all of the outstanding capital stock of BPR, Inc. (“BPR”), a Canadian scientific and engineering services firm that provides multidisciplinary consulting and engineering support for water, energy, industrial plants, buildings and infrastructure projects.  This acquisition further expanded our geographic presence in eastern Canada, and enabled us to provide clients with additional services throughout Canada.  BPR is part of our ECS segment.  As of the acquisition date, the estimated fair value of the purchase price was approximately $186 million, which resulted in $128.1 million of goodwill.  The goodwill amount represented the value paid for the assembled work force, the international geographic presence in eastern Canada, and engineering and consulting expertise.  The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date:

	Amount
	(in thousands)
Current assets	$	77,698
Property and equipment	7,178
Goodwill	128,140
Intangible and other assets	36,988
Current liabilities	(42,481)
Long-term deferred taxes	(9,622)
Noncontrolling interests	(12,222)
Net assets acquired	$	185,679

In fiscal 2011, we made other acquisitions that enhanced our service offerings and expanded our geographic presence in the ECS and TSS segments.  The aggregate fair value of the purchase price for these acquisitions was approximately $100 million.  For fiscal 2011 acquisitions, the fair value purchase price included estimated contingent earn-out liabilities as of the respective acquisition dates in the aggregate amount of $58.5 million.

Certain of our acquisition agreements include contingent earn-out arrangements, which are generally based on the achievement of future operating income thresholds.  The contingent earn-out arrangements are based upon our valuations of the acquired companies and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved.  For acquisitions completed prior to fiscal 2010, contingent earn-out payments are accrued as “Contingent earn-out liabilities” when the related operating income thresholds have been achieved, and a corresponding increase in goodwill is recorded.  These contingent earn-out payments are reflected as cash flows used in investing activities on the condensed consolidated statements of cash flows in the period paid.  At July 1, 2012, there was a maximum of $6.0 million for contingent consideration related to acquisitions completed prior to fiscal 2010 that will be recorded as an addition to goodwill if earned.

For acquisitions consummated in or after fiscal 2010, the fair values of these earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates.  For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in “Estimated contingent earn-out liabilities” and “Other long-term liabilities” on the condensed consolidated balance sheets.  We consider several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following:  (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former shareholders of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of our other key employees.  The contingent earn-out payments are not affected by employment termination.

We perform fair value measurements in accordance with the Financial Accounting Standards Board’s (“FASB”) guidance on “Fair Value Measurements and Disclosures”.  This standard defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance.  This standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three levels:

Level 1:	quoted prices in active markets for identical assets or liabilities.
Level 2:	quoted prices that are observable for the asset or liability, either directly or indirectly such as quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in market that are not active.
Level 3:	unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy.  We use a probability weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount.  The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally two or three years), and the probability outcome percentages we assign to each scenario.  Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent earn-out obligation.  At July 1, 2012, there was a maximum of $80.5 million for contingent consideration outstanding related to acquisitions completed in or after fiscal 2010.  We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates.  Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense and did not have a material impact on earnings in the first nine months of fiscal 2012 or 2011.  Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income, and resulted in gains of $1.7 million and $2.0 million for the third quarter and first nine months of fiscal 2012, respectively, compared to gains of $1.1 million and $1.6 million, respectively, for the same periods in fiscal 2011.

Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings.  The amount paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in our condensed consolidated statements of cash flows.  Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities.

The aggregate current estimated earn-out liabilities of $48.3 million and $64.1 million are reported in “Estimated contingent earn-out liabilities”, and the aggregate non-current estimated earn-out liabilities of $19.0 million and $11.0 million are reported in “Other long-term liabilities” on the condensed consolidated balance sheets at July 1, 2012 and October 2, 2011, respectively.  In the first nine months of fiscal 2012, $30.4 million of earn-outs were paid to former shareholders.  Of this amount, we reported $18.1 million as cash used in financing activities, $0.6 million as cash used in operating activities and $11.7 million as cash used in investing activities.  In the first nine months of fiscal 2011, $21.8 million of earn-outs were paid to former shareholders, all of which was reported as cash used in investing activities.