Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

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Acquisitions
 9 Months Ended
Sep. 30, 2011
Acquisition [Abstract]  
Acquisition
(7) Acquisitions

Wheeler Bros., Inc.

On June 6, 2011, we acquired WBI, a supply chain management company headquartered in Somerset, PA.  WBI supplies vehicle parts to the U.S. Postal Service and the DoD.  We see significant opportunities for leveraging WBI’s supply chain capabilities with our work of extending the service lives of legacy ships, vehicles, aircraft and their systems.  
 
Cash paid at closing was $180 million, which includes approximately $1.9 million of prepaid retention bonuses that are being expensed in the post-acquisition period as the employees provide service. As such, the initial cash purchase price was approximately $178.1 million. WBI’s results of operations are included in the accompanying unaudited condensed consolidated financial statements beginning June 6, 2011. WBI had revenues of approximately $47.1 million and operating income of approximately $8.8 million from the acquisition date through September 30, 2011.
 
For the acquisition of WBI, we recorded assets acquired and liabilities assumed at their fair values as of the acquisition date.  We incurred acquisition-related transaction costs of approximately $15 thousand and $1.8 million for the three- and nine-month periods ended September 30, 2011, respectively, which included financial advisory, legal, accounting and other external costs directly related to the acquisition and are included in selling, general and administrative expenses in the accompanying statements of income.
 
We plan to file an election under Internal Revenue Code Section 338(h) (10) to treat the WBI acquisition as a sale of assets for tax purposes.  We will make a payment to the sellers for the sellers’ incremental tax liabilities as a result of the election.  Our tax advantages resulting from the 338(h) (10) election are expected to significantly exceed the additional payment that will be made to the sellers.  The additional federal and state income tax liabilities paid to the sellers will be recorded as additional purchase price.
 
We may be required to make additional payments of up to an aggregate of $40 million over a four-year post-closing period if WBI achieves certain financial performance targets.  Included in earn-out obligations on the September 30, 2011 balance sheet is an earn-out liability of approximately $15.3 million, which represents our best estimate of the present value of the earn-out obligation. After the June 30, 2011 interim financial statements were issued, we completed our analysis of the earn-out obligation and estimated the fair value to be approximately $15.2 million.  The carrying amount of the earn-out obligation was retrospectively decreased by approximately $7.6 million as of September 30, 2011, with a corresponding decrease to goodwill. Interest expense and subsequent changes in the fair value of the earn-out obligations will be recognized in earnings in the period of change through settlement. We recorded an adjustment of $30 thousand related to the increase in the fair value of the earn-out obligation during the quarter ended September 30, 2011 as an increase of contract costs and earn-out obligations.
 
The total estimated purchase price was allocated to WBI’s net assets based on their estimated fair value as of June 6, 2011.  We recorded the excess of the purchase  price  over the acquired net assets as goodwill.   The allocation of the purchase price shown in the table below is preliminary and subject to change based on finalizing our detailed valuations.  We allocated the purchase price as follows (in thousands):

   
Fair
Description
  
Value
Cash
  $ 3,163  
Accounts receivable
     11,953  
Inventories
     37,670  
Other current assets
     4,027  
Property and equipment
     1,637  
Intangibles – customer-related
     69,400  
Intangibles – acquired technologies
     12,400  
Intangibles – trade name
     7,600  
Current liabilities
     (10,211 )
           
Net identifiable assets acquired
     137,639  
Goodwill
     55,703  
           
Total consideration
   $ 193,342  
           
           
Cash consideration
   $ 178,095  
Acquisition date fair value of
  earn-out obligation
     15,247  
Total consideration
   $ 193,342  
           

The amount of goodwill recorded for the WBI acquisition as of the acquisition date was approximately $55.7 million and reflects the strategic advantage of adding supply chain management to the work we have historically performed to extend the life of military ships, vehicles, aircrafts and their installed systems. We believe that the supply chain capabilities we gain through the acquisition of WBI will enable vertical market expansion in our core business of sustaining legacy platforms and systems.  The goodwill recognized is expected to be deductible for income tax purposes. Of the purchase price, $69.4 million was recorded as a customer-related intangible asset that will be amortized on a straight-line basis over 12 years.  Approximately $12.4 million was recorded as an acquired technologies intangible asset that will be amortized on a straight-line basis over 11 years.  In addition, $7.6 million was allocated to WBI’s trade name that will be amortized on a straight-line basis over nine years.  The fair values assigned to the intangible assets acquired were based on preliminary estimates, assumptions, and other information compiled by management, including independent valuations that utilized established valuation techniques.
The following unaudited pro forma information has been presented as if the WBI acquisition had occurred on January 1, 2010.  This information is based on historical results of operations, adjusted for the allocation of purchase price and other acquisition accounting adjustments, and is not necessarily indicative of results had we completed the WBI acquisition on January 1, 2010.

   
Nine months
  
   
ended September 30,
  
 
2011
    
2010
  
           
Revenues
   $ 538,150     $ 772,039  
                 
Net income
   $ 21,547     $ 28,862  
                 
Basic and diluted earnings per share
   $ 4.12     $ 5.56  


Akimeka

On August 19, 2010, we acquired Akimeka, which is headquartered in Hawaii with offices in Virginia, Florida and Texas. Akimeka is a health services information technology consulting company serving the government market. Akimeka is a recognized leader in the DoD health services and logistics sector dedicated to delivering innovative IT solutions.  Akimeka complements our subsidiary, G&B.
 
Cash paid at closing was $33 million, which includes $725 thousand of prepaid retention bonuses that are being expensed in the post-acquisition period as the employees provide service.  As such, the initial cash purchase price was $32.3 million.  Additional cash consideration of approximately $363 thousand was paid in December 2010 to the sellers based on the final working capital calculation. Akimeka's results of operations are included in the accompanying unaudited condensed consolidated financial statements beginning August 19, 2010.
 
We may be required to make additional earn-out payments of up to an aggregate of $11 million over a three-year post-closing period if Akimeka achieves certain financial performance targets.  Included in earn-out obligations on the September 30, 2011 balance sheet is an earn-out liability of approximately $6.2 million, which represents our best estimate of the present value of the earn-out obligation.  We estimated the fair value by using the expected cash flow approach with probability-weighted revenue inputs and using an appropriate discount rate. Interest expense and subsequent changes in the fair value of the earn-out obligations will be recognized in earnings in the period of the change through settlement. We recorded adjustments of $608 thousand and $1.6 million related to the decrease in the fair value of the earn-out obligation during the three and nine months ended September 30, 2011, respectively, as reductions of contract costs and earn-out obligations.