Annual report pursuant to Section 13 and 15(d)

Acquisitions

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Acquisitions
 12 Months Ended
Dec. 31, 2011
Acquisition [Abstract]  
Acquisitions
(5)  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 USPS and 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. Additional cash consideration of $3 million due to the sellers based on the final working capital adjustment was recorded as additional goodwill and an accrued liability during December 2011.  The $3 million was paid to the sellers during the first quarter of 2012. WBI’s results of operations are included in the accompanying consolidated financial statements beginning June 6, 2011. WBI had revenues of approximately $83.1 million and operating income of approximately $16.3 million from the acquisition date through December 31, 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 $1.8 million for the year ended December 31, 2011, which included financial advisory, legal, accounting and other external costs directly related to the WBI acquisition and are included in selling, general and administrative expenses in the accompanying 2011 statement of income.

We filed an election under Internal Revenue Code Section 338(h) (10) to treat the WBI acquisition as a sale of assets for tax purposes.  We made a payment of approximately $12 thousand 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 was made to the sellers.  The additional amounts paid to the sellers were recorded as additional purchase price.

We may be required to make additional payments of up to $40 million over a four-year post-closing period if WBI achieves certain financial performance targets.  Included in earn-out obligations on the December 31, 2011 balance sheet is an earn-out liability of approximately $11.2 million, net of the current portion of $4.2 million classified in accrued expenses and other current liabilities, which represents our best estimate of the present value of the earn-out obligation. 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 $182 thousand related to the increase in the fair value of the earn-out obligation during the year ended December 31, 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. 
 
We allocated the purchase price as follows (in thousands):

   
Fair
  
Description
  
Value
  
Cash
  $ 1,556  
Accounts receivable
     11,953  
Inventories
     37,232  
Other current assets
     6,709  
Property and equipment
     1,228  
Intangibles – customer-related
     69,400  
Intangibles – acquired technologies
     12,400  
Intangibles – trade name
     7,600  
Current liabilities
     (12,893 )
         
Net identifiable assets acquired
     135,185  
Goodwill
     61,157  
         
Total consideration
   $ 196,342  
         
Cash consideration
   $ 181,095  
Acquisition date fair value of earn-out obligation
     15,247  
Total consideration
   $ 196,342  

The amount of goodwill recorded for the WBI acquisition as of the acquisition date was approximately $61.2 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 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.

   
Years ended December 31,
  
 
2011
    
2010
  
           
Revenues
   $ 687,029     $ 1,021,385  
                 
Net income
   $ 27,885     $ 36,708  
                 
Basic and diluted earnings per share
   $ 5.33     $ 7.07  


Akimeka, LLC

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 included $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 consolidated financial statements beginning August 19, 2010.

Upon acquisition, potential additional payments (“earn-out”) were payable to the sellers of up to $11 million over a three-year post-closing period if Akimeka achieved certain financial performance targets. Akimeka did not achieve the required financial performance targets for the year ended December 31, 2011, therefore no earn-out was due. Included in earn-out obligations on the December 31, 2011 balance sheet is an earn-out liability of approximately $5.1 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 $2.7 million related to the decrease in the fair value of the earn-out obligation during the year ended December 31, 2011, as reductions of contract costs and earn-out obligations.

G&B Solutions, Inc.

On April 14, 2008, we acquired G&B.  Under the terms of the acquisition, we were required to make additional payments (“earn-out”) of up to $4.2 million over a three-year post-closing period if G&B achieved certain financial performance targets. Approximately $1.4 million per year was paid to the seller in 2009 and 2010 and approximately $1.1 million was paid to the seller in 2011, based on G&B’s performance during the respective earn-out periods.  The payments were recorded as goodwill.  

Integrated Concepts and Research Corporation

On June 4, 2007, we acquired ICRC for approximately $11.8 million.  Based on ICRC’s performance total earn-out payments of approximately $2.9 million were paid through December 31, 2010 and were recorded as additional goodwill.  Additional goodwill and a corresponding liability of approximately $314 thousand were recorded as of December 31, 2011 for the earn-out payment that will be made to the seller as a result of achievement of the specified 2011 earnings.