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Mergers and Acquisitions | 3 Months Ended
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Jan. 01, 2017
Mergers and Acquisitions |
Mergers and Acquisitions | 3. Mergers and Acquisitions We did not complete any acquisitions in the first quarter of fiscal 2017. On January 18, 2016, we acquired control of Coffey International Limited (“Coffey”), headquartered in Sydney, Australia. Coffey had approximately 3,300 staff delivering technical and engineering solutions in international development and geoscience. Coffey significantly expands our geographic presence, particularly in Australia and Asia Pacific, and is part of our RME segment. In addition to Australia, Coffey’s international development business has operations supporting federal government agencies in the U.S. and the United Kingdom. The fair value of the purchase price for Coffey was $76.1 million, in addition to $65.1 million of assumed debt, which consisted of secured bank term debt of $37.1 million and unsecured corporate bond obligations of $28.0 million. All of this debt was paid in full from other borrowings in the second quarter of fiscal 2016 subsequent to the acquisition. In the second quarter of fiscal 2016, we also acquired INDUS Corporation (“INDUS”), headquartered in Vienna, Virginia. INDUS is an information technology solutions firm focused on water data analytics, geospatial analysis, secure infrastructure, and software applications management for U.S. federal government customers, and is included in our Water, Environment and Infrastructure (“WEI”) segment. The fair value of the purchase price for INDUS was $18.7 million. Of this amount, $14.0 million was paid to the sellers and $4.7 million was the estimated fair value of contingent earn-out obligations, with a maximum of $8.0 million, based upon the achievement of specified operating income targets in each of the two years following the acquisition. The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the respective acquisition dates for our acquisitions completed in fiscal 2016 (in thousands):
Accounts receivable |  | $ | 71,515 |
Other current assets |  | 18,869 |
Property and equipment |  | 14,218 |
Goodwill |  | 108,323 |
Backlog and trade name intangible assets |  | 29,445 |
Other assets |  | 747 |
Current liabilities |  | (78,311) |
Borrowings |  | (65,086) |
Other long-term liabilities |  | (4,885) |
Net assets acquired |  | $ | 94,835 |
Goodwill additions resulting from the above business combinations are primarily attributable to the existing workforce of the acquired companies and the synergies expected to arise after the acquisitions. Specifically, goodwill additions related to the fiscal 2016 acquisitions primarily represent the value of workforces with distinct expertise in the international development, geoscience, and software applications management markets. In addition, these acquired capabilities, when combined with our existing global consulting and engineering business, result in opportunities that allow us to provide services under contracts that could not have been pursued individually by either us or the acquired companies. The results of these acquisitions were included in our condensed consolidated financial statements from their respective closing dates. Backlog and trade name intangible assets include the fair value of existing contracts and the underlying customer relationships with lives ranging from 1 to 5 years (weighted average of approximately 3 years) and the fair value of trade names with lives ranging from 3 to 5 years. The table below presents summarized unaudited consolidated pro forma operating results including the related acquisition, integration and debt pre-payment charges, assuming we had acquired Coffey and INDUS at the beginning of fiscal 2016. These pro-forma operating results are presented for illustrative purposes only and are not indicative of the operating results that would have been achieved had the related events occurred at the beginning of fiscal 2016.
|  | Pro-Forma |
|  | Three Months Ended |
|  | January 1, 2017 |  | December 27, 2015 |
|  | (in thousands, except per share data) |
Revenue |  | $ | 668,851 |  | $ | 671,669 |
Operating income |  | 39,855 |  | 14,238 |
Net income attributable to Tetra Tech |  | 26,562 |  | 3,016 |
Earnings per share attributable to Tetra Tech |  |  |  |  |
Basic |  | $ | 0.47 |  | $ | 0.05 |
Diluted |  | $ | 0.46 |  | $ | 0.05 |
Coffey and INDUS combined contributed $102.3 million in revenue and $7.4 million in operating income for the first quarter of fiscal 2017. Coffey’s contributions included the benefit of post-acquisition integration with our existing environmental and international development businesses. Amortization of intangible assets was $2.6 million for the first quarter of fiscal 2017. Most of our acquisition agreements include contingent earn-out agreements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based on our valuations of the acquired companies, and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved. The fair values of any 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 “Current contingent earn-out liabilities” and “Long-term contingent earn-out liabilities” on our 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 owners 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 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. 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 contingent earn-out 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 contingent earn-out liability on the acquisition date is reflected as cash used in operating activities. 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. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income. We had no adjustments to our contingent earn-out liabilities in the first quarter of fiscal 2017. During the first quarter of fiscal 2016, we recorded an increase in our contingent earn-out liabilities and reported a related loss in operating income of $1.0 million. This loss represented the final cash settlement during the first quarter of fiscal 2016 of an earn-out liability that was valued at $0 at the end of fiscal 2015. At January 1, 2017, there was a total maximum of $14.5 million of outstanding contingent consideration related to acquisitions. Of this amount, $8.9 million was estimated as the fair value and accrued on our condensed consolidated balance sheet. Subsequent Event. On February 1, 2017, we announced the acquisition of Eco Logical Australia, a multi-disciplinary consulting firm with over 160 staff that provide innovative, high-end environmental and ecological services.

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