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Business Combinations
 9 Months Ended
Mar. 31, 2017
Business Combinations  
Business Combinations

 

2.  Business Combinations

 

Under ASU 805, the acquisition method of accounting requires the Company to record assets acquired and liabilities assumed in an acquisition at their estimated fair values at the date of acquisition. Any excess of the total estimated purchase price over the estimated fair value of the net assets acquired should be recorded as goodwill.  Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, acquired technology, trade names, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.  During the measurement period, which is one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with corresponding adjustments to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

 

AS&E Acquisition

 

On September 9, 2016, the Company acquired by merger 100 percent ownership interest of American Science and Engineering, Inc. (“AS&E”), a leading provider of detection solutions for advanced cargo, parcel and personnel inspection.  AS&E’s operations are included in the Company’s Security division.  The Company financed the total estimated purchase price of $266 million with a combination of cash on hand and borrowings under its existing revolving bank line of credit and also issued Company restricted stock units (“RSUs”) to replace RSUs previously issued by AS&E.  The Company has estimated that $1.4 million of the fair value of these replacement Company RSU awards pertain to the precombination service period and, therefore, this amount has been included in the total estimated purchase price.   Immediately following the close of the acquisition, the Company used $69 million of AS&E’s existing cash on hand to pay down the revolving bank line of credit.

 

The Company is in the process of finalizing its valuation of all the assets acquired and liabilities assumed in the AS&E transaction. As the amounts recorded for certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained about the facts and circumstances that existed at the acquisition date.  The final determination of fair values of certain assets and liabilities will be completed within the measurement period of up to one year from the acquisition date as permitted under GAAP. The AS&E acquisition could necessitate the use of the full one year measurement period to adequately analyze and assess a number of factors used in establishing fair values of the assets and liabilities as of the acquisition date, including values for intangible assets, other accrued expenses and current liabilities, other long-term liabilities, income tax obligations and certain reserves. Any potential adjustments made could be material in relation to preliminary values that have been recorded.

 

The following is a preliminary estimate of the assets acquired and the liabilities assumed by the Company in the acquisition, reconciled to total estimated purchase consideration (in thousands):

 

Cash and cash equivalents

 

$
79,195

 

Accounts receivable

 
25,048

 

Inventories

 
29,725

 

Other current assets

 
7,283

 

Property and equipment

 
5,722

 

Intangible assets

 
74,800

 

Other long-term assets

 
201

 

Accounts payable

 
(5,273

)

Accrued payroll and related expenses

 
(4,723

)

Deferred revenues — current

 
(11,281

)

Advances from customers

 
(13,785

)

Other accrued expenses and current liabilities

 
(7,416

)

Deferred revenues — long term

 
(3,225

)

Deferred income tax liability

 
(9,067

)

Other long-term liabilities

 
(17,966

)

 

 

 

 

Net assets acquired

 
149,238

 

Goodwill

 
116,765

 

 

 

 

 

Total consideration

 

$
266,003

 

 

 

 

 

 

 

The goodwill is largely attributable to expected synergies to be realized from the AS&E transaction, including in relation to the AS&E workforce.

 

Intangible assets are recorded at estimated fair value, as determined by management based on available information, which includes a preliminary valuation prepared by an independent third party. The fair value attributed to the intangible assets acquired was based on preliminary estimates, assumptions and other information compiled by management, including independent valuations that utilized established valuation techniques.  The value attributed to goodwill and intangible assets is not deductible for income tax purposes.  The following table summarizes the fair value of acquired identifiable intangible assets as of the acquisition date (dollar amounts in thousands):

 

 

 

Weighted

 

Gross

 

 

 

Average

 

Carrying

 

 

 

Lives

 

Value

 

Amortizable assets:

 

 

 

 

 

Developed technology

 

10 years

 

$
31,750

 

Customer relationships/backlog

 

7 years

 
27,550

 

 

 

 

 

 

 

Total amortizable assets

 

 

 
59,300

 

Non-amortizable assets:

 

 

 

 

 

Trademarks and trade names

 

 

 
12,300

 

In-process research and development (“IPR&D”)

 

 

 
3,200

 

 

 

 

 

 

 

Total intangible assets

 

 

 

$
74,800

 

 

 

 

 

 

 

 

 

The Company’s condensed consolidated statements of operations include $70.9 million of revenue and $4.7 million of pre-tax income from AS&E for the period from September 10, 2016 to March 31, 2017 and $27.7 million of revenue and $4.9 million of pre-tax income from AS&E for the three months ended March 31, 2017.

 

The following unaudited pro forma results of operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the earliest period presented or the results which may occur in the future. The following unaudited pro forma results of operations assume the AS&E acquisition had occurred on July 1, 2015 (in thousands):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2016

 

2017

 

2016

 

2017

 

Revenues

 

$
235,038

 

$
245,146

 

$
607,645

 

$
726,304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

$
5,161

 

$
19,593

 

$
2,455

 

$
6,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Significant pro forma adjustments incorporated into the pro forma results above for the AS&E acquisition include the recognition of additional amortization expense related to acquired intangible assets and additional interest expense related to debt incurred to finance the acquisition. In addition, significant non-recurring adjustments include the elimination and shift to comparable prior-year periods of non-recurring acquisition-related expenses and employee termination costs related to the integration of AS&E into the Company’s Security division. Total eliminations for these items during the three and nine months ended March 31, 2017 were $0.4 million and $13.6 million, respectively, and these have been added to the comparable prior-year periods.

 

Other Acquisitions

 

During the nine months ended March 31, 2017, the Company completed another acquisition in the Security division that was determined by management to be immaterial.

 

During the nine months ended March 31, 2016, the Company acquired all of the outstanding shares of capital stock of a distributor and manufacturer of electronic components in the United Kingdom, a distributor and manufacturer of flex circuit and touch panel design products in California and a security equipment service company in Brazil. The combined purchase prices consisted of cash payments of $19.6 million and $13.8 million for contingent consideration.

 

Divestitures

 

During the three months ended March 31, 2017, the Company’s Healthcare division completed a divestiture of a business that was determined by management to be immaterial.  The sales price of $12.8 million was settled in cash and resulted in a gain of $2.1 million, which is included in Other income in the condensed consolidated statements of operations.