Note 3 - Acquisitions

9 Months Ended

Sep. 30, 2015

Disclosure Text Block Supplement [Abstract]

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

(3) Acquisitions

ExamWorks operates in a highly fragmented industry and as of September 30, 2015 has completed 52 acquisitions since July 14, 2008. A key component of ExamWorks’ acquisition strategy is growth through acquisitions that expand its geographic coverage, that provide new or complementary lines of business, expand its portfolio of services and that increase its market share.

The Company has accounted for all business combinations using the purchase method to record a new cost basis for the assets acquired and liabilities assumed. The Company recorded, based on a preliminary purchase price allocation, intangible assets representing client relationships, tradenames, covenants not to compete, technology and the excess of purchase price over the estimated fair value of the tangible assets acquired and liabilities assumed as goodwill in the accompanying consolidated financial statements. The goodwill is attributable to synergies achieved through the streamlining of operations combined with improved margins attainable through increased market presence. The results of operations are reflected in the consolidated financial statements of the Company from the date of acquisition.

(a) 2014 Acquisitions

In 2014, the Company completed the following individually insignificant acquisitions, as defined in SEC Regulation S-X Rule 3-05, with an aggregate purchase price of $194.8 million, comprised of $189.0 million cash consideration less cash acquired of $1.1 million, and $6.9 million of contingent consideration. In conjunction with these 2014 acquisitions, the Company incurred aggregate transaction costs of $1.6 million, of which $186,000 and $916,000 was incurred in the three and nine months ended September 30, 2014, respectively. The Company did not incur any costs associated with the indicated acquisitions in the first three quarters of 2015. These amounts are reported in SGA expenses in the Company’s accompanying Consolidated Statements of Comprehensive Income (Loss). These acquisitions enhanced and expanded the presence and service offerings of the Company. 

Company name	Form of acquisition	Date of acquisition
Newton Medical Group (United States)	Substantially all of the assets and assumed certain liabilities	January 13, 2014
Cheselden (United Kingdom)	100% of the outstanding share capital	January 16, 2014
G&L Intermediate Holdings (“Gould & Lamb”) (United States)	100% of the outstanding common stock	February 3, 2014
Assess Medical Group Pty Ltd (Australia)	100% of the outstanding common stock	February 14, 2014
Solomon Associates (United States)	Substantially all of the assets and assumed certain liabilities	May 30, 2014
Ability Services Network (United States)	100% of the outstanding common stock	June 6, 2014
Expert Medical Opinions (United States)	Substantially all of the assets and assumed certain liabilities	August 22, 2014

The preliminary allocation of consideration for these acquisitions is summarized as follows (in thousands):

	Preliminary purchase price allocation December 31, 2014			Adjustments/ reclassifications			Preliminary purchase price allocation September 30, 2015
Equipment and leasehold improvements		886			—			886
Customer relationships		50,216			—			50,216
Tradenames		10,342			—			10,342
Covenants not to compete		590			—			590
Technology		1,870			—			1,870
Goodwill		136,034			470			136,504
Net deferred tax liability associated with step-up in book basis		(9,041	)		—			(9,041	)
Assets acquired and liabilities assumed, net		3,785			(379	)		3,406
Totals		194,682			91			194,773

In 2015, the Company recorded adjustments to working capital resulting in an increase in total consideration paid of $91,000. Goodwill of $116.5 million and other intangible assets of $36.7 million are expected to be deductible for U.S. federal income tax purposes, a portion of which are subject to the provisions of IRC Section 901(m) which contain certain foreign tax credit limitations. The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. 

(b) 2015 Acquisitions

In 2015, the Company completed the following individually insignificant acquisitions, as defined in SEC Regulation S-X Rule 3-05, with an aggregate purchase price of $11.9 million, comprised of $12.6 million cash consideration less cash acquired of $655,000. In conjunction with the 2015 acquisitions, the Company incurred aggregate transaction costs of $170,000, of which $35,000 were incurred in the nine months ended September 30, 2015. These amounts are reported in SGA expenses in the Company’s accompanying Consolidated Statements of Comprehensive Income (Loss). These acquisitions enhanced and expanded the presence and service offerings of the Company.

Company name	Form of acquisition	Date of acquisition
ReliableRS (United States)	Substantially all of the assets and assumed certain liabilities	January 2, 2015
Landmark Exams & Maven Exams (United States)	Substantially all of the assets and assumed certain liabilities	April 14, 2015
Karen Rucas & Associates (Canada)	Substantially all of the assets and assumed certain liabilities	July 13, 2015

The preliminary allocation of consideration for these acquisitions is summarized as follows (in thousands): 

	Preliminary purchase price allocation September 30, 2015
Equipment and leasehold improvements	$	79
Customer relationships		4,465
Tradename		1,065
Covenants not to compete		182
Goodwill		5,208
Assets acquired and liabilities assumed, net		904
Total	$	11,903

Goodwill of $5.0 million and other intangible assets of $5.4 million are expected to be deductible for U.S. federal income tax purposes. The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. The 2015 acquisitions contributed $2.5 million in revenues and $27,000 in operating loss and $5.9 million in revenues and $809,000 in operating income for the three and nine months ended September 30, 2015, respectively.

(c) Pro forma Financial Information

The following unaudited pro forma results of operations for the three and nine months ended September 30, 2014 and 2015 assumes that the 2014 acquisitions were completed on January 1, 2013 and the 2015 acquisitions were completed on January 1, 2014.

For the three and nine months ended September 30, 2014, the pro forma results include adjustments to reflect (reduced) additional interest and other expenses, net of $(191,000) and $45,000, respectively, associated with the payoff or funding of the acquisitions assuming that acquisition related debt was incurred on those referenced above.  In addition, incremental depreciation and amortization expense was recorded as if the acquisitions had occurred on the dates referenced above and amounted to $490,000 and $4.6 million, respectively, for the three and nine months ended September 30, 2014.  Finally, adjustments of $237,000 and $6.4 million were made to reduce SGA expenses for the three and nine months ended September 30, 2014, respectively, principally related to certain salary and other personal expenses attributable to the previous owners of the acquired businesses.  These adjustments represent contractual reductions and are considered to be non-recurring and are not expected to have a continuing impact on the operations of the Company.

For the nine months ended September 30, 2015, the pro forma results include adjustments to reflect additional interest and other expenses of $82,000 associated with the funding of the acquisitions assuming that acquisition related debt was incurred on those referenced above.  In addition, incremental depreciation and amortization expense was recorded as if the acquisitions had occurred on the dates referenced above and amounted to $3,000 and $389,000 for the three and nine months ended September 30, 2015, respectively.  Finally, adjustments of $(28,000) and $401,000 were made to (reduce) and increase SGA expenses for the three and nine months ended September 30, 2015, respectively, principally related to certain salary and other personal expenses attributable to the previous owners of the acquired businesses.  These adjustments represent contractual reductions or increases and are considered to be non-recurring and are not expected to have a continuing impact on the operations of the Company. 

	Three months ended September 30,				Nine months ended September 30,
	2014		2015		2014		2015
	(In thousands, except per share data)
Pro forma revenues	$	207,701	$	206,080	$	605,755	$	614,306
Pro forma net income		3,282		7,152		7,116		1,367
Pro forma income per share: Basic	$	0.08	$	0.17	$	0.19	$	0.03
Pro forma income per share: Diluted	$	0.08	$	0.17	$	0.17	$	0.03

The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions been effective as of January 1 of the respective years or of future operations of the Company.