Note 6 - Acquisitions

12 Months Ended

Jan. 01, 2022

Notes to Financial Statements

Business Combination Disclosure [Text Block]

6.     ACQUISITIONS

The purchase method of accounting in accordance with FASB ASC 805, “Business Combination,” was applied for all acquisitions.  This requires the cost of an acquisition to be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition with the excess cost accounted for as goodwill.  Goodwill arising from the acquisitions is attributable to expected sales synergies from combining the operations of the acquired business with those of the Company.

Future Contingent Payments

As of January 1, 2022, the Company had two active acquisition agreements whereby additional contingent consideration may be earned by the former shareholders: 1) effective October 1, 2017, the Company acquired all of the stock of PSR Engineering Solutions d.o.o. Beograd (Voždovac) (“PSR”) and 2) effective September 30, 2018, the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC (together, “TKE”). The Company estimates future contingent payments at January 1, 2022 as follows:

Fiscal Year Ending	Total
December 31, 2022	$	103
December 30, 2023		600
Estimated future contingent consideration payments	$	703

Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. In the fourth quarter of 2021, the Company remeasured the value of its contingent consideration. The primary driver for remeasuring the contingent consideration was the performance by Thermal Kinetics Engineering (“TKE”) acquired by RCM in 2018.  TKE had very high yearly EBIT targets to achieve earn-out consideration.  TKE performed quite well but two factors contributed to TKE not hitting its targets.  The first was the COVID-19 pandemic which overlapped earn-out years 2 and 3.  TKE had numerous projects in its pipeline that were delayed or eliminated by prospective clients.   The second factor relates to a specific client in earn-out year 2.  This client experienced some problems with the product output, TKE agreed to fix the equipment to keep a valued client happy, thus the additional cost caused TKE to miss its earn-out target.  Based on these factors, the Company decided to amend its asset purchase agreement with TKE to a total of $0.7 million. Potential future contingent payments to be made to all active acquisitions after January 1, 2022 are capped at a cumulative maximum of $0.7 million.  The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of January 1, 2022.  Contingent consideration related to acquisitions is recorded at fair value (level 3) with changes in fair value recorded in other (expense) income, net.

For acquisitions that involve contingent consideration, the Company records a liability equal to the fair value of the estimated contingent consideration obligation as of the acquisition date. The Company determines the acquisition date fair value of the contingent consideration based on the likelihood of paying the additional consideration. The fair value is estimated using projected future operating results and the corresponding future earn-out payments that can be earned upon the achievement of specified operating objectives and financial results by acquired companies using Level 3 inputs and the amounts are then discounted to present value. These liabilities are measured quarterly at fair value, and any change in the fair value of the contingent consideration liability is recognized in the consolidated statements of operations. During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in the consolidated statements of operations.

In the fourth quarter of 2021, the Company remeasured the value of its contingent consideration. The primary driver for remeasuring the contingent consideration was the performance by Thermal Kinetics Engineering (“TKE”) acquired by RCM in 2018.  This remeasurement lead to a $1.7M reduction to the contingent consideration liability.  TKE had very high yearly EBIT targets to achieve earn-out consideration.  TKE performed quite well but two factors contributed to TKE not hitting its targets.  The first was the COVID-19 pandemic which overlapped earn-out years 2 and 3.  TKE had numerous projects in its pipeline that were delayed or eliminated by prospective clients.   The second factor relates to a specific client in earn-out year 2.  This client experienced some problems with the product output, TKE agreed to fix the equipment to keep a valued client happy, thus the additional cost caused TKE to miss its earn-out target.  Based on these factors, the Company decided to amend its asset purchase agreement with TKE.

The Company paid contingent consideration of $0.5 million and $0.3 million during the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021, respectively. 

The changes in the liability for contingent consideration from acquisitions for the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021 are as follows:

Balance as of December 28, 2019	$	3,058
Contingent payments made		(345	)
Changes in fair value of contingent payments		145
Balance as of January 2, 2021	$	2,858
Contingent payments made		(494	)
Changes in fair value of contingent consideration		52
Remeasurement of contingent consideration		(1,713	)
Balance as of January 1, 2022	$	703

Sale of Assets

On July 30, 2021, the Company sold the principal assets and certain liabilities of its Pickering and Kincardine offices, located in Ontario, Canada. These two offices were often referred to as Canada Power Systems and principally provided engineering services to two major nuclear power providers in Canada. The two Canada Power Systems offices were part of a reporting unit within the Company’s Engineering segment. The Company will continue to offer other engineering services in Canada and similar services in the United States.  The Company evaluated this transaction under ASC 205-20, discontinued operations and determined it did not meet the requirements to be treated as such.  For the fifty-two week period ended January 1, 2022 and fifty-three week period ended January 2, 2021, these two offices generated revenue of $4.9 million and $11.8 million, respectively.  The Company recorded a gain on the sale of these net assets of $2.4 million.  The purchase agreement provides for a typical indemnity escrow held by an independent escrow agent in the amount of $0.8 million. The escrow has not been recognized in the Company’s financial statements, as the Company does not control the escrow. Provided there are no asserted indemnity claims, the Company expects to receive the $0.8 million about 18 months from the purchase date.