Mergers and Acquisitions	9 Months Ended
Jun. 29, 2014
Mergers and Acquisitions
Mergers and Acquisitions	3.Mergers and Acquisitions In the second quarter of fiscal 2013, we acquired American Environmental Group, Ltd. (“AEG”), headquartered in Richfield, Ohio. AEG provides environmental, design, construction and maintenance services primarily to solid and hazardous waste, environmental, energy and utility clients. Also in the second quarter of fiscal 2013, we acquired Parkland Pipeline Contractors Ltd., Parkland Pipeline Equipment Ltd., Park L Projects Ltd. and Parkland Projects Ltd. (collectively, “Parkland”), headquartered in Alberta, Canada. Parkland serves the oil and gas industry in Western Canada, and specializes in the technical support, engineering support and construction of pipelines and oilfield facilities. AEG and Parkland are both included in our Remediation and Construction Management (“RCM”) segment. We also made other acquisitions that enhanced our service offerings and expanded our geographic presence in our Engineering and Consulting Services (“ECS”) and Technical Support Services (“TSS”) segments during fiscal 2013. The aggregate fair value of the purchase prices for fiscal 2013 acquisitions was $248.9 million. Of this amount, $171.6 million was paid to the sellers, $2.0 million was recorded as liabilities in accordance with the purchase agreements, and $75.3 million was the estimated fair value of contingent earn-out obligations as of the respective acquisition dates, with an aggregate maximum of $86.7 million upon the achievement of specified financial objectives. In the first quarter of fiscal 2014, we acquired a company that enhanced our service offerings in our ECS segment. 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, the goodwill additions related to the fiscal 2013 acquisitions primarily represent the value of workforces with distinct expertise in the solid and hazardous waste, and oil and gas 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 the consolidated financial statements from their respective closing dates. The purchase price allocations related to acquisitions completed during the fourth quarter of fiscal 2013 and the first quarter of fiscal 2014 are preliminary, and subject to adjustment, based on the valuation and final determination of net assets acquired. We do not believe that any such adjustment will have a material effect on our consolidated results of operations. None of the acquisitions were considered material, individually or in the aggregate, to our condensed consolidated financial statements. As a result, no pro forma information has been provided for the respective periods. 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 “Estimated contingent earn-out liabilities” and “Long-term estimated contingent earn-out liabilities” on the 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 (as described in “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 29, 2013). 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. During the three and nine months ended June 29, 2014, we recorded net decreases in our contingent earn-out liabilities and reported related net gains in operating income of $8.9 million and $34.9 million, respectively, compared with net gains of $7.7 million and $8.7 million, respectively, in the same periods last year. The fiscal 2014 gains primarily resulted from updated valuations of the contingent consideration liability for AEG in the third quarter and Parkland in the second quarter. Adverse weather conditions during the second and third quarter of fiscal 2014 hindered AEG’s ability to complete construction field work. We recognized a net unfavorable operating income adjustment for Parkland related to a single project during the second quarter of fiscal 2014. As a result, we lowered our income projections over the remaining earn-out periods and recorded corresponding reductions of the earn-out liabilities for AEG and Parkland. We also determined that these lower income projections were the result of temporary events, and would not negatively impact AEG and Parkland’s longer-term performance or result in goodwill impairment. However, if our income projections for AEG and Parkland were to decline further, this could result in the impairment of a portion of the combined related goodwill balance of approximately $139 million. In this event, we would also likely have gains in our operating income up to a maximum of the remaining related contingent consideration liabilities. Conversely, if AEG or Parkland’s performance increases beyond our projections, we could incur future losses in operating income if the resulting contingent consideration earned exceeds the current recorded liability. At June 29, 2014, there was a total maximum of $68.3 million of outstanding contingent consideration related to completed acquisitions. Of this amount, $31.5 million was estimated as the fair value and accrued on our condensed consolidated balance sheets. For the nine months ended June 29, 2014, we made $20.6 million of earn-out payments to former owners. Of this amount, we reported $18.7 million as cash used in financing activities and $1.9 million as cash used in operating activities. For the nine months ended June 30, 2013, we made $24.4 million of earn-out payments to former owners. Of this amount, we reported $24.0 million as cash used in financing activities and $0.4 million as cash used in operating activities.

3.Mergers and Acquisitions

In the second quarter of fiscal 2013, we acquired American Environmental Group, Ltd. (“AEG”), headquartered in Richfield, Ohio. AEG provides environmental, design, construction and maintenance services primarily to solid and hazardous waste, environmental, energy and utility clients. Also in the second quarter of fiscal 2013, we acquired Parkland Pipeline Contractors Ltd., Parkland Pipeline Equipment Ltd., Park L Projects Ltd. and Parkland Projects Ltd. (collectively, “Parkland”), headquartered in Alberta, Canada. Parkland serves the oil and gas industry in Western Canada, and specializes in the technical support, engineering support and construction of pipelines and oilfield facilities. AEG and Parkland are both included in our Remediation and Construction Management (“RCM”) segment. We also made other acquisitions that enhanced our service offerings and expanded our geographic presence in our Engineering and Consulting Services (“ECS”) and Technical Support Services (“TSS”) segments during fiscal 2013. The aggregate fair value of the purchase prices for fiscal 2013 acquisitions was $248.9 million. Of this amount, $171.6 million was paid to the sellers, $2.0 million was recorded as liabilities in accordance with the purchase agreements, and $75.3 million was the estimated fair value of contingent earn-out obligations as of the respective acquisition dates, with an aggregate maximum of $86.7 million upon the achievement of specified financial objectives. In the first quarter of fiscal 2014, we acquired a company that enhanced our service offerings in our ECS segment.

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, the goodwill additions related to the fiscal 2013 acquisitions primarily represent the value of workforces with distinct expertise in the solid and hazardous waste, and oil and gas 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 the consolidated financial statements from their respective closing dates. The purchase price allocations related to acquisitions completed during the fourth quarter of fiscal 2013 and the first quarter of fiscal 2014 are preliminary, and subject to adjustment, based on the valuation and final determination of net assets acquired. We do not believe that any such adjustment will have a material effect on our consolidated results of operations. None of the acquisitions were considered material, individually or in the aggregate, to our condensed consolidated financial statements. As a result, no pro forma information has been provided for the respective periods.

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 “Estimated contingent earn-out liabilities” and “Long-term estimated contingent earn-out liabilities” on the 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 (as described in “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 29, 2013). 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. During the three and nine months ended June 29, 2014, we recorded net decreases in our contingent earn-out liabilities and reported related net gains in operating income of $8.9 million and $34.9 million, respectively, compared with net gains of $7.7 million and $8.7 million, respectively, in the same periods last year. The fiscal 2014 gains primarily resulted from updated valuations of the contingent consideration liability for AEG in the third quarter and Parkland in the second quarter. Adverse weather conditions during the second and third quarter of fiscal 2014 hindered AEG’s ability to complete construction field work. We recognized a net unfavorable operating income adjustment for Parkland related to a single project during the second quarter of fiscal 2014. As a result, we lowered our income projections over the remaining earn-out periods and recorded corresponding reductions of the earn-out liabilities for AEG and Parkland. We also determined that these lower income projections were the result of temporary events, and would not negatively impact AEG and Parkland’s longer-term performance or result in goodwill impairment. However, if our income projections for AEG and Parkland were to decline further, this could result in the impairment of a portion of the combined related goodwill balance of approximately $139 million. In this event, we would also likely have gains in our operating income up to a maximum of the remaining related contingent consideration liabilities. Conversely, if AEG or Parkland’s performance increases beyond our projections, we could incur future losses in operating income if the resulting contingent consideration earned exceeds the current recorded liability.

At June 29, 2014, there was a total maximum of $68.3 million of outstanding contingent consideration related to completed acquisitions. Of this amount, $31.5 million was estimated as the fair value and accrued on our condensed consolidated balance sheets. For the nine months ended June 29, 2014, we made $20.6 million of earn-out payments to former owners. Of this amount, we reported $18.7 million as cash used in financing activities and $1.9 million as cash used in operating activities. For the nine months ended June 30, 2013, we made $24.4 million of earn-out payments to former owners. Of this amount, we reported $24.0 million as cash used in financing activities and $0.4 million as cash used in operating activities.