Acquisition of Citizen Engagement Centers Business

6 Months Ended

Mar. 31, 2019

Acquisition of Citizen Engagement Centers Business

On November 16, 2018, we acquired General Dynamics Information Technology's citizen engagement centers business, pursuant to an asset purchase agreement dated October 5, 2018. The assets acquired included existing contracts, contractual relationships and bids for contracts submitted prior to the acquisition date, as well as interests in leased properties, fixed assets, working capital and intangible assets. This acquisition strengthens our position in the administration of federal government programs. This business has been integrated into our U.S. Federal Services Segment. The contract provides for a purchase price of $400.0 million adjusted for the net working capital in excess of or less than an agreed upon target representing an estimate of normalized net working capital. The estimated working capital balance at November 16, 2018, was higher than this estimate and, accordingly, we incurred an estimated purchase price of $430.6 million. We anticipate finalizing the purchase price during the third quarter of fiscal year 2019. To fund the acquisition, we utilized $150 million of borrowings from our credit facility with the balance from our cash on our balance sheet.

As part of the acquisition, we incurred acquisition-related expenses, including legal, accounting and other consultant services. During the fiscal year ended September 30, 2018, we incurred $0.5 million of such costs; during the six months ended March 31, 2019, we incurred an additional $2.7 million. We also incurred additional investing cash outflows of $4.5 million from the acquisition of software licenses needed for newly-acquired employees.

We considered this transaction to be an acquisition of a business. At this time, we are in the process of finalizing our valuation of the acquired assets and assumed liabilities, including our analysis of the value of the intangible assets acquired and the tax effects of the acquisition. In addition, we continue to look for potential assets or liabilities which existed at the acquisition date. Our current estimate of the allocation of the purchase price, updated from December 31, 2018, is shown below.


(dollars in thousands)	Estimated purchase price allocation at December 31, 2018		Adjustments		Estimated purchase price allocation at March 31, 2019
Estimated cash consideration	$	429,335	$	1,238	$	430,573

Billed and unbilled receivables	$	145,319	$	(3,450)	$	141,869
Property and equipment	6,454		—		6,454
Other assets	681		3,412		4,093
Intangible assets	122,300		—		122,300
Total identifiable assets acquired	274,754		(38)		274,716
Accounts payable and other liabilities	33,296		(1,091)		32,205
Net identifiable assets acquired	241,458		1,053		242,511
Goodwill	187,877		185		188,062
Net assets acquired	$	429,335	$	1,238	$	430,573

The fair value of the goodwill is estimated to be $188.1 million. This goodwill represents the value of the assembled workforce and the enhanced knowledge, capabilities and qualifications held by the business. This goodwill balance is expected to be deductible for tax purposes.

The fair value of the intangible assets acquired is estimated to be $122.3 million, representing customer relationships. We have assumed a useful economic life of ten years for most contracts, representing our expectation of the period over which we will receive the benefit. Typically, our customer relationships are based upon the provision of services to our customers on a daily or monthly basis and, although contracts are frequently rebid, we believe that an incumbent provider typically enjoys significant competitive advantages. In reviewing the contract portfolio, we allocated a shorter life to a contract which pertains to the United States decennial census. This contract requires managing a significant ramp-up and ramp-down of work over the census cycle. As much of the benefit from this contract is anticipated to occur within the next two years, we have utilized a shorter asset life for this customer relationship. The average weighted intangible asset life is 7.6 years and amortization will be recorded on a straight-line basis.

(dollars in thousands)

Useful life

Fair value

Customer relationships - all contracts except U.S. Census

10 years

85,300

Customer relationships - U.S. Census

2 years

37,000

Total intangible assets

122,300

The contribution of the acquired business for the three and six months ended March 31, 2019, is shown below.


	Acquisition Contribution for
(dollars in thousands)	Three Months Ended March 31, 2019		Six Months Ended March 31, 2019
Revenue	$	176,003	$	277,266
Gross profit	32,672		51,620

The following table presents certain results for the three and six months ended March 31, 2019 and 2018, as though the acquisition had occurred on October 1, 2017. This pro forma information is presented for information only and is not necessarily indicative of the results if the acquisition had taken place on that date. The pro forma results below eliminate intercompany transactions, include amortization charges for acquired intangible assets, eliminate pre-acquisition transaction costs and include estimates of interest expense, as well as corresponding changes in our tax charge.


	Pro forma results for the three months ended March 31,						Pro forma results for the six months ended March 31,
(dollars in thousands, except per share amounts)	2019		2018		2019		2018
Revenue	$	736,520	$	770,590	$	1,499,568	$	1,592,723
Net income	61,766		56,803		120,962		119,991
Basic earnings per share attributable to MAXIMUS	0.96		0.87		1.88		1.81
Diluted earnings per share attributed to MAXIMUS	0.96		0.86		1.87		1.80

Changes in goodwill for the six months ended March 31, 2019, were as follows:


(dollars in thousands)	U.S. Health & Human Services		U.S. Federal Services		Outside the United States		Total
Balance as of September 30, 2018	$	139,588	$	228,148	$	32,146	$	399,882
Estimated effect of the acquisition of citizen engagement centers business	20,071		165,498		2,493		188,062
Foreign currency translation	—		—		(193)		(193)
Balance as of March 31, 2019	$	159,659	$	393,646	$	34,446	$	587,751

Although the citizen engagement center business has been integrated into our U.S. Federal Services Segment, the acquisition provides benefits across all three segments. The most significant contracts acquired are cost-plus arrangements, which allow us to recover a greater share of our shared corporate overhead. Accordingly, we have allocated the goodwill based on an estimate of the relative fair value of the benefit to each segment.

With the reorganization of the business on October 1, 2018, we reallocated our goodwill to our new reporting segments. This reallocation was based upon the relative fair values of the operating segments on the date of the reorganization.

There have been no impairment charges to our goodwill.

The following table sets forth the components of intangible assets (in thousands):


	As of March 31, 2019										As of September 30, 2018
(dollars in thousands)	Cost		Accumulated Amortization		Intangible Assets, net		Cost		Accumulated Amortization		Intangible Assets, net
Customer contracts and relationships	$	248,770	$	54,838	$	193,932	$	129,113	$	42,683	$	86,430
Technology based intangible assets	5,648		4,267		1,381		5,750		4,212		1,538
Trademarks and trade names	4,480		4,439		41		4,496		4,429		67
Total	$	258,898	$	63,544	$	195,354	$	139,359	$	51,324	$	88,035

As of March 31, 2019, our intangible assets have a weighted average remaining life of 9.2 years, comprising 9.2 years for customer contracts and relationships, 4.6 years for technology-based intangible assets, and 0.8 years for trademarks and trade names. The estimated future amortization expense for the remainder of the current fiscal year and the next five fiscal years for the intangible assets held by the Company as of March 31, 2019, is as follows (in thousands):


Six months ended September 30, 2019	$	18,044
2020	35,307
2021	18,258
2022	15,884
2023	15,785
2024	15,662