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Business combinations | 9 Months Ended
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Jun. 30, 2021
Business Combination and Asset Acquisition [Abstract] |
Business combinations | Business Combinations VES Group, Inc. (VES) On May 28, 2021, we acquired all of VES for an estimated cash purchase price of $1.37 billion (the Acquisition). The final purchase price is subject to adjustment and is expected to be finalized during our fourth fiscal quarter of 2021. This business was integrated into our U.S. Federal Services Segment and is expected to increase revenue attributable to providing independent and conflict-free clinical business process outsourcing (BPO) services at scale. The Acquisition also supports our ongoing strategic priority of expansion into the U.S. Federal market and creates new opportunities to apply digital solutions to improve citizen services. We entered into a new credit agreement to fund the Acquisition. See "Note 6 - Debt" for further details. The results of operations for VES are included in the consolidated results of Maximus, Inc. starting May 28, 2021. At this time, we are in the process of finalizing the purchase price and the valuation of all acquired assets and assumed liabilities. The balances below represent our best estimate and are subject to change:
(in thousands) |  | Estimated Fair Value of Assets and Liabilities |  |  |  |  |  |  |  |  |
Cash consideration paid, net of cash acquired |  | $ | 1,360,231 |  |  |  |  |  |  |  |  |  |
Estimated additional cash payments |  | 7,494 |  |  |  |  |  |  |  |  |  |
Estimated cash consideration, net of cash acquired |  | $ | 1,367,725 |  |  |  |  |  |  |  |  |  |
Accounts receivable - billed, billable and unbilled |  | $ | 44,078 |  |  |  |  |  |  |  |  |  |
Prepaid expenses and other current assets |  | 13,911 |  |  |  |  |  |  |  |  |  |
Property and equipment, net |  | 9,113 |  |  |  |  |  |  |  |  |  |
Operating lease right-of-use assets |  | 18,898 |  |  |  |  |  |  |  |  |  |
Intangible assets |  | 664,000 |  |  |  |  |  |  |  |  |  |
Other assets |  | 12,816 |  |  |  |  |  |  |  |  |  |
Total identifiable assets acquired |  | 762,816 |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued compensation |  | 42,978 |  |  |  |  |  |  |  |  |  |
Operating lease liabilities |  | 18,898 |  |  |  |  |  |  |  |  |  |
Income taxes payable |  | 6,196 |  |  |  |  |  |  |  |  |  |
Deferred income taxes |  | 177,626 |  |  |  |  |  |  |  |  |  |
Other long-term liabilities |  | 6,667 |  |  |  |  |  |  |  |  |  |
Net identifiable assets acquired |  | 510,451 |  |  |  |  |  |  |  |  |  |
Goodwill |  | 857,274 |  |  |  |  |  |  |  |  |  |
Net assets acquired |  | $ | 1,367,725 |  |  |  |  |  |  |  |  |  |
Goodwill represents the value of the assembled workforce and the enhanced knowledge, capabilities, and qualifications held by the business. This goodwill balance is not expected to be deductible for tax purposes. Our evaluation of the intangible assets acquired with VES has identified three assets. The assets were valued using methods which required a number of estimates and, accordingly, they are considered Level 3 measurements within the Accounting Standard Codification No. 820 (ASC 820) fair value methodology. •Customer relationships represent the value of the existing contractual relationships with the United States Federal Government. These were valued using the excess earnings method, which required us to utilize estimated future revenues and earnings from contracts. •VES maintains a provider network of third-party providers that assist in the performance of their clinical services. This network was valued using the cost method, which included both the cost of recreating such a network and the profits foregone during the time which would be required to recreate the network. •VES maintained proprietary technology which interacted with U.S. Federal Government systems, facilitated the transmission of examination data and supported the performance of the contracts. We valued the technology using a relief-from-royalty method, which required us to estimate future revenues and an arms' length royalty rate that a third-party provider might use to supply this service. A summary of the asset values and asset lives is as follows:
(in thousands) |  | Estimated Straight-Line Useful Life |  | Estimated Fair Value
Customer contracts and relationships |  | 12 years |  | $ | 580,000 |
Provider network |  | 12 years |  | 57,000 |
Technology-based intangible assets |  | 14 years |  | 27,000 |
Total intangible assets |  |  |  | $ | 664,000 |
In connection with certain liabilities acquired in the VES acquisition, we have established a liability of $12.0 million for a billing dispute between VES and its customer relating to prior year billings. Our exposure is partially offset by an indemnification asset of $6.0 million. In the event that this dispute is settled for less than $6.0 million, we will return the indemnification asset to the sellers (as well as any difference between the settlement amount and $6.0 million). In the event that the settlement exceeds $6.0 million, we are entitled to utilize the indemnification asset, and if the settlement exceeds $12.0 million, pursue other recourse permitted under the purchase agreement. At this time $12.0 million remains our best estimate of this liability. In addition, we have established a tax liability of $11.8 million for uncertain tax positions within VES, partially offset by another indemnification asset of $6.7 million. Both indemnification assets are secured in third party escrow accounts and we have recourse to other funds in the event these contingencies exceed the escrow balances. From the acquisition date of May 28, 2021 through June 30, 2021, the acquired business contributed revenue of $45.8 million and gross profit of $19.5 million. Amortization of intangible assets for the period through June 30, 2021 was $4.6 million. The Federal division of Attain, LLC (Attain) On March 1, 2021, we acquired all of Attain for a cash purchase price of $419.1 million. This business was integrated into our U.S. Federal Services Segment and is expected to strengthen our position to further design, develop, and deliver more innovative, impactful solutions and drive automation of processes to improve citizen engagement and the delivery of critical federal programs, as well as expand our presence in the U.S. Federal market. We utilized borrowings on the credit facility we had in place at the time, as well as cash on our balance sheet to fund the acquisition. The results of operations for Attain are included in our results from March 1, 2021. We are in the process of finalizing the valuation as of March 1, 2021, of all acquired assets and assumed liabilities and, accordingly, the balances below represent our best estimate and are subject to change:
(in thousands) |  | Estimated fair value of assets and liabilities at acquisition date as of March 31, 2021 |  | Adjustments |  | Estimated fair value of assets and liabilities at acquisition date as of June 30, 2021
Cash consideration, net of cash acquired |  | $ | 419,864 |  |  | $ | (767) |  |  | $ | 419,097 |
Accounts receivable - billed, billable and unbilled |  | $ | 39,274 |  |  | $ | 101 |  |  | $ | 39,375 |
Prepaid expenses and other current assets |  | 1,336 |  |  | (410) |  |  | 926 |
Property and equipment, net |  | 703 |  |  | (703) |  |  | — |
Operating lease right-of-use assets |  | 25,089 |  |  | (129) |  |  | 24,960 |
Other assets |  | 84 |  |  | (10) |  |  | 74 |
Intangible assets |  | 105,000 |  |  | — |  |  | 105,000 |
Total identifiable assets acquired |  | 171,486 |  |  | (1,151) |  |  | 170,335 |
Accounts payable and other liabilities |  | 28,301 |  |  | 562 |  |  | 28,863 |
Operating lease liabilities, less current portion |  | 26,786 |  |  | (385) |  |  | 26,401 |
Net identifiable assets acquired |  | 116,399 |  |  | (1,328) |  |  | 115,071 |
Goodwill |  | 303,465 |  |  | 561 |  |  | 304,026 |
Net assets acquired |  | $ | 419,864 |  |  | $ | (767) |  |  | $ | 419,097 |
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 intangible assets acquired represent customer relationships. We estimated this balance using the excess earnings method (which is a Level 3 measurement within the ASC 820 fair value hierarchy) and used a number of estimates, including expected future earnings from the acquired business and an appropriate expected rate of return. We have assumed a useful economic life of ten years, representing our expectation of the period over which we will receive the benefit. During the three and nine months ended June 30, 2021, the acquired business contributed revenue of $56.4 million and $74.8 million, respectively, and gross profit of $13.2 million and $17.1 million, respectively. VES and Attain The following table presents certain pro forma results for the three and nine months ended June 30, 2021 and 2020 and the twelve months ended June 30, 2021, as though the acquisitions of both VES and Attain had occurred on October 1, 2019. The twelve month information is consistent with that utilized in our debt covenant calculations. This pro forma information is presented for information purposes 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, and estimates of interest expense based upon our total estimated borrowings, eliminate pre-acquisition transaction costs and reflect corresponding changes in our provision for income taxes. Acquisition related costs incurred by Maximus, VES and Attain have been excluded in the following pro forma results. These costs were $8.8 million, $52.2 million and $0.3 million, respectively.
|  | Unaudited pro forma results
|  | Three Months Ended June 30, |  | Nine Months Ended June 30, |  | Trailing Twelve Months Ended June 30,
(in thousands, except per share amounts) |  | 2021 |  | 2020 |  | 2021 |  | 2020 |  | 2021
Revenue |  | $ | 1,335,780 |  |  | $ | 996,462 |  |  | $ | 3,566,466 |  |  | $ | 2,934,920 |  |  | $ | 4,645,540 |
Cost of revenue |  | 1,004,523 |  |  | 787,189 |  |  | 2,679,170 |  |  | 2,283,589 |  |  | 3,503,074 |
Gross profit |  | 331,257 |  |  | 209,273 |  |  | 887,296 |  |  | 651,331 |  |  | 1,142,466 |
Selling, general, and administrative expenses |  | 151,321 |  |  | 110,754 |  |  | 425,062 |  |  | 360,370 |  |  | 551,143 |
Amortization of intangible assets |  | 21,301 |  |  | 25,090 |  |  | 63,856 |  |  | 75,868 |  |  | 88,586 |
Operating income |  | 158,635 |  |  | 73,429 |  |  | 398,378 |  |  | 215,093 |  |  | 502,737 |
Interest expense |  | 8,701 |  |  | 9,423 |  |  | 26,715 |  |  | 28,528 |  |  | 36,426 |
Other (expense)/income, net |  | (7,320) |  |  | (2,126) |  |  | (10,401) |  |  | (11,755) |  |  | (11,437) |
Income before income taxes |  | 142,614 |  |  | 61,880 |  |  | 361,262 |  |  | 174,810 |  |  | 454,874 |
Provision for income taxes |  | 37,123 |  |  | 15,549 |  |  | 94,735 |  |  | 38,897 |  |  | 120,248 |
Net income |  | $ | 105,491 |  |  | $ | 46,331 |  |  | $ | 266,527 |  |  | $ | 135,913 |  |  | $ | 334,626 |
Basic earnings per share |  | $ | 1.70 |  |  | $ | 0.75 |  |  | $ | 4.30 |  |  | $ | 2.14 |  |  | $ | 5.40 |
Diluted earnings per share |  | $ | 1.69 |  |  | $ | 0.75 |  |  | $ | 4.28 |  |  | $ | 2.13 |  |  | $ | 5.37 |
Dividends declared per share |  | $ | 0.28 |  |  | $ | 0.28 |  |  | $ | 0.84 |  |  | $ | 0.84 |  |  | $ | 1.12 |
Weighted average shares outstanding: |  |  |  |  |  |  |  |  |  |
Basic |  | 62,064 |  |  | 61,882 |  |  | 62,028 |  |  | 63,463 |  |  | 62,001 |
Diluted |  | 62,453 |  |  | 62,102 |  |  | 62,300 |  |  | 63,666 |  |  | 62,285 |
Other acquisitions On February 28, 2020, we acquired 100% of the share capital of InjuryNet Australia Pty Limited (InjuryNet) for a purchase price of $4.4 million ($6.7 million Australian Dollars), which included acquisition-related contingent consideration of $2.1 million ($3.1 million Australian Dollars) based upon future earnings. InjuryNet provides workplace medical services in Australia. The business was integrated into our Outside the U.S. Segment. We have completed our assessment of all acquired assets and liabilities assumed. We recorded estimated goodwill and intangible assets of $2.6 million and $0.9 million, respectively, related to the acquisition. On August 21, 2020, we acquired 100% of the share capital of Index Root Korea Co. Ltd (Index Root) for an estimated purchase price of $5.4 million (6.3 billion South Korean Won), which includes acquisition-related contingent consideration estimated at $0.9 million (1.1 billion South Korean Won) based upon future earnings. We acquired Index Root to expand our geographic presence to South Korea. The business was integrated into our Outside the U.S. Segment. We have completed our assessment of all acquired assets and liabilities assumed. We recorded estimated goodwill and intangible assets of $4.6 million and $1.4 million, respectively, related to the acquisition. During the second quarter of fiscal year 2021, we concluded that payment of the contingent consideration was unlikely and, accordingly, a benefit of $1.0 million was recorded within our acquisition expenses. Changes in goodwill for the nine months ended June 30, 2021, were as follows:
(in thousands) |  | U.S. Services |  | U.S. Federal Services |  | Outside the U.S |  | Total
Balance as of September 30, 2020 |  | $ | 164,472 |  |  | $ | 381,719 |  |  | $ | 46,938 |  |  | $ | 593,129 |
Estimated effects of acquisitions |  | — |  |  | 1,161,300 |  |  | 623 |  |  | 1,161,923 |
Foreign currency translation |  | — |  |  | — |  |  | 2,743 |  |  | 2,743 |
Balance as of June 30, 2021 |  | $ | 164,472 |  |  | $ | 1,543,019 |  |  | $ | 50,304 |  |  | $ | 1,757,795 |
There have been no impairment charges to our goodwill. The following table sets forth the components of intangible assets (in thousands):
|  | As of June 30, 2021 |  | As of September 30, 2020
(in thousands) |  | Cost |  | Accumulated Amortization |  | Intangible Assets, net |  | Cost |  | Accumulated Amortization |  | Intangible Assets, net
Customer contracts and relationships |  | $ | 921,023 |  |  | $ | 112,546 |  |  | $ | 808,477 |  |  | $ | 235,287 |  |  | $ | 90,302 |  |  | $ | 144,985 |
VES Provider network |  | 57,000 |  |  | 396 |  |  | 56,604 |  |  | — |  |  | — |  |  | — |
Technology-based intangible assets |  | 32,400 |  |  | 4,994 |  |  | 27,406 |  |  | 5,631 |  |  | 4,723 |  |  | 908 |
Trademarks and trade names |  | 4,516 |  |  | 4,516 |  |  | — |  |  | 4,479 |  |  | 4,479 |  |  | — |
Total |  | $ | 1,014,939 |  |  | $ | 122,452 |  |  | $ | 892,487 |  |  | $ | 245,397 |  |  | $ | 99,504 |  |  | $ | 145,893 |
As of June 30, 2021, our intangible assets have a weighted average remaining life of 11.2 years, comprising 11.2 years for customer contracts and relationships, 11.9 years for the provider network and 13.7 years for technology-based intangible assets. The estimated future amortization expense for the next five years for the intangible assets held by the Company as of June 30, 2021 is shown below. As noted above, we have not yet completed our assessment of the valuation of the intangible assets acquired with VES and Attain. These future amortization expenses represent our best estimate of future costs.
(In thousands) |  | Estimated Future Amortization Expense
Year ended September 30, 2021, Remainder of year |  | $ | 20,518 |
Year ended September 30, 2022 |  | 82,025 |
Year ended September 30, 2023 |  | 82,009 |
Year ended September 30, 2024 |  | 81,885 |
Year ended September 30, 2025 |  | 81,678 |
Year ended September 30, 2026 |  | 81,551 |

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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