Quarterly report pursuant to Section 13 or 15(d)

Business combinations

v3.21.2
Business combinations
 9 Months Ended
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