5. Acquisitions

PSI

On April 30, 2012 (the acquisition date), the Company acquired 100% of the share capital of PSI Services Holding, Inc. and its wholly-owned subsidiary, Policy Studies, Inc. (PSI). The final cash consideration will be based upon a mutually-agreed assessment of the balance sheet at the acquisition date and is currently estimated to be $63.2 million.

PSI supports clients in the administration of a number of health and human services programs exclusively within the United States. MAXIMUS acquired PSI, among other reasons, to strengthen its leadership in the administration of public health and human services programs. The acquired assets and business have been integrated into the Company’s Health Services and Human Services segments.

The assets and liabilities of PSI are recorded in the Company’s financial statements at their fair values as of the date of the acquisition. An initial valuation was performed at June 30, 2012 and this valuation has been updated through September 30, 2012 (below, in thousands)

In the fourth quarter 2012, a net increase of $6.5 million was made to goodwill as the Company finalized the allocation of the purchase price. This position is still subject to change as the final consideration balance is agreed with the former owners of PSI. The principal driver of this increase was an increase in the future obligations related to a loss-making system-integration contract acquired with PSI. This obligation, net of future cash flows, was valued at $15.1 million and will be treated as deferred revenue. This valuation was based upon our understanding of the contract terms and conditions, our estimates of the future costs of completing the contract and the likely profit margin that a participant providing a similar service would most likely charge to cover their overhead costs and their required rate of return. This valuation also affected the related intangible assets and deferred taxation.

The Company is still completing its evaluation of the valuation of the assets and liabilities acquired. In particular, the Company continues to evaluate the closing tax position of PSI within all of the jurisdictions in which it operates. The identifiable assets acquired and liabilities assumed were recognized and measured as of the acquisition date based upon their estimated fair values. The excess of the acquisition date fair value of consideration over the estimated fair value of the net assets acquired was recorded as goodwill and allocated to the Company’s two segments, Health Services and Human Services, based upon the respective valuations of the businesses. The Company considers the goodwill to represent a number of potential strategic and financial benefits that are expected to be realized as a result of the acquisition, including, but not limited to bringing new capabilities to MAXIMUS and the assembled workforce. Goodwill is not expected to be deductible for tax purposes.

Included in the purchase price allocation are deferred taxes related to a net operating loss carryforward of $10.5 million.

The valuation of the intangible assets acquired is summarized below (in thousands).

The total weighted average amortization period is 6.8 years.

Our consolidated statement of operations includes $60.1 million of revenue for the year ended September 30, 2012 generated by the acquired PSI business. The integration of PSI into the Company’s operating and administrative infrastructure does not allow us to identify a meaningful measure of operating income for the acquired PSI business.

During the year ended September 30, 2012, the Company incurred $2.9 million of costs directly related to the acquisition of PSI. These costs include legal fees, valuation costs, severance and costs related to the termination of redundant service contracts.

The following table presents the results for the Company for the year ended September 30, 2012 as though the acquisition of PSI had occurred on October 1, 2010. The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of the Company if the acquisition had taken place at this time. The pro forma results presented include acquisition related costs, amortization charges for acquired intangible assets, adjustments to lease expenses, elimination of intercompany transactions, adjustments to interest and other expenses and related tax effects. The pro forma results in 2011 include costs directly related to the acquisition, including severance costs, which were incurred by the Company after the acquisition date (in thousands).

DeltaWare

On February 10, 2010 (the DeltaWare acquisition date), the Company acquired 100% of the share capital of DeltaWare, Inc. (DeltaWare). DeltaWare is a Canadian company specializing in health administration management systems. MAXIMUS acquired DeltaWare, among other reasons, to broaden its core health services offerings and strengthen its position in the administration of public health programs. The acquired assets and business have been integrated into the Company’s Health Services segment.

The estimated DeltaWare acquisition date fair value of consideration transferred, assets acquired and liabilities are presented below (in thousands).

The acquisition consideration comprised an initial cash payment, followed by additional payments (contingent consideration) totaling up to seven million Canadian Dollars. During fiscal years 2012 and 2011, the Company paid $2.1 million and $1.0 million, respectively, of contingent consideration. These payments were made based upon the achievement of profitability targets. The Company must also pay the former owners of DeltaWare up to four million Canadian Dollars ($4.0 million) based upon the Company making sales of DeltaWare’s products in particular geographic markets prior to December 2016. The Company has recorded a long-term liability of $0.4 million which represents the payment that management assesses will likely be paid. In the event that such sales are anticipated by the Company, this could result in an increase to this liability based upon the size and location of the sales. No such sales have been made to date and the likelihood of future sales between this time and December 2016 is considered low. Management reviews the likelihood of future sales on a quarterly basis and, to the extent that sales opportunities are identified, proposals submitted or contracts won, the Company updates its probability weighted assessment of payment. Changes in this assessment will result in an expense or credit to earnings. The contingent consideration payable for any single contract signed would be based upon the population of the area served but would be capped at one million Canadian Dollars per sale.

The Financial Accounting Standards Board (“FASB”) requires the classification of all assets and liabilities subject to fair value measurement based upon the inputs required for their valuation. Based upon these assessments, the Company recorded charges of $0.1 million and $0.2 million in fiscal 2012 and 2011, respectively, reflecting increases in the estimated payment of consideration. As the inputs required for the valuation of contingent consideration liabilities require significant judgment, they are considered to be Level 3 inputs under the FASB classification.

The effect on the financial statements is summarized below (in thousands):

The identifiable assets acquired and liabilities assumed were recognized and measured as of the acquisition date based upon their estimated fair values. The excess of the acquisition date fair value of consideration over the estimated fair value of the net assets acquired was recorded as goodwill. The Company considers the goodwill to represent a number of potential strategic and financial benefits that are expected to be realized as a result of the acquisition, including, but not limited to bringing new capabilities to MAXIMUS in the adjacent markets and opportunities to expand its geographic reach.

The valuation of the intangible assets acquired is summarized below (in thousands).

The total weighted average amortization period was 8.6 years.

Of the total fair value of consideration, $7.5 million was allocated to goodwill. Goodwill is not expected to be deductible for income tax purposes.

The results of DeltaWare were not material for any periods shown.