Maximus, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Acquisition of Citizen Engagement Centers Business

Acquisition of Citizen Engagement Centers Business

3 Months Ended

Dec. 31, 2018

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 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 made a cash payment of $421.8 million at that date. This amount is subject to adjustment before the end of the second quarter of fiscal year 2019. We currently estimate that our total consideration will be $429.3 million. 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 year ended September 30, 2018, we incurred $0.5 million of such costs; during the three months ended December 31, 2018, 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.

At this time, we are in the process of finalizing our valuation of the acquired assets and assumed liabilities and, accordingly, the balances below represent our best estimate and are subject to change:



(dollars in thousands)	Estimated purchase price allocation
Estimated cash consideration	$	429,335

Billed and unbilled receivables	$	145,319
Property and equipment	6,454
Other assets	681
Intangible assets	122,300
Total identifiable assets acquired	274,754
Accounts payable and other liabilities	33,296
Net identifiable assets acquired	241,458
Goodwill	187,877
Net assets acquired	$	429,335

The fair value of the goodwill is estimated to be $187.9 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

During the three months ended December 31, 2018, the acquired business contributed $101.3 million of revenue and $18.9 million of gross profit to our results. The following table presents certain results for the three months ended December 31, 2018 and 2017, 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 December 31,
(dollars in thousands, except per share amounts)	2018		2017
Revenue	$	763,048	$	822,132
Net income	$	59,196	$	63,293
Basic earnings per share attributable to MAXIMUS	$0.92		$0.95
Diluted earnings per share attributed to MAXIMUS	$0.91		$0.94

Changes in goodwill for the three months ended December 31, 2018, 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	—			187,877		—			187,877
Foreign currency translation	(1,195		)	—		(829		)	(2,024		)
Balance as of December 31, 2018	$	138,393		$	416,025	$	31,317		$	585,735

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. Some of our goodwill is subject to foreign exchange fluctuations and, accordingly, we will record foreign exchange fluctuations in the U.S. Health and Human Services Segment.

There have been no impairment charges to our goodwill.

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



	As of December 31, 2018						As of September 30, 2018
(dollars in thousands)	Cost		Accumulated Amortization		Intangible Assets, net		Cost		Accumulated Amortization		Intangible Assets, net
Customer contracts and relationships	$	248,323	$	45,273	$	203,050	$	129,113	$	42,683	$	86,430
Technology based intangible assets	5,564		4,113		1,451		5,750		4,212		1,538
Trademarks and trade names	4,469		4,417		52		4,496		4,429		67
Total	$	258,356	$	53,803	$	204,553	$	139,359	$	51,324	$	88,035

As of December 31, 2018, our intangible assets have a weighted average remaining life of 9.3 years, comprising 9.3 years for customer contracts and relationships, 4.8 years for technology-based intangible assets, and 1.1 years for trademarks and trade names. The estimated future amortization expense for the next five years for the intangible assets held by the Company as of December 31, 2018, is as follows (in thousands):



Nine months ended September 30, 2019	$	27,541
2020	35,281
2021	18,233
2022	15,859
2023	15,762
2024	15,639