Quarterly report pursuant to Section 13 or 15(d)

Acquisition of Citizen Engagement Centers Business

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Acquisition of Citizen Engagement Centers Business
 6 Months Ended
Mar. 31, 2019
Business Combinations [Abstract]  
Acquisition of Citizen Engagement Centers Business 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