Acquisition of Citizen Engagement Centers Business
|9 Months Ended|
Jun. 30, 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 a purchase price of $430.7 million. We paid $421.8 million in November 2018 and the remaining balance in July 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 nine months ended June 30, 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. We have completed our valuation of most of the assets acquired and liabilities assumed but our assessment of the unbilled accounts receivable balance remains open at this time. We will complete our valuation by September 30, 2019. Our current estimate of the allocation of the purchase price, updated from March 31, 2019, is shown below.
The fair value of the goodwill is estimated to be $184.6 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.
The contribution of the acquired business for the three and nine months ended June 30, 2019, is shown below. Given the integration of the acquired business into our cost structure, it is impracticable to calculate the effect of the acquisition on operating income.
The following table presents certain results for the three and nine months ended June 30, 2019 and 2018, as though the acquisition had occurred on October 1, 2017. 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. This pro forma information is presented for information only. For example, this pro forma information does not include any of our anticipated synergies but does include, for each of the three and nine month periods shown, charges of $4.6 million and $13.9 million, respectively, related to the amortization of the U.S. Census customer relationship intangible asset. Although the U.S. Census contract commenced prior to October 1, 2017, most of the benefit will be recorded in fiscal year 2020. For these and other reasons, this pro forma information is not necessarily indicative of the results if the acquisition had taken place on that date.
Changes in goodwill for the nine months ended June 30, 2019, were as follows:
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:
As of June 30, 2019, our intangible assets have a weighted average remaining life of 9.1 years, comprising 9.2 years for customer contracts and relationships, 4.3 years for technology-based intangible assets, and 0.6 years for trademarks and trade names. The estimated future amortization expense for the remainder of the current fiscal year and the future fiscal years for the intangible assets held by the Company as of June 30, 2019, is as follows (in thousands):
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).
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef