Quarterly report pursuant to Section 13 or 15(d)

Acquisition of Citizen Engagement Centers Business

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.
(dollars in thousands) Estimated purchase price allocation at March 31, 2019 Adjustments Estimated purchase price allocation at June 30, 2019
Cash consideration $ 430,573  $ 126  $ 430,699 
Billed and unbilled receivables 141,869  296  142,165 
Property and equipment 6,454  2,520  8,974 
Other assets 4,093  415  4,508 
Intangible assets 122,300  —  122,300 
Total identifiable assets acquired 274,716  3,231  277,947 
Accounts payable and other liabilities 32,205  (343) 31,862 
Net identifiable assets acquired 242,511  3,574  246,085 
Goodwill 188,062  (3,448) 184,614 
Net assets acquired $ 430,573  $ 126  $ 430,699 

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.
(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 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.

Acquisition Contribution for
(dollars in thousands) Three Months Ended
June 30, 2019
Nine Months Ended
June 30, 2019
Revenue $ 163,381  $ 440,647 
Gross profit 31,943  83,563 

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.

  Pro forma results for the three months ended June 30, Pro forma results for the nine months ended June 30,
(dollars in thousands, except per share amounts) 2019  2018  2019  2018 
Revenue $ 730,710  $ 731,755  $ 2,230,278  $ 2,324,478 
Net income 62,965  56,886  183,927  176,877 
Basic earnings per share attributable to MAXIMUS 0.98  0.86  2.85  2.68 
Diluted earnings per share attributed to MAXIMUS 0.97  0.86  2.84  2.66 

Changes in goodwill for the nine months ended June 30, 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 19,703  162,465  2,446  184,614 
Foreign currency translation —  —  (793) (793)
Balance as of June 30, 2019 $ 159,291  $ 390,613  $ 33,799  $ 583,703 
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 As of September 30, 2018
(dollars in thousands) Cost Accumulated
Assets, net
Cost Accumulated
Assets, net
Customer contracts and relationships $ 248,324  $ 63,684  $ 184,640  $ 129,113  $ 42,683  $ 86,430 
Technology based intangible assets 5,680  4,385  1,295  5,750  4,212  1,538 
Trademarks and trade names 4,489  4,459  30  4,496  4,429  67 
Total $ 258,493  $ 72,528  $ 185,965  $ 139,359  $ 51,324  $ 88,035 
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):
Nine months ended September 30, 2019 $ 8,984 
2020  35,279 
2021  18,230 
2022  15,857 
2023  15,760