Maximus, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Business combinations and disposal

Business combinations and disposal

12 Months Ended

Sep. 30, 2019

Citizen engagement centers

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 provided 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 working capital balance at the acquisition date was higher than this estimate and, accordingly, we incurred a purchase price of $430.7 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. We recorded selling, general and administrative expenses of $2.7 million and $0.5 million in the years ended September 30, 2019 and 2018, respectively. We also incurred additional investing cash outflows of $4.5 million from the acquisition of software licenses required for the newly-acquired employees.

We considered this transaction to be an acquisition of a business. We have completed our valuation of the assets acquired and liabilities assumed.


(dollars in thousands)	Estimated purchase price allocation at June 30, 2019		Adjustments		Final purchase price allocation at September 30, 2019
Cash consideration	$	430,699	$	24	$	430,723

Billed and unbilled receivables	142,165		(88)		142,077
Property and equipment	8,974		4,987		13,961
Other assets	4,508		22		4,530
Intangible assets	122,300		—		122,300
Total identifiable assets acquired	277,947		4,921		282,868
Accounts payable and other liabilities	31,862		4,923		36,785
Net identifiable assets acquired	246,085		(2)		246,083
Goodwill	184,614		26		184,640
Net assets acquired	$	430,699	$	24	$	430,723

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 estimated this balance using the excess earnings method and used a number of estimates, including expected future earnings from the acquired business and an appropriate expected rate of return. We have assumed a useful economic life of 10 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 through fiscal years 2019 and 2020, we have utilized a shorter asset life for this

customer relationship. The average weighted intangible asset life is 7.6 years and amortization is being recorded on a straight-line basis.


	Useful life	Fair value
Customer relationships - all contracts except U.S. Census	10 years	$	85,300
Customer relationship - U.S. Census	2 years	37,000
Total intangible assets		$	122,300

From the acquisition date until September 30, 2019, the acquired business provided $615.1 million and $117.4 million of revenue and gross profit, respectively. 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 years ended September 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, in both years shown, a charge of $18.5 million, 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, more 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 year ended September 30,
(dollars in thousands, except per share data)	2019		2018
Revenue	$	2,985,244	$	3,016,823
Net income	243,968		218,647
Basic earnings per share attributable to MAXIMUS	3.79		3.34
Diluted earnings per share attributed to MAXIMUS	3.77		3.32

GT Hiring Solutions

On August 16, 2019, we acquired 100% of the share capital of GT Hiring Solutions (2005) Inc. ("GT Hiring") for a purchase price estimated to be $6.1 million (8.1 million Canadian Dollars). The purchase price is subject to a net working capital true-up. GT Hiring provides employment services in British Columbia. We acquired GT Hiring to enhance the reach and capabilities of our Canadian employment services and, accordingly, the business has been integrated into our Outside the U.S. Segment. We are still in the process of finalizing the purchase price and the allocation of assets acquired and liabilities assumed. We have recorded estimated goodwill and intangible assets balances of $1.7 million and $2.7 million, respectively related to this acquisition. The goodwill represents the assembled workforce and enhanced knowledge, experience and reputation we have obtained from the acquisition and will be deductible for tax purposes. The intangible assets represent customer relationships.

Noncontrolling interests

Both our United Kingdom Remploy subsidiary and our business in Saudi Arabia had been partially owned by other parties. During fiscal year 2019, we acquired the share capital held by our partners for $0.4 million and $0.2 million, respectively.

Revitalised

On July 18, 2017, we acquired 100% of the share capital of Revitalised Limited ("Revitalised") for $4.0 million. Revitalised provides digital solutions to engage communities in the areas of health, fitness and wellbeing. We acquired Revitalised in order to enhance the capabilities of our health services programs in the United Kingdom and, accordingly, the business was integrated into our Outside the U.S. Segment. Revitalised included goodwill of

$2.8 million and intangible assets of $1.3 million. The goodwill represents the assembled workforce and enhanced capabilities stemming from the acquisition; the intangible assets represent the technology and customer relationships.

K-12 Education

On May 9, 2016, we sold our K-12 Education business. Following the settlement of certain contingencies in May 2017, we recorded a gain of $0.7 million.

Goodwill and intangible assets

Changes in goodwill for the years ended September 30, 2019 and 2018 are shown below. Goodwill has been reallocated to conform with our new segment reporting.


(Dollars in thousands)	U.S. Health and Human Services		U.S. Federal Services		Outside the U.S.		Total
Balance as of September 30, 2017	$	139,588	$	228,148	$	35,240	$	402,976


Foreign currency translation	—		—		(3,094)		(3,094)
Balance as of September 30, 2018	139,588		228,148		32,146		399,882
Acquisition of citizen engagement centers business	24,884		154,470		5,286		184,640
Acquisition of GT Hiring Solutions	—		—		1,347		1,347
Other	—		—		372		372
Foreign currency translation	—		—		(1,772)		(1,772)
Balance as of September 30, 2019	$	164,472	$	382,618	$	37,379	$	584,469

There have been no impairment charges to our goodwill.

Although the citizens 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 corporate overhead. Accordingly, we allocated goodwill based upon an estimate of the relative fair value of the benefit to each segment.

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


	As of September 30, 2019										As of September 30, 2018
	Cost		Accumulated Amortization		Intangible Assets, net		Cost		Accumulated Amortization		Intangible Assets, net
Customer contracts and relationships	$	250,455	$	72,430	$	178,025	$	129,113	$	42,683	$	86,430
Technology-based intangible assets	5,613		4,405		1,208		5,750		4,212		1,538
Trademarks and trade names	4,483		4,466		17		4,496		4,429		67
Total	$	260,551	$	81,301	$	179,250	$	139,359	$	51,324	$	88,035

As of September 30, 2019, our intangible assets have a weighted average remaining life of 9.0 years, comprising 9.1 years for customer contracts and relationships, 4.1 years for technology-based intangible assets and 0.3 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 September 30, 2019, is as follows (in thousands):


2020	$	35,632
2021	18,582
2022	16,212
2023	16,118
2024	15,994