Annual report pursuant to Section 13 and 15(d)

Business Combinations

v3.21.2
Business Combinations
 12 Months Ended
Sep. 30, 2021
Business Combination and Asset Acquisition [Abstract]  
Business Combinations BUSINESS COMBINATIONS
VES Group, Inc. (VES)
On May 28, 2021, the Company acquired 100% of VES for an estimated cash purchase price of $1.36 billion (the "VES Acquisition"). The final purchase price is subject to adjustment and is expected to be finalized during 2022. This business was integrated into our U.S. Federal Services Segment and is expected to increase revenue attributable to providing independent and conflict-free clinical business process services ("BPS"). The VES Acquisition also supports our ongoing strategic priority of expansion into the U.S. Federal market and accelerates our clinical evolution to meet long-term demand for BPS with a clinical dimension. We entered into a new credit agreement to fund the Acquisition. See "Note 9 - Debt" for further details. The results of operations for VES are included in the consolidated results of Maximus, Inc. starting May 29, 2021.
Table 6.1: VES Valuation
Initial Allocation of Assets and Liabilities Adjustments Estimated Allocation
of Assets
and Liabilities as of
September 30, 2021
(in thousands)
Consideration paid:
Cash consideration paid, net of cash acquired $ 1,360,231  $ —  $ 1,360,231 
Estimated additional cash payments 7,494  (2,859) 4,635 
Estimated cash consideration, net of cash acquired 1,367,725  (2,859) 1,364,866 
Assets acquired:
Accounts receivable - billed, billable and unbilled $ 44,078  $ —  $ 44,078 
Prepaid expenses and other current assets 13,911  (5,956) 7,955 
Property and equipment, net 9,113  —  9,113 
Operating lease right-of-use assets 18,898  —  18,898 
Intangible assets 664,000  —  664,000 
Other assets 12,816  (5,650) 7,166 
Total identifiable assets acquired 762,816  (11,606) 751,210 
Liabilities assumed:
Accounts payable and accrued compensation 42,978  (796) 42,182 
Operating lease liabilities 18,898  —  18,898 
Income taxes payable, current 6,196  (523) 5,673 
Deferred income taxes 177,626  (6,129) 171,497 
Other long-term liabilities 6,667  5,603  12,270 
Total identifiable liabilities assumed 252,365  (1,845) 250,520 
Net identifiable assets acquired 510,451  (9,761) 500,690 
Goodwill 857,274  6,902  864,176 
Net assets acquired $ 1,367,725  $ (2,859) $ 1,364,866 
Goodwill represents the value of the assembled workforce and the enhanced knowledge, capabilities, and qualifications held by the business. This goodwill balance is not deductible for tax purposes.
Our evaluation of the intangible assets acquired with VES has identified three assets. The assets were valued using methods which required a number of estimates and, accordingly, they are considered Level 3 measurements within the Accounting Standard Codification No. 820 (ASC 820) fair value methodology.
•Customer relationships represent the value of the existing contractual relationships with the United States Federal Government. These were valued using the excess earnings method, which required us to utilize estimated future revenues and earnings from contracts and an appropriate rate of return.
•VES maintains a provider network of third-party providers that assist in the performance of their clinical services. This network was valued using the cost method and income approach, which included both the cost of recreating such a network and the profits foregone during the time which would be required to recreate the network and an appropriate rate of return.
•VES maintained proprietary technology which interacted with U.S. Federal Government systems, facilitated the transmission of examination data, and supported the performance of the contracts. We valued the technology using a relief-from-royalty method, which required us to estimate future revenues and an arm's length royalty rate that a third-party provider might use to supply this service and an appropriate rate of return.
Table 6.2: VES Intangible Asset Values and Useful Lives
Estimated Straight-Line Useful Life Estimated Fair Value
(in thousands)
Customer contracts and relationships 12 years $ 580,000 
Provider network 12 years 57,000 
Technology-based intangible assets 12 years 27,000 
Total intangible assets $ 664,000 
In connection with certain liabilities acquired in the VES acquisition, we established a liability of $12.0 million for a billing dispute between VES and its customer relating to prior year billings. Our exposure is partially offset by an indemnification asset of $6.0 million. In the event that this dispute is settled for less than $6.0 million, we will return the indemnification asset to the sellers and any difference between the settlement amount and $6.0 million. In the event that the settlement exceeds $6.0 million, we are entitled to utilize the indemnification asset, and if the settlement exceeds $12.0 million, pursue other recourse permitted under the purchase agreement. At this time $12.0 million remains our best estimate of this liability. In addition, we have established a tax liability of $12.3 million for uncertain tax positions within VES, partially offset by another indemnification asset of $7.2 million. Both indemnification assets are secured in third party escrow accounts and we have recourse to other funds in the event these contingencies exceed the escrow balances.
From the acquisition date of May 28, 2021 through September 30, 2021, the acquired business, VES, contributed revenue of $186.6 million and gross profit of $53.5 million. Amortization of intangible assets for the same period was $18.4 million. As of September 30, 2021, we have completed our assessment of all acquired assets and liabilities assumed, except for incomes taxes and working capital true-up.
The Federal division of Attain, LLC ("Attain")
On March 1, 2021, the Company acquired 100% of Attain for a cash purchase price of $419.1 million. This business was integrated into our U.S. Federal Services Segment and is expected to strengthen our position to further design, develop, and deliver more innovative, impactful solutions and drive automation of processes to improve citizen engagement and the delivery of critical federal programs, as well as expand our presence in the U.S. Federal market. We utilized borrowings on the credit facility we had in place at the time, as well as cash on our balance sheet to fund the acquisition. The results of operations for Attain are included in our results from March 1, 2021.
Table 6.3: Attain Valuation
Allocation of Assets and Liabilities
(in thousands)
Consideration paid:
Cash consideration paid, net of cash acquired $ 419,097 
Assets acquired:
Accounts receivable - billed, billable and unbilled 39,375 
Prepaid expenses and other current assets 926 
Operating lease right-of-use assets 24,960 
Intangible assets 105,000 
Other assets 74 
Total identifiable assets acquired 170,335 
Liabilities assumed:
Accounts payable and other liabilities 28,863 
Operating lease liabilities, less current portion 26,401 
Total identifiable liabilities assumed 55,264 
Net identifiable assets acquired 115,071 
Goodwill 304,026 
Net assets acquired $ 419,097 
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 intangible assets acquired represent customer relationships. We estimated this balance using the excess earnings method (which is a Level 3 measurement within the ASC 820 fair value hierarchy) and used a number of estimates, including expected future revenue and earnings from the acquired business and an appropriate expected rate of return. We have assumed a useful economic life of 10 years, representing our expectation of the period over which we will receive the benefit.
As of September 30, 2021, we have completed our assessment of all acquired assets and liabilities assumed. During the year ended September 30, 2021, the acquired business, Attain, contributed revenue of $136.1 million, and gross profit of $33.4 million.
Proforma Results with VES and Attain
The following table presents certain pro forma results for the year ended September 30, 2021 and 2020 as though the acquisitions of both VES and Attain had occurred on October 1, 2019, the first day of fiscal year 2020. The twelve month information is consistent with that utilized in our debt covenant calculations. This pro forma information is presented for information purposes only and is not necessarily indicative of the results that might have occurred if the acquisition had taken place on that date. The pro forma results below eliminate intercompany transactions, include amortization charges for acquired intangible assets, and estimates of interest expense based upon our total estimated borrowings, eliminate pre-acquisition transaction costs, and reflect corresponding changes in our provision for income taxes. Acquisition related costs incurred by Maximus, VES, and Attain have been excluded in the following pro forma results. These costs were $9.5 million, $52.2 million, and $0.3 million, respectively.
Table 6.4: Unaudited Pro Forma Results - As if both VES and Attain Acquisitions Occurred on October 1, 2019
For the Year Ended September 30,
2021 2020
(in thousands, except per share amounts)
Revenue $ 4,672,597  $ 4,013,994 
Cost of revenue 3,566,894  3,107,493 
Gross profit 1,105,703  906,501 
Selling, general, and administrative expenses 553,048  485,903 
Amortization of intangible assets 85,621  101,467 
Operating income 467,034  319,131 
Interest expense (37,410) (38,239)
Other expense, net (2,414) (12,791)
Income before income taxes 427,210  268,101 
Provision for income taxes 102,045  64,328 
Net income $ 325,165  $ 203,773 
Earnings per share:
Basic $ 5.24  $ 3.23 
Diluted $ 5.21  $ 3.22 
Weighted average shares outstanding:
Basic 62,072  63,062 
Diluted 62,365  63,322 
Other acquisitions
On September 14, 2021, we acquired 100% of the share capital of Connect Assist Holdings Limited ("Connect Assist") for an estimated purchase price of $21.1 million (£15.5 million British Pounds). We acquired this business to improve our contact center services and qualifications within the United Kingdom. The business will be integrated into our Outside the U.S. Segment. We have completed a preliminary assessment of all acquired assets and liabilities assumed. We recorded estimated goodwill and intangible assets of $11.1 million and $7.7 million, respectively, related to the acquisition.
On August 21, 2020, we acquired 100% of the share capital of Index Root Korea Co. Ltd ("Index Root") for an estimated purchase price of $5.4 million (₩6.30 billion South Korean Won), which included acquisition-related contingent consideration estimated at $0.9 million (₩1.10 billion South Korean Won) based upon future earnings. We acquired Index Root to expand our geographic presence to South Korea. The business was integrated into our Outside the U.S. Segment. We have completed our assessment of all acquired assets and liabilities assumed. We recorded estimated goodwill and intangible assets of $5.1 million and $1.4 million, respectively, related to the acquisition. During the second quarter of fiscal year 2021, we concluded that payment of the contingent consideration was unlikely and, accordingly, a benefit of $1.0 million was recorded within our acquisition expenses.
On February 28, 2020, we acquired 100% of the share capital of InjuryNet Australia Pty Limited ("InjuryNet") for a purchase price of $4.4 million ($6.7 million Australian Dollars), which included acquisition-related contingent consideration of $2.1 million ($3.1 million Australian Dollars) based upon future earnings. As of September 30, 2021, the contingent consideration has been paid in full. InjuryNet provides workplace medical services in Australia. The business was integrated into our Outside the U.S. Segment. We have completed our assessment of all acquired assets and liabilities assumed. We recorded estimated goodwill and intangible assets of $2.6 million and $0.9 million, respectively, related to the acquisition.