| 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. As of December 31, 2021, we have completed our assessment of all acquired assets and liabilities assumed, except income taxes and working capital true-up. Table 6.1: VES Valuation Allocation of Assets and Liabilities as of September 30, 2021 Adjustments Estimated Allocation (in thousands) Consideration paid: Cash consideration paid, net of cash acquired $ 1,360,231 $ — $ 1,360,231 Estimated additional cash payments 4,635 — 4,635 Estimated cash consideration, net of cash acquired 1,364,866 — 1,364,866 Assets acquired: Accounts receivable - billed, billable and unbilled $ 44,078 $ — $ 44,078 Prepaid expenses and other current assets 7,955 — 7,955 Property and equipment, net 9,113 (1,092) 8,021 Operating lease right-of-use assets 18,898 — 18,898 Intangible assets 664,000 — 664,000 Other assets 7,166 — 7,166 Total identifiable assets acquired 751,210 (1,092) 750,118 Liabilities assumed: Accounts payable and accrued compensation 42,182 — 42,182 Operating lease liabilities 18,898 — 18,898 Income taxes payable, current 5,673 — 5,673 Deferred income taxes 171,497 — 171,497 Other long-term liabilities 12,270 — 12,270 Total identifiable liabilities assumed 250,520 — 250,520 Net identifiable assets acquired 500,690 (1,092) 499,598 Goodwill 864,176 1,092 865,268 Net assets acquired $ 1,364,866 $ — $ 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 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. During the first quarter of fiscal year 2022, the liability has been agreed as $12.0 million. We expect to settle the liability in the second quarter of fiscal year 2022 and recover the indemnification balance from the escrow fund. 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. Connect Assist Holdings Limited ("Connect Assist") On September 14, 2021, we acquired 100% of the share capital of 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 was 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 $11.3 million and $7.7 million, respectively, related to the acquisition. During the three months ended December 31, 2021, we reported $5.8 million and $2.2 million of revenue and gross profit, respectively, from Connect Assist. Aidvantage On October 6, 2021, we completed the acquisition of the student loan servicing business from Navient, rebranded as Aidvantage. The purchase price consideration is contingent upon future operating performance, up to a maximum payment of $65.0 million. At this time, we estimate that total payments will total approximately $15.3 million; this will increase if the number of student loans we are servicing increases or if the contractual relationship we have acquired is extended beyond its current anticipated end date of December 31, 2023. In the event that our anticipated future expense exceeds $15.3 million, we will record any difference as a charge to our statement of operating income. We recorded intangible assets related to the customer relationship of $14.9 million, which we are amortizing over 27 months. This business is a part of our U.S. Federal Services Segment and supplements our existing portfolio of services to the U.S. Department of Education. We are still in the process of completing our valuation of the assets acquired and the contingent consideration. During the three months ended December 31, 2021, we reported $34.7 million and $2.0 million of revenue and gross profit, respectively, from Aidvantage. |
