UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 20172018
Commission file number: 1-12997
MAXIMUS, INC.
(Exact name of registrant as specified in its charter)
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Virginia (State or other jurisdiction of incorporation or organization) | | 54-1000588 (I.R.S. Employer Identification No.) |
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1891 Metro Center Drive, Reston, Virginia (Address of principal executive offices) | | 20190 (Zip Code) |
Registrant's telephone number, including area code: (703) 251-8500
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
| Common Stock, no par value | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ý | | Accelerated filer o | | |
Non-accelerated filer o(Do not check if a smaller reporting company) | | Smaller reporting company o | | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of outstanding voting stock held by non-affiliates of the registrant as of March 31, 20172018 was $3,963,270,858$4,291,433,990 based on the last reported sale price of the registrant's Common Stock on The New York Stock Exchange as of the close of business on that day.
There were 65,136,56864,133,318 shares of the registrant's Common Stock outstanding as of November 6, 2017.14, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 20182019 Annual Meeting of Shareholders to be held on March 14, 2018,20, 2019, which definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the registrant's fiscal year, are incorporated by reference into Part III of this Form 10-K.
MAXIMUS, Inc.
Form 10-K
September 30, 20172018
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included in this Annual Report on Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about our Company, the industry in which we operate and other matters, as well as management's beliefs and assumptions and other statements that are not historical facts. Words such as "anticipate," "believe," "could," "expect," "estimate," "intend," "may," "opportunity," "plan," "potential," "project," "should," "will" and similar expressions are intended to identify forward-looking statements and convey uncertainty of future events or outcomes. These statements are not guarantees and involve risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from such forward-looking statements due to a number of factors, including without limitation:
a failure to meet performance requirements in our contracts, which might lead to contract termination and actual or liquidated damages;
the effects of future legislative or government budgetary and spending changes;
our failure to successfully bid for and accurately price contracts to generate our desired profit;
our ability to maintain technology systems and otherwise protect confidential or protected information;
our ability to attract and retain executive officers, senior managers and other qualified personnel to execute our business;
our ability to manage capital investments and startup costs incurred before receiving related contract payments;
our ability to manage our growth, including acquired businesses;
the ability of government customers to terminate contracts on short notice, with or without cause;
our ability to maintain relationships with key government entities from whom a substantial portion of our revenue is derived;
the outcome of reviews or audits, which might result in financial penalties and impair our ability to respond to invitations for new work;
a failure to comply with laws governing our business, which might result in the Company being subject to fines, penalties, suspension, debarment and other sanctions;
the costs and outcome of litigation;
difficulties in integrating or achieving projected revenues, earnings and earnings forother benefits associated with acquired businesses;
the effects of changes in laws and regulations governing our business, including tax laws, and applicable interpretations and guidance thereunder, or changes in accounting policies, rules, methodologies and practices, and our ability to estimate the impact of such changes;
matters related to business we have disposed of or divested; and
other factors set forth in Exhibit 99.1 of this Annual Report on Form 10-K under the caption "Special Considerations and Risk Factors."
As a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. Additionally, we caution investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made. Except as otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether resulting from new information, future events or otherwise.
PART I
ITEM 1. Business.
Throughout this annual report, the terms "MAXIMUS," "Company," "we," "our" and "us" refer to MAXIMUS, Inc. and its subsidiaries.
General
We are a leading operator of government health and human services programs worldwide. We act as a partner to governments under our mission of Helping Government Serve the People®. We use our experience, business process management expertise, innovation and technology solutions to help government agencies run effective, efficient and accountable programs.
Our company was founded in 1975 and grew both organically and through acquisitions during the early 2000s. Beginning in 2006, we narrowed our service offerings to focus in the area of business process services (BPS) primarily in the health services and human services markets. In parallel, we divested or exited a number of non-core businesses that fell outside these two areas. Our subsequent growth was driven by the expansion of our health services business around the globe, new welfare-to-work contracts outside the United States and the growth of our business with the United States Federal Government. This growth has been both organic and through acquisitions.
Beginning in fiscal year 2017, we experienced what we believe isbelieved was a temporary slowdown due to an industry pause tied to the transition of a new presidential administration in the United States. Although the transition is occurringoccurred at the federal level, we are seeingexperienced the effects on some of our U.S.-based health business as many states depend upon federal funds to finance the services they provide. As a result, our short-term growth expectations were impacted by longer procurement cycles, and increased delays mostlyand contract award protests. Some of this was due to policy and budget uncertainty. Further, agency staffing shortfalls tied to the slow presidential nomination process hindered the decision-making process at both the federal and the state level.
Longer-term, we believe the ongoing demand for our services driven by demographic, economic and legislative trends, coupled with our strong position within our industry, will continue to foster future growth. Our long-term growth thesis is based on the following factors:
Demographic trends, including increased longevity and more complex health needs, place an increased burden on government social benefit and safety-net programs. At the same time, programs that address societal needs must be a good use of taxpayer dollars and achieve their intended outcomes. We believe the macro-economic trends of demographics and government needs, coupled with the need to achieve value for money, will continue to drive demand for our services.
Our contract portfolio offers us excellentgood revenue visibility. Much of our revenue is derived from long-term contractual arrangements with governments. A contract will often have a base period followed by additional option periods. As a result, singleOur contracts may last several years and client relationships may be decades long. At any time, we are typically ablemulti-year arrangements and we have customer relationships which have lasted decades. Because of this longevity, our contract portfolio at any point in time can typically be used to identify more thanapproximately 90% of our subsequent twelve months' anticipated revenue from our existing contracts.for the next twelve months.
We maintain a strong reputation within the government health and human services industry. Our deep client relationships and reputation for delivering outcomes and creating efficiencies creates a strong barrier to entry in a risk-averse environment. Entering our markets typically requires expertise in complex procurement processes, operation of multi-faceted government programs and an ability to serve and engage with diverse populations.
We have a portfolio target operating profit margin that ranges between 10% and 15% with high cash conversion, a healthy balance sheet and access to a $400 million credit facility. Our financial flexibility allows us to fund investments in the business, complete strategic mergers and acquisitions to further supplement our core capabilities and seek new adjacent platforms.
We have an active program to identify potential strategic acquisitions. Our past acquisitions have successfully enabled us to expand our business processes, knowledge and client relationships into adjacent markets and new geographies. Over the past five years, these include:Our recent acquisitions are summarized below.
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▪Date | InAcquisition | Related Segment | Background | Purchase Price (in millions of dollars) |
| November 2018 | General Dynamics Information Technology's Citizen Engagement Centers (the citizen engagement center acquisition) | U.S. Federal Services | Citizen engagement services on large contracts for the U.S. Federal Government | $ 400.0 [Note 1] |
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July 2017 we acquired | Revitalised Limited (Revitalised), a U.K. provider of digital | Health Services | Digital solutions for engaging people in the areas of health, fitness and well-being. |
| wellbeing. | 4.1 |
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▪February 2016 | In 2016, we acquired Ascend Management Innovations, LLC (Ascend), a provider of independent, specialized | Health Services | Independent health assessments and data management tools to U.S. state government agencies in the U.S. |
| agencies. | 44.1 |
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▪December 2015 | In 2016, we acquired Assessments Australia, a provider of assessments that identify the supportThree companies doing business as "Assessments Australia" | Human Services | Health and functional assessment services required to help individuals succeed in a community environment. |
| Australia. | 3.1 [Note 2] |
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▪April 2015 | In 2015, we acquired Acentia, LLC (Acentia), a provider of system | U.S. Federal Services | System modernization, software development, program management and other information technology services to the U.S. Federal Government. |
| 293.5 |
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▪April 2015 | InRemploy (70% acquired in 2015, we acquired Remploy, a leading providerfurther 10% in 2018) | Human Services | Provision of disability employment services in the U.K. |
| United Kingdom. | 3.0 |
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▪January 2014 | InWelfare-to-work contracts owned by Centacare, Australia | Human Services | Provision of welfare-to-work services in Australia. | 2.7 |
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July 2013 we acquired | Health Management Limited (Health Management), a leading provider | Health Services | Provision of occupational health services and independent medical assessments in the U.K.United Kingdom. | 77.9 |
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Note 1 - The purchase price for this business is based upon an estimate. The final price will be based upon the acquired working capital balance. Note 2 - This purchase price includes an estimate of contingent consideration which has not yet been paid. |
Our business segments
The Company is organized and managed based on the services we provide: Health Services, U.S. Federal Services and Human Services.
We operate in the United States, Australia, United Kingdom, Canada, Saudi Arabia and Singapore.
For more information on our segment presentation and geographic distribution of our business, including comparative revenue, gross profit, operating income, identifiable assets and related financial information for the 2018, 2017 2016 and 20152016 fiscal years, see "Note 2. Business segments" within Item 8 of this Annual Report on Form 10-K, which we incorporate by reference herein.
Health Services Segment
Our Health Services Segment generated 56%59% of our total revenue in fiscal year 2017.2018.
The Health Services Segment provides a variety of business process services (program administration), assessments and appeals and related consulting services, primarilyassessments for state, provincial and national government programs. These services support a variety of government health benefit programs including Medicaid, the Children's Health Insurance Program (CHIP) and the Affordable Care Act (ACA) in the U.S., Health Insurance British Columbia (BC) in Canada, and the Health Assessment Advisory Service (HAAS) contract in the U.K.
Approximately 78%77% of our revenue for this segment comes from our comprehensive program administration services for government health benefit programs. These services help people access, navigate and use health benefits and other government programs. They include:
Support for Medicaid, the Children's Health Insurance Program (CHIP)CHIP and the Affordable Care Act (ACA)ACA in the U.S., and Health Insurance BC (British Columbia) in CanadaCanada.
Program eligibility support and enrollment services to help beneficiaries make the best choice for their health insurance coverage and improve their access to health carecare.
Application assistance and independent health plan enrollment counseling to beneficiariesbeneficiaries.
Beneficiary outreach, education, eligibility, enrollment and renewal servicesservices.
Centralized multilingual customer contact centers and multichannel self-service options for easy enrollmentenrollment.
Document and record managementmanagement.
Premium payment processing and administration, such as invoicing and reconciliationreconciliation.
Digital eHealth and well-being solutionswellbeing solutions.
We are a leading player in many of the health program administration markets that we serve. For example, we are:
Theare the largest provider of Medicaid enrollment and CHIP services in the U.S.
A and a leading operator of customer contact centers for state-based health insurance exchanges in the U.S.
Approximately 21%22% of the Segment’s revenue is from our independent appeals and assessments services. These services help governments engage with program recipients, while at the same time helping them improve the
efficiency, cost effectiveness, quality and accountability of their health and disability benefits programs. They include:
Support for the Health Assessment Advisory Service (HAAS)HAAS in the U.K.
Independent disability, long-term sick and other health assessments, including those related to long-term services and supports such as Preadmission Screening and Resident Reviews (PASRR).
Occupational health clinical assessmentsassessments.
We are a leading player in many of the health appeals and assessments markets that we serve. For example, we are:
A leading provider of government-sponsored health benefit assessments and appeals in the U.S. and the U.K.
One of the largest providers of disability and long-term sick support services and occupational health services in the U.K.
The rest of the Segment’s revenue is from specialized consulting services.
Our contracts may be reimbursed on a performance-based, cost-plus, fixed rate fee or a combination of all the above. The Segment may experience seasonality due to transaction-based work, such as program open enrollment periodsperiods. Other fluctuations may arise from changes in programs directed by our clients and activity related to contract life cycles.
Health Services Market Environment
According to the Organization for Economic Cooperation and Development, health care spending in the U.S. still far exceeds that of other high-income countries. The Kaiser Family Foundation noted an acceleration of U.S. health care spending in 2014 (4.3% per capita growth) and 2015 (5.0% per capita growth), particularly due in part, to increasedmore people having health coverage underfrom the ACA and predictsACA. Projections suggest that spendinghealth-spending growth will continue at a higher rate than in recent years,moderate pace (averaging 4.6% per year on a per capita basis) but notis unlikely to reach the double-digit growth seen inof previous decades. We believe that effectively managing these costs, as well as improving quality and access to health care, is a major policy priority for governments. Governments seek efficient and cost-effective solutions to manage their public health benefit programs. This includes programs meant to support individuals with disabilities and long-term medical conditions, as well as individuals with shorter-term health conditions.
In the U.S., as a result of Medicaid expansion and the ACA, many states have made program changes. These changes have occurred most notably through benefit changes ormore individuals who are now eligible for coverage through the ACA health insurance exchanges or via Medicaid expansion. In recent years,coverage and there have been historic decreases in uninsured rates under the ACA. Over the last decade, many state Medicaid programs have furtheralso expanded managed care to new populations and new geographies that havewere historically been served through fee-for-service Medicaid. More recently, some states are also seeking increased flexibility in the operations of their Medicaid programs via waivers requested through the Centers
for Medicare & Medicaid Services. Some of these waivers include individual responsibility components such as beneficiary work requirements and co-pays for benefits. We believe that theseThese waivers may create a more palatable path for additional states to contemplate new ways to operate their health benefit programs over the coming years. The issuance of waivers is contingent upon federal approval.
Many governments are also looking for innovative solutions to support disabled and elderly populations who require long-term services and supports (LTSS). A general trend in the LTSS market has been to ensure that individuals are in the right setting and receiving the right level of support and care. In many cases, this means allowing individuals to receive care at home or in a community-based setting, rather than institutional facilities. With no financial ties to health insurance plans or providers, our conflict-free assessment services assist governments in determining the most appropriate placement and health care services for program beneficiaries.
Outside of the U.S., many governments are seeking partners to help them manage, administer or operate their social benefit programs. Countries like the U.K. are examining how public health relates to productivity, cost reduction and economic growth. The U.K. Government provides a range of social welfare benefits for people who are unable to work as a result of a disability, long-term illness or other health condition. For individuals with long-term sickness or disabilities who are claiming the Employment Support Allowance benefit (a government-provided disability or long term sick benefit), the government requires an independent health assessment provided by a vendor through the Health Assessment Advisory Service (HAAS). The assessment report is then used by the government to determine an individual's level of benefits. We believe there is continued market demand to conduct
independent assessments for participants in public benefit programs and to support employers and their employees through our commercial occupational health services.
We believe the current health market environment positions us to benefit from continued demand across all of our geographies from service areas such as operations program management and independent health and benefit assessments. Overall, we expect the underlying demand for our services to increase over the next several years.
U.S. Federal Services Segment
Our U.S. Federal Services Segment generated 22%20% of our total revenue in fiscal year 2017.2018.
The U.S. Federal Services Segment provides business process services (program administration) for federal government programs, assessmentsolutions, program management, as well as system and appealssoftware development and maintenance services for both federal and similar state-based programs, and technology solutions forvarious U.S. federal civilian programs. The acquisitionSegment also contains certain state-based assessments and appeals work that is part of Acentia in 2015 transformed usthe Segment's heritage within the Medicare Appeals portfolio and continues to a full-service provider of business process services and technology solutions tobe managed within this Segment. We served 19 federal agencies and provided us with access to twelve new contract vehicles with the U.S. Federal Government. We currently serve 22 federal agencies.in fiscal 2018.
Approximately 27%30% of the Segment’s revenue is from our comprehensive program administration services for federal government benefit programs. These include:
Centralized customer contactcitizen engagement centers and support services
Document and record management
Case management, citizen engagement and consumer education
Approximately 34% of the Segment’s revenue is from our independent assessments and appeals services. These include:
Independent medical reviews and worker's compensation benefit appeals
Health benefitMedicare and Medicaid appeals
Program eligibility appeals
Approximately 39%36% of the Segment’s revenue is from our technology solutions. These include:
Modernization of systems and information technology (IT) infrastructure
Infrastructure operations and support
Software development, operations and management
Data analytics
We are typically reimbursed for our services
Many contracts in this Segment earn revenue on a cost-plus or a time-and-materials basis, althoughwhich typically carry the lowest levels of risk and lower levels of profit margin. The Segment also contains performance-based contracts where revenue may also beis earned based upon participant numbers or other transaction-based measures. Our assessments and appeals business is typically based uponmeasures, such as the number and type of casesassessments or appeals processed. The Segment is not expected to experience seasonality related to its programs. However, it may experience fluctuations as a result of volume variations or program maturity, includingwith contracts recording lower revenue and profitability related to transaction or performance based-contracts during program startup. Some
In November 2018, we acquired General Dynamics Information Technology's citizen engagement centers to add to our existing portfolio of work with the U.S. Federal Government. This will provide us with additional cost-plus contracts, may also be structured as cost-reimbursable, which typically carryincluding an expansion of our role with the lowest level of risk but also carry lower levels of operating margin.Centers for Medicare and Medicaid Services and the United States Census Bureau.
U.S. Federal Services Market Environment
TheFollowing the 2016 Presidential election, the U.S. federal services market has beenwas impacted by what we believe is a temporary industry pause tied to the transition to the new U.S. administration. Political struggles and uncertainty around agency budgets, as well as agency staffing shortfalls, have hindered the federal procurement and decision-making process.process causing an overall slowdown of work in some of our core areas.
While federal agency budgets still face fiscal pressures and the new administration is looking for improved efficiencies, we continue to see opportunities to apply our cost-effective and efficient solutions in the federal market. Federal agencies are tasked with cost-effectively managing programs at a time when changing demographics are leading to rising caseloads in many federal programs.
Many federal agencies must also address the maintenance of legacy IT systems and the pressing need for IT infrastructure as IT modernization continues to grow. Legacy processes and systems are fundamental to government operations, yet they are unsustainably expensive to operate in an environment that requires online agility and rapid response to new demands, requirements and global challenges. We are in a prime positionwell positioned to help agencies modernize and operate their mission-critical systems.
Other key factors that will likely impact the U.S. federal market include a variety of political, economic, social and technological issues:
A focus on the citizen experience and citizen services, as well as digital services
Agencies moving from transformation initiatives to operations and maintenance
Agencies seeking consolidation and shared services to achieve cost efficiencies
Changes in the acquisition and contracting environment, including consolidation of General Services Administration schedules, such as Alliant 2
Human Services Segment
Our Human Services Segment generated 22%21% of our total revenue in fiscal year 2017.2018.
The Human Services Segment provides national, state, provincial and local human services agencies with a variety of business process services and related consulting services for governmentwelfare-to-work, child support, higher education institutions and other human services programs. Approximately 70% of our revenue in this segment was earned in foreign jurisdictions, notably Australia and the United Kingdom.
Approximately 75%76% of the Segment’s revenue is from comprehensive workforce services that help disadvantaged individuals transition from government assistance programs to sustainable employment and economic independence. These services:
Supportservices support a variety of programs including theincluding:
The Work Programme and Work Choice in the U.K.;
jobactive and Disability Employment Services and Work for the Dole in Australia;
Temporary Assistance to Needy Families (TANF) in the U.S.;
the Employment Program of British Columbia, Canada;
the Taqat and Taqat Plus programs in Saudi Arabia; and
Workforce Singapore as a Career Matching ProviderProvider.
IncludeThese services cover a number of attributes including eligibility determination, case management, job‑readiness preparation, job search and employer outreach, job retention and career advancement, and selected educational and training servicesservices.
A further 16%15% of the Segment’s revenue is generated from children's services, which includes full and specialized child support case management services, customer contact center operations, and program and systems consulting services. Revenue is typically based upon fixed fees or performance-based measures.
The balance of the Segment’s revenue comes from other specialized services. These include program consulting services, including independent verification and validation, cost allocation plans and other specialized consulting offerings; management tools and professional consulting services for higher education institutions; and tax credit and employer services.
We are typically reimbursedOur payment terms vary between contracts. Within this segment, we have seen a trend towards payments based on the number of activitiesupon outcomes, such as achieving sustained employment targets or through fees for case management with incentives; with an emphasis in recent years to move towards the incentive fees. The Segmentchild support payments. There is not expected to experienceno significant effect from seasonality related to its programs.within this segment.
Human Services Market Environment
We believe our established presence, strong brand recognition, and ability to achieve the requisite performance requirements and outcomes makes us well-positioned to compete for human services opportunities.
We offer clients demonstrated results and decades of proven experience in administering welfare-to-work programs in the U.S., the U.K., Australia, Canada, Saudi Arabia and Singapore. In Australia, we are one of the largest welfare-to-work providers. We also have an established presence in the U.K.'s welfare-to-work market and presently provide employment and job training services under the Work Programme,Choice and Work Programmes, which wasare ending as a key componentresult of the government's austerity plan to rein in costly benefits programsa robust economy, low unemployment and reduce mounting debt.
Given lower unemployment rates in several of our markets, we have seen a shift away from mainstream welfare-to-work programsprograms.
Many governments are shifting their focus to thoseemployment programs that serve individuals with disabilities.disabilities or health conditions. Through our acquisition of Remploy, we have increased our presence in the U.K. disability employment services market where we help people with disabilities
and health conditions obtain mainstream employment. We do similar work in Australia under the Disability Employment Services program that aims to provide individuals with disabilities a supported path towards long-term employment. We are a recognized leader in the U.K and Australia for providing disability employment support services, having achieved accreditations in the U.K. as a Disability Confident Leader and in Australia as a Disability Confident Recruiter. We believe these services are transferrabletransferable to our other geographies and position us well for emerging trends in the disability services market.
In addition, governments seek assistance from private firms for children's services, such as family maintenance and child support. We currently provide services across North America.
We believe ongoing initiatives and measures to reduce costs and improve efficiencies, combined with our outstanding performance, expertise and proven solutions, will continue to drive demand for our core human services offerings across multiple geographies. Our ability to provide value-for-money is important in a market whichthat is very price competitive.
Reorganization of segments
Effective October 1, 2018, our Chief Executive Officer reorganized our reporting segments based on the way management intends to allocate resources, manage performance and evaluate results. This change responds to recent changes in the markets we operate, the increasing integration of health and human services programs worldwide and the evolving needs of our government clients as they aim to deliver services in a more holistic manner to their citizens. Accordingly, we will report operating segments on a geographic basis. Our operating segments will be U.S. Health & Human Services, U.S. Federal Services and Outside the U.S.
Our clients
Our primary clients are government agencies, with the majority at the national, provincial and state level and, to a lesser extent, some at the county and municipal level. In the year ended September 30, 2017,2018, approximately 49%51% of our total revenue was derived from U.S. state government agencies, 26%27% from foreign government agencies, 19%16% from agencies of the U.S. Federal Government and 6% from other sources including local municipalities and commercial customers.
In the U.S., even when our direct clients are state governments, a significant amount of our revenue is ultimately funded via the U.S. Federal Government in the form of cost-sharing arrangements with the states, such as is the case with Medicaid.
In the event of a shutdown of the U.S. Federal Government, a portion of our U.S. Federal Services Segment may be impacted. Many of our federally funded health and human services programs are typically deemed essential, which means that a short-term shutdown would not be expected to cause significant disruption to these operations. Our contract portfolio also contains some services that may be considered discretionary. As a result, we could incur costs in providing the portion of work that is considered discretionary with no certainty of recovery. In all cases, an extended delay may affect certain government programs that rely upon federal funding and may also have an effect on our cash flows if payments are delayed.
For the year ended September 30, 2017,2018, our most significant clients were the U.S. Federal Government, which provided 19%16% of our consolidated revenue, the State of New York, which provided 15%16%, and the U.K. Government, which provided 12% and the Australian Government, which provided 10%. Within these governments, we may be serving several distinct agencies. Our share of revenue with the U.S. Federal Government is expected to increase with the citizen engagement center acquisition.
We typically contract with government clients under four primary pricing arrangements: performance-based, cost-plus, fixed-price and time-and-materials. For the year ended September 30, 2017, 42%2018, 43% of our contracts were performance-based, 35%33% were cost-plus, 18% were fixed-price and 5%6% were time-and-materials.
Generally, the relationships with our clients are longer-term and typicallonger-term. Typical contracts, including option periods, tend to be several years long before they are subject to competitive rebid. See the "Backlog" section below for more details.
Backlog
At September 30, 2017,2018, we estimate that we had approximately $5.7$5.1 billion in backlog. Backlog represents an estimate of the remaining future revenue from existing signed base contracts and revenue from contracts that have been formally awarded, but not yet signed. Our backlog estimate includes revenue expected under the current terms of executed contracts and revenue from contracts in which the scope and duration of the services required are not definite but estimable (such as performance-based contracts). Our backlog estimate does not assume any contract renewals or option period exercises.
Increases in backlog result from the award of new contracts, the extension or renewal of existing contracts and the exercise of option periods. Reductions in backlog come from fulfilling contracts or the early termination of contracts. The backlog associated with our performance-based contracts is an estimate based upon management's experience of caseloads and similar transaction volume from which actual results may vary. We may modify our estimates related to performance-based contracts and as a result backlog from these contracts may increase or decrease based upon the information that management has at that time. Additionally, backlog estimates may be affected by foreign currency fluctuations.
Government contracts typically contain provisions permitting government clients to terminate contracts on short notice, with or without cause.
We believe that period-to-period backlog comparisons are difficult and may not necessarily accurately reflect future revenue we may receive. The actual timing of revenue receipts, if any, on projects included in backlog could change for any of the aforementioned reasons. The dollar amount by segment of our backlog as of September 30, 20172018 and 20162017 was as follows:
| | | | Backlog as of September 30, | Backlog as of September 30, |
| | 2017 | | 2016 | 2018 | | 2017 |
| | (In millions) | (In millions) |
| Health Services | $ | 4,246 |
| | $ | 2,429 |
| $ | 2,682 |
| | $ | 4,246 |
|
| U.S. Federal Services | 324 |
| | 408 |
| 744 |
| | 324 |
|
| Human Services | 1,130 |
| | 1,163 |
| 1,674 |
| | 1,130 |
|
| Total | $ | 5,700 |
| | $ | 4,000 |
| $ | 5,100 |
| | $ | 5,700 |
|
Our businesses typically involve contracts covering a number of years, including option periods. Contracts may include a period between contract signature and operations beginning for startup and transition activities where we
are precluded from recognizing revenue. At September 30, 2017,2018, the average weighted life of these contracts was approximately six years, including option periods. Although the exercise of options is uncertain, in our experience if the incumbent contractor is performing as expected these options are exercised nearly 100% of the time. The longevity of these contracts assists management in predicting revenue, operating income and cash flows. We expect approximately 44%40% of the backlog balance to be realized as revenue in fiscal year 2018 and, with the inclusion of anticipated option period renewals, to represent approximately 94% of current estimated 2018 revenue.2019. We adjust backlog annually for currency fluctuations and for estimated amounts associated with our performance-based contracts based upon the latest information that management has at that time.
As a result of the citizen engagement center acquisition in November 2018, we expect our backlog to increase in fiscal year 2019. Backlog, including the anticipated option period renewals as well as the backlog from the citizen engagement center acquisition, represents approximately 93% of current estimated fiscal year 2019 revenue.
Our growth strategy
Our goal is to enable future growth by remaining a leading provider of business process services (BPS),BPS, technology solutions and consulting services to government agencies. We will continue to deliver quality BPS to government clients to improve the cost effectiveness, efficiency and scalability of their programs as they deal with greater program complexity, rising demand and increasing caseloads. We also continue to seek efficiencies and optimize operations in order to achieve sustainable, profitable growth.
Our three-pronged approach to long-term growth include the following:is as follows.
Grow in our existing markets. With more than 40 years of business expertise in the government market, we continue to be a leader in developing innovative solutions to meet the evolving needs of government agencies in our existing markets. For example, innovations such as digital engagement and analytics provide opportunities for us to serve our clients with greater efficiency and to create a more seamless customer journey for participants in government programs. We continue to seek to enter into long-term relationships with clients to meet their ongoing objectives. As a result, long-term contracts (three to five years with additional option years) are often the preferred contracting method and provide us with predictable, recurring revenue streams. We believe an incumbent has a considerable advantage when contracts are rebid and that client relationships can last for decades.
Move into adjacent markets. As we gain expertise in particular services or geographies, we can use our knowledge and experience in other similar areas. We seek to grow our businesses by leveraging our existing core capabilities, consistently delivering the required outcomes for governments to achieve program goals, and pursuing opportunities with new and current clients in adjacent markets. For example, we continue to expandseek to grow our offeringsfootprint in clinical services as well as long-term services and supports and in fiscal year 2017 commenced a pilot welfare-to-work program in Singapore, based upon our experiences elsewhere.supports.
Incorporate new growth platforms. New growth platforms can be developed organically or through acquisition. We will selectively identify and pursue strategic acquisitions that provide us with a rapid and cost-effective method to enhance our services. This includes obtaining additional skill sets, increasing our access to contract vehicles, expanding our client base, cross-selling additional services, enhancing our technical capabilities and establishing or expanding our geographic presence. Many of our acquisitions allow us to gain new capabilities to use elsewhere within our business. For example, our acquisition of Health Management has givengave us significant occupational health capability and our acquisition of Revitalised improved our digital well-beingwellbeing capabilities. The citizen engagement center acquisition expands our reach in the delivery of citizen services, enables greater economies of scale, and brings enhanced technology and added operational capabilities that we believe will benefit the entire company.
We have centered our core business offerings on delivering BPS to government health and human services agencies in our primary geographies as well as to other civilian agencies within the U.S. Federal Government. Our market focus and established presence positions us to benefit from health care and welfare reform initiatives both in the U.S. and internationally. As such, we continually strive to recruit motivated individuals, including top managers from larger organizations, former government officials, consultants experienced in our service areas and recent college graduates with degrees aligned with our mission, such as degrees in government policy and administration. We believe we can continue to attract and retain experienced and educated personnel by capitalizing on our focused market approach and our reputation as a premier government services provider.
See Exhibit 99.1 of this Annual Report on Form 10-K under the caption "Special Considerations and Risk Factors" for information on risks and uncertainties that could affect our business growth strategy.
Competitive advantages
We offer a private sector alternative for the operation and management of critical government-funded health and human services programs. We believe our reputation and extensive experience give us a competitive advantage as governments value the level of expertise, proven delivery and brand recognition that we bring to our clients. The following areSome of the competitive advantages that allow us to capitalize on various market opportunities:opportunities are as follows.
Proven track record, ability to deliver outcomes and exceptional brand recognition. We assist governments in delivering cost-effective services to beneficiaries of government programs. We run large-scale, and often complex, program management operations on behalf of government agencies, improving the quality of services provided to their beneficiaries and achieving the necessary outcomes to help the government agencies cost-effectively meet their program goals. This has further enhanced our brand recognition as a proven partner with government agencies.
Subject matter expertise. Our workforce includes many individuals who possess substantial subject matter expertise in areas critical to the successful design, implementation, administration and operation of government health and human services programs. Many of our employees have worked for governments in management positions and can offer insights into how we can best provide valuable, practical and effective services to our clients.
Intellectual property that supports the administration of government programs. We have proprietary solutions to address client requirements in our markets that are configurable or provide a platform that can be utilized with other clients. We leverage commercial off-the-shelf platforms across multiple contracts in which we have considerable expertise to ensure we can deploy repeatable proven solutions. We also leverage software development methodologymethodologies to shorten software development cycles. Extensive use of shared infrastructure and standard solutions provides considerable price and quality advantages. We believe our extensive industry focus and expertise embedded in our systems and processes provide us with a competitive advantage.
Digital engagement, analytics and automation solutions to enhance government programs. Participants in government programs expect the same types of digital engagement they rely upon when interacting with consumer-oriented businesses. We believe our clients value our ability to infuse digital, such as mobile applications and social media, into our BPS solutions to make it easier for beneficiaries to engage with government programs. Analytics enable us to optimize our operations and provide our clients with improved outcomes through greater insight into the populations we serve. Process automation incorporated into our BPS solutions increases the efficiency and quality of the programs we operate.
Flexibility and scalability. We are experienced in launching large-scale operations under compressed time frames. We offer clients the flexibility and scalability to deliver the people, processes and technology to complete short- and long-term contractual assignments in the mostan efficient and cost-effective manner.
Financial strength. Our business provides us with robust cash flows from operations as a result of our profitability and our management of customer receivables. In the event that we have significant cash outlays at the commencement of projects, to fund acquisitions, or where delays in payments have resulted in short-term cash flow declines, we may borrow up to $400 million through our credit facility.facility, subject to standard covenants. We have the ability to borrow under our credit facility in all of the principal currencies in which we operate. We believe we have strong, constructive relationships with the lenders on our credit facility. We had $399.3 million available to borrow as of September 30, 2017. We believe our financial strength provides reassurance to government agencies that we will be able to establish and maintain the services they need to operate high-profile public health and human services.services programs.
Focused portfolio of services. We are one of the largest publicly traded companies that provides a portfolio of BPS almost exclusively to government customers. Our government program expertise and proven ability to deliver
defined, measurable outcomes differentiate us from other firms and non-profitnonprofit organizations, including large consulting firms that serve multiple industries and lack the focus necessary to manage the complexities of serving government agencies efficiently.
Established presence outside the United States. Governments outside the U.S. are seeking to improve government-sponsored health and human services programs, manage increasing caseloads, and contain costs. We have an established presence in the U.K., Australia, Canada, Saudi Arabia and Singapore. Our international efforts are focused on delivering cost-effective welfare-to-work and health benefits services to program participants on behalf of governments.
Expertise in competitive bidding. Government agencies typically award contracts through a comprehensive, complex and competitive request for proposals (RFP) and bidding process. Although the bidding criteria vary from contract to contract, typical contracts are awarded based upon a mix of technical solution and price. In some cases, governments award points for past performance tied to program outcomes. With more than 40 years of experience in responding to RFPs, we believe we have the necessary experience and resources to navigate government procurement processes and to assess and allocate the appropriate resources necessary for successful project completion in accordance with contractual terms.
Competition
The market for providing our services to government agencies is competitive and subject to rapid change. However, given the specialized nature of our services and the programs we serve, market entry can be difficult for new or inexperienced firms. The complex nature of competitive bidding, qualifying criteria related to past performance, the required investment in subject-matter expertise, repeatable processes and support infrastructure, and the need to achieve specific program outcomes creates barriers to entry for potential new competitors unfamiliar with the nature of government procurement.
In the U.S., our primary competitors in the Health Services Segment are government in-sourced operations, Conduent, HP, Automated Health Systems, Faneuil and KePro. We consider ourselves to be a significant competitor in the markets in which we operate as we are the largest provider of Medicaid and CHIP administrative programs and operate more state-based health insurance exchanges than any other commercial provider. In the U.S. Federal Services Segment, our primary competitors in the BPS market are Serco, General Dynamics Information Technology, PAE and Conduent. In the U.S. Federal Services Segment, our primary competitors in the technology sector tend to be IBM, Oracle, CSRA, Leidos, Accenture and other federal contractors. Our primary competitors in the Human Services Segment vary according to specific business line, but are primarily specialized consulting service providers and local nonprofit organizations.
Outside of the U.S., our primary competitors in the Health Services Segment include Atos, Capita, Interserve, Virgin Care and Optum. Our primary competitors in the Human Services Segment include Serco, Ingeus, a Providence Service Company, Staffline, Shaw Trust, Sarina Russo, Advanced Personnel Management and other specialized private companies and nonprofit organizations such as The Salvation Army and Goodwill Industries. Although the basis for competition varies from contract to contract, we believe that typical contracts are awarded based upon a mix of comprehensive solution and price. In some cases, clients award points for past performance tied to program outcomes.
Legislative initiatives
We actively monitor legislative initiatives and respond to opportunities as they develop. Much of our work depends upon us reacting quickly to dynamic changes in the legislative landscape to assist with implementation of new legislation. Over the past several years, legislative initiatives created new growth opportunities and potential markets for us. Legislation passed in all the geographies in which we operate hascan have significant public policy implications for all levels of government, and presents viable business opportunities in the health and human services arena.
Some legislative initiatives that have created new growth opportunities for MAXIMUS include:are as follows.
The Affordable Care Act (ACA). Enacted in 2010 and upheld through a Supreme Court decision in 2012, the ACA introduced comprehensive health care reform in the United States. In our Health Services Segment, we have helped states with the operation of their health insurance exchanges and the expansion of their Medicaid programs to include new populations, the integration of state eligibility processing for entitlement programs and new long-term services and supports initiatives that have introduced more flexibility for home- and community-based services. In our U.S. Federal Services Segment, we have also assisted the federal government with the operations of a customer contact center for the Federal Marketplace and independent eligibility appeals services.
Although the future of the ACA is uncertain, the factors that drove the passage of the ACA, including the large number of Americans without health insurance, remain. We believe we remain well-positioned to assist the federal government and individual states with future modifications to the ACA, including those made through waivers.
Children's Health Insurance Program Reauthorization Act (CHIPRA). CHIPRA was signed into law on February 2, 2009, extending the previous SCHIP program. As part of the ACA,Bipartisan Budget Act of 2018, CHIP has been extended and funded through 2019. While the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) provides new federal funding for CHIP through 2017, legislative initiatives are underway for the next round of funding.2027.
Medicaid and CHIP Managed Care Regulations. In 2016, the Centers for Medicare & Medicaid Services issued managed care regulations and federal standards for the Medicaid and Children’s Health InsuranceCHIP programs. These include enhancing
support for consumers, improving health care delivery and quality of care, providing greater access to health care, and ensuring a modern set of rules that better align with the marketplace and Medicare Advantage plans. They also reinforce ongoing efforts to modernize and streamline the enrollment process and the continued value of independent choice counseling.
Work Innovation and Opportunity Act (WIOA). Signed into law in July 2014, WIOA replaces the Workforce Investment Act of 1998 and took effect on July 1, 2015. The law coordinates several core federal employment, training, education and literacy programs. It also requires states to strategically align their workforce development programs, with the option to include TANF, to help job seekers access the necessary support services and to match employers with skilled workers they need to compete in the global economy. WIOA represents potential new opportunities for us to complement our existing TANF welfare-to-work operations in the U.S.
The Welfare Reform Act of 2007 (United Kingdom). The Welfare Reform Act of 2007 replaced Incapacity Benefit with the Employment and Support Allowance and introduced the Work Capability Assessment (WCA). The WCA was designed to distinguish people who could not work due to health-related problems from people who were "fit for work" or, with additional support, could eventually return to work. In 2010, the U.K. Government decided to reassess the 1.5 million people who had previously been determined to be eligible to receive Incapacity Benefits. The U.K. Government also decided that an independent health assessment provided by a vendor partner is the best method for the government to determine the level of benefits for individuals with long-term sickness or disabilities. MAXIMUS has been providing assessments through the resulting Health Assessment Advisory Service (HAAS) on behalf of the Department for Work and Pensions (DWP) since March 2015.
Employees
As of September 30, 2017,2018, we had approximately 20,40018,600 employees, consisting of 12,60011,700 employees in the Health Services Segment, 2,700 employees in our U.S. Federal Services Segment, 4,6003,700 employees in the Human Services Segment and 500 corporate administrative employees. Our success depends in large part on attracting, retaining and motivating talented, innovative, experienced and educated professionals at all levels. As a result of the citizen engagement center acquisition, we will be adding approximately 13,100 employees to our U.S. Federal Services Segment and approximately 300 corporate administrative employees upon the closing of the acquisition.
As of September 30, 2017, 4862018, 453 of our employees in Canada were covered under three different collective bargaining agreements, each of which has different components and requirements. There are 473441 employees covered by two collective bargaining agreements with the British Columbia Government and Services Employees' Union and 1312 employees covered by a collective bargaining agreement with the Professional Employees Association. These collective bargaining agreements expire in 2019 and 2020.
As of September 30, 2017, 1,7892018, 1,593 of our employees in Australia were covered under a Collective Agreement, which is similar in form to a collective bargaining agreement. The Collective Agreement is renewed annually.
As of September 30, 2017, 5432018, 405 of our employees in the U.K. were covered under a collective bargaining agreement with GMB Trade Union and Unite Amicus Trade Union. These collective bargaining agreements do not have expiration dates.
None of our other employees are covered under any such agreement. We consider our relations with our employees to be good.
Other information
MAXIMUS, Inc. is a Virginia Corporation.corporation.
Our principal executive offices are located at 1891 Metro Center Drive, Reston, Virginia, 20190. Our telephone number is 703-251-8500.
Our website address is http://www.maximus.com.maximus.com. We make our website available for informational purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Annual Report on Form 10-K.
We make our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and the proxy statement for our annual shareholders' meeting, as well as any amendments to those reports, available free of charge through our website as soon as reasonably practical after we file that material with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC filings may be accessed through the Investor Relations
page of our website. These materials, as well as similar materials for other SEC registrants, may be obtained directly from the SEC through their website at http://www.sec.gov. This information may also be read and copied at the SEC's Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
ITEM 1A. Risk Factors.
Our operations are subject to many risks that could adversely affect our future financial condition, results of operations and cash flows and, therefore, the market value of our securities. See Exhibit 99.1 of this Annual Report on Form 10-K under the caption "Special Considerations and Risk Factors" for information on risks and uncertainties that could affect our future financial condition and performance. The information in Exhibit 99.1 is incorporated by reference into this Item 1A.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2. Properties.
We own a 60,000 square-foot office building in Reston, Virginia. We also lease offices for operations, management and administrative functions in connection with the performance of our services. At September 30, 2017,2018, we leased 111113 offices in the U.S. totaling approximately 2.52.4 million square feet. In five countries outside the U.S., we leased 333304 offices totaling approximately 1.11.0 million square feet. The lease terms vary from month-to-month to ten-year leases and are generally at market rates. In the event that a property is used for our services in the U.S., we typically negotiate clauses to allow termination of the lease if the service contract is terminated by our customer. Such clauses are not standard in foreign leases.
We believe that our properties are maintained in good operating condition and are suitable and adequate for our purposes.
As a result of the citizen engagement center acquisition, we commenced leasing an additional 20 offices in the U.S. totaling approximately 1.3 million square feet in November 2018.
ITEM 3. Legal Proceedings.
We are subject to audits, investigations and reviews relating to compliance with the laws and regulations that govern our role as a contractor to agencies and departments of the U.S. Federal Government, state, local, and foreign governments, and otherwise in connection with performing services in countries outside of the U.S. Adverse findings could lead to criminal, civil or administrative proceedings, and we could be faced with penalties, fines, suspension or disbarment. Adverse findings could also have a material adverse effect on us because of our reliance on government contracts. We are subject to periodic audits by federal, state, local and foreign governments for taxes. We are also involved in various claims, arbitrations, and lawsuits arising in the normal conduct of our business. These include but are not limited to, bid protests, employment matters, contractual disputes and charges before administrative agencies. Although we can give no assurance, based upon our evaluation and taking into account the advice of legal counsel, we do not believe that the outcome of any pending matter would likely have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Shareholder Lawsuit
lawsuit
In August 2017, the Company and certain officers were named as defendants in a putative class action lawsuit filed in the U.S. District Court for the Eastern District of Virginia. The plaintiff allegesalleged the defendants made a variety of materially false and misleading statements, or failed to disclose material information, concerning the status of the Company’s Health Assessment Advisory Service project for the U.K. Department for Work and Pensions from the period of October 20, 2014 through February 3, 2016. In August 2018, the defendants’ motion to dismiss the case was granted, and the case was dismissed. In October 2018, the plaintiffs filed a notice of appeal to the U.S. Circuit Court for the Fourth Circuit. That appeal is pending. At this time, it is not possible to reasonably predict whether this matter will be permitted to proceed as a class or to reasonably estimate the value of the claims asserted, and we are unable to estimate the potential loss or range of loss.
Medicaid claims
A state Medicaid agency has been notified of two proposed disallowances by the Centers for Medicare and Medicaid Services (CMS) totaling approximately $31 million. From 2004 through 2009, we had a contract with the state agency in support of its school-based Medicaid claims. We entered into separate agreements with the school districts under which we assisted the districts with preparing and submitting claims to the state Medicaid agency
which, in turn, submitted claims for reimbursement to CMS. The defendants denystate has asserted that its agreement with us requires us to reimburse the allegationsstate for the amounts owed to CMS. However, our agreements with the school districts require them to reimburse us for such amounts, and intendtherefore we believe the school districts are responsible for any amounts that ultimately must be refunded to defendCMS. Although it is reasonably possible that a court could conclude we are responsible for the full balance of the disallowances, we believe our exposure in this matter vigorously.is limited to our fees associated with this work and that the school districts will be responsible for the remainder. We have established a reserve to cover our estimated fees earned from this engagement relating to the disallowances. We exited the federal healthcare-claiming business in 2009 and no longer provide the services at issue in this matter. No legal action has been initiated against us.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on the New York Stock Exchange (NYSE) under the symbol "MMS." The following table sets forth, for the fiscal periods indicated, the range of high and low sales prices for our common stock and the quarterly cash dividends per share declared on the common stock.
|
| | | | | | | | | | | |
| | Price Range | | |
| | High | | Low | | Dividends |
| Year Ended September 30, 2017: | |
| | |
| | |
|
| First Quarter | $ | 57.66 |
| | $ | 43.69 |
| | $ | 0.045 |
|
| Second Quarter | 62.78 |
| | 51.74 |
| | 0.045 |
|
| Third Quarter | 64.97 |
| | 57.12 |
| | 0.045 |
|
| Fourth Quarter | 65.37 |
| | 58.58 |
| | 0.045 |
|
Year Ended September 30, 2016: | |
| | |
| | |
|
| First Quarter | $ | 69.85 |
| | $ | 47.95 |
| | $ | 0.045 |
|
| Second Quarter | 55.67 |
| | 45.15 |
| | 0.045 |
|
| Third Quarter | 58.14 |
| | 46.90 |
| | 0.045 |
|
| Fourth Quarter | 61.68 |
| | 54.38 |
| | 0.045 |
|
As of October 1, 2017,5, 2018, there were 43 holders of record of our outstanding common stock. The number of holders of record is not representative of the number of beneficial owners due to the fact that many shares are held by depositories, brokers or nominees. We estimate there are approximately 29,50034,500 beneficial owners of our common stock.
During fiscal years 2018 and 2017, we declared and paid quarterly dividends of $0.045 per share of MAXIMUS common stock. From the first quarter of fiscal year 2019, we expect that the corresponding payment will be $0.25 per share of MAXIMUS common stock. We expectintend to continue our policy of paying regular cash dividends, although there is no assurance as to future dividends. Future cash dividends, if any, will be paid at the discretion of our Board of Directors and will depend, among other things, upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors our Board of Directors may deem relevant.
The following table sets forth information regarding repurchases of common stock that we made during the three months ended September 30, 2017:2018:
|
| | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans(1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (in thousands) |
| July 1, 2017 - July 31, 2017 | — |
| | $ | — |
| | — |
| | $ | 109,417 |
|
| August 1, 2017 - August 31, 2017 | — |
| | — |
| | — |
| | 109,694 |
|
| September 1, 2017 - September 30, 2017 (2) | 135,070 |
| | $64.50 | | — |
| | 109,878 |
|
| Total | 135,070 |
| | | | — |
| | |
|
|
| | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans(1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (in thousands) |
| July 1, 2018 - July 31, 2018 | 10,000 |
| | $ | 62.48 |
| | 10,000 |
| | $ | 197,145 |
|
| August 1, 2018 - August 31, 2018 | 4,925 |
| | 62.92 |
| | 4,925 |
| | 196,836 |
|
| September 1, 2018 - September 30, 2018 (2) | 202,044 |
| | 64.98 |
| | 62,000 |
| | 192,817 |
|
| Total | 216,969 |
| | | | 76,925 |
| | |
|
| |
| (1) | Under a resolution adopted in August 2015,June 2018, the Board of Directors authorized the repurchase, at management's discretion, of up to an aggregate of $200 million of our common stock. The resolution also authorized the use of option exercise proceeds for the repurchase of our common stock. |
| |
| (2) | The total number of shares purchased in September 2017 comprises2018 includes 140,044 restricted stock units which vested in September 20172018 but which were utilized by the recipients to net-settle personal income tax obligations. |
Stock Performance Graph
The following graph compares the cumulative total shareholder return on our common stock for the five-year period from September 30, 20122013, to September 30, 2017,2018, with the cumulative total return for the NYSE Stock Market (U.S. Companies) Index. In addition, we have compared the results of a peer group to our performance. Our peer group is based upon the companies noted in our annual proxy statement as entities with whom we compete for executive talent. Our
During fiscal year 2018, we updated our peer group. The updated peer group is comprised of Booz Allen Holding Corp., CACI International, Conduent, DST Systems, Gartner, Harris Corp., ICF International, ManTech International, Science International Applications Corp (SAIC) and Unisys Corp. Our former peer group was comprised of Booz Allen Holding Corp., CACI International, DST Systems, Gartner, Harris Corp., ICF International, Leidos Holdings, ManTech International, Science International Applications Corp (SAIC)SAIC and Unisys Corp.
This graph assumes the investment of $100 on September 30, 20122013, in our common stock, the NYSE Stock Market (U.S. Companies) Index and our peer group,groups, weighted by market capitalization and assumes dividends are reinvested.
Notes:
| |
| A. | The lines represent index levels derived from compounded daily returns that include all dividends. |
| |
| B. | The indexes are reweighted daily, using the market capitalization on the previous trading day. |
| |
| C. | If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used. |
| |
| D. | The index level for all series was set to $100.00 on September 30, 2012.2013. |
ITEM 6. Selected Financial Data.
We have derived the selected consolidated financial data presented below from our consolidated financial statements and the related notes. The revenue and operating results related to the acquisition of companies are included from the respective acquisition dates. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included as Item 7 of this Annual Report on Form 10-K and with the Consolidated Financial Statements and related Notes included as Item 8 of this Annual Report on Form 10-K. The historical results set forth in this Item 6 are not necessarily indicative of the results of operations to be expected in the future.
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In thousands, except per share data) | (In thousands, except per share data) |
| Consolidated statement of operations data: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Revenue | $ | 2,450,961 |
| | $ | 2,403,360 |
| | $ | 2,099,821 |
| | $ | 1,700,912 |
| | $ | 1,331,279 |
| $ | 2,392,236 |
| | $ | 2,450,961 |
| | $ | 2,403,360 |
| | $ | 2,099,821 |
| | $ | 1,700,912 |
|
| Operating income | 313,512 |
| | 286,603 |
| | 259,832 |
| | 225,308 |
| | 185,155 |
| 295,483 |
| | 313,512 |
| | 286,603 |
| | 259,832 |
| | 225,308 |
|
| Net income attributable to MAXIMUS | 209,426 |
| | 178,362 |
| | 157,772 |
| | 145,440 |
| | 116,731 |
| 220,751 |
| | 209,426 |
| | 178,362 |
| | 157,772 |
| | 145,440 |
|
| Basic earnings per share attributable to MAXIMUS | $ | 3.19 |
| | $ | 2.71 |
| | $ | 2.37 |
| | $ | 2.15 |
| | $ | 1.71 |
| $ | 3.37 |
| | $ | 3.19 |
| | $ | 2.71 |
| | $ | 2.37 |
| | $ | 2.15 |
|
| Diluted earnings per share attributable to MAXIMUS | $ | 3.17 |
| | $ | 2.69 |
| | $ | 2.35 |
| | $ | 2.11 |
| | $ | 1.67 |
| $ | 3.35 |
| | $ | 3.17 |
| | $ | 2.69 |
| | $ | 2.35 |
| | $ | 2.11 |
|
| Weighted average shares outstanding: | | | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
|
| Basic | 65,632 |
| | 65,822 |
| | 66,682 |
| | 67,680 |
| | 68,165 |
| 65,501 |
| | 65,632 |
| | 65,822 |
| | 66,682 |
| | 67,680 |
|
| Diluted | 66,065 |
| | 66,229 |
| | 67,275 |
| | 69,087 |
| | 69,893 |
| 65,932 |
| | 66,065 |
| | 66,229 |
| | 67,275 |
| | 69,087 |
|
| Cash dividends per share of common stock | $ | 0.18 |
| | $ | 0.18 |
| | $ | 0.18 |
| | $ | 0.18 |
| | $ | 0.18 |
| $ | 0.18 |
| | $ | 0.18 |
| | $ | 0.18 |
| | $ | 0.18 |
| | $ | 0.18 |
|
| | | | At September 30, | At September 30, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In thousands) | (In thousands) |
| Consolidated balance sheet data: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Cash and cash equivalents | $ | 166,252 |
| | $ | 66,199 |
| | $ | 74,672 |
| | $ | 158,112 |
| | $ | 125,617 |
| $ | 349,245 |
| | $ | 166,252 |
| | $ | 66,199 |
| | $ | 74,672 |
| | $ | 158,112 |
|
| Total assets | 1,350,662 |
| | 1,348,819 |
| | 1,271,558 |
| | 900,996 |
| | 857,978 |
| 1,462,000 |
| | 1,350,662 |
| | 1,348,819 |
| | 1,271,558 |
| | 900,996 |
|
| Debt | 668 |
| | 165,615 |
| | 210,974 |
| | 1,217 |
| | 1,489 |
| 510 |
| | 668 |
| | 165,615 |
| | 210,974 |
| | 1,217 |
|
| Total MAXIMUS shareholders' equity | 940,085 |
| | 749,081 |
| | 612,378 |
| | 555,962 |
| | 529,508 |
| 1,083,867 |
| | 940,085 |
| | 749,081 |
| | 612,378 |
| | 555,962 |
|
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, our Consolidated Financial Statements and the related Notes.
For an overview of our business, including our business segments and a discussion of the services we provide, see the Business discussion in Item 1.1 - Business.
Recent acquisitions and disposals
We completed fiveThe following acquisitions during the three years ended September 30, 2017:have occurred since October 2015:
In April 2015, we acquired Acentia, LLC (Acentia), a provider of services to the U.S. Federal Government. This business was integrated into our U.S. Federal Services Segment.In April 2015, we acquired a majority ownership of Remploy, a business providing specialized disability employment services for the U.K. government. This business was integrated into our Human Services Segment.
In December 2015, we acquired Assessments Australia. This business was integrated into our Human Services Segment.
In February 2016, we acquired Ascend Management Innovations, LLC (Ascend). This business was integrated into our Health Services Segment.
In July 2017, we acquired Revitalised Limited (Revitalised), a provider of digital solutions for engaging communities in the United Kingdom in the areas of health, fitness and well-being. This business was integrated into our Health Services Segment. |
| | | | | |
| Date | Acquisition | Related Segment | Background | Purchase Price (in millions) |
| November 2018 | General Dynamics Information Technology's Citizen Engagement Centers (the citizen engagement center acquisition) | U.S. Federal Services | Citizen engagement services on large contracts for the U.S. Federal Government. | $ 400.0 [Note 1] |
|
| July 2017 | Revitalised Limited | Health Services | Digital solutions for health, fitness and wellbeing. | 4.1 |
|
| February 2016 | Ascend Management Innovations, LLC | Health Services | Independent health assessments and data management tools to U.S. state government agencies. | 44.1 |
|
| December 2015 | Three companies doing business as "Assessments Australia" | Human Services | Health and functional assessment services in Australia. | 3.1 [Note 2] |
|
Note 1 - The purchase price for this business is based upon an estimate. The final price will be based upon the acquired working capital balance. Note 2 - This purchase price includes an estimate of contingent consideration which has not yet been paid. |
We believe that all fivethese acquisitions will provide us with the ability to complement and expand our existing servicesservices.
In May 2016, we sold our K-12 Education business, which had been part of our Human Services Segment. We recorded gains of $6.9 million and $0.7 million in their respective markets.fiscal years 2016 and 2017, respectively.
Financial overview
We operate a portfolio of clients in a number of U.S. and foreign jurisdictions. Our results for the three years ended September 30, 20172018, have been significantly influenced by the following:a number of factors.
Organic growth within ourOur Health Services Segment primarilyhas reported organic growth through contract expansion in the United States and performance improvement in the Health Advisory and Assessment (HAAS)improved contract in the U.K.;performance.
Declines in ourOur U.S. Federal Services Segment due tohas seen a decline in revenues and profit from the wind-down in 2017loss of a large subcontract for work performed forwith the U.S. Department of Veterans Affairs, where revenue declined by approximately $63 million compared to 2016;the natural and in 2016 the expected closureconclusion of one customer contact center tied to the Federal Marketplacea number of smaller contracts as well as contracts that were re-procured under the Affordable Care Act where revenue declined by approximately $49 million compared to 2015;small business set-asides.
Organic growth in ourOur Human Services Segment from expansion of our international welfare-to-work businesses due mostly to the ramp up of jobactivehas experienced changes in its contract portfolio as new contracts in Australia whichhave been offset expectedby the end of Work Programme and Work Choice Programme contracts in the United Kingdom. Many of these international contracts are pay-for-performance contracts that earn revenue as the contract progresses.
Our Health and Human Services Segments operate in foreign locations and are exposed to fluctuations in foreign currencies. These fluctuations have resulted in overall declines in income since fiscal year 2016.
Our tax rate received benefits from the U.K. dueUnited States Tax Cuts and Jobs Act in 2018, the recording of tax benefits from the vesting of RSUs and the exercise of stock options in fiscal years 2018 and 2017 and research and development tax credits in fiscal year 2017.
We utilized our cash flows from operations in fiscal years 2016 and 2017 to reduce our debt, much of which had been incurred with the wind-down of the Work Programme;
The fluctuation in the value of international currencies, principally the British Pound which fell sharply on June 24, 2016 following the European Union referendum;
The effect of our acquisitions especially that of Acentia, and RemployLLC in 2015 and Ascend Management Innovations, LLC in 2016, which resulted in increases in revenue and operating income, but also cash borrowings,2016. By reducing our debt balance, we reduced our interest expense, amortization of intangible assets and acquisition-related expenses;expenses year-over-year.
The repayment in full of our U.S. cash borrowings through 2016 and 2017, utilizing our operating cash flows, which reduced interest expense;
The sale of our K-12 Education business in May 2016 which resulted in a gain of $6.9$6.9 million on the date of sale and an additional $0.7$0.7 million in May 2017 following the resolution of outstanding contingencies;
contingencies.Interest incomeWe repurchased common shares at a cost of $67.6 million, $28.9 million and tax$31.3 million for the fiscal years ended September 30, 2018, 2017 and 2016, respectively, resulting in corresponding benefits from research and development credits in the United States and in foreign jurisdictions;to earnings per share.
Tax benefits from the vesting of restricted stock units (RSUs) and the exercise of stock options inWe have maintained our quarterly dividend program. During fiscal year 2017 which, under new accounting standards, are recorded as a component of tax expense. In prior years, the benefits from the vesting of RSUs were recorded through our Consolidated Statements of Changes in Shareholders' Equity;
Improved cash flows from operations due to improvements in customer cash collections in fiscal year 2017;
Increased investment in our capital infrastructure in fiscal year 2014 and 2015 which, along with acquisitions, utilized significant amounts of cash and2019, we increased our depreciation expense;
Approximately $143.0 million of repurchases of our own shares as part of our share repurchase program; and
Our quarterly cash dividends.annual payment from $0.18 to $1.00 per year.
International businesses
We operate in international locations and, accordingly,locations. Accordingly, we also transact business in currencies other than the U.S. Dollar, principally the Australian Dollar, the Canadian Dollar, the Saudi Arabian Riyal, the Singapore Dollar and the British Pound. During the year ended September 30, 2017,2018, we earned approximately 28%29% and 17%11% of revenue and operating income, respectively, from our foreign subsidiaries. At September 30, 2017, approximately 25% of our assets are held by foreign subsidiaries. International business exposes us to certain risks, including:risks.
Tax regulations may penalize us if we transfer funds or debt across international borders. Accordingly,borders; accordingly, we may not be able to use our cash in the locations where it is needed. WeThe passage of the Tax Cuts and Jobs Act in the United States in December 2017 eliminated many of these incremental penalties. As a result, we remitted a significant portion of our cash to the United States. Although this has been a significant benefit, some international transaction limitations still exist and there is no guarantee that the current U.S. tax regime will remain in place. To mitigate this risk by maintainingour risks with respect to transferring funds, we maintain sufficient working capital, or havinghave sufficient capital available to us under our credit facility, both within and outside the U.S., to support the short-term and long-term capital requirements of the businesses in each region. We establish our legal entities to make efficient use of tax laws and holding companies to minimize this exposure.
We are subject to exposure from foreign currency fluctuations. Our foreign subsidiaries typically incur costs in the same currency as they earn revenue, thus limiting our exposure to unexpected currency fluctuations. Further, the operations of the U.S. business do not depend upon cash flows from foreign subsidiaries. However, declines in the relevant strength of foreign currencies against the U.S. Dollar will affect our revenue mix, profit margin and tax rate.
Summary of consolidated results
The following table sets forth, for the fiscal years indicated, information derived from our statements of operations.
| | | | | Year ended September 30, | | Year ended September 30, |
| (dollars in thousands, except per share data) | | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
| Revenue | | $ | 2,450,961 |
| | $ | 2,403,360 |
| | $ | 2,099,821 |
| | $ | 2,392,236 |
| | $ | 2,450,961 |
| | $ | 2,403,360 |
|
| Cost of revenue | | 1,839,056 |
| | 1,841,169 |
| | 1,587,104 |
| | 1,797,851 |
| | 1,839,056 |
| | 1,841,169 |
|
| Gross profit | | 611,905 |
| | 562,191 |
| | 512,717 |
| | 594,385 |
| | 611,905 |
| | 562,191 |
|
| Gross profit margin | | 25.0 | % | | 23.4 | % | | 24.4 | % | | 24.8 | % | | 25.0 | % | | 23.4 | % |
| Selling, general and administrative expense | | 284,510 |
| | 268,259 |
| | 238,792 |
| | 285,241 |
| | 284,593 |
| | 269,091 |
|
| Selling, general and administrative expense as a percentage of revenue | | 11.6 | % | | 11.2 | % | | 11.4 | % | | 11.9 | % | | 11.6 | % | | 11.2 | % |
| Amortization of intangible assets | | 12,208 |
| | 13,377 |
| | 9,348 |
| | 10,308 |
| | 12,208 |
| | 13,377 |
|
| Restructuring costs | | 2,242 |
| | — |
| | — |
| | 3,353 |
| | 2,242 |
| | — |
|
| Acquisition-related expenses | | 83 |
| | 832 |
| | 4,745 |
| |
| Gain on sale of a business | | 650 |
| | 6,880 |
| | — |
| | — |
| | 650 |
| | 6,880 |
|
| Operating income | | 313,512 |
| | 286,603 |
| | 259,832 |
| | 295,483 |
| | 313,512 |
| | 286,603 |
|
| Operating income margin | | 12.8 | % | | 11.9 | % | | 12.4 | % | | 12.4 | % | | 12.8 | % | | 11.9 | % |
| Interest expense | | 2,162 |
| | 4,134 |
| | 1,398 |
| | 1,000 |
| | 2,162 |
| | 4,134 |
|
| Other income, net | | 2,885 |
| | 3,499 |
| | 1,385 |
| | 4,726 |
| | 2,885 |
| | 3,499 |
|
| Income before income taxes | | 314,235 |
| | 285,968 |
| | 259,819 |
| | 299,209 |
| | 314,235 |
| | 285,968 |
|
| Provision for income taxes | | 102,053 |
| | 105,808 |
| | 99,770 |
| | 78,393 |
| | 102,053 |
| | 105,808 |
|
| Effective tax rate | | 32.5 | % | | 37.0 | % | | 38.4 | % | | 26.2 | % | | 32.5 | % | | 37.0 | % |
| Net income | | 212,182 |
| | 180,160 |
| | 160,049 |
| | 220,816 |
| | 212,182 |
| | 180,160 |
|
| Income attributable to noncontrolling interests | | 2,756 |
| | 1,798 |
| | 2,277 |
| | 65 |
| | 2,756 |
| | 1,798 |
|
| Net income attributable to MAXIMUS | | $ | 209,426 |
| | $ | 178,362 |
| | $ | 157,772 |
| | $ | 220,751 |
| | $ | 209,426 |
| | $ | 178,362 |
|
| Basic earnings per share attributable to MAXIMUS | | $ | 3.19 |
| | $ | 2.71 |
| | $ | 2.37 |
| | $ | 3.37 |
| | $ | 3.19 |
| | $ | 2.71 |
|
| Diluted earnings per share attributable to MAXIMUS | | $ | 3.17 |
| | $ | 2.69 |
| | $ | 2.35 |
| | $ | 3.35 |
| | $ | 3.17 |
| | $ | 2.69 |
|
The following tables provide an overview of the significant elements of our consolidated statements of operations. As our business segments have different factors driving revenue growth and profitability, the sections that follow cover these segments in greater detail.
Revenue, cost of revenue and gross profit
Changes inOur revenue cost of revenue and gross profitreflects fees earned for between fiscal years 2016 and 2017 are summarized below.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Revenue | | Cost of Revenue | | Gross Profit |
| (dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
| Balance for fiscal year 2016 | | $ | 2,403,360 |
| | |
| | $ | 1,841,169 |
| | |
| | $ | 562,191 |
| | |
|
| Organic growth | | 72,820 |
| | 3.0 | % | | 19,190 |
| | 1.0 | % | | 53,630 |
| | 9.5 | % |
| Net acquired growth | | 8,928 |
| | 0.4 | % | | 7,500 |
| | 0.4 | % | | 1,428 |
| | 0.3 | % |
| Currency effect compared to the prior period | | (34,147 | ) | | (1.4 | )% | | (28,803 | ) | | (1.5 | )% | | (5,344 | ) | | (1.0 | )% |
| Balance for fiscal year 2017 | | $ | 2,450,961 |
| | 2.0 | % | | $ | 1,839,056 |
| | (0.1 | )% | | $ | 611,905 |
| | 8.8 | % |
Revenue increased by approximately 2.0% to $2,451.0 million, with our cost of revenue broadly consistent with the prior year. Our gross profit margin increased from 23.4% to 25.0%. We have identified the significant organic, acquisition-related and currency-related effects below.
Organic revenue growth in our Health and Human Services Segments was partially offset by an anticipated decline in our U.S. Federal Services Segment following the wind-down of a significant subcontract.
services provided. Cost of revenue consists of direct costs related to labor and related overhead, subcontractor labor, outside vendors, rent and other direct costs. The largest component of cost of revenue, approximately two-thirds, is labor (both our labor and subcontracted labor) for our services contracts. Although our increase. Changes in revenue, cost of revenue was driven by similar factors as our revenue movements, our costs have also seen the benefits of increased operational efficiencies in certain projects, which should result in higherand gross profit margins prospectively.for between fiscal years 2016 and 2018 are summarized below.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Revenue | | Cost of Revenue | | Gross Profit |
| | Dollars in thousands | | Percentage change from prior year | | Dollars in thousands | | Percentage change from prior year | | Dollars in thousands | | Percentage change from prior year |
| Balance for fiscal year 2016 | | $ | 2,403,360 |
| | |
| | $ | 1,841,169 |
| | |
| | $ | 562,191 |
| | |
|
| Organic growth | | 72,820 |
| | 3.0 | % | | 19,190 |
| | 1.0 | % | | 53,630 |
| | 9.5 | % |
| Net acquired growth | | 8,928 |
| | 0.4 | % | | 7,500 |
| | 0.4 | % | | 1,428 |
| | 0.3 | % |
| Currency effect compared to the prior period | | (34,147 | ) | | (1.4 | )% | | (28,803 | ) | | (1.6 | )% | | (5,344 | ) | | (1.0 | )% |
| Balance for fiscal year 2017 | | $ | 2,450,961 |
| | 2.0 | % | | $ | 1,839,056 |
| | (0.1 | )% | | $ | 611,905 |
| | 8.8 | % |
| Organic growth | | (83,409 | ) | | (3.4 | )% | | (60,873 | ) | | (3.3 | )% | | (22,536 | ) | | (3.7 | )% |
| Acquired growth | | 1,096 |
| | — | % | | 799 |
| | — | % | | 297 |
| | — | % |
| Currency effect compared to the prior period | | 23,588 |
| | 1.0 | % | | 18,869 |
| | 1.0 | % | | 4,719 |
| | 0.8 | % |
| Balance for fiscal year 2018 | | $ | 2,392,236 |
| | (2.4 | )% | | $ | 1,797,851 |
| | (2.2 | )% | | $ | 594,385 |
| | (2.9 | )% |
We have shown movements in revenue, cost of revenue and gross profit in three categories: organic movement, acquired growth and currency effects.
Our organic revenue growth in revenue, and related cost of revenue, is driven by a number of factors, many of which are addressedreflects changes in our segment-specific discussions below. As a rule, the longevitycontract portfolio from our existing business, supplemented with new work. Most of our contracts and businessare multi-year arrangements, built upon long-term relationships which allow us to maintain a strong backlog of work which willto sustain our revenues over several years. However, eachrevenues. In any year, we will experiencewould anticipate approximately 7% to 10% attrition due to:of work as contracts thatend or are lost or end,lost; contracts that are rebid at lowerwith reduced volumes, scope, rates or volume reductionsa combination of all three; contracted work is taken in house or reduced scope, work that is brought in-house, contracts we optelect not to rebid temporary or short termfor work. We also maintain a small portfolio of short-term projects, which do not provide year-on-year cash flows. To achieve organic growth, we must obtain more work thatthan is ending such aslost.
Our acquisitions provide additional growth to our contract amendments, and innovation. This attrition is anticipated and is typicallyportfolio, offset by growth. Based ondivestitures. We show acquired revenue for one year after the date of the acquisition to allow for a like-for-like comparative.
Our business is affected by fluctuations in foreign currencies in the jurisdictions where we operate. Although revenue and related costs are typically earned and incurred in the same currency, a significant change in foreign exchange rates may adjust our internal analysis,overall profit margins. In addition, each segment has a different exposure to foreign currencies and, accordingly, significant fluctuations may affect the mix of revenues and costs across our segments. We show the effect of currency fluctuations by reporting the difference between our results using current year exchange rates and those results which would have been reported if the average rates utilized in the prior year had prevailed.
Across fiscal years 2017 and 2018, we estimate that we have experiencedcontinued to report organic revenue attrition between 5% and 10% over the last five years. We believe that our attrition rate for 2018 will be approximately 9%. We anticipate that we will offset this attrition with new work, particularly withingrowth in our Health Services Segment. This was offset by declines in our U.S. Federal Services Segment, in both years, and in our Human Services Segment in 2018. In fiscal years 2017 and 2018, we improved our profit margin in the Health and U.S. Federal Services Segments through improved contract performance and cost efficiencies. This was offset by declining profit margins in our Human Services Segment due to dilutive pass-through revenues in a new contract.
Acquired growth in revenue and costs stems from the acquisition of Revitalised and the full year benefit of Ascend and Assessments Australia, partially offset by the sale, in May 2016, of our K-12 Education business.
DuringAfter the U.S. Dollar, our most significant earnings are denominated in British Pounds. The British Pound recorded a sharp drop in the second half of fiscal year 2017, our foreign currency revenues2016, resulting in reduced revenue and costs were affected by fluctuations in theirfiscal year 2017. It has recovered some value against the U.S. Dollar. The most notable change was the decline in the value of the British Pound which suffered a significant declinefiscal year 2018 and, accordingly, resulted in June 2016.revenue and cost growth in fiscal
year 2018. On a constant currency basis, our revenue increasedwe would have recorded growth of 3.4% in 2017 and oura decline of 3.4% in 2018. The corresponding changes in cost of revenue increasedgrowth would have been growth of 1.4%. and a decline of 3.3%, respectively.
Changes inAdditional details with respect to revenue, cost of revenue and gross profit from fiscal year 2015 to 2016 are summarized below.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Revenue | | Cost of Revenue | | Gross Profit |
| (dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
| Balance for fiscal year 2015 | | $ | 2,099,821 |
| | |
| | $ | 1,587,104 |
| | |
| | $ | 512,717 |
| | |
|
| Organic growth | | 194,784 |
| | 9.3 | % | | 177,732 |
| | 11.2 | % | | 17,052 |
| | 3.3 | % |
| Acquired growth | | 157,985 |
| | 7.5 | % | | 117,425 |
| | 7.4 | % | | 40,560 |
| | 7.9 | % |
| Currency effect compared to the prior period | | (49,230 | ) | | (2.3 | )% | | (41,092 | ) | | (2.6 | )% | | (8,138 | ) | | (1.6 | )% |
| Balance for fiscal year 2016 | | $ | 2,403,360 |
| | 14.5 | % | | $ | 1,841,169 |
| | 16.0 | % | | $ | 562,191 |
| | 9.6 | % |
Revenue increased by approximately 14% to $2,403.4 million, withcovered in our cost of revenue increasing by approximately 16% to $1,841.2 million. Our gross profit margin declined from 24.4% to 23.4%. We have identified the significant organic, acquisition-related and currency-related effects below. More detail is provided by segment in the sections which follow.
Mostreview of our organic growth came from contracts in our Health Services Segment.
Our organic cost of revenue increased at a greater rate than our revenue, driven by a full year of the HAAS contract and the jobactive contract in Australia. As expected, both of these contracts operated at lower margins during fiscal 2016 compared to the rest of our business. It is typical with contracts in the startup phase for revenue to lag behind costs. Many performance-based contracts, including jobactive, have outcome-based payments which take time to achieve. In the early months of the contract, no outcome-based payments were realized.
Acquired growth was from our 2016 acquisitions, Ascend and Assessments Australia, as well as the benefits of a full year of results from Acentia and Remploy.
During fiscal year 2016, the U.S. Dollar gained in strength against all international currencies in which we did business. Accordingly, we received lower revenue and incurred lower costs than would have been the case if currency rates had remained stable.individual segments below.
Other operating expenses and benefits
Selling, general and administrative expense (SG&A) consists of costs related to general management, marketing and administration. These costs include salaries, benefits, bid and proposal efforts, travel, recruiting, continuing education, employee training, non-chargeable labor costs, facilities costs, printing, reproduction, communications, equipment depreciation, bad debt expense, legal expenses and the costs of business combinations. Our SG&A is primarily composed of labor costs. These costs may be incurred at a segment level, for dedicated resources which are not client-facing, or at a corporate level. Corporate costs are allocated to segments on a consistent, rational basis. Unlike cost of revenue, SG&A is not directly driven by fluctuations in our revenue and, as our business expands, we would expect to see SG&A decline as a percentage of revenue as we attain economies of scale.revenue.
Our SG&A has grown over the past two years for the following reasons:
Our acquisitions, notably Acentiaremained steady between 2018 and Remploy, have contributed an additional cost base;
Additions to2017. Increases between 2017 and 2016 were driven by significant investments in infrastructure havewhich increased our depreciation expense and maintenance charges by approximately $10 million;
Additional bonus costs for employees to reflect improved performance in fiscal year 2017;
Bad debt expense, approximately $2.5 million, related to a single customer; and
We incurred costs of $2.2 million in 2016 related to a legal matter from fiscal year 2014, which was settled in fiscal year 2017.charges.
As noted above, we have made fivea number of acquisitions during fiscal years 2015, 2016 and 2017.in recent years. These acquisitions have affected and will affect our statements of operations beyond the addition of operating revenues and costs.
We incurred costs related to the acquisition of these entities; typically legal fees, third-party due diligence and costs related to the valuation of intangible assets. ExpensesIn fiscal year 2018, we recorded costs of $0.5 million related to the citizen engagement center acquisition, which closed in November 2018. In fiscal years 2017 and 2016, we incurred expenses of $0.1 million in 2017 relate to Revitalised,and $0.8 million, in 2016related to the acquisitions of Revitalised and Ascend, and Assessments Australia and $4.7 million to Acentia and Remploy.respectively.
We utilized our credit facility to fund our acquisitions. We borrowed funds in April 2015 to acquire Acentia, LLC, along with a further balance in February 2016 to acquire Ascend. These borrowings resulted in an increase in our interest expense. Since the fourth quarter of 2016, we have steadily paid off our credit facility and, accordingly, interest expense has steadily declined. As of September 30, 2018 and 2017, we had no borrowings under the credit facility. We would not anticipate any significantgenerated interest expense beyond the cost of maintaining the credit facility unless we have an acquisition that requires utilization of the credit facility.income in fiscal year 2018.
Our intangible asset amortization increased in fiscalhas been declining year 2016 due to the fullover year, charges fromnotwithstanding the acquisitions of Acentia and Remploy, which were both acquired in April 2015, as well as charges from the 2016 acquisitions ofRevitalised, Ascend and Assessments Australia. Notwithstanding the full year charges from the 2016 acquisitions, intangible amortization expense has declined in fiscal year 2017 as allAll of our assets acquired with our 2015 acquisition of Remploy as well as all technology and trademarksmany of the assets acquired with our 2012 acquisition of Policy Studies, Inc.(PSI), which was acquired in 2012, were fully amortized at reached the end of March 2017. Based upon our current portfolio, we anticipate amortization expensetheir lives in middle of fiscal year 2018 of $10.3 million, the further decline reflecting a full year without Remploy and PSI charges.2017.
During fiscal yearyears 2018 and 2017, we undertook a restructuring of our United Kingdom Human Services operations as part of the integration of Remploy. We recorded restructuring costs of $3.4 million and $2.2 million, respectively, principally severance expenses. This restructuring is expected to result in cost savings in future periods. Remploy is partially owned by its employees and, accordingly, some of this charge is offset through a reduction in income attributable to noncontrolling interests. We do not anticipate additional material restructuring costs at this time.
On May 9, 2016, we sold our K-12 Education business, which was previously part of the Company’s Human Services Segment. At that time, we recorded a gain of $6.9 million, net of reserves of $0.7 million. These reserves were established to cover potentialIn fiscal year 2017, we resolved certain contingencies related to the sale and recorded a further gain of $0.7 million.
Other income
Although we may earn interest on some of our cash and investment balances, we would not anticipate significant other income, particularly in fiscal year 2019 as we anticipate having net borrowings for several quarters as we cover our borrowings related to the citizen engagement center acquisition. Our other income has received some additional benefits which were resolved in Maywe would not anticipate occurring with regularity or pattern.
In fiscal year 2018, we received insurance recoveries related to property damage and generated interest income on our cash balances through short-term investments.
In fiscal year 2017, with recognitionwe received interest income on research and development tax credits which pertained to prior years.
In fiscal year 2016, we received a benefit from a foreign exchange fluctuation. We typically mitigate the risk of such income or expense by matching the reserved balance in full. No additional gains or losses are anticipated from this sale. The K-12 Education business contributed revenuecurrencies of $2.2 millionrevenues and $4.7 million for the years ended September 30, 2016respective costs and 2015, respectively.by settling inter-company transactions on a timely basis.
Income taxes and non-operating expenses
Our effective tax rate for fiscal years 2018, 2017 and 2016 was 26.2%, 32.5% and 2015 was 32.5%, 37.0% and 38.4%, respectively.
Our income tax rateexpense in fiscal year 2017 has been affected by two material events.
We2018 received a significant benefit from the Tax Cuts and Jobs Act (the Act). The Act reduced the statutory U.S. federal income tax rate from 35% to 21%. This resulted in a one-time benefit from the reduction of net deferred tax liabilities, as well as reducing our current year rate to 24.5% for fiscal year 2018 and future years to 21%. This benefit was offset by a one-time charge for undistributed and previously untaxed earnings in foreign locations, as well as the removal of certain tax credits and exemptions. Without the effects of the Act, we estimate that our diluted earnings per share for fiscal year 2018 would have been lower by approximately $0.40. We are monitoring guidance from the United States Treasury Department as to the application of certain aspects of the Act and we are waiting for some U.S. states to announce how they will organize their tax codes prospectively. We anticipate that our effective tax rate for fiscal year 2019, excluding discrete items, will be between 25% and 26%. This will vary depending upon the effect of the guidance noted above as well as any changes in our profit mix.
Our income tax expense in fiscal yearyears 2018 and 2017 received benefits of $2.8 million and $6.6 million related tofrom the vesting of restricted stock units (RSUs) and the exercise of stock options. These tax benefitsPrior to fiscal year 2017, this benefit had previously been recorded through our Consolidated Statements of Changes in Shareholders' Equity but are now required to be recorded as aEquity. Our annual benefit to earnings. We will continue to receive benefits or chargescharge related to RSUthe vesting in future years with the effect beingof RSUs will be dependent upon the number of awards vestingtiming, amount and the share price on the date that date.the awards become available to owners of RSUs. Although this is typically duringmost of our RSUs vest in the fourth quarter, of our fiscal year, we have a significant population of RSUs whose issuance has been deferred. This maydeferred which might result in unpredictable movements withinin our tax provision. As of September 30, 2017,2018, we no longer have anyno outstanding stock options.
We received a one-time benefit of $3.4 million related to research and development tax credits in the United States, Australia and Canada. These credits relate to past years and, accordingly, are not anticipated to recur in future quarters.
Excluding these two events, our effective tax rate for fiscal year 2017 was 35.6%. Our effective tax rate declined from fiscal year 2015 to 2016 due to increased profits in jurisdictions that have a lower tax rate than the United States. Based upon our current projections, we anticipate that our fiscal year 2018 effective tax rate will be in the range of 35% to 36%. This estimate is based upon our current forecast and is dependent upon numerous factors which may change including the share of profits within foreign jurisdictions and the share price and number of stock awards distributed in the fiscal year. Our restricted stock units vest on the last day of the fourth quarter of our fiscal year and, accordingly, our tax rate will be affected by the share price on that date. During fiscal year 2017, we also received a benefit from restricted share awards to board members which had vested in earlier periods but whose distribution had been deferred until their retirement. A similar event in fiscal year 2018 may cause an unusual fluctuation in our tax rate.
Other income includes interest income on cash balances, foreign exchange fluctuations and other miscellaneous credits and expenses which do not form part of our business operations. Most interest income has been derived from our cash balances in foreign jurisdictions and interest income related to the research and development tax credits noted above. In fiscal year 2016, we received a large benefit from a foreign exchange fluctuation which is not expected to recur. We expect to earn an increased amount of interest income in fiscal year 2018 from the increase in our cash balances.
Health Services Segment
The Health Services Segment provides a variety of business process services and appeals and assessments (including commercial occupational health services) as well as related consulting services, for state, provincial and national government programs. These services support a variety of government health benefit programs including Medicaid, the Children's Health Insurance Program (CHIP) and ACAthe Affordable Care Act (ACA) in the U.S., Health Insurance BC (British Columbia) in Canada, and HAASthe Health Assessment Advisory Service (HAAS) contract in the U.K.
|
| | | | | | | | | | | | |
| | | Year ended September 30, |
| (dollars in thousands) | | 2018 | | 2017 | | 2016 |
| Revenue | | $ | 1,404,959 |
| | $ | 1,380,151 |
| | $ | 1,298,304 |
|
| Cost of revenue | | 1,032,331 |
| | 1,032,826 |
| | 1,006,123 |
|
| Gross profit | | 372,628 |
| | 347,325 |
| | 292,181 |
|
| Selling, general and administrative expense | | 136,250 |
| | 132,081 |
| | 107,155 |
|
| Operating income | | 236,378 |
| | 215,244 |
| | 185,026 |
|
| Gross profit percentage | | 26.5 | % | | 25.2 | % | | 22.5 | % |
| Operating margin percentage | | 16.8 | % | | 15.6 | % | | 14.3 | % |
|
| | | | | | | | | | | | |
| | | Year ended September 30, |
| (dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Revenue | | $ | 1,380,151 |
| | $ | 1,298,304 |
| | $ | 1,109,238 |
|
| Cost of revenue | | 1,032,826 |
| | 1,006,123 |
| | 855,130 |
|
| Gross profit | | 347,325 |
| | 292,181 |
| | 254,108 |
|
| Selling, general and administrative expense | | 132,081 |
| | 107,155 |
| | 99,815 |
|
| Operating income | | 215,244 |
| | 185,026 |
| | 154,293 |
|
| Gross profit percentage | | 25.2 | % | | 22.5 | % | | 22.9 | % |
| Operating margin percentage | | 15.6 | % | | 14.3 | % | | 13.9 | % |
Fiscal year 2017 compared to fiscal year 2016
Changes in revenue, cost of revenue and gross profit for the 2017 and 2018 fiscal year 2017years are summarized below.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Revenue | | Cost of Revenue | | Gross Profit |
| (dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
| Balance for fiscal year 2016 | | $ | 1,298,304 |
| | |
| | $ | 1,006,123 |
| | |
| | $ | 292,181 |
| | |
|
| Organic growth | | 104,224 |
| | 8.0 | % | | 47,033 |
| | 4.7 | % | | 57,191 |
| | 19.6 | % |
| Acquired growth | | 9,790 |
| | 0.8 | % | | 7,626 |
| | 0.8 | % | | 2,164 |
| | 0.7 | % |
| Currency effect compared to the prior period | | (32,167 | ) | | (2.5 | )% | | (27,956 | ) | | (2.8 | )% | | (4,211 | ) | | (1.4 | )% |
| Balance for fiscal year 2017 | | $ | 1,380,151 |
| | 6.3 | % | | $ | 1,032,826 |
| | 2.7 | % | | $ | 347,325 |
| | 18.9 | % |
Revenue increased by approximately 6.3% to $1,380.2 million. Gross profit increased by approximately 19% and operating income increased by approximately 16%. |
| | | | | | | | | | | | | | | | | | | | | |
| | | Revenue | | Cost of Revenue | | Gross Profit |
| (dollars in thousands) | | Dollars | | Percentage change from prior year | | Dollars | | Percentage change from prior year | | Dollars | | Percentage change from prior year |
| Balance for fiscal year 2016 | | $ | 1,298,304 |
| | |
| | $ | 1,006,123 |
| | |
| | $ | 292,181 |
| | |
|
| Organic growth | | 104,224 |
| | 8.0 | % | | 47,033 |
| | 4.7 | % | | 57,191 |
| | 19.6 | % |
| Acquired growth | | 9,790 |
| | 0.8 | % | | 7,626 |
| | 0.8 | % | | 2,164 |
| | 0.7 | % |
| Currency effect compared to the prior period | | (32,167 | ) | | (2.5 | )% | | (27,956 | ) | | (2.8 | )% | | (4,211 | ) | | (1.4 | )% |
| Balance for fiscal year 2017 | | $ | 1,380,151 |
| | 6.3 | % | | $ | 1,032,826 |
| | 2.7 | % | | $ | 347,325 |
| | 18.9 | % |
| Organic growth | | 4,917 |
| | 0.4 | % | | (16,411 | ) | | (1.6 | )% | | 21,328 |
| | 6.1 | % |
| Acquired growth | | 1,096 |
| | 0.1 | % | | 799 |
| | 0.1 | % | | 297 |
| | 0.1 | % |
| Currency effect compared to the prior period | | 18,795 |
| | 1.4 | % | | 15,117 |
| | 1.5 | % | | 3,678 |
| | 1.1 | % |
| Balance for fiscal year 2018 | | $ | 1,404,959 |
| | 1.8 | % | | $ | 1,032,331 |
| | — | % | | $ | 372,628 |
| | 7.3 | % |
Our Health Services Segment has recorded organic revenue growth across both fiscal years. This growth has been caused by contract expansion across our existing customer base, as well as performance improvements on other contracts. Our profit margin has improved as a consequence of our business growth, our improved performance and costthe end of revenue increasestwo contracts which were detrimental to our results.
Much of our contract expansion has been driven by a number of factors:
Our scope ofour work expanded on our existing U.S.-based contracts,in the United States, notably with the expansionState of an existing contract in New York State.
We have improved our performance on our United Kingdom-based HAAS contract and are meeting service levels, resulting in reduced penalties against our revenue.
As previously noted, we chose not to rebid a contract with the state of Connecticut which had previously provided approximately $23 million of annual revenue. The existing contract endedYork. Revenue in the fourth quarter of 2016.fiscal 2018 was tempered by delayed contract amendments. This revenue will be recognized in fiscal year 2019.
Our results includeWe have continued to improve our performance in the United Kingdom HAAS contract. This contract includes a fullcombination of incentives and penalties and we have consistently improved our performance in these over fiscal years 2017 and 2018. This contract has been extended through February 2020.
In fiscal year 2016, a contract with annual revenues of approximately $23 million ended and was rebid. We elected to pass on our opportunity to compete for Ascend, which was acquiredthis work resulting in February 2016,lower annual revenues but improved overall margins. In fiscal year 2018, we agreed to terminate a loss-making contract with the U.K. Government. This resulted in a gain from the acceleration of deferred revenue and costs, as well as a long-term improvement to overall margins.
We acquired Ascend and Revitalised in fiscal years 2016 and 2017, respectively. Our acquired growth from fiscal year 2016 to 2017 includes five months of Ascend and two months of Revitalised, respectively. Our acquired growth from 2017 to 2018 includes the remaining ten months of Revitalised.
The significant year-over-year declineMuch of this segment's international revenues are denominated in the British Pound, which declined sharply against the U.S. Dollar in the fourth quarter of fiscal year 2016. Although the value of the British Pound has reduced the benefits of the improved performance on the United Kingdom-based contracts. On a constant currency basis, revenue and cost of revenue growth would have been 8.8% and 5.5%, respectively.
Our gross profit margins benefited from the margin improvements in the United Kingdom, including continued improvements in the performance of the HAAS contract and cost reductions on the Fit for Work contract to service the reduced levels of activity. Our operating profit margins have also received the further benefit of the expansion of the business without the need for a corresponding increase in the administrative base.
The HAAS contract has been extended for a further two years. We also won a rebid of our California Medicaid enrollment broker contract and the new ten-year contract is expected to run through June 2027 and we also received a five-year extension for our enrollment broker contract in Michigan and a one-year extension for our enrollment broker contract in Texas. We anticipate that the Health Services Segment will grow in fiscal year 2018, driven by growth on existing contracts and new work.it is still significantly lower than before June 2016.
Fiscal year 2016 versus fiscal year 2015
Changes in revenue, cost of revenue and gross profit for fiscal year 2016 are summarized below.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Revenue | | Cost of Revenue | | Gross Profit |
| (dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
| Balance for fiscal year 2015 | | $ | 1,109,238 |
| | |
| | $ | 855,130 |
| | |
| | $ | 254,108 |
| | |
|
| Organic growth | | 202,928 |
| | 18.3 | % | | 165,467 |
| | 19.3 | % | | 37,461 |
| | 14.7 | % |
| Acquired growth | | 14,881 |
| | 1.3 | % | | 10,336 |
| | 1.2 | % | | 4,545 |
| | 1.8 | % |
| Currency effect compared to the prior period | | (28,743 | ) | | (2.6 | )% | | (24,810 | ) | | (2.9 | )% | | (3,933 | ) | | (1.5 | )% |
| Balance for fiscal year 2016 | | $ | 1,298,304 |
| | 17.0 | % | | $ | 1,006,123 |
| | 17.7 | % | | $ | 292,181 |
| | 15.0 | % |
Revenue increased by approximately 17% to $1,298.3 million. Gross profit increased by approximately 15% and operating income increased by approximately 20%.
Our revenue and direct cost increases were primarily driven by three factors:
Our scope of work expanded on our existing U.S.-based contracts, notably with the expansion of an existing contract in New York State.
We received a full year benefit from our U.K.-based HAAS contract. This contract commenced March 1, 2015. The HAAS contract experienced operating losses in fiscal year 2015 due to challenges in the recruitment and retention of health care professionals. This resulted in reduced fees from performance incentives in the contract. During fiscal year 2016, our performance on the HAAS contract improved and we experienced operating margins in the high-single digits.
Our results include seven months of operations following our acquisition of Ascend.
These benefits were partially offset by the detrimental effect of the decline in value of the British Pound.
Our gross profit margins declined slightly year-over-year. This was due, in part, to the ramp-up on the HAAS contract which operated at lower margins than the remainder of the segment. As expected, the Fit For Work contract, which commenced in fiscal year 2015, also tempered gross profit margins.
U.S. Federal Services Segment
The U.S. Federal Services Segment provides business process solutions, program management, as well as system and software development and maintenance services (program administration) for various U.S. federal government programs, assessmentcivilian programs. The Segment also contains certain state-based assessments and appeals services for both federalwork that is part of the Segment's heritage within the Medicare Appeals portfolio and similar state-based programs, and technology solutions for federal civilian programs.continues to be managed within this Segment.
| | | | | Year ended September 30, | | Year ended September 30, |
| (dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
| Revenue | | $ | 545,573 |
| | $ | 591,728 |
| | $ | 502,484 |
| | $ | 478,911 |
| | $ | 545,573 |
| | $ | 591,728 |
|
| Cost of revenue | | 406,252 |
| | 453,560 |
| | 383,838 |
| | 352,213 |
| | 406,252 |
| | 453,560 |
|
| Gross profit | | 139,321 |
| | 138,168 |
| | 118,646 |
| | 126,698 |
| | 139,321 |
| | 138,168 |
|
| Selling, general and administrative expense | | 74,345 |
| | 74,792 |
| | 59,252 |
| | 69,312 |
| | 74,345 |
| | 74,792 |
|
| Operating income | | 64,976 |
| | 63,376 |
| | 59,394 |
| | 57,386 |
| | 64,976 |
| | 63,376 |
|
| Gross profit percentage | | 25.5 | % | | 23.3 | % | | 23.6 | % | | 26.5 | % | | 25.5 | % | | 23.3 | % |
| Operating margin percentage | | 11.9 | % | | 10.7 | % | | 11.8 | % | | 12.0 | % | | 11.9 | % | | 10.7 | % |
Fiscal year 2017 compared to fiscal year 2016
Revenue decreased by approximately 7.8% to $545.6 million. Gross profit increased by approximately 0.8% and operating income increased by 2.5%.
AllOur U.S. Federal Services Segment has reported declines in revenue and cost of revenue movements were organic.across both fiscal years 2017 and 2018. These declines have been driven by contract terminations. These include:
We had previously disclosed that this segment would be adversely affected in 2017 by the wind-down of aA significant subcontract for work performed for the Department of Veterans Affairs. In fiscal 2017, revenue from this subcontract was approximately $63 million lower thanAffairs, which ended in fiscal 2016. year 2017;
Contracts which came to their anticipated end; and
Contracts acquired with Acentia which were reserved for small businesses, precluding us from rebidding for the work.
Our year-over-year profit margins have received the benefit of efficiency savings, due in partcontinue to improve, driven by innovation and technology initiatives,improvements, as well as a state-based assessments contract which should continuewas highly accretive in future periods.
The Company expects to benefit from a new short-term contract related to disaster relief efforts which is expected to provide a benefit in the in the first half of fiscal year 2018.
Fiscal year 2016 versusThe acquired business from the citizen engagement center acquisition will be reported in the U.S. Federal Services Segment beginning in fiscal year 2015
Changes2019. In addition, we continue to utilize the project vehicles acquired with Acentia in revenue, cost of revenue and gross profit for fiscal year 2016 are summarized below.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Revenue | | Cost of Revenue | | Gross Profit |
| (dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
| Balance for fiscal year 2015 | | $ | 502,484 |
| | |
| | $ | 383,838 |
| | |
| | $ | 118,646 |
| | |
|
| Organic growth | | (15,043 | ) | | (3.0 | )% | | (11,133 | ) | | (2.9 | )% | | (3,910 | ) | | (3.3 | )% |
| Acquired growth | | 104,287 |
| | 20.8 | % | | 80,855 |
| | 21.1 | % | | 23,432 |
| | 19.7 | % |
| Balance for fiscal year 2016 | | $ | 591,728 |
| | 17.8 | % | | $ | 453,560 |
| | 18.2 | % | | $ | 138,168 |
| | 16.5 | % |
Revenue increased by approximately 18%2015 to $591.7 million. Gross profit increased by approximately 16%enhance and operating income increased by 6.7%.
Revenue growth was driven by a full year of Acentia's business followingexpand our service offerings to the acquisition in April 2015.
Our organic business declined, caused by the anticipated closure of a customer contact center where we provided support for theUnited States Federal Marketplace under the ACA. This accounted for a $49 million reduction in revenue compared to fiscal year 2015. In addition, the majority of contracts from Acentia are cost-plus or time-and-materials which has resulted in lower profit margins in this segment. Cost-plus and time-and-materials work is designed to have lower profit rates as this is generally lower risk work. These declines in profitability were partially offset by expected benefits in the profitability of our contract with the Department of Education.
Our SG&A expense included a full year of expense from the Acentia acquisition.Government.
Human Services Segment
The Human Services Segment provides national, state, provincial and countylocal human services agencies with a variety of business process services and related consulting services for welfare-to-work, child support, higher education institutions and K-12 special educationother human services programs. The K-12 Education business was divested in fiscal year 2016. About 66%Approximately 70% of our revenue in this segment iswas earned in foreign jurisdictions.
| | | | | Year ended September 30, | | Year ended September 30, |
| (dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
| Revenue | | $ | 525,237 |
| | $ | 513,328 |
| | $ | 488,099 |
| | $ | 508,366 |
| | $ | 525,237 |
| | $ | 513,328 |
|
| Cost of revenue | | 399,978 |
| | 381,486 |
| | 348,136 |
| | 413,307 |
| | 399,978 |
| | 381,486 |
|
| Gross profit | | 125,259 |
| | 131,842 |
| | 139,963 |
| | 95,059 |
| | 125,259 |
| | 131,842 |
|
| Selling, general and administrative expense | | 76,675 |
| | 84,157 |
| | 79,719 |
| | 76,835 |
| | 76,675 |
| | 84,157 |
|
| Operating income | | 48,584 |
| | 47,685 |
| | 60,244 |
| | 18,224 |
| | 48,584 |
| | 47,685 |
|
| Gross profit percentage | | 23.8 | % | | 25.7 | % | | 28.7 | % | | 18.7 | % | | 23.8 | % | | 25.7 | % |
| Operating margin percentage | | 9.2 | % | | 9.3 | % | | 12.3 | % | | 3.6 | % | | 9.2 | % | | 9.3 | % |
Fiscal year 2017 compared to fiscal year 2016
Changes in revenue, cost of revenue and gross profit for the 2017 and 2018 fiscal year 2017years are summarized below.
| | | | | Revenue | | Cost of Revenue | | Gross Profit | | Revenue | | Cost of Revenue | | Gross Profit |
| (dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change | |
| | | Dollars in thousands | | Percentage change over previous year | | Dollars in thousands | | Percentage change over previous year | | Dollars in thousands | | Percentage change over previous year |
| Balance for fiscal year 2016 | | $ | 513,328 |
| | |
| | $ | 381,486 |
| | |
| | $ | 131,842 |
| | |
| | $ | 513,328 |
| | |
| | $ | 381,486 |
| | |
| | $ | 131,842 |
| | |
|
| Organic growth | | 14,751 |
| | 2.9 | % | | 19,465 |
| | 5.1 | % | | (4,714 | ) | | (3.6 | )% | | 14,751 |
| | 2.9 | % | | 19,465 |
| | 5.1 | % | | (4,714 | ) | | (3.6 | )% |
| Net acquisition and disposal | | (862 | ) | | (0.2 | )% | | (126 | ) | | — | % | | (736 | ) | | (0.6 | )% | | (862 | ) | | (0.2 | )% | | (126 | ) | | — | % | | (736 | ) | | (0.6 | )% |
| Currency effect compared to the prior period | | (1,980 | ) | | (0.4 | )% | | (847 | ) | | (0.2 | )% | | (1,133 | ) | | (0.9 | )% | | (1,980 | ) | | (0.4 | )% | | (847 | ) | | (0.2 | )% | | (1,133 | ) | | (0.9 | )% |
| Balance for fiscal year 2017 | | $ | 525,237 |
| | 2.3 | % | | $ | 399,978 |
| | 4.8 | % | | $ | 125,259 |
| | (5.0 | )% | | $ | 525,237 |
| | 2.3 | % | | $ | 399,978 |
| | 4.8 | % | | $ | 125,259 |
| | (5.0 | )% |
| Organic growth | | | (21,664 | ) | | (4.1 | )% | | 9,577 |
| | 2.4 | % | | (31,241 | ) | | (24.9 | )% |
| Currency effect compared to the prior period | | | 4,793 |
| | 0.9 | % | | 3,752 |
| | 0.9 | % | | 1,041 |
| | 0.8 | % |
| Balance for fiscal year 2018 | | | $ | 508,366 |
| | (3.2 | )% | | $ | 413,307 |
| | 3.3 | % | | $ | 95,059 |
| | (24.1 | )% |
RevenueThe Human Services Segment recorded organic revenue growth in fiscal year 2017 and an organic decline in fiscal year 2018. In both years, our costs of revenue have increased, by 2.3% to $525.2 million. Grossresulting in declines in gross profit decreased by 5.0% and operating income increased by 1.9%. These results were driven by a number of factors:profit.
We continued to ramp-up the jobactive contract. A portion of the revenue growth from the jobactive contract is pass-through (where we incur the direct costsAcross both years, our mature welfare-to-work contracts in Australia and the client reimburses us) which carries no margin. Our most accretive payments relate to outcome fees, which are received after individualsUnited Kingdom have been placed into employment for a significant period of time. Accordingly, it takes time for contracts of this typecoming to mature.
As expected,an end. In Australia, our Disability Employment Services contract ended and was replaced with its successor arrangement in July 2018. In the U.K., the Work Programme and Work Choice contracts are ending as the government shifts its focus away from mainstream employment programs to focus on programs designed to provide a more holistic approach to support the disabled and long-term sick populations into sustained employment. These changes are detrimental to our profit margin as the caseload from contracts ending steadily declines. The contracts which replace these are in a startup phase, where the workload steadily increases. The newer contracts also place a greater emphasis on sustained employment outcomes which further delays our earning of revenue. Without the impact of the startup of these contracts, we estimate that the Human Services Segment operating margin would have been 5.6% in fiscal year 2018.
The jobactive contract in Australia includes a significant amount of pass-through revenue where we have discretionary spending reimbursed to us with no margin. As well as increasing our administrative burden, this reduces our overall profit margins.
During fiscal year 2018, we recognized approximately $8.0 million of revenue from our operations in Saudi Arabia. Our net assets for our Saudi Arabia operations were approximately $4.5 million at September 30, 2018, and our accounts receivable at our Saudi Arabia operations are approximately $5.4 million, which is net of reserves that we believe are appropriate considering the risk of non-collection of the receivables.
We are challenged across the Segment by low unemployment rates in the United Kingdomgeographies in which we operate. As a consequence, we are winding down and asrequired to adapt our methodology to serve the populations provided to us. We anticipate profit margins in the single digits for fiscal year 2019.
Our results in fiscal year 2017 received a result revenue has declined from this program. No additional cases are being provided but we will continue to service the existing caseload for up to two years from referral.
The decline in revenue and costs from the sale of the K-12 Education business has been partially offset by the benefit from a full year of business from Assessments Australia, business.but this was offset by the disposal of our K-12 Education business in the United States.
The year-over-yeardetrimental effect of the decline in the value of the British Pound has hadfollowing the results of the 2016 referendum on European Union membership affected both revenue and costs in fiscal 2017. The value of the British Pound provided a significant effectbenefit in fiscal 2018.
Reorganization of segments
Effective October 1, 2018, our Chief Executive Officer reorganized our reporting segments based on the segment. On a constant currency basis, revenueway management intends to allocate resources, manage performance and cost of revenue would have increased 2.7% and 5.1%, respectively.
We anticipate that our resultsevaluate results. This change responds to recent changes in the markets we operate, the increasing integration of health and human services programs worldwide and the evolving needs of our government clients as they aim to deliver services in a more holistic manner to their citizens. Accordingly, we will report operating segments on a geographic basis. Our operating segments will be U.S. Health & Human Services, Segment for fiscal year 2018 will be tempered by a number of new contracts which are in their early stages. These contracts tend to have outcome-based payments which take time to achieve. Accordingly, no outcome based payments will occur inU.S. Federal Services and Outside the early months of these contracts. A mature contract should have a steady flow of such outcome-based payments.
Fiscal year 2016 versus fiscal year 2015U.S.
Changes in revenue costrecognition
On October 1, 2018, we adopted a new methodology for reporting revenue. Although this new method will not affect the timing of revenue recognition on most of our contracts, we anticipate that revenue on our welfare-to-work contracts will be accelerated. This reflects our obligation to recognize long-term outcome fees across the period of performance, which may be several months, rather than deferring recognition until outcomes are certain, as was the requirement in fiscal year 2018 and prior. This should result in a closer matching of revenue and gross profitcosts within these contracts and should mitigate some losses recorded in these contracts in their early months, although it is typical that any new contract will generally be less profitable than a mature contract. The effect of this new method of revenue recognition will be far more significant in the Outside the U.S. Segment, as this is where the greater share of welfare-to-work contracts with outcome payments is held.
We project that fiscal year 2019 revenue will benefit by approximately $7 million as a result of the new methodology. We project that the cumulative effect of the new methodology on all prior years will increase our retained earnings, increase our deferred tax assets and decrease our deferred revenue by approximately $33 million, $14 million and $47 million as of October 1, 2018, respectively.
Impact of the citizen engagement center acquisition
On November 16, 2018, we acquired 100% of General Dynamics Information Technology's citizen engagement centers business, pursuant to an asset purchase agreement dated October 5, 2018. This acquisition will affect our results in fiscal year 2019 and beyond.
We expect revenue for fiscal year 20162019 to increase between $600 million and $625 million.
The two largest acquired contracts are summarized below.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Revenue | | Cost of Revenue | | Gross Profit |
| (dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
| Balance for fiscal year 2015 | | $ | 488,099 |
| | |
| | $ | 348,136 |
| | |
| | $ | 139,963 |
| | |
|
| Organic growth | | 6,899 |
| | 1.4 | % | | 23,398 |
| | 6.7 | % | | (16,499 | ) | | (11.8 | )% |
| Acquired growth | | 38,817 |
| | 8.0 | % | | 26,234 |
| | 7.5 | % | | 12,583 |
| | 9.0 | % |
| Currency effect compared to the prior period | | (20,487 | ) | | (4.2 | )% | | (16,282 | ) | | (4.7 | )% | | (4,205 | ) | | (3.0 | )% |
| Balance for fiscal year 2016 | | $ | 513,328 |
| | 5.2 | % | | $ | 381,486 |
| | 9.6 | % | | $ | 131,842 |
| | (5.8 | )% |
Revenue increased by 5.2% to $513.3 million. Gross profit decreased by 5.8%cost-plus contracts and accordingly, we expect mid-single digit operating income decreased by 21%. Revenue was driven by:margins for these contracts.
The ramp-upWe expect an increase in SG&A in order to handle the additional volume of work that the new Australian jobactive contract, which commencedacquisition will create.
Adding the assets related to this acquisition into the total Company portfolio allows us to spread the corporate SG&A costs across a substantially larger base of revenue. This will re-allocate indirect costs from our existing contracts to the two largest acquired cost-plus contracts, where they are recoverable.
Since we report fully allocated operating income for our contracts, we expect an improvement in lateoperating income for our contracts that are not cost-plus contracts.
We expect less interest income because we used a significant portion of our cash on our balance sheet for the acquisition.
We expect interest expense to increase as we utilized $150 million of our credit facility.
We expect to incur one-time acquisition costs of $3 million in fiscal year 2015.2019.
There will be amortization of intangible assets created by purchase accounting. This contract resulted in higher revenueamortization is a non-cash charge and costs, but in fiscal 2016 it operated at a lower margintherefore, our EBITDA will increase more than its predecessor contract;
Revenue from Assessments Australia and a full year of revenue from Remploy;
Anticipated declinesour operating income. We are still in the U.K. Work Programme, owing to lower volumes and referrals withprocess of valuing the expected wind down of the contract in 2017; and
The detrimental effect of foreign currency declines.
The expected declines in gross and operating income were principally caused by the ongoing ramp-up of the jobactive contract in Australia.
The majority of the SG&A increase was driven by a full year of Remploy activity and the acquisition of Assessments Australia.assets acquired.
Liquidity and capital resources
Our principal source of liquidity remains our cash flows from operations. These cash flows are used to fund our ongoing operations and working capital needs as well as investments in capital infrastructure and our share repurchases. These operating cash flows are driven by our contracts and their payment terms. For many contracts, we are reimbursed for the costs of startup operations, although there may be a gap between incurring and receiving these funds. Other factors which may cause shortfalls in cash flows include contract terms where payments are tied
to outcome deliveries, which may not correspond with the costs incurred to achieve these outcomes and short-term delays where government budgets are constrained.
To supplement our operating cash flows, we maintain and utilize our credit facility. Wefacility, which allows us to borrow up to $400 million, subject to standard covenants. In fiscal years 2015 and 2016, we used this facility to fund our acquisitions of Acentia and Ascend, as well as short-term borrowings to cover some immediate working capital needs. At September 30, 2017, we had repaid these balances and had no outstanding borrowings under the credit facility. In September 2017, we extended the life of our credit facility to September 2022, which allows us to borrow up to $400 million, subject to standard covenants. during fiscal year 2018.
We believe our cash flows from operations should be sufficient to meet our day-to-day requirements.
Our priorities for cash utilization are to actively pursue new growth opportunities, to maintain our quarterly dividend program and, where opportunities arise, to make repurchases of our own shares.
We have no requirement to remit funds from our foreign locations back to the United States. However, where remitting these funds is possible and can be performed in a tax-free manner, we will do so. With the passage in the United States of the Tax Cuts and Jobs Act, we have been able to transfer a significant amount of funds from our foreign locations on a tax-free basis. We will continue to explore opportunities to bring back additional funds, taking into consideration the working capital requirements and relevant tax rules in each jurisdiction. Where we are unable to remit funds back without incurring a penalty, we will consider these funds indefinitely reinvested until such time as these restrictions are changed. As a result, we do not record U.S. deferred income taxes on any funds held in foreign jurisdictions. We have not attempted to calculate our potential liability from any transfer of these funds as any such transaction might include tax planning strategies which we have not fully explored. Accordingly, it is not possible to estimate the potential tax obligations if we were to remit all of our funds from foreign locations to the United States.
Our cash balances are held in the following locations and denominations (in thousands of U.S. Dollars):
| | | | As of September 30, 2017 | As of September 30, 2018 |
| U.S. Dollar denominated funds held in the United States | $ | 42,012 |
| $ | 302,098 |
|
| U.S. Dollar denominated funds held in foreign locations | 60,572 |
| 780 |
|
| Funds held in foreign locations in local currencies | 63,668 |
| 46,367 |
|
| | | $ | 349,245 |
|
Where possible,In addition, we hold surplus fundsheld short-term investments of $20.3 million as of September 30, 2018, in foreign locations in United States Dollars. This mitigates our exposure to fluctuations betweenU.S. Dollar denominated investments that mature within the United States Dollar and foreign currencies. We have no requirement or intent to remit cash held in foreign locations to the U.S. We consider undistributed earningsfirst quarter of our foreign subsidiaries to be indefinitely reinvested outside of the U.S. and, accordingly, no U.S. deferred taxes have been recorded with respect to such earnings in accordance with the relevant accounting guidance for income taxes. Should these earnings be remitted as dividends, we may be subject to additional U.S. taxes, net of allowable foreign tax credits. At this time, it is not practicable to estimate the amount of any additional taxes which may be payable on the undistributed earnings given the potential changes in legislation and the tax planning alternatives we could employ, should we decide to repatriate these earnings in a tax-efficient manner. Our priorities for cash utilization remain unchanged. We intend to:
Actively pursue new growth opportunities;
Maintain our quarterly dividend program; and
Make repurchases of our own shares where opportunities arise to do so.
fiscal year 2019.
The following table provides a summary of our cash flow information for the three years ended September 30, 2017.2018.
| | | | | Year ended September 30, | | Year ended September 30, |
| (dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
| Net cash provided by/(used in): | | |
| | |
| | |
| | |
| | |
| | |
|
| Operations | | $ | 337,200 |
| | $ | 180,026 |
| | $ | 206,217 |
| | $ | 323,525 |
| | $ | 337,200 |
| | $ | 180,026 |
|
| Investing activities | | (25,221 | ) | | (87,103 | ) | | (393,872 | ) | | (46,304 | ) | | (25,221 | ) | | (87,103 | ) |
| Financing activities | | (215,429 | ) | | (96,842 | ) | | 111,115 |
| | (91,880 | ) | | (215,429 | ) | | (96,842 | ) |
| Effect of exchange rates on cash and cash equivalents | | 3,503 |
| | (4,554 | ) | | (6,900 | ) | | (2,348 | ) | | 3,503 |
| | (4,554 | ) |
| Net increase/(decrease) in cash and cash equivalents | | $ | 100,053 |
| | $ | (8,473 | ) | | $ | (83,440 | ) | | $ | 182,993 |
| | $ | 100,053 |
| | $ | (8,473 | ) |
Cash provided by operations for the years ended September 30, 2017, 2016 and 2015 was $337.2 million, $180.0 million and $206.2 million, respectively. The factors influencing these cash flows from operations are:
Year-over-year increases inOur operating profits,profit,
Improvements inOur cash collections, most notably
The timing of payments within the United States,contracts, particularly those with up-front payments, and
Advanced payments for contracts in fiscal year 2015 which did not recur to the same extent in later years, and
The timing of tax payments.payments, especially following the passage of the Tax Cuts and Jobs Act in the United States.
We measure our ability to collect receivables from customers using our Days Sales Outstanding (DSO) calculation. We have a target range for DSO of 65 to 80 days and we have typically stayed within the lower end of this range during the past three fiscal years. From September 30, 2014, ourDuring both fiscal years 2018 and 2017, we experienced strong cash collections, particularly towards the end of the year, and reported a DSO increased from 64 days to 67of 63 days at September 30, 2015 then to 70 days at September 30, 2016. As of September 30, 2017, our DSO was 63 days.
Our 2015 fiscal year had the benefit of two large contracts, the HAAS contract2018 and jobactive, which provided up-front payments to cover startup and infrastructure costs.2017. This resulted in significant cash flows from customers in both years, particularly in 2017.
Our tax payments for September 30, 2018, 2017 and 2016 and 2015 were $65.3 million, $87.8 million and $108.3 million, respectively. Tax payments are lower in fiscal year 2018 due to the Tax Cuts and $81.3 million, respectively.Jobs Act in the United States.
We anticipate that our operating cash flows in 2019 may be lower than those in fiscal years 2017 and 2018 will decline fromas those reported in 2017. The significant improvement inyears received the benefit of stronger cash collections and resultant decline in DSO of seven days, is unlikely to be repeated.than anticipated. We note that the early or late payment of invoices from our largest customers may result in significant fluctuations in our cash flows from those anticipated.
In both fiscal years 2016 and 2015, we incurred significant Owing to changes in financial reporting requirements, our cash outflows related to investing activities. These included:
The acquisitions of Acentia and Remployflow statements starting in fiscal year 2015,
The acquisitions of Assessments Australia2019 will include movements in balances which we consider to be restricted cash and Ascendwhich we report in fiscal year 2016,
A significant infrastructure build-out in the United States, principally focused on the our information technology,'prepayments and
Contract startups for HAAS and jobactive, which required initial up-front investment.
other assets.' Our restricted cash balance at September 30, 2018, was $7.3 million. We acquired Revitalised in fiscal year 2017 with a cash payment of $2.7 million. Additional payments are anticipated in fiscal year 2018. We also reported cash inflows in fiscal years 2017 and 2016 from the sale of our K-12 Education business of $1.0 million and $5.5 million, respectively.
Our payments for infrastructure have declined following investments in prior years. Wedo not anticipate that this will result in a significant change in our reported operating cash flows will return to a level consistent with our depreciation expense inflows.
In fiscal year 2018, althoughwe purchased short-term investments of $20.0 million, which is the primary driver of the increase in cash used in investing activities from fiscal year 2017. In fiscal year 2016, we completed a significant build-out of our actions may be affected by startups requirements on any new contracts we may win.
United States infrastructure. This, combined with the acquisition of Ascend and Assessments Australia, increased our investing cash outflows. Our infrastructure investment has returned to a normal level following the completion of this build-out.
Our cash flows from financing activities have been driven by our use of our credit facility, our repurchases of our own common stock and our quarterly dividend.
In fiscal year 2015, we utilized our credit facility to fund the acquisitionsacquisition of Acentia, as well as to fund short-term working capital needs. Commencing in the fourth quarter of fiscal year 2016, we have repaid these borrowings in full, principally from our United States operating cash flows. At September 30, 2017, we had $399.3The citizen engagement center acquisition resulted in cash borrowings of $150.0 million, available to borrow, which we believewill report in the three months ended December 31, 2018, as financing cash inflows, and an investment of approximately $400 million, which we will report as an investing cash outflow. This cash outflow will be sufficientsubject to change based upon the working capital acquired with the business. As we manage our cash in fiscal year 2019, we expect to utilize our credit facility as needed to cover our operating and otherworking capital requirements.
We repurchased 0.61.1 million, 0.6 million and 1.60.6 million shares of common stock during fiscal years 2018, 2017 and 2016, and 2015, respectively at a total costutilizing cash of $143.0$127.7 million. At September 30, 2017,2018, we had $109.9$192.8 million available for future repurchases under a plan approved by our Board of Directors. Subsequent to September 30, 2018, we purchased a further 0.2 million shares of common stock at a cost of approximately $15 million, leaving approximately $178 million available under our current Board authorization. Our share repurchases are at the discretion of our Board of Directors and depend upon our future operations and earnings, capital requirements general financial condition, contractual restrictions and other factors our Board of Directors may deem relevant. Based upon our shares repurchased and our expectations for future purchases, we are anticipating that our diluted number of shares for fiscal year 2018 will be approximately 66.5 million.
Since the second half of fiscal year 2011, we have paid a quarterly dividend of $0.045 per common share. This has resulted in a regular cash outflow of approximately $12 million per year. Our nextIn the first fiscal quarter of 2019, we will pay a dividend isof $0.25 per common share, which we expect to be paidcontinue on November 30, 2017 to shareholdersa quarterly basis and which would result in an annual cash outflow of record on November 15, 2017.approximately $65 million. Continued payment of the dividend is dependent upon boardsubject to Board discretion.
In fiscal years 2015 and 2016,Where we operate in foreign locations, we utilize the United Stateslocal currency to operate our business. Although surplus funds have been transferred to U.S. Dollar gained in strength overdenominated bank accounts, we are still subject to gains or losses on these balances where the other internationalforeign currencies we use, including a sharp drop inappreciate or depreciate against the value of the British Pound in June 2016. The detrimental effect of these declines isU.S. Dollar. These increases or decreases are shown as a reduction in cash through the effect of exchange rates. During fiscal year 2017,rates on our foreign currencies have strengthened, resulting in a beneficial exchange effect.cash balances.
To supplement our statements of cash flows presented on a GAAP basis, we use the measure of free cash flow to analyze the funds generated from operations.
| | | | | Year ended September 30, | | Year ended September 30, |
| (dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
| Cash provided by operations | | $ | 337,200 |
| | $ | 180,026 |
| | $ | 206,217 |
| | $ | 323,525 |
| | $ | 337,200 |
| | $ | 180,026 |
|
| Purchases of property and equipment and capitalized software costs | | (24,154 | ) | | (46,391 | ) | | (105,149 | ) | | (26,520 | ) | | (24,154 | ) | | (46,391 | ) |
| Free cash flow | | $ | 313,046 |
| | $ | 133,635 |
| | $ | 101,068 |
| | $ | 297,005 |
| | $ | 313,046 |
| | $ | 133,635 |
|
Obligations and commitments
The following table summarizes our contractual obligations at September 30, 20172018, that require the Company to make future cash payments:
| | | | | Payments due by period | | Payments due by period |
| (dollars in thousands) | | Total | | Less than
1 year | | 1 - 3
years | | 3 - 5
years | | More than
5 years | | Total | | Less than
1 year | | 1 - 3
years | | 3 - 5
years | | More than
5 years |
| Operating leases | | $ | 175,077 |
| | $ | 69,482 |
| | $ | 90,682 |
| | $ | 14,672 |
| | $ | 241 |
| | $ | 160,667 |
| | $ | 68,959 |
| | $ | 71,566 |
| | $ | 18,172 |
| | $ | 1,970 |
|
| Debt(1) | | 668 |
| | 141 |
| | 282 |
| | 245 |
| | — |
| | 510 |
| | 136 |
| | 271 |
| | 103 |
| | — |
|
| Deferred compensation plan liabilities(2) | | 32,444 |
| | 1,737 |
| | 2,158 |
| | 1,255 |
| | 27,294 |
| | 36,115 |
| | 2,618 |
| | 2,470 |
| | 1,457 |
| | 29,570 |
|
| Total(3) | | $ | 208,189 |
| | $ | 71,360 |
| | $ | 93,122 |
| | $ | 16,172 |
| | $ | 27,535 |
| | $ | 197,292 |
| | $ | 71,713 |
| | $ | 74,307 |
| | $ | 19,732 |
| | $ | 31,540 |
|
| |
| (1) | The debt balance of $0.7$0.5 million at September 30, 20172018, is interest free. Accordingly, no estimated interest payments have been included within the balances above. |
| |
| (2) | Deferred compensation plan liabilities are typically payable at times elected by the employee at the time of deferral. The timing of these payments are based upon elections in place at September 30, 2017,2018, but these may be subject to change. Payments falling due may be deferred again by the employee, delaying the obligation. Payments may also be accelerated if an employee ceases employment with us or applies for a hardship payment. At September 30, 2018, we held assets of $34.3 million in a Rabbi Trust which could be used to meet these obligations. |
hardship payment. At September 30, 2017, we held assets of $28.6 million in a Rabbi Trust which could be used to meet these obligations.
| |
| (3) | Due to the uncertainty with respect to the timing of future cash flows associated with the Company's unrecognized income tax benefits at September 30, 2017,2018, we are unable to reasonably estimate settlements with taxing authorities. The above table does not reflect unrecognized income tax benefits of approximately $1.1$1.3 million, of which approximately $0.6$0.7 million is related interest and penalties. See "Note 15.5. Income taxes" of the Consolidated Financial Statements for a further discussion on income taxes. |
The contractual obligations table also omits our liabilities with respect to acquisition-related contingent consideration as part of the Assessments Australia acquisition in fiscal year 2016 and the Revitalised acquisition in fiscal year 2017.2016. See "Note 5.13. Business combinations and disposal" of our Consolidated Financial Statements for additional information on these balances.
Off-balance sheet arrangements
Other than our operating lease commitments, we do not have material off-balance sheet risk or exposure to liabilities that are not recorded or disclosed in our financial statements. We have significant operating lease commitments for office space; those commitments are generally tied to the period of performance under related contracts. Although onfor certain contracts we are bound by performance bond commitments and standby letters of credit, we have not had any defaults resulting in draws on performance bonds. Also, we do not speculate in derivative transactions. We utilizehave utilized interest rate derivatives to add stability to interest expense and to manage our exposure to interest rate movements.
Effects of inflation
As measured by revenue, approximately 35%33% of our business in fiscal year 20172018 was conducted under cost-reimbursablecost-plus pricing arrangements that adjust revenue to cover costs increased by inflation. Approximately 5%6% of the business was time-and-material pricing arrangements where labor rates are often fixed for several years. We generally have been able to price these contracts in a manner that accommodates the rates of inflation experienced in recent years. Our remaining contracts are fixed-price and performance-based and are typically priced to mitigate the risk of our business being adversely affected by inflation.
Critical accounting policies and estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and judgments that affect the amounts reported. We consider the accounting policies below to be the most important to our financial position and results of operations either because of the significance of the financial statement item or because of the need to use significant judgment in recording the balance. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates. Our significant accounting policies are summarized in "Note 1. Business and summary of significant accounting policies" of the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K.
Revenue Recognition. We recognize revenue on arrangements as work is performed and amounts are earned. We consider amounts to be earned once evidence of an arrangement has been obtained, services have been delivered, fees are fixed or determinable and collectability of revenue is reasonably assured.
Approximately 35%33% of our business is derived from cost-plus pricing arrangements. Revenue on cost-plus contracts is recognized based on costs incurred plus the negotiated fee earned. Our key estimates relate to the allocation of indirect costs. Much of the allocation of allowable indirect costs is based upon rules established by the relevant contract or by reference to U.S. Federal Government standards. While the existence of these rules reduces the risk of a significant error, the allocation of indirect costs is typically audited by our customers and it usually takes a significant period of time for an audit to be concluded. The iterative process of an audit provides us with information to refine our estimates for open periods. We have not recorded any significant adjustments to our revenue related to changes in such estimates for any of the three years ended September 30, 2017.2018. We are current in our submissions of costs to relevant regulators. Although audits of past costs remain open for certain years, we believe it is unlikely that a significant adjustment to prior periods would occur at this time. We believe that the likelihood of a significant adjustment to revenue would be remote.
On certain performance-based arrangements, our per-transaction fees may be higher in earlier years to compensate for anticipated higher costs at the commencement of contract operations. Where the discount in future fees is considered both significant and incremental, we are required to estimate our total future volumes and revenues and allocate an estimated fee to each transaction. We refine these estimates of total future volumes quarterly and we recognize these changes as a cumulative catch-up to our revenue. The sensitivity of these volume estimates is driven by the length of the contract, the size of the discounts and the maturity of the contract. Our greatest revenue volatility from our estimate will typically arise at the mid-point of the contract; in early periods of contract performance, changes to estimates of future volumes will have a smaller true-up; in later periods, there is less likelihood of a significant change in estimate. Although we had a number of contracts with these terms and conditions during the three years ended September 30, 2017,2018, no significant adjustments to revenue were recorded in this period. As of September 30, 2017,2018, many of these contracts are close to maturity and, accordingly, the likelihood of a significant adjustment has diminished. The only significant remaining contract is in our contract with the Department of Education, which is in our U.S. Federal Services Segment. The contract, which has an expected total value of approximately $0.9 billion, has completed its thirdfourth full year of operations and has up to sevensix years of operations remaining. Our transaction billing rate for the future periods is approximately 10% lower than it was for the first two years.earliest periods. If, at September 30, 2017,2018, our estimate of future volumes had increased or decreased by five percent, it would not have resulted in a significant adjustment to revenue and operating income.
Where contracts have multiple deliverables, we evaluate these deliverables at the inception of each contract and as each item is delivered. As part of this evaluation, we consider whether a delivered item has value to a customer on a stand-alone basis and whether the delivery of the undelivered items is considered probable and substantially within our control, if a general right of return exists. Where deliverables, or groups of deliverables, have both of these characteristics, we treat each deliverable item as a separate element in the arrangement, allocate a portion of the allocable arrangement consideration using the relative selling price method to each element and apply the relevant revenue recognition guidance to each element. The allocation of revenue to individual elements requires judgment as, in many cases, we do not provide directly comparable services or products on a standalone basis.
Business combinations and goodwill. The purchase price of an acquired business is allocated to tangible assets and separately identifiable intangible assets acquired less liabilities assumed based upon their respective fair values. The excess balance is recorded as goodwill. Accounting for business combinations requires the use of judgment in determining the fair value of assets acquired and liabilities assumed in order to allocate the purchase price of entities acquired. Our estimates of these fair values are based upon assumptions we believe to be reasonable and, where appropriate, include assistance from third-party appraisal firms.
Goodwill is not amortized, but is subject to impairment testing on an annual basis, or more frequently if impairment indicators arise. Impairment testing is performed at the reporting unit level. This process requires judgment in identifying our reporting units, appropriately allocating goodwill to these reporting units and assessing the fair value of these reporting units. At July 1, 2017,2018, the Company performed its annual impairment test and determined that there had been no impairment of goodwill. In performing this assessment, the Company utilizes an income approach. Such an approach requires estimation of future operating cash flows including business growth, utilization of working capital and discount rates. The valuation of the business as a whole is compared to the Company's market capital at the date of the acquisition in order to verify the calculation. In all cases, we determined that the fair value of our reporting units was significantly in excess of our carrying value to the extent that a 25% decline in fair value in any reporting unit would not have resulted in an impairment charge.
Long-Lived Assets (Excluding Goodwill). The Company reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. Examples of indicators include projects performing less well than anticipated or making losses or an identified risk of a contract termination. Where a potential risk is identified, our review is based on our projection of the undiscounted future operating cash flows of the related customer project. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amount of the related assets (the asset group), we recognize a non-cash impairment charge to reduce the carrying amount to equal projected future discounted cash flows. Judgment is required in identifying the indicators of impairment, in identifying the asset group and in estimating the future cash flows.
No impairment charges were recorded in the three years ending September 30, 2017. During the year ended September 30, 2017, we performed an impairment assessment on long-lived assets with carrying values of $27 million. Although no impairment was identified at this time, we will continue to review for indicators of asset impairment over its remaining life.
2018.
Contingencies. From time to time, we are involved in legal proceedings, including contract and employment claims, in the ordinary course of business. We assess the likelihood of any adverse judgments or outcomes to these contingencies, as well as potential ranges of probable losses and establish reserves accordingly. The amount of reserves required may change in future periods due to new developments in each matter or changes in approach to a matter such as a change in settlement strategy.
Income Taxes. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would "more likely than not" sustain the position following an audit. For tax positions meeting the "more likely than not" threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The assumptions and estimates used in preparing these calculations may change over time and may result in adjustments that will affect our tax charge.
Non-GAAP and other measures
We utilize non‑GAAP measures where we believe it will assist the user of our financial statements in understanding our business. The presentation of these measures is meant to complement, but not replace, other financial measures in this document. The presentation of non-GAAP numbers is not meant to be considered in isolation, nor as an alternative to revenue growth, cash flows from operations or net income as measures of performance. These non-GAAP measures, as determined and presented by us, may not be comparable to related or similarly titled measures presented by other companies.
In recent years, we have made a number of acquisitions. We believe users of our financial statements wish to evaluate the performance of our underlying business, excluding changes that have arisen due to businesses acquired. We provide organic revenue growth as a useful basis for assessing this. To calculate organic revenue growth, we compare current year revenue excluding revenue from these acquisitions to our prior year revenue.
In fiscal year 2017, 28%2018, 29% of our revenue was generated outside the U.S. We believe that users of our financial statements wish to understand the performance of our foreign operations using a methodology which excludes the effect of year-over-year exchange rate fluctuations. To calculate year-over-year currency movement, we determine the current year’s results for all foreign businesses using the exchange rates in the prior year. We refer to this adjusted revenue on a "constant currency basis."
In order to sustain our cash flows from operations, we require regular refreshing of our fixed assets and technology. We believe that users of our financial statements wish to understand the cash flows that directly correspond with our operations and the investments we must make in those operations using a methodology which combines operating cash flows and capital expenditures. We provide free cash flow to complement our statement of cash flows. Free cash flow shows the effects of the Company’s operations and routine capital expenditures and
excludes the cash flow effects of acquisitions, share repurchases, dividend payments and other financing transactions. We have provided a reconciliation of free cash flow to cash provided by operations.
To sustain our operations, our principal source of financing comes from receiving payments from our customers. We believe that users of our financial statements wish to evaluate our efficiency in converting revenue into cash receipts. Accordingly, we provide DSO, which we calculate by dividing billed and unbilled receivable balances at the end of each quarter by revenue per day for the period. Revenue per day for a quarter is determined by dividing total revenue by 91 days.
During fiscal year 2017,2018, we utilized our credit facility. Our credit agreement includes the defined term Consolidated EBITDA and our calculation of Adjusted EBITDA conforms to the credit agreement definition. We believe our investors appreciate the opportunity to understand the possible restrictions which arise from our credit agreement. Adjusted EBITDA is also a useful measure of performance which focuses on the cash generating capacity of the business as it excludes the non-cash expenses of depreciation and amortization, and makes for easier comparisons between the operating performance of companies with different capital structures by excluding interest expense and therefore the impacts of financing costs. The measure of Adjusted EBITA is a step in calculating Adjusted EBITDA and facilitates comparisons to similar businesses as it isolates the amortization effect of business combinations. We have provided a reconciliation from net income to Adjusted EBITA and Adjusted EBITDA as follows:
| | | | | Year ended September 30, | | Year ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
| Net income attributable to MAXIMUS | | $ | 209,426 |
| | $ | 178,362 |
| | $ | 157,772 |
| | $ | 220,751 |
| | $ | 209,426 |
| | $ | 178,362 |
|
| Interest expense | | 379 |
| | 3,466 |
| | 673 |
| | (2,591 | ) | | 379 |
| | 3,466 |
|
| Provision for income taxes | | 102,053 |
| | 105,808 |
| | 99,770 |
| | 78,393 |
| | 102,053 |
| | 105,808 |
|
| Amortization of intangible assets | | 12,208 |
| | 13,377 |
| | 9,348 |
| | 10,308 |
| | 12,208 |
| | 13,377 |
|
| Stock compensation expense | | 21,365 |
| | 18,751 |
| | 17,237 |
| | 20,238 |
| | 21,365 |
| | 18,751 |
|
| Acquisition-related expenses | | 83 |
| | 832 |
| | 4,745 |
| | 947 |
| | 83 |
| | 832 |
|
| Gain on sale of a business | | (650 | ) | | (6,880 | ) | | — |
| | — |
| | (650 | ) | | (6,880 | ) |
| Adjusted EBITA | | 344,864 |
| | 313,716 |
| | 289,545 |
| | 328,046 |
| | 344,864 |
| | 313,716 |
|
| Depreciation and amortization of property, plant, equipment and capitalized software | | 55,769 |
| | 58,404 |
| | 46,849 |
| | 51,884 |
| | 55,769 |
| | 58,404 |
|
| Adjusted EBITDA | | $ | 400,633 |
| | $ | 372,120 |
| | $ | 336,394 |
| | $ | 379,930 |
| | $ | 400,633 |
| | $ | 372,120 |
|
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risks generally relates to changes in foreign currency exchange rates.
At September 30, 20172018 and 2016,2017, we held net assets denominated in currencies other than the U.S. Dollar of $186.8$100.3 million and $203.9$186.8 million, respectively. Of these balances, cash and cash equivalents comprised $63.7$46.4 million and $63.0$63.7 million, respectively. Accordingly, in the event of a 10% unfavorable exchange rate movement across these currencies, we would have reported the following incremental effects on our comprehensive income and our cash flow statement (in thousands).
| | | | As of September 30, | As of September 30, |
| | 2017 | | 2016 | 2018 | | 2017 |
| Comprehensive income attributable to MAXIMUS | $ | (18,680 | ) | | $ | (20,390 | ) | $ | (10,030 | ) | | $ | (18,680 | ) |
| Net decrease in cash and cash equivalents | (6,370 | ) | | (6,300 | ) | (4,640 | ) | | (6,370 | ) |
Where possible, we identify surplus funds in foreign locations and place them into entities with the United StatesU.S. Dollar as their functional currency. This mitigates our exposure to foreign currencies. We mitigate our foreign currency exchange risks within our operating divisions through incurring costs and cash outflows in the same currency as our revenue.
We are exposed to interest rate risk through our credit facility when we utilize it. At September 30, 2017,2018, we had no outstanding borrowings on our credit facility and, accordingly, no exposure to interest rate fluctuations. In the final quarter of fiscal year 2017, our cash balance increased significantly following repayment of the balance onWe utilized our credit facility.facility in November 2018 to fund the acquisition of General Dynamics Information Technology's citizen engagement center business. Based upon our anticipated levels of borrowing, we would anticipate our borrowing rate to be based upon monthly LIBOR plus 1%. Our interest income next yearoverall expense will be driven bydependent upon our useoutstanding borrowings and deployment of funds as well as interest rates in the locations whererate at which we hold funds.repay this borrowing.
ITEM 8. Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data are included as part of this Annual Report on Form 10-K:
REPORT OF ERNSTReport of Ernst & YOUNGYoung LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,Independent Registered Public Accounting Firm,
ON THE AUDITED CONSOLIDATED FINANCIAL STATEMENTSon the Audited Consolidated Financial Statements
Board of Directors and Shareholders
MAXIMUS, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MAXIMUS, Inc. (the Company) as of September 30, 20172018 and 2016, and2017, the related consolidated statements of operations,, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2017. These2018, and the related notes (collectively referred to as the “consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MAXIMUS, Inc.the Company at September 30, 2018 and 2017, and 2016, and the consolidated results of theirits operations and theirits cash flows for each of the three years in the period ended September 30, 2017,2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), MAXIMUS, Inc.’sthe Company’s internal control over financial reporting as of September 30, 2017,2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 20, 20172018, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
|
| |
| /s/ Ernst & Young LLP | |
| | |
| We have served as the MAXIMUS, Inc.’s auditor since 1996. |
| |
| Tysons, Virginia | |
November 20, 20172018 | |
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
| | | | Year ended September 30, | Year ended September 30, |
| | 2017 | | 2016 | | 2015 | 2018 | | 2017 | | 2016 |
| Revenue | $ | 2,450,961 |
| | $ | 2,403,360 |
| | $ | 2,099,821 |
| $ | 2,392,236 |
| | $ | 2,450,961 |
| | $ | 2,403,360 |
|
| Cost of revenue | 1,839,056 |
| | 1,841,169 |
| | 1,587,104 |
| 1,797,851 |
| | 1,839,056 |
| | 1,841,169 |
|
| Gross profit | 611,905 |
| | 562,191 |
| | 512,717 |
| 594,385 |
| | 611,905 |
| | 562,191 |
|
| | | | | | | | | | | |
| Selling, general and administrative expenses | 284,510 |
| | 268,259 |
| | 238,792 |
| 285,241 |
| | 284,593 |
| | 269,091 |
|
| Amortization of intangible assets | 12,208 |
| | 13,377 |
| | 9,348 |
| 10,308 |
| | 12,208 |
| | 13,377 |
|
| Restructuring costs | 2,242 |
| | — |
| | — |
| 3,353 |
| | 2,242 |
| | — |
|
| Acquisition-related expenses | 83 |
| | 832 |
| | 4,745 |
| |
| | | | | | | | | | | |
| Gain on sale of a business | 650 |
| | 6,880 |
| | — |
| — |
| | 650 |
| | 6,880 |
|
| Operating income | 313,512 |
| | 286,603 |
| | 259,832 |
| 295,483 |
| | 313,512 |
| | 286,603 |
|
| | | | | | | | | | | |
| Interest expense | 2,162 |
| | 4,134 |
| | 1,398 |
| 1,000 |
| | 2,162 |
| | 4,134 |
|
| | | | | | | | | | | |
| Other income, net | 2,885 |
| | 3,499 |
| | 1,385 |
| 4,726 |
| | 2,885 |
| | 3,499 |
|
| Income before income taxes | 314,235 |
| | 285,968 |
| | 259,819 |
| 299,209 |
| | 314,235 |
| | 285,968 |
|
| Provision for income taxes | 102,053 |
| | 105,808 |
| | 99,770 |
| 78,393 |
| | 102,053 |
| | 105,808 |
|
| Net income | 212,182 |
| | 180,160 |
| | 160,049 |
| 220,816 |
| | 212,182 |
| | 180,160 |
|
| Income attributable to noncontrolling interests | 2,756 |
| | 1,798 |
| | 2,277 |
| 65 |
| | 2,756 |
| | 1,798 |
|
| Net income attributable to MAXIMUS | $ | 209,426 |
| | $ | 178,362 |
| | $ | 157,772 |
| $ | 220,751 |
| | $ | 209,426 |
| | $ | 178,362 |
|
| Basic earnings per share attributable to MAXIMUS | $ | 3.19 |
| | $ | 2.71 |
| | $ | 2.37 |
| $ | 3.37 |
| | $ | 3.19 |
| | $ | 2.71 |
|
| Diluted earnings per share attributable to MAXIMUS | $ | 3.17 |
| | $ | 2.69 |
| | $ | 2.35 |
| $ | 3.35 |
| | $ | 3.17 |
| | $ | 2.69 |
|
| Dividends per share | $ | 0.18 |
| | $ | 0.18 |
| | $ | 0.18 |
| $ | 0.18 |
| | $ | 0.18 |
| | $ | 0.18 |
|
| Weighted average shares outstanding: | |
| | |
| | |
| |
| | |
| | |
|
| Basic | 65,632 |
| | 65,822 |
| | 66,682 |
| 65,501 |
| | 65,632 |
| | 65,822 |
|
| Diluted | 66,065 |
| | 66,229 |
| | 67,275 |
| 65,932 |
| | 66,065 |
| | 66,229 |
|
See accompanying notes to consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
| | | | Year ended September 30, | Year ended September 30, |
| | 2017 | | 2016 | | 2015 | 2018 | | 2017 | | 2016 |
| Net income | $ | 212,182 |
| | $ | 180,160 |
| | $ | 160,049 |
| $ | 220,816 |
| | $ | 212,182 |
| | $ | 180,160 |
|
| Foreign currency translation adjustments | 8,549 |
| | (13,828 | ) | | (22,570 | ) | (9,334 | ) | | 8,549 |
| | (13,828 | ) |
| Interest rate hedge, net of income taxes of $-, $(16) and $16 | 1 |
| | 24 |
| | (25 | ) | |
| Interest rate hedge, net of income taxes of $-, $- and $(16) | | — |
| | 1 |
| | 24 |
|
| Comprehensive income | 220,732 |
| | 166,356 |
| | 137,454 |
| 211,482 |
| | 220,732 |
| | 166,356 |
|
| Comprehensive income attributable to noncontrolling interests | 2,756 |
| | 1,798 |
| | 2,277 |
| 65 |
| | 2,756 |
| | 1,798 |
|
| Comprehensive income attributable to MAXIMUS | $ | 217,976 |
| | $ | 164,558 |
| | $ | 135,177 |
| $ | 211,417 |
| | $ | 217,976 |
| | $ | 164,558 |
|
See accompanying notes to consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
| | | | September 30, | September 30, |
| | 2017 | | 2016 | 2018 | | 2017 |
| ASSETS | |
| | |
| |
| | |
|
| Current assets: | |
| | |
| |
| | |
|
| Cash and cash equivalents | $ | 166,252 |
| | $ | 66,199 |
| $ | 349,245 |
| | $ | 166,252 |
|
| Short-term investments | | 20,264 |
| | — |
|
| Accounts receivable—billed and billable, net | 394,338 |
| | 444,357 |
| 357,613 |
| | 394,338 |
|
| Accounts receivable—unbilled | 36,475 |
| | 36,433 |
| 31,536 |
| | 36,475 |
|
| Income taxes receivable | 4,528 |
| | 17,273 |
| 5,979 |
| | 4,528 |
|
| Prepaid expenses and other current assets | 55,649 |
| | 56,718 |
| 43,995 |
| | 55,649 |
|
| Total current assets | 657,242 |
| | 620,980 |
| 808,632 |
| | 657,242 |
|
| Property and equipment, net | 101,651 |
| | 131,569 |
| 77,544 |
| | 101,651 |
|
| Capitalized software, net | 26,748 |
| | 30,139 |
| 22,429 |
| | 26,748 |
|
| Goodwill | 402,976 |
| | 397,558 |
| 399,882 |
| | 402,976 |
|
| Intangible assets, net | 98,769 |
| | 109,027 |
| 88,035 |
| | 98,769 |
|
| Deferred contract costs, net | 16,298 |
| | 18,182 |
| 14,380 |
| | 16,298 |
|
| Deferred compensation plan assets | 28,548 |
| | 23,307 |
| 34,305 |
| | 28,548 |
|
| Deferred income taxes | 7,691 |
| | 8,644 |
| 6,834 |
| | 7,691 |
|
| Other assets | 10,739 |
| | 9,413 |
| 9,959 |
| | 10,739 |
|
| Total assets | $ | 1,350,662 |
| | $ | 1,348,819 |
| $ | 1,462,000 |
| | $ | 1,350,662 |
|
| LIABILITIES AND SHAREHOLDERS' EQUITY | |
| | |
| |
| | |
|
| Current liabilities: | |
| | |
| |
| | |
|
| Accounts payable and accrued liabilities | $ | 122,083 |
| | $ | 150,711 |
| $ | 114,378 |
| | $ | 122,083 |
|
| Accrued compensation and benefits | 105,667 |
| | 96,480 |
| 95,555 |
| | 105,667 |
|
| Deferred revenue | 71,722 |
| | 73,692 |
| 51,182 |
| | 71,722 |
|
| Income taxes payable | 4,703 |
| | 7,979 |
| 4,438 |
| | 4,703 |
|
| Long-term debt, current portion | 141 |
| | 277 |
| |
| Other liabilities | 11,950 |
| | 11,617 |
| 11,896 |
| | 12,091 |
|
| Total current liabilities | 316,266 |
| | 340,756 |
| 277,449 |
| | 316,266 |
|
| Deferred revenue, less current portion | 28,182 |
| | 40,007 |
| 20,394 |
| | 28,182 |
|
| Deferred income taxes | 20,106 |
| | 16,813 |
| 26,377 |
| | 20,106 |
|
| Long-term debt | 527 |
| | 165,338 |
| |
| Deferred compensation plan liabilities, less current portion | 30,707 |
| | 24,012 |
| 33,497 |
| | 30,707 |
|
| Other liabilities | 9,106 |
| | 8,753 |
| 17,864 |
| | 9,633 |
|
| Total liabilities | 404,894 |
| | 595,679 |
| 375,581 |
| | 404,894 |
|
| Commitments and contingencies |
|
| |
|
|
|
| |
|
|
| Shareholders' equity: | |
| | |
| |
| | |
|
| Common stock, no par value; 100,000 shares authorized; 65,137 and 65,223 shares issued and outstanding at September 30, 2017 and 2016, at stated amount, respectively | 475,592 |
| | 461,679 |
| |
| Common stock, no par value; 100,000 shares authorized; 64,371 and 65,137 shares issued and outstanding at September 30, 2018 and 2017, at stated amount, respectively | | 487,539 |
| | 475,592 |
|
| Accumulated other comprehensive income | (27,619 | ) | | (36,169 | ) | (36,953 | ) | | (27,619 | ) |
| Retained earnings | 492,112 |
| | 323,571 |
| 633,281 |
| | 492,112 |
|
| Total MAXIMUS shareholders' equity | 940,085 |
| | 749,081 |
| 1,083,867 |
| | 940,085 |
|
| Noncontrolling interests | 5,683 |
| | 4,059 |
| 2,552 |
| | 5,683 |
|
| Total equity | 945,768 |
| | 753,140 |
| 1,086,419 |
| | 945,768 |
|
| Total liabilities and equity | $ | 1,350,662 |
| | $ | 1,348,819 |
| $ | 1,462,000 |
| | $ | 1,350,662 |
|
See accompanying notes to consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
| | | | Year ended September 30, | Year ended September 30, |
| | 2017 | | 2016 | | 2015 | 2018 | | 2017 | | 2016 |
| Cash flows from operations: | |
| | |
| | |
| |
| | |
| | |
|
| Net income | $ | 212,182 |
| | $ | 180,160 |
| | $ | 160,049 |
| $ | 220,816 |
| | $ | 212,182 |
| | $ | 180,160 |
|
| Adjustments to reconcile net income to net cash provided by operations: | |
| | |
| | |
| |
| | |
| | |
|
| Depreciation and amortization of property, plant, equipment and capitalized software | 55,769 |
| | 58,404 |
| | 46,849 |
| 51,884 |
| | 55,769 |
| | 58,404 |
|
| Amortization of intangible assets | 12,208 |
| | 13,377 |
| | 9,348 |
| 10,308 |
| | 12,208 |
| | 13,377 |
|
| Deferred income taxes | 4,762 |
| | 5,652 |
| | 807 |
| 6,721 |
| | 4,762 |
| | 5,652 |
|
| Stock compensation expense | 21,365 |
| | 18,751 |
| | 17,237 |
| 20,238 |
| | 21,365 |
| | 18,751 |
|
| Gain on sale of business | (650 | ) | | (6,880 | ) | | — |
| — |
| | (650 | ) | | (6,880 | ) |
| Changes in assets and liabilities, net of effects of business combinations: | | | | | | | | | | |
| Accounts receivable—billed and billable | 53,025 |
| | (51,986 | ) | | (103,774 | ) | 34,033 |
| | 53,025 |
| | (51,986 | ) |
| Accounts receivable—unbilled | 26 |
| | (5,590 | ) | | (911 | ) | 4,920 |
| | 26 |
| | (5,590 | ) |
| Prepaid expenses and other current assets | 2,584 |
| | (2,027 | ) | | (6,475 | ) | 4,954 |
| | 2,584 |
| | (2,027 | ) |
| Deferred contract costs | 2,037 |
| | (398 | ) | | (7,245 | ) | 1,838 |
| | 2,037 |
| | (398 | ) |
| Accounts payable and accrued liabilities | (28,309 | ) | | (2,371 | ) | | 44,351 |
| (7,725 | ) | | (28,309 | ) | | (2,371 | ) |
| Accrued compensation and benefits | 8,849 |
| | (869 | ) | | (3,157 | ) | (8,795 | ) | | 8,849 |
| | (869 | ) |
| Deferred revenue | (15,401 | ) | | (11,661 | ) | | 47,948 |
| (27,039 | ) | | (15,401 | ) | | (11,661 | ) |
| Income taxes | 8,901 |
| | (13,125 | ) | | 9,134 |
| 7,262 |
| | 8,901 |
| | (13,125 | ) |
| Other assets and liabilities | (148 | ) | | (1,411 | ) | | (7,944 | ) | 4,110 |
| | (148 | ) | | (1,411 | ) |
| Cash provided by operations | 337,200 |
| | 180,026 |
| | 206,217 |
| 323,525 |
| | 337,200 |
| | 180,026 |
|
| Cash flows from investing activities: | | | | | | | | | | |
| Purchases of property and equipment and capitalized software costs | | (26,520 | ) | | (24,154 | ) | | (46,391 | ) |
| Acquisition of businesses, net of cash acquired | (2,677 | ) | | (46,651 | ) | | (289,212 | ) | — |
| | (2,677 | ) | | (46,651 | ) |
| Purchases of property and equipment and capitalized software costs | (24,154 | ) | | (46,391 | ) | | (105,149 | ) | |
| Acquisition of part of noncontrolling interest | | (157 | ) | | — |
| | — |
|
| Proceeds from the sale of a business | 1,035 |
| | 5,515 |
| | — |
| — |
| | 1,035 |
| | 5,515 |
|
| Purchases of short-term investments | | (19,996 | ) | | — |
| | — |
|
| Other | 575 |
| | 424 |
| | 489 |
| 369 |
| | 575 |
| | 424 |
|
| Cash used in investing activities | (25,221 | ) | | (87,103 | ) | | (393,872 | ) | (46,304 | ) | | (25,221 | ) | | (87,103 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| Cash dividends paid to MAXIMUS shareholders | (11,674 | ) | | (11,701 | ) | | (11,852 | ) | (11,692 | ) | | (11,674 | ) | | (11,701 | ) |
| Repurchases of common stock | (28,863 | ) | | (33,335 | ) | | (82,787 | ) | (66,919 | ) | | (28,863 | ) | | (33,335 | ) |
| Stock compensation tax benefit | — |
| | 5,172 |
| | 9,474 |
| |
| Tax withholding related to RSU vesting | (9,175 | ) | | (11,614 | ) | | (12,451 | ) | (8,529 | ) | | (9,175 | ) | | (11,614 | ) |
| Stock option exercises | 924 |
| | 546 |
| | 868 |
| |
| Borrowings under credit facility | 185,000 |
| | 149,823 |
| | 330,993 |
| 136,632 |
| | 185,000 |
| | 149,823 |
|
| Repayment of credit facility and other long-term debt | (349,981 | ) | | (195,200 | ) | | (121,611 | ) | (136,769 | ) | | (349,981 | ) | | (195,200 | ) |
| Stock option exercises | | — |
| | 924 |
| | 546 |
|
| Stock compensation tax benefit | | — |
| | — |
| | 5,172 |
|
| Other | (1,660 | ) | | (533 | ) | | (75 | ) | (4,603 | ) | | (1,660 | ) | | (533 | ) |
| Expansion of credit facility | — |
| | — |
| | (1,444 | ) | |
| Cash (used in)/provided by financing activities | (215,429 | ) | | (96,842 | ) | | 111,115 |
| |
| Cash used in financing activities | | (91,880 | ) | | (215,429 | ) | | (96,842 | ) |
| Effect of exchange rate changes on cash | 3,503 |
| | (4,554 | ) | | (6,900 | ) | (2,348 | ) | | 3,503 |
| | (4,554 | ) |
| Net increase/(decrease) in cash and cash equivalents | 100,053 |
| | (8,473 | ) | | (83,440 | ) | 182,993 |
| | 100,053 |
| | (8,473 | ) |
| Cash and cash equivalents, beginning of period | 66,199 |
| | 74,672 |
| | 158,112 |
| 166,252 |
| | 66,199 |
| | 74,672 |
|
| Cash and cash equivalents, end of period | $ | 166,252 |
| | $ | 66,199 |
| | $ | 74,672 |
| $ | 349,245 |
| | $ | 166,252 |
| | $ | 66,199 |
|
See accompanying notes to consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
| | | | Common Shares Outstanding | | Common Stock | | Accumulated Other Comprehensive Income | | Retained Earnings | | Noncontrolling Interest | | Total | Common Shares Outstanding | | Common Stock | | Accumulated Other Comprehensive Income | | Retained Earnings | | Noncontrolling Interest | | Total |
| Balance at September 30, 2014 | 66,613 |
| | $ | 429,857 |
| | $ | 230 |
| | $ | 125,875 |
| | $ | 223 |
| | $ | 556,185 |
| |
| Balance at September 30, 2015 | | 65,437 |
| | $ | 446,132 |
| | $ | (22,365 | ) | | $ | 188,611 |
| | $ | 3,321 |
| | $ | 615,699 |
|
| Net income | — |
| | — |
| | — |
| | 157,772 |
| | 2,277 |
| | 160,049 |
| — |
| | — |
| | — |
| | 178,362 |
| | 1,798 |
| | 180,160 |
|
| Foreign currency translation | — |
| | — |
| | (22,570 | ) | | — |
| | — |
| | (22,570 | ) | — |
| | — |
| | (13,828 | ) | | — |
| | — |
| | (13,828 | ) |
| Interest rate hedge, net of income taxes | — |
| | — |
| | (25 | ) | | — |
| | — |
| | (25 | ) | — |
| | — |
| | 24 |
| | — |
| | — |
| | 24 |
|
| Cash dividends | — |
| | — |
| | — |
| | (11,852 | ) | | (75 | ) | | (11,927 | ) | — |
| | — |
| | — |
| | (11,701 | ) | | (1,060 | ) | | (12,761 | ) |
| Dividends on RSUs | — |
| | 397 |
| | — |
| | (397 | ) | | — |
| | — |
| — |
| | 363 |
| | — |
| | (363 | ) | | — |
| | — |
|
| Repurchases of common stock | (1,619 | ) | | — |
| | — |
| | (82,787 | ) | | — |
| | (82,787 | ) | (587 | ) | | — |
| | — |
| | (31,338 | ) | | — |
| | (31,338 | ) |
| Stock compensation expense | — |
| | 17,237 |
| | — |
| | — |
| | — |
| | 17,237 |
| — |
| | 18,751 |
| | — |
| | — |
| | — |
| | 18,751 |
|
| Stock compensation tax benefit | — |
| | 9,474 |
| | — |
| | — |
| | — |
| | 9,474 |
| — |
| | 5,172 |
| | — |
| | — |
| | — |
| | 5,172 |
|
| Tax withholding relating to RSU vesting | — |
| | (11,701 | ) | | — |
| | — |
| | — |
| | (11,701 | ) | — |
| | (9,285 | ) | | — |
| | — |
| | — |
| | (9,285 | ) |
| Stock option exercises and RSU vesting | 443 |
| | 868 |
| | — |
| | — |
| | — |
| | 868 |
| |
| Addition of noncontrolling interest from acquisition | — |
| | — |
| | — |
| | — |
| | 896 |
| | 896 |
| |
| Balance at September 30, 2015 | 65,437 |
| | 446,132 |
| | (22,365 | ) | | 188,611 |
| | 3,321 |
| | 615,699 |
| |
| Net income | — |
| | — |
| | — |
| | 178,362 |
| | 1,798 |
| | 180,160 |
| |
| Foreign currency translation | — |
| | — |
| | (13,828 | ) | | — |
| | — |
| | (13,828 | ) | |
| Interest rate hedge, net of income taxes | — |
| | — |
| | 24 |
| | — |
| | — |
| | 24 |
| |
| Cash dividends | — |
| | — |
| | — |
| | (11,701 | ) | | (1,060 | ) | | (12,761 | ) | |
| Dividends on RSUs | — |
| | 363 |
| | — |
| | (363 | ) | | — |
| | — |
| |
| Repurchases of common stock | (587 | ) | | — |
| | — |
| | (31,338 | ) | | — |
| | (31,338 | ) | |
| Stock compensation expense | — |
| | 18,751 |
| | — |
| | — |
| | — |
| | 18,751 |
| |
| Stock compensation tax benefit | — |
| | 5,172 |
| | — |
| | — |
| | — |
| | 5,172 |
| |
| Tax withholding related to RSU vesting | — |
| | (9,285 | ) | | — |
| | — |
| | — |
| | (9,285 | ) | |
| Stock option exercises and RSU vesting | 373 |
| | 546 |
| | — |
| | — |
| | — |
| | 546 |
| 373 |
| | 546 |
| | — |
| | — |
| | — |
| | 546 |
|
| Balance at September 30, 2016 | 65,223 |
| | 461,679 |
| | (36,169 | ) | | 323,571 |
| | 4,059 |
| | 753,140 |
| 65,223 |
| | 461,679 |
| | (36,169 | ) | | 323,571 |
| | 4,059 |
| | 753,140 |
|
| Net income | — |
| | — |
| | — |
| | 209,426 |
| | 2,756 |
| | 212,182 |
| — |
| | — |
| | — |
| | 209,426 |
| | 2,756 |
| | 212,182 |
|
| Foreign currency translation | — |
| | — |
| | 8,549 |
| | — |
| | — |
| | 8,549 |
| — |
| | — |
| | 8,549 |
| | — |
| | — |
| | 8,549 |
|
| Interest rate hedge, net of income taxes | — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
| — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Cash dividends | — |
| | — |
| | — |
| | (11,674 | ) | | (1,132 | ) | | (12,806 | ) | — |
| | — |
| | — |
| | (11,674 | ) | | (1,132 | ) | | (12,806 | ) |
| Dividends on RSUs | — |
| | 348 |
| | — |
| | (348 | ) | | — |
| | — |
| — |
| | 348 |
| | — |
| | (348 | ) | | — |
| | — |
|
| Repurchases of common stock | (558 | ) | | — |
| | — |
| | (28,863 | ) | | — |
| | (28,863 | ) | (558 | ) | | — |
| | — |
| | (28,863 | ) | | — |
| | (28,863 | ) |
| Stock compensation expense | — |
| | 21,365 |
| | — |
| | — |
| | — |
| | 21,365 |
| — |
| | 21,365 |
| | — |
| | — |
| | — |
| | 21,365 |
|
| Tax withholding related to RSU vesting | — |
| | (8,724 | ) | | — |
| | — |
| | — |
| | (8,724 | ) | — |
| | (8,724 | ) | | — |
| | — |
| | — |
| | (8,724 | ) |
| Stock option exercises and RSU vesting | 472 |
| | 924 |
| | — |
| | — |
| | — |
| | 924 |
| 472 |
| | 924 |
| | — |
| | — |
| | — |
| | 924 |
|
| Balance at September 30, 2017 | 65,137 |
| | $ | 475,592 |
| | $ | (27,619 | ) | | $ | 492,112 |
| | $ | 5,683 |
| | $ | 945,768 |
| 65,137 |
| | 475,592 |
| | (27,619 | ) | | 492,112 |
| | 5,683 |
| | 945,768 |
|
| Net income | | — |
| | — |
| | — |
| | 220,751 |
| | 65 |
| | 220,816 |
|
| Foreign currency translation | | — |
| | — |
| | (9,334 | ) | | — |
| | — |
| | (9,334 | ) |
| Cash dividends | | — |
| | — |
| | — |
| | (11,692 | ) | | (2,915 | ) | | (14,607 | ) |
| Dividends on RSUs | | — |
| | 318 |
| | — |
| | (318 | ) | | — |
| | — |
|
| Repurchases of common stock | | (1,088 | ) | | — |
| | — |
| | (67,572 | ) | | — |
| | (67,572 | ) |
| Stock compensation expense | | — |
| | 20,238 |
| | — |
| | — |
| | — |
| | 20,238 |
|
| Tax withholding related to RSU vesting | | — |
| | (8,733 | ) | | — |
| | — |
| | — |
| | (8,733 | ) |
| RSU vesting | | 322 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Acquisition of part of noncontrolling interest | | — |
| | 124 |
| | — |
| | — |
| | (281 | ) | | (157 | ) |
| Balance at September 30, 2018 | | 64,371 |
| | $ | 487,539 |
| | $ | (36,953 | ) | | $ | 633,281 |
| | $ | 2,552 |
| | $ | 1,086,419 |
|
See accompanying notes to consolidated financial statements.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements
For the years ended September 30, 2018, 2017 2016 and 20152016
1. Business and summary of significant accounting policies
Description of business
MAXIMUS, Inc. (the "Company" or "we") is a leading operator of government health and human services programs worldwide.
We conductIn fiscal year 2018, we conducted our operations through three business segments: Health Services, U.S. Federal Services and Human Services.
The Health Services Segment provides a variety of business process services and appeals and assessments as well as related consulting services, for state, provincial and national government programs. These services support a variety of government health benefit programs including Medicaid, the Children's Health Insurance Program (CHIP) and the Affordable Care Act (ACA) in the U.S., Health Insurance BC (British Columbia) in Canada, and the Health Assessment Advisory Service (HAAS) contract in the United Kingdom.U.K.
The U.S. Federal Services Segment provides business process services andsolutions, program management, as well as system and software development and maintenance services for largevarious U.S. Federal Government programs, independent health reviewfederal civilian programs. The Segment also contains certain state-based assessments and appeals services for bothwork that is part of the U.S. Federal GovernmentSegment's heritage within the Medicare Appeals portfolio and similar state-based programs and technology solutions for civilian agencies.continues to be managed within this Segment.
The Human Services Segment provides national, state and localcounty human services agencies with a variety of business process services and related consulting services for governmentwelfare-to-work, child support, higher education institutions and other human services programs. Approximately 70% of our revenue in this segment was earned in foreign jurisdictions.
Principles of consolidation
The consolidated financial statements include the accounts of MAXIMUS, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain financial results have been reclassified to conform with our current period presentation.
Where MAXIMUS owns less than 100% of the share capital of its subsidiaries, but is still considered to have sufficient ownership to control the businesses, the results of these business operations are consolidated within our financial statements. The ownership interests held by other parties are shown as noncontrolling interests.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Our significant estimates include revenue recognition, estimates of the fair value of assets acquired and liabilities assumed in business combinations, estimates of the collectibility of receivables, estimates of future discounts in performance-based contracts, evaluation of asset impairment, accrual of estimated liabilities, valuation of acquisition-related contingent consideration liabilities and income taxes.
Revenue recognition
Revenue is generated from contracts with various pricing arrangements with total revenue contributions in fiscal year 20172018 as follows:
performance-based criteria (42%(43%);
costs incurred plus a negotiated fee ("cost-plus") (35%(33%);
fixed-price (18%); and
time-and-materials (5%(6%).
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
We recognize revenue on arrangements as work is performed and amounts are earned. We consider amounts to be earned once evidence of an arrangement has been obtained, services have been delivered, fees are fixed or determinable and collectability of revenue is reasonably assured.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
We recognize revenue on performance-based contracts when earned, which occurs when we have achieved the performance obligation. This may result in revenue being recognized in irregular increments. In certain performance-based contracts, we may negotiate arrangements where we are reimbursed at higher levels at the beginning of an arrangement. Where we believe the rates in the latter part of the contract represent a significant and incremental discount to the customer, we recognize revenue at an average per-transaction rate. This results in a deferred revenue balance and requires us to estimate future volumes over the life of an arrangement. Adjustments to estimates of future volumes result in adjustments to revenue.
Revenue on cost-plus contracts is recognized as services are performed, based on costs incurred plus the negotiated fee earned. In certain contracts with the U.S. Federal Government, we may be paid an award fee, based upon the quality of the service we perform. Where this fee can be objectively determined, it is recognized ratably over the period of performance, which is between four and six months. Where the fee cannot be determined objectively, all revenue is deferred until the fee has been earned.
We recognize revenue on fixed-priced contracts when earned, as services are provided. Revenue is generally recognized on a straight-line basis unless evidence suggests that revenue is earned or obligations are fulfilled in a different pattern. The timing of expense recognition may result in irregular profit margins.
Revenue on time-and-materials contracts is recognized as services are performed, based on hours worked and expenses incurred.
Where contracts have multiple deliverables, we evaluate these deliverables at the inception of each contract and as each item is delivered. As part of this evaluation, we consider whether a delivered item has value to a customer on a stand-alone basis and whether the delivery of the undelivered items is considered probable and substantially within our control, if a general right of return exists. Where deliverables, or groups of deliverables, have both of these characteristics, we treat each deliverable item as a separate element in the arrangement, allocate a portion of the allocable arrangement consideration using the estimated relative selling price method to each element and apply the relevant revenue recognition guidance to each element.
Sales and purchases in jurisdictions subject to indirect taxes, such as value added tax, are recorded net of tax collected and paid.
New accounting standards
We have adopted two new accounting standard updates during the current fiscal year.
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Stock Compensation, Improvements to Employee Share-Based Payment Accounting. We adopted this standard in fiscal year 2017. The new standard requires us to record the tax benefit or expense related to the vesting of RSUs or the exercise of stock options within our provision for income taxes in the consolidated statement of operations; this benefit was previously reported in the statement of changes in shareholders’ equity. The cash flow effects of the tax benefit are now reported in cash flows from operations; they were previously in cash flows from financing activities. The new standard allows us more flexibility in net settling RSUs as they vest. The new standard also allows for changes in accounting for the forfeiture of stock awards; we will continue to estimate our stock award forfeitures as we expense each award. This new standard has had the following effects in fiscal year 2017:
During the year ended September 30, 2017, approximately 0.5 million shares were issued through the vesting of RSUs and the exercise of stock options, resulting in a decrease in our provision for income taxes of $6.6 million and a corresponding benefit to our cash flows from operations.
Our diluted weighted average shares outstanding was higher by approximately 90,000 shares than it would have been if the former standard had been in place.
The combination of these factors resulted in a net increase of $0.10 to our basic and diluted earnings per share for the year ended September 30, 2017, compared to what would have been recorded under the former accounting guidance.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
The new standard does not require us to adjust previously reported results. Accordingly, we have made no changes to our consolidated statements of operations, cash flows or changes in shareholders' equity for any comparative periods.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The new standard requires us to evaluate whether there are conditions or events that raise substantial doubt about our ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. This new standard would only affect our financial reporting in the event that substantial doubt over our existence was identified. The adoption of this standard did not have a material impact on the financial statements.
We are evaluating the effects of guidance issued in two significant areas of financial reporting. These new standards will have a significant effect on how we report and disclose transactions.
In May 2014, the FASB issued ASUAccounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers.Customers (ASC Topic 606). In addition, the FASB has issued additional updates covering technical items and changing the date of adoption. ThisWe adopted this standard on October 1, 2018, using the modified retrospective method. Under this method, we will recognize the cumulative effect of adoption as an adjustment to our retained earnings balance on October 1, 2018. Our balance sheet at October 1, 2018, will also be adjusted to reflect changes in our deferred revenue and unbilled accounts receivable balances, with corresponding changes to our deferred tax assets and liabilities. We will not adjust our comparative periods; we will provide disclosure of revenue and other related balances as they would have been reported under prior guidance for our fiscal year 2019.
The core principle of ASC Topic 606 is that we should recognize revenue in a manner which depicts the transfer of control for promised services from ourselves to our customers. The new standard will change the manneralso require additional disclosures in which we evaluate revenue recognition for allour first quarter of 2019 regarding our contracts with customers, although the effectincluding disclosure of our remaining unsatisfied performance obligations. We are continuing to assess these disclosures.
To address the changes on revenue recognition will varyarising from contract to contract. We will adopt this standard during our 2019 fiscal year. We haveASC Topic 606, we established a cross-functional steering committee which includes representatives from across all our business and support segments. The steering committee is responsible for evaluating the impact of the standard on our operations including accounting, taxation, internal audit and financial systems. Our approach to analyzing these impacts includesincluded reviewing our current accounting policies and practices to identify potential differences that will result from applying the requirements of the new standard to our existing contracts. In addition, we are in the process of evaluating theWe have identified and made changes needed to our business processes, systems and controls in order to support revenue recognition and the related disclosures under ASC Topic 606.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the new standard. The standard permits a retrospective or cumulativeyears ended September 30, 2018, 2017 and 2016
We have substantially completed our evaluation of the effect transition method. Weof adopting ASC Topic 606. Based upon this assessment, we anticipate that we will adoptrecord an increase of approximately $33 million to our retained earnings balance at adoption, representing the new standard usingafter-tax effect of the retrospective method.acceleration of revenue on certain contracts; our opening balance sheet will show adjustments to unbilled receivables and deferred revenue to reflect these changes, along with corresponding changes in deferred taxation. The most significant cause of this change will come from some of our welfare-to-work contracts which have been reported in our Human Services Segment. Certain contracts include incentive payments where participants reach employment milestones, which are typically remaining in employment for a period of up to twelve months. Under our existing accounting guidance, we are required to defer this revenue until the outcome has been achieved. Under ASC Topic 606, we are required to recognize this revenue over the period where we are providing the relevant services. This will require us to make estimates of future outcome fees and the periods over which these fees will be earned. Other changes from ASC Topic 606 are not expected to be material.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard will changerequires that assets and liabilities arising under leases be recognized on the manner in which we will present our leasingbalance sheet. The standard also requires additional quantitative and qualitative disclosures that provide the amount, timing and uncertainty of cash flows relating to lease arrangements. We willare required to adopt this standard during our 2020 fiscal year.on October 1, 2019. In July 2018, the FASB provided an optional transition method of adoption, permitting entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We intend to adopt using the optional transition method. We are currently evaluating the likely effects on our business.
In August and November 2016, the FASB issued two ASUs pertaining to the statement of cash flows; ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments and ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. These updates will require us to make certain changes to the presentation of our cash flows. The most notable change that we anticipate relates to the treatment of balances we consider to be "restricted cash." Restricted cash represents funds which are held in our bank accounts but which we are precluded from using for general business needs through contractual requirements; these requirements include serving as collateral for lease, credit card or letter of credit arrangements or where we hold funds on behalf of clients. As we do not consider them cash or cash equivalents, we have not included them within our cash flow statement except where we have moved restricted cash in or out of unrestricted cash balances. From October 1, 2018, we will be required to include movements in cash, cash equivalents and restricted cash within our consolidated statement of cash flows. At the time of adoption, we will recast our comparative financial statements as though this standard had always been in place. We are also evaluating the effect of a new standard related to goodwill impairment. This standard would onlydo not believe they will have a significant effect on our results if our goodwill balance was determined to be impaired.reported cash flows.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. This standard will not change the manner in which we would identify a goodwill impairment but would change the manner of the calculation of any resulting impairment. Under existing guidance, we would calculate goodwill for each of our reporting units by calculating the fair value of all existing assets and liabilities within that reporting unit and comparing this to the fair value of the reporting unit; to the extent that this difference is less than our existing goodwill balance related to that reporting unit, we would record an impairment. The new standard will require us to calculate goodwill based upon the difference between the fair value and reported value of a reporting unit. This standard would be effective for our 2021 fiscal year, although early adoption is permitted. We do not anticipate any significant effect on our financial statements as a result of adopting this standard.
With the exceptionThe impact of the new standard will depend on the outcomes of future goodwill impairment tests.
Other than these new accounting standards, discussed above, there have been no new accountingother recent pronouncements that have significance, or potential significance, to the Company's consolidatedwhich we anticipate will significantly affect our financial statements.
Cash, and cash equivalents and restricted cash
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Investments with a longer maturity are shown as short-term investments. Where we are obliged to hold cash balances as collateral for lease, credit card or letter of credit arrangements, or where we hold funds on behalf of clients, this balance is reported within prepayments and other current assets. These restricted cash balances totaled $13.5$7.3 million and $14.1$13.5 million at September 30, 2018 and 2017, and 2016, respectively.
During the year, we have held some liquid investments with an original maturity in excess of three months. We have reported this balance as a short term investment. We have recorded income over the term of this investment,
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 2016 and 20152016
which matured in October 2018. There is no material difference between the fair value and the reported value of the investment at September 30, 2018.
Accounts receivable—billed, billable and unbilled
Billed receivables are balances where an invoice has been prepared and issued and is collectible under standard contract terms.
Many of our clients require invoices to be prepared on a monthly basis. Where we anticipate that an invoice will be issued within a short period of time and where the funds are considered collectible from within standard contract terms, we include this balance as billable accounts receivable.
Both billed and billable balances are recorded at their face amount less an allowance for doubtful accounts. We re-evaluate our client receivables on a quarterly basis, especially receivables that are past due, and reassess our allowance for doubtful accounts based on specific client collection issues.
We present unbilled receivables as a separate component of our consolidated balance sheet. Unbilled receivables represents a timing difference between when amounts are billed or billable and when revenue has been recognized or has occurred as of period end. The timing of these billings is generally driven by the contractual terms, which may have billing milestones whichthat are different from revenue recognition milestones. Our unbilled receivables balance also includes retainage balances, where customers may hold back payment for work performed for a period of time to allow opportunities to evaluate the quality of our performance. Our unbilled receivable balance is recorded at fair value which is the value which we expect to invoice for the services performed, once the criteria for billing have been met.
Business combinations and goodwill
The purchase price of an acquired business is allocated to tangible assets, separately identifiable intangible assets acquired and liabilities assumed based upon their respective fair values. Any excess balance is recorded as goodwill. Costs incurred directly related to an acquisition, including legal, accounting and valuation services, are expensed as incurred.
Intangible assets are separately identified and recorded at fair value. These assets are amortized on a straight-line basis over useful lives estimated at the time of the business combination.
Goodwill is not amortized but is subject to impairment testing on an annual basis, or more frequently if impairment indicators arise. Impairment testing is performed at the reporting unit level. A reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete financial information is prepared and reviewed regularly by segment management. However, components are aggregated if they have similar economic characteristics. The evaluation is performed by comparing the fair value of the relevant reporting unit to the carrying value, including goodwill, of the reporting unit. If the fair value of the reporting unit exceeds the carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds the fair value, the goodwill of the reporting unit may be impaired.
Our reporting units are consistent with our operating segments, Health Services, U.S. Federal Services and Human Services. We perform our annual impairment test as of July 1 of each year. We performed the annual impairment test, as of July 1, 2017,2018, and determined that there had been no impairment of goodwill. In performing this assessment, we utilized an income approach. Such an approach requires estimation of future operating cash flows including business growth, utilization of working capital and discount rates. The valuation of the business as a whole is compared to our market value at the date of the test in order to verify the calculation.
Long-lived assets (excluding goodwill)
Property and equipment is recorded at cost. Depreciation is recorded over the assets' respective useful economic lives using the straight-line method, which are not to exceed 39 years for our buildings and seven7 years for office furniture and equipment. Leasehold improvements are amortized over the shorter of their useful life or the remaining term of the lease. Repairs and maintenance costs are expensed as incurred.
All of the Company's capitalized software represents development costs for software that is intended for our internal use. Direct costs of time and materialmaterials incurred for the development of application software for internal use
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
are capitalized and depreciated using the straight-line method over the estimated useful life of the software, ranging from three to eight years. Costs incurred for upgrades and enhancements that do not result in additional functionality are expensed as incurred.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
Deferred contract costs consist of contractually recoverable direct set-up costs related to long-term service contracts. These costs include direct and incremental costs incurred prior to the commencement of providing service to our customer. These costs are expensed over the period the services are provided using the straight-line method.
We review long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. Our review is based on our projection of the undiscounted future operating cash flows of the related asset group. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amount, we recognize a non-cash impairment charge to reduce the carrying amount to equal projected future discounted cash flows. No impairment charges were recorded in the three years ending September 30, 2017.2018.
Income taxes
Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. In addition, a valuation allowance is recorded if it is believed more likely than not that a deferred tax asset will not be fully realized.
We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would "more likely than not" sustain the position following an audit. For tax positions meeting the "more likely than not" threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Foreign currency
For all foreign operations, the functional currency is the local currency. The assets and liabilities of foreign operations are translated into U.S. Dollars at period-end exchange rates, and revenue and expenses are translated at average exchange rates for the year. The resulting cumulative translation adjustment is included in accumulated other comprehensive income on the consolidated balance sheet. Gains and losses from foreign currency transactions are included in other income, net.
Contingencies
From time to time, we are involved in legal proceedings, including contract and employment claims, in the ordinary course of business.claims. We assess the likelihood of any adverse judgments or outcomes to these contingencies, as well as potential ranges of probable losses and establish reserves accordingly. The amount of reserves required may change in future periods due to new developments in each matter or changes in approach to a matter such as a change in settlement strategy.
Fair value measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants.
Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy in one of the following categories based on the lowest level input that is significant in measuring fair value:
Level 1 - Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.
Level 2 - Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
Level 3 - Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other amounts included within current assets and liabilities that meet the definition of a financial instrument approximate fair value due to the short-term nature of these balances.
We hold investments in a Rabbi Trust on behalf of our deferred compensation plan. These assets are recorded on our consolidated balance sheet at fair value under the heading of "Deferred Compensation Plan Assets". These assets have quoted prices in active markets (Level 1). See "Note 13.12. Employee benefit plans and deferred compensation" for further details.
We have two acquisitions where ourrecorded a contingent consideration payment is contingent upon eventsrelated to an acquisition which take place after the acquisition date.may be paid between now and 2022. The related liability is recorded on our consolidated balance sheet as a liability at estimated fair value and updated on a quarterly basis as an acquisition-related expense or benefit. The valuation of this liability is derived from internal estimates of future performance and not from inputs that are observable (Level 3).
2. Business segments
We have three business segments, Health Services, U.S. Federal Services and Human Services. These segments reflect the way in which historically we organizehave organized and managemanaged the business and is consistent with the manner in which our Chief Executive Officer operatesoperated and reviewsreviewed the results of the business.business during the year ended September 30, 2018.
Expenses which are not specifically included in the segments are included in other categories, including amortization of intangible assets, costs incurred in restructuring our U.K. Human Services business, the direct costs of acquisitions and the gain on sale of the K-12 Education business. These costs are excluded from measuring each segment's operating performance.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 2016 and 20152016
The results of these segments for the three years ended September 30, 20172018 are shown below (in thousands).
| | | | Year ended September 30, | Year ended September 30, |
| | 2017 | | 2016 | | 2015 | 2018 | | 2017 | | 2016 |
| Revenue: | |
| | |
| | |
| |
| | |
| | |
|
| Health Services | $ | 1,380,151 |
| | $ | 1,298,304 |
| | $ | 1,109,238 |
| $ | 1,404,959 |
| | $ | 1,380,151 |
| | $ | 1,298,304 |
|
| U.S. Federal Services | 545,573 |
| | 591,728 |
| | 502,484 |
| 478,911 |
| | 545,573 |
| | 591,728 |
|
| Human Services | 525,237 |
| | 513,328 |
| | 488,099 |
| 508,366 |
| | 525,237 |
| | 513,328 |
|
| Total | $ | 2,450,961 |
| | $ | 2,403,360 |
| | $ | 2,099,821 |
| $ | 2,392,236 |
| | $ | 2,450,961 |
| | $ | 2,403,360 |
|
| Gross Profit: | |
| | |
| | |
| |
| | |
| | |
|
| Health Services | $ | 347,325 |
| | $ | 292,181 |
| | $ | 254,108 |
| $ | 372,628 |
| | $ | 347,325 |
| | $ | 292,181 |
|
| U.S. Federal Services | 139,321 |
| | 138,168 |
| | 118,646 |
| 126,698 |
| | 139,321 |
| | 138,168 |
|
| Human Services | 125,259 |
| | 131,842 |
| | 139,963 |
| 95,059 |
| | 125,259 |
| | 131,842 |
|
| Total | $ | 611,905 |
| | $ | 562,191 |
| | $ | 512,717 |
| $ | 594,385 |
| | $ | 611,905 |
| | $ | 562,191 |
|
| Selling, general and administrative expense: | |
| | |
| | |
| |
| | |
| | |
|
| Health Services | $ | 132,081 |
| | $ | 107,155 |
| | $ | 99,815 |
| $ | 136,250 |
| | $ | 132,081 |
| | $ | 107,155 |
|
| U.S. Federal Services | 74,345 |
| | 74,792 |
| | 59,252 |
| 69,312 |
| | 74,345 |
| | 74,792 |
|
| Human Services | 76,675 |
| | 84,157 |
| | 79,719 |
| 76,835 |
| | 76,675 |
| | 84,157 |
|
| Other | 1,409 |
| | 2,155 |
| | 6 |
| 2,844 |
| | 1,492 |
| | 2,987 |
|
| Total | $ | 284,510 |
| | $ | 268,259 |
| | $ | 238,792 |
| $ | 285,241 |
| | $ | 284,593 |
| | $ | 269,091 |
|
| Operating income: | |
| | |
| | |
| |
| | |
| | |
|
| Health Services | $ | 215,244 |
| | $ | 185,026 |
| | $ | 154,293 |
| $ | 236,378 |
| | $ | 215,244 |
| | $ | 185,026 |
|
| U.S. Federal Services | 64,976 |
| | 63,376 |
| | 59,394 |
| 57,386 |
| | 64,976 |
| | 63,376 |
|
| Human Services | 48,584 |
| | 47,685 |
| | 60,244 |
| 18,224 |
| | 48,584 |
| | 47,685 |
|
| Amortization of intangible assets | (12,208 | ) | | (13,377 | ) | | (9,348 | ) | (10,308 | ) | | (12,208 | ) | | (13,377 | ) |
| Restructuring costs | (2,242 | ) | | — |
| | — |
| (3,353 | ) | | (2,242 | ) | | — |
|
| Acquisition-related expenses | (83 | ) | | (832 | ) | | (4,745 | ) | (947 | ) | | (83 | ) | | (832 | ) |
| Gain on sale of a business | 650 |
| | 6,880 |
| | — |
| — |
| | 650 |
| | 6,880 |
|
| Other | (1,409 | ) | | (2,155 | ) | | (6 | ) | (1,897 | ) | | (1,409 | ) | | (2,155 | ) |
| Total | $ | 313,512 |
| | $ | 286,603 |
| | $ | 259,832 |
| $ | 295,483 |
| | $ | 313,512 |
| | $ | 286,603 |
|
| Operating income as a percentage of revenue: | | | | | | | | | | |
| Health Services | 15.6 | % | | 14.3 | % | | 13.9 | % | 16.8 | % | | 15.6 | % | | 14.3 | % |
| U.S. Federal Services | 11.9 | % | | 10.7 | % | | 11.8 | % | 12.0 | % | | 11.9 | % | | 10.7 | % |
| Human Services | 9.2 | % | | 9.3 | % | | 12.3 | % | 3.6 | % | | 9.2 | % | | 9.3 | % |
| Total | 12.8 | % | | 11.9 | % | | 12.4 | % | 12.4 | % | | 12.8 | % | | 11.9 | % |
| Depreciation and amortization: | |
| | |
| | |
| |
| | |
| | |
|
| Health Services | $ | 29,114 |
| | $ | 31,916 |
| | $ | 27,694 |
| $ | 28,613 |
| | $ | 29,114 |
| | $ | 31,916 |
|
| U.S. Federal Services | 11,175 |
| | 9,953 |
| | 10,363 |
| 8,478 |
| | 11,175 |
| | 9,953 |
|
| Human Services | 15,480 |
| | 16,535 |
| | 8,792 |
| 14,793 |
| | 15,480 |
| | 16,535 |
|
| Total | $ | 55,769 |
| | $ | 58,404 |
| | $ | 46,849 |
| $ | 51,884 |
| | $ | 55,769 |
| | $ | 58,404 |
|
Acquisition-related expenses are costs directlyof completed business combinations as well as the costs of any unsuccessful transactions. The charges above include costs for the acquisition of General Dynamics Information Technology's citizen engagement center business which were incurred fromin fiscal year 2018 prior to the purchases oftransaction closing in fiscal year 2019. Other costs include those related to Revitalised Limited in fiscal year 2017 and both Ascend Management Innovations, LLC (Ascend) and Assessments Australia in 2016 and Acentia, LLC (Acentia) and Remploy in 2015, as well as any unsuccessful transactions.fiscal year 2016.
We principally operate in the U.S.,United States, the U.K.,United Kingdom, Australia, Canada, Saudi Arabia and Singapore.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 2016 and 20152016
Our revenue was distributed as follows (in thousands):
| | | | Year ended September 30, | Year ended September 30, |
| | 2017 | | 2016 | | 2015 | 2018 | | 2017 | | 2016 |
| United States | $ | 1,765,661 |
| | $ | 1,721,261 |
| | $ | 1,559,769 |
| $ | 1,692,823 |
| | $ | 1,765,661 |
| | $ | 1,721,261 |
|
| United Kingdom | 346,342 |
| | 384,649 |
| | 267,702 |
| 347,026 |
| | 346,342 |
| | 384,649 |
|
| Australia | 232,434 |
| | 200,539 |
| | 178,167 |
| 247,850 |
| | 232,434 |
| | 200,539 |
|
| Rest of World | 106,524 |
| | 96,911 |
| | 94,183 |
| 104,537 |
| | 106,524 |
| | 96,911 |
|
| Total | $ | 2,450,961 |
| | $ | 2,403,360 |
| | $ | 2,099,821 |
| $ | 2,392,236 |
| | $ | 2,450,961 |
| | $ | 2,403,360 |
|
Identifiable assets for the segments are shown below (in thousands):
| | | | Year Ended
September 30, | Year Ended
September 30, |
| | 2017 | | 2016 | 2018 | | 2017 |
| Health Services | $ | 515,850 |
| | $ | 543,361 |
| $ | 482,490 |
| | $ | 515,850 |
|
| U.S. Federal Services | 397,824 |
| | 440,006 |
| 375,807 |
| | 397,824 |
|
| Human Services | 169,523 |
| | 153,141 |
| 144,445 |
| | 169,523 |
|
| Corporate/Other | 267,465 |
| | 212,311 |
| 459,258 |
| | 267,465 |
|
| Total | $ | 1,350,662 |
| | $ | 1,348,819 |
| $ | 1,462,000 |
| | $ | 1,350,662 |
|
Our long-lived assets, consisting of property and equipment, capitalized software costs and deferred compensation plan assets, were distributed as follows (in thousands):
| | | | Year Ended
September 30, | Year Ended
September 30, |
| | 2017 | | 2016 | 2018 | | 2017 |
| United States | $ | 101,530 |
| | $ | 118,751 |
| $ | 98,340 |
| | $ | 101,530 |
|
| Australia | 32,165 |
| | 38,852 |
| 20,545 |
| | 32,165 |
|
| Canada | 13,670 |
| | 16,209 |
| 9,504 |
| | 13,670 |
|
| United Kingdom | 9,251 |
| | 11,086 |
| 5,498 |
| | 9,251 |
|
| Rest of World | 331 |
| | 117 |
| 391 |
| | 331 |
|
| Total | $ | 156,947 |
| | $ | 185,015 |
| $ | 134,278 |
| | $ | 156,947 |
|
3. Concentrations of credit risk and major customers
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of accounts receivable -— billed, billable and unbilled.
The majority of our business is in the United States. Revenue from foreign projects and offices was 28%29%, 28% and 26%28% of total revenue for the years ended September 30, 2018, 2017 2016 and 2015,2016, respectively.
InFor each of the yearyears ended September 30, 2017, approximately 49% of2018, our total revenue was derived from the following customers:
|
| | | | | | | | |
| | Year ended
September 30, |
| | 2018 | | 2017 | | 2016 |
| State and local government agencies | 51 | % | | 49 | % | | 46 | % |
| Foreign government agencies | 27 | % | | 26 | % | | 26 | % |
| U.S. Federal Government agencies | 16 | % | | 19 | % | | 22 | % |
| Other sources | 6 | % | | 6 | % | | 6 | % |
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
Many of the state government agencies, many of whoseagency programs receivedreceive significant federal funding, 26% from foreign government agencies, 19% from U.S.-based Federal Government agencies, and 6% fromfunding. The other sources includinginclude local municipalities and commercial customers. We believe that the credit risk associated with our receivables is limited due to the credit worthinesscreditworthiness of these customers.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
During fiscal year 2017,2018, the U.S. Federal Government, the U.K. Government, the Australia Government and the stateState of New York each provided more than 10% of our annual revenue. Within these governments, we may be serving several distinct agencies. Revenue from the U.S. Federal Government was exclusively within the U.S. Federal Segment. Revenue from the U.K. Government was both within the Health Services and Human Services Segments. Revenue from the stateState of New York was exclusively within our Health Services Segment. Revenue from the Australian Government was exclusively within our Human Services Segment. The proportion of revenue recognized from customers providing in excess of 10% of our consolidated revenue for each of the three years ended September 30, 20172018, was from the following governments:as follows:
| | | | Year ended
September 30, | Year ended
September 30, |
| | 2017 | | 2016 | | 2015 | 2018 | | 2017 | | 2016 |
| U.S. Federal Government | 19 | % | | 22 | % | | 20 | % | 16 | % | | 19 | % | | 22 | % |
| New York | 15 | % | | 12 | % | | 10 | % | 16 | % | | 15 | % | | 12 | % |
| United Kingdom | 12 | % | | 16 | % | | * |
| 12 | % | | 12 | % | | 16 | % |
| Australia | | 10 | % | | * |
| | * |
|
| |
* | Government provided less than 10% of our consolidated revenue in this year. |
______________________
* Government provided less than 10% of our consolidated revenue in this fiscal year.
4. Earnings per share
The weighted average number of shares outstanding used to compute earnings per sharesshare was as follows (in thousands):
| | | | Year ended September 30, | Year ended September 30, |
| | 2017 | | 2016 | | 2015 | 2018 | | 2017 | | 2016 |
| Weighted average shares outstanding | 65,632 |
| | 65,822 |
| | 66,682 |
| 65,501 |
| | 65,632 |
| | 65,822 |
|
| Effect of employee stock options and unvested restricted stock awards | 433 |
| | 407 |
| | 593 |
| 431 |
| | 433 |
| | 407 |
|
| Denominator for diluted earnings per share | 66,065 |
| | 66,229 |
| | 67,275 |
| 65,932 |
| | 66,065 |
| | 66,229 |
|
For the years ended September 30, 20172018, 2017 and 2016, and 2015, 9,000we excluded approximately 5,000, 21,0009,000 and 15,00021,000 unvested restricted stock units, respectively, have been excluded from the calculation of diluted earnings per share as the effect of including them would have been anti-dilutive.
5. Income taxes
The components of income before income taxes and the corresponding provision for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2018 | | 2017 | | 2016 |
| Income before income taxes: | |
| | |
| | |
|
| United States | $ | 248,360 |
| | $ | 257,910 |
| | $ | 238,871 |
|
| Foreign | 50,849 |
| | 56,325 |
| | 47,097 |
|
| Income before income taxes | $ | 299,209 |
| | $ | 314,235 |
| | $ | 285,968 |
|
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
|
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2018 | | 2017 | | 2016 |
| Current provision: | |
| | |
| | |
|
| Federal | $ | 42,318 |
| | $ | 70,476 |
| | $ | 69,025 |
|
| State and local | 13,459 |
| | 15,594 |
| | 15,595 |
|
| Foreign | 15,895 |
| | 11,221 |
| | 15,536 |
|
| Total current provision | 71,672 |
| | 97,291 |
| | 100,156 |
|
| Deferred tax expense (benefit): | |
| | |
| | |
|
| Federal | 4,106 |
| | 5,490 |
| | 7,778 |
|
| State and local | 2,902 |
| | 643 |
| | 902 |
|
| Foreign | (287 | ) | | (1,371 | ) | | (3,028 | ) |
| Total deferred tax expense (benefit) | 6,721 |
| | 4,762 |
| | 5,652 |
|
| Provision for income taxes | $ | 78,393 |
| | $ | 102,053 |
| | $ | 105,808 |
|
Our results for the year ended September 30, 2018, benefited from the effects of the Tax Cuts and Jobs Act (the Act), which was signed on December 22, 2017, and was effective from January 1, 2018. The Act reduced our annual tax rate, resulting in reduced expense and a one-time benefit from a reduction in our deferred tax liabilities. It also included a "toll tax" on our undistributed and previously untaxed earnings in foreign locations, which is payable over eight years and which we have included in our long-term liabilities. At September 30, 2018, we have not completed our accounting for the tax effects of enactment of the Act; however, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. For these items we recognized provisional amounts in income tax expense benefit. The toll tax will be included in our U.S. federal income tax return for fiscal year 2018, which is expected to be filed in July 2019.
Our federal statutory income tax rate for the first quarter of fiscal year 2018 was 35%; the rate for the remainder of the fiscal year was 21%. This resulted in a statutory rate for the fiscal year of 24.5%. The provision for income taxes differs from that which would have resulted from the use of this rate is as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2018 | | 2017 | | 2016 |
| Federal income tax provision at statutory rate of 24.5%, 35% and 35% | $ | 73,396 |
| | $ | 109,982 |
| | $ | 100,089 |
|
| State income taxes, net of federal benefit | 12,348 |
| | 10,554 |
| | 10,723 |
|
| Foreign taxation | (1,531 | ) | | (6,940 | ) | | (3,976 | ) |
| Permanent items | 1,176 |
| | 970 |
| | 1,284 |
|
| Tax credits | (2,438 | ) | | (4,851 | ) | | (1,592 | ) |
| Toll tax | 9,425 |
| | — |
| | — |
|
| Deferred tax liability - tax rate change | (10,514 | ) | | — |
| | — |
|
| Vesting of equity compensation | (2,849 | ) | | (6,569 | ) | | — |
|
| Other | (620 | ) | | (1,093 | ) | | (720 | ) |
| Provision for income taxes | $ | 78,393 |
| | $ | 102,053 |
| | $ | 105,808 |
|
The significant items comprising our deferred tax assets and liabilities as of September 30, 2018 and 2017 are as follows (in thousands):
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
|
| | | | | | | |
| | As of September 30, |
| | 2018 | | 2017 |
| Net deferred tax assets/(liabilities) | |
| | |
|
| Costs deductible in future periods | $ | 20,254 |
| | $ | 30,794 |
|
| Deferred revenue | 5,197 |
| | 20,703 |
|
| Stock compensation | 3,469 |
| | 4,976 |
|
| Net operating loss carryforwards | 302 |
| | 360 |
|
| Amortization of goodwill and intangible assets | (27,054 | ) | | (36,100 | ) |
| Capitalized software | (6,016 | ) | | (9,197 | ) |
| Accounts receivable - unbilled | (7,854 | ) | | (12,953 | ) |
| Property and equipment | (2,011 | ) | | (3,924 | ) |
| Prepaid expenses | (2,927 | ) | | (3,741 | ) |
| Other | (2,903 | ) | | (3,333 | ) |
| | $ | (19,543 | ) | | $ | (12,415 | ) |
Our deferred tax assets and liabilities are held in various national and international jurisdictions which do not allow right of offset. Accordingly, our presentation of deferred taxes on our consolidated balance sheet is split between jurisdictions which show a net deferred tax asset and a net deferred tax liability. Our net deferred tax position is summarized below (in thousands):
|
| | | | | | | |
| | As of September 30, |
| | 2018 | | 2017 |
| Balance of tax jurisdictions with net deferred tax assets | $ | 6,834 |
| | $ | 7,691 |
|
| Balance of tax jurisdictions with net deferred tax liabilities | (26,377 | ) | | (20,106 | ) |
| Net deferred tax liabilities | $ | (19,543 | ) | | $ | (12,415 | ) |
In fiscal year 2018, we remeasured our deferred tax asset and liability balances at December 22, 2017, based on the rates at which they are expected to reverse in the future. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our net deferred tax liabilities was a reduction to income tax expense of $10.5 million for the fiscal year ended September 30, 2018. Additionally, in connection with the required one-time U.S. repatriation tax on undistributed earnings, we recorded a provisional tax expense of $9.4 million. The Company will continue to analyze the Act to determine the full effects of the new law and monitor guidance from the United States Treasury Department as to the application of certain aspects of the Act. Additionally, we will monitor guidance for states and how they will organize their tax codes prospectively
We consider our foreign earnings in excess of the earnings subject to the one-time transition tax to be indefinitely reinvested outside of the United States in accordance with the relevant accounting guidance for income taxes. Accordingly, no U.S. deferred taxes have been recorded with respect to such earnings. As of September 30, 2018, our foreign subsidiaries held approximately $47.1 million of cash and cash equivalents in either U.S. Dollars or local currencies.
Cash paid for income taxes during the years ended September 30, 2018, 2017, and 2016 was $65.3 million, $87.8 million and $108.3 million, respectively.
The provision for income taxes includes all provision to return adjustments included in the year recognized in the financial statements.
We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is "more-likely-than-not" that the position will be sustained upon examination. The total amount of unrecognized tax benefits that, if recognized, would affect our annual effective income tax rate was $1.3 million and $1.1 million at September 30, 2018 and 2017, respectively.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
We report interest and penalties as a component of income tax expense. In the fiscal years ending September 30, 2018, 2017 and 2016, we recognized interest expense relating to unrecognized tax benefits of less than $0.1 million in each year. The net liability balance at September 30, 2018 and 2017 includes approximately $0.7 million of interest and penalties.
We recognize and present uncertain tax positions on a gross basis (i.e., without regard to likely offsets for deferred tax assets, deductions and/or credits that would result from payment of uncertain tax amounts). The reconciliation of the beginning and ending amount of gross unrecognized tax benefits was as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2018 | | 2017 | | 2016 |
| Balance at beginning of year | $ | 633 |
| | $ | 448 |
| | $ | 529 |
|
| Increases for tax positions taken in current year | 88 |
| | 185 |
| | — |
|
| Reductions for tax positions of prior years | — |
| | — |
| | (81 | ) |
| Balance at end of year | $ | 721 |
| | $ | 633 |
| | $ | 448 |
|
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. We are no longer subject to federal income tax examinations for years before 2014 and to state and local income tax examinations by tax authorities for years before 2013. In international jurisdictions, similar rules apply to filed income tax returns, although the tax examination limitations and requirements may vary. We are no longer subject to audit by tax authorities for foreign jurisdictions for years prior to 2013.
6. Debt
Credit Facilities
Our credit agreement provides for a revolving line of credit up to $400 million that may be used for revolving loans, swingline loans (subject to a sublimit of $5 million), and to request letters of credit, subject to a sublimit of $50 million. The line of credit is available for general corporate purposes, including working capital, capital expenditures and acquisitions. Borrowings are permitted in currencies other than the U.S. Dollar. In September 2017, we extended the term of our credit agreement to September 2022, at which time all outstanding borrowings must be repaid. At September 30, 2018, we had no borrowings under the credit agreement.
In addition to borrowings under the credit agreement, we have an outstanding loan of $0.5 million (0.7 million Canadian Dollars) with the Atlantic Innovation Fund of Canada. There is no interest charge on this loan. The Atlantic Innovation Fund loan is repayable over 15 remaining quarterly installments.
At September 30, 2018, we held two letters of credit under our credit agreement totaling $0.7 million. Each of these letters of credit may be called by vendors in the event that the Company defaults under the terms of a contract, the probability of which we believe is remote. In addition, two letters of credit totaling $3.0 million, secured with restricted cash balances, are held with another financial institution to cover similar obligations to customers.
Our credit agreement requires us to comply with covenants including a maximum total leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all covenants as of September 30, 2018. Our obligations under the credit agreement are guaranteed by material domestic subsidiaries of the Company, but are otherwise unsecured. In the event that our total leverage ratio, as defined in the credit agreement, exceeds 2.50:1, we would be obliged to provide security in the form of the assets of the parent Company and certain of its subsidiaries. Our credit agreement contains no restrictions on the payment of dividends as long as our leverage ratio does not exceed 2.50:1. At September 30, 2018, our total leverage ratio was less than 1.0:1.0. We do not believe that the provisions of the credit agreement represent a significant restriction to the successful operation of the business or to our ability to pay dividends.
The Credit Agreement provides for an annual commitment fee payable on funds not borrowed or utilized for letters of credit. This charge is based upon our leverage and varies between 0.125% and 0.275%. Commitment fees are recorded as interest expense on the consolidated statement of operations. Borrowings under the Credit Agreement bear interest at our choice at either (a) a Base Rate plus a margin that varies between 0.0% and 0.75% per year, (b) a Eurocurrency Rate plus an applicable margin that varies between 1.0% and 1.75% per year or (c) an
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
Index Rate plus an applicable margin which varies between 1.0% and 1.75% per year. The Base Rate, Eurocurrency Rate and Index Rate are defined by the Credit Agreement.
Derivative Arrangement
In order to add stability to our interest expense and manage our exposure to interest rate movements, we may enter into derivative arrangements to fix payments on part of an outstanding loan balance. We agree to pay a fixed rate of interest to a financial institution and receive a balance equivalent to the floating rate payable. Our outstanding derivative instruments expired during fiscal year 2017. As this cash flow hedge was considered effective, the gains and losses in the fair value of this derivative instrument were reported in accumulated other comprehensive income (AOCI) in the consolidated statement of comprehensive income.
Interest Payments
During the fiscal years ended September 30, 2018, 2017 and 2016, we made interest payments of $0.6 million, $2.0 million and $3.7 million, respectively.
7. Goodwill and intangible assets
Changes in goodwill for the years ended September 30, 2018 and 2017 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Health
Services | | U.S. Federal
Services | | Human
Services | | Total |
| Balance as of September 30, 2016 | $ | 123,679 |
| | $ | 228,148 |
| | $ | 45,731 |
| | $ | 397,558 |
|
| Adjustment to goodwill acquired with Ascend and Assessments Australia, respectively | (557 | ) | | — |
| | 71 |
| | (486 | ) |
| Acquisition of Revitalised | 2,830 |
| | — |
| | — |
| | 2,830 |
|
| Foreign currency translation | 2,508 |
| | — |
| | 566 |
| | 3,074 |
|
| Balance as of September 30, 2017 | 128,460 |
| | 228,148 |
| | 46,368 |
| | 402,976 |
|
| Foreign currency translation | (1,719 | ) | | — |
| | (1,375 | ) | | (3,094 | ) |
| Balance as of September 30, 2018 | $ | 126,741 |
| | $ | 228,148 |
| | $ | 44,993 |
| | $ | 399,882 |
|
There have been no impairment charges to our goodwill.
The following table sets forth the components of intangible assets (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2018 | | As of September 30, 2017 |
| | Cost | | Accumulated Amortization | | Intangible Assets, net | | Cost | | Accumulated Amortization | | Intangible Assets, net |
| Customer contracts and relationships | $ | 129,113 |
| | $ | 42,683 |
| | $ | 86,430 |
| | $ | 129,916 |
| | $ | 33,457 |
| | $ | 96,459 |
|
| Technology-based intangible assets | 5,750 |
| | 4,212 |
| | 1,538 |
| | 7,664 |
| | 5,475 |
| | 2,189 |
|
| Trademarks and trade names | 4,496 |
| | 4,429 |
| | 67 |
| | 4,513 |
| | 4,392 |
| | 121 |
|
| Total | $ | 139,359 |
| | $ | 51,324 |
| | $ | 88,035 |
| | $ | 142,093 |
| | $ | 43,324 |
| | $ | 98,769 |
|
As of September 30, 2018, our intangible assets have a weighted average remaining life of 11.9 years, comprising 12.0 years for customer contracts and relationships, 5.0 years for technology-based intangible assets and 1.3 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, 2018, is as follows (in thousands):
|
| | | |
| 2019 | $ | 9,377 |
|
| 2020 | 8,279 |
|
| 2021 | 7,416 |
|
| 2022 | 7,354 |
|
| 2023 | 7,339 |
|
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
8. Balance Sheet Components
Property and equipment
Property and equipment, at cost, consists of the following (in thousands):
|
| | | | | | | |
| | As of September 30, |
| | 2018 | | 2017 |
| Land | $ | 1,738 |
| | $ | 1,738 |
|
| Building and improvements | 12,044 |
| | 11,799 |
|
| Office furniture and equipment | 203,512 |
| | 207,140 |
|
| Leasehold improvements | 55,918 |
| | 53,531 |
|
| | 273,212 |
| | 274,208 |
|
| Less: Accumulated depreciation and amortization | (195,668 | ) | | (172,557 | ) |
| Total property and equipment, net | $ | 77,544 |
| | $ | 101,651 |
|
Depreciation expense for the years ended September 30, 2018, 2017 and 2016 was $40.7 million, $45.2 million and $49.2 million, respectively.
Capitalized software
Capitalized software consists of the following (in thousands):
|
| | | | | | | |
| | As of September 30, |
| | 2018 | | 2017 |
| Capitalized software | $ | 94,803 |
| | $ | 88,627 |
|
| Less: Accumulated amortization | (72,374 | ) | | (61,879 | ) |
| Total Capitalized software, net | $ | 22,429 |
| | $ | 26,748 |
|
Amortization expense for the years ended September 30, 2018, 2017 and 2016 was $11.2 million, $10.6 million and $9.2 million, respectively.
Deferred contract costs
Deferred contract costs consist of the following (in thousands):
|
| | | | | | | |
| | As of September 30, |
| | 2018 | | 2017 |
| Deferred contract costs | $ | 29,941 |
| | $ | 30,776 |
|
| Less: Accumulated amortization | (15,561 | ) | | (14,478 | ) |
| Total Deferred contract costs, net | $ | 14,380 |
| | $ | 16,298 |
|
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
9. Accounts receivable reserves
Changes in the reserves against accounts receivable were as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2018 | | 2017 | | 2016 |
| Balance at beginning of year | $ | 6,843 |
| | $ | 4,226 |
| | $ | 3,385 |
|
| Additions to reserve | 243 |
| | 5,106 |
| | 2,335 |
|
| Deductions | (2,801 | ) | | (2,489 | ) | | (1,494 | ) |
| Balance at end of year | $ | 4,285 |
| | $ | 6,843 |
| | $ | 4,226 |
|
In evaluating the net realizable value of accounts receivable, we consider such factors as current economic trends, customer credit-worthiness, and changes in the customer payment terms and collection trends. Changes in the assumptions used in analyzing a specific account receivable may result in a reserve being recognized in the period in which the change occurs.
At September 30, 2018 and 2017, $13.4 million and $10.3 million of our unbilled receivables related to amounts pursuant to contractual retainage provisions. We anticipate that the majority of the fiscal 2018 balance will be billed and collected during fiscal year 2019.
10. Commitments and contingencies
Performance bonds
Certain contracts require us to provide a surety bond as a guarantee of performance. At September 30, 2018, we had performance bond commitments totaling $37.5 million. These bonds are typically renewed annually and remain in place until the contractual obligations have been satisfied. Although the triggering events vary from contract to contract, in general we would only be liable for the amount of these guarantees in the event of default in our performance of our obligations under each contract, the probability of which we believe is remote.
Operating Leases
We lease office space and equipment under various operating leases. Lease expense for the years ended September 30, 2018, 2017 and 2016 was $77.0 million, $80.6 million and $75.4 million, respectively. Our operating leases may contain rent escalations or concessions. Lease expense is recorded on a straight-line basis over the life of the respective lease.
Minimum future lease commitments under leases in effect as of September 30, 2018, are as follows (in thousands):
|
| | | | | | | | | | | |
| | Office space | | Equipment | | Total |
| Year ending September 30, | |
| | |
| | |
|
| 2019 | $ | 65,187 |
| | $ | 3,772 |
| | $ | 68,959 |
|
| 2020 | 47,398 |
| | 2,254 |
| | 49,652 |
|
| 2021 | 21,786 |
| | 128 |
| | 21,914 |
|
| 2022 | 11,950 |
| | 2 |
| | 11,952 |
|
| 2023 | 6,220 |
| | — |
| | 6,220 |
|
| Thereafter | 1,970 |
| | — |
| | 1,970 |
|
| Total minimum lease payments | $ | 154,511 |
| | $ | 6,156 |
| | $ | 160,667 |
|
Sublease income for the year ended September 30, 2018, was $2.2 million, and we anticipate future sublease income of approximately $1.7 million per fiscal year through fiscal year 2020.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
Collective bargaining agreements
Approximately 13% of our employees are covered by collective bargaining agreements or similar arrangements, the majority of which expire within one year.
Shareholder lawsuit
In August 2017, the Company and certain officers were named as defendants in a putative class action lawsuit filed in the U.S. District Court for the Eastern District of Virginia. The plaintiff alleged the defendants made a variety of materially false and misleading statements, or failed to disclose material information, concerning the status of the Company’s Health Assessment Advisory Service project for the U.K. Department for Work and Pensions from the period of October 20, 2014 through February 3, 2016. In August 2018, the defendants’ motion to dismiss the case was granted, and the case was dismissed. In October 2018, the plaintiffs filed a notice of appeal to the U.S. Circuit Court for the Fourth Circuit. That appeal is pending. At this time, it is not possible to reasonably predict whether this matter will be permitted to proceed as a class or to reasonably estimate the value of the claims asserted, and we are unable to estimate the potential loss or range of loss.
Medicaid claims
A state Medicaid agency has been notified of two proposed disallowances by the Centers for Medicare and Medicaid Services (CMS) totaling approximately $31 million. From 2004 through 2009, we had a contract with the state agency in support of its school-based Medicaid claims. We entered into separate agreements with the school districts under which we assisted the districts with preparing and submitting claims to the state Medicaid agency which, in turn, submitted claims for reimbursement to CMS. The state has asserted that its agreement with us requires us to reimburse the state for the amounts owed to CMS. However, our agreements with the school districts require them to reimburse us for such amounts, and therefore we believe the school districts are responsible for any amounts that ultimately must be refunded to CMS. Although it is reasonably possible that a court could conclude we are responsible for the full balance of the disallowances, we believe our exposure in this matter is limited to our fees associated with this work and that the school districts will be responsible for the remainder. We have established a reserve to cover our estimated fees earned from this engagement relating to the disallowances. We exited the federal healthcare-claiming business in 2009 and no longer provide the services at issue in this matter. No legal action has been initiated against us.
11. Equity
Stock compensation
At September 30, 2018, 1.2 million shares remained available for grants under our 2017 Equity Incentive Plan. We typically issue new shares in satisfying our obligations under our stock plans.
We grant equity awards to officers, employees and directors in the form of restricted stock units (RSUs). RSUs issued generally vest ratably over one or five years. The fair value of the RSUs, based on our stock price at the grant date, is expensed in equal installments over the vesting period. For the fiscal years ended September 30, 2018, 2017 and 2016, compensation expense recognized related to RSUs was $20.2 million, $21.4 million and $18.8 million, respectively. All individuals who are granted RSUs also receive dividend-equivalent payments in the form of additional RSUs. However, until the shares are issued, they have no voting rights and may not be bought or sold. In the event that an award is forfeited, the dividend-equivalent payments received by the holder with respect to that award are also forfeited. We estimate our stock award forfeitures as we expense each award.
A summary of our RSU activity for the year ended September 30, 2018, is as follows:
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
|
| | | | | | |
| | Shares | | Weighted-Average Grant-Date Fair Value |
| Non-vested shares outstanding at September 30, 2017 | 822,827 |
| | $ | 51.69 |
|
| Granted | 365,071 |
| | 64.33 |
|
| Vested | (464,658 | ) | | 53.35 |
|
| Forfeited | (61,307 | ) | | 54.90 |
|
| Non-vested shares outstanding at September 30, 2018 | 661,933 |
| | 57.78 |
|
In addition to the non-vested shares, certain directors and employees held approximately 0.7 million vested awards whose issuance has been deferred as of September 30, 2018.
The weighted-average grant-date fair value of RSUs granted in the years ended September 30, 2017 and 2016, was $53.63 and $52.00, respectively. The total fair value of RSUs which vested during the years ended September 30, 2018, 2017 and 2016 was $30.3 million, $24.9 million and $27.1 million, respectively. As of September 30, 2018, the total remaining unrecognized compensation cost related to unvested RSUs was $37.2 million. This expense is expected to be realized over the next five years, with a weighted average life of 1.6 years.
Prior to fiscal year 2008, we granted stock options to certain employees. These were granted at exercise prices equal to the fair market value of our common stock at the date of grant, vested over a period of four years and expired ten years after the date of the grant. No compensation expenses related to stock options were recorded in any of the years shown. By September 30, 2018, all stock options issued had either been exercised or expired and no new options have been issued. The following table summarizes information pertaining to the stock options vested and exercised for the years presented (in thousands):
|
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2018 | | 2017 | | 2016 |
| Aggregate intrinsic value of all stock options exercised | $ | — |
| | $ | 4,025 |
| | $ | 4,077 |
|
| Net cash proceeds from exercise of stock options | — |
| | 924 |
| | 546 |
|
The total income tax benefit recognized in the consolidated statement of operations for share-based compensation arrangements was $8.7 million, $15.0 million and $7.4 million for the fiscal years ended September 30, 2018, 2017 and 2016, respectively.
Employees are permitted to forfeit a certain number of shares to cover their personal tax liability, with the Company making tax payments to the relevant authorities. These payments are reported in the consolidated statements of cash flows as financing cash flows. During the three years ending September 30, 2018, 2017 and 2016, we incurred liabilities related to these forfeitures of $8.7 million, $8.7 million and $9.3 million, respectively.
Stock repurchase programs
Under a resolution adopted in June 2018, the Board of Directors authorized the repurchase, at management's discretion, of up to an aggregate of $200 million of our common stock. This resolution superseded a similar authorization from August 2015. The resolution also authorizes the use of option exercise proceeds for the repurchase of our common stock. During the years ended September 30, 2018, 2017 and 2016, we repurchased 1.1 million, 0.6 million and 0.6 million common shares at a cost of $67.6 million, $28.9 million and $31.3 million, respectively. At September 30, 2018, $192.8 million remained available for future stock repurchases.
Between October 1, 2018, and November 20, 2018, we have made additional purchases of 0.2 million shares of common stock at a total cost of approximately $15 million.
12. Employee benefit plans and deferred compensation
We have 401(k) plans for the benefit of employees who meet certain eligibility requirements. The plans provide for Company match, specified Company contributions and discretionary Company contributions. During the years
ended September 30, 2018, 2017 and 2016, we contributed $7.4 million, $7.0 million and $6.0 million to the 401(k) plans, respectively.
We also have a deferred compensation plan, which is a non-qualified plan available to a restricted number of highly compensated employees. The plan enables participants to defer compensation for tax purposes. These deferred employee contributions are held within a Rabbi Trust with investments directed by the respective employees. The assets of the Rabbi Trust are available to satisfy the claims of general creditors in the event of bankruptcy. The assets of the plan are sufficient to meet 95% of the liabilities as of September 30, 2018. The assets within the Rabbi Trust include $20.3 million invested in mutual funds which have quoted prices in active markets. These assets, as well as the related employee liabilities, are recorded at fair value with changes in fair value being recorded in the consolidated statement of operations.
13. Business combinations and disposals
Revitalised
On July 18, 2017, MAXIMUS Companies Limited, a wholly owned subsidiary of MAXIMUS, Inc., acquired 100% of the share capital of Revitalised Limited ("Revitalised"). Consideration is comprised ofWe paid $2.7 million in cashat the point of acquisition and up toa further $1.4 million in contingent consideration.fiscal year 2018, following the achievement of performance targets established at acquisition. Revitalised provides digital solutions to engage communities in the areas of health, fitness and well-being.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 Health Services Segment. Revitalised included goodwill of $2.8 million and intangible assets of $1.3 million. The acquisition agreement includesgoodwill represents the potential for adjustments based upon working capital atassembled workforce and enhanced capabilities stemming from the date of acquisition. We have not yet completed our assessment ofacquisition; the fair value ofintangible assets represent the total consideration, including the contingent consideration, or our assessment of the fair value of the assets acquiredtechnology and liabilities assumed.customer relationships.
K-12 Education
On May 9, 2016, we sold our K-12 Education business, which was previously part of the Human Services Segment. As a resultWe recorded gains of this transaction, we recorded a gain of approximately $6.9 million for the fiscal year ended September 30, 2016. This gain excluded a balance ofand $0.7 million which we had reserved to cover potential contingencies related to the sale. As payment of these contingencies is no longer considered probable, we have recorded additional gain in the fiscal year ended September 30, 2017. The cash balance related to this contingency had been in escrow; and was received in June 2017.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
2017, respectively.
The K-12 Education business contributed revenue of $2.2 million and $4.7 million for the years ended September 30, 2016 and 2015, respectively. We reported an operating loss of $0.2 million and operating income of $0.9 million in the respective years.fiscal year 2016.
Ascend Management Innovations, LLC
On February 29, 2016, MAXIMUS Health Services, Inc., a wholly-owned subsidiary of MAXIMUS, Inc., acquired 100% of the share capital of Ascend for cash consideration of $44.1 million. Ascend is a provider of independent health assessments and data management tools to government agencies in the U.S. We acquired Ascend to broaden our ability to help our existing government clients deal with the rising demand for long-term care services. This business was integrated into our Health Services Segment. Management hasWe estimated the fair value of intangible assets acquired as $22.3 million, with an average weighted life of 18 years, and the fair value of goodwill as $18.0 million, which is expected to be deductible for tax purposes. We believe that this goodwill represents the value of the assembled workforce of Ascend, as well as the enhanced knowledge and capabilities resulting from this business combination. We completed our evaluation of the fair value of all of the assets and liabilities acquired in fiscal year 2017.
Our allocation of fair value for the assets and liabilities acquired is shown below.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
|
| | | | | | | | | | |
| (Amounts in thousands) | | Updated through September 30, 2016 | Adjustments | Updated through September 30, 2017 |
| Cash consideration, net of cash acquired | | $ | 44,069 |
| $ | — |
| $ | 44,069 |
|
| | | | | |
| Billed and unbilled receivables | | $ | 4,069 |
| $ | — |
| $ | 4,069 |
|
| Other assets | | 407 |
| — |
| 407 |
|
| Property and equipment and other assets | | 707 |
| — |
| 707 |
|
| Deferred income taxes | | — |
| 557 |
| 557 |
|
| Intangible assets | | 22,300 |
| — |
| 22,300 |
|
| Total identifiable assets acquired | | 27,483 |
| 557 |
| 28,040 |
|
| Accounts payable and other liabilities | | 1,414 |
| — |
| 1,414 |
|
| Deferred revenue | | 554 |
| — |
| 554 |
|
| Total liabilities assumed | | 1,968 |
| — |
| 1,968 |
|
| Net identifiable assets acquired | | 25,515 |
| 557 |
| 26,072 |
|
| Goodwill | | 18,554 |
| (557 | ) | 17,997 |
|
| Net assets acquired | | $ | 44,069 |
| $ | — |
| $ | 44,069 |
|
|
| | | | |
| (Amounts in thousands) | | Allocation of assets and liabilities |
| Cash consideration, net of cash acquired | | $ | 44,069 |
|
| | | |
| Billed and unbilled receivables | | $ | 4,069 |
|
| Other assets | | 407 |
|
| Property and equipment and other assets | | 707 |
|
| Deferred income taxes | | 557 |
|
| Intangible assets | | 22,300 |
|
| Total identifiable assets acquired | | 28,040 |
|
| Accounts payable and other liabilities | | 1,414 |
|
| Deferred revenue | | 554 |
|
| Total liabilities assumed | | 1,968 |
|
| Net identifiable assets acquired | | 26,072 |
|
| Goodwill | | 17,997 |
|
| Net assets acquired | | $ | 44,069 |
|
The valuation of the intangible assets acquired is summarized below:
|
| | | | | | |
| (Dollars in thousands) | | Useful life | | Fair value |
| Customer relationships | | 19 years | | $ | 20,400 |
|
| Technology-based intangible assets | | 8 years | | 1,700 |
|
| Trade name | | 1 year | | 200 |
|
| Total intangible assets | | | | $ | 22,300 |
|
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
Assessments Australia
On December 15, 2015, MAXIMUS acquired 100% of the share capital of three companies doing business as "Assessments Australia." We acquired Assessments Australia to expand our service offerings within Australia. The consideration was comprised of $2.6 million in cash and contingent consideration of $0.5 million to the sellers of Assessments Australia if sufficient contracts with a specific government agency are won by MAXIMUS prior to December 2022. We performed a probability weighted assessment of this payment. Future changes in our assessment of this liability will be recorded through the consolidated statement of operations. This business was integrated into our Human Services Segment. Management identified goodwill and intangible assets acquired as $3.0 million and $0.4 million, respectively. We believe that the goodwill represents the value of the assembled workforce of Assessments Australia, as well as the enhanced capabilities which the business will provide us. We completed our evaluation of the fair value of all of the assets and liabilities acquired in fiscal year 2017.
The intangible assets acquired represent customer relationships. These are being amortized on a straight-line basis over six years.
At September 30, 2017, we have recorded2018, our estimate of the fair value of the contingent consideration to be $0.5is $0.4 million.
Acentia
On April 1, 2015 (the "acquisition date"), we acquired 100% of the ownership interests of Acentia for cash consideration of $293.5 million.
Acentia provides system modernization, software development, program management and other information technology services and solutions to the U.S. Federal Government. We acquired Acentia, among other reasons, to expand our ability to provide complementary business services and offerings across government markets. The acquired assets and liabilities was integrated into our U.S. Federal Services Segment.
We have completed the process of allocating the acquisition price to the fair value of the assets and liabilities of Acentia as of the acquisition date.
|
| | | | |
| | | Purchase price |
| (Amounts in thousands) | | allocation |
| Cash consideration, net of cash acquired | | $ | 293,504 |
|
| | | |
| Accounts receivable and unbilled receivables | | 35,333 |
|
| Other current assets | | 3,091 |
|
| Property and equipment | | 2,140 |
|
| Intangible assets—customer relationships | | 69,900 |
|
| Total identifiable assets acquired | | 110,464 |
|
| Accounts payable and other liabilities | | 31,350 |
|
| Deferred revenue | | 251 |
|
| Capital lease obligations | | 567 |
|
| Deferred tax liabilities | | 6,741 |
|
| Total liabilities assumed | | 38,909 |
|
| Net identifiable assets acquired | | 71,555 |
|
| Goodwill | | 221,949 |
|
| Net assets acquired | | $ | 293,504 |
|
The excess of the acquisition date consideration over the estimated fair value of the net assets acquired was recorded as goodwill. We consider the goodwill to represent the value of the assembled workforce of Acentia, as well as the enhanced knowledge and capabilities resulting from this business combination. Approximately $175 million of the goodwill balance is anticipated to be deductible for tax purposes.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
The intangible assets acquired represent customer relationships. These are being amortized on a straight-line basis over 14 years.
Remploy
On April 7, 2015 (the "Remploy acquisition date"), we acquired 70% of the ownership interests of Remploy (2015) Limited, whose assets had previously operated under the "Remploy" tradename. The remaining 30% is held in a trust for the benefit of the employees. The acquisition consideration was $3.0 million (£2.0 million).
Remploy provides services to the U.K. Government, particularly in supporting employment opportunities for the disabled. We acquired Remploy to complement our welfare-to-work services in the U.K. The acquired assets and liabilities have been integrated into our Human Services Segment. The principal asset held by Remploy on the Remploy acquisition date was a contract worth $4.6 million. This asset was amortized over two years on a straight-line basis.
DeltaWare Systems, Inc.
Following our acquisition of DeltaWare Systems, Inc. in 2010, we agreed to make payments of up to $4.0 million (Canadian) if we made sales in particular geographic markets prior to December 31, 2016. No such sales were made prior to the expiry of this deadline. At September 30, 2017 and 2016, we had recorded no liability for this obligation.
6. Debt
Credit Facilities
Our credit agreement provides for a revolving line of credit up to $400 million that may be used for revolving loans, swingline loans (subject to a sublimit of $5 million), and to request letters of credit, subject to a sublimit of $50 million. The line of credit is available for general corporate purposes, including working capital, capital expenditures and acquisitions. Borrowings are permitted in currencies other than the U.S. Dollar. In September 2017, we extended the term of our credit agreement to September 2022, at which time all outstanding borrowings must be repaid. At September 30, 2017, we had no borrowings under the credit agreement.
In addition to borrowings under the credit agreement, we have an outstanding loan of $0.7 million (0.8 million Canadian Dollars) with the Atlantic Innovation Fund of Canada. There is no interest charge on this loan. The Atlantic Innovation Fund loan is repayable over 19 remaining quarterly installments.
At September 30, 2017, we held two letters of credit under our credit agreement totaling $0.7 million. Each of these letters of credit may be called by vendors in the event that the Company defaults under the terms of a contract, the probability of which we believe is remote. In addition, two letters of credit totaling $3.0 million, secured with restricted cash balances, are held with another financial institution to cover similar obligations to customers.
Our credit agreement requires us to comply with certain financial covenants and other covenants including a maximum total leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all covenants as of September 30, 2017. Our obligations under the credit agreement are guaranteed by material domestic subsidiaries of the Company, but are otherwise unsecured. In the event that our total leverage ratio, as defined in the credit agreement, exceeds 2.50:1, we would be obliged to provide security in the form of the assets of the parent Company and certain of its subsidiaries. Our credit agreement contains no restrictions on the payment of dividends as long as our leverage ratio does not exceed 2.50:1. At September 30, 2017, our total leverage ratio was less than 1.0:1.0. We do not believe that the provisions of the credit agreement represent a significant restriction to the successful operation of the business or to our ability to pay dividends.
The Credit Agreement provides for an annual commitment fee payable on funds not borrowed or utilized for letters of credit. This charge is based upon our leverage and varies between 0.125% and 0.275%. Borrowings under the Credit Agreement bear interest at our choice at either (a) a Base Rate plus a margin that varies between 0.0% and 0.75% per year, (b) a Eurocurrency Rate plus an applicable margin that varies between 1.0% and 1.75% per year or (c) an Index Rate plus an applicable margin which varies between 1.0% and 1.75% per year. The Base Rate, Eurocurrency Rate and Index Rate are defined by the Credit Agreement.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
Derivative Arrangement
In order to add stability to our interest expense and manage our exposure to interest rate movements, we may enter into derivative arrangements to fix payments on part of an outstanding loan balance. We agree to pay a fixed rate of interest to a financial institution and receive a balance equivalent to the floating rate payable. Our outstanding derivative instruments expired during fiscal year 2017. As this cash flow hedge was considered effective, the gains and losses in the fair value of this derivative instrument were reported in accumulated other comprehensive income (AOCI) in the consolidated statement of comprehensive income.
Interest Payments
During the fiscal years ended September 30, 2017, 2016 and 2015, we made interest payments of $2.0 million, $3.7 million and $1.2 million, respectively.
7. Goodwill and intangible assets
Changes in goodwill for the years ended September 30, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Health
Services | | U.S. Federal
Services | | Human
Services | | Total |
| Balance as of September 30, 2015 | $ | 113,427 |
| | $ | 220,524 |
| | $ | 42,351 |
| | $ | 376,302 |
|
| Acquisitions of Ascend and Assessments Australia, respectively | 18,554 |
| | — |
| | 2,899 |
| | 21,453 |
|
| Adjustment to goodwill acquired with Acentia | — |
| | 7,624 |
| | — |
| | 7,624 |
|
| Disposal of K-12 Education business | — |
| | — |
| | (224 | ) | | (224 | ) |
| Foreign currency translation | (8,302 | ) | | — |
| | 705 |
| | (7,597 | ) |
| Balance as of September 30, 2016 | 123,679 |
| | 228,148 |
| | 45,731 |
| | 397,558 |
|
| Adjustment to goodwill acquired with Ascend | (557 | ) | | — |
| | — |
| | (557 | ) |
| Adjustment to goodwill acquired with Assessments Australia | — |
| | — |
| | 71 |
| | 71 |
|
| Acquisition of Revitalised | 2,830 |
| | — |
| | — |
| | 2,830 |
|
| Foreign currency translation | 2,508 |
| | — |
| | 566 |
| | 3,074 |
|
| Balance as of September 30, 2017 | $ | 128,460 |
| | $ | 228,148 |
| | $ | 46,368 |
| | $ | 402,976 |
|
There have been no impairment charges to our goodwill.
The following table sets forth the components of intangible assets (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of September 30, 2016 |
| | Cost | | Accumulated Amortization | | Intangible Assets, net | | Cost | | Accumulated Amortization | | Intangible Assets, net |
| Customer contracts and relationships | $ | 129,916 |
| | $ | 33,457 |
| | $ | 96,459 |
| | $ | 132,221 |
| | $ | 26,238 |
| | $ | 105,983 |
|
| Technology-based intangible assets | 7,664 |
| | 5,475 |
| | 2,189 |
| | 6,967 |
| | 4,613 |
| | 2,354 |
|
| Trademarks and trade names | 4,513 |
| | 4,392 |
| | 121 |
| | 4,487 |
| | 3,797 |
| | 690 |
|
| Total | $ | 142,093 |
| | $ | 43,324 |
| | $ | 98,769 |
| | $ | 143,675 |
| | $ | 34,648 |
| | $ | 109,027 |
|
Our intangible assets have a weighted average remaining life of 12.5 years, comprising 12.7 years for customer contracts and relationships, 5.2 years for technology-based intangible assets and 2.3 years for trademarks and trade names. Estimated future amortization expense is estimated for the following five fiscal years ending September 30th as follows (in thousands):
|
| | | |
| 2018 | $ | 10,320 |
|
| 2019 | 9,416 |
|
| 2020 | 8,316 |
|
| 2021 | 7,452 |
|
| 2022 | 7,385 |
|
8. Property and equipment
Property and equipment, at cost, consists of the following (in thousands):
|
| | | | | | | |
| | As of September 30, |
| | 2017 | | 2016 |
| Land | $ | 1,738 |
| | $ | 1,738 |
|
| Building and improvements | 11,799 |
| | 11,726 |
|
| Office furniture and equipment | 207,140 |
| | 261,752 |
|
| Leasehold improvements | 53,531 |
| | 52,493 |
|
| | 274,208 |
| | 327,709 |
|
| Less: Accumulated depreciation and amortization | (172,557 | ) | | (196,140 | ) |
| Total property and equipment, net | $ | 101,651 |
| | $ | 131,569 |
|
Depreciation expense for the years ended September 30, 2017, 2016 and 2015 was $45.2 million, $49.2 million and $37.0 million, respectively. During fiscal year 2017, we made significant disposals of our property and equipment, principally related to older items with limited remaining useful lives.
9. Capitalized software
Capitalized software consists of the following (in thousands):
|
| | | | | | | |
| | As of September 30, |
| | 2017 | | 2016 |
| Capitalized software | $ | 88,627 |
| | $ | 80,646 |
|
| Less: Accumulated amortization | (61,879 | ) | | (50,507 | ) |
| Total Capitalized software, net | $ | 26,748 |
| | $ | 30,139 |
|
Amortization expense for the years ended September 30, 2017, 2016 and 2015 was $10.6 million, $9.2 million and $9.9 million, respectively.
10. Deferred contract costs
Deferred contract costs consist of the following (in thousands):
|
| | | | | | | |
| | As of September 30, |
| | 2017 | | 2016 |
| Deferred contract costs | $ | 30,776 |
| | $ | 30,114 |
|
| Less: Accumulated amortization | (14,478 | ) | | (11,932 | ) |
| Total Deferred contract costs, net | $ | 16,298 |
| | $ | 18,182 |
|
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
11. Accounts receivable reserves
Changes in the reserves against accounts receivable were as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | $ | 4,226 |
| | $ | 3,385 |
| | $ | 3,138 |
|
| Additions to reserve | 5,106 |
| | 2,335 |
| | 2,690 |
|
| Deductions | (2,489 | ) | | (1,494 | ) | | (2,443 | ) |
| Balance at end of year | $ | 6,843 |
| | $ | 4,226 |
| | $ | 3,385 |
|
In evaluating the net realizable value of accounts receivable, we consider such factors as current economic trends, customer credit-worthiness, and changes in the customer payment terms and collection trends. Changes in the assumptions used in analyzing a specific account receivable may result in a reserve being recognized in the period in which the change occurs.
At September 30, 2017 and 2016, $10.3 million and $16.2 million of our unbilled receivables related to amounts pursuant to contractual retainage provisions. We anticipate that the majority of the fiscal 2017 balance will be collected during the 2018 fiscal year.
12. Commitments and contingencies
Performance bonds
Certain contracts require us to provide a surety bond as a guarantee of performance. At September 30, 2017, we had performance bond commitments totaling $17.7 million. These bonds are typically renewed annually and remain in place until the contractual obligations have been satisfied. Although the triggering events vary from contract to contract, in general we would only be liable for the amount of these guarantees in the event of default in our performance of our obligations under each contract, the probability of which we believe is remote.
Operating Leases
We lease office space and equipment under various operating leases. Lease expense for the years ended September 30, 2017, 2016 and 2015 was $80.6 million, $75.4 million and $67.1 million, respectively. Our operating leases may contain rent escalations or concessions. Lease expense is recorded on a straight-line basis over the life of the respective lease.
Minimum future lease commitments under leases in effect as of September 30, 2017 are as follows (in thousands):
|
| | | | | | | | | | | |
| | Office space | | Equipment | | Total |
| Year ending September 30, | |
| | |
| | |
|
| 2018 | $ | 65,230 |
| | $ | 4,252 |
| | $ | 69,482 |
|
| 2019 | 50,908 |
| | 3,482 |
| | 54,390 |
|
| 2020 | 34,159 |
| | 2,133 |
| | 36,292 |
|
| 2021 | 10,459 |
| | 13 |
| | 10,472 |
|
| 2022 | 4,198 |
| | 2 |
| | 4,200 |
|
| Thereafter | 241 |
| | — |
| | 241 |
|
| Total minimum lease payments | $ | 165,195 |
| | $ | 9,882 |
| | $ | 175,077 |
|
Sublease income for the year ended September 30, 2017 was $1.2 million, and we anticipate future sublease income of $1.2 million per fiscal year through fiscal year 2020.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
Collective bargaining agreements
Approximately 14% of our employees are covered by collective bargaining agreements or similar arrangements.
Shareholder lawsuit
In August 2017, the Company and certain officers were named as defendants in a putative class action lawsuit filed in the U.S. District Court for the Eastern District of Virginia. The plaintiff alleges the defendants made a variety of materially false and misleading statements, or failed to disclose material information, concerning the status of the Company’s Health Assessment Advisory Services project for the U.K. Department for Work and Pensions from the period October 20, 2014 through February 3, 2016. The defendants deny the allegations and intend to defend the matter vigorously. At this time, it is not possible to predict whether this matter will be permitted to proceed as a class or to estimate the value of the claims asserted. No assurances can be given that we will be successful in our defense of this action on the merits or otherwise. For these reasons, we are unable to estimate the potential loss or range of loss in this matter.
13. Employee benefit plans and deferred compensation
We have 401(k) plans for the benefit of employees who meet certain eligibility requirements. The plans provide for Company match, specified Company contributions and discretionary Company contributions. During the years ended September 30, 2017, 2016 and 2015, we contributed $7.0 million, $6.0 million and $4.7 million to the 401(k) plans, respectively.
We also have a deferred compensation plan, which is a non-qualified plan available to a restricted number of highly compensated employees. The plan enables participants to defer compensation for tax purposes. These deferred employee contributions are held within a Rabbi Trust with investments directed by the respective employees. The assets of the Rabbi Trust are available to satisfy the claims of general creditors in the event of bankruptcy. The assets of the plan are sufficient to meet 88% of the liabilities as of September 30, 2017. The assets within the Rabbi Trust include $15.5 million invested in mutual funds which have quoted prices in active markets. These assets, as well as the related employee liabilities, are recorded at fair value with changes in fair value being recorded in the consolidated statement of operations.
14. Equity
Stock compensation
At September 30, 2017, 1.5 million shares remained available for grants under our 2017 Equity Incentive Plan. We typically issue new shares in satisfying our obligations under our stock plans.
We grant equity awards to officers, employees and directors in the form of restricted stock units (RSUs). RSUs issued generally vest ratably over one or five years. The fair value of the RSUs, based on our stock price at the grant date, is expensed in equal installments over the vesting period. For the fiscal years ended September 30, 2017, 2016 and 2015, compensation expense recognized related to RSUs was $21.4 million, $18.8 million and $17.2 million, respectively. All individuals who are granted RSUs also receive dividend-equivalent payments in the form of additional RSUs. However, until the shares are issued, they have no voting rights and may not be bought or sold. In the event that an award is forfeited, the dividend-equivalent payments received by the holder with respect to that award are also forfeited.
A summary of our RSU activity for the year ended September 30, 2017, is as follows:
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
|
| | | | | | |
| | Shares | | Weighted-Average Grant-Date Fair Value |
| Non-vested shares outstanding at September 30, 2016 | 809,306 |
| | $ | 47.64 |
|
| Granted | 448,289 |
| | 53.63 |
|
| Vested | (400,583 | ) | | 46.17 |
|
| Forfeited | (34,185 | ) | | 46.00 |
|
| Non-vested shares outstanding at September 30, 2017 | 822,827 |
| | 51.69 |
|
In addition to the non-vested shares, certain directors and employees held approximately 0.7 million vested awards whose issuance has been deferred as of September 30, 2017.
The weighted-average grant-date fair value of RSUs granted in the years ended September 30, 2016 and 2015 was $52.00 and $50.82, respectively. The total fair value of RSUs which vested during the years ended September 30, 2017, 2016 and 2015 was $24.9 million, $27.1 million and $68.6 million, respectively. As of September 30, 2017, the total remaining unrecognized compensation cost related to unvested RSUs was $37.6 million. This expense is expected to be realized over the next five years, with a weighted average life of 1.5 years.
Prior to fiscal year 2008, we granted stock options to certain employees. These were granted at exercise prices equal to the fair market value of our common stock at the date of grant, vested over a period of four years and expired ten years after the date of the grant. No compensation expenses related to stock options were recorded in any of the years shown. In fiscal year 2017, our remaining 80,000 stock options were exercised for a weighted average strike price of $11.55. We have no outstanding stock options at September 30, 2017.
The following table summarizes information pertaining to the stock options vested and exercised for the years presented (in thousands):
|
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2017 | | 2016 | | 2015 |
| Aggregate intrinsic value of all stock options exercised | $ | 4,025 |
| | $ | 4,077 |
| | $ | 5,536 |
|
| Net cash proceeds from exercise of stock options | 924 |
| | 546 |
| | 868 |
|
The total income tax benefit recognized in the consolidated statement of operations for share-based compensation arrangements was $15.0 million, $7.4 million and $7.1 million for the fiscal years ended September 30, 2017, 2016 and 2015, respectively. Our tax benefit in fiscal year 2017 was affected by the adoption of a new accounting standard, as detailed in "Note 1. Business and summary of significant accounting policies."
Employees are permitted to forfeit a certain number of shares to cover their personal tax liability, with the Company making tax payments to the relevant authorities. These payments are reported in the consolidated statements of cash flows as financing cash flows. During the three years ending September 30, 2017, 2016 and 2015, we incurred liabilities related to these forfeitures of $8.7 million, $9.3 million and $11.7 million, respectively.
Stock repurchase programs
Under a resolution adopted in August 2015, the Board of Directors authorized the repurchase, at management's discretion, of up to an aggregate of $200 million of our common stock. This resolution superseded similar authorizations from November 2011 and June 2014. The resolution also authorizes the use of option exercise proceeds for the repurchase of our common stock. During the years ended September 30, 2017, 2016 and 2015, we repurchased 0.6 million, 0.6 million and 1.6 million common shares at a cost of $28.9 million, $31.3 million and $82.8 million, respectively. At September 30, 2017, $109.9 million remained available for future stock repurchases.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
15. Income taxes
The components of income before income taxes and the corresponding provision for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2017 | | 2016 | | 2015 |
| Income before income taxes: | |
| | |
| | |
|
| United States | $ | 257,910 |
| | $ | 238,871 |
| | $ | 232,359 |
|
| Foreign | 56,325 |
| | 47,097 |
| | 27,460 |
|
| Income before income taxes | $ | 314,235 |
| | $ | 285,968 |
| | $ | 259,819 |
|
|
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2017 | | 2016 | | 2015 |
| Current provision: | |
| | |
| | |
|
| Federal | $ | 70,476 |
| | $ | 69,025 |
| | $ | 74,050 |
|
| State and local | 15,594 |
| | 15,595 |
| | 15,332 |
|
| Foreign | 11,221 |
| | 15,536 |
| | 9,581 |
|
| Total current provision | 97,291 |
| | 100,156 |
| | 98,963 |
|
| Deferred tax expense (benefit): | |
| | |
| | |
|
| Federal | 5,490 |
| | 7,778 |
| | 2,233 |
|
| State and local | 643 |
| | 902 |
| | 403 |
|
| Foreign | (1,371 | ) | | (3,028 | ) | | (1,829 | ) |
| Total deferred tax expense (benefit) | 4,762 |
| | 5,652 |
| | 807 |
|
| Provision for income taxes | $ | 102,053 |
| | $ | 105,808 |
| | $ | 99,770 |
|
The provision for income taxes differs from that which would have resulted from the use of the federal statutory income tax rate as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2017 | | 2016 | | 2015 |
| Federal income tax provision at statutory rate of 35% | $ | 109,982 |
| | $ | 100,089 |
| | $ | 90,937 |
|
| State income taxes, net of federal benefit | 10,554 |
| | 10,723 |
| | 9,847 |
|
| Foreign taxation | (6,940 | ) | | (3,976 | ) | | (2,208 | ) |
| Permanent items | 970 |
| | 1,284 |
| | 1,602 |
|
| Tax credits | (4,851 | ) | | (1,592 | ) | | (961 | ) |
| Vesting of equity compensation | (6,569 | ) | | — |
| | — |
|
| Other | (1,093 | ) | | (720 | ) | | 553 |
|
| Provision for income taxes | $ | 102,053 |
| | $ | 105,808 |
| | $ | 99,770 |
|
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
The significant items comprising our deferred tax assets and liabilities as of September 30, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | |
| | As of September 30, |
| | 2017 | | 2016 |
| Net deferred tax assets/(liabilities) | |
| | |
|
| Costs deductible in future periods | $ | 30,794 |
| | $ | 27,738 |
|
| Deferred revenue | 20,703 |
| | 23,469 |
|
| Stock compensation | 4,976 |
| | 5,085 |
|
| Net operating loss carryforwards | 360 |
| | 1,291 |
|
| Amortization of goodwill and intangible assets | (36,100 | ) | | (34,484 | ) |
| Capitalized software | (9,197 | ) | | (10,126 | ) |
| Accounts receivable - unbilled | (12,953 | ) | | (13,810 | ) |
| Property and equipment | (3,924 | ) | | (5,517 | ) |
| Prepaid expenses | (3,741 | ) | | (1,296 | ) |
| Other | (3,333 | ) | | (519 | ) |
| | $ | (12,415 | ) | | $ | (8,169 | ) |
Our deferred tax assets and liabilities are held in various national and international jurisdictions which do not allow right of offset. Accordingly, our presentation of deferred taxes on our consolidated balance sheet is split between jurisdictions which show a net deferred tax asset and a net deferred tax liability. Our net deferred tax position is summarized below (in thousands):
|
| | | | | | | |
| | As of September 30, |
| | 2017 | | 2016 |
| Balance of tax jurisdictions with net deferred tax assets | $ | 7,691 |
| | $ | 8,644 |
|
| Balance of tax jurisdictions with net deferred tax liabilities | (20,106 | ) | | (16,813 | ) |
| Net deferred tax liabilities | $ | (12,415 | ) | | $ | (8,169 | ) |
At September 30, 2017, our foreign subsidiaries held approximately $219 million of cumulative earnings. We consider undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the U.S. and, accordingly, no U.S. deferred taxes have been recorded with respect to such earnings in accordance with the relevant accounting guidance for income taxes. Should the earnings be remitted as dividends, we may be subject to additional U.S. taxes, net of allowable foreign tax credits. It is not practicable to estimate the amount of any additional taxes which may be payable on the undistributed earnings given the various tax planning alternatives we could employ should we decide to repatriate these earnings in a tax-efficient manner.
Cash paid for income taxes during the years ended September 30, 2017, 2016, and 2015 was $87.8 million, $108.3 million and $81.3 million, respectively.
The provision for income taxes includes all provision to return adjustments included in the year recognized in the financial statements.
We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is "more-likely-than-not" that the position will be sustained upon examination. The total amount of unrecognized tax benefits that, if recognized, would affect our annual effective income tax rate was $1.1 million and $1.1 million at September 30, 2017 and 2016, respectively.
We report interest and penalties as a component of income tax expense. In the fiscal years ending September 30, 2017, 2016 and 2015, we recognized interest expense relating to unrecognized tax benefits of less than $0.1 million in each year. The net liability balance at September 30, 2017 and 2016 includes approximately $0.6 million of interest and penalties.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
We recognize and present uncertain tax positions on a gross basis (i.e., without regard to likely offsets for deferred tax assets, deductions and/or credits that would result from payment of uncertain tax amounts). The reconciliation of the beginning and ending amount of gross unrecognized tax benefits was as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | $ | 448 |
| | $ | 529 |
| | $ | 812 |
|
| Lapse of statute of limitation | — |
| | — |
| | (200 | ) |
| Increases for tax positions taken in current year | 185 |
| | — |
| | — |
|
| Reductions for tax positions of prior years | — |
| | (81 | ) | | (83 | ) |
| Balance at end of year | $ | 633 |
| | $ | 448 |
| | $ | 529 |
|
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. We are no longer subject to federal income tax examinations for years before 2013 and to state and local income tax examinations by tax authorities for years before 2012. In international jurisdictions, similar rules apply to filed income tax returns, although the tax examination limitations and requirements may vary. We are no longer subject to audit by tax authorities for foreign jurisdictions for years prior to 2012.
16. Quarterly information (unaudited)
Set forth below are selected quarterly consolidated statement of operations data for the fiscal years ended September 30, 20172018 and 2016.2017. We derived this information from unaudited quarterly financial statements that include, in the opinion of our management, all adjustments necessary for a fair presentation of the information for such periods. Results of operations for any fiscal quarter are not necessarily indicative of results for any future period.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 and 2016
Earnings per share amounts are computed independently each quarter. As a result, the sum of each quarter's earnings per share amount may not equal the total earnings per share amount for the respective year.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
| | | | Quarter Ended | Quarter Ended |
| | Dec. 31,
2016 | | March 31,
2017 | | June 30,
2017 | | Sept. 30,
2017 | Dec. 31,
2017 | | March 31,
2018 | | June 30,
2018 | | Sept. 30,
2018 |
| | (In thousands, except per share data) | (In thousands, except per share data) |
| Health Services | $ | 340,729 |
| | $ | 348,994 |
| | $ | 335,090 |
| | $ | 355,338 |
| $ | 352,090 |
| | $ | 365,633 |
| | $ | 359,050 |
| | $ | 328,186 |
|
| U.S. Federal Services | 141,298 |
| | 145,370 |
| | 131,589 |
| | 127,316 |
| 132,983 |
| | 116,327 |
| | 112,226 |
| | 117,375 |
|
| Human Services | 125,537 |
| | 127,683 |
| | 133,768 |
| | 138,249 |
| 138,075 |
| | 130,827 |
| | 126,579 |
| | 112,885 |
|
| Revenue | $ | 607,564 |
| | $ | 622,047 |
| | $ | 600,447 |
| | $ | 620,903 |
| $ | 623,148 |
| | $ | 612,787 |
| | $ | 597,855 |
| | $ | 558,446 |
|
| | | | | | | | | | | | | | | |
| Health Services | $ | 78,234 |
| | $ | 86,454 |
| | $ | 83,269 |
| | $ | 99,368 |
| $ | 91,056 |
| | $ | 98,207 |
| | $ | 97,254 |
| | $ | 86,111 |
|
| U.S. Federal Services | 37,576 |
| | 36,571 |
| | 33,627 |
| | 31,547 |
| 33,358 |
| | 27,374 |
| | 32,276 |
| | 33,690 |
|
| Human Services | 29,008 |
| | 29,292 |
| | 35,293 |
| | 31,666 |
| 27,546 |
| | 23,222 |
| | 25,154 |
| | 19,137 |
|
| Gross profit | $ | 144,818 |
| | $ | 152,317 |
| | $ | 152,189 |
| | $ | 162,581 |
| $ | 151,960 |
| | $ | 148,803 |
| | $ | 154,684 |
| | $ | 138,938 |
|
| | | | | | | | | | | | | | | |
| Health Services | $ | 50,127 |
| | $ | 56,540 |
| | $ | 51,553 |
| | $ | 57,024 |
| $ | 57,640 |
| | $ | 63,017 |
| | $ | 63,782 |
| | $ | 51,939 |
|
| U.S. Federal Services | 17,881 |
| | 17,644 |
| | 15,870 |
| | 13,581 |
| 16,710 |
| | 9,834 |
| | 14,877 |
| | 15,965 |
|
| Human Services | 11,769 |
| | 9,629 |
| | 16,368 |
| | 10,818 |
| 8,051 |
| | 3,393 |
| | 7,469 |
| | (689 | ) |
| Amortization of intangible assets | (3,402 | ) | | (3,386 | ) | | (2,720 | ) | | (2,700 | ) | (2,718 | ) | | (2,603 | ) | | (2,525 | ) | | (2,462 | ) |
| Restructuring costs | (2,242 | ) | | — |
| | — |
| | — |
| — |
| | (2,320 | ) | | — |
| | (1,033 | ) |
| Acquisition-related expenses | — |
| | — |
| | — |
| | (83 | ) | — |
| | — |
| | — |
| | (947 | ) |
| Gain on sale of a business | — |
| | — |
| | 650 |
| | — |
| |
| Other/Corporate | (357 | ) | | (92 | ) | | 90 |
| | (1,050 | ) | — |
| | — |
| | (1,032 | ) | | (865 | ) |
| Operating Income | $ | 73,776 |
| | $ | 80,335 |
| | $ | 81,811 |
| | $ | 77,590 |
| $ | 79,683 |
| | $ | 71,321 |
| | $ | 82,571 |
| | $ | 61,908 |
|
| | | | | | | | | | | | | | | |
| Net income | 46,329 |
| | 53,097 |
| | 57,788 |
| | 54,968 |
| 59,952 |
| | 55,106 |
| | 60,242 |
| | 45,516 |
|
| Net income attributable to MAXIMUS | 46,664 |
| | 52,515 |
| | 56,918 |
| | 53,329 |
| 59,091 |
| | 55,492 |
| | 59,861 |
| | 46,307 |
|
| | | | | | | | | | | | | | | |
| Basic earnings per share attributable to MAXIMUS | | $ | 0.90 |
| | $ | 0.84 |
| | $ | 0.91 |
| | $ | 0.71 |
|
| Diluted earnings per share attributable to MAXIMUS | $ | 0.71 |
| | $ | 0.80 |
| | $ | 0.86 |
| | $ | 0.81 |
| $ | 0.89 |
| | $ | 0.84 |
| | $ | 0.91 |
| | $ | 0.71 |
|
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2018, 2017 2016 and 20152016
| | | | Quarter Ended | Quarter Ended |
| | Dec. 31,
2015 | | March 31,
2016 | | June 30,
2016 | | Sept. 30,
2016 | Dec. 31,
2016 | | March 31,
2017 | | June 30,
2017 | | Sept. 30,
2017 |
| | (In thousands, except per share data) | (In thousands, except per share data) |
| Health Services | $ | 291,903 |
| | $ | 330,567 |
| | $ | 333,699 |
| | $ | 342,135 |
| $ | 340,729 |
| | $ | 348,994 |
| | $ | 335,090 |
| | $ | 355,338 |
|
| U.S. Federal Services | 145,285 |
| | 150,191 |
| | 149,601 |
| | 146,651 |
| 141,298 |
| | 145,370 |
| | 131,589 |
| | 127,316 |
|
| Human Services | 119,534 |
| | 125,695 |
| | 133,794 |
| | 134,305 |
| 125,537 |
| | 127,683 |
| | 133,768 |
| | 138,249 |
|
| Revenue | $ | 556,722 |
| | $ | 606,453 |
| | $ | 617,094 |
| | $ | 623,091 |
| $ | 607,564 |
| | $ | 622,047 |
| | $ | 600,447 |
| | $ | 620,903 |
|
| | | | | | | | | | | | | | | |
| Health Services | $ | 51,972 |
| | $ | 82,717 |
| | $ | 76,775 |
| | $ | 80,717 |
| $ | 78,234 |
| | $ | 86,454 |
| | $ | 83,269 |
| | $ | 99,368 |
|
| U.S. Federal Services | 28,238 |
| | 33,421 |
| | 38,980 |
| | 37,529 |
| 37,576 |
| | 36,571 |
| | 33,627 |
| | 31,547 |
|
| Human Services | 30,005 |
| | 31,529 |
| | 35,624 |
| | 34,684 |
| 29,008 |
| | 29,292 |
| | 35,293 |
| | 31,666 |
|
| Gross profit | $ | 110,215 |
| | $ | 147,667 |
| | $ | 151,379 |
| | $ | 152,930 |
| $ | 144,818 |
| | $ | 152,317 |
| | $ | 152,189 |
| | $ | 162,581 |
|
| | | | | | | | | | | | | | | |
| Health Services | $ | 26,808 |
| | $ | 56,914 |
| | $ | 50,430 |
| | $ | 50,874 |
| $ | 50,127 |
| | $ | 56,540 |
| | $ | 51,553 |
| | $ | 57,024 |
|
| U.S. Federal Services | 10,716 |
| | 14,983 |
| | 19,119 |
| | 18,558 |
| 17,881 |
| | 17,644 |
| | 15,870 |
| | 13,581 |
|
| Human Services | 9,107 |
| | 9,794 |
| | 14,251 |
| | 14,533 |
| 11,769 |
| | 9,629 |
| | 16,368 |
| | 10,818 |
|
| Amortization of intangible assets | (3,149 | ) | | (3,262 | ) | | (3,517 | ) | | (3,449 | ) | (3,402 | ) | | (3,386 | ) | | (2,720 | ) | | (2,700 | ) |
| Restructuring costs | | (2,242 | ) | | — |
| | — |
| | — |
|
| Acquisition-related expenses | (46 | ) | | (529 | ) | | — |
| | (257 | ) | — |
| | — |
| | — |
| | (83 | ) |
| Gain on sale of a business | — |
| | — |
| | 6,453 |
| | 427 |
| — |
| | — |
| | 650 |
| | — |
|
| Other/Corporate | (650 | ) | | — |
| | (2,127 | ) | | 622 |
| (357 | ) | | (92 | ) | | 90 |
| | (1,050 | ) |
| Operating Income | $ | 42,786 |
| | $ | 77,900 |
| | $ | 84,609 |
| | $ | 81,308 |
| $ | 73,776 |
| | $ | 80,335 |
| | $ | 81,811 |
| | $ | 77,590 |
|
| | | | | | | | | | | | | | | |
| Net income | 26,882 |
| | 49,341 |
| | 52,750 |
| | 51,187 |
| 46,329 |
| | 53,097 |
| | 57,788 |
| | 54,968 |
|
| Net income attributable to MAXIMUS | 26,609 |
| | 48,785 |
| | 52,225 |
| | 50,743 |
| 46,664 |
| | 52,515 |
| | 56,918 |
| | 53,329 |
|
| | | | | | | | | | | | | | | |
| Basic earnings per share attributable to MAXIMUS | | $ | 0.71 |
| | $ | 0.80 |
| | $ | 0.87 |
| | $ | 0.81 |
|
| Diluted earnings per share attributable to MAXIMUS | $ | 0.40 |
| | $ | 0.74 |
| | $ | 0.79 |
| | $ | 0.77 |
| $ | 0.71 |
| | $ | 0.80 |
| | $ | 0.86 |
| | $ | 0.81 |
|
17.15. Subsequent EventEvents
Acquisition of General Dynamics Information Technology's Citizen Engagement Centers
On November 16, 2018, we acquired 100% of General Dynamics Information Technology's citizen engagement centers business, pursuant to an asset purchase agreement dated October 5, 2018. This acquisition strengthens our position in the administration of federal government programs. This business is being integrated into our U.S. Federal Services Segment. The cash purchase price of the business was $400.0 million, subject to certain adjustments, including a final assessment of the working capital acquired on the date of the acquisition. To fund the acquisition, we utilized $150.0 million of new borrowings from our credit facility with the balance paid using our cash balance.
As part of the acquisition, we have incurred acquisition-related expenses, including legal, accounting and other consultant services. Costs incurred prior to September 30, 2018, were $0.5 million and are included within "acquisition-related expenses" within our segment disclosure. We anticipate that a further $3 million has been or will be incurred during the first fiscal quarter of 2019.
At this time, we have not yet completed our assessment of the fair value of the assets acquired and liabilities assumed, including the valuation of our intangible assets and goodwill. Accordingly, we are unable to provide all of the information which would typically be disclosed including an allocation of the purchase price and pro forma financial information.
Reorganization of segments
Effective October 1, 2018, our Chief Executive Officer reorganized our reporting segments based on the way management intends to allocate resources, manage performance and evaluate results. This change responds to recent changes in the markets we operate, the increasing integration of health and human services programs worldwide and the evolving needs of our government clients as they aim to deliver services in a more holistic manner to their citizens. Accordingly, we will report operating segments on a geographic basis. Our operating segments will be U.S. Health & Human Services, U.S. Federal Services and Outside the U.S.
Dividend
On October 6, 2017,5, 2018, our Board of Directors declared a quarterly cash dividend of $0.045$0.25 for each share of the Company's common stock outstanding. The dividend is towill be paid on November 30, 20172018, to shareholders of record on November 15, 2017.2018. Based on the number of shares outstanding, the payment will be approximately $2.9$16.1 million.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's (SEC) rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2017.2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control—Integrated Framework (2013). Based on our assessment, we believe that as of September 30, 2017,2018, our internal control over financial reporting was effective based on those criteria.
The attestation report concerning the effectiveness of our internal control over financial reporting as of September 30, 2017,2018, issued by Ernst & Young LLP, the independent registered public accounting firm who also audited our consolidated financial statements, is included following this Item 9A.
Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during our fourth fiscal quarter of 20172018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF ERNSTReport of Ernst & YOUNGYoung LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,Independent Registered Public Accounting Firm,
REGARDING INTERNAL CONTROL OVER FINANCIAL REPORTINGRegarding Internal Control over Financial Reporting
Board of Directors and Shareholders
MAXIMUS, Inc.
Opinion on Internal Control over Financial Reporting
We have audited MAXIMUS, Inc.’s internal control over financial reporting as of September 30, 2017,2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, MAXIMUS, Inc.’s (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2018 of MAXIMUS, Inc. and our report dated November 20, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, MAXIMUS, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of MAXIMUS, Inc. as of September 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2017 of MAXIMUS, Inc. and our report dated November 20, 2017 expressed an unqualified opinion thereon.
|
| |
| /s/ Ernst & Young LLP | |
| | |
| Tysons, Virginia | |
November 20, 20172018 | |
ITEM 9B. Other information.
As previously announced in a Form 8-K filed on October 9, 2018, our wholly-owned subsidiary, MAXIMUS Federal Services, Inc., entered into a definitive Asset Purchase Agreement (the “Purchase Agreement”) on October 5, 2018 to acquire General Dynamics Information Technology's citizen engagement centers business for a cash purchase price of $400.0 million, subject to certain reductions and adjustments including a final assessment of the working capital acquired on the date of the acquisition (the “Acquisition”). The Acquisition was completed on November 16, 2018. The Company funded the Acquisition and related costs and expenses with cash on hand and a borrowing of $150.0 million under its revolving credit facility.
The foregoing does not constitute a complete summary of the terms of the Purchase Agreement, and reference is made to the complete text of the Purchase Agreement filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 9, 2018, and incorporated by reference herein.
The financial statements of the business acquired and pro forma financial information required will be filed on a Current Report on Form 8-K within 71 days of the date on which this report was required to be filed.
PART III
The information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K has been omitted in reliance on General Instruction G(3) to Form 10-K and is incorporated herein by reference to the Company's Proxy Statement relating to its 20182019 Annual Meeting of Shareholders (Proxy Statement) to be filed with the Securities and Exchange Commission (SEC), except as otherwise indicated below:
ITEM 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is incorporated by reference to the Proxy Statement.
ITEM 11. Executive Compensation.
The information required by this Item is incorporated by reference to the Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Except for the information disclosed in this Item below, the information required by this Item is incorporated by reference to the Proxy Statement.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of September 30, 20172018, with respect to shares of our common stock that may be issued under our existing equity compensation plans:
| | | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans(1) | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans(1) |
| Equity compensation plans/arrangements approved by the shareholders(2) | 822,827 |
| | $ | — |
| | 1,542,730 |
| 661,933 |
| | $ | — |
| | 1,237,272 |
|
| Equity compensation plans/arrangements not approved by the shareholders | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
| Total | 822,827 |
| | $ | — |
| | 1,542,730 |
| 661,933 |
| | $ | — |
| | 1,237,272 |
|
| |
| (1) | In addition to being available for future issuance upon exercise of options that may be granted after September 30, 2017,2018, all shares under the 2017 Equity Incentive Plan may be issued in the form of restricted stock, performance shares, stock appreciation rights, stock units or other stock-based awards. |
| |
| (2) | Includes the 2017 Equity Incentive Plan. |
ITEM 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to the Proxy Statement.
ITEM 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to the Proxy Statement.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules.
| |
| (a) | 1. Financial Statements. |
The consolidated financial statements are listed under Item 8 of this Annual Report on Form 10-K.
2. Financial Statement Schedules.
None. Financial statement schedules are not required under the related instructions.
3. Exhibits.
The Exhibits filed as part of this Annual Report on Form 10-K are listed on the Exhibit Index immediately preceding the signature page hereto, which Exhibit Index is incorporated herein by reference.
| |
| (b) | Exhibits—Exhibits — see Item 15(a)(3) above. |
| |
| (c) | Financial Statement Schedules—Schedules — see Item 15(a)(2) above. |
ITEM 16. Form 10-K Summary.
None.
EXHIBIT INDEX
|
| | | | | | |
Exhibit Number | | | | Incorporated by reference herein |
| | Description | | Form | | Date |
| 2.1 | | | | Current Report on Form 8-K (File No. 1-12997)
| | March 9, 2015
|
| 2.2 | | | | Current Report on Form 8-K (File No. 1-12997)
| | October 9, 2018 |
| 3.1 | | | | Quarterly Report on Form 10-Q (File No. 1-12997) | | August 14, 2000
|
| 3.2 | | | | Quarterly Report on Form 10-Q (File No. 1-12997) | | May 10, 2013 |
| 3.3 | | | | Current Report on Form 8-K (File No. 1-12997) | | June 19, 2015 |
| 4.1 | | | | Quarterly Report on Form 10-Q (File No. 1-12997) (Exhibit 4.1) | | August 14, 1997 |
| 10.1 | * | | | Registration Statement on Form S-1 (File No. 333-21611) (Exhibit 10.10)
| | February 12, 1997
|
| 10.2 | * | | | Current Report on Form 8-K (File No. 1-12997) | | April 26, 2006January 16, 2018 |
| 10.3 | * | | | Current Report on Form 8-K (File No. 1-12997) | | November 27, 2007January 16, 2018 |
| 10.4 | * | | | Current Report on Form 8-K (File No. 1-12997) | | November 27, 2007 |
10.5 | * | | | Current Report on Form 8-K (File No. 1-12997) | | November 27, 2007 |
10.6 | * | | | Annual Report on Form 10-K (File No. 1-12997) | | November 16, 2015 |
10.710.5 | * | | | Current Report on Form 8-K (File No. 1-12997) | | November 27, 2007 |
10.8 | * | | | Quarterly Report on Form 10-Q (File No. 1-12997) | | February 4, 2010 |
10.910.6 | * | | | Proxy Statement on Schedule 14A (File No. 1-12997) | | January 27, 2012 |
10.1010.7 | | | | Current Report on Form 8-K (File No. 1-12997) | | December 21, 2015 |
10.1110.8 | | | | Current Report on Form 8-K (File No. 1-12997) | | March 21, 2013 |
10.12 | * | | | Current Report on Form 8-K (File No. 1-12997) | | October 7, 2013 |
10.13 | * | | | Current Report on Form 8-K (File No. 1-12997) | | March 4, 2014 |
|
| | | | | | |
Exhibit
Number
| | | | Incorporated by reference herein |
| Description | | Form | | Date |
10.1410.9 | | | | Current Report on Form 8-K (File No. 1-12997)
| | March 9, 2015 |
10.15 |
| | | | | | |
Exhibit Number | | | | Incorporated by reference herein |
| Description | | Form | | Date |
| 10.10 | | | | Current Report on Form 8-K (File No. 1-12997) | | October 26, 2015 |
10.1610.11 | * | | | Registration Statement on Form S-8 (File No. 333-136400) | | August 8, 2006 |
10.1710.12 | * | | | Current Report on Form 8-K (File No. 1-12997) | | November 27, 2007 |
10.1810.13 | * | | | Current Report on Form 8-K (File No. 1-12997) | | June 23, 2006 |
10.1910.14 | * | | | Current Report on Form 8-K (File No. 1-12997) | | June 23, 2006 |
10.2010.15 | * | | | Annual Report on Form 10-K (File No. 1-12997) (Exhibit 10.2) | | December 22, 1997 |
10.2110.16 | * | | | Registration Statement on Form S-8 (File No. 333-122711) | | February 10, 2005 |
10.2210.17 | * | | | Registration Statement on Form S-8 (File No. 333-217657) | | May 4, 2017 |
10.2310.18 | s | | | Annual Report on Form 10-K (File No. 1-12997) | | November 20, 2017 |
| 21.1 | s | | | | | |
| 23.1 | s | | | | | |
| 31.1 | s | | | | | |
| 31.2 | s | | | | | |
| 32.1 | v | | | | | |
| 32.2 | v | | | | | |
| 99.1 | s | | | | | |
| 101 | | The following materials from the MAXIMUS, Inc. Annual Report on Form 10-K for the year ended September 30, 20172018 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Changes in Shareholders' Equity and (vi) Notes to Consolidated Financial Statements. Filed electronically herewith. | | | | |
| |
| * | Denotes management contract or compensation plan. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | |
Dated: November 20, 20172018 | | MAXIMUS, INC. |
| | | By: | | /s/ RICHARD A. MONTONIBRUCE L. CASWELL |
| | | | | Richard A. MontoniBruce L. Caswell
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ RICHARD A. MONTONIBRUCE L. CASWELL | | President, Chief Executive Officer and Director (principal executive officer) | | November 20, 20172018 |
Richard A. MontoniBruce L. Caswell | | | | |
| | | | | |
| /s/ RICHARD J. NADEAU | | Chief Financial Officer and Treasurer (principal financial and accounting officer) | | November 20, 20172018 |
| Richard J. Nadeau | | | | |
| | | | | |
| /s/ PETER B. POND | | Chairman of the Board of Directors | | November 20, 20172018 |
| Peter B. Pond | | | | |
| | | | |
| /s/ RICHARD A. MONTONI | | Vice Chairman of the Board of Directors | | November 20, 2018 |
| Richard A. Montoni | | | | |
| | | | | |
| /s/ ANNE K. ALTMAN | | Director | | November 20, 20172018 |
| Anne K. Altman | | | | |
| | | | | |
| /s/ RUSSELL A. BELIVEAU | | Director | | November 20, 20172018 |
| Russell A. Beliveau | | | | |
| | | | | |
| /s/ JOHN J. HALEY | | Director | | November 20, 20172018 |
| John J. Haley | | | | |
| | | | | |
| /s/ PAUL R. LEDERER | | Director | | November 20, 20172018 |
| Paul R. Lederer | | | | |
| | | | | |
| /s/ GAYATHRI RAJAN | | Director | | November 20, 20172018 |
| Gayathri Rajan | | | | |
| | | | | |
| /s/ RAYMOND B. RUDDY | | Director | | November 20, 20172018 |
| Raymond B. Ruddy | | | | |
| | | | |
/s/ WELLINGTON E. WEBB | | Director | | November 20, 2017 |
Wellington E. Webb | | | | |
