UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended MarchDecember 31, 2019
OR
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 1-12997
MAXIMUS, INC.
(Exact name of registrant as specified in its charter)
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Virginia | | 54-1000588 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
1891 Metro Center Drive, Reston, Virginia | | 20190 |
(Address of principal executive offices) | | (Zip Code) |
(703) 251-8500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, no par value | | MMS | | New York Stock Exchange |
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 every Interactive Data File required to be submitted 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ý☒ | | Accelerated filer o☐ |
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Non-accelerated filer o☐ | | Smaller reporting company o ☐ |
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| | 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 Exchange Act). Yes o☐ No ý☒
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, no par value | | MMS | | New York Stock Exchange |
As of May 6, 2019,February 3, 2020, there were 63,810,84563,943,497 shares of the registrant’s common stock (no par value) outstanding.
MAXIMUS, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended MarchDecember 31, 2019
INDEX
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PART I. FINANCIAL INFORMATION | | | |
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Item 1. | | | |
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Item 2. | | | |
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Item 3. | | | |
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Item 4. | | | |
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PART II. OTHER INFORMATION | | | |
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Item 1. | | | |
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Item 1A. | | | |
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Item 2. | | | |
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Item 6. | | | |
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Throughout this Quarterly Report on Form 10-Q, the terms “Company,” “we,” “us,” “our” and “MAXIMUS” refer to MAXIMUS, Inc. and its subsidiaries, unless the context requires otherwise.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-lookingForward-looking statements are based on current expectations, estimates, forecasts and projections about us, 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. Wordscan be identified by words such asas: “anticipate,” “intend,” “plan,” “goal,” “seek,” “opportunity,” “could,” “potential,” “believe,” “could,“project,” “estimate,” “expect,” “estimate,“strategy,” “intend,“future,” “likely,” “may,” “opportunity,” “plan,” “potential,” “project,” “should,” “will” and similar expressionsreferences to future periods.
Forward-looking statements are intended to identifyneither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and convey uncertainty of future events or outcomes. These statements are not guarantees and involve risks, uncertainties and assumptionschanges in circumstances that are difficult to predict. Actual outcomespredict and many of which are outside of our control. Our actual results and financial condition may differ materially from suchthose indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements due to a number of factors, including without limitation:include, among others, the following:
•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 other 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, under the caption "Special Considerations and Risk Factors," in our Annual Report on Form 10-K for the year ended September 30, 2018,2019, which was filed with the Securities and Exchange Commission on November 20, 2018.26, 2019.
As a result of theseAny forward-looking statement made by us in this report is based only on information currently available to us 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 speakspeaks only as of the date whenon which it is made. Except as otherwise required by law, weWe undertake no obligation to publicly update or revise any forward-looking statements,statement, whether resultingwritten or oral, that may be made from time to time, whether as a result of new information, future eventsdevelopments or otherwise.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Revenue | Revenue | $ | 736,520 | | $ | 612,787 | | $ | 1,401,139 | | $ | 1,235,935 | Revenue | $ | 818,229 | | | $ | 664,619 | |
Cost of revenue | Cost of revenue | 567,098 | | 463,984 | | 1,072,452 | | 935,172 | Cost of revenue | 642,779 | | | 505,354 | |
Gross profit | Gross profit | 169,422 | | 148,803 | | 328,687 | | 300,763 | Gross profit | 175,450 | | | 159,265 | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 78,102 | | 74,879 | | 157,773 | | 144,438 | Selling, general and administrative expenses | 87,227 | | | 79,671 | |
Amortization of intangible assets | Amortization of intangible assets | 9,519 | | 2,603 | | 14,977 | | 5,321 | Amortization of intangible assets | 9,088 | | | 5,458 | |
| Operating income | Operating income | 81,801 | | 71,321 | | 155,937 | | 151,004 | Operating income | 79,135 | | | 74,136 | |
| Interest expense | Interest expense | 1,569 | | 157 | | 2,194 | | 325 | Interest expense | 484 | | | 625 | |
| Other income, net | Other income, net | 447 | | 1,392 | | 2,492 | | 1,679 | Other income, net | 719 | | | 2,045 | |
Income before income taxes | Income before income taxes | 80,679 | | 72,556 | | 156,235 | | 152,358 | Income before income taxes | 79,370 | | | 75,556 | |
Provision for income taxes | Provision for income taxes | 18,913 | | 17,450 | | 38,746 | | 37,300 | Provision for income taxes | 20,636 | | | 19,833 | |
Net income | Net income | 61,766 | | 55,106 | | 117,489 | | 115,058 | Net income | 58,734 | | | 55,723 | |
(Loss)/income attributable to noncontrolling interests | (158) | | (386) | | (348) | | 475 | |
Loss attributable to noncontrolling interests | | Loss attributable to noncontrolling interests | — | | | (190) | |
Net income attributable to MAXIMUS | Net income attributable to MAXIMUS | $ | 61,924 | | $ | 55,492 | | $ | 117,837 | | $ | 114,583 | Net income attributable to MAXIMUS | $ | 58,734 | | | $ | 55,913 | |
Basic earnings per share attributable to MAXIMUS | $ | 0.96 | | $ | 0.84 | | $ | 1.82 | | $ | 1.74 | |
Diluted earnings per share attributable to MAXIMUS | $ | 0.96 | | $ | 0.84 | | $ | 1.82 | | $ | 1.73 | |
Basic earnings per share | | Basic earnings per share | $ | 0.91 | | | $ | 0.86 | |
Diluted earnings per share | | Diluted earnings per share | $ | 0.91 | | | $ | 0.86 | |
Dividends paid per share | Dividends paid per share | $ | 0.25 | | $ | 0.045 | | $ | 0.50 | | $ | 0.09 | Dividends paid per share | $ | 0.28 | | | $ | 0.25 | |
Weighted average shares outstanding: | Weighted average shares outstanding: | | | | | | | | Weighted average shares outstanding: | | | |
Basic | Basic | 64,369 | | 65,856 | | 64,600 | | 65,857 | Basic | 64,597 | | | 64,827 | |
Diluted | Diluted | 64,643 | | 66,268 | | 64,817 | | 66,223 | Diluted | 64,758 | | | 64,977 | |
See notes to unaudited consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Net income | Net income | $ | 61,766 | | $ | 55,106 | | $ | 117,489 | | $ | 115,058 | Net income | $ | 58,734 | | | $ | 55,723 | |
Foreign currency translation adjustments | Foreign currency translation adjustments | 3,537 | | 2,869 | | (2,183) | | 3,184 | Foreign currency translation adjustments | 6,893 | | | (5,720) | |
| Comprehensive income | Comprehensive income | 65,303 | | 57,975 | | 115,306 | | 118,242 | Comprehensive income | 65,627 | | | 50,003 | |
Comprehensive (loss)/income attributable to noncontrolling interests | (158) | | (386) | | (348) | | 475 | |
Comprehensive loss attributable to noncontrolling interests | | Comprehensive loss attributable to noncontrolling interests | — | | | (190) | |
Comprehensive income attributable to MAXIMUS | Comprehensive income attributable to MAXIMUS | $ | 65,461 | | $ | 58,361 | | $ | 115,654 | | $ | 117,767 | Comprehensive income attributable to MAXIMUS | $ | 65,627 | | | $ | 50,193 | |
See notes to unaudited consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
| | | March 31, 2019 | | September 30, 2018 | | December 31, 2019 | | September 30, 2019 |
| | (unaudited) | | | | (unaudited) | | |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets: | Current assets: | | | | Current assets: | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 46,799 | | $ | 349,245 | Cash and cash equivalents | $ | 149,515 | | | $ | 105,565 | |
Short-term investments | — | | 20,264 | |
Accounts receivable — billed and billable, net of reserves of $6,073 and $4,285 | 491,560 | | 357,613 | |
| Accounts receivable — billed and billable, net of reserves of $6,846 and $5,382 | | Accounts receivable — billed and billable, net of reserves of $6,846 and $5,382 | 511,670 | | | 476,690 | |
Accounts receivable — unbilled | Accounts receivable — unbilled | 131,250 | | 31,536 | Accounts receivable — unbilled | 123,420 | | | 123,884 | |
Income taxes receivable | Income taxes receivable | 20,733 | | 5,979 | Income taxes receivable | 6,049 | | | 20,805 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 49,668 | | 43,995 | Prepaid expenses and other current assets | 53,254 | | | 62,481 | |
Total current assets | Total current assets | 740,010 | | 808,632 | Total current assets | 843,908 | | | 789,425 | |
Property and equipment, net | Property and equipment, net | 76,693 | | 77,544 | Property and equipment, net | 92,377 | | | 99,589 | |
Capitalized software, net | Capitalized software, net | 25,232 | | 22,429 | Capitalized software, net | 32,936 | | | 32,369 | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 200,690 | | | — | |
Goodwill | Goodwill | 587,751 | | 399,882 | Goodwill | 586,659 | | | 584,469 | |
Intangible assets, net | Intangible assets, net | 195,354 | | 88,035 | Intangible assets, net | 171,077 | | | 179,250 | |
Deferred contract costs, net | Deferred contract costs, net | 19,771 | | 14,380 | Deferred contract costs, net | 18,224 | | | 18,921 | |
Deferred compensation plan assets | Deferred compensation plan assets | 32,387 | | 34,305 | Deferred compensation plan assets | 35,151 | | | 32,908 | |
Deferred income taxes | Deferred income taxes | 209 | | 6,834 | Deferred income taxes | 191 | | | 186 | |
Other assets | Other assets | 10,309 | | 9,959 | Other assets | 8,578 | | | 8,615 | |
Total assets | Total assets | $ | 1,687,716 | | $ | 1,462,000 | Total assets | $ | 1,989,791 | | | $ | 1,745,732 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | Current liabilities: | | | | Current liabilities: | | | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | $ | 169,099 | | $ | 114,378 | Accounts payable and accrued liabilities | $ | 174,707 | | | $ | 177,786 | |
Accrued compensation and benefits | Accrued compensation and benefits | 87,698 | | 95,555 | Accrued compensation and benefits | 104,263 | | | 106,789 | |
Deferred revenue | Deferred revenue | 39,215 | | 51,182 | Deferred revenue | 42,756 | | | 43,344 | |
Income taxes payable | Income taxes payable | 3,159 | | 4,438 | Income taxes payable | 5,563 | | | 13,952 | |
Current portion of long-term debt and other borrowings | Current portion of long-term debt and other borrowings | 3,681 | | 136 | Current portion of long-term debt and other borrowings | 7,009 | | | 9,658 | |
Operating lease liabilities | | Operating lease liabilities | 85,625 | | | — | |
Other liabilities | Other liabilities | 17,909 | | 11,760 | Other liabilities | 12,785 | | | 12,709 | |
Total current liabilities | Total current liabilities | 320,761 | | 277,449 | Total current liabilities | 432,708 | | | 364,238 | |
Deferred revenue, less current portion | Deferred revenue, less current portion | 24,910 | | 20,394 | Deferred revenue, less current portion | 32,105 | | | 32,341 | |
Deferred income taxes | Deferred income taxes | 51,060 | | 26,377 | Deferred income taxes | 47,344 | | | 46,560 | |
Long-term debt | 75,295 | | 374 | |
| Deferred compensation plan liabilities, less current portion | Deferred compensation plan liabilities, less current portion | 32,622 | | 33,497 | Deferred compensation plan liabilities, less current portion | 37,298 | | | 34,079 | |
Operating lease liabilities, net of current portion | | Operating lease liabilities, net of current portion | 121,620 | | | — | |
Other liabilities | Other liabilities | 15,487 | | 17,490 | Other liabilities | 19,711 | | | 20,313 | |
Total liabilities | Total liabilities | 520,135 | | 375,581 | Total liabilities | 690,786 | | | 497,531 | |
Shareholders’ equity: | Shareholders’ equity: | | | | Shareholders’ equity: | | | |
Common stock, no par value; 100,000 shares authorized; 63,811 and 64,371 shares issued and outstanding at March 31, 2019, and September 30, 2018, at stated amount, respectively | 498,269 | | 487,539 | |
Common stock, no par value; 100,000 shares authorized; 63,953 and 63,979 shares issued and outstanding at December 31, 2019, and September 30, 2019, at stated amount, respectively | | Common stock, no par value; 100,000 shares authorized; 63,953 and 63,979 shares issued and outstanding at December 31, 2019, and September 30, 2019, at stated amount, respectively | 504,184 | | | 498,433 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (39,136) | | (36,953) | Accumulated other comprehensive loss | (38,487) | | | (45,380) | |
Retained earnings | Retained earnings | 705,824 | | 633,281 | Retained earnings | 833,308 | | | 794,739 | |
Total MAXIMUS shareholders’ equity | 1,164,957 | | 1,083,867 | |
Total MAXIMUS shareholders' equity | | Total MAXIMUS shareholders' equity | 1,299,005 | | | 1,247,792 | |
Noncontrolling interests | Noncontrolling interests | 2,624 | | 2,552 | Noncontrolling interests | — | | | 409 | |
Total equity | Total equity | 1,167,581 | | 1,086,419 | Total equity | 1,299,005 | | | 1,248,201 | |
Total liabilities and equity | Total liabilities and equity | $ | 1,687,716 | | $ | 1,462,000 | Total liabilities and equity | $ | 1,989,791 | | | $ | 1,745,732 | |
See notes to unaudited consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
| | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | 2019 | | 2018 | | 2019 | | 2018 |
Cash flows from operations: | Cash flows from operations: | | | | Cash flows from operations: | | | |
Net income | Net income | $ | 117,489 | | $ | 115,058 | Net income | $ | 58,734 | | | $ | 55,723 | |
Adjustments to reconcile net income to cash flows from operations: | Adjustments to reconcile net income to cash flows from operations: | | | | Adjustments to reconcile net income to cash flows from operations: | | | |
Depreciation and amortization of property and equipment and capitalized software | Depreciation and amortization of property and equipment and capitalized software | 22,407 | | 27,074 | Depreciation and amortization of property and equipment and capitalized software | 15,318 | | | 11,231 | |
Amortization of intangible assets | Amortization of intangible assets | 14,977 | | 5,321 | Amortization of intangible assets | 9,088 | | | 5,458 | |
| Deferred income taxes | Deferred income taxes | 17,764 | | (9,179) | Deferred income taxes | 422 | | | 16,511 | |
Stock compensation expense | Stock compensation expense | 9,904 | | 11,324 | Stock compensation expense | 5,397 | | | 4,971 | |
| Change in assets and liabilities excluding acquired assets and liabilities: | | | | |
Change in assets and liabilities net of effects of business combinations | | Change in assets and liabilities net of effects of business combinations | | | |
Accounts receivable — billed and billable | Accounts receivable — billed and billable | (72,720) | | (18,522) | Accounts receivable — billed and billable | (31,016) | | | (69,890) | |
Accounts receivable — unbilled | Accounts receivable — unbilled | 9,189 | | (4,730) | Accounts receivable — unbilled | 2,013 | | | 20,198 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | (5,118) | | 8,526 | Prepaid expenses and other current assets | 4,063 | | | (5,691) | |
Deferred contract costs | Deferred contract costs | (5,415) | | 1,794 | Deferred contract costs | 848 | | | (1,757) | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | 42,080 | | (3,171) | Accounts payable and accrued liabilities | 2,403 | | | 26,564 | |
Accrued compensation and benefits | Accrued compensation and benefits | (7,443) | | (15,391) | Accrued compensation and benefits | 6,842 | | | 377 | |
Deferred revenue | Deferred revenue | 4,435 | | (23,789) | Deferred revenue | (1,345) | | | (372) | |
Income taxes | Income taxes | (16,496) | | 18,634 | Income taxes | 13,984 | | | (3,848) | |
Operating lease right-of-use assets and liabilities | | Operating lease right-of-use assets and liabilities | (1,622) | | | — | |
Other assets and liabilities | Other assets and liabilities | (3,842) | | 3,811 | Other assets and liabilities | 2,138 | | | (135) | |
Cash flows from operations | Cash flows from operations | 127,211 | | 116,760 | Cash flows from operations | 87,267 | | | 59,340 | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
Purchases of property and equipment and capitalized software costs | Purchases of property and equipment and capitalized software costs | (18,541) | | (13,175) | Purchases of property and equipment and capitalized software costs | (10,487) | | | (9,973) | |
Acquisitions | (421,809) | | (157) | |
Acquisitions of businesses, net of cash acquired | | Acquisitions of businesses, net of cash acquired | — | | | (421,809) | |
| Redemption of short-term investments | 19,996 | | — | |
Maturities of short-term investments | | Maturities of short-term investments | — | | | 19,996 | |
Other | Other | 284 | | 541 | Other | 25 | | | 47 | |
Cash used in investing activities | Cash used in investing activities | (420,070) | | (12,791) | Cash used in investing activities | (10,462) | | | (411,739) | |
Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
Cash dividends paid to MAXIMUS shareholders | Cash dividends paid to MAXIMUS shareholders | (31,983) | | (5,865) | Cash dividends paid to MAXIMUS shareholders | (17,913) | | | (16,033) | |
Purchases of MAXIMUS common stock | Purchases of MAXIMUS common stock | (46,068) | | (1,038) | Purchases of MAXIMUS common stock | (1,898) | | | (40,984) | |
Tax withholding related to RSU vesting | Tax withholding related to RSU vesting | (8,915) | | (8,529) | Tax withholding related to RSU vesting | (10,614) | | | (8,915) | |
| Borrowings | 320,048 | | 124,683 | |
Borrowings under credit facility and other loan agreements | | Borrowings under credit facility and other loan agreements | 83,419 | | | 195,100 | |
Repayment of credit facility and other long-term debt | Repayment of credit facility and other long-term debt | (241,539) | | (124,752) | Repayment of credit facility and other long-term debt | (86,301) | | | (70,033) | |
| Other | Other | (133) | | (2,130) | Other | (493) | | | (133) | |
Cash used in financing activities | (8,590) | | (17,631) | |
Cash (used in)/provided by financing activities | | Cash (used in)/provided by financing activities | (33,800) | | | 59,002 | |
Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | (632) | | 1,070 | Effect of exchange rate changes on cash and cash equivalents | 1,452 | | | (1,068) | |
Net (decrease)/increase in cash, cash equivalents and restricted cash | (302,081) | | 87,408 | |
Net increase/(decrease) in cash, cash equivalents and restricted cash | | Net increase/(decrease) in cash, cash equivalents and restricted cash | 44,457 | | | (294,465) | |
Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | 356,559 | | 179,727 | Cash, cash equivalents and restricted cash, beginning of period | 116,492 | | | 356,559 | |
Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | $ | 54,478 | | $ | 267,135 | Cash, cash equivalents and restricted cash, end of period | $ | 160,949 | | | $ | 62,094 | |
See notes to unaudited consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)
| | | Common Shares Outstanding | | Common Stock | | Accumulated Other Comprehensive Income/(Loss) | | Retained Earnings | | Noncontrolling Interest | | Total | | Common Shares Outstanding | | Common Stock | | Accumulated Other Comprehensive Income/(Loss) | | Retained Earnings | | Noncontrolling interest | | Total |
Balance at Balance at December 31, 2018 | 63,717 | | $ | 492,938 | | $ | (42,673) | | $ | 664,332 | | $ | 2,782 | | $ | 1,117,379 | |
Balance at September 30, 2019 | | Balance at September 30, 2019 | 63,979 | | | $ | 498,433 | | | $ | (45,380) | | | $ | 794,739 | | | $ | 409 | | | $ | 1,248,201 | |
Net income | Net income | — | | — | | — | | 61,924 | | (158) | | 61,766 | Net income | — | | | — | | | — | | | 58,734 | | | — | | | 58,734 | |
Foreign currency translation | Foreign currency translation | — | | — | | 3,537 | | — | | — | | 3,537 | Foreign currency translation | — | | | — | | | 6,893 | | | — | | | — | | | 6,893 | |
Cash dividends | Cash dividends | — | | — | | — | | (15,950) | | — | | (15,950) | Cash dividends | — | | | — | | | — | | | (17,913) | | | (409) | | | (18,322) | |
Dividends on RSUs | Dividends on RSUs | — | | 398 | | — | | (398) | | — | | — | Dividends on RSUs | — | | | 354 | | | — | | | (354) | | | — | | | — | |
Purchases of common stock | Purchases of common stock | (62) | | — | | — | | (4,084) | | — | | (4,084) | Purchases of common stock | (26) | | | — | | | — | | | (1,898) | | | — | | | (1,898) | |
Stock compensation expense | Stock compensation expense | — | | 4,933 | | — | | — | | — | | 4,933 | Stock compensation expense | — | | | 5,397 | | | — | | | — | | | — | | | 5,397 | |
| RSUs vested | 156 | | — | | — | | — | | — | | — | |
| Balance at March 31, 2019 | 63,811 | | $ | 498,269 | | $ | (39,136) | | $ | 705,824 | | $ | 2,624 | | $ | 1,167,581 | |
| Balance at December 31, 2019 | | Balance at December 31, 2019 | 63,953 | | | $ | 504,184 | | | $ | (38,487) | | | $ | 833,308 | | | $ | — | | | $ | 1,299,005 | |
| | | | | | | | | | | | | |
| | | | |
| | | Common Shares Outstanding | | Common Stock | | Accumulated Other Comprehensive Income/(Loss) | | Retained Earnings | | Noncontrolling Interest | | Total | | Common Shares Outstanding | | Common Stock | | Accumulated Other Comprehensive Income/(Loss) | | Retained Earnings | | Noncontrolling interest | | Total |
Balance at September 30, 2018 | Balance at September 30, 2018 | 64,371 | | $ | 487,539 | | $ | (36,953) | | $ | 633,281 | | $ | 2,552 | | $ | 1,086,419 | Balance at September 30, 2018 | 64,371 | | | $ | 487,539 | | | $ | (36,953) | | | $ | 633,281 | | | $ | 2,552 | | | | $ | 1,086,419 | |
Cumulative impact from adopting ASC Topic 606 on October 1, 2018 | Cumulative impact from adopting ASC Topic 606 on October 1, 2018 | — | | — | | — | | 32,929 | | 553 | | 33,482 | Cumulative impact from adopting ASC Topic 606 on October 1, 2018 | — | | | — | | | — | | | 32,929 | | | 553 | | | | 33,482 | |
Net income | Net income | — | | — | | — | | 117,837 | | (348) | | 117,489 | Net income | — | | | — | | | — | | | 55,913 | | | (190) | | | | 55,723 | |
Foreign currency translation | Foreign currency translation | — | | — | | (2,183) | | — | | — | | (2,183) | Foreign currency translation | — | | | — | | | (5,720) | | | — | | | — | | | | (5,720) | |
| Cash dividends | Cash dividends | — | | — | | — | | (31,983) | | (133) | | (32,116) | Cash dividends | — | | | — | | | — | | | (16,033) | | | (133) | | | | (16,166) | |
Dividends on RSUs | Dividends on RSUs | — | | 826 | | — | | (826) | | — | | — | Dividends on RSUs | — | | | 428 | | | — | | | (428) | | | — | | | | — | |
Purchases of common stock | Purchases of common stock | (716) | | — | | — | | (45,414) | | — | | (45,414) | Purchases of common stock | (654) | | | — | | | — | | | (41,330) | | | — | | | | (41,330) | |
Stock compensation expense | Stock compensation expense | — | | 9,904 | | — | | — | | — | | 9,904 | Stock compensation expense | — | | | 4,971 | | | — | | | — | | | — | | | | 4,971 | |
| RSUs vested | 156 | | — | | — | | — | | — | | — | |
| Balance at March 31, 2019 | 63,811 | | $ | 498,269 | | $ | (39,136) | | $ | 705,824 | | $ | 2,624 | | $ | 1,167,581 | |
| Balance at December 31, 2018 | | Balance at December 31, 2018 | 63,717 | | | $ | 492,938 | | | $ | (42,673) | | | $ | 664,332 | | | $ | 2,782 | | | | $ | 1,117,379 | |
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Common Stock | | Accumulated Other Comprehensive Income/(Loss) | | Retained Earnings | | Noncontrolling Interest | | Total |
Balance at Balance at December 31, 2017 | 65,120 | | $ | 481,261 | | $ | (27,304) | | $ | 547,151 | | $ | 6,544 | | $ | 1,007,652 |
Net income | — | | — | | — | | 55,492 | | (386) | | 55,106 |
Foreign currency translation | — | | — | | 2,869 | | — | | — | | 2,869 |
Cash dividends | — | | — | | — | | (2,935) | | (2,129) | | (5,064) |
Dividends on RSUs | — | | 78 | | — | | (78) | | — | | — |
| | | | | | | | | | | |
| | | | | | | | | | | |
Stock compensation expense | — | | 5,922 | | — | | — | | — | | 5,922 |
| | | | | | | | | | | |
| | | | | | | | | | | |
RSUs vested | 123 | | — | | — | | — | | — | | — |
Addition of noncontrolling interest from acquisition | — | | 124 | | — | | — | | (281) | | (157) |
Balance at March 31, 2018 | 65,243 | | $ | 487,385 | | $ | (24,435) | | $ | 599,630 | | $ | 3,748 | | $ | 1,066,328 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Common Stock | | Accumulated Other Comprehensive Income / (Loss) | | Retained Earnings | | Noncontrolling Interest | | Total |
Balance at September 30, 2017 | 65,137 | | $ | 475,592 | | $ | (27,619) | | $ | 492,112 | | $ | 5,683 | | $ | 945,768 |
Net income | — | | — | | — | | 114,583 | | 475 | | 115,058 |
Foreign currency translation | — | | — | | 3,184 | | — | | — | | 3,184 |
| | | | | | | | | | | |
Cash dividends | — | | — | | — | | (5,865) | | (2,129) | | (7,994) |
Dividends on RSUs | — | | 162 | | — | | (162) | | — | | — |
Purchases of common stock | (17) | | — | | — | | (1,038) | | — | | (1,038) |
Stock compensation expense | — | | 11,324 | | — | | — | | — | | 11,324 |
| | | | | | | | | | | |
Tax withholding related to RSU vesting | — | | 183 | | — | | — | | — | | 183 |
RSUs vested | 123 | | — | | — | | — | | — | | — |
Addition of noncontrolling interest from acquisition | — | | 124 | | — | | — | | (281) | | (157) |
Balance at March 31, 2018 | 65,243 | | $ | 487,385 | | $ | (24,435) | | $ | 599,630 | | $ | 3,748 | | $ | 1,066,328 |
See notes to unaudited consolidated financial statements.
MAXIMUS, Inc.
Notes to Unaudited Consolidated Financial Statements
For the Three and Six Months Ended MarchDecember 31, 2019 and 2018
1. Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. As permitted by these instructions, they do not include all of the information and notes required by generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the three and six months ended MarchDecember 31, 2019, are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet at September 30, 2018,2019, has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.
Certain financial results have been reclassified to conform with our current period presentation.
•Our consolidated statement of cash flows for the six months ended March 31, 2018, includes a reclassification to reflect the effect of new accounting guidance.
•Our consolidated balance sheet at September 30, 2018, includes a reclassification to show a comparative balance for current and long-term debt, which were previously reported within "other liabilities."
The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expenses. On an ongoing basis, we evaluate our estimates including those related to revenue recognition and cost estimation on certain contracts, the realizability of goodwill and amounts related to income taxes, certain accrued liabilities and contingencies and litigation. 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.
These financial statements should be read in conjunction with the consolidated audited financial statements and the notes thereto at September 30, 20182019 and 2017,2018, and for each of the three years ended September 30, 2018,2019, included in our Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on November 20, 2018.26, 2019.
Changes in financial reporting
SegmentsLeases
As previously reported, effectiveEffective October 1, 2018, our Chief Executive Officer reorganized our reporting segments based2019, we adopted ASU No. 2016-02, Leases (Topic 842). The new standard requires that assets and liabilities arising under leases be recognized on the way that management intends to allocate resources, manage performance and evaluate results. This reorganizationbalance sheet, except for those with an initial term of segments responds to recent changes in the markets in which 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. Our results for the three and six months ended March 31, 2018, were recast to conform with these new segments. See "Note 2. Segment Information" for more details of this change.
Revenue recognition
less than 12 months. We adopted Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) on October 1, 2018,this standard using thea modified retrospective approach. Accordingly, we did not recast prior period financial information. Certain elections were made in adopting the standard.
•We elected to use the package of practical expedients which, among other things, allows us to not reassess historical lease classification.
•We do not separate lease and non-lease components for all classes of leases, which allows us to account for a lease as a single component.
•We used the optional transition method, and, accordingly,which did not require us to recast our comparative periods.
•We did not use the hindsight practical expedients, which would have allowed us to use hindsight in determining the reasonably certain lease term.
•We did not adjust our accounting for leases with an initial term of twelve months or less.
Upon adopting Topic 842, we recognized a lease liability of $214.5 million, reflecting the cumulative effectpresent value of adoption as an adjustment of $32.9 millionthe future remaining minimum lease payments. Changes to our opening balance sheet are summarized below. There was no cumulative impact to our retained earnings balance on October 1, 2018. We applied this standard only to contracts that hadand the changes did not been completed ascause any material changes in our statements of the dateoperations or our statements of adoption. For contracts that had been modified prior to October 1, 2018, we calculated the cumulative effectcash flows. The adoption of Topic 606 on each contract based upon the aggregate effect of all of the modifications at that date.
842 does not affect our compliance with our existing contracts, including our credit facility.
Topic 606 applies to all of our contracts with customers and supersedes all previous standards on revenue recognition. In adopting Topic 606, we are required to follow a five-step process in order to identify and recognize revenue based upon a principle that revenue should be recognized as goods and services are transferred to customers in amounts that reflect the consideration to which we expect to be entitled for those goods and services. It did not change the actual amount of revenue being recognized for the majority of our contracts but did change the methodology by which we identified that revenue. | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Balance at September 30, 2019 | | Adjustments due to adoption of new standard | | Opening balance at October 1, 2019 |
Assets | | | | | | |
Prepaid expenses and other current assets | | $ | 62,481 | | | $ | (6,131) | | | $ | 56,350 | |
Operating lease right-of-use assets | | — | | | 206,314 | | | 206,314 | |
Liabilities and shareholders' equity | | | | | | |
Accounts payable and accrued expenses | | 177,786 | | | (5,250) | | | 172,536 | |
Operating lease liabilities | | — | | | 88,276 | | | 88,276 | |
Other current liabilities | | 12,709 | | | (648) | | | 12,061 | |
Operating lease liabilities, net of current portion | | — | | | 126,197 | | | 126,197 | |
Other long-term liabilities | | 20,313 | | | (8,392) | | | 11,921 | |
In the most significant change under Topic 606, we are required to estimate and recognize revenue on contracts over the period where we provide a service. This affects contracts where performance outcomes are achieved over time, most notably for welfare-to-work contracts where we are compensated for placing individuals in sustained employment. Under our former methodology of recognizing revenue, we deferred recognizing this outcome-based revenue until the outcome was achieved. Under Topic 606, we estimate our anticipated future fees and recognize them over the expected period of performance. As a result, more judgments and estimates are required within the process of recognizing revenue than were required under the former methodology.
The adoption of Topic 606 resulted in the following changes to our opening balance sheet:
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Balance at September 30, 2018 | | Adjustments due to adoption of new standard | | Opening balance at October 1, 2018 |
Assets | | | | | | |
Accounts receivable - unbilled | | $ | 31,536 | | $ | 35,414 | | $ | 66,950 |
Deferred income taxes | | 6,834 | | (6,625) | | 209 |
Liabilities and shareholders' equity | | | | | | |
Deferred revenue - current | | 51,182 | | (11,767) | | 39,415 |
Deferred income taxes - long-term | | 26,377 | | 7,074 | | 33,451 |
Retained earnings | | 633,281 | | 32,929 | | 666,210 |
Noncontrolling interests | | 2,552 | | 553 | | 3,105 |
The table below shows the effects ofAt the adoption of Topic 606 on our consolidated statement of operations for842, the threeCompany recognized deferred tax assets and six months ended March 31, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2019 | | | | | | Six months ended March 31, 2019 | | | | |
(dollars in thousands) | | Balance under previous accounting guidance | | Adjustments due to adoption of new standard | | Balance as reported | | Balance under previous accounting guidance | | Adjustments due to adoption of new standard | | Balance as reported |
Revenue | | $ | 735,487 | | $ | 1,033 | | $ | 736,520 | | $ | 1,399,372 | | $ | 1,767 | | $ | 1,401,139 |
| | | | | | | | | | | | |
Income before income taxes | | 79,646 | | 1,033 | | 80,679 | | 154,468 | | 1,767 | | 156,235 |
Provision for income taxes | | 18,628 | | 285 | | 18,913 | | 38,467 | | 279 | | 38,746 |
Net income | | 61,018 | | 748 | | 61,766 | | 116,001 | | 1,488 | | 117,489 |
(Loss)/income attributable to noncontrolling interests | | (328) | | 170 | | (158) | | (838) | | 490 | | (348) |
Net income attributable to MAXIMUS | | $ | 61,346 | | $ | 578 | | $ | 61,924 | | $ | 116,839 | | $ | 998 | | $ | 117,837 |
Theliabilities corresponding to the operating lease liabilities and operating right-of-use assets, respectively. These balances offset each other and no net effect on our balance sheet would have been as follows:
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Balance at March 31, 2019, under previous accounting guidance | | Adjustments due to adoption of new standard | | Balance at March 31, 2019, as reported |
Assets | | | | | | |
Accounts receivable - unbilled | | $ | 95,796 | | $ | 35,454 | | $ | 131,250 |
Deferred income taxes | | 6,858 | | (6,649) | | 209 |
Liabilities and shareholders' equity | | | | | | |
Deferred revenue - current | | 51,963 | | (12,748) | | 39,215 |
Deferred income taxes - long-term | | 43,957 | | 7,103 | | 51,060 |
Accumulated other comprehensive loss | | (38,617) | | (519) | | (39,136) |
Retained earnings | | 671,897 | | 33,927 | | 705,824 |
Noncontrolling interests | | 1,581 | | 1,043 | | 2,624 |
resulted from this change.
Additional information and disclosures relating to this change are included within "Note 3. Revenue recognition.Leases."
Statement of cash flows
We adopted 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 on October 1, 2018, using the retrospective method. The most notable change 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 did not consider these restricted cash balances to be cash or cash equivalents, we did not previously include them within our cash flow statement except where restrictions over cash were imposed or lapsed. Beginning on October 1, 2018, we are required to include movements in cash, cash equivalents and restricted cash within our consolidated statements of cash flows.
Accordingly, we have presented our consolidated statement of cash flows using the new rules for all periods shown. Our balances for cash, cash equivalents and restricted cash are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance as of | | | | | | |
(dollars in thousands) | | March 31, 2019 | | September 30, 2018 | | March 31, 2018 | | September 30, 2017 |
Cash and cash equivalents | | $ | 46,799 | | $ | 349,245 | | $ | 253,227 | | $ | 166,252 |
Restricted cash (recorded within "other current assets") | | 7,679 | | 7,314 | | 13,908 | | 13,475 |
Cash, cash equivalents and restricted cash | | $ | 54,478 | | $ | 356,559 | | $ | 267,135 | | $ | 179,727 |
Consolidated Statements of Changes in Shareholders' EquityForthcoming changes
In August 2018, the United States SecuritiesFinancial Accounting Standards Board (FASB) issued ASU No. 2018-15, Intangibles - Goodwill and Exchange Commission (SEC) adopted the final rule under SEC Release No. 33-10532, Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service ContractDisclosure Update. This accounting guidance requires customers in cloud-computing arrangements to identify and Simplification, amendingdefer certain disclosure requirementsimplementation costs in a manner broadly consistent with that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirementsof existing guidance on the analysiscosts to develop or obtain internal-use software. We will adopt this guidance on October 1, 2020. The guidance may be adopted early and we may adopt using either a prospective or retrospective methodology. We are currently assessing the future impact of stockholders' equitythis update on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update introduces a new model for interimrecognizing credit losses on financial statements. Underinstruments, including losses on accounts receivable. We will adopt this guidance on October 1, 2020 and any changes will be recorded as a cumulative adjustment to retained earnings. We are still assessing the amendments,effect of this standard on our financial statements.
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 any subsequent calculation of an analysisimpairment charge. We will adopt this guidance on October 1, 2020. The effect of changes in each captionthis new standard will depend upon the outcome of shareholders' equity presented in the balance sheet must be provided in a note or separate statement. The amendments became effective on November 5, 2018, and didfuture goodwill impairment tests.
Other recent accounting pronouncements are not expected to have a material effect on the Company's consolidatedour financial statements for fiscal year 2019. We have adopted these changes to the Consolidated Statements of Changes in Shareholders’ Equity in this filing.statements.
2. Segment Information
The table below provides certain financial information for each of our business segments.
As noted in "Note 1. Organization and Basis of Presentation," we have made changes to our business segments in fiscal year 2019. Accordingly, the comparative results shown for the three and six months ended March 31, 2018, are presented differently from those shown in previous filings.
From October 1, 2018, we operated We operate our business through three3 segments.
•Our U.S. Health and Human Services Segment provides a variety of business process services such as program administration, appeals and assessments work,services, and related consulting work for U.S. state and local government programs. These services support a variety of programs including the Affordable Care Act (ACA), Medicaid and the Children’s Health Insurance Program the Affordable Care Act(CHIP). We also serve as administrators in state-based welfare-to-work and Temporary Assistance for Needy Families.child support programs.
•Our U.S. Federal Services Segment provides business process solutions, including program administration, appeals and assessment services, as well as system and software development and maintenance services for various U.S. federal civilian programs. This segment also contains certain state-based assessments and appeals work that is part of the segment's heritage within the Medicare Appeals portfolio and continues to be managed within this segment.
•Our Outside the U.S. Segment provides business process solutions for governments and commercial clients outside the U.S.U.S., including health and disability assessments, program administration and case management for welfare-to-workemployment services and other related services.work-support programs. We support programs and deliver services in the United Kingdom, including the Health Assessment Advisory Service (HAAS), the Work & Health Programme and Fair Start; Australia, including jobactive and the Disability Employment Service; Canada, including Health Insurance British Columbia and the Employment Program of British Columbia; Saudi Arabia and Singapore.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | | | Six Months Ended March 31, | | | | | | |
(dollars in thousands) | | 2019 | | % (1) | | 2018 | | % (1) | | 2019 | | % (1) | | 2018 | | % (1) |
Revenue: | | | | | | | | | | | | | | | | |
U.S. Health & Human Services | | $ | 290,737 | | | | $ | 306,249 | | | | $ | 584,950 | | | | $ | 610,490 | | |
U.S. Federal Services | | 289,736 | | | | 116,327 | | | | 506,723 | | | | 249,310 | | |
Outside the U.S. | | 156,047 | | | | 190,211 | | | | 309,466 | | | | 376,135 | | |
Total | | $ | 736,520 | | | | $ | 612,787 | | | | $ | 1,401,139 | | | | $ | 1,235,935 | | |
Gross profit: | | | | | | | | | | | | | | | | |
U.S. Health & Human Services | | $ | 86,260 | | 29.7% | | | $ | 86,586 | | 28.3% | | | $ | 174,291 | | 29.8% | | | $ | 170,817 | | 28.0% | |
U.S. Federal Services | | 60,696 | | 20.9% | | | 27,374 | | 23.5% | | | 108,681 | | 21.4% | | | 60,732 | | 24.4% | |
Outside the U.S. | | 22,466 | | 14.4% | | | 34,843 | | 18.3% | | | 45,715 | | 14.8% | | | 69,214 | | 18.4% | |
Total | | $ | 169,422 | | 23.0% | | | $ | 148,803 | | 24.3% | | | $ | 328,687 | | 23.5% | | | $ | 300,763 | | 24.3% | |
Selling, general & administrative expense: | | | | | | | | | | | | | | | | |
U.S. Health & Human Services | | $ | 29,400 | | 10.1% | | | $ | 36,616 | | 12.0% | | | $ | 61,539 | | 10.5% | | | $ | 71,421 | | 11.7% | |
U.S. Federal Services | | 31,104 | | 10.7% | | | 17,540 | | 15.1% | | | 57,736 | | 11.4% | | | 34,188 | | 13.7% | |
Outside the U.S. | | 17,992 | | 11.5% | | | 18,403 | | 9.7% | | | 36,800 | | 11.9% | | | 36,509 | | 9.7% | |
Restructuring costs | | — | | NM | | 2,320 | | NM | | — | | NM | | 2,320 | | NM |
Other | | (394) | | NM | | — | | NM | | 1,698 | | NM | | — | | NM |
Total | | $ | 78,102 | | 10.6% | | | $ | 74,879 | | 12.2% | | | $ | 157,773 | | 11.3% | | | $ | 144,438 | | 11.7% | |
Operating income: | | | | | | | | | | | | | | | | |
U.S. Health & Human Services | | $ | 56,860 | | 19.6% | | | $ | 49,970 | | 16.3% | | | $ | 112,752 | | 19.3% | | | $ | 99,396 | | 16.3% | |
U.S. Federal Services | | 29,592 | | 10.2% | | | 9,834 | | 8.5% | | | 50,945 | | 10.1% | | | 26,544 | | 10.6% | |
Outside the U.S. | | 4,474 | | 2.9% | | | 16,440 | | 8.6% | | | 8,915 | | 2.9% | | | 32,705 | | 8.7% | |
Amortization of intangible assets | | (9,519) | | NM | | (2,603) | | NM | | (14,977) | | NM | | (5,321) | | NM |
Restructuring costs (2) | | — | | NM | | (2,320) | | NM | | — | | NM | | (2,320) | | NM |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Other (3) | | 394 | | NM | | — | | NM | | (1,698) | | NM | | — | | NM |
Total | | $ | 81,801 | | 11.1% | | | $ | 71,321 | | 11.6% | | | $ | 155,937 | | 11.1% | | | $ | 151,004 | | 12.2% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | | | | | |
(dollars in thousands) | | 2019 | | % (1) | | 2018 | | % (1) |
Revenue: | | | | | | | | |
U.S. Health & Human Services | | $ | 312,281 | | | | | $ | 294,213 | | | |
U.S. Federal Services | | 366,571 | | | | | 216,987 | | | |
Outside the U.S. | | 139,377 | | | | | 153,419 | | | |
Total | | $ | 818,229 | | | | | $ | 664,619 | | | |
Gross profit: | | | | | | | | |
U.S. Health & Human Services | | $ | 89,590 | | | 28.7% | | | $ | 88,031 | | | 29.9% | |
U.S. Federal Services | | 70,821 | | | 19.3% | | | 47,985 | | | 22.1% | |
Outside the U.S. | | 15,039 | | | 10.8% | | | 23,249 | | | 15.2% | |
Total | | $ | 175,450 | | | 21.4% | | | $ | 159,265 | | | 24.0% | |
Selling, general & administrative expense: | | | | | | | | |
U.S. Health & Human Services | | $ | 31,398 | | | 10.1% | | | $ | 32,139 | | | 10.9% | |
U.S. Federal Services | | 39,239 | | | 10.7% | | | 26,632 | | | 12.3% | |
Outside the U.S. | | 16,053 | | | 11.5% | | | 18,808 | | | 12.3% | |
| | | | | | | | |
Other (2) | | 537 | | | NM | | 2,092 | | | NM |
Total | | $ | 87,227 | | | 10.7% | | | $ | 79,671 | | | 12.0% | |
Operating income: | | | | | | | | |
U.S. Health & Human Services | | $ | 58,192 | | | 18.6% | | | $ | 55,892 | | | 19.0% | |
U.S. Federal Services | | 31,582 | | | 8.6% | | | 21,353 | | | 9.8% | |
Outside the U.S. | | (1,014) | | | (0.7)% | | | 4,441 | | | 2.9% | |
Amortization of intangible assets | | (9,088) | | | NM | | (5,458) | | | NM |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other | | (537) | | | NM | | (2,092) | | | NM |
Total | | $ | 79,135 | | | 9.7% | | | $ | 74,136 | | | 11.2% | |
(1) Percentage of respective segment revenue. Percentages not considered meaningful are marked “NM.”
(2) During fiscal year 2018, we incurred costs in restructuring our United Kingdom business.
(3) Other selling, general &and administrative expenses includes credits and costs that are not directly allocated to a particular segment. In the six month periodsthree months ended MarchDecember 31, 2019,2018, these other costs include $2.7 million of costs directly related to the acquisition of the citizen engagement centers business. Refer to "Note 5. Acquisition of Citizen Engagement Centers Business" for more details.
Identifiable assets for the segments are shown below (in thousands):
| | | March 31, 2019 | | September 30, 2018 | | December 31, 2019 | | September 30, 2019 |
U.S. Health & Human Services | U.S. Health & Human Services | | $ | 478,584 | | $ | 442,063 | U.S. Health & Human Services | | $ | 584,038 | | | $ | 500,641 | |
U.S. Federal Services | U.S. Federal Services | | 837,844 | | 375,807 | U.S. Federal Services | | 922,613 | | | 795,553 | |
Outside the U.S. | Outside the U.S. | | 224,274 | | 184,872 | Outside the U.S. | | 245,289 | | | 234,769 | |
Corporate | Corporate | | 147,014 | | 459,258 | Corporate | | 237,851 | | | 214,769 | |
Total | Total | | $ | 1,687,716 | | $ | 1,462,000 | Total | | $ | 1,989,791 | | | $ | 1,745,732 | |
3. Revenue RecognitionLeases
Beginning October 1, 2018,2019, we identify contracts which are, or contain, leases where a contract allows us the right to control identified property or equipment for a period of time in return for consideration. Our leases are typically for office space or facilities, as well as some equipment leases. Where contracts include both lease and non-lease components, we do not typically separate the non-lease components in our accounting.
At the inception of a lease, we recognize revenuea liability for future minimum lease payments based upon the present value of those payments.
•In identifying our future minimum lease payments, we do not include variable lease costs, such as those for maintenance or utilities. These are recorded as lease expenses in accordancethe period in which they are incurred.
•In identifying future lease payments, we do not include short-term leases, identified as those with ASC Topic 606, Revenue from Contracts with Customers. We adopted this standard on October 1, 2018, using the modified retrospective method; accordingly, only periods after October 1, 2018, utilize ASC Topic 606.an initial term of twelve months or less.
Under ASC Topic 606,•Lease options are included within our lease liability only where it is reasonably certain that we will utilize those periods of the lease and incur the related costs.
•In calculating the fair value of our lease liability, we utilize an estimate of our collateralized incremental borrowing rate. This estimate is based upon publicly-available information adjusted for company-specific, country-specific and lease-specific factors. The weighted average incremental borrowing rate utilized at December 31, 2019 is 3.6%.
Over the course of a lease, the lease liability is reduced as scheduled lease payments are made and increased as the implied interest charges are added.
Our right-of-use asset is based upon the lease liability at the contract inception but is adjusted over the life of the lease by lease prepayments, additional costs or lease incentives. The right-of-use asset is amortized on a straight-line basis over the lease term, offset by the interest accretion recorded on the lease liability.
Lease expense is recorded within our consolidated statements of operations based upon the nature of the assets. Where assets are used to directly serve our customers, such as facilities dedicated to customer contracts, lease costs are recorded in "cost of revenue". Facilities and assets which serve management and support functions are expensed through "selling, general and administrative expenses". Costs recorded in the three months ended December 31, 2019 are summarized below.
| | | | | | | | | | | | |
(dollars in thousands) | | | | Three months ended December 31, 2019 |
Operating lease cost | | | | $ | 25,250 | |
Short-term lease cost | | | | 2,110 | |
Variable lease cost | | | | 3,334 | |
Total operating lease costs | | | | $ | 30,694 | |
Future minimum lease payments for noncancelable operating leases as of December 31, 2019 are shown below.
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | Office space | | Equipment | | Total |
For the years ended September 30, | | | | | |
Remainder of 2020 | $ | 63,960 | | | $ | 6,336 | | | $ | 70,296 | |
2021 | 58,107 | | | 6,812 | | | 64,919 | |
2022 | 38,047 | | | 2,904 | | | 40,951 | |
2023 | 25,691 | | | 124 | | | 25,815 | |
2024 | 11,181 | | | 77 | | | 11,258 | |
Thereafter | 7,067 | | | — | | | 7,067 | |
Total minimum lease payments | $ | 204,053 | | | $ | 16,253 | | | $ | 220,306 | |
Less imputed interest | (11,269) | | | (1,792) | | | (13,061) | |
Total lease liabilities | $ | 192,784 | | | $ | 14,461 | | | $ | 207,245 | |
Our weighted average remaining lease term at December 31, 2019 is 3.1 years.
For the three months ended December 31, 2019, we made cash payments of $28.1 million for amounts included in our lease liabilities. New or amended leases resulted in additional right-of-use assets of $17.3 million.
4. Revenue recognition
We recognize revenue as, or when, we satisfy performance obligations under a contract. We account for a contract when the parties have approved the contract and are committed to perform on it, the rights of each party and the payment terms are identified, the contract has commercial substance and it is probable that we will collect substantially all of the consideration. A performance obligation is a promise in a contract to transfer a distinct good or service, or a series of distinct goods or services, to a customer. The transaction price of a contract must be allocated to each performance obligation and recognized as the performance obligation is satisfied.
Although our services may have many components, these components are not necessarily distinct performance obligations as they may be interdependent on or interrelated to each other. Where our contracts contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each component. This method will vary from contract to contract. Where available, we utilize standalone selling prices of similar components. If this information is unavailable, we utilize a suitable metric to allocate selling price, such as costs incurred.
The majority of our contracts have performance obligations which are satisfied over time. In most cases, we view our performance obligations as promises to transfer a series of distinct services to our customer that are substantially the same and which have the same pattern of service. We recognize revenue over the performance period as a customer receives the benefits of our services. This continuous transfer of control is supported by the unilateral right of many of our customers to terminate contracts for convenience, without having to provide justification for this decision. Where we are reimbursed on a cost-plus basis, we recognize revenue based upon our costs incurred to date; where we are reimbursed on a fixed price basis, we recognize revenue based upon an appropriate output measure which may be time elapsed or another measure within the contract. When we have variable fees, such as revenue related to the volume of work or award fees, we allocate that revenue to the distinct periods of service to which they relate. In estimating our variable fees, we are required to constrain our estimates to the extent that it is probable that there will not be a significant reversal of cumulative revenue when the uncertainty is resolved.
Other performance obligations are satisfied at a point in time, rather than over time. We recognize revenue only when the customer has received control over the goods provided. Revenue recognition on these performance obligations does not require a significant level of judgment or estimation.
Where we have contract modifications, these are reviewed to determine whether they should be accounted for as part of the original performance obligation or as a separate contract. Where the modification changes the scope or price and the additional performance obligations are at their standalone selling price, these services are considered as a separate contract. Where there is a modification and the additional performance obligations are not at their standalone selling price, we consider whether those performance obligations are distinct from those already delivered. If services are distinct from those already provided, the contract is accounted for prospectively, as though the original contract had been terminated and a new arrangement entered into. Where the modification includes goods or services which are not distinct from those already provided, we record a cumulative adjustment to revenue based upon a remeasurement of progress towards the complete satisfaction of performance obligations not yet fully delivered.
Disaggregation of revenue
In addition to our segment reporting, we disaggregate our revenues by product,service, contract type, customer type and geography. Our operating segments represent the manner in which our Chief Executive Officer reviews our financial results which is further discussed in "Note 2. Segment information."
By operating segment and service
| | (dollars in thousands) | (dollars in thousands) | | Three Months Ended March 31, 2019 | | Six Months Ended March 31, 2019 | (dollars in thousands) | | Three Months Ended December 31, 2019 | | Three Months Ended December 31, 2018 |
Program administration | Program administration | | $ | 219,732 | | $ | 438,705 | Program administration | | $ | 236,907 | | | $ | 218,973 | |
Assessments and appeals | Assessments and appeals | | 33,331 | | 70,552 | Assessments and appeals | | 33,831 | | | 37,221 | |
Workforce and children services | Workforce and children services | | 23,898 | | 47,801 | Workforce and children services | | 29,386 | | | 23,903 | |
Other | Other | | 13,776 | | 27,892 | Other | | 12,157 | | | 14,116 | |
Total U.S. Health and Human Services | Total U.S. Health and Human Services | | $ | 290,737 | | 584,950 | Total U.S. Health and Human Services | | 312,281 | | | 294,213 | |
| | | | | |
Program administration | Program administration | | $ | 209,996 | | $ | 350,117 | Program administration | | 281,688 | | | 140,121 | |
Technology solutions | Technology solutions | | 37,993 | | 76,876 | Technology solutions | | 43,606 | | | 38,883 | |
Assessments and appeals | Assessments and appeals | | 41,747 | | 79,730 | Assessments and appeals | | 41,277 | | | 37,983 | |
Total U.S. Federal Services | Total U.S. Federal Services | | $ | 289,736 | | 506,723 | Total U.S. Federal Services | | 366,571 | | | 216,987 | |
| | | | | |
Workforce and children services | Workforce and children services | | $ | 69,759 | | $ | 143,037 | Workforce and children services | | 57,239 | | | 73,278 | |
Assessments and appeals | Assessments and appeals | | 67,771 | | 130,081 | Assessments and appeals | | 62,643 | | | 62,310 | |
Program administration | Program administration | | 15,922 | | 31,242 | Program administration | | 17,094 | | | 15,320 | |
Other | Other | | 2,595 | | 5,106 | Other | | 2,401 | | | 2,511 | |
Total Outside the U.S. | Total Outside the U.S. | | $ | 156,047 | | $ | 309,466 | Total Outside the U.S. | | 139,377 | | | 153,419 | |
| | | | | | |
Total revenue | Total revenue | | $ | 736,520 | | $ | 1,401,139 | Total revenue | | $ | 818,229 | | | $ | 664,619 | |
By contract type
| (dollars in thousands) | (dollars in thousands) | | Three Months Ended March 31, 2019 | | Six Months Ended March 31, 2019 | (dollars in thousands) | | Three Months Ended December 31, 2019 | | Three Months Ended December 31, 2018 |
Performance-based | Performance-based | | $ | 261,592 | | $ | 574,479 | Performance-based | | $ | 292,758 | | | $ | 312,887 | |
Cost-plus | Cost-plus | | 298,133 | | 473,431 | Cost-plus | | 362,811 | | | 175,298 | |
Fixed price | Fixed price | | 139,871 | | 287,022 | Fixed price | | 119,216 | | | 147,151 | |
Time and materials | Time and materials | | 36,924 | | 66,207 | Time and materials | | 43,444 | | | 29,283 | |
Total revenue | Total revenue | | $ | 736,520 | | $ | 1,401,139 | Total revenue | | $ | 818,229 | | | $ | 664,619 | |
By customer type
| (dollars in thousands) | (dollars in thousands) | | Three Months Ended March 31, 2019 | | Six Months Ended March 31, 2019 | (dollars in thousands) | | Three Months Ended December 31, 2019 | | Three Months Ended December 31, 2018 |
New York State government agencies | New York State government agencies | | $ | 89,858 | | $ | 181,570 | New York State government agencies | | $ | 97,223 | | | $ | 91,712 | |
Other U.S. state government agencies | Other U.S. state government agencies | | 197,870 | | 396,772 | Other U.S. state government agencies | | 209,886 | | | 198,902 | |
Total U.S. state government agencies | Total U.S. state government agencies | | $ | 287,728 | | $ | 578,342 | Total U.S. state government agencies | | 307,109 | | | 290,614 | |
| | | | |
United States Federal Government agencies | United States Federal Government agencies | | 270,623 | | 468,901 | United States Federal Government agencies | | 351,833 | | | 198,278 | |
International government agencies | International government agencies | | 146,292 | | 289,073 | International government agencies | | 130,816 | | | 142,781 | |
Other, including local municipalities and commercial customers | Other, including local municipalities and commercial customers | | 31,877 | | 64,823 | Other, including local municipalities and commercial customers | | 28,471 | | | 32,946 | |
Total revenue | Total revenue | | $ | 736,520 | | $ | 1,401,139 | Total revenue | | $ | 818,229 | | | $ | 664,619 | |
By geography
| (dollars in thousands) | (dollars in thousands) | | Three Months Ended March 31, 2019 | | Six Months Ended March 31, 2019 | (dollars in thousands) | | Three Months Ended December 31, 2019 | | Three Months Ended December 31, 2018 |
United States of America | United States of America | | $ | 580,473 | | $ | 1,091,673 | United States of America | | $ | 678,852 | | | $ | 511,200 | |
United Kingdom | United Kingdom | | 78,334 | | 151,752 | United Kingdom | | 73,002 | | | 73,418 | |
Australia | Australia | | 50,997 | | 104,370 | Australia | | 37,435 | | | 53,373 | |
Rest of world | Rest of world | | 26,716 | | 53,344 | Rest of world | | 28,940 | | | 26,628 | |
Total revenue | Total revenue | | $ | 736,520 | | $ | 1,401,139 | Total revenue | | $ | 818,229 | | | $ | 664,619 | |
Contract balances
Differences in timing between revenue recognition and cash collection result in contract assets and contract liabilities. We classify these assets as accounts receivable — billed and billable and unbilled receivables andreceivables; the liabilities are classified as deferred revenue.
In many contracts, we bill our customers on a monthly basis shortly after the month end for work performed in that month. Funds are considered collectible and are included within accounts receivable — billed and billable.
Exceptions to this pattern will arise for various reasons, including those listed below.
•Under cost-plus contracts, we are typically required to estimate a contract’s share of our general and administrative expenses. This share is based upon estimates of total costs which may vary over time. We typically invoice our customers at an agreed provisional billing rate which will differ from actual rates incurred. If our actual rates are higher than the provisional billing rates, an asset is recorded for this variance; if the provisional billing rate is higher than our actual rate, we record a liability.
•Certain contracts include retainage balances, whereby revenue is earned but cash payments are held back by the customer for a period of time, typically to allow the customer to evaluate the quality of our performance.
•In certain contracts, notably our welfare-to-work contracts, we earn revenue from program participants achieving outcomes such This balance is classified as sustained employment for periods up to 24 months. This revenue may only be invoiced at the conclusion of this period of performance. Since we are required to recognize revenue over the period where the customer receives the benefit, we record anaccounts receivable - unbilled receivable.until restrictions on billing have been lifted.
•In certain contracts, we may receive funds from our customers prior to performing operations. These funds are typically referred to as “set-up costs” and reflect the need for us to make investments in infrastructure prior to providing a service. This investment in infrastructure is not a performance obligation which is distinct from the service that is subsequently provided and, as a result, revenue is not recognized based upon the establishment of this infrastructure, but rather over the course of the contractual relationship. The funds are initially recorded as deferred revenue and recognized over the term of the contract. Other contracts may not include set-up fees but will provide higher fees in earlier periods of the contract. The premium on these fees is deferred.
•Some of our contracts, notably our welfare-to-work contracts in the Outside the U.S. Segment, include payments for outcomes, such as job retention, which occur over several months. We are required to
estimate these outcome fees ahead of their realization and recognize this estimated fee over the period of delivery.
During the sixthree months ended MarchDecember 31, 2019 and 2018, we recognized revenue of $32.0$18.0 million and $21.8 million included in our deferred revenue balances at September 30, 2018. During the three months ended March 31, 2019 we recognized $23.0 million included in our deferred revenue at December 31, 2018.and 2018, respectively.
Contract estimates
We are required to use estimates in recognizing certain revenue. Our most significant estimates relate to:
•Our welfare-to workSome of our performance-based contract revenue is recognized based upon future outcomes defined in each contract. This is the case in many of our welfare-to-work contracts in the Outside the U.S. Segment, where we estimate our future variable consideration by estimatingare paid as individuals attain employment goals, which may take many months to achieve. We recognize revenue on these contracts over the volumeperiod of performance. Our estimates vary from contract to contract but may include estimates of the number of participants, the length of the contract and timing of our caseloadthe participants reaching employment milestones;milestones. We are required to estimate these outcome fees ahead of their realization and recognize this estimated fee over the period of delivery.
•Our transaction-basedOther performance-based contracts with future outcomes include those where we provide a significantrecognize an average effective rate per participant based upon the total volume of expected participants. In this instance, we are required to estimate the amount of discount applied to our customer in future periods, where we must calculate andetermine the average rate of revenue per transaction based upon our estimates of the total revenue and anticipated volume of work from the contract; and
•Our cost-plus contracts, which require us to prepare an estimate of our indirect costs which are allocated to our contracts.participant.
Where we have changes to our estimates, these are recognized on a cumulative catch-up basis. In fiscal yearthe three months ended December 31, 2019 ourand 2018, we reported reductions in revenue included a reduction of $8.0$1.4 million and $1.5 million from changes in estimates.estimates, respectively.
Deferred contract costs
For many contracts, we incur significant incremental costs at the beginning of an arrangement. Typically, these costs relate to the establishment of infrastructure which we utilize to satisfy our performance obligations with the contract. We report these costs as deferred contract costs and amortize them on a straight-line basis over the shorter of the useful economic life of the asset or the anticipated term of the contract.
Since September 30,In the three months ended December 31, 2019 and 2018, we have deferred $8.2$1.3 million and $3.1 million of costs. During the threecosts, respectively, and six months ended March 31, 2019, we amortized $1.5recorded amortization expense of $2.2 million and $2.8$1.3 million, of deferred contract costs.respectively. This amortization was recorded within our "cost of revenue" on our consolidated statementstatements of operations.
Remaining performance obligations
At MarchDecember 31, 2019, we had approximately $409$300 million of remaining performance obligations. We anticipate that we will recognize revenue on approximately 50%60% of this balance within the next twelve months. This balance excludes contracts with an original duration of twelve months or less, including contracts with a penalty-free termination for convenience clause, and any variable consideration which is allocated entirely to future performance obligations including variable transaction fees or fees tied directly to costs incurred.
4.
5. Earnings Per Share
The weighted average number of shares outstanding used to compute earnings per share was as follows:
| | | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | | | Three Months Ended December 31, | |
(shares in thousands) | (shares in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (shares in thousands) | | | 2019 | | 2018 |
Basic weighted average shares outstanding | Basic weighted average shares outstanding | | 64,369 | | 65,856 | | 64,600 | | 65,857 | Basic weighted average shares outstanding | | | 64,597 | | | 64,827 | |
Dilutive effect of unvested RSUs | Dilutive effect of unvested RSUs | | 274 | | 412 | | 217 | | 366 | Dilutive effect of unvested RSUs | | | 161 | | | 150 | |
Denominator for diluted earnings per share | Denominator for diluted earnings per share | | 64,643 | | 66,268 | | 64,817 | | 66,223 | Denominator for diluted earnings per share | | | 64,758 | | | 64,977 | |
Our dilutive earnings per share for the three months ended December 31, 2019 and 2018, excludes any effect from approximately 274,000 and 282,000 unvested restricted stock units, respectively, as adding them to our calculation would have been antidilutive.
6. Acquisitions
5. Acquisition of Citizen Engagement Centers Business
On November 16, 2018, we acquired General Dynamics Information Technology's citizen engagement centers business pursuant to an asset purchase agreement dated October 5, 2018. The assets acquired included existing contracts, contractual relationships and bids for contracts submitted prior to the acquisition date, as well as interests in leased properties, fixed assets, working capital and intangible assets.$430.7 million. This acquisition strengthens our position in the administration of federal government programs. Thisprograms and the business has beenwas integrated into our U.S. Federal Services Segment. The contract provides for a purchase price of $400.0 million adjusted for the net working capital in excess of or less than an agreed upon target representing an estimate of normalized net working capital. The estimated working capital balance at November 16, 2018, was higher than this estimate and, accordingly, we incurred an estimated purchase price of $430.6 million. We anticipate finalizing the purchase price during the third quarter of fiscal year 2019. To fund the acquisition, we utilized $150 million of borrowings fromcompleted our credit facility with the balance from our cash on our balance sheet.
As part of the acquisition, we incurred acquisition-related expenses, including legal, accounting and other consultant services. During the fiscal year ended September 30, 2018, we incurred $0.5 million of such costs; during the six months ended March 31, 2019, we incurred an additional $2.7 million. We also incurred additional investing cash outflows of $4.5 million from the acquisition of software licenses needed for newly-acquired employees.
We considered this transaction to be an acquisition of a business. At this time, we are in the process of finalizing our valuation of the acquired assets and assumed liabilities, including our analysis of the value of the intangible assets acquired and the tax effects of the acquisition. In addition, we continue to look for potential assets or liabilities which existed at the acquisition date. Our current estimate of the allocation of the purchase price updated from December 31, 2018, is shown below.to the assets acquired and liabilities assumed in September 2019, including goodwill of $184.6 million and intangible assets of $122.3 million.
| | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Estimated purchase price allocation at December 31, 2018 | | Adjustments | | Estimated purchase price allocation at March 31, 2019 | | |
Estimated cash consideration | | $ | 429,335 | | $ | 1,238 | | $ | 430,573 | | |
| | | | | | | | |
Billed and unbilled receivables | | $ | 145,319 | | $ | (3,450) | | $ | 141,869 | | |
Property and equipment | | 6,454 | | — | | 6,454 | | |
Other assets | | 681 | | 3,412 | | 4,093 | | |
Intangible assets | | 122,300 | | — | | 122,300 | | |
Total identifiable assets acquired | | 274,754 | | (38) | | 274,716 | | |
Accounts payable and other liabilities | | 33,296 | | (1,091) | | 32,205 | | |
Net identifiable assets acquired | | 241,458 | | 1,053 | | 242,511 | | |
Goodwill | | 187,877 | | 185 | | 188,062 | | |
Net assets acquired | | $ | 429,335 | | $ | 1,238 | | $ | 430,573 | | |
| | | | | | | | |
The fair valueOn August 16, 2019, we acquired 100% of the goodwill isshare capital of GT Hiring Solutions (2005) Inc. ("GT Hiring") for a purchase price estimated to be $188.1 million. This goodwill represents the value of the assembled workforce and the enhanced knowledge, capabilities and qualifications held by the business. This goodwill balance$6.1 million (8.1 million Canadian Dollars). The purchase price is expected to be deductible for tax purposes.
The fair value of the intangible assets acquired is estimated to be $122.3 million, representing customer relationships. We have assumed a useful economic life of ten years for most contracts, representing our expectation of the period over which we will receive the benefit. Typically, our customer relationships are based upon the provision of services to our customers on a daily or monthly basis and, although contracts are frequently rebid, we believe that an incumbent provider typically enjoys significant competitive advantages. In reviewing the contract portfolio, we allocated a shorter lifesubject to a contract which pertainsnet working capital true-up. GT Hiring provides employment services in British Columbia. We acquired GT Hiring to enhance the United States decennial census. This contract requires managing a significant ramp-upreach and ramp-downcapabilities of work overour Canadian employment services and, accordingly, the census cycle. As much of the benefit from this contract is anticipated to occur within the next two years, we have utilized a shorter asset life for this customer relationship. The average weighted intangible asset life is 7.6 years and amortization will be recorded on a straight-line basis.
| | | | | | | | | | | | | | |
(dollars in thousands) | | Useful life | | Fair value |
Customer relationships - all contracts except U.S. Census | | 10 years | | $ | 85,300 |
Customer relationships - U.S. Census | | 2 years | | 37,000 |
Total intangible assets | | | | $ | 122,300 |
The contribution of the acquired business for the three and six months ended March 31, 2019, is shown below.
| | | | | | | | | | | | | | | | | | |
| | | | | | Acquisition Contribution for | | |
(dollars in thousands) | | | | | | Three Months Ended March 31, 2019 | | Six Months Ended March 31, 2019 |
Revenue | | | | | | $ | 176,003 | | $ | 277,266 |
Gross profit | | | | | | 32,672 | | 51,620 |
The following table presents certain results for the three and six months ended March 31, 2019 and 2018, as though the acquisition had occurred on October 1, 2017. This pro forma information is presented for information only and is not necessarily indicative of the results if the acquisition had taken place on that date. The pro forma results below eliminate intercompany transactions, include amortization charges for acquired intangible assets, eliminate pre-acquisition transaction costs and include estimates of interest expense, as well as corresponding changes in our tax charge.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pro forma results for the three months ended March 31, | | | | Pro forma results for the six months ended March 31, | | |
(dollars in thousands, except per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 |
Revenue | | $ | 736,520 | | $ | 770,590 | | $ | 1,499,568 | | $ | 1,592,723 |
Net income | | 61,766 | | 56,803 | | 120,962 | | 119,991 |
Basic earnings per share attributable to MAXIMUS | | 0.96 | | 0.87 | | 1.88 | | 1.81 |
Diluted earnings per share attributed to MAXIMUS | | 0.96 | | 0.86 | | 1.87 | | 1.80 |
Changes in goodwill for the six months ended March 31, 2019, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | U.S. Health & Human Services | | U.S. Federal Services | | Outside the United States | | Total |
Balance as of September 30, 2018 | | $ | 139,588 | | $ | 228,148 | | $ | 32,146 | | $ | 399,882 |
Estimated effect of the acquisition of citizen engagement centers business | | 20,071 | | 165,498 | | 2,493 | | 188,062 |
Foreign currency translation | | — | | — | | (193) | | (193) |
Balance as of March 31, 2019 | | $ | 159,659 | | $ | 393,646 | | $ | 34,446 | | $ | 587,751 |
Although the citizen engagement center business has been integrated into our Outside the U.S. Federal Services Segment,Segment. We are still in the process of finalizing the purchase price and the allocation of assets acquired and liabilities assumed. We recorded estimated goodwill and intangible assets balances of $1.7 million and $2.7 million, respectively, related to this acquisition. The goodwill represents the assembled workforce and enhanced knowledge, experience and reputation we have obtained from the acquisition provides benefits across all three segments.and will be deductible for tax purposes. The most significant contracts acquired are cost-plus arrangements, which allow us to recover a greater share of our shared corporate overhead. Accordingly, we have allocated the goodwill based on an estimate of the relative fair value of the benefit to each segment.
With the reorganization of the business on October 1, 2018, we reallocated our goodwill to our new reporting segments. This reallocation was based upon the relative fair values of the operating segments on the date of the reorganization.
There have been no impairment charges to our goodwill.
The following table sets forth the components of intangible assets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2019 | | | | | | As of September 30, 2018 | | | | |
(dollars in thousands) | | Cost | | Accumulated Amortization | | Intangible Assets, net | | Cost | | Accumulated Amortization | | Intangible Assets, net |
Customer contracts and relationships | | $ | 248,770 | | $ | 54,838 | | $ | 193,932 | | $ | 129,113 | | $ | 42,683 | | $ | 86,430 |
Technology based intangible assets | | 5,648 | | 4,267 | | 1,381 | | 5,750 | | 4,212 | | 1,538 |
Trademarks and trade names | | 4,480 | | 4,439 | | 41 | | 4,496 | | 4,429 | | 67 |
Total | | $ | 258,898 | | $ | 63,544 | | $ | 195,354 | | $ | 139,359 | | $ | 51,324 | | $ | 88,035 |
As of March 31, 2019, our intangible assets have a weighted average remaining life of 9.2 years, comprising 9.2 years forrepresent customer contracts and relationships, 4.6 years for technology-based intangible assets, and 0.8 years for trademarks and trade names. The estimated future amortization expense for the remainder of the current fiscal year and the next five fiscal years for the intangible assets held by the Company as of March 31, 2019, is as follows (in thousands):
| | | | | |
Six months ended September 30, 2019 | $ | 18,044 |
2020 | 35,307 |
2021 | 18,258 |
2022 | 15,884 |
2023 | 15,785 |
2024 | 15,662 |
6. Income Tax
Our effective income tax rate for the three and six months ended March 31, 2019 was 23.4% and 24.8%, respectively,and 24.1%and 24.5% for the comparable prior year periods, respectively.
Our results for the three and six months ended March 31, 2018, included the estimated effects of the Tax Cuts and Jobs Act (the Act), which was signed on December 22, 2017, and was effective from January 1, 2018. We recorded a one-time "toll tax" on our undistributed and previously untaxed earnings in foreign locations of approximately $9.5 million and a one-time benefit from the reduction of our deferred tax liabilities of $10.6 million. We have completed our analysis of these items and have not recorded any adjustments in this period.
During the six months ended March 31, 2019 and 2018, we made income tax payments of $37.2 million and $28.5 million, respectively.will be amortized over seven years.
7. Supplemental Disclosures
Under a resolution adopted in June 2018, the Board of Directors authorized the purchase, at management's discretion, of up to an aggregate of $200 million of our common stock. During the sixthree months ended MarchDecember 31, 2019, we purchased 0.7 million26,000 of our common shares at a cost of $45.4$1.9 million. During the sixthree months ended MarchDecember 31, 2018, we acquired approximately 17,000654,000 common shares at a cost of $1.0$41.3 million. At MarchDecember 31, 2019, $147.4$144.1 million remained available for future stock purchases. Subsequent to December 31, 2019, we have purchased a further 30,000 shares at a cost of $2.2 million.
During the sixthree months ended MarchDecember 31, 2019, we granted 346,000 RSUs287,000 restricted stock units to our board of directors and employees. These awards will vest ratably over one and five years, respectively.
Our deferred compensation plan uses both mutual fund and life insurance investments to fund its obligations. The mutual funds are recorded at fair value, based upon quoted prices in active markets, and the life insurance investments at cash surrender value; changes in value are reported in the Consolidated Statementour consolidated statements of Operations.operations. At MarchDecember 31, 2019, the deferred compensation plan held $20.0$22.1 million of the mutual fund investments.
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 are shown at values equivalent to fair value due to the short-term nature of these items. Our accounts receivable billed and billable
balance includes both amounts invoiced and amounts that are ready to be invoiced where the funds are collectible within standard invoice terms. Our accounts receivable unbilled balance includes balances where revenue has been
earned but no invoice was issued on or before MarchDecember 31, 2019. 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. Restricted cash is included within "prepaid expenses and other assets" on our balance sheet and is included within "cash, cash equivalents and restricted cash" in our consolidated statements of cash flows. A reconciliation of these balances is shown below.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance as of | | | | | | |
(dollars in thousands) | | December 31, 2019 | | September 30, 2019 | | December 31, 2018 | | September 30, 2018 |
Cash and cash equivalents | | $ | 149,515 | | | $ | 105,565 | | | $ | 54,736 | | | $ | 349,245 | |
Restricted cash (recorded within "other current assets") | | 11,434 | | | 10,927 | | | 7,358 | | | 7,314 | |
Cash, cash equivalents and restricted cash | | 160,949 | | | 116,492 | | | 62,094 | | | 356,559 | |
As noted above, we utilized our credit facility in November 2018 to fund part of the citizen engagement centers acquisition.
During the sixthree months ended MarchDecember 31, 2019 and 2018, we made interest payments of $1.8$0.2 million and less than $0.1$0.2 million, respectively. At March
During the three months ended December 31, 2019 and 2018, we had borrowingsmade income tax payments of $6.3 million and $7.1 million, respectively.
$75.0 million outstanding on the facility.
8. Litigation
In August 2017,We are subject to audits, investigations and reviews relating to compliance with the Companylaws and certain officers were namedregulations that govern our role as defendantsa contractor to agencies and departments of the United States 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 debarment. Adverse findings could also have a putative class action lawsuit filedmaterial 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 U.S. District Court fornormal 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 Eastern Districtadvice of Virginia. The plaintiff allegedlegal counsel, we do not believe that the defendants madeoutcome of any existing matter would likely have a varietymaterial adverse effect on our consolidated financial position, results of materially false and misleading statements,operations 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, our 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 thecash flows.
Medicaid claims asserted, and we are unable to estimate the potential loss or range of loss.
A state Medicaid agency has been notified of two proposed disallowances by the Centers for Medicare and Medicaid Services (CMS) totaling approximately $31.0$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 reserved our estimated fees earned from this engagement relating to the disallowances.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.
8. Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires that assets and liabilities arising under leases be recognized on the balance sheet. The standard also requires additional quantitative and qualitative disclosures that provide the amount, timing and uncertainty of cash flows relating to lease arrangements. This standard is effective for us on October 1, 2019. We will adopt this standard using a modified retrospective approach. This approach also provides practical expedients related to leases that commenced prior to the effective date and allows the use of hindsight when evaluating lease options. We expect that upon adoption we will recognize a material right-of-use asset and lease liability on our balance sheet. We do not expect the standard to have a material impact on our cash flows or results of operations.
9. Subsequent Events
On April 5, 2019,January 3, 2020, our Board of Directors declared a quarterly cash dividend of $0.25$0.28 for each share of our common stock outstanding. The dividend is payable on May 31, 2019,February 28, 2020, to shareholders of record on May 15, 2019. February 14, 2020. Based upon the number of shares outstanding, we anticipate a cash payment of approximately $16$18 million.
Item 2. 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 related Notes included both herein and in our Annual Report on Form 10-K for the year ended September 30, 2018,2019, which was filed with the Securities and Exchange Commission on November 20, 2018.26, 2019.
Business Overview
We are a leading operator of government health and human services programs worldwide. We act asare a responsible and reliable contracting partner to governments under our mission of Helping Government Serve the People®. Governments rely on our financial stability and proven expertise in helping people connect and use critical government programs. 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 offeringsprimary portfolio of work is tied 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 over the last decade was driven by new work, such as that from the expansion of our health services business around the globe, new welfare-to-work contracts outsideAffordable Care Act (ACA) in the United States and the growth of our business with the United States Federal Government. This growth has been both organica growing footprint in clinical services including assessments, appeals and through acquisitions.
Most of our business depends upon government demand for our support services, their propensity to outsource and their procurement processes. These may be affected, both positively and detrimentally, by changesindependent medical reviews in presidential administration, the balance of power within a coalition government or legislative body, by the relative priorities of a government and the processes followed by a government in tendering, procuring and awarding contracts. Our short-term growth expectations were impacted by changes in the industry that we believe were tied to changes in the political environmentmultiple geographies, as well as acquisitions in the United States and
United Kingdom.
In 2018, the Company articulated a long-term growth strategy with three key tenets including a digital transformation embedded in its service offerings, an aim to increase its growing clinical services and a desire to seek strategic acquisitions as a means to set the platform for organic growth.
We believe that started in 2017. We continue to experience longer procurement cycles, increased delays and 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 coupledwill provide our industry with further opportunities for growth and that our strong reputation within this industry, based upon our market leadership, strong financial position within our industry,and experience, will continueallow us to foster futurebenefit from this 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 good revenue visibility. Our contracts are typically multi-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 approximately 90% of our anticipated revenue 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 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.
•Our contract portfolio offers us good revenue visibility. Our contracts are typically multi-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 approximately 90% of our anticipated revenue for the next twelve months.
•We have a total company 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 acquisitions to further supplement our core capabilities and seek new adjacent platforms.We believe that
To supplement our financial strength offers government clients reliability and dependability thatcore business, we can deliver on program objectives and achieve contractual targets.
•We have an active program to identify potential strategic acquisitions. Our acquisitions have successfully enabled us to increase future organic growth, as well as expand our business processes, knowledge and client relationships into adjacent markets and new geographies. During fiscal year 2019,In November 2018, we acquired athe citizen engagement centercenters business which had previously been ownedoperated by General Dynamics Information Technology. This acquisition, strengthenscoupled with our position2015 acquisition of Acentia, LLC, has provided increased scale, customer base and competitive advantages in our business with the administration of government programs.United States Federal Government. In August 2019, we acquired GT Hiring Solutions in Canada, which we have integrated into our Outside the U.S. Segment. This acquisition supplements our existing businesses in this segment.
Financial Overview
Since October 1, 2018, we operatedWe operate our business through three segments, U.S. Health and Human Services, U.S. Federal Services and Outside the U.S. The results for each of these segments for the three and six months ended MarchDecember 31, 2019, compared to the comparative periods in fiscal year 2019, were affected by different factors.
•Our U.S. Health & Human Services Segment reported a decline inorganic revenue growth of 6.1% and a stablegross profit. The revenue movement was the resultoperating profit margins of the rebid or extension on a number of large contracts. The profit margin received the benefit of $4 million of revenue from an expected contract change order including work performed in prior periods.18.6%.
•Our U.S. Federal Services Segment reported revenue growth driven byfrom the acquisition of the citizen engagement centers business which contributed $176.0 million and $277.3 million in revenue inorganic growth both from the threeacquired business and six months ended March 31, 2019, respectively.The organic declines in revenue and costs were due to the completioncore MAXIMUS business. Much of temporary work supporting disaster reliefs efforts, which had supplemented prior fiscal year results, as well as the anticipated ending of other contracts. The second quarter of fiscal year 2018growth was tempereddriven by a non-recurring expense to renegotiate a subcontract on a large business process outsourcing (BPS) program where we increased our scope of work. The second quarter of fiscal year 2019 received the benefit of favorable delivery on performance-based contracts. Census Questionnaire Assistance contract.
•Our Outside the U.S. Segment reported declines in revenue and profit due primarilycontinues to declines in our welfare-to-work business in Australia and the United Kingdom, including the Work Programme and Work Choice contracts in the United Kingdom that are ending. This segment also includes discretionary spending which is passed across to the customer with no added margin, resulting in diluted profit margins.
Other effects of the citizen engagement centers acquisition on our U.S. Federal Services Segment for the six months ended March 31, 2019 are listed below.
•In addition to a payment of $421.8 million to acquire the business, the increase in our workforce required significant additional investment in software licenses resulting in an increase of $4.5 million in property and equipment and a corresponding investing cash outflow. We have accrued a further $8.8 million to pay the estimated balance of the purchase price.
•We completed the transaction using existing cash balances and borrowed funds of $150 million. Although we have made steady progress in reducing our indebtedness, this resulted in an increase in interest expense and a decline in our interest income.
•Our cash flows from operations received the benefits of the increased business. At the acquisition date, the business was in a seasonally high period of the year and, accordingly, had higher than average receivables from customers. In addition, the payroll obligation was lower than that at quarter end.
•Although our administrative cost base has grown to cover the needs of supporting a larger organization, our existing cost base is being spread across a larger revenue base. As our general and administrative costs are allocated to our operating segments, the acquisition is providing a benefit to our profit margins in all of our segments. We estimate that the full fiscal year benefit to operating margin will be 1.25% in our U.S. Health and Human Services Segment and 0.5% in our Outside the U.S. Segment.
•We incurred acquisition-related expenses of $2.7 million. These costs represent the incremental costs incurred in completing the transaction, including legal and advisory costs, integration expenses, valuation services and other consultancy costs.
•We recorded amortization for intangible assets acquired of $10.1 million. We anticipate a full fiscal year expense of $23.6 million for fiscal year 2019.
At this time, we are still in the process of identifying and valuing the assets acquired and liabilities assumed in the purchase. This evaluation includes test work over the opening balance sheet and reviewing an appraisal of the
value of the intangible assets acquired with the business. To the extent that the value of the assets and liabilities vary from our current estimates, we may incur a different annual amortization charge and a different purchase price.
Our Outside the U.S. Segment was affectedchallenged by declines in the value of local currencies against the United States Dollar, resulting in reduced revenues and profits.
On October 1, 2018, we adopted the requirements of the Financial Accounting Standards Board's Accounting Standard Update 2014-09, Revenue from Contracts with Customers, which changed the manner in which we recognize revenue on contracts with our customers. The adoption of this new standard resulted in a catch-up of revenue and net income attributable to our shareholders of $47.2 million and $32.9 million, respectively, which was recorded in retained earnings in the first quarter. If we had applied our previous accounting policies in the current period, our revenue for the three and six months ended March 31, 2019 would have been lower by approximately $1.0 million and $1.8 million, respectively.market conditions.
Results of Operations
Consolidated
The following table sets forth, for the periods indicated, selected statements of operations data:
| | | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | | Three Months Ended December 31, | |
(dollars in thousands, except per share data) | (dollars in thousands, except per share data) | | 2019 | | 2018 | | 2019 | | 2018 | (dollars in thousands, except per share data) | | 2019 | | 2018 | |
Revenue | Revenue | | $ | 736,520 | | $ | 612,787 | | $ | 1,401,139 | | $ | 1,235,935 | Revenue | | $ | 818,229 | | | $ | 664,619 | | |
Cost of revenue | Cost of revenue | | 567,098 | | 463,984 | | 1,072,452 | | 935,172 | Cost of revenue | | 642,779 | | | 505,354 | | |
Gross profit | Gross profit | | 169,422 | | 148,803 | | 328,687 | | 300,763 | Gross profit | | 175,450 | | | 159,265 | | |
Gross profit percentage | Gross profit percentage | | 23.0 | % | | 24.3 | % | | 23.5 | % | | 24.3 | % | Gross profit percentage | | 21.4 | % | | 24.0 | % | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 78,102 | | 74,879 | | 157,773 | | 144,438 | Selling, general and administrative expenses | | 87,227 | | | 79,671 | | |
Selling, general and administrative expense as a percentage of revenue | Selling, general and administrative expense as a percentage of revenue | | 10.6 | % | | 12.2 | % | | 11.3 | % | | 11.7 | % | Selling, general and administrative expense as a percentage of revenue | | 10.7 | % | | 12.0 | % | |
Amortization of intangible assets | Amortization of intangible assets | | 9,519 | | 2,603 | | 14,977 | | 5,321 | Amortization of intangible assets | | 9,088 | | | 5,458 | | |
| Operating income | Operating income | | 81,801 | | 71,321 | | 155,937 | | 151,004 | Operating income | | 79,135 | | | 74,136 | | |
Operating margin | Operating margin | | 11.1 | % | | 11.6 | % | | 11.1 | % | | 12.2 | % | Operating margin | | 9.7 | % | | 11.2 | % | |
Interest expense | Interest expense | | 1,569 | | 157 | | 2,194 | | 325 | Interest expense | | 484 | | | 625 | | |
Other income, net | Other income, net | | 447 | | 1,392 | | 2,492 | | 1,679 | Other income, net | | 719 | | | 2,045 | | |
Income before income taxes | Income before income taxes | | 80,679 | | 72,556 | | 156,235 | | 152,358 | Income before income taxes | | 79,370 | | | 75,556 | | |
Provision for income taxes | Provision for income taxes | | 18,913 | | 17,450 | | 38,746 | | 37,300 | Provision for income taxes | | 20,636 | | | 19,833 | | |
Effective tax rate | | 23.4 | % | | 24.1 | % | | 24.8 | % | | 24.5 | % | |
Effective income tax rate | | Effective income tax rate | | 26.0 | % | | 26.2 | % | |
Net income | Net income | | 61,766 | | 55,106 | | 117,489 | | 115,058 | Net income | | 58,734 | | | 55,723 | | |
(Loss)/income attributable to noncontrolling interests | | (158) | | (386) | | (348) | | 475 | |
Loss attributable to noncontrolling interests | | Loss attributable to noncontrolling interests | | — | | | (190) | | |
Net income attributable to MAXIMUS | Net income attributable to MAXIMUS | | $ | 61,924 | | $ | 55,492 | | $ | 117,837 | | $ | 114,583 | Net income attributable to MAXIMUS | | $ | 58,734 | | | $ | 55,913 | | |
Basic earnings per share attributable to MAXIMUS | | $ | 0.96 | | $ | 0.84 | | $ | 1.82 | | $ | 1.74 | |
Diluted earnings per share attributable to MAXIMUS | | $ | 0.96 | | $ | 0.84 | | $ | 1.82 | | $ | 1.73 | |
Basic earnings per share | | Basic earnings per share | | $ | 0.91 | | | $ | 0.86 | | |
Diluted earnings per share | | Diluted earnings per share | | $ | 0.91 | | | $ | 0.86 | | |
As our business segments have different factors driving revenue fluctuations and profitability, the sections that follow cover these segments in greater detail.
Changes in revenue, cost of revenue and gross profit for the three months ended MarchDecember 31, 2019, are summarized below.
| | | | Revenue | | | Cost of Revenue | | | Gross Profit | | | Revenue | | | Cost of Revenue | | | Gross Profit | |
(dollars in thousands) | (dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change | (dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
Balance for respective period in fiscal year 2018 | | $ | 612,787 | | | | $ | 463,984 | | | | $ | 148,803 | | | |
Organic effect | | (40,381) | | (6.6) | % | | (29,959) | | (6.5) | % | | (10,422) | | (7.0) | % | |
Three months ended December 31, 2018 | | Three months ended December 31, 2018 | | $ | 664,619 | | | | | $ | 505,354 | | | | | $ | 159,265 | | | |
Estimated pre-acquisition results from citizen engagement centers business | | Estimated pre-acquisition results from citizen engagement centers business | | 98,429 | | | | | | 85,341 | | | | | | 13,088 | | | | |
Pro forma results for the three months ended December 31, 2018 | | Pro forma results for the three months ended December 31, 2018 | | 763,048 | | | | | | 590,695 | | | | | | 172,353 | | | | |
Growth from citizen engagement centers contracts | | Growth from citizen engagement centers contracts | | 38,105 | | | 5.0 | % | | 28,591 | | | 4.8 | % | | 9,514 | | | 5.5 | % |
Organic growth from other contracts | | Organic growth from other contracts | | 15,867 | | | 2.1 | % | | 22,553 | | | 3.8 | % | | (6,686) | | | (3.9) | % |
Acquired growth | Acquired growth | | 176,003 | | 28.7 | % | | 143,331 | | 30.9 | % | | 32,672 | | 22.0 | % | Acquired growth | | 2,973 | | | 0.4 | % | | 2,552 | | | 0.4 | % | | 421 | | | 0.2 | % |
Currency effect compared to the prior period | Currency effect compared to the prior period | | (11,889) | | (1.9) | % | | (10,258) | | (2.2) | % | | (1,631) | | (1.1) | % | Currency effect compared to the prior period | | (1,764) | | | (0.2) | % | | (1,612) | | | (0.3) | % | | (152) | | | (0.1) | % |
Balance for respective period in fiscal year 2019 | | $ | 736,520 | | 20.2 | % | | $ | 567,098 | | 22.2 | % | | $ | 169,422 | | 13.9 | % | |
Three months ended December 31, 2019 | | Three months ended December 31, 2019 | | $ | 818,229 | | | 7.2 | % | | $ | 642,779 | | | 8.8 | % | | $ | 175,450 | | | 1.8 | % |
Revenue and cost of revenue for the three months ended MarchDecember 31, 2019, increased compared to the same period in fiscal year 2018,2019, principally driven by the citizen engagement centers business acquisition. Thisacquisition in the U.S. Federal Services Segment.
We acquired the citizen engagement centers business on November 16, 2018. We estimate that revenue and cost of revenue for the period from October 1, 2018 to November 16, 2018 (the acquisition date) would have increased our results by $98.4 million and $85.3 million, respectively. We have utilized pro forma revenue, cost of revenue and gross profit in calculating the changes shown above.
Organic revenue growth in the United States was partially offset by organic revenue declines in all three segments and the detrimental effects of currency in our Outside the U.S. Segment. The factors driving these changes are covereddiscussed in more detail below.
Our cost of revenue includes direct costs related to labor, subcontractor labor, outside vendors, rent and other direct costs.
Our acquired growth represents the citizen engagement centers business, which was acquired on November 16, 2018. The two largest contracts included in the transaction are both cost-plus type contracts. Cost-plus contracts typically have lower financial risk but typically earn margins in the mid-single digits.
We operate in a number of locations where the functional currency is not the U.S. Dollar. During the three months ended March 31, 2019, the value of all of these currencies was lower than in the comparative period in fiscal year 2018. This had a negative impact on revenue and costs.
Changes in revenue, cost of revenue and gross profit for the six months ended March 31, 2019 are summarized below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenue | | | | Cost of Revenue | | | | Gross Profit | | |
(dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
Balance for respective period in fiscal year 2018 | | $ | 1,235,935 | | | | $ | 935,172 | | | | $ | 300,763 | | |
Organic effect | | (93,023) | | (7.5) | % | | (71,933) | | (7.7) | % | | (21,090) | | (7.0) | % |
Acquired growth | | 277,266 | | 22.4 | % | | 225,646 | | 24.1 | % | | 51,620 | | 17.2 | % |
Currency effect compared to the prior period | | (19,039) | | (1.5) | % | | (16,433) | | (1.8) | % | | (2,606) | | (0.9) | % |
Balance for respective period in fiscal year 2019 | | $ | 1,401,139 | | 13.4 | % | | $ | 1,072,452 | | 14.7 | % | | $ | 328,687 | | 9.3 | % |
The factors impacting revenue and cost of revenue for the six months ended March 31, 2019 are similar to those affecting the three month period.
Selling, general and administrative expense (SG&A) consists of indirect costs related to general management, marketing and administration. It is primarily composed of labor costs. These costs may be incurred at a segment level, for dedicated resources that are not client-facing, or at a corporate level. Corporate costs are allocated to segments on a consistent and rational basis. Fluctuations in our SG&A are primarily driven by changes in our administrative cost base, which is not directly driven by changes in our revenue. As part of our work for the United States Federal Government and many states, we allocate these costs using a methodology driven by the Federal Cost Accounting Standards. Our SG&A expense has increased year-over-year due primarily to the acquisition of the citizen engagement centers business, which has added an additional level of infrastructure as well asinfrastructure. The first three months of fiscal year 2019 included approximately $2.7$2.7 million of one-time expenses directly related to the transaction. In the first quarter
Amortization of the current fiscal year, we introduced an early
retirement program for employees that met certain criteria. Asintangible assets received a result, severance payments in the six months ended March 31, 2019 were unusually high and raised SG&A by approximately $4 million. This program should deliver increased efficiency in future periods.
Our results for the six months ended March 31, 2019 include $10.1 millionfull charge from our acquisition of amortization from assets acquired with the citizen engagement centers business.business during the three month period ended December 31, 2019. Additional charges from the acquisition of GT Hiring Solutions also increased our amortization expense.
Our interest expense is primarily driven by borrowings from our credit facility. During the three months ended December 31, 2017,In November 2018, we incurred expenses from short-term borrowingsborrowed $150.0 million to cover working capital obligations, as well as the costs of maintaining the facility. No borrowings were incurred during fiscal year 2019 until November 16, 2018, when $150 million was drawn forpartially fund the acquisition of the citizen engagement centers business.business; this borrowing was repaid in full during fiscal year 2019.
Our effective tax rate for the sixthree months ended MarchDecember 31, 2019, was 24.8%26.0%, compared to 24.5%26.2% in the same period in fiscal year 2018. Our results in fiscal year 2019 benefited from the effects of the Tax Cuts and Jobs Act (the Act), which reduced the U.S. federal income tax rate to 21%. We recognized the effects of the Act during fiscal year 2018, specifically the re-measurement of our deferred tax assets and liabilities as well as impact of the one-time "toll tax" on the undistributed, non-previously taxed foreign earnings of our subsidiaries, resulting in a net benefit of approximately $1.1 million. We have completed our analysis of these items and have not recorded any adjustments in this period.
Our effective income tax rate for fiscal year 2019 is projected to be in the range of 25% to 25.5%.
During our second and fourth fiscal quarters, we receive the tax benefit from the vesting of restricted stock units (RSUs). The benefit is dependent upon the number of RSUs which vest as well as our share price on the vesting date. During the three months ended March 31, 2019 and 2018, we received tax benefits of $1.7 million from the issuance of restricted stock unit awards which had been previously deferred by members of our Board of Directors.
U.S. Health & Human Services Segment
Our U.S. Health and Human Services Segment provides a variety of business process services such as program administration, appeals and assessments workservices, and related consulting work for U.S. state and local government programs. These services support a variety of programs including the Affordable Care Act (ACA), Medicaid and the Children’s Health Insurance Program the Affordable Care Act(CHIP). We also serve as administrators in state-based welfare-to-work and Temporary Assistance for Needy Families.child support programs.
| | | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | | Three Months Ended December 31, | |
(dollars in thousands) | (dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (dollars in thousands) | | 2019 | | 2018 | |
Revenue | Revenue | | $ | 290,737 | | $ | 306,249 | | $ | 584,950 | | $ | 610,490 | Revenue | | $ | 312,281 | | | $ | 294,213 | | |
Cost of revenue | Cost of revenue | | 204,477 | | 219,663 | | 410,659 | | 439,673 | Cost of revenue | | 222,691 | | | 206,182 | | |
Gross profit | Gross profit | | 86,260 | | 86,586 | | 174,291 | | 170,817 | Gross profit | | 89,590 | | | 88,031 | | |
Operating income | Operating income | | 56,860 | | 49,970 | | 112,752 | | 99,396 | Operating income | | 58,192 | | | 55,892 | | |
Gross profit percentage | Gross profit percentage | | 29.7 | % | | 28.3 | % | | 29.8 | % | | 28.0 | % | Gross profit percentage | | 28.7 | % | | 29.9 | % | |
Operating margin percentage | Operating margin percentage | | 19.6 | % | | 16.3 | % | | 19.3 | % | | 16.3 | % | Operating margin percentage | | 18.6 | % | | 19.0 | % | |
Our revenue and cost of revenue for the three month period ended MarchDecember 31, 2019, decreased 5.1%increased 6.1% and 6.9%8.0%, respectively, compared to the same period in fiscal year 2018. Our revenue 2019. All growth was organic. Revenue growth was driven by new contracts and costthe expansion of revenue for the six month period ended March 31, 2019, decreased by 4.2% and 6.6%, respectively, compared to the same period in fiscal year 2018. All movements were organic.
During fiscal years 2019 and 2018, we rebid or extended a number of large contracts with our customers, resulting in reduced contract revenue and profit. It is not unusual that during a bid or sole-source extension of a contract, we negotiate a revenue reduction in order to retain the business. This may be short term in nature and, over the life of the contract, we can improve revenue and profit through scope increases and operating efficiencies.
existing contracts. Our gross profit includes a benefitmargin was tempered slightly by the delayed rollout of $4.0 million from a single contract amendment signedMedicaid managed care in the second quarter of fiscal year 2019 but for which costs had been incurred in earlier periods.North Carolina. Our operating profit margins also received themargin remained steady, helped, in part, by a full quarter of benefit of the cost synergies from the acquisition of the citizen engagement centers business.business in the U.S. Federal Segment, which absorbs general and administrative expenses and reduces allocated costs to this segment.
We continue to anticipate operating marginprofit margins for this segment in the segment will be between 17% and 19% for 17%-18% range during fiscal
year 2019. 2020.
U.S. Federal Services Segment
Our U.S. Federal Services Segment provides business process solutions, including program administration, appeals and assessment services as well as system and software development and maintenance services for various U.S. federal civilian programs. This segment also contains certain state-based assessments and appeals work that is part of the segment's heritage within the Medicare Appeals portfolio and continues to be managed within this segment.
| | | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | | Three Months Ended December 31, | |
(dollars in thousands) | (dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (dollars in thousands) | | 2019 | | 2018 | |
Revenue | Revenue | | $ | 289,736 | | $ | 116,327 | | $ | 506,723 | | $ | 249,310 | Revenue | | $ | 366,571 | | | $ | 216,987 | | |
Cost of revenue | Cost of revenue | | 229,040 | | 88,953 | | 398,042 | | 188,578 | Cost of revenue | | 295,750 | | | 169,002 | | |
Gross profit | Gross profit | | 60,696 | | 27,374 | | 108,681 | | 60,732 | Gross profit | | 70,821 | | | 47,985 | | |
Operating income | Operating income | | 29,592 | | 9,834 | | 50,945 | | 26,544 | Operating income | | 31,582 | | | 21,353 | | |
Gross profit percentage | Gross profit percentage | | 20.9 | % | | 23.5 | % | | 21.4 | % | | 24.4 | % | Gross profit percentage | | 19.3 | % | | 22.1 | % | |
Operating margin percentage | Operating margin percentage | | 10.2 | % | | 8.5 | % | | 10.1 | % | | 10.6 | % | Operating margin percentage | | 8.6 | % | | 9.8 | % | |
Changes in revenue, cost of revenue and gross profit for the three months ended MarchDecember 31, 2019, are summarized below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenue | | | | Cost of Revenue | | | | Gross Profit | | |
(dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
Balance for respective period in fiscal year 2018 | | $ | 116,327 | | | | $ | 88,953 | | | | $ | 27,374 | | |
Organic effect | | (2,594) | | (2.2) | % | | (3,244) | | (3.6) | % | | 650 | | 2.4 | % |
Acquired growth | | 176,003 | | 151.3 | % | | 143,331 | | 161.1 | % | | 32,672 | | 119.4 | % |
Balance for respective period in fiscal year 2019 | | $ | 289,736 | | 149.1 | % | | $ | 229,040 | | 157.5 | % | | $ | 60,696 | | 121.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenue | | | | Cost of Revenue | | | | Gross Profit | | |
(dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
Three months ended December 31, 2018 (1) | | $ | 216,987 | | | | | $ | 169,002 | | | | | $ | 47,985 | | | |
Estimated pre-acquisition results from citizen engagement centers business (2) | | 98,429 | | | | | | 85,341 | | | | | | 13,088 | | | | |
Pro forma results for the three months ended December 31, 2018 | | 315,416 | | | | | | 254,343 | | | | | | 61,073 | | | | |
Growth from citizen engagement centers contracts (3) | | 38,105 | | | 12.1 | % | | 28,591 | | | 11.2 | % | | 9,514 | | | 15.6 | % |
Organic growth from other contracts (4) | | 13,050 | | | 4.1 | % | | 12,816 | | | 5.0 | % | | 234 | | | 0.4 | % |
| | | | | | | | | | | | |
Three months ended December 31, 2019 | | $ | 366,571 | | | 16.2 | % | | $ | 295,750 | | | 16.3 | % | | $ | 70,821 | | | 16.0 | % |
To show the changes between fiscal year 2019 and 2020, we have utilized the following information.
Changes in revenue, cost of revenue and gross profit1.These balances represent our results for the sixthree months ended MarchDecember 31, 2019 are summarized below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenue | | | | Cost of Revenue | | | | Gross Profit | | |
(dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
Balance for respective period in fiscal year 2018 | | $ | 249,310 | | | | $ | 188,578 | | | | $ | 60,732 | | |
Organic effect | | (19,853) | | (8.0) | % | | (16,182) | | (8.6) | % | | (3,671) | | (6.0) | % |
Acquired growth | | 277,266 | | 111.2 | % | | 225,646 | | 119.7 | % | | 51,620 | | 85.0 | % |
Balance for respective period in fiscal year 2019 | | $ | 506,723 | | 103.3 | % | | $ | 398,042 | | 111.1 | % | | $ | 108,681 | | 79.0 | % |
Growth was driven by2018. These results include approximately six weeks of benefit from the citizen engagement centers business, which was acquired on November 16, 2018. The two largest2018 (the acquisition date).
2. acquired contracts which are cost-plus arrangements and, accordingly,These balances represent an estimate of the profit margin is lower than the existing business which includes fixed fee and transaction-based work. We anticipate that operating margin will be approximately 10%results for the full fiscal year.citizen engagement centers business for the pre-acquisition period – the period from October 1, 2018 through to the acquisition date. This balance, combined with our prior year results, provides pro forma results – an estimate of the results of this segment if we had acquired the citizen engagement centers business on or before October 1, 2018.
3. ForThese balances represent the secondgrowth, on a pro forma basis, of the contracts acquired with the citizen engagement centers business from the first quarter of fiscal years 2019 to the first quarter of fiscal year 2020. The principal driver of this growth was the Census Questionnaire Assistance (CQA) contract.
4.These balances represent the growth reported between the first quarters of fiscal years 2019 and 2020 of existing contracts outside those acquired.
We continue to anticipate operating margin was strongprofit margins in the 9%-10% range for this segment for fiscal year 2020. As previously disclosed, the CQA contract had $185 million of revenue in fiscal year 2019. The contract contributed approximately $70 million of revenue in the first fiscal quarter of 2020. It is anticipated to provide approximately $360 million of revenue during the current fiscal year and less than $50 million in fiscal year 2021.
driven by favorable results on several performance based contracts and is higher compared to the same period in 2018 which was tempered by a non-recurring expense to renegotiate a subcontract on a large BPS contract where we increased our scope of work.
One of the contracts noted above covers the operation of the United States Decennial Census. We anticipate revenues from this contract of approximately $200 million and $350 million for fiscal years 2019 and 2020, respectively. Although the contract continues through June 2021, we do not anticipate a material amount of revenue in fiscal year 2021. These estimates are based upon our expectations of the contract at this time which may change through contract performance or changes to the contract.
Our organic business has declined since last fiscal year. This was caused by:
•The anticipated ending of certain contracts;
•The rebid of contracts acquired in 2015 under the small business rules which we were not eligible to rebid for; and
•The absence of some short-term disaster relief work which had improved our results in fiscal year 2018.
Our profit margins in fiscal year 2018 were tempered by a charge of $2.9 million related to costs incurred in renegotiating a subcontract.
The U.S. Federal Government shutdown in December 2018 and January 2019 did not have a significant effect on our business.
Outside the United States Segment
Our Outside the U.S. Segment provides business process solutions for governments and commercial clients outside the United States,U.S., including health and disability assessments, program administration and case management for welfare-to-workemployment services and other related services.work-support programs. We support programs and deliver services in the United Kingdom, including the Health Assessment Advisory Service (HAAS), the Work & Health Programme and Fair Start; Australia, including jobactive and the Disability Employment Service; Canada, including Health Insurance British Columbia and the Employment Program of British Columbia; Saudi Arabia and Singapore.
| | | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | | Three Months Ended December 31, | |
(dollars in thousands) | (dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (dollars in thousands) | | 2019 | | 2018 | |
Revenue | Revenue | | $ | 156,047 | | $ | 190,211 | | $ | 309,466 | | $ | 376,135 | Revenue | | $ | 139,377 | | | $ | 153,419 | | |
Cost of revenue | Cost of revenue | | 133,581 | | 155,368 | | 263,751 | | 306,921 | Cost of revenue | | 124,338 | | | 130,170 | | |
Gross profit | Gross profit | | 22,466 | | 34,843 | | 45,715 | | 69,214 | Gross profit | | 15,039 | | | 23,249 | | |
Operating income | | 4,474 | | 16,440 | | 8,915 | | 32,705 | |
Operating income/(loss) | | Operating income/(loss) | | (1,014) | | | 4,441 | | |
Gross profit percentage | Gross profit percentage | | 14.4 | % | | 18.3 | % | | 14.8 | % | | 18.4 | % | Gross profit percentage | | 10.8 | % | | 15.2 | % | |
Operating margin percentage | Operating margin percentage | | 2.9 | % | | 8.6 | % | | 2.9 | % | | 8.7 | % | Operating margin percentage | | (0.7) | % | | 2.9 | % | |
Changes in revenue, cost of revenue and gross profit for the three months ended MarchDecember 31, 2019, are summarized below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenue | | | | Cost of Revenue | | | | Gross Profit | | |
(dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
Balance for respective period in fiscal year 2018 | | $ | 190,211 | | | | $ | 155,368 | | | | $ | 34,843 | | |
Organic effect | | (22,275) | | (11.7) | % | | (11,529) | | (7.4) | % | | (10,746) | | (30.8) | % |
| | | | | | | | | | | | |
Currency effect compared to the prior period | | (11,889) | | (6.3) | % | | (10,258) | | (6.6) | % | | (1,631) | | (4.7) | % |
Balance for respective period in fiscal year 2019 | | $ | 156,047 | | (18.0) | % | | 133,581 | | (14.0) | % | | 22,466 | | (35.5) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenue | | | | Cost of Revenue | | | | Gross Profit | | |
(dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
Three months ended December 31, 2018 | | $ | 153,419 | | | | | $ | 130,170 | | | | | $ | 23,249 | | | |
Organic decline | | (15,251) | | | (9.9) | % | | (6,772) | | | (5.2) | % | | (8,479) | | | (36.5) | % |
Acquired growth | | 2,973 | | | 1.9 | % | | 2,552 | | | 2.0 | % | | 421 | | | 1.8 | % |
Currency effect compared to the prior period | | (1,764) | | | (1.1) | % | | (1,612) | | | (1.2) | % | | (152) | | | (0.7) | % |
Three months ended December 31, 2019 | | $ | 139,377 | | | (9.2) | % | | $ | 124,338 | | | (4.5) | % | | $ | 15,039 | | | (35.3) | % |
Changes in revenue, cost of revenue and gross profit for the six months ended March 31, 2019, are summarized below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenue | | | | Cost of Revenue | | | | Gross Profit | | |
(dollars in thousands) | | Dollars | | Percentage change | | Dollars | | Percentage change | | Dollars | | Percentage change |
Balance for respective period in fiscal year 2018 | | $ | 376,135 | | | | $ | 306,921 | | | | $ | 69,214 | | |
Organic effect | | (47,630) | | (12.7) | % | | (26,737) | | (8.7) | % | | (20,893) | | (30.2) | % |
| | | | | | | | | | | | |
Currency effect compared to the prior period | | (19,039) | | (5.1) | % | | (16,433) | | (5.4) | % | | (2,606) | | (3.8) | % |
Balance for respective period in fiscal year 2019 | | $ | 309,466 | | (17.7) | % | | $ | 263,751 | | (14.1) | % | | $ | 45,715 | | (34.0) | % |
Our revenue for the three month period ended MarchDecember 31, 2019, decreased by 18%9.2% compared to the same period in fiscal year 2018.2019. On a constant currency basis revenue decreased by 13%8.0%. Cost of revenue decreased by 14%4.5% compared to the same period in fiscal year 2018.2019.
In fiscal year 2019,We continue to be challenged across the Work Programme and Work Choice Programme contractssegment by low unemployment rates in the United Kingdom are ending. Asgeographies in which we operate. Low unemployment and strong economies result in a result, revenuesmaller unemployed population to serve and a population which is typically harder to place into employment. The bush fires in Australia negatively impacted the first fiscal quarter and we anticipate further disruption for the remainder of the fiscal year. The Australian government has put temporary measures in place that exempt participants from these contracts is expected to be lower in fiscal year 2019 by approximately $35 million compared to fiscal year 2018. These contracts have been replaced by new programs that were devolvedcertain activities until early March as the region recovers from the natural disaster. In addition, due to the local authorities. In fiscal year 2018, we began operationscoronavirus outbreak, the Australian Government has restricted travel between China and Australia. This may affect our ability to place jobseekers in Wales, East London and Scotland to provide health and employment services to vulnerable populations with disabilities and complex health conditions. As is often the case with new contracts, weindustries dependent upon travel, such as tourism. We have experienced challenges in the early months of this contract but have taken significant steps to address these with additional resourcesour revenue and investmentcost base, designed to augment our efforts and we expect these contracts,improve operating margins. The pace of improvement may be negatively impacted by the factors discussed above.
Our acquired growth is from the acquisition of GT Hiring Solutions in aggregate to break evenCanada in the fourth quarter of fiscal yearAugust 2019.
The second quarter of fiscal year 2018 included a one-time profit pick-up related to the termination of major elementscontinued strength of the Fit for Work contract. For fiscal year 2019,United States Dollar against the currencies in which we anticipate operating margin for do business outside the segmentwill be between 3% U.S. has resulted in year-over-year declines in our revenue and4%. costs.
Approximately half of our revenue within the Outside the U.S. Segment is generated through contracts within the United Kingdom, most of which are with government agencies. As such, we are closely monitoring developments asfollowing the departure of the United Kingdom Government negotiates a withdrawal from the European Union. We do not anticipate the withdrawal to have a material direct effect on our business in the United Kingdom due to Brexit due to the nature of our customer base and the absence of cross-border operations. However, regardless of the nature and timing of the withdrawal, the uncertainty over the process and the eventual outcome is affectinghas affected us indirectly. We anticipate we will continue to be subject to political risks, as legislative priorities may change, the economic risks from the pre- and post-withdrawal environment, and we may, along with other businesses, experience difficulty in recruiting and retaining employees.
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 purchases of our own common stock.stock and business combinations. 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 which allows us to borrow up to $400 million, subject to standard covenants. In November 2018, we utilized $150 million of borrowing to acquire the citizen engagement centers business, with the balance from existing cash balances. We continuehave since repaid this balance in full. Our international locations have access to borrowing facilities which they may use our facility to manage ourcover short-term working capital requirements butneeds or small acquisitions, such as our acquisition of GT Hiring Solutions in August 2019.
We believe that our cash flows from operations are typicallyto be sufficient to fundmeet our operations. At March 31, 2019, our borrowings under the facility were $75.0 million. During April 2019, we repaid these borrowings in full.
Our priorities for cash utilization are to actively pursue new growth opportunities, toopportunities. We also maintain our quarterly dividend program and, where opportunities arise, to make purchases 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-efficient manner, we will do so. With the passage of the Tax Cuts and Jobs Act in the United States, we are able to transfer a significant amount of funds from our foreign locations on a tax-free basis. We will continue to explore opportunities to makebring back additional funds, available for investment, taking into consideration the working capital requirements and relevant tax rules in each jurisdiction. WhereWhen 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. At MarchDecember 31, 2019, we held $43.4$39.2 million in cash or cash equivalents held in foreign locations in local currencies.
Cash Flows
The following table provides a summary of our cash flow information for the sixthree months ended MarchDecember 31, 2019 and 2018.
| | | | Six Months Ended March 31, | | | | Three Months Ended December 31, | |
(dollars in thousands) | (dollars in thousands) | | 2019 | | 2018 | (dollars in thousands) | | 2019 | | 2018 |
Net cash provided by/(used in): | Net cash provided by/(used in): | | | | | Net cash provided by/(used in): | | | | |
Operations | Operations | | $ | 127,211 | | $ | 116,760 | Operations | | $ | 87,267 | | | $ | 59,340 | |
Investing activities | Investing activities | | (420,070) | | (12,791) | Investing activities | | (10,462) | | | (411,739) | |
Financing activities | Financing activities | | (8,590) | | (17,631) | Financing activities | | (33,800) | | | 59,002 | |
Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | | (632) | | 1,070 | Effect of exchange rate changes on cash and cash equivalents | | 1,452 | | | (1,068) | |
Net (decrease)/increase in cash, cash equivalents and restricted cash | | $ | (302,081) | | $ | 87,408 | |
Net increase/(decrease) in cash, cash equivalents and restricted cash | | Net increase/(decrease) in cash, cash equivalents and restricted cash | | $ | 44,457 | | | $ | (294,465) | |
The factors influencinglargest single driver of our cash flowsflow growth has been from the operations are the effectof our acquisition of the acquired business,our annual management bonus payments and the timing of our tax payments.
•The citizen engagement centers business, which has increased both our revenuescash collections from customers and costs, resultingour cash payments to vendors.
Cash flows from operations improved through the growth of the business, improvements in additional netour cash inflows.collections and timing differences related to our payroll obligations.
•We payhave received operating cash flows from our annual management bonus duringacquisition of the first quarter of each fiscal year. The amount paid in fiscal year 2019 was lower than that paid in fiscal year 2018.citizen engagement centers business.
•Our tax payments in the current fiscal year were $37.2 million, compared to $28.5 million in fiscal year 2018.
Our Days Sales Outstanding (DSO) at MarchDecember 31, 2019, were 7771 days; the balance at September 30, 2018,2019, was 6372 days. Our DSO calculation now includes unbilled balances due toDuring the adoptionfirst quarter of ASC 606.Absent this effect,fiscal year 2019, our DSO would have beengrew by six days to 73 days. Our receivable balancesdays, reflecting a strong cash collection performance at March 31, 2019, include receivables from our Census contract, which is undergoing a quick ramp-up to prepare for activities, and, accordingly, will continue to experience growing receivable balances. Going forward, we believe the increase to DSO from the adoptionend of ASC 606 will be offset by more timely collections on the newly acquired U.S. Federal contracts. We use DSO to evaluate our performance in collecting our receivable balances, both billed and unbilled.fiscal year 2018. We have a target range for DSO of 65 to 80 days and in recent years, we have typically maintained the lower end of this range in recent years.range.
•Beginning in fiscal year 2019, our business in the United States operates on a bi-weekly payroll cycle and, accordingly, our pattern of payments to our employees and the tax authorities are not consistent between quarters. During the first fiscal quarter of 2020, our cash payments were lower than our expenses by approximately one week of payroll, benefiting our cash flow.
Cash used in investing activities for the sixthree months ended MarchDecember 31, 2019, was $420.1$10.5 million compared to $12.8$411.7 million in the same period last year. This includes ourOur fiscal year 2019 cash outflows include an initial payment of $421.8 million for the acquisition of the citizen engagement centers business; the purchase agreement is subject to a working capital true up. We anticipate an additional payment of approximately $8.8 million in our third fiscal quarter. Our capital expenditures also included $4.5 million in one-time payments to cover software licenses required for employees joining us from the citizen engagement centers acquisition.business.
Cash used in financing activities in the sixthree months ended MarchDecember 31, 2019, was $8.6$33.8 million, compared to $17.6$59.0 million of cash provided in the comparative period. For the acquisition of the citizen engagement centers business, we utilized $150 million from our credit facility; we had repaid half of this balance by March 31, 2019. In fiscalFiscal year 2019 we used $46.1included net cash borrowings of $125.1 million, tooffset by $41.0 million of purchases of our own common stock. Debt and stock purchase our common stock, compared with $1.0 milliontransactions were less significant in fiscal year 2018, and a further $32.0 million to pay our quarterly dividend. Our dividend payment represents a payment of $0.25 per share per quarter, compared with $0.045 per share in the prior year.2020.
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.
| | | | Six Months Ended March 31, | | | | Three Months Ended December 31, | |
(dollars in thousands) | (dollars in thousands) | | 2019 | | 2018 | (dollars in thousands) | | 2019 | | 2018 |
Cash flows from operations | Cash flows from operations | | $ | 127,211 | | $ | 116,760 | Cash flows from operations | | $ | 87,267 | | | $ | 59,340 | |
Purchases of property and equipment and capitalized software costs | Purchases of property and equipment and capitalized software costs | | (18,541) | | (13,175) | Purchases of property and equipment and capitalized software costs | | (10,487) | | | (9,973) | |
Capital expenditure as a result of acquisition (1) | Capital expenditure as a result of acquisition (1) | | 4,542 | | — | Capital expenditure as a result of acquisition (1) | | — | | | 4,542 | |
Free cash flow | | $ | 113,212 | | $ | 103,585 | |
Free cash flow - non-gaap | | Free cash flow - non-gaap | | $ | 76,780 | | | $ | 53,909 | |
(1) Purchases of property and equipment and capitalized software costs included $4.5 million in one time payments to cover software licenses required for employees joining us through the citizen engagement centers acquisition.acquisition in November 2018.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenue and expenses. On an ongoing basis we evaluate our estimates, including those related to revenue recognition and cost estimation on certain contracts, the realizability of goodwill and other long-lived assets, and amounts related to contingencies and income tax liabilities. 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.
During the sixthree months ended MarchDecember 31, 2019, we made changes to the manner in which we recognize revenue. This has resulted in a need for additional estimates.record leases. For additional information, please see "Note 3. Revenue recognition"Leases" in our "Notes to Unaudited Consolidated Financial Statements" in Item 1 of this Form 10-Q.
Non-GAAP Measures
We utilize non-GAAPnon-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 fiscal year 2018, 29%2019, 21% 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 fiscal year’s results for all foreign businesses using the exchange rates in the prior fiscal year. We refer to this adjusted revenue on a "constant currency basis."
In recent years, we have made a number of acquisitions. We believe users of our financial statements wish to evaluate the performance of our operations, excluding changes that have arisen due to businesses acquired. Where information is available, we will show pro forma revenue, cost of revenue and gross profit. Pro forma results represent an estimate of the results of the business as though we had owned the business for an entire comparative period, rather than just a portion of it. To provide pro forma financial information, we use the results of the acquired business as prepared by the former owners adjusted to reflect changes in accounting and eliminating transactions between ourselves and the company. Where this information has not been prepared, we will identify acquired revenue and cost of revenue by showing these results for periods for which no comparative results exist within our financial statements. We provide organicpro forma comparative results and acquired revenue growth as a useful basis for assessing this.way of allowing investors to see the growth in our business on a year-over-year basis. This information is supplemented by our calculations of organic revenue. To calculate organic revenue growth, we compare current fiscal year revenue excluding revenue from these acquisitions to our prior fiscal year revenue.
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 replacement capital expenditures and excludes the cash flow effects of acquisitions, purchases of our own common stock, 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.
As noted above, we have access to a $400 million 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. Our credit facility requires us to calculate Adjusted EBITDA on a pro forma basis as though we had owned any acquired business for a full twelve month period prior to the acquisition. We have provided a reconciliation from net income to Adjusted EBITA, Adjusted EBITDA and Pro Forma Adjusted EBITDA as follows:
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| | Six Months Ended March 31, | | | | Trailing Twelve Months Ended March 31, | | |
(dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Net income attributable to MAXIMUS | | $ | 117,837 | | $ | 114,583 | | $ | 224,005 | | $ | 224,830 |
Interest (income)/expense, net | | 79 | | (900) | | (1,612) | | (1,764) |
Provision of income taxes | | 38,746 | | 37,300 | | 79,839 | | 85,581 |
Amortization of intangible assets | | 14,977 | | 5,321 | | 19,964 | | 10,741 |
Stock compensation expense | | 9,904 | | 11,324 | | 18,818 | | 22,455 |
Acquisition-related expenses | | 2,850 | | — | | 3,797 | | 83 |
Gain on sale of a business | | — | | — | | — | | (650) |
Adjusted EBITA | | $ | 184,393 | | $ | 167,628 | | $ | 344,811 | | $ | 341,276 |
Depreciation and amortization of property, plant, equipment and capitalized software | | 22,407 | | 27,074 | | 47,217 | | 52,876 |
Adjusted EBITDA | | $ | 206,800 | | $ | 194,702 | | $ | 392,028 | | $ | 394,152 |
Additional adjusted EBITDA related to citizen engagement centers acquisition | | 6,695 | | | | 16,158 | | |
Pro Forma Adjusted EBITDA | | $ | 213,495 | | | | $ | 408,186 | | |
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| | Three Months Ended December 31, | | | | Trailing Twelve Months Ended December 31, | | |
(dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Net income attributable to MAXIMUS | | $ | 58,734 | | | $ | 55,913 | | | $ | 243,645 | | | $ | 217,573 | |
Interest (income)/expense, net | | (118) | | | (957) | | | 650 | | | (3,290) | |
Provision of income taxes | | 20,636 | | | 19,833 | | | 77,628 | | | 78,376 | |
Amortization of intangible assets | | 9,088 | | | 5,458 | | | 36,684 | | | 13,048 | |
Stock compensation expense | | 5,397 | | | 4,971 | | | 21,200 | | | 19,807 | |
Acquisition-related expenses | | — | | | 2,690 | | | 1 | | | 3,637 | |
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Adjusted EBITA - non-gaap | | $ | 93,737 | | | $ | 87,908 | | | $ | 379,808 | | | $ | 329,151 | |
Depreciation and amortization of property, plant, equipment and capitalized software | | 15,318 | | | 11,231 | | | 56,491 | | | 49,396 | |
Adjusted EBITDA - non-gaap | | $ | 109,055 | | | $ | 99,139 | | | $ | 436,299 | | | $ | 378,547 | |
Additional adjusted EBITDA related to citizen engagement centers acquisition | | | | | 6,695 | | | | | | 28,330 | |
Pro Forma Adjusted EBITDA - non-gaap | | | | | $ | 105,834 | | | | | | $ | 406,877 | |
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Our exposure to market risks generally relates to changes in foreign currency exchange rates.
At MarchDecember 31, 2019, and September 30, 2018,2019, we held net assets denominated in currencies other than the U.S. Dollar of $117.3$189.3 million and $100.3$176.3 million, respectively. Of these balances, cash and cash equivalents comprised $43.4$39.2 million and $46.4$18.9 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).
| | | March 31, 2019 | | September 30, 2018 | | December 31, 2019 | | September 30, 2019 |
Comprehensive income attributable to MAXIMUS | Comprehensive income attributable to MAXIMUS | $ | (11,730) | | $ | (10,030) | Comprehensive income attributable to MAXIMUS | $ | (18,930) | | | $ | (17,630) | |
Net decrease in cash and cash equivalents | Net decrease in cash and cash equivalents | (4,336) | | (4,640) | Net decrease in cash and cash equivalents | (3,920) | | | (1,890) | |
Included within our net assets held in international currency are assets which we consider to be monetary assets — those which hold a fair value close to their book value and which represent a recent cash outflow or which will become a cash inflow or outflow within a short period of time. These assets and liabilities are typically cash, billed, billable and unbilled accounts receivable, current prepaid expenses, accounts payable, accrued compensation, deferred revenue and debt. At MarchDecember 31, 2019, the net value of these assets and liabilities was $94.4 $78.9 million.
Where possible, we identify surplus funds in foreign locations and place them into entities with the U.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 revolving credit facility and other short term borrowings. At March 31, 2019, we had borrowings of $79.0 million. Our interest rate for the revolving credit facility is based upon the one-month London Interbank Offering Rate (LIBOR) or equivalent plus a premium based upon our leverage; this premium is currently 1%. The one-month LIBOR at MarchDecember 31, 2019, was approximately 2.5%1.8%. A hypothetical increaseWe had no borrowings under the facility at December 31, 2019. The majority of our outstanding debt at December 31, 2019, was comprised of short-term borrowings in foreign locations to cover short-term working capital needs. The terms and rates under which we borrow in these jurisdictions varies from location to location. As these borrowings are relatively small and for brief periods, we do not anticipate significant interest ratesrate exposure. In the event that longer-term borrowings were required or if the costs of borrowing became expensive, we would anticipate using our current cash balance to 3.5% would increase our annual interest expense and cash flows by approximately $0.8 million.cover these obligations.
Item 4. Controls and Procedures.
(a) 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 Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures were 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 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.
(b) Changes in Internal Control over Financial Reporting
With the exception of the matters noted below, 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 last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
From October 2018,2019, we have made changes to our accounting for revenueleases based upon changes in accounting principles. These changes have required updates and additions to our existing controls which have been implemented in the current fiscal year.
In November 2018, we acquired the citizen engagement centers business from General Dynamics Information Technology. We are in the process of integrating this business into our existing control environment.
PART II. OTHER INFORMATION
Item 1. 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 United States 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.debarment. 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 existing matter would likely have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Securities class action 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, our 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 reserved our estimated fees earned from this engagement relating to the disallowances.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 1A. Risk Factors.
In connection with information set forth in this Form 10-Q, the factors discussed under “Risk Factors” in our Form 10-K for fiscal year ended September 30, 2018,2019, should be considered. The risks included in the Form 10-K could materially and adversely affect our business, financial condition and results of operations. There have been no material changes to the factors discussed in our Annual Report on Form 10-K for the year ended September 30, 2018,2019, which was filed with the Securities and Exchange Commission on November 20, 2018.26, 2019.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
(c) The following table sets forth the information required regarding purchases of common stock that we made during the three months ended MarchDecember 31, 2019:2019.
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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) |
October 1, 2019 - October 31, 2019 | — | | | $ | — | | | — | | | $ | 146,043 | |
November 1, 2019 - November 30, 2019 | — | | | — | | | — | | | 146,043 | |
December 1, 2019 - December 31, 2019 | 26,000 | | | 72.96 | | | 26,000 | | | 144,146 | |
Total | 26,000 | | | | | 26,000 | | | |
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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) |
Jan. 1, 2019 - Jan. 31, 2019 | | 61,900 | | $ | 66.04 | | 61,900 | | $ | 147,420 |
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Feb. 1, 2019 - Feb. 28, 2019 | | — | | — | | — | | 147,420 |
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Mar. 1, 2019 - Mar. 31, 2019 | | — | | — | | — | | 147,420 |
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Total | | 61,900 | | $ | 66.04 | | 61,900 | | |
(1)
(1) Under a resolutionsresolution adopted in June 2018, the Board of Directors authorized the repurchase,purchase, at management’smanagement's discretion, of up to an aggregate of $200 million of our common stock. ThisThe resolution also authorized the use of option exercise proceeds for the purchase of our common stock.
Item 6. Exhibits.
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Exhibit No. | | Description | | | | |
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2.131.1 | | | | | | |
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31.1 | s | | | | | |
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31.2 | | s | | | | | |
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32.1 | | v | | | | | |
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32.2 | | v | | | | | |
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101 | | | The following materials from the MAXIMUS, Inc. Quarterly Report on Form 10-Q for the quarter ended MarchDecember 31, 2019 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. | | | | |
s Filed herewith.
v Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| MAXIMUS, INC. | |
| | |
Date: May 9, 2019February 6, 2020 | By: | /s/ Richard J. Nadeau |
| | Richard J. Nadeau |
| | Chief Financial Officer |
| | (On behalf of the registrant and as Principal Financial and Accounting Officer) |