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 ~~March~~December 31, 2019

☐ 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)


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:

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):


Large accelerated filer ý☒						Accelerated filer o☐

Non-accelerated filer o☐						Smaller reporting company o ☐

						Emerging growth company o ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No ý☒

~~Securities registered pursuant to Section 12(b) of the Act:~~

~~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 ~~63,810,845~~63,943,497 shares of the registrant’s common stock (no par value) outstanding.

MAXIMUS, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended ~~March~~December 31, 2019

INDEX

PART I. FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

Consolidated Statements of Operations for the Three ~~and Six~~ Months Ended ~~March~~December 31 , 2019 and 2018 (unaudited)

Consolidated Statements of Comprehensive Income for the Three ~~and Six~~ Months Ended ~~March~~December 31 , 2019 and 2018 (unaudited)

Consolidated Balance Sheets as of ~~March~~December 31 , 2019 (unaudited) and September 30, ~~2018~~201 9

Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~March~~December 31 , 2019 and 2018 (unaudited)

Consolidated Statements of Changes in Shareholders’ Equity for the Three ~~and Six~~ Months Ended ~~March~~December 31 , 2019 and 2018 (unaudited)

Notes to Unaudited Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2016

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

3126

Item 4.

Controls and Procedures

3126

PART II. OTHER INFORMATION

Item 1.

Item 1A.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.

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-looking~~Forward-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 ~~expressions~~references to future periods.

Forward-looking statements are ~~intended to identify~~neither 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 assumptions~~changes in circumstances that are difficult to ~~predict. Actual outcomes~~predict and many of which are outside of our control. Our actual results and financial condition may differ materially from ~~such~~those 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 these~~Any 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 ~~when~~on which it is made. ~~Except as otherwise required by law, we~~We undertake no obligation to publicly update ~~or revise~~ any forward-looking ~~statements,~~statement, whether ~~resulting~~written or oral, that may be made from time to time, whether as a result of new information, future ~~events~~developments 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 ~~March~~December 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 ~~March~~December 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, ~~2018~~2019 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

~~Segments~~Leases

~~As previously reported, effective~~Effective October 1, ~~2018, our Chief Executive Officer reorganized our reporting segments based~~2019, 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 reorganization~~balance 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~~ I~~nformation" 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 ~~the~~a 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 effect~~present value of ~~adoption as an adjustment of $32.9 million~~the 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 had~~and the changes did not ~~been completed as~~cause any material changes in our statements of ~~the date~~operations or our statements of ~~adoption. For contracts that had been modified prior to October 1, 2018, we calculated the cumulative effect~~cash 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 of~~At the adoption of Topic ~~606 on our consolidated statement of operations for~~842, the ~~three~~Company 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

~~The~~liabilities 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 o~~n 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' Equity~~Forthcoming changes

In August 2018, the ~~United States Securities~~Financial 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 Contract~~Disclosure Update~~. This accounting guidance requires customers in cloud-computing arrangements to identify and ~~Simplification, amending~~defer certain ~~disclosure requirements~~implementation costs in a manner broadly consistent with that ~~were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements~~of existing guidance on the ~~analysis~~costs 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' equity~~this 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 ~~interim~~recognizing credit losses on financial ~~statements. Under~~instruments, 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 ~~analysis~~impairment charge. We will adopt this guidance on October 1, 2020. The effect of ~~changes in each caption~~this 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 did~~future goodwill impairment tests.

Other recent accounting pronouncements are not expected to have a material effect on ~~the Company's consolidated~~our 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 ~~three~~3 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-work~~employment 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 periods~~three months ended ~~March~~December 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.~~

118

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 Recognition~~Leases

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 ~~revenue~~a 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 ~~accordance~~the 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

1311

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 and~~receivables; 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 ~~six~~three months ended ~~March~~December 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 work~~Some 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 estimating~~are paid as individuals attain employment goals, which may take many months to achieve. We recognize revenue on these contracts over the ~~volume~~period 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 caseload~~the 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-based~~Other performance-based contracts with future outcomes include those where we ~~provide a significant~~recognize 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 an~~determine 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 year~~the three months ended December 31, 2019 ~~our~~and 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 three~~costs, respectively, and ~~six months ended March 31, 2019, we amortized~~ ~~$1.5~~recorded 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 ~~statement~~statements of operations.

Remaining performance obligations

At ~~March~~December 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.

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. This~~programs and the business ~~has been~~was 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 from~~completed 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, 201~~8~~, 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 value~~On August 16, 2019, we acquired 100% of the ~~goodwill is~~share 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 pertains~~net 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-up~~reach and ~~ramp-down~~capabilities of ~~work over~~our 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 for~~represent 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, 201~~8~~, 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 ~~six~~three months ended ~~March~~December 31, 2019, we purchased ~~0.7 million~~26,000 of our common shares at a cost of ~~$45.4~~$1.9 million. During the ~~six~~three months ended ~~March~~December 31, 2018, we acquired approximately ~~17,000~~654,000 common shares at a cost of ~~$1.0~~$41.3 million. At ~~March~~December 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 ~~six~~three months ended ~~March~~December 31, 2019, we granted ~~346,000 RSUs~~287,000 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 Statement~~our consolidated statements of ~~Operations.~~operations. At ~~March~~December 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 ~~March~~December 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 ~~six~~three months ended ~~March~~December 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 borrowings~~made 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 ~~Company~~laws and ~~certain officers were named~~regulations that govern our role as ~~defendants~~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 debarment. Adverse findings could also have a ~~putative class action lawsuit filed~~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 ~~U.S. District Court for~~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 ~~Eastern District~~advice of ~~Virginia. The plaintiff alleged~~legal counsel, we do not believe that the ~~defendants made~~outcome of any existing matter would likely have a ~~variety~~material 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 201~~8, 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.

1915

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 as~~are 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 offerings~~primary 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 outside~~Affordable Care Act (ACA) in the United States and ~~the growth of our business with the United States Federal Government. This growth has been both organic~~a 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. O~~ur short-term growth expectations were impacted by~~ ~~changes in the industry that we believe were tied to changes in the political environment~~multiple 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 ~~coupled~~will 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 ~~continue~~allow us to ~~foster future~~benefit 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.

•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 that~~core 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 ~~center~~centers business ~~which had~~ previously ~~been owned~~operated by General Dynamics Information Technology. This acquisition, ~~strengthens~~coupled with our ~~position~~2015 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 operated~~We 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 ~~March~~December 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 in~~organic revenue growth of 6.1% and a ~~stablegross~~ ~~profit.~~ ~~The revenue movement was the result~~operating 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 by~~from the acquisition of the citizen engagement centers business ~~which contributed~~ ~~$176.0 million~~ and ~~$277.3 million in revenue~~ inorganic growth both from the ~~three~~acquired business and ~~six~~ ~~months ended March 31, 2019, respectively.The~~ ~~organic declines in revenue and costs~~ ~~were~~ ~~due to~~ the ~~completion~~core 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 2018~~growth was ~~tempered~~driven 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 primarily~~continues 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 affected~~challenged 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.

2217

Changes in revenue, cost of revenue and gross profit for the three months ended ~~March~~December 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 ~~March~~December 31, 2019, increased compared to the same period in fiscal year ~~2018,~~2019, principally driven by the citizen engagement centers business ~~acquisition. This~~acquisition 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 ~~covered~~discussed 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 as~~infrastructure. 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. As~~intangible 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 million~~full 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 borrowings~~borrowed $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 for~~partially 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 ~~six~~three months ended ~~March~~December 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 ~~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.


		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 ~~March~~December 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 ~~cost~~the 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 benefit~~margin was tempered slightly by the delayed rollout of ~~$4.0 million from a single contract amendment signed~~Medicaid 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 the~~margin 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 ~~margin~~profit 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 ~~March~~December 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 profit~~1.These balances represent our results for the ~~six~~three months ended ~~March~~December 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 by~~2018. These results include approximately six weeks of benefit from the citizen engagement centers business, which was acquired on November 16, ~~2018. The two largest~~2018 (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. ~~For~~These balances represent the ~~second~~growth, 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 strong~~profit 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.

2520

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.~~

T~~he U.S. Federal~~ G~~overnment 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-work~~employment 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 ~~March~~December 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 ~~March~~December 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 contracts~~segment by low unemployment rates in the ~~United Kingdom are ending. As~~geographies in which we operate. Low unemployment and strong economies result in a ~~result, revenue~~smaller 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 devolved~~certain 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 operations~~coronavirus 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, we~~industries 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 resources~~our revenue and ~~investment~~cost 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 even~~Canada in ~~the fourth quarter of fiscal year~~August 2019.

The ~~second quarter of fiscal year 2018 included a one-time profit pick-up related to the termination of major elements~~continued 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 affecting~~has 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 ~~continue~~have since repaid this balance in full. Our international locations have access to borrowing facilities which they may use ~~our facility~~ to ~~manage our~~cover short-term working capital ~~requirements but~~needs or small acquisitions, such as our acquisition of GT Hiring Solutions in August 2019.

We believe ~~that~~ our cash flows from operations ~~are typically~~to be sufficient to ~~fund~~meet our ~~operations. At~~ ~~March 31, 2019, our borrowings under the facility were $75.0 million.~~ ~~During April 2019, we repaid these borrowings in full.~~

day-to-day requirements.

Our priorities for cash utilization are to actively pursue new growth ~~opportunities, to~~opportunities. 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 ~~make~~bring back additional funds, ~~available for investment~~, taking into consideration the working capital requirements and relevant tax rules in each jurisdiction. ~~Where~~When 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 ~~March~~December 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 ~~six~~three months ended ~~March~~December 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 influencing~~largest single driver of our cash ~~flows~~flow growth has been from the operations ~~are the effect~~of 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 ~~revenues~~cash collections from customers and ~~costs, resulting~~our cash payments to vendors.

Cash flows from operations improved through the growth of the business, improvements in ~~additional net~~our cash ~~inflows.~~collections and timing differences related to our payroll obligations.

•We ~~pay~~have received operating cash flows from our ~~annual management bonus during~~acquisition 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 ~~March~~December 31, 2019, were 7771 days; the balance at September 30, ~~2018,~~2019, was 6372 days. ~~Our DSO calculation now includes unbilled balances~~ ~~due to~~During the ~~adoption~~first quarter of ~~ASC 606~~.A~~bsent this effect,~~fiscal year 2019, our DSO ~~would have been~~grew by six days to 73 ~~days.~~ ~~Our receivable balances~~days, 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 ~~adoption~~end 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 ~~six~~three months ended ~~March~~December 31, 2019, was ~~$420.1~~$10.5 million compared to ~~$12.8~~$411.7 million in the same period last year. ~~This includes our~~Our 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 ~~six~~three months ended ~~March~~December 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 fiscal~~Fiscal year 2019 w~~e used $46.1~~included 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 million~~transactions 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 ~~six~~three months ended ~~March~~December 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~~-~~GAAP~~non-GAAP measures where we believe it will assist the user of our financial statements in understanding our business. The presentation of these measures is meant to complement, but not replace, other financial measures in this document. The presentation of non-GAAP numbers is not meant to be considered in isolation, nor as an alternative to revenue growth, cash flows from operations or net income as measures of performance. These non-GAAP measures, as determined and presented by us, may not be comparable to related or similarly titled measures presented by other companies.

In 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 ~~organic~~pro 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:

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

3024


	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

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 ~~March~~December 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 ~~March~~December 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 ~~March~~December 31, 2019, was approximately ~~2.5~~%1.8%. ~~A hypothetical increase~~We 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 ~~rates~~rate 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 ~~revenue~~leases 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.

3127

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 ~~March~~December 31, ~~2019:~~2019.


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

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
Feb. 1, 2019 - Feb. 28, 2019 — — — 147,420
Mar. 1, 2019 - Mar. 31, 2019 — — — 147,420
Total 61,900 $ 66.04 61,900

(1)

~~(1)~~ Under a ~~resolutions~~resolution adopted in June 2018, the Board of Directors authorized the ~~repurchase,~~purchase, at ~~management’s~~management's discretion, of up to an aggregate of $200 million of our common stock. ~~This~~The resolution also authorized the use of option exercise proceeds for the purchase of our common stock.

3328

Item 6. Exhibits.

Exhibit No.

Description

~~2.1~~31.1

Asset Purchase Agreement dated as of October 5, 2018, by and among General Dynamics Information Technology, Inc., MAXIMUS Federal Services, Inc. and MAXIMUS, Inc. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated October 9, 2018).

~~31.1~~

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Section 906 Principal Executive Officer Certification.

32.2

Section 906 Principal Financial Officer Certification.

101

The following materials from the MAXIMUS, Inc. Quarterly Report on Form 10-Q for the quarter ended ~~March~~December 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.

3429

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.


	MAXIMUS, INC.

Date: ~~May 9, 2019~~February 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)

3530


	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


(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


(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


	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


	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


	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


Six months ended September 30, 2019	$	18,044
2020	35,307
2021	18,258
2022	15,884
2023	15,785
2024	15,662


	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


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

Feb. 1, 2019 - Feb. 28, 2019	—	—		—	147,420

Mar. 1, 2019 - Mar. 31, 2019	—	—		—	147,420

Total	61,900	$	66.04	61,900