ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, our Consolidated Financial Statements and the related Notes.
For an overview of our business, including our business segments and a discussion of the services we provide, see the Business discussion in Item 1.
Recent acquisitions
We completed five acquisitions during the three years ended September 30, 2017:
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•
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In April 2015, we acquired Acentia, LLC (Acentia), a provider of services to the U.S. Federal Government. This business was integrated into our U.S. Federal Services Segment.
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•
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In April 2015, we acquired a majority ownership of Remploy, a business providing specialized disability employment services for the U.K. government. This business was integrated into our Human Services Segment.
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•
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In December 2015, we acquired Assessments Australia. This business was integrated into our Human Services Segment.
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•
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In February 2016, we acquired Ascend Management Innovations, LLC (Ascend). This business was integrated into our Health Services Segment.
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•
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In July 2017, we acquired Revitalised Limited (Revitalised), a provider of digital solutions for engaging communities in the United Kingdom in the areas of health, fitness and well-being. This business was integrated into our Health Services Segment.
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We believe that all five acquisitions will provide us with the ability to complement and expand our existing services in their respective markets.
Financial overview
Our results for the three years ended September 30,
2017
have been significantly influenced by the following:
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•
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Organic growth within our Health Services Segment, primarily through contract expansion in the United States and performance improvement in the Health Advisory and Assessment (HAAS) contract in the U.K.;
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•
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Declines in our U.S. Federal Services Segment due to the wind-down in 2017 of a large subcontract for work performed for the U.S. Department of Veterans Affairs where revenue declined by approximately
$63 million
compared to 2016; and in 2016 the expected closure of one customer contact center tied to the Federal Marketplace under the Affordable Care Act where revenue declined by approximately $49 million compared to 2015;
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|
•
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Organic growth in our Human Services Segment from expansion of our international welfare-to-work businesses due mostly to the ramp up of jobactive in Australia which offset expected declines in the U.K. due to the wind-down of the Work Programme;
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•
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The fluctuation in the value of international currencies, principally the British Pound which fell sharply on June 24, 2016 following the European Union referendum;
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•
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The effect of our acquisitions, especially that of Acentia and Remploy in 2015 and Ascend in 2016, which resulted in increases in revenue and operating income, but also cash borrowings, interest expense, amortization of intangible assets and acquisition-related expenses;
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•
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The repayment in full of our U.S. cash borrowings through 2016 and 2017, utilizing our operating cash flows, which reduced interest expense;
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|
•
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The sale of our K-12 Education business in May 2016, which resulted in a gain of
$6.9 million
on the date of sale and an additional
$0.7 million
in May 2017 following the resolution of outstanding contingencies;
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|
•
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Interest income and tax benefits from research and development credits in the United States and in foreign jurisdictions;
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•
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Tax benefits from the vesting of restricted stock units (RSUs) and the exercise of stock options in fiscal year 2017 which, under new accounting standards, are recorded as a component of tax expense. In prior years, the benefits from the vesting of RSUs were recorded through our Consolidated Statements of Changes in Shareholders' Equity;
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•
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Improved cash flows from operations due to improvements in customer cash collections in fiscal year 2017;
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•
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Increased investment in our capital infrastructure in fiscal year 2014 and 2015 which, along with acquisitions, utilized significant amounts of cash and increased our depreciation expense;
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•
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Approximately
$143.0 million
of repurchases of our own shares as part of our share repurchase program; and
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•
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Our quarterly cash dividends.
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International businesses
We operate in international locations and, accordingly, we also transact business in currencies other than the U.S. Dollar, principally the Australian Dollar, the Canadian Dollar, the Saudi Arabian Riyal, the Singapore Dollar and the British Pound. During the year ended September 30,
2017
, we earned approximately
28%
and 17% of revenue and operating income, respectively, from our foreign subsidiaries. At September 30,
2017
, approximately 25% of our assets are held by foreign subsidiaries. International business exposes us to certain risks, including:
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•
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Tax regulations may penalize us if we transfer funds or debt across international borders. Accordingly, we may not be able to use our cash in the locations where it is needed. We mitigate this risk by maintaining sufficient capital, or having sufficient capital available to us under our credit facility, both within and outside the U.S., to support the short-term and long-term capital requirements of the businesses in each region. We establish our legal entities to make efficient use of tax laws and holding companies to minimize this exposure.
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•
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We are subject to exposure from foreign currency fluctuations. Our foreign subsidiaries typically incur costs in the same currency as they earn revenue, thus limiting our exposure to unexpected currency fluctuations. Further, the operations of the U.S. business do not depend upon cash flows from foreign subsidiaries. However, declines in the relevant strength of foreign currencies against the U.S. Dollar will affect our revenue mix, profit margin and tax rate.
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Summary of consolidated results
The following table sets forth, for the fiscal years indicated, information derived from our statements of operations.
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Year ended September 30,
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(dollars in thousands, except per share data)
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2017
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|
2016
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|
2015
|
Revenue
|
|
$
|
2,450,961
|
|
|
$
|
2,403,360
|
|
|
$
|
2,099,821
|
|
Cost of revenue
|
|
1,839,056
|
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|
1,841,169
|
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|
1,587,104
|
|
Gross profit
|
|
611,905
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|
562,191
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|
512,717
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Gross profit margin
|
|
25.0
|
%
|
|
23.4
|
%
|
|
24.4
|
%
|
Selling, general and administrative expense
|
|
284,510
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|
268,259
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|
238,792
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|
Selling, general and administrative expense as a percentage of revenue
|
|
11.6
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%
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|
11.2
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%
|
|
11.4
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%
|
Amortization of intangible assets
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|
12,208
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|
|
13,377
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|
9,348
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|
Restructuring costs
|
|
2,242
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|
|
—
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|
|
—
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|
Acquisition-related expenses
|
|
83
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|
832
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|
4,745
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Gain on sale of a business
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|
650
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|
|
6,880
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|
|
—
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Operating income
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|
313,512
|
|
|
286,603
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|
259,832
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Operating income margin
|
|
12.8
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%
|
|
11.9
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%
|
|
12.4
|
%
|
Interest expense
|
|
2,162
|
|
|
4,134
|
|
|
1,398
|
|
Other income, net
|
|
2,885
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|
|
3,499
|
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|
1,385
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|
Income before income taxes
|
|
314,235
|
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|
285,968
|
|
|
259,819
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|
Provision for income taxes
|
|
102,053
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|
105,808
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|
99,770
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Effective tax rate
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|
32.5
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%
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|
37.0
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%
|
|
38.4
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%
|
Net income
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|
212,182
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|
180,160
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|
160,049
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Income attributable to noncontrolling interests
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|
2,756
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|
1,798
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|
2,277
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Net income attributable to MAXIMUS
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$
|
209,426
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$
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178,362
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$
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157,772
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Basic earnings per share attributable to MAXIMUS
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$
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3.19
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$
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2.71
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$
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2.37
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Diluted earnings per share attributable to MAXIMUS
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$
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3.17
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$
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2.69
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$
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2.35
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The following tables provide an overview of the significant elements of our consolidated statements of operations. As our business segments have different factors driving revenue growth and profitability, the sections that follow cover these segments in greater detail.
Revenue, cost of revenue and gross profit
Changes in revenue, cost of revenue and gross profit for between fiscal years
2016
and
2017
are summarized below.
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Revenue
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Cost of Revenue
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Gross Profit
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(dollars in thousands)
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Dollars
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|
Percentage change
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|
Dollars
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|
Percentage change
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|
Dollars
|
|
Percentage change
|
Balance for fiscal year 2016
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$
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2,403,360
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|
$
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1,841,169
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|
$
|
562,191
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Organic growth
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|
72,820
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|
3.0
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%
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|
19,190
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|
|
1.0
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%
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|
53,630
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|
9.5
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%
|
Net acquired growth
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|
8,928
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|
0.4
|
%
|
|
7,500
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|
|
0.4
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%
|
|
1,428
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|
|
0.3
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%
|
Currency effect compared to the prior period
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|
(34,147
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)
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|
(1.4
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)%
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|
(28,803
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)
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|
(1.5
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)%
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|
(5,344
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)
|
|
(1.0
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)%
|
Balance for fiscal year 2017
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|
$
|
2,450,961
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|
|
2.0
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%
|
|
$
|
1,839,056
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|
(0.1
|
)%
|
|
$
|
611,905
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|
|
8.8
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%
|
Revenue
increased
by approximately
2.0%
to
$2,451.0 million
, with our cost of revenue broadly consistent with the prior year. Our gross profit margin increased from
23.4%
to
25.0%
. We have identified the significant organic, acquisition-related and currency-related effects below.
Organic revenue growth in our Health and Human Services Segments was partially offset by an anticipated decline in our U.S. Federal Services Segment following the wind-down of a significant subcontract.
Cost of revenue consists of direct costs related to labor and related overhead, subcontractor labor, outside vendors, rent and other direct costs. The largest component of cost of revenue, approximately two-thirds, is labor (both our labor and subcontracted labor) for our services contracts. Although our increase in cost of revenue was driven by similar factors as our revenue movements, our costs have also seen the benefits of increased operational efficiencies in certain projects, which should result in higher gross profit margins prospectively.
Our organic growth in revenue, and related cost of revenue, is driven by a number of factors, many of which are addressed in our segment-specific discussions below. As a rule, the longevity of our contracts and business relationships allow us to maintain a strong backlog of work which will sustain our revenues over several years. However, each year we will experience attrition due to: contracts that are lost or end, contracts that are rebid at lower rates or volume reductions or reduced scope, work that is brought in-house, contracts we opt not to rebid, temporary or short term work that is ending such as contract amendments, and innovation. This attrition is anticipated and is typically offset by growth. Based on our internal analysis, we estimate that we have experienced revenue attrition between 5% and 10% over the last five years. We believe that our attrition rate for 2018 will be approximately 9%. We anticipate that we will offset this attrition with new work, particularly within our Health Services Segment.
Acquired growth stems from the acquisition of Revitalised and the full year benefit of Ascend and Assessments Australia, partially offset by the sale, in May 2016, of our K-12 Education business.
During fiscal year
2017
, our foreign currency revenues and costs were affected by fluctuations in their value against the U.S. Dollar. The most notable change was the decline in the value of the British Pound which suffered a significant decline in June 2016. On a constant currency basis, our revenue increased
3.4%
and our cost of revenue increased
1.4%
.
Changes in revenue, cost of revenue and gross profit from fiscal year 2015 to
2016
are summarized below.
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Revenue
|
|
Cost of Revenue
|
|
Gross Profit
|
(dollars in thousands)
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
Balance for fiscal year 2015
|
|
$
|
2,099,821
|
|
|
|
|
|
$
|
1,587,104
|
|
|
|
|
|
$
|
512,717
|
|
|
|
|
Organic growth
|
|
194,784
|
|
|
9.3
|
%
|
|
177,732
|
|
|
11.2
|
%
|
|
17,052
|
|
|
3.3
|
%
|
Acquired growth
|
|
157,985
|
|
|
7.5
|
%
|
|
117,425
|
|
|
7.4
|
%
|
|
40,560
|
|
|
7.9
|
%
|
Currency effect compared to the prior period
|
|
(49,230
|
)
|
|
(2.3
|
)%
|
|
(41,092
|
)
|
|
(2.6
|
)%
|
|
(8,138
|
)
|
|
(1.6
|
)%
|
Balance for fiscal year 2016
|
|
$
|
2,403,360
|
|
|
14.5
|
%
|
|
$
|
1,841,169
|
|
|
16.0
|
%
|
|
$
|
562,191
|
|
|
9.6
|
%
|
Revenue
increased
by approximately
14%
to
$2,403.4 million
, with our cost of revenue
increasing
by approximately
16%
to
$1,841.2 million
. Our gross profit margin declined from
24.4%
to
23.4%
. We have identified the significant organic, acquisition-related and currency-related effects below. More detail is provided by segment in the sections which follow.
Most of our organic growth came from contracts in our Health Services Segment.
Our organic cost of revenue increased at a greater rate than our revenue, driven by a full year of the HAAS contract and the jobactive contract in Australia. As expected, both of these contracts operated at lower margins during fiscal 2016 compared to the rest of our business. It is typical with contracts in the startup phase for revenue to lag behind costs. Many performance-based contracts, including jobactive, have outcome-based payments which take time to achieve. In the early months of the contract, no outcome-based payments were realized.
Acquired growth was from our
2016
acquisitions, Ascend and Assessments Australia, as well as the benefits of a full year of results from Acentia and Remploy.
During fiscal year
2016
, the U.S. Dollar gained in strength against all international currencies in which we did business. Accordingly, we received lower revenue and incurred lower costs than would have been the case if currency rates had remained stable.
Other operating expenses and benefits
Selling, general and administrative expense (SG&A) consists of costs related to general management, marketing and administration. These costs include salaries, benefits, bid and proposal efforts, travel, recruiting, continuing education, employee training, non-chargeable labor costs, facilities costs, printing, reproduction, communications, equipment depreciation, bad debt expense, legal expenses and the costs of business combinations. Our SG&A is primarily composed of labor costs. These costs may be incurred at a segment level, for dedicated resources which are not client-facing, or at a corporate level. Corporate costs are allocated to segments on a consistent, rational basis. Unlike cost of revenue, SG&A is not directly driven by fluctuations in our revenue and, as our business expands, we would expect to see SG&A decline as a percentage of revenue as we attain economies of scale.
Our SG&A has grown over the past two years for the following reasons:
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•
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Our acquisitions, notably Acentia and Remploy, have contributed an additional cost base;
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|
•
|
Additions to infrastructure have increased depreciation and maintenance charges by approximately
$10 million
;
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|
|
•
|
Additional bonus costs for employees to reflect improved performance in fiscal year 2017;
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|
|
•
|
Bad debt expense, approximately $2.5 million, related to a single customer; and
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|
|
•
|
We incurred costs of $
2.2 million
in 2016 related to a legal matter from fiscal year 2014, which was settled in fiscal year 2017.
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As noted above, we made five acquisitions during fiscal years 2015,
2016
and
2017
. These acquisitions have affected our statements of operations beyond the addition of operating revenues and costs.
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•
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We incurred costs related to the acquisition of these entities; typically legal fees, third-party due diligence and costs related to the valuation of intangible assets. Expenses of
$0.1 million
in 2017 relate to Revitalised,
$0.8 million
in
2016
to Ascend and Assessments Australia and
$4.7 million
to Acentia and Remploy.
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|
•
|
We utilized our credit facility to fund our acquisitions. We borrowed funds in April 2015 to acquire Acentia, along with a further balance in February 2016 to acquire Ascend. These borrowings resulted in an increase in our interest expense. Since the fourth quarter of 2016, we have steadily paid off our credit facility and, accordingly, interest expense has steadily declined. As of September 30, 2017, we had no borrowings under the credit facility. We would not anticipate any significant interest expense beyond the cost of maintaining the credit facility unless we have an acquisition that requires utilization of the credit facility.
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|
•
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Our intangible asset amortization increased in fiscal year 2016 due to the full year charges from the acquisitions of Acentia and Remploy, which were both acquired in April 2015, as well as charges from the 2016 acquisitions of Ascend and Assessments Australia. Notwithstanding the full year charges from the 2016 acquisitions, intangible amortization expense has declined in fiscal year 2017 as all assets acquired with Remploy as well as all technology and trademarks acquired with Policy Studies, Inc.(PSI), which was acquired in 2012, were fully amortized at the end of March 2017. Based upon our current portfolio, we anticipate amortization expense in fiscal year 2018 of
$10.3 million
, the further decline reflecting a full year without Remploy and PSI charges.
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During fiscal year 2017, we undertook a restructuring of our United Kingdom Human Services operations as part of the integration of Remploy. We recorded restructuring costs of
$2.2 million
, principally severance expenses. This restructuring is expected to result in cost savings in future periods. Remploy is partially owned by its employees and, accordingly, some of this charge is offset through a reduction in income attributable to noncontrolling interests. We do not anticipate additional material restructuring costs at this time.
On May 9, 2016, we sold our K-12 Education business, which was previously part of the Company’s Human Services Segment. At that time, we recorded a gain of
$6.9 million
, net of reserves of
$0.7 million
. These reserves were established to cover potential contingencies related to the sale which were resolved in May 2017 with recognition of the reserved balance in full. No additional gains or losses are anticipated from this sale. The K-12 Education business contributed revenue of $
2.2 million
and $
4.7 million
for the years ended September 30,
2016
and
2015
, respectively.
Income taxes and non-operating expenses
Our effective tax rate for fiscal years 2017, 2016 and 2015 was
32.5%
,
37.0%
and
38.4%
, respectively. Our tax rate in fiscal year 2017 has been affected by two material events.
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•
|
We received a benefit in fiscal year 2017 of $6.6 million related to the vesting of restricted stock units (RSUs) and the exercise of stock options. These tax benefits had previously been recorded through our Consolidated Statements of Changes in Shareholders' Equity but are now required to be recorded as a benefit to earnings. We will continue to receive benefits or charges related to RSU vesting in future years with the effect being dependent upon the number of awards vesting and the share price on that date. Although this is typically during the fourth quarter of our fiscal year, we have a significant population of RSUs whose issuance has been deferred. This may result in unpredictable movements within our tax provision. As of September 30, 2017, we no longer have any outstanding stock options.
|
|
|
•
|
We received a one-time benefit of $3.4 million related to research and development tax credits in the United States, Australia and Canada. These credits relate to past years and, accordingly, are not anticipated to recur in future quarters.
|
Excluding these two events, our effective tax rate for fiscal year 2017 was 35.6%. Our effective tax rate declined from fiscal year 2015 to 2016 due to increased profits in jurisdictions that have a lower tax rate than the United States. Based upon our current projections, we anticipate that our fiscal year 2018 effective tax rate will be in the range of 35% to 36%. This estimate is based upon our current forecast and is dependent upon numerous factors which may change including the share of profits within foreign jurisdictions and the share price and number of stock awards distributed in the fiscal year. Our restricted stock units vest on the last day of the fourth quarter of our fiscal year and, accordingly, our tax rate will be affected by the share price on that date. During fiscal year 2017, we also received a benefit from restricted share awards to board members which had vested in earlier periods but whose distribution had been deferred until their retirement. A similar event in fiscal year 2018 may cause an unusual fluctuation in our tax rate.
Other income includes interest income on cash balances, foreign exchange fluctuations and other miscellaneous credits and expenses which do not form part of our business operations. Most interest income has been derived from our cash balances in foreign jurisdictions and interest income related to the research and development tax credits noted above. In fiscal year 2016, we received a large benefit from a foreign exchange fluctuation which is not expected to recur. We expect to earn an increased amount of interest income in fiscal year 2018 from the increase in our cash balances.
Health Services Segment
The Health Services Segment provides a variety of business process services, appeals and assessments (including commercial occupational health services) as well as related consulting services, for state, provincial and national government programs. These services support Medicaid, the Children's Health Insurance Program (CHIP) and ACA in the U.S., Health Insurance BC (British Columbia) in Canada and HAAS in the U.K.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Revenue
|
|
$
|
1,380,151
|
|
|
$
|
1,298,304
|
|
|
$
|
1,109,238
|
|
Cost of revenue
|
|
1,032,826
|
|
|
1,006,123
|
|
|
855,130
|
|
Gross profit
|
|
347,325
|
|
|
292,181
|
|
|
254,108
|
|
Selling, general and administrative expense
|
|
132,081
|
|
|
107,155
|
|
|
99,815
|
|
Operating income
|
|
215,244
|
|
|
185,026
|
|
|
154,293
|
|
Gross profit percentage
|
|
25.2
|
%
|
|
22.5
|
%
|
|
22.9
|
%
|
Operating margin percentage
|
|
15.6
|
%
|
|
14.3
|
%
|
|
13.9
|
%
|
Fiscal year
2017
compared to fiscal year
2016
Changes in revenue, cost of revenue and gross profit for fiscal year
2017
are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Cost of Revenue
|
|
Gross Profit
|
(dollars in thousands)
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
Balance for fiscal year 2016
|
|
$
|
1,298,304
|
|
|
|
|
|
$
|
1,006,123
|
|
|
|
|
|
$
|
292,181
|
|
|
|
|
Organic growth
|
|
104,224
|
|
|
8.0
|
%
|
|
47,033
|
|
|
4.7
|
%
|
|
57,191
|
|
|
19.6
|
%
|
Acquired growth
|
|
9,790
|
|
|
0.8
|
%
|
|
7,626
|
|
|
0.8
|
%
|
|
2,164
|
|
|
0.7
|
%
|
Currency effect compared to the prior period
|
|
(32,167
|
)
|
|
(2.5
|
)%
|
|
(27,956
|
)
|
|
(2.8
|
)%
|
|
(4,211
|
)
|
|
(1.4
|
)%
|
Balance for fiscal year 2017
|
|
$
|
1,380,151
|
|
|
6.3
|
%
|
|
$
|
1,032,826
|
|
|
2.7
|
%
|
|
$
|
347,325
|
|
|
18.9
|
%
|
Revenue
increased
by approximately
6.3%
to
$1,380.2 million
. Gross profit
increased
by approximately
19%
and operating income
increased
by approximately
16%
.
Our revenue and cost of revenue increases were driven by a number of factors:
|
|
•
|
Our scope of work expanded on our existing U.S.-based contracts, notably with the expansion of an existing contract in New York State.
|
|
|
•
|
We have improved our performance on our United Kingdom-based HAAS contract and are meeting service levels, resulting in reduced penalties against our revenue.
|
|
|
•
|
As previously noted, we chose not to rebid a contract with the state of Connecticut which had previously provided approximately $23 million of annual revenue. The existing contract ended in the fourth quarter of 2016.
|
|
|
•
|
Our results include a full year for Ascend, which was acquired in February 2016, as well as two months from Revitalised.
|
|
|
•
|
The significant year-over-year decline in the value of the British Pound has reduced the benefits of the improved performance on the United Kingdom-based contracts. On a constant currency basis, revenue and cost of revenue growth would have been
8.8%
and
5.5%
, respectively.
|
Our gross profit margins benefited from the margin improvements in the United Kingdom, including continued improvements in the performance of the HAAS contract and cost reductions on the Fit for Work contract to service the reduced levels of activity. Our operating profit margins have also received the further benefit of the expansion of the business without the need for a corresponding increase in the administrative base.
The HAAS contract has been extended for a further two years. We also won a rebid of our California Medicaid enrollment broker contract and the new ten-year contract is expected to run through June 2027 and we also received a five-year extension for our enrollment broker contract in Michigan and a one-year extension for our enrollment broker contract in Texas. We anticipate that the Health Services Segment will grow in fiscal year 2018 driven by growth on existing contracts and new work.
Fiscal year
2016
versus fiscal year
2015
Changes in revenue, cost of revenue and gross profit for fiscal year
2016
are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Cost of Revenue
|
|
Gross Profit
|
(dollars in thousands)
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
Balance for fiscal year 2015
|
|
$
|
1,109,238
|
|
|
|
|
|
$
|
855,130
|
|
|
|
|
|
$
|
254,108
|
|
|
|
|
Organic growth
|
|
202,928
|
|
|
18.3
|
%
|
|
165,467
|
|
|
19.3
|
%
|
|
37,461
|
|
|
14.7
|
%
|
Acquired growth
|
|
14,881
|
|
|
1.3
|
%
|
|
10,336
|
|
|
1.2
|
%
|
|
4,545
|
|
|
1.8
|
%
|
Currency effect compared to the prior period
|
|
(28,743
|
)
|
|
(2.6
|
)%
|
|
(24,810
|
)
|
|
(2.9
|
)%
|
|
(3,933
|
)
|
|
(1.5
|
)%
|
Balance for fiscal year 2016
|
|
$
|
1,298,304
|
|
|
17.0
|
%
|
|
$
|
1,006,123
|
|
|
17.7
|
%
|
|
$
|
292,181
|
|
|
15.0
|
%
|
Revenue
increased
by approximately
17%
to
$1,298.3 million
. Gross profit
increased
by approximately
15%
and operating income
increased
by approximately
20%
.
Our revenue and direct cost increases were primarily driven by three factors:
|
|
•
|
Our scope of work expanded on our existing U.S.-based contracts, notably with the expansion of an existing contract in New York State.
|
|
|
•
|
We received a full year benefit from our U.K.-based HAAS contract. This contract commenced March 1, 2015. The HAAS contract experienced operating losses in fiscal year 2015 due to challenges in the recruitment and retention of health care professionals. This resulted in reduced fees from performance incentives in the contract. During fiscal year 2016, our performance on the HAAS contract improved and we experienced operating margins in the high-single digits.
|
|
|
•
|
Our results include seven months of operations following our acquisition of Ascend.
|
These benefits were partially offset by the detrimental effect of the decline in value of the British Pound.
Our gross profit margins declined slightly year-over-year. This was due, in part, to the ramp-up on the HAAS contract which operated at lower margins than the remainder of the segment. As expected, the Fit For Work contract, which commenced in fiscal year 2015, also tempered gross profit margins.
U.S. Federal Services Segment
The U.S. Federal Services Segment provides business process services (program administration) for federal government programs, assessment and appeals services for both federal and similar state-based programs, and technology solutions for federal civilian programs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Revenue
|
|
$
|
545,573
|
|
|
$
|
591,728
|
|
|
$
|
502,484
|
|
Cost of revenue
|
|
406,252
|
|
|
453,560
|
|
|
383,838
|
|
Gross profit
|
|
139,321
|
|
|
138,168
|
|
|
118,646
|
|
Selling, general and administrative expense
|
|
74,345
|
|
|
74,792
|
|
|
59,252
|
|
Operating income
|
|
64,976
|
|
|
63,376
|
|
|
59,394
|
|
Gross profit percentage
|
|
25.5
|
%
|
|
23.3
|
%
|
|
23.6
|
%
|
Operating margin percentage
|
|
11.9
|
%
|
|
10.7
|
%
|
|
11.8
|
%
|
Fiscal year
2017
compared to fiscal year
2016
Revenue
decreased
by approximately
7.8%
to
$545.6 million
. Gross profit
increased
by approximately
0.8%
and operating income
increased
by
2.5%
.
All revenue and cost of revenue movements were organic.
We had previously disclosed that this segment would be adversely affected in 2017 by the wind-down of a significant subcontract for work performed for the Department of Veterans Affairs. In fiscal 2017, revenue from this subcontract was approximately $63 million lower than in fiscal 2016. Our profit margins have received the benefit of efficiency savings, due in part to innovation and technology initiatives, which should continue in future periods.
The Company expects to benefit from a new short-term contract related to disaster relief efforts which is expected to provide a benefit in the in the first half of fiscal year 2018.
Fiscal year
2016
versus fiscal year
2015
Changes in revenue, cost of revenue and gross profit for fiscal year
2016
are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Cost of Revenue
|
|
Gross Profit
|
(dollars in thousands)
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
Balance for fiscal year 2015
|
|
$
|
502,484
|
|
|
|
|
|
$
|
383,838
|
|
|
|
|
|
$
|
118,646
|
|
|
|
|
Organic growth
|
|
(15,043
|
)
|
|
(3.0
|
)%
|
|
(11,133
|
)
|
|
(2.9
|
)%
|
|
(3,910
|
)
|
|
(3.3
|
)%
|
Acquired growth
|
|
104,287
|
|
|
20.8
|
%
|
|
80,855
|
|
|
21.1
|
%
|
|
23,432
|
|
|
19.7
|
%
|
Balance for fiscal year 2016
|
|
$
|
591,728
|
|
|
17.8
|
%
|
|
$
|
453,560
|
|
|
18.2
|
%
|
|
$
|
138,168
|
|
|
16.5
|
%
|
Revenue
increased
by approximately
18%
to
$591.7 million
. Gross profit
increased
by approximately
16%
and operating income
increased
by
6.7%
.
Revenue growth was driven by a full year of Acentia's business following the acquisition in April 2015.
Our organic business declined, caused by the anticipated closure of a customer contact center where we provided support for the Federal Marketplace under the ACA. This accounted for a $49 million reduction in revenue compared to fiscal year 2015. In addition, the majority of contracts from Acentia are cost-plus or time-and-materials which has resulted in lower profit margins in this segment. Cost-plus and time-and-materials work is designed to have lower profit rates as this is generally lower risk work. These declines in profitability were partially offset by expected benefits in the profitability of our contract with the Department of Education.
Our SG&A expense included a full year of expense from the Acentia acquisition.
Human Services Segment
The Human Services Segment provides national, state and county human services agencies with a variety of business process services and related consulting services for welfare-to-work, child support, higher education and K-12 special education programs. The K-12 Education business was divested in fiscal year 2016. About 66% of our revenue in this segment is earned in foreign jurisdictions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Revenue
|
|
$
|
525,237
|
|
|
$
|
513,328
|
|
|
$
|
488,099
|
|
Cost of revenue
|
|
399,978
|
|
|
381,486
|
|
|
348,136
|
|
Gross profit
|
|
125,259
|
|
|
131,842
|
|
|
139,963
|
|
Selling, general and administrative expense
|
|
76,675
|
|
|
84,157
|
|
|
79,719
|
|
Operating income
|
|
48,584
|
|
|
47,685
|
|
|
60,244
|
|
Gross profit percentage
|
|
23.8
|
%
|
|
25.7
|
%
|
|
28.7
|
%
|
Operating margin percentage
|
|
9.2
|
%
|
|
9.3
|
%
|
|
12.3
|
%
|
Fiscal year
2017
compared to fiscal year
2016
Changes in revenue, cost of revenue and gross profit for fiscal year
2017
are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Cost of Revenue
|
|
Gross Profit
|
(dollars in thousands)
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
Balance for fiscal year 2016
|
|
$
|
513,328
|
|
|
|
|
|
$
|
381,486
|
|
|
|
|
|
$
|
131,842
|
|
|
|
|
Organic growth
|
|
14,751
|
|
|
2.9
|
%
|
|
19,465
|
|
|
5.1
|
%
|
|
(4,714
|
)
|
|
(3.6
|
)%
|
Net acquisition and disposal
|
|
(862
|
)
|
|
(0.2
|
)%
|
|
(126
|
)
|
|
—
|
%
|
|
(736
|
)
|
|
(0.6
|
)%
|
Currency effect compared to the prior period
|
|
(1,980
|
)
|
|
(0.4
|
)%
|
|
(847
|
)
|
|
(0.2
|
)%
|
|
(1,133
|
)
|
|
(0.9
|
)%
|
Balance for fiscal year 2017
|
|
$
|
525,237
|
|
|
2.3
|
%
|
|
$
|
399,978
|
|
|
4.8
|
%
|
|
$
|
125,259
|
|
|
(5.0
|
)%
|
Revenue increased by
2.3%
to
$525.2 million
. Gross profit
decreased
by
5.0%
and operating income
increased
by
1.9%
. These results were driven by a number of factors:
|
|
•
|
We continued to ramp-up the jobactive contract. A portion of the revenue growth from the jobactive contract is pass-through (where we incur the direct costs and the client reimburses us) which carries no margin. Our most accretive payments relate to outcome fees, which are received after individuals have been placed into employment for a significant period of time. Accordingly, it takes time for contracts of this type to mature.
|
|
|
•
|
As expected, the Work Programme contracts in the United Kingdom are winding down and as a result revenue has declined from this program. No additional cases are being provided but we will continue to service the existing caseload for up to two years from referral.
|
|
|
•
|
The decline in revenue and costs from the sale of the K-12 Education business has been partially offset by the benefit from a full year of Assessments Australia business.
|
|
|
•
|
The year-over-year decline in the value of the British Pound has had a significant effect on the segment. On a constant currency basis, revenue and cost of revenue would have increased
2.7%
and
5.1%
, respectively.
|
We anticipate that our results in the Human Services Segment for fiscal year 2018 will be tempered by a number of new contracts which are in their early stages. These contracts tend to have outcome-based payments which take time to achieve. Accordingly, no outcome based payments will occur in the early months of these contracts. A mature contract should have a steady flow of such outcome-based payments.
Fiscal year
2016
versus fiscal year
2015
Changes in revenue, cost of revenue and gross profit for fiscal year
2016
are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Cost of Revenue
|
|
Gross Profit
|
(dollars in thousands)
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
Balance for fiscal year 2015
|
|
$
|
488,099
|
|
|
|
|
|
$
|
348,136
|
|
|
|
|
|
$
|
139,963
|
|
|
|
|
Organic growth
|
|
6,899
|
|
|
1.4
|
%
|
|
23,398
|
|
|
6.7
|
%
|
|
(16,499
|
)
|
|
(11.8
|
)%
|
Acquired growth
|
|
38,817
|
|
|
8.0
|
%
|
|
26,234
|
|
|
7.5
|
%
|
|
12,583
|
|
|
9.0
|
%
|
Currency effect compared to the prior period
|
|
(20,487
|
)
|
|
(4.2
|
)%
|
|
(16,282
|
)
|
|
(4.7
|
)%
|
|
(4,205
|
)
|
|
(3.0
|
)%
|
Balance for fiscal year 2016
|
|
$
|
513,328
|
|
|
5.2
|
%
|
|
$
|
381,486
|
|
|
9.6
|
%
|
|
$
|
131,842
|
|
|
(5.8
|
)%
|
Revenue increased by
5.2%
to
$513.3 million
. Gross profit
decreased
by
5.8%
and operating income
decreased
by
21%
. Revenue was driven by:
|
|
•
|
The ramp-up of the new Australian jobactive contract, which commenced in late fiscal year 2015. This contract resulted in higher revenue and costs, but in fiscal 2016 it operated at a lower margin than its predecessor contract;
|
|
|
•
|
Revenue from Assessments Australia and a full year of revenue from Remploy;
|
|
|
•
|
Anticipated declines in the U.K. Work Programme, owing to lower volumes and referrals with the expected wind down of the contract in 2017; and
|
|
|
•
|
The detrimental effect of foreign currency declines.
|
The expected declines in gross and operating income were principally caused by the ongoing ramp-up of the jobactive contract in Australia.
The majority of the SG&A increase was driven by a full year of Remploy activity and the acquisition of Assessments Australia.
Liquidity and capital resources
Our principal source of liquidity remains our cash flows from operations. These cash flows are used to fund our ongoing operations and working capital needs as well as investments in capital infrastructure and our share repurchases. These operating cash flows are driven by our contracts and their payment terms. For many contracts, we are reimbursed for the costs of startup operations, although there may be a gap between incurring and receiving these funds. Other factors which may cause shortfalls in cash flows include contract terms where payments are tied to outcome deliveries, which may not correspond with the costs incurred to achieve these outcomes and short-term delays where government budgets are constrained.
To supplement our operating cash flows, we maintain and utilize our credit facility. We used this facility to fund our acquisitions of Acentia and Ascend, as well as short-term borrowings to cover some immediate working capital needs. At September 30,
2017
, we had no borrowings under the credit facility. In September 2017, we extended the life of our credit facility to September 2022, which allows us to borrow up to $400 million, subject to standard covenants. We believe our cash flows from operations should be sufficient to meet our day-to-day requirements.
Our cash balances are held in the following locations and denominations (in thousands of U.S. Dollars):
|
|
|
|
|
|
As of September 30, 2017
|
U.S. Dollar denominated funds held in the United States
|
$
|
42,012
|
|
U.S. Dollar denominated funds held in foreign locations
|
60,572
|
|
Funds held in foreign locations in local currencies
|
63,668
|
|
Where possible, we hold surplus funds in foreign locations in United States Dollars. This mitigates our exposure to fluctuations between the United States Dollar and foreign currencies. We have no requirement or intent to remit cash held in foreign locations to the U.S. We consider undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the U.S. and, accordingly, no U.S. deferred taxes have been recorded with respect to such earnings in accordance with the relevant accounting guidance for income taxes. Should these earnings be remitted as dividends, we may be subject to additional U.S. taxes, net of allowable foreign tax credits. At this time, it is not practicable to estimate the amount of any additional taxes which may be payable on the undistributed earnings given the potential changes in legislation and the tax planning alternatives we could employ, should we decide to repatriate these earnings in a tax-efficient manner. Our priorities for cash utilization remain unchanged. We intend to:
|
|
•
|
Actively pursue new growth opportunities;
|
|
|
•
|
Maintain our quarterly dividend program; and
|
|
|
•
|
Make repurchases of our own shares where opportunities arise to do so.
|
The following table provides a summary of our cash flow information for the three years ended
September 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Net cash provided by/(used in):
|
|
|
|
|
|
|
|
|
|
Operations
|
|
$
|
337,200
|
|
|
$
|
180,026
|
|
|
$
|
206,217
|
|
Investing activities
|
|
(25,221
|
)
|
|
(87,103
|
)
|
|
(393,872
|
)
|
Financing activities
|
|
(215,429
|
)
|
|
(96,842
|
)
|
|
111,115
|
|
Effect of exchange rates on cash and cash equivalents
|
|
3,503
|
|
|
(4,554
|
)
|
|
(6,900
|
)
|
Net increase/(decrease) in cash and cash equivalents
|
|
$
|
100,053
|
|
|
$
|
(8,473
|
)
|
|
$
|
(83,440
|
)
|
Cash provided by operations for the years ended September 30,
2017
,
2016
and
2015
was
$337.2 million
,
$180.0 million
and
$206.2 million
, respectively. The factors influencing these cash flows are:
|
|
•
|
Year-over-year increases in operating profits,
|
|
|
•
|
Improvements in cash collections, most notably within the United States,
|
|
|
•
|
Advanced payments for contracts in fiscal year 2015 which did not recur to the same extent in later years, and
|
|
|
•
|
The timing of tax payments.
|
We measure our ability to collect receivables from customers using our Days Sales Outstanding (DSO) calculation. We have a target range for DSO of 65 to 80 days and we have typically stayed within the lower end of this range during the past three fiscal years. From September 30, 2014, our DSO increased from 64 days to 67 days at September 30, 2015 then to 70 days at September 30, 2016. As of September 30, 2017, our DSO was 63 days.
Our 2015 fiscal year had the benefit of two large contracts, the HAAS contract and jobactive, which provided up-front payments to cover startup and infrastructure costs.
Our tax payments for September 30, 2017, 2016 and 2015 were
$87.8 million
,
$108.3 million
and
$81.3 million
, respectively.
We anticipate that our operating cash flows in 2018 will decline from those reported in 2017. The significant improvement in cash collections, and resultant decline in DSO of seven days, is unlikely to be repeated. We note that the early or late payment of invoices from our largest customers may result in significant fluctuations in our cash flows from those anticipated.
In both fiscal years 2016 and 2015, we incurred significant cash outflows related to investing activities. These included:
|
|
•
|
The acquisitions of Acentia and Remploy in fiscal year 2015,
|
|
|
•
|
The acquisitions of Assessments Australia and Ascend in fiscal year 2016,
|
|
|
•
|
A significant infrastructure build-out in the United States, principally focused on the our information technology, and
|
|
|
•
|
Contract startups for HAAS and jobactive, which required initial up-front investment.
|
We acquired Revitalised in fiscal year 2017 with a cash payment of
$2.7 million
. Additional payments are anticipated in fiscal year 2018. We also reported cash inflows in fiscal years 2017 and 2016 from the sale of our K-12 Education business of
$1.0 million
and
$5.5 million
, respectively.
Our payments for infrastructure have declined following investments in prior years. We anticipate that our cash flows will return to a level consistent with our depreciation expense in fiscal year 2018 although our actions may be affected by startups requirements on any new contracts we may win.
Our cash flows from financing activities have been driven by our use of our credit facility, our repurchases of our own common stock and our quarterly dividend.
In fiscal year 2015, we utilized our credit facility to fund the acquisitions of Acentia, as well as to fund short-term working capital needs. Commencing in the fourth quarter of fiscal year 2016, we have repaid these borrowings in full, principally from our United States operating cash flows. At
September 30, 2017
, we had
$399.3 million
available to borrow, which we believe will be sufficient to cover our operating and other capital requirements.
We repurchased
0.6 million
,
0.6 million
and
1.6 million
shares of common stock during fiscal years
2017
,
2016
and
2015
, respectively at a total cost of
$143.0 million
. At September 30,
2017
, we had
$109.9 million
available for future repurchases under a plan approved by our Board of Directors. Our share repurchases are at the discretion of our Board of Directors and depend upon our future operations and earnings, capital requirements general financial condition, contractual restrictions and other factors our Board of Directors may deem relevant. Based upon our shares repurchased and our expectations for future purchases, we are anticipating that our diluted number of shares for fiscal year 2018 will be approximately 66.5 million.
Since the second half of fiscal year 2011, we have paid a quarterly dividend of $0.045 per common share. This has resulted in a regular cash outflow of approximately $12 million per year. Our next dividend is to be paid on
November 30, 2017
to shareholders of record on
November 15, 2017
. Continued payment of the dividend is dependent upon board discretion.
In fiscal years 2015 and 2016, the United States Dollar gained in strength over the other international currencies we use, including a sharp drop in the value of the British Pound in June 2016. The detrimental effect of these declines is shown as a reduction in cash through the effect of exchange rates. During fiscal year 2017, our foreign currencies have strengthened, resulting in a beneficial exchange effect.
To supplement our statements of cash flows presented on a GAAP basis, we use the measure of free cash flow to analyze the funds generated from operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Cash provided by operations
|
|
$
|
337,200
|
|
|
$
|
180,026
|
|
|
$
|
206,217
|
|
Purchases of property and equipment and capitalized software costs
|
|
(24,154
|
)
|
|
(46,391
|
)
|
|
(105,149
|
)
|
Free cash flow
|
|
$
|
313,046
|
|
|
$
|
133,635
|
|
|
$
|
101,068
|
|
Obligations and commitments
The following table summarizes our contractual obligations at September 30,
2017
that require the Company to make future cash payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
(dollars in thousands)
|
|
Total
|
|
Less than
1 year
|
|
1 - 3
years
|
|
3 - 5
years
|
|
More than
5 years
|
Operating leases
|
|
$
|
175,077
|
|
|
$
|
69,482
|
|
|
$
|
90,682
|
|
|
$
|
14,672
|
|
|
$
|
241
|
|
Debt(1)
|
|
668
|
|
|
141
|
|
|
282
|
|
|
245
|
|
|
—
|
|
Deferred compensation plan liabilities(2)
|
|
32,444
|
|
|
1,737
|
|
|
2,158
|
|
|
1,255
|
|
|
27,294
|
|
Total(3)
|
|
$
|
208,189
|
|
|
$
|
71,360
|
|
|
$
|
93,122
|
|
|
$
|
16,172
|
|
|
$
|
27,535
|
|
____________________________________________
|
|
(1)
|
The debt balance of
$0.7 million
at September 30, 2017 is interest free. Accordingly, no estimated interest payments have been included within the balances above.
|
|
|
(2)
|
Deferred compensation plan liabilities are typically payable at times elected by the employee at the time of deferral. The timing of these payments are based upon elections in place at September 30, 2017, but these may be subject to change. Payments falling due may be deferred again by the employee, delaying the obligation. Payments may also be accelerated if an employee ceases employment with us or applies for a
|
hardship payment. At September 30,
2017
, we held assets of $28.6 million in a Rabbi Trust which could be used to meet these obligations.
|
|
(3)
|
Due to the uncertainty with respect to the timing of future cash flows associated with the Company's unrecognized income tax benefits at September 30,
2017
, we are unable to reasonably estimate settlements with taxing authorities. The above table does not reflect unrecognized income tax benefits of approximately
$1.1 million
, of which approximately
$0.6 million
is related interest and penalties. See "Note 15. Income taxes" of the Consolidated Financial Statements for a further discussion on income taxes.
|
The contractual obligations table also omits our liabilities with respect to acquisition-related contingent consideration as part of the Assessments Australia acquisition in fiscal year 2016 and the Revitalised acquisition in fiscal year 2017. See "Note 5. Business combinations and disposal" of our Consolidated Financial Statements for additional information on these balances.
Off-balance sheet arrangements
Other than our operating lease commitments, we do not have material off-balance sheet risk or exposure to liabilities that are not recorded or disclosed in our financial statements. We have significant operating lease commitments for office space; those commitments are generally tied to the period of performance under related contracts. Although on certain contracts we are bound by performance bond commitments and standby letters of credit, we have not had any defaults resulting in draws on performance bonds. Also, we do not speculate in derivative transactions. We utilize interest rate derivatives to add stability to interest expense and to manage our exposure to interest rate movements.
Effects of inflation
As measured by revenue, approximately
35%
of our business in fiscal year
2017
was conducted under cost-reimbursable pricing arrangements that adjust revenue to cover costs increased by inflation. Approximately
5%
of the business was time-and-material pricing arrangements where labor rates are often fixed for several years. We generally have been able to price these contracts in a manner that accommodates the rates of inflation experienced in recent years. Our remaining contracts are fixed-price and performance-based and are typically priced to mitigate the risk of our business being adversely affected by inflation.
Critical accounting policies and estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and judgments that affect the amounts reported. We consider the accounting policies below to be the most important to our financial position and results of operations either because of the significance of the financial statement item or because of the need to use significant judgment in recording the balance. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates. Our significant accounting policies are summarized in "Note 1. Business and summary of significant accounting policies" of the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K.
Revenue Recognition.
We recognize revenue on arrangements as work is performed and amounts are earned. We consider amounts to be earned once evidence of an arrangement has been obtained, services have been delivered, fees are fixed or determinable and collectability of revenue is reasonably assured.
Approximately
35%
of our business is derived from cost-plus pricing arrangements. Revenue on cost-plus contracts is recognized based on costs incurred plus the negotiated fee earned. Our key estimates relate to the allocation of indirect costs. Much of the allocation of allowable indirect costs is based upon rules established by the relevant contract or by reference to U.S. Federal Government standards. While the existence of these rules reduces the risk of a significant error, the allocation of indirect costs is typically audited by our customers and it usually takes a significant period of time for an audit to be concluded. The iterative process of an audit provides us with information to refine our estimates for open periods. We have not recorded any significant adjustments to our revenue related to changes in such estimates for any of the three years ended
September 30, 2017
. We are current in our submissions of costs to relevant regulators. Although audits of past costs remain open for certain years, we believe it is unlikely that a significant adjustment to prior periods would occur at this time. We believe that the likelihood of a significant adjustment to revenue would be remote.
On certain performance-based arrangements, our per-transaction fees may be higher in earlier years to compensate for anticipated higher costs at the commencement of contract operations. Where the discount in future fees is considered both significant and incremental, we are required to estimate our total future volumes and revenues and allocate an estimated fee to each transaction. We refine these estimates of total future volumes quarterly and we recognize these changes as a cumulative catch-up to our revenue. The sensitivity of these volume estimates is driven by the length of the contract, the size of the discounts and the maturity of the contract. Our greatest revenue volatility from our estimate will typically arise at the mid-point of the contract; in early periods of contract performance, changes to estimates of future volumes will have a smaller true-up; in later periods, there is less likelihood of a significant change in estimate. Although we had a number of contracts with these terms and conditions during the three years ended
September 30, 2017
, no significant adjustments to revenue were recorded in this period. As of
September 30, 2017
, many of these contracts are close to maturity and, accordingly, the likelihood of a significant adjustment has diminished. The only significant remaining contract is in our contract with the Department of Education, which is in our U.S. Federal Services Segment. The contract, which has an expected total value of approximately $0.9 billion, has completed its third full year of operations and has up to seven years of operations remaining. Our transaction billing rate for the future periods is approximately 10% lower than it was for the first two years. If, at
September 30, 2017
, our estimate of future volumes had increased or decreased by five percent, it would not have resulted in a significant adjustment to revenue and operating income.
Where contracts have multiple deliverables, we evaluate these deliverables at the inception of each contract and as each item is delivered. As part of this evaluation, we consider whether a delivered item has value to a customer on a stand-alone basis and whether the delivery of the undelivered items is considered probable and substantially within our control, if a general right of return exists. Where deliverables, or groups of deliverables, have both of these characteristics, we treat each deliverable item as a separate element in the arrangement, allocate a portion of the allocable arrangement consideration using the relative selling price method to each element and apply the relevant revenue recognition guidance to each element. The allocation of revenue to individual elements requires judgment as, in many cases, we do not provide directly comparable services or products on a standalone basis.
Business combinations and goodwill.
The purchase price of an acquired business is allocated to tangible assets and separately identifiable intangible assets acquired less liabilities assumed based upon their respective fair values. The excess balance is recorded as goodwill. Accounting for business combinations requires the use of judgment in determining the fair value of assets acquired and liabilities assumed in order to allocate the purchase price of entities acquired. Our estimates of these fair values are based upon assumptions we believe to be reasonable and, where appropriate, include assistance from third-party appraisal firms.
Goodwill is not amortized, but is subject to impairment testing on an annual basis, or more frequently if impairment indicators arise. Impairment testing is performed at the reporting unit level. This process requires judgment in identifying our reporting units, appropriately allocating goodwill to these reporting units and assessing the fair value of these reporting units. At July 1,
2017
, the Company performed its annual impairment test and determined that there had been no impairment of goodwill. In performing this assessment, the Company utilizes an income approach. Such an approach requires estimation of future operating cash flows including business growth, utilization of working capital and discount rates. The valuation of the business as a whole is compared to the Company's market capital at the date of the acquisition in order to verify the calculation. In all cases, we determined that the fair value of our reporting units was significantly in excess of our carrying value to the extent that a 25% decline in fair value in any reporting unit would not have resulted in an impairment charge.
Long-Lived Assets (Excluding Goodwill).
The Company reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. Examples of indicators include projects performing less well than anticipated or making losses or an identified risk of a contract termination. Where a potential risk is identified, our review is based on our projection of the undiscounted future operating cash flows of the related customer project. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amount of the related assets (the asset group), we recognize a non-cash impairment charge to reduce the carrying amount to equal projected future discounted cash flows. Judgment is required in identifying the indicators of impairment, in identifying the asset group and in estimating the future cash flows.
No impairment charges were recorded in the three years ending
September 30, 2017
. During the year ended
September 30, 2017
, we performed an impairment assessment on long-lived assets with carrying values of $27 million. Although no impairment was identified at this time, we will continue to review for indicators of asset impairment over its remaining life.
Contingencies.
From time to time, we are involved in legal proceedings, including contract and employment claims, in the ordinary course of business. We assess the likelihood of any adverse judgments or outcomes to these contingencies, as well as potential ranges of probable losses and establish reserves accordingly. The amount of reserves required may change in future periods due to new developments in each matter or changes in approach to a matter such as a change in settlement strategy.
Income Taxes.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would "more likely than not" sustain the position following an audit. For tax positions meeting the "more likely than not" threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The assumptions and estimates used in preparing these calculations may change over time and may result in adjustments that will affect our tax charge.
Non-GAAP and other measures
We utilize non‑GAAP measures where we believe it will assist the user of our financial statements in understanding our business. The presentation of these measures is meant to complement, but not replace, other financial measures in this document. The presentation of non-GAAP numbers is not meant to be considered in isolation, nor as an alternative to revenue growth, cash flows from operations or net income as measures of performance. These non-GAAP measures, as determined and presented by us, may not be comparable to related or similarly titled measures presented by other companies.
In recent years, we have made a number of acquisitions. We believe users of our financial statements wish to evaluate the performance of our underlying business, excluding changes that have arisen due to businesses acquired. We provide organic revenue growth as a useful basis for assessing this. To calculate organic revenue growth, we compare current year revenue excluding revenue from these acquisitions to our prior year revenue.
In fiscal year
2017
,
28%
of our revenue was generated outside the U.S. We believe that users of our financial statements wish to understand the performance of our foreign operations using a methodology which excludes the effect of year-over-year exchange rate fluctuations. To calculate year-over-year currency movement, we determine the current year’s results for all foreign businesses using the exchange rates in the prior year. We refer to this adjusted revenue on a "constant currency basis."
In order to sustain our cash flows from operations, we require regular refreshing of our fixed assets and technology. We believe that users of our financial statements wish to understand the cash flows that directly correspond with our operations and the investments we must make in those operations using a methodology which combines operating cash flows and capital expenditures. We provide free cash flow to complement our statement of cash flows. Free cash flow shows the effects of the Company’s operations and routine capital expenditures and excludes the cash flow effects of acquisitions, share repurchases, dividend payments and other financing transactions. We have provided a reconciliation of free cash flow to cash provided by operations.
To sustain our operations, our principal source of financing comes from receiving payments from our customers. We believe that users of our financial statements wish to evaluate our efficiency in converting revenue into cash receipts. Accordingly, we provide DSO, which we calculate by dividing billed and unbilled receivable balances at the end of each quarter by revenue per day for the period. Revenue per day for a quarter is determined by dividing total revenue by 91 days.
During fiscal year
2017
, we utilized our credit facility. Our credit agreement includes the defined term Consolidated EBITDA and our calculation of Adjusted EBITDA conforms to the credit agreement definition. We believe our investors appreciate the opportunity to understand the possible restrictions which arise from our credit agreement. Adjusted EBITDA is also a useful measure of performance which focuses on the cash generating capacity of the business as it excludes the non-cash expenses of depreciation and amortization, and makes for easier comparisons between the operating performance of companies with different capital structures by excluding interest expense and therefore the impacts of financing costs. The measure of Adjusted EBITA is a step in calculating Adjusted EBITDA and facilitates comparisons to similar businesses as it isolates the amortization effect of business combinations. We have provided a reconciliation from net income to Adjusted EBITA and Adjusted EBITDA as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Net income attributable to MAXIMUS
|
|
$
|
209,426
|
|
|
$
|
178,362
|
|
|
$
|
157,772
|
|
Interest expense
|
|
379
|
|
|
3,466
|
|
|
673
|
|
Provision for income taxes
|
|
102,053
|
|
|
105,808
|
|
|
99,770
|
|
Amortization of intangible assets
|
|
12,208
|
|
|
13,377
|
|
|
9,348
|
|
Stock compensation expense
|
|
21,365
|
|
|
18,751
|
|
|
17,237
|
|
Acquisition-related expenses
|
|
83
|
|
|
832
|
|
|
4,745
|
|
Gain on sale of a business
|
|
(650
|
)
|
|
(6,880
|
)
|
|
—
|
|
Adjusted EBITA
|
|
344,864
|
|
|
313,716
|
|
|
289,545
|
|
Depreciation and amortization of property, plant, equipment and capitalized software
|
|
55,769
|
|
|
58,404
|
|
|
46,849
|
|
Adjusted EBITDA
|
|
$
|
400,633
|
|
|
$
|
372,120
|
|
|
$
|
336,394
|
|
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risks generally relates to changes in foreign currency exchange rates.
At
September 30, 2017
and 2016, we held net assets denominated in currencies other than the U.S. Dollar of $186.8 million and $203.9 million, respectively. Of these balances, cash and cash equivalents comprised
$63.7 million
and
$63.0 million
, respectively. Accordingly, in the event of a 10% unfavorable exchange rate movement across these currencies, we would have reported the following incremental effects on our comprehensive income and our cash flow statement (in thousands).
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
2017
|
|
2016
|
Comprehensive income attributable to MAXIMUS
|
$
|
(18,680
|
)
|
|
$
|
(20,390
|
)
|
Net decrease in cash and cash equivalents
|
(6,370
|
)
|
|
(6,300
|
)
|
Where possible, we identify surplus funds in foreign locations and place them into entities with the United States Dollar as their functional currency. This mitigates our exposure to foreign currencies. We mitigate our foreign currency exchange risks within our operating divisions through incurring costs and cash outflows in the same currency as our revenue.
We are exposed to interest rate risk through our credit facility when we utilize it. At
September 30, 2017
, we had no outstanding borrowings on our credit facility and, accordingly, no exposure to interest rate fluctuations. In the final quarter of fiscal year 2017, our cash balance increased significantly following repayment of the balance on our credit facility. Our interest income next year will be driven by our use and deployment of funds as well as interest rates in the locations where we hold funds.
ITEM 8.
Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data are included as part of this Annual Report on Form 10-K:
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,
ON THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors and Shareholders
MAXIMUS, Inc.
We have audited the accompanying consolidated balance sheets of MAXIMUS, Inc. as of September 30, 2017 and 2016, and the related consolidated statements of operations
,
comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2017. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MAXIMUS, Inc. at September 30, 2017 and 2016, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), MAXIMUS, Inc.’s internal control over financial reporting as of September 30, 2017, based on criteria established in
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 20, 2017 expressed an unqualified opinion thereon.
|
|
|
/s/ Ernst & Young LLP
|
|
|
|
Tysons, Virginia
|
|
November 20, 2017
|
|
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
Revenue
|
$
|
2,450,961
|
|
|
$
|
2,403,360
|
|
|
$
|
2,099,821
|
|
Cost of revenue
|
1,839,056
|
|
|
1,841,169
|
|
|
1,587,104
|
|
Gross profit
|
611,905
|
|
|
562,191
|
|
|
512,717
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
284,510
|
|
|
268,259
|
|
|
238,792
|
|
Amortization of intangible assets
|
12,208
|
|
|
13,377
|
|
|
9,348
|
|
Restructuring costs
|
2,242
|
|
|
—
|
|
|
—
|
|
Acquisition-related expenses
|
83
|
|
|
832
|
|
|
4,745
|
|
|
|
|
|
|
|
Gain on sale of a business
|
650
|
|
|
6,880
|
|
|
—
|
|
Operating income
|
313,512
|
|
|
286,603
|
|
|
259,832
|
|
|
|
|
|
|
|
Interest expense
|
2,162
|
|
|
4,134
|
|
|
1,398
|
|
|
|
|
|
|
|
Other income, net
|
2,885
|
|
|
3,499
|
|
|
1,385
|
|
Income before income taxes
|
314,235
|
|
|
285,968
|
|
|
259,819
|
|
Provision for income taxes
|
102,053
|
|
|
105,808
|
|
|
99,770
|
|
Net income
|
212,182
|
|
|
180,160
|
|
|
160,049
|
|
Income attributable to noncontrolling interests
|
2,756
|
|
|
1,798
|
|
|
2,277
|
|
Net income attributable to MAXIMUS
|
$
|
209,426
|
|
|
$
|
178,362
|
|
|
$
|
157,772
|
|
Basic earnings per share attributable to MAXIMUS
|
$
|
3.19
|
|
|
$
|
2.71
|
|
|
$
|
2.37
|
|
Diluted earnings per share attributable to MAXIMUS
|
$
|
3.17
|
|
|
$
|
2.69
|
|
|
$
|
2.35
|
|
Dividends per share
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
65,632
|
|
|
65,822
|
|
|
66,682
|
|
Diluted
|
66,065
|
|
|
66,229
|
|
|
67,275
|
|
See accompanying notes to consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
Net income
|
$
|
212,182
|
|
|
$
|
180,160
|
|
|
$
|
160,049
|
|
Foreign currency translation adjustments
|
8,549
|
|
|
(13,828
|
)
|
|
(22,570
|
)
|
Interest rate hedge, net of income taxes of $-, $(16) and $16
|
1
|
|
|
24
|
|
|
(25
|
)
|
Comprehensive income
|
220,732
|
|
|
166,356
|
|
|
137,454
|
|
Comprehensive income attributable to noncontrolling interests
|
2,756
|
|
|
1,798
|
|
|
2,277
|
|
Comprehensive income attributable to MAXIMUS
|
$
|
217,976
|
|
|
$
|
164,558
|
|
|
$
|
135,177
|
|
See accompanying notes to consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2017
|
|
2016
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
166,252
|
|
|
$
|
66,199
|
|
Accounts receivable—billed and billable, net
|
394,338
|
|
|
444,357
|
|
Accounts receivable—unbilled
|
36,475
|
|
|
36,433
|
|
Income taxes receivable
|
4,528
|
|
|
17,273
|
|
Prepaid expenses and other current assets
|
55,649
|
|
|
56,718
|
|
Total current assets
|
657,242
|
|
|
620,980
|
|
Property and equipment, net
|
101,651
|
|
|
131,569
|
|
Capitalized software, net
|
26,748
|
|
|
30,139
|
|
Goodwill
|
402,976
|
|
|
397,558
|
|
Intangible assets, net
|
98,769
|
|
|
109,027
|
|
Deferred contract costs, net
|
16,298
|
|
|
18,182
|
|
Deferred compensation plan assets
|
28,548
|
|
|
23,307
|
|
Deferred income taxes
|
7,691
|
|
|
8,644
|
|
Other assets
|
10,739
|
|
|
9,413
|
|
Total assets
|
$
|
1,350,662
|
|
|
$
|
1,348,819
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
122,083
|
|
|
$
|
150,711
|
|
Accrued compensation and benefits
|
105,667
|
|
|
96,480
|
|
Deferred revenue
|
71,722
|
|
|
73,692
|
|
Income taxes payable
|
4,703
|
|
|
7,979
|
|
Long-term debt, current portion
|
141
|
|
|
277
|
|
Other liabilities
|
11,950
|
|
|
11,617
|
|
Total current liabilities
|
316,266
|
|
|
340,756
|
|
Deferred revenue, less current portion
|
28,182
|
|
|
40,007
|
|
Deferred income taxes
|
20,106
|
|
|
16,813
|
|
Long-term debt
|
527
|
|
|
165,338
|
|
Deferred compensation plan liabilities, less current portion
|
30,707
|
|
|
24,012
|
|
Other liabilities
|
9,106
|
|
|
8,753
|
|
Total liabilities
|
404,894
|
|
|
595,679
|
|
Commitments and contingencies
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
Common stock, no par value; 100,000 shares authorized; 65,137 and 65,223 shares issued and outstanding at September 30, 2017 and 2016, at stated amount, respectively
|
475,592
|
|
|
461,679
|
|
Accumulated other comprehensive income
|
(27,619
|
)
|
|
(36,169
|
)
|
Retained earnings
|
492,112
|
|
|
323,571
|
|
Total MAXIMUS shareholders' equity
|
940,085
|
|
|
749,081
|
|
Noncontrolling interests
|
5,683
|
|
|
4,059
|
|
Total equity
|
945,768
|
|
|
753,140
|
|
Total liabilities and equity
|
$
|
1,350,662
|
|
|
$
|
1,348,819
|
|
See accompanying notes to consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
Cash flows from operations:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
212,182
|
|
|
$
|
180,160
|
|
|
$
|
160,049
|
|
Adjustments to reconcile net income to net cash provided by operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant, equipment and capitalized software
|
55,769
|
|
|
58,404
|
|
|
46,849
|
|
Amortization of intangible assets
|
12,208
|
|
|
13,377
|
|
|
9,348
|
|
Deferred income taxes
|
4,762
|
|
|
5,652
|
|
|
807
|
|
Stock compensation expense
|
21,365
|
|
|
18,751
|
|
|
17,237
|
|
Gain on sale of business
|
(650
|
)
|
|
(6,880
|
)
|
|
—
|
|
Changes in assets and liabilities, net of effects of business combinations:
|
|
|
|
|
|
Accounts receivable—billed and billable
|
53,025
|
|
|
(51,986
|
)
|
|
(103,774
|
)
|
Accounts receivable—unbilled
|
26
|
|
|
(5,590
|
)
|
|
(911
|
)
|
Prepaid expenses and other current assets
|
2,584
|
|
|
(2,027
|
)
|
|
(6,475
|
)
|
Deferred contract costs
|
2,037
|
|
|
(398
|
)
|
|
(7,245
|
)
|
Accounts payable and accrued liabilities
|
(28,309
|
)
|
|
(2,371
|
)
|
|
44,351
|
|
Accrued compensation and benefits
|
8,849
|
|
|
(869
|
)
|
|
(3,157
|
)
|
Deferred revenue
|
(15,401
|
)
|
|
(11,661
|
)
|
|
47,948
|
|
Income taxes
|
8,901
|
|
|
(13,125
|
)
|
|
9,134
|
|
Other assets and liabilities
|
(148
|
)
|
|
(1,411
|
)
|
|
(7,944
|
)
|
Cash provided by operations
|
337,200
|
|
|
180,026
|
|
|
206,217
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
(2,677
|
)
|
|
(46,651
|
)
|
|
(289,212
|
)
|
Purchases of property and equipment and capitalized software costs
|
(24,154
|
)
|
|
(46,391
|
)
|
|
(105,149
|
)
|
Proceeds from the sale of a business
|
1,035
|
|
|
5,515
|
|
|
—
|
|
Other
|
575
|
|
|
424
|
|
|
489
|
|
Cash used in investing activities
|
(25,221
|
)
|
|
(87,103
|
)
|
|
(393,872
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Cash dividends paid to MAXIMUS shareholders
|
(11,674
|
)
|
|
(11,701
|
)
|
|
(11,852
|
)
|
Repurchases of common stock
|
(28,863
|
)
|
|
(33,335
|
)
|
|
(82,787
|
)
|
Stock compensation tax benefit
|
—
|
|
|
5,172
|
|
|
9,474
|
|
Tax withholding related to RSU vesting
|
(9,175
|
)
|
|
(11,614
|
)
|
|
(12,451
|
)
|
Stock option exercises
|
924
|
|
|
546
|
|
|
868
|
|
Borrowings under credit facility
|
185,000
|
|
|
149,823
|
|
|
330,993
|
|
Repayment of credit facility and other long-term debt
|
(349,981
|
)
|
|
(195,200
|
)
|
|
(121,611
|
)
|
Other
|
(1,660
|
)
|
|
(533
|
)
|
|
(75
|
)
|
Expansion of credit facility
|
—
|
|
|
—
|
|
|
(1,444
|
)
|
Cash (used in)/provided by financing activities
|
(215,429
|
)
|
|
(96,842
|
)
|
|
111,115
|
|
Effect of exchange rate changes on cash
|
3,503
|
|
|
(4,554
|
)
|
|
(6,900
|
)
|
Net increase/(decrease) in cash and cash equivalents
|
100,053
|
|
|
(8,473
|
)
|
|
(83,440
|
)
|
Cash and cash equivalents, beginning of period
|
66,199
|
|
|
74,672
|
|
|
158,112
|
|
Cash and cash equivalents, end of period
|
$
|
166,252
|
|
|
$
|
66,199
|
|
|
$
|
74,672
|
|
See accompanying notes to consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
Outstanding
|
|
Common
Stock
|
|
Accumulated
Other
Comprehensive
Income
|
|
Retained
Earnings
|
|
Noncontrolling
Interest
|
|
Total
|
Balance at September 30, 2014
|
66,613
|
|
|
$
|
429,857
|
|
|
$
|
230
|
|
|
$
|
125,875
|
|
|
$
|
223
|
|
|
$
|
556,185
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
157,772
|
|
|
2,277
|
|
|
160,049
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
(22,570
|
)
|
|
—
|
|
|
—
|
|
|
(22,570
|
)
|
Interest rate hedge, net of income taxes
|
—
|
|
|
—
|
|
|
(25
|
)
|
|
—
|
|
|
—
|
|
|
(25
|
)
|
Cash dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,852
|
)
|
|
(75
|
)
|
|
(11,927
|
)
|
Dividends on RSUs
|
—
|
|
|
397
|
|
|
—
|
|
|
(397
|
)
|
|
—
|
|
|
—
|
|
Repurchases of common stock
|
(1,619
|
)
|
|
—
|
|
|
—
|
|
|
(82,787
|
)
|
|
—
|
|
|
(82,787
|
)
|
Stock compensation expense
|
—
|
|
|
17,237
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,237
|
|
Stock compensation tax benefit
|
—
|
|
|
9,474
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,474
|
|
Tax withholding relating to RSU vesting
|
—
|
|
|
(11,701
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,701
|
)
|
Stock option exercises and RSU vesting
|
443
|
|
|
868
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
868
|
|
Addition of noncontrolling interest from acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
896
|
|
|
896
|
|
Balance at September 30, 2015
|
65,437
|
|
|
446,132
|
|
|
(22,365
|
)
|
|
188,611
|
|
|
3,321
|
|
|
615,699
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
178,362
|
|
|
1,798
|
|
|
180,160
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
(13,828
|
)
|
|
—
|
|
|
—
|
|
|
(13,828
|
)
|
Interest rate hedge, net of income taxes
|
—
|
|
|
—
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Cash dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,701
|
)
|
|
(1,060
|
)
|
|
(12,761
|
)
|
Dividends on RSUs
|
—
|
|
|
363
|
|
|
—
|
|
|
(363
|
)
|
|
—
|
|
|
—
|
|
Repurchases of common stock
|
(587
|
)
|
|
—
|
|
|
—
|
|
|
(31,338
|
)
|
|
—
|
|
|
(31,338
|
)
|
Stock compensation expense
|
—
|
|
|
18,751
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,751
|
|
Stock compensation tax benefit
|
—
|
|
|
5,172
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,172
|
|
Tax withholding related to RSU vesting
|
—
|
|
|
(9,285
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,285
|
)
|
Stock option exercises and RSU vesting
|
373
|
|
|
546
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
546
|
|
Balance at September 30, 2016
|
65,223
|
|
|
461,679
|
|
|
(36,169
|
)
|
|
323,571
|
|
|
4,059
|
|
|
753,140
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
209,426
|
|
|
2,756
|
|
|
212,182
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
8,549
|
|
|
—
|
|
|
—
|
|
|
8,549
|
|
Interest rate hedge, net of income taxes
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Cash dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,674
|
)
|
|
(1,132
|
)
|
|
(12,806
|
)
|
Dividends on RSUs
|
—
|
|
|
348
|
|
|
—
|
|
|
(348
|
)
|
|
—
|
|
|
—
|
|
Repurchases of common stock
|
(558
|
)
|
|
—
|
|
|
—
|
|
|
(28,863
|
)
|
|
—
|
|
|
(28,863
|
)
|
Stock compensation expense
|
—
|
|
|
21,365
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21,365
|
|
Tax withholding related to RSU vesting
|
—
|
|
|
(8,724
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,724
|
)
|
Stock option exercises and RSU vesting
|
472
|
|
|
924
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
924
|
|
Balance at September 30, 2017
|
65,137
|
|
|
$
|
475,592
|
|
|
$
|
(27,619
|
)
|
|
$
|
492,112
|
|
|
$
|
5,683
|
|
|
$
|
945,768
|
|
See accompanying notes to consolidated financial statements.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements
For the years ended September 30,
2017
,
2016
and
2015
1. Business and summary of significant accounting policies
Description of business
MAXIMUS, Inc. (the "Company" or "we") is a leading operator of government health and human services programs worldwide.
We conduct our operations through
three
business segments: Health Services, U.S. Federal Services and Human Services.
|
|
•
|
The Health Services Segment provides a variety of business process services, appeals and assessments as well as related consulting services, for state, provincial and national government programs. These services support Medicaid, the Children's Health Insurance Program (CHIP) and the Affordable Care Act (ACA) in the U.S., Health Insurance BC (British Columbia) in Canada, and the Health Assessment Advisory Service (HAAS) in the United Kingdom.
|
|
|
•
|
The U.S. Federal Services Segment provides business process services and program management for large U.S. Federal Government programs, independent health review and appeals services for both the U.S. Federal Government and similar state-based programs and technology solutions for civilian agencies.
|
|
|
•
|
The Human Services Segment provides national, state and local human services agencies with a variety of business process services and related consulting services for government programs.
|
Principles of consolidation
The consolidated financial statements include the accounts of MAXIMUS, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Where MAXIMUS owns less than 100% of the share capital of its subsidiaries, but is still considered to have sufficient ownership to control the businesses, the results of these business operations are consolidated within our financial statements. The ownership interests held by other parties are shown as noncontrolling interests.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Our significant estimates include revenue recognition, estimates of the fair value of assets acquired and liabilities assumed in business combinations, estimates of the collectibility of receivables, estimates of future discounts in performance-based contracts, evaluation of asset impairment, accrual of estimated liabilities, valuation of acquisition-related contingent consideration liabilities and income taxes.
Revenue recognition
Revenue is generated from contracts with various pricing arrangements with total revenue contributions in fiscal year
2017
as follows:
|
|
•
|
performance-based criteria (
42%
);
|
|
|
•
|
costs incurred plus a negotiated fee ("cost-plus") (
35%
);
|
|
|
•
|
fixed-price (
18%
); and
|
|
|
•
|
time-and-materials (
5%
).
|
We recognize revenue on arrangements as work is performed and amounts are earned. We consider amounts to be earned once evidence of an arrangement has been obtained, services have been delivered, fees are fixed or determinable and collectability of revenue is reasonably assured.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
We recognize revenue on performance-based contracts when earned, which occurs when we have achieved the performance obligation. This may result in revenue being recognized in irregular increments. In certain performance-based contracts, we may negotiate arrangements where we are reimbursed at higher levels at the beginning of an arrangement. Where we believe the rates in the latter part of the contract represent a significant and incremental discount to the customer, we recognize revenue at an average per-transaction rate. This results in a deferred revenue balance and requires us to estimate future volumes over the life of an arrangement. Adjustments to estimates of future volumes result in adjustments to revenue.
Revenue on cost-plus contracts is recognized as services are performed, based on costs incurred plus the negotiated fee earned. In certain contracts with the U.S. Federal Government, we may be paid an award fee, based upon the quality of the service we perform. Where this fee can be objectively determined, it is recognized ratably over the period of performance, which is between four and six months. Where the fee cannot be determined objectively, all revenue is deferred until the fee has been earned.
We recognize revenue on fixed-priced contracts when earned, as services are provided. Revenue is generally recognized on a straight-line basis unless evidence suggests that revenue is earned or obligations are fulfilled in a different pattern. The timing of expense recognition may result in irregular profit margins.
Revenue on time-and-materials contracts is recognized as services are performed, based on hours worked and expenses incurred.
Where contracts have multiple deliverables, we evaluate these deliverables at the inception of each contract and as each item is delivered. As part of this evaluation, we consider whether a delivered item has value to a customer on a stand-alone basis and whether the delivery of the undelivered items is considered probable and substantially within our control, if a general right of return exists. Where deliverables, or groups of deliverables, have both of these characteristics, we treat each deliverable item as a separate element in the arrangement, allocate a portion of the allocable arrangement consideration using the estimated relative selling price method to each element and apply the relevant revenue recognition guidance to each element.
Sales and purchases in jurisdictions subject to indirect taxes, such as value added tax, are recorded net of tax collected and paid.
New accounting standards
We have adopted two new accounting standard updates during the current fiscal year.
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09,
Stock Compensation, Improvements to Employee Share-Based Payment Accounting
. We adopted this standard in fiscal year 2017. The new standard requires us to record the tax benefit or expense related to the vesting of RSUs or the exercise of stock options within our provision for income taxes in the consolidated statement of operations; this benefit was previously reported in the statement of changes in shareholders’ equity. The cash flow effects of the tax benefit are now reported in cash flows from operations; they were previously in cash flows from financing activities. The new standard allows us more flexibility in net settling RSUs as they vest. The new standard also allows for changes in accounting for the forfeiture of stock awards; we will continue to estimate our stock award forfeitures as we expense each award. This new standard has had the following effects in fiscal year 2017:
|
|
•
|
During the year ended
September 30, 2017
, approximately
0.5 million
shares were issued through the vesting of RSUs and the exercise of stock options, resulting in a decrease in our provision for income taxes of
$6.6 million
and a corresponding benefit to our cash flows from operations.
|
|
|
•
|
Our diluted weighted average shares outstanding was higher by approximately
90,000
shares than it would have been if the former standard had been in place.
|
|
|
•
|
The combination of these factors resulted in a net increase of
$0.10
to our basic and diluted earnings per share for the year ended
September 30, 2017
, compared to what would have been recorded under the former accounting guidance.
|
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
The new standard does not require us to adjust previously reported results. Accordingly, we have made no changes to our consolidated statements of operations, cash flows or changes in shareholders' equity for any comparative periods.
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern.
The new standard requires us to evaluate whether there are conditions or events that raise substantial doubt about our ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. This new standard would only affect our financial reporting in the event that substantial doubt over our existence was identified. The adoption of this standard did not have a material impact on the financial statements.
We are evaluating the effects of guidance issued in two significant areas of financial reporting. These new standards will have a significant effect on how we report and disclose transactions.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers.
In addition, the FASB has issued additional updates covering technical items and changing the date of adoption. This new standard will change the manner in which we evaluate revenue recognition for all contracts with customers, although the effect of the changes on revenue recognition will vary from contract to contract. We will adopt this standard during our 2019 fiscal year. We have established a cross-functional steering committee which includes representatives from across all our business and support segments. The steering committee is responsible for evaluating the impact of the standard on our operations including accounting, taxation, internal audit and financial systems. Our approach to analyzing these impacts includes reviewing our current accounting policies and practices to identify potential differences that will result from applying the requirements of the new standard to our existing contracts. In addition, we are in the process of evaluating the changes needed to our business processes, systems and controls in order to support revenue recognition and the related disclosures under the new standard. The standard permits a retrospective or cumulative effect transition method. We anticipate that we will adopt the new standard using the retrospective method.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The new standard will change the manner in which we will present our leasing arrangements. We will adopt this standard during our 2020 fiscal year. We are evaluating the likely effects on our business.
We are also evaluating the effect of a new standard related to goodwill impairment. This standard would only have a significant effect on our results if our goodwill balance was determined to be impaired.
In January 2017, the FASB issued ASU No. 2017-04,
Simplifying the Test for Goodwill Impairment.
This standard will not change the manner in which we would identify a goodwill impairment but would change the manner of the calculation of any resulting impairment. Under existing guidance, we would calculate goodwill for each of our reporting units by calculating the fair value of all existing assets and liabilities within that reporting unit and comparing this to the fair value of the reporting unit; to the extent that this difference is less than our existing goodwill balance related to that reporting unit, we would record an impairment. The new standard will require us to calculate goodwill based upon the difference between the fair value and reported value of a reporting unit. This standard would be effective for our 2021 fiscal year, although early adoption is permitted. We do not anticipate any significant effect on our financial statements as a result of adopting this standard.
With the exception of the new accounting standards discussed above, there have been no new accounting pronouncements that have significance, or potential significance, to the Company's consolidated financial statements.
Cash and cash equivalents
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Where we are obliged to hold cash balances as collateral for lease, credit card or letter of credit arrangements, or where we hold funds on behalf of clients, this balance is reported within other current assets. These restricted cash balances totaled
$13.5 million
and
$14.1 million
at
September 30, 2017
and
2016
, respectively.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
Accounts receivable—billed, billable and unbilled
Billed receivables are balances where an invoice has been prepared and issued and is collectible under standard contract terms.
Many of our clients require invoices to be prepared on a monthly basis. Where we anticipate that an invoice will be issued within a short period of time and where the funds are considered collectible from within standard contract terms, we include this balance as billable accounts receivable.
Both billed and billable balances are recorded at their face amount less an allowance for doubtful accounts. We re-evaluate our client receivables on a quarterly basis, especially receivables that are past due, and reassess our allowance for doubtful accounts based on specific client collection issues.
We present unbilled receivables as a separate component of our consolidated balance sheet. Unbilled receivables represents a timing difference between when amounts are billed or billable and when revenue has been recognized or has occurred as of period end. The timing of these billings is generally driven by the contractual terms, which may have billing milestones which are different from revenue recognition milestones. Our unbilled receivables balance also includes retainage balances, where customers may hold back payment for work performed for a period of time to allow opportunities to evaluate the quality of our performance. Our unbilled receivable balance is recorded at fair value which is the value which we expect to invoice for the services performed, once the criteria for billing have been met.
Business combinations and goodwill
The purchase price of an acquired business is allocated to tangible assets, separately identifiable intangible assets acquired and liabilities assumed based upon their respective fair values. Any excess balance is recorded as goodwill. Costs incurred directly related to an acquisition, including legal, accounting and valuation services, are expensed as incurred.
Intangible assets are separately identified and recorded at fair value. These assets are amortized on a straight-line basis over useful lives estimated at the time of the business combination.
Goodwill is not amortized but is subject to impairment testing on an annual basis, or more frequently if impairment indicators arise. Impairment testing is performed at the reporting unit level. A reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete financial information is prepared and reviewed regularly by segment management. However, components are aggregated if they have similar economic characteristics. The evaluation is performed by comparing the fair value of the relevant reporting unit to the carrying value, including goodwill, of the reporting unit. If the fair value of the reporting unit exceeds the carrying value,
no
impairment loss is recognized. However, if the carrying value of the reporting unit exceeds the fair value, the goodwill of the reporting unit may be impaired.
Our reporting units are consistent with our operating segments, Health Services, U.S. Federal Services and Human Services. We perform our annual impairment test as of July 1 of each year. We performed the annual impairment test, as of July 1,
2017
, and determined that there had been
no
impairment of goodwill. In performing this assessment, we utilized an income approach. Such an approach requires estimation of future operating cash flows including business growth, utilization of working capital and discount rates. The valuation of the business as a whole is compared to our market value at the date of the test in order to verify the calculation.
Long-lived assets (excluding goodwill)
Property and equipment is recorded at cost. Depreciation is recorded over the assets' respective useful economic lives using the straight-line method, which are not to exceed
39 years
for our buildings and
seven years
for office furniture and equipment. Leasehold improvements are amortized over the shorter of their useful life or the remaining term of the lease. Repairs and maintenance costs are expensed as incurred.
All of the Company's capitalized software represents development costs for software that is intended for our internal use. Direct costs of time and material incurred for the development of application software for internal use are capitalized and depreciated using the straight-line method over the estimated useful life of the software, ranging from
three
to
eight years
. Costs incurred for upgrades and enhancements that do not result in additional functionality are expensed as incurred.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
Deferred contract costs consist of contractually recoverable direct set-up costs related to long-term service contracts. These costs include direct and incremental costs incurred prior to the commencement of providing service to our customer. These costs are expensed over the period the services are provided using the straight-line method.
We review long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. Our review is based on our projection of the undiscounted future operating cash flows of the related asset group. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amount, we recognize a non-cash impairment charge to reduce the carrying amount to equal projected future discounted cash flows.
No
impairment charges were recorded in the three years ending
September 30, 2017
.
Income taxes
Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. In addition, a valuation allowance is recorded if it is believed more likely than not that a deferred tax asset will not be fully realized.
We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would "more likely than not" sustain the position following an audit. For tax positions meeting the "more likely than not" threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Foreign currency
For all foreign operations, the functional currency is the local currency. The assets and liabilities of foreign operations are translated into U.S. Dollars at period-end exchange rates, and revenue and expenses are translated at average exchange rates for the year. The resulting cumulative translation adjustment is included in accumulated other comprehensive income on the consolidated balance sheet. Gains and losses from foreign currency transactions are included in other income, net.
Contingencies
From time to time, we are involved in legal proceedings, including contract and employment claims, in the ordinary course of business. We assess the likelihood of any adverse judgments or outcomes to these contingencies, as well as potential ranges of probable losses and establish reserves accordingly. The amount of reserves required may change in future periods due to new developments in each matter or changes in approach to a matter such as a change in settlement strategy.
Fair value measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants.
Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy in one of the following categories based on the lowest level input that is significant in measuring fair value:
Level 1 - Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.
Level 2 - Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.
Level 3 - Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other amounts included within current assets and liabilities that meet the definition of a financial instrument approximate fair value due to the short-term nature of these balances.
We hold investments in a Rabbi Trust on behalf of our deferred compensation plan. These assets are recorded on our consolidated balance sheet at fair value under the heading of "Deferred Compensation Plan Assets". These assets have quoted prices in active markets (Level 1). See "Note 13. Employee benefit plans and deferred compensation" for further details.
We have
two
acquisitions where our payment is contingent upon events which take place after the acquisition date. The related liability is recorded on our consolidated balance sheet as a liability at estimated fair value and updated on a quarterly basis as an acquisition-related expense or benefit. The valuation of this liability is derived from internal estimates of future performance and not from inputs that are observable (Level 3).
2. Business segments
We have
three
business segments, Health Services, U.S. Federal Services and Human Services. These segments reflect the way in which we organize and manage the business and is consistent with the manner in which our Chief Executive Officer operates and reviews the results of the business.
Expenses which are not specifically included in the segments are included in other categories, including amortization of intangible assets, costs incurred in restructuring our U.K. Human Services business, the direct costs of acquisitions and the gain on sale of the K-12 Education business. These costs are excluded from measuring each segment's operating performance.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
The results of these segments for the three years ended
September 30, 2017
are shown below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
|
|
|
Health Services
|
$
|
1,380,151
|
|
|
$
|
1,298,304
|
|
|
$
|
1,109,238
|
|
U.S. Federal Services
|
545,573
|
|
|
591,728
|
|
|
502,484
|
|
Human Services
|
525,237
|
|
|
513,328
|
|
|
488,099
|
|
Total
|
$
|
2,450,961
|
|
|
$
|
2,403,360
|
|
|
$
|
2,099,821
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
Health Services
|
$
|
347,325
|
|
|
$
|
292,181
|
|
|
$
|
254,108
|
|
U.S. Federal Services
|
139,321
|
|
|
138,168
|
|
|
118,646
|
|
Human Services
|
125,259
|
|
|
131,842
|
|
|
139,963
|
|
Total
|
$
|
611,905
|
|
|
$
|
562,191
|
|
|
$
|
512,717
|
|
Selling, general and administrative expense:
|
|
|
|
|
|
|
|
|
Health Services
|
$
|
132,081
|
|
|
$
|
107,155
|
|
|
$
|
99,815
|
|
U.S. Federal Services
|
74,345
|
|
|
74,792
|
|
|
59,252
|
|
Human Services
|
76,675
|
|
|
84,157
|
|
|
79,719
|
|
Other
|
1,409
|
|
|
2,155
|
|
|
6
|
|
Total
|
$
|
284,510
|
|
|
$
|
268,259
|
|
|
$
|
238,792
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Health Services
|
$
|
215,244
|
|
|
$
|
185,026
|
|
|
$
|
154,293
|
|
U.S. Federal Services
|
64,976
|
|
|
63,376
|
|
|
59,394
|
|
Human Services
|
48,584
|
|
|
47,685
|
|
|
60,244
|
|
Amortization of intangible assets
|
(12,208
|
)
|
|
(13,377
|
)
|
|
(9,348
|
)
|
Restructuring costs
|
(2,242
|
)
|
|
—
|
|
|
—
|
|
Acquisition-related expenses
|
(83
|
)
|
|
(832
|
)
|
|
(4,745
|
)
|
Gain on sale of a business
|
650
|
|
|
6,880
|
|
|
—
|
|
Other
|
(1,409
|
)
|
|
(2,155
|
)
|
|
(6
|
)
|
Total
|
$
|
313,512
|
|
|
$
|
286,603
|
|
|
$
|
259,832
|
|
Operating income as a percentage of revenue:
|
|
|
|
|
|
Health Services
|
15.6
|
%
|
|
14.3
|
%
|
|
13.9
|
%
|
U.S. Federal Services
|
11.9
|
%
|
|
10.7
|
%
|
|
11.8
|
%
|
Human Services
|
9.2
|
%
|
|
9.3
|
%
|
|
12.3
|
%
|
Total
|
12.8
|
%
|
|
11.9
|
%
|
|
12.4
|
%
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Health Services
|
$
|
29,114
|
|
|
$
|
31,916
|
|
|
$
|
27,694
|
|
U.S. Federal Services
|
11,175
|
|
|
9,953
|
|
|
10,363
|
|
Human Services
|
15,480
|
|
|
16,535
|
|
|
8,792
|
|
Total
|
$
|
55,769
|
|
|
$
|
58,404
|
|
|
$
|
46,849
|
|
Acquisition-related expenses are costs directly incurred from the purchases of Revitalised Limited in 2017, Ascend Management Innovations, LLC (Ascend) and Assessments Australia in 2016 and Acentia, LLC (Acentia) and Remploy in 2015, as well as any unsuccessful transactions.
We principally operate in the U.S., the U.K., Australia, Canada, Saudi Arabia and Singapore.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
Our revenue was distributed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
1,765,661
|
|
|
$
|
1,721,261
|
|
|
$
|
1,559,769
|
|
United Kingdom
|
346,342
|
|
|
384,649
|
|
|
267,702
|
|
Australia
|
232,434
|
|
|
200,539
|
|
|
178,167
|
|
Rest of World
|
106,524
|
|
|
96,911
|
|
|
94,183
|
|
Total
|
$
|
2,450,961
|
|
|
$
|
2,403,360
|
|
|
$
|
2,099,821
|
|
Identifiable assets for the segments are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended
September 30,
|
|
2017
|
|
2016
|
Health Services
|
$
|
515,850
|
|
|
$
|
543,361
|
|
U.S. Federal Services
|
397,824
|
|
|
440,006
|
|
Human Services
|
169,523
|
|
|
153,141
|
|
Corporate/Other
|
267,465
|
|
|
212,311
|
|
Total
|
$
|
1,350,662
|
|
|
$
|
1,348,819
|
|
Our long-lived assets, consisting of property and equipment, capitalized software costs and deferred compensation plan assets, were distributed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended
September 30,
|
|
2017
|
|
2016
|
United States
|
$
|
101,530
|
|
|
$
|
118,751
|
|
Australia
|
32,165
|
|
|
38,852
|
|
Canada
|
13,670
|
|
|
16,209
|
|
United Kingdom
|
9,251
|
|
|
11,086
|
|
Rest of World
|
331
|
|
|
117
|
|
Total
|
$
|
156,947
|
|
|
$
|
185,015
|
|
3. Concentrations of credit risk and major customers
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of accounts receivable - billed, billable and unbilled.
The majority of our business is in the United States. Revenue from foreign projects and offices was
28%
,
28%
and
26%
of total revenue for the years ended
September 30, 2017
,
2016
and
2015
, respectively.
In the year ended
September 30, 2017
, approximately
49%
of our total revenue was derived from state government agencies, many of whose programs received significant federal funding,
26%
from foreign government agencies,
19%
from U.S.-based Federal Government agencies, and
6%
from other sources including local municipalities and commercial customers. We believe that the credit risk associated with our receivables is limited due to the credit worthiness of these customers.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
During fiscal year
2017
, the U.S. Federal Government, the U.K. Government and the state of New York each provided more than
10%
of our annual revenue. Within these governments, we may be serving several distinct agencies. Revenue from the U.S. Federal Government was exclusively within the U.S. Federal Segment. Revenue from the U.K. Government was both within the Health Services and Human Services Segments. Revenue from the state of New York was exclusively within our Health Services Segment. The proportion of revenue recognized from customers providing in excess of
10%
of our consolidated revenue for each of the three years ended
September 30, 2017
was from the following governments:
|
|
|
|
|
|
|
|
|
|
|
Year ended
September 30,
|
|
2017
|
|
2016
|
|
2015
|
U.S. Federal Government
|
19
|
%
|
|
22
|
%
|
|
20
|
%
|
New York
|
15
|
%
|
|
12
|
%
|
|
10
|
%
|
United Kingdom
|
12
|
%
|
|
16
|
%
|
|
*
|
|
_________________________________________
|
|
*
|
Government provided less than
10%
of our consolidated revenue in this year.
|
4. Earnings per share
The weighted average number of shares outstanding used to compute earnings per shares was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
Weighted average shares outstanding
|
65,632
|
|
|
65,822
|
|
|
66,682
|
|
Effect of employee stock options and unvested restricted stock awards
|
433
|
|
|
407
|
|
|
593
|
|
Denominator for diluted earnings per share
|
66,065
|
|
|
66,229
|
|
|
67,275
|
|
For the years ended
September 30, 2017
,
2016
and
2015
,
9,000
,
21,000
and
15,000
unvested restricted stock units, respectively, have been excluded from the calculation of diluted earnings per share as the effect of including them would have been anti-dilutive.
5. Business combinations and disposals
Revitalised
On July 18, 2017, MAXIMUS Companies Limited, a wholly owned subsidiary of MAXIMUS, Inc., acquired
100%
of the share capital of Revitalised Limited ("Revitalised"). Consideration is comprised of
$2.7 million
in cash and up to
$1.4 million
in contingent consideration. Revitalised provides digital solutions to engage communities in the areas of health, fitness and well-being. We acquired Revitalised in order to enhance the capabilities of our health services programs in the United Kingdom and, accordingly, the business was integrated into our Health Services Segment. The acquisition agreement includes the potential for adjustments based upon working capital at the date of acquisition. We have not yet completed our assessment of the fair value of the total consideration, including the contingent consideration, or our assessment of the fair value of the assets acquired and liabilities assumed.
K-12 Education
On May 9, 2016, we sold our K-12 Education business, which was previously part of the Human Services Segment. As a result of this transaction, we recorded a gain of approximately
$6.9 million
for the fiscal year ended
September 30, 2016
. This gain excluded a balance of
$0.7 million
which we had reserved to cover potential contingencies related to the sale. As payment of these contingencies is no longer considered probable, we have recorded additional gain in the fiscal year ended
September 30, 2017
. The cash balance related to this contingency had been in escrow; and was received in June 2017.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
The K-12 Education business contributed revenue of
$2.2 million
and
$4.7 million
for the years ended September 30, 2016 and 2015, respectively. We reported operating loss of
$0.2 million
and operating income of
$0.9 million
in the respective years.
Ascend Management Innovations, LLC
On February 29, 2016, MAXIMUS Health Services, Inc., a wholly-owned subsidiary of MAXIMUS, Inc. acquired
100%
of the share capital of Ascend for cash consideration of
$44.1 million
. Ascend is a provider of independent health assessments and data management tools to government agencies in the U.S. We acquired Ascend to broaden our ability to help our existing government clients deal with the rising demand for long-term care services. This business was integrated into our Health Services Segment. Management has estimated the fair value of intangible assets acquired as
$22.3 million
, with an average weighted life of
18 years
, and the fair value of goodwill as
$18.0 million
, which is expected to be deductible for tax purposes. We believe that this goodwill represents the value of the assembled workforce of Ascend, as well as the enhanced knowledge and capabilities resulting from this business combination. We completed our evaluation of the fair value of all of the assets and liabilities acquired in fiscal year 2017.
Our allocation of fair value for the assets and liabilities acquired is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Updated through September 30, 2016
|
Adjustments
|
Updated through September 30, 2017
|
Cash consideration, net of cash acquired
|
|
$
|
44,069
|
|
$
|
—
|
|
$
|
44,069
|
|
|
|
|
|
|
Billed and unbilled receivables
|
|
$
|
4,069
|
|
$
|
—
|
|
$
|
4,069
|
|
Other assets
|
|
407
|
|
—
|
|
407
|
|
Property and equipment and other assets
|
|
707
|
|
—
|
|
707
|
|
Deferred income taxes
|
|
—
|
|
557
|
|
557
|
|
Intangible assets
|
|
22,300
|
|
—
|
|
22,300
|
|
Total identifiable assets acquired
|
|
27,483
|
|
557
|
|
28,040
|
|
Accounts payable and other liabilities
|
|
1,414
|
|
—
|
|
1,414
|
|
Deferred revenue
|
|
554
|
|
—
|
|
554
|
|
Total liabilities assumed
|
|
1,968
|
|
—
|
|
1,968
|
|
Net identifiable assets acquired
|
|
25,515
|
|
557
|
|
26,072
|
|
Goodwill
|
|
18,554
|
|
(557
|
)
|
17,997
|
|
Net assets acquired
|
|
$
|
44,069
|
|
$
|
—
|
|
$
|
44,069
|
|
The valuation of the intangible assets acquired is summarized below:
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Useful life
|
|
Fair value
|
Customer relationships
|
|
19 years
|
|
$
|
20,400
|
|
Technology-based intangible assets
|
|
8 years
|
|
1,700
|
|
Trade name
|
|
1 year
|
|
200
|
|
Total intangible assets
|
|
|
|
$
|
22,300
|
|
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
Assessments Australia
On December 15, 2015, MAXIMUS acquired
100%
of the share capital of
three
companies doing business as "Assessments Australia." We acquired Assessments Australia to expand our service offerings within Australia. The consideration was comprised of
$2.6 million
in cash and contingent consideration of
$0.5 million
to the sellers of Assessments Australia if sufficient contracts with a specific government agency are won by MAXIMUS prior to December 2022. We performed a probability weighted assessment of this payment. Future changes in our assessment of this liability will be recorded through the consolidated statement of operations. This business was integrated into our Human Services Segment. Management identified goodwill and intangible assets acquired as
$3.0 million
and
$0.4 million
, respectively. We believe that the goodwill represents the value of the assembled workforce of Assessments Australia, as well as the enhanced capabilities which the business will provide us. We completed our evaluation of the fair value of all of the assets and liabilities acquired in fiscal year 2017.
The intangible assets acquired represent customer relationships. These are being amortized on a straight-line basis over
six years
.
At
September 30, 2017
, we have recorded our estimate of the fair value of the contingent consideration to be
$0.5 million
.
Acentia
On April 1, 2015 (the "acquisition date"), we acquired
100%
of the ownership interests of Acentia for cash consideration of
$293.5 million
.
Acentia provides system modernization, software development, program management and other information technology services and solutions to the U.S. Federal Government. We acquired Acentia, among other reasons, to expand our ability to provide complementary business services and offerings across government markets. The acquired assets and liabilities was integrated into our U.S. Federal Services Segment.
We have completed the process of allocating the acquisition price to the fair value of the assets and liabilities of Acentia as of the acquisition date.
|
|
|
|
|
|
|
|
Purchase price
|
(Amounts in thousands)
|
|
allocation
|
Cash consideration, net of cash acquired
|
|
$
|
293,504
|
|
|
|
|
Accounts receivable and unbilled receivables
|
|
35,333
|
|
Other current assets
|
|
3,091
|
|
Property and equipment
|
|
2,140
|
|
Intangible assets—customer relationships
|
|
69,900
|
|
Total identifiable assets acquired
|
|
110,464
|
|
Accounts payable and other liabilities
|
|
31,350
|
|
Deferred revenue
|
|
251
|
|
Capital lease obligations
|
|
567
|
|
Deferred tax liabilities
|
|
6,741
|
|
Total liabilities assumed
|
|
38,909
|
|
Net identifiable assets acquired
|
|
71,555
|
|
Goodwill
|
|
221,949
|
|
Net assets acquired
|
|
$
|
293,504
|
|
The excess of the acquisition date consideration over the estimated fair value of the net assets acquired was recorded as goodwill. We consider the goodwill to represent the value of the assembled workforce of Acentia, as well as the enhanced knowledge and capabilities resulting from this business combination. Approximately
$175 million
of the goodwill balance is anticipated to be deductible for tax purposes.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
The intangible assets acquired represent customer relationships. These are being amortized on a straight-line basis over
14 years
.
Remploy
On April 7, 2015 (the "Remploy acquisition date"), we acquired
70%
of the ownership interests of Remploy (2015) Limited, whose assets had previously operated under the "Remploy" tradename. The remaining
30%
is held in a trust for the benefit of the employees. The acquisition consideration was
$3.0 million
(
£2.0 million
).
Remploy provides services to the U.K. Government, particularly in supporting employment opportunities for the disabled. We acquired Remploy to complement our welfare-to-work services in the U.K. The acquired assets and liabilities have been integrated into our Human Services Segment. The principal asset held by Remploy on the Remploy acquisition date was a contract worth
$4.6 million
. This asset was amortized over
two years
on a straight-line basis.
DeltaWare Systems, Inc.
Following our acquisition of DeltaWare Systems, Inc. in 2010, we agreed to make payments of up to
$4.0 million
(Canadian) if we made sales in particular geographic markets prior to December 31, 2016.
No
such sales were made prior to the expiry of this deadline. At September 30, 2017 and 2016, we had recorded
no
liability for this obligation.
6. Debt
Credit Facilities
Our credit agreement provides for a revolving line of credit up to
$400 million
that may be used for revolving loans, swingline loans (subject to a sublimit of
$5 million
), and to request letters of credit, subject to a sublimit of
$50 million
. The line of credit is available for general corporate purposes, including working capital, capital expenditures and acquisitions. Borrowings are permitted in currencies other than the U.S. Dollar. In September 2017, we extended the term of our credit agreement to September 2022, at which time all outstanding borrowings must be repaid. At
September 30, 2017
, we had no borrowings under the credit agreement.
In addition to borrowings under the credit agreement, we have an outstanding loan of
$0.7 million
(
0.8 million
Canadian Dollars) with the Atlantic Innovation Fund of Canada. There is
no
interest charge on this loan. The Atlantic Innovation Fund loan is repayable over
19
remaining quarterly installments.
At
September 30, 2017
, we held
two
letters of credit under our credit agreement totaling
$0.7 million
. Each of these letters of credit may be called by vendors in the event that the Company defaults under the terms of a contract, the probability of which we believe is remote. In addition,
two
letters of credit totaling
$3.0 million
, secured with restricted cash balances, are held with another financial institution to cover similar obligations to customers.
Our credit agreement requires us to comply with certain financial covenants and other covenants including a maximum total leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all covenants as of
September 30, 2017
. Our obligations under the credit agreement are guaranteed by material domestic subsidiaries of the Company, but are otherwise unsecured. In the event that our total leverage ratio, as defined in the credit agreement, exceeds
2.50
:
1
, we would be obliged to provide security in the form of the assets of the parent Company and certain of its subsidiaries. Our credit agreement contains no restrictions on the payment of dividends as long as our leverage ratio does not exceed
2.50
:1. At
September 30, 2017
, our total leverage ratio was less than
1.0
:
1.0
. We do not believe that the provisions of the credit agreement represent a significant restriction to the successful operation of the business or to our ability to pay dividends.
The Credit Agreement provides for an annual commitment fee payable on funds not borrowed or utilized for letters of credit. This charge is based upon our leverage and varies between
0.125%
and
0.275%
. Borrowings under the Credit Agreement bear interest at our choice at either (a) a Base Rate plus a margin that varies between
0.0%
and
0.75%
per year, (b) a Eurocurrency Rate plus an applicable margin that varies between
1.0%
and
1.75%
per year or (c) an Index Rate plus an applicable margin which varies between
1.0%
and
1.75%
per year. The Base Rate, Eurocurrency Rate and Index Rate are defined by the Credit Agreement.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
Derivative Arrangement
In order to add stability to our interest expense and manage our exposure to interest rate movements, we may enter into derivative arrangements to fix payments on part of an outstanding loan balance. We agree to pay a fixed rate of interest to a financial institution and receive a balance equivalent to the floating rate payable. Our outstanding derivative instruments expired during fiscal year 2017. As this cash flow hedge was considered effective, the gains and losses in the fair value of this derivative instrument were reported in accumulated other comprehensive income (AOCI) in the consolidated statement of comprehensive income.
Interest Payments
During the fiscal years ended
September 30, 2017
,
2016
and
2015
, we made interest payments of
$2.0 million
,
$3.7 million
and
$1.2 million
, respectively.
7. Goodwill and intangible assets
Changes in goodwill for the years ended
September 30, 2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
Services
|
|
U.S. Federal
Services
|
|
Human
Services
|
|
Total
|
Balance as of September 30, 2015
|
$
|
113,427
|
|
|
$
|
220,524
|
|
|
$
|
42,351
|
|
|
$
|
376,302
|
|
Acquisitions of Ascend and Assessments Australia, respectively
|
18,554
|
|
|
—
|
|
|
2,899
|
|
|
21,453
|
|
Adjustment to goodwill acquired with Acentia
|
—
|
|
|
7,624
|
|
|
—
|
|
|
7,624
|
|
Disposal of K-12 Education business
|
—
|
|
|
—
|
|
|
(224
|
)
|
|
(224
|
)
|
Foreign currency translation
|
(8,302
|
)
|
|
—
|
|
|
705
|
|
|
(7,597
|
)
|
Balance as of September 30, 2016
|
123,679
|
|
|
228,148
|
|
|
45,731
|
|
|
397,558
|
|
Adjustment to goodwill acquired with Ascend
|
(557
|
)
|
|
—
|
|
|
—
|
|
|
(557
|
)
|
Adjustment to goodwill acquired with Assessments Australia
|
—
|
|
|
—
|
|
|
71
|
|
|
71
|
|
Acquisition of Revitalised
|
2,830
|
|
|
—
|
|
|
—
|
|
|
2,830
|
|
Foreign currency translation
|
2,508
|
|
|
—
|
|
|
566
|
|
|
3,074
|
|
Balance as of September 30, 2017
|
$
|
128,460
|
|
|
$
|
228,148
|
|
|
$
|
46,368
|
|
|
$
|
402,976
|
|
There have been
no
impairment charges to our goodwill.
The following table sets forth the components of intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
As of September 30, 2016
|
|
Cost
|
|
Accumulated
Amortization
|
|
Intangible
Assets, net
|
|
Cost
|
|
Accumulated
Amortization
|
|
Intangible
Assets, net
|
Customer contracts and relationships
|
$
|
129,916
|
|
|
$
|
33,457
|
|
|
$
|
96,459
|
|
|
$
|
132,221
|
|
|
$
|
26,238
|
|
|
$
|
105,983
|
|
Technology-based intangible assets
|
7,664
|
|
|
5,475
|
|
|
2,189
|
|
|
6,967
|
|
|
4,613
|
|
|
2,354
|
|
Trademarks and trade names
|
4,513
|
|
|
4,392
|
|
|
121
|
|
|
4,487
|
|
|
3,797
|
|
|
690
|
|
Total
|
$
|
142,093
|
|
|
$
|
43,324
|
|
|
$
|
98,769
|
|
|
$
|
143,675
|
|
|
$
|
34,648
|
|
|
$
|
109,027
|
|
Our intangible assets have a weighted average remaining life of
12.5 years
, comprising
12.7 years
for customer contracts and relationships,
5.2 years
for technology-based intangible assets and
2.3 years
for trademarks and trade names. Estimated future amortization expense is estimated for the following five fiscal years ending September 30th as follows (in thousands):
|
|
|
|
|
2018
|
$
|
10,320
|
|
2019
|
9,416
|
|
2020
|
8,316
|
|
2021
|
7,452
|
|
2022
|
7,385
|
|
8. Property and equipment
Property and equipment, at cost, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
2017
|
|
2016
|
Land
|
$
|
1,738
|
|
|
$
|
1,738
|
|
Building and improvements
|
11,799
|
|
|
11,726
|
|
Office furniture and equipment
|
207,140
|
|
|
261,752
|
|
Leasehold improvements
|
53,531
|
|
|
52,493
|
|
|
274,208
|
|
|
327,709
|
|
Less: Accumulated depreciation and amortization
|
(172,557
|
)
|
|
(196,140
|
)
|
Total property and equipment, net
|
$
|
101,651
|
|
|
$
|
131,569
|
|
Depreciation expense for the years ended
September 30, 2017
,
2016
and
2015
was
$45.2 million
,
$49.2 million
and
$37.0 million
, respectively. During fiscal year 2017, we made significant disposals of our property and equipment, principally related to older items with limited remaining useful lives.
9. Capitalized software
Capitalized software consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
2017
|
|
2016
|
Capitalized software
|
$
|
88,627
|
|
|
$
|
80,646
|
|
Less: Accumulated amortization
|
(61,879
|
)
|
|
(50,507
|
)
|
Total Capitalized software, net
|
$
|
26,748
|
|
|
$
|
30,139
|
|
Amortization expense for the years ended
September 30, 2017
,
2016
and
2015
was
$10.6 million
,
$9.2 million
and
$9.9 million
, respectively.
10. Deferred contract costs
Deferred contract costs consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
2017
|
|
2016
|
Deferred contract costs
|
$
|
30,776
|
|
|
$
|
30,114
|
|
Less: Accumulated amortization
|
(14,478
|
)
|
|
(11,932
|
)
|
Total Deferred contract costs, net
|
$
|
16,298
|
|
|
$
|
18,182
|
|
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
11. Accounts receivable reserves
Changes in the reserves against accounts receivable were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
4,226
|
|
|
$
|
3,385
|
|
|
$
|
3,138
|
|
Additions to reserve
|
5,106
|
|
|
2,335
|
|
|
2,690
|
|
Deductions
|
(2,489
|
)
|
|
(1,494
|
)
|
|
(2,443
|
)
|
Balance at end of year
|
$
|
6,843
|
|
|
$
|
4,226
|
|
|
$
|
3,385
|
|
In evaluating the net realizable value of accounts receivable, we consider such factors as current economic trends, customer credit-worthiness, and changes in the customer payment terms and collection trends. Changes in the assumptions used in analyzing a specific account receivable may result in a reserve being recognized in the period in which the change occurs.
At
September 30, 2017
and
2016
,
$10.3 million
and
$16.2 million
of our unbilled receivables related to amounts pursuant to contractual retainage provisions. We anticipate that the majority of the fiscal
2017
balance will be collected during the
2018
fiscal year.
12. Commitments and contingencies
Performance bonds
Certain contracts require us to provide a surety bond as a guarantee of performance. At
September 30, 2017
, we had performance bond commitments totaling
$17.7 million
. These bonds are typically renewed annually and remain in place until the contractual obligations have been satisfied. Although the triggering events vary from contract to contract, in general we would only be liable for the amount of these guarantees in the event of default in our performance of our obligations under each contract, the probability of which we believe is remote.
Operating Leases
We lease office space and equipment under various operating leases. Lease expense for the years ended
September 30, 2017
,
2016
and
2015
was
$80.6 million
,
$75.4 million
and
$67.1 million
, respectively. Our operating leases may contain rent escalations or concessions. Lease expense is recorded on a straight-line basis over the life of the respective lease.
Minimum future lease commitments under leases in effect as of
September 30, 2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office space
|
|
Equipment
|
|
Total
|
Year ending September 30,
|
|
|
|
|
|
|
|
|
2018
|
$
|
65,230
|
|
|
$
|
4,252
|
|
|
$
|
69,482
|
|
2019
|
50,908
|
|
|
3,482
|
|
|
54,390
|
|
2020
|
34,159
|
|
|
2,133
|
|
|
36,292
|
|
2021
|
10,459
|
|
|
13
|
|
|
10,472
|
|
2022
|
4,198
|
|
|
2
|
|
|
4,200
|
|
Thereafter
|
241
|
|
|
—
|
|
|
241
|
|
Total minimum lease payments
|
$
|
165,195
|
|
|
$
|
9,882
|
|
|
$
|
175,077
|
|
Sublease income for the year ended
September 30, 2017
was
$1.2 million
, and we anticipate future sublease income of
$1.2 million
per fiscal year through fiscal year 2020.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
Collective bargaining agreements
Approximately
14%
of our employees are covered by collective bargaining agreements or similar arrangements.
Shareholder lawsuit
In August 2017, the Company and certain officers were named as defendants in a putative class action lawsuit filed in the U.S. District Court for the Eastern District of Virginia. The plaintiff alleges the defendants made a variety of materially false and misleading statements, or failed to disclose material information, concerning the status of the Company’s Health Assessment Advisory Services project for the U.K. Department for Work and Pensions from the period October 20, 2014 through February 3, 2016. The defendants deny the allegations and intend to defend the matter vigorously. At this time, it is not possible to predict whether this matter will be permitted to proceed as a class or to estimate the value of the claims asserted. No assurances can be given that we will be successful in our defense of this action on the merits or otherwise. For these reasons, we are unable to estimate the potential loss or range of loss in this matter.
13. Employee benefit plans and deferred compensation
We have 401(k) plans for the benefit of employees who meet certain eligibility requirements. The plans provide for Company match, specified Company contributions and discretionary Company contributions. During the years ended
September 30, 2017
,
2016
and
2015
, we contributed
$7.0 million
,
$6.0 million
and
$4.7 million
to the 401(k) plans, respectively.
We also have a deferred compensation plan, which is a non-qualified plan available to a restricted number of highly compensated employees. The plan enables participants to defer compensation for tax purposes. These deferred employee contributions are held within a Rabbi Trust with investments directed by the respective employees. The assets of the Rabbi Trust are available to satisfy the claims of general creditors in the event of bankruptcy. The assets of the plan are sufficient to meet
88%
of the liabilities as of
September 30, 2017
. The assets within the Rabbi Trust include
$15.5 million
invested in mutual funds which have quoted prices in active markets. These assets, as well as the related employee liabilities, are recorded at fair value with changes in fair value being recorded in the consolidated statement of operations.
14. Equity
Stock compensation
At
September 30, 2017
,
1.5 million
shares remained available for grants under our 2017 Equity Incentive Plan. We typically issue new shares in satisfying our obligations under our stock plans.
We grant equity awards to officers, employees and directors in the form of restricted stock units (RSUs). RSUs issued generally vest ratably over
one
or
five years
. The fair value of the RSUs, based on our stock price at the grant date, is expensed in equal installments over the vesting period. For the fiscal years ended
September 30, 2017
,
2016
and
2015
, compensation expense recognized related to RSUs was
$21.4 million
,
$18.8 million
and
$17.2 million
, respectively. All individuals who are granted RSUs also receive dividend-equivalent payments in the form of additional RSUs. However, until the shares are issued, they have no voting rights and may not be bought or sold. In the event that an award is forfeited, the dividend-equivalent payments received by the holder with respect to that award are also forfeited.
A summary of our RSU activity for the year ended
September 30, 2017
, is as follows:
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Grant-Date
Fair Value
|
Non-vested shares outstanding at September 30, 2016
|
809,306
|
|
|
$
|
47.64
|
|
Granted
|
448,289
|
|
|
53.63
|
|
Vested
|
(400,583
|
)
|
|
46.17
|
|
Forfeited
|
(34,185
|
)
|
|
46.00
|
|
Non-vested shares outstanding at September 30, 2017
|
822,827
|
|
|
51.69
|
|
In addition to the non-vested shares, certain directors and employees held approximately
0.7 million
vested awards whose issuance has been deferred as of September 30, 2017.
The weighted-average grant-date fair value of RSUs granted in the years ended
September 30, 2016
and
2015
was
$52.00
and
$50.82
, respectively. The total fair value of RSUs which vested during the years ended
September 30, 2017
,
2016
and
2015
was
$24.9 million
,
$27.1 million
and
$68.6 million
, respectively. As of
September 30, 2017
, the total remaining unrecognized compensation cost related to unvested RSUs was
$37.6 million
. This expense is expected to be realized over the next
five years
, with a weighted average life of
1.5 years
.
Prior to fiscal year 2008, we granted stock options to certain employees. These were granted at exercise prices equal to the fair market value of our common stock at the date of grant, vested over a period of
four years
and expired
ten years
after the date of the grant.
No
compensation expenses related to stock options were recorded in any of the years shown. In fiscal year 2017, our remaining
80,000
stock options were exercised for a weighted average strike price of
$11.55
. We have no outstanding stock options at September 30, 2017.
The following table summarizes information pertaining to the stock options vested and exercised for the years presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
Aggregate intrinsic value of all stock options exercised
|
$
|
4,025
|
|
|
$
|
4,077
|
|
|
$
|
5,536
|
|
Net cash proceeds from exercise of stock options
|
924
|
|
|
546
|
|
|
868
|
|
The total income tax benefit recognized in the consolidated statement of operations for share-based compensation arrangements was
$15.0 million
,
$7.4 million
and
$7.1 million
for the fiscal years ended
September 30, 2017
,
2016
and
2015
, respectively. Our tax benefit in fiscal year 2017 was affected by the adoption of a new accounting standard, as detailed in "Note 1. Business and summary of significant accounting policies."
Employees are permitted to forfeit a certain number of shares to cover their personal tax liability, with the Company making tax payments to the relevant authorities. These payments are reported in the consolidated statements of cash flows as financing cash flows. During the three years ending September 30, 2017, 2016 and 2015, we incurred liabilities related to these forfeitures of
$8.7 million
,
$9.3 million
and
$11.7 million
, respectively.
Stock repurchase programs
Under a resolution adopted in August 2015, the Board of Directors authorized the repurchase, at management's discretion, of up to an aggregate of
$200 million
of our common stock. This resolution superseded similar authorizations from November 2011 and June 2014. The resolution also authorizes the use of option exercise proceeds for the repurchase of our common stock. During the years ended
September 30, 2017
,
2016
and
2015
, we repurchased
0.6 million
,
0.6 million
and
1.6 million
common shares at a cost of
$28.9 million
,
$31.3 million
and
$82.8 million
, respectively. At
September 30, 2017
,
$109.9 million
remained available for future stock repurchases.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
15. Income taxes
The components of income before income taxes and the corresponding provision for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
United States
|
$
|
257,910
|
|
|
$
|
238,871
|
|
|
$
|
232,359
|
|
Foreign
|
56,325
|
|
|
47,097
|
|
|
27,460
|
|
Income before income taxes
|
$
|
314,235
|
|
|
$
|
285,968
|
|
|
$
|
259,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
Current provision:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
70,476
|
|
|
$
|
69,025
|
|
|
$
|
74,050
|
|
State and local
|
15,594
|
|
|
15,595
|
|
|
15,332
|
|
Foreign
|
11,221
|
|
|
15,536
|
|
|
9,581
|
|
Total current provision
|
97,291
|
|
|
100,156
|
|
|
98,963
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
5,490
|
|
|
7,778
|
|
|
2,233
|
|
State and local
|
643
|
|
|
902
|
|
|
403
|
|
Foreign
|
(1,371
|
)
|
|
(3,028
|
)
|
|
(1,829
|
)
|
Total deferred tax expense (benefit)
|
4,762
|
|
|
5,652
|
|
|
807
|
|
Provision for income taxes
|
$
|
102,053
|
|
|
$
|
105,808
|
|
|
$
|
99,770
|
|
The provision for income taxes differs from that which would have resulted from the use of the federal statutory income tax rate as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
Federal income tax provision at statutory rate of 35%
|
$
|
109,982
|
|
|
$
|
100,089
|
|
|
$
|
90,937
|
|
State income taxes, net of federal benefit
|
10,554
|
|
|
10,723
|
|
|
9,847
|
|
Foreign taxation
|
(6,940
|
)
|
|
(3,976
|
)
|
|
(2,208
|
)
|
Permanent items
|
970
|
|
|
1,284
|
|
|
1,602
|
|
Tax credits
|
(4,851
|
)
|
|
(1,592
|
)
|
|
(961
|
)
|
Vesting of equity compensation
|
(6,569
|
)
|
|
—
|
|
|
—
|
|
Other
|
(1,093
|
)
|
|
(720
|
)
|
|
553
|
|
Provision for income taxes
|
$
|
102,053
|
|
|
$
|
105,808
|
|
|
$
|
99,770
|
|
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
The significant items comprising our deferred tax assets and liabilities as of
September 30, 2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
2017
|
|
2016
|
Net deferred tax assets/(liabilities)
|
|
|
|
|
|
Costs deductible in future periods
|
$
|
30,794
|
|
|
$
|
27,738
|
|
Deferred revenue
|
20,703
|
|
|
23,469
|
|
Stock compensation
|
4,976
|
|
|
5,085
|
|
Net operating loss carryforwards
|
360
|
|
|
1,291
|
|
Amortization of goodwill and intangible assets
|
(36,100
|
)
|
|
(34,484
|
)
|
Capitalized software
|
(9,197
|
)
|
|
(10,126
|
)
|
Accounts receivable - unbilled
|
(12,953
|
)
|
|
(13,810
|
)
|
Property and equipment
|
(3,924
|
)
|
|
(5,517
|
)
|
Prepaid expenses
|
(3,741
|
)
|
|
(1,296
|
)
|
Other
|
(3,333
|
)
|
|
(519
|
)
|
|
$
|
(12,415
|
)
|
|
$
|
(8,169
|
)
|
Our deferred tax assets and liabilities are held in various national and international jurisdictions which do not allow right of offset. Accordingly, our presentation of deferred taxes on our consolidated balance sheet is split between jurisdictions which show a net deferred tax asset and a net deferred tax liability. Our net deferred tax position is summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
2017
|
|
2016
|
Balance of tax jurisdictions with net deferred tax assets
|
$
|
7,691
|
|
|
$
|
8,644
|
|
Balance of tax jurisdictions with net deferred tax liabilities
|
(20,106
|
)
|
|
(16,813
|
)
|
Net deferred tax liabilities
|
$
|
(12,415
|
)
|
|
$
|
(8,169
|
)
|
At
September 30, 2017
, our foreign subsidiaries held approximately
$219 million
of cumulative earnings. We consider undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the U.S. and, accordingly,
no
U.S. deferred taxes have been recorded with respect to such earnings in accordance with the relevant accounting guidance for income taxes. Should the earnings be remitted as dividends, we may be subject to additional U.S. taxes, net of allowable foreign tax credits. It is not practicable to estimate the amount of any additional taxes which may be payable on the undistributed earnings given the various tax planning alternatives we could employ should we decide to repatriate these earnings in a tax-efficient manner.
Cash paid for income taxes during the years ended
September 30, 2017
,
2016
, and
2015
was
$87.8 million
,
$108.3 million
and
$81.3 million
, respectively.
The provision for income taxes includes all provision to return adjustments included in the year recognized in the financial statements.
We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is "more-likely-than-not" that the position will be sustained upon examination. The total amount of unrecognized tax benefits that, if recognized, would affect our annual effective income tax rate was
$1.1 million
and
$1.1 million
at
September 30, 2017
and
2016
, respectively.
We report interest and penalties as a component of income tax expense. In the fiscal years ending
September 30, 2017
,
2016
and
2015
, we recognized interest expense relating to unrecognized tax benefits of less than
$0.1 million
in each year. The net liability balance at
September 30, 2017
and
2016
includes approximately
$0.6 million
of interest and penalties.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
We recognize and present uncertain tax positions on a gross basis (i.e., without regard to likely offsets for deferred tax assets, deductions and/or credits that would result from payment of uncertain tax amounts). The reconciliation of the beginning and ending amount of gross unrecognized tax benefits was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
448
|
|
|
$
|
529
|
|
|
$
|
812
|
|
Lapse of statute of limitation
|
—
|
|
|
—
|
|
|
(200
|
)
|
Increases for tax positions taken in current year
|
185
|
|
|
—
|
|
|
—
|
|
Reductions for tax positions of prior years
|
—
|
|
|
(81
|
)
|
|
(83
|
)
|
Balance at end of year
|
$
|
633
|
|
|
$
|
448
|
|
|
$
|
529
|
|
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. We are no longer subject to federal income tax examinations for years before 2013 and to state and local income tax examinations by tax authorities for years before 2012. In international jurisdictions, similar rules apply to filed income tax returns, although the tax examination limitations and requirements may vary. We are no longer subject to audit by tax authorities for foreign jurisdictions for years prior to 2012.
16. Quarterly information (unaudited)
Set forth below are selected quarterly consolidated statement of operations data for the fiscal years ended
September 30, 2017
and
2016
. We derived this information from unaudited quarterly financial statements that include, in the opinion of our management, all adjustments necessary for a fair presentation of the information for such periods. Results of operations for any fiscal quarter are not necessarily indicative of results for any future period.
Earnings per share amounts are computed independently each quarter. As a result, the sum of each quarter's earnings per share amount may not equal the total earnings per share amount for the respective year.
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Dec. 31,
2016
|
|
March 31,
2017
|
|
June 30,
2017
|
|
Sept. 30,
2017
|
|
(In thousands, except per share data)
|
Health Services
|
$
|
340,729
|
|
|
$
|
348,994
|
|
|
$
|
335,090
|
|
|
$
|
355,338
|
|
U.S. Federal Services
|
141,298
|
|
|
145,370
|
|
|
131,589
|
|
|
127,316
|
|
Human Services
|
125,537
|
|
|
127,683
|
|
|
133,768
|
|
|
138,249
|
|
Revenue
|
$
|
607,564
|
|
|
$
|
622,047
|
|
|
$
|
600,447
|
|
|
$
|
620,903
|
|
|
|
|
|
|
|
|
|
Health Services
|
$
|
78,234
|
|
|
$
|
86,454
|
|
|
$
|
83,269
|
|
|
$
|
99,368
|
|
U.S. Federal Services
|
37,576
|
|
|
36,571
|
|
|
33,627
|
|
|
31,547
|
|
Human Services
|
29,008
|
|
|
29,292
|
|
|
35,293
|
|
|
31,666
|
|
Gross profit
|
$
|
144,818
|
|
|
$
|
152,317
|
|
|
$
|
152,189
|
|
|
$
|
162,581
|
|
|
|
|
|
|
|
|
|
Health Services
|
$
|
50,127
|
|
|
$
|
56,540
|
|
|
$
|
51,553
|
|
|
$
|
57,024
|
|
U.S. Federal Services
|
17,881
|
|
|
17,644
|
|
|
15,870
|
|
|
13,581
|
|
Human Services
|
11,769
|
|
|
9,629
|
|
|
16,368
|
|
|
10,818
|
|
Amortization of intangible assets
|
(3,402
|
)
|
|
(3,386
|
)
|
|
(2,720
|
)
|
|
(2,700
|
)
|
Restructuring costs
|
(2,242
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Acquisition-related expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(83
|
)
|
Gain on sale of a business
|
—
|
|
|
—
|
|
|
650
|
|
|
—
|
|
Other/Corporate
|
(357
|
)
|
|
(92
|
)
|
|
90
|
|
|
(1,050
|
)
|
Operating Income
|
$
|
73,776
|
|
|
$
|
80,335
|
|
|
$
|
81,811
|
|
|
$
|
77,590
|
|
|
|
|
|
|
|
|
|
Net income
|
46,329
|
|
|
53,097
|
|
|
57,788
|
|
|
54,968
|
|
Net income attributable to MAXIMUS
|
46,664
|
|
|
52,515
|
|
|
56,918
|
|
|
53,329
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to MAXIMUS
|
$
|
0.71
|
|
|
$
|
0.80
|
|
|
$
|
0.86
|
|
|
$
|
0.81
|
|
MAXIMUS, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended September 30, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Dec. 31,
2015
|
|
March 31,
2016
|
|
June 30,
2016
|
|
Sept. 30,
2016
|
|
(In thousands, except per share data)
|
Health Services
|
$
|
291,903
|
|
|
$
|
330,567
|
|
|
$
|
333,699
|
|
|
$
|
342,135
|
|
U.S. Federal Services
|
145,285
|
|
|
150,191
|
|
|
149,601
|
|
|
146,651
|
|
Human Services
|
119,534
|
|
|
125,695
|
|
|
133,794
|
|
|
134,305
|
|
Revenue
|
$
|
556,722
|
|
|
$
|
606,453
|
|
|
$
|
617,094
|
|
|
$
|
623,091
|
|
|
|
|
|
|
|
|
|
Health Services
|
$
|
51,972
|
|
|
$
|
82,717
|
|
|
$
|
76,775
|
|
|
$
|
80,717
|
|
U.S. Federal Services
|
28,238
|
|
|
33,421
|
|
|
38,980
|
|
|
37,529
|
|
Human Services
|
30,005
|
|
|
31,529
|
|
|
35,624
|
|
|
34,684
|
|
Gross profit
|
$
|
110,215
|
|
|
$
|
147,667
|
|
|
$
|
151,379
|
|
|
$
|
152,930
|
|
|
|
|
|
|
|
|
|
Health Services
|
$
|
26,808
|
|
|
$
|
56,914
|
|
|
$
|
50,430
|
|
|
$
|
50,874
|
|
U.S. Federal Services
|
10,716
|
|
|
14,983
|
|
|
19,119
|
|
|
18,558
|
|
Human Services
|
9,107
|
|
|
9,794
|
|
|
14,251
|
|
|
14,533
|
|
Amortization of intangible assets
|
(3,149
|
)
|
|
(3,262
|
)
|
|
(3,517
|
)
|
|
(3,449
|
)
|
Acquisition-related expenses
|
(46
|
)
|
|
(529
|
)
|
|
—
|
|
|
(257
|
)
|
Gain on sale of a business
|
—
|
|
|
—
|
|
|
6,453
|
|
|
427
|
|
Other/Corporate
|
(650
|
)
|
|
—
|
|
|
(2,127
|
)
|
|
622
|
|
Operating Income
|
$
|
42,786
|
|
|
$
|
77,900
|
|
|
$
|
84,609
|
|
|
$
|
81,308
|
|
|
|
|
|
|
|
|
|
Net income
|
26,882
|
|
|
49,341
|
|
|
52,750
|
|
|
51,187
|
|
Net income attributable to MAXIMUS
|
26,609
|
|
|
48,785
|
|
|
52,225
|
|
|
50,743
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to MAXIMUS
|
$
|
0.40
|
|
|
$
|
0.74
|
|
|
$
|
0.79
|
|
|
$
|
0.77
|
|
17. Subsequent Event
Dividend
On
October 6, 2017
, our Board of Directors declared a quarterly cash dividend of
$0.045
for each share of the Company's common stock outstanding. The dividend is to be paid on
November 30, 2017
to shareholders of record on
November 15, 2017
. Based on the number of shares outstanding, the payment will be approximately
$2.9 million
.