Notes to the Unaudited Consolidated Financial Statements
1. ORGANIZATION
Maximus, a Virginia corporation established in 1975, is a leading provider of government services worldwide. Maximus operates under its founding mission of Helping Government Serve the People®, enabling citizens around the globe to successfully engage with their governments at all levels and across a variety of health and human services programs. Maximus delivers innovative business process management and technology solutions that contribute to improved outcomes for citizens and higher levels of productivity, accuracy, accountability, and efficiency of government-sponsored programs. Maximus is a proud partner to government agencies in the United States, Australia, Canada, Italy, Saudi Arabia, Singapore, South Korea, Sweden, and the United Kingdom.
2. SIGNIFICANT ACCOUNTING POLICIES
(a)Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries over which the Company has a controlling financial interest, and have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. All intercompany balances and transactions have been eliminated in consolidation.
(b)Basis of Presentation for Interim Periods
Certain information and footnote disclosures normally included for the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted for the interim periods presented. We believe that the unaudited interim financial statements include all adjustments (which are normal and recurring in nature) necessary to present fairly our financial position and the results of operations and cash flows for the periods presented.
The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for the year or future periods. The financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended September 30, 2021 included in our Annual Report on Form 10-K for the fiscal year then ended (the "2021 10-K"). We have continued to follow the accounting policies set forth in those financial statements.
(c)Estimates
The preparation of these financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenue and expenses. At each reporting period end, we make estimates, including those related to revenue recognition and cost estimation on certain contracts, the realizability of goodwill, and amounts related to income taxes, certain accrued liabilities, and contingencies and litigation.
We base our estimates on historical experience and expectations of the future that we believe to be reasonable. The economic and political effects of the COVID-19 global pandemic increase uncertainty, which has reduced our ability to use past results to estimate future performance. Accordingly, our estimates may be subject to greater volatility than has been the case in the past.
3. BUSINESS SEGMENTS
We conduct our operations through three business segments: U.S. Services, U.S. Federal Services, and Outside the U.S.
U.S. Services
Our U.S. Services Segment provides a variety of business process services ("BPS") such as program administration, appeals and assessments, and related consulting work for U.S. state and local government programs. These services support a variety of programs, including the Affordable Care Act ("ACA"), Medicaid, the Children's Health Insurance Program ("CHIP"), Temporary Assistance to Needy Families ("TANF"), and child support programs. Addressing societal macro trends such as aging populations and rising costs, the segment continues to execute on its clinical evolution strategy by expanding its clinical offerings. This includes assessments to determine whether personal care services are medically necessary and public health offerings such as contact tracing, disease investigation, and vaccine distribution support services as part of the governments' COVID-19 response efforts.
U.S. Federal Services
From technology solutions to program administration and operations, our U.S. Federal Services Segment delivers end-to-end solutions that help various U.S. federal government agencies better deliver on their mission. This also includes appeals and assessments services, system and application development, IT modernization, and maintenance services. The segment also contains certain state-based assessments and appeals work that is part of the segment's heritage within the Medicare Appeals portfolio which continues to be managed within this segment. Benefiting from the Maximus Federal Consulting (formerly Attain Federal) platform, the segment executes on its digital strategy to deliver technology solutions that advance agency missions, including the challenge to modernize, provide better customer experience, and drive process efficiencies. The segment continues to expand its clinical solutions with the acquisition of VES Group, Inc., which manages the clinical evaluation process for U.S. veterans and service members on behalf of the U.S. Department of Veterans Affairs. The segment further supports clinical offerings in public health with new work supporting the U.S. Federal Government's COVID-19 response efforts. This included expanded work with the Centers for Disease Control and Prevention ("CDC") for their helpline and increased support for the IRS Wage and Investment Division's response efforts to general inquiries regarding the Coronavirus Aid Relief & Economic Security ("CARES") Act and Economic Impact Payment Service Plan.
Outside the U.S.
Our Outside the U.S. Segment provides BPS for international governments and commercial clients, transforming the lives of people around the world. Helping people find employment, access vital support, and remain healthy, these services include health and disability assessments, program administration for employment services, wellbeing solutions, and other job seeker related services. We support programs and deliver services in the U.K., including the Health Assessment Advisory Service ("HAAS"), the Work & Health Programme, Fair Start, and Restart; Australia, including jobactive and the Disability Employment Service; Canada, including Health Insurance British Columbia and the Employment Program of British Columbia; in addition to Italy, Saudi Arabia, Singapore, South Korea, and Sweden, where we predominantly provide employment support and job seeker services.
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Table 3: Results of Operation by Business Segment |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| Amount | | % (1) | | Amount | | % (1) | | Amount | | % (1) | | Amount | | % (1) |
| (dollars in thousands) |
Revenue: | | | | | | | | | | | | | | | |
U.S. Services | $ | 398,077 | | | | | $ | 448,215 | | | | | $ | 784,494 | | | | | $ | 833,149 | | | |
U.S. Federal Services | 573,288 | | | | | 330,136 | | | | | 1,155,159 | | | | | 735,381 | | | |
Outside the U.S. | 205,961 | | | | | 180,929 | | | | | 388,549 | | | | | 336,304 | | | |
Revenue | $ | 1,177,326 | | | | | $ | 959,280 | | | | | $ | 2,328,202 | | | | | $ | 1,904,834 | | | |
Gross profit: | | | | | | | | | | | | | | | |
U.S. Services | $ | 84,971 | | | 21.3 % | | $ | 119,440 | | | 26.6 % | | $ | 174,670 | | | 22.3 % | | $ | 218,442 | | | 26.2 % |
U.S. Federal Services | 115,153 | | | 20.1 % | | 74,133 | | | 22.5 % | | 241,729 | | | 20.9 % | | 156,629 | | | 21.3 % |
Outside the U.S. | 28,327 | | | 13.8 % | | 37,085 | | | 20.5 % | | 40,207 | | | 10.3 % | | 61,642 | | | 18.3 % |
Gross profit | $ | 228,451 | | | 19.4 % | | $ | 230,658 | | | 24.0 % | | $ | 456,606 | | | 19.6 % | | $ | 436,713 | | | 22.9 % |
Selling, general, and administrative expenses: | | | | | | | | | | | | | | | |
U.S. Services | $ | 38,273 | | | 9.6 % | | $ | 36,593 | | | 8.2 % | | $ | 73,375 | | | 9.4 % | | $ | 74,049 | | | 8.9 % |
U.S. Federal Services | 68,949 | | | 12.0 % | | 50,978 | | | 15.4 % | | 133,874 | | | 11.6 % | | 103,230 | | | 14.0 % |
Outside the U.S. | 24,011 | | | 11.7 % | | 22,013 | | | 12.2 % | | 45,351 | | | 11.7 % | | 42,045 | | | 12.5 % |
Other (2) | (926) | | | NM | | 2,818 | | | NM | | 1,928 | | | NM | | 5,045 | | | NM |
Selling, general, and administrative expenses | $ | 130,307 | | | 11.1 % | | $ | 112,402 | | | 11.7 % | | $ | 254,528 | | | 10.9 % | | $ | 224,369 | | | 11.8 % |
Operating income/(loss): | | | | | | | | | | | | | | | |
U.S. Services | $ | 46,698 | | | 11.7 % | | $ | 82,847 | | | 18.5 % | | $ | 101,295 | | | 12.9 % | | $ | 144,393 | | | 17.3 % |
U.S. Federal Services | 46,204 | | | 8.1 % | | 23,155 | | | 7.0 % | | 107,855 | | | 9.3 % | | 53,399 | | | 7.3 % |
Outside the U.S. | 4,316 | | | 2.1 % | | 15,072 | | | 8.3 % | | (5,144) | | | (1.3) % | | 19,597 | | | 5.8 % |
Amortization of intangible assets | (22,856) | | | NM | | (5,070) | | | NM | | (45,261) | | | NM | | (11,586) | | | NM |
Other (2) | 926 | | | NM | | (2,818) | | | NM | | (1,928) | | | NM | | (5,045) | | | NM |
Operating income/(loss) | $ | 75,288 | | | 6.4 % | | $ | 113,186 | | | 11.8 % | | $ | 156,817 | | | 6.7 % | | $ | 200,758 | | | 10.5 % |
(1)Percentage of respective segment revenue. Percentages not considered meaningful are marked "NM."
(2)Other selling, general, and administrative expenses includes costs that are not allocated to a particular segment. This includes expenses incurred as part of our acquisitions, as well as potential acquisitions which have not been or may not be completed.
4. REVENUE RECOGNITION
The Company recognizes revenue as, or when, we satisfy performance obligations under a contract. The majority of our contracts have performance obligations which are satisfied over time. In most cases, we view our performance obligations as promises to transfer a series of distinct services to our customers that are substantially the same and which have the same pattern of service.
Disaggregation of Revenue
In addition to our segment reporting, we disaggregate our revenues by contract type, customer type, and geography. Our operating segments represent the manner in which our Chief Executive Officer reviews our financial results, which is further discussed in "Note 3. Business Segments."
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Table 4.1: Revenue by Contract Type |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
| (dollars in thousands) |
Performance-based | $ | 516,210 | | | 43.9 % | | $ | 349,749 | | | 36.4 % | | $ | 1,007,166 | | | 43.3 % | | $ | 643,709 | | | 33.8 % |
Cost-plus | 322,823 | | | 27.4 % | | 286,082 | | | 29.8 % | | 662,904 | | | 28.5 % | | 670,565 | | | 35.2 % |
Fixed price | 158,867 | | | 13.5 % | | 146,344 | | | 15.3 % | | 310,372 | | | 13.3 % | | 267,121 | | | 14.0 % |
Time and materials | 179,426 | | | 15.2 % | | 177,105 | | | 18.5 % | | 347,760 | | | 14.9 % | | 323,439 | | | 17.0 % |
Total revenue | $ | 1,177,326 | | | | | $ | 959,280 | | | | | $ | 2,328,202 | | | | | $ | 1,904,834 | | | |
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Table 4.2: Revenue by Customer Type |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
| (dollars in thousands) |
U.S. state government agencies | $ | 411,287 | | | 35.0 % | | $ | 445,697 | | | 46.5 % | | $ | 782,834 | | | 33.7 % | | $ | 833,811 | | | 43.8 % |
U.S. federal government agencies | 553,707 | | | 47.0 % | | 307,870 | | | 32.1 % | | 1,117,801 | | | 48.0 % | | 693,442 | | | 36.4 % |
International government agencies | 194,800 | | | 16.5 % | | 171,700 | | | 17.9 % | | 366,175 | | | 15.7 % | | 319,042 | | | 16.7 % |
Other, including local municipalities and commercial customers | 17,532 | | | 1.5 % | | 34,013 | | | 3.5 % | | 61,392 | | | 2.6 % | | 58,539 | | | 3.1 % |
Total revenue | $ | 1,177,326 | | | | | $ | 959,280 | | | | | $ | 2,328,202 | | | | | $ | 1,904,834 | | | |
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Table 4.3: Revenue by Geography |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
| (dollars in thousands) |
United States | $ | 971,365 | | | 82.5 % | | $ | 778,350 | | | 81.1 % | | $ | 1,939,653 | | | 83.3 % | | $ | 1,568,529 | | | 82.3 % |
United Kingdom | 107,898 | | | 9.1 % | | 72,882 | | | 7.6 % | | 193,705 | | | 8.3 % | | 137,668 | | | 7.2 % |
Australia | 46,670 | | | 4.0 % | | 70,947 | | | 7.4 % | | 99,484 | | | 4.3 % | | 126,878 | | | 6.7 % |
Rest of world | 51,393 | | | 4.4 % | | 37,101 | | | 3.9 % | | 95,360 | | | 4.1 % | | 71,759 | | | 3.8 % |
Total revenue | $ | 1,177,326 | | | | | $ | 959,280 | | | | | $ | 2,328,202 | | | | | $ | 1,904,834 | | | |
Contract balances
Differences in timing between revenue recognition and cash collection result in contract assets and contract liabilities. We classify these assets as accounts receivable — billed and billable and unbilled receivables; the liabilities are classified as deferred revenue.
In many contracts, we bill our customers on a monthly basis shortly after the month end for work performed in that month. These balances are considered collectible and are included within accounts receivable — billed and billable.
Exceptions to this pattern will arise for various reasons, including those listed below.
•Under cost-plus contracts, we are typically required to estimate a contract's share of our general and administrative expenses. This share is based upon estimates of total costs which may vary over time. We typically invoice our customers at an agreed provisional billing rate which may differ from actual rates incurred. If our actual rates are higher than the provisional billing rates, an asset is recorded for this variance; if the provisional billing rates are higher than our actual rates, we record a liability.
•Certain contracts include retainage balances, whereby revenue is earned but some portion of cash payments are held back by the customer for a period of time, typically to allow the customer to confirm the objective criteria laid out by the contract have been met. This balance is classified as accounts receivable — unbilled until restrictions on billing are lifted. As of March 31, 2022, and September 30, 2021, $12.6 million and $10.4 million, respectively, of our unbilled receivables related to amounts pursuant to contractual retainage provisions.
•In certain contracts, we may receive funds from our customers prior to performing operations. These funds are typically referred to as "set-up costs" and reflect the need for us to make investments in infrastructure prior to providing a service. This investment in infrastructure is not a performance obligation which is distinct from the service that is subsequently provided and, as a result, revenue is not recognized based upon the establishment of this infrastructure, but rather over the course of the contractual relationship. The funds are initially recorded as deferred revenue and recognized over the term of the contract. Other contracts may not include set-up fees but will provide higher fees in earlier periods of the contract. The premium on these fees is deferred.
•Some of our contracts, notably our employment services contracts in the Outside the U.S. Segment, include payments for desired outcomes, such as job placement and job retention, and these outcome payments occur over several months. We are required to estimate these outcome fees ahead of their realization and recognize this estimated fee over the period of delivery.
During the three and six months ended March 31, 2022, we recognized revenue of $20.6 million and $61.8 million, respectively, that was included in our deferred revenue balances as of September 30, 2021. During the three and six months ended March 31, 2021, we recognized revenue of $15.2 million and $29.1 million, respectively, that was included in our deferred revenue balances at September 30, 2020.
Contract estimates
We are required to use estimates in recognizing revenue from some of our contracts. As discussed in "Note 2. Significant Accounting Policies," the calculation of these estimates has been complicated by the COVID-19 pandemic, which has reduced our ability to use past results to estimate future performance.
Some of our performance-based contract revenue is recognized based upon future outcomes defined in each contract. This is the case in many of our employment services contracts in the Outside the U.S. Segment, where we are paid as individuals attain employment goals, which may take many months to achieve. We recognize revenue on these contracts over the period of performance. Our estimates vary from contract to contract but may include estimates of the number of participants, the length of the contract, and the participants reaching employment milestones. We are required to estimate these outcome fees ahead of their collection and recognize this estimated fee over the period of delivery. Changes to our estimates are recognized on a cumulative catch-up basis.
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Table 4.4: Effect of Changes in Contract Estimates |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| (in thousands, except per share data) |
Benefit to/(reduction of) revenue recognized due to changes in contract estimates | $ | (1,369) | | | $ | 7,603 | | | $ | (4,215) | | | $ | 15,986 | |
Benefit to/(reduction of) diluted earnings per share recognized due to changes in contract estimates | $ | (0.02) | | | $ | 0.09 | | | $ | (0.05) | | | $ | 0.19 | |
Remaining performance obligations
As of March 31, 2022, we had approximately $550 million of remaining performance obligations. We anticipate that we will recognize revenue on approximately 50% of this balance within the next 12 months. This balance excludes contracts with an original duration of twelve months or less, including contracts with a penalty-free termination for convenience clause, and any variable consideration which is allocated entirely to future performance obligations, including variable transaction fees or fees tied directly to costs incurred.
5. EARNINGS PER SHARE
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Table 5: Weighted Average Number of Shares - Earnings Per Share |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| (in thousands) |
Basic weighted average shares outstanding | 62,227 | | | 62,026 | | | 62,256 | | | 62,022 | |
Dilutive effect of unvested RSUs and PSUs | 154 | | | 268 | | | 153 | | | 190 | |
Denominator for diluted earnings per share | 62,381 | | | 62,294 | | | 62,409 | | | 62,212 | |
Unvested anti-dilutive stock units excluded from the dilutive effect (stock units) | 173 | | 199 | | 192 | | 201 |
6. BUSINESS COMBINATIONS
VES Group, Inc. (VES)
On May 28, 2021, the Company acquired 100% of VES for an estimated cash purchase price of $1.37 billion (the "VES Acquisition"). The final purchase price is subject to adjustment and is expected to be finalized during 2022. VES was integrated into our U.S. Federal Services Segment. The VES Acquisition also supports our ongoing strategic priority of expansion into the U.S. Federal market and accelerates our clinical evolution to meet long-term demand for BPS with a clinical dimension. As of March 31, 2022, we have completed our assessment of all acquired assets and liabilities assumed, with the exception of income taxes and the working capital true-up.
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Table 6.1: VES Valuation |
| Allocation of Assets and Liabilities as of September 30, 2021 | | Adjustments | | Estimated Allocation of Assets and Liabilities as of March 31, 2022 |
| (in thousands) |
Consideration paid: | | | | | |
Cash consideration paid, net of cash acquired | $ | 1,360,231 | | | $ | — | | | $ | 1,360,231 | |
Estimated additional cash payments | 4,635 | | | 4,988 | | | 9,623 | |
Estimated cash consideration, net of cash acquired | 1,364,866 | | | 4,988 | | | 1,369,854 | |
Assets acquired: | | | | | |
Accounts receivable - billed, billable and unbilled | $ | 44,078 | | | $ | — | | | $ | 44,078 | |
Prepaid expenses and other current assets | 7,955 | | | — | | | 7,955 | |
Property and equipment, net | 9,113 | | | (1,092) | | | 8,021 | |
Operating lease right-of-use assets | 18,898 | | | — | | | 18,898 | |
Intangible assets | 664,000 | | | — | | | 664,000 | |
Other assets | 7,166 | | | — | | | 7,166 | |
Total identifiable assets acquired | 751,210 | | | (1,092) | | | 750,118 | |
Liabilities assumed: | | | | | |
Accounts payable and accrued compensation | 42,182 | | | (4,360) | | | 37,822 | |
Operating lease liabilities | 18,898 | | | — | | | 18,898 | |
Income taxes payable, current | 5,673 | | | — | | | 5,673 | |
Deferred income taxes | 171,497 | | | 1,147 | | | 172,644 | |
Other long-term liabilities | 12,270 | | | — | | | 12,270 | |
Total identifiable liabilities assumed | 250,520 | | | (3,213) | | | 247,307 | |
Net identifiable assets acquired | 500,690 | | | 2,121 | | | 502,811 | |
Goodwill | 864,176 | | | 2,867 | | | 867,043 | |
Net assets acquired | $ | 1,364,866 | | | $ | 4,988 | | | $ | 1,369,854 | |
Goodwill represents the value of the assembled workforce and the enhanced knowledge, capabilities, and qualifications held by the business. This goodwill balance is not deductible for tax purposes.
Our evaluation of the intangible assets acquired with VES identified three assets. The assets were valued using methods which required a number of estimates and, accordingly, they are considered Level 3 measurements within the Accounting Standard Codification No. 820 (ASC 820) fair value methodology.
•Customer relationships represent the value of the existing contractual relationships with the U.S. federal government. These were valued using the excess earnings method, which required us to utilize estimated future revenues and earnings from contracts and an appropriate rate of return.
•VES maintains a provider network of third-party providers that assist in the performance of their clinical services. This network was valued using the cost method and income approach, which included both the cost of recreating such a network and the profits foregone during the time which would be required to recreate the network and an appropriate rate of return.
•VES maintained proprietary technology which interacted with U.S. Federal Government systems, facilitated the transmission of examination data, and supported the performance of the contracts. We valued the technology using a relief-from-royalty method, which required us to estimate future revenues and an arm's length royalty rate that a third-party provider might use to supply this service and an appropriate rate of return.
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Table 6.2: VES Intangible Asset Values and Useful Lives |
| Estimated Straight-Line Useful Life | | Estimated Fair Value |
| | | (in thousands) |
Customer contracts and relationships | 12 years | | $ | 580,000 | |
Provider network | 12 years | | 57,000 | |
Technology-based intangible assets | 12 years | | 27,000 | |
Total intangible assets | | | $ | 664,000 | |
In connection with certain liabilities acquired in the VES acquisition, we established a liability of $12.0 million for a billing dispute between VES and its customer relating to prior year billings. Our exposure was partially offset by an indemnification asset of $6.0 million. Following the VES Acquisition, the liability was confirmed at $12.0 million and we have recovered our share of the indemnification asset. We expect to settle the liability in the third quarter of fiscal year 2022. In addition, we established a tax liability of $12.3 million for uncertain tax positions within VES, partially offset by another indemnification asset of $7.2 million.
Connect Assist Holdings Limited ("Connect Assist")
On September 14, 2021, we acquired 100% of the share capital of Connect Assist for an estimated purchase price of $21.1 million (£15.5 million British Pounds). We acquired this business to improve our contact center services and qualifications within the United Kingdom. The business was integrated into our Outside the U.S. Segment. We have completed a preliminary assessment of all acquired assets and liabilities assumed. We recorded estimated goodwill and intangible assets of $11.3 million and $7.7 million, respectively, related to the acquisition.
Aidvantage
On October 6, 2021, we completed the acquisition of the student loan servicing business from Navient, rebranded as Aidvantage. The purchase price consideration is contingent upon future volumes, with a maximum payment of $65.0 million. The final payment is uncertain as there are a number of potential outcomes. We have estimated the fair value of this liability, based upon a probability weighted assessment of the potential outcomes, of $18.6 million. We will update this liability each quarter as changes are made to our estimate of fair value. These changes will be recorded through our statement of operations. If our obligation is less than anticipated, this will result in a benefit to our earnings. The obligation may be higher, either because the number of student loans we are servicing increases or if the contractual relationship we have acquired is extended beyond its current anticipated end date of December 31, 2023. In that instance, we would record an expense to earnings which we would anticipate being offset by additional benefits from the contract. However, the timing of the adjustment to the obligation and the anticipated financial benefits would be unlikely to be consistent. We recorded a single intangible asset related to the customer contract and relationship of $16.7 million, which we are amortizing over 27 months. The goodwill balance, representing the difference between the assets acquired and the estimated obligation, represents the assembled workforce, as well as the knowledge base acquired. This business is a part of our U.S. Federal Services Segment and supplements our existing portfolio of services to the U.S. Department of Education.
During the three months ended March 31, 2022, we reported $47.0 million and $3.4 million of revenue and gross loss, respectively, from Aidvantage. During the six months ended March 31, 2022, we reported $81.7 million and $1.4 million of revenue and gross loss, respectively, from Aidvantage.
BZ Bodies Limited ("BZB")
On January 31, 2022, we acquired 100% of the share capital of BZB for an estimated purchase price of $2.9 million (£2.2 million British Pounds), which includes an estimate of contingent consideration payable upon future performance. BZB provides weight management services for adults, children and vulnerable groups in the United Kingdom. We acquired this business to complement our services within the United Kingdom. The business was integrated into our Outside the U.S. Segment. We recorded estimated goodwill and intangible assets of $1.5 million and $1.3 million, respectively, related to the acquisition. During the three and six months ended March 31, 2022, we reported $1.1 million and $0.6 million of revenue and gross profit, respectively, from BZB.
7. DEBT
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Table 7.1: Details of Debt |
| March 31, 2022 | | September 30, 2021 |
| (in thousands) |
Term Loan A, due 2026 | $ | 1,058,750 | | | $ | 1,086,250 | |
Term Loan B, due 2028 | 397,000 | | | 399,000 | |
Subsidiary loan agreements | 3,971 | | | 38,281 | |
| | | |
Total debt principal | 1,459,721 | | | 1,523,531 | |
Less: Unamortized debt-issuance costs and discounts | (12,424) | | | (13,839) | |
Total debt | 1,447,297 | | | 1,509,692 | |
Less: Current portion of long-term debt | (59,911) | | | (80,555) | |
Long-term debt | $ | 1,387,386 | | | $ | 1,429,137 | |
On May 28, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent ("Credit Agreement"), which replaced our existing revolving credit facility. The Credit Agreement provided for the following three components.
•$1.10 billion term loan facility ("Term Loan A") which matures on May 28, 2026;
•$400.0 million term loan facility ("Term Loan B") which matures May 28, 2028; and
•$600.0 million revolving credit facility ("Revolver") which matures May 28, 2026.
The interest rates applicable to loans under the Credit Agreement are floating rates based upon the London Interbank Offered Rate ("LIBOR") plus a margin. Term Loan A and the Revolver margins are dependent upon our leverage ratio. Term Loan B is set to LIBOR plus 2.00% subject to a floor of 0.50%.
At execution of the Credit Agreement, the interest rates for Term Loan A and the Revolver was LIBOR plus 1.75%. During the first quarter of fiscal quarter 2022, we were able to lower our interest rates on both Term Loan A and the Revolver to LIBOR plus 1.50% based on the attainment of a total leverage ratio of 2.50 or better. As of March 31, 2022, the net total leverage ratio was 2.4. If we can achieve a net total leverage ratio of less than 2.00, the interest rates for Term Loan A and the Revolver could be further lowered to LIBOR plus 1.375%; conversely if the net leverage ratio increases to 2.50 or greater, the rate would revert back to LIBOR plus 1.75%. LIBOR is anticipated to be phased out over the next 18 months, and alternative benchmark rates have been identified in this agreement. This is our only significant arrangement that utilizes LIBOR. As of March 31, 2022, the annual effective interest rate, including original issue discount and amortization of debt issuance costs, was 2.4%.
The Credit Agreement is available for general corporate purposes, including the funding of working capital, capital expenditures, and possible future acquisitions. In addition to borrowings, it allows us to continue to issue letters of credit when necessary. As of March 31, 2022, we had no outstanding balance on the Revolver.
Under the terms of the Credit Agreement, we are required to comply with certain covenants, the terms of which are customary and include a net total leverage ratio and a net interest coverage ratio. The net total leverage ratio is calculated as total outstanding debt less the lower of (a) unrestricted cash or (b) $75.0 million divided by adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA"). With certain exceptions, the covenant requires the net total leverage ratio, as defined by the Credit Agreement to be less than 4.0, calculated over the previous twelve months. The net interest coverage ratio is calculated as EBITDA divided by interest expense, over the previous twelve months. The covenant requires a net interest coverage ratio of 3.0 or greater. As of March 31, 2022, as defined by the Credit Agreement, we calculated a net total leverage ratio of 2.4 and net interest coverage ratio of 15.3. We were in compliance with all applicable covenants under the Credit Agreement as of March 31, 2022, and September 30, 2021. We do not believe that the covenants represent a significant restriction to our ability to successfully operate the business or to pay our dividends.
Costs incurred in establishing the Credit Agreement have been reported as a reduction to the gross debt balance and will be amortized over the respective lives of the arrangements. In addition to the corporate Credit Agreement, we hold smaller credit facilities in Australia, Canada, and the United Kingdom. These allow our businesses to borrow to meet any short-term working capital needs.
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Table 7.2: Details of Future Minimum Principal Payments Due |
| Amount Due |
| (in thousands) |
April 1, 2022 through September 30, 2022 | $ | 32,963 | |
Year ended September 30, 2023 | 66,383 | |
Year ended September 30, 2024 | 86,500 | |
Year ended September 30, 2025 | 93,375 | |
Year ended September 30, 2026 | 801,500 | |
Thereafter | 379,000 | |
Total payments | $ | 1,459,721 | |
8. DERIVATIVES
Interest Rate Derivative Instrument
In June 2021, the Company entered into an interest rate swap agreement for a notional amount of $300.0 million, effective June 28, 2021, with an expiration date of May 28, 2026, which hedges the floating LIBOR on a portion of the term loan (Term Loan A, $1.10 billion balance) under the Credit Agreement to a fixed rate of 0.986%. The Company elected to designate this interest rate swap as a cash flow hedge for accounting purposes.
As this cash flow hedge is considered effective, any future gains and losses are reflected within Accumulated Other Comprehensive Income in the Consolidated Statements of Comprehensive Income. Derivatives in a net asset position are recorded in "Prepaid expenses and other current assets" on our Consolidated Balance Sheets and derivatives in a net liability position are recorded in "Other current liabilities" on our Consolidated Balance Sheets. No ineffectiveness was recorded on this contract during the six months ended March 31, 2022.
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Table 8.1: Details of Derivatives Fair Value |
| March 31, 2022 | | September 30, 2021 |
| (in thousands) |
Assets: | | | |
Interest rate swap | $ | 17,737 | | | $ | — | |
Total assets | $ | 17,737 | | | $ | — | |
Liabilities: | | | |
Interest rate swap | $ | — | | | $ | 410 | |
Total liabilities | $ | — | | | $ | 410 | |
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Table 8.2: Gains on Derivatives |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| (in thousands) |
Net gains recognized in AOCI on derivatives, net of tax (1) | $ | 10,225 | | | $ | — | | | $ | 12,401 | | | $ | — | |
Amounts reclassified to earnings from accumulated other comprehensive loss (2) | 464 | | | — | | | 973 | | | — | |
Net current period other comprehensive income | $ | 10,689 | | | $ | — | | | $ | 13,374 | | | $ | — | |
(1)Amount is net of tax expense of $3.7 million and $4.4 million for the three and six months ended March 31, 2022, respectively.
(2)Amount is net of tax benefit of $0.2 million and $0.3 million for the three and six months ended March 31, 2022, respectively.
Counterparty Risk
The Company is exposed to credit losses in the event of nonperformance by the counterparty to our derivative instrument. Our counterparty has investment grade credit ratings; accordingly, we anticipate that the counterparty will be able to fully satisfy its obligations under the contracts. Our agreements outline the conditions upon which it or the counterparty are required to post collateral. As of March 31, 2022, there was no collateral posted with its counterparty related to the derivatives.
9. FAIR VALUE
The Company had two assets recorded at fair value on a recurring basis as of March 31, 2022, the deferred compensation asset, related to the portion invested in mutual funds and the interest rate swap. For the deferred compensation asset, the mutual funds prices are quoted in active markets and therefore are classified as Level 1. For the interest rate swap, the Company obtains its Level 2 pricing inputs from its counterparty for the interest rate swap. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. As of March 31, 2022, the Company had liabilities recorded at fair value on a recurring basis for contingent consideration related to acquisitions. The contingent consideration liability is considered Level 3, as the inputs are not observable and based on internal assumptions about forecasted revenues, margins, volumes, and probability of contract extensions on businesses acquired.
The fair values of receivables, prepaids, other assets, accounts payable, accrued costs, and other current liabilities approximate the carrying values as a result of the short-term nature of these instruments. The carrying value of our debt is consistent with the fair value as the stated interest rates in the agreements are consistent with the current market rates used in notes with similar terms in the markets (Level 2 inputs).
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Table 9: Fair Value |
| As of March 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Balance |
| (in thousands) |
Assets: | | | | | | | |
Deferred compensation assets - Rabbi Trust | $ | 28,231 | | | $ | — | | | $ | — | | | $ | 28,231 | |
Interest rate swap | — | | | 17,737 | | | — | | | 17,737 | |
Total assets | $ | 28,231 | | | $ | 17,737 | | | $ | — | | | $ | 45,968 | |
Liabilities: | | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 21,340 | | | $ | 21,340 | |
Total liabilities | $ | — | | | $ | — | | | $ | 21,340 | | | $ | 21,340 | |
10. STOCK COMPENSATION
The Company grants restricted stock units ("RSUs") and performance stock units ("PSUs") to eligible participants under its 2021 Stock Incentive Plan, which was approved by the Board of Directors and stockholders. The RSUs granted to employees vest ratably over three to five years and one year for members of the board of directors, in each case from the grant date. PSU vesting is subject to the achievement of certain performance and market conditions and the number of PSUs earned could vary from 0% to 200% of the number of PSUs awarded. The PSUs will vest at the end of a three year-performance period. We issue new shares to satisfy our obligations under these plans. The fair value of each RSU and PSU is calculated at the date of the grant.
During the six months ended March 31, 2022, we issued approximately 340,000 RSUs, which will vest ratably over three or four years, and approximately 87,000 PSUs, which will vest after three years.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | |
Table 11: Details of Changes in Accumulated Other Comprehensive Loss by Category |
| Foreign currency translation adjustment | | Net unrealized (loss)/gain on derivatives, net of tax | | Total |
| (in thousands) |
Balance as of September 30, 2021 | $ | (39,605) | | | $ | (303) | | | $ | (39,908) | |
Other comprehensive income before reclassifications | 436 | | | 12,401 | | | 12,837 | |
Amounts reclassified from accumulated other comprehensive loss | — | | | 973 | | | 973 | |
Net current period other comprehensive income | 436 | | | 13,374 | | | 13,810 | |
Balance as of March 31, 2022 | $ | (39,169) | | | $ | 13,071 | | | $ | (26,098) | |
12. STOCK PURCHASES
Under a resolution adopted in March 2020, the Board of Directors authorized the purchase, at management's discretion, of up to $200.0 million of our common stock. As of March 31, 2022, $120.8 million remained available for future stock purchases.
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Table 12: Stock Purchase Activity |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| (in thousands, except per share data) |
Amount paid for shares repurchased | $ | 24,464 | | | $ | — | | | $ | 25,843 | | | $ | 3,363 | |
Number of shares repurchased | 330 | | | — | | | 348 | | | 52 | |
Average per share price paid | $ | 74.22 | | | $ | — | | | $ | 74.26 | | | $ | 64.98 | |
Since March 31, 2022, we have acquired an additional 238,431 shares of our common stock for $17.7 million.
13. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
| | | | | | | | | | | |
Table 13.1: Details of Cash and Cash Equivalents and Restricted Cash |
| March 31, 2022 | | September 30, 2021 |
| (in thousands) |
Cash and cash equivalents | $ | 92,638 | | | $ | 135,061 | |
Restricted cash (1) | 19,330 | | | 21,509 | |
Cash, cash equivalents, and restricted cash | $ | 111,968 | | | $ | 156,570 | |
(1)Restricted cash is recorded within "Prepaid expenses and other current assets" on the Consolidated Balance Sheets.
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Table 13.2: Supplemental Disclosures of Cash Flow Information |
| | | | For the Six Months Ended |
| | | | | March 31, 2022 | | March 31, 2021 |
| | (in thousands) |
Interest payments | | | | | $ | 17,755 | | | $ | 783 | |
Income tax payments | | | | | 50,531 | | | 42,495 | |
14. ACCOUNTS RECEIVABLE, NET
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Table 14: Details of Accounts Receivable, Net |
| March 31, 2022 | | September 30, 2021 |
| (in thousands) |
Billed and billable receivables | $ | 742,713 | | | $ | 718,728 | |
Unbilled receivables | 148,122 | | | 124,135 | |
Allowance for credit losses | (5,150) | | | (8,044) | |
Accounts receivable, net | $ | 885,685 | | | $ | 834,819 | |
15. PROPERTY AND EQUIPMENT, NET
| | | | | | | | | | | |
Table 15: Details of Property and Equipment, Net |
| March 31, 2022 | | September 30, 2021 |
| (in thousands) |
Land | $ | — | | | $ | 1,738 | |
Building and improvements | — | | | 11,981 | |
Office furniture and equipment | 247,100 | | | 254,102 | |
Leasehold improvements | 88,236 | | | 79,938 | |
Property and equipment, at cost | 335,336 | | | 347,759 | |
Accumulated depreciation | (277,391) | | | (285,132) | |
Property and equipment, net | $ | 57,945 | | | $ | 62,627 | |
As of March 31, 2022, we classified as held for sale one building and the associated land with a carrying value of $5.4 million within "Prepaid expenses and other current assets" on our Consolidated Balance Sheets. As of March 31, 2022, we concluded the fair value less the costs to sell exceeds the carrying value of this asset.
16. COMMITMENTS AND CONTINGENCIES
Litigation
We are subject to audits, investigations, and reviews relating to compliance with the laws and regulations that govern our role as a contractor to agencies and departments of federal, state, local, and foreign governments, and otherwise in connection with performing services in countries outside of the U.S. Adverse findings could lead to criminal, civil, or administrative proceedings, and we could be faced with penalties, fines, suspension, or debarment. Adverse findings could also have a material adverse effect on us because of our reliance on government contracts. We are subject to periodic audits by federal, state, local, and foreign governments for taxes. We are also involved in various claims, arbitrations, and lawsuits arising in the normal conduct of our business. These include but are not limited to bid protests, employment matters, contractual disputes, and charges before administrative agencies. Although we can give no assurance, based upon our evaluation and taking into account the advice of legal counsel, we do not believe that the outcome of any existing matter would likely have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Medicaid claims
The Centers for Medicare and Medicaid Services (CMS) asserted two disallowances against a state Medicaid agency. The state contested the first disallowance and ultimately settled that claim for approximately $7.3 million. The second disallowance of approximately $19.9 million is still being contested by the state. The state is seeking reimbursement from us for the first disallowance of $7.3 million and has indicated its intention to seek reimbursement of the second disallowance if its legal challenge is unsuccessful. From 2004 through 2009, we had a contract with the state agency in support of its school-based Medicaid claims. We entered into separate agreements with the school districts under which we assisted the districts with preparing and submitting claims to the state Medicaid agency which, in turn, submitted claims for reimbursement to CMS. The state has asserted that its agreement with us requires us to reimburse the state for the amounts owed to CMS. However, our agreements with the school districts require them to reimburse us for such amounts, and therefore we believe the school districts are responsible for any amounts that ultimately must be refunded to CMS. Although it is reasonably possible that a court could conclude we are responsible for the full balance of the disallowances, we believe our exposure in this matter is limited to our fees associated with this work and that the school districts will be responsible for the remainder. We have recorded a liability of our estimated fees earned from this engagement relating to the disallowances. We exited the federal healthcare-claiming business in 2009 and no longer provide the services at issue in this matter.
17. SUBSEQUENT EVENT
On April 8, 2022, our Board of Directors declared a quarterly cash dividend of $0.28 for each share of our common stock outstanding. The dividend is payable on May 31, 2022, to shareholders of record on May 13, 2022. Based upon the number of shares outstanding, we anticipate a cash payment of approximately $17.3 million.