MAXIMUS, INC. The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, our Consolidated Financial Statements and related Notes included both herein and in our Annual Report on Form 10-K for the year endedSeptember 30, 2019 , which was filed with theSecurities and Exchange Commission onNovember 26, 2019 . Business Overview We are a leading operator of government health and human services programs worldwide. We are a responsible and reliable contracting partner to governments under our mission of Helping Government Serve the People®. Governments rely on our financial stability and proven expertise in helping people connect and use critical government programs. We use our experience, business process management expertise, innovation and technology solutions to help government agencies run effective, efficient and accountable programs. Our primary portfolio of work is tied to business process services (BPS) in the health services and human services markets. Our growth over the last decade was driven by new work, such as that from the Affordable Care Act (ACA) inthe United States and a growing footprint in clinical services including assessments, appeals and independent medical reviews in multiple geographies. Our growth has been supplemented by acquisitions. COVID-19 pandemic As a provider of essential services, we have made significant changes to our operations to allow us to continue to serve our customers while maintaining a safe work environment for our employees. •Within the United States, we have implemented a hybrid operational model by quickly transitioning the majority of our employees from offices to work-from-home arrangements. We are continuing to work with our customers to increase this population within the constraints of government regulation and shortages in equipment and other resources. •Where employees remain on site, we are committed to ensuring a safe work environment, adhering to local and national regulations including those established by theCenters for Disease Control and Prevention , theOccupational Health and Safety Administration and theEnvironmental Protection Agency withinthe United States . These steps include enforced social distancing; mandatory face-coverings; regular employee temperature checks; rigorous, frequent and proactive cleaning and sanitizing of our facilities; reinforced handwashing and hygiene reminders and the installation of self-cleaning surfaces for high-traffic touchpoints. •Where employees test positive or have come into contract with individuals with a positive diagnosis, we have a response plan which includes communicating with our employees and local health department officials and further sanitizing of the site and isolating of any impacted employees using a paid 14-day self-quarantine. •We have also funded numerous additional administrative leave, sick leave and emergency paid family and medical leave programs to assist our employees in complying with these changes. •In some locations, we have been unable to continue our operations either due to local restrictions or the nature of the services we provide. In particular, many of our welfare-to-work services have been suspended or slowed as we are unable to work directly with jobseekers, and the uncertainties within the employment market make the achievement of employment outcomes challenging. In these cases, our customers are working with us to maintain our workforce and operating capacity in the short-term so that we will be ready to serve once the pandemic-related restrictions are lifted. •Outside the United States, the impact to operations has varied to a greater extent. Several geographies operate face-to-face employment services and assessments. The segment has experienced a slowdown in employment services and a halt of face-to-face assessments on theU.K. Health Assessment Advisory contract. Many of our employees are working from home but those that remain in the offices are adhering to local jurisdictional guidance and regulations related to workplace safety and safeguarding employees. As a result, we continue to serve our clients, maintaining continuity of operations and including strict security standards, while protecting our employees. 19 -------------------------------------------------------------------------------- We anticipate that we will be able to return to our previous levels of performance once the effects of this pandemic abate. However, the timing of this is uncertain and may vary by contract and location. •We have a strong customer base. Withinthe United States , many of the services we provide are either directly for theU.S. Federal Government or are mandated by theU.S. Federal Government. Outsidethe United States , our services are often provided for or funded by national governments. We may experience some delays in payments as governments navigate new processes. •AtJune 30, 2020 , we had$81.5 million of cash and$145 million of borrowings on our credit facility, leaving$255 million of available capacity. We believe we have adequate cash resources and credit availability to handle our obligations as they fall due. •In the long-term, we believe that many of the demographic and legislative trends that we have articulated as opportunities for the growth of our business will continue. With societies continuing to see increased longevity and more complex health needs coupled with a desire by governments to spend wisely and seek outcome-based services, we believe we remain well-placed to build on our existing relationships and reputation. Acquisitions To supplement our core business, we have an active program to identify potential strategic acquisitions. Our acquisitions have successfully enabled us to increase future organic growth, as well as expand our business processes, knowledge and client relationships into adjacent markets and new geographies. InNovember 2018 , we acquired the citizen engagement centers business previously operated by General Dynamics Information Technology. This acquisition, coupled with our 2015 acquisition ofAcentia, LLC , has provided increased scale, customer base and competitive advantages in our business withthe United States Federal Government. InAugust 2019 andFebruary 2020 , we acquiredGT Hiring Solutions inCanada and InjuryNet inAustralia , respectively, which we have integrated into our Outside theU.S. Segment. These acquisitions supplement our existing businesses in this segment. We have paused significant acquisition activity until we see an easing of the uncertainties resulting from the COVID-19 pandemic. We continue to work on smaller tuck-in transactions that support future organic growth. Financial Overview The global pandemic began to impact our operations inMarch 2020 , and its effects have continued into and through our third fiscal quarter. The effect on our financial statements in this period was different across each of our segments. •We experienced less disruption within ourU.S. Health & Human Services andU.S. Federal Services Segments as we worked to maintain our operations, while prioritizing the safety of our employees. We anticipate continued disruption in these segments over the remainder of the year and into fiscal year 2021. Many of our contracts are outcomes or performance based and accordingly we are compensated based on volumes of transactions. We have been able to continue serving our customers and their citizens through expanded work from home technologies, mandated social distancing and face coverings in our site locations, significantly increased sanitization efforts, required use of a health screening mobile app to limit our sites to only employees who are healthy and to help those that fail the health screen to seek medical attention. We have experienced the negative effects of lower than normal activity and volume levels in many of our contracts, particularly those where temporary changes instituted as part of government COVID-19 relief efforts have loosened the requirements for program participants. For example, a significantU.S. Health & Human Services program has halted Medicaid renewals to ensure that individuals and families still have access to healthcare. We have also been impacted by incremental costs due to idle labor, enhanced health screenings and efforts to keep our employees healthy and increased sanitization. We have also experienced offsetting, positive impacts in the form of increased revenue from new work related to COVID-19 response and an expansion of our Census Questionnaire Assistance contract. Our new work is primarily in the areas of COVID-19 general inquiry, unemployment insurance support and contact tracing. •Our Outside theU.S. Segment experienced a more immediate and significant negative impact from the pandemic as a significant portion of our international work is employment related, whether in finding work for individuals or assessing their health and work capabilities. The changes in the employment markets in these jurisdictions has sharply reduced the number of individuals in work and the number of employment opportunities available to them, resulting in a sharp decline in our outcomes-based revenue. This segment 20 -------------------------------------------------------------------------------- was also affected to a lesser extent by the Australian bushfires inDecember 2019 andJanuary 2020 . We believe that as different geographies emerge out of the pandemic, there will be an increased need and pent-up demand for our role to support more people into employment opportunities. •Within our Outside theU.S. Segment, we are required to make judgments based upon our expectations of future employment outcomes for our caseload of jobseekers. These estimates are dependent upon a number of factors, including the effects of the pandemic and the pandemic-related restrictions over the employment markets, the timetable for the easing of pandemic-related restrictions and the speed with which the economies of the jurisdictions in which we operate will recover. •Through our fourth fiscal quarter and into fiscal year 2021, we anticipate that we will continue to see COVID-19 related work as well as benefits from our employment services as we support individuals returning to work. We expect that these benefits will be partially offset by temporary program changes on performance-based contracts. Our assumptions are subject to change as we understand more about the duration of the pandemic and related regulations, the recovery pattern of our core programs, the effects of the budget challenges and other changes in policies or legislation. Results of Operations Consolidated The following table sets forth, for the periods indicated, selected statements of operations data: Nine Months Ended June Three Months Ended June 30, 30, (dollars in thousands, except per share data) 2020 2019 2020 2019 Revenue$ 901,337 $ 730,710 $ 2,537,701 $ 2,131,849 Cost of revenue 715,734 556,463 2,023,550 1,628,915 Gross profit 185,603 174,247 514,151 502,934 Gross profit percentage 20.6 % 23.8 % 20.3 % 23.6 % Selling, general and administrative expenses 89,582 81,604 283,662
239,377
Selling, general and administrative expense as a percentage of revenue
9.9 % 11.2 % 11.2 % 11.2 %
Amortization of intangible assets 8,712 9,049 26,734 24,026
Operating income 87,309 83,594 203,755 239,531
Operating income percentage 9.7 % 11.4 % 8.0 % 11.2 %
Interest expense 616 420 1,565 2,614
Other (expense)/income, net (671) 556 621 3,048
Income before income taxes 86,022 83,730 202,811 239,965
Provision for income taxes 21,558 20,765 51,963
59,511
Effective income tax rate 25.1 % 24.8 % 25.6 % 24.8 % Net income 64,464 62,965 150,848
180,454
Income/(loss) attributable to noncontrolling interests - 67 - (281) Net income attributable to Maximus$ 64,464 $ 62,898 $ 150,848 $ 180,735 Basic earnings per share$ 1.04 $ 0.98 $ 2.38 $ 2.80 Diluted earnings per share$ 1.04 $ 0.97 $ 2.37 $ 2.79
Our business segments have different factors driving revenue fluctuations and profitability. The sections that follow cover these segments in greater detail.
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Changes in revenue, cost of revenue and gross profit for the three months ended
Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change
Three months ended June 30,
2019 $ 730,710 $ 556,463 $ 174,247
Growth from citizen
engagement centers contracts 145,790 20.0 % 124,106 22.3 % 21,684 12.4 %
Organic growth/(decline)
from other contracts 25,754 3.5 % 35,970 6.5 % (10,216) (5.9) %
Acquired growth 4,146 0.6 % 3,535 0.6 % 611 0.4 %
Currency effect compared to
the prior period (5,063) (0.7) % (4,340) (0.8) % (723) (0.4) %
Three months ended June 30,
2020 $ 901,337 23.4 % $ 715,734 28.6 % $ 185,603 6.5 %
Revenue and cost of revenue for the three months ended June 30, 2020 , increased
compared to the same period in fiscal year 2019, principally driven by the
citizen engagement centers business acquisition in the U.S. Federal Services
Segment and to a lesser extent new work tied to helping governments slow the
pace of the pandemic through contact tracing and other efforts to support the
economic downturn through unemployment insurance programs for state governments.
Although the citizen engagement centers business provided a full quarter of
results in both periods, the Census Questionnaire Assistance (CQA) contract is
now operating at its peak level of operations whereas work was at an early stage
in fiscal year 2019.
Our businesses within the United States experienced organic revenue growth,
offset by declines within our Outside the U.S. Segment. The factors driving
changes are discussed in more detail below.
Our cost of revenue includes direct costs related to labor, subcontractor labor,
outside vendors, rent and other direct costs.
Changes in revenue, cost of revenue and gross profit for the nine months ended
June 30, 2020 , are summarized below.
Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change
Nine months ended June 30,
2019 $ 2,131,849 $ 1,628,915 $ 502,934
Estimated pre-acquisition
results from citizen
engagement centers business 98,429 85,341 13,088
Pro forma results for the
nine months ended June 30,
2019 2,230,278 1,714,256 516,022
Growth from citizen
engagement centers contracts 268,118 12.0 % 221,041 12.9 % 47,077 9.1 %
Organic growth/(decline) from
other contracts 37,643 1.7 % 89,399 5.2 % (51,756) (10.0) %
Acquired growth 10,521 0.5 % 9,116 0.5 % 1,405 0.3 %
Currency effect compared to
the prior period (8,859) (0.4) % (10,262) (0.6) % 1,403 0.3 %
Nine months ended June 30,
2020 $ 2,537,701 13.8 % $ 2,023,550 18.0 % $ 514,151 (0.4) %
22-------------------------------------------------------------------------------- We estimate that revenue and cost of revenue from the citizens engagement center business for the period fromOctober 1, 2018 toNovember 16, 2018 (the acquisition date) would have increased our revenue and cost of revenue by$98.4 million and$85.3 million , respectively. We have utilized pro forma revenue, cost of revenue and gross profit in calculating the changes shown above. Selling, general and administrative expense (SG&A) consists of indirect costs related to general management, marketing and administration. It is primarily composed of labor costs. These costs may be incurred at a segment level, for dedicated resources that are not client-facing, or at a corporate level. Corporate costs are allocated to segments on a consistent and rational basis. Fluctuations in our SG&A are primarily driven by changes in our administrative cost base, which is not directly driven by changes in our revenue. As part of our work for the United States Federal Government and many states, we allocate these costs using a methodology driven by the Federal Cost Accounting Standards. Our SG&A expense has increased year-over-year due primarily to: •bad debt charges of$8.8 million from an increase in receivable reserves due to payment concerns related to COVID-19 and a billing dispute with a customer; •increases in business development activity to both bolster our technical skills and plan for increased bidding activity; •increases in our scope of operations, which increases our administrative base; and •higher than usual specific acquisition costs and IT transformation initiatives, including migrating our existing data centers to the cloud; •partially offset by a gain of$1.7 million related to the sale ofQ2 Administrators LLC , a wholly owned subsidiary, during the third quarter of fiscal year 2020. Amortization of intangible assets received a full charge from our acquisition of the citizen engagement centers business during fiscal year 2020. Additional charges from the acquisition ofGT Hiring Solutions and InjuryNet also increased our amortization expense. Our interest expense is primarily driven by borrowings from our credit facility. During fiscal year 2020, we drew on our credit facility to cover our working capital requirements. In fiscal year 2019, we borrowed$150 million to partially fund the acquisition of the citizen engagement centers business; this borrowing was repaid in full before the end of fiscal year 2019. Our effective income tax rate for the three months endedJune 30, 2020 , was 25.1%, compared to 24.8% in the same period in fiscal year 2019. We are closely monitoring the effects of changes in tax legislation, notablythe United States CARES Act, which provides for some tax credits and delayed payment of some taxes. The effect on our results in the three and nine months endedJune 30, 2020 was not material.U.S. Health & Human Services Segment OurU.S. Health and Human Services Segment provides a variety of business process services such as program administration, appeals and assessments services, and related consulting work forU.S. state and local government programs. These services support a variety of programs including the Affordable Care Act (ACA), Medicaid and theChildren's Health Insurance Program (CHIP). We also serve as administrators in state-based welfare-to-work and child support programs. Nine Months Ended June Three Months Ended June 30, 30, (dollars in thousands) 2020 2019 2020 2019 Revenue$ 336,950 $ 291,132 $ 957,929 $ 876,082 Cost of revenue 243,921 204,468 689,856 615,127 Gross profit 93,029 86,664 268,073 260,955 Operating income 61,033 54,250 165,440 167,002 Gross profit percentage 27.6 % 29.8 % 28.0 % 29.8 % Operating income percentage 18.1 % 18.6 % 17.3 % 19.1 % 23
-------------------------------------------------------------------------------- Our revenue and cost of revenue for the three month period endedJune 30, 2020 , increased 15.7% and 19.3%, respectively, compared to the same period in fiscal year 2019. For the nine months endedJune 30, 2020 , growth was 9.3% and 12.1%, respectively. All growth was organic. A number of positive and negative factors impacted this segment during the three and nine months endedJune 30, 2020 . •We experienced an increase in revenue due to short term contracts assisting our customers with COVID-19 related administration. Although within our target range for profitability, these contracts generally have lower operating margins and therefore, tempered the overall operating margins of the segment. •The increase in revenue in theU.S. Federal Services Segment absorbed additional costs from this segment and improved margins; this is likely to reverse in fiscal year 2021 as the CQA contract ends. •Lower volumes on our large outcome-based contracts contributed to lower revenue and lower operating margins. •As we noted in our previous quarterly filing, our revenue in the three months endedJune 30, 2020 received approximately$9 million of benefit from a contract where we performed work prior to the contract amendment being executed inApril 2020 . •Our operating income for the nine months endedJune 30, 2020 was negatively impacted by the bad debt charges of$8.0 million . We anticipate our operating income margins will be between 17% and 18% for the full fiscal year. Our customers in this segment are typicallyU.S. state governments, who have seen increases in the demand for the social services that we administer while also experiencing a significant reduction in their tax revenues. Although this may provide additional opportunities for us, we face the risk that many of our customers may face cash shortfalls from reduced income tax receipts, resulting in potential budgetary pressures and delayed payments.U.S. Federal Services Segment OurU.S. Federal Services Segment provides business process solutions, including program administration, appeals and assessment services as well as system and software development and maintenance services for variousU.S. federal civilian programs. This segment also contains certain state-based assessments, independent medical reviews, and appeals work that is part of the segment's heritage within the Medicare Appeals portfolio and continues to be managed within this segment. Nine Months Ended June Three Months Ended June 30, 30, (dollars in thousands) 2020 2019 2020 2019 Revenue$ 450,143 $ 292,295 $ 1,210,105 $ 799,018 Cost of revenue 365,420 225,492 977,603 623,534 Gross profit 84,723 66,803 232,502 175,484 Operating income 39,233 33,907 101,047 84,852 Gross profit percentage 18.8 % 22.9 % 19.2 % 22.0 % Operating income percentage 8.7 % 11.6 % 8.4 % 10.6 % 24
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Changes in revenue, cost of revenue and gross profit for the three months ended
Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change
Three months ended June 30,
2019 $ 292,295 $ 225,492 $ 66,803
Growth from citizen
engagement centers contracts 145,790 49.9 % 124,106 55.0 % 21,684 32.5 %
Organic growth/(decline)
from other contracts 12,058 4.1 % 15,822 7.0 % (3,764) (5.6) %
Three months ended June 30,
2020 $ 450,143 54.0 % $ 365,420 62.1 % $ 84,723 26.8 %
Changes in revenue, cost of revenue and gross profit for the nine months ended
Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change Nine months ended June 30, 2019 (1)$ 799,018 $ 623,534 $ 175,484 Estimated pre-acquisition results from citizen engagement centers business (2) 98,429 85,341 13,088 Pro forma results for the nine months ended June 30, 2019 897,447 708,875 188,572 Growth from citizen engagement centers contracts (3) 268,118 29.9 % 221,041 31.2 % 47,077 25.0 % Organic growth/(decline) from other contracts (4) 44,540 5.0 % 47,687 6.7 % (3,147) (1.7) % Nine months ended June 30, 2020$ 1,210,105 34.8 %$ 977,603 37.9 %$ 232,502 23.3 % To show the changes between the nine months endedJune 30, 2019 and 2020, we utilized the following information. 1.These balances represent our results for the nine months endedJune 30, 2019 . These results include the citizen engagement centers business, following its acquisition onNovember 16, 2018 (the acquisition date). 2.These balances represent an estimate of the results for the citizen engagement centers business for the pre-acquisition period - the period fromOctober 1, 2018 , through to the acquisition date. This balance, combined with our prior year results, provides pro forma results - an estimate of the results of this segment if we had acquired the citizen engagement centers business on or beforeOctober 1, 2018 . 3.These balances represent the growth, on a pro forma basis, of the contracts acquired with the citizen engagement centers business from the first nine months of fiscal years 2019 to the first nine months of fiscal year 2020. The principal driver of this growth was the Census Questionnaire Assistance (CQA) contract. 4.These balances represent the growth reported between the first nine months of fiscal years 2019 and 2020 of existing contracts outside those acquired. Approximately two-thirds of the revenue in this segment is generated by cost-plus contracts, including almost all of the income acquired from the citizen engagement centers business. Accordingly, we are able to recover COVID-19-related costs incurred on these contracts. Our revenue has increased as a result of new and 25 -------------------------------------------------------------------------------- acquiredcontracts, as well as an increase in new work tied to supporting the government's efforts in slowing down the spread of the pandemic. The segment was unfavorably impacted by volume and revenue reductions on several performance-based contracts this fiscal year. These declines are due to temporary changes on certain contracts as part of the COVID-19 response to ensure that individuals and families continue to have access to vital services. For example, we have experienced a significant decline in volumes of independent medical reviews due to a significant drop in workers' compensation claims. The segment was also impacted by additional costs on some performance-based arrangements and ongoing investments in business development. The CQA contract had$185 million of revenue in fiscal year 2019. The contract contributed approximately$380 million of revenue in the nine months endedJune 30, 2020 and is anticipated to provide approximately$500 million of revenue in fiscal year 2020. While we have experienced some disruption from the COVID-19 pandemic, we believe that the nature of our contracts and the desires of our customers will allow us to continue operating, albeit with some restrictions. We anticipate operating income margins for the remainder of the year will be between 8% and 9%. Outside the United States Segment Our Outside theU.S. Segment provides business process solutions for governments and commercial clients outside theU.S. , including health and disability assessments, program administration and case management for employment services and other work-support programs. We deliver services in theUnited Kingdom , including the Health Assessment Advisory Service (HAAS), the Work & Health Programme and Fair Start;Australia , including jobactive and the Disability Employment Service;Canada , including Health Insurance British Columbia and the Employment Program ofBritish Columbia ;Italy ,Saudi Arabia ,Singapore andSweden . Nine Months Ended June Three Months Ended June 30, 30, (dollars in thousands) 2020 2019 2020 2019 Revenue$ 114,244 $ 147,283 $ 369,667 $ 456,749 Cost of revenue 106,393 126,503 356,091 390,254 Gross profit 7,851 20,780 13,576 66,495 Operating (loss)/income (5,817) 4,989 (33,549) 13,904 Gross profit percentage 6.9 % 14.1 % 3.7 % 14.6 % Operating (loss)/income percentage (5.1) % 3.4 % (9.1) % 3.0 %
Changes in revenue, cost of revenue and gross profit for the three months ended
Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change
Three months ended June
30, 2019 $ 147,283 $ 126,503 $ 20,780
Organic decline (32,122) (21.8) % (19,305) (15.3) % (12,817) (61.7) %
Acquired growth 4,146 2.8 % 3,535 2.8 % 611 2.9 %
Currency effect compared
to the prior period (5,063) (3.4) % (4,340) (3.4) % (723) (3.5) %
Three months ended June
30, 2020 $ 114,244 (22.4) % $ 106,393 (15.9) % $ 7,851 (62.2) %
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Changes in revenue, cost of revenue and gross profit for the nine months ended
Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change
Nine months ended June
30, 2019 $ 456,749 $ 390,254 $ 66,495
Organic decline (88,744) (19.4) % (33,017) (8.5) % (55,727) (83.8) %
Acquired growth 10,521 2.3 % 9,116 2.3 % 1,405 2.1 %
Currency effect compared
to the prior period (8,859) (1.9) % (10,262) (2.6) % 1,403 2.1 %
Nine months ended June
30, 2020 $ 369,667 (19.1) % 356,091 (8.8) % 13,576 (79.6) %
The COVID-19 pandemic had an immediate and significant negative effect on the
results of our Outside the U.S. Segment. This business has several contracts
that are compensated based upon performance-based outcomes, which have been
disrupted by the COVID-19 pandemic.
Our welfare-to-work contracts earn revenue based upon our ability to place
individuals in long-term sustained employment. Revenue is recognized based on
our estimate of the number of individuals who we anticipate reaching these
milestones. As a result, changes in our estimates of our ability to place people
in work and the time that this will take can have significant effects on our
revenue. As a result of the pandemic, we revised our estimates of those
jobseekers who are likely to achieve employment outcomes, reducing our revenue
in the second fiscal quarter of 2020 by approximately $24 million to reflect the
anticipated reduction in outcome payments. Through June 30, 2020 , we have
continued to refine our estimates as we gain a better understanding of the
effects of COVID-19 and the related regulations on the employment markets we
serve. Our revenue remains lower than fiscal year 2019.
•Many of our contracts have been modified. In Australia , the balance between
administrative revenue and outcome-based revenue has been adjusted, to reduce
the risks within the contract. In the United Kingdom , contracts have been
temporarily changed to cost-reimbursable arrangements.
•Our estimates of the number of outcomes we anticipate to achieve has declined
and the time we expect to achieve those outcomes has grown compared to prior
years. This has reduced our potential revenue and slowed our progress towards
recognizing it. All estimates at this time are based upon our expectations as to
how the effects of the pandemic, including regulations adopted by governments
and employment practices adopted by employers, will progress. We have limited
history upon which to base these estimates and, accordingly, our revenue may be
more volatile than we have previously experienced.
Our health assessment contracts, including HAAS, have experienced declines in
volumes as the government instituted a temporary halt on face-to-face
assessments and navigates towards the optimal path to safely resume these
services. We have furloughed some employees under programs to reduce costs in
the short term.
As a result of this disruption, we anticipate that we will continue to
experience operating losses for the remainder of this fiscal year, although we
do not anticipate a significant loss in our fourth fiscal quarter. In the
longer-term, we anticipate an expanded need for our services across all
geographies as we help our customers to expand and adapt their employment
programs to address the economic downturn and help cope with widespread
unemployment.
Our acquired growth is from the acquisition of GT Hiring Solutions in Canada in
August 2019 and InjuryNet in Australia in February 2020 .
The continued strength of the United States Dollar against the currencies in
which we do business outside the U.S. has resulted in year-over-year declines in
our revenue and costs.
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The Outside the U.S. Segment performs a significant part of its operations in
the United Kingdom . As such, we are closely monitoring developments following
the departure of the United Kingdom from the European Union . We do not
anticipate the withdrawal to have a material direct effect on our business in
the United Kingdom due to the nature of our customer base and the absence of
cross-border operations. However, the uncertainty over the process has affected
us indirectly. We anticipate we will continue to be subject to political risks,
as legislative priorities may change and economic risks from the post-withdrawal
environment.
Liquidity and Capital Resources
The COVID-19 pandemic has negatively affected our cash flows since March 2020 .
We are experiencing some delays in payments from our customers in addition to
the operational challenges we are facing on our contracts. At June 30, 2020 , we
had approximately $81.5 million in unrestricted cash and $255 million of
liquidity available on our credit facility. Our cash and cash equivalents
balance included $52.9 million held in foreign locations in local currencies. If
payments continue to be delayed, we may be required to increase our use of the
credit facility. At this time, we do not anticipate disruption to our quarterly
dividend payments but share purchases and significant merger and acquisition
activity has been paused.
Governments worldwide have introduced a number of short-term policies to assist
businesses with their liquidity. We anticipate utilizing payroll credits and the
deferral of tax payments in the United States and the United Kingdom . We have
also furloughed employees in the United Kingdom .
Our international locations have access to borrowing facilities which they may
use to cover short-term working capital needs or small acquisitions, such as our
acquisitions of GT Hiring Solutions and InjuryNet.
We have no requirement to remit funds from our foreign locations back to the
United States . With the passage of the Tax Cuts and Jobs Act in the United
States , we are able to transfer a significant amount of funds from our foreign
locations on a tax-free basis. We will continue to explore opportunities to
bring back additional funds, taking into consideration the working capital
requirements and relevant tax rules in each jurisdiction. When we are unable to
remit funds back without incurring a penalty, we will consider these funds
indefinitely reinvested until such time as these restrictions are changed. As a
result, we do not record U.S. deferred income taxes on any funds held in foreign
jurisdictions. We have not attempted to calculate our potential liability from
any transfer of these funds as any such transaction might include tax planning
strategies which we have not fully explored. Accordingly, it is not possible to
estimate the potential tax obligations if we were to remit all of our funds from
foreign locations to the United States .
Cash Flows
The following table provides a summary of our cash flow information for the nine
months ended June 30, 2020 and 2019.
Nine Months Ended June 30,
(dollars in thousands) 2020 2019
Net cash from/(used in):
Operations $ 96,083 $ 263,711
Investing activities (27,412) (440,706)
Financing activities (89,001) (99,601)
Effect of exchange rate changes on cash and cash equivalents (174) (994)
Net decrease in cash, cash equivalents and restricted cash $ (20,504) $ (277,590)
Our cash flows from operations were reduced compared to fiscal year 2019 due to
the declines in our operating income and the timing of our cash collections. Our
Days Sales Outstanding (DSO) at June 30, 2020 , were 84 days; the balance at
September 30, 2019 , was 72 days. We have a target range for DSO of 65 to 80 days
and in recent years, we have typically maintained the lower end of this range.
As we anticipated, our DSO was negatively impacted due to U.S. state governments
delaying payments to assist their cash flows. During the week subsequent to June
30, 2020 , we received over $90 million in cash collections from U.S. State and
Federal customers, which would have reduced our DSO to 74 days had it arrived
earlier.
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Cash used in investing activities for the nine months ended June 30, 2020 , was
$27.4 million , principally for capital expenditures to support operations.
Cash used in financing activities in the nine months ended June 30, 2020 , was
$89.0 million , compared to $99.6 million of cash used in the comparative period.
Fiscal year 2020 included $167.0 million of purchases of common stock, partially
offset by $142.5 million of net borrowings. Credit facility borrowings and stock
purchase transactions were less significant in fiscal year 2019.
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.
Nine Months Ended June 30,
(dollars in thousands) 2020 2019
Cash flows from operations $ 96,083 $ 263,711 Purchases of property and equipment and capitalized software costs
(28,436) (39,033)
Capital expenditure as a result of acquisition (1) - 4,542
Free cash flow - non-gaap $ 67,647 $ 229,220 (1) Purchases of property and equipment and capitalized software costs included
Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenue and expenses. On an ongoing basis we evaluate our estimates, including those related to revenue recognition and cost estimation on certain contracts, the realizability of goodwill and other long-lived assets, and amounts related to contingencies and income tax liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates. During the nine months endedJune 30, 2020 , we made changes to the manner in which we record leases. For additional information, please see "Note 3. Leases" in our "Notes to Unaudited Consolidated Financial Statements" in Item 1 of this Form 10-Q. Non-GAAP 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 fiscal year 2019, 21% of our revenue was generated outside theU.S. We believe that users of our financial statements wish to understand the performance of our foreign operations using a methodology which excludes the effect of year-over-year exchange rate fluctuations. To calculate year-over-year currency movement, we determine the current fiscal year's results for all foreign businesses using the exchange rates in the prior fiscal year. We refer to this adjusted revenue on a "constant currency basis." In recent years, we have made a number of acquisitions. We believe users of our financial statements wish to evaluate the performance of our operations, excluding changes that have arisen due to businesses acquired. Where information is available, we will show pro forma revenue, cost of revenue and gross profit. Pro forma results represent an estimate of the results of the business as though we had owned the business for an entire comparative 29 -------------------------------------------------------------------------------- period, rather than just a portion of it. To provide pro forma financial information, we use the results of the acquired business as prepared by the former owners adjusted to reflect changes in accounting and eliminating transactions between ourselves and the company. Where this information has not been prepared, we will identify acquired revenue and cost of revenue by showing these results for periods for which no comparative results exist within our financial statements. We provide pro forma comparative results and acquired revenue as a way of allowing investors to see the growth in our business on a year-over-year basis. This information is supplemented by our calculations of organic revenue. To calculate organic revenue growth, we compare current fiscal year revenue excluding revenue from these acquisitions to our prior fiscal year revenue. In order to sustain our cash flows from operations, we require regular refreshing of our fixed assets and technology. We believe that users of our financial statements wish to understand the cash flows that directly correspond with our operations and the investments we must make in those operations using a methodology which combines operating cash flows and capital expenditures. We provide free cash flow to complement our statement of cash flows. Free cash flow shows the effects of the Company's operations and replacement capital expenditures and excludes the cash flow effects of acquisitions, purchases of our own common stock, dividend payments and other financing transactions. We have provided a reconciliation of free cash flow to cash from operations. To sustain our operations, our principal source of financing comes from receiving payments from our customers. We believe that users of our financial statements wish to evaluate our efficiency in converting revenue into cash receipts. Accordingly, we provide DSO, which we calculate by dividing billed and unbilled receivable balances at the end of each quarter by revenue per day for the period. Revenue per day for a quarter is determined by dividing total revenue by 91 days. As noted above, we have a$400 million credit facility. Our credit agreement includes the defined term Consolidated EBITDA and our calculation of Adjusted EBITDA conforms to the credit agreement definition. We believe our investors appreciate the opportunity to understand the possible restrictions which arise from our credit agreement. Adjusted EBITDA is also a useful measure of performance which focuses on the cash generating capacity of the business as it excludes the non-cash expenses of depreciation and amortization, and makes for easier comparisons between the operating performance of companies with different capital structures by excluding interest expense and therefore the impacts of financing costs. The measure of Adjusted EBITA is a step in calculating Adjusted EBITDA and facilitates comparisons to similar businesses as it isolates the amortization effect of business combinations. Our credit facility requires us to calculate Adjusted EBITDA on a pro forma basis as though we had owned any acquired business for a full twelve month period prior to the acquisition. We have provided a reconciliation from net income to Adjusted EBITA, Adjusted EBITDA and Pro Forma Adjusted EBITDA as follows: Trailing Twelve Months Nine Months Ended Ended June 30, June 30, (dollars in thousands) 2020 2019 2020 2019 Net income attributable to Maximus$ 150,848
513 181 49 (278)
Provision of income taxes 51,963 59,511 69,277 76,111
Amortization of intangible assets 26,734 24,026 35,762 26,488
Stock compensation expense 17,558 15,323 23,009 19,848
Acquisition-related expenses 4,162 2,982 4,419 3,929
Gain on sale of a business (1,706) - (1,706) -
Adjusted EBITA - non-gaap $ 250,072
47,496 34,588 65,312 46,570
Adjusted EBITDA - non-gaap $ 297,568
6,695 11,131
Pro Forma Adjusted EBITDA - non-gaap $ 324,041 $ 410,841
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