MAXIMUS, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with the Company's audited consolidated financial statements and the related notes thereto for the fiscal years endedSeptember 30, 2021 , 2020, and 2019 included in Item 8. Financial Statements and Supplementary Data. The discussion below contains management's comments on the Company's business strategy and outlook, and such discussions contain forward-looking statements. These forward-looking statements reflect the expectations, beliefs, plans, and objectives of management about future financial performance and assumptions underlying management's judgment concerning the matters discussed, and accordingly, involve estimates, assumptions, judgments, and uncertainties. The Company's actual results could differ materially from those discussed in the forward-looking statements and the discussion below is not necessarily indicative of future results. Factors that could cause or contribute to any differences include, but are not limited to, those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. Risk Factors and in "Special Note Regarding Forward-Looking Statements." Business Overview For an overview of our business, including our business segments and discussion of the services we provide, see Item 1. Business of this Annual Report on Form 10-K. Financial Overview A number of factors have affected our fiscal year 2021 results, the most significant of which we have listed below. More detail on these changes is presented below within our "Results of Operations" section. •During fiscal year 2021, we acquiredVES Group, Inc. ("VES"), theFederal Division of Attain , LLC ("Attain") andConnect Assist Holdings Limited ("Connect Assist"). In fiscal year 2020, we acquiredInjuryNet Australia Pty Limited ("InjuryNet") andIndex Root Korea Co. Ltd. ("IndexRoot"). From the date of each acquisition, we have received the benefit of additional revenue, as well as additional operating costs. In completing these acquisitions, we have allocated a portion of each purchase price to our intangible asset balance, which we are amortizing over the estimated useful lives of each asset. •To fund the acquisition of VES, we entered into a new credit facility comprised of fixed term debt and a new revolving credit facility. The cost of servicing this debt, as well as the cost of the debt facilities, has resulted in an increase in our interest expense. •We continue to be affected by the Coronavirus ("COVID-19") pandemic. We have received the benefit from new, short-term work, assisting governments with their responses to the pandemic. This has mitigated the effect of declines in our established programs, particularly those where we are reimbursed based upon the number of transactions processed. Our welfare-to-work programs, where we are typically paid based upon our success in placing individuals in work, have experienced significant volatility in their results. •As anticipated, the Census Questionnaire Assistance contract ended in fiscal year 2021, with significantly less work performed than in the fiscal year 2020. 31 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth, for the fiscal years indicated, information derived from our statements of operations. In preparing our discussion and analysis of these results, we focused on the comparison between fiscal years 2021 and 2020. A discussion comparing our results between fiscal years 2020 and 2019 can be found in our Annual Report on Form 10-K for the year endedSeptember 30, 2020 , which we filed with theSecurities and Exchange Commission onNovember 19, 2020 . Table MD&A 1: Consolidated Results of Operations For the Year Ended September 30, 2021 2020 (dollars in thousands, except per share data) Revenue $ 4,254,485$ 3,461,537 Cost of revenue 3,307,510 2,750,535 Gross profit 946,975 711,002 Gross profit percentage 22.3 % 20.5 % Selling, general, and administrative expenses 494,088 387,090
Selling, general, and administrative expenses as a percentage of revenue
11.6 % 11.2 %
Amortization of intangible assets 44,357 35,634
Operating income 408,530 288,278
Operating margin 9.6 % 8.3 %
Interest expense (14,744) (2,059)
Other (expense)/income, net (10,105) 843
Income before income taxes 383,681 287,062
Provision for income taxes 92,481 72,553
Effective tax rate 24.1 % 25.3 %
Net income $ 291,200 $ 214,509
Earnings per share:
Basic $ 4.69 $ 3.40
Diluted $ 4.67 $ 3.39
Our business segments have different factors driving revenue fluctuations and
profitability. The sections that follow cover these segments in greater detail.
Our revenue reflects fees earned for services provided. 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, including subcontracted labor.
Table MD&A 2: Changes in Revenue, Cost of Revenue, and Gross Profit for the Year Ended September 30, 2021
Revenue Cost of Revenue Gross Profit
Dollars % Change Dollars % Change Dollars % Change
(dollars in thousands)
Fiscal year 2020 $ 3,461,537 $ 2,750,535 $ 711,002
Effect of CQA contract (447,554) (12.9) % (371,006) (13.5) % (76,548) (10.8) %
Organic effect 859,479 24.8 % 640,877 23.3 % 218,602 30.7 %
Acquired growth 328,704 9.5 % 244,817 8.9 % 83,887 11.8 %
Currency effect compared
to the prior period 52,319 1.5 % 42,287 1.5 % 10,032 1.4 %
Fiscal year 2021 $ 4,254,485 22.9 % $ 3,307,510 20.2 % $ 946,975 33.2 %
Selling, general, and administrative expenses ("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 U.S. Federal Government and many states, we
allocate these costs using a methodology driven by the U.S. Federal Cost
Accounting Standards.
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Our SG&A expense has increased year-over-year due primarily to:
•the additional cost base from our acquired businesses;
•information technology initiatives, including migration of data systems to the
cloud;
•additional costs to address the COVID-19 pandemic;
•increases in business development activity to both bolster our technical skills
and plan for increased bidding activity; and
•increases in our scope of operations, which increases our administrative base.
In addition, our SG&A for fiscal year 2021 includes $9.5 million of acquisition
expenses related to the VES and Attain transactions, compared to $4.6 million in
fiscal year 2020 for other acquisitions.
Our amortization of intangible assets increased by $8.7 million from fiscal year
2020 to fiscal year 2021.
•The intangible assets associated with the VES acquisition increased our
amortization expense by $18.4 million . We anticipate an annual expense of
$55.3 million in fiscal year 2022.
•The intangible assets associated with the Attain acquisition increased our
amortization expense by $6.1 million . We anticipate an annual expense of
$10.5 million in fiscal year 2022.
•Our acquisition of the Citizen Engagement Centers business in fiscal year 2019
included an intangible asset with a value of $37.0 million and an asset life
concurrent with the CQA contract. This asset was fully amortized in November
2020 , and this reduced our year-over-year charge by $16.2 million .
Shortly before September 30, 2021 , we acquired Connect Assist and in October
2021 we acquired the student loan business previously served by Navient, now
rebranded as Aidvantage. We are in the process of finalizing our valuation of
the intangible assets related to these transactions but we anticipate an annual
additional amortization charge of approximately $7.3 million in fiscal year
2022.
Assuming no further acquisitions, we estimate our amortization expense related
to intangible assets in fiscal year 2022 will be $89.6 million .
The consideration for our acquisition of the Aidvantage is contingent upon the
results of the post-acquisition business. We estimate the fair value of our
payments to be $15.3 million and we will record a liability for this amount. As
our estimate changes, we will record these changes directly to our statement of
earnings.
Table MD&A 3: Non-GAAP Adjusted Results Excluding Amortization of Intangible Assets
For the Year Ended September 30,
2021 2020
(dollars in thousands, except per share data)
Operating income $ 408,530 $ 288,278
Add back: Amortization of intangible assets 44,357 35,634
Adjusted operating income excluding amortization of intangible assets (Non-GAAP)
$ 452,887 $ 323,912 Adjusted operating income margin excluding amortization of intangible assets (Non-GAAP)
10.6 % 9.4 %
Net income $ 291,200 $ 214,509
Add back: Amortization of intangible assets, net of tax 32,752 26,321
Adjusted net income excluding amortization of intangible assets (Non-GAAP)
$ 323,952 $ 240,830
Diluted earnings per share $ 4.67 $ 3.39 Add back: Effect of amortization of intangible assets on diluted earnings per share
0.52 0.41
Adjusted diluted earnings per share excluding
amortization of intangible assets (Non-GAAP) $ 5.19 $ 3.80
Our interest expense increased from $2.1 million in fiscal year 2020 to
$14.7 million in fiscal year 2021. This increase is driven by the costs of our
cash borrowings utilized to acquire VES. Interest expense is expected to be in
the range of $30 million to $33 million due to the debt being outstanding for
the entire fiscal year. As stated in Note 9 - Debt, our
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interest rate will vary based upon both prevailing interest rates and our
leverage ratio. The company expects a 25 basis point decrease in spread on Term
Loan A for first quarter of fiscal year 2022 based on leverage ratio as of
September 30, 2021 . Additional details on our borrowings are including within
the "Liquidity and Capital Resources" section.
Our other income and expense relates to miscellaneous expenses which do not
relate to our ongoing operating or financing needs. In fiscal year 2021, we
incurred $8.5 million related to interim financing for the VES acquisition. This
financing was not used and the cost has been expensed. Expenses related to the
current credit facilities have been deferred and are being recognized over the
life of the agreement.
Our effective income tax rate for the twelve months ended September 30, 2021 and
2020, was 24.1% and 25.3%, respectively. As a result of the retirement of a
board member, our tax rate received a higher than usual benefit in the fourth
quarter of 2021 from the issuance of restricted stock units at a value that
exceeded the charges which had been previously expensed under U.S. generally
accepted accounting principles. For fiscal year 2022, we expect the effective
tax rate to be between 25% and 26%.
U.S. Services Segment
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 in public health with new work in contact tracing, disease
investigation, and vaccine distribution support services as part of the
governments' COVID-19 response efforts. The segment also successfully expanded
into the unemployment insurance market, supporting more than 15 states in their
unemployment insurance programs.
Table MD&A 4: U.S. Services Segment - Financial Results
For the Year Ended September 30,
2021 2020
(dollars in thousands)
Revenue $ 1,662,110 $ 1,329,274
Cost of revenue 1,254,060 969,002
Gross profit 408,050 360,272
Selling, general, and administrative expenses 153,609 132,489
Operating income 254,441 227,783
Gross profit percentage 24.6 % 27.1 %
Operating margin percentage 15.3 % 17.1 %
Our revenue and cost of revenue for the year ended September 30, 2021 , increased
25.0% and 29.4%, respectively, compared to fiscal year 2020. All growth was
organic.
Our growth for the year ended September 30, 2021 , was driven by approximately
$620 million of COVID-19 response work. This work is short-term and has offset
revenue declines resulting from constraints on many of our core programs. Among
other factors, we are reporting lower volumes of transactions on redetermination
contracts as states have paused Medicaid redeterminations as a condition for
receiving enhanced U.S. Federal matching funds. In certain cases,
redeterminations provide a significant part of our activity within volume-based
contracts. We anticipate that COVID-19 response work will be significantly less
in fiscal year 2022 as compared to fiscal year 2021.
The decline in profit margins is principally from core programs operating at
reduced capacity. As the pandemic restrictions ease, we anticipate that our
short-term response work will decline and our core programs will recover, but
the timing of the recovery is uncertain. A further decline in profit margins
resulted from the write-down of approximately $12 million of assets related to a
contract in the start-up phase.
U.S. Federal Services Segment
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.
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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. Benefited by the Maximus Attain
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 and 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.
Table MD&A 5: U.S. Federal Services Segment - Financial Results
For the Year Ended September 30,
2021 2020
(dollars in thousands)
Revenue $ 1,893,284 $ 1,633,337
Cost of revenue 1,460,733 1,314,412
Gross profit 432,551 318,925
Selling, general, and administrative expenses 243,485 186,023
Operating income 189,066 132,902
Gross profit percentage 22.8 % 19.5 %
Operating margin percentage 10.0 % 8.1 %
Table MD&A 6:
Revenue Cost of Revenue Gross Profit
Amount % Change Amount % Change Amount % Change
(dollars in thousands)
Balance for fiscal year 2020 $ 1,633,337 $ 1,314,412 $ 318,925
Effect of CQA contract (447,554) (27.4) % (371,006) (28.2) % (76,548) (24.0) %
Organic growth from other
contracts 387,670 23.7 % 283,429 21.6 % 104,241 32.7 %
Net acquisitions and
disposals 319,831 19.6 % 233,898 17.8 % 85,933 26.9 %
Balance for fiscal year 2021 $ 1,893,284 15.9 % $ 1,460,733 11.1 % $ 432,551 35.6 %
The primary drivers of our results were: •As anticipated, theU.S. Census ("CQA") contract ended inNovember 2020 . •We estimated that our incremental revenue from assisting theU.S. Federal Government with its COVID-19 response for the year endedSeptember 30, 2021 was$466 million . This short-term work has earned relatively high margins, which has offset the tempering of margins on performance-based contracts, such as independent medical reviews for worker's compensation programs that declined sharply since the onset of the pandemic. •Our results include those of VES (fromMay 28, 2021 ) and Attain (fromMarch 1, 2021 ). See Note 6. Business Combinations in the Notes to the Consolidated Financial Statements for further information and Unaudited Pro Forma. Outside theU.S. Segment Our Outside theU.S. Segment provides BPS for international governments and commercial clients, transforming the lives of people around the world. Helping people find employment, access vital support, and remain healthy, these services include health and disability assessments, program administration for employment services, wellbeing solutions, and other job seeker related services. We support programs and deliver services in theU.K. , including the Health Assessment Advisory Service ("HAAS"), the Work & Health Programme, Fair Start, and Restart;Australia , including jobactive and the Disability Employment Service;Canada , including Health Insurance British Columbia and the Employment Program ofBritish Columbia ; in addition toItaly ,Saudi Arabia ,Singapore ,South Korea , andSweden , where we predominantly provide employment support and job seeker services. 35 -------------------------------------------------------------------------------- Table of Contents Table MD&A 7: Outside theU.S. Segment - Financial Results For the Year Ended September 30, 2021 2020 (dollars in thousands) Revenue$ 699,091 $ 498,926 Cost of revenue 592,717 467,121 Gross profit 106,374 31,805 Selling, general, and administrative expenses 86,248 65,938 Operating income/(loss) 20,126 (34,133) Gross profit percentage 15.2 % 6.4 % Operating margin percentage 2.9 % (6.8) %
Table MD&A 8: Outside the
Revenue Cost of Revenue Gross Profit
Amount % Change Amount % Change Amount % Change
(dollars in thousands)
Balance for fiscal year 2020 $ 498,926 $ 467,121 $ 31,805
Organic growth 138,973 27.9 % 72,390 15.5 % 66,583 209.3 %
Net acquisitions and
disposals 8,873 1.8 % 10,919 2.3 % (2,046) (6.4) %
Currency effect compared to
the prior period 52,319 10.5 % 42,287 9.1 % 10,032 31.5 %
Balance for fiscal year 2021 $ 699,091 40.1 % $ 592,717 26.9 % $ 106,374 234.5 %
This segment experienced organic growth in revenue and profit, as well as
acquired growth and currency benefits during fiscal year 2021.
Much of our revenue growth stems from our employment services contracts, where
we are paid based upon our ability to place individuals in long-term sustained
employment. 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 the effects of the COVID-19 pandemic became clear during fiscal year
2020, our revenue was significantly tempered as unemployment rose and available
employment opportunities declined. As fiscal year 2021 has progressed, market
conditions, particularly within Australia , have provided us with increased
number of placements and accordingly, increased our estimates of future
outcomes, increasing our revenue.
These estimates are based upon our current expectations as to how the effects of
the pandemic, including regulations adopted by governments and employment
practices adopted by employers, will progress. We have typically based our
estimates on historical performance. The effects of COVID-19 have limited the
extent to which we can rely upon historical performance and, accordingly, our
revenue may be more volatile than we have previously experienced.
Our results in the fourth quarter of fiscal year 2021 were negatively impacted
by a number of start-up contracts, most notably the United Kingdom Restart
contract, as well as other smaller contracts in other jurisdictions.
Our acquired growth is from the acquisition of InjuryNet in Australia in
February 2020 and IndexRoot in South Korea in August 2020 .
The weakening of the United States Dollar against the currencies in which we do
business outside the U.S. resulted in year-over-year growth in our revenue and
costs.
As pandemic restrictions ease and economies emerge from the pandemic-related
lockdowns, we anticipate robust markets for our employment services and a return
to pre-pandemic levels for our health assessments services. We anticipate that
our results will remain tempered by the start-up contracts through the end of
the second quarter of fiscal year 2022.
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Backlog
Backlog represents estimated future revenue from:
•existing signed contracts;
•contracts that have been awarded but not yet signed; and
•unexercised priced contract options.
As of September 30, 2021 , we estimate that we had approximately $11.2 billion in
backlog.
Table MD&A 9: Backlog by Segment
As of September 30,
2021 2020
(in millions)
U.S Services $ 4,865 $ 4,388
U.S. Federal Services 4,298 2,150
Outside the U.S. 2,052 1,236
Backlog $ 11,215 $ 7,774
As of September 30, 2021 , the average weighted remaining life of the contracts
in our backlog was approximately 4.4 years, including option periods.
Increases in backlog result from the award of new contracts and the extension or
renewal of existing contracts. Reductions in backlog come from fulfilling
contracts or the early termination of contracts which our experience shows to be
a rare occurrence. See "Risk Factors" in Item 1A of this Annual Report. The
backlog associated with our performance-based contracts is an estimate based
upon management's experience of caseloads and similar transaction volume, which
is subject to revision based upon the latest information available.
Additionally, backlog estimates may be affected by foreign currency
fluctuations.
We believe that comparisons of backlog period-to-period are difficult. We also
believe that it is difficult to predict future revenue solely based on analysis
of backlog. The actual timing of revenue from projects included in backlog will
vary. We also may experience periods in which there is a greater concentration
of rebids, resulting in a comparatively reduced backlog balance until subsequent
award or extension on those contracts.
The longevity of these contracts assists management in predicting revenue,
operating income, and cash flows for the purposes of business planning. We
expect approximately 40% of the backlog balance to be realized as revenue in
fiscal year 2022, which is 90% of the midpoint of fiscal year 2022 revenue
guidance. Our standard forecasting process includes analyzing new work pipelines
and submitted responses to requests for proposals ("RFPs") when predicting
future revenue, operating income, and cash flows.
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Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash from operations, and
availability under our revolving credit facilities. As of September 30, 2021 , we
had $135.1 million in cash and cash equivalents. We believe that our current
cash position, access to our revolvers, and cash flow generated from operations
should be not only sufficient for our operating requirements but also to enable
us to fund share repurchases and any required long-term debt payments through
the next several fiscal years and any share repurchases we might choose to make.
See Note 9 to the Consolidated Financial Statements for a more detailed
discussion of our debt financing arrangements.
Table MD&A 10: Net Change in Cash and Cash Equivalents and Restricted Cash
For the Year Ended September 30,
2021 2020
(in thousands)
Operating activities:
Net income $ 291,200 $ 214,509
Non-cash adjustments 122,069 103,006
Changes in working capital 104,053 (72,923)
Net cash provided by operating activities 517,322 244,592
Net cash used in investing activities (1,835,480) (44,138)
Net cash provided by/(used in) financing activities 1,385,693 (230,090)
Effect of foreign exchange rates on cash and cash
equivalents and restricted cash 474 1,705
Net change in cash and cash equivalents and restricted cash
$ 68,009 Net Cash Provided By Operating Activities Net cash provided by operating activities increased by$272.7 million in fiscal year 2021 compared to fiscal year 2020. This increase was primarily driven from growth in the business and changes in working capital including improved cash collections and advanced payments on contract start-ups. Our Days Sales Outstanding ("DSO") as ofSeptember 30, 2021 , were 68 days on a pro forma basis compared to 77 days as ofSeptember 30, 2020 . The decrease in DSO was a result of COVID-19 having a negative impact to our DSO at the end of fiscal year 2020. The DSO as of fiscal year end 2021 is aligned with historical amounts for the Company. 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. Each unit of DSO represents approximately$12.2 million of collections.Net Cash Used In Investing Activities The significant investing activities cash outflows in fiscal year 2021 was the result of the acquisitions of VES, Attain and Connect Assist. Excluding these acquisitions, the remaining cash used in investing activities is$36.6 million for the year endedSeptember 30, 2021 , compared to$44.1 million in the same period 2020. Net Cash Provided By/(Used In) Financing Activities The$1.39 billion financing activities cash inflow in fiscal year 2021 is the result of a new corporate credit facility executed in connection with the two acquisitions. This credit facility provided$1.70 billion of cash in fiscal year 2021, of which$214.8 million was paid down by year end. In addition to the new credit facility, we had other debt borrowings and repayments. In connection with the new credit facility in fiscal 2021, we incurred financing fees resulting in a cash outflow of$23.2 million . See Note 9 to the Consolidated Financial Statements for a more detailed discussion about the new credit facility executed in fiscal year 2021. In addition to the debt activities, our cash flows used in financing activities include cash dividend payments to Maximus shareholders and share repurchases. Dividend payments were$68.8 million and$70.2 million for the years endedSeptember 30, 2021 and 2020, respectively. Payments made for share repurchases were$3.4 million and$167.0 million for the years endedSeptember 30, 2021 and 2020, respectively. 38 -------------------------------------------------------------------------------- Table of Contents Cash in Foreign Locations We have no requirement to remit funds from our foreign locations tothe United States . We will continue to explore opportunities to remit 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 recordU.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 that 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 tothe United States . Free Cash Flow Table MD&A 11: Free Cash Flow For the Year Ended September 30, 2021 2020 (in thousands) Net cash provided by operating activities $ 517,322
(36,565) (40,707)
Free cash flow $ 480,757 Material Cash Requirements from Contractual Obligations Credit Facilities As ofSeptember 30, 2021 , the Company had total outstanding borrowing under our term loans and subsidiary loan agreements of$1.49 billion and$38.3 million , respectively. The Company had no outstanding balances under the corporate revolver credit facility as ofSeptember 30, 2021 and$600 million available under the corporate revolver. Our debt agreement has annual repayment requirements and the balance must be repaid or refinanced at the termination of the agreements, which end in 2026 and 2028. See Note 9 to the Consolidated Financial Statements for information regarding the terms of the Credit Facility, including obligations by fiscal year. Leases As ofSeptember 30, 2021 , we reported current and long-term operating lease liabilities of$76.1 million and$121.8 million , respectively. These balances represent our contractual obligation to make future payments on our leases, discounted to reflect our cost of borrowing. The majority of these leases are for real estate. In the event that we vacate a location, we may be obliged to continue making lease payments. Where possible, we mitigate this risk by including clauses allowing for the termination of lease agreements if the contract the location covers is terminated by our customer. See Note 12 to the Consolidated Financial Statements for information regarding our leases, including obligations by fiscal year. Deferred compensation plan As ofSeptember 30, 2021 , we reported liabilities related to our deferred compensation plan. These balances are due to our employees based upon elections they make at the time of deferring their funds. The timing of these payments may change based upon factors including termination of our employment arrangement with a participant. We maintain a rabbi trust to fund this liability. 39 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in theU.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 2. Significant Accounting Policies" of the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K. Revenue Recognition Although much of our revenue is recognized concurrently with billing or over time following billing, some of our revenue requires us to make estimates. These estimates are reviewed quarterly, with any changes being recorded as a cumulative catch-up in revenue. Some of our performance-based contract revenue is recognized based upon future outcomes defined in each contract. This is the case in many of our welfare-to-work contracts in the Outside theU.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 assumptions about the number of participants and the service delivery period for the participants reaching employment milestones. We are required to estimate these outcome fees ahead of their collection and recognize this estimated fee as revenue over the period of delivery. These estimates are updated on a quarterly basis, with changes in estimates being taken to our income statement. Our estimates were subject to significant revision during fiscal years 2020 and 2021 as sustained employment outcomes were affected by the COVID-19 pandemic. During the year endedSeptember 30, 2021 , we recognized revenue from these performance-based fees of$104.7 million . AtSeptember 30, 2021 , we recorded$48.7 million of these estimated outcome fees as unbilled receivables which will be billed and then collected when we reach the targets we anticipate. Business Combinations andGoodwill Our balance sheet as ofSeptember 30, 2021 , includes$1.77 billion of goodwill and$879.2 million of net intangible assets. These assets are created through business acquisitions and their creation and maintenance requires certain critical estimates. •During an acquisition, we are required to estimate the fair value of all acquired tangible and intangible assets, as well as liabilities assumed, in order to allocate the purchase price. For many assets acquired and liabilities assumed, the calculation of fair value requires little judgment as balances may be readily convertible to cash receipts or cash payments or there may be an active market against which to measure value. For the valuation of intangible assets, significant judgment is necessary in identifying and valuing such assets. This valuation will also involve identifying the useful economic life of this asset. Our estimates of these fair values and useful economic lives are based upon assumptions we believe to be reasonable and, where appropriate, include assistance from third-party appraisal firms. During fiscal years 2021 and 2020, we completed the acquisitions of Attain, VES, InjuryNet, IndexRoot, and Connect Assist. OnOctober 6, 2021 , we acquired the student loan servicing business previously operated by Navient, rebranded as Aidvantage. Our accounting for these acquisitions included determining the fair value of intangible assets representing customer relationships, the VES provider network and VES technology. In making our determination of the fair value of these assets, we utilized estimates, the most significant of which were forecasts related to future revenues and profit margins. These assumptions relate to the future performance of the acquired business, are forward-looking, and could be affected by future economic and market conditions. The asset values and asset lives determined at acquisition may change based upon circumstances such as contract terminations or changes in strategy. When this occurs, we may need to accelerate our amortization charges. These assets are also subject to impairment if events indicate that the carrying value of the assets may not be recoverable. For example, our intangible asset balance includes customer relationship assets which, if the customer relationship ends, would require evaluation of the remaining asset life and asset value. We have a significant contract rebid for an arrangement which ends inMay 2022 which could result in such evaluation. 40 -------------------------------------------------------------------------------- Table of Contents •The excess purchase price over the identified net assets is considered to be goodwill.Goodwill is recorded at the reporting unit level. The identification of our reporting units requires judgment based upon the manner in which our business is operated and the services performed. We believe our reporting units are consistent with our segments. Where we have acquisitions that provide services to more than one segment, or where the acquisition provides benefits across all of our segments, we use judgment to allocate the goodwill balance based upon the relative value we anticipate that each segment will realize. •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 assessing the fair value of these reporting units. As ofJuly 1, 2021 , the Company performed its annual impairment test and determined that there was no impairment of goodwill. In performing this assessment, we assessed qualitative factors to determine whether it was more likely than not that the fair value of a reporting unit was less than its carrying amount, including goodwill. 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 or changes in approach to a matter such as a change in settlement strategy. We are also subject to audits by our government clients on many of our contracts based upon measures such as costs incurred or transactions processed. These audits may take place several years after a contract has been completed. We maintain reserves where we are able to estimate any potential liability that is updated as audits are completed. Non-GAAP and Other Measures We utilize non-GAAP measures where we believe it will assist users 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, net income, or earnings per share 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 2021, 16% 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 or disposed of. We identify acquired revenue and cost of revenue by showing these results for periods for which no comparative results exist within our financial statements. We identify revenue and cost of revenue that has been disposed of in a similar manner. This information is supplemented by our calculations of organic growth. To calculate organic growth, we compare current fiscal year results excluding transactions from acquisitions or disposals to our prior fiscal year results. Our recent acquisitions have resulted in significant intangible assets which are amortized over their estimated useful lives. We believe users of our financial statements wish to understand the performance of the business by using a methodology that excludes the amortization of our intangible assets. Accordingly, we have calculated our operating profit, net income, and earnings per share excluding the effect of the amortization of intangible assets. We have included a table showing our reconciliation of these income measures to their corresponding GAAP measures. Our results in fiscal year 2020 included a significant benefit from the CQA contract as theU.S. Federal Government completed its census. As the pattern of revenue from this contract was significant and non-recurring, we identified the revenue and related costs and excluded them from the organic growth calculation above. We believe that it is helpful to our investors to understand the effect of this contract on our results. 41 -------------------------------------------------------------------------------- Table of Contents In order to sustain our cash flows from operations, we regularly refresh 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 common stock, dividend payments, and other financing transactions. We have provided a reconciliation of cash flows from operations to free cash flow in "Liquidity and Capital Resources." 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. Where our DSO is affected by acquisitions, such as the Connect Assist acquisition inSeptember 2021 , we will perform the DSO calculation on a pro forma basis, including the acquired revenue for the fiscal quarter. As noted above, we have a$2.10 billion corporate 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 corporate credit facility requires us to calculate Adjusted EBITDA on a pro forma basis, as though we had owned any significant acquired business for a full twelve months. Accordingly, we have included the effects of VES and Attain in the table below. We have provided a reconciliation from net income to Non-GAAP Adjusted EBITA, Non-GAAP Adjusted EBITDA, and Non-GAAP Pro Forma Adjusted EBITDA as shown below. Our current credit facilities utilized a different version of EBITDA from that of the credit facility used in prior years. Table MD&A 12: Reconciliation of Net Income to Non-GAAP Adjusted EBITA, Non-GAAP Adjusted EBITDA, and Non-GAAP Pro Forma Adjusted EBITDA For the Year Ended September 30, 2021 2020 (in thousands) Net income $ 291,200$ 214,509 Adjustments: Interest expense 14,744 2,059 Other (expense)/income, net 10,105 (843) Provision for income taxes 92,481 72,553 Amortization of intangibles 44,357 35,634 Stock compensation expense 28,554 23,708 Acquisition-related expenses 10,820 4,621 Gain on sale of a business - (1,718) Adjusted EBITA - Non-GAAP measure 492,261 350,523
Depreciation and amortization of property, equipment, and capitalized software
46,361 64,527
Adjusted EBITDA - Non-GAAP measure
538,622
92,398
Pro forma adjusted EBITDA - Non-GAAP measure $
631,020
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