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, 2022 , 2021, and 2020 included in Item 8. Financial Statements and Supplementary Data. The discussion below contains management's comments on our 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. Our 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 2022 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") and theFederal Division of Attain , LLC ("Attain"). We acquired Aidvantage at the beginning of fiscal year 2022. These acquisitions have been supplemented by several smaller acquisitions in fiscal years 2021 and 2022. In fiscal year 2022, we recognized a full year of revenue and operating costs from the 2021 acquisitions and Aidvantage, as well as intangible asset amortization. To fund the acquisition of VES, we entered into a new credit agreement withJPMorgan Chase N.A. (the Credit Agreement). The Credit Agreement provides both fixed-term debt and a new revolving credit facility. The cost of servicing this debt for a full year, as well as increasing interest rates, have resulted in an increase in our interest expense. •In both fiscal years 2021 and 2022, we received benefits from short-term work assisting governments with their responses to the COVID-19 pandemic. This work was often profitable and mitigated profit declines on established programs where transaction volume was reduced. The short-term work declined by approximately$800 million compared to fiscal year 2021, but the ongoing Public Health Emergency ("PHE") has meant many of our establishedU.S. programs continue to operate at reduced capacity. The timing and nature of the end of the PHE should have a favorable effect on our business. This could occur in fiscal year 2023.
•Within our Outside the
•Our Outside the
•During the fourth quarter of the fiscal year, we completed the sale of our former headquarters building. This resulted in a gain of$11.0 million and a cash inflow of$16.4 million . 27
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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 2022 and 2021. A discussion comparing our results between fiscal years 2021 and 2020 can be found in our Annual Report on Form 10-K for the year endedSeptember 30, 2021 , which we filed with theSecurities and Exchange Commission onNovember 18, 2021 .
Table MD&A 1: Consolidated Results of Operations
For the Year Ended September 30,
2022 2021
(dollars in thousands, except per share data)
Revenue $ 4,631,018 $ 4,254,485
Cost of revenue 3,691,208 3,307,510
Gross profit 939,810 946,975
Gross profit percentage 20.3 % 22.3 %
Selling, general, and administrative expenses 534,493 494,088
Selling, general, and administrative expenses as a percentage of revenue
11.5 % 11.6 %
Amortization of intangible assets 90,465 44,357
Gain on sale of land and building 11,046 -
Operating income 325,898 408,530
Operating margin 7.0 % 9.6 %
Interest expense 45,965 14,744
Other expense, net 2,835 10,105
Income before income taxes 277,098 383,681
Provision for income taxes 73,270 92,481
Effective tax rate 26.4 % 24.1 %
Net income $ 203,828 $ 291,200
Earnings per share:
Basic $ 3.30 $ 4.69
Diluted $ 3.29 $ 4.67
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
Revenue Cost of Revenue Gross Profit
Dollars % Change Dollars % Change Dollars % Change
(dollars in thousands)
Fiscal year 2021 $ 4,254,485 $ 3,307,510 $ 946,975
Organic effect (249,058) (5.9) % (65,687) (2.0) % (183,371) (19.4) %
Acquired growth 667,384 15.7 % 484,552 14.7 % 182,832 19.3 %
Currency effect compared
to the prior period (41,793) (1.0) % (35,167) (1.1) % (6,626) (0.7) %
Fiscal year 2022 $ 4,631,018 8.9 % $ 3,691,208 11.6 % $ 939,810 (0.8) %
Selling, general, and administrative expenses ("SG&A") consist 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 increased cost base from our acquisitions. Our SG&A for fiscal year 2021 includes$9.5 million of acquisition expenses, primarily related to the VES and Attain transactions. In fiscal year 2022, we had a lower level of acquisition activity. We have also recorded a net benefit of$3.4 million from a reduction in contingent considerations due to the sellers of our acquired businesses. Our amortization of intangible assets increased by$46.1 million from fiscal year 2021 to fiscal year 2022. This is the result of acquisitions in both fiscal years, partially offset by amortization related to the Census Questionnaire Assistance contract, which was acquired inNovember 2018 and fully amortized throughNovember 2020 .
Table MD&A 3: Changes in Amortization of Intangible Assets Expense for The Year Ended
Dollars % Change
(dollars in thousands)
Year Ending September 30, 2021 $ 44,357
VES acquisition 36,889 83.2 %
Attain acquisition 4,375 9.9 %
Aidvantage acquisition 7,432 16.8 %
Other 2022 acquisitions 735 1.7 %
CQA contract (2,313) (5.2) %
Other, including foreign exchange (1,010) (2.3) %
Year Ending September 30, 2022 $ 90,465
Our intangible amortization expense is based upon assumptions of the value and
economic life of assets acquired, typically established at the acquisition date.
If these assumptions change, the pattern of future expense may be affected. The
table below shows our results excluding the effects of intangible asset
amortization.
Table MD&A 4: Non-GAAP Adjusted Results Excluding Amortization of Intangible Assets
For the Year Ended September 30,
2022 2021
(dollars in thousands, except per share data)
Operating income $ 325,898 $ 408,530
Add back: Amortization of intangible assets 90,465 44,357
Adjusted operating income excluding amortization of intangible assets (Non-GAAP)
$ 416,363 $ 452,887 Adjusted operating income margin excluding amortization of intangible assets (Non-GAAP)
9.0 % 10.6 %
Net income $ 203,828 $ 291,200
Add back: Amortization of intangible assets, net of tax 66,786 32,752
Adjusted net income excluding amortization of intangible assets (Non-GAAP)
$ 270,614 $ 323,952
Diluted earnings per share $ 3.29 $ 4.67 Add back: Effect of amortization of intangible assets on diluted earnings per share
1.08 0.52
Adjusted diluted earnings per share excluding
amortization of intangible assets (Non-GAAP) $ 4.37 $ 5.19
Our interest expense increased from $14.7 million in fiscal year 2021 to
$46.0 million in fiscal year 2022. This increase is driven by the costs of our
cash borrowings utilized to acquire VES. As stated in Note 8 - Debt and
Derivatives, our interest rate will vary based upon both prevailing interest
rates and our leverage ratio. Additional details on our borrowings are included
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 was expensed. Expenses related to the
current credit facilities have been deferred and are being recognized over the
life of the agreement.
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Our effective income tax rate for the year endedSeptember 30, 2022 and 2021, was 26.4 % and 24.1 %, respectively. The increase in effective tax rate was mainly due to the decreased value of our restricted stock units at vesting compared to the value expensed. For fiscal year 2023, we expect the effective tax rate to be between 24.5% and 25.5%.
OurU.S. Federal Services Segment delivers end-to-end solutions that help variousU.S. federal government agencies better deliver on their mission, including program operations and management, clinical services, and technology solutions. 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. 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 forU.S. veterans and service members on behalf of theU.S. Department of Veterans Affairs . The segment further supports clinical offerings in public health with new work supporting theU.S. Federal Government's COVID-19 response efforts. This included expanded work with theCenters 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:
For the Year Ended September 30,
2022 2021
(dollars in thousands)
Revenue $ 2,259,744 $ 1,893,284
Cost of revenue 1,740,304 1,460,733
Gross profit 519,440 432,551
Selling, general, and administrative expenses 284,509 243,485
Operating income 234,931 189,066
Gross profit percentage 23.0 % 22.8 %
Operating margin percentage 10.4 % 10.0 %
Table MD&A 6:
Revenue Cost of Revenue Gross Profit
Amount % Change Amount % Change Amount % Change
(dollars in thousands)
Balance for fiscal year
2021 $ 1,893,284 $ 1,460,733 $ 432,551
Organic effect (274,569) (14.5) % (188,911) (12.9) % (85,658) (19.8) %
Acquired growth 641,029 33.9 % 468,482 32.1 % 172,547 39.9 %
Balance for fiscal year
2022 $ 2,259,744 19.4 % $ 1,740,304 19.1 % $ 519,440 20.1 %
Our
•We received a full year of benefit from the acquisitions of VES (May 2021 ), Attain (March 2021 ), and Aidvantage (October 2021 ). The VES and Attain work is also more profitable than our legacy business. •Fiscal year 2021 included a significant amount of short-term, profitable work related to the COVID-19 pandemic. Much of this work ceased in late 2021 or early 2022. In addition, fiscal year 2021 includes approximately$67 million of non-recurring revenue related to the CQA contract, which ended in that year. Our organic profit margins have been tempered as we accepted a lower return on an existing contract in exchange for increased funding and anticipated future revenues. We anticipate that ourU.S. Federal Services business will continue to grow in fiscal year 2023, driven primarily by additional volumes anticipated in the VES business. We anticipate operating margins will range between 10% and 11%. 30
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OurU.S. Services Segment provides a variety of business process services ("BPS"), such as program administration, appeals and assessments, 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, theChildren's Health Insurance Program ("CHIP"), Temporary Assistance to Needy Families ("TANF"), and child support programs. As part of the governments' COVID-19 response efforts, the segment supported contact tracing, disease investigation, and vaccine distribution support services during the peak of the pandemic. The segment also successfully expanded into the unemployment insurance market where longer term opportunities have materialized. As part of the broader strategy to evolve clinically and address societal macro trends such as aging populations and rising costs, the segment continues to expand its offerings in public health with new work in in-person assessments.
Table MD&A 7:
For the Year Ended September 30,
2022 2021
(dollars in thousands)
Revenue $ 1,607,612 $ 1,662,110
Cost of revenue 1,264,608 1,254,060
Gross profit 343,004 408,050
Selling, general, and administrative expenses 160,902 153,609
Operating income 182,102 254,441
Gross profit percentage 21.3 % 24.6 %
Operating margin percentage 11.3 % 15.3 %
Our revenue and cost of revenue for the year ended
As anticipated, our revenue and profit margins have declined in fiscal year 2022 as short-term, COVID-19 related work, which typically earn higher margins, has slowed but many of our core programs which rely upon transactions are still running at low volumes due to the ongoing PHE. Our results in fiscal year 2021 include a write-down of approximately$12 million of assets related to a contract in the start-up phase. The timing and nature of the end of the PHE, which could occur in fiscal year 2023, will have a significant effect on our results in fiscal year 2023. Assuming that the PHE does not end, we anticipate operating margins between 8% and 10% in 2023. 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") and Restart;Australia , including Workforce Australia (formerly 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 ,Sweden , andUAE , where we predominantly provide employment support and job seeker services. 31
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Table MD&A 8: Outside the
For the Year Ended September 30,
2022 2021
(dollars in thousands)
Revenue $ 763,662 $ 699,091
Cost of revenue 686,296 592,717
Gross profit 77,366 106,374
Selling, general, and administrative expenses 92,536 86,248
Operating (loss)/income (15,170) 20,126
Gross profit percentage 10.1 % 15.2 %
Operating margin percentage (2.0) % 2.9 %
Table MD&A 9: Outside the
Revenue Cost of Revenue Gross Profit
Amount % Change Amount % Change Amount % Change
(dollars in thousands)
Balance for fiscal year
2021 $ 699,091 $ 592,717 $ 106,374
Organic effect 80,009 11.4 % 112,676 19.0 % (32,667) (30.7) %
Acquired growth 26,355 3.8 % 16,070 2.7 % 10,285 9.7 %
Currency effect compared
to the prior period (41,793) (6.0) % (35,167) (5.9) % (6,626) (6.2) %
Balance for fiscal year
2022 $ 763,662 9.2 % $ 686,296 15.8 % $ 77,366 (27.3) %
This segment experienced organic growth in revenue and costs, as well as acquired growth. This benefit was partially offset by significant declines in the value of international currencies against the United States Dollar.
Organic revenue growth in fiscal year 2022 reflects the benefit of our United Kingdom Restart contract, which commenced in the fourth quarter of fiscal year 2021, partially offset by declines in our Australian business. The Australian business reported strong results in fiscal year 2021 as the COVID-19 pandemic effect declined and opportunities reopened for work placements. Our fiscal year 2022 results initially returned to standard operating levels before a decline in the level of work following the third quarter. The detriment to our profit margin was primarily driven by the Australian business, where the reduction in revenues was not immediately matched with a decline in the cost base; in addition, some short-term severance costs were incurred. Profit margins were also tempered by charges totaling$16.8 million related to an implementation of a software product. Acquired growth is fromConnect Assist Holdings Limited , acquired inSeptember 2021 ;BZ Bodies Limited , acquired inJanuary 2022 ; andStirling Institute of Australia Pty Ltd , acquired inJune 2022 . 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. 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. Our estimates are based upon historical performance, where appropriate and available.
We anticipate our Outside the United States Segment will experience greater stability in fiscal year 2023, with less disruption from residual pandemic factors and underpinned by our core programs. We anticipate operating margins will be in the low single digits.
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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
Table MD&A 10: Backlog by Segment
As of September 30,
2022 2021
(in millions)
U.S. Federal Services $ 13,168 $ 4,298
U.S. Services 5,205 4,865
Outside the U.S. 1,441 2,052
Backlog $ 19,814 $ 11,215 At
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 24% 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.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash from operations, and availability under our revolving credit facilities. As ofSeptember 30, 2022 , we had$40.7 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 required long-term debt repayments, dividends and any share purchases we might choose to make. See Note 8 to the Consolidated Financial Statements for a more detailed discussion of our debt financing arrangements. 33
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Table MD&A 11: Net Change in Cash and Cash Equivalents and Restricted Cash
For the Year Ended September 30,
2022 2021
(in thousands)
Operating activities:
Net cash provided by operating activities $ 289,839 $ 517,322
Net cash used in investing activities (54,009) (1,835,480)
Net cash (used in)/provided by financing activities (248,271) 1,385,693
Effect of foreign exchange rates on cash and cash
equivalents and restricted cash (7,334) 474
Net change in cash and cash equivalents and restricted cash
$
(19,775)
Net Cash Provided By Operating Activities
Net cash provided by operating activities decreased by$227.5 million in fiscal year 2022 compared to fiscal year 2021. This decline was driven by a reduction in profits, the timing of payments from customers, and the timing of our payments to vendors. Both years have received the benefit of faster cash collections. Our Days Sales Outstanding ("DSO") improved fromSeptember 30, 2020 , when it was 77 days, throughSeptember 30, 2021 (68 days) andSeptember 30, 2022 (62 days). Improved collections were driven by the recovery of payments delayed during the COVID-19 pandemic and the timing of large payments at the end of fiscal year 2022. Fiscal year 2021 received cash from up-front payments on contracts, notably in theUnited Kingdom , as new projects started. These cash flows did not recur to the same degree in fiscal year 2022. The timing of both vendor and employee payments across both years also resulted in higher cash outflows from operations in fiscal year 2022. Increased interest payments on our debt, which we held for a full year in fiscal year 2022, were offset by reduced tax payments.
Investing activities for fiscal year 2022 include payments for current-year acquisitions and the settlement of the VES purchase price. This is offset by cash received from the sale of our former headquarters building, which was completed inAugust 2022 . The prior year's cash flows include payments for the acquisitions of VES, Attain and Connect Assist.
The principal drivers of financing cash flows are the Credit Agreement, our equity transactions and restricted cash flows where we hold funds on behalf of customers or vendors.
In fiscal year 2021, we received net cash flows of$1.47 billion , principally from borrowings and costs for the Credit Agreement. These funds were used to acquire VES. In fiscal year 2022, we have made net debt repayments of$155.7 million .
In addition to our dividend, we have purchased
On certain contracts, we maintain funds within our treasury system which is
owned by our client. We treat this cash as restricted cash and hold a
corresponding liability on our balance sheet reflecting balances to be disbursed
on behalf of our client. Although we do not own these funds, they are within our
control and are considered financing cash flows. In fiscal year 2022, we
received the benefit of the Receivables Purchase Agreement ("RPA") we entered
into with Wells Fargo N.A. , under which we can sell certain US-originated
accounts receivable balances. Prior to September 30, 2022 , we sold a customer
invoice for $60.4 million . Although we sold these receivables, we maintained
administrative responsibilities over cash collection. Having sold the invoice,
the customer payment was received on September 30, 2022 , resulting in excess
cash flow. This cash receipt was treated as restricted cash and remitted to
Wells Fargo in October 2022 . We have recorded this transaction as "other" cash
flows from financing activities.
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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 12: Free Cash Flow
For the Year Ended September 30,
2022 2021
(in thousands)
Net cash provided by operating activities $ 289,839
(56,145) (36,565)
Free cash flow $ 233,694 Material Cash Requirements from Contractual Obligations
Credit Facilities
As ofSeptember 30, 2022 , we had total outstanding borrowing under our term loans and subsidiary loan agreements of$1.37 billion and$0.1 million , respectively. We had no outstanding balances under the Credit Agreement revolver as ofSeptember 30, 2022 and$600 million available. The Credit Agreement has annual repayment requirements and the balance must be repaid or refinanced at the termination of the agreements. See Note 8 to the Consolidated Financial Statements for information regarding the terms of the Credit Agreement, including obligations by fiscal year.
Leases
As ofSeptember 30, 2022 , we reported current and long-term operating lease liabilities of$64.0 million and$86.2 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 10 to the Consolidated Financial Statements for information regarding our leases, including obligations by fiscal year.
Deferred compensation plan
As ofSeptember 30, 2022 , we reported liabilities of$43.1 million 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. 35
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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 with the passage of time, 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 employment services 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 estimates of the number of participants reaching employment milestones and the service delivery period for 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. In almost all of the jurisdictions in which we operate, the employment markets have experienced significant changes due to the COVID-19 pandemic. As the pandemic commenced, many employment opportunities were terminated. Our volume of new program participants is beginning to increase as governments shift their focus to addressing the residual impacts of the pandemic, such as the economy and unemployment, particularly in those countries where the pandemic has stabilized, and economies are beginning to reopen. During the year endedSeptember 30, 2022 , we recognized revenue from these performance-based fees of$142.4 million . AtSeptember 30, 2022 , we recorded$55.4 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 and
Our balance sheet as ofSeptember 30, 2022 , includes$1.78 billion of goodwill and$804.9 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. The accounting for our 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. •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. 36
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•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, 2022 , the Company performed its annual impairment test and determined that there was no impairment of goodwill. In performing this assessment, we utilized a quantitative approach. In all cases, we determined that the fair value of our reporting units was significantly in excess of our carrying value to the extent that a 25% decline in fair value in any reporting unit would not have resulted in an impairment charge. 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 operating activities, 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 2022, 16% of our revenue was generated outside the
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. 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 that 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 our 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. 37
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Our Credit Agreement includes the defined term Consolidated EBITDA and our calculation of Adjusted EBITDA conforms to the Credit Agreement. 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 that 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. •The Credit Agreement 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. The Credit Agreement also requires us to adjust for unusual, non-recurring expenses, certain non-cash adjustments and estimated synergies from acquisitions.
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.
Table MD&A 13: Reconciliation of Net Income to Non-GAAP Adjusted EBITA, Non-GAAP Adjusted EBITDA, and Non-GAAP Pro Forma Adjusted EBITDA
For
the Year Ended
2022 2021
(in thousands)
Net income $ 203,828 $ 291,200
Adjustments:
Interest expense 45,965 14,744
Other expense 2,835 10,105
Provision for income taxes 73,270 92,481
Amortization of intangibles 90,465 44,357
Stock compensation expense 30,476 28,554
Acquisition-related expenses 332 10,820
Gain on sale of land and building (11,046) -
Adjusted EBITA - Non-GAAP measure 436,125 492,261
Depreciation and amortization of property, equipment, and capitalized software
42,330 46,361
Adjusted EBITDA - Non-GAAP measure
478,455
30,032 92,398
Pro forma adjusted EBITDA - Non-GAAP measure $
508,487
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