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 the related Notes.
For an overview of our business, including our business segments and a discussion of the services we provide, see Item 1 of this Annual Report on Form 10-K. Financial overview Our results for fiscal year 2020 were significantly affected by the following factors: •The coronavirus (COVID-19) global pandemic had an unfavorable impact on our coreU.S. -based programs where our customers instituted temporary changes to ensure that individuals and families retained access to vital services. This resulted in reduced volumes, leading to declines in revenue and profits within our core business. •We continued our work on the Census Questionnaire Assistance (CQA) contract in support of theU.S. decennial census. Our revenue on this contract was$515 million , compared to$185 million in fiscal year 2019. Our increased cost-plus revenue, including that on the CQA contract, lowered our operating margin. •We performed new services to assist government clients in theU.S. in their COVID-19 response efforts. Our revenue on these contracts, which excludes the extension of planned work related to the CQA contract, was approximately$200 million and was earned in the second half of the fiscal year. •Our Outside theU.S. Segment experienced a significant change in estimates for employment work and a pause in face-to-face assessments, resulting in reduced revenue and profits. •Under our share purchase program, we acquired 2.8 million shares of our own common stock. We continue to buy shares when appropriate opportunities arise. •We increased our quarterly dividend during fiscal year 2020, from$0.25 to$0.28 per share of Maximus common stock. •Our cash flows from operations and free cash flows declined due to additional investment in working capital required by increases to revenue and delayed payments. •We continue to hold minimal debt. Looking forward into fiscal year 2021, it is difficult to predict when the COVID-19 response work will end, when our core programs may return to previous profitability levels, and whether these two opposite forces will coincide. Our operating income margins are expected to be impacted by the challenges we face in operating during the pandemic, including but not limited to the suspension of redeterminations of eligibility required by states accepting enhanced funding from theU.S. Federal Government. 33 -------------------------------------------------------------------------------- Summary of consolidated results The following table sets forth, for the fiscal years indicated, information derived from our statements of operations. In preparing our discussion and analysis of these results, we focused on the comparison between fiscal years 2020 and 2019. A discussion comparing our results between fiscal years 2019 and 2018 can be found in our Annual Report on Form 10-K for the year endedSeptember 30, 2019 , which we filed with theSecurities and Exchange Commission onNovember 26, 2019 . Year ended September 30, (dollars in thousands, except per share data) 2020 2019 Revenue$ 3,461,537 $ 2,886,815 Cost of revenue 2,750,535 2,215,631 Gross profit 711,002 671,184 Gross profit margin 20.5 % 23.2 % Selling, general and administrative expense 387,090 321,023
Selling, general and administrative expense as a percentage of revenue
11.2 % 11.1 %
Amortization of intangible assets 35,634 33,054
Operating income 288,278 317,107
Operating income margin 8.3 % 11.0 %
Interest expense 2,059 2,957
Other income, net 843 3,170
Income before income taxes 287,062 317,320
Provision for income taxes 72,553 76,825
Effective tax rate 25.3 % 24.2 %
Net income 214,509 240,495
Loss attributable to noncontrolling interests - (329)
Net income attributable to Maximus $ 214,509 $ 240,824
Basic earnings per share attributable to Maximus $ 3.40 $ 3.73
Diluted earnings per share attributable to Maximus $ 3.39 $ 3.72
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Revenue, cost of revenue and gross profit
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 and subcontracted labor. Changes in
revenue, cost of revenue and gross profit between fiscal years 2019 and 2020 are
summarized below.
Revenue Cost of Revenue Gross Profit
Dollars in Dollars in Dollars in
thousands Percentage change thousands Percentage change thousands Percentage change
Balance for fiscal year 2019 $ 2,886,815 $ 2,215,631 $ 671,184
Estimated pre-acquisition results
from citizen engagement centers
business 98,429 85,341 13,088
Pro forma results for fiscal year
2019 2,985,244 2,300,972 684,272
Growth from CQA contract 329,453 11.0 % 265,808 11.6 % 63,645 9.3 %
Organic growth from other
contracts 138,008 4.6 % 179,073 7.8 % (41,065) (6.0) %
Net acquisitions and disposals 13,275 0.4 % 11,489 0.5 % 1,786 0.3 %
Currency effect compared to the
prior period (4,443) (0.1) % (6,807) (0.3) % 2,364 0.3 %
Balance for fiscal year 2020 $ 3,461,537 16.0 % $ 2,750,535 19.5 % $ 711,002 3.9 %
On November 16, 2018 , we acquired the citizen engagement centers business that
was integrated into our U.S. Federal Services Segment. Had we acquired this
business at the beginning of fiscal year 2019, we estimate that revenue and
gross profit for fiscal year 2019 would have been higher by $98.4 million and
$13.1 million , respectively. During fiscal year 2020, we received additional
growth from this business, most notably with the CQA contract.
Our other acquired growth in the year came from the full-year benefit of GT
Hiring Solutions (2005) Inc. , which we acquired in fiscal year 2019, and two
fiscal year 2020 acquisitions, InjuryNet Australia Pty Limited and Index Root
Korea Co. Ltd. These acquisitions were all integrated into our Outside the U.S.
Segment. Our U.S. Federal Services Segment disposed of a small business in
fiscal year 2020.
Our U.S. Services and U.S. Federal Services Segments reported organic growth
year-over-year, offset by declines in our Outside the U.S. Segment. Our profit
margins declined in all segments.
Our organic revenue growth or decline reflects changes in our contract portfolio
from our existing business, supplemented with new work. Most of our contracts
are multi-year arrangements, built upon long-term relationships that allow us to
maintain a strong backlog of work to sustain our revenues. In any typical year,
we anticipate 7% to 10% attrition of work as contracts come to a natural end or
are lost; contracts are rebid with reduced volumes, scope, rates or a
combination of all three; contracted work is in-sourced by our customer or we
elect not to rebid. Attrition should exceed our normal range in fiscal year 2021
due to the expected wind-down of the CQA contract. We also maintain a small
portfolio of non-recurring short-term projects. To achieve organic growth, we
must obtain more work than is lost through attrition. The COVID-19 pandemic
caused some short-term disruption to our business; some contracts expanded, some
declined and the business has been subject to additional costs.
Although we were able to maintain services, and add some additional work to
assist customers with pandemic-related assistance, we experienced reduced
volumes on core U.S. -based programs. The effect on our Outside the U.S. Segment
was more significant due to the nature of the work performed.
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Our business is affected by fluctuations in foreign currencies in the
jurisdictions where we operate. Although revenue and related costs are typically
earned and incurred in the same currency, a significant change in foreign
exchange rates may impact our overall profit margins. We show the impact of
currency fluctuations by reporting the difference between our results using
current year exchange rates and results reported if the average rates utilized
in the prior year prevailed. Currency effects are exclusively within the Outside
the U.S. Segment.
Other operating expenses and benefits
Selling, general and administrative (SG&A) expense consists of 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 resources that
are not client-facing, or at a corporate level. Corporate costs are allocated to
segments on a consistent and rational basis. SG&A expenses are not typically
driven by changes in our revenue. We allocate SG&A expenses using a methodology
driven by the Federal Cost Accounting Standards.
SG&A expenses increased year-over-year due primarily to:
•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;
•increases in our scope of operations;
•acquisition-related expenses of $4.6 million , for both completed and
unconsummated deals; and
•higher than usual specific acquisition costs and IT transformation initiatives,
including migrating our existing data centers to the cloud, which allowed the
rapid acceleration of staff into a work-from-home environment.
This increase was partially offset by a gain of $1.7 million related to the sale
of Q2 Administrators LLC , a wholly-owned subsidiary, in our U.S. Federal
Services Segment.
Amortization of intangible assets received a full charge from our acquisition of
the citizen engagement centers business during fiscal year 2020. Additional
charges from our other acquisitions also added to this charge.
Interest expense and other income
Our interest expense principally results from our U.S. -based corporate credit
facility, which was used to acquire the citizen engagement centers business as
well as covering short-term working capital needs throughout fiscal years 2019
and 2020. Credit facilities are also in place in some of our jurisdictions
outside the U.S.
We earn interest on some of our cash balances that are in excess of our working
capital requirements. In addition, in fiscal year 2019, we received interest
income on late invoices from a customer in our U.S. Services Segment.
Income taxes
Our effective tax rate for fiscal years 2020 and 2019 was 25.3% and 24.2%,
respectively. We anticipate that our effective tax rate for fiscal year 2021
will be between 25.8% and 26.5%.
Our tax rate increased in fiscal year 2020 due to reduced benefits from the
vesting of equity compensation. Our income tax expense in fiscal years 2020 and
2019 received benefits of $2.0 million and $4.8 million from the vesting of
restricted stock units (RSUs). Our annual benefit or charge related to the
vesting of RSUs is dependent upon the timing, amount and share price on the date
that the awards become available to owners of RSUs. Although most of our RSUs
vest in the fourth quarter, we have a significant population of RSUs whose
issuance has been deferred that might result in unpredictable movements in our
tax provision. As of September 30, 2020 , we have no outstanding stock options.
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U.S. Services Segment
Our U.S. Services Segment provides a variety of business process services such
as program administration, appeals and assessments work 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 and the
Children's Health Insurance Program (CHIP), Temporary Assistance to Needy
Families (TANF), and child support programs. In fiscal year 2020, the segment
further executed on its clinical evolution strategy by expanding its clinical
offerings in public health with new work in contact tracing, disease
investigation, and COVID-19 response efforts. We also successfully expanded into
the unemployment insurance market as Maximus supported 14 states in their
unemployment insurance programs. We changed the name of our U.S. Health and
Human Services to U.S. Services to recognize the evolution of our service
offerings into new markets and clients.
Year ended September 30,
(dollars in thousands) 2020 2019
Revenue $ 1,329,274 $ 1,176,488
Cost of revenue 969,002 832,379
Gross profit 360,272 344,109
Selling, general and administrative expense 132,489 123,275
Operating income 227,783 220,834
Gross profit percentage 27.1 % 29.2 %
Operating margin percentage 17.1 % 18.8 %
Our U.S. Services Segment revenue and cost of revenue increased by 13% and 16%,
respectively, in fiscal year 2020. All growth was organic. A number of positive
and negative factors impacted this segment.
•We received approximately $129 million of work for assisting states within the
U.S. with their response to the COVID-19 pandemic. Although this work is
accretive, these contracts generally experience lower operating margins and,
therefore, tempered the overall operating margins of the segment.
•Lower volumes on some of our large outcome-based contracts contributed to lower
revenue and lower operating margins. As part of the response from the U.S.
Federal Government to the COVID-19 pandemic, states were allowed to access
increases in matching funds if they provide continuous care to current Medicaid
enrollees and, as a result, redeterminations of eligibility were suspended. This
ensured individuals and families continuous access to vital health care services
during the pandemic. These redeterminations are a significant factor in several
of our contracts and we are paid by the volume of transactions on many
arrangements. This negative impact was offset in other contracts where we are
reimbursed based upon the number of eligible Medicaid participants.
•The increase in revenue in the U.S. Federal Services Segment absorbed
additional corporate SG&A expenses and provided a benefit to operating margins;
this is likely to reverse in fiscal year 2021 as the CQA contract ends.
If and when the pandemic subsides, we would anticipate increases in our
volume-based revenue as governments emerge and programs return to pre-pandemic
levels. We also expect an end to our COVID-19-related contracts. The timing of
each of these is uncertain and these opposing changes may not coincide. Our
customers in this segment are typically U.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 from the pandemic.
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U.S. Federal Services Segment
Our U.S. Federal Services Segment provides program administration, appeals and
assessments services and technology solutions, including system and software
development and maintenance services, for various U.S. federal civilian
programs. The 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.
In fiscal year 2020, the segment expanded its clinical offerings in public
health with new work supporting the Federal Government's COVID-19 response
efforts. This included:
•Expanded work with the Centers for Disease Control and Prevention (CDC ) for
their helpline;
•An outbound customer support center for the Office of the Assistant Secretary
for Health to notify individuals throughout the U.S. of their COVID-19 test
result; and
•IRS Wage and Investment Division response efforts to general inquiries
regarding the Coronavirus Aid Relief & Economic Security (CARES) Act and
Economic Impact Payment Service Plan.
Year ended September 30,
(dollars in thousands) 2020 2019
Revenue $ 1,633,337 $ 1,111,197
Cost of revenue 1,314,412 869,127
Gross profit 318,925 242,070
Selling, general and administrative expense 186,023 126,128
Operating income 132,902 115,942
Gross profit percentage 19.5 % 21.8 %
Operating margin percentage 8.1 % 10.4 %
Revenue Cost of Revenue Gross Profit
Dollars in Dollars in Dollars in
thousands Percentage change thousands Percentage change thousands Percentage change
Balance for fiscal year
2019 $ 1,111,197 $ 869,127 $ 242,070
Estimated pre-acquisition
results from citizen
engagement centers business 98,429 85,341 13,088
Pro forma results for
fiscal year 2019 1,209,626 954,468 255,158
Growth from CQA contract 329,453 27.2 % 265,808 27.8 % 63,645 24.9 %
Organic growth from other
contracts 96,259 8.0 % 95,625 10.0 % 634 0.2 %
Disposal of business (2,001) (0.2) % (1,489) (0.2) % (512) (0.2) %
Balance for fiscal year
2020 $ 1,633,337 35.0 % $ 1,314,412 37.7 % $ 318,925 25.0 %
Revenue and cost of revenue in our U.S. Federal Services Segment increased by
35.0% and 37.7%, respectively, based upon pro forma results for fiscal year
2019.
•The CQA contract provided approximately $330 million of revenue growth compared
to fiscal year 2019. The contract started to wind down operations in October
2020 , and we anticipate revenue from this contract will be between $50 million
and $60 million in fiscal year 2021.
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•Both the CQA contract and the contract to support the Centers for Medicare and
Medicaid (CMS) Contact Center Operations (CCO) are cost-plus arrangements, which
carry lower risk and therefore lower margins than fixed-price or
performance-based arrangements. This has tempered our profit margins in fiscal
year 2020.
•We estimate that our incremental revenue from assisting the U.S. Federal
Government with its COVID-19 response was $71 million , excluding the increases
to the CQA contract tied to the pandemic-related extended response period.
•Our business realized higher revenues from short-term work but also experienced
lower margins due to reduced volumes on performance-based contracts, such as
workers compensation claims reviews that declined sharply since the onset of the
pandemic.
•Our operating income margin also declined due to increased spending on business
development and selling activities.
Outside the U.S. Segment
Our Outside the U.S. Segment provides business process services (BPS) solutions
for governments and commercial clients in geographies beyond the U.S. , including
health and disability assessments, program administration for employment
services and other job seeker-related services. We support programs and deliver
services in the United Kingdom (U.K. ), 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 of British Columbia ;
Italy , Saudi Arabia , Singapore , South Korea and Sweden .
Year ended September 30,
(dollars in thousands) 2020 2019
Revenue $ 498,926 $ 599,130
Cost of revenue 467,121 514,125
Gross profit 31,805 85,005
Selling, general and administrative expense 65,938 68,944
Operating (loss)/income (34,133) 16,061
Gross profit percentage 6.4 % 14.2 %
Operating margin percentage (6.8) % 2.7 %
Changes in revenue, cost of revenue and gross profit for fiscal year 2020 are summarized below.
Revenue Cost of Revenue Gross Profit
Dollars in Dollars in Dollars in
thousands Percentage change thousands Percentage change thousands Percentage change
Balance for fiscal year
2019 $ 599,130 $ 514,125 $ 85,005
Organic decline (111,037) (18.5) % (53,175) (10.3) % (57,862) (68.1) %
Acquired growth 15,276 2.5 % 12,978 2.5 % 2,298 2.7 %
Currency effect compared
to the prior period (4,443) (0.7) % (6,807) (1.3) % 2,364 2.8 %
Balance for fiscal year
2020 $ 498,926 (16.7) % $ 467,121 (9.1) % $ 31,805 (62.6) %
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 were
significantly disrupted. Work related to employment services and face-to-face
health
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assessments suffered due to disruptions in the employment markets and the
halting of face-to-face assessments at the direction of our client as the U.K.
government navigates towards the optimal path to safely resume these services.
Results in the first quarter of fiscal year 2020 were also affected by the
Australian bushfires. The segment reported declining organic revenues and
reduced profit margins in fiscal year 2020.
Our employment services 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 a significant impact 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 . Each quarter
we 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.
Many of our contracts were modified to more favorable terms as a response to the
pandemic. In Australia , the balance between administrative revenue and
outcome-based revenue was adjusted to reduce the risks within the contract. In
the U.K. , contracts were temporarily changed to cost-reimbursement arrangements.
Our estimates of the number of outcomes we anticipate to achieve declined and
the time we expect to achieve those outcomes increased compared to prior years.
This 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 previously experienced.
Although we anticipate that our business will continue to experience disruption
in fiscal year 2021, we believe that we will see an improved outlook in our
operations outside the U.S. We believe that as our customers emerge from the
pandemic, there will be an increased need for our role to support more people
into long-term, sustained employment, particularly in geographies like Australia
where they are emerging from the pandemic and people are returning to work. As a
result of these trends, we are anticipating estimated revenue growth of
approximately $175 million in fiscal year 2021 compared to the prior year. We
also anticipate that we will return to profitability in the second half of
fiscal year 2021.
The continued strength of the U.S. Dollar against the currencies in which we do
business outside the U.S. resulted in year-over-year declines in our revenue and
costs. In general, these currencies weakened during the first three fiscal
quarters of 2020 but strengthened against the U.S. Dollar in the fourth fiscal
quarter.
The Outside the U.S. Segment performs a significant part of its operations in
the U.K. We closely monitor developments following the departure of the U.K.
from the European Union . We do not anticipate the withdrawal to have a material
direct effect on our business 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 September 30,
2020 , we had approximately $71.7 million in unrestricted cash, including
$45.0 million held in foreign locations in foreign currencies. In addition, we
had $400 million of liquidity available on our corporate credit facility and
capacity on smaller credit facilities worldwide. At this time, we believe that
our cash flows from operations, combined with our borrowing capacity, is
sufficient to meet our day-to-day obligations.
Governments worldwide introduced a number of short-term policies to assist
businesses with their liquidity. We utilized payroll credits and the deferral of
tax payments in the United States and the United Kingdom . We also furloughed
employees in the United Kingdom .
We have no requirement to remit funds from our foreign locations to the United
States . The Tax Cuts and Jobs Act in the United States enabled us and continues
to enable us to transfer cash 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
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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 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 to the United States .
The following table provides a summary of our cash flow information for the two
years ended September 30, 2020 .
Year ended September 30,
(in thousands) 2020 2019
Net cash from/(used in):
Operations $ 244,592 $ 356,727
Investing activities (44,138) (483,883)
Financing activities (230,090) (110,859)
Effect of exchange rates on cash and cash equivalents 1,705 (2,052)
Net decrease in cash, cash equivalents and restricted cash $ (27,931) $ (240,067)
The factors influencing cash flows from operations are:
•Our operating results;
•The increased revenue from the CQA contract;
•Our cash collections;
•Our cash payments; and
•The timing of tax payments.
Net income declined from $240.5 million in fiscal year 2019 to $214.5 million in
fiscal year 2020.
The CQA contract resulted in increased working capital requirements.
Our Days Sales Outstanding (DSO) at September 30, 2020 , were 77 days compared to
72 days at September 30, 2019 . 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.
The increase in DSO is a result of an increased level of working capital from
the increased level of revenue we had in the fourth quarter this year. Each unit
of DSO represents approximately $10 million of collections.
Our tax payments for the fiscal years ended September 30, 2020 and 2019, were
$89.1 million and $69.2 million , respectively.
Cash used in investing activities for the year ended September 30, 2020 , was
$44.1 million , principally for capital expenditures to support operations. Our
principal investing activity in fiscal year 2019 was the acquisition of the
citizen engagement centers business, which required a cash outflow of
$430.7 million , as well as a further investment in software licenses of
$4.5 million to cover software license additions for newly-acquired employees.
We also acquired businesses within our Outside the U.S. Segment in both fiscal
years 2020 and 2019.
Our cash used in financing activities were borrowings under our revolving
corporate credit facility, purchases of our common stock and our quarterly
dividend.
We purchased 2.8 million and 0.7 million shares of our common stock during
fiscal years 2020 and 2019, utilizing cash of $167.0 million and $47.4 million ,
respectively. At September 30, 2020 , we had $150.0 million available for future
purchases under a plan approved by our Board of Directors. Our share purchases
are at the discretion of our Board of Directors and depend upon our future
operations and earnings, capital requirements, general financial condition,
contractual restrictions and other factors our Board of Directors may deem
relevant.
Between October 1, 2020 , and November 19, 2020 , we made additional purchases of
0.1 million shares of common stock at a total cost of approximately $3.4
million .
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In fiscal year 2020 and 2019, we paid a quarterly dividend of $0.28 and $0.25
per share, respectively. This resulted in cash outflows of $70.2 million and
$63.9 million , respectively.
Where possible, we identify surplus funds in foreign locations and place them in
entities with the U.S. Dollar as their functional currency, reducing our
exposure to foreign currencies. We mitigate our foreign currency exchange risks
within our operating divisions through incurring costs and cash outflows in the
same currency as our revenue.
To supplement our statements of cash flows presented on a Generally Accepted
Accounting Principles (GAAP) basis, we use the measure of free cash flow to
analyze the funds generated from operations.
Year ended September 30,
(in thousands) 2020 2019
Cash from operations $ 244,592 $ 356,727 Purchases of property and equipment and capitalized software costs
(40,707) (66,846)
Capital expenditure as a result of acquisition (1) - 4,542
Free cash flow $ 203,885 $ 294,423
(1) Purchases of property and equipment and capitalized software costs included
$4.5 million in one-time payments to cover software licenses required for
employees joining us through the citizen engagement centers acquisition in
November 2018 .
International businesses
We operate in international locations. Accordingly, we transact business in
currencies other than the U.S. Dollar, principally the Australian Dollar, the
Canadian Dollar, the South Korean Won, the Saudi Arabian Riyal, the Singapore
Dollar, the Swedish Krona and the British Pound. During the year ended
September 30, 2020 , we earned approximately 14% of our revenue from our foreign
subsidiaries. International business exposes us to certain risks.
•Tax regulations in some jurisdictions may penalize us if we transfer cash
across international borders. The Tax Cuts and Jobs Act eliminated many of these
incremental penalties in the United States and we remitted a significant amount
of excess cash to the U.S. in fiscal year 2019. International transaction
limitations still exist and there is no guarantee that the current U.S. tax
regime will remain in place. We maintain sufficient cash or have sufficient
capital available to us under our corporate credit facilities, both within and
outside the U.S. We establish our legal entities to make efficient use of tax
laws and holding companies to minimize this exposure. At September 30, 2020 , we
held $45 million of cash outside the United States in currencies other than the
U.S. Dollar.
•Our foreign subsidiaries typically incur costs in the same currency as they
earn revenue, thus limiting our exposure to unexpected currency fluctuations.
Further, the operations of the U.S. business do not depend upon cash flows from
foreign subsidiaries. However, declines in the relevant strength of foreign
currencies against the U.S. Dollar affects our revenue mix, profit margin and
tax rate.
Obligations and commitments
The following table summarizes our contractual obligations at September 30,
2020 , that require the Company to make future cash payments:
Payments due by period
Less than 1 - 3 3 - 5 More than
(in thousands) Total 1 year years years 5 years
Operating leases $ 195,509 $ 86,110 $ 85,761 $ 22,051 $ 1,587
Debt(1) 29,721 11,349 18,372 - -
Deferred compensation plan liabilities(2) 42,176 3,522 4,930 2,056 31,668
Total $ 267,406 $ 100,981 $ 109,063 $ 24,107 $ 33,255 ____________________________________________
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(1)Debt obligations include interest expense on our Australian debt facility at
the prevailing rate.
(2)Deferred compensation plan liabilities are typically payable at times elected
by the employee at the time of deferral. The timing of these payments is based
upon elections in place at September 30, 2020 , but these may be subject to
change. Payments falling due may be deferred again by the employee, delaying the
obligation. Payments may also be accelerated if an employee ceases employment
with us or applies for a hardship payment. At September 30, 2020 , we held assets
of $38.2 million in a Rabbi Trust that could be used to meet these obligations.
Off-balance sheet arrangements
We do not have material off-balance sheet risk or exposure to liabilities that
are not recorded or disclosed in our financial statements. We utilize
performance bond commitments and standby letters of credit on certain contracts,
we have not had any defaults resulting in draws on performance bonds. We do not
speculate in derivative transactions. In the past, we utilized interest rate
derivatives to add stability to interest expense and to manage our exposure to
interest rate movements.
Effects of inflation
As measured by revenue, approximately 46% of our business in fiscal year 2020
was conducted under cost-plus pricing arrangements that adjust revenue to cover
costs increased by inflation. Approximately 9% of the business was
time-and-material pricing arrangements where labor rates are often fixed for
several years. We generally were able to price these contracts in a manner that
accommodates the rates of inflation experienced in recent years. Our remaining
contracts are fixed-price and performance-based and are affected by inflation.
Critical accounting policies and estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires us to make estimates and judgments that
affect the amounts reported. We consider the accounting policies below to be the
most important to our financial position and results of operations either
because of the significance of the financial statement item or because of the
need to use significant judgment in recording the balance. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results could differ from those estimates. Our significant accounting policies
are summarized in "Note 1. Business and summary of significant accounting
policies" of the Consolidated Financial Statements included in Item 8 in this
Annual Report on Form 10-K.
Revenue Recognition. 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 typically reviewed quarterly, with any
changes being recorded as a cumulative catch-up in revenue. Our most significant
estimates are listed below.
•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 the U.S. Segment, where we are paid as
individuals attain employment goals, which may take many months to achieve. We
recognize revenue on these contracts over the period of performance. Our
estimates vary from contract to contract but may include estimates of the number
of participants, the length of the contract or the participants reaching
employment milestones. We are required to estimate these outcome fees ahead of
their collection and recognize this estimated fee over the period of delivery.
These estimates are updated on a quarterly basis, with changes in estimate being
taken to our income statement. Our estimates have been subject to significant
revision during fiscal year 2020 as sustained employment outcomes were affected
by the COVID-19 pandemic. During the year ended September 30, 2020 , we
recognized revenue from these performance-based fees of $45.0 million . At
September 30, 2020 , we have recorded $24.8 million of these estimated outcome
fees which will be collected only when we reach the targets we anticipate. This
balance is included on our consolidated balance sheets within the related
contract accounts.
•Other performance-based contracts with future outcomes include those where we
recognize an average effective rate per participant based upon the total volume
of expected participants. In this instance, we are required to estimate the
amount of discount applied to determine the average rate of revenue per
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participant. This balance is estimated each quarter and changes to revenue
recorded through a cumulative catch-up.
Business combinations and goodwill. Our balance sheet at September 30, 2020 ,
includes $593.1 million of goodwill and $145.9 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. During fiscal year 2019, we
completed the acquisition of the citizen engagement centers business. Our
accounting for this acquisition included determining the fair value of the
customer relationships intangible assets acquired. In making our determination
of the fair value of these assets, we estimated discount rates, projected
revenue growth margins 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.
•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. At July 1, 2020 , 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 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 2020, 14% of our revenue was generated outside the U.S. We
believe that users of our financial statements wish to understand the
performance of our foreign operations using a methodology that excludes the
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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 made a number of acquisitions. We believe users of our
financial statements wish to evaluate the performance of our operations,
excluding changes that occurred 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 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. When this information has not been prepared by the sellers, we show the
effect of the acquisition by presenting revenue and cost of revenue for acquired
businesses for the periods through to the anniversary of their acquisition; we
show this as 'acquired growth.' We provide pro forma comparative results and
acquired growth 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 that combines operating cash flows and capital expenditures. We
disclose 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
provide a reconciliation of free cash flow to cash provided 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 disclose 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 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 facility requires us to calculate Adjusted EBITDA on a pro forma
basis as though we had owned any significant acquired businesses for a full
twelve months prior to the acquisition.
We provided a reconciliation from net income to Adjusted EBITA, Adjusted EBITDA
and Pro Forma Adjusted EBITDA as follows:
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Year ended September 30,
(in thousands) 2020 2019
Net income attributable to Maximus $ 214,509 $ 240,824
Interest expense 1,300 (2,591)
Provision for income taxes 72,553 76,825
Amortization of intangible assets 35,634 33,054
Stock compensation expense 23,708 20,774
Acquisition-related expenses 4,621 2,691
Gain on sale of a business (1,718) -
Adjusted EBITA 350,607 371,577Depreciation and amortization of property, plant, equipment and capitalized software
64,527 52,404
Adjusted EBITDA $ 415,134 $ 423,981 Additional adjusted EBITDA related to the citizen engagement centers acquisition from the pre-acquisition period
6,695
Pro forma adjusted EBITDA $ 430,676
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