UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2016
 
Commission File Number: 1-12997
 
MAXIMUS, INC.
(Exact name of registrant as specified in its charter)
 
Virginia
 
54-1000588
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1891 Metro Center Drive
Reston, Virginia
 
20190
(Address of principal executive offices)
 
(Zip Code)
 
(703) 251-8500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No ý
 
As of August 1, 2016 there were 64,891,843 shares of the registrant’s common stock (no par value) outstanding.
 




MAXIMUS, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2016
INDEX
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
 




Throughout this Quarterly Report on Form 10-Q, the terms “Company,” “we,” “us,” “our” and “MAXIMUS” refer to MAXIMUS, Inc. and its subsidiaries.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about us, the industry in which we operate and other matters, as well as management’s beliefs and assumptions and other statements that are not historical facts. Words such as “anticipate,” “believe,” “could,” “expect,” “estimate,” “intend,” “may,” “opportunity,” “plan,” “potential,” “project,” “should,” “will” and similar expressions are intended to identify forward-looking statements and convey uncertainty of future events or outcomes. These statements are not guarantees and involve risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from such forward-looking statements due to a number of factors, including without limitation:
a failure to meet performance requirements in our contracts, which might lead to contract termination and liquidated damages; 
the effects of future legislative or government budgetary and spending changes; 
difficulties in integrating acquired businesses; 
the outcome of reviews or audits, which might result in financial penalties and reduce our ability to respond to invitations for new work; 
a failure to comply with laws governing our business, which might result in the Company being subject to fines, penalties and other sanctions; 
our failure to successfully bid for and accurately price contracts to generate our desired profit; 
our ability to maintain relationships with key government entities from whom a substantial portion of our revenue is derived; 
the ability of government customers to terminate contracts on short notice, with or without cause; 
our ability to manage start-up costs and capital investments incurred before receiving related contract payments; 
our ability to maintain technology systems and otherwise protect confidential or protected information; 
the costs and outcome of litigation; 
matters related to business we have disposed of or divested; and 
other factors set forth in Exhibit 99.1, under the caption "Special Considerations and Risk Factors," in our Annual Report on Form 10-K for the year ended September 30, 2015, which was filed with the Securities and Exchange Commission on November 16, 2015.
As a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. Additionally, we caution investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made. Except as otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether resulting from new information, future events or otherwise.




PART I.  FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
617,094

 
$
572,301

 
$
1,780,269

 
$
1,521,138

Cost of revenue
465,715

 
428,503

 
1,371,008

 
1,133,728

Gross profit
151,379

 
143,798

 
409,261

 
387,410

Less:
 
 
 
 
 
 
 
Selling, general and administrative expenses
69,706

 
66,997

 
199,916

 
178,350

Amortization of intangible assets
3,517

 
3,275

 
9,928

 
6,182

Acquisition-related expenses

 
2,459

 
575

 
4,573

Add:
 
 
 
 
 
 
 
Gain on sale of a business
6,453

 

 
6,453

 

Operating income
84,609

 
71,067

 
205,295

 
198,305

Less:
 
 
 
 
 
 
 
Interest expense
1,029

 
689

 
3,291

 
689

Add:
 
 
 
 
 
 
 
Other income, net
62

 
8

 
3,402

 
1,128

Income before income taxes
83,642

 
70,386

 
205,406

 
198,744

Provision for income taxes
30,892

 
28,127

 
76,433

 
75,108

Net income
52,750

 
42,259

 
128,973

 
123,636

Income attributable to noncontrolling interests
525

 
593

 
1,354

 
1,302

Net income attributable to MAXIMUS
$
52,225

 
$
41,666

 
$
127,619

 
$
122,334

Basic earnings per share attributable to MAXIMUS
$
0.79

 
$
0.63

 
$
1.94

 
$
1.86

Diluted earnings per share attributable to MAXIMUS
$
0.79

 
$
0.62

 
$
1.93

 
$
1.83

Dividends paid per share
$
0.045

 
$
0.045

 
$
0.135

 
$
0.135

Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
65,766

 
65,901

 
65,836

 
65,900

Diluted
66,194

 
67,098

 
66,200

 
67,003

See notes to unaudited consolidated financial statements.

1



MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
52,750

 
$
42,259

 
$
128,973

 
$
123,636

Foreign currency translation adjustments
(9,354
)
 
8,339

 
(11,979
)
 
(12,694
)
Interest rate hedge, net of income taxes of $8, $15, $4 and $15
(11
)
 
(23
)
 
(5
)
 
(23
)
Comprehensive income
43,385

 
50,575

 
116,989

 
110,919

Comprehensive income attributable to noncontrolling interests
525

 
593

 
1,354

 
1,302

Comprehensive income attributable to MAXIMUS
$
42,860

 
$
49,982

 
$
115,635

 
$
109,617

See notes to unaudited consolidated financial statements.
 

2



MAXIMUS, Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
 
 
June 30,
2016
 
September 30,
2015
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
50,609

 
$
74,672

Accounts receivable — billed and billable, net of reserves of $5,173 and $3,385
421,132

 
396,177

Accounts receivable — unbilled
36,331

 
30,929

Income taxes receivable
5,072

 
7,310

Prepaid expenses and other current assets
50,073

 
52,819

Total current assets
563,217

 
561,907

Property and equipment, net
136,295

 
137,830

Capitalized software, net
30,983

 
32,483

Goodwill
398,929

 
376,302

Intangible assets, net
112,966

 
102,358

Deferred contract costs, net
17,068

 
19,126

Deferred compensation plan assets
22,015

 
19,310

Deferred income taxes
5,047

 
11,058

Other assets
11,573

 
11,184

Total assets
$
1,298,093

 
$
1,271,558

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
133,162

 
$
155,411

Accrued compensation and benefits
78,086

 
99,700

Deferred revenue
70,302

 
77,642

Income taxes payable
8,401

 
11,709

Long-term debt, current portion
326

 
356

Other liabilities
10,585

 
11,562

Total current liabilities
300,862

 
356,380

Deferred revenue, less current portion
43,875

 
52,954

Deferred income taxes
5,757

 
6,546

Long-term debt
210,683

 
210,618

Deferred compensation plan liabilities, less current portion
22,801

 
20,635

Other liabilities
8,594

 
8,726

Total liabilities
592,572

 
655,859

Shareholders’ equity:
 

 
 

Common stock, no par value; 100,000 shares authorized; 64,892 and 65,437 shares issued and outstanding at June 30, 2016 and September 30, 2015, at stated amount, respectively
460,409

 
446,132

Accumulated other comprehensive income/(loss)
(34,349
)
 
(22,365
)
Retained earnings
275,846

 
188,611

Total MAXIMUS shareholders’ equity
701,906

 
612,378

Noncontrolling interests
3,615

 
3,321

Total equity
705,521

 
615,699

Total liabilities and equity
$
1,298,093

 
$
1,271,558

 
See notes to unaudited consolidated financial statements.

3



MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
Nine Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 

 
 

Net income
$
128,973

 
$
123,636

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization of property, equipment and capitalized software
39,246

 
37,617

Amortization of intangible assets
9,928

 
6,182

Deferred income taxes
(1,747
)
 
(8,921
)
Stock compensation expense
13,818

 
12,785

Gain on sale of a business
(6,453
)
 

Change in assets and liabilities:
 

 
 

Accounts receivable — billed and billable
(27,469
)
 
(81,430
)
Accounts receivable — unbilled
(5,556
)
 
2,209

Prepaid expenses and other current assets
4,378

 
(3,496
)
Deferred contract costs
956

 
(7,390
)
Accounts payable and accrued liabilities
(20,617
)
 
45,064

Accrued compensation and benefits
(9,974
)
 
(4,546
)
Deferred revenue
(11,703
)
 
32,424

Income taxes
(965
)
 
37,476

Other assets and liabilities
(4,683
)
 
(10,630
)
Cash provided by operating activities
108,132

 
180,980

Cash flows from investing activities:
 

 
 

Purchases of property and equipment and capitalized software costs
(34,103
)
 
(73,167
)
Acquisition of businesses, net of cash acquired
(46,736
)
 
(289,612
)
Proceeds from the sale of a business
5,515

 

Other
381

 
406

Cash used in investing activities
(74,943
)
 
(362,373
)
Cash flows from financing activities:
 

 
 

Cash dividends paid to MAXIMUS shareholders
(8,780
)
 
(8,891
)
Repurchases of common stock
(33,335
)
 
(32,616
)
Tax withholding related to RSU vesting
(11,597
)
 
(12,451
)
Expansion of credit facility

 
(1,444
)
Borrowings under credit facility
139,823

 
255,993

Repayment of credit facility and other long-term debt
(139,817
)
 
(90,112
)
Tax provision due to option exercises and restricted stock units vesting

 
(1,208
)
Stock option exercises
205

 
521

Other
(533
)
 
(75
)
Cash (used in)/provided by financing activities
(54,034
)
 
109,717

Effect of exchange rate changes on cash and cash equivalents
(3,218
)
 
(4,559
)
Net decrease in cash and cash equivalents
(24,063
)
 
(76,235
)
Cash and cash equivalents, beginning of period
74,672

 
158,112

Cash and cash equivalents, end of period
$
50,609

 
$
81,877

See notes to unaudited consolidated financial statements.

4



MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)
 
 
Common
Shares
Outstanding
 
Common
Stock
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total
Balance at September 30, 2015
65,437

 
$
446,132

 
$
(22,365
)
 
$
188,611

 
$
3,321

 
$
615,699

Net income

 

 

 
127,619

 
1,354

 
128,973

Foreign currency translation

 

 
(11,979
)
 

 

 
(11,979
)
Interest rate hedge, net of income taxes

 

 
(5
)
 

 

 
(5
)
Cash dividends

 

 

 
(8,780
)
 
(1,060
)
 
(9,840
)
Dividends on RSUs

 
268

 

 
(268
)
 

 

Repurchases of common stock
(587
)
 

 

 
(31,336
)
 

 
(31,336
)
Stock compensation expense

 
13,818

 

 

 

 
13,818

Tax withholding related to RSU vesting

 
(14
)
 

 

 

 
(14
)
Stock options exercised and RSUs vested
42

 
205

 

 

 

 
205

Balance at June 30, 2016
64,892

 
$
460,409

 
$
(34,349
)
 
$
275,846

 
$
3,615

 
$
705,521

 
Common
Shares
Outstanding
 
Common
Stock
 
Accumulated
Other
Comprehensive
Income / (Loss)
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total
Balance at September 30, 2014
66,613

 
$
429,857

 
$
230

 
$
125,875

 
$
223

 
$
556,185

Net income

 

 

 
122,334

 
1,302

 
123,636

Foreign currency translation

 

 
(12,694
)
 

 

 
(12,694
)
Interest rate hedge, net of income taxes

 

 
(23
)
 

 

 
(23
)
Cash dividends

 

 

 
(8,891
)
 
(75
)
 
(8,966
)
Dividends on RSUs

 
296

 

 
(296
)
 

 

Repurchases of common stock
(753
)
 

 

 
(30,618
)
 

 
(30,618
)
Stock compensation expense

 
12,785

 

 

 

 
12,785

Stock compensation tax benefit

 
(1,208
)
 

 

 

 
(1,208
)
Tax withholding related to RSU vesting

 
(116
)
 

 

 

 
(116
)
Stock options exercised and RSUs vested
72

 
521

 

 

 

 
521

Addition of noncontrolling interest from acquisition

 

 

 

 
896

 
896

Balance at June 30, 2015
65,932

 
$
442,135

 
$
(12,487
)
 
$
208,404

 
$
2,346

 
$
640,398

See notes to unaudited consolidated financial statements.

5



MAXIMUS, Inc.
Notes to Unaudited Consolidated Financial Statements
For the Three and Nine Months Ended June 30, 2016 and 2015
In these Notes to Unaudited Consolidated Financial Statements, the terms “Company,” “MAXIMUS,” “us,” “we” or “our” refer to MAXIMUS, Inc. and its subsidiaries.
1. Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet at September 30, 2015 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.
Certain reclassifications have been made from the prior fiscal year to conform with current presentation. In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes. This standard reduces the complexity of deferred taxation disclosure by showing deferred income tax balances as noncurrent. We adopted this standard and updated our September 30, 2015 balance sheet as if we had adopted this standard at that time. As previously disclosed in our Annual Report on Form 10-K for the year ended September 30, 2015, our balance sheet held $19 million of current deferred tax assets, $0.7 million of noncurrent deferred tax assets included in "Other Assets" and $15.2 million of noncurrent deferred tax liabilities. These balances have been reclassified to record $11.1 million and $6.5 million of noncurrent deferred tax assets and liabilities, respectively.
The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expenses. On an ongoing basis, we evaluate our estimates including those related to revenue recognition and cost estimation on certain contracts, the realizability of goodwill, and amounts related to income taxes, certain accrued liabilities and contingencies and litigation. 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.
These financial statements should be read in conjunction with the consolidated audited financial statements and the notes thereto at September 30, 2015 and 2014 and for each of the three years ended September 30, 2015, included in our Annual Report on Form 10-K for the year ended September 30, 2015 which was filed with the Securities and Exchange Commission on November 16, 2015.

6



2. Segment Information
The table below provides certain financial information for each of our business segments.
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
(dollars in thousands)
 
2016
 
% (1)
 
2015
 
% (1)
 
2016
 
% (1)
 
2015
 
% (1)
Revenue:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Health Services
 
$
333,699

 
100
%
 
$
298,549

 
100
%
 
$
956,169

 
100
%
 
$
813,037

 
100
%
U.S. Federal Services
 
149,601

 
100
%
 
141,011

 
100
%
 
445,077

 
100
%
 
348,205

 
100
%
Human Services
 
133,794

 
100
%
 
132,741

 
100
%
 
379,023

 
100
%
 
359,896

 
100
%
Total
 
$
617,094

 
100
%
 
$
572,301

 
100
%
 
$
1,780,269

 
100
%
 
$
1,521,138

 
100
%
Gross profit:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Health Services
 
$
76,775

 
23.0
%
 
$
69,813

 
23.4
%
 
$
211,464

 
22.1
%
 
$
199,533

 
24.5
%
U.S. Federal Services
 
38,980

 
26.1
%
 
34,780

 
24.7
%
 
100,639

 
22.6
%
 
82,362

 
23.7
%
Human Services
 
35,624

 
26.6
%
 
39,205

 
29.5
%
 
97,158

 
25.6
%
 
105,515

 
29.3
%
Total
 
$
151,379

 
24.5
%
 
$
143,798

 
25.1
%
 
$
409,261

 
23.0
%
 
$
387,410

 
25.5
%
Selling, general and administrative expense:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Health Services
 
$
26,345

 
7.9
%
 
$
25,343

 
8.5
%
 
$
77,312

 
8.1
%
 
$
75,747

 
9.3
%
U.S. Federal Services
 
19,861

 
13.3
%
 
19,244

 
13.6
%
 
55,821

 
12.5
%
 
43,871

 
12.6
%
Human Services
 
21,373

 
16.0
%
 
22,402

 
16.9
%
 
64,006

 
16.9
%
 
58,624

 
16.3
%
Other (2)
 
2,127

 
NM

 
8

 
NM

 
2,777

 
NM

 
108

 
NM

Total
 
$
69,706

 
11.3
%
 
$
66,997

 
11.7
%
 
$
199,916

 
11.2
%
 
$
178,350

 
11.7
%
Operating income:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Health Services
 
$
50,430

 
15.1
%
 
$
44,470

 
14.9
%
 
$
134,152

 
14.0
%
 
$
123,786

 
15.2
%
U.S. Federal Services
 
19,119

 
12.8
%
 
15,536

 
11.0
%
 
44,818

 
10.1
%
 
38,491

 
11.1
%
Human Services
 
14,251

 
10.7
%
 
16,803

 
12.7
%
 
33,152

 
8.7
%
 
46,891

 
13.0
%
Amortization of intangible assets
 
(3,517
)
 
NM

 
(3,275
)
 
NM

 
(9,928
)
 
NM

 
(6,182
)
 
NM

Acquisition-related expenses (3)
 

 
NM

 
(2,459
)
 
NM

 
(575
)
 
NM

 
(4,573
)
 
NM

Gain on sale of a business
 
6,453

 
NM

 

 
NM

 
6,453

 
NM

 

 
NM

Other (2)
 
(2,127
)
 
NM

 
(8
)
 
NM

 
(2,777
)
 
NM

 
(108
)
 
NM

Total
 
$
84,609

 
13.7
%
 
$
71,067

 
12.4
%
 
$
205,295

 
11.5
%
 
$
198,305

 
13.0
%
(1)    Percentage of respective segment revenue. Percentages not considered meaningful are marked “NM.”
(2) 
During the three and nine months ended June 30, 2016, we incurred $2.1 million and $2.8 million, respectively, of legal costs related to a matter that occurred in fiscal year 2014, which is classified in Other SG&A expense.
(3)
Acquisition-related expenses are costs directly incurred from the purchases of Ascend Management Innovations, LLC (Ascend) and Assessments Australia in fiscal year 2016 and the purchase of Acentia in fiscal year 2015, as well as other transaction-related activity. Refer to Note 4 for details regarding the acquisitions.


7



3. Earnings Per Share
The weighted average number of shares outstanding used to compute earnings per share was as follows:
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
(shares in thousands)
 
2016
 
2015
 
2016
 
2015
Basic weighted average shares outstanding
 
65,766

 
65,901

 
65,836

 
65,900

Dilutive effect of employee stock options and unvested RSUs
 
428

 
1,197

 
364

 
1,103

Denominator for diluted earnings per share
 
66,194

 
67,098

 
66,200

 
67,003

No unvested RSUs were excluded from the calculation for any periods presented.
4. Business combinations and disposals
K-12 Education
On May 9, 2016, MAXIMUS, Inc. sold its K-12 Education business, which was previously part of the Company’s Human Services Segment. As a result of this transaction, we recorded a gain of approximately $6.5 million in the quarter ending June 30, 2016. The sale is still subject to a working capital adjustment. The K-12 Education business contributed revenue of $2.3 million and $3.5 million for the nine months ended June 30, 2016 and 2015, respectively. Our operating profit related to the business was not material. Included within our September 30, 2015 balance sheet are total assets of $1.5 million and total liabilities of $2.7 million related to the K-12 Education business.

Ascend Management Innovations, LLC
On February 29, 2016, MAXIMUS Health Services, Inc., a wholly-owned subsidiary of MAXIMUS, Inc. acquired 100% of the share capital of Ascend Management Innovations, LLC ("Ascend") for cash consideration of $44.0 million. Ascend is a provider of independent, specialized health assessments and data management tools to government agencies in the United States. We acquired Ascend to broaden our ability to help our existing government clients deal with the rising demand for long-term care services. This business has been integrated into our Health Services Segment. Management has estimated the fair value of intangible assets acquired as $22.3 million, with an average weighted life of 18 years, and the fair value of goodwill as $18.5 million, which is expected to be deductible for tax purposes. We believe that this goodwill represents the value of the assembled workforce of Ascend, as well as the enhanced knowledge and capabilities resulting from this business combination. At this time, the purchase price is still subject to a working capital evaluation, which may result in a change to the purchase price. We have not yet completed our evaluation of the fair value of all of the assets and liabilities acquired. We anticipate concluding our evaluation, excluding taxation balances, by September 30, 2016.

    

8



Our updated allocation of fair value for the Ascend acquisition, updated through June 30, 2016, is shown below.
(Amounts in thousands)
 
Purchase price allocation
Cash consideration, net of cash acquired
 
$
44,010

 
 
 
Billed and unbilled receivables
 
$
4,069

Other assets
 
407

Property and equipment and other assets
 
707

Intangible assets
 
22,300

Total identifiable assets acquired
 
27,483

Accounts payable and other liabilities
 
1,414

Deferred revenue
 
554

Total liabilities assumed
 
1,968

Net identifiable assets acquired
 
25,515

Goodwill
 
18,495

Net assets acquired
 
$
44,010


The valuation of the intangible assets acquired is summarized below:

(Amounts in thousands)
 
Useful life
 
Fair value
Customer relationships
 
19 years
 
$
20,400

Trade name
 
1 year
 
1,700

Technology-based intangible assets
 
8 years
 
200

Total intangible assets
 
 
 
$
22,300


Assessments Australia

On December 15, 2015, MAXIMUS acquired 100% of the share capital of three companies doing business as "Assessments Australia." We acquired Assessments Australia to expand our service offerings within Australia. The consideration is comprised of $2.6 million in cash and contingent consideration of $0.6 million to the sellers of Assessments Australia if sufficient contracts with a specific government agency are won by MAXIMUS prior to December 2022. We have performed a probability weighted assessment of this payment. Future changes in our assessment of this liability will be recorded through the Statement of Operations. This business has been integrated into our Human Services Segment. Management has estimated goodwill and intangible assets acquired as $2.9 million and $0.4 million, respectively, but the allocation of the fair value of the consideration has not been completed at this time and the purchase price is still subject to adjustments related to working capital and the finalization of our estimate of the fair value of contingent consideration. We anticipate concluding our evaluation, excluding taxation balances, by September 30, 2016. We believe that the goodwill represents the value of the assembled workforce of Assessments Australia, as well as the enhanced capabilities which the business will provide us.
The intangible assets acquired represent customer relationships. These are being amortized on a straight-line basis over 6 years.

9



Acentia
On April 1, 2015 (the “acquisition date”), we acquired 100% of the ownership interests of Acentia, LLC (“Acentia”) for cash consideration of $293.5 million.
Acentia provides system modernization, software development, program management and other information technology services and solutions to the U.S. Federal Government. We acquired Acentia, among other reasons, to expand our ability to provide complementary business services and offerings across government markets. The acquired assets and liabilities have been integrated into our U.S. Federal Services Segment.
We have completed the process of allocating the acquisition price to the fair value of the assets and liabilities of Acentia at the acquisition date. During fiscal year 2016, we completed our identification of tax assets and liabilities as of the acquisition date.
(dollars in thousands)
 
Updated through September 30, 2015
 
Adjustments
 
Updated through June 30, 2016
Estimated purchase consideration, net of cash acquired
 
$
293,504

 
$

 
$
293,504

Billed and unbilled receivables
 
$
35,333

 
$

 
$
35,333

Other assets
 
5,050

 
(1,959
)
 
3,091

Property and equipment
 
2,140

 

 
2,140

Intangible assets — customer relationships
 
69,900

 

 
69,900

Total identifiable assets acquired
 
112,423

 
(1,959
)
 
110,464

Accounts payable and other liabilities
 
32,426

 
(1,076
)
 
31,350

Deferred revenue
 
251

 

 
251

Capital lease obligations
 
567

 

 
567

Deferred tax liabilities
 

 
6,741

 
6,741

Total liabilities assumed
 
33,244

 
5,665

 
38,909

Net identifiable assets acquired
 
79,179

 
(7,624
)
 
71,555

Goodwill
 
214,325

 
7,624

 
221,949

Net assets acquired
 
$
293,504

 
$

 
$
293,504

The excess of the acquisition date consideration over the fair value of the net assets acquired was recorded as goodwill. We consider the goodwill to represent the value of the assembled workforce of Acentia, as well as the enhanced knowledge and capabilities resulting from this business combination. Approximately $175.0 million of the goodwill balance is anticipated to be deductible for tax purposes.
The intangible assets acquired represent customer relationships. These are being amortized on a straight-line basis over 14 years.
5. Goodwill
Changes in goodwill for the nine months ended June 30, 2016 are as follows:
(dollars in thousands)
 
Health Services
 
U.S. Federal Services
 
Human Services
 
Total
Balance as of September 30, 2015
 
$
113,427

 
$
220,524

 
$
42,351

 
$
376,302

Acquisition of Ascend
 
18,495

 

 

 
18,495

Acquisition of Assessments Australia
 

 

 
2,899

 
2,899

Adjustment to goodwill acquired with Acentia
 

 
7,624

 

 
7,624

Disposal of K-12 Education Business
 

 

 
(224
)
 
(224
)
Foreign currency translation
 
(6,600
)
 

 
433

 
(6,167
)
Balance as of June 30, 2016
 
$
125,322

 
$
228,148

 
$
45,459

 
$
398,929



10



6. Supplemental disclosures
During the nine months ended June 30, 2016 and 2015, we made income tax payments of $79.5 million and $47.8 million, respectively.
At June 30, 2016, we held cash and cash equivalents of $50.6 million. Approximately $46.9 million of these funds are denominated in foreign currencies and held in jurisdictions outside the United States and we have no requirement or intent at this time to transfer the funds to the United States. Declines in the value of foreign currencies with respect to the United States Dollar, notably the Australian Dollar and British Pound, resulted in a decline in net assets of $12.0 million in the nine months ended June 30, 2016, including a $3.2 million decline in our cash and cash equivalents balance and a $6.2 million decline in our goodwill balance. These declines were recorded as losses in our Statement of Comprehensive Income.
Under a resolution adopted in August 2015, the Board of Directors authorized the repurchase, at management's discretion, of up to an aggregate of $200 million of our common stock. This resolution superseded similar authorizations from November 2011 and June 2014. The resolution also authorizes the use of option exercise proceeds for the repurchase of our common stock. During the nine months ended June 30, 2016 and 2015, we repurchased 0.6 million and 0.8 million common shares at a cost of $31.3 million and $30.6 million, respectively. At June 30, 2016, $137.5 million remained available for future stock repurchases.
Our deferred compensation plan assets include $10.9 million invested in mutual funds that have quoted prices in active markets. These assets are recorded at fair value with changes in fair value being recorded in the Statement of Operations.
In fiscal 2016, we granted 0.5 million RSUs to our employees. The majority of these awards will vest ratably over five years.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other amounts included within current assets and liabilities that meet the definition of a financial instrument are shown at values equivalent to fair value due to the short-term nature of these items. Our accounts receivable balance includes both amounts invoiced and those where amounts are ready to be invoiced and the funds are collectible within standard invoice terms.
7. Debt
On March 9, 2015, we entered into an amendment to our unsecured credit agreement (the “Credit Agreement”). The Credit Agreement, as amended, provides for a revolving line of credit up to $400 million that may be used for revolving loans, swingline loans (subject to a sublimit of $5 million), and letters of credit (subject to a sublimit of $30 million). The line of credit is available for general corporate purposes, including working capital, capital expenditures and acquisitions. The arrangement will terminate on March 9, 2020, at which time all outstanding borrowings must be repaid.
The Credit Agreement permits us to make borrowings in currencies other than the United States Dollar. At June 30, 2016, we have U.S. Dollar borrowings of $207.5 million and Canadian Dollar borrowings of $2.5 million (3.3 million Canadian Dollars). In addition to borrowings under the Credit Facility, we have an outstanding loan of $0.8 million (1.1 million Canadian Dollars) with the Atlantic Innovation Fund of Canada. There is no interest charge on this loan. The Atlantic Innovation Fund loan is repayable over 24 remaining quarterly installments.
At June 30, 2016, we held three letters of credit under the Credit Agreement totaling $5.2 million. Each of these letters of credit may be called by vendors or customers in the event that the Company defaults under the terms of a contract, the probability of which we believe is remote. In addition, two letters of credit totaling $3.0 million, secured with restricted cash balances, are held with another financial institution to cover similar obligations to customers.
The Credit Agreement requires us to comply with certain financial covenants and other covenants including a maximum total leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all covenants as of June 30, 2016. Our obligations under the Credit Agreement are guaranteed by our material domestic subsidiaries of the Company. The Credit Facility is currently unsecured. In the event that our total leverage ratio, as defined in the Credit Agreement, exceeds 2.5:1.0, the Credit Agreement will become secured by the assets of the parent company and certain of its subsidiaries. There are no restrictions on our dividend payments if our leverage ratio is less than 2.5:1.0. At June 30, 2016, our total leverage ratio was less than 1.0:1.0. Accordingly, we do not believe that the provisions of the Credit Agreement represent a significant restriction on our ability to pay dividends or to the successful operation of the business.
During the nine months ended June 30, 2016 and 2015, we made interest payments of $2.9 million and $0.5 million, respectively. We utilize interest swap agreements to manage our exposure against interest rate fluctuations. Approximately $69 million of our outstanding debt balance was covered by these instruments at June 30, 2016.

11



8. Recent accounting pronouncements
In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. In addition, the FASB has issued additional updates covering technical items and changing the date of adoption. This new standard will change the manner in which we evaluate revenue recognition for all contracts with customers, although the effect of the changes on revenue recognition will vary from contract to contract. We will adopt this standard during our 2019 fiscal year. The standard permits a retrospective or cumulative effect transition method. We anticipate that we will adopt the new standard using the retrospective method. We are continuing to evaluate the likely effects on our business.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations, Simplifying the Accounting for Measurement-Period Adjustments. The new standard eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. This standard would be effective during our 2017 fiscal year. We have elected to early adopt this standard in our current fiscal year.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard will change the manner in which we will present our leasing arrangements. This standard would be effective during our 2020 fiscal year, although early adoption is permitted. We are evaluating the likely effects on our business.
In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation, Improvements to Employee Share-Based Payment Accounting. The new standard will change the manner in which we will present the tax benefit on the vesting of our restricted stock units (RSUs) and stock options. In addition, the company will be allowed more flexibility in net settling RSUs as they vest and in accounting for the forfeiture of RSUs as we recognize their expense. This standard would be effective during our 2018 fiscal year, although early adoption is permitted. We are evaluating the likely effects on our business.
9. Subsequent event
On July 8, 2016, our Board of Directors declared a quarterly cash dividend of $0.045 for each share of our common stock outstanding. The dividend is payable on August 31, 2016 to shareholders of record on August 15, 2016.

12



Item 2.                   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, our Consolidated Financial Statements and related Notes included both herein and in our Annual Report on Form 10-K for the year ended September 30, 2015, which was filed with the Securities and Exchange Commission on November 16, 2015.
Business Overview
We provide business process services (BPS) to government health and human services agencies under our mission of Helping Government Serve the People®. We are one of the largest pure-play health and human services BPS providers to governments in the United States, the United Kingdom, Australia, Canada and Saudi Arabia. We use our experience, business process management expertise and advanced technological solutions to help government agencies run efficient and cost-effective programs, improve program accountability and outcomes, and enhance the quality of services provided to program beneficiaries.
Over the past five years, our business has grown significantly. We believe this growth has been driven by economic and demographic factors, such as aging populations and increased demand for health and human services and the need for governments to operate programs effectively and efficiently. This growth has also been driven by reform efforts in the United States, including the Affordable Care Act (ACA), as well as internationally with various programs in the United Kingdom and Australia.
We believe that governments will continue to seek opportunities to enhance existing processes or address new challenges using companies such as MAXIMUS. We believe that a combination of our innovative solutions, deep subject matter expertise, stringent adherence to our Standards of Business Conduct and Ethics, robust financial performance and global experience gives existing and future customers the confidence that MAXIMUS can reliably operate their high-profile public health and human services programs.
We have completed four acquisitions since March 2015:
In April 2015, we acquired 100% of Acentia, LLC (Acentia), a provider of services to the U.S. Federal Government. This business has been integrated into our U.S. Federal Services Segment.
In April 2015, we acquired 70% of Remploy, a business providing services to the United Kingdom government. This business has been integrated into our Human Services Segment.
In December 2015, we acquired 100% of the share capital of three companies doing business as "Assessments Australia." This business has been integrated into our Human Services Segment.
In February 2016, we acquired 100% of the share capital of Ascend Management Innovations, LLC (Ascend), which has been integrated into our Health Services Segment.
We believe that all four of these acquisitions will allow us to expand our service offerings.
Financial Overview
Our results for the three and nine months ended June 30, 2016 have been driven by the following:
Organic growth, notably within our Health Services Segment, driven by the expansion of existing contracts and the benefit from the Health Assessment and Advisory (HAAS) contract, which commenced in March 2015;
Our acquisitions, which have increased revenue, profit, intangible asset amortization and interest expense; and
The detrimental effect caused by the strength of the United States Dollar in comparison to the other currencies we utilize.
In addition, we have recorded a gain of $6.5 million related to the sale of our K-12 Education business, which was completed in May 2016. This software-oriented, non-core business was part of the Human Services Segment.

13



Results of Operations
Consolidated
The following table sets forth, for the periods indicated, selected statements of operations data:
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
(dollars in thousands, except per share data)
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
617,094

 
$
572,301

 
$
1,780,269

 
$
1,521,138

Cost of revenue
 
465,715

 
428,503

 
1,371,008

 
1,133,728

Gross profit
 
151,379

 
143,798

 
409,261

 
387,410

Gross profit percentage
 
24.5
%
 
25.1
%
 
23.0
%
 
25.5
%
Selling, general and administrative expenses
 
69,706

 
66,997

 
199,916

 
178,350

Selling, general and administrative expense as a percentage of revenue
 
11.3
%
 
11.7
%
 
11.2
%
 
11.7
%
Amortization of intangible assets
 
3,517

 
3,275

 
9,928

 
6,182

Acquisition-related expenses
 

 
2,459

 
575

 
4,573

Gain on sale of a business
 
6,453

 

 
6,453

 

Operating income
 
84,609

 
71,067

 
205,295

 
198,305

Operating margin
 
13.7
%
 
12.4
%
 
11.5
%
 
13.0
%
Interest expense
 
1,029

 
689

 
3,291

 
689

Other income, net
 
62

 
8

 
3,402

 
1,128

Income before income taxes
 
83,642

 
70,386

 
205,406

 
198,744

Provision for income taxes
 
30,892

 
28,127

 
76,433

 
75,108

Effective tax rate
 
36.9
%
 
40.0
%
 
37.2
%
 
37.8
%
Net income
 
52,750

 
42,259

 
128,973

 
123,636

Income attributable to noncontrolling interests
 
525

 
593

 
1,354

 
1,302

Net income attributable to MAXIMUS
 
$
52,225

 
$
41,666

 
$
127,619

 
$
122,334

Basic earnings per share attributable to MAXIMUS
 
$
0.79

 
$
0.63

 
$
1.94

 
$
1.86

Diluted earnings per share attributable to MAXIMUS
 
$
0.79

 
$
0.62

 
$
1.93

 
$
1.83

As our business segments have different factors driving revenue growth and profitability, the sections that follow cover these segments in greater detail.
Changes in revenue, cost of revenue and gross profit for the three and nine months ended June 30, 2016 are summarized below.
 
 
Revenue
 
Cost of Revenue
 
Gross Profit
 (dollars in thousands)
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
Balance for the three month period in fiscal year 2015
 
$
572,301

 
 

 
$
428,503

 
 

 
$
143,798

 
 

Organic growth
 
45,343

 
7.9
 %
 
39,872

 
9.3
 %
 
5,471

 
3.8
 %
Acquired growth
 
9,327

 
1.6
 %
 
5,667

 
1.3
 %
 
3,660

 
2.5
 %
Currency effect compared to the prior period
 
(9,877
)
 
(1.7
)%
 
(8,327
)
 
(1.9
)%
 
(1,550
)
 
(1.1
)%
Balance for the three month period in fiscal year 2016
 
$
617,094

 
7.8
 %
 
$
465,715

 
8.7
 %
 
$
151,379

 
5.3
 %

14



 
 
Revenue
 
Cost of Revenue
 
Gross Profit
(dollars in thousands)
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
Balance for the nine month period in fiscal year 2015
 
$
1,521,138

 
 

 
$
1,133,728

 
 

 
$
387,410

 
 

Organic growth
 
145,427

 
9.6
 %
 
155,380

 
13.7
 %
 
(9,953
)
 
(2.6
)%
Acquired growth
 
149,376

 
9.8
 %
 
111,692

 
9.9
 %
 
37,684

 
9.7
 %
Currency effect compared to the prior period
 
(35,672
)
 
(2.3
)%
 
(29,792
)
 
(2.6
)%
 
(5,880
)
 
(1.5
)%
Balance for the nine month period in fiscal year 2016
 
$
1,780,269

 
17.0
 %
 
$
1,371,008

 
20.9
 %
 
$
409,261

 
5.6
 %
Revenue for the three and nine month periods ended June 30, 2016 increased 7.8% and 17%, respectively, compared to the same periods in fiscal year 2015.
Organic growth was 7.9% and 9.6% of this growth, respectively. It was principally driven by contracts in our Health Services Segment. Much of our organic growth is from contracts in the ramp-up phase, including the Health Assessment Advisory Service and jobactive contracts, and expansion on existing contracts.
Revenue for the three month period benefited from the recent acquisitions of Ascend and Assessments Australia. Revenue for the nine month period included the benefit of a full nine months of results from Acentia and Remploy, which were acquired in April 2015.
The United States Dollar has continued to gain in strength over the currencies used by our foreign subsidiaries. Accordingly, we have recorded lower revenues and profits in the current fiscal year than we would have done if the prior year exchange rates had prevailed. Although we cannot accurately predict the effects of foreign exchange fluctuations, the recent decline in the British Pound makes it likely that revenue and profits will continue to be adversely impacted during the fourth fiscal quarter of 2016.
Cost of revenue for the three and nine month periods ended June 30, 2016 increased 8.7% and 21%, respectively, compared to the same periods in fiscal year 2015. Cost of revenue consists of direct costs related to labor, subcontractor labor, outside vendors, rent and other direct costs. The majority of costs are labor-related and are typically correlated with revenue. Costs in our Health and Human Services Segments were driven higher by projects in ramp-up, where we incur costs in preparing the contract and do not have the efficiency from a contract running at fully capacity with an experienced workforce.
Gross profit for the three and nine month periods ended June 30, 2016 increased 5.3% and 5.6%, respectively, compared to the same periods in fiscal year 2015. Our gross profit margin for these periods was 24.5% and 23.0%, both decreasing from 25.1% and 25.5% in the prior fiscal year.
Selling, general and administrative expense (SG&A) for the three month and nine month periods ended June 30, 2016 increased 4.0% and 12% compared to the same periods in fiscal year 2015. 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 which are not client-facing, or at a corporate level. Corporate costs are allocated to segments on a consistent, rational basis. Fluctuations in our SG&A are driven by changes in our administrative cost base, which is not directly driven by changes in our revenue. SG&A cost increases have been driven by:
Our acquisitions, which resulted in a necessary increase to our overall administrative structure;
Expenses of $2.1 million and $2.8 million, respectively, for the three and nine month periods ended June 30, 2016 of legal costs related to a matter which occurred in fiscal year 2014.
Our SG&A costs as a percentage of revenue have declined, reflecting growing efficiencies as our business expands.
As noted above, we have made four acquisitions during fiscal years 2015 and 2016. These acquisitions have driven the following charges in our statements of operations:
We have incurred costs related to the acquisition of these entities; typically legal fees, third-party due diligence and costs related to the valuation of intangible assets. Expenses of $0.6 million in 2016 relate principally to Ascend; those of $4.6 million in 2015 relate principally to Acentia.

15



The acquisitions of Acentia and Ascend were funded using our credit facility, which we had previously not utilized to any significant effect. Accordingly, our interest expense has increased year-over-year. At present, the interest rate on our borrowings is approximately 1.6%.
Our acquisitions of Acentia and Ascend included the addition of $69.9 million and $22.3 million, respectively, of intangible assets. The other acquisitions also generated intangible assets. Our charge related to the amortization of intangible assets has increased by approximately $2.0 million per fiscal quarter.
On May 9, 2016, we sold our K-12 Education business, which was previously part of the Company’s Human Services Segment. As a result of this transaction, we recorded a gain of approximately $6.5 million in the quarter ending June 30, 2016. The sale is still subject to a working capital adjustment. The K-12 Education business contributed revenue of $2.3 million and $3.5 million for the nine months ended June 30, 2016 and 2015, respectively.
Our other income is typically provided through interest income on our overseas cash balances, which have declined with the acquisitions of Remploy and Assessments Australia. In the three and nine months ended June 30, 2016, we received a short-term benefit from a favorable foreign exchange fluctuation on an inter-company transaction. This transaction was settled at the beginning of the third quarter of fiscal year 2016 and future benefits from other income are not expected to be significant.
Our year-to-date effective tax rate for the 2016 fiscal year is 37.2%, an decrease over the prior year period. We are receiving the benefit of improvements in profits from jurisdictions with lower tax rates than those of the United States. We anticipate that our full year tax rate will be between 37% and 39%, with a bias towards the lower end of this range.
Health Services Segment
The Health Services Segment provides a variety of business process services, as well as related consulting services for state, provincial and national government programs. The majority of our business process services work is in program administration, with the balance in appeals and assessments work. These services support programs like Medicaid, the Children's Health Insurance Program and the Affordable Care Act in the U.S.; Health Insurance BC (British Columbia) in Canada; and the Health Assessment Advisory Service (HAAS) and Fit for Work Service in the U.K.
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
(dollars in thousands)
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
333,699

 
$
298,549

 
$
956,169

 
$
813,037

Cost of revenue
 
256,924

 
228,736

 
744,705

 
613,504

Gross profit
 
76,775

 
69,813

 
211,464

 
199,533

Operating income
 
50,430

 
44,470

 
134,152

 
123,786

Gross profit percentage
 
23.0
%
 
23.4
%
 
22.1
%
 
24.5
%
Operating margin percentage
 
15.1
%
 
14.9
%
 
14.0
%
 
15.2
%
Changes in revenue, cost of revenue and gross profit for the three months ended June 30, 2016 are summarized below.
 
 
Revenue
 
Cost of Revenue
 
Gross Profit
 (dollars in thousands)
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
Balance for respective period in fiscal year 2015
 
$
298,549

 
 

 
$
228,736

 
 

 
$
69,813

 
 

Organic growth
 
35,352

 
11.8
 %
 
29,294

 
12.8
 %
 
6,058

 
8.7
 %
Acquired growth
 
5,704

 
1.9
 %
 
4,011

 
1.8
 %
 
1,693

 
2.4
 %
Currency effect compared to the prior period
 
(5,906
)
 
(2.0
)%
 
(5,117
)
 
(2.2
)%
 
(789
)
 
(1.1
)%
Balance for respective period in fiscal year 2016
 
$
333,699

 
11.8
 %
 
$
256,924

 
12.3
 %
 
$
76,775

 
10.0
 %

16



Revenue for the three month period ended June 30, 2016 increased by 12% compared to the same period in fiscal year 2015. Cost of revenue also increased by 12%.
Increases in organic revenue and profit were driven by expansions across a number of existing contracts, including the Health Assessment Advisory Service contract. In addition, growth was also driven by expansion on an existing contract in New York where we serve a number of healthcare programs.
The United Kingdom Fit For Work contract commenced in fiscal year 2015. This contract has incurred significant costs but anticipated revenue, which was expected to be driven by increased volumes, has not materialized. Along with our client, we are exploring all options including right-sizing the contract and possible termination. Until this occurs, we have taken steps to mitigate losses through cost management and changes in processes.
Our organic revenue and cost growth has been reduced by declines in the value of the British Pound against the United States Dollar.
Changes in revenue, cost of revenue and gross profit for the nine months ended June 30, 2016 are summarized below.
 
 
Revenue
 
Cost of Revenue
 
Gross Profit
(dollars in thousands)
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
Balance for respective period in fiscal year 2015
 
$
813,037

 
 

 
$
613,504

 
 

 
$
199,533

 
 

Organic growth
 
152,468

 
18.8
 %
 
139,994

 
22.8
 %
 
12,474

 
6.3
 %
Acquired growth
 
7,794

 
1.0
 %
 
5,625

 
0.9
 %
 
2,169

 
1.1
 %
Currency effect compared to the prior period
 
(17,130
)
 
(2.1
)%
 
(14,418
)
 
(2.4
)%
 
(2,712
)
 
(1.4
)%
Balance for respective period in fiscal year 2016
 
$
956,169

 
17.6
 %
 
$
744,705

 
21.4
 %
 
$
211,464

 
6.0
 %
For the nine months ended June 30, 2016, revenue and costs of service have increased by 18% and 21%, respectively, to the comparative period in fiscal year 2015. The organic growth in both revenue and costs has been driven by the benefits of nine months of the HAAS contract, which commenced in March 2015, as well as the expansion of existing contracts, notably our contract in New York.
Due to the United Kingdom-based businesses in this segment, we expect that we will see our results in the fourth fiscal quarter further affected by the declines in the value of the British Pound against the United States Dollar. Notwithstanding this, we anticipate that results for our Health Services Segment in the final fiscal quarter of the year will be consistent with the three month period ended June 30, 2016.
U.S. Federal Services Segment
The U.S. Federal Services Segment provides business process solutions for various civilian U.S. Federal programs. Our work is split between program administration, assessments and appeals and technology solutions.
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
(dollars in thousands)
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
149,601

 
$
141,011

 
$
445,077

 
$
348,205

Cost of revenue
 
110,621

 
106,231

 
344,438

 
265,843

Gross profit
 
38,980

 
34,780

 
100,639

 
82,362

Operating income
 
19,119

 
15,536

 
44,818

 
38,491

Gross profit percentage
 
26.1
%
 
24.7
%
 
22.6
%
 
23.7
%
Operating margin percentage
 
12.8
%
 
11.0
%
 
10.1
%
 
11.1
%

17



Revenue and costs of revenue for the three month period ended June 30, 2016 increased 6.1% and 4.1%, respectively, compared to the same period in fiscal year 2015. This has principally been driven by:
The ongoing expansion of our contract with the Department of Education and a large health contract where we are a subcontractor; and
Approximately $3.5 million of benefits to revenue and profit related to various contracts much of which are not expected to repeat.
Changes in revenue, cost of revenue and gross profit for the nine months ended June 30, 2016 are summarized below.
 
 
Revenue
 
Cost of Revenue
 
Gross Profit
(dollars in thousands)
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
Balance for respective period in fiscal year 2015
 
$
348,205

 
 

 
$
265,843

 
 

 
$
82,362

 
 

Organic growth
 
(7,415
)
 
(2.1
)%
 
(2,260
)
 
(0.9
)%
 
(5,155
)
 
(6.3
)%
Acquired growth
 
104,287

 
29.9
 %
 
80,855

 
30.4
 %
 
23,432

 
28.5
 %
Balance for respective period in fiscal year 2016
 
$
445,077

 
27.8
 %
 
$
344,438

 
29.6
 %
 
$
100,639

 
22.2
 %
For the nine months ended June 30, 2016, revenue and costs of service have increased by 28% and 30%, respectively, to the comparative period in fiscal year 2015. These increases have been driven by the Acentia acquisition and the new federal subcontract, partially offset by the closure of the Boise customer contact center and two contracts which were lost in our appeals and assessments work.
Human Services Segment
The Human Services Segment provides national, state and county human services agencies with a variety of business process services and related consulting services. The majority of our work is in the welfare-to-work field, supplemented by child support and consulting and other specialist programs. The majority of our revenue in this Segment is earned in foreign jurisdictions.
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
(dollars in thousands)
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
133,794

 
$
132,741

 
$
379,023

 
$
359,896

Cost of revenue
 
98,170

 
93,536

 
281,865

 
254,381

Gross profit
 
35,624

 
39,205

 
97,158

 
105,515

Operating income
 
14,251

 
16,803

 
33,152

 
46,891

Gross profit percentage
 
26.6
%
 
29.5
%
 
25.6
%
 
29.3
%
Operating margin percentage
 
10.7
%
 
12.7
%
 
8.7
%
 
13.0
%
Changes in revenue, cost of revenue and gross profit for the three months ended June 30, 2016 are summarized below.
 
 
Revenue
 
Cost of Revenue
 
Gross Profit
 (dollars in thousands)
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
Balance for respective period in fiscal year 2015
 
$
132,741

 
 

 
$
93,536

 
 

 
$
39,205

 
 

Organic growth
 
1,400

 
1.1
 %
 
6,188

 
6.6
 %
 
(4,788
)
 
(12.2
)%
Acquired growth
 
3,623

 
2.7
 %
 
1,656

 
1.8
 %
 
1,967

 
5.0
 %
Currency effect compared to the prior period
 
(3,970
)
 
(3.0
)%
 
(3,210
)
 
(3.4
)%
 
(760
)
 
(1.9
)%
Balance for respective period in fiscal year 2016
 
$
133,794

 
0.8
 %
 
$
98,170

 
5.0
 %
 
$
35,624

 
(9.1
)%

18



Revenue for the three month period ended June 30, 2016 increased 0.8% compared to the same period in fiscal year 2015. Costs of revenue increased by 5.0%, resulting in a decline in the gross profit margin.
The jobactive program in Australia has driven growth as the contract has expanded, but this contract is currently less profitable than its predecessor contract which was in place in fiscal year 2015.
The Work Programme contract in the United Kingdom has declined, as anticipated, due to lower volumes.
This growth has been tempered by foreign exchange rate fluctuations, most of which was caused by our Australian and British operations.
Changes in revenue, cost of revenue and gross profit for the nine months ended June 30, 2016 are summarized below.    
 
 
Revenue
 
Cost of Revenue
 
Gross Profit
(dollars in thousands)
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
Balance for respective period in fiscal year 2015
 
$
359,896

 
 

 
$
254,381

 
 

 
$
105,515

 
 

Organic growth
 
373

 
0.1
 %
 
17,646

 
6.9
 %
 
(17,273
)
 
(16.4
)%
Acquired growth