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 March 31, 2017
 
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, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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)
 
 
 
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
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 May 1, 2017 there were 64,822,131 shares of the registrant’s common stock (no par value) outstanding.
 




MAXIMUS, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2017
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; 
our failure to successfully bid for and accurately price contracts to generate our desired profit; 
difficulties in integrating acquired businesses; 
our ability to maintain technology systems and otherwise protect confidential or protected information; 
our ability to attract and retain executive officers, senior managers and other qualified personnel to execute our business;
our ability to manage contract expenditures incurred before receiving related contract payments;
the ability of government customers to terminate contracts on short notice, with or without cause; 
our ability to maintain relationships with key government entities from whom a substantial portion of our revenue is derived; 
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; 
the costs and outcome of litigation; 
matters related to business we 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, 2016, which was filed with the Securities and Exchange Commission on November 21, 2016.
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 March 31,
 
Six Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
Revenue
$
622,047

 
$
606,453

 
$
1,229,611

 
$
1,163,175

Cost of revenue
469,730

 
458,786

 
932,476

 
905,293

Gross profit
152,317

 
147,667

 
297,135

 
257,882

Selling, general and administrative expenses
68,596

 
65,976

 
133,994

 
130,210

Amortization of intangible assets
3,386

 
3,262

 
6,788

 
6,411

Restructuring costs

 

 
2,242

 

Acquisition-related expenses

 
529

 

 
575

Operating income
80,335

 
77,900

 
154,111

 
120,686

Interest expense
744

 
1,273

 
1,593

 
2,262

Other income, net
417

 
2,209

 
680

 
3,340

Income before income taxes
80,008

 
78,836

 
153,198

 
121,764

Provision for income taxes
26,911

 
29,495

 
53,772

 
45,541

Net income
53,097

 
49,341

 
99,426

 
76,223

Income attributable to noncontrolling interests
582

 
556

 
247

 
829

Net income attributable to MAXIMUS
$
52,515

 
$
48,785

 
$
99,179

 
$
75,394

Basic earnings per share attributable to MAXIMUS
$
0.80

 
$
0.74

 
$
1.51

 
$
1.14

Diluted earnings per share attributable to MAXIMUS
$
0.80

 
$
0.74

 
$
1.50

 
$
1.14

Dividends paid per share
$
0.045

 
$
0.045

 
$
0.09

 
$
0.09

Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
65,549

 
65,760

 
65,669

 
65,872

Diluted
65,947

 
66,079

 
65,989

 
66,196

See notes to unaudited consolidated financial statements.

1



MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
Net income
$
53,097

 
$
49,341

 
$
99,426

 
$
76,223

Foreign currency translation adjustments
5,623

 
(466
)
 
(4,071
)
 
(2,625
)
Interest rate hedge, net of income taxes of $5, $21, $(3) and $(4)
(7
)
 
(31
)
 
5

 
6

Comprehensive income
58,713

 
48,844

 
95,360

 
73,604

Comprehensive income attributable to noncontrolling interests
582

 
556

 
247

 
829

Comprehensive income attributable to MAXIMUS
$
58,131

 
$
48,288

 
$
95,113

 
$
72,775

See notes to unaudited consolidated financial statements.
 

2



MAXIMUS, Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
 
 
March 31,
2017
 
September 30,
2016
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
94,862

 
$
66,199

Accounts receivable — billed and billable, net of reserves of $4,163 and $4,226
432,255

 
444,357

Accounts receivable — unbilled
39,878

 
36,433

Income taxes receivable
524

 
17,273

Prepaid expenses and other current assets
50,442

 
56,718

Total current assets
617,961

 
620,980

Property and equipment, net
112,882

 
131,569

Capitalized software, net
27,564

 
30,139

Goodwill
395,011

 
397,558

Intangible assets, net
101,645

 
109,027

Deferred contract costs, net
16,917

 
18,182

Deferred compensation plan assets
25,805

 
23,307

Deferred income taxes
8,791

 
8,644

Other assets
9,910

 
9,413

Total assets
$
1,316,486

 
$
1,348,819

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
130,537

 
$
150,711

Accrued compensation and benefits
80,636

 
96,480

Deferred revenue
63,533

 
73,692

Income taxes payable
11,870

 
7,979

Long-term debt, current portion
217

 
277

Other liabilities
11,582

 
11,617

Total current liabilities
298,375

 
340,756

Deferred revenue, less current portion
32,902

 
40,007

Deferred income taxes
10,550

 
16,813

Long-term debt
115,559

 
165,338

Deferred compensation plan liabilities, less current portion
26,950

 
24,012

Other liabilities
8,740

 
8,753

Total liabilities
493,076

 
595,679

Shareholders’ equity:
 

 
 

Common stock, no par value; 100,000 shares authorized; 64,822 and 65,223 shares issued and outstanding at March 31, 2017 and September 30, 2016, at stated amount, respectively
472,075

 
461,679

Accumulated other comprehensive loss
(40,235
)
 
(36,169
)
Retained earnings
387,881

 
323,571

Total MAXIMUS shareholders’ equity
819,721

 
749,081

Noncontrolling interests
3,689

 
4,059

Total equity
823,410

 
753,140

Total liabilities and equity
$
1,316,486

 
$
1,348,819

 
See notes to unaudited consolidated financial statements.

3



MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
Six Months Ended March 31,
 
2017
 
2016
Cash flows from operations:
 

 
 

Net income
$
99,426

 
$
76,223

Adjustments to reconcile net income to cash flows from operations:
 

 
 

Depreciation and amortization of property, equipment and capitalized software
29,967

 
25,859

Amortization of intangible assets
6,788

 
6,411

Deferred income taxes
(5,721
)
 
(327
)
Stock compensation expense
10,234

 
9,151

Change in assets and liabilities:
 

 
 

Accounts receivable — billed and billable
10,030

 
(35,051
)
Accounts receivable — unbilled
(3,445
)
 
(4,851
)
Prepaid expenses and other current assets
7,512

 
5,443

Deferred contract costs
998

 
810

Accounts payable and accrued liabilities
(17,719
)
 
(19,949
)
Accrued compensation and benefits
(6,293
)
 
(14,211
)
Deferred revenue
(15,853
)
 
(2,009
)
Income taxes
20,715

 
(22,597
)
Other assets and liabilities
209

 
(3,038
)
Cash flows from operations
136,848

 
21,864

Cash flows from investing activities:
 

 
 

Purchases of property and equipment and capitalized software costs
(12,975
)
 
(19,836
)
Acquisition of businesses, net of cash acquired

 
(41,812
)
Proceeds from the sale of a business
385

 

Other
218

 
210

Cash used in investing activities
(12,372
)
 
(61,438
)
Cash flows from financing activities:
 

 
 

Cash dividends paid to MAXIMUS shareholders
(5,837
)
 
(5,860
)
Repurchases of common stock
(28,858
)
 
(31,138
)
Tax withholding related to RSU vesting
(9,267
)
 
(11,597
)
Borrowings under credit facility
135,000

 
130,563

Repayment of credit facility and other long-term debt
(184,828
)
 
(55,219
)
Other
(1,145
)
 

Cash (used in)/provided by financing activities
(94,935
)
 
26,749

Effect of exchange rate changes on cash and cash equivalents
(878
)
 
(1,064
)
Net increase/(decrease) in cash and cash equivalents
28,663

 
(13,889
)
Cash and cash equivalents, beginning of period
66,199

 
74,672

Cash and cash equivalents, end of period
$
94,862

 
$
60,783

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, 2016
65,223

 
$
461,679

 
$
(36,169
)
 
$
323,571

 
$
4,059

 
$
753,140

Net income

 

 

 
99,179

 
247

 
99,426

Foreign currency translation

 

 
(4,071
)
 

 

 
(4,071
)
Interest rate hedge, net of income taxes

 

 
5

 

 

 
5

Cash dividends

 

 

 
(5,837
)
 
(617
)
 
(6,454
)
Dividends on RSUs

 
174

 

 
(174
)
 

 

Repurchases of common stock
(558
)
 

 

 
(28,858
)
 

 
(28,858
)
Stock compensation expense

 
10,234

 

 

 

 
10,234

Tax withholding related to RSU vesting

 
(12
)
 

 

 

 
(12
)
RSUs vested
157

 

 

 

 

 

Balance at March 31, 2017
64,822

 
$
472,075

 
$
(40,235
)
 
$
387,881

 
$
3,689

 
$
823,410

 
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

 

 

 
75,394

 
829

 
76,223

Foreign currency translation

 

 
(2,625
)
 

 

 
(2,625
)
Interest rate hedge, net of income taxes

 

 
6

 

 

 
6

Cash dividends

 

 

 
(5,860
)
 

 
(5,860
)
Dividends on RSUs

 
172

 

 
(172
)
 

 

Repurchases of common stock
(543
)
 

 

 
(29,139
)
 

 
(29,139
)
Stock compensation expense

 
9,151

 

 

 

 
9,151

Tax withholding related to RSU vesting

 
(14
)
 

 

 

 
(14
)
RSUs vested
12

 

 

 

 

 

Balance at March 31, 2016
64,906

 
$
455,441

 
$
(24,984
)
 
$
228,834

 
$
4,150

 
$
663,441

See notes to unaudited consolidated financial statements.

5



MAXIMUS, Inc.
Notes to Unaudited Consolidated Financial Statements
For the Three and Six Months Ended March 31, 2017 and 2016

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. As permitted by these instructions, 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 six months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet at September 30, 2016 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.
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, 2016 and 2015 and for each of the three years ended September 30, 2016, included in our Annual Report on Form 10-K for the year ended September 30, 2016 which was filed with the Securities and Exchange Commission on November 21, 2016.

6



2. Segment Information
The table below provides certain financial information for each of our business segments.
 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
(dollars in thousands)
 
2017
 
% (1)
 
2016
 
% (1)
 
2017
 
% (1)
 
2016
 
% (1)
Revenue:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Health Services
 
$
348,994

 
100
%
 
$
330,567

 
100
%
 
$
689,723

 
100
%
 
$
622,470

 
100
%
U.S. Federal Services
 
145,370

 
100
%
 
150,191

 
100
%
 
286,668

 
100
%
 
295,476

 
100
%
Human Services
 
127,683

 
100
%
 
125,695

 
100
%
 
253,220

 
100
%
 
245,229

 
100
%
Total
 
$
622,047

 
100
%
 
$
606,453

 
100
%
 
$
1,229,611

 
100
%
 
$
1,163,175

 
100
%
Gross profit:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Health Services
 
$
86,454

 
24.8
%
 
$
82,717

 
25.0
%
 
$
164,688

 
23.9
%
 
$
134,689

 
21.6
%
U.S. Federal Services
 
36,571

 
25.2
%
 
33,421

 
22.3
%
 
74,147

 
25.9
%
 
61,659

 
20.9
%
Human Services
 
29,292

 
22.9
%
 
31,529

 
25.1
%
 
58,300

 
23.0
%
 
61,534

 
25.1
%
Total
 
$
152,317

 
24.5
%
 
$
147,667

 
24.3
%
 
$
297,135

 
24.2
%
 
$
257,882

 
22.2
%
Selling, general and administrative 
expense:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Health Services
 
$
29,914

 
8.6
%
 
$
25,803

 
7.8
%
 
$
58,021

 
8.4
%
 
$
50,967

 
8.2
%
U.S. Federal Services
 
18,927

 
13.0
%
 
18,438

 
12.3
%
 
38,622

 
13.5
%
 
35,960

 
12.2
%
Human Services
 
19,663

 
15.4
%
 
21,735

 
17.3
%
 
36,902

 
14.6
%
 
42,633

 
17.4
%
Other (4)
 
92

 
NM

 

 
NM

 
449

 
NM

 
650

 
NM

Total
 
$
68,596

 
11.0
%
 
$
65,976

 
10.9
%
 
$
133,994

 
10.9
%
 
$
130,210

 
11.2
%
Operating income:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Health Services
 
$
56,540

 
16.2
%
 
$
56,914

 
17.2
%
 
$
106,667

 
15.5
%
 
$
83,722

 
13.4
%
U.S. Federal Services
 
17,644

 
12.1
%
 
14,983

 
10.0
%
 
35,525

 
12.4
%
 
25,699

 
8.7
%
Human Services
 
9,629

 
7.5
%
 
9,794

 
7.8
%
 
21,398

 
8.5
%
 
18,901

 
7.7
%
Amortization of intangible assets
 
(3,386
)
 
NM

 
(3,262
)
 
NM

 
(6,788
)
 
NM

 
(6,411
)
 
NM

Restructuring costs (2)
 

 
NM

 

 
NM

 
(2,242
)
 
NM

 

 
NM

Acquisition-related expenses (3)
 

 
NM

 
(529
)
 
NM

 

 
NM

 
(575
)
 
NM

Other (4)
 
(92
)
 
NM

 

 
NM

 
(449
)
 
NM

 
(650
)
 
NM

Total
 
$
80,335

 
12.9
%
 
$
77,900

 
12.8
%
 
$
154,111

 
12.5
%
 
$
120,686

 
10.4
%
(1)    Percentage of respective segment revenue. Percentages not considered meaningful are marked “NM.”
(2)
During the current fiscal year, we incurred costs in restructuring our United Kingdom Human Services business. See "Note 6. Supplemental disclosures" for more information.
(3)
Acquisition-related expenses relate to the acquisitions of Assessments Australia and Ascend in December 2015 and February 2016, respectively.
(4) 
During the six months ended March 31, 2017, we incurred $0.4 million of legal-related costs pertaining to a legacy matter from a business line that the Company exited. During the six months ended March 31, 2016, we incurred $0.7 million of legal costs related to a matter that occurred in fiscal year 2014. Both items are classified within other selling general and administrative expense.


7



3. Earnings Per Share
The weighted average number of shares outstanding used to compute earnings per share was as follows:
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
(shares in thousands)
 
2017
 
2016
 
2017
 
2016
Basic weighted average shares outstanding
 
65,549

 
65,760

 
65,669

 
65,872

Dilutive effect of employee stock options and unvested RSUs
 
398

 
319

 
320

 
324

Denominator for diluted earnings per share
 
65,947

 
66,079

 
65,989

 
66,196

All of our unvested restricted stock units (RSUs) are included in the calculations of dilution above.
During the current fiscal year, we adopted a new accounting standard which changed the methodology by which we calculate our diluted weighted average shares outstanding. See "Note 8. Recent accounting pronouncements" for details of this change.
4. Business combinations
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 $44.1 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 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 $18.0 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.

We have completed our evaluation of the fair value of all of the assets and liabilities acquired.

Our allocation of fair value for the Ascend acquisition, updated through March 31, 2017, is shown below.
(dollars in thousands)
 
Updated through September 30, 2016
 
Adjustments
 
Updated through March 31, 2017
Cash consideration, net of cash acquired
 
$
44,069

 
$

 
$
44,069

 
 
 
 
 
 
 
Billed and unbilled receivables
 
$
4,069

 
$

 
$
4,069

Other assets
 
407

 

 
407

Property and equipment and other assets
 
707

 

 
707

Deferred income taxes
 

 
557

 
557

Intangible assets
 
22,300

 

 
22,300

Total identifiable assets acquired
 
27,483

 
557

 
28,040

Accounts payable and other liabilities
 
1,414

 

 
1,414

Deferred revenue
 
554

 

 
554

Total liabilities assumed
 
1,968

 

 
1,968

Net identifiable assets acquired
 
25,515

 
557

 
26,072

Goodwill
 
18,554

 
(557
)
 
17,997

Net assets acquired
 
$
44,069

 
$

 
$
44,069


    

8



The valuation of the intangible assets acquired is summarized below:

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

Trade name
 
8 years
 
1,700

Technology-based intangible assets
 
1 year
 
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 $0.5 million to the sellers of Assessments Australia if sufficient contracts with a specific government agency are won by MAXIMUS prior to December 2022. We performed a probability weighted assessment of this payment. Changes in our assessment of this liability are recorded through the Statement of Operations. This business was integrated into our Human Services Segment. Management has estimated goodwill and intangible assets acquired as $3.0 million and $0.4 million, respectively, which is deductible for tax purposes. We have completed our evaluation of the fair value of asset and liabilities acquired. We believe that the goodwill represents the value of the assembled workforce of Assessments Australia, as well as the enhanced capabilities that the business will provide us.
The intangible assets acquired represent customer relationships. These are being amortized on a straight-line basis over six years.
5. Goodwill
Changes in goodwill by segment for the six months ended March 31, 2017 are as follows:
(dollars in thousands)
 
Health Services
 
U.S. Federal Services
 
Human Services
 
Total
Balance as of September 30, 2016
 
$
123,679

 
$
228,148

 
$
45,731

 
$
397,558

Adjustment to goodwill acquired with Ascend
 
(557
)
 

 

 
(557
)
Adjustment to goodwill acquired with Assessments Australia
 

 

 
71

 
71

Foreign currency translation
 
(1,932
)
 

 
(129
)
 
(2,061
)
Balance as of March 31, 2017
 
$
121,190

 
$
228,148

 
$
45,673

 
$
395,011


6. Supplemental disclosures
During the six months ended March 31, 2017 and 2016, we made income tax payments of $38.8 million and $68.6 million, respectively.
At March 31, 2017, we held cash and cash equivalents of $94.9 million. Approximately $91.5 million of these funds are denominated in foreign currencies and held in jurisdictions outside the United States. 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 British Pound, resulted in a decline in net assets of $4.1 million in the six months ended March 31, 2017. 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. The resolution also authorizes the use of option exercise proceeds for the repurchase of our common stock. During the six months ended March 31, 2017 and 2016, we repurchased 0.6 million and 0.5 million common shares at a cost of $28.9 million and $29.1 million, respectively. At March 31, 2017, $109.0 million remained available for future stock repurchases.

9



Our deferred compensation plan assets include $13.5 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 year 2017, we granted 0.4 million RSUs to our employees. 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 amounts that are ready to be invoiced and the funds are collectible within standard invoice terms.
During the six months ended March 31, 2017, we undertook a restructuring of our United Kingdom Human Services operations as part of the ongoing integration of Remploy. We recorded restructuring costs of $2.2 million, including severance of $2.0 million and lease termination expenses of $0.2 million. At March 31, 2017, we have accrued costs of $0.2 million related to future lease obligations.
7. Debt
We have a credit facility allowing borrowings of up to $400 million. The arrangement terminates on March 9, 2020, at which time all outstanding borrowings must be repaid.
The credit facility permits us to make borrowings in currencies other than the United States Dollar. At March 31, 2017, we have U.S. Dollar borrowings of $115.0 million and no borrowings in other currencies.
At March 31, 2017, we held two letters of credit under the credit facility totaling $0.7 million. These letters of credit may be called by vendors 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.
Our credit facility 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 March 31, 2017. There are no restrictions on our dividend payments if our leverage ratio is less than 2.5:1.0. At March 31, 2017, our total leverage ratio was less than 1.0:1.0. Accordingly, we do not believe that the provisions of the credit facility represent a significant restriction on our ability to pay dividends or to the successful operation of the business.
During the six months ended March 31, 2017 and 2016, we made interest payments of $1.6 million and $1.7 million, respectively. We utilize interest swap agreements to manage our exposure against interest rate fluctuations. Approximately $34.0 million of our outstanding debt balance was covered by these instruments at March 31, 2017; all arrangements expire before the end of fiscal year 2017. Gains and losses in the fair value of these instruments are recorded in the statement of comprehensive income.
In addition to borrowings under the credit facility, we have an outstanding loan of $0.7 million (0.9 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 21 remaining quarterly installments.
8. Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board (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. We have established a cross-functional steering committee which includes representatives from across all our business and support segments. The steering committee is responsible for evaluating the impact of the standard on our operations including accounting, taxation, internal audit and financial systems. Our approach to analyzing these impacts includes reviewing our current accounting policies and practices to identify potential differences that will result from applying the requirements of the new standard to our existing contracts. In addition, we are in the process of evaluating the changes needed to our business processes, systems and controls in order to support revenue recognition and the related disclosures under the new standard. The standard permits a retrospective or

10



cumulative effect transition method. We anticipate that we will adopt the new standard using the retrospective method.
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. We adopted this standard in the current year. The new standard requires us to record the tax benefit or expense related to the vesting of RSUs or the exercise of stock options within our provision for income taxes in the consolidated statement of operations; this benefit was previously reported in the statement of changes in shareholders’ equity. The cash flow effects of the tax benefit will be reported in cash flows from operations; they were previously in cash flows from financing activities. The new standard allows us more flexibility in net settling RSUs as they vest. The new standard also allows for changes in accounting for the forfeiture of stock awards; we will continue to estimate our stock award forfeitures as we expense each award. This new standard has had the following effects in fiscal year 2017:
During the second fiscal quarter of 2017, approximately 0.2 million RSUs vested. This resulted in a decrease in our provision for income taxes of $2.2 million and a benefit to our cash flows from operations of $2.2 million.
Our diluted weighted average shares outstanding was higher than it would have been if the former standard had been in place.
The combination of these factors resulted in a net increase of $0.03 to our basic and diluted earnings per share for both the fiscal quarter and full year compared to what would have been recorded under the former accounting guidance.
The new standard does not require us to adjust previously reported results. Accordingly, we have made no changes to our consolidated statements of operations, cash flows or changes in shareholders' equity for any comparative periods.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. This standard will not change the manner in which we would identify a goodwill impairment but would change the manner of the calculation of any resulting impairment. Under existing guidance, we would calculate goodwill for each of our reporting units by calculating the fair value of all existing assets and liabilities within that reporting unit and comparing this to the fair value of the reporting unit; to the extent that this difference is less than our existing goodwill balance related to that reporting unit, we would record an impairment. The new standard will require us to calculate goodwill based upon the difference between the fair value and reported value of a reporting unit. This standard would be effective for our 2021 fiscal year, although early adoption is permitted. Our annual goodwill impairment test takes place as of July 1 and we have not yet decided whether we will adopt this standard early.
9. Subsequent event
On April 7, 2017, 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 May 31, 2017 to shareholders of record on May 15, 2017.

11



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, 2016, which was filed with the Securities and Exchange Commission on November 21, 2016.
Business Overview
We are a leading operator of government health and human services programs worldwide. We act as a partner to governments under our founding mission of Helping Government Serve the People.® We use our experience, business process management expertise and advanced technological solutions to help government agencies run effective, efficient and accountable programs.
Over the past five years, our business has reported significant organic growth. We believe this growth has been driven by economic and demographic factors, such as aging populations and increased demand for health care, and political factors, such as health care reform in the United States and welfare reform in Australia and the United Kingdom. In addition, we have acquired businesses that have provided us opportunities to expand our skills, technology and customer relationships to complement our existing business and provide opportunities for further organic growth.
We believe that governments will continue to seek opportunities to enhance existing processes or address new challenges through companies such as MAXIMUS. The current-day environment is dynamic with many potential political and economic changes; in the United States, the Trump Administration has made initial attempts to reform the Affordable Care Act; in the United Kingdom, a general election has been scheduled for June 8, 2017, which may result in policy changes. Nevertheless, we believe the long-term, macro-economic drivers of rising caseloads and increasing demand for effective government programs remain unchanged. We have witnessed common themes emerge across all of our markets as governments tackle changing demographics, decentralization initiatives, and the need to get value for government spend. Periods of change are often beneficial to us as governments seek trusted partners to help them operationalize new ideas and implement new or changing policies.
As governments look to identify and reward providers based upon results, we see opportunities to expand based upon our innovative technology, deep subject matter expertise, stringent adherence to our Standards of Business Conduct and Ethics, robust financial performance and worldwide experience. Further, we are one of the largest commercial service providers to government that is completely conflict-free; we have no financial affiliation with any health plans and providers, service providers or outside entities that could in any way impact or influence our ability to provide objective services to governments and the people they serve.
During fiscal year 2016, we acquired Ascend Management Innovations, LLC (Ascend) and three companies doing business as “Assessments Australia." These businesses were integrated into our Health Services and Human Services Segments, respectively. We believe that both acquisitions will allow us to expand our service offerings.
Financial Overview
Our results for the three and six months ended March 31, 2017 were driven by the following:
Revenue growth over the same period in fiscal year 2016 from the expansion of contracts, particularly within the Health Services Segment;
Profitability improvements as a result of cost management and business optimization initiatives, particularly within the U.S. Federal Services Segment;
The benefit from our acquisition of Ascend in February 2016;
The detrimental effects of the decline in the value of the British Pound, which reduced revenue and profit in both the Health Services and Human Services Segments; and
The restructuring of our Human Services operations in the United Kingdom, as part of the ongoing integration efforts of Remploy, which has resulted in severance and contract termination charges in this period.


12



Results of Operations
Consolidated
The following table sets forth, for the periods indicated, selected statements of operations data:
 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
(dollars in thousands, except per share data)
 
2017
 
2016
 
2017
 
2016
Revenue
 
$
622,047

 
$
606,453

 
$
1,229,611

 
$
1,163,175

Cost of revenue
 
469,730

 
458,786

 
932,476

 
905,293

Gross profit
 
152,317

 
147,667

 
297,135

 
257,882

Gross profit percentage
 
24.5
%
 
24.3
%
 
24.2
%
 
22.2
%
Selling, general and administrative expenses
 
68,596

 
65,976

 
133,994

 
130,210

Selling, general and administrative expense as a percentage of revenue
 
11.0
%
 
10.9
%
 
10.9
%
 
11.2
%
Amortization of intangible assets
 
3,386

 
3,262

 
6,788

 
6,411

Restructuring costs
 

 

 
2,242

 

Acquisition-related expenses


 
529

 

 
575

Operating income
 
80,335

 
77,900

 
154,111

 
120,686

Operating margin
 
12.9
%
 
12.8
%
 
12.5
%
 
10.4
%
Interest expense
 
744

 
1,273

 
1,593

 
2,262

Other income, net
 
417

 
2,209

 
680

 
3,340

Income before income taxes
 
80,008

 
78,836

 
153,198

 
121,764

Provision for income taxes
 
26,911

 
29,495

 
53,772

 
45,541

Effective tax rate
 
33.6
%
 
37.4
%
 
35.1
%
 
37.4
%
Net income
 
53,097

 
49,341

 
99,426

 
76,223

Income attributable to noncontrolling interests
 
582

 
556

 
247

 
829

Net income attributable to MAXIMUS
 
$
52,515

 
$
48,785

 
$
99,179

 
$
75,394

Basic earnings per share attributable to MAXIMUS
 
$
0.80

 
$
0.74

 
$
1.51

 
$
1.14

Diluted earnings per share attributable to MAXIMUS
 
$
0.80

 
$
0.74

 
$
1.50

 
$
1.14

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 months ended March 31, 2017 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 2016
 
$
606,453

 
 

 
$
458,786

 
 

 
$
147,667

 
 

Organic growth
 
23,099

 
3.8
 %
 
17,270

 
3.8
 %
 
5,829

 
3.9
 %
Net acquired growth
 
2,911

 
0.5
 %
 
2,156

 
0.5
 %
 
755

 
0.5
 %
Currency effect compared to the prior period
 
(10,416
)
 
(1.7
)%
 
(8,482
)
 
(1.8
)%
 
(1,934
)
 
(1.3
)%
Balance for respective period in fiscal year 2017
 
$
622,047

 
2.6
 %
 
$
469,730

 
2.4
 %
 
$
152,317

 
3.1
 %

13



    
Revenue for the three months ended March 31, 2017 increased 2.6% compared to the same period in fiscal year 2016. Our cost of revenue increased by a similar amount.
Our results in the second quarter of fiscal year 2016 included $15.2 million of out-of-period revenue and pre-tax income related to two contracts in the Health Services Segment:
We received revenue and income of $8.6 million from a large U.S. contract where a change order was signed in the second quarter with no associated costs during the period because we had commenced work, and incurred costs, during the first quarter and
We received revenue and income of $6.6 million from the U.K. Health Assessment Advisory Service where contract modifications provided relief from penalties incurred in earlier periods.
These two items provided a benefit to our profit margin for that period. Notwithstanding this, we reported additional organic revenue growth, principally driven by our Health Services Segment.
Our cost of revenue includes direct costs related to labor, subcontractor labor, outside vendors, rent and other direct costs. Although movements in cost typically correlate with revenue growth, we experienced operating efficiencies in this quarter, notably within the U.S. Federal Services Segment.
Our net acquired growth represents the performance of the Ascend business through the anniversary of its acquisition in February 2016, partially offset by the prior year results of our K-12 Education business, which we divested during the third fiscal quarter of 2016.
Our results in both the Health and Human Services Segments were adversely affected by the year-over-year decline in the value of the British Pound. In the three months ended March 31, 2016, we had been using an exchange rate of $1.43 to the pound; in the three months ended March 31, 2017, we have been using a rate of $1.24. Much of this decline occurred at the end of our third fiscal quarter of 2016.
Changes in revenue, cost of revenue and gross profit for the six months ended March 31, 2017 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 2016
 
$
1,163,175

 
 

 
$
905,293

 
 

 
$
257,882

 
 

Organic growth
 
83,286

 
7.2
 %
 
42,046

 
4.6
 %
 
41,240

 
16.0
 %
Net acquired growth
 
9,290

 
0.8
 %
 
7,726

 
0.9
 %
 
1,564

 
0.6
 %
Currency effect compared to the prior period
 
(26,140
)
 
(2.2
)%
 
(22,589
)
 
(2.5
)%
 
(3,551
)
 
(1.4
)%
Balance for respective period in fiscal year 2017
 
$
1,229,611

 
5.7
 %
 
$
932,476

 
3.0
 %
 
$
297,135

 
15.2
 %
The factors influencing revenue and cost of revenue are similar to those affecting the fiscal quarter:
Organic revenue growth in our Health Services Segment;
Declines in revenue in our U.S. Federal Services Segment have been offset by efficiencies from increased automation, resulting in improvements to our gross profit margins; and
The detrimental effect of the decline in the value of the British Pound.
Selling, general and administrative expense (SG&A) for the six month periods ended March 31, 2017 increased 2.9% compared to the same period in fiscal year 2016. These costs do not include the United Kingdom restructuring costs of $2.2 million noted below. SG&A consists of indirect costs related to general management, marketing and administration. It is primarily composed of labor costs. These costs may be incurred at a segment level, for dedicated resources that are not client-facing, or at a corporate level. Corporate costs are allocated to

14



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.
During the three months ended December 31, 2016, we undertook a restructuring of our United Kingdom Human Services operations as part of the ongoing integration of Remploy. We recorded restructuring costs of $2.2 million, including severance of $2.0 million and lease termination expenses of $0.2 million. Some smaller charges are expected to occur in future quarters, although no significant costs were incurred in the second quarter. This restructuring is expected to result in cost savings in future periods. Remploy is partially owned by its employees and, accordingly, some of this charge is offset through the loss attributable to noncontrolling interests.
Our interest expense is driven by borrowings from our credit facility. We use derivatives to limit our exposure to interest rate fluctuations. At March 31, 2017, we had fixed interest rate swap arrangements covering $34.0 million of outstanding debt. Our interest rate swaps will expire before the end of fiscal year 2017. During fiscal years 2015 and 2016, we utilized the credit facility to acquire Acentia and Ascend, as well as making short-term borrowings to cover working capital requirements. Our debt balance has steadily decreased over time, reducing interest expense. We anticipate that we will continue to use operating cash flows to pay down our debt balance while continuing to look for acquisition opportunities to expand the business.
Our other income is typically provided through interest income from our foreign cash balances. During fiscal year 2016, we also received the benefit of a foreign exchange gain that is not expected to recur.
Our year-to-date effective tax rate for the 2017 fiscal year is 35.1%. This includes a discrete benefit of $2.2 million related to the vesting of restricted stock units as a result of the retirement of two members of the board of directors in the period. We anticipate that our full year tax rate will be between 35% and 35.5%, with a bias toward the lower end of this range.
Health Services Segment
The Health Services Segment provides a variety of business process services, appeals and assessments as well as related consulting services, for state, provincial and national government programs. These services support a variety of government health benefit programs including Medicaid, the Children's Health Insurance Program (CHIP) and the Affordable Care Act (ACA) 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 March 31,
 
Six Months Ended March 31,
(dollars in thousands)
 
2017
 
2016
 
2017
 
2016
Revenue
 
$
348,994

 
$
330,567

 
$
689,723

 
$
622,470

Cost of revenue
 
262,540

 
247,850

 
525,035

 
487,781

Gross profit
 
86,454

 
82,717

 
164,688

 
134,689

Operating income
 
56,540

 
56,914

 
106,667

 
83,722

Gross profit percentage
 
24.8
%
 
25.0
%
 
23.9
%
 
21.6
%
Operating margin percentage
 
16.2
%
 
17.2
%
 
15.5
%
 
13.4
%
Changes in revenue, cost of revenue and gross profit for the three months ended March 31, 2017 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 2016
 
$
330,567

 
 

 
$
247,850

 
 

 
$
82,717

 
 

Organic growth
 
24,881

 
7.5
 %
 
20,587

 
8.3
 %
 
4,294

 
5.2
 %
Acquired growth
 
3,723

 
1.1
 %
 
2,631

 
1.1
 %
 
1,092

 
1.3
 %
Currency effect compared to the prior period
 
(10,177
)
 
(3.1
)%
 
(8,528
)
 
(3.4
)%
 
(1,649
)
 
(2.0
)%
Balance for respective period in fiscal year 2017
 
$
348,994

 
5.6
 %
 
$
262,540

 
5.9
 %
 
$
86,454

 
4.5
 %

15



Our fiscal year 2016 results received the benefit of out-of-period revenue and income from the $8.6 million delayed change order and the $6.6 million contract modification noted above.This benefit of $15.2 million to our revenue, gross profit and operating income increased our gross profit margin from 21.4% to 25.0% and our operating margin from 13.2% to 17.2%.
Notwithstanding this, our revenue for the three month period ended March 31, 2017 increased by 5.6% compared to the same period in fiscal year 2016. Cost of revenue increased by 5.9%. Our gross and operating profits declined marginally. Our results reflect the following:
We have had organic revenue and cost of revenue growth from our contracts based in New York State;
We have continued to improve our performance on the HAAS contract, reducing contract penalties and accordingly increasing our monthly revenue without corresponding increases in cost; and
We have reduced costs in our Fit for Work contract to service the reduced levels of activity in this arrangement.
Acquired revenue and cost of revenue are from the Ascend business, which was acquired in February 2016.
The reductions in revenue and cost of revenue from currency are almost entirely caused by the decline in the value of the British Pound.
Changes in revenue, cost of revenue and gross profit for the six months ended March 31, 2017 are summarized below. The factors noted above driving the movements in second quarter revenue and cost growth had a similar effect in the year-to-date period. The $8.6 million delayed change order did not affect the comparative numbers as the delay from the first quarter was resolved in the second.
 
 
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 2016
 
$
622,470

 
 

 
$
487,781

 
 

 
$
134,689

 
 

Organic growth
 
81,081

 
13.0
 %
 
50,510

 
10.4
 %
 
30,571

 
22.7
 %
Acquired growth
 
9,790

 
1.6
 %
 
7,626

 
1.6
 %
 
2,164

 
1.6
 %
Currency effect compared to the prior period
 
(23,618
)
 
(3.8
)%
 
(20,882
)
 
(4.3
)%
 
(2,736
)
 
(2.0
)%
Balance for respective period in fiscal year 2017
 
$
689,723

 
10.8
 %
 
$
525,035

 
7.6
 %
 
$
164,688

 
22.3
 %
We have recently finalized a three year extension of a contract with the State of New York. We anticipate that this contract, which has expanded significantly since we commenced work in 2010, will continue to operate at its current run rate over the next three years.
U.S. Federal Services Segment
The U.S. Federal Services Segment provides business process solutions, program management, as well as system development and software development for various civilian U.S. federal programs.

16



 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
(dollars in thousands)
 
2017
 
2016
 
2017
 
2016
Revenue
 
$
145,370

 
$
150,191

 
$
286,668

 
$
295,476

Cost of revenue
 
108,799

 
116,770

 
212,521

 
233,817

Gross profit
 
36,571

 
33,421

 
74,147

 
61,659

Operating income
 
17,644

 
14,983

 
35,525

 
25,699

Gross profit percentage
 
25.2
%
 
22.3
%
 
25.9
%
 
20.9
%
Operating margin percentage
 
12.1
%
 
10.0
%
 
12.4
%
 
8.7
%
Revenue for the three month period ended March 31, 2017 decreased by $4.8 million, or 3.2%, compared to the same period in fiscal year 2016. The corresponding decline in cost of revenue was $8.0 million, or 6.8%. This resulted in an increase to our gross profit, operating income and profit margins. All revenue, cost and profit movement between periods is organic.
We had previously disclosed that the U.S. Federal Segment would be affected by the termination of a large healthcare contract for the U.S. Veteran's Administration where we were working as a subcontractor. This contract ended in April 2017.
A reduction in costs and a spike in volumes on volume-based contracts helped improve gross profit margin.
Revenue for the six month period ended March 31, 2017 decreased $8.8 million, or 3.0%, compared to the same period in fiscal year 2016. The corresponding decline in cost of revenue was $21.3 million, or 9%. The factors driving this were consistent with those for the fiscal quarter.
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 for welfare-to-work, child support, higher education institutions and other Human Services programs. Approximately 66% of our revenue in this segment was earned in foreign jurisdictions.
 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
(dollars in thousands)
 
2017
 
2016
 
2017
 
2016
Revenue
 
$
127,683

 
$
125,695

 
$
253,220

 
$
245,229

Cost of revenue
 
98,391

 
94,166

 
194,920

 
183,695

Gross profit
 
29,292

 
31,529

 
58,300

 
61,534

Operating income
 
9,629

 
9,794

 
21,398

 
18,901

Gross profit percentage
 
22.9
%
 
25.1
%
 
23.0
%
 
25.1
%
Operating margin percentage
 
7.5
%
 
7.8
%
 
8.5
%
 
7.7
%
Changes in revenue, cost of revenue and gross profit for the three months ended March 31, 2017 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 2016
 
$
125,695

 
 

 
$
94,166

 
 

 
$
31,529

 
 

Organic growth
 
3,039

 
2.4
 %
 
4,654

 
4.9
 %
 
(1,615
)
 
(5.1
)%
Divested business
 
(812
)
 
(0.6
)%
 
(475
)
 
(0.5
)%
 
(337
)
 
(1.1
)%
Currency effect compared to the prior period
 
(239
)
 
(0.2
)%
 
46

 
 %
 
(285
)
 
(0.9
)%
Balance for respective period in fiscal year 2017
 
$
127,683

 
1.6
 %
 
$
98,391

 
4.5
 %
 
$
29,292

 
(7.1
)%


17



Changes in revenue, cost of revenue and gross profit for the six months ended March 31, 2017 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 2016
 
$
245,229

 
 

 
$
183,695

 
 

 
$
61,534

 
 

Organic growth
 
11,013

 
4.5
 %
 
12,834

 
7.0
 %
 
(1,821
)
 
(3.0
)%
Acquisitions and divestitures
 
(500
)
 
(0.2
)%
 
100

 
0.1
 %
 
(600
)
 
(1.0
)%
Currency effect compared to the prior period
 
(2,522
)
 
(1.0
)%
 
(1,709
)
 
(0.9
)%
 
(813
)
 
(1.3
)%
Balance for respective period in fiscal year 2017
 
$
253,220

 
3.3
 %
 
$
194,920

 
6.1
 %
 
$
58,300

 
(5.3
)%
Revenue for the three and six month period ended March 31, 2017 increased compared to the same period in fiscal year 2016. Revenue growth was principally due to by our jobactive contract in Australia which was still ramping up in the first quarter of fiscal year 2016. This was partially offset by expected decreases from U.K. as the Work Programme contract begins to wind down.
Costs of revenue for the three and six months ended March 31, 2017 increased at a greater rate than our revenue, resulting in a decline in gross profit margin. Our gross profit margin declined principally due to the U.K. Work Programme contract, which will have no new referrals from April 2017. We are required to service cases for up to two years, so we expect to see revenue from this program to decline over this period.
The segment has received the benefit from the acquisition of Assessments Australia, which was acquired in December 2015 and, accordingly, has provided an additional three months of revenue and profit in the six month period. This was partially offset by our sale of the K-12 Education business in May 2016.
Declines in the value of the British Pound year-over-year have only been partially mitigated by the rise in the Australian Dollar in the three month period.
Liquidity and Capital Resources
Our principal source of liquidity remains our cash flows from operations. These operating cash flows are used to fund our ongoing operations and working capital needs as well as investments in capital infrastructure and share repurchases. Cash flows from operations are driven by our contracts and their payment terms. For some contracts, we are reimbursed for the costs of start-up operations, although there may be a gap between incurring and receiving these funds. Other factors which may cause shortfalls in cash flows include contract terms where payments are tied to outcome deliveries, which may not correspond with the costs incurred to achieve these outcomes and short-term delays where government budgets are constrained.
To supplement our cash flows from operations, we also use a credit facility. We used this facility to fund our acquisitions, as well as short-term borrowings to cover immediate working capital needs. At March 31, 2017, we had outstanding borrowings of $115.0 million under the credit facility. Our credit facility allows us to borrow up to $400 million, subject to standard covenants. We anticipate that our cash flows from operations should be sufficient to meet our day-to-day requirements, as well as pay our interest and repay the principal on our existing borrowings.
At March 31, 2017, our foreign subsidiaries held $91.5 million of our cash and cash equivalents. We have no requirement or intent to remit this cash to the United States. We consider undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the United States and, accordingly, no U.S. deferred taxes have been recorded with respect to such earnings in accordance with the relevant accounting guidance for income taxes. Should the earnings be remitted as dividends, we may be subject to additional U.S. taxes, net of allowable foreign tax credits. It is not practicable to estimate the amount of any additional taxes that may be payable on the undistributed earnings given the various tax planning alternatives we could employ, should we decide to repatriate these earnings in a tax-efficient manner.

18



Cash Flows
The following table provides a summary of our cash flow information for the six months ended March 31, 2017 and 2016.
 
 
Six Months Ended March 31,
(dollars in thousands)
 
2017
 
2016
Net cash provided by/(used in):
 
 

 
 

Operations
 
$
136,848

 
$
21,864

Investing activities
 
(12,372
)
 
(61,438
)
Financing activities
 
(94,935
)
 
26,749

Effect of exchange rate changes on cash and cash equivalents
 
(878
)
 
(1,064
)
Net increase/(decrease) in cash and cash equivalents
 
$
28,663

 
$
(13,889
)
Cash flows from operations were $136.8 million for the six months ended March 31, 2017, compared to $21.9 million in the prior fiscal year. Our increase in cash flows were driven by additional cash collected from customers and the favorable timing of tax payments.
We use the performance indicator of Days Sales Outstanding, or DSO, to evaluate our performance in collecting our receivable balances. At March 31, 2017 our DSO were 69 days, compared to 70 days at the beginning of the year. In fiscal year 2016, our DSO had grown from 67 days at the beginning of the year to 70 days at March 31, 2016. The decline in fiscal 2016 reflected delays in payments from contracts with states in the U.S., resulting in tempered cash flows in the first half of the year. As our DSO has remained steady this year, combined with an increase in revenue, our cash collected from customers over the first half of the year is approximately $100 million higher than last year.
In addition, our cash payments for taxes for the six months ended March 31, 2017 were $38.8 million, compared with $68.6 million for the same period in fiscal year 2016.
Cash used in investing activities for the six months ended March 31, 2017 was $12.4 million compared to $61.4 million in the comparative period. In fiscal year 2016, we used $41.8 million to acquire Ascend and Assessments Australia. We also had significant capital expenditure in Australia in 2016 to prepare for the commencement of the jobactive contract. Our capital expenditure has returned to normal levels after two years of significant investment in our global infrastructure.
Cash flows from financing activities in the six months ended March 31, 2017 include cash payments to pay dividends, repurchase our common stock and settle our employees income tax obligations from net settlement of RSUs which vested in September. These payments related to our equity totaled $44.0 million and $48.6 million, for the first half of fiscal year 2017 and 2016, respectively. During fiscal year 2017, we made net debt repayments of $49.8 million, compared with net borrowings of $75.3 million in the comparative period. Our borrowings in fiscal year 2016 were used to acquire Ascend and cover working capital requirements due to the growth in our DSO.
We anticipate that we will continue to utilize our United States operating cash flows to reduce our debt balance. However, this approach is subject to change from acquisition opportunities, including the opportunity to repurchase our own common stock, and any working capital issues we may experience from slow payment from our customers.
The detrimental effect of exchange rates on cash and cash equivalents of $0.9 million in the 2017 fiscal year primarily reflects the strengthening of the United States Dollar against the British Pound.

19



To supplement our statements of cash flows presented on a GAAP basis, we use the measure of free cash flow to analyze the funds generated from operations.
 
 
Six Months Ended March 31,
(dollars in thousands)
 
2017
 
2016
Cash flows from operations
 
$
136,848

 
$
21,864

Purchases of property and equipment and capitalized software costs
 
(12,975
)
 
(19,836
)
Free cash flow
 
$
123,873

 
$
2,028

Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenue and expenses. On an ongoing basis we evaluate our estimates, including those related to revenue recognition and cost estimation on certain contracts, the realizability of goodwill and other long-lived assets, and amounts related to contingencies and income tax liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.
During the six months ended March 31, 2017, there were no significant changes to the critical accounting policies we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended September 30, 2016 which was filed with the Securities and Exchange Commission on November 21, 2016.
Non-GAAP measures
We utilize non‑GAAP measures where we believe it will assist the user of our financial statements in understanding our business. The presentation of these measures is meant to complement, but not replace, other financial measures in this document. The presentation of non-GAAP numbers is not meant to be considered in isolation, nor as an alternative to revenue growth, cash flows from operations or net income as measures of performance. These non-GAAP measures, as determined and presented by us, may not be comparable to related or similarly titled measures presented by other companies.
During fiscal year 2016, we acquired Ascend and Assessments Australia and disposed of our K-12 Education business. We believe users of our financial statements wish to evaluate the performance of our underlying business, excluding changes that have arisen due to businesses acquired or disposed of. We provide organic revenue growth as a useful basis for assessing this. To calculate organic revenue growth, we compare current year revenue excluding revenue from these acquisitions and divestitures to our prior year revenue.
In fiscal year 2016, 28% 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 which excludes the effect of year-over-year exchange rate fluctuations. To calculate year-over-year currency movement, we determine the current year’s results for all foreign businesses using the exchange rates in the prior year.
In order to sustain our cash flows from operations, we require regular refreshing of our fixed assets and technology. We believe that users of our financial statements wish to understand the cash flows that directly correspond with our operations and the investments we must make in those operations using a methodology which combines operating cash flows and capital expenditures. We provide free cash flow to complement our statement of cash flows. Free cash flow shows the effects of the Company’s operations and routine capital expenditures and excludes the cash flow effects of acquisitions, share repurchases, dividend payments and other financing transactions. We have provided a reconciliation of free cash flow to cash flows from operations.
To sustain our operations, our principal source of financing comes from receiving payments from our customers. We believe that users of our financial statements wish to evaluate our efficiency in converting revenue into cash receipts. Accordingly, we provide DSO, which we calculate by dividing billed and unbilled receivable

20



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.
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. We have provided a reconciliation from net income to Adjusted EBITA and Adjusted EBITDA below. Our credit agreement requires us to utilize Adjusted EBITDA on a trailing twelve month basis to calculate conformity with covenants and other restrictions; in particular, a debt-to-EBITDA ratio exceeding 2.5:1.0 would require us to provide security for the borrowings; a debt-to-EBITDA ratio in excess of 3.5:1.0 would represent a violation of our debt agreement. Our debt-to-EBITDA ratio was below 1.0:1.0 for all periods presented. We have included our calculations of EBITDA below.
 
 
Six Months Ended
March 31,
 
Trailing Twelve Months Ended March 31,
(dollars in thousands)
 
2017
 
2016
 
2017
 
2016
Net income attributable to MAXIMUS
 
$
99,179

 
$
75,394

 
$
202,147

 
$
152,497

Interest expense net of interest income
 
1,243

 
1,761

 
2,948

 
3,230

Provision of income taxes
 
53,772

 
45,541

 
114,039

 
98,331

Amortization of intangible assets
 
6,788

 
6,411

 
13,754

 
12,852

Stock compensation expense
 
10,234

 
9,151

 
19,834

 
17,952

Acquisition-related expenses
 

 
575