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As filed with the Securities and Exchange Commission on May 5, 2022
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________.
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.) |
| | |
1600 Tysons Boulevard, McLean, Virginia | | 22102 |
(Address of principal executive offices) | | (Zip Code) |
| | |
(703) 251-8500 |
(Registrant's telephone number, including the area code) |
1891 Metro Center Drive, Reston, Virginia 20190 |
(Former address) |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, no par value | | MMS | | New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☒ No ☐
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 the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | |
Large accelerated filer ☒ | | Accelerated filer ☐ | | |
Non-accelerated filer ☐ | | Smaller reporting company ☐ | | Emerging growth company ☐ |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
There were 61,412,807 shares of the registrant's Common Stock outstanding as of May 2, 2022.
Table of Contents to Second Quarter 2022 Form 10-Q
Unless otherwise specified, references in this Quarterly Report on Form 10-Q to "our," "we," "us," "Maximus," the "Company," and "our business" 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 safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "opportunity," "could," "potential," "believe," "project," "estimate," "expect," "forecast," "strategy," "future," "likely," "may," "should," "will," and similar references to future periods.
Forward-looking statements that are not historical facts, including statements about our confidence, strategies and initiatives, and our expectations about revenues, results of operations, profitability, liquidity, market demand, the impact of the coronavirus ("COVID-19") global pandemic and related policy implications, and our recent acquisitions are forward-looking statements that involve risks and uncertainties. These risks could cause our actual results to differ materially from those indicated by such forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
•a failure to meet performance requirements in our contracts, which might lead to contract termination and actual or liquidated damages;
•our failure to successfully bid for and accurately price contracts to generate our desired profit;
•the effects of future legislative or government budgetary and spending changes;
•the impact of the Biden Administration on federal procurement, federal funding to states' safety-net programs, and the overall decision-making process related to our industry, including our business and customers;
•our ability to manage our growth, including acquired businesses;
•difficulties in integrating or achieving projected revenues, earnings, and other benefits associated with acquired businesses;
•the outcome of reviews or audits, which might result in financial penalties and impair our ability to respond to invitations for new work;
•our ability to manage capital investments and startup costs incurred before receiving related contract payments;
•our ability to manage our debt;
•the extent and impact of the continuation of the global pandemic and the actions taken or to be taken by us, our customers, and the governments or jurisdictions in which we operate in response to COVID-19;
•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;
•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;
•a failure to comply with laws governing our business, which might result in the Company being subject to fines, penalties, suspension, debarment, and other sanctions;
•the costs and outcome of litigation;
•the effects of changes in laws and regulations governing our business, including tax laws, and applicable interpretations and guidance thereunder, or changes in accounting policies, rules, methodologies, and practices, and our ability to estimate the impact of such changes;
•matters related to business we disposed of or divested; and
•other factors set forth in Item 1A, "Risk Factors" of our Annual Report on From 10-K, filed with the Securities and Exchange Commission on November 18, 2021.
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments, or otherwise.
PART I - Financial Information
Item 1. Financial Statements
Maximus, Inc.
Consolidated Statements of Operations
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| (in thousands, except per share amounts) |
Revenue | $ | 1,177,326 | | | $ | 959,280 | | | $ | 2,328,202 | | | $ | 1,904,834 | |
Cost of revenue | 948,875 | | | 728,622 | | | 1,871,596 | | | 1,468,121 | |
Gross profit | 228,451 | | | 230,658 | | | 456,606 | | | 436,713 | |
Selling, general, and administrative expenses | 130,307 | | | 112,402 | | | 254,528 | | | 224,369 | |
Amortization of intangible assets | 22,856 | | | 5,070 | | | 45,261 | | | 11,586 | |
Operating income | 75,288 | | | 113,186 | | | 156,817 | | | 200,758 | |
Interest expense | (9,438) | | | (756) | | | (19,076) | | | (962) | |
Other income/(expense), net | 715 | | | (520) | | | 404 | | | (1,295) | |
Income before income taxes | 66,565 | | | 111,910 | | | 138,145 | | | 198,501 | |
Provision for income taxes | 16,469 | | | 31,296 | | | 34,719 | | | 53,810 | |
Net income | $ | 50,096 | | | $ | 80,614 | | | $ | 103,426 | | | $ | 144,691 | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | $ | 0.81 | | | $ | 1.30 | | | $ | 1.66 | | | $ | 2.33 | |
Diluted | $ | 0.80 | | | $ | 1.29 | | | $ | 1.66 | | | $ | 2.33 | |
Weighted average shares outstanding: | | | | | | | |
Basic | 62,227 | | | 62,026 | | | 62,256 | | | 62,022 | |
Diluted | 62,381 | | | 62,294 | | | 62,409 | | | 62,212 | |
| | | | | | | |
Dividends declared per share | $ | 0.28 | | | $ | 0.28 | | | $ | 0.56 | | | $ | 0.56 | |
See accompanying notes to unaudited consolidated financial statements.
Maximus, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| (in thousands) |
Net income | $ | 50,096 | | | $ | 80,614 | | | $ | 103,426 | | | $ | 144,691 | |
Other comprehensive income, net of tax: | | | | | | | |
Foreign currency translation adjustments | (23) | | | 770 | | | 436 | | | 7,693 | |
Net gains on cash flow hedge, net of tax | 10,689 | | | — | | | 13,374 | | | — | |
Other comprehensive income | 10,666 | | | 770 | | | 13,810 | | | 7,693 | |
Comprehensive income | $ | 60,762 | | | $ | 81,384 | | | $ | 117,236 | | | $ | 152,384 | |
See accompanying notes to unaudited consolidated financial statements.
Maximus, Inc.
Consolidated Balance Sheets
| | | | | | | | | | | |
| March 31, 2022 | | September 30, 2021 |
| (unaudited) | | |
| (in thousands) |
Assets: | | | |
Cash and cash equivalents | $ | 92,638 | | | $ | 135,061 | |
Accounts receivable, net | 885,685 | | | 834,819 | |
Income taxes receivable | 14,757 | | | 5,413 | |
Prepaid expenses and other current assets | 97,420 | | | 104,201 | |
Total current assets | 1,090,500 | | | 1,079,494 | |
Property and equipment, net | 57,945 | | | 62,627 | |
Capitalized software, net | 42,877 | | | 42,868 | |
Operating lease right-of-use assets | 160,183 | | | 179,349 | |
Goodwill | 1,780,370 | | | 1,774,406 | |
Intangible assets, net | 851,564 | | | 879,168 | |
Deferred contract costs, net | 42,813 | | | 36,486 | |
Deferred compensation plan assets | 44,773 | | | 46,738 | |
Deferred income taxes | 2,635 | | | 990 | |
Other assets | 34,036 | | | 16,839 | |
Total assets | $ | 4,107,696 | | | $ | 4,118,965 | |
Liabilities and Shareholders' Equity: | | | |
Liabilities: | | | |
Accounts payable and accrued liabilities | $ | 302,912 | | | $ | 305,565 | |
Accrued compensation and benefits | 142,512 | | | 186,809 | |
Deferred revenue, current portion | 122,070 | | | 98,588 | |
Income taxes payable | 3,883 | | | 6,782 | |
Long-term debt, current portion | 59,911 | | | 80,555 | |
Operating lease liabilities, current portion | 70,731 | | | 76,077 | |
Other current liabilities | 51,247 | | | 35,057 | |
Total current liabilities | 753,266 | | | 789,433 | |
Deferred revenue, non-current portion | 30,429 | | | 35,932 | |
Deferred income taxes | 198,848 | | | 194,638 | |
Long-term debt, non-current portion | 1,387,386 | | | 1,429,137 | |
Deferred compensation plan liabilities, non-current portion | 44,923 | | | 47,405 | |
Operating lease liabilities, non-current portion | 106,670 | | | 121,771 | |
Other liabilities | 31,958 | | | 20,320 | |
Total liabilities | 2,553,480 | | | 2,638,636 | |
Commitments and contingencies (Note 16) | | | |
Shareholders' equity: | | | |
Common stock, no par value; 100,000 shares authorized; 61,610 and 61,954 shares issued and outstanding as of March 31, 2022 and September 30, 2021, respectively (shares in thousands) | 550,228 | | | 532,411 | |
Accumulated other comprehensive loss | (26,098) | | | (39,908) | |
Retained earnings | 1,030,086 | | | 987,826 | |
Total shareholders' equity | 1,554,216 | | | 1,480,329 | |
Total liabilities and shareholders' equity | $ | 4,107,696 | | | $ | 4,118,965 | |
See accompanying notes to unaudited consolidated financial statements.
Maximus, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 |
| (in thousands) |
Cash flows from operating activities: | | | |
Net income | $ | 103,426 | | | $ | 144,691 | |
Adjustments to reconcile net income to cash flows from operating activities: | | | |
Depreciation and amortization of property, equipment and capitalized software | 21,199 | | | 22,835 | |
Amortization of intangible assets | 45,261 | | | 11,586 | |
Amortization of debt issuance costs and debt discount | 1,297 | | | — | |
Deferred income taxes | (3,318) | | | 7,951 | |
Stock compensation expense | 15,052 | | | 13,479 | |
Change in assets and liabilities, net of effects of business combinations: | | | |
Accounts receivable | (49,064) | | | 70,217 | |
Prepaid expenses and other current assets | 9,769 | | | 8,074 | |
Deferred contract costs | (6,431) | | | (9,184) | |
Accounts payable and accrued liabilities | (3,047) | | | 12,395 | |
Accrued compensation and benefits | (28,281) | | | (16,761) | |
Deferred revenue | 18,473 | | | 13,296 | |
Income taxes | (13,515) | | | 3,230 | |
Operating lease right-of-use assets and liabilities | (1,293) | | | (414) | |
Other assets and liabilities | 2,331 | | | (1,697) | |
Net cash provided by operating activities | 111,859 | | | 279,698 | |
Cash flows from investing activities: | | | |
Purchases of property and equipment and capitalized software | (22,898) | | | (23,584) | |
Acquisitions of businesses, net of cash acquired | (4) | | | (413,940) | |
Net cash used in investing activities | (22,902) | | | (437,524) | |
Cash flows from financing activities: | | | |
Cash dividends paid to Maximus shareholders | (34,659) | | | (34,414) | |
Purchases of Maximus common stock | (25,843) | | | (3,363) | |
Tax withholding related to RSU vesting | (9,673) | | | (9,818) | |
Proceeds from borrowings | 240,000 | | | 500,162 | |
Principal payments for debt | (303,708) | | | (263,838) | |
Other | — | | | (2,762) | |
Net cash (used in)/provided by financing activities | (133,883) | | | 185,967 | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 324 | | | 3,263 | |
Net change in cash, cash equivalents, and restricted cash | (44,602) | | | 31,404 | |
Cash, cash equivalents and restricted cash, beginning of period | 156,570 | | | 88,561 | |
Cash, cash equivalents and restricted cash, end of period | $ | 111,968 | | | $ | 119,965 | |
See accompanying notes to unaudited consolidated financial statements.
Maximus, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Equity |
| Shares | | Amount | | | |
| (in thousands) |
Balance at September 30, 2021 | 61,954 | | $ | 532,411 | | | $ | (39,908) | | | $ | 987,826 | | | $ | 1,480,329 | |
Net income | — | | — | | | — | | | 53,330 | | | 53,330 | |
Foreign currency translation | — | | — | | | 459 | | | — | | | 459 | |
Cash flow hedge, net of tax | — | | — | | | 2,685 | | | — | | | 2,685 | |
Cash dividends | — | | — | | | — | | | (17,347) | | | (17,347) | |
Dividends on RSUs | — | | 272 | | | — | | | (272) | | | — | |
Purchases of Maximus common stock | (18) | | — | | | — | | | (1,379) | | | (1,379) | |
Stock compensation expense | — | | 8,248 | | | — | | | — | | | 8,248 | |
Tax withholding adjustment related to RSU vesting | — | | 2,101 | | | — | | | — | | | 2,101 | |
Balance as of December 31, 2021 | 61,936 | | 543,032 | | | (36,764) | | | 1,022,158 | | | 1,528,426 | |
Net income | — | | — | | | — | | | 50,096 | | | 50,096 | |
Foreign currency translation | — | | — | | | (23) | | | — | | | (23) | |
Cash flow hedge, net of tax | — | | — | | | 10,689 | | | — | | | 10,689 | |
Cash dividends | — | | — | | | — | | | (17,312) | | | (17,312) | |
Dividends on RSUs | — | | 392 | | | — | | | (392) | | | — | |
Purchases of Maximus common stock | (330) | | — | | | — | | | (24,464) | | | (24,464) | |
Stock compensation expense | — | | 6,804 | | | — | | | — | | | 6,804 | |
| | | | | | | | | |
RSUs vested | 4 | | — | | | — | | | — | | | — | |
Balance as of March 31, 2022 | 61,610 | | 550,228 | | (26,098) | | 1,030,086 | | 1,554,216 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Equity |
| Shares | | Amount | | | |
| (in thousands) |
Balance at September 30, 2020 | 61,504 | | $ | 513,959 | | | $ | (42,638) | | | $ | 770,498 | | | $ | 1,241,819 | |
Net income | — | | — | | | — | | | 64,077 | | | 64,077 | |
Foreign currency translation | — | | — | | | 6,923 | | | — | | | 6,923 | |
Cash dividends | — | | — | | | — | | | (17,207) | | | (17,207) | |
Dividends on RSUs | — | | 336 | | | — | | | (336) | | | — | |
Purchases of Maximus common stock | (52) | | — | | | — | | | (3,363) | | | (3,363) | |
Stock compensation expense | — | | 6,062 | | | — | | | — | | | 6,062 | |
Balance as of December 31, 2020 | 61,452 | | $ | 520,357 | | | $ | (35,715) | | | $ | 813,669 | | | $ | 1,298,311 | |
Net income | — | | — | | | — | | | 80,614 | | | 80,614 | |
Foreign currency translation | — | | — | | | 770 | | | — | | | 770 | |
Cash dividends | — | | — | | | — | | | (17,207) | | | (17,207) | |
Dividends on RSUs | — | | 431 | | | — | | | (431) | | | — | |
Stock compensation expense | — | | 7,417 | | | — | | | — | | | 7,417 | |
RSUs vested | 20 | | — | | | — | | | — | | | — | |
Balance as of March 31, 2021 | 61,472 | | $ | 528,205 | | | $ | (34,945) | | | $ | 876,645 | | | $ | 1,369,905 | |
See accompanying notes to unaudited consolidated financial statements.
Maximus, Inc.
Notes to the Unaudited Consolidated Financial Statements
1. ORGANIZATION
Maximus, a Virginia corporation established in 1975, is a leading provider of government services worldwide. Maximus operates under its founding mission of Helping Government Serve the People®, enabling citizens around the globe to successfully engage with their governments at all levels and across a variety of health and human services programs. Maximus delivers innovative business process management and technology solutions that contribute to improved outcomes for citizens and higher levels of productivity, accuracy, accountability, and efficiency of government-sponsored programs. Maximus is a proud partner to government agencies in the United States, Australia, Canada, Italy, Saudi Arabia, Singapore, South Korea, Sweden, and the United Kingdom.
2. SIGNIFICANT ACCOUNTING POLICIES
(a)Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries over which the Company has a controlling financial interest, and have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. All intercompany balances and transactions have been eliminated in consolidation.
(b)Basis of Presentation for Interim Periods
Certain information and footnote disclosures normally included for the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted for the interim periods presented. We believe that the unaudited interim financial statements include all adjustments (which are normal and recurring in nature) necessary to present fairly our financial position and the results of operations and cash flows for the periods presented.
The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for the year or future periods. The financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended September 30, 2021 included in our Annual Report on Form 10-K for the fiscal year then ended (the "2021 10-K"). We have continued to follow the accounting policies set forth in those financial statements.
(c)Estimates
The preparation of these financial statements, in conformity with U.S. GAAP, 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. At each reporting period end, we make 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 expectations of the future that we believe to be reasonable. The economic and political effects of the COVID-19 global pandemic increase uncertainty, which has reduced our ability to use past results to estimate future performance. Accordingly, our estimates may be subject to greater volatility than has been the case in the past.
3. BUSINESS SEGMENTS
We conduct our operations through three business segments: U.S. Services, U.S. Federal Services, and Outside the U.S.
U.S. Services
Our U.S. Services Segment provides a variety of business process services ("BPS") such as program administration, appeals and assessments, and related consulting work for U.S. state and local government programs. These services support a variety of programs, including the Affordable Care Act ("ACA"), Medicaid, the Children's Health Insurance Program ("CHIP"), Temporary Assistance to Needy Families ("TANF"), and child support programs. Addressing societal macro trends such as aging populations and rising costs, the segment continues to execute on its clinical evolution strategy by expanding its clinical offerings. This includes assessments to determine whether personal care services are medically necessary and public health offerings such as contact tracing, disease investigation, and vaccine distribution support services as part of the governments' COVID-19 response efforts.
U.S. Federal Services
From technology solutions to program administration and operations, our U.S. Federal Services Segment delivers end-to-end solutions that help various U.S. federal government agencies better deliver on their mission. This also includes appeals and assessments services, system and application development, IT modernization, and maintenance services. The segment also contains certain state-based assessments and appeals work that is part of the segment's heritage within the Medicare Appeals portfolio which continues to be managed within this segment. Benefiting from the Maximus Federal Consulting (formerly Attain Federal) platform, the segment executes on its digital strategy to deliver technology solutions that advance agency missions, including the challenge to modernize, provide better customer experience, and drive process efficiencies. The segment continues to expand its clinical solutions with the acquisition of VES Group, Inc., which manages the clinical evaluation process for U.S. veterans and service members on behalf of the U.S. Department of Veterans Affairs. The segment further supports clinical offerings in public health with new work supporting the U.S. Federal Government's COVID-19 response efforts. This included expanded work with the Centers for Disease Control and Prevention ("CDC") for their helpline and increased support for the IRS Wage and Investment Division's response efforts to general inquiries regarding the Coronavirus Aid Relief & Economic Security ("CARES") Act and Economic Impact Payment Service Plan.
Outside the U.S.
Our Outside the U.S. Segment provides BPS for international governments and commercial clients, transforming the lives of people around the world. Helping people find employment, access vital support, and remain healthy, these services include health and disability assessments, program administration for employment services, wellbeing solutions, and other job seeker related services. We support programs and deliver services in the U.K., including the Health Assessment Advisory Service ("HAAS"), the Work & Health Programme, Fair Start, and Restart; Australia, including jobactive and the Disability Employment Service; Canada, including Health Insurance British Columbia and the Employment Program of British Columbia; in addition to Italy, Saudi Arabia, Singapore, South Korea, and Sweden, where we predominantly provide employment support and job seeker services.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 3: Results of Operation by Business Segment |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| Amount | | % (1) | | Amount | | % (1) | | Amount | | % (1) | | Amount | | % (1) |
| (dollars in thousands) |
Revenue: | | | | | | | | | | | | | | | |
U.S. Services | $ | 398,077 | | | | | $ | 448,215 | | | | | $ | 784,494 | | | | | $ | 833,149 | | | |
U.S. Federal Services | 573,288 | | | | | 330,136 | | | | | 1,155,159 | | | | | 735,381 | | | |
Outside the U.S. | 205,961 | | | | | 180,929 | | | | | 388,549 | | | | | 336,304 | | | |
Revenue | $ | 1,177,326 | | | | | $ | 959,280 | | | | | $ | 2,328,202 | | | | | $ | 1,904,834 | | | |
Gross profit: | | | | | | | | | | | | | | | |
U.S. Services | $ | 84,971 | | | 21.3 % | | $ | 119,440 | | | 26.6 % | | $ | 174,670 | | | 22.3 % | | $ | 218,442 | | | 26.2 % |
U.S. Federal Services | 115,153 | | | 20.1 % | | 74,133 | | | 22.5 % | | 241,729 | | | 20.9 % | | 156,629 | | | 21.3 % |
Outside the U.S. | 28,327 | | | 13.8 % | | 37,085 | | | 20.5 % | | 40,207 | | | 10.3 % | | 61,642 | | | 18.3 % |
Gross profit | $ | 228,451 | | | 19.4 % | | $ | 230,658 | | | 24.0 % | | $ | 456,606 | | | 19.6 % | | $ | 436,713 | | | 22.9 % |
Selling, general, and administrative expenses: | | | | | | | | | | | | | | | |
U.S. Services | $ | 38,273 | | | 9.6 % | | $ | 36,593 | | | 8.2 % | | $ | 73,375 | | | 9.4 % | | $ | 74,049 | | | 8.9 % |
U.S. Federal Services | 68,949 | | | 12.0 % | | 50,978 | | | 15.4 % | | 133,874 | | | 11.6 % | | 103,230 | | | 14.0 % |
Outside the U.S. | 24,011 | | | 11.7 % | | 22,013 | | | 12.2 % | | 45,351 | | | 11.7 % | | 42,045 | | | 12.5 % |
Other (2) | (926) | | | NM | | 2,818 | | | NM | | 1,928 | | | NM | | 5,045 | | | NM |
Selling, general, and administrative expenses | $ | 130,307 | | | 11.1 % | | $ | 112,402 | | | 11.7 % | | $ | 254,528 | | | 10.9 % | | $ | 224,369 | | | 11.8 % |
Operating income/(loss): | | | | | | | | | | | | | | | |
U.S. Services | $ | 46,698 | | | 11.7 % | | $ | 82,847 | | | 18.5 % | | $ | 101,295 | | | 12.9 % | | $ | 144,393 | | | 17.3 % |
U.S. Federal Services | 46,204 | | | 8.1 % | | 23,155 | | | 7.0 % | | 107,855 | | | 9.3 % | | 53,399 | | | 7.3 % |
Outside the U.S. | 4,316 | | | 2.1 % | | 15,072 | | | 8.3 % | | (5,144) | | | (1.3) % | | 19,597 | | | 5.8 % |
Amortization of intangible assets | (22,856) | | | NM | | (5,070) | | | NM | | (45,261) | | | NM | | (11,586) | | | NM |
Other (2) | 926 | | | NM | | (2,818) | | | NM | | (1,928) | | | NM | | (5,045) | | | NM |
Operating income/(loss) | $ | 75,288 | | | 6.4 % | | $ | 113,186 | | | 11.8 % | | $ | 156,817 | | | 6.7 % | | $ | 200,758 | | | 10.5 % |
(1)Percentage of respective segment revenue. Percentages not considered meaningful are marked "NM."
(2)Other selling, general, and administrative expenses includes costs that are not allocated to a particular segment. This includes expenses incurred as part of our acquisitions, as well as potential acquisitions which have not been or may not be completed.
4. REVENUE RECOGNITION
The Company recognizes revenue as, or when, we satisfy performance obligations under a contract. The majority of our contracts have performance obligations which are satisfied over time. In most cases, we view our performance obligations as promises to transfer a series of distinct services to our customers that are substantially the same and which have the same pattern of service.
Disaggregation of Revenue
In addition to our segment reporting, we disaggregate our revenues by contract type, customer type, and geography. Our operating segments represent the manner in which our Chief Executive Officer reviews our financial results, which is further discussed in "Note 3. Business Segments."
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Table 4.1: Revenue by Contract Type |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
| (dollars in thousands) |
Performance-based | $ | 516,210 | | | 43.9 % | | $ | 349,749 | | | 36.4 % | | $ | 1,007,166 | | | 43.3 % | | $ | 643,709 | | | 33.8 % |
Cost-plus | 322,823 | | | 27.4 % | | 286,082 | | | 29.8 % | | 662,904 | | | 28.5 % | | 670,565 | | | 35.2 % |
Fixed price | 158,867 | | | 13.5 % | | 146,344 | | | 15.3 % | | 310,372 | | | 13.3 % | | 267,121 | | | 14.0 % |
Time and materials | 179,426 | | | 15.2 % | | 177,105 | | | 18.5 % | | 347,760 | | | 14.9 % | | 323,439 | | | 17.0 % |
Total revenue | $ | 1,177,326 | | | | | $ | 959,280 | | | | | $ | 2,328,202 | | | | | $ | 1,904,834 | | | |
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Table 4.2: Revenue by Customer Type |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
| (dollars in thousands) |
U.S. state government agencies | $ | 411,287 | | | 35.0 % | | $ | 445,697 | | | 46.5 % | | $ | 782,834 | | | 33.7 % | | $ | 833,811 | | | 43.8 % |
U.S. federal government agencies | 553,707 | | | 47.0 % | | 307,870 | | | 32.1 % | | 1,117,801 | | | 48.0 % | | 693,442 | | | 36.4 % |
International government agencies | 194,800 | | | 16.5 % | | 171,700 | | | 17.9 % | | 366,175 | | | 15.7 % | | 319,042 | | | 16.7 % |
Other, including local municipalities and commercial customers | 17,532 | | | 1.5 % | | 34,013 | | | 3.5 % | | 61,392 | | | 2.6 % | | 58,539 | | | 3.1 % |
Total revenue | $ | 1,177,326 | | | | | $ | 959,280 | | | | | $ | 2,328,202 | | | | | $ | 1,904,834 | | | |
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Table 4.3: Revenue by Geography |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
| (dollars in thousands) |
United States | $ | 971,365 | | | 82.5 % | | $ | 778,350 | | | 81.1 % | | $ | 1,939,653 | | | 83.3 % | | $ | 1,568,529 | | | 82.3 % |
United Kingdom | 107,898 | | | 9.1 % | | 72,882 | | | 7.6 % | | 193,705 | | | 8.3 % | | 137,668 | | | 7.2 % |
Australia | 46,670 | | | 4.0 % | | 70,947 | | | 7.4 % | | 99,484 | | | 4.3 % | | 126,878 | | | 6.7 % |
Rest of world | 51,393 | | | 4.4 % | | 37,101 | | | 3.9 % | | 95,360 | | | 4.1 % | | 71,759 | | | 3.8 % |
Total revenue | $ | 1,177,326 | | | | | $ | 959,280 | | | | | $ | 2,328,202 | | | | | $ | 1,904,834 | | | |
Contract balances
Differences in timing between revenue recognition and cash collection result in contract assets and contract liabilities. We classify these assets as accounts receivable — billed and billable and unbilled receivables; the liabilities are classified as deferred revenue.
In many contracts, we bill our customers on a monthly basis shortly after the month end for work performed in that month. These balances are considered collectible and are included within accounts receivable — billed and billable.
Exceptions to this pattern will arise for various reasons, including those listed below.
•Under cost-plus contracts, we are typically required to estimate a contract's share of our general and administrative expenses. This share is based upon estimates of total costs which may vary over time. We typically invoice our customers at an agreed provisional billing rate which may differ from actual rates incurred. If our actual rates are higher than the provisional billing rates, an asset is recorded for this variance; if the provisional billing rates are higher than our actual rates, we record a liability.
•Certain contracts include retainage balances, whereby revenue is earned but some portion of cash payments are held back by the customer for a period of time, typically to allow the customer to confirm the objective criteria laid out by the contract have been met. This balance is classified as accounts receivable — unbilled until restrictions on billing are lifted. As of March 31, 2022, and September 30, 2021, $12.6 million and $10.4 million, respectively, of our unbilled receivables related to amounts pursuant to contractual retainage provisions.
•In certain contracts, we may receive funds from our customers prior to performing operations. These funds are typically referred to as "set-up costs" and reflect the need for us to make investments in infrastructure prior to providing a service. This investment in infrastructure is not a performance obligation which is distinct from the service that is subsequently provided and, as a result, revenue is not recognized based upon the establishment of this infrastructure, but rather over the course of the contractual relationship. The funds are initially recorded as deferred revenue and recognized over the term of the contract. Other contracts may not include set-up fees but will provide higher fees in earlier periods of the contract. The premium on these fees is deferred.
•Some of our contracts, notably our employment services contracts in the Outside the U.S. Segment, include payments for desired outcomes, such as job placement and job retention, and these outcome payments occur over several months. We are required to estimate these outcome fees ahead of their realization and recognize this estimated fee over the period of delivery.
During the three and six months ended March 31, 2022, we recognized revenue of $20.6 million and $61.8 million, respectively, that was included in our deferred revenue balances as of September 30, 2021. During the three and six months ended March 31, 2021, we recognized revenue of $15.2 million and $29.1 million, respectively, that was included in our deferred revenue balances at September 30, 2020.
Contract estimates
We are required to use estimates in recognizing revenue from some of our contracts. As discussed in "Note 2. Significant Accounting Policies," the calculation of these estimates has been complicated by the COVID-19 pandemic, which has reduced our ability to use past results to estimate future performance.
Some of our performance-based contract revenue is recognized based upon future outcomes defined in each contract. This is the case in many of our employment services contracts in the Outside the U.S. Segment, where we are paid as individuals attain employment goals, which may take many months to achieve. We recognize revenue on these contracts over the period of performance. Our estimates vary from contract to contract but may include estimates of the number of participants, the length of the contract, and the participants reaching employment milestones. We are required to estimate these outcome fees ahead of their collection and recognize this estimated fee over the period of delivery. Changes to our estimates are recognized on a cumulative catch-up basis.
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Table 4.4: Effect of Changes in Contract Estimates |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| (in thousands, except per share data) |
Benefit to/(reduction of) revenue recognized due to changes in contract estimates | $ | (1,369) | | | $ | 7,603 | | | $ | (4,215) | | | $ | 15,986 | |
Benefit to/(reduction of) diluted earnings per share recognized due to changes in contract estimates | $ | (0.02) | | | $ | 0.09 | | | $ | (0.05) | | | $ | 0.19 | |
Remaining performance obligations
As of March 31, 2022, we had approximately $550 million of remaining performance obligations. We anticipate that we will recognize revenue on approximately 50% of this balance within the next 12 months. This balance excludes contracts with an original duration of twelve months or less, including contracts with a penalty-free termination for convenience clause, and any variable consideration which is allocated entirely to future performance obligations, including variable transaction fees or fees tied directly to costs incurred.
5. EARNINGS PER SHARE
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Table 5: Weighted Average Number of Shares - Earnings Per Share |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2022 | | March 31, 2021 | | March 31, 2022 | | March 31, 2021 |
| (in thousands) |
Basic weighted average shares outstanding | 62,227 | | | 62,026 | | | 62,256 | | | 62,022 | |
Dilutive effect of unvested RSUs and PSUs | 154 | | | 268 | | | 153 | | | 190 | |
Denominator for diluted earnings per share | 62,381 | | | 62,294 | | | 62,409 | | | 62,212 | |
Unvested anti-dilutive stock units excluded from the dilutive effect (stock units) | 173 | | 199 | | 192 | | 201 |
6. BUSINESS COMBINATIONS
VES Group, Inc. (VES)
On May 28, 2021, the Company acquired 100% of VES for an estimated cash purchase price of $1.37 billion (the "VES Acquisition"). The final purchase price is subject to adjustment and is expected to be finalized during 2022. VES was integrated into our U.S. Federal Services Segment. The VES Acquisition also supports our ongoing strategic priority of expansion into the U.S. Federal market and accelerates our clinical evolution to meet long-term demand for BPS with a clinical dimension. As of March 31, 2022, we have completed our assessment of all acquired assets and liabilities assumed, with the exception of income taxes and the working capital true-up.
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Table 6.1: VES Valuation |
| Allocation of Assets and Liabilities as of September 30, 2021 | | Adjustments | | Estimated Allocation of Assets and Liabilities as of March 31, 2022 |
| (in thousands) |
Consideration paid: | | | | | |
Cash consideration paid, net of cash acquired | $ | 1,360,231 | | | $ | — | | | $ | 1,360,231 | |
Estimated additional cash payments | 4,635 | | | 4,988 | | | 9,623 | |
Estimated cash consideration, net of cash acquired | 1,364,866 | | | 4,988 | | | 1,369,854 | |
Assets acquired: | | | | | |
Accounts receivable - billed, billable and unbilled | $ | 44,078 | | | $ | — | | | $ | 44,078 | |
Prepaid expenses and other current assets | 7,955 | | | — | | | 7,955 | |
Property and equipment, net | 9,113 | | | (1,092) | | | 8,021 | |
Operating lease right-of-use assets | 18,898 | | | — | | | 18,898 | |
Intangible assets | 664,000 | | | — | | | 664,000 | |
Other assets | 7,166 | | | — | | | 7,166 | |
Total identifiable assets acquired | 751,210 | | | (1,092) | | | 750,118 | |
Liabilities assumed: | | | | | |
Accounts payable and accrued compensation | 42,182 | | | (4,360) | | | 37,822 | |
Operating lease liabilities | 18,898 | | | — | | | 18,898 | |
Income taxes payable, current | 5,673 | | | — | | | 5,673 | |
Deferred income taxes | 171,497 | | | 1,147 | | | 172,644 | |
Other long-term liabilities | 12,270 | | | — | | | |