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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, 2023
☐ 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) |
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 60,783,621 shares of the registrant's Common Stock outstanding as of May 1, 2023.
Table of Contents to Second Quarter 2023 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," "continue," "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 residual impacts of the coronavirus ("COVID-19") global pandemic, and our recent acquisitions, are forward-looking statements that are subject to 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 could lead to penalties, liquidated damages, actual damages, adverse settlement agreements, and/or contract termination;
•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;
•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 businesses we disposed of or divested; and
•other factors set forth in Item 1A, "Risk Factors" of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on November 22, 2022.
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, 2023 | | March 31, 2022 | | March 31, 2023 | | March 31, 2022 |
| (in thousands, except per share amounts) |
Revenue | $ | 1,206,852 | | | $ | 1,177,326 | | | $ | 2,456,098 | | | $ | 2,328,202 | |
Cost of revenue | 978,249 | | | 948,875 | | | 1,982,748 | | | 1,871,596 | |
Gross profit | 228,603 | | | 228,451 | | | 473,350 | | | 456,606 | |
Selling, general, and administrative expenses | 142,448 | | | 130,307 | | | 288,900 | | | 254,528 | |
Amortization of intangible assets | 23,650 | | | 22,856 | | | 47,168 | | | 45,261 | |
Operating income | 62,505 | | | 75,288 | | | 137,282 | | | 156,817 | |
Interest expense | 20,999 | | | 9,438 | | | 42,605 | | | 19,076 | |
Other income, net | 818 | | | 715 | | | 1,084 | | | 404 | |
Income before income taxes | 42,324 | | | 66,565 | | | 95,761 | | | 138,145 | |
Provision for income taxes | 10,536 | | | 16,469 | | | 23,978 | | | 34,719 | |
Net income | $ | 31,788 | | | $ | 50,096 | | | $ | 71,783 | | | $ | 103,426 | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | $ | 0.52 | | | $ | 0.81 | | | $ | 1.17 | | | $ | 1.66 | |
Diluted | $ | 0.52 | | | $ | 0.80 | | | $ | 1.17 | | | $ | 1.66 | |
Weighted average shares outstanding: | | | | | | | |
Basic | 61,120 | | | 62,227 | | | 61,119 | | | 62,256 | |
Diluted | 61,383 | | | 62,381 | | | 61,265 | | | 62,409 | |
| | | | | | | |
Dividends declared per share | $ | 0.28 | | | $ | 0.28 | | | $ | 0.56 | | | $ | 0.56 | |
See accompanying notes to consolidated financial statements.
Maximus, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2023 | | March 31, 2022 | | March 31, 2023 | | March 31, 2022 |
| (in thousands) |
Net income | $ | 31,788 | | | $ | 50,096 | | | $ | 71,783 | | | $ | 103,426 | |
Other comprehensive (loss)/income, net of tax: | | | | | | | |
Foreign currency translation adjustments | 965 | | | (23) | | | 9,001 | | | 436 | |
Net (losses)/gains on cash flow hedge, net of tax effect of $(1,630), $3,814, $(2,979), and $4,772, respectively | (4,562) | | | 10,689 | | | (8,343) | | | 13,374 | |
Other comprehensive (loss)/income | (3,597) | | | 10,666 | | | 658 | | | 13,810 | |
Comprehensive income | $ | 28,191 | | | $ | 60,762 | | | $ | 72,441 | | | $ | 117,236 | |
See accompanying notes to consolidated financial statements.
Maximus, Inc.
Consolidated Balance Sheets
| | | | | | | | | | | |
| March 31, 2023 | | September 30, 2022 |
| (unaudited) | | |
| (in thousands) |
Assets: | | | |
Cash and cash equivalents | $ | 56,344 | | | $ | 40,658 | |
Accounts receivable, net | 742,387 | | | 807,110 | |
Income taxes receivable | 12,156 | | | 2,158 | |
Prepaid expenses and other current assets | 141,017 | | | 182,387 | |
Total current assets | 951,904 | | | 1,032,313 | |
Property and equipment, net | 46,915 | | | 52,258 | |
Capitalized software, net | 71,393 | | | 58,740 | |
Operating lease right-of-use assets | 162,633 | | | 132,885 | |
Goodwill | 1,780,200 | | | 1,779,415 | |
Intangible assets, net | 751,194 | | | 804,904 | |
Deferred contract costs, net | 47,498 | | | 47,732 | |
Deferred compensation plan assets | 42,049 | | | 37,050 | |
Deferred income taxes | 5,865 | | | 4,970 | |
Other assets | 39,205 | | | 42,447 | |
Total assets | $ | 3,898,856 | | | $ | 3,992,714 | |
Liabilities and Shareholders' Equity: | | | |
Liabilities: | | | |
Accounts payable and accrued liabilities | $ | 259,463 | | | $ | 264,553 | |
Accrued compensation and benefits | 156,990 | | | 178,199 | |
Deferred revenue, current portion | 66,796 | | | 87,146 | |
Income taxes payable | 4,482 | | | 718 | |
Long-term debt, current portion | 84,490 | | | 63,458 | |
Operating lease liabilities, current portion | 55,928 | | | 63,999 | |
Other current liabilities | 53,026 | | | 116,374 | |
Total current liabilities | 681,175 | | | 774,447 | |
Deferred revenue, non-current portion | 25,776 | | | 21,414 | |
Deferred income taxes | 201,079 | | | 206,099 | |
Long-term debt, non-current portion | 1,205,028 | | | 1,292,483 | |
Deferred compensation plan liabilities, non-current portion | 43,706 | | | 40,210 | |
Operating lease liabilities, non-current portion | 121,957 | | | 86,175 | |
Other liabilities | 18,413 | | | 22,515 | |
Total liabilities | 2,297,134 | | | 2,443,343 | |
Commitments and contingencies (Note 11) | | | |
Shareholders' equity: | | | |
Common stock, no par value; 100,000 shares authorized; 60,784 and 60,774 shares issued and outstanding as of March 31, 2023, and September 30, 2022, respectively (shares in thousands) | 572,632 | | | 557,978 | |
Accumulated other comprehensive loss | (33,303) | | | (33,961) | |
Retained earnings | 1,062,393 | | | 1,025,354 | |
Total shareholders' equity | 1,601,722 | | | 1,549,371 | |
Total liabilities and shareholders' equity | $ | 3,898,856 | | | $ | 3,992,714 | |
See accompanying notes to consolidated financial statements.
Maximus, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| For the Six Months Ended |
| March 31, 2023 | | March 31, 2022 |
| (in thousands) |
Cash flows from operating activities: | | | |
Net income | $ | 71,783 | | | $ | 103,426 | |
Adjustments to reconcile net income to cash flows from operations: | | | |
Depreciation and amortization of property, equipment, and capitalized software | 26,321 | | | 21,199 | |
Amortization of intangible assets | 47,168 | | | 45,261 | |
Amortization of debt issuance costs and debt discount | 1,635 | | | 1,297 | |
| | | |
| | | |
Deferred income taxes | (1,368) | | | (3,318) | |
Stock compensation expense | 13,943 | | | 15,052 | |
Loss on sale of businesses | 883 | | | — | |
Change in assets and liabilities, net of effects of business combinations and disposals: | | | |
Accounts receivable | 62,529 | | | (49,064) | |
Prepaid expenses and other current assets | 13,412 | | | 9,769 | |
Deferred contract costs | 583 | | | (6,431) | |
Accounts payable and accrued liabilities | (6,361) | | | (3,047) | |
Accrued compensation and benefits | (14,222) | | | (28,281) | |
Deferred revenue | (18,347) | | | 18,473 | |
Income taxes | (6,578) | | | (13,515) | |
Operating lease right-of-use assets and liabilities | (2,072) | | | (1,293) | |
| | | |
Other assets and liabilities | (14,272) | | | 2,331 | |
Net cash provided by operating activities | 175,037 | | | 111,859 | |
Cash flows from investing activities: | | | |
Purchases of property and equipment and capitalized software | (33,751) | | | (22,898) | |
Acquisitions of businesses, net of cash acquired | — | | | (4) | |
| | | |
Proceeds from sale of businesses | 9,124 | | | — | |
| | | |
Net cash used in investing activities | (24,627) | | | (22,902) | |
Cash flows from financing activities: | | | |
Cash dividends paid to Maximus shareholders | (34,033) | | | (34,659) | |
Purchases of Maximus common stock | — | | | (25,843) | |
Tax withholding related to RSU vesting | (8,475) | | | (9,673) | |
Payments for contingent consideration | (4,041) | | | — | |
| | | |
Proceeds from borrowings | 462,398 | | | 240,000 | |
Principal payments for debt | (530,460) | | | (303,708) | |
Restricted cash movements | (57,060) | | | — | |
Net cash used in financing activities | (171,671) | | | (133,883) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 3,186 | | | 324 | |
Net change in cash, cash equivalents, and restricted cash | (18,075) | | | (44,602) | |
Cash, cash equivalents and restricted cash, beginning of period | 136,795 | | | 156,570 | |
Cash, cash equivalents and restricted cash, end of period | $ | 118,720 | | | $ | 111,968 | |
See accompanying notes to 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, 2022 | 60,774 | | $ | 557,978 | | | $ | (33,961) | | | $ | 1,025,354 | | | $ | 1,549,371 | |
Net income | — | | — | | | — | | | 39,995 | | | 39,995 | |
Foreign currency translation | — | | — | | | 8,036 | | | — | | | 8,036 | |
Cash flow hedge, net of tax | — | | — | | | (3,781) | | | — | | | (3,781) | |
Cash dividends | — | | — | | | — | | | (17,017) | | | (17,017) | |
Dividends on RSUs | — | | 298 | | | — | | | (298) | | | — | |
| | | | | | | | | |
Stock compensation expense | — | | 4,403 | | | — | | | — | | | 4,403 | |
| | | | | | | | | |
| | | | | | | | | |
Balance as of December 31, 2022 | 60,774 | | $ | 562,679 | | | $ | (29,706) | | | $ | 1,048,034 | | | $ | 1,581,007 | |
Net income | — | | — | | | — | | | 31,788 | | | 31,788 | |
Foreign currency translation | — | | — | | | 965 | | | — | | | 965 | |
Cash flow hedge, net of tax | — | | — | | | (4,562) | | | — | | | (4,562) | |
Cash dividends | — | | — | | | — | | | (17,016) | | | (17,016) | |
Dividends on RSUs | — | | 413 | | | — | | | (413) | | | — | |
| | | | | | | | | |
Stock compensation expense | — | | 9,540 | | | — | | | — | | | 9,540 | |
| | | | | | | | | |
RSUs vested | 10 | | — | | | — | | | — | | | — | |
Balance as of March 31, 2023 | 60,784 | | $ | 572,632 | | | $ | (33,303) | | | $ | 1,062,393 | | | $ | 1,601,722 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
See accompanying notes to consolidated financial statements.
Maximus, Inc.
Notes to the Consolidated Financial Statements
1. ORGANIZATION
Maximus, a Virginia corporation established in 1975, is a leading operator of government health and human services programs and provider of technology solutions to governments. Under our mission of Moving People Forward, we offer industry-leading expertise, including citizen engagement, eligibility and program integrity, independent clinical assessments, case management, and technology modernization services to enable citizens around the globe to successfully engage with their governments at all levels. We are a proud partner to government agencies in the United States, Australia, Canada, Italy, Saudi Arabia, Singapore, South Korea, United Arab Emirates, and the United Kingdom.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements, including the notes, include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). All intercompany balances and transactions have been eliminated in consolidation.
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, 2022 included in our Annual Report on Form 10-K for the fiscal year then ended (the "2022 10-K"). We have continued to follow the accounting policies set forth in those financial statements.
Use of 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.
In May 2021, we acquired VES Group, Inc. As part of the acquisition, we allocated a valuation of $27 million to certain technology assets used by the business, which we elected to amortize over twelve years, which was our best estimate of asset life at that time. In fiscal year 2023, we have taken the opportunity to improve our technology portfolio, including the development of technology, which will eventually replace much of the acquired technology. Accordingly, we have revised the asset life on the existing technology assuming the assets will cease being used by September 2026. This change in estimated useful life will result in additional annual amortization expense of $3.8 million per year. In the three and six months ended March 31, 2023, this change reduced our diluted earnings per share by approximately $0.01 and $0.02, respectively.
3. BUSINESS SEGMENTS
We conduct our operations through three business segments: U.S. Federal Services, U.S. Services, and Outside the U.S.
U.S. Federal Services
Our U.S. Federal Services Segment delivers end-to-end solutions that help various U.S. federal government agencies better deliver on their mission, including program operations and management, clinical services, and technology solutions. This also includes appeals and assessments services, system and application development, IT modernization, and maintenance services. The segment also contains certain state-based assessments and appeals work that is part of the segment's heritage which continues to be managed within this segment. Benefiting from the 2021 acquisition of the Attain Federal business, now managed as Technology Consulting Services, 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.
U.S. Services
Our U.S. Services Segment provides a variety of business process services ("BPS"), such as program administration, 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. As part of the government's COVID-19 response efforts, the segment supported contact tracing, disease investigation, and vaccine distribution support services during the peak of the pandemic. The segment also successfully expanded into the unemployment insurance market where longer term opportunities have materialized. As part of the broader strategy to evolve clinically and address societal macro trends such as aging populations and rising costs, the segment continues to expand its offerings in public health with new work in in-person assessments.
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") and Restart; Australia, including Workforce Australia and the Disability Employment Service; Canada, including the Employment Program of British Columbia; in addition to Italy, Saudi Arabia, Singapore, South Korea, and UAE 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, 2023 | | March 31, 2022 | | March 31, 2023 | | March 31, 2022 |
| Amount | | % (1) | | Amount | | % (1) | | Amount | | % (1) | | Amount | | % (1) |
| (dollars in thousands) |
Revenue: | | | | | | | | | | | | | | | |
U.S. Federal Services | $ | 584,075 | | | | | $ | 573,288 | | | | | $ | 1,202,242 | | | | | $ | 1,155,159 | | | |
U.S. Services | 449,703 | | | | | 398,077 | | | | | 889,181 | | | | | 784,494 | | | |
Outside the U.S. | 173,074 | | | | | 205,961 | | | | | 364,675 | | | | | 388,549 | | | |
Revenue | $ | 1,206,852 | | | | | $ | 1,177,326 | | | | | $ | 2,456,098 | | | | | $ | 2,328,202 | | | |
Gross profit: | | | | | | | | | | | | | | | |
U.S. Federal Services | $ | 122,874 | | | 21.0 | % | | $ | 115,153 | | | 20.1 | % | | $ | 245,568 | | | 20.4 | % | | $ | 241,729 | | | 20.9 | % |
U.S. Services | 86,016 | | | 19.1 | % | | 84,971 | | | 21.3 | % | | 169,614 | | | 19.1 | % | | 174,670 | | | 22.3 | % |
Outside the U.S. | 19,713 | | | 11.4 | % | | 28,327 | | | 13.8 | % | | 58,168 | | | 16.0 | % | | 40,207 | | | 10.3 | % |
Gross profit | $ | 228,603 | | | 18.9 | % | | $ | 228,451 | | | 19.4 | % | | $ | 473,350 | | | 19.3 | % | | $ | 456,606 | | | 19.6 | % |
Selling, general, and administrative expenses: | | | | | | | | | | | | | | | |
U.S. Federal Services | $ | 75,050 | | | 12.8 | % | | $ | 68,949 | | | 12.0 | % | | $ | 146,699 | | | 12.2 | % | | $ | 133,874 | | | 11.6 | % |
U.S. Services | 43,415 | | | 9.7 | % | | 38,273 | | | 9.6 | % | | 89,257 | | | 10.0 | % | | 73,375 | | | 9.4 | % |
Outside the U.S. | 23,425 | | | 13.5 | % | | 24,011 | | | 11.7 | % | | 51,814 | | | 14.2 | % | | 45,351 | | | 11.7 | % |
Loss on sale of businesses (2) | 883 | | | NM | | — | | | NM | | 883 | | | NM | | — | | | NM |
Other (3) | (325) | | | NM | | (926) | | | NM | | 247 | | | NM | | 1,928 | | | NM |
Selling, general, and administrative expenses | $ | 142,448 | | | 11.8 | % | | $ | 130,307 | | | 11.1 | % | | $ | 288,900 | | | 11.8 | % | | $ | 254,528 | | | 10.9 | % |
Operating income/(loss): | | | | | | | | | | | | | | | |
U.S. Federal Services | $ | 47,824 | | | 8.2 | % | | $ | 46,204 | | | 8.1 | % | | $ | 98,869 | | | 8.2 | % | | $ | 107,855 | | | 9.3 | % |
U.S. Services | 42,601 | | | 9.5 | % | | 46,698 | | | 11.7 | % | | 80,357 | | | 9.0 | % | | 101,295 | | | 12.9 | % |
Outside the U.S. | (3,712) | | | (2.1) | % | | 4,316 | | | 2.1 | % | | 6,354 | | | 1.7 | % | | (5,144) | | | (1.3) | % |
Amortization of intangible assets | (23,650) | | | NM | | (22,856) | | | NM | | (47,168) | | | NM | | (45,261) | | | NM |
Loss on sale of businesses (2) | (883) | | | NM | | — | | | NM | | (883) | | | NM | | — | | | NM |
Other (3) | 325 | | | NM | | 926 | | | NM | | (247) | | | NM | | (1,928) | | | NM |
Operating income | $ | 62,505 | | | 5.2 | % | | $ | 75,288 | | | 6.4 | % | | $ | 137,282 | | | 5.6 | % | | $ | 156,817 | | | 6.7 | % |
(1)Percentage of respective segment revenue. Percentages not considered meaningful are marked "NM."
(2)During the second quarter of fiscal year 2023, we sold a small commercial practice in the United Kingdom and our employment operations business in Sweden, both subsidiaries within our Outside the U.S. Segment, resulting in a loss. Refer to "Note 7. Divestitures" for more details.
(3)Other includes credits and costs that are not allocated to a particular segment.
4. REVENUE RECOGNITION
We recognize revenue as, or when, we satisfy performance obligations under a contract. The majority of our contracts have performance obligations that 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. We recognize revenue over the performance period as a customer receives the benefits of our services.
Disaggregation of Revenue
In addition to our segment reporting, we disaggregate our revenues by contract type and customer type. 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."
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 4.1: Revenue by Contract Type |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2023 | | March 31, 2022 | | March 31, 2023 | | March 31, 2022 |
| (dollars in thousands) |
Performance-based | $ | 574,747 | | | 47.6 | % | | $ | 516,210 | | | 43.9 | % | | $ | 1,143,964 | | | 46.6 | % | | $ | 1,007,166 | | | 43.3 | % |
Cost-plus | 312,176 | | | 25.9 | % | | 322,823 | | | 27.4 | % | | 659,495 | | | 26.9 | % | | 662,904 | | | 28.5 | % |
Fixed price | 180,674 | | | 15.0 | % | | 158,867 | | | 13.5 | % | | 355,747 | | | 14.5 | % | | 310,372 | | | 13.3 | % |
Time and materials | 139,255 | | | 11.5 | % | | 179,426 | | | 15.2 | % | | 296,892 | | | 12.1 | % | | 347,760 | | | 14.9 | % |
Total revenue | $ | 1,206,852 | | | | | $ | 1,177,326 | | | | | $ | 2,456,098 | | | | | $ | 2,328,202 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 4.2: Revenue by Customer Type |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2023 | | March 31, 2022 | | March 31, 2023 | | March 31, 2022 |
| (dollars in thousands) |
U.S. federal government agencies | $ | 569,897 | | | 47.2 | % | | $ | 553,707 | | | 47.0 | % | | $ | 1,173,815 | | | 47.8 | % | | $ | 1,117,801 | | | 48.0 | % |
U.S. state government agencies | 446,549 | | | 37.0 | % | | 411,287 | | | 34.9 | % | | 883,911 | | | 36.0 | % | | 782,834 | | | 33.7 | % |
International government agencies | 161,359 | | | 13.4 | % | | 194,800 | | | 16.5 | % | | 343,119 | | | 14.0 | % | | 366,175 | | | 15.7 | % |
Other, including local municipalities and commercial customers | 29,047 | | | 2.4 | % | | 17,532 | | | 1.5 | % | | 55,253 | | | 2.2 | % | | 61,392 | | | 2.6 | % |
Total revenue | $ | 1,206,852 | | | | | $ | 1,177,326 | | | | | $ | 2,456,098 | | | | | $ | 2,328,202 | | | |
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 and such balances are considered collectible and are included within accounts receivable, net.
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, 2023 and September 30, 2022, $11.7 million and $13.1 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 that 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, 2023, we recognized revenue of $34.8 million and $85.9 million, respectively, included in our deferred revenue balances at September 30, 2022. During the three and six months ended March 31, 2022, we recognized revenue of $20.6 million and $61.8 million, respectively, included in our deferred revenue balances at September 30, 2021.
Contract estimates
We are required to use estimates in recognizing revenue from some of our contracts.
Some of our performance-based contract revenue is recognized based upon future milestones 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 milestones, which may take many months to achieve. We recognize revenue over the period of performance. Our estimates vary from contract to contract but may include the number of participants within a portfolio reaching employment milestones and the service delivery periods for participants reaching the employment milestone. We estimate the total variable fees we will receive using the expected value method. We recognize the fees over the expected period of performance. At each reporting period, we update our estimates of the variable fees to represent the circumstances present at the end of the reporting period. We are required to constrain our estimates to the extent that it is probable that there will not be a significant reversal of cumulative revenue when the uncertainty is resolved. We do not have a history of significant constraints on these contracts.
Changes to our estimates are recognized on a cumulative catch-up basis. For the three and six months ended March 31, 2023, we reported a reduction in revenue and diluted earnings per share of $6.5 million and $0.08 and $6.1 million and $0.07, respectively from changes in estimates. The corresponding change for the three and six months ended March 31, 2022 was a reduction to revenue and diluted earnings per share of $1.4 million and $0.02 and $4.2 million and $0.05, respectively.
Remaining performance obligations
As of March 31, 2023, we had approximately $400 million of remaining performance obligations. We anticipate that we will recognize revenue on approximately 60% 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
| | | | | | | | | | | | | | | | | | | | | | | |
Table 5: Weighted Average Number of Shares - Earnings Per Share |
| For the Three Months Ended | | For the Six Months Ended |
| March 31, 2023 | | March 31, 2022 | | March 31, 2023 | | March 31, 2022 |
| (in thousands) |
Basic weighted average shares outstanding | 61,120 | | | 62,227 | | | 61,119 | | | 62,256 | |
Dilutive effect of unvested RSUs and PSUs | 263 | | | 154 | | | 146 | | | 153 | |
Denominator for diluted earnings per share | 61,383 | | | 62,381 | | | 61,265 | | | 62,409 | |
The diluted earnings per share calculation for the three and six months ended March 31, 2023 excludes approximately 99,000 and 300,000 unvested anti-dilutive restricted stock units, respectively. For the three and six months ended March 31, 2022, approximately 173,000 and 192,000 unvested anti-dilutive restricted stock units were excluded from the diluted earnings per share calculation, respectively.
6. DEBT AND DERIVATIVES
| | | | | | | | | | | |
Table 6.1: Details of Debt |
| March 31, 2023 | | September 30, 2022 |
| (in thousands) |
Term Loan A, due 2026 | $ | 943,750 | | | $ | 971,250 | |
Term Loan B, due 2028 | 346,721 | | | 395,000 | |
| | | |
Subsidiary loan agreements | 7,785 | | | 64 | |
Funded Debt | 1,298,256 | | | 1,366,314 | |
Less: Unamortized debt-issuance costs and discounts | (8,738) | | | (10,373) | |
Total debt | 1,289,518 | | | 1,355,941 | |
Less: Current portion of long-term debt | (84,490) | | | (63,458) | |
Long-term debt | $ | 1,205,028 | | | $ | 1,292,483 | |
We entered into a credit agreement with JPMorgan Chase Bank, N.A. in May 2021 comprised of Term Loan A, Term Loan B, and a $600.0 million revolving credit facility ("Revolver"). During the first quarter of fiscal year 2023, we converted our interest rate index from the London Interbank Overnight Rate ("LIBOR") to the Secured Overnight Financing Rate ("SOFR").
The Credit Agreement requires us to comply with a number of covenants, including leverage and interest coverage ratios. At March 31, 2023, we are in compliance with all covenants. We do not believe that the covenants represent a significant restriction on our ability to successfully operate the business or to pay dividends.
In addition to the corporate Credit Agreement, we hold smaller credit facilities in Australia, Canada, and the United Kingdom. These allow our businesses to borrow funds to meet any short-term working capital needs.
The following table sets forth future minimum principal payments due under our debt obligations as of March 31, 2023 for the remainder of fiscal year 2023 through fiscal year 2027 and thereafter:
| | | | | |
Table 6.2: Details of Future Minimum Principal Payments Due |
| Amount Due |
| (in thousands) |
April 1, 2023 through September 30, 2023 | $ | 43,900 | |
Year ended September 30, 2024 | 85,985 | |
Year ended September 30, 2025 | 92,860 | |
Year ended September 30, 2026 | 740,985 | |
Year ended September 30, 2027 | 3,485 | |
Thereafter | 331,041 | |
Total Payments | $ | 1,298,256 | |
Interest Rate Derivative Instruments
To reduce our interest rate risk, we entered into interest-rate swap agreements covering our Term Loan A, effectively setting a fixed rate for a portion of our debt. At March 31, 2023, we have arrangements in place that fix our interest rate of $500 million through May 2026 and a further arrangement to fix $150 million through September 2024. The balance of the debt pays interest based upon an index. The floating interest rate on these instruments was converted from LIBOR to SOFR in December 2022, concurrent with our debt agreements. In converting our debt and interest-rate swaps, we utilized the practical expedients allowed under ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which allowed us to treat these amendments as though the modification was not substantial. At March 31, 2023, our effective interest rate, including the original issuance costs and discount rate, was 5.9%.
Our interest-rate swap agreements are valued quarterly and recorded on our balance sheet. As of March 31, 2023, we had an asset of $24.6 million and a liability of $4.5 million, compared to an asset of $31.4 million as of September 30, 2022. These balances were recorded in "other assets" and "other liabilities", respectively, on our consolidated balance sheet. As these hedges are considered effective, all gains and losses are reported within other comprehensive income on our consolidated statement of comprehensive income.
7. DIVESTITURES
On March 6, 2023, we sold a small commercial practice in the United Kingdom, part of our Outside the U.S. Segment, resulting in a pre-tax loss of $0.6 million. The cash consideration will be received in installments, with a fair value of $16.0 million. The installment payments are unconditional.
On March 30, 2023, we sold our Swedish subsidiary for cash consideration of $0.4 million, resulting in a small loss.
8. FAIR VALUE MEASUREMENTS
The following assets and liabilities are recorded at fair value on a recurring basis.
•We hold mutual fund assets within a Rabbi Trust to cover liabilities in our deferred compensation plan. These assets have prices quoted within active markets and, accordingly, are classified as level 1 within the fair value hierarchy.
•We have three interest rate swap agreements, serving to reduce our interest rate risk on our debt. These assets and liabilities can be valued using observable data and, accordingly, are classified as level 2 within the fair value hierarchy.
•We anticipate paying additional consideration for certain acquisitions based upon the subsequent performance of the businesses acquired. This liability is based upon our internal assumptions over revenues, margins, volumes, and contract terms. Accordingly, these inputs are not observable and are classified as level 3 within the fair value hierarchy.
•We will receive payments from the sale of a small commercial practice in the United Kingdom over the next three years. We have discounted the asset based upon our cost of capital, which is not an observable input. The balance at the sale of the business was $6.8 million. These assets are held in "Prepaid expenses and other current assets" and "Other assets" on our consolidated balance sheet.
The tables below present assets and liabilities measured and recorded at fair value in our consolidated balance sheets on a recurring basis and their corresponding level within the fair value hierarchy. No transfers between Level 1, Level 2, and Level 3 fair value measurements occurred for the three months ended March 31, 2023.
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Table 8.1: Fair Value Measurements |
| As of March 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Balance |
| (in thousands) |
Assets: | | | | | | | |
Deferred compensation assets - Rabbi Trust | $ | 25,820 | | | $ | — | | | $ | — | | | $ | 25,820 | |
Interest rate swap - $300 million notional value | — | | | 24,636 | | | — | | | 24,636 | |
Notes receivable | — | | | — | | | 7,055 | | | 7,055 | |
Total assets | $ | 25,820 | | | $ | 24,636 | | | $ | 7,055 | | | $ | 57,511 | |
Liabilities: | | | | | | | |
Interest rate swaps - $350 million notional value | $ | — | | | $ | 4,548 | | | $ | — | | | $ | 4,548 | |
Contingent consideration | — | | | — | | | 13,654 | | | 13,654 | |
Total liabilities | $ | — | | | $ | 4,548 | | | $ | 13,654 | | | $ | 18,202 | |
The fair values of receivables, prepaids, other assets, accounts payable, accrued costs, and other current liabilities approximate the carrying values as a result of the short-term nature of these instruments. The carrying value of our debt is consistent with the fair value as the stated interest rates in the agreements are consistent with the current market rates used in notes with similar terms in the markets (Level 2 inputs).
Accumulated Other Comprehensive Loss
All amounts recorded in accumulated other comprehensive loss are related to our foreign currency translations and interest rate swap, net of tax. The following table shows changes in accumulated other comprehensive loss:
| | | | | | | | | | | | | | | | | |
Table 8.2: Details of Changes in Accumulated Other Comprehensive Loss by Category |
| Foreign currency translation adjustment | | Net unrealized gain on derivatives, net of tax | | Total |
| (in thousands) |
Balance as of September 30, 2022 | $ | (57,109) | | | $ | 23,148 | | | $ | (33,961) | |
Other comprehensive income before reclassifications | 8,885 | | | (5,012) | | | 3,873 | |
Amounts reclassified from accumulated other comprehensive loss | 116 | | | (3,331) | | | (3,215) | |
Net current period other comprehensive losses | 9,001 | | | (8,343) | | | 658 | |
Balance as of March 31, 2023 | $ | (48,108) | | | $ | |