mms-20230331

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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.

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Table of Contents to Second Quarter 2023 Form 10-Q


	SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS	3
Part I - Financial Information		4
Item 1.	Financial Statements	4
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Balance Sheets	6
	Consolidated Statements of Cash Flows	7
	Consolidated Statements of Changes in Shareholders’ Equity	8
	Notes to Consolidated Financial Statements	9
	1. Organization	9
	2. Significant Accounting Policies	9
	3. Business Segments	10
	4. Revenue Recognition	12
	5. Earnings Per Share	14
	6. Debt and Derivatives	14
	7. Divestitures	15
	8 . Fair Value Measurements	15
	9. Equity	17
	10 . Other Balance Sheet Items	17
	11. Commitments and Contingencies	18
	12. Subsequent Event	18
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
	Business Overview	19
	Financial Overview	20
	Results of Operations	20
	Liquidity and Capital Resources	25
	Critical Accounting Policies and Estimates	28
	Non-GAAP and Other Measures	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
Part II - Other Information		31
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	31
	Signatures	32

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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•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.

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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

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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)	$