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UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2015

 

Commission File Number: 1-12997

 

MAXIMUS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(703) 251-8500

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o
(Do not check if smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

As of April 30, 2015, there were 65,891,694 shares of the registrant’s common stock (no par value) outstanding.

 

 

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MAXIMUS, Inc.

 

Quarterly Report on Form 10-Q

 For the Quarter Ended March 31, 2015

 

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	3
	Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2015 and 2014 (unaudited)	3
	Consolidated Statement of Comprehensive Income for the Three and Six Months Ended March 31, 2015 and 2014 (unaudited)	4
	Consolidated Balance Sheets as of March 31, 2015 (unaudited) and September 30, 2014	5
	Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2015 and 2014 (unaudited)	6
	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended March 31, 2015 and 2014 (unaudited)	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18
Item 4.	Controls and Procedures	18
PART II. OTHER INFORMATION
Item 1A.	Risk Factors	20
Item 6.	Exhibits	20
Signatures		21
Exhibit Index		22

 

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Throughout this Quarterly Report on Form 10-Q, the terms “Company,” “we,” “us,” “our” and “MAXIMUS” refer to MAXIMUS, Inc. and its subsidiaries.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Included in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about us, the industry in which we operate and other matters, as well as management’s beliefs and assumptions and other statements that are not historical facts. Words such as “anticipate,” “believe,” “could,” “expect,” “estimate,” “intend,” “may,” “opportunity,” “plan,” “potential,” “project,” “should,” “will” and similar expressions are intended to identify forward-looking statements and convey uncertainty of future events or outcomes. These statements are not guarantees and involve risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from such forward- looking statements due to a number of factors, including without limitation:

 

·                  a failure on our part to comply with laws governing our business, which might result in us being subject to fines, penalties and other sanctions;

 

·                  a failure to meet performance requirements in our contracts, which might lead to contract termination and liquidated damages;

 

·                  the outcome of reviews or audits, which might result in financial penalties and reduce our ability to respond to invitations for new work;

 

·                  the effects of future legislative or government budgetary and spending changes;

 

·                  difficulties in integrating acquired businesses;

 

·                  matters related to business we have disposed of or divested;

 

·                  our failure to successfully bid for and accurately price contracts to generate our desired profit;

 

·                  our ability to maintain relationships with key government entities upon whom a substantial portion of our revenue is derived;

 

·                  the ability of government customers to terminate contracts on short notice, with or without cause;

 

·                  our ability to manage capital investments and start-up costs incurred before receiving related contract payments;

 

·                  our ability to maintain technology systems and otherwise protect confidential or protected information;

 

·                  the costs and outcome of litigation; and

 

·                  other factors set forth in Exhibit 99.1 of our Annual Report on Form 10-K for the year ended September 30, 2014, filed with the Securities and Exchange Commission on November 17, 2014.

 

As a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. Additionally, we caution investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made. Except as otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether resulting from new information, future events or otherwise.

 

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PART I.  FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements.

 

MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2015			2014			2015			2014
Revenue		$	481,794		$	439,015		$	948,837		$	845,607
Cost of revenue		357,449			318,343			705,225			619,019
Gross profit		124,345			120,672			243,612			226,588
Selling, general and administrative expenses		59,392			53,624			111,353			104,889
Amortization of intangible assets		1,432			1,468			2,907			2,823
Acquisition-related expenses		1,514			—			2,114			—
Legal and settlement expenses		—			600			—			600
Operating income		62,007			64,980			127,238			118,276
Interest and other income, net		219			476			1,120			808
Income before income taxes		62,226			65,456			128,358			119,084
Provision for income taxes		23,198			23,995			46,980			44,268
Net income		39,028			41,461			81,378			74,816
(Income)/loss attributable to noncontrolling interests		(220		)	(254		)	(709		)	250
Net income attributable to MAXIMUS		$	38,808		$	41,207		80,669			$	75,066
Basic earnings per share attributable to MAXIMUS		$	0.59		$	0.61		$	1.22		$	1.10
Diluted earnings per share attributable to MAXIMUS		$	0.58		$	0.59		$	1.20		$	1.08
Dividends paid per share		$	0.045		$	0.045		$	0.09		$	0.09
Weighted average shares outstanding:
Basic		65,862			67,884			65,899			68,143
Diluted		66,987			69,307			66,947			69,538

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

		Three months Ended March 31,						Six months Ended March 31,
		2015			2014			2015			2014
Net income		$	39,028		$	41,461		$	81,378		$	74,816
Foreign currency translation adjustments		(10,553		)	1,638			(21,033		)	(1,447		)
Comprehensive income		28,475			43,099			60,345			73,369
Comprehensive (income)/loss attributable to noncontrolling interests		(220		)	(254		)	(709		)	250
Comprehensive income attributable to MAXIMUS		$	28,255		$	42,845		$	59,636		$	73,619

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

 

		March 31, 2015			September 30, 2014
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	114,535		$	158,112
Accounts receivable — billed and billable, net of reserves of $4,004 and $3,138		339,527			263,011
Accounts receivable — unbilled		28,845			26,556
Deferred income taxes		32,572			28,108
Prepaid expenses and other current assets		54,530			56,673
Total current assets		570,009			532,460
Property and equipment, net		103,234			80,246
Capitalized software, net		35,311			39,734
Goodwill		162,214			170,626
Intangible assets, net		34,031			39,239
Deferred contract costs, net		19,005			12,046
Deferred compensation plan assets		21,003			17,126
Other assets, net		10,154			9,519
Total assets		$	954,961		$	900,996
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	126,122		$	103,181
Accrued compensation and benefits		67,765			94,137
Deferred revenue		55,096			55,878
Income taxes payable		16,887			4,693
Other liabilities		6,951			7,432
Total current liabilities		272,821			265,321
Deferred revenue, less current portion		50,682			32,257
Deferred income taxes		15,930			21,383
Deferred compensation plan liabilities, less current portion		20,973			18,768
Other liabilities		6,326			7,082
Total liabilities		366,732			344,811
Shareholders’ equity:
Common stock, no par value; 100,000 shares authorized; 65,871 and 66,613 shares issued and outstanding at March 31, 2015 and September 30, 2014, at stated amount, respectively		438,373			429,857
Accumulated other comprehensive income/(loss)		(20,803		)	230
Retained earnings		169,802			125,875
Total MAXIMUS shareholders’ equity		587,372			555,962
Noncontrolling interests		857			223
Total equity		588,229			556,185
Total liabilities and equity		$	954,961		$	900,996

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

		Six Months Ended March 31,
		2015			2014
Cash flows from operating activities:
Net income		$	81,378		$	74,816
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, equipment and capitalized software		23,706			20,936
Amortization of intangible assets		2,907			2,823
Deferred income taxes		(10,134		)	(1,387		)
Stock compensation expense		8,436			8,561
Change in assets and liabilities:
Accounts receivable — billed and billable		(80,883		)	(37,516		)
Accounts receivable — unbilled		(2,311		)	(50		)
Prepaid expenses and other current assets		(6,043		)	2,539
Deferred contract costs		(7,105		)	1,979
Accounts payable and accrued liabilities		27,274			3,627
Accrued compensation and benefits		(12,263		)	(7,450		)
Deferred revenue		21,858			(6,211		)
Income taxes		19,583			10,153
Other assets and liabilities		(4,337		)	3,640
Cash provided by operating activities		62,066			76,460
Cash flows from investing activities:
Purchases of property and equipment		(44,226		)	(9,516		)
Capitalized software costs		(3,247		)	(7,317		)
Acquisition of business, net of cash acquired		—			(2,670		)
Proceeds from note receivable		282			154
Cash used in investing activities		(47,191		)	(19,349		)
Cash flows from financing activities:
Cash dividends paid		(5,928		)	(6,138		)
Repurchases of common stock		(32,616		)	(34,696		)
Tax withholding related to RSU vesting		(12,453		)	(12,905		)
Expansion of credit facility		(1,444		)	—
Borrowings under credit facility		—			15,000
Repayment of credit facility and other long-term debt		(74		)	(15,082		)
Tax benefit due to option exercises and restricted stock units vesting		—			2,925
Stock option exercises		—			518
Cash used in financing activities		(52,515		)	(50,378		)
Effect of exchange rate changes on cash and cash equivalents		(5,937		)	(1,027		)
Net decrease in cash and cash equivalents		(43,577		)	5,706
Cash and cash equivalents, beginning of period		158,112			125,617
Cash and cash equivalents, end of period		$	114,535		$	131,323

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

 

		Common Shares Outstanding		Common Stock			Accumulated Other Comprehensive Income/(Loss)			Retained Earnings			Noncontrolling Interest			Total
Balance at September 30, 2014		66,613		$	429,857		$	230		$	125,875		$	223		$	556,185
Net income		—		—			—			80,669			709			81,378
Foreign currency translation		—		—			(21,033		)	—			—			(21,033		)
Cash dividends		—		—			—			(5,928		)	—			(5,928		)
Dividends on RSUs		—		196			—			(196		)	—			—
Dividends to noncontrolling interests		—		—			—			—			(75		)	(75		)
Repurchases of common stock		(753	)	—			—			(30,618		)	—			(30,618		)
Stock compensation expense		—		8,436			—			—			—			8,436
Tax withholding related to RSU vesting		—		(116		)	—			—			—			(116		)
RSUs vested		11		—			—			—			—			—
Balance at March 31, 2015		65,871		$	438,373		$	(20,803	)	$	169,802		$	857		$	588,229

 

		Common Shares Outstanding		Common Stock			Accumulated Other Comprehensive Income			Retained Earnings			Noncontrolling Interest			Total
Balance at September 30, 2013		68,525		$	415,271		$	7,987		$	106,250		$	267		$	529,775
Net income		—		—			—			75,066			(250		)	74,816
Foreign currency translation		—		—			(1,447		)	—			—			(1,447		)
Cash dividends		—		—			—			(6,138		)	—			(6,138		)
Dividends on RSUs		—		250			—			(250		)	—			—
Repurchases of common stock		(807	)	—			—			(35,480		)	—			(35,480		)
Stock compensation expense		—		8,561			—			—			—			8,561
Stock compensation tax benefit		—		2,925			—			—			—			2,925
Tax withholding related to RSU vesting		—		(1,877		)	—			—			—			(1,877		)
Stock options exercised and RSUs vested		171		518			—			—			—			518
Balance at March 31, 2014		67,889		$	425,648		$	6,540		$	139,448		$	17		$	571,653

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

Notes to Unaudited Consolidated Financial Statements

For the Three and Six Months Ended March 31, 2015 and 2014

 

In these Notes to Unaudited Consolidated Financial Statements, the terms “Company,” “MAXIMUS,” “us,” “we” or “our” refer to MAXIMUS, Inc. and its subsidiaries.

 

1. Organization and Basis of Presentation

 

General

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and six months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet at September 30, 2014 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. Certain reclassifications have been made from prior year to conform with current presentation.

 

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expenses. On an ongoing basis, we evaluate our estimates including those related to revenue recognition and cost estimation on certain contracts, the realizability of goodwill, and amounts related to income taxes, certain accrued liabilities and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.

 

These financial statements should be read in conjunction with the consolidated audited financial statements and the notes thereto at September 30, 2014 and 2013 and for each of the three years ended September 30, 2014, included in our Annual Report on Form 10-K for the year ended September 30, 2014 which was filed with the Securities and Exchange Commission on November 17, 2014.

 

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2. Segment Information

 

The table below provides certain financial information for each of our business segments. The presentation of segments has been updated from our presentation at prior year to show amortization of intangible assets separately and to reflect the transfer of a small business division from the Health Services Segment to the Human Services Segment.

 

		Three Months Ended March 31,										Six Months Ended March 31,
(Amounts in thousands)		2015			% (1)		2014			% (1)		2015			% (1)		2014			% (1)
Revenue:
Health Services		$	370,383		100	%	$	323,598		100	%	$	721,682		100	%	$	622,182		100	%
Human Services		111,411			100	%	115,417			100	%	227,155			100	%	223,425			100	%
Total		481,794			100	%	439,015			100	%	948,837			100	%	845,607			100	%
Gross Profit:
Health Services		91,887			24.8	%	84,868			26.2	%	177,302			24.6	%	161,374			25.9	%
Human Services		32,458			29.1	%	35,804			31.0	%	66,310			29.2	%	65,214			29.2	%
Total		124,345			25.8	%	120,672			27.5	%	243,612			25.7	%	226,588			26.8	%
Selling, general, and administrative expense:
Health Services		40,774			11.0	%	35,133			10.9	%	75,031			10.4	%	69,308			11.1	%
Human Services		18,523			16.6	%	18,528			16.1	%	36,222			15.9	%	35,602			15.9	%
Other		95			NM		(37		)	NM		100			NM		(21		)	NM
Total		59,392			12.3	%	53,624			12.2	%	111,353			11.7	%	104,889			12.4	%
Operating income:
Health Services		51,113			13.8	%	49,735			15.4	%	102,271			14.2	%	92,066			14.8	%
Human Services		13,935			12.5	%	17,276			15.0	%	30,088			13.2	%	29,612			13.3	%
Amortization of intangible assets		(1,432		)	NM		(1,468		)	NM		(2,907		)	NM		(2,823		)	NM
Acquisition-related expenses (2)		(1,514		)	NM		—			NM		(2,114		)	NM		—			NM
Legal and settlement expenses (3)		—			NM		(600		)	NM		—			NM		(600		)	NM
Other		(95		)	NM		37			NM		(100		)	NM		21			NM
Total		$	62,007		12.9	%	$	64,980		14.8	%	$	127,238		13.4	%	$	118,276		14.0	%

 

(1)                                 Percentage of respective segment revenue. Percentages not considered meaningful are marked “NM.”

(2)                                 Acquisition-related expenses are costs directly incurred from the purchases of Acentia and Remploy.

(3)                                 Legal and settlement expenses consist of costs related to significant legal settlements and non-routine legal matters, including future probable legal costs expected to be incurred in connection with those matters. Legal expenses incurred in the ordinary course of business are included in their respective operating segments.

 

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3. Earnings Per Share

 

The weighted average number of shares outstanding used to compute earnings per share was as follows:

 

		Three Months Ended March 31,				Six Months Ended March 31,
(Amounts in thousands)		2015		2014		2015		2014
Basic weighted average shares outstanding		65,862		67,884		65,899		68,143
Effect of dilutive securities:
Employee stock options and unvested restricted stock units		1,125		1,423		1,048		1,395
Denominator for diluted earnings per share		66,987		69,307		66,947		69,538

 

No shares were excluded from the computation in calculating the earnings per share for the three or six months ended March 31, 2015 or 2014.

 

4. Business combinations

 

Acentia

 

On April 1, 2015 (the “acquisition date”), we acquired 100% of the ownership interests of Acentia, LLC (“Acentia”) for an estimated cash consideration of $294 million. The final cash consideration will be subject to adjustment based upon calculation of the working capital on the acquisition date, as well as certain other adjustments.

 

Acentia provides system modernization, software development, program management and other information technology services and solutions to the United States Federal Government. We acquired Acentia, among other reasons, to expand our ability to provide complementary business services and offerings across government markets. The acquired assets and liabilities will be integrated into our Health Services Segment.

 

As the acquisition occurred after March 31, 2015, no assets, liabilities, results of operations or cash flows related to Acentia are included in these financial statements. We are in the process of allocating the acquisition price to the fair value of the assets and liabilities of Acentia at the acquisition date. In itial estimates of this allocation are shown below but may be subject to change as we complete our assessment of the acquisition date balance sheet.

 

(Amounts in thousands)		Preliminary Purchase Price Accounting
Estimated purchase consideration, net of cash acquired		$	294,005
Billed and unbilled receivables		$	35,087
Other assets		3,635
Property and equipment		1,619
Intangible assets — customer relationships		69,900
Total identifiable assets acquired		110,241
Accounts payable and other liabilities		30,676
Deferred revenue		251
Total liabilities assumed		30,927
Net identifiable assets acquired		79,314
Goodwill		214,691
Net assets acquired		$	294,005

 

The excess of the acquisition date consideration over the estimated fair value of the net assets acquired will be recorded as goodwill. We consider the goodwill to represent the value of the assembled workforce of Acentia, as well as the enhanced knowledge and capabilities resulting from this business combination. Approximately 70% of the goodwill balance is anticipated to be deductible for tax purposes.

 

The intangible assets acquired represent customer relationships. These are expected to be amortized on a straight-line basis over 14 years.

 

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The following table presents certain results for the Company for the three and six months ended March 31, 2015 and 2014 as though the acquisition of Acentia had occurred on October 1, 2013. The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of the Company if the acquisition had taken place on that date. The pro forma results presented below include amortization charges for acquired intangible assets, adjustments to interest expense incurred and exclude related acquisition expenses.

 

		Unaudited pro forma results
		Three Months Ended March 31,						Six Months Ended March 31,
(Amounts in thousands, except per share amounts)		2015			2014			2015			2014
Revenue		$	533,408		$	491,720		$	1,052,390		$	951,669
Net income		40,984			43,783			86,668			79,314
Basic earnings per share attributable to MAXIMUS		0.62			0.64			1.30			1.17
Diluted earnings per share attributable to MAXIMUS		0.61			0.63			1.28			1.14

 

Remploy

 

On April 7, 2015 (the “Remploy acquisition date”), we acquired 70% of the ownership interests of Remploy (2015) Limited, whose assets had previously operated under the “Remploy” tradename. The remaining 30% is held in a trust for the benefit of the employees. The acquisition consideration was $3.0 million (£2.0 million). The purchase agreement stipulates that the net assets of Remploy are to be zero on the Remploy acquisition date as calculated using United Kingdom accounting principles.

 

Remploy provides services to the United Kingdom government, particularly in supporting employment opportunities for the disabled. We acquired Remploy to complement our welfare-to-work services in the United Kingdom. The acquired assets and liabilities will be integrated into our Human Services Segment.

 

No financial results related to Remploy are included in our statement of operations for the three and six months ended March 31, 2015. The results of Remploy for periods prior to the Remploy acquisition date would not have had a significant effect on our financial results.

 

5. Goodwill and Intangible Assets

 

The changes in goodwill for the six months ended March 31, 2015 are as follows:

 

(Amounts in thousands)		Health Services			Human Services			Total
Balance as of September 30, 2014		$	124,920		$	45,706		$	170,626
Foreign currency translation		(6,210		)	(2,202		)	(8,412		)
Balance as of March 31, 2015		$	118,710		$	43,504		$	162,214

 

The following table sets forth the components of intangible assets:

 

		As of March 31, 2015									As of September 30, 2014
(Amounts in thousands)		Cost			Accumulated Amortization			Intangible Assets, net			Cost			Accumulated Amortization			Intangible Assets, net
Customer contracts and relationships		$	40,027		$	9,545		$	30,482		$	42,403		$	7,821		$	34,582
Technology based intangible assets		8,828			7,095			1,733			9,295			6,910			2,385
Trademarks and trade names		4,306			2,490			1,816			4,374			2,102			2,272
Total		$	53,161		$	19,130		$	34,031		$	56,072		$	16,833		$	39,239

 

Our intangible assets at March 31, 2015 had a weighted average remaining life of 11.5 years, comprising 12.5 years for customer contracts and relationships, 2.9 years for technology-based intangible assets and 2.5 years for the trademarks and trade names. Amortization expense for the six months ended March 31, 2015 and 2014 was $2.9 million and $2.8 million, respectively. Estimated future amortization expense excluding the effects of the Acentia and Remploy acquisitions is as follows (in thousands):

 

Six months ended September 30, 2015		$	2,758
Year ended September 30, 2016		5,354
Year ended September 30, 2017		4,955
Year ended September 30, 2018		3,820
Year ended September 30, 2019		2,936
Year ended September 30, 2020		1,832

 

Amortization expenses related to the Acentia and Remploy acquisitions are not included above. The additional expense is anticipated to be approximately $6 million per year.

 

6. Credit facilities

 

On March 9, 2015, we entered into an amendment to our unsecured credit agreement (the “Credit Agreement”). The Credit Agreement, as amended, provides for a revolving line of credit up to $400 million that may be used for revolving loans, swingline loans (subject to a sublimit of $5 million), and to request letters of credit, subject to a sublimit of $30 million. The line of credit is available for general corporate purposes, including working capital, capital expenditures and acquisitions. The arrangement will terminate on March 9, 2020, at which time all outstanding borrowings must be repaid.

 

We had no borrowings under the Credit Agreement at March 31, 2015.

 

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At March 31, 2015, our only indebtedness under the Credit Agreement was three letters of credit totaling $4.7 million. Each of these letters of credit may be called by customers in the event that the Company defaults under the terms of a contract, the probability of which we believe is remote. In addition, two letters of credit totaling $3.0 million, secured with restricted cash balances, are held with another financial institution to cover similar obligations.

 

The Credit Agreement requires us to comply with certain financial covenants and other covenants including a maximum total leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all covenants as of March 31, 2015. Our obligations under the Credit Agreement are guaranteed by material domestic subsidiaries of the Company. The Credit Facility is currently unsecured. In the event that our total leverage ratio, as defined in the credit agreement, exceeds 2.5 to 1, the Credit Agreement will become secured by the assets of the parent company and certain of its subsidiaries. At March 31, 2015, our total leverage ratio was negligible.

 

The Credit Agreement provides for an annual commitment fee payable on funds not borrowed or utilized for letters of credit. This charge is based upon our leverage and varies between 0.15% and 0.3%. Borrowings under the Credit Agreement bear interest at our choice at either (a) a Base Rate plus a margin that varies between 0.0% and 0.75% per year, (b) a Eurocurrency Rate plus an applicable margin that varies between 1.0% and 1.75% per year or (c) an Index Rate plus an applicable margin which varies between 1.0% and 1.75% per year. The Base Rate, Eurocurrency Rate and Index Rate are defined by the Credit Agreement.

 

On April 1, 2015, in connection with the Acentia acquisition, we borrowed $225 million under our Credit Agreement and issued an additional letter of credit for $0.6 million. We currently estimate that our leverage ratio will be below 1.0:1.0 after this borrowing.

 

7. Supplemental disclosures

 

During the six months ended March 31, 2015 and 2014, we made income tax payments of $37.6 million and $35.5 million, respectively.

 

At March 31, 2015, we held cash and cash equivalents of $114.5 million. Approximately 33% of these funds are denominated and held in jurisdictions outside the United States and we have no requirement or intent at this time to transfer the funds to the United States. Declines in the value of foreign currencies with respect to the United States Dollar, notably the Australian Dollar and British Pound, resulted in a decline in net assets of $21.0 million in the six months ended March 31, 2015, including a $5.9 million decline in our cash and cash equivalents balance and a $8.4 million decline in our goodwill balance. These declines were recorded as losses in our statement of comprehensive income.

 

Our deferred compensation plan assets include $9.6 million invested in mutual funds which have quoted prices in active markets. These assets are recorded at fair value with changes in fair value being recorded in the statement of operations. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other amounts included within current assets and liabilities that meet the definition of a financial instrument are shown at values equivalent to fair value due to the short-term nature of these items. Our accounts receivable balance includes both amounts invoiced and those where amounts are ready to be invoiced and the funds are collectable within standard invoice terms.

 

8. Stock Repurchase Programs

 

Under resolutions adopted in November 2011 and June 2014, our Board of Directors authorized the repurchase, at management’s discretion, of up to an aggregate of $275.0 million of our common stock. The resolution also authorized the use of option exercise proceeds for the repurchase of our common stock. During the six months ended March 31, 2015 and 2014, we repurchased 0.8 million and 0.8 million common shares at a cost of $30.6 million and $35.5 million, respectively. The amount available for future repurchases at March 31, 2015 was $104.6 million.

 

9. Revenue recognition

 

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. This new standard will change the manner in which we evaluate revenue recognition for all contracts with customers, although the effect of the changes on revenue recognition will vary from contract to contract. In April 2015, the FASB proposed a one-year delay in the effective date of the standard. If this proposal is ratified, we would adopt this standard during our 2019 fiscal year. The standard permits a retrospective or cumulative effect transition method. We anticipate that we will adopt the new standard using the retrospective method. We are continuing to evaluate the likely effects on our business.

 

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10. Dividend

 

On April 3, 2015, our Board of Directors declared a quarterly cash dividend of $0.045 for each share of our common stock outstanding. The dividend is payable on May 29, 2015 to shareholders of record on May 15, 2015.

 

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Item 2.                   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, our Consolidated Financial Statements and related Notes included both herein and in our Annual Report on Form 10-K for the year ended September 30, 2014, filed with the Securities and Exchange Commission on November 17, 2014.

 

Business Overview

 

We provide business process services (BPS) to government health and human services agencies under our mission of Helping Government Serve the People.® We are one of the largest pure-play health and human services BPS providers to governments in the United States, Australia, Canada, the United Kingdom and Saudi Arabia. We use our experience, business process management expertise and advanced technological solutions to help government agencies run efficient and cost-effective programs, improve program accountability and outcomes and enhance the quality of services provided to program beneficiaries.

 

Over the past five years, our business has grown significantly.  We believe this growth has been driven by economic and demographic factors, such as aging populations and increased demand for health care, and the need for governments to operate programs effectively and efficiently.  This growth has been driven by reform efforts in the United States, including the Affordable Care Act, as well as internationally with various programs in Australia and the United Kingdom.

 

We believe that governments will continue to seek opportunities to enhance existing processes or address new challenges through companies such as MAXIMUS.  We believe that a combination of our innovative technical solutions, deep subject matter expertise, stringent adherence to our Standards of Business Conduct and Ethics, robust financial performance and global experience gives existing and future customers the confidence that MAXIMUS can reliably operate their high-profile public health and human services programs.

 

On April 1, 2015, we acquired Acentia LLC (“Acentia”) for an estimated cash consideration of $294 million. Acentia provides system modernization, software development, program management and other information technology services and solutions to the United States Federal Government. We acquired Acentia, among other reasons, to expand our ability to provide complementary business services and offerings across government markets. We have provided certain unaudited pro forma financial information for Acentia in a Current Report on Form 8-K dated May 8, 2015. The unaudited pro forma financial information from Acentia for the year ended September 30, 2014 was $212 million and pro forma diluted earnings per share increased from $2.11 to $2.25. The pro forma information is based upon historical information and is not necessarily indicative of what would have been achieved or will be achieved.

 

On April 7, 2015, we acquired 70% of the ownership interests of Remploy (2015) Limited, whose assets had previously operated under the “Remploy” tradename. The remaining 30% is held in a trust for the benefit of the employees. Remploy provides services to the United Kingdom government, particularly in supporting employment opportunities for the disabled. We acquired Remploy to complement our welfare-to-work services in the United Kingdom. We expect the acquisition of Remploy will increase our revenue for the second half of the year by approximately $30 million to $35 million.

 

Our financial results for the three and six month periods ended March 31, 2015 do not include any results related to Acentia or Remploy. The results of these businesses will be included in the Health and Human Services Segments, respectively, in future financial reporting. We expect the acquisitions of Acentia and Remploy will increase our revenues for fiscal year 2015 by $140 million to $160 million and diluted earnings per share by $0.07 to $0.09. The acquisition of Acentia was funded, in part, through a borrowing of $225 million on our revolving line of credit.

 

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Results of Operations

 

Consolidated

 

The following table sets forth, for the periods indicated, selected statements of operations data:

 

		Three Months Ended March 31,						Six Months Ended March 31,
(amounts in thousands, except per share data)		2015			2014			2015			2014
Revenue		$	481,794		$	439,015		$	948,837		$	845,607
Gross profit		$	124,345		$	120,672		$	243,612		$	226,588
Gross profit percentage		25.8		%	27.5		%	25.7		%	26.8		%
Selling, general and administrative expenses		$	59,392		$	53,624		$	111,353		$	104,889
Selling, general and administrative expense as a percentage of revenue		12.3		%	12.2		%	11.7		%	12.4		%
Amortization of intangible assets		1,432			1,468			2,907			2,823
Acquisition-related expenses		1,514			—			2,114			—
Legal and settlement expenses		—			600			—			600
Operating income		$	62,007		$	64,980		$	127,238		$	118,276
Operating margin		12.9		%	14.8		%	13.4		%	14.0		%
Interest and other income, net		219			476			1,120			808
Income before income taxes		62,226			65,456			128,358			119,084
Provision for income taxes		23,198			23,995			46,980			44,268
Effective tax rate		37.3		%	36.7		%	36.6		%	37.2		%
Net income		$	39,028		$	41,461		$	81,378		$	74,816
(Income)/loss attributable to noncontrolling interests		(220		)	$	(254	)	$	(709	)	$	250
Net income		$	38,808		$	41,207		$	80,669		$	75,066
Basic earnings per share attributable to MAXIMUS		$	0.59		$	0.61		$	1.22		$	1.10
Diluted earnings per share attributable to MAXIMUS		$	0.58		$	0.59		$	1.20		$	1.08

 

The following provides an overview of the significant elements of our Consolidated Statements of Operations. As our business segments have different factors driving revenue growth and profitability, the sections that follow cover these segments in greater detail.

 

All revenue growth for the periods presented is organic, driven by new work and growth in existing work principally within our Health Services Segment. Overall, profit margins have declined due to expected lower volumes in our federal Medicare appeals business.

 

Acquisition-related expenses are costs incurred related to the acquisitions of Acentia and Remploy. These costs include professional fees and other transaction-related costs. Additional expenses were incurred in April 2015 as the transactions closed.

 

Our effective tax rate for the six months ended March 31, 2015 was 36.6%. We anticipate that our tax rate will increase in the second half of this fiscal year as Acentia operates in the United States and will, accordingly, incur taxes at rates higher than our current effective rate.

 

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