Maximus, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Business and summary of significant accounting policies (Policies)

Business and summary of significant accounting policies (Policies)

12 Months Ended

Sep. 30, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

The consolidated financial statements include the accounts of MAXIMUS, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain financial results have been reclassified to conform with our current period presentation.

Where MAXIMUS owns less than 100% of the share capital of its subsidiaries, but is still considered to have sufficient ownership to control the businesses, the results of these business operations are consolidated within our financial statements. The ownership interests held by other parties are shown as noncontrolling interests.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during each reporting period. We regularly evaluate our estimates. For revenue recognition, we regularly review and update estimates of revenue in contracts where we are required to estimate outcomes which take place over several months, such as our welfare-to-work contracts. We also regularly update estimates where our contracts utilize an average effective rate based upon an anticipated number of participants. Other estimates include estimates of the collectibility of receivables, evaluation of asset impairment, accrual of estimated liabilities, valuation of acquisition-related contingent consideration liabilities and income taxes. Actual results could differ from those estimates.

Changes in financial reporting adopted in fiscal year 2019, Anticipated changes in financial reporting

Changes in financial reporting adopted in fiscal year 2019

Segments

Effective October 1, 2018, our Chief Executive Officer reorganized our reporting segments based upon the way that management intends to allocate resources, manage performance and evaluate results. This reorganization was a response to recent changes to the markets in which we operate, the increasing integration of health and human services programs worldwide and the evolving needs of our government clients as they aim to deliver services in a more holistic manner to their citizens. Our results for the three years ended September 30, 2019 were recast to conform with these new segments. See "Note 2. Business Segments" for more details of this change.

Revenue recognition

We adopted Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) on October 1, 2018, using the modified retrospective method and, accordingly, we recognized the cumulative effect of adoption as an adjustment of $32.9 million to our opening retained earnings balance on October 1, 2018. We applied this standard only to contracts that had not been completed as of the date of adoption. For contracts that had been modified prior to October 1, 2018, we calculated the cumulative effect of the change on each contract based upon the aggregate effect of all of the modifications at that date.

Topic 606 applies to all of our contracts with customers and supersedes all previous standards on revenue recognition. In adopting this new standard, we are required to follow a five-step process in order to identify and recognize revenue based upon a principle that revenue should be recognized as goods and services are transferred to customers in amounts that reflect the consideration to which we expect to be entitled for those goods and

services. It did not change the actual amount of revenue being recognized for the majority of our contracts but did change the methodology by which we identified that revenue.

The most significant change under this new standard required us to estimate and recognize revenue on contracts over the period where we provide a service. This affects contracts where performance outcomes are achieved over time, most notably for welfare-to-work contracts where we are compensated for placing individuals in sustained employment. Under our former methodology of recognizing revenue, we deferred recognizing this outcome-based revenue until the outcome was achieved. Under this new methodology, we estimate our anticipated future fees and recognize them over the expected period of performance. As a result, more judgments and estimates are required within the process of recognizing revenue than were required under the previous standard.

The adoption of Topic 606 resulted in the following changes to our opening balance sheet:


(dollars in thousands)	Balance at September 30, 2018		Adjustments due to adoption of new standard		Opening balance at October 1, 2018
Assets
Accounts receivable - unbilled	$	31,536	$	35,414	$	66,950
Deferred income taxes	6,834		(6,625)		209
Liabilities and shareholders' equity
Deferred revenue - current	51,182		(11,767)		39,415
Deferred income taxes - long-term	26,377		7,074		33,451
Retained earnings	633,281		32,929		666,210
Noncontrolling interests	2,552		553		3,105

The table below shows the effects of the adoption of Topic 606 on our consolidated statements of operations for the year ended September 30, 2019.


	Twelve months ended September 30, 2019
(dollars in thousands, except per share data)	Balance under previous accounting guidance		Adjustments due to adoption of new standard		Balance as reported
Revenue	$	2,883,697	$	3,118	$	2,886,815

Income before income taxes	314,202		3,118		317,320
Provision for income taxes	75,539		1,286		76,825
Net income	238,663		1,832		240,495
(Loss)/income attributable to noncontrolling interests	(977)		648		(329)
Net income attributable to MAXIMUS	$	239,640	$	1,184	$	240,824
Basic earnings per share attributable to MAXIMUS	$	3.72	$	0.01	$	3.73
Diluted earnings per share attributable to MAXIMUS	$	3.70	$	0.02	$	3.72

The effect on our balance sheet would have been as follows:


(dollars in thousands)	Balance at September 30, 2019 under previous accounting guidance		Adjustments due to adoption of new standard		Balance at September 30, 2019 as reported
Assets
Accounts receivable - unbilled	$	88,390	$	35,494	$	123,884
Deferred income taxes	8,065		(7,879)		186
Liabilities and shareholders' equity
Deferred revenue - current	54,834		(11,490)		43,344
Deferred income taxes - long-term	41,055		5,505		46,560
Common stock	497,232		1,201		498,433
Accumulated other comprehensive loss	(43,018)		(2,362)		(45,380)
Retained earnings	759,978		34,761		794,739

Additional information and disclosures relating to this accounting change are included within "Note 4. Revenue recognition."

The additional increase in our "Accounts receivable - unbilled" balance between October 1, 2018 and September 30, 2019 was principally due to the acquisition of the citizen engagement centers business. See "Note 5. Business combinations and disposals."

Statement of cash flows

We adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments and ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash on October 1, 2018, using the retrospective method. The most notable change relates to the treatment of balances we consider to be "restricted cash."

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Restricted cash represents funds which are held in our bank accounts but which we are precluded from using for general business needs through contractual requirements; these requirements include serving as collateral for lease, credit card or letter of credit arrangements or where we hold funds on behalf of clients. We will continue to report our restricted cash balances within "other current assets" on our balance sheet due to these restrictions. However, we are now required to include movements in cash, cash equivalents and restricted cash within our consolidated statements of cash flows.

Accordingly, we have presented our consolidated statements of cash flows using the new rules for all periods shown. Our balances for cash, cash equivalents and restricted cash are as follows:


	Balance as of
(dollars in thousands)	September 30, 2019		September 30, 2018		September 30, 2017		September 30, 2016
Cash and cash equivalents	$	105,565	$	349,245	$	166,252	$	66,199
Restricted cash (recorded within "other current assets")	10,927		7,314		13,475		14,094
Cash, cash equivalents and restricted cash	$	116,492	$	356,559	$	179,727	$	80,293

Anticipated changes in financial reporting

Effective October 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). The new standard requires that assets and liabilities arising under most of our leases be recognized on the balance sheet. We adopted this standard using a modified retrospective approach while recording a cumulative adjustment to the balance sheet. Certain elections must be made in adopting the standard.

•We elected to use the package of practical expedients which, among other things, allows us to not reassess historical lease classification.

•We will not separate lease and non-lease components for all classes of leases, which allows us to account for a lease as a single component.

•We will use the optional transition method, which allows us to recognize a cumulative adjustment to the balance sheet at the date of adoption and to not recast our comparative periods.

•We will not use the hindsight practical expedients, which would have allowed us to use hindsight in determining the reasonably certain lease term.

•We will not adjust our accounting for leases with an initial term of twelve months or less.

The adoption of the standard will have a material effect on our consolidated balance sheet in future periods. We will record right-of-use assets and lease liabilities for our real estate and equipment leases. There will also be adjustments to other assets and liabilities, primarily related to prepaid and deferred rent. We do not anticipate significant changes to our consolidated statements of operations or cash flows as a result of adopting this standard. We do not anticipate that the standard will affect our compliance with our existing contracts, including our credit facility.

At this time, we have transferred our leases to an accounting software solution and updated our processes and controls over leases. We continue to test our processes to ensure that our population of leases is complete and accurate and that our calculations of charges under the new standard are accurate.

In August 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This accounting guidance requires customers in cloud-computing arrangements to identify and defer certain implementation costs in a manner broadly consistent with that of existing guidance on the costs to develop or obtain internal-use software. We will adopt this guidance on October 1, 2020. The guidance may be adopted early and we may adopt using either a prospective or retrospective methodology. We are currently assessing the future impact of this update on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update introduces a new model for recognizing credit losses on financial instruments, including losses on accounts receivable. We will adopt this guidance on October 1, 2020 and any changes will be recorded as a cumulative adjustment to retained earnings. We are still assessing the effect of this standard on our financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. This standard will not change the manner in which we would identify a goodwill impairment but would change any subsequent calculation of an impairment charge. This standard is effective for our 2021 fiscal year, although early adoption is permitted. The effect of this new standard will depend upon the outcome of future goodwill impairment tests.

Other recent accounting pronouncements are not expected to have a material effect on our financial statements.

Short term investments

Short term investmentsAt September 30, 2018, we held some liquid investments with an original maturity in excess of three months. We reported this balance as a short term investment through its maturity in October 2018.

Accounts receivable - billed, billable and unbilled and deferred revenue

Accounts receivable—billed, billable and unbilled and deferred revenue

Billed receivables are balances where an invoice has been prepared and issued and is collectible under standard contract terms.

Many of our clients require invoices to be prepared on a monthly basis. Where we anticipate that an invoice will be issued within a short period of time and where the funds are considered collectible within standard contract terms, we include this balance as billable accounts receivable.

Both billed and billable balances are recorded at their face amount less an allowance for doubtful accounts. We re-evaluate our client receivables on a quarterly basis, especially receivables that are past due, and reassess our allowance for doubtful accounts based on specific client collection issues.

We present unbilled receivables and deferred revenue as separate components of our consolidated balance sheets. These balances represent timing differences between when amounts are billed or billable and when revenue has been recognized or has occurred as of period end. The timing of these billings is generally driven by the contractual terms, which may have billing milestones that are different from revenue recognition milestones. Our unbilled receivables balance also includes retainage balances, where customers may hold back payment for work performed for a period of time to allow opportunities to evaluate the quality of our performance. At September 30, 2019, as a result on the adoption of ASC Topic 606, the balance also includes estimated fees where performance outcomes are anticipated but have not yet been achieved. Our unbilled receivable balance is recorded at fair value which is the value which we expect to invoice for the services performed, once the criteria for billing have been met. We defer revenue where we receive up-front funds to establish the infrastructure needed for a long-term contract.

Business combinations and goodwill

The purchase price of an acquired business is allocated to tangible assets, separately identifiable intangible assets acquired and liabilities assumed based upon their respective fair values. Any excess balance is recorded as goodwill. Costs incurred directly related to an acquisition, including legal, accounting and valuation services, are expensed as incurred.

Intangible assets are separately identified and recorded at fair value. These assets are amortized on a straight-line basis over useful lives estimated at the time of the business combination.

Goodwill is not amortized but is subject to impairment testing on an annual basis, or more frequently if impairment indicators arise. Impairment testing is performed at the reporting unit level. A reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete financial information is prepared and reviewed regularly by segment management. However, components are aggregated if they have similar economic characteristics. The evaluation is performed by comparing the fair value of the relevant reporting unit to the carrying value, including goodwill, of the reporting unit. If the fair value of the reporting unit exceeds the carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds the fair value, the goodwill of the reporting unit may be impaired.

Our reporting units are consistent with our operating segments, U.S. Health and Human Services, U.S. Federal Services and Outside the U.S. We perform our annual impairment test as of July 1 of each year. We performed the annual impairment test, as of July 1, 2019, and determined that there had been no impairment of goodwill. In performing this assessment, we utilized an income approach. Such an approach requires estimation of future operating cash flows including business growth, utilization of working capital and discount rates. The valuation of the business as a whole is compared to our market value at the date of the test in order to verify the calculation.

Long-lived assets (excluding goodwill)

Property and equipment is recorded at cost. Depreciation is recorded over the assets' respective useful economic lives using the straight-line method, which are not to exceed 39 years for our buildings and 7 years for office furniture and equipment. Leasehold improvements are amortized over the shorter of their useful life or the remaining term of the lease. Repairs and maintenance costs are expensed as incurred.

All of the Company's capitalized software represents development costs for software that is intended for our internal use. Direct costs of time and materials incurred for the development of application software for internal use are capitalized and depreciated using the straight-line method over the estimated useful life of the software, ranging from three to eight years. Costs incurred for upgrades and enhancements that do not result in additional functionality are expensed as incurred.

Deferred contract costs consist of contractually recoverable direct set-up costs related to long-term service contracts. These costs include direct and incremental costs incurred prior to the commencement of providing service to our customer. These costs are expensed over the period the services are provided using the straight-line method.We review long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. Our review is based on our projection of the undiscounted future operating cash flows of the related asset group. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amount, we recognize a non-cash impairment charge to reduce the carrying amount to equal projected future discounted cash flows.

Income taxes

Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. In addition, a valuation allowance is recorded if it is believed more likely than not that a deferred tax asset will not be fully realized.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would "more likely than not" sustain the position following an audit. For tax positions meeting the "more likely than not" threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

Foreign currency

For all foreign operations, the functional currency is the local currency. The assets and liabilities of foreign operations are translated into U.S. Dollars at period-end exchange rates, and revenue and expenses are translated at average exchange rates for the year. The resulting cumulative translation adjustment is included in accumulated other comprehensive loss on our consolidated balance sheets. Gains and losses from foreign currency transactions are included in other income, net.

Contingencies

From time to time, we are involved in legal proceedings, including contract and employment claims. We assess the likelihood of any adverse judgments or outcomes to these contingencies, as well as potential ranges of probable losses and establish reserves accordingly. The amount of reserves required may change in future periods due to new developments in each matter or changes in approach to a matter such as a change in settlement strategy.

We are also subject to audits by our government clients on many of our contracts based upon measures such as costs incurred or transactions processed. These audits may take place several years after a contract has been completed. We maintain reserves where we are able to estimate any potential liability which are updated as audits are completed.

Fair value measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants.

Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy in one of the following categories based on the lowest level input that is significant in measuring fair value:

Level 1 - Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.

Level 2 - Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or

quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.

Level 3 - Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.

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 approximate fair value due to the short-term nature of these balances.

We hold investments in a Rabbi Trust on behalf of our deferred compensation plan. These assets are recorded on our consolidated balance sheets at fair value under the heading of "Deferred Compensation Plan Assets". These assets have quoted prices in active markets (Level 1). See "Note 11. Employee benefit plans and deferred compensation" for further details.

We have recorded a contingent consideration payment related to an acquisition which may be paid between now and 2022. The related liability is recorded on our consolidated balance sheets as a liability at estimated fair value and updated on a quarterly basis as an acquisition-related expense or benefit. The valuation of this liability is derived from internal estimates of future performance and not from inputs that are observable (Level 3).