Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - MAXIMUS INCmms-2016x12x31x10qxex32x2.htm
EX-32.1 - EXHIBIT 32.1 - MAXIMUS INCmms-2016x12x31x10qxex32x1.htm
EX-31.2 - EXHIBIT 31.2 - MAXIMUS INCmms-2016x12x31x10qxex31x2.htm
EX-31.1 - EXHIBIT 31.1 - MAXIMUS INCmms-2016x12x31x10qxex31x1.htm


 
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 December 31, 2016
 
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.)
 
 
 
1891 Metro Center Drive
Reston, Virginia
 
20190
(Address of principal executive offices)
 
(Zip Code)
 
(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 ý 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 ý 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 ý
 
As of February 6, 2017 there were 64,813,534 shares of the registrant’s common stock (no par value) outstanding.
 




MAXIMUS, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended December 31, 2016
INDEX
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
 




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 to meet performance requirements in our contracts, which might lead to contract termination and liquidated damages; 
the effects of future legislative or government budgetary and spending changes; 
our failure to successfully bid for and accurately price contracts to generate our desired profit; 
difficulties in integrating acquired businesses; 
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;
our ability to manage contract expenditures incurred before receiving related contract payments;
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; 
the outcome of reviews or audits, which might result in financial penalties and reduce our ability to respond to invitations for new work; 
a failure to comply with laws governing our business, which might result in the Company being subject to fines, penalties and other sanctions; 
the costs and outcome of litigation; 
matters related to business we disposed of or divested; and 
other factors set forth in Exhibit 99.1, under the caption "Special Considerations and Risk Factors," in our Annual Report on Form 10-K for the year ended September 30, 2016, which was filed with the Securities and Exchange Commission on November 21, 2016.
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.




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 December 31,
 
2016
 
2015
Revenue
$
607,564

 
$
556,722

Cost of revenue
462,746

 
446,507

Gross profit
144,818

 
110,215

Selling, general and administrative expenses
65,398

 
64,234

Amortization of intangible assets
3,402

 
3,149

Restructuring costs
2,242

 

Acquisition expenses

 
46

Operating income
73,776

 
42,786

Interest expense
849

 
989

Other income, net
263

 
1,131

Income before income taxes
73,190

 
42,928

Provision for income taxes
26,861

 
16,046

Net income
46,329

 
26,882

(Loss)/income attributable to noncontrolling interests
(335
)
 
273

Net income attributable to MAXIMUS
$
46,664

 
$
26,609

Basic earnings per share attributable to MAXIMUS
$
0.71

 
$
0.40

Diluted earnings per share attributable to MAXIMUS
$
0.71

 
$
0.40

Dividends paid per share
$
0.045

 
$
0.045

Weighted average shares outstanding:
 

 
 

Basic
65,770

 
65,954

Diluted
66,020

 
66,288

See notes to unaudited consolidated financial statements.

1



MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
Three Months Ended December 31,
 
2016
 
2015
Net income
$
46,329

 
$
26,882

Foreign currency translation adjustments
(9,694
)
 
(2,159
)
Interest rate hedge, net of income taxes of $8 and $25
12

 
37

Comprehensive income
36,647

 
24,760

Comprehensive (loss)/income attributable to noncontrolling interests
(335
)
 
273

Comprehensive income attributable to MAXIMUS
$
36,982

 
$
24,487

See notes to unaudited consolidated financial statements.
 

2



MAXIMUS, Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
 
 
December 31,
2016
 
September 30,
2016
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
69,767

 
$
66,199

Accounts receivable — billed and billable, net of reserves of $4,283 and $4,226
426,372

 
444,357

Accounts receivable — unbilled
38,431

 
36,433

Income taxes receivable
1,759

 
17,273

Prepaid expenses and other current assets
51,126

 
56,718

Total current assets
587,455

 
620,980

Property and equipment, net
121,799

 
131,569

Capitalized software, net
28,172

 
30,139

Goodwill
393,480

 
397,558

Intangible assets, net
104,809

 
109,027

Deferred contract costs, net
17,805

 
18,182

Deferred compensation plan assets
23,816

 
23,307

Deferred income taxes
8,929

 
8,644

Other assets
10,072

 
9,413

Total assets
$
1,296,337

 
$
1,348,819

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
134,482

 
$
150,711

Accrued compensation and benefits
68,996

 
96,480

Deferred revenue
64,665

 
73,692

Income taxes payable
9,166

 
7,979

Long-term debt, current portion
240

 
277

Other liabilities
11,563

 
11,617

Total current liabilities
289,112

 
340,756

Deferred revenue, less current portion
36,422

 
40,007

Deferred income taxes
22,731

 
16,813

Long-term debt
150,292

 
165,338

Deferred compensation plan liabilities, less current portion
26,497

 
24,012

Other liabilities
8,911

 
8,753

Total liabilities
533,965

 
595,679

Shareholders’ equity:
 

 
 

Common stock, no par value; 100,000 shares authorized; 64,664 and 65,223 shares issued and outstanding at December 31, 2016 and September 30, 2016, at stated amount, respectively
466,656

 
461,679

Accumulated other comprehensive loss
(45,851
)
 
(36,169
)
Retained earnings
338,460

 
323,571

Total MAXIMUS shareholders’ equity
759,265

 
749,081

Noncontrolling interests
3,107

 
4,059

Total equity
762,372

 
753,140

Total liabilities and equity
$
1,296,337

 
$
1,348,819

 
See notes to unaudited consolidated financial statements.

3



MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
Three Months Ended December 31,
 
2016
 
2015
Cash flows from operations:
 

 
 

Net income
$
46,329

 
$
26,882

Adjustments to reconcile net income to cash flows from operations:
 

 
 

Depreciation and amortization of property, equipment and capitalized software
14,562

 
12,947

Amortization of intangible assets
3,402

 
3,149

Deferred income taxes
5,910

 
(499
)
Stock compensation expense
4,889

 
4,332

Change in assets and liabilities:
 

 
 

Accounts receivable — billed and billable
14,687

 
(29,747
)
Accounts receivable — unbilled
(1,998
)
 
(1,853
)
Prepaid expenses and other current assets
6,245

 
5,316

Deferred contract costs
44

 
764

Accounts payable and accrued liabilities
(14,575
)
 
8,188

Accrued compensation and benefits
(17,237
)
 
(21,383
)
Deferred revenue
(10,096
)
 
(2,886
)
Income taxes
16,902

 
(3,043
)
Other assets and liabilities
2,076

 
(801
)
Cash flows from operations
71,140

 
1,366

Cash flows from investing activities:
 

 
 

Purchases of property and equipment and capitalized software costs
(7,768
)
 
(10,685
)
Acquisition of businesses, net of cash acquired

 
(2,606
)
Proceeds from the sale of a business
385

 

Other
43

 
84

Cash used in investing activities
(7,340
)
 
(13,207
)
Cash flows from financing activities:
 

 
 

Cash dividends paid to MAXIMUS shareholders
(2,920
)
 
(2,941
)
Repurchases of common stock
(28,767
)
 
(31,138
)
Tax withholding related to RSU vesting
(9,255
)
 
(11,553
)
Borrowings under credit facility
65,000

 
47,070

Repayment of credit facility and other long-term debt
(80,067
)
 
(12,721
)
Other
(1,145
)
 

Cash used in financing activities
(57,154
)
 
(11,283
)
Effect of exchange rate changes on cash and cash equivalents
(3,078
)
 
(590
)
Net increase/(decrease) in cash and cash equivalents
3,568

 
(23,714
)
Cash and cash equivalents, beginning of period
66,199

 
74,672

Cash and cash equivalents, end of period
$
69,767

 
$
50,958

See notes to unaudited consolidated financial statements.

4



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, 2016
65,223

 
$
461,679

 
$
(36,169
)
 
$
323,571

 
$
4,059

 
$
753,140

Net income

 

 

 
46,664

 
(335
)
 
46,329

Foreign currency translation

 

 
(9,694
)
 

 

 
(9,694
)
Interest rate hedge, net of income taxes

 

 
12

 

 

 
12

Cash dividends

 

 

 
(2,920
)
 
(617
)
 
(3,537
)
Dividends on RSUs

 
88

 

 
(88
)
 

 

Repurchases of common stock
(559
)
 

 

 
(28,767
)
 

 
(28,767
)
Stock compensation expense

 
4,889

 

 

 

 
4,889

Balance at December 31, 2016
64,664

 
$
466,656

 
$
(45,851
)
 
$
338,460

 
$
3,107

 
$
762,372

 
Common
Shares
Outstanding
 
Common
Stock
 
Accumulated
Other
Comprehensive
Income / (Loss)
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total
Balance at September 30, 2015
65,437

 
$
446,132

 
$
(22,365
)
 
$
188,611

 
$
3,321

 
$
615,699

Net income

 

 

 
26,609

 
273

 
26,882

Foreign currency translation

 

 
(2,159
)
 

 

 
(2,159
)
Interest rate hedge, net of income taxes

 

 
37

 

 

 
37

Cash dividends

 

 

 
(2,941
)
 

 
(2,941
)
Dividends on RSUs

 
77

 

 
(77
)
 

 

Repurchases of common stock
(543
)
 

 

 
(29,139
)
 

 
(29,139
)
Stock compensation expense

 
4,332

 

 

 

 
4,332

Tax withholding related to RSU vesting

 
31

 

 

 

 
31

Balance at December 31, 2015
64,894

 
$
450,572

 
$
(24,487
)
 
$
183,063

 
$
3,594

 
$
612,742

See notes to unaudited consolidated financial statements.

5



MAXIMUS, Inc.
Notes to Unaudited Consolidated Financial Statements
For the Three Months Ended December 31, 2016 and 2015

1. Organization and Basis of Presentation
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 months ended December 31, 2016 are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet at September 30, 2016 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.
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, 2016 and 2015 and for each of the three years ended September 30, 2016, included in our Annual Report on Form 10-K for the year ended September 30, 2016 which was filed with the Securities and Exchange Commission on November 21, 2016.

6



2. Segment Information
The table below provides certain financial information for each of our business segments.
 
 
Three Months Ended December 31,
(dollars in thousands)
 
2016
 
% (1)
 
2015
 
% (1)
Revenue:
 
 

 
 

 
 

 
 

Health Services
 
$
340,729

 
100
%
 
$
291,903

 
100
%
U.S. Federal Services
 
141,298

 
100
%
 
145,285

 
100
%
Human Services
 
125,537

 
100
%
 
119,534

 
100
%
Total
 
$
607,564

 
100
%
 
$
556,722

 
100
%
Gross profit:
 
 

 
 

 
 

 
 

Health Services
 
$
78,234

 
23.0
%
 
$
51,972

 
17.8
%
U.S. Federal Services
 
37,576

 
26.6
%
 
28,238

 
19.4
%
Human Services
 
29,008

 
23.1
%
 
30,005

 
25.1
%
Total
 
$
144,818

 
23.8
%
 
$
110,215

 
19.8
%
Selling, general and administrative expense:
 
 

 
 

 
 

 
 

Health Services
 
$
28,107

 
8.2
%
 
$
25,164

 
8.6
%
U.S. Federal Services
 
19,695

 
13.9
%
 
17,522

 
12.1
%
Human Services
 
17,239

 
13.7
%
 
20,898

 
17.5
%
Other (2)
 
357

 
NM

 
650

 
NM

Total
 
$
65,398

 
10.8
%
 
$
64,234

 
11.5
%
Operating income:
 
 

 
 

 
 

 
 

Health Services
 
$
50,127

 
14.7
%
 
$
26,808

 
9.2
%
U.S. Federal Services
 
17,881

 
12.7
%
 
10,716

 
7.4
%
Human Services
 
11,769

 
9.4
%
 
9,107

 
7.6
%
Amortization of intangible assets
 
(3,402
)
 
NM

 
(3,149
)
 
NM

Restructuring costs (3)
 
(2,242
)
 
NM

 

 
NM

Acquisition-related expenses
 

 
NM

 
(46
)
 
NM

Other (2)
 
(357
)
 
NM

 
(650
)
 
NM

Total
 
$
73,776

 
12.1
%
 
$
42,786

 
7.7
%
(1)    Percentage of respective segment revenue. Percentages not considered meaningful are marked “NM.”
(2) 
During the three months ended December 31, 2016, we incurred $0.4 million of legal-related costs pertaining to a matter that occurred prior to 2009. During the three months ended December 31, 2015, we incurred $0.7 million of legal costs related to a matter that occurred in fiscal year 2014. Both items are classified within other selling general and administrative expense.
(3)
During the three months ended December 31, 2016, we incurred costs in restructuring our United Kingdom Human Services business. See "Note 6. Supplemental disclosures" for more information.






7



3. Earnings Per Share
The weighted average number of shares outstanding used to compute earnings per share was as follows:
 
 
Three Months Ended
December 31,
(shares in thousands)
 
2016
 
2015
Basic weighted average shares outstanding
 
65,770

 
65,954

Dilutive effect of employee stock options and unvested RSUs
 
250

 
334

Denominator for diluted earnings per share
 
66,020

 
66,288

All of our unvested restricted stock units (RSUs) are included in the calculations of dilution above.
During the current fiscal year, we adopted a new accounting standard which changed the methodology by which we calculated our diluted weighted average shares outstanding. This new standard did not materially change this calculation in the current fiscal year. See "Note 8. Recent accounting pronouncements" for details of this change.
4. Business combinations
Ascend Management Innovations, LLC
On February 29, 2016, MAXIMUS Health Services, Inc., a wholly owned subsidiary of MAXIMUS, Inc. acquired 100% of the share capital of Ascend Management Innovations, LLC ("Ascend") for cash consideration of $44.1 million. Ascend is a provider of independent, specialized health assessments and data management tools to government agencies in the United States. We acquired Ascend to broaden our ability to help our existing government clients deal with the rising demand for long-term care services. This business has been integrated into our Health Services Segment. Management has estimated the fair value of intangible assets acquired as $22.3 million, with an average weighted life of 18 years, and the fair value of goodwill as $18.0 million, which is expected to be deductible for tax purposes. We believe that this goodwill represents the value of the assembled workforce of Ascend, as well as the enhanced knowledge and capabilities resulting from this business combination.

We have completed our evaluation of the fair value of all of the assets and liabilities acquired.

Our allocation of fair value for the Ascend acquisition, updated through December 31, 2016, is shown below.
(dollars in thousands)
 
Updated through September 30, 2016
 
Adjustments
 
Updated through December 31, 2016
Cash consideration, net of cash acquired
 
$
44,069

 
$

 
$
44,069

 
 
 
 
 
 
 
Billed and unbilled receivables
 
$
4,069

 
$

 
$
4,069

Other assets
 
407

 

 
407

Property and equipment and other assets
 
707

 

 
707

Deferred income taxes
 

 
557

 
557

Intangible assets
 
22,300

 

 
22,300

Total identifiable assets acquired
 
27,483

 
557

 
28,040

Accounts payable and other liabilities
 
1,414

 

 
1,414

Deferred revenue
 
554

 

 
554

Total liabilities assumed
 
1,968

 

 
1,968

Net identifiable assets acquired
 
25,515

 
557

 
26,072

Goodwill
 
18,554

 
(557
)
 
17,997

Net assets acquired
 
$
44,069

 
$

 
$
44,069



8



    
The valuation of the intangible assets acquired is summarized below:

(dollars in thousands)
 
Useful life
 
Fair value
Customer relationships
 
19 years
 
$
20,400

Trade name
 
8 years
 
1,700

Technology-based intangible assets
 
1 year
 
200

Total intangible assets
 
 
 
$
22,300


Assessments Australia

On December 15, 2015, MAXIMUS acquired 100% of the share capital of three companies doing business as "Assessments Australia." We acquired Assessments Australia to expand our service offerings within Australia. The consideration is comprised of $2.6 million in cash and contingent consideration of $0.5 million to the sellers of Assessments Australia if sufficient contracts with a specific government agency are won by MAXIMUS prior to December 2022. We performed a probability weighted assessment of this payment. Changes in our assessment of this liability are recorded through the Statement of Operations. This business was integrated into our Human Services Segment. Management has estimated goodwill and intangible assets acquired as $3.0 million and $0.4 million, respectively, which is deductible for tax purposes. We have completed our evaluation of the fair value of asset and liabilities acquired. We believe that the goodwill represents the value of the assembled workforce of Assessments Australia, as well as the enhanced capabilities that the business will provide us.
The intangible assets acquired represent customer relationships. These are being amortized on a straight-line basis over six years.
5. Goodwill
Changes in goodwill by segment for the three months ended December 31, 2016 are as follows:
(dollars in thousands)
 
Health Services
 
U.S. Federal Services
 
Human Services
 
Total
Balance as of September 30, 2016
 
$
123,679

 
$
228,148

 
$
45,731

 
$
397,558

Adjustment to goodwill acquired with Ascend
 
(557
)
 

 

 
(557
)
Adjustment to goodwill acquired with Assessments Australia
 

 

 
71

 
71

Foreign currency translation
 
(2,529
)
 

 
(1,063
)
 
(3,592
)
Balance as of December 31, 2016
 
$
120,593

 
$
228,148

 
$
44,739

 
$
393,480


6. Supplemental disclosures
During the three months ended December 31, 2016 and 2015, we made income tax payments of $3.7 million and $19.2 million, respectively.
At December 31, 2016, we held cash and cash equivalents of $69.8 million. Approximately $66.6 million of these funds are denominated in foreign currencies and held in jurisdictions outside the United States. 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 $9.7 million in the three months ended December 31, 2016. These declines were recorded as losses in our Statement of Comprehensive Income.
Under a resolution adopted in August 2015, the Board of Directors authorized the repurchase, at management's discretion, of up to an aggregate of $200 million of our common stock. The resolution also authorizes the use of option exercise proceeds for the repurchase of our common stock. During the three months ended December 31, 2016 and 2015, we repurchased 0.6 million and 0.5 million common shares at a cost of $28.8 million and $29.1 million, respectively. At December 31, 2016, $109.0 million remained available for future stock repurchases.

9



Our deferred compensation plan assets include $12.1 million invested in mutual funds that 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.
In fiscal 2016, we granted 0.4 million RSUs to our employees. These awards will vest ratably over five years.
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 amounts that are ready to be invoiced and the funds are collectible within standard invoice terms.
During the three months ended December 31, 2016, we undertook a restructuring of our United Kingdom Human Services operations as part of the ongoing integration of Remploy. We recorded restructuring costs of $2.2 million, including severance of $2.0 million and lease termination expenses of $0.2 million. At December 31, 2016, we have accrued costs of $0.2 million related to future lease obligations.
7. Debt
We have a credit facility allowing borrowings of up to $400 million. The arrangement terminates on March 9, 2020, at which time all outstanding borrowings must be repaid.
The credit facility permits us to make borrowings in currencies other than the United States Dollar. At December 31, 2016, we have U.S. Dollar borrowings of $149.7 million and no borrowings in other currencies.
At December 31, 2016, we held three letters of credit under the credit facility totaling $5.2 million. Each of these letters of credit may be called by vendors or 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 to customers.
Our credit facility 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 December 31, 2016. There are no restrictions on our dividend payments if our leverage ratio is less than 2.5:1.0. At December 31, 2016, our total leverage ratio was less than 1.0:1.0. Accordingly, we do not believe that the provisions of the credit facility represent a significant restriction on our ability to pay dividends or to the successful operation of the business.
During the three months ended December 31, 2016 and 2015, we made interest payments of $0.6 million and $0.8 million, respectively. We utilize interest swap agreements to manage our exposure against interest rate fluctuations. Approximately $28.0 million of our outstanding debt balance was covered by these instruments at December 31, 2016.
In addition to borrowings under the credit facility, we have an outstanding loan of $0.7 million (1.0 million Canadian Dollars) with the Atlantic Innovation Fund of Canada. There is no interest charge on this loan. The Atlantic Innovation Fund loan is repayable over 22 remaining quarterly installments.

8. Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. In addition, the FASB has issued additional updates covering technical items and changing the date of adoption. 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. We will 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.

10



In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard will change the manner in which we will present our leasing arrangements. This standard would be effective during our 2020 fiscal year, although early adoption is permitted. We are evaluating the likely effects on our business.
In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation, Improvements to Employee Share-Based Payment Accounting. We adopted this standard in the current year. The new standard requires us to record the tax benefit or expense related to the vesting of RSUs or the exercise of stock options within our provision for income taxes in the consolidated statement of operations; this benefit was previously reported in the statement of changes in shareholders’ equity. The cash flow effects of the tax benefit will be reported in cash flows from operations; they were previously in cash flows from financing activities. The new standard will also allow us more flexibility in net settling RSUs as they vest. The new standard also allows for changes in accounting for the forfeiture of stock awards; we will continue to estimate our stock award forfeitures as we expense each award.
No RSUs vested and no stock options were exercised in the three months ended December 31, 2016 so there was no effect on our net income or our cash flows from operations in this period. The new standard has affected the manner in which we calculate our diluted weighted average shares outstanding, but this effect was immaterial and did not change our earnings per share for the quarter. Almost all of our existing stock awards vest in September each year; accordingly, we would expect to record most of the effect of this change in our fourth fiscal quarter once this standard is adopted. We allow deferred vesting of RSUs. During the second quarter of the fiscal year 2017, previously deferred RSUs were issued with the resignation of two members of our Board of Directors. This will result in a tax benefit of $2.1 million, which will be recorded in our second fiscal quarter.
9. Subsequent event
On January 6, 2017, 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 February 28, 2017 to shareholders of record on February 15, 2017.

11



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, 2016, which was filed with the Securities and Exchange Commission on November 21, 2016.
Business Overview
We are a leading operator of government health and human services programs worldwide. We act as a partner to governments under our founding mission of Helping Government Serve the People.® We use our experience, business process management expertise and advanced technological solutions to help government agencies run effective, efficient and accountable programs.
Over the past five years, our business has reported significant organic growth. We believe this growth has been driven by economic and demographic factors, such as aging populations and increased demand for health care, and political factors, such as health care reform in the United States and welfare reform in Australia and the United Kingdom. In addition, we have acquired businesses that have provided us opportunities to expand our skills, technology and customer relationships to complement our existing business and provide opportunities for further organic growth.
We believe that governments will continue to seek opportunities to enhance existing processes or address new challenges through companies such as MAXIMUS. The environment is dynamic with many emerging political and economic changes, including the transition to the new administration in the United States and Brexit in the United Kingdom. Nevertheless, the long-term, macro-economic drivers of rising caseloads and increasing demand for effective government programs remain unchanged. We have witnessed common themes emerge across all of our markets as governments tackle changing demographics, decentralization initiatives, and the need to get value for government spend. Periods of change are often beneficial to us as governments seek trusted partners to help them operationalize new ideas and implement new or changing policies.
As governments look to identify and reward providers based upon results, we see opportunities to expand based upon our innovative technology, deep subject matter expertise, stringent adherence to our Standards of Business Conduct and Ethics, robust financial performance and worldwide experience. Further, MAXIMUS is one of the largest commercial service providers to government that is completely conflict-free. We have no financial affiliation with any health plans and providers, service providers or outside entities that could in any way impact or influence our ability to provide objective services to governments and the people they serve.
During fiscal year 2016, we acquired Ascend Management Innovations, LLC (Ascend) and three companies doing business as “Assessments Australia." These businesses were integrated into our Health Services and Human Services Segments, respectively. We believe that both acquisitions will allow us to expand our service offerings.
Financial Overview
Our results for the three months ended December 31, 2016 were driven by the following:
Revenue growth over the same period in fiscal year 2016 from the expansion of contracts, particularly within the Health Services Segment;
Profitability improvements across our segments as a result of cost management and business optimization initiatives, particularly within the U.S. Federal Services Segment;
The benefit from our acquisition of Ascend in February 2016;
The detrimental effects of the decline in the value of the British Pound, which reduced revenue and profit in both the Health Services and Human Services Segments; and
The restructuring of our Human Services operations in the United Kingdom, as part of the ongoing integration efforts of Remploy, which has resulted in severance and contract termination charges in this period.


12



Results of Operations
Consolidated
The following table sets forth, for the periods indicated, selected statements of operations data:
 
 
Three Months Ended December 31,
(dollars in thousands, except per share data)
 
2016
 
2015
Revenue
 
$
607,564

 
$
556,722

Cost of revenue
 
462,746

 
446,507

Gross profit
 
144,818

 
110,215

Gross profit percentage
 
23.8
%
 
19.8
%
Selling, general and administrative expenses
 
65,398

 
64,234

Selling, general and administrative expense as a percentage of revenue
 
10.8
%
 
11.5
%
Amortization of intangible assets
 
3,402

 
3,149

Restructuring costs
 
2,242

 

Acquisition-related expenses
 

 
46

Operating income
 
73,776

 
42,786

Operating margin
 
12.1
%
 
7.7
%
Interest expense
 
849

 
989

Other income, net
 
263

 
1,131

Income before income taxes
 
73,190

 
42,928

Provision for income taxes
 
26,861

 
16,046

Effective tax rate
 
36.7
%
 
37.4
%
Net income
 
46,329

 
26,882

Income/(loss) attributable to noncontrolling interests
 
(335
)
 
273

Net income attributable to MAXIMUS
 
$
46,664

 
$
26,609

Basic earnings per share attributable to MAXIMUS
 
$
0.71

 
$
0.40

Diluted earnings per share attributable to MAXIMUS
 
$
0.71

 
$
0.40

As our business segments have different factors driving revenue growth and profitability, the sections that follow cover these segments in greater detail.
Changes in revenue, cost of revenue and gross profit for the three months ended December 31, 2016 are summarized below.
 
 
Revenue
 
Cost of Revenue
 
Gross Profit
 (dollars in thousands)
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
Balance for respective period in fiscal year 2016
 
$
556,722

 
 

 
$
446,507

 
 

 
$
110,215

 
 

Organic growth
 
60,187

 
10.8
 %
 
24,777

 
5.5
 %
 
35,410

 
32.1
 %
Acquired growth
 
6,379

 
1.1
 %
 
5,570

 
1.2
 %
 
809

 
0.7
 %
Currency effect compared to the prior period
 
(15,724
)
 
(2.8
)%
 
(14,108
)
 
(3.2
)%
 
(1,616
)
 
(1.5
)%
Balance for respective period in fiscal year 2017
 
$
607,564

 
9.1
 %
 
$
462,746

 
3.6
 %
 
$
144,818

 
31.4
 %

13



Revenue for the three months ended December 31, 2016 increased 9.1%, respectively, compared to the same period in fiscal year 2016. Much of this growth was organic growth from our Health Services Segment.     
For the three months ended December 31, 2015, revenue and profit were unfavorably impacted by the delay of a $8.6 million change order in our Health Services Segment. While working 'at risk', we incurred costs to perform the work but did not recognize the revenue until the contract amendment was executed. If this contract amendment had been executed prior to December 31, 2015, revenue in the first quarter of fiscal 2016 would have been $8.6 million higher, gross and operating profit margins would have been 21% and 9.1% respectively and our diluted earnings per share would have been higher by $0.08.
Cost of revenue for the three months ended December 31, 2016 increased 3.6% compared to the same period in fiscal year 2016. Cost of revenue consists of direct costs related to labor, subcontractor labor, outside vendors, rent and other direct costs. Although movements in cost typically correlate with revenue growth, we experienced operating efficiencies in this quarter, notably within the U.S. Federal Services Segment, as well as the revenue benefit, with no corresponding incremental costs, from the "at risk" contract noted above.
Gross profit for the three months ended December 31, 2016 increased 31% compared to the same period in fiscal year 2016. Our gross profit margin was 23.8%, compared to 19.8% in the same period in fiscal year 2016.
Selling, general and administrative expense (SG&A) for the three month periods ended December 31, 2016 increased 1.8% compared to the same period in fiscal year 2016. These costs do not include the United Kingdom restructuring costs of $2.2 million noted below. SG&A consists of indirect costs related to general management, marketing and administration. It is primarily composed of labor costs. These costs may be incurred at a segment level, for dedicated resources that are not client-facing, or at a corporate level. Corporate costs are allocated to segments on a consistent, rational basis. Fluctuations in our SG&A are driven by changes in our administrative cost base, which is not directly driven by changes in our revenue.
During the three months ended December 31, 2016, we undertook a restructuring of our United Kingdom Human Services operations as part of the ongoing integration of Remploy. We recorded restructuring costs of $2.2 million, including severance of $2.0 million and lease termination expenses of $0.2 million. Some smaller charges will occur in future quarters. This restructuring is expected to result in cost savings in future periods. Remploy is partially owned by its employees and, accordingly, some of this charge is offset through the loss attributable to noncontrolling interests.
Our interest expense is driven by borrowings from our credit facility. We use derivatives to limit our exposure to interest rate fluctuations. At December 31, 2016, we had a fixed interest rate swap covering $28.0 million of outstanding debt. In January 2017, we entered into a further interest rate swap to cover an additional $20.0 million. Both interest rate swaps will expire before the end of fiscal year 2017.
Our other income is typically provided through interest income from our foreign cash balances. During fiscal year 2016, we also received the benefit of a foreign exchange gain that is not expected to recur.
Our year-to-date effective tax rate for the 2017 fiscal year is 36.7%, a decrease over the prior-year period. As a result, our profits are benefiting from an increase in operating income from jurisdictions with lower tax rates outside the United States. We anticipate that our full year tax rate will be between 36% and 37%, with a bias toward the lower end of this range.

14



Health Services Segment
The Health Services Segment provides a variety of business process services, appeals and assessments as well as related consulting services, for state, provincial and national government programs. These services support a variety of government health benefit programs including Medicaid, the Children's Health Insurance Program (CHIP) and the Affordable Care Act (ACA) in the U.S., Health Insurance BC (British Columbia) in Canada, and the Health Assessment Advisory Service (HAAS) and Fit for Work Service in the U.K.
 
 
Three Months Ended December 31,
(dollars in thousands)
 
2016
 
2015
Revenue
 
$
340,729

 
$
291,903

Cost of revenue
 
262,495

 
239,931

Gross profit
 
78,234

 
51,972

Operating income
 
50,127

 
26,808

Gross profit percentage
 
23.0
%
 
17.8
%
Operating margin percentage
 
14.7
%
 
9.2
%
Changes in revenue, cost of revenue and gross profit for the three months ended December 31, 2016 are summarized below.
 
 
Revenue
 
Cost of Revenue
 
Gross Profit
 (dollars in thousands)
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
Balance for respective period in fiscal year 2016
 
$
291,903

 
 

 
$
239,931

 
 

 
$
51,972

 
 

Organic growth
 
56,200

 
19.3
 %
 
29,921

 
12.5
 %
 
26,279

 
50.6
 %
Acquired growth
 
6,067

 
2.1
 %
 
4,995

 
2.1
 %
 
1,072

 
2.1
 %
Currency effect compared to the prior period
 
(13,441
)
 
(4.6
)%
 
(12,352
)
 
(5.1
)%
 
(1,089
)
 
(2.1
)%
Balance for respective period in fiscal year 2017
 
$
340,729

 
16.7
 %
 
$
262,495

 
9.4
 %
 
$
78,234

 
50.5
 %
Revenue for the three month period ended December 31, 2016 increased by 17% compared to the same period in fiscal year 2016. Cost of revenue also increased by 9.4%. The principal driver of both revenue and cost of revenue are from our United States-based businesses and the expansion of existing contracts, including the increased scope of work with New York State. The HAAS contract also provided revenue growth and gross profit expansion in the quarter. Most of the currency effect in this period relates to the HAAS contract which was affected by the devaluation of the British Pound. We acquired Ascend in February 2016 and, accordingly, our results for fiscal year 2017 will include the benefit of this acquired growth.
During the first quarter of fiscal year 2016, revenue and profit were unfavorably impacted, due in large part, by the delay of a change order where we had performed work and incurred the costs prior to the related contract amendment being signed. Costs related to this amendment were incurred in the first quarter of last year but approximately $8.6 million of revenue could not be recognized until the second quarter of fiscal 2016 when the amendment was signed. Although we work "at risk" from time-to-time, the revenue deferred from this arrangement was material to our financial results. If this amendment had been signed prior to the quarter end, our gross and operating profit margins would have been 20.2% and 11.8%, respectively. In addition, the HAAS contract which commenced in fiscal year 2015 and faced performance challenges early on, also tempered margins in the first quarter of fiscal 2016.

    

15



U.S. Federal Services Segment
The U.S. Federal Services Segment provides business process solutions, program management, as well as system development and software development for various civilian U.S. federal programs.
 
 
Three Months Ended December 31,
(dollars in thousands)
 
2016
 
2015
Revenue
 
$
141,298

 
$
145,285

Cost of revenue
 
103,722

 
117,047

Gross profit
 
37,576

 
28,238

Operating income
 
17,881

 
10,716

Gross profit percentage
 
26.6
%
 
19.4
%
Operating margin percentage
 
12.7
%
 
7.4
%
Revenue for the three month period ended December 31, 2016 decreased $4.0 million, or 2.7%, compared to the same period in fiscal year 2016. The corresponding decline in cost of revenue was $13.3 million, or 11%. This resulted in an increase to our gross profit, operating income and profit margins. All revenue, cost and profit movement between periods is organic.
We had previously anticipated that the U.S. Federal Segment would be affected by lower volumes on a large healthcare contract for the U.S. Veteran's Administration where we are a subcontractor. This decline for the first quarter of fiscal year 2017 was in line with expectations and resulted in a significant reduction in revenue. This was offset by improvements in numerous other contracts.
A reduction in costs and temporary spike in volumes on a couple of transaction-based contracts helped improve gross profit margin. We have instituted business optimization efficiencies including the increased use of technology and the reduced use of subcontractors. These efficiencies should recur in future quarters.
The aforementioned subcontract with the Veteran's Administration is now expected to end in Spring 2017 due to insufficient volumes. As a result we currently anticipate that the U.S. Federal Segment will experience an organic revenue decline for the full year of fiscal 2017 compared to fiscal 2016, unless this revenue is backfilled with new work.

Human Services Segment
The Human Services Segment provides national, state and county human services agencies with a variety of business process services and related consulting services for welfare-to-work, child support, higher education institutions and other Human Services programs. About 66% of our revenue in this segment is earned in foreign jurisdictions.
 
 
Three Months Ended December 31,
(dollars in thousands)
 
2016
 
2015
Revenue
 
$
125,537

 
$
119,534

Cost of revenue
 
96,529

 
89,529

Gross profit
 
29,008

 
30,005

Operating income
 
11,769

 
9,107

Gross profit percentage
 
23.1
%
 
25.1
%
Operating margin percentage
 
9.4
%
 
7.6
%

16



Changes in revenue, cost of revenue and gross profit for the three months ended December 31, 2016 are summarized below.
 
 
Revenue
 
Cost of Revenue
 
Gross Profit
(dollars in thousands)
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
 
Dollars
 
Percentage change
Balance for respective period in fiscal year 2016
 
$
119,534

 
 

 
$
89,529

 
 

 
$
30,005

 
 

Organic growth
 
7,974

 
6.7
 %
 
8,180

 
9.1
 %
 
(206
)
 
(0.7
)%
Acquired growth
 
312

 
0.3
 %
 
575

 
0.6
 %
 
(263
)
 
(0.9
)%
Currency effect compared to the prior period
 
(2,283
)
 
(1.9
)%
 
(1,755
)
 
(2.0
)%
 
(528
)
 
(1.8
)%
Balance for respective period in fiscal year 2017
 
$
125,537

 
5.0
 %
 
$
96,529

 
7.8
 %
 
$
29,008

 
(3.3
)%
Revenue for the three month period ended December 31, 2016 increased 5.0% compared to the same period in fiscal year 2016. Revenue growth was principally due to by our jobactive contract in Australia that is now fully ramped. This was offset by expected decreases from U.K as the Work Programme contract begins to wind down. Our U.K. business has also been adversely impacted by the decline in the value of the British Pound.
Costs of revenue increased by 7.8%, resulting in a decline in the gross profit margin. Our gross profit margin declined principally due to the U.K. Work Programme contract which is coming to an end.


Liquidity and Capital Resources
Our principal source of liquidity remains our cash flows from operations. These operating cash flows are used to fund our ongoing operations and working capital needs as well as investments in capital infrastructure and share repurchases. Cash flows from operations are driven by our contracts and their payment terms. For some contracts, we are reimbursed for the costs of start-up operations, although there may be a gap between incurring and receiving these funds. Other factors which may cause shortfalls in cash flows include contract terms where payments are tied to outcome deliveries, which may not correspond with the costs incurred to achieve these outcomes and short-term delays where government budgets are constrained.
To supplement our cash flows from operations, we also use a credit facility. We used this facility to fund our acquisitions, as well as short-term borrowings to cover immediate working capital needs. At December 31, 2016, we had outstanding borrowings of $149.7 million under the credit facility. Our credit facility allows us to borrow up to $400 million, subject to standard covenants. We anticipate that our cash flows from operations should be sufficient to meet our day-to-day requirements, as well as pay our interest and repay the principal on our existing borrowings.
At December 31, 2016, our foreign subsidiaries held $66.6 million of our cash and cash equivalents. We have no requirement or intent to remit this cash to the United States. We consider undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the United States and, accordingly, no U.S. deferred taxes have been recorded with respect to such earnings in accordance with the relevant accounting guidance for income taxes. Should the earnings be remitted as dividends, we may be subject to additional U.S. taxes, net of allowable foreign tax credits. It is not practicable to estimate the amount of any additional taxes that may be payable on the undistributed earnings given the various tax planning alternatives we could employ, should we decide to repatriate these earnings in a tax-efficient manner.

17



Cash Flows
The following table provides a summary of our cash flow information for the three months ended December 31, 2016 and 2015.
 
 
Three Months Ended December 31,
(dollars in thousands)
 
2016
 
2015
Net cash provided by/(used in):
 
 

 
 

Operations
 
$
71,140

 
$
1,366

Investing activities
 
(7,340
)
 
(13,207
)
Financing activities
 
(57,154
)
 
(11,283
)
Effect of exchange rate changes on cash and cash equivalents
 
(3,078
)
 
(590
)
Net increase/(decrease) in cash and cash equivalents
 
$
3,568

 
$
(23,714
)
Cash flows from operations were $71.1 million for the three months ended December 31, 2016, compared to $1.4 million in the prior fiscal year. Our increase in cash flows were driven by:
Improvements in our profitability;
Delays in payments at December 31, 2015 from two customers in the United States, which were subsequently resolved; and
Timing for income tax payments.
We use the performance indicator of Days Sales Outstanding, or DSO, to evaluate our performance in collecting our receivable balances. At December 31 and September 30, 2016, our DSO were 70 days, compared with 75 days at December 31, 2015. An improvement of five days might be expected to improve cash flows by approximately $33 million.
Cash used in investing activities for the three months ended December 31, 2016 was $7.3 million. Cash flows in the comparative period had been affected by significant investment in Australia, for the jobactive contract, as well as the acquisition of Assessments Australia for $2.6 million. As anticipated, our capital expenditures have returned to lower levels. Our cash flows in fiscal year 2017 included $0.4 million as part of the settlement of the sale price of our K-12 Education business.
Cash flows from financing activities in the three months ended December 31, 2016 include cash payments to pay dividends, repurchase our common stock and settle our employees income tax obligations from net settlement of RSUs which vested in September. These payments related to our equity totaled $40.9 million and $45.6 million, for the first quarters of fiscal years 2017 and 2016, respectively. During fiscal year 2017, we made net debt repayments of $15.1 million, compared with net borrowings of $34.3 million in the comparative period. Our borrowings in the first quarter of fiscal year 2016 were driven by the growth in DSOs.
The detrimental effect of exchange rates on cash and cash equivalents of $3.1 million in the 2016 fiscal year primarily reflects the strengthening of the United States Dollar against the Australian Dollar and British Pound.
To supplement our statements of cash flows presented on a GAAP basis, we use the measure of free cash flow to analyze the funds generated from operations.
 
 
Three Months Ended December 31,
(dollars in thousands)
 
2016
 
2015
Cash flows from operations
 
$
71,140

 
$
1,366

Purchases of property and equipment and capitalized software costs
 
(7,768
)
 
(10,685
)
Free cash flow
 
$
63,372

 
$
(9,319
)

18



Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 other long-lived assets, and amounts related to contingencies and income tax liabilities. 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.
During the three months ended December 31, 2016, there were no significant changes to the critical accounting policies we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended September 30, 2016 which was filed with the Securities and Exchange Commission on November 21, 2016.
Non-GAAP measures
We utilize non‑GAAP measures where we believe it will assist the user of our financial statements in understanding our business. The presentation of these measures is meant to complement, but not replace, other financial measures in this document. The presentation of non-GAAP numbers is not meant to be considered in isolation, nor as an alternative to revenue growth, cash flows from operations or net income as measures of performance. These non-GAAP measures, as determined and presented by us, may not be comparable to related or similarly titled measures presented by other companies.
During fiscal year 2016, we acquired Ascend and Assessments Australia and disposed of our K-12 Education business. We believe users of our financial statements wish to evaluate the performance of our underlying business, excluding changes that have arisen due to businesses acquired or disposed of. We provide organic revenue growth as a useful basis for assessing this. To calculate organic revenue growth, we compare current year revenue excluding revenue from these acquisitions to our prior year revenue.
In fiscal year 2016, 28% of our revenue was generated outside the U.S. We believe that users of our financial statements wish to understand the performance of our foreign operations using a methodology which excludes the effect of year-over-year exchange rate fluctuations. To calculate year-over-year currency movement, we determine the current year’s results for all foreign businesses using the exchange rates in the prior year.
In order to sustain our cash flows from operations, we require regular refreshing of our fixed assets and technology. We believe that users of our financial statements wish to understand the cash flows that directly correspond with our operations and the investments we must make in those operations using a methodology which combines operating cash flows and capital expenditures. We provide free cash flow to complement our statement of cash flows. Free cash flow shows the effects of the Company’s operations and routine capital expenditures and excludes the cash flow effects of acquisitions, share repurchases, dividend payments and other financing transactions. We have provided a reconciliation of free cash flow to cash flows from operations.
To sustain our operations, our principal source of financing comes from receiving payments from our customers. We believe that users of our financial statements wish to evaluate our efficiency in converting revenue into cash receipts. Accordingly, we provide DSO, which we calculate by dividing billed and unbilled receivable balances at the end of each quarter by revenue per day for the period. Revenue per day for a quarter is determined by dividing total revenue by 91 days.
Our credit agreement includes the defined term Consolidated EBITDA and our calculation of Adjusted EBITDA conforms to the credit agreement definition. We believe our investors appreciate the opportunity to understand the possible restrictions which arise from our credit agreement. Adjusted EBITDA is also a useful measure of performance which focuses on the cash generating capacity of the business as it excludes the non-cash expenses of depreciation and amortization, and makes for easier comparisons between the operating performance of companies with different capital structures by excluding interest expense and therefore the impacts of financing costs. The measure of Adjusted EBITA is a step in calculating Adjusted EBITDA and facilitates comparisons to similar businesses as it isolates the amortization effect of business combinations. We have provided a reconciliation from net income to Adjusted EBITA and Adjusted EBITDA below. Our credit agreement requires us to utilize

19



Adjusted EBITDA on a trailing twelve month basis to calculate conformity with covenants and other restrictions; in particular, a debt-to-EBITDA ratio exceeding 2.5:1.0 would require us to provide security for the borrowings; a debt-to-EBITDA ratio in excess of 3.5:1.0 would represent a violation of our debt agreement. Our debt-to-EBITDA ratio was below 1.0:1.0 for all periods presented. We have included our calculations of EBITDA below.
 
 
Three Months Ended
December 31,
 
Trailing Twelve Months Ended December 31,
(dollars in thousands)
 
2016
 
2015
 
2016
 
2015
Net income attributable to MAXIMUS
 
$
46,664

 
$
26,609

 
$
198,417

 
$
142,520

Net interest expense
 
746

 
800

 
3,412

 
2,009

Provision of income taxes
 
26,861

 
16,046

 
116,623

 
92,034

Amortization of intangible assets
 
3,402

 
3,149

 
13,630

 
11,023

Stock compensation expense
 
4,889

 
4,332

 
19,308

 
17,603

Acquisition-related expenses
 

 
46

 
786

 
4,191

Gain on sale of a business
 

 

 
(6,880
)
 

Adjusted EBITA
 
82,562

 
50,982

 
345,296

 
269,380

Depreciation and amortization of property, plant, equipment and capitalized software
 
14,562

 
12,947

 
60,019

 
48,829

Adjusted EBITDA
 
$
97,124

 
$
63,929

 
$
405,315

 
$
318,209

    

20



Item 3.                   Quantitative and Qualitative Disclosures about Market Risk.
Our exposure to market risks generally relates to changes in interest rates and foreign currency exchange rates.
We are exposed to market rate risk on interest rates through our revolving credit facility. Our cash equivalent balances are held in highly rated securities with maturities of three months or less. We manage our exposure to interest rate fluctuations through the use of interest rate swap agreements. At December 31, 2016, we had borrowings under our credit facility of $149.7 million and we had an interest rate swap agreement fixing a notional $28.0 million of this balance. Our interest rate varies based upon our leverage, as defined in our agreement with our lenders, but we are currently paying interest at a rate based upon the one-month London Interbank Offering Rate (LIBOR) plus 1%. The one-month LIBOR rate at December 31, 2016 was 0.77%. A hypothetical increase in LIBOR by 10% would increase our annual interest expense and cash flows on our outstanding balance by $0.1 million.
We are exposed to foreign currency exchange risk through our businesses in the United Kingdom, Australia and Canada. At December 31, 2016, we held net assets in functional currencies other than the U.S. Dollar of $200.5 million and, accordingly, in the event of a 10% fluctuation in the value of the local currencies, we would report a $20.5 million gain or loss in our statement of comprehensive income. Our foreign-based businesses mitigate their currency risks through incurring costs in the same currency as their revenue. The operations of the U.S. business do not depend upon cash flows from the foreign businesses.
Item 4.                   Controls and Procedures.
(a)                                 Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b)                                 Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

21



PART II.  OTHER INFORMATION
 
Item 1.              Legal Proceedings.
We are subject to audits, investigations and reviews relating to compliance with the laws and regulations that govern our role as a contractor to agencies and departments of the United States Federal Government, state, local and foreign governments, and otherwise in connection with performing services in countries outside of the U.S. Adverse findings could lead to criminal, civil or administrative proceedings, and we could be faced with penalties, fines, suspension or disbarment. Adverse findings could also have a material adverse effect on us because of our reliance on government contracts. We are subject to periodic audits by state, local and foreign governments for taxes. We are also involved in various claims, arbitrations and lawsuits arising in the normal conduct of our business. These include but are not limited to bid protests, employment matters, contractual disputes and charges before administrative agencies. Although we can give no assurance, based upon our evaluation and taking into account the advice of legal counsel, we do not believe that the outcome of any existing matter would likely have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Item 1A.              Risk Factors.
In connection with information set forth in this Form 10-Q, the factors discussed under “Risk Factors” in our Form 10-K for fiscal year ended September 30, 2016 should be considered. The risks included in the Form 10-K could materially and adversely affect our business, financial condition and results of operations. There have been no material changes to the factors discussed in our Annual Report on Form 10-K for the year ended September 30, 2016 which was filed with the Securities and Exchange Commission on November 21, 2016.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.
(c) The following table sets forth the information required regarding repurchases of common stock that we made during the three months ended December 31, 2016:

Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans (1)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (in thousands)
Oct. 1, 2016 - Oct. 31, 2016
 
145,723

 
$
53.24

 
145,723

 
$
130,037

 
 
 
 
 
 
 
 
 
Nov. 1, 2016 - Nov. 30, 2016
 
322,645

 
$
50.36

 
322,645

 
$
113,790

 
 
 
 
 
 
 
 
 
Dec. 1, 2016 - Dec. 31, 2016
 
91,155

 
$
53.97

 
91,155

 
$
109,046

 
 
 
 
 
 
 
 
 
Total
 
559,523

 
$
51.68

 
559,523

 
 

(1)
Under resolutions adopted in August 2015, the Board of Directors authorized the repurchase, at management’s discretion, of up to an aggregate of $200.0 million of our common stock. The resolution also authorized the use of option exercise proceeds for the repurchase of our common stock.

Item 6.                       Exhibits.
The Exhibits filed as part of this Quarterly Report on Form 10-Q are listed on the Exhibit Index immediately following the Signatures. The Exhibit Index is incorporated herein by reference

22



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
MAXIMUS, INC.
 
 
 
Date: February 9, 2017
By:
/s/ Richard J. Nadeau
 
 
Richard J. Nadeau
 
 
Chief Financial Officer
 
 
(On behalf of the registrant and as Principal Financial and Accounting Officer)

23



EXHIBIT INDEX
Exhibit No.
 
Description
 
 
 
31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Section 906 Principal Executive Officer Certification.
 
 
 
32.2
 
Section 906 Principal Financial Officer Certification.
 
 
 
101
 
The following materials from the MAXIMUS, Inc. Quarterly Report on Form 10-Q for the quarter ended December 31, 2016 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Changes in Shareholders’ Equity and (vi) Notes to Consolidated Financial Statements. Filed electronically herewith.


24