10-K 1 mms-2018x09x30x10k.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2018

Commission file number: 1-12997
____________________________________________________________________________

MAXIMUS, INC.
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
 
54-1000588
(I.R.S. Employer
Identification No.)
 
 
 
1891 Metro Center Drive, Reston, Virginia
(Address of principal executive offices)
 
20190
(Zip Code)
Registrant's telephone number, including area code: (703) 251-8500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, no par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
Emerging growth company  o
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý
The aggregate market value of outstanding voting stock held by non-affiliates of the registrant as of March 31, 2018 was $4,291,433,990 based on the last reported sale price of the registrant's Common Stock on The New York Stock Exchange as of the close of business on that day.
There were 64,133,318 shares of the registrant's Common Stock outstanding as of November 14, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be held on March 20, 2019, which definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the registrant's fiscal year, are incorporated by reference into Part III of this Form 10-K.

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MAXIMUS, Inc.
Form 10-K
September 30, 2018
Table of Contents

 
 
 
 
 
 
 
 



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included in this Annual Report on Form 10-K 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 our Company, 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 actual or 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;
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 capital investments and startup costs incurred before receiving related contract payments;
our ability to manage our growth, including acquired businesses;
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 impair 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, suspension, debarment and other sanctions;
the costs and outcome of litigation;
difficulties in integrating or achieving projected revenues, earnings and other benefits associated with acquired businesses;
the effects of changes in laws and regulations governing our business, including tax laws, and applicable interpretations and guidance thereunder, or changes in accounting policies, rules, methodologies and practices, and our ability to estimate the impact of such changes;
matters related to business we have disposed of or divested; and
other factors set forth in Exhibit 99.1 of this Annual Report on Form 10-K under the caption "Special Considerations and Risk Factors."
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
ITEM 1.    Business.
Throughout this annual report, the terms "MAXIMUS," "Company," "we," "our" and "us" refer to MAXIMUS, Inc. and its subsidiaries.
General
We are a leading operator of government health and human services programs worldwide. We act as a partner to governments under our mission of Helping Government Serve the People®. We use our experience, business process management expertise, innovation and technology solutions to help government agencies run effective, efficient and accountable programs.
Our company was founded in 1975 and grew both organically and through acquisitions during the early 2000s. Beginning in 2006, we narrowed our service offerings to focus in the area of business process services (BPS) primarily in the health services and human services markets. In parallel, we divested or exited a number of non-core businesses that fell outside these two areas. Our subsequent growth was driven by the expansion of our health services business around the globe, new welfare-to-work contracts outside the United States and the growth of our business with the United States Federal Government. This growth has been both organic and through acquisitions.
Beginning in fiscal year 2017, we experienced what we believed was a slowdown due to an industry pause tied to the transition of a new presidential administration in the United States. Although the transition occurred at the federal level, we experienced the effects on some of our U.S.-based health business as many states depend upon federal funds to finance the services they provide. As a result, our short-term growth expectations were impacted by longer procurement cycles, increased delays and contract award protests. Some of this was due to policy and budget uncertainty. Further, agency staffing shortfalls tied to the slow presidential nomination process hindered the decision-making process at both the federal and the state level.
Longer-term, we believe the ongoing demand for our services driven by demographic, economic and legislative trends, coupled with our strong position within our industry, will continue to foster future growth. Our long-term growth thesis is based on the following factors:
Demographic trends, including increased longevity and more complex health needs, place an increased burden on government social benefit and safety-net programs. At the same time, programs that address societal needs must be a good use of taxpayer dollars and achieve their intended outcomes. We believe the macro-economic trends of demographics and government needs, coupled with the need to achieve value for money, will continue to drive demand for our services.
Our contract portfolio offers us good revenue visibility. Our contracts are typically multi-year arrangements and we have customer relationships which have lasted decades. Because of this longevity, our contract portfolio at any point in time can typically be used to identify approximately 90% of our anticipated revenue for the next twelve months.
We maintain a strong reputation within the government health and human services industry. Our deep client relationships and reputation for delivering outcomes and efficiencies creates a strong barrier to entry in a risk-averse environment. Entering our markets typically requires expertise in complex procurement processes, operation of multi-faceted government programs and an ability to serve and engage with diverse populations.
We have a portfolio target operating profit margin that ranges between 10% and 15% with high cash conversion, a healthy balance sheet and access to a $400 million credit facility. Our financial flexibility allows us to fund investments in the business, complete strategic acquisitions to further supplement our core capabilities and seek new adjacent platforms.
We have an active program to identify potential strategic acquisitions. Our acquisitions have successfully enabled us to expand our business processes, knowledge and client relationships into adjacent markets and new geographies. Our recent acquisitions are summarized below.

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Date
Acquisition
Related Segment
Background
Purchase Price
(in millions of dollars)
November 2018
General Dynamics Information Technology's Citizen Engagement Centers
(the citizen engagement center acquisition)
U.S. Federal Services
Citizen engagement services on large contracts for the U.S. Federal Government
$ 400.0
[Note 1]

July 2017
Revitalised Limited
Health Services
Digital solutions for health, fitness and wellbeing.
4.1

February 2016
Ascend Management Innovations, LLC
Health Services
Independent health assessments and data management tools to U.S. state government agencies.
44.1

December 2015
Three companies doing business as "Assessments Australia"
Human Services
Health and functional assessment services in Australia.
3.1
[Note 2]

April 2015
Acentia, LLC
U.S. Federal Services
System modernization, software development, program management and other information technology services to the U.S. Federal Government.
293.5

April 2015
Remploy (70% acquired in 2015, a further 10% in 2018)
Human Services
Provision of disability employment services in the United Kingdom.
3.0

January 2014
Welfare-to-work contracts owned by Centacare, Australia
Human Services
Provision of welfare-to-work services in Australia.
2.7

July 2013
Health Management Limited
Health Services
Provision of occupational health services and independent medical assessments in the United Kingdom.
77.9

Note 1 - The purchase price for this business is based upon an estimate. The final price will be based upon the acquired working capital balance.
Note 2 - This purchase price includes an estimate of contingent consideration which has not yet been paid.
Our business segments
The Company is organized and managed based on the services we provide: Health Services, U.S. Federal Services and Human Services.
We operate in the United States, Australia, United Kingdom, Canada, Saudi Arabia and Singapore.
For more information on our segment presentation and geographic distribution of our business, including comparative revenue, gross profit, operating income, identifiable assets and related financial information for the 2018, 2017 and 2016 fiscal years, see "Note 2. Business segments" within Item 8 of this Annual Report on Form 10-K, which we incorporate by reference herein.
Health Services Segment
Our Health Services Segment generated 59% of our total revenue in fiscal year 2018.
The Health Services Segment provides a variety of business process services and appeals and assessments 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 British Columbia (BC) in Canada, and the Health Assessment Advisory Service (HAAS) contract in the U.K.
Approximately 77% of our revenue for this segment comes from our comprehensive program administration services for government health benefit programs. These services help people access, navigate and use health benefits and other government programs. They include:
Support for Medicaid, CHIP and ACA in the U.S. and Health Insurance BC in Canada.

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Program eligibility support and enrollment services to help beneficiaries make the best choice for their health insurance coverage and improve their access to health care.
Application assistance and independent health plan enrollment counseling to beneficiaries.
Beneficiary outreach, education, eligibility, enrollment and renewal services.
Centralized multilingual customer contact centers and multichannel self-service options for easy enrollment.
Document and record management.
Premium payment processing and administration, such as invoicing and reconciliation.
Digital eHealth and wellbeing solutions.
We are a leading player in many of the health program administration markets that we serve. For example, we are the largest provider of Medicaid enrollment and CHIP services in the U.S. and a leading operator of customer contact centers for state-based health insurance exchanges in the U.S.
Approximately 22% of the Segment’s revenue is from our independent appeals and assessments services. These services help governments engage with program recipients, while at the same time helping them improve the efficiency, cost effectiveness, quality and accountability of their health and disability benefits programs. They include:
Support for HAAS in the U.K.
Independent disability, long-term sick and other health assessments, including those related to long-term services and supports such as Preadmission Screening and Resident Reviews (PASRR).
Occupational health clinical assessments.
We are a leading player in many of the health appeals and assessments markets that we serve. For example, we are:
A leading provider of government-sponsored health benefit assessments and appeals in the U.S. and the U.K.
One of the largest providers of disability and long-term sick support services and occupational health services in the U.K.
The rest of the Segment’s revenue is from specialized consulting services.
Our contracts may be reimbursed on a performance-based, cost-plus, fixed rate fee or a combination of all the above. The Segment may experience seasonality due to transaction-based work, such as program open enrollment periods. Other fluctuations may arise from changes in programs directed by our clients and activity related to contract life cycles.
Health Services Market Environment
According to the Organization for Economic Cooperation and Development, health care spending in the U.S. still far exceeds that of other high-income countries. The Kaiser Family Foundation noted an acceleration of U.S. health care spending in 2014 (4.3% per capita growth) and 2015 (5.0% per capita growth), particularly due to more people having health coverage from the ACA. Projections suggest that health-spending growth will continue at a moderate pace (averaging 4.6% per year on a per capita basis) but is unlikely to reach the double-digit growth of previous decades. We believe that effectively managing these costs, as well as improving quality and access to health care, is a major policy priority for governments. Governments seek efficient and cost-effective solutions to manage their public health benefit programs. This includes programs meant to support individuals with disabilities and long-term medical conditions, as well as individuals with shorter-term health conditions.
In the U.S., as a result of Medicaid expansion and the ACA, more individuals are now eligible for health insurance coverage and there have been historic decreases in uninsured rates under the ACA. Over the last decade, many state Medicaid programs have also expanded managed care to new populations and new geographies that were historically served through fee-for-service Medicaid. More recently, some states are also seeking increased flexibility in the operations of their Medicaid programs via waivers requested through the Centers

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for Medicare & Medicaid Services. Some of these waivers include individual responsibility components such as beneficiary work requirements and co-pays for benefits. These waivers may create a more palatable path for additional states to contemplate new ways to operate their health benefit programs over the coming years. The issuance of waivers is contingent upon federal approval.
Many governments are also looking for innovative solutions to support disabled and elderly populations who require long-term services and supports (LTSS). A general trend in the LTSS market has been to ensure that individuals are in the right setting and receiving the right level of support and care. In many cases, this means allowing individuals to receive care at home or in a community-based setting, rather than institutional facilities. With no financial ties to health insurance plans or providers, our conflict-free assessment services assist governments in determining the most appropriate placement and health care services for program beneficiaries.
Outside of the U.S., many governments are seeking partners to help them manage, administer or operate their social benefit programs. Countries like the U.K. are examining how public health relates to productivity, cost reduction and economic growth. The U.K. Government provides a range of social welfare benefits for people who are unable to work as a result of a disability, long-term illness or other health condition. For individuals with long-term sickness or disabilities who are claiming the Employment Support Allowance benefit (a government-provided disability or long term sick benefit), the government requires an independent health assessment provided by a vendor through the Health Assessment Advisory Service (HAAS). The assessment report is then used by the government to determine an individual's level of benefits.
We believe the current health market environment positions us to benefit from continued demand across all of our geographies from service areas such as operations program management and independent health and benefit assessments. Overall, we expect the underlying demand for our services to increase over the next several years.
U.S. Federal Services Segment
Our U.S. Federal Services Segment generated 20% of our total revenue in fiscal year 2018.
The U.S. Federal Services Segment provides business process solutions, program management, as well as system and software development and maintenance services for various U.S. federal civilian programs. The Segment also contains certain state-based assessments and appeals work that is part of the Segment's heritage within the Medicare Appeals portfolio and continues to be managed within this Segment. We served 19 federal agencies in fiscal 2018.
Approximately 30% of the Segment’s revenue is from our comprehensive program administration services for federal government benefit programs. These include:
Centralized citizen engagement centers and support services
Document and record management
Case management, citizen engagement and consumer education
Approximately 34% of the Segment’s revenue is from our independent assessments and appeals services. These include:
Independent medical reviews and worker's compensation benefit appeals
Medicare and Medicaid appeals
Program eligibility appeals
Approximately 36% of the Segment’s revenue is from our technology solutions. These include:
Modernization of systems and information technology (IT) infrastructure
Infrastructure operations and support
Software development, operations and management
Data analytics

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Many contracts in this Segment earn revenue on a cost-plus or time-and-materials basis, which typically carry the lowest levels of risk and lower levels of profit margin. The Segment also contains performance-based contracts where revenue is earned based upon participant numbers or other transaction-based measures, such as the number and type of assessments or appeals processed. The Segment may experience fluctuations as a result of volume variations or program maturity, with contracts recording lower revenue and profitability during program startup.
In November 2018, we acquired General Dynamics Information Technology's citizen engagement centers to add to our existing portfolio of work with the U.S. Federal Government. This will provide us with additional cost-plus contracts, including an expansion of our role with the Centers for Medicare and Medicaid Services and the United States Census Bureau.
U.S. Federal Services Market Environment
Following the 2016 Presidential election, the U.S. federal services market was impacted by the transition to the new U.S. administration. Political struggles and uncertainty around agency budgets, as well as agency staffing shortfalls, hindered the federal procurement and decision-making process causing an overall slowdown of work in some of our core areas.
While federal agency budgets still face fiscal pressures and the administration is looking for improved efficiencies, we continue to see opportunities to apply our cost-effective and efficient solutions in the federal market. Federal agencies are tasked with cost-effectively managing programs at a time when changing demographics are leading to rising caseloads in many federal programs.
Many federal agencies must also address the maintenance of legacy IT systems and the pressing need for IT infrastructure modernization continues to grow. Legacy processes and systems are fundamental to government operations, yet they are expensive to operate in an environment that requires online agility and rapid response to new demands, requirements and global challenges. We are well positioned to help agencies modernize and operate their mission-critical systems.
Other key factors that will likely impact the U.S. federal market include a variety of political, economic, social and technological issues:
A focus on the citizen experience and citizen services, as well as digital services
Agencies moving from transformation initiatives to operations and maintenance
Agencies seeking consolidation and shared services to achieve cost efficiencies
Changes in the acquisition and contracting environment, including consolidation of General Services Administration schedules, such as Alliant 2
Human Services Segment
Our Human Services Segment generated 21% of our total revenue in fiscal year 2018.
The Human Services Segment provides national, state, provincial and local 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. Approximately 70% of our revenue in this segment was earned in foreign jurisdictions, notably Australia and the United Kingdom.
Approximately 76% of the Segment’s revenue is from comprehensive workforce services that help disadvantaged individuals transition from government assistance programs to sustainable employment and economic independence. These services support a variety of programs including:
The Work Programme and Work Choice in the U.K.;
jobactive and Disability Employment Services in Australia;
Temporary Assistance to Needy Families (TANF) in the U.S.;
the Employment Program of British Columbia, Canada;
the Taqat and Taqat Plus programs in Saudi Arabia; and

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Workforce Singapore as a Career Matching Provider.
These services cover a number of attributes including eligibility determination, case management, job‑readiness preparation, job search and employer outreach, job retention and career advancement, and selected educational and training services.
A further 15% of the Segment’s revenue is generated from children's services, which includes full and specialized child support case management services, customer contact center operations, and program and systems consulting services.
The balance of the Segment’s revenue comes from other specialized services. These include program consulting services, including independent verification and validation, cost allocation plans and other specialized consulting offerings; management tools and professional consulting services for higher education institutions; and tax credit and employer services.
Our payment terms vary between contracts. Within this segment, we have seen a trend towards payments based upon outcomes, such as achieving sustained employment targets or child support payments. There is no significant effect from seasonality within this segment.
Human Services Market Environment
We believe our established presence, strong brand recognition, and ability to achieve the requisite performance requirements and outcomes makes us well-positioned to compete for human services opportunities.
We offer clients demonstrated results and decades of proven experience in administering welfare-to-work programs in the U.S., the U.K., Australia, Canada, Saudi Arabia and Singapore. In Australia, we are one of the largest welfare-to-work providers. We also have an established presence in the U.K.'s welfare-to-work market and presently provide employment and job training services under the Work Choice and Work Programmes, which are ending as a result of a robust economy, low unemployment and a shift away from mainstream welfare-to-work programs.
Many governments are shifting their focus to employment programs that serve individuals with disabilities or health conditions. Through our acquisition of Remploy, we have increased our presence in the U.K. disability employment services market where we help people with disabilities and health conditions obtain employment. We do similar work in Australia under the Disability Employment Services program that aims to provide individuals with disabilities a supported path towards long-term employment. We are a recognized leader in the U.K and Australia for providing disability employment support services, having achieved accreditations in the U.K. as a Disability Confident Leader and in Australia as a Disability Confident Recruiter. We believe these services are transferable to our other geographies and position us well for emerging trends in the disability services market.
We believe ongoing initiatives and measures to reduce costs and improve efficiencies, combined with our outstanding performance, expertise and proven solutions, will continue to drive demand for our core human services offerings across multiple geographies. Our ability to provide value-for-money is important in a market that is very price competitive.
Reorganization of segments
Effective October 1, 2018, our Chief Executive Officer reorganized our reporting segments based on the way management intends to allocate resources, manage performance and evaluate results. This change responds to recent changes in the markets 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. Accordingly, we will report operating segments on a geographic basis. Our operating segments will be U.S. Health & Human Services, U.S. Federal Services and Outside the U.S.
Our clients
Our primary clients are government agencies, with the majority at the national, provincial and state level and, to a lesser extent, some at the county and municipal level. In the year ended September 30, 2018, approximately 51% of our total revenue was derived from U.S. state government agencies, 27% from foreign government agencies, 16% from agencies of the U.S. Federal Government and 6% from other sources including local municipalities and commercial customers.

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In the U.S., even when our direct clients are state governments, a significant amount of our revenue is ultimately funded via the U.S. Federal Government in the form of cost-sharing arrangements with the states, such as is the case with Medicaid.
In the event of a shutdown of the U.S. Federal Government, a portion of our U.S. Federal Services Segment may be impacted. Many of our federally funded health and human services programs are typically deemed essential, which means that a short-term shutdown would not be expected to cause significant disruption to these operations. Our contract portfolio also contains some services that may be considered discretionary. As a result, we could incur costs in providing the portion of work that is considered discretionary with no certainty of recovery. In all cases, an extended delay may affect certain government programs that rely upon federal funding and may also have an effect on our cash flows if payments are delayed.
For the year ended September 30, 2018, our most significant clients were the U.S. Federal Government, which provided 16% of our consolidated revenue, the State of New York, which provided 16%, the U.K. Government, which provided 12% and the Australian Government, which provided 10%. Within these governments, we may be serving several distinct agencies. Our share of revenue with the U.S. Federal Government is expected to increase with the citizen engagement center acquisition.
We typically contract with government clients under four primary pricing arrangements: performance-based, cost-plus, fixed-price and time-and-materials. For the year ended September 30, 2018, 43% of our contracts were performance-based, 33% were cost-plus, 18% were fixed-price and 6% were time-and-materials.
Generally, the relationships with our clients are longer-term. Typical contracts, including option periods, tend to be several years long before they are subject to competitive rebid. See the "Backlog" section below for more details.
Backlog
At September 30, 2018, we estimate that we had approximately $5.1 billion in backlog. Backlog represents an estimate of the remaining future revenue from existing signed base contracts and revenue from contracts that have been formally awarded, but not yet signed. Our backlog estimate includes revenue expected under the current terms of executed contracts and revenue from contracts in which the scope and duration of the services required are not definite but estimable (such as performance-based contracts). Our backlog estimate does not assume any contract renewals or option period exercises.
Increases in backlog result from the award of new contracts, the extension or renewal of existing contracts and the exercise of option periods. Reductions in backlog come from fulfilling contracts or the early termination of contracts. The backlog associated with our performance-based contracts is an estimate based upon management's experience of caseloads and similar transaction volume from which actual results may vary. We may modify our estimates related to performance-based contracts and as a result backlog from these contracts may increase or decrease based upon the information that management has at that time. Additionally, backlog estimates may be affected by foreign currency fluctuations.
Government contracts typically contain provisions permitting government clients to terminate contracts on short notice, with or without cause.
We believe that period-to-period backlog comparisons are difficult and may not necessarily accurately reflect future revenue we may receive. The actual timing of revenue receipts, if any, on projects included in backlog could change for any of the aforementioned reasons. The dollar amount by segment of our backlog as of September 30, 2018 and 2017 was as follows:
 
Backlog as of
September 30,
 
2018
 
2017
 
(In millions)
Health Services
$
2,682

 
$
4,246

U.S. Federal Services
744

 
324

Human Services
1,674

 
1,130

Total
$
5,100

 
$
5,700

Our businesses typically involve contracts covering a number of years, including option periods. Contracts may include a period between contract signature and operations beginning for startup and transition activities where we

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are precluded from recognizing revenue. At September 30, 2018, the average weighted life of these contracts was approximately six years, including option periods. Although the exercise of options is uncertain, in our experience if the incumbent contractor is performing as expected these options are exercised nearly 100% of the time. The longevity of these contracts assists management in predicting revenue, operating income and cash flows. We expect approximately 40% of the backlog balance to be realized as revenue in fiscal year 2019. We adjust backlog annually for currency fluctuations and for estimated amounts associated with our performance-based contracts based upon the latest information that management has at that time.
As a result of the citizen engagement center acquisition in November 2018, we expect our backlog to increase in fiscal year 2019. Backlog, including the anticipated option period renewals as well as the backlog from the citizen engagement center acquisition, represents approximately 93% of current estimated fiscal year 2019 revenue.
Our growth strategy
Our goal is to enable future growth by remaining a leading provider of BPS, technology solutions and consulting services to government agencies. We will continue to deliver quality BPS to government clients to improve the cost effectiveness, efficiency and scalability of their programs as they deal with greater program complexity, rising demand and increasing caseloads. We also continue to seek efficiencies and optimize operations in order to achieve sustainable, profitable growth.
Our three-pronged approach to long-term growth is as follows.
Grow in our existing markets. With more than 40 years of business expertise in the government market, we continue to be a leader in developing innovative solutions to meet the evolving needs of government agencies in our existing markets. For example, innovations such as digital engagement and analytics provide opportunities for us to serve our clients with greater efficiency and to create a more seamless customer journey for participants in government programs. We continue to seek to enter into long-term relationships with clients to meet their ongoing objectives. As a result, long-term contracts (three to five years with additional option years) are often the preferred contracting method and provide us with predictable, recurring revenue streams. We believe an incumbent has a considerable advantage when contracts are rebid and that client relationships can last for decades.
Move into adjacent markets. As we gain expertise in particular services or geographies, we can use our knowledge and experience in other similar areas. We seek to grow our businesses by leveraging our existing core capabilities, consistently delivering the required outcomes for governments to achieve program goals, and pursuing opportunities with new and current clients in adjacent markets. For example, we continue to seek to grow our footprint in clinical services as well as long-term services and supports.
Incorporate new growth platforms. New growth platforms can be developed organically or through acquisition. We will selectively identify and pursue strategic acquisitions that provide us with a rapid and cost-effective method to enhance our services. This includes obtaining additional skill sets, increasing our access to contract vehicles, expanding our client base, cross-selling additional services, enhancing our technical capabilities and establishing or expanding our geographic presence. Many of our acquisitions allow us to gain new capabilities to use elsewhere within our business. For example, our acquisition of Health Management gave us significant occupational health capability and our acquisition of Revitalised improved our digital wellbeing capabilities. The citizen engagement center acquisition expands our reach in the delivery of citizen services, enables greater economies of scale, and brings enhanced technology and added operational capabilities that we believe will benefit the entire company.
 We have centered our core business offerings on delivering BPS to government health and human services agencies in our primary geographies as well as to other civilian agencies within the U.S. Federal Government. Our market focus and established presence positions us to benefit from health care and welfare reform initiatives both in the U.S. and internationally. As such, we continually strive to recruit motivated individuals, including top managers from larger organizations, former government officials, consultants experienced in our service areas and recent college graduates with degrees aligned with our mission, such as degrees in government policy and administration. We believe we can continue to attract and retain experienced and educated personnel by capitalizing on our focused market approach and our reputation as a premier government services provider.
See Exhibit 99.1 of this Annual Report on Form 10-K under the caption "Special Considerations and Risk Factors" for information on risks and uncertainties that could affect our business growth strategy.

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Competitive advantages
We offer a private sector alternative for the operation and management of critical government-funded health and human services programs. We believe our reputation and extensive experience give us a competitive advantage as governments value the level of expertise, proven delivery and brand recognition that we bring to our clients. Some of the competitive advantages that allow us to capitalize on various market opportunities are as follows.
Proven track record, ability to deliver outcomes and exceptional brand recognition. We assist governments in delivering cost-effective services to beneficiaries of government programs. We run large-scale, and often complex, program management operations on behalf of government agencies, improving the quality of services provided to their beneficiaries and achieving the necessary outcomes to help the government agencies cost-effectively meet their program goals. This has further enhanced our brand recognition as a proven partner with government agencies.
Subject matter expertise. Our workforce includes many individuals who possess substantial subject matter expertise in areas critical to the successful design, implementation, administration and operation of government health and human services programs. Many of our employees have worked for governments in management positions and can offer insights into how we can best provide valuable, practical and effective services to our clients.
Intellectual property that supports the administration of government programs. We have proprietary solutions to address client requirements in our markets that are configurable or provide a platform that can be utilized with other clients. We leverage commercial off-the-shelf platforms across multiple contracts in which we have considerable expertise to ensure we can deploy repeatable proven solutions. We also leverage software development methodologies to shorten development cycles. Extensive use of shared infrastructure and standard solutions provides considerable price and quality advantages. We believe our extensive industry focus and expertise embedded in our systems and processes provide us with a competitive advantage.
Digital engagement, analytics and automation solutions to enhance government programs. Participants in government programs expect the same types of digital engagement they rely upon when interacting with consumer-oriented businesses. We believe our clients value our ability to infuse digital, such as mobile applications and social media, into our BPS solutions to make it easier for beneficiaries to engage with government programs. Analytics enable us to optimize our operations and provide our clients with improved outcomes through greater insight into the populations we serve. Process automation incorporated into our BPS solutions increases the efficiency and quality of the programs we operate.
Flexibility and scalability. We are experienced in launching large-scale operations under compressed time frames. We offer clients the flexibility and scalability to deliver the people, processes and technology to complete short- and long-term contractual assignments in an efficient and cost-effective manner.
Financial strength. Our business provides us with robust cash flows from operations as a result of our profitability and our management of customer receivables. In the event that we have significant cash outlays at the commencement of projects, to fund acquisitions, or where delays in payments have resulted in short-term cash flow declines, we may borrow up to $400 million through our credit facility, subject to standard covenants. We have the ability to borrow under our credit facility in all of the principal currencies in which we operate. We believe we have strong, constructive relationships with the lenders on our credit facility. We believe our financial strength provides reassurance to government agencies that we will be able to establish and maintain the services they need to operate high-profile public health and human services programs. 
Focused portfolio of services. We are one of the largest publicly traded companies that provides a portfolio of BPS almost exclusively to government customers. Our government program expertise and proven ability to deliver defined, measurable outcomes differentiate us from other firms and nonprofit organizations, including large consulting firms that serve multiple industries and lack the focus necessary to manage the complexities of serving government agencies efficiently.
Established presence outside the United States. Governments outside the U.S. are seeking to improve government-sponsored health and human services programs, manage increasing caseloads, and contain costs. We have an established presence in the U.K., Australia, Canada, Saudi Arabia and Singapore. Our international efforts are focused on delivering cost-effective welfare-to-work and health benefits services to program participants on behalf of governments.

12



Expertise in competitive bidding. Government agencies typically award contracts through a comprehensive, complex and competitive request for proposals (RFP) and bidding process. Although the bidding criteria vary from contract to contract, typical contracts are awarded based upon a mix of technical solution and price. In some cases, governments award points for past performance tied to program outcomes. With more than 40 years of experience in responding to RFPs, we believe we have the necessary experience and resources to navigate government procurement processes and to assess and allocate the appropriate resources necessary for successful project completion in accordance with contractual terms.
Competition
The market for providing our services to government agencies is competitive and subject to rapid change. However, given the specialized nature of our services and the programs we serve, market entry can be difficult for new or inexperienced firms. The complex nature of competitive bidding, qualifying criteria related to past performance, the required investment in subject-matter expertise, repeatable processes and support infrastructure, and the need to achieve specific program outcomes creates barriers to entry for potential new competitors unfamiliar with the nature of government procurement.
In the U.S., our primary competitors in the Health Services Segment are government in-sourced operations, Conduent, Automated Health Systems, Faneuil and KePro. We consider ourselves to be a significant competitor in the markets in which we operate as we are the largest provider of Medicaid and CHIP administrative programs and operate more state-based health insurance exchanges than any other commercial provider. In the U.S. Federal Services Segment, our primary competitors in the BPS market are Serco, General Dynamics Information Technology, PAE and Conduent. In the U.S. Federal Services Segment, our primary competitors in the technology sector tend to be IBM, Oracle, Leidos, Accenture and other federal contractors. Our primary competitors in the Human Services Segment vary according to specific business line, but are primarily specialized consulting service providers and local nonprofit organizations.
Outside of the U.S., our primary competitors in the Health Services Segment include Atos, Capita, Interserve, Virgin Care and Optum. Our primary competitors in the Human Services Segment include Serco, Staffline, Shaw Trust, Sarina Russo, Advanced Personnel Management and other specialized private companies and nonprofit organizations such as The Salvation Army and Goodwill Industries. Although the basis for competition varies from contract to contract, we believe that typical contracts are awarded based upon a mix of comprehensive solution and price. In some cases, clients award points for past performance tied to program outcomes.
Legislative initiatives
We actively monitor legislative initiatives and respond to opportunities as they develop. Much of our work depends upon us reacting quickly to dynamic changes in the legislative landscape to assist with implementation of new legislation. Over the past several years, legislative initiatives created new growth opportunities and potential markets for us. Legislation passed in all the geographies in which we operate can have significant public policy implications for all levels of government, and presents viable business opportunities in the health and human services arena.
Some legislative initiatives that have created new growth opportunities for MAXIMUS are as follows.
The Affordable Care Act (ACA). Enacted in 2010 and upheld through a Supreme Court decision in 2012, the ACA introduced comprehensive health care reform in the United States. In our Health Services Segment, we have helped states with the operation of their health insurance exchanges and the expansion of their Medicaid programs to include new populations, the integration of state eligibility processing for entitlement programs and new long-term services and supports initiatives that have introduced more flexibility for home- and community-based services. In our U.S. Federal Services Segment, we have also assisted the federal government with the operations of a customer contact center for the Federal Marketplace and independent eligibility appeals services.
We believe we remain well-positioned to assist the federal government and individual states with future modifications to the ACA, including those made through waivers.
Children's Health Insurance Program Reauthorization Act (CHIPRA). CHIPRA was signed into law on February 2, 2009, extending the previous SCHIP program. As part of the Bipartisan Budget Act of 2018, CHIP has been extended and funded through 2027.
Medicaid and CHIP Managed Care Regulations. In 2016, the Centers for Medicare & Medicaid Services issued managed care regulations and federal standards for the Medicaid and CHIP programs. These include enhancing

13



support for consumers, improving health care delivery and quality of care, providing greater access to health care, and ensuring a modern set of rules that better align with the marketplace and Medicare Advantage plans. They also reinforce ongoing efforts to modernize and streamline the enrollment process and the continued value of independent choice counseling.
   Work Innovation and Opportunity Act (WIOA). Signed into law in July 2014, WIOA replaces the Workforce Investment Act of 1998 and took effect on July 1, 2015. The law coordinates several core federal employment, training, education and literacy programs. It also requires states to strategically align their workforce development programs, with the option to include TANF, to help job seekers access the necessary support services and to match employers with skilled workers they need to compete in the global economy. WIOA represents potential new opportunities for us to complement our existing TANF welfare-to-work operations in the U.S.
The Welfare Reform Act of 2007 (United Kingdom). The Welfare Reform Act of 2007 replaced Incapacity Benefit with the Employment and Support Allowance and introduced the Work Capability Assessment (WCA). The WCA was designed to distinguish people who could not work due to health-related problems from people who were "fit for work" or, with additional support, could eventually return to work. In 2010, the U.K. Government decided to reassess the 1.5 million people who had previously been determined to be eligible to receive Incapacity Benefits. The U.K. Government also decided that an independent health assessment provided by a vendor partner is the best method for the government to determine the level of benefits for individuals with long-term sickness or disabilities. MAXIMUS has been providing assessments through the resulting Health Assessment Advisory Service (HAAS) on behalf of the Department for Work and Pensions (DWP) since March 2015.
Employees
As of September 30, 2018, we had approximately 18,600 employees, consisting of 11,700 employees in the Health Services Segment, 2,700 employees in our U.S. Federal Services Segment, 3,700 employees in the Human Services Segment and 500 corporate administrative employees. Our success depends in large part on attracting, retaining and motivating talented, innovative, experienced and educated professionals at all levels. As a result of the citizen engagement center acquisition, we will be adding approximately 13,100 employees to our U.S. Federal Services Segment and approximately 300 corporate administrative employees upon the closing of the acquisition.
As of September 30, 2018, 453 of our employees in Canada were covered under three different collective bargaining agreements, each of which has different components and requirements. There are 441 employees covered by two collective bargaining agreements with the British Columbia Government and Services Employees' Union and 12 employees covered by a collective bargaining agreement with the Professional Employees Association. These collective bargaining agreements expire in 2019 and 2020.
As of September 30, 2018, 1,593 of our employees in Australia were covered under a Collective Agreement, which is similar in form to a collective bargaining agreement. The Collective Agreement is renewed annually.
As of September 30, 2018, 405 of our employees in the U.K. were covered under a collective bargaining agreement with GMB Trade Union and Unite Amicus Trade Union. These collective bargaining agreements do not have expiration dates.
None of our other employees are covered under any such agreement. We consider our relations with our employees to be good.
Other information
MAXIMUS, Inc. is a Virginia corporation.
Our principal executive offices are located at 1891 Metro Center Drive, Reston, Virginia, 20190. Our telephone number is 703-251-8500.
Our website address is maximus.com. We make our website available for informational purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Annual Report on Form 10-K.
We make our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and the proxy statement for our annual shareholders' meeting, as well as any amendments to those reports, available free of charge through our website as soon as reasonably practical after we file that material with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC filings may be accessed through the Investor Relations

14



page of our website. These materials, as well as similar materials for other SEC registrants, may be obtained directly from the SEC through their website at http://www.sec.gov.
ITEM 1A.    Risk Factors.
Our operations are subject to many risks that could adversely affect our future financial condition, results of operations and cash flows and, therefore, the market value of our securities. See Exhibit 99.1 of this Annual Report on Form 10-K under the caption "Special Considerations and Risk Factors" for information on risks and uncertainties that could affect our future financial condition and performance. The information in Exhibit 99.1 is incorporated by reference into this Item 1A.
ITEM 1B.    Unresolved Staff Comments.
None.
ITEM 2.    Properties.
We own a 60,000 square-foot office building in Reston, Virginia. We also lease offices for operations, management and administrative functions in connection with the performance of our services. At September 30, 2018, we leased 113 offices in the U.S. totaling approximately 2.4 million square feet. In five countries outside the U.S., we leased 304 offices totaling approximately 1.0 million square feet. The lease terms vary from month-to-month to ten-year leases and are generally at market rates. In the event that a property is used for our services in the U.S., we typically negotiate clauses to allow termination of the lease if the service contract is terminated by our customer. Such clauses are not standard in foreign leases.
We believe that our properties are maintained in good operating condition and are suitable and adequate for our purposes.
As a result of the citizen engagement center acquisition, we commenced leasing an additional 20 offices in the U.S. totaling approximately 1.3 million square feet in November 2018.
ITEM 3.    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 U.S. 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 federal, 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 pending matter would likely have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Shareholder lawsuit
In August 2017, the Company and certain officers were named as defendants in a putative class action lawsuit filed in the U.S. District Court for the Eastern District of Virginia. The plaintiff alleged the defendants made a variety of materially false and misleading statements, or failed to disclose material information, concerning the status of the Company’s Health Assessment Advisory Service project for the U.K. Department for Work and Pensions from the period of October 20, 2014 through February 3, 2016. In August 2018, the defendants’ motion to dismiss the case was granted, and the case was dismissed. In October 2018, the plaintiffs filed a notice of appeal to the U.S. Circuit Court for the Fourth Circuit. That appeal is pending. At this time, it is not possible to reasonably predict whether this matter will be permitted to proceed as a class or to reasonably estimate the value of the claims asserted, and we are unable to estimate the potential loss or range of loss.
Medicaid claims
A state Medicaid agency has been notified of two proposed disallowances by the Centers for Medicare and Medicaid Services (CMS) totaling approximately $31 million. From 2004 through 2009, we had a contract with the state agency in support of its school-based Medicaid claims. We entered into separate agreements with the school districts under which we assisted the districts with preparing and submitting claims to the state Medicaid agency

15



which, in turn, submitted claims for reimbursement to CMS. The state has asserted that its agreement with us requires us to reimburse the state for the amounts owed to CMS. However, our agreements with the school districts require them to reimburse us for such amounts, and therefore we believe the school districts are responsible for any amounts that ultimately must be refunded to CMS. Although it is reasonably possible that a court could conclude we are responsible for the full balance of the disallowances, we believe our exposure in this matter is limited to our fees associated with this work and that the school districts will be responsible for the remainder. We have established a reserve to cover our estimated fees earned from this engagement relating to the disallowances. We exited the federal healthcare-claiming business in 2009 and no longer provide the services at issue in this matter. No legal action has been initiated against us.
ITEM 4.    Mine Safety Disclosures
Not applicable.

16



PART II
ITEM 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on the New York Stock Exchange (NYSE) under the symbol "MMS."
As of October 5, 2018, there were 43 holders of record of our outstanding common stock. The number of holders of record is not representative of the number of beneficial owners due to the fact that many shares are held by depositories, brokers or nominees. We estimate there are approximately 34,500 beneficial owners of our common stock.
During fiscal years 2018 and 2017, we declared and paid quarterly dividends of $0.045 per share of MAXIMUS common stock. From the first quarter of fiscal year 2019, we expect that the corresponding payment will be $0.25 per share of MAXIMUS common stock. We intend to continue paying regular cash dividends, although there is no assurance as to future dividends. Future cash dividends, if any, will be paid at the discretion of our Board of Directors and will depend, among other things, upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors our Board of Directors may deem relevant.
The following table sets forth information regarding repurchases of common stock that we made during the three months ended September 30, 2018:
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)
July 1, 2018 - July 31, 2018
10,000

 
$
62.48

 
10,000

 
$
197,145

August 1, 2018 - August 31, 2018
4,925

 
62.92

 
4,925

 
196,836

September 1, 2018 - September 30, 2018 (2)
202,044

 
64.98

 
62,000

 
192,817

Total
216,969

 
 
 
76,925

 
 

______________________________________________
(1)
Under a resolution adopted in June 2018, 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 authorized the use of option exercise proceeds for the repurchase of our common stock.
(2)
The total number of shares purchased in September 2018 includes 140,044 restricted stock units which vested in September 2018 but which were utilized by the recipients to net-settle personal income tax obligations.

17



Stock Performance Graph
The following graph compares the cumulative total shareholder return on our common stock for the five-year period from September 30, 2013, to September 30, 2018, with the cumulative total return for the NYSE Stock Market (U.S. Companies) Index. In addition, we have compared the results of a peer group to our performance. Our peer group is based upon the companies noted in our annual proxy statement as entities with whom we compete for executive talent.
During fiscal year 2018, we updated our peer group. The updated peer group is comprised of Booz Allen Holding Corp., CACI International, Conduent, DST Systems, Gartner, Harris Corp., ICF International, ManTech International, Science International Applications Corp (SAIC) and Unisys Corp. Our former peer group was comprised of Booz Allen Holding Corp., CACI International, DST Systems, Gartner, Harris Corp., ICF International, Leidos Holdings, ManTech International, SAIC and Unisys Corp.
This graph assumes the investment of $100 on September 30, 2013, in our common stock, the NYSE Stock Market (U.S. Companies) Index and our peer groups, weighted by market capitalization and assumes dividends are reinvested.
chart-dfac2d82250d51a6a35.jpg
________________________________________________
Notes:
A.
The lines represent index levels derived from compounded daily returns that include all dividends.
B.
The indexes are reweighted daily, using the market capitalization on the previous trading day.
C.
If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
D.
The index level for all series was set to $100.00 on September 30, 2013.


18



ITEM 6.    Selected Financial Data.
We have derived the selected consolidated financial data presented below from our consolidated financial statements and the related notes. The revenue and operating results related to the acquisition of companies are included from the respective acquisition dates. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included as Item 7 of this Annual Report on Form 10-K and with the Consolidated Financial Statements and related Notes included as Item 8 of this Annual Report on Form 10-K. The historical results set forth in this Item 6 are not necessarily indicative of the results of operations to be expected in the future.

 
Year Ended September 30,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(In thousands, except per share data)
Consolidated statement of operations data:
 

 
 

 
 

 
 

 
 

Revenue
$
2,392,236

 
$
2,450,961

 
$
2,403,360

 
$
2,099,821

 
$
1,700,912

Operating income
295,483

 
313,512

 
286,603

 
259,832

 
225,308

Net income attributable to MAXIMUS
220,751

 
209,426

 
178,362

 
157,772

 
145,440

Basic earnings per share attributable to MAXIMUS
$
3.37

 
$
3.19

 
$
2.71

 
$
2.37

 
$
2.15

Diluted earnings per share attributable to MAXIMUS
$
3.35

 
$
3.17

 
$
2.69

 
$
2.35

 
$
2.11

Weighted average shares outstanding:
 
 
 

 
 

 
 

 
 

Basic
65,501

 
65,632

 
65,822

 
66,682

 
67,680

Diluted
65,932

 
66,065

 
66,229

 
67,275

 
69,087

Cash dividends per share of common stock
$
0.18

 
$
0.18

 
$
0.18

 
$
0.18

 
$
0.18

 
 
At September 30,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(In thousands)
Consolidated balance sheet data:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
349,245

 
$
166,252

 
$
66,199

 
$
74,672

 
$
158,112

Total assets
1,462,000

 
1,350,662

 
1,348,819

 
1,271,558

 
900,996

Debt
510

 
668

 
165,615

 
210,974

 
1,217

Total MAXIMUS shareholders' equity
1,083,867

 
940,085

 
749,081

 
612,378

 
555,962



19



ITEM 7.    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 the related Notes.
For an overview of our business, including our business segments and a discussion of the services we provide, see Item 1 - Business.
Recent acquisitions and disposals
The following acquisitions have occurred since October 2015:
Date
Acquisition
Related Segment
Background
Purchase Price
(in millions)
November 2018
General Dynamics Information Technology's Citizen Engagement Centers
(the citizen engagement center acquisition)
U.S. Federal Services
Citizen engagement services on large contracts for the U.S. Federal Government.
$ 400.0
[Note 1]

July 2017
Revitalised Limited
Health Services
Digital solutions for health, fitness and wellbeing.
4.1

February 2016
Ascend Management Innovations, LLC
Health Services
Independent health assessments and data management tools to U.S. state government agencies.
44.1

December 2015
Three companies doing business as "Assessments Australia"
Human Services
Health and functional assessment services in Australia.
3.1
[Note 2]

Note 1 - The purchase price for this business is based upon an estimate. The final price will be based upon the acquired working capital balance.
Note 2 - This purchase price includes an estimate of contingent consideration which has not yet been paid.
We believe that these acquisitions will provide us with the ability to complement and expand our existing services.
In May 2016, we sold our K-12 Education business, which had been part of our Human Services Segment. We recorded gains of $6.9 million and $0.7 million in fiscal years 2016 and 2017, respectively.
Financial overview
We operate a portfolio of clients in a number of U.S. and foreign jurisdictions. Our results for the three years ended September 30, 2018, have been influenced by a number of factors.
Our Health Services Segment has reported organic growth through contract expansion and improved contract performance.
Our U.S. Federal Services Segment has seen a decline in revenues and profit from the loss of a subcontract with the Department of Veterans Affairs, the natural and expected conclusion of a number of smaller contracts as well as contracts that were re-procured under small business set-asides.
Our Human Services Segment has experienced changes in its contract portfolio as new contracts in Australia have been offset by the end of Work Programme and Work Choice Programme contracts in the United Kingdom. Many of these international contracts are pay-for-performance contracts that earn revenue as the contract progresses.
Our Health and Human Services Segments operate in foreign locations and are exposed to fluctuations in foreign currencies. These fluctuations have resulted in overall declines in income since fiscal year 2016.
Our tax rate received benefits from the United States Tax Cuts and Jobs Act in 2018, the recording of tax benefits from the vesting of RSUs and the exercise of stock options in fiscal years 2018 and 2017 and research and development tax credits in fiscal year 2017.

20



We utilized our cash flows from operations in fiscal years 2016 and 2017 to reduce our debt, much of which had been incurred with the acquisitions of Acentia, LLC in 2015 and Ascend Management Innovations, LLC in 2016. By reducing our debt balance, we reduced our interest expenses year-over-year.
The sale of our K-12 Education business in 2016 resulted in a gain of $6.9 million on the date of sale and an additional $0.7 million in 2017 following the resolution of outstanding contingencies.
We repurchased common shares at a cost of $67.6 million, $28.9 million and $31.3 million for the fiscal years ended September 30, 2018, 2017 and 2016, respectively, resulting in corresponding benefits to earnings per share.
We have maintained our quarterly dividend program. During fiscal year 2019, we increased our annual payment from $0.18 to $1.00 per year.
International businesses
We operate in international locations. Accordingly, we transact business in currencies other than the U.S. Dollar, principally the Australian Dollar, the Canadian Dollar, the Saudi Arabian Riyal, the Singapore Dollar and the British Pound. During the year ended September 30, 2018, we earned approximately 29% and 11% of revenue and operating income, respectively, from our foreign subsidiaries. International business exposes us to certain risks.
Tax regulations may penalize us if we transfer funds or debt across international borders; accordingly, we may not be able to use our cash in the locations where it is needed. The passage of the Tax Cuts and Jobs Act in the United States in December 2017 eliminated many of these incremental penalties. As a result, we remitted a significant portion of our cash to the United States. Although this has been a significant benefit, some international transaction limitations still exist and there is no guarantee that the current U.S. tax regime will remain in place. To mitigate our risks with respect to transferring funds, we maintain sufficient working capital, or have sufficient capital available to us under our credit facility, both within and outside the U.S., to support the short-term and long-term capital requirements of the businesses in each region. We establish our legal entities to make efficient use of tax laws and holding companies to minimize this exposure.
We are subject to exposure from foreign currency fluctuations. Our foreign subsidiaries typically incur costs in the same currency as they earn revenue, thus limiting our exposure to unexpected currency fluctuations. Further, the operations of the U.S. business do not depend upon cash flows from foreign subsidiaries. However, declines in the relevant strength of foreign currencies against the U.S. Dollar will affect our revenue mix, profit margin and tax rate.

21




Summary of consolidated results
The following table sets forth, for the fiscal years indicated, information derived from our statements of operations.
 
 
Year ended September 30,
(dollars in thousands, except per share data)
 
2018
 
2017
 
2016
Revenue
 
$
2,392,236

 
$
2,450,961

 
$
2,403,360

Cost of revenue
 
1,797,851

 
1,839,056

 
1,841,169

Gross profit
 
594,385

 
611,905

 
562,191

Gross profit margin
 
24.8
%
 
25.0
%
 
23.4
%
Selling, general and administrative expense
 
285,241

 
284,593

 
269,091

Selling, general and administrative expense as a percentage of revenue
 
11.9
%
 
11.6
%
 
11.2
%
Amortization of intangible assets
 
10,308

 
12,208

 
13,377

Restructuring costs
 
3,353

 
2,242

 

Gain on sale of a business
 

 
650

 
6,880

Operating income
 
295,483

 
313,512

 
286,603

Operating income margin
 
12.4
%
 
12.8
%
 
11.9
%
Interest expense
 
1,000

 
2,162

 
4,134

Other income, net
 
4,726

 
2,885

 
3,499

Income before income taxes
 
299,209

 
314,235

 
285,968

Provision for income taxes
 
78,393

 
102,053

 
105,808

Effective tax rate
 
26.2
%
 
32.5
%
 
37.0
%
Net income
 
220,816

 
212,182

 
180,160

Income attributable to noncontrolling interests
 
65

 
2,756

 
1,798

Net income attributable to MAXIMUS
 
$
220,751

 
$
209,426

 
$
178,362

Basic earnings per share attributable to MAXIMUS
 
$
3.37

 
$
3.19

 
$
2.71

Diluted earnings per share attributable to MAXIMUS
 
$
3.35

 
$
3.17

 
$
2.69

The following tables provide 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.

22



Revenue, cost of revenue and gross profit

Our revenue reflects fees earned for services provided. Cost of revenue consists of direct costs related to labor and related overhead, subcontractor labor, outside vendors, rent and other direct costs. The largest component of cost of revenue, approximately two-thirds, is labor (both our labor and subcontracted labor). Changes in revenue, cost of revenue and gross profit for between fiscal years 2016 and 2018 are summarized below.
 
 
Revenue
 
Cost of Revenue
 
Gross Profit

 
Dollars in thousands
 
Percentage change from prior year
 
Dollars in thousands
 
Percentage change from prior year
 
Dollars in thousands
 
Percentage change from prior year
Balance for fiscal year 2016
 
$
2,403,360

 
 

 
$
1,841,169

 
 

 
$
562,191

 
 

Organic growth
 
72,820

 
3.0
 %
 
19,190

 
1.0
 %
 
53,630

 
9.5
 %
Net acquired growth
 
8,928

 
0.4
 %
 
7,500

 
0.4
 %
 
1,428

 
0.3
 %
Currency effect compared to the prior period
 
(34,147
)
 
(1.4
)%
 
(28,803
)
 
(1.6
)%
 
(5,344
)
 
(1.0
)%
Balance for fiscal year 2017
 
$
2,450,961

 
2.0
 %
 
$
1,839,056

 
(0.1
)%
 
$
611,905

 
8.8
 %
Organic growth
 
(83,409
)
 
(3.4
)%
 
(60,873
)
 
(3.3
)%
 
(22,536
)
 
(3.7
)%
Acquired growth
 
1,096

 
 %
 
799

 
 %
 
297

 
 %
Currency effect compared to the prior period
 
23,588

 
1.0
 %
 
18,869

 
1.0
 %
 
4,719

 
0.8
 %
Balance for fiscal year 2018
 
$
2,392,236

 
(2.4
)%
 
$
1,797,851

 
(2.2
)%
 
$
594,385

 
(2.9
)%
We have shown movements in revenue, cost of revenue and gross profit in three categories: organic movement, acquired growth and currency effects.
Our organic revenue growth reflects changes in our contract portfolio from our existing business, supplemented with new work. Most of our contracts are multi-year arrangements, built upon long-term relationships which allow us to maintain a strong backlog of work to sustain our revenues. In any year, we would anticipate approximately 7% to 10% attrition of work as contracts end or are lost; contracts are rebid with reduced volumes, scope, rates or a combination of all three; contracted work is taken in house or we elect not to rebid for work. We also maintain a small portfolio of short-term projects, which do not provide year-on-year cash flows. To achieve organic growth, we must obtain more work than is lost.
Our acquisitions provide additional growth to our contract portfolio, offset by divestitures. We show acquired revenue for one year after the date of the acquisition to allow for a like-for-like comparative.
Our business is affected by fluctuations in foreign currencies in the jurisdictions where we operate. Although revenue and related costs are typically earned and incurred in the same currency, a significant change in foreign exchange rates may adjust our overall profit margins. In addition, each segment has a different exposure to foreign currencies and, accordingly, significant fluctuations may affect the mix of revenues and costs across our segments. We show the effect of currency fluctuations by reporting the difference between our results using current year exchange rates and those results which would have been reported if the average rates utilized in the prior year had prevailed.
Across fiscal years 2017 and 2018, we continued to report organic revenue growth in our Health Services Segment. This was offset by declines in our U.S. Federal Services Segment, in both years, and in our Human Services Segment in 2018. In fiscal years 2017 and 2018, we improved our profit margin in the Health and U.S. Federal Services Segments through improved contract performance and cost efficiencies. This was offset by declining profit margins in our Human Services Segment due to dilutive pass-through revenues in a new contract.
Acquired growth in revenue and costs stems from the acquisition of Revitalised and the full year benefit of Ascend and Assessments Australia, partially offset by the sale, in May 2016, of our K-12 Education business.
After the U.S. Dollar, our most significant earnings are denominated in British Pounds. The British Pound recorded a sharp drop in the second half of fiscal year 2016, resulting in reduced revenue and costs in fiscal year 2017. It has recovered some value in fiscal year 2018 and, accordingly, resulted in revenue and cost growth in fiscal

23



year 2018. On a constant currency basis, we would have recorded growth of 3.4% in 2017 and a decline of 3.4% in 2018. The corresponding changes in cost of revenue growth would have been growth of 1.4% and a decline of 3.3%, respectively.
Additional details with respect to revenue, cost of revenue and gross profit are covered in our review of our individual segments below.
Other operating expenses and benefits
Selling, general and administrative expense (SG&A) consists of costs related to general management, marketing and administration. These costs include salaries, benefits, bid and proposal efforts, travel, recruiting, continuing education, employee training, non-chargeable labor costs, facilities costs, printing, reproduction, communications, equipment depreciation, bad debt expense, legal expenses and the costs of business combinations. Our SG&A is primarily composed of labor costs. These costs may be incurred at a segment level, for dedicated resources which are not client-facing, or at a corporate level. Corporate costs are allocated to segments on a consistent, rational basis. Unlike cost of revenue, SG&A is not directly driven by fluctuations in our revenue.
Our SG&A has remained steady between 2018 and 2017. Increases between 2017 and 2016 were driven by significant investments in infrastructure which increased our depreciation expense and maintenance charges.
As noted above, we have made a number of acquisitions in recent years. These acquisitions have affected and will affect our statements of operations beyond the addition of revenues and costs.
We incurred costs related to the acquisition of these entities; typically legal fees, third-party due diligence and costs related to the valuation of intangible assets. In fiscal year 2018, we recorded costs of $0.5 million related to the citizen engagement center acquisition, which closed in November 2018. In fiscal years 2017 and 2016, we incurred expenses of $0.1 million and $0.8 million, related to the acquisitions of Revitalised and Ascend, respectively.
We utilized our credit facility to fund our acquisitions. We borrowed funds in April 2015 to acquire Acentia, LLC, along with a further balance in February 2016 to acquire Ascend. These borrowings resulted in an increase in our interest expense. As of September 30, 2018 and 2017, we had no borrowings under the credit facility. We generated interest income in fiscal year 2018.
Our intangible asset amortization has been declining year over year, notwithstanding the acquisitions of Revitalised, Ascend and Assessments Australia. All of our assets acquired with our 2015 acquisition of Remploy as well as many of the assets acquired with our 2012 acquisition of Policy Studies, Inc. reached the end of their lives in middle of fiscal year 2017.
During fiscal years 2018 and 2017, we undertook a restructuring of our United Kingdom Human Services operations as part of the integration of Remploy. We recorded restructuring costs of $3.4 million and $2.2 million, respectively, principally severance expenses. 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 a reduction in income attributable to noncontrolling interests.
On May 9, 2016, we sold our K-12 Education business, which was previously part of the Company’s Human Services Segment. At that time, we recorded a gain of $6.9 million. In fiscal year 2017, we resolved certain contingencies related to the sale and recorded a further gain of $0.7 million.
Other income
Although we may earn interest on some of our cash and investment balances, we would not anticipate significant other income, particularly in fiscal year 2019 as we anticipate having net borrowings for several quarters as we cover our borrowings related to the citizen engagement center acquisition. Our other income has received some additional benefits which we would not anticipate occurring with regularity or pattern.
In fiscal year 2018, we received insurance recoveries related to property damage and generated interest income on our cash balances through short-term investments.
In fiscal year 2017, we received interest income on research and development tax credits which pertained to prior years.

24



In fiscal year 2016, we received a benefit from a foreign exchange fluctuation. We typically mitigate the risk of such income or expense by matching the currencies of revenues and respective costs and by settling inter-company transactions on a timely basis.
Income taxes
Our effective tax rate for fiscal years 2018, 2017 and 2016 was 26.2%, 32.5% and 37.0%, respectively.
Our income tax expense in fiscal year 2018 received a significant benefit from the Tax Cuts and Jobs Act (the Act). The Act reduced the statutory U.S. federal income tax rate from 35% to 21%. This resulted in a one-time benefit from the reduction of net deferred tax liabilities, as well as reducing our current year rate to 24.5% for fiscal year 2018 and future years to 21%. This benefit was offset by a one-time charge for undistributed and previously untaxed earnings in foreign locations, as well as the removal of certain tax credits and exemptions. Without the effects of the Act, we estimate that our diluted earnings per share for fiscal year 2018 would have been lower by approximately $0.40. We are monitoring guidance from the United States Treasury Department as to the application of certain aspects of the Act and we are waiting for some U.S. states to announce how they will organize their tax codes prospectively. We anticipate that our effective tax rate for fiscal year 2019, excluding discrete items, will be between 25% and 26%. This will vary depending upon the effect of the guidance noted above as well as any changes in our profit mix.
Our income tax expense in fiscal years 2018 and 2017 received benefits of $2.8 million and $6.6 million from the vesting of restricted stock units (RSUs) and the exercise of stock options. Prior to fiscal year 2017, this benefit had been recorded through our Consolidated Statements of Changes in Shareholders' Equity. Our annual benefit or charge related to the vesting of RSUs will be dependent upon the timing, amount and share price on the date that the awards become available to owners of RSUs. Although most of our RSUs vest in the fourth quarter, we have a significant population of RSUs whose issuance has been deferred which might result in unpredictable movements in our tax provision. As of September 30, 2018, we have no outstanding stock options.
Health Services Segment
The Health Services Segment provides a variety of business process services and appeals and assessments 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) contract in the U.K.
 
 
Year ended September 30,
(dollars in thousands)
 
2018
 
2017
 
2016
Revenue
 
$
1,404,959

 
$
1,380,151

 
$
1,298,304

Cost of revenue
 
1,032,331

 
1,032,826

 
1,006,123

Gross profit
 
372,628

 
347,325

 
292,181

Selling, general and administrative expense
 
136,250

 
132,081

 
107,155

Operating income
 
236,378

 
215,244

 
185,026

Gross profit percentage
 
26.5
%
 
25.2
%
 
22.5
%
Operating margin percentage
 
16.8
%
 
15.6
%
 
14.3
%


25



Changes in revenue, cost of revenue and gross profit for the 2017 and 2018 fiscal years are summarized below.
 
 
Revenue
 
Cost of Revenue
 
Gross Profit
(dollars in thousands)
 
Dollars
 
Percentage change from prior year
 
Dollars
 
Percentage change from prior year
 
Dollars
 
Percentage change from prior year
Balance for fiscal year 2016
 
$
1,298,304

 
 

 
$
1,006,123

 
 

 
$
292,181

 
 

Organic growth
 
104,224

 
8.0
 %
 
47,033

 
4.7
 %
 
57,191

 
19.6
 %
Acquired growth
 
9,790

 
0.8
 %
 
7,626

 
0.8
 %
 
2,164

 
0.7
 %
Currency effect compared to the prior period
 
(32,167
)
 
(2.5
)%
 
(27,956
)
 
(2.8
)%
 
(4,211
)
 
(1.4
)%
Balance for fiscal year 2017
 
$
1,380,151

 
6.3
 %
 
$
1,032,826

 
2.7
 %
 
$
347,325

 
18.9
 %
Organic growth
 
4,917

 
0.4
 %
 
(16,411
)
 
(1.6
)%
 
21,328

 
6.1
 %
Acquired growth
 
1,096

 
0.1
 %
 
799

 
0.1
 %
 
297

 
0.1
 %
Currency effect compared to the prior period
 
18,795

 
1.4
 %
 
15,117

 
1.5
 %
 
3,678

 
1.1
 %
Balance for fiscal year 2018
 
$
1,404,959

 
1.8
 %
 
$
1,032,331

 
 %
 
$
372,628

 
7.3
 %
Our Health Services Segment has recorded organic revenue growth across both fiscal years. This growth has been caused by contract expansion across our existing customer base, as well as performance improvements on other contracts. Our profit margin has improved as a consequence of our business growth, our improved performance and the end of two contracts which were detrimental to our results.
Much of our contract expansion has been driven by our work in the United States, notably with the State of New York. Revenue in the fourth quarter of fiscal 2018 was tempered by delayed contract amendments. This revenue will be recognized in fiscal year 2019.
We have continued to improve our performance in the United Kingdom HAAS contract. This contract includes a combination of incentives and penalties and we have consistently improved our performance in these over fiscal years 2017 and 2018. This contract has been extended through February 2020.
In fiscal year 2016, a contract with annual revenues of approximately $23 million ended and was rebid. We elected to pass on our opportunity to compete for this work resulting in lower annual revenues but improved overall margins. In fiscal year 2018, we agreed to terminate a loss-making contract with the U.K. Government. This resulted in a gain from the acceleration of deferred revenue and costs, as well as a long-term improvement to overall margins.
We acquired Ascend and Revitalised in fiscal years 2016 and 2017, respectively. Our acquired growth from fiscal year 2016 to 2017 includes five months of Ascend and two months of Revitalised, respectively. Our acquired growth from 2017 to 2018 includes the remaining ten months of Revitalised.
Much of this segment's international revenues are denominated in the British Pound, which declined sharply against the U.S. Dollar in the fourth quarter of fiscal year 2016. Although the value of the British Pound has improved in fiscal year 2018, it is still significantly lower than before June 2016.


26



U.S. Federal Services Segment
The U.S. Federal Services Segment provides business process solutions, program management, as well as system and software development and maintenance services for various U.S. federal civilian programs. The Segment also contains certain state-based assessments and appeals work that is part of the Segment's heritage within the Medicare Appeals portfolio and continues to be managed within this Segment.
 
 
Year ended September 30,
(dollars in thousands)
 
2018
 
2017
 
2016
Revenue
 
$
478,911

 
$
545,573

 
$
591,728

Cost of revenue
 
352,213

 
406,252

 
453,560

Gross profit
 
126,698

 
139,321

 
138,168

Selling, general and administrative expense
 
69,312

 
74,345

 
74,792

Operating income
 
57,386

 
64,976

 
63,376

Gross profit percentage
 
26.5
%
 
25.5
%
 
23.3
%
Operating margin percentage
 
12.0
%
 
11.9
%
 
10.7
%

Our U.S. Federal Services Segment has reported declines in revenue and cost of revenue across both fiscal years 2017 and 2018. These declines have been driven by contract terminations. These include:
A significant subcontract for the Department of Veterans Affairs, which ended in fiscal year 2017;
Contracts which came to their anticipated end; and
Contracts acquired with Acentia which were reserved for small businesses, precluding us from rebidding for the work.
Our year-over-year profit margins continue to improve, driven by innovation and technology improvements, as well as a state-based assessments contract which was highly accretive in fiscal year 2018.
The acquired business from the citizen engagement center acquisition will be reported in the U.S. Federal Services Segment beginning in fiscal year 2019. In addition, we continue to utilize the project vehicles acquired with Acentia in fiscal year 2015 to enhance and expand our service offerings to the United States Federal Government.
Human Services Segment
The Human Services Segment provides national, state, provincial and local 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. Approximately 70% of our revenue in this segment was earned in foreign jurisdictions.
 
 
Year ended September 30,
(dollars in thousands)
 
2018
 
2017
 
2016
Revenue
 
$
508,366

 
$
525,237

 
$
513,328

Cost of revenue
 
413,307

 
399,978

 
381,486

Gross profit
 
95,059

 
125,259

 
131,842

Selling, general and administrative expense
 
76,835

 
76,675

 
84,157

Operating income
 
18,224

 
48,584

 
47,685

Gross profit percentage
 
18.7
%
 
23.8
%
 
25.7
%
Operating margin percentage
 
3.6
%
 
9.2
%
 
9.3
%


27



Changes in revenue, cost of revenue and gross profit for the 2017 and 2018 fiscal years are summarized below.
 
 
Revenue
 
Cost of Revenue
 
Gross Profit

 
Dollars in thousands
 
Percentage change over previous year
 
Dollars in thousands
 
Percentage change over previous year
 
Dollars in thousands
 
Percentage change over previous year
Balance for fiscal year 2016
 
$
513,328

 
 

 
$
381,486

 
 

 
$
131,842

 
 

Organic growth
 
14,751

 
2.9
 %
 
19,465

 
5.1
 %
 
(4,714
)
 
(3.6
)%
Net acquisition and disposal
 
(862
)
 
(0.2
)%
 
(126
)
 
 %
 
(736
)
 
(0.6
)%
Currency effect compared to the prior period
 
(1,980
)
 
(0.4
)%
 
(847
)
 
(0.2
)%
 
(1,133
)
 
(0.9
)%
Balance for fiscal year 2017
 
$
525,237

 
2.3
 %
 
$
399,978

 
4.8
 %
 
$
125,259

 
(5.0
)%
Organic growth
 
(21,664
)
 
(4.1
)%
 
9,577

 
2.4
 %
 
(31,241
)
 
(24.9
)%
Currency effect compared to the prior period
 
4,793

 
0.9
 %
 
3,752

 
0.9
 %
 
1,041

 
0.8
 %
Balance for fiscal year 2018
 
$
508,366

 
(3.2
)%
 
$
413,307

 
3.3
 %
 
$
95,059

 
(24.1
)%
The Human Services Segment recorded organic revenue growth in fiscal year 2017 and an organic decline in fiscal year 2018. In both years, our costs of revenue have increased, resulting in declines in gross profit and operating profit.
Across both years, our mature welfare-to-work contracts in Australia and the United Kingdom have been coming to an end. In Australia, our Disability Employment Services contract ended and was replaced with its successor arrangement in July 2018. In the U.K., the Work Programme and Work Choice contracts are ending as the government shifts its focus away from mainstream employment programs to focus on programs designed to provide a more holistic approach to support the disabled and long-term sick populations into sustained employment. These changes are detrimental to our profit margin as the caseload from contracts ending steadily declines. The contracts which replace these are in a startup phase, where the workload steadily increases. The newer contracts also place a greater emphasis on sustained employment outcomes which further delays our earning of revenue. Without the impact of the startup of these contracts, we estimate that the Human Services Segment operating margin would have been 5.6% in fiscal year 2018.
The jobactive contract in Australia includes a significant amount of pass-through revenue where we have discretionary spending reimbursed to us with no margin. As well as increasing our administrative burden, this reduces our overall profit margins.
During fiscal year 2018, we recognized approximately $8.0 million of revenue from our operations in Saudi Arabia. Our net assets for our Saudi Arabia operations were approximately $4.5 million at September 30, 2018, and our accounts receivable at our Saudi Arabia operations are approximately $5.4 million, which is net of reserves that we believe are appropriate considering the risk of non-collection of the receivables.  
We are challenged across the Segment by low unemployment rates in the geographies in which we operate. As a consequence, we are required to adapt our methodology to serve the populations provided to us. We anticipate profit margins in the single digits for fiscal year 2019.
Our results in fiscal year 2017 received a benefit from a full year of business from Assessments Australia, but this was offset by the disposal of our K-12 Education business in the United States.
The detrimental effect of the decline in the value of the British Pound following the results of the 2016 referendum on European Union membership affected both revenue and costs in fiscal 2017. The value of the British Pound provided a benefit in fiscal 2018.

28



Reorganization of segments
Effective October 1, 2018, our Chief Executive Officer reorganized our reporting segments based on the way management intends to allocate resources, manage performance and evaluate results. This change responds to recent changes in the markets 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. Accordingly, we will report operating segments on a geographic basis. Our operating segments will be U.S. Health & Human Services, U.S. Federal Services and Outside the U.S.
Changes in revenue recognition
On October 1, 2018, we adopted a new methodology for reporting revenue. Although this new method will not affect the timing of revenue recognition on most of our contracts, we anticipate that revenue on our welfare-to-work contracts will be accelerated. This reflects our obligation to recognize long-term outcome fees across the period of performance, which may be several months, rather than deferring recognition until outcomes are certain, as was the requirement in fiscal year 2018 and prior. This should result in a closer matching of revenue and costs within these contracts and should mitigate some losses recorded in these contracts in their early months, although it is typical that any new contract will generally be less profitable than a mature contract. The effect of this new method of revenue recognition will be far more significant in the Outside the U.S. Segment, as this is where the greater share of welfare-to-work contracts with outcome payments is held.
We project that fiscal year 2019 revenue will benefit by approximately $7 million as a result of the new methodology. We project that the cumulative effect of the new methodology on all prior years will increase our retained earnings, increase our deferred tax assets and decrease our deferred revenue by approximately $33 million, $14 million and $47 million as of October 1, 2018, respectively.
Impact of the citizen engagement center acquisition
On November 16, 2018, we acquired 100% of General Dynamics Information Technology's citizen engagement centers business, pursuant to an asset purchase agreement dated October 5, 2018. This acquisition will affect our results in fiscal year 2019 and beyond.
We expect revenue for fiscal year 2019 to increase between $600 million and $625 million.
The two largest acquired contracts are cost-plus contracts and accordingly, we expect mid-single digit operating income margins for these contracts.
We expect an increase in SG&A in order to handle the additional volume of work that the acquisition will create.
Adding the assets related to this acquisition into the total Company portfolio allows us to spread the corporate SG&A costs across a substantially larger base of revenue. This will re-allocate indirect costs from our existing contracts to the two largest acquired cost-plus contracts, where they are recoverable.
Since we report fully allocated operating income for our contracts, we expect an improvement in operating income for our contracts that are not cost-plus contracts.
We expect less interest income because we used a significant portion of our cash on our balance sheet for the acquisition.
We expect interest expense to increase as we utilized $150 million of our credit facility.
We expect to incur one-time acquisition costs of $3 million in fiscal year 2019.
There will be amortization of intangible assets created by purchase accounting. This amortization is a non-cash charge and therefore, our EBITDA will increase more than our operating income. We are still in the process of valuing the assets acquired.
Liquidity and capital resources
Our principal source of liquidity remains our cash flows from operations. These cash flows are used to fund our ongoing operations and working capital needs as well as investments in capital infrastructure and our share repurchases. These operating cash flows are driven by our contracts and their payment terms. For many contracts, we are reimbursed for the costs of startup 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

29



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 operating cash flows, we maintain and utilize our credit facility, which allows us to borrow up to $400 million, subject to standard covenants. In fiscal years 2015 and 2016, we used this facility to fund acquisitions as well as short-term borrowings to cover some immediate working capital needs. At September 30, 2017, we had repaid these balances and had no outstanding borrowings under the credit facility during fiscal year 2018.
We believe our cash flows from operations should be sufficient to meet our day-to-day requirements.
Our priorities for cash utilization are to actively pursue new growth opportunities, to maintain our quarterly dividend program and, where opportunities arise, to make repurchases of our own shares.
We have no requirement to remit funds from our foreign locations back to the United States. However, where remitting these funds is possible and can be performed in a tax-free manner, we will do so. With the passage in the United States of the Tax Cuts and Jobs Act, we have been able to transfer a significant amount of funds from our foreign locations on a tax-free basis. We will continue to explore opportunities to bring back additional funds, taking into consideration the working capital requirements and relevant tax rules in each jurisdiction. Where we are unable to remit funds back without incurring a penalty, we will consider these funds indefinitely reinvested until such time as these restrictions are changed. As a result, we do not record U.S. deferred income taxes on any funds held in foreign jurisdictions. We have not attempted to calculate our potential liability from any transfer of these funds as any such transaction might include tax planning strategies which we have not fully explored. Accordingly, it is not possible to estimate the potential tax obligations if we were to remit all of our funds from foreign locations to the United States.
Our cash balances are held in the following locations and denominations (in thousands of U.S. Dollars):
 
As of September 30, 2018
U.S. Dollar denominated funds held in the United States
$
302,098

U.S. Dollar denominated funds held in foreign locations
780

Funds held in foreign locations in local currencies
46,367

 
$
349,245

In addition, we held short-term investments of $20.3 million as of September 30, 2018, in U.S. Dollar denominated investments that mature within the first quarter of fiscal year 2019.
The following table provides a summary of our cash flow information for the three years ended September 30, 2018.
 
 
Year ended September 30,
(dollars in thousands)
 
2018
 
2017
 
2016
Net cash provided by/(used in):
 
 

 
 

 
 

Operations
 
$
323,525

 
$
337,200

 
$
180,026

Investing activities
 
(46,304
)
 
(25,221
)
 
(87,103
)
Financing activities
 
(91,880
)
 
(215,429
)
 
(96,842
)
Effect of exchange rates on cash and cash equivalents
 
(2,348
)
 
3,503

 
(4,554
)
Net increase/(decrease) in cash and cash equivalents
 
$
182,993

 
$
100,053

 
$
(8,473
)
The factors influencing cash flows from operations are:
Our operating profit,
Our cash collections,
The timing of payments within contracts, particularly those with up-front payments, and

30



The timing of tax payments, especially following the passage of the Tax Cuts and Jobs Act in the United States.
We measure our ability to collect receivables from customers using our Days Sales Outstanding (DSO) calculation. We have a target range for DSO of 65 to 80 days and we have typically stayed within the lower end of this range during the past three fiscal years. During both fiscal years 2018 and 2017, we experienced strong cash collections, particularly towards the end of the year, and reported a DSO of 63 days at September 30, 2018 and 2017. This resulted in significant cash flows from customers in both years, particularly in 2017.
Our tax payments for September 30, 2018, 2017 and 2016 were $65.3 million, $87.8 million and $108.3 million, respectively. Tax payments are lower in fiscal year 2018 due to the Tax Cuts and Jobs Act in the United States.
We anticipate that our operating cash flows in 2019 may be lower than those in fiscal years 2017 and 2018 as those years received the benefit of stronger cash collections than anticipated. We note that the early or late payment of invoices from our largest customers may result in significant fluctuations in our cash flows from those anticipated. Owing to changes in financial reporting requirements, our cash flow statements starting in fiscal year 2019 will include movements in balances which we consider to be restricted cash and which we report in 'prepayments and other assets.' Our restricted cash balance at September 30, 2018, was $7.3 million. We do not anticipate that this will result in a significant change in our reported operating cash flows.
In fiscal year 2018, we purchased short-term investments of $20.0 million, which is the primary driver of the increase in cash used in investing activities from fiscal year 2017. In fiscal year 2016, we completed a significant build-out of our United States infrastructure. This, combined with the acquisition of Ascend and Assessments Australia, increased our investing cash outflows. Our infrastructure investment has returned to a normal level following the completion of this build-out.
Our cash flows from financing activities have been driven by our use of our credit facility, our repurchases of our common stock and our quarterly dividend.
In fiscal year 2015, we utilized our credit facility to fund the acquisition of Acentia, as well as to fund short-term working capital needs. Commencing in the fourth quarter of fiscal year 2016, we repaid these borrowings in full, principally from our United States operating cash flows. The citizen engagement center acquisition resulted in cash borrowings of $150.0 million, which we will report in the three months ended December 31, 2018, as financing cash inflows, and an investment of approximately $400 million, which we will report as an investing cash outflow. This cash outflow will be subject to change based upon the working capital acquired with the business. As we manage our cash in fiscal year 2019, we expect to utilize our credit facility as needed to cover working capital requirements.
We repurchased 1.1 million, 0.6 million and 0.6 million shares of common stock during fiscal years 2018, 2017 and 2016, utilizing cash of $127.7 million. At September 30, 2018, we had $192.8 million available for future repurchases under a plan approved by our Board of Directors. Subsequent to September 30, 2018, we purchased a further 0.2 million shares of common stock at a cost of approximately $15 million, leaving approximately $178 million available under our current Board authorization. Our share repurchases are at the discretion of our Board of Directors and depend upon our future operations and earnings, capital requirements general financial condition, contractual restrictions and other factors our Board of Directors may deem relevant.
Since the second half of fiscal year 2011, we have paid a quarterly dividend of $0.045 per common share. This resulted in a regular cash outflow of approximately $12 million per year. In the first fiscal quarter of 2019, we will pay a dividend of $0.25 per common share, which we expect to continue on a quarterly basis and which would result in an annual cash outflow of approximately $65 million. Continued payment of the dividend is subject to Board discretion.
Where we operate in foreign locations, we utilize the local currency to operate our business. Although surplus funds have been transferred to U.S. Dollar denominated bank accounts, we are still subject to gains or losses on these balances where the foreign currencies appreciate or depreciate against the U.S. Dollar. These increases or decreases are shown as the effect of exchange rates on our cash balances.
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.

31



 
 
Year ended September 30,
(dollars in thousands)
 
2018
 
2017
 
2016
Cash provided by operations
 
$
323,525

 
$
337,200

 
$
180,026

Purchases of property and equipment and capitalized software costs
 
(26,520
)
 
(24,154
)
 
(46,391
)
Free cash flow
 
$
297,005

 
$
313,046

 
$
133,635

Obligations and commitments
The following table summarizes our contractual obligations at September 30, 2018, that require the Company to make future cash payments:
 
 
Payments due by period
(dollars in thousands)
 
Total
 
Less than
1 year
 
1 - 3
years
 
3 - 5
years
 
More than
5 years
Operating leases
 
$
160,667

 
$
68,959

 
$
71,566

 
$
18,172

 
$
1,970

Debt(1)
 
510

 
136

 
271

 
103

 

Deferred compensation plan liabilities(2)
 
36,115

 
2,618

 
2,470

 
1,457

 
29,570

Total(3)
 
$
197,292

 
$
71,713

 
$
74,307

 
$
19,732

 
$
31,540

____________________________________________

(1)
The debt balance of $0.5 million at September 30, 2018, is interest free. Accordingly, no estimated interest payments have been included within the balances above.
(2)
Deferred compensation plan liabilities are typically payable at times elected by the employee at the time of deferral. The timing of these payments are based upon elections in place at September 30, 2018, but these may be subject to change. Payments falling due may be deferred again by the employee, delaying the obligation. Payments may also be accelerated if an employee ceases employment with us or applies for a hardship payment. At September 30, 2018, we held assets of $34.3 million in a Rabbi Trust which could be used to meet these obligations.
(3)
Due to the uncertainty with respect to the timing of future cash flows associated with the Company's unrecognized income tax benefits at September 30, 2018, we are unable to reasonably estimate settlements with taxing authorities. The above table does not reflect unrecognized income tax benefits of approximately $1.3 million, of which approximately $0.7 million is related interest and penalties. See "Note 5. Income taxes" of the Consolidated Financial Statements for a further discussion on income taxes.
The contractual obligations table also omits our liabilities with respect to acquisition-related contingent consideration as part of the Assessments Australia acquisition in fiscal year 2016. See "Note 13. Business combinations and disposal" of our Consolidated Financial Statements for additional information on these balances.
Off-balance sheet arrangements
Other than our operating lease commitments, we do not have material off-balance sheet risk or exposure to liabilities that are not recorded or disclosed in our financial statements. We have significant operating lease commitments for office space; those commitments are generally tied to the period of performance under related contracts. Although for certain contracts we are bound by performance bond commitments and standby letters of credit, we have not had any defaults resulting in draws on performance bonds. Also, we do not speculate in derivative transactions. We have utilized interest rate derivatives to add stability to interest expense and to manage our exposure to interest rate movements.
Effects of inflation
As measured by revenue, approximately 33% of our business in fiscal year 2018 was conducted under cost-plus pricing arrangements that adjust revenue to cover costs increased by inflation. Approximately 6% of the business was time-and-material pricing arrangements where labor rates are often fixed for several years. We generally have been able to price these contracts in a manner that accommodates the rates of inflation experienced in recent years. Our remaining contracts are fixed-price and performance-based and are typically priced to mitigate the risk of our business being adversely affected by inflation.

32



Critical accounting policies and estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and judgments that affect the amounts reported. We consider the accounting policies below to be the most important to our financial position and results of operations either because of the significance of the financial statement item or because of the need to use significant judgment in recording the balance. 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. Our significant accounting policies are summarized in "Note 1. Business and summary of significant accounting policies" of the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K.
Revenue Recognition. We recognize revenue on arrangements as work is performed and amounts are earned. We consider amounts to be earned once evidence of an arrangement has been obtained, services have been delivered, fees are fixed or determinable and collectability of revenue is reasonably assured.
Approximately 33% of our business is derived from cost-plus pricing arrangements. Revenue on cost-plus contracts is recognized based on costs incurred plus the negotiated fee earned. Our key estimates relate to the allocation of indirect costs. Much of the allocation of allowable indirect costs is based upon rules established by the relevant contract or by reference to U.S. Federal Government standards. While the existence of these rules reduces the risk of a significant error, the allocation of indirect costs is typically audited by our customers and it usually takes a significant period of time for an audit to be concluded. The iterative process of an audit provides us with information to refine our estimates for open periods. We have not recorded any significant adjustments to our revenue related to changes in such estimates for any of the three years ended September 30, 2018. We are current in our submissions of costs to relevant regulators. Although audits of past costs remain open for certain years, we believe it is unlikely that a significant adjustment to prior periods would occur at this time.
On certain performance-based arrangements, our per-transaction fees may be higher in earlier years to compensate for anticipated higher costs at the commencement of contract operations. Where the discount in future fees is considered both significant and incremental, we are required to estimate our total future volumes and revenues and allocate an estimated fee to each transaction. We refine these estimates of total future volumes quarterly and we recognize these changes as a cumulative catch-up to our revenue. The sensitivity of these volume estimates is driven by the length of the contract, the size of the discounts and the maturity of the contract. Our greatest revenue volatility from our estimate will typically arise at the mid-point of the contract; in early periods of contract performance, changes to estimates of future volumes will have a smaller true-up; in later periods, there is less likelihood of a significant change in estimate. Although we had a number of contracts with these terms and conditions during the three years ended September 30, 2018, no significant adjustments to revenue were recorded in this period. As of September 30, 2018, many of these contracts are close to maturity and, accordingly, the likelihood of a significant adjustment has diminished. The only significant remaining contract is our contract with the Department of Education, which is in our U.S. Federal Services Segment. The contract, which has an expected total value of approximately $0.9 billion, has completed its fourth full year of operations and has up to six years of operations remaining. Our transaction billing rate for the future periods is approximately 10% lower than it was for the earliest periods. If, at September 30, 2018, our estimate of future volumes had increased or decreased by five percent, it would not have resulted in a significant adjustment to revenue and operating income.
Where contracts have multiple deliverables, we evaluate these deliverables at the inception of each contract and as each item is delivered. As part of this evaluation, we consider whether a delivered item has value to a customer on a stand-alone basis and whether the delivery of the undelivered items is considered probable and substantially within our control, if a general right of return exists. Where deliverables, or groups of deliverables, have both of these characteristics, we treat each deliverable item as a separate element in the arrangement, allocate a portion of the allocable arrangement consideration using the relative selling price method to each element and apply the relevant revenue recognition guidance to each element. The allocation of revenue to individual elements requires judgment as, in many cases, we do not provide directly comparable services or products on a standalone basis.
Business combinations and goodwill. The purchase price of an acquired business is allocated to tangible assets and separately identifiable intangible assets acquired less liabilities assumed based upon their respective fair values. The excess balance is recorded as goodwill. Accounting for business combinations requires the use of judgment in determining the fair value of assets acquired and liabilities assumed in order to allocate the purchase price of entities acquired. Our estimates of these fair values are based upon assumptions we believe to be reasonable and, where appropriate, include assistance from third-party appraisal firms.

33



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. This process requires judgment in identifying our reporting units, appropriately allocating goodwill to these reporting units and assessing the fair value of these reporting units. At July 1, 2018, the Company performed its annual impairment test and determined that there had been no impairment of goodwill. In performing this assessment, the Company utilizes 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 the Company's market capital at the date of the acquisition in order to verify the calculation. In all cases, we determined that the fair value of our reporting units was significantly in excess of our carrying value to the extent that a 25% decline in fair value in any reporting unit would not have resulted in an impairment charge.
Long-Lived Assets (Excluding Goodwill). The Company reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. Examples of indicators include projects performing less well than anticipated or making losses or an identified risk of a contract termination. Where a potential risk is identified, our review is based on our projection of the undiscounted future operating cash flows of the related customer project. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amount of the related assets (the asset group), we recognize a non-cash impairment charge to reduce the carrying amount to equal projected future discounted cash flows. Judgment is required in identifying the indicators of impairment, in identifying the asset group and in estimating the future cash flows.
No impairment charges were recorded in the three years ending September 30, 2018.
Contingencies. From time to time, we are involved in legal proceedings, including contract and employment claims, in the ordinary course of business. 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.
Income Taxes. The Company recognizes 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. The assumptions and estimates used in preparing these calculations may change over time and may result in adjustments that will affect our tax charge.
Non-GAAP and other 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.
In recent years, we have made a number of acquisitions. 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. 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 2018, 29% 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. We refer to this adjusted revenue on a "constant currency basis."
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

34



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 provided by 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.
During fiscal year 2018, we utilized our credit facility. 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 as follows:
 
 
Year ended September 30,
(in thousands)
 
2018
 
2017
 
2016
Net income attributable to MAXIMUS
 
$
220,751

 
$
209,426

 
$
178,362

Interest expense
 
(2,591
)
 
379

 
3,466

Provision for income taxes
 
78,393

 
102,053

 
105,808

Amortization of intangible assets
 
10,308

 
12,208

 
13,377

Stock compensation expense
 
20,238

 
21,365

 
18,751

Acquisition-related expenses
 
947

 
83

 
832

Gain on sale of a business
 

 
(650
)
 
(6,880
)
Adjusted EBITA
 
328,046

 
344,864

 
313,716

Depreciation and amortization of property, plant, equipment and capitalized software
 
51,884

 
55,769

 
58,404

Adjusted EBITDA
 
$
379,930

 
$
400,633

 
$
372,120




35



ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risks generally relates to changes in foreign currency exchange rates.
At September 30, 2018 and 2017, we held net assets denominated in currencies other than the U.S. Dollar of $100.3 million and $186.8 million, respectively. Of these balances, cash and cash equivalents comprised $46.4 million and $63.7 million, respectively. Accordingly, in the event of a 10% unfavorable exchange rate movement across these currencies, we would have reported the following incremental effects on our comprehensive income and our cash flow statement (in thousands).
 
As of September 30,
 
2018
 
2017
Comprehensive income attributable to MAXIMUS
$
(10,030
)
 
$
(18,680
)
Net decrease in cash and cash equivalents
(4,640
)
 
(6,370
)
Where possible, we identify surplus funds in foreign locations and place them into entities with the U.S. Dollar as their functional currency. This mitigates our exposure to foreign currencies. We mitigate our foreign currency exchange risks within our operating divisions through incurring costs and cash outflows in the same currency as our revenue.
We are exposed to interest rate risk through our credit facility when we utilize it. At September 30, 2018, we had no outstanding borrowings on our credit facility and, accordingly, no exposure to interest rate fluctuations. We utilized our credit facility in November 2018 to fund the acquisition of General Dynamics Information Technology's citizen engagement center business. Based upon our anticipated levels of borrowing, we would anticipate our borrowing rate to be based upon monthly LIBOR plus 1%. Our overall expense will be dependent upon our outstanding borrowings and the rate at which we repay this borrowing.

36



ITEM 8.    Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data are included as part of this Annual Report on Form 10-K:


37



Report of Ernst & Young LLP,
Independent Registered Public Accounting Firm,
on the Audited Consolidated Financial Statements

Board of Directors and Shareholders
MAXIMUS, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of MAXIMUS, Inc. (the Company) as of September 30, 2018 and 2017, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 20, 2018, expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ Ernst & Young LLP
 
 
 
We have served as the MAXIMUS, Inc.’s auditor since 1996.
 
 
Tysons, Virginia
 
November 20, 2018
 

38



MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
 
Year ended September 30,
 
2018
 
2017
 
2016
Revenue
$
2,392,236

 
$
2,450,961

 
$
2,403,360

Cost of revenue
1,797,851

 
1,839,056

 
1,841,169

Gross profit
594,385

 
611,905

 
562,191

 
 
 
 
 
 
Selling, general and administrative expenses
285,241

 
284,593

 
269,091

Amortization of intangible assets
10,308

 
12,208

 
13,377

Restructuring costs
3,353

 
2,242

 

 
 
 
 
 
 
Gain on sale of a business

 
650

 
6,880

Operating income
295,483

 
313,512

 
286,603

 
 
 
 
 
 
Interest expense
1,000

 
2,162

 
4,134

 
 
 
 
 
 
Other income, net
4,726

 
2,885

 
3,499

Income before income taxes
299,209

 
314,235

 
285,968

Provision for income taxes
78,393

 
102,053

 
105,808

Net income
220,816

 
212,182

 
180,160

Income attributable to noncontrolling interests
65

 
2,756

 
1,798

Net income attributable to MAXIMUS
$
220,751

 
$
209,426

 
$
178,362

Basic earnings per share attributable to MAXIMUS
$
3.37

 
$
3.19

 
$
2.71

Diluted earnings per share attributable to MAXIMUS
$
3.35

 
$
3.17

 
$
2.69

Dividends per share
$
0.18

 
$
0.18

 
$
0.18

Weighted average shares outstanding:
 

 
 

 
 

Basic
65,501

 
65,632

 
65,822

Diluted
65,932

 
66,065

 
66,229


See accompanying notes to consolidated financial statements.

39



MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
 
Year ended September 30,
 
2018
 
2017
 
2016
Net income
$
220,816

 
$
212,182

 
$
180,160

Foreign currency translation adjustments
(9,334
)
 
8,549

 
(13,828
)
Interest rate hedge, net of income taxes of $-, $- and $(16)

 
1

 
24

Comprehensive income
211,482

 
220,732

 
166,356

Comprehensive income attributable to noncontrolling interests
65

 
2,756

 
1,798

Comprehensive income attributable to MAXIMUS
$
211,417

 
$
217,976

 
$
164,558

   
See accompanying notes to consolidated financial statements.


40



MAXIMUS, Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
 
September 30,
 
2018
 
2017
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
349,245

 
$
166,252

Short-term investments
20,264

 

Accounts receivable—billed and billable, net
357,613

 
394,338

Accounts receivable—unbilled
31,536

 
36,475

Income taxes receivable
5,979

 
4,528

Prepaid expenses and other current assets
43,995

 
55,649

Total current assets
808,632

 
657,242

Property and equipment, net
77,544

 
101,651

Capitalized software, net
22,429

 
26,748

Goodwill
399,882

 
402,976

Intangible assets, net
88,035

 
98,769

Deferred contract costs, net
14,380

 
16,298

Deferred compensation plan assets
34,305

 
28,548

Deferred income taxes
6,834

 
7,691

Other assets
9,959

 
10,739

Total assets
$
1,462,000

 
$
1,350,662

LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
114,378

 
$
122,083

Accrued compensation and benefits
95,555

 
105,667

Deferred revenue
51,182

 
71,722

Income taxes payable
4,438

 
4,703

Other liabilities
11,896

 
12,091

Total current liabilities
277,449

 
316,266

Deferred revenue, less current portion
20,394

 
28,182

Deferred income taxes
26,377

 
20,106

Deferred compensation plan liabilities, less current portion
33,497

 
30,707

Other liabilities
17,864

 
9,633

Total liabilities
375,581

 
404,894

Commitments and contingencies


 


Shareholders' equity:
 

 
 

Common stock, no par value; 100,000 shares authorized; 64,371 and 65,137 shares issued and outstanding at September 30, 2018 and 2017, at stated amount, respectively
487,539

 
475,592

Accumulated other comprehensive income
(36,953
)
 
(27,619
)
Retained earnings
633,281

 
492,112

Total MAXIMUS shareholders' equity
1,083,867

 
940,085

Noncontrolling interests
2,552

 
5,683

Total equity
1,086,419

 
945,768

Total liabilities and equity
$
1,462,000

 
$
1,350,662


See accompanying notes to consolidated financial statements.

41



MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
Year ended September 30,
 
2018
 
2017
 
2016
Cash flows from operations:
 

 
 

 
 

Net income
$
220,816

 
$
212,182

 
$
180,160

Adjustments to reconcile net income to net cash provided by operations:
 

 
 

 
 

Depreciation and amortization of property, plant, equipment and capitalized software
51,884

 
55,769

 
58,404

Amortization of intangible assets
10,308

 
12,208

 
13,377

Deferred income taxes
6,721

 
4,762

 
5,652

Stock compensation expense
20,238

 
21,365

 
18,751

Gain on sale of business

 
(650
)
 
(6,880
)
Changes in assets and liabilities, net of effects of business combinations:
 
 
 
 
 
Accounts receivable—billed and billable
34,033

 
53,025

 
(51,986
)
Accounts receivable—unbilled
4,920

 
26

 
(5,590
)
Prepaid expenses and other current assets
4,954

 
2,584

 
(2,027
)
Deferred contract costs
1,838

 
2,037

 
(398
)
Accounts payable and accrued liabilities
(7,725
)
 
(28,309
)
 
(2,371
)
Accrued compensation and benefits
(8,795
)
 
8,849

 
(869
)
Deferred revenue
(27,039
)
 
(15,401
)
 
(11,661
)
Income taxes
7,262

 
8,901

 
(13,125
)
Other assets and liabilities
4,110

 
(148
)
 
(1,411
)
Cash provided by operations
323,525

 
337,200

 
180,026

Cash flows from investing activities:
 
 
 
 
 
Purchases of property and equipment and capitalized software costs
(26,520
)
 
(24,154
)
 
(46,391
)
Acquisition of businesses, net of cash acquired

 
(2,677
)
 
(46,651
)
Acquisition of part of noncontrolling interest
(157
)
 

 

Proceeds from the sale of a business

 
1,035

 
5,515

Purchases of short-term investments
(19,996
)
 

 

Other
369

 
575

 
424

Cash used in investing activities
(46,304
)
 
(25,221
)
 
(87,103
)
Cash flows from financing activities:
 
 
 
 
 
Cash dividends paid to MAXIMUS shareholders
(11,692
)
 
(11,674
)
 
(11,701
)
Repurchases of common stock
(66,919
)
 
(28,863
)
 
(33,335
)
Tax withholding related to RSU vesting
(8,529
)
 
(9,175
)
 
(11,614
)
Borrowings under credit facility
136,632

 
185,000

 
149,823

Repayment of credit facility and other long-term debt
(136,769
)
 
(349,981
)
 
(195,200
)
Stock option exercises

 
924

 
546

Stock compensation tax benefit

 

 
5,172

Other
(4,603
)
 
(1,660
)
 
(533
)
Cash used in financing activities
(91,880
)
 
(215,429
)
 
(96,842
)
Effect of exchange rate changes on cash
(2,348
)
 
3,503

 
(4,554
)
Net increase/(decrease) in cash and cash equivalents
182,993

 
100,053

 
(8,473
)
Cash and cash equivalents, beginning of period
166,252

 
66,199

 
74,672

Cash and cash equivalents, end of period
$
349,245

 
$
166,252

 
$
66,199

   See accompanying notes to consolidated financial statements.

42



MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
 
Common
Shares
Outstanding
 
Common
Stock
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total
Balance at September 30, 2015
65,437

 
$
446,132

 
$
(22,365
)
 
$
188,611

 
$
3,321

 
$
615,699

Net income

 

 

 
178,362

 
1,798

 
180,160

Foreign currency translation

 

 
(13,828
)
 

 

 
(13,828
)
Interest rate hedge, net of income taxes

 

 
24

 

 

 
24

Cash dividends

 

 

 
(11,701
)
 
(1,060
)
 
(12,761
)
Dividends on RSUs

 
363

 

 
(363
)
 

 

Repurchases of common stock
(587
)
 

 

 
(31,338
)
 

 
(31,338
)
Stock compensation expense

 
18,751

 

 

 

 
18,751

Stock compensation tax benefit

 
5,172

 

 

 

 
5,172

Tax withholding relating to RSU vesting

 
(9,285
)
 

 

 

 
(9,285
)
Stock option exercises and RSU vesting
373

 
546

 

 

 

 
546

Balance at September 30, 2016
65,223

 
461,679

 
(36,169
)
 
323,571

 
4,059

 
753,140

Net income

 

 

 
209,426

 
2,756

 
212,182

Foreign currency translation

 

 
8,549

 

 

 
8,549

Interest rate hedge, net of income taxes

 

 
1

 

 

 
1

Cash dividends

 

 

 
(11,674
)
 
(1,132
)
 
(12,806
)
Dividends on RSUs

 
348

 

 
(348
)
 

 

Repurchases of common stock
(558
)
 

 

 
(28,863
)
 

 
(28,863
)
Stock compensation expense

 
21,365

 

 

 

 
21,365

Tax withholding related to RSU vesting

 
(8,724
)
 

 

 

 
(8,724
)
Stock option exercises and RSU vesting
472