UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, ~~2019~~ 2020

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

For the transition period from to

Commission File Number: 1-12997

MAXIMUS, INC.

(Exact name of registrant as specified in its charter)


Virginia						54-1000588
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1891 Metro Center Drive, Reston, Virginia						20190
(Address of principal executive offices)						(Zip Code)

(703) 251-8500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

MMS

New York Stock Exchange

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

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


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 Exchange Act). Yes o☐ No ý☒

~~Securities registered pursuant to Section 12(b) of the Act:~~

~~Title of each class~~

~~Trading Symbol(s)~~

~~Name of each exchange on which registered~~

~~Common Stock, no par value~~

~~MMS~~

~~New York Stock Exchange~~

As of May ~~6, 2019,~~4, 2020, there were ~~63,810,845~~61,312,619 shares of the registrant’s common stock (no par value) outstanding.

MAXIMUS, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended March 31, ~~2019~~ 2020

INDEX

PART I. FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

Consolidated Statements of Operations for the Three and Six Months Ended March 31, ~~2019~~20 20 and ~~2018~~201 9 (unaudited)

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, ~~2019~~20 20 and ~~2018~~201 9 (unaudited)

Consolidated Balance Sheets as of ~~March~~ M arch 31, ~~2019~~20 20 (unaudited) and September 30, ~~2018~~2019

Consolidated Statements of Cash Flows for the Six Months Ended March 31 ~~2019~~, 20 20 and ~~2018~~201 9 (unaudited)

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended March 31, ~~2019~~20 20 and ~~2018~~201 9 (unaudited)

Notes to Unaudited Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2018

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

3129

Item 4.

Controls and Procedures

3129

PART II. OTHER INFORMATION

Item 1.

Item 1A.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Included in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. ~~These forward-looking~~Forward-looking statements ~~are based on current expectations, estimates, forecasts~~can be identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “opportunity,” “could,” “potential,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will” and ~~projections about us, the industry in which we operate and other matters, as well as management’s beliefs and assumptions and other~~similar references to future periods.

Forward-looking statements that are not historical facts. Words such as “anticipate,” “believe,” “could,” “expect,” “estimate,” “intend,” “may,” “opportunity,” “plan,” “potential,” “project,” “should,” “will”facts, including statements about our confidence, strategies and ~~similar expressions~~initiatives and our expectations about revenues, results of operations, profitability, liquidity, market demand or the impact of the COVID-19 pandemic are ~~intended to identify~~ forward-looking statements ~~and convey uncertainty of future events or outcomes. These statements are not guarantees and~~that involve risks ~~uncertainties~~ and ~~assumptions that are difficult~~uncertainties. These risks could cause our actual results to ~~predict. Actual outcomes and results may~~ differ materially from those indicated by such forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements ~~due~~include, among others, the following:

•the continued spread of the COVID-19 virus, including the speed, depth, geographic reach and duration of the spread, and the actions to ~~a number~~be taken by us, our customers and the governments of ~~factors,~~jurisdictions in which we operate in response to COVID-19;

•the demand for our services and products, including ~~without limitation:~~based on any downturns in the economy;

•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 Item 1A of this Quarterly Report on Form 10-Q and in Exhibit 99.1, under the caption "Special Considerations and Risk Factors," in our Annual Report on Form 10-K for the year ended September 30, ~~2018,~~2019, which was filed with the Securities and Exchange Commission on November ~~20, 2018.~~26, 2019.

~~As a result of these~~Any forward-looking statement made by us in this report is based only on information currently available to us 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 speakspeaks only as of the date ~~when~~on which it is made. ~~Except as otherwise required by law, we~~We undertake no obligation to publicly update ~~or revise~~ any forward-looking ~~statements,~~statement, whether ~~resulting~~written or oral, that may be made from time to time, whether as a result of new information, future ~~events~~developments or otherwise.

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)


		Three Months Ended March 31,						Six Months Ended March 31,							Three Months Ended March 31,				Six Months Ended March 31,
		2019		2018		2019		2018			2020		2019		2020		2019
Revenue	Revenue	$	736,520	$	612,787	$	1,401,139	$	1,235,935	Revenue	$	818,135	$	736,520	$	1,636,364	$	1,401,139
Cost of revenue	Cost of revenue	567,098		463,984		1,072,452		935,172		Cost of revenue	665,037		567,098		1,307,816		1,072,452
Gross profit	Gross profit	169,422		148,803		328,687		300,763		Gross profit	153,098		169,422		328,548		328,687

Selling, general and administrative expenses	Selling, general and administrative expenses	78,102		74,879		157,773		144,438		Selling, general and administrative expenses	106,853		78,102		194,080		157,773
Amortization of intangible assets	Amortization of intangible assets	9,519		2,603		14,977		5,321		Amortization of intangible assets	8,934		9,519		18,022		14,977

Operating income	Operating income	81,801		71,321		155,937		151,004		Operating income	37,311		81,801		116,446		155,937

Interest expense	Interest expense	1,569		157		2,194		325		Interest expense	465		1,569		949		2,194

Other income, net	Other income, net	447		1,392		2,492		1,679		Other income, net	573		447		1,292		2,492
Income before income taxes	Income before income taxes	80,679		72,556		156,235		152,358		Income before income taxes	37,419		80,679		116,789		156,235
Provision for income taxes	Provision for income taxes	18,913		17,450		38,746		37,300		Provision for income taxes	9,769		18,913		30,405		38,746
Net income	Net income	61,766		55,106		117,489		115,058		Net income	27,650		61,766		86,384		117,489
(Loss)/income attributable to noncontrolling interests		(158)		(386)		(348)		475
Loss attributable to noncontrolling interests										Loss attributable to noncontrolling interests	—		(158)		—		(348)
Net income attributable to MAXIMUS	Net income attributable to MAXIMUS	$	61,924	$	55,492	$	117,837	$	114,583	Net income attributable to MAXIMUS	$	27,650	$	61,924	$	86,384	$	117,837
Basic earnings per share attributable to MAXIMUS		$	0.96	$	0.84	$	1.82	$	1.74
Diluted earnings per share attributable to MAXIMUS		$	0.96	$	0.84	$	1.82	$	1.73
Basic earnings per share										Basic earnings per share	$	0.43	$	0.96	$	1.34	$	1.82
Diluted earnings per share										Diluted earnings per share	$	0.43	$	0.96	$	1.34	$	1.82
Dividends paid per share	Dividends paid per share	$	0.25	$	0.045	$	0.50	$	0.09	Dividends paid per share	$	0.28	$	0.25	$	0.56	$	0.50
Weighted average shares outstanding:	Weighted average shares outstanding:									Weighted average shares outstanding:
Basic	Basic	64,369		65,856		64,600		65,857		Basic	63,934		64,369		64,264		64,600
Diluted	Diluted	64,643		66,268		64,817		66,223		Diluted	64,125		64,643		64,446		64,817

See notes to unaudited consolidated financial statements.

MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)


		Three Months Ended March 31,						Six Months Ended March 31,							Three Months Ended March 31,				Six Months Ended March 31,
		2019		2018		2019		2018			2020		2019		2020		2019
Net income	Net income	$	61,766	$	55,106	$	117,489	$	115,058	Net income	$	27,650	$	61,766	$	86,384	$	117,489
Foreign currency translation adjustments	Foreign currency translation adjustments	3,537		2,869		(2,183)		3,184		Foreign currency translation adjustments	(11,629)		3,537		(4,736)		(2,183)

Comprehensive income	Comprehensive income	65,303		57,975		115,306		118,242		Comprehensive income	16,021		65,303		81,648		115,306
Comprehensive (loss)/income attributable to noncontrolling interests		(158)		(386)		(348)		475
Comprehensive loss attributable to noncontrolling interests										Comprehensive loss attributable to noncontrolling interests	—		(158)		—		(348)
Comprehensive income attributable to MAXIMUS	Comprehensive income attributable to MAXIMUS	$	65,461	$	58,361	$	115,654	$	117,767	Comprehensive income attributable to MAXIMUS	$	16,021	$	65,461	$	81,648	$	115,654

See notes to unaudited consolidated financial statements.

MAXIMUS, Inc.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)


		March 31, 2019		September 30, 2018			March 31, 2020		September 30, 2019
		(unaudited)					(unaudited)
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	46,799	$	349,245	Cash and cash equivalents	$	126,257	$	105,565
Short-term investments		—		20,264
Accounts receivable — billed and billable, net of reserves of $6,073 and $4,285		491,560		357,613

Accounts receivable — billed and billable, net of reserves of $12,054 and $5,382						Accounts receivable — billed and billable, net of reserves of $12,054 and $5,382	529,928		476,690
Accounts receivable — unbilled	Accounts receivable — unbilled	131,250		31,536		Accounts receivable — unbilled	120,159		123,884
Income taxes receivable	Income taxes receivable	20,733		5,979		Income taxes receivable	33,852		20,805
Prepaid expenses and other current assets	Prepaid expenses and other current assets	49,668		43,995		Prepaid expenses and other current assets	53,257		62,481
Total current assets	Total current assets	740,010		808,632		Total current assets	863,453		789,425
Property and equipment, net	Property and equipment, net	76,693		77,544		Property and equipment, net	80,843		99,589
Capitalized software, net	Capitalized software, net	25,232		22,429		Capitalized software, net	33,746		32,369
Operating lease right-of-use assets						Operating lease right-of-use assets	179,701		—
Goodwill	Goodwill	587,751		399,882		Goodwill	585,772		584,469
Intangible assets, net	Intangible assets, net	195,354		88,035		Intangible assets, net	161,091		179,250
Deferred contract costs, net	Deferred contract costs, net	19,771		14,380		Deferred contract costs, net	19,278		18,921
Deferred compensation plan assets	Deferred compensation plan assets	32,387		34,305		Deferred compensation plan assets	28,016		32,908
Deferred income taxes	Deferred income taxes	209		6,834		Deferred income taxes	186		186
Other assets	Other assets	10,309		9,959		Other assets	8,320		8,615
Total assets	Total assets	$	1,687,716	$	1,462,000	Total assets	$	1,960,406	$	1,745,732
LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	$	169,099	$	114,378	Accounts payable and accrued liabilities	$	191,505	$	177,786
Accrued compensation and benefits	Accrued compensation and benefits	87,698		95,555		Accrued compensation and benefits	98,882		106,789
Deferred revenue	Deferred revenue	39,215		51,182		Deferred revenue	46,206		43,344
Income taxes payable	Income taxes payable	3,159		4,438		Income taxes payable	758		13,952
Current portion of long-term debt and other borrowings	Current portion of long-term debt and other borrowings	3,681		136		Current portion of long-term debt and other borrowings	9,352		9,658
Operating lease liabilities						Operating lease liabilities	78,656		—
Other liabilities	Other liabilities	17,909		11,760		Other liabilities	12,973		12,709
Total current liabilities	Total current liabilities	320,761		277,449		Total current liabilities	438,332		364,238
Deferred revenue, less current portion	Deferred revenue, less current portion	24,910		20,394		Deferred revenue, less current portion	34,142		32,341
Deferred income taxes	Deferred income taxes	51,060		26,377		Deferred income taxes	49,421		46,560
Long-term debt		75,295		374
Long-term debt, less current portion						Long-term debt, less current portion	150,155		231
Deferred compensation plan liabilities, less current portion	Deferred compensation plan liabilities, less current portion	32,622		33,497		Deferred compensation plan liabilities, less current portion	30,431		34,079
Operating lease liabilities, less current portion						Operating lease liabilities, less current portion	109,339		—
Other liabilities	Other liabilities	15,487		17,490		Other liabilities	10,118		20,082
Total liabilities	Total liabilities	520,135		375,581		Total liabilities	821,938		497,531
Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Common stock, no par value; 100,000 shares authorized; 63,811 and 64,371 shares issued and outstanding at March 31, 2019, and September 30, 2018, at stated amount, respectively		498,269		487,539
Common stock, no par value; 100,000 shares authorized; 61,313 and 63,979 shares issued and outstanding at March 31, 2020, and September 30, 2019, at stated amount, respectively						Common stock, no par value; 100,000 shares authorized; 61,313 and 63,979 shares issued and outstanding at March 31, 2020, and September 30, 2019, at stated amount, respectively	511,023		498,433
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(39,136)		(36,953)		Accumulated other comprehensive loss	(50,116)		(45,380)
Retained earnings	Retained earnings	705,824		633,281		Retained earnings	677,561		794,739
Total MAXIMUS shareholders’ equity		1,164,957		1,083,867
Total MAXIMUS shareholders' equity						Total MAXIMUS shareholders' equity	1,138,468		1,247,792
Noncontrolling interests	Noncontrolling interests	2,624		2,552		Noncontrolling interests	—		409
Total equity	Total equity	1,167,581		1,086,419		Total equity	1,138,468		1,248,201
Total liabilities and equity	Total liabilities and equity	$	1,687,716	$	1,462,000	Total liabilities and equity	$	1,960,406	$	1,745,732

See notes to unaudited consolidated financial statements.

MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


		Six Months Ended March 31,							Six Months Ended March 31,
		2019		2018			2020		2019
Cash flows from operations:	Cash flows from operations:					Cash flows from operations:
Net income	Net income	$	117,489	$	115,058	Net income	$	86,384	$	117,489
Adjustments to reconcile net income to cash flows from operations:	Adjustments to reconcile net income to cash flows from operations:					Adjustments to reconcile net income to cash flows from operations:
Depreciation and amortization of property and equipment and capitalized software	Depreciation and amortization of property and equipment and capitalized software	22,407		27,074		Depreciation and amortization of property and equipment and capitalized software	31,218		22,407
Amortization of intangible assets	Amortization of intangible assets	14,977		5,321		Amortization of intangible assets	18,022		14,977

Deferred income taxes	Deferred income taxes	17,764		(9,179)		Deferred income taxes	3,038		17,764
Stock compensation expense	Stock compensation expense	9,904		11,324		Stock compensation expense	11,800		9,904

Change in assets and liabilities excluding acquired assets and liabilities:
Change in assets and liabilities net of effects of business combinations						Change in assets and liabilities net of effects of business combinations
Accounts receivable — billed and billable	Accounts receivable — billed and billable	(72,720)		(18,522)		Accounts receivable — billed and billable	(52,870)		(72,720)
Accounts receivable — unbilled	Accounts receivable — unbilled	9,189		(4,730)		Accounts receivable — unbilled	2,289		9,189
Prepaid expenses and other current assets	Prepaid expenses and other current assets	(5,118)		8,526		Prepaid expenses and other current assets	4,262		(5,118)
Deferred contract costs	Deferred contract costs	(5,415)		1,794		Deferred contract costs	(497)		(5,415)
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	42,080		(3,171)		Accounts payable and accrued liabilities	22,322		42,080
Accrued compensation and benefits	Accrued compensation and benefits	(7,443)		(15,391)		Accrued compensation and benefits	3,839		(7,443)
Deferred revenue	Deferred revenue	4,435		(23,789)		Deferred revenue	5,300		4,435
Income taxes	Income taxes	(16,496)		18,634		Income taxes	(27,706)		(16,496)
Operating lease right-of-use assets and liabilities						Operating lease right-of-use assets and liabilities	166		—
Other assets and liabilities	Other assets and liabilities	(3,842)		3,811		Other assets and liabilities	1,705		(3,842)
Cash flows from operations	Cash flows from operations	127,211		116,760		Cash flows from operations	109,272		127,211
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchases of property and equipment and capitalized software costs	Purchases of property and equipment and capitalized software costs	(18,541)		(13,175)		Purchases of property and equipment and capitalized software costs	(19,122)		(18,541)
Acquisitions		(421,809)		(157)
Acquisitions of businesses, net of cash acquired						Acquisitions of businesses, net of cash acquired	(2,551)		(421,809)

Redemption of short-term investments		19,996		—
Maturities of short-term investments						Maturities of short-term investments	—		19,996
Other	Other	284		541		Other	98		284
Cash used in investing activities	Cash used in investing activities	(420,070)		(12,791)		Cash used in investing activities	(21,575)		(420,070)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Cash dividends paid to MAXIMUS shareholders	Cash dividends paid to MAXIMUS shareholders	(31,983)		(5,865)		Cash dividends paid to MAXIMUS shareholders	(35,813)		(31,983)
Purchases of MAXIMUS common stock	Purchases of MAXIMUS common stock	(46,068)		(1,038)		Purchases of MAXIMUS common stock	(166,959)		(46,068)
Tax withholding related to RSU vesting	Tax withholding related to RSU vesting	(8,915)		(8,529)		Tax withholding related to RSU vesting	(10,614)		(8,915)

Borrowings		320,048		124,683
Borrowings under credit facility and other loan agreements						Borrowings under credit facility and other loan agreements	341,715		320,048
Repayment of credit facility and other long-term debt	Repayment of credit facility and other long-term debt	(241,539)		(124,752)		Repayment of credit facility and other long-term debt	(191,256)		(241,539)

Other	Other	(133)		(2,130)		Other	(652)		(133)
Cash used in financing activities	Cash used in financing activities	(8,590)		(17,631)		Cash used in financing activities	(63,579)		(8,590)
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(632)		1,070		Effect of exchange rate changes on cash and cash equivalents	(1,868)		(632)
Net (decrease)/increase in cash, cash equivalents and restricted cash		(302,081)		87,408
Net increase/(decrease) in cash, cash equivalents and restricted cash						Net increase/(decrease) in cash, cash equivalents and restricted cash	22,250		(302,081)
Cash, cash equivalents and restricted cash, beginning of period	Cash, cash equivalents and restricted cash, beginning of period	356,559		179,727		Cash, cash equivalents and restricted cash, beginning of period	116,492		356,559
Cash, cash equivalents and restricted cash, end of period	Cash, cash equivalents and restricted cash, end of period	$	54,478	$	267,135	Cash, cash equivalents and restricted cash, end of period	$	138,742	$	54,478

See notes to unaudited consolidated financial statements.

MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)


		Common Shares Outstanding	Common Stock		Accumulated Other Comprehensive Income/(Loss)		Retained Earnings		Noncontrolling Interest		Total			Common Shares Outstanding	Common Stock		Accumulated Other Comprehensive Loss		Retained Earnings		Noncontrolling Interest		Total
Balance at Balance at December 31, 2018		63,717	$	492,938	$	(42,673)	$	664,332	$	2,782	$	1,117,379
Balance at December 31, 2019													Balance at December 31, 2019	63,953	$	504,184	$	(38,487)	$	833,308	$	—	$	1,299,005
Net income	Net income	—	—		—		61,924		(158)		61,766		Net income	—	—		—		27,650		—		27,650
Foreign currency translation	Foreign currency translation	—	—		3,537		—		—		3,537		Foreign currency translation	—	—		(11,629)		—		—		(11,629)
Cash dividends	Cash dividends	—	—		—		(15,950)		—		(15,950)		Cash dividends	—	—		—		(17,900)		—		(17,900)
Dividends on RSUs	Dividends on RSUs	—	398		—		(398)		—		—		Dividends on RSUs	—	436		—		(436)		—		—
Purchases of common stock		(62)	—		—		(4,084)		—		(4,084)
Purchases of MAXIMUS common stock													Purchases of MAXIMUS common stock	(2,741)	—		—		(165,061)		—		(165,061)
Stock compensation expense	Stock compensation expense	—	4,933		—		—		—		4,933		Stock compensation expense	—	6,403		—		—		—		6,403

RSUs vested	RSUs vested	156	—		—		—		—		—		RSUs vested	101	—		—		—		—		—

Balance at March 31, 2019		63,811	$	498,269	$	(39,136)	$	705,824	$	2,624	$	1,167,581
Balance at March 31, 2020													Balance at March 31, 2020	61,313	$	511,023	$	(50,116)	$	677,561	$	—	$	1,138,468


		Common Shares Outstanding	Common Stock		Accumulated Other Comprehensive Income/(Loss)		Retained Earnings		Noncontrolling Interest		Total			Common Shares Outstanding	Common Stock		Accumulated Other Comprehensive Loss		Retained Earnings		Noncontrolling interest		Total
Balance at September 30, 2018		64,371	$	487,539	$	(36,953)	$	633,281	$	2,552	$	1,086,419
Cumulative impact from adopting ASC Topic 606 on October 1, 2018		—	—		—		32,929		553		33,482
Balance at September 30, 2019													Balance at September 30, 2019	63,979	$	498,433	$	(45,380)	$	794,739	$	409	$	1,248,201
Net income	Net income	—	—		—		117,837		(348)		117,489		Net income	—	—		—		86,384		—		86,384
Foreign currency translation	Foreign currency translation	—	—		(2,183)		—		—		(2,183)		Foreign currency translation	—	—		(4,736)		—		—		(4,736)

Cash dividends	Cash dividends	—	—		—		(31,983)		(133)		(32,116)		Cash dividends	—	—		—		(35,813)		(409)		(36,222)
Dividends on RSUs	Dividends on RSUs	—	826		—		(826)		—		—		Dividends on RSUs	—	790		—		(790)		—		—
Purchases of common stock		(716)	—		—		(45,414)		—		(45,414)
Purchases of MAXIMUS common stock													Purchases of MAXIMUS common stock	(2,767)	—		—		(166,959)		—		(166,959)
Stock compensation expense	Stock compensation expense	—	9,904		—		—		—		9,904		Stock compensation expense	—	11,800		—		—		—		11,800

RSUs vested	RSUs vested	156	—		—		—		—		—		RSUs vested	101	—		—		—				—

Balance at March 31, 2019		63,811	$	498,269	$	(39,136)	$	705,824	$	2,624	$	1,167,581
Balance at March 31, 2020													Balance at March 31, 2020	61,313	$	511,023	$	(50,116)	$	677,561	$	—	$	1,138,468

MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY ~~(Continued)~~

(Amounts in thousands)

(Unaudited)


		Common Shares Outstanding	Common Stock		Accumulated Other Comprehensive Income/(Loss)		Retained Earnings		Noncontrolling Interest		Total			Common Shares Outstanding	Common Stock	Accumulated Other Comprehensive Loss	Retained Earnings	Noncontrolling Interest	Total
Balance at Balance at December 31, 2017		65,120	$	481,261	$	(27,304)	$	547,151	$	6,544	$	1,007,652
Balance at December 31, 2018													Balance at December 31, 2018	63,717	492,938	(42,673)	664,332	2,782	1,117,379

Net income	Net income	—	—		—		55,492		(386)		55,106		Net income	—	—	—	61,924	(158)	61,766
Foreign currency translation	Foreign currency translation	—	—		2,869		—		—		2,869		Foreign currency translation	—	—	3,537	—	—	3,537

Cash dividends	Cash dividends	—	—		—		(2,935)		(2,129)		(5,064)		Cash dividends	—	—	—	(15,950)	—	(15,950)
Dividends on RSUs	Dividends on RSUs	—	78		—		(78)		—		—		Dividends on RSUs	—	398	—	(398)	—	—

Purchases of MAXIMUS common stock													Purchases of MAXIMUS common stock	(62)	—	—	(4,084)	—	(4,084)
Stock compensation expense	Stock compensation expense	—	5,922		—		—		—		5,922		Stock compensation expense	—	4,933	—	—	—	4,933

RSUs vested	RSUs vested	123	—		—		—		—		—		RSUs vested	156	—	—	—	—	—
Addition of noncontrolling interest from acquisition		—	124		—		—		(281)		(157)
Balance at March 31, 2018		65,243	$	487,385	$	(24,435)	$	599,630	$	3,748	$	1,066,328

Balance at March 31, 2019													Balance at March 31, 2019	63,811	498,269	(39,136)	705,824	2,624	1,167,581


		Common Shares Outstanding	Common Stock		Accumulated Other Comprehensive Income / (Loss)		Retained Earnings		Noncontrolling Interest		Total			Common Shares Outstanding		Common Stock		Accumulated Other Comprehensive Loss		Retained Earnings		Noncontrolling Interest		Total
Balance at September 30, 2017		65,137	$	475,592	$	(27,619)	$	492,112	$	5,683	$	945,768
Balance at September 30, 2018													Balance at September 30, 2018	64,371		487,539		(36,953)		633,281		2,552		1,086,419
Cumulative impact from adopting ASC Topic 606 on October 1, 2018													Cumulative impact from adopting ASC Topic 606 on October 1, 2018	—		—		—		32,929		553		33,482
Net income	Net income	—	—		—		114,583		475		115,058		Net income	—		—		—		117,837		(348)		117,489
Foreign currency translation	Foreign currency translation	—	—		3,184		—		—		3,184		Foreign currency translation	—		—		(2,183)		—		—		(2,183)

Cash dividends	Cash dividends	—	—		—		(5,865)		(2,129)		(7,994)		Cash dividends	—		—		—		(31,983)		(133)		(32,116)
Dividends on RSUs	Dividends on RSUs	—	162		—		(162)		—		—		Dividends on RSUs	—		826		—		(826)		—		—
Purchases of common stock		(17)	—		—		(1,038)		—		(1,038)

Purchases of MAXIMUS common stock													Purchases of MAXIMUS common stock	(716)		—		—		(45,414)		—		(45,414)
Stock compensation expense	Stock compensation expense	—	11,324		—		—		—		11,324		Stock compensation expense	—		9,904		—		—		—		9,904

Tax withholding related to RSU vesting		—	183		—		—		—		183

RSUs vested	RSUs vested	123	—		—		—		—		—		RSUs vested	156		—		—		—		—		—
Addition of noncontrolling interest from acquisition		—	124		—		—		(281)		(157)
Balance at March 31, 2018		65,243	$	487,385	$	(24,435)	$	599,630	$	3,748	$	1,066,328

Balance at March 31, 2019													Balance at March 31, 2019	$	63,811	$	498,269	$	(39,136)	$	705,824	$	2,624	$	1,167,581

See notes to unaudited consolidated financial statements.

MAXIMUS, Inc.

Notes to Unaudited Consolidated Financial Statements

For the Three and Six Months Ended March 31, ~~2019~~2020 and ~~2018~~ 2019

1. Organization and Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. As permitted by these instructions, they do not include all of the information and notes required by generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the three and six months ended March 31, ~~2019,~~2020, are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet at September 30, ~~2018,~~2019, has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.

~~Certain~~These financial ~~results have been reclassified to conform~~statements should be read in conjunction with ~~our current period presentation.~~

•~~Our~~the consolidated ~~statement of cash flows for~~audited financial statements and the ~~six months ended March 31, 2018, includes a reclassification to reflect the effect of new accounting guidance.~~

•~~Our consolidated balance sheet~~notes thereto at September 30, 2019 and 2018, ~~includes a reclassification to show a comparative balance~~and for ~~current~~each of the three years ended September 30, 2019, included in our Annual Report on Form 10-K which was filed with the Securities and ~~long-term debt, which were previously reported within "other liabilities."~~Exchange Commission on November 26, 2019.

Estimates

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expenses. ~~On an ongoing basis,~~At each reporting period end, we ~~evaluate our~~make estimates including those related to revenue recognition and cost estimation on certain contracts, the realizability of goodwill and amounts related to income taxes, certain accrued liabilities and contingencies and litigation.

We base our estimates on historical experience and ~~on various other assumptions~~expectations of the future that ~~are believed~~we believe to be ~~reasonable under~~reasonable. The economic and political impacts of the ~~circumstances,~~COVID-19 pandemic increases uncertainty, which has reduced our ability to use past results to estimate future performance. Accordingly, our estimates may be subject to greater volatility than has been the ~~results~~case in the past.

•Our balance sheet includes goodwill valued at $585.8 million. This balance is allocated between reporting units, which are consistent with our 3 operating segments. Goodwill is not amortized but is tested for impairment when necessary and no less than once per year. We performed our last annual goodwill impairment test as of ~~which form~~July 1, 2019. As of July 1, 2019, none of our reporting units showed any signs of impairment and all held a fair value estimated to be at least twice as high as their carrying value. We continue to monitor the ~~basis for making judgments about~~fair value of our reporting units and, at this time, we do not believe any goodwill impairment has occurred. This is based upon a number of factors, including the long-term viability of our business and the creditworthiness of our customer base.

•Our balance sheet includes a number of long-lived assets, including property and equipment, capitalized software, operating lease right-of-use assets, deferred contract costs and intangible assets. These assets are depreciated or amortized over their estimated useful economic lives but are subject to impairment if events indicate that the carrying ~~values~~amount may not be recoverable. At this time, there are no significant balances which we believe are not recoverable.

•Our balance sheet includes $650.1 million of ~~assets~~billed, billable and ~~liabilities. Actual results could differ from~~unbilled accounts receivable, net of reserves. We regularly evaluate this balance for recoverability and reserve those ~~estimates.~~

~~These financial statements should be read in conjunction with~~balances where we no longer believe that collection is probable. Bad debt expense has not historically been significant to our business due to the ~~consolidated audited financial statements and the notes thereto at September 30, 2018 and 2017, and for each~~nature of our customers. During the three ~~years~~months ended ~~September 30, 2018, included~~March 31, 2020, we recorded bad debt expense of $7.8 million. We have reserved balances against customers who we believe are experiencing difficulties during the COVID-19 pandemic and may not be able to reimburse us for work performed.

•As disclosed in "Note 4. Revenue Recognition", revenue for some our ~~Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on November 20, 2018.~~

~~Changes in financial reporting~~

~~Segments~~

As previously reported, effective October 1, 2018, our Chief Executive Officer reorganized our reporting segments based on the way that management intends to allocate resources, manage performance and evaluate results. This reorganization of segments responds to recent changeswelfare-to-work contracts in the ~~markets in which we operate,~~Outside the increasing integration of health and human services programs worldwide and the evolving needs of our government clients as they aim to deliver services in a more holistic manner to their citizens. Our results for the three and six months ended ~~March 31, 2018, were recast to conform with these new segments. See "Note 2.~~U.S. Segment I~~nformation" for more details of this change.~~

~~Revenue recognition~~

~~We adopted Accounting Standard Update (ASU) No. 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~ on October 1, 2018, using the modified retrospective method and, accordingly, we recognized the cumulative effect of adoption as an adjustment of $32.9 million to our opening retained earnings balance on October 1, 2018. We applied this standard only to contracts that had not been completed as of the date of adoption. For contracts that had been modified prior to October 1, 2018, we calculated the cumulative effect of Topic 606 on each contractis based upon achievement of future outcomes as defined in each contract. Specifically, we are paid as individuals attain employment goals, which may take many months to achieve. Revenue is recognized on these contracts over the ~~aggregate effect~~period of ~~all of the modifications at that date.~~performance. Employment markets worldwide

~~Topic 606 applies~~have suffered a significant shock during the three months ended March 31, 2020 and many employment opportunities have been terminated or are no longer available. While we expect the volume of new program participants to ~~all~~increase as a result of disruption to employment markets, we believe that our program outcomes for program participants as of March 31, 2020 have been disrupted. Accordingly, we have adjusted revenue and the related unbilled receivables recorded in prior periods. During the three months ended March 31, 2020, we recorded adjustments of approximately $24 million to revenue from changes in estimates to our welfare-to-work contracts. This reduced our net income and diluted earnings per share by approximately $18 million and $0.28, respectively.

•Many of our contracts ~~with customers and supersedes all previous standards on revenue recognition. In adopting Topic 606,~~in the United States are cost-plus contracts, where we are ~~required~~reimbursed for costs that are allowable, allocable and reasonable. Due to ~~follow a five-step process in order~~the COVID-19 pandemic, we are incurring incremental and unusual costs, including additional sick pay and idle labor for employees who are unable to ~~identify and recognize revenue based upon a principle that revenue should be recognized as goods and~~perform services ~~are transferred~~due to ~~customers in amounts that reflect~~their health issues, child care issues or physical restrictions imposed on their workplace. Although the ~~consideration to~~U.S. Federal Government, which ~~we expect to be entitled for those goods and services. It did not change the actual amount of revenue being recognized for~~provides the majority of our cost-plus contracts, ~~but did change the methodology by which we identified that revenue.~~has provided regular guidance, there is some uncertainty within other contracts as to recoverable costs.

Changes in financial reporting

Leases

Effective October 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). The new standard requires that assets and liabilities arising under leases be recognized on the ~~most significant change under~~balance sheet, except for those with an initial term of less than 12 months. We adopted this standard using a modified retrospective approach. Accordingly, we did not recast prior period financial information. Certain elections were made in adopting the standard.

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

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

•We used the optional transition method, which did not require us to recast our comparative periods.

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

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

Upon adopting Topic ~~606,~~842, we recognized a lease liability of $214.5 million, reflecting the present value of the future remaining minimum lease payments. Changes to our opening balance sheet are ~~required~~summarized below. There was no cumulative impact to ~~estimate~~our retained earnings and ~~recognize revenue on contracts over~~ the ~~period where we provide a service. This affects contracts where performance outcomes are achieved over time, most notably for welfare-to-work contracts where we are compensated for placing individuals~~changes did not cause any material changes in ~~sustained employment. Under~~ our ~~former methodology~~statements of ~~recognizing revenue, we deferred recognizing this outcome-based revenue until the outcome was achieved. Under Topic 606, we estimate~~operations or our ~~anticipated future fees and recognize them over the expected period~~statements of ~~performance. As a result, more judgments and estimates~~ ~~are~~ ~~required within the process of recognizing revenue than were required under the former methodology.~~

cash flows. The adoption of Topic ~~606 resulted in the following changes to~~842 does not affect our ~~opening balance sheet:~~compliance with our existing contracts, including our credit facility.

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


(dollars in thousands)	Balance at September 30, 2019		Adjustments due to adoption of new standard		Opening balance at October 1, 2019
Assets
Prepaid expenses and other current assets	$	62,481	$	(6,131)	$	56,350
Operating lease right-of-use assets	—		206,314		206,314
Liabilities and shareholders' equity
Accounts payable and accrued expenses	177,786		(5,250)		172,536
Operating lease liabilities	—		88,276		88,276
Other current liabilities	12,709		(648)		12,061
Operating lease liabilities, net of current portion	—		126,197		126,197
Other long-term liabilities	20,082		(8,392)		11,690

~~The table below shows the effects of~~At the adoption of Topic ~~606 on our consolidated statement of operations for~~842, the ~~three~~Company recognized deferred tax assets and ~~six months ended March 31, 2019.~~

Three months ended March 31, 2019 Six months ended March 31, 2019
(dollars in thousands) Balance under previous accounting guidance Adjustments due to adoption of new standard Balance as reported Balance under previous accounting guidance Adjustments due to adoption of new standard Balance as reported
Revenue $ 735,487 $ 1,033 $ 736,520 $ 1,399,372 $ 1,767 $ 1,401,139
Income before income taxes 79,646 1,033 80,679 154,468 1,767 156,235
Provision for income taxes 18,628 285 18,913 38,467 279 38,746
Net income 61,018 748 61,766 116,001 1,488 117,489
(Loss)/income attributable to noncontrolling interests (328) 170 (158) (838) 490 (348)
Net income attributable to MAXIMUS $ 61,346 $ 578 $ 61,924 $ 116,839 $ 998 $ 117,837

liabilities corresponding to the operating lease liabilities and operating right-of-use assets, respectively. These balances offset each other and no net effect resulted from this change.

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

(dollars in thousands) Balance at March 31, 2019, under previous accounting guidance Adjustments due to adoption of new standard Balance at March 31, 2019, as reported
Assets
Accounts receivable - unbilled $ 95,796 $ 35,454 $ 131,250
Deferred income taxes 6,858 (6,649) 209
Liabilities and shareholders' equity
Deferred revenue - current 51,963 (12,748) 39,215
Deferred income taxes - long-term 43,957 7,103 51,060
Accumulated other comprehensive loss (38,617) (519) (39,136)
Retained earnings 671,897 33,927 705,824
Noncontrolling interests 1,581 1,043 2,624

Additional information and disclosures relating to this change are included within "Note 3. ~~Revenue recognition.~~Leases."

~~Statement of cash flows~~

~~We adopted ASU No. 2016-15~~ ~~Statement of Cash Flows (Topic 230)~~: ~~Classification of Certain Cash Receipts and Cash Payments~~ ~~and ASU No. 2016-18,~~ ~~Statement of Cash Flows (Topic 230): Restricted Cash o~~n October 1, 2018, using the retrospective method. The most notable change relates to the treatment of balances we consider to be "restricted cash." Restricted cash represents funds which are held in our bank accounts but which we are precluded from using for general business needs through contractual requirements; these requirements include serving as collateral for lease, credit card or letter of credit arrangements or where we hold funds on behalf of clients. As we did not consider these restricted cash balances to be cash or cash equivalents, we did not previously include them within our cash flow statement except where restrictions over cash were imposed or lapsed. Beginning on October 1, 2018, we are required to include movements in cash, cash equivalents and restricted cash within our consolidated statements of cash flows.

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

Balance as of
(dollars in thousands) March 31, 2019 September 30, 2018 March 31, 2018 September 30, 2017
Cash and cash equivalents $ 46,799 $ 349,245 $ 253,227 $ 166,252
Restricted cash (recorded within "other current assets") 7,679 7,314 13,908 13,475
Cash, cash equivalents and restricted cash $ 54,478 $ 356,559 $ 267,135 $ 179,727

~~Consolidated Statements of Changes in Shareholders' Equity~~Forthcoming changes

In August 2018, the ~~United States Securities~~Financial Accounting Standards Board (FASB) issued ASU No. 2018-15, Intangibles - Goodwill and ~~Exchange Commission (SEC) adopted the final rule under SEC Release No. 33-10532,~~ Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~Disclosure Update~~. This accounting guidance requires customers in cloud-computing arrangements to identify and ~~Simplification, amending~~defer certain ~~disclosure requirements~~implementation costs in a manner broadly consistent with that ~~were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements~~of existing guidance on the ~~analysis~~costs to develop or obtain internal-use software. We will adopt this guidance on October 1, 2020. We may adopt this guidance using either a prospective or retrospective methodology. We are currently assessing the future impact of ~~stockholders' equity~~this update on our consolidated financial statements and related disclosures.

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

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. This standard will not change the manner in which we would identify a goodwill impairment but would change any subsequent calculation of an ~~analysis~~impairment charge. We will adopt this guidance on October 1, 2020. The effect of ~~changes in each caption~~this new standard will depend upon the outcome of ~~shareholders' equity presented in the balance sheet must be provided in a note or separate statement. The amendments became effective on November 5, 2018, and did~~future goodwill impairment tests.

Other recent accounting pronouncements are not expected to have a material effect on ~~the Company's consolidated~~our financial ~~statements for fiscal year 2019. We have adopted these changes to the Consolidated Statements of Changes in Shareholders’ Equity in this filing.~~statements.

2. Segment Information

The table below provides certain financial information for each of our business segments.

As noted in "Note 1. Organization and Basis of Presentation," we have made changes to our business segments in fiscal year 2019. Accordingly, the comparative results shown for the three and six months ended ~~March 31, 2018, are presented differently from those shown in previous filings.~~

~~From October 1, 2018, we operated~~ We operate our business through ~~three~~3 segments.

•Our U.S. Health and Human Services Segment provides a variety of business process services such as program administration, appeals and assessments ~~work~~,services, and related consulting work for U.S. state and local government programs. These services support a variety of programs including the Affordable Care Act (ACA), Medicaid and the Children’s Health Insurance Program ~~the Affordable Care Act~~(CHIP). We also serve as administrators in state-based welfare-to-work and ~~Temporary Assistance for Needy Families.~~child support programs.

•Our U.S. Federal Services Segment provides business process solutions, including program administration, appeals and assessment services, as well as system and software development and maintenance services for various U.S. federal civilian programs. This 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.

•Our Outside the U.S. Segment provides business process solutions for governments and commercial clients outside the U.S.U.S., including health and disability assessments, program administration and case management for ~~welfare-to-work~~employment services and other ~~related services.~~work-support programs. We ~~support programs and~~ deliver services in the United Kingdom, including the Health Assessment Advisory Service (HAAS), the Work & Health Programme and Fair Start; Australia, including jobactive and the Disability Employment Service; Canada, including Health Insurance British Columbia and the Employment Program of British Columbia; Italy, Saudi Arabia and Singapore.

109

Three Months Ended March 31, Six Months Ended March 31,
(dollars in thousands) 2019 % (1) 2018 % (1) 2019 % (1) 2018 % (1)
Revenue:
U.S. Health & Human Services $ 290,737 $ 306,249 $ 584,950 $ 610,490
U.S. Federal Services 289,736 116,327 506,723 249,310
Outside the U.S. 156,047 190,211 309,466 376,135
Total $ 736,520 $ 612,787 $ 1,401,139 $ 1,235,935
Gross profit:
U.S. Health & Human Services $ 86,260 29.7% $ 86,586 28.3% $ 174,291 29.8% $ 170,817 28.0%
U.S. Federal Services 60,696 20.9% 27,374 23.5% 108,681 21.4% 60,732 24.4%
Outside the U.S. 22,466 14.4% 34,843 18.3% 45,715 14.8% 69,214 18.4%
Total $ 169,422 23.0% $ 148,803 24.3% $ 328,687 23.5% $ 300,763 24.3%
Selling, general & administrative expense:
U.S. Health & Human Services $ 29,400 10.1% $ 36,616 12.0% $ 61,539 10.5% $ 71,421 11.7%
U.S. Federal Services 31,104 10.7% 17,540 15.1% 57,736 11.4% 34,188 13.7%
Outside the U.S. 17,992 11.5% 18,403 9.7% 36,800 11.9% 36,509 9.7%
Restructuring costs — NM 2,320 NM — NM 2,320 NM
Other (394) NM — NM 1,698 NM — NM
Total $ 78,102 10.6% $ 74,879 12.2% $ 157,773 11.3% $ 144,438 11.7%
Operating income:
U.S. Health & Human Services $ 56,860 19.6% $ 49,970 16.3% $ 112,752 19.3% $ 99,396 16.3%
U.S. Federal Services 29,592 10.2% 9,834 8.5% 50,945 10.1% 26,544 10.6%
Outside the U.S. 4,474 2.9% 16,440 8.6% 8,915 2.9% 32,705 8.7%
Amortization of intangible assets (9,519) NM (2,603) NM (14,977) NM (5,321) NM
Restructuring costs (2) — NM (2,320) NM — NM (2,320) NM
Other (3) 394 NM — NM (1,698) NM — NM
Total $ 81,801 11.1% $ 71,321 11.6% $ 155,937 11.1% $ 151,004 12.2%


	Three Months Ended March 31,											Six Months Ended March 31,
(dollars in thousands)	2020		% (1)	2019		% (1)	2020		% (1)	2019		% (1)
Revenue:
U.S. Health & Human Services	$	308,698		$	290,737		$	620,979		$	584,950
U.S. Federal Services	393,391			289,736			759,962			506,723
Outside the U.S.	116,046			156,047			255,423			309,466
Total	$	818,135		$	736,520		$	1,636,364		$	1,401,139
Gross profit:
U.S. Health & Human Services	$	85,454	27.7%	$	86,260	29.7%	$	175,044	28.2%	$	174,291	29.8%
U.S. Federal Services	76,958		19.6%	60,696		20.9%	147,779		19.4%	108,681		21.4%
Outside the U.S.	(9,314)		(8.0)%	22,466		14.4%	5,725		2.2%	45,715		14.8%
Total	$	153,098	18.7%	$	169,422	23.0%	$	328,548	20.1%	$	328,687	23.5%
Selling, general & administrative expense:
U.S. Health & Human Services	$	39,239	12.7%	$	29,400	10.1%	$	70,637	11.4%	$	61,539	10.5%
U.S. Federal Services	46,726		11.9%	31,104		10.7%	85,965		11.3%	57,736		11.4%
Outside the U.S.	17,404		15.0%	17,992		11.5%	33,457		13.1%	36,800		11.9%

Other (2)	3,484		NM	(394)		NM	4,021		NM	1,698		NM
Total	$	106,853	13.1%	$	78,102	10.6%	$	194,080	11.9%	$	157,773	11.3%
Operating income:
U.S. Health & Human Services	$	46,215	15.0%	$	56,860	19.6%	$	104,407	16.8%	$	112,752	19.3%
U.S. Federal Services	30,232		7.7%	29,592		10.2%	61,814		8.1%	50,945		10.1%
Outside the U.S.	(26,718)		(23.0)%	4,474		2.9%	(27,732)		(10.9)%	8,915		2.9%
Amortization of intangible assets	(8,934)		NM	(9,519)		NM	(18,022)		NM	(14,977)		NM



Other	(3,484)		NM	394		NM	(4,021)		NM	(1,698)		NM
Total	$	37,311	4.6%	$	81,801	11.1%	$	116,446	7.1%	$	155,937	11.1%

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

(2) ~~During fiscal year 2018, we incurred costs in restructuring our United Kingdom business.~~

~~(3)~~ Other selling, general &and administrative expenses includes credits and costs that are not ~~directly~~ allocated to a particular ~~segment. In~~segment, including the ~~six month periods ended March 31, 2019, these include $2.7 million~~costs for actual and potential acquisitions of ~~costs directly related to the acquisition of the citizen engagement centers business. Refer to~~ "~~Note 5. Acquisition of Citizen Engagement Centers Business~~" ~~for more details.~~other businesses.

Identifiable assets for the segments are shown below (in thousands):


		March 31, 2019		September 30, 2018			March 31, 2020		September 30, 2019
U.S. Health & Human Services	U.S. Health & Human Services	$	478,584	$	442,063	U.S. Health & Human Services	$	580,487	$	500,641
U.S. Federal Services	U.S. Federal Services	837,844		375,807		U.S. Federal Services	939,824		795,553
Outside the U.S.	Outside the U.S.	224,274		184,872		Outside the U.S.	210,095		234,769
Corporate	Corporate	147,014		459,258		Corporate	230,000		214,769
Total	Total	$	1,687,716	$	1,462,000	Total	$	1,960,406	$	1,745,732

3. Leases

Beginning October 1, 2019, we identify contracts which are, or contain, leases where a contract allows us the right to control identified property or equipment for a period of time in return for consideration. Our leases are typically for office space or facilities, as well as some equipment leases. Where contracts include both lease and non-lease components, we do not typically separate the non-lease components in our accounting.

At the inception of a lease, we recognize a liability for future minimum lease payments based upon the present value of those payments.

•In identifying our future minimum lease payments, we do not include variable lease costs, such as those for maintenance or utilities. These are recorded as lease expenses in the period in which they are incurred.

•In identifying future lease payments, we do not include short-term leases, identified as those with an initial term of twelve months or less.

•Lease options are included within our lease liability only where it is reasonably certain that we will utilize those periods of the lease and incur the related costs.

•In calculating the fair value of our lease liability, we utilize an estimate of our collateralized incremental borrowing rate. This estimate is based upon publicly-available information adjusted for company-specific, country-specific and lease-specific factors. The weighted average incremental borrowing rate utilized at March 31, 2020, is 3.7%.

Over the course of a lease, the lease liability is reduced as scheduled lease payments are made and increased as the implied interest charges are added.

Our right-of-use asset is based upon the lease liability at the contract inception but is adjusted over the life of the lease by lease prepayments, additional costs or lease incentives. The right-of-use asset is amortized on a straight-line basis over the lease term, offset by the interest accretion recorded on the lease liability.

Lease expense is recorded within our consolidated statements of operations based upon the nature of the assets. Where assets are used to directly serve our customers, such as facilities dedicated to customer contracts, lease costs are recorded in "cost of revenue." Facilities and assets which serve management and support functions are expensed through "selling, general and administrative expenses." Costs recorded in the three and six months ended March 31, 2020, are summarized below.


(dollars in thousands)	Three Months Ended March 31, 2020		Six Months Ended March 31, 2020
Operating lease cost	$	23,437	$	48,687
Short-term lease cost	1,454		3,564
Variable lease cost	1,954		5,288
Total operating lease costs	$	26,845	$	57,539

Future minimum lease payments for noncancelable operating leases as of March 31, 2020 are shown below.


(dollars in thousands)	Office space		Equipment		Total
For the years ended September 30,
Remainder of 2020	$	42,136	$	3,832	$	45,968
2021	60,372		6,295		66,667
2022	39,752		2,353		42,105
2023	26,490		98		26,588
2024	11,193		40		11,233
Thereafter	6,989		—		6,989
Total minimum lease payments	$	186,932	$	12,618	$	199,550
Less imputed interest	(11,183)		(372)		(11,555)
Total lease liabilities	$	175,749	$	12,246	$	187,995

Our weighted average remaining lease term at March 31, 2020 is 3.0 years.

For the six months ended March 31, 2020, we made cash payments of $55.9 million for amounts included in our lease liabilities. New or amended leases resulted in additional right-of-use assets of $24.7 million.

4. Revenue Recognition

~~Beginning October 1, 2018, we recognize revenue in accordance with ASC Topic 606,~~ ~~Revenue from Contracts with Customers~~. We ~~adopted this standard on October 1, 2018, using the modified retrospective method; accordingly, only periods after October 1, 2018, utilize ASC Topic 606.~~

~~Under ASC Topic 606, we~~ recognize revenue as, or when, we satisfy performance obligations under a contract. We account for a contract when the parties have approved the contract and are committed to perform on it, the rights of each party and the payment terms are identified, the contract has commercial substance and it is probable that we will collect substantially all of the consideration. A performance obligation is a promise in a contract to transfer a distinct good or service, or a series of distinct goods or services, to a customer. The transaction price of a contract must be allocated to each performance obligation and recognized as the performance obligation is satisfied.

Although our services may have many components, these components are not necessarily distinct performance obligations as they may be interdependent on or interrelated to each other. Where our contracts contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each component. This method will vary from contract to contract. Where available, we utilize standalone selling prices of similar components. If this information is unavailable, we utilize a suitable metric to allocate selling price, such as costs incurred.

The majority of our contracts have performance obligations which are satisfied over time. In most cases, we view our performance obligations as promises to transfer a series of distinct services to our customer that are substantially the same and which have the same pattern of service. We recognize revenue over the performance period as a customer receives the benefits of our services. This continuous transfer of control is supported by the unilateral right of many of our customers to terminate contracts for convenience, without having to provide justification for this decision. Where we are reimbursed on a cost-plus basis, we recognize revenue based upon our costs incurred to date; where we are reimbursed on a fixed price basis, we recognize revenue based upon an appropriate output measure which may be time elapsed or another measure within the contract. When we have variable fees, such as revenue related to the volume of work or award fees, we allocate that revenue to the distinct periods of service to which they relate. In estimating our variable fees, we are required to constrain our estimates to the extent that it is probable that there will not be a significant reversal of cumulative revenue when the uncertainty is resolved.

Other performance obligations are satisfied at a point in time, rather than over time. We recognize revenue only when the customer has received control over the goods provided. Revenue recognition on these performance obligations does not require a significant level of judgment or estimation.

Where we have contract modifications, these are reviewed to determine whether they should be accounted for as part of the original performance obligation or as a separate contract. Where the modification changes the scope or price and the additional performance obligations are at their standalone selling price, these services are considered as a separate contract. Where there is a modification and the additional performance obligations are not at their standalone selling price, we consider whether those performance obligations are distinct from those already delivered. If services are distinct from those already provided, the contract is accounted for prospectively, as though the original contract had been terminated and a new arrangement entered into. Where the modification includes goods or services which are not distinct from those already provided, we record a cumulative adjustment to revenue based upon a remeasurement of progress towards the complete satisfaction of performance obligations not yet fully delivered.

Disaggregation of revenue

In addition to our segment reporting, we disaggregate our revenues by ~~product,~~service, contract type, customer type and geography. Our operating segments represent the manner in which our Chief Executive Officer reviews our financial results which is further discussed in "Note 2. Segment information."

By operating segment and service


							Three Months Ended March 31,						Six Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	Three Months Ended March 31, 2019		Six Months Ended March 31, 2019		(dollars in thousands)	2020		2019		2020		2019
Program administration	Program administration	$	219,732	$	438,705	Program administration	$	236,436	$	219,732	$	473,343	$	438,705
Assessments and appeals	Assessments and appeals	33,331		70,552		Assessments and appeals	29,916		33,331		63,747		70,552
Workforce and children services	Workforce and children services	23,898		47,801		Workforce and children services	28,734		23,898		58,120		47,801
Other	Other	13,776		27,892		Other	13,612		13,776		25,769		27,892
Total U.S. Health and Human Services	Total U.S. Health and Human Services	$	290,737	584,950		Total U.S. Health and Human Services	$	308,698	$	290,737	$	620,979	$	584,950

Program administration	Program administration	$	209,996	$	350,117	Program administration	$	304,367	$	209,996	$	586,055	$	350,117
Technology solutions	Technology solutions	37,993		76,876		Technology solutions	44,508		37,993		88,114		76,876
Assessments and appeals	Assessments and appeals	41,747		79,730		Assessments and appeals	44,516		41,747		85,793		79,730
Total U.S. Federal Services	Total U.S. Federal Services	$	289,736	506,723		Total U.S. Federal Services	$	393,391	$	289,736	$	759,962	$	506,723

Workforce and children services	Workforce and children services	$	69,759	$	143,037	Workforce and children services	$	34,683	$	69,759	$	91,922	$	143,037
Assessments and appeals	Assessments and appeals	67,771		130,081		Assessments and appeals	62,286		67,771		124,929		130,081
Program administration	Program administration	15,922		31,242		Program administration	16,945		15,922		34,039		31,242
Other	Other	2,595		5,106		Other	2,132		2,595		4,533		5,106
Total Outside the U.S.	Total Outside the U.S.	$	156,047	$	309,466	Total Outside the U.S.	$	116,046	$	156,047	$	255,423	$	309,466

Total revenue	Total revenue	$	736,520	$	1,401,139	Total revenue	$	818,135	$	736,520	$	1,636,364	$	1,401,139

By contract type

(dollars in thousands) Three Months Ended March 31, 2019 Six Months Ended March 31, 2019
Performance-based $ 261,592 $ 574,479
Cost-plus 298,133 473,431
Fixed price 139,871 287,022
Time and materials 36,924 66,207
Total revenue $ 736,520 $ 1,401,139


	Three Months Ended March 31,						Six Months Ended March 31,
(dollars in thousands)	2020		2019		2020		2019
Performance-based	$	275,669	$	261,592	$	568,427	$	574,479
Cost-plus	398,973		298,133		761,784		473,431
Fixed price	100,504		139,871		219,720		287,022
Time and materials	42,989		36,924		86,433		66,207
Total revenue	$	818,135	$	736,520	$	1,636,364	$	1,401,139

1312

By customer type


							Three Months Ended March 31,						Six Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	Three Months Ended March 31, 2019		Six Months Ended March 31, 2019		(dollars in thousands)	2020		2019		2020		2019
New York State government agencies	New York State government agencies	$	89,858	$	181,570	New York State government agencies	$	100,222	$	89,858	$	197,445	$	181,570
Other U.S. state government agencies	Other U.S. state government agencies	197,870		396,772		Other U.S. state government agencies	217,195		197,870		427,081		396,772
Total U.S. state government agencies	Total U.S. state government agencies	$	287,728	$	578,342	Total U.S. state government agencies	317,417		287,728		624,526		578,342

United States Federal Government agencies	United States Federal Government agencies	270,623		468,901		United States Federal Government agencies	374,909		270,623		726,742		468,901
International government agencies	International government agencies	146,292		289,073		International government agencies	107,460		146,292		238,276		289,073
Other, including local municipalities and commercial customers	Other, including local municipalities and commercial customers	31,877		64,823		Other, including local municipalities and commercial customers	18,349		31,877		46,820		64,823
Total revenue	Total revenue	$	736,520	$	1,401,139	Total revenue	$	818,135	$	736,520	$	1,636,364	$	1,401,139

By geography


							Three Months Ended March 31,						Six Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	Three Months Ended March 31, 2019		Six Months Ended March 31, 2019		(dollars in thousands)	2020		2019		2020		2019
United States of America	United States of America	$	580,473	$	1,091,673	United States of America	$	702,089	$	580,473	$	1,380,941	$	1,091,673
United Kingdom	United Kingdom	78,334		151,752		United Kingdom	63,722		78,334		136,724		151,752
Australia	Australia	50,997		104,370		Australia	24,540		50,997		61,975		104,370
Rest of world	Rest of world	26,716		53,344		Rest of world	27,784		26,716		56,724		53,344
Total revenue	Total revenue	$	736,520	$	1,401,139	Total revenue	$	818,135	$	736,520	$	1,636,364	$	1,401,139

Contract balances

Differences in timing between revenue recognition and cash collection result in contract assets and contract liabilities. We classify these assets as accounts receivable — billed and billable and unbilled ~~receivables and~~receivables; the liabilities are classified as deferred revenue.

In many contracts, we bill our customers on a monthly basis shortly after the month end for work performed in that month. Funds are considered collectible and are included within accounts receivable — billed and billable.

Exceptions to this pattern will arise for various reasons, including those listed below.

•Under cost-plus contracts, we are typically required to estimate a contract’s share of our general and administrative expenses. This share is based upon estimates of total costs which may vary over time. We typically invoice our customers at an agreed provisional billing rate which ~~will~~may differ from actual rates incurred. If our actual rates are higher than the provisional billing rates, an asset is recorded for this variance; if the provisional billing ~~rate is~~ rates are higher than our actual ~~rate,~~rates, we record a liability.

•Certain contracts include retainage balances, whereby revenue is earned but cash payments are held back by the customer for a period of time, typically to allow the customer to ~~evaluate~~confirm the ~~quality of our performance.~~

•~~In certain contracts, notably our welfare-to-work contracts, we earn revenue from program participants achieving~~ ~~outcomes such~~objective criteria laid out by the contract have been met. This balance is classified as sustained employment for periods up to 24 months. This revenue may only be invoiced at the conclusion of this period of performance. Since we are required to recognize revenue over the period where the customer receives the benefit, we record anaccounts receivable - unbilled ~~receivable.~~until restrictions on billing have been lifted.

•In certain contracts, we may receive funds from our customers prior to performing operations. These funds are typically referred to as “set-up costs” and reflect the need for us to make investments in infrastructure prior to providing a service. This investment in infrastructure is not a performance obligation which is distinct from the service that is subsequently provided and, as a result, revenue is not recognized based upon the

establishment of this infrastructure, but rather over the course of the contractual relationship. The funds are initially recorded as deferred revenue and recognized over the term of the contract. Other contracts may not include set-up fees but will provide higher fees in earlier periods of the contract. The premium on these fees is deferred.

•Some of our contracts, notably our welfare-to-work contracts in the Outside the U.S. Segment, include payments for outcomes, such as job retention, which occur over several months. We are required to estimate these outcome fees ahead of their realization and recognize this estimated fee over the period of delivery.

~~During~~Of our revenue for the three and the six months ended March 31, 2020, approximately $22.1 million and $40.1 million were from cash payments made to us prior to October 1, 2019. For the three and six months ended March 31, 2019, we recognized revenue of $10.2 million and $32.0 million ~~included in our deferred revenue balances at September 30,~~from payments made prior to October 1, 2018. ~~During the three months ended March 31, 2019, we recognized $23.0 million included in our deferred revenue at December 31, 2018.~~

Contract estimates

We are required to use estimates in recognizing ~~certain revenue. Our most significant~~revenue from some of our contracts. As discussed in "Note 1. Organization and Basis of Presentation", the calculation of these estimates ~~relate to:~~has been complicated by the COVID-19 pandemic, which has reduced our ability to use past results to estimate future performance.

•~~Our welfare-to work~~Some of our performance-based contract revenue is recognized based upon future outcomes defined in each contract. This is the case in many of our welfare-to-work contracts in the Outside the U.S. Segment, where we ~~estimate our future variable consideration by estimating~~are paid as individuals attain employment goals, which may take many months to achieve. We recognize revenue on these contracts over the ~~volume~~period of performance. Our estimates vary from contract to contract but may include estimates of the number of participants, the length of the contract and ~~timing of our caseload~~the participants reaching employment ~~milestones~~;milestones. We are required to estimate these outcome fees ahead of their realization and recognize this estimated fee over the period of delivery. In almost all of the jurisdictions in which we operate, the employment markets have experienced significant changes due to the COVID-19 pandemic. For our existing program participants, many employment opportunities have been terminated or are no longer available. Our volume of new program participants is expected to increase but it is unclear as to when these populations will be in a position to seek employment in many industries which have been curtailed by the COVID-19 pandemic. In some cases, we anticipate that we may be unable to place individuals in employment in the short-term.

•~~Our transaction-based~~Other performance-based contracts with future outcomes include those where we ~~provide a significant~~recognize an average effective rate per participant based upon the total volume of expected participants. In this instance, we are required to estimate the amount of discount applied to ~~our customer in future periods, where we must calculate an~~determine the average rate of revenue per ~~transaction~~participant. Our revised estimates of participant numbers are based upon our updated evaluation of probable future volumes. We are required to use estimates ~~of the total revenue and anticipated volume of work from the contract; and~~

•~~Our cost-plus contracts, which require us to prepare an estimate of our indirect costs which are allocated to our contracts~~.in recognizing certain revenue.

Where we have changes to our estimates, these are recognized on a cumulative catch-up basis. In ~~fiscal year~~the three and six months ended March 31, 2020, we reported reductions in revenue of $6.3 million and $7.7 million from changes in estimates as of September 30, 2019. In the three and six months ended March 31, 2019, ~~our~~we reported reductions in revenue ~~included a reduction~~ of $6.5 million and $8.0 million, respectively, from changes in estimates.

Deferred contract costs

For many contracts, we incur significant incremental costs at the beginning of an arrangement. Typically, these costs relate to the establishment of infrastructure which we utilize to satisfy our performance obligations with the contract. We report these costs as deferred contract costs and amortize them on a straight-line basis over the shorter of the useful economic life of the asset or the anticipated term of the contract.

~~Since September 30, 2018, we have deferred $8.2 million of costs. During the three and six months ended March 31, 2019, we amortized~~ ~~$1.5 million~~ ~~and $2.8 million of deferred contract costs.~~


	Three Months Ended March 31,						Six Months Ended March 31,
(dollars in thousands)	2020		2019		2020		2019
Deferred contract cost capitalization	$	2,666	$	5,113	$	3,995	$	8,212
Deferred contract cost amortization	1,321		1,478		3,497		2,820

This amortization was recorded within our "cost of revenue" on our consolidated ~~statement~~statements of operations.

Remaining performance obligations

At March 31, ~~2019,~~2020, we had approximately ~~$409~~$270 million of remaining performance obligations. We anticipate that we will recognize revenue on approximately ~~50%~~55% of this balance within the next ~~twelve~~12 months. This balance excludes contracts with an original duration of twelve months or less, including contracts with a penalty-free termination for convenience clause, and any variable consideration which is allocated entirely to future performance obligations including variable transaction fees or fees tied directly to costs incurred.

4.5. Earnings Per Share

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


		Three Months Ended March 31,			Six Months Ended March 31,				Three Months Ended March 31,		Six Months Ended March 31,
(shares in thousands)	(shares in thousands)	2019	2018	2019	2018	(shares in thousands)	2020	2019	2020	2019
Basic weighted average shares outstanding	Basic weighted average shares outstanding	64,369	65,856	64,600	65,857	Basic weighted average shares outstanding	63,934	64,369	64,264	64,600
Dilutive effect of unvested RSUs	Dilutive effect of unvested RSUs	274	412	217	366	Dilutive effect of unvested RSUs	191	274	182	217
Denominator for diluted earnings per share	Denominator for diluted earnings per share	64,643	66,268	64,817	66,223	Denominator for diluted earnings per share	64,125	64,643	64,446	64,817

Our dilutive earnings per share for the three and six months ended March 31, 2020, excludes any effect from approximately 280,000 and 250,000 unvested restricted stock units, respectively, as adding them to our calculation would have been antidilutive. There were no antidilutive awards in the three and six months ended March 31, 2019.

6. Acquisitions

~~5. Acquisition of Citizen Engagement Centers Business~~

On November 16, 2018, we acquired General Dynamics Information Technology's citizen engagement centers business ~~pursuant to an asset purchase agreement dated October 5, 2018. The assets acquired included existing contracts, contractual relationships and bids~~ for ~~contracts submitted prior to the acquisition date, as well as interests in leased properties, fixed assets, working capital and intangible assets.~~$430.7 million. This acquisition strengthens our position in the administration of federal government ~~programs. This~~programs and the business ~~has been~~was integrated into our U.S. Federal Services Segment. The contract provides for a purchase price of $400.0 million adjusted for the net working capital in excess of or less than an agreed upon target representing an estimate of normalized net working capital. The estimated working capital balance at November 16, 2018, was higher than this estimate and, accordingly, we incurred ~~an estimated~~ ~~purchase price of $430.6 million.~~ We ~~anticipate finalizing the purchase price during the third quarter of fiscal year 2019.~~ ~~To fund the acquisition, we utilized $150 million of borrowings from~~completed our ~~credit facility with the balance from our cash on our balance sheet.~~

~~As part of the acquisition, we incurred acquisition-related expenses, including legal, accounting and other consultant services. During the~~ ~~fiscal~~ year ended September 30, 2018, we incurred $0.5 million of such costs; during the six months ended March 31, 2019, we incurred an additional $2.7 million. We also incurred additional investing cash outflows of $4.5 million from the acquisition of software licenses needed for newly-acquired employees.

~~We considered this transaction to be an acquisition of a business.~~ ~~At this time, we are in the process of finalizing our valuation of the acquired assets and assumed liabilities, including~~ our analysis of the value of the intangible assets acquired and the tax effects of the acquisition. In addition, we continue to look for potential assets or liabilities which existed at the acquisition date. Our current estimate of the allocation of the purchase price ~~updated from December 31, 201~~8~~, is shown below.~~to the assets acquired and liabilities assumed in September 2019, including goodwill of $184.6 million and intangible assets of $122.3 million.

(dollars in thousands) Estimated purchase price allocation at December 31, 2018 Adjustments Estimated purchase price allocation at March 31, 2019
Estimated cash consideration $ 429,335 $ 1,238 $ 430,573
Billed and unbilled receivables $ 145,319 $ (3,450) $ 141,869
Property and equipment 6,454 — 6,454
Other assets 681 3,412 4,093
Intangible assets 122,300 — 122,300
Total identifiable assets acquired 274,754 (38) 274,716
Accounts payable and other liabilities 33,296 (1,091) 32,205
Net identifiable assets acquired 241,458 1,053 242,511
Goodwill 187,877 185 188,062
Net assets acquired $ 429,335 $ 1,238 $ 430,573

~~The fair value~~On August 16, 2019, we acquired 100% of the ~~goodwill is estimated~~share capital of GT Hiring Solutions (2005) Inc. (GT Hiring) for $6.2 million (8.2 million Canadian Dollars). GT Hiring provides employment services in British Columbia. We acquired GT Hiring to ~~be $188.1 million. This goodwill represents~~enhance the ~~value~~reach and capabilities of ~~the assembled workforce~~our Canadian employment services and, accordingly, the ~~enhanced knowledge, capabilities and qualifications held by the business. This goodwill balance is expected to be deductible for tax purposes.~~

The fair value of the intangible assets acquired is estimated to be $122.3 million, representing customer relationships. We have assumed a useful economic life of ten years for most contracts, representing our expectation of the period over which we will receive the benefit. Typically, our customer relationships are based upon the provision of services to our customers on a daily or monthly basis and, although contracts are frequently rebid, we believe that an incumbent provider typically enjoys significant competitive advantages. In reviewing the contract portfolio, we allocated a shorter life to a contract which pertains to the United States decennial census. This contract requires managing a significant ramp-up and ramp-down of work over the census cycle. As much of the benefit from this contract is anticipated to occur within the next two years, we have utilized a shorter asset life for this customer relationship. The average weighted intangible asset life is 7.6 years and amortization will be recorded on a straight-line basis.

~~(dollars in thousands)~~

~~Useful life~~

~~Fair value~~

~~Customer relationships - all contracts except U.S. Census~~

~~10 years~~

~~85,300~~

~~Customer relationships - U.S. Census~~

~~2 years~~

~~37,000~~

~~Total intangible assets~~

~~122,300~~

~~The contribution of the acquired business for the three and six months ended March 31, 2019~~, ~~is shown below.~~

Acquisition Contribution for
(dollars in thousands) Three Months Ended
March 31, 2019 Six Months Ended
March 31, 2019
Revenue $ 176,003 $ 277,266
Gross profit 32,672 51,620

The following table presents certain results for the three and six months ended March 31, 2019 and 2018, as though the acquisition had occurred on October 1, 2017. This pro forma information is presented for information only and is not necessarily indicative of the results if the acquisition had taken place on that date. The pro forma results below eliminate intercompany transactions, include amortization charges for acquired intangible assets, eliminate pre-acquisition transaction costs and include estimates of interest expense, as well as corresponding changes in our tax charge.

Pro forma results for the three months ended March 31, Pro forma results for the six months ended March 31,
(dollars in thousands, except per share amounts) 2019 2018 2019 2018
Revenue $ 736,520 $ 770,590 $ 1,499,568 $ 1,592,723
Net income 61,766 56,803 120,962 119,991
Basic earnings per share attributable to MAXIMUS 0.96 0.87 1.88 1.81
Diluted earnings per share attributed to MAXIMUS 0.96 0.86 1.87 1.80

~~Changes in goodwill for the six months ended March 31, 2019, were as follows:~~

(dollars in thousands) U.S. Health & Human Services U.S. Federal Services Outside the United States Total
Balance as of September 30, 2018 $ 139,588 $ 228,148 $ 32,146 $ 399,882
Estimated effect of the acquisition of citizen engagement centers business 20,071 165,498 2,493 188,062
Foreign currency translation — — (193) (193)
Balance as of March 31, 2019 $ 159,659 $ 393,646 $ 34,446 $ 587,751

~~Although the citizen engagement center~~ business has been integrated into our Outside the U.S. ~~Federal Services Segment,~~Segment. We are still in the process of finalizing the allocation of assets acquired and liabilities assumed. We recorded estimated goodwill and intangible assets balances of $1.5 million and $2.7 million, respectively, related to this acquisition. The goodwill represents the assembled workforce and enhanced knowledge, experience and reputation we have obtained from the acquisition ~~provides benefits across all three segments.~~and will be deductible for tax purposes. The ~~most significant contracts~~intangible assets represent customer relationships, which will be amortized over seven years.

On February 28, 2020, we acquired ~~are cost-plus arrangements, which allow us to recover a greater share of our shared corporate overhead. Accordingly, we have allocated the goodwill based on an estimate~~100% of the ~~relative fair value~~share capital of InjuryNet Australia Pty Limited (InjuryNet) for an estimated purchase price of $3.7 million (5.6 million Australian Dollars). The purchase price is subject to adjustment for a working capital true-up. InjuryNet provides workplace medical services in Australia. The business has been integrated into our Outside the ~~benefit to each segment.~~

~~With~~U.S. Segment. We are still in the ~~reorganization~~process of ~~the business on October 1, 2018, we reallocated our goodwill to our new reporting segments. This reallocation was based upon the relative fair values~~finalizing allocation of ~~the operating segments on the date of the reorganization.~~

~~There have been no impairment charges to our goodwill.~~

~~The following table sets forth the components of intangible~~ assets ~~(in thousands):~~

As of March 31, 2019 As of September 30, 2018
(dollars in thousands) Cost Accumulated
Amortization Intangible
Assets, net Cost Accumulated
Amortization Intangible
Assets, net
Customer contracts and relationships $ 248,770 $ 54,838 $ 193,932 $ 129,113 $ 42,683 $ 86,430
Technology based intangible assets 5,648 4,267 1,381 5,750 4,212 1,538
Trademarks and trade names 4,480 4,439 41 4,496 4,429 67
Total $ 258,898 $ 63,544 $ 195,354 $ 139,359 $ 51,324 $ 88,035

~~As of March 31, 2019, our intangible assets have a weighted average remaining life of 9.2 years, comprising 9.2 years for customer contracts~~acquired and ~~relationships, 4.6 years for technology-based intangible assets, and 0.8 years for trademarks and trade names. The estimated future amortization expense for the~~ ~~remainder of the current fiscal year and the~~ ~~next five~~ ~~fiscal~~ ~~years for the intangible assets held by the Company as of March 31, 2019, is as follows (in thousands):~~

Six months ended September 30, 2019 $ 18,044
2020 35,307
2021 18,258
2022 15,884
2023 15,785
2024 15,662

~~6. Income Tax~~

~~Our effective income tax rate for the~~ ~~three and six~~ ~~months ended March 31, 2019~~ ~~was 23.4% and~~ ~~24.8%, respectively,and 24.1%and 24.5%~~ ~~for the comparable prior year periods,~~ ~~respectively.~~

~~Our results for the three and six months ended~~ ~~March 31, 201~~8, included the estimated effects of the Tax Cuts and Jobs Act (the Act), which was signed on December 22, 2017, and was effective from January 1, 2018. We recorded a one-time "toll tax" on our undistributed and previously untaxed earnings in foreign locations of approximately $9.5 million and a one-time benefit from the reduction of our deferred tax liabilities ~~of $10.6 million. We have completed our analysis of these items and have not recorded any adjustments in this period.~~

~~During the six months ended March 31, 2019 and 2018, we made income tax payments of $37.2 million and $28.5 million, respectively.~~assumed.

7. Supplemental Disclosures

Under a resolution adopted in ~~June 2018,~~March 2020, the Board of Directors authorized the purchase, at management's discretion, of up to ~~an aggregate of~~ $200 million of our common stock. This supplemented a similar resolution adopted in June 2018. During the six months ended March 31, 2020, we purchased approximately 2,767,000 of our common shares at a cost of $167.0 million. During the six months ended March 31, 2019, we ~~purchased 0.7 million of our~~acquired approximately 716,000 common shares at a cost of $45.4 million. ~~During the six months ended March 31, 2018, we acquired approximately 17,000 common shares at a cost of $1.0 million.~~ At March 31, ~~2019, $147.4~~2020, $150.0 million remained available for future stock purchases.

During the six months ended March 31, ~~2019,~~2020, we granted ~~346,000 RSUs~~316,000 restricted stock units to our board of directors and employees. These awards will vest ratably over one and five years, respectively.

Our deferred compensation plan uses both mutual fund and life insurance investments to fund its obligations. The mutual funds are recorded at fair value, based upon quoted prices in active markets, and the life insurance investments at cash surrender value; changes in value are reported in ~~the Consolidated Statement~~our consolidated statements of ~~Operations.~~operations. At March 31, ~~2019,~~2020, the deferred compensation plan held ~~$20.0~~$18.4 million of the mutual fund investments.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other amounts included within current assets and liabilities that meet the definition of a financial instrument are shown at values equivalent to fair value due to the short-term nature of these items. Our debt balances are principally from credit facilities which can be utilized and repaid as required and whose rates are based upon prevailing market conditions; accordingly, we believe the balance disclosed is consistent with fair value. Our accounts receivable billed and billable

balance includes both amounts invoiced and amounts that are ready to be invoiced where the funds are collectible within standard invoice terms. Our accounts receivable unbilled balance includes balances where revenue has been earned but no invoice was issued on or before March 31, ~~2019.~~2020. Restricted cash represents funds which are held in our bank accounts but which we are precluded from using for general business needs through contractual requirements; these requirements include serving as collateral for lease, credit card or letter of credit arrangements or where we hold funds on behalf of clients. Restricted cash is included within "prepaid expenses and other assets" on our balance sheet and is included within "cash, cash equivalents and restricted cash" in our consolidated statements of cash flows. A reconciliation of these balances is shown below.


	Balance as of
(dollars in thousands)	March 30, 2020		September 30, 2019		March 31, 2019		September 30, 2018
Cash and cash equivalents	$	126,257	$	105,565	$	46,799	$	349,245
Restricted cash (recorded within "other current assets")	12,485		10,927		7,679		7,314
Cash, cash equivalents and restricted cash	138,742		116,492		54,478		356,559

~~As noted above, we utilized our credit facility in November 2018 to fund part of the citizen engagement centers acquisition.~~

During the six months ended March 31, ~~2019~~2020 and ~~2018,~~2019, we made interest payments of $0.5 million and $1.8 million, respectively.

During the six months ended March 31, 2020 and ~~less than $0.1~~2019, we made income tax payments of $52.9 million and $37.2 million, respectively. ~~At March 31, 2019,~~

8. Litigation

~~Litigation~~

~~In August 2017, the Company~~government contracts. We are subject to periodic audits by federal, state, local and ~~certain officers were named as defendants~~foreign governments for taxes. We are also involved in ~~a putative class action lawsuit filed~~various claims, arbitrations and lawsuits arising in the ~~U.S. District Court for~~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 ~~Eastern District~~advice of ~~Virginia. The plaintiff alleged~~legal counsel, we do not believe that the ~~defendants made~~outcome of any existing matter would likely have a ~~variety~~material adverse effect on our consolidated financial position, results of ~~materially false and misleading statements,~~operations 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 201~~8, our~~ 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 thecash flows.

Medicaid claims ~~asserted, and we are unable to estimate the potential loss or range of loss.~~

associated with this work and that the school districts will be responsible for the remainder. We have reserved our estimated fees earned from this engagement relating to the ~~disallowances~~.disallowances. We exited the federal healthcare-claiming business in 2009 and no longer provide the services at issue in this matter. The state contested the first disallowance of approximately $12 million in U.S. District Court. In February 2020, the District Court upheld that disallowance, and the state has appealed the case to the U.S. Circuit Court of Appeals. The second disallowance of approximately $19 million is still pending at the U.S. Health and Human Services Departmental Appeals Board. No legal action has been initiated against ~~us.~~

~~8. Recent Accounting Pronouncements~~

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases~~. The new standard requires that assets and liabilities arising under leases be recognized on the balance sheet. The standard also requires additional quantitative and qualitative disclosures that provide the amount, timing and uncertainty of cash flows relatingus with respect to lease arrangements. This standard is effective for us on October 1, 2019. We will adopt this standard using a modified retrospective approach. This approach also provides practical expedients related to leases that commenced prior to the effective date and allows the use of hindsight when evaluating lease options. We expect that upon adoption we will recognize a material right-of-use asset and lease liability on our balance sheet. We do not expect the standard to have a material impact on our cash flows or results of operations.either disallowance.

9. Subsequent Events

On April ~~5, 2019,~~3, 2020, our Board of Directors declared a quarterly cash dividend of ~~$0.25~~$0.28 for each share of our common stock outstanding. The dividend is payable on May ~~31, 2019,~~29, 2020, to shareholders of record on May 15, ~~2019.~~ 2020. Based upon the number of shares outstanding, we anticipate a cash payment of approximately ~~$16~~$17 million.

On May 1, 2020, we sold a subsidiary that holds a contract that we were required to divest to avoid a conflict resulting from a new contract. The purchase price was $3.25 million.

1917

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

The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, our Consolidated Financial Statements and related Notes included both herein and in our Annual Report on Form 10-K for the year ended September 30, ~~2018,~~2019, which was filed with the Securities and Exchange Commission on November ~~20, 2018.~~26, 2019.

Business Overview

We are a leading operator of government health and human services programs worldwide. We ~~act as~~are a responsible and reliable contracting partner to governments under our mission of Helping Government Serve the People^®. Governments rely on our financial stability and proven expertise in helping people connect and use critical government programs. 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~~primary portfolio of work is tied 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 over the last decade was driven by new work, such as that from the ~~expansion of our health services business around the globe, new welfare-to-work contracts outside~~Affordable Care Act (ACA) in the United States and a growing footprint in clinical services including assessments, appeals and independent medical reviews in multiple geographies, as well as acquisitions in the United States and  United Kingdom.

COVID-19 pandemic

We have been and continue to be negatively affected by the COVID-19 pandemic. The dynamic nature of the circumstances increases the difficulty of predicting the scale of disruption from COVID-19 or how deep and severe the economic consequences will be. Accordingly, the full impact of the COVID-19 pandemic is uncertain. Continued business disruption relating to the COVID-19 pandemic may, among other things, negatively impact demand for our services, our workforce availability, our ability to perform fully on our contracts and our costs and may also limit the ability of customers to make timely payments to us, all of which would adversely affect our business, financial position, results of operations and cash flows.

We continue to serve our clients but have been subject to the social distancing, stay-at-home and other restrictions imposed by national, state and local governments. Our challenge has been to find methods of maintaining continuity of operations, including strict security standards, until social distancing requirements are relaxed.

We anticipate that we will be able to return to our previous levels of performance once the effect of this pandemic abates. However, the timing of this is uncertain and may vary by contract and location.

•We have strong relationships with our clients, with many considering us to be providing “essential services” to ensure that vital government programs continue to operate and that citizens continue to receive critical assistance at a time when the need for healthcare and safety-net programs is rising. Where we cannot provide services in the short-term, some of our clients are exploring ways of maintaining our services on a cost-recovery basis until pandemic restrictions are lifted.

•We have a strong customer base. Within the United States, many of the services we provide are either directly for the U.S. Federal Government or are mandated by the U.S. Federal Government. Outside the United States, our services are often provided for or funded by national governments. Although we may experience some delays in payments as governments navigate new processes to make payments, we expect to continue to receive payments.

•At March 31, 2020, we had $126.3 million of cash and $150 million of borrowings on our credit facility, leaving $250 million of available capacity. We believe we have adequate cash resources and credit availability to handle our obligations as they fall due.

•In the long-term, we believe that many of the demographic and legislative trends that we have articulated as opportunities for the growth of our business ~~with the United States Federal Government. This growth has been both organic and through acquisitions.~~

~~Most of our business depends upon government demand for our support services, their propensity~~will continue. With societies continuing to outsource and their procurement processes. These may be affected, both positively and detrimentally, by changes in presidential administration, the balance of power within a coalition government or legislative body, by the relative priorities of a government and the processes followed by a government in tendering, procuring and awarding contracts. O~~ur short-term growth expectations were impacted by~~ ~~changes in the industry that we believe were tied to changes in the political environment in the United States that started in 2017. We continue to experience~~ 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~~see 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~~a desire by governments to ~~achieve value for money, will continue~~spend wisely and seek outcome-based services, we believe we remain well-placed to ~~drive demand for~~build on 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~~existing 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 believe that our financial strength offers government clients reliability and dependability that we can deliver on program objectives and achieve contractual targets.~~reputation.

2018

•We use a well-trained workforce to perform our operations. In order to preserve their safety and security, we have implemented a number of steps to ensure social distancing and the reduction of risk to our workforce. Where possible, employees are encouraged to work from home. Where this is not possible, workplaces are enforcing screening, social distancing and regular cleaning and sanitizing. We have introduced a number of leave and income protection for employees who experience COVID-19 related absences.

Acquisitions

To supplement our core business, we have an active program to identify potential strategic acquisitions. Our acquisitions have successfully enabled us to increase future organic growth, as well as expand our business processes, knowledge and client relationships into adjacent markets and new geographies. ~~During fiscal year 2019,~~In November 2018, we acquired athe citizen engagement ~~center~~centers business ~~which had~~ previously ~~been owned~~operated by General Dynamics Information Technology. This acquisition, ~~strengthens~~coupled with our ~~position~~2015 acquisition of Acentia, LLC, has provided increased scale, customer base and competitive advantages in our business with the ~~administration~~United States Federal Government. In August 2019 and February 2020, we acquired GT Hiring Solutions in Canada and InjuryNet in Australia, respectively, which we have integrated into our Outside the U.S. Segment. These acquisitions supplement our existing businesses in this segment.

We have paused significant acquisition activity until we see an easing of ~~government programs.~~the uncertainties resulting from the COVID-19 pandemic. We continue to work on smaller tuck-in transactions that will support future organic growth in a meaningful way.

Financial Overview

~~Since October 1, 2018, we operated our business through three segments, U.S. Health and Human Services, U.S. Federal Services and Outside the U.S.~~ The ~~results for~~COVID-19 pandemic has affected each of ~~these~~our segments in different ways and at different times. Although all of the jurisdictions in which we operate followed different paths in reacting to the pandemic, the broad approach of restricting travel, cancelling large social gatherings, closing non-essential services and issuing restrictions on daily living developed during the three months ended March 31, 2020. Accordingly, our results for the three and six months ended March 31, ~~2019,~~2020, were affected by the pandemic towards the end of the period. The effects of the pandemic have continued into our third fiscal quarter. The effect on our financial statements in this period was different ~~factors.~~across each of our segments.

•~~Our~~We experienced limited disruption within our U.S. Health & Human Services ~~Segment reported~~ ~~a decline in~~ ~~revenue~~ and a ~~stablegross~~ ~~profit.~~ The revenue movement was the result of the rebid or extension on a number of large contracts. The profit margin received the benefit of $4 million of revenue from an expected contract change order including work performed in prior periods.

•~~Our~~ U.S. Federal Services ~~Segment reported revenue growth driven by~~Segments as we worked to maintain our operations, while prioritizing the ~~acquisition~~safety of our employees. We anticipate some continued disruption in these segments over the ~~citizen engagement centers business which contributed~~ ~~$176.0 million~~ ~~and $277.3 million in revenue~~ ~~in the three and six~~ ~~months ended March 31, 2019, respectively.The~~ ~~organic declines in revenue and~~next two fiscal quarters from incremental costs ~~were~~ due to ~~the completion of temporary work supporting disaster reliefs efforts, which had supplemented prior~~ ~~fiscal~~ ~~year results, as well as the anticipated ending of other contracts.~~ ~~The second quarter of fiscal year 2018 was tempered by a non-recurring expense to renegotiate a subcontract on a large business process outsourcing (BPS) program where~~idle labor, enhanced screening and enhanced cleaning but we ~~increased~~do not anticipate significant changes within our ~~scope of work. The second quarter of fiscal year 2019 received the benefit of favorable delivery on performance-based contracts.~~ contract base.

•Our Outside the U.S. Segment ~~reported declines~~received an immediate and significant negative impact from the pandemic as a significant portion of our international work is employment related, whether in ~~revenue~~finding work for individuals or assessing their health and ~~profit due primarily~~work capabilities. The changes in the employment markets in these jurisdictions has sharply reduced the number of individuals in work and the number of employment opportunities available to ~~declines~~them, resulting in a sharp decline in our ~~welfare-to-work business~~ ~~in Australia and the United Kingdom,~~ ~~including the Work Programme and Work Choice contracts~~ ~~in the United Kingdom~~ ~~that are ending.~~outcome-based revenue. This segment was also ~~includes discretionary spending which is passed across~~affected to a lesser extent by the ~~customer with no added margin, resulting~~Australian bushfires in ~~diluted~~ ~~profit~~ ~~margins.~~

~~Other effects of the citizen engagement centers acquisition on our U.S. Federal Services Segment~~ ~~for the six months ended March 31,~~December 2019 ~~are listed below.~~and January 2020.

•~~In addition to a payment~~The nature of ~~$421.8 million to acquire~~ the ~~business,~~COVID-19 pandemic makes projections more challenging than is typically the ~~increase in our workforce required significant additional investment in software licenses resulting in an increase of $4.5 million in property and equipment and a corresponding investing cash outflow.~~case. We have ~~accrued a further $8.8 million to pay~~made assumptions for the ~~estimated balance~~remainder of the ~~purchase price.~~

•~~We completed~~fiscal year based upon our expectations of how the ~~transaction using existing cash balances~~restrictions imposed by the pandemic will be eased and ~~borrowed funds of $150 million.~~ ~~Although we have made steady progress in reducing our indebtedness, this resulted in an increase in interest expense~~ ~~and a decline in our interest income~~.

•~~Our cash flows from operations received~~are dependent upon how quickly the ~~benefits~~economies of the ~~increased business. At the acquisition date, the business~~ ~~was~~jurisdictions in ~~a seasonally high period of the year and, accordingly,~~ ~~had higher than~~ ~~average~~ ~~receivables from customers. In addition, the payroll obligation was lower than that at quarter end.~~

•~~Although our administrative cost base~~ ~~has grown~~ ~~to cover the needs of supporting a larger organization, our existing cost base~~ ~~is being~~ ~~spread across a larger revenue base. As our general and administrative costs are allocated to our operating segments, the acquisition~~ is ~~providing~~ ~~a benefit to our profit margins in~~ ~~all of our~~ ~~segments. We estimate that the~~ ~~full fiscal year~~ ~~benefit to operating margin~~which we operate will ~~be 1.25% in our U.S. Health and Human Services Segment and 0.5% in our Outside the U.S. Segment.~~recover.

•~~We incurred acquisition-related expenses of~~ ~~$2.7 million. These costs represent the incremental costs incurred in completing the transaction, including legal and advisory costs, integration expenses, valuation services and other consultancy costs.~~

•~~We recorded amortization for intangible assets acquired of~~ ~~$10.1 million. We anticipate a full~~ ~~fiscal~~ ~~year expense of $23.6 million for fiscal year 2019.~~

At this time, we are still in the process of identifying and valuing the assets acquired and liabilities assumed in the purchase. This evaluation includes test work over the opening balance sheet and reviewing an appraisal of the

2119

value of the intangible assets acquired with the business. To the extent that the value of the assets and liabilities vary from our current estimates, we may incur a different annual amortization charge and a different purchase price.

~~Our Outside the U.S. Segment was affected by declines in the value of local currencies against the United States Dollar, resulting in reduced revenues and profits.~~

~~On October 1, 2018, we adopted the requirements of the Financial Accounting Standards Board's Accounting Standard Update 2014-09,~~ ~~Revenue from Contracts with Customers,~~ which changed the manner in which we recognize revenue on contracts with our customers. The adoption of this new standard resulted in a catch-up of revenue and net income attributable to our shareholders of $47.2 million and $32.9 million, respectively, which was recorded in retained earnings ~~in the first quarter. If we had applied our previous accounting policies in the current period, our revenue~~ ~~for the three and six months ended March 31, 2019~~ ~~would have been lower by approximately~~ ~~$1.0 million and~~ ~~$1.8 million, respectively.~~

Results of Operations

Consolidated

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


		Three Months Ended March 31,									Six Months Ended March 31,										Three Months Ended March 31,						Six Months Ended March 31,
(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	2019			2018			2019			2018			(dollars in thousands, except per share data)	2020			2019			2020			2019
Revenue	Revenue	$	736,520		$	612,787		$	1,401,139		$	1,235,935		Revenue	$	818,135		$	736,520		$	1,636,364		$	1,401,139
Cost of revenue	Cost of revenue	567,098			463,984			1,072,452			935,172			Cost of revenue	665,037			567,098			1,307,816			1,072,452
Gross profit	Gross profit	169,422			148,803			328,687			300,763			Gross profit	153,098			169,422			328,548			328,687
Gross profit percentage	Gross profit percentage	23.0		%	24.3		%	23.5		%	24.3		%	Gross profit percentage	18.7		%	23.0		%	20.1		%	23.5		%
Selling, general and administrative expenses	Selling, general and administrative expenses	78,102			74,879			157,773			144,438			Selling, general and administrative expenses	106,853			78,102			194,080			157,773
Selling, general and administrative expense as a percentage of revenue	Selling, general and administrative expense as a percentage of revenue	10.6		%	12.2		%	11.3		%	11.7		%	Selling, general and administrative expense as a percentage of revenue	13.1		%	10.6		%	11.9		%	11.3		%
Amortization of intangible assets	Amortization of intangible assets	9,519			2,603			14,977			5,321			Amortization of intangible assets	8,934			9,519			18,022			14,977

Operating income	Operating income	81,801			71,321			155,937			151,004			Operating income	37,311			81,801			116,446			155,937
Operating margin	Operating margin	11.1		%	11.6		%	11.1		%	12.2		%	Operating margin	4.6		%	11.1		%	7.1		%	11.1		%
Interest expense	Interest expense	1,569			157			2,194			325			Interest expense	465			1,569			949			2,194
Other income, net	Other income, net	447			1,392			2,492			1,679			Other income, net	573			447			1,292			2,492
Income before income taxes	Income before income taxes	80,679			72,556			156,235			152,358			Income before income taxes	37,419			80,679			116,789			156,235
Provision for income taxes	Provision for income taxes	18,913			17,450			38,746			37,300			Provision for income taxes	9,769			18,913			30,405			38,746
Effective tax rate		23.4		%	24.1		%	24.8		%	24.5		%
Effective income tax rate														Effective income tax rate	26.1		%	23.4		%	26.0		%	24.8		%
Net income	Net income	61,766			55,106			117,489			115,058			Net income	27,650			61,766			86,384			117,489
(Loss)/income attributable to noncontrolling interests		(158)			(386)			(348)			475
Loss attributable to noncontrolling interests														Loss attributable to noncontrolling interests	—			(158)			—			(348)
Net income attributable to MAXIMUS	Net income attributable to MAXIMUS	$	61,924		$	55,492		$	117,837		$	114,583		Net income attributable to MAXIMUS	$	27,650		$	61,924		$	86,384		$	117,837
Basic earnings per share attributable to MAXIMUS		$	0.96		$	0.84		$	1.82		$	1.74
Diluted earnings per share attributable to MAXIMUS		$	0.96		$	0.84		$	1.82		$	1.73
Basic earnings per share														Basic earnings per share	$	0.43		$	0.96		$	1.34		$	1.82
Diluted earnings per share														Diluted earnings per share	$	0.43		$	0.96		$	1.34		$	1.82

~~As our~~Our business segments have different factors driving revenue fluctuations and ~~profitability, the~~profitability. The sections that follow cover these segments in greater detail.

Changes in revenue, cost of revenue and gross profit for the three months ended March 31, ~~2019~~2020, are summarized below.


		Revenue						Cost of Revenue							Gross Profit							Revenue						Cost of Revenue	Gross Profit
(dollars in thousands)	(dollars in thousands)	Dollars		Percentage change		Dollars		Percentage change		Dollars		Percentage change		(dollars in thousands)		Dollars		Percentage change		Dollars		Percentage change		Dollars		Percentage change
Balance for respective period in fiscal year 2018		$	612,787			$	463,984			$	148,803
Organic effect		(40,381)		(6.6)	%	(29,959)		(6.5)	%	(10,422)		(7.0)	%
Three months ended March 31, 2019														Three months ended March 31, 2019		$	736,520			$	567,098			$	169,422

Growth from citizen engagement centers contracts														Growth from citizen engagement centers contracts		84,223		11.4	%	68,345		12.1	%	15,878		9.4	%
Organic (decline)/growth from other contracts														Organic (decline)/growth from other contracts		(3,978)		(0.5)	%	30,873		5.4	%	(34,851)		(20.6)	%
Acquired growth	Acquired growth	176,003		28.7	%	143,331		30.9	%	32,672		22.0	%	Acquired growth		3,402		0.5	%	3,030		0.5	%	372		0.2	%
Currency effect compared to the prior period	Currency effect compared to the prior period	(11,889)		(1.9)	%	(10,258)		(2.2)	%	(1,631)		(1.1)	%	Currency effect compared to the prior period		(2,032)		(0.3)	%	(4,309)		(0.8)	%	2,277		1.3	%
Balance for respective period in fiscal year 2019		$	736,520	20.2	%	$	567,098	22.2	%	$	169,422	13.9	%
Three months ended March 31, 2020														Three months ended March 31, 2020		$	818,135	11.1	%	$	665,037	17.3	%	$	153,098	(9.6)	%

Revenue and cost of revenue for the three months ended March 31, ~~2019,~~2020, increased compared to the same period in fiscal year ~~2018,~~2019, principally driven by the citizen engagement centers business ~~acquisition. This~~acquisition in the U.S. Federal Services Segment. Although this acquisition provided a full quarter of results in both periods, the Census

Questionnaire Assistance (CQA) contract is now approaching its peak level of operations whereas work was at an early stage in fiscal year 2019.

Our businesses within the United States experienced organic revenue growth, offset by ~~organic revenue~~ declines ~~in all three segments and the detrimental effects of currency in~~within our Outside the U.S. Segment. The factors driving ~~these~~ changes are ~~covered~~discussed in more detail below.

Our cost of revenue includes direct costs related to labor, subcontractor labor, outside vendors, rent and other direct costs.

Our acquired growth represents the citizen engagement centers business, which was acquired on November 16, 2018. The two largest contracts included in the transaction are both cost-plus type contracts. Cost-plus contracts typically have lower financial risk but typically earn margins in the mid-single digits.

We operate in a number of locations where the functional currency is not the U.S. Dollar. During the three months ended March 31, 2019, the value of all of these currencies was lower than in the comparative period in fiscal year 2018. This had a negative impact on revenue and costs.

Changes in revenue, cost of revenue and gross profit for the six months ended March 31, ~~2019~~2020, are summarized below.


		Revenue						Cost of Revenue							Gross Profit							Revenue						Cost of Revenue	Gross Profit
(dollars in thousands)	(dollars in thousands)	Dollars		Percentage change		Dollars		Percentage change		Dollars		Percentage change		(dollars in thousands)		Dollars		Percentage change		Dollars		Percentage change		Dollars		Percentage change
Balance for respective period in fiscal year 2018		$	1,235,935			$	935,172			$	300,763
Organic effect		(93,023)		(7.5)	%	(71,933)		(7.7)	%	(21,090)		(7.0)	%
Six months ended March 31, 2019														Six months ended March 31, 2019		$	1,401,139			$	1,072,452			$	328,687
Estimated pre-acquisition results from citizen engagement centers business														Estimated pre-acquisition results from citizen engagement centers business		98,429				85,341				13,088
Pro forma results for the six months ended March 31, 2019														Pro forma results for the six months ended March 31, 2019		1,499,568				1,157,793				341,775
Growth from citizen engagement centers contracts														Growth from citizen engagement centers contracts		122,328		8.2	%	96,936		8.4	%	25,392		7.4	%
Organic growth/(decline) from other contracts														Organic growth/(decline) from other contracts		11,889		0.8	%	53,426		4.6	%	(41,537)		(12.2)	%
Acquired growth	Acquired growth	277,266		22.4	%	225,646		24.1	%	51,620		17.2	%	Acquired growth		6,375		0.4	%	5,582		0.5	%	793		0.2	%
Currency effect compared to the prior period	Currency effect compared to the prior period	(19,039)		(1.5)	%	(16,433)		(1.8)	%	(2,606)		(0.9)	%	Currency effect compared to the prior period		(3,796)		(0.3)	%	(5,921)		(0.5)	%	2,125		0.6	%
Balance for respective period in fiscal year 2019		$	1,401,139	13.4	%	$	1,072,452	14.7	%	$	328,687	9.3	%
Six months ended March 31, 2020														Six months ended March 31, 2020		$	1,636,364	9.1	%	$	1,307,816	13.0	%	$	328,548	(3.9)	%

~~The factors impacting~~We estimate that revenue and cost of revenue for the ~~six months ended March 31, 2019 are similar~~period from October 1, 2018 to ~~those affecting~~November 16, 2018 (the acquisition date) would have increased our revenue and cost of revenue by $98.4 million and $85.3 million, respectively. We have utilized pro forma revenue, cost of revenue and gross profit in calculating the ~~three month period.~~changes shown above.

Selling, general and administrative expense (SG&A) consists of indirect costs related to general management, marketing and administration. It is primarily composed of labor costs. These costs may be incurred at a segment level, for dedicated resources that are not client-facing, or at a corporate level. Corporate costs are allocated to segments on a consistent and rational basis. Fluctuations in our SG&A are primarily driven by changes in our administrative cost base, which is not directly driven by changes in our revenue. As part of our work for the United States Federal Government and many states, we allocate these costs using a methodology driven by the Federal Cost Accounting Standards.

Our SG&A expense has increased year-over-year due primarily to:

•bad debt charges of $7.8 million from an increase in receivable reserves due to payment concerns related to COVID-19 and a billing dispute with a customer;

•increases in business development activity to both bolster our technical skills and plan for increased bidding activity;

•increases in our scope of operations, particularly related to the CQA contract in the U.S. Federal Services Segment and

•higher than usual specific acquisition costs and IT transformation initiatives, including migrating our existing data centers to the cloud.

Amortization of intangible assets received a full charge from our acquisition of the citizen engagement centers business ~~which has added an additional level of infrastructure as well as approximately~~ ~~$2.7 million~~ ~~of one-time expenses directly related to the transaction. In the first quarter of the current~~during fiscal year ~~we introduced an early~~

~~retirement program for employees that met certain criteria. As a result, severance payments in~~2020. Additional charges from the ~~six~~ ~~months ended~~ ~~March 31, 2019~~ ~~were unusually high~~acquisition of GT Hiring Solutions and ~~raised SG&A by approximately $4 million. This program should deliver~~InjuryNet also increased ~~efficiency in future periods.~~

~~Our results~~ ~~for the six months ended March 31, 2019~~ ~~include $10.1 million of~~our amortization ~~from assets acquired with the citizen engagement centers business.~~expense.

Our interest expense is primarily driven by borrowings from our credit facility. During ~~the three months ended December 31, 2017,~~fiscal year 2020, we ~~incurred expenses from short-term borrowings~~drew on our credit facility to cover our working capital ~~obligations, as well as the costs of maintaining the facility. No borrowings were incurred during~~requirements. In fiscal year 2019, ~~until November 16, 2018, when $150~~we borrowed $150.0 million ~~was drawn for~~to partially fund the acquisition of the citizen engagement centers ~~business.~~business; this borrowing was repaid in full before the end of fiscal year 2019.

Our effective tax rate for the ~~six~~three months ended March 31, ~~2019,~~2020, was ~~24.8%~~26.1%, compared to ~~24.5%~~23.4% in the same period in fiscal year ~~2018. Our results in fiscal year 2019 benefited from~~2019. We are closely monitoring the effects of changes in tax legislation, notably the ~~Tax Cuts~~United States CARES Act, which provides for some tax credits and ~~Jobs Act (the Act), which reduced the U.S. federal income tax rate to 21%. We recognized the effects~~delayed payment of ~~the Act during fiscal year 2018, specifically the re-measurement of~~some taxes. The effect on our deferred tax assets and liabilities as well as impact of the one-time "toll tax" on the undistributed, non-previously taxed foreign earnings of our subsidiaries, resulting in a net benefit of approximately $1.1 million. We have completed our analysis of these items and have not recorded any adjustments in this period.

~~Our effective income tax rate for fiscal year 2019 is projected to be~~results in the ~~range of 25% to 25.5~~%.

~~During our second~~three and fourth fiscal quarters, we receive the tax benefit from the vesting of restricted stock units (RSUs). The benefit is dependent upon the number of RSUs which vest as well as our share price on the vesting date. ~~During the three~~six months ended March 31, ~~2019 and 2018, we received tax benefits of $1.7 million from the issuance of restricted stock unit awards which had been previously deferred by members of our Board of Directors.~~

2020 was not material.

U.S. Health & Human Services Segment

Our U.S. Health and Human Services Segment provides a variety of business process services such as program administration, appeals and assessments ~~work~~services, and related consulting work for U.S. state and local government programs. These services support a variety of programs including the Affordable Care Act (ACA), Medicaid and the Children’s Health Insurance Program ~~the Affordable Care Act~~(CHIP). We also serve as administrators in state-based welfare-to-work and ~~Temporary Assistance for Needy Families.~~child support programs.


		Three Months Ended March 31,									Six Months Ended March 31,										Three Months Ended March 31,						Six Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2019			2018			2019			2018			(dollars in thousands)	2020			2019			2020			2019
Revenue	Revenue	$	290,737		$	306,249		$	584,950		$	610,490		Revenue	$	308,698		$	290,737		$	620,979		$	584,950
Cost of revenue	Cost of revenue	204,477			219,663			410,659			439,673			Cost of revenue	223,244			204,477			445,935			410,659
Gross profit	Gross profit	86,260			86,586			174,291			170,817			Gross profit	85,454			86,260			175,044			174,291
Operating income	Operating income	56,860			49,970			112,752			99,396			Operating income	46,215			56,860			104,407			112,752
Gross profit percentage	Gross profit percentage	29.7		%	28.3		%	29.8		%	28.0		%	Gross profit percentage	27.7		%	29.7		%	28.2		%	29.8		%
Operating margin percentage		19.6		%	16.3		%	19.3		%	16.3		%
Operating income percentage														Operating income percentage	15.0		%	19.6		%	16.8		%	19.3		%

Our revenue and cost of revenue for the three month period ended March 31, ~~2019 decreased 5.1%~~2020, increased 6.2% and ~~6.9%~~9.2%, respectively, compared to the same period in fiscal year ~~2018.~~ ~~Our revenue~~ ~~and cost of revenue~~ ~~for~~2019. For the six ~~month period~~months ended March 31, ~~2019, decreased~~2020, growth was 6.2% and 8.6%, respectively. All growth was organic.

Revenue growth was driven by ~~4.2%~~new contracts and ~~6.6%, respectively,~~ ~~compared~~the expansion of existing contracts. Our gross profit was negatively impacted by approximately $9 million by a single, large contract where we performed work prior to the ~~same period~~contract being executed. This contract amendment was signed in April 2020 and, accordingly, will benefit our third fiscal ~~year 2018. All movements~~quarter. Our operating profit was negatively impacted by the bad debt charges of $7.1 million.

This segment experienced disruption, resulting in declines in profit margins, from the impact of the COVID-19 pandemic in the last three weeks of March 2020. The disruption was not uniform as each U.S. state and locality imposed different requirements on our working practices and operations. Some locations were ~~organic.~~temporarily closed through local requirements driven by COVID-19.

~~During fiscal years 2019~~Many of the services we provide are considered essential and, ~~2018, we rebid or extended a number of large contracts with~~accordingly, our customers are working with us to ensure continuity of service. We have experienced and expect to continue to experience some disruption in the short term as we change our manner of operating, whether due to a need for additional space to allow for social distancing or through the costs of working from remote locations. This has resulted in some reduced revenue, as we are unable to operate at full efficiency. The effect on each contract varies based upon the requirements imposed by the client or the jurisdiction and the manner in which we are reimbursed for services. In some locations, we have taken on additional work associated with unemployment insurance, which will partially offset some of these losses. We anticipate our operating income margins will be between 17% and 18% for the full fiscal year.

Our customers in this segment are typically U.S. state governments, who have seen increases in the demand for the social services that we administer while also experiencing a significant reduction in their tax revenues. Although this may provide additional opportunities for us, we face the risk that many of our customers may face cash shortfalls from reduced income tax receipts, resulting in ~~reduced contract revenue and profit. It is not unusual that during~~ a ~~bid or sole-source extension of a contract, we negotiate a revenue reduction in order~~need to ~~retain the business. This may be short term in nature and, over the life of the contract, we can improve revenue and profit through scope increases and operating efficiencies.~~

delay payments.

2422

Our gross profit includes a benefit of $4.0 million from a single contract amendment signed in the second quarter of fiscal year 2019 but for which costs had been incurred in earlier periods. Our operating profit margins also received the benefit of the cost synergies from the acquisition of the citizen engagement centers business.

~~We anticipate operating margin~~ ~~for the segment will be between~~ 17% ~~and~~ ~~19%~~ ~~for~~ ~~fiscal year~~ ~~2019~~.

U.S. Federal Services Segment

Our U.S. Federal Services Segment provides business process solutions, including program administration, appeals and assessment services as well as system and software development and maintenance services for various U.S. federal civilian programs. This 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.


		Three Months Ended March 31,									Six Months Ended March 31,										Three Months Ended March 31,						Six Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2019			2018			2019			2018			(dollars in thousands)	2020			2019			2020			2019
Revenue	Revenue	$	289,736		$	116,327		$	506,723		$	249,310		Revenue	$	393,391		$	289,736		$	759,962		$	506,723
Cost of revenue	Cost of revenue	229,040			88,953			398,042			188,578			Cost of revenue	316,433			229,040			612,183			398,042
Gross profit	Gross profit	60,696			27,374			108,681			60,732			Gross profit	76,958			60,696			147,779			108,681
Operating income	Operating income	29,592			9,834			50,945			26,544			Operating income	30,232			29,592			61,814			50,945
Gross profit percentage	Gross profit percentage	20.9		%	23.5		%	21.4		%	24.4		%	Gross profit percentage	19.6		%	20.9		%	19.4		%	21.4		%
Operating margin percentage		10.2		%	8.5		%	10.1		%	10.6		%
Operating income percentage														Operating income percentage	7.7		%	10.2		%	8.1		%	10.1		%

Changes in revenue, cost of revenue and gross profit for the three months ended March 31, ~~2019,~~2020, are summarized below.

Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change
Balance for respective period in fiscal year 2018 $ 116,327 $ 88,953 $ 27,374
Organic effect (2,594) (2.2) % (3,244) (3.6) % 650 2.4 %
Acquired growth 176,003 151.3 % 143,331 161.1 % 32,672 119.4 %
Balance for respective period in fiscal year 2019 $ 289,736 149.1 % $ 229,040 157.5 % $ 60,696 121.7 %


	Revenue						Cost of Revenue						Gross Profit
(dollars in thousands)	Dollars		Percentage change		Dollars		Percentage change		Dollars		Percentage change
Three months ended March 31, 2019	$	289,736			$	229,040			$	60,696


Growth from citizen engagement centers contracts	84,223		29.1	%	68,345		29.8	%	15,878		26.2	%
Organic growth from other contracts	19,432		6.7	%	19,048		8.3	%	384		0.6	%

Three months ended March 31, 2020	$	393,391	35.8	%	$	316,433	38.2	%	$	76,958	26.8	%

Changes in revenue, cost of revenue and gross profit for the six months ended March 31, ~~2019~~2020, are summarized below.

Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change
Balance for respective period in fiscal year 2018 $ 249,310 $ 188,578 $ 60,732
Organic effect (19,853) (8.0) % (16,182) (8.6) % (3,671) (6.0) %
Acquired growth 277,266 111.2 % 225,646 119.7 % 51,620 85.0 %
Balance for respective period in fiscal year 2019 $ 506,723 103.3 % $ 398,042 111.1 % $ 108,681 79.0 %


	Revenue						Cost of Revenue						Gross Profit
(dollars in thousands)	Dollars		Percentage change		Dollars		Percentage change		Dollars		Percentage change
Six months ended March 31, 2019 (1)	$	506,723			$	398,042			$	108,681
Estimated pre-acquisition results from citizen engagement centers business (2)	98,429				85,341				13,088
Pro forma results for the six months ended March 31, 2019	605,152				483,383				121,769
Growth from citizen engagement centers contracts (3)	122,328		20.2	%	96,936		20.1	%	25,392		20.9	%
Organic growth from other contracts (4)	32,482		5.4	%	31,864		6.6	%	618		0.5	%

Three months ended March 31, 2020	$	759,962	25.6	%	$	612,183	26.6	%	$	147,779	21.4	%

~~Growth was driven by~~

To show the changes between the six months ended March 31, 2019 and 2020, we utilized the following information.

1.These balances represent our results for the six months ended March 31, 2019. These results include approximately six weeks of benefit from the citizen engagement centers business, which was acquired on November 16, ~~2018. The two largest~~2018 (the acquisition date).

2. ~~acquired~~ ~~contracts which are cost-plus arrangements~~ ~~and,~~ ~~accordingly~~,These balances represent an estimate of the ~~profit margin is lower than the existing business which includes fixed fee and transaction-based work. We anticipate that operating margin will be approximately 10%~~results for the ~~full fiscal year.~~ ~~For~~citizen engagement centers business for the ~~second quarter of 2019, operating margin was strong and~~

~~driven by favorable results on several performance based contracts and is higher compared~~pre-acquisition period – the period from October 1, 2018 through to the ~~same period in 2018 which was tempered by a non-recurring expense to renegotiate a subcontract~~acquisition date. This balance, combined with our prior year results, provides pro forma results – an estimate of the results of this segment if we had acquired the citizen engagement centers business on or before October 1, 2018.

3.These balances represent the growth, on a ~~large BPS contract where we increased our scope of work.~~

~~One~~pro forma basis, of the contracts ~~noted above covers~~acquired with the ~~operation~~citizen engagement centers business from the first two quarters of fiscal years 2019 to the ~~United States Decennial Census. We anticipate revenues from~~first two quarters of fiscal year 2020. The principal driver of this ~~contract~~growth was the Census Questionnaire Assistance (CQA) contract.

4.These balances represent the growth reported between the first two quarters of ~~approximately $200 million and $350 million for~~ fiscal years 2019 and 2020 ~~respectively. Although~~of existing contracts outside those acquired.

The majority of revenue in this segment is generated by cost-plus contracts, including almost all of the income acquired from the citizen engagement centers business. Accordingly, we are able to recover COVID-19-related costs incurred on these contracts. Our revenue has increased as a result of new and acquired contracts but margins tempered by additional costs on some performance-based arrangements and ongoing investments in business development.

The CQA contract ~~continues through June 2021, we do not anticipate a material amount~~had $185 million of revenue in fiscal year ~~2021. These estimates are based upon~~2019. The contract contributed approximately $210 million of revenue in the first half of fiscal year 2020 and is anticipated to provide approximately $430 - $450 million of revenue during the current fiscal year.

While we have experienced some disruption from the COVID-19 pandemic, we believe that the nature of our ~~expectations~~contracts and the desires of our customers will allow us to continue operating, albeit with some restrictions. We anticipate operating profit margins for the remainder of the ~~contract at this time which may change through contract performance or changes to the contract.~~

~~Our organic business has declined since last~~ ~~fiscal~~ ~~year.~~ ~~This was caused by:~~

•~~The~~ ~~anticipated ending of certain contracts;~~

•~~The rebid of~~ ~~contracts acquired in 2015 under the small business rules which we were not eligible to rebid for;~~year will be between 8% and

•~~The absence of some short-term disaster relief work which had improved our results in fiscal year 2018.~~

~~Our profit margins in fiscal year 2018 were tempered by a charge of $2.9 million related to costs incurred in renegotiating a subcontract.~~

T~~he U.S. Federal~~ G~~overnment shutdown~~ ~~in December 2018 and January 2019 did not have a significant effect on our business.~~ 9%.

Outside the United States Segment

Our Outside the U.S. Segment provides business process solutions for governments and commercial clients outside the ~~United States,~~U.S., including health and disability assessments, program administration and case management for ~~welfare-to-work~~employment services and other ~~related services.~~work-support programs. We ~~support programs and~~ deliver services in the United Kingdom, including the Health Assessment Advisory Service (HAAS), the Work & Health Programme and Fair Start; Australia, including jobactive and the Disability Employment Service; Canada, including Health Insurance British Columbia and the Employment Program of British Columbia; Italy, Saudi Arabia and Singapore.


	Three Months Ended March 31,									Six Months Ended March 31,
(dollars in thousands)	2020			2019			2020			2019
Revenue	$	116,046		$	156,047		$	255,423		$	309,466
Cost of revenue	125,360			133,581			249,698			263,751
Gross (loss)/profit	(9,314)			22,466			5,725			45,715
Operating (loss)/income	(26,718)			4,474			(27,732)			8,915
Gross profit percentage	(8.0)		%	14.4		%	2.2		%	14.8		%
Operating income percentage	(23.0)		%	2.9		%	(10.9)		%	2.9		%

Three Months Ended March 31, Six Months Ended March 31,
(dollars in thousands) 2019 2018 2019 2018
Revenue $ 156,047 $ 190,211 $ 309,466 $ 376,135
Cost of revenue 133,581 155,368 263,751 306,921
Gross profit 22,466 34,843 45,715 69,214
Operating income 4,474 16,440 8,915 32,705
Gross profit percentage 14.4 % 18.3 % 14.8 % 18.4 %
Operating margin percentage 2.9 % 8.6 % 2.9 % 8.7 %

Changes in revenue, cost of revenue and gross profit for the three months ended March 31, ~~2019,~~2020, are summarized below.

Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change
Balance for respective period in fiscal year 2018 $ 190,211 $ 155,368 $ 34,843
Organic effect (22,275) (11.7) % (11,529) (7.4) % (10,746) (30.8) %
Currency effect compared to the prior period (11,889) (6.3) % (10,258) (6.6) % (1,631) (4.7) %
Balance for respective period in fiscal year 2019 $ 156,047 (18.0) % 133,581 (14.0) % 22,466 (35.5) %


	Revenue						Cost of Revenue						Gross Profit
(dollars in thousands)	Dollars		Percentage change		Dollars		Percentage change		Dollars		Percentage change
Three months ended March 31, 2019	$	156,047			$	133,581			$	22,466
Organic decline	(41,371)		(26.5)	%	(6,942)		(5.2)	%	(34,429)		(153.2)	%
Acquired growth	3,402		2.2	%	3,030		2.3	%	372		1.7	%
Currency effect compared to the prior period	(2,032)		(1.3)	%	(4,309)		(3.2)	%	2,277		10.1	%
Three months ended March 31, 2020	$	116,046	(25.6)	%	$	125,360	(6.2)	%	$	(9,314)	(141.5)	%

Changes in revenue, cost of revenue and gross profit for the six months ended March 31, ~~2019,~~2020, are summarized below.

Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change
Balance for respective period in fiscal year 2018 $ 376,135 $ 306,921 $ 69,214
Organic effect (47,630) (12.7) % (26,737) (8.7) % (20,893) (30.2) %
Currency effect compared to the prior period (19,039) (5.1) % (16,433) (5.4) % (2,606) (3.8) %
Balance for respective period in fiscal year 2019 $ 309,466 (17.7) % $ 263,751 (14.1) % $ 45,715 (34.0) %


	Revenue						Cost of Revenue						Gross Profit
(dollars in thousands)	Dollars		Percentage change		Dollars		Percentage change		Dollars		Percentage change
Six months ended March 31, 2019	$	309,466			$	263,751			$	45,715
Organic decline	(56,622)		(18.3)	%	(13,714)		(5.2)	%	(42,908)		(93.9)	%
Acquired growth	6,375		2.1	%	5,582		2.1	%	793		1.7	%
Currency effect compared to the prior period	(3,796)		(1.2)	%	(5,921)		(2.2)	%	2,125		4.6	%
Six months ended March 31, 2020	$	255,423	(17.5)	%	249,698		(5.3)	%	5,725		(87.5)	%

The COVID-19 pandemic has had an immediate and significant negative effect on the results of our Outside the U.S. Segment. This business has several significant contracts that are compensated based upon performance-based outcomes, which have been significantly disrupted by the COVID-19 pandemic.

Our welfare-to-work contracts earn revenue based upon our ability to place individuals in long-term sustained employment. Revenue is recognized based on our estimate of the number of individuals who we anticipate reaching these milestones. As a result of the pandemic, we revised our estimates of those jobseekers who are likely to achieve employment outcomes. In March 2020, we have recorded a decline in our estimated outcomes of approximately $24 million. Although we are continuing to service participants in these programs where we can, the pool of available employment opportunities is significantly lower than before.

Our health assessment contracts, including HAAS, have experienced declines in volumes as our ability to provide face-to-face assessments and the demand for ~~the three month period ended March 31, 2019, decreased by 18% compared to the same period in fiscal year 2018. On~~occupational health services has diminished. As a ~~constant currency basis revenue decreased by 13%. Cost~~temporary measure, we have furloughed some employees and a number of ~~revenue decreased by 14% compared to the same period in fiscal year 2018.~~

~~In fiscal year 2019, the Work Programme and Work Choice Programme contracts~~medical professionals in the United Kingdom ~~are ending.~~ have volunteered to assist the National Health Service. In the latter case, payments made to our employees will be on a pass through basis and will not result in revenue or profit. Our revenues will be significantly reduced until the conditions caused by the pandemic have eased.

As a result ~~revenue from these contracts is expected~~of this disruption, we anticipate that we will continue to ~~be lower in~~experience operating losses for the remainder of this fiscal ~~year 2019 by approximately $35 million compared to fiscal year 2018. These contracts have been replaced by new programs that were devolved to~~year. Within the ~~local authorities. In fiscal year 2018,~~U.K., we began operations in Wales, East London and Scotland to provide health and employment services to vulnerable populations with disabilities and complex health conditions. As is often the case with new contracts, we have experienced challengesare in the ~~early months~~process of ~~this contract but have taken significant steps~~transitioning some of our contracts to ~~address these~~a cost-recovery model. In the longer-term, we anticipate an expanded need for our services across all geographies as we help our customers to expand and adapt their employment programs to cope with ~~additional resources~~widespread unemployment.

Our acquired growth is from the acquisition of GT Hiring Solutions in Canada in August 2019 and ~~investment to augment our efforts and we expect these contracts,~~InjuryNet in ~~aggregate to break even~~Australia in ~~the fourth quarter of fiscal year 2019.~~February 2020.

The ~~second quarter of fiscal year 2018 included a one-time profit pick-up related to the termination of major elements~~continued strength of the ~~Fit for Work contract. For fiscal year 2019,~~United States Dollar against the currencies in which we ~~anticipate operating margin~~ ~~for~~ do business outside the ~~segmentwill be between~~ 3% U.S. has resulted in year-over-year declines in our revenue and4%. costs.

~~Approximately half of our revenue within the~~The Outside the U.S. Segment ~~is generated through contracts within~~performs a significant part of its operations in the United ~~Kingdom, most of which are with government agencies.~~Kingdom. As such, we are closely monitoring developments asfollowing the departure of the United Kingdom ~~Government negotiates a withdrawal~~ from the European Union. We do not anticipate the withdrawal to have a material direct effect on our business in the United Kingdom ~~due to Brexit~~ due to the nature of our customer base and the absence of cross-border operations. However, ~~regardless of the nature and timing of the withdrawal,~~ the uncertainty over the process ~~and the eventual outcome is affecting~~has affected us indirectly. We anticipate we will continue to be subject to political risks, as legislative priorities may change ~~the~~and economic risks from the ~~pre- and~~ post-withdrawal ~~environment, and we may, along with other businesses, experience difficulty in recruiting and retaining employees.~~environment.

Liquidity and Capital Resources

~~Our principal source of liquidity remains~~The COVID-19 pandemic has negatively affected our cash flows ~~from operations. These~~in March 2020 as there are some contracts where we were unable to perform at full level of operations or where payments are outcome-based. At March 31, 2020, we had approximately $126 million in unrestricted cash ~~flows are used~~and $250 million of liquidity available on our credit facility. Our cash and cash equivalents balance included $36.5 million held in foreign locations in local currencies. While we expect a reduction to ~~fund our ongoing operations~~revenues due to the COVID-19 pandemic, we believe that we will have positive free cash flow for the second half of fiscal year 2020.

Governments worldwide have introduced a number of short-term policies to assist businesses with their liquidity. We anticipate utilizing payroll credits in the United States and the United Kingdom, as well as the deferral of certain tax obligations in the United States. We have also furloughed approximately 200 employees in the United Kingdom.

Our international locations have access to borrowing facilities which they may use to cover short-term working capital needs or small acquisitions, such as ~~well as investments in capital infrastructure~~our acquisitions of GT Hiring Solutions and purchases of our own common stock. 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 to outcome deliveries, which may not correspond with the costs incurred to achieve these outcomes and short-term delays where government budgets are constrained.InjuryNet.

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 November 2018, we utilized $150 million of borrowing to acquire the citizen engagement centers business, with the balance from existing cash balances. We continue to use our facility to manage our working capital requirements but believe that our cash flows from operations are typically sufficient to fund our operations. At ~~March 31, 2019, our borrowings under the facility were $75.0 million.~~ ~~During April 2019, we repaid these borrowings in full.~~

~~Our priorities for cash utilization are to actively pursue new growth opportunities, to maintain our quarterly dividend program and, where opportunities arise, to make purchases 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-efficient~~ ~~manner, we will do so.~~ With the passage of the Tax Cuts and Jobs Act in the United States, we are able to transfer a significant amount of funds from our foreign locations on a tax-free basis. We will continue to explore opportunities to ~~make~~bring back additional funds, ~~available for investment~~, taking into consideration the working capital requirements and relevant tax rules in each jurisdiction. ~~Where~~When 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. ~~At March 31, 2019, we held $43.4 million in~~ ~~cash or cash equivalents~~ ~~held in foreign locations in local currencies.~~

Cash Flows

The following table provides a summary of our cash flow information for the six months ended March 31, ~~2019~~2020 and ~~2018.~~2019.


		Six Months Ended March 31,							Six Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2019		2018		(dollars in thousands)	2020		2019
Net cash provided by/(used in):	Net cash provided by/(used in):					Net cash provided by/(used in):
Operations	Operations	$	127,211	$	116,760	Operations	$	109,272	$	127,211
Investing activities	Investing activities	(420,070)		(12,791)		Investing activities	(21,575)		(420,070)
Financing activities	Financing activities	(8,590)		(17,631)		Financing activities	(63,579)		(8,590)
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(632)		1,070		Effect of exchange rate changes on cash and cash equivalents	(1,868)		(632)
Net (decrease)/increase in cash, cash equivalents and restricted cash		$	(302,081)	$	87,408
Net increase/(decrease) in cash, cash equivalents and restricted cash						Net increase/(decrease) in cash, cash equivalents and restricted cash	$	22,250	$	(302,081)

~~The factors influencing~~Our cash flows from operations ~~are~~were reduced compared to fiscal year 2019 due to the ~~effect of the acquired business,~~declines in our ~~annual management bonus payments~~operating income and the timing of our ~~tax payments~~.

•~~The citizen engagement centers business has increased both~~cash payments. These were partially offset by improvements in our ~~revenues and costs, resulting in additional net~~ cash ~~inflows.~~

•~~We pay our annual management bonus during the first~~ ~~quarter of each~~ ~~fiscal~~ ~~year. The amount paid in fiscal year 2019 was lower than that paid in fiscal year 2018.~~collections.

•Our income tax payments infor the ~~current fiscal year~~six months ended March 31, 2020 were ~~$37.2~~$52.9 million, compared to ~~$28.5~~$37.2 million in fiscal year ~~2018.~~2019. We anticipate that our tax payments for the second half of the year will be lower than our provision for income taxes.

•Our Days Sales Outstanding (DSO) at March 31, ~~2019,~~2020 were 7772 days; the balance at September 30, ~~2018,~~2019, was 63also 72 days. ~~Our DSO calculation now includes unbilled balances~~ ~~due to~~ ~~the adoption of ASC 606~~.A~~bsent this effect, our DSO would have been 73 days.~~ Our receivable balances at March 31, 2019, include receivables from our Census contract, which is undergoing a quick ramp-up to prepare for activities, and, accordingly, will continue to experience growing receivable balances. ~~Going forward, we believe~~ ~~the~~ increase to DSO from the adoption of ASC 606 will be offset by more timely collections on the newly acquired U.S. Federal contracts. We use DSO to evaluate our performance in collecting our receivable balances, both billed and unbilled. We have a target range for DSO of 65 to 80 days and in recent years, we have typically maintained the lower end of this ~~range in recent years.~~range. We anticipate our DSO may grow during the remainder of the fiscal year as U.S. state governments may delay payments to assist their cash flows.

Cash used in investing activities for the six months ended March 31, ~~2019,~~2020, was ~~$420.1~~$21.6 million, ~~compared to $12.8 million in the same period last year. This includes our initial payment of $421.8 million~~principally for ~~the acquisition of the citizen engagement centers business; the purchase agreement is subject to a working capital true up. We anticipate an additional payment of approximately $8.8~~ ~~million in our~~ ~~third~~ ~~fiscal quarter. Our~~ capital expenditures ~~also included $4.5 million in one-time payments~~ to ~~cover software licenses required for employees joining us from the citizen engagement centers acquisition.~~support operations.

Cash used in financing activities in the six months ended March 31, ~~2019,~~2020, was ~~$8.6~~$63.6 million, compared to ~~$17.6~~$8.6 million of cash provided in the comparative period. ~~For the acquisition~~Fiscal year 2020 included $167.0 million of ~~the citizen engagement centers business, we utilized $150 million from our credit facility; we had repaid half~~purchases of ~~this balance by March 31, 2019. In fiscal year 2019, we used $46.1 million to purchase our~~ common stock, ~~compared with $1.0~~partially offset by $150.5 million of net borrowings. Credit facility borrowings and stock purchase transactions were less significant in fiscal year ~~2018, and a further $32.0 million to pay our quarterly dividend. Our dividend payment represents a payment of $0.25 per share~~ ~~per quarter, compared with $0.045 per share in~~ ~~the prior year~~.2019.

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.


		Six Months Ended March 31,							Six Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2019		2018		(dollars in thousands)	2020		2019
Cash flows from operations	Cash flows from operations	$	127,211	$	116,760	Cash flows from operations	$	109,272	$	127,211
Purchases of property and equipment and capitalized software costs	Purchases of property and equipment and capitalized software costs	(18,541)		(13,175)		Purchases of property and equipment and capitalized software costs	(19,122)		(18,541)
Capital expenditure as a result of acquisition (1)	Capital expenditure as a result of acquisition (1)	4,542		—		Capital expenditure as a result of acquisition (1)	—		4,542
Free cash flow		$	113,212	$	103,585
Free cash flow - non-gaap						Free cash flow - non-gaap	$	90,150	$	113,212

(1) Purchases of property and equipment and capitalized software costs included $4.5 million in one time payments to cover software licenses required for employees joining us through the citizen engagement centers ~~acquisition.~~acquisition in November 2018.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenue and expenses. On an ongoing basis we evaluate our estimates, including those related to revenue recognition and cost estimation on certain contracts, the realizability of goodwill and other long-lived assets, and amounts related to contingencies and income tax liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.

During the six months ended March 31, ~~2019,~~2020, we made changes to the manner in which we ~~recognize revenue. This has resulted in a need for additional estimates.~~record leases. For additional information, please see "Note 3. ~~Revenue recognition"~~Leases" in our "Notes to Unaudited Consolidated Financial Statements" in Item 1 of this Form 10-Q.

Non-GAAP Measures

We utilize ~~non~~-~~GAAP~~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 fiscal year ~~2018, 29%~~2019, 21% 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 fiscal year’s results for all foreign businesses using the exchange rates in the prior fiscal year. We refer to this adjusted revenue on a "constant currency basis."

In recent years, we have made a number of acquisitions. We believe users of our financial statements wish to evaluate the performance of our operations, excluding changes that have arisen due to businesses acquired. Where information is available, we will show pro forma revenue, cost of revenue and gross profit. Pro forma results represent an estimate of the results of the business as though we had owned the business for an entire comparative period, rather than just a portion of it. To provide pro forma financial information, we use the results of the acquired business as prepared by the former owners adjusted to reflect changes in accounting and eliminating transactions between ourselves and the company. Where this information has not been prepared, we will identify acquired revenue and cost of revenue by showing these results for periods for which no comparative results exist within our financial statements. We provide ~~organic~~pro forma comparative results and acquired revenue ~~growth~~ as a ~~useful basis for assessing this.~~way of allowing investors to see the growth in our business on a year-over-year basis. This information is supplemented by our calculations of organic revenue. To calculate organic revenue growth, we compare current fiscal year revenue excluding revenue from these acquisitions to our prior fiscal year revenue.

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 replacement capital expenditures and excludes the cash flow effects of acquisitions, purchases of our own common stock, 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.

As noted above, we have ~~access to~~ a $400 million 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. Our credit facility requires us to calculate Adjusted EBITDA on a pro forma basis as though we had owned any acquired business for a full twelve month period prior to the acquisition. We have provided a reconciliation from net income to Adjusted EBITA, Adjusted EBITDA and Pro Forma Adjusted EBITDA as follows:


		Six Months Ended March 31,						Trailing Twelve Months Ended March 31,							Six Months Ended March 31,				Trailing Twelve Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2019		2018		2019		2018		(dollars in thousands)	2020		2019		2020		2019
Net income attributable to MAXIMUS	Net income attributable to MAXIMUS	$	117,837	$	114,583	$	224,005	$	224,830	Net income attributable to MAXIMUS	$	86,384	$	117,837	$	209,371	$	224,005
Interest (income)/expense, net	Interest (income)/expense, net	79		(900)		(1,612)		(1,764)		Interest (income)/expense, net	(80)		79		(442)		(1,612)
Provision of income taxes	Provision of income taxes	38,746		37,300		79,839		85,581		Provision of income taxes	30,405		38,746		68,484		79,839
Amortization of intangible assets	Amortization of intangible assets	14,977		5,321		19,964		10,741		Amortization of intangible assets	18,022		14,977		36,099		19,964
Stock compensation expense	Stock compensation expense	9,904		11,324		18,818		22,455		Stock compensation expense	11,800		9,904		22,670		18,818
Acquisition-related expenses	Acquisition-related expenses	2,850		—		3,797		83		Acquisition-related expenses	3,377		2,850		4,400		3,797
Gain on sale of a business		—		—		—		(650)
Adjusted EBITA		$	184,393	$	167,628	$	344,811	$	341,276

Adjusted EBITA - non-gaap										Adjusted EBITA - non-gaap	$	149,908	$	184,393	$	340,582	$	344,811
Depreciation and amortization of property, plant, equipment and capitalized software	Depreciation and amortization of property, plant, equipment and capitalized software	22,407		27,074		47,217		52,876		Depreciation and amortization of property, plant, equipment and capitalized software	31,218		22,407		61,215		47,217
Adjusted EBITDA		$	206,800	$	194,702	$	392,028	$	394,152
Adjusted EBITDA - non-gaap										Adjusted EBITDA - non-gaap	$	181,126	$	206,800	$	401,797	$	392,028
Additional adjusted EBITDA related to citizen engagement centers acquisition	Additional adjusted EBITDA related to citizen engagement centers acquisition	6,695				16,158				Additional adjusted EBITDA related to citizen engagement centers acquisition			6,695				16,158
Pro Forma Adjusted EBITDA		$	213,495			$	408,186
Pro Forma Adjusted EBITDA - non-gaap										Pro Forma Adjusted EBITDA - non-gaap			$	213,495			$	408,186

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our exposure to market risks generally relates to changes in foreign currency exchange rates.

At March 31, ~~2019,~~2020, and September 30, ~~2018,~~2019, we held net assets denominated in currencies other than the U.S. Dollar of $~~117.3~~$161.1 million and ~~$100.3~~$176.3 million, respectively. Of these balances, cash and cash equivalents comprised ~~$43.4~~$36.5 million and ~~$46.4~~$18.9 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).


		March 31, 2019		September 30, 2018			March 31, 2020		September 30, 2019
Comprehensive income attributable to MAXIMUS	Comprehensive income attributable to MAXIMUS	$	(11,730)	$	(10,030)	Comprehensive income attributable to MAXIMUS	$	(16,114)	$	(17,630)
Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents	(4,336)		(4,640)		Net decrease in cash and cash equivalents	(3,649)		(1,890)

Included within our net assets held in international currency are assets which we consider to be monetary assets — those which hold a fair value close to their book value and which represent a recent cash outflow or which will become a cash inflow or outflow within a short period of time. These assets and liabilities are typically cash, billed, billable and unbilled accounts receivable, current prepaid expenses, accounts payable, accrued compensation, deferred revenue and debt. At March 31, ~~2019,~~2020, the net value of these assets and liabilities was $~~94.4~~ $55.4 million.

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 revolving credit facility and other short term borrowings. ~~At March 31, 2019, we had borrowings of $79.0 million.~~ Our interest rate for the revolving credit facility is based upon the one-month London Interbank Offering Rate (LIBOR) or equivalent plus a premium based upon our leverage; this premium is currently 1%. The one-month LIBOR at March 31, ~~2019,~~2020, was approximately ~~2.5~~%0.99%. ~~A hypothetical~~We had borrowings of $150.0 million under the facility at March 31, 2020. Accordingly, an increase of 1% in interest rates would result in an annualized additional expense of $1.5 million. The balance of our outstanding debt at March 31, 2020, was comprised of short-term borrowings in foreign locations to ~~3.5~~%cover short-term working capital needs. The terms and rates under which we borrow in these jurisdictions varies from location to location. As these borrowings are relatively small and for brief periods, we do not anticipate significant interest rate exposure. In the event that longer-term borrowings were required or if the costs of borrowing became expensive, we would ~~increase~~anticipate using our ~~annual interest expense and~~current cash ~~flows by approximately $0.8~~ ~~million.~~balance to cover these obligations.

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting

~~With the exception of the matters noted below, there~~There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

From October 2018, we have made changes to our accounting for revenue based upon changes in accounting principles. These changes have required updates and additions to our existing controls which have been implemented in the current fiscal year.

In November 2018, we acquired the citizen engagement centers business from General Dynamics Information Technology. We are in the process of integrating this business into our existing control environment.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are subject to audits, investigations and reviews relating to compliance with the laws and regulations that govern our role as a contractor to agencies and departments of the United States Federal Government, state, local and foreign governments, and otherwise in connection with performing services in countries outside of the U.S. Adverse findings could lead to criminal, civil or administrative proceedings, and we could be faced with penalties, fines, suspension or ~~disbarment.~~debarment. 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 existing matter would likely have a material adverse effect on our consolidated financial position, results of operations or cash flows.

~~Securities class action 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, ~~our~~ 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~~The Centers for Medicare and Medicaid Services (CMS) has asserted two disallowances against a state Medicaid agency 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 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 reserved our estimated fees earned from this engagement relating to the ~~disallowances~~.disallowances. We exited the federal healthcare-claiming business in 2009 and no longer provide the services at issue in this matter. The state contested the first disallowance of approximately $12 million in U.S. District Court. In February 2020, the District Court upheld that disallowance, and the state has appealed the case to the U.S. Circuit Court of Appeals. The second disallowance of approximately $19 million is still pending at the U.S. Health and Human Services Departmental Appeals Board. No legal action has been initiated against ~~us.~~us with respect to either disallowance.

Item 1A. Risk Factors.

In connection with information set forth in this Form 10-Q, the factors discussed below and under “Risk Factors” in our Form 10-K for fiscal year ended September 30, ~~2018,~~2019, should be considered. The risks included below and in the Form 10-K could materially and adversely affect our business, financial condition and results of operations. ~~There~~

Other than as set forth below, there have been no material changes to the factors discussed in our Annual Report on Form 10-K for the year ended September 30, ~~2018,~~2019, which was filed with the Securities and Exchange Commission on November ~~20, 2018.~~26, 2019.

Our business could be materially and adversely impacted by the recent coronavirus (“COVID-19”) outbreak or other similar outbreaks.

We face various risks related to health epidemics, pandemics and similar outbreaks, including the recent global outbreak of the novel coronavirus disease (“COVID-19”). COVID-19 is negatively impacting worldwide economic activity and has resulted in travel and work restrictions, commercial disruptions and has affected companies' operations around the world. We have been and continue to be affected by the COVID-19 pandemic, including through office closures and changes in working practices. If significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, facility closures or other restrictions in connection with the COVID-19 pandemic, our operations will likely be adversely impacted. If our operations are materially restricted, we may be unable to perform fully on our contracts and our costs may increase as a result of the COVID-19 outbreak. These cost increases may not be fully recoverable or adequately covered by insurance.

We have also experienced procurement delays, increased labor and technology costs and reductions in outcome-based contract revenue. If these conditions are more protracted or severe than anticipated, it could have a

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material effect on our business, cause delays or limit the ability of our customers to perform, including in making timely payments to us.

In recent months, the spread of COVID-19 has led to disruption and volatility in the global capital markets, which increases the cost of capital and could impede our ability to access capital, if we need to do so in the future.

We continue to work with our customers, employees and suppliers to address responsibly this global pandemic. We will continue to monitor the situation and assess further possible implications to our business and our stakeholders and will take appropriate actions in an effort to mitigate adverse consequences. We cannot assure you that we will be successful in any such mitigation efforts.

Our customers, and therefore our business and revenues, are sensitive to negative changes in general economic conditions. In particular, many governments will be anticipating reduced income from taxes as a result of the COVID-19 pandemic. Any continued or further decline in economic conditions, as a result of COVID-19 or otherwise, would negatively impact our business.

We cannot at this time predict the impact of the COVID-19 pandemic and any resulting economic impact, but it could have a material adverse effect on our business, financial position, results of operations and cash flows.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

(c) The following table sets forth the information required regarding purchases of common stock that we made during the three months ended March 31, ~~2019:~~2020.


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)
January 1, 2020 - January 31, 2020	20,000	$	72.48	20,000	$	142,696
February 1, 2020 - February 29, 2020	451,700	67.04		451,700	112,416
March 1, 2020 - March 31, 2020	2,269,246	58.72		2,269,246	150,026
Total	2,740,946			2,740,946

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)
Jan. 1, 2019 - Jan. 31, 2019 61,900 $ 66.04 61,900 $ 147,420
Feb. 1, 2019 - Feb. 28, 2019 — — — 147,420
Mar. 1, 2019 - Mar. 31, 2019 — — — 147,420
Total 61,900 $ 66.04 61,900

(1)

~~(1)~~ Under a ~~resolutions~~resolution adopted in ~~June 2018,~~March 2020, the Board of Directors authorized the ~~repurchase,~~purchase, at ~~management’s~~management's discretion, of up to an aggregate of $200 million of our common stock. ~~This~~The resolution also authorized the use of option exercise proceeds for the purchase of our common stock.

This replaced a similar resolution adopted in June 2018. On March 25, 2020, we announced that we have suspended share repurchases under this authorization. We will re-evaluate the share repurchase program once there is clarity around the impact of the COVID-19 pandemic on our business.

3331

Item 6. Exhibits.

Exhibit No.

Description

~~2.1~~ 3.1

~~Asset Purchase Agreement dated as~~Articles of ~~October 5, 2018, by~~Amendment of Amended and ~~among General Dynamics Information Technology, Inc., MAXIMUS Federal Services, Inc. and MAXIMUS, Inc. (incorporated by reference to Exhibit 2.1~~Restated Articles of ~~the Company's Current Report on Form 8-K dated October 9, 2018)~~Incorporation .

31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Section 906 Principal Executive Officer Certification.

32.2

Section 906 Principal Financial Officer Certification.

101

The following materials from the MAXIMUS, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2019~~2020 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Changes in Shareholders’ Equity and (vi) Notes to Consolidated Financial Statements. Filed electronically herewith.

104

Cover Page Interactive Data File (formatted as Inline XBRL tags and contained in Exhibit 101)

s Filed herewith.

v Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MAXIMUS, INC.

Date: May ~~9, 2019~~7, 2020	By:	/s/ Richard J. Nadeau
		Richard J. Nadeau
		Chief Financial Officer
		(On behalf of the registrant and as Principal Financial and Accounting Officer)

3533


(dollars in thousands)	Balance at March 31, 2019, under previous accounting guidance		Adjustments due to adoption of new standard		Balance at March 31, 2019, as reported
Assets
Accounts receivable - unbilled	$	95,796	$	35,454	$	131,250
Deferred income taxes	6,858		(6,649)		209
Liabilities and shareholders' equity
Deferred revenue - current	51,963		(12,748)		39,215
Deferred income taxes - long-term	43,957		7,103		51,060
Accumulated other comprehensive loss	(38,617)		(519)		(39,136)
Retained earnings	671,897		33,927		705,824
Noncontrolling interests	1,581		1,043		2,624


(dollars in thousands)	Estimated purchase price allocation at December 31, 2018		Adjustments		Estimated purchase price allocation at March 31, 2019
Estimated cash consideration	$	429,335	$	1,238	$	430,573

Billed and unbilled receivables	$	145,319	$	(3,450)	$	141,869
Property and equipment	6,454		—		6,454
Other assets	681		3,412		4,093
Intangible assets	122,300		—		122,300
Total identifiable assets acquired	274,754		(38)		274,716
Accounts payable and other liabilities	33,296		(1,091)		32,205
Net identifiable assets acquired	241,458		1,053		242,511
Goodwill	187,877		185		188,062
Net assets acquired	$	429,335	$	1,238	$	430,573


	Acquisition Contribution for
(dollars in thousands)	Three Months Ended March 31, 2019		Six Months Ended March 31, 2019
Revenue	$	176,003	$	277,266
Gross profit	32,672		51,620


	As of March 31, 2019										As of September 30, 2018
(dollars in thousands)	Cost		Accumulated Amortization		Intangible Assets, net		Cost		Accumulated Amortization		Intangible Assets, net
Customer contracts and relationships	$	248,770	$	54,838	$	193,932	$	129,113	$	42,683	$	86,430
Technology based intangible assets	5,648		4,267		1,381		5,750		4,212		1,538
Trademarks and trade names	4,480		4,439		41		4,496		4,429		67
Total	$	258,898	$	63,544	$	195,354	$	139,359	$	51,324	$	88,035


Six months ended September 30, 2019	$	18,044
2020	35,307
2021	18,258
2022	15,884
2023	15,785
2024	15,662


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)
Jan. 1, 2019 - Jan. 31, 2019	61,900	$	66.04	61,900	$	147,420

Feb. 1, 2019 - Feb. 28, 2019	—	—		—	147,420

Mar. 1, 2019 - Mar. 31, 2019	—	—		—	147,420

Total	61,900	$	66.04	61,900