MAXIMUS, Inc. Fiscal 2019 Form 10-K Summary
Business context and reporting period
MAXIMUS provides business process services for government health and human services programs in the United States, United Kingdom, Australia, Canada, Saudi Arabia and Singapore. The filing covers the fiscal year ended September 30, 2019; the requested fourth quarter ended September 30, 2019 is also presented in the filing. Since October 1, 2018, operations have been reported through U.S. Health and Human Services, U.S. Federal Services and Outside the U.S. segments.
Fiscal 2019 included the November 2018 acquisition of General Dynamics Information Technology’s citizen engagement centers business, which materially expanded U.S. Federal Services and included the 2020 Census Questionnaire Assistance contract.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $2.887 billion | $2.392 billion | 20.7% increase |
| Gross profit | $671.2 million | $594.4 million | 12.9% increase |
| Gross margin | 23.2% | 24.8% | Down 160 bps |
| Operating income | $317.1 million | $295.5 million | 7.3% increase |
| Operating margin | 11.0% | 12.4% | Down 140 bps |
| Net income attributable to MAXIMUS | $240.8 million | $220.8 million | 9.1% increase |
| Diluted EPS | $3.72 | $3.35 | 11.0% increase |
| Cash flow from operations | $356.7 million | $316.8 million | 12.6% increase |
| Free cash flow | $294.4 million | $290.3 million | 1.4% increase |
Fourth-quarter revenue was $755.0 million, up 35.2% from $558.4 million in the prior-year quarter. Fourth-quarter gross profit was $168.3 million, up 21.1%, and operating income was $77.6 million, compared with $61.9 million in the prior-year quarter.
At September 30, 2019, cash and cash equivalents were $105.6 million, compared with $349.2 million a year earlier. Total debt was $9.7 million on the balance sheet, and the company had no borrowings under its $400 million revolving credit facility. The facility matures in September 2022, and the company was in compliance with its covenants; total leverage was below 1.0:1.0.
Fiscal 2019 investing cash outflow was $483.9 million, primarily reflecting the $430.7 million citizen engagement centers acquisition. Financing cash outflow was $110.9 million, including $63.9 million of dividends and $47.4 million of share repurchases. The company had $146.0 million remaining under its share repurchase authorization at year-end. Days sales outstanding increased to 72 days from 63 days, partly due to ASC Topic 606 and the Census contract ramp-up.
Material changes versus the prior comparable period
- U.S. Federal Services revenue increased to $1.111 billion from $478.9 million, primarily due to the acquired citizen engagement centers business. Segment operating margin declined to 10.4% from 12.0% because acquired contracts are largely cost-plus and lower margin.
- U.S. Health and Human Services revenue declined 3.1% to $1.176 billion, while operating income increased to $220.8 million from $218.6 million. Operating margin improved to 18.8% from 18.0% due partly to better absorption of indirect costs.
- Outside the U.S. revenue declined 14.3% to $599.1 million, and operating income fell to $16.1 million from $36.0 million. Factors included low unemployment, contract turnover, lower Australian pass-through activity, unfavorable foreign exchange and the discontinuation of accretive Canadian work.
- Amortization expense increased to $33.1 million from $10.3 million due to acquired intangible assets. Acquisition-related expense was $2.7 million.
- Adoption of ASC Topic 606 increased opening retained earnings by $32.9 million and increased reported fiscal 2019 revenue by $3.1 million and net income attributable to MAXIMUS by $1.2 million versus the prior accounting guidance.
- The quarterly dividend increased from $0.045 per share in fiscal 2018 to $0.25 in fiscal 2019. The company subsequently declared a $0.28 quarterly dividend beginning in fiscal 2020.
Guidance, outlook, risks and unusual items
- Management expected approximately $360 million of Census revenue in fiscal 2020, concentrated in the second and third fiscal quarters, with less than $50 million expected in fiscal 2021. Fiscal 2019 Census revenue was $185 million.
- Management expected a fiscal 2020 effective tax rate of 24.5% to 25.5%.
- Backlog was approximately $9.0 billion, including $2.7 billion of unexercised options, with more than 95% of estimated fiscal 2020 revenue covered by backlog. Approximately one-third of backlog was expected to convert to fiscal 2020 revenue.
- Fiscal 2019 included a $3.7 million long-lived asset impairment and write-off related to an underperforming U.S. Health and Human Services contract.
- A new lease accounting standard adopted October 1, 2019 is expected to materially increase reported assets and liabilities but not significantly affect earnings, cash flow or debt covenant compliance.
- Key risks include government budget and legislative changes, contract termination or non-renewal, rebid and pricing pressure, performance penalties, government audits and disallowances, cybersecurity and data protection, acquisition integration, foreign currency movements, labor availability and litigation.
- A state Medicaid agency received proposed CMS disallowances totaling approximately $31.0 million. MAXIMUS has reserved its estimated fees and believes the school districts involved should bear the principal repayment obligation, although the company acknowledges that a court could determine it responsible for the full amount.
- Government contracts may generally be terminated for convenience with limited notice or compensation. The company also remains exposed to U.S. government shutdowns, although many federally funded health and human services programs are considered essential.
Facts investors should verify
- Whether the Census contract achieves the expected $360 million of fiscal 2020 revenue and how its ramp-up affects margins, receivables and cash conversion.
- Whether organic growth improves after two years of company-wide organic revenue declines and whether the acquired federal portfolio offsets contract attrition.
- The sustainability of U.S. Federal Services margins given the acquired business’s cost-plus contract mix and higher amortization expense.
- Recovery or further deterioration in the Outside the U.S. segment, particularly U.K. and Australian employment programs.
- Collection of the elevated unbilled receivable balance and reversal of the approximately $25 million to $30 million year-end increase in accounts payable caused by the new payable system.
- Resolution and ultimate exposure related to the approximately $31.0 million Medicaid disallowance proposals.
- Judgment-sensitive revenue estimates: approximately $235 million of fiscal 2019 revenue involved variable consideration estimates, including $47.0 million of estimated outcome fees in unbilled receivables.
- Future capital allocation among acquisitions, dividends and share repurchases while maintaining liquidity and covenant headroom.