MAXIMUS, Inc. Fiscal Q1 2017 10-Q Summary
Business Context and Reporting Period
MAXIMUS provides business-process, technology, health, and human-services solutions to government agencies worldwide. The filing covers the three months ended December 31, 2016, compared with the three months ended December 31, 2015. The financial statements are unaudited. Approximately 28% of fiscal 2016 revenue was generated outside the United States.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $607.6 million | $556.7 million | +9.1% |
| Gross profit | $144.8 million | $110.2 million | +31.4% |
| Gross margin | 23.8% | 19.8% | +4.0 percentage points |
| Operating income | $73.8 million | $42.8 million | +72.4% |
| Operating margin | 12.1% | 7.7% | +4.4 percentage points |
| Net income attributable to MAXIMUS | $46.7 million | $26.6 million | +75.4% |
| Diluted EPS | $0.71 | $0.40 | +$0.31 |
| Cash flow from operations | $71.1 million | $1.4 million | +$69.8 million |
| Free cash flow | $63.4 million | $(9.3) million | Improved |
- Segment revenue was $340.7 million in Health Services, $141.3 million in U.S. Federal Services, and $125.5 million in Human Services.
- Segment operating margins were 14.7% for Health Services, 12.7% for U.S. Federal Services, and 9.4% for Human Services.
- Cash and cash equivalents were $69.8 million at December 31, 2016, including approximately $66.6 million held by foreign subsidiaries.
- Total debt was approximately $150.5 million, consisting primarily of $149.7 million drawn under a $400 million revolving credit facility and a $0.7 million Canadian loan.
- The Company was in compliance with its debt covenants; total leverage was below 1.0:1.0. The credit facility matures in March 2020.
- Days sales outstanding was 70 days, compared with 75 days at December 31, 2015.
Material Changes Versus the Prior Comparable Period
- Health Services revenue increased 16.7%, with growth from expanded contracts, including New York State, the HAAS contract, and the February 2016 Ascend acquisition. Its operating margin increased to 14.7% from 9.2%.
- U.S. Federal Services revenue declined 2.7%, but operating income increased 66.9% as cost reductions, technology adoption, lower subcontractor usage, and temporary transaction-volume increases lifted the operating margin to 12.7% from 7.4%.
- Human Services revenue increased 5.0%, primarily from the fully ramped Australian jobactive contract. Gross margin declined to 23.1% from 25.1% because of the winding down of the U.K. Work Programme and foreign-exchange effects.
- Results benefited from recognition of approximately $8.6 million of Health Services revenue that had been performed at risk but was deferred in the prior-year quarter pending execution of a contract change order. Management stated that the prior-year revenue and profit margins would have been higher if the amendment had been executed before December 31, 2015.
- Revenue growth included 10.8% organic growth, 1.1% acquired growth, and a 2.8% negative currency effect. The British Pound decline reduced revenue and profit in the Health and Human Services segments.
- Cash flow from operations improved substantially because of higher profitability, resolution of prior-year customer payment delays, lower income-tax payments, and improved receivables collection.
Guidance, Outlook, Risks, and Unusual Items
- Management expects the full-year fiscal 2017 effective tax rate to be between 36% and 37%, with a bias toward the lower end.
- The U.S. Federal Services subcontract supporting the Veterans Administration is expected to end in spring 2017 because of insufficient volumes. Management anticipates an organic full-year segment revenue decline unless new work backfills the lost revenue.
- The Company recorded $2.2 million of restructuring costs for its U.K. Human Services operations, including $2.0 million of severance and $0.2 million of lease termination costs. Additional smaller charges are expected, while future cost savings are anticipated.
- Foreign-currency translation reduced comprehensive income by $9.7 million in the quarter. A 10% change in the value of foreign currencies would affect comprehensive income by approximately $20.5 million based on the Company’s disclosed foreign net assets.
- MAXIMUS repurchased 559,523 shares for $28.8 million at an average price of $51.68. Approximately $109.0 million remained available under the $200 million authorization.
- The Company declared a quarterly dividend of $0.045 per share payable February 28, 2017.
- Key risks include government budget and legislative changes, contract termination or failure to meet performance requirements, inaccurate contract pricing, audits and investigations, litigation, data-security and technology failures, foreign-exchange volatility, integration of acquisitions, and difficulty managing expenditures before receiving customer payments.
- Management stated that there were no material changes to the risk factors disclosed in the fiscal 2016 Form 10-K and that existing legal matters were not expected to have a material adverse effect, although no assurance was provided.
Important Facts for Investors to Verify
- Determine how much of the margin and earnings improvement reflects the nonrecurring prior-year $8.6 million change-order timing benefit versus sustainable operating efficiencies.
- Monitor the anticipated spring 2017 Veterans Administration contract expiration and the pace of new U.S. Federal Services bookings.
- Assess the durability of Health Services growth, including contributions from Ascend and expanded government contracts.
- Track U.K. restructuring progress, Work Programme runoff, and the effect of further British Pound or Australian Dollar movements.
- Confirm the conversion of strong operating cash flow into debt reduction, share repurchases, and dividends while maintaining adequate liquidity.
- Review covenant compliance, interest-rate exposure, foreign cash restrictions, and the potential U.S. tax consequences of repatriating foreign subsidiary earnings.