MAXIMUS, Inc. 2016 Q3 Form 10-Q Summary
Business Context and Reporting Period
MAXIMUS provides business process services to government health, human services, and U.S. federal agencies in the United States, United Kingdom, Australia, Canada, and Saudi Arabia. The filing covers the three and nine months ended June 30, 2016, within the fiscal year ending September 30, 2016. The financial statements are unaudited.
Financial Performance and Position
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Nine months ended June 30, 2016 | Nine months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $617.1 million | $572.3 million | $1,780.3 million | $1,521.1 million |
| Gross profit | $151.4 million | $143.8 million | $409.3 million | $387.4 million |
| Gross margin | 24.5% | 25.1% | 23.0% | 25.5% |
| Operating income | $84.6 million | $71.1 million | $205.3 million | $198.3 million |
| Operating margin | 13.7% | 12.4% | 11.5% | 13.0% |
| Net income attributable to MAXIMUS | $52.2 million | $41.7 million | $127.6 million | $122.3 million |
| Diluted EPS | $0.79 | $0.62 | $1.93 | $1.83 |
- Third-quarter revenue increased 7.8%; nine-month revenue increased 17.0%. Organic growth contributed 7.9% and 9.6%, respectively, with acquisitions contributing 1.6% and 9.8%.
- Third-quarter operating income increased 19.1%, helped by a $6.5 million gain on the sale of the K-12 Education business. Nine-month operating income increased 3.5% despite higher amortization, acquisition-related costs, and legal expenses.
- SG&A was $69.7 million in the quarter and $199.9 million year to date. SG&A as a percentage of revenue improved to 11.3% from 11.7% in the quarter and remained 11.2% versus 11.7% year to date.
- The effective tax rate was 36.9% in the quarter and 37.2% year to date, compared with 40.0% and 37.8% in the comparable periods.
- Health Services revenue increased 11.8% in the quarter and 17.6% year to date; nine-month operating margin declined to 14.0% from 15.2%.
- U.S. Federal Services revenue increased 6.1% in the quarter and 27.8% year to date, primarily reflecting the Acentia acquisition and contract expansion.
- Human Services revenue increased 0.8% in the quarter and 5.3% year to date, while nine-month operating income declined to $33.2 million from $46.9 million. Lower profitability reflected the less-profitable Australian jobactive program, lower U.K. Work Programme volumes, and foreign exchange effects.
Cash Flow, Debt, and Liquidity
- Cash provided by operating activities was $108.1 million for the nine months, down from $181.0 million in the prior-year period. Management attributed the decline primarily to payment timing, lower upfront customer receipts, project start-up costs, and tax payments.
- Free cash flow was $74.0 million, compared with $107.8 million in the prior-year period.
- Investing cash outflow was $74.9 million, including acquisitions of Ascend and Assessments Australia, partially offset by proceeds from the K-12 sale. Capital expenditures and capitalized software costs were $34.1 million, down from $73.2 million.
- Cash and cash equivalents were $50.6 million at June 30, 2016, compared with $74.7 million at September 30, 2015. Approximately $46.9 million was held in foreign jurisdictions, with no current intent to remit it to the United States.
- Debt totaled approximately $210.0 million under the credit facility, plus $0.8 million under a Canadian loan. The revolving facility provides capacity of up to $400 million and matures in March 2020. The Company was in compliance with its covenants, and its total leverage ratio was below 1.0:1.0 versus a 2.5:1.0 threshold for additional security requirements.
- The Company repurchased $33.3 million of stock during the first nine months and had $137.5 million remaining under its repurchase authorization at June 30, 2016. Dividends paid were $8.8 million.
Material Changes, Outlook, and Unusual Items
- MAXIMUS acquired Ascend for approximately $44.0 million in February 2016. The acquisition added approximately $18.5 million of goodwill and $22.3 million of intangible assets; purchase accounting remained subject to final evaluation.
- The Company sold its K-12 Education business on May 9, 2016, recognizing a gain of approximately $6.5 million. The transaction remained subject to a working capital adjustment.
- The strong U.S. dollar reduced reported revenue, profit, cash, and goodwill. Management expected the weaker British pound to continue adversely affecting fourth-quarter revenue and profit.
- Management expected full-year operating cash flow of approximately $200 million, while cautioning that payment delays from a small number of large customers could cause the target to be missed. Days sales outstanding was 67 days, within the stated 65-to-80-day target range.
- Management expected the full-year effective tax rate to be between 37% and 39%, biased toward the lower end.
- Management expected Health Services fourth-quarter results to be consistent with the June quarter, subject to foreign exchange pressure. The U.K. Fit for Work contract continued to incur significant costs without expected volumes; management was evaluating right-sizing or possible termination.
- U.S. Federal Services included approximately $3.5 million of benefits from various contracts that management did not expect to repeat.
- The filing identified $2.1 million of third-quarter and $2.8 million of year-to-date legal costs related to a matter originating in fiscal 2014.
- Foreign currency translation reduced comprehensive income by $12.0 million year to date. The Company estimated that a 10% movement in relevant foreign currencies would produce an approximately $19.5 million gain or loss in comprehensive income.
- The Board declared a quarterly dividend of $0.045 per share on July 8, 2016, payable August 31, 2016.
Key Risks and Investor Verification Items
- Verify the sustainability of revenue growth and margins after excluding acquisitions, the K-12 gain, nonrecurring federal contract benefits, and favorable or unfavorable currency effects.
- Assess the impact of lower operating cash flow, customer payment timing, contract start-up costs, and the gap between foreign cash balances and U.S. liquidity needs.
- Monitor leverage, interest-rate exposure, credit-facility covenants, and the approximately $69 million of debt covered by interest-rate swaps.
- Review performance and potential losses or termination of the U.K. Fit for Work contract and the lower-margin Australian jobactive program.
- Evaluate integration and final purchase-accounting adjustments for Ascend and Assessments Australia, including goodwill and intangible-asset valuation.
- Consider exposure to government budget changes, contract termination, audits, bid protests, performance requirements, liquidated damages, compliance penalties, litigation, and data-security failures.
- Confirm the final working capital adjustment for the K-12 sale and the effect of the transaction on continuing revenue and profitability.
- Review the company’s stated guidance for approximately $200 million of full-year operating cash flow and a 37% to 39% full-year tax rate against subsequent results.