MAXIMUS, Inc. 10-Q Summary
Business context and reporting period
MAXIMUS provides business process services to government health and human services agencies in the United States, Australia, Canada, the United Kingdom and Saudi Arabia. This unaudited Form 10-Q covers the three and six months ended March 31, 2015, with comparisons to the prior-year periods. Fiscal year-end is September 30.
Financial performance and position
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Six months ended March 31, 2015 | Six months ended March 31, 2014 |
|---|---|---|---|---|
| Revenue | $481.8 million | $439.0 million | $948.8 million | $845.6 million |
| Gross profit | $124.3 million | $120.7 million | $243.6 million | $226.6 million |
| Gross margin | 25.8% | 27.5% | 25.7% | 26.8% |
| Operating income | $62.0 million | $65.0 million | $127.2 million | $118.3 million |
| Operating margin | 12.9% | 14.8% | 13.4% | 14.0% |
| Net income attributable to MAXIMUS | $38.8 million | $41.2 million | $80.7 million | $75.1 million |
| Diluted EPS | $0.58 | $0.59 | $1.20 | $1.08 |
- Six-month operating cash flow was $62.1 million, versus $76.5 million in the prior-year period.
- Six-month free cash flow was $14.6 million, versus $59.6 million, reflecting substantially higher capital expenditures and software investment.
- Cash and cash equivalents were $114.5 million at March 31, 2015, down from $158.1 million at September 30, 2014. Approximately $37 million was held by foreign subsidiaries.
- Accounts receivable increased to $368.4 million, including billed, billable and unbilled receivables, from $289.6 million at September 30, 2014. Management attributed the increase largely to growth and start-up billings in the United Kingdom.
- MAXIMUS had no borrowings under its credit agreement at March 31, 2015. The amended revolving facility provides capacity of up to $400 million and had $4.7 million of outstanding letters of credit. The company was in compliance with its covenants.
- Share repurchases totaled $30.6 million during the six months, and dividends paid totaled $5.9 million. The remaining repurchase authorization was $104.6 million.
Material changes versus the prior comparable period
- Revenue increased 9.7% in the quarter and 12.2% year to date, driven by organic growth, principally in Health Services.
- Health Services revenue increased 14% in the quarter and 16% year to date. Its operating margin declined to 13.8% from 15.4% in the quarter and to 14.2% from 14.8% year to date.
- Human Services revenue declined in the quarter but increased for the six-month period. Its quarterly operating margin fell to 12.5% from 15.0%; foreign currency movements reduced reported revenue by approximately $8.2 million in the quarter and $13.1 million year to date compared with prior-year exchange rates.
- Consolidated gross and operating margins declined primarily because of lower volumes in the federal Medicare appeals business and start-up costs for new contracts.
- Quarterly net income attributable to MAXIMUS and diluted EPS declined despite revenue growth. Year-to-date net income and diluted EPS increased, partly reflecting higher revenue and the absence of the prior-year $0.6 million legal and settlement expense.
- Foreign currency translation reduced comprehensive income by $21.0 million year to date and reduced cash by $5.9 million, principally due to the Australian dollar and British pound.
Guidance, outlook, risks and unusual items
- On April 1, 2015, after the reporting period, MAXIMUS acquired Acentia for estimated cash consideration of $294 million. It borrowed $225 million under the revolving facility to fund the acquisition. Acentia is expected to add $140 million to $160 million of fiscal 2015 revenue and $0.07 to $0.09 of diluted EPS; no Acentia results are included in the reported periods.
- On April 7, 2015, the company acquired 70% of Remploy for approximately $3.0 million. Management expects Remploy to add approximately $30 million to $35 million of second-half revenue; its results are not included in the reported periods.
- Management expects the two acquisitions to increase fiscal 2015 revenue by $140 million to $160 million and diluted EPS by $0.07 to $0.09. The filing states that the tax rate is expected to increase in the second half because Acentia operates in the United States.
- The expansion of an Australian welfare-to-work contract beginning in July 2015 is expected to reduce fourth-quarter earnings by approximately $6 million to $9 million because of expansion costs and reimbursement timing.
- Acentia added approximately $214.7 million of preliminary goodwill and $69.9 million of customer-relationship intangible assets. Additional amortization from the acquisitions is anticipated to be approximately $6 million annually.
- Management identified risks involving government budgets and legislation, contract termination, performance requirements, audits, pricing and bidding, dependence on government customers, acquisition integration, litigation, cybersecurity and protection of confidential information, and working-capital needs.
- Management stated that there were no material changes to previously disclosed risk factors or critical accounting policies. Disclosure controls were effective; controls for Acentia and Remploy were to be integrated after acquisition.
Important facts for investors to verify
- Verify the final purchase-price accounting, working-capital adjustments and financing terms for Acentia, including the impact of the $225 million borrowing on leverage and interest expense.
- Assess whether the projected $140 million to $160 million of acquisition-related fiscal 2015 revenue and $0.07 to $0.09 of EPS accretion are achieved.
- Monitor Medicare appeals volume, Health Services start-up contracts and the associated margin recovery.
- Evaluate the $6 million to $9 million expected Australian contract expansion charge and the subsequent profitability of the contract.
- Track accounts receivable, DSO, operating cash flow and free cash flow, which weakened materially year to date despite higher revenue and earnings.
- Monitor foreign exchange exposure, particularly to the Australian dollar and British pound, and the tax implications of foreign cash and undistributed earnings.