MAXIMUS, Inc. Form 10-Q Summary
Business Context and Reporting Period
MAXIMUS provides business-process, technology, health, federal, and human-services programs to government agencies worldwide. This unaudited Form 10-Q covers the three and nine months ended June 30, 2017, within fiscal 2017, compared with the corresponding 2016 periods.
Key Financial Metrics
| Metric | Three Months 2017 | Three Months 2016 | Nine Months 2017 | Nine Months 2016 |
|---|---|---|---|---|
| Revenue | $600.4 million | $617.1 million | $1,830.1 million | $1,780.3 million |
| Gross profit | $152.2 million | $151.4 million | $449.3 million | $409.3 million |
| Gross margin | 25.3% | 24.5% | 24.6% | 23.0% |
| Operating income | $81.8 million | $84.6 million | $235.9 million | $205.3 million |
| Operating margin | 13.6% | 13.7% | 12.9% | 11.5% |
| Net income attributable to MAXIMUS | $56.9 million | $52.2 million | $156.1 million | $127.6 million |
| Diluted EPS | $0.86 | $0.79 | $2.36 | $1.93 |
- Cash flow from operations was $252.1 million for the nine months, versus $108.1 million in the prior-year period. Free cash flow was $233.0 million versus $74.0 million.
- Cash and cash equivalents were $104.4 million at June 30, 2017, including $101.1 million held by foreign subsidiaries.
- Total debt was approximately $15.7 million, consisting primarily of $15.0 million drawn under the credit facility. The company subsequently repaid the remaining credit-facility balance in July 2017. The facility provides capacity of up to $400 million and expires in March 2020.
- The company was in compliance with debt covenants; its total leverage ratio was below 1.0-to-1.0 at June 30, 2017.
- Accounts receivable, billed and unbilled, totaled $420.7 million. Days sales outstanding improved to 64 days from 70 days at the beginning of fiscal 2017.
- The company repurchased approximately 0.6 million shares for $28.9 million during the nine months. Remaining authorization was $109.3 million at June 30, 2017. Dividends paid were $8.8 million.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased 2.8%, despite a $37.6 million adverse currency effect. Third-quarter revenue declined 2.7%, primarily because of the U.S. Federal Services subcontract wind-down and foreign-exchange effects.
- Health Services revenue increased 7.2% for the nine months, including 9.6% organic growth. Operating margin improved to 15.4% from 14.0%, supported by contract expansion, improved performance on the U.K. HAAS contract, and lower penalties.
- U.S. Federal Services revenue decreased 6.0% for the nine months and 12% in the quarter as a large U.S. Veterans Administration subcontract ended in April 2017. Margin improved year over year for the nine-month period because of automation and lower-cost execution.
- Human Services revenue increased 2.1% for the nine months, but gross margin declined to 24.2% from 25.6%, principally because the U.K. Work Programme was winding down. Operating margin nevertheless improved to 9.8% from 8.7%.
- Gross margin expanded materially for the nine-month period, while third-quarter operating margin was broadly stable. Nine-month results included $2.2 million of U.K. restructuring costs, primarily severance.
- The prior-year period included a $6.5 million gain on the sale of the K-12 Education business and $2.8 million of legal costs. The current period included an additional $0.7 million gain related to release of a sale contingency.
- The effective tax rate was 33.3% for the nine months versus 37.2% in 2016. Third-quarter results benefited from approximately $3.7 million of prior-period U.S. and Canadian research-and-development tax credits and a $2.8 million discrete benefit related to restricted-stock-unit vesting.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that short-term growth is more likely to be in the single digits as governments reassess priorities, legislation, and programs. It remains positive on longer-term opportunities from aging populations, rising health-care demand, and government reform initiatives.
- Management expects a full-year tax rate of approximately 33% to 34%. Certain third-quarter tax and interest benefits were described as nonrecurring.
- The July 2017 acquisition of Revitalised Limited added digital health, fitness, and wellbeing capabilities in the United Kingdom. Consideration was $2.8 million in cash plus up to $1.6 million of contingent consideration; purchase accounting was not complete at the filing date.
- Key risks include contract termination or penalties, inaccurate pricing or failure to meet performance requirements, government budget and legislative changes, information-security failures, personnel retention, contract-payment timing, audits and compliance matters, litigation, foreign-currency exposure, and acquisition integration.
- At June 30, 2017, foreign-currency net assets were $191.6 million; a 10% currency movement could affect comprehensive income by approximately $19.2 million.
- The company reported no material changes to the risk factors in its fiscal 2016 Form 10-K, no material adverse legal matter known to management, and effective disclosure controls.
- The company will adopt the new revenue-recognition standard in fiscal 2019 and anticipates using the retrospective transition method. Lease accounting changes are expected to apply in fiscal 2020.
- The board declared a quarterly dividend of $0.045 per share on July 7, 2017, payable August 31, 2017.
Important Facts for Investors to Verify
- Whether the Federal Services revenue decline has been fully absorbed and whether replacement contract wins offset the subcontract wind-down.
- The sustainability of Health Services margin gains, including HAAS performance improvements and the pending change order involving approximately $4 million of unrecognized revenue.
- The duration and financial impact of the U.K. Work Programme wind-down and related restructuring savings.
- The recurring tax rate after the nonrecurring research-and-development credits and restricted-stock-unit tax benefit.
- The availability and location of cash, particularly the $101.1 million held outside the United States, and any implications of future repatriation.
- The final purchase accounting and contingent consideration for Revitalised and the performance of recently acquired businesses.
- Future exposure to government audits, contract compliance claims, litigation, and foreign-exchange movements.