MAXIMUS, Inc. — Fiscal 2015 Third-Quarter Form 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. The filing covers the three and nine months ended June 30, 2015, with comparisons to the corresponding 2014 periods. The interim financial statements are unaudited.
In April 2015, MAXIMUS acquired Acentia, a U.S. federal government information technology services provider, and 70% of Remploy, a U.K. government employment-services business. Both acquisitions were included in results for the quarter.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | | Nine Months Ended June 30 | |
|---|
| 2015 | 2014 | 2015 | 2014 |
|---|
| Revenue | $572.3 million | $419.9 million | $1,521.1 million | $1,265.5 million |
| Gross profit | $143.8 million | $112.6 million | $387.4 million | $339.2 million |
| Gross margin | 25.1% | 26.8% | 25.5% | 26.8% |
| Operating income | $71.1 million | $55.2 million | $198.3 million | $173.5 million |
| Operating margin | 12.4% | 13.2% | 13.0% | 13.7% |
| Net income attributable to MAXIMUS | $41.7 million | $34.1 million | $122.3 million | $109.2 million |
| Diluted EPS | $0.62 | $0.49 | $1.83 | $1.57 |
- Quarterly revenue increased approximately 36% and year-to-date revenue increased approximately 20%.
- Quarterly net income attributable to MAXIMUS increased approximately 22%; year-to-date net income increased approximately 12%.
- Quarterly diluted EPS increased approximately 27%; year-to-date diluted EPS increased approximately 17%.
- The effective tax rate was 40.0% for the quarter and 37.8% year to date, compared with 38.2% and 37.5%, respectively, in the prior-year periods.
Segment Results
| Segment | Q3 2015 Revenue | Q3 2015 Operating Margin | Q3 2014 Revenue | Q3 2014 Operating Margin |
|---|
| Health Services | $439.6 million | 13.7% | $305.3 million | 14.2% |
| Human Services | $132.7 million | 12.7% | $114.6 million | 11.9% |
- Health Services revenue grew 44% for the quarter and 25% year to date. Growth reflected organic contract growth, Acentia revenue, and new and expanded work, partially offset by unfavorable currency effects.
- Health Services margins declined because of lower federal appeals activity, a larger proportion of lower-margin cost-plus and time-and-materials work, and start-up costs on several contracts.
- Human Services revenue grew 16% for the quarter and 6.5% year to date. Organic growth and Remploy revenue were substantially offset by the stronger U.S. dollar against the Australian dollar and British pound.
- Remploy contributed $17.8 million of quarterly revenue. Acentia contributed $52.9 million of quarterly revenue and $4.3 million of operating income.
Cash Flow, Liquidity, Debt, and Balance Sheet
| Metric | Nine Months 2015 | Nine Months 2014 |
|---|
| Cash provided by operating activities | $181.0 million | $165.2 million |
| Cash used in investing activities | $(362.4) million | $(29.9) million |
| Cash provided by/(used in) financing activities | $109.7 million | $(79.3) million |
| Free cash flow | $107.8 million | $137.6 million |
| Net change in cash | $(76.2) million | $57.3 million |
- Cash and cash equivalents were $81.9 million at June 30, 2015, down from $158.1 million at September 30, 2014. Approximately 80% was held outside the United States.
- Accounts receivable increased to $405.3 million, including billed, billable, and unbilled receivables, from $289.6 million at September 30, 2014. Days sales outstanding improved to 64 from 70 at March 31, 2015.
- Investing cash use included $289.6 million for acquisitions and $73.2 million for property, equipment, and capitalized software.
- Long-term debt was $166.8 million at June 30, 2015, compared with $1.1 million at September 30, 2014. The company had $166.0 million outstanding under its credit facility at quarter end.
- The amended unsecured revolving credit facility provides borrowing capacity of up to $400 million and terminates in March 2020. The company was in compliance with all covenants, and its total leverage ratio was below 1.0-to-1.0, versus a 2.5-to-1.0 threshold for potential collateralization.
- Approximately 60% of outstanding borrowings remained exposed to variable interest rates. A hedge fixed the rate on $66.7 million of principal at June 30, 2015.
Material Changes, Outlook, and Unusual Items
- Acentia generated approximately $292.8 million of estimated purchase consideration, including $214.0 million of preliminary goodwill and $69.9 million of customer-relationship intangible assets. Purchase accounting remained subject to adjustment.
- Acquisition-related expenses were $2.5 million in the quarter and $4.6 million year to date. Additional amortization and acquisition-related borrowing increased expenses.
- Management expected revenue growth in the final fiscal quarter from a new U.S. federal contract with an existing client and other scope expansions. This was expected to be partly offset by lower revenue and profit from the Health Assessment Advisory Service because of challenges recruiting and retaining healthcare professionals.
- The expanded Australian welfare-to-work contract beginning in July 2015 was expected to reduce fiscal 2015 net income by $6 million to $9 million, primarily from expansion costs and reimbursement timing.
- Foreign currency translation reduced comprehensive income and net assets by $12.7 million year to date and reduced cash by $4.6 million.
- Management identified contract performance, audits, government budget and legislative changes, contract termination rights, pricing and bidding, compliance, litigation, cybersecurity and protection of confidential information, acquisition integration, foreign exchange, and start-up funding as material risks.
- Management stated that there were no material changes to the risk factors disclosed in the fiscal 2014 Form 10-K. Disclosure controls were considered effective, while Acentia and Remploy were still being integrated into the internal control environment.
Important Facts for Investors to Verify
- Whether Acentia and Remploy achieve expected growth, margins, and integration benefits, and whether Acentia purchase accounting changes materially.
- The effect of the Australian contract transition and the stated $6 million to $9 million fiscal 2015 net-income impact.
- Recruiting and retention performance under the Health Assessment Advisory Service and the resulting effect on performance incentives.
- Working-capital collection, elevated receivables, cash held offshore, and the sustainability of operating cash flow.
- Variable-rate exposure, debt repayment capacity, covenant compliance, and the availability of the $400 million revolving facility.
- Whether lower consolidated gross and operating margins persist as start-up, cost-plus, time-and-materials, and federal appeals work mix changes.
- Exposure to government budget decisions, contract cancellations, audits, liquidated damages, litigation, regulatory compliance, and foreign-currency movements.
