MAXIMUS, Inc. — Q3 FY2019 Form 10-Q Summary
Business context and reporting period
MAXIMUS provides business-process services to government health and human-services programs. The filing covers the three and nine months ended June 30, 2019, with fiscal year ending September 30, 2019. Operations are reported through U.S. Health & Human Services, U.S. Federal Services, and Outside the U.S. segments.
Financial results and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $730.7 million, up 22.2% | $2.132 billion, up 16.3% |
| Gross profit | $174.2 million; 23.8% margin | $502.9 million; 23.6% margin |
| Operating income | $83.6 million; 11.4% margin | $239.5 million; 11.2% margin |
| Net income attributable to MAXIMUS | $62.9 million | $180.7 million |
| Diluted EPS | $0.97 | $2.79 |
| Operating cash flow | Not separately provided | $263.7 million |
| Free cash flow | Not separately provided | $229.2 million |
Gross and operating margins declined from 25.9% and 13.8% in the prior-year quarter and from 24.8% and 12.7% for the prior-year nine-month period. The effective tax rate was 24.8%, versus 28.9% for the quarter and 26.1% for the nine-month period in the prior year.
At June 30, 2019, cash and cash equivalents were $71.1 million, or $79.0 million including restricted cash. Total debt was approximately $3.9 million, including $3.6 million current debt and $0.3 million long-term debt; no borrowings were outstanding under the $400 million credit facility. Accounts receivable totaled $620.0 million, including $94.1 million unbilled, and days sales outstanding was 77 days, within management’s 65-to-80-day target range.
Material changes versus the prior comparable periods
- Revenue growth was primarily acquisition-driven. The citizen engagement centers business acquired from General Dynamics Information Technology contributed $163.4 million of third-quarter revenue and $440.6 million for the nine-month period.
- U.S. Federal Services revenue increased to $292.3 million for the quarter and $799.0 million for nine months, but margins declined to 11.6% and 10.6%, respectively, because the acquired contracts are predominantly lower-margin cost-plus arrangements.
- U.S. Health & Human Services revenue declined 7.4% for the quarter and 5.3% for nine months, reflecting rebids, extensions, and lower near-term revenue. The prior-year quarter benefited from approximately $13.7 million of delayed change-order revenue.
- Outside the U.S. revenue declined 13.9% for the quarter and 16.5% for nine months, driven by expected declines in United Kingdom and Australian welfare-to-work programs, contract changes, and unfavorable foreign-currency effects.
- Amortization of intangible assets increased to $24.0 million for nine months from $7.8 million, primarily because of acquisition-related intangible assets. Nine-month SG&A also included approximately $2.7 million of acquisition costs and approximately $4 million of unusually high severance expense from an early-retirement program.
- Cash from operations increased to $263.7 million from $188.3 million, but investing cash usage increased to $440.7 million from $40.5 million, mainly due to the $421.8 million initial acquisition payment. The final $8.9 million working-capital true-up payment was made in July 2019.
- The company adopted ASC 606 on October 1, 2018, increasing opening retained earnings by $32.9 million. The new standard increased reported nine-month revenue by approximately $4.1 million and net income attributable to MAXIMUS by approximately $1.9 million versus the former accounting method.
Guidance, outlook, risks, and unusual items
- Management projected fiscal-year operating margins of 18%–19% for U.S. Health & Human Services, 10%–11% for U.S. Federal Services, and approximately 3% for Outside the U.S. The projected fiscal-year effective tax rate was approximately 25%.
- The U.S. Census Questionnaire Assistance contract was ramping more slowly than expected, although management did not anticipate a material change in expected revenue over the contract’s life. The contract runs through June 2021.
- Management expected new work and operating efficiencies to support organic growth in U.S. Health & Human Services in fiscal 2020. Certain new international programs were expected to reach break-even during fiscal 2020.
- Remaining performance obligations were approximately $355 million at June 30, 2019, with approximately 55% expected to be recognized within 12 months. The company stated that its contract portfolio typically identifies approximately 90% of anticipated revenue for the next 12 months.
- Key risks include government budget and legislative changes, contract rebids or termination, performance penalties, audits and compliance proceedings, cybersecurity and data protection, employee retention, acquisition integration, litigation, foreign-currency volatility, and estimation risk under ASC 606.
- A state Medicaid agency received proposed CMS disallowances totaling approximately $31 million relating to historical work performed from 2004 to 2009. MAXIMUS believes the school districts are responsible for amounts ultimately refunded and has reserved its estimated fees; no legal action had been initiated.
- The company expects adoption of lease accounting standard ASC 842 on October 1, 2019, to have a significant balance-sheet effect but a lesser effect on other financial statements. Management did not expect the adoption to affect credit-facility compliance.
- The board declared a $0.25-per-share dividend payable August 30, 2019. The company repurchased approximately $45.4 million of stock during the nine months, with $147.4 million remaining under the authorization.
Important facts for investors to verify
- Separate organic performance from the $440.6 million of acquired revenue and assess whether Federal Services margins can stabilize as the acquisition integrates.
- Monitor billed and unbilled receivables, DSO, and cash conversion, particularly as the Census contract ramps.
- Reconcile reported results with ASC 606 effects and evaluate the estimates underlying performance-based and welfare-to-work revenue.
- Track the expected $23.7 million of fiscal-year acquisition-related amortization and the impact on operating margins and EPS.
- Assess exposure to United Kingdom and Australian contract declines, foreign-exchange movements, government procurement changes, and the approximately $31 million Medicaid disallowance matter.
- Confirm the balance-sheet impact of ASC 842 adoption and the company’s continuing capacity to fund dividends, repurchases, capital spending, and acquisitions.