MAXIMUS, Inc. Form 10-Q Summary
Business Context and Reporting Period
MAXIMUS provides business-process and technology services to government health, human services, and U.S. federal programs. This unaudited filing covers the three months ended December 31, 2017, the first quarter of fiscal 2018, compared with the same period of fiscal 2017.
Key Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $623.1 million | $607.6 million | 2.6% |
| Gross profit / margin | $152.0 million / 24.4% | $144.8 million / 23.8% | Gross profit up 4.9% |
| Operating income / margin | $79.7 million / 12.8% | $73.8 million / 12.1% | Operating income up 8.0% |
| Net income attributable to MAXIMUS | $59.1 million | $46.7 million | Up 27% |
| Diluted EPS | $0.89 | $0.71 | Up $0.18 |
| Cash flow from operations | $37.9 million | $71.1 million | Down $33.3 million |
| Free cash flow | $31.4 million | $63.4 million | Down $32.0 million |
Cash and cash equivalents were $196.9 million at December 31, 2017, compared with $166.3 million at September 30, 2017. Total debt was approximately $12.1 million, including $11.6 million borrowed under the credit facility. The company had access to a $400 million revolving credit facility expiring in September 2022 and was in compliance with all covenants. Total leverage was below 1.0:1.0.
Days sales outstanding was 69 days, compared with 70 days at December 31, 2016. Accounts receivable, billed and billable, increased to $439.0 million from $394.3 million at September 30, 2017. The company paid $2.9 million in dividends and repurchased $1.0 million of stock during the quarter.
Segment Performance and Changes Versus Prior Period
- Health Services: Revenue increased 3.3% to $352.1 million; operating income increased to $57.6 million from $50.1 million, and operating margin improved to 16.4% from 14.7%. Performance benefited from operating efficiencies and improved results on the U.K. Health Assessment Advisory Service contract.
- U.S. Federal Services: Revenue declined 5.9% to $133.0 million and operating income declined to $16.7 million from $17.9 million. The decline primarily reflected the wind-down of a significant subcontract and reduced expected disaster-relief work.
- Human Services: Revenue increased 10.0% to $138.1 million, but operating income fell to $8.1 million from $11.8 million. The segment was affected by lower-margin Australian welfare-to-work activity, pass-through revenue, and startup losses.
Consolidated results benefited from favorable foreign-currency movements, improved Health Services performance, the absence of $2.2 million of prior-year restructuring costs, and lower amortization. SG&A increased as a percentage of revenue to 11.2% from 10.8%; a revised cost-allocation methodology shifted approximately $1.2 million of costs from cost of revenue to SG&A without affecting operating income.
Outlook, Guidance, Risks, and Unusual Items
- Management reported longer government procurement cycles and delays associated with policy, budget, and staffing uncertainty following the U.S. presidential transition. Long term, it continues to expect demand supported by demographic and government-program trends.
- Full-year U.S. Federal Services revenue was expected to be below fiscal 2017, with an additional decline anticipated in the second quarter because of reduced disaster-relief activity.
- The U.K. Fit for Work contract was amended, with most operations expected to cease during the second quarter of fiscal 2018. Management expects the termination to benefit future margins, although closure costs will occur.
- Management projected a fiscal 2018 effective tax rate of 26% to 28%, with quarterly ranges of 26%-27% in the second quarter, 28%-29% in the third quarter, and 26%-27% in the fourth quarter. It estimated approximately $0.35 of fiscal 2018 diluted EPS benefit from the Tax Cuts and Jobs Act.
- Q1 tax accounting included a provisional $9.5 million foreign-earnings toll-tax charge, a $10.6 million deferred-tax-liability benefit, and approximately $6.4 million of lower tax expense from reduced tax rates. The reported effective tax rate was 24.9%, versus 36.7% in the prior-year quarter.
- Management expected the Tax Cuts and Jobs Act to improve fiscal 2018 operating cash flow and free cash flow by approximately $25 million.
- A putative shareholder class action alleges misleading disclosures concerning the U.K. Health Assessment Advisory Services project. The company denies the allegations; the potential loss cannot currently be estimated.
- Principal risks include contract-performance failures, government budget and legislative changes, contract termination, pricing and bidding risk, data-security and compliance failures, government audits, litigation, foreign-currency exposure, and the ability to recruit qualified personnel.
- On January 16, 2018, MAXIMUS announced that Bruce L. Caswell would become Chief Executive Officer on April 1, 2018, replacing Richard A. Montoni.
Investor Verification Checklist
- Verify the provisional Tax Cuts and Jobs Act calculations, including the toll-tax charge, deferred-tax remeasurement, and expected $0.35 EPS benefit.
- Monitor cash conversion, receivables, DSO, and collections after operating cash flow fell materially year over year.
- Assess the effect of the U.S. federal subcontract wind-down and reduced disaster-relief activity on fiscal 2018 revenue and margins.
- Track the closure of the U.K. Fit for Work contract and the continuing profitability of the U.K. Health Assessment Advisory Service contract.
- Review the Australian welfare-to-work ramp-up, pass-through revenue, and startup costs affecting Human Services margins.
- Follow developments in the shareholder lawsuit and any government audits, investigations, contract disputes, or compliance matters.
- Evaluate foreign-currency exposure: a hypothetical 10% unfavorable movement would have reduced comprehensive income attributable to MAXIMUS by approximately $15.6 million at December 31, 2017.
- Confirm the impact of the planned CEO transition and related employment agreements on future compensation and execution.