Business Context and Reporting Period
MAXIMUS, Inc. provides business process outsourcing, administrative, consulting, case management, and employment services to government health and human services agencies. Operations are organized into Health Services and Human Services. This unaudited Form 10-Q covers the three months ended December 31, 2012, MAXIMUS’s fiscal 2013 first quarter, compared with the three months ended December 31, 2011.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $286.3 million | $239.6 million | Up 19.5% |
| Gross profit | $76.5 million | $59.8 million | Up 27.9% |
| Gross margin | 26.7% | 25.0% | Up 1.7 points |
| Operating income | $34.0 million | $26.9 million | Up 26.5% |
| Operating margin | 11.9% | 11.2% | Up 0.7 points |
| Income from continuing operations | $21.8 million | $17.7 million | Up 23.4% |
| Net income | $21.3 million | $17.7 million | Up 20.4% |
| Diluted EPS | $0.61 | $0.51 | Up $0.10 |
| Cash flow from operating activities | $9.6 million | $27.6 million | Down $17.9 million |
| Free cash flow from continuing operations | $(0.4) million | $24.3 million | Down $24.7 million |
Segment revenue was $176.0 million in Health Services, up 11.4%, and $110.3 million in Human Services, up 35.2%. Segment operating margins were 11.7% and 12.4%, respectively.
At December 31, 2012, cash and cash equivalents were $167.1 million, compared with $189.3 million at September 30, 2012. Total debt was approximately $1.7 million, consisting primarily of a $1.7 million interest-free Canadian loan; the balance sheet also included $15.5 million of letters of credit under the revolving facility and $3.0 million issued by another financial institution.
Material Changes Versus the Prior Comparable Period
- Revenue growth included 14.2% from the April 2012 PSI acquisition, 4.5% organic growth, and 0.8% from foreign exchange. PSI contributed $34.1 million of quarterly revenue.
- Health Services benefited from PSI, new and expanded contracts, higher Federal Medicare appeals volumes, health insurance exchange work, and increased Medicaid managed-care volumes.
- Human Services benefited from PSI, the ramp-up of the United Kingdom Work Programme, and new work in Canada and Saudi Arabia. Its margin declined from 12.6% to 12.4%.
- SG&A increased to $42.2 million from $32.8 million, and SG&A as a percentage of revenue increased to 14.7% from 13.7%.
- Discontinued operations produced a $0.5 million loss, compared with $0.05 million of income in the prior-year quarter, primarily reflecting $0.9 million of arbitration costs related to a divested business.
- Operating cash flow declined because of short-term collection delays, seasonal holiday timing, and tax payments that were $8.4 million higher than in the prior-year quarter.
- Investing cash outflows increased to $10.5 million from $0.9 million, driven by $7.1 million of property and equipment purchases and $3.5 million of capitalized software costs.
- The Company repurchased 249,549 shares for $14.6 million, compared with 236,700 shares for $8.8 million in the prior-year quarter. Approximately $114.6 million remained authorized for future repurchases.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects operations and capital expenditures to remain fundable from operating cash flow and considers liquidity adequate for short-term customer payment delays. The filing does not provide specific fiscal-year revenue or earnings guidance.
- Approximately 75% of cash was held overseas, principally in Australia. Repatriation could create additional taxes, but management does not intend to repatriate these funds.
- The $35.0 million revolving credit facility was scheduled to mature on February 28, 2013. It had $19.5 million of borrowing capacity at December 31, 2012, subject to covenants, and management was finalizing a replacement agreement.
- Performance bond commitments totaled $50.4 million. Management considered the likelihood of required payment remote. The Company also had customer and insurance letters of credit.
- A client may terminate for convenience a loss-making systems-integration contract acquired with PSI, potentially creating a one-time non-cash gain. No formal termination notice or settlement existed at the filing date, and the amount of any benefit was not estimable.
- A state Medicaid agency had asserted a $2.3 million claim related to a discontinued business. MAXIMUS believes related school districts are responsible for most amounts and that its exposure is limited primarily to fees.
- A school district’s arbitration claims seeking at least $10 million were denied in full in December 2012, but the district filed a motion to vacate and later raised an unfiled fraud allegation. MAXIMUS stated it would contest the allegation.
- Management reported no material changes to previously disclosed risk factors, no material market-risk changes, and effective disclosure controls. The filing notes that interim results are not necessarily indicative of the full fiscal year.
Investor Verification Priorities
- Verify renewal or replacement of the revolving credit facility after its February 28, 2013 maturity date.
- Monitor cash collections, working-capital requirements, and whether operating cash flow recovers from the first-quarter decline.
- Assess the sustainability of PSI-related revenue and the reported organic growth, particularly after acquisition effects normalize.
- Track performance and cash requirements of the United Kingdom Work Programme and other outcome-based contracts.
- Determine whether the PSI-acquired loss-making contract is terminated and whether any non-cash gain is ultimately recognized.
- Review developments in the Medicaid claim, the SchoolMAX-related proceedings, and associated discontinued-operation costs.
- Consider the tax implications and availability of overseas cash, as well as the Company’s continuing share repurchases and dividend payments.