Business Context and Reporting Period
MAXIMUS, Inc. provides business-process outsourcing, administrative, consulting, case-management, and related services to government health and human-services agencies in the United States, Australia, Canada, and the United Kingdom. The company operates through Health Services and Human Services segments.
This unaudited Form 10-Q covers the three and nine months ended June 30, 2011, within fiscal 2011. The comparable periods are the three and nine months ended June 30, 2010. All share and per-share amounts reflect the two-for-one stock split distributed June 30, 2011.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Nine Months Ended June 30 |
|---|---|---|
| Revenue | $238.3 million, up 12.7% | $679.5 million, up 9.7% |
| Gross profit | $66.4 million; 27.9% margin | $185.4 million; 27.3% margin |
| Operating income from continuing operations | $30.8 million; 12.9% margin | $87.6 million; 12.9% margin |
| Income from continuing operations | $20.0 million | $56.6 million |
| Net income | $19.9 million | $55.6 million |
| Diluted EPS | $0.56 | $1.56 |
| Cash provided by operating activities | Not separately provided | $69.4 million including discontinued operations; $70.5 million from continuing operations |
| Free cash flow from continuing operations | Not separately provided | $53.8 million |
Revenue growth was 7.9% and 6.7% on a constant-currency basis for the quarter and nine-month period, respectively. The Health Services segment generated nine-month revenue of $409.6 million and operating income of $54.1 million, while Human Services generated revenue of $269.9 million and operating income of $33.5 million.
At June 30, 2011, cash and cash equivalents were $204.0 million, restricted cash was $5.1 million, working capital was $245.6 million, and total debt was approximately $1.8 million. No borrowings were outstanding under the $35.0 million revolving credit facility; letters of credit totaled $12.0 million. The company was in compliance with its credit covenants.
For the nine-month period, capital expenditures were $11.0 million and capitalized software costs were $5.7 million. The company repurchased $17.9 million of common stock, paid $7.2 million in dividends, and had $115.4 million remaining under its repurchase authorization at June 30, 2011.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 12.7%, and nine-month revenue increased 9.7%, driven by organic growth in both segments and across geographies.
- Quarterly operating income increased 21.4% to $30.8 million; nine-month operating income increased 13.4% to $87.6 million.
- Operating income excluding legal and settlement expense increased 22.8% for the quarter and 22.3% year to date. The prior-year nine-month period included a $7.5 million insurance recovery, whereas 2011 included $0.4 million of legal and settlement expense.
- Quarterly diluted EPS increased from $0.48 to $0.56, and nine-month diluted EPS increased from $1.35 to $1.56.
- Gross margin increased from 27.0% to 27.9% for the quarter and from 25.8% to 27.3% for the nine-month period.
- Operating cash flow from continuing operations declined to $70.5 million from $120.3 million. Management attributed the decline principally to approximately $20.0 million less cash flow from the United Kingdom business as deferred revenue from a prior contract declined.
- Free cash flow from continuing operations declined to $53.8 million from $103.7 million.
- Cash increased by $48.7 million during the nine-month period, helped by a $5.5 million foreign-exchange benefit.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that demand for core health and human-services services should remain strong because governments must fulfill federal mandates while controlling costs. No specific revenue or earnings guidance was provided in the filing.
- The United Kingdom Flexible New Deal contract terminated during the quarter. Replacement Work Programme contracts are expected to reduce upfront cash benefits and may adversely affect fiscal 2012 cash flow by $4 million to $6 million, which management expects to recover in fiscal 2013.
- The company recorded a $7.3 million charge during the nine months for anticipated losses on a fixed-price contract and carried a related liability of $4.2 million. The contract is expected to be completed in fiscal 2012.
- International operations represented approximately 32% of nine-month revenue. Management estimated that a 1% currency fluctuation in the Australian dollar, Canadian dollar, and British pound would affect revenue by approximately $2.2 million and operating profit by approximately $0.4 million.
- A former SchoolMAX customer alleges damages exceeding $30 million and seeks, among other items, an approximately $11.6 million refund. MAXIMUS disputes the claims and expects to contest them; it also believes it is entitled to indemnification from the buyer of the divested business.
- A state Medicaid agency asserted a $2.3 million claim related to a discontinued business line. MAXIMUS believes the school districts are responsible for amounts at issue and that its exposure is limited to its fees.
- The buyer of the divested ERP business disputed the valuation of certain transferred assets and withheld a remaining payment. MAXIMUS recorded a $1.0 million reserve during the second quarter of fiscal 2011.
- Performance bond commitments declined to $18.9 million from $33.5 million at September 30, 2010. Management considered the probability of payment under these guarantees remote.
- The company declared a $0.09-per-share cash dividend payable August 31, 2011 and completed a two-for-one stock split. Disclosure controls were evaluated as effective, with no material changes in internal control reported.
Important Facts for Investors to Verify
- Whether the United Kingdom contract transition produces the projected $4 million to $6 million fiscal 2012 cash-flow impact and whether recovery occurs in fiscal 2013.
- Progress, final costs, and remaining liability on the fixed-price loss contract.
- Resolution and potential financial exposure from the SchoolMAX dispute, Medicaid claim, and ERP-sale receivable dispute.
- Sustainability of the unusually strong nine-month Health Services margin, which management attributed partly to transaction-based work and favorable contract timing.
- Whether lower deferred revenue and international working-capital movements continue to suppress operating cash flow relative to earnings.
- Remaining capacity and covenant compliance under the revolving facility, including the $12.0 million of outstanding letters of credit.
- Future share repurchases, dividends, and the effect of the June 2011 stock split on reported share counts and per-share comparisons.