MAXIMUS, Inc. 2018 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
MAXIMUS provides business-process services to government health and human-services programs worldwide. The filing covers the three and six months ended March 31, 2018, within fiscal 2018. The company operates through Health Services, U.S. Federal Services, and Human Services segments.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2018 | Year-over-Year | Six Months Ended March 31, 2018 | Year-over-Year |
|---|---|---|---|---|
| Revenue | $612.8 million | Down 1.5% | $1,235.9 million | Up 0.5% |
| Gross profit | $148.8 million | Down 2.3% | $300.8 million | Up 1.2% |
| Gross margin | 24.3% | Down 0.2 points | 24.3% | Up 0.1 points |
| Operating income | $71.3 million | Down 11.2% | $151.0 million | Down 2.0% |
| Operating margin | 11.6% | Down 1.3 points | 12.2% | Down 0.3 points |
| Net income attributable to MAXIMUS | $55.5 million | Up 5.7% | $114.6 million | Up 16.0% |
| Diluted EPS | $0.84 | Up $0.04 | $1.73 | Up $0.23 |
- Six-month cash flow from operations was $116.6 million, compared with $136.8 million in the prior-year period. Free cash flow was $103.4 million versus $123.9 million.
- Cash and cash equivalents were $253.2 million at March 31, 2018, compared with $166.3 million at September 30, 2017.
- Accounts receivable totaled $456.2 million, including $41.2 million of unbilled receivables. Days sales outstanding increased to 68 days from 63 days at September 30, 2017.
- The company had no borrowings under its $400 million revolving credit facility and held $5.7 million of letters of credit. It was in compliance with all covenants, and its total leverage ratio was below 1.0:1.0.
- Total liabilities were $364.2 million and total equity was $1.066 billion at March 31, 2018.
- The quarterly dividend was $0.045 per share. The board declared another $0.045 dividend on April 6, 2018, payable May 31, 2018.
Material Changes Versus the Prior Comparable Period
- Health Services: Six-month revenue increased 4.1% to $717.7 million, while operating income rose 13.1% to $120.7 million. Margins benefited from mature contracts, operating efficiencies, and performance on the U.K. Health Assessment Advisory Service contract. The contract was extended for two years beginning March 1, 2018, but is expected to generate a lower profit margin.
- U.S. Federal Services: Six-month revenue declined 13.0% to $249.3 million and operating income declined 25.3% to $26.5 million. The principal drivers were completed contracts, lower-than-anticipated disaster-relief work, and certain rebids limited to small businesses. A subcontract renegotiation generated approximately $2.9 million of nonrecurring charges, with expected future savings and increased company participation.
- Human Services: Six-month revenue increased 6.2% to $268.9 million, but operating income declined 46.5% to $11.4 million. Profitability was pressured by an unsigned contract extension, lower volumes, low unemployment, and the lower-margin Australian jobactive contract. Management expects mid-single-digit operating margins for this segment.
- Consolidated SG&A increased to 11.8% of quarterly revenue from 11.0%. A fiscal 2018 cost-allocation methodology moved approximately $1.3 million of quarterly and $2.5 million of six-month costs from cost of revenue to SG&A; the change did not affect operating income.
- Net income increased despite lower operating income primarily because the Tax Cuts and Jobs Act reduced the effective tax rate to 24.1% for the quarter and 24.5% for the six months, compared with 33.6% and 35.1%, respectively.
Guidance, Outlook, Risks, and Unusual Items
- Management projects a fiscal 2018 effective tax rate of 25% to 27%, with expected rates of 26% to 28% in the third quarter and 25% to 26% in the fourth quarter. Management expects approximately $0.35 of fiscal 2018 diluted EPS benefit from tax legislation.
- Management expects approximately $25 million of fiscal 2018 cash-flow and free-cash-flow benefit from lower tax rates.
- Tax accounting under the Tax Cuts and Jobs Act remains provisional. The filing records an estimated $9.5 million foreign-earnings toll-tax charge and an $11.7 million deferred-tax-liability reduction, subject to further tax-return information and regulatory guidance.
- Government procurement delays, agency staffing shortages, contract expirations, budget changes, contract repricing, performance requirements, audits, compliance matters, cybersecurity, foreign exchange, and employee retention may affect results.
- The company recorded $2.3 million of additional restructuring costs in its U.K. Human Services business and expects related restructuring to produce future cost savings. Additional costs associated with closing the Fit for Work contract are expected in the third quarter.
- A putative securities class-action lawsuit alleges misleading disclosures concerning the U.K. Health Assessment Advisory Service project. MAXIMUS denies the allegations; the filing states that the probability and potential loss cannot currently be estimated.
- Management expects longer procurement cycles and delays to affect short-term growth, while citing demographic trends, government demand, contract visibility, and investment in digital and clinical capabilities as longer-term growth drivers. More than 90% of anticipated revenue for the subsequent twelve months is typically identifiable from existing contracts.
- The company expects to adopt the new revenue-recognition standard using the modified retrospective approach beginning in fiscal 2019 and expects the standard to affect the timing of revenue recognition for certain variable-fee contracts.
Facts Investors Should Verify
- Whether U.S. Federal Services contract losses and margin pressure stabilize, including the expected savings from the subcontract renegotiation.
- Whether the Health Assessment Advisory Service extension produces the anticipated lower margin and whether related performance incentives or penalties affect results.
- Whether the unsigned Human Services contract extension is executed and revenue and profit are subsequently recognized.
- Final tax-reform accounting, including the toll-tax estimate, deferred-tax remeasurement, and actual fiscal 2018 tax rate.
- Accounts-receivable collections and DSO, which rose to 68 days, as well as the effect on operating cash flow.
- Developments in the securities class action and any government audits, investigations, bid protests, or contract-performance claims.
- The effect of foreign-currency movements, particularly given $163.4 million of net non-U.S.-dollar assets and management’s plan to remit surplus foreign cash to the United States.