MAXIMUS, Inc. Form 10-Q Summary
Business Context and Reporting Period
MAXIMUS provides business-process outsourcing and administrative 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 filing covers the three and six months ended March 31, 2012, the second quarter and first half of fiscal 2012.
Key Financial Metrics
| Metric | Q2 FY2012 | Q2 FY2011 | Six Months FY2012 | Six Months FY2011 |
|---|---|---|---|---|
| Revenue | $243.5 million | $227.1 million | $483.1 million | $441.2 million |
| Gross profit | $64.8 million | $63.1 million | $124.6 million | $119.0 million |
| Gross margin | 26.6% | 27.8% | 25.8% | 27.0% |
| Operating income | $27.4 million | $29.5 million | $54.3 million | $56.8 million |
| Operating margin | 11.3% | 13.0% | 11.2% | 12.9% |
| Net income | $14.3 million | $18.2 million | $32.0 million | $35.7 million |
| Diluted EPS | $0.41 | $0.51 | $0.92 | $1.01 |
Six-month operating cash flow from continuing operations was $69.0 million versus $36.4 million in the prior year. Free cash flow from continuing operations, a non-GAAP measure, was $60.6 million versus $26.1 million. Capital expenditures and capitalized software costs totaled $8.4 million.
Cash and cash equivalents were $229.5 million at March 31, 2012, up from $173.0 million at September 30, 2011. Approximately 50% of cash was held overseas and could be subject to additional taxes if repatriated. Total debt was approximately $1.8 million, while the company had $14.0 million of outstanding letters of credit and $17.1 million of performance-bond commitments. The company reported compliance with its credit-facility covenants and access to $21.0 million of additional U.S. credit capacity.
Material Changes Versus the Prior Comparable Period
- Revenue increased 7.2% in the quarter and 9.5% year to date; constant-currency growth was 6.5% and 9.0%, respectively.
- Health Services revenue rose 17.0% in the quarter and 19.2% year to date, principally due to Texas managed-care contracts. Its operating margin declined to 11.3% from 14.0% in the quarter and to 11.0% from 14.3% year to date because of lower-margin Texas work, new programs, and recently rebid contracts.
- Human Services revenue declined 7.9% in the quarter and 5.5% year to date, primarily because the U.K. Flexible New Deal contract transitioned to the Work Programme. Work Programme revenue was $6.4 million lower in the quarter and $15.0 million lower year to date than the comparable Flexible New Deal revenue.
- Human Services operating income declined in the quarter to $8.6 million from $10.1 million but increased year to date to $18.9 million from $18.6 million. Results included a $2.6 million gain from a fixed-price contract estimate change and change order; the prior-year periods included charges of $4.2 million and $7.3 million, respectively, on that contract.
- SG&A increased to 15.6% of revenue from 14.8% in the quarter and to 14.6% from 14.1% year to date, reflecting increased domestic and international business-development activity.
- Effective tax rates increased to 49.6% in the quarter and 43.3% year to date from 37.4% and 37.1%. The year-to-date rate included a $3.0 million discrete tax charge, including a $1.6 million correction of an immaterial prior-period error.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific quantitative revenue or earnings guidance. Management expects operating cash flow to fund operations and capital expenditures, but cautions that extended payment delays by state customers could adversely affect liquidity, operations, and profitability. International welfare-to-work contracts may require cash outlays before performance-based payments are received.
On April 30, 2012, after the reporting date, MAXIMUS acquired PSI Services Holding, Inc. and Policy Studies, Inc. for $67 million using U.S. cash. The purchase-price allocation was not complete at filing, and the acquisition may require up to $6.7 million of additional letters of credit. The board declared a $0.09-per-share dividend payable May 31, 2012.
Legal and settlement recovery, net, contributed $0.6 million in the quarter and $0.4 million year to date, including a $0.7 million insurance recovery partly offset by PSI acquisition costs. The company also received $2.7 million of Flexible New Deal termination payments and $1.5 million of cost recoveries during the first half.
A former SchoolMAX customer filed an arbitration notice in April 2012 seeking at least $10 million. MAXIMUS disputes the claims, believes it has substantial defenses, and believes it is entitled to indemnification from the buyer of the business. The company cannot reasonably estimate a potential loss.
Other risks include foreign-exchange exposure, government budget pressure, contract performance and cost-estimation risk, and the transition and performance-based economics of the U.K. Work Programme. The company recorded a $1.5 million liability for an anticipated loss on a fixed-price contract. Management stated that no material changes had occurred to the risk factors disclosed in the fiscal 2011 Form 10-K.
Important Facts for Investors to Verify
- Whether the Texas managed-care growth can offset its lower margins and the ongoing U.K. Work Programme revenue transition.
- The final purchase-price allocation, operating contribution, and integration costs of the $67 million PSI acquisition.
- The sustainability and quality of the unusually strong first-half operating cash flow and free cash flow.
- The impact of the elevated tax rate and whether the disclosed tax adjustment is fully resolved.
- The potential exposure from the SchoolMAX arbitration and the effectiveness of any buyer indemnification.
- The availability and geographic location of cash, including potential tax costs if overseas cash is repatriated.
- Performance-bond, letter-of-credit, contingent-consideration, and fixed-price-contract obligations.