MAXIMUS, Inc. Form 10-Q Summary
Business context and reporting period
MAXIMUS provides business-process outsourcing, administrative, consulting, case-management, and support services to government health and human-services agencies in the United States, Australia, Canada, and the United Kingdom. Operations are reported through Health Services and Human Services segments.
The filing covers the three and six months ended March 31, 2011, MAXIMUS’s fiscal second quarter and first half of fiscal 2011. The financial statements are unaudited.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $227.1 million | $441.2 million |
| Gross profit | $63.1 million | $119.0 million |
| Gross margin | 27.8% | 27.0% |
| Operating income from continuing operations | $29.5 million | $56.8 million |
| Operating margin | 13.0% | 12.9% |
| Income from continuing operations | $19.0 million | $36.6 million |
| Net income | $18.2 million | $35.7 million |
| Diluted EPS | $1.02 | $2.01 |
| Cash flow from operating activities | Not separately provided | $35.4 million, including discontinued operations |
| Free cash flow from continuing operations | Not separately provided | $26.1 million |
Six-month operating cash flow from continuing operations was $36.4 million, compared with $70.8 million in the prior-year period. Cash and cash equivalents increased to $183.2 million from $155.3 million at September 30, 2010. Working capital was $235.6 million.
At March 31, 2011, debt consisted primarily of $1.8 million outstanding under an interest-free Canadian research-and-development loan. There were no borrowings under the $35.0 million revolving credit facility, although $11.3 million of letters of credit were outstanding. The facility matures January 25, 2013, and MAXIMUS was in compliance with its covenants.
Capital expenditures were $6.5 million and capitalized software costs were $3.9 million during the six-month period. The Company repurchased $8.5 million of common stock and paid $4.6 million in dividends. Approximately $122.2 million remained available under the stock-repurchase authorization.
Material changes versus the prior comparable period
- Second-quarter revenue increased 11.1% to $227.1 million; constant-currency growth was 8.4%. Six-month revenue increased 8.2% to $441.2 million; constant-currency growth was 6.0%.
- Health Services second-quarter revenue increased 8.2% and operating margin improved to 14.0% from 10.0%. Six-month revenue increased 3.8% and operating margin improved to 14.3% from 11.7%.
- Human Services second-quarter revenue increased 15.9% and six-month revenue increased 15.8%, driven primarily by welfare-to-work operations in Australia and the United Kingdom. Operating margins declined modestly to 11.3% and 10.7%, respectively.
- Gross margin improved to 27.8% in the quarter from 24.7% and to 27.0% for the first six months from 25.2%.
- Operating income increased 6.1% in the quarter and 9.5% for the first six months. The prior-year periods benefited from a $7.5 million insurance recovery; no comparable recovery occurred in 2011. Excluding legal and settlement items, operating income increased 35.5% in the quarter and 22.1% year to date.
- Net income declined in the quarter to $18.2 million from $18.7 million because of discontinued-operation losses, despite higher continuing-operation income. Six-month net income increased to $35.7 million from $31.4 million.
- Operating cash flow from continuing operations declined by $34.4 million year over year, reflecting higher income-tax payments, the absence of the prior-year insurance recovery, and the utilization of significant upfront United Kingdom contract funding received in fiscal 2010.
Outlook, commentary, risks, contingencies, and unusual items
Management stated that demand for core health and human-services offerings should remain strong as governments seek to meet mandates and operate more efficiently. The filing does not provide a specific revenue or earnings forecast.
- A fixed-price Human Services contract generated charges of $4.2 million in the quarter and $7.3 million year to date. A $4.8 million liability was recorded for the anticipated remaining loss, and completion is expected during fiscal 2012.
- The ERP business was sold on September 30, 2010. The buyer is withholding the remaining purchase consideration because of disputed asset valuations; MAXIMUS recorded a $1.0 million reserve. Discontinued operations produced a $0.8 million loss in the quarter and a $0.9 million loss year to date, including disposal losses.
- A former SchoolMAX customer alleges damages exceeding $30 million and has initiated contractual dispute resolution. MAXIMUS disputes the claims and believes it is entitled to indemnification from the business’s buyer.
- A state Medicaid agency has asserted a $2.3 million claim relating to a discontinued business line. No legal action had been initiated, and MAXIMUS believes the school districts are responsible for most potential amounts.
- The United Kingdom Flexible New Deal contract will terminate in the third quarter. Replacement contracts will provide less upfront cash and more contingent payments. Management estimates a $4 million to $6 million adverse cash-flow effect in fiscal 2012, expected to be recouped in fiscal 2013.
- Performance-bond commitments were $25.7 million at March 31, 2011, down from $33.5 million at September 30, 2010. Management considers the likelihood of payment remote.
- Management stated that liquidity and available credit should support anticipated working-capital and capital-expenditure needs, selective acquisitions, stock repurchases, and quarterly dividends for at least the next twelve months.
- The board declared a $0.15 quarterly dividend payable May 31, 2011. It subsequently declared a two-for-one stock split payable June 30, 2011, and a $0.09 dividend payable August 31, 2011.
Important facts for investors to verify
- Reconcile the improvement in continuing-operation earnings with the nonrecurrence of the $7.5 million prior-year insurance recovery.
- Monitor the fixed-price contract’s remaining loss exposure and whether the $4.8 million recorded liability is sufficient through completion.
- Assess the timing and ultimate amount of the disputed ERP sale proceeds and the SchoolMAX and Medicaid-related claims.
- Evaluate the United Kingdom contract transition and its projected $4 million to $6 million fiscal 2012 cash-flow impact.
- Review whether cash conversion normalizes after the unusually high tax payments and the reversal of upfront United Kingdom contract funding.
- Confirm the effect of the subsequent stock split and dividend declarations on per-share comparisons and future share counts.