MAXIMUS, Inc. FY2018 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2018. MAXIMUS provides business process, technology, health, and human services primarily to government agencies in the United States, United Kingdom, Australia, Canada, Saudi Arabia, and Singapore. Fiscal 2018 revenue was generated through Health Services, U.S. Federal Services, and Human Services. The filing is an annual report, not a quarterly report, although quarterly data for the fourth quarter is included.
Business Context
- Health Services represented 59% of revenue and includes Medicaid, CHIP, ACA, enrollment administration, appeals, and health assessments.
- U.S. Federal Services represented 20% of revenue and includes federal program administration, assessments and appeals, and technology services.
- Human Services represented 21% of revenue and includes welfare-to-work, disability employment, child support, and related consulting services.
- Customer concentration remained significant: U.S. state agencies provided 51% of revenue, foreign governments 27%, U.S. federal agencies 16%, and other sources 6%.
- Backlog was approximately $5.1 billion at September 30, 2018, compared with $5.7 billion at September 30, 2017. Management expected approximately 40% of backlog to convert to fiscal 2019 revenue.
Key Financial Metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $2.392 billion | $2.451 billion | Down 2.4% |
| Gross profit | $594.4 million | $611.9 million | Down 2.9% |
| Gross margin | 24.8% | 25.0% | Down 0.2 percentage points |
| Operating income | $295.5 million | $313.5 million | Down 5.7% |
| Operating margin | 12.4% | 12.8% | Down 0.4 percentage points |
| Net income attributable to MAXIMUS | $220.8 million | $209.4 million | Up 5.4% |
| Diluted EPS | $3.35 | $3.17 | Up 5.7% |
| Cash flow from operations | $323.5 million | $337.2 million | Down 4.1% |
| Free cash flow | $297.0 million | $313.0 million | Down 5.1% |
| Cash and cash equivalents | $349.2 million | $166.3 million | Up $183.0 million |
| Debt | $0.5 million | $0.7 million | Minimal debt |
Health Services revenue increased 1.8% to $1.405 billion and operating income increased 9.8% to $236.4 million, raising its operating margin to 16.8% from 15.6%. U.S. Federal Services revenue declined 12.2% to $478.9 million, while operating income declined 11.7% to $57.4 million; its margin improved modestly to 12.0%. Human Services revenue declined 3.2% to $508.4 million, while operating income fell 62.5% to $18.2 million and operating margin declined to 3.6% from 9.2%.
Liquidity, Capital Allocation, and Debt
- Operating cash flow remained strong at $323.5 million, despite being below fiscal 2017 levels.
- Days sales outstanding was 63 days at year-end, below management’s target range of 65 to 80 days.
- The company had $20.3 million of short-term investments and $349.2 million of cash and cash equivalents at September 30, 2018.
- MAXIMUS had no borrowings under its $400 million revolving credit facility at year-end and was in compliance with its covenants. The facility matures in September 2022.
- The company repurchased approximately 1.1 million shares for $67.6 million during fiscal 2018 and had approximately $192.8 million remaining under its repurchase authorization at year-end.
- The quarterly dividend was $0.045 per share during fiscal 2018. The company increased the quarterly dividend to $0.25 per share beginning in fiscal 2019.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower U.S. Federal Services activity and the wind-down or transition of mature Human Services contracts, partly offset by Health Services growth and favorable currency effects.
- Health Services profitability improved because of contract expansion, better performance, cost efficiencies, and the exit from certain loss-making work.
- Human Services profitability deteriorated because of startup costs, declining caseloads on mature contracts, outcome-based payment structures, low unemployment, and pass-through revenue in Australia.
- The effective tax rate declined to 26.2% from 32.5%, benefiting from the U.S. Tax Cuts and Jobs Act, including a $10.5 million deferred-tax remeasurement benefit, partly offset by a $9.4 million transition-tax charge.
- Restructuring costs increased to $3.4 million from $2.2 million, primarily for the United Kingdom Human Services business.
- Fiscal 2018 included no gain from the K-12 Education disposal, compared with a $0.7 million gain in fiscal 2017.
- Operating income and cash flow declined despite higher net income and EPS, reflecting lower operating performance offset by tax benefits and share repurchases.
Guidance, Outlook, Risks, and Unusual Items
- On November 16, 2018, after year-end, MAXIMUS acquired General Dynamics Information Technology’s citizen engagement centers business for approximately $400 million, subject to adjustments. It funded the transaction with cash and $150 million of new revolver borrowings.
- Management expected the acquisition to add $600 million to $625 million of fiscal 2019 revenue, with mid-single-digit operating margins on the two largest cost-plus contracts. Fiscal 2019 was also expected to include approximately $3 million of one-time acquisition costs and higher interest expense.
- Management expected fiscal 2019 operating cash flow to be lower than fiscal 2017 and 2018 because those years benefited from strong year-end collections.
- Beginning October 1, 2018, the company adopted ASC Topic 606 using the modified retrospective method. Management estimated an approximately $33 million increase to opening retained earnings and an approximately $7 million fiscal 2019 revenue benefit, primarily from accelerating welfare-to-work outcome revenue.
- Beginning October 1, 2018, reporting segments were reorganized geographically into U.S. Health & Human Services, U.S. Federal Services, and Outside the U.S.
- Key risks include government budget and legislative changes, contract termination or rebid risk, performance penalties, protests and audits, cybersecurity and data protection, foreign exchange exposure, employee retention, acquisition integration, litigation, and the timing of government payments.
- A pending appeal followed dismissal of a shareholder class action concerning the U.K. Health Assessment Advisory Service project. The company could not estimate any potential loss.
- CMS proposed approximately $31 million of Medicaid disallowances relating to historical school-based Medicaid claims. MAXIMUS reserved for its estimated fees and believes school districts are responsible for the remaining amounts, but stated that a court could determine it responsible for the full balance.
- Performance bond commitments totaled $37.5 million, although management considered the probability of a draw remote. Operating lease commitments totaled $160.7 million.
Most Important Facts to Verify
- Whether the citizen engagement center acquisition achieves the projected $600 million to $625 million of fiscal 2019 revenue and expected margins.
- The amount and terms of post-acquisition revolver borrowings, leverage, interest expense, and covenant headroom.
- Whether Human Services margins recover from the fiscal 2018 decline and remain within management’s expected single-digit range for fiscal 2019.
- The sustainability of the lower tax rate after the discrete Tax Cuts and Jobs Act benefits recorded in fiscal 2018.
- The actual effects of ASC Topic 606 on revenue, retained earnings, deferred revenue, unbilled receivables, and segment profitability.
- Resolution or financial exposure related to the approximately $31 million Medicaid disallowances and the shareholder lawsuit appeal.
- Backlog conversion, renewal rates, contract attrition, and concentration among the U.S. federal government, New York, the United Kingdom, and Australia.