MAXIMUS, Inc. Fiscal 2017 Form 10-K Summary
Business context and reporting period
MAXIMUS provides business process, technology, assessment and consulting services primarily to government health and human services programs. Operations are organized into Health Services, U.S. Federal Services and Human Services segments across the United States, United Kingdom, Australia, Canada, Saudi Arabia and Singapore. This filing covers the fiscal year ended September 30, 2017; fourth-quarter data is included in the annual results.
Management characterized fiscal 2017 as a period of temporary industry disruption caused by the transition to a new U.S. administration, longer procurement cycles, budget uncertainty and agency staffing shortages. The company completed the acquisition of Revitalised Limited, a U.K. digital health, fitness and well-being solutions provider.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $2,451.0 million | $2,403.4 million | +2.0% |
| Gross profit | $611.9 million | $562.2 million | +8.8% |
| Gross margin | 25.0% | 23.4% | +160 basis points |
| Operating income | $313.5 million | $286.6 million | +9.4% |
| Operating margin | 12.8% | 11.9% | +90 basis points |
| Net income attributable to MAXIMUS | $209.4 million | $178.4 million | +17.4% |
| Diluted EPS | $3.17 | $2.69 | +17.8% |
| Cash flow from operations | $337.2 million | $180.0 million | +87.3% |
| Free cash flow | $313.0 million | $133.6 million | +134.4% |
| Cash and cash equivalents | $166.3 million | $66.2 million | +$100.1 million |
| Debt | $0.7 million | $165.6 million | Substantially reduced |
Adjusted EBITDA increased to $400.6 million from $372.1 million. The effective tax rate declined to 32.5% from 37.0%, helped by a $6.6 million benefit from equity award vesting and a $3.4 million benefit from prior-period research and development tax credits. Excluding these items, management estimated the fiscal 2017 effective tax rate at 35.6%.
Segment performance
| Segment | FY2017 revenue | Revenue change | FY2017 operating income | Operating margin |
|---|---|---|---|---|
| Health Services | $1,380.2 million | +6.3% | $215.2 million | 15.6% |
| U.S. Federal Services | $545.6 million | -7.8% | $65.0 million | 11.9% |
| Human Services | $525.2 million | +2.3% | $48.6 million | 9.2% |
- Health Services: Growth reflected expanded U.S. contracts, improved performance on the U.K. Health Assessment Advisory Service contract, the full-year contribution from Ascend and the Revitalised acquisition. Operating margin improved from 14.3% to 15.6%.
- U.S. Federal Services: Revenue declined primarily because a Department of Veterans Affairs subcontract wound down, reducing related revenue by approximately $63 million. Efficiency savings increased gross and operating margins.
- Human Services: Revenue grew with the Australian jobactive contract and Assessments Australia, but gross profit declined because of pass-through revenue, early-stage outcome-based contracts, the U.K. Work Programme wind-down and foreign-exchange effects.
Material changes versus the prior comparable period
- Revenue growth slowed materially from 14.5% in fiscal 2016 to 2.0% in fiscal 2017, reflecting the federal procurement pause, the U.S. Federal Services contract wind-down and foreign-currency pressure.
- Profitability improved despite slower revenue growth. Gross margin increased to 25.0% from 23.4%, primarily due to operational efficiencies and improved U.K. Health Services performance.
- Cash collections improved significantly. Days sales outstanding fell to 63 days from 70 days, contributing to the increase in operating cash flow. Management cautioned that this improvement is unlikely to repeat and expects fiscal 2018 operating cash flow to decline.
- The company repaid substantially all credit-facility borrowings. The revolving facility was extended to September 2022 and provides borrowing capacity of up to $400 million; $399.3 million was available at year-end.
- Fiscal 2017 included $2.2 million of U.K. restructuring costs and a $0.7 million gain related to the resolution of contingencies from the 2016 K-12 Education business sale.
- The company repurchased approximately 0.6 million shares for $28.9 million during fiscal 2017 and had $109.9 million remaining under its repurchase authorization at year-end. The quarterly dividend remained $0.045 per share.
Backlog, outlook and management commentary
- Backlog increased to approximately $5.7 billion from $4.0 billion, led by Health Services backlog of $4.25 billion versus $2.43 billion. Management estimated that 44% of year-end backlog would be recognized as fiscal 2018 revenue and, including anticipated option renewals, would represent approximately 94% of estimated fiscal 2018 revenue.
- Management expects fiscal 2018 Health Services growth from existing contracts and new work. The California Medicaid enrollment broker contract was rebid for a new ten-year term through June 2027, and Michigan and Texas contracts were extended.
- Management expects U.S. Federal Services to benefit from a short-term disaster-relief contract during the first half of fiscal 2018.
- Human Services results are expected to be tempered by early-stage contracts with outcome-based payments, which may not generate material outcome fees during initial operating periods.
- Management estimated fiscal 2018 revenue attrition at approximately 9%, to be offset primarily by new Health Services work. Fiscal 2018 effective tax rate guidance was 35% to 36%, and expected intangible-amortization expense was $10.3 million.
Risks, contingencies and unusual items
- Government customers may terminate contracts on short notice, with or without cause. Government budget changes, shutdowns, delayed appropriations, policy changes and procurement delays could affect revenue, profitability and cash collections.
- Approximately 49% of fiscal 2017 revenue came from U.S. state agencies, many of whose programs depend on federal funding. The U.S. Federal Government, New York State and the U.K. Government represented 19%, 15% and 12% of consolidated revenue, respectively.
- Performance-based contracts expose results to caseloads, transaction volumes, contract maturity and the timing of outcome payments. Fixed-price and performance-based contracts also create pricing and execution risk.
- Foreign operations represented approximately 28% of revenue and 17% of operating income. A 10% unfavorable currency movement would have reduced comprehensive income by approximately $18.7 million and cash by approximately $6.4 million, based on the filing’s sensitivity analysis.
- A shareholder class-action lawsuit filed in August 2017 alleges misleading disclosures concerning the U.K. Health Assessment Advisory Service project. The company denies the allegations; the filing states that the potential loss cannot currently be estimated.
- The company had $175.1 million of operating lease commitments, $32.4 million of deferred compensation liabilities and $17.7 million of performance-bond commitments. Management considered the probability of performance-bond draws remote.
- Fiscal 2017 earnings benefited from tax items that may not recur, including the $6.6 million equity-compensation tax benefit and $3.4 million of prior-period research and development credits.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether federal procurement activity and government budget uncertainty improve sufficiently to offset the loss or wind-down of federal contracts.
- Whether Health Services growth, including the California, Michigan and Texas contracts, offsets approximately 9% anticipated revenue attrition.
- Whether the improved 63-day DSO and $337.2 million of operating cash flow are sustainable after the one-time collection improvement.
- The maturity and profitability trajectory of Australian jobactive and other outcome-based Human Services contracts.
- The potential financial and reputational impact of the shareholder lawsuit and any related government audits or contract reviews.
- The effect of foreign-currency movements, particularly the British pound, on revenue, margins, cash flow and reported results.
- The recurrence of tax benefits and the resulting normalized effective tax rate for fiscal 2018.