MAXIMUS, Inc. 2015 Form 10-K Summary
Business context and reporting period
MAXIMUS provides business process and program-management services to government health and human services agencies in the United States, United Kingdom, Australia, Canada, Saudi Arabia and New Zealand. The filing covers the fiscal year ended September 30, 2015. Although the request references 2015 Q4, the filing is an annual report and includes unaudited quarterly data for the quarter ended September 30, 2015.
During the fourth quarter, the Company changed its segment structure to separately report Health Services, U.S. Federal Services and Human Services. The U.S. Federal Services segment includes federal work formerly reported in Health Services and the Acentia operations acquired in April 2015.
Financial performance and key metrics
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $2,099.8 million | $1,700.9 million | 23.5% increase |
| Gross profit | $512.7 million | $452.1 million | 13.4% increase |
| Gross margin | 24.4% | 26.6% | Down 220 basis points |
| Operating income | $259.8 million | $225.3 million | 15.3% increase |
| Operating margin | 12.4% | 13.2% | Down 80 basis points |
| Net income attributable to MAXIMUS | $157.8 million | $145.4 million | 8.5% increase |
| Diluted EPS | $2.35 | $2.11 | 11.4% increase |
| Operating cash flow | $206.2 million | $213.6 million | 3.5% decrease |
| Free cash flow | $101.1 million | $166.5 million | 39.3% decrease |
Non-GAAP indicators included EBITA of $289.5 million, EBITDA of $336.4 million and adjusted diluted EPS of $2.39. The effective tax rate increased to 38.4% from 36.1%.
For the September 2015 quarter, revenue was $578.7 million, operating income was $61.5 million, net income attributable to MAXIMUS was $35.4 million and diluted EPS was $0.53.
Segment results
| Segment | FY 2015 revenue | FY 2015 operating income | FY 2015 operating margin | Revenue change |
|---|---|---|---|---|
| Health Services | $1,109.2 million | $154.3 million | 13.9% | 22.3% increase |
| U.S. Federal Services | $502.5 million | $59.4 million | 11.8% | 47.0% increase |
| Human Services | $488.1 million | $60.2 million | 12.3% | 7.9% increase |
Liquidity, debt and capital allocation
- Cash and cash equivalents were $74.7 million at September 30, 2015, down from $158.1 million.
- Total debt was $211.0 million, including $209.7 million outstanding under the revolving credit facility.
- The revolving credit facility provides capacity of up to $400 million and matures on March 9, 2020. Approximately $189.5 million remained available at year-end.
- The Company was in compliance with all debt covenants and reported a total leverage ratio below 1.0 to 1.0.
- Interest expense was $1.4 million in FY 2015, compared with none in FY 2014, primarily because borrowings funded the Acentia acquisition and other requirements.
- Investing cash outflows were $393.9 million, including $289.2 million for acquisitions and $105.1 million for property, equipment and capitalized software.
- The Company repurchased $82.8 million of common stock and paid $11.9 million in dividends during FY 2015. Approximately $168.6 million remained available under the repurchase authorization at year-end.
- Days sales outstanding increased to 67 days from 64 days but remained within management’s stated 65-to-80-day target range.
Material changes versus the prior comparable period
- Revenue growth reflected $317.7 million of organic growth and $141.0 million of acquired revenue from Acentia and Remploy, partly offset by a $59.8 million foreign-currency headwind.
- Acentia was acquired for approximately $293.5 million in April 2015 and contributed $104.0 million of revenue and $8.9 million of operating income in the period after acquisition.
- Remploy, a U.K. disability employment-services provider, was acquired in April 2015; MAXIMUS acquired 70% of the business.
- Consolidated gross margin declined because of lower-margin cost-plus and time-and-materials work from Acentia, reduced incentives on the U.K. HAAS contract, lower federal appeals volumes and contract start-up activity.
- U.S. Federal Services revenue increased substantially, but operating income declined 5.9% because high-margin Medicare appeals work declined and Acentia carries a greater mix of lower-margin contracts.
- Health Services operating income increased 34%, supported by new work and contract expansion, despite HAAS recruiting and retention issues.
- Human Services operating income increased 13.3%, supported by organic growth and Remploy, although foreign-exchange movements and start-up costs for a new Australian contract reduced reported results.
- Goodwill increased to $376.3 million from $170.6 million, primarily from the Acentia acquisition. No goodwill or long-lived-asset impairment charges were recorded.
Guidance, outlook, risks and unusual items
- Management anticipated a FY 2016 effective tax rate of 37% to 39%.
- Management expected FY 2016 capital expenditures to be significantly lower than in FY 2015.
- Management expected U.S. Federal Services margins to improve from a Department of Education contract, but to remain closer to FY 2015 levels than earlier historical levels.
- Management expected the Australian welfare-to-work contract to be fully ramped up in FY 2016.
- Backlog was estimated at $4.6 billion at September 30, 2015, up from $3.8 billion. Approximately 45% was expected to convert to FY 2016 revenue, and backlog plus anticipated option renewals represented approximately 93% of estimated FY 2016 revenue.
- The HAAS contract remained a key execution risk because recruiting and retention challenges reduced performance incentives and could materially affect FY 2016 Health Services results.
- Government contracts may be terminated on short notice, with or without cause, and are subject to rebids, audits, performance requirements and potential liquidated damages.
- Other principal risks include government budget changes, federal shutdowns, contract pricing and bidding risk, compliance investigations, litigation, cybersecurity and protected-information risks, acquisition integration and foreign-currency movements.
- Foreign subsidiaries held approximately 80% of year-end cash. Approximately $190 million of foreign earnings were considered indefinitely reinvested outside the United States; repatriation could result in additional U.S. taxes.
- The Company had $27.3 million of performance-bond commitments, although management considered the probability of a draw remote.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The internal-control assessment excluded Acentia, as permitted for an acquired business.
Most important facts for investors to verify
- Whether HAAS recruiting and performance issues were resolved and whether related incentives recovered in FY 2016.
- Whether U.S. Federal Services margins stabilized as Medicare appeals declined and Acentia’s lower-margin work became a larger portion of the segment.
- Actual conversion of the $4.6 billion backlog into revenue and the exercise of assumed contract options.
- Debt repayment, interest-rate exposure and remaining capacity under the $400 million revolving facility.
- Cash conversion, including the effect of higher receivables and the decline in free cash flow.
- Integration, organic growth and profitability of Acentia and Remploy, including goodwill and intangible-asset impairment risk.
- Foreign-exchange effects on international revenue, operating income, cash and accumulated other comprehensive income.
- Government budget, procurement, audit, termination and compliance developments affecting major customers, particularly the U.S. Federal Government and New York.