MAXIMUS, Inc. 10-Q Summary
Business Context and Reporting Period
MAXIMUS provides business-process services to government health and human-services agencies in the United States, Australia, Canada, the United Kingdom, and Saudi Arabia. The filing covers the three months ended December 31, 2013, compared with the three months ended December 31, 2012. The results are unaudited and are not necessarily indicative of the full fiscal year.
Financial Performance and Position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $406.6 million | $286.3 million | 42.0% increase |
| Gross profit | $105.9 million | $76.5 million | 38.4% increase |
| Gross margin | 26.0% | 26.7% | Down 70 basis points |
| Operating income | $53.3 million | $34.0 million | 56.7% increase |
| Operating margin | 13.1% | 11.9% | Up 120 basis points |
| Income from continuing operations | $33.8 million | $21.8 million | 55.2% increase |
| Diluted EPS | $0.49 | $0.31 | 58.1% increase |
| Net income | $33.9 million | $21.3 million | 58.8% increase |
| Operating cash flow | $41.9 million | $9.6 million | Increase of $32.3 million |
| Free cash flow from continuing operations | $34.0 million | $(0.4) million | Improvement of $34.4 million |
Health Services revenue increased 70.0% to $299.2 million, with an operating margin of 13.9% versus 11.7% in the prior-year quarter. Human Services revenue decreased 2.6% to $107.4 million, and its operating margin declined to 10.9% from 12.4%.
Cash and cash equivalents were $120.6 million at December 31, 2013, including restricted cash of $11.9 million. Total liabilities were $305.1 million and shareholders’ equity was $539.1 million. Debt was minimal: $1.4 million remained outstanding under an interest-free Canadian loan, while the company reported no other debt outstanding in its liquidity discussion. MAXIMUS had access to approximately $85.3 million under its U.S. revolving credit facility and was in compliance with all covenants.
Investing cash outflows were $7.9 million, consisting principally of $4.4 million of property and equipment purchases and $3.6 million of capitalized software. Financing cash outflows were $37.1 million, including $21.5 million of share repurchases, $12.8 million of employee tax withholding related to restricted stock vesting, and $3.1 million of dividends.
Material Changes Versus the Prior Comparable Period
- Growth was driven primarily by new and expanded Health Services work related to the Affordable Care Act, increased federal Medicare appeals volumes, and the July 2013 acquisition of Health Management Limited.
- ACA-related customer contact-center volumes exceeded initial expectations because consumers experienced technology problems with health-insurance exchanges.
- SG&A expense increased in absolute dollars to $52.6 million but declined to 12.9% of revenue from 14.7%, reflecting operating leverage from newly launched contracts.
- Gross margin declined because of weaker Human Services profitability, including the absence of performance-based payments received in the prior-year quarter.
- Operating cash flow improved substantially because of higher earnings and improved collections, partially offset by working-capital investment and annual bonus payments.
- The company repurchased 505,738 shares for $22.5 million during the quarter. Approximately $74.9 million remained available under the repurchase authorization at December 31, 2013.
- Foreign currency translation reduced comprehensive income by $3.1 million, and foreign-exchange movements reduced cash by $1.9 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected some ACA-related benefit to continue into the second fiscal quarter through the scheduled March 31, 2014 open-enrollment period. ACA work was expected to shift the company’s seasonal pattern toward greater revenue and earnings in the first half of the fiscal year. Management also identified potential future opportunities if states operating on the federal marketplace migrate to their own exchanges.
Capital expenditures were expected to be lower in fiscal 2014 because significant ACA-related projects had commenced. Management believed operating cash flows and available credit were sufficient to fund operations, capital expenditures, dividends, repurchases, and potential acquisitions. Approximately 65% of cash was held overseas; repatriation could result in additional taxes, which the company had not quantified.
- Key operating risks include failure to comply with government regulations, failure to meet contract performance requirements, contract termination or liquidated damages, government audits, and changes in legislation or government budgets.
- The company had $17.7 million of letters of credit and $49.0 million of performance-bond commitments. Management considered the likelihood of draws remote.
- A state Medicaid agency had asserted a $2.3 million claim related to a discontinued business line. MAXIMUS believed the relevant school districts were responsible for amounts disallowed and that its exposure was limited principally to its fees.
- A school district appeal remained pending after an arbitration panel rejected at least $10 million of asserted damages related to the discontinued SchoolMAX business.
- In January 2014, a purported class action alleged wage-and-hour violations involving trainers and supervisors at a federal health-care project and sought at least $5 million in damages. MAXIMUS denied liability.
- The company continued to receive small cash payments and recognize limited gains from the sale of a discontinued business, while collectability of the related promissory note remained uncertain.
- On January 31, 2014, MAXIMUS acquired certain Australian businesses for $2.7 million in cash; purchase-price allocation was not complete at the filing date.
Important Facts for Investors to Verify
- Whether ACA-related volumes and profitability remain elevated after the March 31, 2014 open-enrollment period.
- The sustainability of Health Services growth and the extent to which it reflects organic growth versus the HML acquisition.
- Whether Human Services margins recover after the loss of prior-year performance-based payments.
- Cash conversion, receivables collections, and the effect of annual bonuses and contract-related working-capital requirements.
- Future share repurchases, dividends, and the impact of overseas cash balances and potential repatriation taxes.
- Developments in the wage-and-hour class action, Medicaid claim, SchoolMAX appeal, and other discontinued-operation contingencies.
- Whether government budget decisions, regulatory changes, audits, or contract-performance requirements affect future awards or existing contracts.