MAXIMUS, Inc. Form 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 and nine months ended June 30, 2014, within the fiscal year ending September 30, 2014. The financial statements are unaudited.
Growth was led by Health Services contracts associated with the Affordable Care Act (ACA), Medicaid, customer contact centers, appeals, and assessments. The Health Services segment represented approximately 72.8% of quarterly revenue, while Human Services represented approximately 27.2%.
Financial performance and liquidity
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Nine months ended June 30, 2014 | Nine months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $419.9 million | $334.3 million | $1,265.5 million | $946.9 million |
| Gross profit | $112.6 million | $94.6 million | $339.2 million | $268.5 million |
| Gross margin | 26.8% | 28.3% | 26.8% | 28.4% |
| Operating income | $55.3 million | $44.4 million | $173.5 million | $129.1 million |
| Operating margin | 13.2% | 13.3% | 13.7% | 13.6% |
| Net income | $34.1 million | $28.1 million | $109.2 million | $81.1 million |
| Diluted EPS | $0.49 | $0.40 | $1.57 | $1.16 |
- Revenue increased 26% for the quarter and 34% for the nine-month period. Management attributed approximately 4.9% of growth to the Health Management Limited acquisition, with the balance primarily organic.
- SG&A increased in dollars but declined as a percentage of revenue to 13.7% from 14.7% in the quarter and to 13.0% from 14.6% for the nine months.
- Cash provided by operating activities was $165.2 million from continuing operations for the nine months, compared with $89.2 million in the prior-year period. Reported free cash flow from continuing operations was $137.7 million versus $50.6 million.
- Capital expenditures and capitalized software costs totaled $27.6 million for the nine months, compared with $38.5 million in the prior-year period.
- Cash and cash equivalents were $182.9 million at June 30, 2014, up from $125.6 million at September 30, 2013. Approximately 55% was held outside the United States; repatriation could create additional taxes, which were not quantified.
- Total debt was approximately $1.3 million at June 30, 2014, consisting primarily of a Canadian interest-free loan. No borrowings were outstanding under the $100 million revolving credit facility, although letters of credit totaled $6.7 million under that facility and $3.0 million with another institution.
- The company had $39.3 million of performance bond commitments and was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Health Services revenue increased 40% in the quarter and 57% for the nine months, driven by ACA-related new work and contract expansion, as well as HML.
- Health Services gross margin declined to 26.1% from 28.9% in the quarter and to 26.0% from 27.5% for the nine months. Management cited lower-margin federal health care contracts reimbursed on a cost-plus basis and additional HML amortization.
- Human Services revenue declined 1.9% in the quarter and 5.2% for the nine months. The prior-year nine-month period included a one-time contract termination benefit of $16.0 million of revenue and $10.9 million of profit.
- Human Services operating income declined to $41.5 million from $46.2 million for the nine months, primarily reflecting the absence of the prior-year termination benefit; quarterly operating income increased to $13.0 million from $11.0 million.
- Acquisition-related expenses were zero in 2014 versus $1.2 million for the quarter and $1.5 million for the nine months in 2013. Legal and settlement expense was $0.6 million for the 2014 nine-month period versus a $0.2 million recovery in the prior-year period.
- Share repurchases increased to $59.4 million for the nine months from $27.8 million. The company increased its repurchase authorization by $150 million in June 2014, leaving $187.3 million available at June 30.
- Foreign currency translation produced a $6.4 million comprehensive-income benefit in the quarter and a $4.9 million benefit for the nine months, compared with losses in the prior-year periods.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected continued ACA and Medicaid demand through fiscal 2014, but anticipated lower ACA volumes in fiscal 2015 and that some supplemental services would not recur.
- Appeals and assessments volumes were expected to decline because of changes to the Recovery Audit Contractor program.
- Two large programs with the U.S. Department of Education and the U.K. Department for Work and Pensions were scheduled to begin in the fourth quarter of fiscal 2014. Management expected initial losses over the following quarters as work ramps up, with anticipated contract amendments expected to offset fourth-quarter losses.
- Australian expansion was expected to support growth but initially temper margins as additional work commenced.
- The company faces risks from government budgetary and legislative changes, contract performance requirements, audits and reviews, regulatory compliance, payment delays, foreign exchange, and the timing of government program volumes.
- A purported wage-and-hour class action alleges misclassification and unpaid overtime involving federal health care project personnel. Plaintiffs allege damages of at least $5.0 million. MAXIMUS reclassified trainers, denies liability regarding supervisors, and had reserved $0.6 million for estimated defense costs and employee liabilities at June 30, 2014.
- A state Medicaid agency has asserted a $2.3 million claim relating to a discontinued business line. MAXIMUS believes its exposure is limited and that school districts bear the principal responsibility.
- The company declared a quarterly dividend of $0.045 per share on July 3, 2014, payable August 29, 2014.
- The company adopted the new customer revenue-recognition standard during fiscal 2018 and was still evaluating its effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether ACA-related revenue and customer-contact-center volumes normalize or decline materially in fiscal 2015.
- The margin impact and ramp-up losses associated with new federal and U.K. programs and lower-margin cost-plus contracts.
- The sustainability of the unusually strong operating cash flow and the expected fourth-quarter increase in accounts receivable.
- The status and potential exposure of the wage-and-hour class action and other contingent claims.
- The tax consequences and practical availability of cash held in foreign jurisdictions.
- The pace and price of further share repurchases under the expanded $193.7 million authorization.
- The ultimate effect of the new revenue-recognition standard on contract accounting and reported results.