MAXIMUS, Inc. 2013 Q2 Form 10-Q Summary
Business context and reporting period
MAXIMUS provides business-process outsourcing, administrative, consulting, case-management, and workforce services primarily to government health and human services agencies. The company reports through Health Services and Human Services segments. The filing covers the quarter and six months ended March 31, 2013, within fiscal 2013; results are unaudited.
Financial performance and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $326.4 million, up 34.1% | $612.6 million, up 26.8% |
| Gross profit | $97.4 million; 29.9% margin | $174.0 million; 28.4% margin |
| Operating income from continuing operations | $50.7 million; 15.5% margin | $84.8 million; 13.8% margin |
| Income from continuing operations | $31.7 million | $53.5 million |
| Net income | $31.7 million | $53.0 million |
| Diluted EPS | $0.91 | $1.52 |
| Cash flow from operating activities | Not separately provided for the quarter | $38.9 million, including discontinued operations |
| Free cash flow from continuing operations | Not separately provided for the quarter | $17.9 million |
- Health Services revenue increased 22.8% in the quarter and 17.1% year to date; operating margins were 14.6% and 13.2%, respectively.
- Human Services revenue increased 56.1% in the quarter and 45.7% year to date; reported operating margins were 16.7% and 14.7%, respectively.
- Cash and cash equivalents were $187.3 million at March 31, 2013, versus $189.3 million at September 30, 2012. Approximately 70% was held overseas and would potentially incur additional taxes if repatriated.
- Total debt was approximately $1.6 million, excluding $18.5 million of letters of credit. The company had $100 million of revolving credit capacity, with $84.5 million available after letters of credit.
- The company was in compliance with all credit-agreement covenants, and its total leverage ratio was below 0.5:1.0.
- Performance bond commitments totaled $47.4 million. Management considered the likelihood of draws under the letters of credit and performance bonds remote.
Material changes versus the prior comparable period
- Revenue growth reflected organic growth, the April 2012 PSI acquisition, and a one-time benefit from terminating an acquired loss-making PSI contract.
- The contract termination contributed approximately $16.0 million of revenue and $10.9 million of operating income, including a substantial non-cash component. Management estimated the benefit to net income at $6.5 million, or $0.19 per diluted share.
- Excluding the termination benefit, quarterly operating-income growth was approximately 45%, versus reported growth of 85%; six-month operating-income growth was approximately 36%, versus reported growth of 56%.
- Human Services’ reported margins benefited materially from the termination. Excluding it, Human Services operating margins were 9.4% for the quarter and 10.9% for the six months.
- Operating cash flow from continuing operations declined to $39.5 million from $69.0 million, primarily because of higher working capital needs and payment delays on two large U.S. contracts.
- Capital spending and capitalized software increased, producing $18.0 million of investing cash outflows versus $5.9 million in the prior-year period.
- Share repurchases totaled $14.6 million for 249,549 shares during the six months; $114.6 million remained available under the authorization at March 31, 2013.
- The effective tax rate declined to 38.3% for the quarter and 38.2% for the six months, compared with 49.6% and 43.3%, respectively, in the prior-year periods. The prior-year rates were affected by a $1.6 million correction of an immaterial prior-year error.
Guidance, outlook, risks, contingencies, and unusual items
- No specific quantitative earnings or revenue guidance was provided in the filing.
- Management cited opportunities related to the Affordable Care Act, state health insurance exchanges, Medicaid administration, Medicare appeals, welfare reform, and international workforce programs.
- The sales pipeline was $2.3 billion at March 31, 2013, down from $2.7 billion at December 31, 2012. The pipeline generally includes opportunities expected to issue requests for proposals within six months and usually excludes future option periods.
- Management noted that government contract performance requirements, audits, regulatory compliance, contract terminations, liquidated damages, and changes in government program funding could materially affect results.
- A state Medicaid agency had asserted a $2.3 million claim relating to a discontinued business. No legal action had been initiated; MAXIMUS believed the relevant school districts were responsible for most potential amounts.
- A school district sought to vacate an arbitration decision that had rejected claims alleging at least $10 million of damages relating to the divested SchoolMAX business. MAXIMUS stated that it would contest related allegations vigorously.
- Discontinued operations included a $0.6 million loss for the six months, including approximately $1.0 million of arbitration-related costs, partly offset by a $0.1 million gain on disposal.
- The board declared a $0.09 quarterly dividend payable May 31, 2013, and subsequently declared a two-for-one stock split payable June 28, 2013.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Separate sustainable operating performance from the unusual $16.0 million revenue and $10.9 million operating-income benefit associated with the terminated PSI contract.
- Assess whether working-capital pressure and customer payment delays normalize, and reconcile operating cash flow with reported earnings.
- Monitor integration and performance of PSI-acquired contracts, including the effect of the terminated loss-making contract.
- Review the $2.3 billion sales pipeline for conversion, timing, margins, and exposure to government procurement delays.
- Evaluate overseas cash balances and potential tax costs of repatriation.
- Track the Medicaid claim, SchoolMAX-related proceedings, letters of credit, performance bonds, and contract-compliance risks.
- Reconcile per-share metrics and historical comparisons for the subsequent two-for-one stock split.