MAXIMUS, Inc. — Fiscal 2012 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2012. The filing is an annual Form 10-K; fourth-quarter data are included but not separately audited. MAXIMUS provides business process services to government health and human services agencies through its Health Services and Human Services segments in the United States, Australia, Canada, the United Kingdom and Saudi Arabia.
Financial performance and position
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $1,050.1 million | $929.6 million | +13.0% |
| Gross profit | $287.9 million | $253.7 million | +13.5% |
| Operating income | $127.6 million | $122.4 million | +4.2% |
| Operating margin | 12.1% | 13.2% | Down 1.1 points |
| Income from continuing operations | $76.1 million | $82.1 million | Down 7.4% |
| Net income | $76.1 million | $81.2 million | Down 6.2% |
| Diluted EPS | $2.19 | $2.28 | Down 3.9% |
| Operating cash flow from continuing operations | $115.2 million | $97.6 million | +18.0% |
| Free cash flow from continuing operations | $92.0 million | $71.5 million | +28.7% |
Gross margin was approximately 27.4% in fiscal 2012 versus 27.3% in fiscal 2011. SG&A increased to $157.4 million, or 15.0% of revenue, from $132.1 million, or 14.2%. The effective tax rate rose to 42.2% from 34.8%, including a $2.7 million prior-year tax error correction; excluding that adjustment, management stated the rate would have been 40.3%.
Health Services revenue increased 18.6% to $671.2 million, with operating income of $80.6 million and a 12.0% margin versus 13.2% in the prior year. Human Services revenue increased 4.2% to $379.0 million, with operating income of $49.9 million and a 13.2% margin versus 12.9%.
At September 30, 2012, cash and cash equivalents were $189.3 million, working capital was $249.5 million, total assets were $695.3 million and shareholders’ equity was $451.1 million. Long-term debt was only $1.7 million, primarily an interest-free Canadian loan. The company had access to up to $19.5 million under its U.S. credit facility, which matured on January 25, 2013. Approximately 66% of cash was held outside the United States.
Material changes versus the prior comparable period
- MAXIMUS acquired PSI Services Holding, Inc. and Policy Studies, Inc. on April 30, 2012. The acquisition contributed $60.1 million of fiscal 2012 revenue, required approximately $66.0 million of net cash consideration and added $39.2 million of goodwill and $22.2 million of identifiable intangible assets.
- Organic revenue growth was 6.5%, while Health Services organic growth was 14.8%. Growth was driven by PSI, new work and Medicaid managed-care expansion, particularly in Texas.
- Health Services margin declined primarily because the Texas contract operates at a lower margin and because of revenue mix changes.
- Human Services revenue excluding PSI-related growth declined 6.4%, mainly because of the transition from the United Kingdom’s Flexible New Deal to the Work Programme and lower Australian volumes. The Work Programme has a more back-ended payment structure.
- Fiscal 2012 included a $6.8 million benefit from changes to a fixed-price contract and a $10.2 million benefit from a Health Services contract amendment. These items supported results and may not recur at the same level.
- Legal and settlement expense was $0.1 million, compared with an $0.8 million recovery in fiscal 2011. Fiscal 2012 included a $0.6 million former-employee lawsuit accrual and a $0.5 million client-indemnification accrual, partly offset by a $1.2 million insurance recovery.
- Share repurchases declined to $13.0 million from $56.5 million, while dividends paid increased to $12.2 million from $10.3 million. The quarterly dividend was increased to $0.09 per share.
Fourth-quarter information
For the quarter ended September 30, 2012, revenue was $300.7 million, operating income was $40.0 million and net income was $23.7 million. Diluted EPS was $0.68. Human Services operating income increased to $21.8 million in the fourth quarter, benefiting from the segment’s typical seasonal contribution from its tax-credit business.
Outlook, risks and unusual items
- Management expected demand to benefit from the Affordable Care Act, Medicaid managed-care expansion, health insurance exchanges, government austerity measures and welfare reform. The company estimated backlog of approximately $2.9 billion at September 30, 2012, with approximately 38% expected to be recognized in fiscal 2013 and backlog representing about 90% of estimated fiscal 2013 revenue.
- Backlog estimates include awarded but unsigned contracts and performance-based assumptions, exclude renewals, and may change because government contracts can generally be terminated on short notice.
- Customer concentration is material: Texas represented 18% of fiscal 2012 revenue, Australia 16% and California 10%. Approximately 61% of revenue came from state and local agencies whose programs received significant federal funding, 26% from foreign customers and 9% from U.S. federal agencies.
- Fixed-price and performance-based contracts represented approximately 71% of revenue. These contracts may produce higher margins but expose MAXIMUS to cost overruns, performance requirements, irregular revenue recognition and liquidated damages.
- Government audits, contract rebids, changes in legislation, budget constraints, failure to meet contractual performance standards and reductions in government program volumes could adversely affect results.
- Liquidity risks include delayed government payments, back-ended cash receipts on international welfare-to-work contracts and significant start-up expenditures. The company stated that prolonged payment delays could require additional financing or other actions.
- Letters of credit totaled $18.5 million and performance-bond commitments totaled $48.0 million. Management considered the likelihood of draws or defaults remote.
- A former SchoolMAX client asserted arbitration claims seeking at least $10 million. MAXIMUS stated that the possible loss could not reasonably be estimated, that it has substantial defenses and that it believes it is entitled to indemnification from the buyer of the business.
- The company had $113.8 million of future operating lease payments and $1.1 million of unrecognized tax benefits, including interest and penalties. It also had $0.4 million of accrued potential DeltaWare contingent consideration.
- The company received unqualified audit opinions on its financial statements and internal control over financial reporting as of September 30, 2012.
Investor verification points
- Verify the sustainability of Health Services growth and the margin impact of the Texas contract.
- Assess the timing, cash economics and profitability of the U.K. Work Programme and other performance-based contracts.
- Reconcile fiscal 2012 earnings with the $6.8 million contract benefit, $10.2 million contract amendment, PSI acquisition effects and higher tax rate.
- Review PSI’s final purchase-price allocation, including the acquired loss-making system-integration contract and related deferred revenue.
- Monitor customer concentration, government procurement and rebid outcomes, backlog conversion and contract termination provisions.
- Confirm the status and potential exposure of the SchoolMAX arbitration, government Medicaid claim and performance guarantees.
- Evaluate overseas cash availability and the potential tax cost of repatriating approximately $108 million of cumulative foreign earnings.