Business Context and Reporting Period
MAXIMUS, Inc. provides business process services to government health and human services programs worldwide, with Health Services, U.S. Federal Services, and Human Services segments. This unaudited Form 10-Q covers the three and nine months ended June 30, 2018, within fiscal 2018, compared with the corresponding 2017 periods.
Key Financial Metrics
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Revenue | $597.9 million | $600.4 million | $1.834 billion | $1.830 billion |
| Gross profit | $154.7 million | $152.2 million | $455.4 million | $449.3 million |
| Gross margin | 25.9% | 25.3% | 24.8% | 24.6% |
| Operating income | $82.6 million | $81.8 million | $233.6 million | $235.9 million |
| Operating margin | 13.8% | 13.6% | 12.7% | 12.9% |
| Net income attributable to MAXIMUS | $59.9 million | $56.9 million | $174.4 million | $156.1 million |
| Diluted EPS | $0.91 | $0.86 | $2.64 | $2.36 |
For the nine months, cash flow from operations was $189.1 million versus $252.1 million in the prior year, and free cash flow was $167.5 million versus $233.0 million. Capital expenditures and capitalized software costs were $21.6 million. Cash and cash equivalents were $229.0 million at June 30, 2018, including $20.2 million of short-term investments. Days sales outstanding was 66 days, compared with 63 days at September 30, 2017.
MAXIMUS had no borrowings under its $400 million revolving credit facility, which matures in September 2022. Letters of credit totaled $0.7 million under the facility and $3.0 million at another financial institution. The company was in compliance with all debt covenants and had no dividend restrictions.
Segment Performance
| Segment | Q3 Revenue Change | Q3 Operating Margin | 9M Revenue Change | 9M Operating Margin |
|---|---|---|---|---|
| Health Services | +7.2% | 17.8% | +5.1% | 17.1% |
| U.S. Federal Services | -15% | 13.3% | -14% | 11.5% |
| Human Services | -5.4% | 5.9% | +2.2% | 4.8% |
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 0.4%, while nine-month revenue increased 0.2%. Currency translation, principally the stronger British pound, added approximately $6.4 million to Q3 revenue and $29.4 million to nine-month revenue.
- Q3 gross margin improved to 25.9% from 25.3%, but nine-month operating margin declined to 12.7% from 12.9%.
- Health Services benefited from approximately $13.7 million of Q3 revenue and operating income related to contract amendments and work performed in earlier periods. Consolidated Q3 results included approximately $15.5 million from similar change orders.
- U.S. Federal Services revenue declined as contracts ended and anticipated disaster-relief work was reduced, although performance-based contracts supported margin improvement.
- Human Services profitability deteriorated as contracts wound down, low unemployment reduced employment-services volumes, and new contracts remained in startup phases. Q3 operating margin fell to 5.9% from 12.2%.
- Net income attributable to MAXIMUS increased 5.2% in Q3 and 12% for the nine months, substantially aided by lower income taxes following the Tax Cuts and Jobs Act.
- The company repurchased approximately 1.0 million shares for $62.6 million during the nine months, versus $28.9 million in the prior-year period. Approximately $197.8 million remained available under the repurchase authorization at June 30, 2018.
Guidance, Outlook, Risks, and Unusual Items
- Management projected a fiscal 2018 effective tax rate of 26% to 27%, including an estimated approximately $27.5 million full-year benefit from U.S. tax reform. Fiscal 2019 effective tax rate was estimated at 25% to 26%. Certain tax accounting remained provisional.
- Management expected Human Services operating margins to remain in the mid-single digits, with additional pressure in the fourth quarter from the July 1, 2018 launch of the Australian Disability Employment Services contract and other startup contracts.
- Management’s longer-term portfolio operating-margin target was 10% to 15%, with high cash conversion and continued investment in acquisitions, technology, digital capabilities, and clinical services.
- The quarterly dividend was $0.045 per share for Q3. The company announced its intention to increase the quarterly dividend to $0.25 per share beginning in fiscal 2019.
- MAXIMUS expected to adopt the new revenue-recognition standard at the beginning of fiscal 2019 using the modified retrospective approach. The cumulative equity adjustment was still being quantified; welfare-to-work incentive revenue was expected to be recognized earlier over service periods.
- A state Medicaid agency was notified of proposed CMS disallowances totaling approximately $31 million relating to historical work performed from 2004 through 2009. MAXIMUS has reserved its estimated fees and believes school districts should bear the remaining exposure.
- A putative securities class action concerning the U.K. Health Assessment Advisory Service remained unresolved. The company denied the allegations and stated that potential loss could not reasonably be estimated.
- Principal business risks include government procurement delays, budget and legislative changes, contract termination or performance penalties, pricing and rebid risk, audits and potential sanctions, litigation, cybersecurity and protected information risks, personnel retention, foreign exchange exposure, and acquisition integration.
Important Facts for Investors to Verify
- Whether Q3’s approximately $15.5 million of change-order revenue and operating income is nonrecurring and how it affects normalized margins.
- The sustainability of Health Services margins as recently renewed or reset contracts mature.
- The extent and timing of Human Services startup losses, contract wind-downs, and the expected Australian contract impact.
- The final effects of the Tax Cuts and Jobs Act, including the provisional toll-tax accounting and the sustainability of the lower tax rate.
- The amount and timing of any cumulative equity adjustment from adoption of the new revenue-recognition standard.
- Potential exposure from the approximately $31 million CMS disallowances and the unresolved securities class action.
- Cash conversion trends, receivables collection performance, share repurchases, and the planned increase in quarterly dividends.