MAXIMUS, Inc. Fiscal 2013 Form 10-K 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. Reportable segments are Health Services and Human Services. This Form 10-K covers the fiscal year ended September 30, 2013; fourth-quarter results are included below where disclosed. The financial statements received an unqualified audit opinion, and management and Ernst & Young concluded that internal controls were effective.
- Health Services represented 65% of fiscal 2013 revenue and includes Medicaid, CHIP, Medicare, Affordable Care Act and health exchange services.
- Human Services represented 35% of revenue and includes welfare-to-work, child support, education and related consulting services.
- Approximately 12,000 employees were employed at September 30, 2013.
Financial performance and key metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Revenue | $1,331.3 million | $1,050.1 million | +26.8% |
| Gross profit | $386.0 million | $287.9 million | +34.1% |
| Gross margin | 29.0% | 27.4% | +160 basis points |
| Operating income | $186.2 million | $127.6 million | +46.0% |
| Operating margin | 14.0% | 12.1% | +190 basis points |
| Income from continuing operations | $117.1 million | $76.1 million | +53.9% |
| Net income | $116.7 million | $76.1 million | +53.3% |
| Diluted EPS | $1.67 | $1.09 | +53.2% |
Fiscal 2013 revenue growth was 27.5% on a constant-currency basis and 19.4% organically. The Health Services segment generated $862.9 million of revenue, $129.8 million of operating income and a 15.0% operating margin. Human Services generated $468.4 million of revenue, $58.1 million of operating income and a 12.4% operating margin.
Fourth-quarter fiscal 2013 revenue was $384.3 million, gross profit was $117.5 million and net income was $35.6 million. Diluted fourth-quarter EPS was $0.51.
Cash flow, liquidity and capital structure
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Operating cash flow from continuing operations | $121.6 million | $115.2 million |
| Capital expenditures | $43.6 million | $18.4 million |
| Capitalized software | $18.6 million | $4.8 million |
| Free cash flow from continuing operations | $59.4 million | $92.0 million |
| Cash and cash equivalents | $125.6 million | $189.3 million |
| Long-term debt | $1.5 million | $1.7 million |
- Cash declined by $63.7 million during fiscal 2013, primarily reflecting the $71.4 million cash acquisition of Health Management Limited, higher capital investment and working-capital needs.
- The company had access to a $100 million revolving credit facility, with $84.6 million available after letters of credit and other usage. Total leverage was less than 0.1:1.0, and all covenants were satisfied.
- Letters of credit totaled $15.4 million and performance bond commitments totaled $50.8 million; management considered the probability of default-related draws remote.
- Working capital was $227.3 million and shareholders’ equity was $529.5 million at September 30, 2013.
- The company repurchased $32.5 million of stock during fiscal 2013 and had $97.1 million remaining under its authorization. The quarterly dividend was $0.045 per share, or $0.18 annually.
Material changes versus the prior comparable period
- Health Services growth reflected Affordable Care Act work, higher Medicare appeals volumes, Medicaid managed-care activity and the full-year contribution from Policy Studies, Inc. The segment’s operating margin increased from 12.0% to 15.0%.
- Human Services revenue increased 23.6%, but reported results included a nonrecurring $16.0 million revenue and $10.9 million operating-profit benefit from the termination of a loss-making systems-integration contract acquired with PSI. Excluding that item, segment revenue was $452.4 million and operating income was $47.2 million, implying a 10.4% operating margin.
- Human Services margins declined because of additional costs in Australia, lower U.S. benefits than in 2012 and the comparatively lower margins of acquired PSI work.
- MAXIMUS acquired U.K. medical-assessment provider Health Management Limited on July 1, 2013 for $77.9 million, including $71.4 million in cash and $6.4 million in stock. HML contributed $14.1 million of fiscal 2013 revenue and $0.5 million of operating income.
- Backlog increased to approximately $3.4 billion from $2.9 billion. Health Services backlog increased to $2.379 billion, while Human Services backlog declined to $1.021 billion.
- The effective tax rate declined to 38.0% from 42.2%, partly because of greater profits in lower-tax jurisdictions and the absence of the prior-year $2.7 million tax-error correction.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2014 Health Services revenue growth from a full-year ACA contribution and HML, but anticipated lower segment margins because of more cost-reimbursable work, the end of highly accretive contracts and a loss-making PSI contract.
- Management forecast Human Services revenue to be approximately flat in fiscal 2014, as international growth was expected to offset a U.S. decline following completion of a large fixed-price contract. The segment operating margin was expected toward the lower end of the stated 10% to 15% range.
- Management expected the fiscal 2014 tax rate to decline slightly.
- Approximately 43% of reported backlog was expected to convert to fiscal 2014 revenue; including anticipated option renewals, backlog was expected to represent approximately 95% of estimated fiscal 2014 revenue. Backlog excludes contract renewals and is subject to changes in scope, volume, estimates and termination.
- Key risks include government budget and legislative changes, ACA implementation and Medicaid expansion decisions, contract rebids or termination, performance requirements and liquidated damages, government audits, customer payment delays, acquisition integration, foreign currency exposure, labor and cost pressures, and claims related to discontinued operations.
- Three customers each contributed more than 10% of fiscal 2013 revenue: Texas, 14%; the U.S. Federal Government, 12%; and Australia, 12%. Foreign-based projects and offices generated approximately 25% of total revenue.
- Approximately 60% of cash was held overseas, and the company had approximately $145 million of undistributed foreign earnings for which U.S. tax was not provided because repatriation was not intended. Potential repatriation tax was not quantified.
- Pending matters include a $2.3 million Medicaid-related claim associated with a discontinued business line and an appeal related to a previously rejected SchoolMAX arbitration claim of at least $10 million. The company believes its exposure is limited or has substantive defenses.
Most important facts for investors to verify
- Whether ACA-related volumes, Medicaid managed-care activity and Medicare appeals remain sufficient to offset the expected Health Services margin normalization.
- Whether the Human Services segment achieves the projected stabilization after removing the $10.9 million contract-termination benefit and completing the large fixed-price contract.
- Customer collections, receivables growth and free cash flow conversion, particularly given the $63.7 million fiscal 2013 cash decline and increased start-up investment.
- Backlog realization, contract renewals and the concentration of revenue among Texas, the U.S. Federal Government and Australia.
- Integration and performance of HML, PSI-related contracts and any additional acquisition or contingent-consideration obligations.
- Exposure to government funding changes, contract termination rights, audits, legal claims, foreign exchange movements and potential taxes on overseas earnings.