MAXIMUS, Inc. 10-Q Summary
Business context and reporting period
MAXIMUS provides business process services to government health and human services agencies in the United States and internationally. This Form 10-Q covers the three and six months ended March 31, 2016, the second quarter and first six months of fiscal 2016. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $606.5 million | $481.8 million | $1,163.2 million | $948.8 million |
| Gross profit | $147.7 million | $124.3 million | $257.9 million | $243.6 million |
| Gross margin | 24.3% | 25.8% | 22.2% | 25.7% |
| Operating income | $77.9 million | $62.0 million | $120.7 million | $127.2 million |
| Operating margin | 12.8% | 12.9% | 10.4% | 13.4% |
| Net income attributable to MAXIMUS | $48.8 million | $38.8 million | $75.4 million | $80.7 million |
| Diluted EPS | $0.74 | $0.58 | $1.14 | $1.20 |
Q2 revenue increased 25.9%, while six-month revenue increased 22.6%. Q2 net income attributable to MAXIMUS increased 25.7%, but six-month net income declined 6.5%. The six-month effective tax rate was 37.4%, compared with 36.6% in the prior-year period.
- Segment revenue for the quarter was $330.6 million in Health Services, $150.2 million in U.S. Federal Services, and $125.7 million in Human Services.
- Six-month operating cash flow was $21.9 million, down from $62.1 million. Free cash flow was $2.0 million versus $14.6 million.
- Cash and cash equivalents were $60.8 million at March 31, 2016, including approximately $47 million held by foreign subsidiaries.
- Accounts receivable totaled $469.0 million, and days sales outstanding were 70 days versus 67 days at September 30, 2015.
- Debt consisted primarily of $285.2 million outstanding under the revolving credit facility, plus approximately $0.8 million of other debt. The facility permits borrowings up to $400 million and matures in March 2020.
- The company was in compliance with its debt covenants, and its total leverage ratio was below 1.0:1.0. An interest-rate swap fixed the rate on $96.7 million of borrowings.
Material changes versus the prior comparable period
- Revenue growth was driven by organic growth, acquisitions, and the addition of Acentia. For Q2, organic growth contributed 13.0 percentage points and acquired growth 15.1 percentage points, partially offset by a 2.2 percentage-point currency effect.
- Gross margin declined because contracts in ramp-up incurred start-up costs before reaching full operating efficiency. Six-month gross profit increased only 5.9% despite 22.6% revenue growth.
- Operating income increased in Q2 but declined for the six-month period. Acquisition-related amortization increased to $6.4 million from $2.9 million, while interest expense increased to $2.3 million from zero due to acquisition financing.
- Health Services benefited from approximately $6.6 million related to prior periods under modifications to the United Kingdom HAAS contract and recognized $8.6 million of U.S. work performed in the first quarter after a contract amendment was signed.
- Human Services profitability weakened materially. Six-month operating income fell to $18.9 million from $30.1 million, primarily reflecting start-up costs for Australia’s jobactive program, weaker United Kingdom performance, and currency effects.
- U.S. Federal Services growth was principally acquisition-driven. Six-month revenue increased 42.6%, while operating income increased 12.0%, with margin declining to 8.7% from 11.1%.
- MAXIMUS acquired Ascend Management Innovations in February 2016 for $39.3 million in cash plus potential contingent consideration and acquired Assessments Australia in December 2015 for $2.6 million in cash plus potential contingent consideration. Purchase price allocations remained provisional.
- Six-month financing cash flow was positive $26.7 million, reflecting net credit-facility borrowings of approximately $75.3 million, offset by $31.1 million of share repurchases and dividends.
Guidance, outlook, commentary, risks, and unusual items
- Management expects a full-year effective tax rate of 37% to 39%, biased toward the lower end.
- Management continued to anticipate approximately $200 million of full-year operating cash flow, assuming improved collections and working-capital benefits.
- Management expected Health Services profitability to improve as HAAS operational performance and contract amendments take effect, and Human Services margins to improve as jobactive completes its start-up phase.
- The United Kingdom Fit for Work contract had incurred significant costs without expected volumes. Management was evaluating right-sizing or possible termination and had implemented cost-mitigation measures.
- Government contracts are subject to performance requirements, audits, termination rights, budget changes, bid and pricing risks, penalties, and potential suspension or disbarment. The company relies substantially on government customers.
- Foreign exchange remains a material risk. A 10% movement in foreign currencies against the U.S. dollar would have produced an estimated $19.4 million gain or loss in comprehensive income based on reported net foreign-currency assets.
- Receivable timing reduced operating cash flow; management reported collecting approximately $25 million of past-due invoices from one customer after March 2016.
- The company reported no material changes to previously disclosed risk factors and did not believe existing litigation, claims, audits, or investigations would likely have a material adverse effect, although adverse government audit findings could result in fines, penalties, suspension, or disbarment.
- Disclosure controls were considered effective. Ascend’s controls were being integrated into MAXIMUS’s control environment.
Important facts for investors to verify
- Whether HAAS contract improvements and the $6.6 million prior-period benefit are recurring or nonrecurring.
- Whether the Fit for Work contract is right-sized, terminated, or remains a source of losses.
- Progress toward the approximately $200 million full-year operating-cash-flow expectation and normalization of DSO.
- Margin recovery in the jobactive and other ramp-up contracts, particularly in Human Services.
- Integration results and final purchase-price allocations for Ascend and Assessments Australia, including contingent consideration.
- Debt repayment capacity, interest-rate exposure, covenant headroom, and remaining credit-facility availability.
- Foreign-exchange impacts, overseas cash restrictions, and potential tax consequences if foreign earnings are remitted to the United States.
- Government contract renewals, audits, performance reviews, bid protests, and any developments involving potential termination or penalties.