MAXIMUS, Inc. — Fiscal 2017 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 31, 2017; fiscal year ended September 30. Results are unaudited. MAXIMUS provides government health and human services programs worldwide through Health Services, U.S. Federal Services, and Human Services segments.
Financial Performance and Position
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $622.0 million | $606.5 million | $1,229.6 million | $1,163.2 million |
| Gross profit | $152.3 million | $147.7 million | $297.1 million | $257.9 million |
| Gross margin | 24.5% | 24.3% | 24.2% | 22.2% |
| Operating income | $80.3 million | $77.9 million | $154.1 million | $120.7 million |
| Operating margin | 12.9% | 12.8% | 12.5% | 10.4% |
| Net income attributable to MAXIMUS | $52.5 million | $48.8 million | $99.2 million | $75.4 million |
| Diluted EPS | $0.80 | $0.74 | $1.50 | $1.14 |
Second-quarter revenue increased 2.6%, including 3.8% organic growth, 0.5% net acquired growth, and a 1.7% adverse currency effect. Six-month revenue increased 5.7%, with 7.2% organic growth, 0.8% net acquired growth, and a 2.2% adverse currency effect.
- Health Services: Q2 revenue of $349.0 million and operating income of $56.5 million; six-month revenue of $689.7 million and operating income of $106.7 million.
- U.S. Federal Services: Q2 revenue declined 3.2% to $145.4 million, but operating income increased 17.8% to $17.6 million as costs declined faster than revenue. Six-month operating margin improved to 12.4% from 8.7%.
- Human Services: Q2 revenue increased 1.6% to $127.7 million, while gross profit declined 7.1% to $29.3 million. The six-month gross margin declined to 23.0% from 25.1%.
Cash flow and liquidity: Six-month operating cash flow was $136.8 million versus $21.9 million in the prior year, and free cash flow was $123.9 million versus $2.0 million. The improvement reflected higher customer collections and favorable tax-payment timing. Days sales outstanding was 69 days versus 70 days at the beginning of fiscal 2017.
Cash and cash equivalents were $94.9 million at March 31, 2017, compared with $66.2 million at September 30, 2016. Approximately $91.5 million was held by foreign subsidiaries outside the United States. The company had $115.0 million of credit-facility borrowings, against a $400 million facility, plus approximately $0.7 million of other debt. Total debt declined from $165.6 million at September 30, 2016 to $115.8 million at March 31, 2017. MAXIMUS was in compliance with its debt covenants and reported a total leverage ratio below 1.0:1.0.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially in the six-month period: operating income increased 27.8% and net income attributable to MAXIMUS increased 31.6%.
- Margin expansion reflected operating efficiencies, particularly in U.S. Federal Services, and stronger Health Services performance.
- The prior-year second quarter included $15.2 million of out-of-period revenue and income from two Health Services contracts, creating a difficult comparison.
- The British Pound decline reduced reported revenue and profit in Health Services and Human Services; foreign-currency translation reduced comprehensive income by $4.1 million in the six-month period.
- Fiscal 2017 included $2.2 million of United Kingdom Human Services restructuring costs, primarily severance and lease termination expenses. Additional smaller charges may occur.
- Cash flows benefited from materially lower tax payments of $38.8 million versus $68.6 million in the prior-year six-month period.
- The company repurchased approximately 0.6 million shares for $28.9 million during the six months, with $109.0 million remaining under the authorization at March 31, 2017.
Guidance, Outlook, Risks, and Unusual Items
Management expects the full-year effective tax rate to be approximately 35% to 35.5%, biased toward the lower end. Management expects operating cash flow to fund operations, capital needs, interest, and repayment of existing borrowings, while retaining flexibility for acquisitions and share repurchases.
Management identified long-term demand drivers including aging populations, increased healthcare demand, welfare reform, decentralization, and government efforts to improve value and efficiency. A three-year extension of a significant New York State contract was finalized, and management expects the contract to continue at its current run rate over the next three years.
The U.S. Federal Services segment’s large Veterans Administration healthcare subcontract ended in April 2017. In Human Services, the U.K. Work Programme will receive no new referrals after April 2017; existing cases may generate revenue for up to two years. The company also expects continued revenue decline from that program as it winds down.
- Key risks include government budget and legislative changes, contract termination or nonrenewal, performance penalties, bid and pricing risk, payment timing, audits, litigation, regulatory compliance, cybersecurity and protection of confidential information, personnel retention, and acquisition integration.
- Foreign exchange remains material: a 10% fluctuation in foreign currencies would affect comprehensive income by approximately $17.3 million based on reported net foreign-currency assets.
- Debt is subject to variable interest rates, although swaps covered $34.0 million of borrowings at March 31, 2017; the swaps expire before the end of fiscal 2017.
- The filing states that existing legal proceedings are not expected to have a material adverse effect, but adverse government audits or reviews could result in penalties, suspension, disbarment, or loss of contracts.
- The company adopted new stock-compensation accounting guidance, which produced a $2.2 million tax benefit and increased fiscal 2017 basic and diluted EPS by $0.03 versus the former method.
Important Facts for Investors to Verify
- Whether Health Services growth and the New York contract extension offset the wind-down of U.K. programs and the end of the Veterans Administration subcontract.
- Whether U.S. Federal Services margin improvements are sustainable after the April 2017 contract termination.
- The effect of British Pound and other currency movements on revenue, profit, cash, and comprehensive income.
- Conversion of unusually strong first-half operating cash flow into full-year cash generation, considering tax-payment timing and working-capital requirements.
- Future restructuring charges and savings from the U.K. Human Services integration.
- Debt repayment progress versus potential acquisitions and additional share repurchases.
- The eventual effect of adopting the new revenue-recognition standard in fiscal 2019 and the new lease standard in fiscal 2020.