MAXIMUS, Inc. — Fiscal 2016 First-Quarter 10-Q Summary
Business context and reporting period
MAXIMUS provides business-process services to government health, human-services and federal agencies in the United States and internationally. The filing covers the three months ended December 31, 2015, compared with the three months ended December 31, 2014. Results include the effects of the April 2015 acquisitions of Acentia and Remploy and the December 2015 acquisition of Assessments Australia.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $556.7 million | $467.0 million | +19.2% |
| Gross profit | $110.2 million | $119.3 million | -7.6% |
| Gross margin | 19.8% | 25.5% | -570 bps |
| Operating income | $42.8 million | $65.2 million | -34.4% |
| Operating margin | 7.7% | 14.0% | -630 bps |
| Net income attributable to MAXIMUS | $26.6 million | $41.9 million | -36.4% |
| Diluted EPS | $0.40 | $0.63 | -36.5% |
| Cash flow from operations | $1.4 million | $56.6 million | Down $55.2 million |
| Free cash flow | $(9.3) million | $42.5 million | Down $51.8 million |
SG&A increased to $64.2 million from $52.0 million, while amortization of intangible assets increased to $3.1 million from $1.5 million, primarily reflecting acquired businesses. The effective tax rate rose to 37.4% from 36.0% as a larger share of earnings was generated in the United States.
At December 31, 2015, cash and cash equivalents were $51.0 million, down from $74.7 million at September 30, 2015. Accounts receivable totaled $458.0 million, including $32.8 million of unbilled receivables. Total debt was approximately $245.3 million, consisting primarily of $244.1 million outstanding under the revolving credit facility. The company had a $400 million revolving facility maturing in March 2020 and was in compliance with all covenants; total leverage was below 1.0x versus a 2.5x threshold for secured status.
Material changes versus the prior comparable period
- Revenue growth was driven substantially by Acentia and Remploy, organic growth in Health Services, and new or ramping contracts. Foreign-currency movements reduced reported revenue and profit.
- Health Services revenue increased 19.8% to $291.9 million, but operating income fell to $26.8 million from $37.8 million. The HAAS contract incurred an operating loss during the quarter, and a pending domestic contract amendment delayed approximately $8.6 million of revenue and $0.08 of earnings into the second quarter.
- U.S. Federal Services revenue increased 34.9% to $145.3 million, including $51.3 million of acquired Acentia revenue. Organic revenue declined 12.7%, and operating income decreased to $10.7 million from $13.3 million.
- Human Services revenue increased 3.3% to $119.5 million, but operating income declined to $9.1 million from $16.2 million. Currency effects, lower organic revenue, early-stage performance of the jobactive contract and a $2.4 million prior-year Saudi Arabian contract benefit affected comparability.
- Operating cash flow was pressured by lower earnings, customer payment delays, tax payments and an increase in days sales outstanding to 75 days from 67 days at September 30, 2015. Management estimated the eight-day increase represented approximately $49 million of reduced cash flow.
- The company repurchased 543,145 shares for $29.1 million and paid $2.9 million in dividends. Approximately $139.4 million remained available under the share-repurchase authorization.
Guidance, outlook, risks and unusual items
Management stated that full-year operating margin is expected to be within its target range of 10% to 15%. Management expected the HAAS contract to become profitable during fiscal 2016 and anticipated improved Human Services margins as the jobactive contract reaches full capacity. Management also expected investing activity to return to lower levels during fiscal 2016 and believed operating cash flows would be sufficient for day-to-day needs, interest payments and repayment of existing borrowings.
- Key execution risks include contract-performance failures, start-up losses, inaccurate bidding or pricing, customer termination rights, government budget constraints and delays in customer payments.
- Government audits, investigations, bid protests, employment matters, contractual disputes and litigation could result in penalties, fines, suspension or disbarment. Management did not believe existing matters were likely to have a material adverse effect.
- Foreign-exchange exposure reduced net assets by $2.2 million during the quarter. A 10% fluctuation in foreign currencies would have produced an estimated $7.7 million gain or loss in comprehensive income based on reported net foreign-currency assets.
- Interest-rate exposure primarily relates to the revolving facility. A 10% increase in LIBOR was estimated to increase annual interest expense and cash flow requirements by approximately $0.1 million.
- Approximately $45.1 million of cash was held by foreign subsidiaries outside the United States, with no current intent or requirement to transfer it to the United States.
- Assessments Australia was acquired for estimated consideration of $2.7 million, including contingent consideration tied to winning a specified contract before December 2017. The purchase-price allocation remained subject to adjustment.
- The company adopted the noncurrent classification of deferred tax balances under ASU 2015-17 and planned to adopt the new revenue-recognition standard during fiscal 2019, using the retrospective method.
Most important facts for investors to verify
- Whether HAAS and Fit for Work achieve profitability and whether the pending domestic contract amendment produces the expected second-quarter revenue and earnings shift.
- Whether customer payment delays normalize and DSO moves toward management’s stated 65-to-80-day target range.
- Progress toward the 10%–15% full-year operating-margin target despite materially lower first-quarter margins.
- Organic performance in U.S. Federal Services and Human Services after separating acquisition and currency effects.
- Debt reduction, interest-rate exposure and available liquidity under the $400 million revolving facility.
- The continued effect of foreign-currency weakness, government budget constraints, contract audits and potential contract-performance liabilities.