MAXIMUS, Inc. — Fiscal 2015 First-Quarter Form 10-Q
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. The filing covers the three months ended December 31, 2014, compared with the prior-year quarter. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $467.0 million | $406.6 million | +15% |
| Gross profit | $119.3 million | $105.9 million | +13% |
| Gross margin | 25.5% | 26.0% | -0.5 percentage points |
| Operating income | $65.2 million | $53.3 million | +22% |
| Operating margin | 14.0% | 13.1% | +0.9 percentage points |
| Net income attributable to MAXIMUS | $41.9 million | $33.9 million | +24% |
| Diluted EPS | $0.63 | $0.49 | +29% |
| Cash flow from operations | $56.6 million | $41.9 million | +35% |
| Free cash flow | $42.5 million | $33.9 million | +25% |
Health Services revenue was $351.7 million, up 18%, and operating income was $50.4 million, up 21%. Human Services revenue was $115.4 million, up 7%, and operating income was $15.5 million, up 32%. The effective tax rate was 36.0%, compared with 37.8%; management anticipated a 36.7% rate for the full fiscal year. The quarter benefited by $0.6 million from the retroactive extension of the U.S. Work Opportunity Tax Credit.
At December 31, 2014, cash and cash equivalents were $149.2 million, versus $158.1 million at September 30, 2014. The company reported access to up to $95.3 million under a revolving credit facility. Approximately 30% of cash was held outside the United States. The filing does not provide a clear total debt balance; cash financing activity included only $39,000 of long-term debt repayment.
Material Changes Versus the Prior Comparable Period
- Growth was entirely organic and reflected new work and expansion of existing contracts across both segments.
- Gross margin declined primarily because of anticipated declines in the federal Medicare appeals business, start-up losses on a new federal contract, and foreign exchange effects.
- Operating margin improved as selling, general and administrative expense rose only modestly and declined to 11.6% of revenue from 12.9%.
- Foreign currency movements reduced comprehensive income by $10.5 million, including a $3.6 million reduction in cash and a $4.2 million reduction in goodwill.
- Capital expenditures and capitalized software costs increased investment cash outflows to $14.0 million from $7.9 million, principally for two United Kingdom projects.
- Share repurchases increased to $32.6 million from $21.5 million. The company repurchased 753,010 shares during October 2014 at an average price of $40.66, with $104.6 million remaining under the authorization at December 31, 2014.
Guidance, Outlook, Risks, and Unusual Items
- Two new United Kingdom contracts were expected to begin generating revenue in the second fiscal quarter, although additional start-up costs were anticipated.
- Health Services benefited from Affordable Care Act open enrollment, which ran from November 1, 2014 through February 15, 2015; management expected seasonal first-quarter strength from this activity.
- United Kingdom start-up payments and milestone-related cash outflows could temper cash flow in subsequent quarters, although management believed available funds were sufficient.
- Key risks include government budget and legislative changes, contract termination or nonrenewal, failure to meet performance requirements, audits and reviews, inaccurate contract pricing, litigation, information-security issues, foreign exchange movements, and difficulties integrating acquisitions.
- Customer payment timing can be affected by outcome-based contracts, billing delays, budget constraints, and contract start-up requirements. Management stated that the company was not significantly affected by the early fiscal 2014 U.S. federal government shutdown.
- Management reported no material changes to previously disclosed risk factors, no material off-balance-sheet risk, and no material changes to critical accounting policies. Disclosure controls were effective, with no material changes to internal control over financial reporting.
- The company declared a quarterly dividend of $0.045 per share on January 6, 2015, payable February 27, 2015.
Important Facts for Investors to Verify
- Reconcile organic revenue growth with contract commencements, expansions, extensions, and the segment-level effects of foreign currency.
- Assess whether Health Services margin pressure from Medicare appeals declines and contract start-up costs is temporary or persistent.
- Monitor the launch economics, reimbursement timing, and cash requirements of the two United Kingdom contracts.
- Verify cash availability by jurisdiction, revolving-facility terms, and the absence or amount of material funded debt, which is not clearly presented in the supplied filing text.
- Evaluate the sustainability of cash generation after repurchases, dividends, capital expenditures, and start-up investments.
- Review the fiscal-year tax-rate expectation and the one-time $0.6 million tax benefit from the Work Opportunity Tax Credit.