MAXIMUS, Inc. 10-Q Summary
Reporting period: Fiscal quarter and six months ended March 31, 2014; comparisons are to the three and six months ended March 31, 2013. The filing is unaudited. MAXIMUS provides business-process services to government health and human-services agencies in the United States and internationally.
Financial Highlights
| Metric | Three months ended March 31, 2014 | Three months ended March 31, 2013 | Six months ended March 31, 2014 | Six months ended March 31, 2013 |
|---|---|---|---|---|
| Revenue | $439.0 million | $326.4 million | $845.6 million | $612.6 million |
| Gross profit | $120.7 million | $97.4 million | $226.6 million | $174.0 million |
| Gross margin | 27.5% | 29.9% | 26.8% | 28.4% |
| Operating income | $64.9 million | $50.7 million | $118.3 million | $84.8 million |
| Operating margin | 14.8% | 15.5% | 14.0% | 13.8% |
| Net income | $41.2 million | $31.7 million | $75.1 million | $53.0 million |
| Diluted EPS | $0.59 | $0.45 | $1.08 | $0.76 |
- Cash flow: Cash provided by operating activities was $76.5 million for the first six months, versus $38.9 million in the prior-year period. Continuing-operations free cash flow, a non-GAAP measure, was $59.7 million versus $17.9 million.
- Liquidity: Cash and cash equivalents were $131.3 million at March 31, 2014, including $12.1 million of restricted cash. Approximately 65% of cash was held overseas and may incur additional taxes if repatriated.
- Debt: Balance-sheet debt consisted primarily of $1.1 million of long-term debt and $0.2 million of current debt. The $100 million revolving facility had $6.7 million of outstanding letters of credit but no borrowings outstanding at quarter-end. A separate interest-free Canadian loan had approximately $1.3 million outstanding.
- Capital allocation: The company repurchased 807,138 shares for $35.5 million during the six months and paid $6.1 million of dividends. The remaining repurchase authorization was $62.1 million at March 31, 2014. A quarterly dividend of $0.045 per share was declared on April 4, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue increased 35% for the quarter and 38% for the six months. Management attributed the increase primarily to organic growth in Health Services, particularly Affordable Care Act-related work, supplemented by the July 2013 acquisition of Health Management Limited, or HML.
- Health Services revenue increased 64% for the quarter and 67% for the six months. Segment operating income increased to $48.8 million from $28.9 million for the quarter and to $90.3 million from $49.5 million for the six months.
- Human Services revenue declined 10% for the quarter and 7% for the six months. Excluding the prior-year terminated contract, revenue increased 2% for the quarter and was approximately flat for the six months.
- Prior-year results included a one-time, non-cash benefit from termination of a PSI-acquired system-integration contract: approximately $16.0 million of revenue and $10.9 million of pre-tax profit. Excluding that item, 2014 operating-income growth was 63% for the quarter and 60% for the six months.
- Reported consolidated gross margins declined year over year, principally because the prior-year contract termination produced unusually high-margin revenue. SG&A as a percentage of revenue improved to 12.6% from 14.3% for the quarter and to 12.7% from 14.5% for the six months.
- MAXIMUS acquired certain Australian businesses operating as Centacare for $2.7 million in cash on January 31, 2014. The acquired revenue was not material and could not be separately estimated.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects continued demand during fiscal 2014 for Affordable Care Act and Medicaid-related services, including supplemental work. MAXIMUS was serving contact centers for five states, the District of Columbia, and the federal government.
- Management noted potential future opportunities if states currently using the federal marketplace migrate to state-based exchanges. It also expects strong appeals and assessments volumes, although Medicare appeals volumes may slow in fiscal 2015 because of changes to the Recovery Audit Contractor program.
- Additional Australian Human Services contract work is expected to commence largely in the final quarter of fiscal 2014.
- Key risks include compliance failures, contract-performance shortfalls, liquidated damages or termination, government audits, legislative and budget changes, customer payment delays, contract start-up cash outflows, foreign-exchange movements, and dependence on government programs.
- Letters of credit totaled $9.7 million and performance-bond commitments totaled $50.5 million at March 31, 2014. Management considered the likelihood of draws remote.
- A purported class action filed in Idaho alleges employee misclassification and unpaid overtime, with claimed damages of at least $5 million. MAXIMUS reclassified trainers as non-exempt, disputes liability as to supervisors, and had reserved $0.6 million for estimated legal defense costs and employee liabilities.
- A discontinued-business Medicaid claim of $2.3 million remains asserted by a state agency; MAXIMUS believes the related school districts are responsible for amounts disallowed. A separate appeal remains pending concerning a previously rejected SchoolMAX arbitration claim of at least $10 million.
- Management stated that disclosure controls were effective, that there were no material changes to internal control over financial reporting, and that there were no material changes to previously disclosed risk factors.
Investor Verification Checklist
- Verify the sustainability and contract concentration of ACA-related revenue and whether exchange migration creates additional awards or execution risk.
- Reconcile reported growth with the prior-year PSI contract-termination benefit and assess margins excluding that unusual item.
- Monitor Human Services performance, Australian contract ramp-up, and the anticipated Medicare appeals slowdown.
- Review the location and repatriation tax implications of overseas cash, along with working-capital requirements and customer payment timing.
- Track share repurchases, remaining authorization, dividends, and the effect of capital returns on share count and liquidity.
- Assess developments and potential exposure in the Idaho wage-and-hour litigation, Medicaid claim, SchoolMAX appeal, letters of credit, and performance bonds.