MAXIMUS, Inc. 10-Q Summary
Business Context and Reporting Period
MAXIMUS provides business process outsourcing, administrative, case management, consulting, and employment services to government health and human services agencies in the United States, Australia, Canada, and the United Kingdom. The company operates through Health Services and Human Services segments.
The filing covers the three months ended December 31, 2010, the first quarter of fiscal 2011, compared with the three months ended December 31, 2009. The financial statements are unaudited. The filing was signed February 8, 2011.
Financial Performance and Position
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $214.1 million | $203.3 million | 5.3% increase |
| Gross profit | $56.0 million | $52.2 million | 7.3% increase |
| Gross margin | 26.1% | 25.7% | 40 basis-point increase |
| Operating income | $27.3 million | $24.1 million | 13.4% increase |
| Operating margin | 12.7% | 11.8% | 90 basis-point increase |
| Income from continuing operations | $17.6 million | $14.6 million | 20.5% increase |
| Net income | $17.5 million | $12.6 million | 38.5% increase |
| Diluted EPS | $0.99 | $0.70 | 41.4% increase |
| Cash flow from operating activities | $29.6 million | $55.0 million | Decrease |
| Free cash flow from continuing operations | $25.7 million | $42.3 million | Decrease |
SG&A was $28.7 million, or 13.4% of revenue, compared with 13.5% in the prior-year quarter. The effective tax rate declined to 36.7% from 39.6%, primarily because of increased profitability in lower-tax foreign jurisdictions.
Health Services revenue was $130.0 million, down 0.5%, while operating income increased to $18.8 million and operating margin expanded to 14.5% from 13.4%. Human Services revenue increased 15.7% to $84.1 million, driven primarily by international employment services, while operating income increased to $8.5 million and operating margin was broadly stable at 10.1%.
Cash and cash equivalents were $177.0 million at December 31, 2010, compared with $155.3 million at September 30, 2010. Working capital was $210.6 million. Debt was $1.5 million, consisting primarily of the Canadian innovation fund loan. The company had a $35.0 million revolving credit facility, with $11.3 million of letters of credit outstanding, and was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven principally by international employment services in Australia and the United Kingdom. Growth was 3.6% on a constant-currency basis and 4.1% organically.
- Operating profitability improved due to Human Services growth, Health Services margin expansion, favorable foreign exchange, and the absence of $0.7 million of prior-year legal and settlement expense.
- Net income benefited from the absence of the prior-year discontinued-operations loss of $2.0 million and from the lower effective tax rate.
- Operating cash flow from continuing operations declined to $30.4 million from $48.9 million. Management attributed the decrease primarily to lower deferred revenue, the timing of annual bonus payments, and higher tax payments, partly offset by improved collections and profitability.
- The company repurchased 136,153 shares for $8.4 million, compared with 186,801 shares for $8.7 million in the prior-year quarter. $118.6 million remained available under the repurchase authorization.
- The ERP business was sold on September 30, 2010. It generated no revenue in the current quarter, compared with $7.0 million in the prior-year quarter. A $0.1 million after-tax loss on disposal was recorded in the current period.
Outlook, Risks, Contingencies, and Unusual Items
Management stated that demand for core health and human services should remain strong as governments seek to meet federal mandates and operate more efficiently. No specific revenue or earnings guidance was provided. Management expects sufficient resources to meet anticipated capital expenditure and working capital needs for at least the next twelve months and believes liquidity supports potential stock repurchases, selective acquisitions, and quarterly dividends.
The company recorded a $3.2 million charge on a fixed-price contract due to increased estimated costs to complete; $2.9 million remained accrued for the anticipated loss. The project is expected to be completed during fiscal 2012, but estimates are subject to risk.
State and local government budget pressures could delay customer payments and adversely affect cash flow, operations, and profitability. International government austerity measures and foreign currency movements may also affect results.
A former SchoolMAX customer initiated a contractual dispute-resolution process in February 2011. The customer alleges damages exceeding $30 million, including a previously proposed refund of approximately $11.6 million. MAXIMUS disputes the claims and believes it is entitled to indemnification from the buyer of the divested business.
A state Medicaid agency has asserted a $2.3 million claim related to a discontinued business line. No legal action has been initiated, and MAXIMUS believes its exposure is limited primarily to fees previously earned.
Performance bond commitments totaled $31.3 million at December 31, 2010. Management considers the likelihood of draws remote. The company declared a quarterly dividend of $0.15 per share on January 7, 2011, payable February 28, 2011.
Most Important Facts for Investors to Verify
- Whether international employment-services growth and favorable foreign exchange effects are sustainable.
- The ultimate cost and profitability of the fixed-price contract with the $3.2 million current-quarter loss charge.
- The potential financial exposure and timing of resolution for the former SchoolMAX customer dispute and the state Medicaid claim.
- Whether government budget constraints result in prolonged customer payment delays.
- The conversion of strong earnings into operating cash flow, particularly after the decline in deferred revenue and other working-capital benefits.
- The company’s continued compliance with credit-facility covenants and its capacity to fund repurchases, dividends, acquisitions, and capital expenditures.