MAXIMUS, Inc. Fiscal 2014 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2014. The filing is an annual report, not a standalone quarterly filing; fourth-quarter data are presented as unaudited supplementary information. MAXIMUS provides business-process services to government health and human services agencies in the United States, Australia, Canada, the United Kingdom and Saudi Arabia through its Health Services and Human Services segments.
Financial performance and condition
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $1,700.9 million | $1,331.3 million | +28% |
| Gross profit | $452.1 million | $386.0 million | +17% |
| Gross margin | 26.6% | 29.0% | Down 240 bps |
| Operating income | $225.3 million | $185.2 million | +22% |
| Operating margin | 13.2% | 13.9% | Down 70 bps |
| Net income attributable to MAXIMUS | $145.4 million | $116.7 million | +25% |
| Diluted EPS | $2.11 | $1.67 | +26% |
| Operating cash flow | $213.6 million | $120.9 million | +77% |
| Free cash flow | $166.5 million | $58.8 million | +183% |
Fourth quarter: Revenue was $435.4 million, gross profit was $112.9 million, net income attributable to MAXIMUS was $36.2 million and diluted EPS was $0.53.
- Health Services: Revenue increased 45% to $1,250.6 million; operating income increased 35% to $175.4 million. Growth was driven primarily by Affordable Care Act work, Medicaid managed-care transitions, Medicare appeals and a full year of Health Management Limited results.
- Human Services: Revenue declined 4% to $450.3 million; operating income declined 13% to $50.5 million. Results reflected the completion of a large fixed-price contract, approximately $11 million of adverse currency effects and the absence of a one-time benefit recognized in 2013.
- Cost-plus contracts expanded in the Health Services portfolio and generally carry lower margins than performance-based or fixed-price work. Health Services also incurred start-up losses on the U.K. Fit for Work and U.S. Department of Education Debt Management contracts.
Liquidity, capital allocation and debt
- Cash and cash equivalents were $158.1 million at September 30, 2014, compared with $125.6 million a year earlier.
- The company had access to approximately $95.3 million under a $100 million revolving credit facility and had no borrowings under that facility.
- Total long-term debt was $1.2 million, consisting primarily of an interest-free Canadian loan. The company was in compliance with its credit covenants.
- Capital expenditures were $36.3 million and capitalized software costs were $10.9 million.
- Cash used for share repurchases was $111.1 million; $135.2 million remained authorized for future repurchases at year-end. Cash dividends paid were $12.2 million, or $0.18 per share for the year.
- Contractual obligations totaled $174.8 million, including $154.0 million of operating leases and $19.5 million of deferred compensation liabilities.
Material changes versus the prior comparable period
- Revenue growth accelerated substantially, led by Health Services and ACA-related work. Excluding the $16.0 million 2013 benefit from termination of a PSI-acquired contract, FY2014 revenue growth was approximately 29% and organic growth was approximately 27%.
- Profit and cash generation improved, but consolidated gross and operating margins declined because of contract mix, start-up costs and the unusually favorable 2013 contract termination benefit.
- Operating cash flow improved by $92.7 million as new contracts matured and working-capital requirements normalized.
- Backlog increased to approximately $3.8 billion from $3.4 billion. Health Services backlog rose to $2.9 billion, while Human Services backlog declined to $0.9 billion.
- MAXIMUS acquired certain Centacare businesses in January 2014 for a net cash payment of $2.7 million. HML, acquired in July 2013, contributed a full year of results in FY2014.
- Share repurchases increased materially, reducing shares outstanding from 68.5 million to 66.6 million at year-end.
Guidance, outlook and risks
- Management anticipated a FY2015 tax rate of 37.0% to 37.5%.
- Management expected FY2015 Health Services revenue to be reduced by approximately $50 million to $100 million by lower ACA volumes and the absence of certain one-time FY2014 services.
- A new U.K. health and disability assessment contract was expected to contribute $140 million to $165 million of FY2015 revenue and be accretive during the year.
- Management expected start-up losses on Fit for Work and Debt Management contracts, with recovery over the contract lives.
- Two large U.K. contract implementations were expected to constrain operating cash flow during the first two quarters of FY2015.
- Human Services faced uncertainty from Australian contract rebids; new contracts were expected to have more contingent revenue, less up-front fees and early-quarter losses.
- Key risks include government budget and legislative changes, contract termination on short notice, performance failures, audits and penalties, competitive bidding and pricing risk, contract start-up costs, litigation, cybersecurity and confidential-information protection, acquisition integration, foreign currency exposure and reliance on government customers.
- The company was defending a purported wage-and-hour class action alleging employee misclassification; plaintiffs claimed at least $5.0 million, and the company had reserved $0.6 million for estimated legal defense costs and employee liabilities.
- Performance bond commitments totaled $38.2 million; management considered the likelihood of a draw remote. The company reported no material off-balance-sheet arrangements beyond operating leases and disclosed no goodwill or long-lived-asset impairment charges.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether ACA-related revenue and volumes declined within management's projected FY2015 range and how much was offset by new U.K. assessment work.
- Actual margins and cash conversion as Fit for Work, Debt Management and other start-up contracts move beyond implementation.
- Progress and profitability of Australian contract rebids and the effect of contingent revenue structures.
- Backlog realization, contract renewals and the exposure created by government termination-for-convenience provisions.
- Outcome and reserve adequacy for the wage-and-hour litigation and any government audits or contract-performance claims.
- Use of the remaining share-repurchase authorization, dividend sustainability and the effect of continued repurchases on diluted share count.
- Foreign currency effects, particularly given approximately 23% of revenue and 20% of operating income from foreign subsidiaries and $221.6 million of foreign-currency net assets.