MAXIMUS, Inc. 10-Q Summary
Business Context and Reporting Period
MAXIMUS provides business-process outsourcing, administrative, consulting, case-management, and workforce services to government health and human services agencies in the United States and internationally. The filing covers the quarter and nine months ended June 30, 2012, within fiscal 2012. Operations are reported through Health Services and Human Services segments.
On April 30, 2012, MAXIMUS acquired PSI Services Holding, Inc. and Policy Studies, Inc. for estimated cash consideration of $64.2 million, strengthening its U.S. health and human services capabilities.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Nine Months Ended June 30 |
|---|---|---|
| Revenue | $266.4 million, versus $238.3 million | $749.4 million, versus $679.5 million |
| Gross profit | $78.7 million; 29.5% margin | $203.3 million; 27.1% margin |
| Operating income | $33.3 million; 12.5% margin | $87.6 million; 11.7% margin |
| Income from continuing operations | $20.5 million | $52.3 million |
| Net income | $20.5 million | $52.5 million |
| Diluted EPS | $0.59 | $1.51 |
| Operating cash flow from continuing operations | Not separately provided | $85.1 million |
| Free cash flow from continuing operations | Not separately provided | $70.3 million |
Gross profit margins were approximately 30% for the quarter and 27% for the nine-month period. SG&A was $43.9 million for the quarter and $114.6 million for the nine months, representing 16.5% and 15.3% of revenue, respectively. The effective tax rates were 40.6% for the quarter and 42.3% for the nine months.
At June 30, 2012, cash and cash equivalents were $168.9 million, compared with $173.0 million at September 30, 2011. Approximately 70% of cash was held overseas. Total debt was approximately $1.7 million, consisting primarily of a Canadian interest-free loan. The company had $18.5 million of letters of credit and $25.4 million of performance-bond commitments. It reported compliance with credit-facility covenants and access to approximately $19.5 million of additional U.S. credit capacity.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 11.8%, or 13.1% on a constant-currency basis. Nine-month revenue increased 10.3%, or 10.4% on a constant-currency basis.
- Organic revenue growth was 2.0% for the quarter and 6.8% for the nine months, excluding PSI.
- Quarterly operating income increased 8.2%; excluding acquisition-related and legal items, it increased 11.8%. Nine-month reported operating income was essentially flat, while adjusted operating income increased 0.9%.
- Health Services revenue increased 20.2% for the quarter and 19.5% for the nine months. Quarterly operating margin improved to 15.1% from 11.2%, while the nine-month margin declined to 12.4% from 13.2%, partly because expanded Texas Medicaid managed-care work carried lower margins.
- Human Services revenue declined 0.6% for the quarter and 3.8% for the nine months. Operating margin declined to 9.6% and 10.8%, respectively, from 15.4% and 12.4%. The primary drivers were the United Kingdom transition from Flexible New Deal to Work Programme, lower Australian activity, and foreign-exchange effects.
- PSI contributed $23.3 million of revenue and $1.8 million of operating income in the reported period. Acquisition-related expenses were $1.9 million in the quarter and $2.1 million for the nine months.
- Cash flow from continuing operations increased to $85.1 million from $70.5 million, but investing cash use rose to $78.2 million from $16.6 million, primarily due to the $66.0 million PSI acquisition payment.
- Income from continuing operations declined for the nine months to $52.3 million from $56.6 million, largely reflecting higher taxes, including a $3.0 million discrete tax charge and a $1.6 million error correction.
Outlook, Commentary, Risks, and Unusual Items
Management expects operating needs and capital expenditures to continue to be funded from operating cash flow. It stated that liquidity is adequate for short-term customer payment delays, but more prolonged delays could require additional capital, amended payment terms, or other actions. No specific revenue or earnings guidance was provided in the filing.
- Government budget pressures may increase demand for efficiency and managed-care administration, but could also lead to contract reductions, pricing pressure, or changes in program volumes.
- International results are exposed to Australian dollar, Canadian dollar, and British pound fluctuations. Foreign-currency effects particularly affected Human Services.
- A fixed-price contract generated gains of $4.4 million in the quarter and $6.8 million for the nine months due to revised completion estimates and a change order; the comparable 2011 period included a $7.3 million charge. The company states that no further anticipated-loss liability remains on that contract.
- A significant Health Services contract amendment produced $10.2 million of additional revenue in the period.
- Insurance recoveries related to prior litigation were $0.4 million for the quarter and $1.2 million for the nine months.
- The company faces a SchoolMAX-related arbitration claim alleging at least $10 million of damages. MAXIMUS is contesting the claim, cannot reasonably estimate a possible loss, and believes it has substantial defenses and potential indemnification from the buyer.
- A state Medicaid agency has asserted a $2.3 million claim relating to a discontinued business line. MAXIMUS believes its exposure is limited to fees previously earned and that school districts are responsible for the remaining amounts.
- The company declared a quarterly dividend of $0.09 per share on July 6, 2012, payable August 31, 2012.
Investor Verification Checklist
- Verify the final purchase-price allocation, valuation of PSI intangible assets, goodwill, and post-acquisition integration results.
- Assess whether Health Services growth, particularly Texas Medicaid managed-care work, can offset its lower margins.
- Monitor the United Kingdom Work Programme revenue ramp, Australian performance, and related foreign-exchange exposure.
- Reconcile reported earnings with unusual items, including acquisition costs, insurance recoveries, contract-estimate gains, and the discrete tax charge.
- Review cash concentration overseas and the potential tax cost of repatriation.
- Track the SchoolMAX arbitration, Medicaid claim, performance bonds, letters of credit, and other contractual contingencies.
- Confirm that operating cash flow remains sufficient to fund acquisitions, capital expenditures, dividends, and share repurchases.