Business Context and Reporting Period
MAXIMUS, Inc. provides business process outsourcing and administrative services to government health and human services agencies in the United States, Australia, Canada, and the United Kingdom. Operations are managed through Health Services and Human Services segments. This unaudited Form 10-Q covers the three months ended December 31, 2011, the first quarter of fiscal 2012, compared with the three months ended December 31, 2010.
Key Financial Metrics
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $239.6 million | $214.1 million |
| Gross profit | $59.8 million; 25.0% margin | $56.0 million; 26.1% margin |
| Operating income from continuing operations | $26.9 million; 11.2% margin | $27.3 million; 12.7% margin |
| Income from continuing operations | $17.7 million | $17.6 million |
| Net income | $17.7 million | $17.5 million |
| Diluted EPS | $0.51 | $0.49 |
| Cash flow from operating activities | $27.6 million | $29.6 million |
| Free cash flow from continuing operations | $24.3 million | $25.7 million |
- Revenue increased 11.9%; constant-currency growth was 11.5%.
- SG&A increased to $32.8 million from $28.7 million, with SG&A at 13.7% of revenue versus 13.4%.
- The effective tax rate was 37.0%, compared with 36.7% in the prior-year quarter.
- Health Services revenue increased 21.6% to $158.0 million, while operating income decreased to $16.8 million from $18.8 million; margin declined to 10.6% from 14.5%.
- Human Services revenue decreased 3.0% to $81.6 million, while operating income increased to $10.3 million from $8.5 million; margin improved to 12.6% from 10.1%.
- Cash and cash equivalents were $191.0 million at December 31, 2011, up from $173.0 million at September 30, 2011. Approximately 55% was held overseas.
- Total debt was approximately $1.7 million, consisting primarily of a $1.7 million interest-free Canadian development loan. The company also had $35.0 million of revolving credit commitments, with $14.0 million of letters of credit outstanding and approximately $21.0 million of stated borrowing availability.
- Current assets were $411.8 million versus current liabilities of $163.8 million. The company reported total shareholders’ equity of $391.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by Health Services, including expansion of Medicaid managed care on the Texas contract and other organic growth.
- Consolidated operating income declined modestly despite higher revenue because of lower Health Services margins, normal contract life-cycle fluctuations, project change-order timing, and dilution from growth in a lower-margin, cost-reimbursable Texas contract.
- Human Services benefited from a $2.7 million termination payment and $1.5 million of cost recoveries related to the terminated United Kingdom Flexible New Deal contract. These benefits partially offset losses and ramp-up costs associated with the replacement Work Programme.
- Operating cash flow declined because the prior-year period benefited from approximately $22.1 million of accounts-receivable collections related to previously delayed customer payments.
- Investing cash use improved to $0.9 million from $4.7 million, including $2.2 million of proceeds from the sale of a discontinued business and lower capitalized software spending.
- Financing cash use increased to $11.3 million from $5.1 million, reflecting $9.7 million of share repurchases and $3.0 million of dividends.
- The company repurchased 236,700 shares for $8.8 million and had approximately $127.9 million available under its repurchase authorization at December 31, 2011.
Outlook, Commentary, Risks, and Unusual Items
- Management expects operations and capital expenditures to remain fundable from operating cash flow and believes liquidity is adequate for short-term payment delays. More prolonged delays by state customers could require additional capital, amended payment terms, or other actions and could adversely affect cash flow and profitability.
- Government customers face fiscal pressure, while demand for Medicaid, welfare-to-work, and other public services remains significant. Changes in government budgets, program volumes, managed-care adoption, contract awards, and contract performance may materially affect results.
- International operations expose the company to foreign-currency movements and challenging fiscal conditions in Australia and the United Kingdom.
- Performance obligations included $14.0 million of letters of credit and $17.2 million of performance bond commitments. Management considered the probability of draws to be remote, and the company was in compliance with its credit-facility covenants.
- Pending matters include a $2.3 million Medicaid-related claim involving a discontinued business line and a dispute with a former SchoolMAX customer alleging damages that had exceeded $30 million, although the amount was expected to decline after a related audit claim was reduced to approximately $42,000. MAXIMUS is contesting the claims and believes it may be indemnified by the buyer of the former business.
- Discontinued operations contributed $46,000 in the quarter, including a $148,000 gain related to a note receivable from a prior divestiture. The $3.7 million note balance remained fully reserved.
- The Board declared a $0.09 per-share quarterly dividend on January 6, 2012, payable February 29, 2012.
- Management stated that disclosure controls were effective, that there were no material changes in internal control over financial reporting, and that there were no material changes to the risk factors in the fiscal 2011 Form 10-K.
Important Facts for Investors to Verify
- Assess whether Health Services margin pressure from the Texas contract, contract life-cycle effects, and project timing is temporary or structural.
- Separate recurring Human Services profitability from the one-time or non-recurring Flexible New Deal termination payment and cost recoveries.
- Monitor execution, cash requirements, and eventual performance-based receipts under the United Kingdom Work Programme.
- Verify the availability and terms of the revolving credit facility, including the January 2013 maturity, letters of credit, borrowing availability, and covenant compliance.
- Track customer payment timing, accounts receivable collection trends, and the concentration of cash held outside the United States.
- Evaluate potential exposure from the Medicaid and former SchoolMAX disputes, as well as the company’s asserted indemnification rights.
- Reconcile non-GAAP constant-currency revenue and free cash flow measures to GAAP results.