MAXIMUS, Inc. Fiscal 2016 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2016; filed November 21, 2016. The filing is an annual report, not a standalone fourth-quarter filing, although quarterly data are included. MAXIMUS provides government health and human services through Health Services, U.S. Federal Services, and Human Services segments in the United States, United Kingdom, Australia, Canada, and Saudi Arabia.
Financial results and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $2,403.4 million | $2,099.8 million | +14.5% |
| Gross profit | $562.2 million | $512.7 million | +9.6% |
| Gross margin | 23.4% | 24.4% | Down 100 bps |
| Operating income | $286.6 million | $259.8 million | +10.3% |
| Operating margin | 11.9% | 12.4% | Down 50 bps |
| Net income attributable to MAXIMUS | $178.4 million | $157.8 million | +13.0% |
| Diluted EPS | $2.69 | $2.35 | +14.5% |
| Adjusted EBITDA | $372.1 million | $336.4 million | +10.6% |
- Segment revenue: Health Services $1,298.3 million, U.S. Federal Services $591.7 million, and Human Services $513.3 million.
- Segment operating margins: Health Services 14.3%, U.S. Federal Services 10.7%, and Human Services 9.3%.
- Cash flow: Operating cash flow was $180.0 million versus $206.2 million in 2015. Free cash flow increased to $133.6 million from $101.1 million because capital expenditures declined substantially.
- Liquidity and debt: Cash and cash equivalents were $66.2 million. Credit-facility borrowings were $164.7 million, with $230.1 million available under the $400 million revolving facility. The company was in compliance with its covenants and reported a total leverage ratio below 1.0x.
- Working capital: Days sales outstanding increased to 70 days from 67 days. Accounts receivable, billed and billable, rose to $444.4 million from $396.2 million.
- Capital returns: The quarterly dividend remained $0.045 per share, or $0.18 annually. MAXIMUS repurchased approximately 0.6 million shares for $31.3 million during fiscal 2016, with $137.8 million remaining under the authorization at year-end.
- Backlog: Estimated backlog was $4.0 billion, down from $4.6 billion. Approximately 51% was expected to convert to fiscal 2017 revenue, and backlog plus anticipated options or extensions represented approximately 93% of forecast fiscal 2017 revenue.
Material changes versus fiscal 2015
- Revenue growth reflected 9.3% organic growth and 7.5% acquired growth, partially offset by a 2.3% currency headwind.
- Health Services revenue increased 17.0% and operating income increased approximately 20%, supported by expanded New York work, a full year of the U.K. HAAS contract, and seven months of Ascend operations.
- U.S. Federal Services revenue increased 17.8%, primarily from a full year of Acentia. Profitability declined because Acentia has a greater mix of lower-margin cost-plus and time-and-materials contracts, while organic revenue declined following the anticipated closure of a Federal Marketplace contact center.
- Human Services revenue increased 5.2%, but operating income fell 21%. The Australian jobactive contract operated at lower margins during its ramp-up, while U.K. Work Programme volumes declined and foreign-exchange movements reduced reported results.
- Gross and operating margins declined because direct costs grew faster than revenue, particularly on start-up and performance-based contracts.
- Interest expense increased to $4.1 million from $1.4 million due to acquisition-related borrowings and working-capital financing.
- MAXIMUS acquired Ascend for $44.1 million and Assessments Australia during fiscal 2016. It also sold its K-12 Education business and recognized a $6.9 million gain.
- Foreign subsidiaries generated approximately 28% of revenue and 16% of operating income. Foreign-currency translation reduced comprehensive income by $13.8 million.
Guidance, outlook, risks, and unusual items
- Management expected fiscal 2017 revenue growth to continue to be led by Health Services, but anticipated lower revenue from the decline in the British pound, the loss of certain nonrecurring work, and approximately $40 million of lower revenue from a U.S. Federal healthcare contract.
- Fiscal 2016 included approximately $36 million of nonrecurring New York infrastructure revenue and approximately $23 million from a Connecticut contract that MAXIMUS elected not to rebid.
- Management expected fiscal 2017 operating margins to improve as HAAS and other ramp-up contracts mature. It also forecast operating cash flow of $230 million to $280 million.
- A restructuring of the U.K. Human Services business was expected to produce an approximately $3.8 million charge in the first quarter of fiscal 2017, with anticipated cost savings later in the year. Human Services was expected to operate below 10% margins in fiscal 2017.
- Direct ACA-related work was estimated to contribute approximately $160 million of fiscal 2017 revenue, with an additional approximately $40 million tied to Medicaid expansion. The potential repeal, replacement, or modification of the ACA was identified as a significant uncertainty, although management expected no effect on results before fiscal 2017.
- Key risks include government budget and legislative changes, contract termination or nonrenewal, performance requirements and liquidated damages, competitive bidding and pricing risk, start-up costs before payment, audits and regulatory compliance, litigation, cybersecurity and protected information, foreign currency movements, acquisition integration, and dependence on government customers.
- Government customers represented the substantial majority of revenue. The U.S. Federal Government contributed 22%, the U.K. Government 16%, and New York State 12% of fiscal 2016 revenue.
- Performance bond commitments totaled $23.0 million; management considered the probability of a draw remote. Pending litigation, audits, and investigations were not expected by management to have a material adverse effect, although outcomes cannot be assured.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether backlog conversion, option renewals, and performance-based volume assumptions support the forecast that approximately 93% of fiscal 2017 revenue is covered.
- The effect of ACA policy changes and the approximately $160 million of estimated direct ACA-related fiscal 2017 revenue.
- Margin recovery on HAAS, Australian jobactive, and other ramp-up contracts, including the expected U.K. restructuring benefits.
- The impact of the $40 million anticipated U.S. Federal Services revenue reduction, the $36 million nonrecurring New York revenue, and the discontinued Connecticut contract.
- Cash conversion, receivable growth, DSO, and the ability to generate the forecast $230 million to $280 million of fiscal 2017 operating cash flow while repaying debt and funding capital returns.
- Foreign-exchange exposure, particularly to the British pound and Australian dollar, and the sensitivity of reported equity to currency movements.
- Potential liabilities from government audits, contract disputes, performance bonds, leases, tax positions, and acquisition-related contingent consideration.