MAXIMUS, Inc. Fiscal 2011 Form 10-K Summary
Business context and reporting period
MAXIMUS provides business process outsourcing and administrative services to government health and human services agencies in the United States, Australia, Canada and the United Kingdom. Its two reportable segments are Health Services and Human Services. This Form 10-K covers the fiscal year ended September 30, 2011; the filing also provides fourth-quarter data for the quarter ended September 30, 2011.
Fiscal 2011 revenue was diversified across state and local government programs with significant federal funding, foreign governments, U.S. federal agencies and other customers. Australia represented 19% of consolidated revenue, Texas 16% and California 11%.
Financial performance and position
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Revenue | $929.6 million | $831.7 million | +11.8% |
| Gross profit | $253.7 million | $220.8 million | +14.9% |
| Operating income | $122.4 million | $107.4 million | +14.0% |
| Operating margin | 13.2% | 12.9% | +30 basis points |
| Income from continuing operations | $82.1 million | $69.4 million | +18.4% |
| Net income | $81.2 million | $70.4 million | +15.3% |
| Diluted EPS | $2.28 | $1.96 | +16.3% |
| Operating cash flow from continuing operations | $97.6 million | $141.0 million | -30.8% |
| Free cash flow from continuing operations | $71.5 million | $118.4 million | -39.6% |
Gross margin was approximately 27.3% in fiscal 2011 versus 26.6% in fiscal 2010. SG&A was $132.1 million, or 14.2% of revenue, compared with 14.3% in the prior year. The effective tax rate declined to 34.8% from 35.9%, primarily because a larger share of profit was generated in lower-tax foreign jurisdictions.
Health Services revenue increased 10.0% to $565.9 million, with operating income of $74.7 million and a 13.2% operating margin. Human Services revenue increased 14.6% to $363.8 million, with operating income of $46.8 million and a 12.9% margin. Human Services benefited from stronger welfare-to-work performance in Australia and the United Kingdom.
At September 30, 2011, cash and cash equivalents were $173.0 million, working capital was $227.4 million and shareholders’ equity was $374.5 million. Long-term debt, including capital lease obligations, was $1.7 million. The company had up to $24.0 million of additional borrowing capacity under its U.S. credit facility and was in compliance with its covenants.
Fiscal 2011 cash flow was reduced by the reversal of favorable working-capital effects from the U.K. Flexible New Deal contract, higher tax payments and lower deferred revenue. Capital expenditures and capitalized software costs totaled $26.1 million. The company repurchased approximately 1.6 million shares for $57.5 million and paid $10.3 million in dividends.
Material changes versus the prior comparable period
- Revenue growth accelerated across both segments, with approximately half of the increase contributed by each segment. Constant-currency revenue growth was 8.4%.
- Operating income excluding legal and settlement recoveries increased 19.1%, reflecting organic growth, operating scale and favorable foreign exchange effects.
- Human Services operating margin improved to 12.9% from 12.4%, while Health Services margin improved to 13.2% from 12.6%.
- The company recorded $7.3 million of additional charges on a fixed-price U.S. education contract, down from $10.3 million in fiscal 2010. No further charges were incurred after the second quarter, and completion was expected in fiscal 2012.
- Net legal and settlement recovery declined to $0.8 million from $5.4 million; fiscal 2010 included $7.5 million of insurance recoveries.
- The ERP division was sold in fiscal 2010 and is classified as discontinued operations. Fiscal 2011 included a $1.7 million dispute-related loss and a total discontinued-operations loss of $1.0 million.
- Backlog increased to approximately $2.9 billion from $2.1 billion, driven primarily by Human Services backlog, which increased to $1.4 billion from $0.6 billion. Management expected approximately 32% of backlog to be recognized in fiscal 2012 and backlog, including anticipated option renewals, to represent 95% of estimated fiscal 2012 revenue.
Guidance, outlook, commentary and risks
Management did not provide a clear numerical earnings or revenue guidance range in the filing. It expected demand for core services to increase as governments implement health-care reform, expand Medicaid managed care, pursue welfare reform and seek cost efficiencies amid budget pressure. The Affordable Care Act and the U.K. Work Programme were identified as significant potential growth drivers.
Backlog and long-term contracts support revenue visibility, but backlog estimates exclude renewals and may change because of contract termination, rebids, performance volumes and government funding decisions. Government customers generally may terminate contracts on short notice, with or without cause.
- Government budget constraints, changes in legislation and procurement delays could reduce or defer awards.
- Failure to meet contractual performance requirements could result in termination, liquidated damages, penalties or loss of future work.
- Performance-based and fixed-price contracts generally carry higher margins but expose the company to volume, execution and cost-overrun risk.
- Approximately 32% of revenue and 46% of operating income came from foreign subsidiaries, creating foreign-exchange and international operating exposure. Approximately 60% of cash was held outside the United States and could incur adverse tax consequences if repatriated.
- Prior payment delays by state customers were ultimately recovered, but more prolonged delays could pressure cash flow, operations and profitability.
- Outstanding commitments included $101.7 million of operating leases, $2.2 million of acquisition-related contingent consideration, $10.4 million of deferred compensation liabilities, $12.0 million of letters of credit and $16.9 million of performance bonds.
- A former SchoolMAX customer alleged damages exceeding $30 million and recommended an approximately $11.6 million refund. MAXIMUS disputed the claims and stated that it expected indemnification from the buyer of the disposed business.
- A U.K. Flexible New Deal claim for $7.8 million was submitted for termination costs and foregone revenue, but recovery was uncertain and no income would be recognized unless entitlement was established.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of September 30, 2011.
Most important facts for investors to verify
- Whether fiscal 2012 revenue and earnings benefited from the $2.9 billion backlog as anticipated, including the uncertainty of option renewals.
- The sustainability of Human Services margins following the transition from Flexible New Deal to the U.K. Work Programme and the completion of the fixed-price education contract.
- The timing and collectability of the $7.8 million U.K. claim and the potential exposure from the SchoolMAX and Medicaid-related disputes.
- The effect of lower deferred revenue and contract-related working capital on operating cash flow and free cash flow.
- The concentration of revenue with Australia, Texas and California, and the effect of foreign exchange and overseas cash balances.
- Future share repurchases, dividends and the replacement of the prior repurchase authorization with a new authorization for up to $125.0 million announced in November 2011.