MAXIMUS, Inc. Form 10-Q Summary
Business Context and Reporting Period
MAXIMUS provides business-process outsourcing, administrative, consulting, case-management, and related services primarily to government health and human services agencies. Operations are reported through Health Services and Human Services segments across the United States, United Kingdom, Australia, Canada, and Saudi Arabia. This unaudited filing covers the three and nine months ended June 30, 2013, within the fiscal year ending September 30, 2013.
The company completed a two-for-one stock split on June 28, 2013; all share and per-share amounts were adjusted accordingly. On July 1, 2013, after the reporting period, MAXIMUS acquired U.K.-based Health Management Limited for approximately $79.0 million.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Nine Months Ended June 30, 2013 | Nine Months Ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $334.3 million | $266.4 million | $946.9 million | $749.4 million |
| Gross profit | $94.6 million | $78.7 million | $268.5 million | $203.3 million |
| Gross margin | 28.3% | 29.5% | 28.4% | 27.1% |
| Operating income from continuing operations | $44.4 million | $33.3 million | $129.1 million | $87.6 million |
| Operating margin | 13.3% | 12.5% | 13.6% | 11.7% |
| Net income | $28.1 million | $20.5 million | $81.1 million | $52.5 million |
| Diluted EPS | $0.40 | $0.29 | $1.16 | $0.76 |
- Third-quarter revenue increased 25.5%; nine-month revenue increased 26.4%. Excluding PSI, organic growth was 25.9% for the quarter and 15.4% for the nine-month period.
- Health Services revenue was $217.9 million in the quarter and $591.8 million for nine months; Human Services revenue was $116.4 million and $355.1 million, respectively.
- Cash provided by operating activities was $88.6 million for the nine months, including $89.2 million from continuing operations, compared with $85.1 million from continuing operations in the prior period.
- Free cash flow from continuing operations was $50.6 million versus $70.3 million in the prior-year period, reflecting substantially higher capital investment.
- Capital expenditures were $24.9 million and capitalized software costs were $13.7 million for the nine months.
- Cash and cash equivalents were $187.9 million at June 30, 2013, compared with $189.3 million at September 30, 2012. Approximately $71.4 million was subsequently used for the HML acquisition.
- Total debt was approximately $1.5 million, excluding letters of credit. The company had $15.5 million of letters of credit under its revolving facility and $3.0 million with another financial institution.
- The company had a $100 million unsecured revolving credit facility, with $84.5 million of borrowing capacity available after letters of credit. It was in compliance with all covenants, and its total leverage ratio was below 0.5:1.0.
- Performance bond commitments totaled $50.9 million at June 30, 2013.
Material Changes Versus the Prior Comparable Period
- Growth benefited from the April 2012 acquisition of PSI, organic expansion, new health-exchange work, strong Federal Medicare appeals volumes, and growth in the United Kingdom.
- Nine-month 2013 results included a one-time benefit from the termination of a loss-making PSI-acquired systems-integration contract: $16.0 million of revenue and $10.9 million of gross and operating profit. Management estimated the after-tax benefit at $6.5 million, or $0.09 per diluted share.
- Excluding the contract termination, nine-month operating-income growth was approximately 35%, rather than the reported 47%.
- Third-quarter Human Services margins declined year over year, partly because the prior-year period included a $4.4 million fixed-price contract change-order benefit and because of lower Australian margins. Nine-month Human Services margins benefited from the unusual contract termination; excluding it, the segment operating margin was 10.4%.
- SG&A declined to 14.7% of revenue from 16.5% in the quarter and to 14.6% from 15.3% for nine months, reflecting PSI integration and operating leverage in the United Kingdom.
- The effective tax rate declined to 37.8% in the quarter and 38.0% for nine months, compared with 40.6% and 42.3%, respectively, in the prior-year periods. The prior-year rates included a $1.6 million correction of an immaterial prior-period error.
- Cash flow was affected by growth-related working-capital needs and payment delays on two large U.S. contracts. Foreign-exchange movements, particularly the weaker Australian dollar, reduced cash by $15.6 million.
- Share repurchases increased to $27.0 million for the nine months from $8.9 million in the prior-year period. Approximately $102.2 million remained available under the repurchase authorization at June 30, 2013.
Guidance, Outlook, Risks, and Unusual Items
- Management identified opportunities related to the Affordable Care Act, including health-insurance exchanges and Medicaid expansion. MAXIMUS estimated more than $150 million of new annual contract value for the following year related to new health-insurance contracts.
- The sales pipeline was $2.2 billion at June 30, 2013, down from $3.4 billion a year earlier, primarily because opportunities had converted into awards. Management cautioned that the pipeline is not guaranteed future revenue.
- Management expected Federal Medicare appeals activity to remain stable at the most recent quarterly level, but stated that future volumes cannot be predicted accurately.
- Management expected Australian Human Services margins to remain at the level recorded in the third quarter. U.K. and Saudi Arabian operations were benefiting from ramp-up and improved margins.
- Approximately 60% of cash and cash equivalents remained overseas after the HML acquisition. Repatriation to the United States could create additional taxes, which had not been quantified.
- Key risks include government budget constraints, delayed customer payments, contract-performance requirements, contract termination, government reviews and audits, regulatory compliance, litigation, foreign-currency fluctuations, and the need to invest working capital and fixed assets for new contracts.
- A state Medicaid agency continued to assert a $2.3 million claim related to a discontinued business line; no legal action had been initiated. MAXIMUS believes the applicable school districts are responsible for amounts disallowed.
- A school district’s prior arbitration claim seeking at least $10 million was denied, and a subsequent motion to vacate the arbitration decision was denied in July 2013. A separate allegation had not resulted in a formal claim or lawsuit.
- The board declared a quarterly dividend of $0.045 per share on July 5, 2013, payable August 30, 2013.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile reported nine-month growth and EPS with the $16.0 million revenue and $10.9 million profit benefit from the terminated PSI contract.
- Assess the sustainability of organic growth, particularly ACA-related awards, health-exchange implementation, Medicaid expansion, and Federal Medicare appeals volumes.
- Monitor accounts receivable, payment timing, and working-capital needs because operating cash flow growth lagged net-income growth.
- Evaluate the impact of the July 1, 2013 HML acquisition on cash, leverage, goodwill, intangible assets, and future operating results.
- Review Australian contract performance and Human Services margins excluding the unusual contract termination benefit.
- Consider overseas cash balances and potential tax costs associated with repatriation.
- Review performance bonds, letters of credit, contract-contingency exposure, and the unresolved Medicaid-related claim.
- Confirm that future capital spending, share repurchases, dividends, and acquisitions remain consistent with available cash flow and credit capacity.