MAXIMUS, Inc. 2019 Q2 Form 10-Q Summary
Business context and reporting period
MAXIMUS provides business-process services to government health and human-services programs worldwide. This filing covers the three and six months ended March 31, 2019, the Company’s fiscal second quarter. Results are reported through three segments: U.S. Health & Human Services, U.S. Federal Services, and Outside the U.S.
Key financial metrics
| Metric | Three months ended March 31, 2019 | Year-over-year change | Six months ended March 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $736.5 million | 20.2% | $1.401 billion | 13.4% |
| Gross profit | $169.4 million | 13.9% | $328.7 million | 9.3% |
| Gross margin | 23.0% | Down from 24.3% | 23.5% | Down from 24.3% |
| Operating income | $81.8 million | 14.7% | $155.9 million | 3.3% |
| Operating margin | 11.1% | Down from 11.6% | 11.1% | Down from 12.2% |
| Net income attributable to MAXIMUS | $61.9 million | 11.6% | $117.8 million | 2.8% |
| Diluted EPS | $0.96 | Up from $0.84 | $1.82 | Up from $1.73 |
Six-month cash flow from operations was $127.2 million, compared with $116.8 million in the prior-year period. Free cash flow was $113.2 million, compared with $103.6 million. Investing cash outflow was $420.1 million, primarily reflecting the $421.8 million initial payment for the citizen engagement centers acquisition.
At March 31, 2019, cash and cash equivalents were $46.8 million, and restricted cash was $7.7 million. Billed and billable receivables were $491.6 million and unbilled receivables were $131.3 million. Total debt was approximately $79.0 million, including $75.0 million outstanding under the credit facility; the Company stated that these borrowings were repaid in full during April 2019. The facility permits borrowings of up to $400 million, subject to covenants.
The Company paid $32.0 million of dividends and repurchased $46.1 million of common stock during the first six months. The quarterly dividend was increased to $0.25 per share from $0.045 in the prior-year period. Adjusted EBITDA was $206.8 million for the six months ended March 31, 2019.
Material changes versus the prior comparable period
- The November 16, 2018 acquisition of General Dynamics Information Technology’s citizen engagement centers business contributed $176.0 million of second-quarter revenue and $277.3 million of six-month revenue. The transaction’s estimated purchase price was $430.6 million, including approximately $188.1 million of estimated goodwill and $122.3 million of acquired intangible assets.
- U.S. Federal Services revenue increased 149.1% in the quarter and 103.3% year to date, primarily because of the acquisition. Its gross margin declined to 20.9% from 23.5% in the quarter, reflecting the acquired business’s predominantly cost-plus contracts.
- U.S. Health & Human Services revenue declined 5.1% in the quarter and 4.2% year to date because of rebids and extensions of large contracts. Operating margin improved to 19.6% from 16.3%, including a $4.0 million benefit from a contract amendment covering work performed in prior periods.
- Outside the U.S. revenue declined 18.0% in the quarter and 17.7% year to date, while operating margin fell to 2.9% from 8.6%. Declines reflected weaker welfare-to-work activity in Australia and the United Kingdom, ending U.K. programs, unfavorable currency effects, and a prior-year one-time profit item.
- SG&A increased in absolute dollars because of the acquired business and $2.7 million of acquisition-related costs, but declined as a percentage of revenue to 10.6% from 12.2% in the quarter. Six-month SG&A included approximately $4.0 million of unusually high severance costs related to an early retirement program.
- Amortization of intangible assets increased to $9.5 million from $2.6 million in the quarter, including amortization from the acquisition. The Company expects approximately $23.6 million of fiscal 2019 amortization related to acquired intangible assets.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2019 operating margins of 17% to 19% for U.S. Health & Human Services, approximately 10% for U.S. Federal Services, and 3% to 4% for Outside the U.S. The projected full-year effective tax rate is 25% to 25.5%.
- The U.S. Federal Services segment expects approximately $200 million of fiscal 2019 revenue and $350 million of fiscal 2020 revenue from the U.S. Decennial Census contract. These estimates may change based on contract performance or modifications.
- At March 31, 2019, remaining performance obligations were approximately $409 million, with about 50% expected to be recognized within the next twelve months, subject to stated exclusions.
- MAXIMUS adopted ASC Topic 606 on October 1, 2018 using the modified retrospective method. The adoption increased opening retained earnings by $32.9 million and increased first-half reported revenue and net income attributable to MAXIMUS by approximately $1.8 million and $1.0 million, respectively, versus prior accounting guidance. The new method requires additional estimates, particularly for outcome-based contracts.
- Management cites longer procurement cycles, contract award protests, policy and budget uncertainty, government staffing constraints, contract rebids, performance requirements, potential contract termination, audits, regulatory compliance, cybersecurity, litigation, acquisition integration, foreign currency movements, and government spending changes as key risks.
- A pending appeal relates to a dismissed securities class action concerning the U.K. Health Assessment Advisory Service. The Company cannot estimate a potential loss. Separately, proposed CMS disallowances total approximately $31 million; MAXIMUS believes the school districts are responsible for most related amounts and has reserved its estimated fees.
- The Company expects to recognize a material right-of-use asset and lease liability upon adoption of the new lease standard on October 1, 2019, without a material effect on cash flows or results of operations.
Important facts for investors to verify
- Confirm the final purchase-price true-up and valuation of assets and liabilities for the citizen engagement centers acquisition, including the expected additional payment of approximately $8.8 million.
- Monitor whether U.S. Federal Services organic declines and Outside-the-U.S. weakness offset the acquired revenue contribution.
- Assess the sustainability of the reported operating performance, given the $4.0 million contract amendment benefit, favorable performance-based contract results, elevated severance costs, and acquisition-related amortization.
- Track receivables and cash conversion: reported DSO was 77 days, or 73 days excluding the ASC 606 effect, versus 63 days at September 30, 2018.
- Verify repayment of the credit-facility borrowings in April 2019 and the Company’s remaining liquidity after dividends, share repurchases, acquisition payments, and working-capital needs.
- Follow the CMS proposed disallowances, the securities litigation appeal, contract rebids, U.K. program transitions, Brexit-related uncertainty, and the ramp-up of the Decennial Census contract.