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MMS > SEC Filings for MMS > Form 10-K on 16-Nov-2012All Recent SEC Filings

Show all filings for MAXIMUS INC

Form 10-K for MAXIMUS INC


16-Nov-2012

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, our Consolidated Financial Statements and the related Notes.

Business Overview

We provide business process services ("BPS") to government health and human services agencies under our mission of Helping Government Serve the People. Our business is focused almost exclusively on administering government-sponsored programs such as Medicaid, CHIP, health care reform, welfare-to-work, Medicare, child support enforcement and other government programs. Founded in 1975, we are one of the largest pure-play health and human services administrative providers to governments in the United States, Australia, Canada and the United Kingdom. We use our expertise, experience and advanced technological solutions to help government agencies run efficient, cost-effective programs and to improve program accountability, while enhancing the quality of services provided to program beneficiaries.

The Company is managed through two segments, Health Services and Human Services. The Health Services Segment provides a variety of business process services, as well as consulting services for state, provincial and federal programs, such as Medicaid, CHIP, Medicare and the British Columbia Health Insurance Program. The Human Services Segment includes a variety of BPS, case management, job training and support services for programs such as welfare-to-work, child support enforcement, K-12 special education and other specialized consulting services.

During recent years, the Company has focused on its core health and human services, expanding these operations in the United States and internationally, while disposing of non-core businesses. This approach has resulted in the Company earning an increasing share of its revenues from overseas markets, up from 16% in 2008 to 26% in 2012. We believe that this focus, balanced by a risk-management structure, has enabled the Company to attain profitable growth in recent years. The Company believes that a combination of its record of results, robust financial performance and global experience leaves it well-positioned to capitalize on opportunities in its existing markets and elsewhere.

During fiscal 2012, the Company completed the acquisition of PSI Services Holding, Inc. and its wholly-owned subsidiary, Policy Studies, Inc. ("PSI"). PSI operations are consistent with, and have been integrated into, our Health and Human Services Segments. The acquisition will strengthen the Company's business in the United States through new resources and customers as well as providing additional experience and knowledge of the health and human services markets.

Industry considerations

Within the United States, fiscal pressures remain a challenge for state governments while at the same time they are also facing increasing demand for critical services from the most vulnerable members of society. The majority of states are required to balance their budgets each year and states have taken steps to more efficiently manage their social programs, including Medicaid. Since Medicaid accounts for a large portion of states' budgets, many states have taken steps to control costs by shifting more populations to managed care, increasing co-pays, reducing provider rates, and modifying benefits. As more populations shift into managed care, demand for our administrative services and program volumes generally increases.

The situation for international governments is also challenging, with each of the areas in which MAXIMUS operates offering unique local issues in addition to general global economic factors. Both Australia and the United Kingdom have implemented measures to deal with significant debt and commitments and both have implemented welfare reform as a means to better manage resources. Companies like MAXIMUS may benefit from the need for governments to reform certain benefits programs.


Table of Contents

Results of Operations

Consolidated



The following table sets forth, for the fiscal year ends indicated, selected
statements of operations data:



                                                       Year ended September 30,
                                                   2012           2011          2010
                                                        (dollars in thousands,
                                                        except per share data)
Revenue                                         $ 1,050,145    $  929,633    $  831,749
Gross profit                                        287,943       253,651       220,833
Selling, general and administrative expense         157,402       132,058       118,778
Selling, general and administrative expense
as a percentage of revenue                             15.0 %        14.2 %        14.3 %
Operating income excluding acquisition
-related expenses and legal and settlement
expenses and recoveries                             130,541       121,593       102,055
Operating income excluding legal and
settlement expense as a percentage of
revenue                                                12.4 %        13.1 %        12.3 %
Acquisition-related expenses                          2,876             -           254
Legal and settlement expense (recovery), net             90          (808 )      (5,605 )
Operating income from continuing operations         127,575       122,401       107,406
Operating margin from continuing operations            12.1 %        13.2 %        12.9 %
Interest and other income, net                        4,176         3,495           916
Income from continuing operations before
income taxes                                        131,751       125,896       108,322
Provision for income taxes                           55,652        43,754        38,925
Tax rate                                               42.2 %        34.8 %        35.9 %
Income (loss) from discontinued operations,
net of income taxes                                       -          (133 )       1,040
Loss on disposal                                         34          (841 )         (28 )
Net income                                      $    76,133    $   81,168    $   70,409
Basic Earnings per share:
Income from continuing operations               $      2.25    $     2.39    $     1.99
Income (loss) from discontinued operations                -         (0.03 )        0.03
Basic earnings per share                        $      2.25    $     2.36    $     2.02
Diluted Earnings per share:
Income from continuing operations               $      2.19    $     2.31    $     1.93
Income (loss) from discontinued operations                -         (0.03 )        0.03
Diluted earnings per share                      $      2.19    $     2.28    $     1.96

The following provides an overview of the significant elements of our Consolidated Statements of Operations. As both of our business segments have different factors driving revenue growth and profitability, the sections that follow cover these segments in greater detail.

We discuss constant currency revenue information to provide a framework for assessing how our business performed excluding the effect of foreign currency rate fluctuations. To provide this information, revenue from foreign operations is converted into United States dollars using average exchange rates from the previous fiscal year.

We discuss operating income from continuing operations excluding acquisition-related expenses and legal and settlement expenses and recoveries. Acquisition-related expenses relate to costs incurred directly as a consequence of the acquisitions of Policy Studies, Inc. ("PSI") in fiscal 2012 and DeltaWare Services, Inc. ("DeltaWare") in fiscal 2010. Legal and settlement expenses and recoveries are typically driven by factors that are not consistent with other drivers of our business and the timing and extent of these expenses and recoveries may have an unusual effect on our financial results. In recent years, we have received the benefits of insurance recoveries from a matter resolved during fiscal 2008 and these recoveries are not expected to continue. Offsetting these, we have incurred other legal charges for significant, non-routine matters which are also not expected to continue to occur. We believe that excluding acquisition-related expenses and legal and settlement expenses and recoveries provides a framework for comparing the performance of the business between periods.

The Company acquired PSI on April 30, 2012 and the financial results above include the performance of PSI for all periods after this date. The year ended September 30, 2012 includes $60.1 million of revenue contributed by PSI. The Company acquired DeltaWare on February 10, 2010 and the financial results include the performance of DeltaWare for all periods after this time. The acquisition of DeltaWare did not make a significant contribution to revenue or operating income. We provide organic revenue growth information to provide a framework for assessing how our business performed excluding the effects of acquisitions. Organic revenue growth comparisons between fiscal 2012 and fiscal 2011 are performed excluding all PSI revenues. Comparisons for the 2011 and 2010 fiscal years are performed excluding DeltaWare results.


Table of Contents

Constant currency revenue, organic growth and operating income excluding acquisition-related expenses and legal and settlement expenses and recoveries are non-GAAP numbers. We believe that these numbers provide a useful basis for assessing the Company's performance. The presentation of these non-GAAP numbers is not meant to be considered in isolation, or as an alternative to revenue growth or operating income as measures of performance.

Revenue increased 13.0% to $1,050.1 million for the year ended September 30, 2012, compared with the prior year. On a constant currency basis, growth would have been 13.2%. Organic growth was 6.5%. Organic growth was driven by the Health Services Segment, which was offset by declines in revenue from our international operations in the Human Services Segment.

Revenue increased 11.8% to $929.6 million for the year ended September 30, 2011, compared with the prior year. On a constant currency basis, the revenue growth would have been 8.4%. The principal driver of growth was new work in the Human Services Segment.

See information on the individual segments below for discussion of drivers.

Selling, general and administrative expense (SG&A) consists of costs related to general management, marketing and administration. These costs include salaries, benefits, bid and proposal efforts, travel, recruiting, continuing education, employee training, non-chargeable labor costs, facilities costs, printing, reproduction, communications, equipment depreciation, intangible amortization and legal expenses incurred in the ordinary course of business. SG&A has increased in absolute terms and as a percentage of revenue owing to significant business development activity, including the preparation of bids and proposals.

Acquisition-related expenses are direct costs incurred as a consequence of the acquisition of PSI (in 2012) and DeltaWare (in 2010). These include legal fees, brokerage fees, due diligence, valuation reports, contract terminations related to redundant support services and severance.

Legal and settlement expense (recovery), net consists of costs, net of reimbursed insurance claims, related to significant legal settlements and non-routine legal matters, including future probable legal costs estimated to be incurred in connection with those matters. Legal expenses incurred in the ordinary course of business are included in selling, general and administrative expense. Legal and settlement expenses (recoveries) are summarized below (in thousands):

                            Year ended September 30,
                            2012        2011      2010
Insurance recoveries     $   (1,180 )  $    -   $ (7,500 )
Employee lawsuit                600         -          -
Client indemnification          490         -          -
Other                           180      (808 )    1,895
Total                    $       90    $ (808 ) $ (5,605 )

The insurance recoveries in fiscal 2012 and 2010 relate to a litigation settlement in fiscal 2008. During the fourth quarter of fiscal year 2012, the company agreed to settle a lawsuit brought by a former employee, and the company accrued $600,000 consisting of settlement and legal costs related to that matter. The company has also accrued $490,000 relating to client indemnification of funds misapprapriated by a former employee. During the 2011 fiscal year, the Company reversed a legal expense previously recognized in fiscal 2010 for a matter which concluded without liability to the Company.

Operating income from continuing operations increased 4.2% to $127.6 million for the year ended September 30, 2012, compared to the prior year. Excluding the acquisition-related expenses and legal and settlement expense, growth would have been 7.4%. This growth was driven by the acquisition of PSI, new work in our Health Services segment and certain one-time benefits in our Human Services segment.

Operating income from continuing operations increased 14.0% in fiscal 2011 compared to fiscal 2010, from $107.4 million to $122.4 million. The increase of $15.0 million was driven by growth in the business, the benefits of favorable exchange rates on foreign-sourced income, and increasing economies of scale in operating the business.

The increase in interest and other income between 2010 and 2012 is primarily attributable to increases in cash balances in jurisdictions which have high interest rates. At September 30, 2012, 66% of the Company's cash is held in jurisdictions other than the United States compared with 24% at September 30, 2009. The increase has been driven by strong cash flows in international businesses.


Table of Contents

Our effective tax rates were 42.2%, 34.8%, and 35.9% in 2012, 2011 and 2010, respectively. The tax charge for the year ended September 30, 2012 includes a charge of $2.7 million to correct an error from prior years. Without this adjustment, the tax rate would have been 40.3%. We do not believe this adjustment is material to the financial statements. The tax rate increased in fiscal 2012 owing to the effect of a greater share of the Company's income being earned in the United States, which has a higher corporate tax charge than other jurisdictions in which the Company does business. The increase in United States profits was driven by organic growth, the acquisition of PSI, which conducts business entirely within the United States, and the anticipated decline in profits in the United Kingdom owing to a transition between contracts which is discussed below.

Health Services Segment



                                  Year ended September 30,
                                2012        2011        2010
                                   (dollars in thousands)
Revenue                       $ 671,181   $ 565,881   $ 514,258
Gross profit                    172,456     147,239     130,276
Operating income                 80,619      74,715      64,725
Operating margin percentage        12.0 %      13.2 %      12.6 %

The Health Services Segment provides a variety of business process services, as well as consulting services for state, provincial and federal programs, such as Medicaid, CHIP, Medicare and the British Columbia Health Insurance Program.

Revenue increased by 18.6%, or 18.9% on a constant currency basis, in fiscal 2012 compared to fiscal 2011. Organic growth was 14.8%. In addition to PSI's results, the Company also benefitted from new work and expansion on existing contracts including the expansion of Medicaid managed care, primarily in Texas. Operating margin declined in fiscal 2012. The Texas contract operates at a lower margin than that of our other work and it is the principal driver of the decline in operating margin. The segment also benefitted in 2012 from $10.2 million of additional revenue and operating income related to a contract amendment.

Revenue increased by 10.0% in fiscal 2011 compared to fiscal 2010. The principal driver of this growth was the expansion of existing work, with contracts in Texas and British Columbia contributing the majority of the increase. In Texas, the Company benefitted from increases in transaction-based activities as more Medicaid populations are shifted into managed care plans. In British Columbia, additional work was being driven by the modernization of a system linking all pharmacies across the Province. Further growth in revenue was generated by higher volumes in transaction-based work in the Company's federal appeals practice. Operating margin in 2011 was higher compared to fiscal 2010, principally due to the volume growth in the federal practice and the add-on work in British Columbia.

Human Services Segment



                                  Year ended September 30,
                                2012        2011        2010
                                   (dollars in thousands)
Revenue                       $ 378,964   $ 363,752   $ 317,491
Gross profit                    115,487     106,412      90,557
Operating income                 49,922      46,822      39,490
Operating margin percentage        13.2 %      12.9 %      12.4 %

The Human Services Segment includes a variety of business process services, case management, job training and support services for programs such as welfare-to-work programs, child support enforcement, K-12 special education and other specialized consulting services.

Revenue increased 4.2% to $379.0 million in fiscal year 2012 compared to fiscal 2011. On a constant currency basis, the growth would have been 4.4%. Excluding acquisition driven growth from PSI, segment revenues would have declined 6.4%. This decline was principally driven by the Company's United Kingdom operations where the "Flexible New Deal" contract, which was in place through much of fiscal 2011, was terminated and replaced with the "Work Programme". The decline in revenues was anticipated and reflects the back-ended payment structure of the Work Programme where a greater share of the revenue is earned when individuals remain in sustained employment for a pre-determined period of time, typically six months. Segment results were also tempered by lower revenue from our Australian operations due to the completion of short-term projects which concluded earlier in the year as well as lower caseload volumes. The operating margin in fiscal 2012 received the benefit of $6.8 million related to changes on a fixed price contract, partially offset by the dampened margins from the transition to the "Work Programme".


Table of Contents

Revenue increased 14.6% to $363.8 million in fiscal 2011 compared to fiscal 2010. On a constant currency basis, the growth would have been 6.9%. Growth was principally driven by our welfare-to-work businesses, particularly in Australia and the United Kingdom. The Australian business provided much of this growth driven by strong volumes, new short-term assignments and performance. Within the United Kingdom, we accelerated the recognition of deferred revenue as a result of the earlier end date of the Flexible New Deal which was offset by cost increases related to the start-up of the Work Programme contract. Operating margins improved compared to the prior year, principally due to increased contract performance in Australia and profit improvement on the Flexible New Deal contract in the United Kingdom. The Company also incurred $7.3 million of charges related to a fixed-price education contract in the United States, compared to a similar charge of $10.3 million in fiscal 2010. No further charges have been incurred by this project since the second quarter of fiscal 2011.

Discontinued Operations

On September 30, 2010, the Company sold its ERP division for cash proceeds of $5.6 million, net of transaction costs of $0.7 million, and recognized a pre-tax loss on sale of less than $0.1 million. The Company previously recorded a pre-tax loss on sale of $1.3 million in fiscal 2009. In 2011, the Company resolved a dispute with the buyer regarding the purchase price adjustment clause in their contract and recorded a loss of $1.7 million.

The Company continues to record small gains on the sale of Unison MAXIMUS, Inc. ("Unison"), a business which was sold in May 2008. The consideration for the sale included a promissory note which is fully reserved. Small payments continue to be received on this note but owing to uncertainties over the collectability of the full balance, the Company has only recorded a gain on sale where recovery is considered assured, which is typically when cash payments are received.

Liquidity and Capital Resources

In recent years, the Company has relied upon cash flows from operations to fund operations, capital expenditures, acquisitions, share repurchases and dividends. Both domestic and overseas locations have remained self-sufficient in funding operations and capital resources. The Company expects to be able to continue to fund operations and capital expenditures from operating cash flows. In prior periods, the Company has faced short-term payment delays from state customers, all of which were ultimately recovered. The Company believes its liquidity and capital positions are adequate to weather short-term payment delays. In the event of more protracted delays, the Company may be required to seek additional capital sources, amend payment terms or take other actions. Extended payment delays could adversely affect the Company's cash flows, operations and profitability.

At September 30, 2012, the Company held $189.3 million in cash and cash equivalents. Approximately 66% of these funds are held in overseas locations, principally in Australia. If we were to transfer these funds to the United States, the Company would be required to accrue and pay additional taxes. We have no requirement to repatriate these funds as we believe we have access to sufficient funds in the United States to fund our operations, capital outlays, dividends, share repurchases or any other requirements. Accordingly, we do not intend to repatriate these funds held overseas and we have not attempted to quantify the charges that might arise if we were to make this transaction. The charges would vary based upon tax legislation in the United States and in the overseas jurisdictions as well as the manner and timing of these transactions.

The Company currently has no debt, with the exception of a $1.7 million interest-free loan from the Atlantic Innovation Fund of Canada, the funds of which must be used for certain investment projects in Prince Edward Island. At September 30, 2012, the Company has access to up to $19.5 million from a credit facility in the United States. These funds are available to cover short-term cash requirements and other potential capital outlays, including share repurchases and acquisitions. Also at September 30, 2012, the Company had letters of credit totaling $18.5 million and performance bond commitments totaling $48.0 million. The letters of credit and performance bonds are typically renewed annually and remain in place until the contractual obligations have been satisfied. Although the triggering events vary from contract to contract, in general we would only be liable for the amount of these guarantees in the event of default of our obligations under each contract, the probability of which we believe is remote.

Our primary source of cash is revenues received from customers. Our collection of cash is driven by billing schedules and payment terms which can vary based upon a number of factors, including contract type. In certain contracts, particularly international welfare-to-work contracts, cash receipts are structured around our performance, which may take several quarters to be realized. In these cases, contracts will typically result in cash outflows over the early period of the contract and the ultimate cash flows of the contract will be subject to risk until the performance outcomes are known. Certain contracts require significant financial outlay in terms of capital assets and in reimbursable start-up costs. These expenditures result in our use of cash which may be reimbursed during the set-up phase or over the life of the contract. Related revenue may also be deferred during the set-up phase. At September 30, 2012, management considered that the net book value of all capital assets, including deferred contract costs, was less than the expected future cash flows related to these assets.


Table of Contents

The Company's acquisition of PSI in April 2012 resulted in a net cash payment of $66.0 million. In addition, the Company incurred approximately $2.9 million of expenses related to the acquisition including the costs of third-party due diligence, integration, severance and contract termination charges. The acquisition of DeltaWare in February 2010 resulted in a net payment of $12.0 million in 2010 and subsequent payments of contingent consideration of $1.0 million and $2.1 million in fiscal 2011 and 2012. The funds utilized for these acquisitions came from cash based in the United States.

The following table provides a summary of our cash flow information for the years ended September 30, 2012, 2011, and 2010:

                                                    Year ended September 30,
                                                2012          2011          2010
                                                     (dollars in thousands)
Net cash provided by (used in):
Operating activities-continuing
operations                                   $  115,160    $   97,585    $  140,971
Operating activities-discontinued
operations                                            -          (725 )      (2,530 )
Investing activities-continuing
operations                                      (86,612 )     (25,877 )     (32,395 )
Financing activities-continuing
operations                                      (17,765 )     (51,608 )     (42,402 )
Effect of exchange rates on cash and cash
equivalents                                       5,579        (1,746 )       3,862
Net increase (decrease) in cash and cash
equivalents                                  $   16,362    $   17,629    $   67,506

Cash provided by operating activities was $115.2 million in fiscal 2012, an increase of $17.6 million from fiscal 2011. The increase was primarily driven by increases in cash receipts from customers. This was driven by increases in revenue as well as the timing of cash receipts on certain projects which do not directly correspond with revenue recognition.

Cash provided by operating activities from continuing operations was $97.6 million in fiscal 2011, a decline of $43.4 million compared to fiscal 2010. The principal driver for this decline was the cash flows associated with the United Kingdom's Flexible New Deal program, which provided significant up-front funds during fiscal 2010, resulting in a larger deferred revenue balance. In the United Kingdom, we received $22.7 million of cash in excess of revenues in fiscal 2010 and recognized revenues in excess of cash receipts of $9.0 million in fiscal 2011, a net change in deferred revenue of $31.7 million. Fiscal 2011 . . .

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