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MMS > SEC Filings for MMS > Form 10-K on 19-Nov-2013All Recent SEC Filings

Show all filings for MAXIMUS INC

Form 10-K for MAXIMUS INC


19-Nov-2013

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 and other government programs. We are one of the largest pure-play health and human services administrative providers to governments in the United States, Australia, Canada, the United Kingdom and Saudi Arabia. We use our deep domain expertise, repeatable processes and technology solutions to help government agencies run efficient, cost-effective programs and to improve program accountability and outcomes, while enhancing the quality of services provided to program beneficiaries.

During the past five years, the Company has focused on its core health and human services businesses. Prior to this point, a number of non-core businesses were divested or discontinued while operations were expanded in the United States and internationally through a combination of organic growth and the acquisition of companies with complementary capabilities. 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 makes it well-positioned to capitalize on opportunities in its existing markets and elsewhere. Both within the United States and internationally, governments are being challenged by factors that increase social burdens, including ageing populations and demands for health care reform, offset by reduced funds with which to deal with these demands. We believe that these trends will provide a demand for services that can be met by companies such as MAXIMUS.

Acquisitions

On July 1, 2013, the Company acquired Health Management Limited (HML), a leading provider of independent health assessments within the United Kingdom. MAXIMUS acquired HML in order to expand the Company's independent medical assessment business and to strengthen the presence of the Company's Health Services Segment in the United Kingdom. HML provided $14.1 million of revenue and $0.5 million of operating income during the fourth fiscal quarter of fiscal year 2013.

On April 30, 2012, the Company acquired Policy Studies, Inc. (PSI). PSI supports government clients in the administration of a number of health and human services programs exclusively within the United States. MAXIMUS acquired PSI, among other reasons, to strengthen its leadership in the administration of public health and human services programs. The acquired assets and business have been integrated into the Company's Health Services and Human Services Segments.

In assessing the performance of our business, we believe that it is helpful to our investors to show organic revenue growth, which represents the increase in revenue from contracts excluding those provided by our acquired businesses. Organic growth is a non-GAAP number that we believe provides a useful basis for assessing the performance of the business excluding the results of PSI and HML. In order to calculate organic growth, we remove the revenue from the acquired businesses from all periods being compared. Organic growth is not meant to be used in isolation, nor as an alternative to revenue growth as a measure of performance.


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Financial overview

The Company has experienced strong year-over-year growth in both revenue and operating profit across both segments. There are a number of drivers of this growth.


The Health Services Segment's organic growth has been fuelled by states transferring from Medicaid populations to managed-care plans, resulting in increased transaction-based activity revenues; additional revenues from services provided for the implementation of the Affordable Care Act; and volume growth in our Medicare federal appeals business.


The Human Services Segment's organic growth has been derived from the ramp-up of our contract in the United Kingdom and expansion into new overseas markets, including Saudi Arabia.


The Company benefitted from acquired growth from HML in 2013 and PSI and 2012.

The Company continues to see opportunities to further expand the business. In particular, the implementation of the Affordable Care Act (ACA) and Medicaid expansion in the United States has provided opportunities for MAXIMUS related to the federal and state-based health insurance exchanges. MAXIMUS estimates that ACA has added more than $150 million in new annual contract revenue for the Company from the operation of customer contact centers for five states, the District of Columbia and the United States Federal Government. In addition, MAXIMUS is providing eligibility appeals services for the federal exchange and expertise and experience to other states in their preparations for the implementation of ACA.

Although the Company's operations have expanded, cash flows from operations have been constrained through the additional requirements for working capital necessitated by the Company's growth, as well as increases in the time taken by our customers to pay us. The Company's free cash flow, which includes cash outflows related to capital expenditures, has also been tempered by the need to invest in the necessary infrastructure primarily associated with new contract awards, particularly in the United States. Overall, the Company's cash balance has declined by $63.7 million during fiscal 2013, which includes a cash payment of $71.4 million related to the acquisition of HML.

Sales pipeline at September 30, 2013 was $2.4 billion, compared to $2.6 billion at September 30, 2012. At the start of the current year, the Company had a significant number of new contracts in start-up and these converted opportunities were the principal driver behind the current fiscal year's growth in revenue. The sales pipeline only reflects opportunities where the request for proposal (RFP) is expected to be released within the next six months. Under most circumstances, contract opportunities that are carried within the pipeline reflect the base contract value and do not include future option periods. Option periods are typically reported in the pipeline six months before they are eligible to be exercised. For contracts with the United States Federal Government, it is common to see a single year base contract with multiple options, whereas state, local and international contracts typically have longer base periods. Our assessment of pipeline reflects only opportunities that the Company is pursuing or planning to pursue and should not be considered as indicative of guaranteed future revenues.

International businesses

The Company operates in international locations and, accordingly, transacts business in currencies other than the United States Dollar, principally the Australian Dollar, the Canadian Dollar, the British Pound and the Saudi Arabian Riyal. During the year ended September 30, 2013, the Company earned approximately 25% of revenues and operating income from foreign subsidiaries. At September 30,


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2013, approximately 34% of the Company's assets are held by foreign subsidiaries. International business exposes the Company to certain risks.


International tax rules may limit the use of cash in other parts of the business without increasing significant additional tax penalties or withholding. The Company mitigates this risk by maintaining sufficient capital within its foreign subsidiaries to support the short-term and long-term capital requirements of the businesses. The Company establishes its legal entities to make the most efficient use of tax laws and holding companies to minimize this exposure.


The Company may be subject to exposure from foreign currency fluctuations. The Company's foreign subsidiaries typically incur costs in the same currency as they earn revenues, thus limiting the Company's exposure to unexpected currency fluctuations. The operations of the U.S. business do not depend upon cash flows from foreign subsidiaries.

The Company's revenues, profits and asset balances, including cash balances, are affected by fluctuations in the currencies noted above. When the United States Dollar is strengthening, as it was during fiscal year 2013, our international operations will contribute less revenue and profit than would have been the case had the currencies remained consistent. In assessing the performance of our business, we believe that it is helpful to our investors to show constant currency revenue growth, which represents the increase in revenue from contracts excluding the effects of year-over-year currency fluctuations. Constant currency growth is a non-GAAP number that we believe provides a useful basis for assessing the performance of the business excluding the unpredictable effects of foreign exchange movements. In order to calculate constant currency, we calculate revenue for all international businesses using the exchange rates used in the prior year. Constant currency growth is not meant to be used in isolation, nor as an alternative to revenue growth as a measure of performance.


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Summary of consolidated results

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

                                                         Year ended September 30,
                                                      2013          2012         2011
                                                          (dollars in thousands,
                                                          except per share data)
Revenue                                            $ 1,331,279   $ 1,050,145   $ 929,633
Gross profit                                           386,033       287,943     253,651
Gross profit margin                                       29.0 %        27.4 %      27.3 %
Selling, general and administrative expense            197,859       157,402     132,058
Selling, general and administrative expense as a
percentage of revenue                                     14.9 %        15.0 %      14.2 %
Operating income excluding acquisition-related
expenses and legal and settlement expenses and
recoveries                                             188,174       130,541     121,593
Operating income excluding legal and settlement
expense as a percentage of revenue                        14.1 %        12.4 %      13.1 %
Acquisition-related expenses                             2,168         2,876           -
Legal and settlement expense (recovery)                   (202 )          90        (808 )
Operating income from continuing operations            186,208       127,575     122,401
Operating margin from continuing operations               14.0 %        12.1 %      13.2 %
Interest and other income, net                           2,851         4,176       3,495
Income from continuing operations before income
taxes                                                  189,059       131,751     125,896
Provision for income taxes                              71,934        55,652      43,754
Tax rate                                                  38.0 %        42.2 %      34.8 %
Income from continuing operations, net of income
taxes                                                  117,125        76,099      82,142
Income (loss) from discontinued operations, net
of income taxes                                           (394 )          34        (974 )
Net income                                         $   116,731   $    76,133   $  81,168
Basic Earnings per share:
Income from continuing operations                  $      1.72   $      1.12   $    1.19
Income (loss) from discontinued operations               (0.01 )           -       (0.01 )

Basic earnings per share                           $      1.71   $      1.12   $    1.18
Diluted Earnings per share:
Income from continuing operations                  $      1.68   $      1.09   $    1.16
Income (loss) from discontinued operations               (0.01 )           -       (0.02 )

Diluted earnings per share                         $      1.67   $      1.09   $    1.14

The Company's common stock was split two-for-one during the 2013 fiscal year. All results presented in these financial statements have been adjusted for this stock split.

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


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Fiscal year 2013 compared to fiscal year 2012

Revenue increased 26.8% to $1,331.3 million. On a constant currency basis, growth would have been 27.5%. Organic growth was 19.4%. Much of the growth came from our Health Services Segment, driven by new work, the expansion of existing contracts and the acquisitions of PSI and HML.

Gross profit increased 34.1% to $386.0 million, representing a profit margin of 29.0% compared to 27.4% in the prior year. Gross profit margins within the Health Services Segment was driven principally by the accretive nature of the higher volumes in our federal Medicare appeals business. Gross profit margins declined within our Human Services Segment, driven in part by additional costs within our Australian business.

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. Our SG&A as a percentage of revenue has remained broadly consistent between fiscal year 2013 and 2012.

Operating income from continuing operations increased 46.0% to $186.2 million for the year ended September 30, 2013, compared to the prior year. Excluding the acquisition-related expenses and legal and settlement expense, growth would have been 44.1%. This growth was driven by the acquisitions of PSI and HML, new work in our Health Services Segment and $10.9 million of income related to a terminated contract.

Interest and other income declined due to decreases in our international cash balances, which generated the majority of our interest income. These funds were used to acquire HML.

Our tax rate for fiscal year 2013 was 38.0%, compared to 42.2% in 2012. The prior year tax rate includes a charge of $2.7 million to correct an error from prior years, without which the rate would have been 40.3%. During fiscal year 2013, the Company received the benefit of increased profits in locations with lower tax rates than the United States, particularly in the United Kingdom, where the ramp up of the UK contract and the acquisition of HML resulted in profits taxed at lower rates. We anticipate that our tax rate will decline slightly during fiscal year 2014, primarily driven by anticipated profit outlook by jurisdiction.

Fiscal year 2012 compared to fiscal year 2011

Revenue increased 13.0% to $1,050.1 million. 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.

Gross profit increased 13.5% to $287.9 million, representing a profit margin of 27.4% compared to 27.3% in the prior year. Although gross profit margins did not move significantly at a consolidated level, gross profit margins in the Health Services Segment declined and those in the Human Services Segment increased, as discussed in more detail below.

SG&A increased by 19.2% to $157.4 million. This increase is in excess of the increase in revenue and was caused by a number of factors including significant business development activity, including the preparation of bids and proposals, and the acquisition of PSI, which resulted in additional intangible asset amortization expense.

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


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PSI, new work in our Health Services Segment and growth in our Human Services Segment. The sections below cover segment results in more detail.

Interest and other income increased primarily due to increases in cash balances in jurisdiction with higher interest rates than the United States. This increase in cash was driven by strong international cash flows.

Our effective tax rate for fiscal year 2012 was 42.2% compared with 34.8% in 2011. The tax charge in fiscal year 2012 included a charge of $2.7 million to correct an error from prior years, without which the rate would have been 40.3%. This increase was driven by a greater share of the Company's profits being recorded in the United States, which has a higher corporate tax rate than other jurisdictions in which the Company operates. The increase in profits in the United States was driven by organic growth; the acquisition of PSI, which conducted all of its business within the United States; and the anticipated decline in profits in the United Kingdom, which is discussed below.

Income from continuing operations, net of income taxes, declined 7.4% to $76.1 million. The benefits from the Company's organic growth and acquisitions were offset by the significantly higher tax rate.

Acquisition-related expenses and legal and settlement expenses

Acquisition-related expenses are direct costs incurred as a consequence of the acquisition of HML in 2013, PSI in 2012 and various other acquisitions that were not completed. These costs include legal fees, brokerage fees, due diligence, valuation reports, contract terminations related to redundant support services and severance.

Legal and settlement expense (recovery) 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,
                                                   2013         2012       2011
       Insurance recoveries                       $   (390 )   $ (1,180 ) $    -
       Employee lawsuit                                  -          600        -
       Client indemnification                            -          490        -
       Other                                           188          180     (808 )

       Legal and settlement expense (recovery)    $   (202 )   $     90   $ (808 )

During fiscal year 2012, the Company agreed to settle a lawsuit brought by a former employee for $0.6 million and agreed to pay $0.5 million relating to client indemnification of funds misappropriated by a former employee. During fiscal year 2013, the Company's insurance provider reimbursed the Company for part of the latter claim.

The insurance recovery in fiscal year 2012 relates to a litigation settlement in fiscal year 2008.

During the 2011 fiscal year, the Company reversed a legal expense previously recognized in fiscal year 2010 for a matter that concluded without liability to the Company.

We discuss operating income from continuing operations excluding acquisition-related expenses and legal and settlement expenses and recoveries. Operating income excluding acquisition-related expenses and legal and settlement expenses and recoveries is a non-GAAP number. 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 as these charges do not


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reflect the underlying performance of the business. This non-GAAP number should not be used in isolation, nor as an alternative to operating income as a measure of performance.

Health Services Segment

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

                                            Year ended September 30,
                                          2013        2012        2011
                                             (dollars in thousands)
              Revenue                   $ 862,879   $ 671,181   $ 565,881
              Gross profit                248,100     172,456     147,239
              Operating income            129,834      80,619      74,715
              Gross profit margin            28.8 %      25.7 %      26.0 %
              Operating profit margin        15.0 %      12.0 %      13.2 %

Fiscal year 2013 versus fiscal year 2012

Revenue increased by 28.6% to $862.9 million. Growth was not significantly affected by year-over-year fluctuations in foreign currency exchange rates. Organic growth was 22.8%. Gross profit increased by 43.9% and operating profit increased by 61.0%, with margins increasing year-over-year.

The results for the segment were driven by:


New work, particularly that associated with ACA;


Expansion of existing contracts, including strong volumes in our federal Medicare appeals practice; and


The benefit of a full year of PSI's business, as well as three months of HML's business.

The expansion of the gross and operating profit margins was driven principally by the accretive nature of the higher volumes in our federal Medicare business.

We expect to see growth in fiscal year 2014 through the full year benefit of our contracts associated with ACA. The Health Services Segment should also receive the benefit of a full year of HML's business. We expect lower margins in the Health Services Segment in fiscal year 2014 compared with fiscal year 2013. This is driven by an expected increase in federal cost-reimbursable contracts, which tend to have lower margins; highly accretive contract work ending; and the launch of a loss-making contract that was acquired as part of the PSI acquisition.

Fiscal year 2012 versus fiscal year 2011

Revenue increased by 18.6%, or 18.9% on a constant currency basis. Organic growth was 14.8%. Gross profit increased by 17.1% and operating profit increased by 7.9%, with margins declining year-over-year.

The results for the segment were driven by:


The expansion of Medicaid managed care, where the transfer of individuals to managed care plans increases the transaction-based revenues recorded by the Company, increasing revenue but reducing margins, as this work is less accretive than our remaining portfolio of contracts; and


The acquisition of PSI, which increased revenue but reduced operating profit margins due to a portfolio of lower-margin contracts.


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Human Services Segment

    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, K-12 special education and other
specialized consulting services.

                                            Year ended September 30,
                                          2013        2012        2011
                                             (dollars in thousands)
              Revenue                   $ 468,400   $ 378,964   $ 363,752
              Gross profit                137,933     115,487     106,412
              Operating income             58,091      49,922      46,822
              Gross profit margin            29.4 %      30.5 %      29.3 %
              Operating profit margin        12.4 %      13.2 %      12.9 %

The results for the Human Services Segment in fiscal year 2013 were affected by a one-time benefit from the termination of a system-integration contract acquired with PSI. The termination resulted in one-time, non-cash benefits to revenue of $16.0 million and to gross and operating profit of $10.9 million. Although contract terminations for convenience do occur within our business, they are infrequent. In addition, this termination was unusual due to the significant effect of the transaction as it involved deferred revenue from the PSI acquisition and does not reflect the underlying operations of the Company. We have provided a reconciliation below showing our results excluding the effect of this contract.

                                  Results for Human Services Segment for year ended
                                                  September 30, 2013
                                  Revenue            Gross profit       Operating profit
                                                (dollars in thousands)
As reported                     $      468,400       $      137,933       $       58,091
Effect of terminated
contract                               (16,035 )            (10,900 )            (10,900 )

Results excluding the
effect of the terminated
contract                               452,365              127,033               47,191

Profit margins excluding
the effect of the
terminated contract.                                           28.1 %               10.4 %

The numbers in the table above are non-GAAP numbers, but we believe that the presentation of these numbers provides a useful basis for assessing the performance of this segment compared to prior periods or the results of our competitors. However, these non-GAAP numbers should not be considered in isolation nor as alternatives to their GAAP equivalents as measures of performance.

Fiscal year 2013 versus fiscal year 2012

Revenue increased 23.6% to $468.4 million. On a constant currency basis, growth would have been 25.4% and organic growth was 12.8%. Gross profit increased 19.4% and operating profit increased 16.4%. Excluding the effect of the termination of the contract, revenue growth was 19.4%.

Results for the segment were driven by a number of factors:


The termination of the contract noted above, which resulted in significant one-time benefits to revenues, profits and profit margins;

. . .

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