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MMS > SEC Filings for MMS > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for MAXIMUS INC

Form 10-Q for MAXIMUS INC


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.

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 related Notes included both herein and in our Annual Report on Form 10-K for the year ended September 30, 2013, filed with the Securities and Exchange Commission on November 19, 2013.

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.

Both within the United States and internationally, governments are being challenged by factors that increase social burdens, including aging populations and demands for health care reform, offset by reduced funds with which to deal with these demands. We believe that these trends will continue to provide a demand for services that can be met by companies such as MAXIMUS. We are also seeing increased scrutiny and heightened accountability within the markets which we serve. The Company believes that a combination of its rigorous employee training, stringent adherence to its Standards of Business Conduct and Ethics, robust financial performance and global experience gives existing and future customers the confidence that MAXIMUS can reliably operate their high-profile public health and human services programs.

Financial overview

The Company experienced significant growth in both revenue and operating profit for the three and six month periods ended March 31, 2014 compared to the same periods in fiscal year 2013. The principal driver of this growth was work in our Health Services segment related to the Affordable Care Act (ACA). In serving our clients, we delivered high-quality customer contact center operations and comprehensive contingency plans where technology issues in the health insurance exchanges were causing delays. The Company was also effectively able to address spikes in call volumes where consumers were unable to enroll in health plans using health insurance exchange websites.

The Company continues to see opportunities to expand further our business related to the ACA and Medicaid-related initiatives. MAXIMUS is currently providing customer contact centers for five states, the District of Columbia and the United States Federal Government. The Company anticipates that some states currently utilizing the federal marketplace may migrate to their own exchanges over the next several years. If this does occur, there will be opportunities for experienced service providers such as MAXIMUS to operate these exchanges.

The Company reported strong operating cash flows in the six month period ended March 31, 2014 driven by increased business. The Company continued to invest funds in working capital as well as in repurchases of common stock. At March 31, 2014, the Company held $131.3 million in unrestricted cash and cash equivalents and had minimal debt.


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Results of Operations



Consolidated



The following table sets forth, for the periods indicated, selected statements
of operations data:



                                                       Three Months                 Six Months
                                                     Ended March 31,             Ended March 31,
(dollars in thousands, except per share data)       2014          2013          2014          2013
Revenue                                          $  439,015    $  326,351    $  845,607    $  612,617

Gross profit                                     $  120,672    $   97,444    $  226,588    $  173,974
Gross profit percentage                                27.5 %        29.9 %        26.8 %        28.4 %

Selling, general and administrative expenses     $   55,129    $   46,693    $  107,732    $   88,915
Selling, general and administrative expense
as a percentage of revenue                             12.6 %        14.3 %        12.7 %        14.5 %

Acquisition-related expenses                              -            16             -           164
Legal and settlement expenses                           600             -           600           142

Operating income from continuing operations      $   64,943    $   50,735    $  118,256    $   84,753
Operating margin from continuing operations
percentage                                             14.8 %        15.5 %        14.0 %        13.8 %

Interest and other income, net                          183           637           904         1,743

Income from continuing operations before
income taxes                                         65,126        51,372       119,160        86,496
Provision for income taxes                           23,964        19,658        44,198        32,999
Tax rate                                               36.8 %        38.3 %        37.1 %        38.2 %

Income from continuing operations, net of
income taxes                                     $   41,162    $   31,714    $   74,962    $   53,497
Income (loss) from discontinued operations,
net of income taxes                              $       45    $      (25 )  $      104    $     (492 )
Net income                                       $   41,207    $   31,689    $   75,066    $   53,005

Basic earnings (loss) per share:
Income from continuing operations                $     0.61    $     0.47    $     1.10    $     0.78
Income (loss) from discontinued operations                -         (0.01 )           -             -
Basic earnings per share                         $     0.61    $     0.46    $     1.10    $     0.78

Diluted earnings (loss) per share:
Income from continuing operations                $     0.59    $     0.45    $     1.08    $     0.77
Income (loss) from discontinued operations                -             -             -         (0.01 )
Diluted earnings per share                       $     0.59    $     0.45    $     1.08    $     0.76

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

The results for the three and six month periods ended March 31, 2013 were affected by a one-time benefit from the termination of a system-integration contract acquired with Policy Studies Inc. (PSI). This termination resulted in one-time, non-cash benefits to revenue and pre-tax profit of $16.0 million and $10.9 million, respectively. 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, which is highly unlikely to be repeated, as it involved deferred revenue from the PSI acquisition and did not reflect the underlying business operations of the Company. Accordingly, we discuss below the results of the business both including and excluding the effect of this contract termination. We believe the presentation of revenue, profit, profit margins and earnings per share excluding the effect of this contract termination provide a useful basis for assessing the Company's performance compared to prior periods or our competitors. However, these numbers are "non-GAAP" numbers and are not meant to be considered in isolation or as alternatives to their GAAP equivalents as measures of performance. A reconciliation between the Company's results and those results excluding the effect of this terminated contract is shown below:


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                                                      Three Months
                                                     Ended March 31,     Six Months Ended
 (dollars in thousands)                                   2013            March 31, 2013

Revenue                                             $         326,351    $         612,617
Less revenue from terminated contract                         (16,035 )            (16,035 )
Revenue excluding terminated contract               $         310,316    $         596,582

Gross profit                                        $          97,444    $         173,974
Less gross profit from terminated contract                    (10,900 )            (10,900 )
Gross profit excluding terminated contract          $          86,544    $         163,074

Operating income                                    $          50,735    $          84,753
Less operating income from terminated contract                (10,900 )            (10,900 )
Operating income excluding terminated contract                 39,835               73,853

Gross profit margin excluding terminated
contract                                                         27.9 %               27.3 %
Operating margin percentage excluding terminated
contract                                                         12.8 %               12.4 %

We discuss constant currency revenue information to provide a framework for assessing how our business performed excluding the effect of foreign currency rate fluctuations. Constant currency revenue growth is a non-GAAP number that we believe is useful for assessing the performance of the business excluding the effects of currency fluctuations. To provide this information, revenue from foreign operations is converted into United States dollars using exchange rates from the comparative period in the prior fiscal year. Constant currency revenue growth should not be considered in isolation, nor as an alternative to revenue growth. In addition, this non-GAAP financial measure, as determined and presented by us, may not be comparable to related or similarly titled measures presented by other companies.

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 acquired in business combinations within the last twelve months. 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 acquisitions. In order to calculate organic growth, we remove the revenue from HML from the three and six month periods ended March 31, 2014. Organic growth is not meant to be used in isolation, nor as an alternative to revenue growth as a measure of performance. In addition, this non-GAAP financial measure, as determined and presented by us, may not be comparable to related or similarly titled measures presented by other companies. In January 2014, the Company acquired additional business in Australia, which would typically be excluded from our organic growth calculation. However, as the contracts acquired with the acquisition were immediately integrated into existing, identical contracts held by MAXIMUS, we are unable to accurately estimate the revenue from this acquisition. However, we believe the acquired revenue from this acquisition would not be material to the business or to the analyses shown below.

Revenue growth for the three and six months ended March 31, 2014 is summarized below:

                                        Three Months                   Six Months
(dollars in thousands)                 Ended March 31                Ended March 31

Revenue for fiscal year 2013,
respective periods               $    326,351                   $    612,617
Revenue from terminated
contract                              (16,035 )    (5) %             (16,035 )     (3 )%
Revenue for fiscal year 2013,
respective periods, excluding
terminated contract              $    310,316                   $    596,582

Organic growth                        112,654       35 %             218,453       36 %
Acquired growth                        16,045        5 %              30,572        5 %

Revenue for fiscal year 2014,
respective periods $ 439,015 35 % $ 845,607 38 %


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Revenue increased 35% and 38% for the three and six month periods ended March 31, 2014, compared to their respective comparative periods. This growth was principally driven by organic growth in the Health Services Segment. The Company also received the benefit of the acquisition of HML, which increased revenue by approximately 5% compared to prior year, offset by the effect of the terminated contract. On a constant currency basis, overall revenue growth would have been 37% and 40% for the three and six month periods ended March 31, 2014, respectively. A decline in the value of the Australian Dollar was responsible for much of the shortfall in revenue.

Gross profit margin declined from 29.9% to 27.5% for the three month period ended March 31, 2014 and declined from 28.4% to 26.8% for the six month period ended March 31, 2014, compared to the same periods in fiscal year 2013. The principal cause of this decline is the termination of the contract noted above.

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 as a percentage of revenue has declined in the quarter ended March 31, 2014, compared with the same period in the prior year. This decline was driven by the significant increase in revenue in fiscal year 2014.

Operating income for the three and six month periods ended March 31, 2014 increased 28% to $64.9 million and 40% to $118.3 million, compared with the comparative periods in fiscal year 2013. If the effect of the contract termination noted above is excluded, operating income growth would have been 63% and 60%, respectively. This growth was driven by organic growth and the acquisition of HML.

Interest and other income, net includes interest earned on cash and cash equivalents and on a note received by the Company for the disposal of a business in fiscal year 2008. The balance also includes immaterial foreign exchange gains and losses and the noncontrolling interest of our operations. Almost all of the income recorded represents income from interest on cash accounts in overseas jurisdictions. The declines recorded reflect the use of overseas cash balances in July 2013 to acquire HML.

The provision for income taxes in the three and six months ended March 31, 2014 was $24.0 million and $44.2 million, respectively, reflecting effective tax rates of 36.8% and 37.1%, respectively. The tax rates are lower than the comparative periods as the Company received the benefit of certain tax credits in this period totaling approximately $0.7 million.

Income from continuing operations, net of income taxes, was $41.2 million, or $0.59 per diluted share, for the three months ended March 31, 2013, compared with $31.7 million, or $0.45 per diluted share, for the same period in fiscal year 2013. For the six month periods ended March 31, 2014 and 2013, income from continuing operations, net of income taxes, was $75.0 million and $53.5 million, or $1.08 and $0.77 per diluted share, respectively. For the periods ending March 31, 2013, net income and diluted earnings per share included the one-time benefits of $6.5 million and $0.09, respectively, from the contract termination noted above.

Health Services



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



                                  Three Months             Six Months
                                 Ended March 31,         Ended March 31,
(dollars in thousands)          2014        2013        2014        2013

Revenue                       $ 324,060   $ 197,948   $ 623,218   $ 373,946
Gross profit                     85,061      54,651     161,879      99,910
Operating income                 48,776      28,909      90,329      49,535

Gross profit percentage            26.2 %      27.6 %      26.0 %      26.7 %
Operating margin percentage        15.1 %      14.6 %      14.5 %      13.2 %

Revenue increased by 64% and 67% for the three and six month periods ended March 31, 2014, compared with the comparative periods in fiscal year 2013. Organic revenue provided the majority of this growth, being 56% and 58% of the increase, respectively, with the balance made up of HML revenues. Increases in revenue were driven by:


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Revenues from new work and expansion of existing contracts, including those related to the implementation and support of the ACA;

Increased volumes in our appeals and assessments businesses, which is reimbursed on a per-transaction basis; and

The acquisition of HML in July 2013.

We anticipate that increased demand for ACA and Medicaid-related services will continue throughout fiscal year 2014 with additional supplemental work to support both programs. We anticipate that volumes within our appeals and assessments businesses will continue to remain strong as new appeals and assessments work offsets a slow-down, expected in fiscal year 2015, in Medicare appeals volumes due to changes in the Recovery Audit Contractor (RAC) program. Future demand may fluctuate either up or down on a seasonal basis or in future enrollment years.

Gross profit margins for the three and six months ended March 31, 2014 were slightly lower than those in the same periods in fiscal year 2013. Gross profit margins remain consistent with prior periods and Company expectations; although short-term fluctuations may be driven by the timing of change orders, open enrollments and the contract lifecycle, these changes are not expected to be significant. Operating profit margin has improved compared to fiscal year 2013, driven by the significant increase in business.

Human Services

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.

                                  Three Months             Six Months
                                 Ended March 31,         Ended March 31,
(dollars in thousands)          2014        2013        2014        2013

Revenue                       $ 114,955   $ 128,403   $ 222,389   $ 238,671
Gross profit                     35,611      42,793      64,709      74,064
Operating income                 16,767      21,459      28,527      35,141

Gross profit percentage            31.0 %      33.3 %      29.1 %      31.0 %
Operating margin percentage        14.6 %      16.7 %      12.8 %      14.7 %

The results in fiscal year 2013 were significantly affected by the terminated contract, the effects of which are summarized below:

                                                      Three Months
                                                     Ended March 31,     Six Months Ended
(dollars in thousands)                                    2013            March 31, 2013

Revenue                                             $         128,403    $         238,671
Less revenue from terminated contract                         (16,035 )            (16,035 )
Revenue excluding terminated contract               $         112,368    $         222,636

Gross profit                                        $          42,793    $          74,064
Less gross profit from terminated contract                    (10,900 )            (10,900 )
Gross profit excluding terminated contract                     31,893               63,164

Operating income                                    $          21,459    $          35,141
Less operating income from terminated contract                (10,900 )            (10,900 )
Operating income excluding terminated contract      $          10,559    $          24,241

Gross profit margin percentage excluding
terminated contract                                              28.4 %               28.4 %
Operating margin percentage excluding terminated
contract                                                          9.4 %               10.9 %

Revenues decreased 10% and 7% for the three and six month periods ended March 31, 2014, compared to the comparative periods in fiscal 2013. Excluding the effects of the terminated contract, revenues increased 2% and remained consistent over the same periods. On a constant currency basis and excluding the terminated contract, revenues would have increased 7% and 4% for the three and six month periods, respectively.


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Gross and operating profit margins have declined year-over-year, driven by the terminated contract. Excluding this effect, profit margins have increased, driven by expected increases for the quarter in international business and short-term consulting contracts.

In future quarters, we anticipate additional growth from the expansion of our contracts in Australia, where MAXIMUS has been awarded a greater allocation of work based upon past performance. Much of this work is expected to commence in the final quarter of fiscal year 2014.

Discontinued operations

The Company continues to record small gains on the sale of Unison MAXIMUS, Inc. ("Unison"), a business that was sold in May 2008. The consideration for the sale included a promissory note that 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. The Company has recorded gains of $0.2 million in the six month periods ended March 31, 2014 and 2013.

Liquidity and Capital Resources

At March 31, 2014, the Company held $131.3 million in cash and cash equivalents. Approximately 65% of these funds are held in overseas locations in which we do business, principally Australia, Canada and the United Kingdom. If we were to transfer these funds to the United States, the Company would be required to accrue and pay additional taxes. We do not intend to repatriate these funds and, accordingly, we have not attempted to quantify the charges which might arise if we were to make this transaction. The charges would vary based upon tax legislation in the United States and the other overseas jurisdictions, as well as the manner and timing in which MAXIMUS would make these transactions.

Owing to restrictions in transferring funds to the United States, domestic cash flows are required to cover dividend payments and share repurchases. In addition, the acquisition of PSI was funded with domestic cash and we would expect any other acquisitions taking place in the United States would be funded in a similar manner. Payments from our customers are our principal source of cash inflows, which are affected by billing schedules, payment terms and delays in payments. Delays in payments most often occur at the beginning of contractual arrangements or may be driven by difficulties with state and local budgets. Although the Company has experienced such delays from customers, most funds are ultimately recovered in full. The Company may also experience cash outflows from contracts at their inception, as start-up costs are incurred prior to revenues being billable, and, where contracts are performance-based, a project may experience initial cash outflows until outcome-based payments are received. To provide against such outflows, the Company utilizes a credit facility with up to $100 million of borrowing capacity. During the three month period ended March 31, 2014, the Company borrowed $15 million to cover short-term cash requirements. This balance was repaid within the quarter and no such borrowings were outstanding at March 31, 2014. The only indebtedness under this credit facility at March 31, 2014 relates to four letters of credit totaling $6.7 million. In addition, the Company has two letters of credit totaling $3.0 million outstanding with another financial institution.

In general, although some overseas locations have required initial investment, the Company has been able to utilize cash flows from operations to fund working capital and capital expenditure requirements in all locations in which it has operated and the Company continues to expect that this will be the case. The Company has one overseas loan: an interest-free loan from the Atlantic Innovation Fund of Canada, which must be used for specific purposes.

At March 31, 2014, the Company was in compliance with all debt covenants.

Cash Flows



                                                                 Six Months Ended
                                                                    March 31,
(dollars in thousands)                                           2014        2013

Net cash provided by (used in):
Operating activities - continuing operations                   $  76,564   $ 39,494
Operating activities - discontinued operations                      (104 )     (554 )
Investing activities - continuing operations                     (19,349 )  (18,039 )
Financing activities - continuing operations                     (50,378 )  (21,866 )
Effect of exchange rate changes on cash and cash equivalents      (1,027 )   (1,004 )
Net increase (decrease) in cash and cash equivalents           $   5,706   $ (1,969 )


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Cash provided by operating activities from continuing operations for the six months ended March 31, 2014 was $76.6 million, compared with $39.5 million in the same period in fiscal year 2013. This increase is driven by the Company's increased profitability.

Cash used in investing activities from continuing operations for the six months ended March 31, 2014 was $19.3 million, compared to $18.0 million for the same period in fiscal year 2013. Investment in property and equipment and capitalized software has declined by approximately $4.8 million year-over-year, reflecting the significant investment which occurred in fiscal year 2013 to address many project start-ups in fiscal year 2014. This decline was offset by a payment of $2.7 million in fiscal year 2014 related to the Company's acquisition of . . .

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