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, 2011, filed with the Securities and Exchange Commission on
November 14, 2011.
Forward Looking Statements
From time to time, we may make forward-looking statements that are not
historical facts, including statements about our confidence and strategies and
our expectations about revenue, results of operations, profitability, current
and future contracts, market opportunities, market demand or acceptance of our
products and services. Any statements contained in this Quarterly Report on Form
10-Q that are not statements of historical fact may be forward-looking
statements. The words "could," "estimate," "future," "intend," "may,"
"opportunity," "potential," "project," "will," "believes," "anticipates,"
"plans," "expect" and similar expressions are intended to identify
forward-looking statements. These statements may involve risks and uncertainties
that could cause our actual results to differ materially from those indicated by
such forward-looking statements. These risks are detailed in Exhibit 99.1 to our
Annual Report on Form 10-K for the year ended September 30, 2011 and
incorporated herein by reference.
Business Overview
We provide business process outsourcing services 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, the Children's Health Insurance Program (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, the United Kingdom and Saudi Arabia. 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 outsourcing
and administrative support 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 business process outsourcing, 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.
On April 30, 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 will be integrated into our core Health
Services 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.
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Results of Operations
Consolidated
The following table sets forth, for the periods indicated, selected statements
of operations data:
Three Months Nine Months
Ended June 30, Ended June 30,
(dollars in thousands, except
per share data) 2012 2011 2012 2011
Revenue $ 266,353 $ 238,296 $ 749,408 $ 679,526
Gross profit $ 78,701 $ 66,399 $ 203,314 $ 185,424
Selling, general and
administrative expenses $ 43,877 $ 35,259 $ 114,592 $ 97,498
Selling, general and
administrative expense as a
percentage of revenue 16.5 % 14.8 % 15.3 % 14.3 %
Operating income from continuing
operations excluding
acquisition-related expenses and
legal and settlement expense 34,824 31,140 88,722 87,926
Acquisition-related expenses and
legal and settlement expense 1,525 361 1,120 361
Operating income from continuing
operations $ 33,299 $ 30,779 $ 87,602 $ 87,565
Operating margin from continuing
operations percentage 12.5 % 12.9 % 11.7 % 12.9 %
Interest and other income, net 1,164 961 3,092 2,371
Income from continuing
operations before income taxes 34,463 31,740 90,694 89,936
Provision for income taxes
13,987 11,780 38,349 33,351
Tax rate 40.6 % 37.1 % 42.3 % 37.1 %
Income from continuing
operations, net of income taxes $ 20,476 $ 19,960 $ 52,345 $ 56,585
Income (loss) from discontinued
operations, net of income taxes $ 9 $ (68 ) $ 117 $ (992 )
Net income $ 20,485 $ 19,892 $ 52,462 $ 55,593
Basic earnings (loss) per share:
Income from continuing
operations $ 0.60 $ 0.58 $ 1.55 $ 1.64
Income (loss) from discontinued
operations - (0.01 ) - (0.03 )
Basic earnings per share $ 0.60 $ 0.57 $ 1.55 $ 1.61
Diluted earnings (loss) per
share:
Income from continuing
operations $ 0.59 $ 0.56 $ 1.51 $ 1.59
Income (loss) from discontinued
operations - - - (0.03 )
Diluted earnings per share $ 0.59 $ 0.56 $ 1.51 $ 1.56
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.
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 constant currency information, revenue from
foreign operations is converted into United States dollars using average
exchange rates from the previous fiscal year.
Following the Company's acquisition of PSI, the results of PSI are included in
the financial results of the Company for the period after April 30, 2012.
Revenue of $23.3 million and operating income before acquisition-related
expenses and legal and settlement expenses of $1.8 million were recorded related
to PSI in the three and nine month periods ended June 30, 2012. We provide
organic revenue growth information to provide a framework for assessing how our
business performed excluding the effects of acquisitions. To provide organic
growth information, revenue in the prior year is compared to the current year
without PSI revenues.
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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 acquisition of PSI. 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 both legal and settlement expenses and
recoveries may have an unusual effect on our financial results. During the
current year, we have received the benefit of an insurance recovery. We believe
that excluding the effects of these costs and recoveries provides a framework
for better assessing the comparability of how the business performed between
periods.
Constant currency revenue, organic growth and operating income excluding legal
and settlement expenses 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 11.8%, or 13.1% on a constant currency basis, for the three
months ended June 30, 2012, compared to the same period in fiscal 2011. Revenue
increased 10.3%, or 10.4% on a constant currency basis, for the nine months
ended June 30, 2012, compared to the same period in fiscal 2011. Organic growth
for the three months and nine months ended June 30, 2012 was 2.0% and 6.8%
respectively. Revenue during the third quarter of fiscal 2012 included the
results of PSI from the acquisition date, which contributed $23.3 million. The
organic growth was driven by the Health Services segment offset by declines in
revenue from the Human Services segment. The principal drivers of the changes in
the Health Services and Human Services Segments are discussed in more detail
below.
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.
Acquisition-related expenses are direct costs incurred as a consequence of the
acquisition of PSI and include legal fees, brokerage fees, due diligence,
valuation reports, contract terminations related to redundant support services
and severance. During the three and nine month periods ended June 30, 2012, the
Company incurred $1.9 million and $2.1 million, respectively, of these costs.
Legal and settlement costs and recoveries consist of significant legal
settlements and non-routine matters, including probable future legal costs
estimated to be incurred in connection with those matters, net of reimbursed
insurance claims. Legal expenses incurred in the ordinary course of business are
included in selling, general and administrative expense. During the three and
nine months ended June 30, 2012, the Company received insurance recoveries of
$0.4 million and $1.2 million, respectively.
Operating income from continuing operations increased 8.2% to $33.3 million for
the three months ended June 30, 2012 compared to the same period in the prior
year. Excluding acquisition-related expenses and legal and settlement costs and
recoveries, operating income increased 11.8% to $34.8 million, compared to the
same period last year. Operating income from continuing operations for the nine
months ended June 30, 2012 was consistent with that of the comparative period in
the prior year. Excluding acquisition-related expenses and legal and settlement
costs and recoveries, operating income increased 0.9% to $88.7 million, compared
to the same period last year. These increases were driven by the Health Services
segment, offset by lower income from the Human Services Segment. The segment
drivers are discussed in more detail below.
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 2008, offset by charges related to the deferred compensation plan and
the acquisition-related contingent consideration related to DeltaWare. The
balance also includes foreign exchange gains and losses, which are typically
immaterial. Almost all of the income recorded represents income from interest on
cash accounts in overseas jurisdictions.
The provision for income taxes in the three and nine months ended June 30, 2012
was $14.0 million and $38.3 million, respectively, reflecting tax rates of 40.6%
and 42.3%, respectively. These rates are higher than those in previous years
owing to changes in our mix of income, with more income being earned in
jurisdictions which carry a higher tax charge, as well as an error of $1.6
million which was recorded in the quarter ended March 31, 2012.
Income from continuing operations, net of income taxes, was $20.5 million, or
$0.59 per diluted share, for the three months ended June 30, 2012, compared with
$20.0 million, or $0.56 per diluted share, for the same period in fiscal year
2011. For the nine month periods ended June 30, 2012 and 2011, income from
continuing operations, net of income taxes was $52.3 million and $56.6 million,
or $1.51 and $1.59 per diluted share, respectively.
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Health Services
Three Months Nine Months
Ended June 30, Ended June 30,
(dollars in thousands) 2012 2011 2012 2011
Revenue $ 170,403 $ 141,788 $ 489,616 $ 409,578
Gross profit 50,787 35,459 127,923 108,056
Operating income 25,652 15,923 60,637 54,098
Operating margin percentage 15.1 % 11.2 % 12.4 % 13.2 %
Revenue increased by 20.2%, or 20.7% on a constant currency basis, for the three
months ended June 30, 2012, compared to the same period in fiscal year 2011.
Organic growth, excluding PSI, was 13.9%. For the three months ended June 30,
2012, Health Services benefitted from $10.2 million of additional revenue and
operating income related to a contract amendment.
Revenue increased by 19.5%, or 19.8% on a constant currency basis, for the nine
months ended June 30, 2012, compared to the same period in fiscal year 2011.
Organic growth, excluding PSI, was 17.4%. For the nine month period ended June
30, 2012, organic growth was driven by expansion of Medicaid managed care,
primarily in Texas. The expansion of work in Texas is cost-reimbursable and
operates at lower margins than that of our other work which is the largest
contributor to the operating margin decline compared to the comparative period.
Human Services
Three Months Nine Months
Ended June 30, Ended June 30,
(dollars in thousands) 2012 2011 2012 2011
Revenue $ 95,950 $ 96,508 $ 259,792 $ 269,948
Gross profit 27,914 30,940 75,391 77,368
Operating income 9,187 14,908 28,100 33,534
Operating margin percentage 9.6 % 15.4 % 10.8 % 12.4 %
Revenue declined by 0.6% for the three months ended June 30, 2012, compared to
the same period in fiscal year 2011. This decline was caused in part by adverse
foreign exchange fluctuations as, on a constant currency basis, revenues would
have increased 1.9%. Excluding the benefit of PSI, revenue declined 15.6%. The
decline in organic revenue was principally driven by the transition from the
United Kingdom's "Flexible New Deal" contract, which was in operation during the
first nine months of fiscal 2011, to the "Work Programme", which commenced in
late fiscal 2011. This decline was anticipated and reflects the payment
structure of the Work Programme where a greater share of the revenues is earned
in placing individuals in sustained employment. Segment results were also
tempered by operations in Australia due to the completion of short-term
government projects which concluded earlier in the year, lower caseload volumes
and unfavorable foreign exchange rates. The Work Programme, lower revenue in
Australia and unfavorable foreign exchange rates was responsible for the decline
in Human Services operating income, offset by contributions from the PSI
acquisition.
Revenue declined by 3.8%, or 3.9% on a constant currency basis, for the nine
months ended June 30, 2012, compared to the same period in fiscal year 2011.
Excluding the benefit of PSI, revenue declined 9.1%. This decline was
principally driven by the transition to the Work Programme noted above. The
decline in operating income was driven by the United Kingdom contract offset by
the acquisition of PSI and the benefit of $6.8 million related to changes in
estimates on a fixed price contract. During the nine months ended June 30, 2011,
the same contract had recorded charges of $7.3 million.
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Discontinued operations
The Company has recorded gains on disposal in the three and nine months ended
June 30, 2012. These principally relate to the sale of the Company's UNISON
subsidiary in 2008, the terms of which included a promissory note of $6.4
million. The Company continues to monitor the payments on the note but no
further gains are certain at this time.
The Company reported losses in discontinued operations in the three and nine
months ended June 30, 2011. These charges related to the sale of the Company's
ERP division in 2010 and included a pre-tax loss on sale of $1.0 million which
the Company recorded owing to a dispute with the purchaser. This dispute was
resolved in September 2011 for a total charge of $1.7 million.
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 June 30, 2012, the Company held $168.9 million in cash and cash equivalents.
Approximately 70% of these funds are held in overseas locations. 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. In
addition to these cash balances, the Company had access to an additional $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.
The Company currently has no debt, with the exception of a $1.7 million
interest-free loan from the Atlantic Innovation Fund of Canada. These funds must
be used for certain investment projects within Prince Edward Island. In addition
to this, certain contracts require us to provide a letter of credit or a surety
bond as a guarantee of performance. At June 30, 2012, the Company had letters of
credit totaling $18.5 million and performance bond commitments totaling $25.4
million. These 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 in our performance 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 June 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.
The Company's acquisition of PSI in April 2012 resulted in a net cash payment to
the sellers of $66 million. In addition, the Company incurred approximately $2.1
million of expenses directly attributable to the acquisition, including the
costs of third-party due diligence, integration, severance and contract
termination charges. The funds utilized in this acquisition came from cash based
in the United States.
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Cash Flows
Nine Months Ended
June 30,
(dollars in thousands) 2012 2011
Net cash provided by (used in):
Operating activities - continuing operations $ 85,061 $ 70,485
Operating activities - discontinued operations - (1,086 )
Investing activities - continuing operations (78,195 ) (16,591 )
Financing activities - continuing operations (13,565 ) (9,634 )
Effect of exchange rate changes on cash and cash equivalents 2,649 5,521
Net increase (decrease) in cash and cash equivalents
$ (4,050 ) $ 48,695
Cash provided by operating activities from continuing operations for the nine
months ended June 30, 2012 was $85.1 million, compared with $70.5 million in the
same period in fiscal year 2011. The increase in net cash flows was driven by a
decrease in payments to tax authorities period-over-period. Excluding the effect
of taxation, the Company received $90.6 million in additional payments from
customers driven by increased revenues and the timing of deferred revenue
receipts, offset by an increase of $88.7 million in payments driven by similar
factors.
Cash used in operating activities from discontinued operations for the nine
months ended June 30, 2011 was $1.1 million. Upon the sale of the Company's ERP
division in fiscal 2010, certain liabilities related to accounts payable and
payroll had not been settled and were made by the Company in October 2010.
Cash used in investing activities from continuing operations for the nine months
ended June 30, 2012 was $78.2 million, compared to $16.6 million for the same
period in fiscal year 2011. The cash flows in fiscal 2012 include the initial
payment of $66 million for the acquisition of PSI, offset by cash receipts of
$2.5 million from the sale of businesses in 2010 and 2008. Cash outflows related
to software costs also declined period-over-period owing to the completion of a
number of capital software projects in the United States in 2011.
Cash used in financing activities from continuing operations for the nine months
ended June 30, 2012 was $13.6 million, compared to $9.6 million for the same
period in fiscal year 2011. The principal driver of the $4.0 million increase
was a reduction of $7.1 million of funds received from employee stock
transactions and an increase in the Company's dividends paid of $1.9 million,
offset by a $7.1 million decline in funds utilized to buy back the Company's
common stock. The decline in employee stock transactions is driven by the expiry
of many of the Company's stock options, which have not been issued to employees
since 2008. The increase in the dividend payment reflects the increase in the
dividend per share from six cents per share to nine cents per share between the
first and fourth quarters of fiscal 2011.
The Company's cash balance increased by $2.6 million in the nine-month period
ended June 30, 2012 owing to foreign exchange rate fluctuations. The principal
driver of this change was the strengthening of the Australian Dollar against the
United States Dollar.
To supplement our statements of cash flows presented on a GAAP basis, we use the
non-GAAP measure of free cash flows from continuing operations to analyze the
funds generated from operations. We believe free cash flow from continuing
operations is a useful basis for comparing our performance with our competitors.
The presentation of non-GAAP free cash flows from continuing operations is not
meant to be considered in isolation, or as an alternative to net income as an
indicator of performance, or as an alternative to cash flows from operating
activities as a measure of liquidity. We calculate free cash flow from
continuing operations as follows:
Nine Months Ended
June 30,
(dollars in thousands) 2012 2011
Cash provided by operating activities - continuing
operations
$ 85,061 $ 70,485
Purchases of property and equipment (11,884 ) (10,963 )
Capitalized software costs (2,850 ) (5,693 )
Free cash flow from continuing operations $ 70,327 $ 53,829
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Repurchases of the Company's common stock
Under a resolution adopted in November 2011, the Board of Directors has
authorized the repurchase, at management's discretion, of up to an aggregate of
$125.0 million of the Company's common stock. The resolution also authorizes the
use of option exercise proceeds for the repurchase of the Company's common
stock. At June 30, 2012, $131.2 million is available for future stock
repurchases. Under earlier repurchase plans, the Company repurchased 240,200 and
513,758 common shares at a cost of $8.9 million and $17.9 million, during the
nine month periods ended June 30, 2012 and 2011, respectively.
Dividend
On July 6, 2012, the Company's Board of Directors declared a quarterly cash
dividend of $0.09 for each share of the Company's common stock outstanding. The
dividend is payable on August 31, 2012, to shareholders of record on August 15,
2012.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities and the reported amounts of revenue and
expenses. On an ongoing basis, we evaluate our estimates including those related
to revenue recognition and cost estimation on certain contracts, the
realizability of goodwill, and amounts related to income taxes, certain accrued
liabilities and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results could differ from those estimates.
We believe that we do not have material off-balance-sheet risk or exposure to
liabilities that are not recorded or disclosed in our financial statements.
While we have significant operating lease commitments for office space, those
commitments are generally tied to the period of performance under related
contracts. Additionally, although on certain contracts we are bound by
performance bond commitments and standby letters of credit, we have not had any
defaults resulting in draws on performance bonds. Also, we do not speculate in
derivative transactions.
During the three and nine months ended June 30, 2012, there were no significant
changes to the critical accounting policies we disclosed in Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K for the year ended September 30, 2011.
