Item 1. Consolidated Financial Statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
2017
|
|
2016
|
Revenue
|
|
$
|
623,148
|
|
|
$
|
607,564
|
|
Cost of revenue
|
|
471,188
|
|
|
462,746
|
|
Gross profit
|
|
151,960
|
|
|
144,818
|
|
Selling, general and administrative expenses
|
|
69,559
|
|
|
65,398
|
|
Amortization of intangible assets
|
|
2,718
|
|
|
3,402
|
|
Restructuring costs
|
|
—
|
|
|
2,242
|
|
Operating income
|
|
79,683
|
|
|
73,776
|
|
Interest expense
|
|
168
|
|
|
849
|
|
Other income, net
|
|
287
|
|
|
263
|
|
Income before income taxes
|
|
79,802
|
|
|
73,190
|
|
Provision for income taxes
|
|
19,850
|
|
|
26,861
|
|
Net income
|
|
59,952
|
|
|
46,329
|
|
Income/(loss) attributable to noncontrolling interests
|
|
861
|
|
|
(335
|
)
|
Net income attributable to MAXIMUS
|
|
$
|
59,091
|
|
|
$
|
46,664
|
|
Basic earnings per share attributable to MAXIMUS
|
|
$
|
0.90
|
|
|
$
|
0.71
|
|
Diluted earnings per share attributable to MAXIMUS
|
|
$
|
0.89
|
|
|
$
|
0.71
|
|
Dividends paid per share
|
|
$
|
0.045
|
|
|
$
|
0.045
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
65,866
|
|
|
65,770
|
|
Diluted
|
|
66,177
|
|
|
66,020
|
|
See notes to unaudited consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
2017
|
|
2016
|
Net income
|
|
$
|
59,952
|
|
|
$
|
46,329
|
|
Foreign currency translation adjustments
|
|
315
|
|
|
(9,694
|
)
|
Interest rate hedge, net of income taxes of $- and $8
|
|
—
|
|
|
12
|
|
Comprehensive income
|
|
60,267
|
|
|
36,647
|
|
Comprehensive income/(loss) attributable to noncontrolling interests
|
|
861
|
|
|
(335
|
)
|
Comprehensive income attributable to MAXIMUS
|
|
$
|
59,406
|
|
|
$
|
36,982
|
|
See notes to unaudited consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
September 30,
2017
|
|
(unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
196,905
|
|
|
$
|
166,252
|
|
Accounts receivable — billed and billable, net of reserves of $5,736 and $6,843
|
438,995
|
|
|
394,338
|
|
Accounts receivable — unbilled
|
30,944
|
|
|
36,475
|
|
Income taxes receivable
|
2,086
|
|
|
4,528
|
|
Prepaid expenses and other current assets
|
49,919
|
|
|
55,649
|
|
Total current assets
|
718,849
|
|
|
657,242
|
|
Property and equipment, net
|
95,931
|
|
|
101,651
|
|
Capitalized software, net
|
24,629
|
|
|
26,748
|
|
Goodwill
|
403,261
|
|
|
402,976
|
|
Intangible assets, net
|
96,138
|
|
|
98,769
|
|
Deferred contract costs, net
|
14,901
|
|
|
16,298
|
|
Deferred compensation plan assets
|
29,826
|
|
|
28,548
|
|
Deferred income taxes
|
7,679
|
|
|
7,691
|
|
Other assets
|
10,316
|
|
|
10,739
|
|
Total assets
|
$
|
1,401,530
|
|
|
$
|
1,350,662
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
133,408
|
|
|
$
|
122,083
|
|
Accrued compensation and benefits
|
67,304
|
|
|
105,667
|
|
Deferred revenue
|
63,185
|
|
|
71,722
|
|
Income taxes payable
|
2,794
|
|
|
4,703
|
|
Other liabilities
|
12,565
|
|
|
12,091
|
|
Total current liabilities
|
279,256
|
|
|
316,266
|
|
Deferred revenue, less current portion
|
24,264
|
|
|
28,182
|
|
Deferred income taxes
|
25,914
|
|
|
20,106
|
|
Long-term debt
|
12,050
|
|
|
527
|
|
Deferred compensation plan liabilities, less current portion
|
34,162
|
|
|
30,707
|
|
Other liabilities
|
18,232
|
|
|
9,106
|
|
Total liabilities
|
393,878
|
|
|
404,894
|
|
Shareholders’ equity:
|
|
|
|
|
|
Common stock, no par value; 100,000 shares authorized; 65,120 and 65,137 shares issued and outstanding at December 31, 2017 and September 30, 2017, at stated amount, respectively
|
481,261
|
|
|
475,592
|
|
Accumulated other comprehensive loss
|
(27,304
|
)
|
|
(27,619
|
)
|
Retained earnings
|
547,151
|
|
|
492,112
|
|
Total MAXIMUS shareholders’ equity
|
1,001,108
|
|
|
940,085
|
|
Noncontrolling interests
|
6,544
|
|
|
5,683
|
|
Total equity
|
1,007,652
|
|
|
945,768
|
|
Total liabilities and equity
|
$
|
1,401,530
|
|
|
$
|
1,350,662
|
|
See notes to unaudited consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2017
|
|
2016
|
Cash flows from operations:
|
|
|
|
|
|
Net income
|
$
|
59,952
|
|
|
$
|
46,329
|
|
Adjustments to reconcile net income to cash flows from operations:
|
|
|
|
|
|
Depreciation and amortization of property and equipment and capitalized software
|
13,719
|
|
|
14,562
|
|
Amortization of intangible assets
|
2,718
|
|
|
3,402
|
|
Deferred income taxes
|
5,707
|
|
|
5,910
|
|
Stock compensation expense
|
5,402
|
|
|
4,889
|
|
Change in assets and liabilities:
|
|
|
|
|
|
Accounts receivable — billed and billable
|
(44,381
|
)
|
|
14,687
|
|
Accounts receivable — unbilled
|
5,535
|
|
|
(1,998
|
)
|
Prepaid expenses and other current assets
|
6,019
|
|
|
6,245
|
|
Deferred contract costs
|
1,413
|
|
|
44
|
|
Accounts payable and accrued liabilities
|
11,387
|
|
|
(14,575
|
)
|
Accrued compensation and benefits
|
(29,588
|
)
|
|
(17,237
|
)
|
Deferred revenue
|
(12,405
|
)
|
|
(10,096
|
)
|
Income taxes
|
9,642
|
|
|
16,902
|
|
Other assets and liabilities
|
2,748
|
|
|
2,076
|
|
Cash flows from operations
|
37,868
|
|
|
71,140
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property and equipment and capitalized software costs
|
(6,514
|
)
|
|
(7,768
|
)
|
Proceeds from the sale of a business
|
—
|
|
|
385
|
|
Other
|
45
|
|
|
43
|
|
Cash used in investing activities
|
(6,469
|
)
|
|
(7,340
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Cash dividends paid to MAXIMUS shareholders
|
(2,930
|
)
|
|
(2,920
|
)
|
Repurchases of common stock
|
(1,038
|
)
|
|
(28,767
|
)
|
Tax withholding related to RSU vesting
|
(8,529
|
)
|
|
(9,255
|
)
|
Borrowings under credit facility
|
59,683
|
|
|
65,000
|
|
Repayment of credit facility and other long-term debt
|
(48,156
|
)
|
|
(80,067
|
)
|
Other
|
—
|
|
|
(1,145
|
)
|
Cash used in financing activities
|
(970
|
)
|
|
(57,154
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
224
|
|
|
(3,078
|
)
|
Net increase in cash and cash equivalents
|
30,653
|
|
|
3,568
|
|
Cash and cash equivalents, beginning of period
|
166,252
|
|
|
66,199
|
|
Cash and cash equivalents, end of period
|
$
|
196,905
|
|
|
$
|
69,767
|
|
See notes to unaudited consolidated financial statements.
MAXIMUS, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
Outstanding
|
|
Common
Stock
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
Retained
Earnings
|
|
Noncontrolling
Interest
|
|
Total
|
Balance at September 30, 2017
|
65,137
|
|
|
$
|
475,592
|
|
|
$
|
(27,619
|
)
|
|
$
|
492,112
|
|
|
$
|
5,683
|
|
|
$
|
945,768
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
59,091
|
|
|
861
|
|
|
59,952
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
315
|
|
|
—
|
|
|
—
|
|
|
315
|
|
Cash dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,930
|
)
|
|
—
|
|
|
(2,930
|
)
|
Dividends on RSUs
|
—
|
|
|
84
|
|
|
—
|
|
|
(84
|
)
|
|
—
|
|
|
—
|
|
Repurchases of common stock
|
(17
|
)
|
|
—
|
|
|
—
|
|
|
(1,038
|
)
|
|
—
|
|
|
(1,038
|
)
|
Stock compensation expense
|
—
|
|
|
5,402
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,402
|
|
Tax withholding related to RSU vesting
|
—
|
|
|
183
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
183
|
|
Balance at December 31, 2017
|
65,120
|
|
|
$
|
481,261
|
|
|
$
|
(27,304
|
)
|
|
$
|
547,151
|
|
|
$
|
6,544
|
|
|
$
|
1,007,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
Outstanding
|
|
Common
Stock
|
|
Accumulated
Other
Comprehensive
Income / (Loss)
|
|
Retained
Earnings
|
|
Noncontrolling
Interest
|
|
Total
|
Balance at September 30, 2016
|
65,223
|
|
|
$
|
461,679
|
|
|
$
|
(36,169
|
)
|
|
$
|
323,571
|
|
|
$
|
4,059
|
|
|
$
|
753,140
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
46,664
|
|
|
(335
|
)
|
|
46,329
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
(9,694
|
)
|
|
—
|
|
|
—
|
|
|
(9,694
|
)
|
Interest rate hedge, net of income taxes
|
—
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
12
|
|
Cash dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,920
|
)
|
|
(617
|
)
|
|
(3,537
|
)
|
Dividends on RSUs
|
—
|
|
|
88
|
|
|
—
|
|
|
(88
|
)
|
|
—
|
|
|
—
|
|
Repurchases of common stock
|
(559
|
)
|
|
—
|
|
|
—
|
|
|
(28,767
|
)
|
|
—
|
|
|
(28,767
|
)
|
Stock compensation expense
|
—
|
|
|
4,889
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,889
|
|
Balance at December 31, 2016
|
64,664
|
|
|
$
|
466,656
|
|
|
$
|
(45,851
|
)
|
|
$
|
338,460
|
|
|
$
|
3,107
|
|
|
$
|
762,372
|
|
See notes to unaudited consolidated financial statements.
MAXIMUS, Inc.
Notes to Unaudited Consolidated Financial Statements
For the
Three
Months Ended
December 31, 2017
and
2016
1. Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. As permitted by these instructions, they do not include all of the information and notes required by generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the
three
months ended
December 31, 2017
are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet at
September 30, 2017
has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. Certain financial results have been reclassified to conform with our current period presentation.
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.
These financial statements should be read in conjunction with the consolidated audited financial statements and the notes thereto at
September 30, 2017
and
2016
and for each of the three years ended September 30, included in our Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on
November 20, 2017
.
2. Segment Information
The table below provides certain financial information for each of our business segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(dollars in thousands)
|
|
2017
|
|
% (1)
|
|
2016
|
|
% (1)
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Services
|
|
$
|
352,090
|
|
|
100
|
%
|
|
$
|
340,729
|
|
|
100
|
%
|
U.S. Federal Services
|
|
132,983
|
|
|
100
|
%
|
|
141,298
|
|
|
100
|
%
|
Human Services
|
|
138,075
|
|
|
100
|
%
|
|
125,537
|
|
|
100
|
%
|
Total
|
|
$
|
623,148
|
|
|
100
|
%
|
|
$
|
607,564
|
|
|
100
|
%
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Services
|
|
$
|
91,056
|
|
|
25.9
|
%
|
|
$
|
78,234
|
|
|
23.0
|
%
|
U.S. Federal Services
|
|
33,358
|
|
|
25.1
|
%
|
|
37,576
|
|
|
26.6
|
%
|
Human Services
|
|
27,546
|
|
|
20.0
|
%
|
|
29,008
|
|
|
23.1
|
%
|
Total
|
|
$
|
151,960
|
|
|
24.4
|
%
|
|
$
|
144,818
|
|
|
23.8
|
%
|
Selling, general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Services
|
|
$
|
33,416
|
|
|
9.5
|
%
|
|
$
|
28,107
|
|
|
8.2
|
%
|
U.S. Federal Services
|
|
16,648
|
|
|
12.5
|
%
|
|
19,695
|
|
|
13.9
|
%
|
Human Services
|
|
19,495
|
|
|
14.1
|
%
|
|
17,239
|
|
|
13.7
|
%
|
Other (2)
|
|
—
|
|
|
NM
|
|
|
357
|
|
|
NM
|
|
Total
|
|
$
|
69,559
|
|
|
11.2
|
%
|
|
$
|
65,398
|
|
|
10.8
|
%
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Services
|
|
$
|
57,640
|
|
|
16.4
|
%
|
|
$
|
50,127
|
|
|
14.7
|
%
|
U.S. Federal Services
|
|
16,710
|
|
|
12.6
|
%
|
|
17,881
|
|
|
12.7
|
%
|
Human Services
|
|
8,051
|
|
|
5.8
|
%
|
|
11,769
|
|
|
9.4
|
%
|
Amortization of intangible assets
|
|
(2,718
|
)
|
|
NM
|
|
|
(3,402
|
)
|
|
NM
|
|
Restructuring costs (3)
|
|
—
|
|
|
NM
|
|
|
(2,242
|
)
|
|
NM
|
|
Other (2)
|
|
—
|
|
|
NM
|
|
|
(357
|
)
|
|
NM
|
|
Total
|
|
$
|
79,683
|
|
|
12.8
|
%
|
|
$
|
73,776
|
|
|
12.1
|
%
|
(1) Percentage of respective segment revenue. Percentages not considered meaningful are marked “NM.”
|
|
(2)
|
Other costs and credits relate to SG&A balances that do not relate directly to segment business activities. During the
three
months ended
December 31, 2016
we incurred
$0.4 million
of legal costs pertaining to a matter which occurred in fiscal year 2009. This matter was settled in the third quarter of fiscal year 2017.
|
|
|
(3)
|
During fiscal year 2017, we incurred costs in restructuring our United Kingdom Human Services business. See "Note 5. Supplemental disclosures" for more information.
|
3. Earnings Per Share
The weighted average number of shares outstanding used to compute earnings per share was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(shares in thousands)
|
|
2017
|
|
2016
|
Basic weighted average shares outstanding
|
|
65,866
|
|
|
65,770
|
|
Dilutive effect of employee stock options and unvested RSUs
|
|
311
|
|
|
250
|
|
Denominator for diluted earnings per share
|
|
66,177
|
|
|
66,020
|
|
All of our unvested restricted stock units (RSUs) are included in the calculations of dilution above.
4. Income Tax
Our results for the first quarter of fiscal year 2018 benefited from the estimated effects of the Tax Cuts and Jobs Act (the Act), which was signed on December 22, 2017 and is effective from January 1, 2018.
Our results for the
three
months ended
December 31, 2017
have been affected by:
|
|
•
|
A one-time "toll tax" on our undistributed and previously untaxed earnings in foreign locations, of approximately
$9.5 million
;
|
|
|
•
|
A one-time benefit from the reduction of our deferred tax liabilities of
$10.6 million
to reflect the new U.S. federal tax rates; and
|
|
|
•
|
A reduced provision for income taxes, which has resulted in a reduction to our expense of approximately
$6.4 million
, compared to our tax provision under previous law.
|
We are required to recognize the expected effects of the Act as of December 31, 2017. The calculations of deferred tax assets and liabilities and the toll tax are complicated by two factors:
|
|
•
|
Our U.S. federal income tax return for fiscal year 2017, which ended on September 30, 2017, is required to be filed on or before July 15, 2018, and certain estimates of differences between recorded amounts for financial reporting purposes and for tax reporting purposes will continue to be refined for the next several months; and
|
|
|
•
|
The “toll tax” requires the gathering of detailed information previously not required to be filed with our U.S. federal tax returns; both the IRS and U.S. Treasury Department will be providing interpretations and guidance over the next several months to assist tax payers in calculating the toll tax. In addition, many U.S. states continue to issue their interpretations of the Act, which may change our estimates of our charge.
|
Accordingly, the accounting for certain income tax effects of the Act is provisional. We believe that we have a reasonable basis for our estimates.
Our effective income tax rate for the
three
months ended
December 31, 2017
was
24.9%
. The net effect of our toll charge and reduction of deferred tax liabilities reduced the effective income tax rate by approximately
1.4%
.
During the
three
months ended
December 31, 2017
and
2016
, we made income tax payments of
$4.0 million
and
$3.7 million
, respectively.
5. Supplemental disclosures
Under a resolution adopted in August 2015, the Board of Directors authorized the repurchase, at management's discretion, of up to an aggregate of
$200 million
of our common stock. The resolution also authorizes the use of option exercise proceeds for the repurchase of our common stock. During the
three
months ended
December 31, 2017
, we repurchased approximately
17,000
common shares at a cost of
$1.0 million
. During
three
months ended
December 31, 2016
, we acquired
0.6 million
common shares at a cost of
$28.8 million
. At
December 31, 2017
,
$108.8 million
remained available for future stock repurchases.
Our deferred compensation plan assets include
$16.2 million
invested in mutual funds that have quoted prices in active markets. These assets are recorded at fair value with changes in fair value being recorded in the Statement of Operations.
During the
three
months ended
December 31, 2017
, we granted
0.3 million
RSUs to our employees. These awards will vest ratably over
five
years.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other amounts included within current assets and liabilities that meet the definition of a financial instrument are shown at values equivalent to fair value due to the short-term nature of these items. Our accounts receivable balance includes both amounts invoiced and amounts that are ready to be invoiced and the funds are collectible within standard invoice terms.
During the
three
months ended
December 31, 2016
, we undertook a restructuring of our United Kingdom Human Services operations as part of the ongoing integration of Remploy. We recorded restructuring costs of
$2.2 million
, principally severance expenses.
As part of our work for the U.S. Federal Government and many states, we allocate costs to individual projects and segments using a methodology driven by the Federal Cost Accounting Standards. During fiscal year 2018, we updated our methodology for allocation of costs which resulted in certain costs which had been within Cost of Revenue now being classified as Selling, General and Administrative Expenses (SG&A). If we had utilized the same methodology in fiscal year 2018 as we had in fiscal year 2017, we estimate that SG&A would have been lower by approximately
$1.2 million
during the first fiscal quarter of 2018. This change in methodology did not affect our operating income.
Shareholder Lawsuit
In August 2017, the Company and certain officers were named as defendants in a putative class action lawsuit filed in the U.S. District Court for the Eastern District of Virginia,
Steamfitters Local 449 Pension Plan v. MAXIMUS
. The plaintiff alleges the defendants made a variety of materially false and misleading statements, or failed to disclose material information, concerning the status of the Company’s Health Assessment Advisory Services project for the U.K. Department for Work and Pensions from the period October 20, 2014 through February 3, 2016, and seek damages to be proved at trial. The defendants deny the allegations and intend to defend the matter vigorously. At this time, it is not possible to reasonably predict whether this matter will be permitted to proceed as a class or to reasonably estimate the value of the claims asserted. No assurances can be given that we will be successful in our defense of this action on the merits or otherwise. For these reasons, we are unable to estimate the potential loss or range of loss in this matter.
6. Debt
Credit Facilities
Our credit agreement provides for a revolving line of credit up to
$400 million
that may be used for revolving loans, swingline loans (subject to a sublimit of
$5 million
), and to request letters of credit, subject to a sublimit of
$50 million
. The line of credit is available for general corporate purposes, including working capital, capital expenditures and acquisitions. Borrowings are permitted in currencies other than the U.S. Dollar. In September 2017, we extended the term of our credit agreement to September 2022, at which time all outstanding borrowings must be repaid. At
December 31, 2017
, we had U.S. Dollar borrowings of
$10.0 million
and Australian Dollar borrowings of
$1.6 million
under the credit agreement.
In addition to borrowings under the credit agreement, we have an outstanding loan of
$0.6 million
(
$0.8 million
Canadian Dollars) with the Atlantic Innovation Fund of Canada. The loan is non-interest bearing and is repayable over
18
remaining quarterly installments.
At
December 31, 2017
, we held
three
letters of credit under our credit agreement totaling
$3.1 million
. Each of these letters of credit may be called by vendors or customers in the event that we default under the terms of a contract, the probability of which we believe is remote. In addition,
one
letter of credit totaling
$1.0 million
, secured with restricted cash balances, is held with another financial institution to cover similar obligations to customers.
Our credit agreement requires us to comply with certain financial covenants and other covenants including a maximum total leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all covenants as of
December 31, 2017
. Our obligations under the credit agreement are guaranteed by material
domestic subsidiaries of the Company, but are otherwise unsecured. In the event that our total leverage ratio, as defined in the credit agreement, exceeds
2.50
:1, we would be obliged to provide security in the form of the assets of the parent company and certain of its subsidiaries. Our credit agreement contains no restrictions on the payment of dividends as long as our leverage ratio does not exceed
2.50
:1. At
December 31, 2017
, our total leverage ratio was less than
1.0
:1.0. We do not believe that the provisions of the credit agreement represent a significant restriction to the successful operation of the business or to our ability to pay dividends.
The Credit Agreement provides for an annual commitment fee payable on funds not borrowed or utilized for letters of credit. This charge is based upon our leverage and varies between
0.125%
and
0.275%
. Borrowings under the Credit Agreement bear interest at our choice at either (a) a Base Rate plus a margin that varies between
0.0%
and
0.75%
per year, (b) a Eurocurrency Rate plus an applicable margin that varies between
1.0%
and
1.75%
per year or (c) an Index Rate plus an applicable margin which varies between
1.0%
and
1.75%
per year. The Base Rate, Eurocurrency Rate and Index Rate are defined by the Credit Agreement.
Derivative Arrangement
In order to add stability to our interest expense and manage our exposure to interest rate movements, we may enter into derivative arrangements to fix payments on part of an outstanding loan balance. We agree to pay a fixed rate of interest to a financial institution and receive a balance equivalent to the floating rate payable. Our outstanding derivative instruments expired during fiscal year 2017. As this cash flow hedge was considered effective, the gains and losses in the fair value of this derivative instrument were reported in accumulated other comprehensive income (AOCI) in the consolidated statement of comprehensive income.
Interest Payments
During the
three
months ended
December 31, 2017
and
2016
, we made interest payments of less than
$0.1 million
and
$0.6 million
, respectively.
7. Recent accounting pronouncements
We are evaluating the effects of guidance issued in three significant areas of financial reporting.
In May 2014, the Financial Accounting Standards Board (the FASB) issued ASU No. 2014-09,
Revenue from Contracts with Customers.
In addition, the FASB has issued additional updates covering technical items and changing the date of adoption. This new standard will change the manner in which we evaluate revenue recognition for all contracts with customers, although the effect of the changes on revenue recognition will vary from contract to contract. We will adopt this standard during our 2019 fiscal year. The standard is required to be applied either retrospectively to each prior period presented (the full retrospective approach) or retrospectively with the cumulative effect of the initial application recognized at the date of initial application (the modified retrospective approach). While we previously disclosed that we anticipated using the full retrospective approach, we have further evaluated both approaches and have concluded that we will adopt the standard using the modified retrospective approach.
We have established a cross-functional steering committee which includes representatives from across all our business and support segments. The steering committee is responsible for evaluating the impact of the standard on our operations including accounting, taxation, internal audit and financial systems. Our approach to analyzing these impacts includes reviewing our current accounting policies and practices to identify potential differences that will result from applying the requirements of the new standard to our existing contracts. We are in the process of evaluating the changes needed to our business processes, systems and controls in order to support revenue recognition and the related disclosures under the new standard. While we are still evaluating the changes that the new standard will have, we expect the standard will affect the timing of revenue recognition for certain of our variable fee contracts.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The new standard will change the manner in which we will present our leasing arrangements. We will adopt this standard during our 2020 fiscal year. We are evaluating the likely effects on our business.
In January 2017, the FASB issued ASU No. 2017-04,
Simplifying the Test for Goodwill Impairment.
This standard will not change the manner in which we would identify a goodwill impairment but would change the manner of the calculation of any resulting impairment. Under existing guidance, we would calculate goodwill for each of our reporting units by calculating the fair value of all existing assets and liabilities within that reporting unit and comparing this to the fair value of the reporting unit; to the extent that this difference is less than our existing goodwill balance related to that reporting unit, we would record an impairment. The new standard will require us to
calculate goodwill based upon the difference between the fair value and reported value of a reporting unit. This standard would be effective for our 2021 fiscal year, although early adoption is permitted.
With the exception of the new accounting standards discussed above, there have been no new accounting pronouncements that have significance, or potential significance, to the Company's consolidated financial statements.
8. Subsequent events
On
January 5, 2018
, our Board of Directors declared a quarterly cash dividend of
$0.045
for each share of our common stock outstanding. The dividend is payable on
February 28, 2018
to shareholders of record on
February 15, 2018
.
On January 16, 2018, we announced the appointment of a new Chief Executive Officer, with Bruce L. Caswell replacing Richard A. Montoni as of April 1, 2018. Both individuals entered into new employment, confidentiality and non-compete agreements; Mr. Caswell's contract is for
three
years, through April 1, 2021; Mr. Montoni's is for
eighteen
months, through September 30, 2019.
On January 16, 2018, we announced the retirement of a member of our Board of Directors, Mayor Wellington E. Webb. Mayor Webb had previously deferred his RSU awards and, as a result, we will record a tax benefit of approximately
$1.7 million
during the three month period ended March 31, 2018.
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, 2017
, which was filed with the Securities and Exchange Commission on
November 20, 2017
.
Business Overview
We are a leading operator of government health and human services programs worldwide. We act as a partner to governments under our mission of
Helping Government Serve the People
®
. We use our experience, business process management expertise, innovation and technology solutions to help government agencies run effective, efficient and accountable programs.
Our company was founded in 1975 and grew both organically and through acquisitions. Beginning in 2006, we narrowed our service offerings to focus in the area of business process services (BPS) primarily in the health services and human services markets. In parallel, we divested or exited a number of non-core businesses that fell outside these two areas. Our subsequent growth was driven by the expansion of our health services business around the globe, new welfare-to-work contracts outside the United States and the growth of our business with the U.S. Federal Government. This growth has been both organic and through acquisitions.
Beginning in fiscal year 2017, we are experiencing what we believe is a slowdown due to an industry pause tied to the transition of a new presidential administration in the United States. Although the transition is occurring at the federal level, we are seeing the effects on our U.S.-based health business as many states depend upon federal funds to finance the services they provide. As a result, our short-term growth expectations were impacted by longer procurement cycles and increased delays, mostly due to policy and budget uncertainty. Further, agency staffing shortfalls tied to the slow presidential nomination process hindered the decision-making process at both the federal and the state level.
Longer-term, we believe the ongoing demand for our services driven by demographic, economic and legislative trends, coupled with our strong position within our industry, will continue to foster future growth. Our long-term growth thesis is based on the following factors:
|
|
•
|
Demographic trends, including increased longevity and more complex health needs, place an increased burden on government social benefit programs. At the same time, programs that address societal needs must be a good use of taxpayer dollars and achieve their intended outcomes. We believe the macro-economic trends of demographics and government needs will continue to drive demand for our services.
|
|
|
•
|
Our contract portfolio offers us excellent revenue visibility. Much of our revenue is derived from long-term contractual arrangements with governments. A contract will often have a base period followed by additional option periods. As a result, single contracts may last several years and client relationships may be decades long. At any time, we are typically able to identify more than 90% of our subsequent twelve months' anticipated revenue from our existing contracts.
|
|
|
•
|
We maintain a strong reputation within the government health and human services industry. Our deep client relationships and reputation for delivering outcomes and creating efficiencies creates a strong barrier to entry in a risk-averse environment. Entering our markets typically requires expertise in complex procurement processes, operation of multi-faceted government programs and an ability to serve and engage with diverse populations.
|
|
|
•
|
We have a portfolio target operating profit margin that ranges between 10% and 15% with high cash conversion, a healthy balance sheet and access to a $400 million credit facility. Our financial flexibility allows us to fund investments in the business, complete strategic mergers and acquisitions to further supplement our core capabilities and seek new adjacent platforms.
|
|
|
•
|
We have an active program to identify potential strategic acquisitions. Our past acquisitions have successfully enabled us to expand our business processes, knowledge and client relationships into adjacent markets and new geographies. Over the past three years, these include:
|
|
|
▪
|
In 2017, we acquired Revitalised Limited (Revitalised), a U.K. provider of digital solutions for engaging people in the areas of health, fitness and well-being.
|
|
|
▪
|
In 2016, we acquired Ascend Management Innovations, LLC (Ascend), a provider of independent, specialized health assessments and data management tools to government agencies in the U.S.
|
|
|
▪
|
In 2016, we acquired Assessments Australia, a provider of assessments that identify the support services required to help individuals succeed in a community environment.
|
Financial Overview
Our results for the
three
months ended
December 31, 2017
were driven by a number of factors:
|
|
•
|
Organic revenue growth of
1.7%
in our Health Segment, driven by our Health Assessment Advisory Service (HAAS) contract in the United Kingdom;
|
|
|
•
|
Organic revenue growth of
7.4%
in our Human Services Segment, driven by our international welfare-to-work businesses, notably from increases in pass through revenue from a contract in Australia;
|
|
|
•
|
Declines in our U.S. Federal Services Segment, due to the wind down of a large subcontract;
|
|
|
•
|
The benefit of year-over-year increases in the value of foreign currencies in which we do business, most notably the British Pound; and
|
|
|
•
|
Significant income tax benefits from the Tax Cuts and Jobs Act.
|
Results of Operations
Consolidated
The following table sets forth, for the periods indicated, selected statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(dollars in thousands, except per share data)
|
|
2017
|
|
2016
|
Revenue
|
|
$
|
623,148
|
|
|
$
|
607,564
|
|
Cost of revenue
|
|
471,188
|
|
|
462,746
|
|
Gross profit
|
|
151,960
|
|
|
144,818
|
|
Gross profit percentage
|
|
24.4
|
%
|
|
23.8
|
%
|
Selling, general and administrative expenses
|
|
69,559
|
|
|
65,398
|
|
Selling, general and administrative expense as a percentage of revenue
|
|
11.2
|
%
|
|
10.8
|
%
|
Amortization of intangible assets
|
|
2,718
|
|
|
3,402
|
|
Restructuring costs
|
|
—
|
|
|
2,242
|
|
Operating income
|
|
79,683
|
|
|
73,776
|
|
Operating margin
|
|
12.8
|
%
|
|
12.1
|
%
|
Interest expense
|
|
168
|
|
|
849
|
|
Other income, net
|
|
287
|
|
|
263
|
|
Income before income taxes
|
|
79,802
|
|
|
73,190
|
|
Provision for income taxes
|
|
19,850
|
|
|
26,861
|
|
Effective tax rate
|
|
24.9
|
%
|
|
36.7
|
%
|
Net income
|
|
59,952
|
|
|
46,329
|
|
Income/(loss) attributable to noncontrolling interests
|
|
861
|
|
|
(335
|
)
|
Net income attributable to MAXIMUS
|
|
$
|
59,091
|
|
|
$
|
46,664
|
|
Basic earnings per share attributable to MAXIMUS
|
|
$
|
0.90
|
|
|
$
|
0.71
|
|
Diluted earnings per share attributable to MAXIMUS
|
|
$
|
0.89
|
|
|
$
|
0.71
|
|
As our business segments have different factors driving revenue growth and profitability, the sections that follow cover these segments in greater detail.
Changes in revenue, cost of revenue and gross profit for the
three
months ended
December 31, 2017
are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Cost of Revenue
|
|
Gross Profit
|
(dollars in thousands)
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
Balance for respective period in fiscal year 2017
|
|
$
|
607,564
|
|
|
|
|
|
$
|
462,746
|
|
|
|
|
|
$
|
144,818
|
|
|
|
|
Organic growth
|
|
6,684
|
|
|
1.1
|
%
|
|
1,214
|
|
|
0.3
|
%
|
|
5,470
|
|
|
3.8
|
%
|
Net acquired growth
|
|
256
|
|
|
—
|
%
|
|
268
|
|
|
0.1
|
%
|
|
(12
|
)
|
|
—
|
%
|
Currency effect compared to the prior period
|
|
8,644
|
|
|
1.4
|
%
|
|
6,960
|
|
|
1.5
|
%
|
|
1,684
|
|
|
1.2
|
%
|
Balance for respective period in fiscal year 2018
|
|
$
|
623,148
|
|
|
2.6
|
%
|
|
$
|
471,188
|
|
|
1.8
|
%
|
|
$
|
151,960
|
|
|
4.9
|
%
|
Organic growth in our Health Services and Human Services Segments were partially offset by declines in our U.S. Federal Services Segment. This decline was largely caused by the wind down of a large subcontract during fiscal year 2017.
Our cost of revenue includes direct costs related to labor, subcontractor labor, outside vendors, rent and other direct costs. Although movements in cost typically correlate with revenue growth, we experienced operating efficiencies in our Health Services Segment, principally on our HAAS contract.
Our results in both the Health Services and Human Services Segments received the benefit of a year-over-year increase in the value of the foreign currencies in which we transact business, most notable from the rise in the value of the British Pound.
Selling, general and administrative expense (SG&A) consists of indirect costs related to general management, marketing and administration. It is primarily composed of labor costs. These costs may be incurred at a segment level, for dedicated resources that are not client-facing, or at a corporate level. Corporate costs are allocated to segments on a consistent, rational basis. Fluctuations in our SG&A are driven by changes in our administrative cost base, which is not directly driven by changes in our revenue. As part of our work for the United States Federal Government and many states, we allocate these costs using a methodology driven by the Federal Cost Accounting Standards. During fiscal year 2018, we updated our methodology for allocation of costs which resulted in certain costs which had been within Cost of Revenue now being classified as SG&A. If we had utilized the same methodology in fiscal year 2018 as we had in fiscal year 2017, we estimate that SG&A would have been lower by approximately $1.2 million during the first fiscal quarter of 2018. This change in methodology did not affect our operating income. Other increases in our SG&A costs relate to the enhancement of our IT capabilities and charges related to the rationalization of some of our administrative facilities.
Amortization charges declined between fiscal years 2017 and 2018. During fiscal year 2017, all intangible assets acquired as part of the Remploy acquisition in 2015 and the technology and trade mark assets which were acquired with our acquisition of Policy Studies, Inc. in 2012 were fully amortized. These assets had been amortized at a rate of approximately $3.1 million per year.
During fiscal year 2017, we undertook a restructuring of our United Kingdom Human Services operations as part of the ongoing integration of Remploy. We recorded restructuring costs of
$2.2 million
, principally severance expenses. This restructuring is expected to result in cost savings in future periods. Remploy is partially owned by its employees and, accordingly, some of this charge is offset through a reduction in income attributable to noncontrolling interests.
Overall, our operating income for the three months ended December 31, 2017 increased by
8.0%
, compared to the comparative period, helped by improved operating performance, favorable currency fluctuations and the absence of restructuring costs.
Our interest expense is driven by borrowings from our credit facility. During the first quarter of fiscal year 2017, we were continuing to pay off the debt balance related to our acquisitions of Acentia and Ascend. Our expense during the first fiscal quarter of 2018 relates primarily to the cost of maintaining the facility as well as some borrowings to cover short-term working capital needs.
Our net income for the three months ended December 31, 2017 increased by
29%
, compared to the comparative period. Our net income attributable to MAXIMUS increased by
27%
. Our diluted earnings per share increased from
$0.71
to
$0.89
. These results received a benefit from changes in our tax rates which are explained below.
Income taxes
Our results for the first quarter of fiscal year 2018 benefited from the estimated effects of the Tax Cuts and Jobs Act (the Act), which was signed on December 22, 2017 and is effective from January 1, 2018.
Our results for the
three
months ended
December 31, 2017
have been affected by:
|
|
•
|
A one-time "toll tax" on undistributed and previously untaxed earnings in foreign locations;
|
|
|
•
|
A one-time benefit from the reduction of our deferred tax liabilities; and
|
|
|
•
|
Reduced U.S. federal income tax rates.
|
The Act imposes a tax on undistributed earnings of our foreign subsidiaries which were not previously remitted to, or taxed in, the United States. This has been referred to as the “toll tax.” The tax is a combination of two elements; a 15.5% charge for the earnings held in cash and an 8% charge on all other earnings. We can claim a
related foreign tax credit for the income taxes paid to a foreign authority. We have recorded a toll tax charge of approximately $9.5 million, which represents our best estimate of the cost at this time. This was an increase to our tax expense in the first quarter.
The Act also reduces the basic rate of U.S. federal income tax from 35% to 21%. We have deferred tax liabilities within the United States. We have recorded a reduction to income tax expense of $10.6 million in the first quarter of fiscal year 2018 to reflect the favorable impact from the lower income tax rates.
The Act reduced our tax rate from 35% to 24.5% for fiscal year 2018 and to 21% for future fiscal years. There are other provisions which will offset this, including a limitation on the deductibility of officers' compensation and the disallowance of deductions for certain other business expenses. We estimate that our provision for income taxes for the first quarter of fiscal year 2018 was approximately $6.4 million lower as a result of lower income tax rates, offset by some other provisions in the Act but excluding the effect of the toll tax and deferred liability true-up noted above.
We have analyzed the other provisions of the Act, including the state income tax consequences, and we believe the impact will be immaterial to the Company.
We are required to recognize the effects of the Act as of December 31, 2017. Specifically we were required to remeasure the deferred tax assets and liabilities as of December 22, 2017 and calculate the expected impact of the one-time “toll tax” on the undistributed, non-previously taxed foreign earnings of our foreign subsidiaries as part of the transition to a new territorial tax regime provided for in the Act. The calculations of deferred tax assets and liabilities and the toll tax are complicated by two factors.
|
|
•
|
Our U.S. federal income tax return for fiscal year 2017, which ended on September 30, 2017, is required to be filed on or before July 15, 2018, and certain estimates of differences between recorded amounts for financial reporting purposes and for tax reporting purposes will continue to be refined for the next several months.
|
|
|
•
|
The “toll tax” requires the gathering of detailed information previously not required to be filed with our U.S. federal tax returns; both the IRS and U.S. Treasury Department will be providing interpretations and guidance over the next several months to assist tax payers in calculating the toll tax. In addition, many U.S. states continue to issue their interpretations of the Act, which may change our estimates of our charge.
|
Accordingly, the accounting for certain income tax effects of the Act is provisional. We believe that we have a reasonable basis for our estimates.
After considering the impact of U.S. tax reform our effective income tax rate for fiscal year 2018 is projected to be in the range of 26% to 28%. We anticipate the following ranges by quarter:
|
|
•
|
26%-27% during the second quarter of fiscal 2018;
|
|
|
•
|
28%-29% during the third quarter; and
|
|
|
•
|
26%-27% during the fourth quarter.
|
During our second and fourth fiscal quarters, we will receive the tax benefit from the vesting of restricted stock units (RSUs). The benefit is dependent upon the number of RSUs which vest as well as our share price on the vesting date.
We anticipate that our earnings in the full fiscal year 2018 will receive a benefit of approximately $0.35 of diluted earnings per share as a consequence of changes in tax legislation from this Act. Absent this legislation, we estimate that our diluted earnings per share for the first fiscal quarter of the year would have been $0.78.
The tax reform law in the U.S. improves our after tax cash flows in the U.S. as compared to the prior tax rates and structure and, accordingly, it is expected to improve returns from our U.S. businesses.
Health Services Segment
The Health Services Segment provides a variety of business process services, appeals and assessments as well as related consulting services, for state, provincial and national government programs. These services support a variety of government health benefit programs including Medicaid, the Children's Health Insurance Program (CHIP) and the Affordable Care Act (ACA) in the U.S., Health Insurance BC (British Columbia) in Canada, and the HAAS contract in the U.K.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
Revenue
|
|
$
|
352,090
|
|
|
$
|
340,729
|
|
Cost of revenue
|
|
261,034
|
|
|
262,495
|
|
Gross profit
|
|
91,056
|
|
|
78,234
|
|
Operating income
|
|
57,640
|
|
|
50,127
|
|
Gross profit percentage
|
|
25.9
|
%
|
|
23.0
|
%
|
Operating margin percentage
|
|
16.4
|
%
|
|
14.7
|
%
|
Changes in revenue, cost of revenue and gross profit for the
three
months ended
December 31, 2017
are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Cost of Revenue
|
|
Gross Profit
|
(dollars in thousands)
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
Balance for respective period in fiscal year 2017
|
|
$
|
340,729
|
|
|
|
|
|
$
|
262,495
|
|
|
|
|
|
$
|
78,234
|
|
|
|
|
Organic growth
|
|
5,710
|
|
|
1.7
|
%
|
|
(6,015
|
)
|
|
(2.3
|
)%
|
|
11,725
|
|
|
15.0
|
%
|
Acquired growth
|
|
256
|
|
|
0.1
|
%
|
|
268
|
|
|
0.1
|
%
|
|
(12
|
)
|
|
—
|
%
|
Currency effect compared to the prior period
|
|
5,395
|
|
|
1.6
|
%
|
|
4,286
|
|
|
1.6
|
%
|
|
1,109
|
|
|
1.4
|
%
|
Balance for respective period in fiscal year 2018
|
|
$
|
352,090
|
|
|
3.3
|
%
|
|
$
|
261,034
|
|
|
(0.6
|
)%
|
|
$
|
91,056
|
|
|
16.4
|
%
|
Our revenue for the three month period ended
December 31, 2017
increased
by
3.3%
compared to the same period in fiscal year
2017
. Cost of revenue
decreased
by
0.6%
. On a constant currency basis, our revenue and cost of revenue grew
1.8%
and declined
2.2%
, respectively.
This segment has a number of mature contracts, which helped drive strong operating margins in the first quarter of fiscal year 2018. In particular, our HAAS contract is a cost reimbursable contract with incentives and penalties based upon service level targets and operating efficiencies. During fiscal years 2017 and 2018, we have made steady improvements in our service delivery resulting in lower penalties and improved margins. As previously disclosed, this contract has been extended for an additional two years commencing March 1, 2018.
We have also received the benefit from the strengthening of foreign currencies, notably the British Pound, over the past twelve months, resulting in increased revenue and costs.
In prior periods, we have noted the effect of the United Kingdom Fit for Work contract, which has suffered losses resulting from activity levels significantly lower than those estimated at contract inception. In November 2017, this contract was amended. The majority of its operations will cease during the second quarter of this fiscal year. We will continue to provide a health advisory service. Although there will be some costs associated with the closure of the contract, the termination of this contract should provide some benefit to our profit margin in future quarters.
U.S. Federal Services Segment
The U.S. Federal Services Segment provides business process solutions, program management, as well as system development and software development for various U.S. civilian federal programs.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
Revenue
|
|
$
|
132,983
|
|
|
$
|
141,298
|
|
Cost of revenue
|
|
99,625
|
|
|
103,722
|
|
Gross profit
|
|
33,358
|
|
|
37,576
|
|
Operating income
|
|
16,710
|
|
|
17,881
|
|
Gross profit percentage
|
|
25.1
|
%
|
|
26.6
|
%
|
Operating margin percentage
|
|
12.6
|
%
|
|
12.7
|
%
|
Revenue for the three month period ended
December 31, 2017
decreased
by
$8.3 million
, or
5.9%
, compared to the same period in fiscal year
2017
. The corresponding decline in cost of revenue was
$4.1 million
, or
3.9%
. All revenue, cost and profit movement between periods is organic.
Our federal business has declined primarily due to the anticipated loss of a significant subcontract in fiscal year 2017 and other contract losses. At the end of fiscal year 2017, we had anticipated a benefit from disaster relief efforts; however, in late November 2017, we were informed that these support efforts would be reduced. Accordingly, we anticipate that our revenue will decline in the second fiscal quarter of 2018. Our full year revenue is expected to be lower than in fiscal year 2017.
The brief U.S. Federal Government shutdown last month had minimal impact to our federal operations. More than 90% of our staff assigned to federal contracts were deemed essential and reported to work as planned. If another shutdown occurs, we would expect a similar level of staff will be sidelined.
Human Services Segment
The Human Services Segment provides national, state and county human services agencies with a variety of business process services and related consulting services for welfare-to-work, child support, higher education institutions and other Human Services programs. Approximately 70% of our revenue in this segment was earned in foreign jurisdictions.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
Revenue
|
|
$
|
138,075
|
|
|
$
|
125,537
|
|
Cost of revenue
|
|
110,529
|
|
|
96,529
|
|
Gross profit
|
|
27,546
|
|
|
29,008
|
|
Operating income
|
|
8,051
|
|
|
11,769
|
|
Gross profit percentage
|
|
20.0
|
%
|
|
23.1
|
%
|
Operating margin percentage
|
|
5.8
|
%
|
|
9.4
|
%
|
Changes in revenue, cost of revenue and gross profit for the
three
months ended
December 31, 2017
are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Cost of Revenue
|
|
Gross Profit
|
(dollars in thousands)
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
|
Dollars
|
|
Percentage change
|
Balance for respective period in fiscal year 2017
|
|
$
|
125,537
|
|
|
|
|
|
$
|
96,529
|
|
|
|
|
|
$
|
29,008
|
|
|
|
|
Organic growth
|
|
9,288
|
|
|
7.4
|
%
|
|
11,326
|
|
|
11.7
|
%
|
|
(2,038
|
)
|
|
(7.0
|
)%
|
Currency effect compared to the prior period
|
|
3,250
|
|
|
2.6
|
%
|
|
2,674
|
|
|
2.8
|
%
|
|
576
|
|
|
2.0
|
%
|
Balance for respective period in fiscal year 2018
|
|
$
|
138,075
|
|
|
10.0
|
%
|
|
$
|
110,529
|
|
|
14.5
|
%
|
|
$
|
27,546
|
|
|
(5.0
|
)%
|
Revenue for the
three
month period ended
December 31, 2017
increased
10%
compared to the same period in fiscal year
2017
. Cost of revenue increased by
15%
.
The majority of the changes in organic revenue and costs stem from our welfare-to-work operations in Australia. Our new jobactive contract was in ramp-up in early fiscal year 2017 and, although it enjoys higher revenues than its predecessor contract, operates at a lower profit margin. The new contract also includes a large quantity of pass-through revenue for discretionary services for which we are reimbursed on a cost basis. This, coupled with start-up losses on new contracts, reduced the profit margin for this segment.
The strengthening of the Australian Dollar and the British Pound, compared to the first quarter of fiscal year 2017, also resulted in increases to our revenue and cost of revenue.
Liquidity and Capital Resources
Our principal source of liquidity remains our cash flows from operations. These cash flows are used to fund our ongoing operations and working capital needs as well as investments in capital infrastructure and our share repurchases. These operating cash flows are driven by our contracts and their payment terms. For many contracts, we are reimbursed for the costs of startup operations, although there may be a gap between incurring and receiving these funds. Other factors which may cause shortfalls in cash flows include contract terms where payments are tied to outcome deliveries, which may not correspond with the costs incurred to achieve these outcomes and short-term delays where government budgets are constrained.
To supplement our operating cash flows, we maintain and utilize our credit facility. We used this facility to fund our acquisitions of Acentia and Ascend, as well as short-term borrowings to cover some immediate working capital needs. At
December 31, 2017
, we had borrowings of
$11.6 million
under the credit facility. In September 2017, we extended the life of our credit facility to September 2022, which allows us to borrow up to
$400 million
, subject to standard covenants. We believe our cash flows from operations should be sufficient to meet our day-to-day requirements for the foreseeable future.
We hold significant cash balances in foreign locations. We mitigate our risk against foreign currency fluctuations by keeping much of these funds in accounts denominated in the United States Dollar. Prior to the passage of the Tax Cuts and Jobs Act (the Act), these funds could not be used within the United States without incurring an incremental tax charge and, accordingly, we had elected to keep these funds indefinitely reinvested in foreign locations. With the passage of the Act, we are evaluating our alternatives to remit these funds to the United States. It is our intention to move substantially all of our cash not required for local working capital needs to the U.S., provided we are able to do so in a tax efficient manner.
Our cash balances were held in the following locations and denominations (in thousands of U.S. Dollars):
|
|
|
|
|
|
As of December 31, 2017
|
U.S. Dollar denominated funds held in the United States
|
$
|
61,888
|
|
U.S. Dollar denominated funds held in foreign locations
|
61,013
|
|
Funds held in foreign locations in local currencies
|
74,004
|
|
Cash and cash equivalents
|
$
|
196,905
|
|
Our priorities for cash utilization remain unchanged. We intend to:
|
|
•
|
Actively pursue new growth opportunities, including strategic acquisitions, business development and investments in technology and innovation to assist organic growth;
|
|
|
•
|
Maintain our quarterly dividend program; and
|
|
|
•
|
Make repurchases of our own shares where opportunities arise to do so.
|
Our growth opportunities include our commitment to investing in new digital technologies, including the related people and processes required, to enhance returns in all our businesses.
Cash Flows
The following table provides a summary of our cash flow information for the
three
months ended
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
Net cash provided by/(used in):
|
|
|
|
|
|
|
Operations
|
|
$
|
37,868
|
|
|
$
|
71,140
|
|
Investing activities
|
|
(6,469
|
)
|
|
(7,340
|
)
|
Financing activities
|
|
(970
|
)
|
|
(57,154
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
224
|
|
|
(3,078
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
30,653
|
|
|
$
|
3,568
|
|
Cash flows from operations were
$37.9 million
for the
three
months ended
December 31, 2017
, compared to
$71.1 million
in the prior fiscal year. The principal cause of this decline was lower cash payments from customers, principally within the United States.
We use the performance indicator of Days Sales Outstanding, or DSO, to evaluate our performance in collecting our receivable balances, both billed and unbilled. We have a target range for DSO of 65 to 80 days and we have typically stayed towards the lower end of this range in recent years. At September 30, 2017, our DSO were
63
days, which represented an unusually low balance. At
December 31, 2017
our DSO were
69
days. This balance is consistent with that at December 31, 2016 of
70
days. Our cash receipts during the first fiscal quarter of the year are typically slower than those in later quarters owing primarily to the number of national holidays. In fiscal year 2017, this did not significantly affect our cash flows as a number of payments from customers anticipated in September 2016 arrived in the following month and provided a benefit to our fiscal year 2017 cash flows. Conversely, our cash collections were stronger than anticipated in September 2017, resulting in lower cash receipts in our first fiscal quarter of 2018.
Cash used in investing activities for the
three
months ended
December 31, 2017
was
$6.5 million
compared to
$7.3 million
in the comparative period. In fiscal year 2017, we received
$0.4 million
from the sale of our K-12 education business.
Cash flows from financing activities in the
three
months ended
December 31, 2017
included net borrowings of
$11.5 million
of our debt, offset by a payment of
$8.5 million
related to our employees' income tax obligations from the vesting of restricted stock units, which occurs in September. Our comparative period in fiscal year 2017 included repurchases of our common stock of
$28.8 million
.
We anticipate that our cash flows from operations and free cash flow will receive a benefit of approximately $25 million in fiscal year 2018 as a result of the Tax Cuts and Jobs Act.
To supplement our statements of cash flows presented on a GAAP basis, we use the measure of free cash flow to analyze the funds generated from operations.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
Cash flows from operations
|
|
$
|
37,868
|
|
|
$
|
71,140
|
|
Purchases of property and equipment and capitalized software costs
|
|
(6,514
|
)
|
|
(7,768
|
)
|
Free cash flow
|
|
$
|
31,354
|
|
|
$
|
63,372
|
|
Critical Accounting Policies and Estimates
Our discussion and analysis of our 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 other long-lived assets, and amounts related to contingencies and income tax liabilities. 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.
During the
three
months ended
December 31, 2017
, 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, 2017
which was filed with the Securities and Exchange Commission on
November 20, 2017
.
Non-GAAP measures
We utilize non‑GAAP measures where we believe it will assist the user of our financial statements in understanding our business. The presentation of these measures is meant to complement, but not replace, other financial measures in this document. The presentation of non-GAAP numbers is not meant to be considered in isolation, nor as an alternative to revenue growth, cash flows from operations or net income as measures of performance. These non-GAAP measures, as determined and presented by us, may not be comparable to related or similarly titled measures presented by other companies.
In fiscal year
2017
, 28% of our revenue was generated outside the U.S. We believe that users of our financial statements wish to understand the performance of our foreign operations using a methodology which excludes the effect of year-over-year exchange rate fluctuations. To calculate year-over-year currency movement, we determine the current year’s results for all foreign businesses using the exchange rates in the prior year. We refer to this adjusted revenue on a "constant currency basis."
In recent years, we have made a number of acquisitions. We believe users of our financial statements wish to evaluate the performance of our operations, excluding changes that have arisen due to businesses acquired. We provide organic revenue growth as a useful basis for assessing this. To calculate organic revenue growth, we compare current year revenue excluding revenue from these acquisitions to our prior year revenue.
In order to sustain our cash flows from operations, we require regular refreshing of our fixed assets and technology. We believe that users of our financial statements wish to understand the cash flows that directly correspond with our operations and the investments we must make in those operations using a methodology which combines operating cash flows and capital expenditures. We provide free cash flow to complement our statement of cash flows. Free cash flow shows the effects of the Company’s operations and routine capital expenditures and excludes the cash flow effects of acquisitions, share repurchases, dividend payments and other financing transactions. We have provided a reconciliation of free cash flow to cash provided by operations.
To sustain our operations, our principal source of financing comes from receiving payments from our customers. We believe that users of our financial statements wish to evaluate our efficiency in converting revenue into cash receipts. Accordingly, we provide DSO, which we calculate by dividing billed and unbilled receivable balances at the end of each quarter by revenue per day for the period. Revenue per day for a quarter is determined by dividing total revenue by 91 days.
As noted above, we have access to a $400 million credit facility. Our credit agreement includes the defined term Consolidated EBITDA and our calculation of Adjusted EBITDA conforms to the credit agreement definition. We believe our investors appreciate the opportunity to understand the possible restrictions which arise from our credit agreement. Adjusted EBITDA is also a useful measure of performance which focuses on the cash generating capacity of the business as it excludes the non-cash expenses of depreciation and amortization, and makes for easier comparisons between the operating performance of companies with different capital structures by excluding interest expense and therefore the impacts of financing costs. The measure of Adjusted EBITA is a step in
calculating Adjusted EBITDA and facilitates comparisons to similar businesses as it isolates the amortization effect of business combinations. We have provided a reconciliation from net income to Adjusted EBITA and Adjusted EBITDA as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Trailing Twelve Months Ended
December 31,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income attributable to MAXIMUS
|
|
$
|
59,091
|
|
|
$
|
46,664
|
|
|
$
|
221,853
|
|
|
$
|
198,417
|
|
Interest expense net of interest income
|
|
(258
|
)
|
|
746
|
|
|
(625
|
)
|
|
3,412
|
|
Provision of income taxes
|
|
19,850
|
|
|
26,861
|
|
|
95,042
|
|
|
116,623
|
|
Amortization of intangible assets
|
|
2,718
|
|
|
3,402
|
|
|
11,524
|
|
|
13,630
|
|
Stock compensation expense
|
|
5,402
|
|
|
4,889
|
|
|
21,878
|
|
|
19,308
|
|
Acquisition-related expenses
|
|
—
|
|
|
—
|
|
|
83
|
|
|
786
|
|
Gain on sale of a business
|
|
—
|
|
|
—
|
|
|
(650
|
)
|
|
(6,880
|
)
|
Adjusted EBITA
|
|
86,803
|
|
|
82,562
|
|
|
349,105
|
|
|
345,296
|
|
Depreciation and amortization of property, plant, equipment and capitalized software
|
|
13,719
|
|
|
14,562
|
|
|
54,926
|
|
|
60,019
|
|
Adjusted EBITDA
|
|
$
|
100,522
|
|
|
$
|
97,124
|
|
|
$
|
404,031
|
|
|
$
|
405,315
|
|