MAXIMUS, INC. 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 endedSeptember 30, 2019 , which was filed with theSecurities and Exchange Commission onNovember 26, 2019 . Business Overview We are a leading operator of government health and human services programs worldwide. We are a responsible and reliable contracting partner to governments under our mission of Helping Government Serve the People®. Governments rely on our financial stability and proven expertise in helping people connect and use critical government programs. We use our experience, business process management expertise, innovation and technology solutions to help government agencies run effective, efficient and accountable programs. Our primary portfolio of work is tied to business process services (BPS) in the health services and human services markets. Our growth over the last decade was driven by new work, such as that from the Affordable Care Act (ACA) inthe United States and a growing footprint in clinical services including assessments, appeals and independent medical reviews in multiple geographies, as well as acquisitions inthe United States andUnited Kingdom . In 2018, the Company articulated a long-term growth strategy with three key tenets including a digital transformation embedded in its service offerings, an aim to increase its growing clinical services and a desire to seek strategic acquisitions as a means to set the platform for organic growth. We believe that demographic and legislative trends will provide our industry with further opportunities for growth and that our strong reputation within this industry, based upon our market leadership, strong financial position and experience, will allow us to benefit from this growth. •Demographic trends, including increased longevity and more complex health needs, place an increased burden on government social benefit and safety-net 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, coupled with the need to achieve value for money, will continue to drive demand for our services. •We maintain a strong reputation within the government health and human services industry. Our deep client relationships and reputation for delivering outcomes and 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. •Our contract portfolio offers us good revenue visibility. Our contracts are typically multi-year arrangements and we have customer relationships which have lasted decades. Because of this longevity, our contract portfolio at any point in time can typically be used to identify approximately 90% of our anticipated revenue for the next twelve months. •We have a total company 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 acquisitions to further supplement our core capabilities and seek new adjacent platforms. To supplement our core business, we have an active program to identify potential strategic acquisitions. Our acquisitions have successfully enabled us to increase future organic growth, as well as expand our business processes, knowledge and client relationships into adjacent markets and new geographies. InNovember 2018 , we acquired the citizen engagement centers business previously operated by General Dynamics Information Technology. This acquisition, coupled with our 2015 acquisition ofAcentia, LLC , has provided increased scale, customer base and competitive advantages in our business withthe United States Federal Government. InAugust 2019 , we acquiredGT Hiring Solutions inCanada , which we have integrated into our Outside theU.S. Segment. This acquisition supplements our existing businesses in this segment. 16 -------------------------------------------------------------------------------- Financial Overview We operate our business through three segments, U.S.Health and Human Services ,U.S. Federal Services and Outside theU.S. The results for each of these segments for the three months endedDecember 31, 2019 , compared to the comparative periods in fiscal year 2019, were affected by different factors. •OurU.S. Health & Human Services Segment reported organic revenue growth of 6.1% and operating profit margins of 18.6%. •OurU.S. Federal Services Segment reported growth from the acquisition of the citizen engagement centers business and organic growth both from the acquired business and the core MAXIMUS business. Much of the growth was driven by the Census Questionnaire Assistance contract. •Our Outside theU.S. Segment continues to be challenged by market conditions. 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) 2019 2018 Revenue$ 818,229 $ 664,619 Cost of revenue 642,779 505,354 Gross profit 175,450 159,265 Gross profit percentage 21.4 % 24.0 % Selling, general and administrative expenses 87,227 79,671
Selling, general and administrative expense as a percentage of revenue
10.7 % 12.0 %
Amortization of intangible assets 9,088 5,458
Operating income 79,135 74,136
Operating margin 9.7 % 11.2 %
Interest expense 484 625
Other income, net 719 2,045
Income before income taxes 79,370 75,556
Provision for income taxes 20,636 19,833
Effective income tax rate 26.0 % 26.2 %
Net income 58,734 55,723
Loss attributable to noncontrolling interests - (190)
Net income attributable to MAXIMUS $ 58,734 $ 55,913
Basic earnings per share $ 0.91 $ 0.86
Diluted earnings per share $ 0.91 $ 0.86 As our business segments have different factors driving revenue fluctuations and profitability, the sections that follow cover these segments in greater detail.
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Changes in revenue, cost of revenue and gross profit for the three months ended
Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change
Three months ended December
31, 2018 $ 664,619 $ 505,354 $ 159,265
Estimated pre-acquisition
results from citizen
engagement centers business 98,429 85,341 13,088
Pro forma results for the
three months ended December
31, 2018 763,048 590,695 172,353
Growth from citizen
engagement centers contracts 38,105 5.0 % 28,591 4.8 % 9,514 5.5 %
Organic growth from other
contracts 15,867 2.1 % 22,553 3.8 % (6,686) (3.9) %
Acquired growth 2,973 0.4 % 2,552 0.4 % 421 0.2 %
Currency effect compared to
the prior period (1,764) (0.2) % (1,612) (0.3) % (152) (0.1) %
Three months ended December
31, 2019 $ 818,229 7.2 % $ 642,779 8.8 % $ 175,450 1.8 %
Revenue and cost of revenue for the three months ended December 31, 2019 ,
increased compared to the same period in fiscal year 2019, principally driven by
the citizen engagement centers business acquisition in the U.S. Federal Services
Segment.
We acquired the citizen engagement centers business on November 16, 2018 . We
estimate that revenue and cost of revenue for the period from October 1, 2018 to
November 16, 2018 (the acquisition date) would have increased our results by
$98.4 million and $85.3 million , respectively. We have utilized pro forma
revenue, cost of revenue and gross profit in calculating the changes shown
above.
Organic revenue growth in the United States was partially offset by declines in
our Outside the U.S. Segment. The factors driving changes are discussed in more
detail below.
Our cost of revenue includes direct costs related to labor, subcontractor labor,
outside vendors, rent and other direct costs.
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 and rational basis.
Fluctuations in our SG&A are primarily 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.
Our SG&A expense has increased year-over-year due primarily to the acquisition
of the citizen engagement centers business, which has added an additional level
of infrastructure. The first three months of fiscal year 2019 included
approximately $2.7 million of one-time expenses directly related to the
transaction.
Amortization of intangible assets received a full charge from our acquisition of
the citizen engagement centers business during the three month period ended
December 31, 2019 . Additional charges from the acquisition of GT Hiring
Solutions also increased our amortization expense.
Our interest expense is primarily driven by borrowings from our credit facility.
In November 2018 , we borrowed $150.0 million to partially fund the acquisition
of the citizen engagement centers business; this borrowing was repaid in full
during fiscal year 2019.
Our effective tax rate for the three months ended December 31, 2019 , was 26.0%,
compared to 26.2% in the same period in fiscal year 2018.
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U.S. Health & Human Services Segment
Our U.S. Health and Human Services Segment provides a variety of business
process services such as program administration, appeals and assessments
services, and related consulting work for U.S. state and local government
programs. These services support a variety of programs including the Affordable
Care Act (ACA), Medicaid and the Children's Health Insurance Program (CHIP). We
also serve as administrators in state-based welfare-to-work and child support
programs.
Three Months Ended December 31,
(dollars in thousands) 2019 2018
Revenue $ 312,281 $ 294,213
Cost of revenue 222,691 206,182
Gross profit 89,590 88,031
Operating income 58,192 55,892
Gross profit percentage 28.7 % 29.9 %
Operating margin percentage 18.6 % 19.0 %
Our revenue and cost of revenue for the three month period ended December 31,
2019 , increased 6.1% and 8.0%, respectively, compared to the same period in
fiscal year 2019. All growth was organic. Revenue growth was driven by new
contracts and the expansion of existing contracts. Our gross profit margin was
tempered slightly by the delayed rollout of Medicaid managed care in North
Carolina . Our operating profit margin remained steady, helped, in part, by a
full quarter of benefit from the citizen engagement centers business in the U.S.
Federal Segment, which absorbs general and administrative expenses and reduces
allocated costs to this segment.
We continue to anticipate operating profit margins for this segment in the
17%-18% range during fiscal year 2020.
U.S. Federal Services Segment
Our U.S. Federal Services Segment provides business process solutions, including
program administration, appeals and assessment services as well as system and
software development and maintenance services for various U.S. federal civilian
programs. This segment also contains certain state-based assessments and appeals
work that is part of the segment's heritage within the Medicare Appeals
portfolio and continues to be managed within this segment.
Three Months Ended December 31,
(dollars in thousands) 2019 2018
Revenue $ 366,571 $ 216,987
Cost of revenue 295,750 169,002
Gross profit 70,821 47,985
Operating income 31,582 21,353
Gross profit percentage 19.3 % 22.1 %
Operating margin percentage 8.6 % 9.8 %
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Changes in revenue, cost of revenue and gross profit for the three months ended
Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change
Three months ended December
31, 2018 (1) $ 216,987 $ 169,002 $ 47,985
Estimated pre-acquisition
results from citizen
engagement centers business
(2) 98,429 85,341 13,088
Pro forma results for the
three months ended December
31, 2018 315,416 254,343 61,073
Growth from citizen
engagement centers
contracts (3) 38,105 12.1 % 28,591 11.2 % 9,514 15.6 %
Organic growth from other
contracts (4) 13,050 4.1 % 12,816 5.0 % 234 0.4 %
Three months ended December
31, 2019 $ 366,571 16.2 % $ 295,750 16.3 % $ 70,821 16.0 %
To show the changes between fiscal year 2019 and 2020, we have utilized the
following information.
1.These balances represent our results for the three months ended December 31,
2018 . These results include approximately six weeks of benefit from the citizen
engagement centers business, which was acquired on November 16, 2018 (the
acquisition date).
2.These balances represent an estimate of the results for the citizen engagement
centers business for the pre-acquisition period - the period from October 1,
2018 through to the acquisition date. This balance, combined with our prior year
results, provides pro forma results - an estimate of the results of this segment
if we had acquired the citizen engagement centers business on or before October
1, 2018 .
3.These balances represent the growth, on a pro forma basis, of the contracts
acquired with the citizen engagement centers business from the first quarter of
fiscal years 2019 to the first quarter of fiscal year 2020. The principal driver
of this growth was the Census Questionnaire Assistance (CQA) contract.
4.These balances represent the growth reported between the first quarters of
fiscal years 2019 and 2020 of existing contracts outside those acquired.
We continue to anticipate operating profit margins in the 9%-10% range for this
segment for fiscal year 2020. As previously disclosed, the CQA contract had $185
million of revenue in fiscal year 2019. The contract contributed approximately
$70 million of revenue in the first fiscal quarter of 2020. It is anticipated to
provide approximately $360 million of revenue during the current fiscal year and
less than $50 million in fiscal year 2021.
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Outside the United States Segment
Our Outside the U.S. Segment provides business process solutions for governments
and commercial clients outside the U.S. , including health and disability
assessments, program administration and case management for employment services
and other work-support programs. We deliver services in the United Kingdom ,
including the Health Assessment Advisory Service (HAAS), the Work & Health
Programme and Fair Start; Australia , including jobactive and the Disability
Employment Service; Canada , including Health Insurance British Columbia and the
Employment Program of British Columbia ; Saudi Arabia and Singapore .
Three Months Ended December 31,
(dollars in thousands) 2019 2018
Revenue $ 139,377 $ 153,419
Cost of revenue 124,338 130,170
Gross profit 15,039 23,249
Operating income/(loss) (1,014) 4,441
Gross profit percentage 10.8 % 15.2 %
Operating margin percentage (0.7) % 2.9 %
Changes in revenue, cost of revenue and gross profit for the three months ended
Revenue Cost of Revenue Gross Profit
(dollars in thousands) Dollars Percentage change Dollars Percentage change Dollars Percentage change
Three months ended
December 31, 2018 $ 153,419 $ 130,170 $ 23,249
Organic decline (15,251) (9.9) % (6,772) (5.2) % (8,479) (36.5) %
Acquired growth 2,973 1.9 % 2,552 2.0 % 421 1.8 %
Currency effect compared
to the prior period (1,764) (1.1) % (1,612) (1.2) % (152) (0.7) %
Three months ended
December 31, 2019 $ 139,377 (9.2) % $ 124,338 (4.5) % $ 15,039 (35.3) %
Our revenue for the three month period ended December 31, 2019 , decreased by
9.2% compared to the same period in fiscal year 2019. On a constant currency
basis revenue decreased by 8.0%. Cost of revenue decreased by 4.5% compared to
the same period in fiscal year 2019.
We continue to be challenged across the segment by low unemployment rates in the
geographies in which we operate. Low unemployment and strong economies result in
a smaller unemployed population to serve and a population which is typically
harder to place into employment. The bush fires in Australia negatively impacted
the first fiscal quarter and we anticipate further disruption for the remainder
of the fiscal year. The Australian government has put temporary measures in
place that exempt participants from certain activities until early March as the
region recovers from the natural disaster. In addition, due to the coronavirus
outbreak, the Australian Government has restricted travel between China and
Australia . This may affect our ability to place jobseekers in industries
dependent upon travel, such as tourism. We have taken steps to address our
revenue and cost base, designed to improve operating margins. The pace of
improvement may be negatively impacted by the factors discussed above.
Our acquired growth is from the acquisition of
The continued strength of the United States Dollar against the currencies in which we do business outside theU.S. has resulted in year-over-year declines in our revenue and costs. 21
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Approximately half of our revenue within the Outside theU.S. Segment is generated through contracts within theUnited Kingdom , most of which are with government agencies. As such, we are closely monitoring developments following the departure of theUnited Kingdom from theEuropean Union . We do not anticipate the withdrawal to have a material direct effect on our business in theUnited Kingdom due to the nature of our customer base and the absence of cross-border operations. However, the uncertainty over the process has affected us indirectly. We anticipate we will continue to be subject to political risks, as legislative priorities may change, the economic risks from the post-withdrawal environment, and we may, along with other businesses, experience difficulty in recruiting and retaining employees. 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, purchases of our own common stock and business combinations. 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 which allows us to borrow up to$400 million , subject to standard covenants. InNovember 2018 , we utilized$150 million of borrowing to acquire the citizen engagement centers business, with the balance from existing cash balances. We have since repaid this balance in full. Our international locations have access to borrowing facilities which they may use to cover short-term working capital needs or small acquisitions, such as our acquisition ofGT Hiring Solutions inAugust 2019 . We believe our cash flows from operations to be sufficient to meet our day-to-day requirements. Our priorities for cash utilization are to actively pursue new growth opportunities. We also maintain our quarterly dividend program and, where opportunities arise, make purchases of our own shares. We have no requirement to remit funds from our foreign locations back tothe United States . With the passage of the Tax Cuts and Jobs Act inthe United States , we are able to transfer a significant amount of funds from our foreign locations on a tax-free basis. We will continue to explore opportunities to bring back additional funds, taking into consideration the working capital requirements and relevant tax rules in each jurisdiction. When we are unable to remit funds back without incurring a penalty, we will consider these funds indefinitely reinvested until such time as these restrictions are changed. As a result, we do not recordU.S. deferred income taxes on any funds held in foreign jurisdictions. We have not attempted to calculate our potential liability from any transfer of these funds as any such transaction might include tax planning strategies which we have not fully explored. Accordingly, it is not possible to estimate the potential tax obligations if we were to remit all of our funds from
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