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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2014

 

Commission File Number: 1-12997

 

MAXIMUS, INC.

(Exact name of registrant as specified in its charter)

 

Virginia

 

54-1000588

(State or other jurisdiction of
 incorporation or organization)

 

(I.R.S. Employer
 Identification No.)

 

 

 

1891 Metro Center Drive
 Reston, Virginia

 

20190

(Address of principal executive offices)

 

(Zip Code)

 

(703) 251-8500

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of August 1, 2014, there were 66,993,971 shares of the registrant’s common stock (no par value) outstanding.

 

 

 



Table of Contents

 

MAXIMUS, Inc.

 

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2014

 

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months and Nine Months Ended June 30, 2014 and 2013 (unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended June 30, 2014 and 2013 (unaudited)

 

4

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2014 (unaudited) and September 30, 2013

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2014 and 2013 (unaudited)

 

6

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

13

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

18

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

18

 

 

 

 

 

PART II. OTHER INFORMATION

 

19

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

19

 

 

 

 

 

Item 1A.

 

Risk Factors

 

20

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

20

 

 

 

 

 

Item 6.

 

Exhibits

 

20

 

 

 

 

 

Signatures

 

21

 

 

 

Exhibit Index

 

22

 

1



Table of Contents

 

Throughout this Quarterly Report on Form 10-Q, the terms “Company”, “we,” “us,” “our” and “MAXIMUS” refer to MAXIMUS, Inc. and its subsidiaries unless this report otherwise indicates or the context otherwise requires.

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

Included in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about our company, the industry in which we operate and other matters, as well as management’s beliefs and assumptions and other statements that are not historical facts. Words such as “anticipate,” “believe,” “could,” “expect,” “estimate,” “intend,” “may,” “opportunity,” “plan,” “potential,” “project,” “should,” and “will” and similar expressions are intended to identify forward-looking statements and convey uncertainty of future events or outcomes. These statements are not guarantees and involve risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from such forward- looking statements due to a number of factors, including without limitation,

 

·                                  a failure on our part to comply with federal, state or local laws governing our business, which might result in us being subject to fines, penalties and other sanctions;

·                                  a failure to meet performance requirements in our contracts, which might lead to contract termination and liquidated damages;

·                                  the outcome of reviews or audits by federal, state and local governments, which might result in financial penalties and reduce our ability to respond to invitations for new work;

·                                  the effects of future legislative or government budgetary and spending changes;

·                                  other factors set forth in Exhibit 99.1 of our Annual Report on Form 10-K for the year ended September 30, 2013, filed with the Securities and Exchange Commission on November 19, 2013.

 

As a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. Additionally, we caution investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made. Except as otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether resulting from new information, future events or otherwise.

 

2



PART I.  FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements.

 

MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue

 

$

419,899

 

$

334,323

 

$

1,265,506

 

$

946,940

 

Cost of revenue

 

307,296

 

239,763

 

926,315

 

678,406

 

Gross profit

 

112,603

 

94,560

 

339,191

 

268,534

 

Selling, general and administrative expenses

 

57,345

 

49,181

 

165,077

 

138,096

 

Acquisition-related expenses

 

 

1,174

 

 

1,500

 

Legal and settlement expenses/(recoveries), net

 

 

(182

)

600

 

(202

)

Operating income from continuing operations

 

55,258

 

44,387

 

173,514

 

129,140

 

Interest and other income, net

 

9

 

701

 

913

 

2,444

 

Income from continuing operations before income taxes

 

55,267

 

45,088

 

174,427

 

131,584

 

Provision for income taxes

 

21,226

 

17,052

 

65,424

 

50,051

 

Income from continuing operations

 

34,041

 

28,036

 

109,003

 

81,533

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of income taxes:

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

(21

)

(3

)

(9

)

(597

)

Gain on disposal

 

118

 

67

 

210

 

169

 

Income (loss) from discontinued operations

 

97

 

64

 

201

 

(428

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

34,138

 

$

28,100

 

$

109,204

 

$

81,105

 

 

 

 

 

 

 

 

 

 

 

Basic earnings/(loss) per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.50

 

$

0.41

 

$

1.60

 

$

1.20

 

Income/(loss) from discontinued operations

 

 

 

0.01

 

(0.01

)

Basic earnings per share

 

$

0.50

 

$

0.41

 

$

1.61

 

$

1.19

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings/(loss) per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.49

 

$

0.40

 

$

1.57

 

$

1.17

 

Income/(loss) from discontinued operations

 

 

 

 

(0.01

)

Diluted earnings per share

 

$

0.49

 

$

0.40

 

$

1.57

 

$

1.16

 

 

 

 

 

 

 

 

 

 

 

Dividends paid per share

 

$

0.045

 

$

0.045

 

$

0.135

 

$

0.135

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

67,659

 

68,162

 

67,982

 

68,168

 

Diluted

 

69,031

 

69,867

 

69,369

 

69,864

 

 

See notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

 

 

Three months
Ended June 30,

 

Nine months
Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net income

 

$

34,138

 

$

28,100

 

$

109,204

 

$

81,105

 

Foreign currency translation adjustments

 

6,366

 

(18,454

)

4,919

 

(20,022

)

Comprehensive income

 

$

40,504

 

$

9,646

 

$

114,123

 

$

61,083

 

 

See notes to unaudited consolidated financial statements.

 

4



Table of Contents

 

MAXIMUS, Inc.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

 

 

 

June 30,
2014

 

September 30,
2013

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

182,942

 

$

125,617

 

Restricted cash

 

13,356

 

12,176

 

Accounts receivable — billed and billable, net of reserves of $3,831 and $3,828

 

274,544

 

272,636

 

Accounts receivable — unbilled

 

17,006

 

20,320

 

Prepaid income taxes

 

2,620

 

358

 

Deferred income taxes

 

27,773

 

26,443

 

Prepaid expenses and other current assets

 

36,159

 

32,049

 

Total current assets

 

554,400

 

489,599

 

 

 

 

 

 

 

Property and equipment, net

 

71,961

 

77,710

 

Capitalized software, net

 

41,482

 

40,456

 

Goodwill

 

175,471

 

171,867

 

Intangible assets, net

 

42,117

 

42,039

 

Deferred contract costs, net

 

13,750

 

14,318

 

Deferred income taxes

 

1,567

 

1,179

 

Deferred compensation plan assets

 

11,242

 

10,314

 

Other assets, net

 

10,090

 

10,496

 

Total assets

 

$

922,080

 

$

857,978

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

101,313

 

$

109,020

 

Accrued compensation and benefits

 

73,133

 

83,280

 

Deferred revenue

 

57,447

 

53,137

 

Current portion of long-term debt

 

164

 

170

 

Income taxes payable

 

17,743

 

8,327

 

Other liabilities

 

11,576

 

8,373

 

Total current liabilities

 

261,376

 

262,307

 

Deferred revenue, less current portion

 

30,056

 

32,953

 

Long-term debt

 

1,150

 

1,319

 

Deferred taxes

 

16,965

 

16,359

 

Deferred compensation plan liabilities, less current portion

 

17,422

 

13,953

 

Other liabilities

 

6,609

 

1,579

 

Total liabilities

 

333,578

 

328,470

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, no par value; 100,000 shares authorized; 67,366 and 68,525 shares issued and outstanding at June 30, 2014 and September 30, 2013, at stated amount, respectively

 

430,642

 

415,271

 

Accumulated other comprehensive income

 

12,906

 

7,987

 

Retained earnings

 

144,954

 

106,250

 

Total shareholders’ equity

 

588,502

 

529,508

 

Total liabilities and shareholders’ equity

 

$

922,080

 

$

857,978

 

 

See notes to unaudited consolidated financial statements.

 

5



Table of Contents

 

MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

 

 

Nine Months
Ended June 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

109,204

 

$

81,105

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

(Income) loss from discontinued operations

 

(201

)

428

 

Depreciation and amortization

 

36,297

 

25,763

 

Deferred income taxes

 

(577

)

3,030

 

Non-cash equity based compensation

 

12,809

 

10,708

 

 

 

 

 

 

 

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable — billed

 

(1,362

)

(50,072

)

Accounts receivable — unbilled

 

3,280

 

(5,921

)

Prepaid expenses and other current assets

 

(1,343

)

(2,522

)

Deferred contract costs

 

556

 

(2,451

)

Accounts payable and accrued liabilities

 

(5,337

)

16,480

 

Accrued compensation and benefits

 

2,510

 

6,941

 

Deferred revenue

 

88

 

(2,940

)

Income taxes

 

6,162

 

5,989

 

Other assets and liabilities

 

3,212

 

2,624

 

Cash provided by operating activities — continuing operations

 

165,298

 

89,162

 

Cash used in operating activities — discontinued operations

 

(148

)

(587

)

Cash provided by operating activities

 

165,150

 

88,575

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(18,389

)

(24,869

)

Capitalized software costs

 

(9,177

)

(13,652

)

Proceeds from settlement of final PSI price

 

 

3,380

 

Acquisition of business, net of cash acquired

 

(2,670

)

 

Proceeds from note receivable

 

350

 

285

 

Cash used in investing activities

 

(29,886

)

(34,856

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Repurchases of common stock

 

(59,354

)

(27,814

)

Employee tax withholding on restricted stock unit vesting

 

(14,681

)

(8,868

)

Tax benefit due to option exercises and restricted stock units vesting

 

2,925

 

4,680

 

Cash dividends paid

 

(9,181

)

(9,202

)

Stock option exercises

 

1,145

 

1,840

 

Issuance of long-term debt

 

15,000

 

 

Repayment of long-term debt

 

(15,122

)

(130

)

Cash used in financing activities

 

(79,268

)

(39,494

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

1,329

 

(15,626

)

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

57,325

 

(1,401

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

125,617

 

189,312

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

182,942

 

$

187,911

 

 

See notes to unaudited consolidated financial statements.

 

6



Table of Contents

 

MAXIMUS, Inc.

Notes to Unaudited Consolidated Financial Statements

For the Three and Nine Months Ended June 30, 2014 and 2013

 

1. Organization and basis of presentation

 

General

 

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. Accordingly, 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 only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and nine month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet at September 30, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements.

 

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, 2013 and 2012 and for each of the three years ended September 30, 2013, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2013 which was filed with the Securities and Exchange Commission on November 19, 2013. Certain comparative balances have been reclassified to conform to the current year presentation.

 

7



Table of Contents

 

2. Segment information

 

The following table provides certain financial information for each of the Company’s business segments (in thousands):

 

 

 

Three Months Ended June 30,

 

Nine Months Ended June 30,

 

 

 

2014

 

% (1)

 

2013

 

% (1)

 

2014

 

% (1)

 

2013

 

% (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Health Services

 

$

305,647

 

100

%

$

217,901

 

100

%

$

928,865

 

100

%

$

591,847

 

100

%

Human Services

 

114,252

 

100

%

116,422

 

100

%

336,641

 

100

%

355,093

 

100

%

Total

 

419,899

 

100

%

334,323

 

100

%

1,265,506

 

100

%

946,940

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Health services

 

79,679

 

26.1

%

62,868

 

28.9

%

241,558

 

26.0

%

162,778

 

27.5

%

Human Services

 

32,924

 

28.8

%

31,692

 

27.2

%

97,633

 

29.0

%

105,756

 

29.8

%

Total

 

112,603

 

26.8

%

94,560

 

28.3

%

339,191

 

26.8

%

268,534

 

28.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Health Services

 

37,430

 

12.2

%

28,507

 

13.1

%

108,980

 

11.7

%

78,882

 

13.3

%

Human Services

 

19,915

 

17.4

%

20,674

 

17.8

%

56,097

 

16.7

%

59,597

 

16.8

%

Corporate/Other

 

 

NM

 

 

NM

 

 

NM

 

(383

)

NM

 

Total

 

57,345

 

13.7

%

49,181

 

14.7

%

165,077

 

13.0

%

138,096

 

14.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Health services

 

42,249

 

13.8

%

34,361

 

15.8

%

132,578

 

14.3

%

83,896

 

14.2

%

Human Services

 

13,009

 

11.4

%

11,018

 

9.5

%

41,536

 

12.3

%

46,159

 

13.0

%

Corporate/Other

 

 

NM

 

 

NM

 

 

NM

 

383

 

NM

 

Subtotal:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Income

 

55,258

 

13.2

%

45,379

 

13.6

%

174,114

 

13.8

%

130,438

 

13.8

%

Acquisition-related expenses

 

 

NM

 

1,174

 

NM

 

 

NM

 

1,500

 

NM

 

Legal and settlement expenses/ (recoveries)

 

 

NM

 

(182

)

NM

 

600

 

NM

 

(202

)

NM

 

Total

 

$

55,258

 

13.2

%

$

44,387

 

13.3

%

$

173,514

 

13.7

%

$

129,140

 

13.6

%

 


(1)                                 Percentage of respective segment revenue. Percentages not considered meaningful are marked “NM”.

 

8



Table of Contents

 

3. Earnings Per Share

 

The following table sets forth the components of basic and diluted earnings (loss) per share (in thousands):

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

34,041

 

$

28,036

 

$

109,003

 

$

81,533

 

Income (loss) from discontinued operations

 

97

 

64

 

201

 

(428

)

Net income

 

$

34,138

 

$

28,100

 

$

109,204

 

$

81,105

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

67,659

 

68,162

 

67,982

 

68,168

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options and unvested restricted stock units

 

1,372

 

1,705

 

1,387

 

1,696

 

Denominator for diluted earnings (loss) per share

 

69,031

 

69,867

 

69,369

 

69,864

 

 

All outstanding stock awards were included in the computation in calculating the earnings per share for the three or nine months ended June 30, 2014 or 2013.

 

4. Supplemental disclosures

 

During the nine months ended June 30, 2014 and 2013, the Company made income tax payments of $57.4 million and $40.6 million, respectively.

 

At June 30, 2014, the Company held cash and cash equivalents of $182.9 million. Approximately 55% of these funds are in jurisdictions outside the United States and the Company does not intend at this time to transfer these funds to the United States.

 

5. Business combinations

 

Health Management Limited

 

On July 1, 2013 (the acquisition date), the Company acquired 100% of the share capital of Health Management Limited (HML) for total consideration of $77.9 million (£51.1 million). The consideration was comprised of $71.4 million (£46.9 million) in cash and 202,972 shares of MAXIMUS stock worth $6.4 million (£4.2 million).

 

HML provides independent health assessments within the United Kingdom. MAXIMUS acquired HML, among other reasons, to expand the Company’s independent medical assessment business and to establish a strong presence in the United Kingdom health services market. The acquired assets and business have been integrated into the Company’s Health Services Segment.

 

The Company allocated the acquisition price to the fair value of the assets and liabilities of HML at the acquisition date. The Company provided estimates of these balances at September 30, 2013 and has updated these estimates as more information became available. The Company has completed this exercise and no additional changes to the acquisition date balance sheet are expected. The assets and liabilities of HML recorded in the Company’s financial statements at the acquisition date are summarized below (in thousands):

 

 

 

Purchase Price Allocation

 

 

 

Updated through
September 30, 2013

 

Adjustments

 

Updated through
June 30, 2014

 

Cash consideration, net of cash acquired

 

$

71,435

 

$

 

$

71,435

 

Stock consideration

 

6,425

 

 

6,425

 

Purchase consideration, net of cash acquired

 

$

77,860

 

$

 

$

77,860

 

 

 

 

 

 

 

 

 

Accounts receivable and unbilled receivables

 

$

7,671

 

$

 

$

7,671

 

Other current assets

 

1,382

 

 

1,382

 

Property and equipment

 

2,752

 

 

2,752

 

Intangible assets

 

20,542

 

 

20,542

 

Total identifiable assets acquired

 

32,347

 

 

32,347

 

Accounts payable and other liabilities

 

6,228

 

 

6,228

 

Deferred revenue

 

1,149

 

 

1,149

 

Current income tax liability

 

612

 

144

 

756

 

Deferred tax liability

 

4,814

 

(113

)

4,701

 

Total liabilities assumed

 

12,803

 

31

 

12,834

 

Net identifiable assets acquired

 

19,544

 

(31

)

19,513

 

Goodwill

 

58,316

 

31

 

58,347

 

Net assets acquired

 

$

77,860

 

$

 

$

77,860

 

 

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The Company considers the goodwill to represent benefits that are expected to be realized as a result of the business combination, including, but not limited to, the assembled workforce and the benefit of the enhanced knowledge and capabilities of HML. Goodwill is not expected to be deductible for tax purposes.

 

The valuation of the intangible assets acquired is summarized below (in thousands).

 

 

 

Useful life

 

Fair value

 

Customer relationships

 

20 years

 

$

19,933

 

Technology-based intangible assets

 

2 years

 

609

 

Total intangible assets

 

 

 

$

20,542

 

 

The weighted average amortization period was 19.5 years.

 

Centacare

 

On January 31, 2014, the Company acquired certain businesses trading as Centacare for $2.7 million ($3.1 million Australian) in cash. The operations of these businesses are consistent with the services provided by MAXIMUS in Australia. The Company acquired these businesses in order to expand our operations in Australia.

 

Of the purchase price, MAXIMUS allocated $3.2 million to intangible assets, representing customer relationships, and $0.5 million to deferred revenue. The intangible assets will be amortized over the anticipated lives of the customer relationships, which are approximately four years.

 

The businesses acquired with Centacare were immediately integrated into the existing MAXIMUS business within our Human Services segment. The results of the acquired business would not be material for any periods shown.

 

6. Goodwill and intangible assets

 

The changes in goodwill for the nine months ended June 30, 2014 are as follows (in thousands):

 

 

 

Health Services

 

Human Services

 

Total

 

Balance as of September 30, 2013

 

$

125,096

 

$

46,771

 

$

171,867

 

Changes to allocation of HML purchase price

 

31

 

 

31

 

Foreign currency translation

 

3,213

 

360

 

3,573

 

Balance as of June 30, 2014

 

$

128,340

 

$

47,131

 

$

175,471

 

 

The following table sets forth the components of intangible assets (in thousands):

 

 

 

As of June 30, 2014

 

As of September 30, 2013

 

 

 

Cost

 

Accumulated
Amortization

 

Intangible
Assets, net

 

Cost

 

Accumulated
Amortization

 

Intangible
Assets, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer contracts and relationships

 

$

43,782

 

$

6,888

 

$

36,894

 

$

39,243

 

$

3,953

 

$

35,290

 

Technology based intangible assets

 

9,490

 

6,757

 

2,733

 

9,583

 

5,974

 

3,609

 

Trademarks and trade names

 

4,400

 

1,910

 

2,490

 

4,421

 

1,303

 

3,118

 

Non-compete arrangements

 

 

 

 

243

 

221

 

22

 

Total

 

$

57,672

 

$

15,555

 

$

42,117

 

$

53,490

 

$

11,451

 

$

42,039

 

 

The Company’s intangible assets have a weighted average remaining life of 11.9 years, comprising 13.1 years for customer contracts and relationships, 3.4 years for technology-based intangible assets and 3.2 years for the trademarks and trade names. Amortization expense for the nine months ended June 30, 2014 and 2013 was $4.4 million and $3.5 million, respectively. Estimated future amortization expense is as follows (in thousands):

 

Three months ended September 30, 2014

 

$

1,543

 

Year ended September 30, 2015

 

6,033

 

Year ended September 30, 2016

 

5,759

 

Year ended September 30, 2017

 

5,360

 

Year ended September 30, 2018

 

4,099

 

Year ended September 30, 2019

 

3,101

 

 

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7. Credit facilities

 

On March 15, 2013, the Company entered into an unsecured five-year revolving credit agreement (the “Credit Agreement”). The Credit Agreement amends and restates the Company’s existing revolving credit agreement entered into in January 2008. The Credit Agreement provides for a revolving line of credit up to $100 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 $30 million. The line of credit is available for general corporate purposes, including working capital, capital expenditures and acquisitions. The arrangement terminates on March 15, 2018, at which time all outstanding borrowings must be repaid.

 

At June 30, 2014, the Company’s only indebtedness under the Credit Agreement was four letters of credit totaling $6.7 million. Each of these letters of credit may be called by customers in the event that the Company defaults under the terms of a contract, the probability of which we believe is remote. In addition, two letters of credit totaling $3.0 million, secured with restricted cash balances, are held with another financial institution to cover similar obligations. During the nine month period ended June 30, 2014, the Company borrowed $15.0 million, which was repaid within the period.

 

The Credit Agreement requires the Company to comply with certain financial covenants and other covenants including a maximum total leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all covenants as of June 30, 2014. The obligations of the Company under the Credit Agreement are guaranteed by material domestic subsidiaries of the Company. The Credit Facility is currently unsecured. In the event that the Company’s total leverage ratio, as defined in the credit agreement, exceeds 2.5 to 1.0 or the Company incurs a certain level of indebtedness outside of the Credit Agreement, the Credit Agreement will become secured by the assets of the Company and certain of its subsidiaries. At June 30, 2014, our total leverage ratio was negligible.

 

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 the Company’s leverage and varies between 0.15% and 0.3%. 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 and the applicable percentages are based upon the Company’s leverage rate at the time of the borrowing.

 

In addition to this revolving credit facility, the Company has a loan agreement with the Atlantic Innovation Fund of Canada. This provided a loan of $1.8 million (Canadian), the proceeds of which were required to be used for specific technology-based research and development. The loan has no interest charge. At June 30, 2014, $1.3 million ($1.4 million Canadian) was outstanding under this agreement, which is repayable in 32 remaining quarterly installments.

 

Certain contracts require us to provide a surety bond as a guarantee of performance. At June 30, 2014, the Company had performance bond commitments totaling $39.3 million. These 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.

 

8. Commitments and contingencies

 

The Company is involved in various legal proceedings, including the matters described below, in the ordinary course of its business.

 

In March 2009, a state Medicaid agency asserted a claim against MAXIMUS, related to a discontinued business line, in the amount of $2.3 million in connection with a contract MAXIMUS had through February 1, 2009 to provide Medicaid administrative claiming services to school districts in the state. MAXIMUS entered into separate agreements with the school districts under which MAXIMUS helped the districts prepare and submit claims to the state Medicaid agency which, in turn, submitted claims for reimbursement to the United States Federal Government. No legal action has been initiated. The state has asserted that its agreement with MAXIMUS requires the Company to reimburse the state for the amounts owed to the Federal Government. However, the Company’s agreements with the school districts require them to reimburse MAXIMUS for such payments and therefore MAXIMUS believes the school districts are responsible for any amounts disallowed by the state Medicaid agency or the Federal Government. The Company believes its exposure in this matter is limited to its fees associated with this work and that the school districts will be responsible for the remainder. MAXIMUS has exited the federal health care claiming business and no longer provides the services at issue in this matter.

 

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Table of Contents

 

In 2008, MAXIMUS sold the SchoolMAX student information system business line as part of the divestiture of the MAXIMUS Education Systems division. In 2012, a school district (“District”) which was a SchoolMAX client filed a formal arbitration notice alleging that MAXIMUS and the buyer failed to (i) use best practices in developing the software and (ii) deliver and test product releases as required by the contract. The District contended that those failures resulted in damages of at least $10 million. In December 2012, the arbitration panel denied the District’s claims in their entirety. Costs related to the arbitration proceeding have been included within discontinued operations. The District subsequently filed a motion to vacate the decision of the arbitration panel which was denied by the court in July 2013. The District has appealed that ruling. Separately, in late 2012, the District claimed that MAXIMUS had defrauded the District in 2007 or 2008 by misrepresenting its intentions regarding the sale of the Education Systems division. That allegation was not part of the arbitration, and no formal claim or lawsuit has been filed. The company believes it has a number of defenses to that allegation and would contest it vigorously if it were formally asserted.

 

In January 2014, MAXIMUS was named a defendant in Norton et al. v. MAXIMUS in the U.S. District Court for Idaho. The plaintiffs in this purported class action are current and former trainers and supervisors at the MAXIMUS federal health care projects in Boise, Idaho and Brownsville, Texas. They allege the Company willfully misclassified them as exempt employees under the Fair Labor Standards Act and failed to pay them overtime, and they seek to establish a nationwide class covering the company’s federal health care operations. The plaintiffs allege compensatory and punitive damages of at least $5.0 million. MAXIMUS has since reclassified the trainers as non-exempt employees and is seeking an expedited resolution of their wage claims. MAXIMUS denies liability as to the supervisors and will contest the matter vigorously. As of June 30, 2014, the Company has reserved $0.6 million to cover the estimated legal costs of defending this lawsuit, in addition to estimated liabilities to employees.

 

9. Stock repurchase program

 

Under a resolution adopted in November 2011, the Board of Directors authorized the repurchase, at management’s discretion, of up to an aggregate of $125 million of the Company’s common stock. Under a resolution adopted in June 2014, the Company increased this balance by $150 million, from $43.7 million to $193.7 million. The resolutions also authorized the use of option exercise proceeds for the repurchase of the Company’s common stock. During the nine months ended June 30, 2014 and 2013, the Company repurchased 1,406,667 and 828,898 common shares at a cost of $60.9 million and $27.0 million, respectively. The amount available for future repurchases was $187.3 million at June 30, 2014.

 

The Company has acquired an additional 403,433 common shares at a cost of $17.0 million between July 1, 2014 and August 8, 2014.

 

10. Revenue recognition

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. This new standard will change the manner in which the Company evaluates revenue recognition for all contracts with customers, although the effect of the changes on revenue recognition will vary from contract to contract. The Company will adopt this standard during its 2018 fiscal year. At present, the Company is continuing to evaluate the effect of this standard.

 

11. Dividend

 

On July 3, 2014, the Company’s Board of Directors declared a quarterly cash dividend of $0.045 for each share of the Company’s common stock outstanding. The dividend is payable on August 29, 2014 to shareholders of record on August 15, 2014.

 

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Table of Contents

 

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

 

The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, our Consolidated Financial Statements and related Notes included both herein and in our Annual Report on Form 10-K for the year ended September 30, 2013, filed with the Securities and Exchange Commission on November 19, 2013.

 

Business Overview

 

We provide business process services (BPS) to government health and human services agencies under our mission of Helping Government Serve the People. ® Our business is focused almost exclusively on administering government-sponsored programs, such as Medicaid, CHIP, health care reform, welfare-to-work, Medicare, child support and other government programs. We are one of the largest pure-play health and human services administrative providers to governments in the United States, Australia, Canada, the United Kingdom and Saudi Arabia. We use our deep domain expertise, repeatable processes and technology solutions to help government agencies run efficient, cost-effective programs and to improve program accountability and outcomes, while enhancing the quality of services provided to program beneficiaries.

 

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

 

During fiscal year 2012, the Company acquired Policy Studies, Inc. (PSI). This acquisition strengthened MAXIMUS’ leadership in the administration of public health and human services programs within the United States. During fiscal year 2013, the Company acquired Health Management Limited (HML), a provider of independent health assessments in the United Kingdom. We believe the acquisition of these businesses has provided MAXIMUS with enhanced expertise and knowledge base to enable us to compete for work both domestically and internationally.

 

Financial overview

 

The Company experienced significant growth in both revenue and operating profit for the three and nine month periods ended June 30, 2014 compared to the same periods in fiscal year 2013. The principal driver of this growth was contracts in our Health Services segment related to the Affordable Care Act (ACA). In serving our clients, we delivered high-quality customer contact center operations and comprehensive contingency plans where technology issues in the health insurance exchanges were causing delays. The Company was also effectively able to address spikes in call volumes where consumers were unable to enroll in health plans using health insurance exchange websites.

 

The Company continues to see opportunities to expand further our business related to the ACA and Medicaid-related initiatives. MAXIMUS is currently providing customer contact centers for five states, the District of Columbia and the United States Federal Government. At present, 36 states use the federal marketplace rather than a state-based health insurance exchange and the Company anticipates that some of these states may migrate to their own exchanges over the next several years. If this does occur, there will be opportunities for experienced service providers such as MAXIMUS to operate these exchanges. In international markets, we continue to see demand as governments rationalize their benefits programs and increase their propensity to outsource. We believe that this will provide opportunities to providers like MAXIMUS in both our existing and new markets.

 

The Company reported strong operating cash flows in the nine month period ended June 30, 2014 driven by increased business. The Company continued to invest funds in working capital as well as in repurchases of common stock. At June 30, 2014, the Company held $182.9 million in unrestricted cash and cash equivalents, of which approximately 55% is held in foreign locations, and minimal debt.

 

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Table of Contents

 

Results of Operations

 

Consolidated

 

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

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

(dollars in thousands, except per share data)

 

2014

 

2013

 

2014

 

2013

 

Revenue

 

$

419,899

 

$

334,323

 

$

1,265,506

 

$

946,940

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

$

112,603

 

$

94,560

 

$

339,191

 

$

268,534

 

Gross profit percentage

 

26.8

%

28.3

%

26.8

%

28.4

%

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

$

57,345

 

$

49,181

 

$

165,077

 

$

138,096

 

Selling, general and administrative expense as a percentage of revenue

 

13.7

%

14.7

%

13.0

%

14.6

%

 

 

 

 

 

 

 

 

 

 

Acquisition-related expenses

 

 

1,174

 

 

1,500

 

Legal and settlement expenses/ (recoveries)

 

 

(182

)

600

 

(202

)

 

 

 

 

 

 

 

 

 

 

Operating income from continuing operations

 

$

55,258

 

$

44,387

 

$

173,514

 

$

129,140

 

Operating margin from continuing operations percentage

 

13.2

%

13.3

%

13.7

%

13.6

%

 

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

9

 

701

 

913

 

2,444

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

55,267

 

45,088

 

174,427

 

131,584

 

Provision for income taxes

 

21,226

 

17,052

 

65,424

 

50,051

 

Tax rate

 

38.4

%

37.8

%

37.5

%

38.0

%

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of income taxes

 

$

34,041

 

$

28,036

 

$

109,003

 

$

81,533

 

Income (loss) from discontinued operations, net of income taxes

 

$

97

 

$

64

 

$

201

 

$

(428

)

Net income

 

$

34,138

 

$

28,100

 

$

109,204

 

$

81,105

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.50

 

$

0.41

 

$

1.60

 

$

1.20

 

Income (loss) from discontinued operations

 

 

 

0.01

 

(0.01

)

Basic earnings per share

 

$

0.50

 

$

0.41

 

$

1.61

 

$

1.19

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.49

 

$

0.40

 

$

1.57

 

$

1.17

 

Income (loss) from discontinued operations

 

 

 

 

(0.01

)

Diluted earnings per share

 

$

0.49

 

$

0.40

 

$

1.57

 

$

1.16

 

 

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.

 

Revenue increased 26% and 34% for the three and nine month periods ended June 30, 2014, compared to their respective comparative periods. The acquisition of HML resulted in growth of 4.9% for the three and nine month periods respectively, with the balance driven by organic growth. This growth was driven by the Health Services segment, which received the benefit of significant new work and expansion of existing work related to the Affordable Care Act.

 

Gross profit margins have declined in fiscal year 2014 compared to the prior year. These declines are principally driven by our Health Services segment.

 

Selling, general and administrative expense (SG&A) consists of costs related to general management, marketing and administration. These costs include salaries, benefits, bid and proposal efforts, travel, recruiting, continuing education, employee training, non-chargeable labor costs, facilities costs, printing, reproduction, communications, equipment depreciation, intangible amortization and legal expenses incurred in the ordinary course of business. SG&A as a percentage of revenue has declined in the quarter ended June 30, 2014, compared with the same period in the prior year. This decline was driven by the significant increase in revenue in fiscal year 2014.

 

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Table of Contents

 

Operating income for the three and nine month periods ended June 30, 2014 increased 24% to $55.3 million and 34% to $173.5 million, compared with the comparative periods in fiscal year 2013. Operating profit margins remain broadly comparative year-over-year.

 

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

 

The provision for income taxes for the nine months ended June 30, 2014 was $65.4 million, reflecting an effective tax rate of 37.5%. The Company received the benefit of tax credits of $0.7 million during the current fiscal year.

 

Health Services

 

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

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

(dollars in thousands)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

305,647

 

$

217,901

 

$

928,865

 

$

591,847

 

Gross profit

 

79,679

 

62,868

 

241,558

 

162,778

 

Operating income

 

42,249

 

34,361

 

132,578

 

83,896

 

 

 

 

 

 

 

 

 

 

 

Gross profit percentage

 

26.1

%

28.9

%

26.0

%

27.5

%

Operating margin percentage

 

13.8

%

15.8

%

14.3

%

14.2

%

 

Revenue increased by 40% and 57% for the three and nine month periods ended June 30, 2014, compared with the comparative periods in fiscal year 2013. HML contributed 7.5% and 7.9% to growth for the three and nine month periods, respectively, with most of the balance driven by new work and expansion of existing contracts related to the implementation and support of the ACA.

 

Gross profit margins have declined for both the three month and nine month periods ended June 30, 2014. This has been driven by lower margins in our new health care contracts with the Federal Government, which are reimbursed on a cost-plus basis and therefore typically receive lower margins. During the latter half of fiscal year 2013 and the first half of the current year, the Company received the benefit of accretive growth in our appeals and assessments businesses. This growth offset the declines in gross profit for the nine months ended June 30, 2014 compared to the prior year.

 

Operating profit margins for fiscal year 2014 reflect the effects of the contracts noted above and additional charges related to HML’s intangible asset amortization, offset by the effect of the Company’s economies of scale as the growth in the business exceeds the increase in the Company’s SG&A.

 

We anticipate that increased demand for ACA and Medicaid-related services will continue throughout fiscal year 2014 with additional supplemental work to support both programs. Although most of this work is recurring, some services will not be repeated in fiscal year 2015. We also anticipate that volumes in our ACA-related work will be lower next year. We anticipate that volumes within our appeals and assessments businesses will decline due to changes in the Recovery Audit Contractor (RAC) program.

 

During the fourth quarter of fiscal year 2014, the Company will commence operations in two new large programs with the United States Department of Education and the United Kingdom Department of Work and Pensions. These contracts are anticipated to record losses over the next few quarters as the level of work expands. The Company is also anticipating contract amendments on other projects in the fourth quarter of fiscal year 2014 which are expected to offset the losses in that quarter.

 

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Table of Contents

 

Human Services

 

The Human Services Segment includes a variety of business process services, case management, job training and support services for programs such as welfare-to-work programs, child support, K-12 special education and other specialized consulting services.

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

(dollars in thousands)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

114,252

 

$

116,422

 

$

336,641

 

$

355,093

 

Gross profit

 

32,924

 

31,692

 

97,633

 

105,756

 

Operating income

 

13,009

 

11,018

 

41,536

 

46,159

 

 

 

 

 

 

 

 

 

 

 

Gross profit percentage

 

28.8

%

27.2

%

29.0

%

29.8

%

Operating margin percentage

 

11.4

%

9.5

%

12.3

%

13.0

%

 

Revenues decreased 1.9% three month period ended June 30, 2014, compared to the comparative period in fiscal 2013. This decline was principally driven by declines in the value of the Australian Dollar compared to the United States Dollar. For the nine months ended June 30, 2014, revenue declined 5.2% compared to the same period in fiscal year 2013. The prior year included a one-time benefit from a contract termination of $16.0 million of revenue and $10.9 million of profit.

 

Gross profit and operating margins have improved for the three months ended June 30, 2014, principally driven by the performance of our short-term consulting contracts. Gross and operating profit margins for the nine months ended June 30, 2013 received the benefit of a contract termination, resulting in a one-time benefit to these results. Excluding the effects of this termination, gross profit and operating profit margins would have grown, driven by the Company’s international businesses and short-term consulting projects.

 

In future quarters, we anticipate growth from the expansion of our contracts in Australia, where MAXIMUS has been awarded a greater allocation of work based upon past performance. This growth will initially temper margins as the work commences in the final quarter of fiscal year 2014.

 

Discontinued operations

 

The Company continues to record small gains on the sale of Unison MAXIMUS, Inc. (“Unison”), a business that was sold in May 2008. The consideration for the sale included a promissory note that is fully reserved. Small payments continue to be received on this note but owing to uncertainties over the collectability of the full balance, the Company has only recorded a gain on sale where recovery is considered assured, which is typically when cash payments are received. The Company has recorded gains of $0.2 million in the nine month periods ended June 30, 2014 and 2013.

 

Liquidity and Capital Resources

 

At June 30, 2014, the Company held $182.9 million in cash and cash equivalents. Approximately 55% of these funds are held in foreign locations in which we do business, principally Australia, Canada and the United Kingdom. If we were to transfer these funds to the United States, the Company would be required to accrue and pay additional taxes. We do not intend to repatriate these funds and, accordingly, we have not attempted to quantify the charges which might arise if we were to make this transaction. The charges would vary based upon tax legislation in the United States and the other foreign jurisdictions, as well as the manner and timing in which MAXIMUS would make these transactions.

 

Accordingly, domestic cash flows are required to cover dividend payments and share repurchases. In addition, the acquisition of PSI in 2012 was funded with domestic cash and we would expect any other acquisitions taking place in the United States would be funded in a similar manner. Payments from our customers are our principal source of cash inflows, which are affected by billing schedules, payment terms and delays in payments. Delays in payments most often occur at the beginning of contractual arrangements or may be driven by difficulties with state and local budgets. Although the Company has experienced such delays from customers, most funds are ultimately recovered in full. The Company may also experience cash outflows from contracts at their inception, as start-up costs are incurred prior to revenues being billable, and, where contracts are performance-based, a project may experience initial cash outflows until outcome-based payments are received. The Company utilizes a credit facility with up to $100 million of borrowing capacity. During the nine month period ended June 30, 2014, the Company borrowed $15 million to cover short-term cash requirements. This balance was repaid before March 31, 2014. No borrowings were outstanding at June 30, 2014.

 

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

 

At June 30, 2014, the Company was in compliance with all debt covenants.

 

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Table of Contents

 

Cash Flows

 

 

 

Nine Months Ended
June 30,

 

(dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

Operating activities — continuing operations

 

$

165,298

 

$

89,162

 

Operating activities — discontinued operations

 

(148

)

(587

)

Investing activities — continuing operations

 

(29,886

)

(34,856

)

Financing activities — continuing operations

 

(79,268

)

(39,494

)

Effect of exchange rate changes on cash and cash equivalents

 

1,329

 

(15,626

)

Net increase (decrease) in cash and cash equivalents

 

$

57,325

 

$

(1,401

)

 

Cash provided by operating activities from continuing operations for the nine months ended June 30, 2014 was $165.2 million, compared with $89.2 million in the same period in fiscal year 2013. Operating cash inflows have increased due to the Company’s increased business. In addition, as a significant number of new contracts commenced in the latter half of fiscal year 2013, there were administrative delays in payments from our clients. Many of these issues have been resolved in fiscal year 2014 and this has resulted in significant cash receipts in excess of revenues. However, owing to the growth of the business as well as the anticipated timing of cash receipts, we are anticipating that the Company’s accounts receivable balance will grow during the fourth fiscal quarter of 2014.

 

Cash used in investing activities from continuing operations for the nine months ended June 30, 2014 was $29.9 million, compared to $34.9 million for the same period in fiscal year 2013. Investment in property and equipment and capitalized software has declined by approximately $11.0 million year-over-year, reflecting the significant investment which occurred in fiscal year 2013 to address many project start-ups in fiscal year 2014. This decline was offset by a payment of $2.7 million in fiscal year 2014 related to the Company’s acquisition of Centacare’s business and the receipt of $3.4 million in fiscal year 2013 related to the final settlement of the acquisition price of PSI.

 

Cash used in financing activities from continuing operations for the nine months ended June 30, 2014 was $79.3 million, compared to $39.5 million for the same period in fiscal year 2013. The Company has continued to repurchase common stock in fiscal year 2014, using $59.4 million compared with $27.8 million in fiscal year 2013.

 

The Company’s cash balance increased by $1.3 million in the nine month period ended June 30, 2014 from foreign exchange rate fluctuations. The principal driver of this change was the strengthening of the British Pound 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 flow 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)

 

2014

 

2013

 

 

 

 

 

 

 

Cash provided by operating activities — continuing operations

 

$

165,298

 

$

89,162

 

Purchases of property and equipment

 

(18,389

)

(24,869

)

Capitalized software costs

 

(9,177

)

(13,652

)

Free cash flow from continuing operations

 

$

137,732

 

$

50,641

 

 

Repurchases of the Company’s common stock

 

Under a resolution adopted in November 2011, the Board of Directors authorized the repurchase, at management’s discretion, of up to an aggregate of $125 million of the Company’s common stock. Under a resolution adopted in June 2014, the Company increased this balance by $150 million. The resolutions also authorized the use of option exercise proceeds for the repurchase of the Company’s common stock. During the nine months ended June 30, 2014 and 2013, the Company repurchased 1,406,667 and 828,898 common shares at a cost of $60.9 million and $27.0 million, respectively. The amount available for future repurchases was $187.3 million at June 30, 2014.

 

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Table of Contents

 

Letters of Credit and Performance Bonds

 

Certain contracts require us to provide a letter of credit or a surety bond as a guarantee of performance. At June 30, 2014, the Company had letters of credit totaling $9.7 million and performance bond commitments totaling $39.3 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.

 

Dividend

 

On July 3, 2014, the Company’s Board of Directors declared a quarterly cash dividend of $0.045 for each share of the Company’s common stock outstanding. The dividend is payable on August 29, 2014 to shareholders of record on August 15, 2014.

 

Critical Accounting Policies and Estimates

 

During the three and nine months ended June 30, 2014, 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, 2013.

 

Item 3.                        Quantitative and Qualitative Disclosures about Market Risk.

 

There have been no material changes in the information presented in Item 7A of our Annual Report on Form 10-K for the year ended September 30, 2013.

 

Item 4.                        Controls and Procedures.

 

(a)                                 Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

(b)                                 Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

 

PART II.  OTHER INFORMATION

 

ITEM 1.                        Legal Proceedings.

 

The Company is involved in various legal proceedings, including the matters described below, in the ordinary course of its business.

 

In March 2009, a state Medicaid agency asserted a claim against MAXIMUS, related to a discontinued business line, in the amount of $2.3 million in connection with a contract MAXIMUS had through February 1, 2009 to provide Medicaid administrative claiming services to school districts in the state. MAXIMUS entered into separate agreements with the school districts under which MAXIMUS helped the districts prepare and submit claims to the state Medicaid agency which, in turn, submitted claims for reimbursement to the United States Federal Government. No legal action has been initiated. The state has asserted that its agreement with MAXIMUS requires the Company to reimburse the state for the amounts owed to the Federal Government. However, the Company’s agreements with the school districts require them to reimburse MAXIMUS for such payments and therefore MAXIMUS believes the school districts are responsible for any amounts disallowed by the state Medicaid agency or the Federal Government. The Company believes its exposure in this matter is limited to its fees associated with this work and that the school districts will be responsible for the remainder. MAXIMUS has exited the federal health care claiming business and no longer provides the services at issue in this matter.

 

In 2008, MAXIMUS sold the SchoolMAX student information system business line as part of the divestiture of the MAXIMUS Education Systems division. In 2012, a school district (“District”) which was a SchoolMAX client filed a formal arbitration notice alleging that MAXIMUS and the buyer failed to (i) use best practices in developing the software and (ii) deliver and test product releases as required by the contract. The District contended that those failures resulted in damages of at least $10 million. In December 2012, the arbitration panel denied the District’s claims in their entirety. Costs related to the arbitration proceeding have been included within discontinued operations. The District subsequently filed a motion to vacate the decision of the arbitration panel which was denied by the court in July 2013. The District has appealed that ruling. Separately, in late 2012, the District claimed that MAXIMUS had defrauded the District in 2007 or 2008 by misrepresenting its intentions regarding the sale of the Education Systems division. That allegation was not part of the arbitration, and no formal claim or lawsuit has been filed. The company believes it has a number of defenses to that allegation and would contest it vigorously if it were formally asserted.

 

In January 2014, MAXIMUS was named a defendant in Norton et al. v. MAXIMUS in the U.S. District Court for Idaho. The plaintiffs in this purported class action are current and former trainers and supervisors at the MAXIMUS federal health care projects in Boise, Idaho and Brownsville, Texas. They allege the Company willfully misclassified them as exempt employees under the Fair Labor Standards Act and failed to pay them overtime, and they seek to establish a nationwide class covering the company’s federal health care operations. The plaintiffs allege compensatory and punitive damages of at least $5.0 million. MAXIMUS has since reclassified the trainers as non-exempt employees and is seeking an expedited resolution of their wage claims. MAXIMUS denies liability as to the supervisors and will contest the matter vigorously. As of June 30, 2014, the Company has reserved $0.6 million to cover the estimated legal costs of defending this lawsuit, in addition to estimated liabilities to employees.

 

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Table of Contents

 

Item 1A.               Risk Factors.

 

In connection with information set forth in this Form 10-Q, the factors discussed under “Risk Factors” in our Form 10-K for fiscal year ended September 30, 2013 should be considered. The risks included in the Form 10-K could materially and adversely affect our business, financial condition and results of operations. There have been no material changes to the factors discussed in our Form 10-K.

 

Item 2.                        Unregistered Sales of Equity Securities and Use of Proceeds.

 

(c) The following table sets forth the information required regarding repurchases of common stock that we made during the three months ended June 30, 2014:

 

Period

 

Total
Number of
Shares
Purchased

 

Average
Price Paid
per Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans (1)

 

Approximate Dollar
Value of Shares that
May Yet Be
Purchased
Under the Plan
(in thousands)

 

Apr. 1, 2014 — Apr. 30, 2014

 

217,900

 

$

42.49

 

217,900

 

$

53,080

 

 

 

 

 

 

 

 

 

 

 

May 1, 2014 — May 31, 2014

 

68,929

 

42.07

 

68,929

 

$

50,398

 

 

 

 

 

 

 

 

 

 

 

Jun. 1, 2014 — Jun. 30, 2014

 

312,700

 

42.49

 

312,700

 

$

187,328

 

 

 

 

 

 

 

 

 

 

 

Total

 

599,529

 

$

42.44

 

599,529

 

 

 

 


(1)        Under a resolution adopted and publicly announced in November 2011, the Board of Directors had authorized the repurchase, at management’s discretion, of up to an aggregate of $125 million of the Company’s common stock. Under a resolution adopted and publicly announced in June 2014, the Board of Directors authorized the repurchase of an additional $150 million of the Company’s common stock. Both resolutions also authorized the use of option exercise proceeds for the repurchase of the Company’s common stock.

 

Item 6.                        Exhibits.

 

The Exhibits filed as part of this Quarterly Report on Form 10-Q are listed on the Exhibit Index immediately following the Signatures. The Exhibit Index is incorporated herein by reference.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

MAXIMUS, INC.

 

 

 

Date: August 8, 2014

By:

/s/ Richard J. Nadeau

 

 

Richard J. Nadeau

 

 

Chief Financial Officer

 

 

(On behalf of the registrant and as Principal Financial and Accounting Officer)

 

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Table of Contents

 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

31.1

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Section 906 Principal Executive Officer Certification.

 

 

 

32.2

 

Section 906 Principal Financial Officer Certification.

 

 

 

101

 

The following materials from the MAXIMUS, Inc. Quarterly Report on Form 10-Q for the year ended June 30, 2014 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements. Filed electronically herewith.

 


* Denotes management contract or compensation plan.

 

22