MAXIMUS

11419 Sunset Hills Road

Reston VA 20190

 

July 29, 2010

 

United States Securities and Exchange Commission

Division of Corporate Finance — Mail Stop 3010

Washington DC 20549

 

Dear Ms. Monick,

 

In response to a telephone call from Howard Efron, we have been asked to provide further examples of analysts’ reports from fiscal year 2008, focusing on the unusual and infrequent events which occurred in that year and the charge of $2.2 million disclosed and recorded in the first quarter of that year.

 

In addition, we acknowledge that:

 

·                  The Company is responsible for the adequacy and accuracy of the disclosure in the filing;

·                  Staff comments or changes to disclosure in response to staff comments do not foreclose the Securities and Exchange Commission from taking any action with respect to the filing;

·                  The Company may not assert staff comments as a defense in any proceeding initiated by the Securities and Exchange Commission or any person under the federal securities laws of the United States.

 

There were no significant, unusual events during the first quarter of fiscal year 2008.

 

However, during the quarter, the Company did record a pre-tax charge of $2.2 million ($1.3 million after tax) reflecting the correction of an understatement of stock compensation expense in 2006 and 2007.  As previously noted in our letter of June 18, 2010, this item was mentioned in our earnings call and was the subject of questions at the time.

 

Following the call, reports were prepared by a number of analysts, including the following:

 

·                  CJS Securities, whose report is included in Appendix 1.  This report mentions the $2.2 million charge on page 1, “normalizing” EPS for the effect of the charge.  In addition, there is no evidence that CJS Securities considered the charge so significant that it affected their understanding of the Company’s results in any of the years between 2006 and 2008.

 

1

 

·                  Jefferies & Co (Appendix 2).  This report mentions the charge on page 1 and summarizes it (along with a temporary increase in tax rates) as “transitory”.  The charge is excluded in preparing a pro forma calculation of EPS.

 

·                  UBS and GARP Research & Securities published reports, but did not mention the charge.  The GARP report is included at Appendix 3.

 

The Company recorded some legal expenses in the second and third quarter and a gain on sale of a building in the third quarter.  However, the most significant unusual events occurred in the fourth quarter, where the Company recorded a $7.5 million pre-tax ($4.6 million after-tax) goodwill impairment charge and a $37.5 million pre-tax ($23.2 million after-tax) legal and settlement charge related to the settlement with Accenture over the Texas subcontract.

 

At the time of the Company’s initial earnings call on November 13, 2008, the details of the legal settlement were not known.  However, all analysts’ reports focused either on EBITDA (excluding the impairment charge) or “pro forma” results with the impairment charge reversed out.  We believe this is significant evidence that the analysts are focused on adjusted income.  For example, in Appendix 4 we have included the report of Stifel Nicolaus.  We note that:

 

·                  The report acknowledges the goodwill impairment charge on page 2;

 

·                  The report prepares an analysis of fourth quarter EBIT margin, which excludes goodwill impairment and legal expenses.

 

Following settlement of the Accenture matter, Stifel Nicolaus released a follow-up note on December 15 ,2008, included as Appendix 5.  This note focuses on the legal and settlement charge, in itself a reflection of the nature of this charge to the analyst community.  As well as analyses similar to those performed in the previous note, this report also includes a section called “FY08 EPS Restated From Prior Periods” which mentions pro forma EPS of $0.71 for the quarter and $2.83 for the fiscal year.  These pro forma numbers are consistent with those used by the Company in its press release of December 12, 2008 and include adjustments for legal and settlement expense, goodwill impairment and the sale of the building.

 

It remains our opinion that the error in stock compensation expense is immaterial to the Company both in the aggregate and within each year affected.  This is based upon the magnitude of the adjustment, the nature of the charge and the comprehensive disclosure of the correction by management in the Company’s Form 10-Q in the first quarter of 2008.  We feel that the review of the analyst reports in 2008 confirms this view as:

 

·                  The focus of the analysts appears to be on an earnings figure adjusted for unusual events, such as the legal and settlement charge or the goodwill impairment.  As a consequence, any adjustments must be viewed in the context of a net income based upon a larger earnings figure than that recorded under GAAP;

 

2

 

·                  Unlike the goodwill impairment or legal and settlement expense, which are greater in scale and significance to the Company, analysts did not place a significant amount of interest in the stock-compensation correction, with some analysts omitting mention of it entirely.

·                  We are not aware of any shareholder viewing the correction of the error as a materially misleading adjustment, notwithstanding the disclosure of the adjustment in the financial statements, earnings call and certain of the analyst reports.

 

Please do not hesitate to contact us if you need further information or clarification.

 

Sincerely

 

 

/s/ David N. Walker
David N. Walker
Chief Financial Officer

 

3

 

Appendix 1

 

CJS SECURITIES

 

50 MAIN ST
WHITE PLAINS
NY 10606

 

Telephone

(914) 287-7600

 

MAXIMUS		MARKET OUTPERFORM		FEBRUARY 7, 2008
(MMS-$39.91:NYSE)				P-TARGET:$49

 

COMPANY UPDATE

 

·                  GOOD START TO THE YEAR,  EPS EX-CHARGE $0.07 BETTER THAN EXPECTED

·                  STRONG MARGINS IN OPERATIONS SEG. MORE THAN OFFSET WEAK SYSTEMS

·                  ECONOMIC DOWNTURN NOT EXPECTED TO IMPACT CO. AS EVIDENCED BY GROWING BACKLOG

·                 EPS GUIDANCE RAISED TO ACCOUNT FOR BUYBACK ACCRETION

·                 RAISING FY09 ESTIMATES, REITERATE  MKT. OUTPERFORM RATING

 

The core operations business continues to drive solid results at MAXIMUS making up for poor results in its systems segment. Overall top line sales of 202mm were 1mm shy of our model for FQ1 08 but again can be attributed to the troubled systems unit which was over 2mm below our estimate.  Operating margins were 90bps better than expected as the operations unit delivered nearly 300bps higher profitability. Consulting was 80bps above our model and Systems showed a loss of $3mm vs our just above break even expectation. The company has struggled to turn this unit around as it appears software development costs have been mounting and a couple of contracts may be operating at a loss. While MMS tries to rework these contracts this segment remains a drag on earnings, masking the strong performance of its core health and human services business and it now appears that systems will not be profitable this year. Despite this the other businesses are more than making up for this shortfall and we are maintaining our prior estimates for the year.

 

Excluding a $2.2mm charge for the forfeiture of options EPS would have been approximately $0.07 better than our estimate. Cash flow from operations was strong at $20.8mm and FCF was $16.7mm.  The company has done an excellent job focusing on reducing DSOs, which were 77 days in the quarter within the targeted 75-85 day range. Guidance for FY08 CFFO remains at $50-60mm with FCF expected to be $30-40mm. Overall guidance for sales remains unchanged at $850mm to $880mm but EPS guidance is now higher at $2.60 to $2.85 (was $2.40 to $2.65

 

Financial Metrics

GAAP Earnings Per Share

Current Price

$35.82

Cash $(MM)

$62

FY (Sep)

2008e

was

2009e

was

52 Week Range

$26.65 - $48.33

Total Debt $(MM)

$0

Q1 Dec

$0.51 a

$0.50

Shares Out FD (MM)

19.0

Net Debt/Cap

0%

Q2 Mar

$0.62

Float (MM)

19

Return on Equity

-2%

Q3 Jun

$0.78

Average Daily Vol.

405 K

Est. 3-5 yr Rev growth

10-15%

Q4 Sep

$0.85

Market Cap ($MM)

$681

Est. 3-5 yr EPS growth

13-17%

Year

$2.75

$3.30

$3.15

Enterprise Value ($MM)

$618

Dividend Yield

1%

P/E

13.0X

10.9X

Mgmt/Director Ownership

1.6%

Book Value per Share

$18.49

EV/ EBITDA

27.7 X

5.5X

 

Charles Strauzer	cstrauzer@cjs-securities.com
PLEASE REFER TO THE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES, ANALYST CERTIFICATION AND PRICE CHART.

 

 

but excluded the buyback) given the previously announced $150mm accelerated share repurchase and will likely net more shares given the lower share price.

 

Backlog continues to grow even though there are some investors who may have the perception that a tough economic climate will impact MMS.  The total pipeline now stands at $1.5bln vs. 1.3bln in FY07. There are several reasons we believe MMS can weather a challenging economic environment;

 

·                  60% of its business are BPO type services which are typically driven and funded by the federal government,

·                  States tend to outsource more in tougher budgetary environments to try and save money,

·                  Focus of services on cost reductions and efficiencies, which is appealing to its customer base during tougher times,

·                  Privatization services typically are attractive during tighter fiscal cycles because MMS can do the same job as government more efficiently and often with less expense.

·                  Lastly case loads usually increase in more difficult times, as there are more people in need of help increasing the need for the work performed by MMS.

 

We are maintaining our FY 08 estimates but raising our FY 09 EPS for continued progress in growing its core operations margins. Our $49 valuation is based on 8X our FY08E EBITDA (below takeout multiples and inline with comparable public company valuations).      If MMS can rid themselves of unprofitable businesses it would help further expand margins and could use cash proceeds received to further enhance value. Accordingly, we reiterate our market outperform rating.

 

 

MAXIMUS

Actual vs. Estimates for Q1 12/07e (in MMs except EPS)

 

		Year Ago Actual					Current Quarter Actual							Current Q Estimate					Better/
		Q1 12/06			% Revs		Q1 12/07			% Revs		Y/Y		Q1 12/07e			% Revs		(Worse)
Segment Revenues
Consulting		24.7			15.3	%	22.2			11.0	%	-10.1	%	22.2			10.9	%	-0.2	%
Systems		34.5			21.4	%	34.0			16.8	%	-1.6	%	36.3			17.8	%	-6.3	%
Operations		101.9			63.3	%	145.8			72.2	%	43.0	%	144.8			71.2	%	0.7	%
Total Revenue		161.1			100.0	%	202.0			100.0	%	25.3	%	203.2			100.0	%	-0.6	%
Income from Operations
Consulting		2.8			11.4	%	1.2			5.2	%	-59.1	%	1.0			4.4	%	16.8	%
Systems		(1.6		)	-4.6	%	(3.1		)	-9.2	%	96.7	%	0.6			1.5	%	-661.9	%
Operations		(16.0		)	-15.7	%	18.7			12.8	%	-216.8	%	12.8			8.9	%	46.0	%
Consolidating Adjustments		0.5					(0.2		)			-151.0	%	0.5					-146.0	%
Total Income from Operations		(14.4		)	-8.9	%	16.5			8.2	%	-214.9	%	14.9			7.3	%	11.0	%
Gross Profit		20.3			12.6	%	52.8			26.1	%	160.2	%	51.5			25.3	%	2.5	%
Selling, General & Administrative		(34.7		)	-21.5	%	(36.3		)	-18.0	%	4.6	%	(36.6		)	-18.0	%	0.9	%
EBIT		(17.4		)	-10.8	%	16.5			8.2	%	NM		14.9			7.3	%	11.0	%
Interest Income		1.6			1.0	%	1.5			0.7	%	-6.9	%	0.3			0.1	%	400.3	%
Pretax Income		(15.8		)	-9.8	%	18.0			8.9	%	NM		15.2			7.5	%	18.7	%
Taxes		5.8			3.6	%	(7.4		)	-3.7	%	NM		(5.9		)	-2.9	%	-20.1	%
Tax Rate		36.9		%	NA		41.1		%	NA		4.2	%	39.0		%	NA		-2.1	%
Net Income		$	(9.9	)	-6.2	%	$	10.6		5.3	%	NM		$	9.3		4.6	%	14.5	%
EPS (Fully Diluted)		$	(0.48	)	NA		$	0.51		NA		-205.9	%	$	0.50		NA
EPS (Fully Diluted) Ex Items							$	0.57						$	0.50
Fully Diluted Shares		21.6			NA		20.9			NA		-3.4	%	18.7			NA		-10.3	%
EBITDA		(10.9		)	-6.7	%	22.7			11.2	%	-308.5	%	21.5			10.6	%	5.5	%
Depreciation & Amortization		5.1			3.1	%	5.1			2.5	%	0.0	%	5.5			2.7	%	8.8	%

 

Source: CJS Securities Estimates, Company Documents

 

 

MAXIMUS, Inc. (MMS)

Income Statement

All Figures $MM, except per share

 

		FY 2004a			FY 2005a			FY 2006e			Q1 12/06			Q2 3/07			Q3 6/07			Q4 9/07			FY 2007e			Q1 12/07			Q2 3/08e			Q3 6/08e			Q4 9/08e			FY 2008e			FY 2009e
Revenue		603.8			647.5			700.9			161.1			179.1			196.6			201.9			738.6			202.0			210.0			226.0			230.1			868.0			950.9
% growth year-to-year		8.1		%	7.2		%	8.2		%	-1.0		%	-0.4		%	5.3		%	17.5		%	5.4		%	25.3		%	17.3		%	15.0		%	14.0		%	17.5		%	9.5		%
Cost of Revenue		(427.7		)	(467.6		)	(547.4		)	(140.9		)	(136.2		)	(138.1		)	(146.4		)	(561.6		)	(149.2		)	(153.3		)	(160.8		)	(161.8		)	(625.1		)	(675.5		)
% of Revenue		70.8		%	72.2		%	78.1		%	87.4		%	76.1		%	70.3		%	72.5		%	76.0		%	73.9		%	73.0		%	71.2		%	70.3		%	72.0		%	71.0		%
% growth year-to-year		9.2		%	9.3		%	17.1		%	19.4		%	1.3		%	-13.0		%	7.5		%	2.6		%	5.9		%	12.6		%	16.4		%	10.6		%	11.3		%	8.0		%
Gross Profit		176.0			180.0			136.3			20.3			42.9			58.4			55.5			177.1			52.8			56.7			65.2			68.3			242.9			275.4
Gross Margin		29.2		%	27.8		%	19.5		%	12.6		%	23.9		%	29.7		%	27.5		%	24.0		%	26.1		%	27.0		%	28.8		%	29.7		%	28.0		%	29.0		%
% growth year-to-year		7.0		%	2.2		%	-24.2		%	-54.7		%	-5.4		%	449.1		%	55.8		%	29.9		%	160.2		%	32.2		%	11.5		%	23.0		%	37.2		%	13.4		%
Selling, General & Administrative		(113.0		)	(116.7		)	(129.7		)	(34.7		)	(34.5		)	(35.4		)	(31.1		)	(135.6		)	(36.3		)	(37.8		)	(40.7		)	(41.4		)	(156.1		)	(171.2		)
% of Revenue		18.7		%	18.0		%	18.5		%	21.5		%	19.2		%	18.0		%	18.0		%	18.4		%	18.0		%	18.0		%	18.0		%	18.0		%	18.0		%	18.0		%
% Growth Year-to-Year		5.2		%	3.3		%	11.1		%	9.8		%	11.5		%	9.5		%	-10.9		%	4.6		%	4.6		%	9.7		%	15.1		%	33.1		%	15.2		%	9.6		%
Write off of deferred contract costs								(17.1		)	(28.0		)	(6.5		)				0.2						(2.2		)
Legal Expense		0.0			(7.0		)	(9.4		)	(3.0		)	(6.1		)	(33.0		)	(2.5		)	(44.6		)													0.0			0.0
Operating Profit		63.0			56.3			(2.8		)	(17.4		)	2.3			(9.9		)	21.8			(3.1		)	16.5			18.9			24.5			26.8			86.7			104.3
% of Revenue		10.4		%	8.7		%	-0.4		%	-10.8		%	1.3		%	-5.1		%	10.8		%	-0.4		%	8.2		%	9.0		%	10.8		%	11.7		%	10.0		%	11.0		%
% Growth Year-to-Year		10.5		%	-10.7		%	-105.0		%	-237.0		%	-83.1		%	-67.8		%	1281.0		%	11.0		%	-195.0		%	714.6		%	-346.6		%	22.8		%	-2865.9		%	20.2		%
Net Interest Income & Other		1.0			3.3			6.9			1.6			1.6			0.9			2.1			6.3			1.5			0.4			0.3			0.3			2.5			1.8
Pretax Income		64.1			59.6			4.0			(15.8		)	3.9			(9.0		)	24.0			3.1			18.0			19.3			24.8			27.1			89.2			106.1
% of Revenue		10.6		%	9.2		%	0.6		%	-9.8		%	2.2		%	-4.6		%	11.9		%	0.4		%	8.9		%	9.2		%	11.0		%	11.8		%	10.3		%	11.2		%
% Growth Year-to-Year		9.7		%	-7.0		%	-93.2		%	-207.1		%	-73.2		%	-68.4		%	633.9		%	-22.7		%	-214.3		%	390.4		%	-374.5		%	13.2		%	2761.2		%	18.9		%
Taxes		(25.3		)	(23.6		)	(1.6		)	5.8			(1.6		)	(5.4		)	(10.3		)	(11.4		)	(7.4		)	(7.6		)	(9.7		)	(10.6		)	(35.3		)	(41.4		)
Tax Rate		39.5		%	39.5		%	39.0		%	36.9		%	40.0		%	-59.4		%	42.8		%	364.7		%	41.1		%	39.4		%	39.0		%	39.0		%	39.5		%	39.0		%
Net Income		38.8			36.1			2.5			(9.9		)	2.4			(14.4		)	13.7			(8.3		)	10.6			11.7			15.1			16.6			54.0			64.7
% of Revenue		6.4		%	5.6		%	0.4		%	-6.2		%	1.3		%	-7.3		%	6.8		%	-1.1		%	5.3		%	5.6		%	6.7		%	7.2		%	6.2		%	6.8		%
% Growth Year-to-Year		9.7		%	-7.0		%	-93.2		%	-211.7		%	-73.4		%	-16.9		%	588.3		%	-435.6		%	-206.6		%	395.1		%	-205.1		%	20.7		%	-753.8		%	19.9		%
Net Earnings per Share fd		$	1.76		$	1.67		$	0.11		$	(0.48	)	$	0.11		$	(0.65)		$	0.63		$	(0.38	)	$	0.51		$	0.62		$	0.78		$	0.85		$	2.75		$	3.30
% Growth Year-to-Year		6.3		%	-5.4		%	-93.2		%	-218.1		%	-73.5		%	-18.8		%	589.3		%	-435.0		%	-205.9		%	472.6		%	-219.8		%	36.0		%	-827.7		%	20.1		%
Net (Charges)/Income		0.0			(4.2		)	(23.8		)	(17.3		)	(7.6		)	(28.6		)	(1.2		)	(54.7		)	(1.3		)	0.0			0.0			0.0			(1.3		)	0.0
Pro-Forma Net Income(ex one time items)		38.8			40.3			26.2			7.3			10.0			14.2			14.9			46.4			11.9			11.7			15.1			16.6			55.3			64.7
Pro-Forma EPS (ex one time items)		$	1.76		$	1.86		$	1.20		$	0.34		$	0.45		$	0.65		$	0.68		$	2.12		$	0.57		$	0.62		$	0.78		$	0.85		$	2.82		$	3.30
% Growth Year-to-Year		6.3		%	5.7		%	-35.4		%	-19.2		%	6.9		%	-1044.8		%	62.2		%	76.6		%	68.4		%	35.4		%	21.2		%	25.4		%	32.6		%	17.2		%
FAS 123R Options expense pre-tax**		0.0			0.0			5.8			1.5			1.5			0.8			0.8			4.5			1.1			1.1			1.1			1.1			4.4			4.4
FD EPS before options exp.		$	1.76		$	1.86		$	1.36		$	0.38		$	0.49		$	0.70		$	0.70		$	1.58		$	0.60		$	0.65		$	0.82		$	0.89		$	2.95		$	3.44
% Growth Year-to-Year		6.3		%	5.7		%	-26.7		%	-17.4		%	6.2		%	-2656.0		%	52.5		%	15.7		%	58.6		%	31.7		%	16.2		%	26.6		%	87.0		%	16.5		%
Weighted Avg. S/O (mil)-fd		22.0			21.7			21.8			21.6			22.0			22.0			21.9			21.9			20.9			19.0			19.3			19.4			19.6			19.6
EBITDA		76.2			71.4			20.6			(10.9		)	8.7			29.3			30.7			22.3			22.7			25.5			31.1			33.4			112.7			128.7
% of Revenue		12.6		%	11.0		%	2.9		%	-6.7		%	4.9		%	14.9		%	15.2		%	3.0		%	11.2		%	12.1		%	13.8		%	14.5		%	13.0		%	13.5		%
% Growth Year-to-Year		11.6		%	-6.3		%	-71.1		%	-159.5		%	-54.8		%	-216.4		%	274.6		%	8.3		%	-308.5		%	191.7		%	6.1		%	9.0		%	404.6		%	14.2		%
Depreciation & Amortization		13.2			15.1			17.6			5.1			5.0			5.4			5.5			21.0			5.1			5.5			5.5			5.5			21.6			20.0
% of Revenue		2.2		%	2.3		%	2.5		%	3.1		%	2.8		%	2.8		%	2.7		%	2.8		%	2.5		%	2.6		%	2.4		%	2.4		%	2.5		%	2.1		%
% Growth Year-to-Year		17.1		%	15.2		%	16.5		%	21.9		%	19.2		%	30.2		%	6.9		%	18.8		%	0.0		%	10.6		%	1.3		%	-0.3		%	2.8		%	-7.2		%

 

Source: Company Reports and CJS Securities Estimates

 

Notes:

 

(1) Pro-forma to include FAS 123 R option expense for years FY 05 and beyond

 

 

COMPANY : MAXIMUS INC

CURRENCY : USD

 

HISTORY OF RECOMMENDATION AND PRICE TARGET CHANGES

 

DATE		CLOSING PRICE		RECOMMENDATION CHANGE		PRICE TARGET
16-Nov-2007		39.92				49.00
10-May-2007		39.93				46.00
12-Feb-2007		29.34				38.00
22-Dec-2006		29.77				31.00
07-Aug-2006		27.85				34.00
29-Jun-2006		23.79				30.00
29-Jun-2006		23.79		MARKET OUTPERFORM
23-Nov-2005		37.00				44.00
19-Sep-2005		37.43		MARKET PERFORM
01-Jul-2005		36.00				41.00

 

Source: Firstcall & CJS Sec.

 

Charles Strauzer    cstrauzer@cjs -securities.com

 

IMPORTANT DISCLOSURES

 

Valuation Methodology: 8X 2008E EV/EBITDA

 

Investment Risks: TX contract resolution and potential liability claims, State budget cuts/reductions, management execution, competition, general macro economic factors, timing of contracts, inability to reduce costs in underperforming units, cost over-runs in fixed price contracts, penalties for non-performance, acquisitions.

 

CJS Securities, Inc. Equity Research rating system

 

Market Outperform (MO): a stock that should perform at least 15% better than the Russell 2000 index over the next 6-18 months Market Perform (MP): a stock that should perform in line with or slightly better than the Russell 2000 index

 

Market Under-Perform (MU): a stock expected to under-perform the Russell 2000 index

 

We will continue to have some stocks on a Monitor List, where we are indicating to clients not to expect a similar level of research coverage as companies on our active coverage list. Hence, we do not have investment opinions, nor do we intend to publish estimates, on Monitor list names.

 

As of 1/2/08, CJS Securities provides active research on 66 companies, of which 42 (64%) are rated MO(buy) and 24 (36%) are rated MP(hold) and 0 (0%) are rated MU(sell), we also have two additional companies on our Monitor List (no rating, estimates or price target).

 

The information and statistics in this report have been obtained from sources we believe are reliable but we do not warrant their accuracy or completeness. Prices and opinions concerning the composition of market sectors included in this report reflect the judgments as of this date and are subject to change without notice. This material is for your information only and does not constitute an offer to buy or sell, or the solicitation of any offer to buy or sell any securities. CJS Securities Inc., its affiliates, directors, officers, stockholders, employees (or members of their families), and accounts with respect to which the forgoing have investment discretion, may have long or short positions in, and may, as principal or agent, buy or sell the securities mentioned herein. Occasionally, CJS Securities, Inc. may receive sales credits or fees, directly or indirectly, when an individual company under research coverage or a related peer company does an underwritten offering.  CJS intends to seek commission related non-investment banking services over the next 3 months. Accordingly, the firm may have a conflict of interest that could effect the objectivity of this report.

 

ANALYST CERTIFICATION

 

The Research Analyst(s) who prepared the document / email hereby certify that the views expressed in this document / email

 

 

Appendix 2

 

Jefferies & Company, Inc.

 

February 7, 2008

 

Technology IT Services

 

United States of America

 

MAXIMUS (NYSE: MMS)

 

Quarter Offers Proof Point of Improved Health

 

Company Update Estimate Change

 

Rating:		BUY
Price:		$35.82
Price Target:		$55.00
Bloomberg:		NYSE: MMS

 

Market Data

 

52-Week Range:		$48.33-$26.65
Total Entprs. Value (MM):		$689.9
Market Cap. (MM):		$750.7
Insider Ownership:		1.7	%
Institutional Ownership:		97.0	%
Shares Out. (MM):		20.9
Float (MM):		18.2
Avg. Daily Vol.:		190,017

 

Financial Summary

 

Book Value (MM):		$	273.0
Book Value/Share:		$	13.07
Net Debt (MM):		$	(60.8	)
Net Debt/Capital:		0.0		%
ROE:		15.3		%
3-5 Yr. Est. EPS Growth Rate:		15.0		%
ROIC:		16.5		%
Lg-Trm Debt to Eqty:		0.0		%

 

ROE: Estimate for FYE 2008

ROIC: Estimate for FYE 2008

 

USD		2005A		2006A		2007A		2008E
Rev. (MM)		—		700.9		738.6		877.7
Prev.		—		—		—		865.0
EV/Rev.		NM		1.0x		0.9x		0.8x
EPS
Cal.		1.66		(0.79	)	0.59		3.00
Prev. Cal.		—		—		—		2.88
Cal. P/E		21.6x		NM		60.7x		11.9x
EPS Diluted
EPS
Dec		—		0.41		(0.48	)	—
Mar		—		0.41		0.11		—
Jun		—		(0.81	)	(0.65	)	—
Sep		—		0.09		0.63		—
FY Sep		—		0.11		(0.37	)	2.81
Prev. FY		—		—		(0.38	)	2.80
FY P/E		NM		NM		NM		12.7x
GAAP EPS.
Consensus		—		0.11		(0.38	)	2.73

 

Investment Summary

MMS should outperform the market in C08 due to accelerating top-line growth to the upper teens, an expanding operating margin likely in the double digits, and lowered operating risks due to improved control systems. We remain bullish and highlight the healthy quarter was actually even stronger than the results imply.

 

Event

Maximus reported revenue and EPS of $202 million and $0.51. Revenue was ahead of consensus based on healthy growth in the Operations segment. EPS met consensus expectations, though was negatively impacted by a $2.2 million non-cash charge and temporarily higher tax rate that veiled the upside in operating results.

 

Key Points

·             Raising our fiscal 2008 estimates to reflect new guidance. Our fiscal year 2008 revenue and EPS estimates move to $877.7 million and $2.81 from $865 million and $2.80. Management reiterated revenue guidance of $850–880 million, though made an upward revision to EPS guidance to $2.60–2.85 from $2.35–2.65 to reflect accretion from the accelerated share repurchase program. Supporting the increased guidance is $324 million of new awards during the quarter, representing a book-to-bill of 1.6x. New awards, including multi-hundred million dollar contracts in California and Texas, and a healthy sales pipeline lend confidence to our raise.

 

·             Strong quarter obscured by transitory events. Maximus reported a 25% increase in revenue and the operating margin improved from negative 8.9% a year-ago to 9.3%, after excluding a $2.2 million non-cash charge related to a forfeiture calculation on previous years’ stock-based compensation. Results were fueled by strong performance in the Operations segment (72% of revenue), which grew its top-line by a normalized 24% and swung to a 13% operating margin compared to a loss in the same quarter the previous year. The normalized growth within Operations excludes a negative $15.7 million revenue impact from the termination of the Ontario contract and reduction of the Texas contract last year.  Excluding this impact from overall results reduces top line growth by about 10%. On the other hand, the company reported a $2.2 million non-cash charge related to prior years’ stock-based compensation and a more than 100 bp temporary increase in the tax rate from a change in Canadian tax law. We note that the impact of these events combined to impact EPS by approximately $0.07, exceeding our estimate by 8 cents.

 

Valuation/Risks

At 12x our raised C08 EPS estimate, MMS is trading at nearly a 30% discount to its 10-year median forward P/E of 18x. Key risks include the impact of discretionary spending cuts in a softening economy and execution on improving the performance of the Systems segment. Please refer to the attached DCF to understand the operating assumptions supporting our $55 one-year price target.

 

Matthew G. McKay, CFA

(617) 342-7909, mmckay@Jefferies.com

 

Please see important disclosure information on pages 7 - 9 of this report.