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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 March 31, 2012

 

Commission File Number: 1-12997

 

MAXIMUS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(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):

 

 

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 April 30, 2012, there were 33,947,468 shares of the registrant’s common stock (no par value) outstanding.

 

 

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MAXIMUS, Inc.

 

Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2012

 

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	3
	Consolidated Statements of Operations for the Three Months and Six Months Ended March 31, 2012 and 2011 (unaudited)	3
	Consolidated Balance Sheets as of March 31, 2012 (unaudited) and September 30, 2011	4
	Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2012 and 2011 (unaudited)	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	19
Item 4.	Controls and Procedures	20
PART II. OTHER INFORMATION		20
Item 1.	Legal Proceedings	20
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

 

Throughout this Quarterly Report on Form 10-Q, the terms “Company”, “we,” “us,” “our” and “MAXIMUS” refer to MAXIMUS, Inc. and its subsidiaries.

 

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PART I.  FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements.

 

MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2012			2011			2012			2011
Revenue		$	243,452		$	227,116		$	483,055		$	441,230
Cost of revenue		178,686			164,050			358,442			322,205
Gross profit		64,766			63,066			124,613			119,025
Selling, general and administrative expenses		37,959			33,572			70,715			62,239
Legal and settlement recovery, net		591			—			405			—
Operating income from continuing operations		27,398			29,494			54,303			56,786
Interest and other income, net		824			919			1,928			1,410
Income from continuing operations before income taxes		28,222			30,413			56,231			58,196
Provision for income taxes		14,011			11,375			24,362			21,571
Income from continuing operations		14,211			19,038			31,869			36,625
Discontinued operations, net of income taxes:
Income (loss) from discontinued operations		—			(265		)	—			(265		)
Gain (loss) on disposal		62			(554		)	108			(659		)
Income (loss) from discontinued operations		62			(819		)	108			(924		)
Net income		$	14,273		$	18,219		$	31,977		$	35,701
Basic earnings (loss) per share:
Income from continuing operations		$	0.42		$	0.55		$	0.95		$	1.06
Income (loss) from discontinued operations		—			(0.02		)	—			(0.02		)
Basic earnings per share		$	0.42		$	0.53		$	0.95		$	1.04
Diluted earnings (loss) per share:
Income from continuing operations		$	0.41		$	0.54		$	0.92		$	1.03
Income (loss) from discontinued operations		—			(0.03		)	—			(0.02		)
Diluted earnings per share		$	0.41		$	0.51		$	0.92		$	1.01
Dividends paid per share		$	0.09		$	0.08		$	0.18		$	0.14
Weighted average shares outstanding:
Basic		33,788			34,422			33,725			34,392
Diluted		34,728			35,574			34,638			35,500

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

		March 31, 2012			September 30, 2011
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	229,537		$	172,950
Restricted cash		6,681			4,839
Accounts receivable — billed, net of reserves of $4,226 and $3,265		140,664			146,900
Accounts receivable — unbilled		7,242			7,170
Prepaid income taxes		4,109			12,959
Deferred income taxes		23,943			19,256
Prepaid expenses and other current assets		29,406			27,202
Total current assets		441,582			391,276
Property and equipment, net		50,722			51,740
Capitalized software, net		26,697			26,616
Goodwill		72,705			71,323
Intangible assets, net		5,246			5,651
Deferred contract costs, net		6,939			8,020
Deferred income taxes		812			732
Deferred compensation plan assets		9,116			8,004
Other assets, net		2,015			1,917
Total assets		$	615,834		$	565,279
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	67,278		$	55,470
Accrued compensation and benefits		40,409			47,748
Deferred revenue		59,265			47,902
Current portion of long-term debt		132			42
Acquisition-related contingent consideration		2,005			1,840
Income taxes payable		5,497			5,104
Other accrued liabilities		2,377			5,787
Total current liabilities		176,963			163,893
Deferred revenue, less current portion		3,553			2,575
Long-term debt		1,625			1,654
Acquisition-related contingent consideration, less current portion		401			388
Income taxes payable, less current portion		1,538			1,484
Deferred income taxes		11,136			11,945
Deferred compensation plan liabilities, less current portion		9,895			8,883
Total liabilities		205,111			190,822
Shareholders’ equity:
Common stock, no par value; 60,000 shares authorized; 56,413 and 56,018 shares issued and 33,951 and 33,793 shares outstanding at March 31, 2012 and September 30, 2011, at stated amount, respectively		389,477			377,579
Treasury stock, at cost; 22,462 and 22,225 shares at March 31, 2012 and September 30, 2011, respectively		(425,651		)	(416,850		)
Accumulated other comprehensive income		20,069			12,480
Retained earnings		426,828			401,248
Total shareholders’ equity		410,723			374,457
Total liabilities and shareholders’ equity		$	615,834		$	565,279

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

		Six Months Ended March 31,
		2012			2011
Cash flows from operating activities:
Net income		$	31,977		$	35,701
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations		(108		)	924
Depreciation and amortization		11,545			10,783
Deferred income taxes		(5,315		)	1,146
Non-cash equity based compensation		5,633			4,495
Change in assets and liabilities:
Accounts receivable — billed		7,268			(1,596		)
Accounts receivable — unbilled		(63		)	2,021
Prepaid expenses and other current assets		(4,092		)	1,669
Deferred contract costs		1,109			(1,229		)
Accounts payable		12,298			12,287
Accrued compensation and benefits		(6,287		)	(6,567		)
Deferred revenue		11,291			(11,296		)
Income taxes		8,910			(10,334		)
Other assets and liabilities		(5,128		)	(1,618		)
Cash provided by operating activities — continuing operations		69,038			36,386
Cash used in operating activities — discontinued operations		—			(951		)
Cash provided by operating activities		69,038			35,435
Cash flows from investing activities:
Proceeds from sale of discontinued operations		2,240			—
Proceeds from note receivable		272			—
Purchases of property and equipment		(6,576		)	(6,464		)
Capitalized software costs		(1,832		)	(3,872		)
Cash used in investing activities — continuing operations		(5,896		)	(10,336		)
Cash used in investing activities — discontinued operations		—			—
Cash used in investing activities		(5,896		)	(10,336		)
Cash flows from financing activities:
Employee stock transactions		1,687			8,013
Repurchases of common stock		(9,749		)	(8,459		)
Tax benefit due to option exercises and restricted stock units vesting		2,510			3,818
Issuance of long-term debt		—			300
Cash dividends paid		(6,061		)	(4,643		)
Cash used in financing activities — continuing operations		(11,613		)	(971		)
Cash used in financing activities — discontinued operations		—			—
Cash used in financing activities		(11,613		)	(971		)
Effect of exchange rate changes on cash and cash equivalents		5,058			3,706
Net increase in cash and cash equivalents		56,587			27,834
Cash and cash equivalents, beginning of period		172,950			155,321
Cash and cash equivalents, end of period		$	229,537		$	183,155

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

Notes to Unaudited Consolidated Financial Statements

For the Three and Six Months Ended March 31, 2012 and 2011

 

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 for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and six months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet at September 30, 2011 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, 2011 and 2010 and for each of the three years ended September 30, 2011, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011 filed with the Securities and Exchange Commission on November 14, 2011.

 

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2. Segment Information

 

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

 

		Three Months Ended March 31,												Six Months Ended March 31,
		2012			% (1)			2011			% (1)			2012			% (1)			2011			% (1)
Revenue:
Health Services		$	161,170		100	%		$	137,779		100	%		$	319,213		100	%		$	267,790		100	%
Human Services		82,282			100	%		89,337			100	%		163,842			100	%		173,440			100	%
Total		243,452			100	%		227,116			100	%		483,055			100	%		441,230			100	%
Gross Profit:
Health services		41,137			26	%		38,320			28	%		77,136			24	%		72,597			27	%
Human Services		23,629			29	%		24,746			28	%		47,477			29	%		46,428			27	%
Total		64,766			27	%		63,066			28	%		124,613			26	%		119,025			27	%
Selling, general, and administrative expense:
Health Services		22,935			14	%		18,968			14	%		42,151			13	%		34,422			13	%
Human Services		15,024			18	%		14,623			16	%		28,564			17	%		27,802			16	%
Corporate/Other		—			NM			(19		)	NM			—			NM			15			NM
Total		37,959			16	%		33,572			15	%		70,715			15	%		62,239			14	%
Operating income from continuing operations:
Health services		18,202			11	%		19,352			14	%		34,985			11	%		38,175			14	%
Human Services		8,605			10	%		10,123			11	%		18,913			12	%		18,626			11	%
Corporate/Other		—			NM			19			NM			—			NM			(15		)	NM
Subtotal: Segment Operating Income		26,807			11	%		29,494			13	%		53,898			11	%		56,786			13	%
Legal and settlement recovery, net		591			NM			—			NM			405			NM			—			NM
Total		$	27,398		11	%		$	29,494		13	%		$	54,303		11	%		$	56,786		13	%

 

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

 

3. Earnings Per Share

 

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

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2012			2011			2012			2011
Numerator:
Income from continuing operations		$	14,211		$	19,038		$	31,869		$	36,625
Income (loss) from discontinued operations		62			(819		)	108			(924		)
Net income		$	14,273		$	18,219		$	31,977		$	35,701
Denominator:
Basic weighted average shares outstanding		33,788			34,422			33,725			34,392
Effect of dilutive securities:
Employee stock options and unvested restricted stock units		940			1,152			913			1,108
Denominator for diluted earnings (loss) per share		34,728			35,574			34,638			35,500

 

No shares were excluded from the computation in calculating the earnings per share for the three or six months ended March 31, 2012 or 2011.

 

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4. Comprehensive Income

 

Comprehensive income comprises net income plus changes in cumulative foreign currency translation adjustments. The components of comprehensive income for the three and six months ended March 31, 2012 and 2011 are as follows (in thousands):

 

		Three months Ended March 31,						Six months Ended March 31,
(in thousands)		2012			2011			2012			2011
Net income		$	14,273		$	18,219		$	31,977		$	35,701
Foreign currency translation adjustments		3,358			2,459			7,589			6,388
Comprehensive income		$	17,631		$	20,678		$	39,566		$	42,089

 

5. Legal and Settlement Recovery, Net

 

Legal and settlement recovery, net consists of reimbursed insurance claims, net of costs related to significant legal settlements and non-routine legal matters, including future probable legal costs estimated to be incurred in connection with those matters. This account also includes the incremental costs of acquisitions, including legal fees, brokerage fees and valuation reports. Legal expenses incurred in the ordinary course of business are included in selling, general and administrative expense.

 

The following table sets forth the matters that represent legal and settlement recovery, net:

 

		Three months Ended March 31,						Six Months Ended March 31,
(in thousands)		2012			2011			2012			2011
Insurance recovery		$	735		$	—		$	735		$	—
Acquisition expenses		(144		)	—			(144		)	—
Other		—			—			(186		)	—
Total		$	591		$	—		$	405		$	—

 

The insurance recoveries relate to a litigation settlement in fiscal 2008. Acquisition expenses relate to the purchase of PSI Holdings, Inc. in April 2012.

 

6. Income Taxes

 

During the period ended March 31, 2012, the Company recorded a discrete tax charge of $3.0 million, which had the effect of increasing the effective tax rate from 38% to 43.3% for the year-to-date period. The charge relates to changes in the estimated blended state tax rate and includes the correction of an error of $1.6 million. The Company does not believe this correction is material to its consolidated financial statements.

 

7. Property & Equipment

 

Property and equipment, at cost, consist of the following (in thousands):

 

		March 31, 2012			September 30, 2011
Land		$	1,800		$	1,800
Building and improvements		11,485			11,485
Office furniture and equipment		101,118			94,558
Leasehold improvements		9,856			9,798
Property and equipment, gross		124,259			117,641
Less: Accumulated depreciation and amortization		(73,537		)	(65,901		)
Total property and equipment, net		$	50,722		$	51,740

 

8. Software development costs

 

Software development costs consist of the following (in thousands):

 

		March 31, 2012			September 30, 2011
Capitalized software development costs		$	43,437		$	40,798
Less: Accumulated amortization		(16,740		)	(14,182		)
Total Software development costs, net		$	26,697		$	26,616

 

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9. Goodwill and Intangible Assets

 

The changes in goodwill for the six months ended March 31, 2012 are as follows (in thousands):

 

		Health Services			Human Services			Total
Balance as of September 30, 2011		$	43,242		$	28,081		$	71,323
Foreign currency translation		269			1,113			1,382
Balance as of March 31, 2012		$	43,511		$	29,194		$	72,705

 

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

 

		As of March 31, 2012									As of September 30, 2011
		Cost			Accumulated Amortization			Intangible Assets, net			Cost			Accumulated Amortization			Intangible Assets, net
Technology-based intangible assets		$	7,280		$	4,353		$	2,927		$	7,146		$	4,097		$	3,049
Customer contracts and relationships		3,535			1,838			1,697			3,454			1,513			1,941
Trademark		642			137			505			620			102			518
Non-compete arrangements		251			134			117			242			99			143
Total		$	11,708		$	6,462		$	5,246		$	11,462		$	5,811		$	5,651

 

The intangible assets include $3.4 million of fully-amortized technology-based assets still in use by the Company. The Company’s intangible assets have a weighted average remaining life of 6.0 years, comprising 6.3 years for technology-based intangible assets, 5.2 years for customer contracts and relationships, 7.8 years for the trademark, and 1.8 years for non-compete arrangements. Amortization expense for the six months ended March 31, 2012 was $0.6 million. Future amortization expense is estimated as follows (in thousands):

 

Six months ended September 30, 2012		$	585
Year ended September 30, 2013		1,091
Year ended September 30, 2014		723
Year ended September 30, 2015		702
Year ended September 30, 2016		702
Year ended September 30, 2017		702
Thereafter		741
Total		$	5,246

 

10. Acquisition-related contingent consideration

 

In February 2010, the Company acquired 100% of the share capital of DeltaWare Systems, Inc. (“DeltaWare”). As part of the acquisition arrangement, certain payments were to be made to the previous owners of DeltaWare based upon profitability and sales targets. The fair value of these payments was estimated at the time of acquisition based upon a probability-weighted approach based upon management’s estimates of likely payments and the balance is updated on a quarterly basis as more information comes available. Changes to the liability based upon these changes in estimates are recorded as “other income”. The Financial Accounting Standards Board (“FASB”) requires the classification of all assets and liabilities subject to fair value measurement based upon the inputs required for their valuation. As the inputs required for the valuation of these liabilities require significant judgment, they are considered to be Level 3 inputs under the FASB classification.

 

The Company must pay the former owners of DeltaWare the sum of two million Canadian Dollars ($2 million) in the event that certain profitability targets are reached. The Company believes that these targets have been reached and that payment will be made subject to completion of audit procedures and other administrative matters, which we expect to conclude shortly. This balance is shown as a current liability. The Company recorded charges of $0.1 million and $0.2 million during the six month periods ended March 31, 2012 and 2011, respectively, with respect to this balance.

 

The Company must also pay the former owners of DeltaWare up to four million Canadian Dollars ($4 million) based upon the Company making sales of DeltaWare’s products in particular geographic markets. The Company has recorded a long-term liability of $0.4 million which represents the payment that management assesses will likely be paid. In the event that such sales are anticipated by the Company, this could result in an increase to this liability based upon the size and location of the sales. No such sales have been made to date and the likelihood of future sales between this time and the end of the measurement period in 2016 is considered low. Management reviews the likelihood of future sales on a

 

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quarterly basis and, to the extent that sales opportunities are identified, proposals submitted or contracts won, the Company updates its probability weighted assessment of payment. Changes in this assessment will result in an expense or credit. The contingent consideration  payable for any single contract signed would be based upon the population of the area served but would be capped at one million Canadian Dollars per sale.

 

The effect on the financial statements is summarized below (in thousands):

 

		Acquisition-related contingent consideration
		Current portion			Long-term portion			Total
Balance as of September 30, 2011		$	1,840		$	388		$	2,228
Additional estimated consideration		101			—			101
Foreign currency translation		64			13			77
Balance as of March 31, 2012		$	2,005		$	401		$	2,406

 

11. Commitments and Contingencies

 

Litigation

 

The Company is involved in various legal proceedings, including contract and employment claims, in the ordinary course of its business. The matters reported on below involve significant pending or potential claims against us.

 

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 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. Accordingly, 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. During the second quarter of fiscal 2009, MAXIMUS recorded a $0.7 million reduction of revenue reflecting the fees it earned under the contract. MAXIMUS has exited the federal healthcare 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 2011, a school district which was a SchoolMAX client initiated the dispute resolution process under their contract. The client raised a number of issues pertaining to services and products delivered under the contract. The client also raised certain audit issues pertaining to royalties and most favored customer pricing but has apparently abandoned those claims in light of a final audit report that only questioned a total amount of approximately $42,000.  The parties participated in various mediation sessions during 2011, but they did not reach a resolution.  In April 2012, the 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 client contends that those failures resulted in damages of at least $10 million.  MAXIMUS and the buyer are contesting the client’s claims.  We cannot at this time reasonably estimate the possible loss that could be incurred if the plaintiff were to prevail but we believe that we have substantial defenses. In addition, we believe that we are entitled to indemnification from the buyer of the business for the claims asserted in the arbitration notice.

 

Credit Facilities and Performance Bonds

 

The Company has a revolving credit agreement with SunTrust Bank. At March 31, 2012, the only indebtedness outstanding under this agreement was letters of credit totaling $14.0 million. The revolving credit facility contains customary financial and other covenants that require the maintenance of certain ratios including a maximum leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all covenants as of March 31, 2012.

 

Certain contracts require us to provide a surety bond as a guarantee of performance. At March 31, 2012 and September 30, 2011, the Company had performance bond commitments totaling $17.1 million and $16.9 million, respectively. These bonds are

 

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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.

 

Flexible New Deal Contract Liabilities and Contingent Gains

 

In August 2009, the Company commenced work for the United Kingdom government as a provider of services under the “Flexible New Deal,” a welfare-to-work initiative. The work was performed in the Company’s Human Services Segment. This initiative was terminated for all contract providers during the 2011 fiscal year and replaced with the “Work Programme,” under which MAXIMUS also performs services. As a consequence of the termination of the Flexible New Deal, MAXIMUS incurred certain costs related to the termination of contracts, including property leases for offices which are no longer occupied by the Company but for which the Company retains responsibility for future lease payments. For properties which have been exited, the Company has recognized a liability for future lease rentals, service charges and property taxes for which they are liable, offset by anticipated future sublease rentals. The Company initially recorded a reserve of $0.5 million at September 30, 2011 to cover these liabilities which has been fully utilized at March 31, 2012.

 

As part of the Flexible New Deal contract, MAXIMUS was entitled to reimbursement for costs incurred as a consequence of early termination, as well as a contract settlement for payments the Company would have received for realizing certain long-term goals under the contract. During the six months ended March 31, 2012, MAXIMUS received a claim of $2.7 million for revenue foregone and $1.5 million of cost recoveries, net of subcontractor expenses.

 

Loss contract

 

During the three and six month periods ended March 31, 2012, the Company recorded a gain of $2.6 million on a fixed price contract owing to changes in our estimate to complete the work and the execution of a change order. During the three and six month periods ended March 31, 2011, the Company recorded a charge of $4.2 million and $7.3 million, respectively, on the same contract. The Company has recorded a liability of $1.5 million related to the anticipated loss to be recorded on this contract. The revenue and profitability on this contract are based upon estimated costs to complete the project, which are inherently subject to risk.

 

12. Stock Repurchase Programs

 

Under resolutions adopted in July 2008 and September 2010, the Board of Directors authorized the repurchase, at management’s discretion, of up to an aggregate of $175.0 million of the Company’s common stock. The resolutions also authorized the use of option exercise proceeds for the repurchase of the Company’s common stock. During the six months ended March 31, 2012 and 2011, the Company repurchased 236,700 and 275,158 common shares at a cost of $8.8 million and $8.5 million, respectively.

 

On November 8, 2011, the Board of Directors replaced the existing share repurchase program with a new program. This program authorizes the Company to repurchase, at management’s discretion, up to $125.0 million of its common stock. The resolutions also authorize the use of option exercise proceeds for the repurchases of the Company’s common stock.

 

As a result of stock option exercises since November 8, 2011, the amount available for future repurchases increased to $129.8 million as of March 31, 2012.

 

13. Recent accounting pronouncements

 

In May 2011, the FASB issued new guidance on fair value disclosure. The guidance changes certain fair value measurement principles and enhances the disclosure requirements, particularly for assets or liabilities which require valuation based upon a Company’s own information and assumptions. This guidance is effective for this quarter and has resulted in additional disclosures related to our acquisition related contingent consideration.

 

In 2011, the FASB issued new disclosure guidance related to the presentation of the Statement of Comprehensive Income. This guidance eliminates the current option to report other comprehensive income and its components in the consolidated statement of stockholders’ equity. The requirement to present reclassification adjustments out of accumulated other comprehensive income on the face of the consolidated statement of income has been deferred. We will adopt this accounting standard on its effective date, which will be for all financial statements relating to periods beginning October 1, 2012. This adoption will not have any impact on our financial position or results of operations, but will impact our financial statement presentation.

 

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In 2011, the FASB issued new accounting guidance that simplifies goodwill impairment tests. The new guidance states that a “qualitative” assessment may be performed to determine whether further impairment testing is necessary. We will adopt this accounting standard upon its effective date, which will be periods beginning after October 1, 2012. We do not anticipate that this adoption will have a significant impact on our financial position or results of operations.

 

14. Discontinued operations

 

On May 2, 2008, the Company sold its Unison MAXIMUS, Inc. subsidiary for $6.5 million, including a promissory note of $6.4 million. At March 31, 2012, the promissory note has a current value of $3.5 million, which has been fully reserved since the disposal. The Company recorded a gain on sale of $0.1 million in the three and six month periods ended March 31, 2012. The Company continues to monitor the payments on the note but no further gains are certain at this time.

 

On September 30, 2010, the Company sold its ERP division. During the first half of fiscal 2011, the Company reserved an additional pre-tax loss on sale of $1.0 million owing to a dispute with the purchaser of the division. This matter was settled in the second half of fiscal 2011 for $1.7 million.

 

15. Subsequent Events

 

Acquisition of PSI Services Holding, Inc.

 

On April 30, 2012, the Company acquired 100% of the stock of PSI Services Holding, Inc. and its wholly-owned subsidiary, Policy Studies, Inc. (collectively “PSI”). The acquisition will strengthen the Company’s business in the United States through new resources and customers as well as providing additional experience and knowledge of the health and human services markets. The purchase price was $67 million, subject to adjustment based upon PSI’s working capital on the date of acquisition. MAXIMUS paid for PSI using existing cash funds. The Company has not yet completed its allocation of the consideration to the assets acquired.

 

Dividend

 

On April 6, 2012, the Company’s Board of Directors declared a quarterly cash dividend of $0.09 for each share of the Company’s common stock outstanding. The dividend is payable on May 31, 2012, to shareholders of record on May 15, 2012.

 

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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, 2011, filed with the Securities and Exchange Commission on November 14, 2011.

 

Forward Looking Statements

 

From time to time, we may make forward-looking statements that are not historical facts, including statements about our confidence and strategies and our expectations about revenue, results of operations, profitability, current and future contracts, market opportunities, market demand or acceptance of our products and services. Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be forward-looking statements. The words “could,” “estimate,” “future,” “intend,” “may,” “opportunity,” “potential,” “project,” “will,” “believes,” “anticipates,” “plans,” “expect” and similar expressions are intended to identify forward-looking statements. These statements may involve risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks are detailed in Exhibit 99.1 to our Annual Report on Form 10-K for the year ended September 30, 2011 and incorporated herein by reference.

 

Business Overview

 

We provide business process outsourcing services to government health and human services agencies under our mission of Helping Government Serve the People.® Our business is focused almost exclusively on administering government-sponsored programs such as Medicaid, the Children’s Health Insurance Program (CHIP), health care reform, welfare-to-work, Medicare, child support enforcement and other government programs. Founded in 1975, we are one of the largest pure-play health and human services administrative providers to governments in the United States, Australia, Canada and the United Kingdom. We use our expertise, experience and advanced technological solutions to help government agencies run efficient, cost-effective programs and to improve program accountability, while enhancing the quality of services provided to program beneficiaries.

 

The Company is managed through two segments, Health Services and Human Services. The Health Services Segment provides a variety of business process outsourcing and administrative support services, as well as consulting services for state, provincial and federal programs, such as Medicaid, CHIP, Medicare, and the British Columbia Health Insurance Program. The Human Services Segment includes a variety of business process outsourcing, case management, job training, and support services for programs such as welfare-to-work programs, child support enforcement, K-12 special education, and other specialized consulting services.

 

On April 30, 2012, the Company completed the acquisition of PSI Holdings, Inc. and its wholly-owned subsidiary, Policy Studies, Inc. (“PSI”). The acquisition will strengthen the Company’s business in the United States through new resources and customers as well as providing additional experience and knowledge of the health and human services markets.

 

Industry considerations

 

Within the United States, fiscal pressures remain a challenge for state governments while at the same time they are also facing increasing demand for critical services from the most vulnerable members of society. The majority of states are required to balance their budgets each year and states have taken steps to more efficiently manage their social programs, including Medicaid. Since Medicaid accounts for a large portion of states’ budgets, many states have taken steps to control costs by shifting more populations to managed care, increasing co-pays, reducing provider rates, and modifying benefits. As more populations shift into managed care, demand for our administrative services and program volumes generally increases.

 

The situation for international governments is also challenging, with each of the areas in which MAXIMUS operates offering unique local issues in addition to general global economic factors. Both Australia and the United Kingdom have implemented measures to deal with significant debt and commitments and both have implemented welfare reform as a means to better manage resources.  Companies like MAXIMUS may benefit from the need for governments to reform certain benefits programs.

 

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Results of Operations

 

Consolidated

 

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

 

		Three Months Ended March 31,						Six Months Ended March 31,
(dollars in thousands, except per share data)		2012			2011			2012			2011
Revenue		$	243,452		$	227,116		$	483,055		$	441,230
Gross profit		$	64,766		$	63,066		$	124,613		$	119,025
Selling, general and administrative expenses		$	37,959		$	33,572		$	70,715		$	62,239
Selling, general and administrative expense as a percentage of revenue		15.6		%	14.8		%	14.6		%	14.1		%
Operating income from continuing operations excluding legal and settlement recovery		26,807			29,494			53,898			56,786
Legal and settlement recovery, net		591			—			405			—
Operating income from continuing operations		$	27,398		$	29,494		$	54,303		$	56,786
Operating margin from continuing operations percentage		11.3		%	13.0		%	11.2		%	12.9		%
Interest and other income, net		824			919			1,928			1,410
Income from continuing operations before income taxes		28,222			30,413			56,231			58,196
Provision for income taxes		14,011			11,375			24,362			21,571
Tax rate		49.6		%	37.4		%	43.3		%	37.1		%
Income from continuing operations, net of income taxes		$	14,211		$	19,038		$	31,869		$	36,625
Income (loss) from discontinued operations, net of income taxes		$	62		$	(819	)	$	108		$	(924	)
Net income		$	14,273		$	18,219		$	31,977		$	35,701
Basic earnings (loss) per share:
Income from continuing operations		$	0.42		$	0.55		$	0.95		$	1.06
Income (loss) from discontinued operations		—			(0.02		)	—			(0.02		)
Basic earnings per share		$	0.42		$	0.53		$	0.95		$	1.04
Diluted earnings (loss) per share:
Income from continuing operations		$	0.41		$	0.54		$	0.92		$	1.03
Income (loss) from discontinued operations		—			(0.03		)	—			(0.02		)
Diluted earnings per share		$	0.41		$	0.51		$	0.92		$	1.01

 

The following provides an overview of the significant elements of our Consolidated Statements of Operations. As each of our business segments have different factors driving revenue growth and profitability, the sections that follow cover these segments in greater detail.

 

We discuss constant currency revenue information to provide a framework for assessing how our business performed excluding the effect of foreign currency rate fluctuations. To provide this information, revenue from foreign operations is converted into United States dollars using average exchange rates from the previous fiscal year.

 

We discuss operating income from continuing operations excluding legal and settlement expenses and recoveries. Legal and settlement expenses and recoveries are typically driven by factors that are not consistent with other drivers of our business, and the timing and extent of both legal and settlement expenses and recoveries may have an unusual effect on our financial results. During the current year, we have received the benefit of an insurance recovery and incurred costs related to the acquisition of PSI. We believe that excluding the effects of these costs and recoveries provides a framework for assessing how the business performed excluding the effects of legal and settlement expenses and recoveries.

 

Constant currency revenue and operating income excluding legal and settlement expenses are non-GAAP numbers. We believe that these numbers provide a useful basis for assessing the Company’s performance. The presentation of these non-GAAP

 

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