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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, 2014

 

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, 2014, there were 67,697,400 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, 2014

 

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, 2014 and 2013 (unaudited)	3
	Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended March 31, 2014 and 2013 (unaudited)	4
	Consolidated Balance Sheets as of March 31, 2014 (unaudited) and September 30, 2013	5
	Consolidated Statements of Cash Flows for the Six Months Ended March 31, 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	20
Item 4.	Controls and Procedures	20
PART II. OTHER INFORMATION		21
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	22
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 6.	Exhibits	22
Signatures		23
Exhibit Index		24

 

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.

 

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 March 31,						Six Months Ended March 31,
		2014			2013			2014			2013
Revenue		$	439,015		$	326,351		$	845,607		$	612,617
Cost of revenue		318,343			228,907			619,019			438,643
Gross profit		120,672			97,444			226,588			173,974
Selling, general and administrative expenses		55,129			46,693			107,732			88,915
Acquisition-related expenses		—			16			—			164
Legal and settlement expenses		600			—			600			142
Operating income from continuing operations		64,943			50,735			118,256			84,753
Interest and other income, net		183			637			904			1,743
Income from continuing operations before income taxes		65,126			51,372			119,160			86,496
Provision for income taxes		23,964			19,658			44,198			32,999
Income from continuing operations		41,162			31,714			74,962			53,497
Discontinued operations, net of income taxes:
Income/(loss) from discontinued operations		22			(91		)	12			(594		)
Gain on disposal		23			66			92			102
Income (loss) from discontinued operations		45			(25		)	104			(492		)
Net income		$	41,207		$	31,689		$	75,066		$	53,005
Basic earnings/(loss) per share:
Income from continuing operations		$	0.61		$	0.47		$	1.10		$	0.78
Income/(loss) from discontinued operations		—			(0.01		)	—			—
Basic earnings per share		$	0.61		$	0.46		$	1.10		$	0.78
Diluted earnings/(loss) per share:
Income from continuing operations		$	0.59		$	0.45		$	1.08		$	0.77
Income/(loss) from discontinued operations		—			—			—			(0.01		)
Diluted earnings per share		$	0.59		$	0.45		$	1.08		$	0.76
Dividends paid per share		$	0.045		$	0.045		$	0.09		$	0.09
Weighted average shares outstanding:
Basic		67,884			68,179			68,143			68,171
Diluted		69,307			69,909			69,538			69,835

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

		Three months Ended March 31,						Six months Ended March 31,
		2014			2013			2014			2013
Net income		$	41,207		$	31,689		$	75,066		$	53,005
Foreign currency translation adjustments		1,638			(965		)	(1,447		)	(1,568		)
Comprehensive income		$	42,845		$	30,724		$	73,619		$	51,437

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

 

		March 31, 2014			September 30, 2013
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	131,323		$	125,617
Restricted cash		12,073			12,176
Accounts receivable — billed, net of reserves of $5,430 and $3,828		309,784			272,636
Accounts receivable — unbilled		20,303			20,320
Prepaid income taxes		75			358
Deferred income taxes		29,928			26,443
Prepaid expenses and other current assets		31,966			32,049
Total current assets		535,452			489,599
Property and equipment, net		70,982			77,710
Capitalized software, net		41,542			40,456
Goodwill		173,191			171,867
Intangible assets, net		42,974			42,039
Deferred contract costs, net		12,321			14,318
Deferred income taxes		590			1,179
Deferred compensation plan assets		10,977			10,314
Other assets, net		8,950			10,496
Total assets		$	896,979		$	857,978
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	109,654		$	109,020
Accrued compensation and benefits		64,651			83,280
Deferred revenue		53,042			53,137
Current portion of long-term debt		158			170
Income taxes payable		18,379			8,327
Other liabilities		10,115			8,373
Total current liabilities		255,999			262,307
Deferred revenue, less current portion		27,065			32,953
Long-term debt		1,149			1,319
Deferred compensation plan liabilities, less current portion		16,161			13,953
Other liabilities		24,969			17,938
Total liabilities		325,343			328,470
Shareholders’ equity:
Common stock, no par value; 100,000 shares authorized; 67,889 and 68,525 shares issued and outstanding at March 31, 2014 and September 30, 2013, at stated amount, respectively		425,648			415,271
Accumulated other comprehensive income		6,540			7,987
Retained earnings		139,448			106,250
Total shareholders’ equity		571,636			529,508
Total liabilities and shareholders’ equity		$	896,979		$	857,978

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

		Six Months Ended March 31,
		2014			2013
Cash flows from operating activities:
Net income		$	75,066		$	53,005
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations		(104		)	492
Depreciation and amortization		23,759			17,934
Deferred income taxes		(1,387		)	6,757
Non-cash equity based compensation		8,561			7,062
Change in assets and liabilities:
Accounts receivable — billed		(37,516		)	(33,311		)
Accounts receivable — unbilled		(50		)	(8,152		)
Prepaid expenses and other current assets		2,539			(2,521		)
Deferred contract costs		1,979			(1,413		)
Accounts payable and accrued liabilities		3,835			8,728
Accrued compensation and benefits		(7,450		)	(1,877		)
Deferred revenue		(6,211		)	(2,934		)
Income taxes		10,153			(6,561		)
Other assets and liabilities		3,390			2,285
Cash provided by operating activities — continuing operations		76,564			39,494
Cash used in operating activities — discontinued operations		(104		)	(554		)
Cash provided by operating activities		76,460			38,940
Cash flows from investing activities:
Purchases of property and equipment		(9,516		)	(13,351		)
Capitalized software costs		(7,317		)	(8,240		)
Proceeds from settlement of final PSI price		—			3,380
Acquisition of business, net of cash acquired		(2,670		)	—
Proceeds from note receivable		154			172
Proceeds from sale of discontinued operations		—			—
Cash used in investing activities		(19,349		)	(18,039		)
Cash flows from financing activities:
Repurchases of common stock		(34,696		)	(15,403		)
Employee tax withholding on restricted stock unit vesting		(12,905		)	(6,677		)
Tax benefit due to option exercises and restricted stock units vesting		2,925			4,680
Cash dividends paid		(6,138		)	(6,131		)
Stock option exercises		518			1,752
Issuance of long-term debt		15,000			—
Repayment of long-term debt		(15,082		)	(87		)
Cash used in financing activities		(50,378		)	(21,866		)
Effect of exchange rate changes on cash and cash equivalents		(1,027		)	(1,004		)
Net increase/(decrease) in cash and cash equivalents		5,706			(1,969		)
Cash and cash equivalents, beginning of period		125,617			189,312
Cash and cash equivalents, end of period		$	131,323		$	187,343

 

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, 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 of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and six month periods ended March 31, 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.

 

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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,
		2014			% (1)		2013			% (1)		2014			% (1)		2013			% (1)
Revenue:
Health Services		$	324,060		100	%	$	197,948		100	%	$	623,218		100	%	$	373,946		100	%
Human Services		114,955			100	%	128,403			100	%	222,389			100	%	238,671			100	%
Total		439,015			100	%	326,351			100	%	845,607			100	%	612,617			100	%
Gross Profit:
Health services		85,061			26.2	%	54,651			27.6	%	161,879			26.0	%	99,910			26.7	%
Human Services		35,611			31.0	%	42,793			33.3	%	64,709			29.1	%	74,064			31.0	%
Total		120,672			27.5	%	97,444			29.9	%	226,588			26.8	%	173,974			28.4	%
Selling, general, and administrative expense:
Health Services		36,285			11.2	%	25,742			13.0	%	71,550			11.5	%	50,375			13.5	%
Human Services		18,844			16.4	%	21,334			16.6	%	36,182			16.3	%	38,923			16.3	%
Corporate/Other		—			NM		(383		)	NM		—			NM		(383		)	NM
Total		55,129			12.6	%	46,693			14.3	%	107,732			12.7	%	88,915			14.5	%
Operating income from continuing operations:
Health services		48,776			15.1	%	28,909			14.6	%	90,329			14.5	%	49,535			13.2	%
Human Services		16,767			14.6	%	21,459			16.7	%	28,527			12.8	%	35,141			14.7	%
Corporate/Other		—			NM		383			NM		—			NM		383			NM
Subtotal:
Segment Operating Income		65,543			14.9	%	50,751			15.6	%	118,856			14.1	%	85,059			13.9	%
Acquisition-related expenses		—			NM		16			NM		—			NM		164			NM
Legal and settlement expenses		600			NM		—			NM		600			NM		142			NM
Total		$	64,943		14.8	%	$	50,735		15.5	%	$	118,256		14.0	%	$	84,753		13.8	%

 

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

 

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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,
		2014			2013			2014			2013
Numerator:
Income from continuing operations		$	41,162		$	31,714		$	74,962		$	53,497
Income (loss) from discontinued operations		45			(25		)	104			(492		)
Net income		$	41,207		$	31,689		$	75,066		$	53,005
Denominator:
Basic weighted average shares outstanding		67,884			68,179			68,143			68,171
Effect of dilutive securities:
Employee stock options and unvested restricted stock units		1,423			1,730			1,395			1,664
Denominator for diluted earnings (loss) per share		69,307			69,909			69,538			69,835

 

No shares were excluded from the computation in calculating the earnings per share for the three or six months ended March 31, 2014 or 2013.

 

4. 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 assets and liabilities of HML were recorded in the Company’s financial statements at their fair values at the acquisition date as follows (in thousands):

 

		Purchase Price Allocation
		Updated through September 30, 2013			Adjustments			Updated through March 31, 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 Dollars) 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. Accordingly, we are unable to accurately estimate the revenue from this acquisition. However, we believe the acquired revenue from this acquisition would not be material.

 

5. Goodwill and Intangible Assets

 

The changes in goodwill for the six months ended March 31, 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		1,393			(100		)	1,293
Balance as of March 31, 2014		$	126,520		$	46,671		$	173,191

 

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

 

		As of March 31, 2014									As of September 30, 2013
		Cost			Accumulated Amortization			Intangible Assets, net			Cost			Accumulated Amortization			Intangible Assets, net
Customer contracts and relationships		$	43,130		$	5,766		$	37,364		$	39,243		$	3,953		$	35,290
Technology based intangible assets		9,343			6,415			2,928			9,583			5,974			3,609
Trademarks and trade names		4,378			1,696			2,682			4,421			1,303			3,118
Non-compete arrangements		—			—			—			243			221			22
Total		$	56,851		$	13,877		$	42,974		$	53,490		$	11,451		$	42,039

 

The Company’s intangible assets have a weighted average remaining life of 11.9 years, comprising 13.2 years for customer contracts and relationships, 3.6 years for technology-based intangible assets and 3.4 years for the trademarks and trade names. Amortization expense for the six months ended March 31, 2014 and 2013 was $2.8 million and $2.3 million, respectively. Estimated future amortization expense is as follows (in thousands):

 

Six months ended September 30, 2014		$	3,046
Year ended September 30, 2015		5,968
Year ended September 30, 2016		5,692
Year ended September 30, 2017		5,293
Year ended September 30, 2018		4,052
Year ended September 30, 2019		3,070

 

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6. 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 expenses, capital expenditures and acquisitions. The arrangement terminates on March 15, 2018, at which time all outstanding borrowings must be repaid.

 

At March 31, 2014, the Company’s only borrowings under the Credit Agreement were 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 are held with another financial institution to cover similar obligations. During the three month period ended March 31, 2014, the Company borrowed $15 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 March 31, 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 March 31, 2014, our total leverage ratio was less than 0.1 to 1.0.

 

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. At March 31, 2014, the Company utilized the lowest available applicable margins listed above.

 

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 Dollars, the proceeds of which were required to be used for specific technology-based research and development. The loan has no interest charge. At March 31, 2014, $1.3 million (1.4 million Canadian Dollars) was outstanding under this agreement, which is repayable in 33 remaining quarterly installments.

 

Certain contracts require us to provide a surety bond as a guarantee of performance. At March 31, 2014 and September 30, 2013, the Company had performance bond commitments totaling $50.5 million and $50.8 million, respectively. 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.

 

7. 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. 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. MAXIMUS has exited the federal health care claiming business and no longer provides the services at issue in this matter.

 

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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 asserted 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 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 project in Boise. 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 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 March 31, 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.

 

8. Stock Repurchase Programs

 

Under a resolution adopted in November 2011, the Board of Directors authorized the repurchase, at management’s discretion, of up to an aggregate of $125.0 million of the Company’s common stock. The resolution also authorized the use of option exercise proceeds for the repurchase of the Company’s common stock. During the six months ended March 31, 2014 and 2013, the Company repurchased 807,138 and 499,098 common shares at a cost of $35.5 million and $14.6 million, respectively. The amount available for future repurchases was $62.1 million at March 31, 2014.

 

The Company has acquired an additional 241,500 shares at a cost of $10.3 million between April 1, 2014 and May 9, 2014.

 

9. Subsequent Events

 

Dividend

 

On April 4, 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 May 30, 2014 to shareholders of record on May 15, 2014.

 

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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, 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.

 

Financial overview

 

The Company experienced significant growth in both revenue and operating profit for the three and six month periods ended March 31, 2014 compared to the same periods in fiscal year 2013. The principal driver of this growth was work 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. The Company anticipates that some states currently utilizing the federal marketplace 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.

 

The Company reported strong operating cash flows in the six month period ended March 31, 2014 driven by increased business. The Company continued to invest funds in working capital as well as in repurchases of common stock. At March 31, 2014, the Company held $131.3 million in unrestricted cash and cash equivalents and had minimal debt.

 

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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)		2014			2013			2014			2013
Revenue		$	439,015		$	326,351		$	845,607		$	612,617
Gross profit		$	120,672		$	97,444		$	226,588		$	173,974
Gross profit percentage		27.5		%	29.9		%	26.8		%	28.4		%
Selling, general and administrative expenses		$	55,129		$	46,693		$	107,732		$	88,915
Selling, general and administrative expense as a percentage of revenue		12.6		%	14.3		%	12.7		%	14.5		%
Acquisition-related expenses		—			16			—			164
Legal and settlement expenses		600			—			600			142
Operating income from continuing operations		$	64,943		$	50,735		$	118,256		$	84,753
Operating margin from continuing operations percentage		14.8		%	15.5		%	14.0		%	13.8		%
Interest and other income, net		183			637			904			1,743
Income from continuing operations before income taxes		65,126			51,372			119,160			86,496
Provision for income taxes		23,964			19,658			44,198			32,999
Tax rate		36.8		%	38.3		%	37.1		%	38.2		%
Income from continuing operations, net of income taxes		$	41,162		$	31,714		$	74,962		$	53,497
Income (loss) from discontinued operations, net of income taxes		$	45		$	(25	)	$	104		$	(492	)
Net income		$	41,207		$	31,689		$	75,066		$	53,005
Basic earnings (loss) per share:
Income from continuing operations		$	0.61		$	0.47		$	1.10		$	0.78
Income (loss) from discontinued operations		—			(0.01		)	—			—
Basic earnings per share		$	0.61		$	0.46		$	1.10		$	0.78
Diluted earnings (loss) per share:
Income from continuing operations		$	0.59		$	0.45		$	1.08		$	0.77
Income (loss) from discontinued operations		—			—			—			(0.01		)
Diluted earnings per share		$	0.59		$	0.45		$	1.08		$	0.76

 

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.

 

The results for the three and six month periods ended March 31, 2013 were affected by a one-time benefit from the termination of a system-integration contract acquired with Policy Studies Inc. (PSI). This termination resulted in one-time, non-cash benefits to revenue and pre-tax profit of $16.0 million and $10.9 million, respectively. Although contract terminations for convenience do occur within our business, they are infrequent. In addition, this termination was unusual due to the significant effect of the transaction, which is highly unlikely to be repeated, as it involved deferred revenue from the PSI acquisition and did not reflect the underlying business operations of the Company. Accordingly, we discuss below the results of the business both including and excluding the effect of this contract termination. We believe the presentation of revenue, profit, profit margins and earnings per share excluding the effect of this contract termination provide a useful basis for assessing the Company’s performance compared to prior periods or our competitors. However, these numbers are “non-GAAP” numbers and are not meant to be considered in isolation or as alternatives to their GAAP equivalents as measures of performance. A reconciliation between the Company’s results and those results excluding the effect of this terminated contract is shown below:

 

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