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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 June 30, 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 August 1, 2014, there were 66,993,971 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 June 30, 2014

 

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements		3
		Consolidated Statements of Operations for the Three Months and Nine Months Ended June 30, 2014 and 2013 (unaudited)		3
		Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended June 30, 2014 and 2013 (unaudited)		4
		Consolidated Balance Sheets as of June 30, 2014 (unaudited) and September 30, 2013		5
		Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2014 and 2013 (unaudited)		6
		Notes to Unaudited Consolidated Financial Statements		7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		18
Item 4.		Controls and Procedures		18
PART II. OTHER INFORMATION				19
Item 1.		Legal Proceedings		19
Item 1A.		Risk Factors		20
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		20
Item 6.		Exhibits		20
Signatures				21
Exhibit Index				22

 

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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 June 30,						Nine Months Ended June 30,
		2014			2013			2014			2013
Revenue		$	419,899		$	334,323		$	1,265,506		$	946,940
Cost of revenue		307,296			239,763			926,315			678,406
Gross profit		112,603			94,560			339,191			268,534
Selling, general and administrative expenses		57,345			49,181			165,077			138,096
Acquisition-related expenses		—			1,174			—			1,500
Legal and settlement expenses/(recoveries), net		—			(182		)	600			(202		)
Operating income from continuing operations		55,258			44,387			173,514			129,140
Interest and other income, net		9			701			913			2,444
Income from continuing operations before income taxes		55,267			45,088			174,427			131,584
Provision for income taxes		21,226			17,052			65,424			50,051
Income from continuing operations		34,041			28,036			109,003			81,533
Discontinued operations, net of income taxes:
Loss from discontinued operations		(21		)	(3		)	(9		)	(597		)
Gain on disposal		118			67			210			169
Income (loss) from discontinued operations		97			64			201			(428		)
Net income		$	34,138		$	28,100		$	109,204		$	81,105
Basic earnings/(loss) per share:
Income from continuing operations		$	0.50		$	0.41		$	1.60		$	1.20
Income/(loss) from discontinued operations		—			—			0.01			(0.01		)
Basic earnings per share		$	0.50		$	0.41		$	1.61		$	1.19
Diluted earnings/(loss) per share:
Income from continuing operations		$	0.49		$	0.40		$	1.57		$	1.17
Income/(loss) from discontinued operations		—			—			—			(0.01		)
Diluted earnings per share		$	0.49		$	0.40		$	1.57		$	1.16
Dividends paid per share		$	0.045		$	0.045		$	0.135		$	0.135
Weighted average shares outstanding:
Basic		67,659			68,162			67,982			68,168
Diluted		69,031			69,867			69,369			69,864

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

		Three months Ended June 30,						Nine months Ended June 30,
		2014			2013			2014			2013
Net income		$	34,138		$	28,100		$	109,204		$	81,105
Foreign currency translation adjustments		6,366			(18,454		)	4,919			(20,022		)
Comprehensive income		$	40,504		$	9,646		$	114,123		$	61,083

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

 

		June 30, 2014			September 30, 2013
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	182,942		$	125,617
Restricted cash		13,356			12,176
Accounts receivable — billed and billable, net of reserves of $3,831 and $3,828		274,544			272,636
Accounts receivable — unbilled		17,006			20,320
Prepaid income taxes		2,620			358
Deferred income taxes		27,773			26,443
Prepaid expenses and other current assets		36,159			32,049
Total current assets		554,400			489,599
Property and equipment, net		71,961			77,710
Capitalized software, net		41,482			40,456
Goodwill		175,471			171,867
Intangible assets, net		42,117			42,039
Deferred contract costs, net		13,750			14,318
Deferred income taxes		1,567			1,179
Deferred compensation plan assets		11,242			10,314
Other assets, net		10,090			10,496
Total assets		$	922,080		$	857,978
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	101,313		$	109,020
Accrued compensation and benefits		73,133			83,280
Deferred revenue		57,447			53,137
Current portion of long-term debt		164			170
Income taxes payable		17,743			8,327
Other liabilities		11,576			8,373
Total current liabilities		261,376			262,307
Deferred revenue, less current portion		30,056			32,953
Long-term debt		1,150			1,319
Deferred taxes		16,965			16,359
Deferred compensation plan liabilities, less current portion		17,422			13,953
Other liabilities		6,609			1,579
Total liabilities		333,578			328,470
Shareholders’ equity:
Common stock, no par value; 100,000 shares authorized; 67,366 and 68,525 shares issued and outstanding at June 30, 2014 and September 30, 2013, at stated amount, respectively		430,642			415,271
Accumulated other comprehensive income		12,906			7,987
Retained earnings		144,954			106,250
Total shareholders’ equity		588,502			529,508
Total liabilities and shareholders’ equity		$	922,080		$	857,978

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

		Nine Months Ended June 30,
		2014			2013
Cash flows from operating activities:
Net income		$	109,204		$	81,105
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations		(201		)	428
Depreciation and amortization		36,297			25,763
Deferred income taxes		(577		)	3,030
Non-cash equity based compensation		12,809			10,708
Change in assets and liabilities:
Accounts receivable — billed		(1,362		)	(50,072		)
Accounts receivable — unbilled		3,280			(5,921		)
Prepaid expenses and other current assets		(1,343		)	(2,522		)
Deferred contract costs		556			(2,451		)
Accounts payable and accrued liabilities		(5,337		)	16,480
Accrued compensation and benefits		2,510			6,941
Deferred revenue		88			(2,940		)
Income taxes		6,162			5,989
Other assets and liabilities		3,212			2,624
Cash provided by operating activities — continuing operations		165,298			89,162
Cash used in operating activities — discontinued operations		(148		)	(587		)
Cash provided by operating activities		165,150			88,575
Cash flows from investing activities:
Purchases of property and equipment		(18,389		)	(24,869		)
Capitalized software costs		(9,177		)	(13,652		)
Proceeds from settlement of final PSI price		—			3,380
Acquisition of business, net of cash acquired		(2,670		)	—
Proceeds from note receivable		350			285
Cash used in investing activities		(29,886		)	(34,856		)
Cash flows from financing activities:
Repurchases of common stock		(59,354		)	(27,814		)
Employee tax withholding on restricted stock unit vesting		(14,681		)	(8,868		)
Tax benefit due to option exercises and restricted stock units vesting		2,925			4,680
Cash dividends paid		(9,181		)	(9,202		)
Stock option exercises		1,145			1,840
Issuance of long-term debt		15,000			—
Repayment of long-term debt		(15,122		)	(130		)
Cash used in financing activities		(79,268		)	(39,494		)
Effect of exchange rate changes on cash and cash equivalents		1,329			(15,626		)
Net increase/(decrease) in cash and cash equivalents		57,325			(1,401		)
Cash and cash equivalents, beginning of period		125,617			189,312
Cash and cash equivalents, end of period		$	182,942		$	187,911

 

See notes to unaudited consolidated financial statements.

 

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MAXIMUS, Inc.

Notes to Unaudited Consolidated Financial Statements

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

 

1. Organization and basis of presentation

 

General

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and nine month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet at September 30, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements.

 

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expenses. On an ongoing basis, we evaluate our estimates including those related to revenue recognition and cost estimation on certain contracts, the realizability of goodwill, and amounts related to income taxes, certain accrued liabilities and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.

 

These financial statements should be read in conjunction with the consolidated audited financial statements and the notes thereto at September 30, 2013 and 2012 and for each of the three years ended September 30, 2013, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2013 which was filed with the Securities and Exchange Commission on November 19, 2013. Certain comparative balances have been reclassified to conform to the current year presentation.

 

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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 June 30,										Nine Months Ended June 30,
		2014			% (1)		2013			% (1)		2014			% (1)		2013			% (1)
Revenue:
Health Services		$	305,647		100	%	$	217,901		100	%	$	928,865		100	%	$	591,847		100	%
Human Services		114,252			100	%	116,422			100	%	336,641			100	%	355,093			100	%
Total		419,899			100	%	334,323			100	%	1,265,506			100	%	946,940			100	%
Gross Profit:
Health services		79,679			26.1	%	62,868			28.9	%	241,558			26.0	%	162,778			27.5	%
Human Services		32,924			28.8	%	31,692			27.2	%	97,633			29.0	%	105,756			29.8	%
Total		112,603			26.8	%	94,560			28.3	%	339,191			26.8	%	268,534			28.4	%
Selling, general, and administrative expense:
Health Services		37,430			12.2	%	28,507			13.1	%	108,980			11.7	%	78,882			13.3	%
Human Services		19,915			17.4	%	20,674			17.8	%	56,097			16.7	%	59,597			16.8	%
Corporate/Other		—			NM		—			NM		—			NM		(383		)	NM
Total		57,345			13.7	%	49,181			14.7	%	165,077			13.0	%	138,096			14.6	%
Operating income from continuing operations:
Health services		42,249			13.8	%	34,361			15.8	%	132,578			14.3	%	83,896			14.2	%
Human Services		13,009			11.4	%	11,018			9.5	%	41,536			12.3	%	46,159			13.0	%
Corporate/Other		—			NM		—			NM		—			NM		383			NM
Subtotal:
Segment Operating Income		55,258			13.2	%	45,379			13.6	%	174,114			13.8	%	130,438			13.8	%
Acquisition-related expenses		—			NM		1,174			NM		—			NM		1,500			NM
Legal and settlement expenses/ (recoveries)		—			NM		(182		)	NM		600			NM		(202		)	NM
Total		$	55,258		13.2	%	$	44,387		13.3	%	$	173,514		13.7	%	$	129,140		13.6	%

 

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

 

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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 June 30,						Nine Months Ended June 30,
		2014			2013			2014			2013
Numerator:
Income from continuing operations		$	34,041		$	28,036		$	109,003		$	81,533
Income (loss) from discontinued operations		97			64			201			(428		)
Net income		$	34,138		$	28,100		$	109,204		$	81,105
Denominator:
Basic weighted average shares outstanding		67,659			68,162			67,982			68,168
Effect of dilutive securities:
Employee stock options and unvested restricted stock units		1,372			1,705			1,387			1,696
Denominator for diluted earnings (loss) per share		69,031			69,867			69,369			69,864

 

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

 

4. Supplemental disclosures

 

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

 

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

 

5. Business combinations

 

Health Management Limited

 

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

 

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

 

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

 

		Purchase Price Allocation
		Updated through September 30, 2013			Adjustments			Updated through June 30, 2014
Cash consideration, net of cash acquired		$	71,435		$	—		$	71,435
Stock consideration		6,425			—			6,425
Purchase consideration, net of cash acquired		$	77,860		$	—		$	77,860
Accounts receivable and unbilled receivables		$	7,671		$	—		$	7,671
Other current assets		1,382			—			1,382
Property and equipment		2,752			—			2,752
Intangible assets		20,542			—			20,542
Total identifiable assets acquired		32,347			—			32,347
Accounts payable and other liabilities		6,228			—			6,228
Deferred revenue		1,149			—			1,149
Current income tax liability		612			144			756
Deferred tax liability		4,814			(113		)	4,701
Total liabilities assumed		12,803			31			12,834
Net identifiable assets acquired		19,544			(31		)	19,513
Goodwill		58,316			31			58,347
Net assets acquired		$	77,860		$	—		$	77,860

 

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

 

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

 

		Useful life		Fair value
Customer relationships		20 years		$	19,933
Technology-based intangible assets		2 years		609
Total intangible assets				$	20,542

 

The weighted average amortization period was 19.5 years.

 

Centacare

 

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

 

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

 

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

 

6. Goodwill and intangible assets

 

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

 

		Health Services			Human Services			Total
Balance as of September 30, 2013		$	125,096		$	46,771		$	171,867
Changes to allocation of HML purchase price		31			—			31
Foreign currency translation		3,213			360			3,573
Balance as of June 30, 2014		$	128,340		$	47,131		$	175,471

 

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

 

		As of June 30, 2014									As of September 30, 2013
		Cost			Accumulated Amortization			Intangible Assets, net			Cost			Accumulated Amortization			Intangible Assets, net
Customer contracts and relationships		$	43,782		$	6,888		$	36,894		$	39,243		$	3,953		$	35,290
Technology based intangible assets		9,490			6,757			2,733			9,583			5,974			3,609
Trademarks and trade names		4,400			1,910			2,490			4,421			1,303			3,118
Non-compete arrangements		—			—			—			243			221			22
Total		$	57,672		$	15,555		$	42,117		$	53,490		$	11,451		$	42,039

 

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

 

Three months ended September 30, 2014		$	1,543
Year ended September 30, 2015		6,033
Year ended September 30, 2016		5,759
Year ended September 30, 2017		5,360
Year ended September 30, 2018		4,099
Year ended September 30, 2019		3,101

 

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7. Credit facilities

 

On March 15, 2013, the Company entered into an unsecured five-year revolving credit agreement (the “Credit Agreement”). The Credit Agreement amends and restates the Company’s existing revolving credit agreement entered into in January 2008. The Credit Agreement provides for a revolving line of credit up to $100 million that may be used for revolving loans; swingline loans (subject to a sublimit of $5 million), and to request letters of credit, subject to a sublimit of $30 million. The line of credit is available for general corporate purposes, including working capital, capital expenditures and acquisitions. The arrangement terminates on March 15, 2018, at which time all outstanding borrowings must be repaid.

 

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

 

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

 

The Credit Agreement provides for an annual commitment fee payable on funds not borrowed or utilized for letters of credit. This charge is based upon the Company’s leverage and varies between 0.15% and 0.3%. Borrowings under the Credit Agreement bear interest at our choice at either (a) a Base Rate plus a margin that varies between 0.0% and 0.75% per year, (b) a Eurocurrency Rate plus an applicable margin that varies between 1.0% and 1.75% per year or (c) an Index Rate plus an applicable margin which varies between 1.0% and 1.75% per year. The Base Rate, Eurocurrency Rate and Index Rate are defined by the Credit Agreement and the applicable percentages are based upon the Company’s leverage rate at the time of the borrowing.

 

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

 

Certain contracts require us to provide a surety bond as a guarantee of performance. At June 30, 2014, the Company had performance bond commitments totaling $39.3 million. These bonds are typically renewed annually and remain in place until the contractual obligations have been satisfied. Although the triggering events vary from contract to contract, in general we would only be liable for the amount of these guarantees in the event of default in our performance of our obligations under each contract, the probability of which we believe is remote.

 

8. Commitments and contingencies

 

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

 

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

 

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

 

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

 

9. Stock repurchase program

 

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

 

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

 

10. Revenue recognition

 

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

 

11. Dividend

 

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

 

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

 

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

 

Business Overview

 

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

 

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

 

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

 

Financial overview

 

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

 

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

 

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

 

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Results of Operations

 

Consolidated

 

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

 

		Three Months Ended June 30,						Nine Months Ended June 30,
(dollars in thousands, except per share data)		2014			2013			2014			2013
Revenue		$	419,899		$	334,323		$	1,265,506		$	946,940
Gross profit		$	112,603		$	94,560		$	339,191		$	268,534
Gross profit percentage		26.8		%	28.3		%	26.8		%	28.4		%
Selling, general and administrative expenses		$	57,345		$	49,181		$	165,077		$	138,096
Selling, general and administrative expense as a percentage of revenue		13.7		%	14.7		%	13.0		%	14.6		%
Acquisition-related expenses		—			1,174			—			1,500
Legal and settlement expenses/ (recoveries)		—			(182		)	600			(202		)
Operating income from continuing operations		$	55,258		$	44,387		$	173,514		$	129,140
Operating margin from continuing operations percentage		13.2		%	13.3		%	13.7		%	13.6		%
Interest and other income, net		9			701			913			2,444
Income from continuing operations before income taxes		55,267			45,088			174,427			131,584
Provision for income taxes		21,226			17,052			65,424			50,051
Tax rate		38.4		%	37.8		%	37.5		%	38.0		%
Income from continuing operations, net of income taxes		$	34,041		$	28,036		$	109,003		$	81,533
Income (loss) from discontinued operations, net of income taxes		$	97		$	64		$	201		$	(428	)
Net income		$	34,138		$	28,100		$	109,204		$	81,105
Basic earnings (loss) per share:
Income from continuing operations		$	0.50		$	0.41		$	1.60		$	1.20
Income (loss) from discontinued operations		—			—			0.01			(0.01		)
Basic earnings per share		$	0.50		$	0.41		$	1.61		$	1.19
Diluted earnings (loss) per share:
Income from continuing operations		$	0.49		$	0.40		$	1.57		$	1.17
Income (loss) from discontinued operations		—			—			—			(0.01		)
Diluted earnings per share		$	0.49		$	0.40		$	1.57		$	1.16

 

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

 

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

 

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

 

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

 

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