SEC Company Response from MAXIMUS, INC. (MMS) (CIK 0001032220) (MMS) — Apr 19, 2016
MAXIMUS, INC. (MMS) (CIK 0001032220)
Date: April 19, 2016 · CIK: 0001032220 · Accession: 0001032220-16-000178
AI Filing Summary & Sentiment
Reasoning
Letter
Division of Corporate Finance United States Securities and Exchange Commission Form 10-K for Fiscal Year Ended September 30, 2015 Filed November 16, 2015 File No. 1-12997
Re: MAXIMUS, Inc.
Dear Mr. Thompson,
MAXIMUS, Inc. (the "Company," "we," or "us) has received your letter of March 23, 2016 containing comments on the filing referenced above.
We have produced your comments below (underlined) and provided our responses following each comment.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Summary of Consolidated Financial Results
1. Please provide greater transparency of the underlying reasons for your organic growth in revenues and profitability on a consolidated and segment basis for each year presented. Specifically describe in this discussion the drivers of your organic revenue growth (i.e. sales to new customers, increased sales to existing customers, new service and product offerings, and/or pricing).
In future filings, we will revise our discussion of organic revenue and profitability growth to provide additional information regarding the primary reasons for such growth. If appropriate, we will identify the impacts of large, specific contracts, such as the U.K. Health Appeals and Assessments contract (HAAS). We will also provide additional discussion and analysis regarding the anticipated effects of legislation and trends with respect to the type of work within our segments, such as program administration, appeals and assessments work and consulting work.
An example of such prospective disclosure, using our discussion comparing fiscal year 2015 to fiscal year 2014 from our Annual Report on Form 10-K for illustrative purposes, is shown as Appendix 1 to this letter.
2. We note that cost of sales is material to your results and varies between periods as a percentage of revenues but you do not provide a direct discussion and analysis of this line item. Please revise your disclosure to provide a direct comparative discussion and analysis of these costs on a consolidated and segment basis for each year presented in addition to your current disclosure that is in the context of gross profit margin. In doing so, please disclose the material components of which these costs consist. Your disclosure should quantify and analyze the impact of each significant component of cost of sales that caused this line item to materially vary between comparative periods, with explanation of the associated underlying reasons. This disclosure should be presented in a manner to allow investors to discern the relative contribution of each component cited to the total change in cost of sales.
In future filings, we will include more discussion of the organic, acquired and currency impacts of the cost of revenues so readers can better understand the impact on gross profit across periods in a manner consistent to that in which we show movements in revenue.
An example of such prospective disclosure, using our discussion comparing fiscal year 2015 to fiscal year 2014 from our Annual Report on Form 10-K for illustrative purposes, is shown as Appendix 1 to this letter.
3. Please revise your disclosure to provide a comparative discussion and analysis of selling, general and administrative expenses on a consolidated and segment basis for each year presented. Your disclosure should quantify and analyze the impact of each significant component of selling, general and administrative expenses that caused this line item to materially vary between comparative periods, with explanation of the associated underlying reasons.
In future filings, we will include more discussion of movements in our selling, general and administrative (SG&A) expense, including discussion of the input of acquisitions, currency and bonus levels. An example of such prospective disclosure, using our discussion comparing fiscal year 2015 to fiscal year 2014 from our Annual Report on Form 10-K for illustrative purposes, is shown as Appendix 1 to this letter.
Critical Accounting Policies and Estimates, page 33
4. We note your disclosure that changes in cost estimates related to cost-plus pricing arrangements may result in significant changes to revenues. Please revise your disclosure in future filings to discuss how accurate your estimates have been in the past, how much the estimates have changed in the past and whether the estimates are reasonably likely to change in the future, and provide an analysis of the sensitivity of the cost estimates to change based on other outcomes that are reasonably likely to occur and would have a material effect. Further, please provide similar disclosure with respect to performance-based volume estimates to the extent changes in volume estimates are material. Please refer to the Commission Guidance Regarding Management´s Discussion and Analysis of Financial Condition and Results of Operations, Release No 34-48960.
In our future filings, we will include in our analysis in Management's Discussion and Analysis of Financial Condition and Results of Operations a specific discussion of the accuracy of past estimates, changes in estimates which have occurred during the latest period and an analysis of the sensitivity of our cost-plus and performance-based contracts to future adjustments due to changes in estimates that are reasonably likely to occur and would have a significant effect. We will also update our disclosures to provide additional detail on these estimates in a manner similar to that below.
For our cost-plus contracts, our key estimates relate to the allocation of indirect costs. Much of the allocation of indirect costs is based upon defined rules established by the U.S. Federal Government or the relevant contract. While the existence of these rules reduces the risk of a significant error, the allocation of indirect costs is typically audited by the customer, and it usually takes a significant period of time for an audit to be concluded. The iterative process of an audit provides us with information to refine our estimates for open periods. We have not recorded any significant adjustments to our revenue related to changes in such estimates for any of the three years ended September 30, 2015. We are current in our submissions of costs to our relevant regulators. Although audits of past costs remain open for certain years, we believe it is unlikely that a significant adjustment related to prior periods would occur at this time. We believe that the likelihood of a significant adjustment to revenue would be remote.
On some of our performance-related contracts, our per-transaction fees may be higher in earlier years to compensate for anticipated higher costs at the commencement of contract operations. Where the discount in future fees is considered both significant and incremental, we are required to estimate our total future volumes and revenues and allocate an estimated fee to each transaction. We refine our estimates of future volumes quarterly and we recognize these changes as a cumulative catch-up to our revenue.
The sensitivity of the volume estimates in these transactions is driven by the length of the contract, the size of the discounts and the maturity of the contract. In the early periods of contract performance, changes to estimates of future volumes will have a greater effect on future, rather than past, revenues. A contract reaching maturity will generally have less volatility in the estimating process, so revenue volatility will diminish.
Although we had a number of contracts with these terms and conditions during the three-year period ended September 30, 2015, no significant adjustments to revenue were recorded in that period. As of September 30, 2015, many of these contracts have reached or are close to maturity and, accordingly, the likelihood of a significant adjustment has diminished. The only significant remaining contract is a large contract in our U.S. Federal Services Segment which has nine remaining years of operations. Our rate per transaction is currently based upon future projected volumes. If, at September 30, 2015, our estimate of those volumes had increased or decreased by five percent, it would not have resulted in a significant adjustment to revenue and operating profit.
Non-GAAP and other measures, page 35
5. In future filings please describe in greater detail why management believes that the presentation of non-GAAP measures (including free cash flow, adjusted diluted earnings per share, EBITA, Adjusted EBITDA) provides useful information to investors regarding your financial position and results of operations. Please refer to paragraph (1)(i)(C) of item 10(e) of Regulation S-K. Please note that this comment also applies to filings on Form 10-Q and Form 8-K that contain disclosure of non-GAAP financial measures.
In future filings, we will give more detail on how our non-GAAP measures provide useful information to our investors.
We provide free cash flow to complement our statements of cash flows. In order to sustain our cash flows from operations, we require regular refreshing of our fixed assets and technology. We believe that users of our financial statements wish to understand the cash flows that directly correspond with our operations and the investments we must make in those operations using a methodology which combines operating cash flows and capital expenditures. Free cash flow shows the effects of the Company’s operations and routine capital expenditure and excludes the cash flow effects of acquisitions, share repurchases, dividend payments and other financing transactions.
We provide adjusted diluted earnings per share to complement our other disclosures of earnings per share. We believe users of our financial statements benefit from identifying unusual, infrequently-occurring events which were not anticipated within our guidance and which fall outside the operations of the business. Our management uses this measure to set expectations and assess the performance of the Company.
In fiscal year 2015, for the first time, we included measures of EBITA, EBITDA and Adjusted EBITDA. Our Credit Agreement (as defined in the next section) includes the defined term Consolidated EBITDA and our calculation of EBITDA conforms to the Credit Agreement definition. We believe our investors appreciate the opportunity to understand the possible restrictions which arise from our Credit Agreement. EBITDA is also a useful measure of performance which focuses on the cash generating capacity of the business, excluding the non-cash expenses of depreciation and amortization, and makes for easier comparisons between the operating performance of companies with different capital structures by excluding interest expense and therefore the impacts of financing costs. The measure of EBITA is a step in calculating EBITDA and facilitates comparisons to similar businesses as it isolates the amortization effect of business combinations. The only use of the measure of Adjusted EBITDA reflected the effect of a one-time non-cash transaction in fiscal year 2013.
We will provide the explanations above in future filings to provide readers of our financial statements with more detail on what this measure entails and why management believes this measure is meaningful.
Item 8. Financial Statements and Supplementary Data
6. Debt, page 58
6. We note your credit agreement requires you to comply with certain financial covenants and other covenants including a maximum total leverage ratio and a minimum fixed charge coverage ratio. Please tell us whether the credit agreement covenants and/or other provisions of the agreement restrict or limit your ability to pay dividends, and your consideration of providing the disclosures required by Rule 4-08(e)(1) and (2) of Regulation S-X.
Our Amended and Restated Revolving Credit Agreement dated as of March 15, 2013, as amended by the First Amendment thereto dated as of March 9, 2015, and the Second Amendment thereto dated as of October 23, 2015 (the "Credit Agreement") is filed as Exhibit 10.10 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. There are no restrictions on the payment of dividends as long as our Leverage Ratio (i.e., the ratio of (i) Consolidated Total Debt (as defined in the Credit Agreement) as of the date of measurement to (ii) Consolidated EBITDA (as defined in the Credit Agreement) for the four consecutive fiscal quarters ending on or immediately prior to such date) does not exceed 2.50 to 1.00 as of the end of any fiscal quarter. As of the fiscal quarter ending September 30, 2015, the Leverage Ratio was 0.63:1.00. Based upon our Consolidated EBITDA at September 30, 2015, we calculate that we could have incurred additional indebtedness in excess of $625 million (to reach a debt balance of approximately $840 million) without triggering any restrictions on dividends.
The net assets of the Company as of September 30, 2015 were $615.7 million. Pursuant to the Virginia Stock Corporation Act, distributions may not be made if a corporation would not be able to pay its debts as they become due in the usual course of business or if the total assets of such corporation would be less than the sum of its total liabilities plus the amount that would be needed, if the business were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution (unless the articles or incorporation permit otherwise).
Accordingly, we believe that neither the provisions of the Credit Agreement nor applicable state law represent a significant restriction to our ability to pay dividends or to the successful future operations of the Company.
In future filings, we will update our disclosure consistent with the following:
“Our Amended and Restated Credit Agreement dated as of March 9, 2015 (Credit Agreement) contains no restrictions on the payment of dividends as long as our Leverage Ratio, as defined in the Credit Agreement, does not exceed 2.5:1. The Leverage Ratio is defined as the ratio of Consolidated Total Debt, as defined, as of any quarter end to Consolidated EBITDA, as defined. As of September 30, 2015, the Leverage Ratio was 0.63:1. Our Consolidated EBITDA at September 30, 2015 was $336.4 million while our consolidated debt was $214.8 million. Accordingly, we do not believe that the provisions of the Credit Agreement represent a significant restriction to our ability to pay dividends or to the successful future operations of the business.”
XXX
We acknowledge that:
•
The Company is responsible for the adequacy and accuracy of the disclosure in the filing.
•
Staff comments or changes to disclosure in response to staff comments do not foreclose the Securities and Exchange Commission from taking any action with respect to the filing.
•
The Company may not assert staff comments as a defense in any proceeding initiated by the Securities and Exchange Commission or any person under the federal securities laws of the United States.
If you have any additional questions or require more information, please contact me at 1891 Metro Center Drive, Reston, Virginia 20190 or at (703) 251-8500.
Sincerely,
/s/ Richard J. Nadeau
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CORRESP 1 filename1.htm CORRESP April 19, 2016 William H. Thompson Accounting Branch Chief Division of Corporate Finance United States Securities and Exchange Commission Washington D.C. 20549 Re: MAXIMUS, Inc. Form 10-K for Fiscal Year Ended September 30, 2015 Filed November 16, 2015 File No. 1-12997 Dear Mr. Thompson, MAXIMUS, Inc. (the "Company," "we," or "us) has received your letter of March 23, 2016 containing comments on the filing referenced above. We have produced your comments below (underlined) and provided our responses following each comment. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary of Consolidated Financial Results 1. Please provide greater transparency of the underlying reasons for your organic growth in revenues and profitability on a consolidated and segment basis for each year presented. Specifically describe in this discussion the drivers of your organic revenue growth (i.e. sales to new customers, increased sales to existing customers, new service and product offerings, and/or pricing). In future filings, we will revise our discussion of organic revenue and profitability growth to provide additional information regarding the primary reasons for such growth. If appropriate, we will identify the impacts of large, specific contracts, such as the U.K. Health Appeals and Assessments contract (HAAS). We will also provide additional discussion and analysis regarding the anticipated effects of legislation and trends with respect to the type of work within our segments, such as program administration, appeals and assessments work and consulting work. An example of such prospective disclosure, using our discussion comparing fiscal year 2015 to fiscal year 2014 from our Annual Report on Form 10-K for illustrative purposes, is shown as Appendix 1 to this letter. 2. We note that cost of sales is material to your results and varies between periods as a percentage of revenues but you do not provide a direct discussion and analysis of this line item. Please revise your disclosure to provide a direct comparative discussion and analysis of these costs on a consolidated and segment basis for each year presented in addition to your current disclosure that is in the context of gross profit margin. In doing so, please disclose the material components of which these costs consist. Your disclosure should quantify and analyze the impact of each significant component of cost of sales that caused this line item to materially vary between comparative periods, with explanation of the associated underlying reasons. This disclosure should be presented in a manner to allow investors to discern the relative contribution of each component cited to the total change in cost of sales. In future filings, we will include more discussion of the organic, acquired and currency impacts of the cost of revenues so readers can better understand the impact on gross profit across periods in a manner consistent to that in which we show movements in revenue. An example of such prospective disclosure, using our discussion comparing fiscal year 2015 to fiscal year 2014 from our Annual Report on Form 10-K for illustrative purposes, is shown as Appendix 1 to this letter. 3. Please revise your disclosure to provide a comparative discussion and analysis of selling, general and administrative expenses on a consolidated and segment basis for each year presented. Your disclosure should quantify and analyze the impact of each significant component of selling, general and administrative expenses that caused this line item to materially vary between comparative periods, with explanation of the associated underlying reasons. In future filings, we will include more discussion of movements in our selling, general and administrative (SG&A) expense, including discussion of the input of acquisitions, currency and bonus levels. An example of such prospective disclosure, using our discussion comparing fiscal year 2015 to fiscal year 2014 from our Annual Report on Form 10-K for illustrative purposes, is shown as Appendix 1 to this letter. Critical Accounting Policies and Estimates, page 33 4. We note your disclosure that changes in cost estimates related to cost-plus pricing arrangements may result in significant changes to revenues. Please revise your disclosure in future filings to discuss how accurate your estimates have been in the past, how much the estimates have changed in the past and whether the estimates are reasonably likely to change in the future, and provide an analysis of the sensitivity of the cost estimates to change based on other outcomes that are reasonably likely to occur and would have a material effect. Further, please provide similar disclosure with respect to performance-based volume estimates to the extent changes in volume estimates are material. Please refer to the Commission Guidance Regarding Management´s Discussion and Analysis of Financial Condition and Results of Operations, Release No 34-48960. In our future filings, we will include in our analysis in Management's Discussion and Analysis of Financial Condition and Results of Operations a specific discussion of the accuracy of past estimates, changes in estimates which have occurred during the latest period and an analysis of the sensitivity of our cost-plus and performance-based contracts to future adjustments due to changes in estimates that are reasonably likely to occur and would have a significant effect. We will also update our disclosures to provide additional detail on these estimates in a manner similar to that below. For our cost-plus contracts, our key estimates relate to the allocation of indirect costs. Much of the allocation of indirect costs is based upon defined rules established by the U.S. Federal Government or the relevant contract. While the existence of these rules reduces the risk of a significant error, the allocation of indirect costs is typically audited by the customer, and it usually takes a significant period of time for an audit to be concluded. The iterative process of an audit provides us with information to refine our estimates for open periods. We have not recorded any significant adjustments to our revenue related to changes in such estimates for any of the three years ended September 30, 2015. We are current in our submissions of costs to our relevant regulators. Although audits of past costs remain open for certain years, we believe it is unlikely that a significant adjustment related to prior periods would occur at this time. We believe that the likelihood of a significant adjustment to revenue would be remote. On some of our performance-related contracts, our per-transaction fees may be higher in earlier years to compensate for anticipated higher costs at the commencement of contract operations. Where the discount in future fees is considered both significant and incremental, we are required to estimate our total future volumes and revenues and allocate an estimated fee to each transaction. We refine our estimates of future volumes quarterly and we recognize these changes as a cumulative catch-up to our revenue. The sensitivity of the volume estimates in these transactions is driven by the length of the contract, the size of the discounts and the maturity of the contract. In the early periods of contract performance, changes to estimates of future volumes will have a greater effect on future, rather than past, revenues. A contract reaching maturity will generally have less volatility in the estimating process, so revenue volatility will diminish. Although we had a number of contracts with these terms and conditions during the three-year period ended September 30, 2015, no significant adjustments to revenue were recorded in that period. As of September 30, 2015, many of these contracts have reached or are close to maturity and, accordingly, the likelihood of a significant adjustment has diminished. The only significant remaining contract is a large contract in our U.S. Federal Services Segment which has nine remaining years of operations. Our rate per transaction is currently based upon future projected volumes. If, at September 30, 2015, our estimate of those volumes had increased or decreased by five percent, it would not have resulted in a significant adjustment to revenue and operating profit. Non-GAAP and other measures, page 35 5. In future filings please describe in greater detail why management believes that the presentation of non-GAAP measures (including free cash flow, adjusted diluted earnings per share, EBITA, Adjusted EBITDA) provides useful information to investors regarding your financial position and results of operations. Please refer to paragraph (1)(i)(C) of item 10(e) of Regulation S-K. Please note that this comment also applies to filings on Form 10-Q and Form 8-K that contain disclosure of non-GAAP financial measures. In future filings, we will give more detail on how our non-GAAP measures provide useful information to our investors. We provide free cash flow to complement our statements of cash flows. In order to sustain our cash flows from operations, we require regular refreshing of our fixed assets and technology. We believe that users of our financial statements wish to understand the cash flows that directly correspond with our operations and the investments we must make in those operations using a methodology which combines operating cash flows and capital expenditures. Free cash flow shows the effects of the Company’s operations and routine capital expenditure and excludes the cash flow effects of acquisitions, share repurchases, dividend payments and other financing transactions. We provide adjusted diluted earnings per share to complement our other disclosures of earnings per share. We believe users of our financial statements benefit from identifying unusual, infrequently-occurring events which were not anticipated within our guidance and which fall outside the operations of the business. Our management uses this measure to set expectations and assess the performance of the Company. In fiscal year 2015, for the first time, we included measures of EBITA, EBITDA and Adjusted EBITDA. Our Credit Agreement (as defined in the next section) includes the defined term Consolidated EBITDA and our calculation of EBITDA conforms to the Credit Agreement definition. We believe our investors appreciate the opportunity to understand the possible restrictions which arise from our Credit Agreement. EBITDA is also a useful measure of performance which focuses on the cash generating capacity of the business, excluding the non-cash expenses of depreciation and amortization, and makes for easier comparisons between the operating performance of companies with different capital structures by excluding interest expense and therefore the impacts of financing costs. The measure of EBITA is a step in calculating EBITDA and facilitates comparisons to similar businesses as it isolates the amortization effect of business combinations. The only use of the measure of Adjusted EBITDA reflected the effect of a one-time non-cash transaction in fiscal year 2013. We will provide the explanations above in future filings to provide readers of our financial statements with more detail on what this measure entails and why management believes this measure is meaningful. Item 8. Financial Statements and Supplementary Data 6. Debt, page 58 6. We note your credit agreement requires you to comply with certain financial covenants and other covenants including a maximum total leverage ratio and a minimum fixed charge coverage ratio. Please tell us whether the credit agreement covenants and/or other provisions of the agreement restrict or limit your ability to pay dividends, and your consideration of providing the disclosures required by Rule 4-08(e)(1) and (2) of Regulation S-X. Our Amended and Restated Revolving Credit Agreement dated as of March 15, 2013, as amended by the First Amendment thereto dated as of March 9, 2015, and the Second Amendment thereto dated as of October 23, 2015 (the "Credit Agreement") is filed as Exhibit 10.10 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. There are no restrictions on the payment of dividends as long as our Leverage Ratio (i.e., the ratio of (i) Consolidated Total Debt (as defined in the Credit Agreement) as of the date of measurement to (ii) Consolidated EBITDA (as defined in the Credit Agreement) for the four consecutive fiscal quarters ending on or immediately prior to such date) does not exceed 2.50 to 1.00 as of the end of any fiscal quarter. As of the fiscal quarter ending September 30, 2015, the Leverage Ratio was 0.63:1.00. Based upon our Consolidated EBITDA at September 30, 2015, we calculate that we could have incurred additional indebtedness in excess of $625 million (to reach a debt balance of approximately $840 million) without triggering any restrictions on dividends. The net assets of the Company as of September 30, 2015 were $615.7 million. Pursuant to the Virginia Stock Corporation Act, distributions may not be made if a corporation would not be able to pay its debts as they become due in the usual course of business or if the total assets of such corporation would be less than the sum of its total liabilities plus the amount that would be needed, if the business were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution (unless the articles or incorporation permit otherwise). Accordingly, we believe that neither the provisions of the Credit Agreement nor applicable state law represent a significant restriction to our ability to pay dividends or to the successful future operations of the Company. In future filings, we will update our disclosure consistent with the following: “Our Amended and Restated Credit Agreement dated as of March 9, 2015 (Credit Agreement) contains no restrictions on the payment of dividends as long as our Leverage Ratio, as defined in the Credit Agreement, does not exceed 2.5:1. The Leverage Ratio is defined as the ratio of Consolidated Total Debt, as defined, as of any quarter end to Consolidated EBITDA, as defined. As of September 30, 2015, the Leverage Ratio was 0.63:1. Our Consolidated EBITDA at September 30, 2015 was $336.4 million while our consolidated debt was $214.8 million. Accordingly, we do not believe that the provisions of the Credit Agreement represent a significant restriction to our ability to pay dividends or to the successful future operations of the business.” XXX We acknowledge that: • The Company is responsible for the adequacy and accuracy of the disclosure in the filing. • Staff comments or changes to disclosure in response to staff comments do not foreclose the Securities and Exchange Commission from taking any action with respect to the filing. • The Company may not assert staff comments as a defense in any proceeding initiated by the Securities and Exchange Commission or any person under the federal securities laws of the United States. If you have any additional questions or require more information, please contact me at 1891 Metro Center Drive, Reston, Virginia 20190 or at (703) 251-8500. Sincerely, /s/ Richard J. Nadeau Richard J. Nadeau Chief Financial Officer Appendix 1 Attached is a discussion comparing fiscal year 2015 to fiscal year 2014, based upon our Annual Report on Form 10-K. To best address your comments, we have elected to update tables and adjust the manner of our discussion and analysis, rather than simply add new words or paragraphs. For ease of review, we have removed sections which do not pertain directly to the comments. Summary of consolidated results The following table sets forth, for the fiscal year ends ind