Maximus, Inc. 10-Q Summary
Business Context and Reporting Period
Maximus provides business process management, technology, health, and human services to government agencies in the United States and internationally. This unaudited Form 10-Q covers the three and six months ended March 31, 2022, the second quarter and first half of fiscal 2022, and was filed May 5, 2022.
Operations are reported through U.S. Services, U.S. Federal Services, and Outside the U.S. segments. The company continues to emphasize digital transformation, clinical services, and market expansion.
Financial Performance and Liquidity
| Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Six Months Ended March 31, 2022 | Six Months Ended March 31, 2021 |
|---|---|---|---|---|
| Revenue | $1.177 billion | $959.3 million | $2.328 billion | $1.905 billion |
| Gross profit | $228.5 million | $230.7 million | $456.6 million | $436.7 million |
| Gross margin | 19.4% | 24.0% | 19.6% | 22.9% |
| Operating income | $75.3 million | $113.2 million | $156.8 million | $200.8 million |
| Operating margin | 6.4% | 11.8% | 6.7% | 10.5% |
| Net income | $50.1 million | $80.6 million | $103.4 million | $144.7 million |
| Diluted EPS | $0.80 | $1.29 | $1.66 | $2.33 |
- Revenue increased 22.7% in the quarter and 22.2% year to date, primarily from acquisitions. Gross profit declined 1.0% in the quarter but increased 4.6% year to date.
- Adjusted operating income excluding intangible amortization was $98.1 million in the quarter and $202.1 million year to date, with adjusted operating margins of 8.3% and 8.7%, respectively.
- Net cash provided by operating activities was $111.9 million year to date, compared with $279.7 million in the prior-year period. Non-GAAP free cash flow was $89.0 million versus $256.1 million.
- Cash and cash equivalents were $92.6 million at March 31, 2022; cash, cash equivalents, and restricted cash totaled $112.0 million.
- Total debt principal was $1.460 billion, including $1.059 billion under Term Loan A and $397.0 million under Term Loan B. The company had no outstanding revolver balance.
- The reported net total leverage ratio was 2.4 and the net interest coverage ratio was 15.3, compared with covenant requirements of less than 4.0 and at least 3.0, respectively. The company was in compliance with its covenants.
- Accounts receivable increased to $885.7 million from $834.8 million at September 30, 2021; reported days sales outstanding increased slightly to 68 days from 67 days.
Material Changes Versus the Prior Comparable Period
- U.S. Federal Services revenue increased 73.7% in the quarter and 57.1% year to date, reflecting VES, Attain, and Aidvantage acquisitions. The segment's quarterly operating margin improved to 8.1% from 7.0%.
- U.S. Services revenue declined 11.2% in the quarter and 5.8% year to date. COVID-related revenue declined by approximately $120 million in the quarter and $150 million year to date versus the prior-year periods, while Medicaid redetermination volumes remained depressed.
- Outside the U.S. revenue increased 13.8% in the quarter and 15.5% year to date, but operating income declined to $4.3 million in the quarter and the segment recorded a $5.1 million operating loss year to date. Higher costs, lower Australian contract volumes, and the ramp-up of the U.K. Restart contract pressured margins.
- Gross margin declined primarily because higher-margin pandemic-related work contracted, established programs remained below normal volumes, and acquired and organic work carried higher costs.
- Interest expense increased to $9.4 million in the quarter and $19.1 million year to date, primarily because of debt incurred to fund the VES acquisition.
- Intangible-asset amortization increased to $22.9 million in the quarter and $45.3 million year to date, principally from recent acquisitions.
- Operating cash flow declined due to lower operating income, unfavorable working-capital timing, higher interest and tax payments, and the absence of a prior-year benefit from cash receipts.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2022 interest expense of approximately $40 million to $42 million and an effective tax rate of 24.5% to 25.5%.
- Full-year operating margin expectations are 9% to 11% for U.S. Services and 10% to 11% for U.S. Federal Services. Management expects a small loss for Outside the U.S. for fiscal 2022.
- U.S. Services recovery depends significantly on the end of the federal public health emergency and the resumption of Medicaid redeterminations, which management did not expect until late fiscal 2022.
- Management assumed student loan repayments would resume in September 2022. Further delays could reduce Aidvantage revenue and profit. Aidvantage recorded $47.0 million of quarterly revenue and a $3.4 million gross loss.
- An Australian employment-services contract ends in June 2022 and the follow-on contract has a significantly lower caseload, creating expected revenue declines and ramp-down and severance costs.
- As of March 31, 2022, remaining performance obligations were approximately $550 million, with about 50% expected to be recognized within 12 months.
- The VES purchase price remains subject to working-capital and tax adjustments. The company expects to settle a $12.0 million acquired billing-dispute liability in the third quarter of fiscal 2022; a related $6.0 million indemnification asset has been recovered.
- Aidvantage contingent consideration was estimated at $18.6 million, with a maximum potential payment of $65.0 million. Changes in the estimate will affect earnings and payments are expected through fiscal 2024.
- The company faces normal-course government audits, investigations, bid protests, employment matters, contractual disputes, and litigation. A Medicaid matter involves approximately $7.3 million settled and $19.9 million still contested; the company believes its exposure is limited and has recorded a liability for estimated fees.
- Key ongoing risks include government budget and policy changes, contract termination or performance penalties, pricing and bidding risk, acquisition integration, cybersecurity and protected information, staffing, regulatory compliance, litigation, COVID-19 effects, foreign exchange, and floating-rate debt exposure.
Most Important Facts for Investors to Verify
- Whether Medicaid redeterminations and other transaction-based U.S. Services volumes recover as the public health emergency ends.
- Whether student loan repayments resume as assumed and whether Aidvantage transitions to profitability.
- The profitability and cash-flow contribution of VES, Attain, Connect Assist, and other acquired businesses after amortization and integration costs.
- The effect of lower Australian caseloads and U.K. Restart ramp-up on Outside the U.S. results.
- Debt repayment progress, floating interest-rate exposure, covenant headroom, and fiscal 2022 interest expense.
- Working-capital trends, particularly accounts receivable, DSO, contract estimates, and the sharp decline in operating cash flow.
- Final VES purchase-price adjustments, the Medicaid claims matter, Aidvantage contingent consideration, and other acquisition-related liabilities.
- The filing states that disclosure controls were effective as of March 31, 2022 and that there were no material changes to internal control over financial reporting.