Maximus, Inc. Q1 FY2021 Form 10-Q Summary
Business context and reporting period
Maximus is a global provider of business-process services to government health, human-services, employment, and related programs, with approximately 34,000 employees. The filing covers the three months ended December 31, 2020, compared with the three months ended December 31, 2019. Operations comprise U.S. Services, U.S. Federal Services, and Outside the U.S.
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $945.6 million | $818.2 million | 15.6% |
| Gross profit | $206.1 million | $175.5 million | 17.4% |
| Gross margin | 21.8% | 21.4% | +40 bps |
| Operating income | $87.6 million | $79.1 million | 10.7% |
| Operating margin | 9.3% | 9.7% | -40 bps |
| Net income | $64.1 million | $58.7 million | 9.1% |
| Diluted EPS | $1.03 | $0.91 | 13.2% |
Financial condition and key metrics
- Operating cash flow was $98.1 million, compared with $87.3 million in the prior-year quarter. Free cash flow was $89.0 million versus $76.8 million.
- Cash, cash equivalents, and restricted cash ended at $149.8 million, including $132.6 million of unrestricted cash. Management reported approximately $400 million of available liquidity under the corporate credit facility and smaller facilities.
- Total debt was $32.6 million, consisting of foreign borrowings; there were no borrowings under the corporate revolving credit facility. Interest expense declined to $0.2 million from $0.5 million.
- Days sales outstanding improved to 75 days from 77 days at September 30, 2020, but remained above the 71-day level at December 31, 2019. Management noted payment delays from customers, particularly U.S. state governments.
- Total assets were $2.07 billion and shareholders’ equity was $1.30 billion at December 31, 2020. Goodwill was $595.9 million, with no impairment indicated.
- The quarterly dividend remained $0.28 per share. The board declared another $0.28 dividend payable February 26, 2021. The company repurchased approximately 52,000 shares for $3.4 million, with $146.7 million remaining under the authorization.
Material changes versus the prior comparable period
- Revenue increased across all segments: U.S. Services rose 23% to $384.9 million; U.S. Federal Services rose 11% to $405.2 million; and Outside the U.S. rose 11.5% to $155.4 million.
- U.S. Services operating income increased to $61.5 million, but operating margin declined to 16.0% from 18.6% because of higher costs and lower volumes in certain core performance-based programs.
- U.S. Federal Services operating income declined to $30.2 million from $31.6 million, and operating margin fell to 7.5% from 8.6%. Higher short-term COVID-related revenue was offset by lower margins, reduced performance-based volumes, and increased business-development spending.
- Outside the U.S. returned to profitability, with operating income of $4.5 million versus a $1.0 million loss. Results benefited from Australian seasonal demand, currency movements, acquisitions, and improved employment-services activity.
- COVID-response work generated approximately $160 million of consolidated revenue, including approximately $114 million in U.S. Services and $46 million in U.S. Federal Services.
- SG&A increased 28.4% to $112.0 million, partly due to approximately $5.4 million of U.S. severance expense, technology initiatives, pandemic-related costs, and higher business-development activity.
- Revenue benefited by $10.2 million, and diluted EPS by $0.12, from changes in estimates on certain performance-based contracts. These estimates remain unusually volatile because of pandemic-related disruptions.
Guidance, outlook, risks, and unusual items
- Management expects fiscal 2021 COVID-response revenue of approximately $425 million to $475 million. It expects the related work to decline as pandemic restrictions ease, while affected core programs may recover; the timing remains uncertain.
- Expected fiscal 2021 operating margins are 16.5% to 17.5% for U.S. Services, 6% to 7% for U.S. Federal Services, and approximately breakeven for Outside the U.S. Management expects Outside the U.S. operating margins to be negative in the second quarter, followed by improvement.
- Management expects a fiscal 2021 effective tax rate of 25.75% to 26.5%.
- Key risks include COVID-19 duration and recovery patterns, federal procurement and funding changes under the Biden Administration, government budget pressure, contract performance and termination risk, pricing and bidding risk, cybersecurity and data protection, employee retention, regulatory compliance, audits, litigation, and acquisition integration.
- U.S. state customers face lower tax receipts and potential budgetary pressure, which could cause delayed payments or reduced demand. The company also incurred pandemic-related sick pay and idle-labor costs, with uncertainty regarding recoverability under some cost-plus contracts.
- CMS has asserted two Medicaid disallowances against a state agency totaling approximately $31 million relating to historical work. Maximus believes its exposure is limited primarily to fees earned and that school districts bear the remaining amounts; it has reserved estimated fees. One approximately $12 million disallowance was upheld by a district court and appealed; the approximately $19 million second matter remains pending.
- Remaining performance obligations were approximately $400 million at December 31, 2020, with approximately 55% expected to be recognized within 12 months, subject to stated exclusions and variable consideration limitations.
Important facts for investors to verify
- Whether COVID-response revenue of $425 million to $475 million for fiscal 2021 is achieved and how quickly temporary work declines.
- Whether core U.S. program volumes and margins recover as Medicaid redeterminations and other government activities resume.
- The sustainability of the $10.2 million favorable contract-estimate adjustment and the volatility of Outside-the-U.S. employment-services estimates.
- Customer payment timing, DSO, receivables of $782.8 million, and the effect of state-government budget pressure on liquidity.
- Progress and ultimate exposure related to the approximately $31 million Medicaid disallowances, as well as other government audits and contract compliance matters.
- Whether segment margin guidance and the expected Outside-the-U.S. return to approximately breakeven are achieved.
- The effect of the CQA contract wind-down, severance, technology spending, currency movements, and future acquisitions on reported profitability and cash flow.