MAXIMUS, INC. — Second Quarter Fiscal 2024 Form 10-Q
Business Context and Reporting Period
Maximus provides technology, clinical, program administration, and business process services to U.S. federal, state, local, and international government agencies. The filing covers the quarter and six months ended March 31, 2024, with comparisons to the periods ended March 31, 2023.
Operations comprise U.S. Federal Services, U.S. Services, and Outside the U.S. The company had approximately 60.8 million common shares outstanding as of May 6, 2024.
Financial Performance and Position
| Metric | Three months ended March 31, 2024 | Six months ended March 31, 2024 |
|---|---|---|
| Revenue | $1.348 billion | $2.675 billion |
| Gross profit / margin | $317.6 million / 23.6% | $617.6 million / 23.1% |
| Operating income / margin | $127.5 million / 9.5% | $235.0 million / 8.8% |
| Net income | $80.5 million | $144.7 million |
| Diluted EPS | $1.31 | $2.35 |
| Operating cash flow | Not separately provided for the quarter | $152.1 million |
| Free cash flow | Not separately provided for the quarter | $104.5 million |
- Six-month revenue increased 8.9% year over year, while gross profit increased 30.5% and operating income increased 71.2%.
- Six-month adjusted operating income, excluding intangible amortization and divestiture-related charges, was $281.0 million, or 10.5% of revenue. Adjusted diluted EPS was $2.90.
- Cash and cash equivalents were $77.4 million at March 31, 2024; cash, cash equivalents, and restricted cash totaled $118.3 million.
- Total debt principal was $1.216 billion, with $1.210 billion of debt reported after issuance costs and discounts. The effective interest rate, including issuance costs and discounts, was 5.9%.
- The company had access to an additional $600 million under its revolving credit facility and was in compliance with all debt covenants. The trailing-twelve-month net leverage ratio was 1.74x and interest coverage was 7.48x.
- Accounts receivable, net increased to $916.0 million from $826.9 million at September 30, 2023. Days sales outstanding increased to 62 days from 60 days at fiscal year-end.
- The company declared a quarterly dividend of $0.30 per share, payable May 31, 2024.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 11.7% to $1.348 billion; quarterly operating income rose from $62.5 million to $127.5 million, and net income rose from $31.8 million to $80.5 million.
- Six-month operating margin improved to 8.8% from 5.6%, primarily reflecting stronger contract performance and operating leverage.
- U.S. Federal Services revenue increased 14.7% for the six-month period, with operating margin improving to 11.0% from 8.2%. Growth was driven principally by higher volume and performance on Veterans Affairs medical disability examination contracts.
- U.S. Services revenue increased 9.8% for the six-month period, while operating margin improved to 13.7% from 9.0%. Medicaid redetermination activity and a large state assessment program contributed to the improvement.
- Outside the U.S. revenue declined 12.1% for the six-month period, and operating margin declined to 0.2% from 1.7%, reflecting disposals, weaker employment-services volumes, and operational challenges. The quarter was approximately break-even on an operating basis.
- Operating cash flow declined to $152.1 million from $175.0 million despite higher net income, primarily because of the timing of collections. Management stated that approximately $100 million of collections were received during the first week of April 2024.
- Capital expenditures and capitalized software increased to $47.5 million from $33.8 million. The company also paid $18.0 million for an acquisition of part of a long-term IT-services vendor.
- Debt principal declined by approximately $41.3 million from September 30, 2023. The company paid $36.6 million of dividends and $464.8 million of principal while drawing $423.4 million of borrowings during the six months.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2024 effective tax rate of 24.5% to 25.5%.
- U.S. Federal Services full-year operating margin is expected to be approximately 12%, with continued growth primarily from Veterans Affairs medical disability examination volumes.
- U.S. Services full-year operating margin is expected to be between 11% and 14%. Management expects the benefit from elevated Medicaid redetermination volumes to normalize during the second half of fiscal 2024.
- Outside the U.S. is expected to generate a slightly above break-even full-year operating margin.
- CMS is pursuing an earlier-than-expected recompete of the $6.6 billion Contact Center Operations contract, in part to add a labor harmony agreement requirement. The formal RFP process was expected to begin around May 16, 2024.
- A majority of the Veterans Affairs medical disability examination contracts acquired through VES are subject to a rebid process because volumes have exceeded the original contract ceilings. These contracts represented approximately 10% to 15% of fiscal 2023 company revenue.
- The company’s primary risks include government budget and legislative changes, contract recompetes and termination rights, performance penalties, pricing and bidding risk, contract audits, cybersecurity and data protection, litigation, regulatory compliance, acquisition integration, personnel retention, interest rates, and foreign currency movements.
- Multiple lawsuits and a multidistrict litigation proceeding relate to the 2023 MOVEit cybersecurity incident. The company cannot predict the outcome or estimate a possible loss.
- Maximus has accrued $3.5 million related to a Department of Justice Civil Investigation Demand concerning the Census project. Additional losses are reasonably possible but cannot currently be estimated.
- Revenue recognized from changes in contract estimates reduced quarterly revenue by $3.1 million and diluted EPS by $0.04; for the six-month period, the reductions were $9.2 million and $0.11, respectively.
- The company reported no material changes to previously disclosed risk factors and concluded that its disclosure controls and procedures were effective.
Most Important Facts for Investors to Verify
- Progress and timing of the CMS Contact Center Operations recompete and the potential effect on revenue, margins, and backlog.
- Rebid outcomes, volume assumptions, and contract economics for the Veterans Affairs medical disability examination portfolio.
- Whether Medicaid redetermination volumes normalize as expected and how this affects U.S. Services margins.
- Collection timing, accounts receivable growth, DSO, and the sustainability of operating cash flow and free cash flow.
- Debt repayment capacity, refinancing requirements beginning with Term Loan A maturity in 2026, and exposure to variable interest rates after swap expirations.
- Potential financial, legal, regulatory, and reputational consequences of the MOVEit litigation and DOJ Census investigation.
- Recoverability of the $28.5 million of capitalized software associated with new U.S. Services offerings and the carrying values of acquired intangible assets.