Maximus, Inc. — Fiscal 2024 First-Quarter Form 10-Q
Business Context and Reporting Period
Maximus provides government services through three segments: U.S. Federal Services, U.S. Services, and Outside the U.S. The filing covers the three months ended December 31, 2023, compared with the three months ended December 31, 2022. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $1,327.0 million | $1,249.2 million | 6.2% increase |
| Gross profit | $300.1 million | $244.7 million | 22.6% increase |
| Gross margin | 22.6% | 19.6% | Up 300 basis points |
| Operating income | $107.5 million | $74.8 million | 43.8% increase |
| Operating margin | 8.1% | 6.0% | Up 210 basis points |
| Net income | $64.1 million | $40.0 million | 60.4% increase |
| Diluted EPS | $1.04 | $0.65 | Increase of $0.39 |
| Cash flow from operations | $21.6 million | $(134.7) million | Improved by $156.3 million |
| Free cash flow | $(0.6) million | $(150.4) million | Improved by $149.7 million |
Revenue growth was primarily organic. U.S. Federal Services revenue increased 9.5% to $677.1 million, with operating margin improving to 10.2% from 8.3%. U.S. Services revenue increased 11.5% to $489.8 million, with operating margin improving to 13.5% from 8.6%, supported by resumed Medicaid redeterminations. Outside the U.S. revenue declined 16.4% to $160.1 million, and the segment recorded a $0.1 million operating loss versus $10.1 million of operating income in the prior-year quarter.
At December 31, 2023, cash and cash equivalents were $104.2 million, while cash, cash equivalents, and restricted cash totaled $153.5 million. Accounts receivable, net, was $860.4 million, including an allowance for credit losses of $8.0 million. Days sales outstanding was 59 days, compared with 74 days at December 31, 2022.
Total debt principal was $1.320 billion, consisting primarily of the Term Loan A, Term Loan B, and $80.0 million drawn on the revolver. The effective interest rate, including issuance costs and discounts, was 6.0%. The company had $520 million of additional revolving-credit availability and was in compliance with all debt covenants. Trailing-twelve-month covenant leverage was 2.14x and net interest coverage was 6.66x.
The company declared a quarterly dividend of $0.30 per share. A dividend of approximately $18.3 million was payable on February 29, 2024.
Material Changes Versus the Prior Comparable Period
- Gross profit and operating income grew faster than revenue, reflecting improved operating leverage and staffing utilization.
- U.S. Federal Services benefited from higher volumes, particularly U.S. Department of Veterans Affairs medical disability examination contracts.
- U.S. Services benefited from expanded eligibility and clinical-services programs and the resumption of Medicaid redeterminations.
- Outside the U.S. performance deteriorated due to lower employment-services volumes and the divestiture of operations in Canada, Italy, and Singapore. These divestitures generated a $1.0 million loss.
- SG&A increased $22.7 million, primarily from business growth and spending in anticipation of future work.
- Operating cash flow improved substantially because of stronger collections and the absence of certain prior-year payroll-tax and income-tax payments.
- Performance-based revenue increased to 53.1% of total revenue from 45.6%; time-and-materials revenue declined to 7.8% from 12.6%.
- Revenue and diluted EPS were reduced by $4.6 million and $0.07, respectively, from changes in contract estimates.
Guidance, Outlook, Risks, and Unusual Items
- Management expects full-year operating margins of 11%–12% for both U.S. Federal Services and U.S. Services.
- Management expects the Outside the U.S. segment to produce a slightly above break-even full-year operating margin.
- The expected fiscal 2024 effective tax rate is 24.5%–25.5%.
- Approximately $300 million of remaining performance obligations existed at December 31, 2023; approximately 70% was expected to be recognized within 12 months.
- The Centers for Medicare & Medicaid Services plans to recompete the Call Center Operations contract. The company expects uninterrupted work until the recompete is completed, but a change in expectations could impair the related $41.6 million customer-relationship intangible asset or shorten its useful life.
- The company faces multiple lawsuits related to the 2023 MOVEit cybersecurity incident. Management cannot estimate the ultimate outcome or potential loss.
- A Department of Justice investigation concerning the Census project remains ongoing. The company has accrued $3.0 million, but additional losses are reasonably possible and cannot currently be estimated.
- Government audits, contract performance requirements, contract terminations, budget changes, competition, cybersecurity exposure, litigation, regulatory compliance, labor availability, interest-rate movements, and reliance on government customers remain material risks.
- Management states that current cash, operating cash flow, and revolver availability should support operations, required debt repayments, dividends, and potential share purchases for the next 12 months and beyond.
Important Facts for Investors to Verify
- Whether the improved U.S. Services margins persist as Medicaid redetermination volumes normalize.
- Progress toward restoring consistent profitability in the Outside the U.S. segment and the financial effect of recent divestitures.
- Timing and competitive outcome of the CMS Call Center Operations recompete and any impact on the related intangible asset.
- Cash conversion, accounts-receivable aging, credit-loss allowances, and the sustainability of operating cash flow.
- Debt repayment requirements, variable-rate exposure, the September 2024 expiration of a $150 million interest-rate hedge, and the May 2026 Term Loan A maturity.
- Potential financial, legal, and reputational consequences of the MOVEit litigation and the Census DOJ investigation.
- Whether contract-estimate changes, performance-based revenue assumptions, and remaining performance obligations produce future revenue reversals or margin volatility.