Maximus, Inc. Second Quarter Fiscal 2023 Summary
Business Context and Reporting Period
Maximus, Inc. provides government health and human services programs and technology solutions across U.S. Federal Services, U.S. Services, and Outside the U.S. The unaudited Form 10-Q covers the quarter and six months ended March 31, 2023, within fiscal 2023. The company reported approximately 39,500 employees and 12,550 contingent workers.
Key Financial Metrics
| Metric | Three months ended March 31, 2023 | Year-over-year change | Six months ended March 31, 2023 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1,206.9 million | 2.5% | $2,456.1 million | 5.5% |
| Gross profit | $228.6 million | 0.1% | $473.4 million | 3.7% |
| Gross margin | 18.9% | 19.4% prior year | 19.3% | 19.6% prior year |
| Operating income | $62.5 million | Down from $75.3 million | $137.3 million | Down from $156.8 million |
| Operating margin | 5.2% | 6.4% prior year | 5.6% | 6.7% prior year |
| Net income | $31.8 million | Down from $50.1 million | $71.8 million | Down from $103.4 million |
| Diluted EPS | $0.52 | Down from $0.80 | $1.17 | Down from $1.66 |
| Operating cash flow | Not separately provided | Not applicable | $175.0 million | Up from $111.9 million |
| Free cash flow | Not separately provided | Not applicable | $141.3 million | Up from $89.0 million |
Interest expense increased to $21.0 million in the quarter and $42.6 million for the six-month period, compared with $9.4 million and $19.1 million, respectively, in the prior-year periods. The effective interest rate was 5.9% at March 31, 2023, compared with 2.4% a year earlier.
Cash and cash equivalents were $56.3 million at March 31, 2023. Total debt was $1.29 billion, consisting primarily of Term Loan A due 2026 and Term Loan B due 2028. The company had access to a $600 million revolving credit facility, was compliant with all debt covenants, and reported a 2.48x consolidated net total leverage ratio and 7.33x consolidated net interest coverage ratio.
Segment Performance and Material Changes
- U.S. Federal Services: Second-quarter revenue increased 1.9% to $584.1 million. Operating income increased to $47.8 million, while operating margin was 8.2%. Growth was driven primarily by volume increases in the VES clinical business. Margin benefited temporarily from a contract close-out, while scaling costs tempered profitability.
- U.S. Services: Revenue increased 13.0% to $449.7 million, but operating income declined to $42.6 million from $46.7 million. Operating margin fell to 9.5% from 11.7% as higher-margin pandemic-related work declined and costs rose on expanded and new contracts.
- Outside the U.S.: Revenue declined 16.0% to $173.1 million and the segment reported a $3.7 million operating loss, compared with $4.3 million of operating income in the prior-year quarter. Results were affected by reduced Australian contract scope, foreign-exchange headwinds, delays in a major new program, and lower employment-program volumes. The company sold a small U.K. commercial practice and its Swedish employment operations in March 2023.
- For the six-month period, revenue growth was primarily organic. Currency effects reduced revenue by $36.8 million, or 1.6%, and reduced gross profit by $5.7 million.
- Revenue estimate changes reduced second-quarter revenue by $6.5 million and diluted EPS by approximately $0.08. For the six-month period, the reductions were $6.1 million and approximately $0.07, respectively.
- The company revised the useful life of certain VES technology assets, resulting in approximately $3.8 million of additional annual amortization. The change reduced diluted EPS by approximately $0.01 in the quarter and $0.02 year to date.
Cash Flow, Liquidity, and Capital Allocation
Operating cash flow increased to $175.0 million for the first six months, supported principally by improved collections. Days sales outstanding declined to 56 days at March 31, 2023, from 62 days at September 30, 2022; management expects DSO to return to approximately 60 to 70 days by fiscal year-end.
Investing cash outflows were $24.6 million, including $33.8 million for property, equipment, and capitalized software, partly offset by $9.1 million of proceeds from business disposals. Financing cash outflows were $171.7 million, primarily reflecting $530.5 million of debt principal payments, $34.0 million of dividends, and $8.5 million of tax withholding related to restricted stock vesting.
The company fixed interest rates on $650 million of debt through interest-rate swaps and converted its debt and swaps from LIBOR to SOFR. Management stated that a 100-basis-point increase in SOFR would increase annual interest expense by approximately $6.4 million at current debt balances. The company’s near-term capital allocation plan prioritizes debt reduction using free cash flow.
Guidance, Outlook, and Risks
- Fiscal 2023 effective tax rate guidance is 24.5% to 25.5%.
- U.S. Federal Services full-year operating margin is expected to be 10% to 11%, with additional VES volumes expected to support growth.
- U.S. Services full-year operating margin is expected to be 9% to 11%. Medicaid eligibility redetermination work was expected to begin in the third fiscal quarter, with a greater contribution anticipated in the fourth quarter.
- Outside the U.S. full-year operating margin is expected to be 1% to 3%. Management expects the divestitures to marginally improve margins.
- Remaining performance obligations were approximately $400 million at March 31, 2023, with approximately 60% expected to be recognized within 12 months, subject to the filing’s exclusions for certain short-duration and variable-consideration contracts.
- Key risks include government contract termination or rebidding, failure to meet performance requirements, pricing and contract-estimate risk, government budget and legislative changes, audits and investigations, cybersecurity and data-protection risks, labor availability, acquisition integration, foreign-exchange movements, rising interest rates, and litigation or potential sanctions affecting government contracting eligibility.
- The company stated that no material changes occurred to the risk factors disclosed in its 2022 Form 10-K. Existing litigation, audits, and investigations were not expected to have a material adverse effect based on current assessments, although outcomes remain uncertain.
Important Facts for Investors to Verify
- Whether Medicaid redetermination volumes begin and ramp as expected during the second half of fiscal 2023.
- VES volume growth, contract close-out effects, and whether U.S. Federal Services margins reach the 10% to 11% full-year target.
- Whether U.S. Services margins recover as pandemic-related work declines and new work scales.
- The performance of the Australian and Restart programs, international employment volumes, and the impact of currency movements.
- Interest-rate sensitivity, debt repayment requirements, and continued compliance with leverage and interest-coverage covenants.
- The effects of contract-estimate changes, including the $6.5 million second-quarter revenue reduction and related EPS impact.
- Cash conversion and DSO, including whether collections normalize toward management’s projected 60-to-70-day range.
- The financial and operational effects of the March 2023 U.K. and Swedish divestitures and any remaining contingent consideration obligations.