Maximus, Inc. — Fiscal 2022 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2022. The filing is an annual Form 10-K rather than a standalone fourth-quarter filing; fourth-quarter information is included within the full-year results.
Business Context
Maximus provides business process, clinical, employment, program administration, and technology services primarily to government agencies. Fiscal 2022 revenue was generated approximately 47% from U.S. federal agencies, 35% from U.S. state agencies, 16% from international government agencies, and 2% from other customers. The company operated through U.S. Federal Services, U.S. Services, and Outside the U.S. segments.
Key strategic developments included the full-year contribution from VES and Attain, acquired in fiscal 2021, and Aidvantage, acquired from Navient in October 2021. The company employed approximately 39,500 people and used approximately 12,550 contingent workers at year-end.
Key Financial Metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $4.631 billion | $4.254 billion | 8.9% increase |
| Gross profit | $939.8 million | $947.0 million | 0.8% decrease |
| Gross margin | 20.3% | 22.3% | Down 200 bps |
| Operating income | $325.9 million | $408.5 million | 20.2% decrease |
| Operating margin | 7.0% | 9.6% | Down 260 bps |
| Net income | $203.8 million | $291.2 million | 30.0% decrease |
| Diluted EPS | $3.29 | $4.67 | 29.6% decrease |
| Operating cash flow | $289.8 million | $517.3 million | 44.0% decrease |
| Free cash flow | $233.7 million | $480.8 million | 51.4% decrease |
| Adjusted EBITDA | $478.5 million | $538.6 million | 11.2% decrease |
| Pro forma adjusted EBITDA | $508.5 million | $631.0 million | 19.4% decrease |
Segment Performance
| Segment | FY2022 Revenue | Revenue Change | FY2022 Operating Margin |
|---|---|---|---|
| U.S. Federal Services | $2.260 billion | 19.4% increase | 10.4% |
| U.S. Services | $1.608 billion | 3.3% decrease | 11.3% |
| Outside the U.S. | $763.7 million | 9.2% increase | (2.0)% |
U.S. Federal Services benefited from VES, Attain, and Aidvantage, partly offset by the decline in temporary COVID-19 work and the end of a Census Questionnaire Assistance contract. U.S. Services was pressured by reduced COVID-related activity and continued low transaction volumes under the U.S. Public Health Emergency. Outside the U.S. benefited from the U.K. Restart contract but was affected by Australian weakness, foreign exchange, severance costs, and $16.8 million of charges related to a software implementation.
Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $40.7 million at September 30, 2022; total cash, cash equivalents, and restricted cash were $136.8 million.
- Total debt principal was $1.366 billion, comprising $971.3 million of Term Loan A, $395.0 million of Term Loan B, and $0.1 million of subsidiary borrowings. Carrying value of total debt was $1.356 billion.
- The $600 million revolving credit facility was undrawn and fully available at year-end. The company was in compliance with its debt covenants, reporting a net total leverage ratio of 2.6 and net interest coverage ratio of 11.0.
- Effective interest rate was 4.69%, compared with 2.05% in fiscal 2021. Management expected the credit agreement benchmark to transition from LIBOR to SOFR in fiscal 2023.
- Debt repayments were $155.7 million on a net basis during fiscal 2022. Principal maturities include approximately $65.9 million in fiscal 2023 and $741.5 million in fiscal 2026.
- Maximus paid $68.7 million in dividends and repurchased $96.1 million of common stock during fiscal 2022. The quarterly dividend was $0.28 per share, and $50.6 million remained authorized for repurchases at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue increased $376.5 million, primarily from acquired businesses, partially offset by a $249.1 million organic decline and a $41.8 million foreign-exchange headwind.
- Gross profit declined despite higher revenue because COVID-related temporary work decreased by approximately $800 million and established programs continued to experience reduced transaction volumes.
- Amortization of intangible assets increased from $44.4 million to $90.5 million, mainly due to recent acquisitions.
- Interest expense increased from $14.7 million to $46.0 million because of acquisition-related borrowings and higher interest rates.
- Operating cash flow declined by $227.5 million, reflecting lower profits, payment timing, reduced upfront contract cash flows, and higher interest payments.
- Backlog increased to approximately $19.8 billion from $11.2 billion, with a weighted average remaining contract life of approximately 6.8 years, including options. Backlog estimates are subject to transaction volumes, contract options, foreign exchange, and rebid outcomes.
- Revenue mix shifted toward clinical and performance-based services. Clinical Services represented 25.4% of revenue versus 16.4% in fiscal 2021, while performance-based contracts represented 45.2% versus 33.3%.
Guidance, Outlook, and Unusual Items
- Management expected fiscal 2023 U.S. Federal Services operating margins of 10% to 11%, driven primarily by higher VES volumes and implementation of the PACT Act.
- Assuming the Public Health Emergency did not end, management expected fiscal 2023 U.S. Services operating margins of 8% to 10%. The timing and nature of the PHE’s expiration could materially affect volumes and results.
- Management expected Outside the U.S. operating margins in the low single digits, with greater stability as pandemic-related disruptions receded.
- Management expected a fiscal 2023 effective tax rate of 24.5% to 25.5%, compared with 26.4% in fiscal 2022.
- The company recorded an $11.0 million gain and received $16.4 million of proceeds from the sale of its former headquarters building.
- Aidvantage generated $184.3 million of revenue and $28.3 million of gross profit in fiscal 2022. Its seller-related contingent consideration liability was $13.8 million at year-end, with the servicing arrangement currently expected to end December 31, 2023.
- Management recognized $142.4 million of performance-based revenue based on estimated future outcomes and held $55.4 million of related estimated outcome fees as unbilled receivables. Changes in estimates reduced fiscal 2022 revenue by $2.5 million.
Risks and Contingencies
- Revenue is highly dependent on government contracts, appropriations, renewals, competitive rebids, and contracts that may be terminated without cause.
- Fixed-price and performance-based contracts expose the company to inaccurate volume, cost, staffing, pricing, and outcome estimates.
- COVID-19 effects, Public Health Emergency policy changes, labor shortages, wage inflation, and government budget delays could affect volumes, costs, and cash collections.
- Variable-rate debt creates interest-rate risk. A 100-basis-point increase in rates was estimated to reduce annual earnings by approximately $10.6 million.
- Acquisition integration, goodwill and intangible-asset valuation, and contract performance create impairment and margin risks. Goodwill impairment testing at July 1, 2022 resulted in no impairment charge.
- The company is exposed to cybersecurity, privacy, data protection, regulatory, audit, litigation, bid protest, and potential government-contract sanctions risks.
- Performance bond commitments totaled $19.0 million. Management did not believe existing litigation would likely have a material adverse effect, but the filing notes that legal and government audit outcomes remain uncertain.
- AHCCCS sued Maximus regarding historical Arizona Medicaid claims and sought $5.4 million in damages. The company stated that it had valid defenses and that school districts were responsible for amounts ultimately required to be refunded beyond Maximus’s fees.
Investor Verification Checklist
- Verify the sustainability of U.S. Federal Services growth and expected VES-related volumes, including the effect of the PACT Act.
- Monitor the end of the Public Health Emergency and its effect on Medicaid transaction volumes and U.S. Services margins.
- Assess whether Outside the U.S. operations recover from Australian weakness and the $16.8 million software-related charges.
- Reconcile reported earnings with higher amortization, acquisition-related costs, interest expense, and non-GAAP adjustments.
- Review debt maturities, floating-rate exposure, the transition from LIBOR to SOFR, and the company’s ability to reduce leverage while funding dividends and buybacks.
- Evaluate the quality and conversion timing of the $19.8 billion backlog, particularly performance-based and option-period amounts.
- Review assumptions supporting estimated performance-based revenue, unbilled receivables, contingent consideration, goodwill, and acquired intangible assets.
- Confirm the scope limitation in internal-control testing: Aidvantage was excluded from management’s and the auditor’s internal-control assessment, although the financial statement and internal-control opinions were unqualified.