MAXIMUS, Inc. Form 10-Q Summary
Business context and reporting period
MAXIMUS provides business-process services to government and commercial clients, primarily in health, human services, program administration, assessments, appeals, technology, and employment services. This unaudited filing covers the three and six months ended March 31, 2020, the second quarter of fiscal 2020. Results were materially affected by the COVID-19 pandemic during the latter part of the quarter.
Key financial metrics
| Metric | Three months ended March 31, 2020 | Year-over-year change | Six months ended March 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $818.1 million | Up 11.1% | $1.636 billion | Up 16.8% |
| Gross profit | $153.1 million | Down 9.6% | $328.5 million | Comparable |
| Gross margin | 18.7% | Down from 23.0% | 20.1% | Down from 23.5% |
| Operating income | $37.3 million | Down from $81.8 million | $116.4 million | Down from $155.9 million |
| Operating margin | 4.6% | Down from 11.1% | 7.1% | Down from 11.1% |
| Net income attributable to MAXIMUS | $27.7 million | Down from $61.9 million | $86.4 million | Down from $117.8 million |
| Diluted EPS | $0.43 | Down from $0.96 | $1.34 | Down from $1.82 |
| Cash flow from operations | Not separately reported for the quarter | — | $109.3 million | Down from $127.2 million |
| Free cash flow | Not separately reported for the quarter | — | $90.2 million | Down from $113.2 million |
Revenue, segments, debt, and liquidity
- U.S. Health and Human Services revenue increased 6.2% for both the quarter and six-month period. Six-month operating income was $104.4 million, with a 16.8% margin.
- U.S. Federal Services revenue increased 35.8% for the quarter and 50.0% on a reported basis for six months. Growth was led by the acquired citizen engagement centers business and the Census Questionnaire Assistance contract. Six-month operating income was $61.8 million, with an 8.1% margin.
- Outside the U.S. revenue declined 25.6% for the quarter and 17.5% for six months. The segment recorded a quarterly operating loss of $26.7 million and a six-month operating loss of $27.7 million.
- At March 31, 2020, cash and cash equivalents were $126.3 million, including $36.5 million held outside the United States. The company reported $250 million of available credit-facility capacity and $150 million of credit-facility borrowings.
- Total debt was approximately $159.5 million, including $9.4 million current debt and $150.2 million long-term debt. Operating lease liabilities totaled approximately $188.0 million following adoption of ASC Topic 842.
- Accounts receivable totaled $650.1 million, net of reserves. Days sales outstanding were 72 days, unchanged from September 30, 2019.
- Six-month cash used for investing was $21.6 million, primarily capital expenditures. Financing activities used $63.6 million, including $167.0 million of share repurchases and $35.8 million of dividends, partially offset by net debt borrowings.
Material changes versus the prior comparable period
- Revenue growth was principally driven by the citizen engagement centers acquisition and expansion of U.S. Federal Services contracts, but profitability declined sharply because costs grew faster than revenue.
- COVID-19 disrupted international employment and health-assessment activities, reducing outcome-based revenue and increasing operating losses in the Outside the U.S. segment.
- Management recorded an approximately $24 million reduction to revenue from revised estimates on international welfare-to-work contracts. The adjustment reduced net income by approximately $18 million and diluted EPS by approximately $0.28.
- Bad-debt expense was $7.8 million, reflecting increased reserves associated with COVID-19 payment concerns and a customer billing dispute.
- SG&A increased to $106.9 million for the quarter from $78.1 million, driven by bad-debt charges, higher business-development activity, expanded operations, acquisition costs, and IT transformation initiatives.
- The company adopted lease accounting under ASC Topic 842 on October 1, 2019, recognizing operating lease right-of-use assets and liabilities without a material effect on retained earnings or reported operating results.
- MAXIMUS repurchased approximately 2.77 million shares for $167.0 million during the six months. Repurchases were suspended on March 25, 2020, pending greater clarity regarding COVID-19 effects.
Guidance, outlook, commentary, and risks
- Management expected U.S. Health and Human Services full-year operating margins of 17% to 18% and U.S. Federal Services operating margins of 8% to 9% for the remainder of fiscal 2020.
- Management expected continued operating losses in the Outside the U.S. segment for the remainder of fiscal 2020, although it anticipated longer-term demand growth as governments address widespread unemployment.
- Management expected positive free cash flow during the second half of fiscal 2020 and stated that available cash and credit capacity were adequate for obligations as they came due.
- Management anticipated higher DSO if U.S. state governments delayed payments, and expected continued incremental costs from idle labor, remote work, enhanced screening, and cleaning.
- COVID-19 could reduce demand, workforce availability, contract performance, recoverability of costs, customer payments, and cash flow. Outcome-based contracts are particularly exposed to disrupted employment markets.
- Government audits, contract-performance disputes, legislative or budget changes, cybersecurity events, litigation, and potential contract termination remain material risks.
- CMS-related Medicaid disallowances total approximately $31 million. A $12 million disallowance was upheld by a district court and appealed; a separate $19 million disallowance remained pending. MAXIMUS believes its exposure is limited primarily to fees earned, with school districts responsible for the remainder.
- Remaining performance obligations were approximately $270 million at March 31, 2020, with approximately 55% expected to be recognized within 12 months, subject to stated exclusions and contract terms.
- On May 1, 2020, the company sold a subsidiary holding a contract requiring divestiture for $3.25 million.
Important facts for investors to verify
- Whether COVID-19-related disruptions, revised outcome estimates, and international operating losses persist or improve.
- The recoverability and collection timing of the $650.1 million receivable balance, including the $12.1 million reserve for billed and billable receivables.
- Whether U.S. segment margins achieve management’s stated targets and whether cost-plus contracts recover incremental pandemic-related costs.
- Liquidity, covenant compliance, credit-facility availability, and the effect of potential payment delays by state-government customers.
- The status and ultimate financial exposure from the approximately $31 million Medicaid disallowances.
- The effects of share-repurchase suspension, dividends, and future capital-allocation decisions on cash balances and leverage.
- Potential goodwill, long-lived-asset, contract-estimate, and credit-loss impacts as pandemic conditions develop.