MAXIMUS, INC. — Fiscal 2023 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 30, 2023, compared with the periods ended June 30, 2022. Maximus provides government health, human services, technology modernization, employment, and clinical assessment services in the U.S. and internationally.
Financial Performance and Position
| Metric | Q3 FY2023 | Q3 FY2022 | 9M FY2023 | 9M FY2022 |
|---|---|---|---|---|
| Revenue | $1.189 billion | $1.126 billion | $3.645 billion | $3.454 billion |
| Gross profit | $264.4 million | $210.2 million | $737.7 million | $666.8 million |
| Gross margin | 22.2% | 18.7% | 20.2% | 19.3% |
| Operating income | $58.4 million | $54.6 million | $195.7 million | $211.4 million |
| Operating margin | 4.9% | 4.8% | 5.4% | 6.1% |
| Net income | $30.9 million | $31.3 million | $102.6 million | $134.8 million |
| Diluted EPS | $0.50 | $0.51 | $1.67 | $2.17 |
- Cash flow: Nine-month operating cash flow was $169.8 million, essentially unchanged from $169.8 million in the prior-year period. Free cash flow was $110.9 million versus $133.8 million.
- Liquidity: June 30 cash and cash equivalents were $35.0 million; cash, cash equivalents, and restricted cash totaled $91.7 million. The company reported access to $561 million of additional revolving capacity.
- Debt: Funded debt was $1.318 billion and total debt, net of issuance costs and discounts, was $1.310 billion. The effective interest rate was 5.9%, versus 3.4% a year earlier. The company was in compliance with all debt covenants.
- Leverage: Trailing-twelve-month covenant net leverage was 2.45x and net interest coverage was 6.39x, compared with covenant limits of 4.00x and 3.00x, respectively.
- Shareholder returns: The quarterly dividend remained $0.28 per share. No common stock repurchases were made during the nine-month period, compared with $73.9 million of repurchases in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 5.6%; nine-month revenue increased 5.5%. Growth was primarily organic, with favorable contributions from U.S. Federal Services and U.S. Services.
- U.S. Federal Services revenue increased 11.1% in Q3 and operating income increased 35.3%, supported by higher Veterans Evaluation Services volumes and improved scaling. Full-year segment operating margin guidance was 10% to 11%.
- U.S. Services revenue increased 12.5% in Q3, while operating income increased 47.9%. Medicaid eligibility redeterminations resumed and were expected to provide a greater contribution in the fiscal fourth quarter. Full-year segment operating margin guidance was 9% to 11%.
- Outside the U.S. revenue declined 22.5% in Q3 and the segment remained loss-making, with a $15.2 million operating loss. Factors included low unemployment, reduced Australian contract scope, slower ramp-up of a major program, execution challenges, unfavorable currency translation, and divestitures. Management expected the segment to finish fiscal 2023 in a loss position.
- Gross margin improved substantially in Q3, but SG&A increased to 15.4% of revenue from 11.8%, partly because of cybersecurity-related costs, business investments, and acquisition-related charges. Nine-month operating margin declined to 5.4% from 6.1%.
- Interest expense more than doubled to $21.0 million in Q3 and increased to $63.6 million for nine months, primarily because of higher market interest rates.
- The company revised the useful life of certain VES technology assets, creating approximately $3.8 million of additional annual amortization. The change reduced diluted EPS by approximately $0.01 in Q3 and $0.03 for nine months.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fiscal 2023 effective tax rate of 23.0% to 23.5%.
- Management expected continued U.S. Federal Services growth, primarily from VES volumes, and a greater U.S. Services benefit from Medicaid redeterminations in the final quarter.
- In June 2023, Maximus recorded a $22.1 million expense for investigation and remediation of the MOVEit cybersecurity incident, including notifications, credit monitoring, and identity restoration services. Management estimated that personal information of approximately 14.5 million to 17.5 million individuals may require notification; actual costs and affected individuals could be greater.
- Two purported class actions were filed in August 2023 relating to the MOVEit incident. The company could not estimate the potential loss or outcome. Additional legal, regulatory, contractual, reputational, and operational consequences remain possible.
- Management identified government budget and legislative changes, contract performance and termination risk, pricing and bidding risk, audits and investigations, cybersecurity, personnel retention, litigation, acquisition integration, foreign exchange, and debt management as material risks.
- Approximately $350 million of remaining performance obligations existed at June 30, 2023; approximately 65% was expected to be recognized within 12 months, subject to stated exclusions and contract estimates.
- Management stated that actions to improve the international segment could result in additional charges, including asset impairment, in fiscal 2024 or later.
Investor Verification Priorities
- Verify the ultimate cost, affected population, litigation exposure, insurance recoveries, and regulatory or customer consequences associated with the MOVEit incident.
- Assess whether Medicaid redetermination volumes and timing deliver the expected fourth-quarter operating leverage in U.S. Services.
- Monitor VES volume growth, staffing requirements, contract performance, and the sustainability of U.S. Federal Services margins.
- Evaluate the turnaround plan, potential impairment charges, currency effects, and contract economics in the Outside the U.S. segment.
- Reconcile debt repayment requirements, floating-rate exposure, interest-rate swap coverage, and liquidity against expected free cash flow.
- Review the impact of contract-estimate changes, performance-based revenue recognition, government audits, and potential contract penalties or terminations.