Maximus, Inc. First-Quarter Fiscal 2023 Summary
Business context and reporting period
Maximus provides government health and human-services administration, clinical assessment, citizen engagement, program integrity, case management, and technology modernization services across the U.S. and internationally. The unaudited Form 10-Q covers the three months ended December 31, 2022, compared with the three months ended December 31, 2021. The company reported approximately 39,500 employees and 12,550 contingent workers.
Operations are organized into U.S. Federal Services, U.S. Services, and Outside the U.S. segments. Revenue was 48.3% from U.S. federal agencies, 35.0% from U.S. state agencies, 14.5% from international government agencies, and 2.1% from other customers.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $1,249.2 million | $1,150.9 million | 8.5% increase |
| Gross profit | $244.7 million | $228.2 million | 7.3% increase |
| Gross margin | 19.6% | 19.8% | Down 20 bps |
| Operating income | $74.8 million | $81.5 million | 8.3% decrease |
| Operating margin | 6.0% | 7.1% | Down 110 bps |
| Net income | $40.0 million | $53.3 million | 25.0% decrease |
| Diluted EPS | $0.65 | $0.85 | Decrease |
| Operating cash flow | $(134.7) million | $(2.9) million | Greater cash use |
| Free cash flow | $(150.4) million | $(9.2) million | Greater cash use |
SG&A increased 17.9% to $146.5 million, or 11.7% of revenue, from 10.8% in the prior-year period. The increase included approximately $6.5 million of severance costs intended to reduce future expenses. Amortization of intangible assets was $23.5 million, compared with $22.4 million.
Interest expense increased to $21.6 million from $9.6 million. The effective interest rate was 6.0% at December 31, 2022, compared with 2.3% at December 31, 2021. The effective tax rate was 25.2%, compared with 25.5%.
At December 31, 2022, cash and cash equivalents were $63.1 million, while cash, cash equivalents, and restricted cash totaled $159.8 million. Accounts receivable increased to $1.014 billion from $807.1 million at September 30, 2022, and days sales outstanding increased from 62 to 74 days.
Total debt principal was $1.574 billion, including $957.5 million of Term Loan A, $347.6 million of Term Loan B, $261.6 million drawn on the revolver, and $7.1 million of subsidiary borrowings. Total debt, net of issuance costs and discounts, was $1.564 billion. The company was in compliance with its debt covenants. Approximately $1.003 billion of principal is scheduled for fiscal 2026.
The company declared a quarterly dividend of $0.28 per share. A February 2023 dividend payment was expected to total approximately $17.1 million.
Material changes versus the prior comparable period
- Revenue increased 8.5%, consisting of 10.3% organic growth and a 1.9% unfavorable currency effect; acquired growth contributed 0.2%.
- U.S. Federal Services revenue rose 6.2%, but operating margin declined to 8.3% from 10.6%, partly because higher-volume cost-plus work and the decline of higher-margin pandemic work affected profitability.
- U.S. Services revenue increased 13.7%, while operating margin fell to 8.6% from 14.1% as pandemic-related, higher-margin work declined and newer business ramped.
- Outside the U.S. revenue increased 4.9% despite a 12.3% currency headwind. Operating income improved to $10.1 million from an operating loss of $9.5 million, supported by the U.K. Restart program reaching full capacity and cost reductions in Australia.
- Operating cash flow was adversely affected by a $200.7 million increase in accounts receivable, slower December collections, bonus payments, and higher debt-servicing costs.
- Debt principal increased by approximately $207.5 million from September 30, 2022, primarily reflecting revolver borrowings used in connection with slower collections and the repayment of part of the Term Loan B.
- The company converted its debt and interest-rate swaps from LIBOR to SOFR and increased fixed-rate debt coverage to $500 million.
- A change in the estimated useful life of technology acquired with VES Group increased expected annual amortization by $3.8 million and reduced Q1 diluted EPS by approximately $0.01.
Guidance, outlook, risks, and unusual items
- Management expected U.S. Federal Services operating margins of 10% to 11% for fiscal 2023, U.S. Services operating margins of 9% to 11%, and Outside the U.S. operating margins of 3% to 7%.
- Management expected the resumption of Medicaid eligibility redeterminations to benefit U.S. Services beginning in the third fiscal quarter, with a greater contribution in the fourth quarter. The timing depends on state implementation.
- Management expected the fiscal 2023 effective tax rate to be between 24.5% and 25.5%.
- Management anticipated improved collections after quarter-end and reported that approximately $75 million of revolver debt had been repaid by the end of January 2023.
- Approximately $425 million of remaining performance obligations existed at December 31, 2022, with approximately 60% expected to be recognized within 12 months. The balance excludes certain short-term and variable-consideration contracts.
- Key risks include government budget and legislative changes, contract termination or nonrenewal, performance penalties, audits and investigations, contract pricing and execution, acquisition integration, elevated interest rates, foreign-exchange movements, cybersecurity, staffing, litigation, and compliance risks that could result in fines, suspension, or debarment.
- The company settled the Arizona Medicaid claims matter in December 2022; the settlement amount had previously been accrued. Management did not believe existing litigation would likely have a material adverse effect, but litigation outcomes remain uncertain.
- The first-quarter cash shortfall included a temporary $52.3 million restricted-cash item related to customer funds previously sold under the receivables purchase program; absent further transactions, management anticipated a corresponding financing cash outflow in the quarter ending March 31, 2023.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting or previously disclosed risk factors.
Important facts for investors to verify
- Whether the anticipated Medicaid redetermination volumes begin on schedule and generate the expected second-half revenue and margin contribution.
- Whether U.S. segment margins recover toward management’s fiscal-year ranges as pandemic-related work declines and newer programs mature.
- Accounts receivable collection trends, days sales outstanding, operating cash flow, and the pace of revolver repayment.
- Interest-rate exposure, the effect of SOFR-based borrowing costs, and compliance with leverage and interest-coverage covenants.
- The timing and funding of the approximately $1.003 billion of principal due in fiscal 2026.
- Foreign-currency movements and their effect on international revenue and profit.
- Estimates underlying performance-based revenue, employment outcomes, remaining performance obligations, contingent consideration, and litigation or government-audit exposure.