Business Context and Reporting Period
Maximus, Inc. is a government services provider focused on health and human services, business process services, technology solutions, clinical assessments, appeals, and employment programs. Operations are organized into U.S. Services, U.S. Federal Services, and Outside the U.S. segments across the United States and eight other countries.
This Form 10-K was filed November 18, 2021 and covers the fiscal year ended September 30, 2021. Fiscal 2021 included the COVID-19 pandemic, the acquisitions of Attain’s Federal business, Veterans Evaluation Services Group (VES), and Connect Assist, and the wind-down of the U.S. Census Questionnaire Assistance contract.
Key Financial Metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $4.254 billion | $3.462 billion | +22.9% |
| Gross profit | $947.0 million | $711.0 million | +33.2% |
| Gross margin | 22.3% | 20.5% | +180 bps |
| Operating income | $408.5 million | $288.3 million | +41.7% |
| Operating margin | 9.6% | 8.3% | +130 bps |
| Net income | $291.2 million | $214.5 million | +35.8% |
| Diluted EPS | $4.67 | $3.39 | +37.8% |
| Operating cash flow | $517.3 million | $244.6 million | +111.4% |
| Free cash flow | $480.8 million | $203.9 million | +135.8% |
Non-GAAP adjusted operating income excluding intangible amortization was $452.9 million, or a 10.6% margin, compared with $323.9 million and 9.4% in fiscal 2020. Adjusted diluted EPS excluding intangible amortization was $5.19 versus $3.80.
- U.S. Services revenue was $1.662 billion, up 25.0%, with a 15.3% operating margin versus 17.1%. Approximately $620 million of revenue came from COVID-19 response work.
- U.S. Federal Services revenue was $1.893 billion, up 15.9%, with a 10.0% operating margin versus 8.1%. Federal COVID-19 response work contributed approximately $466 million of incremental revenue.
- Outside the U.S. revenue was $699.1 million, up 40.1%, and operating income improved to $20.1 million from a $34.1 million operating loss.
- Backlog was approximately $11.2 billion, up from $7.8 billion, with an average weighted remaining contract life of approximately 4.4 years. Management expected approximately 40% of backlog to convert to fiscal 2022 revenue.
Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $135.1 million at September 30, 2021; cash, cash equivalents, and restricted cash totaled $156.6 million.
- Total debt principal was $1.524 billion, consisting primarily of a $1.086 billion Term Loan A due 2026 and a $399.0 million Term Loan B due 2028. Debt net of issuance costs was $1.510 billion.
- The $600 million revolving credit facility had no outstanding balance at year-end and was available for working capital and other corporate purposes.
- The company reported a credit-agreement net leverage ratio of 2.3 and net interest coverage ratio of 17.0, compared with required thresholds of less than 4.0 and at least 3.0.
- Interest expense increased to $14.7 million from $2.1 million because of acquisition-related borrowings. A $300 million interest-rate swap hedged a portion of Term Loan A.
- Dividends paid were $68.8 million, and share repurchases were $3.4 million. The company had $146.7 million remaining under its repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected organic expansion, acquisitions, favorable foreign currency effects, and COVID-19 response activity, partly offset by the completion of the Census contract.
- Gross and operating margins improved overall, although U.S. Services margins declined because core programs operated at reduced volumes, temporary response work is expected to decline, and approximately $12 million of assets related to a start-up contract were written down.
- The U.S. Federal Services segment benefited from higher-margin COVID-19 work and partial-year contributions from Attain and VES. VES contributed $186.6 million of revenue and $53.5 million of gross profit from acquisition through year-end; Attain contributed $136.1 million of revenue and $33.4 million of gross profit.
- Acquisitions increased goodwill to $1.774 billion from $593.1 million and net intangible assets to $879.2 million from $145.9 million. Fiscal 2021 acquisition spending was approximately $1.799 billion.
- Operating cash flow improved substantially due to business growth, improved collections, and advance payments related to contract start-ups. Days sales outstanding improved to 68 days from 77 days.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fiscal 2022 interest expense of approximately $30 million to $33 million and an effective tax rate of 25% to 26%.
- Management expected significantly less COVID-19 response work in fiscal 2022, with a gradual recovery in core programs; the timing of recovery remained uncertain.
- Outside-the-U.S. results were expected to remain pressured by start-up contracts, including the U.K. Restart contract, through the end of the second quarter of fiscal 2022.
- Fiscal 2022 amortization expense was estimated at approximately $89.6 million, assuming no further acquisitions, including anticipated amortization from VES, Attain, Connect Assist, and the subsequent Aidvantage acquisition.
- On October 6, 2021, Maximus acquired Navient’s student loan servicing business, rebranded Aidvantage. Estimated contingent consideration was approximately $15.3 million, with estimated intangible assets of approximately $14.9 million to be amortized over 27 months.
- A significant CMS Contact Center Operations contract was scheduled to end May 31, 2022, with a new award timeline anticipated for June 2022. Loss of the recompete could adversely affect revenue, profitability, and goodwill or intangible asset recoverability.
- Key risks include government budget and legislative changes, contract termination or non-renewal, performance penalties, fixed-price and performance-based contract estimation risk, COVID-19 effects, labor shortages and vaccine-mandate-related attrition, cybersecurity and data privacy incidents, acquisition integration, leverage, and government audits or investigations.
- The company disclosed a contested Medicaid matter involving approximately $19.9 million of potential disallowances and a settled matter of approximately $7.3 million. Management believes the school districts are responsible for amounts ultimately refunded, subject to litigation risk.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded VES, which represented approximately 4% of revenue and 6% of gross profit for the partial year.
Important Facts for Investors to Verify
- Whether temporary COVID-19 revenue declines as expected and whether underlying Medicaid, employment, assessment, and public health volumes recover.
- The outcome of the CMS Contact Center Operations recompete and the impact of any contract loss or margin change.
- VES and Attain integration progress, realized synergies, contract renewals, and the performance of VES’s VA-dependent business.
- Debt repayment, floating-rate exposure, interest expense, covenant compliance, and the company’s ability to maintain dividends and repurchases.
- The collectability and ultimate realization of estimated performance-based revenue, including $48.7 million of estimated outcome fees recorded as unbilled receivables.
- Potential impairment or accelerated amortization affecting the $1.774 billion goodwill balance and $879.2 million of net intangible assets.
- Exposure from government audits, Medicaid disallowances, performance bonds, litigation, cybersecurity events, and vaccine-mandate-related workforce disruption.