Maximus, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2021. The filing is unaudited and should be read with the fiscal 2020 Form 10-K. Maximus provides government health, human services, technology, and employment-related business-process services through U.S. Services, U.S. Federal Services, and Outside the U.S. segments.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Revenue | $1.244 billion | $901.3 million | $3.148 billion | $2.538 billion |
| Gross profit | $291.9 million | $185.6 million | $728.6 million | $514.2 million |
| Gross margin | 23.5% | 20.6% | 23.1% | 20.3% |
| Operating income | $139.6 million | $87.3 million | $340.4 million | $203.8 million |
| Operating margin | 11.2% | 9.7% | 10.8% | 8.0% |
| Net income | $94.5 million | $64.5 million | $239.2 million | $150.8 million |
| Diluted EPS | $1.51 | $1.04 | $3.84 | $2.37 |
Q3 revenue increased 38.0%, gross profit increased 57.2%, operating income increased 59.9%, and net income increased 46.6% year over year. Nine-month revenue increased 24.1%, gross profit increased 41.7%, operating income increased 67.0%, and net income increased 58.6%.
Segment results
- U.S. Services: Q3 revenue was $436.3 million, up 29%; operating income was $62.2 million, up 2%. Gross margin declined to 24.0% from 27.6%, primarily because core programs operated at reduced capacity while COVID-19 response work offset lower transaction volumes. Nine-month operating margin was 16.3% versus 17.3%.
- U.S. Federal Services: Q3 revenue was $617.6 million, up 37%; operating income was $86.1 million, up 119%. Gross margin increased to 25.2% from 18.8%, supported by higher-margin COVID-19 work and contributions from Attain and VES. Nine-month revenue increased 11.8% and operating margin increased to 10.3% from 8.4%.
- Outside the U.S.: Q3 revenue was $189.6 million, up 65.9%; operating income was $8.3 million versus a $5.8 million loss. Nine-month operating income was $27.9 million versus a $33.5 million loss, reflecting recovery in employment services, particularly Australia, and currency benefits. Management expects start-up losses from new contracts to cause an operating loss in Q4 FY2021.
Cash flow, liquidity, and capital structure
- Nine-month cash flow from operations was $246.7 million versus $96.1 million in the prior-year period. Free cash flow, a non-GAAP measure, was $214.5 million versus $67.6 million.
- Investing cash outflow was $1.812 billion, principally for the $1.360 billion VES acquisition and $419.1 million Attain acquisition.
- At June 30, 2021, cash and cash equivalents were $96.1 million; cash, cash equivalents, and restricted cash totaled $113.2 million.
- Total debt principal was $1.708 billion, including $1.1 billion five-year and $400 million seven-year term loans and $200 million drawn on a $600 million revolving facility. Net total leverage was 2.4:1, and the company was in compliance with its debt covenants.
- Available liquidity included approximately $400 million under the revolving credit facility. Management expects to use most free cash flow to reduce debt and does not anticipate significant additional acquisitions in the near term.
- An interest-rate swap hedges $300 million of the $1.1 billion term loan at a fixed rate of 0.986%. Management estimates that a 100-basis-point increase in rates would reduce annual earnings by approximately $12.3 million.
Material changes and unusual items
- Maximus acquired Attain’s federal business on March 1, 2021, for approximately $419.1 million, and VES Group on May 28, 2021, for estimated cash consideration of approximately $1.368 billion. Both were integrated into U.S. Federal Services.
- The acquisitions increased goodwill to $1.758 billion from $593.1 million and net intangible assets to $892.5 million from $145.9 million. Purchase accounting valuations remain subject to change, particularly for VES.
- Acquisition-related expenses were $8.8 million through June 2021. The company also recorded an $8.5 million cost related to an unused interim financing facility.
- COVID-19 response work generated approximately $460 million of Q3 revenue and $860 million of nine-month revenue. Management expects more than $1 billion of COVID-19 response revenue for FY2021, but this work is short-term and may decline as conditions normalize.
- The 2020 Census Questionnaire Assistance contract concluded during FY2021, reducing the year-over-year comparison by approximately $170.4 million in Q3 and $313.2 million in nine months.
- Changes in contract estimates benefited Q3 revenue by $1.8 million and nine-month revenue by $17.8 million, adding $0.03 and $0.20, respectively, to diluted EPS.
Guidance, outlook, and risks
- Management expects FY2021 U.S. Services operating margins of 16% to 17%, U.S. Federal Services operating margins of 10% to 11%, and a full-year effective tax rate of 25% to 25.5%.
- Management expects approximately $10 million of additional interest expense during the remainder of FY2021 and anticipates using cash generation to reduce leverage.
- Management expects Attain and VES to be accretive to EPS in FY2022, but this is based on preliminary estimates and may change.
- Key risks include the duration and effects of COVID-19, volatility in performance-based employment contracts, government budget and procurement changes, contract termination or nonrenewal, performance penalties, audits, litigation, cybersecurity, personnel retention, and acquisition integration.
- VES derives all of its revenue from Department of Veterans Affairs contracts, creating customer concentration and renewal, pricing, audit, and performance risks.
- The company disclosed a VES billing dispute liability of $12.0 million, partially offset by a $6.0 million indemnification asset, and an $11.8 million uncertain-tax-position liability, partially offset by a $6.7 million indemnification asset.
- A state Medicaid matter involves approximately $7.3 million of settled disallowances and a further approximately $19.9 million disallowance still being contested. Maximus believes its exposure is limited and that school districts should bear most repayment obligations, but the outcome is uncertain.
- Disclosure controls were effective. Internal-control integration for VES remains in process following the acquisition.
Investor verification points
- Verify the final VES purchase price allocation, acquired intangible values, goodwill, tax treatment, and the resolution of the VES billing and tax contingencies.
- Assess the sustainability and margins of COVID-19 response revenue as temporary programs wind down.
- Track debt repayment, interest expense, leverage covenant headroom, variable-rate exposure, and availability under the revolving facility.
- Evaluate renewal, pricing, and performance risks in VES’s Department of Veterans Affairs contracts.
- Monitor recovery in Outside the U.S. employment services and the expected Q4 FY2021 start-up losses.
- Reconcile GAAP results with management’s non-GAAP measures, including adjusted EBITDA, earnings excluding intangible amortization, and free cash flow.