Business Context and Reporting Period
Maximus, Inc. provides business process, technology, clinical, health, and human services to government agencies in the United States and internationally. This unaudited Form 10-Q covers the three months ended December 31, 2021, the first quarter of fiscal 2022, and was filed February 3, 2022.
Operations are reported through U.S. Services, U.S. Federal Services, and Outside the U.S. segments. Results reflect the acquisitions of VES, Attain Federal, Connect Assist, and the Aidvantage student-loan servicing business.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $1.151 billion | $945.6 million |
| Gross profit | $228.2 million | $206.1 million |
| Gross margin | 19.8% | 21.8% |
| Operating income | $81.5 million | $87.6 million |
| Operating margin | 7.1% | 9.3% |
| Net income | $53.3 million | $64.1 million |
| Diluted earnings per share | $0.85 | $1.03 |
| Interest expense | $9.6 million | $0.2 million |
| Cash flow from operations | $(2.9) million | $98.1 million |
| Free cash flow | $(9.2) million | $89.0 million |
- U.S. Federal Services revenue increased to $581.9 million from $405.2 million, with operating income rising to $61.7 million from $30.2 million.
- U.S. Services revenue was substantially flat at $386.4 million, while operating income declined to $54.6 million from $61.5 million.
- Outside the U.S. revenue increased to $182.6 million from $155.4 million, but the segment reported an operating loss of $9.5 million versus operating income of $4.5 million.
- Adjusted operating income excluding intangible-amortization expense was $103.9 million, with a 9.0% adjusted margin, compared with $94.1 million and 10.0% in the prior period. Adjusted diluted EPS was $1.12 versus $1.11.
Liquidity, Debt, and Cash Flow
- Cash and cash equivalents were $181.8 million at December 31, 2021; cash, cash equivalents, and restricted cash totaled $202.6 million.
- Total debt principal was $1.607 billion, including $100.0 million outstanding under the revolving credit facility. Reported total debt, net of issuance costs and discounts, was $1.594 billion.
- The company had a $600 million revolving facility and term loans maturing in 2026 and 2028. The annual effective interest rate was 2.3% at quarter-end.
- The net total leverage ratio was 2.47 against a covenant requirement below 4.0, and the net interest coverage ratio was 16.4 against a minimum of 3.0. The company was in compliance with its covenants.
- Operating cash flow was pressured by working-capital outflows, timing of payments, previously deferred U.S. CARES Act payments, and higher interest payments. Capital expenditures and capitalized software totaled $6.3 million.
- The quarterly dividend was $0.28 per share. The company paid $17.3 million in dividends and repurchased $1.4 million of common stock during the quarter; $145.3 million remained available under the repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Revenue grew 21.7%, primarily from acquired businesses, while organic revenue declined by $32.8 million. Acquired growth contributed $235.8 million.
- Gross profit increased 10.7%, but gross margin declined to 19.8% from 21.8% because higher-margin COVID-related work declined and certain operations experienced lower volumes or startup costs.
- Operating income, net income, and diluted EPS declined despite higher revenue. Higher amortization from acquisitions increased expense by $15.9 million year over year, and interest expense increased by $9.4 million because of acquisition-related borrowing.
- U.S. Federal Services benefited from VES, Attain, and Aidvantage, while organic work was affected by a lower-margin contract and the nonrecurrence of the Census Questionnaire Assistance contract.
- Outside the U.S. margins deteriorated as employment-service caseloads declined, the U.K. Restart contract had not reached full service capacity, and prior-year Australian recovery benefits did not recur.
- Revenue and diluted EPS were reduced by $4.7 million and $0.05, respectively, from changes in contract estimates, compared with a $10.2 million revenue and $0.12 diluted EPS benefit in the prior-year quarter.
Guidance, Outlook, Risks, and Unusual Items
- Management expects core programs to begin returning toward capacity in the latter half of fiscal 2022, while COVID-related work is expected to decline. The timing and extent of Medicaid redeterminations remain uncertain.
- Fiscal 2022 interest expense is expected to be $33 million to $35 million. The expected effective tax rate is 25% to 26%.
- The VES acquisition was completed for estimated cash consideration of $1.365 billion, with final purchase-price adjustments still subject to completion. VES included a $12.0 million billing-dispute liability, partially offset by a $6.0 million indemnification asset.
- Aidvantage consideration is contingent on future performance, with total payments currently estimated at approximately $15.3 million and a maximum potential payment of $65.0 million. The acquired customer-relationship intangible asset of $14.9 million is being amortized over 27 months.
- Approximately $570 million of remaining performance obligations existed at December 31, 2021; about 50% was expected to be recognized within the next 12 months.
- A significant intangible asset relates to a contract subject to rebid in June 2022. An unsuccessful rebid could accelerate amortization and reduce future earnings.
- Material risks include government contract termination or rebid risk, performance penalties, changes in government budgets and legislation, COVID-19 effects, contract-estimation volatility, acquisition integration, cybersecurity, staffing, litigation, regulatory compliance, interest-rate exposure, and foreign exchange.
- The company is contesting or responding to Medicaid disallowance matters totaling approximately $27.2 million. Management believes its exposure is limited primarily to fees earned, although an adverse outcome could result in greater liability.
- The company uses a $300 million interest-rate swap to hedge a portion of its floating-rate debt. LIBOR is expected to be phased out, with alternative benchmark provisions included in the credit agreement.
Important Facts for Investors to Verify
- Whether Medicaid redeterminations resume as anticipated and offset declining COVID-related work.
- The sustainability of U.S. Federal Services growth after the VES, Attain, and Aidvantage acquisition contributions.
- Progress toward profitability and full capacity on the U.K. Restart contract and performance of the broader Outside the U.S. segment.
- The June 2022 rebid outcome and any resulting impairment or accelerated amortization.
- Cash conversion, working-capital requirements, interest-rate exposure, and debt reduction following the VES acquisition.
- Final purchase-price adjustments, contingent consideration, and integration results for recent acquisitions.
- Developments in the Medicaid disallowance matter, government audits, contract disputes, and other contingencies.