Maximus, Inc. Form 10-Q Summary
Business Context and Reporting Period
Maximus provides business process, health and human services, technology, assessments, appeals, and employment services to government and commercial clients across the United States and internationally. The filing covers the three and six months ended March 31, 2021, the company’s fiscal second quarter, with comparisons to the prior-year periods.
Operations are reported through U.S. Services, U.S. Federal Services, and Outside the U.S. segments. Approximately 34,000 employees support programs in four continents. COVID-19 response work, including contact tracing, unemployment insurance, vaccine support, disease investigation, and federal helpline services, was a significant growth driver.
Financial Highlights
| Metric | Three Months Ended March 31, 2021 | Prior Year | Six Months Ended March 31, 2021 | Prior Year |
|---|---|---|---|---|
| Revenue | $959.3 million | $818.1 million | $1.905 billion | $1.636 billion |
| Gross profit | $230.7 million | $153.1 million | $436.7 million | $328.5 million |
| Gross margin | 24.0% | 18.7% | 22.9% | 20.1% |
| Operating income | $113.2 million | $37.3 million | $200.8 million | $116.4 million |
| Operating margin | 11.8% | 4.6% | 10.5% | 7.1% |
| Net income | $80.6 million | $27.7 million | $144.7 million | $86.4 million |
| Diluted EPS | $1.29 | $0.43 | $2.33 | $1.34 |
- Second-quarter revenue increased 17.3%; six-month revenue increased 16.4%.
- Second-quarter operating income increased 203.4%; six-month operating income increased 72.4%.
- Second-quarter net income increased 191.5%; six-month net income increased 67.5%.
- Second-quarter and six-month effective tax rates were 28.0% and 27.1%, respectively, compared with 26.1% and 26.0% in the prior-year periods.
- Quarterly and year-to-date dividends remained $0.28 per share and $0.56 per share, respectively.
Segment Performance
| Segment | Q2 Revenue | Q2 Revenue Change | Q2 Operating Income | Q2 Operating Margin |
|---|---|---|---|---|
| U.S. Services | $448.2 million | 45% | $82.8 million | 18.5% |
| U.S. Federal Services | $330.1 million | (16.1%) | $23.2 million | 7.0% |
| Outside the U.S. | $180.9 million | 55.9% | $15.1 million | 8.3% |
- U.S. Services growth included approximately $175 million of COVID-19 response revenue for the six-month period. Management expects this work to be short-term and to decline as pandemic restrictions ease.
- U.S. Federal Services was affected by the expected wind-down of the Census Questionnaire Assistance contract, which reduced second-quarter revenue by approximately $133.1 million versus the prior year. Attain contributed one month of results.
- Outside the U.S. recovered from the pandemic-related employment-services downturn, particularly in Australia. Revenue benefited from improved estimates of future employment outcomes and favorable currency movements.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Six-month operating cash flow was $279.7 million, compared with $109.3 million in the prior year.
- Six-month free cash flow, a non-GAAP measure, was $256.1 million, compared with $90.2 million.
- Investing cash outflow was $437.5 million, primarily reflecting $413.8 million of cash consideration for the Attain acquisition and $23.6 million of capital expenditures and capitalized software costs.
- Financing cash flow was $186.0 million, including net debt borrowings of approximately $236.3 million, dividends of $34.4 million, share repurchases of $3.4 million, and tax withholding related to equity awards.
- At March 31, 2021, unrestricted cash was $101.7 million and cash, cash equivalents, and restricted cash totaled $120.0 million.
- Total debt was approximately $267.2 million, consisting of $16.6 million current debt and $250.6 million long-term debt, compared with approximately $28.9 million at September 30, 2020. The increase primarily funded Attain.
- Management reported approximately $160 million of remaining availability under the corporate credit facility, in addition to capacity under smaller international facilities.
- Accounts receivable totaled $760.4 million, including $582.5 million billed or billable and $177.9 million unbilled. Pro forma days sales outstanding was 70 days, within the company’s 65-to-80-day target range.
- Remaining performance obligations were approximately $425 million at March 31, 2021; approximately 55% was expected to be recognized within the following 12 months.
Material Changes and Unusual Items
- On March 1, 2021, Maximus acquired the Federal division of Attain, LLC for estimated cash consideration of $419.9 million. The acquisition added estimated goodwill of $303.5 million and customer-related intangible assets of $105.0 million. Attain contributed $19.9 million of revenue and $3.0 million of operating income during the quarter and six-month period from acquisition.
- On April 20, 2021, after quarter-end, Maximus agreed to acquire VES Group, Inc. for $1.4 billion, subject to adjustments and customary closing conditions. VES provides medical disability examinations for the U.S. Department of Veterans Affairs.
- Maximus expects to borrow approximately $1.5 billion to fund VES and refinance existing debt. Management expects leverage of approximately 2.7:1 at closing and intends to use most free cash flow to reduce leverage below 2.5:1.
- Management identified $7.6 million of second-quarter revenue and $0.09 of diluted EPS benefit from changes in contract estimates; the six-month benefit was $16.0 million of revenue and $0.19 of diluted EPS.
- Acquisition-related expenses were $2.5 million in the quarter and $4.3 million year to date, partly offset by a $1.0 million reversal of contingent consideration related to Index Root.
- Goodwill increased to $899.8 million from $593.1 million at September 30, 2020, primarily because of Attain. No goodwill impairment charges were recorded.
Guidance, Outlook, and Risks
- Management expects full-year fiscal 2021 U.S. Services operating margins of 17% to 18%.
- Management expects U.S. Federal Services operating margins of 9% to 10%, including the anticipated effect of VES; excluding VES, the expected margin was approximately 8%.
- The projected fiscal 2021 annual effective tax rate is 26% to 27%.
- COVID-19 response work was expected to contribute approximately $850 million of fiscal 2021 revenue, including approximately $242 million in the second quarter. The duration and profitability of this work remain uncertain.
- New international employment-services contracts are expected to produce startup losses in the second half of fiscal 2021, particularly in the fourth quarter, before becoming profitable in fiscal 2022.
- Management expects Attain to be accretive for fiscal 2021, while VES is expected to be slightly dilutive for fiscal 2021 because of acquisition, financing, and amortization costs. Both acquisitions were expected to be accretive to EPS in fiscal 2022, although this is based on preliminary estimates.
- Key risks include COVID-19 effects, government funding and procurement changes, contract performance and termination, competitive bidding and pricing, dependence on government customers, contract-estimate volatility, acquisition integration, increased leverage and interest expense, cybersecurity, audits, litigation, and potential sanctions or debarment.
- A Medicaid matter involves two federal disallowances totaling approximately $31 million. Maximus believes its exposure is limited primarily to fees earned and that school districts are responsible for the remaining amounts; no legal action had been initiated against Maximus as of the filing.
- A 10% unfavorable foreign-currency movement would have reduced comprehensive income by approximately $17.0 million and cash by approximately $8.3 million at March 31, 2021. A 1% increase in interest rates would have increased annualized interest expense by approximately $2.4 million on corporate-facility borrowings.
Important Facts for Investors to Verify
- Whether COVID-19 response revenue declines as expected and whether core government-program volumes recover.
- The final purchase-price allocation and integration performance for Attain.
- Regulatory approval, financing, closing, contract concentration, and integration risks associated with the VES acquisition.
- The effect of approximately $1.5 billion of planned borrowing on leverage, interest expense, covenants, credit ratings, and free cash flow.
- The sustainability of contract-estimate benefits, international employment-outcome assumptions, and forecast margins.
- The resolution and ultimate exposure related to the approximately $31 million Medicaid disallowances and other government audits or claims.
- Whether management’s projected 26% to 27% annual effective tax rate and stated segment margin targets are achieved.