Maximus, Inc. Third Quarter 2022 Form 10-Q Summary
Business Context and Reporting Period
Maximus provides government health, human services, technology, program administration, clinical assessment, and employment services in the United States and internationally. The filing covers the quarter and nine months ended June 30, 2022, filed August 4, 2022. Operations are reported through U.S. Services, U.S. Federal Services, and Outside the U.S.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $1.126 billion | $1.244 billion | $3.454 billion | $3.148 billion |
| Gross profit | $210.2 million | $291.9 million | $666.8 million | $728.6 million |
| Gross margin | 18.7% | 23.5% | 19.3% | 23.1% |
| Operating income | $54.6 million | $139.6 million | $211.4 million | $340.4 million |
| Operating margin | 4.8% | 11.2% | 6.1% | 10.8% |
| Net income | $31.3 million | $94.5 million | $134.8 million | $239.2 million |
| Diluted EPS | $0.51 | $1.51 | $2.17 | $3.84 |
Net cash provided by operating activities was $169.8 million for the first nine months, versus $246.7 million in the prior-year period. Non-GAAP free cash flow was $133.8 million, compared with $214.5 million. Capital expenditures and capitalized software totaled $35.9 million.
At June 30, 2022, cash and cash equivalents were $93.7 million, or $110.6 million including restricted cash. Accounts receivable totaled $868.0 million, and days sales outstanding were 70 days versus 68 days at September 30, 2021.
Total debt principal was $1.495 billion, including $50.0 million drawn on the revolver; reported debt, net of issuance costs and discounts, was $1.483 billion. The company reported a net total leverage ratio of 2.90x and net interest coverage ratio of 12.0x, and was in compliance with its debt covenants. The effective interest rate was 3.4%.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 9.5%, while nine-month revenue increased 9.7%, primarily because acquisitions more than offset organic declines and foreign-exchange effects.
- Third-quarter gross profit fell 28.0% and operating income fell 60.9%. Margins contracted substantially because prior-year results benefited from higher-margin COVID-19 response work and because of unfavorable contract performance.
- Organic revenue declined $251.3 million in the quarter, while acquired revenue contributed $150.2 million. Nine-month organic revenue declined $280.0 million, while acquired revenue contributed $606.4 million.
- U.S. Services revenue declined 8.5% in the quarter and operating margin decreased to 8.0% from 14.3%. COVID-19-related revenue declined to approximately $24 million from $164 million, and Medicaid redetermination volumes remained depressed.
- U.S. Federal Services revenue declined 14.9% in the quarter but increased 24.2% year to date, reflecting acquisitions including VES and Aidvantage. Organic results were affected by the completion of large, higher-margin pandemic-related contracts.
- Outside the U.S. revenue increased 6.0% in the quarter, but the segment reported an operating loss of $11.2 million versus income of $8.3 million. The segment recorded an $11.7 million charge for an expected loss on a modernization contract, and Australian contract transition costs and lower follow-on caseloads also reduced results.
- Interest expense increased to $10.8 million in the quarter and $29.9 million year to date, primarily due to debt used to finance the VES acquisition.
- Amortization of acquired intangible assets increased to $22.7 million in the quarter and $68.0 million year to date, versus $12.1 million and $23.7 million, respectively, in the prior-year periods.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2022 interest expense of approximately $42 million and an effective tax rate between 25.0% and 25.5%.
- Full-year operating margin expectations are 10% to 11% for both U.S. Services and U.S. Federal Services. U.S. Services recovery is not expected until fiscal 2023 because the federal public health emergency delays Medicaid eligibility redeterminations.
- U.S. Federal Services margins are expected to be tempered by $8 million to $10 million of additional VES staffing costs for fiscal 2023.
- Management expects the Outside the U.S. segment to report a loss for fiscal 2022.
- Remaining performance obligations were approximately $550 million at June 30, 2022, with approximately 45% expected to be recognized within 12 months. The balance excludes certain short-term and variable-consideration contracts.
- Aidvantage generated $47.5 million of third-quarter revenue and $8.8 million of gross profit. The contingent consideration liability was $16.4 million at June 30, 2022, with potential payments expected through fiscal 2024 and a maximum contractual payment of $65.0 million.
- The company recorded a $2.3 million third-quarter benefit from reducing the estimated Aidvantage contingent consideration obligation.
- Key risks include government budget and legislative changes, contract termination or nonrenewal, performance requirements and audits, contract pricing and cost estimates, acquisition integration, debt and floating interest rates, COVID-19 effects, cybersecurity, staffing, foreign exchange, litigation, and potential sanctions or debarment.
- A Medicaid dispute involves approximately $7.3 million settled by the state and a further approximately $19.9 million disallowance being contested. Maximus believes its exposure is limited and has recorded a liability for estimated fees earned.
- Management stated that there were no material changes to previously disclosed risk factors and that disclosure controls and internal control over financial reporting were effective as of June 30, 2022.
Important Facts for Investors to Verify
- Whether Medicaid eligibility redeterminations resume as anticipated in fiscal 2023 and restore U.S. Services volumes and margins.
- The sustainability of U.S. Federal Services growth after pandemic-related contracts ended and the effect of VES staffing investments.
- Progress and final economics of the Outside the U.S. modernization contract and the Australian contract transition.
- Changes in floating interest rates, debt repayment requirements, leverage, and the company’s ability to maintain covenant compliance.
- Actual Aidvantage volumes, contract duration, and final contingent consideration payments.
- Realization of the approximately $550 million remaining performance obligation balance and the assumptions underlying performance-based revenue.
- Potential exposure from the Medicaid disallowance matter, government audits, contract disputes, and other litigation or compliance proceedings.
- The effect of acquisitions, intangible-asset amortization, foreign exchange, and future share repurchases on reported earnings and cash flow.