Maximus, Inc. Fiscal 2020 Form 10-K Summary
Business context and reporting period
Maximus provides business process services to government agencies, primarily in health, human services, employment services, assessments, appeals, citizen engagement and technology. The filing covers the fiscal year ended September 30, 2020, with comparisons to fiscal 2019.
- U.S. Services represented 38% of revenue, U.S. Federal Services 47%, and Outside the U.S. 15%.
- Revenue by customer source was approximately 39% U.S. state agencies, 45% U.S. federal agencies, 13% foreign governments and the balance from other customers.
- COVID-19 materially affected operations, reducing volumes on certain core programs while generating new contact-tracing, unemployment-insurance, public-health and other response work.
Financial results and key metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Revenue | $3.462 billion | $2.887 billion | 16.0% increase |
| Gross profit | $711.0 million | $671.2 million | 3.9% increase |
| Gross margin | 20.5% | 23.2% | Down 270 bps |
| Operating income | $288.3 million | $317.1 million | 9.1% decrease |
| Operating margin | 8.3% | 11.0% | Down 270 bps |
| Net income attributable to Maximus | $214.5 million | $240.8 million | 10.9% decrease |
| Diluted EPS | $3.39 | $3.72 | 8.9% decrease |
| Cash flow from operations | $244.6 million | $356.7 million | 31.4% decrease |
| Free cash flow | $203.9 million | $294.4 million | 30.7% decrease |
| Cash and cash equivalents | $71.7 million | $105.6 million | Decrease |
| Total debt | $28.9 million | $9.9 million | Increase |
Adjusted EBITDA was $415.1 million, compared with $424.0 million in fiscal 2019. The company paid $70.2 million in dividends and repurchased $167.0 million of common stock during fiscal 2020. The quarterly dividend increased from $0.25 to $0.28 per share.
At September 30, 2020, Maximus had $400 million available under its corporate revolving credit facility, no borrowings under that facility, and was in compliance with its covenants. Total leverage was below 1.0:1.0. Additional borrowings included $21.4 million under an Australian facility and $7.0 million under smaller foreign facilities.
Material changes versus the prior comparable period
- Revenue growth was led by the U.S. Federal Services segment, including the Census Questionnaire Assistance contract, which generated $515 million of fiscal 2020 revenue versus $185 million in fiscal 2019.
- U.S. Federal Services revenue increased 47.0% to $1.633 billion, but operating margin declined to 8.1% from 10.4%, primarily because of the higher mix of lower-margin cost-plus work and increased business-development spending.
- U.S. Services revenue increased 13.0% to $1.329 billion, while operating margin declined to 17.1% from 18.8%. COVID-19 response work added approximately $129 million of revenue but generally carried lower margins; Medicaid redetermination volumes also declined.
- Outside the U.S. revenue declined 16.7% to $498.9 million, and the segment moved to an operating loss of $34.1 million from operating income of $16.1 million. Employment-service volumes and face-to-face health assessments were disrupted by COVID-19.
- Higher cost-plus and time-and-materials revenue, pandemic-related costs, reduced performance-based volumes, and international contract estimate revisions compressed consolidated margins.
- Operating cash flow declined because of increased working-capital needs and delayed customer payments. Days sales outstanding increased to 77 days from 72 days.
- Backlog declined to approximately $7.8 billion from $9.0 billion, primarily because of the expected wind-down of the Census contract. Management expects approximately 40% of backlog to convert to fiscal 2021 revenue.
Guidance, outlook, commentary and unusual items
- The Census Questionnaire Assistance contract was scheduled to end in June 2021 and was expected to generate only $50 million to $60 million of fiscal 2021 revenue, compared with $515 million in fiscal 2020.
- Management expected Outside the U.S. revenue to grow by approximately $175 million in fiscal 2021 and the segment to return to profitability in the second half of fiscal 2021, while remaining loss-making in the first half.
- Management expected a fiscal 2021 effective tax rate of approximately 25.8% to 26.5%.
- The timing of the end of COVID-19 response work, recovery of core program volumes, resumption of face-to-face assessments and normalization of margins remained uncertain.
- Maximus recorded approximately $24 million of revenue reductions in the second quarter from revised estimates on international performance-based employment contracts. The company recognized $45.0 million of performance-based outcome revenue during fiscal 2020, including $24.8 million of estimated fees dependent on achieving future targets.
- The filing identifies revenue recognition for variable consideration in performance-based contracts as the critical audit matter. The estimates depend on participant volumes, employment outcomes and service periods.
- Maximus adopted the lease standard in fiscal 2020, recognizing operating lease liabilities and right-of-use assets. The adoption had no material effect on earnings or cash flow.
- A legacy Medicaid claims matter involved two CMS disallowances totaling approximately $31 million. The company believes its exposure is limited to fees earned and that school districts are responsible for the remaining amounts; the company had reserved its estimated fees.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19-related work offsets the loss of Census revenue and the normalization of lower-volume core programs.
- The timing and profitability of the U.S. Federal Services contract transition following the Census wind-down.
- Recovery of Outside the U.S. employment-services volumes and resumption of U.K. face-to-face assessments.
- Cash collections, days sales outstanding, working-capital requirements and use of the $400 million credit facility.
- Reasonableness of performance-based revenue estimates and the collectability of the $24.8 million in estimated outcome fees.
- Potential effects of ACA litigation, changes in Medicaid rules, government budgets, contract terminations, audits, disallowances and procurement policy changes.
- Customer and contract concentration, including approximately 27% of U.S. Services revenue from New York State and approximately 55% of total revenue from U.S. federal agencies and New York State combined.
- Exposure to cybersecurity incidents, protected health information requirements, performance penalties, bid protests and government debarment risks.