Company reaffirms guidance in strengthened financial position following significant debt reduction

Maximus (NYSE:MMS), a leading provider of government services worldwide, reported financial results for the three and six months ended March 31, 2023.

Highlights for the second quarter of fiscal year 2023 include:

Revenue increased 2.5% to $1.21 billion, compared to $1.18 billion for the prior year period. Organic growth was 3.9% and driven by new or expanded programs in the U.S. segments.

Diluted earnings per share were $0.52, and adjusted diluted earnings per share were $0.80.

Record cash flows with cash provided by operating activities totaling $309.7 million and free cash flow of $291.6 million, enabling $275 million of debt reduction.

The company is maintaining revenue and earnings guidance for fiscal year 2023, with revenue expected to range between $4.85 billion and $5.0 billion and adjusted diluted earnings per share between $4.00 and $4.30 per share.

A quarterly cash dividend of $0.28 per share is payable on May 31, 2023, to shareholders of record on May 15, 2023.

"Our second quarter results demonstrated solid execution, and we are entering the second half of fiscal year 2023 with excellent visibility into the key drivers to achieve our full-year financial targets," said Bruce Caswell, President and Chief Executive Officer. "In the quarter, we de-levered our debt position by a full half-turn which was driven by record cash flows. We continue to focus on optimizing our portfolio with the divestiture of two small businesses in the Outside the U.S. segment, which were not core to our strategy and did not meet our financial objectives."

Caswell continued, "Last quarter, we noted good line of sight to key operating assumptions, most notably around Medicaid redeterminations and volume growth in our Federal clinical services business driven by PACT Act legislation. I'm pleased that our outlook has proven durable as we are reaffirming fiscal year 2023 guidance and remain confident in our capability to execute in a superior manner in support of our customers' essential programs."

Second Quarter Results

Revenue for the second quarter of fiscal year 2023 increased 2.5% to $1.21 billion, compared to $1.18 billion for the prior year period. Organic growth was 3.9% driven by new or expanded programs in the U.S. segments.

For the second quarter of fiscal year 2023, operating margin was 5.2% and the adjusted operating margin was 7.1%. This compares to margins of 6.4% and 8.3%, respectively, for the prior year period. Diluted earnings per share were $0.52 and adjusted diluted earnings per share were $0.80. This compares to $0.80 and $1.07, respectively, for the prior-year period.

An operating loss in the Outside the U.S. segment and lower-than-expected U.S. Federal Services segment profitability tempered second quarter fiscal year 2023 results. Two small businesses in the Outside the U.S. segment, which contributed to the operating loss, were divested in the quarter resulting in an approximately one-cent reduction to diluted earnings per share for the second quarter of fiscal year 2023.

Additionally, the prior year period contained profitable short-term COVID response work in the U.S. segments and had less interest expense due to a more favorable rate environment.

U.S. Federal Services Segment

U.S. Federal Services Segment revenue for the second quarter of fiscal year 2023 increased 1.9% to $584.1 million, compared to $573.3 million reported for the prior year period. All growth was organic and driven primarily by volume growth on the Veterans Affairs Medical Disability Exams (MDE) contracts, which comprise the Veterans Evaluations Services (VES) business.

The segment operating margin for the second quarter of fiscal year 2023 was 8.2%, compared to 8.1% reported for the prior year, and slightly lower than company expectations. While MDE contract volumes increased across the quarter, total volumes were slightly lower than forecasted, and higher costs were incurred for training of VES staff to yield full productivity. Strong line of sight remains on the volume forecast, and the full-year fiscal 2023 margin for the U.S. Federal Services Segment is still expected to range between 10% and 11%.

U.S. Services Segment

U.S. Services Segment revenue for the second quarter of fiscal year 2023 increased 13.0% to $449.7 million, compared to $398.1 million reported in the prior year period. All growth was organic and driven by previously disclosed new work in the core business areas of eligibility support and clinical services.

The segment operating margin for the second quarter of fiscal year 2023 was 9.5%, compared to 11.7% reported for the prior year period that contained profitable, short-term work. The segment's profitability remained impacted by the paused Medicaid redeterminations, which are scheduled to restart in the third quarter. The full-year fiscal 2023 margin for the U.S. Services Segment is still expected to range between 9% and 11% with a lift to profitability expected in the fourth quarter reflecting an expected full-period contribution from redeterminations.

Outside the U.S. Segment

Outside the U.S. Segment revenue for the second quarter of fiscal year 2023 decreased 16.0% to $173.1 million, compared to $206.0 million reported in the prior year period. Organic revenue contracted 8% due primarily to lower revenue in Australia following last year's rebid outcome and currency was a 7% headwind.

The segment realized an operating loss of $3.7 million for the second quarter of fiscal year 2023, compared to an operating profit of $4.3 million in the prior year period. The company is focused on portions of the segment that are underperforming. Two small businesses, a commercial division within the United Kingdom and the employment services business in Sweden, were divested, which had combined operating losses in the quarter of $1.5 million.

Sales and Pipeline

Year-to-date signed contract awards at March 31, 2023, totaled $1.22 billion and contracts pending (awarded but unsigned) totaled $1.27 billion. The book-to-bill ratio at March 31, 2023, was 2.1x calculated on a trailing twelve-month basis.

The sales pipeline at March 31, 2023, totaled $31.9 billion, comprised of approximately $5.6 billion in proposals pending, $0.94 billion in proposals in preparation, and $25.3 billion in opportunities tracking. New work opportunities represent approximately 78% of the total sales pipeline.

Balance Sheet and Cash Flows

At March 31, 2023, cash and cash equivalents totaled $56.3 million, and gross debt was $1.30 billion. The ratio of debt, net of allowed cash, to adjusted EBITDA for the quarter ended March 31, 2023, as calculated in accordance with the company's credit agreement, was 2.5x assisted by $275 million of debt reduction in the quarter. This compares to 3.0x at December 31, 2022.

For the second quarter of fiscal year 2023, cash provided by operating activities totaled $309.7 million and free cash flow was $291.6 million. The record quarterly cash flows made up for the temporarily low cash flows in the first quarter of fiscal year 2023. DSO was 56 days as of March 31, 2023. Going forward, the company expects to be in the target range of 60 to 70 days.

On April 6, 2023, our Board of Directors declared a quarterly cash dividend of $0.28 for each share of our common stock outstanding. The dividend is payable on May 31, 2023, to shareholders of record on May 15, 2023.

Reaffirming FY23 Guidance

Maximus is reaffirming fiscal year 2023 guidance from the prior quarter. Revenue is expected to range between $4.85 billion and $5.0 billion, and adjusted operating income is expected to range between $415 million and $440 million, which excludes an estimated $94 million of expense for amortization of intangible assets. Adjusted diluted earnings per share is expected to range between $4.00 and $4.30 per share and free cash flow is expected to range between $225 million and $275 million.

The company's guidance still assumes that redetermination activities in the U.S. Services Segment phase in during the third quarter, making a full period contribution in the fourth quarter of fiscal year 2023, and volumes continue to ramp on the MDE contracts in the VES business related to the PACT Act in U.S. Federal Services.

The company forecasts a slight reduction to interest expense, now ranging between $82 million and $85 million, an effective income tax rate between 24.5% and 25.5%, and weighted average shares outstanding between 61.2 million and 61.3 million shares for fiscal year 2023.

Conference Call and Webcast Information

Maximus will host a conference call tomorrow, May 4, 2023, at 9:00 a.m. ET. Shareholders are invited to submit questions for management's consideration by emailing IR@maximus.com up to one hour prior to the call.

The call is open to the public and available by webcast or by phone at:

877.407.8289 (Domestic) / +1.201.689.8341 (International)

For those unable to listen to the live call, a recording of the webcast will be available on investor.maximus.com.

About Maximus

As a leading strategic partner to governments across the globe, Maximus helps improve the delivery of public services amid complex technology, health, economic, environmental, and social challenges. With a deep understanding of program service delivery, acute insights that achieve operational excellence, and an extensive awareness of the needs of the people being served, our employees advance the critical missions of our partners. Maximus delivers innovative business process management, impactful consulting services, and technology solutions that provide improved outcomes for the public and higher levels of productivity and efficiency of government-sponsored programs. For more information, visit maximus.com.

Non-GAAP Measures and Risk Factors

This release refers to non-GAAP measures and other indicators, including organic growth, free cash flow, operating income and EPS adjusted for amortization of intangible assets, EBITDA, and other non-GAAP measures.

A description of these non-GAAP measures, the reasons why we use and present them, and details as to how they are calculated are included in our earnings presentation and forthcoming Form 10-Q.

The presentation of these non-GAAP numbers is not meant to be considered in isolation, nor as alternatives to cash flows from operations, revenue growth, or net income as measures of performance. These non-GAAP financial measures, as determined and presented by us, may not be comparable to related or similarly titled measures presented by other companies.

Statements that are not historical facts, including statements about the company's confidence and strategies, and the company's expectations about revenues, results of operations, profitability, future contracts, market opportunities, market demand, or acceptance of the company's products are forward-looking statements that involve risks and uncertainties.

These risks could cause the company's actual results to differ materially from those indicated by such forward-looking statements. A summary of risk factors can be found in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2022, which was filed with the Securities and Exchange Commission (SEC) on November 22, 2022. The Company's SEC reports are accessible on maximus.com.


Maximus, Inc. Consolidated Statements of Operations (Unaudited)

	For the Three Months Ended				For the Six Months Ended
	March 31, 2023		March 31, 2022		March 31, 2023		March 31, 2022
	(in thousands, except per share amounts)
Revenue	$	1,206,852	$	1,177,326	$	2,456,098	$	2,328,202
Cost of revenue		978,249		948,875		1,982,748		1,871,596
Gross profit		228,603		228,451		473,350		456,606
Selling, general, and administrative expenses		142,448		130,307		288,900		254,528
Amortization of intangible assets		23,650		22,856		47,168		45,261
Operating income		62,505		75,288		137,282		156,817
Interest expense		20,999		9,438		42,605		19,076
Other income/(expense), net		818		715		1,084		404
Income before income taxes		42,324		66,565		95,761		138,145
Provision for income taxes		10,536		16,469		23,978		34,719
Net income	$	31,788	$	50,096	$	71,783	$	103,426

Earnings per share:
Basic	$	0.52	$	0.81	$	1.17	$	1.66
Diluted	$	0.52	$	0.80	$	1.17	$	1.66
Weighted average shares outstanding:
Basic		61,120		62,227		61,119		62,256
Diluted		61,383		62,381		61,265		62,409

Dividends declared per share	$	0.28	$	0.28	$	0.56	$	0.56


Maximus, Inc. Consolidated Balance Sheets

	March 31, 2023			September 30, 2022
	(unaudited)
	(in thousands)
Assets:
Cash and cash equivalents	$	56,344		$	40,658
Accounts receivable, net		742,387			807,110
Income taxes receivable		12,156			2,158
Prepaid expenses and other current assets		141,017			182,387
Total current assets		951,904			1,032,313
Property and equipment, net		46,915			52,258
Capitalized software, net		71,393			58,740
Operating lease right-of-use assets		162,633			132,885
Goodwill		1,780,200			1,779,415
Intangible assets, net		751,194			804,904
Deferred contract costs, net		47,498			47,732
Deferred compensation plan assets		42,049			37,050
Deferred income taxes		5,865			4,970
Other assets		39,205			42,447
Total assets	$	3,898,856		$	3,992,714
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and accrued liabilities	$	259,463		$	264,553
Accrued compensation and benefits		156,990			178,199
Deferred revenue, current portion		66,796			87,146
Income taxes payable		4,482			718
Long-term debt, current portion		84,490			63,458
Operating lease liabilities, current portion		55,928			63,999
Other current liabilities		53,026			116,374
Total current liabilities		681,175			774,447
Deferred revenue, non-current portion		25,776			21,414
Deferred income taxes		201,079			206,099
Long-term debt, non-current portion		1,205,028			1,292,483
Deferred compensation plan liabilities, non-current portion		43,706			40,210
Operating lease liabilities, non-current portion		121,957			86,175
Other liabilities		18,413			22,515
Total liabilities		2,297,134			2,443,343
Shareholders' equity:
Common stock, no par value; 100,000 shares authorized; 60,784 and 60,774 shares issued and outstanding as of March 31, 2023, and September 30, 2022, respectively (shares in thousands)		572,632			557,978
Accumulated other comprehensive loss		(33,303	)		(33,961	)
Retained earnings		1,062,393			1,025,354
Total shareholders' equity		1,601,722			1,549,371
Total liabilities and shareholders' equity	$	3,898,856		$	3,992,714


Maximus, Inc. Consolidated Statements of Cash Flows (Unaudited)

	For the Three Months Ended						For the Six Months Ended
	March 31, 2023			March 31, 2022			March 31, 2023			March 31, 2022
	(in thousands)
Cash flows from operating activities:
Net income	$	31,788		$	50,096		$	71,783		$	103,426
Adjustments to reconcile net income to cash flows from operations:
Depreciation and amortization of property, equipment, and capitalized software		14,041			9,834			26,321			21,199
Amortization of intangible assets		23,650			22,856			47,168			45,261
Amortization of debt issuance costs and debt discount		601			648			1,635			1,297
Deferred income taxes		(37	)		(3,089	)		(1,368	)		(3,318	)
Stock compensation expense		9,540			6,804			13,943			15,052
Loss on sale of businesses		883			—			883			—
Change in assets and liabilities, net of effects of business combinations and disposals:
Accounts receivable		263,278			(34,950	)		62,529			(49,064	)
Prepaid expenses and other current assets		2,788			14,884			13,412			9,769
Deferred contract costs		1,596			380			583			(6,431	)
Accounts payable and accrued liabilities		(10,003	)		29,405			(6,361	)		(3,047	)
Accrued compensation and benefits		39,049			28,024			(14,222	)		(28,281	)
Deferred revenue		(33,111	)		12,544			(18,347	)		18,473
Income taxes		(16,043	)		(23,836	)		(6,578	)		(13,515	)
Operating lease right-of-use assets and liabilities		(1,124	)		5,077			(2,072	)		(1,293	)
Other assets and liabilities		(17,200	)		(3,899	)		(14,272	)		2,331
Net cash provided by operating activities		309,696			114,778			175,037			111,859
Cash flows from investing activities:
Purchases of property and equipment and capitalized software		(18,054	)		(16,571	)		(33,751	)		(22,898	)
Acquisitions of businesses, net of cash acquired		—			(4	)		—			(4	)
Proceeds from sale of businesses		9,124			—			9,124			—
Net cash used in investing activities		(8,930	)		(16,575	)		(24,627	)		(22,902	)
Cash flows from financing activities:
Cash dividends paid to Maximus shareholders		(17,016	)		(17,312	)		(34,033	)		(34,659	)
Purchases of Maximus common stock		—			(24,464	)		—			(25,843	)
Tax withholding related to RSU vesting		—			—			(8,475	)		(9,673	)
Payments for contingent consideration		(2,626	)		—			(4,041	)		—
Proceeds from borrowings		193,696			140,000			462,398			240,000
Principal payments for debt		(469,105	)		(287,023	)		(530,460	)		(303,708	)
Restricted cash movements		(47,587	)		—			(57,060	)		—
Net cash used in financing activities		(342,638	)		(188,799	)		(171,671	)		(133,883	)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		765			(48	)		3,186			324
Net change in cash, cash equivalents, and restricted cash		(41,107	)		(90,644	)		(18,075	)		(44,602	)
Cash, cash equivalents and restricted cash, beginning of period		159,827			202,612			136,795			156,570
Cash, cash equivalents and restricted cash, end of period	$	118,720		$	111,968		$	118,720		$	111,968


Maximus, Inc. Consolidated Results of Operations by Segment (Unaudited)

	For the Three Months Ended										For the Six Months Ended
	March 31, 2023					March 31, 2022					March 31, 2023					March 31, 2022
	Amount			% (1)		Amount			% (1)		Amount			% (1)		Amount			% (1)
	(dollars in thousands)
Revenue:
U.S. Federal Services	$	584,075				$	573,288				$	1,202,242				$	1,155,159
U.S. Services		449,703					398,077					889,181					784,494
Outside the U.S.		173,074					205,961					364,675					388,549
Revenue	$	1,206,852				$	1,177,326				$	2,456,098				$	2,328,202
Gross profit:
U.S. Federal Services	$	122,874		21.0	%	$	115,153		20.1	%	$	245,568		20.4	%	$	241,729		20.9	%
U.S. Services		86,016		19.1	%		84,971		21.3	%		169,614		19.1	%		174,670		22.3	%
Outside the U.S.		19,713		11.4	%		28,327		13.8	%		58,168		16.0	%		40,207		10.3	%
Gross profit	$	228,603		18.9	%	$	228,451		19.4	%	$	473,350		19.3	%	$	456,606		19.6	%
Selling, general, and administrative expenses:
U.S. Federal Services	$	75,050		12.8	%	$	68,949		12.0	%	$	146,699		12.2	%	$	133,874		11.6	%
U.S. Services		43,415		9.7	%		38,273		9.6	%		89,257		10.0	%		73,375		9.4	%
Outside the U.S.		23,425		13.5	%		24,011		11.7	%		51,814		14.2	%		45,351		11.7	%
Loss on sale of businesses (2)		883		NM			—		NM			883		NM			—		NM
Other (3)		(325	)	NM			(926	)	NM			247		NM			1,928		NM
Selling, general, and administrative expenses	$	142,448		11.8	%	$	130,307		11.1	%	$	288,900		11.8	%	$	254,528		10.9	%
Operating income/(loss):
U.S. Federal Services	$	47,824		8.2	%	$	46,204		8.1	%	$	98,869		8.2	%	$	107,855		9.3	%
U.S. Services		42,601		9.5	%		46,698		11.7	%		80,357		9.0	%		101,295		12.9	%
Outside the U.S.		(3,712	)	(2.1	)%		4,316		2.1	%		6,354		1.7	%		(5,144	)	(1.3	)%
Amortization of intangible assets		(23,650	)	NM			(22,856	)	NM			(47,168	)	NM			(45,261	)	NM
Loss on sale of businesses (2)		(883	)	NM			—		NM			(883	)	NM			—		NM
Other (3)		325		NM			926		NM			(247	)	NM			(1,928	)	NM
Operating income	$	62,505		5.2	%	$	75,288		6.4	%	$	137,282		5.6	%	$	156,817		6.7	%

(1)		Percentage of respective segment revenue. Percentages not considered meaningful are marked "NM."
(2)		During the second quarter of fiscal year 2023, we sold a small commercial practice in the United Kingdom and our employment operations business in Sweden, both subsidiaries within our Outside the U.S. Segment, resulting in a loss.
(3)		Other includes credits and costs that are not allocated to a particular segment.


Maximus, Inc. Consolidated Free Cash Flows - Non-GAAP (Unaudited)

	For the Three Months Ended						For the Six Months Ended
	March 31, 2023			March 31, 2022			March 31, 2023			March 31, 2022
	(in thousands)
Net cash provided by operating activities	$	309,696		$	114,778		$	175,037		$	111,859
Purchases of property and equipment and capitalized software		(18,054	)		(16,571	)		(33,751	)		(22,898	)
Free cash flow	$	291,642		$	98,207		$	141,286		$	88,961


Maximus, Inc. Non-GAAP Adjusted Results Excluding Amortization of Intangible Assets (Unaudited)

	For the Three Months Ended						For the Six Months Ended
	March 31, 2023			March 31, 2022			March 31, 2023			March 31, 2022
	(dollars in thousands, except per share data)
Operating income	$	62,505		$	75,288		$	137,282		$	156,817
Add back: Amortization of intangible assets		23,650			22,856			47,168			45,261
Adjusted operating income excluding amortization of intangible assets (Non-GAAP)	$	86,155		$	98,144		$	184,450		$	202,078
Adjusted operating income margin excluding amortization of intangible assets (Non-GAAP)		7.1	%		8.3	%		7.5	%		8.7	%

Net income	$	31,788		$	50,096		$	71,783		$	103,426
Add back: Amortization of intangible assets, net of tax		17,446			16,884			34,806			33,414
Adjusted net income excluding amortization of intangible assets (Non-GAAP)	$	49,234		$	66,980		$	106,589		$	136,840

Diluted earnings per share	$	0.52		$	0.80		$	1.17		$	1.66
Add back: Effect of amortization of intangible assets on diluted earnings per share		0.28			0.27			0.57			0.53
Adjusted diluted earnings per share excluding amortization of intangible assets (Non-GAAP)	$	0.80		$	1.07		$	1.74		$	2.19

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Maximus Reports Fiscal Year 2023 Second Quarter Results