Maximus, Inc.

Greetings and welcome to the MAXIMUS fiscal 2020 first quarter conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lisa Miles, Senior Vice President of Investor Relations for Maximus. Thank you, Ms. Miles. You may begin.

Good morning, and thank you for joining us. With me today is Bruce Caswell, President and CEO, and Rick Nadeau, Chief Financial Officer. I'd like to remind everyone that the number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially, as a result of risks we face, including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the information contained in our earnings release today and our most recent forms 10-Q and 10-K filed with the SEC. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances except as required by law. Today's presentation may contain non-GAAP financial information. Management uses this information in its internal analyses of results and believes this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results, and providing meaningful period-to-period comparisons. For reconciliation of the non-GAAP measures presented in this document, please see the company's most recent quarterly earnings press release. And with that, I'll hand the call over to Rick.

Thank you, Lisa. This morning, Maximus reported revenue for the first quarter of fiscal 2020 of $818.2 million, compared to $664.6 million in the prior year period. Top-line growth was driven by the expected increases in the U.S. federal services segment due to a full quarter contribution from the acquired business. The expected ramp up of the census contract and organic growth in both our U.S. Health and Human Services and U.S. Federal segments. This was partially offset by reductions in our outside the U.S. segment. Total company operating margin was 9.7% for the first quarter and lower compared to the prior year period. This is due to a greater mix of cost plus contracts that generate lower operating margins and continued weakness in our employment services businesses in our outside the U.S. segment, which continues to be challenged by market conditions. For the first quarter, diluted earnings per share were 91 cents and better than our expectations, benefiting from strong operational and financial performance in our U.S. health and human services segment and the timing of revenue and income within our U.S. federal segment. I will now speak to our segment results in the first quarter. First quarter revenue for the U.S. Health and Human Services segment increased 6% to $312.3 million compared to the same period last year. All growth was organic and attributable to new contracts and expansion of existing work. The operating margin for the segment in the first quarter came in better than expected at 18.6%. The segment benefited from strong operational and financial performance across a number of health services contracts. Additionally, cost synergies resulting from the Federal Citizen Engagement Center's business acquisition in November 2018 continue to help this segment's margins. Revenue for the first quarter of fiscal 2020 in the U.S. Federal Services segment was $366.6 million, representing an increase of $149.6 million compared to the same period last year. First quarter revenue for this segment exceeded our expectations, mostly due to the timing from the acceleration of approximately $10 million of revenue into the first quarter from future periods. In addition, the census contract continued its ramp toward peak activity levels, and the segment realized a full quarter benefit related to the acquisition of the Federal Citizen Engagement Center's business. The census contract delivered approximately $70 million of revenue in the first quarter and is expected to grow in the next two fiscal quarters. On the bottom line, the U.S. Federal Services segment finished the quarter with an operating margin of 8.6%. As a reminder, fiscal year 2020's contract mix will be weighted more heavily towards cost plus contracts, which increases revenue and operating income but dilutes margin. Outside the U.S. segment, first quarter revenue was $139.4 million and lower compared to the prior year period. We experienced organic declines primarily in our employment services businesses in which volumes and caseloads continue to be challenged by the effects of robust full employment economies across our geographies. The segment end of the quarter nearing break even. As we have previously discussed with nearly half of the work in the segment tied to employment services contracts in Australia and the UK, we have already taken measures to manage our costs. We are working with our clients and other industry partners about the appropriate terms and performance-based measures needed to sustain a viable supply chain in light of the macroeconomic environment. The devastating bushfires in Australia also tempered results in the first fiscal quarter. The government has taken measures to protect its citizens and has temporarily modified certain requirements for program participants which will disrupt our employment services case flows, placements, and outcomes in the coming months. Australia has also been affected by the outbreak of the coronavirus. While it is too early to quantify, we anticipate an unfavorable impact due to the reduced need for job seekers in certain sectors, such as tourism. Both of these events will have temporary unfavorable impacts on the business in Australia. The degree of impact will largely be determined by the duration of impact and length of recovery in the region. We are monitoring the situation closely and supporting our government client, customers, and employees in this time of need. We are also taking steps to diversify our portfolio in markets such as the United Kingdom by making strategic investments to broaden our efforts in emerging opportunities, new market development, and additional sales and marketing activity. To give you some color for fiscal 2020, we are investing approximately $5.5 million in the UK as our team has been developing key partnerships and working to extend our reach into new agencies. These investments come at a time when the UK is in need of financially stable partners to deliver key policy objectives for the government. And while many of these opportunities have long runways, our efforts could prove to be pivotal and expanding our portfolio in the coming years. I will speak briefly on balance sheet and cash flow items. In the first quarter, Maximus delivered cash flows from operations of $84.6 million and free cash flow of $76.8 million. Days sales outstanding were 71 at December 31, which is within our expected 65 to 80 day range. At December 31, 2019, we held cash and cash equivalents of $149.5 million and no outstanding draws on our credit facility. During the quarter, we purchased 26,000 shares of Maximus stock for a total of $1.9 million. On the topic of capital allocation, our number one priority continues to be acquisitions that drive long-term sustainable organic growth.