Maximus, Inc.

Greetings and welcome to the Maximus Fiscal 2020 Fourth Quarter and Year-End Conference Call. At this time, all participants are on 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, Ms. Lisa Miles, Senior Vice President of Investor Relations for Maximus. Thank you, Ms. Miles. You may now begin.

Good morning, and thank you for joining us today. With me is Bruce Caswell, President and Chief Executive Officer, and Rigne Doe, Chief Financial Officer. I'd like to remind everyone that a 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 the risks we face, including those discussed in Item 1A of our Annual Report on Form 10-K. We encourage you to review the information contained in our earnings release today and our most recent forms 10Q and 10K 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 a 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.

Thanks, Lisa. impact on our operating results for fiscal year 2020. Bruce and I would like to thank all of our Maximus teams who, with incredible heart and dedication, worked tirelessly to keep us safe when we are required to work on site and transition staff to work remotely where possible. We adopted a hybrid operational model in March that enabled our teams to continue to operate essential programs in order to connect citizens to vital services in this pandemic-impacted world. As noted in our press release this morning, total company revenue for fiscal 2020 increased to $3.46 billion compared to $2.89 billion in the prior year. Approximately $330 million of the revenue increase was attributable to the Census Questionnaire Assistance Contract in support of the U.S. decennial census. The fiscal 2020 top line also benefited from new work in the US assisting with covert response efforts where we support governments with their public health responses in areas such as contact tracing disease investigation test results reporting coven information lines unemployment insurance claims processing and other coven related assistance. This work contributed to organic growth for fiscal 2020 of 15.7% or 4.6% excluding the census contract and was tempered by declines in our operations outside the US. While COVID related revenues increased as a result of the pandemic, our fiscal 2020 earnings declined. Our full year operating margin was 8.3% and diluted earnings per share were $3.39 for fiscal 2020. As we have explained previously, there are three primary areas of negative impact to fiscal 2020 earnings. One, we experienced reduced volumes on several large U.S. programs where both state and federal government clients instituted temporary program changes in response to COVID-19. This includes, but is not limited to, the halting of Medicaid redeterminations in our state-based business and a pause on the repayment of federal student loans in our U.S. federal services segment. There was a greater mix of cost plus revenue in fiscal 2020 driven by the census contract in the U.S. federal services segment And three, the outside the U.S. segment experienced a significant change in estimates for employment services work and a pause in face-to-face assessments. Our fiscal 2020 effective income tax rate was 25.3% compared to 24.2% in the prior year. The higher rate this year was attributable to normal course vesting of stock compensation, which had a reduced benefit tied to a lower share price. I will start my comments on segment results with the U.S. services segment previously named U.S. Health and Human Services. Revenue for the U.S. services segment in fiscal 2020 increased 13% to $1.33 billion compared to $1.18 billion last year. All growth was organic resulting from new contracts, including those to support COVID-19 response efforts and expansion of existing work. This allowed us to offset the temporary volume and revenue declines in certain core programs stemming from the pandemic. We estimate that the COVID response work contributed $129 million of revenue to the US services segment in fiscal 2020. As a reminder, the Families First Coronavirus Response Act provided states with a temporary increase in US federal matching funds for Medicaid if they meet certain requirements, which includes ensuring continuous care for Medicaid enrollees. This means Medicaid redeterminations have been halted so that individuals and families continue to have access to vital health care services during this global public health crisis. As a result, we experienced a significant revenue and profit headwind resulting from lower volumes on some of our largest Medicaid programs. Furthermore, state budgetary pressures have created the need to work closely with our clients to make adjustments to our scope of work to provide needed relief. As a result, the segment delivered an operating margin of 17.1% in fiscal 2020 compared to 18.8% for the prior year. Revenue for fiscal 2020 in the U.S. federal services segment increased to $1.63 billion compared to $1.11 billion in the prior year, driven most significantly by the $330 million increase of the census contract. Organic growth excluding the census contract was 8%. In fiscal 2020, the census contract delivered approximately $515 million of revenue, compared to $185 million in the prior year. The segment benefited from new contracts and new work related to COVID response efforts. We estimate that our COVID response work contributed approximately $71 million of revenue to the U.S. Federal Services segment in fiscal 2020, which excludes the increases to the census contract tied to the pandemic-related extended response period. On the bottom line, The segment delivered an 8.1% operating margin for fiscal 2020, reflecting multiple sources of downward pressure, including a greater mix of cost plus revenue in fiscal 2020 related to the census contract and the contact center operations contract, which is also known as 1-800-Medicare. Both contracts carry lower margins due to their cost plus nature. Reductions in volumes, revenue, and profit from performance-based contracts were a result of the pandemic. For example, there is a pause on student loan repayments impacting our Department of Education contract. And as I discussed last quarter, we continue to see much lower workers' compensation claims compared to pre-COVID levels. Investment in business development and marketing is ongoing as we further expand into the U.S. federal market. As you are probably aware, there is a lag from the time of investment until we begin to get traction. This lag has increased due to the pandemic. However, we made progress in expanding our scope in certain agencies, like the IRS, where we support the agency in responding to general inquiries regarding the CARES Act and the payments under the Economic Impact Plan. This is the first time the IRS has used a public sector partner for citizen engagement at this scale. Fiscal 2020 revenue for the outside the U.S. segment was $498.9 million compared to $599.1 million in the prior year. The segment experienced the most pronounced impact from the pandemic and finished the year in a lost position. our employment services businesses realized a significant decline in the number of employment opportunities available to those individuals looking for work, which caused us to take a write-down to unbilled receivables of $24 million in the second quarter. Since then, operating performance for this segment has improved each quarter, and the operating loss was less than $1 million in the fourth quarter of fiscal 2020. In addition, approximately one-third of this segment's revenue is tied to our health assessment advisory services contract in the United Kingdom, where face-to-face assessments were suspended in March. As a result, the program is operating at reduced levels of activity. While the segment continued to operate at reduced activity levels across both our major programs and our emerging market territories, in the second half of fiscal 2020, we currently expect an improved outlook in fiscal 2021. Based on what we know today, we are forecasting that the segment will deliver top-line growth in fiscal 2021 of approximately $175 million over the prior year. This is predominantly driven by rising unemployment and forecasted volume increases in our employment services contracts that support individuals into long-term sustained employment. We are already starting to experience increased volumes in markets that are beginning to emerge from the pandemic, such as Australia. The segment is also expected to benefit from new work wins that will generate revenue and profit in fiscal 2021. On the bottom line, we expect the segment to remain in a lost position in the first half of fiscal 2021 with a return to profitability in the second half of the year. Lastly, it is important to note that our outlook may continue to be impacted by the pandemic, but Maximus remains exceptionally poised to help governments navigate significant challenges as the world emerges from the global pandemic. Let me turn to cash flow items and the balance sheet. For fiscal 2020, cash flow from operations was $244.6 million, and free cash flow was $203.9 million. Cash from operations was negatively impacted in the year due to the additional investment in working capital required by increases in revenue and the timing of collections. DSO was 77 days at September 30, 2020, compared to 72 days for the same date last year, which accounts for $50 million of the increase in our accounts receivable. There was also an increased level of investment in working capital for increased receivables resulting from the higher revenues we had in the fourth quarter this year, $924 million, compared to the fourth quarter last year, $755 million. Assuming 72 days DSO, that increase in revenue caused an increase in receivables of $130 million. We studied the historical relationship of our free cash flow and net income And being a high-cash conversion business, these two metrics are closely correlated looking back to fiscal 2014 on a cumulative basis. We expect lower revenues in the fourth quarter of fiscal 2021 compared to fiscal 2020 and accordingly expect free cash flow to be higher than net income in fiscal 2021. We finished fiscal 2020 with $71.7 million of cash and cash equivalents. During the quarter ended September 30, 2020, we paid down all of our draws on our corporate credit facility. Let me touch on capital allocation. We continue to manage the business conservatively. Liquidity is not a concern, and while we generally operate under an essential service provider designation, we are keenly aware of budget pressures impacting our customers. We previously indicated that any large-scale M&A was paused while tuck-in transactions would continue. Given our current financial standing, proof of our ability to successfully operate in the pandemic, and strong debt markets, we restarted our M&A activities as new prospects come to market. We do not anticipate a disruption to our future quarterly cash dividends. Share purchases will continue to be made opportunistically. We believe it is critical to make ongoing investments in our business, particularly in our people, processes, and technology to enable uninterrupted delivery to our clients while maintaining our competitive edge. In closing, we are establishing guidance for fiscal 2021. Revenue is projected to be between $3.2 billion and $3.4 billion, and diluted earnings per share is projected to be between $3.45 and $3.70. This is a wider range than prior years due to the significant uncertainties we face in predicting the amount and duration of the COVID response work and the disruption to core programs across all of our segments. As a reminder, the census contract is in the wind down phase. We expect approximately $460 million less revenue from this contract in fiscal 2021 compared to fiscal 2020. Proforma revenue in fiscal 2020, adjusting for the change in the census contract, is approximately $3 billion. Against the midpoint of fiscal 2021 guidance, which is $3.3 billion, this implies organic growth of approximately 10%, excluding the census contract. This anticipated growth is driven by two main factors. Significant top-line growth from operations outside the U.S., where, as I noted earlier, we expect revenue increases of approximately $175 million, primarily due to forecasted volume increases on our employment services contracts and new work coming online, and forecasted resumption of activities and volumes of core program work within our U.S. services segment. Looking forward into fiscal 2021, it is difficult to predict when the COVID response work will end and when our core programs may return to previous profitability levels and whether these two will coincide. Our profit performance for fiscal 2021 is expected to lag revenue performance for all three segments, which reflects the pandemic-related challenges, such as lower volumes in many large U.S.-based programs, For example, Medicaid eligibility redeterminations were suspended to ensure people continue to have insurance, which is the main driver behind the reduced volumes. However, the modest increases we have experienced in some Medicaid enrollments has not been sufficient to offset the impact from halting Medicaid redeterminations. All of our Medicaid contracts have different terms which result in varying revenue impacts as a result of these dynamics. Fiscal 2021 cash from operations is projected to be between $340 and $390 million, and free cash flow is expected to be between $300 and $350 million. Our effective income tax rate is expected to be between 25.75% and 26.5%. Weighted average shares in the fourth quarter of fiscal 2020 were $62.3 million. Absent share purchases, we would expect the weighted average shares in fiscal 2021 to be between 62.1 and 62.2 million. We expect the U.S. services segment operating margin to be in the 16.5 to 17.5 percent range. We expect the U.S. federal services segment operating margin to be in the 6 to 7 percent range. The outside the U.S. segment is expected to have positive operating income, but this segment continues to be more severely impacted by the pandemic than the two U.S. segments. And, accordingly, operating margins in the low single digits for the full fiscal year is a reasonable expectation. As I noted earlier, we expect the outside the U.S. segment profit to be slightly negative in the first half of the year, with improvement occurring in the back half of fiscal 2021. Predicting the quarterly profile is challenging. Much of our COVID response work is scheduled to conclude after our first quarter ending December 31, 2020. Based on our current assumptions, this means that the second quarter of fiscal 2021 is likely to experience a significant drop in revenue and earnings. While it is possible that some of this work will be extended, this is not guaranteed. It is also difficult to predict when the public health emergency declaration will cease, when the U.S. federal government will permit states to execute redeterminations, and when other core programs will return to previous levels. We hope that these remarks provide you with insight into our fiscal 2021 based on what we know today. And with that, I will turn the call over to Bruce.