Maximus, Inc.

Greetings, and welcome to the Maximus fiscal 2021 second 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, James Francis, Senior Director of Investor Relations for Maximus. Thank you, Mr. Francis. You may begin.

Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO, and Rick Nadeau, CFO. 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 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.

Thank you, James. This morning, Maximus reported a strong second quarter for fiscal 2021, with revenue increasing 17.3% to $959.3 million over the prior year period and diluted earnings coming in at $1.29 per share. The company's operating income margin was 11.8% for the quarter. Our better than expected results were driven by the high level of COVID response work revenue in the U.S. segments and employment services work in Australia, which experienced higher than expected volumes of activities. Since our February 4th call, we have continued to win a substantial amount of new work as Maximus plays an integral role helping government customers serve their citizens during the pandemic. Our revenue attributable to COVID response activities, such as contact tracing, unemployment insurance, CARES Act communications, and vaccine communications were $242 million for the second quarter and $402 million year to date. We project COVID response revenue will now range between $800 and $850 million for the full fiscal year. Our Australia employment services business achieved a high level of performance in the quarter as job seekers were able to find and sustain work as the Australian economy opened up. The performance on this contract has improved faster than we projected, resulting in higher second quarter revenue and profit for our outside the U.S. segment. The organic growth rate for the second quarter of fiscal 2021 was 12.8%, or 29%, excluding the Census contract revenue reduction. Results for the quarter included one month of attained operations from the acquisition date of March 1st, which added approximately $20 million of revenue and $3 million of operating income after the expense related to amortization of intangible assets. I will now take you through our segment results, starting with U.S. services. Second quarter fiscal 2021 revenue in the U.S. services segment increased to $448.2 million, driven by an estimated $175 million of COVID response work. The segment operating income margin was 18.5% and reflects better than expected operating results for the COVID response programs that offset the significant revenue and profit headwinds to some core programs related to the pandemic. The segment continues to be affected by the pause in eligibility redeterminations for Medicaid, and the timing of some core programs returning to pre-pandemic levels remains uncertain. I would like to emphasize that we cannot predict the relationship between core program improvement and the conclusion of the COVID response work. Our full-year expectations for the U.S. services segment remain unchanged, with a 17 to 18 percent full-year operating margin predicted. Revenue for the second quarter of fiscal 2021 for the U.S. federal services segment decreased to $330 million due to the conclusion of the census contract, which contributed $133 million less revenue this quarter as compared to the prior year period. As I mentioned earlier, segment results included a one-month contribution from ATTAIN of approximately $20 million. Excluding census, organic growth for the segment was 13% and driven by an estimated $56 million of COVID response work revenue. COVID response work continues to backfill some of the temporary pandemic-related shortfalls created by reduced volumes, revenue, and profit from accretive performance-based contracts in this segment. The operating income margin for U.S. federal was 7%. We announced two acquisitions in the quarter for U.S. federal services. As we disclosed on March 1, ATTAIN is estimated to contribute $120 million to $140 million of revenue for the seven months of the fiscal year. The pro forma trailing 12-month adjusted EBITDA for ATTAIN is approximately $32 million, which indicates ATTAIN is expected to be accretive in fiscal 2021. We present adjusted EBITDA in the management's discussion and analysis section of our Form 10Qs and 10Ks. The full year segment operating income margin expectations for the U.S. federal services segment has improved from 6 to 7% previously forecasted to approximately 8%. This is before including the acquisition of Veterans Evaluation Services, or VES, that we announced on April 21st with an expected close date in our third fiscal quarter. Due to their fixed price nature, the VES contracts will naturally carry an operating income margin that is greater than our U.S. federal historical average over the past three years. Adding in VES, our full-year fiscal 2021 guidance for the U.S. federal services segment improves to between 9% and 10% for segment operating income margins. Turning to outside the U.S. segment, revenue for the first quarter of fiscal 2021 was $180.9 million. This segment experienced the most pronounced negative impacts from the pandemic, and last year's second quarter resulted in an operating loss of $26.7 million. This year, the segment's second quarter operating income was $15.1 million, and the margin was 8.3%. As I mentioned, the better than expected results for the outside the U.S. segment were largely due to Australia, where market conditions continued to create and sustain job opportunities in conjunction with our team pushing performance and efficiency initiatives. On our February 4th call, we noted that there was strong demand for employment services in the outside the U.S. segment. Our employment services contracts typically experience startup losses in the early phases of their operations, and our prior guidance included our best estimate at that time. Since then, we have won more new employment services work than we projected. On April 26th, we announced a significant win in the UK on a program named UK Restart, where we secured two of our preferred regions. In addition to this win, the outside the U.S. segment has exciting new employment services programs in Saudi Arabia, Sweden, South Korea, and Italy. Due to the startup nature of these contracts, there will be startup losses incurred in the third and fourth quarters in the outside the U.S. segment as revenue ramps into the next fiscal year. The U.K. restart is responsible for the largest share of the incremental startup loss. These startup losses are more heavily weighted to the fourth quarter of fiscal 2021. The profitability of all of these outside the U.S. startup contracts is expected to exceed 10% over the life of the contracts, given their performance-based nature and the strong demand for employment services. These contracts range in length from one year to six years. We expect significant improvement to the financial contribution from these contracts in fiscal 2022. With the startup losses, the fiscal 2021 full year margin for outside the U.S. is expected to be in the low single digits, with the fourth quarter swinging to a loss as activity picks up on the UK restart program. Let me turn to cash flow items and the balance sheet. At March 31, 2021, we had $240 million of borrowings on our $400 million corporate credit facility. We had cash and cash equivalents of $101.7 million. DSO was 70 days at March 31, 2021, including attain on a pro forma basis. This compares to 75 days at December 31, 2020, and 72 at March 31, 2020. Cash flows were strong in the quarter, with cash from operations of $181.6 million and free cash flow of $167.1 million for the three months ended March 31, 2021. Given the two significant acquisitions we recently announced, I will expand on my usual capital allocation remarks. The financing required for the VES transaction will result in initial leverage estimated to be approximately 2.7 times debt over pro forma adjusted EBITDA. Pro forma adjusted EBITDA is calculated by using the last 12 months of EBITDA for Maximus in accordance with our existing credit facility. plus estimated EBITDA for attain and for VES, assuming the acquisitions were included in our operating results for the entire trailing 12-month period. Traditionally, Maximus has maintained low leverage. We strive to be good stewards of shareholder capital and believe that we are appropriately selective in the acquisitions we pursue, focusing on those that we believe are both consistent with our strategy and will enable us to drive future organic growth. On the April 21st VES announcement call, I indicated that we would pause significant M&A activity while we integrate Attain and VES. We want to prioritize integrating these two respected companies. Accordingly, we will use most of our free cash flow for the next several quarters to pay down debt. Our aim is to maintain our leverage ratio below 2.5 times. We have long-term contracts and longer-term relationships with customers, solid rebid win rates, and satisfactory new work win rates to assure reasonable and stable operating cash flows in the future. Our expected future cash flows permit us to comfortably pay the debt service, to execute selective tuck-in M&A transactions, to invest in our business organically, and to pay the quarterly dividend, which we evaluate each quarter. We will continue to search for and execute tuck-in transactions that are accretive, deliver good value, and have a strong potential to drive future organic growth. Guidance for the remaining half of fiscal 2021 is complicated by four factors. One, the nature and longevity of COVID response work that we have been winning and performing. Two, the two acquisitions we announced. Three, the impact of the significant startup contracts outside the U.S. And four, the negative impact of the COVID pandemic on some of our core programs. Let me address these factors in that order. First, the COVID response work we have earned to date and project to earn in fiscal year 2021 is much greater than anticipated when we communicated our first quarter results on February 4th. As I mentioned, we are now forecasting $800 million to $850 million of COVID response work in the full fiscal year 2021. We expect this work to diminish over time and accordingly project a drop in the fourth quarter as compared to the third quarter. Second, we have included the acquisition of VES in our guidance, assuming the transaction closes in the beginning of June. When we announced the deal on April 21st, we disclosed the estimated revenue from June through September to be $160 to $175 million. There are one-time expenses of approximately $13 million for the VES transactions. There is interest expense tied to the term loan borrowings that we will use to finance the acquisition. We are still finalizing the intangibles valuation, but based on what we are seeing today, the VES acquisition will be slightly dilutive to earnings per share for the remainder of fiscal 2021. Third, we have startup losses planned outside the U.S. with a more meaningful effect felt in the fourth quarter. Fourth, We are assuming the negative impacts related to the public health emergency persist through the remainder of the fiscal year 2021 as signaled by the January 22nd letter from the then Secretary of the Department of Health and Human Services to the U.S. governors. We are assuming the public health emergency will continue past our fiscal 2021 year end. All of that together, we now expect total company revenue to be in the range of $4 to $4.2 billion for fiscal 21, and our estimated diluted earnings per share to be in the range of $4.20 to $4.40 per share. Cash from operations is expected to be between $400 and $450 million, and free cash flow is expected to be between $360 and $410 million. The guidance range is wider than typical in mid-year, but it's necessary to account for the volatility in the COVID response work. The midpoint of our guidance range for revenue indicates an expected organic growth rate of 9.9% for fiscal 21 as compared to fiscal 20. We also consider the impact of the COVID response work in the census contract and calculated an expected adjusted organic growth rate of approximately 6% for fiscal 21. Our effective income tax rate should be in the range of 26 to 27% for the full fiscal year 2021 and weighted average shares outstanding in the range of 62.2 million and 62.3 million shares. Our effective income tax rate is being impacted by the high level of income in Australia and the reduced income in the UK caused by the startup contracts. The $4.30 midpoint of updated guidance implies reduced earnings in the second half of fiscal 2021 as compared to the first half. We anticipate a step down of third quarter earnings compared to second quarter results, which is primarily driven by some one-time costs for the VES transaction. We anticipate an additional step down of fourth quarter earnings compared to the third quarter created by the increased impact of the startup contracts in the outside the U.S. segment and the reduced forecasted levels of COVID response work. Let me make a few comments as we consider fiscal 2022. The amount of revenue we expect from the two acquisitions is estimated to be between $700 and $750 million. While we do expect some of the COVID response work to continue into fiscal year 2022, it is extremely difficult to predict. Equally hard to predict is the timing and impact of the public health emergency on Medicaid redeterminations and the resulting increase to Maximus revenue. Our forecasting precision remains limited due to ongoing volatility created by the pandemic. as you see with the results announced today as compared to our estimates three months ago. Bruce and I are grateful to our busy and hardworking teams around the world. We are responding quickly to customers needing help with vaccine administration, working hard on large-scale existing and new employment services programs, and beginning to integrate two important acquisitions with valued team members. And with that, I will turn the call over to Bruce.