Maximus, Inc.

Greetings and welcome to the Maximus Fiscal 2022 First Quarter Earnings 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, Madison West, Vice President of Investor Relations and ESG for Maximus. Thank you, Ms. West. Please go ahead.

Good morning, and thank you for joining us. With me today is Bruce Caswell, President and CEO, David Mutrin, CFO, and James Francis, Vice President of Investor Relations. 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, including those discussed in Item 1A of our most recent forms, 10Q and 10K. We encourage you to review the information contained in our most recent filings with the SEC and our earnings press release today. 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 also contains non-GAAP financial information. Management uses this information internally to analyze results and believes it may be informative to investors in gauging the quality of our financial performance, identifying trends, and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures presented, please see the company's most recent forms 10Q and 10K. And with that, I'll hand the call over to David.

Thanks, Madison. This morning, Maximus reported revenue for the first quarter of fiscal year 2022. which increased 21.7% year-over-year to $1.15 billion. As expected, top-line growth was driven primarily by the contributions from acquisitions in the U.S. federal services segment and, to a lesser extent, ramping of the startups in the outside-the-U.S. segment, which includes the U.K. Restart Program. On the bottom line for the first quarter of fiscal 2022, the operating income margin was 7.1%. or 9.0%, excluding the expense for intangibles amortization. Diluted earnings per share were 85 cents, or $1.12, excluding the amortization expense. Our first quarter results were slightly better than anticipated, with some variability by segment. As a reminder, we expect a depressed earnings profile in the first half of the fiscal year, caused by delays in our core programs returning to pre-pandemic levels as the COVID response work declines. Also, as previously noted, startups in the outside the U.S. segment, most notably the UK restart program, will continue to ramp with operating losses in the first half of fiscal 2022. COVID response work delivered about $120 million in the first quarter of fiscal 2022, or about $40 million less than in the prior year period. While our organic revenue declined 3.5% in the quarter, adjusting for the COVID response work and the concluded census contract, normalized organic growth would be approximately 9% year over year. Let me pause here for a housekeeping item. Over the past two years, we've estimated revenue associated with COVID response work, recognizing that the large volume and the temporary nature are important to investors' understanding of our business. As the COVID pandemic continues and seems to be transitioning to an endemic, we are seeing some of this temporary work transition to longer-term work supporting our customers, in some cases beyond work specifically supporting COVID response. Given this evolution, and with the large bubble of short-term work behind us, we will be gradually moving away from tracking and estimating this in such detail. I will now review financial results for the segments. The U.S. services segment delivered revenue of $386.4 million for the quarter, which was relatively flat year over year. COVID response work in the segment declined approximately $32 million from the prior year period. Normalized for the COVID work, revenue grew 12%. This was all organic and driven by ramping of new, longer-term work. The segment operating income margin was 14.1%. as compared to 16.0% in the prior year. This segment exceeded our expectations modestly in the quarter, driven primarily by more short-term COVID response work. Medicaid redeterminations remain paused due to the most recent public health emergency extension, which occurred on January 14th and will remain in effect for 90 days. Despite the extension, we still anticipate that redetermination activities should begin to resume in fiscal 2022. We have assumed a one-month delay from our previous projection, meaning our outlook today assumes starting this work in the month of May 2022. For the U.S. Federal Services segment, first quarter fiscal 2022 revenue increased 43.6 percent to $581.9 million. driven primarily by contributions from the attained federal and VES acquisitions. The acquisitions occurred in the second and third quarter, respectively, of fiscal 2021. COVID response work in the segment declined approximately $8 million from the prior year period. On an organic basis, revenue declined 13% in the quarter. Adjusting for COVID response work and the concluded census contract, normalized organic growth in the segment would be about 5% over the prior year period. The operating income margin for U.S. federal services was 10.6% in the first quarter of fiscal 2022 as compared to 7.5% in the prior year period. As expected, the recent acquisitions help blend up the operating margin for the segment. Turning to outside the U.S. segment, First quarter revenue increased 17.5% to $182.6 million. Ramping of the startups, including the UK Restart Program, were the primary contributor to growth in the segment. The segment realized an operating loss of $9.5 million for the first quarter as compared to operating income of $4.5 million in the first quarter of fiscal 2021. The prior year period was bolstered by above-average performance on job placement activities in Australia as that country began to emerge from the pandemic. In this quarter, the startups that have planned losses up front continued to ramp and are still projected to reach break-even at the midpoint of fiscal 2022. This includes the UK Restart Program, and Bruce will provide an update in his prepared remarks. Let me touch on the balance sheet and cash flow items. As of December 31, 2021, we had gross debt of $1.61 billion, and we had unrestricted cash and cash equivalents of $182 million. The ratio of debt net of allowed cash to pro forma EBITDA, as calculated in accordance with our credit agreement, is 2.5 times. This compares to 2.3 times at September 30, 2021. Cash used in operations totaled $3 million, and free cash flow used was $9 million for the first quarter of fiscal 2022. These results reflect the anticipated increase in working capital, which included the payment of deferred payroll tax and was contemplated in our fiscal 2022 cash flow guidance. We had good cash collections, and our DSO at December 31st was 67 days, putting us at the lower end of our target range of 65 to 80 days. In terms of capital allocation, we continue to favor M&A as a means to drive long-term organic growth. Our M&A program continues to evaluate prospects while we remain prudent stewards of capital. This means being selective in our evaluations and maintaining our goal of reducing debt. We believe that our balance sheet and cash from operations provide us with good access to capital to fund acquisitions. Finally, we remain committed to future quarterly cash dividends and share purchases will continue to be made opportunistically. Let's go to fiscal 2022 guidance and assumptions. We are raising top line guidance and now project revenue to be between 4.5 and $4.7 billion for the full fiscal year. Our earnings guidance remains unchanged. We expect diluted EPS to be between $4 and $4.30 and adjusted diluted EPS, which excludes intangibles amortization expense, to be between $5.07 and $5.37. Our intangibles amortization expense is projected to be approximately $90 million in fiscal 2022. Our cash flow guidance is unchanged. with cash flows from operations expected to range between $275 and $325 million, and free cash flow between $225 and $275 million. We anticipate interest expense to be between $33 and $35 million, the effective income tax rate between 25 and 26 percent, and weighted average shares absent share purchases to be between 62.5 and $62.6 million. Our expectations for margins in the domestic segments are unchanged, with the U.S. services segment expected to be in the 13 to 14 percent range and the U.S. federal services margin to be in the 10 to 11 percent range for fiscal year 2022. For the outside the U.S. segment, we now expect the margin to be in the 1 to 3 percent range for the full year reflecting our expectation that margin will improve in the second half of the fiscal year. Let me provide some commentary on the updated guidance. Our top line forecast has increased, thanks largely to more COVID response work that we anticipate will benefit the first half of fiscal 2022. This stacks on top of the core business revenue projection and the assumed acquisition contributions, all of which remain largely unchanged from last quarter. reiterating our belief that the core business growth engine is running well. On the bottom line, the contribution from more COVID response work has been offset by some bottom line headwinds in our core business. In particular, the start to redeterminations is now expected to resume on or around May 1st, as I mentioned. Also, new core work related to fiscal 2021 awards is still on track to contribute revenue in fiscal 2022, but ramp at a more gradual rate. In addition, our employment services contracts in the UK and Australia have a reduced volume forecast due to the strength of the current labor markets. The current earnings guidance can accommodate these dynamics, but we still face risk of further delays, in particular related to the start of redetermination activities, which are outside of our control and may cause revenue and earnings to move to the right. We currently project that the quarterly earnings profile is a little less steep than we estimated last quarter. We now forecast about 60% of our operating income and earnings to be realized in the second half of the fiscal year. This means we still expect depressed earnings in the second fiscal quarter as COVID response work continues to taper down and the resumption of core programs remains delayed. We still expect to exit the year at a higher run rate following improved performance in the back half of fiscal 2022. In closing, we remain optimistic about the future growth of the business, bolstered by our 2021 acquisition. While the COVID response work will continue to make for tougher year-over-year comparisons in the near term, underlying growth is accelerating, as evidenced by the normalized organic growth of 9% in the quarter. And although exact timing is not entirely in our control, there remains a clear line of sight to margin improvement in all three segments. And with that, I'll turn the call over to Bruce.