Company Overview

Maximus, Inc. (MMS) is a leading provider of government services worldwide, with a rich history spanning nearly half a century. The company has established itself as a trusted partner to governments across the globe, helping to improve the delivery of public services amidst complex technological, health, economic, environmental, and social challenges.

Maximus' origins can be traced back to 1975 when it was founded in Virginia as a private company focused on providing management consulting services to state and local governments. Over the decades, the company has evolved and diversified its offerings, expanding its footprint both domestically and internationally. Today, Maximus operates through three core business segments: U.S. Federal Services, U.S. Services, and Outside the U.S.

The company's mission of "Moving People Forward" has been at the forefront of its operations, helping millions of people access vital government services. Maximus has developed extensive experience working with local, state, federal, and international government clients, delivering high-quality, scalable, and cost-effective citizen services. This has enabled government agencies to fulfill their missions effectively.

Business Segments

U.S. Federal Services

The U.S. Federal Services segment delivers end-to-end solutions that help various U.S. federal government agencies better achieve their missions, including program operations and management, clinical services, and technology solutions. This segment has been a key driver of Maximus' growth, with revenue increasing 13.9% to $2.74 billion in fiscal year 2024, accounting for 51.6% of the company's total revenue. The segment's operating income margin also improved to 12.2% in fiscal year 2024, up from 10.4% in the prior year, as the company's focus on higher-margin performance-based work, including assessment volumes, continued to yield positive results.

The segment also includes system and application development, IT modernization, and maintenance services. The clinical services component comprises appeals and assessments services, which includes managing the evaluation process for U.S. veterans and service members on behalf of the U.S. Department of Veterans Affairs (VA) and certain state-based assessments and appeals work. Under the Technology Consulting Services (TCS) division, the segment executes on its digital strategy to deliver technology solutions that advance agency missions, including modernization, improved customer experience, and increased process efficiencies.

For the three months ended June 30, 2024, revenue in the U.S. Federal Services Segment was $683.35 million, up 17.0% compared to the prior year period. Cost of revenue increased 16.5% to $497.27 million. Gross profit grew to $186.07 million, with the gross profit percentage increasing to 27.2% from 26.9% in the prior year quarter. Operating income was $106.13 million, with an operating margin of 15.5%, up from 12.7% in the year ago period.

The segment's revenue and margin growth was primarily driven by volume increases and strong performance on contracts related to clinical assessments. Management anticipates the U.S. Federal Services Segment will continue to grow for the remainder of fiscal year 2024, led by additional volumes in clinical services. Full-year operating margins are expected to be around 12.5%.

The segment is monitoring the recompete process for two significant contracts - the Centers for Medicare & Medicaid Services contact center operations contract and the VA medical disability examination contracts. As the incumbent provider, Maximus believes it has significant operational advantages, but the outcomes of these recompete processes could have a material impact on the segment's future performance.

U.S. Services

The U.S. Services segment provides a variety of business process services (BPS) to U.S. state and local government programs, such as program administration, assessments, and related consulting work. This segment experienced a 5.5% increase in revenue to $1.91 billion in fiscal year 2024, driven by strong performance across the core Medicaid-related portfolio. The segment's operating income margin also expanded to 12.9% in fiscal year 2024, up from 10.1% in the prior year, as the company benefited from the return to normal Medicaid redetermination volumes and related overperformance.

These services support programs including the Affordable Care Act (ACA), Medicaid, the Children's Health Insurance Program (CHIP), Temporary Assistance to Needy Families (TANF), and child support programs. In the prior fiscal year, this segment was impacted by reduced operating leverage resulting from the pause in Medicaid redeterminations during the COVID-19 pandemic. However, redeterminations resumed in late fiscal year 2023, and fiscal year 2024 is demonstrating a recovery of operating leverage and related margin improvement.

For the three months ended June 30, 2024, revenue in the U.S. Services Segment increased 5.2% to $472.30 million, while cost of revenue was relatively flat at $351.29 million. Gross profit grew to $121.01 million, with the gross profit percentage increasing to 25.6% from 21.9% in the prior year quarter. Operating income was $61.48 million, with an operating margin of 13.0%, up from 10.5% a year earlier.

The segment's revenue growth was principally from Medicaid-related activities, including a portion of Medicaid redetermination work, which drove improved profitability as the cost base had been built up in anticipation of this increased volume. Management expects the U.S. Services Segment to deliver a full-year operating margin of approximately 13.0%.

Outside the U.S.

The Outside the U.S. segment, which provides BPS for international governments, saw a 4.6% decrease in revenue to $657 million in fiscal year 2024. This decline was primarily due to divestitures of certain businesses in the prior year, which reduced revenue by 6.1%. However, the segment's organic growth in the second half of the fiscal year, particularly in the United Kingdom, along with improved profitability, demonstrated the company's efforts to optimize its international portfolio and focus on more profitable opportunities.

Maximus' Outside the U.S. Segment provides BPS for international governments, helping people find employment, access vital support, and remain healthy. Services include health and disability assessments, program administration for employment services, well-being solutions, and other job seeker-related services. The company supports programs and delivers services in the United Kingdom, Australia, and other countries.

This segment recorded a small operating loss in the first three quarters of fiscal year 2024 as management undertakes steps to improve performance and deliver consistent profitability. These steps have included the divestiture of the employment services business in Canada and operations in Italy and Singapore during fiscal year 2024, as well as the disposal of the commercial practice in the United Kingdom and the Swedish subsidiary in fiscal year 2023.

For the three months ended June 30, 2024, revenue in the Outside the U.S. Segment increased 2.3% to $159.28 million, while cost of revenue decreased 8.7% to $134.06 million. Gross profit improved to $25.23 million, with the gross profit percentage increasing to 15.8% from 5.7% in the prior year quarter. The segment recorded an operating loss of $1.42 million, compared to an operating profit of $15.24 million a year earlier.

The revenue growth in the quarter was driven by the company's United Kingdom business as well as the continued ramp-up of contracts in Saudi Arabia. Management anticipates the Outside the United States Segment will yield a slightly above break-even operating margin for the full fiscal year 2024.

Financials

Maximus' financial performance in fiscal year 2024 was strong, with the company reporting organic revenue growth of 8.8% and adjusted earnings per share (EPS) of $6.11, well above the prior year's $3.83. The company's free cash flow generation was also impressive, reaching $401 million, or 1.3 times net income, highlighting the strong cash-generating capabilities of its business model.

For fiscal year 2024, Maximus' revenue was $5.31 billion, with net income of $306.91 million. Operating cash flow (OCF) was $515.26 million, and free cash flow (FCF) was $401.07 million. In the most recent quarter (Q4 2024), revenue was $1.32 billion, net income was $72.50 million, OCF was $103.83 million, and FCF was $78.00 million. Revenue grew 4.4% year-over-year, driven by volume increases across the company's core programs.

Looking ahead to fiscal year 2025, Maximus has provided guidance that reflects a balanced approach to growth and profitability. The company expects revenue to be in the range of $5.28 billion to $5.43 billion and adjusted EBITDA margin to be approximately 11%, with adjusted EPS projected between $5.70 and $6.00 per share. This guidance implies a compound annual growth rate of 5% in revenue from fiscal year 2022 to the midpoint of fiscal year 2025, showcasing the company's ability to deliver sustainable growth over the medium term.

Maximus also expects free cash flow between $345 million and $375 million for fiscal 2025. The capital expenditure spend rate is expected to slow to around 1.5% of revenue in fiscal 2025, down from the prior year. The effective tax rate is estimated to be around 25% for fiscal 2025.

Geographically, Maximus operates primarily in the United States, with 12% of revenue generated outside the U.S. in the most recent quarter. The company has divested some international operations in recent years to focus on its core U.S. business.

Liquidity

Throughout its history, Maximus has demonstrated the ability to successfully navigate various political transitions, affecting both the executive and legislative branches at the federal and state level. The company has built the capacity to support its customers in implementing different policy priorities, from expanding social safety net programs to providing states greater flexibility in program delivery.

Maximus' position as the largest partner to the government in the administration of well-established entitlement and related mandatory spending programs has allowed it to deliver strong financial results with positive long-term trend lines spanning many administrations. The company has supplemented its organic growth through strategic acquisitions, such as the acquisitions of VES Group, Inc., the federal business of Attain, LLC, and a service contract with the U.S. Department of Education under the Aidvantage brand. These acquisitions have allowed the company to expand into new markets and further strengthen its capabilities.

As of September 30, 2024, Maximus had a debt/equity ratio of 0.052. The company had $183.12 million in cash and cash equivalents and access to a $750 million revolving credit facility. The current ratio and quick ratio both stood at 1.49. Maximus reduced its debt leverage ratio from 2.2 times at the prior year-end to 1.4 times by the end of fiscal 2024, demonstrating improved financial flexibility.

Competitive Advantages

One of the key factors underpinning Maximus' success has been its ability to navigate various political and policy transitions, both at the federal and state levels. The company's long-standing relationships with government agencies, deep understanding of program service delivery, and proven track record of operational excellence have made it a trusted partner for administering critical government programs, even as priorities and leadership change.

For example, during the Trump administration, Maximus was instrumental in helping states leverage private sector partners to administer certain benefit programs, particularly in the wake of the COVID-19 pandemic. The company's agility and responsiveness in supporting these efforts have positioned it well to navigate the current transition to the incoming administration, where the focus on efficient government service delivery and technology modernization remain key priorities.

Maximus' commitment to innovation and digital transformation has also been a differentiating factor. The company's recent investments in enterprise technology, including the establishment of a Global Capability Center and the appointment of a Chief Digital and Information Officer, have enhanced its ability to identify, shape, and respond to customer needs, while also driving greater operational efficiency and innovation in its solution offerings.

Challenges and Risks

However, Maximus is not without its challenges. The company is currently engaged in a legal dispute with the U.S. Department of Health and Human Services over the early rebid of the CMS Contact Center Operations (CCO) contract, which includes the 1-800-MEDICARE program. Maximus has filed a lawsuit in the U.S. Court of Federal Claims, challenging the government's decision to recompete the contract prematurely and impose an unnecessary labor harmony agreement requirement. The outcome of this legal battle could have significant implications for the company's federal business, as the CCO contract represents a substantial portion of its revenue.

Additionally, Maximus operates in a highly regulated and politically sensitive environment, which exposes the company to various risks, including changes in government policies, budgetary constraints, and the potential for legal or regulatory challenges. The company's international operations also bring additional complexities, such as currency fluctuations and differences in local regulations and market dynamics.

In May 2023, Maximus was impacted by the MOVEit data breach, which resulted in multiple lawsuits being filed against the company. Maximus has been cooperating with investigations and providing updates to impacted individuals. The financial impact has not been material to date.

Conclusion

Despite these challenges, Maximus remains well-positioned to capitalize on the growing demand for efficient and technology-enabled government services. The company's diversified business model, strong customer relationships, and proven ability to deliver innovative solutions position it as a leader in the government services industry.

As governments worldwide grapple with the ongoing digital transformation of public services, Maximus' expertise in translating policy priorities into scalable, technology-driven operations will continue to be in high demand. The company's investments in areas such as artificial intelligence, machine learning, and cloud-based technologies are expected to further enhance its ability to drive process efficiencies, improve customer experiences, and enable its government partners to better serve their citizens.

The government services industry is seeing increased demand driven by demographic trends, constrained government budgets, and the need for technology modernization. Maximus is well-positioned to capitalize on these industry tailwinds given its proven track record, comprehensive service offerings, and strong customer relationships.

In conclusion, Maximus' long-standing history, diversified business model, and unwavering commitment to innovation make it a compelling investment proposition in the government services sector. While challenges and uncertainties remain, the company's ability to navigate complex political and regulatory environments, coupled with its strong financial performance and growth trajectory, suggest that Maximus is well-positioned to continue powering government's digital transformation in the years to come.