MAXIMUS INC

Results of Operations

The following table sets forth items from our consolidated statements of operations for the three months ended December 31, 2023 and December 31, 2022.

Our business segments have different factors driving revenue fluctuations and profitability. The sections that follow cover these segments in greater detail. Our revenue reflects fees earned for services provided. Cost of revenue consists of direct costs related to labor and related overhead, subcontractor labor, outside vendors, rent, and other direct costs. The largest component of cost of revenue, approximately two-thirds, is labor, including subcontracted labor.

Selling, general, and administrative expenses ("SG&A")

Selling, general, and administrative expenses ("SG&A") consist of indirect costs related to general management, marketing, and administration. It is primarily composed of labor costs. These costs may be incurred at a segment level, for dedicated resources that are not client-facing, or at a corporate level. Corporate costs are allocated to segments on a consistent and rational basis. Fluctuations in our SG&A are primarily driven by changes in our administrative cost base, which is not directly driven by changes in our revenue. As part of our work for the U.S. federal government and many states, we allocate these costs using a methodology driven by the U.S. Federal Cost Accounting Standards.

Our SG&A expense increased by $22.7 million year-over-year, primarily driven by growth in our business, including additional spending in anticipation of future work.

Amortization of intangible assets

Our intangible asset amortization for the three months ended December 31, 2023 is consistent with the comparative period in fiscal year 2023.

On December 15, 2023, the Department of Health and Human Services publicly announced that the Centers for Medicare & Medicaid Services (CMS) will recompete the Call Center Operations (CCO) contract to include a labor harmony agreement. We are currently in the second option period of the contract and have operated the program since 2018. No timeline has been disclosed on future actions by the government, including a Request For Proposal release date. Until a recompete process is complete, which typically takes a year or more for a contract of this size and complexity, we expect to continue work uninterrupted on the current contract.

Our balance sheet includes a $41.6 million customer-relationship intangible asset with a five-year remaining life related to this contract which was part of the 2018 acquisition of General Dynamics Information Technology (GDIT) contact centers. In the event that our expectations change with respect to this contract, the value of this asset or its estimated remaining life may need to be adjusted.

Interest Expense

Our interest expense has remained consistent year-over-year as declines in our debt balance are offset by increased interest rates. We have mitigated our risk by fixing interest rates on approximately half of our debt and our near-term capital allocation plan continues to prioritize reducing our debt using our free cash flow.

Provision for Income Taxes

Our effective income tax rate for the three months ended December 31, 2023 and 2022, was 25.0% and 25.2%, respectively. For fiscal year 2024, we expect the effective tax rate to be between 24.5% and 25.5%.

U.S. Federal Services Segment

Our U.S. Federal Services Segment delivers end-to-end solutions that help various U.S. federal government agencies better deliver on their mission, including program operations and management, clinical services, and technology solutions. This segment also includes appeals and assessments services, system and application development, Information Technology ("IT") modernization, and maintenance services. Certain state-based assessments and appeals work that is part of the segment's heritage continues to be managed within this segment. Under Technology Consulting Services ("TCS"), the segment executes on its digital strategy to deliver technology solutions that advance agency missions, including the challenge to modernize, provide better customer experience, and drive process efficiencies. The segment continues to expand its clinical solutions through VES, which manages the clinical evaluation process for U.S. veterans and service members on behalf of the U.S. Department of Veterans Affairs ("VA").

Our revenue and cost of revenue for the three months ended December 31, 2023, increased 9.5% and 5.0%, respectively, compared to the three months ended December 31, 2022. All growth in the first quarter of fiscal year 2024 was organic.

As anticipated, much of this growth was driven by increased volumes on expanded programs, including the U.S. Department of VA's Medical Disability Examinations ("MDE") contracts.

Our profit margins have improved period-over-period. Our results in the first quarter of fiscal year 2023 reflected hiring and staffing costs in anticipation of higher volumes, thus tempering margins. Our results in fiscal year 2024 reflect those anticipated volumes. We anticipate full-year operating margin will range between 11% and 12%.

U.S. Services Segment

Our U.S. Services Segment provides a variety of business process services ("BPS"), such as program administration, assessments, and related consulting work for U.S. state and local government programs. These services support a variety of 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. Over the last three years, many programs in this segment have been operating with depressed margins resulting from the pause in Medicaid redeterminations. The depressed margins have resulted from reduced operating leverage in the segment as costs could not scale down at the same rate to meet lower demand due to requirements to fulfill other obligations on these contracts. Now that redetermination activities have resumed, we expect fiscal year 2024 and beyond to reflect a recovery of operating leverage.

Our revenue and cost of revenue for the three months ended December 31, 2023, increased 11.5% and 4.4%, respectively, compared to the three months ended December 31, 2022. All growth in the first quarter of fiscal year 2024 was organic.

This segment received the benefit of expanded eligibility support and clinical services programs, as well as the resumption of Medicaid redetermination activities.

Profit margins in fiscal year 2023 reflected the pause in redetermination activities, which have since been resumed. We anticipate our full-year operating margin will range between 11% and 12%.

Outside the U.S. Segment

Our Outside the U.S. Segment provides BPS for international governments, transforming the lives of people around the world. Helping people find employment, access vital support, and remain healthy, these services include health and disability assessments, program administration for employment services, wellbeing solutions, and other job seeker-related services. We support programs and deliver services in the United Kingdom, including the Health Assessment Advisory Service ("HAAS") and the recently awarded replacement contract to start in 2024, Functional Assessment Services (“FAS”), and Restart; Australia, including Workforce Australia and employment support and job seeker services worldwide.

This segment recorded a break-even margin in the first quarter of fiscal year 2024 as management undertakes steps to improve performance and deliver consistent profitability in this part of our organization. These steps included the divestiture in fiscal year 2024 of our employment services business in Canada and all of our operations in Italy and Singapore. In fiscal year 2023, we disposed of our commercial practice in the United Kingdom and our Swedish operations.

In the first quarter of fiscal year 2023, this segment received a significant benefit from higher employment services volumes, which did not recur. Revenue from our employment services contracts include payments based upon our ability to place individuals in long-term, sustained employment. We recognize this revenue over the period of performance using estimates of these outcomes, which are typically based upon past performance. Changes in these estimates may have a significant effect on our revenue.

We anticipate our Outside the United States Segment will yield slightly above break-even operating margin for the full year.