MAXIMUS INC

Results of Operations

The following table sets forth items from our consolidated statements of operations for the three and six months ended March 31, 2024, and March 31, 2023.

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 ("SG&A") expenses

SG&A expense consists 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 expense 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 $48.7 million for the six months ended March 31, 2024 compared to the same period in fiscal year 2023, 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 and six months ended March 31, 2024 has declined compared to the same period in fiscal year 2023. This decline reflects the amortization in full of intangible assets from our Aidvantage acquisition.

Our balance sheet includes intangible assets of $502 million and $40 million from the 2021 VES and 2019 GDIT acquisitions, respectively. These assets, comprising customer relationships, technology, and a medical provider network, continue to support contracts acquired with these acquisitions. The greater part of these assets are being amortized over the remaining nine and five years, respectively. In the event that our expectations change with respect to these acquired contracts, the value of these assets and the estimated remaining lives of these assets 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 sought to mitigate 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 and six months ended March 31, 2024, was 25.4% and 25.2%, respectively, compared to 24.9% and 25.0% for the three and six months ended March 31, 2023. 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 VA.

Our revenue and cost of revenue for the three months ended March 31, 2024, increased 20.1% and 16.7%, respectively. For the six months ended March 31, 2024, revenue and cost of revenue growth was 14.7% and 10.7%, respectively. All growth in fiscal year 2024 was organic.

Our revenue and margin growth has principally been driven by volume growth and strong performance on our contracts with the VA relating to MDEs.

We anticipate that our U.S. Federal Services Segment will continue to grow for the remainder of fiscal year 2024, driven primarily by additional volumes anticipated in MDEs. We anticipate that our full-year operating margin will be around 12%.

Recently, unique circumstances have led to potential recompetes of two significant contracts held by Maximus:

•The Centers for Medicare & Medicaid Services (CMS) has taken steps to recompete the Contact Center Operations (CCO) contract awarded to us in 2022 at a value of $6.6 billion over a base plus nine-year period of performance. The earlier-than-expected action is for the express purpose of including a labor harmony agreement requirement. Meanwhile, Maximus has consistently met or exceeded all contractual service levels with uninterrupted operations and driven the highest independently measured customer satisfaction in the history of the program. CMS indicates a formal Request for Proposal (RFP) process is expected to commence on or around May 16, 2024. We anticipate continuing to work on this contract uninterrupted until the recompete process is completed and that, as the incumbent, we have significant operational advantages.

•A majority of the MDE contracts under the VA, which comprise our acquired VES business, had ceilings on claims volumes at the time of award in 2018. Volumes have significantly increased since the passage of the PACT Act, thereby requiring a rebid process. In fiscal year 2023, these contracts together represented between 10% and 15% of total Company revenue. We anticipate continuing to work on these contracts uninterrupted until the recompete process is completed and that, as the incumbent, we have significant operational advantages.

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. Previously, this segment suffered from reduced operating leverage resulting from the pause in Medicaid redeterminations during the COVID-19 pandemic. Redeterminations resumed in late fiscal year 2023, meaning fiscal year 2024 and beyond are demonstrating and should continue to demonstrate recovery of operating leverage and related margin improvement.

Our revenue and cost of revenue for the three months ended March 31, 2024, increased 8.1% and decreased 2.1%, respectively, compared to the three months ended March 31, 2023. For the six months ended March 31, 2024, our revenue and cost of revenue increased 9.8% and 1.1%, respectively, compared to the six months ended March 31, 2023. All growth was organic.

Growth in the first half of fiscal year 2024 was principally from Medicaid redetermination activities, supplemented by a large, state-based assessment program which has ramped up in recent quarters.

Our margins in the first half of fiscal year 2024 have received the benefit of additional volumes from redetermination activity, that we anticipate returning to normal levels through the second half of the year. We anticipate a full-year operating profit margin of between 11% and 14%.

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 and the recently awarded replacement contract to start in 2024, Functional Assessment Services, and Restart; and Australia, including Workforce Australia, and other 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 in the second quarter. 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.

The improvement in the valuation of the British Pound provided an additional benefit to revenue and profit in the first six months of fiscal year 2024.

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