MAXIMUS INC

Results of Operations

The following table sets forth items from our consolidated statements of operations for the three and nine months ended June 30, 2024, and June 30, 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 for the three months ended June 30, 2023, included $22.1 million of expenses for investigation and remediation activities related to a cybersecurity event. Notwithstanding this, our SG&A expenses for the nine months ended June 30, 2024, have increased compared to the comparative period. This growth is principally from growth in our administrative base as the business expands.

Amortization of intangible assets

Amortization of intangible assets remained consistent for the three months ended June 30, 2024, as compared to three months ended June 30, 2023. For the nine months ended June 30, 2024, amortization of intangible assets decreased by $2.1 million as compared to nine months ended June 30, 2023. The decline was principally driven by the amortization in full of intangible assets from our Aidvantage acquisition.

Our balance sheet includes intangible assets of $487 million and $37 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. Following the amendment of our debt agreement, we continue to mitigate our risk by fixing interest rates on approximately half of our debt. 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 nine months ended June 30, 2024, was 25.4% and 25.3%, respectively, compared to 15.1% and 22.3% for the three and nine months ended June 30, 2023. Our tax rates in fiscal year 2023 received the benefit of discrete tax benefits from tax credits, which did not recur in fiscal year 2024. 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 system and application development, Information Technology ("IT") modernization, and maintenance services. Clinical services 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 that is part of the segment's heritage. 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.

Our revenue and cost of revenue for the three months ended June 30, 2024, increased 17.0% and 16.5%, respectively, compared to the three months ended June 30, 2023. For the nine months ended June 30, 2024, revenue and cost of revenue growth were 15.4% and 12.5%, respectively, compared to the nine months ended June 30, 2023. 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 relating to clinical assessments. Our profit margins have grown as the volume growth has allowed for economies of scale.

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 in clinical services. We anticipate that our full-year operating margin will be around 12.5%.

We continue to monitor the status of announced recompetes of two of our significant contracts:

•The Centers for Medicare & Medicaid Services is currently recompeting the Contact Center Operations contract awarded to us in 2022, which is earlier-than-expected, and for the express purpose of including a labor harmony agreement requirement. In June 2024 we filed a pre-award protest which will be adjudicated by the Government Accountability Office. The Company expects to receive a response prior to the end of fiscal year 2024. The $6.6 billion contract value over a base plus a nine-year period of performance, is equivalent to approximately 10% to 15% of total Company revenue on an annual basis. The contract type is cost-plus-award-fee which traditionally carries low single digit margins. Given the contract's absorption of indirect costs, the impact to consolidated operating income from the absence of this contract would likely be more significant than just the low single digit margin, depending in part on the extent to which we would be able to mitigate the effects. 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. We anticipate continuing to work on this contract uninterrupted until the recompete process, including any subsequent protest actions, is completed. We also believe 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 our 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 June 30, 2024, increased 5.2% and 0.2%, respectively, compared to the three months ended June 30, 2023. For the nine months ended June 30, 2024, our revenue and cost of revenue increased 8.2% and 0.8%, respectively, compared to the nine months ended June 30, 2023. All growth was organic.

Growth in fiscal year 2024 was principally from Medicaid-related activities, a portion of which includes redetermination activities related to the unwinding exercise, resulting in additional volumes in transactions generating revenue on a cost-base which had been built up in anticipation of this growth. This resulted in improvements to our profit margins, that we anticipate returning to normal levels over the coming quarters. We anticipate a full-year operating profit margin of approximately 13%.

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 scheduled to start in the fourth quarter of fiscal year 2024, Functional Assessment Services, and Restart; and Australia, including Workforce Australia, and other employment support and job seeker services in a number of other countries.

This segment has recorded a small loss in 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.

Revenue growth in the quarter was driven by our United Kingdom business, as well as the continued ramp up of contracts in Saudi Arabia.

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 nine 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.