MAXIMUS INC

Results of Operations

The following table sets forth, for the fiscal years indicated, information derived from our statements of operations. In preparing our discussion and analysis of these results, we focused on the comparison between fiscal years 2024 and 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

Our SG&A expenses 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 expenses have expanded through our growth, as well as investments made in our workforce and infrastructure. In addition, our SG&A includes charges which are not directly connected to our day-to-day operations. Our costs for the year ended September 30, 2024 and 2023, include charges of $2.9 million and $29.3 million, respectively, for the investigation and remediation costs of a previously disclosed cybersecurity incident. As previously disclosed, the Company believes that the personal information of a significant number of individuals was accessed by an unauthorized third party by exploiting a zero-day vulnerability in a file transfer application used by the Company for internal and external file sharing purposes. We have provided notices to individuals whose personal information, including social security numbers, protected health information, and/or other personal information, may have been included in the impacted files.

Interest expense

Interest expense for fiscal year 2024 and 2023 decreased from $84.1 million to $82.4 million. Our exposure to increasing interest rates in the United States was mitigated by a reduction in our debt balance and by maintaining interest rate swap agreements on approximately 50% of our gross debt.

Our effective interest rate was 5.52% at September 30, 2024, compared to 5.97% at September 30, 2023, and 4.69% at September 30, 2022. We have mitigated our risk by fixing interest rates on $650 million of our debt and our near-term capital allocation plan continues to prioritize reducing our debt using our free cash flow. At our current debt balances, a 100 basis point change in SOFR would result in an increased annual interest expense of $5.0 million.

Income taxes

Our effective income tax rate for the year ended September 30, 2024 and 2023, was 24.5% and 23.1%, respectively. Our tax rate in fiscal year 2023 received the benefit of higher tax credits. For fiscal year 2025, 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 solutions that help various U.S. federal government agencies better deliver on their mission, including program operations and management, clinical services, and technology solutions. The 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 year ended September 30, 2024, increased 13.9% and 12.2%, respectively, compared to fiscal year 2023. All movement was organic.

Our revenue and margin growth has principally been driven by volume growth and strong performance on our contracts relating to clinical assessments.

We anticipate that revenue and profit margins will remain consistent through fiscal year 2025. 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. In September 2024, the Government Accountability Office partially sustained our pre-award protest thereby requiring redrafting of the labor harmony requirement. In November 2024, we filed a lawsuit in the U.S. Court of Federal Claims challenging the rebid of the contract awarded to us. The delayed procurement timeline now assumes an anticipated award in late second quarter of fiscal year 2025 and we remain engaged in the process to maintain leverage in advocating for our legal rights. Meanwhile, a subsequent contract option year has been executed by the customer which extends the current contract through September 2025. 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 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 2024, these contracts together represented approximately 30% to 35% of this segment's 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.

We anticipate operating margins in fiscal year 2025 of approximately 12%.

U.S. Services Segment

Our U.S. Services Segment provides a variety of BPS, such as program operations, clinical services, employment services, and technology solutions and related consulting work for U.S. state and local government programs. These services support a variety of programs, including the programs under ACA, Medicaid, the Children's Health Insurance Program (CHIP), Temporary Assistance to Needy Families (TANF), and child support programs. In fiscal years 2020 through 2023, many programs in this segment were operating with depressed margins resulting from the pause in Medicaid redeterminations. The depressed margins resulted from reduced operating leverage in the segment as costs could not scale down at the same rate to meet lower demand due to the requirements to fulfill other obligations on these contracts. Fiscal year 2024 reflected a full period of volumes. The middle two quarters of the fiscal year experienced slightly elevated volumes from excess temporary work. This work was concluded by the last fiscal quarter with the segment’s margin appropriately aligned.

Our revenue for the year ended September 30, 2024, increased 5.5% and cost of revenue slightly declined compared to fiscal year 2023. All movement was organic.

Growth in fiscal year 2024 was principally from Medicaid-related activities returning to normal levels, supplemented by some additional volumes from catch-up work. This resulted in improvements to our profit margins. At this time, much of the additional volume and extra services related to the unwinding have ended and, accordingly, we anticipate that our results in fiscal year 2025 will revert to a run-rate consistent with the fourth quarter of fiscal year 2024. We anticipate profit margins of approximately 11% in fiscal year 2025.

Outside the U.S. Segment

Our Outside the U.S. Segment provides BPS and technology solutions for international governments. These services include health and disability assessments, program administration for employment services, wellbeing solutions and other job seeker-related services, digitally-enabled customer services, and advanced technologies for modernization. We support programs and deliver services in the United Kingdom, including the newly awarded Functional Assessment Services (FAS) contract, which replaced the Health Assessment Advisory Service (HAAS) contract, and the Restart employment program; and Australia, including Workforce Australia, and other employment support and job seeker services in a number of other countries.

The Outside the U.S. Segment has tempered losses through a rebalancing of its contract portfolio and the divestiture of a number of operations as part of an effort to improve performance and deliver consistent profitability. We are prioritizing these efforts and anticipate a smaller footprint once completed. We expect these actions would result in divestiture-related charges that would not impact our adjusted operating income.

The divestitures include the sale of a small commercial practice in the United Kingdom and our Swedish business in fiscal year 2023 and the sale of our businesses in Italy and Singapore, as well as our Canadian employment services contract, in fiscal year 2024. These disposals had a positive effect on our overall profit margins.

Margins also received the benefit of improved organic performance, where costs were reduced. Much of this benefit was from our contracts in the United Kingdom, which also received the benefit of stronger currency than in fiscal year 2023.

We recognize revenue over our period of performance, using estimates of our ability to place people in work and the time that this will take. Our estimates are based upon historical performance, where appropriate and available, and are constantly updated. This may result in volatility within revenue as changes in estimates of future performance impact the revenue recognized in any period.