Greetings, and welcome to the Maximus Fiscal 2024 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jessica Batt, Vice President, Investor Relations and ESG. Thank you. You may begin.

Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO; David Mutryn, CFO; and James Francis, Vice President of Investor Relations. I’d like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially as a result of risks we face including those discussed in Item 1A of our most recent Forms 10-Q and 10-K. We encourage you to review the information contained in our recent filings with the SEC and our earnings press release. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances except as required by law. Today’s presentation also contains non-GAAP financial information. Management uses this information internally to analyze results and believe, it may be informative to investors engaging the quality of our financial performance, identifying trends, and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures presented, please see the company’s most recent Forms 10-Q and 10-K. And with that, I’ll hand the call over to David.

Thanks, Jessica, and good morning. Our exceptional third quarter results demonstrate our ability to capitalize on volume growth against the backdrop of strong demand in our programs across the Board. We are very pleased to raise guidance for the third consecutive quarter. I’ll walk you through our thinking for the last quarter of this year and then I’ll share some early color on next fiscal year. Turning to quarterly results. Maximus reported revenue of $1.31 billion for the third quarter of fiscal year 2024, which represents 10.6% year-over-year growth, or 11.2% on an organic basis. All three segments posted organic growth with our largest U.S. Federal Services being the primary driver in the quarter. Adjusted operating income margin was 12.6% and adjusted EPS was $1.74 for the quarter, which compares to 6.9% and $0.78 respectively for the prior year period. Results are best explained at the segment level, so let’s go there. For the U.S. Federal Services segment, revenue increased 17.0% to $683 million, which was all organic and driven predominantly by volume growth on expanded clinical programs. The operating income margin for U.S. Federal Services in the third quarter was 15.5% as compared to 12.7% in the prior year period. These results reflect our focus on solid execution in a period of high demand, particularly in the assessment space. The higher margin also reflects a temporarily favorable mix of lower cost-plus revenue and higher performance based revenue. For the U.S. Services segment, revenue increased 5.2% to $472 million. This growth all organic was due to strong performance across the Medicaid-related portfolio, a portion of which were excess volumes from the now completed unwinding exercise. The operating income margin for the third quarter was 13.0% and compares to 10.5% for the prior year period. As expected, there was a slight…

Thanks, David, and good morning. We are pleased to have delivered another solid quarter, contributing to what we expect will be a strong fiscal year. High quality and efficient delivery of higher than expected volumes across the business reflect the benefits of our business model, enabling the positive financial results David has shared today. We continue to focus on executing the strategy outlined in our 2022 Investor Day. Recent awards demonstrate our continued delivery within our three strategic areas, future of health, technology modernization and customer services digitally enabled. To that end, I’d like to share a few refined areas of focus we’re excited about. Let’s begin with recent wins. We recently announced the award of our first task order under the IRS Enterprise Development Operations Services or EDOS, Blanket Purchase Agreement or BPA. Under the task order, our teams will support the IRS internal management division by designing and developing all functional and technical enhancements for the agency’s internal operations and accounting program, valued at $87 million over a five-year period. The award is evidence of our commitment to expanding our technology modernization services. We first announced our inclusion on the BPA last fiscal year and are pleased to be selected for one of the first few task orders awarded. The IRS has been a valuable client for several decades and we are thrilled to have the opportunity to continue our strong collaborative relationship while supporting the agency’s modernization mission. Earlier this year, we were successful in winning new work with the Transportation Security Administration for Operations, Technology, Innovation and Management, or TSA OPTIMA for short, with an approximate total contract value of $171 million over six years. As has been reported in the Trade Press, an initial protest by the incumbent was resolved in our favor. A second…

Thank you. The floor is now open for questions. [Operator Instructions] Today’s first question is coming from Charlie Strauzer of CJS Securities. Please go ahead.

Hi. Good morning. Just if we can pick up on the CCO commentary, Bruce, since the protest has been filed, are there any updates in terms of timeline or conversations or color that you’ve gotten back from the – from CMS?

Sure, Charlie. Yes, I don’t have really much to add from my prepared remarks. I mean, we noted that the protest is now with the Government Accountability Office. We expect that they’ll respond by September 30 at the latest. They could respond sooner. This protest action, I guess, one thing that’s worth noting is that the 100-day stay – is a stay on award that you get as a consequence of filing with the GAO. It doesn’t keep the agency from progressing the procurement process itself. So, interestingly, the next phase of the procurement has proposal volumes two through five. We’ve already – past the phase where volume one, which is an initial qualification process, was due in June, but volumes two through five are due, I believe, September 13 or so. And as a consequence, we – as I said, we’re in the process of considering that volume response, because it would have to precede final response from the GAO, which could occur as late as September 30. So we would only see the GAO process having a real impact to the anticipated award date, which was publicly stated is intent of award coming out January 16. If subsequent to this initial GAO process, there were subsequent processes either back through the GAO or through higher level appeals to Court of Federal Claims or what have you, that could affect the actual award date itself. So that’s the sense of the timing. I would say that the – many potential paths remain here that this could take. And I just note two things. We remain super focused on delivering top quality service as we have. We are thrilled that the independently measured customer satisfaction scores with this program were really the highest since we took over responsibility for the contract this last open enrollment period. And we’ll continue to deliver exceptional service and let the process play itself out. And I also mentioned that we’re really committed to achieving a fair outcome here, and we’re going to fully intend to pursue all potential paths necessary to do that. So, David, would you add anything?

Yes. Charlie, on CCO, I’ll just add, since investors have been interested in the profitability of this contract. I wanted to point out the contract is cost plus award fee, as we’ve said, which does traditionally carry low single digit margin. Although, given the contract’s absorption of indirect costs, the impact to our total operating income from the absence of the contract would likely be more significant than just low single digit margins. And that depends in part on the extent to which we’d be able to mitigate the effect of that lost indirect absorption. But regardless of the recompete outcome, we don’t expect it to have a significant impact to our current view of fiscal year 2025.

Great, thank you. And just shifting gears to guidance, if we could, looking at Q4 and the early color you gave us for 2025. Is it possible to get a little bit more color as to the incremental revenue not expected to reoccur in 2025? What is implied growth – what is the implied growth rate behind that? The comment that you said, it may look similar to the latest revenue guidance. Are we talking flat year-over-year, low single digit growth? Is this on a pro forma basis, that kind of thing?

Sure. Yes. So for fiscal year 2024, with less than a quarter remaining, our visibility is very strong. We feel good and confident in raising that guidance, both as a result of the Q3 overperformance and continued momentum in Q4. Looking to 2025, yes, my commentary was that our current view, which, let me reemphasize is an early view, will be giving our formal guidance in November. But our early view is that fiscal year 2025 would be roughly similar to where we now expect fiscal year 2024 to land, which, of course, is now $100 million higher than our prior guidance. We’ve been consistent that we do expect some top and bottom line moderation in U.S. Services, in particular, as a result of the redetermination volumes that were historically high given the three years of continuous Medicaid enrollment. And while we’ve, maybe on prior calls, focused a bit more on the bottom line and margin impact of that surge in volumes, we do recognize there’s a top line impact as well, which we’ve wanted to call out here. So the strength in fiscal year 2024 has been really in both U.S. segments, U.S. Services and U.S. Federal. But the portion that’s not expected to recur is concentrated in U.S. Services. Much of that related to the redetermination volume, which we talked about. But one last point, while we reiterate our belief that long-term demand for our business will continue to grow and support mid-single-digit organic growth, there can be fluctuations year-to-year. Bearing in mind that we’ve – we’re on track to deliver a second year of high single digit organic growth at 9% at the midpoint of our guidance.

Great. Thank you. That’s very helpful.

Great. Thanks, Charlie. Next question.

Thank you. The next question is coming from Bert Subin of Stifel. Please go ahead.

Hey, good morning and thank you for the questions.

Good morning, Bert.

Maybe just to, I guess, pick up there as we think about the potentially the excess, it seems like you’re mostly calling out the redetermination side. I guess if we think about VES and the VA side of things, substantial growth in the fiscal third quarter, and it helped boost your margin quite a bit for U.S. Federal. I guess next week, I think we’re looking at an Industry Day for that rebid. And there’s an expectation that there could be an RFP next month and then award by November. Obviously, right now the VA is grappling with some funding issues. Can you just give us your thoughts on maybe what your near-term expectations are for that business and then what they are as you think about FY2025? Because it would seem like as you roll out automation tools, that should be a pretty solid margin boost next year that would help potentially offset what you’ve been dealing – at least partially offset the tailwinds that are turning to headwinds and redetermination. So just curious if you could provide some color there.

A lot of dynamics there, Bert. And it’s a great series of questions, compound question. So the first piece I’ll start and then I’ll turn it over to David to comment a little bit more on the margin expectations. So, first of all, as it relates to the rebid, you’re absolutely correct. Our information is similar to yours in that there was a revised RFI that was issued in late June. And the intent of that, as expressed in the RFI, is to award a two-year contract. And that would be – these would be contracts for regions one through four of the MDE program. The RFP is expected to be released in August, submittal is due in September, and an award before November 1. Interestingly, the period of performance will be from November 1, 2024 through October 31, 2026. So a two year contract award there. Further, not much more to comment on the rebid, except to just reiterate, I think what all in the industry are quite aware, which is that they’re recompeting this due to the volume limits that have been approached or being approached on the existing contracts and to provide extra capacity to the vendors. We can’t comment any more specifically on the rebid dynamic, given how imminent it is. But you also talked a little bit about the budget. The increased caseload of disability claims that have resulted from the PACT Act to put pressure, obviously not just on the funding for the program to complete C&P exams for the MDE process, but also obviously for the benefits themselves for veterans. And it’s a broadly bipartisan supported program. And while the budget request was not acted on prior to adjournment, presently we think that will continue to very much be a congressional priority in…

Yes. Thanks, Bruce. Just a little more commentary on the Q3 margins in the Federal segment, since this is a component. So I mentioned in my prepared remarks that one driver was the unusual mix of higher performance based revenue and lower cost-plus revenue. I probably shouldn’t even say unusual, because we have seen this somewhat a seasonal impact with lower cost-plus revenue in the third quarter, which has occurred in the past. So that played a part in the higher margin this quarter. And then in addition, our assessment programs did have particularly strong volumes. Our production was strong, and essentially some volume was pulled into Q3 from other quarters, which drove performance on both the top and bottom line. So as Bruce said, going forward, we expect Q4 volumes on the clinical work to moderate slightly as a result of that pulling in from other quarters in Q3, but then remain steady for the foreseeable future.

Got it. That was extremely helpful. So thank you for that commentary. Just a clarification as we’ve gone into this period where the VA is grappling with some underfunding. Have you seen yet at least, I guess, early indications in that 4Q of a material change in volumes, or has it been fairly steady so far and sort of waiting for that to ripple through?

Really the latter part has been steady.

Got it. Okay. In terms of, I guess, for a follow-up, as we think about the early commentary for FY2025, I mean, the book-to-bill, you noted has been running a little lower. And I guess, what gives you confidence that that’s going to sort of snap back to a 1.0 or above? That’ll give you sort of the ability to offset some of the revenue headwinds you talked about as you go into next year?

Great question. And I guess, as you might expect, to have a bit of a multi-part answer, so bear with me. That is that – first of all, there are a number of dynamics in play. There are some macro dynamics, and then there are some dynamics related just to Maximus. The TSA OPTIMA procurement, we commented on that because in my prepared remarks, it’s an extreme – bit of an extreme example, but it really demonstrates the propensity for opportunities in our business to shift to the right, and not just by quarters, but at times a year or more than a year, with multiple protests and so on and so forth. So we see that dynamic, unfortunately, playing itself out. And you wonder at some point whether that there’ll be a correction to that because customers become familiar with the companies that are protesting. And that’s – and it’s a small contracting community. But I won’t comment further on that. I’ll just say that it’s illustrative of some of the considerations that impact the book-to-bill.. It also illustrates that what we’re seeing is more of a volume issue than a win rate issue for new work, from our perspective. Other market factors that include one important, one is the targets that have been established for small business. The Biden administration has indicated that by FY2025, they want to see 15% spending for small disadvantaged businesses and that’s up from preliminary goal that has been achieved at 12% in FY2023. So we’ve seen a number of higher value awards that historically would have been competed full and open through agency level IDIQs get pulled back and then reclassified for small business. And we acknowledge, of course, that a thriving small business ecosystem is important for the GovCon sector. Larger…

Bruce, as always very helpful. I just have one more question for David. In terms of, you said sort of at least 10% margin for next year, obviously, as early comments are still getting through that process. But if we go back to the 2022 Investor Day, sort of talking about a 9 to 12 medium-term, 10 to 14 longer-term, or I guess, 9 to 12 near-term, 10 to 14 longer-term, if we were to end up seeing Maximus closer to 10.0 [ph] next year, is that going to be a function of, I guess, a combination of OUS running lower and then maybe running those multiple systems for the VA? I’m just curious, it seems like your progress on margins have been really good, even excluding some of the excess redetermination. So I’m just curious why you would potentially take a full point step back.

Yes, Bert, again, it’s a wide range and early color. I wanted to acknowledge that there will just be a little pressure to margins as a result of that accretive revenue falling off. So I wanted to lay out the 10% is some level of assurance that not a dramatic margin impact.

Great. Thank you for all the questions.

Thank you.

Thank you. Ladies and gentlemen, this brings us to the end of the question-and-answer session and concludes today’s event. We thank you for your participation and interest in Maximus. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.