Greetings, and welcome to the Maximus' Fiscal 2025 Third Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Batt, Vice President of Investor Relations for Maximus. Thank you, Ms. Batt. 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 believes it may be informative to investors in identifying trends, gauging the quality of our financial performance 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 Bruce.

Thanks, Jessica, and good morning. I'm excited to share another record-breaking quarter for Maximus earnings. For the third quarter fiscal year 2025, adjusted diluted earnings per share reached $2.16, a 24% increase year-over-year. We realized 15% growth in adjusted EBITDA. Finally, Q3 revenue of $1.35 billion is growth of 4.3% on an organic basis year-over-year. Congratulations to the tens of thousands of Maximus team members responsible for these accomplishments. In what has been for many in the government, IT and consulting sector, an uncertain environment, we have remained resilient, focused on our customers and on consistent quality delivery at scale. Since our Q2 earnings call, we've seen clarification of certain priorities of the administration and the introduction of new legislation, the impacts of which will cascade to our state customers. We have come to expect this over decades of serving our government customers, and we believe that we are ideally positioned to respond. As I've said for years, a core capability of Maximus is our ability to translate policy changes into operational models, largely performance-based that deliver accountable outcomes aligned with the mission of our customers. In short, I believe we are purpose-built for the operating tempo of today's environment. As part of our business update, I'd like to share why we believe that we are well positioned to assist both federal and state clients as the details of recent legislation and regulatory changes become more clearly understood and implementation planning begins. Let's first look at the One Big Beautiful Bill Act, which we believe could create meaningful addressable opportunities for us following proposed changes in Medicaid and SNAP. Turning to Medicaid. The administration continues to focus on managing federal spend on Medicaid. The legislation will impose certain administrative activities while shifting more enforcement responsibility to the states. Most notably,…

Thanks, Bruce, and good morning. We had outstanding third quarter results, particularly on the earnings side, driven by solid execution on programs where our government customers increasingly rely on us for efficient handling of greater work output. These results reflect high demand in what are predominantly performance-based arrangements across our contracts. We are raising guidance again this year to not only account for the performance this quarter, but to also capture improved clarity for the upcoming fourth quarter as compared to our thinking on the last call. I'll end my remarks today by sharing early thinking on our expectations for fiscal year 2026, which precedes formal guidance this November. Turning to the results for this third quarter of fiscal year 2025. Maximus reported revenue of $1.35 billion, representing 2.5% year-over-year growth or 4.3% on an organic basis. The U.S. Federal Services and the -- outside the U.S. segments both posted positive organic growth with the U.S. Federal Services segment being the main driver of our consolidated results. The U.S. Services segment delivered results in line with expectations. On the bottom line, the Maximus adjusted EBITDA margin was 14.7%, and adjusted EPS was $2.16 for the quarter, which compares to 13.1% and $1.74, respectively, for the prior year period. This quarter's adjusted EBITDA margin is noticeably above the high end of our target range. This can happen in periods where volumes are stronger than anticipated, thanks to our ability to gain operating leverage on incremental volumes. This leverage is partly the result of our intentional investments in technology, workflow optimization and cost models. Turning to segments. Revenue for the U.S. Federal Services segment increased 11.4% to $761 million. Growth was all organic. We've seen a favorable trend this year where volumes on certain programs, especially in our clinical portfolio, have continued…

[Operator Instructions] Our first question comes from the line of Charlie Strauzer with CJS Securities.

Just if we could start off with the Big Beautiful Bill and where Maximus could or should benefit from potential work. Talk about what the key drivers are kind of behind that -- those opportunities? And do you have some flexibility now to go after some more outsourcing type projects at the state level and the federal level like unemployment or social security, things like that?

Sure, Charlie. I'd be happy to. And I appreciate the last point of your comment, especially because as we've looked at the market opportunities, what may be a bit counterintuitive is that the opportunities within those other program areas are actually collectively more substantial than even the immediate opportunities within the Medicaid area. So let me kind of walk through all of that because that's a very important area. So as you well know, the One Big Beautiful Bill Act or OBBBA, has some significant outcomes for our U.S. Services segment in the areas, primarily of Medicaid and SNAP initially. There's an increased -- in the Medicaid area, I'll just kind of unpack each of them. There's an increased emphasis on program eligibility and on work requirements, as I discussed in my prepared remarks. And we, together view those as having a positive impact and really an important lever for U.S. Services organic growth, although we're presently really not incorporating that in our FY '26 guidance to any substantive level. We really see it as an FY '27 growth factor for the company. The main reason being that it takes time to get from the legislation itself to the implementing regulations and our understanding is that the implementing regulations for work requirements won't be finalized until June of 2026. Giving states -- this kind of sets up a bit of a squeeze, right, because they then have until December of 2026 to get ready and get implemented and be underway in January of 2027. So we think that this -- putting this in the context of growth, historically, we characterized the U.S. Services segment as capable of low to mid-single-digit organic growth and whereas federal would be more mid- to high. So collectively, the total company would be a mid-single-digit…

Nothing to add.

Okay. I hope that helps, Charlie. Other questions?

Certainly. Thinking of, from looking at these opportunities, obviously, it's very early, but any chance of any kind of quantification of what the benefit might look like given the wide range, obviously?

Well, I tried to provide a little bit of that just in terms of what it could mean for the growth rate for the overall segment. So I think you can impute from that with work requirements and the enhanced eligibility requirements, we think it could lift U.S. services from mid- single digit to high single digit. And certainly, depending on the timing and size of opportunities in other areas, including helping assisting states with SNAP and assisting states with UI, it could take it conceivably into the low double-digit area. The SNAP one is a particularly interesting one because many states are looking at their payment error rates and doing the math and saying, look, we stand to lose, in some cases, hundreds of millions of dollars of federal funding. So the cost benefit is pretty straightforward. If they can make an investment of a fraction of that in addressing some of the key items that are bottlenecks in that process leading to higher error rates, then there's a huge return for them. And that always becomes a compelling platform for seeking assistance from companies like Maximus.

Great. And just looking at your competitive advantage against potential competitors that are out there. When you think about the conflict-free nature of your business, are there many competitors that can claim the same level of conflict free?

Well, we've said for many years that we're -- we've made a very deliberate decision to remain independent and conflict-free and in particular, have no direct or indirect financial relationships with payers or providers, which is very critical to the work that we do in the Medicaid space and to a certain degree as well the Medicare space. And because of that, it was very important to us as well, as I mentioned in my remarks that from a work requirement standpoint, this is work that needs to be done in a very conflict-free manner where beneficiaries are reporting, obviously, whether they're engaged in work, but more importantly, whether they may have a qualifying condition that could exempt them from those requirements. And as I noted, that then becomes really off limits in terms of managed care plan engagement with beneficiaries. And that's an important -- very important element of the law that's been passed that I think is only now becoming recognized within the state community, and we're helping to ensure that that's the case. In terms of other companies in a similar position, we've, from time to time, noted smaller privately held companies that have similar characteristics. But I would just say size matters in this market, and we have an established presence as the Medicaid managed care enrollment broker in -- I think it's about 23 states presently. We probably serve I would say, roughly 60% of the individuals nationally on the Medicaid program. And as you've seen even just from evidence in the results this quarter, scale is everything in this area of the business. And we think that the invested infrastructure that's been bought and paid for by government that can be easily modified at an incremental expense and not a massive new cost of investment puts Maximus in a great position to help address these opportunities and creates candidly, a bit of a competitive barrier. And I think that, that's important because in this era of just intense focus on greater efficiency and greater capital utilization, the government deserves to benefit from the investments they've already made. I hope that helps.

Very helpful. And then looking at the recent DoD win for the Air Force, is defense going to become more of a kind of an increasing focus for you guys?

The short answer is yes. And I appreciate the question. I feel like I'm disadvantaging David here in terms of questions. So I hope you have one for him, too. We've long recognized that our core capabilities across the company have a role to play in the defense community. But candidly, we had so much work on our plate historically in integrating acquisitions and expanding in certain areas of the civilian world that has not been a focus. But this has been something we've been planning for quite some time. In 2021, when we combined our business with Veterans Evaluation Services, we identified what we call a synergy pipeline. And those are the opportunities where we know that once combined with VES, we've now got the right to win in areas that include the DoD and in particular, the defense health community, which is something we've been focused on. In prior calls, I've mentioned that I've been pleased that of the three pipelines that we look at, which is the civilian pipeline and federal, the health pipeline and then the defense pipeline, that defense health area has been really moving nicely. It's kept going. And so we are now seeing pipeline opportunities that we first identified back in 2021, coming to fruition and going through adjudication and that could lead to growth drivers for the company as we traverse '26 and really get into FY '27. So a little bit back-end loaded, but another area to point to as we think about our FY '27 modeling. The other point I'd make is that the technology modernization challenges that we're seeing in the civilian area in terms of modernizing antiquated legacy applications, migrating to the cloud and so forth are obviously seen in the defense community as well. So some of…

It certainly does. And David, not to leave you out, looking at the guidance for the rest of the year, thank you for giving us the operating margin ranges. But any chance you can share with us the splits of the top line for Q4? By segment.

I'm sorry, what was the last part of your question?

Just looking at the total revenue, any chance you could give us some guidance for how that should split up by segment?

Yes. Good question. It's probably a little too early to say because I think some of the same kind of risks and opportunities that I pointed to are present in both of the larger two segments, the 2 U.S. segments. So I think both have a wide range of scenarios in a similar manner. Some a little different than other with the U.S. services market more sensitive to the timing of any opportunities that could result from the areas that Bruce highlighted in your first question. And certainly, on the federal front, budget constraints as agencies are looking to become more efficient and whether that results in near-term opportunity or risk and whether or not the timing aligns on that two, even though we think the opportunity -- a great opportunity to bring new ideas and look for potential growth such as contract consolidations and that sort of thing, that sometimes comes along with potentially giving up revenue elsewhere. So I'm hesitant to give segment level guidance at this stage.

Got it. Okay. That's fair. And then just looking at the overall early thoughts. Obviously, if you come in inline with FY '25 revenue in FY '26, is there -- given the operating leverage of the model and the efficiencies you've been able to realize by segment, if you look at the bottom line, the EPS, if you will, is there a chance that we should see some growth there even with flat revenue for next year?

Yes. Good question. So we are pretty specific with our thinking for the EBITDA margin, which, of course, you could think of a range around the -- in my prepared remarks, I pointed to the implied margin for Q4 of this year is about 12.5%. As we look at FY '25, we've just reported here an extraordinary quarter with EBITDA margin of 14.7%. And so I think we'd be reticent to expect another quarter like that to recur and lift the future period. So that kind of explains maybe why we're looking at 12.5% next year versus closer to 13% in our guide for fiscal year '25. But I guess the other thing I would point out on the earnings front, which I said in my prepared remarks, but didn't quantify is that our interest expense could be another tailwind to our EPS. If we look at our projected cash flow right just here ahead of us in the fourth quarter as well as through next year, absent M&A or share repurchases, the delevering, we anticipate would drive interest expense being $20 million to $25 million lower next year. So that could be like a $0.30 EPS type year-over-year improvement there. So that provides some bottom line potential as well.

Our next question comes from the line of Brian Gesuale with Raymond James.

Appreciate the color and really strong results here. A couple of questions. I want to maybe start off with the VA. You had made a lot of investments in the back office to increase both efficiency and capacity. Can you talk about where we're at with those investments you've made?

Sure. I'd be happy to, Brian. I'll start, and then I'm going to turn it over to David for some additional thoughts. So yes, we have -- we began by investing in building out our network. The key, we believe, on this contract is to have a very broad national network that includes the ability to reach into rural areas. We've also invested heavily in rural -- in the infrastructure field, literally the vehicles that we use for mobile clinics, so we can meet veterans on their terms, often in places like Walmart parking lots and so forth to make sure we're serving veterans wherever we possibly can. So there have been infrastructure investments, brick-and-mortar vehicles, modernized vehicles and so forth. There's been investments in building out the clinical network so that we've got the broad array of specialists that are needed, particularly because with the PACT Act, for example, a logical case would be there's a lot more folks that need pulmonary lung function tests and so forth. So you have to build that out. Then there's been technology investments. And we've been thoughtful and, I would say, phase-wise in our approach of introducing technology because in some ways, you're changing the engine in the plane while you're flying it to use that analogy. The technology that we had been using, I would say, a way to characterize it would be was not as modern as other technologies in the sense of allowing us to, for example, identify potential errors in a process early on and avoid them being created. So you end up putting more time and effort into the quality control function downstream if you're not catching the potential errors earlier. The new technology that we're introducing, it's all focused on the veteran experience and on expediting…

Yes. Maybe just -- well said, just more of a housekeeping item that reminded me of the technology rollout that Bruce noted, taking place around the end of our fiscal year here is one driver that we expect to have our depreciation expense grow next year. On the other hand, as you can see in our 10-K chart, for example, our intangibles amortization is anticipated to go down by about $11 million from $25 million to $26 million. So our total depreciation and amortization should be somewhat similar year-over-year, but I wanted to point out that dynamic.

Appreciate all that commentary. I want to -- since the business is so sensitive on volumes, particularly with this VA work, how are you thinking about over the next few quarters? I mean we're looking at inventory levels, packed, nonpacked greater than 700,000. You added capacity, and it seems like some of that capacity is benefiting the customer in that we saw a 23% sequential increase in process claims. How are we thinking about that over the next few quarters? Obviously, they're not in hand, but what would be reasons to slow that down? It seems like we have a very good line of sight for very good VA growth through June at least.

Well, I'll begin and then turn it over to David. First of all, the VA has been very public about their effort to push to reduce the overall backlog of inventory levels. And they issued a press release, in fact, in late June, stating that they're ahead of their goal to -- for the highest number of claims processed in FY '25 and so forth. So we know it's been a big push, and we know that their efforts are to really complete that by the end of this fiscal year and make great progress in that regard. Our current view is that the unprecedented levels that we saw in the June quarter are likely to moderate somewhat as a result. And we've reflected that in our guidance. You asked kind of what are the factors that would cause that. Well, the main one would be that as each of the vendors ends up with the capacity they now have working through their component of the backlog, we're going to reach an equilibrium or a steady state where the processing timeliness for the entire system is in a good place and veterans, the cases coming in are being processed and handled timely and veterans are getting great service and the inventory becomes more kind of at a working level over time. And we think that we're kind of on that path. And obviously, the vendors collectively have made a great progress with working with the customer to reduce the inventory levels. You see that reflected in the charts that are published publicly. So we're going to continue to focus on that, on that objective, which they've clearly stated is a key one. But I'd also note that over time, there appears to be kind of a long-term steady state inventory level and backlog level that these programs operate at, where you're going to -- there's always going to be some. And the fact is you can carry that with the capacity in the system and still meet the timeliness requirements and the quality requirements that are required for the program for veterans. Another point that I'd leave you with is that veterans are, as you well know, often needing to be seen and requesting to be seen and to be reassessed when they believe that there's a change in their condition that requires a re-rating of their benefit. And in fact, more than half, maybe closer to 2/3 of the incoming volumes in the program are those types of cases. And so these are veterans that have ongoing needs and as they progress in their journey, need to be reassessed. And there'll always be that inventory, if you will, that incoming volume of reassessments to help ensure veterans are getting the level of benefit that they deserve. So with that, I'll turn it over to David for his thoughts.

Thanks. Well said. I agree. And just to characterize the June quarter in particular, as Bruce said, I think it was a quarter where on top of high volumes coming in, we improved our own speed to process claims. So we saw the kind of double benefit to our own case load and claims completed. So they were especially strong results. We actually saw, as an aside, a similar dynamic on some of our smaller clinical programs in the segment where we just had a tremendous execution quarter that drove down our own case load. So as Bruce said, while we expect some moderation from those especially high levels in Q3, we also see sustained ongoing.

Right. And so I guess a few questions off of that. One, if I recall last quarter, the Federal segment had a FEMA -- positive FEMA that went away sequentially. Can you maybe quantify that? And in fact, if that did occur because these numbers still look really good, absorbing that. And then secondly, I guess the previous kind of equilibrium run rate or capacity in the industry was about 640,000, call it, claims per quarter completed. It was 800,000. Are you suggesting we go back to 640,000 because the comps just seem very easy to me.

Could you repeat that last part, go back to 640.

The last part was so this quarter, the process completed claims packed and nonpacked were over 800,000 units or people versus what had been running at about 640,000. And I'm just -- the comp -- so the comps for the next few quarters seem very easy to me because I wouldn't imagine even if we're not running at 800, we wouldn't drop down and start running at the prior run rate when the whole industry is added capacity.

Yes. No, I follow you. Yes. I mean, so those are the metrics for the overall program of which we're 1 of 4 vendors. So I think the point we were making about our own Q3 was that we had especially high volume ourselves as we not only addressed the high demand, but also improved our own speed from receiving the claims to completing the claims. But I think you're correct on the whole program, especially with the stated intent of the VA that they intend to continue to drive this high level for the next few quarters.

Fantastic. And was there a FEMA contribution last quarter that was not in this quarter? And can you maybe size that a little bit if that's the case?

Yes. Yes. So for FEMA, one of the areas of work we do is supporting disaster response, which can be obviously difficult to predict, and we're there ready to help as needed. I don't have the kind of precise size off the top of my head for what it was. I would point out it's more of a BPO type work. So the -- it's really staffing up and staffing down, not the same dynamic as the volume-based program where we just have more volume come in that we can work. So the bottom line it's not as sensitive.

Okay. Appreciate that color. Just maybe a couple of quick ones to wrap up here. As I look at the margin kind of setup over the next few quarters, you mentioned that it will be on the higher end of your range that you typically guide to. I also want to kind of weave in the Big Beautiful Bill Act as well. If I think about VA volumes being above what they had been, that's generally a very good contribution on those volume increases. And then I guess you mentioned '27 for some OBB impacts, favorable impacts. Would it be possible to see some of those Medicaid redeterminations that come in at extremely high margin levels incrementally come in '26. I would assume the timing would be a little bit earlier than fiscal '27 for that part.

Well, on the twice yearly redetermination. So first, recognize that, that requirement only applies to the expansion population, which is about 20% of the overall Medicaid population. And that one, too, is required to be in place by the end of calendar 2026.

So I guess I would agree with David that it's maybe not likely that states would want to begin sooner with that. But again, it's still early days and those conversations are just starting. So it could -- if states have the flexibility to begin sooner, they may seek to do that in some cases.

Okay. Yes. No, that's exactly what we're hearing that some of the states are moving ahead quicker than the bill requires. Just final one for me to sneak in, and then I'll jump back into the queue. Can you talk about some of the [ Dodge ] headwinds? It seems like everything else is pretty much going well above anything we could have foreseen. We're hearing about some [ Dodge ] impacts. Maybe you could talk about what's going on at the SEC as well as maybe anything with IRS or any other customers that you want to discuss.

Yes. I'll begin with some high level and let David address the specifics as it relates to the SEC and so forth. But I noted in my prepared remarks that we're really pleased that the impact of contract actions across our portfolio has been really minimal. I'd say if we had to put a number on it, conservatively less than 0.5% of our FY '25 revenues. And we'd expect that as well as we look at FY '26 as everybody has seen, the shift now that's occurred is where Dodge -- individuals who were previously assigned to the Dodge in some cases, have taken positions within the agencies to continue to address really the kind of primary objectives that the Dodge was set up to address, and that's really software modernization, process modernization, driving efficiencies and so forth. And the agenda has really become that of the agency heads and department heads themselves, working in conjunction with the White House and with OMB. So what does that mean? We're now seeing a shift in terms of phase, and we've talked kind of about phases here historically. So we're having conversations about less about kind of the immediate cost-cutting objectives, which were characterized by the earlier stages of this and more about how efficiencies can be gained and thoughtful ways to structure programs going forward and delivery going forward. One area, I think that is on a lot of people's minds is how student loan servicing will be handled going forward with the trajectory of the Department of Education presently. If that function, as has been widely reported, were to move over to another department like treasury, how will that be done? And what will the contractual structures be to support that? And how does that perhaps present an opportunity to relook at the entire borrower experience as they navigate return to repayment and as we see the volumetrics in the default program likely shift into the fall and the winter. So a lot of conversations going on right now that are candidly very operationally focused. And there are opportunities now that are presented given this environment and given the budget environment that we're working in to talk about things like contract consolidations and ways to use technology more effectively, move to more performance-based contracting models -- so I actually feel like we're through an important first stage and the business model of Maximus and the value that Maximus delivers in critical programs held up well during that stage. And now we're moving to the next stage where we're focused on efficiencies and on, in some cases, redesign of the way programs are delivered. So with that, David can add some additional color as it relates to specific customers or the sectors that you mentioned.

Yes. I think Bruce summed it up well upfront that as we look at what specifically have we seen as far as rate cuts that were initiated by Dodge, still are relatively small given the base of our revenue of less than 0.5% of our total revenue. And that would include [indiscernible] mentioned, not all that impactful given the revenue base. Operator, back to you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.