Maximus, Inc. (MMS) Q3 2026 Earnings Report, Transcript and Summary

Greetings, and welcome to the Maximus Fiscal 2026 Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce James Francis, Vice President of Investor Relations. Please go ahead.

Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO; and David Mutryn, CFO. 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 Form 10-K. We encourage you to review the information contained in our recent filings with the SEC and our earnings release. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances, except required by law. Today's presentation also contains non-GAAP financial information. 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, James, and good morning. We are pleased to report strong third quarter results today, which demonstrate solid execution and support of our customers' important missions. I'll begin by reviewing the third quarter results and also address the customer-directed contract modification that impacts our near-term outlook. I'll move to our forecast for the remainder of this fiscal year and conclude with early thoughts on fiscal year 2027, which precedes formal guidance this November. For the third quarter, Maximus reported revenue of $1.28 billion, which was in line with our expectations and enables us to reiterate full year revenue guidance. The prior year period benefited from higher temporary natural disaster support and also contained temporary clinical volume surges in primarily the U.S. Federal Services segment. On the bottom line, adjusted EBITDA margin was 15.0% and adjusted EPS was $2.22 for the quarter, which compares to 14.7% and $2.16, respectively, for the prior year period. Across fiscal year 2026, we've driven margin improvement through strong execution and selective deployment of efficiency-enhancing technology and have not had to rely as much on incremental or surge volumes that defined the prior fiscal year. Let's go to the segment results. Third quarter revenue for U.S. Federal Services was $721 million and in line with our revenue expectations for the segment. As I shared before, the prior year period benefited from elevated natural disaster support that has not recurred at the same levels and was responsible for close to half of the revenue change. The remaining portion of the year-over-year revenue decline was primarily attributable to the temporary clinical volume surges. The operating income margin for this segment in the third quarter was 18.6% as compared to 18.1% in the prior year period. Our ability to drive efficiencies amidst solid volumes across the various program areas continued to benefit third quarter margins in this segment. A customer-directed pause in the performance incentives on our Department of Veterans Affairs Medical Disability Exam or VA MDE program is expected to impact profitability of the segment beginning in the fourth quarter, which I'll expand on in the guidance discussion. Turning to the U.S. Services segment. Third quarter revenue was $418 million and was consistent with our expectation of continuing to close the gap to prior year revenues ahead of a return to positive growth in the fourth quarter. Our fourth quarter revenue forecast for this segment continues to be positive mid-single-digit organic growth over the prior year as activities and engagements with the Medicaid population are anticipated to pick up. This stems from several current state customers using Maximus to enact and administer legislative-driven required changes to their programs. The segment's operating income margin for the third quarter was 10.8% and reflects solid upward progression across this fiscal year as we have previously communicated. Turning to the Outside the U.S. segment. Third quarter revenue was $140 million, and the segment recognized an operating profit of $1.2 million. Variances to volumes across several programs ranging from clinical to employment services are responsible for the revenue delta versus the prior year. As we've stated before, our goal remains to drive growth and further margin improvement in the segment by successful conversion of this segment's sales pipeline. Moving to cash flow items. Cash flows used in operating activities was $125 million and free cash flow was an outflow of $137 million for the third quarter. As we anticipated and communicated last quarter, DSO remained elevated at 98 days, driven by administrative delays at a major federal customer. I'm pleased to report that collections from this customer have accelerated in July with approximately $245 million received since June 30. I'll share more about our expectations for the remainder of Q4 when I come to the guidance update. During the third quarter, as detailed in our Form 8-K filed on May 28, we raised $325 million of Term Loan B, some of which was used to pay down our revolver and provide additional flexibility as we manage temporary working capital timing. We ended the third quarter with total debt of $1.65 billion, up from $1.55 billion as of March 31. Our consolidated net total leverage ratio per our credit agreement was 2.0x, up from 1.8x in the prior quarter. We remain within our stated target leverage ratio range of 2x to 3x. During the third quarter, we repurchased approximately 0.75 million shares totaling $50 million. As of June 30, 2026, the entire $400 million from the Board of Directors authorization in May remained available for future repurchases. Turning to capital allocation priorities. Our overall priorities have not changed. We prioritize organic investments, most of which are expensed and have committed to a dividend that we intend to grow over time with earnings. After that, we consider M&A opportunities and opportunistic share repurchases. In the recent past, between these 2, we have deployed capital exclusively on share repurchasing. Since the beginning of our fiscal year 2025, we have repurchased approximately 8.3 million shares, representing about 14% of our beginning outstanding shares. As we have been saying for the past several quarters, even amidst market conditions that remain favorable to share repurchases, we also continue to seek acquisition targets that can expand capabilities, customer access and longer-term organic growth opportunities. We remain disciplined in our evaluation of targets and seek high probability revenue synergies capable of driving long-term organic growth and shareholder value. We consider valuation carefully in the context of current market conditions and growth potential and the expected return must exceed our cost of capital. Looking forward, we plan to continue to execute on these capital deployment priorities while considering market dynamics, near-term liquidity, the potential M&A opportunity set and all within the constraint of our stated target net debt ratio of 2x to 3x. Moving to fiscal year 2026 guidance. As I mentioned, a modification to our VA MDE contract has impacted our earnings expectations for the fourth quarter of this fiscal year. In the just completed third quarter, our customer notified all vendors of a temporary pause of performance incentives and disincentives. These are assessed on an individual basis to each vendor based on performance metrics, including timeliness, accuracy and quality. Our strong performance in these areas enabled by our direct investments into this program's operations and technology means that positive incentives have been included in our reporting each quarter of fiscal year 2026 to date. The pause arises from the customers' priority to improve their review and validation process after vendors submit their detailed monthly invoices. With this pause effective July 1, 2026, we have removed any assumed fourth quarter fiscal year 2026 contribution from incentives, which reduces our diluted EPS guidance by approximately $0.35, which is in line with the contribution of these incentives in each of the first 3 quarters of the fiscal year. As I mentioned, this contractual modification related solely to the incentive mechanism, and we do not expect an impact to our DSO assumption. So with that, we have revised our adjusted diluted EPS guidance and expect it to range between $7.90 and $8.20 per share. The new midpoint is $8.05 and $0.35 less than the prior guidance midpoint of $8.40. This revised EPS guidance translates to a full year adjusted EBITDA margin guidance of approximately 13.7% for fiscal year 2026. Our updated full year guidance implies fourth quarter adjusted diluted EPS at the midpoint of $1.91 and adjusted EBITDA margin of approximately 13% (sic) [ 13.7% ]. We are adjusting free cash flow guidance to reflect the earnings guidance change and free cash flow is now expected to range between $425 million and $475 million. As always, the timing of specific receivable collections has the potential to cause significant cash flow variation at the end of a given period, and our guidance reflects our unchanged expectation that DSO will finish the fiscal year below 70 days. As I said, we continue to make solid progression in catching up collections with a major federal customer that we disclosed on the prior call. Finally, we are reiterating fiscal year 2026 revenue guidance, which is expected to range between $5.2 billion and $5.35 billion, albeit with a bias towards the lower end. Let me touch on full year operating margin assumptions for the segments. We expect the U.S. Federal Services full year segment operating margin to now range between 16.5% and 17.0%. For Q4, we expect the U.S. Federal Services operating margin to be between 14.5% and 15.0%. For the U.S. Services segment full year operating margin, we expect a range of 9.5% to 10.0%, which, as a reminder, includes the $6.9 million noncash charge in the prior quarter. And for Outside the U.S., we still expect the segment to breakeven on a full year basis, which implies a profitable fourth quarter. Other updated assumptions include expected interest expense of roughly $88 million, and we anticipate our full year tax rate to range between 24% and 24.5%. I'll close my remarks today with some comments on next year, which precedes official fiscal year 2027 guidance that we anticipate providing on the year-end call in November. I'll start with the contract modification on the VA MDE program. Our assumption based on customer guidance is the temporary pause continues through December 31, 2026. Therefore, we presume that in the first quarter of fiscal year 2027, we will not be eligible to earn incentives. While a range of scenarios could play out across the remainder of next year with this major program, we remain confident in securing the rebid and continuing to serve this important customer and mission. Looking at the overall Maximus financial profile, I'd point to this fourth quarter of fiscal year 2026 as a reasonable run rate for earnings power and adjusted EBITDA margin going into next fiscal year under the current incentive suspension, while recognizing it remains to be seen how the successor contract is ultimately structured. For the Federal Services segment as a whole, on a revenue basis, we remain focused on a combination of new work pipeline opportunities and volume-based prospects on current programs that we desire to increase. As we spoke to on the last call, we have submitted opportunities and continue to await award decisions and in one case, final protest resolution. We are confident that our pipeline is sufficient to drive sustainable growth, but the pace of procurement and corresponding timing of awards remains difficult to predict. Turning to U.S. Services. We are forecasting a positive revenue growth inflection beginning in the fourth quarter of fiscal 2026. We remain optimistic that this segment will see positive organic growth continuing into fiscal year 2027, and Bruce will provide an update on the Medicaid and SNAP opportunities tied to the H.R. 1 legislation. We look forward to providing formal fiscal year 2027 guidance in November. And with that, I'll turn the call over to Bruce.

Thanks, David, and good morning. Our third quarter results reflect another period of strong execution across the business and reinforce our confidence in the opportunities ahead even as our updated outlook reflects a customer-driven change on our VA MDE program. We continue to see the benefits of our technology investments, improving both the customer experience and financial performance of programs at scale. We believe that our deal shaping efforts focused on traditional RFP and nontraditional pipeline opportunities such as other transaction authorities or OTAs, align with the goals and direction of the federal government. Further, awards in the quarter, pending execution ramped nicely, setting the stage for sequential book-to-bill improvement. As David mentioned, during the quarter, the VA implemented a temporary pause in the performance incentive and disincentive mechanism covering all vendors. While affecting our outlook for that program in the near term, we believe that our ability to deliver solid earnings performance and continue investing in our long-term growth priorities remains intact. Our model is to support our customers as they navigate their own program environment, which can include responding to their legislative, regulatory and compliance needs. Importantly, we believe that our relationship with the customer remains strong as we continue to deliver high-quality work in a timely and cost-effective manner while making investments to further improve the veteran experience. On that front, a Draft Performance Work Statement or PWS, was just released, which is a key component of the draft RFP that we've been waiting on. While it's not a comprehensive view of the future contract, our preliminary analysis indicates that the scope of work, including all 6 regions that comprise our work today are included in this PWS. This bolsters our optimism about the next contract, and we believe our delivery track record, operational expertise, investments and trusted partnership position us well moving forward. More broadly, we believe that the encouraging demand signals across our markets, growing adoption of our technology-enabled solutions and a healthy set of opportunities support a positive outlook for the long term. Let's turn to an update on those opportunity metrics as well as awards as they provide an important lens into both the current procurement environment and where we see growth emerging over the medium and long term. Our total pipeline sales opportunities was $50.4 billion at June 30, comprised of approximately $2.9 billion in proposals pending, $2.4 billion in proposals in preparation and $45.1 billion in opportunities we are tracking. The share of new work in the total pipeline is 57%, and the U.S. Federal Services segment's share of the total pipeline is 55%. While some of the change in pipeline value compared to last quarter reflects normal pipeline maturation and portfolio management, it also reflects a larger dynamic, particularly in the federal civilian market, where certain opportunities have experienced procurement delays, scope revisions or in some cases, cancellation as agencies continue to navigate evolving priorities, budget considerations and the policy environment. As a result and reflecting this dynamic, in some cases, agencies are awarding more bridge contracts and short-term extensions and opportunities are maturing more slowly. That said, we continue to view the underlying demand environment as constructive with the latest total value of opportunities remaining substantial and supporting our long-term growth objectives. We strive to maintain a disciplined target-rich pipeline that reflects opportunities where we believe there's a clear path to award and successful execution. Our year-to-date signed contract awards as of the end of the third quarter were $1.25 billion of total contract value. These awards translate into a book-to-bill ratio of approximately 0.5x using our standard reporting for the trailing 12-month period. In addition, at June 30, we had a balance of another $1.35 billion worth of contracts that have been awarded but not yet signed. Encouragingly, our balance of awarded but not yet signed contracts represents a significant step-up from the last quarter and was driven primarily by successful longer-term recompete activity. There are a number of attractive new work opportunities in our pipeline associated with H.R. 1, also known as the Working Families Tax Cut Act, which we believe will increasingly contribute to growth as we exit the fourth quarter. We adjusted our timing expectations as customers digest recently published interim federal rules and navigate their state legislative and program environments. Let me share what we're seeing at the moment with regard to Medicaid community engagement or work requirements. As planned, organic growth in U.S. Services is expected to return in the fourth quarter as beneficiary outreach and engagement activity drives higher volumes on several existing contracts. Prospective customer discussions, while highly active, have progressed in many cases, more slowly than expected, considering they are less than 6 months until the go-live date. There's little doubt that the complexity of the recently released interim final rule by CMS has created additional uncertainty for states as they determine how best to operationalize compliance requirements, particularly as they relate to medically frail beneficiaries within existing program structures. We know from experience that large-scale program changes involving technology, operations, policy and constituent communications simply take time to implement, particularly when they affect programs serving millions of beneficiaries and state government customers are deliberate with their decisions. That said, absent a change in statute, the underlying need for administrative support, beneficiary engagement, compliance monitoring and technology enablement is expected to remain intact. Altogether, we believe that the demand for community engagement solutions remains positive. And as states continue to evaluate options, we remain optimistic that Maximus has an important role to play. SNAP meanwhile, continues to advance in some ways more quickly than Medicaid-related opportunities. With more than 40 demonstrations of our Accuracy Assistant tool completed and 150 customer meetings, the level of interest and engagement has grown in recent months. We've responded to active procurements, submitted unsolicited proposals and continue to engage with customers regarding approaches to improving program integrity and payment accuracy. Notably, the latest SNAP performance data indicates that payment error rates have not materially improved. The recently released USDA fiscal year 2025 payment error rate or PER data showed a national average of approximately 10.6% compared to roughly 10.9% in fiscal year 2024. The newly released data reinforces what many states have been anticipating as they evaluate future financial exposure and operational priorities. While the PER varies across states, the overall results indicate that payment accuracy remains a significant challenge across much of the country. As a reminder, under H.R. 1, states may elect to use either the just released fiscal year 2025 PER or fiscal year 2026 PER due out in June 2027 when determining their SNAP benefit cost share, which becomes effective October 1, 2027. However, regardless of their PER, states will be responsible for a 25% increase in the SNAP administrative cost share beginning October 1 of this year. This creates both a near-term administrative burden and a longer-term financial incentive to reduce error rates. Ultimately, we believe our combination of program expertise, delivery capabilities, analytical tools and technology integration know-how positions Maximus well as states seek practical paths to improving accuracy while preserving the citizen experience. I'd like to turn to the pace of AI adoption, which continues to accelerate inside Maximus and with our customers in alignment with our strategy and investments. Importantly, we're not simply reacting to customer requirements. We're helping shape practical AI-enabled solutions often through our own internal use that customers can adopt with confidence. Today, approximately 75% to 80% of the new bids and rebids in our pipeline contain explicit requirements or evaluation criteria related to AI. We are also seeing AI procurements become more sophisticated with agencies placing greater emphasis on governance, security, transparency, human oversight, responsible AI practices and the ability to demonstrate measurable mission outcomes. Increasingly, AI is no longer treated as an innovation add-on, but is becoming an expected component of modern service delivery and operational transformation strategies. Similarly, AI enablement through continuous innovation has become part of our operating rhythm inside Maximus. As just one example, AI-based improvements to core business processes such as IVR and script optimization, chatbot enhancement and proactive text and e-mail engagement in just 5 contracts yielded a better customer experience and a 3.5% operating margin improvement for that group. So in addition to building AI into our solutions for new work, we are systematically updating existing operations that are designed to better meet our customers' needs. Further, through Maximus Ventures, our strategic investment arm, we continue to identify innovative and differentiated technologies that we believe can strengthen future customer solutions and create new pathways for growth by accelerating adoption across government markets. One example is our direct investment in Spectro Cloud, which is an AI infrastructure management software provider rather than an AI model company, providing an advanced platform that helps enterprises, public sector organizations, neo clouds and sovereign clouds build and operate production AI infrastructure with greater control over cost, security and governance. We believe that capabilities like these are what allow government customers to move beyond experimentation and deploy AI securely at scale, particularly those in highly regulated areas, including defense. We view Spectro Cloud as one component of a broader ecosystem necessary to help government customers accelerate AI adoption while maintaining the security, governance and operational controls that those mission environments require. Our objective through these venture investments is to bring differentiated capabilities to our customers, including preferred access and co-development arrangements where appropriate, creating strategic partnerships that are designed to accelerate deployment, strengthen our competitive position, support revenue growth and increase customer value. Let me close with an update on the defense and national security market, which remains a priority in our long-term growth strategy. While many civilian agencies continue to experience procurement delays and budget uncertainty, we believe the Department of War procurement engine is functioning more consistently. Demand signals remain strong and our engagement with customers continues to expand. As part of our strategic planning, we identified a total Maximus addressable market of defense-related opportunities of nearly $47 billion, only a small portion of which is reflected in our reported pipeline. Our objective is to ensure we are positioned to participate in that opportunity set, both through traditional and nontraditional procurement paths. In addition to the OTAs I mentioned earlier, I'm pleased that the Hackathon platform we created, bringing government, industry and academia together has generated pathways to new programs of record for our customers. We're evaluating how we expand our capabilities, customer access and relevance, past performance qualifications and market presence, particularly in advance of the arrival of opportunities we believe will emerge over the next several years. Customer intimacy remains paramount, understanding mission needs, helping agencies address technical debt and bringing modern technology-enabled delivery models to government customers through highly accountable performance-based arrangements are all areas where we believe Maximus can differentiate. Importantly, our defense and national security business is already demonstrating success with notable key wins at the Air Force and Transportation Security Administration. We continue to see evidence that large government customers are increasingly willing to consider capable alternatives outside of the traditional provider ecosystem. We believe this is a sustainable direction of travel and one that creates opportunities for differentiated companies with proven execution. More broadly, our strategy helps support a continued diversification of the company by expanding our exposure to durable growth markets while reducing concentration over time. In closing, we continue to see a healthy mix of opportunities and navigable challenges as we look ahead to fiscal year 2027. The procurement environment remains understandably uneven. Certain legislative opportunities continue to evolve and customers continue to navigate a complex budget and operating environment. At the same time, we're encouraged by the momentum we're seeing in areas such as SNAP, AI-enabled solutions and defense and national security. We are continuing to invest thoughtfully, strengthen our capabilities and position the company for long-term growth. As always, our focus remains on controlling the controllables, delivering for our customers, executing with discipline and urgency and creating sustainable value for our shareholders. And with that, we'll open the line for Q&A. Operator?

[Operator Instructions] Our first question is from Will Gildea with CJS Securities.

So just starting with the temporary contract modification at the VA. Maybe can you just give us any more color on that? And what kind of went into the VA's decision-making process to pause incentives?

Sure. Happy to start and David to add to that. We've been told by the customer that it's a temporary pause. I mentioned the current contract lasts until December 31. And we have seen, interestingly, a Draft Performance Work Statement issued by the VA that's come out that has a comment period for the vendor community that closes on August 12. So we understand that they're moving ahead, obviously, with their plans for the next procurement. It becomes then a question of will that procurement potentially be completed in time to align with the December 31 deadline or not. And while it wouldn't be unprecedented to get something done in that amount of time, we also, in the procurement have noticed that the volumes that they lay out for the community to respond to suggest that the base contract would begin in the middle of next year. So that leaves us presently working with information from the customer where they've indicated that the current incentive pause is 180 days in nature and would be completed in December -- at December 31 when the current contracts are scheduled to terminate, but also with the likelihood that we could see up to a 6-month extension to the current contracts to align with the timing that we've seen in the Performance Work Statement. And as it relates to just the nature of the administrative action that they're taking that's led to this, I know we get the question, is this something that's uncommon? Do you see it from time to time? And I would just say that it's not uncommon for our customers to need to respond over the life of the contract. And these are long-term contracts, the changes in the legislative and the policy and the compliance environment. So while it's not common for a significant contractual term like this to be suspended, it's also not unprecedented. And our model actually is to support customers as their needs change through the administration of contracts over the life of those contracts. So another example that you'll know we've seen before is when customers modify their invoicing requirements in response to their own environment internally or their environment is such that they have extended periods where they're trying to get contract amendments executed and so forth that can lead to the delays in executions or payments on contracts. We view that as just a part of doing business as a responsible government contractor being flexible and adroit and being able to use our scale and our agility to help our customers manage through those processes and those times. So -- and overall, honestly, I'd say that it's a contributing factor to the trust that our customers place in us to administer programs on their behalf. So that's why part of our business model is to have contracts for decades and to support our customers through times like this, we see this as no different.

Well, I might just add one more point that these incentives have become a bigger contribution for us in our fiscal year '26 than they have been in prior years, which is really a testament to the investments we've made into the program over the past several years that have brought us to the high level of performance across the incentive metrics.

Yes, that is super helpful. So just for, I guess, the initial early look at fiscal year '27 when you say our earnings power in Q4 is a good run rate for the rest of the year, you're kind of implying that it's likely that the pause will be longer than for 180 days. Is that -- do I have the right idea?

Yes. I mean I think there's a range of scenarios there is what we said. So during a period where there's an absence of incentives, yes, I think that Q4 run rate, which, as I mentioned, based on our full year guidance, that's 13% implied EBITDA margin in Q4. I do think that's a reasonable run rate for this period. I'd point out it's still inside the near-term adjusted EBITDA margin range that we laid out in May of 12% to 15%. And maybe go even further to say, we still believe that 12% to 15% is an appropriate range for the business in the near term. So setting incentives on this one program aside, margins have been steadily increasing over the past several quarters, and we see continued opportunity to drive further technology and improvement to that.

Yes. And then just on the preliminary VA PWS, can you discuss maybe the economics or market share? Are there any changes we should be aware of? Was there any language about incentives in it? Just anything about the initial RFP?

Yes. Well, the short answer is not there, really wasn't. So the Draft PWS that's been released is Section B-3 of a larger RFP that will, I'm sure, be released with all the other components to comprise the RFP in due course. And as I mentioned, the VA is seeking vendor community input by August 12 just on the PWS. So there's really nothing there that speaks to the pricing mechanisms that they intend or incentive structures or anything. It really just lays out the scope of work. And I would say we like the fact that, first of all, the scope of work and the nature of the work and what the requirements are for the vendor and so forth are entirely consistent with the way the work is currently done by the vendor community and also the regions comprised in the PWS are all 6 regions. So that's not just the 4 domestic regions, but also the predischarge region as well as the international region. So it's a comprehensive PWS. It's consistent. And it appears from it that the areas that the VA is really valuing in terms of -- as it relates to the veteran experience, and that is making sure that we're able to schedule veterans efficiently and use their time wisely and only see them when they need to be seen and ensure that we're doing everything we can to shorten our component of the overall cycle time that comprises the handling of a veteran claim are all -- they are ongoing priorities of the VA, and they align perfectly to the areas where we've been making investments in capacity and technology as a company. So we feel good about what we're seeing, and we're eager to provide some feedback to the VA as part of the process.

That is helpful. Switching gears, a nice step-up in unsigned but awarded contracts. Maybe you can talk about what some of those opportunities are? And are you expecting them to convert to signed in the current procurement environment?

Yes. I will say that, first of all, I like the characteristics of what we're seeing here because what's in that awarded but unsigned category is really longer contracts with a longer duration. And I mentioned in my earlier remarks that sometimes you're seeing in an environment like this short-term actions, short-term extensions and so forth. So the kind of the durability of those awards is great. The second thing I would note is that we've been operating in an environment where the probability of protest has been pretty high. Every time something gets awarded inevitably, especially if it's a light award environment, vendors tend to protest. And there's no consequence often for protests. So why not do it, right? If you're an incumbent, it extends your period of performance on your current contract. Without getting to specific contract gains, I'm pleased that what we're seeing in the awarded but unsigned category includes deals that have been through that protest process and successfully resolved. So they're really just pending the administrative process of contract execution. So that's why I felt confident to say we'll see that ripple through in sequential improvements to book-to-bill in subsequent quarters.

Sounds great. And then I guess, turning pages -- turning to SNAP and Medicaid work requirements, et cetera. A couple of quarters ago, you guys gave an outlook for high single-digit growth in 2027. It seems like you're optimistic on Q4 growth, which is great. Just maybe you can talk about the puts and takes to hitting that outlook in 2027. Can you reaffirm that outlook? Yes.

Yes. I think as we look to 2027, first of all, we've reiterated that this current fourth quarter of '26, we have -- we believe can achieve mid-single-digit organic growth in that segment. So that's an important turning point for the segment, and we do see that momentum carrying into 2027. Why don't I turn it to Bruce for some of the details behind the various policies.

Yes. I really love to talk about the policy side of it. The interesting thing is that there was a couple of dozen state -- Democratic states attorneys general that sued the Trump administration over the recently released interim final rule for the implementation of Medicaid work requirements, as it relates specifically to the definitions around medical frailty and whether individuals who are medically frail, what additional information might they need to provide to demonstrate that they cannot comply with the work requirement? Well, The Federal District Court judge ruled, I want to say, back on maybe the 29th of July, that they declined to stop the Trump administration. So it enabled the Trump administration to proceed with the implementation of the requirements under the act. So that at least at this point maybe pending an appeal process, but that suggests that the work requirements will continue and need to be implemented as of January 1, 2027. And recall also that, that also begins a period where for the expansion population, Medicaid expansion population, which is about 21 million people nationally, semiannual redeterminations also begin. Now that work doesn't begin all on January 1 because if you think about it, somebody who's determined eligible as of January 1 would then have to have their eligibility rechecked in July, 6 months later would be the first time that happens. So we would see activities ramping up around that over the next calendar year. And then also because presently, states now are scrambling candidly to figure out how do we operationalize the interim final rule? It's worth noting that for at least 2027, beneficiaries will be able to self-attest to medical frailty. So there is some time that states have and the activities are funded on a 90-10 basis to help states come into compliance. So we have a year here where states will figure out what does this mean in terms of the additional attestation requirements? Will they need to be evidenced by doctor's note? How do we do that within the construct of our health systems and maybe our managed care plans? All of that has to get sorted out, but the implementation is, as we understand, and proceeding according to plan. So we're out there having conversations with our customers. And as David has said, we're pleased that already in some of our current contracts, we've gotten the green light to ramp up activities in the fourth quarter related to beneficiary outreach and engagement and so forth, and we'll expect that to continue. The other element, of course, of H.R. 1 is SNAP. I commented on that in my prepared remarks. And again, that's an area where the states have this looming deadline for having to shoulder an increased component of the administrative cost of the program beginning in October this year and then increased benefit costs subsequent to that. So we continue to get significant interest from state customers and remain engaged with them on that front.

Can you provide any more color -- a question for David. Can you provide any more color on the collections expected in Q4? What are the puts and takes to hitting your free cash flow guidance, if there are any?

Yes. So the one area is DSO that I talked to in my prepared remarks. As I talked about in some detail on last quarter's call, there's a federal -- large federal customer that we are catching up on collections from. As I said, it's a federal agency. It's a funded contract. So we have full confidence that the outstanding invoices will be collected. And I shared an update in my remarks that since June 30, we've had great momentum with this single customer collecting $245 million since July 1. So our expectation is that, that healthy pace will continue and bring us to that expectation we set of DSO dropping below 70 by the end of September.

And with that in mind, the balance sheet is strong. You talked about your priorities for capital allocation. Is M&A becoming a more important short-term focus? What are your criteria for acquisitions?

Yes. As I said, we consider both share repurchasing and M&A as important considerations over the long term. On the M&A front, we do see it as an important tool despite market conditions as we look toward long-term organic growth. We want to make sure we are investing in capabilities, customer sets, those sorts of things that can unlock pipeline and high probability of revenue synergies. So that remains something we're focused on. I think it's consistent with what we've been saying for several quarters now that we continue to evaluate opportunities on that front.

Thanks, Will. Operator, back to you.

Thank you. This does conclude today's conference. We thank you again for your participation. You may disconnect your lines at this time.