Maximus, Inc. (NYSE:MMS) Q3 2025 Earnings Call Transcript

Maximus, Inc. (NYSE:MMS) Q3 2025 Earnings Call Transcript August 8, 2025

Operator: 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.

Jessica Batt: 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.

Bruce L. Caswell: 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, there’s now a twice yearly up from annual requirement to determine eligibility for the Medicaid expansion population. This comprises an estimated 21 million people across the 41 states that have expanded Medicaid coverage to those making up to 138% of the federal poverty level. States must review their program processes and implement changes to ensure compliance by December 2026. Our U.S. services team will be working closely with current and prospective state clients to help them meet these new requirements while continuing to deliver exceptional customer service.

As I noted on our last quarterly call, in many cases, this could include assisting beneficiaries in transitioning to a marketplace plan to provide continuity of coverage. Secondly, the recent legislation codifies Medicaid work requirements for the expansion population, while some states through Waiver authority are seeking to include certain individuals in traditional Medicaid categories. Starting January 1, 2027, states will be required to verify with participants completion of 80 hours per month of qualifying activities. This is a major policy change, but not one with which we lack familiarity. During President Trump’s prior administration, at the direction of one of our state clients, Maximus developed and implemented operational modifications designed to make beneficiary work requirement reporting as accessible and efficient as possible while meeting policy objectives.

With this new statute in effect, we are again working with our state customers to demonstrate how to modify program operations to comply with the new law while maintaining a high level of quality of beneficiary engagement. Notably, the new law prohibits managed care plans from performing work activity verifications or handling exemption requests, which would constitute a conflict of interest. As an established conflict-free partner, Maximus has the independence necessary to support our state clients with compliance under the new legislation. Our human-centered and technology-supported approach to compliance with the new law efficiently leverages existing program investments like contact center infrastructure and digital services. Our goal is for beneficiaries to engage through whatever modality is best for them, call, text, mobile app and so forth, and that their experience is respectful and empathic.

The last piece of the bill I’ll discuss is its impact on state supplemental nutrition assistance programs, or SNAP, driven by a nearly 11% national payment error rate in 2024 according to the USDA, the new legislation enacts eligibility accuracy requirements in order for states to maintain federal funding levels. Beginning with 2025 or 2026 data, states with higher SNAP payment error rates will be required to cover more of the program’s cost, shifting what was once a fully federally funded benefit partially on to state budgets. Last quarter, we discussed the recent OPM guidance that increases flexibility states have to use contractors and contracted employees to execute programs. This policy change allows companies like Maximus to help states meet new requirements, whether in Medicaid, unemployment insurance or in this case, SNAP.

We’re excited to help our current and prospective clients implement technology-led solutions that increase efficiencies, accuracy and provide a consistent high-quality customer experience. I’m pleased that subsequent to the quarter close, we executed a contract modification with one of our long-time state customers to take on an expanded role in supporting SNAP administration. With a strong track record of partnering with state governments to navigate and implement complex policy changes, we are increasingly confident in the growth trajectory of our U.S. Services segment over the next 18 to 24 months as implementing regulations are formalized and states move from planning to operationalization of these new policies. Beyond the bill, we are seeing a heightened focus on reducing spending and increased efficiencies and greater use of technology at the agency level.

We believe this is an excellent opportunity to implement more efficient technology-led models for the delivery of citizen services and program missions. As I mentioned last quarter, I’m pleased that we had minimal impact this fiscal year from any change in contract actions. We believe this speaks to the nature of the services we provide and our earned reputation for delivering quality outcomes accountably under performance-based contracting models. Looking ahead, as has been the case for years, federal and state budget priorities and cycles reflecting macroeconomic trends will shape our FY ’26 outlook. David will share more color in his prepared remarks and how specifically we’ve considered budget headwinds and policy-driven tailwinds in our early color for fiscal year 2026.

Now let me turn to the business more broadly. During our 2022 Investor Day, we committed to investing in our leadership team and building strength through client relationships and laid out a strategy for growth through targeting adjacent agencies. This time last year, I shared that we were expanding our growth team through leaders and teams aligned to specific U.S. federal markets, civilian, defense and health. The combined success of these two strategies is evident in our recently announced win at the Department of Defense. Maximus secured a $77 million contract with the U.S. Air Force Life Cycle Management Center to provide cybersecurity and cloud-based services, aiming to enhance innovation and operational readiness across the DoD. The contract spans a base year with four 1-year options and a potential 6-month extension.

Under this contract, Maximus will work to deliver scalable and resilient cybersecurity, cloud and engineering support across multiple security domains. Congratulations to the team members who worked diligently to make this possible. We believe this win is further evidence of our ability to expand into adjacent agencies and deliver capabilities aligned with the mission of our Air Force customer. We’re proud to have the opportunity to play an increasing role supporting our country’s national security priorities. Our 2022 strategy also emphasized expanding our technical capabilities, which in the federal government often require independent certification to broaden the aperture of our pipeline. As part of that forward-looking approach, we recently achieved Cybersecurity Maturity Model Certification or CMMC Level 2, an important milestone.

Effective mid-December 2024, CMMC 2.0 is a DoD initiative designed to standardize and elevate cybersecurity practices across the defense industrial base. Our recent CMMC Level 2 certification validates our enhanced cybersecurity posture as a defense contractor. We also anticipate that it should position us to compete effectively across the entire federal government contracting landscape as these standards are likely to become the norm. This added certification has already resulted in the expansion of our pipeline with potential new work in new addressable areas in FY ’26. Within the U.S. Federal segment, we expect that these and other accomplishments will contribute to the ongoing success we are seeing in our financial results. In 2022, we set a target of 10% to 12% operating income in the segment.

This year, we are forecasting to meaningfully exceed this target. Now let me turn to awards reporting and the pipeline. Through the third quarter of fiscal year 2025, signed awards totaled $3.4 billion of total contract value. Further, at June 30, there were $1.4 billion worth of contracts that have been awarded but not yet signed. These awards translate into a book-to-bill of approximately 0.8x using our standard reporting for the trailing 12-month or TTM period. In a BPO-centric business like ours with average contract length and values at the higher end of the industry, the TTM book-to-bill metric is naturally sensitive to rebid timing. We’ve seen this in recent quarters, characterized by lower-than-normal rebid levels. As such, we view book-to-bill as only one measure of future growth.

To illustrate, our book-to-bill at the end of the third quarter of fiscal year 2024 was 0.6x. Since then, revenue has grown 4.3% and adjusted EBITDA 15%, underscoring how on-contract growth is another important source of organic growth, providing added strength and resilience to our portfolio. We continue to view book-to-bill as a valuable metric, but one that must be interpreted in the full context of contract timing, backlog dynamics and overall financial performance. Our total pipeline of sales opportunities at June 30 was $44.7 billion compared to $41.2 billion reported at March 31. The current pipeline is comprised of approximately $3.1 billion in proposals pending, $1.2 billion in proposals in preparation and $40.4 billion in opportunities we are tracking.

Of our current pipeline, approximately 63% represents new work. Additionally, 67% of the $44.7 billion total pipeline is attributable to our U.S. Federal Services segment. I’ll wrap my remarks with a brief recognition of Maximus’ 50 years of service, which we celebrate this year. Since 1975, Maximus has served as a delivery partner for government, turning legislation and policy into real- world results. Our work spans some of the nation’s most complex high-volume programs delivered with speed, precision, efficiency and accountability. Leveraging this strong 50-year foundation, we are excited about the Maximus of the future and our rapid transformation as a technology partner and solution provider to government. Let me give you an example of where this is showing up today.

I’m excited about our role in the upcoming National Defense Industrial Association, or NDIA Hackathon, which we are cosponsoring with organizations, including AWS and Palantir. This first-of-its-kind event will be held at George Mason University’s Fuse facility and the Washington Convention Center in late August. The Hackathon is intentionally designed to address real operational problems facing the U.S. military today and accelerate the access to innovative technology for our service men and women. Championed by our Chief Digital Information Officer and Chief Technology Officer and reflecting the impact of our defense and national security team, we believe this is another demonstration of Maximus leading the way with innovation. Our drive to accelerate access to technology and its practical application to national security mission objectives reflects an imperative of our nation and a strategic differentiator for Maximus.

And with that, I’ll turn the call over to David.

David W. Mutryn: 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 to come in at an elevated run rate. Two years ago, we deliberately invested in added capacity for our clinical work, and that action is now paying dividends as we can scale up to meet the high demand. The operating income margin for the segment in the third quarter was 18.1% as compared to 15.5% in the prior year period. This has set a new high watermark for the segment margin and is a testament to our ability to process elevated levels of work to help our customers.

As I mentioned, those elevated levels, which can be unplanned, have a significant effect on the bottom line. For the U.S. Services segment, revenue decreased slightly to $440 million as compared to the prior year period revenue of $472 million. Last year’s results were positively impacted by the excess volumes tied to the Medicaid unwinding exercise that was largely completed during the first three quarters of fiscal year 2024. I’d like to acknowledge our success in addressing the unwinding exercise last year, demonstrating how change can promote opportunity. As noted in Bruce’s prepared remarks regarding Medicaid and SNAP, we see a similar opportunity for Maximus to rapidly implement policy and legislative changes in support of our customers.

The segment’s operating income margin for the third quarter was 10.2% compared to 13.0% for the prior year period, which benefited from the excess unwinding volumes. In our view, the segment continues to perform and execute well, and we are focused on driving bottom line improvement headed into next fiscal year when we expect stronger volume levels even before taking into account new market opportunities. Turning to the — outside the U.S. segment. Revenue decreased to $147 million for the quarter, primarily due to divestitures of multiple employment services businesses in prior periods. The related decrease in revenue was partially offset by organic growth of 7.3% and a slight currency benefit. The segment’s operating income margin this quarter was 4.0% and compares to a small loss in the prior year period.

We’re pleased to report ongoing margin stability in the segment with our goal over the longer term to drive further margin improvement through continued scaling in our present markets. Turning to cash flow items. Cash provided by operating activities was a net outflow of $183 million and free cash flow was a net outflow of $198 million for the quarter. As we saw last quarter and anticipated for this current quarter, we saw a continued cash flow impact by payment delays. Days sales outstanding, or DSO, stepped up again to 96 days for this quarter, which, as I remarked on the last call, we expect to be at peak. It’s also well above our historical range and a dynamic that we view as temporary. The payment delays and corresponding higher DSO were primarily driven by two programs, both of which have had positive updates in July that I will take a moment to describe.

The first is one of our major U.S. federal programs. We experienced administrative delays that led to a significant increase in our billed AR balance as of June 30. I’m pleased to report that we made meaningful progress and collected more than $300 million related to this major U.S. federal program in July. The second is one of our large state-based programs that we disclosed last quarter. We faced administrative delays tied to a pending contractual extension of our work, which drove an increase to our unbilled AR balance. The positive update is that we received the fully executed extension in July, which prompted $224 million moving from unbilled AR to billed AR. This alone brings our unbilled AR back into a normal range. We anticipate collecting this balance in the fourth quarter.

The positive impact of these two items give us confidence in our expectations for a strong fourth quarter of free cash flow as evident in our updated free cash flow guidance. As a reminder, the exact timing of payments can impact reported free cash flow at September 30. We ended the third quarter with total debt of $1.67 billion, resulting in a consolidated net total leverage ratio of 2.1x. High near-term borrowings necessary to cover the higher DSO has increased this ratio, yet we are still at the low end of our target range of 2 to 3x. As a reminder, this ratio is our debt net of allowed cash to consolidated EBITDA for the last 12 months as calculated in accordance with our credit agreement. Going forward, by September 30, we expect the ratio to be comfortably below 2x.

The delay in collections has also prompted a more constrained approach to capital allocation, though we believe the recent improvements should enable us to return to our historic approach. This includes seeking potential opportunities on the M&A front and resuming opportunistic share repurchases, utilizing the approximately $66 million remaining under the current $200 million Board of Directors share repurchase authorization. Moving to updated guidance for fiscal year 2025. We’re announcing our third consecutive guidance raise, which reflects the exceptional results this quarter as well as an improvement to our outlook for the fourth quarter, thanks to better visibility and less uncertainty compared to our prior thinking. For revenue, the midpoint is increasing by $100 million to a range of $5.375 billion to $5.475 billion.

Our implied full year organic growth rate now stands at about 4% over the prior year. Our full year adjusted EBITDA margin guidance for fiscal year 2025 is now approximately 13%, which is a 130 basis point improvement from prior guidance. Our adjusted EPS guidance increases by $1 at the midpoint to range between $7.35 and $7.55 per share. At the midpoint, this reflects year-over-year earnings growth of 22%. With the positive updates to the temporary conditions impacting DSO that I mentioned, we expect a strong finish to the year for free cash flow. We are raising our free cash flow guidance to between $370 million and $390 million. We anticipate DSO falling back to more normal levels next quarter, thanks in part to the now finalized state extension and expected imminent payment.

To be clear, our guidance assumes that we will collect the $224 million now billed related to that contract prior to September 30, 2025. A few words on segment operating margin assumptions. The U.S. Federal segment is now forecasted to deliver a margin of approximately 15%. U.S. Services segment is expected to be around 10.5% and outside the U.S. is expected to be between 3% and 5% for the full fiscal year. We expect interest expense of approximately $81 million and our full year tax rate expectation of between 28% and 29% is unchanged. As a reminder, the higher tax rate on a full year basis is tied to the divestiture-related charges in the first quarter. The weighted average shares expectation is also unchanged at 58 million shares on a full year basis.

I’ll wrap up by sharing our early thinking on our expectations for next fiscal year. As always, this precedes official guidance that we will provide for fiscal year 2026 on the year-end call in November. As context, a year ago, we expressed some caution on fiscal year ’25 year-over-year growth given the excess volumes we experienced in fiscal year ’24, most notably related to our support of Medicaid programs. Our initial guidance for the year that we provided in November, then adjusted in December for the divestiture was revenue of $5.25 billion and adjusted EPS of $5.85 at the midpoint. Since then, our midpoints have increased by $175 million for revenue and $1.60 for adjusted EPS. We have successfully delivered on higher volumes, particularly in our clinical portfolio in the U.S. Federal segment while also continuing to drive technology and process efficiencies in our cost structure.

We are purpose-built to enable us to scale up to meet increasing demand, recognizing that from time to time, components of our business that are volume sensitive can be less easy to precisely predict. As we now look to fiscal year 2026 revenue, it’s still early enough to have wide-ranging scenarios. Two areas of focus that are dynamic and create a wider range of scenarios are: first, volume- based contributions that we are not certain will recur at the same level as they have in fiscal year 2025. Second, we are carefully watching for signs of budget constraints and efficiency objectives from customers, which may create opportunities in the long run, but may create near-term headwinds on both the federal and state side. We are staying equally focused on the opportunities in front of us, some of a material nature that could be decided in early fiscal year 2026.

This includes proposals sitting in both our in preparation and submitted buckets that, if successful, we anticipate could mildly contribute to fiscal year 2026 and then make stronger contributions to fiscal year 2027. We’re also spending time now preparing for opportunities tied to the One Big Beautiful Bill. The exact implementation time line related to these opportunities is uncertain, and therefore, we are prudently forecasting the revenue contribution in fiscal year 2027, although it is possible some portion could come in fiscal year 2026. All that said, at this stage, our preliminary thinking is we have visibility into an anticipated revenue range that is roughly in line with or possibly just slightly below our now raised fiscal year 2025 guidance.

There are also scenarios of modest revenue growth, which we believe would result from some combination of less volume moderation on current programs, less impact from budget constraints coming to fruition, and acceleration in revenue from the opportunities we’ve discussed and updates to the administration’s priorities that increase demand for our services. I’ll add that our early view also contemplates that in fiscal year 2027, we could see acceleration of organic growth that maps to these opportunities. Stepping back, we believe this demonstrates the business is running in a disciplined manner while we execute on our growth strategy that aligns with our customers’ priorities. On the margin front, our current view is we expect next year’s adjusted EBITDA margin to remain near the high end of our 10% to 13% target range.

This was consistent with the implied guidance for our fourth quarter of about 12.5%. This represents a significant improvement to our fiscal year 2024 adjusted EBITDA margin of 11.6% and our initial fiscal year 2025 guidance of approximately 11%. We believe the sustainability of these higher levels reflects our continuous improvement of productivity and efficiency in our delivery while accommodating our growth investments. The final component to this early view is interest expense, where we anticipate a meaningful reduction next fiscal year. Once more, this represents our early view of our expectations, and we plan to provide formal guidance in November as usual. In conclusion, we’re pleased that recent performance shows us meeting our targets that we have set for ourselves and communicated to shareholders in recent years with respect to both our organic revenue growth rate target and our goal to grow earnings faster than revenue.

From fiscal year 2022 to today’s fiscal year 2025 guidance, organic revenue growth averages 7%, comfortably achieving our mid-single-digit target. In addition, during that same period, we have been able to grow earnings by almost 20% on a compound annual growth rate basis. Looking forward into fiscal year 2026 and beyond, we believe that our organic revenue growth potential remains well intact. And with that, we will open the line for Q&A. Operator?

Q&A Session

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

Charles S. Strauzer: 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?

Bruce L. Caswell: 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 grower. This area that we’re discussing, just the Medicaid work requirements and program integrity, which relates to needing to redetermine eligibility for the expansion population twice a year rather than once a year, we expect to be a positive uplift to that U.S. services growth rate. And while it’s early days, it could bring that growth rate more to the mid- to high single-digit range over time. And we think also that given our history and the work that we’ve done for so many states over the years for Medicaid, but maybe more importantly, from an economic standpoint, the invested infrastructure that’s already out there that exists, we’re really very well positioned as a company to go address that.

So now broadening the aperture. When we think about opportunities in SNAP and even beyond that unemployment insurance, there are macro factors already in play. We’re seeing some budget pressures that are really indicating early headwinds for FY ’26 from states. But at the same time, we always view these as creating opportunity. And I feel like the table is set for more opportunity now than we’ve seen historically because we have the ability under the guidance that was provided by OMB back on March 11 to give states greater flexibility in working with contracted vendors or contracted resources provided they meet merit system principles, which we have certified we do in delivering these programs. We have a great track record also having served, I think, about 17 states from an unemployment insurance standpoint back during the pandemic.

And so depending on how things play out, states could easily say, look, these are kind of tighter times. We want to focus on working efficiently with private sector partners and Maximus is in an excellent position to assist them in that regard. From an opportunity sizing perspective, we actually are — the way we look at those markets, we see them as having larger average capture size than the Medicaid work that I described. And so it’s early innings, and we’ve got less certainty around how all this comes together at the state level and which states might move sooner than others. I mentioned in my prepared remarks that I was thrilled that we already have had one of our large state customers expand a contract to enable us to do more work in the SNAP area.

So as that plays out, those net new opportunities could collectively tip the U.S. Services segment into double-digit growth. Over time. Again, we’ve taken a cautious view for FY ’26 of that, but we really feel like it could be a significant tailwind for us as we go into FY ’27. So the conversations we’re having with our customers are early days. They remain in planning mode. Many customers wanted to wait to engage until the legislation was passed. Some customers are saying, well, we need to explore what they’re implementing regulations might mean. But there’s another element of this to keep in mind is that this is not our first rodeo when it comes to implementing some of these requirements. During the prior administration, as I mentioned in my remarks, we really worked with the state all the way through an operating model to enable them to address work requirements.

And so we’ve got a playbook that’s ready. It’s on the shelf. We’ve updated it, and it doesn’t require significant investments in new systems and technology. It’s more investments to enable us to configure the infrastructure that we already have in place to handle things like Medicaid eligibility and so forth and consumer engagement, as I mentioned. So with all that said, that’s why we’re taking a view that we characterize it mostly as an FY ’27 opportunity, but really a great opportunity for U.S. services. I don’t know, David, would you add anything to that?

David W. Mutryn: Nothing to add.

Bruce L. Caswell: Okay. I hope that helps, Charlie. Other questions?

Charles S. Strauzer: 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?

Bruce L. Caswell: 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.

Charles S. Strauzer: 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?

Bruce L. Caswell: 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.

Charles S. Strauzer: 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?

Bruce L. Caswell: 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 the core competencies and skills that we need to bring to bear in terms of assisting customers in moving, if you will, kind of payloads, so application stacks into the cloud, modernizing them, even in some cases, then buying those back as a service that can be delivered are important to the defense community. And that’s why the achievement recently of the CMMC Level 2 for us that I mentioned is — was so critical. And it was critical that we got it done quickly. And I would say, compared to many in the community, we got it done faster than others. And we’re — I’m super proud of the team for doing that. The third point I’d make is that in terms of the positioning is that we’ve really brought in some amazing excellent new leaders into the technology organization.

And these individuals and the teams that they’ve built around them have deep experience working for defense customers. So we’re better aligned now overall to the direction of travel of the DoD. — we’re seeing this all pay off in the Air Force win that I mentioned, and that really showcases the capability of Maximus to be a trusted partner in the delivery of mission-oriented work for a defense customer. Overall, if we back up a little bit, the administration is saying they want a greater focus on performance-based contracts where it’s practical. They want to open up the supplier community and engage more of the commercial providers. And as you know, because you’ve followed us for so many years, Charlie, the Maximus has deep experience and capabilities when it comes to performance-based contracting.

And further, we’ve got strategic relationships that we’ve been developing and that we have been kind of bringing to the market with key commercial software providers that are addressing the government marketplace. So we’re putting all of these pieces together. And we feel that while the defense pipeline is a substantive portion of our pipeline presently, it’s got a much greater potential for us over the longer term and than the current defense revenues we have today. So I’d wrap it all up by just saying that we view a very strong opportunity set that’s out there that’s really untapped by us. We’re encouraged by the early indication of our right to win as evidenced by the Air Force Award. And in particular, we’ve been doing things like demonstrating thought leadership, whether it’s through the work in artificial intelligence and creating an AI road map for a certain defense customer that I’ve mentioned on previous calls or the NDIA Hackathon that’s coming up in August, where we’re front and center as a sponsor and participant in that.

I really feel like we’ve got a bright future ahead. And we’re taking it in a very thoughtful, pragmatic way that allows us to leverage our capabilities, move adjacently into these areas and deliver greater value for our nation. As I like to say, I hope that helps.

Charles S. Strauzer: 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.

David W. Mutryn: I’m sorry, what was the last part of your question?

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

David W. Mutryn: 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.

Charles S. Strauzer: 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?

David W. Mutryn: 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.

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

Brian A. Gesuale: 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?

Bruce L. Caswell: 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 claims through the process with a high, high degree of accuracy and less need for individuals involved in more routine and mundane tasks in processing the claims.

And so it’s still early days, and we’ll be rolling those capabilities out as we close out this fiscal year and enter the next fiscal year. And we expect that, that will enable us to really step up, again, now in that area, the throughput of the business and the quality process of the business should become simplified in that regard. The last thing I’d say is that we are real partners with the VA and wanting to make sure veterans have the best experience possible. And in some cases, that means doing a greater job as we possibly can to get through very, very complicated medical records. It’s not uncommon in this business to have an average case file, including a medical record that’s 3,000 to 5,000 pages in length. That’s a lot of information for a clinical reviewer to get through.

So without giving up a lot of details, I will just say we’ve invested heavily in two areas where artificial intelligence and machine learning can be of great assisted value. Initially, one area, and I talked about this on a prior call, is in just helping organize that information, which is heterogeneous in nature, conclude could be a printout from an electronic medical record. It could be case file notes, it could be results from clinical tests or exams, getting that all organized in a manner where there’s a common taxonomy to it and can be navigated quickly is something that’s not simple to do, but something that we’ve done an excellent job of. And that’s enabled us to present information to clinical reviewers in a much more streamlined fashion.

The next thing we’ll do and that we’ll work on is making sure that if there is information in that medical record that’s relevant, timely meets the requirements of the VA that we extract it and make use of it so that we’re minimizing the requirement for veterans to necessarily be seen if they may have been seen previously in the last, say, the last six months and the results of that visit could be sufficient to meet the requirement of the exam. So a little bit down in the weeds for you, but those are examples of where those technology investments are just progressing over time, will take hold. We’ll continue to improve the veteran experience and also streamline the way we operate the business. And with that, I’ll turn it over to David for a few comments.

David W. Mutryn: 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.

Brian A. Gesuale: 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.

Bruce L. Caswell: 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.

David W. Mutryn: 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.

Brian A. Gesuale: 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.

David W. Mutryn: Could you repeat that last part, go back to 640.

Brian A. Gesuale: 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.

David W. Mutryn: 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.

Brian A. Gesuale: 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?

David W. Mutryn: 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.

Brian A. Gesuale: 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.

David W. Mutryn: 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.

Bruce L. Caswell: 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.

Brian A. Gesuale: 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.

Bruce L. Caswell: 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.

David W. Mutryn: 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.

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