Q3 2026 Maximus Inc Earnings Call

August 6, 2026

Speaker #1: Greetings and welcome to the MAXIMUS fiscal 2026 third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

Operator: Greetings, welcome to the Maximus Fiscal 2026 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. 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.

Operator: Greetings, welcome to the Maximus Fiscal 2026 Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. 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.

Speaker #1: If anyone should require operator assistance, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce James Francis, Vice President of Investor Relations.

Speaker #1: Please go ahead.

Speaker #2: 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.

James Francis: Good morning, 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. With that, I'll hand the call over to David.

Speaker #2: 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.

Speaker #2: 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.

James Francis: 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. With that, I'll hand the call over to David.

Speaker #2: Today's presentation also contains non-GAAP financial information. For 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.

Speaker #3: 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.

David Mutryn: Thanks, James. Good morning. We are pleased to report strong Q3 results today, which demonstrate solid execution and support of our customers' important missions. I'll begin by reviewing the Q3 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 Q3, 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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.

David Mutryn: 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. Q3 revenue for U.S. Federal Services was $721 million, 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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.

David Mutryn: The operating income margin for this segment in the Q3 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 Q3 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 Q4, which I'll expand on in the guidance discussion. Turning to the U.S. Services segment, Q3 revenue was $418 million, consistent with our expectation of continuing to close the gap to prior year revenues ahead of a return to positive growth in the Q4.

Speaker #3: 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 VAMDE program is expected to impact profitability of the segment beginning in the fourth quarter, which I'll expand on in the guidance discussion.

Speaker #3: 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.

Speaker #3: 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.

David Mutryn: Our Q4 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 program. The segment's operating income margin for the Q3 was 10.8%, reflects solid upward progression across this fiscal year, as we have previously communicated. Turning to the Outside the U.S. segment, Q3 revenue was $140 million, 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.

Speaker #3: This stems from several current state customers using MAXIMUS to enact and administer legislative-driven required changes to their program. 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.

Speaker #3: 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.

Speaker #3: As we've stated before, our goal remains to drive growth and further margin improvement in the segment by successfully converting this segment's sales pipeline.

Speaker #3: 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.

David Mutryn: 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 Q3. As we anticipated and communicated last quarter, DSO remained elevated at 98 days, driven by administrative delays at a major federal customer. I am pleased to report that collections from this customer have accelerated in July, with approximately $245 million received since 30 June. I will share more about our expectations for the remainder of Q4 when I come to the guidance update. During Q3, as detailed in our Form 8-K filed on 28 May, 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.

Speaker #3: 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 30th.

Speaker #3: 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 28th, we raised $325 million of term loan B, some of which was used to pay down our revolver and provide additional flexibility as we managed temporary working capital timing.

Speaker #3: We ended the third quarter with total debt of $1.65 billion, up from $1.55 billion as of March 31st. Our consolidated net total leverage ratio per our credit agreement was 2.0 times, up from 1.8 times in the prior quarter.

David Mutryn: We ended Q3 with total debt of $1.65 billion, up from $1.55 billion as of 31 March. Our consolidated net total leverage ratio per our credit agreement was 2.0 times, up from 1.8 times in the prior Q. We remain within our stated target leverage ratio range of 2 to 3 times. During Q3, we repurchased approximately 0.75 million shares totaling $50 million. As of 30 June 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 two, we have deployed capital exclusively on share repurchasing.

Speaker #3: We remain within our stated target leverage ratio range of 2 to 3 times. During the third quarter, we repurchased approximately $0.75 million shares totaling $50 million.

Speaker #3: As of June 30th, 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.

Speaker #3: 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.

Speaker #3: In the recent past, between these two, 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.

David Mutryn: 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 2 to 3 times.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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 2 to 3 times.

Speaker #3: Moving to fiscal year 2026 guidance, as I mentioned, a modification to our VAMDE contract has impacted our earnings expectations for the fourth quarter of this fiscal year.

David Mutryn: Moving to fiscal year 2026 guidance. As I mentioned, a modification to our VA MDE contract has impacted our earnings expectations for Q4 of this fiscal year. In the just completed Q3, 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 customer's priority to improve their review and validation process after vendors submit their detailed monthly invoices.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: The pause arises from the customer's priority to improve their review and validation process after vendors submit their detailed monthly invoices. With this pause effective July 1st, 2026, we have removed any assumed fourth quarter fiscal year 2026 contribution from incentives, which reduces our diluted EPS guidance by approximately 35 cents.

David Mutryn: With this pause effective 01 July 2026, we have removed any assumed Q4 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 three 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. 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.

Speaker #3: Which is in line with the contribution of these incentives in each of the first three 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.

Speaker #3: 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 35 cents less than the prior guidance midpoint of $8.40.

Speaker #3: 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%.

David Mutryn: Our updated full year guidance implies Q4 adjusted diluted EPS at the midpoint of $1.91 and adjusted EBITDA margin of approximately 13%. 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: As I said, we continue to make solid progression in catching up collections with the major federal customer that we disclosed on the prior call.

Speaker #3: Finally, we are reiterating fiscal year 2026 revenue guidance, which is expected to range between 5.2 billion and 5.35 billion dollars, albeit with a bias towards the lower end.

Speaker #3: 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%.

David Mutryn: 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 non-cash charge in the prior quarter. For Outside the U.S., we still expect the segment to break even on a full year basis, which implies a profitable Q4. 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%.

Speaker #3: 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 dollar non-cash charge in the prior quarter.

Speaker #3: And for outside the U.S., we still expect the segment to break even 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%.

Speaker #3: 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.

David Mutryn: 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 31 December 2026. Therefore, we presume that in the Q1 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 Q4 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.

Speaker #3: I'll start with the contract modification on the VAMDE program. Our assumption based on customer guidance is the temporary pause continues through December 31st, 2026.

Speaker #3: 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.

Speaker #3: 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.

David Mutryn: 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 Q4 of fiscal 2026.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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 HR-1 legislation.

David Mutryn: We remain optimistic that this segment will see positive organic growth continuing into fiscal year 2027, 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. With that, I'll turn the call over to Bruce.

Speaker #3: We look forward to providing formal fiscal year 2027 guidance in November. And with that, I'll turn the call over to Bruce.

Speaker #1: 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 VAMDE program.

Bruce Caswell: Thanks, David, 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 non-traditional 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.

Speaker #1: 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 RFPs and non-traditional pipeline opportunities—such as other transaction authorities, or OTAs—align with the goals and direction of the federal government.

Speaker #1: 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.

Speaker #1: 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.

Bruce Caswell: 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: While it's not a comprehensive view of the future contract, our preliminary analysis indicates that the scope of work, including all six regions that comprise our work today, are included in this PWS.

Speaker #1: 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.

Bruce Caswell: This bolsters our optimism about the next contract. 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 of sales opportunities was $50.4 billion at 30 June, 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: Our total pipeline of sales opportunities was $50.4 billion at June 30th, 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.

Speaker #1: 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.

Bruce Caswell: The share of new work in the total pipeline is 57%. 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, reflecting this dynamic, in some cases, agencies are awarding more bridge contracts and short-term extensions. 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 in supporting our long-term growth objectives.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: 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.

Bruce Caswell: 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 Q3 were $1.25 billion of total contract value. These awards translate into a book-to-bill ratio of approximately 0.5 times using our standard reporting for the trailing 12-month period. In addition, at 30 June, we had a balance of another $1.35 billion worth of contracts that had 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.

Speaker #1: These awards translate into a book-to-bill ratio of approximately $0.5 times using our standard reporting for the trailing 12-month period. In addition, at June 30th, we had a balance of another $1.35 billion worth of contracts that had been awarded but not yet signed.

Speaker #1: 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.

Speaker #1: There are a number of attractive new work opportunities in our pipeline associated with HR-1, also known as the Working Families Tax Cut Act. Which we believe will increasingly contribute to growth as we exit the fourth quarter.

Bruce Caswell: 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 Q4. 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 Q4 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 there are less than six months until the go-live date.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: Prospective customer discussions while highly active have progressed in many cases more slowly than expected, considering there are less than six months until the go-live date.

Speaker #1: 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.

Bruce Caswell: 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: 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.

Bruce Caswell: 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: As a reminder, under HR-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 1st, 2027.

Bruce Caswell: 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 1 October 2027. Regardless of their PER, states will be responsible for a 25% increase in the SNAP administrative cost share beginning 1 October 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.

Speaker #1: However, regardless of their PER, states will be responsible for a 25% increase in the SNAP administrative cost share beginning October 1st of this year.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: 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.

Bruce Caswell: 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.

Speaker #1: Today, approximately 75 to 80 percent 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.

Speaker #1: 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 email engagement, in just five contracts, yielded a better customer experience, and a 3.5% operating margin improvement for that group.

Bruce Caswell: As just one example, AI-based improvements to core business processes such as IVR and script optimization, chatbot enhancement, and proactive text and email engagement in just five contracts yielded a better customer experience and a 3.5% operating margin improvement for that group. 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: One example is our direct investment in SpectroCloud, which is an AI infrastructure management software provider rather than an AI model company, providing an advanced platform that helps enterprises, public sector organizations, neoclouds, and sovereign clouds build and operate production AI infrastructure with greater control over cost, security, and governance.

Bruce Caswell: 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, neoclouds, and sovereign cloud 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.

Speaker #1: 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.

Speaker #1: We view SpectroCloud 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.

Speaker #1: 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.

Bruce Caswell: 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 Defense 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.

Speaker #1: 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.

Speaker #1: 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 dollars, only a small portion of which is reflected in our reported pipeline.

Speaker #1: Our objective is to ensure we are positioned to participate in that opportunity set, both through traditional and non-traditional 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.

Bruce Caswell: Our objective is to ensure we are positioned to participate in that opportunity set, both through traditional and non-traditional procurement paths. In addition to the OTAs I mentioned earlier, I am 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 are 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: 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.

Bruce Caswell: 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: 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.

Bruce Caswell: 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. With that, we'll open the line for Q&A. Operator?

Speaker #1: 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.

Speaker #1: And with that, we'll open the line for Q&A. Operator?

Speaker #2: Thank you. Well, now we conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad.

Operator: Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment as we poll for questions. Our first question is from Will Gildea with CJS Securities.

Speaker #2: A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.

Speaker #2: One moment as we pull for questions. Our first question is from Will Gildea with CJS Securities.

Will Gildea: Hi, good morning, thanks for taking our questions.

Speaker #3: Hi. Good morning, and thanks for taking our questions.

Speaker #4: Sure. Good morning, Will.

Bruce Caswell: Sure. Good morning, Will.

Speaker #3: 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?

Will Gildea: 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?

Speaker #4: Sure. Happy to start. And save it to add to that. We've been told by the customer that it's a temporary pause I mentioned the current contracts last until December 31st.

Bruce Caswell: 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 contracts last until 31 December, 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 12 August. We understand that they're moving ahead, obviously, with their plans for the next procurement. It becomes a question of will that procurement potentially be completed in time to align with the 31 December deadline or not? While that 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 suggests that the base contract would begin in the middle of next year.

Speaker #4: 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 12th.

Speaker #4: 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 31st deadline, or not?

Speaker #4: And while that 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.

Speaker #4: 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 31st, when the current contracts are scheduled to terminate.

Bruce Caswell: 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 31 December, when the current contracts are scheduled to terminate. 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. 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? I would just say that it's not uncommon for our customers to need to respond over the life of a contract, and these are long-term contracts, to changes in the legislative and the policy and the compliance environments.

Speaker #4: But also with the likelihood that we could see up to a six-month extension to the current contracts to align with the timing that we've seen in the performance work state.

Speaker #4: 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?

Speaker #4: 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 a contract.

Speaker #4: And these are long-term contracts. The changes in the legislative and the policy and the compliance environments so while it's not common for a significant contractual term like this to be suspended, it's also not unprecedented.

Bruce Caswell: While it's not common for a significant contractual term like this to be suspended, it's also not unprecedented. Our model actually is to support customers as their needs change through the administration of contracts over the life of those contracts. Another example that you'll note 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 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.

Speaker #4: 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 note 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.

Speaker #4: We do that as just a part of doing business, as a responsible government contractor being flexible and a droit and being able to use our scale and our agility to help our customers manage through those processes and those times.

Speaker #4: 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.

Bruce Caswell: 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. 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.

Speaker #4: 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.

Speaker #4: Will, I might

David Mutryn: Will, I might just add one more point, that these incentives have become a bigger contribution for us in our fiscal year 2026 than they had 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.

Speaker #5: just add one more point. These incentives have become a bigger contribution for us in our fiscal year 26 than they had 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.

Speaker #3: Yes. Yep. 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.

Will Gildea: Yes. Yep, that is super helpful. Just for, I guess, the initial early look at fiscal year 2027, 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. Do I have the right idea?

Speaker #3: Is that do I have the right idea?

Speaker #4: Yeah. 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 that Q4 run rate, which, as I mentioned, based on our full-year guidance, that's 13% implied EBITDA margin in Q4.

David Mutryn: I think there's a range of scenarios there, is what we've said. 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 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%. Maybe go even further to say we still believe that 12% to 15% is an appropriate range for the business in the near term. 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.

Speaker #4: 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%.

Speaker #4: 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.

Speaker #4: 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.

Speaker #3: Yep. 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?

Will Gildea: 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.

Speaker #3: Was there any language about incentives in it? Just anything about the initial RFP?

Speaker #4: Yeah. Well, the short answer is not there really wasn't. So the draft PWS that's been released is section B3 of a larger RFP that will I'm sure be released with all the other components to comprise the RFP in due course.

Bruce Caswell: Well, the short answer is there really wasn't. The draft PWS that's been released is Section B3 of a larger RFP that will, I'm sure, be released with all the other components to comprise the RFP in due course. As I mentioned, the VA is seeking vendor community input by 12 August just on the PWS. 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. 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. The regions comprised in the draft PWS are all six regions.

Speaker #4: As I mentioned, the VA is seeking vendor community input by August 12th just on the PWS. So there's really nothing there that speaks to the pricing mechanisms that they intend or incentive structures or anything.

Speaker #4: 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 done.

Speaker #4: By the vendor community and also the regions comprised in the PWS draft PWS are all six regions. So that's not just the four domestic regions, but also the pre-discharge region, as well as the international region.

Bruce Caswell: That's not just the four domestic regions, but also the pre-discharge region as well as the international region. It's a comprehensive PWS. It's consistent, 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, 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's claim. They all are ongoing priorities of the VA, they align perfectly to the areas where we've been making investments in capacity and technology as a company.

Speaker #4: 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, are making sure that we're able to schedule veterans efficiently and use their time wisely, 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 the veteran's claim.

Speaker #4: These are all ongoing priorities of the VA, and they align perfectly with the areas where we've been making investments in capacity and technology as a company.

Speaker #4: 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.

Bruce Caswell: We feel good about what we're seeing, and we're eager to provide some feedback to the VA as part of the process.

Speaker #3: That is helpful. Thank you. Switching gears, nice step up in unsigned but awarded contracts. Maybe you can talk about what some of those opportunities are.

Will Gildea: That is helpful. Thank you. Switching gears, 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?

Speaker #3: And are you expecting them to convert to signed in the current procurement environment?

Speaker #4: Yeah. 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 of a longer duration.

Bruce Caswell: Yeah. 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 contracts of a longer duration. 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. 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. Why not do it, right? If you're an incumbent, it extends your period of performance on your current contract.

Speaker #4: 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 kind of the durability of those awards is great.

Speaker #4: 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.

Speaker #4: And there's no consequence often for protests. So why not do it, right? If you're an incumbent, it extends your it extends your period of performance on your current contract.

Speaker #4: Without getting too specific contract names, I'm pleased that what we're seeing in the award of an unsigned category includes deals that have been through that protest process and successfully resolved.

Bruce Caswell: Without getting to specific contract names, 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. They're really just pending the administrative process of contract execution. That's why I felt confident to say we'll see that ripple through in sequential improvements to book-to-bill in subsequent quarters.

Speaker #4: 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 and subsequent quarters.

Speaker #3: Sounds great. And then I guess turning pages, turning to SNAP and Medicaid work requirements, etc., a couple of quarters ago, you guys gave an outlook for high single-digit growth in 2027.

Will Gildea: Sounds great. I guess 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? Yeah.

Speaker #3: 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.

Speaker #3: Can you reaffirm that outlook? Yeah.

Speaker #4: Yeah. 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.

David Mutryn: Yeah. I think as we look to 2027, first of all, we've reiterated that this current Q4 of 2026, we believe can achieve mid-single digit organic growth in that segment. 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?

Speaker #4: 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?

Speaker #2: Yeah. William, I'd love to talk about the policy side of it. The interesting thing is that there were a couple of dozen Democratic state attorneys general who sued the Trump administration over the recently released interim final rule for the implementation of Medicaid work requirements.

Bruce Caswell: Yeah. Will, you know I'd love to talk about the policy side of it. Interesting thing is that there was a couple dozen Democratic state 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 29 July, that they declined to stop the Trump administration, so enabled the Trump administration to proceed with the implementation of the requirements under the act.

Speaker #2: 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.

Speaker #2: Well, the federal district court judge ruled, I want to say back on maybe the 29th of July, that the declined to stop the Trump administration so enabled the Trump administration to proceed with the implementation of the requirements under the act.

Speaker #2: So that, at least at this point, may be pending an appeal process. But that suggests that the work requirements will continue and need to be implemented as of January 1st, 2027.

Bruce Caswell: That, at least at this point, may be pending an appeal process, but that suggests that the work requirements will continue and need to be implemented as of 1 January 2027. Recall also that that also begins a period where for the Medicaid expansion population, which is about 21 million people nationally, semi-annual redeterminations also begin. Now, that work doesn't begin all on 1 January, because if you think about it, somebody who's determined eligible as of 1 January would then have to have their eligibility rechecked in July. Six months later would be the first time that happens. We would see activities ramping up around that over the next calendar year. Also, because presently, states now are scrambling, candidly, to figure out how do we operationalize the interim final rule.

Speaker #2: And recall also that that also begins the period where for the expansion population, the Medicaid expansion population, which is about 21 million people nationally, semi-annual redeterminations also begin.

Speaker #2: Now, that work doesn't begin all on January 1st because if you think about it, somebody who's determined eligible as of January 1st would then have to have their eligibility rechecked in July, six months later would be the first time that happens.

Speaker #2: 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?

Speaker #2: 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.

Bruce Caswell: It's worth noting that for at least 2027, beneficiaries will be able to self-attest to medical frailty. There is some time that states have, and the activities are funded on a 90/10 basis to help states come into compliance. 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 a 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 it, proceeding according to plan.

Speaker #2: 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?

Speaker #2: Will they need to be evidenced by a doctor's note? How do we do that within the construct of our health systems, and maybe our managed care plans?

Speaker #2: All of that has to get sorted out. But the implementation is, as we understand it, proceeding according to plan. So we're out there having conversations with our customers.

Bruce Caswell: 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 Q4 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. We continue to get significant interest from state customers and remain engaged with them on that front.

Speaker #2: 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.

Speaker #2: And we'll expect that to continue. The other element, of course, of HR1 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.

Speaker #2: And then increased benefit costs subsequent to that. So we continue to get significant interest from state customers and remaining engaged with them on that front.

Speaker #3: Thank you. Can you provide any more color 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?

Will Gildea: Thank you. 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?

Speaker #4: Yeah. So, the one area is DSO that I talked to in my prepared remarks. As I mentioned in some detail on last quarter's call, there's a large federal customer that we are catching up on collections from.

David Mutryn: Yeah. 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 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. I shared an update in my remarks that since 30 June, we've had great momentum with this single customer, collecting $245 million since 1 July. 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.

Speaker #4: 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 30th, we've had great momentum with this single customer, collecting 245 million since July 1st.

Speaker #4: 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.

Speaker #3: Thank you. 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?

Will Gildea: Thank you. 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?

Speaker #3: What are your criteria for acquisitions?

Speaker #4: Yeah. 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.

David Mutryn: Yeah. 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 revenue synergies. 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.

Speaker #4: 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 revenue synergy.

Speaker #4: 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.

Speaker #3: All right. I will leave it there. Thank you very much.

Will Gildea: All right. I will leave it there. Thank you very much.

Speaker #1: Thanks, Will. Operator, back to you.

Bruce Caswell: Thanks, Will. Operator, back to you.

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

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