MAXIMUS, Inc. 2026 Q3 Earnings Call

Please go ahead. 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.

Thanks, James, good morning. We are pleased to report strong third-quarter results today, which demonstrate solid execution in support of our customers' important missions. I'll begin by reviewing the third-quarter results and also address the customer-directed contract modification that impacts our near-term outlook. I'll move to our forecast for the remainder of this fiscal year and conclude with early thoughts on fiscal year 2027, which precedes formal guidance this November. For the third quarter, Maximus reported revenue of $1.28 billion, which was in line with our expectations and enables us to reiterate full-year revenue guidance. The prior year period benefited from higher temporary natural disaster support and also contained temporary clinical volume surges in primarily the U.S. Federal Services segment. On the bottom line, adjusted EBITDA margin was 15.0% and adjusted EPS was $2.22 for the quarter, which compares to 14.7% and $2.16 respectively for the prior year period.

Across fiscal year 2026, we've driven margin improvement through strong execution and selective deployment of efficiency-enhancing technology and have not had to rely as much on incremental or surge volumes that defined the prior fiscal year. Let's go to the segment results. Third-quarter revenue for U.S. Federal Services was $721 million and in line with our revenue expectations for the segment. As I shared before, the prior year period benefited from elevated natural disaster support that has not recurred at the same levels and was responsible for close to half of the revenue change. The remaining portion of the year-over-year revenue decline was primarily attributable to the temporary clinical volume surges. The operating income margin for this segment in the third quarter was 18.6%, as compared to 18.1% in the prior year period.

Our ability to drive efficiencies amidst solid volumes across the various program areas continued to benefit third-quarter margins in this segment. A customer-directed pause in the performance incentives on our Department of Veterans Affairs Medical Disability Exam, or VA MDE program, is expected to impact profitability of the segment beginning in the fourth quarter, which I'll expand on in the guidance discussion. Turning to the U.S. Services segment, third-quarter revenue was $418 million and was consistent with our expectation of continuing to close the gap to prior year revenues ahead of a return to positive growth in the fourth quarter. Our fourth-quarter revenue forecast for this segment continues to be positive mid-single-digit organic growth over the prior year as activities and engagements with the Medicaid population are anticipated to pick up. This stems from several current state customers using Maximus to enact and administer legislative-driven required changes to their programs.

The segment's operating income margin for the third quarter was 10.8% and reflects solid upward progression across this fiscal year, as we have previously communicated. Turning to the Outside the U.S. segment, third-quarter revenue was $140 million, and the segment recognized an operating profit of $1.2 million. Variances to volumes across several programs, ranging from clinical to employment services, are responsible for the revenue delta versus the prior year. As we've stated before, our goal remains to drive growth and further margin improvement in the segment by successful conversion of this segment's sales pipeline. Moving to cash flow items, cash flows used in operating activities was $125 million, and free cash flow was an outflow of $137 million for the third quarter. As we anticipated and communicated last quarter, DSO remained elevated at 98 days, driven by administrative delays at a major federal customer.

I'm pleased to report that collections from this customer have accelerated in July, with approximately $245 million received since June 30th. 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 manage temporary working capital timing. We ended the third quarter with total debt of $1.65 billion, up from $1.55 billion as of March 31st. Our consolidated net total leverage ratio per our credit agreement was 2.0 times, up from 1.8 times in the prior quarter. We remain within our stated target leverage ratio range of two to three times. During the third quarter, we repurchased approximately 0.75 million shares totaling $50 million.

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. 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. 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. Moving to fiscal year 2026 guidance. As I mentioned, a modification to our VA MDE contract has impacted our earnings expectations for the fourth quarter of this fiscal year. In the just-completed third quarter, our customer notified all vendors of a temporary pause of performance incentives and disincentives.

These are assessed on an individual basis to each vendor based on performance metrics including timeliness, accuracy, and quality. Our strong performance in these areas, enabled by our direct investments into this program's operations and technology, means that positive incentives have been included in our reporting each quarter of fiscal year 2026 to date. The pause arises from the customer's priority to improve their review and validation process after vendors submit their detailed monthly invoices. With this pause effective July 1, 2026, we have removed any assumed fourth quarter fiscal year 2026 contribution from incentives, which reduces our diluted EPS guidance by approximately $0.35, which is in line with the contribution of these incentives in each of the first three quarters of the fiscal year. 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. Our updated full-year guidance implies fourth quarter 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, Our guidance reflects our unchanged expectation that DSO will finish the fiscal year below 70 days.

As I said, we continue to make solid progression in catching up collections with a major federal customer that we disclosed on the prior call. Finally, we are reiterating fiscal year 2026 revenue guidance, which is expected to range between $5.2 billion and $5.35 billion, albeit with a bias towards the lower end. Let me touch on full-year operating margin assumptions for the segments. We expect the U.S. Federal Services full-year segment operating margin to now range between 16.5% and 17.0%. For Q4, we expect the U.S. Federal Services operating margin to be between 14.5% and 15.0%. For the U.S. Services segment full-year operating margin, we expect a range of 9.5% to 10.0%, which, as a reminder, includes the $6.9 million 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 fourth quarter.

Other updated assumptions include expected interest expense of roughly $88 million, and we anticipate our full-year tax rate to range between 24% and 24.5%. I'll close my remarks today with some comments on next year, which precedes official fiscal year 2027 guidance that we anticipate providing on the year-end call in November. I'll start with the contract modification on the VA MDE program. Our assumption, based on customer guidance, is the temporary pause continues through December 31st, 2026. Therefore, we presume that in the first quarter of fiscal year 2027, we will not be eligible to earn incentives. While a range of scenarios could play out across the remainder of next year with this major program, we remain confident in securing the rebid and continuing to serve this important customer and mission.