Maximus Q3 2026 Earnings Call: Complete Transcript

Maximus (NYSE: MMS ) held its third-quarter earnings conference call on Thursday. Below is the complete transcript from the call. This content is powered APIs. 22, slightly higher than the prior year.

20 due to a temporary pause in performance incentives on a major VA contract. S. Federal Services segment faced a revenue decline due to reduced natural disaster support and clinical volume surges, but maintained strong operating margins. S.

Services segment anticipates a return to positive growth in Q4, driven by activities related to Medicaid program changes. Cash flows were negatively impacted by delays in collections from a major federal customer, although significant progress in collections was reported post-quarter. Maximus continued share repurchases and M&A evaluations, with a focus on strategic growth and maintaining a leverage ratio of 2-3 times. 4 billion in sales opportunities, with a notable increase in awarded but unsigned contracts, indicating future growth potential.

AI adoption is accelerating, with AI requirements present in up to 80% of new bids, enhancing operational efficiency and customer solutions. The defense and national security market remains a strategic growth area, with Maximus expanding its presence and capabilities in this sector. Full Transcript OPERATOR 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. 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.

Please go ahead. James Francis, Vice President of Investor Relations Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO, and David Mutren, 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 as required by law.

Today's presentation also contains non-GAAP financial information. For a reconciliation of the non-GAAP measures presented, please see the company's most recent Forms 10-Q and 10-K, and with that I'll hand the call over to David. David Mutryn, Chief Financial Officer Thanks, James, and good morning. We are pleased to report strong third quarter results today which demonstrate solid execution and support of our customers' important missions.

I'll begin by reviewing the third quarter results and also address the customer-directed contract modification that impacts our near-term outlook. I'll move to our forecast for the remainder of this fiscal year and conclude with early thoughts on fiscal year 2027, which precedes formal guidance this November. 28 billion, which was in line with our expectations and enables us to reiterate full-year revenue guidance. S.

Federal Services segment. 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.

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.

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. 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 legislatively driven, required changes to their programs. 8% and reflects solid upward progression across this fiscal year as we have previously communicated.

S. 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 were $125 million and free cash flow was an outflow of $137 million for the third quarter. As we anticipated and communicated last quarter, DSO remained elevated at 98 days, driven by administrative delays at a major federal customer. I'm pleased to report that collections from this customer have accelerated in July, with approximately $245 million received since June 30. I'll share more about our expectations for the remainder of Q4 when I come to the guidance update.

As detailed in our Form 8-K filed on May 28, we raised $325 million of Term Loan B, some of which was used to pay down our revolver and provide additional flexibility as we manage temporary working capital. 55 billion as of March 31. 8 times in the prior quarter. We remain within our stated target leverage ratio range of 2 to 3 times.

75 million shares, totaling $50 million as of June 30, 2026. The entire $400 million from the Board of Directors authorization in May remains 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. 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 in 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. 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 relates solely to the incentive mechanism, and we do not expect an impact to our DSO assumption. 20 per share.

40. 7% for fiscal year 2026. 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. 35 billion, albeit with a bias towards the lower end. Let me touch on full-year operating margin assumptions for the segments.

S. 0%. S. 0%.

S. 9 million non-cash charge in the prior quarter. , we still expect the segment to break even on a full-year basis, which implies a profitable fourth quarter. 5%.

I'll close my remarks today with some comments on next year, which precedes official fiscal year 2027 guidance that we anticipate providing on the year-end call in November. I'll start with the contract modification on the VA MDE program. Our assumption, based on customer guidance, is the temporary pause continues through December 31, 2026. Therefore, we presume that in the first quarter of fiscal year 2027 we will not be eligible to earn incentives.

While a range of scenarios could play out across the remainder of next year with this major program, we remain confident in securing the rebid and continuing to serve this important customer and mission. Looking at the overall Maximus financial profile, I'd point to this fourth quarter of fiscal year 2026 as a reasonable run rate for earnings power and adjusted EBITDA margin going into next fiscal year under the current incentive suspension, while recognizing it remains to be seen how the successor contract is ultimately structured.

For the Federal Services segment as a whole, on a revenue basis, we remain focused on a combination of new work, pipeline opportunities, and volume-based prospects on current programs that we desire to increase. As we spoke to on the last call, we have submitted opportunities and continue to await award decisions and, in one case, final protest resolution. We are confident that our pipeline is sufficient to drive sustainable growth, but the pace of procurement and corresponding timing of awards remains difficult to predict. S.

Services, we are forecasting a positive revenue growth inflection beginning in the fourth quarter of fiscal 2026. R. 1 legislation. We look forward to providing formal fiscal year 2027 guidance in November, and with that, I'll turn the call over to Bruce.

Bruce Caswell — President & Chief Executive Officer Thanks, David, and good morning. Our third quarter results reflect another period of strong execution across the business and reinforce our confidence in the opportunities ahead. Even as our updated outlook reflects a customer-driven change on our VA MDE program, we continue to see the benefits of our technology investments improving both the customer experience and financial performance of programs at scale.

We believe that our deal-shaping efforts focused on traditional RFP and nontraditional pipeline opportunities, such as Other Transaction Authorities, or OTAs, align with the goals and direction of the federal government. Further awards in the quarter pending execution ramped nicely, setting the stage for sequential book-to-bill improvement. As David mentioned, during the quarter the VA implemented a temporary pause in the performance incentive and disincentive mechanism covering all vendors.

While affecting our outlook for that program in the near term, we believe that our ability to deliver solid earnings performance and continue investing in our long-term growth priorities remains intact. Our model is to support our customers as they navigate their own program environment, which can include responding to their legislative, regulatory, and compliance needs. Importantly, we believe that our relationship with the customer remains strong as we continue to deliver high-quality work in a timely and cost-effective manner while making investments to further improve the veteran experience.

On that front, a draft Performance Work Statement, or PWS, was just released, which is a key component of the draft RFP that we've been waiting on. While it's not a comprehensive view of the future contract, our preliminary analysis indicates that the scope of work, including all six regions that comprise our work today, are included in this PWS. This bolsters our optimism about the next contract, and we believe our delivery track record, operational expertise, investments, and trusted partnership position us well moving forward.

More broadly, we believe that the encouraging demand signals across our markets, growing adoption of our technology-enabled solutions, and a healthy set of opportunities support a positive outlook for the long term. Let's turn to an update on those opportunity metrics as well as awards, as they provide an important lens into both the current procurement environment and where we see growth emerging over the medium and long term. 1 billion in opportunities we are tracking. 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.