Maximus, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 FY20 Maximus Ironing Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your phone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker for this morning, Ms. Lisa Miles, Senior Vice President of Investor Relations. Thank you. You may go ahead, madam.

Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO, and Rick Nadeau, Chief Financial Officer. 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 Exhibit 99.1 of our SEC filings. We encourage you to review the information contained in our earnings release today and our most recent forms 10-Q and 10-K filed with the SEC. 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 may contain non-GAAP financial information. Management uses this information in its internal analyses of results and believes this information may be informative to investors, engaging the quality of our financial performance, identifying trends in our results, and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures presented in this document, please see the company's most recent quarterly earnings press release. And with that, I'll hand the call over to Rick.

Thank you, Lisa. We continue to operate in a world affected by the COVID-19 pandemic. We are successful working under a hybrid operational model which maintains delivery of our services through a mix of safe on-site working arrangements and work from home arrangements. The model enables continuity for our government customers and uninterrupted assistance for citizens at a time when their need for health care and safety net programs is crucial. Not surprisingly, we have been subjected to both headwinds and tailwinds stemming from the pandemic. Our outside the U.S. segment continues to experience the greatest headwinds, resulting from a temporary halt on face-to-face assessments and a general pandemic-related slowdown in employment services. In our U.S. operations, we are experiencing headwinds on various performance-based contracts, as volumes and revenues are lower. This is resulting from COVID-19 response efforts by our government clients who have relaxed certain program requirements in order to ensure that the most vulnerable citizens continue to access the vital services they need. We also have a multitude of tailwinds that have provided a favorable uptick, most notably new COVID-19 response work and the extension of the census contract in response to COVID-19. We have made meaningful progress in securing more appropriate contract terms on some employment services contracts to support the goals of our customers as economies gradually reopen and program operations resume. The net result of these puts and takes is a positive update to our revenue and earnings guidance. Revenue and earnings were better than expected principally due to new work and the expansion of the existing work tied to the COVID-19 response, including the extension of the census contract, as well as an improved outlook for Australia employment services operations. As a result, we now expect revenue will range between $3.375 and $3.425 billion. and diluted earnings per share to range between $3.20 to $3.30 per share. We expect cash from operations to range between $200 and $220 million and free cash flow between $180 and $200 million. Cash from operations and free cash flow are being guided downward primarily due to the increased requirement for investment and working capital as a result of increased revenue. As previously noted, delays in collections of receivables can cause significant cash flow variation at quarter or year end. Nevertheless, we are extremely pleased that the teams were able to win and onboard a significant amount of new work to offset the unfavorable impacts. This demonstrates the trust that clients put in us to bring forth our expertise, stand up large operations in tight timeframes, and provide high-quality critical services even in the most challenging times. I will now cover third quarter results and related COVID-19 impacts. Revenue for the third quarter of fiscal 2020 increased to $901.3 million compared to $730.7 million in the prior period, driven by the census contract and new COVID-19 response work. such as contact tracing and assistance with unemployment benefits. Including the Citizen Engagement Center contracts, which includes the census contract, organic growth for the third quarter of fiscal 2020 was 3.5% and was tempered by our outside the U.S. segment. Operating margin for the third quarter of fiscal 2020 was 9.7%. reflecting lower revenue from performance-based contracts and a greater mix of cost plus work from the census contract. Diluted earnings per share were $1.04 and benefited from a change order worth $9 million or 11 cents per share. As expected, the change order was signed in the third quarter, but the costs were incurred in the prior periods. Now moving on to the segments. Third quarter revenue for the U.S. Health and Human Services segment totaled $337 million, representing a 15.7% increase over the prior period. All growth was organic, resulting from new contracts, including those tied to the COVID-19 response and expansion of existing work. Operating margin for the U.S. Health and Human Services segment was 18.1% and benefited from the aforementioned change order. Excluding the change order, segment operating margin was 15.9%. Operational disruptions related to the pandemic unfavorably impacted the segment and tempered the segment operating margin this quarter. As an example, on a significant performance-based Medicaid contract, the customer paused renewals to ensure that individuals and families retained access to healthcare, reducing our volumes and revenues. For the remainder of the year, continued disruptions are expected, but we believe we are still on track for an operating margin between 17% and 18% for the full year for this segment. Third quarter revenue for the U.S. Federal Services segment increased to $450.1 million compared to $292.3 million in the prior year period. All growth in the segment was organic. Excluding the census contract and the remainder of the Citizen Engagement Center contracts, organic growth was 4.1%, driven by new work, including those tied to the COVID-19 response and growth on existing contracts. The operating margin for the U.S. federal services segment was 8.7% for the third quarter of fiscal 2020. Operating margin for this segment is lower on a comparative basis due to volume and revenue reductions on several performance-based contracts and the greater mix of cost plus contracts this fiscal year, which typically carry lower margins. Let me give an example of reduced volumes which stem from the pandemic. We are experiencing a significant decline in volumes of independent medical reviews due to a precipitous drop in workers' compensation claims. In California, overall workers' compensation claims have plummeted to approximately 1,100 in May compared to more than 50,000 claims in January. On a positive note, the census contract continued to operate at a peak level of operations due to the Census Bureau's extended response period. This contract delivered $170 million of revenue in the third quarter, yielding year-to-date revenue of approximately $380 million. We continue to support the Census Bureau and estimate that this contract will deliver approximately $500 million of revenue for the full fiscal year and the rest. The COVID-19 pandemic continues to have the most pronounced effect on our outside U.S. segment. Third quarter revenue was $114.2 million, and the segment had a loss of $5.8 million. This segment has several significant employment services contracts, most notably the UK and Australia, and the Health Assessment Advisory Service, or HOSS, contract in the UK, all of which continue to operate at reduced levels as these economies wrestle to emerge from the pandemic. The operating loss for the third quarter of fiscal 2020 is a better result than we previously forecast, primarily related to an improved outlook and greater visibility of future outcome payments in Australia. In Australia, we modified certain contractual terms to reflect more equitable pay points, which will put the segment on an improved trajectory. As we mentioned last quarter, we modified the UK contracts to a cost reimbursement model. However, other disruptions persist in this segment, including the suspension of face-to-face assessments on the Haas contract in the UK, as our customer navigates toward the optimal path to safely resume this volume of work. This segment is expected to end the full year in an operating loss position, with the fourth quarter improving on the third quarter results and coming in slightly below break-even. As we look to FY21, we believe that as different geographies emerge from the pandemic at different paces, there will be an expanded need for our services and pent-up demand for our role to help governments provide their citizens employment opportunities. Turning to the balance sheet, we finished the third quarter with cash and cash equivalents of approximately $81.5 million. Outstanding draws on our credit facility totaled $145 million, leaving $255 million available for borrowing. Cash from operations were $96.1 million, and free cash flow was $67.6 million for the nine months ended June 30th. Year-to-date cash from operations has been negatively impacted due to the additional investment in working capital required by increases to revenue, the timing of collections, and lower income attributable to the outside the U.S. segment. DSOs of 84 days of June 30, 2020 caused negative cash flows for the third quarter. DSOs were outside our typical range at 84 days due to delays in too large payments from significant customers. Shortly after the quarter, we collected more than $90 million of accounts receivable. DSOs would have been 74 days within our typical range of 65 to 80 days if those payments had been included. We are continuing to monitor collections closely, and as a reminder, one day of DSO is between $9 and $10 million of receivables and directly impacts our estimates of cash from operations and free cash flow. We are committed to managing the business in a conservative manner with a focus on liquidity and ability to remain flexible. We still face uncertainties, including state budgetary pressures, and recognize that our customers continue to experience significant disruptions to their tax receipts. As I have noted before, our historical experience during economic downturns is that our designation as an essential service provider in the United States puts us in a favorable position in working with our clients on invoicing and payments. The management team and the board of directors have not wavered in taking a prudent and constructive approach to cash deployment for the remainder of our fiscal year and likely beyond. Currently, we do not anticipate a disruption to our future quarterly cash dividends, but share purchases and significant M&A activity remain paused. Tuck in transactions that will support future organic growth in a meaningful way will continue in a judicious manner. In closing, let me briefly touch on fiscal year 2021. We thought it was important to provide some color and transparency around our preliminary thoughts. As we contemplate 2021, there is clearly more uncertainty and accordingly more volatility than normal. We currently expect ongoing benefits from the COVID-19 response work into fiscal 2021. We also anticipate improvements in operations outside the U.S. where we expect favorable tailwinds in our employment services business as the need for support into work will be a key driver to economic recoveries around the world. Lastly, we recognize opportunities for increases to the core health program benefits we administer, particularly in the US. These favorable tailwinds are expected to be at least partially offset by temporary program changes on some of our larger performance-based contracts. It is impossible to predict with certainty when some of these core programs will resume to somewhat normal operations. These dynamics, both positive and negative, are highly dependent on the following. The ultimate duration of the pandemic. The threat of future further negative pandemic-related impacts. The recovery pattern of our core programs. The potential impacts resulting from budget challenges with our government clients. The possibility of delayed or missed payments by customers. for the potential for further supply chain disruptions impacting IT or safety equipment, the impact of further legislation or government policies on programs we operate, and particularly in the U.S., the correlation between unemployment and volumes in core benefit programs such as Medicaid and the health benefit exchanges. Additionally, we have noted in the past the portfolio experiences normal course erosion each year. and we count on new work wins to backfill. The census contract will wind down next year as expected, delivering less than $70 million of revenue in fiscal 2021 as compared to approximately $500 million of expected revenue for fiscal 2020. We think it is useful to review the analyst consensus estimates for fiscal 2021. On the top line, we are cautiously optimistic that we can exceed the consensus revenue estimate of approximately $2.95 billion. However, on the bottom line, we acknowledge continued uncertainty tied to temporary program changes from the COVID-19 responses of various governments. Therefore, earnings consensus estimates of $3.71 per share is achievable, but a bit optimistic. At this time, we believe there is a wide range of possible outcomes as we look into next year. As is our normal practice, we will provide formal guidance during our year-end call in November. Bruce and I remain optimistic that Maximus will emerge from this disruption as a stronger company. We believe that our efforts since March have demonstrated our ability to quickly deploy a hybrid operational model, safeguard our employees, operate and execute under less than ideal conditions and be a dependable partner for the wide-ranging needs of our customers and the citizens we are proud to support. And with that, I will turn the call over to Bruce Caswell.