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spk03: This means we expect an immediate increase of 30 cents for each of the first four quarters after redeterminations resume. In short, it is unlikely to be that simple. So I'd like to spend a few minutes here taking you through our current thinking on how the earnings profile may unfold. Consider that this work will not have been completed for nearly three years, and we, as well as our customers, have never been faced with a pause and restart of redetermination. I'll highlight several factors as to why the potential earnings impact is complex, meaning there can be a wide degree of variability. First, redeterminations don't typically have specific pay points. Instead, we are often paid for units such as number of minutes on the phone or number of documents processed. Similar to how it took us time to isolate the redetermination effect when they paused, It's difficult to predict with certainty how total program volume will be tied to redeterminations when they resume. Second, some contracts have a tiered pricing structure, meaning various ranges of volume of work output can have different unit rates. Within a given range, profitability can vary. And finally, The volume impacts depend in part on decisions that some state customers have not yet made due to ongoing uncertainty as to the PHE end date and how they will elect to conduct the unwinding. We are discussing opportunities with current and potential customers. For this reason, our earnings expectation may continue to change between now and the eventual resumption. The shape of the curve is not yet known. So what does this all mean? Based on what we know today, we still expect this volume to be highly accretive, but potentially at slightly lower margins than in previous forecasts. We now believe 30 cents per quarter rough order of magnitude is possible, but I want to caution that we now see that as the upper end of a range. We continue to refine our expectations and stress test the impact of different scenarios. Another factor for fiscal year 2023 earnings is our interest expense. which we expect to increase year over year as a result of higher rates. As we detail in our SEC filings, $300 million of our debt is fixed rate through an interest rate derivative and the remainder is floating rate. Based on today's forecast of rates, we could see the expense be in the range of $70 to $80 million for next year. Consistent with our past practice, we will provide guidance for fiscal year 2023 in November. And with that, I'll turn the call over to Bruce.
spk02: Thank you, David, and good morning, everyone. I'd first like to thank those who attended our Investor Day on May 24th, where we unveiled our refreshed three- to five-year strategic plan, and our segment leaders shared details on how we will continue to drive our business forward. I shared the three strategic pillars that will define areas of focus and priority for Maximus, which are, first, the future of health, that grows our clinical capabilities to meet rising demand for independent and conflict-free health services by governments. Building on our success first in the UK and more recently in the US, including last year's acquisition of VES, we see significant market opportunity to continue expanding our clinical assessments business. Second is technology services, where we apply advanced technologies for IT modernization and will expand our ability to transform complex but aging government systems in support of our customers' missions. And third, customer services digitally enabled. Think of this as the extension and expansion of our already successful digital transformation strategy, making greater use of the data we collect through our operations and leveraging intelligent automation and cognitive computing, such as natural language processing. We will also bring to scale areas of proficiency such as robotic process automation or RPA. So collectively, we improve the consumer experience while driving greater cost efficiencies in our operations. Taken together, these pillars significantly expand our addressable market, which I noted now stands at an estimated $150 billion in annual value, growing in the mid-single digits. Technology services and clinical and health services represent significant portions of that figure. From a segment standpoint, there is greater emphasis on the U.S. federal market, but all three segments have strong opportunities. Finally, I shared our underlying goals behind this next phase of the company, which are to support reliable mid-single-digit organic growth while enabling margin expansion to 10% to 14%, excluding intangibles amortization. Bearing in mind the barriers to entry in certain core markets, Our goal is to continue to leverage the conflict-free status of Maximus on which many of our customers rely. As we embark on this next phase of our evolution, I look forward to providing updates on our progress along with key success measures. These include winning more work in our technology solutions business tied to modernizing legacy systems with clients who know our brand, achieving key wins with new clients, and finally, continued investment in technology, strategic relationships, and most importantly, our people, that will help us grow the business. In fact, we're already seeing positive proof points that provide early momentum to the strategic refresh. Let me mention a few. As an example of our work in the technology services pillar, we recently won additional work valued at $60 million total contract value, or TCV, on the Army Unified ERP contract and are a partner on this program, directly supporting customer requirements. Through this effort, Maximus serves as the lead integrator of the Army's Logistics Modernization Program, the Army's core logistics information technology initiative. This program is one of the world's largest fully integrated supply chain, maintenance, repair and overhaul, planning, execution, and financial management systems. Specifically, we are aligned to the type of work we want to do for digital modernization solutions such as application development and operations in cybersecurity. During his remarks, David mentioned that we plan to ramp up staffing in anticipation of higher volumes in the VES business, driven by the PACT Act. The PACT Act expands certain conditions under which veterans would presumptively qualify for benefits and would result in increases in medical disability exam volumes. By ramping up our hiring now and making certain investments to retain our current employee base, we are demonstrating our ability to perform urgently and ensuring that veterans will be seen as soon as possible once their claims are filed. We look forward to working with our partners at the VA and the various veteran services organizations to support the estimated more than 3.5 million veterans that may be eligible for expanded presumptive benefits. Also, during the third quarter, we successfully hired more than 600 nurses nurse practitioners, and physician assistants necessary to commence assessment work in mid-May for a key state client. This is new work for us with the potential for expansion to other state Medicaid programs and is yet another example of our ability to deliver complex programs with a clinical dimension at scale. Both the potential volumes related to the PACT Act and new assessment work are examples that validate our commitment to the future of health as a strategic pillar. and continue to demonstrate our ability to act with urgency in response to the dynamic needs of our customers. Historically, our clinical capabilities in the U.S. were more limited, covering Medicare appeals, workers' compensation, and limited areas of Medicaid. As part of our market strategies, we have expanded our capabilities to larger markets in Medicaid and veterans' evaluations. By doing so, we are in a better position to pivot into further adjacent assessments markets. We are advantaged not only by our independence and ability to recruit, train, and manage clinical skills at scale, but also by future opportunities for realizing greater efficiencies through technology and shared services. Our continued investment in recruitment and retention evidences the new normal to which no business is immune, demanding more flexibility and, in many cases, greater remote working opportunities. While touching on the challenges of the current labor market, I'd like to add some commentary to the OUS write-down to which David spoke earlier. Over the past year, I've mentioned that there are certain skills that have become more difficult to attract and retain, particularly in today's environment. Most notable and specific to our business are clinical and technology experts. While I'm pleased with our success in hiring the clinicians I previously mentioned in a tough market, a contributing factor to the write-down we faced this quarter was higher than historical attrition among the technology team on the project. Like many businesses, we are rapidly adjusting to the scarcity of certain technical skills and the optionality that remote work offers for many. Let me share some news, which we're proud of, that recognizes our efforts spent investing in the federal business where we have sought to build scale, develop deep relationships, and deliver complex programs of national priority. In Washington Technology's Top 100 U.S. Federal Contractors Annual Ranking, by prime contract obligations, we broke into the top 20 and took number 19 for 2022, up six positions from last year. As we focus on our refreshed strategic plan and make continued investments in the federal space, both organically and through acquisition, we seek to build on our efforts acknowledged by this award. In regards to the PHE, earlier David noted that another extension has occurred, and the exact timing of the PHE unwinding remains unclear and, of course, out of our control. Last quarter, I mentioned CMS's comprehensive guidance and resources available to states, meaning it remains only a question of when, by our estimations. In the meantime, we are actively working with current and prospective clients to ensure we are well positioned to restart operations once the PHE ends. I will now turn to award metrics and pipeline as of June 30th. Signed awards in the quarter include a one-year extension of our CCO contract with CMS. The extension, which began on June 1st, provides continued funding for the program. The CCO rebid remains under procurement with a final announcement still expected in late summer. As a reminder from our second quarter discussion, included in this quarter's awards is our new contract to administer central and regional change center eligibility operations for the Indiana Family and Social Services Administration, or FSSA. The contract has a four-year base period worth $425 million, with the option for two one-year renewals. In April, we were awarded a three-year extension through March 2025 for our Florida Healthy Kids contract, which has a total contract value of $64 million. Under this contract, Maximus provides a variety of services, including eligibility and enrollment for the state's CHIP and KidCare programs. For fiscal 2022, signed awards totaled $4.02 billion of TCV at June 30th. Further, at June 30th, there were $476 million worth of contracts that had been awarded but not yet signed. As I noted, these are strong bookings for us at this point in the year, and virtually all are long-term in nature. Book to bill is a metric we now track which is the ratio of our signed contract awards, new business, and rebids divided by our revenue in the same period. This number exceeding one means that our backlog is growing and is a good leading indicator of future organic growth. Over the past 12 months, as of June 30th, our book to bill was approximately 1.4 times. Let's turn our attention to our pipeline of addressable sales opportunities. Our total contract value pipeline at June 30th was $32.5 billion, compared to $29.8 billion reported in the second quarter of fiscal 2022. The June 30th pipeline is comprised of approximately $7.3 billion in proposals pending, $3.6 billion in proposals in preparation, and $21.6 billion in opportunities tracking. Of our total pipeline of sales opportunities, 59% represents new work. Before closing, I have an important update following the outcome of our annual shareholders meeting in March, where shareholders voted in favor of a racial equity audit. We are making progress on this front. We recently engaged the law firm WilmerHale to assess our operations, policies, and public engagement through a racial equity lens. WilmerHale has significant experience conducting equity audits, culture reviews, and other assessments of civil rights issues for clients in several sectors. Maximus is committed to diversity, equity, and inclusion. Creating a diverse, equitable, and inclusive culture for all is not only the right thing to do, but it's also central to our mission of moving people forward and our ability to positively impact the communities we serve. A report on the results of the racial equity audit will be published upon completion, which is expected to be in 2023. We find ourselves in an exciting period for the company. where old and new have successfully joined together to greatly improve our capabilities and potential. Internal planning behind the strategic refresh and new branding also included the establishment of new global core values, thereby uniting us to a common set of values that will guide our actions and behaviors. In a company-wide virtual event in July, we revealed the six values consisting of accountability, collaboration, compassion, customer focus, innovation, and respect. These six values represent current beliefs woven throughout everything we do at Maximus and our aspirations for the future. While the remaining profitable COVID work is coming to an end in the near future, we are seeing longer-term tailwinds for FY23 and beyond in the form of solid wins and add-on work. We have a strong and respected brand in the marketplace. At the federal level, we are increasing our impact on the modernization and transformation agendas of our customers. We are seeing not only a strong pipeline, but some early wins. At the state level, we are well positioned to respond to states as they determine the appropriate path to take when the PHE is lifted. And, of course, we always look to augment our organic momentum with appropriately sized acquisitions that support long-term organic growth. And with that, we will open the line for Q&A.
spk00: Thank you. Mr. Francis, the floor is yours for the Q&A session.
spk01: Good morning, everyone. I see we have Charlie Strouser from CJS on. Let's go to his line, please.
spk05: Good morning. Good morning, Charlie. Hey, Charlie. So let's start off with the outside the U.S. forward loss provision that you recorded in the quarter, and can we get a little bit more color there in terms of, you know, do you have your arms wrapped around the issue now, and do you think you have the staffing in place to, you know, kind of move the contract forward at the pace you're looking for?
spk02: Yeah, absolutely, Charlie. David's going to start, and then I'll add some color commentary at the end.
spk04: Yeah, sure. So this contract is for an implementation of a software product, and it is a fixed price contract. As I mentioned in my prepared remarks, we recognize revenue on a percentage of completion basis. While that is not a common arrangement for us, we do have experience with this platform having implemented it before. By not common, I mean that in other parts of our portfolio, we tend to see configuration of customer systems using either time and materials contracts or fixed price level of effort contracts. In the quarter, the loss resulted from, in short, our forecasted costs increasing, which required us to book the loss in the period. Anything to add, Bruce?
spk02: Yeah, I underscore that this is a software product that we've owned for more than a decade. We've considered this successfully for other customers in the past. In this case, the project is for a larger customer with a more complex systems environment. Of course, it was undertaken during the pandemic, which was probably not optimal for either the customer or for us. But as I've mentioned, The tough labor market as a consequence contributed to the forecast reduction because the cycle times that it takes to find and train the resources that you need as well as to replace underperforming resources have been elongated during this period. We're not pleased, obviously, with the recent challenges that were faced, but I can assure you that we're applying experience for our management, including tenured technical leaders that understand the product and have been with the company for some time. and we're focused on meeting our contractual obligations. Great. That's helpful. Anything further on that?
spk05: Yeah, would you like to move to another question or any further questions? Yeah, that's good and very helpful. Thank you. If we could talk a little bit more about the potential exploration down the road of the PHE. David, you kind of framed the high end of the range of 30 cents per quarter being that higher end. Can you help me frame what the range might look like in fiscal 23 and, more specifically, the lower end of that range, what that might look like?
spk04: Sure. Yeah, of course. So a rough order of magnitude, I'd say, for the low end would be in the $0.15 range, as I believe we have a good line of sight to at least that level. It's worth pointing out, I think, as we model different scenarios, the precise earnings impact actually depends on which month or which quarter the PHE ends. since the redetermination volume must be considered in conjunction with what other volumes are already in the system and the corresponding staffing level. So, for example, at times we may be able to carry existing staff to perform that work as it comes in, whereas at other times in the year it may require a greater restaffing effort. As I mentioned, we still expect this volume to be highly accretive, but with all the moving parts on this scope, there's a higher degree of variability, so we do see potential for the margin to be slightly lower. than in the previous forecast of a straight 30 cents. I thought it may be also helpful to put this range into the context of the margin ranges that I provided last quarter and at the investor day. So for U.S. services, you'll recall I said we expect a range after the PHE end of 11 to 14 percent. I still feel that this range is in the ballpark, though the margins could fluctuate quarter to quarter for the reasons I've explained. And as a comparison, the US services margin in the third quarter was 8%. So if you model a pickup of the equivalent of $0.15 per quarter at the low end, that would bring margins to maybe slightly under that 11%, whereas $0.30 would bring the margin comfortably into that 11% to 14% range, in fact, even closer to the high end. Does that help?
spk05: Yeah, very much. Thank you very much on that. And Bruce, maybe just shifting to a bigger picture with the PHE. coming out of Washington in regards to letting the PHA expire. Any thoughts there with the midterms coming up? It seems like another extension seems likely here, but could that move even further down the road?
spk02: It's a good question, Charlie, and we hesitate to engage in political prognosticating, but I think your reading of the tea leaves is likely accurate. I mean, the general consensus is that with up to 14 or 15 million Americans potentially facing disenrollment through the redetermination process, the timing of this with regard to the midterm elections becomes a critical consideration. What we do know is that CMS has committed, as you may recall, to giving governors 60 days notice of the expiration of the PHE, and so that's a signal that everyone is watching for Since the current extension, as you noted, is set to expire in mid-October, we therefore look for that signal sometime in mid-August, so within really almost 10 or 11 days from now. Also, I just wanted to maybe add a little color to why it's more challenging to forecast the impact of the unwinding than just kind of a binary event that leads to maybe a step function change in volumes kind of across the portfolio. So forgive me, as you know, my background in policy tends to make me want to explain these things a little bit more in a detailed fashion. So there's a difference between initiating a case action and completing that case action. So think of initiating a case action as reaching out for new information like an update on income or household composition or what have you. Completing the case action is either the continued enrollment of that individual or family or disenrollment. States have the flexibility to initiate case actions as early as two months before the end of the PHE, hence the importance of the signal that I mentioned. Or they can have the flexibility to complete case actions, which is the enrollment event or disenrollment event, as much as 14 months after the end of the PHE. So there's a broad time period here, and the point is that each state's going to do what they think is really best for their circumstances. So one thing that we can conclude is that when we see the signal or hear the signal, This work is going to spread out easily over the course of a year, depending on the priorities of the state. Hope that helps.
spk05: Very much so. Thank you. And then staying on the topic a little bit, are there pieces of the PHE that get funding, like telehealth, et cetera, that potentially could be moved out of the – at cancellation, if you will, that could become standalone items in another stimulus package?
spk02: I certainly hope that's the case. Again, not in a position to comment on the politics of it, but I will say we had the great fortune of being able to host Senator Mark Warner in our offices recently, and that is specifically a topic that he spoke to about what we've really learned during the pandemic of the importance of telehealth and And really it's viability as a sustained, you know, kind of engagement and patient engagement and treatment modality in a way that, you know, I think coming out of the pandemic we ought to be adjusting our policy to and reimbursement policies to support telehealth going forward. So I know that that's something that's absolutely being talked about. And clearly there's another dynamic at play here, which my understanding is is incorporated in the legislation that's been developed between Senator Schumer and Manchin, and that is how the subsidies that have supported individuals in the exchanges, the enhanced subsidies, if you will, during the pandemic can be sustained going forward to avoid significant likely increases in premiums that individuals could face, in many instances as high as 50%. So there's a lot happening from a policy perspective that as those pieces fall into place, will create the environment that states will then have to navigate in terms of how they move individuals that may not be eligible any longer for Medicaid into some form of continuing coverage. In fact, some states have contemplated the idea of effectively temporarily or presumptively moving individuals that are no longer qualifying for Medicaid into you know, if the state has a basic health plan, for example, which is usually an income threshold above Medicaid but below the exchange, put them there or maybe even into the exchange and then go through the process of further determining, you know, based on their eligibility of their kind of long-term plan for coverage. So there's an awful lot on the table here and interrelated points. I guess I'd say one final thing, and that is there have been individuals certainly in the Congress that have talked about decoupling the Medicaid continued enrollment provision from the PHE as well. You know, and for any reasons that we've discussed previously, but fundamentally because states want to ensure in many instances that people are getting the appropriate coverage that they qualify for for their income and other factors, while we haven't seen that incorporated in any potential legislation since the original Build Back Better Act, we're familiar that that's something that's still being discussed in some circles. So I guess the final point would be stay tuned, right, Charlie?
spk05: Sounds that way. Shifting back to the new awards and pipeline, you had a fair amount of signed contracts at $4 billion in the quarter. Is it safe to say that the CCO extension is the largest in that bucket, or is there other contracts in there that you care to talk more about?
spk02: So, Charlie, yes, I think it's safe to say that that one-year extension that provides continued funding was likely the largest component. But I will say a close second was the Indiana project that we mentioned that moved from the awarded unsigned to the awarded signed category in the quarter. And I will anticipate maybe a follow-up question, and just as I indicated in my prepared remarks, note that the schedule for the award of the CCO rebid contract remains late summer, as we understand, likely late August notification. So that's where that stands.
spk05: Great. And then, you know, just touching on the VES and the PACT Act, any more context there you can provide in terms of the length of that potential contract and the types of uplift over time on that as well, and potentially the margin profile behind that.
spk02: Well, I'll tell you what we know at this point. Fundamentally, the passage of the PACT Act is not necessarily changing the contract that we currently provide these examinations under. That contract remains as it was when we combined with BES and acquired that business, and we can provide you some further insights as we go forward here on the end date of that current contract. The point that we're focused on is that there will be a little bit of time between the anticipated signature of the PACT Act and the beginning of the ramp-up of the volumes, likely about 90 days. So we expect the volume initially there to be an initial surge of new claims as The VA has been already beginning to talk about the importance of this new benefit for veterans, and you can imagine the very excellent veteran services organizations out there that work with veterans every day have been promoting the importance of veterans coming forward and filing these claims. So we expect there to be an initial surge. Our current expectation is that we would start to see those volumes toward the end of the first quarter of fiscal year 2023. And indeed, we're already in the planning phase for this with the VA and the VSOs as they provided some guidance to veterans. The ongoing question of, well, what then, is an important one. And in our view, and I think also supported by some of the modeling that's been done by the VA, we expect a sustained volume of claims related to the Act. And this is largely due to the fact that many veterans have not yet really manifested the onset of health conditions that the Act makes presumptive. Over time, these veterans, as they age, there's an expectation that they'll encounter the onset and recognition of various health conditions that will lead them then to file claims. You'd asked a little bit about the margin profile. I would just say, as in many of our businesses, volumes matter. our ability to have a significant network of clinicians to serve these veterans across all the regions. And as you know, there are districts or regions, if you will, the way this contract is structured. We don't expect any particular anomalies or volumetric differences across the regions. I think it's something where you're going to find veterans across the country that submit these claims. So we need to make sure our networks are in place to support those veterans and hence why we are making a major investment, as David noted, of between $8 and $10 million in this fiscal year to, first of all, ensure that we are retaining the current staff that we have, but also ramping up new staff in advance of the anticipated volumes. We think there are, and this is a fairly well-published figure, up to about 3.5 million veterans that may qualify for new benefits under the SAC So it's, in our view, a substantial lift to volumes and a sustained increase to the program over the longer term.
spk05: That's great. Thank you. Thank you for taking all of my questions. I appreciate that.
spk02: Sure. Thank you, Charlie. We appreciate it.
spk01: Okay. We have one shareholder question here, Bruce and David. Can you give a quick update on the labor market pressures that you're seeing?
spk02: Yeah. Why don't James, why don't I start with that, and I welcome David's further thoughts and comments on it. So as I've said in my prepared remarks, the tightness that we're seeing in the labor market is particularly impacting our ability to attract and retain technical and certain clinical talent. In the OUS segment, again, as I mentioned previously, we experienced higher than normal attrition on a complex technology project that was a contributing factor to the write-down this quarter. Continuing to offer people more flexibility helps put us in a better position to attract the right kind of talent for our business, certainly. But at the same time, we're realizing as we go forward, as I think many businesses are, that some work is just best done with teams working physically together. And I'll note that this is a discussion I've had with peers in the industry, and they're finding the same thing as we get kind of further into this quasi-post-pandemic period. We're learning, as others do, and I expect that the current allure of offering 100% work from home at very high salaries and unlimited vacation and so forth for technology workers will inevitably adjust over time. So on the positive side, and likely while we've made very good progress with the clinical skills that I mentioned during the call, we have a very strong brand, and if anything, it was strengthened during the pandemic. We work hard every day to provide competitive compensation and benefits for our people. And then once they're here, we focus on additional training and skill development to give them what they need to continue their career here at Maximus. And I would probably conclude by noting that over time, higher wage rates affect all market participants, and they become reflected in the rebids and the new work that everyone is bidding on. Meanwhile, for current contracts that are a fixed unit rate or performance-based in our portfolio, we work very hard to offset labor cost pressures through greater use of technology. That said, I want to be clear that we also don't shy away from seeking equitable adjustments from our clients in cases where the market difference from the bid model to where we find ourselves today is particularly profound. So with that, I know I covered a lot of ground, David. I don't know if you have anything further you'd like to add.
spk01: Nothing else to add, thank you. Excellent. Well, that concludes the question and answer session today. Operator, back to you.
spk00: Ladies and gentlemen, thank you for your participation and interest in Maximus. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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