Maximus, Inc.

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.

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.

Thank you. Mr. Francis, the floor is yours for the Q&A session.