Maximus, Inc.

Greetings and welcome to the Maximus Fiscal 2026 Second Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Francis, Vice President of Investor Relations. Thank you. You may begin.

Good morning, and thanks for joining us. With me today is Bruce Caswell. 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 reconciliation of the non-GAAP measures presented, please see the company's most recent forms 10Q and 10K. And with that, I'll hand the call over to David.

Thanks, James, and good morning. I would characterize our completed second quarter in three ways. First, strong execution with the sequential step-up to profitability we anticipated. Second, clear evidence that our technology investments are contributing to bottom-line returns as reflected in our improved full-year earnings outlook. And third, increased capital deployment toward share repurchases. given our view that our shares have been trading at an attractive valuation. Turning to second quarter results, Maximus reported revenue of $1.31 billion, consistent with our expectations and on track with our full year guidance. As I indicated on previous calls, as we progress across this fiscal year, we are facing tough comparative quarters to last year, which benefited from natural disaster work in the U.S. federal services segment, and temporary clinical volume surges in both domestic segments. On the bottom line, adjusted EBITDA margin was 14.4%, and adjusted EPS was $2.07 for the quarter, which compares to 13.7% and $2.01, respectively, for the prior year period. The improvement highlights our ability to drive margin improvement through efficiencies enabled by automation, including AI tools. One example is a dispute resolution program for a government customer where earnings by approximately the same amount, meaning they effectively net out of adjusted EPS. First, we recorded an asset impairment related to a subset of capitalized assets attributable to the U.S. services segment. This non-cash impairment was tied to an unusual circumstance dating back to fiscal 2024, where a software asset was built and capitalized under a prior contract for a specific customer. A recent decision by this customer led us to writing off the balance of the asset, which was $6.9 million, or 9 cents per share, impact to the U.S. services segment operating income. The second item is a discrete research and development tax benefit totaling $4.2 million, or approximately 8 cents per share. As we have become a more tech-forward company with higher levels of R&D activity, we undertook an initiative to identify and document all eligible R&D tax credits. These credits became recognizable at the completion of the exercise during the second quarter. As I mentioned, the impact of these roughly offset an adjusted EPS, and both items have no impact on our adjusted EBITDA. Let's go to the segment results. Second quarter revenue for the U.S. Federal Services segment was $753 million and in the range that we expected for this period. The prior year period revenue was $778 million and benefited primarily from elevated natural disaster support that has not recurred at the same levels. I mentioned on the February call that this dynamic is expected to recur for this segment in fiscal year 2026 when comparing to the prior year. Excluding the natural disaster work, U.S. federal services grew 1.5% organically year over year. The operating income margin for this segment in the second quarter was 17.6% as compared to 15.3% in the prior year period. Another item I mentioned on the February call when we increased the full year segment margin guide is the anticipated durability of this segment's margin. This quarter's segment margin is delivering on that commitment thanks to technology initiatives embedded in our programs that decouple labor costs from our ability to process more volumes. In fact, we are raising the margin guide for this segment again this quarter, which I'll touch on shortly. Moving to the U.S. services segment, Second quarter revenue was $416 million as compared to the prior year period revenue of $442 million. I noted on the February call that our first quarter segment results had the greatest anticipated divergence and that by the fourth quarter of fiscal year 2026, we anticipate positive organic growth, which we continue to forecast. These second quarter results are evidence of that progression. Bruce will provide a positive update on current state customer priorities that are anticipated to make contributions in fiscal year 2027. The segment's operating income margin for the second quarter was 9.3% and was impacted by the $6.9 million non-cash item I mentioned earlier. Excluding the charge, the margin would have been 10.9% for this period, and demonstrate substantial uplift from the lower segment margin in the first quarter that we anticipated. Turning to the outside the U.S. segment, second quarter revenue was $137 million, and the segment realized an operating loss of $3.1 million. As I mentioned on the February call, we are tracking a number of opportunities in the geographies that remain after our reshaping efforts. The majority of segment revenue stems from programs in the United Kingdom, with Canada and the Gulf region comprising the balance of the segment. Our goal remains of driving growth and further margin improvement in the segment by building scale and those limited geographies, all of which have a corresponding set of pipeline opportunities. Moving to cash flow items, cash provided by operating activities was $190 million, and free cash flow was $179 million for the second quarter. We continue to expect improving cash flow across the year and are reiterating our free cash flow guidance for the full year of between $450 and $500 million. As we anticipated and communicated last quarter, DSO remained elevated at 78 days, driven by ongoing administrative delays at a major federal customer. We are working diligently with this customer to process the outstanding invoices, and we expect collections to accelerate and thus DSO to trend downward and finish fiscal year 2026 below 70 days, driving strong second-half free cash flow. We currently believe that DSO may remain elevated as of June 30th, then improving in our fourth fiscal quarter. Of note, we also expanded our receivables purchase agreement from a ceiling of $250 million to a ceiling of $350 million. We view this as a helpful and low-cost tool to help manage short-term liquidity needs. We ended the second quarter with total debt of $1.55 billion, representing a slight reduction from the first quarter balance. Our consolidated net total leverage ratio per our credit agreement was 1.8 times and unchanged from the ratio at December 31st. We remain below our stated target leverage ratio range of two to three times. During the second quarter, we repurchased approximately 1.4 million shares, totaling $111 million, and subsequent to quarter end through May 1st, we repurchased an additional 0.6 million shares, totaling $40 million. We were pleased to announce this morning a board-authorized refresh of our share repurchase program for further share repurchases up to an aggregate of $400 million, effective May 11th. Let me expand on our thinking and provide some context for capital deployment in the near term. This fiscal year, we've been carefully managing our cash through the DSO dynamics I mentioned. In the second quarter, we deployed the majority of our free cash flow to share repurchases. We have long said that we are opportunistic in our share repurchasing. To be more direct, we prioritize repurchasing when we believe our share price does not reflect the intrinsic value of the business based on a disciplined and conservative assessment. Going forward, we will continue to execute on our capital deployment priorities while considering near-term liquidity, the potential M&A opportunity set, and all within the constraint of our stated target net debt ratio of two to three times. Even amidst market conditions that are favorable to share repurchases, we continue to seek acquisition targets to accelerate longer-term organic growth. We remain focused on targets that add capabilities, add and expand customer relationships, and create revenue synergy opportunities. We also remain disciplined in our evaluation of targets and require that valuations must be reasonable in the context of current market conditions and the expected return must exceed our cost of capital. Moving to guidance, we're raising our fiscal year 2026 earnings outlook for the second consecutive quarter and we're reiterating both revenue and free cash flow guidance. Starting from the top, we expect that fiscal year 2026 revenue will range between $5.2 billion and $5.35 billion. Our full year adjusted EBITDA margin guidance for fiscal year 2026 is now approximately 14.2%, which is a 20 basis point improvement from prior guidance. Our adjusted EPS guidance increases by 20 cents, and is now expected to range between $8.25 and $8.55 per share. It's notable that this represents 14% year-over-year growth at the midpoint of the new adjusted earnings guidance. Finally, free cash flow is expected to range between $450 and $500 million. While the timing of specific receivable collections always has the potential to cause significant cash flow variation at the end of a given period, the guidance reflects our expectations that DSO will finish the fiscal year below 70 days as we catch up on collections from the major federal customer. I'll provide some color on full-year operating margin assumptions for the segments. We expect the U.S. Federal Services full-year segment operating margin to be approximately 17.5% and the U.S. Services segment full-year operating margin to be approximately 10.0% with the update reflecting the $6.9 million non-cash charge this quarter. and for outside the U.S., we are expecting the segment to be roughly break-even on a full-year basis. Other updated assumptions include expected interest expense of roughly $84 million, and we anticipate our full-year tax rate to range between 24% and 25%. I'll conclude with updated thinking around our near-term margins. Approximately 18 months ago, we laid out a near-term adjusted EBITDA margin target range of 10% to 13%. At that time, our margin was around 11.6%, and we are now guiding to approximately 14.2% for fiscal 2026. Much of the improvement has come from technology enhancements and cost discipline that we believe have staying power. Given that progress, we are raising our near-term adjusted EBITDA margin target range to 12% to 15%. We expect to operate toward the upper end of that range in periods with stable volumes and continued technology leverage, while recognizing that new program ramps and mix can affect margins in any given year. Meanwhile, revenue is holding within the range we set out for fiscal 2026, despite difficult comparable periods that we anticipated and communicated. Looking forward, we believe that our robust near-term pipeline is of high quality and capable of driving awards and revenue contribution in the coming quarters. And with that, I'll turn the call over to Bruce.