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Operator: Greetings and welcome to the Maximus Fiscal Year 2023 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Batt, Vice President of Investor Relations and ESG. Thank you. Please go ahead.

Jessica Batt : Good morning and thanks for joining us. With me today is Bruce Caswell, President and CEO; David Mutryn, CFO; and James Francis, Vice President of Investor Relations. 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 Forms 10-Q and 10-K. We encourage you to review the information contained in our recent filings with the SEC and our earnings press 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. Management uses this information internally to analyze results and believe it may be informative to investors in gaging the quality of our financial performance, identifying trends, and providing meaningful period-to-period comparisons. 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 : Thanks, Jessica, and good morning. We made significant progress in the second quarter executing on our financial and strategic priorities while generating strong cash flows and delevering our balance sheet by 0.5 turn sequentially. We also have strong line of sight on the drivers that will support margin improvement in the second half of the year, and as a result, are reaffirming our fiscal year 2023 financial. Finally, we divested 2 small businesses in the Outside the U.S. segment. I will now discuss our results in greater detail. Maximus reported revenue of $1.21 billion for the second quarter of fiscal year 2023, which represents 2.5% year over year growth, or 4% on an organic basis. Our organic growth more than overcame the completion of short-term COVID work that was about $100 million in the year ago quarter.

Adjusted operating income margin was 7.1% and adjusted EPS was $0.80 for the quarter. This compares to 8.3% and $1.07, respectively, for the prior year period, which still included profitable short-term COVID response work in the domestic segments and lower interest expense due to the interest rate environment a year ago. Last year’s second quarter was effectively the last period with meaningful short-term work in the business. The Outside the U.S. segment realized a loss and margins in the quarter were slightly below our expectations, primarily driven by the U.S. Federal segment. Let’s turn there. For the U.S. Federal Services segment, revenue increased 1.9% to $584 million, which was all organic and driven primarily by volume growth in the VA Medical Disability Exam, or MDE contracts, which comprise our Veterans Evaluation Services, or VES, business.

The operating income margin for U.S. Federal Services in the second quarter was 8.2% as compared to 8.1% in the prior year period and slightly lower than we anticipated. The main driver behind the lower profitability relates to timing in the VES business, as we have scaled up to handle greater volumes stemming from the PACT Act. While volumes increased throughout the quarter, they were slightly lower than we had forecast. At the same time, we incurred higher costs associated with training and ramping up staff to full productivity. The good news is that the volumes continue to increase, and we have a strong line of sight over the remainder of our fiscal year with high confidence that we have the capacity to meet the demand. For the U.S. Services segment, revenue increased 13.0% to $450 million.

As I’ve noted in recent quarters, contributions from new work wins across the portfolio in core business areas such as eligibility, support and clinical services are driving growth in the segment. The U.S. Services operating income margin was 9.5% in the second quarter of fiscal 2023. This reflects the expected headwind of paused Medicaid redetermination activities. As we covered on the last call, we anticipate redetermination activities to commence in the third quarter. Turning to Outside the U.S. segment. Revenue decreased 16% year over year to $173 million for the quarter. Organic revenue contracted 8.0% and driven primarily by lower revenue in Australia following last year’s rebid outcome. Currency impacts reduced revenue by approximately 7% from the prior year period.

The segment had an operating loss in the second quarter of $3.7 million as compared to an operating profit of $4.3 million in the prior year period. We remain unsatisfied with the performance in margins of the Outside the U.S. segment and are systematically focused on portions of the segment that are underperforming. As such, we divested 2 small businesses in the segment with combined operating losses of $1.5 million in the quarter. Bruce will cover a few added details on the divested business. As a result of the transactions, there was a loss on sale of approximately $900,000, so the impact to diluted EPS in the quarter was about a $0.01 reduction. The loss on sale is included in the SG&A line on our income statement and is not included in the Outside the U.S. segment OI.

Going forward, we expect the impact of the divestitures to be slightly accretive to the segment’s margin and the company’s earnings. Let’s now turn to cash flow and balance sheet items. As we expected, cash flows this quarter were robust and made up for the temporarily low cash flow in the prior quarter. Cash from operating activities for the quarter ended March 31st, 2023, was $310 million and free cash flow was $292 million. Collections in the second quarter were very strong with DSOs finishing at 56 days. Our normal target range is 60 to 70 days. Our cash flow performance enabled us to repay $275 million of debt, and we ended the second quarter with total debt of $1.30 billion. Our net debt to EBITDA ratio was 2.5x at the end of the quarter, which is a reduction of 0.5 half a turn from 3.0x at December 31st.

As a reminder, this ratio is our debt, net of allowed cash, to adjusted EBITDA for the last 12 months as calculated in accordance with our credit agreement. We fully paid down our revolving line of credit at March 31st, giving us access to the full line of $600 million. During the second quarter of fiscal 2023, we also fixed an additional $150 million of debt through September 30th, 2024. This means our mix of debt is now about 50% fixed and 50% floating. Overall, we are pleased with the progress we are making on our near-term capital allocation priority of debt reduction. We are on track to finish the fiscal year below 2.5x as we guided last quarter. Our longer-term capital allocation priority remains strategic acquisitions to accelerate organic growth.

Let’s go to fiscal 2023 guidance, which remains unchanged from the prior quarter. Adjusted EPS, excluding intangibles amortization, is projected to be between $4.00 and $4.30 per share. Adjusted operating income is estimated to be between 415 and $440 million, which is before the estimated $94 million of intangibles amortization expense. Revenue is projected to be between 4.85 and $5 billion. This represents year-over-year growth of 5% to 8%, substantially all organic, and overcomes the $300 million reduction in short-term COVID response work. Free cash flow is estimated to be between $225 million to $275 million for fiscal 2023. We expect our earnings profile for the third and fourth quarters to both strengthen sequentially, particularly in the fourth quarter, driven by redeterminations in the U.S. Services segment and PACT Act volumes in the Federal segment.

We expect to step up in the third quarter as compared to the second quarter results as the volumes grow. On the prior call, we noted how the third quarter should be viewed as a transition quarter for U.S. Services with volumes phasing in which still remains the case. Then, in the fourth quarter, a much greater step up is expected from the third quarter as there should be a full period of redetermination activities in U.S. Services and further volume growth in the VES business which, as I’ve noted, we believe there is good line of sight to. As we have stated previously, there remains some uncertainty about how exactly the redetermination volumes will flow through our programs; in particular, since it relies in part on how beneficiaries interact with the process.

That said, we are confident that our guidance range accommodates the likely financial impact, which is concentrated in our fourth quarter. Moving to segment margins for the full year, we still expect U.S. Federal Services in the 10% to 11% range, although most likely towards the lower end of the range due to this most recent quarter’s performance. U.S. Services is expected to finish strong in the fourth quarter due to the redeterminations and the full year blended expectation is still 9% to 11%. For Outside the U.S., we now expect operating income margins in the 1% to 3% range. Last quarter, we guided to the low end of the 3% to 7% range. The reduction to the forecast is attributable to the emerging markets portion of the segment resulting from a combination of a delay to starting a major new program, which we expect to be temporary as well as continued difficulty by smaller employment programs and achieving critical mass amidst current economic conditions.

Our interest expense projection is trending favorably in light of recent debt reduction and the interest rate environment. We now expect between 82 and $85 million of interest expense for fiscal 2023. We expect the full year effective income tax rate between 24.5% and 25.5% and weighted average shares outstanding between 61.2 and 61.3 million. With that, I will turn the call over to Bruce.

Bruce Caswell : Thank you, David, and good morning, everyone. Our second quarter results exhibited meaningful progress on our goal for solid execution and continued momentum building across fiscal 2023. We demonstrated healthy rationalization of our debt and related interest expense. We have taken action in areas of the portfolio that were not driving long-term shareholder value and are committed to further evaluation. Another quarter complete means better visibility to our reaffirmed guidance. Let me share a look behind the scenes as we enter a busy second half of the fiscal year. Top of mind for us is visibility and execution in 2 key areas: first, in our U.S. Services segment, supporting our state customers with their Medicaid redeterminations as part of the unwinding of the continuous coverage provision; and second, in our Federal Services segment, processing high volumes in our Veterans Evaluation Services, or VES, business, which include claims related to the PACT Act.

On the redetermination front, the key assumptions that we discussed last quarter remain well intact. That is, we anticipate some states with larger populations, which include our current customers, spreading the work out over the allowable period, meaning there is more than a year in which Maximus will be supporting our state customers in working through this renewal workload. As a result, we anticipate an increase in volumes in our third quarter, meaning we should have full period contribution and be at run rate in our fourth quarter. I’m pleased that we recently added several modestly sized programs to support either existing customers with new eligibility work under which redeterminations fall, or new customers who are seeking assistance during the unwind phase.

In addition, we are well positioned to provide assistance to other states later this summer and fall, who may find themselves in need of our expertise and ability to scale staff and processing quickly once they get into their redetermination work. Turning to the VES business. We are seeing an increase in volumes, both related to current inventory and new PACT Act cases as the VA and affiliated organizations continue to publicize these expanded benefits and process initial claims. As David noted, the actual volumes we saw were slightly below our forecast for the second quarter as awareness builds and the VA and its partners like Maximus become more familiar with these claims. Nevertheless, we’ve invested in ramping up new staff to full productivity as this is the first quarter in which PACT Act volumes have begun to flow and is not indicative of expectations for the rest of the year.

In fact, our analysis of building claim inventories, coupled with our planned capacity, provides us with a high degree of confidence in our outlook for the second half of FY ’23. As we’ve stated on prior calls, the increased volumes from the PACT Act are anticipated to ramp over the remainder of FY ’23 and be sustained well into FY ’24 as we work through initial claims. It’s worth noting for exams in general, whether they are PACT Act or non-PACT Act, there is a recurring element driven by veteran’s medical conditions evolving over time. The benefits for which veterans qualify are tied to severity of their condition and corresponding disability rating, meaning a change in one’s condition can result in either the VA or the veteran requesting a reexamination.

As David mentioned, during the quarter, we divested 2 small businesses in the Outside the U.S. segment as we continue to optimize our portfolio where possible. The first was a commercial division within the United Kingdom. The second was our employment services business in Sweden. For both, we determined that they were noncore to our strategy. And not meeting our financial objectives. We routinely evaluate our portfolio of businesses in this way and will continue to do so, particularly in light of the segment’s performance this second quarter. Together, the annual revenue run rate is about $40 million. Going forward, we expect the transactions to be slightly accretive to our earnings. The financial impact, especially given the partial year, is not large enough to affect our guidance.

I will now provide an update to the IRS Enterprise Development, Operations Services, or EDOS, procurement, which had been under protest and is now resolved. We have secured our place on the multiple award Blanket Purchase Agreement worth up to $2.6 billion over 7 years for the resulting task orders which are expected to contribute in our fiscal year 2024 and beyond. The resolution removes uncertainty around the timing of future task orders. This is a core win in our strategic focus area of technology modernization and builds on our relationship with the IRS as a trusted partner. We are proud to be supporting the long-term modernization and transformation of the IRS’s technology infrastructure. Remaining in Federal, we also recently received good news for our Aidvantage business, which is aligned with our strategic focus of customer services digitally enabled.

We were just awarded a position on the successor contract vehicle known as Unified Servicing and Data Solution, or USDS, which supports our work serving student loan borrowers over the next decade and is expected to commence when the current contract concludes on December 31st, 2023. The new IDIQ under the Federal Student Aid office, or FSA, within the Department of Education, spans a 10-year period, including options, and has an awarded potential value of $16 billion. We estimate more than a $2 billion realizable value for MAXIMUS based on Aidvantage’s projected run rate going into the new contract. The FSA has made it clear their goal is to continue to enhance the borrower experience through improved performance, transparency and accountability.

As a conflict-free, experienced, and trusted operator, Maximus offers the FSA a borrower-first mentality and the added agility of our technology capabilities to improve the borrower experience. We’ve been successfully operating under performance-related service level agreement metrics, which had been added to the current contracts, and we look forward to bringing innovation and borrower focus to FSA for the decade to come. To that point, we have also been entrusted with more borrower accounts, which now total over 9 million borrowers, or about 1/4 of the approximately 39 million Department of Education borrower accounts, which is up from 5.8 million borrowers at the time of contract novation in October of 2021. A quick reminder that return to repayment is scheduled to begin the earlier of 60 days after the debt relief litigation is resolved in the Supreme Court or 60 days after June 30th, 2023.

Debt relief would decrease our revenue while return to repayment increases our revenue on our existing contract. As we’ve said before, these potential outcomes are accommodated in our FY ’23 guidance. I will now turn to award metrics and pipeline as of March 31st. For the second quarter of fiscal 2023, signed awards totaled $1.22 billion of total contract value. Further, at March 31st, there were $1.27 billion worth of contracts that had been awarded but not yet signed. These awards translate into a book to bill of approximately 2.1x for the trailing 12-month period which, as a reminder, includes our large CCO award in Q4 of the last fiscal year. I’ll offer a few comments on our awards that came in during the second quarter, which contributed to our $1.22 billion year-to-date booked awards.

We have not included any value for the new IRS EDOS BPA. The subsequent task orders carry the value potential of $2.6 billion across the awardees, meaning contributions to our signed awards would occur as task orders are executed. Also, the new IDIQ for USDS was awarded subsequent to quarter close. Finally, I’d like to highlight 2 contracts worth nearly $0.5 billion that contributed to our solid bookings this second quarter and illustrate the strength of our customer relationships. First is a recompete win on our Florida Healthy Kids contract worth $332 million over 12 years, including option periods. This contract provides A variety of services, including eligibility and enrollment for the state’s CHIP program, known as Healthy Kids. Last year, we announced an extension on this program through March of 2025.

So the period of performance for this win begins in April of 2025 and carries us through the year 2037 with options. This is a prime example of how we can secure long-term contracts that offer excellent revenue and margin visibility. The second award is a 2-year extension on our Michigan Enrollment Broker Services contract worth $124 million. Our relationship with this customer, the Michigan Department of Health and Human Services, goes back to 1997, which underpins the long-term value proposition of the services we provide. Let’s turn our attention to our pipeline of opportunities. Our pipeline at March 31st was $31.9 billion compared to $30.5 billion reported in the first quarter of fiscal 2023. The March 31st pipeline is comprised of approximately $5.6 billion in proposals pending, $900 million in proposals in preparation, and $25.3 billion in opportunities tracking.

Of our total pipeline of sales opportunities, 78% represents new work. Additionally, 62% of the $31.9 billion total pipeline is attributable to our U.S. Federal Services segment. With the meaningful progress achieved in the second quarter behind us, our priorities for the remainder of fiscal 2023 are clear. Specifically, execution on ramping volumes in our core Medicaid eligibility and veterans assessments markets, continued focus on underperforming business, and disciplined capital allocation. Over the broader horizon, I’m very pleased with the combination of recompete awards and new work awards that bolster our future and enable us to deliver reliable, mid-single-digit organic growth. Multiple multibillion dollar awards in the Federal segment solidify our reputation as a proven large-scale partner to the federal government in delivering mission-critical citizen services.

Finally, in addition to our near-term focus on execution, the management team is optimizing our organizational model and processes to support our 3-to-5-year strategy, and for that matter, the company longer term. Our activities will bring greater use of technology and innovation in our operations, create greater value for our customers, and underpin our operating income margin commitments we made last May on Investor Day. And with that, we’ll open the line for Q&A. Operator?

Operator: Thank you. We will now be conducting a question-and-answer session, and I will turn the call over to Mr. Francis.

James Francis : That’s great. That concludes the question-and-answer session. Thanks for joining us today. Operator, back to you.

Operator: Ladies and gentlemen, thank you for your participation and interest in Maximus. You may disconnect your line to log off the webcast at this time and enjoy the rest of your day.