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Presentation

Operator: Greetings, and welcome to the MAXIMUS Fiscal 2024 Fourth Quarter and Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. 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 ESP for Maximus. Thank you, Ms. Batt. 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. 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-Ks. 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 believes it may be informative to investors in identifying trends, gauging the quality of our financial performance, 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-Ks. And with that, I’ll hand the call over to Bruce.

Bruce Caswell: Thanks, Jessica, and good morning. With preparation for the incoming administration now underway, I would like to offer perspective on how MAXIMUS is favorably positioned for opportunity as well as areas we are watching with interest. As we’ve experienced through prior transitions in administrations, we are naturally at a point where there are more questions than answers, leading to speculation and uncertainty on topics from federal budget priorities to the likely role and impact of the proposed department of government efficiency. Our business has successfully operated for nearly half a century as a proven partner to governments across numerous political transitions, affecting both the executive and legislative branches at the federal and state level.

Over the course of these transitions, we’ve developed the capacity to support our customers in implementing various policy priorities, from expanding social safety net programs to providing states greater flexibility in program delivery. Over the decades, the administrations we’ve served have seen the value in leveraging private sector partners like Maximus to provide high-quality, scalable, and cost-effective citizen services and to enable agencies to deliver on their mission through technology modernization. Our position as the largest partner to government in the administration of well-established entitlement and related mandatory spending programs has enabled us to deliver strong financial results with positive long-term trend lines spanning many administrations.

Some of the largest mandatory spending programs we support, such as compensation and pension benefits for veterans, are perennially supported on a bipartisan basis. When we set our last strategic vision for the company, there was a deliberate focus on bipartisan priorities that are fundamental to the government’s role in supporting its citizens. For example, with considerable government business still transacted on paper, the need for citizen services digitally enabled is undisputed. To date, only two percent of federal government forms have been digitized. Notably, the digital experience law signed under the first Trump administration progressed to implementation guidance under the Biden administration. The priority of supporting our veterans with medical disability examinations through the compensation and pension claim process expanded under the PACT Act with bipartisan support that continues.

States seeking to more effectively manage Medicaid budgets have and are likely to continue to rely on partners like MAXIMUS to provide independent and conflict-free assessments for beneficiaries enrolling in long-term services and supports. Technology modernization remains a long-term spending priority for civilian, defense, and health agencies, not only for the productivity efficiencies it can deliver but as a strategic imperative in response to an ever more complex cybersecurity and geopolitical landscape that exposes the weaknesses of antiquated systems and processes. Looking ahead, the fundamental obligations of government to support its citizens will not change, but it’s prudent to consider how the means by which programs are delivered may continue to evolve.

For example, through pandemic-era legislation, the prior Trump administration granted states greater flexibility to work with private sector partners in the administration of certain benefit programs. Whether accomplished through legislation, executive order, waiver authority, or rulemaking, Maximus has decades of experience guiding our customers through changes that can impact eligible populations and program delivery models. Our ability to translate policy priorities into technology-enabled operations implemented and scaled with agility and designed to deliver quality services and value for money remains a hallmark of our business. Our role administering programs that support more than one hundred million Americans, including veterans, senior citizens, student loan borrowers, and individuals with disabilities, positions us uniquely to identify opportunities with our customers and the incoming administration to advance the bipartisan goals of improved customer service and effective program delivery to eligible populations.

While this interim period of transition has naturally created uncertainty, what we do know is that MAXIMUS is an established, reliable, and trusted partner to governments on both sides of the aisle. We are well prepared to advise, adapt, and implement any changes that may affect our current programs, and perhaps more importantly, to partner in the effective implementation of new priorities as they become known. Just a year ago, I similarly talked about this being an unprecedented era, using words like volatility and ambiguity to describe the global environment we anticipated for fiscal year 2024. At that time, despite the global uncertainties, we were confident in our ability to return to stability and more normalized operations. As David will share, our teams exceeded our forecast through solid execution across the segments while benefiting from strong volumes in certain programs.

We continue to deliver on our three to five-year strategy and meet or exceed our targets. Highlights from FY 2024 include organic revenue growth of nine percent and record adjusted earnings per share of six dollars and eleven cents per share. Our team’s dedication to and focus on our strategic goals have been instrumental in these achievements. Throughout FY 2024, we prioritized both top-line growth, refining our approach to new work and project expansion, and bottom-line efficiency through various cost reduction and optimization initiatives. We plan to continue these priorities this fiscal year as our investments in business development, innovation, enterprise technology, and performance management drive pipeline conversion and greater operating leverage to set up FY 2026 and beyond.

While David will share our formal guidance for FY 2025, I’m particularly proud that we’re forecasting to achieve a five percent revenue compound annual growth rate over a three-year period, consistent with our goal of mid-single-digit organic growth. With that, let’s look at some of our recent wins that will contribute to top-line growth. In FY 2024, we successfully secured two task orders under the IRS Enterprise Development Operations Services or EDOS blanket purchase agreement. Combined, the task orders contribute a total contract value of one hundred and twenty-eight million and represent two of the six task orders awarded to date. These victories are key milestones in our strategic focus on technology modernization and underscore our role with the IRS as one of their trusted partners.

Within our federal segment, we recently secured the rebate of our California independent medical review project, valued at one hundred and twenty million dollars total contract value over a base three-year period. Since 2013, we’ve supported the Department of Industrial Relations Division of Workers’ Compensation by providing independent medical reviews. This program serves as a cornerstone for our future of health strategic pillar and showcases the long-term customer relationships that are a key element of our business model. We are thrilled to share that Maximus has secured a recent victory collaborating with an agency within the Department of Defense to enhance its artificial intelligence capabilities. This initial contract, along with the expected follow-on contract, is particularly notable as it introduces us to a new client and reflects a new contracting model for Maximus that enables customer-driven R&D.

In a crowded market with many companies offering strategic advisory services on AI, we believe our selection acknowledges the practical capabilities that we’ve built and the credibility of our subject matter experts in this area. We look forward to supporting this DoD customer in their AI roadmap and to expanding these services to other defense and civilian agencies. Our latest victories not only showcase our ongoing success in executing on the pillars of our three to five-year strategy but also highlight our capability to enter new agencies and expand into related markets. Turning to the bottom line, I’m excited to share an update on our Maximus Forward program. In FY 2024, our enterprise technology organization undertook significant change.

We welcomed Derek Ledger as our Chief Digital and Information Officer or CDIO and with him Mike Raker as our Chief Technology Officer. Under their leadership, the office of the CDIO has sharpened service delivery and execution, deepened our capacity to identify, shape, and respond to customer needs, and positioned Maximus to drive greater innovation in our operations and solution offerings. Three highlights that illustrate these accomplishments include: first, working with our federal market leads, our CVIO team has mapped more than ninety percent of the known requirements in our near-term fine to our capability sets, which we call Mission Threads. We’ve concurrently identified certain accelerators like AIML that we believe will further differentiate our ability to deliver on Mission Threads and contribute to improved win rates.

Operator: Second,

Bruce Caswell: through Maximus Forward, enterprise technology has contributed significant annual recurring savings and efficiencies, some of which have been reinvested. And finally, in FY 2024, we launched our Global Capability Center or GCC, a small acquisition of a long-time delivery partner. Our GCC is now part of how we solution deliver and innovate as a company. We view Maximus Forward as an ongoing transformation initiative driven out of my office that will continue to have us challenge established structures and processes, promote more efficient operations, and provide for reinvestment in the business to address priorities from talent acquisition and development to technology and innovation. Let me turn now to our award metrics and pipeline.

Fiscal year 2024 signed awards totaled $2.2 billion of total contract value. Further, at September 30th, there were $312 million worth of contracts that had been awarded but not yet signed. These awards translate into a book to bill of approximately 0.4 times for the trailing twelve-month period. As we mentioned last quarter, the lower book to bill reflects a lower than normal period of rebid activity. And we anticipated that it would remain below one through the end of the fiscal year. For context, about half of our awards were new work, so only 0.2 times came from rebids. Despite a historically consistent rebid win rate of about ninety percent. If rebids were evenly distributed, a typical year would have nearly 1.0 times coming from rebids alone.

As the volume of adjudications for both rebids and new work are expected to increase over the next twelve months and return to a more normal volume, given the circumstances as we know them today, we anticipate that our book to bill will return to 1.0. Our pipeline at September 30th was $54.3 billion compared to $44.1 billion reported in the third quarter of fiscal 2024. The September 30th pipeline is comprised of approximately $4.2 billion in proposals pending, $7.1 billion in proposals in preparation, and $42.9 billion in opportunities tracking. Of our total pipeline of sales opportunities, approximately forty-eight percent represents new work. Additionally, sixty-eight percent of the $54.3 billion total pipeline is attributable to our US Federal Services segment.

As a reminder, the increased pipeline is largely driven by the CMS contact center operations or CCO contract, valued at $6.6 billion. Our commitment to challenging the basis for and legality of the CCO solicitation remains unchanged. Last month, after receiving a partially sustained ruling from our GAO protest, we filed suit in the US Court of Federal Claims or COC. Concurrently, we sought and received a stay of award from the government until March 15th, 2025, to facilitate judicial review and allow the court to render its decision before that date. While the COC case is pending, we acknowledge the recently announced planned changes in key roles within the administration. We remain steadfast in our view that the labor harmony agreement requirements in the solicitation are unnecessary, inappropriate, and illegal.

As a reminder, the justification provided for the rebate was the potential risk of a service interruption due to labor act. I’ll note that recently, our ability to maintain operations without disruption was soundly demonstrated when successive hurricanes devastated much of the southeast. Many employees in the region faced challenges, and MAXIMUS responded by safeguarding their pay while temporarily directly in the storm’s paths. With certain contact centers closed to protect our employees and their families, their colleagues across the country stepped up to the challenge. Many working unscheduled overtime, service remained uninterrupted with the CCO team handling over one hundred and ninety thousand calls without any impact on call wait times.

Finally, also included in our pipeline are both the two-year rebate of most regions under the VA medical disability exams or MDE contracts, as well as the expected procurement for the successor contracts for all regions of this work. The VA recently executed the next option year for our current contracts for all regions and we expect to receive results of the two-year rebid before calendar year-end. As we enter a new fiscal year, I remain confident in our position and optimistic about the growth of the company. We’ve spent much of the last few years focusing on our strategic plan, working to ensure we have the right resources in place and making investments in technologies and capabilities, that help to ensure we are well-positioned not only to protect our base but win new work for current and new customers.

We’re quickly approaching the primary milestone of our three to five-year strategic plan and have several quarters behind us where we’ve demonstrated our ability to deliver on the targets we set out. I’m very proud of the team at Maximus for their passion, focus, and exceptional work driving our strategy forward. Thanks to their commitment, we’re firmly on track to building a successful and dynamic Maximus for the future. And with that, I’ll turn the call over to David.

David Mutryn: Thanks, Bruce, and good morning. I’ll take a moment to expand on the recap of fiscal year 2024, which I’m particularly proud of as we delivered on our commitments and had impressive performance across our portfolio of contracts. This time last year, expressed optimism from healthy tailwinds that could drive a strong year. Looking back, we exceeded those high expectations as we supported our government customers on important complex programs, some of which experienced unprecedented volumes across the year. Our landing spot for the year was organic revenue growth of 8.8 percent and adjusted earnings of $6.11 per share, just above the midpoint of the forecasted earnings range from the last call. A hallmark of our business model is cash flow generation, and this year delivered free cash flow just over $400 million.

That’s nearly eighty percent growth over the prior year and represents a 1.3 times conversion to net income which is exactly where we want the business to be. Meanwhile, we stayed on course with capital allocation priorities and maintained a disciplined approach with debt paydown. Finished this year at 1.4 times net leverage, which is almost a full turn of leverage reduction in a one-year period. The final item I’ll highlight is that our official guidance for fiscal 2025 aligns with the early color we provided in August. The midpoint of $5.35 billion of revenue and $5.85 of adjusted EPS reflect underlying growth when you account for the excess volumes that we capture in fiscal year 2024. More on that later. Let’s go to total company results.

For the full fiscal year 2024, consolidated revenue increased 8.2 percent to $5.31 billion. As I mentioned, organic revenue growth was 8.8 percent, comfortably exceeding our longer-term target of sustainable mid-single-digit organic growth. The three primary pieces of growth were one, core programs with volume growth that we believe have durability for the foreseeable future. Two, programs tied to Medicaid-related activities, such as redeterminations that have experienced a return to full volume, and three, incremental work on those Medicaid-related activities provided surplus volumes in earlier periods. I’ll touch on the last piece more in our fiscal 2025 guidance discussion. On the bottom line, fiscal year 2024 adjusted EPS was $6.11 per share, which is a significant step up from the $3.83 per share for the prior year.

The same pieces of growth I just mentioned contributed to this year’s earnings power. Also, as a reminder, we had a cybersecurity incident in fiscal 2023 that had a $0.35 per share impact. First, as we cross fiscal years, we are altering the profitability metric we use for guidance. Moving from adjusted OI dollars to adjusted EBITDA margin. This change is responsive to investor feedback as adjusted EBITDA aligns better with disclosures from our government services peers. Thus providing investors a more relevant comparable metric. Our adjusted EBITDA definition is detailed in the earnings presentation and in short, the only adjustment is to exclude divestiture-related charges. For the full fiscal 2024, our adjusted EBITDA margin was 11.6 percent, and compares to 9.1 percent for the prior year.

On the last call, we said the adjusted OI expectation was an approximately 11 percent margin. That translates to an expectation of an 11.6 percent adjusted EBITDA margin which we delivered. A quick word on total company performance for the fourth quarter. Before I turn to segments. The fourth quarter of fiscal 2024 revenue grew 4.4 percent or 4.7 percent on an organic basis. Adjusted EBITDA margin was 11.0 percent. Adjusted EPS was $1.46 per share in the quarter. We believe that the fourth quarter is good as it excludes the excess volumes that benefited prior quarters. Turning to the US Federal Services segment, revenue increased 13.9 percent to $2.74 billion. All growth was organic and driven predominantly by volume growth on expanded clinical programs.

The operating income margin for US Federal Services was 12.2 percent in fiscal 2024, as compared to 10.4 percent in the prior year. A higher mix of performance-based work, which includes assessment volumes, continued to be a driver of margin enhancement in the segment. For the US services segment, revenue increased 5.5 percent to $1.91 billion. All growth was organic and driven by strong performance across the core Medicaid-related portfolio, that has returned to normal levels plus extra volumes contributed to some overperformance in the segment. This manifested in the first through third quarters of fiscal 2024 and was concluded by the fourth quarter. US services operating income margin was 12.9 percent as compared to 10.1 percent in the prior year.

The overperformance I just mentioned also enhanced margins in this segment. The margin in the fourth quarter was a healthy 11.1 percent which we believe is more indicative of future periods’ performance for the segment. For the outside the US segment, revenue decreased 4.6 percent to $657 million. Divestitures that occurred in the prior year reduced revenue for the year by 6.1 percent, while currency effects provided a partially offsetting benefit of 1.7 percent. It’s worth noting that in the second half of the fiscal year, organic growth accelerated in the segment and was attributable to program growth primarily in the United Kingdom. The segment realized operating income of $8 million for fiscal 2024, compared to an operating loss of $9 million in the prior year.

Our forecast going into this year was slightly above breakeven and the fact that we landed right in that window demonstrates our efforts to improve profitability and contain volatility in the segment are taking hold. The fourth quarter delivered a 4.8 percent margin, showing improvement across the year attributable to strength in core programs that remain in the segment. That said, and as we’ve alluded to on prior calls, we are focused on executing a key portfolio shaping action that should reliably move the segment into the 3 percent to 7 percent margin range and ultimately, closer to the profitability of the domestic segment. Once completed, there should be a modestly smaller footprint that emphasizes the profitable components. We have studied the segment carefully and see a healthy pipeline of exciting squarely aligned with the company’s strategic vision.

Successful capture of those opportunities should lead to ongoing diversification of customers, increased scale, and a greater mix of higher value services. Let’s turn to the balance sheet and cash flow items. As of September 30th, 2024, we had gross debt of $1.15 billion and we had unrestricted cash and cash equivalents of $183 million. We finished this year with a debt ratio of 1.4 times, down from 2.2 times at this point last year. As a reminder, this ratio is our debt net of allowed cash to consolidated EBITDA for the last twelve months as calculated in accordance with our credit agreement. We paid down a little over $100 million across this year, and the remaining improvement to the leverage ratio was from an increased trailing twelve-month consolidated EBITDA.

Cash flows from operating activities totaled $515 million and free cash flow was $401 million. This compares to $314 million and $224 million respectively for the prior year. Through good collections, our days sales outstanding or DSO have remained consistent at sixty-one days at September 30, 2024, and sixty days at the same point last year. During fiscal year 2024, we repurchased approximately 0.9 million shares totaling about $73 million. Subsequent to year-end, between October 1st and November 19th, we repurchased an additional 0.5 million shares for approximately $43 million. Accounting for the activity through November 19th, we have approximately $128 million remaining on the $200 million authorization granted by the Board of Directors in June.

Briefly touch on our priorities for capital allocation, which remain essentially unchanged from our disciplined approach. We first fund organic investments, which are typically a combination of capital expenditures and expenses, and do not require substantial outlays. Next, we maintain a quarterly dividend that we intend to grow over time with earnings. And that currently stands at $0.30 per share. After these, our priority for capital deployment is strategic acquisitions intended to accelerate organic growth. We presently have an appetite for M&A that brings us new or enhanced capabilities or a new or expanded customer set. As always, we will evaluate acquisition opportunities with discipline. And our balance sheet provides capacity for good opportunities in fiscal year 2025 and beyond.

Lastly, we repurchased our shares opportunistically depending on current market conditions. In recent periods, debt paydown took more of a commanding focus, and now we are well below our two to three times target range. Absent significant M&A, an ongoing reduction to the leverage ratio should be expected going forward, albeit at a slower pace than recent periods. Let’s go to fiscal 2025 official guidance, which is consistent with our early color provided on the last call. For fiscal 2025, revenue is projected to be between $5.275 billion and $5.425 billion. Adjusted EBITDA margin is estimated to be approximately 11 percent and adjusted EPS is projected to be between $5.70 and $6.00 per share. I’ll share some thoughts on guidance. Believe the consolidated business is capable of growing organically in the mid-single-digit over the longer term.

Bruce mentioned the compound annual growth rate from fiscal year 2022 to the midpoint of fiscal 2025 guidance is 5.0 percent. The added benefit to that measurement is that it naturally ignores the excess volumes in fiscal 2024. It is also despite the fact that we have made a number of small divestitures over the period. So the organic growth over that horizon is even higher. I’d like to note that we estimate that this year’s guidance has modest underlying organic growth. As I mentioned, we saw excess volumes primarily in U.S. Services that led to successive guidance raises across fiscal 2024. And which will not recur in fiscal 2025. Guidance for fiscal 2025 implies that we are able to backfill that piece with organic growth stemming from both the US federal and outside the US segment.

It is worth pointing out that since the early color we gave in August, our forecasted revenue from backlog has increased. However, given the risk of procurement delays relating to the transition of the new administration, we have been prudent in derisking our revenue guidance which now includes only about two percent of revenue from new work not yet won. Typically, that figure would be five percent or a bit more. This small amount of new work that we have included assumes partial contributions in fiscal 2025 but would drive more significant contributions to fiscal 2026 and beyond. For the two outstanding rebids that Bruce mentioned, a reminder that the CMS CCO contract is under an option period through September 2025, and that the desired early recompete regardless of outcome should not have an impact on fiscal year 2025.

And for the Veterans Affairs MDE two-year recompete for purposes of raising volume ceiling, we’ve anticipated a seamless transition to the new contract maintaining status quo as a leading provider. Let me provide some color on full-year segment margins. We expect the U.S. Federal Services margin to be nearing the 12 percent range, which is broadly in line with fiscal 2024 performance. We expect our US services segment margin to be in the 11 percent range, and which is aligned with the fourth-quarter exit rate when the segment’s overperformance had normalized. And for outside the US, we estimate a margin between 1 percent and 3 percent representing incremental forward progress on the segment’s profitability. Further improvement through action remains a priority in the near term.

From a cash flow standpoint, we expect free cash flow between $345 million and $375 million for fiscal 2025. Consistent with prior years, we expect a slightly negative free cash flow in Q1 as a result of seasonality and timing of certain payments. Our CapEx spend rate should also slow for fiscal 2025 compared to the prior year. And trend more towards 1.5 percent of revenue. Some other assumptions around fiscal year 2025 include an estimated $92 million of intangible amortization expense, and $45 million of depreciation and amortization tied to PP&E and capitalized software. Interest expense is estimated to be about $65 million. Finally, the full-year effective income tax rate should be around 25 percent, and weighted average shares should be about 61 million.

Looking further ahead and following the transition to adjusted EBITDA guidance, we wanted to provide a current view on our near-term margin expectation. We believe a reasonable range in the near term is 10 percent to 13 percent adjusted EBITDA margin. With our guidance for fiscal year 2025 of approximately 11 percent, this range demonstrates our view that there are further opportunities for margin enhancement in the years following fiscal 2025. We also have some contingency built into the low end of the range to account for uncertainty that is inherent looking further into the future. I’ll wrap up by expressing the same optimism for fiscal 2025 as we had at this point last year. We’re starting another year with strong visibility to our portfolio of programs and ongoing attention towards cost management and operational excellence.

With that, we’ll open the line for Q&A. Operator?

Operator: Thank you. The floor is now open for questions. CJS Securities. Please go ahead.

Charlie Strauzer: Hi. Good morning. Very well. Hope you’re well, Bruce.

Bruce Caswell: Good. Thank you. Bruce, maybe we could talk a little bit more about the CCO contract, just kind of get that out of the way. Maybe a bit more of a refresh there, as to, you know, anything moving beyond what we’ve already seen.

Bruce Caswell: Sure. Well, let’s see. As I mentioned in my prepared remarks, we are focused at the GAO level. Was upheld on one component, which was that the procurement needed to be clarified. And the clarifications that were issued to the procurement also updated the submission deadline for the Phase two proposals, also the intended notification of award date. So phase two proposals are still due before the end of November, and the administration the current administration indicated that they would not make an award announcement until March of 2025. Obviously, things have changed since then. We are under an option year that’s been exercised that funds us entirely through this current fiscal year. And as I mentioned, you know, there’s a lot to watch presently in terms of the new positions that are being announced, some as recently as just the last couple of days.

So while they’ll very likely be changes in priorities in the new administration at HHS, we’re only recently learning about these new leadership positions and discerning, I think, with everybody else what that might mean. So coming back to the basics, we’ve, you know, continued to maintain, and as I mentioned, in my remarks, that we are very steadfast in our view the lack of the need for labor harmony agreement and therefore the procurement itself. We’re like I said, operating under the third option period of the existing contract. So were that to continue, there are six additional option years that are left on that contract that could be exercised. I’d probably further note that under the prior Trump administration, they were very supportive of our program delivery model.

The excellent independently measured performance that we’re able to deliver. And it’s worth also noting that together we were able to navigate obviously the significant continuity of operations challenge that was required to accommodate the pandemic. And that was probably the greatest, most extreme test of continuity of operations as I said in my, you know, in my prepared remarks, it’s that fundamental basis of whether continuity of operations is adequate to sustain conditions like that and others, including labor actions. That has led the current administration to want to include the labor harmony agreement. So we feel like we’ve more than demonstrated the efficacy of that model. So to summarize, we are focused on continuing to provide excellent service to sixty-five million Americans, and we’re gonna vigorously pursue our claim in the quarter of federal claims.

And we’ll support the new administration in their leadership transition as we have prior administrations. That’s where things stand, Charlie.

Charlie Strauzer: Great. And that’s a good segue looking at, you know, Trump 1.0 versus, you know, Trump 2.0. Maybe you could provide a little bit more color on how the company fared. I was finding, you know, the CCO on the last Trump administration and you know, how should we think about Trump 2.0 in comparison to the prior administration.

Bruce Caswell: Yeah. I think that’s the question that everybody in the Con sector is getting these days. So let me give you our perspective on it. And then a number of points of which quite frankly, I’ll pick up from the prepared remarks in terms of the nature of the programs that we administer, the nature of our business model being focused on, if efficient delivery of government services. But let me, you know, kind of back up to Trump 1.0. So during Trump 1.0, there were delays in the appointments of individuals into key positions to make decisions on procurements. And as you’ll recall, that slowed the procurement process down. Longer than it had historically taken during administration transitions. And would say that we don’t expect that to be something that would repeat this time.

This administration has a lot of experience. They’ve had a lot of time to put plans in place and get people into key positions, and I think we’re seeing a lot of that already in terms of the tempo of the announcements that have been made. So, less likely in the second Trump administration to see that. Those delays. However, in any administration change, inevitably, certain procurements get slowed down. And whether you think about those in terms of, are they strategic priorities or not as the administration transitions, or are they just at a dollar value where the level of scrutiny and sign-off that’s gonna be required then makes it even more dependent on having key positions filled, that’s an open question. So we are, you know, we wanted to be prudent in our forecasting for FY 2025, and David can comment more on this as we get into more questions.

And that’s why only two percent of our revenue for FY 2025 really is would come from new work that we would be winning and delivering in this fiscal year, which is would compare maybe to, you know, five percent in a normal year. So we try to incorporate that. Another comment I would make is that during the last Trump administration, that administration was very much open to ideas that we and others, that I will give our team a great deal of credit, brought to the table related to granting states greater flexibility to use private sector contractors to administer certain programs. And that flexibility to contract that we’ve talked about on prior calls and during that period, was ultimately baked into some legislation during the pandemic. It was very prescient to do that because that created the opportunity for governors to turn to private partners when we were in a crisis and particularly as it related to the administration of unemployment insurance benefits.

And if I recall the numbers correctly, there were thirty-seven different states or so in I’m gonna say between thirty-seven and forty-seven that turned to private partners to help with that crisis. And Maximus ended up serving actually a majority of those states. So that was great. You know, the pie was expanded for everyone, and we felt that we were able to demonstrate our value to many of our clients. So point two would be, I think, as we transition to Trump 2.0, if we look at the past as prologue, you know, being a company that is well-positioned at the state level as well as at the federal level is a strength for a business, and we feel like we’re such a company. The last point I would make there is that compared to Trump 1.0, we’re a very different company than we were then.

We accomplished some very significant acquisitions in the 2021 time period as you’re very well aware, and so we’ve got a much broader portfolio of offerings. We’ve got a much more significant business development and market leadership team in our federal business than we had historically. And we have been successful now in winning new work in agencies like the Department of Homeland Security and even mentioned the AI work that we’ve just recently won in one of the units of the Department of Defense. So we’re in a position where we can have conversations during this administration that we might not have had historically. So with that, I would just say turning for a moment to the Department of Government Efficiency. I think we’re all, you know, wondering, and watching closely in terms of what that will mean, how that will work procedurally in terms of what levers are available to them, how they will work with Congress in terms of executing priorities.

And rather than speculating on, you know, at an agency level or in terms of broad spots of spending or what the implications might be, I would say we’re taking a very balanced view. You know, one of the risks that we need to keep in mind is if there were to be a reduction in the number of civil servants in government, what impact would that have in the contracting and procurement functions? And could that in some way just and there’s already been a silver tsunami that we’ve talked about on prior calls of individuals retiring from government. So you have to be prudent and ask yourself the question as a government contractor, what could the implications be in terms of just the workforce that’s needed to execute the contracts, administer, and oversee the contracts in that environment?

And then, the next question would be, what will the priorities be of an organization like that? Well, in our view, you know, we’re a company that’s really purpose-built to help deliver efficient government services in the model that is focused on high quality and accountability. And, we’ve done that for decades, and we feel like we have a great track record. I think a fairly unique combination of a track record and experience with these types of performance-based contracting models and programs that are a combination of people, process, and technology that can be deployed to efficiently deliver the mission of government and doesn’t work to conversations with individuals who might be in new roles in departments where they lack necessarily the institutional knowledge and familiarity with how those departments function.

And have delivered their programs historically. So for now, we’re just going to make sure that we are able to share our thoughts and our subject matter expertise and be in the conversations where we need to be. But even before that, I guess I would underscore, we’re gonna focus on continued high-quality execution and service delivery to, you know, more than a hundred million Americans that rely on us every day for critical government programs, many of which, as I mentioned in my prepared remarks, are entitlement by nature and if not entitlement, mandatory spending programs. So we’ll focus on execution. We’ll listen to our customers. And we’ll support our customers as they go through this transition and be able to certainly offer a number of ideas that we would have on ways to drive even greater efficiency in certain programs.

Charlie Strauzer: Great. Thanks, Patrick. I think that’s sorry for the long answer there, Charlie. No. That’s that’s that’s terrific, actually. I thank you thank you for you providing color there. And Sure. If maybe shifting to David for a second on the revenue guidance. And the margins implied. It looks like, you know, revenue guidance is in line with what other I was expecting. And but, you know, margins are slightly below not terribly, but just, you know, kind of some more color as to what’s driving that. If you could you could

David Mutryn: Sure. Yes. So I can’t help but first talk about fiscal year 2024 margins, pointing out again that they benefited from those excess volumes in the U.S. Services segment, which were quite accretive. So let me let me help. Kind of size what that impact is which may help your understanding of where we landed for fiscal year 2025. So recall the midpoint of our guidance coming into fiscal year 2024 was $5.20. So we exceeded that by $0.91. And as we said on the last call a significant portion of that was driven by the temporary excess volumes that we don’t expect to recur in our fiscal year 2025 forecast. Another helpful way I think about sizing it is on margin. And if you look back a year ago, our guidance going into fiscal year 2024 was for adjusted OI margin of 9.8 percent.

So if you add in our depreciation, which is about 0.6 percent, that translates into guidance going into the year for an adjusted EBITDA margin of 10.4 percent. So we came in at 11.6 percent which demonstrates that the overperformance came in at a higher margin. If you look at Q4, which we say was free of those excess volumes, we were at 11 percent adjusted EBITDA margin which is consistent with our fiscal year 2025 guidance. So I think that kind of path from 10.4 percent to now 11 percent you get a sense that a portion of the end-year performance is temporary, but a significant portion is also durable. And carries forward into that 11 percent guide. So that kind of said another way looking at 2025, we’re backfilling that higher margin revenue from last year with work that naturally comes in at more normal levels of

Charlie Strauzer: Great. And maybe we can segue into the backlog if we could. Maybe Bruce, Maybe provide us some more clarity on the differential versus last year and help us understand more about what needs to happen to improve book to bill. Just, you know, just help us clarify that a little more.

Bruce Caswell: Great. So Charlie, I’m gonna ask David to start with the mechanics of the Vivek pieces in the backlog and then I’ll provide some more color on the book to bill expectations as we go forward.

David Mutryn: Sure. Yeah. So looking at the backlog, first, reduction naturally happens when we burn through revenue. So if you start with our backlog as of this time last year, remove $5.3 billion of fiscal year 2024 revenue that we booked. And then we partially backfilled that with $2.5 billion of signed and unsigned awards. As Bruce said, fiscal year 2024 had an unusually low level of rebid adjudication, which is not a bad thing. So in the case of this year, simply more backlog was burned than replenished through the new contract award. Of the remaining reduction to backlog, the largest driver was the portion of contracts for the VA medical disability examination contract that are currently going through a recompete due to the contractual.

So the value attributable to the remaining life of those was removed from our backlog as of September 30. And now that outstanding two-year procurement is sitting in our pipeline specifically in opportunities pending. Then last, you may ask for CTO. In that case, the remaining option periods of our current contract remain in our reported backlog which follows our standard practice of including option periods unless we have a high degree of confidence that they would not be exercised. So those are the big moving pieces.

Bruce Caswell: Yeah. So a little bit more color on the book to build dynamics. So first of all, you know, David’s noted and I noted in my remarks that we had a relatively light year as it related to REBIT volume. We expect that to be shifting as we come into 2025. And then as you well know, there are some rebids that are out there right now that anticipate to be awarded in the near term, including the VA MDE contracts, which we would hope to hear on before the end of the calendar year. I am pleased that for the rebids that we did have this last year, we’re right in the middle of fairway in terms of our historical rebid win rates. We’ve often said that we’d like to model our business and we intend our business to be to demonstrate a ninety percent, you know, plus or minus three bid win rate.

And that’s been the case over the last five years and continues which is great. We expect that the book to build, therefore, will trend more toward 1.0 as we get into FY 2025 and we see a more normal year for rebids. But also, you know, some of the procurements that have been in the pipeline and planned. We feel like we’ve got a very strong pipeline. We’ve built out and made investments in our market leads teams, the business development teams, the capture teams, and so forth. And a number of the procurements that we’ve been tracking have been progressing according to plan. And I would say, are probably less likely to be in a category where they’re thought to be discretionary and maybe would slow down or different decisions made. These are, you know, again, we like to strategically focus on programs that generally enjoy bipartisan support and are essential government services and so forth.

So the fact is, you know, the fundamental need for government to serve citizens and to serve them efficiently and in a high-quality fashion hasn’t changed. And as I also mentioned, you know, the fundamental challenges of government as it relates to aging technology to accommodate advances in cybersecurity standards and so forth that begin at the DOD level and then will likely flow their way down into the civilian level, that hasn’t changed. So we feel like we’ve got a robust pipeline. There may be some delays, and we’ve been cautious about that as it relates to the procurement, the pace or velocity of getting procurement decisions through. And you know, I feel like we’re in a good position as we prosecute that pipeline in FY 2025 to build that book to build back up as we turn the corner into 2026 and then beyond.

You know? And I also mentioned that we had four consecutive quarters in FY 2022 and 2023, above 2.0 on book to bill as we saw that was a period of kind of outsized volume as it relates to rebids. The final point I’d make is that I’m pleased that our federal pipeline which I noted I think that’s at a probably an all-time high in terms of the percentage of our total pipeline that is federal. I noted it at sixty-eight percent. And that comprises a lot of opportunities that are very much aligned with the capabilities that we’ve acquired over the last couple of years. So the 2021 acquisitions are doing exactly what we intended, and that is, you know, when we invest in an acquisition like that, it’s to create that next growth platform for growth for the company.

And we’re seeing a great alignment with opportunities that allow us to build on the capabilities that we have with the Versus acquisition, but also with the I would go back to the Ascentia acquisition in 2015 and the attained federal acquisition in 2021. So collectively, those service lines are quite substantial. And, you know, honestly, a couple of years ago, we wouldn’t have had the permission to win and the opportunity to bid on a lot of the pipeline that we’re now prosecuting. So, I’m looking at all those conditions and the investments that we’ve made and, that collectively makes it clear that we’ve got plenty of targets to go after, and I feel like we’re in a very good position to win our fair share.

Charlie Strauzer: Great. That’s very helpful. Thanks, Bruce. Just shifting back to the guidance. If we could talk about quarterly cadence, as we build out our models with, you know, fiscal 2025, you know, David, is there, you know, anything that we need to build into our thinking for from a cadence standpoint?

David Mutryn: Sure. Not nothing too unusual. On the top line, we’re fairly evenly distributed across the year with the exception seasonality does typically drive higher revenue one as is normal related to open enrollment activities. On the bottom line, our guidance, as I said, is an eleven percent EBITDA margin for the year. Looking across the year, we expect the first half of the year would be a little bit lower than that and the back half of the year a little bit higher than that. So taken together, that would show a trend of earnings growing from quarter to quarter over the fiscal year.

Charlie Strauzer: Got it. And same on segment basis too, which how should we think about that?

David Mutryn: Yeah. Same on the segment basis. I mean, of the three segments, you know, US services, we pointed out, have the excess volume. So the top line on US services is expected to be down a little bit year over year as a result of that with the other two segments growing year over year.

Charlie Strauzer: Great. And then lastly on cash flow, you know, I mean, with, you know, $400 million of free cash flow, that’s, you know, you’re calling for a slight dip in that this year. You know, what are some of the things that are driving that?

David Mutryn: Sure. So first, looking at fiscal year 2024, just dissecting the performance net income, DSOs, and CapEx were all pretty much in line with our expectations. So it’s really other components of working capital that contributed to the overperformance which you can see if you look at our cash flow statement as a component. There’s a lot of positive numbers in that section. So looking at fiscal year 2025, the guidance reflects number one lower earnings which fall to cash flow. Also, a portion of those other working capital benefits that helped fiscal year 2024 are forecasted to reverse. And then that’s partially offset by a lower estimated CapEx. In 2025 versus 2024. So all that said the free cash flow to net income ratio which I cited in my prepared remarks, for fiscal year 2025, that the guidance comes in between 1.2 and 1.3 times. That’s free cash flow and net income. So probably in line with our expectation.

Charlie Strauzer: Great. This has all been very helpful. Thank you very much for answering my questions.

David Mutryn: You bet. Okay. Operator, back to you.

Operator: Thank you, ladies and gentlemen. This does conclude today’s Q&A conference and today’s event. We would like to thank you for your participation in Maximus’ business call today. You may disconnect your lines or log off the webcast and enjoy the rest of your day.