MAXIMUS, Inc. Stock

Greetings, and welcome to the Maximus Fiscal 2026 Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce James Francis, Vice President of Investor Relations. Please go ahead.

Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO; and David Mutryn, CFO.

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 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 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.

Thanks, James, and good morning. We are pleased to report strong third quarter results today, which demonstrate solid execution and support of our customers' important missions. I'll begin by reviewing the third quarter results and also address the customer-directed contract modification that impacts our near-term outlook. I'll move to our forecast for the remainder of this fiscal year and conclude with early thoughts on fiscal year 2027, which precedes formal guidance this November.

For the third quarter, Maximus reported revenue of $1.28 billion, which was in line with our expectations and enables us to reiterate full year revenue guidance. The prior year period benefited from higher temporary natural disaster support and also contained temporary clinical volume surges in primarily the U.S. Federal Services segment.

On the bottom line, adjusted EBITDA margin was 15.0% and adjusted EPS was $2.22 for the quarter, which compares to 14.7% and $2.16, respectively, for the prior year period. Across fiscal year 2026, we've driven margin improvement through strong execution and selective deployment of efficiency-enhancing technology and have not had to rely as much on incremental or surge volumes that defined the prior fiscal year.

Let's go to the segment results. Third quarter revenue for U.S. Federal Services was $721 million and in line with our revenue expectations for the segment. As I shared before, the prior year period benefited from elevated natural disaster support that has not recurred at the same levels and was responsible for close to half of the revenue change. The remaining portion of the year-over-year revenue decline was primarily attributable to the temporary clinical volume surges.

The operating income margin for this segment in the third quarter was 18.6% as compared to 18.1% in the prior year period. Our ability to drive efficiencies amidst solid volumes across the various program areas continued to benefit third quarter margins in this segment. A customer-directed pause in the performance incentives on our Department of Veterans Affairs Medical Disability Exam or VA MDE program is expected to impact profitability of the segment beginning in the fourth quarter, which I'll expand on in the guidance discussion.

Turning to the U.S. Services segment. Third quarter revenue was $418 million and was consistent with our expectation of continuing to close the gap to prior year revenues ahead of a return to positive growth in the fourth quarter. Our fourth quarter revenue forecast for this segment continues to be positive mid-single-digit organic growth over the prior year as activities and engagements with the Medicaid population are anticipated to pick up.

This stems from several current state customers using Maximus to enact and administer legislative-driven required changes to their programs. The segment's operating income margin for the third quarter was 10.8% and reflects solid upward progression across this fiscal year as we have previously communicated.

Turning to the Outside the U.S. segment. Third quarter revenue was $140 million, and the segment recognized an operating profit of $1.2 million. Variances to volumes across several programs ranging from clinical to employment services are responsible for the revenue delta versus the prior year. As we've stated before, our goal remains to drive growth and further margin improvement in the segment by successful conversion of this segment's sales pipeline.

Moving to cash flow items. Cash flows used in operating activities was $125 million and free cash flow was an outflow of $137 million for the third quarter. As we anticipated and communicated last quarter, DSO remained elevated at 98 days, driven by administrative delays at a major federal customer. I'm pleased to report that collections from this customer have accelerated in July with approximately $245 million received since June 30. I'll share more about our expectations for the remainder of Q4 when I come to the guidance update.

During the third quarter, as detailed in our Form 8-K filed on May 28, we raised $325 million of Term Loan B, some of which was used to pay down our revolver and provide additional flexibility as we manage temporary working capital timing. We ended the third quarter with total debt of $1.65 billion, up from $1.55 billion as of March 31. Our consolidated net total leverage ratio per our credit agreement was 2.0x, up from 1.8x in the prior quarter. We remain within our stated target leverage ratio range of 2x to 3x.

During the third quarter, we repurchased approximately 0.75 million shares totaling $50 million. As of June 30, 2026, the entire $400 million from the Board of Directors authorization in May remained available for future repurchases.

Turning to capital allocation priorities. Our overall priorities have not changed. We prioritize organic investments, most of which are expensed and have committed to a dividend that we intend to grow over time with earnings. After that, we consider M&A opportunities and opportunistic share repurchases. In the recent past, between these 2, we have deployed capital exclusively on share repurchasing.

Since the beginning of our fiscal year 2025, we have repurchased approximately 8.3 million shares, representing about 14% of our beginning outstanding shares. As we have been saying for the past several quarters, even amidst market conditions that remain favorable to share repurchases, we also continue to seek acquisition targets that can expand capabilities, customer access and longer-term organic growth opportunities.

We remain disciplined in our evaluation of targets and seek high probability revenue synergies capable of driving long-term organic growth and shareholder value. We consider valuation carefully in the context of current market conditions and growth potential and the expected return must exceed our cost of capital.

Looking forward, we plan to continue to execute on these capital deployment priorities while considering market dynamics, near-term liquidity, the potential M&A opportunity set and all within the constraint of our stated target net debt ratio of 2x to 3x.

Moving to fiscal year 2026 guidance. As I mentioned, a modification to our VA MDE contract has impacted our earnings expectations for the fourth quarter of this fiscal year. In the just completed third quarter, our customer notified all vendors of a temporary pause of performance incentives and disincentives. These are assessed on an individual basis to each vendor based on performance metrics, including timeliness, accuracy and quality.

Our strong performance in these areas enabled by our direct investments into this program's operations and technology means that positive incentives have been included in our reporting each quarter of fiscal year 2026 to date. The pause arises from the customers' priority to improve their review and validation process after vendors submit their detailed monthly invoices.

With this pause effective July 1, 2026, we have removed any assumed fourth quarter fiscal year 2026 contribution from incentives, which reduces our diluted EPS guidance by approximately $0.35, which is in line with the contribution of these incentives in each of the first 3 quarters of the fiscal year.

As I mentioned, this contractual modification related solely to the incentive mechanism, and we do not expect an impact to our DSO assumption. So with that, we have revised our adjusted diluted EPS guidance and expect it to range between $7.90 and $8.20 per share. The new midpoint is $8.05 and $0.35 less than the prior guidance midpoint of $8.40. This revised EPS guidance translates to a full year adjusted EBITDA margin guidance of approximately 13.7% for fiscal year 2026.

Our updated full year guidance implies fourth quarter adjusted diluted EPS at the midpoint of $1.91 and adjusted EBITDA margin of approximately 13% (sic) [ 13.7% ]. We are adjusting free cash flow guidance to reflect the earnings guidance change and free cash flow is now expected to range between $425 million and $475 million. As always, the timing of specific receivable collections has the potential to cause significant cash flow variation at the end of a given period, and our guidance reflects our unchanged expectation that DSO will finish the fiscal year below 70 days. As I said, we continue to make solid progression in catching up collections with a major federal customer that we disclosed on the prior call.

Finally, we are reiterating fiscal year 2026 revenue guidance, which is expected to range between $5.2 billion and $5.35 billion, albeit with a bias towards the lower end. Let me touch on full year operating margin assumptions for the segments. We expect the U.S. Federal Services full year segment operating margin to now range between 16.5% and 17.0%. For Q4, we expect the U.S. Federal Services operating margin to be between 14.5% and 15.0%.

For the U.S. Services segment full year operating margin, we expect a range of 9.5% to 10.0%, which, as a reminder, includes the $6.9 million noncash charge in the prior quarter. And for Outside the U.S., we still expect the segment to breakeven on a full year basis, which implies a profitable fourth quarter. Other updated assumptions include expected interest expense of roughly $88 million, and we anticipate our full year tax rate to range between 24% and 24.5%.

I'll close my remarks today with some comments on next year, which precedes official fiscal year 2027 guidance that we anticipate providing on the year-end call in November.

I'll start with the contract modification on the VA MDE program. Our assumption based on customer guidance is the temporary pause continues through December 31, 2026. Therefore, we presume that in the first quarter of fiscal year 2027, we will not be eligible to earn incentives. While a range of scenarios could play out across the remainder of next year with this major program, we remain confident in securing the rebid and continuing to serve this important customer and mission.

Looking at the overall Maximus financial profile, I'd point to this fourth quarter of fiscal year 2026 as a reasonable run rate for earnings power and adjusted EBITDA margin going into next fiscal year under the current incentive suspension, while recognizing it remains to be seen how the successor contract is ultimately structured.

For the Federal Services segment as a whole, on a revenue basis, we remain focused on a combination of new work pipeline opportunities and volume-based prospects on current programs that we desire to increase.

As we spoke to on the last call, we have submitted opportunities and continue to await award decisions and in one case, final protest resolution. We are confident that our pipeline is sufficient to drive sustainable growth, but the pace of procurement and corresponding timing of awards remains difficult to predict.

Turning to U.S. Services. We are forecasting a positive revenue growth inflection beginning in the fourth quarter of fiscal 2026. We remain optimistic that this segment will see positive organic growth continuing into fiscal year 2027, and Bruce will provide an update on the Medicaid and SNAP opportunities tied to the H.R. 1 legislation. We look forward to providing formal fiscal year 2027 guidance in November.

And with that, I'll turn the call over to Bruce.

Thanks, David, and good morning. Our third quarter results reflect another period of strong execution across the business and reinforce our confidence in the opportunities ahead even as our updated outlook reflects a customer-driven change on our VA MDE program. We continue to see the benefits of our technology investments, improving both the customer experience and financial performance of programs at scale.

We believe that our deal shaping efforts focused on traditional RFP and nontraditional pipeline opportunities such as other transaction authorities or OTAs, align with the goals and direction of the federal government. Further, awards in the quarter, pending execution ramped nicely, setting the stage for sequential book-to-bill improvement.

As David mentioned, during the quarter, the VA implemented a temporary pause in the performance incentive and disincentive mechanism covering all vendors. While affecting our outlook for that program in the near term, we believe that our ability to deliver solid earnings performance and continue investing in our long-term growth priorities remains intact. Our model is to support our customers as they navigate their own program environment, which can include responding to their legislative, regulatory and compliance needs.

Importantly, we believe that our relationship with the customer remains strong as we continue to deliver high-quality work in a timely and cost-effective manner while making investments to further improve the veteran experience. On that front, a Draft Performance Work Statement or PWS, was just released, which is a key component of the draft RFP that we've been waiting on. While it's not a comprehensive view of the future contract, our preliminary analysis indicates that the scope of work, including all 6 regions that comprise our work today are included in this PWS. This bolsters our optimism about the next contract, and we believe our delivery track record, operational expertise, investments and trusted partnership position us well moving forward.

More broadly, we believe that the encouraging demand signals across our markets, growing adoption of our technology-enabled solutions and a healthy set of opportunities support a positive outlook for the long term.

Let's turn to an update on those opportunity metrics as well as awards as they provide an important lens into both the current procurement environment and where we see growth emerging over the medium and long term.

Our total pipeline sales opportunities was $50.4 billion at June 30, comprised of approximately $2.9 billion in proposals pending, $2.4 billion in proposals in preparation and $45.1 billion in opportunities we are tracking.

The share of new work in the total pipeline is 57%, and the U.S. Federal Services segment's share of the total pipeline is 55%. While some of the change in pipeline value compared to last quarter reflects normal pipeline maturation and portfolio management, it also reflects a larger dynamic, particularly in the federal civilian market, where certain opportunities have experienced procurement delays, scope revisions or in some cases, cancellation as agencies continue to navigate evolving priorities, budget considerations and the policy environment.

As a result and reflecting this dynamic, in some cases, agencies are awarding more bridge contracts and short-term extensions and opportunities are maturing more slowly. That said, we continue to view the underlying demand environment as constructive with the latest total value of opportunities remaining substantial and supporting our long-term growth objectives. We strive to maintain a disciplined target-rich pipeline that reflects opportunities where we believe there's a clear path to award and successful execution.

Our year-to-date signed contract awards as of the end of the third quarter were $1.25 billion of total contract value. These awards translate into a book-to-bill ratio of approximately 0.5x using our standard reporting for the trailing 12-month period. In addition, at June 30, we had a balance of another $1.35 billion worth of contracts that have been awarded but not yet signed. Encouragingly, our balance of awarded but not yet signed contracts represents a significant step-up from the last quarter and was driven primarily by successful longer-term recompete activity.

There are a number of attractive new work opportunities in our pipeline associated with H.R. 1, also known as the Working Families Tax Cut Act, which we believe will increasingly contribute to growth as we exit the fourth quarter. We adjusted our timing expectations as customers digest recently published interim federal rules and navigate their state legislative and program environments.

Let me share what we're seeing at the moment with regard to Medicaid community engagement or work requirements. As planned, organic growth in U.S. Services is expected to return in the fourth quarter as beneficiary outreach and engagement activity drives higher volumes on several existing contracts. Prospective customer discussions, while highly active, have progressed in many cases, more slowly than expected, considering they are less than 6 months until the go-live date.

There's little doubt that the complexity of the recently released interim final rule by CMS has created additional uncertainty for states as they determine how best to operationalize compliance requirements, particularly as they relate to medically frail beneficiaries within existing program structures.

We know from experience that large-scale program changes involving technology, operations, policy and constituent communications simply take time to implement, particularly when they affect programs serving millions of beneficiaries and state government customers are deliberate with their decisions.

That said, absent a change in statute, the underlying need for administrative support, beneficiary engagement, compliance monitoring and technology enablement is expected to remain intact. Altogether, we believe that the demand for community engagement solutions remains positive. And as states continue to evaluate options, we remain optimistic that Maximus has an important role to play.

SNAP meanwhile, continues to advance in some ways more quickly than Medicaid-related opportunities. With more than 40 demonstrations of our Accuracy Assistant tool completed and 150 customer meetings, the level of interest and engagement has grown in recent months. We've responded to active procurements, submitted unsolicited proposals and continue to engage with customers regarding approaches to improving program integrity and payment accuracy.

Notably, the latest SNAP performance data indicates that payment error rates have not materially improved. The recently released USDA fiscal year 2025 payment error rate or PER data showed a national average of approximately 10.6% compared to roughly 10.9% in fiscal year 2024. The newly released data reinforces what many states have been anticipating as they evaluate future financial exposure and operational priorities.

While the PER varies across states, the overall results indicate that payment accuracy remains a significant challenge across much of the country. As a reminder, under H.R. 1, states may elect to use either the just released fiscal year 2025 PER or fiscal year 2026 PER due out in June 2027 when determining their SNAP benefit cost share, which becomes effective October 1, 2027. However, regardless of their PER, states will be responsible for a 25% increase in the SNAP administrative cost share beginning October 1 of this year. This creates both a near-term administrative burden and a longer-term financial incentive to reduce error rates.

Ultimately, we believe our combination of program expertise, delivery capabilities, analytical tools and technology integration know-how positions Maximus well as states seek practical paths to improving accuracy while preserving the citizen experience.

I'd like to turn to the pace of AI adoption, which continues to accelerate inside Maximus and with our customers in alignment with our strategy and investments. Importantly, we're not simply reacting to customer requirements. We're helping shape practical AI-enabled solutions often through our own internal use that customers can adopt with confidence.

Today, approximately 75% to 80% of the new bids and rebids in our pipeline contain explicit requirements or evaluation criteria related to AI. We are also seeing AI procurements become more sophisticated with agencies placing greater emphasis on governance, security, transparency, human oversight, responsible AI practices and the ability to demonstrate measurable mission outcomes. Increasingly, AI is no longer treated as an innovation add-on, but is becoming an expected component of modern service delivery and operational transformation strategies.

Similarly, AI enablement through continuous innovation has become part of our operating rhythm inside Maximus. As just one example, AI-based improvements to core business processes such as IVR and script optimization, chatbot enhancement and proactive text and e-mail engagement in just 5 contracts yielded a better customer experience and a 3.5% operating margin improvement for that group. So in addition to building AI into our solutions for new work, we are systematically updating existing operations that are designed to better meet our customers' needs.

Further, through Maximus Ventures, our strategic investment arm, we continue to identify innovative and differentiated technologies that we believe can strengthen future customer solutions and create new pathways for growth by accelerating adoption across government markets.

One example is our direct investment in Spectro Cloud, which is an AI infrastructure management software provider rather than an AI model company, providing an advanced platform that helps enterprises, public sector organizations, neo clouds and sovereign clouds build and operate production AI infrastructure with greater control over cost, security and governance.

We believe that capabilities like these are what allow government customers to move beyond experimentation and deploy AI securely at scale, particularly those in highly regulated areas, including defense. We view Spectro Cloud as one component of a broader ecosystem necessary to help government customers accelerate AI adoption while maintaining the security, governance and operational controls that those mission environments require.

Our objective through these venture investments is to bring differentiated capabilities to our customers, including preferred access and co-development arrangements where appropriate, creating strategic partnerships that are designed to accelerate deployment, strengthen our competitive position, support revenue growth and increase customer value.

Let me close with an update on the defense and national security market, which remains a priority in our long-term growth strategy. While many civilian agencies continue to experience procurement delays and budget uncertainty, we believe the Department of War procurement engine is functioning more consistently.

Demand signals remain strong and our engagement with customers continues to expand. As part of our strategic planning, we identified a total Maximus addressable market of defense-related opportunities of nearly $47 billion, only a small portion of which is reflected in our reported pipeline. Our objective is to ensure we are positioned to participate in that opportunity set, both through traditional and nontraditional procurement paths.

In addition to the OTAs I mentioned earlier, I'm pleased that the Hackathon platform we created, bringing government, industry and academia together has generated pathways to new programs of record for our customers. We're evaluating how we expand our capabilities, customer access and relevance, past performance qualifications and market presence, particularly in advance of the arrival of opportunities we believe will emerge over the next several years.

Customer intimacy remains paramount, understanding mission needs, helping agencies address technical debt and bringing modern technology-enabled delivery models to government customers through highly accountable performance-based arrangements are all areas where we believe Maximus can differentiate. Importantly, our defense and national security business is already demonstrating success with notable key wins at the Air Force and Transportation Security Administration.

We continue to see evidence that large government customers are increasingly willing to consider capable alternatives outside of the traditional provider ecosystem. We believe this is a sustainable direction of travel and one that creates opportunities for differentiated companies with proven execution. More broadly, our strategy helps support a continued diversification of the company by expanding our exposure to durable growth markets while reducing concentration over time.

In closing, we continue to see a healthy mix of opportunities and navigable challenges as we look ahead to fiscal year 2027. The procurement environment remains understandably uneven. Certain legislative opportunities continue to evolve and customers continue to navigate a complex budget and operating environment.

At the same time, we're encouraged by the momentum we're seeing in areas such as SNAP, AI-enabled solutions and defense and national security. We are continuing to invest thoughtfully, strengthen our capabilities and position the company for long-term growth. As always, our focus remains on controlling the controllables, delivering for our customers, executing with discipline and urgency and creating sustainable value for our shareholders.

And with that, we'll open the line for Q&A. Operator?

[Operator Instructions] Our first question is from Will Gildea with CJS Securities.

So just starting with the temporary contract modification at the VA. Maybe can you just give us any more color on that? And what kind of went into the VA's decision-making process to pause incentives?

Sure. Happy to start and David to add to that. We've been told by the customer that it's a temporary pause. I mentioned the current contract lasts until December 31. And we have seen, interestingly, a Draft Performance Work Statement issued by the VA that's come out that has a comment period for the vendor community that closes on August 12.

So we understand that they're moving ahead, obviously, with their plans for the next procurement. It becomes then a question of will that procurement potentially be completed in time to align with the December 31 deadline or not. And while it wouldn't be unprecedented to get something done in that amount of time, we also, in the procurement have noticed that the volumes that they lay out for the community to respond to suggest that the base contract would begin in the middle of next year.

So that leaves us presently working with information from the customer where they've indicated that the current incentive pause is 180 days in nature and would be completed in December -- at December 31 when the current contracts are scheduled to terminate, but also with the likelihood that we could see up to a 6-month extension to the current contracts to align with the timing that we've seen in the Performance Work Statement.

And as it relates to just the nature of the administrative action that they're taking that's led to this, I know we get the question, is this something that's uncommon? Do you see it from time to time? And I would just say that it's not uncommon for our customers to need to respond over the life of the contract. And these are long-term contracts, the changes in the legislative and the policy and the compliance environment.

So while it's not common for a significant contractual term like this to be suspended, it's also not unprecedented. And our model actually is to support customers as their needs change through the administration of contracts over the life of those contracts. So another example that you'll know we've seen before is when customers modify their invoicing requirements in response to their own environment internally or their environment is such that they have extended periods where they're trying to get contract amendments executed and so forth that can lead to the delays in executions or payments on contracts.

We view that as just a part of doing business as a responsible government contractor being flexible and adroit and being able to use our scale and our agility to help our customers manage through those processes and those times. So -- and overall, honestly, I'd say that it's a contributing factor to the trust that our customers place in us to administer programs on their behalf. So that's why part of our business model is to have contracts for decades and to support our customers through times like this, we see this as no different.

Well, I might just add one more point that these incentives have become a bigger contribution for us in our fiscal year '26 than they have been in prior years, which is really a testament to the investments we've made into the program over the past several years that have brought us to the high level of performance across the incentive metrics.

Yes, that is super helpful. So just for, I guess, the initial early look at fiscal year '27 when you say our earnings power in Q4 is a good run rate for the rest of the year, you're kind of implying that it's likely that the pause will be longer than for 180 days. Is that -- do I have the right idea?

Yes. I mean I think there's a range of scenarios there is what we said. So during a period where there's an absence of incentives, yes, I think that Q4 run rate, which, as I mentioned, based on our full year guidance, that's 13% implied EBITDA margin in Q4. I do think that's a reasonable run rate for this period. I'd point out it's still inside the near-term adjusted EBITDA margin range that we laid out in May of 12% to 15%. And maybe go even further to say, we still believe that 12% to 15% is an appropriate range for the business in the near term. So setting incentives on this one program aside, margins have been steadily increasing over the past several quarters, and we see continued opportunity to drive further technology and improvement to that.

Yes. And then just on the preliminary VA PWS, can you discuss maybe the economics or market share? Are there any changes we should be aware of? Was there any language about incentives in it? Just anything about the initial RFP?

Yes. Well, the short answer is not there, really wasn't. So the Draft PWS that's been released is Section B-3 of a larger RFP that will, I'm sure, be released with all the other components to comprise the RFP in due course. And as I mentioned, the VA is seeking vendor community input by August 12 just on the PWS. So there's really nothing there that speaks to the pricing mechanisms that they intend or incentive structures or anything. It really just lays out the scope of work.

And I would say we like the fact that, first of all, the scope of work and the nature of the work and what the requirements are for the vendor and so forth are entirely consistent with the way the work is currently done by the vendor community and also the regions comprised in the PWS are all 6 regions. So that's not just the 4 domestic regions, but also the predischarge region as well as the international region. So it's a comprehensive PWS. It's consistent.

And it appears from it that the areas that the VA is really valuing in terms of -- as it relates to the veteran experience, and that is making sure that we're able to schedule veterans efficiently and use their time wisely and only see them when they need to be seen and ensure that we're doing everything we can to shorten our component of the overall cycle time that comprises the handling of a veteran claim are all -- they are ongoing priorities of the VA, and they align perfectly to the areas where we've been making investments in capacity and technology as a company. So we feel good about what we're seeing, and we're eager to provide some feedback to the VA as part of the process.

That is helpful. Switching gears, a nice step-up in unsigned but awarded contracts. Maybe you can talk about what some of those opportunities are? And are you expecting them to convert to signed in the current procurement environment?

Yes. I will say that, first of all, I like the characteristics of what we're seeing here because what's in that awarded but unsigned category is really longer contracts with a longer duration. And I mentioned in my earlier remarks that sometimes you're seeing in an environment like this short-term actions, short-term extensions and so forth. So the kind of the durability of those awards is great.

The second thing I would note is that we've been operating in an environment where the probability of protest has been pretty high. Every time something gets awarded inevitably, especially if it's a light award environment, vendors tend to protest. And there's no consequence often for protests. So why not do it, right? If you're an incumbent, it extends your period of performance on your current contract.

Without getting to specific contract gains, I'm pleased that what we're seeing in the awarded but unsigned category includes deals that have been through that protest process and successfully resolved. So they're really just pending the administrative process of contract execution. So that's why I felt confident to say we'll see that ripple through in sequential improvements to book-to-bill in subsequent quarters.

Sounds great. And then I guess, turning pages -- turning to SNAP and Medicaid work requirements, et cetera. A couple of quarters ago, you guys gave an outlook for high single-digit growth in 2027. It seems like you're optimistic on Q4 growth, which is great. Just maybe you can talk about the puts and takes to hitting that outlook in 2027. Can you reaffirm that outlook? Yes.

Yes. I think as we look to 2027, first of all, we've reiterated that this current fourth quarter of '26, we have -- we believe can achieve mid-single-digit organic growth in that segment. So that's an important turning point for the segment, and we do see that momentum carrying into 2027. Why don't I turn it to Bruce for some of the details behind the various policies.

Yes. I really love to talk about the policy side of it. The interesting thing is that there was a couple of dozen state -- Democratic states attorneys general that sued the Trump administration over the recently released interim final rule for the implementation of Medicaid work requirements, as it relates specifically to the definitions around medical frailty and whether individuals who are medically frail, what additional information might they need to provide to demonstrate that they cannot comply with the work requirement?

Well, The Federal District Court judge ruled, I want to say, back on maybe the 29th of July, that they declined to stop the Trump administration. So it enabled the Trump administration to proceed with the implementation of the requirements under the act. So that at least at this point maybe pending an appeal process, but that suggests that the work requirements will continue and need to be implemented as of January 1, 2027.

And recall also that, that also begins a period where for the expansion population, Medicaid expansion population, which is about 21 million people nationally, semiannual redeterminations also begin. Now that work doesn't begin all on January 1 because if you think about it, somebody who's determined eligible as of January 1 would then have to have their eligibility rechecked in July, 6 months later would be the first time that happens.

So we would see activities ramping up around that over the next calendar year. And then also because presently, states now are scrambling candidly to figure out how do we operationalize the interim final rule? It's worth noting that for at least 2027, beneficiaries will be able to self-attest to medical frailty. So there is some time that states have and the activities are funded on a 90-10 basis to help states come into compliance.

So we have a year here where states will figure out what does this mean in terms of the additional attestation requirements? Will they need to be evidenced by doctor's note? How do we do that within the construct of our health systems and maybe our managed care plans? All of that has to get sorted out, but the implementation is, as we understand, and proceeding according to plan. So we're out there having conversations with our customers. And as David has said, we're pleased that already in some of our current contracts, we've gotten the green light to ramp up activities in the fourth quarter related to beneficiary outreach and engagement and so forth, and we'll expect that to continue.

The other element, of course, of H.R. 1 is SNAP. I commented on that in my prepared remarks. And again, that's an area where the states have this looming deadline for having to shoulder an increased component of the administrative cost of the program beginning in October this year and then increased benefit costs subsequent to that. So we continue to get significant interest from state customers and remain engaged with them on that front.

Can you provide any more color -- a question for David. Can you provide any more color on the collections expected in Q4? What are the puts and takes to hitting your free cash flow guidance, if there are any?

Yes. So the one area is DSO that I talked to in my prepared remarks. As I talked about in some detail on last quarter's call, there's a federal -- large federal customer that we are catching up on collections from. As I said, it's a federal agency. It's a funded contract. So we have full confidence that the outstanding invoices will be collected.

And I shared an update in my remarks that since June 30, we've had great momentum with this single customer collecting $245 million since July 1. So our expectation is that, that healthy pace will continue and bring us to that expectation we set of DSO dropping below 70 by the end of September.

And with that in mind, the balance sheet is strong. You talked about your priorities for capital allocation. Is M&A becoming a more important short-term focus? What are your criteria for acquisitions?

Yes. As I said, we consider both share repurchasing and M&A as important considerations over the long term. On the M&A front, we do see it as an important tool despite market conditions as we look toward long-term organic growth. We want to make sure we are investing in capabilities, customer sets, those sorts of things that can unlock pipeline and high probability of revenue synergies.

So that remains something we're focused on. I think it's consistent with what we've been saying for several quarters now that we continue to evaluate opportunities on that front.

Thanks, Will. Operator, back to you.

Thank you. This does conclude today's conference. We thank you again for your participation. You may disconnect your lines at this time.

Greetings, and welcome to the Maximus Fiscal 2026 Second Quarter Earnings Conference Call.

[Operator Instructions] 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, President and CEO, and David Mutryn, CFO. I would like to remind everyone that a number of statements being made today 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 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 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.

Thanks, James, and good morning. I would characterize our completed second quarter in 3 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 towards 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 automation has helped us create meaningful operating leverage. The second quarter results included two unusual items, with one reducing earnings, and the other increasing 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 noncash 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 $0.09 per share impact to the U.S. Services segment operating income.

The second item is a discrete Research & Development tax benefit totaling $4.2 million or approximately $0.08 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 in 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 margins. 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 noncash item I mentioned earlier. Excluding the charge, the margin would have been 10.9% for this period and demonstrates 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 in 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 million 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 30, 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 1.8x and unchanged from the ratio at December 31. We remain below our stated target leverage ratio range of 2x to 3x.

During the second quarter, we repurchased approximately 1.4 million shares totaling $111 million. And subsequent to quarter end through May 1, 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 11.

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 2x to 3x. 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 $0.20 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 million 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 expectation 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 noncash charge this quarter. And for outside the U.S., we are expecting the segment to be roughly breakeven 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 towards 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.

Thanks, David, and good morning. At roughly this point last year, I shared progress on our multiyear transformation initiative, where we streamlined certain areas of the business, driving cost out and funding investments in technology, primarily in the area of AI-enabled automation. Those investments are improving our operations and enabling us to scale a business that already supports roughly 1 in 3 Americans who rely on the programs we deliver for government.

At the halfway point of fiscal year 2026, our results provide further evidence that the investments we've made in technology, automation and AI-enabled tools are improving execution across the business. Our second consecutive earnings guidance increase reflects that progress and suggests that we are slightly ahead of the technology leverage goals we set at the beginning of the year.

We also believe that we remain well positioned to execute against our capital deployment priorities, including selective investments in capabilities that strengthen our differentiation, potential acquisition targets that could accelerate longer-term organic growth by augmenting capabilities and customer access and share repurchases supported by the Board-authorized $400 million program refresh.

As a reminder, we remain focused on the federal defense and national security domains for our inorganic priorities.

I'll focus my remarks today on 3 areas: first, the growing emphasis across government on fraud; second, how we're accelerating AI and automation in our solutions and across Maximus; and third, the progress we're seeing with state customers around Medicaid community engagement, also called work requirements, SNAP and, unemployment insurance administration.

Our government customers want programs that work, programs with integrity that are effective, efficient and trusted, delivered by partners free from conflicts of interest, often under performance-based contracts structured to provide transparency and accountability to outcomes.

Increasingly, better technology and data quality is helping customers flip the model to combat fraud upfront rather than relying solely on after-the-fact detection, often referred to as pay-and-chase. The technology-enabled services that Maximus provides to government are designed to embed integrity directly into program operations, using analytics, automation, data matching and increasingly AI-supported workflows to drive execution and support oversight without slowing service delivery.

It's important to emphasize our role in this ecosystem. As I've commented in the past, Maximus doesn't make policy, but we do help operationalize it. Our focus is on translating policy intent into practical technology-enabled solutions that strengthen program integrity and reinforce public trust. We're seeing growing bipartisan alignment around this approach. A number of customers are using advanced data matching and analytics to address issues like concurrent enrollment, where Medicaid beneficiaries may be enrolled in multiple states concurrently, connecting data sets across programs to ensure enrollment integrity.

Technology allows these checks to happen faster, more accurately and at scale, increasingly preventing enrollment errors before they occur. As a trusted partner to government, we develop data-driven insights through tens of millions of interactions with citizens each year. That data matters, not just because it provides our teams and our customers real insight on the user experience, how people engage, where they struggle and how they make choices. But moreover, this data is increasingly informing models that are designed to improve program delivery, eliminate friction, prevent fraud and improve outcomes for our customers.

Fiscal 2026 has seen a planned acceleration of AI across Maximus through a company-wide initiative, and I'm pleased to provide an update on our enterprise activation. AI is already enabling Maximus to deliver even greater value for our customers. Our solutions are accelerating service delivery, providing deeper insights on program effectiveness, enabling rapid adaptation to changing policy and mission priorities and increasing operating leverage and scale.

Let me begin with two customer-focused proof points. First, our Total Experience Management or TXM solution that I briefly mentioned on the last call is capturing the attention of government customers and winning in the marketplace. In fact, one representative of the federal agency acknowledged TXM as the most sophisticated deployment of AI in a contact center environment that they have seen to date. We continue to invest in TXM as we address this multibillion-dollar government market.

Second, our AI accelerator team rapidly implemented an innovative solution developed in-house using a combination of generative and probabilistic AI to streamline high-volume claim processing on a core program where we serve as an independent dispute resolution entity. Nearly half of the effort required in processing claims is now handled through automation, enabling staff to focus on outcome accuracy and more complex cases.

Our AI focus has been straightforward. We are deploying it where we believe it helps our customers run programs with greater integrity, speed and consistency and where it's designed to measurably reduce friction for the people those programs serve. Doing that responsibly requires more than a model. It requires a methodology that leverages domain knowledge, brings the workforce along, embeds controls into workflows and integrates securely into legacy environments.

We are intentionally acting as customer zero for many of these initiatives. In the government context, where trust and proven execution are critical, we believe that this matters. Through internal use, we gain firsthand insight into what drives adoption, the governance and controls required, how to integrate with real-world workflows and what it takes to move from a successful pilot to scalable, sustainable operations.

We are already seeing the impact of our AI investments applied at scale on certain programs. I only expect this to grow as we move from pilots to scale with high-value contact center use cases from call deflection to summarization, from training to quality assurance, from intelligent document processing to real-time fraud detection. Our toolkit is broad and includes proprietary techniques developed through our R&D investments, venture investments and partnerships with early-stage companies and preferred relationships with industry leaders.

That said, I'm optimistic about the ultimate potential for AI for our customers as we're in the early innings with regard to deploying some of our most sophisticated AI solutions. These solutions have the greatest potential to transform delivery models with speed and cost-effective delivery of high-quality complex services. As an example, through our Corporate Venture Capital, or CVC function, we invested in the health AI domain to create new intellectual property that we plan to deploy in the near term.

This IP uses knowledge graphs and a complex clinical ontology to provide decision support traceability for clinical assessments that government programs require. While we're advancing with the rapid pace of AI developments, we also acknowledge the still evolving federal and state government regulatory environment as well as the limitations of legacy systems with which we often must integrate.

An equal, if not more important consideration, of course, is the environment of public trust that is foundational to the programs we administer on behalf of government.

Finally, as you would expect, no area of the business has been exempted from our AI enablement from back-office operations such as AP invoice processing to our business support functions like legal and human resources, to enterprise technology development, we are examining every aspect of how we work and create value. For employees, our generative AI tools delivered through familiar channels like Microsoft Teams are designed to streamline common tasks and are poised to evolve as Agentic orchestration matures in the enterprise.

So, to summarize, we're executing as planned, moving with speed and urgency, but also respecting the pace of our customers. We're demonstrating the art of the possible, backing it up with proof points and differentiating Maximus in winning new work and our rebids. We view our combination of domain knowledge, ability to gain insights from large operational data sets and our industry-leading tech talent as a powerful competitive differentiator.

Next, I'll share how the procurement environment looks for us today. On the federal side, particularly in civilian agencies, the shortage of acquisition professionals continues to make forecasting procurement time lines difficult. In an environment where awards have shifted right, protests have increased, further delaying outcomes.

Moreover, certain technology modernization initiatives, again, particularly in civilian agencies, have been slow to manifest in formal procurements, although the underlying demand signal is strong. That said, we believe momentum is starting to build, and we'll be in a good position heading into next year.

On the state side, we're seeing solid traction in a number of areas related to HR-1 or the Working Families Tax Cut Act. Presently, there are two states working with us toward arrangements that could utilize our existing contracts to support Medicaid community engagement or MCE compliance. Depending on the contracting mechanism, these opportunities may either show up as higher volumes under existing contracts or be reported as new awards.

One of these examples, we estimate could drive a more than 30% increase in current program revenue, subject to final scope and implementation timing. More broadly, states remain actively engaged in both planning and delivery to address Medicaid needs and the momentum we're seeing is consistent. The timing of final MCE regulations has necessitated that states leave placeholders in their operating plans until regulations solidify, which is expected next quarter.

Following that, we believe action by customers to put in place solutions where we play a role could accelerate. We're also making good progress on positioning Maximus to assist states in lowering SNAP payment error rates through our accuracy assistant offering. After multiple rounds of demos being well received with certain customers, our conversations are increasingly focused on integration, technical detail and indicative pricing, which tells us that we've moved beyond concept and into serious implementation planning.

Senior state officials have commented on the comprehensiveness of our SNAP solution, noting that Accuracy Assistant is the only truly end-to-end complete vendor solution they have seen.

Finally, we're seeing renewed traction in unemployment insurance administration, representing a small but important pipeline. We view this as both reflecting current economic conditions and also the greater flexibility granted to states to use private partners for this work, a development championed by Maximus and of which I've spoken previously.

Moving now to our award metrics and pipeline. Our year-to-date signed contract awards as of the end of the second quarter were $913 million of total contract value, in addition, at March 31, we had a balance of $322 million worth of contracts that have been awarded but not yet signed. These awards translate into a book-to-bill ratio of approximately 0.5x using our standard reporting for the trailing 12-month period.

The second quarter had a quarterly book-to-bill ratio of 0.5x, reflecting sequential improvement from the prior quarter's figure of 0.2x. Turning to our total pipeline of sales opportunities. We had $56.8 billion at March 31, comprised of approximately $4.6 billion in proposals pending, $1.5 billion in proposals in preparation and $50.7 million in opportunities we are tracking.

The share of new work in the total pipeline is 59%, and the U.S. Federal Services segment's share of the total pipeline is 58% Finally, even as states await final work requirement regulations expected this summer, I'm pleased that the second quarter pipeline includes an HR-1-related opportunity set that increased 75% compared to our tracking of this set last quarter. The other positive sign of HR-1 progression is that our forecast for U.S. services includes mid-single-digit organic growth in Q4, providing early momentum as we enter FY '27, with improvement possible as the HR-1 pipeline matures and converts.

In all, I'm proud of the team for their continued focused execution this quarter, for the momentum we are building to capitalize on market opportunities and for the enterprise-wide focus on our continued evolution as a leading provider of technology-enabled solutions to government. And with that, we'll open the line for Q&A. Operator?

[Operator Instructions] Our first question is from Will Gildea with CJS Securities.

I guess for David, any more color on the higher DSOs in the quarter, and you refreshed the buyback authorization, but how are you thinking about capacity for share buybacks considering the cash flow lumpiness?

Yes. Thanks. So a little more color on the higher DSO. It stems from a major federal customer, as I said, and it's the same customer that contributed to the temporarily higher DSO in our fiscal year 2025. We did anticipate a buildup of accounts receivable in our November guidance and then again in February when we said we expected DSO to remain elevated in Q2.

So, a little more detail. This is a large program with extremely complex and data-intensive invoicing requirements. The slowdown in collections has occurred since November as we've worked with our customer on incorporating new and evolving requirements, many of which are retroactive, so may require rework of prior period invoices. This is a federal agency. We're operating under a funded contract.

So, we do have full confidence that the outstanding invoices will be collected. And we continue to regularly collect, but this customer's AR increase in Q2. And our current view is that it may remain flat in Q3 before declining in Q4 as we expect to catch up and collect more than our revenue. So that matches with my prepared remarks that we believe DSO may remain elevated as of June 30 and improve in Q4. So near-term cash flow plays into our thinking, as I said, among other factors with the share repurchase, including the valuation as well as any kind of near-term M&A opportunities. So, we factor all that thinking into our repurchase calculation.

That is super helpful. And then thinking about HR-1 opportunities in SNAP, you talked about that error prevention solution and the good response from potential customers, are you currently planning or marketing or planning to bring to market other solutions for SNAP?

Well, it's Bruce. Yes, the heart of the solution is the accuracy assistant tool, which has been very well received in the marketplace. And in fact, as I mentioned in my prepared remarks, we've had customers say that it's the most comprehensive end-to-end tool out there. And those very same customers have now come to us and said, okay, how would we get something like this implemented? What would the indicative pricing be? So, at the heart of it is really that tool and then the services that we can wrap around that tool to help states identify instances where there could be inconsistency.

The tool surfaces inconsistencies in the data and then the BPO services you use to go out and contact the beneficiaries and get corrections to that made and ensure that you're making accuracy, an accurate eligibility determination. So that's the core tool there.

I'll also say on the Medicaid side, we have a community engagement tool that's been designed and structured to allow beneficiaries, first of all, to navigate the process of determining whether they actually need to comply with the work requirements because they may have conditions that meet the qualifications for exemption. So, there's an entire upfront process where folks need to be given the ability to apply for an exemption that has to be determined.

And if they, and they do have appeal rights, if they don't agree with the outcome of that determination, they can appeal that. And then once they're into, say they've gotten through that process and they actually then need to be demonstrating compliance with the 80 hours a month work requirement. The tool, very simply mobile app style allows them to do things like image of time sheet or any kind of evidence that they may have volunteered, they're working in the community, they're at a job, what have you. And we use our intelligent document processing solution, which is AI-enabled as well to ensure that those documents appropriately reflect the hours worked from a federal compliance standpoint in the core legacy system.

So there is a lot of tech that we're building as part of this. And as I mentioned in my remarks, our view about implementing AI for our customers is that it's not about having a shiny tool. It's about understanding workflows. It's understanding the governance and the guardrails. It's about bringing the staff along that are going to be using these tools because it requires retraining and so forth.

And most importantly, it's working with the customers to ensure that the public trust that they've created with these programs is maintained and if anything, enhanced if possible, through the use. So we feel like we're in a great position to obviously help our customers navigate HR-1.

That's great color. And then just asking for some more color on the state side. What are the dynamics that have driven revenue declines in the first two quarters of the year? And why are you confident in a return to growth by Q4?

Yes, sure. I'll take it. Thanks. We expected the year-over-year comparisons to improve over the remaining quarters, we said that last quarter. And Q2 is sequentially up from Q1. So we are seeing that play out. I mentioned in the prepared remarks that there was an element of higher clinical work in the prior year period in U.S. Services as well as U.S. Federal. On the U.S. Services side, one of our larger clinical contracts in the segment had some state-specific dynamics that drove a reduction in volume year versus year.

So not really indicative of any broader trend. I think what our confidence in Q4 really is driven by the HR-1-related activities, which we expect to see coming in, in Q4. And that sequential growth in U.S. Services actually drives our expectation that for the whole company, revenue and earnings, we believe, should be a little higher sequentially in Q4 versus Q3. So there's a little quarterly color while I'm at it.

And then you keep raising the margin outlook on U.S. Federal based on tech initiatives and efficiency gains. Maybe add some more color on exactly what those efficiency gains are? And why are we not, why have we yet to see a similar dynamic in the Services segment?

Sure. Will, I'll take that one. First to note, our federal contracts are generally larger, meaning that when you implement technology initiatives, they get applied in that segment to programs that are larger from a scale and volume standpoint. So, they just, by definition, are going to be more impactful on the margins of the business. Secondly, all of our U.S. services contracts, is to remember, particularly in Medicaid and the health benefit exchange area, they see us delivering services directly to consumers.

And so that, again, that issue of public trust that I mentioned is super important for our customers. It's front and center for our state customers. And as a consequence, they've expressed, I will say, decidedly more caution in the adoption of AI and other automation tools without first really understanding deeply how guardrails can be put in place to ensure that they maintain compliance with program regulations because compliance is super important to them.

It's also worth noting that there's a patchwork quilt of regulations out there at the state level that our clients have to individually navigate, whereas that's less the case at the federal level presently.

Third, U.S. Services contracts certainly have great incremental technology opportunities in them. There's no question. But they also operate in a fairly sophisticated environment that incorporates a lot of legacy systems. So therefore, there are multiple points of integration with state legacy systems that are required in just executing our program delivery model. I want to give you an example to kind of bring this home.

In one state, in particular, our employees are trained across 5 different state systems in order to do their work. So environments like this are much more challenging to apply automation to and particularly when this has to be done across multiple vendor contracts that have to be coordinated. And then finally, to kind of overlay all of this, our state customers already have a lot on their plates, particularly with the requirements for implementing HR-1.

So in many cases, they have limited bandwidth. They don't have the budget resources necessarily to do a lot more than that. And they're performing the system surgery, if you will, that's needed to really drive significant automation and changing an already very stable in most cases and positive end user experience has just become less of an immediate priority for them. So David, would you add anything more to that?

No, that's great. Thanks.

Switching back to federal. Do you have any updates on the VA contract? Is the recompete still expected in the summer? Or do you think there will most likely be an extension? And do you have an Industry Day later this month, what are you looking to accomplish or learn there?

Yes, I'll take that to start. The current contract, as a reminder, goes through December 31 for all vendors, December 31, 2026. And so the VA has not yet released a formal time line for the rebid. And we expect, I guess what we expect to learn at the upcoming Industry Day is maybe what that time line is intended to be.

What we do know is that, generally speaking, agencies across government have the ability, if needed, to extend existing contracts as they complete their recompete process. Again, we don't know yet if the VA will need to do that or intend to do that. We may learn that at the Industry Day as well. We'll see. So we'd expect to be able to share more information on subsequent calls as it becomes available from the customer.

In the meantime, we're remaining just completely focused on providing first-class service to veterans and to the VA. And we think we've earned the reputation for delivering a high-quality veteran experience. I'll note that this is very much made possible by the many employees in our Veterans Evaluation Services subsidiary themselves that have served and our veterans. They understand that experience and how to navigate these programs. And they do so with a great deal of empathy and compassion, I'll note. So we feel like we're delivering great value to the VBA under the current contract.

And therefore, we are optimistic about the future outcome of the rebid. We've got a strong track record with the VBA. We've got demonstrated delivery capabilities at scale and capacity. We've made significant technology investments and continue to make significant investments in further improving the veteran experience. And by that, I mean focusing specifically on reducing the time that veterans spend in our portion of the MDE claims process. So that's the update that I'm able to provide at this time.

And outside of the VBA, are there any notable recompetes over the next 12 to 24 months?

Nothing that I'd call out in particular. As you've noted, the veterans exam recompete is the largest. Everything else is kind of normal recompete cadence within our contract portfolio. As I noted in my prepared remarks, we are seeing bid determinations including rebid determinations moving to the right, both on the federal and the state side. But that's not necessarily a bad thing because often our work can be extended while we're awaiting the outcome of rebid and our rebid win rate remains very high. So not a bad environment necessarily.

That sounds great. And just one more, more of a guidance question for David. On the federal side, are there any other tough comps to lap in these last two quarters? know, yes, the emergency stuff was a tough comp for this quarter.

Yes. If you look back at fiscal year '25, Q3, the June quarter was also very strong on the surge in clinical volumes. So that will remain a tough comp as well Q4 to a lesser extent.

Thank you. This concludes our Q&A session and our call. Thank you for your participation. You may disconnect your lines at this time, and have a great day.

Greetings, and welcome to the Maximus Fiscal 2026 First Quarter Conference Call. [Operator Instructions]

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Francis, VP of Investor Relations. Thank you. You may begin.

Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO; and David Mutryn, CFO.

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 required by law. Today's presentation also contains non-GAAP financial information. 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 Bruce.

Thanks, James, and good morning. Our ability to deliver consistent performance is evidenced in our first quarter results and enables us to raise earnings guidance and narrow our revenue guidance for the full fiscal year 2026.

Maximus operates in a resilient sector of government spend and the delivery of essential services in a high quality and efficient manner is a hallmark of our business. The performance and outcomes-based nature of portfolio has aligned well with administration priorities and has historically operated largely unaffected through temporary shutdowns. The strength of that foundation enabled us to expand to support new customers as with U.S. Air Force and to focus on the pursuit of opportunities ahead that we see both in our federal and state markets. Most currently, that's Medicaid and SNAP on the state side, and I'll share how those are tracking.

Finally, I'll update you on our continued strategic evolution as a trusted provider of technology-driven solutions and services to our government customers. This strategy includes expanding our use of automation, including, in some instances, AI to augment how work is done, enhance citizen satisfaction and improve financial performance, enabling reinvestment to support our customers and drive shareholder value.

Our first quarter results reflect virtually no direct impact to our contract portfolio from the shutdown last fall. Historically, a significant majority of our programs are deemed essential when a temporary shutdown occurs, resulting in the ability to maintain our P&L forecast. However, 2 secondary impacts tend to be slower payments from customers, which David will touch on and temporary delays in award decisions. Both of these dynamics occurred, so let's go through the awards and pipeline metrics now.

For the first quarter of fiscal year 2026, signed awards totaled $246 million of total contract value. In addition, at December 31, we had a balance of $699 million worth of contracts that have been awarded, but not yet signed. These awards translate into a book-to-bill ratio of approximately 0.5x using our standard reporting for the trailing 12-month period. The lower TTM book-to-bill ratio was impacted by very light award activity in our just completed first quarter, which had a quarterly book-to-bill ratio of 0.2x. The awards in the quarter comprised primarily several smaller recompete wins for the U.S. services business, which we typically have on a rolling basis.

The government shutdown had a direct impact on our U.S. federal award activity, which has also been noted recently by others in our industry. We view it as a timing dynamic and not a structural change, and we anticipate award activity will pick up across the 3 remaining quarters of this fiscal year. Our fiscal 2026 guidance assumes virtually no contribution from new work and that subsequent award activity likely fuels our fiscal year 2027 and beyond.

Turning to our pipeline of sales opportunities. We had $59.1 billion at December 31 compared to $51.3 billion reported at September 30. The current pipeline is comprised of approximately $3.8 billion in proposals pending, $2.4 billion in proposals in preparation and $52.9 billion in opportunities we are tracking. The share of new work in the total pipeline is 59% and the U.S. Federal Services segment's share of the total pipeline is 61%.

Two elements of our pipeline are noteworthy. First, our reporting is beginning to include a small number of potential opportunities in Medicaid and SNAP related to the Working Families Tax Cut or WFTC legislation. We had messaged on prior calls and noted that the September 30 pipeline did not yet include such opportunities. While not a major driver of the pipeline increase this quarter, discussions with certain states are progressing such that we're adding specific opportunities that we believe represent actionable pads to support implementation of the new legislation. I'll touch on that momentarily.

Second, proposals pending or submitted and proposals that we are currently preparing total combined $6.2 billion of total contract value. This is a 55% increase from the combined figure of $4.0 billion 1 year ago, which we believe is an indicator that positive pressure is building to both secure our normal course recompetes as well as enable future new work awards that contribute to our long-term organic growth target.

Let's go to updates on the current challenges facing state customers, starting with the majority of whom expanded Medicaid and will soon be required to conduct twice yearly eligibility determinations for their expansion populations. Cumulatively, the expansion population nationwide is roughly 1/4 of the total Medicaid population. We're fortunate to have strong working relationships through existing contracts with many of the expansion states for whom we already perform eligibility support services.

We continue to see more frequent eligibility support driving up engagement with Medicaid beneficiaries. As we've noted previously, more frequent engagement is the principal driver of volumes on many of our state contracts. In other words, activity levels per beneficiary, not absolute enrollment, are the key drivers for many contracts. Where practical, we anticipate states will leverage existing contracts and establish program infrastructure to meet the legislative requirement for semiannual eligibility determinations, which begins next January 1.

Another new requirement for states that I've spoken to previously and also pertains to the Medicaid expansion population, is community engagement, also known as Work Requirements. Also effective January 1, 2027, this will compel states to implement new compliance processes and expand overall program administration. Community engagement comprises employment, education and training and volunteering for those beneficiaries not qualifying for an exemption.

For years, Maximus has supported programs designed for employment as an end goal in adjacent programs like TANF and SNAP. We believe our ability to not only determine compliance with work requirements, but to also connect beneficiaries to local job opportunities, builds on capabilities we have developed in these adjacent programs and further differentiates Maximus.

Presently, we're working closely with current and prospective state customers on pads to modify program operations and leverage our technology investments, while delivering a high-quality customer experience. To that end, in a January 29 press release, CMS announced Maximus as 1 of 10 companies with existing Medicaid eligibility and enrollment contracts with states that are voluntarily pledged to help states successfully prepare for and implement Medicaid community engagement requirements. We anticipate making digital tools and resources such as our community engagement tracking tool and job boards available to existing state Medicaid clients at reduced costs through this investment. I am pleased to see pipeline opportunities that anticipate both RFP-based procurements and contract amendments to begin implementation activities in the coming months.

Let's turn to the SNAP program, touching on a couple of high points as reminders. SNAP represents an emerging opportunity for Maximus as it is a program that has traditionally been administered by states and counties themselves. SNAP has a smaller administrative funding component, which historically has been shared by states in the federal government on a 50-50 basis as well as a larger benefit funding component, the food assistance itself, which is 100% federally funded.

Beginning in government fiscal year 2028, if a state has a payment error rate greater than 6%, which an estimated 43 states, including DC do, they are required to begin contributing to the benefit in a manner correlated to their error rate. States may either use their FY '25 or FY '26 error rate for calculation of their share of food costs, making actions this year potentially consequential for many to reduce their payment error rates.

Finally, under the WFTC Act beginning in government fiscal year 2027, all states will be responsible for 75% of the administrative funding for SNAP. Put together, it's expected to highly incentivize states to work swiftly to reduce if needed, and maintain their error rate at or below 6%. Last week, we announced the launch of our accuracy assistant tool that is purpose-built to help states reduce their SNAP payment error rate. Using predictive analytics and intelligent automation to help detect data inconsistencies and flag potential errors before they occur and become costly. We are proud to offer this AI-powered solution that's designed to help provide states with real-time error prevention and reporting to support continuous improvement.

Our Accuracy Assistant tool has the capability to integrate into existing state data environments, making it an attractive option as states consider cost of implementation and timelines. We anticipate states will prioritize tools such as Accuracy Assistant in the near term to help drive error root cause analysis, while considering longer-term process redesign, technology and operating models to deliver consistent, higher-quality determinations. With our decades of experience delivering outcomes for our customers, we believe Maximus is well equipped to support both near- and longer-term state objectives.

Moving to what is clearly becoming a game changer in the government services arena. Maximus' strategic expansion of automation, including the use of AI is impacting the way we work, the technology solutions we offer our customers and the delivery of customer outcomes and the public experience or PX through the programs we administer. I'll highlight a few recent examples. We recently unseated a well-established incumbent, scoring 98% of available technical points on a bid in our Outside the U.S. segment, the scope of which includes the technology platform to support the determination of government compensation based on clinical evidence accompanying claims submissions.

Our solution represented an evolution of our AI-powered intelligent document processing tool in current production in our U.S. business. Overall, the bid scored nearly 97% out of the 100% scoring criteria. This win demonstrates our ability to leverage AI-driven technology capabilities that are designed to help meet customer demand across our business, while derisking delivery through component modularity and standardized deployment models. Our AI solutions and capabilities consist of a combination of in-house development, especially in areas where our proprietary process knowledge and data provide the most value and carefully chosen partnerships with leading providers for more standardized use cases such as employee self-service.

We're now demonstrating practical applications of Agentic AI tools within clearly defined and controlled environments. We believe that these tools recognized for their goal-oriented behavior, adaptability and context awareness have the potential to deliver greater business value. As I've mentioned before, within our business, we're acting as customer zero, from which we develop capabilities and experience to then demonstrate for our customers.

Our data shows that staff at all levels and departments are quickly adopting AI tools and participating in training. In fact, in some cases, our frontline employees are the most active, underscoring the human-centered transformation that blends advanced technology with cultural and operational change. With positive proof points already achieved, we are excited to deploy the next wave of capabilities through which we can show the art of the possible to our customers.

Continuing on AI. I'd like to highlight another program where we implemented an AI-based solution to significantly streamline the processing of payment-related disputes. Our solution automated data extraction and validation of electronic records, followed by empirical nonsubjective evaluation against state laws. This approach has led to 45% of disputes being resolved autonomously and significantly increased throughput capacity for our customer. We also measured material improvements to financial performance on the program on a year-over-year basis, thereby enabling further technical investment on behalf of our government customers.

Finally, as further evidence of our evolution as a trusted provider of increasingly AI-driven solutions to our government customers, I am pleased to announce that Maximus was very recently selected as the single awardee of the U.S. General Services Administration, or GSA, Blanket Purchase Agreement or BPA, to support the agency's Government Experience Contact Center or GXCC services transformation, which is still subject to the regulatory protest period. Previously known as the GSA public experience portfolio, GXCC supports the channels, including telephone, e-mail and web chat that help the public navigate government programs and services and information.

As described in the solicitation, the BPA performance period is up to 5 years, including options and has no maximum orders or ceiling amount. As included in the solicitation, the GSA anticipates awarding 5 orders within 2 months of this award, and this BPA can support new customer agency programs under their own call orders. I'll close today with the exciting news that Maximus just won a spot on the Forbes list of America's Best Employers for 2026. This is our second year being recognized for this annual award, which is conducted through an independent survey. The full award list and corresponding details are scheduled for announcement by Forbes next week on February 10. We are honored to be recognized and appreciate all of our employees that contribute to the trust placed in us by our customers.

And with that, I'll turn the call over to David.

Thanks, Bruce, and good morning. We're pleased to start fiscal year 2026 with solid first quarter results that show the business is tracking to our expectations. We had no material income statement impact from the government shutdown last fall. Guidance today reflects improvement to our full year earnings outlook, and we are narrowing the range of our revenue guidance.

During the quarter, we completed the divestiture of our Child Support business within the U.S. Services segment, which comprised approximately $25 million of annual revenue and a gain of approximately $9 million was recognized. While a long-time business of Maximus, we concluded that it was neither meeting our financial expectations for growth and profitability, nor was a core offering as we've evolved to pursue higher value services in the state market. We are committed to a disciplined evaluation of all areas of the business on an ongoing basis and have a desire to free up organizational capacity to focus on more attractive opportunities for Maximus in the future.

Turning to quarterly results. I'll begin with framing them as broadly in line with our expectations when we provided fiscal year 2026 guidance on the November earnings call. For the first quarter of fiscal year 2026, Maximus reported revenue of $1.35 billion, representing a 4.1% decline over the prior year period. Of that, roughly 1.5% was related to the Outside the U.S. segment divestiture that occurred near the end of the first quarter of last year, while most of the balance was organic movements. The U.S. Federal Services segment posted positive organic growth, which was offset by the U.S. services and Outside the U.S. segments.

On the bottom line, adjusted EBITDA margin was 12.7% and adjusted EPS was $1.85 for the quarter, which compares to 11.2% and $1.61, respectively, for the prior year period. I should mention that divestiture-related activity, which is not reflected in our adjusted metrics drove a year-over-year improvement in our GAAP earnings. The prior year period contained $38 million of charges for the Outside the U.S. divestiture, while this current period included a gain of $9 million for the small divestiture in the U.S. Services segment.

Beyond that, our year-over-year improvement was driven by performance of the U.S. Federal Services segment. I'll also note that results today are consistent with our expectations for a slightly lower first quarter adjusted EPS compared to the remaining quarters of fiscal year 2026.

Let's turn to the segments. Revenue for the U.S. Federal Services segment increased 0.8% to $787 million as compared to the prior year period and all growth was organic. As a reminder, revenue for the prior year period in this segment benefited from unexpected volume growth and natural disaster support, which we did not forecast to recur at the same level. The operating income margin for this segment in the first quarter was 16.5% as compared to 12.7% in the prior year period. This quarter's segment margin reflects the wider adoption of technology initiatives that enhance productivity of our staff across multiple program areas within U.S. Federal Services. We anticipate durability of this benefit through fiscal year 2026, and we've increased the guidance for this segment's full year margin.

In to the U.S. Services segment, revenue decreased to $415 million as compared to the prior year period revenue of $452 million. Contraction in this segment was anticipated and stems from a number of programs that are experiencing lower volumes or demand for engagement compared to prior years. We continue to believe there is a strong opportunity for Maximus to assist state customers with emerging requirements in their Medicaid and SNAP programs. The segment's operating income margin for the first quarter was 7.1% compared to 9.0% for the prior year period.

This quarter's lower margin follows a similar pattern to last fiscal year where the Q1 margin was depressed, and we contemplated this dynamic in fiscal year 2026 guidance. In recent years, the need to have more resources for the open enrollment period temporarily increases costs beyond the incremental revenue contribution. As I'll touch on shortly, the full year margin guidance for this segment reflects an improvement to the bottom end of the range.

Turning to the Outside the U.S. segment. Revenue decreased to $143 million as compared to the prior year period revenue of $170 million. A majority of this delta about $19 million was attributable to the divestiture of the Australian and South Korean businesses near the end of the prior year period. The remainder of the decrease stemmed from lower volumes on several programs and was partially offset by a small currency benefit. The segment realized an operating loss of $1.4 million compared to an operating profit of $8.1 million in the prior period.

The leaner segment following the divestitures has prioritized business development investments. Meanwhile, the corresponding revenue contributions tied to new work opportunities has shifted out, which also affects full year margin guidance for this segment. In prior periods, we have spoken to margin stability in this segment and we do not view this quarter as changing our belief around a healthier segment. Our goal over the longer term remains to drive further margin improvement by building scale in our present geographies.

Turning to cash flow items. Cash used in operating activities was a net outflow of $244 million and free cash flow was a net outflow of $251 million for the quarter. These first quarter cash outflows reflected expected seasonality around timing of cash payments in the business as well as temporary delays of collections in our U.S. Federal Services segment is a result of administrative delays on one of our programs and, to a lesser extent, some lingering delays from the government shutdown. These delays drove a step-up of our days sales outstanding or DSO to 78 days for this quarter. We anticipate the DSO will remain temporarily elevated at March 31 and then normalize in the latter half of this fiscal year.

Our free cash flow guidance is unchanged and is still expected to range between $450 million and $500 million. We ended the first quarter with total debt of $1.58 billion, resulting in a consolidated net total leverage ratio of 1.8x. The increase to the leverage ratio from 1.5x at September 30 resulted from near-term borrowing needs amidst the cash flow dynamics in Q1. We remain below our stated target leverage ratio range of 2 to 3x. As a reminder, this ratio is our debt net of allowed cash to consolidated EBITDA for the last 12 months as calculated in accordance with our credit agreement. Finally, absent any M&A activity or share repurchases, which we don't explicitly forecast, we would continue to expect to finish fiscal year 2026 at or below 1.0x.

Speaking more broadly about capital allocation, our first priority is organic investment. We run a disciplined process to evaluate and fund initiatives where we consistently deploy capital to refresh technology, build capacity and design more effective ways for our customers to accomplish their missions. From there, our priorities have not changed from what we've articulated on prior calls. We continue to seek acquisitions that can accelerate future organic growth under a disciplined evaluation framework and with a bias towards the federal market.

I'll finish with updated guidance for fiscal year 2026. We're raising earnings guidance, narrowing revenue guidance and maintaining free cash flow guidance. We started fiscal year 2026 with strong visibility and our first quarter results naturally strengthen our view of today's updated guidance. Starting with revenue. Both ends of the range are reduced by $25 million to remove the approximate impact of the divested business. This means the bottom end of our revised fiscal year 2026 guidance is $5.2 billion of revenue. We are adjusting the top end of the range by an additional $50 million to account for delays in our already modest in-year new work revenue assumption. This brings the top end of our range to $5.35 billion and provides us excellent visibility to revenue guidance.

Our full-year adjusted EBITDA margin guidance for fiscal year 2026 is now approximately 14%, which is a 30 basis point improvement from prior guidance. Our adjusted EPS guidance increases by $0.10 and is now expected to range between $8.05 and $8.35 per share. At the midpoint of $8.20, this reflects year-over-year earnings growth of more than 11%. There are corresponding updates to our full year operating margin assumptions by segment. We expect the U.S. Federal Services margin to range between 16.5% and 17%, a 100 basis point improvement from prior guidance.

We expect our U.S. Services segment margin to be in the 10.5% to 11% range which is bringing up the bottom end from prior guidance. And for Outside the U.S., we believe the segment will be profitable this year with an estimated full year margin between 1% and 3%. Other updated assumptions include expected interest expense of roughly $75 million, and we anticipate our full year tax rate to range between 24.5% and 25.5%.

In conclusion, we're pleased with how fiscal year 2026 has come into focus. We believe the updated guidance reflects a solid line of sight on our current portfolio of programs and highlights the durability of the essential services we provide to government. Further, we are excited by the opportunities for the business as we are seeing building demand for a tech-enabled partner to implement government imperatives. This supports our conviction on the organic revenue growth potential of Maximus as we take prudent steps now to prepare for growth in fiscal year 2027 and beyond.

And with that, we will open the line for Q&A. Operator?

[Operator Instructions]

Our first question will come from the line of Charlie Strauzer with CJS Securities.

A quick question, just kind of broader picture kind of question. When you look at your revenue guidance, roughly how much of that is in the end versus having to -- versus new work?

Yes, Charlie, it's David. Thanks. Yes, as Bruce mentioned in the script, there's virtually no new work remaining forecast. Even entering the year, as we said, it was already modest. Our initial guidance coming into the year had about 3% of not yet new work in the midpoint of the guidance. So with the narrowing of the revenue range that very small now.

And the same with you, David, for a few minutes, if we could just get a little bit more color on the segment revenue guidance and your thoughts behind some of the drivers that -- or potentially impediments to achieving the -- these goals?

Yes. We feel confident in our guidance range. For U.S. Services revenue was down more in the first quarter that was expected in line with our forecast. We don't believe that, that's a run rate that will continue. In fact, we expect the year-over-year comparison should improve for U.S. services over the remaining quarters of the year. And actually, by the end of the year, by Q4, we believe year-over-year organic growth will resume for U.S. Services. I'd point out for federal, some of the things I mentioned in the script related to natural disaster support and the surge revenue, we'll make for some tough comps in the federal segment for the rest of the year. So there's a little color by segment.

Got it. And then Bruce, you mentioned the new award kind of AI related from the GAO (sic) [ GSA ] Perhaps give us some examples of the type of programs that you could be awarded in that Blanket Award?

Sure. I just -- I do want to clarify that it's the GSA, General Services Administration. But the -- it's still early days. First of all, it's really up to client in terms of the type of task orders that might come through the contract. But to give you a little bit more color, both on the platform and on the types of programs. The underlying platform that we bid on that is our TXM platform that we've talked about, I think, extensively on prior calls, but also certainly through our marketing activities.

And TXM is a cloud-based platform that brings together a multichannel contact center environment, so it's not just voice with natural language processing and with AI that can obviously assist with that, but also web chat, but also intelligent document processing. And more and more these days, document processing takes many forms. It could be people taking images of and submitting paper documents, but also responding to digital channels and applications and so forth or having information pushed to them that they then respond to.

So to give you a use case, think of like the Food and Drug Administration, where somebody needs to report a food product or something that they bought that they think might be contaminated or to which they maybe had an adverse reaction. They may begin the call by calling in and just providing that basic information. And the system may then push to them a request, for example, for an image of the barcode of the food product. And it may ask where the food product was purchased. And depending on the recipient's -- or the caller's response, there may be multiple stores of that type in the area where they're calling from and they'll further be able to use mapping capabilities to say, well, which store actually was it.

So there's a great deal of intelligence that you can build into the consumer interaction to make it very, very seamless. But the real power that we see in this is that often contact centers are the front lines for understanding broader issues that are happening either public health issues or maybe issues related to food product safety. So the front lines for the FDA or even the front lines for the CDC could be contact centers where you start seeing calls surging in certain areas of the country related to an event. It's the analytics capability and the data analysis that you can do on top of this platform that is, in many ways, its most powerful asset in terms of helping agencies achieve their mission.

So I can talk about some of the attributes being cloud-based and modular and flexible and scalable and so forth. But I'm glad you asked the question what you did because it's really that use case that brings it to life. So we're excited to get going. It's a very recent award. But like we said, we are excited to support the GSA as they work to implement programs that are important to them, like related to government procurement, information centers and so forth, but also to give other agencies and departments the ability to take advantage of this great vehicle. I hope that helps.

Yes, very helpful. And to stay with you Bruce, talk a little bit more about SNAP and obviously, early days there, too. And in your early conversations with state customers what's the kind of receptivity been towards the new offering you talked about recently?

To address it directly, the receptivity to our Accuracy Assistant has been really positive. It's a great tool. It's a tool, quite frankly, I think states have really needed because it allows you, first of all, to kind of mine the data sets of existing cases and understand what the root causes are that could be driving error rates up in the first place. Sometimes those root causes there are just fundamental inaccuracies between the data that an applicant is providing and data that could be available through third-party data sources that you want to check against. And that might be just because the data is stale or the individual is reporting the data in a different manner than has been reported through other electronic means.

You can also have an accuracy that are related to just the training of individuals collecting the information. I know that I struggle with semi-monthly versus biweekly income, which is which, right, that kind of thing. So the accuracy assistant tool helps, first of all, by learning and then it can be used real-time as cases are coming in and being processed to identify cases that have the attributes that could lead to an error if action is not taken. And it then allows the worker and that worker could be a state or county worker or it could be a Maximus employee to intercede and collect further information from the beneficiary before you put inaccurate data into the database against which a rules engine runs that might make an inaccurate determination.

It's important to recall, too, that error rate at the state level is both the positive errors and the negative errors in the sense that if you're underpaying someone, that's as much an error as if you're overpaying someone. So it's the collective score that a state has that has to be below 6%. So we're excited to get going on that. I would say one other thing in this, we'd expect the initial conversations with states to lead to interest in the tool and the licensing and deployment and implementation and operation of the tool.

And then on top of that, that's the near term kind of effect. But in the longer term, what you really want to do is have a conversation of, how do we look at the workflow, the business process, what fundamentally has led us to the state that we're in, honestly, and figure out how to redesign that and instrument that business process differently.

So we think that there's almost a consultative aspect that could lead to business process services opportunities in the medium to longer term with the SNAP population with these states. And like I said in my prepared remarks, time is of the essence because it's the measurement period that we're in right now, FY '26, that's going to determine the component of benefit funding that states are going to have to provide in federal government fiscal year 2028, beginning in that year.

And maybe I'll just add a little, Charlie, since we're on it. We're often asked about trying to size the opportunity and the timing. So I can just comment a little bit about that. We had shared last year and really for the combination of emerging needs for Medicaid and SNAP. With a multitude of assumptions, we've estimated the potential needs by states for both Medicaid and SNAP all combined could create a high single to low double-digit organic growth opportunity for U.S. services.

And we continue to believe that this is a reasonable estimate for the ultimate revenue run rate from this work once it's fully ramped. And as far as timing goes, we'd expect new work would layer in over fiscal year '27 and into fiscal year '28. So fiscal year '28, at some point could be kind of the full run rate of the new normal under these requirements.

Great. Very helpful there. And then just shifting gears to the VA contract, any update there to the timing?

Sure. Go ahead, David.

No, our current contracts have a period of performance through December 31, 2026. So not impactful in any way to this year's guidance. Presumably, the RFP and everything will come out between now and then. We remain confident in our performance under the current contract and that remains to be the timing.

I might just add one thing, Charlie, and that's back in Q2 of last year, we talked about some of the investments that we've been making in the program from a technology standpoint. So we don't want you to have the impression that we are kind of just waiting for the rebid to come out. We actually have been very, very busy with technology investments that can improve the veteran experience, reinvesting back into that program for government to make it a better veteran experience enable us to have the capacity that we believe will be required under the rebid, while maintaining high quality levels. So there's a lot going on behind the scenes this year and this summer as we implement new technology, and we're very excited about that work that's ongoing.

Our next questions come from the line of Brian Gesuale with Raymond James.

I want to dig into the PACT Act stuff. It looks like the volumes -- the completed volumes were down 11% sequentially organizationally there. You talked about there not being a impact from the shutdown. Did you see any monthly change in those volumes that you ran through your system from October through December?

Thanks, Brian. It's David. Without seeing the data right in front of me, there's presumably some seasonal impact to consider with December with the holidays and things. So I'm not sure if that would be something you consider. I think broadly speaking, our view of the volumes hasn't changed much over the past few quarters. There was certainly a surge period last year where the vendors collectively were processing more that were coming in, and that was an intentional kind of deliberate search by the customer there. So we continue to see some moderation when you look at '26 versus '25, but still strong underlying demand. So we see cases that are inbound for the whole system continue to kind of slowly grow, which shows underlying strong demand.

It was my understanding that the VA was working a lot of surge over time to get those cases to you. So during the shutdown, that over time in that rate of pushing those cases to the vendor community didn't slow down at all. It just seems like that would maybe be nonmission critical to run over time to push these cases and maybe there would be a little bit of a disruption in the calendar fourth quarter, where even October volumes might have been as light as the December volumes.

We didn't see any meaningful impact. I mean the real surge period was earlier in '25, which we see both in our results but also in the overall case load of the vendors.

Okay. Fantastic. For your guidance for the year, what are you viewing the PACT volumes off of this run rate that you had in the first quarter?

The short answer is pretty steady for the remainder of the fiscal year from the first quarter.

Okay. Great. Moving over maybe to the U.S. Service business. Can you explain some of the lower volumes, I guess, maybe how do we think about the lower population of beneficiaries on Medicaid impacting those numbers, presumably incremental call volume on exchanges as premiums were going all over the place? How are you -- maybe just help us understand how that impacted things in the quarter.

I don't think there was really a precise impact from those in the quarter. There was no kind of single driver to the revenue change year-over-year. There was a number of programs. All in all, we continue to have a portfolio, especially on the Medicaid side, which is highly transaction driven. So we do view the net impact if the additional requirement result in a lower total membership, we think it's still a net positive because of the additional transactions that will need to take place to accomplish that.

Brian, I might -- sorry, go ahead. And then I'll add a little...

Go ahead, Bruce.

I think as you're thinking about the future years for Medicaid, too, there's a dynamic that I don't think we've called out succinctly before that we wanted to make sure we were clear on. And that is, the Medicaid community engagement requirements for the expansion population are, as you know, effective January 1, 2027. But we likely will see activity in the fourth quarter of FY '26, first quarter of FY '27 as there's a lot of outreach activities that states have to engage in to that eligible population.

And so they're sending letters, they're making phone calls and so forth, saying get ready for this. This is going to be a new requirement for you and so forth. That activity is something, I think, where states are still working through what portion of the population they actually have to directly reach out to. In some cases, the state might say, well, look, if I can through data matching, preliminarily determined that certain cohort of this expansion population doesn't actually qualify for the work requirement because they have certain conditions that meet exemption requirements. I'm not going to even bother reaching out to them. But that's a ground that hasn't been covered yet. And I think lawyers are talking about, well, do we just reach out to everybody and then take it from there.

So you'll see a bit of -- kind of volatility in that as that shakes out. And I think CMS' guidance to states and the activities around their recent announcement and so forth, supporting states will help bring some clarity to that. But that work requirement or community engagement requirement is a real thing kind of as of January 1, with even some activities preceding that.

The dynamic that we want to also focus on though is the redeterminations. When you think about it, the requirement for semiannual redeterminations doesn't happen until a January 1 and that means that the activity won't happen until July because you can have a new -- somebody who's newly determined eligible on January 1, 2027, you're not going to need to redetermine their eligibility until July of that year.

I think there's been some thinking that you see this like major surge in redetermination activity starting in January, not really the case. It's the cohorts that start rippling through midyear. That's why David made the point earlier that '27 is a building year and you get the full run rate benefit of these activities in '28. Hope that helps.

Yes. That's really helpful color. I appreciate that. On U.S. Services, what's the drivers for -- so I'm just trying to determine how transitory these lower volumes are on the programs. Maybe you can give some specific programs or broader slots of that, where we're seeing a lower volume. How transitory that is? And then what would drive improvements in both the revenue run rate and the margin outlook as we go forward, right? Because presumably, I think your margins will need to see a significant recovery to hit the full year bogey that you've put out in the U.S. Services segment.

Yes. I'll start with the margins. So as I said in my prepared remarks, there's element of seasonality in the portfolio in U.S. Services, it's a little more pointed than it has been historically, but what you saw it last year as well, with the first quarter being the lower margin for U.S. Services. And it's really driven by a couple of contracts, which caused this dynamic where profitability is down in the first quarter, but then higher in the remaining 3 quarters. So that alone really is the story with margins. It doesn't really require any significant change in the trends of the populations or anything like that. It's just the way that certain contracts are priced in the current portfolio. So we see, as we said, we actually improved the margin guidance for the segment a little bit.

And the Q1 results, I would also frame is in line with our expectations on both the top and bottom line for U.S. Services. It's a little more structural with our contracts than any trend.

Can U.S. Services grow for the year?

We -- as I said in the first question, we expect -- likely not for the full year, but we expect it to turn to positive organic growth by Q4.

Okay. And then maybe just a real quick one and I'll jump out of the queue on the Federal Services. Can you remind me the magnitude of the FEMA kind of nonrecurring element that kind of pops in. And I think -- maybe just remind us what month that's the most pronounced as well or what quarter rather as we look at comping out that business in Federal.

Yes. Its context last year was in the $100 million range, so about 2% of our revenue, just the natural disaster support. And it's typically the first two quarters, kind of the hurricane season and aftermath, but it spread a little more last year. So it's hard to predict, but typically the hurricane season that drives that demand.

Operator, back to you.

Thank you so much, everyone. This does now conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.

Greetings, and welcome to the Maximus Fiscal 2025 Fourth Quarter and Year-End Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Francis, Vice President of Investor Relations.

Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO; David Mutryn, CFO; and Jessica Batt, 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 required by law. Today's presentation also contains non-GAAP financial information. 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 Bruce.

Thanks, James, and good morning. I'll begin by recapping fiscal year 2025, which was notable not only for the financial results, but for our team's ability to remain focused on serving our customers amidst a period of significant change in the government services sector. I'll then cover our priorities for fiscal year 2026, aligned with our strategic vision and current and anticipated future market conditions, including investments that are designed to prepare Maximus for what we believe are meaningful growth and market expansion opportunities. Investments in AI capabilities are an important priority and reflect our evolution as a technology-driven partner to governments.

Fiscal year 2025 was a year of significant achievement for Maximus, marked by success across multiple domains. We entered the year with strong visibility into the underlying portfolio of the business, both in terms of revenue and backlog and certain programs returning to more steady-state levels following post-pandemic upticks. We guided with prudent judgment given the changing political environment. In what emerged as a markedly different approach by the current administration following the transition, we carefully navigated an uncertain environment that brought new priorities and opportunities that developed as the year progressed.

Looking back at where we started, I'm pleased to report that revenue and profitability came in higher than projected, reflecting both the strength of our core operations and the disciplined execution of our strategy throughout the year. The organic growth rate of the consolidated business was 3.9%, with the U.S. Federal Services segment delivering 12.1% organic growth and the -- outside the U.S. segment delivering 4.1% organic growth. This outcome is attributable to the dedication of our teams across the enterprise who are delivering on customer priorities. Equally important, our contractual relationships remained stable and secure throughout the year, with cancellations or impacts at just 0.5% of fiscal year 2025 revenue, a figure that is unchanged from our prior earnings call. This underscores the essential nature of the services we provide and the trust our customers place in us to support their mission and deliver outcomes that matter in a dynamic operating environment.

Even as policy and technology continue to evolve, we believe that maintaining and expanding these long-term commitments is a testament to the value we deliver and the quality and reliability of our services. Taken together, the strong fiscal year 2025 financial results, the durability of our customer relationships and the strategic investments we are making give us confidence in our future as a tech-enabled mission-critical partner to government. We are proud of what we accomplished, and we are energized by the momentum we're carrying into fiscal 2026. Our focus remains on delivering consistent performance, maintaining trusted partnerships and utilizing our increased customer presence and evolving capabilities for future growth.

Looking ahead, I want to share 3 strategic priorities on which we are executing during fiscal 2026 that we believe are favorably positioning the business for opportunities to accelerate growth in fiscal year 2027 and beyond. These priorities include: first, expanding in U.S. federal markets; second, policy-driven initiatives, mainly around the One Big Beautiful Bill Act, actionable in our U.S. Services segment; and third, deployment of AI and related tech-enabled automation. Our commitment to advancing this third priority is driving an important transformation across Maximus from how we execute internal functions and support our employees to the delivery of our performance-based contracts and also to the expansion of our technology-based solutions for governments.

I'll note that these and other investments were made possible by our earlier focus on what we called Maximus Forward, an organization-wide commitment to rethinking critical business functions and their cost. Starting with our U.S. Federal business, our commitment to delivering even greater value to our customers is unwavering. We also believe the investments we made through both inorganic and organic means have expanded capacity, enhanced our competitiveness and created platforms that we believe can provide durable organic growth. In prior quarters, I've spoken about our efforts to strengthen our infrastructure, for example, rapidly achieving CMMC Level 2 certification and capabilities through what we call mission threads that tie directly to the pipeline we are prosecuting over the next several years. We believe our foundation for sustained growth is robust and that we are aligned with and in many cases, ahead of the evolving needs of our customers. We are confident in the opportunities ahead and our ability to continue to create long-term value for shareholders.

Our federal leaders and teams are aligned strategically to civilian, health and defense and national security markets. I'll speak briefly to each. We are recognized for having a distinguished portfolio of civilian work, delivering essential services for student loan management, the IRS and the SEC as examples. We occupy a vital corridor of the civilian space and have deliberately aligned to bipartisan priorities that are fundamental to the government's role of supporting its citizens. We continue to see opportunities to deliver on the administration's priorities for modernized, accountable and cost-effective citizen services while recognizing how budget priorities are increasing the importance of blending deep program expertise with commercial innovation.

Many modernization needs remain unaddressed, and we believe that Maximus is well positioned to address these priorities. With an earned reputation in the delivery of performance-based contracts and tech modernization, we are regularly engaged as trusted advisers, leveraging our investment in solution architects and are favorably positioned for the opportunities we are tracking. To our knowledge, Maximus is the only public company in our sector that has formally documented its mix of contracts that are performance-based, which stands at 54.4% for fiscal year 2025. We believe this distinction reinforces our leadership in driving accountable and measurable results.

I've commented previously that the timing of procurements is less certain in the civilian pipeline than we've historically experienced, which highlights the importance of supporting our customers and delivering our current programs with a continued emphasis on quality and efficiency. Additionally, we've noted our investment in further differentiating Maximus as a leader in enabling the citizen experience or CX of the future. Our Total Experience Management or TXM solution, which I've mentioned on prior calls, is a FedRAMP secure, modular, flexible, scalable and configurable platform that helps enable federal agencies to deliver smarter citizen-centric services.

AI-infused and packaged and sold as a cloud-based service, which is rapidly becoming the preferred procurement method of government agencies, we believe that TXM is well positioned to replace end-of-life on-premise systems. I'm proud of what our team has developed, as evidenced by a recent demo where TXM was said to be one of the most advanced and integrated demonstrations of AI in the CX platform for government yet experienced by the customer. We believe TXM is a strong fit for the pipeline of contact center consolidations we see in the market.

On to the health market, which we define as including defense and nondefense-related programs and opportunities. After setting a deliberate course in this market with the 2021 acquisition of Veterans Evaluation Services, we are pleased to see synergy pipeline opportunities for new customers coming to bid and Maximus well positioned with what we believe are competitive solutions. Compared to the civilian pipeline, I'm encouraged by the procurement tempo of health opportunities with key procurement milestones largely on track. Given current conditions and the nature of the programs we're bidding, we anticipate that outcomes could be consequential for fiscal 2027 and beyond.

In the defense and national security area, our strategic pursuit of certain opportunities has been affirmed by the highly credible wins with new customers we've seen seeking a change from traditional providers. Let me share one example. Most recently, Maximus was awarded a new joint cyber command and control readiness contract by the United States Air Force Lifecycle Management Center's Cryptologic and Cyber Systems Division. This award with a potential value of $86 million marks our second major engagement with the Air Force under this program and represents meaningful expansion of our technology services portfolio within the defense sector. Through this contract, Maximus will lead engineering analysis, software modification, maintenance and enhancement as well as the maturation of existing architecture and infrastructure.

The period of performance includes a base year, four 1-year option periods and an optional 6-month extension. We believe this award reflects the depth of our technology expertise and delivery capability, underscoring our ability to support the Air Force's defense readiness mission. It highlights our capabilities in software engineering, development and modernization and reinforces our position as a trusted partner in advancing mission outcomes.

Our highly skilled technology professionals will deliver modeling and application analysis to help enable mission execution, further strengthening our role in supporting national security objectives. I'm proud of the progress we've made overcoming barriers that make expanding in this business area challenging. We believe that recent directives emphasizing speed, outcomes, access to commercial tech and streamlining contracting fit our strategic offerings well. In support of this strategy, we're expanding our participation in other transaction authorities, or OTAs, which the Department of War increasingly favors as a faster and more flexible acquisition path.

Collectively, we believe these actions suggest an evolution in contracting that will accommodate newer entrants like Maximus and support longer-term defense and national security policy objectives. In further support of this strategy, we've formed and are investing in our first cooperative research and development agreement, or CRADA, providing a mechanism for developing, maturing and retaining Maximus intellectual property through collaboration with the Department of War. This agreement supports hosting of recurring hackathon events, capability demonstrations and technology experiments in a Maximus-operated sensitive compartmented information facility, or SCIF.

This CRADA positions Maximus closer to the men and women in uniform that conduct global operations for the department and positions Maximus at the center of advanced research and development. These activities align directly with the department's evolving acquisition strategies for rapid prototyping, IT and modernization. Recent commentary from department leadership has signaled the desire for greater investment by the industry. While this may present challenges for some competitors, Maximus is actively demonstrating on-contract innovation as part of our technology forward strategy. More than 4 months on, the landscape around the One Big Beautiful Bill Act remains largely unchanged, but the priorities it established continue to be front and center for our state customers within our U.S. Services segment.

The legislation creates meaningful opportunities for Maximus in both Medicaid and SNAP, and we remain actively engaged with clients to prepare for the requirements ahead. On Medicaid, the administration continues its focus on managing federal spend with new rules requiring twice yearly eligibility determinations for the expansion population and codifying work requirements beginning in early 2027. States must review and adjust their processes to comply, and our U.S. services team is working closely with clients to ensure readiness. As we noted previously, we believe Maximus is well positioned as a conflict-free partner to support these compliance efforts, having done so for similar requirements in TANF and SNAP for almost 30 years.

While the Medicaid changes are significant, state's foremost priority at the moment, based on active discussions is around SNAP. The budget implications of the new payment accuracy requirements are far greater as states with higher payment error rates will be required to absorb more of the program's expense. This shift is driving strong interest in technology-led solutions that can improve efficiency and payment accuracy. As I mentioned on the last call, Maximus already has an expanded role with a long-standing state customer, and we expect SNAP to remain a focal point of engagement given potential state budget implications. Although the policy environment has not materially shifted since our last call, these initiatives continue to be priorities for our customers. In our view, we are the right partner to help states navigate the changes, mitigate risk and deliver high-quality outcomes across both SNAP and Medicaid.

I'll close my discussion of strategic priorities with AI, where Maximus is proud to be a leader for government customers in this unprecedented era, demonstrating the art of the possible in transforming public service delivery. Our role is not only to provide solutions, but to show what is achievable when innovation is combined with decades of deep program knowledge, policy experience and operational data. By embedding AI directly into our business processes, we are enabling customers to benefit from advanced automation, AI-powered quality monitoring and real-time insights. These capabilities are helping agencies operate more efficiently, make better decisions and deliver improved outcomes for the people they serve.

We have already successfully deployed AI-driven tools across enterprise programs where these solutions have accelerated service delivery, strengthened compliance and enhanced customer satisfaction. In addition to our AI-powered TXM solution I mentioned earlier, we're also serving as customer zero for our own large-scale deployments of AI solutions in ITSM or service management and HR help desk support as well as knowledge management. This first-to-deploy experience provides us with deep insights, enabling our solutions to be tested, refined and proven before being extended to our customers.

Maximus' AI guiding principles form a robust framework for responsible innovation grounded in ethical governance, human-centric design and mission-aligned outcomes. Our governance structure is designed to ensure that our innovation is both responsible and sustainable. Looking ahead, we have approximately 30 AI-related deployments either planned or in process across Maximus. These initiatives vary in scale from small pilots to large enterprise implementations with further full deployments expected in fiscal 2026. This pipeline reflects both the demand for AI-enabled solutions and our commitment to investing in the future of government services.

Let me turn now to our award metrics and pipeline. For fiscal year 2025, signed awards totaled $4.7 billion of total contract value. Further, at September 30, there were $331 million worth of contracts that have been awarded but not yet signed. These awards translate into a book-to-bill of approximately 0.9x for the trailing 12-month period and reflects ongoing progress toward increasing this metric, a previously stated goal of ours. As a reminder, we continue to view book-to-bill as a relevant forward indicator to pipeline conversion over the broader horizon, but not the sole determinant of the business' ability to grow organically.

Also, in periods of lower-than-normal rebid activity, which we've experienced recently, the TTM book-to-bill is expected to be below 1.0. Then in periods of greater rebid activity and given our larger contract lengths and values, the metric tends to show outsized performance. It's worth noting that the improvement to TTM book-to-bill of 0.9 was driven by more dramatic quarterly sequential improvement. The quarter ended September 30 book-to-bill was 1.0x compared to 0.3x for the June 30 quarter, a marked improvement in the pipeline conversion of both recurring and new work.

Our pipeline at September 30 was $51.3 billion compared to $44.7 billion reported in the third quarter of fiscal 2025. The September 30 pipeline is comprised of approximately $3.4 billion in proposals pending, $1.4 billion in proposals in preparation and $46.6 billion in opportunities tracking. Of our total pipeline of sales opportunities, approximately 64% represents new work. Additionally, 66% of the $51.3 billion total pipeline is attributable to our U.S. Federal Services segment. Notably, in this latest pipeline view, U.S. Services segment opportunities tied to the One Big Beautiful Bill Act remain in the development stage with potential revenue in fiscal 2027 and therefore, are not yet captured in the pipeline. And with that, I'll turn the call over to David.

Thanks, Bruce, and good morning. I'd like to recap our strong fiscal year 2025 with a few financial highlights and then walk through results in our typical fashion. I'll close with formal fiscal year 2026 guidance and commentary. First, I'm proud of the team's strong execution to enable finishing fiscal year 2025 right on the mark for revenue, which totaled $5.43 billion. This equates to organic growth of 3.9% over the prior year. From an earnings standpoint, the full year adjusted EBITDA margin was 12.9% and adjusted earnings per share were $7.36. The fourth quarter included a higher level of severance charges related to ongoing cost management efforts.

Second, the fourth quarter was also notable for its strong cash flows as we had anticipated, enabling us to deliver $366 million of free cash flow for the full fiscal year 2025. Third, from a capital allocation standpoint, we stayed focused on debt paydown and opportunistic share repurchases. At September 30, our net leverage was 1.5x. Looking back across the full fiscal year, we repurchased approximately $457 million worth of shares, including $151 million in the fourth quarter. Finally, our official guidance for fiscal 2026 aligns with the early color we provided in August.

The midpoint of $5.325 billion of revenue reflects our current view of volume dynamics on some of our variable work that I will discuss in more detail. Meanwhile, the $8.10 midpoint of adjusted EPS guidance reflects ongoing margin expansion and 10% growth over fiscal 2025. Continued adoption of technology and careful cost management are key enablers on the bottom line outlook, while the recent share repurchase activity further benefited diluted EPS by lowering the weighted average shares outstanding.

Last, the midpoint of our free cash flow guidance is $475 million, representing about 30% year-over-year growth. Those are the key highlights, so let's turn to total company results. For the full fiscal year 2025, revenue increased 2.4% to $5.43 billion. As I mentioned, organic revenue growth was 3.9% and aligned with our long-term target of sustainable mid-single-digit organic growth. The U.S. Federal Services segment drove the growth, thanks to several programs in the clinical and natural disaster support domains experiencing high demand for our services. Our profitability improved to deliver a 12.9% adjusted EBITDA margin for the full fiscal 2025 as compared to 11.6% for the prior year. This was attributable to the higher demand in the U.S. Federal Service segment, coupled with technology and cost initiatives.

Fiscal 2025 adjusted EPS was $7.36 as compared to $6.11 for the prior year, representing a healthy 20% increase. While most of it was improved profitability as evidenced by the higher adjusted EBITDA margin, a portion of the year-over-year improvement stemmed from the share repurchase activity this year. I would like to make a note about our just completed fourth quarter earnings. During the quarter, we took deliberate action to yield cost savings in future periods, which included severance charges totaling approximately $16 million. These were booked within the 2 domestic segments and had a more pronounced effect on the operating margins of the U.S. Services segment.

Let's go to segment results. Starting with the U.S. Federal Services segment, revenue increased 12.1% over the prior fiscal year to $3.07 billion. All growth was organic and driven by a combination of expected and unexpected volume growth across several programs, primarily in the clinical domain. In addition, this segment includes contracts to rapidly stand up support in the wake of natural disasters, which generated higher revenue than a typical year.

The higher volumes in both areas extended across several quarters this year and by the fourth quarter, had settled back to more typical levels. The operating income margin for U.S. Federal Services was 15.3% in fiscal 2025 as compared to 12.2% in the prior year. The same demand that drove the segment's top line also benefited the margin since incremental volumes often provide operating leverage. Another reason for the margin expansion is greater implementation of technology initiatives that increase productivity of staff on the programs. For the U.S. Services segment, revenue decreased to $1.76 billion as compared to the prior year revenue of $1.91 billion. As we've noted on recent quarterly calls, across fiscal year 2024, we were successful with helping our state customers process unprecedented engagements tied to the Medicaid unwinding exercise. This was essentially the last of the pandemic-related impacts to the segment.

By this year, fiscal 2025, the effort was complete and Medicaid engagements reflected both normal course assistance to states and a more typical Medicaid population. The U.S. Services operating income margin was 9.7% as compared to 12.9% in the prior year. As a reminder, last year's margin benefited from the overperformance, and we anticipated that it would not reoccur. Also, the segment's margin in the fourth quarter of this fiscal year was impacted by a meaningful portion of the $16 million total company severance cost that I referenced earlier. We expect this cost management effort to lift full fiscal 2026 margins in this segment. For the -- outside the U.S. segment, revenue decreased year-over-year to $600 million due to divestitures of multiple employment services businesses in prior periods. The related decrease in revenue was partially offset by positive organic growth totaling 4.1% and a small currency benefit.

The operating income margin for the -- outside the U.S. segment was 3.7% as compared to 1.2% in the prior year. We have stated previously that we intend for the segment to reliably deliver in the 3% to 7% margin range and over time, move up in that range and closer to the profitability of the domestic segment. We are pleased with progress so far. Beyond that, we continue to see a healthy pipeline of opportunities to deliver higher-value services, which could support margin improvement.

Turning to cash flow items. As expected, we had strong collections in the fourth quarter. Fiscal year 2025 cash flows from operating activities totaled $429 million and free cash flow was $366 million. The fourth quarter alone had free cash flows of $642 million. Our days sales outstanding, or DSO, improved substantially from the third quarter's 96 days, landing at 62 days at September 30, 2025. We ended fiscal year 2025 with gross debt of $1.35 billion, and we had unrestricted cash and cash equivalents of $222 million. At September 30, our debt ratio was 1.5x. As a reminder, this ratio is our debt net of allowed cash to consolidated EBITDA for the last 12 months as calculated in accordance with our credit agreement. We achieved our goal of ending the year comfortably below 2x. And 1 quarter ago at June 30, the ratio was 2.1. The improvement came from expedited paydown after catching up collections on 2 contracts that had created a temporarily higher DSO in prior quarters.

During fiscal year 2025, we repurchased approximately 5.8 million shares, totaling about $457 million, which was enabled by 2 Board of Directors authorization announcements. Following an additional $31 million of repurchases subsequent to year-end, we have approximately $250 million remaining as of today on the current $400 million authorization granted by the Board of Directors in September. Moving to capital allocation. Our framework for priorities is unchanged. We first make organic investments, most of which flow through the income statement. We also maintain a $0.30 per share quarterly dividend that we intend to grow over time with earnings. Following these, we prioritize strategic acquisitions intended to accelerate organic growth. We also repurchased our shares opportunistically depending on current market conditions.

As we move further into fiscal year 2026, we continue to evaluate suitable M&A targets, which could bring new or enhanced capabilities and new or expanded customer set or a combination of both. We will maintain our disciplined approach to evaluation of deals, and we intend to stay within our 2x to 3x target debt ratio range. Given our high annual cash conversion and current 1.5x debt ratio, we believe that there is ample capacity for a transaction of varying sizes, ranging from more of a tuck-in style deal to a larger deal proportional to our balance sheet capacity. If we do not conduct a transaction in fiscal year 2026 and do not complete any further share repurchases, we anticipate a debt ratio of roughly 1.0x at September 30, 2026.

Let's go to official guidance. For fiscal 2026, revenue is projected to be between $5.225 billion and $5.425 billion with a midpoint of $5.325 billion. Adjusted EBITDA margin is estimated to be approximately 13.7%, and adjusted EPS is projected to be between $7.95 and $8.25 per share, giving a midpoint of $8.10. Free cash flow for fiscal year 2026 is projected to be between $450 million and $500 million. This guidance is aligned with the early thinking we provided on the Q3 earnings call, where we acknowledge that fiscal 2026, particularly revenue, had wide-ranging scenarios. Fortunately, this year is coming into sharper focus as we typically expect at this point, with the revenue guidance reflecting how a portion of the excess volumes in fiscal 2025 are not anticipated to recur in fiscal 2026, along with seasonal natural disaster support that is inherently difficult to forecast. Those components are responsible for a year-over-year revenue headwind of approximately 3%, which we expect to partially offset with 1% of organic growth, netting to a 2% year-over-year delta at the midpoint of guidance.

We acknowledge that in prior periods, we have benefited from higher volumes that increased guidance multiple times, but the circumstances causing them were not forecastable at the start of the fiscal year. For example, once into fiscal 2025, there emerged a clear and stated priority to reduce backlogs across multiple programs. By the fourth quarter, the temporary extra work requested by our government customers for us to collectively meet those priorities had moderated. Another positive development on our top line forecast is that some of the risks we had contemplated in the early color on the Q3 call, such as possible budget constraints from customers are not believed to be as large a threat to fiscal year 2026.

We also see opportunities tied to new work that if awarded in fiscal year 2026, could contribute to the year, but given the difficulty in predicting the timing, we expect would be a more meaningful driver of revenue in fiscal year 2027 and beyond. We believe that we remain on target with our goal to achieve a mid-single-digit organic growth rate over the longer term. Of note, the compound annual growth rate from fiscal year 2023 to the midpoint of fiscal 2026 guidance is 4.0% on an organic basis, which is not impacted by excess volumes we experienced in both fiscal years 2024 and 2025.

Turning to the bottom line. Since the early color in August, our adjusted EBITDA margin expectation has improved to 13.7% for formal guidance. The projected improvement stems from numerous areas such as the U.S. Federal Services segment, where the benefits of our technology initiatives, combined with stable volumes are resulting in opportunities to increase profitability. This applies to our clinical work and our tech-enabled customer service programs, where small efficiency improvements can result in meaningful cost avoidance. Notably, the margin guidance exceeds the company's target range of 10% to 13% that I stated at this point last year. Our intent is to leave this range intact and target the high end for the periods following fiscal 2026 to account for the prospect of a higher share of new work in the business.

Often, new programs at Maximus begin at a lower margin and improve over time with the profile depending on the nature and pricing structure of the work. Walking down to the EPS level, the $8.10 adjusted earnings per share midpoint reflects both the improved profitability and the denominator benefit from the share repurchase activity throughout fiscal year 2025. It's worth noting the 3-year compound annual growth rate using the adjusted EPS guidance is 28% demonstrating not only the post-pandemic recovery, but our ability to gain significant earnings improvement through pursuit of higher-value work and disciplined management of the business.

A quick word on estimated segment operating margins for the full year fiscal 2026. We expect the U.S. Federal Services margin to range between 15.5% and 16%. We expect our U.S. Services segment margin to be in the 10% to 11% range. And for outside the U.S., we estimate a margin between 3% and 5%. For the free cash flow guidance, the midpoint of $475 million represents year-over-year growth of 30%. We typically have a negative free cash flow in Q1 as a result of seasonality and timing of certain payments, and we are expecting a temporary delay of payments from some customers, including expected lingering impacts from the recently concluded government shutdown, which would further impact Q1. We then anticipate strong cash flows across the remainder of the fiscal year, effectively catching up from the expected low first quarter.

Other assumptions around fiscal year 2026 include an estimated $81 million of intangibles amortization expense and $58 million of depreciation and amortization tied to PP&E and capitalized software. Interest expense is estimated to be about $69 million. Finally, the full year effective income tax rate should be around 25% and weighted average shares should be about 55.5 million on a full year basis.

I'll conclude by reiterating our belief in a favorable outlook for Maximus beyond the formal guidance we have laid out today. Underpinning this is our strong visibility to our portfolio of programs, ongoing attention to cost management and focus on delivering operational excellence increasingly with more automation. Our proposal activity continues to build, notably in the U.S. Federal Services segment in which successful conversion could have positive implications to fiscal year 2027 and beyond. On the state side, we believe that the business is poised to respond to fast-evolving needs of customers who are required to be more diligent in their administration of Medicaid and SNAP. We currently anticipate that fiscal 2026 will be defined by shaping efforts with actual work and associated revenue coming to bear beginning in fiscal year 2027. And with that, we'll open the line for Q&A. Operator?

[Operator Instructions] Our questions are coming from Charlie Strauzer with CJS Securities.

This is Will on for Charlie. Congrats on the strong quarter. Looking at the guidance, the EBITDA margin is for '26 is a lot stronger than we expected. Can you give some more color on what's driving that expansion even with the expectation for flat revenue? Is it related to mix shift or all productivity and efficiency initiatives?

David is going to start out with that, and I may add some color commentary.

Sounds good. Yes, if you look at the margin guidance we laid out for each of the segments, all 3 are actually slightly higher than where they finished fiscal year '25. For U.S. Services, it's worth pointing out, as I did on the prepared remarks that the portion of severance that they incurred in the fourth quarter hurt their margin in that quarter and the related savings are supporting the guide for '26 there. I think the theme across all 3 segments really is the continued deployment of technology and automation as well as cost management. And on the cost management front, you may notice on the P&L, total company SG&A, if you consider that there was $40 million of divestiture charges in the first year -- in the first half of 2025, the rest of SG&A is essentially flat from '24 to '25 despite the revenue growth.

So we're very focused on continuing to stay competitive on the cost side. And then maybe one other detail I'll point out that's related to the EBITDA and also the cash flow for that matter is that a number of capitalized software projects that have been driving CapEx the past couple of years are now operational and therefore, amortizing. So you can see in our -- in the various FY '26 guidance metrics, a higher forecast for D&A and a lower forecast for CapEx.

That is super helpful. And then looking at the revenue guidance, can you add any more color or detail around growth by segment?

Sure. Yes. Without maybe going all the way to specific guidance by segment, I'll point out that both U.S. Federal and U.S. Services may see mild contraction. We expect a little bit more erosion on the U.S. Federal side given their overperformance in '25. And what I had called out on the call specifically was clinical work and disaster response work. For context there, the clinical work is in both U.S. Federal and U.S. Services and the disaster response is on the federal side. So federal has a little bit more of what we called out as headwinds, but also the strongest pipeline in the near term as well. So those are kind of the commentary between the segments.

And then switching gears a little bit. How are you thinking about the effects of the government shutdown on your results, both in Q1 and the full year?

Sure. It's Bruce. I'll take that. We really don't anticipate any negative impacts on our delivery on our contract portfolio in Q1 FY '26. Nearly all of our programs were deemed essential services by the government. And in some cases, some of those programs had received sufficient funding prior to the shutdown through other legislative vehicles like the IRA, for example. And my top comment there would be that this really reflects the very deliberate strategy of the company over the years to develop a very durable contract portfolio that fares well in these types of situations. So to put a little more color on it, I believe that across our base of nearly 40,000 employees, we were very fortunate to have fewer than a dozen that were impacted by funding curtailments in the portfolio.

And we, of course, kept those staff on salary and employed and gave them an opportunity to do some refresher training and some upskilling training and so forth during that period. Of course, now certain departments and agencies are -- could be impacted going forward because the CR presently only extends funding for those through January 30. So like others in our sector, we're going to continue to monitor that. But in prior shutdowns, including the most recent one or any indication, we will remain optimistic that any impact for us would be minimal. I did want to note that the Department of Veterans Affairs and the USDA, which includes SNAP funding, both have full year build in place already. And therefore, they'd be unaffected by any potential further shutdown potentially in January. So it's also our understanding as we come into this that the funding for essential entitlement programs like Medicaid would continue for an additional 30 days after January 30. So should any subsequent partial government shutdown come to pass. So David, anything you'd add further to that?

Yes. Just on the -- a little commentary on the cash flow front. As I mentioned in the prepared remarks, we've seen some payment delays from a portion of our federal customers. So I'll point out also, we have -- we've had several federal customers continue to pay us through the month of October. So the month of October was really in fairly good shape considering that the government was shut down the whole month. But nonetheless, we do expect currently that December 31 will have an elevated DSO.

I hope that helps further questions, Will.

That helps. And then along those lines, you guys collected a lot of receivables in Q4 and leverage is down to 1.5 turns. So what are your priorities for allocating that capital in the short term? And you briefly talked about M&A. Could you add some color on the type of things that you're looking for?

Sure. Happy to do that. Fundamentally, Will, our criteria that we apply remain the same as they've been for some time, meaning that we'll be disciplined in deploying capital to combine with high-quality companies that can create new growth platforms for Maximus. That's the fundamental. We've been fairly explicit with our investors in the marketplace, noting that our priority in the near term is growth in the U.S. federal market. And within that, we do have a bias toward the defense and national security space. Our research suggests that the CAGR in that area over the next several years is north of about 9%. We also believe from our research that the overall services marketplace and software spend marketplace in the defense community is well in excess of $150 billion. And we believe the addressable component for Maximus to be nearly $50 billion. So an excellent market and one that's growing and one candidly that we've now established our ability to win in on an organic basis.

So if we think about how we would further accelerate our growth potential as a business, there are 3 categories, if you will, that we've been considering. The first is access to customer relationships because qualified past performance is just so important in this market to win in this market. And in some cases, there would be contract vehicles that we could potentially gain access to through a combination with another company. The second category is technical capabilities to augment what we are already bringing to bear in the marketplace through the mission threads and the accelerator work that I mentioned in my prepared remarks.

And the third is business systems capabilities. While some of those can be -- and certifications, if you will, while some of those can be achieved organically like the CMMC Level 2 certification that we've mentioned, others like having a certified purchasing procurement system, the faster path to those is sometimes through a combination or an acquisition. So from that perspective, in terms of criteria, that's what we'd be focusing on in terms of priorities. But I'll ask David to add to that in terms of any other metrics or criteria he'd like to share.

Sure. Maybe I'll just add. We certainly consider other uses of capital, including repurchases, which, as you've seen, we've done a fair amount over the past year, especially in this environment. But I do want to emphasize that our primary reason for M&A is to unlock organic growth potential, which we believe can deliver significant value over the longer term. So that's really what we look for is revenue synergies and organic growth acceleration.

That is helpful. I think just one more for me. Thanks for the update on the opportunities related to the Big Beautiful Bill. What phase of the opportunity would you say we are in right now? And what are you actively working on with states? And then can you provide any detail on the timing of RFPs coming out from the states?

Sure. Happy to do that. So as I mentioned in the prepared remarks, there's been no real update from a policy perspective and not surprisingly, no regulatory updates either. Our understanding is that if we're going to see implementing regulations, for example, related to Medicaid work requirements, those wouldn't be coming out until this summer. So states are working with imperfect information. But in our view, they're in a situation where they can plan out an awful lot of what it's going to take to be compliant with these requirements, think about the impacts on their business processes and on their state systems and how they're going to go about engaging the beneficiaries.

And of course, for Medicaid, those are the beneficiaries in the expansion population. That's estimated to be about 21 million people on a national basis. So there's a lot of preplanning that can be done. And in fact, there have been articles out there saying from notable consultants saying if states haven't started planning, they're already behind. The update for this quarter based on our engagement in the marketplace, and it makes sense when we think about the time line is that SNAP is being taken very seriously. And why is that? The SNAP payment error rate issue as it's addressed in the bill can lead to a significant financial lift for states who don't bring their error rates down below 6%.

The federal payments related to SNAP will be affected in federal fiscal year 2028. So beginning in October of 2027, those payments could be affecting those payments -- payment impacts can take 2 forms. The first is on the benefit component of the SNAP funding. And the second is on the federal administrative component, which would drop from 50% to 25%. The assessment of the error rates that will affect that payment impact in October of '27 is based on federal fiscal year '25 or '26. So work has to begin ASAP to start addressing those error rates so that the measurement period within that measurement period, states can bring them into alignment and be able to avoid, in many cases, hundreds of millions of dollars of lost federal benefit and administrative cost reimbursement.

So we're out there very much engaging with our customers, doing demonstrations, having conversations about what we believe from our research and experience are the main causes of error rates in the SNAP payment process. And I think I've mentioned on a prior call, if not, I'll mention it now. From our analysis, we believe that we've got the ability to help states address about 90% of the causes of error. How do we do that? It's a combination of our historical program knowledge and business process expertise and interpretation of how policy can be implemented in an operational environment more effectively. Sometimes, quite frankly, that's as simple as improving training.

One of the sources of error, just as a brief anecdote is sometimes a case worker might enter semi-monthly income as if it were biweekly or the opposite. And candidly, I think a lot of people out there, including myself, would struggle to immediately define what the difference is. So with that said, technology can play a big part in this, and we've developed AI-driven tools that can help states go through their databases and their systems of record and identify likely sources of error in their cases and then put plans in place to address that, both for existing cases to improve the error rates there, but also for new incoming cases as they come into the system.

I mentioned in my prepared remarks, too, that we have 30 years of experience already helping state customers with the federal regulations pertaining to work requirements. And I wanted to amplify that just a little bit. And interestingly, folks may not be aware that there have been really a work requirement component to the SNAP program and the TANF program for many years.

In the SNAP program, it's known as FSET, which is the Food Stamp Employment and Training program, whereby able-bodied adults without dependents or referred to in Washington policy speak as ABAWDs have to meet certain work requirements. TANF's requirements actually go back to the -- they trace their legislative heritage back to the early 1990s. I think probably the welfare reform bill under Bill Clinton known as PRWORA. In both cases, those programs have requirements for beneficiaries to demonstrate and states to demonstrate compliance of the beneficiaries in a far more complicated way than other programs classically have like unemployment insurance, where it's really just a brief self-attestation.

We've built technology and deployed technology to enable our customers to meet those complex federal requirements over the course of decades. So we feel like the similarity between that requirement and what we'd expect to see in the Medicaid work requirements is substantial and should position us well to address those needs. So to close, we're cautiously optimistic that this increased urgency around SNAP will lead to procurement activity. Already, for example, I'm familiar with one state that's put a request for information out to the vendor community asking for how they would assist in addressing the SNAP payment error rates. RFIs usually lead to RFPs that then lead to awards and engagement.

And I've been very bullish on this market because many states have, as we've been referring to, a bought and paid for infrastructure with Maximus already established where we every day engage many of the beneficiaries who are going to be impacted by these programs, both in Medicaid and SNAP because there is shared eligibility often among this population between those 2 programs. So Will, that is -- I'm sorry to go on to quite a bit there, but this is an area we're obviously quite passionate about. I would say, in summary, we think it's the most significant expansion opportunity for our U.S. services business that we've seen since the Affordable Care Act. There you go.

Operator, back to you.

Thank you so much, everyone. This does conclude today's question-and-answer session. And with that, we will bring the call to a close. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.