MMS - NYSE

Greetings, and welcome to the Fiscal 2025 Fourth Quarter and Year End Earnings Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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-Ks. I encourage you to review the information contained in our recent filings with the SEC and our earnings press release. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances except as required by law. Today's presentation also contains non-GAAP financial information. For a reconciliation of the non-GAAP measures presented, please see the company's most recent Forms 10-Q and 10-Ks. And with that, I'll hand the call over to Bruce.

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, Inc. 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 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 in delivering on customer priorities. Equally important, our contractual relationships remained stable and secure throughout the year, with cancellations or impacts at just 1.5% 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 three 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 two 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 advisors. Leveraging our investment in solution architects, we 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 a 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 non-defense related programs and opportunities. After setting a deliberate course in this market with the 2021 acquisition of Veterans Valuation 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 Centers 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 one-year option periods, and an optional six-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, 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 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 four 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, 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 thirty years. While the Medicaid changes are significant, states' 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 longstanding 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 and 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 are 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 total $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 0.9 times for the trailing twelve-month period and reflect 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, as 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 1.0 times compared to 0.3 times 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 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 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 pay down and opportunistic share repurchases. At September 30, our net leverage was 1.5 times. 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 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 $8.1 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 two 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 the 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 costs 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 ninety-six days landing at sixty-two days at 09/30/2025. 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 1.5 times. As a reminder, this ratio is our debt net of allowed cash to consolidated EBITDA for the last twelve months as calculated in accordance with our credit agreement. We achieved our goal of ending the year comfortably below two times and one quarter ago at June 30 the ratio was 2.1. The improvement came from expedited pay down after catching up collections on two 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 two Board of Directors authorization announcements. Following an additional $31 million of repurchase 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 repurchase 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 sets or a combination of both. We will maintain our disciplined approach to evaluation of deals and we intend to stay within our two to three times target debt ratio range. Given our high annual cash conversion and current 1.5 times 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 1.0 times at 09/30/2026. Let's go to official guidance. For fiscal year 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 $8.1. 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 acknowledged that fiscal year 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% 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 $8.1 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 three-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, a result of seasonality and timing of certain payments. 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, which successful conversion could have positive implications for fiscal year 2027 and beyond. On the state side, we believe that the business is poised to respond to fast-evolving needs of customers required to be more diligent in their administration of Medicaid and SNAP. We currently anticipate that fiscal year 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?

Thank you. We'll now be conducting a question and answer session. Our questions are coming from Charlie Strauzer with CJS Securities. Please proceed with your questions.

Hi, this is Will on for Charlie. Congrats on the strong quarter.

Thanks, Will. Good morning.

Morning. Looking at the guidance, the EBITDA margin is for 26% 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? Thank you.

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

Yes, if you look at the margin guidance we laid out for each of the segments, all three are actually slightly higher than where they finished fiscal year 2025. For U.S. Services, it's worth pointing out, as I did in 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 2026 there. I think the theme across all three 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 2025, the rest of SG&A is essentially flat from 2024 to 2025 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 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 2026 guidance metrics a higher forecast for D&A and a lower forecast for CapEx.

That is super helpful. Thank you. And then looking at the revenue guidance, can you add any more color 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 2025. 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.

Thank you. 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 2026. 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 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 prior shutdowns, including the most recent one, are any indication, we all 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 funding in place already. 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 funding for essential entitlement programs like Medicaid would continue for an additional thirty 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.

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, well, 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 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 three 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 two 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 let David 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. Thank you. I think just one more for me. Thanks for the update on the opportunities related to 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. I'm 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 work requirements, those wouldn't be coming out until this summer. 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 process and on their state systems and how they're going to go about engaging the beneficiaries. And of course, for Medicaid, 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 pre-planning that can be done. And in fact, there have been articles out there saying from notable consultants saying if states 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 timeline, 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 2027, those payments could be affecting. Those payments payment impacts can take two 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 '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 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 caseworker might enter semimonthly 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 database 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 that come into the system. I mentioned in my prepared remarks too that we have thirty 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 policies speak as ABODS have to meet certain work requirements. TANF's requirements actually go back to their legislative heritage to the early 1990s. I think probably the welfare reform bill under Bill Clinton known as PERWARA. 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. 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, 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 two 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. Thank you very much.