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

Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO; David Mutryn, CFO; and James Francis, Vice President of Investor Relations. I'd like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions.

Actual events and results may differ materially as a result of risks we face, including those discussed in Item 1A of our most recent Forms 10-Q and 10-K. We encourage you to review the information contained in our recent filings with the SEC and our earnings press release.

The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances, except as required by law. Today's presentation also contains non-GAAP financial information.

Management uses this information internally to analyze results and believe it may be informative to investors, engaging the quality of our financial performance, identifying trends and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures presented, please see the company's most recent Forms 10-Q and 10-K.

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

Thanks, Jessica, and good morning. Our third quarter results reflect strong organic revenue growth and progress on our commitment to margin improvement, particularly in the U.S. Federal and U.S. Services segments. Our federal team is successfully ramping up to meet the unprecedented demand for clinical assessments for veterans.

Our team supporting state customers have begun assisting beneficiaries in navigating the unwinding effort as redeterminations resume. Third quarter results include an expense of approximately $22 million for the cybersecurity incident that we disclosed last week.

This charge represents our updated best estimate of costs to be incurred related to the incident for the total investigation, which is expected to be concluded this month, and remediation activities. The outside the U.S.

segment realized a much greater than anticipated operating loss, driven in large part by macroeconomic factors that have caused our expectations to decline on our employment services contracts.

Looking ahead, we feel confident in ongoing successful delivery to enable a step-up in earnings in the fourth quarter with our expectations for the quarter, largely intact from last quarter. Turning back to third-quarter results. Maximus reported revenue of $1.19 billion, which represents 5.6% year-over-year growth or 6.7% on an organic basis.

This growth was driven by both the U.S. Federal and U.S. Services segments, which I'll cover shortly. Adjusted operating income margin, which excludes only intangibles amortization, was 6.9% and adjusted EPS was $0.78. This compares to 6.9% and $0.78, respectively, for the prior year period.

To be clear, the approximately $22 million expense related to the cybersecurity incident I mentioned earlier is included in this quarter's results, reducing our adjusted margin by approximately 180 basis points and our adjusted EPS by $0.26. It is accounted for in other SG&A and not allocated to the segments.

Absent these incident costs, adjusted operating income margin would have been 8.7% and adjusted EPS $1.04. I'll also point out that last year's period had less interest expense due to lower interest rates, while in this quarter, our tax rate had favorability from a number of discrete items, which benefited EPS by approximately $0.06.

Let's go into detail around the segments. For the U.S. Federal Services segment, revenue increased 11.1% to $584 million, which was all organic. The key drivers were volume growth on both the Veterans Affairs medical disability exams contracts, which comprise the Veterans Evaluation Services or VES business, and on our student loan servicing work.

The operating income margin for U.S. Federal Services in the third quarter was 12.7% as compared to 10.4% in the prior year period and slightly better than we anticipated. Strong delivery by VES driven by ramping PACT Act-related volumes drove the improved margins. For the U.S. Services segment, revenue increased 12.5% to $449 million, also all organic.

Contributions from new work wins last year are still driving strong growth numbers in the segment, plus we have an uptick to revenue from beginning to process redetermination volume. The U.S. Services operating income margin was 10.5% in the third quarter.

This compares to 8.0% in the prior year period when redeterminations remained paused and the meaningful short-term COVID response work had largely concluded. The margin reported this quarter is consistent with our expectations for an improving trend in this segment across the remainder of fiscal year 2023 as redetermination activities ramp.

As a reminder, over the last 3 years, many programs in this segment have been operating with depressed margins resulting from the pause in Medicaid redetermination. With their resumption, we expect a full period of conducting redeterminations in the fourth quarter. Turning to the outside the U.S. segment.

Revenue decreased 22.5% year-over-year to $156 million for the quarter.

Organic revenue contracted 16.6%, driven primarily by a lower run rate in Australia following last year's rebid outcome and a $14.4 million reduction due to lower estimates for future period outcomes-based payments on employment services programs, predominantly in the United Kingdom.

Last quarter's two divestitures and currency impacts reduced revenue by 4.5% and 1.8%, respectively, as compared to the prior year period. This segment had an operating loss in the third quarter of $15.2 million as compared to an operating loss of $11.2 million in the prior year period.

The much greater-than-anticipated loss this quarter is attributable to the aforementioned $14.4 million reduction due to lower estimates, which falls to the bottom line. The revenue recognition for many of our employment services contracts requires us to reflect in our current period our best estimate of future employment outcomes.

Since last quarter, both our view and our customers' view of macroeconomic conditions have moderated. We are not satisfied with the financial performance of this business.

And with the disappointing third-quarter results, we reiterate our commitment to shaping this segment, bearing in mind practical constraints to represent a portfolio that is strategically aligned and drives consistent profitability.

To that end, we divested 2 businesses in the March quarter, and we continue to execute on multiple cost-saving initiatives in the segment. Let's now turn to cash flow and balance sheet items. Cash used in operating activities for the third quarter was $5 million and free cash flow was an outflow of $30 million.

DSO of 61 days near the low end of our expected range of 60% to 70%, but an increase from 56 days in the prior quarter and thus increased our working capital. There was also a timing impact from an additional payroll cycle for cash flow as of June 30. We expect an improvement to fourth quarter cash flow.

I would like to note that our CapEx has begun to increase, and we expect it to run at these higher levels through fiscal year 2024. The main driver is investment in capitalized software on a number of systems that we anticipate providing enhanced efficiency, especially in highly scaled areas of the business.

We ended the third quarter with total debt of $1.32 billion, and our net debt-to-EBITDA ratio remained unchanged at 2.5x from last quarter. As a reminder, this ratio is our debt net of allowed cash to adjusted EBITDA for the last 12 months as calculated in accordance with our credit agreement.

Our priority in the remaining quarter of fiscal year 2023 is further debt reduction, which our projected cash flows should afford. We remain on track to finish the fiscal year below 2.5x. This will offer us flexibility to execute on our longer-term capital allocation priority, which is strategic acquisitions to accelerate organic growth.

Let me update you on fiscal year 2023 guidance, which has been impacted on the bottom line by third-quarter results. Revenue is holding, and we are tightening the range, now expecting to be between $4.875 billion and $4.975 billion.

The midpoint of this range is unchanged from last quarter at $4.925 billion, representing year-over-year growth of approximately 6.5%, which is substantially all organic and overcomes the $300 million reduction in short-term COVID response work.

Adjusted operating income following our pattern to exclude only intangibles amortization, is now estimated to be between $387 million and $401 million. This includes the approximately $22 million from the cybersecurity incident, whereas excluding this expense, our range of $409 million to $423 million.

This is down modestly from last quarter's $415 million to $440 million, driven by the third quarter loss in the outside the U.S. segment. Adjusted EPS is now projected to be between $3.74 and $3.94 per share.

Again, this includes the $0.26 from the cybersecurity incident, whereas excluding these costs, our adjusted EPS guide would have been intact from last quarter and tightened to between $4 and $4.20. Our EPS guide has better-holding power due to an improvement to the full-year tax rate.

Finally, free cash flow is now estimated to be between $190 million and $230 million for fiscal 2023. As with adjusted OI, our free cash flow would have seen less of an impact with guiding to between $212 million and $252 million, excluding the cybersecurity incident costs.

I should also note that our full-year CapEx projection is now approximately $85 million. Our third quarter results offer us yet further visibility to our projections for the last quarter of this year. U.S.

Federal is demonstrating solid momentum that should continue to build into the fourth quarter, and if anything, has improved from our prior thinking.

The second driver to fourth quarter improvement is a full period of Medicaid redeterminations, which should continue ramping as compared to third quarter, albeit not with a sharp step up, and that ramp should continue into fiscal year 2024. With just one quarter remaining, the adjusted EPS guidance implies $1.22 to $1.42 in Q4.

Thus, our expectations for strong sequential earnings growth are largely unchanged from last quarter. Let me briefly touch on segment margin for the full fiscal 2023 year. No change to U.S. Federal services expectations, and we should finish towards the lower end of the 10% to 11% range as noted last quarter. Also, no change to U.S.

services with an expectation of 9% to 11% for the year. The outside the U.S. is now expected to finish in a loss position with the fourth quarter expected to be slightly below breakeven. Our interest expense projection is still between $82 million and $85 million for fiscal year 2023, albeit we expect to come in toward the lower end of the range.

Our full year effective income tax rate projection is now between 23.0% and 23.5% and weighted average shares outstanding between 61.4 million and $61.5 million.

Our guidance ranges do not include any additional costs related to the cybersecurity incident other than the approximately $22 million recorded in Q3, which reflects our best estimate based on the currently available information. Let me now share some early thinking on fiscal year 2024, ahead of our November call when we typically issue guidance.

From a revenue standpoint, our current line of sight suggests a positive organic growth projection aligned with our mid-single-digit growth target. From an earnings standpoint, we expect a meaningful lift in fiscal year 2024 as compared to this year.

Our current thinking is the fourth quarter of this year is a good proxy for the earnings power of the business going into next year. One thing to be aware of is the redetermination dynamic.

I mentioned earlier that we expect volumes to continue ramping into fiscal year 2024, driven by anticipated higher volumes or more numerous consumer interactions tied to elevated Medicaid roles, which have grown substantially over the course of the pandemic. So we would expect the contribution from these volumes in U.S.

Services to grow from the fourth quarter into the first half of fiscal year 2024 and then settle back to a steady state level in the back half of the fiscal year. Consistent with our past practice, we will provide guidance for fiscal year 2024 in November. With that, I will turn the call over to Bruce..

Thank you, David, and good morning, everyone. I'm pleased with our progress executing on programs of national policy significance and importance to our customers and the citizens we serve each day.

As we deliver on Medicaid redeterminations and enhanced benefits for our nation's veterans, our core business reflects strength we have not seen in several years. Operating margin improvement in our U.S.

segments reflects the business operating at scale and momentum that has enabled us to more than overcome the year-over-year decline of short-term COVID work.

Let me provide an update on return to repayment in our student loan business, where you'll recall, we act as a servicer of Federal Direct loans working under the rules and oversight of the Department of Education, Federal Student Aid, or FSA, and not as a loan originator.

The suspension of federal student loan payments, interest, and collections has ended with payments beginning again in October 2023. Our teams are preparing now to ensure a smooth transition to repayment, a few details of which I'll share. First, communication with borrowers is key.

For the loans we service, Maximus is supplementing FSA communications with more get-ready-for-repayment information. Second, Maximus began hiring and training in July to support the increased demand as borrowers enter repayment with forecast based on prepayment pause volumes.

This will continue through August, well in advance of the first billing notices being sent in September.

Finally, consistent with our strategic focus on customer services digitally enabled, Maximus continues to develop solutions, including chatbots, web chat, and web information to support greater opportunities for borrowers to self-service, thus creating reductions in call volumes and staffing demands.

The restart of tens of millions of borrowers' student loan payments marks an unprecedented event, one that our teams are preparing to deliver on in a thoughtful and well-organized manner.

Similar to our student loan business, over the last several quarters, our Medicaid eligibility and enrollment teams have been preparing for the unwind phase, which commenced in April of this year.

The unprecedented nature of this unwind phase makes it inherently difficult to forecast eligibility redetermination volumes as many beneficiaries have never been through the process previously. With each month that passes, we are learning and adjusting program forecasts in an educated manner.

Some lessons learned thus far include ex parte redeterminations where a third-party data matching makes interaction with the beneficiary unnecessary to support a state's determination have been first priority for many states. Further, beneficiary behavior has been hard to predict for ourselves and our Medicaid clients.

As an example, in one large state, a significant cohort of individuals has been far less responsive than anticipated. This group may not realize that they've been disenrolled until they need to seek service.

In light of this, while staffing has been a challenge, we have staffed to ensure a high degree of quality and customer service because this is a high priority for our clients.

With this being said, early review of July data shows volume activity for the fourth quarter is trending upward, giving us confidence in the volumes moving into fiscal year 2024. We believe this trend will continue and eventually peak and plateau in the first half of the next fiscal year.

Turning to VES, as David conveyed, we're happy to report that volumes in the quarter met our customers' high expectations for forecasted exams. The increased volumes from the PACT Act are anticipated to continue ramping upward through Q4 of the current fiscal year and be sustained throughout fiscal year 2024.

With the future of health as a key pillar in our 3- to 5-year strategy, solid performance on this contract demonstrates that our core business is doing well, and we are continuing to deliver on the goals we laid out in 2022. Like many companies, innovation and, in particular, artificial intelligence is woven into our strategic direction.

In each pillar of our plan, the future of health, customer services, digitally enabled and advanced technologies for modernization, innovation is at the core of our success.

Across our programs and technology solutions, innovation goes beyond cost savings and margin enhancement, although there is certainly an element of this to creating differentiating capabilities in our highest-value programs.

Examples, which I've spoken of before, include innovations we have developed and patented by which we can intake, index, and categorize large volumes of unstructured data and use machine learning to enable more efficient navigation of these files by our clinical assessors. Turning to AI.

While in commercial contact centers, AI might be seen as purely an opportunity to reduce headcount through more automated consumer interactions. Our view is that government customers will see it as a tool to increase accuracy and improve quality, enabling our staff to provide greater value to citizens.

In this vein, our teams have identified use cases for AI, some of which we are piloting presently, where the technology is used to support our CSRs, improving the quality of calls by providing more timely feedback and quality assurance.

While we are excited about the opportunities AI creates across our business, we are also measured, pragmatic, and committed to doing the right thing and putting our people first.

Our commitment is demonstrated through the establishment of our AI Governance Board, organized under leadership in the Office of the General Counsel and made up of cross-functional and interdisciplinary team members.

The Board will enable adaptive risk management and organized collaborative oversight to ensure AI aligns with existing and future legal and regulatory frameworks, our client expectations and requirements, organizational values and ethical considerations, and business objectives.

We look forward to sharing more about our innovation journey on future calls. I would be remiss if I did not comment on the recent cybersecurity incident that has impacted hundreds of companies thus far and which resulted in the recognition of a significant expense in the quarter.

As we previously disclosed, MOVEit is a third-party application licensed from progress software that is used by our project teams to share our government customers' data, and in some instances, that data pertains to individuals who participate in various government programs.

The MOVEit vulnerability that was exploited was a critical 0-day vulnerability, which is a flaw and a piece of software that's unknown to the owner of the application. Because the vulnerability wasn't known, there was no patch or remediation option available to companies like Maximus prior to the exploitation of the vulnerability.

We investigated the incident promptly with expert assistance and took remedial steps to address the reported vulnerabilities. Data privacy and security remain a top priority, and we are committed to protecting the data entrusted to us.

We have not identified any impact from this vulnerability on other parts of our corporate network and remain confident in the integrity of the network.

Finally, we have been working with a subset of our customers who are using the impacted application as part of their workflows and continue to provide updates and support to them as our investigation proceeds. Turning to outside the U.S. segment.

Earlier in the quarter, we announced that Maximus has been selected as the largest provider of the new Functional Assessment Services or FAST contract due to launch in the United Kingdom in fiscal year 2024.

Since 2015, Maximus has been the only national provider of the Health Assessment Advisory Service, or HAAS contract on behalf of the Department for Work and Pensions. The FAST contract replaces HAAS and expands our scope with 2 health and disability assessment types and maintains our position as a leading provider of health assessments to the U.K.

government. Similar to my earlier discussion on VES, this win also shows our commitment to the strategy we articulated last year and ability to deliver on our goals. The combined estimated value of the contract, including subcontracting, is $1 billion over 5 years, with the option to extend for a further 2 years.

Remaining outside the U.S., David discussed the disappointing results in our employment services business in the quarter, a reflection of macroeconomic conditions, particularly in the United Kingdom, and further evidence that we must remain focused on restructuring and optimizing this business.

Last quarter, we announced the divestiture of 2 small businesses in the OUS segment. The divestitures demonstrate our commitment to analyzing the segment's operations and taking measures to optimize this portfolio.

In the near term, we will continue to optimize performance and tightly manage costs while evaluating additional actions in the context of current market conditions. I will now turn to award metrics in the pipeline as of June 30. Earlier in my prepared remarks, I discussed the good news regarding the $1 billion FAST contract in the United Kingdom.

Last quarter, we discussed the IRS Enterprise Development Operations Services, or EDAS contract in our Federal segment. As a reminder, the EDAS agreement is worth up to $2.6 billion to the awardees over 7 years for the resulting task quarters. The awards from which are expected to contribute in our fiscal year 2024 and beyond. Moving to rebids.

Fiscal year 2023 has been a successful rebid year, providing stability and line of sight to our revenue and earnings for fiscal year 2024 and beyond. Having a solid base, a testament to the strong relationships we maintain with our customers gives us the space to focus on the new work opportunities that exist in our broader addressable market.

In April, we were awarded the rebid of the USAC Lifeline and affordable connectivity program business process outsourcing contract valued at $92 million over 5 years, including option periods. This contract began in 2021 as an emergency surge program to support the emergency broadband benefit program.

The successful rebid is another example of our success in transitioning short-term COVID work into longer-term contracts. In May, we were awarded a 2-year extension for our Service BC contact center contract with a 1-year option to extend to 2026.

Under this contract, Maximus delivers multichannel contact center services on behalf of British Columbia's Ministry of Citizen Services. For the third quarter of fiscal 2023, signed awards totaled $4.3 billion of total contract value. Further, at June 30, there were $3.1 billion worth of contracts that had been awarded but not yet signed.

These awards translate into a book-to-bill of approximately 2.2x for the trailing 12-month period. As a reminder, this includes our large CCO award from Q4 of the last fiscal year. Normalizing for this award, which will no longer be part of the calculation next quarter, the trailing 12-month book-to-bill would be 1.1x.

Let's turn our attention to our pipeline of opportunities. Our pipeline at June 30 was $32.1 billion compared to $31.9 billion reported in the second quarter of fiscal 2023. The June 30 pipeline is comprised of approximately $2.6 billion in proposals pending, $850 million in proposals in preparation, and $28.7 billion in opportunities tracking.

Of our total pipeline of sales opportunities, 80% represents new work. Additionally, 62% of the $32.1 billion total pipeline is attributable to our U.S. Federal Services segment. As I conclude, I'd like to congratulate our Vice President of Diversity, Equity, and Inclusion Dr. Arvenita Washington Cherry, and the broader DE&I team.

Maximus was recently named 13 on Forbes 2023 Best Employers for Diversity List. This is a 209-spot improvement from 2022, which was only possible thanks to the dedication and commitment of Dr. Cherry and her team. We continue to take steps to integrate DE&I into the important work we do each day, strengthening the fabric of our company.

I'm grateful for the enthusiastic response and engagement of thousands of our employees as evidenced by their participation in the 6 employee resource groups we've launched over the last year. The Forbes recognition is validation of the success of our journey thus far.

With a quarter to go, in addition to our confidence in our core business performance, the success of our rebids this year has created a solid foundation for the future, enabling our teams to focus on new work in the form of competitive wins and scope expansion of existing contracts, historically, a major element of our organic growth.

With fiscal year 2023 nearing its end in fiscal year 2024 on the horizon, we remain focused on executing on our 3- to 5-year strategy and achieving mid-single-digit organic revenue growth, supporting longer-term total company operating income margins of 10% to 14%. As I've mentioned, innovation is one tool in our toolbox that will help us get there.

But there's also no substitute for the traditional tools that benchmarking, operational analysis, process optimization, and performance management provide. On prior calls, we've acknowledged that the way we structure and operate the business must continue to evolve in concert with our growth and execution of our strategy.

I anticipate that over time, these efforts will further underpin our reliable financial performance. And with that, we'll open the line for Q&A. Operator..

[Operator Instructions] We will now be conducting a question-and-answer session. I'll turn it over to Mr. Francis..

I was quick there. Good morning. Welcome to the Q&A session. Let's first please go to the line of Charlie Strauzer with CJS Securities.

Charlie, do we, have you?.

Okay. Great. If we can maybe start off by talking a little bit more about the 2024 kind of initial views there in your top line in terms of top-line expectations and maybe a little bit more color just around the assumptions you're putting behind the initial look to next year..

Sure. Thanks, Charlie, it's David. So yes, as I said in my remarks, we currently do see a good line of sight to continued mid-single-digit organic growth. And we look to Q4 as a good barometer for the run rate of the business going forward. So if you begin with the midpoint of our implied Q4 range for adjusted EPS, that's $1.2.

Our current view today that this is in the range of the run rate we'd expect through fiscal year '24, which would result in significant earnings growth year-over-year. And the implied guide for Q4 is approximately a 10% adjusted OI margin, which is also consistent with our current thinking around what to expect for fiscal year '24.

Now of course, that doesn't mean that earnings will be evenly spread over the year. So to elaborate on my prepared remarks, we now see the contribution from redeterminations actually growing from Q4 of this year into the first half and peaking sometime in the first half of fiscal year 2024 and then subsiding to a new steady state.

The other big driver would be VES. And simply put here, we expect the strong demand to continue at least through fiscal year '24, and really for the foreseeable future. And then I'd caution while these are 2 growth areas for sure, that our business also has a normal component of erosion.

That's typically at least in the mid-single-digit range, and that can result from many factors, including programs coming to a natural end, some portion of lost rebids or volume decline. That said, this year, we've certainly seen success at defending our major recompetes, which provides a good foundation.

So all that put together, as I said, we currently have the good line of sight to mid-single-digit organic growth and then maintaining that Q4 level of adjusted OI margins of approximately 10%..

Great. That's very helpful.

And then built into that, what are your thoughts on the kind of the redetermination uptick there, the $0.15 to $0.30 range that you talked about in the past, kind of what's the status of that if you win?.

Charlie, it's Bruce. Great question. As we've done in the past, I'll start and provide a little bit of a policy backdrop, and then David can get you to the numbers. I mentioned in my prepared remarks that, obviously, this is an unprecedented journey that states are going on.

And in fact, we laid out on the last call kind of the timing with which states are doing their disenrollments. And as you may recall, that began in April, as we said, with only 4 states, but really kind of has peaked and is coming to an end in July with the final 11 states beginning their disenrollment.

And so all of that means that the process is a bit more back-end loaded than we would see kind of the crest of this wave, if you will, a little bit later and outside of this fiscal year, likely in the first quarter of FY '24. So it's made it difficult to forecast volumes, but we're learning a few things as we go along the way.

And if I were to net out my prior comments from my prepared remarks, I would tell you that we're seeing meaningful month-to-month growth in quarter-over-quarter growth in the consumer interactions that we're having as people receive their redetermination packets and engage with us, and so forth.

Certainly, the fact that there were these ex parte determinations that were done initially where the enrollment -- the reenrollment or the disenrollment was based on third-party available data contributed to the fact that we didn't get as many in consumer interactions in the early months.

So there's a number of factors there, as I mentioned, that are contributing to the gradual ramp. We're learning that there are certain demographics are cohorts of beneficiaries that are harder to reach and engage than states would have anticipated.

New York highlighted this in their report recently that the 18- to 34-year-olds had a reenrollment rate of only 62%, whereas the statewide number was 72%. It could be because this is their first time through the process.

It also could be that certain beneficiaries are ignoring even the fact that they're being disenrolled until they have a medical need, an urgent medical need, and then they'll present at a hospital or a doctor's office or need to get a prescription refilled and then need to go through the process.

I mentioned the ex-parte determinations it could very well be that there -- despite state's desire to have the third-party data be as current as possible, it's likely that there are individuals out there for which the ex-parte data is outdated.

And that leads to an administrative disenrollment that beneficiaries then need to appeal and reapply into the program. So all these trends are tough because you can't really forecast them for a population that we've not dealt with before. And we're working with our clients to analyze the data and update our volume forecast accordingly.

And there could be new trends as well that present themselves along the way. So when they do, we'll continue to analyze and learn and update our outlook, but that's the way we're seeing things presently.

David?.

Yes. So just to add, our Q4 projection that is included in our guidance does have us in the previously communicated range of $0.15 to $0.30 a quarter benefit from those volumes. As I have noted before, isolating the impact precisely of the redeterminations is imperfect.

And since we've now provided a fairly specific Q4 forecast inclusive of a full quarter of redetermination, we think this is more of a helpful way to guide than ongoing effort made the specific impact of this one component of our volume..

Great. And maybe we can have a little bit more of a discussion on the OUS segment.

Just in terms of the employment contracts that have been causing you guys some problems there or just how fixable is it? And what are the steps that you need to take to kind of get the margins back on track to where you think you can get to that 3% to 7% range?.

Sure. So Charlie, I'll take that and, of course, welcome David additional comments. We've stated pretty clearly that we're not satisfied with the financial performance of the business, and we're very committed to shaping the segment. Bearing in mind that there are macroeconomic headwinds that we're facing.

And we're seeing low unemployment rates in a number of countries, including the United Kingdom. And in the U.K., in particular, there's persistent high inflation across the board, and that includes with wages. So it's a difficult environment to operate in.

I will say we're seeing early indications in the United Kingdom that the unemployment rate may grow in the next year. There are certain macroeconomic predictions that are being made that would suggest that unemployment would bottom out at about 4.1% in calendar '23 and then increased to 4.5% in calendar '24.

Depending on whether we see that and see that outcome there and maybe in other economies like Australia, that could provide an increased flow of job-ready beneficiaries into the system and provide some relief to that dynamic that we've been seeing.

Overall, though, I guess I would back out ways and just say the key to improving margins in the OUS portfolio, in our view is to continue to scale the business and diversify the business. But in those geographies where you can really have a larger footprint.

So we see our established geographies like the United Kingdom, followed by Australia and Canada as being those anchors. We're also excited, I should note about our growth in the Gulf region, which has been fantastic. We've been operating there for over a decade now.

And I think that we've really earned a position as a trusted supplier to governments there. There are increasing demand for government programs from their citizens and certainly, that environment is supported by strong government balance sheets.

So what this means is we're going to continue to focus our efforts on addressing the underperforming less strategic areas of the business and the portfolio with all options being considered. Getting back to breakeven is our first objective.

And we believe, over time, a well-diversified but narrower footprint can deliver acceptable margins even above the near-term target that we've established at 3% to 7% toward the higher single-digit margins.

But David, would you want to add anything further to that?.

Sure. I would completely agree, and we certainly aspire to at least high single-digit margins in this segment, albeit the timeline to achieve this would likely be over a multiyear period. So what we're doing now really with urgency is moving to be at least at breakeven, if not better..

Thanks, Charlie. First, David, I've got a couple of emailed questions here for you.

So first, if you -- or as you look forward to results normalizing at higher margins across each segment, how should we consider the cadence of improvement from VA exams and redeterminations? That is to say, do we see unusually strong performance in those businesses near term that ultimately wanes? Or does that remain a growth driver beyond FY '24?.

Sure. This is David. I'll begin with the VA exam. When we look at the VA claims inventory log, which is publicly available, we see that the number of claims in the queue is growing every day even with the added capacity by us and the VA and the other providers.

So this certainly supports our expectation that the strong volumes here will continue for the foreseeable future and shortly through fiscal year '24. We're also continuously implementing technology and process enhancements to further optimize our operations there, of course, being done in concert with the VA, leveraging our close partnership.

So turning to redeterminations. I touched on this a bit already. While the unprecedented nature of the unwind has made it difficult to forecast with precision, we've definitely learned more and are applying this to our future forecast.

And based on that, we do now believe that redetermination volumes will continue to grow, reach a peak in the first half of our fiscal year 2024, and then settle into a range that is steady state and still very accretive compared to the pandemic period..

Thanks, David. Last question.

Free cash flow, any early thoughts around FY '24?.

Yes. So I would go back to what we committed and guided to in our Investor Day last year, which should still hold, which is that we would expect at least 1.3x free cash flow to GAAP net income, and that's really as a result of our noncash expenses like intangibles amortization and stock comp expense.

And then just a reminder that cash flow can certainly be lumpy quarter-to-quarter based on changing working capital needs and sometimes just the timing of certain payments or collections..

Great. And Bruce, last one for you.

What's the latest on EDAS, and how do you see task orders helping FY '24?.

Well, we still expect to see task orders. The first half quarter is on the IRS DOS program coming out soon. We know that they've stood up a program office and they're working with their counterparts internally to determine which task quarters put through the pipeline initially.

Our other view is that in FY '24, we're not currently dependent on a high contribution from this new work from EDAs. -- but rather it's really a program that's going to be multiyear in nature and support to a certain degree, FY '24, but certainly the out years. DOS contract is a vehicle that we announced last quarter.

And as folks will remember, and due to its nature, it effectively has a zero dollar value in our reporting of the award. So the subsequent task orders that will bid on will carry the value and come through our pipeline and ultimately be bid on, obviously, by us and the other awardees..

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