Maximus, Inc. (MMS) Earnings Call Transcript

Greeting. Welcome to the Maximus call on their agreement to acquire Agile Defense. [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'd like to remind everyone that a number of statements being made today will be preliminary or forward-looking in nature. Please remember that such statements are preliminary and subject to adjustment or 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 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 forthcoming 10-K. And with that, I'll hand the call over to Bruce.

Thanks, James, and good morning. Earlier, we announced that we have signed an agreement to acquire privately owned Agile Defense, as we continue to execute our objective to position Maximus for the future, this acquisition is a natural next step in progressing key components of our long-term strategy. First, we have consistently discussed our desire to further expand within attractive segments of the U.S. federal market that we believe are capable of high organic growth in their own right, building upon earlier successful organic growth efforts. Agile Defense accelerates our access and presence within the defense and national security markets by bringing an earned and highly regarded reputation in serving the Department of War, Department of Homeland Security, the intelligence community and federal law enforcement functions. These capabilities address some of our nation's most critical and fastest-growing priorities across these federal departments and should provide substantial reach into these high-potential growth markets with durable spending characteristics. Second, this acquisition should accelerate our technology evolution, by significantly strengthening our capabilities and domain knowledge in mission-focused data analytics and artificial intelligence, cybersecurity and cloud modernization. In today's defense procurement environment, capabilities and domain knowledge alone are insufficient to succeed. Equally important, our demonstrated success in what are known as nontraditional procurement models such as other transaction agreements or OTAs, which can greatly compress the time from concept and prototype to production deployment and impact at scale. Agile Defense brings to Maximus a proven track record of winning in both the traditional and nontraditional procurement models. Agile Defense's capabilities, customer relationships and highly skilled workforce is expected to provide Maximus with an enlarged platform for future growth. First, in the defense and national security community, but also in response to the evolving needs of federal civilian agencies. Maximus serves approximately 1 in 3 Americans through their programs we deliver on behalf of our customers. We pride ourselves and being a leader in transforming government services through technology automation, including responsible, customer-driven AI deployment. Together with Agile, Maximus seeks to build on our leading position in citizen services delivery, while broadening our participation in technology-intensive federal missions. We believe this combination can create long-term value for customers and shareholders. We view the acceleration of our presence within Defense and National Security as a strategic imperative and one that builds on our organic growth success with customers, including the Air Force Joint Cyber Command and Control or JCC2 and the Transportation Security Administration. We are particularly attracted to these missions because we believe they represent clear priorities of the federal government that we expect to last long into the future and align with capabilities and senior leadership in which we've been investing for years. They require continuous investment, attract significant innovation and are increasingly dependent on advanced technology, cybersecurity, data pipeline creation, sensor integration, artificial intelligence, cloud adoption and digital capabilities to deliver mission priorities. Agile Defense is expected to significantly expand our relationships, qualifications and capabilities within the Department of War, National Security and federal law enforcement communities. We see a strong demand signal, and we believe our Maximus addressable services market in the Department of War will alone reach $58 billion by 2029. Technology Services, including IT and digital modernization, software and analytics, in which Agile Defense is well positioned is the fastest-growing segment and comprises $21 billion of this addressable market. Further, beyond the procurement of technology services and solutions, a significant and growing portion of our defense budget is allocated to research and development, testing and evaluation or RDT&E. Agile Defense brings highly desirable qualifications in this area, including a single award IDIQ contract with a ceiling of $1.01 billion. Defense-wide, the FY '27 RDT&E budget request represents 137% growth over FY '26. And at $343.7 billion is 83% the size of the corresponding defense procurement budget. We believe these budget outlooks reflect the macro demand environment where our national defense priorities will place greater reliance on capabilities that advance cross program and platform integration, joint interoperability, sensor and network integration, data pipeline construction and AI-driven analytics. As the DoW weapon systems ecosystem becomes increasingly interconnected, linking C5ISR systems and autonomous edge devices. Increasing complexity will require ongoing significant investment in RDT&E. Furthermore, work in this area requires a high degree of cleared resources, facility access and that RDT&E contractors provide continuous agility and independence from traditional OEMs. The combination with Agile Defense brings these desirable attributes to Maximus and helps build on the independent and conflict-free status that we've maintained, providing favorable barriers to entry in certain civilian business lines. As we've demonstrated with prior acquisitions, our objective is to support customer missions where there are opportunities to strengthen the competitive position amidst ongoing demand for services that are underpinned by prioritized funding streams. We believe that Agile Defense fits this formula to facilitate sustainable, diversified long-term growth, which we regard as an important characteristic of our business. Let me turn to offer a more detailed picture of what Agile Defense offers its customers and some interesting features of the company. Agile Defense brings deep technical expertise innovation and mission understanding developed through years of supporting customers that range from the Defense Information Systems Agency, or DISA, and the Chief Digital and Artificial Intelligence Office or CDAO, under the DoW, two, the U.S. Army and U.S. Cyber Command. Agile's relationships also extend to USCIS in the Department of Homeland Security. A particularly compelling aspect of Agile Defense is Agile Labs, the company's innovation engine that we believe can be a powerful driver of growth and differentiation across the companies. Agile Labs brings specialized technical talent, applied research and development capabilities and expertise in emerging technologies that help customers rapidly translate innovation into mission outcomes, all within the secure AI-enabled solutions they demand from Maximus today. We believe the combination enables Maximus to extend the reach and impact of our existing investments in software engineering, secure platforms and novel delivery services across a broader set of customer missions. As an example, through its first deployed engineers and trainers, Agile Labs brings high-performance AI-driven engineering and Department of Board proven AI harness that shorten the time between data integration and AI-enabled decision-making and training for combatant commands and Joint Staff. Agile Labs provides a platform for continued modernization, designed to deliver new capabilities at speed that government missions demand and strengthens Maximus' technology leadership. Across government, customers increasingly seek partners that can do more than deploy technology. They need partners that can translate technology investments into measurable mission outcomes. Bring together mission expertise, secure integration and execution that make AI operationally effective, even as the underlying models continue to advance. For this reason, Agile Labs is embedded in many of the programs delivered by Agile Defense and plays a leading role in their CDAO enterprise-wide OTAs. Further demonstrating their alignment with the preferred purchasing models of the DoW, over 50% of Agile Defense's revenue comes from fixed-price contract arrangements and only 6% from cost-plus work. Together, this ability to rapidly deliver technology capabilities and solutions, often in the field under nontraditional structures and on a performance basis, we believe positions Agile Defense, to contribute organic growth at a rate in excess of our traditional civilian business lines. As we combine our organizations, we believe there will be opportunities to integrate Agile Defense capabilities into existing Maximus customer relationships, while also bringing Maximus' operational expertise in technology-enabled solutions to a broader set of federal customers. More specifically, Agile Defense provides Maximus with valuable access to established customers, contract vehicles, technical qualifications and more than 1,100 cleared professionals that strengthen our ability to pursue opportunities across the national security marketplace. There are also native elements of the company that we've been seeking, one notable example being a certified procurement system. Correspondingly, with our CMMI Level 5 designation and highly desirable FedRAMP boundary, Maximus brings new capabilities to support Agile Defense. Importantly, the combination expands our addressable opportunity pipeline. Beyond the simple addition of the 2 companies' existing pipelines, unlocking a new set of opportunities that neither organization could have pursued as effectively on a stand-alone basis and increasing the P-win on joint pipeline opportunities. We believe the combination creates a stronger platform for innovation by bringing together complementary technical, operational and mission-focused capabilities to support increasingly complex customer missions while continuing to deliver the quality and reliability our government partners expect. Finally, an important consideration in pursuing this deal was the recognition that the cultures of our organizations are highly aligned as both companies are mission-driven, focused on customer outcomes and recognized that lasting success comes from combining talented people, innovative technology and disciplined execution. I'll close my remarks by underscoring that Agile Defense's deep multi-domain expertise and strong reputation are expected to provide the foundation for Maximus to meet the increasingly complex priorities of government while accelerating our evolution as a federal technology and mission services company. Together, we expect to create a stronger platform to support customers across health care, civilian, defense, national security and federal law enforcement missions. To our new colleagues that we anticipate joining us for agile Defense, we're excited about the experience, expertise and mission focus that you will bring to Maximus. We share your commitment to excellence, innovation, integrity and service. Together, we will continue to help governments achieve outcomes that matter while creating new opportunities for growth, innovation and long-term value creation. And with that, I'll turn the call over to David to discuss the transaction details and financial considerations.

Thanks, Bruce. As a management team, one of our primary objectives is to deploy capital in ways that create and enhance long-term shareholder value. We continue to view strategic M&A as an important component of our capital allocation framework and believe acquisitions can be an effective way to accelerate growth, expand capabilities and strengthen our competitive position. Like our previous acquisitions, we have applied the same disciplined process in evaluating Agile Defense. We assessed the strategic fit, customer relationships, technology capabilities, cultural alignment, financial profile and long-term value creation opportunities associated with the transaction. Our long-standing primary intent with acquisitions is to accelerate sustainable organic growth and thus, long-term shareholder value, and we believe this transaction aligns squarely with that strategy. The contracted purchase price is $660 million and is subject to certain customary adjustments, including a future earnout that could total up to $50 million. We anticipate closing the acquisition during this first fiscal quarter of 2027, subject to customary closing conditions and regulatory approvals. The transaction will be funded through a combination of cash on hand, borrowings on our revolver and an expansion of our existing Term Loan A facility. Without accounting for the acquisition, a preliminary ratio of debt, net of allowed cash to consolidated EBITDA as defined in our credit agreement for the quarter ended September 30, 2026, is 1.7x. Accounting for this transaction, which we expect to close in the current quarter, would bring the preliminary September 30 net debt ratio to between 2.2x and 2.3x on a pro forma basis. well within our 2x to 3x target range. We continue to expect strong cash generation from the combined company. Turning to valuation. The purchase price represents an implied transaction multiple of approximately 11x our expectation of Agile Defense's 2027 adjusted EBITDA. When accounting for the net present value of anticipated tax basis step-up associated with the transaction as well as the potential earnout, the effective multiple is also approximately 11x 2027 adjusted EBITDA. We believe the valuation is supported by the highly visible near-term growth outlook, underpinned by recent new business success, the quality of the customer relationships, the depth of the cleared workforce the differentiated technology capabilities and the strategic positioning within the defense and national security markets. More specifically, for the 9 months ended September 30, 2026, Agile's book-to-bill was 3.1x, which supports our expectation of double-digit organic growth in 2027 for this business. From an income statement perspective, Agile's calendar year 2027 revenue is expected to be roughly $450 million, and their adjusted EBITDA margin is expected to be within our target range of 12% to 15%, which is a testament to the high-value work they provide as well as the portfolio of largely fixed price and time and materials contracts. We expect the transaction to be immediately accretive to adjusted diluted earnings per share following closing and approximately neutral to our fiscal year 2027 GAAP earnings per share. Beyond the immediate financial contribution of the business, we believe there is significant potential to accelerate our organic growth. We have been messaging publicly for several quarters our continued intent to grow and expand in the national security space. And while we have had some important organic wins, we've also been focused on this acquisition investment thesis. We believe the combination of the 2 companies will enhance our position in the national security space and result in a more robust growth outlook than either company alone. And while the primary thesis is to accelerate growth with national security customers, we also plan to pursue opportunities to leverage Agile Defense's technology capabilities with Maximus' long-standing civilian customer relationships. Looking ahead, we plan to continue evaluating strategic opportunities that align with our long-term growth objectives while maintaining the disciplined approach to capital allocation that has guided us for many years. Consistent with our capital allocation framework, we remain committed to returning capital to shareholders through opportunistic share repurchases. As we have discussed previously, we evaluate repurchases through a disciplined lens that considers valuation, expected returns, leverage, available liquidity and alternative uses of capital. While this acquisition represents an important strategic investment, our resulting debt ratio remains near the low end of our target range as we continue to expect strong cash generation in the coming quarters. We, therefore, believe we will have the capacity to actively repurchase shares following closing, which we expect will be our capital allocation priority for the remainder of fiscal year 2027. Subject to market conditions and our established capital allocation criteria, we currently anticipate deploying $200 million in share repurchases across the remainder of fiscal year 2027. Finally, echoing Bruce's comments, I want to extend a warm welcome to our soon-to-be colleagues from Agile Defense to the Maximus team. We are excited about the expertise, innovation and mission focus they will bring to the organization. and we look forward to working together as we enter this next chapter of service to our government customers. And with that, we will open the line for questions. Operator?

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

Congratulations on the deal. So as investors try to get their arms around the business, can you give us any color on what makes Agile take from your perspective and how the business has performed recently?

Let me begin by just talking about what makes it tick. And I hit a few of these comments in my prepared remarks, but something I might want to offer in terms of getting further visibility to the kind of business it is. I'll talk about a couple of specific contract areas and customers that they serve. So just this summer, Agile was awarded a $100 million OTA agreement supporting NORAD and USNORTHCOM, that focuses on helping operational users actually adopt and deploy AI within mission environments. So it means that Agile is not just simply building technology and handing it over. They embed engineers, and I talked in my prepared remarks about force deployed engineers and trainers directly alongside users that help integrate AI into day-to-day mission workflows. And that to me and to us, it reflects the higher value role that demonstrates the trust that they've established with some of the Department of War's most important organizations. Another example that we like to talk about is the work that they do and the relationship they have with the Chief Digital and Artificial Intelligence Officer, CDAO. The CDAO has really become the focal point for many of the Department awards most important AI initiatives and Agile is participating across multiple programs that support AI adoption, data readiness and operational deployment. That positioning is really difficult to replicate and gives us a lot of confidence that the company is really participating in areas where they're likely to receive sustained investment over time, which is the case, in fact, if you look at the CDAO's budget over time, it's increased really materially. What excites us most about Agile, is that they appear to be moving beyond being viewed as a traditional government services provider. So when we look at the complex programs that they support, the OTA agreements that they've received you see them helping the Department of War operationalize AI, supporting primary mission of the organizations, participating in some of the earliest efforts around agentic AI -- and that makes us -- I really believe that Agile has built a reputation as a trusted implementation partner for DoW for some of their highest priority technology initiatives. And that's a position that we believe creates really meaningful opportunities for Maximus for years to come. So I hope that additional color helps a little bit, and I'm going to put it over to David here.

Yes. Just as it relates to recent performance, what we're really most excited about is their strong new business success in year-to-date 2026. I mentioned a 3.1x book-to-bill for the 9 months ending September 30, which -- that really fuels our double-digit organic growth expectation in 2027.

All right. Great. That's very helpful. And just what does growth look like? I understand double-digit growth is the outlook for 2027, but what does growth look like at Agile over the past few years, both organic and including acquisitions?

Yes. I will point out that Agile combined with a company called IntelliBridge in January of 2025. So it's been almost 2 years now and that has been integrated. So there is a component of acquisitive growth in the historical period. Again, we're really focused and excited about the forward growth potential given the recent new business success. So those companies have really come together and have built a really strong growth engine.

Great. Can you talk more about the makeup of contracts at Agile? What are average performance periods or backlog? Is there any significant contract concentration?

Yes. Very low contract concentration, which is great. The largest contracts in the portfolio is a little over $50 million of annual revenue, and the top 10 contracts are just short of half of all revenue. So really good diversity across Department of War, Homeland Security. So great portfolio there

Yes. Thanks. And just can you add some more color how we should think about revenue synergies from the deal. Specifically, does Agile bring relationships with agencies Maximus doesn't serve today? And are there contract vehicles are positioned on the other side that open new work from legacy Maximus?