Maximus previews a pair of big recompete tests

Maximus is gearing up for two significant tests on the recompete front that, one way or another, will help shape its outlook and future given how both contracts at hand are at least one-fourth of the sales mix.

Rebid number one is just around the corner even though Maximus only booked this award in late 2022 – the potential 10-year, $6.6 billion contract to operate citizen contact centers for the Centers for Medicare and Medicaid Services.

During Maximus' fiscal second quarter earnings call Thursday, chief executive Bruce Caswell told investors that CMS will release a final solicitation for the rebid "on or around" Thursday, May 16.

In December, CMS announced its intent to rebid the contract and include a labor harmony requirement in the new iteration that will also have a potential 10-year duration.

Labor harmony provisions are designed to ensure that services provide a contractor to a government customer will not be interrupted or disrupted due to union or labor organization activities by a contractor's employees or workforce.

CMS appears to be including a labor harmony provision in response to multiple strikes by Maximus employees over the past two years, such as the October action where approximately 700 Communications Workers of America members walked off their jobs across seven states.

The agency is effectively putting a new request for proposals out in year two of the current contract, whose incumbent derives a bulk of its sales from this program.

Maximus received approximately $770 million in revenue from the CMS contract during its 2023 fiscal year, according to USASpending.gov figures. That represents approximately 15.7% of the total $4.9 billion in total sales for Maximus' fiscal year, which runs in concurrence with the government.

During the call with analysts, Caswell cautioned that procurements of this size and complexity can take up to a year or more to complete and potentially up to three years.

He also provided this outlook of the short-term road ahead for the recompete that explains the long timeline he provided:

"There's a strong likelihood that an RFP could trigger a pre-award protest to the GAO, and potentially further, given the unprecedented nature of the anticipated labor harmony requirement. It's also important to note here that further complicating the path forward is that there are significant operational impacts that would need to be accommodated and considered under resulting new contracts, including slowdown requirements to significant small business subcontractors who may be, in our view, least equipped to comply."

Caswell did not provide much more commentary on Tysons, Virginia-headquartered Maximus' strategy for approaching the recompete. In an accompanying slide presentation for investors, the company did not include the CMS rebid in its pipeline of active proposals and opportunities being tracked.

Neither was the second major recompete high on Maximus' agenda – a set of medical disability examination contracts with the Veterans Affairs Department that are also up for rebid later this year.

Maximus inherited those contracts through its company-record $1.4 billion acquisition of Veterans Evaluation Services in 2021. That work collectively represents between 10% and 15% of total annual revenue, according to Maximus' third quarter 10-Q filing.

But the circumstances driving that dynamic at VA are far different versus CMS.

Caswell said the early rebids are required because each contract includes a ceiling on claims volumes. Those have increased significantly since the PACT Act to upgrade veteran health care services went into effect in August 2022.

VA is also recompeting only some of the regions Maximus works in, Caswell said. Which means Maximus will not lose all of that revenue if its pursuit is not successful, but the company is starting the prep work ahead of the RFPs' unveiling.

"We're making significant investments in internal use software to further streamline processes and build capacity in that business," Caswell said. "As we exit this fiscal year and go into the next fiscal year, we should be in a solid position in terms of capacity to handle the volumes in the newly-completed program."

Fiscal second quarter revenue of $1.35 billion was 11.7% higher than the prior year period, while the company also reported an organic growth rate of 12.6%. Maximus reported adjusted operating income of $149.1 million in the quarter as well.

The company lifted both ends of its full-year financial outlook with revenue in the range of $5.15 billion-to-$5.25 billion and adjusted operating income now seen at $540 million-to-$560 million.