Maximus Inc (MMS) 2002 Q3 法說會逐字稿

Good morning. All sites are now in the conference line. Welcome to the Maximus second quarter conference call. During the presentation all participants will be there a listen-only mode. Afterwards you'll be invited to participate in a question and answer session. At that time if you have a question, press the 1 on your touchtone telephone to register for a question. As a reminder this conference call is being recorded on Thursday, August 1st, 2002. I'll turn the program over to your host, Russ Beliveau with Maximus.

Participating this morning in the conference call will be David Mastram, our CEO and Richard Montoni our chief financial officer, as well as other senior members of the management team who are in attendance. I'd like to add that statements that are not historical facts, including statements about the company's expectations about revenue, results of operations, profitability, future contracts, market opportunities, market demand, our acceptance of the company's products are forward-looking statements that involve risks and uncertainties. These uncertainties could cause the companies actual results to differ materially from those indicated by such forward-looking statements detailed in Exhibit 99.1 to the company's most recent quarterly or annual report filed with the Securities and Exchange Commission. File number 001-12997. The company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date here of or to reflect the occurrence of unanticipated events. The inclusion of any statement in this release does not constitute an admission by Maximus or any other person that events or circumstances described in such statements are material. Before David provides you with a business outlook, we'll turn it over to Richard Montoni to provide you with a financial overview. Rich.

Thank you, Russ, and welcome to those joining us on the call today. I will review the results of this June 2002 quarter, comment upon certain key metrics and address certain other financial matters that may be of interest to you. This would include our view on the September 2002 quarter. Overall, from a financial perspective, we are very pleased with the results of the quarter. During this quarter we have: Achieved a record level of quarterly revenues of 133.1 million dollars. We have attained earnings and margins that sequentially are much improved. We have improved our DSOs from 106 at March 31st, 2002, to 96 days at June 30th, 2002. We generated 25.9 million cash from operations and 23.8 free cash flow, both of these are record quarterly achievements for the company. We continue our share repurchase program acquiring 633,500 shares during the June quarter and subsequent to year-end we increased the amount of our share repurchase program. And lastly we ended the quarter with a strong cash position on hand of 111 million dollars. Now let me take some time and review some key metrics behind that story. Revenue. Our revenue of 133.1 million was up 1.9 percent from the comparable prior year quarter and sequentially up 9.1 percent. And of this 9.1 percent, of that 7.5 percent was organic. The year-to-date revenue was 384.6 million. This is up 6.8 percent, and of that 5.3 was organic. The sequential change in our quarterly revenue was due to the following main factors. Our health management services group increased revenues 20.1 percent. Our human services group, 9.4 percent; systems group, 8.1 percent. And slight decline offset by a slight decline in our consulting group of 1.4 percent. On margins. Gross margin improved sequentially by 240 basis points. And this reflects the improved performance on that certain East Coast project. You will recall in the March quarter this project represented a loss of approximately three and a half million dollars. And during the quarter, as we had planned, this project status improved and ran essentially at break even. Our gross margin in comparison to the June 2001 quarter was comparable increasing by 30 basis points. SG and A expense decreased sequentially as a percentage of revenue by 150 basis points, and this is due to the higher level of sales and I believe is now in the range of our traditional experience. In absolute dollars, SG and A was flat in comparison to the June 2001 quarter SG and A as a percentage of revenue increased 290 basis points. This reflects increased spending on areas intended to strengthen our infrastructure and marketing capabilities and grow the company, including our proposal facility systems, finance and compliance personnel and it also includes some SG and A related to acquired businesses. Subsequently, our operating margin improved sequentially by 410 basis points for 13.4 percent. Cash flow from operations and free cash flow during the June quarter both in our cash flow from operations and free cash flow were at record levels, as I mentioned. We generated 25.9 million from cash flow from operations. This compares to 9.7 million in the comparable June quarter. And year-to-date cash flow from operations was 35 million versus 23 million in the June 2001 time frame. The higher level of cash flow from operations was driven by a higher level of net income, improved collections on accounts receivable/DSOs, our ability to defer certain income tax payments and also fluctuations in working capital. Similarly, free cash flow for June of 2002 quarter was 23.8 million which compares favorably to the 6.3 million in the June 2001 quarter. As a result our year-to-date free cash flow is 25.4 million, versus 13.6 million in the prior year-to-date period. On cash position and financial strength, our cash position remains strong at 111 million in cash and marketable securities, which compares to 114 million at the beginning of the quarter. And this obviously was achieved due to the high level of free cash flow during the quarter. We ended the quarter with this level of cash even having expended 19.4 million on a stock repurchase program, and 8.6 million on business combination. This strong cash position, coupled with our no debt position leads us in excellent liquidity and financial position which enables our stock repurchase program and business acquisition program. On accounts receivable. They decreased 2.6 million during the quarter, resulting in 139.6 million in receivables at June 30th. This occurred even with increasing sales and resulted in improved DSOs which I will discuss shortly. And within this improvement we saw a 5.6 million decrease in the build counts receivable being offset by an increase of approximately three million in unbilled. This increase in unbilled relates to largely to the terms of certain contracts that provide for delayed billing. A large amount relates to three particular ERP engagements, Wayne county, North Dakota and Oklahoma. This is all excellent news. Two of these are brand spanking new in terms of opportunities and we're very proud to have those opportunities. However, it does result in an increase in the unbilled from this new work, but would I say that this type of increase resulting from new work is a welcome increase in unbilled. Much of this provides for billing in the September quarter and we therefore expect that the amount of the unbilled will decrease from these contracts between now and September. However, overall I do think we need to expect that there will be quarterly fluctuations in unbilled, depending on the contract billing terms. On DSOs, we had previously reaffirmed our focus on DSO improvement. And during the June quarter we saw significant improvement. Our DSOs improved from 106 days to 96 days at June 30th, 2002. This improvement in DSO was to a great extent the accomplishment of many individuals putting focus on their accounts and billed and collect. We continue to look at those areas along the cash to collection cycle for additional improvement and do deal with the area of contract terms to best balance accelerated cash flow with winning new business. I would say that over the long run we believe the range within which DSOs are acceptable for Maximus is 95 to 105 days. On stock repurchases: During the June quarter our stock repurchase program remained active and we do intend that it will continue so. We repurchased 633,500 shares during the quarter for a total cost of 19.4 million. As a result, our year-to-date through June 2002 purchases are approximately 766 thousand shares, for a total cost of 24.7 million dollars. We used the original limit of the 30 million approved by our board by June 30th, 2002. Our board increased stock repurchases by approving the use of option proceeds and subsequent to June and in July they also approved an additional authorization of 30 million dollars. Consequently, at June 30th, we had approximately 11.9 million dollars available for future repurchases. And that number excludes the 30 million that was subsequently authorized by the board. On weighted average sales outstanding, our WASOs for the June quarter were 23,226,000, which is a sequential decrease of 624,000, or about 2.6 percent. And this was due somewhat to a reduced average stock price during the quarter. The impact of the reduced average stock price was actually about 85,000 on WASO's. But mostly to the effect of the weighting of the shares purchased in March and in June. And year over year increase is mostly due to the million share stock sale that occurred June of 2001. Looking forward, we do expect that the impact will be greater, because the shares purchased in the June quarter will be outstanding for a full quarter. And we will have - we will have September quarter purchases coming into the calculation. And also as is always the case increases in the average stock price will increase the calculation decrease taken the other way. And in summary we expect a decreasing WASO calculation in the September quarter versus June by approximately 500 to 750,000 shares. This is all subject to stock price fluctuations and repurchase activities. Again, naturally you need to be cognizant that the stock price level will have an impact on this. Two final points before I turn this over to David. One, we did issue some restrictive stock units during the June quarter. You will note in our income statement there is an $85,000 charge during the June 2002 quarter for noncash equity based compensation. This relates to 170,000 restricted stock units we issued during the quarter. We did this in lieu of issuance of some of our options that we otherwise would have issued as an element of our ongoing annual compensation plan. This is based upon recommendations from Watts and Wyatt [ph] And shareholder interest and increasing the amount of stock actually owned by our management team. Also we believe this action is in the spirit of the current hot topic of discussion about the expensing of options in that the issuance of the RSUs, unlike options, does result in an expense on our income statement. The amount of the noncash expense related to these RSUs, will increase to approximately $250,000 per quarter, as we have these RSUs outstanding for the full quarter. Finally, on guidance, we are pleased that these results for the quarter are in line with what we had previously provided as our expectations for the quarter. We believe this results in part from the highly resilient nature of much of our business and in part from our efforts to improve the ways we forecast. Yet we also recognize the continuous improvement in this area as the key to success. Being a September 30th year-end company this is the time of year when we're in the process of preparing our detailed business plans for 2003. All of this process will be wrapped up by September and will serve as the basis for our thoughts on FY 2003. And we will share those thoughts with you when we release our results for the September quarter. Excuse me, when we release the results for the September quarter. As to our thoughts on the September quarter, we are expecting that earnings per share will be in the range of 50 to 53 cents per share. And that revenues will be in the range of 136 million to 142 million dollars. Our expectations are tempered to accommodate a tenuous macro environment. And understanding that state and local governments are under substantial pressure to deal with budgetary issues, yet considering our backlog, pipeline and specified growth opportunities which David will discuss. With that, I thank you and this concludes my prepared remarks and I'll now turn this call back to David.

Thank you, Rich. Last quarter I said I thought the worst was behind us. The results of this quarter reinforce that statement. In this third quarter we turned the corner on the problematic East Coast project, which, as projected, broke even for the quarter and should be profitable on a going forward basis. We also began to realize benefits from our newly established proposal center and have trained 120 Maximus vice presidents in preproposal marketing. On the financial front, we have returned to normal margins and have made great strides toward managing DSOs and receivables, as Rich just explained. This and improved earnings generated record cash flows. While we made significant progress in the quarter to get back on track, we still face several challenges in the current economic environment which has affected the demand for some of the services we offer. Maximus has now felt the impact of the declining tax revenues and government budget cuts but more in the growth rate than in terms of our decline in our business. Moreover we're in an election year with 36 gubernatorial races this November. And that is delaying procurement in some areas since governs are unlikely to start anything that could become an election issue. We expect the slower growth environment to continue for another three or four quarters. On the positive side, there is still plenty of bidding opportunities that we're opening new areas all the time. For example, we recently won a small but important pilot contract to implement a SmartCard security system in the department of the treasury. We propose a new type of SmartCard with a computer chip and a proximity detector that makes inserting the card into a card reader unnecessary. This technology could accelerate acceptance of SmartCard based security systems that rely on biometric identification. We're also working closely with the Department of Defense on homeland security initiatives, including mobilization. Maximus has developed an automated system known as Warrior Readiness that's gaining increasing acceptance in the DOD to facilitate the call up of National Guard and reserve units. We also have important news in our health business. A recently published study of the Maximus administered Star Plus program in Houston, Texas showed the state saved 17 percent of its Medicaid case by enrolling aged and disabled citizens into Medicaid managed care. Savings amounted to 123,000 million dollar over two years for just 50,000 beneficiaries. To our knowledge, we administer the only program of its kind in the nation. Obviously there are nationwide implications since Medicaid is a major budget buster for state governments. We are also in the middle of some exciting procurements that expand our capabilities in the systems area. Maximus recently won a contract in Vermont to implement a web based child care system using the Java II Enterprise edition standard. The J2EE standard is the wave of the future in government. And we have one of the first statewide implementations in human services, a major break through for us. As you can see Maximus is evolving, growing in new areas and building capabilities demonstrating our leadership position. Our pipeline remains solid, for example in contracts signed year-to-date the number one this quarter to 455 million versus 347 million last quarter. The total is about the same as last year. In terms of our total market opportunities, including proposals pending, proposals in process and RFPs that we're tracking, 712 million this quarter, down slightly from 763 million the same quarter a year ago. The real challenge today for Maximus is one of business development and sales capture, to ensure Maximus aggressively capitalizes on new business opportunities, we have invigorated our preproposal marketing and we're now benefiting from our new state-of-the-art proposal center which has produced some of the best proposals I've seen at Maximus. In the past our preproposal marketing had not been especially strong, so we believe we can capture a larger market share by being more aggressive in preproposal market. At this point I'd like to review each of our business segments or groups. The help management group is experiencing growth from add on work in some large contracts including California and New York. With the resolution of the problem contract, the group has returned to more normal operating margins. The Texas study which I mentioned has opened up some exciting possibilities which we are just beginning to pursue. Our systems group is continuing to see an abundance of opportunities and posted several new wins in the quarter, particularly in the ERP justice and asset solutions areas. In addition, we are encouraged by the increased levels of interest in our security offerings. Such as the trust to traveller program. We're fortunate that our systems business is not wholly relying on tax revenues. For example, within the justice solutions division, much of our work is funded by court fines or fees. As discussed last quarter, reduced demand for larger outsourcing contracts has impacted the near term growth potential of the human services group. Recall this group includes our child support and welfare to work divisions. Aside from the rebid on the Balmer [ph] Project, however, the group's business is stable. In addition, our acquisition in Australia is meeting all of our performance expectations and we've recently hired high level business development consultant to strategically position us to expand throughout Australia. Within the consulting group, revenues were relatively flat. Demand within the IT consulting practice has declined as government procurements of large systems projects have dropped in light of current economic conditions. In addition, we have experienced greater than expected delays in the revenue cycle in our RevMAX practice area. Normalize we still have a solid book of RevMAX business a number of new contract wins and we're actively seeking senior level staff to more effectively service the level of business that we currently have. Overall, while business environment is mixed by group, the company's total revenue base remains resilient and our pipeline solid. I'd also like to just touch on the strength of our financial condition as well. As Rich noted, cash flows for the quarter reached 25.9 million, a record for the company. And while we repurchased 633,000 shares of Maximus stock in the quarter, and completed an 8.6 million dollar acquisition, our net cash and equivalents position remains substantially unchanged at 111 million dollars. So while we believe our stock has represented a compelling investment opportunity at current levels, and we have taken advantage of this opportunity through our repurchase program, we are still maintaining the flexibility to fund growth initiatives both internally as well as through acquisitions. Before we open it up to questions I'd like to comment on the second announcement that went out this morning. First, I'd like to thank Russ Beliveau for his efforts on the company's behalf over the past eight years. I know many of you have enjoyed good relationships with Russ and his position as head of investor relations. We look forward to Russ continuing with us on our board. I'd also like to welcome Marilyn Seaman [ph] And John Hailey [ph] To our board, having two great new outside directors gives us additional perspective and broader expertise that will serve us well in our efforts to grow this company. Finally, I'd like to close on corporate responsibility, which is clearly on the minds of many investors today. Rich and I as CFO and CEO will be certifying all financial statements from this point forward. This is not an exchange or SEC requirement but nevertheless we're undertaking this responsibility. Another area to raise corporate responsibility is separating the chairman and CEO's roles we've always done this to ensure objectivity and balance between the board and senior management so we're already in compliance with this. And as we've announced previously, we're moving to an outside dominated board, which is another action being encouraged. So Maximus has been, and will continue to be, a responsible corporation. Maximus continues to grow out of debt. We have a greater capability than at any other time in our history. We have many opportunities and challenges. So we have to - so we have much work to do in helping government serve the people. With that I'd like to open up the call for questions 00:23:40

At this time if you would like to ask a question, you can do so by pressing the 1 on your touchtone telephone. To withdraw a question press the pound key. Once again if you would like to ask a question, press 1 on your touchtone telephone. Please wait one moment while we await our first question. At this time we will take our first question from the site of Bill Loomis with Legg Mason. Please go ahead.

Good quarter guys. On RevMAX go into more detail what do you mean by delays? And as far as when we're looking at the consultant group overall, including RevMAX, what type of growth do you see in the fiscal fourth quarter sequentially? Do you see it up a few million? Flat? Down if you could drill down a little further on what's going on with RevMAX since that was pretty back end loaded.

On RevMAX as David said it's delays tempering our expectations for the RevMAX practice and hence the consulting group as a whole. And as you're aware, it does have a respectable gross profit, actually high gross profit. So when we temper its growth expectations it has an impact on gross profit for the group. We do think it's still a great business to be in. We'll experience growth. But we think it's just advisable that to become conservative in terms of what our expectations are for that group and to position it to succeed as it moves forward as opposed to just barely get by, if you will. So we're very excited about it. We think it's going to continue to be successful. But again we've tempered back the growth expectations to what we think is a reasonable level and it's reflected in our overall expectations of the quarter.

The consulting revenues being sequentially down flat in the fourth quarter?

We expect they'll be sequentially flat, Bill.

Because looking at the RevMAX, my understanding was the work you've done earlier and then you submit for payment and wait for those to come back. Where is that? Where is the disconnect? When you say delays, you mean delays from the federal government reviewing proposals or?

Delays encompasses I think a couple of touch points. One I think there's delays in signing of new contracts, just because of the general environment. You've got hesitation in the customer community to sign contracts. General feeling that this is still a very good service and they want to move forward but it takes longer to get the contract signed. And also federal government review and approval of those claims that are submitted takes time and I think our folks are a little optimistic in terms of how much time it will take. And even state personnel taking longer to turn the claims around and submit them. So when you add all of that up, that's what we mean when we say delays, Bill.

Thank you.

We will take our next question from the site of Thatcher Thompson [ph] With CIBC World Markets.

Congratulations on a quick quarterly turnaround. At least the first stage of it, let's hope. The restricted stock units, is that instead of options going forward?

We're looking at that very closely. Our board is going to be considering whether we should adopt a policy to expense options. And depending on that decision it casinos a relative better light on restricted stock units. So we have from our, our consultants have recommended we maintain a mix of restricted stock units and options going forward. So, yes, there will be more of them.

Okay. But a decision hasn't been made whether it will be one or the other? Or both?

Correct. Well, no, the decision has been made that there will be restricted stock units. The question is will there also be stock options.

All right. And then with the business, the concern has been that state and local tax revenues are down, bad for your business. Can you comment about how much of your state and local work is actually federally funded and therefore tied to federal legislation that would have to be changed for your revenue to change?

I think virtually almost all the contracts that we have some federal money in them. Probably 68 percent of the total dollar value is federal money. So it's very heavily federally subsidized.

How much that is tied to kind of recurring programs that you expect to continue year after year rather than one time engagements?

We generally historically have had 70 to, 65 to 75 percent of recurring revenues from year to year, considering that we're projecting to grow.

Good. Thanks.

We will take our next question from the site of Charles Trapton [ph] With Adams Harkness and Hill. Please go ahead.

Do you have a feeling how much the Australian business contributed during the quarter?

We do. The revenue - keep in mind we had it just about two months. It was 2.8 million dollars.

2.8 million

And the income from it was roughly 200,000 in the quarter. But keep in mind that's the first period that we had on board.

Is that a seasonal business? Is it fair to annualize it, or are there seasonal factors in there?

You can annualize it.

Great. And what are your thoughts on uses of cash from here? You've got almost five dollars a share on the balance sheet right now in cash equivalents. What are your priorities? Share repurchases, M and A?

Both.

Working capital.

We want to make sure we have enough capital to have the flexibility to be aggressive in acquisitions. We also are looking at our stock from our perspective like a 15 percent return forever, for purchasing it. So we now measure our acquisitions against is it better to have - is the acquisition better than buying our own stock back. So that's been the standard now.

Rich, what's your comfort level with debt, if you see something that's larger than the 100 million of cash on hand?

That's a great question. And that would really be something that would be addressed by the full board and the executive management team in terms of what our comfort level is with debt. Generally we've been debt adverse. I know David has an opinion and I know he's anxious to share it. But I know in the past we want operating leases. (Laughter)

But we do own the building. But I will say that it doesn't mean one couldn't build a compelling argument for us to consider debt. Generally I think we are seeing some pretty good opportunities in the marketplace as some other folks who tried to get into this business may not be as quite as successful. If we saw something that was in that regards we would consider it. It would have to be a very compelling reason to take on debt. Again, contrary to our general position that we don't want to leverage up the company. Particularly permanently.

Do you all have a line with somebody right now?

At this time we don't.

Thank you.

We will take our next question from the site of Jennifer Child with Bear Stearns, please go ahead.

Given that you're about a third of the way through the fourth quarter, how much of the fourth quarter revenue guidance that you've given us would you say is in the bag?

This speaks to the resiliency of the company and the nature of the out sourcing contracts and I do think you touch upon a very interesting topic. I think we do a reasonable job to look at our pipeline, measure our pipeline, know our opportunities, know our engagements. Jennifer, I will tell you that it is north of 90 percent. It's better than one-third. North of 90 percent and that's within what we consider to be the comfort zone. And that's one of the things we triangulate when we give you the guidance we just gave you.

Of the 455 million in new wins, how much of that was new business versus renewal?

We don't have that right off the bat. We'll have to get back to you on that one.

Taxes paid this year, year-to-date versus last year, in terms of so we can get apples to apples cash flow comparison.

Statement of cash flows, you'll get all of that detail when we publish our cash flows. If you hold on one minute, I'll give you a little bit of color on that.

While you're looking, David can you give us the components of the market opportunities?

We're seeing, as we mentioned a year ago, we thought our systems group was turning around. As I've mentioned in the past, I think our systems group has significant growth opportunities. We're seeing a lot of - Tom Grisham [ph] Is here with us. I think Tom it would be helpful if you went over some new wins for them.

The systems area is exciting. System group as David mentioned is certainly showing continued improved performance both for the quarter and for the year. We're ahead of expectations, key driver has been the key awards we've had. We've had significant awards, enterprise level awards with our government appliance. Through the third quarter of this year we've been awarded over 65 million dollars in contracts in the comparable period last year the number would be 32 million. So you can really see the significant growth and expansion in backlog which is obviously helping the profitability. The good news is the awards haven't been limited to a single vertical. It's been across all verticals. Our ERP business won a 15 million dollar contract from North Dakota. We're building off the statewide contract in Oklahoma for ERP. Justice has won statewide contracts in Alaska. And Nevada. And just won another significant contract in Chester county. Asset solutions division just won a big contract in the state of New York. And David mentioned the treasury contract in smart cards, which is an real important area tied in with homeland defense and security. And he commented on the public systems awards in Vermont. And we also won another child care contract in Florida. So the success we're seeing is spanning all the business segments and all the verticals that we're focused on in the systems group. We have a really optimistic view of where that group is headed.

In terms of this three metrics you typically give us, I think proposals pending, those that you are working on and those that you are tracking.

Basically our proposals pending is 351 million dollars right now. This compares to 326 million in the comparable quarter a year ago and only 196 million last quarter. So there's significantly more proposals pending right now. In terms of in process, we're at about 111 million, the same as last quarter, down from about 167 in the quarter before that. In terms of tracking RPs, 250 million versus 270 million last year, down from 347 in the last quarter. The total market basket, it's about 712 million, which is between the numbers posted for the same quarter a year ago and last quarter. So it's right in line with what I've been saying.

Okay.

This is Rich, getting back to you on your question regarding new versus rebids. We just don't track that metrics. So and the reason is it's difficult to sort through what are add ons versus pure rebids, et cetera. So we just don't track that metric.

And David, can you give us a little color on how you resolved the East Coast situation?

I went up there for four months.

Any lessons learned?

That project was, as I think I said earlier, was a contract that we had purchased about four years ago from another company and had been very successful. It won a rebid about a year ago. And the people that were running it had not really been what we called maximized. And so they felt that they could handle this project. But as it went on they got deeper and deeper into trouble and we finally pulled the trigger and said we have to step in and fix it. Because of its magnitude and impact on earnings as you saw last quarter, I personally went up there February, March and April, part of January, and literally four days a week redirected the project to bring it back into compliance with not only our standards but the contract standards. The reason I spent the time up there wasn't simply to fix that project. I figured if there was something that wrong with the company, that there must be some systemic problems in our control mechanisms and our training. So I developed a set of best practices, 20 pages long, questionnaires for each area that the project was addressing. And we've now created a best practices unit in our compliance office to make sure that all contracts comply with what we know to be best practices in each area of our business. So there was 25 to 30 home office people went up there. We took it on just not to fix the project but to make sure it doesn't happen again. And so far it's worked.

Do you have the best practices in place for all your practice areas?

We have best practices in place for all generic functions right now such as financial management. Rich's charge is to make sure that the best practices are implemented in all financial areas of the company. We have best practices of human resources. We have best practices in facility management. We have best practices in systems. And back-up of data centers. We have best practices in operating call centers, operating reception areas. About 20 different areas that not only the project manager going to be held accountable for but there will be another matrix type level of accountability from the home office that holds those projects accountable for that. So we're not relying on just one set of eyes to make sure we're complying with our standards.

Thanks.

Let me close the loop on the one last topic that we need to address for you. And that is that you had asked a question about our level of tax payments. And in 2001, year-to-date, for nine months, we had made payments of 18 and a half million dollars and in 2002 we've made payments of $12 million. So we've made payments of six and a half million dollars less. There's two drivers there. The income levels and the other one obviously is there's some tax savings, elections that we availed ourselves of. And this is a factor as I mentioned in the improvement cash flow. Most of this was all realized in this June quarter.

Thank you.

Once again, if you would like to ask a question, you can do so by pressing the 1 on your touchtone telephone. We will take our next question from the site of Cynthia Holton with RBC Capital Markets. Please go ahead.

Just a couple of questions. First on the DSO level. Could you just discuss a little bit more maybe in terms of the 95 to 105 days? Is that kind of a long-term target? I guess I just want to get a better sense why perhaps that number couldn't come down from 95 over a longer period of time.

It is a longer term bandwidth within which I think we should operate. I'm not prognosticating on September or December or anything like that. It's just over the longer run I see that's the bandwidth which we should feel comfortable. North of that bandwidth I think we should have concerns. South of that bandwidth ,I really question given the current nature of our business model whether it's viable to drive it any lower cost benefit basis. We can certainly adopt policies and have very strict terms that would drive it lower. But you have to start asking the question are you not competitive in the industry? Are you losing bids that you otherwise would be able to win? So that's a tough call once you start to cross that line. The other comment I would make is that historically, looking at our DSOs, it only was slightly less than the 96. We came near record at the 96. And that happened in 99 and in the March and June quarter when we had 94 and 95 days respectively. So that made me feel comfortable that the 95 is really kind of the best we might do for now.

And then maybe you can give a little bit more color on, you discussed human services the child support to work best programs, the current contract seems stable but the new projects seem I guess less robust or there aren't as many opportunities. I guess that seems contrary to what some of the companies are, that have reported have discussed. I know they're doing more on the transaction part of it. If you could just address that a little bit more why you're seeing new bids fairly slow and on the transaction component of it, activity seems still pretty healthy.

Let's take child support because I think that's probably the area you're referring to. Child support business, Maximus has been basically the dominant player in full service child support operations where we're really the case managers for the government. There's another called state disbursement which operates transaction based check units at the state level that market has traditionally been dominated formerly by Lockheed Martin or ACS tier technology is getting into it. So they're seeing more activity in Illinois, Ohio, California that's why you're hearing of, what you're hearing from them. Nonetheless, we're not bypassing that market, we're trying to enter that market, too. But we're not the dominant player. We happen to have a break through contract. So in our traditional markets they're pretty flat. Some other markets that look attractive to us where we're not the dominant player, they are growing.

Okay. Do you have any other - any other significant renewals coming up over the next quarter or two in that? The only one is Baltimore, Maryland child enforcement contract is being rebid right now. There's an issue, it's eight month contract. There's an issue whether it's going to continue after that. And we're just in the middle of the rebid.

The expectation of that in terms of the guidance, is it assuming you're going to stay steady state? I guess what's the expectations on the estimates for that?

That's an 2003 issue. That doesn't affect this fiscal year.

Great. Thank you.

We will take our next question from the site of Arnold Ernser [ph] With CJS Securities.

This is Charlie Strawser [ph] For Arnie. Most of my questions have been answered. Going back to your board, you say you're boosting the outside directors. Are there plans to add additional on site directors to make the majority outside?

Yes.

Can you give a time frame of six, 12, 18 months?

2003 for sure.

And on the systems side, in justice systems, you mentioned a couple of wins there. Care to comment on the number of RFPs, not so much in dollars, but the number of RFPs you're currently bidding for in justice systems?

This is Tom. That division is very active. We have numerous RFPs across the country from California to Texas. Michigan, Massachusetts, the division across the country is very active. Driven by court interested in automating court operations and also the fact that they're less sensitive to the funding issues that are affecting other parts of government. Much of their funding comes through fines and fees so they have a more stable source. So we have a great solution there and we have one of our busiest additions.

Who do you see in competition there?

The biggest competitor we run into is ACS. They acquired a company called SCT that's the biggest competitor we've run into.

Thank you very much.

We will take our next question from the site of Dan Walker with Calmar [ph] Investments. Please go ahead.

I didn't hear this when you were talking David, but say you have now renegotiated New Jersey or is that still pending?

I never mentioned that. It's still pending. I think we've come to a conceptual agreement it's now just getting through the paperwork.

I believe you talked about how you would hope to just renegotiate the way you would organize your group rather than the amount of dollars to be recompensed.

Yes, they have a requirement in the contract that we maintain, for example 115 people on the phone center. We don't need 115 people on the phone center at times. And we want to redeploy those to other areas but they've been pretty liberal in letting us assign work to those people, as long as they're available at the phone center. And we've worked within that constraint.

Rich, a question for you. Perhaps it's hard to figure at the moment. But how would you view your free cash profile in the September quarter?

My thinking is that we should not expect a repeat quarter in September as it relates to record cash flows and free cash flow. Some of these things are what you might consider to be one time type improvements, improving DSOs is a one-time type of improvement and now the name of the game is holding onto that position. The situation in terms of the tax savings is a one-time - and I do believe recurring type situation that we will hold onto. But it won't repeat in September. So I think we start to get back to really the cash flow that's generated from operations. And I would steer you in that direction, Danna.

Something along the lines of converting net income into cash but no more.

Right and obviously the biggest part would be working capital fluctuations.

Are you in a position to say whether you've been buying shares in July?

No. We don't do that. What we do is rereport our activity for a quarter at the point end of the quarter, tell you whether we intend or probably don't intend to be active as we move forward, which we've told we do intend to be active during the September quarter. But we'll record our activity for the September quarter when we report the September results.

You're not saying you didn't you're just saying you won't tell us?

Correct.

Given the that systems seems to be your better performing group, if we were to look forward, which of the three other groups would you expect to turn for the better first? Based on what you know.

Right now the health group, as you heard, had a significant increase in revenues for the quarter and returned to profitability. And seems to have a number of interesting prospects going forward. So probably the health group will also be a leader there.

Expect can more sequential progress from it over the next several quarters?

I am, yes.

A final question from me. I know you likely don't want to talk too much about 2003, but would you believe that as we attempt to annualize the Q4 levels of income that that ought to be a sustainable base that you would hope to build on from there, whether it's slow build or more rapid build?

What I said was that our challenge is not so much sustaining our current business level but having a higher growth rate. So I don't anticipate things would go down. Our focus is on them improving.

Thank you very much and good luck.

Our next question will come from the site of Michael Legg with Jeffries. Please go ahead.

You talked about the possible use of cash continuing to be acquisitions. Can you give us flavor as to what you're seeing out there available for purchase? Is Australia still a key focus to expand through acquisition? Thanks.

There are interesting opportunities that pop up all the time in terms of acquisitions. I must get two or three of them a week. Our challenge is to keep our focus. We have acquired a number of - I think 15 are the number and we've kept them all profitable but every time we get one it adds to the load of integration and ensuring that there's culture is the same as ours and making sure they're profitable. Right now our focus would be on acquisitions that at our core competencies of the company and there are some of those that are out there we're looking on. We may announce one fairly shortly. So we're looking for acquisitions in our core competencies but I don't anticipate any more in Australia. We have our hands full just to get that one on stream and take advantage of what it has to offer.

What about on the pricing perspective, is the pricing in the state and local acquisitions coming down from the private side?

I haven't seen that. There's been no significant deterioration in price.

Thank you.

We will take our next question from the site of Adam Waldo [ph] With Lehman Brothers.

Thank you for letting me sneak a couple in here. I know it's a little premature to talk too much about fiscal 2003 given you'd rather that you'd like to comment about it in the second quarter. But obviously a lot of investors are starting to look out to fiscal 2003 at this point. Implicitly the street consensus of about 215 at the EPS line implies, I think, if we're doing our math right, low double digit to mid teens organic revenue growth and some modest margin expansion and some modest share repurchases. Could you give us a flavor, David, for specifically what kinds of levels of heightened activity in the proposal center or specific business development initiatives would give us the confidence in the ability to drive that growth rate in this environment and secondly would you remind us how much remains in dollar value on your existing buy back program? And what your thought processes are with respect to additional buy backs versus acquisitions given your overcapitalized balance sheet.

In terms of looking forward to fiscal 2003, we have a long-term stated goal of Maximus of 15 percent growth rate. And our bonus program is going to be tied to a 15 percent growth rate. So our objective is to try to get there. We'll have a better idea on whether we can do that as our business plans develop. But we're not letting go of that as something we want to achieve. In terms of getting there in this environment, I talked about being more aggressive in preproposal marketing, which we've not been in the past. And we think we can gain a greater share of the market even if it's not growing as fast by being more effective in that area. Our proposal center certainly helps, as I've said we've put out some of the best proposals I've seen. We just have to get better at marketing, get a higher market share to achieve the levels of long-term growth that we're trying to achieve in this area of economic slowness. In terms of the buy back of stock, as of the end of - I'll just turn it over to Rich he has the numbers.

On June 30th we had remaining under authorized at that time authorized, board authorized repurchases. And we had 11.9 million. The board subsequently approved another 30 million.

That's the 30 million on the 22nd, Rich?

That's right.

As you think beyond that cash continuing to pile up and can you give us a sense for whether the first call on capital would be further share buy backs relative to acquisitions at this point, both for near term earnings accretion management and long-term shareholder wealth accretion given the valuation of the stock.

We also mentioned that one of the criterion we will use is whether the acquisition is a better buy than buying our own stock. So we have plenty of authorization to buy our own stock as we look at acquisitions. We'll compare them with that. We'll just make the appropriate decisions. We're not interested in having a lot of cash around. We just want enough to make sure we're solid and still have flexibility to do things?

Finally, Rich, I know you've been doing a lot of work thinking through possibilities of cutting the billing and cycle time with clients as a key driver of improving DSO. Where are the cycle times now where do you think they could go over what time period?

That continues to be an area that we look at. You're right, Adam, we look at intently. Cycle periods really varies from business unit to business unit. We've got some that will cut bills nearly on a weekly basis. We have other practices that the nature of that practice that it takes a much longer time than I would like to see. Another point that Tom is reminding me of here is that we are moving to convert as many customers as possible to EFT. Electronic funds payment. And we're going through in what I think is a very smart fashion identifying those who are not paying us via EFT, those that are volume payers and going out and proactively visiting with them, negotiating with them asking them to accommodate EFT payments. I think that's helping the situation as well.

Terrific. Thank you.

We will take a follow-up question from Charles Trafton with Adams Harkness and Hill. Please go ahead.

How much of the cash from ops this quarter was from the tax benefit from stock options?

1.2 million dollars.

And you were talking about not being able to repeat this in the September quarter. There was a discussion of a tax payment. I got lost a little bit in there. How much was that? Those deferred tax button you pushed.

The delta in the deferred tax category was approximately 6.6 million dollars.

So you're thinking something in the September quarter of back to about, what did you do last year?

Charles, the net impact of the tax activity is four six. I gave you gross number. So four six tax.

So I think last year you were negative seven. I'm sorry you were positive 25 in the last quarter. Do you think that will be more like 10 or 12 in the September?

I think you're in the right direction.

Okay. Great.

We will take our next question from the site of Tom Maher with BB and T Capital Markets.

Congratulations on a good quarter. Just some housekeeping items. I got onto the call late. I didn't get a chance to write these down could you go over the organic growth numbers in the quarter for the year.

I would be glad to do that. We talked about organic growth for the quarter, which sequential we're up 9.1 percent which seven and a half percent was organic. And then our year-to-date revenue was up 6.8 percent, 5.3 percent of which was organic.

And then you also mentioned a share count reduction going forward in terms of modeling. Could you give me what that was again?

I said there's several variables that could move this one way or another. But I did say I expect a decrease in the weighted average shares outstanding in the range of 500 to 750,000 shares.

Okay. And finally, interest income looked like you had about 900,000 in the quarter, assuming no further acquisitions. Is that a good number to use going forward as well.

900 in the quarter for what?

If I read it correctly the interest income in the quarter was 900 some thousand.

That's right. It might temper down as we do share repurchases. Temper down.

Great. Thanks very much. I appreciate it

We will take our next question from the site of John Robon [ph] With Gagnon Securities.

Good morning. On the Q2 conference call there were several items of concern. And one the DSOs you've already taken care of. Could you go into what some of the following items might be, the deferred revenue, also the capitalized software and would you talk about competition that's come in to the new child support area, please.

Did you say competition in the new child support area?

Into the child support area, I mean. In the last call someone raised a question about several new competitors that had come in. ACS and others that had come into child support. I'm wondering what effect or affect you might see in that area.

There hasn't really been new competitors in the child support area. I think what you may have heard is that in the SBU area, the disbursement unit, that access is starting to compete in that area with other people that are already there. But in our traditional area, there hasn't really been any new competition.

I'm sorry. I'm referring to ACS that's come into the business and also the fleet bank was selling two subs and there was also a BC, they took an investment in another company in the child support business. This was mentioned in your Q2 call.

There is no new competition. It's just it shifted. Instead of working for fleet bank it now works for ACS. And we had two prime competitors. One is now ACS and then public policy studies in Denver. PSI was acquired 25 percent was acquired by a venture capital group so it didn't change. The company is still there. The one that worked for ASA, the ones - there's no new ones they just changed ownership.

Any effect if in the marketplace because of these changes?

None that we've seen.

Thank you.

Let me answer a couple other topics you asked here. You're right I think we took care of the DSO situation. You asked about deferred revenue. And deferred revenue, actually this quarter is increased. It increased to six and a half million dollars whereas in March it was 5.7 million dollars. I'll tell you this is really an end result number when you sit down and analyze your projects, project by project, where does it stand, with build situation and unbuild situation, a deferred revenue situation. And I will tell you there's no one particular answer that says it went up during the quarter for this reason. It's just a detailed analysis of our project. On the capitalized software situation, you will see in our basic financial statement that during the quarter the amount of capitalized software, and this will be from our statement of cash flows, will actually be less than prior periods. And the reason here is that the 8$26,000 which is less than prior periods. And that will be principally because we've got one business unit that has completed the build of the modification and enhancement, significant enhancement. And they're going from basically the development stage to the production stage and they're now rolling out this and the people that have been doing the development now are assigned to production, customer service. So they're being expensed and we're starting to amortize the costs associated with that. So that capitalized software activity will go away. You'll start to see the amortization of expenses associated with that.

Thank you.

We will take a follow-up question from Jennifer Child with Bear Stearns. Please go ahead.

In the 15 percent growth goal, was that top line or bottom line?

Both.

Thank you.

We will take another follow-up question from Adam Waldo [ph] With Lehman Brothers. Please go ahead.

Just a few couple follow-up items. Can you give accounts payable balance at the end of the fiscal third quarter?

We will do that.

Maybe I'll throw the other one in. On the corporate staff side, can you give us a sense for what total corporate staff was and home office staff was at the end of the quarter?

We can do that as well. The AP was 10.6 million dollars. And corporate staff at the end of the June period was 203.

That's at the home office?

Yes.

The total corporate staff did that move up much from the 4861 in the last quarter.

Total head count? Total head count is - it's approximately 5,300.

How many of those would have come from the Australia acquisition?

Probably 400.

Thank you very much.

This concludes today's Q and A session. I'll turn it back over to management for any final comments.

Just in closing we'd like to thank you for participating in the call. Please note that a replay of the call will begin today at noon and will be available until midnight August the 8th. Please call for the replay 800-283-4799 in the United States or 402-220-0860 internationally. It will also be rebroadcast on our web site at WWW. Maximus.com. Again, thank you very much.

This concludes today's conference. You may disconnect at any time.