Maximus Inc (MMS) 2013 Q4 法說會逐字稿

Greetings and welcome to the MAXIMUS fiscal 2013 fourth-quarter and year-end conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Lisa Miles, Senior Vice President of Investor Relations for MAXIMUS. Thank you. Ms. Miles, you may begin.

Good morning. Thank you for joining us on today's conference call. I would like to point out that we have posted a presentation on our website under the investor relations page to assist you in following along with the call.

With me today is Rich Montoni, Chief Executive Officer; David Walker, Chief Financial Officer; and Bruce Caswell, President and General Manager of the Health Services segment.

Before we begin, I would 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 and actual events and results may differ materially as a result of risks we face including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the summary of these risks in our most recent 10-K filed with the SEC. The Company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances.

Today's presentation may contain non-GAAP financial information. Management uses this information in its internal analysis of results and believes that this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results, and providing meaningful period-to-period comparisons. For a reconciliation of non-GAAP measures presented in this document, please see the Company's most recent quarterly earnings press release.

With that, I will turn the call over to Dave.

Thanks, Lisa. We are pleased to report another year of solid financial results and strong growth, reflecting the contributions of work coming online from new programs as well as the ongoing expansion on existing contracts.

Some key highlights of fiscal 2013 include overall solid growth in core and adjacent markets; several new contracts related to the Affordable Care Act; and the acquisition of Health Management, which broadens our footprint in the UK.

Let's move into the financial details, starting with the fourth quarter. Total Company revenue from continuing operations grew 28% to $384.3 million compared to the fourth quarter of last year, driven by the health segment. Organic revenue in the fourth quarter of fiscal 2013 was solid at 23%. Fourth-quarter revenue was a little better than expected simply due to several change orders that were executed in the fourth quarter but had previously been anticipated to occur in fiscal 2014.

Operating margin in the quarter was largely as expected at 15% and for the fourth quarter, GAAP income from continuing operations net of taxes totaled $35.6 million or $0.51 per diluted share.

For the full fiscal year, revenue increased to $1.33 billion or 27% compared to fiscal 2012. As a reminder, revenue in the full-year included approximately $16 million of nonrecurring revenue from a terminated contract in the second quarter that we excluded from our guidance. Excluding that revenue, we over delivered on the topline by about $5 million compared to our full-year guidance primarily due to change orders. For the full fiscal year, revenue growth was driven by new work, the expansion of existing contracts, and the acquisition of PSI and Health Management.

For the full year, GAAP income from continuing operations net of taxes totaled $117.1 million or $1.68 per diluted share. This included approximately $0.09 of benefit related to the terminated contract and about $0.01 that is primarily related to acquisition expense. Excluding the $0.08 contribution from these two items, adjusted diluted earnings per share from continuing operations for the full year totaled $1.60, an increase of 36% compared to $1.18 in fiscal 2012.

Since adjusted EPS is a non-GAAP view of our earnings, we have included a reconciliation table that details all our adjustments in the financial schedules of the press release.

Let's turn to results by segment, starting with health services. The health services segment continues to deliver consistent solid results. Fiscal 2013 was highlighted by our success in securing new work related to the Affordable Care Act or ACA. The Company also benefited from healthy volumes in our federal Medicare appeals business and other new work across the segment. While the majority of growth was organic in nature, the segment did have a full-year contribution from the PSI acquisition as well as Q4 contributions from the Health Management acquisition. Most importantly, the segment had a record year of profitable growth.

Let's start with results for the fourth quarter. Revenue in Q4 increased 49% to $271 million compared to the same period last year, driven by new work, expansion on existing contracts, and the Health Management acquisition. Fourth-quarter operating income for the segment increased 130% to $45.9 million compared to the prior year and the segment delivered an operating margin of 16.9% in the quarter, benefiting from strong accretive transactional volume growth in our federal Medicare appeals business.

For the full fiscal year, health services revenue grew 29% to $862.9 million, which was largely organic and driven by new work and expansions on existing programs. For fiscal 2013, health services segment operating income increased to $129.8 million, a 61% increase over fiscal 2012 with a full-year operating margin of 15%. This compared to a 12% operating margin in the prior year.

The margin expansion in fiscal 2013 was driven principally by the accretive nature of the higher volumes in our federal Medicare business. All in all another great year for the health segment.

Let's turn our attention to financial results for the human services segment. Overall the segment performed largely as expected for the full fiscal year, benefiting from the ramp up in the UK, a new contract in Saudi Arabia, and the PSI acquisition which contributed a full year of revenue compared to only five months in fiscal 2012.

For the fourth quarter of fiscal 2013, revenue for the human services segment decreased 5% to $113.3 million compared to the same period last year. Fourth-quarter operating income for the segment totaled $11.9 million, and operating margin was 10.5%. Both operating income and margin were down compared to the fourth quarter of last year. This is because last year's Q4 results included short-term work in our US operations that was highly accretive and drove up operating margins over that period.

As you may recall from our Q2 call, our fiscal 2013 results from the human services segment were improved by a one-time non-cash revenue and profit contribution related to a terminated contract. Because of the unusual nature of this windfall, we have excluded $16 million in revenue and $10.9 million in profit from our guidance and discussion of full-year results. Because this is a non-GAAP view, we have provided a reconciliation table in the press release.

Excluding this terminated contract, full-year revenue grew 19% to $452.4 million compared to fiscal 2012. Revenue growth is driven principally from the UK, Saudi Arabia, and the PSI acquisition. For the full year, operating income for the human services segment totaled $47.2 million resulting in a full-year operating margin of 10.4%.

As a reminder, both fiscal 2012 and fiscal 2013 included certain and frequently occurring benefits to revenue, operating income, and margin. In fiscal 2012, operating margin benefited primarily from reductions in the cost to complete a fixed-price contract, which largely offset the startup losses in the UK. In fiscal 2013, the expected margin improvement from the UK contract helped offset the lowered margins in our Australian operations that were related to permanent program changes as well as lower margins in our domestic human services business. Generally the US human services business has lower margins and the full year benefited the PSI acquisition tempered margins.

Moving on to cash flow and balance sheet items, days sales outstanding were 69 days for the fourth quarter. Cash provided by operating activities for both the fourth quarter and full year were impacted primarily by timing of payments at the end of the year. We had a large weighting of billable revenue occurring at the back end of the quarter, driven by change orders and the timing of large transactions. Additionally, we are seeing more administrative review of invoices prior to payments. As a result, our receivables in the past year have landed more squarely in the guidance range that we've already provided of 65 to 80 days.

For the fourth quarter, cash provided from operating activities from continuing operations totaled $32.4 million, with free cash flow of $8.7 million. For the full fiscal year, cash provided by operating activities from continuing operations totaled $121.6 million with free cash flow of $59.4 million.

Our full-year free cash flow was slightly below our range due in part to required CapEx specifically tied to the large number of new contracts.

Our balance sheet remains healthy and we ended the fiscal year with cash and cash equivalents totaling $125.6 million, of which 60% is held overseas. During the fourth quarter, we used cash of $71.4 million of our overseas cash to complete the purchase of Health Management. Also in the quarter, we used approximately $5.5 million to purchase 145,600 shares of MAXIMUS common stock under our share repurchase program. For the full year, we repurchased a total of 974,498 shares for $32.5 million.

At September 30, 2013, MAXIMUS had approximately $97 million available for future repurchases. All share amounts are adjusted for our stock split in June of this year.

Our ongoing cash deployment activities will continue to include dividends, repurchases, and strategic acquisitions. With the generation of free cash flow and available line of credit, we feel we can handily address our cash flow needs.

Moving onto guidance, since our last call we have completed our detailed bottoms up planning and budgeting process. To that end, we are confirming our fiscal 2014 guidance. We continue to expect revenue to range between $1.555 billion to $1.650 billion driven principally by growth in the health segment.

Furthermore, in excess of 95% of our forecasted fiscal 2014 revenue is in the form of backlog or contract options. This is based upon the midpoint of our revenue range. We entered fiscal 2014 with backlog at September 30 of $3.4 billion.

On the bottom line, we continue to expect adjusted diluted EPS from continuing operations in the range of $1.75 to $1.85. This would imply a total Company margin excluding legal to range between 12% and 13%. We remain confident that the necessary drivers are in place for solid growth in fiscal 2014.

Last quarter I talked about some of the assumptions that went into our fiscal 2014 guidance and I will revisit those today. We are now assuming a tax rate of 37.8%, which is a change from our last disclosure in August, where we were modeling a flat 37%. The tax rate increase is principally driven by geographic mix, with strong growth coming from our US operations.

We are also forecasting that the vast majority of growth will come from the Health segment and that the human services segment will be fairly flat compared to fiscal year 2013.

Let's cover the details by segment. For the Health segment, we believe revenue will be more level loaded throughout the year. This is due to an initial surge of work tied to the ACA launch and open enrollment in Q1 and partially in Q2. We expect that this revenue will be seasonally lower in the back half of the year and will be backfilled by new work that is ramping up such as federal eligibility appeals contracts.

We continue to expect lower margins in the Health segment in fiscal year 2014 compared to fiscal year 2013 with three primary drivers. First, contract mix. While our new federal contracts may drive a lot of revenue in fiscal year 2014, the largest contributors are cost reimbursable. While they have low execution risk, they have a lower margin.

As a reminder, our new Department of Ed contract is forecasted to be in a nominal to moderate loss position in the year one startup phase.

Second, we have some highly accretive work going away in fiscal year 2014 such as the Minnesota HIX contract, which is currently winding down. Additionally, the sizable reduction in revenue and profit from the California Healthy Families CHIP program, which ended in fiscal 2013.

And lastly, a large contract that was acquired as part of the PSI deal launched on October 1 will be dilutive. During the due diligence process we identified this as a strategic but loss-making contract, which was reflected in the acquisition purchase price. The acquisition of PSI has been accretive, including the anticipated results of this contract.

On the human services side, we are forecasting that the year will be fairly flat on the top line compared to fiscal year 2013. However, this assumes that growth in our international human services operation will be offset by a decline in the US, largely related to the successful completion of a large multiyear fixed-price contract. In addition, we anticipate that human Services revenue will be more level loaded across the quarters.

In fiscal 2012 and fiscal 2013, the segment enjoyed unusual benefits from a couple of contracts that will not repeat next year. So right now we believe that full-year operating margins in the human services segment will be towards the lower end of our stated range of 10% to 15%.

Moving onto cash flow guidance, we expect cash provided by operating activities derived from continuing operations to be in the range of $145 million to $170 million for fiscal 2014 and we expect free cash flow from continuing operations to range between $95 million and $120 million.

So all in all, MAXIMUS wrapped up another year of great financial results and we see fiscal year 2014 shaping up to be a year of continued growth. Thanks for your continued interest and now I will turn the call over to Rich.

Thank you, David, and good morning, everyone. We are very pleased with another year of continued solid top and bottom line growth. First, thanks to our 12,000 employees for their tremendous efforts in making fiscal 2013 so successful for MAXIMUS. The operational expansion this year and the future growth trajectory we have in place are both a direct result of their contributions.

The past fiscal year was defined by the significant progress we made on our long-term growth objectives and other areas where we can best maximize shareholder value. Today I will share updates on our three primary goals, which include securing our fair share and a little more of work related to the healthcare reform in the United States, growing our US federal book of business, and expanding our international operations in both segments.

Let's start off with an update on our first area of long-term growth, healthcare reform in the US. In fiscal 2013, MAXIMUS successfully established a leading position in the health insurance exchange market. We helped Minnesota build and launch their exchange and we supported California with some short-term work to help train customer service staff. Most importantly, we cemented our position as the leading partner for providing high-quality customer service for the exchanges as we launched operations for six state-based and two federal customer contact centers.

We're delivering value to these important reform efforts and we are proud of our work. Our exchange customer contact centers ramped up as planned and we are already answering consumer calls in many of our operations well ahead of the October 1 go live.

As you know from the extensive press coverage, a number of exchanges have faced a variety of challenges mostly from a technology perspective. But I'm very pleased with our performance as we delivered on the scope and requirements of our contracts. And in some cases, we have stepped up to take on additional tasks to help fill the gaps through our health insurance exchange or HIX contact centers and we continue to serve as a reliable partner for our clients.

Our contact centers provide assistance to a wide range of consumers including individuals and families, as well as in some cases small business owners and their employees. We also work closely with other stakeholders including the Navigators, Assistors, and Brokers.

Initial calls from consumers primarily focused on learning more about the Affordable Care Act and its benefits. More recently we are hearing from consumers who need additional assistance with how the law affects them personally. Our staff is answering questions related to the following -- plan availability and cost, provider networks, eligibility for Medicaid and tech subsidies, and enrollment into a health plan.

Some of our contact centers are also serving as channels for consumers to commit submit and complete their applications over the phone and by Web chat. We have often talked about how our ability to interact with consumers on their terms is a value add for our clients. Through our HIX operations, we apply this area of expertise to serve Americans as they apply for coverage, whether it's over the phone, on paper, through the Web, or with the assistance of a Navigator or Broker.

We are also gearing up under our new contract to perform eligibility appeals services for the federal exchange. Under this program, MAXIMUS will provide the overall management of the eligibility appeals process. This work relates to helping individuals who believe their eligibility determination was incorrect and are appealing the decision. MAXIMUS will operate a resolution process for appeals, review appeal requests and supporting documents, coordinate data collections with appellants, and provide general case management.

We are scheduled to fully launch our operations in early January. Looking ahead, we continue to view health insurance exchanges and other work related to the Affordable Care Act as a multi-year growth driver. Over the next several years, we expect some states will consider transitioning to their own state-based exchanges. And lastly, demographic trends are likely to push certain states to consider an expansion of companion programs such as Medicaid.

Let's move on to our second area for long-term growth, the expansion of our federal operations. These are part of our health services segment. We are extremely pleased with the success we have had an expanding the federal book of business in our traditional service line supporting CMS.

But as I talked about in the past, we've put a sizable effort into serving new federal markets and certainly over the past two years we have enhanced our current offerings, invested heavily in business development and delivery resources, and identified opportunities to apply our core areas of expertise to new federal agencies.

And these efforts have led to the recently announced contract win from the US Department of Education Office of Federal Student Aid. The core business functions of this new contract are very similar to the work we do across our Health segment and right in our wheel house. While we are excited about this new work, we have just been advised that the award has been protested to GAO. The agency has 100 days to review the protest.

At this point, we have stopped work on the contract while the protest is under review. From a financial perspective, we don't believe this will have a meaningful impact to fiscal 2014. Furthermore, protests are common and are to be expected as we grow into larger, new federal markets.

But overall, we are extremely pleased with the substantial progress that our federal team has achieved in fiscal 2013. The team's focus today is on executing these new wins and we are optimistic about other opportunities down the road as they work to backfill their pipeline.

Turning now to our third growth area, expanding our international operations. This expansion has taken several forms, from importing core competencies into both existing and new markets to increasing the scope of current operations. We also continue to assess new geographies where governments seek assistance from partners like MAXIMUS for important reform efforts.

But our primary efforts today are keenly focused on delivering new services into existing markets. The acquisition of Health Management in July provided a strategic platform for introducing our core health offerings to the UK. The integration of the Health Management organization has resulted in an exceptionally strong delivery team that is well-positioned for future work, including emerging opportunities that we believe may lead to proposal activity during fiscal 2014.

Our growth plans for Health Management are built upon the reputation and demonstrated performance of our welfare-to-work operations in the UK. In late September, the Department for Work and Pensions issued the most recent quarterly report covering vendor performance through June of 2013. I am pleased to share that MAXIMUS remains one of the highest performing providers under the work program. In fact, our Thames Valley region is ranked third across all regions since the start of the contract. And when you look at cumulative performance since the beginning of the program, MAXIMUS is tied for third out of 18 providers.

In Saudi Arabia, we have a formal memorandum of understanding with the Kingdom of Saudi Arabia that extends the pilot program for three years. We expect a signed contract by the end of this quarter.

Looking ahead, our international growth strategy will continue to be based on our land and expand approach and be driven by multiple factors. We continue to review opportunities across both segments with governments that are implementing health and human services reform programs.

It is important to note that administrative and policy changes can accelerate or delay reform initiatives. However, we believe that our international operations have the potential to be significant contributors to total Company revenue over the long-term as they have been in recent years.

Moving on to rebids. For fiscal 2013, we had 14 contracts with a total contract value of approximately $475 million up for rebid. By September 30, 2013, we secured 95% of this total contract value through contract wins or extensions as well as 100% of our option periods.

As we mentioned on last quarter's call, we expect fiscal 2014 to be a light year from rebid perspective. Contract rebids are cyclical by nature and our reported numbers are sensitive to the timing of when rebids are procured and awarded.

For fiscal 2014, we have 15 contracts with a total contract value of approximately $225 million up for rebid. We also have 15 option periods up for extension or option election with a total value of approximately $135 million. So fiscal 2014 will be an extraordinarily light year for rebids and with fewer rebids up for bid, we anticipate this will ultimately lower our overall total awards in fiscal 2014 as well.

Since both fiscal 2013 and 2014 were light rebid years, we anticipate that fiscal 2015 will be a heavier rebid year Based on what we know today, we believe we will have more than $1 billion of total contract value up for rebid in fiscal 2013. But it's very early and that number can change as governments may extend contracts, which is a trend that we've seen. Nevertheless we felt it would be helpful to give investors some perspective since we have had some light rebid years of late.

Let's turn now to our new sales awards and the pipeline. Signed awards reached a record level in fiscal 2013 with $1.9 billion in signed contract awards, of which a substantial portion was derived from new work and as expected, heavily weighted to the Health segment. And at September 30, 2013, we had an additional $362 million in new contracts pending. As a reminder, these are contracts where we have received notification of award and are in contract negotiations but have not yet been signed.

Sales pipeline at September 30, 2013 was $2.4 billion, which is slightly higher than last quarter. The pipeline is slightly lower compared to the same period in fiscal 2012 due to opportunities converting into new sales. It is important to remember that we expect normal fluctuations in our pipeline primarily as opportunities convert into new sales. The pipeline includes opportunities across multiple geographies and both of our segments.

When you add it all up, we had a very good year in terms of rebids and options as well as a pipeline that remains robust. This sets a solid platform for continued growth through fiscal 2014 and beyond.

In closing, as we look to the future, we remain keenly focused on our top three strategic growth priorities, including winning additional work related to Phase II of the Affordable Care Act over the next several years; continued growth for our federal book of business; and further expansion of our international operations across both of our segments.

While we have these specific areas of focus, our long-term growth is not dependent on a single geography or program, but instead is driven by macro trends and the extended growth drivers. Governments around the globe continue to seek partnerships with companies like MAXIMUS and we continue to focus on operating efficient and effective health and human services programs and achieving those outcomes that matter most to our clients and to their citizens.

With our fiscal 2014 preliminary guidance now confirmed, we are excited about the future growth opportunities and remain committed to generating long-term value for our shareholders.

With that, let's open it up for questions. Operator?

(Operator Instructions). Brian Kinstlinger, Sidoti & Company.

Good morning, guys. Thanks so much. The first question I had was I'd like to understand a little bit more about the human services segment. What was the impact that led to the drop in revenue? What was the impact of FX maybe? Why was the guidance flat year-over-year? I guess that leads to how large was the contract that reached successful completion?

Good morning, Brian. This is Rich. We are going to ask Dave Walker to field your questions.

Thanks, Brian. First of all, let's just talk about the drop in human services in Q4. The segment decreased 5% and last year's Q4 quarter-over-quarter had some short-term work in the US operations that was highly accretive, drove up margins for that period. So it's less that this Q4 drop than the Q4 same year was extraordinarily high last year in both revenue and margins.

FX is a great question and we have all been watching the strong US dollar. When you look at FX for particularly in the fourth quarter, there was a currency impact. The fourth quarter is down 2% of revenue and 1% for the year but in terms of real dollars, that's a decline of $6.7 million in the quarter and $7.2 million in the year largely related to human services. So when you look at human services, that is adversely impacted more by the currency than health, which is driving down the quarter and somewhat next year.

When we talk about the guidance for human services, and just what is happening, there's puts and takes in any business and that's what we are seeing in 2014. We have a large fixed-price contract that's coming to an end, which will be offset in part by growth in our international operations.

You asked about the size of that contract and for the last two years, it's averaged about $20 million a year and it has been very accretive, so it was a very successful contract and in fact, the definition of success with this one was to prepare an operations for the client.

So it ended for all the right reasons and if you look overall the pipeline includes a lot of opportunities about human services, so we are really optimistic about the long-term prospects in human services particularly internationally but it is flat, a little currency, a little bit of this contract, successful contract coming to an end.

Then certainly that contract going away has an impact in margin. It was a large contract. It was highly accretive and that will drive down the margin a bit. So we will see more normalized margins. We also are getting a full-year benefit of PSI in human services and we have often talked about -- but I will reiterate -- our human services business in the US tends to be lower than our international business and so when we increase a full-year benefit of that work, it has a dilutive effect on the business. But I would describe the business in the US as steady and accretive as I was saying with PSI.

Great, my second question is maybe can you talk about how low enrollments on the federal exchange or the problems on the website impact your call center volume? You touched on it a little bit, but then have the early glitches slowed or increased the number of people you need to hire on these programs this year, which would obviously impact revenue since it's cost-plus?

Brian, this is Rich. What I would like to do is I would like to share with just a couple thoughts from a summary level on the Affordable Care Act and MAXIMUS's position. We have Bruce Caswell here, who as you know, is the President and General Manager of our Health segment, so Bruce day in and day out is living all of these dynamics. So as it relates to the impact of the enrollment numbers and the glitches, I'm going to ask Bruce to respond to that.

But first, just a couple of comments from a summary level perspective. I think it is important to separate the operations of the health insurance exchanges, which is the role that MAXIMUS plays from the system work of others, which system work we've seen under the microscope on a daily basis from a headline perspective.

We always said our primary focus is the operations side and in our role of operating the contact centers that we do operate, we have delivered on our contractual commitments. We have supported our customers and in some cases, we were able to fill some gaps that were created because of these glitches.

And it is interesting to think back that well over a year ago when we knew this Affordable Care Act was coming at us, we focused on capacity management. We wanted to make sure we had the right resources assigned to the right opportunities and the right clients. Frankly, it involved declining some opportunities that were out there where we thought there was high risk of nonperformance.

So today, we are very, very pleased with our performance as it relates to the operations. It's early on but I think what has happened thus far is really I think a great testimony to MAXIMUS's ability to deliver and also the strategic path we took to focus. As you know, we are big, big fans on focus. I think it's proven out that focus puts us in a position to deliver on those (technical difficulty) given all that's going around is very, very important.

So with that backdrop, Bruce, do you want to take a minute or two and talk about those other two aspects?

Sure, I'd be happy to. Brian, good morning. Thanks for the question. In fact, I will start I think with the question related to the glitches and then obviously since that has an impact on enrollments, bridge to that.

So as Rich noted, our work is largely state-based and we did not have any involvement in the construction of the healthcare.gov website and that system. Clearly with the issues that they were experiencing, there have been increases initially and calls to our call center. The call center volumes were in fact quite high and on the temporary basis, we have been able to add staff to adjust to that and managed really our operations accordingly in that regard.

But it's important to know that that has been temporary in nature and as the issues get resolved, we would expect that the staffing profile in those federal call centers will return to what we previously forecast under those contracts.

Bridging to the state level, certainly a number of the state projects have gone quite well and others still have implementation issues that they are addressing and so I guess I would characterize it as a bit of a mix in the sense that while there have been some bumps, we have been very -- I think I would really pride our team on the planning that they put into developing contingency plans in conjunctions with our clients. I am reminded of an example from day one when there literally was a manual on the floor that we would refer to as issues arose and we would stand with our clients and make a decision at that time on how to implement the contingency plan, execute it immediately, and do so effectively.

So you have to be agile in this environment. I think our experience as a Company has proven out well in that instance. So we have managed I think quite well to our contractual requirements. I'm very pleased with the performance across the projects at the state level and the federal level to date, and I think that speaks to the flexibility.

So fundamentally we don't see any real material change to our current expectations as a consequence of those issues that have been addressed.

Turning separately then to enrollments, as you are probably well aware from the enrollment information that was released by the Administration, the enrollments have been fairly strong at the state level and the majority of the work that we are doing is with the state-based exchanges. You will recall that we are a partner to General Dynamics in the federal marketplace and we actually only operate two of the 17 customer contact centers under that contract.

So for the state portals and so forth that have actually been functioning, I think it's fair to characterize at a higher level, the next important point is that we are not actually paid on enrollments. We're paid on the activities that we complete in those service centers. An example of those might be taking calls, assisting with application completion, performing in some instances certain mail house operations. In a number of contracts, we support the shop exchange as well as the individual.

And thus far I would say broadly the overall activity volumes on which we are compensated have been very much in the fairway for the programs and their forecasted targets.

It's also worth noting that our largest customer contact operations both at the federal and the state level are paid for on a cost reimbursable basis and that model offers some protections obviously to the downside for any potential margin erosion. I hope that addresses the question.

Carl McDonald, Citigroup.

Great, thank you. I wanted to stick on that topic. Just understand the contractual relationships that you have either with the federal or the state exchanges. Is it purely a cost-plus relationship or is there a situation where if volumes run above expected levels you have to go back and renegotiate something? Or is it just purely cost-plus, if volumes are higher, you get paid more?

Good morning, Carl. It's Bruce. Thanks for the question. So for the federal contract, and that would be the call center contract as well as the upcoming eligibility appeals contract, those our cost reimbursable or cost-plus contracts. Similarly for one of our largest state contracts, it is also cost reimbursable. So we are really able to toggle the resources that we assign on those accordingly to adjust to volume changes either positive or negative.

The rest of the contracts I would characterize as being very similar to the way we've done health services contracts in the past. And as we've described those, they often -- they are performance-based, but they have a fixed and a variable component and so we structure them such that the fixed component that were paid for covers the ongoing kind of structural cost of the program. And the variable payments can relate to everything from call minutes to in some instances mailings, applications completed and so forth. And as a consequence there, we are able to modulate, if you will, our variable cost structure to accommodate volume changes accordingly.

So overall it's been I think a very strong model for this relatively uncertain marketplace in the early days.

Great, and how much of a concern is it to you if the federal website issues persist? Just for the sake of argument, instead of 7 million people enrolling in exchanges, it ends up being half of that. Just wondering about the impact that would have on the Medicare appeals revenue, presumably if enrollment is much lower, you wouldn't end up with as many appeals down the road.

I guess I'd like to maybe just call a distinction between the enrollments through the Affordable Care Act and Medicare. I think what we might be talking about is eligibility appeals.

(multiple speakers) Sorry, eligibility appeals line.

Great, so I think you're right that eligibility appeals are going to be a function of volume but also they are a function of system functionality, right? So if issues persist related to data matching, availability of third-party data sources, consumers might find themselves in a situation where they are more inclined to appeal because either they might believe that their application didn't fully reflect for example income for the period being looked at and so forth.

So there are a lot of variables that are going to factor into whether an eligibility appeal is generated. I do think that you're right, the primary driver will be volumes over time. But it's really early days and very early days to know what that impact will be.

The larger issue that some states are concerned about is ultimately sustainability as these volumes materialize and in that regard again, it's still very, very early in the process and states have a lot of levers at their disposal to modulate their cost structures. Furthermore, you may recall that the establishment grants that are available to states can actually be applied for and drawn down on through the end of 2014 with level 2 money being able to be spent for three years subsequent.

So there's some call it funding backstops that are available to them to address that issue.

Great, thank you.

[Dave Stibler], Jefferies.

Good morning, thanks for taking the questions. First on was just -- getting back to the health margins that was originally asked and those are kind of coming in at the lower end of the 10% to 15% range for fiscal 2014. I'm just curious with some of the pressures going on there of new business coming online, how should we think about that over the longer term after 2014? Is that something that should trail closer to the midpoint of the 10% to 15% as you reprice business and other M&A deals that you've folded in there and just simply improve operations?

Dave, it's Lisa. Can you clarify which segment you are asking about? You said health, but I think you might be referring to human services.

I'm sorry, I meant human. Thanks.

That being the case, we're going to ask Dave Walker to field your question, David.

You know, Dave, we talked a little bit about it. The margins came down to the lower end of the range because a large accretive contract went away and we certainly have a bigger volume in the US but we also talked about the contract going away in terms of revenue, which is why it's flat being backfilled by international work, which generally tends to be more accretive.

So if you look beyond 2014, I think it's tied to how successful we are internationally. Margins are tricky and I will remind you of the UK contract, depends on revenue recognition. So I could be really successful in getting case workload but if it's tied to outcomes like in the UK, where there's a six-month deferral, I could get a lag in the margin so we will be subject to some timing of the revenue recognition on those large BPO sort of contracts.

So long-term, we think there's a lot of opportunities internationally that we think will be very helpful to margin and just growth. And as short-term, you know I think the US market tends to be steady in the boat and accretive.

Okay, and if I could just have my follow-up on the guidance for 2014 here, obviously this is the second update we have had on it and I'm just curious now that you have more visibility, we know the Department of Education outcome, the eligibility appeals is out. What gives you confidence in that range? Do you feel like you are biased to the upwards part of that range now that you have more visibility? Or what are the factors that could cause you to deviate from the midpoint there?

Really we are reiterating guidance and the good news about our business is it is somewhat predictable, but the reason it somewhat predictable is when we take a look at 2014, 95% of that is coming from backlog. So we are pretty comfortable with the range.

That being said, there are transactional volumes that can cause some variability in the topline and I think we've demonstrated our ability to manage our cost structure, to manage the bottom line around that variability. But there will always be a range driven by those things. I would say new business really is a big driver and something we are very focused on but it will drive more fiscal 2015.

Dave, I would add at this point while there are dynamics, the nature of our business, given there's such a long lead time with new business development, it really is the sort of thing where this year we sell next year's growth. So you will note that the pipeline remains very, very hearty. A good portion of that is new business. I look at that as really being the drivers to growth in 2015 when we get -- we may get some of those wins in 2014 and get partial years but the full-year kicks in in 2015.

So I am pleased to see that we've got growth aspirations that are solid for beyond 2014 but it also means it's difficult to go and find real large contracts for 2014, just given the nature of the business development cycle.

Thanks, guys.

Richard Close, Avondale Partners.

Thank you, congratulations on a very solid fiscal year. Talking a little bit about the health services division, you talked about revenue. I think you mentioned level loaded through the year. Can you just walk us through maybe the quarterly progression, sort of the puts and takes on the revenue on a quarterly basis in health?

Sure, Richard, so when we talk about revenue for health, ACA, we think that you will see more of an initial surge in Q1 partially Q2. They have an open enrollment so notionally when we looked at it, that's what we think will happen very much tied to volumes. And then on the back end of the year, so you would say well that would have front ended you and then it would have trailed down a little bit. But on the back end of the year, we think we will see the eligibility appeals and Department of Ed contracts kicking in. So that will tend to have a leveling effect for the year.

So how do Medicare appeals factor into that? I know that was a big growth driver in the fourth quarter of outperformance. How are you thinking about that business?

We think it will level off. We had a lot of growth last year in those appeals but we think those will level off and that's what our outlook is. Relatively flat.

Okay, just as a follow-up on this revenue, with respect to I guess add-on services, that type of stuff that you're being asked to do to fill the holes or voids with some of the initial ACA stuff, whether it's state or federal, can you quantify any type of maybe revenue -- incremental revenue opportunity? I assume that's part of the front-end loaded or the first and second quarter ACA contribution.

I think the good news about our BPO business is it's over the lifecycle, so there's constant evolution of these programs, policies, and I think that's what we do very well and that's what we are known for. But remember, we have a lot of reimbursable contracts to the degree we provide that help, it will provide revenue. It won't necessarily drive the bottom line so much on a weighted average basis. But in fact in our forecasts, we weighted in and factored some opportunities of that nature within those existing contracts because we do anticipate the clients have a lot of change to manage and frankly, they are happy to have MAXIMUS on their team to do exactly that.

It's really the difference between the midpoint of our forecast and the 95% of which is in the form of backlog. That will give you some consolidated perspective on the quantification of it.

Then just final question for me and I appreciate the time, when we talk about pipeline and the strength of your pipeline, is there any way you could give us indication at least directionally or percentages, rough percentages in terms of how that breaks down maybe international versus health and human and sort of on a divisional basis? Or do you not want to get into that type of granularity?

More the latter, Richard, although we will say directionally it's across the board. We do have significant opportunities in both our domestic and international and health and don't forget human services. While its performance last year -- this year versus last year, this quarter versus last quarter was more flattish, we still think there's long-term great opportunities for the human services segment as well.

The other highlight is that we have noted that a substantial portion, which is a qualitative direction for you, of this year's new wins happens to be in the new business category, as does -- and I think we used the term the majority of our sales pipeline is new work.

Great, thank you. Congratulations again.

Frank Sparacino, First Analysis.

Just one question for me on the human services side. Can you just talk a little bit longer term in terms of where you see new opportunities? But also I'm curious -- I think there was an expectation the Saudi contract would come to fruition and be substantially larger than the pilot you are running. So maybe if you can talk about that in more detail but also what the expectation is next year in the UK?

Glad to answer that. I think three part question, Frank. First, I will tackle the Saudi situation. As it relates to the Saudi contract, here is where we are. We just signed an MOU memorandum of understanding that extends the work for another three years. I think that's one year base and two option years but it's three years in total. And we do see some promising opportunities as we dialogue with our client in terms of what their needs are and where they need assistance. So we believe there is some real opportunity long-term.

But you need to keep in mind that that market takes time to move these things along, just as the nature of the business, sometimes international and in the case of the Kingdom of Saudi Arabia. So I see that one really as a fact that we are very focused on our existing markets and we are looking to expand those existing markets in our land and expand mantra, which has worked very, very well in Canada, United Kingdom, Australia, and we hope the KSA.

I would also add that historically our growth internationally has been mostly in the area of human services, but our strategy is to advance our health new business development in those geographies where we have human services and that customer has a need for what we do. So I would say we are anxious to see some new opportunities there, which dovetails to -- as you are well aware -- we acquired a company, HML, in the United Kingdom in July and that's a very important part -- building block of that strategy. Is that helpful?

It is, thank you. Just UK?

In the UK situation, we are still excited about growth in the UK, health and human services. While we don't see great opportunities to pick up new work within a region, when the government does move forward to reallocate work between regions, we think we are very well positioned. But the big driver there is when and if the government will move forward. They do express their intent to do so, so we are anxious to see when that will happen and I think we are very well positioned for it. We have identified other opportunities in the UK that are human services significant opportunities as well.

Thank you, Rich.

Brian Gesuale, Raymond James.

Good morning, guys. Nice job on the results here. Really just two quick ones. Can you tell us where you put the Department of Education contract in terms of the business development or pipeline metrics?

Then also I don't recall if the Texas renewal was part of bookings this quarter.

Good morning, Brian. Thank you very much. If I understand your question, the Department of Education business, and that would be the BD results, that would be the forecasted revenue and operating income, that work resides within our federal business in health, which is part of our health segment.

I think, Brian, to further your question because I think you're getting to pipeline, that actually resided in the awarded signed numbers at 9/30.

Perfect, that's great, that's very helpful. And then Texas?

That's what she spoke to was Texas?

No, that was DOE.

The Texas renewal?

That sits in the awarded unsigned bucket at 9/30.

Okay, great. Then maybe if you could just comment a little bit on visibility into the guidance you guys have out there, I think you said 95% is coming from existing customers or options.

Backlog. Actually backlog, right?

How does that compare to previous years? I guess with your pipeline at record numbers and also the mix of it being incremental of new business in that pipeline, how should we think about what visibility might look like versus years in the past?

Last year was about 90%, but I think generally that 90% to 95% is where it's always been, so I would say we are pretty consistent with I think the prior years and no surprise given the nature of the business.

Great, thanks a lot.

Charlie Strauzer, CJS Securities.

Good morning. Two short questions, if I could. The first is on when you look at the pipeline of kind of the tracking proposals, any sense of the timing of when some of those proposals will be coming out and what areas might those be from kind of predominately focused on?

Our view on it is -- and you need to appreciate the nature of government procurement. We say it's glacial, which means it's very big and very slow and also is subject to pushing to the right, more likely to get pushed to the right than to the left, Charlie, so you need to operate within that context.

That being said, we have what I think is a prudent policy that we don't count anything as a sales pipeline unless we have an expectation the RFP is going to come out within six months. So that kind of sets the pipeline as being something where we should be proposing a good portion of it within the next year.

That is about as precise as we can get with those -- that soft data.

That's fair. And also too just in terms of what you think in terms of the opportunities that are in that -- those dragging proposals, are they particularly large ones or is it federally-based, is it more human services or health services-based?

When we analyze that and I think this is good news, it really is all over the map, from a segment perspective, from a geography perspective, and I would even say from a size perspective, we don't want to become too dependent upon big wins to grow single, big wins to grow the Company. Singles and doubles are very, very good in our business.

Excellent, then just lastly on the CapEx side in terms of the applied guidance for next year, I see CapEx is coming down a fair amount next year but it still looks like it's about $50 million for the year. Can you talk a little bit more about what is going to be in that number there?

I think you got it exactly right, so we've targeted about $50 million and it's down from last year but that's because we had so many new contracts launching particularly at the beginning of this year with all the health insurance exchanges, so that's what it reflects.

Got it, thank you very much.

I actually only had one other thing to add as it relates to our Texas contract and the question from pipeline. Subsequent to quarter close, the Texas contract was signed.

It seems we have no further questions at this time. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.