Maximus Inc (MMS) 2015 Q4 法說會逐字稿

Greetings, and welcome to the MAXIMUS FY15 fourth-quarter and year-end conference call.

(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, and thanks for joining us. With me today is Rich Montoni, CEO; Bruce Caswell, President; and Rick Nadeau, CFO.

Beginning this quarter, we are modifying the way we speak to our financial results. In the interest of brevity, we will cover the financial trends, and move away from repeating all the numbers on the income statement. All the pertinent information can be found in our press release and the detailed presentation that we provide on the investor relations home page of the MAXIMUS website each quarter. Today's financial results are shown in three segments, and today's press release also includes a supplemental table that details financial results for all four quarters of FY15 under the new segment structure.

I'd like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions, 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 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 the non-GAAP measures presented in this document, please see the Company's most recent quarterly earnings press release.

And with that, I will hand the call over to Rick.

Thanks, Lisa.

As we get started this morning, I wanted to first address the reason for our 2016 earnings guidance revision. The revision is a result of a single program, the UK Health Assessment Advisory Service, which is in start-up. While we have made substantial progress in effecting positive change to the program, the ramp-up to contract volume targets has been slower than originally planned. As a result, we now expect that FY16 diluted earnings per share will range between $2.40 and $2.70.

We have put forth FY16 earnings guidance that includes a wide range of possible outcomes under this program. The lower end of the range assumes that we continue to face challenges related to achieving our contract volume targets. The upper end of the range contemplates improved performance and increased volume output. The management team is certainly focused on delivering results that move us toward the upper end of this range.

Both Rich and I will go into greater detail on the UK Assessment contract throughout the call. However, as it relates to our longer-term, 3- to 5-year outlook, we firmly believe that the overall macro trends for our Business remain intact. We continue to see opportunities for our core services across all of our segments and geographies. Governments around the world continue to seek ways to run more effectively and efficiently, while at the same time dealing with rising caseloads, changing demographics, and unsustainable social programs spend. Through a combination of short-term and long-term opportunities, we see continued growth for years to come.

Let me start with the results for the full year. We had another solid year, with double-digit, top- and bottom-line growth. Revenue for FY15 increased 23% over last year. Of this growth, 19% was organic, primarily from the Health and Federal Services segments, and 8% was driven by the acquisitions of Acentia and Remploy. Year-over-year, top-line growth was offset by $60 million, a 4% decline, due to the unfavorable effects of foreign currency. On a constant-currency basis, revenue would have increased 27% year over year.

We wanted to be sure to point out that our operating margins did benefit from a reduction to the Company's 2015 management cash bonus plan, which reduced SG&A in the fourth quarter and the full year. From an accounting perspective, the cash bonus accrues throughout the year based on how the Company performs against its targets. The lower cash bonus payments were largely due to the slower ramp of the UK Assessment contract and our need to drive future improvements. The adjustment was proportionately allocated across the three segments, and improved the full-year operating margin by 30 basis points. As a result, operating margin for FY15 was 12.4%. As expected, operating margin for the full year was tempered by new programs in start-up, and the decrease in volumes in our US Federal Medicare appeals business, which were highly accretive.

For FY15, net income attributable to MAXIMUS increased 8% (sic - see slide 4, "9%") and GAAP diluted earnings per share increased 11% to $2.35 compared to FY14. This included $0.04 of acquisition-related expenses. Excluding the acquisition-related expenses, adjusted diluted earnings per share for FY15 increased 13% to $2.39.

Moving on to results for the fourth quarter, revenue grew 33% compared to last year, of which 22% was attributable to organic growth, and 16% was tied to the acquisitions of Acentia and Remploy. This was offset by approximately $21 million, a 5% decline, due to unfavorable foreign currency exchange rates. On a constant-currency basis, total revenue would have grown 38%. Revenue in the fourth quarter was lower than expected, principally due to the UK Assessment contract.

The bonus adjustment provided operating margin improvement in the fourth quarter of approximately 100 basis points. As a result, fourth-quarter operating margin was 10.6%. As expected, it was tempered by new programs in start-up, including jobactive in Australia and the Health Assessment Advisory Service in the UK.

For the fourth quarter of FY15, net income attributable to MAXIMUS totaled $35.4 million. The tax rate was 40.4%, which computes to diluted earnings per share of $0.53.

Now I will speak to segment results, starting with Health Services. The Health segment delivered another solid year of strong top-line growth, driven by new work and the expansion of existing contracts. All growth in this segment was organic. Revenue grew 29% for the fourth quarter, and was up 22% for the full year compared to the same periods in FY14. Operating margin was 10.3% for the quarter and 13.9% for the full year. As expected, operating margins were tempered by new programs in start-up, most notably the UK Assessment contract.

For FY15, the UK Assessment contract delivered approximately $105 million in revenue and an operating loss of $4 million. Revenue was short of our initial projected range of $140 million to $165 million. The shortfall has two primary elements. First, our staffing levels are running lower than our plan and, therefore, billable costs are lower than forecast. As a result, revenue and operating income are lower on the cost reimbursable piece of the contract. Second, we are not achieving certain performance metrics, most notably volume targets. And as a result, we are not earning the performance-based incentive fees.

We are firmly committed to getting the program on track, and we have made significant progress in bringing positive improvements to the overall service. Rich will talk about this in greater detail in his prepared remarks.

As we mentioned in our Form 8-K filing last week, we have decided to break out our US Federal Services business into a third reporting segment. We believe this will be useful to investors, as it provides additional visibility to our overall financial results. The US Federal Services segment had a solid year. On the top line, fourth-quarter revenues increased 70% over the prior-year period, of which 56% was attributable to Acentia. For FY15, revenue grew 47% compared to last year, of which 30% was attributable to the Acentia acquisition, and 17% was organic growth from new work and the expansion of existing contracts.

Operating margin for the fourth quarter was 13.5%, and for FY15, 11.8%. Operating margins for the fourth quarter and full year were impacted by the expected decline in the Medicare appeals volumes, which were highly accretive. We had steady improvements throughout the fiscal year from the ramp-up of the Department of Education contract, which remains on track to break even in FY16. As a result, this helped the year-over-year comparisons in the fourth quarter of 2015.

Let me turn to financial results for the Human Services segment. Revenue increased 12% in the fourth quarter and 8% for FY15 compared to the prior-year periods. Top-line increases were driven by the acquisition of Remploy and solid organic growth, which was offset by the unfavorable impact from foreign currency translations. This segment was the most adversely impacted by foreign currency exchange rates, which reduced full-year revenue by approximately $37 million. On a constant-currency basis, revenue would have grown 23% in the fourth quarter and 16% for the full year of FY15.

Operating margin was 10.4% for the fourth quarter and 12.3% for the full fiscal year. Margin expansion was principally due to solid delivery across North America, the United Kingdom and Saudi Arabia. This was offset by the expected start-up losses in the jobactive contract in Australia, which launched on July 1, 2015.

Let me move on to discuss cash flow and balance sheet items. Days sales outstanding were 67 days for the fourth quarter, which is in line with our targeted range of 65 to 80 days. For the fourth quarter of FY15 cash provided by operating activities totaled $25.2 million, with negative free cash flow of $6.7 million. For the full fiscal year, cash provided by operating activities totaled $206.2 million, with free cash flow of $101.1 million.

Our balance sheet remains healthy, and we ended the fiscal year with cash and cash equivalents of $74.7 million, most of which was outside the United States. Our long-term cash deployment priorities remain unchanged, and include dividends, opportunistic share buybacks, working capital investments to support the growth in the Business, and acquisitions.

During the fourth quarter, we repurchased 865,000 shares of MAXIMUS common stock for $52.2 million. This brings our total repurchases for FY15 to approximately 1.6 million shares for $82.8 million. We had a weighted average price of $51.11 for all repurchases in FY15. Subsequent to quarter close, we repurchased approximately 103,000 shares for an additional $6.1 million with a weighted average price of $59.41. We presently have an estimated $162.5 million remaining under the Board authorized program.

With the generation of free cash flow and our available line of credit, we believe we can sufficiently address our cash needs in 2016. We currently expect that spending on capital expenditures will decrease significantly in FY16. We remain committed to sensible and practical uses of cash in order to best position and grow the Business. Most importantly, our priority remains squarely focused on strengthening our core Business for long-term growth.

Let me complete the guidance discussion. Today we are establishing formal guidance for FY16. We continue to expect FY16 revenue to range between $2.4 billion and $2.5 billion, driven by growth across all segments, predominantly in Health and US Federal Services, and to a lesser extent, the Human Services Segment. At September 30, 2015, we had $4.6 billion in backlog. Based on the midpoint of our 2016 revenue guidance, we estimate that approximately 93% of our forecasted FY16 revenue is already in the form of backlog or option periods.

On the bottom line, we now expect diluted earnings per share to range between $2.40 and $2.70. This is expected to be more back-end loaded. Right now we anticipate that for the first quarter of FY16 diluted earnings per share will be lower compared to the fourth quarter of FY15 due to programs in the start-up phase.

Let me share some additional data points on our formal FY16 guidance. First, the number-one reason why we reduced our FY16 earnings guidance is the slower ramp and resulting lower income contribution of the UK Assessment contract. As I mentioned earlier, our guidance assumes a wide range of potential outcomes on this contract. And as a reminder, this contract does have a stop-loss provision that restricts our loss to 5% of allowable costs, plus any costs incurred that are not billable under the contract in any contract year. Our analyses indicate that it is unlikely that we will trigger the stop-loss in either contract year one, which ends February 29, 2016, or contract year two.

Second, we still have other programs in start-up that will continue to have tempering impact in FY16. This includes the Australian jobactive, the US Department of Education, and the UK Fit For Work contracts. Third, our guidance is always subject to fluctuations in foreign currency exchange rates. And lastly, we are estimating that the tax rate for FY16 will range between 37% and 39%. The final tax rate will ultimately depend on the mix of operating income contribution from our various tax jurisdictions.

So, when you add it all up, we are forecasting revenue growth between 14% and 19%, and GAAP-basis earnings growth between 2% and 15% for FY16. We expect cash provided by operating activities to be in the range of $200 million to $230 million for FY16. And we expect free cash flow to range between $130 million and $160 million.

Thanks for your continued interest. And now I will turn the call over to Rich.

Thank you, Rick, and good morning, everyone.

While the challenges we face with the UK Assessment contract result in reduced earnings outlook for FY16, it's important to remember that this is a single contract in our global portfolio. Over the past 12 months, we've introduced several new growth platforms that strengthen our position for future opportunities in key markets. And the macro trends that drive demand for our services at the global level remain very favorable.

In my comments this morning, I will provide some additional insights on the UK Assessment contract. I'll speak to the challenges we face today, what we're doing to address them, and highlight some areas where we have already made solid improvements to the overall service. I will then give an update on the Acentia integration and our expectations for the third Affordable Care Act open enrollment period in the US. I will also update you on our sales awards and pipeline. And I will close by sharing with you my view on our commitment to deliver solid growth in FY16.

Let me pick up where Rick left off, and start with the UK Assessment contract. As a reminder, this is the contract where MAXIMUS is conducting assessments for individuals seeking certain disability benefits according to the rules set down by the UK Parliament. The program faced significant criticism under the previous provider. When MAXIMUS took over the contract in March 2015, we acknowledged that it would take time to bring meaningful improvements to the program.

You may recall that this is a hybrid contract that is predominantly cost-reimbursable. However, it also has significant performance incentives, with the largest being tied to volumes. While we have increased volumes during the start-up phase, we are falling short of achieving the initial volume targets.

Our ability to hit the volume targets is tied directly to three areas: the number of healthcare professionals that we recruit, the number that complete training and graduate, and the productivity of these new recruits. In order to get the program better aligned with our contractual targets, we need to have the right number of qualified healthcare professionals. That goal hasn't changed.

What has changed is the amount of time it is taking us to recruit, graduate and ramp-up the new staff. But we feel confident that, over time, we can achieve our goals. We have modified our forecast to account for the slower-than-expected staffing ramp. In order to meet these, we believe that we will have the staffing resources in place to meet volume demand and contractual targets by the end of summer 2016.

Let me now walk you through the three main areas where we are aggressively working to address the challenges. The first area is recruitment. We launched a comprehensive recruitment campaign to ensure that we have a continued flow of qualified candidates in the appropriate locations. We have expanded our network of recruitment partners, and enhanced our employee referral program. We implemented an advertising and social media campaign, launched a recruitment portal website, and have been exhibiting at a number of recruitment fairs across the country. Through these efforts, we have seen a sizable uptick in the number of new recruits.

The second area is improved training and support, which leads to better graduation rates. It's important to recognize that, once hired, candidates must then complete rigorous training, pass a series of competency tests, and graduate to become fully accredited. To increase the graduation rates, we have some key initiatives under way. We've increased our engagement and coaching efforts with new candidates during the entire training period. This is already yielding results in keeping more candidates in the process. We are also working with those recruits who struggle with the initial competency test, and are providing them with individualized training support. With this extra support, we expect that more candidates will successfully graduate to full accreditation.

The third area is productivity. Once new staff begin performing assessments, there is a learning curve, and it may take between six and eight months for them to achieve full productivity levels. In the meantime, we have efforts under way to increase productivity with our current workforce. We have optimized the work schedules of our staff, and offered voluntary overtime incentives, including weekend shifts, to increase the number of assessments we can complete each day. This has a direct influence on our ability to reduce the significant backlog that we inherited at the time of contract takeover. We expect that the increased recruiting efforts, supplemented by the enhanced training and optimization of our current workforce, will help us to increase our productivity, meet volume targets, and reduce wait times over the coming months.

Over the past eight months, we've already made significant progress, and realized several early accomplishments that I'd like to share. These demonstrate that, over time, we can bring about the necessary changes to put this program on the path to success. The first is addressing the current backlog. This was a top priority for the Department of Work and Pensions. At the time of contract takeover, we inherited a significant caseload of more than 550,000 outstanding assessments. Today, we have eliminated more than a third of that backlog. We're making concerted progress to continue to reduce the backlog of cases, and shorten wait times.

The second area of major progress is improved stakeholder engagement. We established a customer representative group of more than 25 nonprofits and disability advocacy groups to bring them to the table. The group continues to provide us with practical feedback that we incorporate into our operations to effect positive change in such areas as clinical training, the assessment interview, and our facilities and customer communications.

The third area is an improved customer experience, where we really have made substantial progress to help improve the engagement levels of all customers. We've refreshed and rolled out enhanced program engagement materials to help people better understand the assessment process, and prepare for their appointment. These include a user-friendly website with enriched multimedia content.

We're also working hand in hand with DWP to update customer-facing materials to make them easier to understand. We recently completed usability testing of the draft materials, and 96% of the testers reported positively on the materials. These changes go a long way to improving customer engagement.

Last month, we also launched a new helpline to assist customers with completing their pre-assessment forms, and provide practical support on the types of medical evidence that may be required. We're currently piloting text messaging as a means to prompt customers to complete certain tasks, and to remind them of their upcoming appointments. A full nation-wide rollout is planned in the coming weeks.

All of these accomplishments have not gone unnoticed. During a Public Work and Pensions Select Committee meeting last month, several government officials praised our recruiting plan and our efforts to work through the backlog. These public remarks are confirmation of our effective working relationship with DWP, and our belief that we are the right Company to bring about improvements to this highly visible program.

To put it all in perspective, we are making meaningful improvements and it's on an upward trajectory. But the progress remains short of initial targets, and hence, original projections for operating income. This is a single contract with an operating income ramp that's now pushed to the right. As we continue to make strides forward, this is not a matter of loss mitigation, but rather on bringing this start-up to a mature operation level so as to deliver normalized operating income contribution. And we've done this in many situations before.

Let me explain. Start-ups are simply the nature of our Business, and new programs are the best avenue to create substantial, long-term shareholder value. Growing pains are often normal during the early days of a new program, and the pace at which start-up programs move to maturity can be difficult to predict. MAXIMUS has demonstrated results in managing challenging start-ups.

If you've followed MAXIMUS long enough, you may remember that we faced challenges on start-up programs in the past. Prime examples include our contracts in British Columbia and Texas. It took time, resources, and a significant level of effort to implement the many changes needed to turn these programs around. They are now two of our flagship contracts that have delivered meaningful shareholder value over time.

We still believe the UK Assessment contract will drive long-term significant shareholder value. It will just take longer than originally planned.

Turning now to our US Federal operations, where we expanded our portfolio in FY15 with the acquisition of Acentia, our innovation efforts are nearly complete. And as we mentioned last quarter, we are seeing new prospects that combine business process outsourcing with technology solutions. The acquisition provides us with additional contract vehicles, and access to new agencies. It opens up an entirely new set of opportunities for MAXIMUS.

We won a small but strategic task order on a vehicle that we gained through the acquisition. The work is for physical and behavioral health assessment reviews for individuals placed on a disabled list from their current assignments. This work is for one branch of the military. The goal of this service is to either return individuals to their current duty, assign them to a new duty or assignment, or allow them to leave the service.

This new task order plays nicely into our continuum of existing assessments in appeal services. It's also positive confirmation of the role that the acquired contract vehicles will play in our longer-term growth strategy for the Federal segment. And while the federal procurement process can be slow moving, we believe over the next few years we will start seeing formal opportunities where we can play a meaningful role as a service provider.

Shifting now to our support of the Affordable Care Act in the US, the third open enrollment period, or what we refer to as OE3, began last week and will run through January 31, 2016. While we're in the very early stages of OE3, we believe that ACA-related revenue has largely stabilized into a relatively steady state. While the number of first-time enrollments are projected to be lower, we continue to support other ACA activities, such as completing redeterminations, answering tax-related questions, and managing certain components of consumer engagement. However, as with any large-scale government program, we also expect normal course fluctuations year in and year out, as states prioritize a wide-ranging set of initiatives under ACA.

Let's move on to new awards, pipeline and re-bids. Starting with new awards, we finished FY15 with record annual signed contract awards of $3.4 billion. We also had an additional $149 million in new awarded but unsigned contracts at September 30, 2015.

At September 30, the sales pipeline remained healthy at $3.2 billion. As noted in the press release, this includes the anticipated re-bid for the UK work program. This re-bid is not expected to be awarded until FY17, but the lengthy re-bid process is expected to begin in the spring. Overall, both this short-term pipeline and our longer-term outlook hold a broad mix of re-bids and new work, representing opportunities in multiple geographies and all segments.

Let's wrap up with re-bids. While the Texas Eligibility Support Services contract is still outstanding for FY15, we remain cautiously optimistic on the outcome. As we've previously stated, FY16 will be a much lighter re-bid year. We have 10 contracts with a combined total contract value of approximately $170 million up for re-bid in FY16.

In summary, the management team is keenly focused on improving our performance on the UK Assessment contract, and delivering results towards the upper end of our guidance range. We have our arms around the issues, and have corrective action plans well under way. This is but one contract in our global portfolio, and over the long term we fully expect that this will provide solid returns to our shareholders. Most importantly, the macro drivers remain intact, and we are confident about the continued demand for our services for decades to come.

MAXIMUS recently celebrated our 40th anniversary in September, and I'd like to thank the more than 16,000 employees worldwide for their valuable contributions. Governments around the world have brought us in as a trusted partner to implement programs tied to major reform efforts, from welfare-to-work to managed care and health insurance exchanges, to performance-based social reform efforts. We will continue to capitalize on opportunities that will grow the Business and generate shareholder value.

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

(Operator Instructions)

Brian Kinstlinger, Maxim Group.

The first question I had, as you know guidance at the midpoint was reduced by $0.40. Can you quantify what you had expected for revenue and EPS contributions for the assessments contracts in your preliminary guidance versus what your expectations are at the low end, high end of today's revised guidance?

Brian, good morning. This is Rich. And just to repeat the question so everybody understands it. And the connection is just fine, Brian.

Your question is, what was assumed for revenue and earnings in our original preliminary guidance and the revised guidance, which is at the midpoint about $0.40 less, what's behind that? Glad to respond to it. I'm going to ask Rick Nadeau to at least initially respond to that question, Brian.

Brian, thank you. Our guidance is based on what we know today and reflects a wide range of probable outcomes. The lower end of the range assumes that we continue to face challenges on achieving our contract volume targets.

In terms of revenue, the lower end assumes approximately $230 million of revenue and a pretax operating loss of about $7 million. This is due to us not earning incentive fees as a result of us not hitting the volumes, the volume targets. The middle of the range assumes break-even operating income.

And then the upper end of the guidance range assumes higher levels of revenue and assumes that we are earning incentive fees tied to the performance targets, most notably the volume targets. The upper end contemplates $280 million of revenue approximately and an operating margin of approximately 7%. Brian, the Management team is diligently focused to drive performance toward the upper end of the guidance range.

You are correct. Our preliminary guidance did assume higher revenue and margins than is presently assumed in our formal guidance. The preliminary 2016 guidance assumed operating margin that was at the upper and of our targeted range of 10% to 15% of operating income that we talk about.

Those estimates were based on early trends that we were experiencing in the first few months of the contract. Therefore, it assumed that we would be running at higher staffing levels and earning the incentive fees on the performance-based targets. Rich, did you have anything to add to that?

Rick, I would add from a qualitative perspective, and as you could imagine Brian, the Management team has spent a lot of time contemplating what the revised guidance should be. And it does, as you will note, it reflects a range of probable outcomes. And our thinking when we set this formal guidance was to provide a range where the Management team has a very high level of confidence in delivering within that range.

I'd also add that while not assured, we believe that the upper end of the range is achievable. And our goal clearly is to exceed the lower end of the range. And the Management team is determined to drive towards the upper end of that revised range.

Dave Styblo, Jefferies.

I do want to stay on HAAS for a second here. Just want to make sure I fully understand how to think about the move on the contract here. Certainly it's a push-out to the right, Rich.

I just want to make sure that I understand after that, are we also talking about getting to the same full run rate earnings potential that you originally thought you could make on it, or is there any press-down on that over time?

Dave, that's a great question. I think it's helpful for the listeners to envision a ramp curve. And that's where we are with a start-up situation. Starting from basically a takeover of a prior operation from predecessor and ramping it up in terms of its ability to deliver monthly volumes and increased quality, et cetera.

So I envision this ramp curve, and it was a very aggressive ramp curve. We are climbing that ramp curve. We are making improvements. We are increasing, but not at the same rate. And really effectively the best vision is to envision that ramp curve pushing to the right.

You hit upon a very meaningful aspect, and that is at the end of the day, will the mature level be at the same level originally anticipated? And the answer is, yes, definitely yes. We are not lowering the expected level of performance at the end of the day or delivery or volume level revenue level of this contract when it's mature.

Okay, great. As a follow-up to that, I think you've said you'd be fully staffed in the summer of 2016. So I know obviously you don't have 2017 guidance out, but if you had does that insinuate that the 2017 numbers wouldn't change? That you would be operating at that full run rate by that point, or does the push-out to the right sort of impact your FY17 as well?

I think what it means is that we expect that during our FY16 we will reach full maturity level. And that means for all of 2017 that project would be operating at that level. And you touch upon a very important point in terms of there will be a radical difference in 2017's performance versus 2016 performance for this start-up contract.

Stephen Lynch, Wells Fargo.

I was wondering if you could talk about the slower than expected ramp of staffing for the UK Assessment contract. Is that being driven by a shortage of qualified healthcare professionals in the market? Or if you could just talk about what factors are causing the drag in recruiting, that would be great.

Stephen, think that's a great question. Bruce Caswell, who is our President, by the way has spent, as you expect, along with the rest of the Executive team, a lot of time on this project. He has been over to London several times and has some really great insight in terms of what's been done and what we will do to move this forward. I'm going to ask Bruce to comment upon and give you some insights as it relates to that topic

Thanks Stephen, and good morning.

Fundamentally, actually recruiting has improved quite a bit over the course of the last several months. Actually is no longer as a significant a constraint as it was previously. So we feel like we've made very good progress in recruiting and we are now reaching a level of recruiting that, from a rate perspective, is an appropriate level.

So the issue is really that we need to sustain that rate for the foreseeable future. We've done that through a number of methods, by increasing our supply chain partners, focusing on the quality of the recruits that were getting and so forth. So recruiting, less of a constraint.

The real issue that we've been facing is our ability to graduate those trainees that we bring into the system on a timely basis and ensure that we have a high level of graduation rate, and obviously a correspondingly low attrition. And it might be helpful just to give you a sense of what the training program is like that folks have to go through. It's very extensive and rigorous.

Takes a long time, about three months, for them to complete. They have to go through multiple competency tests in that process. And these are healthcare professions that, for a good portion of their career, predating their joining us, have been giving very direct care to folks in a clinical environment versus assessing very complex conditions, many of which can fluctuate from day to day.

So it's a very different type of work. It's a career shift for these folks. But they are by far the most qualified people to serve as assessors.

So while we can speak further about a number of the actions we've taken to address training and improve graduation rates, I did want to just clarify that recruitment, we feel we've made great progress on and in no longer represents the primary constraint to our success.

Charlie Strauzer, CJS Securities.

If we can shift a little bit, if I can, ask maybe Rick this question. The pro forma organic growth rates in both Federal and Human, if you had those numbers I'd appreciate those.

Charlie, you're asking for the pro forma organic growth rate for the Federal segment and the Human segment for the year ended September 30, 2015?

And the quarter, please.

And the quarter. Sure. Rick?

I'm sorry. Which order did you want them? Health first?

Human and Federal, actually.

Okay. Human and Federal.

Federal on the top line grew 70%, 56% was attributable to -- this is fourth quarter, 56% was attributable to Acentia. And for FY15 revenue grew 47%, and 30% was attributable to Acentia and 17% from organic growth. That was Federal. And then Human was 12% in the fourth quarter and 8% for the fiscal years with the top-line being driven by the acquisition of Remploy.

I'm sorry, so that's the 12% number is the organic number or is that --

I'm sorry. Total revenue, 12% and 8%.

Got it. And that's all driven by the Acentia (multiple speakers)

On a constant currency basis, revenue would have been 23% in the fourth quarter and 16% for the full fiscal year. That's what -- that's in the script.

Got it. That's great. Okay, thank you very much. Wasn't clear on that part. My second question is on Texas, I know you said it still pending but there is there any update on timing of that contract?

I think we expect to hear in this calendar year, probably in the December time frame.

Richard Close, Canaccord Genuity.

First, I was wondering if you could comment. You mentioned the first quarter will be sequentially down from the fourth quarter.

How should we think about second quarter? Will that be flat year over year you're thinking? Just talk about maybe the quarterly progression

This is Rick. We expect Q1, as we said, will be lower compared to the fourth quarter. That is because we have many programs, as you know, in the start-up. Based on what we know today we would expect a steady level of earnings growth throughout the remainder of the year will grow throughout the year.

However, I do want you to keep in mind that the timing of revenue and profit from things such as change orders and contract amendments can impact contract trends. So we can wind up doing work on a particular piece of work and having the charge go in one quarter and we cannot record the revenue because we have a change order that's pending and not signed. It would then wind up getting signed in the next quarter.

So we can get some lumpiness that can result from that.

Richard, that was your first question. Do you have another one?

Yes. My follow-up would be on the Affordable Care Act. We were looking for about $300 million-plus contribution from that in FY15. Can you let us know where you stood for FY15 on health reform, and then how you're thinking about health reform contribution going forward? I think you said that you expect it to be stable, but just additional commentary in and around that, please?

We'll be glad to do that, Richard. I will say that you're right. We did expect that we'd have contribution in that vicinity actual and FY15.

I think FY15 ended up being a very positive year from an Affordable Care Act perspective. There's just a lot of work that tends to come out of the woodworks. Bruce is going to comment in detail, but it feels like the table is set for, again, we think it's getting closer to steady-state.

The nature of the work that we do seems to be changing. The issues seem to -- some issues, last year issues seem to be resolved, but new issues pop up. So Bruce, please add to that.

Rich, you're absolutely right. I guess what I'd add is we'll see normal course fluctuations with our State clients as they prioritize the wide-ranging set a initiatives that are in front of them. And as we've talked about a little bit this year's open enrollment period, for example, has a new series of tax forms that individuals will be receiving if they received qualified coverage through Medicaid or CHIP. They now get the 1095b forms.

A number of our clients will turn to us to help them with either the production or the fielding of phone calls around those types of forms. We also, for example, in one of our larger contracts are helping the client -- you've, I'm sure, followed the status of the co-ops and there are certain co-ops that have shut down just prior to the open enrollment period. In one instance there's up to 200,000 individuals that need to transition into new plans on a very expeditious basis.

So we'll turn and surge and help to support our clients in those activities. So I would call that part of kind of normal course volume fluctuations that we would see. But overall, as Rich has indicated, we feel like we've reached pretty much a steady state stabilized operation with the Affordable Care Act.

Richard, I'm going to add one other very important point. It's more of a horizon observation. When we first got into the Affordable Care Act and parsing how MAXIMUS might play a meaningful role, the industry pretty much focused on the universality of healthcare. Let's get everybody we possibly can signed up into a healthcare program.

We knew there would be a second and a third chapter. The second and third chapter would move away from the universality of healthcare. And that's still a lot of work every year to re-enrollment folks.

But also towards quality and cost of healthcare, and in particular one of the big drivers there would be long-term care for elder individuals. We are starting to see that solidify in our marketplace. So I won't go into in-depth detail here, but as you follow MAXIMUS I think you should expect that that's going to further solidify and we'll see more opportunities in that direction.

Allen Klee, Sidoti.

Two questions. One, if you could talk a little about what you said on the student loan contract and how that's going to go to break-even potentially next year. But what the opportunity you see there is.

And then second, going back to the UK contract, one more time to understand. For the people you hire, what are the competitive choices that you think they have that can also be an issue?

Those are good questions. Bruce, would you take the first one? Give folks a little bit of background on the student loan project, what we do and then the break-even concept and opportunities moving forward.

Clearly, the one thing that crosses my mind, Allen, is that this contract is important to MAXIMUS because it's with an agency that we really have not done any work with in the past, the Department of Education. And it's a sizable opportunity. And as folks probably know, it was in start-up last year and is moving towards maturity. Bruce, do want to comment on how were doing there?

I'll begin, and then actually turn it to Rick a little bit. As a reminder, the scope of the work that we do there is we help students who have reached a default status but for whom their cases have not been turned over to private collection agencies. And that's a large volume of students.

I think estimates nationally are there is at least 5 million individuals and that will be growing toward nearly 10 million individuals by 2020 that will need that kind of assistance in that program. And we have been working with the Department to implement upgrades to the technology platform that supports the program, and moving through, as Rich had noted, the normal course start-up of the program to turn it to a point where we expected to break even in FY16. And Rick, would you like to add to that?

Yes. You have to remember, it's a 10-year contract. And Rich is right, it started and when we were in start-up last year. This year we have made the progress that we expected. And it should be approaching break-even soon, inside FY16, and then it will turn profitable. As I said it's a full 10-year contract. Now, Bruce, did you want to talk about the healthcare professionals and what other things that compete for their --

This is a HAAS question.

Yes, absolutely. Yes, let me begin by talking little bit about the types of healthcare professionals that we recruit. Because we recruit, to a large degree, nurses, individuals with physical therapy, or PT, or occupational therapy, OT, capabilities. And coming up in the future we will also be adding mental health nurses to the cadre of folks that we'll be able to recruit.

A large proportion of the individuals that we serve, as you could imagine, have mental health conditions that become part of that assessment process. So having folks with that clinical capability is quite important. Doctors also comprise a significant component, but I would characterize it more in the 10% to 15% range of the folks that we are recruiting.

It's a very tight labor market in the United Kingdom. And individuals have a lot of options, whether it's to go to work for the National Health Service, whether it's to practice in a general practice mode, a GP-type environment, or whether it's to do additional work on other assessment-related contracts that are out there. So furthermore, the types of characteristics that individuals need to have and the capabilities kind of really preclude you from hiring folks directly out of medical school, for example.

These are individuals that need to have a level of experience and capability and really emotional intelligence, and the ability to navigate through a very complex assessment process in a manner where it's a very conversational and low anxiety experience for the claimant. All the while manipulating and documenting the evidence of that assessment in a fairly sophisticated IT tool. So that does narrow the type of field the folks that can be successful in the role.

We have been working very hard, however, now to profile and understand what are the characteristics of folks that can be successful and have been successful in this role and feed that back into the recruiting process. And then finally I might say of the work that we do, there are certain elements of the work, like scrutinizing complex cases that come in on paper, determining what additional further medical evidence is needed that can only be done by individuals once they've been in the program for up to maybe a year.

So it's really this time that we are seeing now as our new recruits that we've hired through the summer come in and get established, get more experienced that we'll start to see increases in productivity, but meaningfully an increase in their capability to handle a wider range of cases.

Frank Sparacino, First Analysis.

On the UK contract, Rick, I just want to figure out from a worst-case scenario perspective, you talked about stop-loss provision at 5% of allowable cost. Can you help us think about that in terms of actual dollars relative to your low end of range you talked about earlier, $7 million?

Stop-loss provision in the contract restricts our loss to 5% of allowable costs on the contract plus any costs that we incurred that are not billable under the contract in any contract year, meaning it's a contract-by-contract-year calculation. This contract has been disclosed to be in approximately GBP595 million, which translates to a little bit more than $900 million, which put the stop-loss, then, under the contract at something like $15 million per contractual year.

When you factor in unbillables we ran $5.5 million of unbillables on this contracts during FY15. So that would give you a stop-loss that is around $20 million per contract year. Now, our analysis indicates that we believe it's remote that we will trigger that stop-loss in either contract year one, which ends February 29, 2016, or contract year two.

Frank, do you have a follow-up?

No. Thank you, guys.

Brian Kinstlinger, Maxim Group.

Thanks so much for taking my follow-up. The first is how many healthcare professionals do you have on that contract, the assessments contract, right now and what does the current workload require? And the follow-up, so that I'm done with my questions is, what was the impact to actually earning [general] revenue? You said in currency in the fourth quarter and how did impact FY16 guidance on earnings, please?

Brian, I think there are three questions there. Your first one (technical difficulties) that we have, and -- or that we need, and then what's the current number of FTEs that we have. And then I think your third question is really the impact of currency on the consolidated results.

Rick will answer the third one first and then we'll come back to Bruce on question one and two.

The currency impact on the full year was approximately $44 million of revenue and about $0.02 of earnings per share is what we calculated.

As a matter of client confidentiality, we can't actually speak to the detailed metrics in terms of the number of healthcare professionals that we have on board, but I would remind you that we feel like we've made very significant progress in expanding our supply chain of qualified healthcare professionals. I spoke a moment ago about the breadth of that supply chain.

We've added recruiting partners and others. And we really feel that we've put a very solid number of new hires into the pipeline. And they're now coming through, graduating and becoming productive.

It's worth noting, like we said, that it takes individuals up to six to eight months to reach full productivity after they graduate. And that's why we're seeing the lag in the uptake of production. But we feel that we are at the right rate for recruiting. And we feel that we just need to keep it going for the foreseeable future.

Stephen Lynch, Wells Fargo.

I wanted to ask about backlog coverage of guidance. It sounds like you have about 93% of FY16 revenue guidance in the form backlog or option periods. It looks like that's up from 90% coverage at this time last year going into FY15.

Can you maybe talk a little bit about what's driving the difference there? Are there any difference in the underlying assumptions, maybe a bigger cushion for FX impact, or is this just normal course timing of contracts? That'd be great, thanks.

Yes, I think this. I'm pleased that it 93%. I've always felt that 90% seems to be, given our business model, Stephen, 90% seems to be a very comfortable number. And frankly, I think it's a great business model when you've got a 90% of next year's midpoint in the form of backlog.

Glad to see it's 93%. But we didn't change the way we measure it. It's measured in the same fashion. And I might even put the additional 3%, which is nice, in the category of statistically within the same range. I think it's very comparable and very solid as we enter next year.

Thank you very much for joining us on today's conference call. Management will be available following this. Thank you.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.