Maximus Inc (MMS) 2017 Q1 法說會逐字稿

Welcome to the Maximus Inc. First quarter conference call. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to your host, Lisa Miles, Senior Vice President, Investor Relations For Maximus. Thank you. You may begin.

Good morning and thanks for joining us. With me today is Rich Montoni, Chief Executive Officer, Bruce Caswell, President and Rick Nadeau, Chief Financial Officer. 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 of results and believes 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'll hand the call over to Rick.

Thanks, Lisa. This morning Maximus reported financial results from fiscal year 2017. As noted in the press release results for the quarter were solid and with some areas delivering better than expected performance. For the first quarter of fiscal year 2017, total company revenue grew 9% to $607.6 million compared to the same period last year. Most of the growth in the quarter was organic. This was offset by unfavorable effects of foreign currency translation. On a constant currency basis, total company revenue would have grown 12% compared to the same period last year. Total company operating margin for the first quarter of fiscal year 2017 was solid at 12.1%. For the first quarter of fiscal year 2017, net income attributable to Maximus was $46.7 million in GAAP diluted earnings per share totalled $0.71. GAAP EPS was better than expected. Much of the over delivery was tied to solid performance across the portfolio.

Most notably the US Federal Services segment was better by approximately $0.04 per share. In addition, restructuring costs in the UK were less than previously forecasted and as a result we picked up an additional $0.02 per share. When comparing to the prior year period it is important to remember that results in the Health segment were negatively impacted by the timing of a change order that was pushed into the second quarter of last year. As a reminder, we recognize the costs in the first quarter but did not record the associated revenue of approximately $8.6 million and earnings of approximately $0.08 per share until the change order was signed in the second quarter of fiscal year 2016

As mentioned in this morning's press release, we reaffirmed our EPS guidance for fiscal year 2017 of $2.90 to $3.10. We reaffirmed our cash flow guidance and we updated our fiscal year 2017 revenue guidance to range between $2.425 billion and $2.475 billion. The main driver to our lower revenue outlook is a recently cancelled contract in the US Federal Services segment where we are a subcontractor. I will provide additional guidance details later in my remarks. Now, I will speak to segment results starting with Health Services. First quarter revenue for the Health Services segment increased 17% compared to the same period last year.

Most of the growth in the Health Services segment was organic. This was primarily due to the expansion on existing contracts including our increased scope of work in New York state. The decrease in the value of the British pound tempered top line growth. On a constant currency basis growth would have been 21%. As expected the Health Services segment operating margin for the first quarter of fiscal year 2017 increased to 14.7% compared to 9.2% reported for the same period last year. The margin expansion is attributable to two main factors.

First, margins were tempered in the same period last year due to the aforementioned delayed contract amendment. Second, we realized forecasted improvements from programs that were ramping up in the last fiscal year including the UK Health Assessment Advisory Service contract. We are pleased that the HAAS contract continues to make solid progress and is still on tract to deliver operating margins in our targeted range. We have made significant process improvements, improved stake holder relations and pleased our at 93%.

I will now address the US Federal Services segment. First quarter revenue for the Federal Segment decreased 3% compared to the prior year. As we discussed last quarter, the lower revenue was largely driven by significantly lower volumes on a large healthcare contract. This work is for the department of veterans affairs and Maximus is a subcontractor on that contract.

As noted in this morning's press release, we were recently notified that the contract is being cancelled due to insufficient volumes and it will now end in April 2017. As I said, this is the main driver to our revised revenue guidance for fiscal year 2017. On the bottom line, US Federal Services segment was better than expected in the first quarter by approximately $0.04 of diluted earnings per share. This was due to better than projected volumes on a couple of transaction-based contracts and to a lesser extent we also realized some savings that were tied to automation initiatives.

As a result, operating margin for the first quarter of fiscal year 2017 was 12.7% compared to 7.4% reported for the same period last year. I will now turn to financial results of Human Services segment. For the first quarter revenue increased 5% compared to last year. Most of the growth in the quarter was organic. This was driven by increased revenue from our Australian operations which offset expected decreases in the United Kingdom as the work program contract begins to wind down. As expected unfavorable currency rates negatively effected top line growth. On a constant currency basis growth would have been 7%.

Human Services segment operating margin in the first quarter of fiscal year 2017 was 9.4% compared to 7.6% reported for the same period last year. The operating margin improvement was principally due to the expected improvement to the Australia job active contract that is now fully ramped. It is important to note that segment operating margin excludes the $2.2 million restructuring charge in the UK. As a reminder the restructuring is related to the ongoing consolidation and integration of our Human Services operations in the UK. We believe it is more useful for investors to see a separate line on the face of the financial statements rather than including it as a part of the SG&A line within the segment results.

I will now briefly discuss cash flow and balance sheet items. In the first quarter Maximus delivered strong cash flows with cash flow from operations of $71.1 million and free cash flow of $63.4 million. Days sales outstanding were in line with our expectations and totalled 70 days at December 31st. During the 3 months ended December 31st, we used cash of approximately $15 million to pay down our long term debt and ended the quarter with a remaining long term debt obligation of $150.5 million. We also repurchased approximately 559,000 shares of Maximus common stock for $28.8 million.

The weighted average price was $51.68 per share. We presently have an estimated $109 million remaining under the board authorized program. We continue to maintain a healthy balance sheet that offers us flexibility for capital deployment and investments. At December 31 we had cash and cash equivalence totalling $69.8 million most of which was held outside the United States. Our capital allocation priorities remain unchanged. First, we will pursue selected acquisitions in an effort to enhance our position for new market opportunities. Second, we will continue with our quarterly cash dividend and will execute our opportunistic share buy back program and lastly, we will continue to use excess cash to pay down the debt. Above all, we remain committed to sensible and practical uses of cash as we aim to create long term shareholder value. Lastly, I will close my prepared remarks with guidance.

We note that our first quarter performance was strong with constant currency revenue growth of 12% and an operating income margin of 12.1%. While we are maintaining our full year earnings guidance and still expect GAAP diluted earnings per share to range between $2.90 and $3.10 we are lowering our revenue range. The revised range of$2.425 billion to $2.475 billion is principally due to the aforementioned contract cancellation in the US Federal Services segment. While we already forecasted lower volumes on this contract, the cancellation now means that revenue in fiscal 2017 compared to last year will be $65 million to $70 million lower.

However, it is important to note that we operate a portfolio of contracts and there were other puts and takes in the model that contributed to this decision including currency impacts and a rebid loss. Unfavorable foreign currency is now expected to further impact us another $10 million. Or $20 million on the full year if you include what we said on our last call. We were recently notified that we lost our Medicare Part A East appeals work which will also impact the revenue for the year by $10 million.

Our technical solutions scored high. Our prior performance on this contract had been graded as excellent and we recently won back the Western region for Medicare Part A appeals last quarter. Accordingly, we felt we had a very strong position going into the Part A East rebid but we lost to what we view as an overly aggressive price. We are also maintaining our cash flow guidance but with a bias towards the top end of the range. We still expect cash flow from operations to be in the range of $230 million to $280 million. In free cash flow to range between $170 million and $220 million for the fiscal year 2017.

You may recall that the company is adopting a new accounting standard for stock compensation in fiscal 2017. The standard requires companies to record the income tax benefit or expense as a reduction to the income tax provision. As a result of the exercising of stock options or vesting of restricted stock units. With the retirement of two of our directors effective of January 1, 2017, we will recognize a benefit tied to the new accounting standard in the second quarter of fiscal year 2017.

As a result, we are estimating that our effective income tax rate in the second quarter of fiscal year 2017 will be approximately 34%. For the full year, our tax rate estimate is unchanged and we still expect it to range between 36% and 37% with a bias towards 36%. Thanks for your continued interest and now I will turn the call over to Rich.

Thank you, Rick. Good morning every one. Overall we are pleased with a solid results in the quarter and our full year outlook for earnings per share. This despite certain setbacks that let us to trim our revenue outlook for the remainder of the year. With $4 billion of opportunities in our reported pipeline we see continuing demand for our services and are keenly focused on capturing new organic growth while protecting our base business.

Most importantly, the long term macro economic drivers of rising case loads and increasing demand for effective government programs remain unchanged. Common themes have emerged across all of the markets as governments tackle changing demographics and decentralization initiatives and the need to get value for government spend. First, as demographics shift the fundamental need for wide range of government program administration including critical service and services has not changed. People are living longer and have more complex healthcare needs.

Many face financial hardships and other barriers that require a combination of social safety net programs and support into work. At the same time, we are seeing in some markets an increased focus on citizen responsibility and engagement as a condition of receiving benefits. Government programs that focus on measurable outcomes can cost effectively address this need. Second, we are seeing a shift towards the decentralization of some public programs. We see this in the US with the proposal of block grant funding for Medicaid and the potential removal of certain federal mandates.

We also see it in the United Kingdom with the devolution of procurement program management program to local authorities. This potential change to funding in governments mechanics enhances the overall flexibility that state and local authorities can use to shape their benefit programs. Third, outsourcing and public-private partnerships continue to serve as the vehicle for cost effective solutions. Governments must ensure programs are address societal needs are a good use of taxpayer dollars and achieve their intended outcomes.

By laying out the performance expectations, rewarding the partners who deliver, governments and citizens benefit from this increased accountability. We believe this environment particularly favors companies like Maximus who can deliver highly-complex government programs in a transparent and independent fashion. Moving on to our US operations, we are just starting to see how these macro drivers intersect with the priorities of the new presidential administration. Demographics to the US of increased demand for public benefit programs and governments are looking for solutions across a range of social solutions. Medicaid, Medicare Long Term Care programs, Social Security, welfare-to- work, nutrition and assistance programs and more.

Transition periods are often the right time to propose new ideas that can help governments at all levels achieve the goals. In many of the president's proposed directions we are seeing common areas where Maximus provides value such as: creating efficiencies to manage the cost of government services, increasing accountability to demonstrate that programs are achieving their desired outcomes, promoting individual responsibility, such as copays and work requirements beneficiaries of health and human service programs and ensuring integrity of public programs by better addressing fraud, waste and abuse. While it is still very early in the transition, we anticipate that some of these priorities will become legislation and regulations and will then be translated into actions at the program level. Front and center is the Affordable Care Act where the discussion has moved from repeal to repeal and repair.

Congressional leadership said they are committed to not pull the rug on the from citizens are who being covered by the ACA today but they have not yet come to consensus on a tactical plan. For Medicaid, flexibility appears to be the common denominator. The new administration reiterated its support for block grants in January and state leaders are calling for things such as reciprocity on waivers where states can leverage the pre approved waiver of another state, less prescriptive regulation so states can better shape their own programs based on their demographics and values and an adequate level of federal funding to achieve their desired outcomes.

It is important note these will take time, particularly if legislative changes are required or there are changes to funding mechanisms, depending on the pace of change this may impact our growth over the short term but doesn't change the long term underpinnings of the macro demand trends that remain favorable. Turning now to our operations outside the US where we have seen some movement in the disability services market as governments seek to improve ways for engaging and serving these populations. We recently launched a handful of small but strategic employment program contracts in the United Kingdom where we will be serving people with disabilities and the long term unemployed. On the health side our UK business, we recently won a contract to deliver mental health and well being support to the Ministry of Defense Joint Forces Command.

While the contract is small it does expand our presence into a department. Under the 3 year contract our health management subsidiary will deliver an online based solution providing a variety of services to joint forces command personnel. These services include well being advice and guidance, clinically validated mental health support and interactive tools that enable employees to monitor their own health and well being. We also continue to pursue the available opportunities for the new work and health program. We're working hard on our pursuit for new work in Wales, London and Manchester.

Moving on to new awards, pipeline and rebids. Our assigned contracts for the first quarter fiscal 2016 total $462 million. We also had an additional $150 million in awarded unsigned contracts at December 31, 2016. Our pipeline of opportunity at December 31, 2016, was $4 billion, sequentially down from the $4.3 billion last quarter. This decline is due in part to contracts converting to new awards and as happens in the normal course, a handful of losses. We also experienced some procurement delays. During the quarter we had several opportunities delayed that in aggregate totaled approximately $250 Million.

This means that the $250 million has fallen out of our reported pipeline numbers because they no longer meet the 6 month parameter of our reported pipeline. However, we expect that most of these opportunities will come back into our pipeline over the next 12 months. Delays are quite normal during any transition. Of the $4 billion pipeline just under 60% is new work and reflects opportunities across all three segments and our current geographies. Bare in mind that the conversion of sales pipeline in the future revenue growth will ultimately depend upon win-rates, the timing of awards, how they ramp up and the rate of recurring revenue.

In summary, we're in a dynamic environment with emerging political and economic changes. We firmly believe that the challenges that arise during periods of change often mean future opportunities for Maximus. The macro trends for our business remain favorable and we remain positive about our long term outlook. We believe Maximus will continue to play a key role in helping governments around the world address changing demographics and rising case loads with more effective and efficient programs that make best use of taxpayers spend. With that we'll move on to Q&A. Operator.

Before we begin the Q&A session I've been informed by management that they have a clarification.

We have an incorrect number in our materials. In today's presentation and in and my prepared remarks, we said that the foreign currency was an incremental $10 million unfavorable impact. While the incremental impact of $10 million is correct, the number of $20 million for the full year is not correct. For the full year, the unfavorable foreign currency impact is expected to be $60 million and not $20 million. We will update the materials when we file our materials in the 8-K with the Securities and Exchange Commission next week. We'll now begin the Q&A session. Operator.

Thank you. We'll now be conducting the question-and-answer session. (Operator instructions). One moment please while we pull for questions. Our first question comes from Tom Carroll of Stifel. Please proceed with your question.

Good morning, everybody. Yeah, so I have a point of clarification and a question on seasonality. First, the tax item that you called out in today's release, I'm pretty sure that was already captured in your guidance. I think we had modeled it for fourth quarter. Can you confirm this especially in light of guidance that didn't change or go up commensurate with the tax benefit?

Good we will do that, Tom and good morning this is Rich. I'll ask Rick to field that one.

Hello, Tom. What we were referring to, we had two directors that retired and in the second quarter of fiscal year 2017, the quarter that began January 1, 2017, their restricted stock units they had deferred became vested. So we did pick up approximately $0.03 that will be recorded in the second quarter. So if you use an effective rate of 34% for the second quarter, I think that will give you what you want that period. We are indicating that we think the effective tax rate -- income tax rate for the full year will still be between 36% and 37%. It will be closer to 36%. That's why I said with a bias toward the lower end. So that $0.03 was really incremental.

This was captured in the initial guidance that you provided us?

Not in the last quarter but today.

This then I have a question on seasonality. Your first quarter margins I think are seasonally the lowest and they expand sequentially through the year after that. Has anything changed with that this year? Your margins are pretty strong this quarter so, would you expect them to grow from here into the subsequent quarters?

Yes, Tom, I think if you look at the history we do have -- the margins do tend to get a little better as we go through your fiscal year. So I wouldn't think that that's going to be overly dramatic, but yes, that has been the general pattern we have seen over the years.

Thanks, Tom. Next question, please.

Our next question comes from Richard Close from and Canaccord Genuity. Please proceed with your question.

I want to hit on the current environment. Rich, you talk about seeing increase in personal responsibility for benefits. I think co-payments around there. And shift towards decentralized programs and you also made a comment in terms of the pace of change may impact growth over the short term. And really just trying to flush that out here for the domestic market, whether you think you're going to see more opportunities over the course of the next one or two years or is that more offset in terms of program changes that may negatively impact your business?

Richard, I think those are great questions and I think in all fairness to the situation, not just Maximus, but I think almost every company doing business in the US, recognizes with the new administration and their sense of urgency in initiatives there remains a number of questions and things to be determined. That being said, what we are seeing and what we are pulsing is we're hearing a lot of common themes or common areas where we believe Maximus provides some pretty significant value. You touched upon a few of them. In my mind we're hearing things such as we need to move forward and create efficiencies to better manage the cost of government services. We need to increase accountability to demonstrate the programs are achieving their desired outcomes and you know for years we've encouraged governments to go towards outcomes base relationships.

We're also hearing -- and you mentioned these-- promotion of individual responsibilities such as co-pays and work requirements for the beneficiaries of Health and Human Services programs and lastly, I mentioned there's serious discussion about the integrity of public programs by better addressing fraud, waste and abuse. So, while it's early in the transition, we do in fact anticipate some of the priorities will become legislation and regulation and eventually they'll be translated into program level actions and requirements and I think Maximus is very, very well positioned in that context. So I think it means that while the new administration is finding their way and moving forward there will be a short term pause, but I would expect that very soon in the short term we will start to see these things translate into opportunities.

Okay. As a follow-up on that, with respect to the pipeline, have you seen any new services in terms of maybe new agencies that you potentially contract -- any type of new initiatives that may be were not there a year ago that offer up an opportunity?

I don't think new agencies -- I'm not aware of new agencies per se that we would pursue. It's typical agencies with whom we operate and we relate. So I expect it will be the same agencies. However, I think the way it will play out is we're starting to hear specific initiatives as they move forward. And they're not solidified yet. But I go back to my original answer where we expect those ideas will translate into action and program requirements. Bruce Caswell is here and Bruce also operates this space.

I would absolutely agree. I think -- for competitive reasons we shouldn't name specific opportunities and specific agencies but we're starting to see interest expressed by those agencies for information from the vendor community to support plans and programs that were part of the general policies articulated by the administration as they were on the campaign trail and now as they entered office. We're starting to see those interests begin to be expressed in the form of procurement activity.

Richard, thanks for your question. Next question, please.

Our next question comes from Brian Kinstlinger of Maxim Group. Please proceed with your question.

Great, thank you. So in terms of federal, maybe Rich can you talk about the pipeline growth opportunities outside of the contract cancellation, how you see the progress versus where you thought you would be in your position in pipeline and growth after acquiring Acentia. I know it was going to be the long term gain and not a short term gain.

I'd be glad to do that, Brian. Good question. I think it's been two years since we acquired Acentia. When we acquired Acentia we knew that it would take time to gain traction with new opportunities resulting from that acquisition. And at this point in time I would say it may take a little bit -- it may take more time than we originally expected, particularly given the impacts of the new administration. However, we do have our business teams fully integrated. They're actively pursuing many new opportunities. So I would classify that as we really got good traction where we need it. Our federal pipeline is in fact strong we have new BPO business opportunities where we can leverage the Maximus core capabilities with the Acentia delivered strategic IT services opportunities and most importantly we're using Acentia calls to strengthen our bids. We are finding that technology continues to play a very important role in our solutions and Acentia strong suit is technology. So I find it very comforting when we go to market with the BPO bid we got a strong element of IT capability that's brought to the table by Acentia. So I think we're still on target, may take more time, Brian.

Then follow-up and then I'll get back in the queue. Can you talk about the profitability on that VA contract, I may have missed if you did say that and is that loss the offsetting factor of your tax benefit?

Glad to answer that. And Rick Nadeau is anxious to do that.

Hi, Brian. Yeah, that contract was in the normal range that we have of 10% to 15%. It started a little slower in the first year and it was -- but it was in that normal 10% to 15% range.

Next question, please.

Brian--- I think Brian you had a second part of that question I am not sure I followed it could you ask me that again? Brian?

He's gone? Sorry Brian.

The next question, please.

Our next question comes from Charlie Strauzer from CJS securities. Proceed with your question.

Just picking up on Richard and Brian's discussion with you about the pipeline and given the -- how president Trump has basically been acting with swift urgency in terms of putting out new mandates. Have you seen -- I know you said suffered delays in the pipeline for about $250 million but have you seen a pick-up in pace in terms of the urgency from some of the agencies you were talking to and have you had conversations with the administration, as well in terms of potential opportunities down the road.

You got two questions in there, Charlie. Have we seen any specific actions by these agencies and then, two, what are we pulsing out there with the agencies with whom we deal. As it relates to the first part of your question, no, we really haven't seen any specific impact or action at the program level to the programs that we operate. So nothing to the extent of the executive order any immediate impact it had as it relates to the seven countries where there is immigration action. We haven't seen anything such as that. As you would expect, we have a very active program to interface with the new administration, all the way up to the Secretary level, and we're very engaged. I think we have a very good pulse in terms when what is being discussed and where we are headed. I am going to ask Bruce to chime in here and share with you a little more color in terms of what we see happening.

I think we're finding obviously that a number of the Cabinet Secretaries need to be confirmed and go through the process. In face with Tom Price next up at HHS there's been some speculation that we'll get a bit more clarity on the Trump administration's plans for ACA repeal, replace once Secretary Price is in place. Part of it is just gated by getting those executive's in place and their deputy secretaries and assistant secretaries in the programmatic staff before we'll start to get a bit more clarity. I think it was Tennessee Senator Bob Corker said in the last couple of days as it relates to the Affordable Care Act there is no consensus from my vantage point there -- is not a consolidation around a particular thought yet. There is a lot yet to be determined and we're monitoring closely and staying engaged and on occasion we may see things that are in early stages like a request for information to industry, but nothing as I said previously in the form of formal procurements that reflect the implementation of the policy at this point.

Thank you very much.

Next question, please.

Our next question comes from the Frank Sparacino with First Analysis Securities. Please proceed with your question.

Hi, guys. I know we talked around this, but I want to go around the pipeline and more on visibility given the transition that's going on and how do you get confidence in your ability this year to convert some of these contracts?

Frank, this is Rich. I think that's a great question. When we think about growth and we think about the pipeline, it's related but the pipeline discussion is shorter term in nature and I'm going to talk about the longer term thought process we have as it relates to growth and I think this is most apropos for Maximus's model. When we think about long-term growth we always said there will be years where we have super growth and we'll have years where there's less than average growth. In recent years, as you know, we've had very, very favorable legislation, reform efforts, new programs in the US and other countries which in the long term it's really -- those are short term variables that tend to fluctuate year to year and I think that's where we are and I will come back to that as it relates to pipeline.

When we consider long-term growth we go back to the long-term growth drivers. You know them well, It's the demographics in the intersection with government fiscal situations, we think those are inevitable, irreplaceable drivers and are going to be here for a very, very long time. How it plays out in the pipeline which is a shorter term look at things, when we look at the pipe we look at the aggregate amount of the pipe and $4.3 billion going to $4 billion sequentially while it's down we do have some wins that naturally that's a good reason why the pipeline goes down. We did have some losses and losses occur in the normal course and I do think we have roughly $250 million of impact where things went out of the pipeline and moved to the right.

I expect they will come back. So, I think the pipeline is steady state for the most part. Naturally management will continue to refresh the pipeline with best efforts. I think ultimately how much of that translates into revenue depends upon four things: It depends upon our win rate; it depends on timing of an awards and naturally how they ramp, in addition the rate of recurring revenue. If we've got some revenue that's not recurring such as this VA contract it has a bit of an impact into how much the pipeline translates into organic growth. When I think about it, I think the pipeline's at a good level and positions us to do well as we move forward it is not a foregone conclusion because we have to focus on winning our fair share and then ramping those projects up. I hope you find that helpful, Frank.

Thanks, Frank. Next question.

You bet.

Our next questions come in from Shane Svenpladsen with Avondale Partners. Please proceed with your question.

Good morning. It looks like there has been a handful of preadmission screening in resident review bids out lately and I'm curious as to how your Ascend business is doing there and any updates on new wins since acquiring that business?

I'm going to ask Bruce to answer that in a minute. But I would say that -- the dynamics we have seen in that space (inaudible) appeals and assessments and we've been I think a major player for close to a decade in that space and I think our independence is insurmountable and is very formidable-- I think (inaudible) is very exciting in general in terms of short term dynamics. Bruce, anything you'd like to add?

Thanks for the question. I would say first of all, we agree with you. There has been a number of good (inaudible) opportunities out in the market. We were very pleased that the Ascend Business won their single largest customer the Tennessee customer won that rebid and in winning that rebid, expanded the types of reviews they're doing from level one to include level two. What we are pleased to see, as these bids come out additional assessment programs being added to make these contracts much more comprehensive and that plays to an organization like Maximus with Ascend as our partner that can handle a larger more complicated multi-program assessment. We're pleased with the performance to date and very pleased with what we're seeing in the pipeline.

That's good to hear. As a follow-up, with respect to the umbrella agreement under which the work and health program is being bid, it appears that both Maximus and the Remploy subsidiary put in bids in each of the six regions but Maximus didn't win any and Remploy only won one. Is there anything that has changed there either in terms of what the government is looking for or competitive bidding behaviours on the part of you competitors that explains that?

I think that's a great question. We'll ask Bruce to field that one.

Sure, Shane. As it relates to the work and health program you're correct. An interesting point that came out, I think it was in an article written by the Guardian, the past performance component as it weighed into the evaluation was only 4.8%. That really opened up the market for vendors that had not been previously been performing or maybe not performing at a high level on the work program of the work choice program to become entrants into the market. As we indicated on that specific program, we are disappointed clearly with the outcome and felt that our bid fell short of our expectations in that area. But at the same time when you look at the total expected spend -- and don't forget this is a framework -- of which there will be call off opportunities in the future the GBP69 million in contract value compares to what historically through the work choice and the work program at its peek was about GBP500 million. We said for some time that the program will be shrinking and we factored that into our guidance. Also, quite importantly, outside of this program, the two largest areas London and Manchester will be procured separately by those authorities. And when you look at that GBP69 million total value, those being the largest areas you can imagine the largest component annual contract values will be for those areas and that will be a separate competition and as Rich mentioned in his remarks we're focused not just on London and Manchester but the Wales opportunity that we have in front of us off of the framework. I hope that provides some context.

Thanks, Shane. Next question, please.

Next question comes from Allen Klee from Sidoti. Please proceed with your question.

For your US federal segment, you commented that your operating margins were mostly benefited from some transaction based contracts. I'm just wondering if you can give us a sense of the duration of those contracts or do we think of this as kind of a longer term recurring type of thing? And then second, for your Affordable Care business, can you give us a sense of how it's trended in the quarter. Thank you.

We're glad to do that. I think Rick Nadeau can answer both of those. To be clear your first question is a little more color on the margin for our federal in the quarter and sustainability the root cause of it and what we are seeing from the Affordable Care Act.

You're right. We did receive a benefit from a couple of volume based contracts in our Federal Segment. We had in that particular case very good volume. As we've tried to explain in the past, volumes do matter significantly to some contracts and sometimes it's positive through a specific contract and sometimes negative. In these particular case those are two contracts that we have in the US Federal Government Segment and we had good volumes on it and those are long-term contracts but the volumes do not necessarily -- the volumes will fluctuate somewhat from quarter-to-quarter. So we just happen to have very good volumes on both of those contracts this quarter but I think the margin this quarter is a little higher than what you'll see on a going forward basis. With respect to the second part of your question we did not see a substantial change in the revenue that we tag as being attributable to the Affordable Care Act this quarter.

Thanks, Allen. Next and question, please.

Our next question is a follow-up from Brian Kinstlinger. Please proceed with your question.

Great, thanks. If you look at the bookings trends in a trailing 12 month basis or on a quarterly basis it's down 30% and that has been going on for a few quarters. What I want to do is exclude the recompetes in there and talk about what the trend looks like year-over-year if we did adjust for that.

Okay. As you know we don't disclose the two separately. But I would say as it relates to rebids and rebids in particular, we actually there wasn't much up for rebid in this particular quarter. We had one situation up for rebid and we mentioned we were not successful in that particular situation. It was a cost -- it was a situation where frankly we had someone bid what we think was a very, very low price. I think it's an isolated situation. But in general I think we're in a good situation in that what we do look at and what we do disclose is how much of that pipeline is new work versus reccurring work and I believe at this point in time we're over 50% of the pipeline represents new work from a total contract value perspective. That's historically what we have disclosed and puts us in a good position in terms of delivering some organic growth as we move forward.

As a follow-up. If I looked at the trailing 12 months versus the previous 12 months, since you awards are down so much, was that previous 12 months significant rebid year? For example, looking at fiscal 2015 which would be a majority of the trailing 12 months. Is that a very large year in terms of recompetes when you did --$3.4 million--- sorry billions-- sorry in bookings?

Yeah, I think 2015 was a very significant year in terms of rebids. 2016, I think was a relatively light year. In fact 2015 I believe had Texas in there, which, as you know, is a very large contract. 2015 is relatively light and year-to-date 2017 is very, very light. Overall 2017 I think 2017 will be a light year for rebid as well.

Thanks Brian. Next question, please.

(Operator instructions). Our next question is a follow-up from Tom Carroll.

Thanks for the follow-up. I wanted to -- high level question, if we think back to the healthcare reform debate before the Affordable Care Act which led to increased contract opportunity for Maximus , if we apply that timeline to today, when would you expect to start seeing increased RFP activity that you guys are eluding to?

Well, we'll tag team on this. It's very interesting high-level question. To recap the question, you're curious to know if we map over before the Affordable Care Act and what sort of discussions and activities and there certainly was -- it's an important thing to remember, there was a lot of discussion about healthcare reform before the Affordable Care Act came into being. Bruce, what's your recollection in terms of timing on that?

Well, I mean, I think it was probably from when the regulation passed to when we really started seeing RFP activities about a year maybe between 12-18 months. We had to get into the regulatory stage and get regulations established and then a lot of protocol to establish at the states in terms of how they would interact with federal government and the first set of opportunities there and the first real RFP's were related much more toward planning in the planning grants and so forth. So, it's not a perfect analog to where we find ourselves right now. Because obviously with any activities around -- repairing and then potentially replacing elements of the Affordable Care Act things can move on different time lines. A case and point would be -- actually there have been a number of fascinating articles out there about what can be accomplished with 51 votes versus what would take 60 or more votes. And there are some thinking that elements of the repair could be accomplished as part of a reconciliation process requiring only 51 votes.

And if it's possible to move in an expeditious fashion forward to some of the revisions in Medicaid and there's been a lot of talk about block grants and Rich has mentioned that, our view and our perspective would be that would devolve authority to the states -- so you could see state level RFP activity on a faster time frame than you would have under the Affordable Care Act just given that we are really modifying something that is already in place. We talk to our clients, our clients have said the thing about block granting though is that no one can really agree on how to establish the baseline and whether it is done on just a snapshot get the ability to them to function in a way where they're not dependant on a protracted process. You can see activity on a faster time frame than you would have under the affordable care act given we are modifying something that's already in place.

When we talk our clients nobody can agree to establish the baseline and whether it's done on the snapshot of prior spend or if it becomes a per capita model and the per capita model sets more of a ceiling than a block grant. As our clients handicap it they'll be inclined to move forward with waivers and seek broader waiver authority knowing that block granting could be the second phase of that. My overall view would be there is some likelihood that we would see RFP activity sooner than we saw under the Affordable Care Act because quite frankly we're modifying existing structures and existing programs rather than having to go through a formal design development process that we did under ACA.

Any other questions, Tom?

That's it.

Next question, please.

Our next question is a follow-up from Richard Close. Please proceed with your question.

Yes, I'd like to jump off on the last discussion, Bruce, in talking about state level Medicaid. Obviously you guys benefit from Medicaid expansion in certain states. Obviously did not necessarily benefit in certain states where you have contracts in terms of--- that decided not to expand. In talking -- obviously those states are at a disadvantage. What are your thoughts in terms of how they get made whole maybe on Medicaid as opposed to states that did expand and thoughts on that and whether and that could be an opportunity, sort of a backdoor expansion in states like Georgia, Texas or Florida, Tennessee?

There that's a great question. Thanks, Richard. Some thoughts on that. Number 1, I think you're seeing there are certain Republican governors out there that have gone through expansion that are advocating pretty strongly that expansion be sustained in whatever form the legislation takes. Most recently Governor Kasich has included Medicaid expansion-- the ongoing sustainment of it in his 2017/2018 budget. For those states that have it, I think their view would be if we ultimately move to block grants that's a good thing. And there is a debate raging right now as to whether the baseline would include the expansion population or not. If you did it, you're probably in a better position to argue for a higher funding level in your block grant than if you didn't. Then comes the question about states that haven't done it and how would they go about addressing it. Our view would be while expansion itself is not -- obviously wildly popular among the Republican party and the Republican governors, there's a point on page 3 of the Paul Ryan summary plan that kind of speaks to this about bringing Medicaid into the 21sts century. It says instead of shackling states with more mandates our plan empowers states to design Medicaid programs that best meet their needs.

So I think that's another way of saying, block granting and devolving authority to states and giving them the ability to design programs that meet the unique demographic requirements and market requirements of their populations, what we would see on the horizon. In that context it's expansion by another name. It begins with the funding but if you're giving governors broad authority to design how the programs will function and incorporate components like the personal responsibility elements and health savings account like-- we've seen in Indiana and Michigan where parenthetically Maximus has a great deal of experience operating those programs for those governors, then I think you could see a broader array of population above standard 100% federal poverty level being served. It comes down to what the governors put in the programs. For example, I think it's the healthy Indiana plan 2.0 anticipates a $20.00 payment for any individual in the expansion population so that would be up to 138% of the federal (inaudible) level. That itself is anticipated to generate $200 million in savings for the states. So as the governors are thinking about all this and trying to balance the pot of money they get the fact that is going to be kind of capped from a federal perspective and then if a gap opens up between their needs how do they close the financial impact of that gap and they'll have to balance that with those types of requirements. So I think the answer to the back door expansion which you mentioned is probably block granting.

Just as a follow-up to that, can are you remind us how many states that you guys are helping with Medicaid in some fashion and how many of those expanded or did not expand?

To answer your first question, we serve as the Medicaid Managed Care enrollment broker in 22 states. So that's kind of the broad array where we help enroll individuals into managed care plans and that has grown as you're well aware to incorporate other individuals and developing the disabled population and the developmentally disabled population, the intellectually disabled population, aged, blind or disabled populations, and so forth. In the subset we provide eligibility support services to the Medicaid programs and we'll of to get back to the exact number of expansion states but the largest ones from a volume perspective that have expanded would be New York and California and then certainly Michigan as we've supported their program and Pennsylvania. Probably the top four. Although of course we support Vermont and other states like that, smaller ones. Of the states you probably would ask the other side of the coin question which is where do you operate Medicaid programs that haven't expanded that would present upside and that would include Texas and Illinois.

Thanks, Richard.

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