Maximus, Inc. (MMS) Q3 2012 Earnings Report, Transcript and Summary

Greetings and welcome to the MAXIMUS Fiscal 2012 Third Quarter Conference Call. At this time all participants are in a listen-only-mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Lisa Miles, Vice President of Investor Relations for MAXIMUS. Thank you, Ms. Miles, you may begin.

Good morning. Thank you for joining us on today's conference call. I would like to point out that we’ve posted a presentation to our website under the Investor Relations page to assist you in following along with today's call. With me today is Rich Montoni, Chief Executive Officer; and David Walker, Chief Financial Officer. Following Rich's prepared comments, we will open the call up for Q&A. Before we begin, I’d like to remind everyone that a number of statements being made today will be forward-looking in nature. Please reminder that such statements are only predictions, and actual events or results may differ materially as the results 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. And with that, I’ll turn the call over to Dave.

Thanks, Lisa. Good morning everyone. Once again, MAXIMUS reported another quarter of solid top and bottom line results. Revenue increased 12% to $266.4 million compared to the same period last year. The year-over-year increase was driven by the health services segment and contributions from the PSI acquisition, which closed on April 30. Results for the third quarter include a change order that was previously expected to occur in the fourth quarter and contributed $10.2 million of revenue and approximately $0.10 of diluted earnings per share. Third quarter operating income, excluding legal and acquisition expenses, totaled $34.8 million with total company operating margins of 13.1%. Our tax rate in the quarter was 41%, which was slightly higher than forecasted due to a larger mix of profits taxable from higher tax jurisdictions. This rate increase tempered earnings by approximately $0.03. For the third quarter, GAAP income from continuing operations net of taxes totaled $20.5 million or $0.59 per diluted share. Excluding legal, settlement and acquisition-related expenses, adjusted diluted earnings per share from continuing operations were $0.62. Also during the quarter, we made significant progress with the PSI acquisition. We are pleased to report that the integration is largely complete and we are live with all PSI employees now using MAXIMUS payroll and financial systems. As always, we’ve included a supplemental table in the PowerPoint presentation to help investors understand the quarter’s highlights. The same table can also be found on the last page of this morning’s press release. Moving on to results by segment. Third quarter financial results from the health services segment were better than expected and bolstered by the acceleration of the $10.2 million related to the change order this quarter. The team was able to finalize the contract amendment with the client at the end of June, slightly ahead of schedule. As a reminder, the contract amendment relates to a new program where the scope of services increased once the program was launched. And it also reimburses the company for services performed in prior quarters. For the third quarter, health services revenues grew 20% to $170.4 million compared to the same period last year. Excluding revenue from the change order, third quarter revenue from the health segment still grew 13%, benefiting from stronger organic growth in the core business and 2 months of revenue from PSI. Health services operating income totaled $25.7 million for the third quarter and resulted in segment operating margin of 15.1%. Turning to human services. Third quarter revenue for the segment totaled $96 million, which was comparable to the same period last year and grew 2% on a constant currency basis. Segment operating income for the third quarter totaled $9.2 million delivering an operating margin of 9.6%. As expected, the ongoing ramp up on the U.K. work program dampened human services revenue and income compared to the third quarter of last year. But the contract remains on track to achieve breakeven during the fourth quarter. The segment also benefited from contributions from PSI, which were offset by lower year-over-year results from our Australian operations. In Australia, we completed work on a couple of short term government initiatives such as green jobs program. We also experienced lower volumes of job seekers relative to last year and we were impacted by unfavorable currency headwinds. During the last conference call, we refined our financial estimates for the U.K. work program for fiscal 2013. We continue to track towards those targets and our longer term outlook remains unchanged. Operationally in the U.K., we are still experiencing case load volumes and placements that are slightly ahead of our original plan. But outcomes remain slightly behind our expectations. Over the last couple of quarters, we’ve had several questions from the investment community about work program vendor performance measures and possible reallocations of work. We still expect that the government will issue performance metrics in early autumn and we are confident that we will be in the upper quartile of performance. Further, we don’t expect to see any reallocation of work until January 2013. Our willingness to take on additional work will depend on the terms in additions and the regions that are up for reallocation. Overall, we remain optimistic on the longer term outlook of the work program and we believe it will be a solid contributor to financials over the life of the contract. Moving on to cash flow and balance sheet items. Third quarter net income of $20.5 million contributed to another quarter of solid cash flows. Days Sales Outstanding totaled 58 days in the quarter. For the third quarter, cash provided by operating activities from continuing operations totaled $16 million with free cash flow of $9.7 million. During the quarter, we used cash of $66 million to complete the acquisition of PSI. Even with this large cash outflow, our balance sheet remains healthy with a solid cash position. At June 30, we had approximately $168.9 million in cash and cash equivalence of which approximately 31% was held domestically. Looking ahead, we will continue to employ the same fundamental principles of cash deployment, which include; investing in business development and growth prospects across all our markets including both organic opportunities and strategic acquisitions. And we are actively looking for targets that meet our criteria, continuing our quarterly cash dividend strategy and finally, executing our share buybacks on an opportunistic basis. But most importantly, the team remains committed to growing the business, getting a reasonable return on investments and delivering long term shareholder value. Before I hand the call over to Rich, I’ll wrap up with updated guidance. We are reiterating our fiscal 2012 revenue guidance and we still expect full year revenue to range between $1.03 billion and $1.06 billion. On the bottom line, we are increasing our earnings estimates for fiscal 2012. We now expect adjusted diluted earnings per share for the full year to range between $2.25 and $2.35 excluding non-recurring acquisition-related charges. As we stated on our last earnings call, we continue to expect approximately $4 million in acquisition-related expenses, which we’ve excluded from our adjusted diluted earnings per share and during the third quarter, we incurred $1.9 million of the estimated $4 million. Moving on to cash flows. We are reiterating our guidance for fiscal ’12. We still expect cash provided by operating activities derived from continuing operations to be in the range of $100 million to $120 million, and we still expect free cash flow from continuing operations to be in the range of $75 million to $95 million. And with that, I’ll turn the call over to Rich.

Thanks, David, and good morning everyone. With another solid quarter of financial results behind us, we are able to raise our earnings outlook for the year and affirm the growth platform for fiscal 2013. Today, I’ll focus my comments on some notable events since our last call including health care reform and new awards in both current and new geographies. I’d like to start off with an update on our domestic operations. On the health services side, the Supreme Court’s decision earlier this summer reaffirmed that health care reform remains a great opportunity for MAXIMUS. The court’s decision clarified the States must proceed with some form of health insurance exchange, but Medicaid expansion is now optional. Let’s start with the State Hicks procurement environment. Most of the procurements to date have been heavily weighted towards technology-only bids. We recently announced our first health insurance exchange award, a $41 million contract to design, develop and implement the technical solution for Minnesota’s exchange. The Minnesota RFP was the first in the marketplace with a strong focus on the consumer facing components of the exchange. As we’ve said early on, our focus for exchanges is primarily an operations in business process management. As the prime contractor, MAXIMUS will lead a team of specialized technology firms. With our direct experience in process model development and delivery execution, our role in Minnesota is a natural extension of our core competencies. We can draw on our deep experience of implementing business process model improvements and delivering efficiencies and eligibility in enrollment for large public health insurance programs. As we begin our work on the Minnesota exchange, we continue to remain well positioned for the downstream future operations of the exchanges. We believe there are only a handful of BPO vendors who are logical players in the health insurance exchange operations markets. As the deadline approaches for exchange operations to begin in fall of 2013, States are evaluating their procurement approaches. We believe that some States will look to leverage existing service center infrastructures and contractual relationships. Consequently, we think we are in a really good position to win our fair share of exchange operations awards. Looking down the pipeline, we believe that approximately 20 States, most of which have received substantial grants, are best positioned for a State-based exchange. 12 of these 20 States recently affirmed to the Secretary of Health and Human services their intent to create State-based health insurance exchanges. Approximately 24 States remain undecided. These States are considering whether to develop their own exchange or adopt either of the Federally Facilitated Exchange, or FFE, or State partnership models either as a long term solution or as a temporary bridge to a fully State-based exchange. The remaining 6 States will most likely participate in the FFE. The Federal government is in the process of building the technology for their exchange and we expect to see additional procurements for the operations and other support functions later this year. We believe MAXIMUS is well positioned to support the Federal exchange initiatives through our Federal services subsidiary. Regardless of the model or path the States choose, it’s important to note that health care reform is a multiyear effort, and that revenue from health insurance exchanges will not reach mature levels until fiscal 2015 or 2016. The Supreme Court ruling also gives States additional flexibility on the timing and scope of Medicaid expansion. So States are carefully studying the economic impacts of Medicaid expansion. With 100% Federal funding, initially decreasing to 90% in later years, States may have a hard time turning down Federal dollars for services and programs that they currently fund largely from their own budgets. States must also consider how hospitals who handle lower disproportionate hospital share, or DISH payments, for uninsured individuals without the additional coverage from Medicaid. And there’s been substantial discussions on how Medicaid expansion can benefit local economies through job creation and health services industry. However, a recent GAO survey of State Budget Directors highlights concerns that the technology administrative cost of Medicaid expansion would outweigh prospective savings for States in the near term. Some States are waiting for the November elections, while others are requesting additional flexibility through the waiver process, such as block grants or unrestricted lump sum payments. So we recognize that not every State will proceed with Medicaid expansion and those that do may implement at different points in time. Following the Supreme Court ruling, the Congressional budget office revised their coverage expectations of their health care reform. CBO has now stated that the direction of States remains uncertain and now estimates that 11 million new enrollees will come in by 2022, down 35% from their original estimate of 17 million. Based on this estimated 35% reduction, we have modified our expectations for the annual total addressable market under Medicaid expansion accordingly. We now expect this addressable market to range between $130 million and $200 million annually. The low end of the range establishes a floor if certain States never expand Medicaid. However, we think that the more likely scenario is that over time many States will ultimately elect to expand their Medicaid programs over the coming years. As a result of the affordable Care Act's enhanced outreach in streamline eligibility rules and systems, most Medicaid programs, even those in the non-expansion States will likely experience increased enrollments of currently eligible individuals. This is often referred to as the welcome mat or the woodwork effect. So moving forward, we continue to expect that the States will seek multiple paths to drive efficiencies and contain costs including shifting Medicaid populations into managed care. California is one State that is taking a number of steps to increase efficiencies and manage costs. The State has a plan in motion to shift Medi-Cal/Medicaid populations from additional counties into managed care beginning in mid-2013. The State also plans to move Medicare benefits for its dual-eligibles in Medi-Cal, and we are in the early planning stages to support the States on both of these efforts. Under the 2 initiatives, the State estimates savings of approximately $1.7 billion by the end of 2014. Additionally, California’s fiscal 2013 budget includes an initiative to move the children served by the healthy family’s CHIP program into Medi-Cal. The transition is currently expected to begin no earlier than January 2013, will be done in multiple phases and is expected to last a full year. We are working closely with the Managed Risk Medical Insurance Board and the Department of Health Care Services on how we can best support the transition planning, design and implementation activities. We are in active discussions with our California clients and we believe we may likely retain several of the operational functions we perform in the CHIP program today. The program generated just over $50 million in revenue in fiscal 2011 since the shift from Healthy Families in the Medi-Cal won’t be a one-to-one revenue match; we know revenue will be lower. But at this point in time, we cannot speculate on how much until we finalize the scope of work that we will likely to continue to perform. New Hampshire is another State that’s moving individuals into managed care in response to the increased Medicaid expenditure and the need to improve services to beneficiaries. MAXIMUS is one of small but strategic contract with the State to operate a temporary call center to assist Medicaid participants with the self-selection and enrollment into managed care plans. We are pleased to develop relationships and serve the Medicaid population in a new state. Turning now to our Federal operations. We are very much on track with our expansion strategy. As we mentioned previously, we are enhancing our current offerings and looking at new agencies and adjacent markets where we can apply our core competencies. In contrast to the defense contracting market, we see promising new emerging opportunities in the health and human services space. Our sales pipeline for longer term Federal opportunities has grown significantly over the last 18 months and we have successfully added 7 new government-wide acquisition contracts, or what is referred to as GWACs, to our available contracting vehicles. And we recently won a CMS duals program assessment contract which is small, but strategic in our swim lane. The progress of our Federal services team is sowing the seeds for growth for fiscal 2013 and beyond. Finally, wrapping up our domestic update with human services. The integration of PSI is moving forward as planned. The additional resources we’ve picked up, including top flight proposals and solution teams, are a tremendous assets to our business development efforts. Let me share a couple of examples, MAXIMUS recently started work on a new child support services project in Missouri, under a 3-year, $5.7 million contract, which also carries an additional 3 option years thereafter. We’ve also expanded our geographic presence with a one-year $2 million workforce services contract in South Carolina for the jobs upfront Mean More Pay, or JUMMP program. This program has four additional one-year option periods following the base contract. Moving now to our international operations. I just returned from a visit to U.K. where I had the pleasure of meeting with the team. I am pleased that overall the program operations remain on track and as David noted, we still expect the contract to breakeven during the fourth quarter, setting as on the right path for fiscal 2013. As you know, the economy continues to be a challenge for the U.K. and the work program has received both positive and negative media attention. However, the government and MAXIMUS both remain committed to the success of this important welfare reform initiative. We also have good news out of Australia to share this morning. We were recently awarded a contract with a new client, the Department of Immigration and Citizenship. The 20-month contract has an estimated value between $15 million and $20 million depending on the specific client volumes and has a 12-month extension option. This new work should more than offset a couple of short-term initiatives that were completed earlier this year. Under this new award, MAXIMUS will provide client support and independent observer services for the young, unaccompanied asylum seeker and refugees arriving in Australia. MAXIMUS is excited to be delivering these very important support services for the Department of Immigration and Citizenship to clients originating from countries around the world. And finally, we have a very exciting development in the expansion of our global operations. MAXIMUS has been selected to operate a pilot program to provide assistance to job seekers in Saudi Arabia. The contract was signed in June and operations went live last week. The program is expected to provide 15 months of revenue in the range of $12 million to $15 million. MAXIMUS is serving job seekers through 5 sites, providing case management support and addressing barriers to employment. Each site has a business development officer to develop and maintain relationships with employers and local industries. As we’ve mentioned before, governments around the world face similar challenges with social issues and we are pleased to expand our core service offerings to a promising new geography. Moving on to new awards in the sales pipeline. At August 3, fiscal year-to-date signed contract wins totaled $1.2 billion, and new contracts pending are those that are awarded but unsigned, totaled $185.8 million. Our pipeline of total sales opportunities is at record levels of $3.4 billion at August 3. Most notably, of the $3.4 billion in total pipeline, we have submitted proposals totaling $1.7 billion of contract value that we are awaiting decision on. The overall sales pipeline represents many growth opportunities across both segments and all geographies. As a reminder, investors should expect routine fluctuations between the pipeline and new sales categories. These shifts are driven by the different stages in the procurement process as well as the timing of when contracts are awarded and ultimately signed. In closing, I am pleased with our progress on our short term goals to grow the business domestically; the integration of PSI continues to go well. We signed our first health insurance exchange contract and we are on our way to winning our fair share of health care reform work. And we are making very substantial progress gaining more traction in our Federal operations. Internationally, we continue to expand the global footprint of our workforce services operations with a new pilot program in Saudi Arabia and a new population in Australia. And our U.K. contract remains on track to achieve breakeven status before the end of the fiscal year. With increased EPS guidance for the remainder of fiscal 2012, fiscal year 2013 is shaping up to be great year as the results of the full year’s contribution from PSI, our profitable contract in the U.K. and the many domestic and global opportunities on the horizon. And with that, let’s open it up for questions. Operator?

[Operator instructions] Our first question comes from the line of Charlie Strauzer with CJS Securities.

Rich, can you expand a little bit more on this growing pipeline of opportunities? It’s a pretty big number and obviously you said it’s pretty broad based across the board. Are there any particularly large single opportunities that have been released from an RFP standpoint currently? And also, if you look at it from opportunities in the new Obamacare-related field, are there any in there as well?

Glad to do that, Charlie. I think you’re right. We’re very pleased with the sequential increase in what our, what we call, total pipeline opportunities. It increased to approximately $3.4 billion at the end of the third quarter 2012. But when you look at the growth, the sequential increase, one, it’s been RFP’s tracking. The other category is in proposals pending, and I’ll speak a little bit more to the proposals pending because that’s a little closer in terms of reality. The RFP’s tracking, as you know, tend to be longer term in nature. So I'll just talk a little bit about what’s happening to that increase in proposals pending to the $1.7 billion number. When we look at the $1.7 billion, we’re pleased to see that by far, the lion's share of it relates to new work as opposed to rebids, and in fact, of the $1.7 billion, about $400 million relates to rebids. That leaves $1.3 billion that’s related to new work and when we look at that, it’s interesting to note, about $335 million is international and the remaining approximate $1 billion is domestic and of the domestic component, a good portion of it is related or sparked by ACA, but less than half of it sparked by ACA. So I’m really pleased to see that the growth is not only across segments, the opportunities is not only across segments and across geographies, it’s really across the entire business and that’s quite pleasing.

Our next question comes from the line of Brian Gesuale of Raymond James.

Pipeline looks terrific. Nice job on the quarter. Wondering if you could give us a little bit of insight on how the U.K. losses have been progressing over the last couple of quarters in that path towards break even next quarter.

Glad to do that, Brian, and thanks for commenting on our pipeline and thanks for the comment on the quarter. On the U.K., while we don’t disclose precise revenue and loss by quarter information, it’s pretty much tracking to where we expected which it delivered a loss in the June quarter, and when we track the underlying metrics, Brian, in terms of fast forwarding the impacts of the attachments in the placements in the outcomes, we’re landing pretty much where we expected to be on our revised guidance. I think last quarter we provided some revised guidance on the U.K. Program based upon where the metrics have been tracking. So pretty much on board. It delivered a loss this quarter and we’re planning and pushing forward to get it towards break even during this fourth quarter, and obviously the plan is to set the stage for a growth and profitable fiscal ’13 on that project.

Our next question comes from the line of Brian Kinstlinger with Sidoti & Company.

The question I had was you lay out 20 states that are positioned for exchanges, and then I think 24 to 30 that are positioned for FFE. I’m wondering, first of all those 20 states, how many are states in which MAXIMUS handles enrollments for Medicaid? And then of the 24 to 30, if you can just explain how that’s going to be run. Are each of the 24 to 30 going to be operated separately under the federal system? Or will there be one program run by an operator for that entire process?

Brian, first that’s a 2-part question, so to break it apart and then ask Bruce Caswell to respond to the 2 questions. You’re asking of the roughly 20 that we think will have their own exchange, how many are MAXIMUS clients and then of the 24 to 30 that will go the federal route, how will all of that work? What will they do, how will they proceed? The latter part is a very in-depth question. As you can imagine, you’ve got lots of federal resources that are trying to answer that question, but I’m going to ask Bruce Caswell to take a crack at it.

Sure. I’d be happy to. I think, Brian, one way to also look at the states is, as we mentioned, a subset of those 20 include 12 that have affirmatively declared to sectors [indiscernible] that are intend to run a state-based exchange and of those 12, 6 are existing MAXIMUS clients in terms of our Medicaid managed care enrollment broker services and/or the services we provide to streamline the eligibility and enrollment process for Medicaid and chip programs. So 50% of that subset. And then within the broader 20, I’d say the ratio relatively holds. So you’d find, I’m going to say 40% to 50% of that group being existing MAXIMUS clients. Turning to the second question of how the federal model will proceed, we believe it’s likely that the federal government s it has in the past will look to work a combination of leveraging existing procurement vehicles that they have in place that maybe have headroom in them or the ability to be expanded to accommodate the additional services needed to support the exchange. And secondly, a combination of new procurements. Its’ likely that the work will be segmented in such a manner as it is performed at the state level where you could see call center services being separated from the eligibility and enrollment, if you will, back office administrative services. So we’re ensuring that we’re well positioned for either path and to support the multiple procurement strategy that we think is the likely outcome.

Our next question comes from the line of Scott Green with Bank of America Merrill Lynch.

Could you elaborate on the Saudi Arabia market? So any initial indication of how the government might evaluate results? Is this a fee-for-service or results-oriented pilot? And then how many other vendors are participating?

Great question. As you can appreciate, we’re very excited about the Saudi Arabian opportunity, and I’ll share with you some of the details. I think the number one, I think, theme here is that obviously this is a country that’s sophisticated that has -- and we’ve said all along that there are many countries on this globe that have similar social issues. They very much are moving forward to improve the employment situation of Saudi nationals. You can go research and see that they have a very sophisticated program to achieve just that. MAXIMUS, I believe, is the third vendor to help in this particular situation and it’s a pilot program. So in this pilot, we will have 5 sites in total. To date we have launched, and I think last week we launched 3 sites in 3 separate cities. We have 2 sites that remain in separate cities. We plan that they will go live next week. We have had a core group of our individuals who’ve been on the ground for the last 6 months working with the government to understand the goals of the government, what they hope to achieve and defining the structure of the pilot program and once we were awarded the work, we deployed certain experts from our Australian operations and U.S. operations really to get the program started to help with the build out of the infrastructure, recruiting staff, training staff. We have done and plan to do a majority of the work by hiring locally, and we plan that this pilot will run about 15 months and there are some performance objectives associated with it. I would tell you the structure, the pay points are, some are fixed in nature, some are variable in nature type of outcomes. But I also want to emphasize, and this is very important it being a pilot, that it not be a back end-loaded contract structure similar to the U.K. It’s not structured nearly in that fashion. So we’re excited about it. We’ll see how it develops over the longer term. Our belief is if the results of the pilot are satisfactory, that the government has intent to move the program across the entire nation. And so we’re very excited about this opportunity albeit an early pilot program.

All right. Great. That’s very helpful. Is there any preliminary indication for what a potential expansion could look like in terms of addressable market, or it’s still too early?

It’s really still too early to put anything out there. But it would be sizeable, but again it depends upon a successful pilot. We have to go through that process first.

Our next question comes from the line of Frank Sparacino with First Analysis.

Maybe a question on the U.K. Seems like the front end, I guess, the process seems to be working well in terms of caseload volume. So just curious on sort of the back end, what some of the issues are? And then just any thoughts around the economy there, unemployment rates, et cetera as you look out over the next 6 to 12 months.

Yes. I think the way we look at it, Frank, is that when you study the structure of the program, it’s very much a program where future results are a function of prior accomplishments, and if you follow it through, I’ll say the journey of an unemployed individual through employment, we end up with pay points that are based upon prior accomplishments. So, on the front end we have referrals from the government. We attach a certain percentage of those and just to make the point, not all of the individuals that are referred to us by the government show up for an interview. We will reach out to 100% of those individuals, but not all of those individuals show up. The forecasted response rate of those individuals when we first modeled the program was in the vicinity of 95%. So as you go through and you experience reality with the program, it will vary from that particular metric, and I think in this case we’re pretty close to that original metric. And the next step in the process is that we find the individual an opportunity. We place the individual. In this case, placement is not a pay point, but it’s a very, very important milestone in the whole process because the placement is the most important occurrence before you reach an outcome, and an outcome in this case is defined to be somebody be employed for 13 weeks in the case of hard to serve, 26 weeks in the case of other individuals. And so when we monitor these various progress points, we’re fine as it relates to the number of referrals. We’re fine as it relates to the acceptances of the referral. The placements I think are spot on. The challenge is getting individuals to 13 and 26 weeks. We believe the main -- and that’s not where we initially modeled it to be. It’s slightly behind, but that’s basically what’s assumed in our revised guidance that it’s out there. I think the number one thing is that the economy is a bit softer than we initially modeled and there is a slight correlation. There is a correlation between our ability to find somebody a job and keep them in that job in the economy. So I think the number one driver in all of this has been a softer U.K. economy. That being said, again we factored all of this into our current guidance that’s out there and we continue to monitor it very, very closely and we continue to work with our government client to see what can be done to improve those performance metrics and exceed our original expectations in our current guidance. Does that help, Frank?

It does.

[operator instructions] Our next question comes from the line of Charlie Strauzer with CJS Securities.

Just a follow-up. If you could perhaps give us a sense of what the organic growth was for each of the segments in the quarter and also how should we think about the margins going into Q4 by segment? Obviously you had the benefit from the change orders. So how should we think of a more normalized margin?

All right, Charlie. I’m going to recap your question and I’m going to ask Dave Walker to pick them up. But I think you’ve got a 2-part question. One is, what are we seeing for organic growth from a segment perspective; and what do we think is going to happen in Q4 from a margin perspective? Dave Walker?

Sure, Charlie. The organic growth in health was 13.9%. Human services actually declined 15% but that’s not a surprise because of the U.K. year-over-year. So that was expected within overall organic growth rate of about 2%. And we were certainly suffering from currency headwinds in the quarter. It was a strong quarter last year. I think we lost about $3.2 million roughly in currency year-over-year, mainly driven by Australia.

Okay. And margins for the fourth quarter.

By segment.

Oh, I think it’s consistent with our expectations.

I think, Charlie, overall from a consolidated perspective, we’re expecting that we’re going to end up in a 12% to 13% range in the fourth quarter and I actually think it’s going to be a biased a bit towards human services which I think will have a stronger operating margin.

Got it, great. And what would drive that in Q4 versus where we’re…?

Seasonality. Seasonality becomes a big factor.

Our next question comes from the line of Brian Kinstlinger with Sidoti & Company.

Great. I want to dig into the proposals outstanding a little bit more. I think that was the most important number that came out. So on the $335 million roughly of international work, I’m interested to hear how much of that is welfare to work and maybe some of the large deals we talk about the Analyst Day almost -- probably about a year ago now or more and if any of those have materialized into RFP’s. And then on the $1 billion of ACA -- sorry, $1 billion of which just a little bit under half was ACA, are you looking to bid more on the development side, the IT side? Or I know it’s not your main focus. Is it being handful more proposals still for you even though it’s not your main focus? Maybe give us a sense of that.

Okay. Good question. So the 2 questions to frame them are, of the $335 million approximate of the $1.3 billion in new work, and we’re talking about from a proposal submitted. Right, Brian?

Yes.

Of that $335 million that we highlighted as international, about half of it is welfare to work. And again, the opportunities are U.S. domestic, Canada and opportunities in Australia. So I think it’s spread across the geographic board. I don’t recall the particular items we presented last June. But I think some of them certainly are new, and I think they’re in line with the trend that we laid out at that particular point in time where these countries just have the same compelling reason to move forward. I think that’s the key takeaway is that we’re actually seeing these governments take a hard look at the existing programs with a compelling need to reengineer them and they’re leaning towards firms like MAXIMUS to partner with. I think that’s the overall take away internationally in part domestic. Your second question was, of the $1 billion domestic, and I said less than half is ACA sparked, but do we want to do more development work? The answer is, not really. Our principle interest is in the business process services side. We’ve moved forward with this one opportunity feeling quite comfortable with our partners and our capability and also the fact that it was one of the first out there. So we really, really wanted to be a player early on, Brian.

If I can sneak a second on the international just to be clear, on the Analyst Day you mentioned 5 countries in Europe and I won’t name them specifically so competitors don’t have to hear that, but you mentioned 5 countries that are thinking about programs you’re working with, you’re in discussions with. So Europe, I think is the main focus, not Canada. I’m thinking about Australia for welfare to work. Are there any pilots getting close to beginning where it could lead to something large, like Saudi Arabia but more on Europe?

Yes. I think it's -- I don’t think it’s concentrated in Europe. We continue to watch opportunities in Europe and it’s interesting when what we are experiencing as it relates to new countries stepping up and becoming an opportunity, it can flex from quarter to quarter. You may have a particular country that is very, very interested in moving forward and then they hit a brick wall as it relates to their funding or their politics or whatever reasons might be, and then you’ll have another country that will suddenly -- which we graded as perhaps a tier two opportunity, become a tier one opportunity. So I would say even within the European Union, we do see a lot of flux quarter to quarter in terms of who’s likely to move forward. I think that the 5 countries that were previously mentioned, we still see a level of interest. But I would say that the Saudi opportunity was not one that was high in our list at that point in time and moved forward quite quickly.

Our next question comes from the line of Frank Sparacino with First Analysis.

Just wanted to follow up on the GWACs, which I'm not too familiar with. Just curious as to the type of contracts that you’re getting involved with there.

Bruce, can you respond to that? Bruce Caswell, our federal operations reports to Bruce. So he’s been very, very active and involved in this area.

Absolutely. Sure. I think that it’s fair to characterize these as broad contracts, platforms that provide the ability to get our services into the government through a number of means, whether it’s the traditional full solutions that we provide in the areas of contact centers and document management and program integrity and appeals and so forth, or on a more, call it, staff-on basis where we’re providing specific labor categories and labor elements to the government either as a primer contractor or a subcontractor. So the GWACs that we’ve been awarded include positions as a prime contractor on broad government procurement vehicles as well as a sub to other companies on vehicles that are agency-specific but have the ability for other agencies to pull through procurements. So it’s really a -- it's a great opportunity for us to, I think, execute on our strategy which has been to broaden our reach into selected federal agencies and pull through the full capabilities of the company. These vehicles are really a precondition or a platform element of that strategy.

Exactly. I would emphasize that in the federal space, that these vehicles are GWACs are akin to a hunting license. It really is necessary if you’re really going to participate in federal work that you pursue the right vehicles, and as you can appreciate, we’re very much focused on civil health and human services-related spaces. So we’re really pleased to have picked up these new vehicles. It’s very, very important to our concentration. And the other point I would mention is that we still see very meaningful growth opportunities for MAXIMUS, unlike what’s happening in other government space, most notably intelligence and defense, which I think they’re more of a contracting mode.

Our next question comes from Brian Kinstlinger with Sidoti & Company.

That was quick. Okay, so I’m going to ask 2 quick ones and I’ll be through. The first one is California. You mentioned you can’t, and I understand it’s difficult to understand by folding in Healthy Families into Medi-Cal what that would cost you in terms of revenue. I saw an article that suggested California wants to save $13 million, which isn’t a huge number on that, but that’s what they want to save. What I think all of that is MAXIMUS or there are other support services that go into that? And then my second question, it’s completely unrelated. The $2 million of costs you expect related to the acquisition in the fourth quarter, is that severance or what are the other charges that we would see for an additional quarter?

Let’s take the last one first. Dave Walker, I think, can you respond to that, the $2 million in cost?

Sure. There was a big chunk that is severance. That’s right. There are some termination fees of their payroll vendor, things like that that’s in there. And I think there’s some branding marketing cost.

The second question was the $13 million that you read about California’s targeted savings on this California Healthy Families program. Bruce?

Sure. The majority of the savings that are forecasted are really in provider reimbursements because the physicians are paid at a lower rate by the plans under Medi-Cal than they are under Healthy Families. So that’s the key driver to the savings number.

There are no further questions at this time. I would like now end the Q&A and this concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.