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…

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…

[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.