Maximus, Inc. (MMS) Q4 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the MAXIMUS Fiscal 2015 Fourth Quarter and Year End Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Lisa Miles, Senior Vice President of Investor Relations for MAXIMUS. Thank you, Ms. Miles, you may begin.

Good morning. And thanks for joining us. With me today is Rich Montoni, CEO; Bruce Caswell, President; and Rick Nadeau, CFO. Beginning this quarter we are modifying the way we speak to our financial results. In the interest of brevity we will cover the financial trends and move away from repeating all the numbers on the income statement. All the pertinent information can be found in our press release and the detailed presentation that we provide on the Investor Relations homepage of the MAXIMUS website each quarter. Today's financial results are shown in three segments and today's press release also includes a supplemental table that details financial results for all four quarters of fiscal 2015 under the new segment structure. I would like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions and actual events and results may differ materially as a result of risks we face including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the summary of these risks in our most recent 10-K filed with the SEC. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances. Today's presentation may contain non-GAAP financial information. Management uses this information in its internal analysis of results and believes that this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period to period comparisons. For reconciliation of the non-GAAP measures presented in this document, please view the company's most recent quarterly earnings press release. And with that, I'll turn the call over to Rick.

Thanks, Lisa. As we get started this morning, I wanted to first address the reason for our 2016 earnings guidance revision. The revision is a result of a single program, the U.K. Health Assessment Advisory Service, which is in start-up. While we've made substantial progress in effecting positive change for the program, the ramp-up to contract volume targets has been slower than originally planned. As a result we now expect that fiscal 2016 diluted earnings per share will range between $2.40 and $2.70. We have put forth fiscal 2016 earnings guidance that includes a wide range of possible outcomes under this program. The lower end of the range assumes that we continue to face challenges related to achieving our contract volume targets. The upper end of the range contemplates improved performance and increased volume output. The management team is certainly focused on delivering results that move us towards the upper end of this range. Both Rich and I, will go into greater detail on the U.K. assessment contract throughout the call. However, as it relates to our longer term three to five year outlook we firmly believe that the overall macro trends for our business remain intact. We continue to see opportunities for our core services across all of our segments and geographies. Governments around the world continue to seek ways to run more effectively and efficiently, while at the same time dealing with rising caseloads, changing demographics and unsustainable social programs spend. Through a combination of short-term and long-term opportunities we see continued growth for years to come. Let me start with results for the full year. We had another solid year with double-digit top and bottom line growth. Revenue for fiscal 2015 increased 23% over last year. Of this growth 19% was organic, primarily from the Health and Federal Services segments and 8% was driven by the acquisitions of Acentia and Remploy. Year-over-year top line growth was offset by $60 million, a 4% decline due to the unfavorable effects of foreign currency. On a constant currency basis revenue would have increased 27% year-over-year. We wanted to be sure to point out that our operating margins did benefit from a reduction to the company's 2015 management cash bonus plan, which reduced SG&A in the fourth quarter and the full year. From an accounting perspective, the cash bonus accrues throughout the year, based on how the company performs against its targets. The lower cash bonus payments were largely due to the slow ramp of the U.K. Assessment contract and our need to drive future improvements. The adjustment was proportionately allocated across the three segments and improved the full year operating margin by 30 basis points. As a result, the operating margin for fiscal 2015 was 12.4%. As expected operating margin for the full year was tempered by new programs in start-up and the decrease in volumes in our U.S. Federal Medicare Appeals business, which were highly accretive. The fiscal 2015 net income attributable to MAXIMUS increased 8% and GAAP diluted earnings per share increased 11%, to $2.35 compared to fiscal 2014. This included $0.04 of acquisition related expenses. Excluding the acquisition related expenses, adjusted diluted earnings per share for fiscal year 2015 increased 13% to $2.39. Moving on to results for the fourth quarter. Revenue grew 33% compared to last year, of which 22% was attributable to organic growth and 16% was part of the acquisitions of Acentia and Remploy. This was offset by approximately $21 million, a 5% decline due to unfavorable foreign currency exchange rates. On a constant currency basis, total revenue would have grown 38%. Revenue in the fourth quarter was lower than expected principally due to the U.K. Assessment contract. The bonus adjustment provided operating margin improvement in the fourth quarter of approximately 100 basis points. As a result fourth quarter operating margin was 10.6%. As expected it was tempered by new programs and start-up including jobactive in Australia and the Health Assessment Advisory service the U.K. For the fourth quarter of fiscal year 2015 net income attributable to MAXIMUS totaled $35.4 million. The tax rate was 40.4%, which computes to diluted earnings per share of $0.53. Now I will speak to segment results starting with Health Services. The Health segment delivered another solid year of strong top line growth, driven by new work and the expansion of existing contracts. All growth in this segment was organic. Revenue grew 29% for the fourth quarter and was up 22% for the full year compared to the same period in fiscal 2014. Operating margin was 10.3% for the quarter and 13.9% for the full year. As expected operating margins were tempered by new programs and start-up, most notably the U.K. Assessment contract. For fiscal year 2015, the U.K. Assessment contract delivered approximately $105 million in revenue and an operating loss of $4 million. Revenue was short of our initial projected range of $140 million to $165 million. The shortfall has two primary elements. First, our staffing levels are running lower than our plan and therefore [billable] costs are lower than forecast. As a result revenue and operating income are lower on the cost reimbursable piece of the contract. Second, we're not achieving certain performance metrics, most notably volume targets. And as a result we're not earning the performance-based incentive fees. We are firmly committed to getting the program on track and we have made significant progress in bringing positive improvements to the overall service. Rich will talk about this in greater detail in his prepared remarks. As we mentioned in our Form 8-K filing last week, we have decided to breakout our U.S. Federal Services business into a third reporting segment. We believe this will be useful to investors as it provides additional visibility to our overall financial results. The U.S. Federal Services segment had a solid year. On the top line fourth quarter revenues increased 70% over the prior year period, of which 56% is attributable to Acentia. For fiscal year 2015, revenue grew 47% compared to last year of which 30% was attributable to the Acentia acquisition and 17% was organic growth from new work and the expansion of existing contracts. Operating margin for the fourth quarter was 13.5% and for fiscal year 2015, 11.8%. Operating margins for the fourth quarter and full year were impacted by the expected decline in the Medicare appeals volumes, which were highly accretive. We had steady improvements throughout the fiscal year from the ramp-up of the Department of Education contract, which remains on track to break even in fiscal 2016. As a result this helped year-over-year comparisons in the fourth quarter of 2015. Let me turn to financial results for the Human Services segment. Revenue increased 12% in the fourth quarter and 8% for fiscal year 2015, compared to the prior-year periods. Top line increases were driven by the acquisition of Remploy and solid organic growth, which was offset by the unfavorable impact from foreign currency translations. This segment was the most adversely impacted by foreign currency exchange rates, which reduced full year revenue by approximately $37 million. On a constant currency basis, revenues would have grown 23% in the fourth quarter and 16% for the fourth year of fiscal 2015. Operating margin was 10.4% for the fourth quarter and 12.3% for the full fiscal year. Margin expansion was principally due to solid delivery across North America, United Kingdom and Saudi Arabia. This was offset by the expected start-up losses in the jobactive contract in Australia, which launched on July 1, 2015. Let me move on to discuss cash flow and balance sheet items. Days sales outstanding were 67 days for the fourth quarter, which is in line with our targeted range of 65 to 80 days. For the fourth quarter of fiscal 2015, cash provided by operating activities totaled $25.2 million, with negative free cash flow of $6.7 million. For the full fiscal year, cash provided by operating activities total $206.2 million with free cash flow of $101.1 million. Our balance sheet remains healthy and we ended the fiscal year with cash and cash equivalents of $74.7 million, most of which was outside the United States. Our long-term cash deployment priorities remain unchanged and include dividends, opportunistic share buybacks, working capital investments to support the growth in the business and acquisitions. During the fourth quarter we repurchased 865,000 shares of MAXIMUS common stock for $52.2 million. This brings our total repurchases for fiscal 2015 to approximately 1.6 million shares for $82.8 million. We had a weighted average price of $51.11 for all repurchases in fiscal 2015. Subsequent to quarter close, we repurchased approximately 103,000 shares for an additional $6.1 million with a weighted average price of $59.41. We presently have an estimated $162.5 million remaining under the Board authorized program. With the generation of free cash flow and our available line of credit, we believe we can sufficiently address our cash needs in 2016. We currently expect that spending on capital expenditures will decrease significantly in fiscal year 2016. We remain committed to sensible and practical uses of cash in order to best position and grow the business. Most importantly our priority remains squarely focused on strengthening our core business for long-term growth. Let me complete the guidance discussion. Today we're establishing formal guidance for fiscal 2016. We continue to expect fiscal year 2016 revenue to range between $2.4 billion and $2.5 billion driven by growth across all segments, predominantly in Health and U.S. Federal Services and to a lesser extent the Human Services segment. At September 30, 2015, we had $4.6 billion in backlog. Based on the midpoint of our 2016 revenue guidance, we estimate that approximately 93% of our forecasted fiscal year 2016 revenue is already in the form of backlog or option periods. On the bottom line we now expect diluted earnings per share to range between $2.40 and $2.70. This is expected to be more back end loaded. Right now we anticipate that for the first quarter of fiscal year 2016, diluted earnings per share will be lower compared to the fourth quarter of fiscal year 2015, due to programs in the start-up phase. Let me share some additional data points on our formal fiscal year 2016 guidance. First, the number one reason why we reduced our fiscal year 2016 earnings guidance is the slower ramp and resulting lower income contribution of the U.K. Assessment contract. As I mentioned earlier, our guidance assumes a wide range of potential outcomes on this contract and as a reminder this contract does have a stop-loss provision that restricts our loss to 5% of allowable costs plus any costs incurred that are not billable under the contract in any contract year. Our analyses indicate that it is unlikely that we will trigger the stop-loss in either contract year one which ends February 29, 2016 or contract year two. Second, we still have other programs in start-up that will continue to have tempering impact in fiscal year 2016. This includes the Australian jobactive, the U.S. Department of Education and the U.K. Fit for Work contracts. Third, our guidance is always subject to fluctuations in foreign currency exchange rates. And lastly, we are estimating that the tax rate for fiscal year 2016 will range between 37% and 39%. The final tax rate will ultimately depend on the mix of operating income contribution from our various tax jurisdictions. So, when you add it all up we're forecasting revenue growth between 14% and 19% and GAAP basis earnings growth between 2% and 15% for fiscal 2016. We expect cash provided by operating activities to be in the range of $200 million to $230 million for fiscal year 2016 and we expect free cash flow to range between $130 million and $160 million. Thanks for your continued interest and now I'll turn the call over to Rich.

Thank you, Rick and good morning, everyone. While the challenges we faced with the U.K. Assessment contract resulted in reduced earnings outlook for fiscal year 2016, it is important to remember that this is a single contract in our global portfolio. Over the past 12 months we've introduced several new growth platforms that strengthen our position for future opportunities in key markets. And the macro trends that drive demand for our services at the global level remain very favorable. In my comments this morning I will provide some additional insights on the U.K. Assessment contract. I will speak to the challenges we face today, what we're doing to address them and highlight some areas where we have already made solid improvements to the overall service. I will then give an update on the Acentia integration and our expectations for the third Affordable Care Act open enrollment period in the U.S. I will also update you on our sales awards and pipeline and I will close by sharing with you, my view on our commitment to deliver solid growth in fiscal 2016. Let me pick up where Rick left off and start with the U.K. Assessment contract. As a reminder, this is the contract where MAXIMUS is conducting assessments for individuals seeking certain disability benefits, according to the rules set down by the U.K. Parliament. The program faced significant criticism under the previous provider. When MAXIMUS took over the contract in March 2015, we acknowledged that it would take time to bring meaningful improvements to the program. You may recall that this is a hybrid contract that is predominantly cost reimbursable. However, it also has significant performance incentives with the largest being tied to volumes. While we have increased volumes during the start-up phase we are falling short at achieving the initial volume targets. Our ability to hit the volume targets is tied directly to three areas; the number of healthcare professionals that we recruit, the number that complete training and graduate and the productivity of these new recruits. In order to get the program better aligned with our contractual targets, we need to have the right number of qualified healthcare professionals, that goal hasn't changed. What has changed is the amount of time it is taking us to recruit, graduate and ramp-up the new staff. But we feel confident that over time we can achieve our goals. We have modified our forecasts to account for this slower-than-expected staffing ramp. In order to meet these, we believe that we will have staffing resources in place to meet volume demand and contractual targets by the end of summer 2016. Let me now walk you through the three main areas where we are aggressively working to address the challenges. The first area is recruitment. We launched a comprehensive recruitment campaign to ensure that we have a continued flow of qualified candidates in the appropriate locations. We've expanded our network of recruitment partners and enhanced our employee referral program. We implemented an advertising and social media campaign, launched a recruitment portal website and have been exhibiting at a number of recruitment fairs across the country. Through these efforts, we've seen a sizable uptick in the number of new recruits. The second area is improved training and support, which leads to better graduation rates. It's important to recognize that once hired, candidates must then complete rigorous training, pass a series of competency tests and graduate to become fully accredited. To increase the graduation rates we have some key initiatives underway. We have increased our engagement and coaching efforts with new candidates during the entire training period. This is already yielding results in keeping more candidates in the process. We are also working with those recruits who struggle with the initial competency test and are providing them with individualized training support. With this extra support, we expect that more candidates will successfully graduate to full accreditation. The third area is productivity. Once new staff begin performing assessments there's a learning curve and it may take between six and eight months for them to achieve full productivity levels. In the meantime we have efforts underway to increase productivity with our current workforce. We have optimized the work schedules of our staff and offered voluntary overtime incentives including weekend shifts to increase the number of assessments we can complete each day. This has a direct influence on our ability to reduce the significant backlog that we inherited at the time of contract takeover. We expect that the increased recruiting efforts supplemented by the enhanced training and optimization of our current workforce will help us to increase our productivity, meet volume targets and reduce wait times over the coming months. Over the past eight months we've already made significant progress and realized several early accomplishments that I would like to share. These demonstrate that over time we can bring about the necessary changes to put this program on the path to success. The first is addressing the current backlog. This is a top priority for the Department of Work & Pensions. At the time of contract takeover we inherited a significant caseload of more than 550,000 outstanding assessments. Today we have eliminated more than a third of that backlog. We are making concerted progress to continue to reduce the backlog of cases and shorten wait times. The second area of major progress is improved stakeholder engagement. We established a customer representative group more than 25 nonprofits and disability advocacy groups to bring them to the table. The group continues to provide us with practical feedback that we incorporate into our operations to effect positive change in such areas as clinical training, the assessment interview in our facilities and customer communications. The third area is an improved customer experience. We really have made substantial progress to help improve the engagement levels of all customers. We've refreshed and rolled out enhanced program engagement materials to help people better understand the assessment process and prepare for their appointment. These include a user-friendly website with enriched multimedia content. We are also working hand-in-hand with DWP to update customer [phasing] materials to make them easier to understand. We recently completed usability testing of the graph materials and 96% of testers reported positively on the materials. These changes go a long way to improving customer engagement. Last month we also launched our new help line to assist customers for completing their pre-assessment forms and provide practical support on the types of medical evidence that may be required. We are currently piloting text messaging as a means to prompt customers to complete certain tasks and to remind them of their upcoming appointments. A full nationwide rollout is planned in the coming weeks. All of these accomplishments have not gone unnoticed. During a public Work & Pensions elect committee meeting last night, several government officials praised our recruiting plan and our efforts to work through the backlog. These public remarks are confirmation of our effective working relationship with DWP and our belief that we are the right company to bring about improvements to this highly visible program. To put it all in perspective, we are making meaningful improvements in this on and upward trajectory. But the progress remains short of initial targets and hence original projections for operating income. This is a single contract with an operating income ramp that is now pushed to the right. As we continue to make strides forward this is not a matter of loss mitigation but rather on bringing the start-up to a mature operation level so as to deliver normalized operating income contribution and we've done this in many situations before. Let me explain. Start-ups are simply the nature of our business and new programs are the best avenue to create substantial long-term shareholder value. Growing pains are often normal during the early days of a new program and the pace at which start-up programs move to maturity should be difficult to predict. MAXIMUS has demonstrated results in managing challenging start-ups. If you have followed MAXIMUS long enough you may remember that we faced challenges on start-up programs in the past. Prime examples include our contracts in British Columbia and Texas. They took time, resources and a significant level of effort to implement the many changes needed to turn these programs around. They are now two of our flagship contracts that have delivered meaningful shareholder value over time. We still believe the U.K. Assessment contract will drive long-term significant shareholder value. It will just take longer than originally planned. Turning now to our U.S. Federal operations where we expanded our portfolio in fiscal 2015, with the acquisition of Acentia. Our integration efforts are nearly complete and as we mentioned last quarter we are seeing new prospects that combine business process outsourcing with technology solutions. The acquisition provides us with additional contract vehicles and access to new agencies. It opens up an entirely new set of opportunities for MAXIMUS. We won a small but strategic task order on a vehicle that we gained through the acquisition. The work is for physical and behavioral health assessment reviews for individuals placed on the disabled list from their current assignments. This work is for one branch of the military. The goal of the service is to either return individuals to their current duty, assign them to a new duty or assignment or allow them to leave the service. This new task order plays nicely into our continuum of existing assessments and appeal services. It's also positive confirmation of the role that the acquired contract vehicles would play in our longer term growth strategy for the Federal segment. And while the federal procurement process tends to be slow-moving we believe over the next few years we will start seeing formal opportunities where we can play a meaningful role as a service provider. Shifting now to our support of the Affordable Care Act in the U.S., the third open enrollment period or what we refer to as OE3, began last week and will run through January 31, 2016. While we are in the very early stages of OE3 we believe that ACA related revenue has largely stabilized into a relatively steady state. While the number of first-time enrollments are projected to be lower, we continue to support other ACA activities, such as completing redeterminations, answering tax related questions and managing certain components of consumer engagement. However as with any large-scale government program we also expect normal course fluctuations year in and year out as states prioritize in wide-ranging set of initiatives under ACA. Let's move onto new awards, pipeline and re-bids. Starting with new awards we finished fiscal 2015 with record annual signed contract awards of $3.4 billion. We also had an additional $149 million in new awarded but unsigned contracts at September 30, 2015. At September 30th, the sales pipeline remained healthy at $3.2 billion. As noted in the press release this includes the anticipated re-bid for the U.K. Work Program. This re-bid is not expected to be awarded until fiscal 2017, but the lengthy re-bid process is expected to begin in the spring. Overall both the short term pipeline and our longer-term outlook hold the broad mix of re-bids in new work representing opportunities in multiple geographies and all segments. Let's wrap up with re-bids. While the Texas Eligibility Support Services contract is still outstanding for fiscal 2015, we remain cautiously optimistic on the outcome. As we have previously stated fiscal 2016 will be a much lighter re-bid year. We have 10 contracts with a combined total contract value of approximately $170 million up for re-bid in fiscal 2016. In summary the management team is keenly focused on improving our performance on the U.K. Assessment contract and delivering results towards the upper end of our guidance range. We have our arms around the issues and have corrective action plans well underway. This is but one contract in our global portfolio and over the long-term we fully expect that this will provide solid returns to our shareholders. Most importantly the macro drivers remain intact and we are confident about the continued demand for our services for decades to come. MAXIMUS recently celebrated our 40th anniversary in September and I'd like to thank the more than 16,000 employees worldwide for their valuable contributions. Governments around the world have brought us in as a trusted partner to implement programs targeted at major reform efforts from welfare to work to managed care and health insurance exchanges to performance-based social reform efforts. We will continue to capitalize on opportunities that will grow the business and generate shareholder value. And with that let's open it up for questions. Operator?

[Operator Instructions] Our first question comes from the line of Brian Kinstlinger from Maxim Group. Please go ahead with your question.

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

Brian, good morning. This is Rich. And just to repeat the question so everybody understands it. And the connection is just fine Brian. Your question is what was assumed for revenue and earnings in our original preliminary guidance and the revised guidance which is at midpoint about $0.40 less what's behind that? Glad to respond to and I am going to ask Rick Nadeau to at least initially respond to that question, Brian.

Yes. Brian thank you. Our guidance is based on what we know today and reflects a wide range of probable outcomes. The lower end of the range assumes that we continue to face challenges on achieving our contract volume targets. In terms of revenue the lower end assumes approximately $230 million of revenue and a pretax operating loss of about $7 million. This is due to us not earning incentive fees as a result of us not hitting the volumes -- the volume targets. The middle of the range assumes breakeven operating income and then the upper end of the guidance range assumes higher levels of revenue and assumes that we're earning incentive fees tied to the performance targets, most notably the volume targets. The upper end contemplates $280 million of revenue approximately and an operating margin of approximately 7%. Brian, the management team is diligently focus to drive performance towards the upper end of the guidance range. You are correct. Our preliminary guidance did assume higher revenue and margins than is presently assumed in our formal guidance. The preliminary 2016 guidance assumed operating margin that was at the upper end of our targeted range of 10% to 15% of operating income that you talk about. Those estimates were based on early trends that we were experiencing in the first few months of the contract. Therefore assumed that we would be running at higher staffing levels and earning the incentive fees on the performance-based targets. Rich did you have anything to add to that.

Rick, I would add from a qualitative perspective and as you can imagine, Brian, the management team has spent a lot of time contemplating what the revised guidance should be and it does as you will note it reflects a range of probable outcomes. And our thinking when we set to this formal guidance was to provide a range. And the management team has a very high level of confidence in delivering within that range. I would also add that while not assured we believe that the upper end of the range is achievable and our goal clearly is to exceed the lower end of the range and the management team is determined to drive towards the upper end of that revised range. Next question please.

Our next question comes from the line of David Styblo from Jefferies. Please go ahead with your question.

Good morning. Thanks for the questions. I do want to [stand hot] for a second here. Just want to make sure I fully understand how to think about the move on the contracts here. Certainly as they push out to the right, Rich, I just want to make sure that I understand, after that, are we also talking about getting to the same full run rate earnings potential that you originally thought you could make on it or is there any touchdown on that over time?

Dave, that's a great question. So I think it's helpful for the listeners to envision a ramp curve. That's where we are with the start-up situation. Starting from basically a takeover of a prior operation from predecessor and ramping it up in terms of its authority to deliver monthly volumes and increased quality et cetera. And so I envision this ramp curve and it was a very aggressive ramp curve. We are climbing that ramp curve. We are making improvements. We are increasing but not at the same rate and really effectively the best vision is to envision that ramp curve pushing to the right. You hit upon a very meaningful aspect and that is at the end of the day will the mature level be at the same level originally anticipated and the answer is yes, definitely yes. We are not lowering the expected level of performance at the end of the day, or delivery or volume level or revenue level of this contract when it's mature.

So a follow-up to that. I think you said you had be, I think fully staffed in the summer of '16. I know obviously you don’t have '17 guidance out, but I if you had does that sort of insinuate that the '17 numbers wouldn't change, that you would be operating at that full run rate at that point or is there sort of the push-out to the right sort of impact fiscal year '17 as well?

Well I think what it means is that we expect that during our fiscal '16 we will reach full maturity level and that means for all of '17 that product would be operating at that level. And you touched upon a very important point in terms of, there will be a radical difference in '17's performance versus '16's performance for this set of contract.

Our next question comes from Stephen Lynch from Wells Fargo. Please go ahead with your question.

I was wondering if you could talk about the slower than expected ramp of staffing for the U.K. Assessment contract. Is that being driven by a shortage of qualified healthcare professionals in the market or if you could just talk about what factors causing the drag in recruiting that weak rate?

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

Thanks, Stephen and good morning. So fundamentally actually recruiting has improved quite a bit over the course of the last several months and actually is no longer kind of as significant a constraint as it was previously. So we feel like we've made very good progress in recruiting and we are now reaching a level of recruiting that from a rate perspective is an appropriate level. So the issue is really that we need to sustain that rate for the foreseeable future. We have done that through a number of methods by increasing our supply chain partners, focusing on the quality of the recruits that we are getting and so forth. So recruiting is less of constraint. The real issue that we've been facing is our ability to graduate those trainees that we bring into the system on a timely basis and ensure that we have a high level of graduation rate and obviously correspondingly low attrition. It might be helpful just to give you a sense of what the training program is like that folks have to go through. It is very extensive and rigorous, takes a long time about three months for them to complete. They have to go through multiple competency tests in that process. And these are healthcare professionals that for a good portion of their career, predating their joining us have been giving very direct care to folks in a clinical environment versus assessing very complex conditions many of which can fluctuate from day-to-day. So it's a very different type of work. It's a career shift for these folks, but they are by the most qualified people to serve as assessors. So while we can speak further about a number of the actions we have taken to address training and improve graduation rates, I did want to just clarify that recruitment we feel we made great progress on and it no longer represents the primary constraint to our success.

Thank you, Bruce.

Next question please.

Our next question comes from the line of Charlie Strauzer from CJS Securities. Please go ahead with your question.

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

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

And the quarter please.

And the quarter as well as the fiscal year. Rick?

I am sorry which order did you want them in, Health first?

Human and Federal actually.

Human and Federal, okay. So Federal on the top line grew 70%. 56% was attributable to -- this is fourth quarter. 56% was attributable to Acentia and for fiscal 2015 revenue grew 47% and 30% was attributable to Acentia and 17% from organic growth that was Federal. And then Human was 12% in the fourth quarter and 8% for the fiscal year, with the top line being driven by the acquisition of Remploy.

That the 12% number is the organic number or was that revenue?

I am sorry total revenue, 12% and 8%.

That was altered then by the transaction of Remploy.

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

Got it. Great. Okay thank you very much. It wasn't clear on that part. And then my second question is on Texas. I know you said bill pending, but is there any update on timing of that contract?

I think we expect to hear in this calendar year, probably December timeframe.

Great. Thank you very much.

Our next question comes from the line of Richard Close - Canaccord Genuity. Please go ahead with your question.

First I was wondering if you could comment, you mentioned first quarter will be sequentially down from the fourth quarter. How should we think about second quarter? Will that be flat year-over-year you thinking or just talk about maybe the quarterly progression?

Yes. This is Rick. We expect Q1 as we said will be lower compared to the fourth quarter. That is because we have many programs as you know in the start-up. Based on what we know today we would expect a steady level of earnings growth throughout the remainder of the year. We will grow throughout the year. However, I do want you to keep in mind that the timing of revenue and profit from things such as change orders and contract amendments can impact contract trends. So we can wind up doing work on a particular piece of work and having the charge go in one quarter and we cannot record the revenue because we have a change order that is pending and not signed, it would then wind up getting signed in the next quarter. So we can get some lumpiness that can result from that.

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

Yes. My follow-up would be on the Affordable Care Act. I think we were looking for about $300 million plus contribution from that in fiscal '15. Can you let us know where you stood for fiscal '15 on health reform and then how you are thinking about health reform contribution going forward? I think you said that you expect it to be stable, but just additional commentary in and around that please.

Be glad to do that, Rich. I will say that you are right, we did expect that we had have contribution in that vicinity actual in fiscal '15. I think fiscal '15 ended up being a very positive year from an Affordable Care Act perspective. There is just a lot of work that tends to come out of the woodworks. Bruce is going to comment in detail, but it feels like the table is set for -- again we think it's getting closer to steady-state. The nature of the work that we do seems to be changing. The issues seem to -- some issues, last year issues seem to be resolved, but new issues pop up. So Bruce please add to that.

Rich you are absolutely right. I guess what I would add is we will see normal course fluctuations with our state clients as they prioritize a wide-ranging set of initiatives that are in front of them. And as we talked about a little bit this year's open enrollment period for example has a new series of tax forms that individuals will be receiving if they received qualified coverage through Medicaid, now got the 1095B forms. A number of our clients will turn to us to help them with either the production or fielding of phone calls around those types of forms. We also for example in one of our larger contracts are helping a client, I'm sure followed the status of the co-ops and there are certain co-ops that have shutdown just prior to the open enrollment period. In one instance there is up to 200,000 individuals that need to transition into new plans on a very expeditious basis. So we will turn and surge and help to support our clients in those activities. So I would call that part of kind of normal course on volume fluctuations that we would see. But overall as Rich has indicated we feel like we have reached pretty much a steady-state stabilized operation with the Affordable Care Act.

Richard I am going to add one other very important point as it's more of a horizon observation. But when we first got into the Affordable Care Act and parsing how MAXIMUS might play a meaningful role, the industry is pretty much focused on the universality of healthcare. Let's get a rewind. We positively came and signed up into a healthcare program. We knew that the second and third chapter would move away from the universality of healthcare and that's still a lot of work every year to re-annual folks, but also towards quality and cost of healthcare and in particular one of the big drivers there would be long-term care for elderly individuals. We are starting to see that solidify in our marketplace. so I won't go into in-depth detail here but as you follow MAXIMUS I think you should expect that that's going to further solidifying, we will see more opportunities in that direction. Next question please.

Our next question comes from the line of Allen Klee from Sidoti. Please go ahead with your question.

I had two questions. One, if you could talk a little about what you said on the student loan contract and how that's going to go to breakeven potentially next year, but what the opportunity you see there is? And then second, just going back to the U.K. contract one more time to understand, for the people you hire, what are the kind of the competitive choices that you think they have that can also be an issue?

Those are good questions. Bruce would you take the first one, give us a little bit of background on the student loan project, what we do and then the breakeven concept in opportunities moving forward. Clearly the one thing that crosses my mind Allen, is that this contract is important to MAXIMUS because it's with an agency that we really have not done any work with them in the past, the Department of Education and it's a sizable opportunity. And as folks probably know it was in start-up last year and is moving towards maturity. Bruce, you want to comment on how we are doing there?

I will begin and then actually turn it to Rick a little bit. But as a reminder the scope of the work that we do there is we help students who have reached their default status but for whom their cases have not been turned over to private collection agencies and that's a large volume of students. I think the estimates nationally are there is at least 5 million individuals and that will be growing toward nearly 10 million individuals by 2020, that will need that kind of assistance in that program. We have been working with the Department to implement upgrades to the technology platform that supports the program and moving through as Rich as noted the normal course start-up of the program to turn it to a point where we are expected to breakeven in fiscal '16. And Rick would like to add to that.

Just to remember, it's a 10 year contract and Rich is right, it started and we were in start-up last year. This year we have made the progress that we expected and it should be approaching breakeven soon, in fact fiscal '16 and that it will turn profitable. As I said it's a full 10 year contract. Now Bruce did you want to talk about the healthcare professionals and what other things that compete for their…

This is a harsh question.

Yes it is. Let me begin by just talking about a little bit about the types of healthcare professionals that we recruit, because we recruit to a large degree nurses, individuals with physical therapy or PT or occupational therapy, OT, capabilities. And coming up in the future we will also be adding mental health nurses to the [indiscernible] folks that we will be able to recruit. A large proportion of individuals that we serve as you could imagine have mental health conditions that become part of that assessment process. So having folks with that clinical capability is quite important. Doctors also comprise a significant component, but I would characterize it more in the 10% to 15% range of the folks that we are recruiting. It is a very tight labor market in the United Kingdom and individuals have a lot of options whether it's to go to work for the National Health Service, whether it's to practice in a general practice mode, a GP type environment or whether it's to do additional work on other assessment related contracts that are out there. So furthermore the types of characteristics that individuals need to have and the capabilities kind of really preclude you from hiring folks directly out of medical school for example. These are individuals that need to have a level of experience and capability and really emotional intelligence and the ability to navigate through a very complex assessment process in a manner where it's a very conversational and kind of low anxiety experience for the claimant, all the while manipulating and documenting the evidence of that assessment in a fairly sophisticated IT tool. So that does narrow the type of field of folks that can be successful in the role. We've been working very hard however now to profile and understand what are the characteristics of folks that can be successful and have been successful in this role and feed that back into the recruiting process. And then finally I might say of the work that we do there are certain elements of the work like scrutinizing complex cases that come in on paper, determining what additional further medical evidence is needed, that can only be done by individuals once they've been in the program for up to maybe a year. So it's really this time that we are seeing now as our new recruits that we have hired through the summer come in and get established and get more experienced that we will start to see increases in productivity but meaningfully an increase in their capability to handle a wider range of cases.

Next question please.

Our next question comes from the line of Frank Sparacino - First Analysis. Please go ahead with your question.

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

Sure. Stop-loss provision in the contract restricts our loss to 5% of allowable costs on the contract plus any costs that we incurred that are not billable under the contract, in any contract here. Meaning it's a contract by contract to your calculation. This contract has been disclosed at being approximately £595 million, which translates to a little bit more than $900 million, which puts the stop-loss under the contract at something like $15 million per contractual year. When you factor in on billables, we ran $5.5 million of unbillables on this contract during fiscal year '15, so that we give you a stop-loss that's around $20 million per contract year. Now our analysis indicates that we believe it is remote that we will trigger that stop-loss in either contract year one which ends February 29, 2016 or contract year two.

Frank you have a follow-up?

No. Thank you.

Thanks, Frank.

You are welcome. Then next question please.

Our next question comes from the line of Brian Kinstlinger from Maxim Group. Please go ahead.

The first, is how many healthcare professionals do you have on that contract, the Assessments contract right now and what is the current -- what you will require in the follow-up. So undoubtedly my question is what will be the impacts to actually earnings and revenue you said in currency in the fourth quarter and how did it impact fiscal 2016 guidance and earnings? Please.

Brian, I think there are three questions there. Your first one [indiscernible] or that we need and then what's the current number of FTEs that we have and then I think your third question is really the impact of currency and the consolidated results. Rick will quickly the third answer one first and then we will come back to Bruce on question one and two.

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

As a matter of client confidentiality we can't actually speak to the detailed metrics in terms of the number of our healthcare professionals that we have on board. But I would remind you that we feel like we've made very significant progress in expanding our supply chain of qualified healthcare professionals. I spoke a moment ago about the breadth of that supply chain. We've added recruiting partners and others and we really feel like we put a very solid number of new hires into the pipeline and they are now coming through graduating and becoming productive. It's worth noting like we said, that it takes individuals up to six to eight months to reach full productivity after they graduate, that's why we are seeing that lag in the uptick of production. But we feel that we are at the right rate for recruiting and we feel that we just need to keep it going for the foreseeable future.

Thanks. Brian any follow-ups.

No. That's it. Thank you.

Next question please.

Our final question for today comes from the line of Stephen Lynch from Wells Fargo. Please go ahead.

I just wanted to ask about backlog coverage of guidance, it sounds like you have about 93% of fiscal '16 revenue guidance in the form of backlog or option periods. It looks like that's up from 90% coverage at this time last year going into fiscal '15. Can you maybe talk a little bit about what's driving the difference there or are there any difference in the underlying assumptions maybe a bigger cushion for FX impact or is this just normal course timing of contracts? That would be great. Thanks.

I'd say I am please that it's 93%. I have always felt that 90% seems to be -- given our business model Stephen, 90% seems to be a very comfortable number and frankly I think it's a great business model when you got 90% of next year's midpoint in the form of backlog. Glad to see it's 93%, but we didn't change the way we measure it. It's measured in the same fashion and I might even put the additional 3% which is nice in a category of statistically within the same range. So I think it's very comparable and very solid as we enter next year.

Stephen, do you have a follow-up to that?

No. That's it from me. Thank you.

Well that's the final question.

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

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