Maximus, Inc. (MMS)

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MAXIMUS Inc. (MMS)

F3Q09 Earnings Call

August 6, 2009 9:00 am ET

Executives

Lisa Miles – Vice President Investor Relations

Rich Montoni – Chief Executive Officer

David Walker – Chief Financial Officer

Analysts

Charles Strauzer – CJS Securities

Brian Kintslinger – Sidoti & Company

Jason Kupferberg – UBS

George Price – Stifel Nicolaus

Presentation

Operator

Welcome to MAXIMUX third quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the call over to Lisa Miles, Vice President Investor Relations.

Lisa Miles

I would like to point out that we have posted a presentation to our Web site 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 remember that such statements are only predictions and actual events or results may differ materially as a result of risks we face including those discussed in Exhibit 99.1 out 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.

David Walker

This morning we reported third quarter financial results that were in line with expectations despite a challenging environment for our clients. We continue to deliver consistent results focusing on the fundamentals with an emphasis on profitable sustainable growth.

This morning MAXIMUS reported third quarter revenue totaling $185.2 million up 1% on a constant currency basis compared to the same period last year. Eighty-nine percent of total company revenue came from the operations segment providing a recurring stream of predictable revenue.

Third quarter net income from continuing operations totaled $15 million with diluted earnings per share of $0.84. This included approximately $4.8 million or $0.16 per diluted share in legal expenses and a large insurance recovery related to the arbitration settlement in December. Excluding this net benefit, earnings from continuing operations were $0.68 per diluted share and in line with expectations.

For the last two years MAXIMUS has consistently delivered on its goal to achieve a 10% plus operating margin and this quarter is no exception. For the third quarter, operating margin totaled 10.7% driven by a 12.1% margin from the operations segment with consulting approaching breakeven for the third quarter. All in all it was another clean solid quarter.

Let's turn our attention to segment level results. For our fiscal 2009 third quarter the operations segment posted revenue of $165.5 million an 8.3% increase over last year on a constant currency basis driven by organic growth in the base business.

Sequential growth over the second quarter was driven principally by a full quarter's contribution from the recently launched Pennsylvania Medicaid managed services program and a healthy stream of revenue from our Australian Employment Services operations as we completed work under the old contract. The operations segment continues to meet top line and bottom line expectations with third quarter operating income of $20 million and a 12.1% operating margin.

This morning we announced a notification of award on a significant new win in the United Kingdom to provide employment and job training services under the U.K.'s Flexible New Deal program. We estimate that the five-year program will be worth approximately $200 million in USD.

Revenue recognized under this new U.K. contract will initially lag behind costs. This means that in fiscal 2010 we expect to generate approximately $15 million in revenue from this new program, and we anticipate that the program will lose between $0.05 and $0.10 per diluted share in the first half of fiscal 2010.

However, we expect a positive contribution in the second half of fiscal '10 and anticipate that it will be fully accretive in 2011 with margins well within our targeted range of 10% to 15%. Like other large contracts of this sort, there will also be startup expenditures for this new U.K. contract, the majority of which will be in fiscal year '09. But in the category of good news, our current outlook for startup expenditures for our expansion in Australia are expected to be sufficiently lower to offset our startup costs in the U.K.

Moving on to the consulting segment, results for the quarter were in line with our expectations. Consulting segment revenue totaled $19.7 million and the segment is nearing breakeven with a nominal loss of $146,000. Revenue was lower compared to last year, largely reflecting the wind down of the old [RevMax] business and timing of several large ERP projects, which had strong revenue in the prior fiscal year and, as planned, are ramping down in the current year.

A modest operating loss reflects aggressive cost cutting initiatives that are offsetting the revenue decline. We continue to focus on bringing the consulting segment to consistent profitability through tightly managed labor utilization, aggressive cost controls and by bringing the last remaining legacy contracts to successful resolution.

Moving on to balance sheet and cash flow items, MAXIMUS continues to maintain and generate healthy levels of cash with no debt. Our clients value financial stability which has received more focus by our clients as selection criteria and as part of their competitive procurement process.

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