Maximus, Inc. (MMS)

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MAXIMUS, Inc. (MMS)

Q1 2013 Earnings Conference Call

February 7, 2013 09:00 a.m. ET

Executives

Rich Montoni – CEO

David Walker – CFO

Lisa Miles – SVP of Investor Relations

Analysts

Presentation

Operator

Greetings, and welcome to the MAXIMUS Fiscal 2013 First 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, Lisa Miles, Senior Vice President of Investor Relations for MAXIMUS. Thank you, Ms. Miles. You may begin.

Lisa Miles

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 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 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

Thanks, Lisa. This morning, MAXIMUS reported first quarter revenue that was in line with our expectations. Revenue in the quarter grew 19% to $286.3 million compared to the same period last year with organic growth of 5%. Top line increases for the quarter came from solid growth in both our domestic and international operations and across both segments.

On the bottom line, earnings in the quarter were better than our expectations driven principally by accretive transaction based work in the Health Services segment primarily in our appeals business. We also experienced stronger than expected results in our Human Services segment from the domestic workforce services contract.

Total segment operating income, excluding legal, settlement and acquisition expense totaled $34.3 million in the first fiscal quarter and operating margins were 12%. For the first quarter, income from continuing operations, net of taxes totaled $21.8 million or $0.62 per diluted share. This includes approximately $0.01 per share of net legal, settlement and acquisition related expenses. Excluding these expenses, adjusted earnings per diluted share were $0.63 in the first quarter.

Let’s jump into the results by segment starting with health services. For the first quarter, health services revenue increased 11% to $176 million compared to the same period last year. The growth was fueled by the PSI acquisition as well as our net growth resulting from new work and expansion of existing contracts. On the bottom line, operating income Health Services segment was $20.6 million and operating margin was 11.7% in the first quarter. The segment benefited from growth on existing contracts and higher volumes in our federal Medicare appeals work. Compared to the same period last year, operating income increased 23% and operating margin expanded 110 basis points.

As a reminder, last year’s first quarter operating margin was lowered by the timing of a change order that was delayed to the third quarter and margin dilution from the managed care expansion in Texas where we experienced a temporary spike in low margin revenue.

The Health Services segment performed ahead of our expectations for the first quarter, the favorable revenue in margin results were driven principally by increased volumes in transaction based programs such are federal Medicare appeals business where higher volumes have resulted principally from the growing activity from RAC contractors. We expect this trend to continue for the remainder of the fiscal year.

In addition we’ve also started to see revenue materialized a little bit sooner than expected from work related to health insurance exchanges as states progress towards meeting the implementation deadlines in late 2013 and 2014.

Let’s now turn our attention to financial results for human services. For the first fiscal quarter, revenue for the Human Services segment increased 35% to $110.3 million compared to last year. This growth was driven by the PSI acquisition, as well as organic growth principally from our international operations, this includes the expected ramp up in the United Kingdom as well as new programs in Canada and Saudi Arabia.

First quarter operating income for the Human Services segment totaled $13.7 million, delivering a stronger than anticipated operating margin of 12.4%. The segment benefited from some performance base payments on a large domestic welfare-to-work program which we do not expect to see on this scale going forward. I’m also pleased to note that the UK program was fully profitable in the first quarter and remains on track to achieve our full year target operating margins. These contributions offset the anticipated lower margin from the Australia program resulting from economic and regulatory factors that we discussed last quarter. This margin change is expected to continue for the foreseeable future.

Moving on to cash flow and balance sheet items. Cash flow in the fiscal first quarter was consistent with our seasonal expectations. As expected, cash flow was dampened as a result of normal government payment slowdowns during the holidays, which resulted in DSOs of 67 days in the quarter. However, we do expect DSOs to continue at a similar level next quarter. As a result of a couple of large programs that both have administrative processing challenges unrelated to funding. As a result cash provided by operating activities from continuing operations totaled $10.1 million for the first quarter, free cash flow was negative at approximately $0.5 million. This reflects an expected increase in CapEx related to the high level of startups as well as the cash flow impact from the change in DSOs.

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