Maximus, Inc. (MMS) Q4 2012 Earnings Report, Transcript and Summary

Greetings and welcome to the MAXIMUS Fiscal 2012 Fourth Quarter and Year-End Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, 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 have 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 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 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 10K 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 will turn the call over to Dave.

Thanks, Lisa. We’re pleased to report another solid year of financial results which reflects the company’s healthy portfolio of projects. Fiscal 2012 was highlighted by strong growth in core markets, the acquisition and integration of PSI and a successful ramp-up on the work program contract in the UK which achieved break even in the fourth quarter. As we kick off fiscal ’13, we remain committed to winning our fair share of healthcare reform contracts securing new profitable work and strategically deploying cash to drive long term shareholder value so let’s move into the financial details for the quarter and the full year. For the fourth quarter total company revenue from continuing operations grew 20% to $300.7 million. For the full fiscal year revenue increased 13% to $1.05 billion. Growth for the full year was driven principally by new work, the expansion of existing contracts and the acquisition of PSI which offset the expected revenue decreases in our international human services operations. Full year revenue grew 7% organically compared to last year. Total company operating margins were strong and in-line with expectations at 13.9% for the fourth quarter and 12.4% for the full fiscal year. The tax rate in the fourth quarter was 42.1% and includes year-end tax true-up of approximately $1.2 million. As a result fourth quarter GAAP income from continuing operations net of taxes totaled $23.8 million or $0.68 per diluted share. This included cost of $0.06 per share related to the tax adjustment, legal and settlement expenses and recoveries and acquisition related expenditures. Excluding these costs fourth quarter adjusted diluted earnings per share from continuing operations totaled $0.74 a 16% increase compared to $0.64 reported for the same period last year. For the full year GAAP income from continuing operations net of taxes totaled $76.1 million or $2.19…

Thanks, David, and good morning, everyone. We’re proud of our achievements in fiscal 2012 as we continue to grow the business and maximize shareholder value. We completed the acquisition of PSI, this expanded our domestic footprint. We achieved breakeven on our U.K. work program contract, this sets the table for continue growth in fiscal 2013. And most notably our fiscal year-to-date signed awards or exceptional and our pipeline of opportunities remains robust. As David mentioned many new contracts are just getting underway and they will add a recurring stream of long term revenue and deliver profitable growth as they mature. We are equally excited that our first health insurance exchange win is in the books and the implementation is progressing largely as expected. This is a major step in achieving our goal of securing our fair share of healthcare reform work here in the U.S.. As a result of the reelection of President Obama last week the implementation of the Affordable Care Act will likely continue as planned. Now that the election cycle is complete states can focus on meeting future implementation deadlines. Following this summer’s Supreme Court decision states continue to weigh their options and timelines for expanding their Medicaid programs. Although the U.S. Department of Health and Human Services has not set a deadline for these decisions, states can expand their Medicaid programs at any time. Organizations like the National Conference of State Legislatures are expecting state lawmakers to play a key role in deciding whether to expand Medicaid when they convene this winter and next spring. For our Medicaid expansion book of business our outlook remains the same. We still estimate an addressable market growth of $130 million to $200 million annually. Similarly our outlook for individual health insurance exchanges remains the same. We still estimate a…

[Operator Instructions]. Our first question is from the line of Brian Kinstlinger with Sidoti & Company.

To the first question I wanted to talk about the exchanges of course, I want to understand the $500 million you talk about on the exchanges, that assumes if every state outsourced? Is that accurate? And then can you sort of talk about the small business exchanges that you haven’t touched on much and the market opportunity there.

I would like to say that Bruce Caswell who is the President and General Manager of our Health Segment and as you very well know Bruce has been very, very involved in the U.S. Health Business and very close to our pursuits in the health insurance exchange for marketplace. So we will ask Bruce to answer that question.

To answer your first question related to the $500 million and total addressable market opportunity that really incorporates the decision path that the states currently face whether it's to do a state based exchange or a state partnership exchange or federally facilitated exchange. So we developed the model to allow for those multiple paths, so it is an addressable market regardless of whether the state provides the service or they ultimately have this service provided by the federal government. So that’s the first question and then the second question, can you repeat the second question for me Brian just related to the small business?

The timing and maybe the market size of that opportunity.

We have not quantified the total addressable market for the small business exchange but the timing is such that as states look at the federally facilitated exchange option, the scope of the small business exchange will be incorporated in that, so as we look into the opportunities to support the federal government in that area that would be an element of the support we will be providing. So for the shop exchanges in those states and as Rich noted in his comments CMS estimates that as many as 35 states may take that federally facilitated exchange path. Separately it's going to be a state by state decision with some states procuring the shop exchanges separate from the individual exchanges.

Our next question is from the line of Charles Strauzer of CJS Securities.

Just hoping if you can share with us the organic or same store growth rates in Q4 and then maybe what kind of assumptions you have built at the ’13 and touching upon the workers’ comp contract, you want to - can you expand a little bit more on you know what kind of cause the states to kind of move that way and how you’re able to win that contract. Thanks.

Dave Walker, we are going to ask him to talk about organic growth, I think Charles was asking about Q4 organic growth dynamics as well as fiscal ’13 and then we will turn it over to Bruce on the California opportunity of which we’re very excited.

Sure I will start with ’13 to give perspective. Overall the PSI revenue the share is about $60 million in fiscal ’12 the majority of it happened in Q4, we will give you the breakout in a second and when we look at next year fiscal ’13, we expect PSI to be in the $120 million to $130 million range. So that’s down from the current run-rate and that was expected when we did the acquisition. So when you back up our overall growth rate is expected to be somewhere in the neighborhood of 17% to 21%. So that puts the, I guess, the organic growth rate between 11% and 17% for fiscal ’13. The fourth quarter of the year, we had a total growth rate of 20% and the organic growth rate was 5.5% with PSI contributing approximately $37 million in the top line.

Bruce? California contract?

Sure and to explain a little bit more about the services that we are providing there, there are 2 elements to it, there are the independent medical reviews and the independent billing reviews and I’ll just give you a little color on what that really covers. The independent billing reviews would be for example in situations where payment has been denied for out of network services or there is a billing dispute between a provider as it relates to services that have either already been provided or are been preauthorized. The payment for and often as you would expect the provider services are billed on a bundled basis, or unbundled basis and the payer seek to pay on a bundled basis. So those independent billing reviews are one element, the independent medical reviews and example for that might be an individual seeking preauthorization for services related to workers’ compensation claim or medical condition that they have, such as back surgery. So to go into the detail, the opportunity evolved really over the course of a number of years and really was called for state legislation. So there is a statutory requirement to implement the program by January of this coming year and it really is a new process for the state where the reviews that we will be providing will be a new review between the claimant and what historically has been the administrative law judge process or LJ process. So the state expects that the savings will accrue from the administrative savings in that process and the new review capabilities that we can providing. So the IMR and IBR - so fundamentally there will be fewer administrative law judge hearings as part of that process.

The other point that I want to add is this is very, very complimentary of what we already do in the federal appeals business. We really see it as an extension for the same offering just to a different geography. We also do the appeals work for a number of states. So it's essentially an offering to new client and we’re excited about it.

The next question is from the line of Scott Green of Bank of America Merrill Lynch.

First maybe for Dave on free cash flow guidance for next year, maybe you could just talk about elaborate a little more on the step up in CapEx, how you see that trending with revenue growth over the next few years or is there anything temporary what the step up in CapEx?

So the free cash flow is down because of CapEx, you’re quite right. So we gave an operating cash flow of the $115 to $135 range and by the way the biggest driver there is just DSO. So a growing company ties up money in receivable so that’s a factor there but the same factor, growth, which we think to be a good problem, ties up CapEx and the BBL, the IT when you win a lot of work you got to invest a lot in the front end for lease hold improvements for offices your equipping for this system install and so you typically capitalize them and amortize them over the life of the contract. So what you see is virtually a doubling of our CapEx and capital software spend from $23 million in fiscal ’12 to about $45 million. We have about 10 startups which is an unprecedented level and about 5 more in the pipe we think so. So the question is, do we foresee this as a trend? We do think in general we are at a growth rate of double digit, so the next year’s growth rate is much higher percentage than just 10% - 11%. So it would -- could modestly come down but on the other hand if this growth trajectory continues I actually think that’s a good thing.

Our next question is from the line of Brian Kinstlinger with Sidoti.

The follow-up on the RFPs for exchanges, maybe you can talk about the timing of when you think they will start coming out. I think a while back you thought awards would happen in sometime I think in this early calendar year coming in and then well the federal exchanges dominates your ability to maintain your market share given the estimation of so many starting in that?

First on the timing of these RFPs and then the federal exchange does it impact our ability to dominate the market as it relates to?

First of all in terms of the timing of the RFPs as Rich mentioned in his call notes, we’re already seeing for those states that are opting for the state based exchanges, a flow of RFPs related to the customer contact centers. So those timings, timing of those RFPs are really as expected but it is also important to note that states are going to also turn to existing contract vehicles to satisfy the demand for those services. So we would expect and have seen initial conversations with states around task orders add on to existing contracts to support those types of services, call center, customer contact center services. So that is as expected. As it relates to your second question with the federally facilitated exchange, many states and in fact in CMS, we will say that it's not their intent to stay on that exchange indefinitely. There is a one year requirement to remain on the federally facilitated exchange before you can then move to a state based exchange. So in our modeling and in our estimate many states will just because the lack of time right now to get a state based exchange completed, opt for the federal exchange to begin with but then get on a glide path where they can take over essential operations for those exchanges in the out years. So I think that’s consistent with the way we looked at the revenue ramp up in this business where you start to see some revenue in the FY ’13 and FY ’14 period but it really doesn’t reach maturity until the FY ’15, FY ’16 period.

And I would add to that that I do think underlying all of this in terms of where do these states end up vis-à-vis the federal exchange. I think it was just a long standing value that states very much want to control their own destiny, serve their people, handle all of the beneficiary one-on-one type communications. In this system it's really where the touch occurs and the federal government on the other hand fully recognizes that it's very difficult for them to provide that level of touch and sensitivity that really is critical in an effective program. So while I think for convenience and time purposes more states will go towards the federal exchange, our belief is that over the long run even though as they do we will look to more back to the state based model and hence to answer, to close out with your question in terms of our position with the states, I really don’t see it as a concern, as it relates to our position. In fact I think it's an interesting opportunity to help those states that first go with the federal exchange to then transition back to a state based model.

This concludes today’s teleconference. You may disconnect your lines at this time. We thank you for your participation.

Thank you very much folks.