Greetings and welcome to the MAXIMUS Fiscal 2014 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 now 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 on our website under the Investor Relations page to assist you in following along with the call. With me today is Rich Montoni, Chief Executive Officer; David Walker, Chief Financial Officer, and Bruce Caswell, President and General Manager of the Health Services Segment. 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 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 maybe informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period-to-period comparisons. For a reconciliation of non-GAAP measures presented in this document, please see the Company’s most recent quarterly earnings press release. And with that, I’ll turn the call over to Dave.

Thanks, Lisa. This morning, MAXIMUS reported first quarter revenue of $406.6 million, a 42% increase compared to the same period last year. As expected, organic growth in the quarter was significant at 37%. Top-line increases for the quarter were attributable to the forecasted growth in our domestic health business, much of which was tied to new contracts from the Affordable Care Act. Total segment operating income totaled $53.3 million in the first fiscal quarter and operating margin was 13.1%. For the first quarter, income from continuing operations, net of taxes, totaled $33.8 million or $0.48 per diluted share. This is a 55% increase to diluted EPS compared to $0.31 reported for the same period last year. Earnings in the quarter were ahead of our expectations, driven principally by the increase in the Health Segment. Let’s jump into results by segment starting with Health Services. The Health Services Segment delivered an exceptionally strong quarter with revenue increasing 70% to $299.2 million compared to the same period last year. Top-line increases were fueled principally by organic growth resulting from new work and expansion of existing contracts, most notably those related to the Affordable Care Act. As a reminder, the open enrollment period for health insurance exchange is commenced on October 1, and as expected, drove volumes and revenue in our customer contact centers. Health Segment revenue was stronger-than-expected, delivering strong transactional volumes. We also provided additional high-value support to existing and new clients for business process diagnostics, business process re-engineering and greater shared services delivery as part of the ACA rollout. Rich will talk more about the specifics in his prepared remarks. Health Services Segment operating income in the first quarter of fiscal 2014 more than doubled compared to the same period last year and totaled $41.6 million with an operating margin…

Good morning, and thank you, David. We are pleased with our solid start to fiscal 2014, having achieved top- and bottom-line results that beat expectations and allow us to raise our outlook for the remainder of the year. These results are even more impressive when you consider the demanding market environment for private-sector government partners that operate highly visible health and human services programs. For MAXIMUS, our continued success is based upon our ability to understand the needs of our clients as we provide the appropriate level of support during these challenging times. This morning, I’d like to focus my commentary on how we are doing just that, adding value to our clients through scalable, flexible, and responsive operations. Challenges within the implementation of the Affordable Care Act have dominated the headlines for several months. As the federal government and several states face problems with the technology side of their exchanges, our Health Services team found opportunities to provide alternatives and implement comprehensive contingency plans for both existing and new clients. Our solutions allow the exchange workflow to continue while our clients and their systems’ vendors address the technology speed bumps. The technical deficiencies created the immediate need for direct consumer contact in order to continue the application and enrollment process. For example, a number of states did not anticipate the need for a large volume of paper applications or the additional effort required to assist consumers in completing applications through their web portal. In response, we quickly ramped up staffing and trained workers, bridging the gaps in the HIX workflows and helping enrollments to continue. As David noted, volumes in many of our HIX contact centers came on strong during the last six weeks of calendar 2013. In response, we added more than 1,300 staff across our contact centers…

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Charlie Strauzer with CJS Securities. Please proceed go ahead with your question.

Hi, good morning. Can you hear me okay?

We can hear you fine.

Fantastic. My two questions are very simple. Just when you look the influx of some of the higher volumes from the ACA enrollment and some of the appeals work that you saw higher volumes there, too. Is this more kind of the emergency triage, kind of one-time related, or do you think there will be longer-term opportunities that will come out of this? Also, the second question will be other larger opportunities that are in the pipelines for domestic and international. Can you talk a little bit more about that, as well? Thanks.

Okay, Charlie. We’ll give it a go here. On your first question, as it relates to the additional volumes we are currently experiencing under the Affordable Care Act, I think it is helpful to break the discussion area into two pieces, the fields work that we do and the additional work that we are doing and I expect we’ll continue to do for the foreseeable future related to ACA/the health insurance exchanges. In general, on that topic we think that the Affordable Care Act will have, I would say, more legs and longer legs if you will, than previously anticipated. And by that I mean, we were pleasantly rewarded this quarter with additional scope from our clients, additional needs and our teams did a great job to step up and provide surge support. I do think that that will continue and that these large transformations, as we all know, these large system transformations often times take longer to reach the point of optimal operations and I do think while technology will step, should step up and play a very important role the population with which we work, do need face-to-face services and that’s what we’re very, very good at. So I think that this is going to last longer than most folks anticipate and I think our role will continue longer than most folks anticipate. We also think that there will be additional work in terms of scope and services. We’ve talked about HIX 2.0 [ph], really its transferring into the Affordable Care Act 2.0. So I would expect there will be additional work, including such things as some states decide to move off the federal exchange on to their own state-based exchange. As it relates to the appeals work that we’re doing, we’ve been very fortunate and all that’s related to the Medicare program. We haven’t really gotten into the appeals that we will do as it relates to our separate contract under the Affordable Care Act. But the federal appeals for the Medicare program, as you know, for last year, had been running higher. The volumes have been running higher and we expect that at least in the short-term they are going to be running higher at that higher level. I don’t think they’re going to spike any higher than they have been. We’ve been working on backlog and I think that’s going to keep us quite busy for the short-term. And then, clearly we need to keep an eye on what happens as it relates to ACA-related initiatives, regulations, et cetera and the future balance that’s to be achieved with changing regulation and the extent to which RACs move into other areas of audit focus. Is that helpful on your first question?

Very much so. Thank you.

Okay. On other large opportunities, I’m really pleased with the quality of the opportunities in the pipeline. When we look at it, we do see significant opportunities across the board, across the geographies and across the segments and as you would expect some of those are related to our health business in the Affordable Care Act, but we have meaningful opportunities outside that as well. So the best way I would describe it is it’s very different diversified and a good portion, the majority of the work in the pipeline represents new work, which you would expect given the fact that we’ve got a light rebid year coming up. So the rebid piece plays less of a role than perhaps historically it had.

Great. Thank you very much.

Sure.

And next question is coming from the line of Brian Gesuale with Raymond James. Please go ahead with your question.

Yes, good morning. Nice job on the quarter, and, David, congratulations on retirement. First one is actually for you. You look really relaxed on that picture on Slide 22. Was that Photoshop or does pending retirement feel that good?

I’m always pretty relaxed, Brian.

Seriously. I guess wanted to talk a little bit about pipeline. Could you maybe give us a little color on the pipeline that’s domestic versus international, as well as maybe any Health and Human split?

Well, Dave and I are going to take teams on that one, Brian. This is Rich. And I think that’s kind of a follow on as it relates to the prior question. Pipeline quality, again I would go back and say, it remains at a very high level, essentially consistent with the prior period and the split is very pleasing between domestic and international Health and Human Services. And when I think about it, Brian, I really do think that what’s playing out here is the long-term thesis that we’ve had on the table that as these governments move forward and try to deal with their fiscal challenges coupled with the demographic challenges, increasing populations and more folks needing assistance from their government, it continues to open up opportunities for MAXIMUS long-term. So we’ve got some things that are really new work with new geographies and again those take time, Brian. I mean these, particularly federal governments can take quite a bit of time for them to re-engineer a program, be it a health program or welfare program, but we remain excited and convinced that that trend is real and will continue for quite some time and I think we’re very well-positioned.

And as a reminder, Brian, about 23% of our work is outside the U.S. in fiscal 2013, and so we’re seeing our opportunities track generally with our mix.

And the other thing I would remind us is that we do have a goal to increase our health business outside of the U.S. piggybacking on the nice platform and brand that our Human Services has laid before us. So again, our goal is to expand our Health business outside the U.S. and we’re starting to see some real opportunities bubble up in that context.

Okay, terrific. And Rich, wondering if you could – if there is a specific geographies, you’ve highlighted Canada and the U.K. in the past. Any geographies where you’re particularly excited as you look out over the next 12 months?

I’ve got to tell you, I don’t have any bias. It almost feels like a horse race where they’re all engaged. They do play-up one another. I think it’s fascinating to see how the world operates today. At a country level, there is a very significant appetite for country leaders to learn what other countries are doing and share best practices and lessons learned and I think we play a meaningful role in that when we visit with our clients and our prospects and it also happens with our team. So as an example, we’ll see an exciting win in the U.S. and then the folks up in Canada will run with it or we’ll see some best practices here in the U.S. and our prospects and clients in the U.K. are very interested to speak to our U.S. leaders. We’ll have them visit, we’ll have them share some details on the program. And last, I don’t want to forget our folks in Australia. They continue to do a great job and while at one point in time we looked at the mountain tops in Australia and felt that there may be more of a steady state business, but based upon the performance of that team they continue to receive additional assignments and I still see it as some pretty good growth opportunities.

Okay. Thanks very much.

Okay. Thank you.

Next question please.

Next question is coming from the line of Richard Close of Avondale Partners. Please go ahead with your question.

Yes. Just really quick, I’m curious if you guys can talk a little bit about the health margins, obviously stronger than what we were looking for. Can you talk a little bit about the trends in that or what you expect maybe in the second quarter based on the number of change orders and volumes that you’re talking about?

Yes. That’s a great question, Richard. Let me generally talk and reiterate about what we expect by segment for the whole year and for the quarter. In Human, our guidance really remains unchanged. We expect the revenue to be fairly flat to slightly up, but in the lower half of our 10% to 15% range. Now on point, in Health, which has really been driving our business as of late with health insurance exchanges as you know, and we are going to continue to be bolstered by open enrollment. So we saw the spike happen late in this quarter and that will continue into Q2. So you’ll see Q2 up and the margin is going to go with that, just simply because of the continuation of what we saw in Q1 as well some contracts by contract type we had to get inequitable adjustments. So we’ll see those lag in Q2, but of some of the working costs that’s already been incurred. So you would expect our margin to have some seasonality improvement in Q2, but if you look at the margins and Health overall for the year, it will be the higher end of our 10% to 15% range. So the margins will be very strong in Health.

Okay. And a follow-up question, I guess, on the outperformance of ACA versus appeals. I assume it’s more skewed towards the ACA than appeals. And if you can talk a little bit about appeals going forward, everything that’s going on with the RACs you mentioned, the rebid process and the regulatory. I’m curious to get your thoughts on appeals backlogs going forward and then maybe the impact of the Two-Midnight Rule on those potential backlogs?

Yes, let me start at a high level and then I’ll turn it in for Rich and others to chime in. First of all, as a reminder, the appeals actually performed better than our expectation. We actually expect them to turn down more than they have. So we just didn’t see that, right, which is what bolstered us. So it’s less that the appeals were growing that they just really haven’t turned down, okay. And when we look at the delivery and the over-delivery in Health, it’s really across the board. ACA certainly is strong, but we’ve seen all our programs come on strong. So the whole portfolio is performing very well. And so, I think we happen to be at the right place where there’s a lot of needs and that’s what it’s reflecting.

And Richard, on the moratorium as it relates to the RACs and just to set the discussion, we do know that last week CMS extended the moratorium on RAC claims for what’s referred to as short inpatient stays. And at this point, and we do know that those are prior moratorium, so it’s just is an extension of that date. We’ve not seen a material impact as a result of moratorium and we have not seen a slowing of the caseloads coming in. That being said, we do understand the trends. I do think there is a lag factor. So given the lag factor, but given the backlog we don’t see a short-term impact to us as it relates to this extended moratorium. And I’d also say, remember that the work we do here is just one element of the appeals work that we do. We do expect that if the RACs are defocused from the short-term inpatient stay type work or claims that they will focus in other areas. So I view this as not meaningful to fiscal 2014. Again given the backlog and given the lag factor more relevant to 2015 and beyond and what will be interesting to monitor is what the RACs do is to refocus. So we have to believe there are some pretty significant additional areas for improvement as it relates to the claims work in the Medicare program.

Okay, thanks. Congratulations on your successful execution here.

Well, thank you, Richard. I appreciate that.

Next question please.

Next question is from Frank Sparacino of First Analysis. Please proceed with your question.

Hi, guys. Rich, just sort of following up on that. As it relates to the appeals for the exchanges, maybe just talk about your expectations in timing, when you’ll start to see some of that work come in, in a meaningful way and also I assume there is a correlation related to the call center volume activities that you’ve had that have been better than expected due to the technology challenges. I assume there is a similar parallel that relates to the appeals, but maybe just talk on those two things.

I think that’s fair. I’m going to ask Bruce Caswell to respond to that Frank.

Great. Good morning, Frank. Thanks for the question and as you’re well aware we handle the appeals at the federal marketplace level and has been in the press recently. A reasonable backlog has been building up, but at the same time we’ve been working to resolve upwards of about 4,000 appeals that can be resolved through just an administrative process, outreach to the consumer, working with them to clarify their application and ultimately to resolve that. So while the technology challenges remain, there are business process workarounds that lead to increase labor on our part and it’s important to note that that is a cost reimbursable contract. So there’s really not a financial risk associated with the scope issues in that appeals work. So we are continuing to handle the eligibility appeals that come in and triage them, those that can be handled and then work hand-in-hand with our client to identify additional workarounds to the business process and prioritization of their technology remediations. That are really the responsibility of other contractors to get that program stabilized.

And just a follow-up on the last question. On the Medicare appeals business, can you give us a sense as to – it seems like your confidence in that business looking forward has a lot to do with the backlog that you have, I mean there has been a lot of talk, obviously at the Level 3 appeals of the backlog issues. Do you have a substantial backlog right now as it relates to the Level 2 that you’re working?

Well, Frank, it’s fair to say that not all RACs obviously perform at the same level of efficiency, right. So our understanding would be that some of the RACs have more backlog that they’re working through and others. And as a consequence, the higher volumes that we’ve seen likely a function of that affect. So as we have said, as we continue to moved forward not only do we currently not see a decline in that, but it’s likely that the RACs are going to continue to substitute a way to other type of appeals that they’ll look at. It’s interesting under the final rule, the CMS-1599-F [ph] final rule related to the two midnight stay. It’s really just the patient status reviews that RACs look at that are excluded from this process. But importantly there are other types of claims that the RACs can continue to work in an inpatient hospital environment. Those would include coding reviews, reviews for medical necessity of a surgical procedure and so forth. So there are some reviews in that area that they continue to work and that we continue to see and then obviously we anticipate they’ll continue to substitute a way to other areas.

Thank you, guys.

You bet.

Thanks, Frank. Next question please.

Next question is from Brian Kinstlinger of Sidoti & Company. Please proceed with your question .

Great. Thanks so much. The first question I have, I see the Department of Education award is still under protest. Can you remind us if you’re actually generating revenue as a result from this contract? And then if the GAO keeps this contract in your hands, does this change your guidance in any way for this year in the top- or bottom-line?

Let me kind of refresh folks in terms of where that protest stands and then we have Dave Walker to address this specific question as it relates to revenue and guidance for fiscal 2014. As you’re aware, that protest and it’s akin to a legal matter. So we can’t give you a whole lot of details, but the GAO is handling that protest. They are schedule to render their opinion on the protest on or before February 20. So that’s a significant date. Dave Walker as it relates to revenue…

Sure.

What would you add?

Brian, there is a group of probabilities on this thing. So we do have an awaited basis, a small amount of revenue in our 2014 guidance, buts it’s very neutral to earnings. So really it affects next year for us.

Specifically I don’t think regardless of the outcome of that I don’t think we would amend our guidance for fiscal 2014 for that event.

Yes, right. And then Dave, you mentioned the new seasonality. If I have it right, revenue peaks in the second quarter and then goes slightly lower sequentially the third and fourth quarter. But if we think about EPS, as in the fourth quarter, you’ve generally had a low amount of very high-margin revenue that typically spikes earnings. Will fourth quarter still be seasonally strong in earnings or do you think not so much?

Not like it had because some of the businesses that tended to drive that seasonality are not as large relative to the whole portfolio mix, okay. And really you’ll see, if you just think about it a macro of your modeling beyond 2014, the first half of our year is going to be our strongest permanently because of HIX for this particular year because not only because of the momentum going into Q2, but the change orders heading into Q2 as well. You’ll have an exceptionally strong quarter in Q2, but still do generally okay in the fourth quarter, but not like it was proportionally. We used to have what is called a hockey stick model and now it will be much front loaded.

Great. Thanks so much.

Next question please.

(Operator Instructions) The next question is from Dave Styblo of Jefferies. Please go ahead with your question.

Good morning. Thanks for taking the questions guys. I hopped on the call a little bit late. So I apologize if this has been asked and answered. Just taking a step back and staying on the appeals business, can you give us an updated amount of the percentage of revenue that that drives?

On the appeals business, I assume you’re talking strictly about the Medicare appeals business. We don’t disclose the percentage of revenue as it relates to individual divisions or service line offerings. So we’re not able to give you that percentage, Dave.

On a higher level, I think you’ve talked about the federal operations being around 10%. So I think my understanding was that the RAC component was less than 3%, that you may have spiked that once or twice.

Again, I can’t get into whether it’s 3% or 10%, but it’s within the 10%. So you can deduce that’s less than 10%, the Medicare appeals per se.

Okay. Got it. And then just moving along to the business that you – basically raised guidance for. It sounds like some of that is organic. Some of that could be from states that are having trouble and you’re helping them out. Do you have a sense for how much of this might be one-time in nature and could roll off as we go into next year?

I think it’s a great question. I think it’s less than one might think. I do think you should expect that some of this work will pullback. On the other hand, I think it’s going to take longer to pull it back. You need to remember that the reenrollment is going to be here again before you know it and I also think that the wildcard in the whole equation, Dave is, how long will it take not only to fix the technology underlying this, but to really optimize the processes, so that the system in its total is working for people in a very efficient fashion. So I think it’s going to take multiple quarters for all of that to work out and I think it’s going to extend well into fiscal 2015 as my sense at this particular point. And I also think what all of the noise that we’re seeing is going to create a pretty significant demand for appeals in the Medicaid/Affordable Care Act space.

That’s really helpful. On that point of it extending into 2015, can you speak to the term of the contracts? Obviously, in some of the periods leading up until now, it was contained within a year, but are you suggesting that the terms of this contract lead over for a one, two or even three-year period, as you help these states out?

Bruce?

Yes, I’d happy to answer that. Dave, generally our HIX service center contracts are multi-year in nature. So they would continue into the 2015 enrolling period and beyond and that’s obviously consistent with our overall business model, developing decades on relationships. And also maybe like to add a little bit more depth to it. True to say the work that we’re doing to support our clients in the Affordable Care Act is not just limited to running the service centers. There are many existing clients in Medicaid space that have needs at their level to comply to the Affordable Care Act by modifying their business processes to handle the new eligibility rules around Modified Adjusted Gross Income, to look as they see a higher influx of Medicaid applications for support and processing those, that sous chef that Rich referred to and to work, as Rich has also referred to, handling eligibility appeals. So our eligibility appeals works is not just at the federal level, but for many of our state clients we can help with, if you will, the teeing up of an appeal on the completion of a case such that then ultimately a state Medicaid employee can make that determination. So it’s actually a very rich kind of tapestry, if you will of ACA support functions. And furthermore, as we enter the summer months, you’re probably quite aware that the qualified life events through which people can actually continue to apply for and gain coverage during the non-open enrollment period are fairly rich, right. They can include everything from enabling individuals that have a change in income that affects their subsidy to select a plan. If you move to a new area that offers different plans that’s a qualifying life event; typical ones like marriage, birth, adoption, losing coverage through divorce, things like that. So while we certainly would expect some seasonality reflecting the close of open enrollment presently, which is scheduled for March 31, and I say that presently because there is certainly some talk about a potential extension there and then the reopening in November 15. There are additional, if you will, volumes and services related to that type of work in those transactions that you see during that interim period.

So, Dave, just a reminder. Health contracts tend to have like three-year base, two-year option. So they tend to be about five years, some higher, lower, but they average just shy all our contracts of under five years and these are no different and generally change is our friend.

And I’d add one point to that. Most of the work that we’re doing, the additional scope work we’re doing, is just piggybacking on the existing contracts. So in the form of change orders and some of them, it’s already just hardwired in. The exception with the additional work, the work we’re doing for new states that heretofore haven’t been customers and we received inbound calls to action to help those states and I think I talked about one of them, Oregon on my call notes.

Rob, I will go ahead and take one last question today.

Thank you. And the last question is a follow-up from the line of Brian Kinstlinger with Sidoti. Please go ahead with your question.

Right, thanks. Just one. We’ve talked a lot about the appeals for Medicare. I’m not sure we talked too much about the appeals work for the federal exchange. I’m curious when that contract has provided revenue run rate that’s mature. I think it lags the enrollment period and so when is the seasonality also for the contract.

Brian, I think we touched upon it earlier, but that contract is very, very young in terms of its startup. We are engaged, we are working with our client. I think we’ve built a great relationship with our client to help them meander through all of the technological changes as you would expect that one would experience as you’re trying to handle appeals for the federal health insurance exchange. And given the complications and it looks like the volumes are going to get there sooner or later. I do think that the table is set for some pretty significant volumes on the federal health insurance exchange. I don’t see this reaching full equilibrium until fiscal 2015. That’s my gut.

And just a reminder. That contract is reimbursable. So – well slower march, but it self-adjusts as they are having interfaces or technology challenges as new clients always will have and we can form our technology, et cetera, it self-adjusts to size and sometimes that stuff that we’re doing that’s out of scope normally with the original bid. You won’t see in our pipeline numbers. So sometimes in our organic growth is actually some of that new business as we help our clients cope with change. In regard it’s complicated.

Great. Thank you, guys.

You’re welcome. Thank you.

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