Greetings and welcome to the Maximus Fiscal 2013 Third 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. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. 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. 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 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 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, and good morning. This morning Maximus reported another quarter of strong growth, reflecting the contributions of work coming online from new programs as well as ongoing expansion on existing contracts. For the third quarter of fiscal 2013, total Company revenue increased 26% to $334.3 million compared to $266.4 million reported for the third quarter of last year. As a reminder, the prior year period included a $10.2 million change order in health segment that bolstered revenue and operating margins. Substantially all the revenue growth in the quarter was organic, driven by solid momentum from both our business segments as well as a nice mix of revenue expansion from both our domestic and international operations. Accretive revenue growth in the third quarter helped drive higher operating income and margins. For the third quarter, total Company operating income excluding legal settlement and acquisition expense increased 30% to $45.4 million compared to the same period last year. This reflects an operating margin of 13.6% for our fiscal 2013 third quarter. On the bottom line, earnings were in line with our expectations. For the third quarter, income from continuing operations net of taxes totaled $28 million or $0.40 per diluted share. This included $0.01 of net legal settlement and acquisition expense. Excluding this, adjusted diluted EPS for the third quarter increased 32% to $0.41 per share. Let’s jump into results by segment, starting with health services. For the third quarter, health services revenue increased 28% to $217.9 million compared to $170.4 million for the same period last year. This top line increase was driven by favorable volumes in our health appeals business, organic growth for new work, and expansion of existing programs. Operating income for the health services segment increased 34% to $34.4 million compared to $25.7 million reported for the same period last year. Operating margin improved to 15.8% in the third quarter of fiscal ’13 driven by accretive growth in our federal appeals and other transaction-based programs. This compares favorably to 15.1% reported in the prior year period which benefited from the aforementioned $10.2 million charge order that accounted for approximately $0.05 of earnings per share to overall earnings in Q3 last year. All in all, the health services segment continues to benefit from strong demand in our core service areas. Since our last call, we’ve announced new health insurance exchange wins in Maryland, Hawaii, and the District of Columbia. This expands our footprint for customer contact centers to six state exchanges and a federal exchange. Rich will provide further operational details on our progress with these important new programs. Let’s now turn our attention to financial results for human services. For the third fiscal quarter, revenue for the human services segment increased 21% to $116.4 million compared to $96 million last year. For the third quarter, revenue increases for the human services segment were driven principally by the ongoing ramp-up of the work program contract in the U.K. as well as growth from our other international operations. Human services operating income for the fiscal third quarter grew 20% and totaled $11 million, with an operating margin of 9.5%. This compares to operating income of $9.2 million and a margin of 9.6% last year. As a reminder, the prior year period included a $2.1 million net benefit from a fixed price contract. Excluding this, this segment had solid year-over-year operating margin expansion driven by the ongoing ramp-up in the U.K. and accretive growth in other operations outside the U.S. that offset the expected lower margin in Australia. Moving on to cash flow and balance sheet items, cash provided by operating activities from continuing operations totaled $49.7 million for the third quarter, and we generated free cash flow of $32.7 million. This solid cash flow generation in the quarter was driven by strong earnings and timing related to working capital items, and was consistent with our expectations. As I mentioned on our last call, we had a couple of payment slowdowns in the first half of the year. As expected, we received some of the payments in the third quarter and as a result our DSOs improved sequentially to 65 days. We anticipate further collection progress in the fourth quarter, some of which we’ve already received. During the quarter, we also used cash of approximately $12.4 million to repurchase the equivalent of 329,800 shares of Maximus common stock, and on June 30, 2013 we had $102.2 million available for future repurchases under our Board-authorized share repurchase program. Our cash balance was unfavorably impacted by currency exchange rates. Because the U.S. dollar has been particularly strong, most notably in relationship to the Australian dollar, translation differences decreased our cash balance by approximately $14.6 million in the quarter. Our strong cash flow more than offset this decline, and at June 30 we had $187.9 million in cash and cash equivalents. Approximately $142 million of this cash was held overseas, and subsequent to quarter close we used international cash of approximately $71.4 million to complete the acquisition of Health Management Limited, or HML. We’re very excited about this international acquisition because it broadens our existing operation in the U.K. as we extend our core competencies into this important market. We see real promise to serve more programs and capitalize on the opportunities we see intersecting between both our health and human service offerings. Rich will talk about this in greater detail in his prepared remarks. We remain very focused in sensible cash deployment and using our cash to drive long-term shareholder value. Our priorities include our quarterly cash dividend, opportunistic share repurchases, strategic acquisitions, and the ongoing funding of organic growth. Lastly, Maximus is reiterating its fiscal 2013 revenue, earnings and cash flow guidance. The Company continues to expect fiscal 2013 revenue to range between $1.26 billion and $1.31 billion and adjusted diluted earnings per share from continuing operations to range between $1.50 and $1.58. The Company continues to expect cash provided by operating activities from continuing operations to range between 115 million and $135 million; but due to organic growth in the business and new programs ramping up, we now expect that our capital spending will exceed our prior CAPEX guidance. Despite this increase, we still expect that our free cash flow from continuing operations will fall within our guidance range of 70 million and $90 million, but more likely toward the lower end of that range. Maximus is also reiterating its preliminary fiscal year 2014 revenue and earnings guidance, which includes the contributions from the acquisition of Health Management. Let me provide some color on our fiscal year ’14 preliminary guidance that we issued on July 1. Our preliminary guidance is a top-down view based upon the facts and circumstances that we know today. We’ll complete our formal bottom-up planning process later this month and will provide final guidance on our November call. So let me outline some of the dynamics shaping our fiscal year ’14 guidance. Let’s start with the many positives. As you know, we have a record number of programs that started this year and provided partial year contributions in fiscal year ’13. We will now receive a full-year benefit from all this new work in fiscal year ’14, and our forecast reflects these contributions based upon our current optics. These programs include our independent review services for the California Workers’ Compensation Program, as well as the customer contact center operations for the six state-based exchanges and the federal marketplace. We also made significant headway in building up our U.S. federal operations with several key wins in the books. While we are seeing solid top-line growth in the federal market, the contracts are often lower margin, cost-reimbursable work. We also expect our appeals volumes to return to more normalized levels as we move into next year. We also factored some expected reductions into our guidance. This includes non-recurring Hicks work in states like Minnesota and California. Additionally, contracts that served as bridge programs to the Affordable Care Act, such as work related to preexisting conditions provisions, are now folding into state exchange operations. We’ve also talked about program changes, including the reduction in revenue and profit from the California Healthy Families CHIP program, which has been rolled into the Medicaid program. We expect continued revenue and profit decline from this program moving into fiscal year ’14. In addition, a recent development in Illinois has put our new Medicaid eligibility verification contact at risk. In June, an arbitrator ruled that under the union’s collective bargaining agreement, the State is required to use State employees to perform this work. Right now, our model assumes that the program winds down by the end of December. Finally, we are forecasting our fiscal 2014 tax rate to improve to 37% from our current year rate of approximately 38%. This reflects our international mix of business and favorable legislative changes outside the U.S. So when you add it all up, it’s important to remember that we’re managing a portfolio of contracts, and while we do experience some normal course fluctuations in the portfolio, the growth drivers more than make up for the reductions and we’re quite pleased with the top and bottom line growth targets that we’ve laid out for our fiscal 2014. At this time, the Company continues to expect that fiscal year 2014 revenue will increase 21% to 28% and range between 1.555 billion and $1.650 billion. On the bottom line, we expect earnings growth between 14 and 20% and that diluted EPS will range between $1.75 and $1.85. So overall, fiscal 2014 is shaping up to be another great year of double-digit top and bottom line growth for Maximus. With that, I’ll hand it over to Rich.

Thanks David, and good morning everyone. This quarter’s financial results are right in line with our growth trajectory for the remainder of fiscal 2013 and set a solid platform for continued top and bottom line growth next fiscal year. We’re pleased to be targeting double-digit growth for fiscal 2014 as we continue to benefit from macro drivers and solid demand trends in our core markets. Let’s start off this morning with an update on our U.S. health operations. Here, we have exceeded our initial goal for work related to the Affordable Care Act. With many new ACA-related contract wins under our belt, Maximus has successfully established the leading position in the state-based health and insurance exchange market. Maximus will be operating the customer contact centers for six of the 16 state-based exchanges including Connecticut, the District of Columbia, Hawaii, Maryland, New York, and Vermont. As we mentioned last quarter, we are also part of the team selected for the contact center operations contract for the federal marketplace. We estimate that all of this new work adds up to more than $150 million in new annual contract value. This exceeds the target goal that we laid out of winning 20 to 25% of the total addressable market of approximately $500 million in new annual contract value, so we’re pleased to have secured our fair share and a little bit more of health insurance exchange work. Operations for these new contracts are ramping up nicely. The Maryland Hicks customer contact center went live last week and our professionals are already hard at work answering general inquiries about the Affordable Care Act and health insurance exchanges. They are also helping consumers prepare for the open enrollment period that commences on October 1. We are operating two customer contact centers for the federal marketplace. Our Brownsville, Texas location also launched operations last week and our customer service representatives are already taking calls. The build-out of our second site in Boise, Idaho is progressing as planed, and the team will be ready for open enrollment in October. The build-outs of our remaining exchange contracts are on track. Hiring is progressing as expected and our training teams are gearing up to prepare our customer service representatives for incoming calls. We are pleased with the overall progress, and Maximus will be operations ready to support our government clients for the October 1 open enrollment. Additionally, we will continue to assist our current state clients who were defaulting to the federal marketplace as they strive to meet ACA requirements, including the No Wrong Door provisions. So with our new exchange operations on track, we remain keenly focused on the next wave of ACA-related opportunities. Right now, we see a landscape developing where over the next several years, many states will likely consider additional initiatives, including the expansion of Medicaid and other health provisions under ACA. So as we’ve stated all along, healthcare reform will be a long-term multi-year growth driver for Maximus, particularly as the different health insurance marketplaces evolve over time. Moving on to our international operations, the acquisition of Health Management in July was an important next step for introducing our core health offerings to the United Kingdom. Health Management is the largest independent occupational health provider in the United Kingdom. Their services include health assessments, sickness absence referrals and management services, wellness programs, primary care and wellbeing services, and employee assistance programs. Health Management brings a team of recognized and highly qualified occupational health consultants to Maximus. Health Management is a great fit for Maximus because both companies share many of the same fundamental values. We are both keenly focused on providing our clients with innovative solutions to address their health, social and productivity challenges. By coupling our core independent review competencies developed in the U.S. with an established proven partner in the U.K., we’ve created an exceptionally strong delivery team that is well positioned for future opportunities. The acquisition of Health Management demonstrates our commitment to serving more clients in this important market and working with the U.K. government to achieve it’s program goals. As we mentioned last quarter, we see emerging opportunities that may lead to RFP activity during fiscal 2014, so we are very excited to further enhance our offerings in existing markets to create new long-term growth platforms. Our expansion in the United Kingdom builds upon the positive reputation and solid performance by our U.K. welfare to work team. They remain one of the top performing vendors under the work program, a position that was most recently highlighted in the vendor statistics issued in late June. Let me give you a general update on what’s happening with the work program. Since we started the contract in July 2011, referrals into the work program have been lumpy; however, as we’ve gained additional experience on the program, we’ve achieved confirming data points that provide us with better trend data, improved our overall visibility, and allow us to refine our operational and financial models. As you may recall from our disclosures in fiscal 2012, we initially saw higher caseload volumes; however, since the start of the program Year 2 in April 2012, we’ve experienced overall referrals that are lower than the forecast initially laid out. We initially thought volumes would return to more normalized levels based upon our prior experience, but volumes remained lower than expected, which led to lower revenue levels. Despite the lower revenue, we have successfully managed to remain in-line with our net income expectations. The team has done an excellent job of managing resources and labor. This is all factored into our current 2013 guidance as well as our preliminary guidance for fiscal 2014. There’s also been interest on how future reallocations might work. The Department for Work and Pensions has two models for reallocations: first, they can do intra-region reallocations, which is a shift of caseloads within the regions that we already operate. DWP has stated that the intra-region reallocations would only shift up to 5% of caseloads to other qualified vendors within that region. This shift is immaterial to Maximus and would account for less than $500,000 in new annual revenue in the regions we currently serve. The second type of reallocation is an inter-region reallocation. In this case, the qualified high performing vendor can pick up an entirely new region if they are on the framework for that particular region. At this time, it’s unclear what the timing on this inter-region reallocation may be, but we don’t believe there will be any material reallocation of work in the near term. I want to further reinforce what we’ve been saying from the beginning of this program – our interest in picking up any new regions is contingent upon the overall terms and conditions of the contract. So while we think reallocation opportunities exist down the road and are an important part of our land and expand strategy, we’re far more excited about the many new promising opportunities that we see starting to materialize for new programs and new work in the U.K. Our current operations combined with our acquisition of health management creates a springboard for many of those longer term greenfield opportunities. Turning now to rebids, we have 14 contracts with a total value of approximately 475 million up for rebid in fiscal 2013. We’ve secured 440 million to date and have met our goal to win 90%-plus of the total contract value up for rebid. The rebid on our Texas Medicaid contract is still being negotiated; however, our current contract ends in August, so we expect finalization of the contract very soon. So at this point in time, we now have one rebid remaining with a total contract value of approximately $11 million, so all considered fiscal 2013 is tracking to be a very successful year of rebids. We’ll provide information about the contracts that are up for rebid in fiscal 2014 on our November call, but we expect it to be a light year from a rebid perspective. Moving on to new sales award in the pipeline, we delivered another solid quarter of new sales awards with 1.3 billion of year-to-date signed awards at June 30. New contracts pending contributed an additional 413 million to our sales awards. These are contracts where we have received notification of award and are in contract negotiations but have not yet been signed. Sales pipeline at June 30, 2013 was $2.2 billion, which is slightly lower than the previous quarter mostly due to contracts shifting out of the pipeline and into the award categories but also due to the loss of a federal eligibility support contract. The pipeline includes opportunities across multiple geographies in both segments and consists of $278 million in proposals pending, $158 million in proposals in preparation, and $1.8 billion in opportunities tracking. In closing, we continue to make steady meaningful progress towards our three-pronged long-term growth strategy, which includes securing our fair share of healthcare reform work in the U.S., growing our federal book of business, and expanding our international operations. We are proud of the teams’ achievement in securing our fair share of the first wave of health insurance exchange contracts, and we remain optimistic about other long-term opportunities in the other areas of healthcare reform. The acquisition of Health Management has provided Maximus with a strengthened position for future opportunities in the U.K. health market. It also supports our international growth objectives as we expand our service offerings and our geographic footprint. It’s important to keep in perspective that our long-term growth is not dependent upon a single business area or geography, but rather upon macro trends and extended growth drivers. We see many new emerging opportunities for our core capabilities in all of our geographies, and with our fiscal 2014 preliminary guidance in place, we remain committed to generating long-term shareholder value as we continue to grow the business. With that, let’s open it up for questions. Operator?

Thank you. [Operator instructions] Our first question comes from the line of Charles Strauzer of CJS Securities. Please proceed with your question.

Hi, good morning.

Good morning, Charles.

Rich, if you could expand a little bit more on the HML acquisition. I know it’s one that kind of slipped through the cracks a little bit, given some of the noise about a large federal contract. But talk to me about, a, the rationale between the acquisition a little bit more, and also if you could maybe frame the opportunities – the market opportunity, I should say – that’s behind the rationale there.

Charles, I’d be glad to do that. As a starting point, what I would say is back up a little bit and recall our discussion in terms of what our international expansion strategy is, and we actually have a four-phase expansion strategy. The fourth phase is once we’ve established a single significant program in a new geography, their initial task is to establish themselves as a leading provider, a credible provider, good brand in the community known by the government officials, and then use that to springboard and offer additional services, i.e. Phase 4, to that government, again piggybacking on the brand, the reputation we established during Phase 3. In the case of the U.K., really the charge was led by our human services team who established and won – you may remember two, three years ago – that initial win with the work program, and the team has done from Day 1 and continues to do a great job to serve that client and built a great brand. That team worked with our health services folks to identify opportunities, health-related opportunities in the U.K. In this particular case, it became clear the best way to take advantage of what we think are growing opportunities in the U.K. was to make an acquisition. Working with our M&A team, our health and human services folks all worked to sort through the likely candidates, what was available, and we were very, very fortunate to be introduced to HML and come to terms to acquire HML. It really is just a first-class organization, just from an operational perspective, a diligence perspective. It’s a company that has great, great people who are very much focused on the same values as Maximus, and that’s quality service to its clients. It has a good reputation within the government already, so it’s a great, I’d say, adjacency for us and really puts us, when combined with HML, into a great position to win some opportunities in the U.K., which we think will occur over the next several years. I won’t get into particular opportunities, but I do say that that’s a government that does procure on a central basis programs for which now HML with Maximus is very, very well positioned to serve that government, so we’re excited about it.

And Rich, I know you can’t really talk about specific opportunities, but is there a general sense of maybe the market opportunity that you could maybe share with us?

In terms of market opportunity, I think there’s just a cadre of services that fall within welfare programs and health programs for the U.K. government. It’s interesting in the U.K. – I mean, effectively these programs are run under the same department, so our existing client; so whether it’s similar to what we do here in the U.S. in terms of processing appeals, assessments, and really just running the back room of these programs would be the general opportunity for us.

Great. And then my follow-up is just thinking internationally. When you look at the Saudi Arabia pilot program there, can you give us an update on the next phase there?

Oh boy, that’s a real dynamic country in terms of the changes that are occurring from a social level in many, many dimensions. I think the team’s done a good job on this pilot program. We’re in active negotiations to extend the pilot and renew the pilot, so we’re very confident that those discussions are advancing as planned. I do think longer term, there will be additional opportunities for Maximus above and beyond that single program.

Great. Thank you very much, Rich.

You bet, Charles. Thank you.

Thanks, Charlie. Next question please?

Your next question is from the line of Carl McDonald with Citigroup. Please go ahead with your question.

Great, thanks. I’d be interested if you could talk a little bit about the composition of the pipeline. As you mentioned, you’ve had a lot of contracts leave the pipeline and be awarded, so just be interested if that mix of business within the pipeline has changed to any significant degree in terms of the types of contracts that are in it.

Good morning, Carl, this is Rich. I don’t really see a meaningful shift. It’s not as if it’s shifted to bias towards one segment or one geography. I do think that we have strong opportunities here in the U.S. The U.S. is biased, perhaps, towards health; but otherwise, I see strong growth opportunities geographically, growth plans for Canada, U.K., U.S. – yes, with a bias towards health – and Australia, so across all of our geographies. I’d say in the other countries, you’ll find perhaps a bias towards human services is one, and again let’s be clear – our long-term growth strategy, and I’d like to say it’s the land and expand examples we’ve set in Canada and Australia, and we’re now in process in the U.K., we seek to have a meaningful book of business in both segments.

And then a separate question on the forecasting. When you look at your top-down versus your bottom-up analysis, where do the biggest variances tend to occur between those two different perspectives?

Dave Walker is with us today. I’m going to deflect this one to Dave and ask him for his initial thoughts on that.

Well, top-down versus bottom-up – I mean, at the bottom-up, and remember it happens in the next week and then we’ll roll forward to November, it will start by what’s in the pipeline. That has yet to be decided and there’s a few things that can move that, and that helps us. You also have to appreciate when we do the bottom-up, we have at least a few more months of operating history, and that’s helpful for us to gauge future operating income for things that are in start-up phase. So I think we’re pretty good at hitting the mark where we think it is, but sometimes they start a little slower. We assess where that is, and it helps us do that. So those are the sort of items that cause us to reconcile the two, and then if we get differences between the segments, we do have a lot of discretion in terms of what we spend on business development and how we support organizations, so we have the ability to always adjust our SG&A and our selling costs to adapt to what we think to be an appropriate business space in the markets we want to address. So that’s where we’ll reconcile all that and square it up.

Carl, I would add this to David’s comment – the top-down is, I think, a bit more firm than many top-down. Some top-down are just a macro, what do we think the market is growing at, and that becomes our top-down placeholder. This is a situation where we do a top-down, Dave Walker and his team, they will identify down to more material projects, what we see as new work next year and work that might be phasing out, or big projects that are going into maintenance mode, so we do start to get a bead on that. The difference between the top-down and our final number is we do go into a division-by-division review of the division leaderships’ forecast where we want to make investments, where we want to pursue new business, and really provide a second guess, if you will, on a division-by-division basis, major program-by-program basis. So the top-down differs from the bottom-up in that the bottom-up is just more of a real scrub of the data as we know it, and obviously we’re closer to the beginning of the year than when we perform our top-down. Is that helpful, Carl?

Yes, that’s great. Thank you.

Next question, please?

The next question is from the line of Frank Sparacino of First Analysis. Please proceed with your question.

Hi guys. I wanted to go back to the U.K. work program and just get a sense of what factors are impacting the business there and how much of that is related to the economy, but also just get a better sense—I think the original projections for that contract, the operating margin was in the 15% range. Just curious where you think that will be going forward if in fact the lower volume and revenue trends persist.

Frank, this is Rich. I think it’s helpful to separate the top line or revenue dynamics in the work program from the bottom line, and it makes the point about the nature of the model. From a top line perspective, the biggest variable based on the original plan, and the original plan was based upon estimates provided to all the bidders by the U.K. government, the referral levels are down in comparison to their estimates. We started the program where actually referrals were greater than the estimates – you may recall some quarters where we shared that with you, but year-to-date in the most recent year, the referrals are down, and that’s the beginning of the pipeline. So you need to feather that through, and we do model that through and there is a delay because, you know, the larger pay point is not when we find a referral a job but when they’ve been in that job. So as it relates to the bottom line, the good news is the program is such that most of our cost, which is labor, is variable; and we monitor that very, very closely. I think that’s the difference between a first-class operator and those who aren’t, an ability to have the right amount of customer service representatives focused on the cases that we have, and the team has done a great job such that from a bottom line perspective, it is exactly where we expect it to be from an operating income percentage. It’s at the upper end of the range, so I have no complaints with the program in that context. The government had an initial best estimate as it relates to referrals. We can speculate why referrals are lower – it’s economic in nature, and it’s also just the referrals that the government in reality had available. I do know that there is an intent and discussions between the industry, including Maximus and the client, to work on those referrals. Fingers crossed, they may increase, but it’s difficult to forecast. Does that help, Frank?

It does, thank you.

Okay. Next question, please.

Your next question is from the line of Brian Kinstlinger with Sidoti & Company. Please proceed with your question.

Hi, good morning.

Good morning, Brian.

So the first question I’ve got, if I exclude one-time items, and I assume 2Q was the bottom for the operating margin in human services, given we saw the full effect of Australia’s changes, I would have expected a little bit more of a bounce in 3Q on the volumes; and based on what you’ve just said, you’re hitting your targets on margin in that program. So I guess I’m curious why we didn’t see a little bit more of a bounce sequentially, and should we expect margins to improve with volume increases over the next few quarters, if they do increase?

Okay, I’m going to ask Dave Walker. You’ve got a two-part question. I think, one, why were margins not greater in the human services segment this quarter; and then what do we expect on a go-forward basis, in particular Q4?

Sure. Thanks, Brian. Great question. So actually sequentially the profit grew 4.3% and the revenue 3.6, so it did increase. And the U.K., which in fact is at an operating income is pretty consistent with our expectation, is just a piece of the pie, and the pie isn’t staying still. Remember, we threw a lot of domestic growth with the PSI acquisition in there, and the other programs are growing nicely. So I would say the U.K. is at the higher end of the portfolio range, and there is volatility within programs quarter-over-quarter. In fact, just as a reminder, Q4 is generally heavily driven by seasonality in both health and human services, and I think human services you’ll see the biggest sequential growth in Q4. Again, that’s driven by we see seasonality in Max Network, we see it in tax credit, and timing of change orders. So we will see it go up; but again, I think the U.K. is just a piece of the pie, and the U.K. as the bigger piece of that pie has been relatively flat.

Just for your perspective, Brian, Max Network is Australia.

Oh yes, I’m sorry. And when you look into next year, I think all of the businesses are going to grow nicely, and we expect sequential growth. I think U.K. will have its share, and in order for it to contribute more margin, it would need to grow at a faster rate, and we’re not seeing that at this time. We’re seeing growth across the board. So I would expect our margins to maintain within our guidance that we currently have. If I just looked at them relatively speaking, generally speaking health, where we think we have the greatest differentiation, will be at the higher end of our margin range, and human will tend to be at the lower end of our margin range. But they’ve been about equal over the last year or so.

That’s helpful. My follow-up is hypothetically, if you were not to win the federal appeals contract, what would happen to your ’14 revenue and EPS guidance? I guess would it suggest—I know you factor them, but would it suggest you’d probably be more towards the low end and likely a shortfall? It seemed that your proposals pending wasn’t that high, given this outstanding RFP, so I’m curious about that.

Well, I guess I’ll answer it two ways for you. One, we would still be within the range, so that’s why we give a range and that’s why it’s so broad this early in the year. I would say the second part of it is not to forget that’s a cost reimbursable contract, so I have two ranges I’ve given you – revenue and operating income. I’m more confident of my ability to work my operating income than I am the top line of low margin business that’s reimbursable. So as you know, we perform best when it’s operation-based and when it’s outcome-based, and so we’re glad to take the reimbursable revenue but it is not our favorite.

One thing I’d like to add to this, and that is what I refer to as the one-year phenomenon. When we present pipeline information, our protocol is just to include the base year. Of late, we’ve seen a trend with the federal government—base contract, rather, base contract value. We’ve seen a trend with the federal government whereby what they’ve been doing is going out with a one-year base contract with multiple – three, four, five, eight-plus option years. For all practical purposes, that will likely end up being a multiple year contract arrangement, but the federal government is going with a one-year base. So it’s difficult to discern that when you look at the pipeline information. It would be included as a one-year contract value, so keep that in mind.

Yeah, that’s helpful. Thanks.

Next question, please?

The next question is coming from the line of Brian Hoffman with Avondale Partners. Please proceed with your question.

Good morning. Thank you for taking the questions. I’ve got—my first question is on the healthcare claims appeals business. You mentioned that this should return to more normalized levels. Can you talk a bit about what’s going on here and driving this change, and when you expect normalized levels to start to appear?

Glad to do that, Brian, and I’m going to hand this over in a minute to Bruce Caswell, who I believe you know runs our health segment. Bruce is closely tied to what’s going on with our federal business and appeals, and we’re real happy that it’s been a great contributor all of this year. But to be clear, when we say more normalized levels, the volumes in that business over last year have spiked significantly. In every quarter, we’ve seen significant increases. We think it’s going to level off in terms of increasing, but level off at the higher level. I don’t expect that it’s going to go back to what it was in years past, so it’s more a leveling off than back to normalized levels. So with that perspective, I’m going to hand this over to Bruce and any comments you’d like to share about what’s going on in the appeals world, if you will.

Sure. Brian, good morning. I think first of all, as you’re probably quite aware, it’s difficult to predict future volumes. There are a lot of factors that can affect the volumes in the appeals world. Certainly the ongoing debate around how Part B of A claims are going to be handled based on the interim final rule that was issued in March has the hospital community lobbying hard for less restrictive rebilling rights there. If anything, you can maybe attribute a little bit of the leveling off – and again, leveling at a high level – to some of those dynamics, with maybe fewer BofA appeals and more claims being just billed as Part B. But counterbalancing that, as you’re probably aware, is that about a year ago, CMS allowed the RAP contractors to expand their work to prepayment audits, and that prepayment audit program really only covered 11 states and so there is some speculation – and I think it’s based on strong evidence – that that’s been a successful program, that that prepayment audit program could be expanded to a much larger set of states. So that would provide, obviously, a bit of a tailwind. Finally, there is the dynamic just around the whole RAP re-procurement process where, as you’re aware, the re-procurements were intended to transition contracts in the February to April timeframe of next year, but there is even late-breaking news this morning that some of the existing RAP contractors are going to be getting extensions in terms of their ability to continue to submit claims and support the appeals process, suggesting that any effect you might see or expect in early ’14 would be pushed out. So I think just to summarize, Rich put it well when he said while we’ve seen a leveling off, it’s a leveling at a much higher level than historical volumes, and we’ve used that as the basis for our forward projections because it’s really the best information we currently have.

Well, and to be clear, leveling off at a high level with it ramping up to the year, mathematically that means it’s a growth driver in real dollars next year over this year.

Next question, please.

Our next question is from the line of Brian Jeswali with Raymond James. Please proceed with your question.

Yeah, good morning guys. Rich, wanted to dive into the pipeline one more time. It strikes me that the international composition might be a little bit higher than what it was a year ago through growth there, but also the profitability mix of this might be a little bit higher as maybe more performance-based contracts within the pipeline relative to what we saw in the federal side this year.

Oh boy, Brian, I think that is a data point that’s true. We do see increasing opportunities that are performance-based. That being said, we’ve got a three-tier growth strategy here: health, focusing in years past on U.S., now international; federal; and then international per se. In years past, there has been a tendency towards performance-based contracts, hence higher margin, but I will say we still have very significant growth aspirations for our federal business, some of which I think will be performance based, hence higher margins, some of which could be at the other end of the continuum, way at the other end of the continuum, really cost reimbursables which would carry single-digit margins. So it’s really difficult at this point in time to handicap what’s in that pipeline from a profitability-mix perspective.

I guess, Brian, I would add from a comparison to last year, as you recall, the pipeline was quite large at this quarter last year, much of it due to some of the opportunities we saw related to the Affordable Care Act. So if I pivot off that and look at this year, it’s probably fair to say that perhaps in this year’s pipeline, we do see a greater number of international opportunities when we look at relative to last year.

Great, that’s very helpful. Maybe just a margin question in the human services side of things. Can you talk maybe to how Australia kind of progresses as what has been a headwind this year and maybe the timing of when it converts to begin to be a tailwind for the business after you kind of digest some of these investments that you’ve made.

Well, I actually think Max Network sequentially year-over-year was down, but it has certainly leveled off so we’re actually seeing it, if you look sequentially, it’s kind of at the level that we think it will be as the government adjusts to those programs there. And we still think it’s a program where it will continue to drive the top line through additional allocations of work and adjacencies that we’ve been successful in.

Yeah, I would add to that—I agree with Dave Walker’s comments, and I would add to it. My view is that I think Max Network really has stabilized and is in very much the growth mode. So they’ve done a great job to deal with the programmatic changes that came about about a year ago. I think we’re done with the year-over-year impacts of that. I think they’re growing top line and bottom line, and it’s a solid performer. We’ve got a great management team down there. It has a great partnership with our client. They’ve had some nice wins and have a nice pipeline, so I view it as a very solid growth business.

Okay, thanks.

Next question?

Our next question is a follow-up from the line of Frank Sparacino of First Analysis. Please proceed with your question.

Hi guys. I just wanted to come back, maybe Richard or Bruce, on the state-based exchanges. I’m just curious – obviously there’s been a lot of criticism or skepticism on the federal side of things, but just curious where you think the six states are that you’re working with, particularly New York, which is far and away the largest.

Thanks for the question, Frank. Bruce, what your views on that?

Well, I appreciate the question, Frank, and I actually spent the day on Monday in Albany with the team that’s standing up that operation, and I would say across the board for the six states we’re working with, we are very much ready to go live. We’ll be ready to go live in October for open enrollment, and as Rich mentioned in his script, we’ve already in fact gone live in two locations – Brownsville, Texas as part of the federal operation, and then in Maryland with an information line for general questions. So as we’re looking at the states as they plan the last few months here to October 1, invariability as I’m sure you’re reading, they’re making tough choices and prioritizing on Day 1 system functionality, what’s absolutely essential for the operations. But we have found across the board that our clients remain singularly focused on a positive consumer experience on Day 1, so any kind of re-prioritization of functionality generally leads to more work being done in the back office to ensure that the consumer experience is first class, and if anything, that could lead to more labor on our part, handling additional manual tasks that then become automated through subsequent system fixes. So we’re feeling quite confident about Day 1 operations across the board.

Next question, please.

Thank you. As a reminder, you may press star, one to ask a question, and we ask you to please limit yourself to two questions. The next question is a follow-up from Brian Kintslinger with Sidoti & Company.

Good morning again. The first question I’ve got is do you expect the federal exchange to be ready for open enrollment in October; and if not, do you think it will be ready for enrollments January 1?

Like me to take that? Brian, it’s Bruce. Thanks a lot for the question. Again, our involvement in the federal exchange is really through our work as a subcontractor to Vangent GDIT in the call center areas, and so our optics obviously to readiness of several of the key platform areas, like the federal exchange platform system, or FEP system, or the data services hub is limited to really probably about the same information you can pick up in the media. At the same time, a lot has been said about the progression of those efforts. There are states that have gone through now successful testing against the data services hub. There are standards being published for the things they call the account transfer objects, which is a critical element of how data will move between federally-facilitated exchange operations and the state governments that retain, as you may know, an obligation to handle those Medicaid cases that come down from the federal level and provide the system of record. So there is what we would refer to as a complex orchestration that has to be completed between the federal level and the state level, and as Rich mentioned in his remarks, we’re working hard to help our state clients that retain obligations related to the No Wrong Door provisions of the Act to ensure that their systems and operations are going to be ready to handle those cases as they come down. So overall, I would just say that our efforts bringing up in a timely manner the Brownsville operation last week, the ongoing fit-up and readiness of the Boise operation suggest that certainly from a call center perspective, again, we’ll be ready on Day 1.

And Brian, I would emphasize that from Maximus’ perspective, we are doing everything we can and we will carry our fair share of responsibility on the federal exchange, but there are very, very many moving parts, many not the responsibility of Maximus, so it’s difficult to handicap your questions in their entirety from our perspective. It’s a great question, though.

Great. The last is two housekeeping items. The first is of the Hicks work you’ve won, how much is federal; and then where is the increased CAPEX going? It’s one of your lower free cash flow years in a long time, so maybe highlight where that money is going.

It’s a difficult one to answer in terms of the Hicks components, Brian, because we’re just not at liberty to disclose the component parts. The clients are quite finicky about that, so we’re going to have to decline responding to that one. On the CAPEX, Dave Walker, we do have some dynamics on the CAPEX level. What would be your commentary?

It’s very much start-up driven, so if you look at it, it is cap software that we have to put in place, and a good portion tends to be funded but we have to defer that revenue to in fact put these systems, these call center systems – phones, switches, et cetera – into place, so it’s a little bit you see it in the furniture and fixtures and you see it in the equipment. Even the internal back office, our employee headcount has grown so fast that we actually had to book another license just to have software for our time cards. So it’s all anticipated and it’s all tied to start-up, and you can triangulate the revenue growth with how this stuff tracks. So that’s what it’s tied to.

Thank you, Brian. Next question, please?

The next question is a follow-up from the line of Brian Hoffman with Avondale. Please go ahead with your question.

Hey, thanks for taking another question. Can you tell us how much revenue growth in the quarter came from PSI and what sort of growth you’re anticipating for PSI over the next year?

Yeah, sure. Just a second. Virtually if you look at it year-over-year, it’s all organic growth materially, and really essentially that means PSI declined year-over-year, and we expected that. When we purchased PSI, we did expect some decline due to client concentration, so both entities would maintain all the combined work in certain program areas, and we’ve seen that to be true. So essentially, all the growth you’re seeing materially is organic.

Next question, please?

The next question is a follow-up from the line of Brian Jeswali with Raymond James. Please go ahead with your question.

Yeah, just a quick follow-up. You guys had taken Illinois out of the guidance, it looks like, as of December. Can you maybe talk a little bit about the union dynamics going on with this, likelihood of appeal, and maybe also whether there would be termination costs attached to Illinois ending the contract relationship?

Sure, Brian. I’m going to ask Bruce Caswell to respond to that one.

Happy to. Brian, as you know, this was a two-year contract under which Maximus, just by way of background, helps the state caseworkers verify the continued eligibility for individuals in the medical system’s programs, including Medicaid. In July of 2012, the union filed a grievance under their collective bargaining agreement that the State was required to use union employees. June 20, 2013, the arbitrator ruled, as you are aware, in favor of the union, and we’re really awaiting further direction from our client regarding their intent to appeal, so I really can’t speculate at this point. They have, it’s our understanding, until October to make that decision, so as a consequence given the current environment, we’ve made the decision, obviously, to reflect that contract as winding down in December, as would be required under the arbitrator’s ruling. That said, we’ll continue to seek guidance from our client on what role, if any, we might be able to continue to provide to help them effect the transition, should they choose to go in that direction. I guess I would turn it over to Dave Walker to comment on the impact of any wind-down costs or transition costs in the program.

It’s all going to be very much tied to where we end up in the negotiation, but it’s all baked into our forecast.

Thanks a lot, guys.

Before we move on to our next question, we did receive a query that I’d like to clarify. It’s really kind of a follow-on to the earlier discussions as it relates to the operating margin in the human services segment. To wrap up what Dave Walker shared with you, while the operating margin for that segment was flat on a sequential basis and the main drivers were good performance by U.K., good performance by Max Network, with really the softness being and what we’ve shared with you in the past, the U.S. domestic market in human services. That being said, we do expect that that segment will have growth and improvement in its operating margin in the fourth quarter, and we do expect that health will have another solid quarter. In fact, I think we’ll have top line growth in both segments such that when you add it up, we feel comfortable with our top line and bottom line guidance, adjusted EPS for fiscal ’13. In fact, at this point in time we’re confident that we tend to be at the upper end of both ranges. So with that, I’ll open it up to any final questions that may be out there.

For ’13.

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