MAXIMUS, Inc. F3Q08 (Qtr End 06/30/08) Earnings Call Transcript

Aug. 7.08 | About: MAXIMUS, Inc. (MMS)


F3Q08 Earnings Call

August 7, 2008 8:30 am ET


Lisa Miles – Vice President, Investor Relations

David N. Walker - Chief Financial Officer

Richard A. Montoni - Chief Executive Officer, President and Director


Anurag Rana - KeyBanc Capital Markets

Charles Strauzer - CJS Securities

George Price - Stifel Nicolaus & Company, Inc.

Jason Kupferberg - UBS


Welcome to MAXIMUS third quarter earnings call. (Operator Instructions) At this time I would like to turn the call over to Lisa Miles, Vice President of Investor Relations.

Lisa Miles

If you wish to follow along, we’ve posted a presentation on our website under the Investor Relations page. On the call today is Rich Montoni, Chief Executive Officer, and David Walker, Chief Financial Officer. Following our prepared comments we will open the call up for Q&A.

Before we begin I’d like to remind everyone that a number of statements 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 and our most recent 10-K filed with the SEC. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances.

And with that, I’ll turn the call over to Dave.

David N. Walker

Before we begin a quick bit of housekeeping. Earlier this week, MAXIMUS filed an 8-K which reflected businesses sold in the third quarter. This document reclassifies revenue and cost associated with our divested businesses out of our continuing operations' financial statements. We provided the last two years to provide good baseline financial information. We hope you found this information helpful. So today I’ll focus primarily on results from continuing operations.

Let’s turn our attention to financial results. Total company revenue for the third quarter was $206.3 million, a 9% increase compared to revenue of $189.7 million reported for the same period last year. All growth was organic and driven by new and expanding work in the Operations segment.

The company reported net income of $11.4 million in the third quarter or earnings of $0.61 per diluted share. Our earnings were favorably impacted by a gain of $0.23 associated with the sale of two businesses and a property in McLean, Virginia. This unusual gain was offset by a charge for an anticipated settlement of $0.24. Excluding these one time items, pro forma earnings were $0.62 per diluted share.

The one-time items relate to divesting non-core businesses, streamlining administrative office space, and better positioning divisions for improved performance or sale. These are clear steps taken towards becoming a focused Health and Human Services operations pure play.

The gains from the sale of the non-core businesses are included in the income from discontinued operations net of taxes of $1.6 million or $0.09 per diluted share. The gain largely relates to the sale of Security Solutions division. We also completed the sale of our Unison subsidiary, for which the company has deferred recognition of a pre-tax gain of $3.9 million. The company also recognized a pre-tax gain of $3.9 million or $0.14 a diluted share related to the sale of an administrative office in McLean, Virginia, as we continue to take steps to streamline our operating costs.

The sum of these divesture and property gains of $0.23 per share were offset by the Justice settlement provision of $7 million pre-tax included in the legal and settlement line of the financial, along with $700,000 in anticipated legal charges related to the ongoing arbitration with Accenture.

Since our prior guidance did not include the $0.24 per diluted share for the settlement charge, it needs to be added back to earnings to be comparable to the consensus estimate of $0.75. Excluding the settlement charge, earnings would have been $0.85 per diluted share, which is $0.10 a share better than consensus, indicative of the continuing strong performance in our core Health and Human Services business.

Let’s turn our attention to financial results by segment. Starting with the Operations segment, revenue for the Operations segment increased 13% to $157.9 million compared to $140.3 million reported for the same period last year. Third quarter revenue growth was fueled by new and expanding work, most notably from our work for services and health operations.

As a reminder, on last quarter’s call we discussed that our second quarter revenue was bolstered by infrequently occurring revenue of approximately $6.9 million related to a large hardware and software purchase. Normalizing for this large purchase, revenue grew sequentially relative to the second fiscal quarter by 2.5%.

Moving on to segment margin, the Operations segment recorded third quarter operating income of $23.8 million or an operating margin of 15% compared to income of $24.6 million, an operating margin of 18% for the same period last year, which included a one time profit uplift of approximately $3.2 million related to accounts receivable collections which were previously reserved on the Texas project.

Overall, the company continues to enjoy a solid stream of predictable, long term recurring revenue from the Operations segment. As a result, we still expect the segment to deliver operating margin in the 12% to 15% range for the full fiscal year. Both our growth and financial performance in Operations continues to confirm our strategy of focusing on our core Health and Human Services business offerings.

Let’s turn our attention to the Consulting segment, which had revenue of $19.7 million for the third quarter compared to $19.2 million reported for the same period last year. Consulting segment operating income totaled approximately $0.5 million for the third quarter. Segment results for the period were in line with our expectations.

We continue to transition this segment away from the contingency based, RevMax work and make investments into new markets such as program integrity and Medicaid fraud, waste and abuse. Rich will talk in greater detail about our longer term plans for Consulting and its importance to the Operations business later in the call.

Moving on to the Systems segment, as expected, financial results continued to be mixed within the segment. Third quarter revenue for the segment totaled $28.7 million, with a loss of approximately $5.6 million. Asset Solutions and ERP divisions delivered results that were in line or better than our expectations. The financial performance by both Asset and ERP offset some of the losses in Justice and Education.

The Justice settlement this quarter resolves all remaining contractual requirements in our legacy environment. Justice has been working on product development requirements in both its legacy and next generation web-based product. In anticipation of this settlement, we have been able to significantly reduce the overhead in this division and allow the team to provide its development focus on a single, development environment.

In addition, we will eliminate a project that has been losing money and as part of the anticipated settlement we expect to receive an accretive maintenance revenue stream from this client. We believe this positions us to drive more efficiency in the operation, hence improved financial performance of this business. This in turn better positions the division for additional investment or a potential sale.

As we discussed on our last earnings call, we remain committed to a parallel path for these underperforming systems businesses. As we streamline and optimize these businesses, we are also actively exploring all alternatives for these operations.

Overall, both gross profit and SG&A as a percent of revenue have been running at consistent levels over the last several quarters. During the third quarter, total company operating margin was affected by several nonrecurring events such as gains from the property sale and the divested businesses as well as legal and settlement expense. Normalized for all these items, MAXIMUS achieved an 8.9% margin in the quarter. Excluding the losses in Systems, the margin would have been in excess of 11%.

Moving on to balance sheet and cash flow items, we ended the third quarter with cash totaling $77.9 million. As announced in this morning’s press release, we’ve completed our accelerated share repurchase program and received a refund of cash in excess of that required to purchase the shares under the program of approximately $13.9 million.

With the completion of our ASR and the $13.9 million in cash from the true up, the Board of Directors has adopted a resolution to increase funds available under our prior Board-authorized repurchase program. The Board has approved repurchases up to $75 million, expanding the program by approximately $30 million.

Total accounts receivable for the third quarter was $176.5 million. We also have an additional $1.7 million in long- term accounts receivable, which are classified within other assets on the balance sheet. With our ongoing focus on AR and cash management, we ended the quarter with days sales outstanding totaling 79 days, well within the level we normally anticipate of 75 to 85 days.

MAXIMUS generated cash from operations totaling $12.8 million. Free cash flow, which the company defines as cash from operations, less property and equipment and capitalized software, was $6 million.

Thank you for your time this morning. With that, I’ll turn the call over to Rich.

Richard A. Montoni

I appreciate that the reported results for the quarter are complex and there are a lot of moving pieces. I also appreciate that recurring charges may be concerning, so I want to take the time this morning to help you understand what’s behind the numbers. When you do look behind the numbers, you’ll see how the quarter constitutes a positive step in our strategy to focus and solidify MAXIMUS as the leading pure play provider in government health and human services.

And when we complete this phase of concentrating our focus - and rest assured, we will - special charges will not be a recurring theme, and our business will be more focused, more predictable, well positioned to grow, and more profitable.

This quarter’s results have two key points. First, we are proceeding with our plan to refine our business focus on our core health and human service offerings, hence our efforts to divest certain non-core businesses and exit a certain Justice contract.

Second, our core Operations segment delivered another solid quarter. The ongoing success of our Operations segment reaffirms our strategy of optimizing our existing book of business while sensibly adding new revenue. This segment is the engine to our future, and it is delivering on all cylinders.

Operations now constitutes 77% of our revenue and delivered an operating margin of approximately 15%. Understanding both of these points is critical to understanding the heart of our strategy.

Let’s take a closer look at our progress to focus. With our actions over the last several quarters, we are currently headed in the right direction. During the third quarter we completed two non-core divestitures, Unison and Security Solutions. These divestitures resulted in gains on sales, one of which was deferred.

In addition, we are actively moving along a parallel path of pursuing divestitures of other non-core operations while working at the same time to improve performance through the elimination of recurring losses. Our efforts have been very consistent with our strategy of business optimization that’s been successfully deployed within our Operations segment.

In the third quarter, we booked a $7 million provision in anticipation of settling and exiting a legacy Justice solutions contract. This action serves a dual purpose. It better positions the business for improved performance and it was a necessary step to remove a significant impediment to future investment or conveyance.

It’s very important to point out that while pursuing this strategy we are very cognizant of the needs of our key customers and our employees. We have assured our key clients that their needs will continue to be at the forefront of our plans.

On the divestment front, we have bankers engaged and we are in an active dialogue with potential buyers for certain divisions within our enterprise Systems segment. While we are very active in making solid progress, it’s not appropriate to provide any details or assurances of the potential outcome of these efforts. Also, any future divestment could yield significant gains or losses depending on business unit and timing.

Again, it’s important to see our divestment strategy in concert with initiatives to improve performance of our overall operations as we strive to become the leading health and human services pure play in the government market.

On Operations, as David noted, Operations' 15% operating margin was at the high end of our long term 10% to 15% range for the segment as we benefited from seasonal tax credit work. Continued strength in the Operations segment reflects the addition of new profitable work, most notably in the areas of health and workforce services, both domestically and internationally, the transformation of the Texas project, and additional profit expansion due to optimization initiatives.

Our optimization efforts over the last two years have focused on pursuing new business more selectively, including [rebids]; the improved use of technologies such as our productization efforts, as we talked about last quarter, and other critical business process improvements, such as call center best practices, that can be replicated from project to project.

On the top line, 2008 will represent a year of exceptional growth from our Operations segment. Our organic growth and ability to layer on new profitable work within the Operations segment reflects our industry leading position in the market. Additionally, our long-established brand and proven expertise provides clients with a demonstrated resource for some of their most important programs, many of which are federally funded and federally mandated. This leaves us well positioned to target and win opportunities from the health and human services arena that we’re tracking in our pipeline, which remains at record levels.

On our Consulting segment, in addition to profitably growing our core Health and Human Services business, we’ve furthered our efforts to improve performance in our Consulting segment. Within Consulting, we continue to transition away from our historical contingency based RevMax practice and ultimately to an orderly transition out of this business.

We’ve taken major strides towards realigning our core competencies with the key drivers we see for longer term market demand.

As we continue to de-emphasize our RevMax programs, we have focused our resources more in favor of program integrity based initiatives, including Medicaid fraud, waste and abuse, third-party liability and payment error rate measurement, or PERM. These developing markets have a lot of promise, and we’ve made several key investments in the future of this product line and the longer term growth prospects.

Let me give you an example. Our existing fraud, waste and abuse program with the State of New York has generated a lot of interest and positions us well for the next round of states coming out with RFPs or similar initiatives. While investments in new markets will dilute our margins in Consulting in the short term, we remain optimistic about our overall direction.

The recent appointment of Deanne Wertin to lead our Consulting segment underscores our commitment to leveraging our Operations and Consulting together in the marketplace. Deanne has extensive consulting experience and comes out of our Health Operations practice, where she previously managed a $125 million business and oversaw some of our most critical programs, including two major programs in California. We are very pleased to have Deanne in this key role.

Before we move on I want to comment on the market environment. We all read the headlines of state and local leaders expressing concern over revenue shortfalls for upcoming budgets. Ultimately, we are not completely immune to budgetary constraints in a difficult economic environment, and we’ve experienced some isolated instances on the fringe that are not material. Quite frankly, we believe that we are better insulated today than in prior years. Today our mix of business is weighted much more towards the administration of federally mandated health and human services programs.

In fiscal 2002 and 2003, the Operations business was just under 60% of total company revenue. Today the segment is approaching 80% of our total book of business. We view this mix shift as extremely positive and believe it further validates our narrowed focus, but overall we remain cautiously optimistic on the market environment for our services.

Also, with the presidential election looming in the fall, I would say that despite obvious distinctions between the parties, we consider this election a neutral factor for MAXIMUS. For example, Democrats tend to be more focused on spending domestically and creating programs which require our services, but are more in favor of a governmentrun model. Republicans are generally more apt to reduce spending on social programs, but they are stronger proponents of outsourcing. Both candidates have focused on healthcare and the long term need to deliver more services.

More value for dollars spent can only mean an increasing need for value-added consulting and administrative services. Regardless of the outcome, we are not anticipating a major impact on the demand for our services either way, and in the long run we believe the long-term demand drivers will continue to strengthen.

On acquisitions, beyond the domestic landscape we will complement our organic growth initiatives with the right tuckin acquisitions, particularly where we can add domain expertise and increase our geographic footprint.

On August 1 we closed the acquisition of West Country Training & Consultancy Services, Ltd. or WTCS, a U.K. employment and training company that specializes in helping people who are disadvantaged in the labor market to gain employment. WTCS operates within the Welfare to Work initiative and has a regional focus in 15 locations throughout the southwest of England. This acquisition provides MAXIMUS with a foothold into the United Kingdom employment and training marketplace and creates a solid platform to compete for several key tenders being issued under the Flexible New Deal program.

This acquisition dovetails with our strong presence in the Welfare to Work market. MAXIMUS is the leader in TANF-funded work force services programs here in the United States. We've not only successfully built this practice into a profitable enterprise, but we're also the top-ranked for-profit provider in the Australian work force services marketplace as well. The company has also played a critical role in supporting Israel in the creation and development of a well-regarded work force services program.

Switching gears, let's talk about our new sales awards and total company sales pipeline. At August 5, 2008 we had new signed awards totaling $700 million and another $213 million in contracts that had been awarded but not yet signed. Our sales pipeline is at a record level and at August 5th it totaled $1.8 billion. The increase compared to last quarter was driven by new opportunities across all segments. Some of these opportunities are in the early stages and based upon historical procurement cycles they're more likely to provide revenue in late 2009 and 2010, but this only reaffirms our longer-term vision of focusing our efforts in this market, where demand continues to remain favorable.

Our pipeline also includes rebids, some of which are substantial. On that front, I'm very pleased to also report that we expect two of our current contracts in Texas will be extended until December 31, 2009. For work beyond this date two of the RFPs were released, and our team is engaged in preparing responses. As a reminder, we have a third contract in Texas that will run through August of 2010.

Let's look at our capitalization. As Dave discussed, we completed our accelerated share repurchase program, reactivated our share buyback program, and have increased the authorization to $75 million. In light of our strong cash flows and a demonstrated success in improving our operational performance, we are now in a position to resume our Board-authorized share repurchase program. With our ASR, buyback program and ongoing dividend, returning cash to shareholders and delivering long-term value are clearly important to us and our actions support this.

At the same time, and in light of our consistent cash flow generation, we are comfortable with our working capital requirements and our ongoing strategy of cultivating our core operations through organic growth and tuckin acquisitions.

Let me move on to guidance. As noted in this morning's press release, we are modifying our revenue guidance to remove revenue for the now-discontinued operations which contributed revenue in fiscal '08 of approximately $13 million. As a result, we now expect revenue in the range of $815 million to $830 million for fiscal 2008.

On EPS, principally as a result of the $0.24 provision for the anticipated Justice division settlement, the company now expects diluted earnings per share in the range of $2.30 to $2.35 for the full fiscal year. This guidance excludes any gains or losses from potential future divesture or restructuring activities.

Before I open it up to Q&A, I just want to thank you for joining us on today's call and for your ongoing support. As I hope was clear, we are very pleased with the successes we have generated in our Operations segment and we continue to address challenges head on in other areas of our business while exploring alternatives for noncore operations.

When we update you in November we will share with you our detailed expectations for fiscal 2009. In short, despite a tougher economic environment, we are excited in our prospects and we will continue to emphasize sustainable, profitable growth in the coming quarters. We see fiscal 2009 as being a much more focused platform, with the expectation of delivering much improved financial results generated from our base operations. This will principally come from strong performance resulting from our more narrowed focus on our core health and human services offerings.

And now let's open up the call to your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Anurag Rana - KeyBanc Capital Markets.

Anurag Rana - KeyBanc Capital Markets

Nice job on getting some of these issues in the Justice division out. Now that you have some movement over there, what should we expect losses out of Systems for this year, you know, and more importantly how should we look at this division next year?

Richard A. Montoni

Thank you and we are pleased to be moving forward with this focusing program. As we look forward, a lot of it depends. I view most of the dynamics will occur in connection with divestiture of these businesses and will be an important subset of any gain or loss on sale. And I think as I talked about in my call notes, that will really depend upon which business is sold for what price and what timing, and we'll have to factor into that equation, obviously, the cost of the business that's on our books. I view it less as an operating loss from the enterprise divisions. I really like this Justice solution provision. I view it as really better positioning them for sale.

Anurag Rana - KeyBanc Capital Markets

And just on the macro environment, you did touch on it but can you get a little more specific on how should we expect, I would say, you know, rewards comings into the fourth quarter and more so your visibility going into next year?

Richard A. Montoni

You know, the way we look at next year and FY '09 - I'll talk a little bit about FY '09 and, again, we don't provide detailed guidance until we finish our planning process, which we're in the midst of doing now, and we print our final fiscal '08 results, so we'll talk about that in November - but nevertheless, when we frame fiscal 2009, this is the way we think about it.

First off, a lot of the efforts in 2008, it's not so much about the one-time gains and losses, but it's more about positioning 2009 and beyond. And as we enter 2009, our goal is to be completing our efforts to divest/remedy the noncore business, particularly those that are generating losses, so that'll provide us a purified, more focused base operations as the platform for fiscal '09.

And winning re-bids will be very, very important in fiscal '09. We've got some big re-bids coming up, and we're in the process of preparing for those now. And I do think we'll see organic growth opportunities not only domestically but international.

And lastly I'd tell you that I think '09 is going to be more about not so much top line growth issue; that's not our strategy. As you know, the last couple of years we've focused - it's not about making the sales and increasing revenues, it's about generating operating income. We will continue with that strategy, so FY '09 is not going to be about top line. The key will be reducing the drain of the noncore businesses as quickly as possible, and we want to continue the stellar delivery of great results from our Operations segment.

If we achieve those two goals alone, Anurag, FY '09 should shape up to be a very pleasing year bottom line. So I say stay tuned.


Your next question comes from Charles Strauzer - CJS Securities.

Charles Strauzer - CJS Securities

When you look at the Consulting business, I appreciate there's been a lot of work and effort going into Systems and getting that fixed and hopefully pieces sold, but Consulting, you know, it used to be a double-digit operating margin business. It hasn't been there for quite some time. In fact, it hasn't even been in the high single digits for quite some time. What gives you confidence that you can get it back to kind of those levels and, you know, really, is that going to be kind of more of the mean focus in '09, you know, once you kind of get Systems behind you?

Richard A. Montoni

I think that's an important thing in '09, but it's not the primary thing in '09. We believe it's important and opportunistic and creates value to our shareholders by having a Consulting business. That being said, the Consulting business of the future is and needs to be much different than the Consulting business we've had in the past.

A lot of the profitability that was behind the profits of the Consulting segment in the past came from the RevMax claiming business. If you study that business I think you'll find that it's saturated, it's competitive, and just the profit margins are not what they used to be years ago, nor do we believe that they will return to those levels. So we're exiting that product line, and we're looking to new product lines where we think there's increasing demand. And as I mentioned earlier today, those areas would include fraud, waste and abuse error rate work that we do, and third-party liability work. We think there’s some pretty significant work in that area, Charles, and so we’re gearing up to go in that direction.

The other thing I would say is in the course of operating these large programs, four states in our Operations segment, we have tremendous subject matter expertise. We know what best practices are from state to state, and when we talk to our customers they very much say they reply upon MAXIMUS to bring to them these best practices. And really that’s something that should be packaged in the form of consulting services. That’s one of the directions we’re headed.

Charles Strauzer – CJS Securities

So if you’re shifting towards, you know, kind of some of these new opportunities, you know, that’s some of the areas I think are, you know, have been viewed as higher margin by some of your competitors. Is that, you know, a correct assumption?

Richard A. Montoni

That’s correct.

Charles Strauzer – CJS Securities

Then if you can talk a little bit, too, about Q4 and the implied guidance that you’ve given out, if you can give us a little bit more granularity about what to expect by segment for both sales and margins.

David N. Walker

Well, we gave overall guidance for the top level for the year, you know, so that’s easy enough to back into. And generally speaking, I think you'll see Operations heading where it is. I think you’ll see the losses reducing in Systems in part because of the actions that we’re taking. And that’ll shape up to [inaudible] put those points together to get to where we’ve given you guidance.

Richard A. Montoni

And I would say, from an overall perspective I would expect the trend that you’ve seen not only in this quarter but in preceding quarters and that thematically is the solid performance from our Operations segment. That, again, I think will lead the parade in Q4.

David N. Walker

Yes. I mean, you know, in fact if you at this quarter, you know, if you adjust the Justice settlement back of $0.24 to our reported EPS of $0.61 and that’s the sheet that we had on our press release that gets you back to that $0.85, that’s what you ought to be comparing to, you know, what was consensus of $0.75. So we over delivered due to that health and human services-based business. And that just says the base business is really strong and it’s continuing to be.

Charles Strauzer – CJS Securities

And this is something that would cause the margins to decline significantly in Q4 from Q3 in Operations, correct?

David N. Walker

No. In fact some of the tax crediting business is, you know - actually help us in the fourth quarter. We saw some of the benefit in the third, and we’ll see some of that in that fourth. And then, you know, it’ll return back to lower levels when you get into the next year. So there is some seasonality in the tax crediting business that’s helpful in Q4.

Charles Strauzer – CJS Securities

Right. And then when we look at the top line by segment just, you know, maybe a little bit more direction there. You know, Consulting was roughly $20 million. You know, I would assume something, you know, similar to that so it doesn’t sound like there’s going to be much growth there until you subsequently, you know, see some of these RFPs let out and [inaudible].

David N. Walker

Yes. I would say Consulting is in investment mode for the future. We’re doing a lot of work there, but that’s not translating into immediate top line. But it is certainly pressuring the bottom line, and that’s what you’re seeing. And, you know, Operations, you know, it’s a pretty predictable trend rate, I think.

Charles Strauzer – CJS Securities

And then one housekeeping question. The Unison deferral of the gain, when do you expect to realize that gain?

David N. Walker

You know, the way that worked is there’s a note which includes the interest of about 6.3%, and so anytime you have a big note you wait until its much more reasonably assured. So it’ll be sometime out in the future. It’s a facts and circumstances sort of situation, Charlie.

Charles Strauzer – CJS Securities

But not in Q4, correct?

David N. Walker


Richard A. Montoni

Probably at least a year, Charlie.

David N. Walker

Yes, at least.


Your next question comes from George Price – Stifel, Nicolaus & Company, Inc.

George Price – Stifel, Nicolaus & Company, Inc.

First, in terms of demand, can you just maybe give a little bit more granularity in terms of what, you know, maybe what types of services you’ve seen starting to be impacted on the fringe, you know, maybe what states, what, you know, the timing of that was?

Richard A. Montoni

First off when I think about demand for what we do, the first cut at it that I find helpful is to address exactly what we do and what’s the criticality of what we do to the customer and the significance of it to the customer. And I think when we talked about mix shift this makes the point that, in the operations world, most of what we do is the administration of these large federally mandated programs, and it’s the administration piece.

So I think, when the states look at managing their budgets, it's more difficult than - actually the low-hanging fruit for them is actually to go after reductions in the benefits spend per se. That’s where most of the money is spent. So when they’re looking to save hundreds of millions of dollars, that’s where they tend to focus their reductions.

And I think that has a pretty significant consequence to those folks who are providing benefits under these programs. We don’t generally provide benefits under these programs. I think it’s a different view the states take towards the administration. They have to continue the administration and, in fact, when they reduce on the administration, there can actually be significant increases in the form of fraud, waste and abuse or folks not getting appropriate services, hence there can be some real difficulties to the constituents.

So we are experiencing, in the administrative side of things, the states continue to require and engage us on the administrative spend side. We do have some programs where what we do - and this is in the Welfare to Work arena  that starts to get towards benefits spend, providing services where we help people find jobs. And in the last softening of the economy as well as at this point in time, that’s where we’ve seen some reductions on the margin. We had a couple programs, one I recall being in Southern California, where they reduced their spend 5% on the Welfare to Work type circumstances. But it's really not a big book of our business, so it really hasn’t been material to us.

George Price – Stifel, Nicolaus & Company, Inc.

So the divested businesses, $13 million through divestiture in April in revenue, right? I got that right?

Richard A. Montoni

That’s correct.

George Price - Stifel Nicolaus & Company, Inc.

That's roughly halfway through the year, right? An extra month? Guidance is coming down $15 to $20 million in revenue?

David N. Walker

I think that's right. So I think it annualizes to be pretty much the revised guidance just simply strips out the discontinued operations.

George Price - Stifel Nicolaus & Company, Inc.

Is there anything else going on in there? It could be off by a minor amount. I'm just wondering if there's anything else.

David N. Walker

Yes, I think the only difference would be rounding. We just rounded the numbers given the level of precision that exists with that and one quarter to go. Really, the adjustment in the guidance was really to bring down that top line for the stripped out reclassification of discontinued operations for the full year.

George Price - Stifel Nicolaus & Company, Inc.

Okay, and then last question is on the Justice stuff. What is the - I don't know if you can quantify a little bit some of the comments you made before in terms of how much the maintenance revenue stream is that you anticipate on the other side of this project and what the ongoing losses are going to be from the product development portion. As I understood it you had losses from the project-related stuff and then you're also making some investments in product development. I don't know if you can clarify that any further.

Richard A. Montoni

It's really not possible at this point in time, and I do want to make it clear that the provision in the quarter is the provision for anticipated settlement. We're well down the path of negotiations with the customer. I have every reason to believe that we will sign a firm agreement. And we also believe as part of that negotiation that we'll have ongoing work that we will do. But when you add all that up it's really not practical to forecast how much revenue that will be, what the profit will be. So I think it's best to just hold that off as a contingent upside situation.

And in terms of, you know, what the ongoing Justice business will look like, we have not and will not get into the detailed metrics for each division, but we have shared that the two divisions - Education and Justice - in the past have generated and are expected to generate substantial losses that, between the two of them, for fiscal '08 pretax order of magnitude $30 million, and they're pretty much on track to do that. You know, we'll get some - we've taken some actions to reduce costs which should help us in that situation, and we do have some upside obviously with a new contract should we sign and move forward and realize the revenue and profit from that new contract. But I'd hold that aside, George.


Your next question comes from Jason Kupferberg - UBS.

Jason Kupferberg - UBS

I just had a question on California specifically. I know there's been some news about the budget impasse there that's been going on for some time, and I believe they're still, collectively as a state, your biggest customer. You made a reference to, I think, a welfare program in Southern California that maybe saw a little bit of cuts, but anything more broadly affecting you in California because of the budget situation there?

Richard A. Montoni

No, it really hasn't impacted us. I know it has impacted other providers. Again, I think it's more on the folks who provide direct benefits and services. I also think it's probably - what's part of the equation is the fact that the HDL contract, which is one of the big contracts, was just let this year and awarded this year. So I think as a matter of protocol. In the year you go to a competitive bid and award it, it's not appropriate really to turn around and try to reduce that. So we don't sense that there's any imminent likelihood of impact, adverse impact, in California, in part or in total.

And the other interesting observation is one of our other top five contracts is Texas, and Texas happens to be in a very unique situation given the price of oil and gas, so I don't see any jeopardy for that state.

The one last data point I will share with you, last night I was looking at our book we prepare for the call, and we've got a couple of projects international in scope that are actually becoming large projects for us. I was very pleased to see that. It diversifies our situation, and these two locations don't have the fiscal stress that the states themselves do, so it further insulates the circumstance.

Jason Kupferberg - UBS

And just a question on the EPS guidance so that I understand the numbers here. The midpoint of the range I guess is being cut by $0.30 and we know that $0.24 is because of the Justice contract, correct?

Richard A. Montoni

That's correct.

Jason Kupferberg - UBS

So what's the other $0.06?

Richard A. Montoni

I think it's just - we're just ending up towards the lower end of the range as we wrap up the year. There's really no one specific item, Jason.

Jason Kupferberg - UBS

And just lastly, on the Accenture arbitration, can we get any update there? I know there was $700,000 of legal charges for that, and you guys had talked about I think $0.07 or so of total legal expected expenses for the second half of the year. Is that still the right number, and is that just Accenture or is that other stuff, too? And, you know, where do we stand with the Accenture arbitration?

Richard A. Montoni

Jason, that is just the Accenture arbitration, and that was a provision for anticipated costs in the fourth quarter. I'd also say, as it relates to the arbitration itself, that proceeding is still an active proceeding. The parties are working to come up with a date certain or a timeframe certain. We don't have one at this point in time, but I expect that it's going to be some time next spring when the arbitration will likely occur.

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