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PRSC > SEC Filings for PRSC > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for PROVIDENCE SERVICE CORP

Form 10-Q for PROVIDENCE SERVICE CORP


9-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes for the three and six months ended June 30, 2013 and 2012 as well as our consolidated financial statements and accompanying notes and management's discussion and analysis of financial condition and results of operations included in our Form 10-K for the year ended December 31, 2012. For purposes of "Management's Discussion and Analysis of Financial Condition and Results of Operations", references to Q2 2013 and Q2 2012 mean the three months ended June 30, 2013 and the three months ended June 30, 2012, respectively. In addition, references to YTD 2013 and YTD 2012 mean the six months ended June 30, 2013 and the six months ended June 30, 2012, respectively.

Overview of our business

We are a direct provider of government sponsored social services and a manager of not-for-profit organizations under contract that delivers government sponsored social services. In addition, we broker and manage Medicaid funded non-emergency transportation services. As a result of and in response to the large and growing population of eligible beneficiaries of government sponsored services, increasing pressure on governments to control costs and increasing acceptance of privatized social services and managed care solutions, we have grown both organically and by making strategic acquisitions.

We are focused on driving organic and acquisitive growth, improving operating efficiencies, and developing performance management systems that will enhance and leverage our people and processes. Our core competencies include:

? Enduring relationships with payers clients and referral sources;

? Geographic reach, breadth of services and experience;

? Management of the transportation and human service needs of defined populations;

? Management of provider networks, contract bidding infrastructure;

? Managed care contracting experience, and;

? Technology platform development.

By enhancing and leveraging these core competencies, we believe we can benefit from emerging trends in healthcare such as healthcare reform, coordinated and integrated healthcare and continued outsourcing of transportation management.

While we believe we are well positioned to benefit from healthcare reform legislation and to offer our services to a growing population of individuals eligible to receive our services, there can be no assurances that programs under which we provide our services will receive continued or increased funding.

While we believe we are positioned to potentially benefit from trends that favor our in-home provision of social services, budgetary pressures still exist that could reduce funding for the services we provide. Medicaid budgets are fluid and dramatic changes in the financing or structure of Medicaid could have a negative impact on our business.

As of June 30, 2013, we were providing social services directly to approximately 53,100 unique clients, and had approximately 17.2 million individuals eligible to receive services under our non-emergency transportation services contracts. We provided services to these clients from approximately 390 locations in 43 states and the District of Columbia in the United States, and British Columbia and Alberta, Canada.


Critical accounting estimates and policies

As of June 30, 2013, there has been no change in our accounting policies or the underlying assumptions or methodology used to fairly present our financial position, results of operations and cash flows for the periods covered by this report.

For further discussion of our critical accounting policies see management's discussion and analysis of financial condition and results of operations contained in our Form 10-K for the year ended December 31, 2012.

Results of operations

Segment reporting. Our financial operating results are organized and reviewed by our chief operating decision maker as two reportable segments-Social Services and NET Services. We operate these reportable segments as separate divisions and differentiate the segments based on the nature of the services they offer as more fully described in our Form 10-K for the year ended December 31, 2012.

Consolidated Results. The following table sets forth the percentage of consolidated total revenues represented by items in our unaudited condensed consolidated statements of income for the periods presented:

                                            Three months ended               Six months ended
                                                 June 30,                        June 30,
                                           2013             2012           2013            2012
Revenues:
Social services                               31.2%           32.3%           31.3%          34.4%
Non-emergency transportation services          68.8            67.7            68.7           65.6
Total revenues                                100.0           100.0           100.0          100.0

Operating expenses:
Client service expense                         26.5            27.4            26.7           29.1
Cost of non-emergency transportation
services                                       63.6            64.8            63.2           62.6
General and administrative expense              4.4             4.9             4.4            4.9
Asset impairment charge                         0.2               -             0.1              -
Depreciation and amortization                   1.3             1.3             1.3            1.4
Total operating expenses                       96.0            98.4            95.7           98.0

Operating income                                4.0             1.6             4.3            2.0

Non-operating expense:
Interest expense (income), net                  0.6             0.7             0.6            0.7
Income before income taxes                      3.4             0.9             3.7            1.3
Provision for income taxes                      1.4             0.4             1.5            0.5
Net income                                     2.0%            0.5%            2.2%           0.8%

Overview of trends of our results of operations for YTD 2013

Our Social Services revenues for YTD 2013 as compared to YTD 2012 were unfavorably impacted by contract terminations, waivers granted under the No Child Left Behind Act, or NCLB, decreased encounters and first quarter inclement weather that resulted in a reduction of our billable hours in certain markets. In addition, revenue from our Canadian operations declined for YTD 2013 as compared to YTD 2012 due to the impact of a reorganization of the service delivery system in British Columbia and increased competition in this market, which began in early 2012. Partially offsetting decreases in these revenues for YTD 2013 as compared to YTD 2012 was the implementation of new programs and increased census in certain of our markets.


We believe the industry trend away from the more expensive out of home service providers in favor of home and community based delivery systems like ours will continue. In addition, we believe that our effective low cost home and community based service delivery system is becoming more attractive to certain payers that have historically only contracted with not-for-profit social services organizations. Further, we believe we are well positioned to benefit from emerging trends in healthcare, particularly the development of integrated models of healthcare delivery and financing and increased outsourcing of transportation management.

Our NET Services revenue for YTD 2013 as compared to YTD 2012 was favorably impacted by the expansion of business in our Georgia, Texas, New York and South Carolina markets, an additional contract in Wisconsin, which commenced on September 1, 2012 but terminated on July 31, 2013, rate adjustments and continued expansion of our California ambulance commercial and managed care lines of business. The additional revenue from new business was partially offset by the transition of the Connecticut contract from a full risk to an administrative services only contract effective February 1, 2013. The results of operations for YTD 2013 as compared to YTD 2012 included an increase in revenue of 10.6% due to new businesses implemented, while the cost of transportation increased by 4.1% during this period. While we believe that utilization will continue to be a factor which could impact the results of our operations for the remainder of 2013, we expect continued positive revenue impact from new contracts implemented in 2012 and from negotiated rate adjustments in select programs.

Q2 2013 compared to Q2 2012

Revenues



Social services. Social services revenue is comprised of the following:



                                        (in thousands)
                                      Three Months Ended
                                           June 30,              Percent
                                       2013          2012        change
Home and community based services   $   76,849     $ 78,624          -2.3 %
Foster care services                     9,052        8,363           8.2 %
Management fees                          3,853        3,113          23.8 %
Total social services revenue       $   89,754     $ 90,100          -0.4 %

Home and community based services. Contract terminations in Florida and Canada, the impact of waivers granted under the NCLB and decreased encounters in certain markets led to a decrease in home and community based services revenue for Q2 2013 as compared to Q2 2012. The decrease in revenue was partially offset by the impact of increased census and new programs being implemented in various markets.

Foster care services. Our foster care services revenue increased during Q2 2013 from Q2 2012 primarily as a result of expanding services into rural areas in Tennessee and an increase in intakes in Illinois.

Management fees. Fees for management services provided to certain not-for-profit organizations under management services agreements increased slightly as a percentage of social services revenue to 4.3% for Q2 2013 from 3.5% for Q2 2012. The termination of, and changes to, certain management service agreements resulted in increased management fees in Q2 2013, but will result in decreased management fee revenue for the remainder of 2013.


Non-emergency transportation services.

(in thousands)

Three Months Ended
June 30, Percent
2013 2012 change
Non-emergency transportation services $ 197,883 $ 188,837 4.8 %

NET Services revenue was favorably impacted by the following:

? a full quarter impact for one region in Georgia implemented in July 2012 and the Texas Medicaid contract implemented in May 2012;

? the completed multi-phased implementation of the New York City administrative services contract which began in May 2012;

? a full quarter of the implementation of our Southeast Wisconsin contract effective September 1, 2012, which subsequently terminated on July 31, 2013;

? continued expansion of our California ambulance commercial and managed care lines of business; and

? rate adjustments related to historical utilization in a number of our contracts.

The factors noted above were partially offset by the elimination and transition of the Connecticut "at-risk" agreement to a new administrative services only contract implemented in February 2013, which resulted in a decrease in revenue from Connecticut.

A significant portion of NET Services revenue was generated under capitated contracts where we assumed the responsibility of meeting the transportation needs of beneficiaries residing in a specific geographic region for fixed payment amounts per beneficiary. Due to the fixed revenue stream and variable expense structure of our NET Services segment, expenses related to this segment vary with seasonal fluctuations. We expect our operating results will continuously fluctuate on a quarterly basis.

Operating expenses

Social Services

Client service expense. Client service expense included the following for Q2 2013 and Q2 2012:

                                   (in thousands)
                                 Three months ended
                                      June 30,              Percent
                                  2013          2012        change
Payroll and related costs      $   56,288     $ 57,400          -1.9 %
Purchased services                  6,286        6,576          -4.4 %
Other operating expenses           13,526       12,349           9.5 %
Stock compensation                    196          203          -3.4 %
Total client service expense   $   76,296     $ 76,528          -0.3 %

Payroll and related costs. Our payroll and related costs decreased during Q2 2013 from Q2 2012 primarily due to the decrease of approximately $802,000 in payroll and related costs of our tutoring business. This decrease was principally the result of the impact of waivers granted under the NCLB. The overall decrease in payroll and related costs resulted in a decrease in the ratio of payroll and related costs as a percentage of revenue of our Social Services segment to 62.7% for Q2 2013 from 63.7% for Q2 2012.


Purchased services. We subcontract with a network of providers for a portion of the workforce development services we provide throughout British Columbia. In addition, we incur a variety of other support service expenses in the normal course of business including foster parent payments, pharmacy payments and out-of-home placements. In Q2 2013 we experienced decreased costs resulting from contract terminations in Canada of approximately $267,000. Purchased services, as a percentage of our Social Services segment revenue decreased to 7.0% for Q2 2013 from 7.3% for Q2 2012 primarily due to the impact of decreased workforce development costs in Canada relative to the level of revenue from this market.

Other operating expenses. Other operating expenses, as a percentage of revenue of our Social Services segment, increased to 15.1% for Q2 2013 from 13.7% for Q2 2012 primarily due to an increase in our costs for incurred but not reported general liability and workers' compensation claims of approximately $427,000.

Stock-based compensation. Stock-based compensation expense was primarily comprised of the amortization of the fair value of stock options and restricted stock awarded to key employees since January 1, 2009 under our 2006 Long-Term Incentive Plan, or 2006 Plan, which was approximately $166,000 and $203,000 for Q2 2013 and Q2 2012, respectively. In addition, stock-based compensation expense included costs related to performance restricted stock units granted to an executive officer.

NET Services



Cost of non-emergency transportation services. Cost of non-emergency
transportation services expense included the following for Q2 2013 and Q2 2012:



                                                   (in thousands)
                                                 Three months ended
                                                      June 30,                    Percent
                                               2013              2012              Change
Payroll and related costs                  $      23,071     $      19,357               19.2 %
Purchased services                               153,317           154,992               -1.1 %
Other operating expenses                           6,235             5,902                5.6 %
Stock compensation                                   308               388              -20.6 %
Total cost of non-emergency
transportation services                    $     182,931     $     180,639                1.3 %

Payroll and related costs. The increase in payroll and related costs of our NET Services segment for Q2 2013 as compared to Q2 2012 was due to additional staff hired for new contracts and contract expansions in Georgia, Texas, South Carolina and New York, along with additional staffing needed for expansion of the California ambulance commercial and managed care lines of business. Payroll and related costs, as a percentage of NET Services revenue, increased to 11.7% for Q2 2013 from 10.3% for Q2 2012 as we have added additional call center staff to ensure our compliance with the more demanding service authorization process and intake response time requirements of some of our new contracts, as well as transitioning the Connecticut contract and various New York managed care contracts from full risk contracts to administrative services only contracts, which result in higher payroll and related costs as a percentage of their revenue.

Purchased services. We subcontract with third party transportation providers to provide non-emergency transportation services to our clients. During the past year we have expanded our current business in Georgia, Texas, South Carolina, California and Wisconsin (which subsequently terminated on July 31, 2013) as well as through other various managed care markets. These additions resulted in an increase in purchased transportation costs for Q2 2013 as compared to Q2 2012; however, these increases were offset by the transition of our Connecticut "at risk" contract to an "administrative services" only contract, thus removing the responsibility of having to pay transportation providers for services. As a percentage of NET Services revenue, purchased services decreased to approximately 77.5% for Q2 2013 from 82.1% for Q2 2012.


Other operating expenses. Other operating expenses increased slightly for Q2 2013 as compared to Q2 2012 due primarily to increased telecommunication expenses to support new contracts and expanded markets. Other operating expenses as a percentage of NET Services revenue increased to 3.2% for Q2 2013 from 3.1% for Q2 2012 as a result of such new business.

Stock-based compensation. Stock-based compensation expense was primarily comprised of the amortization of the fair value of stock options and restricted stock awarded to employees of our NET Services segment since January 1, 2009 under our 2006 Plan which was approximately $271,000 and $389,000 for Q2 2013 and Q2 2012, respectively. In addition, stock-based compensation expense included costs related to performance restricted stock units granted to an executive officer and a key employee.

General and administrative expense.

(in thousands)

Three months ended
June 30, Percent
2013 2012 change
$ 12,731 $ 13,791 -7.7 %

The decrease in administrative expenses for Q2 2013 as compared to Q2 2012 was primarily a result of a decrease in payroll and related costs of approximately $389,000, a decrease in stock compensation expense of approximately $440,000 and a decrease in tax consulting fees of approximately $244,000. General and administrative expense, as a percentage of revenue, decreased to 4.4% for Q2 2013 from 4.9% for Q2 2012 primarily due to the decreases in general and administrative expenses discussed above as well as a total revenue increase of approximately 3.1% that did not significantly impact general and administrative expenses.

Asset impairment charge.

During Q2 2013, the not-for-profit entities managed by Rio Grande Management Company, L.L.C., or Rio, our wholly-owned subsidiary, were notified of the termination of funding for some or all of their services. We expect that, due to this change in funding, the not-for-profit entities will not be able to maintain the level of business they historically experienced, which is expected to result in the decrease or elimination of services provided by Rio. Based on these factors, in connection with preparing the financial statements included in this report, we initiated an analysis of the fair value of goodwill and determined that goodwill related to Rio was impaired. Based on this determination, as of June 30, 2013, we recorded a non-cash charge of approximately $492,000 to reduce the carrying value of the related goodwill to zero.

Depreciation and amortization.

(in thousands)

Three months ended
June 30, Percent
2013 2012 change
$ 3,734 $ 3,610 3.4 %

As a percentage of revenues, depreciation and amortization was approximately 1.3% for Q2 2013 and Q2 2012.


Non-operating (income) expense

Interest expense. Our current and long-term debt obligations have decreased to approximately $123.5 million at June 30, 2013, from $145.5 million at June 30, 2012, which was a significant factor contributing to the decrease in our interest expense for Q2 2013 as compared to Q2 2012.

Interest income. Interest income for Q2 2013 and Q2 2012 was approximately $30,000 and $43,000, respectively, and resulted primarily from interest earned on interest bearing bank and money market accounts.

Provision for income taxes

Our effective tax rate for Q2 2013 and Q2 2012 was 39.8% and 43.3%, respectively. Our effective tax rate was higher than the United States federal statutory rate of 35.0% for Q2 2013 and Q2 2012 due primarily to state taxes as well as non-deductible stock option expense.

EBITDA and Adjusted EBITDA

After adjusting for the items noted in the table below, Adjusted EBITDA was $15.7 million for Q2 2013 as compared to $8.5 million for Q2 2012.

EBITDA and Adjusted EBITDA are non-GAAP measurements. We utilize these non-GAAP measurements as a means to measure overall operating performance and to better compare current operating results with other companies within our industry. Details of the excluded items and a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measure are presented in the table below (in thousands). The non-GAAP measures do not replace the presentation of our GAAP financial results. We have provided this supplemental non-GAAP information because we believe it provides meaningful comparisons of the results of our operations for the periods presented. The non-GAAP measures are not in accordance with, or an alternative for, GAAP and may be different from non-GAAP measures used by some other companies.

                                     Three months ended
                                          June 30,
                                      2013          2012

Net income                         $     5,876     $ 1,418

Interest expense, net                    1,689       1,866
Provision for income taxes               3,888       1,085
Depreciation and amortization            3,734       3,610

EBITDA                                  15,187       7,979

Asset impairment charge                    492           -
Strategic alternatives costs (a)             -         519

Adjusted EBITDA                    $    15,679     $ 8,498


a) Represents costs incurred related to our review of strategic alternatives arising from unsolicited proposals to take our company private. We terminated this review in June 2012 upon determining that a continued focus on our operations was the best alternative to maximize shareholder value.


YTD 2013 compared to YTD 2012

Revenues



Social services. Social services revenue is comprised of the following:





                                        (in thousands)
                                       Six Months Ended
                                           June 30,              Percent
                                      2013          2012         change
Home and community based services   $ 153,810     $ 162,749          -5.5 %
Foster care services                   17,496        16,718           4.7 %
Management fees                         6,802         6,109          11.3 %
Total social services revenue       $ 178,108     $ 185,576          -4.0 %

Home and community based services. Contract terminations in Florida and Canada, the impact of waivers granted under the NCLB, inclement weather in the first quarter of 2013 and decreased encounters in certain markets led to a decrease in home and community based services revenue for YTD 2013 as compared to YTD 2012. The decrease in revenue was partially offset by increased census and the impact of new programs being implemented in various markets.

Foster care services. Our foster care services revenue increased during YTD 2013 from YTD 2012 primarily as a result of expanding services into rural areas in Tennessee and increases in intakes in Illinois. This increase, however, was partially offset by a decrease in foster care services provided in Arizona, Oregon and Nevada due to reduced payer authorizations for these services.

Management fees. Fees for management services provided to certain not-for-profit organizations under management services agreements increased slightly as a percentage of social services revenue to 3.8% for YTD 2013 from 3.3% for YTD 2012. The termination of, and changes to, certain management service agreements resulted in increased management fees during YTD 2013, but will result in decreased management fee revenue for the remainder of 2013.

Non-emergency transportation services.

(in thousands)

Six Months Ended
June 30, Percent
2013 2012 change
Non-emergency transportation services $ 391,016 $ 353,508 10.6 %

NET Services revenue was favorably impacted by the following:

? the award of two additional regions in South Carolina in February 2012;

? the award of two additional regions in Georgia in April and July 2012;

? the completed multi-phased implementation of the New York City administrative services contract which began in May 2012;

? implementation of a Wisconsin contract effective September 1, 2012, which subsequently terminated on July 31, 2013;

? continued expansion of our California ambulance commercial and managed care lines of business; and

? rate adjustments matching historical utilization in a number of our contracts.

A significant portion of NET Services revenue was generated under capitated contracts where we assumed the responsibility of meeting the transportation needs of beneficiaries residing in a specific geographic region for fixed payment amounts per beneficiary. Due to the fixed revenue stream and variable expense structure of our NET Services segment, expenses related to this segment vary with seasonal fluctuations. We expect our operating results will continuously fluctuate on a quarterly basis.


Operating expenses

Social Services

Client service expense. Client service expense included the following for YTD 2013 and YTD 2012:

. . .

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