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PRSC > SEC Filings for PRSC > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for PROVIDENCE SERVICE CORP

Form 10-Q for PROVIDENCE SERVICE CORP


8-Nov-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 nine months ended September 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 Q3 2013 and Q3 2012 mean the three months ended September 30, 2013 and the three months ended September 30, 2012, respectively. In addition, references to YTD 2013 and YTD 2012 mean the nine months ended September 30, 2013 and the nine months ended September 30, 2012, respectively.

Overview of our business

We are a direct provider of government sponsored human services and a manager of not-for-profit organizations under contracts that deliver 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 human 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 and 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.

We believe we are well positioned to benefit from healthcare reform legislation by offering our services to a growing population of individuals eligible to receive our services. However, 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 human 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 September 30, 2013, we were providing human services directly to approximately 55,700 unique clients, and had approximately 16.0 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 September 30, 2013, there has been no change in our accounting policies or the underlying assumptions or methodologies 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-Human Services (formerly our Social Services segment) 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. During Q3 2013, the Company changed the name of its Social Services segment to Human Services. The name change was made as part of a rebranding effort to reflect the future vision of the Human Services business, and to fully better describe the broad spectrum of services it provides.

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            Nine months ended
                                                      September 30,                September 30,
                                                   2013           2012           2013          2012
Revenues:
Human services                                        30.6 %         30.0 %         31.1 %        32.9 %
Non-emergency transportation services                 69.4           70.0           68.9          67.1
Total revenues                                       100.0          100.0          100.0         100.0

Operating expenses:
Client service expense                                27.8           26.2           27.0          28.1
Cost of non-emergency transportation services         64.0           65.4           63.5          63.6
General and administrative expense                     4.0            4.3            4.3           4.7
Asset impairment charge                                  -            0.9            0.1           0.3
Depreciation and amortization                          1.3            1.4            1.3           1.4
Total operating expenses                              97.1           98.2           96.2          98.1

Operating income                                       2.9            1.8            3.8           1.9

Non-operating expense:
Interest expense (income), net                         0.7            0.7            0.6           0.7
Loss on extinguishment of debt                         0.2              -            0.1             -
Income before income taxes                             2.0            1.1            3.1           1.2
Provision for income taxes                             0.7            0.7            1.2           0.5
Net income                                             1.3 %          0.4 %          1.9 %         0.7 %


Overview of trends of our results of operations for YTD 2013

Our Human Services revenues for YTD 2013 as compared to YTD 2012 were unfavorably impacted primarily by the termination of, and changes to, certain management service agreements and waivers granted under the No Child Left Behind Act, or NCLB. 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 in certain of our markets. Client service expenses also decreased from YTD 2012 to YTD 2013 by 0.7% or $1.5 million due to personnel and client expenses which were eliminated as a result of contract terminations and changes.

Our NET Services revenues for YTD 2013 as compared to YTD 2012 were favorably impacted by the expansion of business in our Georgia, Texas, New York and South Carolina markets, rate adjustments and continued expansion of our California ambulance commercial and managed care lines of business. The additional revenues from new business were partially offset by the transition of the Connecticut contract from a full risk to an administrative services only contract effective February 1, 2013 and the termination of our Wisconsin Medicaid contract effective July 31, 2013. The results of operations for YTD 2013 as compared to YTD 2012 included an increase in revenue of 6.0% due to new business, while the cost of transportation increased by 3.0% during this period, contributing to improved margins for the quarter. While we believe that changes in utilization of transportation services will continue to be a factor which may 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.

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. We also believe that the movement toward continued outsourcing of healthcare related non-emergency transportation management by governmental agencies and managed care organizations is a positive trend for the Company. 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 focus on logistics management as an important factor in improving patient access to preventative and health management services.

Q3 2013 compared to Q3 2012

Revenues



Human services. Human services revenues are comprised of the following:



                                        (in thousands)
                                      Three months ended
                                         September 30,          Percent
                                       2013          2012        change
Home and community based services   $   74,640     $ 72,259          3.3 %
Foster care services                     9,282        8,394         10.6 %
Management fees                            780        3,297        -76.3 %
Total human services revenues       $   84,702     $ 83,950          0.9 %

Home and community based services. Our new workforce development program in Wisconsin, as well as an increase in school based revenues due to schools starting earlier in 2013 as compared to 2012, resulted in increased revenues for Q3 2013 as compared to Q3 2012. These increases were partially offset by the impact of certain other contract losses and changes in program requirements in Florida.


Foster care services. Our foster care services revenues increased during Q3 2013 from Q3 2012 primarily as a result of expanding services into rural areas in Tennessee, which began in the second half of 2012.

Management fees. Fees for management services provided to certain not-for-profit organizations under management services agreements decreased due to the termination of, and changes to, certain management service agreements during 2013.

Non-emergency transportation services.

(in thousands)

Three months ended
September 30, Percent
2013 2012 change
Non-emergency transportation services $ 192,011 $ 196,335 -2.2 %

The decrease in NET Services revenues was primarily due to:

? the transition of the Connecticut "at-risk" contract to an administrative services only contract in February 2013, which resulted in a decrease in revenue; and

? the elimination of both the State and Southeast Region Medicaid contracts in Wisconsin effective July 31, 2013.

The decreases above were partially offset by:

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

? expansion of the managed care population in our New York City administrative contract; and

? positive rate adjustments in a number of our contracts.

A significant portion of NET Services revenues were 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 continue to fluctuate on a quarterly basis.

Operating expenses

Human Services



Client service expense. Client service expense included the following for Q3
2013 and Q3 2012:



                                   (in thousands)
                                 Three months ended
                                    September 30,          Percent
                                  2013          2012        change
Payroll and related costs      $   56,423     $ 55,031          2.5 %
Purchased services                  6,579        5,951         10.6 %
Other operating expenses           13,761       12,260         12.2 %
Stock compensation                    118          220        -46.4 %
Total client service expense   $   76,881     $ 73,462          4.7 %


Payroll and related costs. Our payroll and related costs increased during Q3 2013 from Q3 2012 primarily due to the increase of approximately $1.2 million in payroll and related costs for a workforce development contract in Wisconsin that began in 2013. The overall increase in payroll and related costs resulted in an increase in the ratio of payroll and related costs to revenues in our Human Services segment to 66.6% for Q3 2013 from 65.6% for Q3 2012.

Purchased services. We subcontract with a network of providers for a portion of the workforce development services we provide throughout British Columbia, Canada. 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 Q3 2013 we experienced an increase in costs for foster parent payments of approximately $210,000 and pharmacy payments of approximately $226,000 as compared to Q3 2012. Purchased services as a percentage of our Human Services segment revenues increased to 7.8% for Q3 2013 from 7.1% for Q3 2012.

Other operating expenses. Other operating expenses increased by approximately $234,000 for Q3 2013 as compared to Q3 2012 due to an increase in incurred but not reported automobile, general liability and workers' compensation claims. Additionally, other operating expenses increased by approximately $626,000 for client related costs including client tuition, mileage and transportation, primarily related to new program expenses. Other increases in Q3 2013 compared to Q3 2012 included professional fees and temporary labor expenses. Other operating expenses, as a percentage of revenues of our Human Services segment, increased to 16.2% for Q3 2013 from 14.6% for Q3 2012.

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 under our 2006 Long-Term Incentive Plan, or 2006 Plan, which was approximately $100,000 and $200,000 for Q3 2013 and Q3 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 Q3 2013 and Q3 2012:



                                                      (in thousands)
                                             Three months ended September 30,            Percent
                                                2013                   2012               Change
Payroll and related costs                 $         23,383       $         20,241               15.5 %
Purchased services                                 147,010                155,675               -5.6 %
Other operating expenses                             6,435                  6,967               -7.6 %
Stock compensation                                     221                    365              -39.5 %
Total cost of non-emergency
transportation services                   $        177,049       $        183,248               -3.4 %

Payroll and related costs. The increase in payroll and related costs of our NET Services segment for Q3 2013 as compared to Q3 2012 was due to additional staff hired for new managed care contracts nationwide, the last phase of expansion in our New York City Medicaid contract and for the 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 12.2% for Q3 2013 from 10.3% for Q3 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 the increase in administrative services only contracts, which resulted 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 transitioned our Connecticut "at risk" contract to an "administrative services" only contract, thus eliminating our responsibility for paying transportation providers for services. This resulted in a decrease in purchased transportation costs for Q3 2013 as compared to Q3 2012. As a percentage of NET Services revenue, purchased services decreased to approximately 76.6% for Q3 2013 from 79.3% for Q3 2012.

Other operating expenses. Other operating expenses decreased for Q3 2013 as compared to Q3 2012 due primarily to decreased telecommunication expenses as well as lower loss reserves for our captive insurance company, which were partially offset by increased software maintenance and contract consulting fees. Other operating expenses as a percentage of NET Services revenues decreased to 3.4% for Q3 2013 from 3.6% for Q3 2012.

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 under our 2006 Plan which was approximately $200,000 and $349,000 for Q3 2013 and Q3 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
September 30, Percent
2013 2012 change
$ 11,082 $ 12,069 -8.2 %

The decrease in administrative expenses for Q3 2013 as compared to Q3 2012 was primarily a result of a decrease in payroll and related costs of approximately $1.5 million, which was mainly attributable to changes in management service agreements, partially offset by an increase of approximately $554,000 in facility costs. General and administrative expense, as a percentage of revenue, decreased to 4.0% for Q3 2013 from 4.3% for Q3 2012.

Asset impairment charge.

During Q3 2012, our foreign wholly-owned subsidiary WCG International Ltd., or WCG, experienced a decline in its business due to the impact of a reorganization of the service delivery system in British Columbia. As part of this reorganization, all of the contracts for services in this market expired and new contracts were put up for bid. Due to an increased level of competition in British Columbia and a decrease in the number of services funded, WCG was unable to regain the level of business it enjoyed prior to the reorganization. Based on these factors, we initiated an analysis of the fair value of goodwill and other intangible assets and determined that customer relationships which comprise other intangible assets were impaired. Based on this determination, we recorded a non-cash charge of approximately $2.5 million during Q3 2012 to reduce the carrying value of customer relationship intangible assets based on their estimated fair values.

Depreciation and amortization.

(in thousands)

Three months ended
September 30, Percent
2013 2012 change
$ 3,725 $ 4,018 -7.3 %


As a percentage of revenues, depreciation and amortization was approximately 1.3% for Q3 2013 and 1.4% for Q3 2012.

Non-operating (income) expense

Interest expense. Our current and long-term debt obligations have decreased to approximately $123.5 million at September 30, 2013, from $140.5 million at September 30, 2012, which was a significant factor contributing to the decrease in our interest expense for Q3 2013 as compared to Q3 2012.

Loss on extinguishment of debt. Loss on extinguishment of debt of approximately $525,000 for Q3 2013 resulted from the write-off of deferred financing fees related to our credit facility that was repaid in full in August 2013 with proceeds from our amended and restated credit facility. We accounted for the unamortized deferred financing fees related to the previous credit facility under ASC 470-50 - Debt Modifications and Extinguishments. As current and previous credit facilities were loan syndications, and a number of lenders participated in both credit facilities, the Company evaluated the accounting for financing fees on a lender by lender basis and recorded a charge accordingly.

Interest income. Interest income for Q3 2013 and Q3 2012 was approximately $40,000 and $25,000, respectively, and resulted primarily from interest earned on interest bearing bank and money market accounts.

Provision for income taxes

Our effective tax rate for Q3 2013 and Q3 2012 was 36.7% and 61.1%, respectively. Our effective tax rate was higher than the United States federal statutory rate of 35.0% for Q3 2013 and Q3 2012 due primarily to state taxes and non-deductible stock option expense. The Q3 2013 effective tax rate was favorably impacted by disqualifying dispositions of incentive stock options, whereas the Q3 2012 effective tax rate was unfavorably impacted by lower projected income before income taxes, which was primarily due to the $2.5 million intangible impairment charge recorded during the quarter.

EBITDA and Adjusted EBITDA

After adjusting for the items noted in the table below, Adjusted EBITDA was $11.7 million for Q3 2013 as compared to $11.5 million for Q3 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. 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.


                                       (in thousands)
                                     Three months ended
                                        September 30,
                                      2013          2012

Net income                         $    3,527     $  1,158

Interest expense, net                   1,876        1,965
Provision for income taxes              2,048        1,859
Depreciation and amortization           3,725        4,018

EBITDA                                 11,176        9,000

Asset impairment charge                     -        2,506
Loss on extinguishment of debt            525            -
Strategic alternatives costs (a)            -            2

Adjusted EBITDA                    $   11,701     $ 11,508


______________

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



Human services. Human services revenues are comprised of the following:



                                        (in thousands)
                                       Nine months ended
                                         September 30,          Percent
                                      2013          2012         change
Home and community based services   $ 228,449     $ 235,007         -2.8 %
Foster care services                   26,777        25,113          6.6 %
Management fees                         7,583         9,406        -19.4 %
Total human services revenues       $ 262,809     $ 269,526         -2.5 %

Home and community based services. Contract terminations in Florida and Canada, as well as the impact of waivers granted under the NCLB, led to a decrease in home and community based services revenues for YTD 2013 as compared to YTD 2012. The decrease in revenue was partially offset by our new workforce development program in Wisconsin that began during YTD 2013.

Foster care services. Our foster care services revenues 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. The termination of, and changes to, certain management service agreements resulted in decreased management fees during YTD 2013 as compared to YTD 2012.


Non-emergency transportation services.

(in thousands)

Nine months ended
September 30, Percent
2013 2012 change
Non-emergency transportation services $ 583,028 $ 549,844 6.0 %

NET Services revenues were 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 and was completed in the first quarter of 2013;

. . .

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