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PRSC > SEC Filings for PRSC > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for PROVIDENCE SERVICE CORP

Form 10-Q for PROVIDENCE SERVICE CORP


8-Aug-2014

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, 2014 and 2013, 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, 2013. For purposes of "Management's Discussion and Analysis of Financial Condition and Results of Operations," references to Q2 2014 and Q2 2013 mean the three months ended June 30, 2014 and the three months ended June 30, 2013, respectively. In addition, references to YTD 2014 and YTD 2013 mean the six months ended June 30, 2014 and the six months ended June 30, 2013, respectively.

Overview of our business

We provide domestic and international human services, arrange for and manage non-emergency transportation services and provide workforce development 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, including the acquisition of Ingeus Ltd. ("Ingeus") during the second quarter of 2014.

Ingeus provides workforce development services that include resume and job interview skills, networking and job placement services, and technical job training through internally staffed or outsourced resources. Its client base is broad, and includes long-term unemployed, disabled, and unskilled individuals, as well as individuals that cope with medical illnesses, are newly graduated from educational institutions, and those that have been released from incarceration for an extended length of time. Ingeus contracts primarily with government entities that seek to reduce the unemployment rate generally, or for specific targeted cohorts.

We continue to focus on improving operating efficiencies, organic and acquisitive growth, and developing performance management systems designed to enhance and leverage our core competencies. Our core competencies include our enduring customer relationships, geographic reach, breadth of services and experience, management of the health and work employment related needs of defined populations, management of provider networks, large-scale government contract bidding infrastructure, managed care contracting experience and technology platform development. By enhancing and leveraging these core competencies and expanding both domestically and internationally, we believe we can benefit from emerging trends in healthcare and other human services, such as U.S. healthcare market reform and human services government outsourcing trends globally, and the related regulatory environments. Further, by managing larger populations of clients eligible to receive our services, and outsourcing transportation management, we believe we can reduce the cost of care and services and achieve improvement in measureable outcomes.

While we believe we are well positioned to benefit from legislated and market-driven healthcare reform, trends in government outsourcing of certain human services globally, 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. Additionally, it is not clear when the healthcare reform legislation will be fully implemented or when, and if, we will see any positive impact.

We also believe we are positioned to potentially benefit from recent trends that favor our in-home and community-based provision of human services; however, 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. We believe our business model allows us to make adjustments to help mitigate state budget pressures that are impacted by federal spending.


As of June 30, 2014, we were providing human services directly to approximately 59,900 clients under our Human Services segment and 250,500 clients under our Workforce Development ("WD") Services segment. Additionally, we had approximately 19.5 million individuals eligible to receive services under our non-emergency transportation services contracts. We provided services from our Human Services segment from 360 locations in 24 states, the District of Columbia, and 3 provinces in Canada as of June 30, 2014. Services from our Non-emergency Transportation ("NET") Services segment were provided from approximately 37 locations in 39 states and the District of Columbia as of June 30, 2014. As of June 30, 2014, our WD Services segment provided services from over 160 locations in Australia, France, Germany, Poland, Saudi Arabia, South Korea, Spain, Sweden, Switzerland and the United Kingdom.

Recent Developments

On March 31, 2014, we entered into a Share Sale Agreement (the "Sale Agreement") to purchase all of the outstanding equity of Ingeus Limited ("Ingeus"), and an Australian Share Sale Agreement Side Deed (the "Side Deed") pursuant to which, effective as of the closing, we guaranteed the obligations of Ingeus Europe Limited, a subsidiary of Ingeus, in its purchase of the share capital of Ingeus UK Limited from Deloitte LLP. Effective May 30, 2014, the acquisition was completed. Ingeus, based in Australia, is a distributed work force development company and market leader in outsourced employability programs, operating in the social improvement, employment and welfare services markets.

Pursuant to the Sale Agreement and the Side Deed, we paid a purchase price comprised of (i) a GBP 35.0 million, plus customary adjustments, cash payment on May 30, 2014 ($92.3 million, after increase for customary adjustments), (ii) contingent consideration of up to GBP 75.0 million ($126.0 million), payable over a five year period, based on the achievement of certain Ingeus milestones including the achievement of certain levels of Ingeus' earnings before interest, taxes, depreciation and amortization and other defined criteria and (iii) contingent consideration of 5.0 million ($8.4 million) upon successful award of a specified customer contract. In addition, on May 30, 2014, the Company issued restricted shares of the Company's common stock and payment of cash to the former shareholders of Ingeus with a combined value of GBP 14.3 million ($24.1 million), subject to a vesting schedule of 25% per year over a four year period which is accounted for as a compensatory arrangement. The foreign currency translations above were based on the conversion rate on May 30, 2014.

Critical accounting estimates and policies

As of June 30, 2014, 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, 2013.

Results of operations

Segment reporting. Our financial operating results are organized by reportable segment and reviewed by our chief operating decision maker. Historically, we had two reportable segments, Human Services and NET Services. However, with the acquisition of Ingeus in the second quarter of 2014, we created a third reportable segment, WD Services. We operate these reportable segments as separate divisions and differentiate the segments based on the nature of the services they offer.


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,
                                                   2014           2013           2014          2013
Revenues:
Non-emergency transportation services                 62.9 %         68.8 %         65.4 %        68.7 %
Human services                                        28.7           31.2           30.0          31.3
Workforce development services                         8.4             -             4.6             -
Total revenues                                       100.0          100.0          100.0         100.0

Operating expenses:
Cost of non-emergency transportation services         57.1           63.6           58.7          63.2
Client service expense                                25.7             -            27.3            -
Workforce development service expense                  7.1           26.5            3.9          26.7
General and administrative expense                     4.7            4.4            4.7           4.4
Depreciation and amortization                          1.5            1.3            1.4           1.3
Asset impairment charge                                  -            0.2              -           0.1
Total operating expenses                              96.1           96.0           96.0          95.7

Operating income                                       3.9            4.0            4.0           4.3

Non-operating expense:
Interest expense, net                                  0.4            0.6            0.4           0.6
Income before income taxes                             3.5            3.4            3.6           3.7
Provision for income taxes                             1.6            1.4            1.6           1.5
Net income                                             1.9 %          2.0 %          2.0 %         2.2 %

Overview of trends of our results of operations for YTD 2014

Our NET Services revenues for YTD 2014 as compared to YTD 2013 were favorably impacted by new contracts and expansion in certain markets. The results of operations for YTD 2014 as compared to YTD 2013 included an increase in revenue of 6.0% due to new business, while the cost of transportation as a percentage of Non-emergency transportation services revenue decreased to 89.7% during YTD 2014 as compared to 92.0% during YTD 2013, due primarily to lower utilization of transportation services resulting from inclement weather in the first quarter of 2014.

Our Human Services revenues for YTD 2014 as compared to YTD 2013 increased 6.8% and were favorably impacted by contracts that began in 2013 and were fully implemented by the end of the first quarter of 2014. Client service payroll and related costs also increased in YTD 2014 from YTD 2013 by 6.8%; however, client service purchased services costs increased in YTD 2014 from YTD 2013 by 105.8%. This increase was due to higher than expected foster care expenses in our Texas contract, which we will be exiting in the second half of 2014.

Our WD Services revenues for YTD 2014 were $28.8 million. Workforce development service expenses comprised 84.7% of workforce development services revenue. We believe this ratio will fluctuate from period to period based upon contract milestones and start-up costs of most workforce development contracts.

We believe the industry trend away from more expensive facility-based care services in favor of clinically appropriate home and community-based delivery systems such as ours will continue. 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 human 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. In addition, we believe we are well-positioned to globally expand our workforce development services with the management team and resources obtained through the acquisition of Ingeus.


Q2 2014 compared to Q2 2013

Revenues

Non-emergency transportation services. NET Services revenues were as follows (in thousands):

Three Months Ended June 30, Dollar Percent 2014 2013 change change $ 216,296 $ 197,883 $ 18,413 9.3 %

The increase in NET Services revenues in Q2 2014 was driven by:

? new state contracts in Maine, Utah and Rhode Island which began in August 2013, February 2014 and May 2014, respectively; ? an increase in membership in Georgia, Michigan, New Jersey and New York; ? expansion of our current Michigan Medicaid contract along with the implementation of approximately 600,000 lives via multiple new Michigan managed care contracts;
? implementation of various new managed care contracts in Ohio, Kansas and Illinois;
? continued expansion of our California commercial and managed care lines of business; and
? rate adjustments matching historical utilization in a number of our contracts, as well as new rates for several renewed and awarded contracts.

This revenue growth was partially offset by a decrease in revenue resulting from the introduction of risk corridors in our Nevada contract, as well as the elimination of a City of Hartford contract and both the State and Southeast Region Medicaid contracts in Wisconsin in July 2013.

A significant portion of NET Service revenue is generated under capitated contracts where we assume the responsibility of meeting the covered transportation requirements of beneficiaries residing in a specific geographic region for fixed payment amounts per beneficiary. Due to the fixed revenue stream and seasonal variability of transportation utilization which impact our expenses, we expect our operating results will regularly fluctuate on a quarterly basis.

Human services. Human services revenues are comprised of the following (in thousands):

                                          Three Months Ended June 30,           Dollar         Percent
                                           2014                 2013            change         change
Home and community based services     $       82,080       $       76,849     $    5,231             6.8 %
Foster care services                          16,394                9,052          7,342            81.1 %
Management fees                                  348                3,853         (3,505 )         -91.0 %

Total human services revenues         $       98,822       $       89,754     $    9,068            10.1 %

Home and community based services. Home and community based services revenue increased in Q2 2014 from Q2 2013 primarily due to revenue derived from an acquired entity in Idaho of approximately $1.7 million, the impact of rate increases in certain programs during the latter half of 2013, increased costs under certain cost reimbursement contracts and further expansion into autism services.

Foster care services. Our foster care services revenues increased in Q2 2014 from Q2 2013 primarily as a result of our foster care contract in Texas that began in 2013. Although we have generated increased foster care service revenue under this contract, costs under the contract have been higher than expected. Therefore, we have decided to exit the contract through an orderly transition.


Management fees. The exit of, and changes to, certain management service agreements resulted in decreased management fees in Q2 2014 as compared to Q2 2013. We expect management fees to continue to decrease in 2014 and become a nominal part of our business.

Workforce development services. WD Services revenue was as follows (in thousands):

Three Months Ended June 30, Dollar 2014 2013 change $ 28,835 $ - $ 28,835

WD services revenue represents revenue from our newly acquired subsidiary, Ingeus. The Q2 2014 revenue includes one month of revenue derived from providing international outsourced employability programs.

Operating expenses

NET Services

Cost of non-emergency transportation services. NET Services expenses included the following for Q2 2014 and Q2 2013 (in thousands):

                                          Three Months Ended June 30,           Dollar         Percent
                                           2014                 2013            change         change
Purchased services                    $      162,304       $      153,317     $    8,987             5.9 %
Payroll and related costs                     27,054               23,071          3,983            17.3 %
Other operating expenses                       6,859                6,235            624            10.0 %
Stock-based compensation                         180                  308           (128 )         -41.6 %
Total cost of non-emergency
transportation services               $      196,397       $      182,931     $   13,466             7.4 %

Purchased services. We subcontract with third party transportation providers to provide non-emergency transportation services to our clients. The increase in purchased services for Q2 2014 compared to Q2 2013 is attributable to additional purchased service costs for our expanded business and new contracts covering Hawaii, Kansas, Louisiana, Maine, Michigan, New Mexico, Ohio, Rhode Island, New York, and Utah, as well as further expansion in the California commercial and managed care markets. This increase was partially offset by decreases due to the termination of one City of Hartford contract, several managed care contracts, and both of our Wisconsin contracts. As a percentage of NET Services revenue, purchased services decreased to approximately 75.0% for Q2 2014, from 77.5% for Q2 2013.

Payroll and related costs. The increase in payroll and related costs of our NET Services segment for Q2 2014 as compared to Q2 2013 was due to the hiring of additional staff for new contracts in Maine, Rhode Island and Utah, expansion efforts across numerous other markets and 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 12.5% for Q2 2014 from 11.7% for Q2 2013, 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. All of these activities resulted in higher payroll and related costs as a percentage of consolidated revenue.

Other operating expenses. Other operating expenses increased for Q2 2014 as compared to Q2 2013 due primarily to additional business taxes for our expanded business covering Hawaii and New Mexico, as well as more consulting services used to support the NET Services segment growth. Other operating expenses as a percentage of NET Services revenues were 3.2% for Q2 2014 and Q2 2013.


Stock-based compensation. Stock-based compensation expense was approximately $0.2 million and $0.3 million for Q2 2014 and Q2 2013, respectively. This item 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 Long-Term Incentive Plan, amended (the "2006 Plan") as well as costs related to performance restricted stock units.

Human Services



Client service expense.  Client service expense, which includes expenses from
our Human Services segment, included the following for Q2 2014 and Q2 2013 (in
thousands):



                                   Three Months Ended June 30,          Dollar      Percent
                                    2014                 2013           change       change
Payroll and related costs      $       60,755       $       56,288     $  4,467          7.9 %
Purchased services                     13,107                6,286        6,821        108.5 %
Other operating expenses               14,439               13,526          913          6.7 %
Stock-based compensation                   63                  196         (133 )      -67.9 %
Total client service expense   $       88,364       $       76,296     $ 12,068         15.8 %

Payroll and related costs. Our payroll and related costs increased in Q2 2014 from Q2 2013 primarily due to increased headcount in certain markets, including North Carolina, Texas and Virginia, as well as an acquisition in Idaho. Payroll and related costs of our Human Services segment as a percentage of Human Services segment revenue were 61.5% for Q2 2014 and 62.7% for Q2 2013.

Purchased services. We incur a variety of other support service expenses in the normal course of our domestic business, including foster parent payments, pharmacy payments and out-of-home placements. In addition, we subcontract with a network of providers for a portion of our legacy workforce development services we provide in the Human Services segment. In Q2 2014, we experienced an increase in foster parent payments of approximately $7.8 million. This increase was primarily related to our contract in Texas that began in 2013. As discussed above, we have decided to exit this contract. Purchased services of our Human Service segment, as a percentage of our Human Services segment revenue increased to 13.3% for Q2 2014, up from 7.0% for Q2 2013 due to the impact of foster parent payments.

Other operating expenses. Other operating expenses of our Human Services segment, as a percentage of Human Services segment revenue, decreased slightly to 14.6% for Q2 2014 from 15.1% for Q2 2013.

Stock-based compensation. Stock-based compensation includes the amortization of the fair value of stock options and restricted stock awarded to key employees under our 2006 Plan, as well as costs related to performance restricted stock units.


Workforce Development Services



Workforce development service expense.  Workforce development service
expense, from our WD Services segment, were as follows (in thousands):



                                  Three Months Ended June 30,         Dollar
                                      2014                 2013       change
Payroll and related costs      $            14,042         $   -     $ 14,042
Purchased services                           7,246             -        7,246
Other operating expenses                     2,649             -        2,649
Stock-based compensation                       486             -          486
Total client service expense   $            24,423         $   -     $ 24,423

Payroll and related costs. The payroll and related costs of Ingeus totaled $14.0 million. Payroll and related costs of our WD Services segment as a percentage of WD Services segment revenue were 48.7% for Q2 2014.

Purchased services. We subcontract with a network of providers for a portion of the workforce development services we provide. Q2 2014, includes $7.2 million of purchased services expense related to Ingeus. Purchased services of our WD Service segment, as a percentage of our WD Services segment revenue was 25.1% for Q2 2014.

Other operating expenses. Other operating expenses of our WD Services segment, as a percentage of WD Services segment revenue, were 9.2% for Q2 2014.

Stock-based compensation. Stock-based compensation was approximately $0.5 million for Q2 2014. This item includes the expense related to the amortization of the fair value of restricted stock awards issued in connection with the acquisition of Ingeus.

General and administrative expense. General and administrative expenses were as follows (in thousands):

Three Months Ended June 30, Dollar Percent 2014 2013 change change $ 16,163 $ 12,731 $ 3,432 27.0 %

The increase in general and administrative expenses for Q2 2014 as compared to Q2 2013 was primarily a result of approximately $2.5 million in costs incurred during Q2 2014 related to the acquisition of Ingeus, as well as an increase in facilities costs of approximately $1.8 million related to Ingeus' facility costs. These increases were partially offset by a decrease in payroll and related costs of approximately $0.8 million, primarily attributable to changes in management service agreements. General and administrative expense, as a percentage of revenue, increased to 4.7% in Q2 2014 from 4.4% in Q2 2013.

Depreciation and amortization. Depreciation and amortization were as follows (in thousands):

Three Months Ended June 30, Dollar Percent 2014 2013 change change $ 5,143 $ 3,734 $ 1,409 37.7 %

As a percentage of revenues, depreciation and amortization was approximately 1.5% and 1.3% for Q2 2014 and Q2 2013, respectively.


Asset impairment charge.

During Q2 2013, the not-for-profit entities managed by Rio Grande Management Company, L.L.C. ("Rio"), our wholly-owned subsidiary, were notified of the termination of funding for certain of their services. We expected that, due to this change in funding, the not-for-profit entities Rio serves will not be able to maintain the level of business they historically experienced, which was expected to result in the decrease or elimination of services provided by Rio. Based on these factors, in connection with preparing our quarterly financial statements for the period ended June 30, 2013, we initiated an analysis of the fair value of goodwill and determined that goodwill related to Rio was impaired. Based on this determination, we recorded a non-cash charge of approximately $0.5 million in the Human Services segment as of June 30, 2013 to reduce the carrying value of the related goodwill to zero.

Non-operating expense

Interest expense, net. Our current and long-term debt obligations have increased from approximately $123.5 million at June 30, 2013 to $191.6 million at June 30, 2014. The decrease in our interest expense for Q2 2014 as compared to Q2 2013 primarily resulted from the elimination of the convertible debt in Q2 2014, as well as a decrease in the interest rate under the revised terms of our amended credit facility completed in August 2013.

Provision for income taxes

Our effective tax rate for Q2 2014 and Q2 2013 was 45.3% and 39.8%, respectively. Our effective tax rate was higher than the United States federal statutory rate of 35.0% for Q2 2014 and Q2 2013 due primarily to state taxes as well as non-deductible stock option expense. In addition, a significant amount of the expenses incurred in connection with the Ingeus acquisition in the second . . .

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